Kenya’s debt dilemma: IMF, protests, and the possible path to fiscal reform
- Churchill Ogutu
- Mar 30
- 9 min read
Updated: Mar 31
The last 12 months in Kenya have been tumultuous: violent protests against a government tax-raising bill, the first impeachment of a Deputy-President, and a backdrop of rising public debt and a cost-of-living crisis. Economically, things have stabilised somewhat, but persistent challenges remain and this month the government has asked the IMF to negotiate a new lending programme after abandoning the latest review of the current programme. We take a look at Kenya’s sovereign debt and its high servicing costs, political challenges making fiscal consolidation more difficult, and consider how a new IMF programme could make a lasting difference.
In the wake of a devastating cycle of droughts and floods, amid a backdrop of the pandemic and global inflation, in 2021 the IMF awarded Kenya a US$2.34bn funding programme[1] (later extended and increased to US$3.8bn). The funding was dependent on the nation meeting various conditions including raising taxes, reducing subsidies, cutting spending, modernising monetary policy and other structural reforms. The goal was to begin making the Kenyan government more fiscally responsible and sustainable, as well as driving anti-corruption[2] measures and cracking down on corporate tax evasion.
Whilst these terms seem sensible on paper, unfortunately their execution was not smooth. In 2024 the Kenyan government attempted to introduce a new Finance Bill to raise US$2.67B in revenue. The original proposal for the bill included new taxes on basic commodities such as bread, cooking oil, and vehicle ownership, plus some economic levies that would ultimately hike the price of essentials such as sanitary pads, nappies and mobile phones.
Unsurprisingly, ordinary citizens were unhappy at bearing the brunt of these increases during an existing cost-of-living crisis, and protests broke out across the country. Demonstrations began peacefully but escalated quickly and culminated in thousands of protesters storming the Kenyan Parliament Building in Nairobi. This led to the deaths of at least 50 people associated with the protests[3]. In an attempt to restore political order, President William Ruto dismissed all but one member of his cabinet and launched a campaign against his Deputy President Rigathi Gachagua, ultimately leading to Gachagua’s impeachment and removal.
Amidst the tumultuous times of civil unrest and political upheaval, economists had one eye on another challenge looming on the horizon – the 2021 IMF package was due to end imminently, in April 2025. With much speculation about a potential new package, an agreement was announced in mid-March[4] - the current programme would be terminated and a new programme negotiated. Risks clearly still exist for Kenya, but how has it got into its current debt situation?
A decade of increasing debt
Currently, Kenya dedicates almost 70%[5] of its annual government revenues to servicing a sovereign debt which has doubled in the last five years[6], and which now equates to 67% of GDP, up from just below 50% in 2015. This has primarily been driven by three factors: long-term infrastructure investments; economic shocks including floods and drought; and rising debt servicing costs linked to global interest rates. This debt (c.US$80bn) (Figures 1 & 2) is split roughly equally between domestic and international creditors, with the external debt in foreign currency exposing the country to exchange rate risk and global interest rate fluctuations.
As analysts on the ground, our view is that while external debt has received more media and investor attention, a significant thorn in Kenya’s side is its domestic debt, which is currently somewhat overlooked by the global community. Domestic debt is an issue because Kenya has until recently been stuck in a vicious cycle of rising rates; effectively turning the screw on itself. The majority of domestic debt is in the form of Kenyan Treasury Bonds, for which the government has had to offer increasingly high interest rates to compensate for the associated default risk, and which has been exacerbated by a depreciating currency that needed to be propped up. Coupled with high inflation, these costs have been so severe that Treasury Bond rates reached a high of 18.46% in February 2024[7]. These costs raised legitimate concerns about defaulting 12 months ago, but policy rates have been lowered since autumn 2024.
Figure 1: Domestic Debt
This isn’t to say that there aren’t challenges with Kenya’s external debt too, and it’s worth considering that Kenya has had to access international and syndicated markets at relatively higher interest rates compared to their peers. A key factor in the mispricing of risk is the way Eurobond interest rates are determined: when Kenya (or any sovereign) issues a Eurobond, the interest rate is set through a combination of market forces, credit ratings, and the negotiation process between the issuer (Kenya), its financial advisors, and the investment banks underwriting the issuance.
