## 1kenea2022003

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### EXECUTIVE SUMMARY — Context and Recent Developments
- Global backdrop: volatile commodity prices, slowing growth in key trading partners, constrained frontier market access, multi-season drought worsening food insecurity in arid and semi-arid regions.
- Political: smooth transition after August elections; William Ruto sworn in as President on September 13.
- Policy actions:
  - Strong tax overperformance in FY2021/22 cushioned shocks.
  - Petrol subsidies eliminated early in the new administration; smaller fertilizer subsidies announced.
  - Inflation breached CBK target band; monetary policy tightened by 175 basis points in 2022.
  - Foreign reserves adequate but lower than projected due to shortfalls in FY2021/22 external public commercial and project financing and cuts in foreign-financed projects.
  - Market conditions for frontier economies expected to remain challenging into 2023.

### RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS — Growth, Inflation, External Sector, Fiscal
- Growth and output:
  - Real GDP grew by 6 percent y/y in H1 2022.
  - After 7.5 percent y/y rebound in 2021, 2022 normalized: robust services, agricultural output declined for third successive quarter due to drought.
  - Manufacturing indicator bottomed out in 2022Q3.
- Inflation and monetary policy:
  - Inflation was 9.5 percent y/y in November, above CBK 2.5–7.5 percent target band since June; driven by food, fuel, electricity.
  - NFNF inflation ticked up to 4.2 percent.
  - CBK policy rate tightened by cumulative 175 basis points in three hikes beginning in May.
- External sector and reserves:
  - Goods exports through August grew 11.3 percent y/y; goods imports grew 18.8 percent y/y; non-oil imports grew 5.3 percent y/y.
  - Remittances grew 10.4 percent y/y in January–September.
  - Official FX reserves above 3.5 months of import coverage but lower than expected at 3rd reviews.
  - Planned international issuance of US$1.1 billion did not occur.
- Fiscal and public debt:
  - Tax overperformance in FY2021/22 created space; primary spending under-executed by about 1.9 percentage points of GDP.
  - Committed but undisbursed expenditure ~0.6 percent of FY2022/23 GDP will carry over.
  - Overall public debt was 3.6 percentage points of GDP lower at end-June 2022 than expected at 3rd reviews.
  - In Q1 FY2022/23: tax mobilization in line with expectations; domestic financing short of targets; new unbudgeted expenditure ~1.3 percent of GDP emerged.
  - Gross subsidy costs expected to reach 0.5 percent of GDP in FY2022/23; outgoing administration’s pause on fuel price adjustments estimated cost 0.4 percent of GDP.
  - Carryover to FY2022/23: 0.6 percent of GDP; exchequer requests outstanding at end-June: 0.3 percent of GDP; fuel subsidies (April 15–June 15): 0.1 percent of GDP; county transfers (equitable share): 0.2 percent of GDP.
- Financial sector and FX market:
  - Banking sector sound: adequate capital and liquidity, strong profitability through 2022Q3; NPLs declined to 11.4 percent of gross loans as of 2022Q3.
  - Private sector credit growth entered double digits.
  - By late September, 22 banks (46.4 percent of sector assets) received CBK no-objection certificates on credit pricing models.
  - Shilling depreciated against the U.S. dollar faster but smoother than 2021; between March and October 2022, Kenya’s real and nominal effective exchange rates appreciated by 8.1 percent and 4.8 percent respectively.
  - Liquidity in the interbank FX market dried up; intermediation shifted to bank-client market.
- Market indicators:
  - Yield on 2024 bond rose from 4.25 percent (February 2022) to briefly above 22 percent (mid-July); as of November 24 it was 12.83 percent.
  - November 2022: total amounts accepted in T-bills and T-bond auctions exceeded offered amounts (first since February).

### PROGRAM PERFORMANCE
- Quantitative and continuous conditionalities:
  - All end-June 2022 QPCs and continuous QPCs met.
  - Tax collection overperformed by 0.8 percentage points of GDP; primary balance overperformed by 1.9 percentage points of GDP.
  - Net international reserves overperformed adjusted target by US$418 million.
- Indicative targets and MPCC:
  - End-June 2022 priority social expenditure overperformed by 0.2 percent of GDP.
  - MPCC met: three-month average of inflation was 7.2 percent within target band as of end-June 2022.
- Structural benchmarks (SBs):
  - Only one of three July–August 2022 SBs met amid political uncertainty; outstanding SBs implemented or expected soon.
  - Draft action plan to restore KPLC profitability (end-July 2022 SB) prepared but delayed; updated action plan expected by end-December 2022 (proposed rephased SB).
  - Circular for MTRS (end-August 2022 SB) met.
  - Review of fuel pricing mechanism and task force (end-July 2022 SB) not met; expected by end-December 2022 (proposed rephased SB).
  - Publication of beneficial ownership information (end-June 2021 SB) commenced in November 2022.
  - Audits of COVID-19 vaccine spending (end-May 2022 SB) completed with delay and published.

### REQUESTS TO THE FUND AND PROGRAM ADJUSTMENTS
- Authorities request augmentation of access by 30 percent of quota (SDR162.84 million) under the ECF arrangement to help meet fiscal financing needs and support FX reserves.
- Authorities request modifications of end-December 2022 and end-June 2023 targets on net international reserves and end-June 2023 targets on tax revenues and the primary fiscal balance.
- New targets for end-December 2023 and new structural benchmarks proposed.

### RISKS — Near-term tilt and Mitigating Factors
- Risks tilted toward adverse outcomes:
  - External: slowing global/regional growth, tighter external financing, surging U.S. dollar, volatile commodity prices.
  - Domestic: drought, fiscal pressures, market-access constraints.
- Mitigating factors:
  - Authorities’ strong performance to date and commitment to contingency measures.
  - Close engagement with development partners.
  - Tailored capacity development, including MTRS development support.

### MEDIUM-TERM OUTLOOK AND NEAR-TERM REVISIONS
- Growth and inflation projections (Text Table 3, Kenya: Growth and Inflation Projections, In percent):
  - 2022 Growth: 5.7 (3rd reviews), Revised 5.3
  - 2023 Growth: 5.3 (3rd reviews), Revised 5.1
  - Inflation (average) 2022: 7.3 (3rd reviews), Revised 7.7
  - Inflation (average) 2023: 6.9 (3rd reviews), Revised 7.8
  - Inflation (end-year) 2022: 8.4 (3rd reviews), Revised 9.5
  - Inflation (end-year) 2023: 5.8 (3rd reviews), Revised 6.5
- Near-term: growth revised down due to weaker global outlook, drought impact on 2022 agriculture, planned public investment cuts, anticipated monetary tightening.
- Staff projects inflation to peak in 2023Q1 and move back within CBK target band in 2023Q3; NFNF inflation expected higher in 2023, peaking in 2023Q2.

### EXTERNAL POSITION, RESERVES, AND FINANCING CHANGES
- Current account deficit/GDP projected to widen to 5.7 percent in 2022; decline to 5.4 percent in 2023 as energy imports ease and tourism/remittances remain robust.
- FX reserves path revised downward due to US$1.8 billion shortfall in FY2021/22 external public commercial (US$1.1 billion) and project borrowing (US$0.7 billion), further cuts in foreign-financed projects (~US$1 billion) in FY2022/23, and weaker net private capital flow outlook.
- Text Table 4 (Kenya: Changes in External Financing Since the 3rd Reviews, In millions of U.S. dollars):
  - 2022-24 External financing gap 1,875
  - Current account deficit (excl. grants) -853
  - Reduction in net public borrowing (excl. program support) 2,728
  - Sources of financing 1,875
  - Private sector financing (net) -1,199
  - Reserves drawdown 2,945
  - Program support 128
  - Memorandum Item: Primary fiscal balance 1/ 292
  - 1/ Fiscal year data. Data for 2022 reflect FY2021/22 outturn.

### MEDIUM-TERM FISCAL OUTLOOK AND DEBT DYNAMICS
- Medium term:
  - Growth projected to converge to about 5.5 percent.
  - Inflation averaging around 5 percent.
  - Fiscal consolidation to allow CA deficit to stabilize around 5 percent of GDP.
- Debt dynamics under baseline:
  - Public debt expected to peak at 67.6 percent of GDP in FY2022/23 (62 percent of GDP in PV terms).
  - Improvement in PV of external debt-to-exports ratio since last assessment.
- Authorities’ fiscal plans:
  - Rationalization of non-priority spending of 1.7 percentage points of GDP in FY2022/23 to contain overall fiscal deficit at 5.8 percent of GDP in FY2022/23.
  - Supplementary FY2022/23 Budget to be submitted by end-January 2023 targeting primary deficit of 1.1 percent of GDP.
  - FY2023/24 budget proposal expected to target primary balance surplus of 0.3 percent of GDP requiring new tax measures for 0.9 percent of GDP and further reductions in non-priority primary spending.
- Text Table 5 (Kenya: Budgetary Impact of On-Going Fiscal Initiatives, In Ksh. billions) — selected entries preserved exactly:
  - Revenue: 2,462; Impact emerging pressures 502; Baseline FY22/23 2,513; % of GDP 17.6
  - Tax: 2,024; Impact emerging pressures 112; Baseline FY22/23 2,035; % of GDP 14.5
  - Non-tax: 438; Impact emerging pressures 40; Baseline FY22/23 483; % of GDP 3.1
  - Grants: 33; Impact emerging pressures -5; Baseline FY22/23 28; % of GDP 0.2
  - Total expenditures and net lending: 3,359; Impact emerging pressures 276; Impact budgetary offsets -249; Baseline FY22/23 3,386; % of GDP 24.0
  - Primary spending (including net lending): 2,668; Impact emerging pressures 276; Impact budgetary offsets -245; Baseline FY22/23 2,699; % of GDP 19.1
  - Interest payments: 691; Impact emerging pressures 0; Impact budgetary offsets -4; Baseline FY22/23 687; % of GDP 4.9
  - Overall balance (A): -863; Impact emerging pressures -276; Impact budgetary offsets 294; Baseline FY22/23 -845; % of GDP -6.2
  - Total financing (B): 863; Impact emerging pressures 90; Impact budgetary offsets -108; Baseline FY22/23 845; % of GDP 6.2
  - Foreign financing: 281; Impact emerging pressures 92; Impact budgetary offsets -102; Baseline FY22/23 271; % of GDP 2.0
  - Domestic financing: 582; Impact emerging pressures -2; Impact budgetary offsets -65; Baseline FY22/23 714; % of GDP 4.2
  - o\w use of SDR allocation: 0; Impact emerging pressures 24; Impact budgetary offsets 24; Baseline FY22/23 0.2
  - Financing gap (A+B): 0; Impact emerging pressures -187; Impact budgetary offsets 186; Baseline FY22/23 0; % of GDP 0.0
  - Memorandum: Nominal GDP 14,002; Baseline 14,551; % of GDP 100.0
  - Primary balance: -172; Impact emerging pressures -276; Impact budgetary offsets 291; Baseline -158; % of GDP -1.2

### MONETARY, EXCHANGE RATE, AND FINANCIAL SECTOR POLICIES
- Monetary policy:
  - Principal objective: achieve and maintain price stability.
  - Staff projects inflation to peak around 10 percent y/y in early 2023Q1 and to remain outside target band in 2023Q2, returning by 2023Q3 with further monetary tightening.
  - Real policy rate on a one-year-looking basis marginally positive after 175 basis points tightening in 2022; real interbank rate at multi-year lows.
  - Further increases in domestic interest rates could underpin market interest as government seeks domestic financing.
- Exchange rate policy:
  - Authorities committed to exchange rate flexibility as shock absorber; limit FX sales to respond to excessive volatility consistent with program FX reserves goals.
  - Considering issuing additional guidelines aligned with the FX Global Code to address interbank FX market challenges.
- Financial sector and operational reforms:
  - Modernization of monetary policy framework per 2021 White Paper; Central Securities Depository delayed to early 2023 for further testing.
  - CBK monitoring rising FX loans and deposits shares and operational risks from digitalization; 10 digital credit providers licensed as of September 2022.

### BANKING SYSTEM, SOEs, AND GOVERNANCE
- Banking system:
  - Banks generally well-capitalized and liquid; small/medium banks with greater exposure to riskier lending face higher NPL and provisioning challenges.
  - Core and total capital adequacy ratios (end-September 2022): 16.2 and 19.0 percent (statutory minimums: 10.5 and 14.5 percent).
  - Liquidity ratio (end-September 2022): 51.6 percent (statutory minimum: 20 percent).
- State-Owned Enterprises (SOEs):
  - KQ (Kenya Airways):
    - Insolvent; met 75 percent of targeted cost reduction in FY2021/22.
    - Total value of KQ’s debt portfolio (as of November 17, 2022): US$835 million; US$688 million guaranteed by GoK.
    - Restructuring targets: cost reduction US$120 million per annum by 2024; GoK disbursed Ksh.10 billion in October 2022.
    - Novation: KQ will novate US$485 million guaranteed loans to GoK; estimated increase in annual payment obligations from Consolidated Funds Services: Ksh.10 billion per year.
  - KPLC (Kenya Power and Lighting Company):
    - 15 percent base tariff reduction in January 2022 hurt liquidity.
    - Authorities reported KPLC liquidity gap Ksh.69 billion as of June 2022 (0.5 percent of GDP).
    - Government support in FY2021/22 and FY2022/23 detailed; projected necessary government support in FY2022/23: Ksh.2.35 billion.
    - NT to submit action plan to Cabinet Sub-Committee by end-December 2022 (rephased SB).
- SOE support:
  - FY2021/22 extraordinary SOE support budgeted Ksh.32.3 billion; actual disbursements Ksh.17.5 billion (0.14 percent of GDP).
  - FY2022/23 supplementary provision for extraordinary support: Ksh.37.3 billion (0.3 percent of GDP).
  - Cumulative extraordinary support FY2021/22 and FY2022/23 projected Ksh.54.8 billion (0.4 percent of FY2021/22 GDP) — below 1.0 percent of GDP program threshold.
  - Offsets: policy of budgetary offsets for 50 percent of extraordinary SOE support in FY2021/22 and FY2022/23; 100 percent after FY2022/23.

### GOVERNANCE, ANTI-CORRUPTION, AML/CFT, AND PROCUREMENT
- Beneficial ownership:
  - Publication of beneficial ownership information of successful bidders of new procurements reported into PPIP since mid-November 2022 (prior action).
  - Revised bidding documents (April 2022) require beneficial ownership information.
- AML/CFT:
  - Kenya 2022 Mutual Evaluation by ESAAMLG highlighted major deficiencies.
  - Authorities plan to submit draft amendments to POCAMLA and Regulations by end-June 2023 (proposed SB).
  - Strengthen AML/CFT supervision and due diligence, including for PEPs.
- Procurement monitoring:
  - Prioritize enhancement of data analysis capabilities; develop central procurement data repository; roll out e-procurement integrated with IFMIS.
- Special audit:
  - Auditor-General to conduct a special audit on supplementary budgeting (Article 223) — report to be published by end-September 2023 (new SB).
- Conflict of Interest Law and asset declarations:
  - Draft Conflict of Interest Bill and Access to Information Regulations to be published/submitted to Parliament before end-2022; staff notes weaknesses in draft Conflict of Interest Law re asset declarations.

### SOCIAL, HUMANITARIAN, AND CLIMATE ISSUES
- Food insecurity:
  - 4.5 million people (8 percent of total population) assessed facing severe food insecurity at end-October 2022.
  - Government declared national emergency in September 2021.
  - Pass-through of global staple food price increase to domestic prices estimated at 97 percent.
  - UNICEF/GoK (July 2022): 884,464 children under 5 and 115,725 pregnant and breastfeeding women malnourished and in need of treatment.
- Drought:
  - One of the longest droughts in last 40 years in ASAL regions; PLEWs forecast Oct–Dec 2022 short rains likely to underperform; drought not expected to improve before June 2023.
  - FY2022/23 Supplementary Budget projected KSh.10.2 billion (0.07 percent of GDP) in drought-related spending, nearly 60 percent intended for food provision.
- Climate commitments and finance:
  - National Climate Change Action Plan 2018–22; as of end-2021, more than 90 percent of electricity generation from renewable sources.
  - National targets: universal access to clean cooking by 2028; universal use of clean energy by 2030; 10 percent forest cover by 2030.
  - Kenya committed to reducing 32 percent of GHG emissions by 2030; estimated cost USD 62 billion with 13 percent mobilization pledge.
  - CBK Guidance on Climate-Related Risk Management issued October 15, 2021; banks submitted implementation plans by end-June 2022.

### PROGRAM FINANCING, AUGMENTATION, AND CAPACITY TO REPAY
- Authorities request augmentation under ECF by 30 percent of quota (SDR162.84 million or about US$215 million) to be made available in full to CBK upon completion of 4th reviews and provided as local currency budget support.
- Augmentation would bring cumulative GRA and PRGT access net of repurchases (including 2021 RCF) to 435 percent of quota (about US$3.2 billion) by 2024, within normal cumulative access limits.
- Residual external financing gap to be absorbed by reserves drawdown, lowering import coverage to 3.7 months by end-2022 and to 3 months by end-2023 (3rd reviews: 3.9 and 4.2 months respectively).
- Program financing prospects:
  - Program described as fully financed with firm commitments next twelve months and good prospects thereafter.
  - Authorities well advanced in securing US$900 million external commercial borrowing for FY2022/23 (as of October 2022 contracted US$300 million via a 3-year international bank loan).
  - Official concessional financing from WB and AfDB; discussions on successor DPO underway.
- Capacity to repay:
  - Total outstanding credit to Fund (including proposed augmentation) projected at SDR 2,361.2 million, or 435 percent of quota in 2024, equivalent to 2.4 percent of GDP and 40 percent of gross international reserves in 2023.
  - Total debt service to Fund would peak by 2028 at 2.3 percent of exports of goods and services, and 1.8 percent of fiscal revenue—potential medium-term repayment risk.

### RISKS, SCENARIOS, AND POLICY IMPLICATIONS
- Downside scenarios:
  - Continued poor rains worsening food insecurity, slowing growth, raising inflation.
  - Persistent investor concerns or loss of confidence increasing fiscal and BOP pressures, depressing reserves.
  - Larger declines in commodity export prices reducing FX supply.
  - Higher public contingent liabilities and spending without offsets worsening debt path.
- Upside scenarios:
  - Better-than-expected rainfall supporting faster agricultural recovery, easing food prices and inflation.
  - Faster easing of global commodity prices containing cost of living and supporting consumption.
  - Rebounding confidence and market access with demonstrated commitment to fiscal consolidation.
- Policy implications emphasized:
  - Growth-friendly fiscal consolidation to put debt/GDP on downward trajectory.
  - Active role for monetary policy and exchange rate flexibility; further monetary tightening consistent with returning inflation to target by 2023Q3.
  - Limit FX interventions to excessive volatility and support interbank FX market reactivation and deeper domestic debt markets.
  - Strengthen revenue mobilization via MTRS and PFM, protect priority social spending, and rationalize SOE support with offsets.

### SELECTED KEY STATISTICS AND TARGETS (preserved exactly as presented)
- Inflation (November 2022): 9.5 percent y/y.
- NFNF inflation (November 2022): 4.2 percent.
- Real GDP growth: 6 percent y/y in H1 2022; 7.5 percent y/y in 2021.
- Remittances growth (Jan–Sep): 10.4 percent y/y.
- Net international reserves overperformance: US$418 million.
- NPLs: 11.4 percent of gross loans as of 2022Q3.
- Policy tightening in 2022: 175 basis points cumulative.
- CBK capital adequacy ratios (end-September 2022): core 16.2 percent; total 19.0 percent.
- Liquidity ratio (end-September 2022): 51.6 percent.
- Public debt peak: 67.6 percent of GDP in FY2022/23 (62 percent of GDP in PV terms).
- Current account deficit: 5.7 percent of GDP in 2022; projected 5.4 percent in 2023; medium-term ~5 percent.
- FY2022/23 Supplementary Budget drought allocation: KSh.10.2 billion (0.07 percent of GDP).
- Extraordinary SOE support: FY2021/22 actual Ksh.17.5 billion (0.14 percent of GDP); FY2022/23 provision Ksh.37.3 billion (0.3 percent of GDP); cumulative projected Ksh.54.8 billion (0.4 percent of FY2021/22 GDP).
- Requested augmentation under ECF: SDR162.84 million (30 percent of quota).

*Source: 1kenea2022003 (IMF staff report and MEFP excerpts).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Kenya faces a turbulent global backdrop: volatile commodity prices, slowing growth in key trading partners, constrained frontier market access to international capital markets, and a multi-season drought worsening food insecurity in arid and semi-arid regions.
- Domestic political development: A smooth transition following the August elections demonstrated increasing institutional strengths; William Ruto sworn in as President on September 13.
- Policy actions and environment:
  - Strong tax overperformance in FY2021/22 helped cushion shocks.
  - The administration eliminated petrol subsidies in their first week in office and announced smaller new fertilizer subsidies.
  - Inflation breached the Central Bank of Kenya (CBK) target band; monetary policy tightened by 175 basis points this year.
  - Foreign reserves are adequate but lower than previously projected due to shortfalls in FY2021/22 external public commercial and project financing and spending cuts in FY2022/23 extending to externally-financed projects.
  - Markets conditions for frontier economies expected to remain challenging into 2023.

