## 1kenea2021002 ## Source details **Canonical URL:** [1kenea2021002](https://www.imf.org/-/media/files/publications/cr/2021/english/1kenea2021002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1kenea2021002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1kenea2021002.pdf.json) --- ### Macroeconomic outlook and recent developments - Real GDP growth: -0.1 (2020, Est.), 7.6 (2021, Proj.), 5.7 (2022, Proj.), 6.1 (2023, Proj.). - Inflation - average: 5.3 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023). - Quarterly and sector highlights: - Q2 2020: real GDP contracted by 5.5 percent year-on-year. - Q3 2020: year-on-year growth -1.1 percent; quarter-on-quarter turned positive. - Unemployment reported at 10.4 percent during the pandemic period referenced. - Agriculture growth: 6–7 percent through 2020. - Accommodation & food services: -83 percent (2020Q2). - Education: -56 percent (2020Q2) with later reversal upon reopening. - High-frequency and other indicators: - Shilling depreciated by 8 percent overall in 2020 (elsewhere noted 9.5 percent to end-January). - Remittances increased by 10 percent in 2020 (10.7 percent in one tabulation). - Exports of goods rose by 3.3 percent in 2020; imports declined by 12.5 percent. - Reserves: $8.0 billion by end-January 2021 (from $9.1 billion at end-2019); coverage noted as 4.4 months of prospective imports and 4.6 months in other tables. ### Fiscal position, budgetary framework, and consolidation strategy - Central government finances (percent of GDP): - Revenue: 17.2 (2020), 17.0 (2021), 16.8 (2022), 17.6 (2023). - Expenditure: 25.0 (2020), 25.7 (2021), 24.3 (2022), 23.5 (2023). - Fiscal balance: -7.8 (2020), -8.7 (2021), -7.5 (2022), -5.8 (2023). - Public debt: 65.8 (2020), 70.4 (2021), 72.6 (2022), 72.9 (2023). - Fiscal program objectives: - Stabilize and then reduce public debt via multi-year fiscal consolidation to bring the primary deficit below its debt-stabilizing level by FY23/24 and put debt-to-GDP on a declining trend thereafter. - Tax-to-GDP ratio target: from 12.9 percent of GDP in FY20/21 to 15.6 percent in FY23/24. - Commitment to further tax policy measures of 0.8–0.9 percent of GDP per year in FY22/23 and FY23/24. - Recurrent spending reduction target: reduce by 2.1 percentage points of GDP (from 20.0 percent of GDP in FY20/21 to 17.9 percent of GDP in FY23/24), while protecting social priority expenditures. - Key fiscal measures and estimates (full-year impacts): - Tax cuts effective April 2020 (net): -105.0 Ksh bn, -1.0% of GDP. - Revenue-raising measures: 81.3 Ksh bn, 0.8% of GDP. - VAT exemption eliminations: 51.1 Ksh bn, 0.5% of GDP. - Measures effective January 2021 (excl. tax reversals): 27.5 Ksh bn, 0.2% of GDP (CIT incl. new minimum and digital taxes). - Total before reversal of tax cuts: -62.7 Ksh bn, -0.7% of GDP. - Total after reversal of tax cuts on Jan 1, 2021: 102.0 Ksh bn, 1.0% of GDP. - Supplementary and stimulus: - FY2019/20 supplementary budget: 0.4 percent of GDP. - FY20/21 stimulus package: 0.5 percent of GDP. - FY20/21 supplementary budget projections: fiscal deficit expected contained to 8.7 percent of GDP and debt ratio to 70.4 percent of GDP. - Financing projections and gaps: - Proposed IMF blended access: SDR 1,655 billion (305 percent of quota) — SDR 1,248.44 million (230 percent of quota) from the EFF and SDR 407.09 million (75 percent of quota) from the ECF. - Program fully financed through June-2022 with good prospects thereafter. - Planned external borrowing first 18 months: $4.8 billion concessional; $2.3 billion commercial (Eurobond issuance) for project financing. - Potential additional $5 billion Eurobond issuance exclusively for debt management operations. - Financing gap examples (USD mn): 2021: 2,116; 2022: 341; 2023: 293. ### Debt sustainability, risks, and DSA findings - DSA classification and metrics: - Debt assessed as sustainable but at high risk of debt distress (overall and external). - Composite Indicator (CI): 3.01 — classification: Medium debt-carrying capacity. - Public gross nominal debt (percent of GDP): 2019: 62.0; 2019/20 Prel.: 65.9; 2020/21: 70.4; 2021/22: 72.6; 2022/23: 72.9; 2023/24: 71.4; 2024/25: 69.2. - External debt (% GDP): 35.6 (2020), 37.8 (2021), 37.6 (2022), 36.7 (2023). - Key vulnerabilities and stress-test outcomes: - PV of PPG external debt-to-exports breaches thresholds under some scenarios; debt-service-to-exports ratio exceeds thresholds in projections, notably around Eurobond maturities (2024). - Tailored shock examples: contingent liabilities from SOEs, PPPs, and bank recapitalization combined up to 8.1 percent of GDP in a one-time shock. - Public debt projected to peak and then decline if fiscal consolidation proceeds; debt-stabilizing primary balance estimated at 1.2 percent of GDP in 2023 under program. - Policy recommendations from DSA: - Prioritize concessional borrowing; limit non-concessional external borrowing to critical growth-enhancing projects and debt management operations. - Continue fiscal consolidation and revenue mobilization; lengthen domestic debt maturities; improve debt reporting and monitoring (include county and extra-budgetary units). - Consider debt management operations to refinance 2024 Eurobond and syndicated loans when conditions permit. ### IMF-supported program design, access, and modalities - Program request and coverage: - Authorities requested 38-month arrangements under the EFF and the ECF with combined access of 305 percent of quota (SDR 1,655 billion). - Program aims: stabilize economy, reduce debt vulnerabilities through multi-year fiscal consolidation centered on raising tax revenues and tightly controlling spending while safeguarding resources for vulnerable groups; advance structural and governance reforms; strengthen monetary framework and financial stability. - Financing composition: - SDR 1,248.44 million (230 percent of quota) EFF; SDR 407.09 million (75 percent of quota) ECF. - Proposed use to catalyze G-20 DSSI relief (~$0.6 billion) and $1.6 billion budget support from other development partners in 2021. - Monitoring and flexibility features: - Quarterly monitoring through the second review; semi-annual thereafter. - IT on tax collection (floor) for first two reviews covering FY20/21; conversion to PC from third review as uncertainty recedes. - Adjustors: COVID-19 vaccine-related spending; net international reserves (NIR) adjustor (symmetric for budget loans and commercial borrowing, asymmetric for program/project grants); adjustor on extraordinary SOE support (from July 1, 2021 to end-June, 2023 absorb half of extraordinary support up to 1 percentage point of GDP cumulatively). - Program targets (selected, central government percent of GDP): - Revenue: 17.3 (2019/20 Prel.), 17.0 (2020/21), 16.8 (2021/22), 17.6 (2022/23), 18.6 (2023/24). - Expenditure: 25.1, 25.7, 24.3, 23.5, 22.9. - Overall balance: (7.8), (8.7), (7.5), (5.8), (4.3). - Primary balance (memo): (3.5), (4.6), (3.0), (1.1), 0.2. ### COVID-19 response, social protection, and vaccine deployment - Health and containment measures: - Isolation beds increased to 7,411 by end-September 2020 from 8 at start of March. - Travel restrictions, bans on large gatherings, school closures, curfew, social distancing, mask requirements; phased easing since early July 2020; schools reopened fully January 2021. - Fiscal and emergency financing: - RCF disbursement (May): Ksh 78.3 billion or $739 million. - World Bank DPO augmented: $1 billion. - Use of RCF funds (Ksh bn): Total 78.3 (100%); Health 21.0 (27%); Social protection 17.3 (22%); Liquidity support 21.9 (28%); Youth employment 10.0 (13%); Education/food/other 8.2 (10%). - Social protection and digital transfers: - Cash transfer schemes reached some 1.8 million households in 2020 (from 1.2 million in 2019); typical transfers about $10 per week via mobile money. - Vaccine deployment: - Kenya began vaccinating in early March using COVAX supplies to cover 20 percent of population; plan to procure for another 10 percent. - Rollout plan in three phases stretching into mid-2023. - World Bank expected to support vaccine delivery with a $50 million loan; costs largely covered through the current fiscal year but could increase if scaled up. ### State-Owned Enterprises (SOEs), PPPs, and governance priorities - SOE fiscal risks and actions: - Profit of public entities outside central government declined to Ksh 62.5 billion (0.6 percent of GDP) in FY19/20 (one-third decline). - Prior actions and benchmarks: - Complete financial evaluation of 9 highest-risk SOEs by end-March 2021 (prior action). - Prepare in-depth evaluation and strategy for top 15–20 SOEs by end-May 2021 (structural benchmark). - Extraordinary SOE support in FY20/21 limited to exigent needs; supplementary budget provides 0.3 percent of GDP. - Governance reforms: draft blueprint by July 2021; integrated monitoring and reporting system by September 2021; expanded fiscal risk analysis by end-September 2021. - PPPs and PIM: - Revamp PPP Unit; implement revised institutional structure by March 2021; operationalize PPP Project Facilitation Fund by July 2021. - Stocktaking of public investment projects and identification of projects to rationalize by March 2021 (structural benchmark). - Governance, procurement, and anti-corruption measures: - Publish procurement information including beneficial ownership on procurement portal; expedite State Procurement Portal by end-April 2021. - Publish audit of all COVID-related spending in FY2019/20 by end-May 2021 (structural benchmark). - AML/CFT: complete National AML/CFT Strategy and Action Plan by June 2021; enhance Financial Reporting Centre strategic priorities by July 2021. - Review and strengthen asset declaration, conflict of interest rules, and Access to Information Act operationalization. ### Monetary policy, banking sector, and financial stability - Monetary policy stance and objectives: - Maintain accommodative stance within inflation-targeting regime (5 percent +/- 2.5 percentage points). - Allow exchange rate to function as shock absorber; FX interventions only to smooth excessive volatility. - Publish white paper on monetary policy framework reforms by end-June 2021 (structural benchmark). - Banking sector soundness and indicators: - Capital adequacy ratio: 19.2 percent (end-2020) / Core capital adequacy ratio: 16.7 percent (dec. table). - Liquidity ratio: 55 percent (one table) / 54.6 percent (another table). - NPL ratio: rose from 12.7 percent (Feb 2020) to 14.1 percent (Dec 2020). - Return on equity: 20 percent earlier in year to 14 percent (Dec 2020) / 19.6 percent to 13.8 percent in another tabulation. - Loan restructurings: ~54 percent of system loans restructured by end-year; about 90 percent of restructurings by large banks. - Financial sector measures and initiatives: - CBK cuts: policy rate and cash reserve ratio cuts (100 bps each March 2020; policy rate cut another 25 bps to 7 percent in April 2020). - Liquidity measures: tripled tenor on reverse repo instruments; increased limits and waived fees on mobile money transactions; MSME credit guarantee scheme with initial seed capital Ksh 10 billion launched December 2020. - Supervisory actions: ICAAP re-submissions, guidance on dividends, requirement to publish bank capital adequacy ratios by end-March 2021. ### Monitoring, performance criteria, and reporting - Quantitative performance criteria (selected test dates and figures): - Primary budget balance (national government, KSh millions, floor cumulative): End March: -405.9; End June: -507.8; End Dec: -202.9; End June (2022): -369.4. - Stock of CBK net international reserves (floor, US$ mn): End March: 5,901; End June: 7,547; End Dec: 6,536; End June (2022): 6,203. - Ceilings on new external non-concessional borrowing and domestic guarantees specified for test dates (e.g., Contracting and guaranteeing of new external non-concessional borrowing: End Dec: 6,407 US$ mn). - Technical Memorandum of Understanding (TMU) highlights: - NIR definition and adjustors; primary balance definition and SOE support adjustor (floor adjusted by half of extraordinary SOE support up to cumulative 1.0 percent of GDP for July 1, 2021–June 30, 2023). - Program exchange rates as of February 4, 2021 specified (e.g., US Dollar: 109.8647 KSh per 1.00). - Concessionality threshold: grant element at least 35 percent; discount rate 5 percent; program reference rate for six-month USD SOFR 0.04 percent. - Detailed data reporting calendar with monthly, quarterly, and weekly requirements and deadlines. ### Risks, upside scenarios, and program sensitivities - Downside risks (selected): - More protracted pandemic leading to sharp rise in global risk premia. - Lower agricultural output from adverse weather or locust invasions. - Political tensions and violence around constitutional referendum and 2022 elections. - Further sizable SOE losses and materialized contingent liabilities. - Deterioration in security situation affecting tourism, FDI, and inflows. - Challenges in implementing revenue mobilization and expenditure rationalization. - Upside risks: - Faster-than-projected rebound from accelerated vaccine deployment. - Lower oil prices improving terms of trade. - RAM likelihood definitions: - "low": probability below 10 percent; "medium": 10–30 percent; "high": 30–50 percent. - Program resilience: - Quarterly reviews and a set of structural benchmarks in the first year to ensure close engagement during high uncertainty. *Source: Kenyan authorities and IMF staff estimates and projections as presented in the provided content.* ### 0.1 percent in 2020. Even with this recovery, challenges remain in the return to durable and ### 1kenea2021002 - 0.1 percent in 2020. Even with this recovery, challenges remain in the return to durable and ### Macroeconomic outlook and recent developments - Real GDP growth: -0.1 (2020, Est.), 7.6 (2021, Proj.), 5.7 (2022, Proj.), 6.1 (2023, Proj.). - Inflation - average: 5.3 (2020), 5.0 (2021), 5.0 (2022), 5.0 (2023). - The COVID-19 shock delivered a large contraction in Q2 2020 (real GDP contracted by 5.5 percent year-on-year) with unemployment reported at 10.4 percent during the pandemic period referenced. - Sectoral notes: agriculture remained strong due to favorable weather; construction and some services sub-sectors maintained positive growth; education experienced a very large contraction driven by school closures (later reversed with reopening). ### Fiscal position and debt outlook - Central government finances (fiscal year basis): - Revenue (% GDP): 17.2 (2020), 17.0 (2021), 16.8 (2022), 17.6 (2023). - Expenditure (% GDP): 25.0 (2020), 25.7 (2021), 24.3 (2022), 23.5 (2023). - Fiscal balance (% GDP): -7.8 (2020), -8.7 (2021), -7.5 (2022), -5.8 (2023). - Public debt (% GDP): 65.8 (2020), 70.4 (2021), 72.6 (2022), 72.9 (2023). - Kenya’s debt: assessed as sustainable but at high risk of debt distress. Fiscal and balance-of-payments financing needs are sizable over the medium term. - External debt (% GDP): 35.6 (2020), 37.8 (2021), 37.6 (2022), 36.7 (2023). ### Monetary, financial, and external sector indicators - Broad money (% change): 10.6 (2020), 11.8 (2021), 10.6 (2022), 11.4 (2023). - Credit to private sector (% change): 7.7 (2020), 7.7 (2021), 7.8 (2022), 10.1 (2023). - Policy rate, end of period (%): 7.0 (2020); subsequent end-period policy rates not shown in the excerpt. - Current account (% GDP): -4.8 (2020), -5.3 (2021), -5.4 (2022), -5.5 (2023). - Reserves (in months of imports): 4.6 (2020), 4.6 (2021), 4.3 (2022), 4.1 (2023). - REER (% change): -1.5 (2020); subsequent REER entries not shown. ### IMF-supported program and financing request - Financing history and request: - Rapid Credit Facility (RCF) financing provided in May 2020 for initial COVID-19 support. - Authorities requested a 38-month extended arrangement under the Extended Fund Facility (EFF) and an arrangement under the Extended Credit Facility (ECF). - Total blended access proposed at SDR 1.655 billion (305 percent of quota) — SDR 1,248 million (230 percent of quota) from the EFF arrangement and SDR 407 million (75 percent of quota) from the ECF arrangement — to help meet balance-of-payments and budget-support needs and to catalyze support from other official lenders and capital markets. - The program is intended to stabilize the economy, reduce debt vulnerabilities through a multi-year fiscal consolidation centered on raising tax revenues and tightly controlling spending while safeguarding resources for vulnerable groups, advance structural reforms and governance (including SOE weaknesses and anticorruption), and strengthen the monetary policy framework and financial stability. ### Policy measures and authorities’ response to COVID-19 - Health and containment measures: isolation facilities expanded (isolation beds increased to 7,411 by end-September 2020 from 8 at start of March); travel restrictions, bans on large gatherings, school closures, curfew, social distancing, mask requirements; domestic movement restrictions introduced and later eased. - Economic and financial measures: - CBK cuts: policy rate and cash reserve ratio cut by 100 bps each in March 2020; policy rate cut another 25 bps to 7 percent in April 2020; tripled tenor on liquidity-injecting reverse repo instruments. - Banks encouraged to extend repayment terms on previously performing loans; listing of negative credit information with credit reference bureaus suspended for six months for loans previously performing and later resumed. - Mobile money fee reductions and encouragement of mobile money usage (referenced in Box 2). - Fiscal measures: - Supplementary budget for FY2019/20 provided additional resources equal to 0.4 percent of GDP (health, cash transfers, VAT refunds acceleration, pending bills). - FY20/21 stimulus package of 0.5 percent of GDP (additional funding, support to hard-hit sectors, youth jobs program). - Temporary tax cuts starting April 2020: standard VAT rate reduced from 16 to 14 percent; personal income tax top rate and standard corporate income tax rate reduced from 30 to 25 percent; turnover tax on small businesses reduced from 3 to 1 percent. Some temporary measures were later reversed (temporary tax cuts ended in January, 2021). ### Program design features and risks - Program flexibility: incorporates flexibility to recognize near-term challenges for tax yields in a stressed economic environment and possible contingent liabilities from the SOE sector. - Key risks identified: - Uncertainty about the path of the pandemic. - Contingent liabilities from state-owned enterprises (SOEs) and financial weaknesses in some SOEs. - Potential pressures from a planned constitutional referendum and the 2022 elections. - Program conditionality emphasis: priority on revenue administration, spending efficiency, fiscal transparency, anti-corruption framework improvements (transparency and accountability), and AML/CFT agenda. ### Governance, SOE, and monetary/financial stability priorities - Strengthen management of fiscal risks from SOEs and ensure any SOE support is consistent with limited fiscal space. - Fiscal structural reforms to prioritize revenue administration, spending efficiency, and fiscal transparency. - Continue improvements in the anti-corruption framework and advance AML/CFT work. - Monetary policy: maintain an accommodative stance within the inflation-targeting regime; allow the exchange rate to function as a shock absorber; maintain close supervision of credit risks and provisioning. ### Selected operational and programmatic details - The request aims to catalyze support from the G-20 DSSI and development partners, along with capital market financing, to help close financing gaps in 2021. - The arrangements are expected to provide a strong signal of support and confidence but are subject to notable risks requiring steadfast pursuit of program objectives given the upcoming political calendar. *Source: Kenyan authorities and IMF staff estimates and projections, Kenya: Requests for an Extended Arrangement under the Extended Fund Facility and an Arrangement under the Extended Credit Facility (Executive Summary and selected tables/excerpts).