IMF Review: Kenya Faces Heighten External Financial Risk –Fitch
The cancellation of Kenya’s ninth and final review under its current Extended Fund Facility (EFF) and Extended Credit Facility (ECF) programmes will add to the government’s fiscal and external financing challenges, Fitch Ratings says.
Analysts said they believe the development is most likely due to Kenya’s failure to meet revenue and budget deficit targets under the two facilities.
Fitch had assumed the programmes would end normally at their expiry date in April 2025, and that a successor facility would be negotiated with the IMF, when the rating agency affirmed Kenya’s ‘B-’ rating with a stable outlook in January 2025.
The government has requested a new IMF programme, but this has yet to be finalised. At the time of the revised budget in January, the government intended multilateral financing to provide around half of the USD5 billion it sought to borrow externally in the fiscal year to end-June 2025 (FY25).
This included the final disbursement of about USD500 million under the EFF/ECF programmes and USD400 million under a separate IMF Resilience and Sustainability Facility.
Fitch believes there is a high risk that multilateral funding, including USD800 million anticipated by the government under the World Bank’s Development Policy Operations budget support, could be delayed until a new programme is agreed with the IMF.
Agreeing on a new deal may take time given the government’s difficulty meeting the terms of the old EFF/ECF arrangements.
In January, for example, Fitch anticipated further fiscal slippage, with the budget deficit reaching 4.8% of GDP in FY25, 1.5pp higher than the government’s initial budget target set under the old EFF/ECF programmes and 0.4pp above its January 2025 revised target.
This revision was driven by rising debt servicing costs, higher social spending and new expenditure pressures from collective bargaining agreements, even as progress on revenue reforms was limited.
“We also believe the new US administration will significantly reduce bilateral assistance to Kenya, which averaged 0.7% of Kenya’s GDP annually in 2021-2023”. Reduced multilateral and bilateral funding could increase reliance on more expensive commercial borrowing to meet external financing requirements.
Kenya’s near-term external refinancing pressures have eased since the sovereign’s USD1.5 billion bond issue in February 2025. This allowed the government to buy back a 2027 Eurobond worth USD900 million. The government has also secured a USD1.5 billion financing line from the United Arab Emirates, although the facility’s terms are unclear.
“We expect government external debt service to decline in FY25 to USD4.1 billion from USD5.4 billion in FY24.
“However, we project it to exceed USD5 billion annually in FY26-FY29, ensuring external financing needs remain large.
“This is partly due to a high interest burden: we forecast interest payments to remain above 30% of revenue in FY25 and FY26, which is more than double the median of 14.8% for ‘B’ category sovereigns”, Fitch said.
Analysts noted that the trend of current account deficits largely financed by official borrowing has led to a build-up in net external debt, which analysts estimate at 53% of GDP at end-2024, nearly double the ‘B’ median of 27.9%.
The large share of foreign-currency-denominated external public debt means that the government’s debt service burden would rise if the local currency were to depreciate sharply, for example, because of greater external financing difficulties.
In its January assessment, Fitch had assumed that Kenya’s external buffers would remain weak, with foreign-exchange reserves at USD8.9 billion by end-December 2025.
This would provide 3.6 months of current external payments, below the median for ‘B’ category sovereigns of 4.2 months. A sharp decline in these buffers or greater financing strains could put downward pressure on Kenya’s rating, Fitch said. #IMF Review: Kenya Faces Heighten External Financial Risk –Fitch
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