The Central Bank of Kenya has launched an aggressive
dollar-purchase plan to cushion the shilling after the IMF failed to
give an assurance over renewal of the suspended $1.5 billion standby
credit facility.
A delegation of the International
Monetary Fund failed to announce a renewal of the standby loan after
concluding a visit to Nairobi on Wednesday.
“Discussions
will continue in the coming period,” said the IMF statement indicating
that there were unresolved differences with the government.
“Technical
work will continue to firm up underpinnings of the plan, which could be
supported by a Fund arrangement,” it concluded.
The
three-year standby loan is intended to protect the Kenyan shilling
against external shocks and raise the country’s credibility in the eyes
of international lenders.
The Central Bank (CBK), on
the same day that the IMF team concluded its mission in the country,
issued a circular to all chief executives of commercial banks announcing
that it would start buying US dollars from the lenders to boost its
foreign exchange reserves. The regulator committed to buy up to $100
million each month from commercial banks, for a three-month period
(March-June).
“The minimum amount for these purchases will be $1 million, and
will be transacted at the prevailing market rate and at CBK’s
discretion,” said William Nyagaka, the bank’s director, financial
markets department.
“This will bolster CBK’s
preparedness to deal with the heightened global volatility and
uncertainties. CBK sees an opportunity for such purchases given the
developments unfolding in the global markets and economy,” he added.
The
IMF team, led by Benedict Clements, was also in Kenya for negotiations
over a new precautionary three-year standby arrangement and its
financial and economic policies.
The standby facility
was suspended 17 months ago after the government failed to meet the
IMF’s reform agenda, including scrapping of controls on the cost of
loans and imposition of value added tax on petroleum products. The
government has since removed controls on the cost of bank loans and
introduced eight per cent VAT on all petroleum products.
An attempt by The EastAfrican
to get clarification from CBK on whether the dollar purchases were
informed by the government’s failure to secure the IMF’s standby
facility proved unsuccessful.
“Most of these questions
seem to be better directed to the IMF,” said Wallace Kantai, assistant
director at the Governor’s office and the Bank’s Head of Communications.
The IMF declined to clarify its position regarding the standby facility.
“I have nothing to add to the statement at this point,” said Tobias Rasmussen, the IMF Kenya Resident Representative.
Ukur Yatani, Kenya’s CS for the National Treasury did not respond to our calls by the time of going to press.
The
IMF has introduced new conditions for disbursement of the standby loan,
including reduction of the rising fiscal deficit and implementing tax
and expenditure reforms that do not hurt private sector investments and
stifle economic growth.
According to Mr Clements, there
was a general agreement with the government on a plan to cut wastage,
boost revenues, and reduce budget deficit to below four per cent of GDP
by the 2022/2023 fiscal year.
Kenya’s forex reserves
declined to $8.4 billion (5.11 months of import cover) during the week
ending February 27 from $8.5 billion (5.17 months of import cover) in
the week ending February 20, according to CBK data.
The
yields on Kenya’s 10-year Eurobond climbed to around 4.8 per cent from
around 4.5 per cent in the same period, according to CBK’s weekly
economic indicator report.
Public debt hit Ksh6.04
trillion ($60.4b) in December 2019 from Ksh5.27 trillion ($52.7b),
putting the national budget plan at risk due to rising cost of debt
service payments.
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