## Kenya: IMF staff report excerpt (content unit 1kenea2021004)

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### Executive summary — context and program rationale
- Kenya’s medium-term outlook: positive; program supports multi-year fiscal consolidation to reduce debt vulnerabilities while preserving priority social and development spending ahead of 2022 elections.
- Pre-COVID performance: GDP growth averaged 5.0 percent over 2010−19.
- Poverty: World Bank estimates poverty (US$1.9/day) rose from 34.4 percent in 2019 to 35.7 percent in 2020.
- COVID-19 vaccination milestones:
  - Delivery of 13.3 million doses of Johnson & Johnson (World Bank funded) started September 2021.
  - By late November 2021: some 6.3 million doses administered; 8.4 percent of adults fully vaccinated.
  - Government targets: vaccinate 10 million people by end-2021 and fully vaccinate all adults (26 million people) by end-2022.
- IMF support: Executive Board approved 38-month ECF/EFF arrangements equivalent to 305 percent of quota in April 2021.

### Program status and performance (as of end-June / Q3 2021)
- Program performance: robust; all end-June prior actions (PCs) and indicative targets (ITs) met.
- Fiscal outturns:
  - FY20/21 primary deficit: 4.0 percent of GDP (KSh.-455.12 billion reported elsewhere).
  - Overall balance FY20/21: 8.2 percent of GDP (against programmed 8.6 percent).
- Structural reforms:
  - All but one structural benchmark for 2021 implemented; beneficial ownership publication delayed (proposed new SB end‑March 2022).
- Real economy and inflation:
  - Economy contracted by -0.3 percent in 2020.
  - 2021 H1 real GDP growth: 5.3 percent y-o-y.
  - Headline inflation rose from 5.9 percent in March to 6.5 percent in October 2021; non-food / non-fuel inflation remained anchored below 3 percent.
- External/reserve developments:
  - Current account deficit narrowed to 4.5 percent of GDP in 2020.
  - Gross international reserves: US$9.4 billion at end-September 2021; also reported as US$9.6 billion at end-September in other tables.
  - Major inflows supporting reserves: US$1 billion Eurobond; US$750 million World Bank budget support; two Fund disbursements totaling US$715 million; SDR allocation SDR520.2 million (US$740 million).
- Banking sector and financial stability:
  - Total CAR: 18.9 percent.
  - NPL ratio: 13.9 percent (end-August 2021).
  - Private credit growth: 7.7 percent y-o-y at end-August 2021; deposit growth: 12 percent in 2020.
  - About half of loans restructured; 93 percent resumed timely repayment by end-August 2021.
  - Banks hold government securities equal to 31 percent of banks’ assets.

### Macroeconomic outlook and risks
- Growth forecasts:
  - Staff’s 2021 growth forecast revised from 6.4 percent to 5.9 percent after GDP revision.
  - Medium-term GDP forecast revised from 6.1 to 5.5 percent; staff projects growth rebound to 5.9 percent in 2021 and to stabilize at 5.5 percent over the medium term.
- Inflation: projected to return to the mid-point of CBK target range during 2022 and remain near that level through medium term.
- External position: broadly in line with fundamentals; reserves comfortably above Fund’s ARA metric.
- Downside risks include:
  - uncontrolled COVID-19 outbreaks, terms-of-trade shocks, global capital market spillovers, election-related disruptions (general elections scheduled August 9, 2022), materialization of SOE contingent liabilities, and unfavorable rain/drought conditions.
- Program flexibility: accommodates vaccine-related expenditures and SOE restructuring needs via proposed adjustors and recalibrated PCs.

### Fiscal policy, adjustments, and SOE contingent risks
- FY21/22 recalibration:
  - Authorities incorporated World Bank loan US$130 million (0.1 percent of GDP) for vaccines.
  - SOE reform spending visibility: 0.4 percent of GDP in FY21/22; offsets identified for half (0.2 percent of GDP).
  - Targeted temporary measures for drought/security: 0.2 percent of GDP.
  - Combined impact: add 0.5 percent of GDP to FY21/22 primary deficit.
  - Recalibrated FY21/22 primary deficit: 3.4 percent of GDP versus original 2.9 percent target (or 3.3 percent including vaccine and SOE support as provisionally estimated at 1st Reviews).
- SOE vulnerabilities and planned support:
  - In‑depth evaluations identified KSh.383 billion liquidity gap over five years for 18 SOEs (excluding KQ).
  - Kenya Airways (KQ): projected US$1 billion restructuring cost; GoK guarantees/exposures include US$750 million; GoK to take over US$827 million of KQ debt; US$473 million direct budgetary support in FY2021/22–FY2022/23 to clear overdue obligations and upfront restructuring costs.
  - KPLC: identified KSh.110 billion medium-term liquidity gap; Exchequer to provide KSh.7.5 billion in FY21/22 for last mile electrification arrears; Presidential Taskforce report used to prepare action plan.
  - Other SOE support: Kenya Airports Authority and Kenya Wildlife Service to receive KSh.4.8 billion temporary support.
- Supplementary budget and financing:
  - Supplementary budget for FY21/22 to be submitted to Parliament by early 2022 (proposed SB end‑January 2022) detailing offsets (KSh.24.5 billion identified).
  - Half of Kenya’s SDR allocation (US$370 million SDR) to be on‑lent in domestic currency by CBK to finance larger primary deficit.
  - World Bank loan for vaccination: US$130 million (0.1 percent of GDP).

### Medium-term fiscal strategy and revenue mobilization
- Key levers: domestic revenue mobilization, expenditure control, higher public spending efficiency, prudent borrowing.
- Debt anchor and targets:
  - Authorities plan transition to medium-term debt anchor of 55 percent of GDP in present value terms and pursue strategy to achieve it by mid-2022.
  - Public debt expected: 71 percent of GDP in FY21/22–FY22/23 (around 62 percent of GDP in PV terms).
- Revenue strategy:
  - Medium-Term Revenue Strategy (MTRS) in progress to achieve planned tax effort of 0.8–0.9 percent of GDP per year in FY22/23 and FY23/24.
  - Tax-to-GDP ratio history and targets:
    - Tax-to-GDP: 15.4 percent in FY2014/15; about 13 percent in FY2019/20; 12.9 percent at end-FY20/21.
    - Authorities aim for tax-to-GDP ratio of 15.6 percent by FY24/25.
- Expenditure control:
  - Contain wage bill via rationalization per SRC recommendations; roll out common payroll system across MDAs and Counties by June 2022.
  - Protect priority social spending (defined floor amounts set in TMU).

### Monetary policy modernization and financial stability
- CBK strategy (July):
  - Diversify/refine macro modelling; improve data; enhance interbank market via Central Securities Depository (CSD); introduce a band around the CBK policy rate to anchor interbank rate; improve communication.
  - CSD target: fully develop by April 2022; benefits include improved monetary transmission and repo market functioning.
- Financial soundness indicators (selected):
  - Core CAR: 16.3 percent; Total CAR: 18.9 percent.
  - Liquidity ratio: 57.0 percent (statutory minimum: 20 percent).
  - Gross NPLs: 13.9 percent (August 2021).
  - Outstanding restructured loans: about 16 percent of gross loans; 93 percent performing under restructured terms.
- Banking sector exposures and risks:
  - Banks’ holdings of government securities: 30–31 percent of assets.
  - Stress testing: a 5 ppt shock to current NPLs could lead 10 out of 39 banks to face capital shortfalls (less than 0.4 percent of GDP).
  - Policy measures: encourage consolidation of small banks; roll-out CSD to improve liquidity distribution; strengthen resolution framework (KDIC).
- Climate and regulatory actions:
  - CBK issued Guidance (October 15, 2021) on integrating climate-related risks; banks to submit implementation plans by mid-2022 and disclosures by mid-2023.
  - CBK modernization white paper published in late July 2021.

### External sector, reserves, and competitiveness
- Reserve levels and projections:
  - Gross international reserves: US$8,284 (2020) ; 10,788 (2021) ; projected 8,974 (2022) ; Table memo lists 8,284 (2020), 10,788 (2021), 8,974 (2022) — in USD million.
  - Reserve coverage: 4.6 months of prospective imports at end-September (US$9.6 billion reported in one table); projected to decline to US$8.9 billion or 4.2 months of imports by end-2022.
- Current account:
  - CA deficit: 4.5 percent of GDP in 2020; projected to increase to 5.2 percent of GDP in 2021 and stabilize around 5 percent over medium term.
- External financing and borrowing program (Jul 1, 2021 to Dec 31, 2022):
  - Volume of new PPG external debt: USD 12,700.8 million (100 percent).
  - Concessional debt: USD 6,303.3 (50 percent); Non-concessional: USD 6,397.6 (50 percent).
  - PV of new debt (program): USD 9,904.9 million (100 percent).
- Export competitiveness challenges:
  - Exports of goods and services to GDP declined from almost 20 percent in 2011 to about 11 percent in 2019.
  - Kenya attracted 1.3 percent of GDP in FDI on average in 2010-19 (vs around 3 percent for Ethiopia and Rwanda).

### Debt sustainability, public debt metrics, and risks
- Debt levels and projections:
  - Gross public debt increased from 44.4 percent of GDP end-2015 to 67.4 percent of GDP end-2020.
  - Domestic public debt: 32.4 percent of GDP at end-2020; Treasury bonds account for 77 percent of domestic public debt.
  - Nominal PPG external debt end-2020: 35 percent of GDP.
- DSA conclusions and key numbers:
  - Kenya’s debt-carrying capacity: assessed Medium; CI Index: 3.04 (threshold for Strong: 3.05).
  - PV of total public debt benchmark for Medium capacity: 55 percent of GDP; PV public debt remains above 55 percent until 2025.
  - Public debt (PV terms): around 60.3 percent of GDP in 2020; expected to decline starting 2023 under program consolidation.
  - Total DSA shock calibrations: one-time contingent liabilities shock equal to 8.6 percent of GDP (components preserved from source).
- Fund exposures and capacity to repay:
  - Total outstanding credit to the Fund would reach SDR 1,301.4 million, or 239.8 percent of quota, at end-2021; peak at SDR 2,198.4 million, or 405 percent of quota in 2024 (equivalent to around 2.4 percent of GDP).
  - IMF repurchases and charges peak at 2.3 percent of exports of goods and services and 4.1 percent of reserves in 2028.
- Program debt-policy measures:
  - Proposal to replace separate nominal ceilings on new external concessional and non-concessional borrowing with a ceiling on the present value of contracting or guaranteeing of new external debt by the national government (PV ceiling).
  - TMU defines PV calculation, adjustors, and exclusions (including treatment of KQ-related guarantee replacements).

### Structural, governance, transparency, and revenue administration reforms
- Governance and anti-corruption:
  - Forensic audits of COVID-19 spending; Public Procurement Information Portal published many tenders but beneficial ownership (BO) publication delayed due to privacy/legal constraints; roadmap to require bidder consent and publish BO for new tenders by early 2022 (new SB end‑March 2022).
  - Proposed SB: publish results of forensic audit of COVID-19 vaccine spending up to June 2021 and comprehensive audit of FY2020/21 by end‑May 2022.
- Revenue administration:
  - Level II audits increased from 40 in FY2019/20 to 671 in FY2020/21; tax expenditures reported at 2.96 percent of GDP in 2020 (down from 4.9 percent in 2017).
  - MTRS in progress with Fund TA; planned tax measures of 0.8–0.9 percent of GDP in FY22/23 and FY23/24.
- Public financial management and PIM:
  - Stocktaking of projects completed end‑March 2021; identified 437 stalled/underperforming projects recommended for cancellation.
  - PIMIS targeted fully operational by 1st July 2022; PIM manuals and regulations timelines preserved.
- Wage bill and payroll reforms:
  - Wage freeze for FY2021/22 and FY2022/23; target to reduce wage bill by 0.5 percentage points of GDP between FY2020/21 and FY2023/24.
  - Common payroll system linked to IFMIS: roadmap to implement by June 2022.

### Financial inclusion, digitalization, and MSME support
- Financial inclusion: rose to 83 percent by 2019 (from 27 percent in 2016) via mobile financial services.
- Mobile money and digital initiatives:
  - Value of mobile money transactions nearly KSh.600 billion monthly after fee reductions.
  - Ajira Digital Project aimed at fostering one million online jobs.
- Credit Guarantee Scheme (CGS):
  - Established December 2020 to support MSMEs; loans extended under CGS topped KSh.1 billion as at August 2021.
  - Risk sharing: 50:50 pari-passu basis; maximum guarantee exposure 25 percent of principal.

### Program conditionality, TMU, monitoring, and proposed adjustments
- QPCs and ITs: performance criteria for end-December 2021, end‑June 2022, and end‑December 2022; notable adjustments proposed:
  - Increase end‑June 2022 PC on the primary balance to reflect vaccine spending, extraordinary SOE support net of offsets, and emergency spending for drought/security.
  - Increase end‑December 2021 and end‑June 2022 NIR targets to reflect SDR allocation and adopt end-of-period NIR monitoring.
  - Introduce PV ceiling on contracting/guaranteeing new external public debt (TMU details on PV discounting and adjustors preserved).
- Program finance assurances: program fully financed with firm commitments for 12 months post-2nd reviews; financing mix includes World Bank DPOs, AfDB, JICA, and market access (Eurobond issuance advanced to late‑2021).
- Reporting obligations: NT and CBK to provide data per TMU Table 8 (monthly/quarterly deadlines preserved); review schedule includes third review on/after May 7, 2022.

### Key policy recommendations and priorities (staff appraisal)
- Continue implementation under ECF/EFF given robust performance and authorities’ commitment.
- Maintain multi-year fiscal consolidation while protecting priority social spending and accommodating vaccine and targeted SOE support through adjustors and offsets.
- Strengthen revenue mobilization via MTRS and continued tax administration reforms.
- Safeguard external stability by retaining exchange rate flexibility, preserving reserves, and combining concessional official financing with selective market access.
- Advance SOE restructurings (KQ, KPLC) using least-cost strategies, conditional and phased support, and mechanisms to protect Exchequer interests.
- Modernize monetary policy operations (CSD rollout, interbank market improvements) and strengthen financial sector supervision, resolution, and climate risk integration.

*Source: IMF staff report content from 1kenea2021004 (Kenya country report excerpt).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Kenya’s medium-term economic outlook remains positive, supported by the authorities’ continued firm commitment to their economic program amidst a complex environment.
- Economic recovery is well underway, but Kenya’s Sustainable Development Goals (SDGs) have suffered significant setbacks, and poverty has increased.
- The authorities view the program as essential support for sound fiscal management ahead of the 2022 elections, reinforcing a multi-year fiscal consolidation plan to reduce debt vulnerabilities and preserve priority social and development spending.
- Before the COVID-19 shock, GDP growth averaged 5.0 percent over 2010−19, with improving living standards, but declining government revenues and exports as a share of GDP alongside large infrastructure investments partly financed by non-concessional borrowing contributed to rising fiscal deficits and debt vulnerabilities.
- The World Bank estimates the poverty rate (at US$1.9 per day) rose from 34.4 percent in 2019 to 35.7 percent in 2020.
- Kenya’s COVID-19 vaccination program picked up speed in the second half of 2021:
  - Delivery of 13.3 million doses of Johnson & Johnson ordered by the government with World Bank funding started in September 2021.
  - By late November 2021, some 6.3 million COVID-19 vaccine doses had been administered and 8.4 percent of adults had been fully vaccinated.
  - Government targets: vaccinate 10 million people by end-2021 and fully vaccinate all adults (26 million people) by end-2022.
- Confirmed COVID-19 cases fell after a fourth wave that peaked in August 2021.

### Program status
- In April 2021, the IMF’s Executive Board approved 38-month arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) in an amount equivalent to 305 percent of quota.
- The arrangements support Kenya’s response to the COVID-19 shock and the authorities’ plan to reduce debt vulnerabilities while advancing structural reforms to:
  - Strengthen the anti-corruption framework;
  - Address financial weaknesses in state-owned enterprises (SOEs);
  - Strengthen the monetary policy framework and support financial stability.

### Program performance (as of end-June 2021)
- Program performance was robust in a challenging environment.
- All end-June prior actions (PCs) and indicative targets (ITs) were met.
- Fiscal outturns:
  - The FY20/21 primary deficit was 4.0 percent of GDP, below the 4.5 percent of GDP target.
  - The overall balance was 8.2 percent of GDP (against a programmed 8.6 percent).
- The primary balance significantly overperformed; social spending modestly overperformed.
- Structural reform agenda accelerated after initial delays:
  - All but one structural benchmark for 2021 are now implemented.
  - Publication of beneficial ownership information, delayed due to conflicting privacy requirements, is expected to begin early next year.
- GDP performance and inflation:
  - Economy contracted by -0.3 percent in 2020.
  - 2021 H1 real GDP growth was 5.3 percent y-o-y.
  - Headline inflation rose from 5.9 percent in March to 6.5 percent in October 2021; non-food / non-fuel inflation remained anchored below 3 percent.
- External and reserve developments:
  - In 2020, the current account deficit narrowed to 4.5 percent of GDP.
  - At end-September 2021, gross international reserves stood at US$9.4 billion, bolstered by significant financial inflows including:
    - Eurobond issuance of US$1 billion;
    - US$750 million in World Bank budget support;
    - Two disbursements totaling US$715 million under the Fund program in Q2;
    - SDR allocation in August of SDR520.2 million equivalent to US$740 million.
- Banking sector and financial stability:
  - Banking system total CAR at 18.9 percent.
  - Five small banks and one midsized bank breached the minimum requirement of 14.5 percent in 2020.
  - NPL ratio at 13.9 percent.
  - Private credit growth of 7.7 percent y-o-y at end-August 2021; deposit growth of 12 percent.
  - About half of all loans were restructured; 93 percent had resumed timely repayment by end-August 2021.
  - Government credit guarantee scheme provided KSh.1 billion of loans to MSMEs since end-2020.
  - Banks hold government securities equal to 31 percent of banks’ assets.

### Fiscal and policy developments
- FY20/21 budget execution overperformed targets:
  - Tax revenues rebounded following tax-mobilizing measures in effect since January 1, 2021, notwithstanding legal challenges to the Corporate Minimum Tax (CMT).
  - The High Court suspended the CMT in early March 2021 on constitutionality concerns (EBS/21/52). On September 20, 2021, the High Court ruled the CMT unconstitutional. The authorities have appealed the ruling.
- Authorities have prioritized meeting the deficit target via tax policy measures and strong spending control, and are addressing financial vulnerabilities in SOEs.
- Support measures during the pandemic included temporary tax cuts, cash transfers, a credit guarantee scheme, a youth employment program, temporarily eased repayment conditions for borrowers, and a more accommodative monetary stance.

### Requests and proposed adjustments
- The Kenyan authorities request:
  - Modification of the PCs on the primary balance to reflect materialization of previously expected spending needs (COVID-19 vaccines and SOEs) and modest additional spending for humanitarian support;
  - Modification of the PCs on net international reserves to reflect revised FX flows (e.g., SDR allocation) and a switch to end-of-period NIR program monitoring.
  - A new ceiling on the present value of contracting or guaranteeing of new external debt by the national government is proposed to replace the separate nominal ceilings on new external concessional and non-concessional borrowing in line with recent reforms to the IMF Debt Limits Policy.

### Risks to the program and outlook
- Uncertainty remains very high due to the COVID-19 pandemic and upcoming 2022 elections, with medium-term risks tilted to the downside.
- The program is designed to provide flexibility to address continuing challenges (COVID-19 vaccination and SOE restructuring needs) while still achieving program objectives.
- Elections:
  - General elections are scheduled for August 9, 2022.
  - Candidates are required to resign from government at least six months before the election.
  - Parliament is expected to adjourn early; the FY2022/23 budget is being prepared on a compressed schedule targeting passage at end-March 2022.
  - Past elections have been associated with social tensions and disruptions to economic activity.

### Additional analytical and technical notes
- Box 1 (Revision and Rebasing of National Accounts):
  - On September 9, 2021, KNBS revised 2010−19 annual and quarterly national accounts and released preliminary 2020 estimates, completing a comprehensive GDP revision and rebasing launched in 2017.
  - The 2019 revised nominal GDP was 5.3 percent higher than the previous estimate; by 2020 the difference from staff estimates based on the previous data had narrowed to 1.6 percent.
  - Historical real GDP growth rates for 2010−19 were revised down by 0.8 percentage points on average; notable sector revisions include agriculture (-0.7 ppt), construction (-2.4), trade (-0.8), transport (-0.5), hotels and accommodation (-2.6), education (-2.0); manufacturing growth rates were revised up by 0.5 ppt on average.
  - In 2019, services sector share in GDP stood at 62 percent (compared to 50 percent based on previous data); agriculture revised down to 21 percent of GDP.

*IMF Executive Board approved 38-month ECF/EFF arrangements equivalent to 305 percent of quota; mission conducted remotely from Washington, D.C. during October 12–November 3, 2021.*

### Box 1. Revision and Rebasing of National Accounts (concluded)

### Box 1. Revision and Rebasing of National Accounts (concluded)

### Implications for staff’s GDP forecast
- Estimated base effect for recovery from the pandemic in 2021 declined from +3.2 percent to +1.5 percent due to a less severe drop in Q2 2020 (−6.3 percent seasonally adjusted quarter-on-quarter versus −9.4 percent based on previous data).
- Education and manufacturing sectors showed improved resilience.
- Staff’s 2021 growth forecast revised down from 6.4 percent to 5.9 percent.
- Medium-term GDP forecast revised down from 6.1 to 5.5 percent, while maintaining the assumption that fiscal structural and governance reforms under the EFF/ECF will have a positive impact on growth.

### Program performance (end-June)
- Overall assessment: Program performance was robust in a challenging environment; structural benchmark implementation advanced after earlier delays.
- QPCs and ITs: All end-June quantitative performance criteria (PC) and indicative targets were met comfortably; primary deficit PC met by a wide margin (KSh.455 billion vs. a target of KSh.508 billion).
- MPCC: Inflation remained within the 2.5–7.5 percent target range.
- SB (end-May): Kenya Airways’ (KQ) financial evaluation (end-May SB on SOE financial evaluations) was completed in August.
- SBs (end-June): Of three end-June SBs, two implemented with delay and one pending:
  - CBK published its Strategy to Strengthen and Modernize the Monetary Policy Framework (July).
  - Decision to implement a common payroll system across MDAs and Counties delivered with an agreed roadmap in late October to implement the payroll system by June 2022.
  - Beneficial ownership (BO) information not yet reflected on the public procurement portal due to conflicting legal and privacy requirements (SB not met). A roadmap established to adopt a new bidding document by end-March 2022 requiring consent from beneficial owners to publish BO information (proposed new structural benchmark for end-March 2022).
- SBs (end-September and end-December): Of three remaining SBs for 2021, one met, one implemented with delay, one met well in advance:
  - Annual report on tax expenditures launched at end-September (related SB met).
  - Separate reports on fiscal risks from PPPs and SOEs issued, intended to feed into forthcoming budget process (end-September SB implemented with delay).
  - End-December SB on tax audits of firms in sectors with large compliance gaps, using risk-based approaches, met well before target date.