Figure 2: External Debt
As discussed in the previous article of Plato Group’s Thought Leadership series, the methodology used by credit rating agencies can result in the mispricing of risk of an African sovereign, thus leading to inaccurate credit ratings. This has a knock-on effect, pushing up yields when those sovereigns look to borrow from international debt markets, ensuring much better returns for those purchasing the bonds at the expense of the issuing country. We witnessed this in February last year when Kenya’s US$1.5bn Eurobond issuance was heavily oversubscribed when the yield[8] was at 10.375%, and again last month when the US$1.5bn Eurobond was over three times oversubscribed with a yield of 9.95%.
These are the unfortunate circumstances which leave Kenya now with public debt at 67% of GDP, exceeding the World Bank and IMF’s recommended thresholds in Present Value terms[9]. Notwithstanding this, as of October 2024, the IMF’s Debt Sustainability Analysis gave Kenya a ‘sustainable’ rating[10] due to some positive steps taken by the government over the last twelve months, and a more stable currency.
What steps have the government taken?
Here on the ground in Nairobi, what we see is hard working Kenyans with entrepreneurial spirit, positive trends in educational enrolment and literacy, increasing gender parity, increasing globalisation and more integration of technology in business and government. What's needed is increased public and private investment in the country to bridge the development gap, with less spending going on servicing public debt or waste.
There are already some positive signs in the Kenyan market that could indicate change is on the horizon. In 2024 the appreciation of the Kenyan Shilling helped to deflate the stock of external debt in local currency terms. Already this year, we have seen the Central Bank of Kenya complete the country’s first ever domestic bond buyback as a move to manage debt, alongside the buyback of US$900m from its 2019 Eurobond to alleviate the external debt situation. These measures have been received positively by market participants who had previously been considering the possibility of a default. And all was not lost for the controversial Finance Bill either as in December, parliament carved out and approved two revenue-raising laws from the original package that collectively aim to raise US$340m this FY24/25; although admittedly this is a lot lower than what was envisaged in the original bill.
These recent moves may be small steps on a long road to stability, but they are steps nonetheless. One of the major challenges will be overcoming corruption, where Kenya ranks 121 out of 180 countries[11]: what’s needed are institutional solutions that reflect citizen concerns - curbing wasteful spending, implementing strong fiscal policy rules and increasing efficiency of tax collection through digitisation. That is within the power of the Kenyan government, but the politics are tricky.
The Political Situation makes Fiscal Consolidation more difficult
Following the events in autumn 2024, Opposition-allied politicians were brought into the Cabinet by the President to form a “broad-based government”, ostensibly to satisfy calls for greater checks on the Kenya Kwanza administration. However, there are costs associated with having to satisfy several disparate interests in Cabinet and which may have implications for the ongoing fiscal consolidation as Kenya gets closer to elections in 2027. Furthermore, the public pushback against the 2024 Finance Bill means that subsequent iterations of Finance Bills need a wider consensus lest they trigger further waves of protests. To put it bluntly, the government will be skating on thin ice as it aims to achieve its fiscal consolidation goal in the coming years.
The present IMF programme established essential safeguards for fiscal discipline, but recent outcomes have not met the expectations of the multilateral lender. The IMF programme failed to meet expectations, leading to cancelled reviews and delayed reforms. Despite this, the government has formally requested a new programme, with discussions set to continue.
How will the IMF approach a re-negotiated programme?
Ideally, an IMF programme provides signalling to private creditors and an anchor for more multilateral financing. That said, we have seen economies muddle through without an IMF programme provided there is periodic policy surveillance through Article IV consultations[12]. For Kenya, the choice for a successor programme boils down to two broad issues. The first relates to the intensity of the accompanying reforms that may be required: A funded Extended Fund Facility (EFF) and/or Extended Credit Facility (ECF) instruments[13], as was the case with the current programme that entailed periodic reviews, could be an option. However, on the back of non-adherence to past targets, we struggle to see the sweet spot of reviews that would be agreeable to both the IMF and the government.
Other options include precautionary instruments such as Standby Arrangement (SBA) and/or Standby Credit Facility (SCF) which would be drawn down in the event of some negative economic shock; and the non-funded Policy Coordinating Instrument (PCI). The Resilience and Sustainability Financing (RSF) is climate-linked and goes hand in hand with an existing programme.