* ### Box 1. COVID-19 and the Authorities’ Response (concluded) ### Box 1. COVID-19 and the Authorities’ Response (concluded) ### Public health measures, mobility restrictions, and reopening - Credit guarantee scheme for SMEs launched in December 2020 with initial seed capital of Ksh 10 billion; authorities working with development partners to expand it. - Measures gradually lifted since early July 2020: nighttime curfew shortened, local and international flights resumed, limits on attendance at public gatherings relaxed. - Schools and universities started to reopen in October and reopened fully in January 2021. - Bulk of the tax cuts were reversed starting January 1, 2021. - Remaining containment measures: a 10pm to 4am curfew, restrictions on operating practices of bars and restaurants, and caps on attendance at various types of gatherings. ### Economic impact and recovery - GDP growth decline moderated to -1.1 percent year-on-year in the third quarter of 2020. - Overall, the economy likely posted a slight contraction of -0.1 percent in 2020. - Core inflation stable at under 3 percent; headline inflation remained close to the mid-point of the central bank’s target range despite increasing fuel prices. - High-frequency indicators pointed to a continuing recovery at the end of 2020 and moving into 2021. ### External position, remittances, and reserves - Current account deficit narrowed to 4.8 percent of GDP in 2020 due to strong remittances, solid horticultural exports, and lower imports. - Heightened capital market volatility led to reduced capital inflows and a decline in FDI. - Shilling depreciated by 8 percent against the US dollar overall in 2020. - Reserves declined to $8.0 billion by end-January 2021 (from $9.1 billion at end-2019); coverage remains adequate at 4.4 months of prospective imports. ### Emergency financing and use of RCF funds - Rapid Credit Facility (RCF) disbursement in May: Ksh 78.3 billion or $739 million. - Augmented World Bank DPO: $1 billion. - Domestic financing of government increased. - Governance spending response to COVID-19 (use of RCF funds, totals): - Total: 78.3 Ksh bn (100%) - Health: 21.0 Ksh bn (27%) - Social protection: 17.3 Ksh bn (22%) - Liquidity support (VAT refunds, pending bills): 21.9 Ksh bn (28%) - Youth employment program: 10.0 Ksh bn (13%) - Education support, food relief, and other: 8.2 Ksh bn (10%) ### Fiscal outcomes and public debt - Emergency tax package effective April 2020 included measures to broaden the tax base by eliminating costly VAT exemptions and corporate income tax preferences. - Revenue fell sharply due to reduced economic activity and disruptions to tax administration. - Temporary additional COVID-19-related expenditures of 0.4 percent of GDP in FY19/20 were offset with restraint of about 0.6 percentage of GDP in other areas. - FY19/20 fiscal deficit contained at 7.8 percent of GDP (similar to 7.7 percent of GDP in FY18/19). - Public debt rose to about 66 percent of GDP in FY19/20 (from 62 percent in FY18/19). ### Financial sector soundness and vulnerabilities - Banking sector at beginning of 2020 was well-capitalized, liquid, and profitable. - Regulatory ratios at end-2020: - Capital adequacy ratio: 19.2 percent - Liquidity ratio: 55 percent - Banks’ NPL ratio rose from 12.7 percent in February 2020 to 14.1 percent in December 2020. - CBK indicated that about 54 percent of system loans had been restructured at end-year to support performing borrowers. - Bank profitability: return on equity fell to 14 percent in December 2020 from 20 percent earlier in the year, partly due to increased forward-looking provisioning in line with IFRS9 guidelines. ### External assessment and competitiveness - Kenya’s external position in 2020 broadly in line with level implied by fundamentals and desirable policies (Annex II). - Fiscal consolidation under the EFF/ECF arrangements expected to help strengthen the external position and support private sector growth over time. - An improvement in Kenya’s competitiveness would be necessary to curtail the prolonged decline of Kenya’s share of world exports. ### Mobile money during the pandemic (Box 2) - CBK and commercial banks encouraged mobile money usage; providers waived charges for small transactions between mobile wallets and bank accounts, and for balance inquiries on linked bank accounts. - CBK approved increases in maximum value of any one transaction, total daily transactions, and the amount that could be held in mobile wallets; measures implemented in March and extended to end-December 2020. - Mobile money transaction volume and value fell by 20 percent and 14 percent year-on-year in April 2020, then surged to 17 percent and 58 percent growth, respectively, by December 2020. - Number of mobile money accounts rose to 2,058 per 1,000 adults at end-2020. - Cash transfer schemes ramped up during the pandemic to reach some 1.8 million households in 2020 from 1.2 million in 2019, with each typically receiving for a limited period transfers amounting to about $10 per week directly to their mobile money accounts. ### Outlook and risks - Growth projection for 2021: 7.6 percent (driven partly by base effects and despite continued weakness in tourism and a slowdown in agriculture after 2020’s exceptionally good harvest). - Inflation expected to remain contained despite rising global oil prices due to generally moderate recovery in domestic demand. - Current account deficit projected to widen modestly in line with recovering oil prices and increased capital imports. - Medium-term: economy expected to settle at potential growth rate of roughly 6 percent. - Exports of goods and services projected to reach 13.3 percent of GDP in 2025, broadly the same share as observed in 2018. - World Bank initial estimates: pandemic increased poverty rate to 36 percent, raising the number of poor by 2 million (erasing poverty reduction gains of last 5 years). - Risks tilted to the downside (Annex I), including: - A more protracted pandemic leading to a sharp rise in global risk premia. - Lower agricultural output due to adverse weather or worsening locust invasions. - Political tensions and violence around upcoming constitutional referendum and general elections. - Further sizable SOE losses and materialization of contingent liabilities of SOEs not offset by compensatory measures. - Deterioration in Kenya’s security situation. - Challenges in implementing economic policy agenda including revenue mobilization and expenditure rationalization initiatives. - Upside risks: faster-than-projected rebound from accelerated vaccine deployment or otherwise; lower oil prices improving terms of trade. ### Vaccine deployment (Box 3) - Kenya began vaccinating in early March using vaccines from the COVAX initiative expected to provide vaccines sufficient to cover 20 percent of the population. - Kenya plans to procure vaccines for another 10 percent of the population. - Government’s rollout plan: three phases stretching into mid-2023 to progressively cover the most vulnerable groups, subject to global vaccine availability. - Near-term financing: most vaccines expected to be provided for free by COVAX; World Bank expected to support vaccine delivery with a $50 million loan; costs of vaccine deployment largely covered at least through the current fiscal year. - Costs could increase over time, especially if the vaccination program is scaled up. ### Program policies: fiscal consolidation, revenue mobilization, and expenditure prioritization - Program objectives (from the authorities’ Letter of Intent and MEFP): 1. Support COVID-19 response while reducing debt vulnerabilities via multi-year fiscal consolidation centered on raising tax revenues. 2. Advance broader structural reform and governance agenda, including addressing weaknesses in SOEs and strengthening anti-corruption framework. 3. Strengthen monetary policy framework and support financial stability. - Fiscal strategy objective: stabilize and then reduce public debt burden via multi-year consolidation to bring the primary deficit below its debt-stabilizing level by FY23/24 and keep debt-to-GDP ratio on a firmly declining trend thereafter (DSA, Table 2). - Tax-to-GDP ratio target: bring ratio from 12.9 percent of GDP in FY20/21 to 15.6 percent in FY23/24. - Commitment to undertake further tax policy measures of 0.8–0.9 percent of GDP per year in FY22/23 and FY23/24 and ongoing efforts to strengthen revenue administration. - Recurrent spending reduction target: reduce by 2.1 percentage points of GDP (from 20.0 percent of GDP in FY20/21 to 17.9 percent in FY23/24), while protecting social priority expenditures (including COVID-19 vaccines) and development spending. ### Revenues, measures, and fiscal targets - Tax policy changes (full-year impact; Ksh bn and % of GDP): - Tax changes effective April 2020 (net): -105.0 Ksh bn, -1.0% of GDP - Tax relief: -186.3 Ksh bn, -1.8% of GDP - CIT rate cut²: -33.8 Ksh bn, -0.3% of GDP - PIT rate cut²: -81.6 Ksh bn, -0.8% of GDP - PIT personal relief: -19.0 Ksh bn, -0.2% of GDP - VAT rate cut²: -49.4 Ksh bn, -0.5% of GDP - Gross transaction value: -2.6 Ksh bn, 0.0% of GDP - Revenue-raising measures: 81.3 Ksh bn, 0.8% of GDP - CIT changes: 28.2 Ksh bn, 0.3% of GDP - VAT exemption eliminations: 51.1 Ksh bn, 0.5% of GDP - Other: 2.0 Ksh bn, 0.0% of GDP - Measures effective July 2020: 14.8 Ksh bn, 0.1% of GDP - PIT exemption eliminations: 0.3 Ksh bn, 0.0% of GDP - Excise duty: 1.5 Ksh bn, 0.0% of GDP - VAT exemption eliminations: 7.7 Ksh bn, 0.1% of GDP - Fees and levies: 5.4 Ksh bn, 0.0% of GDP - Measures effective January 2021 (excl. tax reversals): 27.5 Ksh bn, 0.2% of GDP - CIT (incl. new minimum and digital taxes): 27.5 Ksh bn, 0.2% of GDP - Total before reversal of tax cuts: -62.7 Ksh bn, -0.7% of GDP - Total after reversal of tax cuts on Jan 1, 2021: 102.0 Ksh bn, 1.0% of GDP - Note: items marked with ² were reversed on January 1, 2021; ¹ estimates based on pre-COVID tax base; actual yields from reversal in near term likely smaller due to reduction of tax base following COVID-19. - Authorities intensified efforts to expedite judicial procedures to collect outstanding tax debts and anticipate payment of dividends from public sector entities (expected yield about 0.3 percentage points of GDP). - In February 2021 the government submitted to Parliament a FY20/21 supplementary budget limiting recurrent spending (particularly for transfers and entitlements) and better prioritizing domestically-financed projects while providing limited support to SOEs hit by the shock (prior action). - Resulting FY20/21 projections: fiscal deficit expected to be contained to 8.7 percent of GDP and debt ratio to 70.4 percent of GDP. - Fiscal targets for FY21/22: fiscal deficit expected to decline by 1.2 percentage points of GDP with an improvement of 1.6 percentage points in the primary balance; tax mobilization expected to improve by 0.6 percent of GDP driven largely by full-year impact of January 2021 tax measures. - Expenditure outlays expected to decline by 1.4 percentage points of GDP reflecting unwinding of COVID expenditures (0.5 percent of GDP) and further expenditure restraint. - Authorities to submit FY21/22 budget consistent with program targets by end-April 2021 (structural benchmark). - Fiscal risks from SOEs are elevated; FY21/22 deficit may need to accommodate some SOE extraordinary budgetary support. *Source: IMF staff summary of Kenyan authorities’ documents and IMF staff calculations as presented in the provided content.* ### 19. Fiscal consolidation measures beyond FY21/22 aim to protect high-priority service ### 19. Fiscal consolidation measures beyond FY21/22 aim to protect high-priority service delivery and investment programs ### Revenue mobilization and tax measures - Focus: broadening the tax net and reducing remaining tax exemptions (including in VAT). - Past IMF technical assistance identified a range of tax measures that the authorities could consider to significantly improve collection going forward. - Durable progress depends on continuous efforts to strengthen revenue administration in line with past Fund advice (MEFP, ¶27). - Authorities expressed interest in follow-up TA from the Fund to support identifying tax policy measures to achieve the tax path under the program in FY22/23 and FY23/24. ### Expenditure restraint and public financial management (PFM) - Expenditure-side focus: restraining recurrent expenditure—particularly through a gradual reduction in the wage bill and transfers to public sector entities—and improving the efficiency and effectiveness of government spending, consistent with recommendations in the recent Public Expenditure Review undertaken by the World Bank (MEFP, ¶28–¶30). - Program envisages further strengthening PFM systems, particularly in: - budget control and execution processes, - cash management, - public investment management—including related to PPPs and associated fiscal risks (MEFP, ¶31–¶35). ### Financing strategy and external debt vulnerabilities - Authorities have shifted financing strategy to prioritize concessional financing; with recovery of market access they plan commercial borrowing in limited amounts to safeguard external debt sustainability. - While Kenya is at high risk of debt distress and subject to zero limits on non-concessional borrowing, the authorities requested, and staff supports, non-zero limit exceptions for project financing and debt management operations (MEFP, Table 1). - Planned external borrowing in the first 18-months of the program: - $4.8 billion of government external borrowing will be concessional. - $2.3 billion in commercial borrowing (Eurobond issuance) for project financing (Summary Table of Projected External Borrowing Program in DSA, ¶9). - The borrowing plan allows for another $5 billion Eurobond issuance to be used exclusively for debt management operations, which could include a refinancing of the 2024 Eurobond and retiring of relatively expensive syndicated loans. - Domestic market projected to be an important source of public financing, particularly during the early phase of the program. - Authorities emphasized reducing debt vulnerabilities, extending maturity of domestic debt, balancing domestic and external financing, utilizing concessional financing where available, and accessing private capital markets judiciously. - Program consistent with the Fund’s Debt Limit Policy. ### State-Owned Enterprises (SOEs): fiscal risks and reform strategy - SOEs emerged as an important source of fiscal risk. - Profit of public entities outside the budgetary central government declined by a third in FY19/20, to Ksh 62.5 billion (0.6 percent of GDP). - Additional fiscal pressures could arise from SOE debt on-lent or guaranteed by the government (DSA, ¶2). - COVID-19 exacerbated preexisting financial weaknesses for several SOEs (examples: public universities, Kenya Power, Kenya Railways, Kenya Airways). - Staged approach to evaluate and address SOE fiscal risks: - Financial evaluation of the 9 SOEs with largest fiscal risks to the FY2020/21 budget to be completed by end-March 2021 (prior action). These SOEs: Kenya Airways, Kenya Airports Authority, Kenya Railways Corporation, Kenya Power, Kenya Electricity Generating Company, Kenya Ports Authority and the three largest public universities. - Extraordinary SOE support in FY20/21 should be limited to exigent needs; the supplementary budget provides for 0.3 percent of GDP. - By end-May 2021, National Treasury to prepare an in-depth forward-looking financial evaluation of the top 15-20 SOEs and a strategy for addressing financial pressures (structural benchmark). - Reforms to improve SOE oversight, monitoring and governance: - Complete a draft blueprint identifying necessary actions and legal reforms to enhance governance by July 2021 (supported by IMF TA). - Develop an integrated monitoring and reporting system by September 2021. - Establish a performance management monitoring and evaluation framework and initiate a review of institutional structures. - Transparency of fiscal risk reporting: - By end-September 2021, an expanded fiscal risk analysis quantifying contingent liabilities from high-risk SOEs and PPPs will be included in the annual Budget Review and Outlook paper (structural benchmark). - Authorities committed to scale-up resources at the Treasury’s Government Investment and Public Enterprises (GIPE) Department and expressed interest in continued IMF technical assistance in fiscal risk analysis and legal reforms. ### Governance, procurement, anti-corruption and AML/CFT measures - Governance reform agenda pillars: - Promote fiscal transparency via publishing procurement information including beneficial ownership data of companies awarded contracts. - Operationalize the Access to Information Act. - Review the legal framework for asset declarations of senior public officials and conflict of interest rules. - Implement AML/CFT measures to prevent laundering of proceeds of corruption. - Audit and procurement initiatives: - Auditor General progressing toward a comprehensive audit of all COVID-related spending in FY2019/20; results expected to be published by end-May 2021 (structural benchmark). - Forensic audit of KEMSA covering 13 March––31 July period presented to Parliament in September 2020; it found numerous violations of the Procurement and the Public Finance Management Acts and inefficiencies. - Public Procurement Information Portal (PPIP) launched July 2018; however, PPIP portal has yet to publish beneficial ownership information. - KEMSA made available beneficial ownership information for companies awarded contracts in the year to September 2020. - Specific structural benchmarks and reforms: - Ensure comprehensive information on public tenders, including beneficial ownership information of awarded entities, is publicly available on the government procurement information portal; bidders to face dissuasive sanctions for non-compliance. Work on the State Procurement Portal expedited for completion by end-April 2021. - Operationalize the Access to Information Act through enactment of regulations and introduce proactive disclosure across ministries; develop standards for digitization and automation of records (MEFP, ¶56/(i)/1). - Review and strengthen preventive anti-corruption framework: establish a uniform disclosure regime, strengthen sanctions on misreporting, and improve accessibility of asset declarations (MEFP, ¶56/(i)/2). - Strengthen AML/CFT measures: effective implementation of customer due diligence for politically exposed persons; complete National AML/CFT Strategy and Action Plan by June 2021 to address deficiencies identified in the National Risk Assessment (MEFP, ¶56/(i)/3). - Develop strategic priorities of the Financial Reporting Centre to strengthen use of financial intelligence to trace proceeds of corruption and share relevant intelligence with law enforcement agencies. ### Monetary policy framework and financial stability - CBK’s accommodative monetary policy stance remains appropriate. - CBK measures since COVID-19 outbreak have been consistent with the central bank’s medium-term inflation target of 5 percent +/- 2.5 percentage point (ppt) band, while ensuring continued good functioning of domestic capital markets. - Exchange rate allowed to function as a shock absorber; foreign exchange interventions used only to minimize excessive volatility. - CBK plans to publish a white paper by end-June 2021 outlining planned reforms to improve the monetary policy framework (structural benchmark) (MEFP, ¶41). - Loan restructurings: - Widespread preemptive loan restructurings accounted for a reported 54 percent of banking system loans by value. - About 90 percent of restructurings were carried out by large banks following IFRS9 guidelines; these banks are well-capitalized. - Supervisory and regulatory processes continue to ensure prudent asset classification and provisioning; CBK instructed banks in August 2020 to revisit their capital planning (ICAAP) and potentially curtail dividend payments. - New credit guarantee scheme can support new credit to SMEs. - Safeguards and oversight: - CBK implemented most recommendations from the September 2019 safeguards assessment, including strengthening the internal audit function and management of foreign reserves. - Monitoring going forward: - Close monitoring of post-shock economic and financial market situation, including loss provisioning and impact on banks’ earnings and capital buffers as restructurings roll off. - Loan classification and provisioning rules will continue to be fully applied as arrangements roll off to ensure accurate recognition of potential losses. ### Financing and program modalities; program outlook - Authorities request 38-month arrangements under the EFF and the ECF to meet medium-term balance of payments adjustment needs. - Staff view: Kenya’s public debt is sustainable; fiscal adjustment under the program will reduce debt-related risks and put debt as a share of GDP firmly on a declining path by the end of the arrangements. - Given return of more normal global market conditions, staff expect authorities to be able to access the Eurobond market at reasonable prices. - Kenya faces fiscal and BOP financing gaps through the program period, particularly large during the first two years. - Proposed financing under the arrangements would partially fill these gaps, combined with: - relief from the G20 under the DSSI (approximately $0.6 billion), - budget support from other development partners ($1.6 billion in 2021). - If DSSI creditors elect to provide relief on debt service coming due in the second half of 2021, this could provide additional exceptional financing. *IMF staff summary based on the cited chapter content.