### Macroeconomic outlook and risks
- Medium-term outlook: Economic growth projected to rebound in 2021 to 5.9 percent and stabilize at 5.5 percent over the medium term (supported by base effects).
- Inflation: Headline inflation projected to return to the mid-point of the CBK’s target range during 2022 and stay near that level through the medium term as monetary policy anchors price expectations.
- External position: Projected to remain comfortable, benefiting from improving export prospects, the recent SDR allocation, and recovery in tourism.
- Downside risks (Annex II): Highly uncertain outlook; risks include:
  - Uncontrolled COVID-19 outbreaks with limited vaccine availability undermining recovery and increasing fiscal and external pressures.
  - Terms-of-trade shocks from high imported commodity prices widening the current account deficit and heightening price pressures.
  - Spillovers via global capital markets from policy responses in major economies affecting frontier economies like Kenya.
  - Upcoming general elections could pressure budget execution and reform implementation and potentially lead to socio-political tensions.
  - Materialization of large contingent liabilities from SOEs could undermine fiscal consolidation, slow public debt reduction, and pressure FX reserves.
  - Unfavorable rain conditions could exacerbate severe drought and deep food insecurity in northern regions, increasing social tensions and security risks and necessitating further temporary and targeted emergency spending.
- Authorities’ views on outlook: Authorities agreed with staff’s positive outlook, noted resilience to COVID-19 shock in 2020, expressed concern about lasting impacts to Kenya’s Sustainable Development Goals, expected near-term growth support from unwinding pent-up demand (notably services), and in the medium term anticipated growth around 6 percent driven by services, especially financial and IT services.

### Policy discussions — Near-term program and medium-term Article IV-related priorities
- Focus areas: (i) addressing immediate COVID-19 related spending and development needs while reducing debt vulnerabilities via multi-year fiscal consolidation; (ii) promoting external stability and strengthening export competitiveness; (iii) modernizing the monetary policy framework and safeguarding financial stability; (iv) supporting inclusive growth and improving governance.

Supporting the COVID-19 response while reducing medium-term debt vulnerabilities — Near Term
- FY21/22 execution: Strong execution in July–September 2021; primary balance remained in positive territory (vs. an expected deficit) due to buoyant trade-related taxes, enhanced tax compliance measures, and careful spending execution.
- Parliamentary pressure: Authorities resisted pressure to cut fuel taxes and committed to compensatory measures if appeal to reinstate the CMT is rejected.
- Recalibration of end-June 2022 fiscal conditionality required due to:
  - World Bank loan contracting: June 2021 World Bank loan for US$130 million (0.1 percent of GDP) finalized to accelerate COVID-19 vaccination.
  - SOE reform spending visibility: Spending needs related to SOE reform of 0.4 percent of GDP in FY21/22 incorporated in baseline; authorities identified offsets for half of SOE support (0.2 percent of GDP).
  - Targeted temporary measures: Severe drought and security deterioration prompted agreement on a targeted and temporary package of urgent measures equal to 0.2 percent of GDP.
  - Combined impact: These add a combined 0.5 percent of GDP to the FY21/22 primary deficit (after spending cuts equal to half of the SOE support) and require recalibration consistent with program flexibility.
- FY21/22 primary deficit estimates under recalibration:
  - FY21/22 primary deficit would be 3.4 percent of GDP compared to an original target of 2.9 percent of GDP (excluding vaccine and extraordinary SOE spending) or 3.3 percent of GDP (including vaccine and SOEs extraordinary support) as provisionally estimated at the 1st Reviews of the EFF/ECF arrangements.

Addressing SOE financial vulnerabilities
- In-depth financial evaluations (supported by Fund TA) identified a KSh.383 billion liquidity gap over the next five years for 18 SOEs presenting the largest financial and fiscal risks, excluding Kenya Airways.
- Expected coverage: Given limited fiscal space, the liquidity gap expected to be mainly covered by cost-saving reforms in those SOEs.
- Kenya Airways (KQ):
  - Authorities developing restructuring plans and anticipate significant medium-term financial support.
  - Much of projected US$1 billion cost for KQ’s restructuring is deemed unavoidable due to prior GOK guarantee of US$750 million and large arrears.
  - Authorities plan fundamental restructuring (downsizing operations and staff, efficiency measures, renegotiation of leases and supplier contracts), tight links between phased support and restructuring performance, and mechanisms to protect the Exchequer’s financial interests; authorities do not intend to nationalize the carrier.
- Kenya Power and Lighting (KPLC):
  - By end-year, authorities to present a plan to address KPLC financial vulnerabilities based on Presidential Taskforce findings, including review of Power Purchase Agreements and fast-tracking restructuring.
  - KPLC management replaced in November; a forensic audit of procurement practices launched.
  - In FY21/22 Exchequer will provide KSh.7.5 billion to KPLC, clearing much of outstanding arrears for last mile electrification.
  - World Bank supporting efforts via upcoming Development Policy Operation (DPO).
- Other SOE support in FY21/22:
  - Kenya Airports Authority and Kenya Wildlife Services to receive KSh.4.8 billion temporary support to cover pandemic revenue fallout.

Supplementary budget and financing
- A supplementary budget for FY21/22 will detail spending offsets in current and capital spending related to SOE support to contain the primary deficit within program targets; additional measures may be introduced if needed to achieve end-June 2022 targets.
- Supplementary budget expected to be submitted to Parliament at the latest in early 2022 (proposed new SB for end-January 2022).
- Portion of Kenya’s SDR allocation will be used to finance the larger primary deficit: half of Kenya’s SDR allocation (US$370 million SDR) will be on-lent in domestic currency by the CBK.
- World Bank loan for COVID-19 vaccination: US$130 million (0.1 percent of GDP).

### Medium-term fiscal strategy and reform priorities
- Key levers to safeguard development spending while reducing debt vulnerabilities: domestic revenue mobilization, expenditure control, higher public spending efficiency, and prudent borrowing.
- FY22/23 Budget:
  - Achieving the targeted 2.2 percentage points of GDP reduction in the primary balance requires further revenue mobilization and political commitment across government heading into elections.
  - Non-priority primary spending will need continued reduction while protecting priority social spending and accommodating offsets for extraordinary SOE support.
  - Government set expedited FY22/23 budget timelines with submission to Parliament expected by end-January (vs. legal deadline end-April) (new proposed SB for end-April).
- Revenues:
  - Medium-Term Revenue Strategy (MTRS) in progress to sequence tax policy and administrative measures to widen the tax base and achieve planned tax effort of 0.8–0.9 percent of GDP per year in FY22/23 and FY23/24, supported by Fund TA.
  - KRA stepped-up risk-based audits and annual reporting on tax expenditures launched in September.
- Expenditure control:
  - Continue containing the wage bill through rationalization of wage allowances per Salaries and Remuneration Commission recommendations and improve public investment efficiency.
- Fiscal structural reforms:
  - Progress on government effectiveness and fiscal risk management, supported by Fund TA.
  - Roll-out of a common payroll system for public employees.
  - Reports on risks from PPPs and SOEs to feed into next year’s budget along with KQ risk analysis.
- Lowering medium-term fiscal risks:
  - Implement steps to enhance SOE management and oversight, including separation of roles, Cabinet approval of an ownership policy for the SOE portfolio, expanding debt coverage to include all SOE debt liabilities, and extending financial evaluations to more SOEs.
  - Authorities considering establishment of a fiscal risk management structure coordinated across government at senior management level.
- Debt anchor and sustainability:
  - Authorities plan transition to a medium-term debt anchor of 55 percent of GDP in present value terms and pursuing a strategy to achieve it by mid-2022.
  - Public debt: Under the baseline, public debt expected to reach 71 percent of GDP in FY21/22–FY22/23 (around 62 percent of GDP in PV terms).
  - Debt dynamics: Primary deficit expected to be brought below its debt-stabilizing level by end-2023, putting the debt ratio on a downward path thereafter.
  - Supportive factors: ability to limit pandemic-induced deficit increase, commitment to fiscal consolidation under EFF/ECF (including measures to limit SOE support impact), and favorable overall debt repayment profile with plans to optimize debt structure if market conditions permit.

### Authorities’ views (policy and fiscal stance)
- Authorities reiterated commitment to a multi-year consolidation effort centered on revenue-enhancing and spending-reducing measures under the Fund-supported program.
- They noted prompt responses to initiatives that threatened tax revenues as evidence of commitment to reduce debt vulnerabilities.
- Authorities expressed concerns about the realistic yield of tax measures envisaged in FY22/23 and FY23/24.

*International Monetary Fund — Box 1. Revision and Rebasing of National Accounts (concluded) from the Kenya country report excerpt provided.*

### 21.      The authorities emphasized reducing debt vulnerabilities as a key priority to support

### 21. The authorities emphasized reducing debt vulnerabilities as a key priority to support

### Debt vulnerabilities and financing strategy
- Authorities stressed success in extending the maturity of domestic debt and the need for a financing strategy that:
  - balances domestic and external financing;
  - utilizes concessional financing where available; and
  - accesses private capital markets judiciously.
- The new, national debt ceiling in present value terms is intended to serve as a credible anchor of medium-term fiscal policies.
- Authorities seek favorable market conditions to undertake debt management operations to lower the costs of debt and refinancing risks.

### Tax revenue performance (Box 2)
- Trend and levels:
  - Tax-to-GDP ratio: reached 15.4 percent of GDP in FY2014/15; fell to about 13 percent of GDP in FY2019/20.
  - Income taxes: declined from 8.5 percent of GDP in FY2014/15 to 6.7 percent of GDP in FY2019/20.
  - Tax ratio at end-FY20/21: 12.9 percent of GDP.
- Drivers of decline:
  - growing number of discretionary personal income tax incentives;
  - widespread VAT exemptions;
  - erosion of the corporate income tax (CIT) base from tax depreciation and capital allowances; and
  - reduction in the effective tax base due to the role of the agricultural sector.
- COVID-19 effects and policy response:
  - COVID-19 shock led to further reduction to 12.9 percent of GDP as economic activity slowed and temporary tax cuts were introduced (EBS/21/29).
  - The fall would have been larger if authorities had not repealed most COVID-19 tax cuts and introduced additional base broadening tax measures as of January 1, 2021 (EBS/21/52).
- Regional and international comparisons:
  - In 2020, Kenya collected less taxes (as a share of GDP) than Burundi and Rwanda; but significantly more than Tanzania and Uganda.
  - Kenya relied more on income taxes and less on indirect taxes compared to the EAC average.
  - Indirect taxes mobilized on average about 8.8 percent of GDP in regional peers versus 6.5 percent of GDP in Kenya.
  - Kenya’s tax collection is below the average for middle income countries of around 15–20 percent of GDP.
- Authorities’ medium-term tax targets and measures:
  - Intent to achieve a tax-to-GDP ratio of 15.6 percent by FY24/25.
  - Plan to build on recent base broadening tax interventions (EBS/21/52) and introduce additional tax measures for 0.8–0.9 percent of GDP in FY22/23 and FY23/24.
  - Drawing on past IMF advice in revenue administration (EBS/21/29).
- IMF support:
  - Authorities are developing a Medium-Term Revenue Strategy (MTRS) with Fund TA (Annex VII) to broaden the tax base and sustain the medium-term tax path envisaged under the Fund-supported program.

### External stability and export competitiveness
- Near-term reserves and projections:
  - Gross international reserves: US$9.6 billion at end-September, at 4.6 months of prospective imports or 148 percent of the IMF’s assessing reserves adequacy (ARA) metric.
  - Reserves bolstered by Kenya’s US$740 million SDR general allocation.
  - Projected reduction in gross international reserves to US$8.9 billion or 4.2 months of imports by end-2022 due to large FX needs associated with support provided to KQ and the increase in debt repayment.
  - Strengthening private inflows from 2023 expected to support reserves and import coverage.
- Medium-term assessment:
  - Kenya’s external position is broadly in line with medium-term economic fundamentals and desirable policies (Annex III).
  - International reserves are comfortably above the recommended range for the Fund’s reserve adequacy metric for credit-constrained economies.
  - Importance of continued exchange rate flexibility and steadfast implementation of fiscal consolidation under the EFF/ECF arrangements to keep the external position in balance.
- Export competitiveness challenges:
  - Exports of goods and services to GDP declined from almost 20 percent in 2011 to about 11 percent in 2019.
  - Kenya attracted just 1.3 percent of GDP in FDI on average in 2010-19, compared with around 3 percent of GDP for Ethiopia and Rwanda.
  - Factors hindering export performance:
    - lack of export sector dynamism and barriers to entry in certain markets;
    - product market regulations;
    - inefficiencies of the SOE sector;
    - lack of access to finance by SMEs;
    - non-tariff barriers; and
    - corruption.
  - Within exports, the share of services has been increasing, with financial services emerging as Kenyan firms establish a growing regional presence.
- Authorities’ view on exports:
  - Authorities more optimistic than staff about export growth prospects, citing resilience of goods exports (horticulture, tea, coffee) and opportunities from free trade arrangements (AfCFTA, the UK, and US) and services sectors (digital technology, financial services, logistics, transportation).

### Public investment efficiency (Box 3)
- Trends and levels:
  - Public investment ratio: averaged slightly below 4 percent of GDP from 1990-2007; climbed to exceed 7 percent of GDP in 2016-19.
  - Public capital stock: remained relatively low and continued to lag behind regional partners and the EAC average.
- Infrastructure and access:
  - Quality of infrastructure and access to services relatively strong overall but vary across sectors.
  - In 2015, roads and electricity services stood out in coverage and access compared to peers; social infrastructure performance mixed (public health access comparatively good; education and water relatively limited).
- Efficiency gap:
  - Hybrid indicator shows an average efficiency gap of 29% for Kenya.
- Institutional improvements and reforms:
  - 2018 Public Investment Management Assessment (PIMA) recommended improvements in planning, budgeting, implementation, and strengthening National Treasury’s role in validating project viability.
  - Authorities developed a framework to strengthen oversight of the public investment cycle and an automated management information system to ensure projects follow PIM regulations and costing methodologies.
  - IMF-supported program (EBS/21/52) focused on stocktaking of existing projects and commitments, rationalizing the investment portfolio (completed at end-March 2021), and operationalizing the new PIM framework to support efficient and sustainable scaling up of the PPP program without undue fiscal risks.

### Monetary policy modernization and financial stability
- CBK modernization strategy (July):
  - diversify and refine macroeconomic modelling and forecasting frameworks and improve data collection;
  - enhance interbank market functioning via full roll-out of the Central Securities Depository (CSD), followed by steps to introduce a band around the CBK policy rate to provide an anchor for the interbank rate, and strengthen transparency of banks’ loan pricing;
  - improve public understanding of monetary policy decisions.
  - These priorities align with recommendations of Fund TA (Annex VII).
- Banking sector positioning and risks:
  - Banks’ holdings of government securities stand at a relatively high 31 percent of assets and are expected to rise further in the coming year.
  - Staff analysis suggests a substantial increase in government financing needs above anticipated levels could start to crowd out private credit growth (Annex VI).
  - Despite repeal of law limiting banks’ interest rates in 2019, lending rates have not moved much higher than the previous cap rate.
  - Banks’ credit pricing models require CBK approval; banks consider that approvals could be expedited.
- Measures to address small banks:
  - Authorities encouraging consolidation (mergers and acquisitions) to allow small banks to achieve appropriate scale.
  - Planned CSD to facilitate liquidity exchange between large and small banks by enabling financing against repo collateral.
- Financial safety nets and resolution:
  - CBK responsible for early intervention and emergency liquidity assistance; Kenya Deposit Insurance Corporation (KDIC) has a mandate for bank resolution.
  - Planned institutional arrangements to support efficient cooperation: inter-agency coordination, data sharing, early intervention arrangements, review of legal and operational framework for bank resolution, potentially including utilization of a bridge bank.
- Banks and climate-related risks:
  - In October 2021, CBK issued Guidance to banks to integrate climate-related risks into governance, strategy, risk management and disclosure frameworks — a first for SSA.
  - CBK plans to work with banks to build capacity and integrate climate-related risk management into day-to-day operations.
- Authorities’ views on monetary and financial policy:
  - Authorities consider banks effectively positioned to support credit needs during recovery.
  - Plan to continue strengthening monetary policy transmission and the banking sector to leverage emerging technologies while managing risks.
  - Anticipate integration of climate-related risk management will enable banks to seize opportunities from the transition to a low carbon-climate resilient economy while managing related risks.

### CBK regulatory guidance on climate change (Box 4)
- Context and timing:
  - Guidance issued just ahead of COP26; Kenya among the first countries to issue such guidance and the only African country to do so at that time.
  - Paris Agreement entered into force for Kenya in January 2017 and forms part of the laws of the Constitution of Kenya (Article 2(6)); the Climate Change Act, 2016 is the main legislation.
- Types of financial sector climate risks identified:
  - (i) physical risk;
  - (ii) transition risk; and
  - (iii) legal liability risk.
- Guidance scope and benchmarking:
  - Aimed at banks’ supervisory boards and senior management to integrate climate-related risks in business decisions and activities.
  - Requires consideration of climate-related financial risks in governance arrangements, risk management practices, and disclosure.
  - Benchmarked to recommendations of the FSB, the Basel Committee on Banking Supervision, the Network for Greening the Financial System, and other central banks.
- Implementation expectations and deadlines:
  - Banks are expected to submit implementation plans for assessment, monitoring, mitigation, and resource allocations related to climate risks to the CBK by mid-2022.
  - Banks are expected to complete disclosure of related reporting by mid-2023.
- Regulatory approach:
  - Guidance is not prescriptive; it does not set specific risk weights on climate-related lending exposures or apply higher run-off rates on funding exposed to climate events.
  - Holds supervisory boards and senior management responsible for assessment, possible quantification and monitoring, oversight of mitigation and control, and allocation of appropriate resources.

*IMF staff report content as provided.*

### 33.      Kenya’s economic agenda needs to promote more and higher quality jobs. Steady

### 33.      Kenya’s economic agenda needs to promote more and higher quality jobs. Steady

### Labor market, structural transformation, and digitalization
- Steady poverty reduction over the previous decade accompanied a large share of workers transitioning from agriculture to higher income jobs, but this slowed after 2016.
- Some segments of services (finance, IT, and skill intensive social services, such as education and health) continue to generate high-skilled jobs, but they only account for one-tenth of total employment and remain restricted to urban areas.
- Promoting spatial and gender equality and reducing youth unemployment would support shared prosperity and fully reap Kenya’s demographic dividend.
- Digitalization has promoted access to finance: financial inclusion rose to 83 percent by 2019 from 27 percent in 2016 on widespread adoption of mobile financial services.

### Authorities’ views on jobs, services, and digitalization
- Higher quality jobs are necessary to fully utilize Kenya’s demographic dividend and reduce youth unemployment.
- Building on Kenya’s services sector dynamism, particularly in the finance and IT sectors, is key to unlock the country’s economic potential.
- The 2019 Banking Sector Charter incorporates the adoption of more customer centered business models by banks.
- Kenya’s comparative advantage in digitalization can further benefit MSMEs by enhancing access to credit, know-how (Finance Plus) and micro-insurance.
- Promoting exports of financial, IT and professional services and green energy technologies could strengthen Kenya’s role as a services hub in the region.

### Governance, transparency, and anti-corruption measures
- Promoting good governance is an essential part of the EFF/ECF-supported program to address known shortcomings and support a dynamic and inclusive recovery.
- Authorities’ priorities include: combatting corruption through more transparent procurement practices, forensic audits and follow-up on their findings, implementing laws establishing access to information and asset declarations of public officials, improving revenue administration and tax expenditure transparency, and strengthening AML/CFT supervision in the financial sector.
- Forensic and regulatory audits:
  - By end-May 2022, the authorities will publish results of a forensic audit of COVID-19 vaccine spending up to June 2021 and a comprehensive audit of public expenditures in FY2020/21 with a chapter on COVID-19-related spending (proposed new SB, end-May 2022).
  - The Office of the Auditor-General has completed three special audits of COVID-19 spending which confirmed important problems in procurement of healthcare equipment and issues with procedural and transactional controls at different levels of government; as of early November, none of these audits have been adopted by Parliament, creating a bottleneck for follow-up.
- Public procurement and beneficial ownership (BO) information:
  - A wide range of information on tender awards is now published in the newly revamped public procurement portal.
  - BO information has not yet been published (SB for end-June, not met) due to data privacy requirements.
  - Authorities plan to amend and adopt revised standard bidding documents to obtain bidders’ consent for publication by end-March 2022 (proposed new SB for end-March 2022) to enable BO publication of newly-awarded tenders beginning in early 2022.
- Regulations of the Access to Information Act are expected to be finalized and published by December 2021 after delays; an inter-agency group is finalizing the Conflict-of-Interest Bill and provisions on public officials’ asset disclosures to expedite submission to Parliament.

### AML/CFT, financial intelligence, and supervisory strengthening
- Bolstering the use of financial intelligence and implementation of AML/CFT supervision would enhance financial integrity and support anti-corruption efforts.
- The National Risk Assessment report and AML/CFT Action Plan are expected to be published by end-2021 upon approval by Cabinet.
- The Financial Reporting Centre has continued efforts to elevate risk awareness and build capacity to identify and report potential corruption-related activities.
- Authorities intend to strengthen AML/CFT supervision in line with Kenya’s ongoing 2nd round Mutual Evaluation by ESAAMLG; the on-site mutual evaluation visit is expected in January 2022.
- Strengthening AML/CFT risk-based supervision would ensure effective implementation of preventive measures by banks to mitigate risk of proceeds of corruption being laundered in the banking system.

### Program financing, modalities, and external support
- The program is fully financed—financing assurances are in place, with firm commitments for the twelve months following the 2nd reviews of the EFF and ECF arrangements and good prospects thereafter.
- Kenya’s external financing needs would be covered by a mix of official external budget financing by the World Bank via DPO and Program-for-Results financing instruments, as well as the African Development Bank, and Japan International Cooperation Agency; planned FY21/22 Eurobond issuance (advanced to late-2021); along with access to Fund resources upon successful completion of reviews under the EFF/ECF arrangements.
- Purchases under the EFF and ECF will be on-lent to the government in local currency and used for budget support.

### Program risks and contingencies
- Significant risks to program implementation include:
  - uncontrolled COVID-19 outbreaks while the pandemic is still a global threat;
  - political tensions around the general elections or erosion of consensus behind the need for action to reduce Kenya’s debt-related risks;
  - materialization of important contingent liabilities from the SOE sector;
  - challenges of data consistency that could delay policy decisions.
- These risks are mitigated by the authorities’ commitment to adopting contingency measures as needed, close engagement with donors, and a tailored CD strategy supporting reform implementation.

### Kenya’s capacity to repay the Fund and debt metrics
- Total outstanding credit to the Fund would reach SDR 1,301.4 million, or 239.8 percent of quota, at end-2021.
- This would peak at SDR 2,198.4 million, or 405 percent of quota in 2024, equivalent to around 2.4 percent of GDP, 18.9 percent of exports of goods and services and 29.4 percent of gross international reserves.
- IMF repurchases and charges peak at 2.3 percent of exports of goods and services and 4.1 percent of reserves in 2028.
- Materialization of downside risks (uncontrolled COVID-19 outbreaks, pullback of international investors from frontier markets, socio-political tensions, delays in reform implementation) could place stress on Kenya’s capacity to repay the Fund.
- Given likely continued access to concessional financing and Kenya’s strong track record of servicing debts to the Fund and other creditors, Kenya’s ability to repay the Fund would remain adequate.

