Kenya Set to Resume Critical IMF Negotiations in February Following Programme Collapse and Mounting Fiscal Pressures

Kenya is poised to resume high-stakes negotiations with the International Monetary Fund in February 2026, marking a critical attempt to secure a new funding arrangement following the collapse of its previous $3.6 billion programme in March 2025. The renewed engagement, confirmed by National Treasury officials, represents a cautious but essential effort by Kenyan authorities to restore confidence with international lenders while navigating severe fiscal pressures, escalating public debt, and growing concerns about long-term debt sustainability.

According to Raphael Owino, Director General of the Public Debt Management Office at the National Treasury, IMF staff are expected to return before the end of February to continue discussions that had originally been scheduled for January but were postponed to allow for additional internal consultations. The delay underscores the complexity of negotiations and the need for both parties to align on reform priorities and conditionalities before proceeding with formal programme discussions.

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The Collapse of Kenya’s Previous IMF Programme

Kenya’s previous IMF arrangement, a multi-year extended fund facility and extended credit facility approved in 2021, effectively collapsed in March 2025 after Nairobi failed to meet most agreed performance targets. The Fund withheld approximately Sh109.7 billion ($850.9 million) in financing after Kenya missed 11 of 16 conditions, including critical fiscal and structural reform benchmarks that had been established as prerequisites for continued financial support.

The missed targets encompassed a wide range of policy areas, reflecting systemic challenges in Kenya’s governance and fiscal management. Delays in restructuring Kenya Airways—the national flag carrier that has struggled with persistent losses and debt accumulation—represented one significant failure. The government had committed to implementing a comprehensive restructuring plan for the airline, but political resistance and competing priorities resulted in implementation delays that violated IMF conditions.

Misappropriation of the fuel stabilization fund constituted another serious breach of programme conditions. The fund, designed to cushion consumers from volatile international oil prices, was allegedly diverted for other government expenditures, undermining fiscal transparency and raising questions about Kenya’s commitment to sound public financial management. This violation particularly concerned IMF officials given the importance of fiscal discipline to debt sustainability.

Missed tax reforms further complicated Kenya’s programme compliance. The government had committed to implementing measures to broaden the tax base, improve collection efficiency, and increase revenue as a share of GDP. However, political opposition to specific tax proposals, administrative capacity constraints, and weak enforcement mechanisms resulted in revenue collection falling short of targets, widening fiscal deficits beyond agreed limits.

Failure to curb spending and clear supplier arrears represented additional areas of non-compliance. Despite commitments to fiscal consolidation, government expenditure continued exceeding budgeted levels, driven by political pressures, wage demands from public sector unions, and development spending commitments. Simultaneously, the stock of pending bills and supplier arrears—money owed to contractors and service providers—continued accumulating rather than being systematically cleared as required under the programme.

The outcome meant that Kenya, which was in line to receive several hundred million dollars in disbursements during the final year of the programme, had to reorganize its financing plans. In the 2025/26 budget, the Treasury deliberately excluded anticipated IMF financing to manage public expectations, even as negotiations continued behind the scenes to salvage the relationship and develop a successor arrangement.

Recent Assessment Mission and Programme Request

IMF staff last visited Kenya between September 25 and October 9, 2025, conducting an economic assessment and engaging in early discussions about potential reform priorities under a new programme. During this mission, Fund officials evaluated Kenya’s macroeconomic performance, fiscal position, debt sustainability, and structural reform implementation capacity while no new programme had been finalized.

Kenya has formally requested a new IMF-supported program, and preliminary discussions are underway according to the Fund’s official communications. The IMF indicated it is working with Kenyan authorities to review recent developments and update the macroeconomic assessment while awaiting details on the government’s priorities for any new arrangement.

The forthcoming February mission will focus on several critical areas including conducting a comprehensive debt sustainability analysis—a technical assessment that examines whether Kenya can service its debt obligations without requiring relief or restructuring. This analysis will be crucial in determining the size, structure, and conditions of any potential new programme.

Additionally, negotiations will address outstanding issues around securitization of government assets and loans, a contentious topic during previous discussions. The IMF has raised concerns about loan securitization and whether such securitized obligations should be classified as public debt, with implications for debt stock calculations and sustainability assessments.

