The International Monetary Fund (IMF) has urged Kenya to carefully balance the introduction of new tax measures aimed at boosting revenue with managing its growing debt. The IMF cautioned that while new taxes are necessary to address budget shortfalls, their introduction could provoke public unrest, as seen in the June 2024 nationwide protests triggered by controversial tax proposals in the Finance Bill.
The IMF report highlights the complex balancing act Kenya faces: raising domestic revenue to sustain crucial spending in priority sectors while also meeting substantial debt obligations. The Fund warned that significant cuts to development expenditure could lead to the stalling of key projects, risking penalties and inflating project costs beyond their original budgets.
To restore public trust, the IMF emphasized the importance of transparency and effective governance. The organization commended Kenya’s fiscal discipline efforts following the Finance Bill’s withdrawal, which included austerity measures aimed at addressing a budget deficit of Sh346 billion. The country’s economy remains “resilient,” according to IMF First Deputy Managing Director Gita Gopinath, with growth above regional averages and external inflows supporting the shilling.
The IMF noted that recent spending cuts in Kenya’s FY2024/25 budget are largely stop-gap measures, many of which are temporary and will likely need adjustment. Moving forward, the Fund advised reallocating resources to bolster social safety nets and poverty alleviation programs. Additionally, it warned against drastic cuts to development spending, which may hinder economic growth and undermine debt management strategies.
Kenya’s difficult fiscal position is compounded by a history of exogenous shocks, such as the COVID-19 pandemic, adverse global economic trends, and severe droughts, which have all challenged its ability to meet spending needs. In response, the government has attempted to increase revenue while curbing expenditures, yet struggles with mounting pending bills and constrained development funding. The IMF recommends that Kenya’s fiscal strategy include expanded domestic revenue mobilization under the Medium-Term Revenue Strategy (MTRS), with measures to streamline recurrent spending and improve efficiency.
In October, the IMF approved a Sh78 billion loan for Kenya, highlighting the need to continue efforts toward fiscal consolidation while addressing significant risks. The IMF underscored the need for fiscal transparency and accountability, along with timely identification of contingency measures to mitigate economic pressures.