### Program conditionality, targets, and adjustors
- Staff proposes performance criteria for end-December 2021, end-June 2022, and end-December 2022 and changes in some definitions (MEFP Table 1).
- Notable proposed adjustments:
  - increasing the end-June 2022 performance criterion on the primary balance to reflect increased spending related to COVID-19 vaccines, extraordinary financial support for SOEs net of spending offsets, and emergency spending for drought and security;
  - increasing the end-December 2021 and end-June 2022 NIR targets to reflect revisions to main FX flow components, including the SDR allocation and adopting end-of-period NIR calculation for program monitoring;
  - a proposed ceiling on the present value of newly contracted or guaranteed external public debt to replace previous separate nominal ceilings on new external concessional and non-concessional borrowing.
- The program will continue to accommodate, through PC adjustors:
  - all COVID-19 vaccine-related expenditures;
  - SOE extraordinary support up to a cumulative limit of 1.0 percent of GDP in such support in FY21/22 and FY22/23 (adjustor on the primary balance limited to half this amount);
  - main components of FX inflows (TMU ¶7 and ¶9).
- The SOE adjustor is modified to become symmetric, tightening the primary balance target if SOE extraordinary support execution faces delays.
- New structural benchmarks (SBs) proposed:
  - end-January 2022 and end-April 2022 SBs on submission of a FY21/22 supplementary budget and the FY22/23 fiscal budget;
  - a new end-March 2022 SB on adoption of a new standard bidding document and publication of BO information for new tenders awarded by early next year;
  - a new SB on publication of audits relating to COVID-19 spending to enhance transparency.

### Data provision, capacity development, and institutional coordination
- Data provision is adequate for surveillance and program review, but further bolstering institutional capacity would enhance policy design and the accuracy and timeliness of data.
- Staff encouraged authorities to implement Fund technical assistance advice and strengthen cooperation between Kenya’s statistics-producing agencies, particularly on fiscal and external sector statistics.

### Staff appraisal and macro-fiscal outlook
- Kenya’s economy rebounded after showing impressive resilience during the pandemic; the authorities’ prompt policy response limited economic fallout and prepared the ground for recovery.
- With increased vaccine availability, the COVID-19 vaccination program is progressing.
- The medium-term outlook is positive, but challenges remain in securing an inclusive recovery as the pandemic reversed some previous gains in poverty reduction.
- Program performance was robust: all end-June PCs and ITs were met; fiscal performance was strong, with the primary deficit target met by a wide margin, and social spending modestly overperformed.
- Revenue and fiscal consolidation:
  - Tax policy measures implemented are contributing to solid recovery of tax revenue.
  - The medium-term revenue strategy should help identify well-sequenced measures to deliver the anticipated 0.8–0.9 percent of GDP in tax revenue annually in FY22/23 and FY23/24.
  - The CMT remains an important part of plans; authorities committed to compensatory measures should their appeal to reinstate the CMT be rejected.
- FY21/22 primary deficit:
  - Recalibrated to reflect COVID-19 vaccine spending and extraordinary support for SOEs.
  - The proposed FY21/22 primary deficit would be 3.4 percent of GDP, compared to the 2.9 percent target at the time of the 1st reviews.
- SOE reform and fiscal risks:
  - Authorities are advancing the SOE agenda and ensuring support for troubled SOEs does not undermine debt sustainability.
  - Least-cost strategies for KQ and KPLC are crucial; restructuring KQ will require safeguards to minimize Exchequer cost and protect Exchequer financial interests.
- Fiscal transparency and governance:
  - Further strengthening fiscal transparency and governance remains a priority.
  - Publication of BO information on the public procurement website should commence by early 2022.
  - Planned audits of the COVID-19 vaccination program and COVID-19-related spending will support fiscal transparency; prompt action is needed on earlier audits to bolster confidence.
- External position and monetary policy:
  - Kenya’s public debt is sustainable, and Kenya remains at high risk of debt distress.
  - FX reserves are anticipated to decline from the inter-year peak in 2021 through end-2022 as the current account normalizes and external repayments increase.
  - Kenya’s SDR allocation, half of which is expected to be saved, provides a buffer against potential shocks.
  - Monetary policy remains appropriately accommodative; Core inflation remains moderate.
  - The CBK should maintain its stance while inflation and inflation expectations remain well-anchored within the target band and use FX interventions only to minimize excessive volatility.
- Banking sector:
  - The banking sector overall has been resilient during the pandemic.
  - Kenya’s banking sector appears well positioned to meet public and private financing needs, while private sector credit growth remains moderate.
  - Swift approvals for credit models would help avoid perceptions of unnecessary constraints on lending; the planned Central Securities Depository (CSD) will help facilitate liquidity for small banks.

*Source: 1kenea2021004 - 33.      Kenya’s economic agenda needs to promote more and higher quality jobs. Steady*

### 53.      Global and domestic risks are increasing. The multi-speed global recovery and tightening

### 53.      Global and domestic risks are increasing.

### Major findings
- The multi-speed global recovery and tightening global financing conditions carry the potential to unsettle market financing prospects for frontier borrowers like Kenya.
- Continued strong policy implementation will be important for smooth access to concessional external financing sources, including under the EFF/ECF arrangements.
- Given the electoral calendar, bold political commitment by all levels of government will be necessary to ensure that the FY22/23 budget is in line with program objectives.

*IMF staff summary excerpt.*

### 54.      Staff supports the authorities’ requests for completion of the second reviews and

### 1kenea2021004 - 54.      Staff supports the authorities’ requests for completion of the second reviews and

### Program support and reviews
- Staff supports the authorities’ requests for completion of the second reviews and modification of PCs, IT, and SBs under the ECF/EFF arrangements, given the overall robust performance under the arrangements and the authorities’ commitment to meeting program objectives.
- Staff recommends that the next Article IV consultation be held within 24 months in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.
- Note: The second EFF-ECF reviews will take place on December 17, 2021. 1/

### Real sector developments and activity
- As the fourth COVID-19 wave abated, stringency of containment measures returned to early 2021 levels (Oxford Stringency Index series shown).
- Residential mobility recovered (Residential Google Mobility Trend, 7-day moving averages).
- The recovery continued in the first half of the year: electricity generation, cement, and visitor arrivals (3MMA, y/y) indicate improvement.
- PMI and PMI employment sub-index indicate a continuing pickup in activity.
- In 2021 GDP growth will be driven by strong base effects, and a turnaround in services sector growth.

### Poverty and policy response
- The policy responses only marginally offset the increase in poverty caused by COVID-19 (figures show pre-Covid-19, after Covid-19, and after Covid-19 + response for All/Rural/Urban).

### Fiscal sector developments
- Tax revenue had been on a declining trend even prior to COVID (Tax revenue series as percent of GDP shown).
- Decline driven by personal and corporate income taxes (PIT, CIT series).
- Capital expenditure was maintained in FY20/21, albeit at lower levels than in earlier years; current expenditure increased slightly in FY20/21 due to larger transfers and interest payments.
- The increase in the deficit due to the COVID-19 shock has been contained, but public debt continued to rise (Fiscal deficit and Public debt series as percent of GDP shown).

### Financing and debt management
- A successful Eurobond issue in June marked Kenya's return to global capital markets since the COVID-19 pandemic began.
- Stock of domestic debt increased; domestic market 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 amid heightened uncertainty.
- EMBIG spreads and domestic yields series shown; average time to maturity of domestic debt increased (years).

### External sector developments
- The current account deficit narrowed in 2020 as smaller trade and primary income deficits offset the COVID-19 shock on services receipts (Current Account percent of GDP series).
- Exports were resilient in 2020 supported by bumper tea and horticulture harvests (volume of main export products: Coffee, Tea, Horticulture — 3MMA, annual percent change).
- In 2021, imports recovered strongly with the pick up in economic activity (Contributions to Imports Growth series).
- Remittances increased by 9 percent in 2020, and grew by 20 percent through June 2021, driven by transfers from North America (Remittances, USD mn).
- The COVID shock led to a reduction in FDI and a reversal in net portfolio inflows, limiting sources of BOP financing (Balance on Financial Account percent of GDP).
- FX reserves remain adequate (Gross International Reserves in USD mn and months of imports).

### Monetary and exchange rate developments
- Headline inflation picked up on the back of surging food and energy prices (Inflation: Headline, Core, Food, Energy — percent y-o-y series).
- Domestic markets have remained liquid amidst large official and private FX inflows (Interest rates and liquidity series).
- The CBK withdrew liquidity from the market and kept excess reserves stable (Excess Reserves and Net Liquidity Injections series).
- Private sector credit growth was halted by the COVID-19 shock (Private Sector Credit y/y and Lending Rate series).
- During the pandemic, the exchange rate acted as a shock absorber, reversing the previous trend of real effective exchange rate appreciation (Kenyan Shilling per USD and REER index; Target band 2.5%-7.5% shown).

### Financial sector structure and soundness
- Financial sector structure, capital adequacy, and NPLs series are presented (2021 Q1 capital adequacy, risk-weighted assets in KSH; NPLs levels and ratios, Central Bank of Kenya as source).

### External financing, balance of payments, and reserves (selected figures)
- Table 4 (BPM6): Current account and components, merchandise trade, services, primary income, secondary income, remittances, capital and financial account, and Gross international reserves (USD mn) presented for 2020–26.
- Gross international reserves (Table 4 memo): 8,284 (2020), 10,788 (2021), 8,974 (2022), 9,787 (2023), 10,674 (2024), 11,576 (2025), 12,518 (2026) — in USD million (series shown in Table 4 and Tables 7–8).
- Table 8: Gross financing requirements and sources, including IMF repurchases and program financing; memorandum items include reserves in months of GNFS imports (4.7, 5.6, 4.2, 4.2, 4.2, 4.2, 4.2 across projection years).

### IMF arrangements, approvals, and schedule (selected items)
- April 2, 2021: Approval of the 38-month EFF and ECF arrangements (Table 6).
- June 20, 2021: Completion of the first EFF-ECF reviews and observance of continuous and end-March 2021 performance criteria (Table 6).
- November 7, 2021: Completion of the second EFF-ECF reviews and observance of continuous and end-June 2021 performance criteria (Table 6). 1/
- Schedule of prospective reviews and available purchases and loans for 2021–24 provided (Table 6).

### Key projections and fiscal metrics (selected series)
- Fiscal-year-based headline series shown in Table 1a: total revenue, tax revenues, expenditure, current and capital expenditure, primary and overall balance, net domestic borrowing, and public gross and net nominal debt — presented as percent of GDP and levels for 2019/20–2025/26 (series in Table 1a).
- Calendar-year-based projections in Table 1b for 2020–26: Real GDP, CPI, broad money, credit to non-government sector, fiscal balances, public debt, investment and saving, current account balance, and gross international reserves (series in Table 1b).

### Policy implications and priorities (drawn from data and staff recommendations)
- Continue program implementation under the ECF/EFF arrangements given robust performance and authorities’ commitment to program objectives.
- Proceed with planned reviews and modifications of performance criteria, instruments, and safeguards as requested by the authorities.
- Maintain vigilance on inflationary pressures driven by food and energy prices and calibrate monetary policy and liquidity operations accordingly.
- Strengthen revenue mobilization to address declining tax revenue trends (personal and corporate income taxes) and to contain fiscal deficits while protecting priority spending.
- Manage external financing needs by combining market access (Eurobond issuance when feasible) and official financing to preserve adequate reserves and debt sustainability.
- Monitor banking sector asset quality and capital adequacy amid rising domestic debt exposure by banks.

*Source: IMF staff estimates and Kenyan authorities (content as provided in the supplied document).*

1/ The second EFF-ECF reviews will take place on December 17, 2021.

### Annex I. Key Recommendations of the 2018 Article IV Consultation

### Annex I. Key Recommendations of the 2018 Article IV Consultation

### Fiscal Policy — Key Recommendations and Implementation Status
- Recommendation: Implement additional revenue measures (including reform of the remaining exemptions in the corporate income tax and value added tax) to complement those in the supplemental budget for FY2017/18 and the draft budget for FY2018/19; expenditure cuts are necessary to achieve the deficit target of 5.7 percent of GDP.
  - Status of implementation:
    - "Absent significant tax policy measures, revenues fell short of budget targets for successive years and deficits remained above 7 percent of GDP."
    - "Revenue-enhancing measures to broaden the tax base were enacted in April and June 2020 with an estimated yield of 1.2 percent of GDP."
    - "Tax cuts implemented at the onset of the pandemic were reversed at the start of 2021."
    - "A recently-initiated-annual-tax expenditure report should help to further identify new areas of resource mobilization."
    - "A Medium-Term Revenue Strategy (MTRS) is being developed, supported by FAD technical assistance."
- Recommendation: Provide a medium-term focus to budgeting, including the setting of expenditure ceilings that are consistent with medium term fiscal targets and realistic revenue projections.
  - Status of implementation:
    - "A more conservative approach to revenue projection was adopted starting with FY19/20."
    - "Alongside the pick-up in economic activity and the effect of new tax measures, this contributed to FY20/21 program targets for revenue and the primary deficit being met."
    - "The authorities have improved medium-term budgeting, supported by IMF technical assistance. However, more is needed to improve coordination among all units involved in budget preparation."
- PFM recommendations: Further clarify Kenya’s fiscal rules; reduce pressures on transfers to counties; prevent the accumulation of arrears; improve the efficiency of public investment and expenditure control; closely monitor the implementation of PPPs and new spending programs under the Big Four.
  - Status of implementation:
    - "Introduction of a debt anchor is underway."
    - "Steps to improve public financial management have included: stocktaking of existing public investment projects with identification of projects to be rationalized and regular quarterly reporting on pending bills."
    - "Reports have been published quantifying risks from contingent liabilities from high-risk SOEs and PPPs; and work is ongoing to incorporate an expanded fiscal risk report as part of the annual budget process."
    - "Work is under way to enhance IFMIS to enable contract generation and management for multi-year project commitments."

### Monetary and Exchange Rate Policy — Key Recommendations and Implementation Status
- Recommendation: Eliminate or modify interest rate controls, including by delinking the lending cap from the CBR, significantly increasing the lending rate cap, and abolishing the floor on time deposit rates.
  - Status of implementation:
    - "In November 2019 the interest rate caps on commercial loans were repealed."
- Recommendation: Revitalize efforts to modernize the inflation-targeting framework, including establishing an interest rate corridor around the CBR; taking additional steps to smooth volatility in the interbank market; and allowing greater shilling flexibility in response to external shocks.
  - Status of implementation:
    - "On July 27, 2021 the CBK published its strategy to strengthen and modernize the monetary policy framework (white paper), much in line with the 2018 Article IV recommendations."
    - "Maintaining a flexible exchange rate regime, with market interventions only in response to excess exchange rate volatility is a key monetary policy objective of the CBK."
    - "The REER depreciated by 7 percent in 2020 as the CBK appropriately allowed the Shilling to act as a shock absorber during the COVID pandemic."

### Financial Sector Policies — Key Recommendations and Implementation Status
- Recommendation: Maintain efforts to strengthen the banking supervision framework and take action to ensure that all banks are compliant with prudential capital and liquidity ratios.
  - Status of implementation:
    - "The CBK is on course to pilot the centralized Electronic Data Warehouse (EDW) that enables real-time access to supervisory data for regulators."
    - "The Kenyan banking sector’s capital position remains robust as regulatory ratios stood well above statutory requirements."
    - "The CBK has since 2016 adopted the Internal Capital Adequacy Assessment Program (ICAAP) in ensuring that banks hold adequate capital aligned to their risk profile and market niche."
    - "Results of a forward-looking stress test exercise carried out by the CBK were published in their Kenya Financial Sector Stability Report, September 2021."
    - "CBK engaged all banks to develop a Credit Risk-Based Pricing Model, a key pillar of the Banking Sector Charter. Individual bank models require approval; this process is continuing."
    - "The authorities are committed to strengthening the legal and regulatory framework to safeguard financial stability. This include the amendment of the CBK Act to allow CBK to regulate and supervise the unregulated digital lenders and the amendment of microfinance act that was submitted to Cabinet in March 2021 for approval and submission to the National Assembly."

### Structural Policies — Key Recommendations and Implementation Status
- Recommendation: Improve governance by strengthening PFM.
  - Status of implementation:
    - "Advances in the authorities’ governance agenda include: publication of comprehensive audits of the use of COVID-19 funds in FY2019/20; launching of a public procurement portal."
    - "Implementation laws establishing access to information and asset declarations of public officials is ongoing, together with efforts to strengthen the AML/CFT regulatory framework."

### Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Responses
- Potential External Shocks
  - Uncontrolled Covid-19 local outbreaks and limited access to vaccines
    - Likelihood / Time Horizon: High / Short to Medium Term
    - Expected Impact: High — could adversely impact growth, spur capital outflows, pressure the exchange rate, worsen fiscal balances, and increase debt vulnerabilities.
    - 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."
  - De-anchoring of inflation expectations in the U.S. leading to rising core yields and risk premia
    - Likelihood / Time Horizon: Medium / Short to Medium Term
    - Expected Impact: High — could trigger capital outflows, hamper capital market access, depreciate the exchange rate, worsen fiscal balances, and increase debt vulnerabilities.
    - Policy Response:
      - "Compress expenditure to contain the negative fiscal-debt impact;"
      - "Maintain exchange rate flexibility."
  - Rising commodity prices amid bouts of volatility
    - Likelihood / Time Horizon: Medium / Short to Medium Term
    - Expected Impact: Medium — higher commodity prices could increase external and domestic imbalances and weigh on economic growth.
    - Policy Response:
      - "Compress expenditure to contain fiscal pressures;"
      - "If the shock is persistent and threatens second-round effects, tighten monetary policy to ensure inflation expectations remain well-anchored;"
      - "Maintain exchange rate flexibility."
  - Cyber-attacks
    - Likelihood / Time Horizon: Medium / Short to Medium Term
    - Expected Impact: Medium — can trigger financial instability or 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 / Short to Medium Term
    - Expected Impact: High — would affect vulnerable households, lead to social tensions, slower growth, increase food inflation, and pressure public spending and the current account.
    - Policy Response:
      - "Use targeted programs to help vulnerable groups and reprioritize spending;"
      - "Guard against second-round effects on inflation."
- Potential Domestic Shocks
  - Resumption of adverse weather conditions or locust invasion
    - Likelihood / Time Horizon: Low / Short Term to Medium Term
    - Expected Impact: High / Low depending on geography — could lower agricultural production, slow growth, increase food inflation, and pressure public spending and the current account.
    - Policy Response:
      - "Use targeted programs to help vulnerable groups and reprioritize spending;"
      - "If necessary, guard against second-round effects on inflation."
  - Political risks (including around the 2022 presidential election)
    - Likelihood / Time Horizon: Medium / Short to Medium Term
    - Expected Impact: High — potential for political violence and associated economic disruption.
    - Policy Response:
      - "Remain committed to reforms under the program."
  - Emergence of greater-than-expected weaknesses in the SOE sector
    - Likelihood / Time Horizon: High / Short to Medium Term
    - Expected Impact: Medium — would create additional fiscal pressures and difficult tradeoffs with other priorities, possibly crowding out the private sector.
    - Policy Response:
      - "Continued financial evaluation of health of top SOEs;"
      - "Implement least-cost strategies to address SOE financial pressures."
  - Deterioration in security situation
    - Likelihood / Time Horizon: Medium / Short to Medium Term
    - Expected Impact: High — would adversely affect tourism, FDI, and portfolio inflows, and hence 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: Medium / Short to Medium Term
    - Expected Impact: Medium — would lead to higher budget deficits, increased debt ratios, crowding out of private investment, and weaker growth.
    - Policy Response:
      - "Remain committed to fiscal targets and reforms under the program."

### External Sector Assessment — Key Findings and Projections
- Overall assessment:
  - "Kenya’s overall external position in 2020 is assessed to be broadly in line with the level implied by medium-term fundamentals and desirable policies."
  - "International reserves are comfortably above the recommended range for the Fund’s reserve adequacy metric for credit-constrained economies."
  - "The programmed fiscal consolidation would help strengthen Kenya’s external sector position and support private sector growth, with exchange rate flexibility allowing the economy to absorb external shocks."
  - "Further attention to improving Kenya’s competitiveness would help boost the world market share of Kenya’s exports and further support its external position."
- Current Account (CA) — recent outcome and drivers:
  - "Kenya’s current account deficit amounted to 4.5 percent of GDP in 2020—one percentage point lower than in 2019 and below its 2015–19 average (5.9 percent of GDP)."
  - Factors supporting the CA in 2020:
    - "Persistent decline in the ratio of non-energy imports to GDP" following completion of major infrastructure projects in 2017-18.
    - "Weak demand for imports and lower imported energy bill, combined with the resilience of exports, buoyant remittances and a drop in FDI-related outflows" helped offset the COVID-19 shock on tourism.
    - "Remittances reached 3 percent of GDP in 2020—0.2 percentage points higher than in 2019—and have grown further by 20 percent in the first half of 2021 relative to 2020:H1."
- Current Account — projections and risks:
  - "The CA deficit is projected to increase to 5.2 percent of GDP in 2021 and stabilize around 5 percent of GDP over the medium term."
  - Drivers of the 2021 widening:
    - "Kenya’s recovery from the COVID-19 shock and higher oil prices" supporting exports but also boosting imports.
    - "Capital goods imports are expected to gradually increase reflecting improvements in both investor sentiment and the business climate."
    - "Oil imports are expected to remain around 2.8 percent of GDP, in line with the post-2015 energy intensity of the economy."
    - "Export growth will be supported by Kenya’s improving business environment, key infrastructure projects coming to completion, and large potential in the agricultural sector."
    - "Services are projected to gradually increase over the medium term, as the tourism sector returns to normal after the COVID-19 shock."
    - "Remittances are also projected to remain an important financing item."
  - Downside risks to the CA projections: "weather conditions and commodity prices—which could affect food and oil imports."
- External balance assessment (EBA-lite results for 2020):
  - CA-Actual: -4.5 (percent of GDP)
  - Adjusted CA (cyclically adjusted, including multilateral consistency adjustments): -4.1
  - CA Norm (from model): -3.6
  - CA Gap: -0.5 (percent of GDP)
    - "o/w Relative policy gap 1.4"
  - Elasticity: -0.11
  - REER Gap (in percent): 4.3 / 12.3 (two model outputs)
  - Notes:
    - "The reported ratios to GDP reflect the revision by the Kenya National Bureau of Statistics of the historical GDP series in September 2021, which resulted in an increase in the level of nominal GDP (e.g., by 5.3 percent in 2019)."
    - "The contribution of policy gaps to the current account gap is 1.4 percent of GDP, with the fiscal deficit being the main contributor (1 percent of GDP)."
- Real Exchange Rate (REER) — recent path and assessment:
  - "Kenya’s real effective exchange rate (REER) has been on an appreciating trend in recent years."
  - "With the onset of the pandemic in 2020, the exchange rate acted as a shock absorber, reversing the trend of REER appreciation and helping bring the end-2020 REER to its 5-year moving average and keep the annual average REER unchanged relative to 2019."
  - "The REER depreciated further in 2021:Q1, before strengthening in the second quarter of the year, on modest nominal exchange rate moves in the context of program financing by the IMF and the World Bank, and the successful US$1 billion Eurobond issuance."
  - EBA-lite REER model result: "a gap of 12.3 percent for 2020."
  - Staff assessment range for the REER gap: "in the range of 4 percent and 12 percent."

