## 1kenea2022002 ## Source details **Canonical URL:** [1kenea2022002](https://www.imf.org/-/media/files/publications/cr/2022/english/1kenea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1kenea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1kenea2022002.pdf.json) --- ### EXECUTIVE SUMMARY — Context, program performance, requests, and risks - Context and shocks: - Kenya’s economy rebounding strongly amid global shocks from the war in Ukraine, trade disruptions, and tighter frontier market financing conditions. - Shortfall in rains and continuing drought in semi-arid regions add uncertainty and pressure on vulnerable groups. - Pass-through of global price shocks implies inflation set to increase, albeit temporarily. - Surge in global fuel prices makes containing the cost of recently granted fuel subsidies urgent. - Program performance (end-December / end-May 2022): - All quantitative performance criteria (PCs) and one of two indicative targets (ITs) for end-December were met comfortably. - IT on social priority spending missed due to brief delay in executing some wage payments. - One of four structural benchmarks (SBs) was met; others saw delays. - Supplementary FY2021/22 Budget consistent with program objectives submitted to parliament (end-January SB). - SB on adoption of new tender documents (end-March) implemented with delay in April. - Submission of FY2022/23 Budget (end-April SB) implemented with delay as some tax measures were submitted in May and June. - End-May SB on publication of a forensic audit of COVID-19 vaccine spending up to June 2021 and comprehensive audit of FY2021/22 with chapter on COVID-19 spending was not met; ongoing audits likely to be completed by end-June and published by mid-July. - Authorities’ requests to IMF: - a) Waiver of applicability for the end-June 2022 PCs for the Extended arrangement under the EFF. - b) Modification of the PC on net international reserves (NIR) for end-June 2022 and end-December 2022. - c) Establishment of three new SBs: - Issuance of a National Treasury circular presenting an action plan for development of a Medium-Term Revenue Strategy (end-August 2022). - Completion of a review of the fuel pricing mechanism and constitution of a taskforce to oversee progressive elimination of the fuel subsidy within the first half of FY2022/23 (end-July 2022). - Submission of an action plan on Kenya Power and Lighting Company (KPLC) to restore medium-term profitability and fully cover financing gaps through end-Dec 2023 (end-July 2022). - Program risks: - Outlook subject to significant downside risks from COVID-19, the war in Ukraine, and the 2022 elections. - Program delivers resilience and flexibility to address vaccination needs and SOE restructuring while achieving objectives. ### RECENT ECONOMIC DEVELOPMENTS — External, COVID-19, and macro indicators - External exposure and price shocks: - Russia and Ukraine account for around 1.5 percent of Kenyan exports and 2.7 percent of imports. - Between January and May 2022, global prices rose by around: crude oil ~30 percent, wheat ~40 percent, fertilizers ~11 percent. - As of June 10, 2022, yields on Kenya’s 2-year Treasury Bond increased by 134 basis points from end-2021; 5-year yield rose by 113 basis points. - Kenya’s EMBI spread rose above 900 basis points by early June from below 500 basis points in mid-February. - COVID-19 developments: - Most COVID-19 related restrictions relaxed. - Infection positivity rate rose from 3.6 percent to 12.5 percent in first half of June 2022. - Vaccination: 31.4 percent of adults fully vaccinated as of mid-June 2022 (up from 5 percent at end-2021); Moderna announced a US$500 million investment to establish a vaccine facility in Kenya. - Selected macro outturns and indicators: - Real GDP growth: rebound to 7.5 percent in 2021 (after modest contraction in 2020). - Headline inflation: 5.1 percent (y/y) by February 2022; rose to 7.1 percent in May 2022. - Core inflation (excluding food and fuel): 2 percent in February to 2.6 percent in May. - Minimum wages: authorities announced a 12 percent increase (first since 2018). - Current account: 5.5 percent of GDP in 2021; widened in early 2022. - International reserves: 4.4 months of import coverage (adequate), build-up through end-March 2022 smaller than anticipated. - Shilling: real effective depreciation of 2.7 percent in 2021 and 1.3 percent through April 2022 (preliminary). - Fiscal outcomes: - Primary deficit at end-December 2021: Ksh.38 billion (0.3 percent of GDP) vs target Ksh.203 billion (1.9 percent of GDP). - Tax collection exceeded end-December PC by 0.4 percentage points of annual GDP. - Primary deficit at end-May 2022: Ksh.78.8 billion (0.6 percent of GDP). - Relatively modest domestic fuel price increases through May were not adequate to contain rising fuel subsidies. ### BOX 2 — Tax Performance in FY2021/22 (summary) - Performance: - Tax collection exceeded program objectives by 0.4 percentage points of GDP at end-December 2021. - Preliminary collection likely reached 12.3 percent of GDP through end-May 2022. - Monthly collections through May 2022 surpassed monthly targets by an average of 10.7 percent. - Staff projection and carryover: - Staff projects tax revenues to exceed end-FY2021/22 target by Ksh.55 billion (0.4 percentage points of GDP — conservative estimate). - Carryover to FY2022/23 conservatively estimated at 0.4 percent of GDP (up from prior estimate 0.3 percent of GDP). - Staff projects package of new tax measures needed to achieve FY2022/23 tax objectives at 0.4 percentage points of GDP (compared to 0.8 percentage point at second EFF/ECF reviews). - Drivers: - Permanent: stronger-than-anticipated resilience, yield of January 2021 tax measures, durable KRA compliance improvements (voluntary disclosure, debt recovery, revamped audits with IMF TA). - Temporary: spike in input price inflation affecting VAT and excises. ### FY2022/23 BUDGET, FISCAL STRATEGY, AND CONTINGENCY PLANNING - FY2021/22 supplementary budget: - Approved March 30. - Targeted primary deficit Ksh.419 billion (3.3 percent of GDP); accommodated additional spending including COVID-19 vaccine interventions and SOE support (combined total 0.3 percent of GDP). - Allocated emergency drought and security spending (0.2 percent of GDP). - SOE support estimated at Ksh.32.3 billion, about Ksh.16.1 billion below prior projection (rephasing of KQ support). - Supplementary budget maintained tax collection at programmed 13.2 percent of GDP. - FY2022/23 Budget and tax uncertainty: - Amendments to Finance Bill removed 0.2 percentage point of GDP in tax measures shortly before Parliament adjourned (MEFP¶22). - Authorities plan to introduce tax administration measures and expedite MACT legal resolution by July 2022 to compensate roughly one-half of the tax loss; remainder expected to be offset by FY2021/22 tax carryover of 0.4 percent of GDP. - Authorities committed to introduce additional tax measures in FY2022/23 equal to any unresolved shortfall. - Prepared to adopt further contingency measures and spending offsets if deterioration of macroeconomic environment undermines tax collection or delays fuel subsidy elimination. - Medium-term fiscal strategy: - Objective: reduce debt vulnerabilities; bring primary deficit below its debt-stabilizing level in 2023 via revenue mobilization and expenditure restraint. - Revenue plans: introduce additional tax measures for 0.9 percent of GDP in FY2023/24 (MTRS to set out measures). - Expenditure plans: restrain recurrent expenditures (wages and transfers) and improve public investment management. - Fiscal anchors and debt: - Public debt sustainable but at high risk of distress (DSA). - Baseline: public debt expected to peak at 70.4 percent of GDP in FY22/23. - National Treasury proposed replacing nominal legal ceiling (KSh.9 trillion) with medium-term debt-to-GDP anchor of 55 percent of GDP in PV terms; transition postponed and now expected enacted by end-2022. - Interim: raise legal ceiling to Ksh.10 trillion. ### STATE-OWNED ENTERPRISES (SOEs) — risks, support, and reforms - SOE support envelope and usage: - SOE support envelope covered by SOE adjustor: 1 percent of FY2021/22 GDP (Ksh.127.5 billion); half financed through budgetary offsets and half through higher borrowing. Limits total increase in primary deficit over FY2021/22–FY2022/23 due to SOE support to 0.5 percent of GDP. - Staff estimates nearly Ksh.69 billion will be used (Ksh.32.3 billion in FY2021/22 and Ksh.36.6 billion in FY2022/23) of the Ksh.127.4 billion covered by the SOE adjustor. - Kenya Airways (KQ): - Guaranteed and unguaranteed debt totaling US$868.7 million as of March 2022 expected to be serviced by the government; GoK largest shareholder (48.7 percent). - GoK will novate US$485 million of KQ’s guaranteed debt principal over coming years. - KQ support included Ksh.20.3 billion in FY2021/22 supplementary; restructuring plan progressed with advisory support; loan agreement preparation and conditional disbursements tied to KPIs. - Kenya Power and Lighting Company (KPLC): - Updated evaluation includes impact of 15 percent electricity tariff reduction in January; tariff reduction lowered revenues by an estimated Ksh.26.3 billion per annum. - Identified cost-saving measures yield benefits over time but insufficient to fully offset revenue impact. - Government anticipated to provide budget support to KPLC in FY2021/22 and FY2022/23; Ksh.9.05 billion support in FY2021/22 included Ksh.7.05 billion to fill liquidity gap from tariff cut. - New SB: submission of KPLC action plan to Cabinet Sub-Committee by end-July 2022 to restore medium-term profitability and fully cover financing gaps through end-Dec 2023; recommendation to avoid future tariff reductions unless fully backed by cost-saving measures. - SOE governance and oversight: - Authorities finalizing SOE classification and inventory and working on SOE Ownership Policy (with Fund TA) to detail governance, ownership allocation, privatization priorities, corporate governance expectations, performance monitoring and reporting, and disclosure guidelines. - GIMIS modules and expanded financial evaluations planned to monitor unguaranteed and guaranteed loans and fiscal risks. ### GOVERNANCE, ANTI-CORRUPTION, AML/CFT AND AUDITS - Procurement and beneficial ownership: - Revised bidding documents adopted April 8, effective April 21, 2022; beneficial owners’ consent form included for tenders from April 21, 2022; publication of beneficial ownership information on PPIP by 15th day of subsequent month for new procurements. - End-March SB on revised bidding documents implemented with delay. - Audits: - Comprehensive audit of FY2020/21 published in June with chapter on COVID-19 spending; forensic audit of COVID-19 vaccine spending expected to be completed by end-June and published by mid-July 2022. - Mission advised law enforcement follow-up and strengthening asset declaration/conflict of interest regimes. - AML/CFT: - ESAAMLG on-site visit completed; final report expected in September 2022. - National Risk Assessment completed; should be published and used to inform supervisory strategy. - Proceeds of Crime and Anti-Money Laundering (Amendment) Act 2022 enacted; NRA and Action Plan (2021–26) completed; typologies to be published by September 2022. ### MONETARY POLICY, INFLATION, AND FINANCIAL STABILITY - Inflation and policy stance: - Inflation target range: 2.5–7.5 percent (CBK). - By May 2022 headline inflation had risen 2 percentage points from February, nearing upper bound; staff projects inflation to rise above target band during 2022, peaking in 2022Q3, returning within band by 2023Q2. - CBK raised policy rate by 50 basis points on May 30, 2022; advised to stand ready to adjust monetary policy to limit second-round effects. - Exchange rate guidance: FX should function as shock absorber; FX interventions limited to responding to excessive volatility and avoiding overshooting. - Monetary modernization: - Plan to roll out a modern central securities depository (CSD) by June 2022 as precursor to introducing an interest rate corridor. - CBK assessing macro models and forecasting framework with Fund TA. - Banking sector: - End-March 2022 regulatory ratios: risk-weighted capital adequacy ratio 18.9 percent; liquidity ratio 55 percent. - NPL ratio at 14 percent at end-March 2022 (from 12.5 percent at March 2020); loan loss provisions remain adequate. - Credit growth expected to remain in single digits. - MSME Credit Guarantee Scheme supported about 1,800 loans valued at around Ksh.3 billion; 98 percent performing as of April 2022. - CBDC: - CBK issued a CBDC discussion paper February 2022; public comments sought; staff provided comments. ### PROGRAM FINANCING, NIR, AND IMF REPAYMENT CAPACITY - Program financing and external financing: - Program is fully financed with firm commitments for twelve months following third reviews and good prospects for remainder. - Official concessional financing from World Bank (US$750 million DPO approved March 2022 and fully disbursed), AfDB, JICA. - Planned FY2021/22 EUR1 billion Eurobond issuance replaced by US$1.1 billion bank loans, assumed to be refinanced by Eurobond issuance in 2025. - SDR179.13 million (around US$238.1 million as of June 14, 2022) to be made available upon successful completion of third EFF/ECF reviews. - Net International Reserves (NIR) and TMU adjustments: - Authorities request modification of QPCs on NIR for end-June 2022 and end-December 2022 reflecting updated assessment. - TMU Table 3 projected program and project loans, grants, commercial borrowing and FX outflows (US$ millions) — select entries: - Program grants and loans: 2022 End-June: 1,451; 2022 End-Dec: 353; 2023 End-June: 1,220. - Commercial and Semi-concessional borrowing: 2022 End-June: 1,108; 2022 End-Dec: 0; 2023 End-June: 900. - Foreign exchange outflows related to KQ support: 2022 End-June: 132; 2022 End-Dec: 91; 2023 End-June: 183. - Kenya’s capacity to repay the Fund: - Total outstanding credit to the Fund projected at SDR2,198.4 million. - Projected at 405 percent of quota in 2024. - Equivalent to around 2.2 percent of GDP and 26.6 percent of gross international reserves. - Total debt service to the Fund would peak by 2028 at: 2.1 percent of exports of goods and services; 1.6 percent of fiscal revenue. - Recent market developments: yield on June 2021 US$ Eurobond increased by around 550 basis points (as of June 14, 2022). - Risks to repayment capacity: - Downside risks: persistent pullback of international investors, socio-political tensions, delays in reforms. - Mitigating factors: continued access to concessional financing, Kenya’s track record of servicing IMF and other creditors, multi-year fiscal consolidation anchored by tax measures, authorities’ exchange rate flexibility, smoothed phasing of Fund disbursements, continued strength of remittances. ### PROGRAM CONDITIONALITY, TMU, AND MONITORING - QPCs and ITs set for test dates: June 30, 2022; December 31, 2022; June 30, 2023 — covering primary balance (cash basis), tax revenue, NIR of CBK, PV of contracting/guaranteeing new external debt (ceiling), accumulation of external debt arrears (continuous ceiling), new domestic guarantees and a monetary policy consultation clause (band). - Continuous PC and ceilings: - Public and publicly-guaranteed external debt arrears defined as overdue payments beyond 30 days. - Ceiling on contracting or guaranteeing new external debt applies to PV of new external debt contracted or guaranteed by public sector. - Adjustors and defined items: - SOE support adjustor with Ksh.127.5 billion cap (1.0 percent of FY2021/22 GDP) over FY2021/22–FY2022/23; TMU Table 1 projected extraordinary support to SOEs (Ksh. million): 2022 Jun.: 48,426; 2022 Dec.: 36,638; 2023 Jun.: 36,638. - Program grants adjustor and COVID-19 vaccination financing adjustor defined in TMU. - Program exchange rates specified (TMU Table 5): US Dollar 109.8647 Ksh per currency unit; SDR 157.464; and others. - Monitoring and reporting: - TMU defines data reporting requirements and frequencies; program monitored via periodic PCs, continuous PCs, MPCC, and SBs (Table 2). - Review schedule: Fourth review on or after November 7, 2022; Fifth review on or after May 7, 2023; Sixth review on or after November 7, 2023. ### RISK ASSESSMENT MATRIX — Selected external and domestic shocks and policy responses - Potential external shocks and responses: - Rising and volatile food and energy prices: Likelihood High; Time Horizon Short to Medium Term; Expected Impact High. - Policy responses: accelerate convergence of domestic to global fuel prices while compressing expenditure; if persistent, tighten monetary policy; maintain exchange rate flexibility; consult with staff if very large shock. - Russia’s invasion of Ukraine escalation: Likelihood High; Time Horizon Short to Medium Term; Expected Impact Medium. - Policy responses: diversify import sources (fertilizer, wheat); targeted support to vulnerable; consider alternative financing mixes. - Outbreaks of lethal COVID-19 variants: Likelihood Medium; Time Horizon Short to Medium Term; Expected Impact High. - Policy responses: redouble vaccination efforts; reprioritize spending to protect vulnerable while compressing overall expenditure; maintain exchange rate flexibility. - De-anchoring of inflation expectations in U.S./Europe: Likelihood Medium; Time Horizon Short to Medium Term; Expected Impact High. - Policy responses: compress expenditure; maintain exchange rate flexibility. - Potential domestic shocks and responses: - Adverse weather/locusts: Likelihood Medium/Low; Expected Impact High/Low. - Policy responses: targeted support to vulnerable; reprioritize spending; guard against second-round inflation effects. - Political risks around 2022 election: Likelihood Medium; Expected Impact High. - Policy response: remain committed to program reforms. - Emergence of greater-than-expected SOE weaknesses: Likelihood High; Expected Impact Medium. - Policy responses: continued financial evaluation, implement least-cost strategies. - Deterioration in security: Likelihood Medium; Expected Impact High. - Policy responses: reprioritize fiscal spending to security; strengthen AML/CFT framework. ### STAFF RECOMMENDATION, APPRAISAL, AND CONCLUSION - Staff supports the authorities’ requests for: - Completion of the third reviews. - Waiver of applicability of end-June 2022 PCs under the Extended arrangement (due to unavailable final data). - Modification of PCs under the EFF/ECF arrangements (including NIR). - Establishment of three new SBs related to MTRS action plan (end-August 2022), fuel pricing review and taskforce (end-July 2022), and KPLC action plan (end-July 2022). - Macroeconomic outlook and priorities: - Growth resilient; key external risk deeper disruptions from war in Ukraine; key domestic risk delayed long rains and election-related pressures. - Inflation to accelerate in 2022 and temporarily exceed CBK’s target range; CBK’s May 2022 policy tightening welcomed. - Fiscal consolidation to continue while protecting priority social spending; strong tax performance provides buffers. - Need for sustained SOE governance reforms, containment of SOE fiscal risks, and accountability linking Exchequer support to performance metrics. *Source: IMF staff report, Kenya — Executive Summary and selected TMU/MEFP excerpts (June 29, 2022).