Escalating Debt Burden and Fiscal Pressures

Kenya’s decision to pursue new talks with the IMF comes amid heightened fiscal pressure and a public debt burden that has reached alarming levels. Public debt stood at Sh12.04 trillion by September 2025, crossing the psychological Sh12 trillion threshold for the first time in the country’s history. This represents a year-on-year increase of Sh1.26 trillion, or 11.7%, from Sh10.79 trillion in September 2024.

The debt-to-GDP ratio reached 67.3% by September 2025, hovering dangerously close to the 70% level that many debt sustainability frameworks identify as a critical threshold where debt distress risks escalate substantially. At such elevated levels, countries typically face difficulty accessing affordable financing, experience credit rating downgrades, and encounter reduced fiscal space for productive investments.

The composition of Kenya’s debt has shifted dramatically toward domestic sources, reflecting constrained access to external concessional finance following the IMF programme collapse. Domestic debt reached Sh6.66 trillion by September 2025, representing 55% of total public debt, up from approximately 52% a year earlier. This rising domestic debt share has profound implications for the private sector, monetary policy, and long-term economic growth.

External debt stood at Sh5.39 trillion, or 30.1% of GDP, with multilateral lenders accounting for 56.7% of external obligations, bilateral creditors holding 18.5%, and commercial lenders representing 23.4%. The declining bilateral share reflects reduced concessional lending from traditional partners, while the substantial commercial component—primarily Eurobonds—exposes Kenya to refinancing risks and foreign exchange volatility.

The Domestic Borrowing Trap

Heavy reliance on domestic borrowing to fund budget shortfalls has raised serious concerns among economists and market analysts about crowding out private sector credit and long-term economic stability. Critics point to government borrowing of approximately Sh3.5 billion per day from domestic sources, a pace that absorbs liquidity from financial markets and reduces credit availability for businesses and households.

The government’s appetite for domestic debt has been reflected in aggressive issuance of Treasury bills and bonds throughout 2025. In January 2026, Kenya conducted its first bond auction of the calendar year, raising Sh60.6 billion in an oversubscribed sale that demonstrated continued investor confidence despite macroeconomic uncertainties. However, this confidence should not obscure underlying fiscal challenges, as each successful auction adds to the debt stock that must eventually be serviced and refinanced.

The crowding out effect manifests clearly in credit statistics. In 2024-2025, private sector credit contracted by 1.1% while government borrowing grew by 16.6%, according to Parliamentary Budget Office data. Kenyan banks have demonstrated a clear preference for financing government over the private sector, holding Sh2.365 trillion in government securities compared to just Sh281.5 billion in outstanding mortgage loans by 2023.

This financial sector bias toward government paper reflects rational risk-return calculations by banks, as Treasury securities offer guaranteed returns with zero credit risk, whereas private sector lending involves credit assessment costs, default risks, and longer recovery periods. However, the aggregate consequence is underinvestment in productive sectors of the economy, limiting job creation, innovation, and long-term growth potential.

Debt Servicing Costs Consuming Revenue

Perhaps most alarming is the trajectory of debt servicing costs, which have reached levels that fundamentally constrain fiscal flexibility and development spending. Kenya is on pace to exceed Sh1 trillion in total debt interest payments by the end of the 2024/25 fiscal year, marking the first time debt servicing has crossed this psychological threshold.

In the first seven months of the 2024/25 financial year, Kenya had already paid Sh585.63 billion in debt interest, comprising Sh444.73 billion in domestic interest and Sh140.90 billion in foreign interest. This translates to an average of Sh83.66 billion per month, up from approximately Sh70 billion monthly in the previous fiscal year.

The debt service-to-revenue ratio has deteriorated to alarming levels, with some estimates suggesting that debt servicing now consumes nearly 80% of ordinary government revenues. This leaves minimal fiscal space for development expenditure, social programs, and essential public services, creating a vicious cycle where reduced investments in infrastructure and human capital further constrain economic growth and revenue generation.

The relationship between development spending and debt servicing has completely reversed over the past decade. In 2015, development expenditure was more than three times larger than debt interest payments. By January 2025, debt interest payments were more than double development expenditure, highlighting severe crowding out of funds that could otherwise support infrastructure, health, education, and other public services essential for long-term prosperity.