*Annex I. Key Recommendations of the 2018 Article IV Consultation — Source PDF: 1kenea2021004*

### 6.      In 2020, Kenya’s current account deficit was largely financed by debt financing. Other

### 1kenea2021004 - 6.      In 2020, Kenya’s current account deficit was largely financed by debt financing. Other

### External financing, current account, and reserves
- 2020: Other net investment flows amounted to 3.6 percent of GDP, reflecting government borrowing, including IMF emergency support, as well as private sector borrowing, especially by non-bank corporations.
- FDI net inflows reached only 0.5 point of GDP, reflecting the impact of the COVID-19 shock on retained earnings.
- Volatility in global financial markets in 2020 reduced portfolio inflows and the government’s appetite for external commercial borrowing.
- June 2021: Kenya placed a US$1 billion Eurobond; yield fell below the initial guidance to 6.3 percent amid strong demand.
- End-2020: Reserves stood at US$8.3 billion (compared to US$9.1 billion at end-2019).
- Reserve coverage at end-2020:
  - 8.3 percent of GDP
  - about 4.7 months of next year’s imports
  - about 150 percent of the IMF’s reserve adequacy metric for credit-constrained economies
- Reserve adequacy metric note: the model suggests that the optimal level of reserves for Kenya is 3.1 months of imports.
- End-September 2021: Gross international reserves had increased to US$9.4 billion, bolstered by:
  - Eurobond issuance of US$1 billion
  - US$750 million in budget support from the World Bank
  - two disbursements totaling US$715 million under the extended arrangements under the EFF and ECF

### Exchange rate policy and competitiveness
- The CBK engages in periodic FX interventions to smooth volatility; the exchange rate acted as a shock-absorber during the pandemic.
- Given the CBK’s credibility, well-anchored inflation expectations, and adequate reserve coverage, there is scope for greater exchange rate flexibility to absorb external shocks.
- Export performance and competitiveness:
  - Exports of goods and services averaged 13 percent of GDP in 2001−13; the ratio of total exports to GDP fell to 6 percent in 2020.
  - Kenya’s major trading (export) partners (accounting for about 75 percent of Kenya’s exports) include: The United States, China, South Africa, United Kingdom, Japan, India, Germany, France, the United Arab Emirates, Uganda, Netherlands, Italy, Belgium, and Tanzania.
  - Evidence suggests Kenya has lost competitiveness despite reforms and broadly favorable competitiveness ranks relative to Sub-Saharan Africa.
  - Export product composition concentrated in products characterized by low technological intensity, low value-added, and low market growth has contributed to lack of export dynamism.
- Policy implications:
  - Strengthen competitiveness including the business environment as part of the authorities’ reform program under the EFF and ECF.
  - Increase efficiency in the use of public resources in connection with addressing financial risks from SOEs to enhance competitiveness.

### Authorities’ views
- Authorities broadly concurred with the bottom-line assessment that Kenya’s external position is broadly in line with fundamentals and desirable policies, while noting wide confidence intervals around model results amid the pandemic.
- Authorities emphasized:
  - Heightened uncertainty about economic scarring from COVID-19 worldwide, which can weaken the link between price and external position adjustments.
  - Kenya’s tourism sector has historically rebounded quickly from shocks.
  - Favorable prospects for Kenya’s financial services firms to expand in Sub-Saharan Africa.
  - The role of technology and innovation in supporting more dynamic growth of services exports given Kenya’s role as a technology leader in the region.

### Fiscal risks management (Annex IV)
- COVID-19 contributed to materialization of fiscal risks via a severe fall in tax revenue, mounting spending pressures, and contingent liabilities from SOEs.
- April 2020: Base-broadening measures introduced to limit collapse of tax revenue and improve tax efficiency (e.g., reduction of VAT tax expenditures).
- With IMF TA, Kenya has taken steps to evaluate, monitor, and manage fiscal risks arising from SOEs (EBS/21/52).
- A holistic approach to fiscal risks management is urged to secure macroeconomic stability and fiscal sustainability, including:
  - Thorough understanding of risks and potential budgetary implications.
  - Identifying appropriate mitigating measures.
  - Transparent communication around fiscal risks to establish credibility and improve accountability.
- Cross-country comparison:
  - Kenya’s fiscal risks disclosure compares favorably with other SSA countries but falls short of Georgia (coverage of reporting covers 90 percent of SOEs and quasi-fiscal operations) and advanced countries like the Netherlands, New Zealand, and Australia (reporting includes scenario analysis and stress testing).
- EFF/ECF support:
  - Authorities prepared fiscal risks reports covering macro-fiscal risks as well as risks from SOEs and PPPs; these reports will feed into the annual budget process (MEFP ¶17).
  - Authorities consider establishing a fiscal risk management structure coordinated across government institutions.

- Graphic 1: Four stages of fiscal risks management summarized:
  - (i) Identify sources of fiscal risks and assess size and likelihood (assess maximum possible loss and most likely impact; classify where probabilities are difficult).
  - (ii) Assess mitigating measures, including direct controls, regulation/charges/incentives, risk sharing, and risk transfer.
  - (iii) Determine whether to budget for unmitigated risks using appropriations for costs, contingency appropriations, and buffer funds.
  - (iv) Determine whether additional fiscal headroom is needed and take informed decisions on safety margins relative to the debt ceiling.

### Digitalization and pandemic response (Annex V)
- Mobile and internet access:
  - Broadband internet subscriptions reached 53 percent of the population in 2020 (almost all wireless).
  - Kenya ranks in the top five countries in Sub-Saharan Africa on a broad measure of mobile connectivity in terms of both level (in 2019) and increase (from 2014 to 2019).
- Digital responses to COVID-19:
  - Mobile technology used for contact tracing, reporting, and COVID-19 test result verification via QR code under the Trusted Travel platform.
  - Mobile technologies used to scale up social protection programs with cash transfers distributed via mobile wallets.
  - Since M-Pesa introduction in 2007, number of mobile money accounts grew to be larger than the total population.
- Transaction values and initiatives:
  - Value of mobile money transactions almost doubled to close to KSh.600 billion (about US$5.5 billion) a month after lowering fees and relaxing regulations governing mobile money.
  - Fast-tracking of the Ajira Digital Project aiming to foster one million online jobs.
  - Ministry of Education supported digital learning through several platforms.
  - National Police Service implementing a digital reporting system.
  - Special Economic Zones Authority launched an online one-stop shop portal for investors.
  - Lands Ministry launched a digital land information management system (Ardhisasa) for processing land transactions.
- Regulatory strengthening:
  - Computer Misuse and Cybercrimes Act (2018) and Data Protection Act (2019); a Data Protection Commissioner appointed in late 2020.
  - Mobile payment service providers required to adhere to AML/CFT frameworks.
  - Draft legislation under consideration to empower the central bank to supervise digital lenders.
- Impact on sectors and GDP:
  - Total real GDP growth fell from 5 percent in 2019 to -0.3 percent in 2020.
  - Telecommunications registered growth increase from 9.1 percent in 2019 to 10.5 percent in 2020.
  - Finance and insurance grew at 5.6 percent in 2020.
  - Education services output declined by 10.8 percent in 2020 due to school closures (April-December 2020 and April 2021); limited access to online learning constrained by smartphone affordability.
  - GSMA survey (2019): 48 percent of Kenyan adults cited affordability as the top barrier to mobile phone usage.

### Banking system lending capacity (Annex VI)
- Banking system structure:
  - 39 commercial banks: 20 private commercial banks (67 percent of system assets); 17 foreign banks (32 percent); 2 small state-owned institutions (1 percent).
  - Of the 17 foreign banks, 14 operate as subsidiaries, 3 as branches.
  - By size: 9 large banks (70 percent of banking system assets); 9 mid-sized banks (21 percent); 21 small banks (9 percent of assets).
- Asset composition and exposures:
  - Holdings of government securities are 30 percent of assets.
  - Loans to the private sector are 49 percent of assets.
  - Among bank loans: 28 percent consumer purchases, 14 percent real estate, 58 percent loans to various sectors including trade, transport, manufacturing, and agriculture.
  - Foreign currency loans are about one-quarter of all loans.
- Sector growth:
  - The sector’s asset base grew by 12.4 percent in 2020, paced slightly higher than in 2019, driven mainly by investment in government securities and private sector loans.
- Lending capacity conclusion:
  - A simple projection model finds that banks would be able to meet government borrowing needs in the baseline without crowding out private credit growth; results could differ with significant deviations from government borrowing projected in the program.

*Source: 1kenea2021004 - 6. In 2020, Kenya’s current account deficit was largely financed by debt financing. Other (IMF).*

### 3.      Customer deposits are banks’ main

### 3.      Customer deposits are banks’ main

### Funding structure and recent deposit dynamics
- Customer deposits accounted for 75 percent of funding at end-2020.
- During the COVID-19 pandemic, customer deposits grew at annual pace of 13.7 percent in 2020, exceeding 11 percent growth in 2019.
- Drivers cited for deposit growth in 2020: higher government spending, remittances, lower customer spending in lockdowns, and deposit mobilization via digital and mobile banking.

### Capital and liquidity position entering and during the pandemic
- Banks’ aggregate capital adequacy ratio (CAR) stood at 18.9 percent at end-June 2020, almost unchanged from the pre-pandemic level, and above the 14.5 percent regulatory threshold.
- Six banks, with assets of 4.1 percent of the total system, breached the CAR minimum requirement during 2020.
- Some small banks were undercapitalized relative to the minimum requirement.
- During 2020, liquidity of the overall banking system remained well above the minimum required liquidity ratio, although some small banks continued to rely on central bank liquidity support.

### Authorities’ policy measures and effects on banks
- Asset-side measures:
  - The CBK encouraged banks to offer borrowers who were current at the onset of the pandemic the chance to restructure their loans and provided some flexibility in banks’ classifications of these restructured loans.
  - About half of all banks’ loans were restructured; 93 percent of those had resumed timely repayment of principal and interest by end-August 2021.
  - The overall NPL ratio rose by only about 2 ppt since the start of the pandemic to 13.9 percent at end-August 2021, although NPL ratios were somewhat higher at mid-sized and small banks.
  - NPLs were highest on loans for trade and manufacturing followed by those to households for consumer and mortgage loans.
- Liquidity and earnings support:
  - Banks’ liquidity in aggregate was supported by significant holdings of government securities and the CBK’s actions in lowering the banks’ reserve requirement by 100 bps and extending the maturity of repo financing from 28 to 91 days.
  - The CBK lowered the policy rate by 125 bps and required approval for any dividend payouts.
  - Banks’ after-tax profit declined by 28 percent to KSh.304 billion in 2020, largely on account of provisioning against potential credit losses, but had since recovered during 2021, benefiting from some release of provisions, recoveries, and stable margins on credit growth.
- Note: The program for restructuring banks’ loans during the pandemic expired in March 2021.

### Methodology for assessment of private sector credit capacity
- Model projects major funding sources of commercial banks: deposits, borrowed funds, placements, other liabilities, equity and retained earnings using the macroframework, historical information and judgment.
- Accounting identity used (variables preserved as in source):
  - Total assets for the next period (A_{t+1}) is equal to the sum of total deposit liabilities (D_{t+1}), borrowed funds for next year (BF_{t+1}), placement accounts PPPP_{t+1}, other liabilities OOOO_{t+1}, equity capital (E_t) and retained earnings for the next period (π_{t+1}).
  - Change in asset size: ΔP_{t+1} = P_{t+1} − P_t
- Marginal capacity to provide financing estimated by change in projected asset size; allocations: cash reserves and investment in government securities first, residual to private credit.
- Key assumptions:
  - Customer deposit growth D_{t+1} is linked to nominal GDP growth (noted as conservative given deposit growth of 13 percent during 2020 outpaced nominal GDP growth of 4.8 percent).
  - Borrowed funds, placements, other liabilities (BBBB_{t+1}, PPPP_{t+1}, OOOO_{t+1}) projected using a simple average of recent history and judgment.
  - No banks exit the system and equity capital (E_t) remains constant.
  - Profit growth linked to GDP growth and retained profits determined by historical average retention ratio.

### Baseline assessment and projections
- The resulting change in the asset base of the banking sector (ΔA_{t+1}) is estimated to average 10.6 percent per year from 2021 to 2023 based on historical trends.
- Banks’ cash reserves are equal to the minimum required reserve ratio set by the CBK, assumed unchanged through 2023.
- Banks’ holdings of government securities follow the borrowing requirement in the program macroframework, which anticipates needs during 2021–23 of 5.3 percent of GDP, 4.7 percent, and 3.3 percent respectively.
  - This is estimated to result in an average increase in banks’ holdings of government securities by 21.5 percent in 2021 and 17.6 percent and 11.7 percent in 2022 and 2023, respectively.
  - Non-bank holdings of government securities are held constant at a historical level of 45 percent of net domestic financing during the projection period.
- Baseline private sector credit expansion:
  - Banks are projected to expand lending to the private sector at an average rate of 10.2 percent a year for the next three years.
  - Annual lending growth: 8.4 percent in 2021, 9.1 percent in 2022 and 12.6 percent in 2023.

### Alternative scenario: increased government financing needs
- Illustrative alternative: increase in government’s net domestic financing needs by 3 ppt, scaled to the last quarter of 2021 and applied fully in 2022 and 2023.
- Resulting change in banks’ holdings of government securities: increase by 26 percent, 28 percent, and 20 percent, respectively.
- Effect on private sector credit: private sector credit growth falls by an average of 5 ppt versus the baseline.
- Implication: while banking sector can accommodate some fiscal flexibility, a large deviation of government spending beyond the program level could significantly hamper recovery in private sector credit.

### Other scenarios and drivers of credit growth
- Upside support:
  - Continued rollout of vaccines and improved business conditions due to easing of COVID-19 containment-related restrictions could support credit growth.
  - For qualifying borrowers, continued rollout of the Credit Guarantee Scheme (CGS) introduced in December 2020 could mitigate credit risk and support greater credit expansion to MSMEs.
- Downside risk:
  - Additional waves of COVID-19 could cause economic activity to fall, further weaken asset quality, and tighten underwriting credit standards by banks.

### Policy implications and recommendations
- Financial sector capacity:
  - The exercise indicates the financial sector in Kenya is adequately positioned to accommodate flexibility in fiscal policy under the program without denying the private sector resources needed to support economic recovery.
  - A substantially large increase in the net domestic financing (NDF) needs of the government beyond the program level could significantly hamper the recovery in private sector credit growth unless matched by a commensurate increase in banks’ funding sources or additional increase in non-bank holdings of government securities.
- Bank-level measures:
  - Banks should continue to strengthen profitability by adapting business models, expanding lending opportunities, continuing to develop digitalization and mobile banking, promoting non-interest business activity, and improving cost-efficiency.
- Regulatory and supervisory measures:
  - Authorities should continue to take steps, as noted in the 2021 CBK Financial Stability Report, to strengthen the capital, liquidity and profitability of small banks by encouraging consolidation to achieve scale.

*Source: 1kenea2021004 - 3.      Customer deposits are banks’ main (IMF PDF).*

### 11.      Kenya is a high-intensity TA country. TA focuses on tax policy and revenue administration,

### 11.      Kenya is a high-intensity TA country. TA focuses on tax policy and revenue administration,

### Technical assistance focus
- TA focuses on tax policy and revenue administration, including development of a medium-term revenue strategy; public financial management; the regulatory and supervisory framework for the financial sector; monetary policy analysis and macroeconomic forecasting; and on government finance, national accounts, and balance of payment statistics.

### Background and COVID-19 context
- Kenya experienced four consecutive waves of COVID-19, with the most recent wave having peaked in August 2021; new infections were near the lowest since the start of the pandemic as of December 2, 2021.
- Vaccination objectives and status:
  - Target to vaccinate 10 million people by end-2021 and to have all adults (26 million people) fully vaccinated by end-2022.
  - By end-October 2021: 5.3 million doses administered and 6 percent of adults fully vaccinated.
  - World Bank project approved end-June 2021 provides US$130 million for vaccine procurement and deployment; enables procurement of some 13.3 million doses of the Johnson & Johnson vaccine (deliveries started in September).
- Health and containment policy stance:
  - Prioritize vulnerable groups (health workers, teachers, those above 58 years of age).
  - Continue awareness campaigns and enforcement of containment measures; expect gradual removal of measures as vaccination increases but stand ready to tighten if necessary.

### Economic impact and policy response
- Economic contraction and recovery:
  - Real GDP contracted by 0.3 percent in 2020.
  - Year-on-year growth fell to -4.7 percent in Q2 2020 and rose to 1.2 percent in Q4 2020.
  - Growth expected to rise to 5.9 percent in 2021 and to settle at about 5.5 percent over the medium term.
- Policy measures under the 8-point Economic Stimulus Program (ESP):
  - New employment program for youth; guarantee scheme for small businesses; cash transfers; fast-tracked VAT refunds and other government obligations.
  - Tax Law Amendment Act (2020) temporarily reduced tax burden on individuals and corporations beginning April 2020; most temporary tax cuts ended January 1, 2021.
  - Central Bank of Kenya (CBK) measures: lowered policy rate, liquidity support, eased repayment conditions, reduced mobile money charges.
- High-frequency indicators in 1H 2021:
  - Electricity production grew by almost 8 percent y-o-y.
  - Cement consumption grew by over 25 percent.
  - Tourism remained subdued; airport arrivals up to June 2021 at less than half of pre-pandemic levels.

### Inflation and external sector
- Inflation:
  - Target range: 2.5–7.5 percent.
  - Headline inflation: 5.9 percent in March 2021; 6.9 percent in September 2021; declined to 6.5 percent in October 2021.
  - Non-food/non-fuel inflation remained under 3 percent.
- External position:
  - Current account deficit narrowed to 4.5 percent of GDP in 2020.
  - Goods exports grew by 11.1 percent y-o-y in 1H 2021 (US dollar terms).
  - Energy imports grew by 32 percent and non-energy imports by 20 percent (1H 2021).
  - Shilling depreciated by 8 percent against the US dollar in 2020 and stabilized in 2021.
  - Foreign exchange reserves: US$9.6 billion at end-September 2021.
  - Reserve-supporting inflows in 2Q 2021: Eurobond issuance of US$1 billion; US$750 million in World Bank budget support; two disbursements totaling US$715 million from the IMF under the present program.

### Public finances and budget execution
- FY2020/21 outcomes:
  - Overall fiscal deficit contained to KSh.929 billion (compared to KSh.956 billion projected).
  - Primary balance of the national government in FY2020/21: KSh.-455.12 billion (-4.0 percent of GDP) came in well above the floor for the end-June 2021 test date.
  - Stronger-than-anticipated tax collection due to revenue mobilization measures.
  - Efforts to restrain non-priority spending kept total spending slightly below program level.
  - Corporate Minimum Tax (CMT) introduced at 1 percent of gross turnover in 2021 faced legal challenges; collection halted by court order in April and found unconstitutional in September 2021; authorities have appealed.
- FY2021/22 performance to date:
  - In Q1 FY2021/22, revenue was KSh.6.5 billion higher than the budget target; expenditure slightly under-executed due to tight expenditure controls.

### Banking sector and financial stability
- Policy actions and outcomes:
  - CBK lowered policy rate by 125 bps and increased maximum tenor on reverse repo from 28 to 90 days.
  - About half of all banks’ loans were restructured by end-March 2021; by end-August 2021 outstanding restructured loans amounted to 16 percent of total loans, of which 93 percent were performing as per the restructured terms.
  - Nonperforming loan (NPL) ratio rose by about 2 ppt from the start of the pandemic to 13.9 percent at end-August 2021.
  - Total capital adequacy ratio (CAR) at 18.9 percent, above the minimum requirement of 14.5 percent.
  - Deposit growth was 12 percent in 2020; private sector credit growth at 7.7 percent y-o-y in September 2021.
  - Deposit insurance expanded from 100 to 500 thousand shillings per depositor; ex-ante funded deposit insurance fund covers about 18 percent of insured deposits and is growing towards the IADI target of 30 percent coverage.
- Strengthening financial safety nets and regulatory framework remain ongoing priorities.

### Economic Recovery Strategy (ERS) priorities
- ERS builds on ESP and focuses on:
  - Enhancing budgetary allocations to strengthen healthcare systems.
  - Investment in ICT and digital infrastructure.
  - Enabling the private sector to play a larger role in recovery.
  - Facilitating a green and resilient recovery.
  - Enhancing resilience to global supply chain shocks.
  - Support to MSMEs.
  - Full and timely implementation of the ESP.
  - Enhancement of targeted social protection.
  - Strengthening national capacity for disaster risk management.
  - Mainstreaming diaspora financial and intellectual resources.
  - Enhanced budgetary support to police and security services for COVID-19 containment enforcement.
  - Strengthening governance and economic management.
  - Expediting implementation of policy, legal and institutional reforms.
  - Strengthening monitoring and evaluation systems.

### Macroeconomic outlook and risks
- Baseline projections:
  - Growth: 5.9 percent in 2021; about 5.5 percent over the medium term with a slightly increasing trend.
  - Inflation: projected to return to near the mid-point of the CBK target range during 2022 and stay near that level through the medium term.
  - External current account deficit: expected to stabilize around 5 percent of GDP over the medium-term.
- Key risks:
  - Uncontrolled COVID-19 outbreaks globally or locally could undermine the recovery and increase fiscal and external pressures.
  - Terms-of-trade shocks from higher imported commodity prices could widen the current account deficit and heighten inflation.
  - Spillovers from global capital market policy responses.
  - Domestic risks: general elections could pressure budget execution and reform implementation; socio-political tensions could rise.
  - Contingent liabilities from SOEs could undermine fiscal consolidation if not met by strong response.
- Risk management:
  - Intend to keep half of the recent SDR allocation (US$738 million) as reserves at CBK while on-lending the other half to Government to help meet budget financing needs in FY2021/22.

### Program objectives and policy priorities
- Overarching objective: secure a strong post-COVID-19 recovery with robust and inclusive growth.
- Key policy priorities:
  - COVID-19 response: vaccinate all adults, ensure provision of health services, address vulnerable groups, and support economic activity.
  - Fiscal policy: undertake growth-friendly fiscal consolidation to preserve debt sustainability by bolstering revenue primarily through broadening of the tax base and curtailing overall spending while prioritizing high-impact social and investment expenditure.
  - Public financial management: decisively increase the efficiency and transparency of public spending, including by SOEs.
  - Governance: enhance institutional oversight, strengthen preventive frameworks, and move toward greater transparency.
  - Monetary policy: strengthen framework by refining policy operations to keep short-term interest rates stable and close to the policy rate.
  - Access to affordable finance: transform the banking sector around customer centricity, risk-based credit pricing, transparency, and ethical banking.
  - Financial stability: enhance prudential regulation and supervision and operational tools.
  - Structural reforms: deepen reforms to improve the business environment and boost investment, employment creation, and potential growth.
  - Statistics: improve data quality in line with international best practices.

