The International Monetary Fund (IMF) and Kenya have reached a staff-level agreement on economic policies following the sixth review of extended credit fund facilities' arrangement to unlock more funds for the government.
International Monetary Fund

The International Monetary Fund (IMF) and Kenya have reached a staff-level agreement on economic policies following the sixth review of extended credit fund facilities’ arrangement to unlock more funds for the government.

In a statement, IMF said a staff team from the multilateral lender led by Haimanot Teferra, visited Nairobi and held discussions with the Kenyan authorities for the 2023 Article IV Consultation.

The discussion also covered the sixth review of Kenya’s economic program supported by the IMF’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF), and the first Review under the Resilience Sustainability Facility (RSF).

The EFF/ECF arrangements were approved by the IMF Executive Board on April 2, 2021 and extended by 10 months on July 17, 2023 to help Kenya maintain robust and inclusive growth while preserving macroeconomic stability and debt sustainability.

Recall that SDR407.1 million RSF was approved by the IMF Executive Board on July 17, 2023 to support Kenya’s ambitious efforts to build resilience to climate change.

The mission also considered Kenya’s request for augmentation under the EFF/ECF arrangements, according to the statement released by IMF.

The EFF/ECF arrangements would provide access to a total amount of SDR2.93 billion which is about US$3.8 billion at the current exchange rate if approved by IMF Board.

Under the EFF/ECF augmentations and the RSF support, the total IMF commitment under these arrangements over the duration of the program would be SDR3.34 billion (about US$4.43 billion).

Ms. Teferra said the agreement is subject to IMF management approval and consideration by the Executive Board, which is expected in January 2024.

Upon completion of the sixth reviews by the IMF Executive Board, Kenya would have immediate access to SDR514.48 million (about US$682.4 million), including from the augmentation of access under the EFF/ECF arrangements (SDR469.25 million) and first review of RSF (SDR45.23 million).

This would bring total IMF financial support disbursed under the EFF/ECF and RSF arrangements to SDR2.02 billion (about US$[2.68] billion), she added.

“The tightening global financing conditions for frontier economies and global geopolitical tensions are compounding the challenges from the legacy of the pandemic and multi-season drought, further straining Kenya’s balance of payments and fiscal financing requirements. The authorities’ strong reform program aims to enhance the policy framework substantially and restore confidence to ensure access to the global bond market.

“The economy has displayed resilience, with real GDP expanding by 5.4 percent in the first half of 2023, primarily due to a robust recovery in the agriculture sector following the return of rains. In the fiscal year 2022/23, the primary deficit came in as expected at 0.6 percent of GDP, reflecting tight expenditure management in light of tax shortfalls. Financing conditions continue to be challenging. With a tightening of monetary policy in June, and increased liquidity constraints in the banking sector, yields on government bonds have experienced a notable upward trend. The external current account deficit has narrowed, driven by a recovery in the tourism sector to pre-COVID-19 levels and reductions in non-energy imports. The real exchange rate has depreciated to its lowest level in five years. Headline inflation has fallen within the target range of 2.5–7.5 percent since July.

“Despite continued commitment to the implementation of the IMF-supported economic program which is broadly on track, persistent uncertainty looms over Kenya’s effective access to international bond markets. This uncertainty is exerting substantial pressure on liquidity, primarily due to the sizeable external debt service payments anticipated in 2024. Against this backdrop, the authorities are actively mobilizing additional financing from their development partners, the IMF, and commercial sources while concurrently intensifying their efforts to enhance macroeconomic policies and implement structural reforms.

“Steadfast implementation of a package of mutually reinforcing policies remains the key to sustain macroeconomic stability, anchor market confidence, continue to deliver on the program’s objectives, and bolster Kenya’s medium-term prospects.

“A tighter fiscal stance is envisaged under the program to help reduce debt vulnerabilities and achieve a PV debt/GDP of 55 percent, the authorities’ debt anchor, by 2029. This will entail timely implementation of reforms to broaden the domestic tax base and improve tax compliance.

“These are critical for achieving the authorities’ revenue objectives of reversing the trajectory of the tax-to-GDP ratio while promoting equity and fairness in the tax regime.

“Expenditure rationalization will need to continue, with a focus on enhanced efficiency of public investments, better targeting of subsidies and transfers, addressing weakness in state corporations, and digital delivery of public services. The social safety nets and fiscal risk management framework need to be further enhanced.

“The mission welcomed the Central Bank of Kenya’s (CBK’s) steps to modernize the monetary policy framework and improve the functioning of the FX market. The recent introduction of a new interest rate corridor centered around the policy rate, aimed at guiding the interbank rate, is anticipated to enhance the transmission of monetary policy.

“Additionally, initiatives like the DhowCSD and other policy adjustments are expected to stimulate interbank repos, potentially minimizing market fragmentation. Further efforts to improve the functioning of the FX market and greater exchange rate flexibility would reduce the costs to the real economy from large spreads and excess FX demand, while encouraging capital inflows and reducing outflows.

“Credible and mutually reinforcing policies would help maintain favourable inflation differentials with trading partners, boost export competitiveness, and mitigate balance of payments pressures. Efforts, including to strengthen the macroprudential policy framework will be key to reducing financial sector risks.

“On the upside, should investor confidence recover fully, a virtuous cycle of inflows could stabilize the exchange rate and bring down inflation to the target faster than expected. An enhanced rebound in agriculture could bolster growth, help reduce inflation further, while earlier than expected market access would ease financing challenges. Further progress with reforms that improve the business environment, and that support a market and rules-based economy would reinforce this upside risk. On the domestic front, the key downside risk is that the policy shift now underway, if loses its momentum, could erode confidence and lead to increased FX demand and reserve drain.

“Externally, the key downside risks in the form of higher commodity prices, a slowdown in trading partners’ demand, and a worsening of external financing conditions could weigh on the prospects of rebuilding external buffers.

“Progress on the climate agenda under the RSF remains strong. Fast-tracking the reforms will also create a conducive environment for attracting climate finance.

“The Article IV discussions complemented the program by focusing on assessing Kenya’s public sector balance sheet, benchmarking its revenue performance to peers, exchange rate passthrough to inflation and examining medium-term structural issues related to export competitiveness.

“Responses to near-term challenges should be complemented by actions to anchor confidence and improve medium-term prospects for export competitiveness and governance and the anti-corruption framework for an inclusive, green, and vibrant economy.

“The staff team is grateful to the authorities for their hospitality and candid and constructive discussions and reaffirms the IMF’s support for the government’s efforts to implement its economic reform agenda.” Naira Devaluation Deepens Economic Crisis in Nigeria

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