Why IMF Gave Kenya Ksh55.1 Billion Loan

The International Monetary Fund (IMF) on Tuesday, December 20 approved a Ksh55.1 billion ($447.39 million) loan to Kenya.

IMF explained in its press statement that it had completed the fourth reviews of the 38-month arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements. 

The Board’s decision thus enabled the immediate disbursement of the Ksh55.1 billion usable for budget support, including an augmentation under the ECF arrangement of 30 per cent of quota, about Ksh26.6 billion (US$215.81 million).

This brings Kenya’s cumulative disbursements under the EFF/ECF arrangements to about Ksh.203.8 billion (US$1.655.59 million). With the augmentation, the total amount under the EFF/ECF arrangements rises to 335 per cent of quota or about Ksh297.3 billion (US$2.416 billion).

An image of IMF offices. /FILE

The EFF/ECF arrangements that were approved on April 2, 2021, IMF added, aim to support Kenya’s program to address debt vulnerabilities, the authorities’ response to the COVID-19 pandemic and global shocks, and to enhance governance and broader economic reforms.

"Kenya’s economy remains resilient against a challenging global backdrop and is projected to grow 5.3 per cent in 2022. Inflation moved above the Central Bank of Kenya’s (CBK) target band in June and is expected to peak in early 2023.

"Despite double-digit export growth, the current account is expected to widen on higher global oil prices in 2022. Downside risks predominate in the near term, while Kenya’s medium-term outlook remains favorable although climate-related risks are elevated," IMF's statement read in part.

IMF explained that with progress on fiscal consolidation, public debt has begun leveling off. Additionally, taxes performed strongly in the Financial Year (FY2021/22), while spending was compressed on shortfalls in external commercial financing, leading to an overperformance of 1.7 per cent of GDP in the primary deficit. 

However, IMF noted that obligations carried over from last fiscal year and an increase in unbudgeted spending in early FY2022/23 increased pressures on the budget. 

IMF hailed President William Ruto's government as having reasserted Kenya’s commitment to fiscal consolidation, targeting a lower overall fiscal deficit than the original budget.

The CBK has raised policy rates by a cumulative 175 basis points in 2022. This is despite the Kenyan Shilling continuing to depreciate against the U.S. dollar while the dollar strengthened globally, and liquidity has declined in the interbank forex market. 

"A lower projected path of FX reserves reflects financing shortfalls last fiscal year and planned cuts in foreign-financed projects during FY2022/23. Reserves remain adequate at three months of imports, gradually increasing over the medium term," IMF added.

IMF also praised Kenya’s advancing structural reform agenda, albeit with some delays. 

In the areas of governance and transparency, IMF noted that authorities have completed and published audits of COVID-19 vaccine spending and begun publishing beneficial ownership information of successful bidders in new procurements. However, progress on addressing financial weaknesses in state-owned enterprises and a planned review of the fuel pricing mechanism were delayed during the political transition.

“Kenya’s commitment to its economic program supported by the Fund’s Extended Fund Facility and the Extended Credit Facility arrangements is anchoring debt sustainability. The economy has performed well amid slowing global growth, tighter financing conditions and volatile commodity prices, while the continuing drought has increased food insecurity, and climate-related risks pose ongoing challenges. Mutually reinforcing prudent macroeconomic policies and resolute implementation of structural reforms remain essential to safeguard positive medium-term prospects.

A car being fuelled at a petrol station. /FILE

“Strong performance of tax revenues supported resilience and cushioned the initial impact of global shocks on households and businesses, and the new administration’s elimination of petrol subsidies and plans for significant reprioritization of expenditure to keep the fiscal deficit below the budgeted level are commendable. Looking ahead, continued strong commitment to fiscal consolidation over the medium term remains key to reduce debt vulnerabilities. Additional tax policy measures, anchored in a Medium-Term Revenue Strategy to secure space for needed social and development spending, and improved spending efficiency, revenue administration, and public financial and debt management will be key," stated Antoinette Sayeh, Deputy Managing Director and Acting Chair of IMF.

Sayeh called for the continuous profress on the structural reform agenda alongside new initiatives to promote inclusive growth. By beginning to publish beneficial ownership information for successful bidders of new procurements, she added that Kenya delivers on a key commitment to enhance transparency and accountability. 

"However, the AML/CFT legal framework needs strengthening and stepped-up efforts on compliance. Addressing vulnerabilities at Kenya Airways and Kenya Power and Lighting Company is urgent, along with strengthening the governance framework for state-owned corporations. 

"Planned reviews of the fuel pricing mechanism and the audit of extrabudgetary spending are also important. High vulnerability to climate change calls for multi-faceted policy action," she added.