*IMF staff report and authorities’ Letter of Intent and Memorandum of Economic and Financial Policies (Nairobi, December 2, 2021).*

### 15.      Program performance at end-June 2021 was good overall. Quantitative results were

### 1kenea2021004 - 15.      Program performance at end-June 2021 was good overall. Quantitative results were

### Program performance summary
- Program performance at end-June 2021 was good overall.
- Quantitative results were strong, with all end-June performance criteria (PCs) and indicative targets (ITs) met.
- Structural reform agenda experienced delays due to challenges including legal complications; several structural benchmarks (SBs) were not met on time.
- After redoubling efforts, all but one outstanding SBs have been implemented; the last is expected to be implemented by end-March 2022.

### Quantitative targets (MEFP Table 1)
- All end-June PCs and ITs were met comfortably.
- The inflation target under the monetary policy consultation clause was met.
- The PC on the primary deficit: outcome KSh.455 billion vs. ceiling of KSh.508 billion.
- Achievement attributed to good revenue performance and tight spending control despite the COVID-19 pandemic.

### Fiscal policy — objectives, measures, and requests
- Objective: balance near-term support for economic revitalization and COVID-19 aftermath with reducing debt vulnerabilities over the medium term.
- Health and social priorities:
  - Accelerating COVID-19 vaccination program.
  - Meeting health and economic needs amid drought in northern regions and security pressures.
- Fiscal stance:
  - Shift focus to reducing deficit and putting debt on a downward path within the program timeframe to lower financing risks and expand private sector credit.
- Revenue mobilization:
  - Tax-to-GDP ratio dropped from 15.1 to 13.0 percent over 2016/17–2019/20; plan to recover lost ground via revenue administration reforms and carefully designed tax policy measures.
- Protection of priority social programs:
  - Indicative target on priority social spending included in program design.
  - Priority social spending includes vaccination and immunization programs, transfers to vulnerable groups, free primary and secondary education, food programs, and health coverage and insurance.
  - Overall development spending envelope intended to remain steady at close to 5 percent of GDP.
- FY2021/22 budget and consolidation:
  - Full-year impact of reversal of 2020 tax cuts: 0.5 percentage points of GDP.
  - Projected improvement of 1 percent of GDP compared to prior year outcome, building on overperformance in tax revenue in FY2020/21.
  - Revenue-enhancing measures in Tax Law Amendment Act No 2 of 2020 and Finance Act 2020 estimated full-year yield of KSh.102,629 billion excluding the CMT (based on pre-pandemic tax base).
  - Finance Act 2021 measures estimated overall positive impact on revenue of KSh.1,296 million.
  - FY2021/22 budget aims to protect priority social spending (KSh.397 billion), provide targeted support to vulnerable sectors (KSh.28 billion), and sustain critical projects (Big Four Initiative).
- Legal challenges and compensating measures:
  - High Court orders abrogated the CMT (found unconstitutional) and suspended periodic inflation adjustment for excise tax on petroleum and petroleum products.
  - Government has filed appeals to the Court of Appeal.
  - Anticipation that strong performance of import duties and VAT at end-September 2021 will fully compensate for losses from suspension of CMT and excise inflation adjustments, enabling full realization of FY2021/22 tax target.
  - Commitment to achieve PCs on taxes and primary balance; strengthened spending controls, improved expenditure prioritization, delayed execution of non-essential projects.
  - Plan to enhance CMT design; readiness to take compensating measures if appeal rejected.

### Vaccination, drought, and security-related spending requests
- COVID-19 vaccination financing:
  - Secured World Bank loan of US$130 million to accelerate vaccine interventions with objective to inoculate all adults by end-2022.
  - Request modification of the end-June 2022 ceiling on the primary balance to accommodate US$130 million World Bank resources.
  - COVAX and bilateral donations would help achieve objective of vaccinating 10 million people by end-2021 and all adults by end-2022.
- Drought and security emergency spending:
  - Preparing temporary, targeted spending measures for national security operations and drought mitigation (livestock offtake, water trucking, food relief, nutritional supplements, medical supplies).
  - Request modification of the end-June 2022 PC on the primary balance to reflect urgently needed spending of KSh.20 billion.

### Support to State-Owned Enterprises (SOEs)
- Anticipated SOE support in FY2021/22: KSh.48.4 billion.
  - Breakdown examples:
    - KSh.7.5 billion to Kenya Power (last mile connectivity).
    - KSh.1.7 billion to Kenya Wildlife Service (temporary budget support).
    - KSh.3.1 billion to Kenya Airports Authority (support for operation and maintenance).
    - Substantial Exchequer support for restructuring Kenya Airways.
- Fiscal offsets and adjustor:
  - Identified spending offsets of KSh.24.5 billion (equivalent of half of expected extraordinary SOE support) via reducing recurrent spending and rationalizing non-priority projects.
  - Request modification of end-June primary balance target to reflect provision of SOE support for KSh.48.4 billion.
  - Commitment: absent realization of extraordinary SOE spending, target a more ambitious primary balance equal to half of the under-execution in such support (new adjustor).

### Supplementary budget and structural benchmark
- Intention to reflect additional spending in a FY2021/22 supplementary budget (new SB for end-January 2022).
  - Supplementary budget will target a primary deficit of KSh.424 billion in line with program objectives.
  - Supplementary budget to detail interventions (COVID-19 vaccines, emergency spending, SOE support) and clearly identify offsets (KSh.24.5 billion savings from reductions in recurrent expenditures and rationalization of non-priority capital projects).
  - Commitment to protect priority social spending and projects included in borrowing plan.
  - Commitment to target a more ambitious primary deficit should there be delays in SOE support execution (new adjustor).

### Medium-term consolidation and revenue strategy
- Commitment to continue fiscal consolidation to reduce debt vulnerabilities.
- Target to bring the primary deficit below its debt-stabilizing level in 2023 and into positive territory by FY2023/24.
- Plan to raise tax-to-GDP ratio to create space for growth-enhancing investments and priority social spending.
  - Additional tax policy measures planned for 0.8 percent of GDP in FY2022/23 and 0.9 percent of GDP in FY2023/24.
  - Development of a Medium-Term Revenue Strategy (MTRS), supported by IMF TA, to inform selection of tax measures.
- Expenditure control:
  - Progressive reduction in recurrent expenditure as a ratio to GDP by containing wage bill growth and streamlining goods and services.
  - Keep development spending steady at close to 5 percent of GDP.
  - Submit to Parliament a budget for FY2022/23 consistent with programed deficit and revenue targets (new SB for end-April 2022).

### Debt framework and fiscal risk management
- Seek to move away from a debt ceiling to introduce a credible debt anchor to crystallize policy intention of reducing debt and maintaining debt sustainability (see ¶36).
- Establishment of a fiscal risk management structure by end-June 2022 to oversee monitoring and assessment of fiscal risks across the public sector.
  - Will conduct a benchmarking exercise drawing on international good practices.
- Contingency planning:
  - Any revenue shortfall for FY2021/22 will be compensated by additional revenue measures.
  - Ready to further curtail non-critical spending if necessary to offset pressures.
  - Flexibility in program conditionality to cater to vaccination and SOE support needs while aiming to respect fiscal path.

### Fiscal structural reforms — tax system reform and tax expenditures
- Objective: reverse declining trend of revenues by reforming tax system to improve efficiency and equity and reduce compliance cost.
- Rationale:
  - Past proliferation of incentives made tax system less efficient and harder to administer.
  - Several incentives eliminated in Tax Law Amendment Act (2020) and Finance Act (2020).
- Tax Expenditure Report findings:
  - Tax expenditures amounted to 2.96 percent of GDP in 2020, down from 4.9 percent of GDP in 2017.
  - 2.18 percent of GDP in 2020 relate to domestic VAT across sectors including agriculture, manufacturing, and transport.
  - Corporate income tax accounted for 0.53 percent of GDP in 2020, mainly from tax allowances and deductions for investment in plant and machinery.
  - Considerable scope for further reductions, particularly from VAT and excise taxes.
- Policy stance on CMT:
  - Continue to view the CMT as a valuable tool for equitable financing of public services.
  - Intend to expeditiously resolve legal challenges to CMT implementation by appropriately amending its design.

*International Monetary Fund — Kenya: Program performance and fiscal policy discussion as of end-June 2021.*

### 31.      Revenue administration reforms—aimed at improving compliance and taxpayer

### 31.      Revenue administration reforms—aimed at improving compliance and taxpayer

### Revenue administration reforms: objectives and actions
- Areas of focus: enhancing tax and customs debt management (including leveraging the iTax debt module); strengthening audits; developing and implementing risk-based frameworks for targeted tax enforcement; expanding the number of taxpayers by identifying new or non-compliant income earners; stepping up post-clearance audit and risk management; enhancing exemptions compliance; improving customs scanning; strengthening monitoring of petroleum trade; applying enhanced methods for import valuation; enhancing use of import valuation tools; implementing a new integrated customs management system (iCMS).
- iCMS objectives: strengthen integrity, entrench best practices in risk management, and support automated entry processing.
- Audit function at KRA:
  - Level II audits increased from 40 in FY2019/20 to 671 in FY2020/21.
  - Structural benchmark for end-2021 (increase by 30 percent the number of Level II audits of firms) has been met.
  - Rollout to all KRA regional offices: only two regions yet to fully operationalize the audit function; expected to be fully set by end-2021.
- Risk-based compliance strategies:
  - Domestic Department developed a risk matrix tool to score and guide targeting of high risk taxpayers.
  - Risk-based strategies for extractive sector developed and being implemented.
  - Sample risk-based compliance strategies developed for the Real Estate Sector in the North Rift Region; to be rolled out nationwide during the current fiscal year.
  - Implementation of IMF TA recommendations in relation to high-net-worth individuals is ongoing, with most recommended actions already in place.
  - Aim to automate risk profiling and case selection for both Level I and Level II Compliance interventions.
- Post-clearance audit (PCA):
  - PCA staff increased from 21 at end-March 2021 to currently 30 (target was 45 by end-June 2021).
  - Future target: increase PCA staff to 45 by end-December 2021 to undertake 540 PCA audits in 2021 comprising 108 field audits, 324 desk audits, and 108 compliance audits.
- Customs valuation and exemptions:
  - Applying mirror data analysis and tax and customs data matching (with IMF TA) to identify major valuation gaps by sectors or commodities.
  - A team set up to monitor and verify VAT exemptions in customs issued over the last 5 years; so far carried out 14 exemption verifications.
  - Aim to expand exemption verification to include areas under the East African Community Customs Management Act.
- Customs entry processing:
  - Current performance: 85 percent of compliant entries are processed within 24 hours.
  - Target: process all compliant customs entries within 24 hours.
  - Sea Cargo module of iCMS to be fully rolled out by December 2021 to speed processing.

### Public procurement reforms
- World Bank PER findings: significant potential to reduce transaction costs and secure lower prices via standardization and framework agreements.
- E-procurement:
  - Agreed implementation strategy and roadmap approved in September 2020.
  - Open international invitation to tender for the e-GP system software advertised in August and tender closed mid-September.
  - Pilot of new system to be initiated by July 2022; full rollout across MDAs planned by July 2023.
  - Competitive procurement of a system developer temporarily delayed due to budget challenges.

### Controlling the government wage bill
- Target: achieve a decline of 0.5 percentage points in the ratio of the government wage bill to GDP between FY2020/21 and FY2023/24.
- Policy measures:
  - Wage freeze for FY2021/22 and FY2022/23 by not adjusting basic salary structures, allowances, and benefits for the first two years of the four-year period covered by the 3rd remuneration and benefits review.
  - Limit new employment to priority areas; MDAs must obtain prior confirmation from National Treasury on availability of funding before recruitment approval.
- Further actions:
  - By end-June 2022, harmonize and rationalize categories, rates, and rules for allowances.
    - SRC issued Allowances Policy Guidelines in early October; final guidelines to be in place from the start of FY2022/23.
    - Guidelines seek to limit allowances to no more than 40 percent of gross pay over time.
  - By end-June 2022, implement a common payroll system linked to IFMIS across MDAs and Counties:
    - Unified Payroll System to be the upgraded GHRIS.
    - Payroll data to be cleaned and audited prior to transfer.
    - Milestones achieved: (i) rolling out of unified payroll number generating system; (ii) assessment of GHRIS capabilities for integration with IFMIS and other standalone systems; (iii) appointment of a task team to upgrade GHRIS; (iv) development and validation of three prototype modules (Payroll Management and Administration, Leave Management, and Pension Claim).
    - Validated prototype expected to be piloted with the Teachers Service Commission and one large ministry in November and December 2021.
    - Three additional prototype modules (establishment control; training and development; third-party deduction management) being developed and to be validated by 31st January 2022.
  - Upon implementation, extend common payroll to some SAGAs prioritizing those receiving recurrent transfers from National Government.

### Public Investment Management (PIM)
- Objectives: improve value for money in public capital expenditure; develop framework for project appraisal and selection; automated project management information system.
- PIM guidelines: issued via Treasury Circular No.16 of 2019 covering all phases of public investment cycle.
- Rationalizing pipeline:
  - Stocktaking extended to all sectors; identified 437 stalled or underperforming projects that should be canceled.
  - Cabinet decision to terminate these projects expected by March 2022 (contractual issues to be addressed first).
- Public Investment Management Information System (PIMIS):
  - Expert appointed after delay; targeting PIMIS fully operational by 1st July 2022.
- Manuals:
  - Manuals virtually complete: Economic Project Appraisal; Monitoring; Evaluation and Reporting; National Parameters and Commodity Specific Conversion Factors.
  - Aim to finalize and have manuals in full use across MDAs by January 2022 and Counties by July 2022.
  - PIM Regulations 2021 to be finalized prior to engaging Counties.
- Compliance and regulations:
  - All new investment projects required to provide concept notes and costing in compliance with guidelines.
  - PIM representative on the budget panel to ensure investments included in annual budget have followed the process.
  - Converting PIM guidelines into regulations; draft regulation presented to National Assembly in May 2021; aim for regulations to be in place within FY2021/22.
- Addressing obstacles to donor funds: focus on administrative delays, adequate budget appropriations, and availability of counterpart funds.

### Public Financial Management (PFM) reforms and IFMIS enhancements
- Focus areas: strengthening budget processes, IFMIS functionality, commitment controls, and cash management.
- Cash Management Framework: regularly updated cash and debt plans approved by Cash Management Committee.
- Targets and milestones:
  - By June 2022, complete rollout of automated cash flow plans and automated exchequer releases for MDAs enabling all exchequer requests to be processed online through IFMIS.
    - Automation of cash flow plans completed and to be rolled out after user training.
    - Automation of exchequer requests completed but requiring resolution of digital signature elements; official launch of integrated automated system expected by June 2022 (piloting beforehand).
    - This launch is six months later than previously planned.
  - By June 2022, enhance IFMIS to enable contract generation and contract management for multi-year commitments.
    - System configured to enable generation of purchase orders and capture commitments in IFMIS.
    - Five commonly used procurement methods to be configured in IFMIS to enable end-to-end procurement.
  - By December 2022, develop IFMIS regulations to enforce system use for all procurements so commitments are captured when entered.
  - By June 2023, ensure all MDA budget proposals for FY2023/24 prepared using a common costing approach built into Hyperion and elaborated in a budget costing manual.
  - By June 2023, complete review of extra-budgetary units to consolidate and, where appropriate, bring them within the budgetary central government perimeter.

### Public debt management
- Objectives: enhance debt reporting, lengthen maturities, avoid bunching of repayments, strengthen PDMO structures and functions per PFM Law.
- Domestic market reforms and outcomes:
  - Implemented Treasury Mobile Direct for retail sale of government securities; enabled auction of bids by banks through internet banking.
  - Developing Central Securities Depository System; maintaining smooth yield curve; supporting market structure and conduct; lengthening maturity profile; enhancing transparency through publication of auction rules and guidelines; strengthening bond benchmark building program.
  - Average time to maturity of outstanding treasury securities increased from 7.7 years in June 2020 to 8.8 years in June 2021.
  - Ratio of T-bills to T-bonds moved from 30:70 to 20:80.
- External debt and IRU:
  - Proactively increasing utilization of committed concessional financing while maintaining presence in international financial market.
  - Investor Relations Unit (IRU) established and has a page on National Treasury website.
- Planned actions and timelines:
  - By end-December 2021, subject to favorable market conditions, issue a Eurobond to provide financing for the FY2021/22 budget (previously programmed for early 2022).
  - By end-June 2022, subject to favorable market conditions, issue a Eurobond to repay in full or in part the bond maturing in 2024 as part of a debt management operation.
  - By end-June 2022, launch an enhanced micro-site for the IRU to support external communication.
  - By end-June 2022, issue PFM regulations and a service contract for PDMO to operationalize the framework for debt management in the PFM Act.
    - Taskforce (Attorney General's Office, CBK, National Treasury) constituted to review institutional arrangements for public debt management; expected to present recommendations to Cabinet Secretary, National Treasury and Planning by end-March 2022.
  - By end-June 2022, replace nominal public legal debt ceiling of KSh.9 trillion with a debt anchor centered on: (i) medium-term debt anchor set at 55 percent of GDP with debt measured in present value terms; and (ii) an accountability requirement mandating transparent communication to Parliament and the public on plans and progress towards achieving the debt anchor within a specific timeframe.
    - National Treasury to submit proposal for amendment of PFM law on debt ceiling to Attorney General and Parliament in November 2021.
  - By end-October 2022, expand coverage of public debt reporting to include non-guaranteed public sector debts (including arrears) not currently included.
    - FY2020/21 Annual Public Debt Management Report included non-guaranteed debt of 18 public entities; 9 of these had non-guaranteed debt totaling KSh.105 billion (1 percent of GDP).
    - Aim to expand next year’s debt report coverage to Counties and remaining SOEs.

### G20 Debt Service Suspension Initiative (DSSI)
- First phase (January-June 2021): Government obtained debt suspension of US$425 million (KSh.45.5 billion).
- Second phase (July-December 2021): Government requested bilateral debt service suspension estimated at US$379 million; projected to be lower at around US$89 million due to non-participation by some creditors.

### Public Private Partnerships (PPPs)
- Revamping PPP Unit in National Treasury to scale up PPP program efficiently while managing fiscal risks.
  - Appointed a Director-General for the PPP Unit.
  - Creating and institutionalizing a joint PIM-PPP planning framework to determine procurement route (traditional public sector vs PPP).
  - Strengthening coordination between PDMO and PPP Unit as envisioned in PPP Act.
  - New institutional structure approved and recruitment underway.
- Specific action:
  - In context of a supplementary budget for FY2021/22, fully operationalize the PPP Project Facilitation Fund through creation of a budget line for annual funding.

*Source: 1kenea2021004 - 31.      Revenue administration reforms—aimed at improving compliance and taxpayer*

### 39.      Pension reform. To put pensions on a sustainable footing, we have introduced a funded

### 1kenea2021004 - 39.      Pension reform. To put pensions on a sustainable footing, we have introduced a funded

### Pension reform
- Introduced a funded pension scheme for public sector workers: the Public Service Superannuation Scheme (PSSS).
- Objective: transform the Public Service Pension ecosystem into a customer centered, modern and technologically driven sector.
- Digitization and re-engineering of pension management system to be completed by June 2022.
- PSSS commencement and coverage:
  - Commenced on 1st January 2021 and will replace the current pay-as-you-go system over time.
  - Participants: all new public sector employees who were below the age of 45 years as of 1st January 2021 and those employed after that date.
- Contribution rates into the Public Service Superannuation Fund:
  - Employer (GoK): 15 percent of members basic salary.
  - Scheme members: 7.5 percent of members basic salary.
- Phased member contribution schedule over first three years:
  - Year 1: 2 percent
  - Year 2: 5 percent
  - Year 3: 7.5 percent
- Governance and oversight:
  - Fund managed by a Board of Trustees and supervised by the Retirement Benefits Authority.
- Noted advantage: portability of pension benefits facilitating free movement of staff into and out of the public sector.

### State-Owned Enterprises — overview and financial evaluation
- In-depth financial evaluations (end-May SB) identified a cumulative KSh.383 billion liquidity gap over the next five years for 18 SOEs involving the largest financial and fiscal risks (excluding Kenya Airways).
- The gap is expected to be primarily covered via SOEs’ cost saving measures.
- Two SOEs with largest fiscal risks: Kenya Airways (KQ) and Kenya Power and Lighting Company (KPLC).

### Kenya Airways PLC (KQ) — diagnosis and planned interventions
- Current situation and exposures:
  - KQ has been insolvent for some time; financial difficulties compounded by COVID-19.
  - KQ has the highest cost-base among all airlines in the SSA region.
  - GoK equity share: 48.7 percent.
  - GoK exposure includes US$750 million of guarantees to creditors.
  - KQ has relied on moratoriums, waivers, and cash injections from the budget.
- Restructuring approach and fiscal implications:
  - GoK initiated a multi-year restructuring to adapt KQ to post-COVID aviation environment: trim network; rationalize frequencies; operate a smaller fleet; rationalize staff complement.
  - GoK will take over US$827 million of KQ’s debt.
  - In addition, in FY2021/22 and FY2022/23, US$473 million will be provided as direct budgetary support to clear overdue payment obligations and cover upfront costs of restructuring.
- Fiscal containment measures:
  - Introduce budgetary offsets for 50 percent of KQ fiscal support, in line with program commitments.
  - Commitment to limit impact on debt dynamics and protect priority social spending.
- Safeguards and implementation milestones:
  - By end-November 2021: National Treasury (NT) to hire an airline consultant with international experience to negotiate for concessions.
  - By December 2021 (at the latest): prepare a detailed restructuring action plan to improve KQ’s operational profitability; plan to serve as basis for monitoring progress.
  - By December 2021: establish an accountability mechanism to ensure restructuring is followed by KQ Board, including a tracker for key actions and milestones (e.g., trimming the network; rationalizing frequencies and the fleet; addressing the high-cost structure, including the salary/wage bill).
  - Milestones to be included in KPIs for KQ’s CEO and other senior executives.
  - By December 2021: prepare a loan agreement with KQ that shall include conditions for providing financial support — clear KPIs, timelines, reporting obligations and disbursement plan. Signing contingent on approval of supplementary budget by Parliament.
  - Progress under the action plan to be reviewed quarterly by NT; NT reports sent to Cabinet.
  - Disbursements from NT to KQ to be conditional on progress and released only when there is clear and tangible progress towards pre-agreed targets.
  - Ensure Exchequer support terms prioritize liability to the Exchequer while support is outstanding.