### Recent economic and financial developments
- Growth and output:
  - Real GDP grew by 6 percent y/y in H1 2022.
  - After a strong rebound in 2021 (7.5 percent y/y), 2022 saw normalization with robust services but agricultural output declined for the third successive quarter due to drought.
  - An indicator of manufacturing activity bottomed out in 2022Q3.
- Inflation and monetary policy:
  - Inflation was 9.5 percent y/y in November, above the CBK’s 2.5–7.5 percent target band since June, driven by food, fuel, and electricity prices.
  - Nonfood, nonfuel (NFNF) inflation ticked up to 4.2 percent.
  - Monetary policy rate was tightened by a cumulative 175 basis points in three hikes beginning in May.
- External sector and reserves:
  - Goods exports through August grew by 11.3 percent y/y; goods imports grew 18.8 percent y/y driven by a hefty fuel import bill; non-oil imports grew 5.3 percent y/y.
  - Tourism recovery and remittances (10.4 percent y/y in January–September) mitigated current account impact.
  - Official FX reserves are above 3.5 months of import coverage but lower than expected at the 3rd reviews.
  - Previously planned international issuance of US$1.1 billion did not occur due to markets conditions and election-related uncertainty.
- Fiscal developments and public debt:
  - Strong tax overperformance in FY2021/22 created space to cushion shocks while meeting program targets.
  - Fiscal financing fell short late in FY2021/22; primary spending under-executed by about 1.9 percentage points of GDP.
  - Committed but undisbursed expenditure of about 0.6 percent of FY2022/23 GDP will carry over into FY2022/23 (mainly transfers to counties, fuel subsidies, and SOE support).
  - Overall public debt was 3.6 percentage points of GDP lower at end-June 2022 than expected at the 3rd reviews.
  - In Q1 FY2022/23, tax mobilization was in line with expectations; domestic financing was short of targets; new unbudgeted expenditure of about 1.3 percent of GDP emerged for subsidy costs, drought and security, and projects.
  - Gross subsidy costs are expected to reach 0.5 percent of GDP in FY2022/23; the outgoing administration’s pause on fuel price adjustments (estimated cost 0.4 percent of GDP) contributed.
  - Total carryover to FY2022/23: 0.6 percent of GDP; exchequer requests outstanding at end-June: 0.3 percent of GDP; fuel subsidies (April 15–June 15): 0.1 percent of GDP; county transfers (equitable share): 0.2 percent of GDP.
- Financial sector and FX market:
  - Banking sector sound with adequate capital and liquidity and strong profitability through 2022Q3; credit risks remain elevated.
  - Nonperforming loans declined to 11.4 percent of gross loans as of 2022Q3.
  - Private sector credit growth entered double digits.
  - By late September, 22 banks accounting for 46.4 percent of sector assets had received no-objection certificates from CBK on credit pricing models.
  - Banks’ shares of FX loans, deposits, and liabilities have risen; net short FX open position increased.
  - Digital credit providers are under CBK supervisory purview; ten providers had received approval as of September 2022.
  - The Shilling depreciated against the U.S. dollar at a faster but somewhat smoother pace than in 2021 and has begun appreciating in real effective terms; between March and October 2022, Kenya’s real and nominal effective exchange rates appreciated by 8.1 percent and 4.8 percent respectively.
  - Liquidity in the interbank FX market has dried up and shifted to the bank-client market; difficulty sourcing U.S. dollars in local market continues.
- Market indicators and financing:
  - Yield on the 2024 bond rose from as low as 4.25 percent in February 2022 to briefly above 22 percent in mid-July; as of November 24, it stood at 12.83 percent.
  - In November 2022, total amounts accepted in T-bills and T-bond auctions exceeded offered amounts, a first since February.
  - Stock market experienced net foreign sales in 2022 to date.

### Program performance
- Quantitative and continuous conditionalities:
  - All end-June 2022 quantitative performance criteria (QPCs) and continuous QPCs were met.
  - Tax collection overperformed by 0.8 percentage points of GDP; primary balance overperformed by 1.9 percentage points of GDP.
  - Net international reserves (NIR) overperformed the adjusted target by US$418 million.
- Indicative targets and MPCC:
  - End-June 2022 priority social expenditure overperformed by 0.2 percent of GDP.
  - No exchequer requests outstanding for more than 90 days accumulated.
  - Monetary policy consultation clause (MPCC) met: three-month average of inflation was 7.2 percent within the target band as of end-June 2022.
- Structural benchmarks (SBs):
  - Only one of three benchmarks for July–August 2022 was met amid political uncertainty; outstanding delayed SBs are either implemented or expected to be completed soon.
  - A draft action plan to restore KPLC’s medium-term profitability (end-July 2022 SB) was not met; the action plan was prepared but internal consultations delayed; updated action plan expected to be submitted to the Cabinet sub-committee by end-December 2022 (proposed rephased SB).
  - A circular issued on August 30 with an action plan for developing a Medium-Term Revenue Strategy (MTRS) met the end-August 2022 SB.
  - Review of the fuel pricing mechanism and establishment of a task force to oversee progressive fuel subsidy elimination within the first half of FY2022/23 (end-July 2022 SB) was not met; steps taken by the new administration toward removing fuel subsidies mean remaining actions under the SB are now expected to be implemented by end-December 2022 (proposed rephased SB).
  - Publication of beneficial ownership information of entities awarded public contracts (end-June 2021 SB) commenced in November 2022.
  - Publication of audits of COVID-19 vaccine spending (end-May 2022 SB) implemented with delay—the audits were completed by July and subsequently published.

### Requests to the Fund
- Authorities request an augmentation of access by 30 percent of quota (SDR162.84 million) under the Extended Credit Facility arrangement to help meet fiscal financing needs and support FX reserves.
- Authorities request modifications of end-December 2022 and end-June 2023 targets on net international reserves and end-June 2023 targets on tax revenues and the primary fiscal balance (reflecting stronger proposed FY2022/23 fiscal targets).
- New targets for end-December 2023 and structural benchmarks are proposed.

### Risks to the program
- The near-term outlook carries both upside and downside risks, with the balance tilting more toward adverse outcomes.
- Risks arise from external sources (slowing global and regional growth, tighter external financing conditions, surging U.S. dollar, volatile commodity prices) and domestic sources (drought, fiscal pressures, market-access constraints).
- Mitigating factors:
  - Authorities’ strong performance to date and commitment to contingency measures to achieve program objectives.
  - Close engagement with development partners.
  - A tailored capacity development strategy to support reforms, including plans to develop a Medium-Term Revenue Strategy.

*Approved by Catherine Pattillo (AFR) and Eugenio Cerutti (SPR); mission discussions held in Nairobi during October 25–November 8, 2022.*

### 5.      The medium-term outlook is    positive, but the near-term has weakened modestly

### 5.      The medium-term outlook is    positive, but the near-term has weakened modestly

### Near-term revisions to growth and inflation
- Growth forecast revised down due to:
  - a weaker global and regional outlook;
  - the drought’s impact on 2022 agricultural output, normalizing in 2023;
  - planned cuts in public investment and anticipated monetary policy tightening.
- Staff projects inflation to peak in 2023Q1 but to gradually move back within the central bank’s target band in 2023Q3 on global price developments, recovery in agriculture, anticipated administered price adjustments, and the persistence of domestic inflation dynamics.
- Nonfood, nonfuel inflation is expected to be higher in 2023, peaking in 2023Q2, on a lagged response to food and fuel prices, with the impact mitigated by further anticipated monetary policy tightening.
- Text Table 3. Kenya: Growth and Inflation Projections (In percent)
  - 2022: Growth 5.7 (3rd reviews), Revised 5.3
  - 2023: Growth 5.3 (3rd reviews), Revised 5.1
  - Inflation (average) 2022: 7.3 (3rd reviews), Revised 7.7
  - Inflation (average) 2023: 6.9 (3rd reviews), Revised 7.8
  - Inflation (end-year) 2022: 8.4 (3rd reviews), Revised 9.5
  - Inflation (end-year) 2023: 5.8 (3rd reviews), Revised 6.5

### External position and reserves
- The current account (CA) deficit/GDP is projected to widen to 5.7   percent in 2022, as the elevated fuel import bill will be partially offset by improving services balance and higher remittances.
- In 2023, easing energy imports and robust tourism and remittances will see a decline in CA deficit/GDP to 5.4 percent.
- FX reserves during the program have been revised downward relative to the 3rd reviews projections on a US$1.8 billion shortfall in external public commercial (US$1.1 billion) and project borrowing (US$0.7 billion) in FY2021/22, further cuts in foreign-financed projects of close to US$1 billion as part of the tighter fiscal stance in FY2022/23, and revisions in the outlook for net private capital flows reflecting expectations of tight global financial conditions persisting in 2023.
- Materialization of upside potential on external fiscal financing would support a higher reserves level than in the current baseline.
- Text Table 4. Kenya: Changes in External Financing Since the 3rd Reviews (In millions of U.S. dollars)
  - 2022-24 External financing gap 1,875
  - Current account deficit (excl. grants) -853
  - Reduction in net public borrowing (excl. program support) 2,728
  - Sources of financing 1,875
  - Private sector financing (net) -1,199
  - Reserves drawdown 2,945
  - Program support 128
  - Memorandum Item: Primary fiscal balance 1/ 292
  - 1/ Fiscal year data. Data for 2022 reflect FY2021/22 outturn.

### Medium-term outlook and fiscal adjustment
- Over the medium term:
  - Growth is projected to converge to about 5.5 percent.
  - Inflation averaging around 5 percent.
  - Fiscal consolidation would facilitate adjustment, allowing the CA deficit to stabilize around 5 percent of GDP.
  - While the medium-term FX reserves path has shifted downward, reserves will remain adequate over the medium term, supported by mutually-reinforcing policies and the normalization of global financial market conditions.
- Kenya’s debt dynamics under the baseline:
  - Public debt expected to peak at 67.6 percent of GDP in FY2022/23 (62 percent of GDP in present value (PV) terms).
  - Improvement in the PV of external debt-to-exports ratio since the last assessment.
- Authorities’ fiscal plans and measures:
  - Scaling up affordable housing and water supply via public private partnerships.
  - Establishment of a Financial Inclusion Fund (“Hustler Fund”) with heavy private sector participation.
  - Scaling up of contributions to the National Social Security Fund to 6 percent each from employee and employer.
  - Ambitious rationalization of non-priority spending of 1.7 percentage points of GDP in FY2022/23 to offset spending pressures and contain the overall fiscal deficit at 5.8 percent of GDP in FY2022/23 (below FY2021/22 and budgeted FY2022/23 levels of 6.2 and 6.0   percent of GDP, respectively).
- Text Table 5. Kenya: Budgetary Impact of On-Going Fiscal Initiatives (In Ksh. billions)
  - Revenue: 2,462; Impact emerging pressures 502; Baseline FY22/23 2,513; % of GDP 17.6
  - Tax: 2,024; Impact emerging pressures 112; Baseline FY22/23 2,035; % of GDP 14.5
  - Non-tax: 438; Impact emerging pressures 40; Baseline FY22/23 483; % of GDP 3.1
  - Grants: 33; Impact emerging pressures -5; Baseline FY22/23 28; % of GDP 0.2
  - Total expenditures and net lending: 3,359; Impact emerging pressures 276; Impact budgetary offsets -249; Baseline FY22/23 3,386; % of GDP 24.0
  - Primary spending (including net lending): 2,668; Impact emerging pressures 276; Impact budgetary offsets -245; Baseline FY22/23 2,699; % of GDP 19.1
  - Interest payments: 691; Impact emerging pressures 0; Impact budgetary offsets -4; Baseline FY22/23 687; % of GDP 4.9
  - Overall balance (A): -863; Impact emerging pressures -276; Impact budgetary offsets 294; Baseline FY22/23 -845; % of GDP -6.2
  - Total financing (B): 863; Impact emerging pressures 90; Impact budgetary offsets -108; Baseline FY22/23 845; % of GDP 6.2
  - Foreign financing: 281; Impact emerging pressures 92; Impact budgetary offsets -102; Baseline FY22/23 271; % of GDP 2.0
  - Domestic financing: 582; Impact emerging pressures -2; Impact budgetary offsets -65; Baseline FY22/23 714; % of GDP 4.2
  - o\w use of SDR allocation: 0; Impact emerging pressures 24; Impact budgetary offsets 24; Baseline FY22/23 0.2
  - Financing gap (A+B): 0; Impact emerging pressures -187; Impact budgetary offsets 186; Baseline FY22/23 0; % of GDP 0.0
  - Memorandum: Nominal GDP 14,002; Baseline 14,551; % of GDP 100.0
  - Primary balance: -172; Impact emerging pressures -276; Impact budgetary offsets 291; Baseline -158; % of GDP -1.2

- A Supplementary FY2022/23 Budget consistent with program objectives will be submitted to Cabinet by end-January 2023, targeting a primary deficit of 1.1 percent of GDP (stronger than the 1.2 percent under the 3rd reviews).
- Preparations for the FY2023/24 budget have commenced; the budget proposal is expected to target a primary balance surplus of 0.3 percent of GDP (0.2 percent of GDP at the 3rd reviews), requiring a comprehensive package of new tax measures for 0.9 percent of GDP and further reductions in non-priority primary spending.
- Text Table 6. Kenya: Sources of Improvement in the FY2022/23 Primary Balance Compared to Approved Budget (In percent of GDP)
  - Spending pressures (A) 1.9
  - Revenue windfall (B) 0.3 (Tax 0.1; Non-tax 0.3)
  - Grants windfall (C) 0.0
  - Spending offset (D) 1.7 (Recurrent 0.3; Capital 1.3: domestic 0.6; foreign 0.8)
  - Impact on the primary balance (E=A-B-C-D) -0.1

### Risks and scenarios
- Risks are tilted toward adverse outcomes in the near term, dominated by external factors: intensification of global spillovers from the war in Ukraine, commodity price shocks, and faster tightening of monetary policy in major economies.
- Downside risks:
  - Shortfall in rains would worsen food insecurity and malnutrition in impacted areas of the ASAL, slow growth, and push inflation higher.
  - Persistent investor concerns about frontier economies or lack of confidence in Kenya’s fiscal path could exacerbate fiscal financing and balance of payments pressures, depressing reserve coverage.
  - Larger decline in prices of key commodity exports would impact FX supply.
  - Higher public sector contingent liabilities and spending, including for security and drought-related needs, could slow the reduction in public debt if not offset.
- Upside risks:
  - Better-than-expected rainfall would support a faster recovery in agricultural production, ease food prices and headline inflation, and improve food security.
  - Faster-than-expected easing of global commodity prices would help contain cost of living and support private consumption.
  - Confidence, investment, and market access could rebound more quickly than expected on resolution of global uncertainty and with Kenya’s demonstrated commitment to fiscal consolidation.

### Monetary, exchange rate, and financial sector policy
- Discussions emphasized reducing debt risks by putting debt/GDP on a downward trajectory, complemented by a more active role for monetary policy and exchange rate flexibility.
- Monetary policy:
  - Achieving and maintaining price stability is the principal objective.
  - Near-term inflation outlook has deteriorated; staff projects inflation to peak around 10 percent y/y in early 2023Q1 and to remain outside the central bank’s target band in 2023Q2.
  - Taking into account the 175 basis points in CBK policy tightening to date in 2022, Kenya’s real policy rate on a one-year-looking basis (using staff’s inflation projection) was marginally positive, while the real interbank rate remained at multi-year lows.
  - Real policy rates peaking at a low single digit levels in early 2023 would support the return of inflation within the CBK’s target in 2023Q3.
  - Further increases in domestic interest rates could help underpin market interest as the government seeks to meet domestic financing needs.
- Exchange rate policy:
  - Authorities affirmed commitment to exchange rate flexibility and the shock absorbing role of the exchange rate.
  - Considering program FX reserves goals, authorities plan to limit FX sales to responding to excessive market volatility while recognizing the role of a mutually-consistent policy framework in supporting the medium-term buildup in FX reserves.
  - Authorities are considering issuing additional guidelines aligned with the FX Global Code to address structural challenges in the interbank FX market.
- Financial sector and operational reforms:
  - Progress in modernizing the monetary policy framework per the earlier White Paper; efforts to strengthen forecasting and policy analysis advancing with AFRITAC East support.
  - Launch of the Central Securities Depository, expected to facilitate collateralized transactions among banks, delayed to early 2023 for further testing.
- Structural and debt management measures:
  - Strategic objectives for debt management include issuance of liquid benchmark domestic government bonds across all maturities; exploring market-based external debt operations to smooth the debt service profile; increasing utilization of committed external concessional financing and tapping international financial markets to rollover maturing Eurobonds if conditions are favorable; empowering the Public Debt Management Office (PDMO); and deepening the domestic debt securities market via reforms developed by the National Treasury and the CBK.

*Source: IMF staff projections and mission report excerpt.*

### 18.      The banking system is sound yet exposed to evolving risks (MEFP, section H). With

### 18.      The banking system is sound yet exposed to evolving risks (MEFP, section H)

### Banking system soundness and evolving risks
- Banks are "well-capitalized and liquid overall," but small and medium-sized banks with greater exposure to riskier lending continue to grapple with resolving NPLs and maintaining adequate provisioning.
- Improving asset quality remains contingent on the economic recovery; unpaid government bills, including from local governments, weigh on the sector.
- The CBK continues to encourage consolidation through takeovers of weaker banks.
- The CBK has devoted considerable efforts to training loan officers on risk-based pricing and issued no-objection certificates to many institutions; banks indicate full rollout of their credit pricing models will hinge on sector-wide approvals for reasons of competitiveness.
- The CBK is monitoring the gradually rising share of FX loans and deposits in the banking system to assess vulnerability to currency risks.
- Kenyan banks have seen strong expansion in the EAC region and are systemic in host countries, raising the possibility of regional spillovers and spillbacks in financial and economic policy.
- The CBK closely monitors operational risks from digitalization (including cyber and fraud risks) and risks from corporate exposures across the banking sector.
- Future missions are planned to continue assisting the CBK build a nowcasting framework into the FPAS.

### Modernizing the fiscal framework and revenue mobilization
- Authorities are committed to strengthening revenue administration and mobilization to support ambitious tax revenue goals (MEFP, ¶19–20).
- The MTRS aims to modernize Kenya’s tax policy system, improve compliance, and inform critical policy decisions.
- The action plan issued in August 2022 (met SB) provides specific milestones to identify mutually supportive tax policy and administrative measures to widen the tax base and mobilize domestic revenues.
- An initial draft of the MTRS is expected to be finalized by end-February 2023 with continuing support of Fund TA.
- The Kenya Revenue Authority (KRA) is enhancing compliance by strengthening audits and data-driven compliance risk management and reducing abuse—particularly related to VAT—and improving taxpayer services.
- Strengthening PFM systems remains key; the NT is pursuing an ambitious agenda to improve budget processes and controls and strengthen fiscal risk management (MEFP, ¶24).
- The Auditor General is launching a special audit on the mechanism, efficiency, and effectiveness of supplementary budgeting—including under Article 223 of the Constitution—to be published by end-of-September (proposed new SB; MEFP, ¶63).
- A Fiscal Risk Committee (FRC) has been established with Fund TA to anticipate, monitor, evaluate, manage, and mitigate fiscal risks across the public sector—including related to Public Private Partnerships (PPPs; MEFP, ¶27–28).
- Authorities are reviewing the fuel pricing mechanism and establishing a taskforce to ensure fuel pricing decisions are aligned with available resources (rephased SB proposed for end-December 2022, MEFP, ¶25).

### Addressing SOEs’ financial challenges and governance
- SOE reform progress was limited since third reviews; President Ruto set an objective to step up privatization to rationalize SOEs.
- Budget risks from Kenya Airways (KQ) and Kenya Power and Lighting Company (KPLC) remain elevated.
- Authorities reduced extraordinary SOE support to Ksh.17.5 billion (0.14 percent of GDP) in FY2021/22 from an originally budgeted Ksh.32.3 billion, while the FY2022/23 Supplementary Budget will reflect extraordinary support of Ksh.37.3 billion (0.3 percent of GDP). The bulk would go to KQ, while support to KPLC would be reduced.
- Focus remains on identifying cost-saving reforms at KQ and KPLC given limited fiscal space.

KQ (Kenya Airways)
- KQ remains insolvent with the highest cost base among regional airlines even as it met 75 percent of its targeted cost reduction in FY2021/22.
- Restructuring priorities include network optimization, lease negotiation, staff rationalization, and other cost management efforts.
- The airline retired sixteen loss-making networks and renegotiated some aircraft leases but faces challenges in rationalizing staff costs.
- Discussions are ongoing to novate KQ’s guaranteed debt.
- Authorities aim to provide extraordinary budget support to KQ under safeguards linked to accountability mechanisms and key performance indicators on restructuring commitments.
- Note: In early November 2022, KQ pilots went on strike, prompting intervention of a Labor Court.

KPLC (Kenya Power and Lighting Company)
- The 15 percent base tariff reduction of January 2022 significantly negatively impacted KPLC’s liquidity position.
- Restoration of monthly adjustments in passthrough of variable electricity costs (FX depreciation and inflation adjustments) beginning in September 2022 will help cashflows somewhat.
- Authorities reported a lower KPLC liquidity gap at Ksh.69 billion as of June 2022 (0.5 percent of GDP, compared to 1 percent of GDP in 2021).
- Large sums remain outstanding on payables and receivables, including for government support of the rural electrification scheme; limited progress has been made on cost-saving measures.
- Authorities committed to submit to Cabinet a draft action plan on addressing KPLC’s liquidity gap and restoring medium-term profitability (rephased SB proposed for end-December 2022).

- Authorities are prioritizing rationalization of state corporations (SCs) and committed to strengthening SC governance and oversight (MEFP, ¶41–42).
- Progress has been made developing and operationalizing a Government Investment Management Information System (GIMIS); plans to further develop capabilities for assessing fiscal risks from SCs.
- A draft Ownership Policy for SCs will be submitted to Cabinet by end-June 2023.
- Authorities are beginning work, with Fund TA, on legal reforms to anchor new ownership arrangements and other measures outlined in the Blueprint.

