IMF may delay approval of fresh funding to Kenya

An exterior of the International Monetary Fund (IMF) headquarters in Washington, DC.  

Photo credit: File | AFP

The International Monetary Fund (IMF) might push back its board approval of fresh funding to Kenya following the withdrawal of the controversial Finance Bill 2024, which has prompted the multilateral lender to review its projection of the country’s spending and revenue targets.

The IMF Executive Board had been expected to hold a meeting on Friday, July 12 to complete the seventh Extended Credit Facility and Extended Fund Facility and the second review under the Resilience and Sustainability Facility and approve its latest disbursement to Kenya thereafter.

But multiple sources close to the IMF Mission in Kenya said the meeting is now unlikely to take place against the backdrop of talks on fresh revenue-raising measures.

A review yesterday of the IMF Executive Board Calendar, which runs up to July 17, showed the meeting had not been scheduled.

The board calendar could, however, change as the agenda for each meeting is normally finalised a day prior.

The withdrawal of the Finance Bill 2024 is set to force the review of targets for future disbursements by the IMF, including the primary budget balance of the national government and tax revenue.

The primary budget balance describes the difference between the government’s revenue and its non-interest expenditures.

The ninth review of the programme in March 2025 and the final disbursement from the IMF will be based on fiscal (primary balance and tax revenues) targets agreed upon between the multilateral lender and Kenyan authorities that cover the period between July 1 and December 31, 2024.

The IMF is expected to disburse a total of Sh124.4 billion ($968.69 million) between July this year and the end of the programme in April next year. Kenyan authorities and the IMF are expected to agree on new fiscal targets covering the period to December 31, 2024, after the adoption of a new fiscal framework for the 2024/25 fiscal year which will outline a revised fiscal deficit and tax revenue target.

Tax revenues are projected to drop to Sh2.51 trillion after the withdrawal of new revenue-raising measures which had been expected to yield Sh346 billion in collections.

President William Ruto on Friday noted that the planned expenditure cuts would only realise Sh177 billion in savings, leaving a hole of Sh169 billion to be plugged through higher than previously planned borrowing.

The 2024/25 fiscal deficit is expected to rise from the approved Sh597 billion to Sh766 billion or 4.6 percent of GDP from 3.3 percent previously.

“Cutting the entire amount would significantly and drastically affect the delivery of critical government services, while borrowing would increase our fiscal deficit by a margin that would have significant repercussions on many other sectors, including interest rates and exchange rates,” he said.

“We have since struck a middle ground and will be proposing to the National Assembly a budget cut of Sh177 billion and borrow the difference.”

IMF funding is customarily based on the compliance with conditions that extend beyond just deficit and tax revenue targets to targets on public debt, foreign exchange reserves, and inflation. Kenya had been projected to keep the primary budget balance of the national government at a surplus of Sh156.2 billion while raising Sh1.28 trillion in taxes between July and December 2024.

The government was also expected to spend at least Sh258 billion on social expenditures while keeping the inflation rate between 2.5 and 7.5 percent.

Kenya has additional non-quantitative targets to meet in the next six months, including the publishing of a report consisting of a comprehensive assessment of the national government’s continued involvement or investment in State corporations.

The IMF completed the seventh review of its multi-year programme with Kenya on June 11.

The multilateral lender highlighted developments, including the rebound of the agriculture sector, the deceleration of headline inflation, and the calming of refinancing risks associated with the June 2024 Eurobond maturity following a partial buyback.

The IMF, however, warned of the impact of the underperformance of tax revenue targets and asked for corrective measures which would have included new taxation measures in the Finance Bill 2024.

“Despite these positive developments, a significant shortfall in tax revenue collection and deterioration in the primary fiscal balance in the financial year 2023/24 relative to programme targets is expected to keep domestic borrowing needs elevated. As a result, interest payments have increased, putting pressure on public debt even after the latter benefited from a strengthened shilling,” IMF Mission Chief to Kenya Haimanot Teferra said in June.

“A sizable and upfront fiscal adjustment in the financial year 2024/25 will be needed to correct the course. To this end, the authorities have taken decisive steps towards fiscal consolidation by introducing several measures in the context of the draft 2024/25 Budget and the 2024 Finance Bill.”

The IMF did not specify the size of the disbursement expected at the end of the seventh review of the programme but was previously expected to make its largest remaining release to Kenya in its next approval this month.

New tax measures contained in the Finance Bill 2024 had been expected to further improve fiscal consolidation while anchoring Kenya’s fiscal target under its programme with the IMF.

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