Kenya meets IMF terms after legal changes

Treasury secretary Henry Rotich. PHOTO | JEFF ANGOTE | NMG 

By GEOFFREY IRUNGU

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Summary

• Kenya met at least eight of the conditions specified in the March 2018 IMF staff report, but was only partially in compliance for several others while information is lacking on the status of some such as modernisation of the monetary policy framework.
• Among the conditions that have so far been met include effecting fiscal consolidation through austerity implemented via a supplementary budget, and increase of tax revenues.

Kenya’s compliance with conditions of the International Monetary Fund has improved with the recent legal enactments, even after a fallout with the fund.

Kenya met at least eight of the conditions specified in the March 2018 IMF staff report, but was only partially in compliance for several others while information is lacking on the status of some such as modernisation of the monetary policy framework.

Among the conditions that have so far been met include effecting fiscal consolidation through austerity implemented via a supplementary budget, and increase of tax revenues.

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This included widening the tax base by introducing new measures to remove value added tax exemptions and meeting the fiscal deficit target for the 2017/18 fiscal year.

Parliament passed new tax measures that are expected to reduce the deficit and cut reliance on debt by raising more revenue for the exchequer.

While it cut VAT on fuel to eight per cent instead of applying the standard 16 per cent, it introduced several other measures that effectively counteracted the effect of the lower VAT on fuel.

Analysts said the Treasury was in a better position to negotiate with the IMF for a new precautionary facility after the old one expired on September 14.

“We are of the view that the austerity measures will give the Treasury ammunition to renegotiate a new precautionary facility with the IMF following the expiry of the $989.8 million Stand-By Arrangement,” said Genghis Capital, an investment bank.

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The Central Bank of Kenya’s (CBK) official foreign exchange reserves are also above the target of 4.5 months of import cover agreed on with the fund.

As of September 25, the CBK held official reserves to the tune of 5.6 months of import cover.

“One of the reasons for obtaining the IMF facility was to have a fall-back position in terms of foreign exchange reserves that Kenya can resort to if need be.

“Now we have enough forex reserves. That shilling’s value is okay. On the rate cap, it couldn’t be removed because that would make credit expensive,” said Susan Makena, a research analyst at Sterling Capital.

Kenya is, however, yet to comply with enacting a new Income Tax Act, which further reduces the exemptions and thereby widens the tax base — a revenue raising strategy that is intended to also cut reliance on debt financing in the Budget.