The International Monetary Fund has offered a temporary cushion to East Africa but with conditions attached.
This week, IMF approved credit extensions to Kenya and Tanzania as they battle rising inflation.
However, the fund said that subsidies in Kenya and Rwanda have to end as soon as October.
Early last week, the IMF board approved $235.6 million worth of Extended Credit Facility (ECF) and Economic Fund Facility (EFF) for Kenya. It also approved an SDR 795.58 million (about $1,046.4 million) ECF arrangement for Tanzania, with about $151.7 million to be disbursed immediately..
However, the countries will have to adhere to certain fiscal policies, including eliminating fuel subsidies that have been running since last year.
The IMF says subsidies are costly to the government and cannot lower prices in situations where other factors raise the price of fuel.
Kenya has been paying oil marketers Ksh13 billion ($110 million) per month in subsidies.
IMF said this may misalign the country’s domestic with foreign prices unless the subsidies are eliminated. “The authorities also plan to complete by end July 2022 a review of application of Kenya’s fuel pricing mechanism and constitute a taskforce to oversee the progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure that fuel pricing actions are at all times aligned to the approved budget.”
The subsidy should be replaced with targeted social safety nets such as giving stipends to the elderly and other vulnerable groups, IMF said.
Rwanda’s social safety nets were lauded but Kigali was told to increase coverage and “phase out fuel subsidies as planned”.
Dar received plaudits for cushioning locals from Covid-19 as well as spillovers from the Ukraine war. Tanzania announced a fuel subsidy in May.
IMF's total disbursement to Kenya since April 2021 is $1.2 billion. It is part of the $2.34 billion total funding under the fund’s EFF and ECF that was approved in 2021. The money is for settling obligations and cushioning the country against the effects of global crises.
“Considerable development and reform challenges and external headwinds, including Covid-19 induced scars and the war in Ukraine, risk eroding hard-won economic gains. Against this backdrop and recognising countries’ strong track record in reform implementation, IMF supports the authorities’ requests for an ECF arrangement to meet pressing financing needs.”
For Uganda, the IMF will continue to disburse the $1 billion ECF loan that has a zero-interest rate, with a grace period of five and half years.