## 1kenea2020003

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### Executive summary: context, request, and IMF support
- Kenya performance pre-COVID-19:
  - Real GDP growth: 5.4 percent in 2019.
  - Inflation: averaged 5.2 percent in 2019.
  - Gross public debt: 62.4 percent of GDP in June 2019.
  - Fiscal deficit: widened in 2018/19 to 7.8 percent of GDP.
  - Foreign exchange reserves: US$8 billion as of March 27, 2020 (about 4.4 months of 2021 imports).
- Authorities’ request and staff response:
  - Authorities requested financial assistance under the Rapid Credit Facility (RCF) exogenous shock window.
  - Staff supports a disbursement of SDR 542.8 million, equivalent to 100 percent of quota (equivalent to US$743.9 million), based on urgent balance of payments and fiscal financing needs.

### Macroeconomic impact of COVID-19, outlook, and financing needs
- Growth and activity:
  - Real GDP growth projected: 0.8 percent in 2020 (a shortfall of 5 percentage points relative to the pre-COVID baseline).
  - Staff projects growth: 5.5 percent in 2021; 6.1 percent in 2022; 5.8 percent in 2023 and over the medium-term.
- External sector and balance of payments:
  - External financing gap: about $2.1 billion (2.1 percent of GDP) in 2020.
  - Current account: narrowed to 4.5 percent of GDP in 2019; expected to be 4.4 percent of GDP in 2020.
  - Key external impacts:
    - Tourism receipts: about 1.8 percent of GDP in 2019 pre-shock; after shock tourism receipts about 1.8 percent pre-shock vs 0.3 percent after-shock (see scenario table: pre-shock 1,952; after-shock 293).
    - Agricultural exports (coffee, tea, horticulture): 2.6 percent of GDP pre-shock vs 1.9 percent after shock.
    - Remittances: about 3.0 percent of GDP in 2019; projected 2.7 percent of GDP after shock.
  - Exchange rate: shilling depreciated by 5.4 percent between February 28 and March 24.
- Fiscal impact:
  - Fiscal financing gap in 2019/20 due to COVID-related spending and lower revenue collection.
  - Authorities planned a near-term pause in fiscal consolidation to accommodate COVID-related fiscal measures.
- Financial sector and risks:
  - Banking system: liquid, well-capitalized and profitable before the shock.
  - Nonperforming loans (NPLs): 12.7 percent of loans at end-February 2020; banks’ asset quality could deteriorate as trade and SME exposures are affected.
- Scenario / key financing table extracts (2020, pre-shock vs after-shock):
  - Current account: pre-shock -4,919 (‑4.5 percent of GDP); after-shock -4,520 (‑4.4 percent of GDP).
  - Exports of goods and services: pre-shock 13,055 (12.0 percent of GDP); after-shock 9,514 (9.3 percent of GDP).
  - Tourism: pre-shock 1,952 (1.8 percent of GDP); after-shock 293 (0.3 percent of GDP).
  - Imports of goods and services: pre-shock 22,671 (20.9 percent of GDP); after-shock 17,713 (17.3 percent of GDP).
  - Remittances: pre-shock 3,244 (3.0 percent of GDP); after-shock 2,729 (2.7 percent of GDP).
  - Capital and financial accounts: pre-shock 5,555 (5.1 percent of GDP); after-shock 2,375 (2.3 percent of GDP).
  - Net FDI: pre-shock 1,947 (1.8 percent of GDP); after-shock 750 (0.7 percent of GDP).
  - Government net borrowing: pre-shock 2,767 (2.6 percent of GDP); after-shock 1,716 (1.7 percent of GDP).
  - Gross financing: pre-shock 4,485 (4.1 percent of GDP); after-shock 3,228 (3.2 percent of GDP).
  - Commercial borrowing: pre-shock 2,012 (1.9 percent of GDP); after-shock 600 (0.1 percent of GDP).
  - Financing gap: pre-shock -636 (-0.6 percent of GDP); after-shock 2,145 (2.1 percent of GDP).
  - IMF (net): pre-shock -136 (-0.1 percent of GDP); after-shock 120 (0.1 percent of GDP) reflecting RCF disbursement of 744 (0.7 percent of GDP) and repayments 136 (0.1 percent of GDP).
  - World Bank financing: 300 (0.3 percent of GDP) post-shock.
  - Reserve accumulation: pre-shock -500 (-0.5 percent of GDP); after-shock 1,233 (1.2 percent of GDP).

### Fiscal policy: near term impact and projections
- Near-term fiscal projections and impacts:
  - Total revenue and grants in 2019/20 expected to be 0.6 percent of GDP lower; total expenditure 0.8 percent of GDP higher than mid-February projections.
  - Projected 0.3 percentage point of GDP reduction in capital spending limits overall deficit impact.
  - Fiscal deficit expected to expand by 0.8 percent of GDP to 8.6 percent of GDP in 2019/20.
  - Fiscal deficit projected to decline to 7.8 percent of GDP in 2020/21.
  - Current outlays in 2020/21 projected to be about 1.4 percent of GDP higher compared to pre-crisis projections.
  - Staff projections assume about 75 percent of the fiscal cost of recently announced tax relief measures will be compensated for by reduced tax exemptions in FY20/21, remainder phased in over next 2−3 years.
- Central government financial operations (selected figures, table-exact):
  - Revenues and grants: 2018/19: 1,691 (KES billion); Pre-shock: 2,012 (KES billion); Proj. 2019/20: 1,883 (KES billion) / 19.1% of GDP / 18.5% of GDP.
  - Tax revenue: 2018/19: 1,401 (KES billion); Pre-shock: 1,557 (KES billion); Proj. 2019/20: 1,416 (KES billion) / 14.8% / 13.9%.
  - Nontax revenue: 2018/19: 271 (KES billion); Pre-shock: 422 (KES billion); Proj. 2019/20: 422 (KES billion) / 4.0% / 4.1%.
  - Expenditure and net lending: 2018/19: 2,406 (KES billion); Pre-shock: 2,714 (KES billion); Proj. 2019/20: 2,765 (KES billion) / 25.8% / 27.1%.
  - Current expenditure: 2018/19: 1,857 (KES billion); Pre-shock: 2,104 (KES billion); Proj. 2019/20: 2,209 (KES billion) / 20.0% / 21.7%.
  - Development and net lending: 2018/19: 549 (KES billion); Pre-shock: 610 (KES billion); Proj. 2019/20: 556 (KES billion) / 5.8% / 5.5%.
  - Overall balance: 2018/19: -721 (KES billion) / -6.7% of GDP; Pre-shock: -702 (KES billion); Proj. 2019/20: -882 (KES billion) / -8.6% of GDP.
  - Financing (2019/20 proj): 567 (KES billion) / 5.6% of GDP.
  - Financing gap (+ = shortfall) (2019/20 proj): 003140.0 / 3.1% (table entry preserved).
  - Additional financing (2019/20 proj):
    - IMF (RCF disbursement): 00770.0 / 0.8% of GDP.
    - World Bank: 00310.0 / 0.3% of GDP.
    - Additional net domestic financing: 002060.0 / 2.0% of GDP.
  - Memorandum item: Nominal GDP: 9,303 (2018/19); Pre-shock 10,511; Proj. 2019/20 10,196 (KES billion).

### Financing sources and IMF support proposal
- Financing closure strategy:
  - Additional net domestic financing (drawing down government deposits, utilizing unused Eurobond proceeds of 2019).
  - Additional World Bank financing (0.3 percent of GDP).
  - RCF disbursement (0.8 percent of GDP).
- IMF support proposal:
  - Staff proposes support of 100 percent of quota (SDR 542.8 million) under the RCF exogenous shock window.
  - Proposed access of 100 percent of quota is about 34.6 percent of the BOP financing gap.
  - With the RCF disbursed, total outstanding credit from the Fund will amount to SDR 705.9 million, or 130 percent of quota, at end-2020.
  - Total obligations to the Fund would be 12.3 percent of gross international reserves, 10.2 percent of exports, and 0.9 percent of GDP in 2020 and decline thereafter.
  - Staff assesses Kenya faces an external financing gap of about $2.1 billion (2.1 percent of GDP) in 2020.

### Policy recommendations: fiscal, monetary, social protection, and governance
- Fiscal strategy and revenue:
  - Staff supports pausing fiscal adjustment in near term to accommodate COVID-related measures, but urges tax relief measures be temporary and reversed once crisis passes.
  - Staff recommends tax rate reductions for VAT, turnover tax, and personal income tax be reversed post-crisis.
  - For 2021/22 and beyond, authorities should pursue fiscal adjustment through improvements in public procurement and expenditure management, and include revenue measures to restore and raise revenue-to-GDP ratio above pre-COVID levels.
  - Prepare contingency plan for potential deepening of the shock; additional health and social protection spending in 2020/21 and beyond should be financed by reduction in nonpriority spending or revenue measures.
  - Identify lower-priority public investment projects for possible reprioritization.
- Monetary policy and financial stability:
  - CBK actions: reduction of the policy rate to 7.25 percent from 8.25 percent; reduction of the reserve requirement to 4.25 percent from 5.25 percent; extension of REPO tenors; temporary flexibility on classification and provisioning of loans restructured due to the pandemic (until March 2021).
  - Staff advises accommodative monetary policy to support growth; CBK should keep decisions data-dependent and allow exchange rate to act as shock absorber.
  - Staff recommends close monitoring of NPLs, supports initiatives to contain possible spikes in NPLs and to increase supervisory capacity.
  - Staff advises against permanent modification of loan classification rules and welcomes authorities’ plan to sunset flexibility by March 2021.
- Targeting social protection and health spending:
  - Authorities’ supplementary budget and reprogramming include COVID-19 interventions of KES 40 billion (0.4 percent of GDP) in 2019/20:
    - KES 5 billion for health.
    - KES 13 billion to expedite clearance of unpaid bills.
    - KES 10 billion to fast-track VAT refunds.
    - KES 10 billion for cash transfers to the elderly, disabled, and low-income households.
  - Staff estimates an additional 0.6 percent of GDP in spending could be required above allocations so far to protect livelihoods.
- Transparency and governance:
  - Safeguarding Fund and other financial assistance should be used for very urgent crisis resolution purposes.
  - Authorities should undertake independent audits of samples of crisis mitigation spending and publish results.
  - Publish procurement documentation and ex-post validation of delivery including names of awarded companies and beneficial owners.
  - Post-crisis, introduce legislation to improve capacity to detect illicit enrichment and address conflicts of interest, and improve fiscal transparency (expand government finance statistics, commence quarterly fiscal outturn reporting, annual consolidated non-financial public sector reporting).

