Over the past decade, Kenya’s economic trajectory has been a delicate balance between growth aspirations and mounting fiscal constraints. With the expiration of the International Monetary Fund’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF) set for April 2025, Kenya faces a pivotal moment in its macroeconomic landscape. This signals the need for the country to reassess its fiscal policies, debt management, and growth strategies moving forward.

Rising debt: A national concern

As of January 2025, Kenya’s total debt stood at Ksh 11.02 trillion, with Ksh 5.93 trillion in domestic debt and Ksh 5.09 trillion in foreign debt, according to Cabinet Secretary for National Treasury and Economic Planning John Mbadi. While debt is a typical tool for financing growth, Kenya’s growing fiscal imbalance and narrow tax base have cast doubt on the sustainability of its debt profile. The government, reliant on external and domestic borrowing, faces a precarious situation: increasing reliance on debt to finance deficits while also grappling with declining domestic revenue collections.

The IMF’s programmes—specifically the EFF and ECF—have provided essential concessional financing that allowed Kenya to weather fiscal storms and maintain macroeconomic stability. However, as these programmes near their conclusion, the fiscal challenges Kenya faces are more pronounced. The most recent Ninth Review Meeting indicated a mutual agreement to end these programmes, with the government and the IMF expressing the need for a new arrangement.

According to the 2025 Budget Policy Statement, Kenya continues to grapple with a persistent budget deficit, projected to reach 5.4% of GDP in 2025. This enduring gap between revenue and expenditure reflects broader structural issues, including inefficiencies in public spending, corruption, and a weak tax system. Kenya’s external debt is heavily influenced by loans from multilateral institutions, such as the IMF and World Bank, as well as bilateral creditors, including China. The continued rise in external debt has increased concerns about the country’s ability to meet its obligations without stifling economic growth or exacerbating poverty. Moreover, the recent downgrades from international credit rating agencies signal waning investor confidence in the country’s fiscal outlook.

Implications of IMF’s programmes expiration

The conclusion of the IMF’s EFF and ECF marks a turning point for Kenya. These programmes, designed to stabilise the country’s macroeconomic environment, provided Kenya with financing at more favourable terms than those available in the commercial loan market. Their cessation will leave Kenya with greater challenges in managing its fiscal policies and securing external financing on reasonable terms.

The most immediate consequence of this exit is the loss of concessional financial support. Without the IMF’s assistance, Kenya may turn to more expensive commercial loans or return to the Eurobond market, with higher borrowing costs. These alternatives would increase the country’s debt burden and place additional pressure on its budget.

Additionally, the U.S. administration’s freeze on foreign aid, including funding from USAID, has compounded Kenya’s fiscal difficulties. Foreign aid has historically supported crucial public services and development projects, and its reduction further limits the government’s fiscal space. This forces the government to reprioritise spending, potentially cutting back on vital sectors such as health, education, and infrastructure.

The IMF programmes have also incentivised significant structural reforms in governance, public financial management, and state-owned enterprises (SOEs). These reforms were conditional for receiving IMF financing and have helped mitigate fiscal waste. With the programmes ending, these reforms are at risk of stalling, potentially allowing inefficiencies and corruption to persist, especially in SOEs, which are a significant drain on government resources.

Exploring a new IMF programme: What options exist?

With the expiration of the current programmes, Kenya is already engaged in discussions with the IMF regarding a new agreement. Although the new programme’s details remain unclear, several potential directions could be pursued to navigate the country’s economic challenges.

1. Policy-driven programme with structural reform focus

A new IMF arrangement might focus more on structural reforms rather than the financial-centric programmes of the past. Experts speculate that the IMF may prioritise reforms to improve the domestic economy, particularly by enhancing the efficiency of state-owned enterprises (SOEs) and expanding domestic revenue mobilisation.

Reforming SOEs has long been a priority due to inefficiencies and corruption within these entities. Restructuring them could free up valuable resources for debt servicing and development. The IMF could push for privatisation or restructuring of SOEs to reduce public expenditure, building on existing government initiatives.

Additionally, a new program could emphasise tax reforms, a critical area for Kenya’s fiscal health. The country’s tax-to-GDP ratio remains among the lowest in the region, hindered by excessive tax exemptions and a limited tax base. A new IMF arrangement could include broadening the tax base, improving compliance, and rationalising tax exemptions, complementing the government’s fiscal consolidation efforts.

1. Debt restructuring or reprofiling

Given the country’s escalating debt, the government might consider pursuing debt restructuring or reprofiling as part of a new IMF agreement. This could involve negotiating with creditors to extend loan maturities or reduce interest rates, as the Eurobond did. If successful, this could alleviate some of the fiscal pressure, freeing up funds for critical public services and development.

However, debt restructuring is not without risks. Creditors may be reluctant to offer favourable terms, especially if they believe the country’s fiscal management is unsustainable. Additionally, debt reprofiling could damage Kenya’s creditworthiness, making future borrowing more expensive.

1. Private sector-led growth and foreign direct investment

A more optimistic path could involve increasing engagement with the private sector and attracting foreign direct investment (FDI). Kenya has long sought to boost FDI, particularly in manufacturing, energy, and infrastructure sectors. A new IMF programme might focus on creating a more favourable business environment, addressing regulatory bottlenecks, and reducing corruption to stimulate private sector investment.

While promising, this approach requires significant reforms to enhance the ease of doing business, reduce capital costs, and boost investor confidence.

Is there hope? Insights from the 2025 Budget Policy Statement

The 2025 Budget Policy Statement (BPS) outlines strategies to address Kenya’s fiscal imbalances. The BPS aims to reduce the fiscal deficit to 4.5% of GDP by 2025 despite rising debt levels and dwindling foreign aid. Key strategies include tax modernisation initiatives and public expenditure streamlining. These reforms are designed to enhance revenue collection, reduce inefficiencies, and address wasteful government spending.

If effectively implemented, these reforms could create the fiscal space necessary for Kenya to navigate its economic challenges without resorting to harmful austerity measures. However, the country’s history of ambitious policy declarations struggling to materialise due to corruption, institutional weaknesses, and political instability raises concerns about the potential for successful implementation.

Conclusion: Striking a balance

As Kenya approaches this critical juncture in its economic trajectory, the country faces the difficult task of ensuring fiscal sustainability while meeting the population’s demands for essential services and economic opportunities. The expiration of IMF support and the freeze on foreign aid have created a tight fiscal environment with limited room to manoeuvre.

To navigate these challenges, the government must prioritise deep structural reforms, particularly in SOE management, tax collection, and public expenditure. The 2025 Budget Policy Statement provides a roadmap for fiscal consolidation, but political will and effective implementation will be essential to steer Kenya towards a more resilient and diversified economy.