Return of the bitter pill: Kenya softens IMF stance as Iran shock bites

The William Ruto government is eyeing a "positive outcome" from long-standing talks with the International Monetary Fund (IMF) to be held in Washington DC later this month, Central Bank of Kenya (CBK) Governor Kamau Thugge said on Tuesday.

The move signals a renewed willingness by Nairobi to strike a deal with the IMF after months of rocky talks, including the collapse of a nine-day mission led by Haimanot Teferra that departed the capital without an agreement in early March.

The IMF team had been in the Kenyan capital from late February to early March 2026, but talks broke down over the Fund's demands for deep austerity, transparency around billions in off-budget debt, and governance overhauls conditions the Ruto administration, facing an election in 18 months, deemed politically toxic, officials said. 

The Iran-US conflict, which has triggered fears of a balance of payments crisis and created fresh headwinds for the economy, has left President William Ruto's government with few viable alternatives, analysts said.

"We will continue those discussions in Washington later on this month and we hope for a positive outcome," Thugge told journalists during a post-Monetary Policy Committee briefing, confirming that Nairobi will resume intensive talks with the Fund during the Spring Meetings.

Analysts say the economic fallout from the Middle East conflict—surging oil prices, disrupted supply chains and long queues at petrol stations across the country—has stripped Nairobi of its earlier room for manoeuvre.

A new programme could see Kenya now join a long line of emerging economies forced to swallow the Fund's 'bitter pill' when prominent global shocks, from the Covid-19 pandemic to the war in Ukraine, and now the Iran war shrink fiscal space and leave governments exposed.

President Ruto had previously pushed back against suggestions of a falling out with the IMF amid stalled talks, framing the stalemate as a sign of financial strength and sovereignty.

In early March, an IMF mission led by Haimanot Teferra departed Nairobi without a deal after nine days of talks.

"We have agreed that if we need your money, we will come for it. If we don't need it, we will do with the resources we have," Ruto said at a public forum on March 10. "Is it wrong to be able to stand on your own and do your own stuff? Is that a weakness or a strength?"

At the time, Ruto insisted Kenya would negotiate only on its own terms. 

Former presidential adviser David Ndii had also previously echoed that bullishness on social media: "We are not negotiating with the IMF."

Behind the bravado, officials and advisers in the Ruto administration, The Standard learned, had privately expressed caution that with a general election due in under 18 months, IMF demands for austerity, cutbacks in State jobs and reductions in public spending could reignite social tensions, and the kind of deadly protests that forced a humiliating policy reversal on tax hikes in 2024 complicating the President’s reelection bid. 

The eruption of the Iran-US conflict in late March is said to have, however, changed the calculus dramatically, analysts say. As a net oil importer, Kenya has seen its current account hammered by the spike in crude prices.

Amid the Iran shock to the economy, the CBK on Wednesday slashed its 2026 growth forecast to 5.3 per cent from 5.5 per cent and projected the current account deficit to widen to 3.0 per cent of GDP from 2.2 per cent.

Ahead of the Washington talks and the Iran war fallout, the CBK governor yesterday sought to project an image of preparedness, noting the apex bank had built foreign exchange buffers to $13.35 billion, or 5.68 months of import cover.

"We were waiting for this kind of shock," Thugge said. "That is why we built up our reserves... we should be able to manage volatility in the shilling-dollar exchange rate going forward."

Remittances from the diaspora, a vital source of foreign exchange, are however expected to decelerate, while tourism receipts are forecast to grow more slowly.

Thugge acknowledged the risks but sought to reassure markets that the banking and other sectors of the economy have so far weathered the storm.

"So far we haven't seen any impact of this on the banking sector," he said, responding to queries about deposit flights. "That's not to say that there won't be any impact, but of course it depends on how long this conflict lasts... a slower economy could ultimately have an impact on credit risk."

Without a new IMF programme, Kenya's options are seen to narrow sharply. Domestic borrowing remains expensive, and international capital markets are constrained by high interest rates.

The Fund, however, continues to push for deep structural reforms, including transparency around billions in off-budget debt.

Central to the impasse is a $3.5 billion conversion of Chinese railway debt into a securitised loan, which IMF officials argue masks Kenya's true Sh12.8 trillion debt burden.