Kenya’s Shift in IMF Engagement: Fiscal Freedom or Miscalculation?
Last year, Kenya witnessed widespread protests driven by public discontent over tax hikes, rising living costs, and its government’s economic policies. These demonstrations hinted not-so-subtly at growing frustrations with Kenya’s fiscal management, particularly with its reliance on external debt and the stringent, unforgiving austerity measures linked to International Monetary Fund (IMF) programs.
It is against this backdrop that Kenya has recently opted to forgo the final review of its existing IMF programs. This decision involves forfeiting $800 million in the final tranche of a series of disbursements (103 billion Kenyan Shillings), raising considerable concerns about the nation’s ability to maintain economic stability and secure alternative funding, all while responsibly managing its growing debt burden.
Kenya’s Engagement with the IMF: A Double-Edged Sword
Kenya has had a complex relationship with the IMF since time immemorial. It experienced firsthand the “lost development decade” of the '90s, where draconian Structural Adjustment Programmes (SAPs) set by the IMF and World Bank worsened an already dire debt crisis. In Kenya, as in other IMF loan-recipient countries, this led to layoffs in the civil service and removal of subsidies for essential services such as health and education; essentially, this was a time of stalled development and stunted growth.
Things looked up (and East) for a time. Kenya’s pivot toward China, especially under President Mwai Kibaki’s administration, provided an alternative source of development (and especially infrastructure) financing. With Beijing’s relatively hands-off approach – eschewing the policy-heavy conditions of Western lenders – Kenya was able to make strides in infrastructure development, with flagship projects like the Standard Gauge Railway (SGR) having begun in the previous decade.
However, these loans came at a cost, and mounting repayment obligations coupled with rising fiscal pressures slowly nudged Kenya back into the arms of the IMF. By the late 2010s, Kenya was once again flirting with the institution, this time under the guise of debt sustainability. The COVID-19 pandemic’s plummeting revenues and surging expenditures left Kenya with limited options, and in 2021, it had officially cosied up with the IMF, signing onto a $2.34 billion, 38-month-long (and soon to be extended) program.
This program, under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF), was introduced to help Kenya navigate its pandemic-induced economic strains. In order to qualify, however, for the next disbursement, Kenya would need to reduce its fiscal deficit and raise its revenues. It attempted to do so by broadening its tax base and introducing new levies through economic reforms stated in its famously contentious Finance Bill of 2024, which sparked widespread discontent and led to violent protests. The Bill proved difficult to pass, and its eventual withdrawal, while widely agreeable to Kenyans, left the country in a precarious position: unable to meet IMF conditions, yet still reliant on external financing.
And, indeed, Kenya was unable to meet crucial fiscal benchmarks in the last year. The fiscal deficit was estimated to be 4.9% of GDP in the past year and is predicted to be 4.3% in the next budget cycle – an improvement, but insufficient still to comfortably pad the government’s coffers.
Now, Kenya’s latest move to forgo the final IMF review and seek a fresh lending arrangement raises questions about its long-term economic strategy. Is Kenya aiming to secure more favourable terms, or is this a short-term escape from IMF scrutiny? How will this affect investor confidence and her ability to secure other funding? All things considered, what does this move imply about Kenya’s economic future?
Kenya’s Debt Servicing Burden: A Looming Crisis
Kenya’s decision to forgo the final IMF review does not erase the reality of its towering debt obligations. According to the Central Bank of Kenya, the country’s public debt reached Kshs 10.6 trillion (70.8% of its GDP) in the previous fiscal year, and grew to 11.02 trillion as at March 2025, with external loans making up almost half of this amount. The cost of servicing debt is just as staggeringly high, with the debt service to revenue ratio being 69.6% at the end of the 2023/24 fiscal year – almost 40% higher than the IMF threshold of 30%.
The combination of weak revenue performance and high debt servicing costs has forced the government to pay debt with debt – a classic case of a debt spiral. But now, with the final $800 million IMF tranche off the table, Kenya must explore other means of meeting its obligations. Kenya now faces a critical decision: how will it fund its next steps?