### Strengthening governance and fighting corruption
- Authorities resolved outstanding operational issues and started publication of beneficial ownership information of successful bidders of new procurements reported into the Public Procurement Information Portal (PPIP) since mid-November 2022 (prior action; MEFP, ¶58).
- Revised bidding documents in April 2022 enabled collection of beneficial ownership information.
- The Public Procurement Regulatory Authority aims to prioritize enhancing data analysis capabilities of procurement-related information (MEFP, ¶59).
- Authorities intend to strengthen follow-up on audit findings of the Auditor-General by promoting greater coordination among state bodies, including law enforcement agencies, strengthening monitoring capabilities, and enhancing public reporting (MEFP, ¶60).
- Rapid production and publishing of multiple audits of COVID-19-related spending have identified numerous structural and transactional issues, initiated investigations of suspicious transactions, and highlighted the need for systematic follow-up of findings and recommendations.
- The Kenya 2022 Mutual Evaluation Report by ESAAMLG highlighted major deficiencies in Kenya’s AML/CFT regime.
- Authorities plan by end-June 2023 to submit to the National Assembly draft amendments to the Proceeds of Crime and Anti-Money Laundering Act and Regulations to address gaps in the AML/CFT legal framework, including requirements on politically exposed persons (PEPs), in line with FATF standards (proposed new SB; MEFP, ¶64).
- Authorities aim to prioritize ensuring compliance by banks with enhanced due diligence measures for higher risk customers, including PEPs, through AML/CFT risk-based supervision.
- Stakeholder and public consultations on the draft Access to Information Regulations and the draft Conflict of Interest Bill were finalized; authorities plan to publish and submit the documents to Parliament before end-2022 (MEFP, ¶57 and 61).
- Weaknesses remain in the current draft Conflict of Interest Law related to the asset declaration system (scope of coverage, publication of asset declaration information, and mechanisms for validating accuracy), creating a risk that adoption in current form may fail to improve accountability and integrity.

### Emerging priorities
- New reform initiatives under development (MEFP, ¶43) include:
  - A Financial Inclusion Fund (Hustler Fund) to expand access to credit with a built-in savings (pension) component for those outside the formal workforce, supported by partial government contributions capped at a limit.
  - Raising minimum contributions to the National Social Security Fund.
  - Targeted interventions to expand affordable housing.
  - Privatization of SOEs and amendments to legal framework to facilitate it.
- Provision will be made in the forthcoming FY2022/23 Supplementary budget for anticipated costs related to the Financial Inclusion Fund of 0.1 percent of GDP.
- Staff will assess impacts and fiscal risks of these policies in future program reviews as they are further developed.
- Kenya is highly vulnerable to climate change, especially droughts and floods (Box 3).
- Climate-sensitive sectors (agriculture, tourism, and trade) comprise over a third of domestic production.
- CBK’s 2021 Guidance on Climate-Related Risk Management to the banking sector is expected to help banks integrate climate-related risks into governance, strategy, risk management and disclosure frameworks (MEFP, ¶53).
- Authorities expressed interest in accessing the Resilience and Sustainability Trust (RST).
- Renewable sources account for more than 90 percent of electricity generation capacity, up from 60 percent a decade ago.
- A World Bank Country Climate and Development Report (CCDR) for Kenya is expected to be completed by end-June 2023.

### Program issues, financing, and risks
- Authorities request augmentation of access under the ECF arrangement by 30 percent of quota (SDR 162.84 million or about US$215 million; Table 7). This would be made available in full to the CBK upon completion of the 4th ECF/EFF reviews, who will provide it as budget support to the government in local currency.
- The proposed augmentation would help ease pressures on official FX reserves and ensure continuity in budget financing, including to respond to the ongoing drought and food security needs, by partially offsetting the impact of shortfalls in external financing and potentially catalyzing additional support by Kenya’s development partners.
- It would bring cumulative GRA and PRGT access net of repurchases (including the 2021 Rapid Credit Facility) to 435 percent of quota (about US$3.2 billion) by 2024, remaining within normal cumulative access limits (Table 8).
- The residual external financing gap will be absorbed by reserves drawdown, lowering import coverage to 3.7 months by end-2022 and to 3 months by end-2023 (3rd reviews: 3.9 months and 4.2 months, respectively).
- Upside potential for reserve coverage from stepped-up support by development partners exists.

Program financing details and prospects
- The program is fully financed, with firm commitments over the next twelve months and good prospects for the remainder of the program (Table 6).
- External commercial financing: authorities are well advanced in securing the budgeted US$900 million external commercial borrowing for FY2022/23 (full disbursement anticipated by early 2023) by tapping medium-term loan facilities from international banks (MEFP, ¶26).
  - As of October 2022, the authorities had contracted US$300 million via a 3-year international bank loan.
- Official concessional financing: provided by the World Bank (WB) and the African Development Bank (AfDB), with AfDB support already disbursed.
  - Discussions are underway on a successor arrangement in FY2022/23 to the US$750 million WB Development Policy Operation (DPO) disbursed in FY2021/22.
  - Underutilization of the WB loan targeting acceleration of COVID-19 vaccination in FY2021/22 is expected to be compensated over the next two fiscal years.

Risks and capacity to repay the Fund
- The program faces significant risks (¶6), mitigated by authorities’ strong performance and contingency measures, close engagement with donors and creditors, and tailored capacity development strategy.
- At end-2021, the share of Kenya’s multilateral debt was less than half of its total external public debt and is projected to remain below 50 percent over the medium term under the baseline (Table 10).
- There is no collateralized, public and publicly-guaranteed external debt.
- Total outstanding credit to the Fund (including the proposed augmentation) is projected at SDR 2,361.2 million, or 435 percent of quota in 2024, equivalent to 2.4 percent of GDP, and 40 percent of gross international reserves in 2023, with the latter exceeding the 75th percentile of past Fund UCT-quality arrangements for LICs (Figure 8).
- Total debt service to the Fund would peak by 2028 at 2.3 percent of exports of goods and services, and 1.8 percent of fiscal revenue.
- These relatively elevated levels of scheduled debt service to the Fund may pose risks to capacity to repay over the medium term.
- Near-term downside risks include continued lack of market access for frontier issuers and delays in reform implementation.
- Mitigating factors: continued access to concessional financing, expected normalization of international market access toward the end of the program, Kenya’s strong track record of servicing debts to the Fund and other creditors, multi-year fiscal consolidation anchored in the program, tax policy measures to boost revenues, and authorities’ commitment to maintain exchange rate flexibility.
- One key objective is growth-friendly fiscal consolidation, achieving the debt-stabilizing primary balance during the program to put public debt/GDP on a downward path; four external debt indicators are also on a downward path with near-term breaches relative to five LIC-DSA thresholds declining over the medium term.

### Requested modifications to program conditionality
- New QPCs for all relevant indicators for the end-December 2023 test date.
- Modifications of QPCs on primary balance and tax revenue for the end-June 2023 test date (stronger fiscal objectives) and of net international reserves for the end-December 2022 and end-June 2023 test dates.
- Resetting the timeline for delayed end-July 2022 SBs (KPLC action plan and review of the fuel pricing mechanism) to end-December 2022.
- Establishment of four new SBs:
  - Submissions of FY2022/23 supplementary budget and FY2023/24 budget, both consistent with the program’s objectives and targets.
  - Special audit of the mechanism, efficiency, and effectiveness of supplementary budgets, including under Article 223 of the Constitution, to improve budget control.
  - Submitting draft amendments to the National Assembly to support anti-corruption efforts in line with FATF standards, including requirements on politically-exposed persons.

*Source: MEFP section H, chapter content as provided.*

### 31.      Kenya is navigating through a turbulent global backdrop. The recent political transition

### 1kenea2022003 - 31.      Kenya is navigating through a turbulent global backdrop. The recent political transition

### Macroeconomic outlook and risks
- Economy grew at a 6 percent y/y rate during the first half of 2022.
- Outlook has weakened amid a worsening international economic outlook, tighter global financial conditions, and heightened volatility.
- An expected normalization of rainfall next year should support recovery in agricultural production, easing food and headline inflation and improving food security and nutrition in ASAL regions.
- Risks to the near-term outlook are tilted to adverse outcomes; medium-term outlook remains positive but is subject to climate-related shocks.

### Program performance and fiscal policy
- Quantitative targets under the program are all met; structural reform agenda has seen delays amid election-related uncertainty.
- Fiscal targets for end-June 2022 recorded notable overperformance amid challenges in securing planned financing.
- New administration identified expenditure savings of about 1.7 percent of GDP to contain overall fiscal balance given spending pressures of 1.9 percent of GDP (mainly carryover from FY2021/22 and additional unbudgeted election spending).
- Supplementary FY2022/23 Budget will target a primary deficit of 1.1 percent of GDP (a slight improvement over approved FY2022/23 Budget).
- A tax package of 0.9 percent of GDP is critical in FY2023/24 to further reduce fiscal imbalances and broaden the tax base.
- In subsequent years, further improvements in spending efficiency and tax policy and revenue administration are essential.

### Public debt and debt management
- Public debt expected to peak at 67.6 percent of GDP in FY2022/23 (62 percent of GDP in present value terms).
- Debt dynamics expected to be bolstered by fiscal consolidation under the program, stabilizing debt/GDP and bringing it to more prudent levels over the medium term.
- Improvement in external debt service-to-exports ratio will remain gradual.
- Staff welcomes authorities’ comprehensive strategy to strengthen debt management.

### Monetary policy, exchange rate, and external sustainability
- Authorities raised the policy rate by a combined 175 basis points in 2022.
- Staff projects inflation peaking in 2023Q1, supported by a deceleration in food inflation.
- Staff recommends further tightening of monetary policy; sees a rise in the real policy rate (based on prospective inflation) to low single-digit levels as consistent with inflation moving back inside the CBK’s target band in 2023Q3.
- Central bank liquidity operations should align the interbank overnight rate and commercial banks’ excess reserves with the stance of monetary policy.
- Higher real rates should support external sustainability, FX reserves goals, and meeting government’s domestic financing needs while facilitating financing from local capital markets and avoiding shortening of maturities.
- With reduced external buffers, mutually-reinforcing policies to support external adjustment and strengthen adequacy of FX reserves are important.
- CBK should closely monitor domestic and global developments and stand ready to respond as needed.

### Foreign exchange market and reserves
- Staff welcomes authorities’ intention to support reactivation of Kenya’s interbank foreign exchange market.
- Following the war in Ukraine, Kenya experienced tight forex demand, reduced interbank FX liquidity, and a relatively smooth depreciation of the bilateral exchange rate against the U.S. dollar; the Shilling has risen against other trading partners due to the U.S. dollar surge.
- Exchange rate flexibility should help the exchange rate function as a shock absorber, support competitiveness, and protect FX reserve buffers.
- Reactivating efficient interbank FX functioning and price discovery should address pressures in sourcing foreign exchange and mitigate increasing FX exposures in the banking sector.
- Official FX interventions (FX sales) should be limited to addressing excessive market volatility and be consistent with program FX reserves goals.
- Effective communication of CBK policy intentions will be important amid elevated global uncertainty.

### Banking sector and financial stability
- Banks are well-capitalized and liquid overall; authorities should continue close monitoring of risks.
- Priorities: resolution of NPLs, continued adequate provisioning; CBK’s approach to consolidating weaker banks is welcome.
- CBK increased engagement with banks on risk-based loan pricing; faster issuance of no-objection certificates could help unlock MSME credit.
- Continued attention to risks from banks’ FX positions—now closely monitored from a capital adequacy perspective alongside underwriting of FX loans—should be a priority.
- CBK should closely monitor spillovers and spillbacks from local banks’ regional expansion and operational risks from digitalization.

### State-owned enterprises (SOEs) and governance
- New Administration’s focus on minimizing fiscal drain from SOEs is welcome; decisive steps are needed for KQ and KPLC.
- KQ and KPLC continue to receive extraordinary budget support, albeit at a lower level than initially budgeted; progress on fundamentally addressing their financial vulnerabilities has been limited.
- Critical actions:
  - Steadfast implementation of KQ’s restructuring plan to cut costs, with exchequer support linked to clear accountability; novation process addressing servicing of KQ’s guaranteed debt.
  - For KPLC, reinstitution of passthrough of variable costs in September is welcome; progress needed on action plan to address KPLC’s liquidity gap and medium-term profitability.
  - Improve governance framework for SOE oversight, including on the SOE Blueprint, while pursuing privatization objectives.

### Anti-corruption, procurement, and AML/CFT
- Strengthening anti-corruption legal framework, enhancing transparency, and effective follow up on audit findings should remain priorities.
- Staff welcomes publication of beneficial ownership information of winning bidders through the Public Procurement Information Portal and encourages strengthening data analysis capabilities on procurement information.
- Planned special audit on supplementary budget spending, including under Article 223 of the Constitution, will provide transparency and accountability.
- Authorities should act to address strategic deficiencies identified in the Kenya 2022 Mutual Evaluation Report by ESAAMLG and amend AML/CFT legal framework in line with FATF standards, including requirements on politically-exposed persons.
- Authorities should conduct AML/CFT risk-based supervision to ensure banks’ compliance.
- Government progress on draft Conflict of Interest Law is noted, but substantial changes are needed—especially relating to asset declarations; staff encourages rapid modifications regarding collection and publication of asset declarations prior to parliamentary submission.

### Staff requests and program adjustments
- Staff supports completion of the 4th ECF/EFF reviews with an augmentation of access of 30 percent of quota under the ECF arrangement within the normal cumulative access limit, and modifications of QPCs for end-December 2022 and end-June 2023, given performance and commitment to program objectives.

### Box 1 — Drought in Kenya (humanitarian and fiscal impacts)
- Kenya experiencing one of the longest droughts in the last 40 years in ASAL regions after below-average rainfall for four successive seasons.
- PLEWs forecast October-December 2022 short rains are likely to underperform; drought situation not expected to improve before June 2023.
- Government declared a national emergency in September 2021.
- Pass-through of global staple food price increase to domestic prices in Kenya estimated to be 97 percent.
- UNICEF/GoK (July 2022) data: 884,464 children under 5 and 115,725 pregnant and breastfeeding women were malnourished and in need of treatment.
- Kenya Food Security Steering Group estimates food insecure people increased from 3.5 million at end-2021 to 4.5 million by end-October 2022.
- FY2022/23 Supplementary Budget projected to allocate KSh.10.2 billion (0.07 percent of GDP) in drought-related spending, nearly 60 percent intended to finance food provision.

### Box 2 — Recent inflation developments
- Inflation in first eleven months of 2022 accelerated from 5.4 percent y/y in January to 9.5 percent in November, breaching CBK’s 2.5–7.5 percent target range for the sixth consecutive month.
- Food inflation increased from 8.9 percent to 15.4 percent over the same period.
- Contribution of key commodities (wheat, maize, milk, edible oils) increased from 1.2 percentage points in January 2022 to 3.1 percentage points in October 2022.
- Overall food inflation contributed nearly 80 percent of the average price increase over the same period.
- Authorities’ actions earlier in the year: waiver of import duty on 540,000 metric tons of white maize (imported before August 22, 2022, subsequently extended to September 30, 2022); fertilizer subsidy Ksh.3 billion (April planting) and Ksh.2.2 billion (October); waiver of Railway Development Levy and Import Declaration Fee on gazetted white maize (July 14, 2022); temporary subsidy of sifted maize in July to keep retail 2kg maize at Ksh.100.
- Authorities resumed gradual adjustments in domestic retail fuel prices in March 2022 after pausing October 2021–February 2022; adjustments paused in July and August around the elections.
- On September 14, authorities resumed monthly fuel price adjustments and announced the largest increase of the year (15.6 percent, averaged across products), eliminating the subsidy for petrol and sharply reducing the subsidy for diesel and kerosene.
- The 15 percent reduction in the retail electricity tariff in January provided counterweight to inflation but created cashflow challenges at Kenya Power and Lighting Company.
- Following September’s move to restore adjustments in variable electricity charges, overall fuel inflation jumped to 13.8 percent in November.
- Non-food, non-fuel inflation moved from 1.9 percent in January 2022 to 4.2 percent in November.
- As of November, lower income households living in Nairobi experienced inflation at 10.4 percent compared to 6.9–7.8 percent for higher income groups.
- Surge in inflation expected to erode living standards and raise poverty rates amid elevated food insecurity.

### Box 3 — Climate change goals and financing
- Kenya is highly vulnerable to climate change impacts, especially droughts and floods.
- 2020 ND-GAIN Country Index ranks Kenya 39th most vulnerable and 154th in readiness out of 181 countries.
- As a lower-middle income country depending heavily on rain-fed agriculture, climate change is expected to reduce Kenya’s economic activity on average by 2–2.8 percent of GDP every year.
- World Bank estimates climate change increased frequency of drought-induced food insecurity episodes from every 20 years (1980s) to every 2–3 years.
- Climate-related impacts could significantly affect household income and welfare, increase food insecurity and poverty, and lower labor productivity due to climate-sensitive illnesses and greater food insecurity.

*Source: 1kenea2022003 (IMF staff report).*

### 4.5 million people (8 percent of total population)

### 1kenea2022003 - 4.5 million people (8 percent of total population)

### Food insecurity and poverty impacts
- 4.5 million people (8 percent of total population) assessed to be facing severe food insecurity at end-October 2022.
- Climate change is likely to worsen poverty; some estimates suggest that a 1-degree increase in average temperatures can result in a 2.1 percent increase in the poverty headcount rate.

### Climate policy commitments and targets
- The Government of Kenya has adopted the National Climate Change Action Plan 2018–22 aimed at maintaining a low carbon development trajectory.
- As of end-2021, more than 90 percent of electricity production was generated from renewable sources.
- National targets:
  - Universal access to clean cooking by 2028.
  - Universal use of clean energy by 2030.
  - 10 percent forest cover by 2030.
- Kenya has committed to reducing 32 percent of its GHG emissions by 2030 and to adapt to climate risks as part of its Nationally Determined Contributions (NDCs) under the 2015 Paris Agreement.
- The Government of Kenya estimated the cost of achieving its NDCs at USD 62 billion and committed to mobilize resources to meet 13 percent of the total cost.

### Climate finance, private sector role, and financial sector measures
- To meet elevated climate investment needs, authorities are focused on enhancing the country’s capacity to attract climate-related finance.
- Private sector investments are expected to be vital for climate-smart growth in Kenya given the current fiscally constrained environment.
- Steps taken to stimulate green finance and integrate climate risk into the financial system include:
  - Issuance of a sovereign green bond framework.
  - Issuance of a Guidance on Climate-Related Risk Management to the banking sector to enable banks to integrate climate-related risks into governance, strategy, risk management, and disclosure frameworks—expected to facilitate banks’ leverage on business opportunities from mitigation and adaptation efforts.

*Source: 1kenea2022003 - 4.5 million people (8 percent of total population).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Background
- Kenyan economy has demonstrated "remarkable resilience" to global shocks: COVID-19 pandemic, spillovers from the war in Ukraine, and tighter global financial market conditions.
- New government remains fully committed to the IMF-supported program and intends to pursue prudent macroeconomic policies to reduce debt vulnerabilities and support sustainable and inclusive development.
- Good revenue performance has enabled a "purposeful and progressive approach" to recent shocks (global oil, food, and fertilizer prices, and higher external commercial financing costs).
- Economic growth and recent conditions:
  - Real GDP grew 6 percent y/y in the first half of 2022 despite continuing drought that negatively impacted agricultural output and food security.
  - Peaceful resolution of election-related uncertainty supported the business environment.
  - Global slowdown, tighter external financing, strong U.S. dollar, and volatile commodity prices create a challenging policymaking backdrop.
- Program implementation and requests:
  - Kenya met all program quantitative targets as of end-June 2022 but faced delays in structural reforms amid elections and political uncertainty.
  - Begun publishing beneficial owners of successful bidders of new procurements reported into the Public Procurement Information Portal (PPIP) since mid-November 2022.
  - Requests:
    - Modification of end-December 2022 and end-June 2023 QPCs on floors on net international reserves and end-June 2023 QPCs on floors on primary fiscal balance and tax revenues (Table 1).
    - Reset end-July 2022 SBs (KPLC action plan and review of fuel pricing mechanism) for end-December 2022 due to implementation delays.
    - Set new SBs on: submission of FY2022/23 supplemental budget and FY2023/24 budget; special audit on mechanism, efficiency and effectiveness of supplementary budgeting (including under Article 223 of the Constitution); and strengthening AML/CFT supervision to support anti-corruption efforts (Table 2).
    - Augmentation of access under the ECF arrangement by 30 percent of quota (SDR162.84 million) upon completion of the 4th EFF/ECF reviews, to support international reserves at the CBK with corresponding local currency amount as budget support.
- Policy stance:
  - Committed to multi-year fiscal consolidation supported by higher revenues and expenditure rationalization to put overall public debt-to-GDP on a downward trajectory.
  - Monetary policy to focus on maintaining price stability and resisting second-round effects from higher food and fuel prices.
  - Exchange rate flexibility to continue as shock absorber to support competitiveness, protect reserves, and facilitate foreign exchange market functioning.
  - Government ready to take additional measures if needed and will consult the IMF in advance of revisions.

