IMF review fallout: Kenya misses out on $850M installment due to non-compliance
Kenya's financial situation has taken a turn for the worse, with the country failing to receive the ninth disbursement of its extended fund facility (EFF) and extended credit facility (ECF) programs with the International Monetary Fund (IMF). The primary reason for this delay is Kenya's failure to implement key governance and economic reforms demanded by the IMF and other international lenders, including the World Bank.
The IMF's Extended Credit Facility (ECF) program is designed for countries that spend more than they generate in revenue and need to borrow to finance their budget. In 2021, Kenya secured approval for a $2.34B ECF and Extended Fund Facility (EFF) from the IMF to navigate COVID-19-induced economic strains. However, the Kenyan government has yet to meet the IMF's requirements to qualify for the next disbursement.
One of the critical reforms required by the IMF is the slashing of Kenya's fiscal deficit and ramping up revenue-raising measures. This includes raising taxes, such as the controversial 3% digital asset tax (DAT) on cryptocurrency transactions, which was introduced in amendments to the 2023 Finance Act. The DAT sparked widespread violent protests, forcing the Kenyan government to withdraw the act pending a judicial hearing. Despite the withdrawal, the DAT remains a contentious issue in Kenya.
The IMF also demands specific economic policies from countries before allocating funds on a progressive basis. However, Kenya's failure to pass the Conflict of Interest Bill, the lack of a Single Treasury Account, and delays in adopting an electronic procurement system are significant obstacles in the way of meeting these requirements. These governance issues are critical prerequisites for the World Bank's frozen $750 million loan, which is linked to the IMF program.
The Conflict of Interest Bill, when passed, aims to enhance transparency and governance accountability. However, its non-passage has created concerns about these very issues. Moreover, Kenya has multiple unauthorized bank accounts at county governments—some counties reportedly having over 200 accounts—which undermines fiscal discipline and accountability. The Central Bank of Kenya lacks a direct mandate to compel county governments to close these unauthorized accounts, creating a significant structural loophole enabling potential embezzlement.
Last year, the Kenyan Supreme Court upheld the amendments as constitutional and okayed the implementation of the law. However, the withdrawal of the Finance Act amendments, including the DAT, is still pending a judicial hearing. The delay in implementing these reforms has further complicated Kenya's financial situation and undermined confidence in the country’s reform progress.
In summary, Kenya’s failure to secure the ninth IMF disbursement arises from insufficient progress on mandated governance reforms—especially the conflict of interest legislation, treasury account rationalization, and procurement system modernization—leading to suspended financial support from both the IMF and World Bank as reported by Bloomberg. The delay in implementing these reforms has placed Kenya in a precarious financial position, with the frozen World Bank funding further complicating the country's financial situation.
- The digital asset tax (DAT) on cryptocurrency transactions, a revenue-raising measure, was introduced in Kenya but faced controversy and was later withdrawn, causing the IMF's Extended Credit Facility (ECF) program disbursement to remain delayed.
- Apart from the DAT, Kenya's failure to pass the Conflict of Interest Bill, the lack of a Single Treasury Account, and delays in adopting an electronic procurement system are additional obstacles hindering the country from meeting the IMF's requirements, potential embezzlement, and undermining fiscal discipline.
- The suspended financial support from both the IMF and World Bank, due to Kenya's inability to implement necessary governance and economic reforms, places the country in a precarious financial position, with the frozen World Bank funding further adding to its complications.