Reworking the Portfolio
Turning to other international multilateral institutions, many think, may prove more difficult because of the IMF split. The IMF often acts as a stamp of approval for a country’s economic policies, giving confidence to other lenders. The World Bank, for example, ties its budget support loans, Development Policy Operation (DPO), to economic governance improvements, and Kenya’s deviation from the IMF program may raise concern among stakeholders who worry that these improvements may not hold.
Kenya recently explored another external financier: a $1.5 billion loan from the United Arab Emirates (UAE). Initially slated for liability management, the loan is likely now to provide some much-needed budgetary support. However, it also points to a concerning trend toward further increases in external financing. An over-reliance on external debt could, on top of increasing the debt level and service burdens, expose the country to exchange rate risk.
Kenya has recently resorted to commercial borrowing, demonstrated through its issuance of Eurobonds to manage its debt obligations. In February 2025, Kenya raised $1.5 billion through an 11-year Eurobond, which was used partially to buy back another 2027-maturing bond and repay other commercial debts. These were well received by investors, evident in the lower-than-previous coupon rate. Experts think that the one-year decrease from 9.75% to 9.5% in interest rates implies a “much more favourable risk sentiment”, possibly due to the Shilling’s stability in the last year. Even so, the reliance on commercial loans merits at least some cause for concern: while it may help address pressing short-term liquidity issues, commercial loans, with their higher interest rates and shorter repayment periods, may pose long-term threats to debt sustainability.
Moreover, stepping away from the review does not mean severing ties with the IMF completely; if anything, it may look like a recalibration of their engagement, with Kenya seeking more flexible terms while the IMF reassesses its approach in helping the country address its fiscal challenges. Already, the Kenyan government has made a request to the IMF to establish a new financial arrangement - one that, ideally, includes addressing immediate liquidity needs and a roadmap to fiscal consolidation for the long-term.
The success of any new program depends on Kenya’s ability to structurally reform in its most substantial problem areas. A key priority is improving revenue collection by enhancing tax administration and broadening the tax base while being careful not to provoke public backlash with all its disastrous consequences. Strides have already been made in this respect, with the Kenya Revenue Authority, responsible for collecting taxes, recording an impressive 11.1% growth in revenue collection last year. Impressive as this was, heavy-handed tax policies drew criticism for stifling business growth with their excessively 'cumbersome and arbitrary' approach.
Equally pressing is the need for the Kenyan government to control its expenditures. Instead of vague cost cutting measures, the government must slim its spending, especially in politically sensitive inefficiencies – bloated public spending, redundant government agencies, and corrupt procurement processes, to name a few.
Conclusion
Kenya’s decision to abandon the final IMF review is indicative of its precarious fiscal position. While this may provide short-term relief from stringent IMF measures, it raises some concerns about Kenya’s ability to secure sustainable alternatives and maintain investor confidence. All the while, its heavy debt burden – now exceeding Kshs 11 trillion – demands urgent structural reforms in its service.
Ultimately, debt restructuring must be a central pillar of Kenya’s fiscal strategy. The country’s heavy reliance on foreign-currency borrowing has exposed it to exchange rate volatility and rising debt-servicing costs. To mitigate these risks, Kenya must prioritize more sustainable domestic financing options and seek concessional loans with lower interest rates and longer repayment periods. By balancing its debt portfolio and ensuring that borrowing aligns with long-term economic growth objectives, Kenya can create a more resilient fiscal framework that reduces dependency on external lenders while maintaining economic stability.
Whether Kenya can secure a more favourable financial arrangement with the IMF or other lenders is entirely dependent on its demonstrated commitment to fiscal discipline. A recalibrated economic strategy that equally emphasizes immediate liquidity needs with long-term sustainability efforts is critical in steering the country in the right direction – away from deeper financial distress and toward resilience and self-sufficiency.