### Medium-term outlook, public debt, and DSA findings
- Medium-term growth baseline:
  - 2021: 5.5 percent; 2022: 6.1 percent; 2023: 5.8 percent; medium-term: 5.8 percent.
  - Authorities’ view: expected growth in 2020 around 3 percent; envisaged growth of at least 6½ percent over medium term with full implementation of reform and development program.
- Public debt and fiscal path (selected table values):
  - Public gross nominal debt (percent of GDP): 2019/20: 64.7; 2020/21: 68.2; 2021/22: 69.3; 2022/23: 68.2; 2023/24: 66.3; 2024/25: 66.7.
  - Public gross debt, PV (percent of GDP): 2019/20: 57.1; 2020/21: 59.4; 2021/22: 62.3; 2022/23: 63.6; 2023/24: 63.7; 2024/25: 62.9.
  - Central government revenues and expenditures (selected levels, Ksh billions): Revenues and grants 2018/19: 1,690.8; 2019/20: 2,055.2; 2020/21: 1,929.9. Expenditure and net lending 2018/19: 2,405.9; 2019/20: 2,874.2; 2020/21: 2,730.2.
  - Gross official reserves (end period, US$ millions): 2019: 9,116; 2020: 7,882; 2021: 8,355.
- DSA key findings and risk rating:
  - Incorporating COVID-19 impact in DSA shifts assessment to "high risk of debt distress" from prior "moderate".
  - Solvency and liquidity breaches: PV of PPG external debt-to-exports ratio breaches its threshold of 240 percent in 2020–2024; external debt service-to-exports ratio exceeds threshold in 2024 by 15 percentage points.
  - Baseline projections: total public debt projected to increase from 61.7 percent of GDP in 2019 to 69.9 percent in 2022, then gradually decline.
  - PV public debt-to-revenue ratio: increases from 313.9 percent in 2019 to 357.4 percent in 2022; eases to 282.7 percent in 2030 and 190.7 percent in 2040.
  - Debt carrying capacity: CI at 3.12 (October 2019 WEO) above upper threshold 3.05; debt carrying capacity classified "Strong".
- Stress tests and vulnerabilities:
  - Tailored stress tests include contingent liabilities shock (7 percent of GDP) and market financing shock (Eurobonds).
  - Kenya susceptible to export and market financing shocks; protracted shocks or loss of market access at reasonable prices would raise probability of persistent breaches.
  - Authorities plan to prioritize concessional financing and lengthen maturities to reduce refinancing risks.

### Immediate RCF request and program matrix excerpts
- RCF request:
  - Request: emergency financing under RCF of SDR 542.8 million (100 percent of quota).
  - Disbursement modality: direct budget support to the National Treasury’s account at CBK.
  - Memorandum of understanding signed between National Treasury and CBK on responsibilities for servicing IMF obligations.
- Macroeconomic baseline table highlights (selected figures):
  - Real GDP (percent): 2019/20: 2.9; 2020/21: 3.1; 2021/22: 5.8; 2022/23: 5.9; 2023/24: 5.8; 2024/25: 5.8.
  - CPI (period average): 2019/20: 5.2; 2020/21: 5.2; 2021/22: 5.0.
  - Exports volume (percent change): 2019/20: -5.6; 2020/21: -1.4; 2021/22: 9.7.
  - Gross international reserves (US$ billions): 2019: 9.5; 2020: 8.9; 2021: 7.2; 2022: 7.9; 2023: 8.3; 2024: 9.3; 2025: 10.1.
- External sector and reserves (selected):
  - Current account (US$ millions): 2019: -4,309; 2020: -4,520; 2021: -4,593.
  - Goods exports (US$ millions): 2019: 6,049; 2020: 5,197.
  - Goods imports (US$ millions): 2019: 16,418; 2020: 13,974.
  - Reserve cover (months of next year's imports): 2019: 6.0; 2020: 5.6; 2021: 4.0; 2022: 3.9; 2023: 4.0.

### Authorities’ Letter of Intent: commitments and measures
- COVID-19 impact and outlook (authorities):
  - 2019 growth: 5.4 percent.
  - Preliminary estimate for 2020: around 3 percent.
  - Framework underlying RCF request assumes growth of 0.8 percent in 2020.
  - Risks "slanted heavily to the downside."
- Fiscal response (authorities’ measures and intent):
  - Additional COVID-19 related spending: at least 0.4 percent of GDP relative to previous budget; includes 0.1 percent of GDP in cash transfers to orphans, elderly, most vulnerable.
  - Tax reductions reducing revenues by 0.4 percent of GDP this fiscal year: 100 percent tax relief for lower-income individuals; income and corporate tax rates reduced from 30 to 25 percent; VAT rate reduced from 16 to 14 percent; turnover tax reduced from 3 to 1 percent.
  - Authorities committed to eliminating a long list of exemptions in corporate income tax and VAT to offset revenue impact and improve tax efficiency.
  - Commitment to restore revenues as activity recovers and to raise tax revenue ratio over medium term.
  - Multi-year fiscal consolidation plan to be implemented more gradually; mix of revenue and expenditure measures to reduce deficits and put public debt on downward path.
- CBK policy and financial stability measures (authorities):
  - 100 bps cuts in policy rate and cash reserve ratio; increased reverse repo tenors; increased flexibility for bank loan classification and provisioning; steps to extend borrower maturities.
  - CBK remains mindful of price stability; inflation risks described as "balanced"; policy decisions to remain data-dependent; continued commitment to flexible exchange rate regime with selective FX intervention.
- Safeguards, transparency, and IMF commitments:
  - Kenya does not intend to introduce measures that would exacerbate balance of payments difficulties; will comply with IMF Articles of Agreement.
  - Commitment to implement safeguards assessment recommendations and provide recent external audit reports.
  - Commitment to post-crisis independent audits of crisis-related expenditures and publication of results.
  - Authorities authorize IMF to publish the Letter and staff report for the RCF disbursement request.
- DSA summary (authorities and staff):
  - Risk of external debt distress: High.
  - Overall risk of debt distress: High.
  - Kenya’s debt remains sustainable but risk rating moved to High due to COVID-19 shock.
  - Projections assume Eurobonds will be rolled over once global markets reopen; need for sustained fiscal consolidation emphasized.

### Debt composition, public and external debt details
- Public debt composition and recent trends:
  - Gross public debt increased from 50.2 percent of GDP at end-2015 to an estimated 61.7 percent of GDP at end-2019.
  - About half of public debt owed to external creditors.
- External public debt (PPG) at end-2019:
  - Nominal PPG external debt: about 31½ percent of GDP.
  - Composition: multilateral ~33½ percent; bilateral ~33 percent (about 72 percent of bilateral owed to non-Paris Club members, mainly China for SGR); commercial ~33 percent.
  - Existing Eurobonds: US$6.1bn in total (60 percent of commercial debt at end-2019).
- Domestic public debt:
  - Domestic public debt: 30.2 percent of GDP at end-2019.
  - Treasury bonds: about 70 percent of domestic debt; Treasury bills make up remainder.
  - Interest rates (March 2020 averages): 91-day: 7.3 percent; 182-day: 8.1 percent; 364-day: 9.2 percent.
  - Average time to maturity for government domestic securities: 5¾ years at end-2019.
  - Holders: about half by commercial banks, followed by pension funds.

### Debt management recommendations and medium-term actions
- Debt management:
  - Strengthen debt management capacity to prepare for large repayments on commercial borrowing.
  - Strategy components: near-term external refinancing plan; lengthen maturities to limit refinancing risks.
  - Continue prioritizing concessional borrowing for investment projects; limit non-concessional borrowing to projects with high social and economic returns.
  - Take measures to unblock about US$10 billion of committed but undisbursed official development assistance to avoid commitment fees and reduce reliance on commercial financing.
- Medium-term fiscal priorities:
  - Delivering on fiscal consolidation essential to reduce risks.
  - Expand coverage of public debt reporting to include county governments, extra budgetary units, non-guaranteed SOE debt.
  - Improve public debt management and revenue administration and maintain public investment to raise growth and export potential.

*Source: IMF staff and Kenyan authorities (content unit 1kenea2020003).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and request for IMF support
- Kenya was performing well before the COVID-19 shock: Real GDP growth is estimated 5.4 percent in 2019; inflation averaged 5.2 percent in 2019.
- Public debt and fiscal vulnerabilities: Gross public debt rose to 62.4 percent of GDP in June 2019. The fiscal deficit widened in 2018/19 to 7.8 percent of GDP.
- External reserves: Foreign exchange reserves stood at US$8 billion as of March 27, 2020 (about 4.4 months of 2021 imports).
- Authorities requested financial assistance under the Rapid Credit Facility (RCF) exogenous shock window.
- Staff supports a disbursement of SDR 542.8 million, equivalent to 100 percent of quota (equivalent to US$743.9 million), based on urgent balance of payments and fiscal financing needs.