### Macroeconomic developments and outlook
- Recent developments:
  - Real GDP growth: 6 percent y/y in the first half of 2022 (slower than 7.5 percent in 2021).
  - Sector drivers: services recovery (hospitality, trade, transport, finance) and mining expansion; agriculture reduced by low rainfall and drought.
  - High-frequency indicators point to resilience in 2022Q3; orderly political transition, credit expansion, strong diaspora remittances, and tourism recovery expected to strengthen activity in 2022Q4.
- Inflation:
  - Headline inflation above target range of 2.5–7.5 percent since June 2022.
  - Consumer prices increased from 5.4 percent y/y in January to 9.5 percent y/y in November.
  - Drivers: higher food prices (reduced agricultural production), global supply chain constraints, higher import prices, and higher global oil prices.
  - Policy measures: September subsidies for petrol eliminated; diesel and kerosene subsidies substantially reduced; variable electricity charges reinstated.
  - Non-food/non-fuel inflation rose from 2 percent in January to 3.8 percent in October.
- External sector:
  - Current account deficit expected to widen from 5.2 percent of GDP in 2021 to 5.7 percent of GDP in 2022 due to higher import bills (oil derivatives, cereals, fertilizers).
  - Offsets: strong tourism receipts (on track to reach pre-pandemic levels), robust remittances, higher prices for tea, horticulture, coffee.
  - Foreign exchange reserves declined but remain adequate.
- Fiscal and public debt:
  - Fiscal deficit (cash basis, from financing side) in FY2021/22 declined to 5.8 percent of GDP against a programmed target of 7.8 percent of GDP.
  - Tax revenue increased to 13.7 percent of GDP from 12.6 percent of GDP in FY2020/21.
  - Planned EUR 1 billion (around US$1.1 billion) Eurobond issuance did not occur.
  - External project financing and net domestic financing were over US$700 million and Ksh.50 billion below budgeted amounts, respectively.
  - Public and publicly guaranteed debt at end-June 2022: Ksh.8.6 trillion (68.1 percent of GDP), Ksh.444 billion lower than programmed.
  - Net accumulation of pending bills: Ksh.36.7 billion at MDAs, Ksh.57 billion at Counties, and Ksh.71.1 billion at SAGAs and SCs—a total of Ksh.164.8 billion.
- Banking sector:
  - Core and total capital adequacy ratios as of end-September 2022: 16.2 and 19.0 percent, respectively (statutory minimums: 10.5 and 14.5 percent).
  - Liquidity ratio as of end-September 2022: 51.6 percent (statutory minimum: 20 percent).
  - Credit to private sector has maintained double-digit growth since March 2022.

- Outlook projections:
  - Real GDP: expected to grow by 5.3 percent in 2022; growth projected to slow to 5.1 percent in 2023.
    - Drivers of 2023 slowdown: global slowdown, monetary policy tightening, drag from fiscal consolidation.
    - Agricultural recovery expected with forecast normal rainfall in 2023; tourism normalization and strong remittances to provide support.
  - Inflation: projected to peak in coming months with gradual downward movement in food inflation and lagged impact of monetary policy; expected to remain outside the target band in the near term with recovery in agriculture supporting deceleration in 2023.
  - Current account: 2022 deficit in percent of GDP expected to be smaller than previously projected (narrower trade deficit); 2023 projected improvement as energy imports ease and tourism/remittances remain robust.
  - Medium term: growth expected to converge toward 5.5 percent, inflation to return to the mid-point of the target band, and the current account deficit to about 5 percent of GDP.
- Risks:
  - High uncertainty from weather/climate, global commodity prices, new COVID-19 waves, and investor sentiment toward frontier economies.
  - Positive scenario: normalization of global capital markets and better-than-expected rainfall improving agricultural recovery, lowering food inflation, and reducing fiscal pressures.

### Program objectives, performance, and policies
- Program objectives (supported by EFF/ECF arrangements):
  - Promote sound macroeconomic management via prudent debt policies, improve efficiency of public spending, and support competitiveness.
  - Foster good governance in public resource management.
  - Key policy priorities:
    - Fiscal policy: undertake growth-friendly fiscal consolidation to preserve debt sustainability by bolstering revenue (broadening tax base) and curtailing overall spending while prioritizing high-impact social and investment expenditure.
    - COVID-19 response: vaccinate all adults, ensure health services, address vulnerable groups, and support economic activity.
    - Public financial management: increase efficiency and transparency of public spending including by SOEs.
    - Governance: enhance institutional oversight, strengthen preventive frameworks, and boost transparency.
    - Monetary policy: proactive approach to achieve inflation objective; refine policy operations to keep short-term interest rates stable and close to the policy rate; support vibrant interbank markets.
    - Access to affordable finance: transform banking sector with customer centricity, risk-based credit pricing, transparency, and ethical banking.
    - Financial stability: enhance prudential regulation and supervision and strengthen operational tools.
    - Structural reforms: deepen reforms to improve business environment, boost investment, employment and potential growth.
    - Statistics: improve data quality to support policymaking, transparency, and accountability.
- Program performance as of end-June 2022:
  - Quantitative performance criteria (QPCs): All end-June 2022 and continuous QPCs met.
    - Tax collection overperformed by 0.8 percentage points of GDP.
    - Primary balance overperformed by 1.9 percentage points of GDP.
    - NIR overperformed adjusted target by US$418 million.
  - Indicative targets (ITs): End-June 2022 target on priority social expenditure overperformed by 0.2 percent of GDP; no outstanding exchequer requests >90 days accumulated.
  - Monetary policy consultation clause (MPCC): Met with three-month average of inflation at 7.2 percent within target band as of end-June 2022.
  - Structural benchmarks (SBs): Only one of three benchmarks for July-August met; delays due to political uncertainty.
    - Draft action plan to restore KPLC medium-term profitability (end-July 2022 SB) was prepared but internal consultations delayed; NT awaits new administration guidance.
    - Circular with action plan for development of a Medium-Term Revenue Strategy (MTRS) issued on August 30 (end-August 2022 SB).
    - Review of fuel pricing mechanism and establishment of task force to oversee progressive elimination of fuel subsidy within first half of FY2022/23 (end-July 2022 SB) lagged due to lack of political direction.
    - Publication of beneficial ownership information of entities awarded public contracts (end-June 2021 SB) commenced from November 2022.
    - Publication of audits of COVID-19 vaccine spending (end-May 2022 SB) completed with delay by July 2021 and reports for all 47 counties have now been published.

### Fiscal policy and spending pressures
- Fiscal strategy: balance near-term support to population amid shocks with imperative of reducing debt vulnerabilities over medium term; focus on deficit reduction to place debt-to-GDP on downward path and lower financing risks to expand private credit.
- Fiscal consolidation to be supported by revenue mobilization anchored on the MTRS (¶19).
- Spending pressures in FY2022/23 (Text Table 1):
  - Total Additional Spending: 279,264 Ksh. millions; 1.9 percent of GDP.
  - Carryover from FY2021/22: 88,660 Ksh. millions; 0.6 percent of GDP.
  - Approvals granted under Article 223: 61,016 Ksh. millions; 0.4 percent of GDP.
    - o/w subsidies (fuel, maize, fertilizer through September 2022): 26,091 Ksh. millions; 0.2 percent of GDP.
  - Other spending needs: 129,587 Ksh. millions; 0.9 percent of GDP.
    - o/w subsidies (fuel, maize, fertilizer): 63,366 Ksh. millions; 0.4 percent of GDP.
    - o/w drought and security: 18,195 Ksh. millions; 0.1 percent of GDP.
    - o/w Financial Inclusion Fund and Pension: 20,000 Ksh. millions; 0.1 percent of GDP.
  - Source: National Treasury.

- Additional fiscal notes:
  - Ksh.89 billion of expenditures authorized in previous fiscal year but undisbursed must be honored.
  - Additional spending pressures of Ksh.190 billion emerged between July and mid-September 2022, including Ksh.26 billion approved under Article 223.
  - Remaining pressures (Ksh.130 billion) mainly related to July and August pause in fuel price adjustments, July’s temporary maize flour subsidy, drought emergency interventions, and new administration initiatives including fertilizer subsidies and the Financial Inclusion Fund ("Hustler Fund", ¶43).

_Italic: Appendix I. Letter of Intent; Memorandum of Economic and Financial Policies; Technical Memorandum of Understanding — Nairobi, Kenya, December 7, 2022._

### 14.      We intend to address these pressures in the context of a Supplementary FY2022/23

### Supplementary FY2022/23 Budget and Fiscal Structural Reforms

### Supplementary FY2022/23 Budget: objectives and composition
- Target overall balance: 5.8 percent of GDP (supplementary budget) compared to an outturn of 6.2 percent of GDP in FY2021/22.
- Revenue projection: tax collection expected to reach Ksh.2,035 billion at end-June against a program target of Ksh.2,024 billion.
- Spending ceiling: contain expenditures at Ksh.3,386 billion.
- Offsetting measures for existing pressures (Ksh.290 billion):
  - Cuts on non-priority recurrent spending: Ksh.48.6 billion (examples: domestic and foreign travels, training expenses, hospitality expenses).
  - Rationalization of non-priority projects: Ksh.181.6 billion.
- Financing mix: domestic issuance of liquid benchmark bonds across all maturities, and concessional and commercial external financing.
- World Bank DPO: discussions underway on up-scaling FY2022/23 World Bank DPO; additional resources to replace more expensive financing.
- Market-based debt liability management operations: actively exploring to reduce rollover risks from maturing external commercial debts.
- Rationale for project rationalization: recognition of slow absorption of ongoing projects.
- Parliamentary timeline: submit supplementary budget proposal to parliament for approval by end-January 2023.

### FY2023/24 targets and fiscal path
- FY2023/24 fiscal deficit target: 4.4 percent of GDP (a 1.4 percentage point reduction from this year’s expected outturn).
- Total revenue and grants projected: 17.8 percent of GDP.
  - Supported by comprehensive tax package: 0.9 percent of GDP (broadening tax base, especially indirect taxes).
- Total expenditure projected: decline by 1.2 percent of GDP.
- Structural benchmark: 0.3 percent of GDP primary balance surplus target.
- Budget submission timeline: submit FY2023/24 budget to Parliament by end-April 2023 consistent with primary balance target.

### Medium-term fiscal consolidation and debt anchor
- Commitment: follow program path for fiscal consolidation to reduce debt vulnerabilities.
- Revenue objective: raise ratio of revenue to GDP to well above pre-COVID levels.
- Additional tax measures planned: yield 0.2 percent of GDP in FY2024/25.
- Recurrent expenditure: continue to progressively reduce as a ratio to GDP by containing wage bill growth and transfers to counties and public companies.
- Development spending target: enhance development spending close to 5 percent of GDP.
- Move from nominal public debt ceiling to debt anchor:
  - Anchor based on present value of debt-to-GDP ratio to crystallize policy intention of reducing debt and maintaining sustainability (¶26).
  - New framework to anchor expectations under the EFF/ECF arrangement and enhance transparency and accountability.

### Contingency planning and fiscal risk management
- High uncertainties and risks to fiscal program, particularly government revenues due to global shocks and ramifications of the war in Ukraine.
- Revenue shortfall response: compensate by taking additional revenue measures drawn from MTRS work with IMF support.
- Additional spending response: stand ready to further curtail non-critical spending if necessary.
- Fiscal Risk Committee (FRC):
  - Recently established to help monitor and assess fiscal risks, including PPP-related contingency liabilities (¶28).
  - National Treasury, with IMF TA, operationalizing FRC expected to hold inaugural meeting before 31st December 2022.
  - Fiscal Risk Working Group formed from National Treasury directorates/departments.
  - After October 2022 IMF workshop, working group populated initial tentative fiscal risk register, developed fiscal risk sections in briefs and summary memo, prepared terms of reference, and developed operational calendar for FRC.

### Tax policy and the Medium-Term Revenue Strategy (MTRS)
- Objective: reform tax system to strengthen revenue collection, reversing past tax incentive erosion of tax base.
- Revenue mobilization target: increase revenue mobilization by 8 percentage points of GDP by 2030.
- MTRS timeline:
  - Time-bound action plan developed (end-August 2022 SB).
  - Prepare initial draft of MTRS in consultation with development partners by end-February 2023.
  - Submit draft MTRS to Cabinet for approval by August 2023 after stakeholder consultations.
- Link to President Ruto’s inaugural speech and work in context of MTRS.

### Revenue administration reforms at Kenya Revenue Authority (KRA)
- Key objectives:
  - Develop and implement risk-based compliance strategies.
    - Restructure Compliance Risk Management Committee by end-June 2023 to enhance compliance in registration, filing, and correct reporting and payment.
  - Strengthen KRA’s audit function:
    - Refresh and upgrade staff skills by end-April 2023.
    - Strengthen feedback loops between disputes and audit areas by end-June 2023.
    - Initiate process changes and capability enhancements to improve audit quality and establish mechanisms for assessing audit impact on compliance by end-June 2023.
  - Strengthen data analytics for CRM:
    - Develop credible and reliable taxpayer register and ledger accounts by end-March 2023.
    - Implement a data management strategy by end-June 2023.
  - Manage exemptions:
    - Broaden VAT exemption verification at customs to new areas, including East African Community Customs Management Act-administered areas, by end-June 2023.
  - Improve taxpayer service:
    - Enhance use of data science for services and compliance interventions and leverage stakeholder engagement in design and delivery.

### Public procurement, wage bill control, and payroll systems
- E-procurement system:
  - Acquire e-procurement to incorporate into IFMIS to automate Procurement Act/regulations application.
  - Pilot new system by July 2023; full roll-out across MDAs by end-December 2023 with World Bank support (resource mobilization delays noted).
- Government wage bill savings:
  - Objective: reduce ratio of government wage bill to GDP by 0.6 percentage points between FY2020/21 and FY2023/24.
  - Implemented wage freeze for FY2021/22 and FY2022/23; limit new employment to priority areas.
  - Planned actions:
    - Harmonize and rationalize categories, rates, and rules for allowances; SRC objective: contain allowances to no more than 40 percent of gross pay overtime.
    - Implement common payroll system linked to IFMIS across all National Government ministries and departments and all counties (MDCs) by end-December 2022.
    - Expand Unified Human Resource (UHR) system (currently three modules: Payroll Administration, Leave Management, Pensions Claim) with four additional modules—including establishment control; training and development; Emeriti Identification; third-party deduction management.
    - UHR full roll-out across MDCs by October 2023.
    - Extend UHR coverage in due course to all Commissions, State Corporations, Public Universities, and Agencies.
    - Ensure Collective Bargaining Agreements consider available resources.

### Public Investment Management (PIM) reforms
- Rationalize pipeline of existing projects:
  - Cabinet decision to review 437 stalled or underperforming projects.
  - Task force to analyze and identify projects to be rationalized; multi-agency task force for physical audit and verification expected by end-December 2022.
- Public Investment Management Information System (PIMIS):
  - National Treasury issuing circular to MDAs to start using PIMIS by end-December 2022.
- PIM regulations:
  - Developed and expected to be in place by January 2023.
  - Roll-out to national government entities and Counties as prerequisite to PIM manuals implementation by end-July 2023.

### Public Financial Management (PFM) milestones
- By end-December 2022: develop draft IFMIS regulations to enforce use for all procurements so commitments are captured in IFMIS.
- By end-January 2023: complete rollout of automated cash flow plans and automated exchequer releases for MDAs to enable all exchequer requests to be processed online through IFMIS.
- By end-March 2023: enhance IFMIS to enable generation of purchase orders to ensure all multi-year commitments are captured; milestone postponed by three months due to contractor delays.
- By end-December 2023: ensure all MDA budget proposals for FY2024/25 prepared using common costing approach based on Hyperion system (previously envisaged for FY2023/24); Budget Manual (including costing guidelines) to be validated by end-December 2022.
- By end-June 2023: complete review of number of extra-budgetary units with view to consolidating them and, where appropriate, bring them within budgetary central government perimeter.

### Fuel pricing and subsidy elimination
- Decisive steps to eliminate fuel subsidies after delays.
- Review fuel pricing mechanism to draw lessons on implementation and ensure fuel pricing actions aligned to approved budget.
- Establish taskforce (National Treasury, Ministry of Energy and Petroleum, EPRA) to align fuel pricing actions to approved budget (rephased to end-December 2022 SB).

### Medium-Term Debt Management Strategy (MTDS) implementation
- Reduce refinancing risks:
  - Ratio of Treasury bonds to Treasury bills: rose from 79:21 in June 2021 to 85:15 in June 2022.
  - Average time to maturity of outstanding Treasury bonds: increased from 7.7 years in June 2020 to 9.1 years in June 2022, currently stands at 8.9 years.
  - FY2022/23 MTDS aims to increase share of domestic borrowing on a flow basis to 32 percent of net financing through June 2025, subject to favorable market conditions.
  - Continue lengthening maturity profile with issuance of liquid benchmark domestic government bonds across all maturities and explore market-based commercial debt options to reduce rollover risks from maturing external commercial debts.
- Primary reliance on concessional external financing:
  - Planned US$1.1 billion external commercial financing for FY2021/22 did not take place amid unfavorable market conditions.
  - Plan to raise US$900 million external commercial borrowing planned for FY2022/23 from international banks; one third contracted and offers under review for remainder.
- Strengthening legal framework for PFM:
  - By end-March 2023: resubmit legislative amendments to harmonize definition of public debt and replace nominal debt limit with 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 mandating transparent communication to Parliament and the public on plans and progress towards achieving the debt anchor within a specific timeframe.
  - By end-June 2023: issue PFM regulations and a delegation contract for PDMO to operationalize debt management framework envisioned in the PFM Act.
    - Taskforce (Attorney General's Office, CBK, National Treasury) constituted to review current situation and make proposals; expected to present recommendations by end-March 2023.
- Broadening reporting of SOE non-guaranteed debts:
  - Increased from 18 entities out of around 260 in FY2020/21 PDMR to 26 in FY2021/22 PDMR.
  - Plan to automate data collection from all State-owned entities by linking to existing electronic reporting systems.
- Reforms to deepen domestic debt securities market:
  - Strengthened auction management: implemented Treasury Mobile Direct for retail sales, enabled auction bids by banks via internet banking, lengthened maturity of government debt securities, strengthened bond benchmark program, published auction rules and guidelines.
  - Deploy new Central Securities Depository System (CSD) in 2023Q1 to enhance market infrastructure, accommodate alternative retail investment opportunities, and enable active horizontal repo market to drive increased liquidity.
  - Enhance outreach to market participants to ensure efficient operation of Government Securities market and support liquidity along the entire yield curve.

### Public Private Partnerships (PPPs)
- Commitment to carefully evaluate costs and risks associated with PPPs.
- PPP Directorate (PPPD) expanding staff to strengthen analytical capacities in project origination and structuring, safeguards and legal support.
- National Treasury creating and institutionalizing a joint PIM planning framework by end-March 2023 to streamline decision-making on on-budget procurement versus PPP framework and ensure only projects with highest socio-economic returns undertaken.

*KENYA — Excerpt from Supplementary FY2022/23 Budget and Fiscal Structural Reforms (paragraphs 14–27).*

### 28.      The PPPD will continue strengthen its reporting on risks. To this end, a quantification

### 1kenea2022003 - 28.      The PPPD will continue strengthen its reporting on risks. To this end, a quantification

### PPP risk reporting and Fiscal Risk Register
- The PPPD will continue strengthen its reporting on risks.
- A quantification and likelihood of fiscal risks associated to PPPs, informed by the Fiscal Commitments and Contingency Liability (FCCL) framework, will be included in the Fiscal Risk Register and discussed within the Fiscal Risk Committee.
- The PPP Committee will be shared the risk profile of the portfolio and expected pipeline of projects at different stages of the project cycle.
- Status of PPP projects began to be reported in the Annual Report to Parliament in September 2022.

### Pension reform and pension management system
- Introduced on January 2021 a funded pension scheme for public sector workers: the Public Service Superannuation Scheme (PSSS).
- Re-engineering and digitizing the pension management system is underway.
- Due to delays in the bidding process, expected timeline:
  - Testing stage by June 2023.
  - System complete by end-December 2023.

### Extraordinary support to State-Owned Enterprises (SOEs) — FY2021/22 and FY2022/23
- FY2021/22 supplemental budget provided Ksh.32.3 billion (0.3 percent of GDP) for extraordinary support to SOEs; actual disbursements were Ksh.17.5 billion (0.14 percent of GDP).
- Primary drivers of FY2021/22 shortfall:
  - Lower-than-anticipated support to Kenya Airways (KQ).
  - No support provided to Kenya Wildlife Services (budgeted Ksh.2 billion).
  - No support provided to Kenya Airports Authorities (budgeted Ksh.1 billion).
- KPLC received Ksh.9.05 billion under Supplementary Budget II, up from Ksh.7.05 billion in the originally approved budget.
- Government did not implement planned partial compensation to KPLC for the rural electrification scheme in FY2021/22.
- Spending offsets identified totaling Ksh.7.4 billion (0.06 percent of GDP), equivalent to one-half of the shortfall in extraordinary support to SOEs in FY2021/22; offsets achieved by reducing recurrent spending and rationalizing non-priority projects.

- FY2022/23 supplementary budget provision for extraordinary support: Ksh.37.3 billion (0.3 percent of GDP), a decline of Ksh.8.7 billion compared to the originally budgeted amount.
- KPLC planned support in FY2022/23: Ksh.2.35 billion to address part of the liquidity gap from the January 2022 electricity tariff reduction.
- Budgetary allocation for KQ in FY2022/2023: Ksh.20.0 billion, of which Ksh.10.0 billion was disbursed in September 2022.
- Cumulative extraordinary support to SOEs in FY2021/22 and FY2022/23 projected at Ksh.54.8 billion (0.4 percent of FY2021/22 GDP), below the 1.0 percent of GDP threshold agreed under the program (TMU ¶7).
- Program adjustor: absent realization of extraordinary SOE spending in FY2022/23, government committed to target a more ambitious primary balance equal to half of the under execution in such support.

### SOE financial evaluations and liquidity gaps
- Earlier financial evaluations identified a cumulative Ksh.383 billion liquidity gap over five years for 18 SOEs (excluding Kenya Airways).
- The liquidity gap expected to be primarily covered via SOEs’ cost saving measures, partially materialized and reflected in FY2021/22 financial results.
- Rise in global fuel prices since early 2022 has complicated some planned measures.
- Kenya Airways (KQ) and Kenya Power and Lightning Company (KPLC) pose the largest fiscal risks.

