The International Monetary Fund Headquarters in Washington, DC.
Kenya, a beacon of stability in Africa, is now grappling with social and economic challenges that risk the country’s stability in the future. The risks stem primarily from youth discontent, entrenched corruption, and a growing public debt.
While the government holds the central responsibility for maintaining the country’s economic stability, the international community — particularly the International Monetary Fund (IMF) and the World Bank — also shares this responsibility. The IMF and the bank should consider recalibrating the objectives of their lending programmes in Kenya to prioritise long-term stability and re-align their debt sustainability analysis to reflect political and societal reality without lowering their sustainability threshold.
Furthermore, the government, together with the IMF and the World Bank, should convene a meeting with Kenyan stakeholders, creditors and donors for informal consultation about rescheduling maturing debt obligations to future dates and supporting a Debt Relief-for-Stability Programme, that would create rewarding jobs for the youth, reduce poverty and combat corruption.
Youth discontent and poverty
Analysts have long warned that the jobless youth is a time bomb. The National Council for Population and Development (NCPD) estimated in 2017 that the youth population in Kenya will have increased by 48.9 per cent from 2010 to 2025 and an additional 19.8 percentage points by 2030. A majority of young Kenyans now complete secondary education and have a variety of skills that should allow them to flourish. However, even with those skills, most young Kenyans remain trapped in mediocre jobs. Poverty remains pervasive in Kenya. According to the Afrobarometer (2024), 61 per cent of Kenyans did not have enough to eat over the last 12 months and 59 per cent lived in high or moderate poverty in 2021-2023. Kenya is just about as poor as Ethiopia (61 per cent) and significantly poorer than Tanzania (47 per cent) or Ghana (33 per cent).
High-income inequality exacerbates the widespread poverty in Kenya. A staggering 0.1 per cent of the population owns more wealth than the remaining 99.9 per cent combined, according to a 2024 Oxfam report. Kenya achieved solid economic growth over the last decade, but growth left most Kenyans behind. Apparently, the successive governments did not accord adequate priority to joblessness, poverty and inequality.
Kenyans agree that corruption is the number one issue facing the country. It severely weakens governance and public finance, undermines economic development and hurt the social fabric. Kenya is ranked 126th out of 180 countries in the world, according to the latest ranking by Transparency International.
Both past and current administrations have pledged to combat corruption. However, the measures introduced by the government were not sustained with sufficient vigour. As a result, corruption has persisted, as reflected in Kenya's consistently low ranking on the Corruption Perceptions Index above.
Sensible reforms, such as the independence of the Central Bank of Kenya, were introduced in the mid-1990s amidst a severe economic crisis triggered by mega corruption scandals. These reforms restored market confidence and helped resolve the economic crisis. However, as noted earlier, the reforms were gradually and steadily peeled away.
Kenya’s public debt now stands at 73 per cent of the Gross Domestic Product (GDP), having more than doubled in just over a decade. There are three primary drivers behind this rapid increase in debt burden. First, fiscal disciple eroded under the three previous governments. The budget was in balance in the late 2000s but steadily deteriorated since then to record an overall deficit of 8.1 per cent of GDP in 2020. Efforts have been made to reverse this trend, but the deficits accumulated over 20 years could not be wiped out in a few years.
Political expediency, motivated to facilitate competing demands of ethnic groups, may partly explain the erosion of fiscal discipline. Many new ministerial and other senior positions as well as a number of state agencies were created over this period. Second, the introduction of devolution in the 2010 Constitution increased fiscal pressure, rather than being fiscally neutral as intended. The central government retained some functions meant to be devolved to county governments, while also adding new functions. At the same time, about 15 per cent of national revenue began to be allocated to the counties
Third, a significant portion of government borrowing was not directed toward financing productive investments. In fact, capital expenditure by the government has consistently remained relatively small (4-5 per cent of GDP). Syndicated commercial bank loans, sovereign bonds, World Bank loans, and IMF credits —amounting to a combined total of $40 billion — were primarily used to cover budget deficits or replenish international reserves.
Debt sustainability analysis
The IMF and World Bank maintain that Kenya’s public debt is sustainable. This assessment is based on their debt sustainability analysis (DSA) that projects a substantial decline in both the level of outstanding debt and debt service payments as a ratio to GDP in the next three to four years. Continuing to increase tax revenue is a requirement to achieve the projected declines in these debt sustainability indicators. While their assessment may be technically accurate, the issue is not just technical. The question is how prudent the government and Kenyans want to be in accepting the risks of future instability.
Increasing taxes on basic goods and essential public services may offer a quick fix but risks undermining the social fabric. The government has recently raised those taxes, and the DSA assumes that the government will continue to do so. Additionally, when spending cuts are implemented, social safety nets and essential public services often become casualties of the political reality.
The pressure to raise taxes to pay debt will only grow, particularly if the government takes on new debt at higher interest rates. Kenya recently borrowed $2.5 billion from the Eurobond market at a very high-interest cost of 10.8 per cent. If Kenya's credit ratings are downgraded further from the current junk status, the costs of future Eurobond issuances could be even higher. Moreover, the large sums that Kenya is currently borrowing from the IMF are largely on commercial terms.