### Macroeconomic impact of COVID-19, outlook, and financing needs
- Growth and activity:
  - Real GDP growth is projected to drop to 0.8 percent in 2020 (a shortfall of 5 percentage points relative to the pre-COVID baseline).
  - Staff projects growth will improve to 5.5 percent in 2021 and 6.1 percent in 2022, then decline to 5.8 percent in 2023 and remain at this rate over the medium-term.
- External sector and balance of payments:
  - Staff expects an external financing gap of about $2.1 billion (2.1 percent of GDP) in 2020.
  - Current account: staff estimates CA deficit narrowed to 4.5 percent of GDP in 2019 and is expected to be 4.4 percent of GDP in 2020.
  - Key external impacts include a sharp contraction in tourism receipts (tourism receipts about 1.8 percent of GDP in 2019 after shock), declines in agricultural exports (coffee, tea, and horticulture: 2.6 percent of GDP pre-shock vs 1.9 percent after shock), and lower remittances (remittances about 3.0 percent of GDP in 2019; projected remittances 2.7 percent of GDP after shock).
  - The shilling depreciated by 5.4 percent between February 28 and March 24 (reflecting US dollar appreciation).
- Fiscal impact:
  - Staff expects a fiscal financing gap in 2019/20 due to COVID-related spending and lower revenue collection.
  - The authorities planned a pause in fiscal consolidation in the near term to accommodate COVID-related fiscal measures.
- Financial sector and risks:
  - Banking system was liquid, well-capitalized and profitable before the shock; Nonperforming loans (NPLs) remain high at 12.7 percent of loans at end-February 2020.
  - Staff assesses that banks’ asset quality could deteriorate as trade and SME exposures are affected.
- Scenario / key financing table extracts (pre-shock vs after shock, 2020):
  - Current account: pre-shock -4,919 (‑4.5 percent of GDP); after-shock -4,520 (‑4.4 percent of GDP).
  - Exports of goods and services: pre-shock 13,055 (12.0 percent of GDP); after-shock 9,514 (9.3 percent of GDP).
  - Tourism: pre-shock 1,952 (1.8 percent of GDP); after-shock 293 (0.3 percent of GDP).
  - Imports of goods and services: pre-shock 22,671 (20.9 percent of GDP); after-shock 17,713 (17.3 percent of GDP).
  - Remittances: pre-shock 3,244 (3.0 percent of GDP); after-shock 2,729 (2.7 percent of GDP).
  - Capital and financial accounts: pre-shock 5,555 (5.1 percent of GDP); after-shock 2,375 (2.3 percent of GDP).
  - Net foreign direct investments: pre-shock 1,947 (1.8 percent of GDP); after-shock 750 (0.7 percent of GDP).
  - Government net borrowing: pre-shock 2,767 (2.6 percent of GDP); after-shock 1,716 (1.7 percent of GDP).
  - Gross financing: pre-shock 4,485 (4.1 percent of GDP); after-shock 3,228 (3.2 percent of GDP).
  - Commercial borrowing: pre-shock 2,012 (1.9 percent of GDP); after-shock 600 (0.1 percent of GDP).
  - Financing gap (excess of financing -): pre-shock -636 (-0.6 percent of GDP); after-shock 2,145 (2.1 percent of GDP).
  - IMF (net): pre-shock -136 (-0.1 percent of GDP); after-shock 120 (0.1 percent of GDP) reflecting RCF disbursement of 744 (0.7 percent of GDP) and repayments 136 (0.1 percent of GDP).
  - World Bank financing: 300 (0.3 percent of GDP) post-shock.
  - Reserve accumulation: pre-shock -500 (-0.5 percent of GDP); after-shock 1,233 (1.2 percent of GDP).

### Policy discussions and recommendations
- Fiscal policy:
  - Staff supports the authorities’ plan to pause fiscal adjustment in the near term to accommodate COVID-related fiscal measures.
  - Staff recommends that tax relief measures in response to the shock be made temporary and reversed once the crisis has passed.
  - Staff projects a fiscal financing gap in 2019/20 which will be partially filled by the RCF disbursement.
- Monetary policy and financial stability:
  - Staff advises accommodative monetary policy to support growth during the shock.
  - The Central Bank of Kenya (CBK) should continue to closely track inflation developments and keep its policy decisions data-dependent.
  - The CBK should continue to allow the exchange rate to act as a shock absorber.
  - Monetary and liquidity measures noted in authorities’ response include: reduction of the policy rate to 7.25 percent from 8.25 percent; reduction of the reserve requirement to 4.25 percent from 5.25 percent; extension of the tenor on REPO agreements; temporary flexibility on classification and provisioning of loans restructured due to the pandemic (until March 2021).
- Targeting social protection and health spending:
  - Authorities’ supplementary budget and reprogramming include COVID-19 interventions of KES 40 billion (0.4 percent of GDP) in 2019/20, including KES 5 billion for health, KES 13 billion to expedite clearance of unpaid bills, KES 10 billion to fast-track VAT refunds, and KES 10 billion for cash transfers to the elderly, disabled, and low-income households.
  - Staff estimates an additional 0.6 percent of GDP in spending could be required above what has been allocated so far to protect livelihoods.
- Design of tax measures:
  - The authorities’ package includes measures estimated at an annual cost of 1.7 percent of GDP: full income tax relief for persons earning below the equivalent of $225 per month; reduction of the top PAYE rate from 30 to 25 percent; reduction of the standard corporate income tax rate from 30 to 25 percent; reduction of the turnover tax rate on small businesses from 3 to 1 percent; reduction of the standard VAT rate from 16 to 14 percent; elimination of a long list of exemptions in the VAT and corporate income tax (elimination of exemptions is expected to be largely revenue neutral over time).
- Other authorities’ actions:
  - CBK transferred financial gains of KES 7.4 billion from the recent currency exchange to the Treasury to support the budget.
  - Support by commercial banks and mobile network operators under CBK guidance, including flexibility to borrowers and waiving or reducing charges on mobile money transactions.

### Medium-term outlook and risks
- Baseline medium-term growth: 5.5 percent in 2021, 6.1 percent in 2022, 5.8 percent in 2023 and over the medium-term.
- Outlook assumptions: gradual recovery of the global economy through 2020−21 and resumption of Kenya’s market access once global financial conditions normalize.
- Downside risks:
  - A deeper or more prolonged global pandemic or spread in Kenya could further deteriorate the outlook and strain balance sheets of the public sector, households, and firms.
  - Domestic risks include stronger-than-expected negative impact of the locust invasion on agriculture production, weaker remittances, and more severe impairment of bank balance sheets from the 2020 slowdown.
- Authorities’ view: Authorities expected growth in 2020 to be around 3 percent and envisaged that full implementation of their reform and development program would lead to growth of at least 6½ percent over the medium term.

_Source: IMF staff and Kenyan authorities (Executive Summary)._

### 10.       Staff supports the authorities’ plan to pause fiscal adjustment to accommodate

### 1kenea2020003 - 10.       Staff supports the authorities’ plan to pause fiscal adjustment to accommodate

### Fiscal impact of COVID-related measures and near-term projections
- Staff expect total revenue and grants in 2019/20 to be 0.6 percent of GDP lower and total expenditure be 0.8 percent of GDP higher than projected in mid-February.
- A projected 0.3 percentage point of GDP reduction in capital spending limits the impact on the overall deficit.
- The fiscal deficit compared to 2018/19 is expected to expand by 0.8 percent of GDP to 8.6 percent of GDP in 2019/20.
- Staff project that the fiscal deficit will decline to 7.8 percent of GDP in 2020/21.
- Current outlays in 2020/21 will be about 1.4 percent of GDP higher compared to pre-crisis projections.
- Staff projections assume about 75 percent of the fiscal cost of the recently announced tax relief measures will be compensated for by reduced tax exemptions in FY20/21, with the remainder coming in the next 2−3 years.

### Central government financial operations (selected figures from text table)
- Revenues and grants:
  - 2018/19: 1,691 (KES billion)
  - Pre-shock: 2,012 (KES billion)
  - Proj. 2019/20: 1,883 (KES billion) / 19.1% of GDP / 18.5% of GDP (table formatting preserved)
- Of which Tax revenue:
  - 2018/19: 1,401 (KES billion)
  - Pre-shock: 1,557 (KES billion)
  - Proj. 2019/20: 1,416 (KES billion) / 14.8% / 13.9%
- Nontax revenue:
  - 2018/19: 271 (KES billion)
  - Pre-shock: 422 (KES billion)
  - Proj. 2019/20: 422 (KES billion) / 4.0% / 4.1%
- Expenditure and net lending:
  - 2018/19: 2,406 (KES billion)
  - Pre-shock: 2,714 (KES billion)
  - Proj. 2019/20: 2,765 (KES billion) / 25.8% / 27.1%
- Current expenditure:
  - 2018/19: 1,857 (KES billion)
  - Pre-shock: 2,104 (KES billion)
  - Proj. 2019/20: 2,209 (KES billion) / 20.0% / 21.7%
- Development and net lending:
  - 2018/19: 549 (KES billion)
  - Pre-shock: 610 (KES billion)
  - Proj. 2019/20: 556 (KES billion) / 5.8% / 5.5%
- Overall balance:
  - 2018/19: -721 (KES billion) / -6.7% of GDP
  - Pre-shock: -702 (KES billion)
  - Proj. 2019/20: -882 (KES billion) / -8.6% of GDP
- Financing and financing gap:
  - Financing (2019/20 proj): 567 (KES billion) / 5.6% of GDP
  - Financing gap (+ = shortfall) (2019/20 proj): 003140.0 / 3.1% (table entries preserved)
- Additional financing (2019/20 proj):
  - IMF (RCF disbursement): 00770.0 / 0.8% of GDP
  - World Bank: 00310.0 / 0.3% of GDP
  - Additional net domestic financing: 002060.0 / 2.0% of GDP
- Memorandum item:
  - Nominal GDP: 9,303 (2018/19), Pre-shock 10,511, Proj. 2019/20 10,196 (KES billion)

(Note: table entries are presented exactly as they appear in the source.)

