The International Monetary Fund (IMF) has raised concerns about Kenya’s rising public debt, cautioning the government against further borrowing without a comprehensive fiscal strategy. During a virtual Q&A session on Thursday, IMF Communications Director Julie Kozack emphasized that Kenya remains at high risk of debt distress, necessitating prudence in its financial decisions.
Kozack’s remarks come amid reports of the Kenyan government considering a $1.5 billion loan facility from the United Arab Emirates (UAE). While she refrained from commenting on the specifics of the proposed deal, Kozack underscored the critical balance Kenya must strike between addressing its immediate fiscal needs and reducing its debt vulnerabilities.
“We assess Kenya to have a high risk of debt distress,” Kozack stated. “Any new borrowing should be carefully evaluated within a comprehensive fiscal strategy to address both existing and emerging fiscal challenges.”
Rising Debt and Rejected Tax Proposals
Kenya’s public debt has grown to approximately KSh 10.6 trillion as of July 2024, with a domestic debt stock of KSh 5.41 trillion. For the 2024/25 fiscal year, the debt service obligation is projected at KSh 1.85 trillion, comprising KSh 843.4 billion for debt redemption and KSh 1.1 trillion for interest payments.
The government’s earlier attempt to expand its revenue base through the Finance Bill 2024 was met with widespread rejection. Protests led by Generation Z in mid-June and early July forced President William Ruto to withdraw the controversial bill, which had been expected to generate KSh 340 billion.
This public resistance has left the government with limited options, leading to a renewed focus on external borrowing despite warnings from the IMF. Attempts to introduce new tax measures have already sparked public outrage, complicating the government’s efforts to stabilize the economy.
IMF’s Conditions for Borrowing
The IMF has advised Kenya to implement several reforms to address its fiscal challenges and meet borrowing conditions. These include:
- Increasing tax revenues: By broadening the tax base and enforcing compliance.
- Reducing subsidies: Especially in non-priority areas to curb spending.
- Cutting government waste: Ensuring efficient use of public resources.
- Enhancing transparency and governance: Strengthening oversight mechanisms.
- Reforming state-owned enterprises: To improve their financial sustainability.
- Fiscal consolidation: Balancing revenue growth with controlled expenditure.
Kozack highlighted that policymakers in Kenya, as in other regions, face a complex challenge of meeting spending priorities such as health, education, and social programs while managing the debt burden.
IMF Engagements with Kenya
The IMF remains actively engaged with Kenyan authorities on these fiscal issues. Deputy Managing Director Nigel Clarke is scheduled to visit Nairobi from December 9 to 10 for discussions with government officials and key stakeholders. Updates on these engagements are expected to provide further insights into Kenya’s path forward.
A Delicate Balancing Act
Kenya’s economic outlook, while showing potential for improvement, remains vulnerable to shocks. Additional borrowing without structural reforms could exacerbate the situation, risking further debt distress. Analysts warn that continued reliance on debt will likely strain the country’s finances, especially given the high cost of servicing existing obligations.
As the government weighs its next steps, the IMF’s message is clear: any financial decision must align with a well-structured fiscal strategy that prioritizes economic stability and sustainable development.
