A High Court ruling declaring the Privatization Act, 2023 unconstitutional has further complicated Kenya’s efforts to unlock more than Sh77.5 billion in new funding from the International Monetary Fund (IMF).
The IMF has partly linked the funding plan to comprehensive reforms of state-owned enterprises (SOEs), including the sale and closure of some as a condition for a four-year $3.6 billion (Sh464 billion) loan.
The Privatization Law was renewed in October 2023 to support the sale of parastatals, with some relying on State bailouts and showing little prospect of recovery.
The Supreme Court struck down the new law on the grounds that it was enacted without adequate public participation – a constitutional requirement.
Treasury has identified 11 parastatals for sale, including Kenyatta International Convention Center (KICC), New KCC, Kenya Pipeline Company, National Oil Company of Kenya (Nock) and Kenya Seed Company.
“The six memoranda received plus some selected stakeholders cannot effectively represent the views of the people as required by Articles 10 and 118 of the Constitution as explained by the court for the purpose of making the law,” the court said.
The privatization setback was combined with the government’s failure in June to implement new tax measures in the Finance Bill, 2024 after deadly protests emerged as an obstacle to unlocking new funding from the IMF.
Kenya agreed to a four-year loan with the IMF in 2021 and signed up for an additional loan to support climate change measures in May 2023, bringing total IMF loan access to $3.6 billion (Sh464 billion).
Kenya, which is awaiting a long-delayed $600 million (Sh77.5 billion) IMF tranche, needs funds.
Treasury officials have previously said they expect the IMF board to consider approving the disbursement this month, but no date has been set for a meeting to discuss it.
The Treasury is walking a financing tightrope after deadly protests forced President William Ruto’s administration to abandon tax measures that would have raised Sh346 billion this year. As a result, Kenya has widened its budget deficit to 4.3 percent of gross domestic product for the current fiscal year through June from an initial 3.3 percent, which could breach the IMF program’s target.
To fill the hole, the plan is to tap foreign debt and borrow billions locally.
Speaking last month, the governor of the Central Bank of Kenya (CBK) Kamau Thugge announced that the government has met most of the review targets, save or those that touch the revenue performance.
In addition to fiscal consolidation and better management of public resources, the government was tasked by the IMF to improve the effectiveness of monetary policy, the foreign exchange market, the governance and anti-corruption framework and address climate risks as part of the program reform package.
On the monetary end, Dr Thugge said the CBK had achieved its net international reserve targets in December 2023 and June 2024.
“The problem is on the revenue side. We missed the target in December 2023 and June 2024… we have said that the target is too high,” said the governor.
The difficulty of meeting the target in the current situation has seen the IMF and the government return to the table to seek consensus on new revenue targets due to the collapse of the Finance Bill, 2024.
Last week, a staff team from the IMF completed a fact-finding visit to Kenya to discuss recent developments. In a statement at the end of the visit, the IMF said it had held productive discussions with the government on the latter’s policies and reforms to address evolving economic and fiscal challenges.
The IMF added that it was committed to helping Kenya identify “policies that can encourage the completion of the review in the programs implemented as soon as possible.”
Uncertainty about the privatization program, which will be implemented after the latest discussions, is likely to delay the funding decision.
The IMF has flagged the fiscal risks associated with SOEs as a major concern earlier this year.
A state report on Kenya (dated January 2024) shows a cumulative liquidity gap of Sh383 billion over five years for 18 SOEs-not including Kenya Airways- which poses the greatest financial and fiscal risk to taxpayers.
To reduce this exposure, the government and the IMF agreed that in October 2024, the Treasury will submit to Parliament and publish an assessment of the national government’s involvement or investment in State companies.
This assessment will also include specific recommendations of companies to be privatized, merged, or liquidated or transferred to the district, and the same timeline.
By December 2023, the Treasury has published a list of 11 parastatals to be privatized and is seeking public views on the proposed sale.