* ### 38. Combined access of 305 percent of ### 1kenea2021002 - 38. Combined access of 305 percent of ### Program financing and access - Combined access of 305 percent of quota under the arrangements is proposed to help Kenya cover fiscal and external financing needs. - With ECF access capped at the applicable PRGT norm of 75 percent of quota given earlier Fund financing, staff proposes: - SDR 1,248.44 million (230 percent of quota) from the EFF. - SDR 407.09 million (75 percent of quota) from the ECF. - The program is fully financed through June-2022 with good prospects for the remainder of the arrangements. - The authorities will also seek grants from donors or additional concessional lending from the African Development Bank or other IFIs. ### Monitoring modalities and program flexibility during heightened uncertainty - Rationale: - High degree of uncertainty surrounding the baseline and unusually large risks in the early period due to COVID-19. - Pandemic-related uncertainties include tax yields and contingent liabilities from the SOE sector. - Monitoring modalities proposed: - Quarterly monitoring through the second review to ensure close engagement during a period of high uncertainty. - From the second review, program monitoring would be conducted on a semi-annual basis, with the expectation of reduced uncertainty. - IT on tax collection: An IT on tax collection (floor) for the first two program reviews (covering FY20/21). In case of any tax shortfall that would compromise achievement of the primary deficit PC, the authorities are committed to identifying expenditure offsets (MEFP, ¶25) and depending on the extent and nature of the shortfall potentially additional tax measures. - From the third review, the IT will be converted into a PC as COVID-19 uncertainty recedes. - Structural benchmarks: In the first year, structural benchmarks (MEFP, Table 2) to measure policy implementation; once the crisis recedes, expand focus to a broader range of reforms. - Adjustor on COVID-19 vaccine-related spending: Adjustors on PCs (primary fiscal balance, concessional borrowing limit, and the net international reserves) to enable accelerated vaccination if feasible before costs are incorporated into the program baseline (TMU, ¶7 and ¶9). - Adjustor on net international reserves (NIR): - Symmetric for budget loans and commercial borrowing (other than debt management purposes). - Asymmetric for program and project grants (NIR target adjusted only in case of shortfalls of inflows compared to the baseline) (TMU, ¶9). - CBK preference noted: would have been preferable to apply the asymmetric adjustor to non-grant budget flows as well. - Adjustor on extraordinary SOE support: - From July 1, 2021 to end-June, 2023 the program will include an adjustor on the primary balance target to absorb half of extraordinary support to SOEs up to 1 percentage point of GDP in such support, on a cumulative basis (TMU, ¶7). - The other half of such costs and any support exceeding this amount will require equivalent offsetting measures to meet program targets. ### Fiscal framework and key statistics (Central Government Financial Operations, 2019/20–2023/24, in percent of GDP) - Kenya: Central Government Financial Operations, 2019/20–2023/24 (in percent of GDP) - 2019/20 Prel, 2020/21, 2021/22, 2022/23, 2023/24 (Projected) - Revenue: 17.3, 17.0, 16.8, 17.6, 18.6 - Expenditure: 25.1, 25.7, 24.3, 23.5, 22.9 - Overall Balance: (7.8), (8.7), (7.5), (5.8), (4.3) - Financing: 7.8, 6.7, 6.3, 5.3, 3.9 - Net Foreign Financing: 3.3, 1.7, 1.1, 0.9, 1.1 - Project loans: 1.5, 2.2, 2.2, 2.2, 2.2 - Program loans: 2.3 - IMF RCF: 0.7 - Commercial borrowing: 0.1, 3.2, 3.9, 0.8, 0.7 - Standard Gauge Railway: 0.4, 0.1, 0.0, 0.0, 0.0 - Repayments: (1.0), (3.8), (5.0), (2.0), (1.8) - Net Domestic Financing: 4.5, 5.0, 5.2, 4.4, 2.8 - Financing gap: (2.0), (1.2), (0.5), (0.4) - Potential additional sources: - IMF (EFF/ECF): 0.7, 0.5, 0.5, 0.4 - DSSI Relief: 0.6 - World Bank: 0.7, 0.7 - Memo item: - Primary Balance: (3.5), (4.6), (3.0), (1.1), 0.2 - Sources: Kenyan authorities and IMF staff calculations. ### Limits on borrowing and repayment capacity - Limits: - A PC is set on new foreign currency non-concessional borrowing reflecting Kenya’s elevated debt risks. - PCs will also be set on new foreign currency concessional borrowing and new domestic guarantees granted by the central government. - Capacity to repay the Fund: - Total amount of outstanding credit to the Fund based on existing and prospective drawings would be SDR 1,301.4 million, or 239.7 percent of quota, at end-2021. - This would peak at SDR 2,198 million, or 405 percent of quota in 2024 and then steadily decline. - Fund credit outstanding will peak at 2.2 percent of GDP. - Public debt service will peak over 112 percent of exports and about 79 percent of revenue. - For comparison: median PRGT country: 2.4 percent of GDP, 11.4 percent of exports and 17.3 of revenue. - Associated servicing risks would be mitigated by expected increased access to concessional financing in the early years and by progress in putting debt on a downward trajectory. - Materialization of downside risks (worse-than-expected growth or pullback of international investors) could place stress on Kenya’s capacity to repay the Fund. - Given likelihood of continued access to concessional financing and Kenya’s strong track record of servicing debts, Kenya’s ability to repay the Fund would remain adequate. ### Staff appraisal: outlook, policy priorities, and risks - Impact and response: - Kenya has been hit by an unprecedented external shock; growth contracted sharply in Q2 2020 and recovered strongly since mid-2020. - Authorities responded quickly with tax relief, targeted expenditure measures, and CBK actions to improve liquidity and maintain financial market functioning. - Fiscal vulnerabilities and debt: - COVID-19 exacerbated preexisting vulnerabilities: lower tax revenues, necessary COVID-related spending, interruption in planned fiscal consolidation in FY19/20 and a moderate widening of the deficit in FY20/21. - Kenya’s debt is sustainable, though debt vulnerabilities have increased, and Kenya is at high risk of debt distress. - COVID-19 shock created fiscal and external financing gaps over the next several years; priority should be concessional over external non-concessional borrowing. - External non-concessional borrowing should be limited to critical growth-enhancing investment projects and debt management operations when conditions are favorable. - Program role and priorities: - Fund-supported program to anchor pandemic response and multi-year consolidation effort centered on raising tax revenues and firm expenditure control. - Aim: bring the primary deficit below its debt-stabilizing level during the program period to put debt on a downward trajectory. - Recent tax changes and reversal of temporary cuts are critical; further tax policy measures and revenue administration improvements are essential. - Emphasis on maintaining social and development spending while reducing debt-related vulnerabilities. - SOE risks and fiscal governance: - Financial weaknesses in some SOEs are an important source of fiscal risk. - Program follows a staged approach to evaluate contingencies and ensure strategies are consistent with limited fiscal space. - Build National Treasury capacity to monitor SOE risks and embed effective reporting on fiscal risks from SOEs and public private partnerships into the annual budget process. - Structural reforms and anti-corruption: - Immediate structural reform priorities: fiscal governance, revenue administration improvements, spending efficiency (public financial management and public investment measures), and increasing fiscal transparency. - Anti-corruption: work of the Auditor General on procurement irregularities and publication of audits covering all COVID-related expenditures in FY19/20 and disclosure of beneficial ownership information for contract-awarded companies expected to improve confidence. - Monetary and financial stability stance: - Authorities pursued appropriately accommodative monetary stance; should maintain this stance so long as inflation and inflation expectations remain well-anchored within the CBK’s target band. - A monetary policy consultation clause (MPCC) is proposed to monitor inflation performance. - CBK allowed the shilling to act as a shock absorber and should continue to do so; use FX intervention only to minimize excessive volatility. - Bank sector: remains well-capitalized and liquid but preexisting asset quality issues were exacerbated; close supervision of credit risks and adequacy of provisioning should be maintained. - New credit guarantee scheme can support SME credit but should avoid undue exposure to banks’ troubled borrowers or creating large contingent liabilities. *Sources: Kenyan authorities and IMF staff calculations.* ### 51. Staff supports the authorities’ request for 38-month arrangements under the EFF and ### 1kenea2021002 - 51. Staff supports the authorities’ request for 38-month arrangements under the EFF and ### Program support and rationale - Staff supports the authorities’ request for 38-month arrangements under the EFF and the ECF. - Kenya faces protracted balance of payments and fiscal financing needs that will be addressed via envisaged fiscal adjustment and structural policies under the program, including a focus on competitiveness. - The authorities’ strong demonstrated commitment to fiscal reforms during this unprecedented global shock is a key consideration in staff’s support for the program. ### Real sector developments - Mobility and containment: - Oxford Stringency Index and Residential Google Mobility Trend show forceful reaction to COVID-19 and gradual loosening after last June; mobility in Kenya was more restrained compared to SSA peers until early 2021. - Sector dynamics: - Recovery in 2020Q3 was strong but uneven across sectors; followed by a modest rebound in employment at end-2020. - Growth drivers: - "In 2021 GDP growth will be driven by strong base effects, and a turnaround in services sector growth." - Socio-economic impacts: - The socio-economic impacts of the crisis are severe and persistent. - Coping strategies (May–June, July–Sept, Oct–Nov): reduced food consumption; reduced non-food consumption; relied on savings (use of savings has declined); engaged in additional income; purchased on credit; assistance from friends and family; selling assets; delayed payments; took loan. ### Fiscal sector developments - Revenue and expenditure trends: - Tax revenues had been on a declining trend even prior to COVID. - Capital expenditure was maintained in FY19/20, albeit at lower levels than in earlier years. - Reprioritization of current expenditure allowed a slight decline in FY19/20 even as spending shifted toward the COVID response. - Deficit and debt: - "The increase in the deficit due to the COVID-19 shock has been contained..." - Public debt continued to rise. - Revenue composition: - Increase in revenues driven by personal and corporate income taxes. ### Financing and domestic debt market - Shift in financing: - As COVID-19 hampered access to international markets, reliance on domestic financing increased in FY19/20 and FY20/21, increasing the stock of domestic debt. - Market conditions: - Domestic financing conditions remained favorable toward longer-term securities, allowing the government to improve the maturity profile of domestic debt. - Commercial banks increased exposure to the sovereign. - EMBIG spreads show global external financing conditions gradually returned to pre-COVID levels. - Domestic yields and maturity: - Charts indicate 3-month T-bill, 1-year T-bill, policy rate, and 10-year bond yields; average time to maturity of domestic debt (Years) improved. ### External sector developments - Current account and trade: - "The current account deficit narrowed in 2020 with a declining goods deficit." - Exports were resilient in 2020 due to strong horticulture and tea exports despite initial global supply chain disruptions. - Imports held back by low commodity prices and weak domestic demand. - Remittances: - Remittances increased by 10 percent in 2020, driven by transfers from North America. - Financial account and reserves: - COVID shock led to reduction in FDI and net portfolio inflows, limiting BOP financing sources. - FX reserves declined by $ 0.8 billion between end-2019 and end-2020, but are still above adequate levels. ### Monetary and exchange rate developments - Inflation: - Headline inflation eased on low core inflation and moderating food prices driven by strong agricultural production. - Core inflation and components tracked (Core, Food, Energy). - Liquidity and credit: - Domestic markets remained liquid, supported by CBK policy measures. - Above-average levels of excess reserves and net liquidity injections observed. - Private sector credit growth was halted by the COVID-19 shock. - Exchange rate: - Kenyan Shilling (KES) depreciated following the COVID-19 shock. - Real effective exchange rate showed a reversal in the real appreciation seen in recent years. - Target band (2.5%-7.5%) noted for real effective exchange rate. ### Financial soundness indicators - Banking sector capitalization and liquidity: - Capital Adequacy Ratio (Core Capital Relative to Risk-Weighted Assets) ranged around 15%–19% in series presented; "Kenyan banks remain well-capitalized overall." - Liquid Assets to Total Assets and Liquid Assets to ST liabilities rose; loan-to-deposit ratio declined as appetite for liquid assets rose. - Profitability and asset quality: - Banking sector profitability declined (ROE/ROA fall). - Interest margins narrowed and non-interest expenses surged. - NPL Ratio rose, driven by cost of NPL provisioning following rapid increase in NPLs. - FX exposure: - Net Open Position in FX (share of total capital) remained contained. ### Key projections and selected indicators (excerpts) - Real GDP (fiscal year basis): - 2017/18: 5.5 - 2018/19: 5.8 - 2019/20: 2.6 - 2020/21: 3.7 - 2021/22: 6.6 - 2022/23: 5.9 - 2023/24: 6.1 - 2024/25: 6.1 - CPI (period average): 5.2, 5.2, 5.0, 5.0, 5.0, 5.0, 5.0, 5.0 (2017/18–2024/25) - Tax revenues (percent of GDP): - 2017/18: 14.8 - 2018/19: 15.0 - 2019/20: 13.6 - 2020/21: 13.5 - 2021/22: 14.7 - 2022/23: 15.6 - 2023/24: 15.6 - 2024/25: 15.6 - Expenditure (percent of GDP): ranged from 25.3 (2017/18) to projected 22.1 (2024/25). - Overall balance (percent of GDP): - 2017/18: -7.4 - 2018/19: -7.7 - 2019/20: -7.8 - 2020/21: -8.7 - 2021/22: -7.5 - 2022/23: -5.8 - 2023/24: -4.3 - 2024/25: -3.7 - Public gross nominal debt (percent of GDP): - 2017/18: 59.3 - 2018/19: 62.0 - 2019/20: 65.8 - 2020/21: 70.4 - 2021/22: 72.6 - 2022/23: 72.9 - 2023/24: 71.4 - 2024/25: 69.2 - Gross international reserves (end of period, billions of US$; fiscal-year basis): - 2017/18: 8.9 - 2018/19: 9.5 - 2019/20: 9.7 - 2020/21: 10.1 - 2021/22: 9.5 - 2022/23: 9.9 - 2023/24: 10.6 - 2024/25: 12.0 - Remittances: increased by 10 percent in 2020 (driven by transfers from North America). ### Central government financial operations (selected figures, KSh billions) - Revenues and grants (2020/21 Prel. to 2024/25 Proj. series): - 2020/21 Prel.: 1,753.4 - 2020/21 Supp I: 1,898.0 - 2021/22 Proj. BPS 21: 2,080.0 - 2024/25 Proj.: 3,149.1 - Expenditure and net lending (same series): - 2020/21 Prel.: 2,545.0 - 2020/21 Supp I: 2,864.5 - 2021/22 Proj. BPS 21: 3,010.0 - 2024/25 Proj.: 3,780.6 - Overall balance including measures (cash basis, incl. grants): ranges from -791.5 (2020/21 Prel.) to -631.5 (2024/25 Proj.). - Net foreign financing and disbursements: - Net foreign financing and disbursements include proposed IMF (RCF + proposed EFF/ECF) amounts: IMF (RCF+ proposed EFF/ECF) entries include 78.3 (one cell) and 79.0, 77.6, 58.4, 66.4, 67.3, 0.0 (series in table). ### Program financing and IMF access - Table 6: Proposed schedule of approval, prospective reviews and available purchases and loans (2021–24) shows total available (Total Available Purchases and Loans) summing to Total 1,248.44 SDR millions / 230.00 Percent of quota / 1,800.75 USD millions in the presented aggregation. - Table 7: Indicators of Fund Credit, 2021–30: - Fund obligations based on existing credit (SDR millions) e.g., Total 80.4 (2021), 50.5 (2022), 21.7 (2023), 0.1 (2024), 54.4 (2025)... - Obligations to the Fund from existing and prospective credit (SDR millions) e.g., 80.4 (2021), 50.5 (2022), 21.7 (2023), 0.1 (2024), 82.7 (2025), 215.9 (2026), 295.3 (2027)... - Outstanding Fund credit based on existing and prospective drawings (end-of-period, SDR millions) e.g., 1,301.4 (2021), 1,603.9 (2022), 2,035.5 (2023), 2,198.3 (2024), 2,115.8 (2025)... - Memorandum: Quota (in millions of SDRs) 542.8. ### External financing requirements and gap - Table 8 highlights: - Total requirements (USD mn): 2018: 6,715; 2019: 8,374; 2020: 6,357; 2021: 7,570; 2022: 8,146; 2023: 8,674; 2024: 11,365; 2025: 10,276. - Total sources (USD mn): 2018: 7,737; 2019: 9,416; 2020: 5,592; 2021: 5,454; 2022: 7,805; 2023: 8,381; 2024: 12,022; 2025: 12,240. - Financing gap (USD mn): 2018: -1,022; 2019: -1,042; 2020: 765; 2021: 2,116; 2022: 341; 2023: 293; 2024: -657; 2025: -1,964. - Additional financing sources include IMF (net) and other items; Disbursements (Proposed ECF/EFF Program) entries appear in table. *Source: Kenyan authorities and IMF staff estimates, projections, and accompanying figures and tables in the provided content.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Overview - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). - The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline: - "low" indicates a probability below 10 percent, - "medium" a probability between 10 and 30 percent, - and "high" a probability between 30 and 50 percent. - The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. - Non-mutually exclusive risks may interact and materialize jointly. - “Short term” and “medium term” indicate risks could materialize within 1 year and 3 years, respectively. ### Potential External Shocks - Covid-19 resurgence - Likelihood / Time Horizon: Medium / Short to Medium Term - Expected Impact on Economy: - High. This could adversely impact growth, spur capital outflows from the private sector and pressure the exchange rate. - Fiscal balances would worsen, including due to balance sheet scarring in the private sector, and debt vulnerabilities would rise further. - Policy Response: - Reprioritize spending to support the vulnerable while compressing overall expenditure to contain the negative fiscal-debt impact. - Maintain exchange rate flexibility. - Accelerate reforms to address structural weakness affecting competitiveness. - Sharp rise in global risk premia - Likelihood / Time Horizon: Medium / Short to Medium Term - Expected Impact on Economy: - High. This could trigger capital outflows from the private sector and hamper capital market access by the sovereign. - The exchange rate would depreciate, the fiscal balances would worsen, and debt vulnerabilities would rise further. - Policy Response: - Compress expenditure to contain the negative fiscal-debt impact. - Maintain exchange rate flexibility. - Oversupply and volatility in the oil market - Likelihood / Time Horizon: Medium / Short to Medium Term - Expected Impact on Economy: - High. This would be a positive shock for Kenya, easing potential external balance pressures from other sources. - Policy Response: - If needed to meet fiscal objectives, capitalize on lower fuel prices by aligning fuel VAT to the standard rate. - Cyber-attacks - Likelihood / Time Horizon: Medium / Short to Medium Term - Expected Impact on Economy: - Medium. Such attacks can trigger financial instability or widely disrupt socio-economic activities. - Policy Response: - Continue reforms to strengthen cyber security capabilities at both government and private sector level. - Higher frequency and severity of natural disasters - Likelihood / Time Horizon: Medium/Low / Short to Medium Term - Expected Impact on Economy: - High. This would lead to slower growth, an increase in food inflation, pressures on public spending and the current account, and adversely affect vulnerable households. - Policy Response: - Guard against second-round effects on inflation. - Use targeted programs to help vulnerable groups and reprioritize spending. ### Potential Domestic Shocks - A resumption of adverse weather conditions or locust invasion - Likelihood / Time Horizon: Medium / Short Term to Medium Term - Expected Impact on Economy: - High / Low. Depending on the geographical area impacted this could lead to lower agricultural production and slower growth, an increase in food inflation, pressures on public spending and the current account, and adversely affect vulnerable households. - Policy Response: - Use targeted programs to help vulnerable groups and reprioritize spending. - Guard against second-round effects on inflation if necessary. - Political risks - Likelihood / Time Horizon: Medium / Short to Medium Term - Expected Impact on Economy: - High. Political violence could emerge around the planned 2021 referendum and 2022 presidential election as seen in previous elections. - Policy Response: - Remain committed to reforms under the program. - Emergence of greater-than-expected weaknesses in the SOE sector - Likelihood / Time Horizon: Medium / Short to Medium Term - Expected Impact on Economy: - Medium. This would create additional fiscal pressures, potentially leading to further crowding out of the private sector, although the magnitude would be highly uncertain. - Policy Response: - Carry out financial evaluation of health of top SOEs. - Prepare and carry out strategy for addressing SOE financial pressures. - Deterioration in security situation - Likelihood / Time Horizon: Medium / Short to Medium Term - Expected Impact on Economy: - High. This would adversely affect recovery of the tourism sector, foreign direct investment and portfolio inflows and, in turn, growth. - Policy Response: - Reprioritize fiscal spending to accommodate security needs. - Maintain policies to improve macro fundamentals (e.g., structural and governance reforms). - Strengthen and robustly implement AML/CFT framework to help prevent, detect, and disrupt the financing of terrorism. - Risks from poor implementation capacity, fiscal pressures in the run-up to the election, and weak program ownership - Likelihood / Time Horizon: Low / Short to Medium Term - Expected Impact on Economy: - Medium. This would lead to higher budget deficits, which would increase debt ratios, crowd out private investment, and ultimately weaken growth. - Policy Response: - Remain committed to fiscal targets and reforms under the program. *Source: 1kenea2021002 - Annex I. Risk Assessment Matrix.