The IMF conundrum: risks and opportunities for Kenya on its increased engagement with the IMF.

  • 7 Aug 2023
  • 4 Mins Read
  • 〜 by Jewel Tete

Kenya’s relationship with the International Monetary Fund (IMF) has recently come under scrutiny as the country seeks to address its economic challenges and secure external financial support through the Resilience and Sustainability Fund. 

While partnering with the IMF offers opportunities for economic stabilisation and growth, the Fund’s display of support for the Finance Act 2023, against the backdrop of protests pointing to the increased cost of living, has ignited a hot-button issue amongst the public. This thorny dilemma cites concerns over the organisation’s conditionalities which have been widely criticised. 

Opponents of the fund contend that IMF policy prescriptions provide uniform solutions that are insufficiently adapted to the particular conditions of each nation. Overreliance on IMF loans could compromise Kenya’s economic sovereignty, subjecting key policy decisions to external influence. These standard, austere loan conditions reduce economic growth and deepen and prolong financial crises, creating severe hardships for the poorest people in borrowing countries and strengthening local antagonism to the IMF.


At the heart of the public’s opposition to the IMF’s involvement in Kenya’s economic affairs lies concerns echoing the potential ramifications of the proposed taxes on citizens’ wallets. Owing to what President William Ruto in his speech during the signing of the FY 2023/2024 ministerial performance contracts referred to as ‘endless cycles of unfulfilled pledges’, these tax reforms are interpreted by some as an opportunity to embezzle public funds, hence the retaliation. A troubling equation takes shape: increased taxes in the face of public distrust in government on one hand, stagnant incomes on the other, and the looming threat of reduced money in the pockets of ordinary Kenyans. In tandem with this enigma is the Government’s robust plan to bolster its revenue streams through increased taxes in pursuit of enhancing our financial capacity to accommodate the substantial Sh75 billion loan secured from the IMF. 


The dissatisfaction with these perceived burdensome reforms is likely to continue causing social unrest, putting a strain on the social fabric and further reducing public trust in the government. This inevitably casts a shadow of uncertainty over Kenya’s economy, triggering disruptions in economic activities, inhibiting investment, and deterring tourists. This volatile environment also inflicts long-term damage, as businesses curtail growth plans and public infrastructure deteriorates amid protests. 


The situation underscores the question of how to optimise our revenue collection mechanisms to service Kenya’s obligations to the IMF. The Finance Act 2023 ventures into the realm of progressive taxation models by raising the top personal income tax rate from 30% to 35%, targeting those with a monthly income of more than 500,000 shillings. Also worth mentioning in this discussion is the long-standing debate on the expansion of the tax base to cover the informal sector. Despite accounting for a hefty chunk of the total employment in the country, the shadow economy is neither taxed nor monitored by the government. This is of course owing to challenges related to the lack of capacity to address the gaps in data. 


In an attempt to drive fiscal innovation, the Finance Act 2023 has employed efforts towards this direction by roping in key players in the informal/unregulated space through the introduction of the Digital Asset tax and the digital content monetisation tax, among other tax measures. Formalising the informal sector offers a promising path. Policy transmissions regarding tax will gain precision from the wealth of data that formalisation ushers in. However, the ongoing social unrest challenges incentive towards tax compliance and creates a breeding ground for the reluctance of the informal sector to embrace formalization. 


The cost of living, as measured by the inflation basket, is significantly influenced by food prices. Kenya’s reliance on a limited range of staple foods makes its population susceptible to food price shocks, which can exacerbate inflation and contribute to economic instability. Promoting food and nutrition security reveals a potent solution to calm the turbulence of social unrest. This can be achieved through diversifying food options, which in turn enhances resilience against such shocks. Promoting agricultural diversification involves supporting farmers to cultivate a wider variety of crops. This can be realised through subsidies, access to credit, training, and the development of local markets. By investing in research and development for more resilient and nutritious crops, as well as the use of digital innovations in agriculture, Kenya will be set on the path towards achieving long-term food security. Furthermore, encouraging the consumption of indigenous crops can not only enhance food diversity but also support local economies and traditional knowledge systems.


The government can as well explore diversifying revenue streams through non-tax sources. By leveraging natural resources sustainably and promoting public-private partnerships, the country can make strides towards sustained economic growth and reduce vulnerability to economic shocks. However, the success of these efforts is interwoven with other critical aspects such as effective governance, transparency, and stakeholder participation. 


As Kenya charts its course through the intricacies of securing external financial support all while maintaining focus on the well-being of its citizens, the stage is set for the Kenya Kwanza Government to fulfil its mandate of ensuring the stewardship of resources will be responsible, transparent, and accountable. In his address during the ministerial contract signing, President Ruto reiterated his government’s dedication to dispelling public distrust by fulfilling the obligations of the Bottom-Up Economic Transformation Agenda. With a resolute stance on robust performance, quantifiable progress, and effective delivery, the government echoes its dedication to an accountable and responsive governance paradigm.