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Kenya’s economy has been rebounding strongly in a challenging environment. - Global shocks from the war in Ukraine and related trade disruptions—alongside more challenging financing conditions for frontier markets due to a normalization of monetary policy in advanced economies—will impact the external position in the near term. - Inflation is set to increase, albeit temporarily, with the pass-through of global price shocks. - Domestically, shortfall in rains and the continuing drought in the semi-arid regions are adding to uncertainties and pressuring vulnerable groups. - The authorities view their IMF-supported program as a key policy anchor in the face of these shocks. - Surging global fuel prices have made containing the cost of recently granted fuel subsidies urgent. - Kenya’s strong fiscal performance provides scope to cushion the adjustment to these shocks without exceeding program deficit targets. - Strong performance of tax revenues is a key driver of this resilience. - Policy tradeoffs will remain difficult heading into August elections. ### Program performance - All quantitative performance criteria (PCs) and one of the two indicative targets (ITs) for end-December were met comfortably. - The IT on social priority spending was missed on a brief delay in executing some wage payments. - One of four structural benchmarks (SBs) was met, while others saw delays. - A supplementary FY2021/22 Budget consistent with the program objectives was submitted to parliament (end-January SB). - The SB on adoption of new tender documents to enable the publication of beneficial ownership information for awarded tenders (end-March) was implemented with delay in April. - Submission of a FY2022/23 Budget consistent with the program objectives (end-April) was implemented with delay as some tax-enhancing measures were submitted in May and June. - The end-May SB on publication of a forensic audit of COVID-19 vaccine spending up to June 2021 and a comprehensive audit of expenditures in FY2021/22 with a chapter on COVID-19 spending was not met; ongoing audits likely will be completed by end-June and published by mid-July. ### Requests from the authorities - The Kenyan authorities request: - a) waiver of applicability for the end-June 2022 PCs for the Extended arrangement under the Extended Fund Facility (EFF); - b) modification of the PC on net international reserves (NIR) for end-June 2022 and end-December 2022; and - c) establishment of three new SBs related to: - (i) issuance of a National Treasury circular presenting an action plan for development of a Medium-Term Revenue Strategy (end-August 2022); - (ii) completion of a review of how the fuel pricing mechanism has been applied to date and constitution of a taskforce to oversee the progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure that fuel pricing actions are at all times aligned to the approved budget (end-July 2022); and - (iii) submission of an action plan on Kenya Power and Lighting Company (KPLC) by end-July 2022 to restore KPLC’s medium-term profitability and fully cover financing gaps through end-Dec 2023. ### Risks to the program - The outlook is subject to significant downside risks. - Near-term uncertainty remains elevated due to the COVID-19 pandemic, the economic fallout of the war in Ukraine, and the upcoming 2022 elections. - Despite risks, the program is delivering resilience and providing flexibility to address continuing challenges (COVID-19 vaccination and SOE restructuring needs) while achieving program objectives. ### Recent economic developments - The war in Ukraine affects Kenya through trade in goods and services, financial channels, and higher imported prices: - Kenya’s direct trade exposure to Russia and Ukraine is relatively small: around 1.5 percent of Kenyan exports and 2.7 percent of imports. - France, Germany, and Netherlands accounted for an average 12 percent share in Kenya’s exports, while the U.S. and the U.K. accounted for an additional 16 percent (average) share. - Between January and May 2022, global prices of crude oil, wheat and fertilizers have risen by around 30, 40, and 11 percent, respectively. - As of June 10, 2022, yields on Kenya’s 2-year Treasury Bond had increased by 134 basis points from end-2021, while the 5-year yield had risen by 113 basis points. - Kenya’s EMBI spread rose above 900 basis points by early June from below 500 basis points in mid-February. - COVID-19 developments: - Kenya relaxed most COVID-19 related restrictions. - The Omicron variant caused a steep but short-lived spike in cases in December 2021. - In the first half of June 2022, the infection positivity rate went up from 3.6 percent to 12.5 percent. - Vaccination accelerated, with 31.4 percent of adults fully vaccinated as of mid-June 2022 (up from 5 percent at end-2021); but has leveled off since then. - Moderna has announced a US$500 million investment to establish a COVID-19 vaccine manufacturing facility in Kenya. - Policymaking environment: - The environment for policymaking will remain challenging in the runup to the August 9 general elections. - Leading presidential contenders—former Prime Minister Raila Odinga (Orange Democratic Movement, Azimio La Umoja) and Deputy President William Ruto (United Democratic Alliance, Kenya Kwanza)—have emphasized priorities including small businesses, youth, farmers, and low-income households, while highlighting the importance of addressing debt vulnerabilities. - The Fund-supported program is generally viewed as providing a critical anchor to debt sustainability and maintaining confidence. ### Recent macroeconomic outturns and indicators - Growth: - Following a modest contraction in 2020, real GDP growth rebounded to 7.5 percent in 2021. - Inflation: - Headline inflation had decelerated to 5.1 percent (y/y) by February 2022. - Inflation rose to 7.1 percent in May 2022. - Excluding food and fuel, inflation increased from 2 percent in February to 2.6 percent in May. - The authorities announced a 12 percent increase in the minimum wages, the first since 2018. - External sector: - After reaching 5.5 percent of GDP in 2021, the current account deficit widened in early 2022 on rising global commodity prices and the recovering economy. - International reserves remained at adequate levels (4.4 months of import coverage), although their build-up through end-March 2022 was smaller than anticipated, including on postponement of planned Eurobond issuance. - The Shilling depreciated by 2.7 percent, on average, in real effective terms in 2021 and by 1.3 percent through April 2022 (preliminary estimate). - Fiscal performance: - At end-December 2021, the primary deficit fell to Ksh.38 billion (0.3 percent of GDP) compared to a target of Ksh.203 billion (1.9 percent of GDP). - Tax collection exceeded the end-December PC by 0.4 percentage points of annual GDP. - At end-May 2022, the primary deficit stood at Ksh.78.8 billion (0.6 percent of GDP). - Strength in tax collection reflects both permanent and cyclical factors. - Relatively modest increases in domestic fuel prices through May were not adequate to contain the cost of rising fuel subsidies. - Supplementary FY2021/22 Budget: - Approved on March 30. - Targeted a primary deficit of Ksh.419 billion (the equivalent of 3.3 percent of GDP) to accommodate additional spending agreed in the second EFF/ECF reviews, including COVID-19 vaccine interventions and SOE support (combined total of 0.3 percent of GDP). - Allocated funds for emergency drought and security spending (0.2 percent of GDP). - SOE support was estimated at Ksh.32.3 billion, about Ksh.16.1 billion below the level projected at the second EFF/ECF reviews, primarily driven by rephasing of support to KQ to FY2022/23. - The supplementary budget conservatively maintained tax collection at the programmed 13.2 percent of GDP, despite tax overperformance. *Source: IMF staff report, Kenya — Executive Summary (June 29, 2022).* ### Box 2. Tax Performance in FY2021/22 ### Box 2. Tax Performance in FY2021/22 ### Overview - Tax collection exceeded program objectives by 0.4 percentage points of GDP at end-December 2021 (MEFP, Table 1). - Preliminary data indicate collection likely reached 12.3 percent of GDP through end-May 2022. - Monthly collections through May 2022 surpassed the authorities’ monthly targets (aligned to program objectives) by an average of 10.7 percent. - Monthly cumulative tax collection as a share of the expected tax outturn for the year (i.e., the end-June 2022 PC) have been consistently above the historical shares of actual collection over the past twenty years. ### Performance versus targets and projected outturn - Staff projects tax revenues to exceed the end-FY2021/22 target by Ksh.55 billion (0.4 percentage points of GDP—described as a conservative estimate given an overperformance of 0.6 percentage points of GDP at end-May on a cumulative basis). - With only one month remaining in the fiscal year, the forecast is subject to limited uncertainty and the end-June 2022 outturn could be stronger. ### Drivers: permanent versus temporary components - Permanent improvements: - Stronger-than-previously-anticipated resilience of Kenya’s economy. - Healthy yield of the January 2021 tax enhancing measures originally subject to high uncertainty about the impact of COVID-19 on Kenya’s tax potential (EBS/21/72). - Durable improvements in tax compliance by the Kenya Revenue Authority through: - Enhanced voluntary tax disclosure program. - Stepped up tax debt recovery efforts. - Revamped audit functions—supported by IMF TA. - Temporary component: - Primarily associated with the spike in input price inflation, which affects the tax base of VAT and many excises. ### Carryover to FY2022/23 and implications for tax measures - Staff expects permanent improvements in FY2021/22 tax collection will carry over to next fiscal year. - Based on the stronger than anticipated outturn in May (0.6 percent of GDP overperformance with respect to monthly targets), the carryover to FY2022/23 is conservatively estimated at 0.4 percent of GDP. - Note: Prior to availability of the May tax data, staff’s estimate of the carryover was 0.3 percent of GDP. - Staff projects the size of the package of new tax measures needed to achieve the FY2022/23 tax objectives at 0.4 percentage points of GDP (compared to an estimate of 0.8 percentage point at the second EFF/ECF reviews). - Authorities have identified, with the support of IMF TA, a menu of contingency tax measures to be implemented should tax mobilization disappoint (MEFP¶26). *Source: Box 2, IMF staff report (FY2021/22).* ### 15. The FY2022/23 Budget as approved results in uncertainty on tax revenues, reinforcing ### 15. The FY2022/23 Budget as approved results in uncertainty on tax revenues, reinforcing the need for contingency plans (MEFP¶22) ### Fiscal uncertainty and contingency planning - Amendments to the Finance Bill made shortly before Parliament adjourned ahead of elections eliminated 0.2 percentage point of GDP in tax measures envisaged under the FY2022/23 Finance Bill (MEFP¶22). - Authorities’ response: - Introduce a new package of tax administration measures—drawing on recent Fund TA—and expedite resolution of pending legal challenges to the minimum alternative corporate tax (MACT) by July 2022; together expected to compensate for roughly one-half of the tax loss. - Remainder expected to be offset by higher-than-previously-expected permanent improvement in FY2021/22 tax mobilization (Box 2), estimated tax carryover to FY2022/23 of 0.4 percent of GDP as opposed to 0.3 percent of GDP envisaged at the time of the FY2022/23 Budget proposal. - Commitment to introduce in FY2022/23 additional tax measures for an equivalent amount should resolution of MACT legal challenges not be favorable. - Preparedness for further contingencies (MEFP¶24): - Authorities stand ready to adopt further contingency measures. - Deterioration of the macroeconomic environment (¶10.) could significantly affect tax collection by depressing the yield of tax measures and could undermine gradual domestic fuel price adjustment, delaying elimination of fuel subsides. - Authorities committed to compensate any revenue shortfall with additional tax measures, drawing from their Medium-Term Revenue Strategy (MTRS) developed with Fund TA (¶24). - Stand ready to adopt spending offsets if needed and to consult with the Fund on appropriate policy responses to very large negative surprises from global fuel prices. ### Medium-term fiscal strategy and expenditure priorities - Objective: reduce debt vulnerabilities while protecting high-priority service delivery and investment programs. - Key target: put debt on a downward trajectory by bringing the primary deficit below its debt-stabilizing level in 2023 via revenue-mobilizing and expenditure-curbing measures. - Revenue plans: introduce additional tax measures for 0.9 percent of GDP in FY2023/24 (the MTRS will set out possible measures). - Expenditure plans: restrain recurrent expenditures—particularly for wages and transfers—paired with improvements in public investment management (MEFP¶30–31). - Support measures: continue progress in improving public financial management systems—including strengthening expenditure controls and public procurement consistent with a recent Public Expenditure Review from the World Bank (MEFP¶29, ¶32). ### Public debt outlook and fiscal anchors - Public debt status: sustainable but remains at high risk of distress (DSA, EBS/21/29). - Baseline: public debt expected to peak at 70.4 percent of GDP in FY22/23. - Projection: primary deficit projected to fall below its debt-stabilizing level in 2023, putting the debt ratio on a downward path (Tables 2a and 2b). - Legal and institutional reforms: - National Treasury submitted amendment to PFM Regulations to replace current nominal legal ceiling on debt issuance (at KSh.9 trillion) with a medium-term debt-to-GDP anchor of 55 percent of GDP in present value (PV) terms (MEFP¶33). - Proposed anchor set at 55 percent of GDP consistent with maintaining debt sustainability in the face of shocks; includes accountability requirement to explain to Parliament how planned policies bring the debt ratio to target. - Transition from nominal legal public debt ceiling to debt anchor postponed for further consultation and now expected to be enacted by end-2022. - Interim measure: amendment of the PFM Regulations passed to raise the existing legal public debt ceiling to Ksh.10 trillion. - Other steps: strengthen debt management and reporting (MEFP¶33), including expanding coverage of public debt to include SOE debts not currently captured. ### SOEs: oversight, risks, and reform actions - Oversight and governance: - Authorities finalizing SOE classification and inventory and working on SOE Ownership Policy—drawing on Fund TA—to detail governance architecture, ownership allocation, privatization priorities, corporate governance expectations, performance monitoring and reporting, and disclosure guidelines (MEFP¶45–46). - Ongoing SOE risks to the budget (MEFP¶23 and MEFP, section E): - Limited fiscal space means financial vulnerabilities at key SOEs are being addressed mainly by cost-saving reforms in those SOEs. - Specific SOE developments and figures: - Kenya Airways (KQ): - Progress on restructuring plan with advisory support, some delays. - Guaranteed and unguaranteed debt totaling US$868.7 million as of March 2022 expected to be serviced by the government; discussions ongoing with KQ’s creditors. - Mission urged authorities to advance loan agreement with KQ to link budget support to commitments to deliver on KQ reforms. - Kenya Power and Lighting Company (KPLC): - Updated financial evaluation (supported by Fund TA) includes impact of 15 percent electricity tariff reduction announced in January. - Tariff reduction lowered revenues by an estimated Ksh.26.3 billion per annum and aggravated pre-existing liquidity challenges. - Identified cost-saving measures would yield benefits over time but are not sufficient to fully offset revenue impact. - Authorities anticipate providing budget support to KPLC in FY2021/22 and FY2022/23 as temporary relief. - Authorities committed to submit an action plan to the Cabinet Sub-Committee on KPLC by end-July (new SB). - Recommendation: avoid any future reduction in electricity tariff unless fully backed by well-identified and achievable cost-saving measures. - SOE support envelope (TMU ¶7): - Envelope of SOE support covered by the SOE adjustor is 1 percent of FY2021/22 GDP (i.e., Ksh.127.5 billion), half financed through budgetary offsets and half through higher borrowing. Limits total increase in primary deficit over FY2021/22–FY2022/23 due to SOE support to 0.5 percent of GDP. - Staff estimates authorities will have used nearly Ksh.69 billion (Ksh.32.3 billion in FY2021/22 and Ksh.36.6 billion in FY2022/23) of the Ksh.127.4 billion covered by the SOE adjustor. ### Governance, anti-corruption, and AML/CFT - Public procurement and beneficial ownership: - Beneficial owners’ consent form to be included in standard bidding documents; tender notices effective from April 21, 2022 required to use revised bidding documents (end-March SB, not met–implemented with delay). - Procurement regulation requires comprehensive information—including on beneficial ownership—of successful tenders to be published on the Public Procurement Information Portal (PPIP) by the 15th day of the subsequent month. - Objective: publication of beneficial ownership information of successful bidders, originally an end-June 2021 SB. - Audits and follow-up: - End-May 2022 SB on audits not met, but authorities published a comprehensive audit of FY2020/21 with a chapter on COVID-19 spending and advanced audit of COVID-19 vaccine spending expected by mid-July. - Mission advised advancing law enforcement’s effective follow-up and strengthening asset declaration and conflict of interest regime to align with international standards (MEFP ¶62). - AML/CFT supervision: - ESAAMLG on-site visit completed; final report expected in September upon adoption by the ESAAMLG plenary. - Authorities completed National Risk Assessment (NRA), which should be published (MEFP¶59) and used to inform AML/CFT supervisory strategy and actions to mitigate corruption-related money laundering risk. - Recommendation: increased use of financial intelligence to detect and disseminate information on corruption-related activities to facilitate investigation. ### Revenue administration and PFM modernization - Modernizing revenue administration (MEFP¶27): - Authorities developing an MTRS with Fund TA to modernize tax policy, improve compliance, and inform policy decisions. - Action Plan to be issued by end-August 2022 (new SB) to provide decisionmakers a coherent framework to identify tax policy and administrative measures to widen the tax base and mobilize domestic revenues while ensuring equity and fairness. - KRA actions: enhance large and medium taxpayer offices; strengthen audits and data-driven compliance risk management; implement risk-based frameworks; bolster efforts to verify exemptions and reduce abuse—particularly related to VAT; improve taxpayer services to foster voluntary compliance. - PFM strengthening (MEFP¶26 and ¶32): - National Treasury pursuing agenda to strengthen budget processes, commitment controls, and cash management. - Intend to establish—with Fund TA support—a Fiscal Risk Committee (FRC) to anticipate, monitor, evaluate, manage, and mitigate fiscal risks across the public sector. ### Monetary policy framework, inflation, and financial stability - Inflation and policy response: - By May 2022, headline inflation had risen by 2 percentage points from February, nearing the upper end of the target band of 2.5–7.5 percent, largely on pass-through of global shocks, policy adjustments, and higher food prices. - Staff projects headline inflation to rise above the CBK’s