Kenya misses International Monetary Fund review, leading to cancellation of $850M funding release
Kenya's attempt to boost tax revenues through amendments to its 2023 Finance Act, including a controversial 3% digital asset tax (DAT) on cryptocurrency transactions, sparked widespread violent protests in the country. However, the Kenyan government withdrew the digital asset tax amendment pending a judicial hearing, following last year's Supreme Court ruling that upheld the digital asset tax amendments as constitutional.
In 2021, Kenya secured a $2.34B Extended Credit Facility (ECF) and Extended Fund Facility (EFF) from the International Monetary Fund (IMF). The funds were aimed at aiding countries with budget deficits. However, Kenya failed to meet the IMF's conditions for the next disbursement, including reducing the fiscal deficit and increasing revenue. As a result, Kenya failed to receive the ninth disbursement of its $850 million IMF EFF/ECF programs.
The IMF demands specific economic policies from countries before allocating funds on a progressive basis. The World Bank also froze a related $750 million loan disbursement tied to Development Policy Operations (DPO) for similar reasons—failure to execute key policy reforms.
The implications for Kenya’s potential new deal with the IMF include potential delays or increased conditionality for any new IMF funding. The Fund typically requires demonstrable progress in governance, fiscal reforms, and debt management before approving new disbursements or programs.
Kenya will also face heightened scrutiny of its debt strategy, especially given Moody’s recent warnings about Kenya’s heavy domestic borrowing and unsustainable debt servicing, which adversely affect creditworthiness and fiscal sustainability. This increased scrutiny could lead to increased pressure on Kenya to improve financial management reforms, enhance revenue collection, and contain expenditure.
Poor fiscal structure and governance jeopardize confidence from international partners and investors, which could result in a possible tightening of budget support and financial aid from multilateral partners until Kenya fully meets reform conditions. This could impact Kenya’s fiscal space and development projects.
In summary, Kenya’s failure to meet the IMF program's conditions halted the ninth disbursement under the existing $850M EFF/ECF programs. This has complicated prospects for a new IMF deal, which will likely require Kenya to demonstrate stronger commitments to fiscal reforms, debt sustainability, and governance improvements before fresh funding is released.
- The Kenyan government, met with the challenge of securing additional funds after failing to meet IMF conditions, might consider looking towards alternative sources, such as the crypto finance sector, for revenue generation, given the recent withdrawal of the digital asset tax amendment from the 2023 Finance Act.
- Amidst the obstacles faced in securing funds from traditional sources, the Kenyan business sector, including general-news outlets and political entities, may advocate for more lenient tax policies on crypto transactions to boost tax revenues, as seen in the protests sparked by the initial digital asset tax amendment.
- As Kenya navigates its challenging financial situation and seeks to regain the approval of international financiers, it could face increased scrutiny and pressure regarding its general financial management, particularly in light of recent controversies like the digital asset tax amendment and the regulatory framework around cryptocurrencies in the finance sector.