### Policy on offsets for extraordinary SOE support
- In FY2021/22 introduced budgetary offsets for 50 percent of extraordinary support to SOEs (including KQ); to be extended to FY2022/23.
- After FY2022/23, offsets will be set at 100 percent of extraordinary support.
- Commitment to protect priority social spending while addressing fiscal space tradeoffs.

### Kenya Airways PLC (KQ) — financial position and restructuring
- Operating loss for first six months of 2022: Ksh.5 billion, a 31.5 percent reduction in operating losses as of end-2021.
- In absence of higher fuel prices during the period, KQ would have recorded an operating profit.
- KQ currently covers operational costs (less financing and legacy costs) buoyed by recovery in post-COVID-19 volumes, but retains the highest cost base among Sub-Saharan African airlines and has a negative equity position.
- As of November 17, 2022, total value of KQ’s debt portfolio: US$835 million; of this, US$688 million is guaranteed by Government of Kenya (GoK).
- As of end-October 2022, payables approximately Ksh.44 billion, of which Ksh.24 billion is overdue.

- Restructuring action plan (prepared May 2022) initiatives:
  - Network optimization: rationalize twelve loss-making routes; concluded and sixteen destinations retired.
  - Operating leases negotiation: reduce fleet size, terminate some leases, repurpose select aircraft to freighters; in-principle agreements in 2022Q3; GoK disbursement of Ksh.10 billion in October 2022 supported settlement of past due amounts.
  - Staff rationalization: anticipated right sizing, but substantive reductions on staff costs not yet implemented.
  - Collective Bargaining Agreements (CBA): several onerous clauses for pilots; minimal progress on CBA reviews.
  - Cost management: target cost reduction set at US$120 million per annum by 2024, rising from US$73 million in FY2021/22 to US$93 million in FY2022/23 and US$120 million from FY2023/24. In FY2021/22, KQ met 75 percent of the targeted saving.
  - GoK support: continued financial support in FY2022/23 for normalization of overdue payments and working capital; lower GoK disbursement in FY2021/22 limited realized gains from lease negotiations.
  - Ancillary business lines and strategic partnerships: reported 20 percent growth across all business lines; strategic partnership framework concluded with South African Airlines (SAA).

- Novation of GoK guaranteed debt: KQ will novate US$485 million (GoK guaranteed) loans to GoK; guarantees already part of GoK debt stock; estimated increase in annual payment obligations from Consolidated Funds Services: Ksh.10 billion per year.
- GoK settled outstanding debt service arrears on guaranteed loan as of end-September 2022; additional amounts through end-June 2023 on debt service payments included in the Supplementary Budget.
- Payments made on behalf of KQ deemed shareholder loans; shareholder agreements with agreed term sheets are being prepared.

- Safeguards and monitoring for KQ restructuring:
  - Loan agreement for shareholder loans prepared with KPIs, timelines, reporting obligations and disbursement plan as conditions for financial support; signing delayed due to political transition and expected before end-December 2022.
  - Accountability mechanism under discussion; a tracker under development to monitor key actions and milestones in the restructuring process; milestones included in KPIs for KQ’s CEO and senior executives.
  - Progress under the action plan to be reviewed quarterly by NT, with reports sent to the Cabinet.

### Kenya Power and Lighting Company PLC (KPLC) — financial position and turnaround actions
- KPLC working capital position at end-June 2022: negative Ksh.47.8 billion, improved from Ksh.69 billion in June 2021.
- Updated 2022 financial evaluation estimates a liquidity gap of Ksh.69 billion (0.5 percent of GDP, down from 1 percent in 2021).
- January tariff cut resulted in annual loss in revenue of Ksh.26.3 billion; the tariff cut is set to expire at the end of December 2022, and if implemented, KPLC’s liquidity situation will drastically improve and GoK support may no longer be necessary.
- PPA renegotiations with independent power producers (IPP) recommended by Presidential taskforce October 2021; PPA Renegotiation Committee formed and initiated discussions, but long duration means benefits not included in financial projections.
- For half-year ending June 2022, government support covered liquidity gap by Ksh.7.05 billion.
- Projected necessary government support in FY2022/23: Ksh.2.35 billion.
- KPLC’s working capital expected to remain in deficit in the medium term; comprehensive approach needed including clearance of GoK obligations to KPLC.

- By end-December 2022 (rephased SB), NT and Ministry of Energy will submit to relevant Cabinet Sub-Committee an action plan to restore KPLC’s medium-term profitability and fully cover financing gaps through end-2023. The plan will:
  - Be informed by Presidential Taskforce report and updated KPLC 2022 financial evaluations.
  - Identify steps to improve operational efficiency and realize targeted cost savings via a turnaround strategy focused on increasing power sales and revenue collection, improving cashflow management, reducing operational costs, reducing system losses, and restructuring expensive commercial debt.
  - Re-engineer business processes: automated billing, metering, and payments.
  - Target medium-term loss benchmark of 15 percent approved by the regulator.
  - Adjust organization structure and staffing levels for fit-for-purpose skills and a performance-based management culture.
  - Reform procurement and stock management to optimize resource use and reduce wastage.

### SOE governance and oversight reforms
- Strategy on SOE reforms developed to enhance financial and operational efficiency, cost savings, and strengthen oversight.
- Priorities and timelines:
  - Development of Government Investment Management Information System (GIMIS) loans module envisaged completion by December 2022 to facilitate reporting by state corporations on unguaranteed, guaranteed, and on-lent loans.
  - With IMF technical support, develop User Requirements for the analytical module (Financial Evaluation and Risk Analysis) by end-January 2023; system to be accessible by line ministries, National Treasury, and SCAC.
  - By December 2022, review organizational arrangements within NT for financial oversight of SCs and ensure role and functions for Government investments are provided for in legislative framework.
  - Revise Blueprint to align with new policy priorities and sequence reform measures.
  - A draft Ownership Policy for SCs developed by NT and SCAC with Fund and WB advice; consultations delayed by political transition and to be reactivated with a new draft to be submitted to Cabinet by end-June 2023.
  - Approval by Cabinet and publication of an updated inventory and a new classification of SCs to occur by end-March 2023.
  - By end-November 2022, establish system through which all SCs’ audited financial statements and annual reports will be made public via NT’s website and ensure continuous disclosure.
  - Published in early November 2022: SCs performance evaluation report for FY2020/21; annual publications to continue.
  - By end-June 2023, integrate and disclose a register of “specially permitted procurement procedures” as mandated by Section 107(3) of the Public Procurement and Asset Disposal Regulations.

*KENYA  INTERNATIONAL MONETARY FUND*

### 43.      Consistent with the Kenya Vision 2030, we are working to transform Kenya to an

### 1kenea2022003 - 43.      Consistent with the Kenya Vision 2030, we are working to transform Kenya to an

### Development initiatives and social programs
- Financial Inclusion Fund
  - Aim: develop bottom-of-the-pyramid, affordable financial products to promote financial inclusion and savings and institute an informal sector pension scheme.
  - Government matching: match one shilling for every two shillings of contribution to the pension scheme up to a maximum of Ksh3,000 per year.
  - Expected launch: December 2022.
- National Social Security Fund Reform
  - Objective: raise the minimum contribution from the current Ksh.200 per employee and employer to a ratio of 6 percent of gross salary.
- Affordable Housing
  - Interventions: increase supply of new housing and the share of affordable housing in total housing supply by offering low-cost mortgages and structuring affordable long-term housing finance schemes—including a National Housing Fund and Cooperative Social Housing Schemes.
- Privatization of SOEs
  - Action: overhaul the Privatization Act by June 2023 to establish a simplified framework to facilitate faster privatization while ensuring transparency and accountability.
  - Process: identify a list of SOEs to be privatized based on financial and legal due diligence.

### Monetary policy: objectives, stance, and reforms
- Policy objectives
  - Maintain headline inflation within target range: 5±2.5 percent.
  - Maintain a flexible exchange rate regime, with market interventions only in response to excess exchange rate volatility.
  - Further improve the monetary policy framework.
  - A monetary policy consultation clause (MPCC) with a 5 percent ±2.5 percent band triggers consultation with the IMF Executive Board if inflation falls outside the band.
- Recent inflation and policy actions
  - Inflation status: remained outside the target band since June 2022, mainly driven by food and fuel prices.
  - Fuel inflation: surged to 12.6 percent in October after gradual withdrawal of fuel and electricity subsidy from September.
  - Food inflation: increased to 15.8 percent in October due to dry weather conditions and global food price developments.
  - Non-food, non-fuel inflation: remained below 4 percent.
  - Central Bank Rate (CBR) adjustments:
    - May 2022: increased CBR by 50 basis points.
    - September 2022: increased CBR by 75 basis points.
    - November 2022: increased CBR by 50 basis points.
  - Commitment: mitigate second-round effects, anchor inflation expectations, and adjust monetary policy stance as needed; ensure consistency with external sustainability and FX reserves goals.
- Exchange rate policy and market functioning
  - Exchange rate approach: maintain a flexible, market-driven exchange rate system to absorb external shocks.
  - Shilling performance: bilateral Shilling per U.S. dollar exchange rate weakened further by 8.2 percent in the first eleven months of 2022, with lower volatility than in 2021.
  - Drivers of FX pressures: U.S. dollar strength, rapid policy changes in advanced economies, higher global prices for imported food, fuel, and fertilizers.
  - Domestic FX market issues: liquidity affected; interbank FX market transactions declined, limiting price action.
  - Measures: issue additional guidelines to support smooth, fair and efficient foreign exchange market functioning; align guidelines with best practices and incorporate relevant elements of the FX Global Code.
  - FX interventions by CBK: limited to responding to excessive market volatility.
- Monetary policy framework reforms
  - Removal of interest rate caps in late 2019 opened way for further reforms.
  - July 2021 white paper: “Modernization of the Monetary Policy Framework and Operations.”
  - Ongoing reform focus:
    - Refining macroeconomic modeling and forecasting frameworks; CBK strengthening forecasting framework and MPC surveys; August 2022 IMF AFRITAC East mission focused on Quarterly Projection Model (QPM).
    - Rollout of a Centralized Securities Depository System (CSD) by March 2023 to improve interbank market functioning.
    - Improving communication of monetary policy decisions.

### Financial sector: stability, reforms, and supervision
- 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 performance and indicators
  - Credit to private sector: expanded at a broadly steady pace through the pandemic and accelerated with economic recovery.
  - Gross non-performing loans (NPLs) ratio: decreased to 13.7 percent in September 2022 from 14.1 percent in December 2020.
  - Outstanding restructured loans: about 10 percent of gross loans with about 90 percent of restructured loans performing as per restructured terms.
  - All banks publicly disclosed audited 2021 financial statements, including capital adequacy ratios in March 2022, indicating the banking sector is well capitalized and no imminent systemic risk in the sector.
- COVID-19 measures and their expiry
  - Interventions (most expired by March 2021): regulatory flexibility, loan restructuring, adjustments in fees charged on mobile money transactions.
  - Temporary suspension of sharing negative credit information and waiver on fees on low value mobile money transactions have expired; expansion of maximum limit on e-wallet and transactions remains.
  - Ongoing monitoring of outstanding restructured loans and impact on banks’ earnings and capital buffers.
- Credit Guarantee Scheme (CGS) for MSMEs
  - Risk sharing: 50:50 pari-pasu basis; subject to a maximum guaranteed exposure of 25 percent of the principal amount.
  - Objective: facilitate better financing terms and incentivize credit extension to MSMEs.
  - Uptake: total loans under CGS have topped Ksh.4 billion as of September 2022 since program start in December 2020.
- Banking sector reform agenda and initiatives
  - Banking Sector Resilience: consolidation and regional expansion (Democratic Republic of Congo, Rwanda, Tanzania); focus on strong business models and governance.
  - Real-time supervision: implementation of centralized Electronic Data Warehouse (EDW) launched February 2022 to merge supervisory information; APIs to connect EDW to banks for near real-time supervisory data; EDW Onboarding Portal for Digital Credit Providers completed March 2022.
  - Microfinance Act review: Microfinance Bill approved by Cabinet in November 2021 and forwarded to National Assembly.
  - Kenya Mortgage Refinance Company (KMRC)
    - Licensed: September 18, 2020.
    - Objective: provide long-term finance to primary mortgage lenders to increase availability and affordability of mortgage loans.
    - Corporate bond issuance: 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)
    - Effective: December 23, 2021; empowered CBK to license, regulate and supervise DCPs.
    - Digital Credit Providers Regulations, 2022 operationalized on March 18, 2022.
    - Licensing deadline: unregulated DCPs required to apply by September 17, 2022 or cease operations; as of that date, 10 DCPs had been granted licenses.
  - Greening Kenya’s Banking Sector
    - Guidance on Climate-Related Risk Management issued October 15, 2021 to integrate climate risks into governance, strategy, risk management and disclosure.
    - Capacity building workshops: conducted February–March 2022.
    - Submissions: all banks submitted board-approved Climate-Related Risk Management Implementation Plans by end June 2022.
    - Reporting: banks to submit quarterly progress reports to CBK from end September 2022.
    - Objective: attract global funds for climate resilience and position Kenya as a green finance hub.
- Payments, CBDC, and AML/CFT
  - National Payments Strategy, 2022-2025 launched February 2022: vision for a secure, fast, efficient, and collaborative payments system anchored on trust, security, usefulness, choice, and innovation.
  - Discussion Paper on Central Bank Digital Currency (CBDC) issued February 2022; public comments sought by May 20, 2022; over 100 submissions received from multiple regions and being analyzed.
  - AML/CFT supervision
    - Dedicated AML/CFT supervision team established within CBK.
    - Adoption of off-site supervision tools and development of onsite inspection plan for November 2022–June 2023.
    - Enhancing efficiency through automation and updating banking AML/CFT supervision manual to be completed by June 2023.
    - Targeted onsite AML/CFT inspections conducted; appropriate actions taken for non-compliance with CBK AML/CFT guidelines and POCAMLA.
    - Kenya Mutual Evaluation Report issued in November 2022 following ESAAMLG mutual evaluation process.
    - Commitment: continue measures to enhance effectiveness of AML/CFT supervision in line with FATF recommendations.

### Governance, transparency, and procurement reforms
- Access to information framework
  - Prioritized as a pillar for enhanced transparency and accountability.
  - Access to Information Regulations finalized and to be gazetted by end-December 2022.
  - Actions: monitor implementation progress at national and county levels; develop information standards for proactive information provision and processing requests; develop Standards for Digitization and Automation of Records; work with county governments on legislative actions to operationalize framework.
  - Initial focus areas for monitoring methodology and information standards: debt, budget, tax expenditures, PPPs and procurement.
- Beneficial ownership transparency in public procurement
  - Revised standard tender documents (April 2022): winning bidders required to submit beneficial ownership information as a pre-condition to signing procurement contracts.
  - Circular No. 05/2022 (October 27, 2022): requires all procuring entities to enter beneficial ownership information into the Public Procurement Information Portal (PPIP).
  - PPIP enhancements: mandatory fields to capture beneficial ownership information enabling electronic submission.
  - Publication plan:
    - Publish on the PPIP full names; national identity card number or passport number; postal address; and percentage of voting rights a person holds in the company, of beneficial owners of winning/successful bidders of procurements issued from April 21, 2022 onward and reported by procuring entities.
    - Timing: publish thereafter by the 15th day of the subsequent month of signing the contract.
    - Prior action: starting publication with names of beneficial owners of awarded contracts is a prior action under the fourth reviews of the Fund-supported program.
    - Reporting: by end-June 2023, and every six months thereafter, publish a report on compliance with publication of beneficial ownership information by the ten largest spenders in each sector.

*International Monetary Fund — Kenya Country Report content excerpt*

### 59.      We will prioritize continuous enhancement of our monitoring and data analysis

### We will prioritize continuous enhancement of our monitoring and data analysis capabilities of procurement-related information

### Procurement monitoring and data repository
- Prioritize continuous enhancement of monitoring and data analysis capabilities of procurement-related information, including identification of red flags and corruption-related trends and risks.
- Supported by development of a central repository of data on public procurement, mandated under the Public Procurement and Asset Disposal Act, 2015 (section 9-1-m).
- Facilitated by planned rollout of e-procurement and its integration with the PPIP and other government databases, such as IFMIS (¶22).
- PPRA to coordinate with and provide continuous training to procuring entities, law enforcement agencies and other relevant stakeholders to:
  - facilitate data sharing;
  - develop functionalities tailored to specific information and analysis needs, including generation of relevant reports.

### Audit follow-up and accountability
- Enhance follow up and implementation of the Auditor-General’s audit findings and recommendations, including from completed audits of COVID-19 spending.
- Explore measures to:
  - (i) promote greater coordination and collaboration among state institutions involved in the audit and accountability cycle, including law enforcement agencies;
  - (ii) strengthen follow up and implementation systems and consolidate monitoring capabilities and structures, including integrating them with social accountability and participatory frameworks;
  - (iii) enhance public reporting, including publishing a summary of NT’s Internal Auditor-General Department’s annual reports.
- Enhance coordination during the Parliamentary review process of audit reports to strengthen follow up and implementation of Parliamentary recommendations.

### Asset declarations and conflict of interest framework
- Review process finalized to align asset declarations and conflict of interest legal framework with international standards and best practices.
- A draft Conflict of Interest Bill will be approved by Cabinet and submitted to Parliament by end-December 2022.
- Reform objectives include:
  - (i) consolidate wealth declarations and interest declarations of public officials into one uniform disclosure regime;
  - (ii) rationalize responsibility for analyzing and verifying disclosures and imposing sanctions for false declarations or failure to declare in a single agency;
  - (iii) enhance role, responsibilities and capability of enforcement agencies to investigate, prosecute and sanction illicit enrichment and other corruption offenses.
- Goal to achieve full automation of asset declarations for all public officials; pilot program in place for EACC officials; rollout planned in other institutions in FY2022/23.

### Judiciary capacity to adjudicate corruption cases
- Strengthening Judiciary capacities to efficiently adjudicate corruption-related criminal cases.
- In October 2022, 127 principal magistrates with mixed jurisdiction were appointed to oversee corruption and economic crimes cases at the lower level to address backlog; appropriate training is a top priority.
- Delays being addressed through Court Users Committee and Bar Bench; working toward video conference and filming capabilities in courtrooms despite shortages in digital equipment and infrastructure.

### Supplementary budget transparency and special audit
- Commit to provide accountability and transparency on supplementary budget spending by MDAs to ensure greater consistency between expenditure plans and outcomes.
- Facilitate the Auditor-General with support and access to relevant records for requisitions (demand) and disbursements (supply) to conduct a special audit on the mechanism, efficiency and effectiveness of the supplementary budgeting, including under Article 223 of the Constitution.
- The report will be published by end-September 2023 (new SB).

### AML/CFT enhancements to support anti-corruption
- Strengthen AML/CFT legal framework in line with FATF standards to support anti-corruption efforts:
  - FRC to prepare draft amendments to the Proceeds of Crime and Anti-Money Laundering Act, 2009 (POCAMLA) and the Proceeds of Crime and Anti-Money Laundering Regulations, 2013 (POCAMLR) for submission to the National Treasury and Economic Planning for onward transmission to the State Law Office.
  - Submit to the National Assembly draft amendments to POCAMLA and POCAMLR to be in line with FATF standards addressing gaps identified in the Kenya Mutual Evaluation Report 2022 (end-June 2023 new SB).
- Enhance beneficial ownership transparency:
  - Kenya Business Registration Services (BRS) to require existing companies to submit beneficial ownership information to the electronic register as a pre-requisite to access BRS’ online services; targeting full compliance.
  - Draft amendments prepared for (i) the Limited Liability Partnership Act and (ii) the Companies Act (require nominee shareholders and directors to disclose their nominators); public participation completed; finalization for onward transmission to the Attorney General by end-March 2023.
  - Amendments to the Beneficial Ownership Regulations prepared to provide a mechanism for access by reporting institutions; finalization for onward transmission to the Attorney General by end-March 2023.
- Implement actions from the 2021 National Risk Assessment (NRA):
  - NRA found corruption is amongst the top three proceeds-generating predicate offences.
  - FRC prioritized financial intelligence analysis and dissemination relating to corruption, with 30 percent of intelligence dissemination to law enforcement agencies related to corruption in the past 12 months.
  - CBK to enhance AML/CFT supervision in the banking sector via inspections based on the onsite plan to strengthen compliance with customer due diligence, beneficial ownership, and monitoring and reporting in accordance with POCAMLA.
  - National Action Plan on AML/CFT developed and shared with competent authorities; FRC to coordinate monitoring and evaluation and provide periodic updates through FRC’s annual reports.

### Data quality (Section J)
- Policy objective: production and dissemination of high-quality economic statistics as foundation for evidence-based decision making.
- Continued improvement of availability, quality, coverage, and timeliness of statistics.
- Enhancements completed or in progress:
  - New statistical censuses and sample surveys: Integrated Survey of Services; Study of Trade Margins; Study of Underground Economy; Study of Informal Transportation; Micro, Small and Medium Enterprises Survey; Survey of Non-Profit Institutions; 2020 Census of Commercial Farms and Green Houses.
  - Work on improvement of IIP data in progress.
  - September 2021: national accounts statistics updated to a base period of 2016.
- Planned reporting and milestones:
  - (i) general government fiscal outturns on a quarterly basis by February 2023;
  - (ii) annual fiscal data of the public corporations’ sector (including financial and non-financial corporations) by February 2023;
  - (iii) migration of the fiscal framework to GFSM 2014 based concepts, starting with the QEBR for second quarter of FY2022/23.