target band during 2022, peaking in 2022Q3, but return within the band by 2023Q2 as global commodity prices ease somewhat (¶10.). - Mission advised CBK to stand ready to adjust monetary policy to limit second-round effects on prices; welcomed May 30, 2022 decision to raise the policy rate by 50 basis points and the intention to take additional measures as needed. - Exchange rate guidance: exchange rate should continue functioning as a shock absorber; FX interventions limited to responding to excessive market volatility and avoiding exchange rate overshooting. - Monetary policy modernization (MEFP¶49): - CBK assessing past experience with macroeconomic models and forecasting framework with Fund TA. - Plan to roll out a modern central securities depository (CSD) by June 2022 as precursor to introducing an interest rate corridor around the policy rate. - Strengthening market intelligence, transparency, and monetary policy communication. - Banking sector resilience and risks: - At end-March 2022, regulatory ratios well-above statutory requirements: risk-weighted capital adequacy ratio at 18.9 percent and liquidity ratio at 55 percent. - NPL ratio reached 14 percent at end-March 2022 from 12.5 percent at the beginning of the pandemic (March 2020). Loan loss provisions remain adequate. - Credit growth expected to remain in the single digits as banks pursue cautious approach. - MSME financing: National Treasury’s Credit Guarantee Scheme (CGS) has supported about 1,800 loans valued at around Ksh.3 billion in total issued by seven banks; almost all loans (98 percent) were performing as of April 2022. - Progress in approving banks’ risk-based models: one large bank’s model and three small banks’ models approved. - CBDC: - CBK issued a Central Bank Digital Currency (CBDC) discussion paper for public opinion in February 2022; paper highlights CBDC’s potential role in reducing cost of cross-border payments. Staff provided comments to CBK’s CBDC team (Annex II). ### Program financing assurances and external financing - Program financing: program is fully financed with firm commitments for twelve months following the third reviews of the EFF/ECF arrangements and good prospects for remainder of the program. - External budget financing mix and details: - Official concessional financing from World Bank via DPO and Program-for-Results, African Development Bank, and Japan International Cooperation Agency. The US$750 million World Bank Development Policy Operation was approved in March 2022 and has since been fully disbursed. - Planned FY2021/22 EUR1 billion Eurobond issuance replaced by US$1.1 billion of bank loans, assumed to be refinanced by a Eurobond issuance in 2025. - Additional commercial borrowing budgeted in FY2022/23; potential on-lending for budget support of a bigger share of the 2021 general SDR allocation remains as contingency. - SDR179.13 million (around US$238.1 million as of June 14, 2022) will be made available upon successful completion of the third EFF/ECF reviews. Purchases under the EFF arrangement (SDR141.13 million) and disbursements under the ECF arrangement (SDR38 million) will be on-lent to the government in local currency and used for budget support. *International Monetary Fund — excerpt from the Kenya report (sections covering FY2022/23 Budget, fiscal strategy, SOEs, governance, revenue administration, monetary policy, and program financing).* ### 32. Kenya’s capacity to repay the Fund is adequate but is subject to risks (Table 8). The total ### Kenya’s capacity to repay the Fund is adequate but is subject to risks (Table 8) ### Repayment capacity and key metrics - Total amount of outstanding credit to the Fund is projected at SDR2,198.4 million. - This is projected to be 405 percent of quota in 2024. - Equivalent to around 2.2 percent of GDP and 26.6 percent of gross international reserves. - Total debt service to the Fund would peak by 2028 at: - 2.1 percent of exports of goods and services - 1.6 percent of fiscal revenue - Recent market developments: - The yield on the June 2021 US$ Eurobond has since increased by around 550 basis points (as of June 14, 2022). - Planned bank borrowing is at a shorter tenor, with an interest rate including fees expected well below 10 percent. ### Risks to repayment capacity and mitigating factors - Downside risks that could increase pressure on repayment capacity: - Persistent pullback of international investors from frontier markets. - Socio-political tensions and delays in reform implementation related to the upcoming elections. - Mitigating factors: - Likelihood of continued access to concessional financing. - Kenya’s strong track record of servicing debts to the Fund and other creditors. - Multi-year fiscal consolidation anchored by tax policy measures to boost revenues. - Authorities’ commitment to maintain exchange rate flexibility. - Smoothed phasing of Fund disbursements. - Continued strength of remittances as a source of foreign exchange. ### Program risks, performance, and mitigation - The program faces significant risks in an uncertain global and domestic environment. - Mitigating elements: - Authorities’ fiscal overperformance providing buffers to navigate global shocks. - Authorities’ demonstrated commitment to adopt contingency measures as needed. - Close engagement with donors. - Tailored capacity development (CD) strategy to support structural reforms, including plans to develop a MTRS. - Productive discussions with economic teams of leading Presidential candidates on program objectives and main policies. ### Requested modifications to program conditionality - Authorities request modification of program conditionality as follows: - Establishment of new quantitative performance criteria for all relevant indicators for June 2023 as in MEFP, Table 1. - Waiver of applicability of end-June 2022 PCs under the extended arrangement for which no final data are available for assessment. - Modification of quantitative performance criteria on net international reserves (NIR) for end-June 2022 and end-December 2022, reflecting an updated assessment (¶9 and MEFP Table 1). - Establishment of three new structural benchmarks (MEFP, Table 2) for: - issuance by end-August 2022 of a National Treasury circular presenting an action plan for development of a MTRS setting revenue objectives consistent with program targets; - by end-July 2022, completion of a review of how the fuel pricing mechanism has been applied to date and constitution of a taskforce to oversee progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure that fuel pricing actions are at all times aligned to the approved budget; - submission to the Cabinet Sub-Committee on KPLC by end-July 2022 of an action plan to restore KPLC’s medium-term profitability and fully cover financing gaps through end-December 2023. ### Staff appraisal — macroeconomic outlook and policy priorities - Economic resilience and risks: - Kenya’s economy has been resilient; activity is returning to normal as most COVID-19 restrictions have been relaxed. - Key external risk: deeper disruptions from the war in Ukraine. - Key domestic risk: delayed arrival of the long rains increasing uncertainty, plus potential pressures from upcoming general elections. - Food insecurity has worsened in impacted regions. - Global developments and rapid monetary policy normalization in advanced economies will temporarily weaken the external position and strain international financing conditions. - Inflation and monetary policy: - In 2022, inflation will accelerate on higher import prices and domestic policy actions, including needed adjustments in retail fuel prices, temporarily exceeding the authorities’ target range later in the year. - Staff welcomed the CBK’s May 2022 adjustment in the monetary policy stance to limit second-round effects and keep inflation expectations well-anchored within the CBK’s inflation band. - The Shilling has acted as a shock absorber and should continue to do so; FX interventions should be limited to minimizing excessive volatility and avoiding overshooting. - Progress on strengthening the monetary framework should continue, in line with the CBK’s recent White Paper. ### Fiscal policy, revenues, and contingency planning - The Fund-supported program anchors efforts to reduce debt vulnerabilities and mitigate uncertainties. - Performance: - Quantitative conditionality performance has remained strong, especially on fiscal targets. - Structural agenda has seen some delays, with progress in key areas. - FY2022/23 Budget: - Aligned with tax revenue and primary balance targets, continuing consolidation to reduce debt vulnerabilities, improve tax mobilization, and rationalize non-priority primary spending while protecting priority social spending. - Revenue mobilization: - Strong performance of tax revenues through May gives confidence that permanent improvements will carry into FY2022/23. - Changes in the Finance Bill during budget approval have increased uncertainty around tax revenues. - Staff welcomes alternative measures being adopted and stresses the need for contingency planning. - Ongoing work on a MTRS, developed with Fund TA, will provide options to enhance revenues and ensure fair distribution of the tax burden. - Authorities intend to compensate any revenue shortfall next year with additional tax measures, drawing from their MTRS. ### SOEs, governance, and anti-corruption - State-owned enterprises (SOEs): - Momentum needed to contain budget risks from SOEs. - Implementation of the Blueprint for Governance Reforms at State Corporations is crucial for improving SOE financial oversight. - Kenya Airways (KQ): steadfast implementation of the restructuring plan is essential, with clear accountability linking Exchequer support to progress on key performance metrics. - KPLC: - Staff welcomes the updating of KPLC’s financial evaluation to reflect the recent 15 percent electricity tariff reduction. - A comprehensive action plan to restore KPLC’s long-term viability and cover financing gaps through end-2023 is urgently needed. - Any future reduction in electricity tariff should be fully backed by well-identified and achievable cost-saving measures. - Anti-corruption and AML/CFT: - Issuance of revised tender documents in April enables collection and publication of beneficial ownership information of successful bidders. - Ongoing audit of COVID-19 vaccine spending and a comprehensive audit of FY2020-21 spending of MDAs will improve transparency and accountability and should be followed up by enforcement agencies. - Anti-corruption preventive framework requires substantial enhancements; the draft conflict of interest legislation should be brought in line with international best practices. - AML/CFT supervision should be intensified to mitigate corruption-related money laundering risk in banks and other higher risk sectors and make greater use of financial intelligence. - The now-completed National Risk Assessment should be published to raise risk awareness. ### Banking sector and MSME credit - Banking sector health and policy guidance: - Banks are well-capitalized and liquid overall; reducing NPLs should remain a priority. - CBK should closely monitor provisioning as some borrowers may struggle with emerging shocks. - For small banks that are struggling, CBK’s encouragement of consolidation with stronger banks is welcome. - CBK’s increased engagement with banks on risk-based loan pricing could help unlock MSME credit at rates that reflect riskiness. - The Credit Guarantee Scheme (CGS) could help reduce the risk of lending to MSMEs while avoiding undue exposure to banks’ troubled borrowers. *Source: IMF staff report text provided in the content unit.* ### 44. Staff supports the authorities’ requests for completion of the third reviews, waiver of ### 1kenea2022002 - 44. Staff supports the authorities’ requests for completion of the third reviews, waiver of applicability of the end-June 2022 PCs under the Extended arrangement, and modification of PCs under the EFF/ECF arrangements ### Staff recommendation - Staff supports the authorities’ requests for completion of the third reviews, waiver of applicability of the end-June 2022 PCs under the Extended arrangement, and modification of PCs under the EFF/ECF arrangements, given the performance under the arrangements and the commitment toward meeting the program’s objectives. ### Real sector developments (selected series) - Real GDP-0.35.97.55.85.75.55.35.55.55.55.55.5 - GDP deflator4.95.25.05.26.55.27.05.05.25.05.15.1 - CPI (period average)5.36.46.15.87.34.86.95.05.15.05.15.0 - CPI (end of period)5.67.05.75.08.45.05.85.04.75.05.44.8 - Terms of trade (goods; deterioration, -)10.2-3.9-2.20.7-7.22.11.61.81.21.30.90.9 - Exchange rate (Kenyan shilling/US$, average)106.5.109.5......... - Real effective exchange rate (depreciation, -)0.0.-2.7......... ### Monetary and financial sector (selected series) - Broad money (M3)13.211.16.111.39.711.013.410.312.110.812.012.0 - Reserve money1.910.811.011.03.310.79.010.08.410.69.710.8 - Credit to non-government sector8.48.08.67.912.19.813.810.812.712.112.412.3 - Policy rate7.07.07.0......... - M3/GDP (percent)37.237.035.037.034.137.034.336.934.736.935.135.4 - Non-performing loans (percent of total gross loans)14.113.113.1........ ### Fiscal sector and public finances (selected aggregates) - Total revenue, grants and unidentified tax policy measures16.716.016.016.817.517.317.218.217.718.217.917.9 - Tax revenues13.212.612.613.213.414.414.015.314.815.414.915.0 - Non-tax revenues3.43.13.13.13.72.53.02.62.72.52.72.6 - Grants0.20.30.30.50.50.30.20.30.30.30.30.3 - Expenditure24.424.224.224.925.423.023.222.522.221.922.021.9 - Current18.719.319.319.420.217.918.517.417.416.917.217.0 - Capital5.74.94.95.55.25.24.75.14.85.04.94.9 - Primary balance-3.4-4.0-4.0-3.4-3.3-1.2-1.20.20.20.50.50.6 - Overall balance-7.6-8.2-8.2-8.2-7.8-5.8-5.9-4.2-4.4-3.7-4.1-4.0 - Excluding grants-7.8-8.5-8.4-8.7-8.3-6.1-6.2-4.6-4.7-3.9-4.4-4.3 - Net domestic borrowing4.35.55.55.15.13.43.62.32.72.83.02.9 ### Public debt (selected measures) - Public gross nominal debt63.767.967.871.270.271.270.469.668.767.467.265.7 - Public net nominal debt58.962.962.966.764.767.064.865.863.164.061.559.9 - Public gross debt, PV58.761.060.361.961.561.760.460.258.257.855.753.0 - Public net debt, PV53.956.055.457.456.157.654.956.552.654.450.047.2 - Gross domestic debt30.232.532.534.833.835.233.634.532.833.932.532.2 - Gross external debt33.435.335.336.436.336.036.735.135.933.534.733.4 ### External sector and balance of payments (selected aggregates) - Current account balance (including grants)-4.8-5.1-5.5-5.1-5.9-5.1-5.5-5.0-5.3-5.0-5.1-5.0 - Exports (goods and services)9.710.110.611.212.011.912.812.513.312.913.613.9 - Imports (goods and services)17.719.220.120.021.920.522.021.022.121.422.222.3 - Gross international reserves (In billions of US$)8.310.89.59.08.89.810.210.711.011.611.912.7 - Gross international reserves (In months of next year imports)4.55.64.44.23.94.24.24.24.24.24.24.2 Selected detailed BOP numbers (millions of U.S. dollars) - Current account-4,797-5,631-6,064-5,962-6,888-6,376-6,860-6,705-7,071-7,193-7,641-8,020 - Merchandize trade-8,430 -10,354 -11,381-11,351-13,237-12,293-13,419-13,338-14,008-14,767-15,758-16,648 - Exports f.o.b.6,0526,9376,8337,8088,1328,6609,1119,58110,06611,12312,06913,038 - Imports f.o.b. 14,48217,29218,21419,15821,36920,95322,53022,91924,07425,89027,82729,686 - Primary income-1,671-1,713-1,658-2,161-1,966-2,523-2,661-2,561-2,972-3,201-3,545-3,957 - Secondary income, of which4,9526,0506,1286,3856,6746,8317,1697,2247,5468,1258,7719,466 - Remittances3,1083,5583,7763,8934,1554,2424,5714,6034,9355,3305,7586,219 ### External financing and financing requirements (selected) - (1)Gross financing requirements6,2837,4747,9008,3018,9218,5219,05010,52011,09610,6659,96410,369 - (1)Current account deficit (excl. grants)4,8475,7666,1996,0977,0236,5116,9956,8407,2067,3287,7768,155 - (1)Amortization of general government loans (excl. IMF repurchase)1,3011,5781,5682,1311,8301,9792,0251,6801,8902,9221,5851,498 - (2)Change in reserves (+ = increase)-9252,5041,163-1,814-7128131,419887795863846862 - (3)Gross financing sources4,0686,8587,2125,0336,6808,1229,30010,56811,06711,52810,81011,231 - (3)FDI, net5042505956499619961,1271,1951,1831,4841,6852,011 - (3)Public sector borrowing (excl. official budget support)3,1842,7182,9492,4513,4283,5193,8442,7502,9304,3064,8354,641 - (4)Errors and omissions522520-573000000000 - (1)+(2)-(3)-(4)Total financing needs7672,6012,4241,4541,5291,2121,169839824000 ### Debt financing plan (selected totals) - By sources of debt financing14,99410011,630100 - Concessional debt, of which 7,697514,37938 - Non-concessional debt, of which7,298497,25162 - Commercial terms7,104477,10461 - Uses of debt financing14,99410011,630100 - Infrastructure4,717313,56331 - Social Spending2,939201,66514 - Budget Financing1,40798667 - For debt management operations 5,000335,00043 ### IMF program access and phasing (selected entries) - April 2, 2021 Approval of the 38-month EFF and ECF arrangements 141.1326.0075.9914.00217.1240.00 - June 20, 2021 Completion of the first EFF-ECF reviews and observance of continuous and end-March 2021 performance criteria. 198.1236.5086.8516.00284.9752.50 - November 7, 2021 Completion of the second EFF-ECF reviews and observance of continuous and end-June 2021 performance criteria. 1/ 135.7025.0048.859.00184.5534.00 - May 7, 2022 Completion of the third EFF-ECF reviews and observance of continuous and end-December 2021 performance criteria. 141.1326.0038.007.00179.1333.00 - Total1,248.44230.00407.0975.001,655.53305.00 *Sources: Kenyan authorities; and IMF staff estimates and projections.