The government maintains that missing even a single payment would plunge Kenya into a debt default crisis, similar to what Zambia and Ghana have experienced. Based on this belief, the government continues to plan tax increases while ruling out any form of debt restructuring, including rescheduling maturing obligations. However, sovereign debt restructuring becomes protracted when it involves writing off outstanding debt, especially when multiple creditor groups are involved. Kenya is solvent, so it is neither necessary nor appropriate to consider debt write-offs.
For Kenya, rescheduling maturing payments on concessional terms should suffice. Such rescheduling would reduce the net present value of the outstanding debt, meaning that the declines in the debt-to-GDP ratio and other debt sustainability indicators projected in the current DSA could be achieved without the need to raise taxes. There is no reason to expect that rescheduling negotiations would necessarily be protracted. Kenya successfully undertook a similar rescheduling in the 1990s, and the process went smoothly. The key is to engage creditors early before it becomes exceedingly difficult to meet payment obligations.
Shared responsibility
The fundamental objective of the IMF is to achieve sustainable growth and prosperity for all of its 190 member countries. The World Bank shares this objective. Stability is, of course, a prerequisite for sustainable growth and prosperity. In other words, while the responsibility to maintain economic, social and political stability rests with the Kenya government, it is shared by the IMF, World Bank and the broader international community.
The principle of shared responsibility suggests that the IMF and World Bank should prioritise safeguarding long-term stability in Kenya more than they have in the past. This will require a stronger emphasis on enhancing equity and reducing social and economic inequalities. This is a core mandate assigned to the World Bank by the international community.
There is also a need for a more cautious approach to managing public debt; economic growth targets underlying DSA should be more conservative than they have been in the past. Similarly, tax revenue targets should more deliberately account for social and political realities.
In addition, the international community may offer to reschedule maturing debt payments, with the understanding that the financial resources saved would be directed toward programmes and projects aimed at addressing the root causes of instability. This could be termed the Debt Relief-for-Stability Programme (DRSP). For example, if one-fourth of the rescheduled amount were allocated to stability-focused programs, at least Sh300 billion could be made available to finance the DRSP.
Debt relief-for-stability programme
The proposed DRSP should include the following three main components:
*Job creation where young people can thrive: 70-80 per cent of jobs are in the informal sector. Informal businesses and jobs could be transformed into profitable ventures by: (a) reducing the hostility of their business environment through streamlining regulatory frameworks and adopting policies of forbearance; and (b) improving access to energy and other infrastructure specifically designed for informal businesses. The Hustler Fund could be developed into a market-based microfinance institution, funded by private capital and modelled after successful private microfinance initiatives.
*Assistance to cushion the high cost of living: If a cash grant were extended immediately to all Kenyan households living in absolute poverty, it could help alleviate the current social tensions. An unconditional cash transfer program would be an effective tool, and the expertise exists to establish a platform for its efficient administration. It is estimated that around four million Kenyan households live in absolute poverty. If a cash grant of KSh3,000 per month were provided, the program would cost approximately KSh150 billion per year.
*Combat corruption: Corruption has remained intractable over the past three decades despite numerous attempts. This experience suggests that calling for a strong leadership at the highest levels of government may be necessary but not sufficient. The key to sustaining strong anti-corruption measures may be the much stronger ability of the public to hold high-ranking government officials accountable. Measures to strengthen this ability could include:
(a) Protecting whistleblowers and enabling citizens to report corruption safely and anonymously through digital platforms.
(b) Utilising technologies like blockchain to enhance transparency in public spending.
(c) Encouraging peaceful demonstrations, prosecuting cases of excessive use of police force, and safeguarding press freedom.
International engagement
Kenya’s economic stability is not solely the responsibility of its government. The IMF, World Bank, and the broader international community share the responsibility. Consistent with the principle of shared responsibility, the IMF and World Bank should realign their respective objectives to prioritise Kenya’s long-term stability. The basic assumptions of debt sustainability analysis should be also aligned to this priority.
Public participation is key to democratic governance. Therefore, the Kenyan government, the IMF and World Bank should convene a joint meeting with the civil society, youth groups and other stakeholders as well as Kenya’s creditors and donors for informal consultation on key elements of the Debt Relief for Stability Programme and implications of seeking a debt rescheduling.
If the proposed approach gained broad support during informal consultations, all participants should incorporate the consensus into their respective activities. In particular, the government should integrate key elements of the debt-relief-for-stability programme into its policies and programmes and informally engage the Paris Club and other official and private creditors.
If successful, the approach proposed in this article could serve as a model for other African nations facing similar challenges of debt and social vulnerabilities, potentially creating a new platform for international engagement.
* The authors are former senior officials of the IMF and the World Bank, each with substantial experience in Africa, particularly in Kenya. Hiroyuki Hino, a former Mission Chief for Kenya and Senior Advisor in the African Department of the IMF, also served as Economic Advisor to then-Prime Minister Raila Odinga and Senior Advisor to Deputy President William Ruto (now President). He currently conducts research at Duke University.
*Jim Adams and Praful Patel, both former vice-presidents of the World Bank, have played pivotal roles in shaping global development strategies over several decades. Adams served as Country Director for Kenya and for Uganda, and Tanzania, while Patel was Director for Infrastructure for Africa. Both also bring valuable experience from Asia to inform policy discourse in Africa.