### Financing sources and IMF support proposal
- A fiscal financing gap is expected and would be closed by additional net domestic financing—including drawing down government deposits, utilizing unused proceeds from the Eurobond issuance of 2019, additional World Bank financing (0.3 percent of GDP), and by the RCF disbursement (0.8 percent of GDP).
- Authorities are actively pursuing additional financing from the World Bank and African Development Bank.
- Staff proposes to provide support of 100 percent of quota (SDR 542.8 million) under the RCF exogenous shock window.
- The proposed access of 100 percent of quota is about 34.6 percent of the BOP financing gap.
- With the RCF disbursed, total outstanding credit from the Fund will amount to SDR705.9 million, or 130 percent of quota, at end-2020.
- Total obligations to the Fund would be at 12.3 percent of gross international reserves, 10.2 percent of exports, and 0.9 percent of GDP in 2020 and decline thereafter.
- Staff assesses Kenya faces an external financing gap of about $2.1 billion (2.1 percent of GDP) in 2020.

### Policy recommendations on fiscal strategy and revenue
- Staff supports the authorities’ plan to pause fiscal adjustment to accommodate COVID-related fiscal measures but urges that tax relief measures be made temporary.
- Staff recommends that the tax rate reductions for the VAT, turnover tax, and personal income tax be reversed once the crisis has passed.
- For 2021/22 and beyond, authorities envisage further fiscal adjustment based on improvements in public procurement and public expenditure management to allow reductions in spending as a share of GDP without adversely affecting the quality of public services or achievement of the Big 4 Agenda (universal health care, agriculture, housing, and manufacturing).
- Staff recommend that revenue measures also be part of the medium-term fiscal consolidation strategy, with the aim of restoring and then raising the revenue-to-GDP ratio above that prevailing before the COVID crisis.
- Staff recommends the authorities prepare a contingency plan to address a potential deepening of the shock; additional spending for health and social protection in 2020/21 and beyond would need to be financed by reduction in nonpriority spending or introduction of revenue measures.
- A list of lower-priority public investment projects should be identified in case that need arises.

### Monetary policy and financial sector measures
- The CBK lowered the CBR to 7.25 percent and cut the reserve ratio by 100 bps to 4.25 percent in response to COVID-19.
- With headline inflation near the mid-point of the CBK’s target range, core inflation moderate, and an expected large negative output gap, monetary policy could continue to counterbalance the pandemic-related slowdown.
- The CBK should continue to closely track inflation developments and keep its policy decisions data-dependent.
- Continued steps to strengthen the monetary policy framework, as previously planned, will bolster CBK’s capacity to respond to negative shocks.
- The CBK should continue to allow the exchange rate to act as shock absorber.
- Staff recommends close monitoring of NPLs and supports CBK initiatives to contain possible spikes in NPLs (e.g., measures encouraging lenders to extend loan repayment schedules) and increase supervisory capacity.
- Staff advises against modifying loan classification rules and welcomes the authorities’ plan to sunset these by March 2021 to ensure transparency and accurate measurement of NPLs and potential losses.

### Transparency, governance, and use of financial assistance
- Safeguarding Fund and other financial assistance should ensure such assistance is used for very urgent crisis resolution purposes.
- Authorities should undertake independent audits of samples of crisis mitigation spending and publish the results of these audits.
- Authorities should publish documentation on related procurement contracts on the government’s website, together with ex-post validation of delivery and the name of awarded companies and the name of their beneficial owners.
- Once the crisis abates, authorities should introduce legislation to improve capacity to detect illicit enrichment and address conflicts of interest in line with international best practices and Fund advice.
- Improve fiscal transparency by expanding the quality and coverage of government finance statistics and commencing quarterly reporting on government fiscal outturns and annual reporting for the consolidated non-financial public sector, including public corporations.

### Staff appraisal and outlook
- Kenya registered its first case of COVID-19 on March 12, 2020.
- The pandemic is expected to significantly lower growth in 2020, with large impacts on services and agricultural exports, remittances, and the financial account.
- Staff supports pausing fiscal adjustment to mount a strong response, while urging tax relief measures be temporary.
- Incorporating the impact of the global shock from COVID-19 in Kenya’s DSA results in a shift in the assessment compared to the 2018 DSA to high risk of debt distress; authorities plan to prioritize use of available concessional financing.
- The planned return to a fiscal consolidation path after the current COVID-19 crisis abates will reduce debt-related risks.
- Staff and the authorities continue discussions on policies for 2021 and beyond to strengthen medium-term economic performance and form the basis for a potential Fund-supported arrangement.
- To help achieve consolidation, staff advise implementing measures to raise revenues as a share of GDP over the medium term.

*Source: Kenyan authorities and IMF staff calculations (excerpt).*

### 23.      Staff support the authorities’ request for an RCF of 100 percent of quota

### 23.      Staff support the authorities’ request for an RCF of 100 percent of quota

### Immediate financing request and purpose
- Staff support the authorities’ request for an RCF of 100 percent of quota (SDR 542.8 million).
- The disbursement will provide emergency funding to the budget and will support foreign exchange reserves in the wake of the urgent balance of payments gap generated by the COVID-19 pandemic.

### Macroeconomic outlook and key real-sector indicators
- Real GDP: 2019/20: 2.9; 2020/21: 3.1; 2021/22: 5.8; 2022/23: 5.9; 2023/24: 5.8; 2024/25: 5.8.
- GDP deflator: 2019/20: 3.1; 2020/21: 6.5; 2021/22: 6.7; 2022/23: 5.1; 2023/24: 5.2; 2024/25: 5.1.
- CPI (period average): 2019/20: 5.2; 2020/21: 5.2; 2021/22: 5.0; 2022/23: 5.0; 2023/24: 5.0; 2024/25: 5.0.
- Exports volume: 2019/20: -5.6; 2020/21: -1.4; 2021/22: 9.7; 2022/23: 7.8; 2023/24: 8.0; 2024/25: 8.0.
- Imports volume: 2019/20: -0.9; 2020/21: 5.9; 2021/22: 11.2; 2022/23: 7.3; 2023/24: 6.8; 2024/25: 6.5.
- Gross international reserves (US$ billions): 2019: 9.5; 2020: 8.9; 2021: 7.2; 2022: 7.9; 2023: 8.3; 2024: 9.3; 2025: 10.1 (Table 1a).

### Fiscal position and public debt
- Central government: Total revenue, grants and unidentified tax policy measures (percent of GDP): ranges around 17.6–19.8 across years in tables.
- Tax revenues (percent of GDP): 2019/20: 13.9; 2020/21: 13.7; 2021/22: 14.2; 2022/23: 14.5; 2023/24: 14.8; 2024/25: 14.8.
- Expenditure (percent of GDP): 2019/20: 27.1; 2020/21: 25.5; 2021/22: 24.6; 2022/23: 23.7; 2023/24: 23.0; 2024/25: 22.0.
- Overall balance (percent of GDP, excluding grants): 2019/20: -8.1; 2020/21: -7.7; 2021/22: -6.8; 2022/23: -5.8; 2023/24: -4.9; 2024/25: -3.9 (Table 1a and 1b).
- Public gross nominal debt (percent of GDP): 2019/20: 64.7; 2020/21: 68.2; 2021/22: 69.3; 2022/23: 68.2; 2023/24: 66.3; 2024/25: 66.7.
- Public gross debt, PV (percent of GDP): 2019/20: 57.1; 2020/21: 59.4; 2021/22: 62.3; 2022/23: 63.6; 2023/24: 63.7; 2024/25: 62.9.

### Central government financial operations (selected levels, Ksh billions and percent of GDP)
- Revenues and grants (Ksh billions): 2018/19: 1,690.8; 2019/20: 2,055.2; 2020/21: 1,929.9; 2021/22: 1,882.9; 2022/23: 2,177.0; 2023/24 Prel. BPS: 1,976.6; 2024/25 Proj. BPS: 2,463.1 (Table 2a).
- Tax revenue (Ksh billions): 2018/19: 1,400.6; 2019/20: 1,591.2; 2020/21: 1,437.5; 2021/22: 1,416.2; 2022/23: 1,743.2; 2023/24 Prel. BPS: 1,542.8; 2024/25 Proj. BPS: 2,018.6.
- Expenditure and net lending (Ksh billions): 2018/19: 2,405.9; 2019/20: 2,874.2; 2020/21: 2,730.2; 2021/22: 2,764.6; 2022/23: 2,748.0; 2023/24 Prel. BPS: 2,857.5; 2024/25 Proj. BPS: 2,968.2.
- Interest payments (Ksh billions): 2018/19: 375.7; 2019/20: 441.5; 2020/21: 433.7; 2021/22: 433.7; 2022/23: 456.0; 2023/24 Prel. BPS: 456.0; 2024/25 Proj. BPS: 541.3.
- Overall balance including measures (cash basis, incl. grants, Ksh billions): 2018/19: -721.1; 2019/20: -657.4; 2020/21: -800.4; 2021/22: -881.7; 2022/23: -571.2; 2023/24 Prel. BPS: -880.9; 2024/25 Proj. BPS: -505.1.
- Financing: Net foreign financing (Ksh billions): 2018/19: 414.5; 2019/20: 353.5; 2020/21: 327.1; 2021/22: 327.1; 2022/23: 345.2; 2023/24 Prel. BPS: 420.7; 2024/25 Proj. BPS: 319.3.
- Memorandum: Total gross public debt, gross (Ksh billions): 2018/19: 5,809.1; 2019/20: 6,600.0; 2020/21: 7,656.9; 2021/22: 8,647.7; 2022/23: 9,620.5; 2023/24 Prel. BPS: 10,552.2; 2024/25 Proj. BPS: 11,408.6.