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Potential External Shocks - Rising and volatile food and energy prices. - Likelihood/Time Horizon: High; Short to Medium Term - Expected Impact on Economy: High. Higher commodity prices would increase external and domestic imbalances and weigh on economic growth. - Policy Response: - Accelerate converge of domestic to global fuel prices while compressing expenditure to contain fiscal pressures; - If the shock is persistent, tighten monetary policy to ensure inflation expectations remain well-anchored; - Maintain exchange rate flexibility; - If the further shock is very large, consult with staff on response consistent with overarching objective of fiscal consolidation to reduce debt vulnerabilities. - Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions. - Likelihood/Time Horizon: High; Short to Medium Term - Expected Impact on Economy: Medium. Such sanctions could disrupt imports o f fertilizer and wheat and raise borrowing costs and limit options for non-concessional external financing. - Policy Response: - Diversify sources of imports for key inputs and staples (e.g., fertilizer; wheat) - Deploy targeted support to most vulnerable leveraging existing assistance programs. - Considering alternative financing mixes, including medium-term syndicated loans and on-lending of the 2021 general SDR allocation. - Outbreaks of lethal and highly contagious COVID-19 variants. - Likelihood/Time Horizon: Medium; Short to Medium Term - Expected Impact on Economy: High. This could adversely impact growth, spur capital outflows from the private sector and pressure the exchange rate. Fiscal balances would worsen, including due to balance sheet scarring in the private sector, and debt vulnerabilities would rise further. - Policy Response: - Redouble vaccination effo rts; - 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. and/or advanced European countries. - Likelihood/Time Horizon: Medium for the U.S. and Medium/Low for the euro area; Short to Medium Term - Expected Impact on Economy: High. This could trigger capital outflows from the private sector and hamper capital market access by the sovereign. The exchange rate would face depreciation pressures, the fiscal balances would worsen, and debt vulnerabilities would rise further. - Policy Response: - Compress expenditure to contain the negative fiscal-debt impact; - Maintain exchange rate flexibility. - Cyber-attacks. - Likelihood/Time Horizon: Medium; Short to Medium Term - Expected Impact on Economy: Medium. Such attacks can trigger financial instability or widely disrupt socio-economic activities. - Policy Response: - Continue reforms to strengthen cyber security capabilities at both government and private sector level. - Natural disasters related to climate change. - Likelihood/Time Horizon: Medium/Low; Short to Medium Term - Expected Impact on Economy: High. This would lead to slower growth, an increase in food inflation, pressures on public spending and the current account, and adversely affect vulnerable households. - Policy Response: - Guard against second-round effects on inflation; - Use targeted programs to help vulnerable groups and reprioritize spending. ### Potential Domestic Shocks - A resumption of adverse weather conditions or locust invasion. - Likelihood/Time Horizon: Medium/Low; Short Term to Medium Term - Expected Impact on Economy: High/Low. Depending on the geographical area impacted this could lead to lower agricultural production and slower growth, an increase in food inflation, pressures on public spending and the current account, and adversely affect vulnerable households. - Policy Response: - Use targeted programs to help vulnerable groups and reprioritize spending; - If necessary, guard against second-round effects on inflation. - Political risks. - Likelihood/Time Horizon: Medium; Short to Medium Term - Expected Impact on Economy: High. Political violence could emerge around the 2022 presidential election as seen in previous elections. - Policy Response: - Remain committed to reforms under the program. - Emergence of greater-than-expected weaknesses in the SOE sector. - Likelihood/Time Horizon: High; Short to Medium Term - Expected Impact on Economy: Medium. This would create additional fiscal pressures, potentially leading to further crowding out of the private sector, although the magnitude would be highly uncertain. - Policy Response: - 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 on Economy: High. This would adversely affect recovery of the tourism sector, foreign direct investment, and portfolio inflows and, in turn, growth. - Policy Response: - Reprioritize fiscal spending to accommodate security needs; and - 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 elections, and weak program ownership. - Likelihood/Time Horizon: Medium; Short to Medium Term - Expected Impact on Economy: Medium. This would lead to higher budget deficits, which would increase debt ratios, crowd out private investment, and ultimately weaken growth. - Policy Response: - Remain committed to fiscal targets and reforms under the program. *Annex I. Risk Assessment Matrix — IMF staff assessment and policy responses as provided in the source content.* ### introduction of the legal instruments to enact the agreed tax-enhancing measures, but these will be ### 1kenea2022002 - introduction of the legal instruments to enact the agreed tax-enhancing measures, but these will be ### Attachments and program status - Authorities request: - Modification of the end-June and end-December 2022 quantitative performance criteria (QPCs) for net international reserves. - Waiver of applicability of the end-June 2022 PCs under the EFF arrangement (final data not yet available). - Establishment of new structural benchmarks related to: - Issuance of a circular that includes an action plan for the development of a medium-term revenue strategy. - Completion of a review of how the pricing mechanism has been applied to date and public announcement and constitution of a taskforce to oversee the progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure that fuel pricing actions are at all times aligned to the approved budget. - Submission of an action plan to the Cabinet Sub-Committee on Kenya Power and Lighting Company (KPLC) to restore KPLC’s medium-term profitability and fully cover any financing gaps (pre-existing and new) through end-2023, as identified by the updated 2022 financial evaluation. - Officials committing to provide the IMF with relevant information necessary for monitoring progress. - Authorization to publish this letter of intent, the attached MEFP, the TMU, and related staff report upon clearance with the authorities. - Signatories: - Hon. (Amb.) Ukur Yatani, EGH, Cabinet Secretary, National Treasury & Planning - Dr. Patrick Njoroge, CBS, Governor, Central Bank of Kenya - Attachments (2): I. Memorandum of Economic and Financial Policies (MEFP); II. Technical Memorandum of Understanding (TMU). *Attachment I. Memorandum of Economic and Financial Policies — Nairobi, Kenya, June 29, 2022* ### I. Background — key developments and indicators - Economic rebound and growth: - Real GDP growth: 7.5 percent in 2021 following a 0.3 percent contraction in 2020. - Recovery supported by services (wholesale and retail trade, transport and storage, education, ICT, financial and insurance services); manufacturing performed better; agriculture recorded a modest decline due to inadequate rainfall in first half of the year. - High-frequency indicators point to continued recovery in Q1 2022 (acreage, sales, bank credit, ICT indicators, diaspora remittances, hospitality). - Inflation dynamics: - Inflation target range: 2.5–7.5 percent. - Inflation timeline: - Below 6 percent in early 2021. - Rose from June 2021, peaked at 6.9 percent in September 2021. - Headline inflation lowered to 5.1 percent by February 2022. - Headline inflation inched up to 7.1 percent by May 2022. - Non-food/non-fuel inflation: 2.6 percent in May 2022. - Minimum wages raised by 12 percent in May (not expected to significantly impact inflation). - COVID-19 and vaccination: - As of early June 2022: 6 recorded cases per 1,000 population; case fatality rate around 2 percent. - Vaccine supply and uptake: - 27.9 million doses received since start of campaign, about two-thirds via COVAX. - Over 18 million doses administered by early June 2022. - 31 percent of adults fully vaccinated by early June 2022. - Aim to fully vaccinate all adults (27 million people) by end-2022. - Moderna announced plans for a US$500 million manufacturing facility for RNA COVID-19 vaccines in Kenya (capacity up to 500 million vaccine doses per year when fully operational). - External sector and trade shocks: - Current account deficit: 5.5 percent of GDP in 2021; expected to widen to 5.9 percent of GDP in 2022. - Goods exports grew by 11 percent in dollar terms in 2021. - Energy and non-energy imports grew by about 59 and 21 percent, respectively (2021). - Tourism receipts reached 84 percent of their pre-pandemic level (2021). - Remittances grew by 20 percent (2021). - Russia and Ukraine account for around 1.5 percent of Kenyan exports and 2.7 percent of imports. - Public finances and fiscal performance: - Primary fiscal deficit contained to Ksh.37.6 billion by end-December 2021, below end-December target of Ksh.202.9 billion. - Tax overperformance exceeded original target by Ksh.53 billion (0.4 percent of GDP) through end-December 2021. - Supplementary FY2021/22 budget (submitted January 26; approved March 30) supported: - Emergency drought- and security-related relief: Ksh.20 billion. - COVID-19 vaccine interventions: Ksh.8.1 billion. - Support to SOEs: Ksh.32.3 billion. - Supplementary budget resulted in widening of the primary fiscal deficit by Ksh.60 billion (0.5 percent of GDP) consistent with EFF/ECF design; deterioration was about 0.1 percentage point less than previously expected due to delays in some SOE support. - Fuel subsidy and Petroleum Development Levy (PDL) Fund: - Since July 2020, PDL Fund established to smooth volatility of domestic fuel prices. - Fuel subsidies reached Ksh.23 billion (0.2 percent of GDP) by end-March 2022. - Cost of stabilizing fuel prices estimated at Ksh.10 billion per month (net of PDL resources) by early April 2022. - Banking sector health: - Loans restructured at the one-year restructuring period covered Ksh.1.75 trillion (57 percent of banks’ gross loan portfolios) originally; by end-March 2022 outstanding restructured loans amounted to 11.7 percent of total bank loans, 90 percent performing per restructured terms. - Sector NPL ratio: 14 percent at end-March 2022; restructured loans contributed 1.3 percentage points to NPL ratio. - Total CAR: 18.9 percent (above minimum requirement of 14.5 percent). - Deposit growth: 8 percent in 2021. - Private sector credit growth: 9.1 percent y-o-y in February 2022. - Deposit insurance expanded from 100 to 500 thousand shillings per depositor; ex-ante funded deposit insurance fund covers about 17 percent of insured deposits and is growing toward IADI target of 30 percent coverage. ### II. Macroeconomic outlook — projections, risks, and policy stance - Growth and current account: - Real GDP growth projection: 5.7 percent in 2022. - Medium-term growth convergence: 5.5 percent. - Current account deficit expected to widen modestly in 2022 and narrow over the medium term as exports recover. - Kenya imports about 43 percent of its wheat from Russia and Ukraine. - Policy responses to global shocks: - Announced Ksh.5.7 billion in support to subsidize 114,000 metric tons of various types of fertilizers. - Government measures to cushion households and firms from higher pump prices; domestic fuel prices kept low despite dramatic increases in international prices. - Authorities state an adjustment in domestic fuel prices is necessary for fiscal and debt sustainability; adjustment should be well calibrated, gradual, and timebound. - Inflation outlook and monetary policy: - Inflation expected to remain well anchored but could temporarily go above target range in late 2022 due to higher global prices. - Electricity tariff reduction: 15 percent reduction implemented in January 2022. - Central Bank of Kenya stands ready to take measures to stem any second-round effects from supply shocks. - Uncertainties and downside risks: - Deepening of war in Ukraine could affect activity, external position, financing, and confidence. - Volatile and higher global commodity prices disproportionately affect poor households. - New COVID-19 waves could undermine recovery and increase fiscal and external pressures. - Unfavorable weather could affect agricultural production and food security. - Upcoming general elections and change in administration could pressure budget execution and reform implementation. - Materialization of contingent liabilities from SOEs could undermine fiscal consolidation, slow public debt reduction, and pressure FX reserves. - Contingent positive scenario: - Resolution of war in Ukraine and limited impact from COVID-19 variants would support global growth, moderate inflationary pressures, and boost confidence. ### III. Program objectives and priorities - Primary policy objective: - Secure a strong post-COVID-19 recovery with robust and inclusive growth. - Key policy priorities: - 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. - COVID-19 response: Vaccinate all adults, ensure provision of required health services, address urgent needs of vulnerable groups, and support economic activity. - Public financial management: Increase efficiency and transparency of public spending, including by SOEs, to eliminate waste and achieve better value for money. - Governance: Enhance institutional oversight arrangements, strengthen preventive frameworks to improve accountability and foster good governance, and move towards greater transparency. - Monetary policy: Strengthen the monetary policy 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 toward customer centricity, risk-based credit pricing, transparency, and ethical banking. - Financial stability: Safeguard financial stability by enhancing prudential regulation and supervision and enhancing operational tools amid increasing financial sector complexity. - Structural reforms: Deepen structural reforms to improve the business environment and boost investment, employment creation, and potential growth. - Statistics: Improve data quality in line with international best practices to support economic policymaking, transparency, and accountability. *Memorandum of Economic and Financial Policies (MEFP), Attachment I, Nairobi, Kenya, June 29, 2022* ### 14. Program performance at end-December 2021 was good overall. Quantitative results ### 14. Program performance at end-December 2021 was good overall. Quantitative results ### Program performance — summary findings - All end-December quantitative performance criteria (QPCs) were met comfortably. - All but one indicative target (IT) were met; the missed IT related to priority social expenditure and was restored early in the new year as delayed payments were processed. - Three structural benchmarks (SBs) were not met on time; two of the missed SBs are being implemented with delays. - Structural reform agenda experienced delays due to operational and legal issues and a phased introduction of legal instruments for tax-enhancing measures; these will be completed by end-June 2022. ### Quantitative targets (MEFP, Table 1) — key figures and outcomes - Primary deficit QPC: Ksh.37.6 billion versus a ceiling of Ksh.202.9 billion (met by a wide margin: 1.6 percent of GDP). - Tax revenue QPC: Ksh.836.2 billion vs Ksh.783.2 billion (0.4 percent of GDP outperformance). - Inflation target under the monetary policy consultation clause was met. - One IT on priority social expenditure missed but spending was restored after early-year processing of delayed payments. - Strong overall performance attributed to commitment to fiscal responsibility and program delivery amid large and unanticipated global shocks. ### Structural Benchmarks (MEFP, Table 2) — status and actions - SB end-June 2021: Provide comprehensive information on public tenders awarded on the Public Procurement Information Portal (PPIP). - Not fully implemented: improvements made to PPIP but publication of beneficial ownership information hampered by data privacy requirements. - Specific steps identified; revised tender bidding documents adopted to unlock progress. - Commitment: comprehensive information, including beneficial ownership, on tenders issued from April 21, 2022, onwards will be publicly available on PPIP by the 15th day of the subsequent month after the tender is awarded (in line with Executive Order No. 2/2018). - SB end-January 2022: Submit to Parliament a supplementary budget for FY2021/22 consistent with programmed deficit target. - Met: supplementary budget submitted on January 26, 2022. - SB end-March 2022: Adopt revised bidding documents to obtain consent from beneficial owners to publish beneficial ownership information in PPIP. - Not met at end-March. - Revised tender documents published April 8; effective for all public procurements from April 21, 2022; beneficial owners’ consent required for new tenders effective April 21, 2022 — SB implementable with delay. - SB end-April 2022: Submit to Parliament a budget for FY2022/23 consistent with programmed deficit and revenue targets. - Not met on time; expected to be implemented with delay by end-June. - FY2022/23 budget proposal submitted April 6, 2022, had fiscal targets consistent with program objectives. - Supporting legislation initially expected to identify new tax measures for 0.5 percentage points of GDP; Finance Bill submitted April 5, 2022 contained new tax measures for 0.4 percentage points of GDP. - Remaining 0.1 percent of GDP in tax measures introduced through changes in custom duties at the East African Community (EAC) level (submitted to and adopted by the EAC committee in May 2022) and other administrative instructions introduced by end-June 2022. - SB end-May 2022: Publish 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. - Not met on time. - Comprehensive audit published in June with a chapter on COVID-19-related spending in the summary report. - Operational issues delayed special audit of COVID-19 vaccine spending; expected to be completed and submitted to Parliament by end-June 2022 and published by mid-July 2022. ### Fiscal policy — objectives and tradeoffs - Policy aim: balance near-term support for economic recovery with reducing debt vulnerabilities over the medium term. - Recognizes shocks from the war in Ukraine and drought impacts on northern regions and security situation. - Shift in fiscal focus as pandemic recedes: reduce deficit and put debt-to-GDP ratio on a downward path within program timeframe to lower financing risks and expand private sector credit. - Development spending envelope targeted to remain steady at close to 5 percent of GDP. ### Revenue mobilization — role and measures - Tax-to-GDP ratio fell from 15.1 percent to 13.1 percent over FY2016/17–2019/20; recovering lost ground is central to fiscal consolidation. - Prior measures already adopted: April 2020 base broadening measures, January 2021 tax-increasing measures. - Strong tax performance in current fiscal year provides margins to respond to Ukraine war shocks (e.g., support for fertilizer users, gradual passing of global fuel price increases). - Ongoing tax mobilization tools: revenue administration reforms and carefully designed tax policy measures to ensure equitable adjustment and growth-friendly outcomes. - Legal process: High Court consideration of pending legal challenges to the minimum alternative corporate tax (MACT) expected in July 2022; if unfavorable, other tax measures will be implemented to achieve Ksh.8 billion in FY2022/23 expected from MACT reintroduction. ### Policy response to global fuel and commodity price shocks - International commodity prices surged since the war began and expected to remain elevated over the calendar year. - Policy approach: gradual realignment of domestic fuel prices with global prices, combined with reprioritization of non-essential spending to contain subsidy costs within budgetary resources. - Implemented pump price increases: on average 4.1 percent on March 15, 8.1 percent on April 15, 4.1 percent on May 15, and 6.5 percent on June 15. - Use of strong tax overperformance estimated at Ksh.55 billion through end-June 2022 in the second Supplementary FY2021/22 budget (submitted May 19) to: - smooth domestic fuel price adjustment: Ksh.37 billion; - support users of fertilizer products: Ksh.3 billion; - improve security: Ksh.4 billion. - Draft FY2022/23 budget includes an appropriation of Ksh.20 billion for the year to cover remaining subsidy position at start of FY2022/23; consistent with Petroleum Duty Levy (PDL) revenue and intended use of the Petroleum Stabilization Fund. - Contingency: if global oil prices rise beyond projections, options include revisiting pace of price adjustments to reduce subsidy cost or identifying budgetary offsets; government will engage IMF staff if increases are larger than can be reasonably accommodated. - Commitment: by end-July 2022, complete a review of the pricing mechanism and publicly announce and constitute a taskforce to oversee progressive elimination of the fuel subsidy within the first half of FY2022/23 (new structural benchmark). ### FY2022/23 Budget — targets and composition - Budget submitted to Parliament on April 6, 2022 targets a 2.1 percentage points of GDP reduction in the primary deficit compared