### Program monitoring, review schedule, and financing requests (Section K)
- Program monitoring instruments: periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, indicative targets (Table 1), and structural benchmarks (Table 2). Definitions and reporting requirements are in the Technical Memorandum of Understanding (TMU).
- Commitment: government will not introduce or intensify restrictions on payments and transfers for current international transactions, conclude bilateral payments agreements incompatible with Article VIII of IMF’s Articles of Agreement, or introduce or intensify import restrictions for balance of payments reasons without IMF prior approval.
- Review schedule:
  - Fifth review on or after May 7, 2023;
  - Sixth review on or after November 7, 2023;
  - Seventh review on or after May 7, 2024.
- Requested program modifications and financing:
  - Request modifications to program targets and augmentation of access under the ECF arrangement.
  - Request revisions to end-December 2022 and end-June 2023 QPCs on floors on net international reserves and end-June 2023 QPCs on floors on primary fiscal balance and tax revenues (Table 2).
  - Request reset of end-July 2022 SBs (KPLC action plan and review of fuel pricing mechanism) to end-December 2022.
  - Request setting of new SBs on: submissions of FY2022/23 supplemental budget and FY2023/24 budget; special audit on supplementary budgeting; strengthening AML/CFT supervision to support anti-corruption efforts (Table 2).
  - Request an augmentation of access under the ECF arrangement by 30 percent of quota (SDR162.84 million) to be made available upon completion of the 4th reviews to support international reserves at the CBK with the corresponding local currency amount made available as budget support.

### Selected quantitative targets and program figures (Table 1 and related text)
- Primary budget balance of the national government (- = deficit; floor): values shown include -428.0, -421.2, -170.2, met, -110.2, -110.2, -174.8, -158.0, 63.9.
- Tax revenue (floor): 1,667.3, ..., 1,770.2, met, 862.3, 862.3, 2,024, 2,035, 1,058.
- Stock of central bank net international reserves (floor, in millions of US$): 7,168, 5,877, 6,295, met, 5,494, 4,984, 5,477, 4,393, 3,270.
- Public and publicly-guaranteed external debt arrears (ceiling): 0 ... 0 met 0 0 0 0 0.
- New domestic guarantees granted by the central government (ceiling): 5 ... 0 met 5 5 5 5 5.
- PV of contracting or guaranteeing of new external debt (ceiling, millions of US$): 8,846, 3,846, 810 met 9,905, 9,905, 11,630, 11,766, 13,340.
- Indicative target — Priority social expenditures of the national government (floor): 397 ... 432 met 205 205 421 421 211.
- Monetary policy consultation clause upper band (annual, percentage points): 7.5 ... 7.5 7.5 7.5 7.5 7.5.
- Center inflation target (annual, percentage points): 5.0 ... 7.2 met 5.0 5.0 5.0 5.0 5.0.
- Memorandum item — Programmed amount of new debt issuance for PV-reducing, debt management operations: 5,000 ... 0 ... 5,000 5,000 5,000 5,000 5,000.
- Memorandum item — Nominal value of contracting or guaranteeing of new external debt under new PV ceiling (in millions of US$): 12,635, 7,635, 3,161 ... 14,521, 14,521, 16,814, 16,963, 19,474.
- Note on augmentation request: augmentation under ECF by 30 percent of quota equals SDR162.84 million.

*Source: Technical Memorandum and program documentation excerpt (Nairobi, Kenya, December 7, 2022).*

### 1.      This memorandum sets out the understandings between the Kenyan authorities and the IMF

### 1kenea2022003 - 1.      This memorandum sets out the understandings between the Kenyan authorities and the IMF

### Overview
- Purpose: Defines 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.
- Coverage: The National Government of Kenya (GoK) corresponds to the budgetary national government covering parliament, national judiciary, and executive including Ministries, Departments, Agencies (MDAs), and Constitutional Commissions and Independent Offices.

### I. Quantitative Performance Criteria (QPCs) and Indicative Targets (ITs)
- QPCs established for test dates: December 31, 2022; June 30, 2023; December 31, 2023.
- QPCs apply 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);
  - a monetary policy consultation clause (band).
- Indicative targets for the same test dates:
  - the change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling);
  - priority social spending of the national government (floor).

### II. Performance Criterion on the Primary Balance of the National Government
- Definition: national government revenues and grants minus expenditures and net lending, plus due interest payments; measured on a cash basis.
- Treatment of SOE support and operations:
  - Financial support transactions of the national government with and on behalf of SOEs with negative equity as of end-June 2020 recorded as a transfer to an entity outside the national government.
  - Debt swaps or exchanges of financial assets between the national government and SOEs with negative equity as of end-June 2020 recorded as a reduction in net lending and an increase in grants to SOEs.
- Measurement (from the financing side, cumulatively from fiscal-year start to test date):
  - Components: (a) negative of net domestic financing of the national government; (b) negative of net external financing of the national government; (c) domestic and external interest payments of the national government.
  - Test-date measurement periods:
    - July 1, 2022, to December 31, 2022 (for end-December 2022);
    - July 1, 2022, to June 30, 2023 (for end-June 2023);
    - July 1, 2023, to December 31, 2023 (for end-December 2023).
- Definitions:
  - Net domestic financing comprises:
    1. net domestic bank financing (including credit from commercial banks and the CBK, overdraft facility, on-lending of part of the SDR General Allocation, changes in bank holdings of national government debt, drawdown of national government deposits);
    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: 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 below for FY2021/22 and FY2022/23, provided that the cumulative SOEs support reported in Table 1 below plus any overage does not exceed KSh.127.36 billion (1.0 percent of the FY2021/22 GDP) over that period.
    - The floor will be adjusted downward (upward) by the full amount of any SOE support in excess (falling short) of the amounts set out in TMU Table 1 below for FY2023/24. This adjustor does not apply to FY2023/24.
    - Monthly reporting: fiscal outturn tables (BOT) will be amended to show explicitly amounts paid in each month and targeted levels for the month.
  - TMU Table 1 (Projected Extraordinary Support to SOEs, KSh. million)
    - 2022 Dec.: 37,268
    - 2023 Jun.: 37,268
    - Source: Kenyan authorities. (Cumulative from July 1, 2022 for FY2022/23 ending in June 2023, and from July 1, 2023 for FY2023/24 for end-December 2023.)
  - 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)
    - 2022 Dec.: 0
    - 2023 Jun.: 0
    - 2023 Dec.: 0
    - Source: Kenyan authorities. (Cumulative from July 1, 2022 for FY2022/23 ending in June 2023 and from July 1, 2023 for FY2023/24 for end-December 2023.)
  - COVID-19 vaccination 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.

### III. Performance Criterion on the Net International Reserves (NIR) of the Central Bank of Kenya
- 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);
  - Kenya’s reserve tranche position with the IMF.
- Exclusions from gross official international reserves:
  - pledged, swapped, or any encumbered reserve assets, including reserve assets used as collateral or guarantees for third-party external liabilities;
  - deposits with Crown agents;
  - precious metals other than gold, assets in nonconvertible currencies and illiquid foreign assets.
- Gross official reserve liabilities 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 total of (i) program loans, (ii) revenue component of project loans, and (iii) external commercial and semi-concessional borrowing (excluding for payments of principal of existing debt with proceeds from newly issued debt for debt management purposes (¶20)) exceeds (falls short) the programmed amounts in TMU Table 3, the NIR target will be adjusted upward (downward) by the difference.
  - If program grants or revenue component of project grants falls short of TMU Table 3 programmed amounts, 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) the programmed amounts in TMU Table 3, the NIR target will be adjusted downward (upward) by the difference.
  - 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.
- Monitoring and conversion:
  - NIR is monitored in U.S. dollars.
  - Assets and liabilities in other currencies shall be converted into dollar equivalent values using the exchange rates as specified in TMU Table 4.

- 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, 2022 for FY2022/23 and July 1, 2023 for FY2023/24):
  - Program grants and loans: End-Dec. 2022: 769; End-June 2023: 1,619; End-Dec. 2023: 304
  - Program loans: 769; 1,619; 304
  - Program grants: 0; 0; 0
  - Project loans and grants: 261; 693; 362
  - Project loans (revenue component): 239; 603; 362
  - Project grants (revenue component): 22; 90; 0
  - Commercial and Semi-concessional borrowing: 496; 896; 0
  - Foreign exchange outflows related to KQ support: 81; 161; 41
  - Source: Kenyan authorities.

- TMU Table 4 (Program Exchange Rates; Rates as of February 4, 2021)
  - US Dollar: 109.8647 Kenyan Shillings per currency unit; Currency units per US Dollar: 1.00
  - STG Pound: 149.8768; 0.73
  - Japanese Yen: 1.045882; 105.05
  - Canadian Dollar: 85.7648; 1.28
  - Euro: 131.9809; 0.83
  - Swiss Franc: 122.2213; 0.90
  - Swedish Kronor: 13.0437; 8.42
  - Danish Kronor: 17.7509; 6.19
  - Chinese Yuan: 17.0114; 6.46
  - Australian Dollar: 83.662; 1.31
  - SDR: 157.464; 0.70
  - Source: Central Bank of Kenya.

### IV. Continuous Performance Criterion on Public and Publicly-Guaranteed External Debt Arrears
- Definition: overdue payments (principal or interest) not made by their contract due date nor during the applicable grace period, on debt contracted by the national government; arrears to official and private external creditors.
- For monitoring: overdue payments beyond 30 days after the original contract due date (to allow time to process repayment after debtor notifies inability to pay).
- Exclusions: arrears relating to debt subject to renegotiation (dispute or ongoing renegotiation) or rescheduling.
- External debt is defined on a currency basis.
- Applicability: cumulative flow in gross terms from January 1, 2021; applies on a continuous basis.

### V. Ceiling on the Contracting or Guaranteeing of New External Debt
- Reference definition: 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 definition (current liability created under a contractual arrangement requiring future payments in assets or services). Principal forms:
  - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits; repurchase agreements; official swap arrangements);
  - (ii) suppliers’ credits (deferred payment contracts);
  - (iii) leases (present value at inception of all lease payments during agreement period, excluding operation/repair/maintenance payments).
- Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
- Coverage for the ceiling:
  - External debt: 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 GoK, and foreign-currency denominated obligations of the CBK contracted on behalf of the national government (excluding newly contracted financing from the IMF and the General SDR allocation).
  - Guaranteed debt: explicit promise by the public sector to pay or service a third-party obligation (payments in cash or in kind).
  - External debts in currencies other than the U.S. dollar converted to U.S. dollars at program exchange rates (Table 4).
- Contracting of debt and credit lines:
  - A debt is considered contracted when all conditions for its entry into effect have been met, including approval by the Attorney General.
  - Contracting of credit lines (drawable at any time, with no predetermined disbursement schedules or with multiple disbursements) is considered contracting of debt.
- Definition of the 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 GoK and creditors of Kenya Airlines that (i) replace two guarantees previously provided by GoK to the same lenders; (ii) result in present value savings compared to the debt obligations that GoK would have had to assume had the two guarantees been triggered are excluded from the PC.
- Present value calculation:
  - PV of debt at contracting calculated by discounting future stream of payments of debt service due on the debt.
  - For debts with a grant element equal or below zero, PV set equal to the nominal value of the debt.
  - Discount rate: unified discount rate of 5 percent (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 (Table 4).
  - For variable-rate debt (benchmark rate + fixed spread), PV calculated using a program reference rate plus fixed spread (basis points) specified in contract.
    - Program reference rate for the 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 (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, Japanese Yen, and GBP Sterling, the spread over six-month USD SOFR is 15 basis points.
    - If variable rate linked to a benchmark other than six-month USD SOFR, a spread reflecting the difference between benchmark and six-month USD SOFR (rounded to the nearest 50 basis points) will be added.
- Debt Management Operations (DMOs):
  - Defined as the repayment or refinancing of the principal of outstanding external public debts prior to or at their maturity dates.
  - Programmed issuance of non-concessional debt for use in DMOs is shown as a memorandum item in Table 1 of the accompanying Memorandum of Economic and Financial Policies.

*Source: Memorandum of Understanding between the Kenyan authorities and the IMF (content unit 1kenea2022003).*

### 21.      An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this

### 1kenea2022003 - 21.      An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this

### External debt ceiling adjustor and treatment of project financing
- 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.
- The debt ceiling would be adjusted upward by the full amount in PV terms of any project financing dedicated to COVID-19 vaccine interventions that was not anticipated at the time of setting of the performance criterion.
  - The 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.
- 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 using a discount rate of 7 percent, and these amounts will not be capped by the nominal value of the debt.

### Monetary policy consultation clause and inflation bands
- The bands around the projected 12-month rate of inflation in consumer prices (headline CPI published by KNBS) are specified as follows (TMU Table 5):
  - Upper band: 7.5 (end–Dec. 2022, end–Jun. 2023, end–Dec. 2023)
  - Center point: 5.0 (end–Dec. 2022, end–Jun. 2023, end–Dec. 2023)
  - Lower band: 2.5 (end–Dec. 2022, end–Jun. 2023, end–Dec. 2023)
- If the observed average of the 12-month CPI inflation for the three months preceding the test date falls outside the lower or upper bands specified above, the authorities will complete a consultation with the IMF Executive Board which would focus on:
  - (i) the stance of monetary policy and whether the Fund-supported program remains on track;
  - (ii) the reasons for program deviations, taking into account compensating factors; and
  - (iii) proposed remedial actions if deemed necessary.
- When the consultation with the IMF Executive Board is triggered, access to Fund resources will be interrupted until the consultation takes place.

### Floor on tax revenue (quantitative performance criterion)
- Tax revenue of the national government are defined as the sum of:
  - personal income tax (PAYE),
  - corporate income tax,
  - import duties,
  - excise duties,
  - value added tax, and
  - other taxes (e.g., alternative minimum tax, digital sales tax).
- For the program, tax revenues exclude items presented in the monthly Budget Outturn Tables (BOT): taxes related to “Ministerial Appropriation in Aid” (i.e., RML, RDL, PDL), “Taxes on International Trade and Transactions (IDF fee),” “Capital gains,” and “other taxes on goods and services.”

### Indicative target on national government outstanding exchequer requests
- National government outstanding exchequer requests are defined as invoices for goods or services provided to the national government for which requisitions for payment have been received in IFMIS but corresponding funds from the exchequer account have not been released.
- The program ceiling for the change in the stock of outstanding exchequer requests refers to requisitions made after the start of July 2021 and invoices unpaid for 90 days or longer, disregarding any changes related to legal rulings or claims found invalid on bills originated before the start of the program.

### Indicative target on priority social spending
- Priority social spending of the national government is defined as the sum of:
  - cash transfers to orphans and vulnerable children,
  - cash transfers to elderly persons,
  - cash transfers to persons with severe disabilities,
  - free primary education expenditure,
  - free secondary education expenditure,
  - school food and sanitary programs,
  - free maternal healthcare,
  - universal health coverage,
  - health insurance subsidy for targeted categories (i.e., orphans, vulnerable children, elderly, and people with disabilities), and
  - spending for vaccination and immunization.
- The floor on priority social spending of the national government is defined as the programmed amounts set out in TMU Table 6:
  - Priority Social Spending (KSh. millions):
    - 2022 Dec.: 210,389
    - 2023 Jun.: 420,777
    - 2023 Dec.: 210,979
  - Note: Cumulative from July 1, 2022 for FY2022/23 ending in June 2023 and from July 1, 2023 for FY2023/24 for end-December 2023.

### Data reporting requirements (summary of data to be reported)
- The National Treasury (NT) and the CBK will provide information at the frequency and within reporting deadlines specified in TMU Table 7; authorities will transmit promptly any data revisions.
- Selected reporting requirements and deadlines include (information, frequency, reporting deadline, responsible entity):
  - Primary balance of the national government: Monthly, Within 20 days after month end, CBK.
  - Net domestic bank financing (including net commercial bank credit to the national government and net CBK credit to the national government broken down in their main components): Monthly, Within 20 days after month end, CBK.
  - Net nonbank financing of the national government: Monthly, Within 20 days after month end, NT.
  - Proceeds from privatization: Monthly, Within 20 days after month end, NT.
  - Debt service paid and coming due on domestic debt: Monthly, Within 20 days after month end, CBK.
  - Debt service paid and coming due on external debt: Monthly, Within 20 days after month end, NT.
  - Disbursements and repayment schedule of external concessional and non-concessional project loans, including securitization: Monthly, Within 20 days after month end, NT.
  - Disbursements and repayment schedule of budget support loans: Monthly, Within 20 days after month end, NT.
  - Disbursements and repayment schedule of all external loans: Monthly, Within 20 days after month end, NT.
  - Net proceeds from issuance of external debt: Monthly, Within 20 days after month end, NT.
  - Any exceptional financing (including rescheduled principal and interest): Monthly, Within 20 days after month end, NT.
  - Net changes in the stock of short-term external debt: Quarterly, Within 45 days after quarter end, NT.
  - Change in external arrears, including interest and principal, and penalties: Monthly, Within 20 days after month end, NT.
  - Stock and movements in MDAs’ pending bills for prior fiscal years: Monthly, Within 20 days after month end, NT.
  - Stock of exchequer requests made after the start of July 2020 and unpaid for 90 days or more: Monthly, Within 20 days after month end, NT.
  - Execution of Extraordinary SOE support: Monthly, Within 20 days after month end, NT.
  - National government transactions with and on behalf of SOEs broken down in main categories: Quarterly, Within 20 days after the end of the quarter, NT.
  - Stock of Treasury Bills and Bonds: Quarterly, Within 45 days after quarter end, NT.
  - Auctions of T-bills and T-bonds via primary dealers, including number and value of submitted and accepted bids, minimum, maximum and weighted average interest rates and maturity dates: Weekly, Within 7 working days after the end of the week, NT.
  - Total new other domestic debt contracted or guaranteed: Monthly, Within 20 days after the end of the quarter, NT in collaboration with CBK.
  - Total new contracted external project loans: Monthly, Within 20 days after the end of the quarter, NT.
  - Total other new contracted or guaranteed external concessional debt: Monthly, Within 20 days after the end of the quarter, NT in collaboration with CBK.
  - Total new Eurobond issuances: Monthly, Within 20 days after the end of the quarter, NT.
  - Total new other non-concessional external debt contracted or guaranteed: Monthly, Within 20 days after the end of the quarter, NT in collaboration with CBK.
  - CBK’s holding of monetary gold (excluding amounts pledged as collateral): Monthly, Within 20 days after the end of the month, CBK.
  - Holdings of SDRs: Monthly, Within 20 days after the end of the month, CBK.
  - CBK holdings of convertible currencies in cash or in nonresident financial institutions: Monthly, Within 20 days after the end of the month, CBK.
  - Total outstanding liabilities of the CBK to the IMF excluding the SDR allocations: Monthly, Within 20 days after month end, CBK.
  - Convertible currency liabilities of the CBK to nonresidents with an original maturity of up to and including one year: Monthly, Within 20 days after month end, CBK.
  - Commitments to sell foreign exchange arising from derivatives: Monthly, Within 20 days after month end, CBK.
  - Currency in circulation: Monthly, Within 20 days after month end, CBK.
  - Required and excess reserves: Monthly, Within 20 days after month end, CBK.
  - Concessional and non-concessional medium- and long-term external debt contracted or guaranteed by the national government and CBK: Monthly, Within 20 days after month end, NT.
  - Accumulation of national government external debt arrears: Monthly, Within 20 days after the end of the quarter, NT.
  - Social priority spending of the national government: Quarterly, Within 45 days after quarter end, NT.
  - Grants to national government entities and total subsidies: Quarterly, Within 20 days after month end, NT.
  - Guarantees issued by the national government to counties, public enterprises, and all parastatal entities: Monthly, Within 20 days after the end of the quarter, NT.
  - Stock of guarantees extended by the national government: Monthly, Within 20 days after the end of the quarter, NT.
  - 12-month CPI inflation: Monthly, Within 15 days after the end of the month, KNBS.
  - Financial Soundness Indicators (core and expanded) for other depository corporations: Quarterly, Within 20 days after quarter end, CBK.

### Debt Sustainability Analysis (DSA) summary and public debt coverage
- Joint Bank-Fund Debt Sustainability Analysis:
  - Risk of external debt distress: High
  - Overall risk of debt distress: High
  - Granularity in the risk rating: Sustainable
  - Application of judgment: No
- Key findings:
  - Kenya’s debt is sustainable. While overall and external ratings for risk of debt distress remain high, debt dynamics are being bolstered by the fiscal consolidation under the IMF supported program.
  - High deficits in the past, combined with export and output losses in 2020 caused by the pandemic, have resulted in near-term deterioration of solvency and liquidity debt indicators.
  - Market pressures in the wake of the war in Ukraine and monetary tightening in advanced countries have limited access to commercial borrowing in 2022.
  - Compared to the last DSA assessment, the outlook for present value of external debt-to-exports has improved, due to:
    - stronger than anticipated fiscal outturn in FY2021/22,
    - planned rationalization of capital spending in FY2022/23 (reflected in lower-than-previously anticipated external financing),
    - faster recovery of tourism, and
    - boost to exports from higher export prices in 2022.
  - These positive trends are partly offset by the impact of projected higher nominal interest rates on the present value of debt, reflecting the higher cost of external loans with floating interest rates and of new external commercial and domestic debt.
  - Kenya’s debt indicators will improve as fiscal consolidation progresses and exports and output recover from global shocks, although improvement remains gradual for the external debt service-to-exports ratio.
  - Sustained fiscal consolidation would stabilize debt next year and bring it to more prudent levels over the medium term, while protecting social spending.
  - The DSA suggests Kenya is susceptible to export and exchange rate shocks; more prolonged and protracted shocks would present downside risks to the debt outlook.
- Public debt coverage for the analysis:
  - Perimeter covers debt of the central government, Social Security Fund, central bank debt taken on behalf of the government, and government guaranteed debt.
  - External DSA covers external debt of central government and central bank, including publicly guaranteed debt, as well as private sector external debt.
  - Public DSA covers both external and domestic debt incurred or guaranteed by the central government; does not cover entire public sector (e.g., extra-budgetary units and county governments).
  - Debt coverage excludes legacy debt of the pre-devolution county governments estimated at KSh 53.8 billion (0.5 percent of GDP), which is included in a stress scenario.
  - The DSA uses a currency-based definition of external debt; nonresidents’ direct participation in the domestic debt market is small (below one percent of total outstanding government securities).
- Combined contingent liabilities stress test components and calibrations:
  - 3.1 percent of GDP to capture reported non-guaranteed debt of SOEs, extra-budgetary units and PPPs. Survey of 26 state-owned entities showed reported non-guaranteed loan obligations equal to KSh.99.3 billion (0.8 percent of GDP) at end-June 2022; 77 percent denominated in U.S. dollars and 4.4 percent owed by extra-budgetary units. Standard calibration of 2 percent for non-guaranteed SOE debt retained in the stress test.
  - 0.5 percent of GDP to cover legacy debt of the pre-devolution county governments.
  - 5 percent of GDP for a financial market shock (a value that exceeds the existing stock of financial sector nonperforming loans of about 4 percent of GDP).

