IMF’s new terms for Kenya $1.5b standby loan

Sunday December 1 2019

Central Bank of Kenya (CBK) headquarters in Nairobi.

Central Bank of Kenya (CBK) headquarters in Nairobi. Kenya last month removed controls on the cost of bank loans, which was a key condition that the IMF had set for Nairobi to access its funding. PHOTO | SALATON NJAU | NMG 

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The International Monetary Fund has introduced a set of new conditions for Kenya to access its $1.5 billion precautionary loan that was suspended in September last year, barely weeks after the country scrapped control of interest rates in compliance with the international lender’s demands.

An IMF team that visited Nairobi between November 18 and 22 wants the Treasury to cut the rising budget deficit which stood at 7.7 per cent of GDP in the 2018/2019 financial year.

The fund also wants the government to implement “tax and expenditure reforms that do not hurt private sector investments and stifle economic growth,” before the resumption of talks planned for early next year.

The new conditions are set to throw a spanner in the government’s plans to access funding from the IMF, including the critical precautionary loan to cushion the shilling from external economic shocks.

“Progress in this direction (reduction of fiscal deficit), including the design of tax and expenditure reforms that support a growth-friendly fiscal consolidation, would be important to anchor a new Fund-supported programme,” said the IMF in a statement after the visit which was led by Benedict Clements.

The IMF says it held talks with acting Treasury Cabinet Secretary Ukur Yatani the Central Bank of Kenya Governor Dr Patrick Njoroge, the Head of Public Service Dr Joseph Kinyua among other senior government officials.


The Fund officials also met representatives of the private sector and “development partners.”

The two-year (March 2016-March 2018) standby loan was approved by the IMF board to help cushion the Kenyan shilling from unforeseen economic shocks that could distort the country’s balance of payments position.

The programme was extended by six months in March 2018 after Kenya was unable to complete its programme reviews due to the repeated 2017 General Election.

Convergence criteria

The East African Community convergence criteria agreed by member countries requires that budget deficits should not exceed three per cent of GDP to discourage countries from excessive borrowing.

The IMF ordinarily offers loans to help countries tackle balance of payment problems and stabilise their economies.

Kenya last month removed controls on the cost of bank loans, which was a key condition that the IMF had set for Nairobi to access its funding.

The Treasury also pushed through an eight per cent value added tax on all petroleum products, which was also part of the initial conditions that the IMF wanted fulfilled before renewing the funding programme in September last year.

The VAT on fuel was halved from 16 per cent in the wake of massive public resistance when it was introduced.

While the IMF is happy with the removal of the rate caps to free more credit to the private sector and give CBK more monetary policy flexibility, the country’s rising budget deficit that has accelerated accumulation of debt appears to be the new focus for the Bretton Woods institution.

The Kenyan parliament approved a proposal by the National Treasury to raise the debt ceiling to Ksh9 trillion ($90 billion) in October, fuelling fears that the country is rapidly drifting towards debt distress due to the government’s increased appetite for expensive loans.

“Credit growth has remained low (6.6 per cent year-on-year in October) but is expected to rise steadily because of the recent elimination of interest rate controls and deployment of innovative credit products targeting small enterprises. Staff welcomes these reforms, which will support higher and more inclusive growth,” says the IMF in a statement dated November 22.

Forex reserves

The Kenyan government has been keen on protecting its foreign exchange reserves that are increasingly coming under pressure as the country struggles to service its import bills and foreign denominated debts against a backdrop of missed tax revenue targets, falling export earnings and unpredictable remittance inflows.

Dr Njoroge last week expressed fears that the economy is highly exposed without the IMF’s standby facility.

“We made the point that it is in our interest to get that insurance because shocks can be large,” said Dr Njoroge in the monthly Monetary Policy Committee briefing.

Kenya’s forex reserves have declined in the past one month, falling to $8.77 billion (5.44 months of import cover) on November 21 from a high of $8.94 billion (5.59 months of import cover) on October 24, according to Central Bank data.

The Kenya National Bureau of Statistics latest report shows that Kenya’s total export earnings declined to Ksh49.6 billion in August from Ksh50.22 billion in July this year, largely due to a fall in both the quantity and value of coffee and tea exports.

During the eight months’ period to August Kenya’s coffee export earnings declined to Ksh1.46 billion from Ksh1.49 billion ($14.9 million) in January while tea export earnings dropped to Ksh9.45 billion ($94.5 million) from Ksh11.83 billion ($118.3 million) in the same period.

Earnings from cut flower exports also declined to Ksh6.61 billion ($66.1 million) from Ksh9.93 billion ($99.3 million) while those from vegetable exports fell to Ksh1.67 billion ($16.7 million) from Ksh2.5 billion ($25 million).

On the other hand, CBK data shows that for the 10 months’ period (January-October) this year, the amount of dollars Kenyans living abroad sent back home declined to $224.29 million in October from $244.83 million in January.

Acting Treasury CS Yatani and PS Julius Muia have been laying the ground work to start fresh talks with the IMF, with hopes of restoring the two-year standby loan facility, which is intended to cushion the shilling against external shocks and raise the country’s credibility in the eyes of foreign lenders.

Tough call

Kenya’s lawmakers through the Parliamentary Budget Office however said the country’s rising debt service payments that amounted to Ksh775 billion ($7.75 billion) in the 2018/2019 fiscal year has complicated the entire fiscal consolidation framework, making attempts by the National Treasury to reduce budget deficit a tough call.
Total public debt had reached Ksh5.6 trillion ($56 billion) in September 2018 and is projected to hit Ksh6.5 trillion by the end of this year, putting the entire fiscal framework at risk due to rising cost of debt service payments.

According to PBO the trends in revenue collection compared with expenditure have depicted a widening budget deficit over time, with revenue collections falling by an average of Ksh100 billion ($1 billion) every year over the past decade.

According to the lawmakers, growth in Kenya’s debt over the years has been on account of little improvement in the budget primary deficit, increase in debt service payments, annual revenue shortfalls and weak commitment to fiscal consolidation over the medium term.

“As a result, the fiscal space has shrunk considerably,” according to PBO’s Budget Options report for the 2019/2020 fiscal year and the medium term.