The International Monetary Fund (IMF) has approved a 257 billion shillings loan to Kenya, which will come with a series of conditions for Nairobi, as the Washington-based lender returns to the center of Kenya’s economic policy.
The loan would help Nairobi cope with financing shortages linked to Covid-19, finance structural reforms and address the urgent need to reduce Kenya’s debt vulnerabilities.
In a statement on Friday, the IMF said its board had approved the 38-month financing plan under the Extended Credit Facility (ECF) and Extended Finance Facility (EFF).
The ECF provides financial assistance to countries facing protracted balance of payments problems. It was created under the Poverty Reduction and Growth Trust Fund (PRGT) as part of a broader reform aimed at making IMF financial support more flexible and better suited to the diverse needs of developing countries. low income, including in times of crisis.
For its part, the EFF is extended to a country facing serious balance of payments problems in the medium term due to structural weaknesses which require time to remedy.
Loans under an extended agreement have a longer repayment period and are mainly used to help countries implement structural reforms in the medium term.
“The three-year financing plan will support the next phase of the authorities’ COVID-19 response and their plan to reduce debt vulnerabilities while preserving resources to protect vulnerable groups,” the IMF said in a statement.
Treasury Secretary Ukur Yatani said this was the country that had marched to the IMF amid the pandemic, and asked for support to deal with budget deficits. Yatani said all structural reforms to be implemented were suggested by Kenya, not the IMF, as he tried to allay fears that the lender would initiate another round of painful structural reforms that are hurting Kenya. under the Me regime.
Yatani said some of the parastatals that are lined up for reforms include Kenya Airways and Kenya Power, which are also in dire financial straits.
For its part, the said the program would advance the broader reform and governance agenda, including addressing weaknesses in some state-owned enterprises (SOEs) and enhancing transparency and accountability through the anti-corruption framework.
The approval allows for the immediate disbursement of approximately 33.8 billion shillings ($ 307.5 million), which can be used for budget support.
This follows emergency aid from the Fund to Kenya in May 2020 (100% of quota, or 81.2 billion shillings ($ 739 million) at the time of approval.
The IMF notes that Kenya was initially hit hard by the COVID-19 pandemic.
With a strong political response, the economy recovered from 2021 after likely registering a slight contraction of 0.1% in 2020.
“Even with this recovery, challenges remain in returning to sustainable and inclusive growth, and past progress in poverty reduction has been reversed,” the statement said.
The Covid-19 shock also exacerbated the country’s pre-existing fiscal vulnerabilities.
He noted that Kenya’s debt remains sustainable, but poses a high risk of debt distress.
To address debt risks, Kenya has taken steps to keep the budget deficit and debt ratios at 8.7 and 70.4% of GDP, respectively, during this fiscal year.
The press release indicates that budgetary and balance of payments financing needs remain significant in the medium term.
“The support of the G-20 under the Debt Service Suspension Initiative (DSSI) and development partners will help close the financing gap in 2021 with financing in the capital markets,” added the IMF.
The IMF notes that Nairobi is committed to reducing debt vulnerabilities through a multi-year fiscal consolidation effort focused on increasing tax revenues and tight spending controls, preserving resources to protect vulnerable groups.
“This will also help advance the structural and governance reform agenda, including addressing weaknesses in some SOEs and strengthening transparency and accountability through the anti-corruption framework,” the statement said.
He says the program incorporates flexibility, including recognizing the short-term challenges of tax returns in the currently stressed economic environment and the contingent liabilities of the SOE sector.
“The authorities’ program sets a clear path for reducing debt risks. It will bring the primary balance below its debt stabilization level during the EFF / FEC agreements and restore tax revenues – which had declined even before. the Covid-19 shock – back to the levels reached in recent years, ”said Antoinette Sayeh, Deputy Managing Director and Acting President of the IMF in the press release.
“The authorities should continue to provide the necessary support to the economy and ensure space for social and development spending, even if they have appropriately reversed some extraordinary measures, including the temporary tax cuts that have taken place. end in January 2021 “, she added.
The IMF boss said the short-term reform program should also focus on pressing structural policy challenges.
She said as the financial weaknesses of some parastatals have become a key source of fiscal risks, the capacity to manage these risks should be enhanced while ensuring that any support provided to them is consistent with Kenya’s limited fiscal space.
“Structural fiscal reforms should prioritize revenue administration, spending efficiency and fiscal transparency.”