*Source: IMF and IDA staff memorandum (selected excerpts).*

### 4.      Kenya’s overall public debt has increased in recent years. Gross public debt increased

### 1kenea2022003 - 4.      Kenya’s overall public debt has increased in recent years. Gross public debt increased

### Debt levels and composition
- Gross public debt increased from 45.7 percent of GDP at end-2015 to 67.8 percent of GDP at end-2021.
- External public debt amounts to about half of Kenya’s overall public debt.
- Nominal PPG external debt at end-2021 amounted to 34.5 percent of GDP, corresponding to 27.4 percent of GDP in present value terms.
- Domestic public debt reached 33.3 percent of GDP at end-2021.

### External debt: creditors, instruments, and terms
- Multilateral creditors accounted for about 43 percent of external debt at end-2021.
- Bilateral creditors represented close to 31 percent of external debt at end-2021; about 64 percent of Kenya’s bilateral debt is owed to non-Paris Club members, mainly loans from China.
- Commercial debt accounted for about 27 percent of external public debt in 2021 (mainly Eurobonds, loans and export credits).
- Eurobonds accounted for 72 percent of commercial debt (US$7.1 billion); loans represented 28 percent (about US$2.7 billion).
- Kenya has not contracted any collateralized external debt.
- Guarantees by the central government on debt contracted by other entities amount to US$ 1.4 billion and are included in the stock of PPG debt.
- Debt service relief under the G-20 DSSI in 2021 amounted to US$504 million or 0.46 percent of GDP; repayment will increase external financing needs over 2022–28.

### Domestic debt, market developments, and maturities
- The yield curve shifted up and flattened since end-2020, reflecting near-term inflationary pressures, CBK policy adjustments, heightened election-related uncertainty, and greater reliance on domestic issuance in the last quarter of FY2021/22.
- Share of Treasury bills in the domestic debt stock fell from 35 percent at end-FY2018/19 to 18.7 percent at end-FY2021/22.
- Average time to maturity of government domestic bonds, excluding T-bills, increased from 6.3 years at end-FY2018/19 to 9.1 years at end-June 2022.
- About half of government domestic debt securities are held by pension funds; commercial banks hold a 47 percent share.
- Starting in the last quarter of FY2021/22, domestic debt issuance shifted mainly to the short-end of the maturity spectrum amid heightened uncertainty and rising inflation.

### Contingent liabilities and private external debt
- Contingent liabilities (including public guarantees) amounted to US$1,429 million or 2.0 percent of GDP (end-2021).
- Published data on private external debt is available through 2018 and extrapolated forward with net private external debt BOP flows; net private external debt flows through end-2021 indicate a steady upward trend in the stock of private debt as a share of GDP.
- Syndicated loans amounting to Euro 305.4 million claimed by a syndicate of Italian commercial banks related to Arror, Kimwarer, and Itare dams projects are disputed and subject to on-going arbitration/court proceeding; the outstanding amount is kept in the stock of public debt but its debt service schedule is not included in the DSA baseline.

### Macroeconomic assumptions and outlook
- Real GDP growth projected at 5.3 and 5.1 percent in 2022 and 2023, respectively.
- Medium-to long-term real GDP growth projections broadly unchanged at around 5.5 percent.
- Nominal GDP (Ksh billion) current DSA: 2022: 13,650; 2023: 15,453; 2024: 17,237; 2025: 19,087; 2026: 21,137; 2027: 23,387; Long-term 1/: 57,822.
- Real GDP (growth) current DSA: 2022: 5.3; 2023: 5.1; 2024–2027 and long-term: 5.5.
- Revenue and grants (percent of GDP) current DSA: 2022: 17.5; 2023: 17.6; 2024: 17.9; 2025: 18.0; 2026: 17.9; 2027: 18.1; Long-term: 19.4.
- Primary fiscal balance (percent of GDP) current DSA: 2022: -1.4; 2023: -0.3; 2024: 0.5; 2025: 0.8; 2026: 0.8; 2027: 0.9; Long-term: 1.0.
- Non-interest current account (percent of GDP) current DSA: 2022: -4.3; 2023: -3.6; 2024: -3.6; 2025: -3.4; 2026: -3.3; 2027: -3.4; Long-term: -3.0.
- Exports of goods and services (growth) current DSA: 2022: 18.9; 2023: 9.9; 2024: 10.1; 2025: 10.2; 2026: 8.9; 2027: 8.3; Long-term: 9.6.

### Fiscal adjustment, financing, and risks
- FY2021/22 fiscal deficit compressed to 6.2 percent of GDP (versus forecast of 8.2 percent of GDP in the last DSA).
- FY2021/22 primary fiscal deficit was 1.9 percent of GDP smaller than budgeted; about 0.6 percent of FY2021/22 GDP in committed but undisbursed expenditure will carry over to FY2022/23.
- Additional unbudgeted expenditure needs of 1.3 percent of GDP emerged in FY2022/23 (0.4 percent of GDP emergency spending under Article 223; 0.9 percent of GDP from pausing fuel price adjustments and drought and policy priorities).
- Authorities identified measures amounting to 1.7 percent of projected FY2022/23 GDP to offset these pressures (expenditure cuts and recognition of additional tax revenues).
- A comprehensive package of new tax measures amounting to 0.9 percent of GDP is required to narrow the primary deficit and align with Kenya’s Medium-Term Revenue Strategy, alongside efficiency gains in tax and customs administration and reductions in non-priority primary spending.
- Overall deficit expected to durably decline to below 4 percent of GDP over the medium term under continued adjustment.

### Specific operations and assumptions affecting debt metrics
- CBK lent the equivalent of three-quarters of the 2021 US$740 million general allocation of SDRs to the government in local currency to meet financing needs in FY2021/22 and FY2022/23; the amounts lent enter the DSA PV calculation with a present value reflecting a grant element of 39.4 percent.
- Under-execution of external project financing amounted to over US$700 million in FY2021/22; a previously-planned EUR1 billion (around US$1.1 billion) Eurobond issuance did not take place and is not included in the DSA baseline.
- Planned rationalization of capital spending in the FY2022/23 Supplementary Budget will lower external financing needs by around US$1 billion.
- As part of KQ restructuring, government began servicing the guaranteed portion of KQ external debts; the principal of these obligations plus remaining government guarantee on other KQ external loans was US$688 million as of November 2022 (lower than the US$750 million government guarantee of KQ debts included in the stock of external PPG debt at end-2021). The operation lowers the nominal stock of external PPG debt but raises its present value due to assumed interest payments and shorter repayment period.

*Source: IMF staff report text as provided.*

### 15.      The current account deficit is expected to widen to 5.7 percent of GDP in 2022, before

### 15.      The current account deficit is expected to widen to 5.7 percent of GDP in 2022, before

### Current account outlook
- The current account deficit is expected to widen to 5.7 percent of GDP in 2022, before converging to 5 percent over the medium term.
- Drivers of the 2022 widening:
  - Disruption of global trade and finance from the war in Ukraine.
  - Sharp increases in international import prices of commodities with relatively inelastic demand, such as oil derivatives, cereals, and fertilizers.
  - Only partial offset from higher prices for Kenya’s main agricultural exports (tea, horticulture, and coffee) and consumer and intermediate goods exports in 2022.
- Medium-term strengthening expected due to:
  - Further fiscal consolidation.
  - Robust goods exports and tourism receipts.
  - A flexible exchange rate.
  - Gradual normalization of global commodity and financial market conditions.
- Export growth supporting factors:
  - Improving business environment and leveraging existing trade and investment agreements.
  - New administration’s priorities to increase manufacturing (including agro-processing) and services (including tourism and financial sector) share in the economy.
  - Policies to enhance agricultural productivity (focus on farmer-led irrigation, efforts to modernize Kenya’s food systems, greater value chain integration).
  - Services projected to increase as tourism realizes full potential.
  - Remittances projected to remain robust over the medium term.
- Financing of private sector current account deficit:
  - Diversified sources including foreign direct investment (FDI) and financial and non-financial corporate borrowing.

### External financing and public sector borrowing program
- Public sector gross financing needs to be met with a balanced mix of external and domestic financing.
- External financing focus:
  - Continued primary reliance on concessional development loans.
  - Authorities’ external borrowing program aligns with commitments under the IMF-supported EFF/ECF program, including an overall ceiling on the present value of newly contracted or guaranteed external public debt (a PPA under the World Bank’s SDFP).
- Cumulative external borrowing program through end-December 2023 consistent with planned drawings in FY2022/23 and FY2023/24.
- Borrowing program provides space for:
  - US$1.1 billion external commercial financing (did not take place in FY2021/22).
  - US$5 billion for debt management operations (both put on hold given challenging market conditions and not reflected in the DSA baseline).
- Kenya expected to continue tapping global capital markets to roll over maturing external commercial financing; next Eurobond maturity falls due in June 2024.
- Text Table 6 (summary figures):
  - Volume of New Debt from Jul 1, 2021 to Dec 31, 2023: US$ million 17,654 (100 percent)
  - PV of New Debt from Jul 1, 2021 to Dec 31, 2023: US$ million 13,340 (100 percent)
  - By sources of debt financing:
    - Concessional debt: US$ million 10,156 (58 percent) | PV 5,950 (45 percent)
    - Multilateral debt: US$ million 4,508 (26 percent) | PV 2,593 (19 percent)
    - Bilateral debt: US$ million 3,107 (18 percent) | PV 1,765 (13 percent)
    - Other: US$ million 2,511 (14 percent) | PV 1,574 (12 percent)
    - Non-concessional debt: US$ million 7,498 (42 percent) | PV 7,389 (55 percent)
      - Semi-concessional: US$ million 379 (2 percent) | PV 227 (0 percent)
      - Commercial terms: US$ million 7,120 (40 percent) | PV 7,120 (53 percent)
  - By Creditor Type:
    - Multilateral: US$ million 4,693 (27 percent) | PV 2,716 (20 percent)
      - World Bank: US$ million 3,894 (22 percent) | PV 2,231 (17 percent)
    - Bilateral - Paris Club: US$ million 1,146 (6 percent) | PV 667 (5 percent)
    - Bilateral - Non-Paris Club: US$ million 1,962 (11 percent) | PV 1,086 (8 percent)
    - Other: US$ million 9,853 (56 percent) | PV 6,858 (66 percent)
  - For debt management operations:
    - US$ million 5,000 (28 percent) | PV 5,000 (37 percent)
  - Uses of debt financing:
    - Infrastructure: US$ million 4,693 (27 percent) | PV 3,591 (27 percent)
    - Social Spending: US$ million 5,661 (32 percent) | PV 3,356 (25 percent)
    - Budget Financing: US$ million 1,368 (8 percent) | PV 885 (6 percent)
    - Other: US$ million 5,932 (33 percent) | PV 3,655 (42 percent)
    - For debt management operations: US$ million 5,000 (28 percent) | PV 5,000 (37 percent)

### Realism of baseline and fiscal consolidation assumptions
- Baseline assumes an improvement of the fiscal primary balance of 3.3 percentage points of GDP over three years in 2022–24.
  - This improvement falls in the top quartile of the distribution for LICs.
  - Staff considers this realistic and in line with authorities’ consolidation plans under the program.
- Supporting considerations:
  - Execution of FY2021/22 budget and careful expenditure management in face of unanticipated pressures in FY2022/23.
  - Medium-term plans to strengthen tax revenues and streamline recurrent expenditures (particularly wages and transfers to public sector entities).
  - Plans to improve public investment management and budgetary controls.
  - Actions taken during the pandemic to broaden the tax revenue base, providing fiscal space (e.g., gradual approach to adjusting domestic fuel prices during 2022).
  - Planned actions to identify offsets to compensate for expenditure pressures in FY2022/23 while reducing the primary balance below budgeted levels.
- Growth assumptions:
  - Return of real GDP growth to its long-term potential following the strong recovery from the COVID–19 shock in 2021 underpins the near-term growth trajectory.
  - Export growth projected to be higher than in the recent past, with exports of goods and services recovering from the 2020 global shock and by 2029 returning to a similar share of GDP as observed in 2015.

### Country classification and applied stress tests
- Kenya’s debt carrying capacity assessed as Medium.
  - Composite Indicator (CI) Index value: 3.02.
  - CI incorporates IMF October 2022 WEO projections and 2021 World Bank CPIA.
  - CI marginally lower relative to last DSA due to weaker global growth outlook and slightly lower projected import coverage of reserves, partly offset by upward revisions in real growth, remittances-to-GDP, and CPIA score.
- Tailored stress tests included:
  - Combined contingent liabilities stress test.
  - Market financing shock applied (for market-access countries) to assess rollover risks from deterioration in global risk sentiment, temporary nominal depreciation, and shortening of maturities of new external commercial borrowing.

### External debt sustainability analysis (key indicators and stress results)
- External debt burden indicators in terms of exports breach thresholds under the baseline, producing a mechanical high-risk signal.
  - PV of PPG external debt-to-exports solvency indicator remains above the threshold (180 percent) through 2025.
  - Debt service-to-exports liquidity indicator exceeds its threshold (15 percent) until 2030.
  - Solvency indicator gradually declines as exports recover.
  - Liquidity indicator’s long-term decline is interrupted by Eurobond repayments in 2024 and 2028 and rollover of external bank loans due in 2025.
- Improvement relative to last DSA:
  - Stronger-than-anticipated fiscal outturn in FY2021/22.
  - Planned rationalization of capital spending in FY2022/23 leading to lower-than-previously anticipated external financing.
  - Faster recovery of tourism.
  - Boost to exports from higher export prices in 2022 linked to global developments.
  - Offsetting factor: higher projected nominal interest rates increasing PV of debt (impact of floating-rate external loans and new external commercial and domestic debt).
- Specific indicator levels and dynamics:
  - PV of PPG external debt as share of GDP remains well below the 40 percent indicative threshold throughout the projection period.
    - Expected to decline from 27 percent in 2021 to 18 percent in 2042.
  - External debt service-to-revenue ratio exceeds its threshold in 2024 (reflecting maturing Eurobond).
- Stress test sensitivities:
  - Under the most extreme shock (shock to export growth), PV of debt-to-exports and debt service-to-exports breach thresholds over the entire medium-term projection period.
  - Under the most extreme one-time depreciation scenario, debt service-to-revenue ratio can potentially breach the threshold in 2023–26 and in 2028.
- Market financing pressures:
  - Market liquidity risks ranked as moderate.
  - Kenya’s EMBI spread: 641 basis points as of November 14, 2022 (above threshold of 570 basis points), having come down from highs prior to the elections.
  - Gross financing needs are below high-risk threshold (14 percent of GDP).
  - Fiscal consolidation under IMF-supported EFF/ECF program would help keep gross financing needs below the threshold.
  - Persistent deterioration in global market conditions would exacerbate financing risks.
  - Shift toward domestic deficit financing calls for monitoring given elevated domestic interest rates.

### Public debt sustainability analysis (key indicators and stress results)
- PV of total public debt-to-GDP ratio remains above the 55 percent benchmark (for medium debt-carrying capacity) until 2025, generating a mechanical high-risk signal.
  - Public sector debt projected to peak in 2021–22:
    - PV terms: 61.6 percent of GDP in 2021 to 61.7 percent in 2022.
  - Thereafter a steady decline is projected.
  - PV of public debt-to-revenue ratio projected to decline from 369 percent in 2021 to 115 percent in 2042 with fiscal consolidation.
- Stress tests indicate:
  - PV of debt-to-GDP ratio likely to remain above its indicative benchmark for most of the projection period under stress scenarios and even in the historical scenario.
  - Under the most extreme combined contingent liabilities shock, PV of public debt-to-GDP would breach 55 percent through 2029.
- Implication:
  - Importance of ambitious reform agenda to reorient economy to private-sector and export-oriented growth drivers to durably reduce debt-related vulnerabilities.

### Risk rating, vulnerabilities, and mitigation factors
- Overall assessment: Kenya’s overall and external public debts are sustainable but remain at high risk of debt distress.
- Mechanical risk signals: sustained breaches of sustainability thresholds under baseline for:
  - PV of external debt-to-exports.
  - External debt service-to-exports ratios.
  - PV of overall public debt-to-GDP ratio.
- Factors mitigating mechanical risk signals:
  - Decisive actions in 2020–21 to limit deficit increases from global shocks and to broaden the tax base.
  - Multi-year fiscal consolidation under IMF-supported EFF/ECF program to reduce deficits and increase tax revenue.
  - Consistently strong remittances supporting external sustainability and a more favorable outlook for exports.
  - Generally smooth external debt service profile on a declining trajectory as share of exports and public revenues, with plans to further optimize if market conditions are favorable.
  - Close attention to SOE risks and EFF/ECF commitment to limit fiscal support impacts (e.g., via offsets).
  - Ongoing efforts under SDFP to rationalize public investments with rigorous criteria.
  - Efficient infrastructure investment expected to raise growth and export potential, supporting external sustainability.

### Conclusions on fiscal consolidation and debt trajectory
- Fiscal consolidation under the IMF-supported program would achieve and surpass the debt-stabilizing primary balance.
- Debt projected to begin declining as a share of GDP starting in 2023.
- Indicators measured against exports expected to gradually improve with export recovery and competitiveness-enhancing reforms under EFF/ECF.
- Given magnitude of mechanical threshold breaches under the baseline, consolidation efforts need to be sustained over the medium term to restore fiscal space and reduce debt-related risks.
- Notable points:
  - PV of total public debt-to-GDP remains above the 55 percent indicative threshold, but authorities’ commitment to fiscal consolidation under the program safeguards debt sustainability.
  - Measures already taken include permanent broadening of tax revenue base and expenditure savings.
  - Multiyear fiscal consolidation plan in the 2022 Budget Policy Statement (BPS) and FY2022/23 Budget premised on conservative revenue projections and commitment to additional policy steps under the EFF/ECF program.
  - Authorities preparing a Supplementary FY2022/23 Budget aligned with IMF-supported EFF/ECF objectives.
  - Kenya’s PV of external debt as a share of GDP is well below 40 percent and expected to decline.
  - Borrowing plan relies on balanced mix of commercial and concessional financing, supported by limits on external borrowing under EFF/ECF and PPAs under SDFP to improve debt transparency.

*IMF staff report excerpt (Kenya): paragraphs 15–27, external and public debt sustainability analysis.*

### 28.      Debt sustainability is also supported by stable and strong remittances, Kenya’s

### Debt sustainability is also supported by stable and strong remittances, Kenya’s

### Factors supporting debt sustainability
- Stable and strong remittances amounting to 32 percent of exports of goods and services in 2021 would continue to be an important source for foreign currency receipts going forward.
- Relatively smooth debt service profile—except for maturing Eurobonds and external bank loans in 2024, 2025, and 2028—is on a clear declining trajectory over the projection period, signaling a strengthening in debt servicing capacity.
- Authorities’ commitment to absorb the fiscal costs associated with materialization of SOE-related contingent liabilities with a limited impact on the programmed fiscal envelope will help avoid further deterioration in the public sector balance sheet.
- Protracted breaches of most debt burden indicators are a source of concern, but the mitigating factors above help support the debt sustainability assessment.

### Risks, uncertainties, and vulnerabilities
- Assessment is subject to heightened uncertainty in the global environment and a narrow scope for deviations from the domestic reform agenda underpinning the baseline.
- Kenya is exposed to heightened risks to the global outlook through international trade and financing channels.
- Intensification of global spillovers from the war in Ukraine could drive persistent investor concerns about the prospects of frontier economies and increase the cost of financing.
- Faster-than-projected tightening of monetary policy in major economies could further tighten financing conditions and result in decline in demand for Kenya exports from the main trading partners.
- Domestic government bond holdings by pension funds and commercial banks expose the economy to feedback between sovereign and financial sector risks.
- The need to rollover maturing external commercial debt exposes the country to risks from a liquidity squeeze.
- Delays in the implementation of structural reforms, or shocks to the global demand for commodities, could lead to growth in exports that is lower than the one expected in the baseline.
- Even with the strong commitment by authorities to fiscal consolidation, there is a risk for slippages especially in the long run.
- Crowding-in effect of the fiscal consolidation into private sector growth might take longer to materialize.

