Brace for IMF bitter medicine as Kenya inks another Sh103b loan

The IMF urged the government to cut down on public spending, ban fuel and food subsidies, and impose higher taxes, which could potentially impact public employment and cost of living. [iStockphoto]

Kenya is preparing to get another International Monetary Fund (IMF) loan worth Sh103 billion, signalling the arrival of yet another round of the global lender’s tough austerity measures.

The IMF has asked the Ruto government to administer another round of its famous bitter medicine of austerity measures meaning Kenyans should brace themselves for a more difficult economic period ahead.

The IMF urged the government to cut down on public spending, ban fuel and food subsidies, and impose higher taxes, which could potentially impact public employment and the cost of living, especially amidst the current unemployment and economic crises.

The global lender outlined its fresh tough demands in a statement following the successful negotiation between its staff and the Kenyan authorities.

This agreement will result in the release of about Sh103 billion in a fresh loan for the Kenya Kwanza administration.

The funds will be a relief for the government in its efforts to cut its fiscal deficit amid increasing pressure to repay foreign rising debt.

The shilling’s rapid depreciation against the dollar is swelling Kenya’s debt by billions daily, and the IMF cash will boost the country’s forex reserves and ease the pressure. To secure the conditional funding, the IMF asked Kenya to implement additional tax hikes and reduce public expenditure.

This is aimed at alleviating the mounting debt repayments, said IMF, but the move is expected to place an additional burden on the already financially strained Kenyans, analysts said.

Economic crisis

The IMF suggests that Kenya must prioritise reducing government expenditures and increasing tax revenues to prevent a potential economic crisis caused by excessive debt. “A tighter fiscal stance is envisaged under the programme to help reduce debt vulnerabilities and achieve a PV debt/GDP of 55 per cent, the authorities’ debt anchor, by 2029,” said IMF mission chief to Kenya Haimanot Teferra, in a statement yesterday.

“This will entail timely implementation of reforms to broaden the domestic tax base and improve tax compliance.”

“These are critical for achieving the authorities’ revenue objectives of reversing the trajectory of the tax revenue-to-GDP ratio while promoting equity and fairness in the tax regime.”

The recommended restructuring by the IMF is expected to result in job losses at state corporations such as Kenya Airways and Kenya Power, as per their reform demands.

“Expenditure rationalization will need to continue, with a focus on enhanced efficiency of public investments, better targeting of subsidies and transfers, addressing weakness in state corporations, and digital delivery of public services,” said the IMF.

“The social safety nets and fiscal risk management framework need to be further enhanced.”

The approval and consideration of the agreement by the IMF Executive Board is anticipated to take place in January next year.

Immediate access

Following the completion of IMF’s sixth review, Kenya will be granted immediate access to $682.3 million (Sh103 billion), bringing total IMF financial support disbursed under recent arrangements to Kenya to $2.68 billion or Sh407 billion.

With the implementation of the new IMF programme and the anticipation of ongoing inflationary pressures, the cost of living is projected to go up even further. This is particularly concerning as Kenyans are grappling with the adverse effects of the Covid-19 pandemic, which resulted in the loss of their means of sustenance.

Amid pressure to bring down the cost of living, the government has shown a strong interest in implementing new tax increases rattling even its support base. 

The IMF prescription of another round of tax, governance and monetary policy reforms is now likely to stoke further fears of another return to painful measures that have resulted in civil servants losing their jobs and increased taxes.

The IMF contends that numerous publicly-owned institutions are currently overstaffed, and in certain instances, employees are receiving excessive compensation.

A weakening shilling has also triggered fears of a fresh round of inflationary pressure, which is set to become a political headache for the government.

The shilling has fallen steeply, setting up the country for more expensive imports, electricity and debt servicing distress.

With no external funding and only costly debt available, the government says its hands are tied and the country is left with few options.