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Treasury Secretary’s Cautious Approach

Despite the push to reengage the IMF, Treasury Cabinet Secretary John Mbadi has publicly cautioned against rushing into another IMF loan arrangement without careful consideration of alternatives and implications. In a December 2025 interview, Mbadi argued that countries with stable and growing economies should avoid IMF borrowing unless facing severe economic shocks.

Mbadi’s position reflects a nuanced view of Kenya’s relationship with the Fund, positioning the institution in the role of external economic reviewer and technical advisor rather than lender of last resort. This perspective acknowledges the value of IMF monitoring and policy advice while expressing reluctance about the conditionalities and policy constraints that typically accompany funded programmes.

The Treasury Secretary’s stance may also reflect political considerations, as IMF programmes often require unpopular measures such as tax increases, subsidy removals, public sector wage restraint, and spending cuts that generate domestic opposition. With general elections scheduled for 2027, the government faces difficult tradeoffs between implementing reforms necessary for IMF support and maintaining political viability through populist spending.

Nevertheless, Mbadi confirmed that his ministry is actively preparing for the February mission, with technical documentation already shared with IMF representatives on issues like securitization of the sports fund and other contingent liabilities. He expressed confidence that progress has been made on resolving technical issues, though acknowledging that debt sustainability analysis and broader reform frameworks remain under discussion.

Alternative Financing Arrangements

The government is simultaneously pursuing other avenues to ease financing needs beyond the IMF. Officials are pushing for faster disbursement of World Bank Development Policy Operations (DPO) funds worth approximately $750 million (Sh97 billion), though this too faces delays due to unmet prior conditions.

The World Bank has established preconditions related to procurement systems reform, fiscal governance improvements, and county budget approval processes that must be satisfied before DPO disbursements can proceed. Negotiations on these conditions continue, with the Treasury expressing urgency given fiscal pressures and the Bank indicating that reviews currently slated for completion by March 2026 must be finalized before funds can be released.

Kenya has also continued tapping commercial debt markets through Eurobond issuances, a strategy that provides immediate liquidity but at the cost of higher interest rates and foreign exchange exposure compared to concessional multilateral lending. In 2025, the country issued a $1.5 billion dual-tranche Eurobond to finance early retirement of maturing debt and provide general budget support.

The Treasury has outlined a Medium-Term Debt Strategy targeting a borrowing mix of 75% domestic and 25% external sources through 2028, aiming to reduce the debt-to-GDP ratio from 63.7% to 57.8%. However, critics question whether this strategy is sustainable given the crowding out effects of domestic borrowing and the limited capacity of Kenya’s financial markets to absorb continued government debt issuance at the envisaged scale.

Potential Implications of Resumed IMF Engagement

The resumption of IMF talks carries several significant potential implications for Kenya’s economy, financial markets, and development trajectory. Perhaps most immediately, renewed engagement may reassure foreign investors and credit rating agencies by signaling commitment to reforms and debt sustainability. International investors closely watch IMF involvement as a barometer of policy credibility and economic management quality.

A successful programme negotiation could provide a structured framework for fiscal consolidation, helping to curb deficits and manage borrowing costs through agreed fiscal targets and reform milestones. IMF programmes typically establish quantitative performance criteria on fiscal balances, debt accumulation, and monetary aggregates, creating external accountability mechanisms that can strengthen domestic fiscal discipline.

The monitoring and conditionality framework associated with IMF programmes can also improve transparency and governance, as regular programme reviews require detailed reporting on fiscal operations, debt management, and structural reform implementation. This enhanced transparency may increase public sector accountability and reduce opportunities for fiscal mismanagement or corruption.

IMF support often complements central bank efforts to stabilize exchange rates and control inflation, which can improve conditions for trade and investment. The policy coherence between fiscal consolidation supported by the IMF and monetary tightening conducted by the Central Bank of Kenya could create a more stable macroeconomic environment conducive to private sector development.

However, the implications are not uniformly positive. Failure to agree on clear terms or acceptable conditions may perpetuate financing uncertainty, potentially placing more pressure on expensive domestic borrowing and heightening public finance risks. If negotiations collapse or produce an unfunded programme without financial support, Kenya may face renewed market skepticism about its fiscal trajectory.