### External sector, balance of payments, and reserves
- Current account (US$ millions): 2019: -4,309; 2020: -4,520; 2021: -4,593; 2022: -4,991; 2023: -5,478; 2024: -5,987; 2025: -6,532 (Table 4a).
- Goods: exports, f.o.b. (US$ millions): 2019: 6,049; 2020: 5,197; 2021: 5,807; 2022: 6,328; 2023: 6,918; 2024: 7,594; 2025: 8,262.
- Goods: imports, f.o.b. (US$ millions): 2019: 16,418; 2020: 13,974; 2021: 16,342; 2022: 17,984; 2023: 19,601; 2024: 21,342; 2025: 23,118.
- Gross official reserves (end of period, US$ millions): 2019: 9,116; 2020: 7,882; 2021: 8,355; 2022: 8,810; 2023: 9,092; 2024: 9,822; 2025: 10,643.
- Reserve cover (in months of next year's imports, Table 4a): 2019: 6.0; 2020: 5.6; 2021: 4.0; 2022: 3.9; 2023: 4.0; 2024: 4.0; 2025: 4.0.

### Monetary and financial sector indicators
- Policy rate (Table 1a/1b): levels reported e.g., 2018/19: 10.0; 2019/20: 9.5; 2020/21: 9.0 (periods with “.....” indicate data not shown).
- Broad money (M3, percent change): Example series shows M3 growth and levels; M3/GDP (percent) around 38.5–41.9 across years in tables.
- Banking sector financial soundness (selected):
  - Regulatory capital to risk-weighted assets: 2019 Dec: 18.8; Feb-20: 18.7.
  - Non-performing loans to total gross loans (percent): Mar-19: 12.8; Jun-19: 12.7; Sep-19: 12.4; Dec-19: 12.0; Feb-20: 12.7.
  - Return on assets (ROA): Dec-19: 2.5; Feb-20: 2.2.
  - Liquid assets to total assets: Dec-19: 39.3; Feb-20: 40.2.

### IMF credit and obligations (Table 6)
- RCF requested: 100 percent of quota = SDR 542.8 million.
- Fund obligations based on existing credit (in millions of SDRs): Total 2020: 87.1; 2021: 91.3; 2022: 50.5; 2023: 21.7; 2024–2030: 0.1 or 0.0 (detailed yearly breakdown provided in Table 6).
- Obligations to the Fund from existing and prospective credit (in millions of SDRs): 2025: 54.4; 2026: 108.7; 2027–2029: 108.7 each; 2030: 54.4.
- Outstanding Fund credit based on existing and prospective drawings (end-of-period, in millions of SDRs): 2020: 705.9; 2021: 614.7; 2022: 564.4; 2023: 542.8; 2024: 542.8; 2025: 488.5; 2026: 380.0; 2027: 271.4; 2028: 162.8; 2029: 54.3; 2030: 0.0.
- Outstanding Fund credit in percent of quota (end-of-period): 2020: 130.0; 2021: 113.2; 2022: 104.0; 2023: 100.0; 2024: 100.0; 2025: 90.0; 2026: 70.0; 2027: 50.0; 2028: 30.0; 2029: 10.0; 2030: 0.0.
- Memorandum: Quota (in millions of SDRs) = 542.8; SDR per USD (as at March 30, 2020) = 0.73.

### External financing requirements and role of IMF support (Table 7)
- Total requirements (US$ mn, financial years): 2018: 6,031; 2019: 7,096; 2020: 6,165; 2021: 6,697; 2022: 7,143; 2023: 7,607.
- Current account deficit (US$ mn): 2018: 4,364; 2019: 4,309; 2020: 4,520; 2021: 4,593; 2022: 4,991; 2023: 5,478.
- Financing gap (excess of financing = negative): 2018: -1,031; 2019: -1,126; 2020: 2,145; 2021: -599; 2022: -524; 2023: -312.
- IMF (net) financing (US$ mn): 2018: -146; 2019: -154; 2020: 612; 2021: -126; 2022: -70; 2023: -30.
- Disbursements (RCF) shown as: 2020: 744 (Table 4a and Table 7 indicate disbursement detail consistent with RCF usage).

_Italic: Source: IMF staff assessment and country tables as presented in the referenced chapter._

### Appendix I.  Letter of Intent

### Appendix I. Letter of Intent

### COVID-19 impact and economic outlook
- The COVID-19 pandemic is having a significant negative impact on the Kenyan population and economy; protecting public health is the priority.
- Economic sectors affected: trade, tourism, services, agriculture, manufacturing.
- Growth projections and assumptions:
  - 2019 growth: 5.4 percent.
  - Pre-pandemic IMF staff projection (February 2020): 5.8 percent.
  - Preliminary estimate for 2020: around 3 percent.
  - Framework underlying the RCF request assumes growth of 0.8 percent in 2020.
  - Risks are "slanted heavily to the downside."

### Fiscal response: additional spending, revenue measures, and fiscal consolidation
- Additional COVID-19 related spending:
  - At least 0.4 percent of GDP relative to the previous budget.
  - Includes 0.1 percent of GDP in cash transfers to orphans, the elderly, and the most vulnerable.
  - Costs could rise if the crisis worsens; authorities committed to approving necessary funding.
- Tax reductions (will reduce revenues by 0.4 percent of GDP this fiscal year relative to the previous budget):
  - 100 percent tax relief for lower-income individuals.
  - Reduced income and corporate tax rates: from 30 to 25 percent.
  - Reduced VAT rate: from 16 to 14 percent.
  - Reduced turnover tax rate: from 3 to 1 percent.
- Revenue-side offset and medium-term intent:
  - Authorities have undertaken to eliminate a long list of exemptions in the corporate income tax and VAT to help offset the revenue impact and improve tax efficiency.
  - Once activity recovers sufficiently, the authorities will review tax measures to fully restore revenues as a share of GDP.
  - Continued commitment to raising the ratio of tax revenue to GDP over the medium term.
- Fiscal consolidation strategy:
  - The multi-year fiscal consolidation plan will be implemented more gradually than originally envisaged.
  - Plan entails a mix of revenue and expenditure measures to reduce budget deficits and put public debt on a downward path.

### Balance of payments, reserves, and external financing
- External vulnerabilities:
  - Lower oil prices should help offset weaker exports and remittances and keep the current account stable.
  - Drying up of international capital and pullback from emerging/frontier markets could worsen the balance of payments.
  - Balance of payments gap could reach up to 2.1 percent of GDP.
  - In that situation, international reserve coverage would be expected to decline significantly.
- Request to the IMF:
  - Kenya requests emergency financing under the Rapid Credit Facility (RCF) of SDR 542.8 million, equivalent to 100 percent of quota.
  - Requested disbursement modality: direct budget support to the National Treasury’s account at the Central Bank of Kenya (CBK).
  - A memorandum of understanding has been signed between the National Treasury and the CBK on responsibilities for servicing IMF obligations.
- Additional external financing:
  - Expect to receive additional financing from the World Bank and pursuing funds from the African Development Bank.
  - Plan to subsequently resume discussions on a potential precautionary Stand-By Arrangement/Standby Credit Facility (SBA/SCF) previously initiated in February.

### Central Bank of Kenya (CBK) policy and financial stability measures
- Monetary and macro-financial measures taken since the start of the crisis:
  - 100 bps cuts in the policy rate and cash reserve ratio.
  - Increase in reverse repo tenors.
  - Increased flexibility for banks’ loan classification and provisioning requirements.
  - Steps to extend maturity dates for bank borrowers affected by the pandemic.
- Policy stance and mandates:
  - Measures aim to maintain liquidity, prevent abrupt financial dislocations, and support availability of credit.
  - CBK remains mindful of its price stability mandate; current inflation risks described as "balanced" (low energy prices and weakening demand offsetting potential import-driven pressures).
  - CBK decisions will remain data-dependent.
  - CBK remains committed to a flexible exchange rate regime; exchange rate used as a shock absorber with selective FX intervention to minimize excess volatility.
  - Parallel efforts to strengthen the monetary policy framework are underway.

### Safeguards, transparency, and IMF-related commitments
- Article VIII and trade payment restrictions:
  - Kenya does not intend to introduce measures that would exacerbate balance of payments difficulties.
  - Kenya will continue to comply with the provisions of the IMF’s Articles of Agreement and avoid additional trade restrictions for balance of payments purposes.
- Safeguards and audits:
  - In the context of the September 2019 safeguards assessment, authorities remain committed to implementing IMF staff recommendations and to providing Fund staff with the most recently completed external audit reports.
  - Commitment to post-crisis auditing by the independent audit office of samples of crisis-related expenditures and publication of the results.
  - Strong commitment to ensuring effective and transparent use of public funds, strengthening institutions, detecting illicit enrichment, and addressing conflict of interest in line with international best practices and Fund advice.
- Publication authorization:
  - The authorities authorize the IMF to publish this Letter and the staff report for the RCF disbursement request.

