(Bloomberg) -- An International Monetary Fund team is in Kenya to gauge the economic impact of a recent court ruling on tax measures and an expanded budget deficit that threw off course a $3.6 billion financing program.
The visit is “a fact-finding mission, and as part of our ongoing and constructive dialog with the Kenyan authorities to find a balanced path forward,” Julie Kozack, an IMF spokesperson, said at a briefing on Thursday.
The timing of the East African nation’s next loan review and payment was thrown off schedule when Kenyans took to the streets in protests against planned taxes that left more than 60 people dead. The government has been forced to widen its budget deficit by 28% after dropping those contentious revenue measures.
The next IMF review is expected to unlock about $600 million, according to Central Bank of Kenya Governor Kamau Thugge.
The lender said last week it’s reviewing the impact on the Kenyan economy of a court ruling that invalidated a set of taxes introduced in 2023 before it approves a disbursement. Quashing that set of levies — which include doubling value-added tax on fuel to 16% — will slash revenue by about 214 billion shillings ($1.66 billion), according to the Treasury.
The IMF is also analyzing the impact of President William Ruto’s decision to abandon another bunch of unpopular tax measures that led to protests and would have raised about $2.7 billion for the current fiscal year. As a result, the government now expects a wider fiscal gap at 4.3% of gross domestic product, compared with an initial estimate of 3.3% when it presented its spending plan in June.
Balancing Act
All three major credit-rating companies have lowered their assessment of the nation’s debt deeper into junk, citing the government’s diminishing capacity to raise revenue. Kenya is at high risk of debt distress and reducing that vulnerability is a central objective of the IMF program. Some of the program’s reforms are aimed at scaling back the accumulation of new debt and reducing deficits.
Kenya’s situation reflects broader challenges facing many other economies on the continent, according to the IMF’s communications director. The nations have to balance the need to spend on priority areas such as health and education, with managing public debt.
“Policymakers in the region, including in Kenya, face a complex balancing act,” Kozack said. “The goal of the program is to help establish sound macroeconomic fundamentals, which we see as crucial for fostering sustainable and inclusive growth, as well as for generating jobs, especially for young Kenyans.”
The fund has faced criticism over the perceived rigidity of the economic prescriptions that accompany its bailouts, including in Kenya. Protesters also raised questions over government corruption, which made the proposed tax increases yet more bitter.
“The program includes initiatives to improve governance and transparency and to ensure the proper use, ensure the responsible use of public funds,” said Kozack. “But it is also important that these policies go through a process of broad consultation so that they can gain the necessary public support, and we’re currently working with the authorities to ensure that the objectives of the program can be met.”
--With assistance from Matthew Hill.
(Updates with comment from the ninth paragraph.)
©2024 Bloomberg L.P.