The political economy challenges of implementing IMF conditions should not be underestimated. Previous programmes have foundered on the government’s inability or unwillingness to implement politically difficult reforms, including subsidy removals, tax increases, public sector wage restraint, and state-owned enterprise restructuring. With elections approaching in 2027, the political space for unpopular reforms may be particularly constrained.

Scenarios Under Consideration

According to economists familiar with the negotiations, four different scenarios are under consideration for Kenya’s new IMF arrangement. These range from normal access programmes providing standard financing levels, to exceptional access arrangements offering larger financial envelopes for countries facing severe balance of payments pressures.

Alternative structures include non-funded facilities that focus primarily on policy monitoring and reform implementation without providing direct financial support. Such arrangements, sometimes called Policy Coordination Instruments or Staff Monitored Programmes, allow countries to benefit from IMF policy advice and the signaling effects of Fund engagement without incurring additional debt.

Precautionary facilities represent another option, providing countries with access to IMF resources that can be drawn upon if balance of payments crises emerge but remain untapped if conditions remain stable. These arrangements can provide insurance against external shocks while avoiding the stigma and conditionality burdens of drawn programmes.

The choice among these scenarios will depend on negotiations between Kenyan authorities and IMF staff regarding the country’s financing needs, policy adjustment requirements, and debt sustainability outlook. Kenya’s preference appears to favor arrangements that provide policy endorsement and technical support without large new borrowing, while the IMF’s position will likely emphasize the need for credible fiscal adjustment regardless of financing modalities.

Looking Ahead: Critical Questions

As Kenya navigates 2026, several critical questions loom over its fiscal and debt management strategy. Can the government sustain its current pace of domestic borrowing without triggering adverse consequences such as sharply higher interest rates or crowding out of private investment? The finite capacity of Kenya’s domestic financial market to absorb government borrowing suggests that current patterns may not be sustainable indefinitely.

Will negotiations with the IMF ultimately bear fruit, and if so, what conditions will be attached to any new programme? The track record of missed targets under the previous arrangement raises questions about Kenya’s ability to implement agreed reforms, while the approaching election cycle may constrain the government’s willingness to adopt politically costly measures.

How will the 2027 general elections affect fiscal discipline and reform implementation? Electoral cycles typically see fiscal expansion as governments increase spending to curry favor with voters, potentially undermining consolidation efforts required for IMF programme compliance. The political calendar thus adds urgency to completing negotiations and implementing reforms before campaign pressures intensify.

The successful bond auction in January 2026, while demonstrating market confidence, represents a continuation of patterns that may not be sustainable indefinitely. Each successful auction adds to the stock of debt that must eventually be serviced and refinanced, and the interest burden of Sh1.1 trillion projected for FY2025/26 already represents a significant constraint on fiscal flexibility.

Conclusion

The February 2026 IMF mission to Kenya represents a critical juncture in the country’s economic management and development trajectory. With public debt exceeding Sh12 trillion, debt servicing consuming the majority of government revenue, and fiscal deficits persisting despite rhetorical commitments to consolidation, Kenya faces difficult choices about its economic future.

A successful IMF programme could provide an anchor for fiscal reforms, restore international credibility, and create policy frameworks supporting long-term debt sustainability. However, past failures to meet programme conditions, political constraints on implementing unpopular reforms, and the approaching electoral cycle all create substantial uncertainty about whether negotiations will produce a viable arrangement.

The outcome of the February talks will be closely watched by markets, investors, credit rating agencies, and development partners. A fresh IMF agreement—whether funded or focused on policy support—could serve as a cornerstone of Kenya’s medium-term economic strategy, providing structure and accountability for necessary but difficult reforms.

Conversely, failure to reach agreement or produce a credible programme could exacerbate financing pressures, accelerate the shift toward expensive domestic and commercial borrowing, and increase risks of debt distress. For a country that has demonstrated remarkable economic resilience and growth potential, the stakes could hardly be higher as negotiations resume in the coming weeks.

Original Variation

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By: Montel Kamau

Serrari Financial Analyst

30th January, 2026