Kenya Seeks a Funded IMF Programme Amid Economic Strains

Earlier in 2025, Kenya was halfway through its $3.6 billion IMF arrangement, which included the Extended Fund Facility (EFF) and Extended Credit Facility (ECF). However, progress slowed when Kenya did not meet key fiscal discipline and revenue improvement targets. Consequently, it lost an $800 million disbursement after canceling planned tax increases during nationwide protests.

This disruption left Kenya facing significant financial gaps while maintaining economic stability without the expected IMF support.

In response to ongoing tight public finances, marked by high debt servicing and poor revenue collection, Kenya's Central Bank has decided to stimulate the economy through monetary easing. In its seventh consecutive move, the benchmark lending rate was lowered by 25 basis points to 9.50% from 9.75% on August 12, 2025.

Despite a slight rise in inflation—from 3.8% in June to 4.1% in July—the rate remains well within the Central Bank’s target range of 2.5% to 7.5%. Projected GDP growth is stable at 5.2% for 2025 and 5.4% for 2026, while the current account deficit stands at 1.5% of GDP, up slightly from 1.3% the previous year.

These monetary steps highlight Kenya’s need for more supportive measures to boost economic activity, as public finances continue to be tight.

Central Bank Governor Kamau Thugge has made it clear that Kenya wants a funded program in the upcoming IMF negotiations, rather than just policy advice or a standby arrangement. This preference stems from Kenya’s need for concrete financial support to handle external debt and stabilize its fiscal situation.

Some analysts thought Kenya might choose a non-funded program due to past challenges in meeting IMF conditions. However, Thugge confirmed Kenya’s desire for direct financing, prioritizing financial relief over just guidance.

Kenya’s fiscal situation puts more strain on its economic management. The finance ministry has set a target for a fiscal deficit of 4.5% of GDP for the 2025/26 fiscal year, down from 5.1% in the previous year. This is part of broader spending cuts aimed at tightening finances and improving efficiency without introducing new taxes that could spark protests.

The government aims to widen the tax base, improve compliance, and address leaks, rather than increase existing taxes. Still, critics raise concerns about the risks of implementing these plans, which could undermine deficit-reduction efforts and damage public trust.

Kenya’s debt servicing costs are among the highest in the world when compared to revenue. Rating agency Moody’s reports that one-third of the government’s revenue goes toward interest payments. Additionally, nearly two-thirds of its fiscal financing—about 4% of GDP annually—comes from domestic borrowing, which strains the ability to manage debt and weakens the country's credit profile.

Moody’s highlights the need for an IMF program to reassure investors and lower external borrowing costs. Kenya faces annual external debt repayments averaging $3.5 billion, increasing the urgency for a funded financial arrangement.

A funded IMF program could bring significant benefits, like easing debt repayments, restoring investor confidence, and offering immediate fiscal relief. However, the government must show that it can implement reforms effectively, given past failures to meet IMF targets.

Public sentiment is sensitive; new taxes or perceived austerity measures could lead to unrest. The budget focuses on revenue growth without explicit tax hikes, indicating an awareness of this risk.

The upcoming IMF mission is critical. A successful negotiation could unlock vital funds and help establish better fiscal management. Failure to secure support could worsen economic instability and expose weaknesses in domestic borrowing strategies.

Kenya's renewed engagement with the IMF, emphasizing a funded program, shows both urgency and practicality. While monetary policy is becoming more accommodating, fiscal pressures and debt service costs remain significant. Achieving a funded agreement, along with credible implementation of reforms, is essential for protecting Kenya’s economic future and rebuilding investor trust.