* ### 62.1 percent of GDP in 2019, owing to heavy infrastructure investments in previous years, but was ### 1kenea2021002 - 62.1 percent of GDP in 2019, owing to heavy infrastructure investments in previous years, but was ### COVID-19 response and health system capacity - An inter-ministerial committee was established in end-February 2020, two weeks before the first case was confirmed. - Containment measures introduced in March 2020: isolation facilities, quarantine of at-risk persons, travel restrictions, bans on large meetings, closure of schools and universities, and a country-wide nighttime curfew. - Additional restrictions (April): movement in and out of high-risk counties. - Isolation beds for infectious diseases increased from a total of 8 at the start of March 2020 to 7,411 at end-September 2020. - Containment measures eased as capacity rose; by early July curfew shortened, flights resumed, limits on gatherings relaxed; schools/universities reopened fully in January 2021. - Current containment measures include a 10pm to 4am curfew, restrictions on operating practices of bars and restaurants, and caps on attendance at various gatherings. ### Economic impact, recovery, and sectoral performance - 2020Q2: real GDP contracted by 5.5 percent year-on-year. - Accommodation & food services declined by 83 percent. - Education declined by 56 percent. - Services overall contracted by 11.7 percent. - Secondary sector contracted by 1 percent; manufacturing declined by 3.9 percent. - 2020Q3: quarter-on-quarter real GDP growth turned positive; year-on-year rate rose to -1.1. - Agriculture growth: maintained strong growth of 6–7 percent through the year. - Manufacturing: began showing signs of recovery with leading indicators improving. - Baseline projections: - Real GDP contraction in 2020 projected at 0.1 percent (program framework assumes real GDP will contract by 0.1 percent in 2020). - Growth in 2021 projected at 7.6 percent. - Medium-term growth projected to settle at about 6 percent. - Inflation projected to remain near the mid-point of the CBK target range in 2020 and through the medium term. ### Inflation and prices - CBK target range: 5±2.5 percent. - Headline y/y inflation ranged between 7.4 percent and 4.2 percent over the past year. - Headline inflation was 5.7 percent y/y in January 2021. - Average inflation rates cited: 5.2 percent in 2019 and 5.4 percent in 2020. - Non-food/non-fuel inflation: consistently under 3 percent over the past year. - Reduced food price inflation in first half of 2020 due to strong agricultural performance; fuel prices increased. ### External sector and exchange rate - Goods exports in 2020 rose by 3.3 percent compared to 2019, buoyed by agricultural products (tea and non-flower horticulture). - Imports declined by 12.5 percent, mainly due to lower oil prices. - Remittances rose by 10.7 percent in 2020. - Current account deficit narrowed to an estimated 4.8 percent of GDP in 2020 from 5.8 percent in 2019. - Shilling depreciation: 9.5 percent against the US dollar over the 12 months to end-January. - Reserves: 4.71 months of imports at end-January. - Flexible exchange rate regime absorbed most movement in March 2020. ### Digital payments and financial inclusion - March 2020 measures: limits on mobile money transactions enhanced and charges on low value transactions (of up to Ksh 1,000) eliminated; measures in effect until end-2020. - Transactions outside bank branches increased from 90 percent before the pandemic to over 94 percent during the pandemic. - An additional 2.8 million Kenyans, or 10 percent of the active mobile money subscription base, began using mobile money following the measures. - Mobile money accounts held by more than double the adult population and served as backbone for cash transfers during the pandemic. ### Banking system resilience and monetary policy response - Pre-COVID banking system: well-capitalized, profitable, and liquid due to earlier prudential reforms. - Central Bank of Kenya (CBK) policy actions in March–April 2020: - Central Bank Rate (CBR) reduced by 125 bps from 8.25 percent to 7.25 percent in March and further to 7.0 percent in April. - Cash Reserve Ratio reduced by 100 bps. - Maximum tenor on liquidity-injecting reverse repo instruments increased from 28 to 90 days. - Banking system indicators at end-December: - Capital adequacy ratio: 19.2 percent. - Liquidity ratio: 54.6 percent. - Deposits grew by 13.2 percent in the year to December. - Interbank rate mostly in the 2-6 percent range since June. - Non-performing loans (NPLs): rose from 12.3 percent in February to 14.1 percent in December. - Banks' return on equity declined from 19.6 percent in February to 13.8 percent in December. - Loan relief by end-December 2020: - Relief measures provided to borrowers accounting for 54.2 percent of the banking system’s gross loans via moratoria of three, six and twelve months (interest or both principal and interest). - One-fifth of restructured loans were personal loans; 40 percent of all personal loans benefited from relief. - Among restructured business loans, trade, manufacturing, real estate and agriculture were largest beneficiaries. - About 90 percent of total relief was extended by large banks. ### Fiscal impact, revenue measures, and spending - Pre-COVID revenue and expenditure y/y changes (12 months to February 2020): revenue +13.7 percent, expenditure +10.8 percent. - Budget Policy Statement (February 2020) projected deficit of 6.3 percent of GDP for FY2019/20 (down from 7.7 percent in FY2018/19). - Actual FY2019/20 deficit: 7.8 percent of GDP. - April–December 2020 (FY2020/21 early period): total revenue fell by 15.8 percent y/y; expenditure contracted by 2.6 percent y/y. - Tax cuts introduced in April 2020 (Tax Amendment Act) included: - Corporate income tax rate cut from 30 to 25 percent. - Personal income tax: tax-free threshold almost doubled (to about $225 per month) and top rate reduced from 30 to 25 percent. - Standard VAT rate reduced from 16 to 14 percent. - Turnover tax for small businesses reduced from 3 to 1 percent. - Estimated cost of these tax cuts: 1.9 percent of GDP on a full-year basis, corresponding to roughly 10 percentage points of the decline in revenue observed since April. - Revenue-enhancing measures aligned with Fund recommendations: - Tax Amendment Act (April) removed multiple exemptions under VAT and corporate income tax for a full-year impact of 0.8 percent of GDP. - Finance Act 2020 (June) introduced additional measures with a full-year impact of 0.4 percent of GDP, main component being a minimum alternative tax under corporate income tax levied at 1 percent of turnover effective January 1, 2021 with expected full-year yield of 0.2 percent of GDP. - COVID-related spending and stimulus: - Ksh 40 billion (0.4 percent of GDP) in FY2019/20 supplementary budget. - Ksh 58 billion (0.5 percent of GDP) stimulus package in FY2020/21. - Uses included health sector resourcing, liquidity support to businesses (accelerated VAT refunds and pending bills), cash transfers to urban poor, and a youth employment program. - IMF Rapid Credit Facility (May): 100 percent of quota, USD 739 million. - As at end-June 2020, 72 percent of the funds had been utilized; remainder used in second half of 2020. - Allocation of RCF funds: Ministry of Health 27 percent; State Department for Social Protection transfers 22 percent; youth employment program 13 percent; liquidity support to businesses including VAT refunds 13 percent and pending bills 15 percent; other COVID-related interventions 10 percent. - Comprehensive audit by the Auditor General of all COVID-related spending in FY2019/20 is underway; results to be published by end-May 2021 (structural benchmark). ### Fiscal program targets and debt outlook - Program aims to reduce fiscal deficit and put public debt-to-GDP on a downward trajectory through multi-year fiscal consolidation. - Program arrangements requested: 38-month EFF and ECF arrangements (305 percent of quota, disbursed as budget support). - Program fiscal targets: - FY2020/21 deficit targeted at 8.7 percent of GDP. - Deficit expected to decline to 4.3 percent of GDP in FY2023/24. - Public debt-to-GDP expected to peak at 73.0 percent in FY2022/23 and then start declining. - External current account projected to widen modestly from 4.8 percent of GDP in 2020 to 5½ percent of GDP over the medium term. - Reserve coverage projected to remain adequate. ### Risks, policy priorities, and program objectives - Main risks: - Another COVID-19 flare-up domestically or in trading partners. - Deterioration in global sentiment toward emerging markets disrupting capital flows. - Weather risks and locust recurrence affecting agriculture. - Delays in fiscal consolidation and structural reforms raising financing pressures and reducing medium-term growth. - Upside risks: faster rebound in activity and government revenue. - Key policy priorities (Program objectives): - COVID-19 response: health services, vulnerable groups, and support to economic activity. - Fiscal policy: growth-friendly fiscal consolidation, bolster revenue via broadening tax base, curtail overall spending while prioritizing high-impact social and investment expenditure. - Public financial management: increase efficiency, effectiveness, and transparency; eliminate waste. - Monetary policy: refine policy operations to keep short-term interest rates stable and close to the policy rate. - Access to affordable finance: transform banking sector with customer centricity, risk-based credit pricing, transparency, and ethical banking. - Financial stability: enhance prudential regulation and supervision and operational tools. - Structural reforms: improve business environment, boost investment and employment. - Governance: strengthen oversight, preventive frameworks, accountability, and transparency. - Statistics: improve data quality per international best practices. ### Fiscal policy actions (near term) - Near-term objective: effective COVID-19 response while containing further increases in public debt; as pandemic fades, primary objective becomes reducing debt vulnerabilities and progressively reducing fiscal deficit. - Consolidation approach: - Significant revenue-raising measures focusing on reducing tax expenditures and improving tax efficiency. - Prioritize spending, eliminate waste, protect growth-enhancing expenditures. - Continue zero-based budgeting, policy of no new investment projects, and review externally funded projects for alignment with the Big Four Agenda. - Exercise caution in contracting non-concessional borrowing and prioritize concessional borrowing. - Revisit legal debt ceiling to ensure consistency with program targets. - FY2020/21 target: overall fiscal deficit of 8.7 percent of GDP. - Broadening of tax base: revenue-enhancing measures enacted in April and June with estimated full-year yield of Ksh 124 billion (1.2 percent of GDP). This excludes inflation adjustments to excise taxes introduced in October 2020 with an estimated revenue yield of Ksh 6 billion in FY2020/21. *Source: 1kenea2021002 - 62.1 percent of GDP in 2019, owing to heavy infrastructure investments in previous years, but was (IMF).* ### Introduction of a minimum income tax payable by all ### Introduction of a minimum income tax payable by all companies at 1 % of the gross turnover ### Revenue measures and immediate fiscal impact - Specific measures introduced and associated full-year revenue estimates (Ksh million): - Introduction of a minimum income tax payable by all companies at 1 % of the gross turnover — 1 Jan. 2021 — 21,000 - Introduction of tax on digital services at 1.5% of the gross transaction value — 1 Jan. 2021 — 2,000 - Other income tax measures — 1 Jan. 2021 — 4,501 - Fees and levies, various changes — 1 July, 2020 — 5,383 - Excise duty, various changes — 1 July, 2020 — 1,500 - VAT exemption removals — 1 July, 2020 — 7,654 - Pay-as-you-earn (PAYE) exemption removals — 1 July, 2020 — 300 - Total Revenue-Raising Measures: 123,629 (Ksh million) - Reversal of April 2020 tax cuts: - Additional revenue estimated at Ksh 115 billion on a full-year basis (1.0 percent of GDP) - Table of tax cuts (sunset date 1 Jan. 2021) — full-year revenue costs and full-year revenue gains from reversal (Ksh million): - CIT: reduction of standard rate from 30% to 25% — Full-year revenue costs 33,757 — Full-year revenue gains from reversal 23,630 - PAYE: Increase personal relief from Ksh 16,896 to Ksh 28,800/month; Retained — Full-year revenue costs 100,546 — Full-year revenue gains from reversal 55,091 - Revise tax brackets and reduce top tax rate from 30% to 25% — 1 Jan. 2021 — Full-year revenue costs 81,559 — Full-year revenue gains from reversal 57,091 - VAT: reduction of standard rate from 16% to 14% — 1 Jan. 2021 — Full-year revenue costs 49,379 — Full-year revenue gains from reversal 34,565 - Turnover tax on small businesses reduced from 3% to 1% — Retained — Full-year revenue costs 2,630 — Full-year revenue gains from reversal 0 - Total value of tax cuts — 186,312 (Ksh million) - Of which reversed on 1 January 2021 — 164,695 (Ksh million) — 115,286 (Ksh million) gains from reversal - Note: Gains from revenue reversals are projected to be temporarily lower as the economy recovers. ### Expenditure control, SOE support, and financing - Expenditure-control measures: - Freeze on all new recruitment without National Treasury approval - Any adjustments of remuneration and benefits to be sanctioned by the Salaries and Remuneration Commission (SRC) - Focus development budget on completion of ongoing projects; stop commencement of any new project not approved by the National Treasury - State-owned enterprises (SOEs): - Identified immediate support needs: plan to spend a total of Ksh 36 billion on extraordinary SOE support in FY2020/21 - Extraordinary support to be based on careful evaluation of need and accompanied by steps to put entities on a sound footing - Financing strategy: - External non-concessional financing confined to (i) essential projects lacking concessional financing and (ii) debt management operations that reduce net present value of public debt and improve debt service profile - Requested in December 2020 debt service relief under the G20 Debt Service Suspension Initiative; expect to defer debt service totaling about USD 639 million that would have fallen due in the first half of 2021 to subsequent years - Supplementary budget (presented to Parliament early February, prior action for the program): - Total revenue and grants of Ksh 1,898 billion - Total expenditure of Ksh 2,864 billion - Total financing 966 billion ### Fiscal targets and medium-term trajectory - FY2021/22 targets: - Fiscal deficit target: 7.5 percent of GDP (a 1.2 percentage point reduction from this year’s expected outturn) - Total revenue including grants projected to reach 16.8 percent of GDP - Increased tax revenue expected to contribute 0.6 percent of GDP (driven largely by full-year impact of measures taking effect on 1 January 2021) - Total expenditure projected to decline by 1.4 percent of GDP (decline in SOE and COVID-related spending) - Structural benchmark: submit to Parliament by end-April 2021 a budget for FY2021/22 consistent with the 7.5 percent of GDP deficit target - Medium-term objectives: - Reduce deficit to 4.3 percent of GDP by FY2023/24 - Raise ratio of revenue to GDP to well above pre-COVID levels - Planned additional tax policy measures to yield 0.8 percent of GDP in FY2022/23 and 0.9 percent of GDP in FY2023/24 - Progressively reduce recurrent expenditure as ratio to GDP, containing growth in wage bill and in spending on goods and services, while keeping development spending steady at close to 5 percent of GDP - Risk management: - If revenue shortfalls occur relative to program targets, compensate by taking additional revenue measures or curtailing non-critical spending (focusing on domestically-financed capital expenditure), in consultation with IMF staff ### Fiscal structural reforms — tax policy and administration - Tax exemptions and efficiency: - IMF TA identified substantial tax expenditures from exemptions and incentives; IMF TA identified potential revenue gain of 2.6 percent of GDP within the VAT from further removal of exemptions outside agriculture and limiting of zero-rating - IMF TA identified revenue potential of 0.8 percent of GDP from more equitable taxation of capital income and substantial potential from excise taxes - Structural benchmark: start publication of an annual report on tax expenditures and their budget implications by September 2021 - The new minimum alternative tax described as a valuable tool in an equitable approach to taxation - Revenue administration initiatives and targets: - Enhance tax and customs debt management leveraging the iTax debt module; strengthen audits; implement risk-based frameworks; expand taxpayer base; step up post-clearance audit; enhance exemptions compliance; improve customs scanning; strengthen monitoring of petroleum trade; apply enhanced methods for import valuation; implement new integrated customs management system (iCMS) - Specific operational objectives and structural benchmarks: - By end-2021: increase by 30 percent the number of Level II audits of firms in large and medium taxpayer offices (structural benchmark for end-2021) - By end-June 2021: increase assigned post-clearance audit staffing from current 21 to 45 - By December 2021: enhance valuation methods in customs using data analysis (mirror data analysis and tax and customs data matching) - By December 2021: complete comprehensive review of end-use of exempt products and complete audit of all exemptions over the past 5 years - By June 2021: achieve processing of all compliant customs entries within 24 hours - By June 2021: develop and implement risk-based compliance strategies for two to three non-compliant sectors (professionals, high net worth individuals, real estate) and the extractive sector, including KRA participation in cost audits in upstream petroleum sector ### Expenditure efficiency, procurement, wage bill, and public investment management (PIM) - Expenditure rationalization potential: - Public Expenditure Review (PER) identified options for expenditure rationalization yielding savings estimated at 2.6 percent of GDP: - Strengthened government procurement: 0.9 percent of GDP - Improved wage-bill management: 0.2 percent of GDP - Rationalization of public investment project pipeline: 1.5 percent of GDP - E-procurement and procurement reform: - Roadmap and strategy for e-procurement approved in December 2020 - Aim to have a system developer identified by end-April 2021 - Pilot by December 2021 and apply by December 2022 the new e-procurement system across Government Ministries, Departments, and Agencies (MDAs) - Wage bill control and payroll management: - Intend to gradually reduce ratio of government wage bill to GDP by about 0.5 percentage points by FY2023/24 - Measures include restraint in hiring and wage awards and improved wage-bill management - Actions and structural benchmarks: - By June 2021: harmonize and rationalize categories, rates, and rules for allowances - By June 2021: issue decision to implement across MDAs, Counties, and SAGAs a common payroll system linked to IFMIS (structural benchmark); payrolls to be cleaned and audited prior to transfer - By December 2022: complete automation of personnel expenditure using the new payroll system in at least 50 percent (by value) of MDAs, Counties, and SAGAs - Public Investment Management (PIM) challenges and reforms: - Public investment plan includes some 4,000 projects; about $10 billion of committed but undisbursed official development assistance - PER identified 522 dormant projects and potential one-off expenditure savings of about 1.5 percent of GDP from cancelling one-third of these - Steps taken and timelines: - Applying temporarily a project management system linked to IFMIS for stocktaking; completed work for most sectors - By March 2021: complete stocktaking of existing projects and associated commitments in education, health, and infrastructure; enter results in the Hyperion system; identify projects to be rationalized (structural benchmark) - By July 2021: appoint a substantive director for the PIM department - By July 2021: fully operationalize new PIM framework covering all phases of project cycle - By July 2021: ensure all new projects are based on clearly defined criteria and pre-determined costing methodologies in line with PIM regulations and guidelines ### Public Financial Management (PFM) and public debt management - PFM reforms and IFMIS enhancements: - Introduced a new Cash Management Framework; limit monthly exchequer releases consistent with aggregate in-year cash and debt plans approved by the Cash Management Committee - Review number of extra-budgetary units with view to consolidation and bringing within perimeter of budgetary central government where appropriate - Specific actions and structural benchmarks: - By March 2021: initiate regular quarterly reporting on pending bills covering MDAs, Counties, SAGAs and State Corporations (SCs) (structural benchmark) - By June 2021: develop IFMIS to capture all outstanding commitments when obligations are entered; require all MDA commitments to be immediately entered and valid only once entered on IFMIS with penalty for non-compliance - By July 2021: automate cashflow plans and exchequer for MDAs and Counties so exchequer requests are processed online through IFMIS - By July 2021: strengthen IFMIS functionality to cover multi-year commitments, pending bills, procurement and cash plans, and budgeting for allowances - By June 2022: ensure all MDA budget proposals for 2022/23 prepared using a common costing approach built into the Hyperion budget preparation system and elaborated in a budget costing manual - By June 2022: develop functional system of commitment control where only valid financial commitments are those entered on IFMIS and all government contracts accompanied by an IFMIS-linked certificate of validity - Public debt management enhancements and timelines: - Strengthen debt reporting, lengthen maturities, avoid bunching of repayments, enhance PDMO structure and functions, establish Investor Relations Unit - Domestic market deepening measures: Treasury Mobile Direct platform for retail sale of government securities; enable auction of bids by banks through internet banking; develop Central Securities Depository System; maintain smooth yield curve; support treasurers and dealers; lengthen maturity profile; publish auction rules and guidelines; strengthen bond benchmark building program - External debt: increase utilization of committed concessional financing; participation in G20 Debt Service Suspension Initiative to reduce financing pressures - Specific timelines: - By July 2021: issue regulations and a service contract for the Public Debt Management Office to make operational the framework for debt management envisioned in the PFM Act - By October 2022: expand coverage of public debt in regular reporting to include non-guaranteed public sector debts (including arrears) not currently included *Source: 1kenea2021002 - Introduction of a minimum income tax payable by all companies at 1 % of the gross turnover* ### 35. Public Private Partnerships (PPPs). Given the limited fiscal space, we are revamping the ### 35. Public Private Partnerships (PPPs) ### A. Public Private Partnerships (PPPs) - Revamping the PPP Unit in the National Treasury to support efficient and sustainable scaling up of the PPP program while avoiding undue fiscal risks. - Appointed a Director-General for the PPP Unit to provide strong leadership and strategic oversight. - Creating and institutionalizing a joint PIM-PPP planning framework to streamline decisions on whether projects should be procured through traditional public sector methods or as PPPs. - Strengthening coordination between PDMO and the PPP Unit for effective control of fiscal exposure, as envisioned in the PPP Act. - Specific actions: - By March 2021, commencing implementation of a revised institutional structure for the PPP Unit as provided in the PPP Act. - By July 2021, fully operationalizing the PPP Project Facilitation Fund through creation of a budget line for annual funding. ### B. Pension reform - Introducing a funded pension scheme for public sector workers, the Public Service Superannuation Scheme (PSSS), to put pensions on a sustainable footing. - Digitalizing the pension management system, targeted for completion by June 2022. - PSSS details: - Commenced at the start of 2021 and will over time replace the current pay-as-you-go system. - Participants include all new public sector workers and current workers under the age of 45. - PSSS contributions will be paid into a Public Service Fund supervised by the Retirement Benefits Authority. - PSSS will allow portability of pension benefits, facilitating free movement of staff into and out of the public sector. ### C. State-Owned Enterprises (SOEs) — evaluation, monitoring, and management - Adopt a staged approach to evaluate, monitor and manage financial problems in SOEs characterized by overlapping mandates, low profitability, weak governance and poor value for money. - Key components: - (i) Very near term: evaluation of financial health and FY2020/21 fiscal needs of SOEs that pose