*Source: Excerpt from IMF country report content unit 1kenea2022003.*

### 30.      The authorities broadly shared Fund staff’s assessment, emphasizing that reducing

### 1kenea2022003 - 30.      The authorities broadly shared Fund staff’s assessment, emphasizing that reducing

### Authorities' assessment and policy stance
- The authorities broadly shared Fund staff’s assessment, emphasizing that reducing debt vulnerabilities is a key priority to support Kenya’s developmental agenda.
- They stressed the indispensable role of sustainable debt financing in meeting the infrastructure needs of Kenya’s vibrant economy.
- The authorities highlighted determination to:
  - continue to extend the maturity of domestic debt;
  - pursue a financing strategy that balances domestic and external financing;
  - rely primarily on concessional financing; and
  - access international capital markets judiciously.
- The authorities reiterated strong commitment to debt transparency.
- They expressed confidence that passage of the new, national debt ceiling in present value terms, expected to be a priority for the new parliament, will serve as a credible anchor of their medium-term fiscal policies.
- The authorities noted active efforts to undertake debt management operations to lower the costs of debt and refinancing risks, particularly by seeking to refinance maturing commercial debt with long-dated debt instruments.

### Key baseline debt and external sector projections (selected figures preserved exactly as presented)
- External debt (nominal), in percent of GDP (historical and projections): 52.6; 60.0; 60.3; 61.5; 62.9; 65.1; 66.5; 67.3; 68.7; 70.3; 70.3; 66.7; 46.5; 67.5.
- Public and publicly guaranteed (PPG) external debt, in percent of GDP: 30.3; 35.4; 34.5; 35.0; 34.4; 33.6; 33.1; 32.6; 32.7; 31.8; 24.0; 26.0; 33.0.
- Change in external debt (percent of GDP): 2.6; 7.4; 0.3; 1.2; 1.4; 2.2; 1.4; 0.8; 1.4; -0.2; -0.7.
- Identified net debt-creating flows (percent of GDP): 0.8; 3.9; -0.1; 2.1; 1.5; 1.1; 0.6; 0.5; 0.3; -1.2; -1.9; 2.1; 0.3.
- Non-interest current account deficit (percent of GDP): 4.0; 3.6; 4.0; 4.3; 3.6; 3.6; 3.4; 3.3; 3.4; 2.8; 3.1; 5.5; 3.4.
- Exports (percent of GDP): 11.4; 9.6; 10.7; 12.0; 12.8; 13.3; 13.7; 14.0; 14.2; 16.9; 25.7.
- Imports (percent of GDP): 20.3; 17.6; 19.8; 21.6; 22.0; 22.2; 22.3; 22.5; 22.9; 24.3; 32.4.
- Net current transfers (negative = inflow, percent of GDP): -5.3; -4.9; -5.5; -5.8; -5.9; -5.9; -5.9; -6.0; -6.1; -6.2; -6.5; -5.1; -6.0.
- Net FDI (negative = inflow, percent of GDP): -0.4; -0.6; 0.0; -0.6; -0.8; -0.9; -1.1; -1.2; -1.3; -2.0; -2.9; -0.9; -1.3.
- Endogenous debt dynamics (percent of GDP): -2.8; 0.8; -4.0; -1.6; -1.3; -1.5; -1.6; -1.7; -1.9; -2.0; -2.2.
  - Contribution from nominal interest rate (percent): 1.2; 1.2; 1.2; 1.4; 1.8; 1.8; 1.7; 1.7; 1.6; 1.7; 1.4.
  - Contribution from real GDP growth (percent): -2.4; 0.1; -4.1; -3.0; -3.1; -3.3; -3.3; -3.4; -3.5; -3.7; -3.5.
  - Contribution from price and exchange rate changes (percent): -1.7; -0.4; -1.1.
- Residual (percent of GDP): 1.8; 3.6; 0.3; -0.8; -0.1; 1.0; 0.8; 0.3; 1.1; 1.0; 1.2; 1.0; 0.7.
- Sustainability indicators:
  - PV of PPG external debt-to-GDP ratio (percent): 27.4; 26.6; 26.8; 26.1; 25.6; 25.1; 25.0; 24.2; 17.7.
  - PV of PPG external debt-to-exports ratio (percent): 256.1; 221.5; 208.6; 195.9; 186.5; 179.8; 175.4; 143.4; 68.8.
  - PPG debt service-to-exports ratio (percent): 35.0; 25.8; 23.5; 22.6; 20.5; 29.6; 21.2; 19.2; 15.8; 14.5; 7.3.
  - PPG debt service-to-revenue ratio (percent): 23.8; 15.1; 15.3; 15.7; 15.2; 22.3; 16.5; 15.2; 12.6; 13.3; 9.0.
- Gross external financing need (Million of U.S. dollars): 24,024; 22,467; 23,437; 25,575; 26,016; 28,701; 28,551; 29,626; 30,403; 36,776; 56,928.
- Key macroeconomic assumptions (selected):
  - Real GDP growth (percent): 5.1; -0.3; 7.5; 5.3; 5.1; 5.5; 5.5; 5.5; 5.5; 5.5; 5.6; 4.4; 5.4.
  - GDP deflator in US dollar terms (change in percent): 3.5; 0.9; 1.8; 0.6; -2.2; 0.6; 1.3; 1.6; 0.7; -0.1; -0.2; 4.5; 0.2.
  - Effective interest rate (percent): 2.6; 2.2; 2.1; 2.4; 3.0; 3.0; 2.8; 2.7; 2.5; 2.5; 2.2; 2.3; 2.6.
  - Growth of exports of G&S (US dollar terms, in percent): -0.8; -15.4; 21.8; 18.9; 9.9; 10.1; 0.2; 8.9; 8.3; 9.7; 10.0; 2.2; 10.1.
  - Growth of imports of G&S (US dollar terms, in percent): 1.2; -13.2; 23.3; 16.0; 4.3; 7.4; 7.5; 7.7; 8.0; 7.4; 8.8; 3.6; 7.7.
  - Grant element of new public sector borrowing (in percent): 26.8; 28.5; 22.1; 24.4; 24.2; 25.3; 28.2; 31.6; 25.2.
  - Government revenues (excluding grants, in percent of GDP): 16.8; 16.4; 16.5; 17.3; 17.4; 17.6; 17.7; 17.6; 17.8; 18.4; 20.7; 16.9; 17.9.
  - Aid flows (Million of US dollars): 1,476; 1,841; 1,785; 2,133; 2,300; 2,749; 3,103; 3,114; 3,195; 3,923; 5,576.
  - Grant-equivalent financing (in percent of GDP): 1.0; 1.1; 1.3; 1.2; 1.1; 1.1; 1.0; 0.8; 1.1.
  - Grant-equivalent financing (in percent of external financing): 31.8; 33.8; 26.7; 29.6; 29.9; 31.5; 35.3; 41.4; 31.0.
  - Nominal GDP (Million of US dollars): 100,328; 100,931; 110,519; 117,068; 120,322; 127,770; 136,548; 146,277; 155,325; 201,910; 341,482.
  - PV of external debt (memorandum, percent): 53.2; 53.1; 53.3; 57.6; 59.0; 59.8; 61.0; 62.7; 60.3.
  - Total external debt service-to-exports ratio (percent): 170.3; 188.3; 160.0; 141.2; 133.5; 134.8; 119.7; 112.9; 104.2; 79.7; 41.6.
  - PV of PPG external debt (Million of US dollars): 30,279; 31,148; 32,247; 33,352; 34,979; 36,723; 38,816; 48,939; 60,316.

### Public sector debt (baseline and projections, selected figures preserved)
- Public sector debt (percent of GDP): 59.1; 68.0; 67.8; 68.6; 67.0; 64.9; 63.0; 61.1; 59.6; 51.0; 30.0; 52.0; 59.7.
- Of which: external debt (percent of GDP): 30.3; 35.4; 34.5; 35.0; 34.4; 33.6; 33.1; 32.6; 32.7; 31.8; 24.0; 26.0; 33.0.
- Change in public sector debt (percent of GDP): 2.6; 8.9; -0.1; 0.7; -1.6; -2.1; -1.9; -1.9; -1.5; -1.8; -2.3.
- Identified debt-creating flows (percent of GDP): 2.3; 7.8; 0.6; -2.4; -2.3; -2.2; -2.0; -2.1; -2.1; -2.4; -2.8; 2.6; -2.3.
- Primary deficit (percent of GDP): 3.4; 3.8; 2.7; 1.4; 0.3; -0.5; -0.8; -0.8; -0.9; -0.9; -1.3; 3.5; -0.6.
- Revenue and grants (percent of GDP): 17.0; 16.7; 16.7; 17.5; 17.6; 17.9; 18.0; 17.9; 18.1; 18.7; 21.0; 17.3; 18.2.
- Primary (noninterest) expenditure (percent of GDP): 20.4; 20.4; 19.4; 18.8; 18.0; 17.4; 17.2; 17.1; 17.2; 17.8; 19.7; 20.8; 17.6.
- Automatic debt dynamics (percent of GDP): -1.2; 4.0; -2.1; -3.7; -2.6; -1.6; -1.2; -1.2; -1.2; -1.5; -1.4.
  - Contribution from average real interest rate (percent): 2.4; 2.6; 1.7; -0.3; 0.7; 1.9; 2.2; 2.1; 1.9; 1.2; 0.2.
  - Contribution from real GDP growth (percent): -2.7; 0.1; -4.8; -3.4; -3.3; -3.5; -3.4; -3.3; -3.2; -2.8; -1.7.
- Residual (percent of GDP): 0.4; 1.1; -0.7; 3.1; 0.7; 0.1; 0.1; 0.1; 0.7; 0.6; 0.5; 0.7; 0.7.
- PV of public debt-to-GDP ratio (percent): 61.6; 61.7; 60.0; 57.8; 55.9; 54.0; 52.5; 44.0; 24.1.
- PV of public debt-to-revenue and grants ratio (percent): 368.7; 353.1; 340.4; 322.5; 310.9; 301.0; 289.6; 235.3; 114.9.
- Debt service-to-revenue and grants ratio (percent): 57.4; 54.1; 55.9; 52.0; 57.0; 62.7; 54.5; 49.9; 43.9; 39.1; 17.0.
- Gross financing need (percent of GDP): 13.2; 12.8; 12.1; 10.5; 10.4; 10.7; 9.0; 8.1; 7.1; 6.4; 2.3.

### Sensitivity and stress-test results (high-level)
- Public and PPG external debt indicators present various stress-test scenarios across 2022–32 (Tables 3–4 and Figures):
  - Table 3 shows baseline PV of debt-to-GDP and PV of debt-to-exports ratios and multiple alternative and bound tests (e.g., B1 Real GDP growth; B2 Primary balance; B3 Exports; B5 Depreciation; combinations).
  - Table 4 presents sensitivity analysis for public debt, with baseline public debt in 2022 = 62 (percent of GDP) and projected values under alternative scenarios and bound tests (e.g., A1 historical averages, B1–B6 bound tests, C1–C4 tailored tests).
- Figures highlight most extreme shocks:
  - Most extreme shock for several indicators includes one-time depreciation and combined contingent liabilities.
  - Market-financing risk indicators flag potential heightened liquidity needs; Gross financing needs (GFN) breach benchmark: Yes; GFN benchmarks: 14.
  - EMBI spreads value reported as 570.
- Stress-test thresholds and breaches:
  - Thresholds reported for several indicators (e.g., PV of debt-to-GDP ratio threshold 40; debt service-to-revenue ratio threshold 180 in Table 3 context; public debt benchmark 55 in Table 4).
  - Bold values in sensitivity tables indicate a breach of the threshold.

### Diagnostic tools and drivers of debt dynamics
- Figure analyses include:
  - Drivers of debt dynamics decomposition for external debt and public debt showing contributions of current account + FDI, nominal interest rate, real GDP growth, price and exchange rate changes, residuals.
  - Realism tools plotting public and private investment rates and contribution to real GDP growth; fiscal adjustment and possible growth paths under different fiscal multipliers.
  - Market-financing risk indicators illustrating maximum gross financing needs over a 3-year horizon and EMBI spreads.

### Implicit policy implications reflected in the material
- Emphasize reducing debt vulnerabilities while preserving access to sustainable debt financing for infrastructure.
- Prioritize extending domestic debt maturity and balancing domestic vs external financing.
- Rely primarily on concessional financing and judicious international market access.
- Use debt management operations to lower cost and refinancing risks, including refinancing maturing commercial debt with long-dated instruments.
- Maintain debt transparency and implement a present value-based national debt ceiling as a medium-term anchor.

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

### Introduction

### Introduction

### Overview
- Kenyan authorities appreciate the robust policy discussions during the fourth reviews under the Extended Credit Facility and Extended Fund Facility (ECF/EFF) arrangements and broadly share staff’s appraisal and recommendations.
- Economy buffered external and domestic shocks, including spillovers from the war in Ukraine and multi-season droughts, with resilience reflecting economic diversification.
- New administration committed to a bottom-up economic development approach and revenue-based fiscal consolidation to place public debt on a sustainable footing.
- Primary policy objective: maintain price stability to support robust and inclusive growth, anchored on strong policies promoting sound macroeconomic management.
- Authorities committed to fulfilling ECF/EFF program commitments and National Development Plan objectives; implementing an 8-point Economic Stimulus Program focused on supporting Micro, Small and Medium-sized Enterprises (MSMEs), youth, and women.

### Program Performance
- All quantitative targets were met; some structural benchmarks delayed amid elections and political uncertainty.
- Planned Eurobond issuance of $1.1bn for first half of 2022 was suspended due to market access difficulties.
- All end-June 2022 and continuous QPCs were met.
- Tax collection and primary balance overperformed by 0.7 and 1.7 percentage points of GDP, respectively.
- Net international reserves overperformed the adjusted target.
- End-June 2022 IT targets on priority social expenditure overperformed.
- No exchequer requests outstanding for more than 90 days were accumulated.
- MPCC met with the three-month average of inflation within the target band as of end-June 2022.
- Structural reform delays: 1/3 SBs (end-July-August) completed on time; authorities committed to complete pending items by end-2022.
- Specific pending items: action plan to restore Kenya Power and Lighting Company (KPLC) medium-term profitability pending internal consultations; circular with action plan for Medium-Term Revenue Strategy (MTRS) issued on August 30; review of fuel pricing mechanism and task force for progressive elimination of fuel subsidy awaiting further consultations.
- Publication of audits of COVID-19 vaccine spending completed by July 2021 with reports for all 47 counties now published.
- Authorities request augmentation of access by 30 percent of quota under the ECF program.
- Authorities request modifications of end-December 2022 and end-June 2023 targets on net international reserves and end-June 2023 targets on tax revenues and primary fiscal balance; proposing new targets for end-December 2023 and structural benchmarks.
- Lower reserves path reflects unfavorable global financial conditions in FY21/22, rationalization of public investment projects reducing foreign project finance inflows, and a more cautious view on private sector capital flows.

### Recent Economic Developments and Outlook
- Growth expanded to 5.6 percent in 2022, down from 7.5 percent in 2021.
- Growth supported by quick/ orderly political transition, robust expansion in credit to the private sector, service sector strength, and remittances.
- Near-term outlook subject to upside risks: authorities’ strong program performance and contingency measures; smooth government transition; better-than-expected rainfall improving agricultural production and food security; potential rebound in confidence, investment, and market access on resolution of global uncertainty.
- Consumer prices increased from 5.4 percent in January to 9.5 percent in November 2022; rise driven by higher food prices from reduced agricultural production, global supply constraints, and higher import prices.
- Current account deficit expected to widen from 5.2 percent of GDP in 2021 to 5.7 percent of GDP in 2022 due to elevated fuel import bill, partially offset by improving services balance and higher remittances.
- Gross international reserves cover 3.5 months of imports.
- Authorities confident that materialization of upside potential on external fiscal financing would support a higher level of reserves than in the current baseline.

### Fiscal Policy and Debt Management
- Authorities committed to fiscal and debt sustainability through multi-year fiscal consolidation to place public debt on a downward trajectory.
- Actions: bolster revenue collection, control overall spending, prioritize investment expenditures, and address drought-related food price increases and food insecurity in arid and semi-arid regions.
- Mitigating options: contingency measures to achieve program objectives, close engagement with development partners, and a tailored CD strategy including plans to develop an MTRS.
- Kenya Revenue Authority (KRA) commitments:
  - Develop and implement risk-based compliance strategies.
  - Strengthen KRA’s audit function by rebuilding audit capacity, upgrading staff skills, and strengthening feedback loops between disputes and audit areas.
  - Strengthen data analytics for compliance risk management.
  - Improve VAT compliance and broaden VAT exemption verification at customs to new areas, including those administered under the East African Community Customs Management Act, by end-June 2023.
  - Improve taxpayer service and use of data science to support voluntary compliance and timely services.
  - Meet any FY2022/23 tax target gap arising from court decision not upholding the Minimum Alternative Tax through administrative measures.
- Commitment to contain spending pressures and strengthen PFM:
  - Rationalization of non-priority spending equal to 1.7 percentage points of GDP in FY2022/23 to offset pressures and protect priority social spending.
  - Submit supplementary FY2022/23 Budget consistent with program objectives by end-January 2023.
  - National Treasury to improve budget processes, controls, and fiscal risk management.
- SOE reform and subsidy policy:
  - Reduce extraordinary SOE support; identify cost-saving reforms at Kenya Airways (KQ) and KPLC.
  - Plan to eliminate fuel subsidies; domestic fuel prices adjusted since September; petrol subsidies fully eliminated during first week of new government with modest cross-subsidization to support kerosene and diesel.
  - Authorities expect landed costs of diesel and kerosene to drop further in December and January 2023, effectively eliminating need for subsidies.
- Debt management measures:
  - Aim for overall budget target below approved budget in FY22/23 to deliver a more favorable debt/GDP path.
  - Reduce refinancing risks by issuing liquid benchmark domestic government bonds across all maturities.
  - Increase utilization of committed external concessional financing.
  - Tap international financial markets to roll over maturing Eurobonds and optimize external debt service profile if market conditions permit.
  - Strengthen Public Debt Management Office (PDMO) and deepen domestic debt securities market via reforms by National Treasury (NT) and CBK.
  - Resubmit to Parliament legislative amendments to harmonize public debt definition and replace nominal debt limit with a debt anchor centered on two pillars by end-March 2023.

### Monetary, Exchange Rate, and Financial Sector Policies
- Central Bank of Kenya (CBK) objectives: maintain headline inflation within target range and a flexible, market-determined exchange rate system with interventions limited to smoothing excess market volatility.
- CBK to issue foreign exchange market guidelines aligned with best practices and relevant elements of the FX Global code.
- Monetary policy actions in 2022:
  - May 2022: CBR increased by 50 basis points (bps).
  - September 2022: CBR increased by 75 basis points.
  - November 2022: CBR increased by 50 basis points.
  - Total policy rate increase in 2022: 175 bps.
- Monetary stance is data dependent; current inflation outside CBK’s band largely driven by food and fuel prices; policy aims to minimize second-round effects and anchor inflation expectations; CBK stands ready to react further if warranted.
- CBK modernization under 2021 White Paper includes introducing a Central Securities Depository (CSD) to improve monetary policy transmission and emphasis on effective communication.
- Banking sector: stable, profitable, resilient; CBK emphasizes preservation of capital and liquidity buffers, monitoring FX exposures, reducing NPLs, maintaining adequate provisioning, improving asset quality, and monitoring operational risks from digitalization and corporate exposures.
- By September 22, more than half of banks had received no-objections certificates from the CBK on their risk-based credit pricing models.
- Climate-related initiatives:
  - CBK’s 2021 Guidance on Climate-Related Risk Management expected to help banks integrate climate risks into governance, strategy, risk management, and disclosure frameworks.
  - Authorities seeking positive consideration under the Resilience and Sustainability Trust (RST) aligned with climate policies.
  - Ongoing CCRD with the WB targeted to be completed by end-June 2023.

### Structural, Transparency, and Governance Reforms
- Structural reforms to improve business environment, boost investment, create employment, and raise potential growth.
- Public procurement improvements:
  - Acquire e-procurement system to integrate with IFMIS and automate Procurement Act application.
- Wage bill and payroll reforms:
  - Implement common payroll system linked to IFMIS across all National Government ministries/departments and all counties (MDCs) by end-December 2023.
- Public Investment Management (PIM) improvements to deliver value for money.
- Planned special audit on supplementary budget spending, including under Article 223 of the Constitution, to ensure transparency and accountability.
- Implementation of LOI commitments:
  - Timely action on Auditor-General’s audit findings and recommendations, including COVID-19 spending audits.
  - Align asset declaration and conflict of interest legal frameworks with international standards.
  - Strengthen judiciary capacity to adjudicate corruption-related criminal cases.
  - Publish beneficial ownership of companies and legal persons.
  - Implement actions to address corruption vulnerabilities from 2021 National Risk Assessment, including prudent debt policies and spending efficiency reforms.
- AML/CFT reforms:
  - Timely actions to address strategic deficiencies identified in the Kenya 2022 Mutual Evaluation Report by ESAAMLG.
  - Submit draft amendments on the Proceeds of Crime and Anti-Money Laundering Act to the National Assembly and enhance due diligence through risk-based supervision.
- Development initiatives consistent with Kenya Vision 2030:
  - Hustler Fund (Financial Inclusion Fund), National Social Security Fund Reforms, affordable housing, and SOE privatization to reduce fiscal risks.
  - Preliminary estimates show very limited impact on national budget; affordable housing and water supply to be delivered through public private partnerships.
  - Financial Inclusion Fund envisioned to secure private sector participation with limited budgetary implications.
  - Increase National Social Security Fund contributions to 6 percent each from employee and employer to bolster national savings and strengthen social safety net.

### Conclusion and Request
- Authorities committed to policies maintaining macroeconomic stability, resilience, fiscal and debt sustainability, and enhancing buffers against external shocks.
- Policy efforts aimed at unlocking growth potential in line with the National Development Plan and new administration priorities.
- Authorities seek Executive Directors’ support to conclude the fourth program reviews to catalyze additional external support.

*Source: 1kenea2022003 - Introduction*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1kenea2022003.pdf_