to FY2021/22 through permanent revenue improvements and prioritized spending. - Budget recognizes FY2021/22 tax overperformance’s carryover effect initially estimated at 0.3 percentage points of GDP; strong tax outturn through end-May 2022 increases estimated carryover to 0.4 percentage points of GDP. - Budget envisaged adoption of 0.5 percentage points of GDP in new tax measures, including: - changes in income taxes (capital gains, financial derivatives, digital services); - increases in selected excise rates (gambling, wine and spirits, tobacco); - removal of some VAT exemptions (specialized institutions); - increases in selected custom duties; - improvements in tax compliance (enhanced tax debt collection, incentives for faster resolution of tax disputes). - Legal instruments for measures: Finance Bill (submitted April 5), changes to customs duties at EAC (submitted May 13 and approved May 27), and administrative instructions by end-June 2022. - Parliamentary amendments removed measures worth 0.2 percentage points of GDP from the Finance Bill (including excise on betting and lottery and VAT on fertilizers and export services) and dropped some tax administrative measures. - Additional revenue prospects to ensure FY2022/23 tax targets: - Positive resolution of MACT legal challenges: 0.07 percentage points of GDP if resolved by end-July. - Reinforced tax administration efforts initiated in June: 0.03 percentage points of GDP. - Contingency: if MACT legal challenges fail, introduce additional tax measures in FY2022/23 equivalent to the shortfall from the Medium-Term Revenue Strategy (MTRS) menu. ### Expenditure priorities, SOE support, and fiscal offsets - Priority social spending protected as Ksh.420.8 billion (covers vaccination/immunization, transfers to vulnerable groups, free primary and secondary education, food programs, health coverage/insurance). - Commitment to avoid accumulation of arrears and promptly pay outstanding exchequer requests at start of FY2022/23 as first call on budget. - SOE support in FY2021/22: - Supplemental budget provided Ksh.32.3 billion (0.3 percent of GDP), below prior projection of Ksh.48.4 billion. - Support included: - Ksh.9.05 billion to Kenya Power and Lighting Company (KPLC), including Ksh.7.05 billion budget support to fill liquidity gap from the January electricity tariff reduction; - Ksh.2 billion to Kenya Wildlife Service (KWS); - Ksh.1 billion to Kenya Airports Authority (KAA); - Ksh.20.3 billion to support broad restructuring of Kenya Airways (KQ). - Shortfalls relative to previous projections driven mainly by assumed rephasing of KQ support to FY2022/23 and lower-than-projected allocations to KWS and KAA; KPLC allocation was higher reflecting tariff cut impact. - Government did not implement partial compensation to KPLC for the rural electrification scheme in FY2021/22. - Fiscal offsets identified to respect program deficit objectives: - Spending offsets of Ksh.16.2 billion (0.1 percent of GDP, equivalent to one-half of extraordinary SOE support in FY2021/22) achieved via reduced recurrent spending and rationalization of non-priority projects. - FY2022/23 anticipated SOE support: - Total need Ksh.36.6 billion (0.3 percent of GDP). - KPLC expected to receive Ksh.7.05 billion to address part of liquidity gap. - Rest allocated to KQ, including assumed payments for debt service for guaranteed and unguaranteed debt subject to creditor agreements. - Cumulative extraordinary support to SOEs in FY2021/22 and FY2022/23 projected at Ksh.68.98 billion (0.5 percent of FY2021/22 GDP), below the 1.0 percent of GDP agreed under the program and Ksh.16.1 billion lower than projection at the previous review. - Program adjustor: absent realization of extraordinary SOE spending in FY2022/23, target a more ambitious primary balance equal to half of the under-execution in such support. ### Medium-term consolidation strategy and commitments - Continue revenue mobilization and tight expenditure control 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. - Intend to introduce additional tax policy measures for 0.9 percent of GDP in FY2023/24, guided by the Medium-Term Revenue Strategy (MTRS) and IMF TA work. - Recurrent expenditure to be progressively reduced as a ratio to GDP by containing wage bill growth and streamlining goods and services, while keeping development spending steady at close to 5 percent of GDP. *Source: 1kenea2022002 - 14. Program performance at end-December 2021 was good overall. Quantitative results* ### 25. We seek to move away from our fixed, nominal public debt ceiling and introduce a ### 25. We seek to move away from our fixed, nominal public debt ceiling and introduce a ### Debt framework and anchor - Move away from a fixed, nominal public debt ceiling and introduce a credible anchor of present value of the debt-to-GDP ratio to crystalize our policy intention of reducing debt and maintaining debt sustainability (see ¶32). - The credibility of the new framework will anchor expectations for all stakeholders around the government’s intended debt reduction path and will benefit from our commitments under the EFF/ECF-supported program with the IMF. - Expected outcomes: strengthen the credibility of the government’s strategy to reduce debt vulnerabilities by enhancing transparency and accountability around the envisaged path to reach the medium-term anchor. ### Fiscal risks and contingency planning - Global shocks entail high risks to the fiscal program, particularly for government revenues; rapid changes in the macroeconomic context, including further ramifications of the war in Ukraine, could depress yields of the adopted tax measures and hence tax receipts. - Any revenue shortfall relative to program targets for FY2022/23 will be compensated for by taking additional revenue measures, drawing from work under the MTRS with IMF support. - Authorities stand ready to further curtail non-critical spending if necessary to offset further pressures, including from newly arising spending priorities. - Institutional response: - Establish a fiscal risk management structure by end-July 2022, to be coordinated across the government at senior management level to oversee monitoring and assessment of fiscal risks. - A workshop with Fund technical assistance is scheduled for early June 2022 to concretize plans. ### Fiscal Structural Reforms — Medium-Term Revenue Strategy (MTRS) and tax policy - Build on the MTRS to reverse the previously declining trend of revenues caused in part by proliferation of incentives making the tax system less efficient and difficult to administer. - Past initiatives: Tax Law Amendment Act (2020), Finance Act (2020), and the recently published Tax Expenditure Report. - Planned deliverables and timelines: - End-August 2022 SB: issue a circular that includes an action plan for development of a Medium-Term Revenue Strategy (MTRS) that identifies quantified overarching revenue objectives consistent with programmed tax revenue targets, clarifies the role of each institution involved, and identifies a concrete and time-limited sequence of actions for achievement of such objectives. - The action plan will be further elaborated in the 2022 Budget Review and Outlook Paper, which will be sent to Parliament by end-September. ### Revenue administration reforms and compliance - Focus areas: enhancing tax and customs administration; strengthening compliance risk management; modernizing business operations; improving community perceptions of fairness; improving staff integrity; addressing aggressive tax planning, tax evasion, and tax fraud. - Key objectives and actions: - Develop and implement risk-based compliance strategies, with data-driven approaches. - Domestic taxes: develop compliance improvement plans (CIPs) targeting: (i) high risk sectors (e.g., construction and e-commerce and the digital economy); (ii) major taxpayer segments (premier clients, large businesses, and SMEs); and (iii) high risk issues (international tax risks, including BEPS, the informal sector, and aggressive tax planning by individuals). - Develop a Premier Tax Office Risk Management Plan by June 2022. - Restructure the Compliance Risk Management Committee by June 2023. - Focus on lifting compliance in registration, filing, and correct reporting and payment. - Customs focus: (i) improving compliance in valuation and classification of goods; (ii) strengthening management of transits; (iii) addressing cross-border smuggling, especially of excisable goods. - Strengthen the KRA’s audit function: - Rebuild audit capacity, including refresh and upgrade staff skills (by December 2022). - Strengthen feedback loops between disputes and audit areas (by June 2023). - Initiate process changes and capability enhancements to improve quality and establish mechanisms for assessing impact of the audit function on compliance (by June 2023). - Large and medium taxpayer offices: - Enhancements fully operationalized; Level II audits increased from 40 in FY2019/20 to 671 in FY2020/21. - Structural benchmark for end-2021 to increase by 30 percent the number of Level II audits of firms (using risk-based approaches) was met. - Audit functions rolled out to all KRA regional offices. - Strengthen data analytics to support CRM: - Establishment of a data governance framework and a data quality policy. - Develop credible and reliable taxpayer register and ledger accounts (by December 2022). - Implement a data management strategy to better access and utilize current and new data (by June 2023). - Commit critical analytical resources on priority/value-adding issues. - Managing exemptions: - Team set up to monitor and verify VAT exemptions in customs issued over the last 5 years; 14 exemption verifications carried out so far. - Aim to expand exemption verification to consider additional areas, including those administered under the East African Community Customs Management Act, by June 2023. - Improving taxpayer service to support voluntary compliance: - Strengthen facilitation and access to services; use data science to develop effective and timely services and compliance interventions (by June 2023); leverage stakeholder engagement in design and delivery of taxpayer services. ### Public procurement reforms - Recent PER from the World Bank identified potential to reduce transaction costs and secure lower prices via standardization and framework agreements. - Acquire an e-procurement system integrated with IFMIS to automate application of the Procurement Act and regulations. - Timeline and status: - Agreed implementation strategy and roadmap approved in September 2020; further approval from the Ministry of Information and Communications Technology. - Business and functional technical requirements developed; discussions on shared infrastructure with IFMIS department held. - Competitive procurement of a system developer temporarily delayed due to budget challenges. - Open international invitation to tender for the e-GP system software advertised in August and tender closed mid-September 2021. - Development began in May 2022, delaying pilot initiation to January 2023 and full rollout across Government MDAs to December 2023. ### Wage bill control and public sector compensation - 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. - Strategy: restraint in hiring and compensation, including implementation of a wage freeze for FY2021/22 and FY2022/23 (no adjustment to basic salary structures, allowances, and benefits for first two years of the four-year period covered by the 3rd remuneration and benefits review). - Hiring policy: limit new employment to priority areas; require MDAs to obtain prior confirmation from National Treasury on funding availability before seeking recruitment approval. - Further planned actions: - By end-June 2022, harmonize and rationalize categories, rates, and rules for allowances. - SRC issued Allowances Policy Guidelines in early October; final Allowances Policy Guidelines will be in place from the start of FY2022/23. - Guidelines seek to streamline allowances management and over time ensure allowances are limited to no more than 40 percent of gross pay. - By end-June 2022, implement across MDAs and Counties a common payroll system linked to IFMIS. - Unified Payroll System to be upgraded Government Human Resource Information System (GHRIS). - Payroll data to be cleaned and audited prior to transfer. - Milestones: (i) appointment of task team to upgrade GHRIS; (ii) assessment of GHRIS integration capabilities with IFMIS and other standalone systems; (iii) roll-out of Unified Payroll Number Generating System; (iv) development, validation, and completion of three prototype modules (Payroll Management and Administration, Leave Management, and Pension Claim). - Piloting of validated prototype conducted in 11 MDAs and Counties between November 2021 and February 2022. - Three additional prototype modules (establishment control; training and development; third-party deduction management) are being developed. - Upon implementation across MDAs and Counties, seek to extend the common payroll system to some SAGAs, prioritizing those that benefit from recurrent budget transfers from the National Government. ### Public Investment Management (PIM) - Objective: ensure investment portfolio is efficiently managed and new projects are based on clearly defined criteria and pre-determined costing methodologies. - Actions and progress: - Rationalizing the pipeline of existing projects: - Expanded stocktaking exercise identified 437 stalled or underperforming projects that should be canceled. - Cabinet decision to terminate these projects made; a task force preparing analysis of projects to be rationalized. - Expect work to be completed by November 2022, after which rationalizations would begin. - Developing a Public Investment Management Information System (PIMIS): - Consultant appointed after some delay; key modules completed; system testing and stakeholder engagement underway. - Target PIMIS fully operational by July 1, 2022. - Introducing manuals to guide operations: - Manuals for Economic Project Appraisal; Monitoring; Evaluation and Reporting; and National Parameters and Commodity Specific Conversion Factors are virtually complete, completed, published, and being applied across MDAs. - Ensuring PIM guidelines are followed: - All new investment projects required to provide concept notes and costing in compliance with guidelines. - A PIM representative on the budget panel ensures investments in the annual budget have followed stipulated processes. - Implementing new PIM regulations: - PIM guidelines converted into regulations; draft presented to the National Assembly in May 2021 and gazetted in April 2022. - Anticipate regulations to be fully in place within FY2021/22. - Manuals to guide operations will be applied to Counties later; full rollout at County level expected by July 2023. - Address obstacles to flow of funds from development partners: - Address administrative delays; ensure budget appropriations adequate to honor outstanding and planned commitments; make counterpart funds available. ### Public Financial Management (PFM) reforms and IFMIS enhancements - Strengthen expenditure control and improve efficiency/effectiveness of public spending; focus areas include budget processes, IFMIS functionality, commitment controls, and cash management. - Actions and targets: - Add functionality and enhance controls to IFMIS; introduced a new Cash Management Framework with regularly updated cash and debt plans approved by the Cash Management Committee. - 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. - System for automating cash flow plans completed and in use by MDAs. - Automation of exchequer requests completed and being tested by the National Treasury, Office of the Controller of Budget at Central Bank of Kenya. - System piloted with full rolling out planned at beginning of FY2022/23 (six months later than previously planned). - By December 2022, enhance IFMIS to enable contract generation and contract management for multi-year commitments. - Configured system to enable generation of purchase orders to ensure commitments are captured in IFMIS. - Five commonly used procurement methods to be configured in IFMIS to enable end-to-end procurement through the system. - By December 2022, develop draft IFMIS regulations to enforce use of the system for all procurements to ensure commitments are captured in IFMIS when entered into. - By June 2023, ensure all MDA budget proposals for FY2023/24 prepared using a common costing approach built into the Hyperion budget preparation system and elaborated in a budget costing manual. - Procurement for a vendor to develop the costing tool (Hyperion Budget Preparation System production mode) is ongoing. - Preparation of the Budget Manual commenced in July 2021 and is at an advanced stage; intend to finalize and disseminate manuals by end of December 2022. - By June 2023, complete a review of the number of extra-budgetary units with a view to consolidating and, where appropriate, bring them within the perimeter of the budgetary central government. ### Public debt management and domestic debt market development - Strengthen debt reporting, lengthen maturities, and avoid bunching of repayments to mitigate refinancing and settlement risks. - Enhance structures and functions of the Public Debt Management Office (PDMO) as envisioned in the PFM Law. - Reforms to deepen the domestic debt securities market (National Treasury working with CBK): - Strengthened auction management through Treasury Mobile Direct platform for retail sale of government securities and enabled auction of bids by banks through internet banking. - Further actions: (a) develop the Central Securities Depository System; (b) maintain a smooth yield curve for domestic debt securities; (c) support enhancement of market structure and conduct through treasurers and dealers of commercial banks; (d) lengthen maturity profile of government debt securities; (e) enhance transparency through publication of auction rules and guidelines; (f) strengthen the bond benchmark building program. - Result: the average time to maturity of outstanding treasury securities has increased from 7.7 years in June 2020 to *Source: 1kenea2022002 - 25. We seek to move away from our fixed, nominal public debt ceiling and introduce a* ### 9.0 years in March 2022, with the ratio of T-bills to T-bonds moving from 20:80 to 16:84. Regarding ### 1kenea2022002 - 9.0 years in March 2022, with the ratio of T-bills to T-bonds moving from 20:80 to 16:84. Regarding ### Debt management and external financing - Raise US$1.1 billion external financing for FY2021/22 through bank loans, repayable in 3 years. This financing replaces the planned Eurobond issuance due to unfavorable market conditions. - Planned Eurobond issuance as part of a market-based, debt management operation to improve the debt profile has been put on hold, while remaining in active consideration. - Public debt is projected at Ksh.8.8 trillion at close of the financial year. - Interim legal nominal debt ceiling measure: by end-June 2022, raise the legal nominal debt ceiling from the current level of Ksh.9 trillion to Ksh.10 trillion to enable full financing of the FY2022/23 budget. - Medium-term reform: By end-December 2022, replace the nominal debt limit with a debt anchor centered on two pillars: - (i) a medium-term debt anchor set at 55 percent of GDP with debt measured in present value terms; and - (ii) an accountability requirement that mandates transparent communication to Parliament and the public on plans and progress towards achieving the debt anchor within a specific timeframe. - By