the highest fiscal risk to the FY2020/21 budget. - (ii) Over the next few months: completion of an in-depth analysis of the financial vulnerabilities of the largest and most exposed firms. - (iii) Development of a strategy to address fiscal risks from SOEs, including a framework for deciding on interventions; any extraordinary support will be in line with this framework. - Specific elements and timelines: - Complete financial evaluation of the 9 SOEs with largest fiscal risk to the FY20/21 budget, to include projection of related urgent fiscal needs in FY2020/21 supported by clear presentation of their necessity (prior action). - Entities to include Kenya Airways, Kenya Airports Authority, Kenya Railways Corporation, Kenya Power and Lighting PLC, Kenya Electricity Generating Company PLC, Kenya Ports Authority, and three of the largest universities. - Analysis will apply IMF-developed tools and cover baseline assessment; expenditure, revenue, and debt drivers; COVID-19 impact; factors determining the size of remedial measures; modality of remedial measures and impact on the fiscal framework. - Any extraordinary SOE support in FY2020/21 will be limited to exigent needs and based on this evaluation. - By end-May 2021, prepare a strategy for addressing financial pressures in the SOE sector including an in-depth forward-looking financial evaluation of the top 15-20 SOEs representing the largest financial and fiscal risks, a framework for deciding on interventions, and reforms to rationalize the SOE sector (structural benchmark). - SOE selection for financial evaluation will use transparent criteria and include a forward-looking assessment of cash flows and associated fiscal risks; the evaluation will inform any extraordinary SOE support in FY2021/22. - Strategy will include a framework for deciding on interventions and reforms to rationalize government involvement in the sector, reflect limited fiscal space and be consistent with programmed fiscal targets. - IMF team will be closely consulted; an independent outside financial advisor will be engaged to evaluate the financial situation and least cost restructuring options of Kenya Airways. ### D. State-Owned Enterprises — governance and oversight reforms - Continue improving oversight and governance arrangements following the State Corporation Act of 2012 and the 2015 code of good corporate governance. - State Corporation Advisory Committee (SCAC) to lead implementation of norms; progress includes improved board composition and reporting. - Results of SOE evaluations will inform restructuring and governance reforms for retained SOEs and portfolio rationalization to resolve overlapping mandates. - Specific governance actions and timelines: - By July 2021, complete a draft blueprint indicating needed legal reforms and implementation actions to operationalize efficiency in oversight and management of SOEs (to be supported by IMF TA). - By September 2021, develop an integrated monitoring and reporting system accessible by relevant oversight entities (line ministries, National Treasury, and SCAC) to operate as a database and early warning system for proactive rapid response interventions on policy and regulatory compliance targets. - Enhance performance management, monitoring and evaluation framework for commercial state corporations, including capacity building, development of guidelines, and a rewards and sanctions framework. - Initiate a review of institutional structures across MDAs, SAGAs, and SCs; pilot review and action plan to eliminate duplicate functions in at least one sector by December 2021. Roll-out in other sectors based on a roadmap agreed by July 2021. ### E. Broader public sector fiscal risk analysis - Strengthen risk analysis and monitoring of the broader public sector. - Specific actions: - By end-September 2021, start including in the annual Budget Review and Outlook paper an expanded fiscal risk analysis that quantifies contingent liabilities stemming from high-risk SOEs and initiates coverage of PPPs (structural benchmark). - Analysis will include specific coverage of high-risk SOEs and any other entities incurring financial difficulties or relying on direct or indirect government support, report on expected costs of guarantees, risk exposure to completed and planned PPPs nearing completion, and discuss risk mitigation measures. - By September 2021, apply strengthened budgeting and reporting templates for SAGAs and SCs using an automated Management Information System. ### D. Monetary Policy ### Policy objectives - Primary objectives: - (i) maintain headline inflation within the target range (5±2.5 percent); - (ii) maintain a flexible exchange rate regime, with market interventions only in response to excess exchange rate volatility; - (iii) further improve the monetary policy framework. - A monetary policy consultation clause (MPCC) with a 5 percent +/- 2.5 ppt band will help monitor inflation performance, providing for a consultation with the Executive Board to be triggered if inflation falls outside the band (TMU, ¶23). ### Strengthening the monetary policy framework - Publish by June 2021 a white paper outlining reforms to strengthen the monetary policy framework (structural benchmark). - Reform focus areas as conditions permit with normalization following the COVID-19 shock: - i) Refining macroeconomic modeling and forecasting frameworks. - ii) Improving operations of financial markets, including fully developing by December 2021 a Centralized Security Depository to improve monetary policy transmission and promote efficiency and transparency in the government domestic debt market. - CBK has rolled-out Treasury Mobile Direct and Internet Banking, installed the Enterprise Data Warehouse (EDW) for near-real time data capture and analysis, and is assisting ACI-Kenya and the Treasurers forum with formation of a financial association for the domestic market. - iii) Improving communication of monetary policy decisions. ### Recent reforms strengthening CBK - Key reforms to support monetary policy transmission and CBK capacity: - Repeal in November 2019 of interest rate caps on commercial bank loans under section 33B of the Banking Act. - Strengthening of the CBK balance sheet: in July 2018 authorized share capital increased from Ksh 5 billion to Ksh 50 billion; paid-up share capital gradually increased from Ksh 5 billion to Ksh 35 billion. - Issuance of new generation coins and banknotes on December 11, 2018 and May 31, 2019, respectively, with additional security features. - Demonetization of the old series Ksh 1,000 note concluded on September 30, 2019. - Strengthening CBK systems, processes, and people: upgrades of the core banking system T24, Kenya Electronic Payments and Settlements System (KEPSS); realignment of CBK structure; rollout of Treasury Mobile Direct; roll-out of the CSD system. ### E. Financial Sector ### Policy objectives and pillars - Objectives: safeguarding financial stability and expanding access to affordable finance as the financial sector supports the economy through the COVID-19 pandemic. - Four pillars: customer centricity; risk-based credit pricing; transparency; ethical practices. ### Banking sector resilience and key indicators (as at December 31, 2020) - Core capital adequacy ratio: 16.7 percent (statutory minimum 10.5 percent). - Total capital adequacy ratio: 19.2 percent (statutory minimum 14.5 percent). - Liquidity ratio at end-December: 54.6 percent (statutory minimum 20 percent). - Gross Non-Performing Loans (NPLs) to Gross Loans ratio: 14.1 percent in December, up from 12.3 percent in February 2020. - Noted increases in NPLs in transport and communications, trade, real estate, and agriculture sectors mainly due to COVID-19 related slowdown. ### COVID-19 financial sector measures - CBK implemented monetary, financial, prudential and regulatory measures coordinated with other Government interventions. - Enhancing digital platforms: - In consultation with authorized Payment Service Providers (PSPs) and commercial banks, limits on mobile money transactions were enhanced and charges on low value transactions (of up to Ksh 1,000) eliminated; measures remained in effect until end-2020. - Notable increase in transaction volumes and values of low value transactions and transfers between bank and mobile e-wallets; AML/CFT checks strengthened. - Loan restructuring: - Banks committed to discuss restructuring of loans with customers whose loans were performing as at March 2 but were adversely impacted by the pandemic. - In the nine months to end-2020, 401,096 loan facilities valued at Ksh 1.63 trillion (54 percent of the banking sector loan book of Ksh 3 trillion) have been restructured. - Credit referencing: - CRB Regulations, 2020 became effective on April 8, 2020, refreshing the 2013 framework and providing for temporary suspension of listing of negative credit information in exceptional circumstances. - CBK issued Banking Circular Number 7 and Number 8 of 2020 temporarily suspending the sharing of negative credit information on credit facilities that became non-performing as from April 1 for six months from April 1 to September 30. - Business continuity planning: - On March 27, CBK issued guidance to the banking sector on pandemic planning and business continuity aligned to Ministry of Health protocols. - Over 90 percent of the bank branch network across the country has remained open during the pandemic period, including in areas under movement restrictions. ### MSME credit guarantee scheme - Established a new credit guarantee scheme (CGS) to share the risk of new credit origination to MSMEs. - Design shares risk on a first-loss basis between participating banks and the scheme to incentivize credit extension to reactivate the economy amid high uncertainty. ### Capital adequacy and supervision measures - CBK adopted ICAAP since 2016 to ensure banks hold adequate capital aligned to risk profile; ICAAPs are part of the Supervisory Review and Evaluation Process (SREP). - On August 14, CBK issued a Circular requiring banks and mortgage finance companies to re-submit by October 31, 2020 their ICAAP documents for 2020, taking into account: - The impact of the COVID-19 pandemic and mitigating measures taken by the institution. - Measures taken and proposed to strengthen the balance sheet and maintain adequate capital and liquidity. - Any proposed distribution of 2020 profits. - Banks were required not to make decisions on distribution of 2020 profits before discussing re-submitted ICAAP documents with CBK. - Banks to submit 2021 ICAAPs by April 2021. - All banks to publicly disclose their capital adequacy ratios by end-March 2021 based on audited end-year financial statements for 2020. - Publication plan: individual end-year bank capital adequacy ratios and overall sector capital adequacy status in the annual 2020 Bank Supervision Report by May 2021. ### Banking sector vision and reforms - Banking Sector Resilience: - Pandemic has led to consolidations and combinations: acquisition of Mayfair Bank by CIB of Egypt; acquisition of Transnational Bank by Access Bank of Nigeria; acquisition of Jamii Bora Bank by Co-operative Bank of Kenya Limited. - Kenyan banks continue regional expansion via acquisitions in the Democratic Republic of Congo, Rwanda and Tanzania. - CBK will continue focus on building a resilient banking sector with strong business models and governance frameworks. - Moving towards real-time supervision: - Implementing a centralized Electronic Data Warehouse (EDW) to merge information sets provided by banks to CBK. - Using APIs to connect EDW directly to banks for near real-time data access to enhance offsite surveillance and focus onsite inspections; pilot work underway with selected banks. - Maximizing opportunities from financial innovation while minimizing risks: - CBK engagement with domestic, regional and international partners to foster innovation and manage risks. - CBK co-hosted the 2020 Virtual Africa Hackathon in August with the Monetary Authority of Singapore (MAS); the Hackathon attracted 74 applicants from 14 countries to identify technology solutions from African Fintechs addressing health and economic impacts of COVID-19. *Kenya — IMF staff report excerpt* ### 19. The winner from Cameroon participated in the virtual Global Singapore Fintech ### 1kenea2021002 - 19. The winner from Cameroon participated in the virtual Global Singapore Fintech Festival in December. ### Digital finance, Bigtech governance, and fintech engagement - The winner from Cameroon participated in the virtual Global Singapore Fintech Festival in December. - Governance of Bigtechs: - In October, the Dialogue on Global Digital Finance Governance was launched. - The dialogue, co-Chaired by the United Nations Development Program and CBK, seeks to provide a platform for advancing consensus on policy and regulatory responses to the development of global digital financing platforms appropriate for developing countries contexts and economies. - Central Bank of Kenya (CBK) initiatives related to digital lending and fintech: - The Central Bank of Kenya (Amendment) Bill, 2020 (the Bill) was published on June 19. - The principal objective of the Bill is to empower CBK to supervise and regulate digital lenders. - The Bill proposes that the CBK acts as the regulator of digital lenders in Kenya, so as to ensure a fair and non-discriminatory marketplace for access to credit. - The Bill is currently under consideration by the National Assembly. ### Microfinance regulatory review - Review of the Microfinance Act: - CBK has been reviewing the existing regulatory and supervisory framework for microfinance banks to accommodate considerable changes in the Microfinance industry. - CBK finalized the review of draft Microfinance Bill and forwarded it to the State Law Office for consideration in December 2019. - As at end of December 2020, the State Law Office had finalized legislative drafting of the Microfinance Bill ahead of publication and tabling of the Bill for consideration by the National Assembly. ### Mortgage refinancing and KMRC licensing - Licensing of Kenya Mortgage Refinance Company (KMRC): - On September 18, CBK licensed the Kenya Mortgage Refinance Company Plc (KMRC) as the first mortgage refinance company in Kenya. - The license was granted pursuant to the CBK (Mortgage Refinance Companies) Regulations, 2019. - KMRC’s principal objective is to provide long term finance to primary mortgage lenders (commercial banks, mortgage finance companies, microfinance banks and Savings and Credit Co-operatives) to increase the availability and affordability of mortgage loans to the public. ### Strengthening AML/CFT framework and related actions - Progress and implementation: - Significant progress has been made on improving the AML/CFT legal framework and its implementation through various initiatives. - Strengthened cash transaction monitoring and reporting by banks. - Enhanced offsite and onsite surveillance through targeted AML/CFT onsite inspections. - Enforcement of administrative sanctions and penalties arising from AML/CFT violations identified during inspections, including penalties levied on banks, payment service providers, money remittance providers and other financial institutions. - Demonetization exercise: - Conducted a successful demonetization exercise in 2019 withdrawing the old generation Kenya Shilling 1,000 note. - The exercise was informed by concerns about large banknotes being used for illicit financial flows and emergence of counterfeits. - Reviewed experiences of Australia, European Union, Pakistan, United Kingdom and India in crafting the demonetization strategy. - Strong AML/CFT filters in banks were critical to success to ensure illicit funds were screened out of the financial sector. - AML/CFT monitoring and reporting: - AML/CFT monitoring was scaled up by the Central Bank of Kenya with 15 targeted inspections conducted during this period on financial institutions. - Financial institutions scaled up AML/CFT screening reporting with over 3,000 Suspicious Transaction Reports (STRs) submitted for further investigation. ### National Risk Assessment (NRA) on Money Laundering and Terrorism Financing - NRA objectives and status: - In March 2019, the Government of Kenya embarked on the National Risk Assessment (NRA) on Money Laundering and Terrorism Financing. - Main objective: identify and assess money laundering and terrorism financing threats and vulnerabilities at the national level, covering significant economic sectors including the financial sector. - Findings will assist Kenya to develop a national money laundering and terrorism financing national strategy and an action plan to address deficiencies in Kenya’s AML/CFT legal and institutional framework. - The exercise is on-going with data collection from various sectors including the banking sector completed in December 2020. ### Fiscal governance and public procurement reforms - Strengthening fiscal governance and procurement transparency: - Continued efforts to strengthen fiscal governance, including implementation of the new Procurement Act to prevent misuse of public funds. - The Procurement Act provides a legal framework for implementation of electronic procurement by all public entities. - Public entities are required to publish all procurement related information in line with open contracting standards and Executive Order No 2 of 2018. - Comprehensive information on public tenders awarded, including beneficial ownership information of awarded entities, will be publicly available on the government procurement information portal; bidders will be subject to dissuasive sanctions for non-compliance (structural benchmark for end-June 2021). - The State Procurement Portal will be expedited and completed by end-April 2021. - Reforms to strengthen procurement in public investment are being pursued. - The joint effort of the Competition Authority of Kenya and Public Procurement Regulatory Authority will be strengthened to ensure irregularities encountered in procurement can be met with appropriate penalties. - The MOU signed by both parties will be cleared by the Attorney General and the National Treasury will gazette the necessary competition rules by end-March 2021. ### AML/CFT reviews, mutual evaluation, and strategic planning - Upcoming reviews and strategy formulation: - Review the effectiveness of AML/CFT measures in the context of the ongoing NRA and the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) mutual evaluation in the second half of 2021. - From the NRA, formulate the National AML/CFT Strategy and Action Plan by June 2021 to address identified gaps in the AML/CFT framework. - Develop and adopt, by July 2021, the Financial Reporting Centre (FRC)’s strategic priorities to bolster its functions and support anti-corruption efforts by analyzing financial intelligence related to the proceeds of corruption and disseminating results to relevant law enforcement agencies. ### Anti-corruption legal framework, enforcement, and transparency measures - Legislative and institutional measures: - Enacted laws contributing to enhanced governance and transparency include the Access to Information Law (from 2016), the Leadership and Integrity Act (2012), Ethics and Anti-Corruption Commission Act (2012), Public Officer and Ethics Act (2003), Anti-Corruption and Economic Crimes Act (2003) and Law on Bribery (2016). - Bribery regulations and guidelines have been developed and are going through public participation prior to submission to Parliament. - Additional resources provided for law enforcement agencies (LEAs) including EACC and DPP to hire specialized experts for prosecution of corruption cases. - Set up a multi-agency taskforce to enhance coordination between LEAs on corruption and economic crime cases. - Progress made in reducing backlog of cases in courts and development of a case management system to reallocate resources and collect statistics on workflow. - Measures to improve detection and enforcement: - (i) Improving capability of detection through better implementation of preventive measures: - 1) Effective implementation of the Access to Information Act is essential; Regulations to operationalize the Act have been drafted. By May 2021, stakeholder and public consultations on the Regulations will commence and resources will be provided to facilitate participation. By March 2022, standards for digitization and automation of records will be developed to ensure systems can comply with minimum access to information requirements. - 2) After completion of UNCAC peer review process (cycles 1 and 2), initiated review of legal framework of asset declarations and conflict of interest rules for senior public officials to align with international best practices. Enhancements will aim to (i) consolidate wealth and interest declarations into one uniform disclosure regime, (ii) rationalize responsibility for analyzing and verifying disclosures and imposing sanctions for false or omitted declarations in a single agency, and (iii) enhance role, responsibilities and capability of enforcement agencies to investigate, prosecute and sanction illicit enrichment and other corruption offenses. - 3) Continue to use AML/CFT measures to support anti-corruption efforts; support Financial Reporting Centre (FRC) to encourage and strengthen use of financial intelligence to trace proceeds of corruption by sharing relevant financial intelligence with law enforcement agencies. FRC will continue partnership with the Multi Agency Team (MAT) to detect and deter corruption activities. - 4) Ensure all companies are required to submit accurate, complete and updated beneficial ownership information to the Registrar of Companies by end-January 2021. - (ii) Improving enforcement by ensuring cases are promptly processed through the criminal justice system: - 1) Continue to publish status of all corruption cases on a public website in a timely manner and monitor corruption cases in the High Court Anti-Corruption Division and Anti-Corruption Magistrate’s Court, including parties to the case, judicial officer, court process stage, next date for hearing, and reasons for adjournments. - 2) Established the National Council on Administration of Justice (NCAJ) to implement and oversee efficient, effective and consultative coordinated approach in administration and reform of the justice system. - 3) To ensure effective prosecution and sanction of corruption and economic crimes, continue to enhance domestic coordination among law enforcement agencies through the Multi-Agency framework; fully operationalize the recently established Anti-Corruption and Economic Division of the High Court and enhance capacity of the Special Anti-Corruption Courts to operationalize day-to-day hearings of corruption cases. - (iii) Judicial transparency and case management: - 1) The Judiciary will publish data on backlog of all commercial, civil and land-associated cases on the judiciary website. - 2) Support mainstreaming of court annexed mediation in the Judiciary, with emphasis on the Environment, Lands and Commercial Courts. ### Other structural reforms and business environment outcomes - Policy objective: - Deepening structural reforms to improve the business environment and boost investment and employment creation. - Achievements and indicators: - Poverty rate reduced to 36.1 percent in 2015-16 from 46.6 percent in 2005–06. - Gini index reduced to 0.41 from 0.47. - Kenya generally performs better than peers in sub-Saharan Africa on the Global Competitiveness Index. - Recent improvements include significant simplification of processes to start a business and better provision of electricity. - Kenya ratified the African Continental Free Trade Area (AfCFTA) and COMESA-EAC-SAD FTA Tripartite agreements in 2018. - Initiated negotiations on a bilateral trade agreement with the USA and recently signed a trade deal with the United Kingdom allowing duty- and quota-free access to that market on specified products. *IMF staff report excerpt as provided in the source content.