As Kenya contemplates undergoing a Governance Diagnostic Assessment (GDA) by the International Monetary Fund (IMF), the experiences of Sri Lanka and Cameroon offer timely and cautionary lessons.
While such an assessment could unlock a new $ 3.5 billion Extended Credit Facility (ECF) and Resilience and Sustainability Facility (RSF) program for 2025 – 2028, positioning Kenya for stronger fiscal consolidation and foreign capital inflows, it also risks exposing systemic governance failures with far-reaching economic consequences.
Sri Lanka’s GDA, conducted in March 2023, laid bare widespread corruption and governance weaknesses. These ranged from weak central bank independence and legal frameworks to compromised revenue collection, opaque public procurement systems, and underperforming state-owned enterprises (SOEs).
Among its 16 action points were calls for transparent appointments to its anti-corruption commission, asset declarations by top political figures, reforms to procurement laws, creation of a beneficial ownership registry, and greater judicial oversight. The diagnostic’s brutal honesty underscored the cost of inaction: diminished investor confidence, lost revenues, and erosion of public trust.
Cameroon faced a similar reckoning. Its March 2023 assessment targeted key areas: anti-corruption, fiscal governance, financial sector oversight, and property rights enforcement. Findings revealed entrenched weaknesses in public financial management, tax administration, and SOE governance- all of which have direct implications on the country’s fiscal sustainability and financial stability.
These GDAs draw from the IMF’s 2018 Framework for Enhanced Engagement on Governance, an institutional response to corruption’s corrosive impact on economies. Building on reforms initiated in 1997 and expanded in 2017 and 2020, the 2018 framework systematically assesses governance vulnerabilities and promotes actionable reforms. The IMF emphasizes that corruption not only erodes tax revenues and inflates public procurement costs but also distorts spending priorities, starving health, education, and infrastructure of vital funding.
How Corruption Breaks the System it Depends on
Data reveals that countries with lower corruption levels collect 4% more tax revenue as a percentage of GDP. Corruption compromises financial system oversight, exacerbates non-performing loans through poor lending practices, and depresses credit availability due to high transaction costs and information asymmetries.
It also leads to regulatory capture, fosters instability, and undermines investor confidence- reflected in reduced FDI inflows and weakened sovereign credit ratings. Moreover, countries with high corruption scores often exhibit poor rankings on the Global Peace Index, indicating wider governance failures.
The IMF’s governance framework targets 6 core functions: fiscal management, financial oversight, central bank governance, market regulation, rule of law, and anti-money laundering and counter-terrorism financing (AML/CTF). The intent is not only to identify and report on governance shortcomings but to support countries in adopting SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) reforms across ministries, departments, agencies, SOEs, and semi-autonomous government agencies.
For Kenya, the potential upsides of an IMF GDA are considerable. A successful assessment could catalyze concessional and commercial financing, lower debt-servicing costs through improved sovereign ratings, and greater FDI. It would also boost macroeconomic stability by enhancing CBK independence, reducing non-performing loans linked to government arrears, and improving the efficiency of public investment and social spending.
However, a scathing diagnostic- especially one that echoes the severe findings in Sri Lanka- could undermine the country’s credibility with both multilateral and private creditors. Negative signals from the IMF might trigger a surge in Kenya’s Eurobond yields, causing mark-to-market losses, steepening yield curves, and raising both LCY and FCY debt servicing costs.
The result would be tighter liquidity, rising bank lending rates, and further crowding out of MSMEs and households from credit markets. A downgraded sovereign rating could push Kenya deeper into junk status, making external financing more expensive or inaccessible- dimming hopes for long-term growth and development.
In essence, while a Governance Diagnostic Assessment offers a path to fiscal and institutional strengthening, Kenya must weigh the risks and benefits carefully. Transparency, political will, and swift reform implementation will determine whether such an exercise becomes a catalyst for renewal or a public reckoning with painful economic consequences.
Nicasio Karani is a banking and macroeconomics specialist, currently serving as General Manager- Special Projects and Bank Economist at Equity Group Holdings PLC.
