World Bank's and IMF's unseen hand in painful Sh3.6tr budget

In the run-up to the presentation of the controversial Kenya Kwanza administration’s inaugural Sh3.67 trillion national budget, top policy wonks at the State House and the National Treasury were keen to take a cue from global lenders.

The government planners had “no other option” but to implement the International Monetary Fund (IMF) and the World Bank programmes through the budget as a condition to revive the cash-starved economy through their generous but conditional bailouts. 

Financial Standard could not immediately reach IMF, the World Bank or State House for this article. 

But earlier, IMF and the World Bank had heaped rare praise on the government with the former particularly saying President William Ruto’s administration “has been taking very prudent measures both on the fiscal front and on the monetary policy side” to minimise fiscal risks.

“We see the government as very determined to be in a position of strength. What is the evidence? We have a programme and in the programme, there is an agreement tightening the fiscal side,” IMF Managing Director Kristalina Georgieva told The Standard in an earlier interview, alluding to the clearer painful taxation measures.

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“We have seen the budget that has been crafted exceeding that target. We are in very intensive discussions with the Central Bank on how it can help in retaining that position of strength.”

Kenya and both the IMF and the World Bank have agreed on lucrative loan programmes running into hundreds of billions of shillings to help support the cash-starved Kenya Kwanza administration.

It is betting on these multi-billion economic support packages to stabilise its finances.

The much-needed bailout packages from IMF and the World Bank are tipped to help the Ruto administration avert a potential debt default and economic collapse, amidst the persisting political and economic uncertainty, according to analysts.

But the conditional deals include strict austerity plans, including a controversial public sector pay freeze and increased taxes on fuel and key commodities.

Ballooning inflation, escalating borrowing costs, and a strong dollar have made repaying sovereign loans and raising money significantly more expensive for Kenya amid fears of default.

The cash shortage crisis has seen the government struggle to pay civil servants and disburse funds to the counties and schools.

Cost of living

The shilling has also weakened sharply against the dollar, piling further pressure on Kenyans amid a cost of living crisis that has plunged many into poverty and fuelled demonstrations.

Over time, IMF and the World Bank have been subject to a range of criticisms, generally focused on the conditions of their loans.

The criticism has been that their policies of structural adjustment and macroeconomic intervention can make an already difficult economic situation worse.

The recent budget is in line with IMF calls to see Kenya shrink its deficits - through tax hikes and spending cuts - in what various interest groups say will cause far more economic damage than experts had assumed.

President Ruto’s administration, which took over last September, has been under pressure to bring down the cost of living and some of the proposed tax measures have been questioned by various interest groups.

But in making the budget, the government was seen to face pressure to find a balance between reforms to satisfy IMF and the World Bank and measures to win over and shield hard-pressed consumers from the cost-of-living crisis, analysts said.

President Ruto has often signalled his government is ready to take the IMF’s bitter prescription to get the battered economy back on track.

“The cumulative IMF commitment to Kenya will amount to SDR (special drawing rights) 2.633 billion (about $3.52 billion or Sh485.7 billion) by April 2025,” said National Treasury Secretary Prof Njuguna Ndung’u in his budget speech in Parliament.

Prof Ndungu said money from institutions such as IMF is crucial to support the economy. “That’s why we are appreciative of the bilateral engagements,” he said.

Loan programme

Kenya’s IMF programme entered a fresh phase recently while the World Bank has agreed on a multi-billion-shilling loan programme with the Kenya Kwanza administration as it grapples with record inflation, fiscal imbalances and low reserves.

Teams from the Bretton Wood Institutions had met with President Ruto and officials from the National Treasury in the months preceding the budget day.

As expected, they prescribed another round of tax, governance and monetary policy reforms as part of their ongoing debt negotiations with the government.

It is these measures as presented in the budget that have now stoked fears of a return to painful measures that have resulted in civil servants losing their jobs and increased taxes.

Echoing IMF’s and World Bank objectives, President Ruto has, however, emphasised the need for the government to live within its means even as the Kenya Revenue Authority (KRA) comes under pressure to onboard more taxpayers into the tax net.

The new government has already done away with maize and the fuel subsidies that had been put in place by the previous regime, exposing Kenyans to a higher cost of living.

The prices of basic commodities rose to eight per cent in May from 7.9 per cent a month earlier, according to the Kenya National Bureau of Statistics (KNBS), with inflationary pressures expected to continue.

IMF had been against the fuel subsidy instituted by the Jubilee regime, terming it regressive.

It has maintained that subsidies must be more “targeted” to benefit the poor and not be a drain on State coffers.

Subsidising inputs

Rather than targeting assistance to consumers, the new administration, President Ruto has said, will seek to reduce food production costs and increase output by subsidising inputs such as fertiliser and quality seeds.

Treasury CS similarly told MPs that government-proposed spending and tax measures will reboot the struggling economy, which is battling record debt, and high energy and food prices.

He argued that the government has taken “the long-term sustainable approach of subsidising the production of goods instead of consumption to respond to the rising cost of living.”

“In this regard, the government has instituted immediate interventions that are aimed at providing short-term solutions to the high cost of living while at the same time building a momentum for the long-term economic vibrancy and transformation,” he said.

The budget presentation programme was earlier marked by controversy after MPs allied to the opposition alliance, Azimio staged a walkout in protest of the proposed budget.

The MPs led by Minority Leader Opiyo Wandayi booed Prof Ndung’u and walked out as soon as he started speaking.

Before the current arrangement, IMF had to cut short a programme it had with the previous Uhuru government for a stand-by facility after the latter failed to meet some of the conditions, including reducing its debt appetite.

The Ruto government has since rolled back all measures that were put in place to cushion Kenyans against the negative effects of the Covid-19 pandemic.

With inflationary pressures expected to continue, the cost of living, which has generally gone up, is expected to worsen, with many Kenyans still reeling from the negative effects of Covid-19, which saw a majority of them lose their livelihoods.