* ### 58. Reforms are underway that will support growth in the period ahead. Th ese include (i) ### Reforms are underway that will support growth in the period ahead. ### Reforms supporting growth - Key reforms include: - (i) reforming fertilizer subsidies through the introduction of an e-voucher program that will improve targeting and reduce vulnerabilities to corruption; - (ii) establishing an agricultural commodities exchange that will make agriculture more efficient and reduce vulnerabilities to corruption in sales to the government's strategic food reserve; - (iii) changing land use rules to help facilitate private investment in housing; - (iv) achieving universal health care; and - (v) reducing the number of days to register a business with implementation of the Kenya Investment Policy. ### Gender equality and related policies - Findings and policy actions: - Gender equity remains a focus; Kenya ranked 137 out of 189 countries on the UNDP’s 2017 Gender Inequality Index. - Policies to be put in place: - reduce discrimination against women and further enforce implementation of existing gender-rebalancing laws and policies; - expand health services targeted to women; - encourage girls’ retention in secondary and tertiary schools; - further invest in infrastructure that improves households’ access to running water to reduce time spent by women fetching water; - improve access to credit guarantee schemes to boost women’s entrepreneurship and economic independence. ### Data quality and statistical improvements - Policy objective: - production and dissemination of high-quality economic statistics to enhance evidence-based decision making. - Enhancements made and planned: - New statistical surveys: Integrated Survey of Services; Study of Trade Margins; Study of Underground Economy; Study of Informal Transportation; Medium, Small and Micro Enterprises Survey; Survey of Non-Profit Institutions. - Joined the Enhanced General Data Dissemination System (e-GDDS) initiative in December 2018. - Released the Foreign Investment Survey in April 2019. - Submitted international investment position (IIP) data series from 2008 to 2018 to the Fund in July 2020 (available on the IMF website). - Working toward improving quality of national accounts and government financial statistics with IMF technical assistance; expected reporting improvements: - (i) general government fiscal outturns on a quarterly basis by June 2022; - (ii) annual fiscal data of the public corporations sector (including financial and non-financial corporations) by December 2021; - (iii) migration of the fiscal framework to GFSM 2014 based concepts by December 2021. ### Program monitoring framework - Monitoring mechanisms: - periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, and indicative targets (Table 1); - structural benchmarks (Table 2) monitor structural reform progress; - detailed definitions and reporting requirements in the Technical Memorandum of Understanding (TMU). - Restrictions during program period: - government will not introduce or intensify restrictions on payments and transfers for current international transactions or introduce or modify any multiple currency practice without the IMF’s prior approval; - will not conclude bilateral payments agreements incompatible with Article VIII of the IMF’s Articles of Agreement; - will not introduce or intensify import restrictions for balance of payments reasons. - Review timing: - The first two reviews of the program will take place on or after June 20 and November 7, 2021, respectively. ### Quantitative performance criteria and indicative targets (Table 1) — selected figures (in billions of Kenyan shillings, unless otherwise indicated) - Test dates and program projections: 2021 End March, End June; 2021 End Dec; 2022 End June (columns labeled Prog.). - Quantitative performance criteria — Fiscal targets: - Primary budget balance of the national government (- = deficit; floor): - End March: -405.9 - End June: -507.8 - End Dec: -202.9 - End June (2022): -369.4 - Tax revenue (floor) — values shown in table: - End Dec: -- (blank) - End June (2022): 783.2 1,667.3 (note: table layout shows multiple entries) - Monetary targets: - Stock of central bank net international reserves (floor, in millions of US$) 3: - End March: 5,901 - End June: 7,547 - End Dec: 6,536 - End June (2022): 6,203 - Public debt targets: - Contracting and guaranteeing of new external non-concessional borrowing (ceiling, millions of US dollars) 4: - End March: 3,407 - End June: 3,407 - End Dec: 6,407 - End June (2022): 7,612 - o/w: Debt for a debt management purpose 4, 5: - End March: 2,000 - End June: 2,000 - End Dec: 5,000 - End June (2022): 5,000 - o/w: Debt for projects 4, 6: - End March: 1,407 - End June: 1,407 - End Dec: 1,407 - End June (2022): 2,612 - Contracting and guaranteeing of new external concessional borrowing (ceiling, millions of US dollars) 4: - End March: 2,000 - End June: 3,100 - End Dec: 4,800 - End June (2022): 4,800 - Public and publicly-guaranteed external payment arrears (ceiling) 7: - all test dates: 0 - New domestic guarantees granted by the central government (ceiling) 1: - all test dates: 5 - Indicative targets: - Tax revenue (floor) 1, 2: - End March: 996.2 - End June: 1,433.3 - Priority social expenditures of the national government (floor) 1: - End March: 293 - End June: 391 - End Dec: 205 - End June (2022): 397 - Change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling) 1: - all test dates: 0 - Monetary policy consultation clause: - Upper band (annual, percentage points): 7.5 7 - Center inflation target (annual, percentage points) 8: - all test dates: 5.0 - Lower band (annual, percentage points): - all test dates: 2.5 - Notes and definitions referenced in Table 1 (selected): - 3: For program monitoring, the daily average for the month when testing dates are due. Excludes encumbered reserves. - 1: Targets are cumulative flows from July 1, 2020 to June 30, 2021 and from July 1, 2021 to June 30, 2022; except for national government exchequer requests outstanding for 90 days or more that are cumulative from July 1, 2020. - 2: For program purpose, the floor excludes taxes related to “Ministerial Appropriation in Aid” (i.e., RML, RDL, PDL,), “Taxes on International Trade and Transactions (IDF fee)”, “Capital gains”, and “other taxes on goods and services”. - 7: Continuous. - 8: Compliance will be evaluated based on the 12-month annual inflation average of the latest three months. ### Proposed structural benchmarks (Table 2) — selected measures, targets, and macro-criticality - Fiscal consolidation and SOE risk reduction (Prior actions and targets): - Present to Parliament a supplementary budget for FY2020/21 consistent with programed targets. — Prior action — Anchor fiscal consolidation. - Complete financial evaluation of the 9 SOEs with largest fiscal risk to the FY2020/21 budget, to include projection of related urgent fiscal needs in FY2020/21 supported by clear presentation of their necessity. — Prior action — Reduce fiscal risks related to SOEs. - Prepare a strategy for addressing financial pressures in the SOE sector including an in-depth and forward-looking financial evaluation of the top 15-20 SOEs representing the largest financial and fiscal risks, a framework for deciding on interventions, and reforms to rationalize the SOE sector. — End-May 2021 — Reduce fiscal risks related to SOEs. - Include in the annual Budget Review and Outlook paper an expanded fiscal risk analysis that quantifies contingent liabilities stemming from high-risk SOEs and initiate coverage of PPPs. — End-September 2021 — Improve transparency and accessibility of information on the broader public sector. - Fiscal transparency: - Initiate regular quarterly reporting on pending bills, covering MDAs, Counties, SAGAs and State Corporations (SCs). — End-March 2021 — Enhance fiscal transparency in a critical area. - Publish the results of an audit of all COVID-19-related expenditures in FY2019/20. — End-May 2021 — Safeguard public resource and enhance transparency and accountability. - Ensure comprehensive information on public tenders awarded, including beneficial ownership information of the awarded entities, is publicly available on the government procurement information portal, and that bidders are subject to dissuasive sanctions for non-compliance. — End-June 2021 — Reduce corruption risks by strengthening transparency and enhancing oversight. - Start publication of annual report on tax expenditures and their budget implications. — End-September 2021 — Strengthen transparency and enhance oversight. - Revenue collection and tax administration: - Submit to Parliament a budget for FY2021/22 consistent with the programed deficit target. — End-April 2021 — Ensure fiscal consolidation consistent with program objectives. - Increase by 30 percent the number of Level II audits of firms, using risk-based approaches to select taxpayers with focus on industry sectors with large gaps in compliance identified by the IMF VAT-Gap analysis. — End-December 2021 — Increase compliance and tax revenue. - Public financial management and PIM: - Issue decision to implement across MDAs, Counties, and SAGAs a common payroll system linked to IFMIS. — End-June 2021 — Contain growth and improve efficiency of expenditure and reduce corruption risks. - Complete stocktaking of existing projects and associated commitments in the areas of education, health, and infrastructure, enter the results in the Hyperion system, and identify projects to be rationalized. — End-March 2021 — Improve debt management and efficiency of spending. - Monetary policy framework: - Publish a white paper outlining strategy to strengthen and modernize the monetary policy framework. — End-June 2021 — Strengthen the capacity to implement monetary policy effectively in the context of flexible inflation targeting. ### Technical Memorandum of Understanding (Attachment II) — highlights - Location and date header: Nairobi, Kenya, March 19, 2021. - Scope: - Defines understandings between Kenyan authorities and the IMF regarding definitions of quantitative performance criteria (QPCs) and indicative targets (ITs), their adjusters and data reporting requirements for the EFF and ECF arrangements. - National Government of Kenya (GOK) defined as budgetary national government encompassing national executive, legislative and judicial powers covered by the National Budget, including parliament, national judiciary, executive, Ministries, Departments, Agencies (MDAs), and Constitutional Commissions and Independent Offices. - Quantitative performance criteria established for March 31, 2021; June 30, 2021; December 31, 2021; June 30, 2022, covering: - primary balance of the national government including grants, cash basis (floor); - tax revenue of the national government (floor); - stock of net official international reserves (NIR) of the Central Bank of Kenya (CBK) (floor); - contracting or guaranteeing of new external non-concessional borrowing by the national government and the CBK (ceiling); - contracting or guaranteeing of new external concessional borrowing by the national government and the CBK (ceiling); - accumulation of public and publicly guaranteed external public arrears (continuous ceiling); - new domestic guarantees granted by the national government or assumption of SOE debt not reflected in the primary balance (ceiling); - a monetary policy consultation clause (band). - Indicative targets set for same test dates for: - tax revenue of the national government (floor); - change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling); - priority social spending of the national government (floor). ### Primary balance definition and adjustors - Primary balance definition: - national government primary balance on a cash basis = national government revenues and grants minus expenditures and net lending, plus due interest payments. - For program purposes, measured from financing side as sum of: - (a) negative of net domestic financing of the national government; - (b) negative of net external financing of the national government; - (c) domestic and external interest payments of the national government. - End-March 2021 and end-June 2021 test dates measured cumulatively from July 1, 2020; end-December 2021 and end-June 2022 measured cumulatively from July 1, 2021. - Definitions of components (selected): - Net domestic financing comprises: (1) net domestic bank financing (including credit from commercial banks and the CBK, overdraft facility, changes in bank holdings of government debt, drawdown of government deposits at banks or CBK); (2) net domestic nonbank financing; (3) proceeds from privatization; (4) any other borrowing securitized by or repaid with national government revenue. - Net external financing at actual transaction exchange rates comprises: disbursements of external project loans (including securitization); disbursements of budget support loans; negative of principal repayments due on all external loans; net proceeds from issuance of external debt; any exceptional financing (including rescheduled principal and interest); net changes in short-term external debt; any change in external arrears including interest payments. - Domestic and external interest payments = due interest charges on domestic and external national government debt. - Adjustors to the primary balance floor: - Floor adjusted downward by half of any extraordinary SOE support in FY2021/22 and FY2022/23 up to a cumulative amount of 1.0 percent of GDP in such support over that period. Extraordinary SOE support defined as spending on current and capital transfers to SOEs included in GFS 2014 category “Grants to Other General Government Units” (item 263 and subitems), reported in Annex III Table “Expense (KSh. Millions)” in excess of amounts specified in TMU Table 1. Coverage of SOEs to be refined in subsequent reviews to reflect findings of financial evaluations and strategy objectives. - Floor adjusted upward (downward) if budgetary program grants not specifically related to COVID-19 vaccination exceed (fall short of) programmed amounts in TMU Table 2. - If resources to finance COVID-19 vaccination become available by the 2nd Review, the floor will be adjusted downward by the amount of foreign concessional project financing dedicated to COVID-19 vaccine interventions and any COVID-19 vaccine related import cost not covered by such financing. Rationale to be reassessed in context of 2nd Review. ### Net official international reserves (NIR) of the CBK — definition and adjustors - NIR calculation: - NIR = total gross official international reserves minus official reserve liabilities. - Gross official international reserves include: - CBK holdings of monetary gold (excluding pledged collateral); - holdings of SDRs; - CBK holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, other financial instruments); - Kenya’s reserve tranche position with the IMF. - Gross official usable international reserves exclude: - pledged, swapped, or any encumbered reserve assets (including reserve assets used as collateral or guarantees for third-party external liabilities); - deposits with Crown agents; - precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets. - Gross official reserve liabilities defined as: - total outstanding liabilities of the CBK to the IMF, excluding the SDR allocations; - convertible currency liabilities of the CBK to nonresidents with an original maturity up to and including one year; - commitments to sell foreign exchange arising from derivatives (futures, forwards, swaps, options). - Adjustors to the NIR target: - If total of (i) program loans, (ii) revenue component of project loans and (iii) external commercial and semi-concessional borrowing — excluding for payments of principal of existing debt with proceeds from newly issued debt for debt management purposes — exceeds (falls short of) programmed amounts in TMU Table 3, NIR target adjusted upward (downward) by the difference. - If program grants or revenue component of project grants falls short of programmed amounts in TMU Table 3, NIR target adjusted downward by the difference. - NIR target adjusted downward by full amount of import costs associated with COVID-19 vaccine purchases less any external project financing received for this purpose; rationale to be reassessed in context of 2nd Review. - If pledged DSSI relief exceeds (falls short of) programmed amounts in TMU Table 4, NIR target adjusted upward (downward) by the difference. - Table excerpts (authorities’ projections, KSh. million): - Table 1. Kenya: Projected Budgetary Transfers to SOEs 1 (KSh. million) - 2021 Mar.: 625,336 - 2021 Jun.: 833,781 - 2021 Dec.: 437,735 - 2022 Jun.: 875,470 - Source: Kenyan authorities. - Note: 1 Cumulative from July 1, 2020 for FY 2020/21 and from July 1, 2021 for FY 2021/22. - Table 2. Kenya: Program Grants Disbursements 1 (KSh. million) - 2021 Mar.: 5,182 - 2021 Jun.: 7,404 - 2021 Dec.: 1,125 - 2022 Jun.: 2,500 - Source: Kenyan authorities. - Note: 1 Cumulative from July 1, 2020 for FY 2020/21 and from July 1, 2021 for FY 2021/22. *Source: 1kenea2021002 - Extract (PDF chapter/section).* ### 10. NIR is monitored in U.S. dollars, and, for program monitoring purposes, assets and ### 1kenea2021002 - 10. NIR is monitored in U.S. dollars, and, for program monitoring purposes, assets and ### Net International Reserves (NIR) monitoring - NIR is monitored in U.S. dollars. - For program monitoring purposes, assets and liabilities in currencies other than the U.S. dollar shall be converted into dollar equivalent values using the exchange rates as specified in TMU Table 5. - Net international reserves will be computed as the daily average for the month of the applicable test date. ### Projected government grants and borrowing (Table 3) - Units: (US$ millions). Cumulative from July 1, 2020 for FY 2020/21 and from July 1, 2021 for FY 2021/22. - Program loans and grants: - 2021 Mar.: 577 - 2021 Jun.: 1880 - 2021 Dec.: 1039 - 2022 Jun.: 1341 - Of which: grants: - 2021 Mar.: 48 - 2021 Jun.: 67 - 2021 Dec.: 5 - 2022 Jun.: 22 - Project loans and grants (revenue component): - 2021 Mar.: 525 - 2021 Jun.: 825 - 2021 Dec.: 284 - 2022 Jun.: 740 - Of which: grants (project): - 2021 Mar.: 121 - 2021 Jun.: 170 - 2021 Dec.: 35 - 2022 Jun.: 99 - External commercial and semi-concessional borrowing: - 2021 Mar.: 0 - 2021 Jun.: 1125 - 2021 Dec.: 0 - 2022 Jun.: 1266 - Source: Kenyan authorities. ### DSSI Relief (Table 4) - Units: (US$ millions). Cumulative from July 1, 2020 for FY 2020/21 and from July 1, 2021 for FY 2021/22. - Total DSSI relief: - 2021 Mar.: 433.7 - 2021 Jun.: 639.4 - 2021 Dec.: 0.0 - 2022 Jun.: 0.0 - Source: Kenyan authorities. ### Continuous performance criterion on public and publicly-guaranteed external payment arrears - Definition: - Public and publicly-guaranteed external payment arrears to official and private external creditors are overdue payments (principal or interest) not made by their contract due date nor during the applicable grace period. - For program monitoring, arrears are defined as overdue payments beyond 30 days after the original contract due date (to allow time to process repayments after notification of inability to pay). - Excludes arrears relating to debt subject to renegotiation (dispute or ongoing renegotiation) or rescheduling. - External debt is defined on a currency basis. - The performance criterion is defined as a cumulative flow in gross terms from January 1, 2021 and applies on a continuous basis. ### Definition and measurement of external debt; ceiling on new external debt - Debt definition: As set out in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No.15688-(14/107), adopted December 5, 2014). - External debt: any debt denominated in foreign currency (i.e., currency other than Kenyan Shillings (KSh)). For debt with original maturity of one year or less, new debt is measured as the change in the outstanding stock over the specified period. - The ceiling does not apply to the use of Fund resources. - External debt and its concessionality will be measured in U.S. dollars at program exchange rates. - Performance criteria (ceiling) apply to the nominal value of new non-concessional external debt and the nominal value of new concessional external debt contracted or guaranteed by the national government and/or the CBK. - The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended. ### Program exchange rates (Table 5) — Rates as of February 4, 2021 - Keny an Shillings per currency unit / Currency units per US Dollar: - US Dollar: 109.8647 / 1.00 - STG Pound: 149.8768 / 0.73 - Japanese Yen: 1.045882 / 105.05 - Canadian Dollar: 85.7648 / 1.28 - Euro: 131.9809 / 0.83 - Swiss Franc: 122.2213 / 0.90 - Swedish Kronor: 13.0437 / 8.42 - Danish Kronor: 17.7509 / 6.19 - Chinese Yuan: 17.0114 / 6.46 - Australian Dollar: 83.662 / 1.31 - SDR: 157.464 / 0.70 - Source: Central Bank of Kenya. ### Concessionality, present value