How World Bank and IMF loans are reshaping policy making in Africa | Financial Issues

Nairobi, Kenya – Over the years, international lenders such as the World Bank and the International Monetary Fund (IMF) have provided financing to developing countries that is often cheaper than commercial lending, especially through lending windows.

But such investments often come with reforms that require governments to strengthen public finance management, improve tax collection, ensure economic efficiency, and implement measures to strengthen their economy.

Supporters say that these measures help to ensure that borrowed money is used properly, reduce the risk of corruption, and protect countries from serious debt problems. Critics, however, say it could increase the influence of international lenders on domestic elections, especially in countries that lack access to affordable financing.

Across Africa, governments seeking debt financing have been required to implement reforms beyond the activities the loan is intended to support. These efforts have included changes in the management system.

Kenya’s recent acquisition of $750m in World Bank funding has brought these tensions back into the spotlight. The package includes regular lending from the World Bank through the International Bank for Reconstruction and Development (IBRD) and financing through the International Development Association (IDA), and reforms related to governance, public finance, climate resilience, and social security.

The big question is whether such changes strengthen institutions and improve public services, or whether they allow foreign lenders to exert more influence on domestic decisions.

Cheap loans… but at what cost?

President William Ruto has criticized what he says are demands that African countries are sometimes expected to meet when seeking foreign investment.

Speaking at a dinner at State House for members of African Trade and Investment Development Insurance (ATIDI) on June 2, Ruto said some lenders adopt policies that go beyond the financial objective.

“It’s difficult to go and borrow money from people. They force you to do everything. You know. Do this, go pass this law, why go and introduce sex laws, go do this, and do this. Things that don’t match the money you’re looking for,” said Ruto.

Kenya received the funds under the second phase of the three-phase Fiscal Sustainability and Resilient Growth Development Policy Operation.

According to the World Bank, the funds support governance reforms, financial management, social security, and the livelihoods of refugees and host communities. The program has raised questions about how many governments have to negotiate when they rely on international funding.

“It takes two to stabilize. When funding is constrained, governments have less room to negotiate. As funding flows, things tend to slow down,” Churchill Ogutu, head of research at Capital A Investment Bank, told Al Jazeera.

Ogutu said Kenya’s efforts to raise funds through various channels, including through international markets, reflect a desire to reduce dependence on formal lending.

The human cost of lender-driven change

In Africa as a whole, reforms related to international finance often involve political measures such as raising taxes, reducing subsidies, and controlling costs.

Creditors say that such measures are necessary to restore financial stability and reduce credit risk. Critics say it could increase spending on groceries and put more pressure on families struggling financially.

The Kenyan protests against the 2024 Anti-Finance Bill, which later escalated into anti-government protests, demonstrated political interest in financial reform. Rights groups and other observers have reported that more than 60 people have died during the unrest.

The protests followed tax proposals that Kenya sought to meet fiscal targets under its IMF-backed program. Adopted in 2021, the program included measures aimed at promoting capital accumulation, reducing financial problems, and implementing economic reforms.

Wangari Kebuchi, an economist and managing director of Expertise Global, said the budgets of the financial sector are often the first to be affected by governments when they increase spending.

“When budgets are tight, public sector funds are cut first, and children, who are a large part of our population, bear the brunt of weak health, education and security systems,” Kebuchi told Al Jazeera.

Kebuchi said Kenya is facing high debt financing costs, low development aid, and weak domestic revenues, leaving governments with little money to meet the needs of the people.

Similar conflicts have erupted elsewhere on the continent. Nigeria scrapped the oil tax by 2023 and re-imposed foreign currency exchange rates at a time when the Naira had fallen sharply, leading to higher import and transport costs.

Ghana, after defaulting on its debt by 2022, has implemented a combination of measures to curb the hiring of workers, control wages, and reduce expected inflation and social unrest.

Debate over fair lending is not new. Critics have argued that the Structural Adjustment Programs introduced by the World Bank and the IMF in the 1980s and 1990s weakened public services in parts of Africa through fiscal austerity, currency hiding, and market reforms.

Supporters of these programs say that the reforms addressed a long-term economic slowdown and helped restore financial stability, while critics say that the incomes faced by people were low.

Some studies have linked IMF programs to health outcomes in sub-Saharan Africa, although the findings remain controversial.

Policy influence through credit allocation

Proponents of structured lending argue that credit requirements are designed to protect both borrowers and lenders. They say that strong institutions, good financial management, and good governance increase the chances of countries being able to repay debt and develop economies.

The World Bank has said that sustainable finance is intended to support long-term development by helping governments deal with potential crises and managing the economy.

Eric Musau, head of research and finance at Standard Investment Bank, said the low-cost currency provides governments with cheaper ways to borrow while reducing their reliance on expensive commercial loans.

“By increasing repayment windows and offering interest, the facility reduces the cost of borrowing,” Musau told Al Jazeera.

He said interest rate loans are very important for countries like Kenya, which have been facing difficulties in accessing affordable financing due to credit crunch.

“Ideally, capital expenditure should benefit ordinary citizens. For countries like Kenya with low debt, these loans reduce the cost of debt, and the interest rate is aimed at helping the most vulnerable,” he said.

For governments facing high debt and limited financing options, low-cost loans remain attractive. However, experience across Africa shows that the value of interest payments is measured not only by the interest rate and repayment period, but also by the changes and consequences that accompany access.

As Kenya and other countries continue to pursue the balance between financial aid and national needs, the debate over appropriate lending will continue. For many citizens, however, the debate is less about the ability to borrow and more about what those decisions mean for everyday life.

“There is something very strange here: Citizens are asked to pay more taxes to support health, education, water, social security, and then they are asked to pay out of pocket for the same services because the tax money does not really reach,” said Kebuchi.