Kenya must convince the International Monetary Fund (IMF) that it can meet set revenue and spending discipline targets to unlock new funding from the Washington-based institution, the National Treasury and the Central Bank of Kenya (CBK) have disclosed.
According to the Kenyan authorities, the IMF is eager to see final budget estimates for the upcoming 2025-26 fiscal year and accompanying revenue-raising measures before signing off on a new credit facility.
The conditions set by the IMF come after the government faced protests last year when it tried to expand taxes aggressively, indicating that a new deal with the institution could once again inspire public discontent.
Central Bank Governor Kamau Thugge said that missed revenue and budget consolidation targets were the key reasons for the abandonment of the previous IMF programme at its final review.
“The IMF would obviously want to see what is included in the budget. What kind of expenditure measures are in the budget, the kind of fiscal consolidation and revenue-raising measures included,” he said in an interview on the sidelines of the IMF 2025 Spring Meetings last week.
“Treasury missed the performance criteria on revenue and on the primary balance, and so by the time we had discussions with them, it would have been very difficult even to correct the missed targets by April 1. We, therefore, decided not to complete the review and start negotiations on a new EFF/ECF programme (Extended Fund Facility/Extended Credit Facility (ECF)” said Dr Thugge.
The ECF provides medium-term financial assistance to low-income countries with protracted external payments problems while the EFF provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address.
President William Ruto last June declined to assent to the Finance Bill 2024 after widespread protests targeting the raft of taxes that were approved in Parliament. The Bill had proposed to introduce a motor vehicle tax at an effective range of between Sh5,000 and Sh100,000 per vehicle, value-added tax (VAT) at 16 percent on bread and remove income tax exemption on income of a registered trust scheme, among others.
The botched revenue plans have left the National Treasury with gaping holes, forcing it drastically cut back on collection targets—a development that is likely cloud talks for new IMF cash.
For example, since July 2024, the Treasury has cut tax targets for the fiscal year ending June by Sh516 billion.
The government originally planned to collect Sh2.917 trillion in taxes when it unveiled the 2024/25 budget in June 2024, but has since reconsidered the ambitious target and lowered it by Sh516 billion. This cut represents 17.7 percent of the original collection target.
The IMF confirmed that it is ready to support Kenya as long as various issues, including budget discipline, are addressed.
“On Kenya, we have had a long-standing engagement over the years, and we continue to have such engagements going forward. As we noted the government has asked for a follow-on programme to try and address the remaining challenges,” said Abebe Sellasie, director of the African Department at the IMF.
“We are discussing how to do that, it’s good to see that the economy has been performing quite well in some parts, and the current account deficit is narrowing. There are quite a lot of strides. However, there are fiscal challenges, which are a significant part of the last programme’s objectives and that need to be addressed.”
The country signed up to the EFF/ECF programme against the backdrop of the Covid-19 pandemic which resulted in stretched budgetary requirements to cushion the economy from the impact of the shock and a lack of access to other forms of financing such as sovereign bonds.
Kenya missed out on Sh110 billion ($850.9 million) in new funding from the IMF when the fund pulled the plug on the programme signed off in April 2021 over failure to meet key parameters, which also include irregular spending of collections from the fuel levy and the lack of clear reforms for State-owned firms such as Kenya Airways.
A total of 11 conditions agreed upon between Kenya and the IMF were not met leading to the scrapping of the ninth review of the EFF/ECF programme.
The expiry of the facilities left Kenya with a budget financing gap which raises the prospect of more borrowings in the absence of spending cuts.
The IMF admitted at the time that the country was likely to miss performance targets related to the programme before its initial expiry date of April 1, 2025.
“The understanding regarding the ninth EFF/ECF reviews is based on the assessment of performance under the programme and reasonable prospects for forward-looking commitments to help achieve the programme’s objectives prior to its expiration,” said the IMF in a statement last month.
Kenya must convince the International Monetary Fund (IMF) that it can meet set revenue and spending discipline targets to unlock new funding from the Washington-based institution, the National Treasury and the Central Bank of Kenya (CBK) have disclosed.
According to the Kenyan authorities, the IMF is eager to see final budget estimates for the upcoming 2025-26 fiscal year and accompanying revenue-raising measures before signing off on a new credit facility.
The conditions set by the IMF come after the government faced protests last year when it tried to expand taxes aggressively, indicating that a new deal with the institution could once again inspire public discontent.
Central Bank Governor Kamau Thugge said that missed revenue and budget consolidation targets were the key reasons for the abandonment of the previous IMF programme at its final review.
“The IMF would obviously want to see what is included in the budget. What kind of expenditure measures are in the budget, the kind of fiscal consolidation and revenue-raising measures included,” he said in an interview on the sidelines of the IMF 2025 Spring Meetings last week.
“Treasury missed the performance criteria on revenue and on the primary balance, and so by the time we had discussions with them, it would have been very difficult even to correct the missed targets by April 1. We, therefore, decided not to complete the review and start negotiations on a new EFF/ECF programme (Extended Fund Facility/Extended Credit Facility (ECF)” said Dr Thugge.
The ECF provides medium-term financial assistance to low-income countries with protracted external payments problems while the EFF provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address.
President William Ruto last June declined to assent to the Finance Bill 2024 after widespread protests targeting the raft of taxes that were approved in Parliament. The Bill had proposed to introduce a motor vehicle tax at an effective range of between Sh5,000 and Sh100,000 per vehicle, value-added tax (VAT) at 16 percent on bread and remove income tax exemption on income of a registered trust scheme, among others.
The botched revenue plans have left the National Treasury with gaping holes, forcing it drastically cut back on collection targets—a development that is likely cloud talks for new IMF cash.
For example, since July 2024, the Treasury has cut tax targets for the fiscal year ending June by Sh516 billion.
The government originally planned to collect Sh2.917 trillion in taxes when it unveiled the 2024/25 budget in June 2024, but has since reconsidered the ambitious target and lowered it by Sh516 billion. This cut represents 17.7 percent of the original collection target.
The IMF confirmed that it is ready to support Kenya as long as various issues, including budget discipline, are addressed.
“On Kenya, we have had a long-standing engagement over the years, and we continue to have such engagements going forward. As we noted the government has asked for a follow-on programme to try and address the remaining challenges,” said Abebe Sellasie, director of the African Department at the IMF.
“We are discussing how to do that, it’s good to see that the economy has been performing quite well in some parts, and the current account deficit is narrowing. There are quite a lot of strides. However, there are fiscal challenges, which are a significant part of the last programme’s objectives and that need to be addressed.”
The country signed up to the EFF/ECF programme against the backdrop of the Covid-19 pandemic which resulted in stretched budgetary requirements to cushion the economy from the impact of the shock and a lack of access to other forms of financing such as sovereign bonds.
Kenya missed out on Sh110 billion ($850.9 million) in new funding from the IMF when the fund pulled the plug on the programme signed off in April 2021 over failure to meet key parameters, which also include irregular spending of collections from the fuel levy and the lack of clear reforms for State-owned firms such as Kenya Airways.
A total of 11 conditions agreed upon between Kenya and the IMF were not met leading to the scrapping of the ninth review of the EFF/ECF programme.
The expiry of the facilities left Kenya with a budget financing gap which raises the prospect of more borrowings in the absence of spending cuts.
The IMF admitted at the time that the country was likely to miss performance targets related to the programme before its initial expiry date of April 1, 2025.
“The understanding regarding the ninth EFF/ECF reviews is based on the assessment of performance under the programme and reasonable prospects for forward-looking commitments to help achieve the programme’s objectives prior to its expiration,” said the IMF in a statement last month.