### Kenya Power and Lighting Company PLC (KPLC) — diagnosis and planned actions
- Financial status and risks:
  - Deteriorating business performance with substantial pending bills.
  - Negative working capital position of KSh.69 billion at 30th June 2020.
  - Outstanding trade payables of KSh.79.4 billion, of which over KSh.60 billion was overdue.
  - GoK equity share: 50 percent.
  - Presidential Taskforce presented report on 29th October 2021.
- Planned action plan and measures (to be prepared by December 2021):
  - Prepare an action plan to cover KPLC’s identified KSh.110 billion liquidity gap in the medium term.
  - Plan to draw on findings of the Presidential Taskforce report.
  - Steps to improve operational efficiency and realize targeted cost savings via a turnaround strategy focused on:
    - Meeting customer needs,
    - Increasing power sales and revenue collection,
    - Improvement of cash flow management,
    - Reduction of operational costs,
    - Reduction of system losses,
    - Restructuring of expensive commercial debt.
  - Business process re-engineering to focus on automated billing, metering, and payments.
  - Target to reduce system losses to be within the medium-term loss benchmark of 15 percent approved by the regulator.
  - Align organization structure and staffing with required skills and performance-based management to increase staff productivity and reduce operational costs.
  - Reforms in procurement and stock management to optimize resource use and reduce wastage.

### SOE Governance Arrangements
- Rationale: COVID-19 exacerbated financial pressures and revealed pre-existing structural weaknesses (overlapping mandates, poor financial performance, weak governance).
- Completed Strategy on SOE reforms outlining steps to enhance financial and operational efficiency and cost savings.
- Planned governance reforms and deliverables:
  - By June 2022: review organizational arrangements within NT for financial oversight of SCs and ensure the role and functions for Government investments as a core function of the NT are fully provided for in the legislative framework.
  - By June 2022: prioritize development of Government Investment Management Information System (GIMIS) modules to facilitate reporting by SCs on unguaranteed, guaranteed, and on-lent loans; develop framework to monitor evolution of individual SC loans capturing new disbursements, repayments, and outstanding amounts. GIMIS to be accessible by relevant oversight entities including line ministries, National Treasury, and SCAC.
  - Extend coverage of financial evaluations of SCs undertaken in NT; together with GIMIS, facilitate identification, quantification, monitoring, reporting, and management of fiscal risks from SCs, including guarantees and contingent liabilities.
- Blueprint for Governance Reforms of SCs:
  - Completed by end-July 2021 target date.
  - Aims to reinforce separation of roles and responsibilities among oversight institutions; ensure ownership role and a policy role for NT on behalf of GoK.
  - Implementation actions and timelines:
    - By end December 2021:
      - Define categories of SCs for government-wide use and prepare and publish an updated inventory of SCs.
      - Ensure publication and publicization of all commercial SCs’ annual reports in an easily accessible format.
      - Take concrete actions to enforce compliance by board members with ethics and integrity expectations for Boards of Directors of SCs.
    - By end June 2022:
      - Obtain Cabinet approval of an ownership policy for the entire portfolio of SCs as outlined in the Blueprint.
      - Develop a comprehensive performance contracting and monitoring framework for commercial SCs.
      - Ensure all SCs disclose and publicize their anti-corruption performance indicators.
      - Initiate institutional coordination for the design of an aggregate report on SCs’ anti-corruption performance indicators.
    - By end July 2022:
      - Publish performance evaluation reports of SCs for FY2020/2021 and continue annual publications thereafter.

### Monetary Policy — objectives and reforms
- Primary policy objectives:
  - Maintain headline inflation within target range: 5±2.5 percent.
  - Maintain a flexible exchange rate regime, with market interventions only in response to excess exchange rate volatility.
  - Further improve the monetary policy framework.
- Monetary policy consultation clause (MPCC): a 5 percent ±2.5 percent band to monitor inflation performance and trigger consultation with the Executive Board if inflation falls outside the band (TMU, ¶23).
- Reform agenda and planned measures:
  - Removal of interest rate caps in late 2019 improved monetary policy effectiveness.
  - White paper published in July 2021: “Modernization of the Monetary Policy Framework and Operations” (structural benchmark).
  - Reform foci as conditions normalize post-COVID:
    i) Refining macroeconomic modeling and forecasting frameworks:
      - Review FPAS framework, strengthen forecast process and team, engagements with the MPC, nowcasting framework including expectations surveys by CBK, and core macro model QPM; plan extensions to the model.
    ii) Improving operations of financial markets:
      - Fully develop by April 2022 a Centralized Security Depository (CSD) to improve monetary policy transmission and promote efficiency and transparency in the government domestic debt market.
      - CSD benefits: mitigate segmentation in interbank market; enhance liquidity distribution; strengthen operation of secured overnight market; manage systemic risk; automate operations via Straight Through Processing (STP); enable full transfer of collateral for repo transactions.
      - Experience with CSD will inform further reforms including review of methodology for calculating interbank rate as operational target and introduction of a band around the CBR to anchor the interbank rate.
      - CBK initiatives: roll-out of Treasury Mobile Direct, Internet Banking; installed Enterprise Data Warehouse (EDW) for near-real time data capture and analysis; assisting ACI-Kenya and Treasurers forum to develop framework to strengthen conduct in financial markets.
    iii) Improving communication of monetary policy decisions, including introducing publication of a quarterly inflation report.

### Financial Sector — status, measures, and targets
- Policy objectives: safeguard financial stability and expand access to affordable finance; promote sustainability and resilience along four pillars: customer centricity; risk-based credit pricing; transparency; and ethical practices.
- Banking sector soundness (as at end-August 2021 unless stated):
  - Core capital adequacy ratio: 16.3 percent.
  - Total capital adequacy ratio: 18.9 percent.
  - Statutory minimums: 10.5 percent (core), 14.5 percent (total).
  - Liquidity ratio: 57.0 percent (statutory minimum: 20 percent).
  - Gross Non-Performing Loans (NPLs) to Gross Loans: 13.9 percent in August 2021 (from 14.1 percent in December 2020).
  - Outstanding restructured loans: about 16 percent of gross loans; about 93 percent of restructured loans performing as per restructured terms.
- Stress-testing and capital resilience:
  - Credit risk stress test suggests a shock increase of some 5 ppt in current NPLs (above and beyond pandemic-elevated levels) would lead 10 out of 39 banks to face a capital shortfall relative to minimum requirements, but this would be less than 0.4 percent of GDP.
  - Authorities encourage enhanced surveillance, governance strengthening, mergers and acquisitions, and capital strengthening efforts.
- Assessment of COVID-19 financial sector measures:
  - Temporary regulatory measures were implemented and most expired by March 2021.
  - Key measures and outcomes:
    - Loan restructuring:
      - 57 percent of the banking industry’s loan portfolio was restructured in 2020; facility maintained until March 2021.
      - By end-August 2021, outstanding restructured loans amounted to 16 percent of total loans; 93 percent performing as per restructured terms.
      - Restructured loans in arrears account for about 1 percent of total banking sector gross loans.
      - Regulatory flexibility on loan classification and provisioning unwound; after June 3, 2021 standard procedures apply.
    - Strengthening the Credit Referencing Mechanism:
      - CRB Regulations effective April 8, 2020; provided for temporary suspension of listing of negative credit information in exceptional circumstances.
      - On April 14, CBK issued Banking Circular Number 7 and Number 8 of 2020 suspending temporarily the sharing of negative credit information on credit facilities that became non-performing for six months to September 30, 2020. This measure expired on September 30.
    - Business Continuity Planning:
      - On March 27, 2020, CBK issued guidance on pandemic planning and business continuity aligned to Ministry of Health protocols.
      - Over 90 percent of bank branch network remained open during the pandemic, including in areas under movement restrictions.
    - Ensuring Capital Adequacy:
      - ICAAP adopted since 2016; on August 14, 2020 CBK required banks and mortgage finance companies to re-submit ICAAP documents by October 31, 2020 accounting for pandemic-related developments.
      - Updated ICAAPs reviewed by CBK and used to review profit distribution decisions including dividends.
      - All banks publicly disclosed audited 2020 financial statements, including capital adequacy ratios in March 2021, showing the banking sector is well capitalized with no imminent systemic risk.
      - Individual end-year bank capital adequacy ratios and overall sector status published in the annual 2020 Bank Supervision Report in May 2021.
    - Enhancing use of digital platforms:
      - Limits on mobile money transactions were enhanced and fees on low value transactions (of up to KSh.1,000) eliminated.
      - Bank transactions on mobile phones increased from 55.7 percent before the pandemic to [text truncated in source].

*Source: Excerpt from the provided IMF chapter/section content.*

### 84.8 percent of all transactions. Anti-Money Laundering and Combatting the Financing of

### 1kenea2021004 - 84.8 percent of all transactions. Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) checks were also strengthened to guard against abuses. The waiver on fees on low value mobile money transactions was lifted in January 2021 but the expansion of the maximum limit on wallet and transactions remains.

### Credit Guarantee Scheme (CGS) and MSME support
- A new credit guarantee scheme (CGS) established to expand access to affordable credit to MSMEs and support COVID-19 recovery.
- Risks are shared on a 50:50 pari-pasu basis; subject to a maximum guarantee exposure of which 25 percent of the principal amount.
- Total loans extended to MSMEs under the CGS have topped KSh.1 billion as at August 2021 since the start of the program in December 2020.
- MSMEs from 40 counties and drawn from 11 different sectors have benefited.

### Banking sector reforms and resilience
- Continued focus on realization of CBK’s Banking Sector Charter.
- Completed pandemic-period transactions: 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 expanding regionally including in the Democratic Republic of Congo, Rwanda, and Tanzania.
- CBK commitment: build a resilient banking sector with strong business models and governance frameworks to support post-pandemic recovery.

### Real-time supervision and data infrastructure
- Implementation of a centralized Electronic Data Warehouse (EDW) to merge different information sets provided by banks to CBK.
- EDW to connect to banks through Application Program Interfaces (APIs) to access supervisory data on a near real-time basis.
- Pilot work with selected banks as CBK moves towards integrating the EDW with banks.

### Microfinance and mortgage refinancing initiatives
- Review of the Microfinance Act: finalized draft Microfinance Bill forwarded to the State Law Office in December 2019; legislative drafting finalized in December 2020; Bill forwarded to the National Treasury in March 2021 for Cabinet approval and tabling to the National Assembly.
- Licensing of Kenya Mortgage Refinance Company PLC (KMRC) on September 18, 2020 under CBK (Mortgage Refinance Companies) Regulations, 2019.
- KMRC objective: provide long term finance to primary mortgage lenders to increase availability and affordability of mortgage loans.
- As at June 30, 2021, KMRC disbursed KSh.800.2 million to four participating mortgage lenders under the World Bank Group line of credit.
- A mortgage portfolio of KSh.5.8 billion from seven other mortgage lenders is under review for refinancing.
- KMRC at an advanced stage of issuing a corporate bond to provide a sustainable source of funding; transaction advisory team hired; bond issuance scheduled in Q4 2021.

### Digital lenders and legislative action
- The Central Bank of Kenya (Amendment) Bill, 2020 published on June 19 and republished in April 2021 to incorporate public consultation input.
- Principal objective: empower CBK to supervise and regulate digital lenders for a fair and non-discriminatory marketplace.
- Bill passed by the National Assembly in October 2021 and being finalized for Presidential assent.

### Strengthening AML/CFT framework and actions taken
- Strengthened cash transaction monitoring and reporting by banks, enhanced offsite and onsite surveillance with targeted AML/CFT onsite inspections.
- Enforcement of administrative sanctions and penalties on banks, payment service providers, money remittance providers and other financial institutions for AML/CFT violations.
- Successful demonetization exercise in 2019 withdrawing the old Kenya Shilling 1,000 note to address illicit financial flows and counterfeit threats.
- CBK scaled up AML/CFT monitoring with 15 targeted inspections; financial institutions reported over 3,000 Suspicious Transaction Reports (STRs) for further investigation.
- goAML system deployment: full adoption by banks completed; roll-out ongoing for remittance providers and money changers; expansion to Law Enforcement Agencies (LEAs) planned within the next six months as permitted by the pandemic situation.

### Greening the banking sector
- Guidance on Climate-Related Risk Management issued on October 15, 2021 to enable banks to integrate climate-related risks into governance, strategy, risk management and disclosure frameworks.
- Objective: enable banks to leverage business opportunities from mitigation and adaptation efforts, attract global green finance, and position Kenya as a green finance hub.
- CBK to work with banks to build capacity and integrate climate-related risk management into day-to-day operations.

### Public procurement, transparency, and beneficial ownership
- Implementation of the Procurement Act to provide legal framework for electronic procurement; public entities required to publish procurement information in line with open contracting standards and Executive Order No 2 of 2018.
- New State Procurement Portal: development phase completed; two-week pilot with 10 procuring entities conducted; operational rollout of new Portal infrastructure completed.
- Publication of tender award information including beneficial ownership (BO) in the Public Procurement Information Portal (PPIP); addressing privacy impediments by developing procedural measures to obtain consent for publication from beneficial owners.
- Commitment: adopt revised standard bidding documents to obtain consent from beneficial owners and start requiring consent for all new tenders (new structural benchmark for end-March 2022).
- Joint MOU signed between Competition Authority of Kenya (CAK) and Public Procurement Regulatory Authority (PPRA); MOU cleared by the Attorney General and related completion rules gazetted.

### Anti-corruption framework, institutions, and planned reforms
- Kenya’s anti-corruption legal framework includes: Public Officer and Ethics Act (2003); Anti-Corruption and Economic Crimes Act (2003); Leadership and Integrity Act (2012); Ethics and Anti-Corruption Commission Act (2012); Access to Information Law (from 2016); Law on Bribery (2016).
- Multi Agency Team on Corruption (MAT) chaired by the Attorney General with heads of law enforcement and prosecutorial agencies (DPP, DCI, EACC, ARA, NIS, CBK, KRA & FRC) facilitates processing of investigations, prosecutions and asset recovery interventions.
- Judiciary established an Anti-Corruption and Economic Crimes Division of the High Court to expedite adjudication.
- Planned reforms include consolidation of wealth and interest declarations into one uniform disclosure regime; rationalization of responsibilities for analyzing and verifying disclosures and imposing sanctions; enhancement of enforcement agencies’ roles and capabilities.
- Review of the Conflict of Interest Bill ongoing; interagency group constituted to fast-track submission to Parliament.

### Access to Information and records digitization
- Access to Information Act implementation a priority; implementing Regulations drafted; public consultations being concluded.
- Taskforce considering stakeholder comments; final Regulations to be submitted to the Ministry of ICT, Innovation and Youth Affairs, Office of the Attorney General, and Parliament in December 2021.
- By March 2022, standards for digitization and automation of records will be developed to ensure systems meet minimum access to information requirements.

### Judiciary transparency, case management, and publication of caseloads
- Commitment to publish status of all corruption cases on the Judiciary website including filed cases, resolved cases, pending cases, case backlog, case clearance rate, average time to disposition, and reasons for adjournments for High Court Anti-Corruption Division and Anti-Corruption Magistrates’ Court at Milimani.
- Case Management System developed to facilitate resource reallocation and aggregate workflow statistics.
- Judiciary will publish data on filed cases, resolved cases, pending cases, case backlog, case clearance rate, average time to disposition, and reasons for adjournments for Milimani Magistrates’ Commercial Court and Milimani High Commercial Division, Milimani Civil Division and Environment and Land Courts.

### COVID-19 spending audits and accountability
- National Audit Office (NAO) completed 3 special audits of COVID-19 spending.
- KEMSA special audit report tabled in September 2021 and awaits adoption by Parliament.
- Audit of subnational government COVID-19 spending issued in May 2021; undergoing parliamentary deliberation with 38 counties having appeared before Parliament and 9 to submit in writing their responses.
- Third audit report of COVID-19 spending across ministries submitted to Parliament in May 2021 but not yet deliberated by Parliament.
- Commitment: publish results of a forensic audit of COVID-19 vaccine spending up to end June 2021 and a comprehensive audit of expenditures in FY2020/21 with a chapter on COVID-19-related spending (new structural benchmark for end-May 2022).

### AML/CFT national risk assessment, mutual evaluation, and capacity building
- Final draft of the National Risk Assessment (NRA) report and National AML/CFT Action Plan to be submitted to Cabinet for approval and be made public by December 2021.
- Draft legislation to require lawyers to declare suspicious activity is advancing and under review in Parliament.
- Financial Reporting Centre strengthening reporting tools (goAML system) for timely reporting of STRs, Cash Transaction reports, and Monetary Instrument declarations.
- Training and engagement programs prioritized to raise awareness and competencies among reporting entities, LEAs, and financial intelligence analysts; engagement programs include corruption risk and red flags in public procurement.
- Kenya undergoing desk review of its 2nd round Mutual Evaluation (ME) by Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG); on-site ME visit expected in January 2022.
- Business Registration Service implementing efforts to ensure companies submit beneficial ownership information to the e-Registry, publishing the Beneficial Ownership e-Register Manual, intensifying resources for system processing and outreach events.

### Data quality and statistics
- Production and dissemination of high-quality economic statistics viewed as foundation for evidence-based policy making.
- Commitment to improve availability, quality, coverage, and timeliness of macroeconomic statistics.

*Italicized source: Extracted from the provided content unit 1kenea2021004.*

### 67.      Data coverage, quality, and timeliness. We have enhanced economic statistics with a

### Data coverage, quality, and timeliness

### Data enhancements and dissemination
- New statistical surveys introduced:
  - 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
- Milestones and releases:
  - 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).
- Ongoing improvements:
  - Working toward improving the quality of national accounts and government finance statistics with IMF technical assistance.
  - Addressing capacity gaps in key National Treasury departments and ICT systems.
  - Strengthening coordination at the Inter Department committee on GFS to address delays in achieving GFS milestones.
  - CBK introduced new surveys to assess the impact of policy measures on key sectors in the context of the pandemic.

### Reporting objectives and timelines
- Expected reporting improvements:
  - (i) Report general government fiscal outturns on a quarterly basis by December 2022.
  - (ii) Report annual fiscal data of the public corporations’ sector (including financial and non-financial corporations) by December 2022.
  - (iii) Migrate the fiscal framework to GFSM 2014 based concepts, starting with the QEBR for second quarter of FY2021/22.
- Expected outcome: Improved transparency and easier, more reliable access to information on the state of the economy and public finances.

### Program monitoring and governance
- Monitoring framework:
  - Program monitored based on periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, and indicative targets (as set out in Table 1).
  - Structural benchmarks used for monitoring progress on structural reforms (as set out in Table 2).
  - Detailed definitions and reporting requirements contained in the Technical Memorandum of Understanding (TMU) attached to the memorandum.
- External restrictions during program:
  - During the program period, the government will not introduce or intensify restrictions on payments and transfers for current international transactions or introduce/modify any multiple currency practice without the IMF’s prior approval; will not conclude bilateral payments agreements incompatible with Article VIII; will not introduce or intensify import restrictions for balance of payments reasons.
- Review dates:
  - Third review on or after May 7, 2022.
  - Fourth review on or after November 7, 2022.
  - Fifth review on or after May 7, 2023.

### Requested program modifications and rationale
- Requested adjustments:
  - Increase the end-June 2022 performance criterion on the primary balance to reflect higher spending pressures, including for humanitarian support.
  - Replace separate nominal ceilings on new external concessional and non-concessional borrowing with a newly introduced ceiling on the present value (PV) of contracting or guaranteeing of new external debt by the national government (reflecting IMF Debt Limits Policy reforms effective June 30, 2021).
  - Higher nominal equivalent of the end-June 2022 PV debt limit than the combined nominal ceiling set at the time of the 1st ECF/EFF reviews reflects assumption of some additional debts of Kenya Airways as part of its restructuring.
  - Modify the basis upon which the QPC on NIR is assessed by adopting a more standard approach used in other countries.

### Key quantitative performance criteria and indicative targets (selected figures from Table 1)
- Fiscal targets (primary budget balance of the national government, - = deficit; floor):
  - Series of entries shown: -407.8 -134.8 met -507.8 -455.1 met -202.9 -202.9 -369.4 -428.0 -110.2
- Tax revenue (floor) — selected entries:
  - 783.2 783.2 1,667.3 1,667.3 862.3
- Stock of central bank net international reserves (floor, in millions of US$) — selected entries:
  - 5,862 6,090* met 7,451 5,591* 6,326* met 6,634 7,915 6,151 7,265 5,668
  - Note: *Calculated at daily average of the month of the test date. Starting from December 2021, NIR targets are set for end-of-period. For comparison, the end-of-period outturn for March and June, 2021 were $6,129 million and $7,672 million.
- Public debt targets (selected ceilings, millions of US$):
  - Contracting and guaranteeing of new external non-concessional borrowing: 3,407 0 met 3,407 1,000 met 6,407 ... 7,612 ...
  - PV of contracting or guaranteeing of new external debt (ceiling, millions of US$): 7,726 ... 8,846 9,905
- Indicative targets (selected):
  - Priority social expenditures of the national government (floor): 293 290 not met 391 404 met 205 205 397 397 205
  - Change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling): 0 4.2 not met 0 0 met 0 0 0 0 0
- Memorandum items for adjustors:
  - Programmed amount of new debt issuance for PV-reducing, debt management operations: 2,000 ... 5,000 5,000 5,000 5,000 5,000
  - Nominal value of contracting and guaranteeing of new external borrowing under nominal ceilings at time of 1st ECF/EFF reviews (in millions of US$): 5,407 0 met 6,507 ... 11,207 ... 12,412 ...
  - Nominal value of contracting or guaranteeing of new external debt under new PV ceiling (in millions of US$): 11,207 ... 12,635 14,521

### Structural benchmarks (selected measures and status)
- SOE restructuring and governance:
  - 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 — Target: End-May 2021 — Status: Not met. Implemented with delay.
  - 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 — Target: End-Sep 2021 — Status: Not met. Implemented with delay.
- Fiscal transparency:
  - Initiate regular quarterly reporting on pending bills covering MDAs, Counties, SAGAs and SCs — Target: End-Mar. 2021 — Status: Met.
  - Publish the results of an audit of all COVID-19-related expenditures in FY2019/20 — Target: End-May 2021 — Status: Not met. Implemented with delay.
  - Publish results of a forensic audit of COVID-19 vaccine spending up to June 2021 and a comprehensive audit of expenditures in FY2020/21 with a chapter on COVID-19-related spending — Target: End-May 2022 — Status: New.
  - Ensure comprehensive information on public tenders awarded, including beneficial ownership information, publicly available on the government procurement information portal — Target: End-Jun. 2021 — Status: Not met.
  - Start publication of annual report on tax expenditures and their budget implications — Target: End-Sep. 2021 — Status: Met.
  - Adopt revised standard bidding documents to obtain consent from beneficial owners to publish beneficial ownership information for awarded tenders in PPIP; start requiring consent for all new tenders — Target: End-March 2022 — Status: New.
- Budget and revenue collection:
  - Submit to Parliament a budget for FY2021/22 consistent with the programmed deficit target — Target: End-Apr. 2021 — Status: Not met. Implemented with delay.
  - Submit to Parliament a supplementary budget for FY2021/22 consistent with programmed deficit target — Target: End-Jan. 2022 — Status: New.
  - Submit to Parliament a budget for FY2022/23 consistent with programmed deficit and revenue targets — Target: End-April 2022 — Status: New.
  - Increase by 30 percent the number of Level II audits of firms using risk-based approaches — Target: End-Dec. 2021 — Status: Met.
- Public Financial Management:
  - Issue decision to implement across MDAs and Counties a common payroll system linked to IFMIS — Target: End-June 2021 — Status: Not met. Implemented with delay.
- Public Investment Management:
  - Complete stocktaking of existing projects and associated commitments in education, health, and infrastructure; enter results in Hyperion and identify projects to be rationalized — Target: End-March 2021 — Status: Met.
  - Publish a white paper outlining strategy to strengthen and modernize the monetary policy framework — Target: End-June 2021 — Status: Not met. Implemented with delay.

