Monday, December 31, 2018

Will effects of Kenya’s fallout with the IMF be felt this year?

Dominic Omondi
When Central Bank of Kenya Governor Patrick Njoroge recently told off the International Monetary Fund (IMF) over the latter’s remarks that the Shilling was overvalued, it was to cap off what had been the frosty relations between Kenya and the global lender for the better of 2018. Things started going south in February last year when it became apparent that the country had lost access to a precautionary credit facility. This is after it failed to keep its side of the bargain in the $989 million (Sh100 billion) Stand-By Arrangement (SBA) programme. The move led to the ‘insurance cover’ being yanked away from Kenya’s reach. Although Kenya had never drawn from this facility, its absence left the country exposed in case of external shocks. SEE ALSO :IMF sees Namibia’s GDP contracting in 2018
Despite Kenya losing access to the facility, CBK in most of the Monetary Policy Committee briefings continued to cite the Sh100 billion SBA as one of the safeguards the country had against short-term shocks in the foreign exchange market. Complete review That was not true, and a media article sensationally called out the CBK for this dishonesty. “Access to the money and programme was lost due to the failure to complete that review,” said IMF’s resident representative Jan Mikkelsen when he appeared before the National Assembly’s Budget Committee. Kenya and IMF staff never reached an agreement for the second review of the programme due to “fiscal slippages.”  The disagreement was also aggravated by a law that put a ceiling on the rate that banks charged loans. SEE ALSO :CBK: Kenya to sell infrastructure bond worth Sh50b
IMF insisted that the ceiling had curtailed the flow of money into some sections of the economy. Fiscal deficit- the difference between what the country mobilised in revenues and its expenditure had widened to 8.8 per cent of the Gross Domestic Product (GDP). This exceeded the programme’s target by two per cent of GDP. A widening of the fiscal deficit meant that the country had to borrow more to bridge the gap, a trend that the Washington-based institution feared would have some unfortunate ending if not checked. “Without corrective action, staff expects public debt to reach nearly 60 per cent of GDP this year (2018),” said IMF in a statement. “The debt levels that we see now are still manageable in terms of the level. What we are concerned about is the flow of new debts. And we see that the trajectory is going to a place where it will not be sustainable anymore. And you will get into trouble eventually,” Mikkelsen told MPs. A loud-mouthed, ‘un-professorial’ IMF is not what Kenyan authorities expected.  For long, even as the media kept up the ante on Kenya’s binge-borrowing, the IMF had always insisted that things were not that bad. SEE ALSO :Treasury, Central Bank tussle over reserve cash billions
Treasury always directed naysayers to the IMF. This camaraderie would be heavily tested in 2018. It was found to be wanting.  Treasury and CBK officials eventually requested for more time to put in place policies that would return it into IMF’s good books. They got six months. “On March 12, 2018, the Executive Board of the IMF approved Kenyan authorities’ request for a six-month extension of the country’s SBA to allow additional time to complete the outstanding reviews,” said the global lender. “The reviews are expected to be completed by September 2018. Completion of the reviews will enable the Kenyan authorities to have access to funds available under the precautionary SBA.” The Kenyan authorities committed to reduce the fiscal deficit and substantially modify interest controls. Between March and September, Treasury tried to play by IMF’s guidebook. By the end of Financial Year 2017/18 in June, it had compressed its fiscal deficit to 7.1 per cent of GDP, well within its commitment to IMF. The narrowing was largely due to its decision to freeze most of the development projects during the period under review. As part of his policy changes for the Financial Year 2018, National Treasury Cabinet Secretary Henry Rotich brought to Parliament a raft of policies, including a proposal to repeal a provision in the Banking Amendment Act, 2016 that put a ceiling on interest rates charged by lenders on loans and a floor on interest rate they would give depositors. SEE ALSO :Government tax free bond fails to stem shilling’s decline
But, saddled with debts themselves, MPs resoundingly rejected Rotich’s bid to remove the ceiling on the interest rate charged on loans by lenders. Instead, they opted to remove the floor on interest rate banks would give to depositors, a move that is likely to discourage saving. Treasury had also committed to getting rid of tax exemptions to VAT and income tax.  As part of this, petroleum products would start attracting 16 per cent VAT from September. But this tax measure was also resisted, with President Uhuru Kenyatta proposing to slash it by half. The clock kept ticking, and Treasury’s commitment to IMF remained unfulfilled. It soon became apparent that Kenya wouldn’t keep its side of the bargain. Although Treasury and CBK insisted that Kenya’s external position was impressive and the country did not need IMF’s insurance, it became apparent that it would be tough going into the debt market without IMF’s cover. Already, bondholders for the two Eurobonds that Kenya had issued had placed a premium on the existence of an IMF facility. But relations with the IMF continued to get from bad to worse. Kenya vetoed the publishing of a report by an IMF mission, which most observers had rightly suspected, was due to its damning conclusion on Kenya’s debt. “The IMF is in town and they are reviewing our performance. We are confident in terms of our objectives…but at this point, we don’t need the money from that perspective. We have 5.9 months of import cover. We are pretty comfortable in that sense,” said CBK Governor. Increase taxes And when the programme lapsed: “There is nothing unique about any programme ending. I think what’s important is that we did have a very successful two-year programme, which is now coming to an end,” Rotich told reporters. “As a country that is entering into the medium and developed countries, we should be relying less and less on IMF facilities, especially if you have come of age in our macroeconomic management.” And then on October 23, came IMF’s damning report whose publication Treasury had vetoed. The report said that Kenya is two steps away from experiencing difficulties in repaying her debts. According to IMF, the country’s risk of defaulting on debt repayment had increased from low to moderate as a huge repayment burden put pressure on the country’s meagre revenues. But that was not all. The stability of the Shilling for the better of 2018, which gave CBK and Treasury officials the audacity to tell off IMF, might as well be artificial, according to the report. “Reflecting limited movement of the shilling relative to the US dollar, MCM’s (Monetary and Capital Markets Department) 2018 report on exchange rate arrangement to be published in February 2018 will reclassify Kenya’s shilling from floating to other managed arrangement,” said IMF. And that is why Dr Njoroge, a former IMF insider, was livid. It remains a wait and sees approach this year if Treasury goes for another Eurobond to pay-off another one. And then, as the year came to a close, it became apparent that an IMF team had been in the country for 10 days from December 10. Their mission? “To hold discussions on a new IMF-supported programme,” said IMF in a press release after the visit. The findings of the mission will be presented to IMF’s executive board, its highest decision-making organ, who will discuss it and make a decision. And Kenya can only hope for the decision to be expedited before it plunges into the market this year.

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