Kenya's Fiscal Plan Faces Turbulence Amidst Protests and Economic Strain

Kenya's government plans to cut spending by 1.9% and expand the fiscal deficit to 3.6% of GDP for 2024-25 after retracting tax hikes due to protests. President William Ruto responded by firing almost the entire cabinet. The treasury has revised the budget, while the IMF monitors the situation closely.

Kenya's government plans to slash 2024-25 spending by 1.9% and widen the fiscal deficit to 3.6% of GDP in a revamped budget, the treasury disclosed, weeks after being compelled to reverse tax hikes following mass protests.

In response to the growing unrest, President William Ruto dismissed nearly his entire cabinet last week, committing to form a broad-based government. Demonstrators initially protested against the now-abandoned tax hikes but extended their demands to include Ruto's resignation and significant political reforms to address corruption and poor governance.

Earlier this month, Ruto proposed a mix of spending cuts and increased borrowing to close the $2.7 billion budget gap left by the scrapped tax hikes. Parliamentarians returning next week will need to debate and ratify the supplementary budget signed by Treasury Secretary Chris Kiptoo on July 11.

The revised budget sets total spending at 3.87 trillion Kenyan shillings ($30 billion), down from 3.99 trillion shillings ($31 billion), according to Kiptoo. Recurrent expenditure is expected to decrease by 2.1%, with development spending dropping by 16.4%.

Despite the withdrawal of the tax hike, the energy regulator increased the road maintenance levy on Monday to 25 shillings per liter of fuel from 18 shillings. Facing the most severe crisis of his presidency, Ruto is balancing the demands of lenders, like the IMF, to reduce deficits against a population grappling with high living costs.

The IMF announced on Thursday that it is reviewing the situation in Kenya and making necessary adjustments to address the evolving challenges. ($1 = 128.7500 Kenyan shillings)

(With inputs from agencies.)