Treasury Cabinet secretary Njuguna Ndung’u (centre) with Economic Planning PS James Muhati (right) and his Treasury counterpart Dr Chris Kiptoo in Nairobi on December 6. PHOTO | DIANA NGILA | NMG
In April 2021, the International Monetary Fund (IMF) announced that it would advance Kenya Sh287.8 billion for budgetary support, a loan that sparked a public outrage that caught the attention of Washington, where the lender is headquartered.
To access the funds in batches, Kenya made several commitments among them to reduce its debt vulnerabilities by ramping up revenues, cutting wasteful spending, deal with mismanagement and corruption as part of the 38-month arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF).
Four reviews later, Kenya has so far received Sh203.6 billion from the IMF after meeting some of the conditions while missing others.
The completion of the fourth review of the EFF/ECF saw the Washington-based institution release Sh55 billion on Tuesday, plus an additional Sh26.5 billion for the fight against drought and food insecurity.
But what are the salient issues about this programme? IMF has sought to give answers to frequently asked questions:
HOW WOULD YOU DESCRIBE THE OVERALL PROGRAMME?
The programme involves a multi-year fiscal consolidation centred on increasing tax revenue and carefully prioritising expenditures while safeguarding resources to protect vulnerable groups.
It is aimed at reducing debt vulnerabilities.
READ: Why experts changed tune on IMF reforms for Africa
It also advances the broader reform and governance agenda by addressing weaknesses in State-owned enterprises (SOEs) and strengthening the country’s anticorruption framework.
Finally, it strengthens the monetary policy framework and supports financial stability.
WHAT WERE THE MAIN FINDINGS OF THE FOURTH EXECUTIVE BOARD REVIEW OF THE IMF-BACKED PROGRAMME?
Kenya outperformed its fiscal targets by wide margins in FY2021/22. Tax revenue and budget deficit outperformed their targets.
With global markets disrupted and uncertainty around the concluded elections, financing shortfalls constrained spending in the last financial year.
As a result, the overall fiscal deficit (the difference between revenue and spending) came in well below target at 6.2 per cent of gross domestic product (GDP).
Facing significant pressure due to carryover from last year and unbudgeted spending from early in FY2022/23, the incoming administration of President William Ruto took bold action to hold this year’s deficit below the budgeted level.
They decisively cut fuel subsidies and announced cost savings of 1.7 per cent of GDP, while protecting spending for the most vulnerable.
Global shocks pushed inflation to 9.5 per cent in November. Reduced capital inflows have also affected foreign exchange reserves, though they remain adequate.
The Central Bank of Kenya has tightened its monetary policy stance three times since May to prevent second-round effects and keep inflation expectations anchored.
However, their delays on the structural reform agenda saw some delays amid political uncertainty around the election period.
By beginning to publish beneficial ownership information of entities awarded public contracts in November, Kenya delivered on a longstanding goal.
An action plan for Kenya’s Medium Term Revenue Strategy was issued in August.
However, the planned review of the fuel pricing mechanism and the action plan to restore the profitability of Kenya Power were delayed.
WHAT HAS BEEN ACCOMPLISHED?
The programme has supported Kenya’s response to the Covid-19 pandemic and the global shocks of 2022.
It also provided an anchor in a period of uncertainty around national elections.
Debt has begun to stabilise around 68 per cent of GDP, well below the previous projections.
Kenya has met all the quantitative performance criteria under the fourth review and strongly overperformed in several areas including tax revenue, the primary balance of the government, and limits on the contracting of public debt.
Targets on priority social expenditure also overperformed by Sh35 billion.
This review covered targets through end-June 2022 under Kenya’s IMF-supported programme.
By broadening the tax base and strengthening tax administration so that those who owe taxes pay taxes, Kenya generated Sh103 billion in extra revenues, substantially over-performing the objectives set when the program was approved in April 2021.
Those extra revenues are providing resources to support additional government spending aimed at protecting Kenyan households in the face of recent global shocks.
This included support to communities afflicted by drought, fertiliser subsidies, and smoothing of fuel price increases in 2022 as prices in Kenya were gradually brought into line with global levels.
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WHAT ELSE IS BEING DONE TO TACKLE KENYA’S FISCAL CHALLENGES?
Steps are being taken to strengthen budget processes and controls and fiscal risk management.
A special audit by the Auditor General on supplementary budgeting—including under Article 223 of the Constitution––is planned to be published by end-September 2023.
A Fiscal Risk Committee has been created to manage and mitigate fiscal risks across the public sector.
Given limited fiscal space, the new administration is prioritizing reforms at state corporations.
Key areas include identifying cost-saving reforms at Kenya Airways and Kenya Power to make them financially stronger and strengthening governance and oversight of state corporations.
HOW IS IT HELPING KENYANS HIT BY HIGH COSTS AND THOSE IN DROUGHT-AFFECTED?
The flexibility built into the design of the program includes careful policy choices to protect the vulnerable and support Kenyans in the face of new challenges.
The programme has provisions to protect social spending even as spending in other areas is rationalised. In FY2021/22, social expenditure overperformed its target by 0.2 per cent of GDP.
This year, to respond to rising food insecurity, the FY2022/23 Supplementary Budget plans to allocate an additional Sh10.2 billion in drought-related spending, of which nearly 60 per cent is intended to finance food provision.
Delivering strong tax revenues also creates room for priority spending, including on social programmes.
It also allowed the smoothing of price increases as fuel prices in Kenya are brought into line with global levels and temporary fertiliser subsidies.
KENYA’S BORROWING COSTS HAVE INCREASED - HOW IS THE PROGRAM REDUCING DEBT VULNERABILITIES?
Financing conditions in global markets became much more challenging for frontier-market issuers like Kenya after central banks in advanced economies started raising interest rates to reduce inflation.
Kenya is at high risk of debt distress, and reducing debt vulnerabilities is a central goal of the IMF-supported program.
The path of fiscal consolidation under the authorities’ program will put debt as a share of GDP firmly on a downward trajectory.
WHAT CAUSED THE DECLINE IN THE PATH OF INTERNATIONAL RESERVES AND WHAT IS THE IMF ADVICE ON THE EXCHANGE RATE?
Kenya’s reserves will remain adequate although import coverage is projected to decline in 2023 due to lower external financing before beginning to gradually increase in 2024.
Compared to the third EFF/ECF review, the path of Foreign Exchange reserves has been revised downward.
Public external borrowing was substantially lower in FY2021/22, resulting in fewer FX inflows.
The borrowing of EUR 1 billion Sh135.3 billion, originally planned as a Eurobond issuance, did not take place against a broad erosion of investor confidence toward frontier market debt.
Borrowing for project implementation was also lower by $ 0.7(Sh86.1 billion) due to delays.
In addition, to rationalize spending in FY2022/23, public investment plans are being scaled back (nearly Sh123 billion).
Finally, the outlook for net private capital flows has been revised on expectations that tight global financial conditions will persist in 2023.
HOW IS THE PROGRAM ADVANCING THE GOVERNANCE AND ANTI-CORRUPTION AGENDA?
Promoting good governance remains an essential part of the Fund’s engagement with the Kenyan authorities.
The authorities’ program contains specific commitments to protect public resources, enhance transparency and accountability to reduce corruption risks, and better manage SOEs.
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