Kenya has reneged on the deal with the International Monetary Fund (IMF) after failing to meet key financial commitments under a $3.6 billion funding program.
The East African nation had agreed in 2021 to curb spending and increase tax collection as part of the deal, but the administration of President William Ruto has struggled to implement the required measures. The IMF has now called off its scheduled review of Kenya’s financial position, meaning a final $850 million payout will not be disbursed.
The government’s failure to meet its IMF obligations follows widespread domestic backlash against its tax policies. In 2023, Ruto’s administration attempted to introduce new levies to shore up public finances but was forced to backtrack after mass protests erupted across the country.
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The demonstrations, driven largely by young Kenyans frustrated with soaring living costs and dwindling economic opportunities, turned into one of the most significant challenges to Ruto’s presidency. The protests, which intensified in cities like Nairobi and Kisumu, saw thousands of citizens take to the streets in defiance of the proposed Finance Act, which sought to introduce new taxes on essential goods and services.
The unrest escalated as security forces clashed with demonstrators, leading to violent confrontations that resulted in multiple fatalities. Reports indicate that dozens of young Kenyans lost their lives in the protests, either due to direct police action or chaotic stampedes as security forces sought to disperse crowds.
The killings triggered further outrage, with many accusing the government of using excessive force to silence dissent. Ruto’s administration, which initially defended the tax measures as necessary for economic stability, found itself on the defensive as public anger mounted. The scale of the backlash ultimately forced the government to rescind key elements of the Finance Act, marking a significant policy retreat.
Ruto, acutely aware of the political damage caused by his handling of the protests, now faces a delicate balancing act. With an eye on re-election in 2027, he appears cautious about further antagonizing the public. His administration’s decision to abandon the tax hikes and default on IMF commitments suggests a strategic pivot aimed at restoring public favor. However, the move comes at a cost. Kenya now faces financial uncertainty, with the IMF withdrawing a crucial tranche of funding and global investors growing increasingly skeptical about the government’s ability to manage its debts.
To bridge the widening budget deficit, Ruto’s administration has sought alternative sources of funding. Kenya recently secured a $1.5 billion loan from the United Arab Emirates (UAE), which, while providing temporary fiscal relief, raises concerns about the country’s growing dependence on external borrowing. The UAE deal also exposes Kenya to foreign exchange risks, potentially worsening the nation’s debt burden. Additionally, the government has restructured a Eurobond, extending its maturity by 11 years to ease immediate repayment pressures. However, such measures are merely stopgaps, and experts warn that Kenya’s financial position remains precarious.
The financial markets have responded negatively to the IMF’s withdrawal. The Kenyan shilling has weakened significantly, and the country’s foreign debt has seen a selloff, reflecting investor fears about the long-term sustainability of Kenya’s fiscal policies. Analysts caution that any alternative funding arrangement that fails to enforce strict financial discipline could further erode investor confidence, increasing borrowing costs for the country.
To mitigate the risks of further economic instability, Ruto has also sought to stabilize his political standing by striking a power-sharing agreement with his main rival, Raila Odinga. The pact is expected to help the government push budgetary measures through parliament with less resistance, ensuring smoother governance in the run-up to the next elections. However, it remains uncertain whether Ruto will be willing to implement another round of controversial economic reforms before 2027, given the political risks involved.