### Key DSA (Debt Sustainability Analysis) findings and risks
- Joint Bank-Fund DSA summary:
  - Risk of external debt distress: High.
  - Overall risk of debt distress: High.
  - Granularity in the risk rating: Sustainable.
  - Application of judgment: No.
- Debt sustainability and vulnerabilities:
  - Kenya’s debt remains sustainable, but the risk rating moved to High from Moderate due to the COVID-19 shock exacerbating existing vulnerabilities.
  - Impact channels: sharp decline in exports and economic growth; stronger fiscal response increasing deficits; historical high deficits and decline in tax revenue as a share of GDP.
  - Solvency indicators:
    - PV of external debt-to-GDP ratio and PV of total public debt-to-GDP ratios are firmly below indicative thresholds under the baseline.
    - Breaches under the baseline: PV of external debt-to-exports ratio and external debt service-to-exports ratio are above thresholds.
  - Projections assume existing Eurobonds will be rolled over once global capital markets reopen to frontier market issuers.
  - The DSA highlights the need for sustained fiscal consolidation to reduce public debt as a share of GDP over the medium term.
  - Kenya is susceptible to export and market financing shocks; more protracted shocks would present downside risks to the debt outlook.
  - Kenya’s debt-carrying capacity: CI at 3.12 (based on October 2019 WEO) remains above the upper threshold value of 3.05.

### Selected IMF relations and financial position figures (as reported)
- Quota and holdings:
  - Quota: 542.8 (SDR Million), 100.00 percent of quota.
  - Fund holdings of currency (Exchange Rate): 529.49 (SDR Million), 97.54 percent of quota.
  - Reserve Tranche Position: 13.40 (SDR Million), 2.47 percent of quota.
- SDR Department:
  - Net cumulative allocation: 259.65 (SDR Million), 100.00 percent allocation.
  - Holdings: 31.68 (SDR Million), 12.20 percent.
- Outstanding purchases and loans:
  - ECF Arrangements: 249.96 (SDR Million), 46.05 percent of quota.
- Projected payments to Fund (SDR Million, based on existing use of resources and present holdings of SDRs):
  - 2020 Principal: 86.85; Charges/Interest: 0.24; Total: 87.09.
  - 2021 Principal: 91.19; Charges/Interest: 0.12; Total: 91.31.
  - 2022 Principal: 50.34; Charges/Interest: 0.12; Total: 50.46.
  - 2023 Principal: 21.58; Charges/Interest: 0.12; Total: 21.69.
  - 2024 Charges/Interest: 0.12; Total: 0.12.

*Prepared by the Authorities of Kenya (Letter of Intent dated April 30, 2020) and submitted to the IMF.*

### 1.      Kenya’s public debt includes obligations of the central government. Debt data include both

### Kenya’s public debt includes obligations of the central government

### Background on debt
- Debt data include both external and domestic obligations and guarantees; external DSA covers external debt of the central government and the central bank, as well as of the private sector; stress tests apply to public and publicly guaranteed (PPG) debt.
- The public DSA covers both external and domestic debt incurred or guaranteed by the central government; public domestic debt is comprised of central government debt.
- Total public debt in this analysis refers to the sum of public domestic and public external debt, but does not cover the entire public sector such as extra-budgetary units and county governments.
- Because the DSA coverage does not include debt of non-guaranteed state-owned enterprises (SOEs), an additional 2 percent of GDP is added to the contingent liability test.
- Contingent liabilities also include 5 percent of GDP for a loan default financial market shock (above existing stock of financial sector NPLs).
- Debt coverage excludes legacy debt of the pre-devolution county governments (modest) and non-guaranteed debt of SOEs.
- The DSA uses a currency-based definition of external debt; nonresidents’ direct participation in the domestic debt market is about one percent of total outstanding government securities and is not significant.

### Recent trends and composition
- Gross public debt increased from 50.2 percent of GDP at end-2015 to an estimated 61.7 percent of GDP at end-2019, reflecting high past deficits and large infrastructure projects.
- About half of Kenya’s public debt is owed to external creditors.
- Central government borrowing and government-guaranteed debt are captured; county governments have not been allowed to borrow without government guarantee since 2010 while extra-budgetary units face no such constraint.

### External public debt (PPG)
- Nominal PPG external debt at end-2019 was about 31½ percent of GDP, evenly divided among multilateral, bilateral, and commercial creditors.
- At end-2019:
  - Multilateral creditors accounted for about 33½ percent of external credit.
  - Bilateral creditors accounted for 33 percent; about 72 percent of bilateral debt is owed to non-Paris Club members (mainly China for SGR).
  - Commercial debt accounted for about 33 percent of external public debt (up from 22¾ percent at end-2015).
  - Existing Eurobonds, US$6.1bn in total, accounted for 60 percent of commercial debt at end-2019.
- Eurobond issuance history (select):
  - June 2014: inaugural sovereign Eurobonds, US$2 billion in June and further US$750 million in December 2014.
  - February 2018: additional US$2 billion sovereign Eurobond issue.
  - May 2019: sovereign bond issue of US$2.1 billion.
- Syndicated loans highlights:
  - October 2015: two-year US$750 million syndicated loan at LIBOR plus 570 basis points (effective yield 8 percent); payment for nearly 90 percent extended to April 2018; maturity extended to seven years in February 2018.
  - 2019: 10-year US$250 million syndicated loan in January and 9-year US$1.25 billion syndicated loan in February for refinancing.

### Domestic public debt
- Domestic public debt was 30.2 percent of GDP at end-2019.
- Domestic debt composition:
  - Treasury bonds account for about 70 percent of total domestic debt stock.
  - Treasury bills make up the remainder.
- Interest rates (March 2020 averages):
  - 91-day: 7.3 percent
  - 182-day: 8.1 percent
  - 364-day: 9.2 percent
- Average time to maturity for government domestic securities was 5¾ years at end-2019.
- Holders of government domestic debt securities: about half by commercial banks, followed by pension funds.

### Underlying assumptions and macroeconomic baseline
- Baseline medium- to long-term growth projection: 5.8 percent.
- Short-term: slowdown in 2020 related to COVID-19; inflation expected to remain close to the middle of the authorities’ target range.
- Fiscal projections:
  - Fiscal deficit declined from a peak of 9.1 percent of GDP in 2016/17 to 7.8 percent of GDP in 2018/19.
  - Tax revenues reached 15.1 percent of GDP in 2018/19 (improved by 0.3 percentage points of GDP compared to previous year).
  - Non-tax revenues were 0.2 percentage points of GDP less than in 2017/18.
  - Long-term overall deficit expected to decline and stay around 3.2 percent of GDP, with the primary deficit around 0.3 percent of GDP.
- Financing assumptions:
  - As financing needs decline and domestic capital markets deepen, gross external financing as a share of GDP is expected to gradually decline with a relatively stable grant element of new borrowing.
  - Staff projections assume resumption of market access and issuance of additional Eurobonds to meet financing needs and maintain market presence.
- Current account:
  - Current account deficit estimated to have narrowed to 4.5 percent of GDP in 2019.
  - Remittances estimated to have remained stable at 3 percent of GDP in 2019.
  - Inward FDI inflows expected to finance close to one third of the current account deficit throughout the projection period.

### Debt carrying capacity and stress tests
- Kenya’s debt carrying capacity is classified as "Strong".
  - Composite indicator (CI) based on October 2019 WEO and World Bank’s 2018 CPIA is 3.12, above threshold 3.05.
- Standard and tailored stress tests applied:
  - Six standardized stress tests plus two tailored stress tests:
    - Tailored test 1: combined contingent liabilities of a one-time debt shock equivalent to 7 percent of GDP (SOEs 2 percent of GDP + bank recapitalization 5 percent of GDP).
    - Tailored test 2: market financing shock assessing rollover risks for market-access LICs (Eurobonds), considering deterioration in global risk sentiment, temporary nominal depreciation, and shortening maturities of new external commercial borrowing.

### External debt sustainability analysis (key findings)
- COVID-19 global shock causes one solvency indicator to breach threshold under baseline in 2020–2024:
  - PV of PPG external debt-to-exports ratio breaches indicative threshold of 240 percent in 2020–2024 due to export shocks; ratio gradually declines thereafter.
  - PV of PPG external debt as share of GDP remains below 55 percent threshold throughout projection period, declining from 27.6 percent in 2019 to 27.2 percent in 2024 and to 12.5 percent in 2040.
- Liquidity indicators:
  - External debt service-to-exports ratio exceeds its threshold in 2024 by 15 percentage points mainly due to repayment of commercial external debt.
  - Debt service-to-exports ratio exceeds its threshold over 2020–2028 and 2031–2032 partly due to lower exports and higher deficits from the global shock and amortization profile; remains below threshold afterwards.
- Under standard stress tests:
  - PV of debt-to-exports breaches threshold for longer periods under severe shocks (shock to export growth).
  - Debt service-to-exports ratio exceeds threshold over projection period under the most extreme shock (shock to export growth).
  - Debt service-to-revenue ratio is below threshold in all scenarios except for a single one-off breach under the most extreme scenario in 2024.

### Public debt sustainability analysis (key findings)
- Baseline projections for total public debt:
  - Total public debt (percent of GDP) projected to increase from 61.7 percent in 2019 to 69.9 percent in 2022, then gradually decline.
  - Remains strictly below the benchmark of 70 percent of GDP in PV terms.
- PV of public debt-to-revenue ratio:
  - Increases from 313.9 percent in 2019 to 357.4 percent in 2022.
  - Eases to 282.7 percent in 2030 and further to 190.7 percent in 2040.
- Debt service-to-revenue ratio expected to remain stable in the longer term.
- Alternative scenarios:
  - PV of public debt-to-GDP ratio would remain below the indicative benchmark most of the time.
  - Under the most extreme shock (shock to the primary balance), PV public debt-to-GDP would breach benchmark marginally in 2022–2024.

