Serrari Group

Kenya faces mounting economic uncertainties following President William Ruto’s decision to retract support for a controversial finance bill amid widespread public outcry and violent protests. The bill, designed to generate 346 billion Kenyan shillings ($2.68 billion) through new taxes on essential goods and services like bread and mobile-money transfers, was a crucial component of Kenya’s efforts to meet fiscal targets set by the International Monetary Fund (IMF).

Analysts and investors expressed concerns over the implications of the bill’s withdrawal, predicting significant fiscal deficits in the coming years. Neville Z. Mandimika of Morgan Stanley pointed out that Kenya is likely to miss its fiscal deficit targets of 4.7% this year and 3.5% next year as stipulated by the IMF program.

Kenya’s relationship with the IMF, underscored by a substantial four-year loan agreement and additional funding for climate change initiatives, hinges on periodic reviews of economic reforms. Despite recent progress towards a seventh review, the withdrawal of the finance bill jeopardizes IMF disbursements crucial for stabilizing Kenya’s economy.

Market reactions were swift, with Kenya’s sovereign dollar bonds experiencing increased yields above 10%, limiting international borrowing options. As a consequence, Kenya may resort to heightened domestic borrowing, potentially driving up local borrowing costs, as cautioned by Moody’s credit rating agency.

JPMorgan analysts emphasized the urgent need for Kenya to pursue fiscal consolidation through stringent spending cuts amidst the economic turmoil. Giulia Pelligrini of Allianz Global Investors highlighted the necessity for thorough fiscal management amidst public discontent and economic instability.

In response to the developments, stakeholders await clarity from the IMF on recalibrating their support for Kenya’s economic program, while President Ruto’s administration faces tough decisions to restore fiscal stability amidst ongoing social unrest.

Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

1st July, 2024

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