A Supreme Court ruling declaring the Privatization Act 2023 unconstitutional appears set to further complicate Kenya’s efforts to secure more than Sh77.5 billion in fresh funding from the International Monetary Fund.
The IMF had partly linked the financing plan to a comprehensive overhaul of state-owned enterprises, including the sale and closure of some, as a condition for a $3.6 billion (464 billion shillings) four-year loan.
The privatization law was updated in October 2023 to support the sale of parastatal companies, some of which rely on government bailouts and show little prospect of recovery.
The Supreme Court struck down the new law on the grounds that it was passed without sufficient public participation – a constitutional requirement.
The Treasury has already identified 11 parastatals for sale, including the Kenyatta International Conference Centre (KICC), the New Kenyatta Convention Centre, the Kenya Pipelines Company, the Kenya National Oil Corporation (NOC) and Kenya Seed.
“The six submissions we received along with a few carefully selected stakeholders cannot effectively represent the views of the people as required under Articles 10 and 118 of the Constitution as interpreted by the courts for the purposes of enacting legislation,” the court said.
The privatization setback, coupled with the government’s failure in June to pass new tax measures in the 2024 finance bill in the wake of deadly protests, have emerged as obstacles to securing new IMF financing.
Kenya agreed to a four-year loan with the IMF in 2021 and signed an additional loan to support climate change measures in May 2023, bringing total IMF lending to $3.6 billion (Sh464 billion).
Kenya, which is awaiting a long-awaited $600 million (Sh77.5 billion) tranche of the International Monetary Fund loan, is in dire need of funds.
Treasury officials said earlier they expected the IMF board to consider approving the disbursement later this month, but no meeting has been scheduled to discuss the matter.
The Treasury is struggling to secure funding after deadly protests forced President William Ruto’s administration to scrap tax measures that would have raised Sh346 billion this year. As a result, Kenya’s budget deficit has widened to 4.3% of gross domestic product for the current fiscal year to June from an initial 3.3%, potentially breaching the IMF programme’s targets.
To bridge this gap, the kingdom plans to tap foreign loans and borrow billions domestically.
Speaking last month, Bank of Kenya Governor Kamau Thugee revealed that the government had achieved most of the audit targets, except those touching on revenue performance.
In addition to strengthening public finances and improving public resource management, the IMF has tasked the government with improving the effectiveness of monetary policy, the foreign exchange market, the governance framework, combating corruption, and addressing climate risks as part of the program’s reform package.
On the monetary front, Dr. Thuji said that the Central Bank of Kuwait achieved its target for net international reserves in December 2023 and June 2024.
“The only problem was on the revenue side. We missed the targets in December 2023 and June 2024… However, the targets were too high,” the governor said.
The difficulty of achieving the targets under the current circumstances has prompted the IMF and the government to return to the negotiating table in an attempt to reach a consensus on new revenue targets due to the collapse of the 2024 Finance Bill.
Last week, an IMF staff team concluded a fact-finding visit to Kenya to discuss recent developments. In a statement issued at the end of the visit, the IMF said it had fruitful discussions with the government on its policies and reforms to address growing economic and financial challenges.
The IMF added that it is committed to helping Kenya identify “policies that can support the completion of reviews under the ongoing program as soon as possible.”
Uncertainty over the privatization program, which came after the last round of discussions, is likely to delay the financing decision for a longer period.
The IMF had already flagged the financial risks associated with state-owned enterprises as a major concern earlier this year.
A national report on Kenya (dated January 2024) pointed to a cumulative liquidity gap of Sh383 billion over five years for 18 state-owned companies – excluding Kenya Airways – that pose the greatest financial and tax risks to taxpayers.
To reduce this exposure, the government and the IMF agreed that by October 2024, the Treasury will submit to Parliament and publish an assessment of the national government’s continued involvement or investment in state-owned enterprises.
This assessment should also include specific recommendations on which companies will be privatized, merged, liquidated or transferred to the provinces, and the timetables for doing so.
In December 2023, the Treasury published a list of 11 parastatals slated for privatization, and invited public input on the proposed sale.