The International Monetary Fund (IMF) is carefully assessing the economic implications of a recent court ruling in Kenya that nullified a series of taxes introduced in 2023. This evaluation is key to determining whether the IMF will approve the next round of loan disbursement to the East African nation.
The IMF is examining both the legal challenges and President William Ruto’s decision to repeal the controversial taxes that ignited widespread anti-government protests in June and July, which resulted in the deaths of at least 61 people.
“The review process is ongoing,” an IMF spokesperson stated in an email on Wednesday, emphasizing the fund’s commitment to helping Kenya address its economic hurdles. The fund’s support will be crucial as the country navigates its current financial landscape.
The annulled taxes, which included a doubling of value-added tax (VAT) on fuel to 16%, would have contributed approximately 214 billion shillings ($1.66 billion) to government revenue. According to Treasury Principal Secretary Chris Kiptoo, the cancellation of these levies may necessitate further budget reductions, a challenge for the Kenyan government as it works to balance fiscal sustainability with political stability.
In response to the revenue shortfall, Kenya has already slashed its budget through June 2025 by 3%, increased borrowing, and expanded the projected fiscal deficit to 4.2% of gross domestic product (GDP) from an earlier target of 3.3%. These measures were taken after the protests and resulting political turmoil that not only strained government finances but also led to downgrades in Kenya’s credit ratings by the three major ratings agencies, pushing the country deeper into junk status.
The IMF has yet to set a firm date for the board meeting to discuss Kenya’s $3.6 billion financing program, which is scheduled to conclude in April 2024. Originally expected to take place in June, the meeting was postponed and could take place later this year. The delay in discussions has raised concerns about the timely release of Kenya’s next IMF tranche.
Central Bank of Kenya Governor Kamau Thugge has indicated that Kenya expects to receive approximately $600 million from the IMF upon the successful completion of the current review.
Adding to the uncertainty, Kenya’s Supreme Court is scheduled to begin hearing oral arguments against the repeal of the Finance Act 2023 next week. Last month, the top court issued a conservatory order that temporarily suspended a lower court’s ruling declaring the taxes unconstitutional, adding another layer of complexity to Kenya’s fiscal outlook.
Analysis: The nullification of these critical tax measures poses a significant risk to Kenya’s fiscal stability. Losing a substantial portion of its planned revenue will force the government to either increase borrowing or make deeper spending cuts, both of which present economic challenges. Kenya’s reliance on external loans, such as the one from the IMF, makes securing this funding even more urgent.
Investors, meanwhile, are watching the situation closely. A decision from the IMF to delay or reduce the next loan disbursement could further shake confidence in the Kenyan economy. The country’s downgraded credit ratings already reflect rising risks, and any further delays in fiscal adjustments could have negative implications for both bondholders and businesses operating in Kenya.
The prospect of a more prolonged fiscal imbalance means that investors may face heightened market volatility, and those positioned in Kenyan bonds could see further price declines. However, the IMF’s eventual approval could provide a stabilizing factor, potentially leading to a rally in government bonds and equities. For market participants, there is an opportunity to profit from this volatility, especially if Kenya is able to secure IMF support and address its budgetary challenges in the months ahead.
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