The Executive Board of the International Monetary Fund (IMF) today completed the third review under the 38-month arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements.
The Board’s decision allows for an immediate disbursement of SDR 179.13 million (about US$235.6 million), usable for budget support, bringing Kenya’s total disbursements for budget support so far to about US$1,208.2 million.
Kenya’s EFF/ECF arrangements for a total of SDR 1.655 billion (305 percent of quota or about US$2.34 billion at the time of program approval on April 2, 2021, aim to support Kenya’s program to address debt vulnerabilities, the authorities’ response to the COVID-19 pandemic and global shocks resulting from the war in Ukraine, as well as to improve governance and support broader economic reforms.
Kenya’s economy has rebounded strongly in a challenging environment and is projected to grow 5.7 percent in 2022.
Inflation moved above the Central Bank of Kenya’s (CBK) official target band of 2.5 percent to 7.5 percent in June and is expected to peak this year before easing back within the band in early 2023.
Downside risks predominate in the near-term. Uncertainties stem from the war in Ukraine, continuing drought in the semi-arid regions, unsettled global financial market conditions and the political calendar. But Kenya’s medium-term outlook remains favorable.
The very strong tax performance seen in the fiscal year 2021/22 has created fiscal space to temporarily cushion part of the impact of rising international fuel prices on households and businesses while still meeting program targets.
The program targets agreed at the Second Reviews also accommodated emergency spending needs for drought in the semi-arid regions and security.
The approved fiscal year 2022/23 budget broadens tax collection and maintains careful expenditure control while protecting social spending.
Kenya’s structural reform agenda, focused on improving governance, has advanced despite some delays.
Oversight of state-owned enterprises is being reinforced. New tender documents will allow achieving the longstanding goal of publishing beneficial ownership information of successful bidders for public procurements.
An ongoing audit of COVID-19 vaccine spending and the recently completed comprehensive audit of FY2020/21 spending with a focus on COVID-19 spending will improve transparency and enable follow-up by enforcement agencies and other stakeholders.
At the conclusion of the Executive Board’s discussion, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, stated:
“Kenya’s economic program supported by the Fund’s Extended Fund Facility and the Extended Credit Facility arrangements is providing an essential policy anchor to debt sustainability and public confidence. Despite the resilient economic recovery, the program remains subject to downside risks, including from deeper disruptions from the war in Ukraine, unsettled global market conditions, and an increase of food insecurity. In this context, the authorities’ continued steadfast commitment to prudent policies and advancing structural reforms remains essential to maintain macroeconomic stability and safeguard Kenya’s positive medium-term prospects.
“Strong fiscal performance is providing a welcome resilience. Although the authorities are adjusting domestic fuel prices to international levels more gradually, program targets are still being met thanks to strong tax revenues. Nevertheless, more targeted programs to support vulnerable households should accompany the ongoing review of the fuel pricing mechanism and plans for reforms to ensure that pricing actions are always aligned to the approved budget. Looking ahead, the authorities should sustain their fiscal consolidation efforts to reduce debt vulnerabilities, while securing space for needed social and development spending. This requires further improving spending efficiency and undertaking additional tax policy and revenue administration measures drawing from the forthcoming Medium-Term Revenue Strategy.
“The Central Bank of Kenya’s (CBK) recent monetary policy tightening is welcome. The CBK should stand ready to continue to adjust its stance to limit second-round effects from higher food and fuel prices and to keep inflation expectations well-anchored amid a temporary increase of inflation above the target band. The flexible exchange rate functioned as a shock absorber during the pandemic and should continue to do so against current global shocks, with forex interventions limited to addressing excessive volatility.
“Maintaining the momentum in the authorities’ structural reform agenda is critical. Building on the ongoing efforts to improve the oversight of state-owned enterprises, it is essential to advance the restructuring of Kenya Airways and restore the long-term viability of Kenya Power and Lighting Company. Further improvements in the anti-corruption framework and the AML/CFT agenda as well as an effective follow-up of expenditure audits are needed to enhance transparency and accountability.”