The second thing to note is whether Kenya’s successor programme would be granted on normal or exceptional access. Normal access for IMF funding is capped at six times the recipient’s quota[14]. Kenya’s recently abandoned ninth review disbursement under the EFF/ECF was 68.0% of its quota, US$491m; so, if Kenya opts for normal access financing, this is the amount that it can realistically access. That means that Kenya could tap reasonably higher financing under exceptional access[15] subject to meeting certain criteria, or a lower financing amount under normal access; the catch 22 situation that Kenya finds itself in the negotiating table.
Given that external gross financing needs to start building up in 2027, the election year, we think that a more realistic scenario is for a funded programme finalised in late 2026. With Kenya expected to repay the IMF US$561m this year and next year, this will increase its funding scope for a meaningful IMF programme. We thus see scope for a non-funded programme or, more likely, no-programme in the next 18 months, before Kenya firms up a successor programme.
Why this all matters
For Kenyans, it is imperative that the country’s national debt – and in particular the cost of servicing that debt – gets onto a more sustainable path, otherwise the government will not be able to access and invest the requisite levels of capital required to bridge the development gap.
For the global community, resolving Kenya’s – and Africa’s – debt crisis is also not just a matter of economic justice; it is a strategic necessity. The EU has a vested interest in stabilising economies like Kenya’s with its growing, youthful and educated workforce, to mitigate migration pressures and foster economic partnerships. Additionally, donor fatigue is real – traditional aid is depleting (as evidenced by the recent abolition of USAID and cuts to the UK and European aid budgets), and African states need better access to private capital at reasonable rates.
Notwithstanding the Kenyan government’s own responsibilities that we’ve discussed, the IMF can play a critical role here: it can provide longer term concessional loans that ease Kenya’s external debt. This can lead to more manageable debt servicing costs, helping to ease interest rates on domestic debt, reducing the debt servicing burden even further, and initiate an unwinding of the debt distress cycle. Consequently, credit ratings will improve (although there are other variables involved), allowing Kenya to re-access international debt markets at less cost. Of course, we will have to wait and see how the IMF negotiations play out, and how these factors play into the election cycle as we get closer to the 2027 Presidential elections.
This article is just the tip of the iceberg when it comes to analysing the economic and political situation in Kenya. If you’d like more information, deeper analysis or an answer to a specific question, get in touch with Plato Group here on the ground in Nairobi.
This thought leadership paper is published in collaboration between Churchill Ogutu, Dilan Saujani, and Plato Group Ltd. The usual disclaimer applies.
Churchill Ogutu
Churchill is an Economist with the Pan-African financial services firm IC Group where he provides research coverage on select African economies and is based in Nairobi (Churchill Ogutu I LinkedIn). Previously, he worked as Head of Research of Nairobi-based investment bank, Genghis Capital.
Dilan Saujani
Dilan is an Economist with CARE International, supporting the UK government and institutional funders achieve their international development and humanitarian objectives (Dilan Saujani I LinkedIn). Previously, he was an economist in His Majesty's Treasury with responsibility for deepening UK financial ties with markets across Africa and Latin America.
Plato Group
Plato Group is a network of global economists, senior monetary and fiscal policy experts, bankers, lawyers, and diplomats (incl. former Ambassadors), with direct experience in markets across the world. Plato Group blends international and local expertise, providing comprehensive insights tailored to a client’s specific needs.
Footnotes
Kenya ranks number 121 out of 180 countries on Transparency International’s Corruption Perception Index: Corruption Perceptions Index 2024 - Transparency.org
Statement from the Kenyan National Commission on Human Rights, 16 July 2024: Statement on Mukuru Murders and Updates on the Anti-Finance Bill Protests
IMF Staff concludes visit to Kenya, March 2025 https://www.imf.org/en/News/Articles/2025/03/16/pr2566-imf-staff-concludes-visit-to-kenya
Kenya’s 2023/24 Annual Public Debt Management Report, October 2024: Annual-Public-Debt-Management-Report-.pdf
Table 10, Public Debt statistics https://www.treasury.go.ke/wp-content/uploads/2025/02/QEBR-Report-1st-Half-for-FY-2024-25.pdf
A yield is simply the interest rate a government pays on its newly issued bonds, indicating the cost of borrowing for that nation.
It should be noted that these thresholds are not necessarily a prescription, but rather possible indicators for debt sustainability challenges.
Transparency International’s Corruption Perception Index: Corruption Perceptions Index 2024 - Transparency.org
https://www.elibrary.imf.org/display/book/9798400294129/CH001.xml
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