### Technical Memorandum of Understanding (TMU) — highlights
- TMU purpose: Sets out 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 EFF and ECF arrangements.
- National Government definition: Budgetary national government encompassing national executive, legislative and judicial powers covered by the National Budget (parliament, national judiciary, executive including MDAs, and Constitutional Commissions and Independent Offices).
- QPC coverage (test dates December 31, 2021; June 30, 2022; December 31, 2022):
  - 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 CBK (floor).
  - Present value of contracting or guaranteeing of new external debt by the national government and the CBK (ceiling).
  - Accumulation of public and publicly-guaranteed external debt arrears (continuous ceiling).
  - New domestic guarantees granted by the national government or assumption of SOE debt not reflected in the primary balance (ceiling).
  - Monetary policy consultation clause (band).
- Primary balance measurement and adjustors:
  - Primary balance defined on cash basis as revenues and grants minus expenditures and net lending, plus due interest payments.
  - For program purposes measured from financing side as the sum of: (a) negative of net domestic financing; (b) negative of net external financing; and (c) domestic and external interest payments.
  - Measurement cumulative from July 1, 2021 for end-December 2021 test date and from July 1, 2022 for end-June 2022 and end-December 2022 test dates.
  - Adjustors include:
    - Floor adjusted downward (upward) by half of any SOE support in excess (falling short) of amounts set out in TMU Table 1 for FY2021/22 and FY2022/23, provided cumulative SOE support plus any overage does not exceed KSh.126.5 billion (1.0 percent of the FY2021/22 GDP) over that period.
    - Floor adjusted downward if budgetary program grants not specifically related to COVID-19 vaccination fall short of the programmed amounts in TMU Table 2.
    - Floor 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 foreign concessional project financing.
- Projected extraordinary support to SOEs (Table 1, KSh. million, cumulative from July 1):
  - 2021 Dec.: 0
  - 2022 Jun.: 48,426
  - 2022 Dec.: 36,638
- Program grants disbursements (Table 2, KSh. million, cumulative from July 1):
  - 2021 Dec.: 547
  - 2022 Jun.: 2,500
  - 2022 Dec.: 0

*Source: Nairobi, Kenya, December 2, 2021 — Attachment II. Technical Memorandum of Understanding*

### 8.      The stock of net official international reserves (NIR) of the CBK will be calculated as the

### 8.      The stock of net official international reserves (NIR) of the CBK will be calculated as the

### Definition and components of NIR
- NIR is calculated as the difference between total gross official international reserves and official reserve liabilities.
- Gross official international reserves are the sum of:
  - the CBK’s holdings of monetary gold (excluding amounts pledged as collateral);
  - holdings of Special Drawing Rights (SDRs);
  - CBK holdings of convertible currencies in cash or in nonresident financial institutions (deposits, securities, or other financial instruments); and
  - Kenya’s reserve tranche position with the IMF.
- Gross official usable international reserves exclude:
  - pledged, swapped, or any encumbered reserve assets, including but not limited to reserve assets used as collateral or guarantees for third-party external liabilities;
  - deposits with Crown agents; and
  - precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets.
- Gross official reserve liabilities are defined as:
  - the 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 of up to and including one year; and
  - commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options).

### Adjustors to the NIR target (program monitoring)
- NIR target adjustments:
  - If the total of (i) program loans, (ii) the revenue component of project loans, and (iii) external commercial and semi-concessional borrowing (excluding for payments of principal of existing debt with the proceeds from newly issued debt for debt management purposes (¶21 bullet a)) exceeds (falls short) the programmed amounts set out in TMU Table 3 below, the target for NIR will be adjusted upward (downward) by the difference;
  - If program grants or the revenue component of project grants falls short of the programmed amounts set out in TMU Table 3, the target for NIR will be adjusted downward by the difference;
  - If foreign exchange outflows related to financial support provided to Kenya Airways exceeds (falls short) the programmed amounts set out in TMU Table 3, the target for NIR will be adjusted downward (upward) by the difference;
  - The NIR target will be adjusted downward by the full amount of import costs associated with COVID-19 vaccine-related purchases less any external project financing received for this purpose.
  - If the pledged DSSI relief exceeds (falls short of) the programmed amounts set out in TMU Table 4 below, the target for NIR will be adjusted upward (downward) by the difference.

### Monitoring currency and exchange rate conversion
- 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.

### Key program figures (Table 3: Projected program and project loans, grants, commercial borrowing and KQ outflows) (US$ millions)
- Program grants and loans: 2021 End-Dec 375; 2022 End-June 1619; 2022 End-Dec 252
- Program loans: 2021 End-Dec 370; 2022 End-June 1597; 2022 End-Dec 252
- Program grants: 2021 End-Dec 5; 2022 End-June 22; 2022 End-Dec 0
- Project loans and grants: 2021 End-Dec 327; 2022 End-June 816; 2022 End-Dec 293
- Project loans (revenue component): 2021 End-Dec 296; 2022 End-June 736; 2022 End-Dec 259
- Project grants (revenue component): 2021 End-Dec 30; 2022 End-June 80; 2022 End-Dec 34
- Commercial and Semi-concessional borrowing: 2021 End-Dec 1191; 2022 End-June 0; 2022 End-Dec 0
- Foreign exchange outflows related to KQ support: 2021 End-Dec 0; 2022 End-June 240; 2022 End-Dec 117
- Note: Cumulative from July 1, 2021 for FY2021/22 and from July 1, 2022 for FY2022/23.

### DSSI relief (Table 4) (US$ millions)
- DSSI total debt relief:
  - 2021 Mar. 312.0
  - 2021 Jun. 424.8
  - 2021 Dec. 88.9
  - 2022 Jun. 88.9
- Note: Cumulative from July 1, 2020 to June 30, 2021 for FY2020/21 and from July 1, 2021 to June 30, 2022 for FY2021/22.

### Program exchange rates (Table 5) (Rates as of February 4, 2021)
- US Dollar: Kenyan Shillings per currency unit 109.8647; Currency units per US Dollar 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.

### Continuous performance criterion on public and publicly-guaranteed external debt arrears
- Definition:
  - Public and publicly-guaranteed external debt arrears are overdue payments (principal or interest), not made by their contract due date nor during the applicable grace period, on debt contracted by the national government.
  - Arrears are defined as overdue payments beyond 30 days after the original contract due date; excludes arrears relating to debt subject to renegotiation (dispute or ongoing renegotiation) or rescheduling.
  - External debt is defined on a currency basis.
- Performance criterion:
  - Defined as a cumulative flow in gross terms from January 1, 2021 and applies on a continuous basis.

### Ceiling on contracting or guaranteeing of new external debt — definitions and coverage
- Definition of debt follows paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements (Executive Board Decision No.15688-(14/107), adopted December 5, 2014).
- Debt understood as a current liability created under a contractual arrangement requiring future payments in assets or services. Primary forms include:
  - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements);
  - (ii) suppliers’ credits;
  - (iii) leases (debt is the present value at inception of lease payments expected during the agreement).
- Arrears, penalties, and judicially awarded damages arising from failure to make payment under contractual obligation that constitutes debt are debt.
- Coverage:
  - External debt is any debt contracted or guaranteed by the public sector denominated in foreign currency (other than Kenyan Shilling).
  - Public sector external debt includes foreign-currency denominated obligations of the National Government of Kenya, and foreign-currency denominated obligations of the Central Bank of Kenya contracted on behalf of the national government (excluding newly contracted financing from the IMF and the General SDR allocation).
  - For program purposes, a ‘guaranteed debt’ is an explicit promise by the public sector to pay or service a third-party obligation.
  - External debts in currencies other than the U.S. dollar will be converted in U.S. dollars at program exchange rates.

### Contracting of debt and credit lines
- A debt is considered contracted when all conditions for its entry into effect have been met, including approval by the Attorney General.
- Contracting of credit lines with no predetermined disbursement schedules or with multiple disbursements will also be considered as contracting of debt.

### Debt ceiling and present value calculation
- A performance criterion (ceiling) applies to the present value (PV) of new external debt contracted or guaranteed by the public sector; applies also to debt contracted or guaranteed for which value has not yet been received.
- Exclusion: Loan obligations between the national government and creditors of Kenya Airlines that (i) replace two guarantees previously provided by GOK to the same lenders; (ii) result in present value savings compared to the debt obligations that GOK would have had to assume had the two guarantees been triggered are excluded from the PC.
- Present value (PV) calculation:
  - PV at contracting is calculated by discounting the future stream of payments of debt service due on this debt.
  - For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt.
  - Discount rate used: the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).
  - Grant element of external debts in currencies other than the U.S. dollar calculated in U.S. dollar terms at program exchange rates.
  - For debts with variable interest rate (benchmark plus fixed spread), PV calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract.
  - Program reference rate for the six-month USD SOFR is 0.04 percent (fixed for duration of program).
  - Spreads:
    - Spread of six-month Euro EURIBOR over six-month USD SOFR is -56 basis points.
    - Spread of six-month JPY OIS over six-month USD SOFR is -8 basis points.
    - Spread of six-month GBP SONIA over six-month USD SOFR is 1 basis point.
    - For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD SOFR is 15 basis points.
  - Where variable rate is linked to a benchmark other than six-month USD SOFR, a spread reflecting the difference between that benchmark and six-month USD SOFR (rounded to the nearest 50 basis points) will be added.

### Debt management operations (DMOs) and adjustors to debt ceiling
- DMOs defined as repayment or refinancing of principal of outstanding external public debts prior to or at their maturity dates.
- Programmed issuance of non-concessional debt for use in DMOs is shown as a memorandum item in Table 1 of the accompanying Memorandum of Economic and Financial Policies.
- Adjustors:
  - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this ceiling, in case deviations are prompted by a change in financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees). The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed.
  - The debt ceiling would be adjusted upward by the full amount in PV terms of any project financing dedicated to COVID-19 vaccine interventions that was not anticipated at the time of setting of the performance criterion. Authorities will consult with IMF staff on any planned external concessional borrowing for this purpose before contracts/guarantees.
  - The debt ceiling will be adjusted downward by the full amount of: (1) any shortfall between the actual and programmed issuance of debt for use in DMOs, and (2) the issuance of any debts for use in DMOs that do not result in a reduction of the present value (present value savings) of the overall public external debt and an improvement of the overall public external debt service profile.
  - In calculation of present value savings from DMOs, the discounted future stream of payments on the newly issued debt instrument (including all costs) will be compared with the discounted future stream of debt service due on the instrument it replaces using a discount rate of 7 percent, and these amounts will not be capped by the nominal value of the debt.

### Ceiling on new domestic guarantees granted by the national government
- National government guarantees on domestic borrowing include all guaranteed commitments for:
  - (i) borrowing in domestic currency from residents and nonresidents; as well as
  - (ii) guarantees extended by any SOE.

### Monetary policy consultation clause
- Bands around the projected 12-month rate of CPI inflation (headline CPI published by KNBS) are specified in TMU 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 in TMU Table 6, the authorities will complete a consultation with the IMF Executive Board focusing on:
  - (i) the stance of monetary policy and whether the Fund-supported program remains on track;
  - (ii) the reasons for program deviations, taking into account compensating factors; and
  - (iii) proposed remedial actions if deemed necessary.
- When the 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-Dec. 2021 / end–Jun. 2022 / end-Dec. 2022
  - Upper band: 7.5 / 7.5 / 7.5
  - Center point: 5.0 / 5.0 / 5.0
  - Lower band: 2.5 / 2.5 / 2.5
- Source: Kenyan authorities.

### Fiscal and program targets (selected)
- Tax revenue of the national government defined as 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). Excludes: “Ministerial Appropriation in Aid” taxes (RML, RDL, PDL), “Taxes on International Trade and Transactions (IDF fee),” “Capital gains,” and “other taxes on goods and services.”
- National government outstanding exchequer requests defined as invoices for goods or services provided to the national government with requisitions in IFMIS but funds not released; program ceiling refers to requisitions made after start of July 2021 and invoices unpaid for 90 days or longer, disregarding changes related to legal rulings or claims found invalid on bills originated before program start.
- Priority social spending (defined items include cash transfers to orphans and vulnerable children, elderly persons, persons with severe disabilities; free primary and secondary education expenditure; school food and sanitary programs; free maternal healthcare; universal health coverage; health insurance subsidy for targeted categories; spending for vaccination and immunization).
  - Floor on priority social spending set as programmed amounts in TMU Table 7.
  - Table 7 (KSh. millions) Priority Social Spending:
    - 2021 Dec.: 205,395
    - 2022 Jun.: 397,320
    - 2022 Dec.: 210,389
  - Note: Cumulative from July 1, 2021 for FY2021/22 and from July 1, 2022 for FY2022/23.

*Source: Kenyan authorities.*

### 30.      To monitor program performance, the National Treasury and the CBK will provide to the IMF

### 30.      To monitor program performance, the National Treasury and the CBK will provide to the IMF

### Monitoring and reporting obligations
- The National Treasury (NT) and the Central Bank of Kenya (CBK) will provide to the IMF the information at the frequency and within the reporting deadlines specified in TMU Table 8.
- The authorities will transmit promptly to Fund staff any data revisions, as well as other information necessary to monitor the arrangements with the IMF.
- For any information (and data) that is (are) relevant for assessing performance against program objectives but is (are) not specifically defined in this memorandum, the authorities will consult with Fund staff.

### TMU Table 8 — Summary of data to be reported (selected entries and deadlines)
- Primary balance of the national government — various components (net domestic bank financing; net nonbank financing; proceeds from privatization; debt service on domestic and external debt; disbursements and repayment schedules of external concessional and non-concessional project loans; budget support loans; net proceeds from issuance of external debt; exceptional financing; change in external arrears; MDAs’ pending bills; exchequer requests unpaid for 90 days or more; Extraordinary SOE support; national government transactions with and on behalf of SOEs).
  - Frequency: Monthly or Quarterly as specified.
  - Reporting deadlines: Within 20 days after month end for monthly items; Within 45 days after quarter end or within 20 days after the end of the quarter for quarterly items.
  - Responsible entities: CBK and NT as indicated for each line item.
- Public debt
  - Stock of Treasury Bills and Bonds — Quarterly — Within 45 days after quarter end — NT.
  - Auctions of T-bills and T-bonds via primary dealers — Weekly — Within 7 working days after the end of the week — NT.
  - Total new other domestic debt contracted or guaranteed — Monthly — Within 20 days after the end of the quarter — NT in collaboration with CBK.
  - Total new Eurobond issuances — Monthly — Within 20 days after the end of the quarter — NT.
  - Other contracted external debt items — Monthly — Within 20 days after the end of the quarter — NT (in collaboration with CBK where specified).
- Gross official international reserves
  - CBK’s holding of monetary gold; Holdings of SDRs; CBK holdings of convertible currencies in cash or in nonresident financial institutions — Monthly — Within 20 days after the end of the month — CBK.
- Official reserve liabilities
  - Total outstanding liabilities of the CBK to the IMF excluding the SDR allocations; Convertible currency liabilities of the CBK to nonresidents with original maturity up to and including one year; Commitments to sell foreign exchange arising from derivatives — Monthly — Within 20 days after month end — CBK.
- Other indicators
  - Currency in circulation; Required and excess reserves; Concessional and non-concessional medium- and long-term external debt contracted or guaranteed by the national government and CBK — Monthly — Within 20 days after month end — CBK/NT as specified.
  - Accumulation of national government external payment arrears — Monthly — Within 20 days after the end of the quarter — NT.
  - Social priority spending of the national government — Quarterly — Within 45 days after quarter end — NT.
  - Grants to national government entities and total subsidies — Quarterly — Within 20 days after month end — NT.
  - 12-month CPI inflation — Monthly — Within 15 days after the end of the month — KNBS.
  - Financial Soundness Indicators (core and expanded) for other depository corporations — Quarterly — Within 20 days after quarter end — CBK.

### Debt coverage, risks, and DSA conclusions
- Public debt perimeter for the analysis: debt of the central government, Social Security Fund, central bank debt taken on behalf of the government, and government guaranteed debt.
- The external DSA covers external debt of the central government and the central bank, including publicly guaranteed debt, as well as of the private sector. The public DSA covers both external and domestic debt incurred or guaranteed by the central government; it does not cover the entire public sector (e.g., extra-budgetary units and county governments).
- Debt coverage excludes legacy debt of the pre-devolution county governments estimated at KSh 53.8 billion (0.5 percent of 2020 GDP).
- 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.

- DSA judgment and summary:
  - Risk of external debt distress: High.
  - Overall risk of debt distress: High.
  - Granularity in the risk rating: Sustainable.
  - Application of judgment: No.
  - Key conclusion: Kenya’s debt is sustainable. While overall and external ratings for risk of debt distress remain high, debt dynamics will be bolstered by the fiscal consolidation envisaged under the IMF supported program.

### Debt dynamics and composition (exact figures)
- Gross public debt increased from 44.4 percent of GDP at end-2015 to 67.4 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 amounted to 35 percent of GDP.
- Multilateral creditors accounted for about 40 percent of external debt at end-2020.
- Bilateral creditors represented close to 33 percent of external debt at end-2020.
- Of Kenya’s bilateral debt, about 63 percent is owed to non-Paris Club members.
- Non-guaranteed debt of 18 SOEs (9 of which were found to have non-guaranteed debt) totaled KSh.105 billion (1 percent of GDP).
- Legacy county debt: KSh 53.8 billion (0.5 percent of 2020 GDP).
- External commercial debt (mainly Eurobonds, loans and export credits) accounted for about 28 percent of external public debt (end-2020).
- Eurobonds accounted for US$6.1 billion (64 percent of commercial debt).
- Syndicated loans represented about $2.8 billion (30 percent of commercial debt).
- Kenya successfully issued a new US$1 billion Eurobond in June 2021.

### DSA contingent liabilities stress test calibrations (exact values)
- 3.1 percent of GDP to capture non-guaranteed debt of SOEs and PPPs (includes non-guaranteed debt of 18 SOEs; KSh.105 billion = 1 percent of GDP for the 9 SOEs noted).
- 0.5 percent of GDP to cover legacy debt of pre-devolution county governments.
- 5 percent of GDP for a financial market shock (exceeds existing stock of financial sector NPLs of about 4 percent of GDP).
- Total (2+3+4+5) expressed in the Text Table: 8.6 percent of GDP.

### Selected DSA debt stock and service table extracts (exact values)
- Total debt stock (end-2020): 66,495 (In US$); Percent total debt: 100.0; Percent GDP: 67.4.
- External debt (end-2020): 34,491 (In US$); Percent total debt: 51.9; Percent GDP: 35.0.
- Multilateral creditors (end-2020): 13,695 (In US$); Percent total debt: 20.6; Percent GDP: 13.5.
- Bilateral creditors (end-2020): 11,278 (In US$); Percent total debt: 17.0; Percent GDP: 11.1.
- Bonds (end-2020): 6,100 (In US$); Percent total debt: 9.2; Percent GDP: 6.0.
- Commercial creditors (end-2020): 2,826 (In US$); Percent total debt: 4.3; Percent GDP: 2.8.
- Domestic debt (end-2020): 32,005 (In US$); Percent total debt: 48.1; Percent GDP: 32.4.
- Nominal GDP (at average Ksh/$ rate, 2020): 101,233.

### Data coverage improvements and authorities’ actions
- Kenyan authorities are working on expanding the coverage of public debt in regular reports to include non-guaranteed debt of the public sector (including arrears) by October 2022.
- The Annual Public Debt Management Report for FY 2020/21 included non-guaranteed debt of 18 public entities considered to pose the highest fiscal risk; next fiscal year’s debt report is expected to extend coverage to counties and remaining SOEs.

_Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA); Approved By: Annalisa Fedelino (IMF, AFR); Martin Kaufman (IMF, SPR); Marcello Estevão, and Asad Alam (IDA); December 2, 2021._

### 6.      Kenya’s domestic public debt reached

### 6.      Kenya’s domestic public debt reached

### Domestic public debt profile and market composition
- Domestic public debt reached 32.4 percent of GDP at end-2020.
- Debt instruments:
  - Treasury bonds: 77 percent of the total stock of domestic public debt.
  - Treasury bills: remainder (implied).
- Holders of government domestic debt securities:
  - About half held by commercial banks.
  - Next largest holders: pension funds.

### Interest rates and maturity profile
- Average interest rates in October 2021:
  - 91-day: 7.0 percent.
  - 182-day: 7.4 percent.
  - 364-day: 8.2 percent.
- Average time to maturity for government domestic bonds (excluding T-bills):
  - Increased from 6.3 years in June 2019 to 8.6 years in June 2021.
  - This lengthening of the maturity profile helped alleviate short-term rollover risks.

### Data on private external debt
- Published data on private external debt available through 2018 and extrapolated forward with net private external debt BOP flows.
- Source: International Investment Position (IIP) data published in the IMF Statistics Department IIP database.
- Compared with the last DSA, the 2020 ratio of total private external debt to GDP is 1.7 percentage points higher, reflecting improved data coverage.

### Underlying macroeconomic assumptions and revisions
- KNBS revisions (September 2021) to historical GDP series:
  - Level of nominal GDP is higher (example: by 5.3 percent in 2019).
  - 2010–19 real growth was on average 0.8 percent lower than previously estimated (5.0 vs 5.8 percent).
  - Result: downward revision of growth potential and a lower average real growth rate over the projection period.
- Implications:
  - Initial nominal GDP level higher than in the last DSA (April 2021), but long-run nominal GDP below previous projections.
  - Affects all ratios to GDP in the DSA framework.
  - Corresponds with slower long-run import growth, improving the non-interest current account balance.
- Fiscal and sectoral assumptions broadly in line with previous projections but now include:
  - Baseline costs of SOE restructuring.
  - Expansion of the authorities’ COVID-19 vaccination program.
  - Modest additional emergency spending for drought and security.

### Growth outlook (baseline)
- Medium- to long-term annual trend growth: 5.5 percent.
  - Described as about 0.5 percentage points above the pre-pandemic average.
- Drivers and supportive factors:
  - Robust investment and productivity growth.
  - Reforms to open markets and support credit to the private sector.
  - Favorable demographic backdrop (growing working-age population and falling dependency ratio).
  - IMF 2021 EFF/ECF program supporting private investment rate.
- Short-term notes:
  - Estimated growth for 2021 significantly affected by school-related base effects (0.5 percentage points).
  - 2022 growth supported by tourism recovery.
  - Manufacturing and services (transportation and education) drove the 2021 recovery.

