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Post Reply: World Bank Withholds Sh96.93 Billion Loan to Kenya Over Delayed Reforms

<blockquote><div class="quotetitle">Quote from <a class="profile-link highlight-moderator" href="https://lawguide.co.ke/understanding-law/legal-forum/profile/lawyer/">Lawyer</a> on July 25, 2025, 7:00 am</div><div id="pl-7204"  class="panel-layout" ><div id="pg-7204-0"  class="panel-grid panel-no-style" ><div id="pgc-7204-0-0"  class="panel-grid-cell"  data-weight="1" ><div id="panel-7204-0-0-0" class="so-panel widget widget_sow-editor panel-first-child panel-last-child" data-index="0" data-style="{&quot;background_image_attachment&quot;:false,&quot;background_display&quot;:&quot;tile&quot;,&quot;background_image_size&quot;:&quot;full&quot;,&quot;background_image_opacity&quot;:&quot;100&quot;,&quot;border_thickness&quot;:&quot;1px&quot;}" ><div
			
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<p dir="ltr">The World Bank has postponed the release of a Sh96.93 billion loan to Kenya, equivalent to $750 million, due to delays in implementing critical governance and anti-corruption reforms. This decision has deepened Kenya’s fiscal challenges, leaving the Treasury to address a significant funding gap as the 2024/25 financial year progresses. The loan, part of the World Bank’s Development Policy Operations (DPO) facility, was contingent on Kenya meeting specific policy and institutional reforms aimed at improving fiscal management, governance, and transparency in public finances. The delay has sparked concerns about Kenya’s ability to bridge its budget deficit and meet mounting debt obligations.</p>
<p dir="ltr">The primary reason for the withholding of the loan is Kenya’s failure to pass the Conflict of Interest Bill, 2023. This legislation was a key condition set by the World Bank to ensure greater accountability and curb corrupt practices among public officials and politicians. President William Ruto declined to sign the bill into law, citing concerns over 12 clauses that he argued had been weakened by Members of Parliament. These clauses were intended to prevent public servants from receiving gifts during official duties, prohibit government officials from seeking tenders with public entities, and mandate regular declarations of wealth, including assets held by spouses and children, to curb unexplained wealth accumulation.</p>
<p dir="ltr">The Senate further complicated the process by rejecting amendments proposed by the National Assembly to strengthen the bill. These amendments aimed to address issues such as insider dealings and tender fixing, practices that have historically enabled public officials to amass significant wealth disproportionate to their salaries. The World Bank also required Kenya to adopt a single bank account for public finances and automate government tenders to eliminate collusion and enhance transparency. These reforms remain incomplete, prompting the World Bank to delay the disbursement of the second tranche of the DPO loan, following the release of Sh155 billion ($1.2 billion) in the first tranche last year.</p>
<p dir="ltr">The delay has created a Sh97 billion hole in Kenya’s 2024/25 budget, exacerbating the country’s fiscal strain. Treasury Cabinet Secretary John Mbadi indicated that the earliest the funds could now be released is July 2025, leaving the government to explore alternative financing options. To address the shortfall, the Treasury plans to borrow Sh591.9 billion from the local credit market to bridge a broader Sh876.1 billion budget deficit for the financial year starting July 2024. This increased reliance on domestic borrowing has raised concerns among financial institutions, including the Central Bank of Kenya, the Institute of Social Accountability, and the Institute of Public Finance, which have warned that government borrowing could crowd out private sector credit and stifle economic growth.</p>
<p dir="ltr">The delay comes at a time when Kenya is grappling with significant debt repayment pressures, particularly to external creditors like China. Treasury documents reveal that some government departments have already overspent their allocations, intensifying fiscal challenges. For instance, the State Department of Social Protection and Senior Citizens exceeded its Sh35.7 billion budget by Sh2.4 billion by April 2024, while State House had spent 98 percent of its Sh7.96 billion allocation in the same period. To manage these pressures, the Treasury is preparing a third supplementary budget for the current financial year.</p>
<p dir="ltr">Kenya’s fiscal challenges are compounded by sluggish tax revenue and a decline in private sector lending. According to the Central Bank of Kenya, bank lending to the private sector shrank by 1.4 percent in December 2024 compared to the previous year, partly due to a stronger Kenyan shilling affecting the valuation of foreign currency-denominated loans. This contraction has impacted job creation, with the 2025 Economic Survey reporting a slight dip in new jobs to 703,700 in 2024 from 720,900 in 2023, despite the private sector contributing 90 percent of employment.</p>
<p dir="ltr">The Kenya National Chamber of Commerce and Industry (KNCCI) has projected a challenging financial year for businesses, citing high taxes, rising operational costs, and unfavorable policies. A survey of 1,981 businesses conducted by KNCCI revealed that 60 percent of firms do not plan to expand their workforce in 2025, attributing the negative outlook to declining sales and increased costs. These economic headwinds have further strained Kenya’s ability to meet its fiscal obligations without external support.</p>
<p dir="ltr">The World Bank has emphasized that the release of the DPO funds depends on Kenya completing the agreed-upon reforms and maintaining an adequate macroeconomic and fiscal policy framework. Qimiao Fan, the World Bank Division Director for Kenya, Rwanda, Somalia, and Uganda, stated that the timing of the loan disbursement hinges on the government meeting these conditions. The DPO facility is designed to support reforms that create fiscal space, improve governance, and promote inclusive growth, aligning with Kenya’s Vision 2030 development strategy.</p>
<p dir="ltr">Kenya has increasingly turned to multilateral lenders like the World Bank and the African Development Bank for budget support, particularly after the International Monetary Fund (IMF) discontinued its funding program. The IMF ended its support after Kenya failed to meet 11 conditions, including the restructuring of Kenya Airways and a review of fuel levy collections, resulting in a missed opportunity for Sh63.3 billion ($490 million) in funding. The Treasury has not factored in IMF funding for the next four financial years but has initiated talks for a new program. Meanwhile, Kenya expects to rely on World Bank support until at least the 2028/29 financial year, with projected disbursements totaling Sh682 billion in equal annual amounts.</p>
<p dir="ltr">The withholding of the Sh96.93 billion loan underscores the importance of governance and anti-corruption reforms in securing international financing. The delay risks exacerbating Kenya’s debt distress, with public debt standing at 68 percent of GDP in 2024, according to the World Bank. Interest payments currently absorb about a third of tax revenue, limiting the government’s ability to fund essential services like education and healthcare. The World Bank has also downgraded Kenya’s GDP growth projection to 4.5 percent for 2025, citing persistent food inflation and drought-related agricultural challenges in Eastern Africa.</p>
<p dir="ltr">To mitigate these challenges, the World Bank recommends formalizing the economy, reforming the tax system to enhance fairness and efficiency, and strengthening tax compliance through better enforcement and simplified procedures. The introduction of an e-procurement system by the National Treasury, launched in March 2025, aims to curb corruption and save an estimated Sh50 billion annually by streamlining public procurement processes. However, the success of these measures depends on the government’s commitment to implementing reforms swiftly and effectively.</p>
<p dir="ltr">As Kenya navigates this fiscal crisis, the government faces pressure to balance debt repayment, economic growth, and public service delivery. The delay in World Bank funding serves as a reminder of the critical link between governance reforms and financial stability, urging policymakers to prioritize transparency and accountability to secure Kenya’s economic future.</p>
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