end-March 2023, issue PFM regulations and a service contract for PDMO to make operational the framework for debt management envisioned in the PFM Act. - A taskforce comprising experts from the Attorney General's Office, the CBK, and the National Treasury has been constituted to review the current situation and make a proposal to strengthen institutional arrangements for public debt management. - A Bill harmonizing the definition of public debt in the Constitution of Kenya 2010 with the PFM Act and its attendant regulations has been submitted to Parliament for consideration and approval. - Taskforce expected to present recommendations on the operational framework for debt management to Cabinet Secretary, National Treasury and Planning by end-October 2022. ### Investor relations, transparency, and reporting - Established an Investor Relations Unit (IRU) to strengthen communication with external stakeholders. The IRU now has a page on the National Treasury website. - By end-June 2022, launch an enhanced micro-site for the IRU to support external communication. A site prototype has been developed and is currently under review by stakeholders. - By end-October 2022, expand the coverage of public debt reporting to include non-guaranteed public corporations’ debts (including arrears) not currently included. - The Annual Public Debt Management Report for FY2020/21 included non-guaranteed debt of 18 public entities considered to pose the highest fiscal risk. - Of these 18 SOEs, 9 were found to have non-guaranteed debt totaling Ksh.105 billion (1 percent of GDP). - For FY2021/22 Debt Management Report, aim to expand coverage to the remaining SOEs. ### G20 Debt Service Suspension Initiative (DSSI) - First phase (January—June 2021): Government obtained debt suspension of US$423.5 million (Ksh.46.5 billion). - Second phase (July–December 2021): Government requested debt service suspension estimated at US$379 million from all bilateral creditors. - Debt service relief received in 2021:H2 is estimated at US$80.3 million (Ksh.8.8 billion) due to non-participation by non-Paris Club creditors. ### Public Private Partnerships (PPPs) - Revamped the PPP Directorate in the National Treasury to support efficient and sustainable project delivery without undue fiscal risks, including appointment of a Director-General. - Creating and institutionalizing a joint PIM planning framework to streamline decision-making on procurement route (traditional on-budget public procurement vs PPP). - Strengthened coordination between the PPP Directorate and the PDMO for effective control of fiscal exposure, as envisioned in the PPP Act. - Fully operationalized the PPP Project Facilitation Fund in the context of the FY2021/22 supplementary budget through creation of a budget line for annual funding. - Inclusion of fiscal risk analysis of PPPs in the Budget Policy Statement, as per the requirements of the PFM Law. ### Pension reform - Introduced a funded pension scheme for public sector workers: the Public Service Superannuation Scheme (PSSS). - PSSS commenced on January 1, 2021; will replace the previous pay-as-you-go system over time. - PSSS has attracted more than 352,000 members so far, with a current fund value of Ksh.27 billion. - Contribution rates: - Employer (GoK) contribution: 15 percent of the members basic salary. - Member contribution: phased over first three years at rates of 2 percent, 5 percent, and 7.5 percent in the first, second, and third years, respectively, reaching 7.5 percent thereafter. - Participants: all new public sector employees who were below the age of 45 years as of January 1, 2021; and those employed after that date. - Anticipated re-engineering and digitizing of pension management system: testing stage by January 2023 and system completion by end-June 2023 (reengineering project delayed due to longer-than-expected bidding process). - Government-backed pensions scheme for informal workers, the Kenya National Entrepreneurs Savings Trust, targeting over 15 million informal sector workers, has been registered. ### State-Owned Enterprises (SOEs): overview and vulnerabilities - In-depth financial evaluations (end-May 2021 SB) identified a cumulative Ksh.383 billion liquidity gap over the next five years for 18 SOEs (excluding Kenya Airways). - The liquidity gap expected to be primarily covered via SOEs’ cost saving measures, complicated by rise in global fuel prices since late February. - Kenya Airways (KQ) and Kenya Power and Lighting Company (KPLC) are the two companies with largest fiscal risks. - To contain fiscal impact of support to SOEs, introduce during FY2021/22 and FY2022/23 budgetary offsets for 50 percent of extraordinary support to SOEs, including KQ, in line with program commitments and conditionality flexibility. After FY2022/23, offsets set at 100 percent of the extraordinary support. ### Kenya Airways (KQ): financial state and restructuring - GoK is the largest shareholder of KQ (48.7 percent equity share) and has exposure including US$750 million of previously-issued guarantees to creditors. - As of March 31, 2022, the total value of KQ’s debt portfolio was US$868.7 million, including all debts, loans, letters of credit facilities, and convertible equity amounts. - GoK will novate US$485 million of KQ’s guaranteed debt principal over the coming years. - Direct budgetary support will be provided to: - clear overdue payment obligations; - service other debt (guaranteed and unguaranteed) falling due in coming years but not eligible for novation; and - cover the upfront costs of restructuring (amounts for such support in FY2021/22 and FY2022/23 are included in ¶23 above). - Guarantees on multiple credit facilities by local banks will remain in force. - Negotiations for servicing of KQ’s guaranteed and unguaranteed debt are ongoing and expected to be completed in FY2022/23. - Restructuring actions and safeguards: - Hired an airline consultant with international experience and know-how to negotiate for concessions. - May 2022: completed preparation of a detailed restructuring action plan to improve KQ’s operational profitability. - June 2022: established an accountability mechanism to ensure restructuring follow-through by KQ Board; implement a tracker for key actions and milestones. - June 2022: prepared a loan agreement with KQ including conditions, clear KPIs, timelines, reporting obligations and disbursement plan; signing of loan agreements by end-June 2022. - NT to review progress quarterly and send reports to the Cabinet. - Disbursements from NT to KQ conditional on progress toward pre-agreed targets. - Exchequer support terms to prioritize the liability to the Exchequer while support is outstanding. ### Kenya Power and Lighting Company (KPLC): financial state and corrective measures - GoK is the largest shareholder of KPLC (50 percent equity share). - KPLC had a negative working capital position of Ksh.69 billion on June 30, 2021, and outstanding trade payables of Ksh.79.4 billion of which over Ksh.60 billion was overdue. - Updated 2022 financial evaluation: estimated liquidity gap of about 1 percent of GDP. - January tariff cut opened up new liquidity gaps of Ksh.26.3 billion annually. - For the second half of FY2021/22, the Ksh.26.3 billion gap expected to be covered by cost-saving measures and government support of Ksh.7.05 billion, although yields from some cost-saving measures remain to be confirmed. - Despite additional government support of Ksh.7.05 billion in FY2022/23, significant financing gaps remain on an annual basis over the medium term and KPLC’s working capital will remain in deficit in the foreseeable future. - Necessary actions: comprehensive turnaround strategy including clearance of GoK obligations to KPLC; improve operational efficiency; increase power sales and revenue collection; improve cash flow management; reduce operational costs; reduce system losses to within medium-term loss benchmark of 15 percent approved by the regulator; re-engineer business process (automated billing, metering, payments); fit-for-purpose organization structure and staffing; procurement and stock management reforms; restructure expensive commercial debt. - Institutional steps: - Presidential taskforce on Power Purchase Agreements submitted report in September 2021. - National Treasury taskforce assessed KPLC financial status and presented report in October 2021. - Steering committee formed to follow up on Presidential taskforce recommendations. - KPLC Board reconstituted and a new managing director is being recruited. - New structural benchmark: by end-July 2022, prepare and submit to the Cabinet Sub-Committee on KPLC an action plan to restore medium-term profitability and cover fully any financing gaps (pre-existing and new) through end-2023. The plan to be jointly prepared by National Treasury and the Ministry of Energy and informed by Presidential Taskforce findings and updated 2022 financial evaluations. ### SOE governance arrangements and monitoring systems - Completed a Strategy on SOE reforms to enhance financial and operational efficiency and cost savings. - By June 2022, prioritize development of Government Investment Management Information System (GIMIS) modules to: - facilitate reporting by SCs on their full set of unguaranteed, guaranteed, and on-lent loans; - develop a framework to monitor evolution of individual SC loans, capturing new disbursements, repayments, and outstanding amounts of disbursed loans. - Intend to have user requirements developed for the analytical module by end-December 2022. - GIMIS to be accessible by relevant oversight entities, including line ministries, National Treasury, and SCAC. - By December 2022, review organizational arrangements within NT for financial oversight of SCs and ensure that the role and functions for Government investments as a core function of the NT are fully provided for in the legislative framework. - Extend coverage of financial evaluations of SCs undertaken in NT to facilitate identification, quantification, monitoring, reporting, and management of fiscal risks stemming from SCs, including guarantees and contingent liabilities. *International Monetary Fund — Kenya chapter excerpt* ### 46. Implementation of the Blueprint for Governance Reforms of SCs is underway. The ### 46. Implementation of the Blueprint for Governance Reforms of SCs is underway. ### Governance reforms for State Corporations (SCs) - Objective: Improve governance of SCs by (i) strengthening the GoK’s ability to act as an informed, active, and more transparent owner, (ii) putting in place more efficient and effective institutional arrangements for SCs’ ownership and oversight, and (iii) introducing a legal framework that is more favorable to commercial SCs’ activities. - Draft inventory and classification: - A draft document containing an updated inventory and a new classification of SCs, plus guidelines and expectations for SCs’ management, has been prepared. - Expected approval by the Cabinet by end-July 2022 and publication immediately thereafter. - Public disclosure of audited financial statements and annual reports: - A system to make all SCs’ audited financial statements and annual reports public via NT’s website will be fully operational by end-August 2022. - A directive will require SCs to publish such documents on their own websites. - SCs policy preparation: - Government’s SCs policy preparation ongoing with plans for submission for public consultation by end-June 2022 and adoption by the Cabinet by end-July 2022. - With IMF and World Bank advice, the policy will detail the new SCs’ governance architecture, a rationale for state ownership, corporate governance expectations, and reporting and disclosure guidelines. - These elements from the Blueprint and SCs Strategy will be anchored through legal reform thereafter. - Actions by end-November 2022: - (i) Take concrete actions to ensure that SCs’ board members comply with the presentation of their asset declarations. - (ii) Ensure that all SCs disclose and publicize their anti-corruption performance indicators and initiate institutional coordination efforts for the design of an aggregate report on SCs’ anti-corruption performance indicators. - (iii) Publish the performance evaluation reports of SCs for FY2020/21 and continue annual publications thereafter. - (iv) Secure technical assistance for the design of a new performance contracting and monitoring framework for commercial SCs. ### Monetary policy - Primary policy objectives: - (i) Maintain headline inflation within our target range (5±2.5 percent). - (ii) Maintain a flexible exchange rate regime, with market interventions only in response to excess exchange rate volatility. - (iii) Further improve the monetary policy framework. - A monetary policy consultation clause (MPCC) with a 5 percent ±2.5 percent band will help monitor inflation performance, providing for consultation with the Executive Board if inflation falls outside the band (TMU, ¶23). - Recent policy stance and actions: - The MPC lowered the policy rate by 125 basis points at the beginning of the pandemic to 7 percent. - The cash reserve ratio was lowered by 100 basis points to 4.25 percent. - In its May 30, 2022 meeting, the Committee raised the policy rate by 50 basis points. - The MPC will closely monitor impacts and stands ready to take additional measures as necessary. - Monetary policy reform agenda: - Removal of interest rate caps in late 2019 facilitated reforms. - Published in July 2021 a white paper on “Modernization of the Monetary Policy Framework and Operations.” - Reform focus areas as conditions normalize: - Refining macroeconomic modeling and forecasting frameworks: - CBK hosted an IMF AFRITAC East FPAS scoping mission in October 2021. - Implementation ongoing: strengthen nowcasting and business survey frameworks, the quarterly projection model, and data management; enhance coverage of MPC surveys; introduced remittances survey. - Improving operations of financial markets: - Implement a Centralized Security Depository (CSD) by June 2022 to improve monetary policy transmission, mitigate segmentation in the interbank market, enhance liquidity distribution, strengthen the secured overnight market, eliminate paper-based processes via Straight Through Processing (STP), and enable full transfer of collateral for repo transactions. - Experience with the CSD will inform review of the methodology for calculating the interbank rate as the operational target and introduction of a band around the CBR. - Roll-out of Treasury Mobile Direct and Internet Banking; installation of Enterprise Data Warehouse (EDW) for near-real time data capture and analysis. - Improving communication of monetary policy decisions: - Introduce publication of a quarterly inflation report. ### Financial sector — stability, reforms, and COVID-19 response - 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-March 2022 unless otherwise stated): - Core capital adequacy ratio: 16.2 percent. - Total capital adequacy ratio: 18.9 percent. - Statutory minimums: 10.5 and 14.5 percent respectively. - Liquidity ratio: 55.0 percent (statutory minimum 20 percent). - Gross NPLs to gross loans: 14.0 percent in March 2022 from 14.1 percent in December 2020. - Outstanding restructured loans: about 11.7 percent of gross loans with about 90 percent of restructured loans performing per the restructured terms. - Stress testing and resilience: - A credit risk stress test suggests that a shock increase of some 5 ppt in current NPLs above already elevated pandemic levels would lead to an impact of less than 0.4 percent of GDP on capital shortfall relative to minimum requirements. - Authorities encourage banks to strengthen governance, business models, pursue mergers and acquisitions, and other capital strengthening efforts. - COVID-19 related 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-March 2022, outstanding restructured loans amounted to 11.7 percent of total loans; 90 percent performing per restructured terms. - Restructured loans that have fallen in arrears: about 1.1 percent of total banking sector gross loans. - Regulatory flexibility on loan classification and provisioning unwound; after June 3, 2021, standard procedures applied. - Credit referencing mechanism: - CRB Regulations effective April 8, 2020; temporary suspension of listing of negative credit information was possible in exceptional circumstances. - CBK Banking Circulars 7 and 8 of 2020 temporarily suspended sharing of negative credit information on facilities that became non-performing for six months to September 30, 2020; measure expired on that date. - Ensuring capital adequacy: - ICAAP adopted since 2016; CBK required resubmission for 2020 by October 31, 2020 to account for pandemic developments. - Updated ICAAP submissions informed review of profit distribution including dividends. - In 2021, bank profitability improved; some banks announced dividend payments after audit of 2021 financial statements. - All banks publicly disclosed their audited 2021 financial statements, including capital adequacy ratios, in March 2022. - Digital platforms and transaction patterns: - Limits on mobile money transactions were enhanced and fees on low value transactions (of up to Ksh.1,000) eliminated at pandemic onset. - Bank transactions on mobile phones increased from 55.7 percent before the pandemic to 84.8 percent of all transactions. - Waiver on fees on low value mobile money transactions lifted in January 2021 but expansion of maximum limit on wallet and transactions remains. - AML/CFT checks strengthened. - Credit Guarantee Scheme (CGS) for MSMEs: - Risks shared on a 50:50 pari-pasu basis; subject to a maximum guaranteed exposure of 25 percent of the principal amount. - Total loans extended under CGS: Ksh.3.3 billion as at March 2022 (since start in December 2020). - Beneficiaries: MSMEs from 46 counties and 11 different sectors. - Credit quality: 98 percent of guaranteed loans performing. - Ongoing and planned reforms: - Banking sector resilience: - Pandemic-period transactions completed: 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 (DRC, Rwanda, Tanzania). - Real-time supervision: - Implementing centralized EDW launched in February 2022 to merge supervisory data; connect via APIs to banks for near real-time access. - EDW Onboarding Portal for Digital Credit Providers completed March 2022 to automate licensing. - Review of the Microfinance Act: - Draft Microfinance Bill finalized by State Law Office in December 2020; forwarded to National Treasury in March 2021; approved by Cabinet in November 2021 and forwarded to the National Assembly. - Licensing of Kenya Mortgage Refinance Company (KMRC): - Licensed September 18, 2020 under CBK (Mortgage Refinance Companies) Regulations, 2019. - As of June 30, 2021, KMRC disbursed Ksh.800.2 million to four participating mortgage lenders under the World Bank Group line of credit. - Mortgage portfolio of Ksh.5.8 billion from seven other mortgage lenders is under review for refinancing. - KMRC issued a corporate bond of Ksh.1.4 billion in February 2022. - Central Bank of Kenya (Amendment) Act, 2021 on Digital Credit Providers (DCPs): - Bill passed by the National Assembly in October 2021 and assented to by the President on December 7, 2021. - Digital Credit Providers Regulations published on March 18, 2022. - Unregulated DCPs should apply for a license from the CBK by September 17, 2022 or cease operations. - Greening Kenya’s banking sector: - Guidance on Climate-Related Risk Management issued October 15, 2021. - Sensitization workshop for CEOs on October 29, 2021. - Capacity building workshops for bank staff and CBK staff conducted February to March 2022. - Initiative aims to attract global funds and position Kenya as a green finance hub. *Source: 1kenea2022002 - 46. Implementation of the Blueprint for Governance Reforms of SCs is underway.