The IMF Program concludes
Earlier in 2025, there were concerns about the likelihood of the IMF Program completion. These concerns were upheld as the program got cancelled ahead of the last disbursement. With external funding plugging the gap from the likes of the World Bank and China, the Kenyan government weathered the storm with FX and local asset pricing holding stable. This was certainly the first sign that the economy was perhaps more resilient than had been expected.
The IMF revisited Kenya in October to consider a new program from scratch to support the economy. While headways were made by all accounts, there were some fundamental sticking points that may hamper any chance of a new program in the near term. The IMF typically requires some sort of fiscal consolidation or austerity to control deficits and promote longer-term economic recovery, which has also been echoed in part by the World Bank. In addition, the IMF has come to blows with Kenya over inefficient tax collection and parcelling outstanding debts in Special Purpose Vehicle (SPV)’s to potentially avoid reporting various liabilities.
With the Fiscal Deficit forecast to increase to 4.9% of GDP next year, the Government has stated on multiple occasions that they are not willing to make further fiscal adjustments, likely in a bid to maintain political capital that can be fragile at best. Furthermore, the IMF would likely push for further debt swaps/restructuring which risks spooking foreign investors given the potential for defaults in the future. However, short-end Eurobond pricing has remained relatively unchanged since September with yields under 8%.
The IMF have also warned against currency swaps on loans from nations such as China, albeit these warnings were not exclusively to Kenya. Concerns around FX risks and liabilities feel legitimate, especially given the relatively stable CNY (CNH) rate, a touch above 7.00 vs USD - if there is a sudden appreciation of the Yuan back to 2022 levels, then this would certainly strain Kenya’s Foreign Reserves assuming the loans are marked correctly. However in the absence of any significant moves in the Yuan, the Kenyan Treasury claims a $215m per year saving that could help ease the debt burden.
Central Bank intervenes with foreign reserves and monetary easing
Reported Foreign Reserves have in fact been one of the brighter metrics in Kenya, last printing at $12.3 billion (c. 5.4 Months of Import Cover) following the Eurobond issue in October. While the import cover is still far less than neighbouring nations, it does keep Kenya well above its statutory requirement of four months. Last year, there were concerns that these reserves may quickly dwindle in a bid to keep the FX rate unchanged. It’s still rumoured that the Central Bank of Kenya (CBK) has been speculatively buying USD on any drops closer to 129, but with the rate in such a tight range over the last few months, would speculate that the CBK has had less capacity to stock up USD via the FX market.
The CBK has remained active with their monetary easing policy, with the latest 25bp rate cut in October to 9.25%. This came despite gathering momentum in the Inflation rate up towards 5%, representing the mid-point of the range that the CBK has stated they would be comfortable with. While there is clearly some buffer here against any further upticks in inflation, any further momentum will start to strain the CBK’s appetite to cut further and also put pressure on the Shilling.
KES depreciation on the horizon
It’s possible that we’re now starting to see signs of that upward pressure, as KES depreciated by around 60bps in the last week. While this may seem modest relative to EM peers, it’s a fairly significant move in the context of KES with 30-Day Volatility increasing by 7x. We did see a similar situation recently in Uganda, where FX rates climbed without any significant macroeconomic driver. It quickly became apparent that foreign investors were looking to temporarily hedge local credit positions and the bid for USD in Spot FX and NDF’s injected the volatility. On paper, this situation could well currently be mirrored in Kenya although the USD bid feels driven more by locals which would suggest a drop in liquidity on the ground, something not seen since 2023.
If the depreciation gathers momentum, this could again test Kenya’s political stability. Over the last few years, there have been multiple instances of unrest on the ground, largely in response to proposed fiscal budgets by the incumbent government. Following the death of former President Amolo Odinga, a key lynchpin of Kenya politics was lost. Odinga was an important player in building the current pseudo-coalition in Kenya, with current President Ruto fielding opposition members into the cabinet. In Odinga’s absence, his Orange Democratic Movement may look to retract their support for President Ruto’s bid to be re-elected in 2027. If the Kenya Shilling suffers significant depreciation over the coming twelve months, this could be reason for an opposition bid to gather momentum, likely with an agenda to shun the IMF’s proposals for fiscal consolidation.
In conclusion
As we look to the end of 2025, the situation for the Kenya Shilling feels tentative. Having remained steadfast for over a year despite a range of economic challenges, the early signs of a move up to 130 is cause for concern. However given no clear single marco-economic driver over the last week, there is a decent chance we may see stability again at around 129.25 before the end of the year, whether that comes from the CBK defending the 130 level, or local credit hedging by foreign investors (if the core reason for the recent depreciation similar to Uganda) being unwound.
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