Major stakeholders of the International Monetary Fund (IMF), led by Western nations, are urging Kenya to request an IMF assessment to address issues of corruption and governance as the country seeks to unlock crucial financial support. According to sources, disbursement of approximately $600 million under Kenya’s IMF Extended Credit Facility program has been stalled, primarily due to the government’s reversal of a $2.7 billion tax increase that had sparked widespread protests earlier in the year.

The IMF program, which expires next year, was initially intended to support Kenya’s efforts to stabilize its economy. However, political instability and public dissatisfaction have threatened the success of these reforms. These challenges have intensified demands from Western governments for a comprehensive IMF governance diagnostic that would address systemic corruption in Kenya and suggest governance reforms. The sources, including two diplomatic insiders and one familiar with the situation, requested anonymity given the sensitive nature of these discussions.

The Governance Diagnostic: A Key Step Toward Reform

Governance diagnostics, introduced by the IMF as part of its transparency and accountability agenda, are in-depth assessments of a country’s governance vulnerabilities, corruption risks, and mismanagement practices. According to the IMF, these assessments are designed to “analyze weaknesses in governance and propose strategies to address them.” Since 2014, the IMF has conducted governance diagnostics for 14 countries, including high-profile cases like Ukraine, Sri Lanka, and Cameroon, highlighting corruption as a key factor in economic instability.

In Kenya’s case, the governance diagnostic would examine public financial management, scrutinize the misappropriation of public funds, and pinpoint specific areas where corruption has impaired economic performance. One source familiar with the situation stated that the diagnostic would reveal “where the leaks are, where the challenges are, and where the problems lie,” and propose potential responses to rectify them.

However, for the IMF to initiate a governance diagnostic, the Kenyan government must formally request it. Thus far, Nairobi has yet to make such a request, though Western governments continue to push for it. An IMF official told Reuters that they have “encouraged the authorities in the past and continue to do so in requesting governance diagnostics.”

Protests and Public Backlash

The issue of corruption and fiscal mismanagement has become a central grievance among Kenyan citizens. In July 2024, protests erupted across the country in response to President William Ruto’s government’s plan to introduce massive tax hikes, which aimed to raise revenue for debt repayments and infrastructure projects. The tax increases triggered widespread anger among young people, who expressed frustration that their taxes were being used to fund the lavish lifestyles of politicians.

The protests, which led to the deaths of more than 50 people and were marked by violent clashes with police, prompted the government to withdraw the controversial tax proposals. However, this decision has left the Kenyan government scrambling for alternative revenue-raising measures, as it struggles to narrow its fiscal deficit.

“People are dying on the streets, and our taxes are being stolen by politicians,” said a protester during one of the demonstrations in Nairobi. “This country needs accountability, not more taxes that will just line the pockets of the elite.”

Kenya’s Economic Woes: A Growing Deficit and Mounting Debt

Kenya’s economic challenges extend beyond governance concerns. The East African nation is grappling with a growing fiscal deficit, soaring public debt, and inflation that has pushed millions of people into poverty. According to the World Bank, Kenya’s public debt reached over $90 billion in 2023, equivalent to nearly 70% of its gross domestic product (GDP), a dramatic rise from just 50% in 2018.

Despite these challenges, Kenya remains a key player in the region’s economy, with sectors like agriculture, manufacturing, and services contributing to its GDP. However, the mismanagement of public funds and widespread corruption have severely hampered its ability to meet economic targets.

In August 2024, Finance Minister John Mbadi announced that the government would need to reintroduce some of the tax measures that had been scrapped earlier in the year. Yet, in September, Mbadi appeared to reverse course, stating that the government would instead seek input from the public on potential alternatives to raise revenue. This shift has left international investors and lenders concerned about the government’s commitment to fiscal reform.

Diplomatic sources have indicated that the IMF will not consider releasing the remaining $600 million under the current program until the Kenyan government presents a credible plan to narrow the fiscal deficit. The sources emphasized that while Western nations want to see Kenya succeed, further disbursements will depend on Nairobi’s ability to address governance issues and implement meaningful reforms.

International Pressure and Kenya’s Response

Western nations, including the United States, the United Kingdom, and the European Union, have been vocal in their calls for Kenya to improve its governance record. These governments have historically provided significant financial support to Kenya through development aid and bilateral loans. However, recent revelations of corruption and mismanagement have made Western donors more cautious, with many now tying financial assistance to governance reforms.

The U.S. government, in particular, has made its stance clear. In a statement earlier this year, the U.S. Embassy in Nairobi said: “We remain committed to supporting Kenya’s development, but this support must be conditional on improved transparency and accountability. Corruption is a threat to Kenya’s democracy and economic prosperity, and we expect the government to take decisive action.”

Kenya’s government, led by President Ruto, has acknowledged the need for reform but has so far resisted calls for an IMF-led governance diagnostic. Some officials within the administration view the diagnostic as an infringement on Kenya’s sovereignty, while others fear that it could expose damaging evidence of corruption at the highest levels of government.

Despite these concerns, pressure from Western governments continues to mount. A diplomatic source told Reuters: “Kenya needs to take this step if it wants to unlock further support. The governance diagnostic is not about imposing conditions but helping Kenya address its challenges and build a more sustainable future.”

The Role of the IMF and Potential Consequences

The IMF has long played a crucial role in Kenya’s economic development, providing financial assistance through various lending programs designed to support structural reforms. The current IMF program, initiated in 2021, was intended to help Kenya navigate the economic fallout from the COVID-19 pandemic and address its rising debt burden. The program, however, has faced numerous setbacks, including delays in disbursements and political instability.

If Kenya fails to request a governance diagnostic and address the underlying issues of corruption and mismanagement, it risks losing critical financial support from both the IMF and Western donors. This would have severe consequences for Kenya’s economy, potentially leading to further public unrest, investor flight, and a deepening of the fiscal crisis.

On the other hand, if the government takes the bold step of requesting the diagnostic, it could pave the way for much-needed reforms that would not only restore confidence among international lenders but also improve public trust in Kenya’s institutions. A successful governance diagnostic could also help Kenya identify key areas for improvement in public financial management, enabling the country to better allocate resources and reduce waste.

Conclusion: A Critical Juncture for Kenya

As Kenya stands at a crossroads, the decisions made in the coming months will have far-reaching consequences for its economic future. While the challenges of corruption and governance are deeply entrenched, they are not insurmountable. With the support of the international community, Kenya has an opportunity to implement reforms that would strengthen its institutions, restore public confidence, and put the country on a more sustainable path to growth.

For now, all eyes are on Nairobi as Western nations continue to push for a governance diagnostic that could unlock much-needed financial support from the IMF. Whether Kenya’s leadership will take this step remains to be seen, but one thing is clear: the future of the country’s economy hangs in the balance.

photo source: Google

By; Montel Kamau

Serrari Financial Analyst

2nd October, 2024