* ### 56. We launched the National Payments Strategy, 2022-2025 in February 2022. It seeks to ### 1kenea2022002 - 56. We launched the National Payments Strategy, 2022-2025 in February 2022. It seeks to ### National Payments Strategy and Digital Currencies - Launched: National Payments Strategy, 2022-2025 in February 2022. - Vision: "a secure, fast, efficient, and collaborative payments system that supports financial inclusion and innovations that benefit Kenyans." - Core principles anchoring the vision: trust, security, usefulness, choice, and innovation. - CBDC actions: - Issued a Discussion Paper on Central Bank Digital Currency (CBDC) in February 2022 to assess applicability in Kenya and highlight risks and opportunities. - Public consultation: sought comments from the public by May 20, 2022. - Any eventual decision to introduce a CBDC would involve the government, regulators, the private sector, and the public. ### Governance: Transparency and Procurement - Public Procurement Information Portal (PPIP): - Key information on all tender awards published on the PPIP. - Will publish beneficial ownership information of companies awarded tenders in the PPIP for new procurements issued from April 21, 2022 onwards, together with other key information of tender awards. - Comprehensive information, including on beneficial ownership, on these new procurements will become publicly available on the PPIP by the 15th day of the subsequent month of the tender awards. - Revised standard bidding documents and timelines: - Public consultation on the draft beneficial ownership form completed on March 15, 2022. - Revised standard bidding documents to incorporate the beneficial ownership commitment and disclosure form. - Issued PPRA Circular No.2 of 2022 on April 8, 2022 to inform adoption of revised standard bidding documents. - Revised bidding documents take effect from April 21, 2022; consent for all new tenders required immediately upon effective date (SB for end-March 2022). - Sanctions and oversight: - Implementation mechanisms developed to ensure bidders are subject to dissuasive sanctions for non-compliance. - Steps to ensure appropriate oversight mechanisms are in place throughout the tender process. ### Anti-Corruption Framework and Enforcement - Legal framework components cited: - 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; members include DPP, DCI, EACC, ARA, NIS, CBK, KRA & FRC. - Facilitated processing of corruption investigations, prosecutions, and asset recovery interventions. - Judiciary: - Anti-Corruption and Economic Crimes Division of the High Court established to expedite adjudication of corruption cases. - Planned reforms: - Further legal, policy and administrative interventions to strengthen implementation of anti-corruption agenda. - Review legal framework of asset declarations and conflict-of-interest rules to align with international best practices; planned enhancements include: - (i) Consolidate wealth and interest declarations into one uniform disclosure regime. - (ii) Rationalize responsibility for analyzing/verifying disclosures and imposing sanctions in a single agency. - (iii) Enhance enforcement agencies’ role, responsibilities and capability for investigating, prosecuting and sanctioning illicit enrichment and other corruption offenses. - (iv) Ensure publication of information on asset declarations of public officials, including assets beneficially owned. - Prioritize preventive anti-corruption framework and an operational asset declaration system (details under final review by inter-agency committee). - Target enactment of the Conflict-of-Interest Act by end-December 2022. ### Access to Information and Records Digitization - Access to Information Act implementation: - Draft implementing Regulations forwarded to the Attorney General for publishing; commit to expedite approval and allocate sufficient funds for rollout. - By December 2022, develop standards for digitization and automation of records to ensure capacity to comply with minimum access to information requirements. ### COVID-19-Related Spending Transparency and Audits - Audit commitments and status: - National Office of the Auditor-General completed 3 special audits of COVID-19 spending. - KEMSA special audit report committed to the Public Investment Committee (PIC); final PIC report on KEMSA approved for tabling on September 22, 2021 but awaiting adoption and reporting by the National Assembly. - Sub-national government COVID-19 spending special audit report discussed by the Senate Committee on Health and tabled and adopted by the Senate on February 23, 2022. - National government COVID-19 special audit report on spending across ministries submitted to Parliament in May 2021; under deliberation by the Public Accounts Committee. - Committed to publish results of a forensic audit of COVID-19 vaccine spending up to end-March 2022 and a comprehensive audit of expenditures in FY2020/21 with a section on COVID-19-related spending (SB for end-May 2022). - The comprehensive audit was published in June, with a dedicated section on COVID-19-related spending in the summary report. - The special audit of COVID-19 vaccine spending expected to be completed and submitted to Parliament by end-June and published by mid-July 2022. - Follow-up: - Commit to ensure follow-up and proper accountability in relation to completed audits and to conduct audits of remaining COVID-19 spending and act upon Parliamentary guidance. ### AML/CFT and Anti-Corruption Support - National AML/CFT actions: - National Risk Assessment (NRA) report and National AML/CFT Action Plan (2021–26) completed and shared with stakeholders. - NRA report to be made public in connection with official launch by July 2022. - Committed to implement actions identified in AML/CFT Action Plan to strengthen regime. - Proceeds of Crime and Anti-Money Laundering (Amendment) Act 2022 enacted: requires lawyers to declare suspicious activity; approved by Parliament in December 2021 and passed into law by the President in January 2022. - Kenya Financial Reporting Centre conducting nationwide outreach to reporting institutions to raise awareness on ML/TF risks relating to corruption and improve quality of suspicious transaction reporting. - Will publish ML/TF typologies, including corruption-related money laundering typologies, by September 2022 and continue updates as risks evolve. - Mutual Evaluation: - ESAAMLG second round Mutual Evaluation on-site visit completed in February 2022; second face-to-face meetings set for July 2022. - Final ME report expected in September 2022 upon adoption by the ESAAMLG plenary. - Outcomes will inform actions to strengthen AML/CFT framework, including assessing and strengthening effectiveness of AML/CFT risk-based supervision. ### Data Quality and Statistical Improvements - Policy objective: produce and disseminate high-quality economic statistics to support evidence-based policymaking. - New statistical surveys and releases: - Integrated Survey of Services - Study of Trade Margins - Study of Underground Economy - Study of Informal Transportation - Medium, Small and Micro Enterprises Survey - Survey of Non-Profit Institutions - Joined the Enhanced General Data Dissemination System (e-GDDS) initiative in December 2018. - First Foreign Investment Survey released in April 2019; another in August 2021. - Submitted international investment position (IIP) data series from 2008 to 2018 to the Fund in July 2020 (available on IMF website). - National accounts statistics rebased to 2016 in September 2021 (previous base 2009). - Capacity and reporting improvements and timelines: - Address capacity gaps in key departments of the National Treasury and in ICT systems; strengthen coordination at the Inter Department committee on GFS. - Expected reporting improvements: - (i) General government fiscal outturns on a quarterly basis by December 2022. - (ii) Annual fiscal data of the public corporations’ sector (including financial and non-financial corporations) by December 2022. - (iii) Migration of the fiscal framework to GFSM 2014 based concepts, starting with the QEBR for second quarter of FY2021/22. - CBK introduced new surveys to assess impact of policy measures on key sectors in the context of the pandemic. ### Program Monitoring and IMF Engagement - 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 in Table 2 used for monitoring progress on structural reforms. - Technical Memorandum of Understanding (TMU) contains detailed definitions and reporting requirements and defines scope and frequency of data for program monitoring. - Exchange restrictions and import policy commitments: - During program period, government will not introduce or intensify restrictions on payments and transfers for current international transactions, introduce/modify any multiple currency practice without IMF prior approval, conclude bilateral payments agreements incompatible with Article VIII, or introduce/intensify import restrictions for balance of payments reasons. - Review schedule: - Fourth review on or after November 7, 2022. - Fifth review on or after May 7, 2023. - Sixth review on or after November 7, 2023. - Requests to IMF: - Request modification of QPCs on net international reserves for end-June 2022 and end-December 2022 to lower targets, reflecting lower expected net FX inflows. - Request waiver of applicability of end-June 2022 PCs under the EFF arrangement (final data not yet available). - Request establishment of three new structural benchmarks: - (1) Issuance by end-August 2022 of a circular that includes an action plan for development of an MTRS that sets revenue objectives consistent with program targets. - (2) By end-July 2022, review application of domestic fuel pricing mechanism and publicly announce and constitute a taskforce to oversee progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure fuel pricing actions are aligned to the approved budget. - (3) Submission to the Cabinet Sub-Committee on KPLC by end-July 2022 of an action plan to restore KPLC’s medium-term profitability and fully cover any financing gaps (pre-existing and new) through end-2023, as identified by the updated 2022 financial evaluation. *Source: 1kenea2022002 - 56.* ### 1. This memorandum sets out the understandings between the Kenyan authorities and the IMF ### This memorandum sets out the understandings between the Kenyan authorities and the IMF regarding the definitions of quantitative performance criteria (QPCs) and indicative targets (ITs), their adjusters and data reporting requirements for the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements. ### Scope and definitions - The National Government of Kenya (GoK) corresponds to the budgetary national government encompassing the activities of the national executive, legislative and judicial powers covered by the National Budget, and specifically includes the parliament, national judiciary, and executive including Ministries, Departments, Agencies (MDAs), and Constitutional Commissions and Independent Offices. - For the program, all definitions and be measured and monitored as specified in this memorandum. ### Quantitative performance criteria (QPCs) and indicative targets (ITs) - QPCs established for test dates: June 30, 2022; December 31, 2022; and June 30, 2023, with respect to: - the primary balance of the national government including grants, cash basis (floor); - tax revenue of the national government (floor); - the stock of net official international reserves (NIR) of the Central Bank of Kenya (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 state-owned enterprise (SOE) debt not reflected in the primary balance (ceiling); and - a monetary policy consultation clause (band). - Indicative targets set for the same test dates with respect to: - the change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling); and - priority social spending of the national government (floor). ### Performance criterion on the primary balance of the national government - Definition: - National government primary balance on a cash basis = national government revenues and grants minus expenditures and net lending, plus due interest payments. - Any financial support transaction of the national government with and on behalf of SOEs with negative equity as of end-June 2020 is recorded as a transfer to an entity outside the national government regardless of whether the national government acquires a claim on the SOE. - Operations such as debt swap or exchange of financial assets between the national government and SOEs with negative equity as of end-June 2020 are recorded as a reduction in net lending and an increase in grants to SOEs. - Measurement (financing side): - Primary balance = (a) negative of net domestic financing of the national government; (b) negative of net external financing of the national government; and (c) domestic and external interest payments of the national government. - Measurement periods: - end-June 2022 test date: cumulative from July 1, 2021, to June 30, 2022; - end-December 2022 and end-June 2023 test dates: cumulative from July 1, 2022, to June 30, 2023. - Components defined: - Net domestic financing comprises: 1. net domestic bank financing (including credit from commercial banks and the CBK, the overdraft facility and on-lending of part of the SDR General Allocation to the national government; changes in bank holdings of national government debt; drawdown of national government deposits held at commercial banks or the CBK); 2. net domestic nonbank financing (changes in non-bank holdings of national government debt and other obligations); 3. proceeds from privatization; 4. any other borrowing securitized by, or otherwise to be repaid with national government revenue. - Net external financing at actual transaction exchange rates is the sum of: - disbursements of external project loans, including securitization; - disbursements of budget support loans; - the negative of principal repayments due on all external loans; - net proceeds from issuance of external debt; - any exceptional financing (including rescheduled principal and interest on external debt); - net changes in the stock of short-term external debt; - any change in external arrears including interest payments. - Domestic and external interest payments are the due interest charges on domestic and external national government debt. - Adjustors to the primary balance floor: - SOE support adjustor: - The floor will be adjusted downward (upward) by half of any SOE support in excess (falling short) of the amounts set out in TMU Table 1 for FY2021/22 and FY2022/23, provided cumulative SOEs support reported in Table 1 plus any overage does not exceed Ksh.127.5 billion (1.0 percent of the FY2021/22 GDP) over that period. - Fiscal outturn tables (BOT) will be amended to show amounts paid each month and targeted levels for the month. - TMU Table 1: Projected Extraordinary Support to SOEs (Ksh. million) — cumulative from July 1, 2021 for FY2021/22 and from July 1, 2022 for FY2022/23: - 2022 Jun.: 48,426 - 2022 Dec.: 36,638 - 2023 Jun.: 36,638 - Program grants adjustor: - The floor will be adjusted downward if budgetary program grants not specifically related to COVID-19 vaccination fall short of the programmed amounts set out in TMU Table 2. - TMU Table 2: Program Grants Disbursements (Ksh. million) — cumulative from July 1, 2021 for FY2021/22 and from July 1, 2022 for FY2022/23: - 2022 Jun.: 2,500 - 2022 Dec.: 0 - 2023 Jun.: 0 - COVID-19 vaccination financing adjustor: - If additional resources to finance COVID-19 vaccination become available, the floor will be adjusted downward by the amount of foreign concessional project financing dedicated to COVID-19 vaccine interventions and any COVID-19 vaccine related import cost not covered by foreign concessional project financing. ### Performance criterion on the net international reserves (NIR) of the Central Bank of Kenya (CBK) - NIR definition: - NIR = total gross official international reserves minus official reserve liabilities. - Gross official international reserves include: - CBK’s holdings of monetary gold (excluding amounts pledged as collateral); - holdings of Special Drawing Rights (SDRs); - CBK’s 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 international reserves exclude: - pledged, swapped, or any encumbered reserve assets, including reserve assets used as collateral or guarantees for third-party external liabilities; - deposits with Crown agents; and - precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets. - Gross official reserve liabilities include: - 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; - commitments to sell foreign exchange arising from derivatives (futures, forwards, swaps, options). - Adjustors to the NIR target: - 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 of) the programmed amounts set out in TMU Table 3, the NIR target will be adjusted upward (downward) by the difference. - If program grants or the revenue component of project grants falls short of programmed amounts in TMU Table 3, the NIR target will be adjusted downward by the difference. - If foreign exchange outflows related to financial support provided to Kenya Airways exceed (fall short of) the programmed amounts in TMU Table 3, the NIR target 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. - TMU Table 3: Projected Program and Project Loans, Grants, Commercial Borrowing and Foreign Exchange Outflows Related to Budget Support to Kenya Airways (US$ millions) — cumulative from July 1, 2021 for FY2021/22, and from July 1, 2022 for FY2022/23: - Program grants and loans: - 2022 End-June: 1,451 - 2022 End-Dec: 353 - 2023 End-June: 1,220 - Program loans: - 2022 End-June: 1,424 - 2022 End-Dec: 353 - 2023 End-June: 1,220 - Program grants: - 2022 End-June: 27 - 2022 End-Dec: 0 - 2023 End-June: 0 - Project loans and grants: - 2022 End-June: 753 - 2022 End-Dec: 232 - 2023 End-June: 768 - Project loans (revenue component): - 2022 End-June: 645 - 2022 End-Dec: 212 - 2023 End-June: 700 - Project grants (revenue component): - 2022 End-June: 108 - 2022 End-Dec: 20 - 2023 End-June: 68 - Commercial and Semi-concessional borrowing: - 2022 End-June: 1,108 - 2022 End-Dec: 0 - 2023 End-June: 900 - Foreign exchange outflows related to KQ support: - 2022 End-June: 132 - 2022 End-Dec: 91 - 2023 End-June: 183 - DSSI relief adjustor: - If the pledged DSSI relief exceeds (falls short of) the programmed amounts set out in TMU Table 4, the NIR target will be adjusted upward (downward) by the difference. - TMU Table 4: DSSI Relief (US$ millions) — cumulative from July 1, 2021 for FY2021/22: - 2022 Jun.: 80.3 - Currency conversion and exchange rates: - NIR is monitored in U.S. dollars. Assets and liabilities in currencies other than the U.S. dollar are converted into dollar equivalent values using exchange rates as specified in TMU Table 5. - TMU Table 5: Program Exchange Rates (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 ### Continuous performance criterion on public and publicly-guaranteed external debt arrears - Definition: - Public and publicly-guaranteed external debt arrears to official and private external creditors are overdue payments (principal or interest) not made by their contract due date nor during the applicable grace period thereafter, on debt contracted by the national government. - Arrears (principal or interest) to official and private creditors are defined as overdue payments beyond 30 