Kenya: IMF Executive Board Approves U.S.$2.34 Billion ECF and EFF Arrangements for Kenya

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On April 2, 2021, the Executive Board of the International Monetary Fund (IMF) approved 38-month arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) for Kenya in an amount equivalent to SDR 1.655 billion (305 percent of quota or about US$2.34 billion) to support the next phase of the authorities' COVID-19 response and address the urgent need to reduce debt vulnerabilities.

Approval of the ECF/EFF enables immediate disbursement of about US$307.5 million, usable for budget support. This follows Fund emergency support to Kenya in May 2020 (100 percent of quota, equivalent to US$739 million at the time of approval, see Press Release No. 20/208).

Kenya was hit hard at the onset by the COVID-19 pandemic. With a forceful policy response, the economy has been picking up heading into 2021 after likely posting a slight contraction of 0.1 percent in 2020. Even with this recovery, challenges remain in the return to durable and inclusive growth, and past gains in poverty reduction have been reversed.

The COVID-19 shock also exacerbated the country's pre-existing fiscal vulnerabilities. Kenya's debt remains sustainable, but it is at high risk of debt distress. To address debt-related risks, the authorities have taken action to hold the fiscal deficit and debt ratios to 8.7 and 70.4 percent of GDP, respectively, this fiscal year. Fiscal and balance-of-payments financing needs remain sizable over the medium term. Support from the G-20 under the Debt Service Suspension Initiative (DSSI) and development partners will contribute to closing the financing gap in 2021 along with financing from capital markets.

The authorities' program would set a basis for a resurgence of growth and shared prosperity. Building on critical steps already taken, it aims to reduce debt vulnerabilities through a multi-year fiscal consolidation effort centered on raising tax revenues and tightly controlling spending, safeguarding resources to protect vulnerable groups. It will also advance the structural reform and governance agenda, including by addressing weaknesses in some state-owned enterprises (SOEs) and strengthening transparency and accountability through the anticorruption framework.

Finally, it will strengthen the monetary policy framework and support financial stability. Against the backdrop of extraordinary uncertainty, the program incorporates flexibility, including by recognizing near-term challenges related to tax yields in the current stressed economic environment and possible contingent liabilities from the SOE sector.

At the conclusion of the Executive Board's discussion, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, stated:

"The authorities' program charts a clear path to reduce debt-related risks. It will bring the primary balance below its debt-stabilizing level during the EFF/ECF arrangements and restore tax revenue - which had been falling even before the COVID-19 shock - back to levels achieved in recent years. The authorities should continue to provide necessary support to the economy and secure space for social and development spending even as they have appropriately reversed some extraordinary measures, including the temporary tax cuts which ended in January, 2021.

"The near-term reform agenda should also focus on urgent structural policy challenges. As financial weaknesses in some state-owned enterprises (SOEs) have emerged as a key source of fiscal risks, the ability to manage these risks should be strengthened while ensuring that any support provided to SOEs is consistent with Kenya's limited fiscal space. Fiscal structural reforms should prioritize revenue administration, spending efficiency, and fiscal transparency. Continuing improvement in the anti-corruption framework through steps to enhance transparency and accountability and the AML/CFT agenda are also essential.

"The Central Bank of Kenya's (CBK) proactive policy stance has provided essential support during a very challenging period. Monetary policy should remain accommodative in the context of the inflation targeting regime, the exchange rate should continue to function as a shock absorber, and close supervision of credit risks and provisioning should be maintained.

"The program supported by EFF/ECF arrangements with the Fund provides a strong signal of support and confidence. It is also subject to notable risks, including from uncertainty about the path of the pandemic, and steadfast pursuit of the program objectives will be essential also considering the upcoming political calendar. The Kenyan authorities have demonstrated strong commitment to fiscal reforms during this unprecedented global shock, and Kenya's medium-term prospects remain positive".

Kenya: Selected Economic Indicators, 2020-2023

2020

Est.

2021

Proj.

2022

Proj.

2023

Proj.

Output

Real GDP growth (%)

-0.1

7.6

5.7

6.1

Prices

Inflation - average (%)

5.3

5.0

5.0

5.0

Central government finances (fiscal year)1

Revenue (% GDP)

17.2

17.0

16.8

17.6

Expenditure (% GDP)

25.0

25.7

24.3

23.5

Fiscal balance (% GDP)

-7.8

-8.7

-7.5

-5.8

Public debt (% GDP)

65.8

70.4

72.6

72.9

Money and Credit

Broad money (% change)

10.6

11.8

10.6

11.4

Credit to private sector (% change)

7.7

7.7

7.8

10.1

Policy rate, end of period (%)

7.0

...

...

...

Balance of payments

Current account (% GDP)

-4.8

-5.3

-5.4

-5.5

Reserves (in months of imports)

4.6

4.6

4.3

4.1

External debt (% GDP)

35.6

37.8

37.6

36.7

Exchange rate

REER (% change)

-1.5

...

...

...

Source: Kenyan authorities and IMF staff estimates and projections.

1 Based on fiscal year (i.e., 2020 represents 2019/20).

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