Kenya and the International Monetary Fund (IMF) are set to negotiate a fresh financial assistance program, replacing the existing one, as the country grapples with soaring debt-servicing costs stemming from years of heavy borrowing and government spending.

To sustain its ability to meet debt obligations, Kenya requires ongoing financial backing from the IMF. Haimanot Teferra, the IMF’s mission chief, confirmed in a statement following a visit to Nairobi that the IMF had received an official request from Kenyan authorities for a new program.

Both parties have agreed to discontinue the ninth review of the current Extended Fund Facility (EFF) and Extended Credit Facility (ECF) programs, which were scheduled to expire next month. The combined value of the ECF/EFF arrangement stands at $3.6 billion.

Following the announcement, Kenyan dollar bonds declined, with 2048 maturities dropping over one cent each, trading at just above 80 cents. Some maturities hit their lowest levels in six months. Under the existing program, approximately $3.12 billion had been approved for disbursement by October 2023, implying that the now-abandoned ninth review could have unlocked an additional $480 million.

Neither IMF officials nor Kenyan government representatives have clarified how much funding remains at stake under the halted review. The IMF's statement also omitted any reference to the Resilience and Sustainability Facility, which was approved for Kenya in July 2023 and had already disbursed $180.4 million of its $541.3 million total by October.

While Teferra acknowledged the request for a new IMF program, she did not specify whether it would involve lending or technical assistance. However, Finance Minister John Mbadi previously told Reuters that Kenya would be seeking a financing program.

“The market is understandably disappointed,” said Charlie Robertson, head of macro-strategy at FIM Partners. He estimated that up to $800 million in IMF funding may now be uncertain. However, he noted that the prospects of a new IMF agreement, along with Kenya’s recent $1.5 billion Eurobond issuance and an untapped $1.5 billion loan from the United Arab Emirates, were reassuring investors.

"A funded IMF deal would be the best-case scenario," Robertson added, suggesting that a new program could incorporate funds that would have been available under the abandoned review.

The ECF/EFF program, initiated in April 2021, has faced significant challenges, including last year's deadly anti-tax hike protests and controversy surrounding fresh borrowing from the UAE. In response to its growing debt burden, the government has been aggressively seeking new funding sources, including increased domestic revenue collection, to meet financial obligations and support critical expenditures such as climate change adaptation.

As of June 2023, Kenya’s total debt-to-GDP ratio stood at 65.7%, exceeding the widely accepted sustainability threshold of 55%, according to finance ministry data.

Last month, Kenya joined a rising number of African nations tapping international markets to refinance maturing debts and stabilize key expenditures such as healthcare. Countries like Ivory Coast and Angola have undertaken similar liability management measures to navigate economic uncertainties.