calculations, and program reference rates - Concessional debt: debt that includes a grant element of at least 35 percent. - Grant element calculation: - Grant element = (Nominal value - NPV) / Nominal value, expressed as a percentage of nominal value. - NPV is calculated at the time of the signing date by discounting the future stream of debt service payments. - Discount rate used: 5 percent. - Debt with a grant element lower than 35 percent is considered non-concessional. - Variable interest rate loans: - PV of debt with variable interest rate (benchmark plus fixed spread) calculated using a program reference rate plus the fixed spread specified in the debt contract. - Program reference rate for the six-month USD SOFR is 0.04 percent and will remain fixed for the duration of the program. - Spreads: - Six-month Euro EURIBOR over six-month USD SOFR: -56 basis points. - Six-month JPY OIS over six-month USD SOFR: -8 basis points. - Six-month GBP SONIA over six-month USD SOFR: 1 basis point. - For currencies other than Euro, JPY, and GBP, the spread over six-month USD SOFR is 15 basis points. - Where variable rate linked to a benchmark other than six-month USD SOFR, a spread reflecting the difference between the benchmark rate and the six-month USD SOFR (rounded to the nearest 50 bps) will be added. - Footnote: The program reference rate and spreads are based on the “average projected rate” for the six-month USD SOFR over the following 10 years from the Fall 2020 World Economic Outlook (WEO). ### Sub-ceilings on new non-concessional external debt (performance criterion) - Two sub-ceilings included: a. Debt for debt management operations that improves the overall public debt profile. - Operations must reduce the present value of external debt and improve the external debt service profile. - Refinancing of principal payments with proceeds from newly issued debt for debt management purposes will count against this sub-ceiling and must improve the overall public debt profile as specified. - Refinancing of outstanding interest payments using proceeds from non-concessional borrowing for debt management is not permitted and will result in non-observance. - This sub-ceiling is cumulative from the beginning of the program. b. Debt (including bond issuance) for financing projects integral to the development program for which concessional financing is not available. - Refers to projects specified in ANNEX I; any non-concessional external debt for projects not listed in ANNEX I results in non-observance of the performance criterion. - This sub-ceiling is cumulative from the beginning of the program. - Amounts applied toward this limit do not count toward the sub-ceiling on non-concessional borrowing for debt management purposes. ### Ceiling on new domestic guarantees granted by the national government - National government guarantees on domestic borrowing include all guarantee commitments for: - (i) borrowing in domestic currency from residents and nonresidents; - (ii) guarantees extended by any SOE. ### Monetary policy consultation clause and inflation bands (Table 6) - If the observed average of the 12-month rate of CPI inflation for the three months preceding the test date falls outside the lower or upper bands specified, the authorities will consult with the IMF Executive Board focusing on: - (i) the stance of monetary policy and whether the Fund-supported program remains on track; - (ii) reasons for program deviations, taking into account compensating factors; - (iii) proposed remedial actions if necessary. - When consultation with the IMF Executive Board is triggered, access to Fund resources will be interrupted until the consultation takes place. - Table 6 — Kenya: Monetary Policy Consultation Clause, 2021–22 (percent values): - end–Mar. 2021 / end–Jun. 2021 / end–Dec. 2021 / end–Jun. 2022: - Upper band: 7.5 / 7.5 / 7.5 / 7.5 - Center point: 5.0 / 5.0 / 5.0 / 5.0 - Lower band: 2.5 / 2.5 / 2.5 / 2.5 - Source: Kenyan authorities. ### Floor on tax revenue of national government (indicative target and quantitative performance criterion) - Tax revenue defined as the sum of: personal income tax (PAYE), corporate income tax, import duties, excise duties, value added tax, and other taxes (e.g., alternative minimum tax, digital sales tax). - Exclusions for program purposes: taxes related to “Ministerial Appropriation in Aid” (i.e., RML, RDL, PDL), “Taxes on International Trade and Transactions (IDF fee),” “Capital gains,” and “other taxes on goods and services” as presented in the monthly Budget Outturn Tables (BOT). ### Indicative target on national government outstanding exchequer requests - Defined as invoices for goods or services provided to the national government for which requisitions for payment have been received in IFMIS but corresponding funds from the exchequer account have not been released. - Program ceiling refers to requisitions made after the start of July 2020 and invoices unpaid for 90 days or longer, disregarding changes related to legal rulings or claims found invalid on bills originated before the program start. ### Indicative target on priority social spending (Table 7) - Priority social spending of the national government defined as sum of: - cash transfers to orphans and vulnerable children, - cash transfers to elderly persons, - cash transfers to persons with severe disabilities, - free primary education expenditure, - free secondary education expenditure, - school food and sanitary programs, - free maternal healthcare, - universal health coverage, - health insurance subsidy for targeted categories (i.e., orphan, vulnerable children, the elderly, and people with disabilities), - spending for vaccination and immunization. - Floor defined as programmed amounts set out in TMU Table 7. - Table 7 — Kenya: Priority Social Spending (KSh. millions). Cumulative from July 1, 2020 for FY 2020/21 and from July 1, 2021 for FY 2021/22: - 2021 Mar.: 292,611 - 2021 Jun.: 390,978 - 2021 Dec.: 205,395 - 2022 Jun.: 397,320 - Source: Kenyan authorities. ### Data reporting (Table 8) — summary of data to be reported, frequencies, and deadlines - National Treasury (NT) and the Central Bank of Kenya (CBK) will provide information at specified frequencies and reporting deadlines. Authorities will promptly transmit any data revisions to IMF staff. - Selected reporting requirements and deadlines: - Monthly (within 20 days after month end) — Responsible entities: CBK or NT depending on series: - Net domestic bank financing (CBK) - Net nonbank financing of the national government (NT) - Proceeds from privatization (NT) - Debt service paid and coming due on domestic debt (CBK) - Debt service paid and coming due on external debt (NT) - Disbursements and repayment schedule of external concessional and non-concessional project loans, including securitization (NT) - Disbursements and repayment schedule of budget support loans (NT) - Disbursements and repayment schedule on all external loans (CBK) - Net proceeds from issuance of external debt (CBK) - Any exceptional financing (including rescheduled principal and interest) (NT) - Change in external arrears, including interest and principal, and penalties (NT) - Stock and movements in MDAs’ pending bills for prior fiscal years (NT) - Stock of exchequer requests made after the start of July 2020 and unpaid for 90 days or more (NT) - Guarantees issued by the national government to counties, public enterprises, and all parastatal entities (NT) — monthly within 20 days after the end of the quarter. - Stock of guarantees extended by the national government (NT) — monthly within 20 days after the end of the quarter. - Quarterly (within 45 days after quarter end unless noted): - Net changes in the stock of short-term external debt (NT) — Quarterly within 45 days after quarter end. - Stock of Treasury Bills and Bonds (NT) — Quarterly within 45 days after quarter end. - Social priority spending of the national government (NT) — Quarterly within 45 days after quarter end. - Financial Soundness Indicators (core and expanded) for other depository corporations (CBK) — Quarterly within 20 days after quarter end. - Weekly: - Auctions of T-bills and T-bonds via primary dealers (NT) — Within 7 working days after the end of the week. - Selected other monthly/quarterly series and responsible entities: - Total new other domestic debt contracted or guaranteed (NT in collaboration with CBK) — Monthly within 20 days after the end of the quarter. - Total new contracted external project loans (NT) — Monthly within 20 days after the end of the quarter. - Total other new contracted or guaranteed external concessional debt (NT in collaboration with CBK) — Monthly within 20 days after the end of the quarter. - Total new Eurobond issuances (NT) — Monthly within 20 days after the end of the quarter. - Total new other non-concessional external debt contracted or guaranteed (NT in collaboration with CBK) — Monthly within 20 days after the end of the quarter. - Gross official international reserves and components (CBK) — Monthly within 20 days after the end of the month. - Official reserve liabilities (CBK) — Monthly within 20 days after month end. - Currency in circulation; required and excess reserves (CBK) — Monthly within 20 days after month end. - Concessional and non-concessional medium- and long-term external debt contracted or guaranteed by the national government and CBK (NT) — Monthly within 20 days after month end. - Accumulation of national government external payment arrears (NT) — Monthly within 20 days after the end of the quarter. - Grants to government entities and total subsidies (NT) — Quarterly within 20 days after month end. - 12-month CPI inflation (KNBS) — Monthly within 15 days after the end of the month. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1kenea2021002.pdf* ### Annex I. List of Projects ### 1kenea2021002 - Annex I. List of Projects ### List of Projects (by sector and project titles) - Digital Learning - Access to Universal Information - E-Government Services - ICT and BPO Development - ICT Infrastructure Connectivity - Cooperative Development and Management - Agricultural Production and Management - Fisheries, Aqua Culture and Blue Economy - Food Security and Crop Diversification Project - KAGRC Liquid Nitrogen - Livestock Resources development and Management - Mechanization of Agricultural Development Project - National Value Chain Support Programme - Promotion of Industrial Development and Investments - Provision of Credit to MSMEs in Manufacturing sector- KIE - Construction of Computer Labs to Support Digital Literacy Programme - Education - Infrastructure Development and Expansion of TVETs - Renovation and expansion of infrastructure in public primary schools - Renovation and expansion of infrastructure in public Secondary schools - University Education - Vocational Training and Research - Vocational Training Centres Support (Youth Polytechniques) - National Grid System - Energy - Rural Electrification - Correctional Facilities Enhanced Security - Digitization of Land registries - Environment Protection and Management - Forests and Water Towers Conservation - Irrigation and Drainage - Processing and Registration of Title deeds - Sanitation Infrastructure Development and Management - Sewerage Infrastructure Development - Water Harvesting and Storage for Irrigation - Water Resources Conservation and Protection - Water Storage and Flood Control - Construction of Affordable Housing Units - Improvement of Housing Planning and Infrastructure - Construction of Housing Units for National Police & Kenya Prison - Construction of Markets and Fire Stations - Kenya Informal Settlements Improvement & slum upgrading projects - Construction of Roads and Bridges and Roads rehabilitation - Improvement of Infrastructure - Expansion of Airports and air strips (Malindi, Lanet, Migori) - Lamu Port- South Sudan- Ethiopia - Transport (LAPSSET) Project - Special Economic Zones (Naivasha & Dongo Kundu) - Expansion of Courts Improvement/Access to Justice - Establishment of Regional Cancer Centres - Universal Health Coverage - Expansion of Referral Hospitals - Forensic and Diagnostics - Free Maternity Program - Managed Equipment Service-Hire of Medical Equipment for 98 Hospital - Reproductive Maternal Neo-natal Child & Adolescent Health-RMNCAH - Roll-out of Universal Health Coverage, COVID-19 response and mitigation strategy - Human wildlife mitigation programme - Wildlife conservation/Tourism Promotion and Marketing - Maintenance of Access Roads and Airstrips in Parks - Tourism Infrastructure Development and Promotion ### Observations on project list - Projects span digital, ICT, agriculture, education, energy, environment, housing, transport, justice, health, conservation, and tourism sectors. - Several projects explicitly linked to national priorities (e.g., LAPSSET, National Grid System, Universal Health Coverage, TVET expansion, SGR-related items referenced in debt coverage). ### Source - Annex I. List of Projects (from the provided content unit) --- ### Debt Sustainability Analysis — Key Findings and Risk Assessment - Joint Bank-Fund Debt Sustainability Analysis - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of judgment: No - Narrative summary: - "Kenya’s debt is sustainable, and its debt dynamics will be bolstered by the fiscal consolidation envisaged under the IMF supported program." - Planned fiscal consolidation will help address debt vulnerabilities exacerbated by the global COVID-19 shock, but the risk of debt distress continues to be assessed as high. - High deficits—from the past and generated by the current shock—combined with the sharp decline in export and economic growth caused by the pandemic, have deteriorated solvency and liquidity debt indicators, particularly when measured against Kenya’s current debt-carrying capacity (evaluated as medium). - Debt indicators will improve as fiscal consolidation progresses and exports and output recover, although improvement is particularly gradual for indicators in terms of exports. - Sustained fiscal consolidation would stabilize debt towards the end of the program and bring it to more prudent levels over the medium term while securing resources to support social spending. - Kenya is projected to assume limited reliance on market financing over the coming three years and roll-over of existing Eurobonds. - The DSA suggests susceptibility to export and exchange rate shocks; prolonged and protracted shocks would present downside risks. ### Contextual notes - Kenya was first assessed at high risk of debt distress in May 2020. - The Composite Indicator for Kenya is estimated at 3.01, translating into a Medium Debt-Carrying Capacity Assessment, revised from Strong. It is based on the 2020 October WEO and CPIA vintage released on July 2020. - Approved By: Annalisa Fedelino (IMF, AFR); Martin Kaufman (IMF, SPR); and Marcello Estevão (IDA) - Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA) - Date: March 19, 2021 --- ### Public Debt Coverage and Contingent Liability Stress Tests - Public debt definition and coverage: - Public debt includes obligations of the central government; 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. - Public DSA covers both external and domestic debt incurred or guaranteed by the central government; public domestic debt consists of central government debt. - Total public debt 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. - Debt coverage excludes legacy debt of the pre-devolution county governments (whose size is modest). - The external public debt register includes granular data disclosure; it could be more regularly updated. - 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. - Contingent liability stress tests incorporated: - 3.1 percent of GDP to capture non-guaranteed debt of state-owned enterprises (SOEs) and Public Private Partnerships (PPPs). Baseline already incorporates 0.3 percent of GDP assumed for SOE support as well as amounts borrowed directly by the Kenyan government and on-lent to SOEs. - 5 percent of GDP for a loan default financial market shock—a value that exceeds the existing stock of financial sector NPLs of about 4 percent of GDP. --- ### Background on Debt Levels and Composition (selected figures) - Gross public debt: - Increased from 48.6 percent of GDP at end-2015 to an estimated 69 percent of GDP at end-2020. - About half of Kenya’s public debt is owed to external creditors. - Nominal PPG external debt at end-2020: 35.6 percent of GDP (about four percentage points higher than at end-2019). - External creditor shares at end-2020: - Multilateral creditors: about 40 percent of external debt. - Bilateral creditors: close to 33 percent of external debt; within bilateral, about 63 percent is owed to non-Paris Club members, mainly loans from China for SGR. - Commercial debt (mainly Eurobonds and syndicated loans): about 26 percent of external public debt at end-2020. - Eurobonds account for 70 percent of commercial debt (US$6.1 billion); syndicated loans represent 27 percent (about $2.5 billion). - External commercial debt decreased in 2020 as authorities prioritized concessional borrowing during the pandemic. - Domestic public debt: - Reached 33 percent of GDP at end-2020. - Issued mostly as Treasury bonds (about 70 percent of the total stock) and Treasury bills. - 91-day, 182-day, and 364-day average interest rates (December 2020): 6.9 percent, 7.4 percent and 8.3 percent respectively. - Average time to maturity for government domestic debt securities increased from 5¾ years at end-2019 to 7.9 years at end-2020. - About half of government domestic debt securities are held by commercial banks, followed by pension funds. --- ### Underlying Assumptions and Medium-Term Projections - Growth and inflation: - Baseline expects solid growth over the medium term despite 2020 slowdown from the global COVID-19 shock. - 2021 recovery to be driven by manufacturing and services, particularly education, transportation and trade (wholesale and retail). - After rebound from COVID-19 shock, economy expected to settle at potential growth (roughly 6 percent) over the medium to long term. - Medium-term growth supported by the reform agenda under the proposed EFF/ECF program, expected to underpin a healthy investment rate, particularly private investment, and favorable prospects for external demand propelling exports. - Exports of goods and services projected to reach 13.3 percent of GDP in 2025, broadly the same share as observed in 2018. - Inflation expected to remain close to the middle of the authorities’ target range in the near and medium term. - Fiscal outlook and financing: - Fiscal deficit reached 7.8 percent of GDP in 2019/20, 1.2 percentage points less than the deficit approved in the supplemental budget. - Tax revenues declined to 13.6 percent of GDP in 2019/20. - With strong adjustment under the proposed program, Kenya would reach the average debt-stabilizing primary deficit, estimated at 1.2 percent of GDP, in 2023. - Over the medium term, the overall deficit expected to decline and stay below 4 percent of GDP, with the primary surplus at 0.5 percent of GDP. - In 2021 a significant share of financing expected from concessional and semi-concessional borrowing, including from the IMF and other multilaterals; financing from commercial lenders is estimated at $1.1 billion as part of the authorities' plan to limit reliance on external commercial borrowing. - Authorities consider debt management operations if market conditions favorable; debt management operations are not reflected in the baseline. - Kenya expected to tap global capital markets to roll over Eurobonds as they mature. - External sector: - Current account deficit amounted to 4.8 percent of GDP in 2020—one percentage point lower than in 2019. - Current account supported by resilient exports (tea and horticulture) and lower global energy prices; tourism receipts contracted; remittances performed strongly. - Baseline projects a stable current account deficit over the medium term, financed by diversified sources including FDI and financial and non-financial corporate borrowing. - Realism assessment: - Baseline assumes improvement of the primary balance of 3.7 percentage points of GDP over the next three years, which falls in the top quartile of the distribution for LICs. - Staff view: this is realistic and in line with authorities’ plan for fiscal consolidation as set out in the 2021 Budget Policy Statement (BPS). - Export growth projected slightly higher than recent past as exports recover from early 2019 drought and 2020 global shock. - By 2025 exports of goods and services projected to return to similar level as share of GDP observed in 2018. --- ### Selected Macroeconomic Indicators (historical and short-term; values as presented) - Real GDP growth (percent): 2013: 5.9; 2014: 5.4; 2015: 5.7; 2016: 5.9; 2017: 4.8; 2018: 6.3; 2019: 5.4; 2020: -0.1 - CPI inflation, average (percent): 2013: 5.7; 2014: 6.9; 2015: 6.6; 2016: 6.3; 2017: 8.0; 2018: 4.7; 2019: 5.2; 2020: 5.3 - CPI inflation, eop (percent): 2013: 7.1; 2014: 6.0; 2015: 8.0; 2016: 6.3; 2017: 4.5; 2018: 5.7; 2019: 5.8; 2020: 5.6 - Current account balance (percent of GDP): 2013: -8.8; 2014: -10.4; 2015: -6.9; 2016: -5.8; 2017: -7.2; 2018: -5.7; 2019: -5.8; 2020: -4.8 - Overall fiscal balance (percent of GDP): 2013: -5.2; 2014: -6.1; 2015: -8.4; 2016: -7.4; 2017: -9.1; 2018: -7.4; 2019: -7.7; 2020: -7.8 - Gross international reserves (in billions of US$): 2013: 6.4; 2014: 8.0; 2015: 7.5; 2016: 7.5; 2017: 7.1; 2018: 8.1; 2019: 9.1; 2020: 8.3 - Gross international reserves (months of imports): 2013: 3.8; 2014: 5.4; 2015: 5.6; 2016: 4.7; 2017: 4.3; 2018: 4.8; 2019: 6.1; 2020: 4.7 - Total public debt (gross, percent of GDP): 2013: 41.1; 2014: 46.8; 2015: 47.9; 2016: 53.5; 2017: 57.4; 2018: 59.3; 2019: 62.1; 2020 (Prel.): 65.9 - Private investment (percent of GDP): 2013: 14.3; 2014: 17.2; 2015: 15.1; 2016: 9.0; 2017: 9.7; 2018: 8.6; 2019: 8.0; 2020: 7.0 - Credit to the private sector (y/y growth, percent): 2013: 20.1; 2014: 22.2; 2015: 17.3; 2016: 4.4; 2017: 2.5; 2018: 2.4; 2019: 7.1; 2020: 7.7 --- ### Comparative DSA Projections (excerpt) - Real GDP Growth (Current DSA): 2017: 4.8; 2018: 6.3; 2019: 5.4; 2020: -0.1; 2021: 7.6; Long-term: 6.0 - Primary Fiscal Deficit (percent of GDP) (Current DSA): 2017: 4.5; 2018: 3.7; 2019: 3.6; 2020: 4.1; 2021: 3.7; Long-term: -1.0 - Non-interest Current Account (percent of GDP) (Current DSA): 2017: 5.0; 2018: 4.1; 2019: 3.8; 2020: 2.8; 2021: 3.5; Long-term: 3.6 --- ### Summary Table of Projected External Borrowing Program (April 1, 2021 to June 30, 2022) — Program Purposes (figures preserved as presented) - Notes: Present value (PV) of debt calculated using terms of individual loans and 5 per cent program discount rate; for commercial debt PV defined as nominal/face value. Debt management operations are not reflected in the baseline. "Planned potential borrowing for debt management operations" noted. - By sources of debt financing (USD million / Percent): - Total: 12,376 / 100 (Volume of new debt) - PV of new debt (program purposes): 10,342 / 100 - Concessional debt, of which: 4,765 / 39 ; 2,787 / 27 - Multilateral debt: 2,420 / 20 ; 1,451 / 14 - Bilateral debt: 2,345 / 19 ; 1,336 / 13 - Other: 0 / 0 ; 0 / 0 - Non-concessional debt, of which: 2,611 / 21 ; 2,555 / 25 - Semi-concessional: 282 / 2 ; 22 / 2 - Commercial terms: 2,329 / 19 ; 2,329 / 23 - Debt for Debt Management Operations (Non-Concessional): 5,000 / 40 ; 5,000 / 48 - By Creditor Type (USD million / Percent): - Total: 12,376 / 100 ; 10,342 / 100 (PV) - Multilateral: 2,702 / 22 ; 1,677 / 16 - Bilateral - Paris Club: 579 / 5 ; 34 / 3 - Bilateral - Non-Paris Club: 1,766 / 14 ; 993 / 10 - Private: 2,329 / 19 ; 2,329 / 23 - Private for Debt Management Operations: 5,000 / 40 ; 5,000 / 48 - Uses of debt financing (USD million / Percent): - Total: 12,376 / 100 ; 10,342 / 100 (PV) - Infrastructure: 4,295 / 35 ; 3,522 / 34 - Social Spending: 755 / 6 ; 642 / 6 - Budget Financing: 2,326 / 19 ; 1,391 / 13 - Potential Debt Management Operations 2/: 5,000 / 40 ; 5,000 / 48 - PPG external debt: Volume of new debt and PV of new debt presented for April 2021 - June 2022 (program purposes) as above. --- *Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA), March 19, 2021.