### Risk rating and vulnerabilities
- DSA finding: risk of debt distress moved to "high" from "moderate" in the context of the COVID-19 global shock.
- Drivers of deterioration:
  - Sharp decline in export growth and economic growth due to COVID-19.
  - Strong fiscal response increasing budget deficits.
  - High past deficits linked to large infrastructure projects.
- Breaches:
  - Breaches of both solvency and liquidity indicators under the baseline (PV of external debt-to-exports and external debt service-to-exports).
  - One large liquidity breach in 2024 mainly attributed to Eurobond repayment; historical record suggests Kenya should be able to roll it over when global capital markets reopen to frontier market issuers.
- Vulnerabilities and risks:
  - Susceptible to export and market financing shocks.
  - Prolonged or protracted shocks, including loss of market access at reasonable prices, would increase probability that debt indicators remain in breach over time.

*Source: IMF staff analysis contained in the referenced DSA chapter.*

### 17.      Kenya’s debt remains s u stai nable, and its debt indicators are expected to improve when the

### 1kenea2020003 - 17.      Kenya’s debt remains s u stai nable, and its debt indicators are expected to improve when the

### Debt sustainability and outlook
- Kenya’s PV of external debt as a share of GDP will gradually decline over time, remaining well below the 55 percent indicative threshold.
- Kenya’s external debt indicators are expected to improve as:
  - the authorities are committed to fiscal consolidation;
  - exports are expected to recover after the global shock dissipates and Kenya further unlocks its substantial export potential;
  - stable and strong remittances continue to be an important source for foreign currency receipts.
- Reserves are at a comfortable level.

### Debt management and financing recommendations
- Authorities are encouraged to further strengthen debt management capacity to manage and prepare for large repayments on commercial borrowing.
- Expected components of the strategy:
  - have a strategy on near-term external refinancing;
  - over the next years, refinance loans at a longer maturity to limit refinancing risks.
- Borrowing guidance:
  - concessional borrowing should continue to play an important role in financing investment projects due to its lower cost and longer maturity profile;
  - non-concessional borrowing should be limited to finance those projects with high social and economic returns.
- Kenya has about US$10 billion of committed but undisbursed official development assistance; measures should be taken to unblock this low-cost financing to avoid commitment fees on undisbursed funds and reduce reliance on commercial financing.
- Delivering on fiscal consolidation is essential to further reduce risks.
- The authorities are encouraged to expand the coverage of public debt to include:
  - county governments;
  - extra budgetary units;
  - non-guaranteed SOE debt.
- Continue improving public debt management and revenue administration, which will be key to maintaining debt sustainability.
- Public investment in infrastructure will be critical to raise growth and export potential, supporting external debt sustainability.

### Historical DSA findings and judgment
- The October 2018 DSA found:
  - in the baseline, external debt service to exports exceeded the high-risk threshold for two years;
  - the ratio of debt service to exports touched the threshold for one year, which made the mechanical external risk of debt distress high;
  - there was a breach of the present value of external debt to exports in the stress test scenario.
- Because the baseline breaches were temporary and related to a bullet Eurobond repayment, and given Kenya’s strong access to international markets and a comfortable level of reserves, the final risk of debt distress was assessed as moderate with the use of judgement.

*Source: 1kenea2020003 - 17.      Kenya’s debt remains s u stai nable, and its debt indicators are expected to improve when the*

### 19.      The authorities acknowledged that the indicators of debt level and debt services had

### 19.      The authorities acknowledged that the indicators of debt level and debt services had

### Authorities' assessment and planned actions
- The authorities acknowledged that the indicators of debt level and debt services had deteriorated, noting the adverse impact of the global economic shock and the increased utilization of external commercial financing in the recent past.
- They agreed that sustained fiscal consolidation to reduce deficits, increasing the utilization of committed concessional financing and reducing uptake of new external commercial financing were important to strengthen debt sustainability.
- They noted large uncertainties in the outlook for economic growth and the external environment, making a precise evaluation of debt distress risk ratings difficult and warranting the use of judgement to maintain the pre-COVID-19 rating.
- The authorities emphasized the importance of expanding debt coverage to include counties, non-guaranteed debt contracted by extra budgetary units, and SOEs.
- They planned a gradual approach to monitoring contingent liabilities, for example, to start monitoring external borrowing by large SOEs.
- They were actively seeking to lengthen maturities and avoid bunching of repayments to limit refinancing risks, while noting a large liquidity buffer at the Central Bank of Kenya including the remaining deposits from last year’s Eurobond issuance.

### External Debt Sustainability — baseline trajectory (selected indicators, percent of GDP)
- External debt (nominal): 2017: 46.1; 2018: 47.9; 2019: 46.8; 2020: 47.2; 2021: 45.9; 2022: 44.3; 2023: 43.0; 2024: 41.3; 2025: 41.5; 2026: 41.8; 2027: 42.0; 2028: 41.7; 2029: 41.8; 2030: 41.6; 2040: 28.6
- PPG external debt (of external debt): 2017: 28.8; 2018: 30.6; 2019: 31.5; 2020: 33.0; 2021: 34.0; 2022: 34.2; 2023: 34.2; 2024: 33.8; 2025: 32.6; 2026: 31.7; 2027: 30.9; 2028: 29.5; 2029: 28.6; 2030: 27.6; 2040: 15.5
- Change in external debt: 2017: 6.2; 2018: 1.8; 2019: -1.1; 2020: 0.4; 2021: -1.3; 2022: -1.6; 2023: -1.4; 2024: -1.7; 2025: 0.2; 2026: 0.3; 2027: 0.2; 2028: -0.3; 2029: 0.1; 2030: -0.1; 2040: -0.3
- Identified net debt-creating flows: 2017: -0.1; 2018: -1.3; 2019: -0.4; 2020: 3.4; 2021: 0.9; 2022: 0.7; 2023: 0.9; 2024: 1.0; 2025: 1.1; 2026: 1.0; 2027: 1.0; 2028: 0.9; 2029: 0.8; 2030: 0.8; 2040: 1.3
- Non-interest current account deficit: 2017: 5.0; 2018: 3.5; 2019: 2.9; 2020: 2.9; 2021: 2.8; 2022: 2.8; 2023: 2.9; 2024: 3.0; 2025: 2.9; 2026: 2.9; 2027: 2.9; 2028: 2.8; 2029: 2.7; 2030: 2.7; 2040: 3.1
- Endogenous debt dynamics (contribution): 2017: -3.8; 2018: -3.2; 2019: -2.2; 2020: 1.2; 2021: -1.0; 2022: -1.2; 2023: -1.0; 2024: -1.0; 2025: -0.8; 2026: -0.8; 2027: -0.9; 2028: -0.9; 2029: -0.9; 2030: -0.9; 2040: -1.0
- PV of PPG external debt-to-GDP ratio (selected projection years): 2020: 27.8; 2021: 27.6; 2022: 27.2; 2023: 26.0; 2024: 25.1; 2025: 24.3; 2026: 23.0; 2027: 22.1; 2028: 21.2; 2029: 21.2; 2030: 12.5
- PPG debt service-to-exports ratio (selected years): 2017: 17.0; 2018: 19.6; 2019: 31.4; 2020: 27.5; 2021: 25.9; 2022: 25.5; 2023: 24.4; 2024: 36.1; 2025: 24.1; 2026: 22.8; 2027: 21.9; 2028: 24.8; 2029: 19.8; 2030: 19.6; 2040: 9.4
- Gross external financing need (Million of U.S. dollars): 14,462; 15,845; 12,905; 13,723; 10,962; 10,916; 10,523; 12,319; 14,559; 15,867; 17,411; 18,147; 17,231; 17,405; 28,933

### Key macroeconomic assumptions (selected)
- Real GDP growth (in percent): 2017: 4.8; 2018: 6.3; 2019: 5.4; 2020: 0.8; 2021: 5.5; 2022: 6.1; 2023: 5.8; 2024: 5.8; 2025: 5.8; 2026: 5.8; 2027: 5.8; 2028: 5.8; 2029: 5.8; 2030: 5.8; 2040: 5.8
- GDP deflator in US dollar terms (change in percent): 2017: 9.0; 2018: 4.5; 2019: 3.1; 2020: 6.4; 2021: 0.8; 2022: 2.6; 2023: 2.6; 2024: 2.5; 2025: 2.5; 2026: 2.4; 2027: 2.5; 2028: 2.5; 2029: 2.5; 2030: 2.5; 2040: 2.5
- Effective interest rate (percent): 2017: 3.3; 2018: 3.5; 2019: 3.7; 2020: 3.5; 2021: 3.1; 2022: 3.3; 2023: 3.4; 2024: 3.3; 2025: 3.7; 2026: 3.7; 2027: 3.6; 2028: 3.6; 2029: 3.5; 2030: 3.5; 2040: 3.0
- Grant element of new public sector borrowing (in percent): projection years include values such as 41.1; 19.3; 22.1; 22.7; 17.1; 25.9; 27.1; 26.8; 28.6; 29.4; 28.6; 33.2
- Government revenues (excluding grants, in percent of GDP): 2017: 17.9; 2018: 18.0; 2019: 18.0; 2020: 17.7; 2021: 17.4; 2022: 17.5; 2023: 17.8; 2024: 17.9; 2025: 17.9; 2026: 17.9; 2027: 17.8; 2028: 17.8; 2029: 17.7; 2030: 17.7; 2040: 18.6
- Aid flows (Million of US dollars): 982.7; 1,086.8; 1,196.6; 2,627.7; 2,136.1; 2,274.1; 2,330.5; 2,368.5; 2,232.8; 2,655.9; 2,830.7; 3,007.6; 3,191.5; 3,374.7; 5,990.7
- Nominal GDP (Million of US dollars): 79,010; 87,824; 95,385; 102,214; 108,702; 118,237; 128,276; 139,123; 150,866; 163,492; 177,378; 192,387; 208,718; 226,367; 510,898