days after the original contract due date to allow time to process due repayment after notification of inability to pay. - Excludes arrears relating to debt subject to renegotiation (dispute or ongoing renegotiation) or rescheduling. - External debt is defined on a currency basis. - The performance criterion is defined as a cumulative flow in gross terms from January 1, 2021 and applies on a continuous basis. ### Ceiling on contracting or guaranteeing of new external debt - Definition of debt: - For program purposes, the definition of debt follows paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No.15688-(14/107), adopted December 5, 2014. - “Debt” means a current (not contingent) liability created under a contractual arrangement through provision of value in the form of financial and nonfinancial assets (including currency) or services, requiring the obligor to make one or more future payments in assets or services to discharge principal and/or interest liabilities. - Primary forms include: (i) loans (advances of money, including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); (ii) suppliers’ credits (supplier permits obligor to defer payments until after delivery); (iii) leases (debt is the present value at inception of all lease payments expected during agreement excluding payments covering operation, repair, maintenance). - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt (e.g., payment on delivery) will not give rise to debt. - Coverage of debt for the ceiling: - External debt for the ceiling = any debt contracted or guaranteed by the public sector denominated in foreign currency (currency other than the Kenyan Shilling (Ksh.)): - 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). - Definition of debt is as above with the exception noted. - A ‘guaranteed debt’ is an explicit promise by the public sector to pay or service a third-party obligation (involving payments in cash or in kind). - External debts in currencies other than the U.S. dollar will be converted into U.S. dollars at program exchange rates. - Contracting of debt and treatment of 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 (drawable at any time and entered into effect) with no predetermined disbursement schedules or with multiple disbursements is considered contracting of debt. - Definition of debt ceiling: - A performance criterion (ceiling) applies to the present value (PV) of new external debt contracted or guaranteed by the public sector. - The ceiling also applies to debt contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended. - Loan obligations between the national government (GoK) and the 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 calculation: - PV of debt at contracting = discounting the future stream of payments of debt service due on this debt. - For debts with grant element equal or below zero, PV is set equal to the nominal value of the debt. - Discount rate = 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 variable interest rate debts (benchmark + fixed spread), PV calculated using program reference rate plus the fixed spread (in basis points) specified in the debt contract. - Program reference rate for six-month USD Secured Overnight Financing Rate (SOFR) is 0.04 percent and will remain fixed for the duration of the program. - Spreads over six-month USD SOFR for interest rates in other currencies (fixed for program duration): 1. Spread of six-month Euro EURIBOR over six-month USD SOFR is -56 basis points; 2. Spread of six-month JPY Overnight Indexed Swap (OIS) over six-month USD SOFR is -8 basis points; 3. Spread of six-month GBP Sterling Overnight Interbank Average (SONIA) over six-month USD SOFR is 1 basis point; 4. For interest rates on currencies other than Euro, JPY, and GBP, the spread over six-month USD SOFR is 15 basis points. - Where the variable rate is linked to a benchmark other than six-month USD SOFR, a spread reflecting the difference between the benchmark rate and six-month USD SOFR (rounded to the nearest 50 basis points) will be added. - Debt management operations: - Present value savings calculation for replacement obligations (footnote detail): - In calculation of present value savings, the discounted future stream of payments of debt service due on the newly issued debt instrument (including all costs associated with the operation) will be compared with the discounted future stream of debt service due on the instrument it replaces using a discount rate of 7 percent, the interest rate assumed for rollover of commercial debts in Kenya’s Debt Sustainability Analysis (DSA), and these amounts will not be capped by the nominal value of the debt. - Concessionality calculation takes into account maturity, grace period, payment schedule, upfront commissions, and management fees. *Source: Memorandum of Understanding between the Kenyan authorities and the IMF (program TMU excerpts).* ### 20. Debt Management Operations (DMOs) are defined as the repayment or refinancing of the ### 20. Debt Management Operations (DMOs) are defined as the repayment or refinancing of the ### Definition and treatment of DMOs - DMOs are defined as the repayment or refinancing of the principal of outstanding external public debts prior to or at their maturity dates. - The 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 to the external debt ceiling - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this ceiling in case deviations from the performance criterion on the PV of new external debt are prompted by a change in the financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees) of a debt or debts. - The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed. ### Adjustments for COVID-19 vaccine project financing - The debt ceiling will 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 and the conditions on such borrowing before the loans are either contracted or guaranteed by the national government. - The rationale for this adjustment will be reassessed in the context of the next review of the EFF/ECF arrangements. ### Downward adjustments to the debt ceiling related to DMOs - 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 calculating present value savings from DMOs: - The discounted future stream of payments of debt service due on the newly issued debt instrument (including all costs associated with the operation) will be compared with the discounted future stream of debt service due on the instrument it replaces. - A discount rate of 7 percent is used. - These amounts will not be capped by the nominal value of the debt. ### Notes on rates used - The program reference rate and spreads are based on the “average projected rate” for the six-month USD SOFR over the following 10 years from the Fall 2020 World Economic Outlook (WEO). - The discount rate used for DMOs is set equal to the interest rate assumed for rollover of commercial debts in Kenya’s Debt Sustainability Analysis (DSA), with the present value savings thus reflecting the benefit to the public external debt service profile of the longer duration of the newly issued debt instrument compared to that of the debt instrument it replaces. ### Related program provisions and monitoring (high-level pointers from adjacent sections) - Monetary Policy Consultation Clause (MPCC) uses bands around the projected 12-month CPI inflation with: - Upper band 7.5, Center point 5.0, Lower band 2.5 for end-Jun. 2022, end–Dec. 2022, end-Jun. 2023. - Priority social spending floor is defined and quantified in TMU Table 7: - Priority Social Spending (Ksh. Millions): 2022 Jun. 397,320; Dec. 210,389; 2023 Jun. 420,777. - Program monitoring requires frequent data reporting across debt, financing, reserves, and other fiscal and monetary indicators (see TMU Table 8 for specific frequencies and reporting deadlines). *Kenya — International Monetary Fund (staff report excerpt).* ### 4. The expectation is that GDP growth momentum will be sustained in 2022, within the ### 1kenea2022002 - 4. The expectation is that GDP growth momentum will be sustained in 2022, within the ### Growth outlook and macroeconomic context - GDP growth momentum expected to be sustained in 2022, within the region of 6.8 percent. - Rebound drivers from 2021 expected to carry over: recovering exports and services, in particular wholesale and retail trade, transport and storage, education, information and communication, and financial and insurance services. - New global inflationary pressures in 2022 are pushing inflation up towards the upper policy bound, necessitating closer attention. ### External position, reserves, and exchange rate - Current account deficit expected to widen by half a percentage point to 5.9 percent of GDP in 2022, relative to 2021, reflecting developments in international prices and import costs. - Expected gradual return to normalcy as exports continue to improve. - Foreign exchange reserves remain adequate. - Flexibility in the exchange rate has facilitated adjustment to external shocks in the Kenya context. ### Health, vaccination, and pandemic implications - Authorities accelerating vaccination to fully immunize all 27 million adults by end-2022. - Over 18 million doses have been administered to date. - Over 31 percent of Kenyans were inoculated by June 2022. - Infection rates in June: 6 recorded cases per 1000 and a case fatality rate of 2 percent. - Moderna announced plans to build a US$500 million manufacturing facility for RNA COVID-19 vaccines in Kenya. ### Program performance and fiscal governance - Performance on quantitative criteria (QPCs) generally strong: all QPCs and one of the two indicative targets (ITs) for end-December 2021 met, some with ample margins. - The IT on priority social spending was missed temporarily by 0.08 percent of GDP due to delayed teacher wage payments; corrected in January. - Structural benchmarks (SBs): - FY2021/22 supplementary budget submitted in January, in line with program requirement. - Adoption of new tender documents to enable publication of beneficial ownership information (end-March 2022) implemented with a delay of some weeks in April 2022. - Submission of a FY2022/23 Budget consistent with program objectives (end-April 2022) implemented with a delay as tax-enhancing measures were only submitted in May and June 2022. - End-May fiscal governance SB: comprehensive audit of expenditures in FY2021/22 with a chapter on COVID-19 spending published with a delay, in June. - Special audit of COVID-19 vaccine spending for FY2021 delayed operationally but expected to be published this month. ### Authorities' requests under the program - Request for a waiver for end-June 2022 PCs under the EFF given absence of final data needed for assessment. - Request modification of the QPCs on net international reserves for end-June 2022 and end-December 2022 to reflect updated assessments. - Request establishment of new quantitative performance criteria for relevant indicators for June 2023. - Request establishment of three new SBs related to: - Issuance of a National Treasury circular presenting an action plan for development of a medium-term revenue strategy setting revenue objectives consistent with program targets (end-August 2022). - Completion of a review of how the fuel pricing mechanism has been applied to date and constitution of a taskforce to oversee the progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure that fuel pricing actions are at all times aligned to the approved budget (end-July 2022). - Submission by end-July 2022 of an action plan to restore Kenya Power and Lighting Company’s medium-term profitability and to fully cover financing gaps through end-Dec 2023. ### Fiscal policy, revenue performance, and spending priorities - Fiscal revenues strengthened significantly with robust tax performance. - Carryover of strong fiscal performance into FY2022/23 is key to supporting revenue projections. - Authorities will undertake new tax measures under the ongoing medium-term revenue strategy if needed. - Fiscal policy seeks to balance support for economic recovery against reducing debt vulnerabilities; beyond FY2022/23 strategy seeks primary deficit below its debt-stabilizing level. - Revenue administration reforms at KRA supported by IMF technical assistance contributed to durable improvements in tax compliance. - Reforms include managing exemptions, strengthening KRA audit functions, improved compliance risk management, data-driven approaches, and an enhanced voluntary tax disclosure program. - Compliance improvement plans targeted sectors: construction and e-commerce and the digital economy; major taxpayer segments: premier clients, large businesses, and SMEs; and also international tax risks, informal sector, aggressive tax planning by individuals. ### Expenditure management and SOE policy - Authorities closely manage expenditures with a proactive strategy to contain the ratio of the government wage bill to GDP, including an effective wage freeze for FY2021/22 and FY2022/23 and limiting new employment to priority areas tied to funding availability. - Plans to harmonize and rationalize categories, rates, and rules for allowances and implement a common payroll system linked to IFMIS across government entities. - State-owned enterprises (SOEs) received support during FY2021/22 and will continue to do so in FY2022/23; authorities exploring least-cost approaches to SOEs including Kenya Airways and Kenya Power and Lighting Company Ltd. - On fuel prices, authorities intend gradual realignment of domestic fuel prices with global prices, accompanied by careful reprioritization of non-essential spending; budget aligned with program path and spending rationalizations absorbing cost of fuel subsidies. - National Treasury actions include strengthening budget processes, commitment controls, cash management, rationalizing pipeline of projects, and implementing new public investment management regulations; procurement and PFM system improvements also ongoing. ### Social stability and fuel subsidy measures - Fuel price increases and growing food price and supply pressures amid worsening drought in 19 arid and semi-arid counties raise food security and social stability risks. - Government decision on July 14, 2022, to hold fuel pump prices constant for the month July to August 2022. - Temporary hold intended to allow time to put in place targeted measures to cushion rapidly rising number of vulnerable persons impacted: an additional 0.6 million in the month of June 2022 alone. - Government authorized an additional budget allocation in FY2022/23 to cover the fuel subsidy cost in the cycle of July-August 2022; sufficient budget offsets will be identified to ensure observance of the FY2022/23 primary deficit target. - Government committed to resume gradual fuel pump price adjustment in subsequent months following establishment of mechanisms for well-targeted subsidy programs. ### Debt management and domestic debt market development - Transition away from targeting a fixed, nominal public debt ceiling to the use of a credible debt anchor by end of the year. - Medium-term debt anchor set at 55 percent of GDP with debt measured in present value terms. - Accountability requirement with transparent communication to Parliament and the public on plans and progress. - Enhancements to the structures and functions of the Public Debt Management Office to facilitate implementation of the PFM Law. - National Treasury and CBK working to deepen the domestic debt securities market: strengthened auction management, Treasury Mobile Direct platform for retail sale of government securities, enabled auction of bids by banks through internet banking, development of Central Securities Depository System. ### Monetary policy and financial sector - Central bank shifted from post-pandemic accommodation to a tighter monetary stance amid an increasingly complex global inflationary environment. - At end-May, the Monetary Policy Committee (MPC) raised the policy rate by 50 basis points to anchor inflation expectations amid elevated risks from global commodity prices and supply chain disruptions. - Authorities refining macroeconomic modeling and forecasting frameworks, enhancing financial market operations, improving monetary policy transmission and communication, and promoting efficiency and transparency in the domestic debt market in line with CBK’s White Paper. - Modern central securities depository being rolled out ahead of introduction of an interest rate corridor around the policy rate to enhance policy efficacy and interbank market functioning. - Banking sector resilient: core capital, capital adequacy and liquidity ratios all above statutory thresholds. - Non-performing loan ratio (as a share of gross loans) remains two percentage points above pre-pandemic levels. - Measures used during the pandemic (loan restructuring, strengthened credit referencing, ensuring capital adequacy) have been effective; CBK monitoring NPLs and conducting credit risk stress tests. - Ongoing reforms: expand access to affordable finance via fintech, implement CBK’s Banking Sector Charter, real-time supervision, update Microfinance Act, legislate regulation of digital lenders, license Kenya Mortgage Refinance Company, green the banking sector, upgrade AML/CFT framework. ### Payments system and CBDC assessment - National Payments Strategy (NPS: 2022-2025) launched in February 2022 to consolidate gains and map next chapter in Kenya’s payment journey, building on M-Pesa successes. - M-Pesa Global Pay Virtual VISA Card links to M-PESA wallets and enables virtual card-holders to make secure payments to international online sites for goods and services, providing potential access to as many as 100 million foreign merchants. - NPS vision: secure, fast, efficient, and collaborative payments system supporting financial inclusion and innovation; anchored on trust, security, usefulness, choice, and innovation. - Authorities assessing potential applicability of a central bank digital currency (CBDC) in Kenya; a discussion paper published in February sought public comments by May 20, 2022. ### Structural reforms, governance, and anti-corruption - Beneficial owners’ consent form included in standard bidding documents for public procurements; tender notices effective from April 21, 2022. - Comprehensive information, including beneficial ownership of successful tenders, to be published on the Public Procurement Information Portal by the 15th day of the subsequent month. - Work to finalize SOE classification and inventory and to develop SOE Ownership Policy; Fund support requested for establishment of new Fiscal Risks Committee. - Anti-corruption framework strengthening continues: accelerate asset declaration, advance and execute key legislation, intensify AML/CFT supervision to prevent laundering of corruption proceeds. - Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) completed its on-site visit; a final report expected in September 2022. - National Risk Assessment completed and its findings are informing AML/CFT supervisory strategy and actions to mitigate corruption-related money laundering risk. ### Conclusion and authorities’ commitment - Kenyan authorities remain committed to prudent macroeconomic management with policies to maintain stability, support recovery and foster inclusive growth. - Policy efforts to unlock growth potential are vital to achieving key development objectives articulated in the program and in the National Development Plan. - Authorities look forward to Executive Directors’ support towards conclusion of the third EFF/ECF program review. *IMF staff report excerpt (chapter).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1kenea2022002.pdf_