### Selected macroeconomic projections (excerpted values)
- Nominal GDP (Ksh billion), Current DSA:
  - 2021: 11,975
  - 2022: 13,328
  - 2023: 14,790
  - 2024: 16,388
  - 2025: 18,163
  - 2026: 20,133
  - Long-term (average 2027–41): 50,993
- Real GDP (growth), Current DSA:
  - 2021: 5.9
  - 2022: 5.8
  - 2023–2026: 5.5 (annual)
  - Long-term: 5.6
- Revenue and grants (percent of GDP), Current DSA:
  - 2021: 16.0
  - 2022: 16.6
  - 2023: 17.5
  - 2024: 18.0
  - 2025: 18.4
  - 2026: 18.8
  - Long-term: 19.5
- Primary fiscal deficit (percent of GDP), Current DSA:
  - 2021: -3.6
  - 2022: -2.3
  - 2023: -0.5
  - 2024: 0.3
  - 2025: 0.9
  - 2026: 1.3
  - Long-term: 1.0
- Non-interest current account (percent of GDP), Current DSA:
  - 2021: -3.9
  - 2022: -3.9
  - 2023: -4.0
  - 2024: -3.9
  - 2025: -3.9
  - 2026: -3.8
  - Long-term: -3.4
- Exports of goods and services (growth), Current DSA:
  - 2021: 13.3
  - 2022: 17.9
  - 2023: 13.3
  - 2024: 11.9
  - 2025: 10.8
  - 2026: 8.9
  - Long-term: 9.6

### Fiscal outcomes and medium-term fiscal strategy
- Fiscal deficit reached 8.2 percent of GDP in 2020/21 due to the COVID-19 shock.
- Tax revenues declined to 12.6 percent of GDP in 2020/21.
- Primary deficit in FY20/21: 4.0 percent of GDP (under-execution of planned spending held it below the 4.5 percent target).
- With continued adjustment under the IMF 2021 EFF/ECF program:
  - Kenya’s primary deficit is projected to narrow in 2023 below its average debt-stabilizing level over the medium-term, estimated at 1.3 percent of GDP.
  - Over the medium term, the overall deficit is expected to decline and stay below 4 percent of GDP, with on average zero primary balance (Table 2 reference).
- Policy stance:
  - Authorities assumed to limit reliance on external commercial borrowing to reduce debt-related vulnerabilities.
  - In 2021, 64 percent of external public financing expected to be concessional and semi-concessional (including IMF and World Bank).
  - Commercial financing in 2021 estimated at US$2.2 billion.

### SDR allocation, DSSI relief, and SOE contingent liabilities
- 2021 general allocation of SDRs to Kenya: equivalent of US$740 million (0.7 percent of GDP).
  - Authorities plan to retain half in reserves and on-lend up to half to substitute foregone fiscal financing.
  - Baseline assumes half (US$370 million) on-lent by the Central Bank of Kenya to the government as a 30-year domestic claim with bullet maturity.
  - Domestic financing need reduced by the domestic-currency equivalent of the face value of the claim (Ksh41.4 billion).
  - The claim enters PV of total public debt with a present value reflecting a grant element of 47 percent.
  - This reduces the PV of total public debt by 0.35 percent of GDP in 2021.
- G-20 Debt Service Suspension Initiative (DSSI) relief in 2021:
  - Relief in the first half of 2021 amounted to 0.39 percent of GDP.
  - Additional anticipated in the second half of 2021: 0.08 percent of GDP.
  - Total DSSI relief: USD 514 million.
- Kenya Airways (KQ) restructuring:
  - Government expects to take responsibility for full repayment of up to USD 827.4 million of loans to KQ.
  - USD 750 million is guaranteed by the Government of Kenya (GoK); guarantee already included in end-2020 stock of public debt.
  - DSA assumption: replacement of the full amount of KQ-related guarantees with the full amount of KQ loans subject to the operation in the DSA debt perimeter, including additional non-guaranteed debt of USD 77.4 million.
  - GoK assumed to service the debt based on the original amortization schedule of KQ‘s loan agreements.
  - Authorities plan offsetting expenditure cuts for half of the amount of extraordinary SOE support (up to one percent of GDP), and to fully offset amounts beyond this level.

### External sector and current account
- Current account deficit:
  - Amounted to 4.5 percent of GDP in 2020 (around one percentage point lower than in 2019).
  - Projected to stabilize at around 5 percent of GDP over the medium term.
- Drivers of 2020 narrowing:
  - Trade and primary income account improvements offset negative travel and transport receipts.
  - Trade deficit narrowed due to resilient goods exports, weaker import demand, and lower energy and commodity prices.
  - Surplus on income account increased (stronger remittances and drop in FDI-related outflows).
  - Favorable weather boosted horticulture and tea exports.
- Outlook:
  - Capital goods imports expected to gradually increase with investor sentiment and business climate improvements.
  - Exports of goods and services projected to reach 13.4 percent of GDP in 2026 (broadly same share as in 2016).
  - Export growth supported by improving business environment, agricultural potential, Big 4 development agenda, and Economic Recovery Strategy.
  - Services and remittances projected to gradually increase as tourism returns to normal.

### External borrowing program (Jul 1, 2021 to Dec 31, 2022) — summary figures
- Volume of new PPG external debt from Jul 1, 2021 to Dec 31, 2022 (USD million): 12,700.8 (100 percent)
  - Concessional debt: 6,303.3 (50 percent)
    - Multilateral debt: 3,461.1 (27 percent)
    - Bilateral debt: 2,842.1 (22 percent)
  - Non-concessional debt: 6,397.6 (50 percent)
    - Semi-concessional: 193.2 (2 percent)
    - Commercial terms: 6,204.4 (49 percent)
- PV of new debt (program purposes) (USD million): 9,904.9 (100 percent)
  - Concessional debt PV: 3,553.8 (36 percent)
  - Non-concessional debt PV: 6,351.1 (64 percent)
    - Semi-concessional PV: 146.7 (1 percent)
    - Commercial terms PV: 6,204.4 (63 percent)
- By creditor type (volume of new debt, USD million):
  - Multilateral: 3,461.1 (27 percent)
    - World Bank: 2,595.1 (20 percent)
  - Bilateral - Paris Club: 1,159.5 (9 percent)
  - Bilateral - Non-Paris Club: 1,682.6 (13 percent)
  - Other (including for debt management operations): 6,397.6 (50 percent)
    - For debt management operations: 5,000.0 (39 percent)
- Uses of debt financing (volume, USD million):
  - Infrastructure: 3,735.3 (29 percent)
  - Social Spending: 2,026.6 (16 percent)
  - Budget Financing: 1,006.8 (8 percent)
  - Other (including for debt management operations): 5,932.2 (46.7 percent)
    - For debt management operations: 5,000.0 (39 percent)

*Source: IMF staff summary of the chapter "6.      Kenya’s domestic public debt reached" from the provided IMF country report material.*

### 17.      Kenya’s debt carrying capacity is assessed as Medium (Text Table 6). The debt carrying

### Kenya’s debt carrying capacity is assessed as Medium (Text Table 6)

### Debt-carrying capacity and Composite Indicator (CI)
- CI Index: 3.04
- Applicable CI threshold for Strong rating: 3.05
- Current CI rating: Medium
- Previous CI index (based on April 2021 WEO): exceeded threshold for a Strong rating (implied > 3.05); October 2021 WEO vintage CI falls below 3.05 and does not trigger upward revision.
- Drivers of the downward revision versus April 2021: GDP rebasing that lowered real GDP growth historically and in projections, upward revision of nominal GDP (level effect), changes in centered 10-year averages of real GDP growth and remittances to GDP; world economic growth revision insufficient to offset Kenya GDP revisions.

CI Index components (10-year averages and contributions)
- CPIA: coefficient 0.385; 10-year average 3.70; contribution 1.43 (47%)
- Real growth rate (in percent): coefficient 2.719; 10-year average 4.67; contribution 0.13 (4%)
- Import coverage of reserves (in percent): coefficient 4.052; 10-year average 42.67; contribution 1.73 (57%)
- Import coverage of reserves^2 (in percent): coefficient -3.990; 10-year average 18.21; contribution -0.73 (-24%)
- Remittances (in percent): coefficient 2.022; 10-year average 3.04; contribution 0.06 (2%)
- World economic growth (in percent): coefficient 13.520; 10-year average 3.14; contribution 0.42 (14%)
- CI Score: 3.04 (100%); CI rating: Medium

Applicable thresholds (based on Medium debt-carrying capacity)
- EXTERNAL debt burden thresholds:
  - PV of debt in % of Exports: 180
  - Debt service in % of Exports: 15
- TOTAL public debt benchmark:
  - PV of total public debt in percent of GDP: 55
  - PV of total public debt in percent of GDP threshold (external-specific): 40
- Debt service in % of Revenue threshold: 18

### Tailored stress tests and shock scenarios
- One tailored stress test: one-time contingent liabilities shock equivalent to 8.6 percent of GDP, composed of:
  - contingent liabilities from SOEs: 2 percent of GDP (standard level)
  - contingent liabilities from PPPs: 35 percent of the existing PPP stock, or 1.1 percent of GDP
  - bank recapitalization need: 5 percent of GDP (standard level)
- Second tailored stress test: market financing shock for market-access countries (including Kenya) assessing rollover risks from:
  - deterioration in global risk sentiment
  - temporary nominal depreciation
  - shortening of maturities of new external commercial borrowing

### External debt sustainability findings
- PV of PPG external debt-to-exports (solvency) remains above the 180 percent threshold during 2021–27 (mechanical high-risk signal).
- External debt service-to-exports (liquidity) exceeds its 15 percent threshold throughout the 10-year projection period.
- Solvency indicator gradually declines as exports recover; liquidity indicator long-term decline interrupted by Eurobond repayments in 2024, 2028 and 2031.
- PV of PPG external debt as share of GDP remains below the 40 percent indicative threshold throughout projections:
  - PV external debt-to-GDP expected to decline from 28.2 percent in 2021 to 17 percent in 2041.
  - External debt service-to-revenue ratio exceeds its threshold in 2024 due to Eurobond maturity in that year.
- Standard stress tests: under the most extreme shock (shock to export growth), PV debt-to-exports and debt service-to-exports breach thresholds over the entire medium-term projection; debt service-to-revenue may breach threshold in 2028 under extreme scenario.
- Market financing liquidity indicators:
  - EMBI spread: fell from 727 basis points in 2020Q1 to 499.5 basis points at end-October; threshold 570 basis points.
  - Gross financing needs: declined from 14 percent of GDP (previous DSA) to 12 percent of GDP currently; threshold 14 percent of GDP indicates high risk.
  - 2021 general allocation of SDRs portion not transferred to budget: US$370 million (0.3 percent of GDP) could serve as additional safety buffer.
- Risks: global liquidity tightening could raise financing risks; shift toward domestic financing warrants monitoring despite longer domestic debt maturities.

### Public debt sustainability findings
- PV of total public debt-to-GDP ratio remains above the 55 percent benchmark (Medium capacity) until 2025, creating a mechanical high-risk signal.
- Public sector debt path:
  - PV public debt: 60.3 percent of GDP (PV terms) in 2020 rising to 62.2 percent in 2022, then gradually declining.
  - PV public debt-to-revenue ratio: 363 percent in 2020 → 376 percent in 2021 → 210 percent in 2031 → 91.1 percent in 2041.
- Stress scenarios: under the most extreme shock (shock to GDP growth), PV public debt-to-GDP breaches 55 percent benchmark for the entire projection period.
- Debt trajectory under program:
  - Fiscal consolidation would achieve and surpass the debt-stabilizing primary balance.
  - Debt would begin declining as a share of GDP starting in 2023.
  - Indicators measured against exports expected to improve as exports recover and competitiveness reforms advance.

### Risk rating, vulnerabilities, and mitigating factors
- Overall risk of external and public debt distress: high in the context of the global COVID-19 shock.
- Key vulnerabilities and drivers:
  - Sharp temporary declines in export and GDP growth due to COVID-19 and a strong fiscal response interrupting planned consolidation.
  - Mechanical deterioration in debt indicators, especially those expressed in terms of exports.
  - SOE-related contingent liabilities and large past deficits partly due to large infrastructure projects.
  - Concentration of liquidity pressure in 2024 due to Eurobond maturity.
  - Political-calendar uncertainty (upcoming general elections) could pressure budget execution and reform implementation.
- Factors supporting debt sustainability:
  - Decisive actions in 2020 and 2021 to limit pandemic-induced deficit increases and to broaden the tax base.
  - Multi-year fiscal consolidation under the IMF-supported EFF/ECF program to decisively reduce deficits and increase tax revenue.
  - Consistently strong remittances and favorable outlook for exports.
  - Favorable overall debt profile and generally smooth amortization profile; authorities consider further optimization and potential debt management operations if market conditions allow.
  - Close monitoring and financial evaluations of largest SOEs; commitment under EFF/ECF to limit fiscal impact of SOE support (e.g., via offsets).
  - Ongoing efforts under the SDFP to rationalize public investments on rigorous criteria.
  - Remittances projected to reach 32 percent of exports of goods and services in 2021.
- Additional mitigating considerations:
  - Kenya’s PV of external debt-to-GDP well below 40 percent and expected to decline.
  - Borrowing plan balances commercial and concessional financing; EFF/ECF program limits on government external borrowing and PPAs under SDFP support improved debt transparency.
  - Potential debt management operations (not in DSA baseline), including refinancing syndicated loans and the 2024 Eurobond with long-dated instruments, could meaningfully improve external debt profile.
  - Authorities’ commitment to absorb materialized SOE-related fiscal costs with limited impact on the programmed fiscal envelope supports public-sector balance-sheet insulation.
  - Relatively smooth debt service profile except for the 2024 Eurobond maturity and an overall declining trajectory in debt service capacity.

*IMF staff analysis as presented in the cited chapter.*

### 29.      The debt profile also calls for a strong debt management framework and its effective

### 1kenea2021004 - 29.      The debt profile also calls for a strong debt management framework and its effective

### Debt management, policy recommendations, and priorities
- The debt profile calls for a strong debt management framework and its effective implementation.
- Authorities’ active plans to manage portfolio risks include refinancing maturities coming due on better terms to improve the overall debt profile.
- Authorities are encouraged to further strengthen debt management capacity to manage and prepare for large repayments of commercial borrowing.
- Authorities’ plans to refinance loans at a longer maturity to limit refinancing risks are welcomed.
- Concessional borrowing should continue to play an important role in financing investment projects because of its lower cost and longer maturity profile.
- Non-concessional borrowing should be utilized to finance projects that are critical for the authorities’ development strategy and have high social and economic returns.
- Efficient investment in infrastructure will raise growth and export potential and support Kenya’s external debt sustainability.
- Delivering on fiscal consolidation, while seeking to preserve social and development spending, would further reduce risks.
- Authorities are encouraged to expand the coverage of public debt to include county governments and non-guaranteed debts of SOEs and extra budgetary units and to continue improving public debt management and revenue administration.

### Authorities’ views and strategy
- The authorities broadly shared Fund staff’s assessment, emphasizing that reducing debt vulnerabilities is a key priority to support Kenya’s developmental agenda.
- They highlighted success in extending the maturity of domestic debt and the need for a financing strategy that:
  - balances domestic and external financing,
  - utilizes concessional financing where available,
  - accesses private capital markets judiciously.
- The authorities reiterated commitment to expand the coverage of public debt in regular reports to include non-guaranteed public sector debts (including arrears).
- Publication of information for 18 public entities in the Public Debt Management Report for FY 2020/21 was noted as an important milestone.
- The authorities expect a new national debt ceiling in present value terms to be adopted in 2022, which they see as a credible anchor of medium-term fiscal policies.
- They are actively seeking debt management operations to lower costs of debt and refinancing risks, especially by seeking to refinance syndicated loans and the 2024 Eurobond with long-dated debt instruments.
- If market conditions are favorable, the authorities are considering debt management operations.

### Selected public and external debt statistics and projections (key series as presented)
- External debt (nominal) (In percent of GDP): 2018 50.0, 2019 52.1, 2020 59.7, 2021 62.2, 2022 62.8, 2023 64.9, 2024 66.1, 2025 67.4, 2026 68.5, 2031 70.5, 2041 66.3, (further projection) 42.6, 67.5.
- Of which: public and publicly guaranteed (PPG) (percent of GDP): 2018 29.2, 2019 29.9, 2020 35.0, 2021 36.7, 2022 36.0, 2023 35.8, 2024 34.4, 2025 34.1, 2026 33.9, 2031 31.5, 2041 24.7, (further projection) 23.3, 34.2.
- Identified net debt-creating flows (percent of GDP): -1.7, 0.3, 3.6, 1.7, 1.2, 1.1, 0.8, 0.6, 0.4, -0.7, -1.6, 2.4, 0.4.
- Non-interest current account deficit (percent of GDP): 4.2, 4.1, 3.4, 3.9, 3.9, 4.0, 3.9, 3.9, 3.8, 3.3, 3.4, 5.7, 3.7.
- Exports (percent of GDP): 12.5, 11.4, 9.7, 10.1, 11.2, 11.9, 12.5, 12.9, 13.1, 15.1, 22.2.
- Imports (percent of GDP): 21.9, 20.3, 17.7, 19.2, 20.0, 20.5, 21.0, 21.4, 21.6, 23.4, 30.9.
- Net FDI (negative = inflow) (percent of GDP): -1.6, -1.1, -0.5, -0.2, -0.6, -0.8, -0.9, -1.0, -1.1, -1.7, -2.5, -1.3, -1.1.
- Residual (percent of GDP): 0.7, 1.7, 4.0, 0.8, -0.6, 1.0, 0.4, 0.6, 0.7, 0.4, 0.9, 0.5, 0.6.
- Gross external financing need (Million of U.S. dollars): 22,671, 25,771, 22,220, 23,095, 24,901, 25,896, 28,865, 28,640, 29,721, 38,849, 56,652.
- Key macroeconomic assumptions — Real GDP growth (in percent): 5.6, 5.0, -0.3, 5.9, 5.8, 5.5, 5.5, 5.5, 5.5, 5.5, 5.8, 4.2, 5.6.
- GDP deflator in US dollar terms (change in percent): 6.4, 3.7, 1.1, 2.2, 0.6, 1.1, 1.5, 1.8, 1.8, 0.1, 0.2, 4.1, 0.9.
- Effective interest rate (percent): 2.7, 3.1, 2.3, 2.3, 2.1, 1.9, 1.8, 1.8, 1.9, 2.0, 1.7, 2.7, 2.0.
- Growth of exports of G&S (US dollar terms, in percent): 10.7, -0.6, -14.8, 13.3, 17.9, 13.3, 11.9, 10.8, 8.9, 8.6, 10.2, 1.2, 10.9.
- Growth of imports of G&S (US dollar terms, in percent): 5.7, 1.2, -12.4, 17.9, 10.5, 9.6, 9.6, 9.1, 8.4, 7.2, 9.2, 3.4, 9.3.
- Grant element of new public sector borrowing (in percent): 25.3, 41.6, 32.1, 25.4, 31.5, 30.1, 31.9, 35.4, 30.8 (as presented in projections).
- Government revenues (excluding grants, in percent of GDP): 17.3, 16.8, 16.4, 16.0, 16.6, 17.5, 18.0, 18.4, 18.8, 19.1, 20.9, 16.8, 18.2.
- Nominal GDP (Million of US dollars): 92,251, 100,416, 101,233, 109,489, 116,475, 124,192, 132,958, 142,806, 153,337, 202,548, 355,744.
- Nominal dollar GDP growth (percent): 12.4, 8.9, 0.8, 8.2, 6.4, 6.6, 7.1, 7.4, 7.4, 5.6, 9.5, 8.5, 6.5.

### Public sector debt dynamics and fiscal framework (selected public DSA figures)
- Public sector debt (percent of GDP): 2018 56.4, 2019 58.6, 2020 67.4, 2021 69.5, 2022 70.4, 2023 69.6, 2024 67.4, 2025 64.4, 2026 61.2, 2031 48.8, 2041 26.5, Average/Projection 47.9, 61.0.
- Identified debt-creating flows (percent of GDP): 2.2, 2.5, 7.5, 1.4, -0.1, -1.7, -2.6, -3.0, -3.3, -2.8, -2.0, 2.6, -2.2.
- Primary deficit (percent of GDP): 3.2, 3.4, 3.8, 3.6, 2.2, 0.5, -0.3, -0.9, -1.3, -1.0, -0.5, 3.4, -0.1.
- Revenue and grants (percent of GDP): 17.5, 17.0, 16.6, 16.4, 17.1, 17.8, 18.3, 18.7, 19.1, 19.4, 21.2, 17.3, 18.5.
- Automatic debt dynamics: -1.0, -0.9, 3.7, -2.2, -2.4, -2.2, -2.2, -2.1, -2.0, -1.9, -1.5.
- Contribution from average real interest rate (percent): 2.5, 2.5, 2.6, 1.5, 1.4, 1.5, 1.4, 1.4, 1.4, 0.8, 0.0.
- Contribution from real GDP growth (percent): -2.9, -2.7, 0.2, -3.7, -3.8, -3.7, -3.6, -3.5, -3.4, -2.7, -1.5.
- PV of public debt-to-GDP ratio (selected projection values as presented): 60.3, 61.7, 62.2, 61.2, 59.2, 56.3, 53.2, 40.7, 19.3 (years and exact alignment per table preserved in source).
- Debt service-to-revenue and grants ratio (percent): 44.7, 62.0, 53.7, 51.8, 58.2, 56.0, 58.1, 46.8, 39.8, 41.4, 12.4.
- Gross financing need (percent of GDP): 11.0, 14.0, 12.7, 12.1, 12.2, 10.5, 10.3, 7.8, 6.3, 7.0, 2.2.

### Stress tests, sensitivity analyses, and risks (high level)
- The Public and External DSAs include alternative scenarios, bound tests, and tailored tests covering risks such as weaker real GDP growth, primary balance deterioration, lower exports, other flows shocks, depreciation, combined shocks, and combined contingent liabilities.
- Table results signal potential breaches of thresholds under some stress tests (bold values in source indicate breaches).
- Figures and tables highlight that most extreme shocks for different indicators include one-time depreciation, exports shock, and combined contingent liabilities among the most adverse.

### Program context and supportive measures
- Authorities are pursuing a multi-year fiscal consolidation plan to reduce debt vulnerabilities while preserving priority spending, aiming to transition to a medium-term debt anchor of 55 percent of GDP (present value terms) by mid-2022.
- Authorities plan to bring the primary deficit below its debt-stabilizing level in 2023 and into positive territory by FY2023/24.
- Monetary policy stance remains appropriate with inflation targeted within 2.5–7.5 percent; the authorities aim to sustain a flexible exchange rate regime and intervene only in case of excessive volatility.
- Structural measures include SOE reform strategy, strengthening financial oversight, improving revenue administration, enhancing transparency and anti-corruption measures, and digitalization to support financial inclusion and MSME access to finance.

*Prepared by the African Department (in consultation with other Departments); content as presented in the source PDF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1kenea2021004.pdf_