* ### 10. Kenya’s debt carrying capacity is assessed as Medium, given an estimated Composite ### 10. Kenya’s debt carrying capacity is assessed as Medium, given an estimated Composite Indicator (CI) of 3.01 ### Composite indicator and classification - Composite Indicator (CI) score: 3.01. - CI captures weighted average of: Country Policy and Institutional Assessment (CPIA), real GDP growth, remittances, import coverage of reserves (and its square), and global growth. - CI vintage inputs: October 2020 WEO and World Bank CPIA vintage released in July 2020. - Final classification: Medium (current assessment). - Previous assessment: Strong. - Change drivers: - Revision to 10-year global growth average from 3.5 percent to 2.9 percent (largest weight; explains close to 70 percent of CI change). - Revision to Kenya’s 10-year average growth from 5.7 percent to 5.1 percent (contributes about 14 percent of CI fall). - Lower reserves coverage contributed to a lower score. - Higher remittances growth supported a higher score. - CI component breakdown (coefficients, 10-year average values, and component contributions): - Country Policy and Institutional Assessment (CPIA): coefficient 0.4; 10-year average 3.7; CI component 1.44. - Real GDP growth, percent: coefficient 2.7; 10-year average 5.1; CI component 0.14. - Import coverage of reserves, percent: coefficient 4.1; 10-year average 39.4; CI component 1.60. - Import coverage of reserves^2, percent: coefficient -4.0; 10-year average 15.5; CI component -0.62. - Remittances, in percent of GDP: coefficient 2.0; 10-year average 3.0; CI component 0.06. - Global growth, in percent: coefficient 13.5; 10-year average 2.9; CI component 0.40. - Composite Indicator (CI) Rating: Medium (current assessment); Strong (previous assessment). - Applicable external debt burden thresholds and total public debt benchmark for Medium classification: - PV of debt in % of exports: 55 - PV of external debt in percent of GDP: 40 - Debt service in % of exports: 15 - PV of total public debt in percent of GDP: 180 (note: table formatting in source indicates mapping between indicators) ### External debt sustainability analysis (EDS) - Baseline breaches: - Debt indicators in terms of exports breach thresholds under the baseline due to slowdown in exports and higher external debt. - One solvency indicator breached: PV of PPG external debt-to-export ratio exceeds threshold. - One liquidity indicator breached: debt-service-to-exports ratio exceeds threshold. - Projection behavior: - Solvency indicator remains above threshold (180 percent) during 2021–27 but gradually declines as exports recover. - Liquidity indicator (debt-service-to-exports) exceeds its threshold (15 percent) throughout the 10-year projection. - Long-term decline in liquidity indicator interrupted by Eurobond repayments in 2024 and 2028. - PV of PPG external debt as share of GDP: - Remains below the 40 percent indicative threshold throughout the projection period. - Expected decline from 28.7 percent in 2021 to almost 17 percent in 2041. - Remains below threshold even under the most extreme shock (one-time depreciation). - External debt service-to-revenue ratio: - Exceeds its threshold (18 percent) in 2024, reflecting Eurobond maturity that year. - Financing support and operations: - G20 DSSI support requested in January 2021 reduced debt service by about US$640 million in 2021. - Authorities considering debt management operations, if market conditions favorable, to improve debt service profile. - Tailored stress tests: - One tailored stress test: one-time debt shock equivalent to 8.1 percent of GDP combining contingent liabilities from SOEs (2 percent of GDP), PPPs (35% of existing PPP stock equating to 1.1 percent of GDP), and bank recapitalization (5 percent of GDP). - Second tailored stress test: market financing shock for market-access LICs assessing rollover risks from deterioration in global risk sentiment, temporary nominal depreciation, and shortening maturities of new external commercial borrowing. - Standard stress tests: - Under the most extreme shock (shock to export growth), PV of debt-to-exports and debt service-to-exports breach thresholds over projection period. - Under the most extreme scenario, debt service-to-revenue ratio is above threshold until 2025. - Market financing risks and indicators: - EMBI spread fell from 727 basis points in 2020Q1 to 498 basis points during the 3 months ending in January 2021; remains below threshold (570 basis points). - Gross financing needs declined from 15 percent of GDP in previous DSA to 13 percent of GDP currently; below threshold (14 percent of GDP) indicating high risks. - Exception: 2024 rollover of Eurobond increases financing needs to 14.3 percent of GDP. - Shift in deficit financing mix towards domestic resources warrants monitoring; recent success in extending domestic debt maturity mitigates some domestic refinancing risk. ### Public debt sustainability analysis (PDS) - PV public debt-to-GDP dynamics: - Public sector debt (PV terms) projected: increase from 62.4 percent of GDP in 2020 to 64.2 percent in 2022, followed by gradual decline. - PV public debt-to-GDP remains above the 55 percent benchmark (for Medium capacity) until 2027. - Average PV debt-to-GDP ratio amounts to 62.8 percent during 2020–25 (0.3 percentage point of GDP above figure at time of May 2020 DSA for the RCF). - PV public debt-to-revenue ratio: - Increases from 360 percent in 2020 to 373 percent in 2021, before declining to 248 percent in 2030 and to 105 percent in 2040. - Alternative scenarios: - Under the most extreme shock (shock to GDP growth), PV public debt-to-GDP breaches 55 percent benchmark during 2021–35. - Comparative threshold note: - Under Strong debt carrying capacity the threshold on PV of public debt is 70 percent of GDP. ### Risk rating, vulnerabilities, and outlook - Current risk of debt distress: high in context of the ongoing global COVID-19 shock. - Key vulnerability channels: - Sharp temporary decline in export and GDP growth due to COVID-19. - Strong fiscal response interrupting planned consolidation. - Mechanical signals from debt indicators worsened, particularly those expressed in terms of exports. - Potential SOE contingent liabilities (monitoring and financial evaluations of nine largest SOEs as prior action; planned increase to 15–20 SOEs assessed before end of FY20/21). - High past deficits partly due to large infrastructure projects. - Susceptibility to export and exchange rate depreciation shocks. - Mitigating factors supporting sustainability assessment: - Debt-stabilizing primary balance achieved and surpassed during the program; debt begins declining as share of GDP during last year of EFF/ECF arrangements. - Indicators against exports expected to improve as exports recover and reforms enhance competitiveness. - Smooth debt service profile overall, except for 2024 Eurobond maturity; declining trajectory over projection period. - Authorities’ commitment to absorb fiscal costs from SOE contingent liabilities with limited impact on programmed fiscal envelope. - Prospects for restoring strong debt carrying capacity over medium term with global growth rebound, strong policy commitments, and efforts to replenish external buffers. - Stable and strong remittances as an important foreign currency receipt source. - Policy implication on consolidation: - Given duration of mechanical threshold breaches, consolidation efforts need to be sustained after program conclusion to bring debt to healthier levels. - Authorities have taken actions to broaden tax revenue base and pursue expenditure savings amid pandemic. - Multiyear fiscal consolidation plan in 2021 Budget Policy Statement (BPS) premised on more conservative revenue projections and commitment to additional steps to increase tax revenues and control expenditures under EFF/ECF program. ### Debt management and policy recommendations - Public debt management and financing strategy recommendations: - Continue and strengthen debt management capacity to manage and prepare for large repayments of commercial borrowing. - Refinance maturities coming due on better terms to improve the overall debt profile; plans to refinance loans at longer maturities to limit refinancing risks are welcome. - Concessional borrowing should continue to finance investment projects due to lower cost and longer maturities. - Non-concessional borrowing should be limited to projects critical for development strategy with high social and economic returns. - Efficient infrastructure investment to raise growth and export potential to support external debt sustainability. - Deliver fiscal consolidation while preserving social and development spending to further reduce risks. - Expand coverage of public debt reporting to include county governments, extra budgetary units, and non-guaranteed SOE debt. - Continue improving public debt management and revenue administration. - Specific operational suggestions: - Consider debt management operations to refinance syndicated loans and the 2024 Eurobond with long-dated instruments (not reflected under baseline) to improve external debt profile. - Monitor financing risks if global market conditions tighten unexpectedly; sustain efforts to lengthen domestic debt maturity profile. *International Monetary Fund — Kenya: Debt Sustainability Analysis (excerpt).* ### 23. While underscoring the high degree of uncertainty on the outlook, the authorities ### 23. While underscoring the high degree of uncertainty on the outlook, the authorities ### Authorities' assessment and risk classification - The authorities underscored a high degree of uncertainty on the outlook. - They acknowledged that debt and debt service indicators have deteriorated, reflecting the adverse impact of the global COVID-19 shock that contributed to larger primary deficits and lower growth. - The authorities acknowledged that Kenya remains at high risk of debt distress—overall and external debt. ### Recent financing behavior and drivers of higher public debt - Higher public debt was driven by the increased utilization of external commercial financing of the past. - During 2020 Kenya avoided utilizing commercial borrowing and relied heavily on the domestic debt markets. ### Commitments and policy actions under the program - Commitment to fiscal consolidation under the program, including continued efforts to improve tax revenues. - Commitment to strengthen exports to help improve liquidity and solvency debt indicators. - Commitment to continue to rely on concessional financing. - Commitment to limit the use of commercial borrowing to the amounts allowed under the IMF supported program and observe the IMF Debt Limits Policy. - Active search for debt management operations to lower the costs of debt and refinancing risks, especially by seeking to refinance syndicated loans and the 2024 Eurobond with long-dated debt instruments. - Commitment to implement reforms to deepen the domestic debt markets to enhance efficiency in the secondary market and lower the cost of government debt securities across the yield curve. - Commitment to increase debt transparency through expanded coverage and reporting of public debt. ### Selected DSA indicators and financing needs (as reported) - Gross external financing need (Million of U.S. dollars): 17,743; 21,052; 23,612; 27,875; 30,583; 36,489; 44,486; 49,323; 55,874; 74,955; 88,395. - The DSA tables and figures present multiple projections and sensitivity analyses indicating vulnerabilities under alternative scenarios and stress tests (including shocks to growth, exports, depreciation, and combined contingent liabilities) and show breaches of thresholds under some scenarios. *Source: Kenya DSA text and tables, staff estimates and projections.* ### 1. Our Kenya authorities appreciate the constructive engagement with staf f during ### Our Kenya authorities appreciate the constructive engagement with staff during ### I. Overview and program request - Authorities appreciate constructive engagement with staff during recent program negotiations for arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF). - Authorities broadly concur with the staff appraisal and policy recommendations. - Authorities request 38-month arrangements under the EFF and ECF with blended access at 305 percent of quota to be disbursed as budget support. - Authorities expect that together with support from development partners and other financing sources, including the G20 Debt Service Suspension Initiative, the proposed arrangements will fill the fiscal and external financing gaps over the medium term. - Authorities have completed the required prior actions and look forward to Executive Directors’ support for the arrangements. ### II. Recent economic developments and outlook - Real GDP growth declined from 5.4 percent in 2019 to an estimated -0.1 percent in 2020. - Services sector (accommodation and food services) was most affected by domestic containment measures; education sector contracted; agriculture and construction remained strong. - Growth is projected at 7.6 percent in 2021, with substantial uncertainties around medium-term estimates due to the COVID-19 shock. - Headline inflation has remained within the target range of 5±2.5 percent. - Lower food price inflation in the first half of 2020, supported by strong agricultural performance, helped keep headline inflation broadly stable despite higher fuel prices. - External sector: exports of goods rose by 3.3 percent in 2020; value of imports declined by 12.5 percent in 2020 reflecting lower oil import prices. - Remittances rose notwithstanding the global downturn. - Current account deficit narrowed to an estimated 4.8 percent of GDP in 2020 from 5.8 percent in 2019. - The flexible exchange rate acted as a shock absorber and strengthened external sector resilience. ### III. Fiscal policy and debt management - Authorities will pursue revenue-based fiscal consolidation during the program period and beyond to stabilize public debt and bring it onto a downward trajectory. - Adjustment goal: reduce the primary fiscal deficit to below its debt-stabilizing level. - Authorities implemented measures to broaden the tax base as recommended by the IMF and enacted in April and June 2020; they are strengthening revenue administration and will implement further tax policy measures in ensuing fiscal years. - Authorities have reversed most emergency tax relief measures and introduced measures to improve tax performance during the pandemic. - Expenditure policy: rationalize non-priority spending while protecting health and other social expenditures, including transfers to vulnerable groups and free primary and secondary education. - Indicative target to ensure protection of health and other social expenditures. - Strengthen public financial management (PFM), particularly budget control and execution processes, and cash management. - Near-term priority: contain pandemic impact by maintaining support for the health sector and those most impacted; protect vulnerable groups and stimulate activity in key areas. - Support packages include accelerated payment of VAT refunds and pending bills to suppliers, cash transfers to urban poor, stimulus for hard-hit sectors with emphasis on creating youth employment, and supporting SMEs through a recently launched credit guarantee scheme. - Authorities will unwind emergency spending on non-priority areas, adding to the January 1, 2021 reversals of tax cuts. - Debt strategy: balance domestic and external financing, utilize concessional financing where available, and extend maturity of domestic debt. - External non-concessional financing will be confined to funding essential projects for which concessional financing is not available and for liability management purposes. - Authorities maintain preference for an asymmetric net international reserves (NIR) adjustor also on non-grant budget flows due to uncertainties around timing of donor flows and their import content. ### IV. Monetary and financial sector policies - Central Bank of Kenya (CBK) committed to ensuring price stability; headline inflation to be kept within target range of 5 ± 2.5 percent consistent with the monetary policy consultation clause (MPCC). - CBK will maintain an accommodative monetary policy stance to support recovery. - Swift policy reaction to COVID-19 included monetary policy easing, emergency liquidity provision and pre-emptive loan restructurings. - CBK will maintain flexible exchange rate policy and limit interventions to smoothing excess volatility. - CBK will publish a white paper by June 2021 outlining requisite reforms to strengthen the monetary policy framework. - Reforms will focus on refining macroeconomic modeling and forecasting frameworks, improving financial market operations, and fully developing a Centralized Security Depository to improve monetary policy transmission and promote efficiency and transparency in the government domestic debt market. - Improve communication of monetary policy decisions and strengthen CBK’s internal capacity. - Repeal in November 2019 of interest rate caps on commercial bank loans under section 33B of the Banking Act supports monetary policy transmission. - Demonetization of old series Ksh1,000 currency notes concluded on September 30, 2019 to address illicit financial flows, corruption and counterfeits. - Financial stability and access to affordable finance remain priorities; banking sector remains stable and resilient. - Supervisory and regulatory processes to focus on prudent asset classification and provisioning; CBK advised banks to revisit capital planning, reassess portfolio resilience, and potentially curtail dividend payments. - Continued improvement in prudential regulation and supervision, including addressing cyber challenges. ### V. Structural reforms - Fiscal structural reforms to address SOE challenges (overlapping mandates, low profitability, weak governance, poor value for money). - Immediate action: evaluation of the financial health and fiscal needs of nine SOEs with the largest fiscal risks to the FY20/21 budget. - Follow-up: in-depth analysis of financial vulnerabilities of the largest and most exposed firms and development of a strategy to address fiscal risks from SOEs, including a framework to guide interventions. - Reforms aim to strengthen corporate governance and enhance oversight to limit contingent liability risks. - Governance reforms comprise four priorities: - Ensure comprehensive information on public tenders, including beneficial ownership information of awarded entities, is publicly available on the government procurement information portal. - Operationalize the Access to Information Act. - Review legal framework for asset declarations of senior public officials and conflict of interest rules to establish a uniform disclosure regime, strengthen sanctions on misreporting, and improve accessibility of asset declarations. - Undertake a national risk assessment on money laundering and terrorism financing to develop a national AML/CFT strategy and Action Plan to address identified deficiencies. - Support Financial Reporting Centre (FRC) work to encourage and strengthen use of financial intelligence to trace proceeds of corruption by sharing relevant intelligence with law enforcement agencies. - Authorities to strengthen the business environment to facilitate investment-led inclusive growth, including reducing the number of days to register a business; measures to boost agricultural productivity and reduce gender inequality. ### VI. Program modalities - Authorities appreciate program design focusing on indicative targets and quarterly reviews given pandemic uncertainty. - Note that key variables in the macroeconomic framework underpinning the program are subject to rapid changes and emphasize care in interpreting results. - WEO global growth projections used in debt carrying capacity assessment have been superseded in the rapidly changing environment and the projection remains highly uncertain (DSA, ¶11). ### VII. Conclusion - Authorities commit to strengthening macroeconomic stability and enhancing economic resilience. - Pursue multi-year fiscal consolidation to bring public debt on a downward trajectory while preserving space for growth-friendly public investment, including in The Big Four. - Seek Executive Directors’ support for approval of the EFF and ECF arrangements to complement efforts to contain the pandemic’s impact and reignite durable and sustainable growth. - Expect Fund financing to catalyze additional grant and concessional financing from development partners to augment ongoing recovery efforts. *Source: 1kenea2021002.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1kenea2021002.pdf_