### Public Sector Debt — baseline trajectory (selected indicators, percent of GDP)
- Public sector debt: 2017: 56.9; 2018: 60.2; 2019: 61.7; 2020: 66.7; 2021: 69.1; 2022: 69.9; 2023: 69.8; 2024: 68.5; 2025: 66.7; 2030: 40.8; 2040: 41.2; (continued projection detail present in table)
- Change in public sector debt: 2017: 6.3; 2018: 3.4; 2019: 1.5; 2020: 5.0; 2021: 2.4; 2022: 0.8; 2023: -0.1; 2024: -1.3; 2025: -1.8; 2030: -1.0
- Identified debt-creating flows: 2017: 0.6; 2018: 2.1; 2019: 4.8; 2020: 5.7; 2021: 2.5; 2022: 0.8; 2023: -0.1; 2024: -1.3; 2025: -1.8; 2030: -1.0
- Primary deficit: 2017: 4.5; 2018: 3.7; 2019: 4.0; 2020: 4.1; 2021: 3.1; 2022: 2.1; 2023: 1.1; 2024: 1.1; 2025: 0.0; 2030: -0.4
- PV of public debt-to-GDP ratio (selected): projections include values such as 57.6; 61.3; 63.4; 63.9; 63.6; 62.2; 60.4; 50.8; 36.0
- Debt service-to-revenue and grants ratio (selected): 38.2; 42.3; 53.5; 53.8; 68.0; 74.5; 71.5; 78.6; 70.4; 63.9; 41.0
- Gross financing need (percent of GDP): 11.5; 11.4; 13.8; 13.8; 15.2; 15.4; 14.0; 14.4; 12.4; 11.7; 8.8

### Sensitivity and stress testing (key outcomes)
- Table 3 and Table 4 present sensitivity analyses for 2020–2030 across scenarios:
  - Baseline and Alternative Scenarios (A1: Key variables at their historical averages) and Bound Tests (B1–B6) and Tailored Tests (C1–C4).
  - Thresholds used (examples): PV of debt-to-GDP ratio threshold 55; Debt service-to-revenue ratio threshold 70; PV of debt-to-exports ratio threshold 240.
  - Selected stress-test results (examples):
    - Debt service-to-exports ratio baseline (2020): 27; alternative and bound/test series show increases and potential breaches depending on scenario.
    - PV of debt-to-GDP ratio and PV of debt-to-exports ratio exhibit higher values under adverse scenarios (details shown in tables and figures).
- Figures identify most extreme shocks for indicators:
  - Debt service-to-revenue ratio: Most extreme shock is Market financing.
  - PV of debt-to-exports ratio: Most extreme shock is Exports.
  - PV of debt-to-GDP ratio: Most extreme shock is One-time depreciation.
  - Debt service-to-exports ratio: Most extreme shock is Exports.

### Market-financing risk and realism diagnostics
- Market-financing risk indicators highlight potential heightened liquidity needs and benchmark breaches:
  - Benchmarks and observed indicators include GFN benchmark 14 and EMBI spread value 570 (EMBI spreads correspond to the latest available data).
  - Statement: "Breach of benchmark Yes" for potential heightened liquidity needs.
- Realism tool and fiscal adjustment illustrations:
  - Fiscal adjustment scenarios and potential real GDP growth paths are shown under multipliers 0.2, 0.4, 0.6, 0.8.
  - Distribution of projected 3-year adjustment and comparison to historical Fund-supported programs are presented.

### COVID-19 fiscal and balance of payments impact (authorities' statement, May 6, 2020)
- Request for emergency financing under the Rapid Credit Facility (RCF): SDR 542.8 million, equivalent to 100 percent of quota.
- COVID-19 developments and macro impact:
  - First COVID-19 case: March 12, 2020. As of May 3, number of COVID-19 cases: 465 persons.
  - Balance of payments financing gap assessed at about $2.1 billion equivalent to 2.1 percent of GDP due to abrupt loss of access to international capital markets.
  - Fiscal deficit expected to worsen to 7.8 percent of GDP, reflecting reduced fiscal revenues and increased expenditures to fight the pandemic.
  - Annual cost of tax relief measures estimated at 1.7 percent of GDP.
- Governance commitments:
  - Authorities undertake independent post-crisis auditing of COVID-19 related expenditures and to publish the results.
  - Commitment to implement recommendations of the latest safeguards assessment.
  - Statement: "Kenya’s capacity to repay the Fund is strong and public debt remains sustainable."

*Sources: Country authorities; and staff estimates and projections.*

### 7. While Kenya’s public debt remains sustainable, the downgrade in the debt risk

### 7. While Kenya’s public debt remains sustainable, the downgrade in the debt risk rating from moderate to high risk of debt distress is purely a consequence of the impact of the global COVID-19 crisis which has exacerbated existing vulnerabilities

### Debt outlook and external vulnerabilities
- Downgrade in the debt risk rating: from "moderate" to "high risk of debt distress" attributed to the global COVID-19 crisis exacerbating existing vulnerabilities.
- Pandemic effects:
  - Dampened exports and economic growth.
  - Resulted in a breach of solvency and liquidity indicators thresholds related to exports.
- Authorities' expectation: debt indicators will improve as exports rebound once the global shock dissipates.

### Financial sector risks and bank asset quality
- Banks’ asset quality is expected to deteriorate due to impaired loan servicing.
- SME exposure: loan servicing especially from small and medium-sized enterprises (SMEs) would be affected by limited business activity.
- Sector concentration: the trading sector accounts for the largest share of bank loans.

### Policy responses to the pandemic (Immediate measures)
- Institutional response:
  - In February 2020, an inter-ministerial National Emergency Response Committee was established to lead the COVID-19 response.
- Public health and containment measures implemented:
  - Suspension of all international passenger flights.
  - Closure of schools and universities.
  - Imposition of social distancing requirements.
  - A night curfew.
  - Restrictions to mobility from the most affected counties.
  - Ramped up health system capacity including establishment of isolation facilities, quarantine of at-risk persons, and recruitment of additional health workers.
- Fiscal measures (supplementary budget):
  - Protection of vulnerable groups and increased expenditure for the health sector.
  - Cash transfers to the elderly, disabled, and low-income households.
  - Allocations to expedite clearance of unpaid bills to suppliers and VAT refunds.
  - Tax relief measures:
    - Reduction of the top marginal tax rate from 30 to 25 percent.
    - Reduction of the standard corporate income tax rate from 30 to 25 percent.
    - Reduction of the turnover tax rate on small businesses from 3 to 1 percent.
    - Reduction of the standard VAT rate from 16 to 14 percent.
- Monetary and financial sector measures by CBK and banks:
  - CBK commitments:
    - Remain committed to ensuring price and financial stability.
    - Continue to track inflation developments and keep monetary policy decisions data-dependent.
    - Remain committed to a flexible exchange rate regime; limit FX interventions to smoothen excess market volatility.
  - Recent CBK actions:
    - Cut the policy rate and cash reserve ratio by 100 basis points (bps) each.
    - Increased reverse repo tenors.
    - Temporarily increased flexibility on banks’ loan classification and provisioning requirements.
  - Commercial banks:
    - Extending flexibility on loan terms to borrowers impacted by the pandemic on a case by case basis.
  - Mobile network operators:
    - Waiving or reducing charges on mobile money transactions to disincentivize use of cash.

### Post-crisis measures and medium-term strategy
- Fiscal consolidation plan:
  - Once the crisis abates, authorities will pursue previously-planned fiscal consolidation to reduce macroeconomic vulnerabilities and bring public debt on a downward trajectory.
  - Target: achieving about 3 percent of GDP by 2022/23 (refers to fiscal consolidation magnitude).
  - Measures: appropriate mix of revenue and expenditure measures.
  - Improvements planned in public procurement and public expenditure management to allow overall reductions in spending without adversely affecting service delivery or the Big Four Agenda objectives.
  - Review of tax measures to fully restore revenues as a share of GDP once economic activity sufficiently recovers.
- IMF-supported program discussions:
  - Authorities look forward to resumption of discussions on a potential precautionary Stand-By Arrangement (SBA)/Standby Credit Facility (SCF) to support their economic reform program.
  - Reform objectives:
    - Support a growth-friendly fiscal adjustment that protects public investment and priority social spending.
    - Boost revenue performance.
    - Enhance debt sustainability.
    - Complementary measures: ongoing improvements in the monetary policy framework and eventual adoption of an inflation-targeting regime.
    - Foster financial stability by enhancing prudential regulations and supervision, and deepening structural reforms.

### Conclusion and financing outlook
- Authorities’ commitments:
  - Further strengthen macroeconomic stability and enhance economic resilience.
  - Pursue gradual fiscal consolidation that ensures public debt sustainability while preserving growth-friendly public investment and social spending.
- Financing request and expectations:
  - Authorities seek Executive Directors’ support for a disbursement under the RCF to complement efforts to contain the pandemic and dampen its economic impact.
  - Anticipation that Fund financing will catalyze additional grant and concessional financing from development partners to augment ongoing efforts to contain the pandemic and support recovery.

*IMF staff report excerpt.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1kenea2020003.pdf_