## 1kenea2023001

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### Executive summary and program requests
- Kenya faces multiple near-term challenges: limited fiscal and external buffers, elevated cost of living, exchange rate pressures, tight financial conditions, and global headwinds.
- Authorities request:
  - Extension of the EFF/ECF arrangements by 10 months through April 1, 2025.
  - Blended augmentation of access by 75 percent of quota under the EFF/ECF arrangements.
  - Support under a 20-month Resilience and Sustainability Facility (RSF) with access of 75 percent of quota (SDR407.1 million, about US$544 million).
  - For end-June 2023 QPCs under the EFF arrangement: waiver of nonobservance for the tax revenues target and waiver of applicability for other end-June 2023 PCs.
  - Modification of the end-December 2023 target on net international reserves and its adjustors.

*Program performance highlights*
- All end-December 2022 quantitative performance criteria (QPC) and continuous performance criteria (PC) since prior reviews: met.
- End-December 2022:
  - Indicative target on priority social spending: met.
  - Indicative target on exchequer requests: missed by 0.2 percent of GDP.
  - Structural benchmarks (SBs) for January–April 2023: met.
  - Two end-December 2022 SBs: one not met but implemented with delay (KPLC action plan implemented in May 2023); the SB on fuel price decisions outstanding and proposed to be reset to end-August 2023.
- Monetary Policy Consultation Clause (MPCC): triggered for end-December 2022; would be triggered for end-June 2023 if inflation in June stays above 6.75 percent.

*Source: IMF staff report — EXECUTIVE SUMMARY (Kenya), May 8–22, 2023.*

### Recent macroeconomic and financial developments
- Output and inflation:
  - Real GDP growth in 2022: 4.8 percent; projected GDP growth in 2023: 5 percent; medium-term growth: 5.3–5.4 percent.
  - Headline inflation in May 2023: 8 percent y/y; inflation target band: 2.5–7.5 percent (inflation remained above band since June 2022).
  - Producer price inflation in 2022: at a decade high and well above consumer price inflation.
- External sector and reserves:
  - Current account deficit in 2022: 5.1 percent of GDP; projected to narrow to 4.8 percent of GDP in 2023.
  - Gross reserves expected at 3.3 months of prospective imports in 2023 despite H2 decline.
  - Year-to-date change in Shilling per US$ as of June 29, 2023: 13.8 percent; year-on-year change as of June 29, 2023: 19.2 percent y/y (compared to 9 percent y/y by end-2022).
  - Real effective exchange rate: depreciated 7.2 percent between end-2022 and May 2023; staff estimates REER gap in range 4–15 percent for 2022.
- Monetary stance and FX market:
  - CBK tightened policy rate by a cumulative 350 basis points since May 2022, including a 100 basis points hike on June 26, 2023.
  - Dollar shortages widened spreads; CBK actions since late-March include restarting the interbank FX market, issuing a Kenyan Foreign Exchange Code, reinstating two inter-dealer brokers, and verbal clarifications on circulars.
  - Government introduced a rolling six-month credit fuel import scheme; CBK intervened with modest but persistent FX sales; gross official reserves remain adequate per program definitions.
- Banking sector and financing:
  - Banking sector capital and liquidity: well above statutory requirements (core CAR: 15.5 percent; total CAR: 18.4 percent as of March 2023).
  - Nonperforming loans (NPLs) in 2022Q4: 11.1 percent of total gross loans (other reported figure: 14 percent in March 2023 table notes).
  - Private credit growth: resumed, 11.6 percent in March 2023 after slowdown since mid-2022.
  - Banks’ FX loans, deposits, and liabilities shares continue to rise; larger on-balance sheet net short FX open positions and off-balance sheet net long positions (majority swaps with clients).

### Fiscal stance, execution, and debt dynamics
- FY2022/23 and FY2023/24 budgets:
  - Supplementary I FY2022/23 Budget adopted targeting a smaller primary deficit than program baseline: 1.0 vs. 1.1 percent of GDP.
  - Supplementary II (approved June 22, 2023) introduces targeted cuts of 0.2 percentage points of GDP; approved version exceeded end-June 2023 target by 0.04 percent of GDP.
  - Draft FY2023/24 budget targets a primary surplus of 0.7 percent of GDP (higher than 0.3 percent under 4th reviews) predicated on a comprehensive revenue package for 1.6 percent of GDP (Finance Bill measures ~1.5 percent noted).
- Revenue performance and corrective measures:
  - End-April 2023 primary balance: surplus of 1.1 percent of GDP through April 2023.
  - For end-June 2023 QPCs under the EFF, tax revenues likely to be missed; authorities commit to corrective tax measures to ensure FY2023/24 targets are achieved (Rapid Revenue Initiatives and additional measures yielding 0.4–0.6 percent of GDP planned).
- Public debt and sustainability:
  - PV of public debt/GDP expected to peak in 2023 and then decline steadily to below the 55 percent PV threshold by 2028 under the baseline.
  - Public debt is sustainable but remains at high risk of distress.
  - Total outstanding credit to the IMF (including proposed augmentation and RSF) projected at SDR 3,093 million in 2025, or 569.8 percent of quota.
  - Ratios to GDP and gross international reserves peak at 3.5 and 47.2 percent in 2024, respectively.

### Policy priorities and contingency planning
- Policy pillars:
  - Fiscal consolidation: multi-year effort anchored on raising tax revenues and rationalizing spending while protecting priority social spending.
  - Monetary policy: proactive response to inflationary developments and shocks; maintain data dependence and clear communication.
  - External sector: deepen FX market, strengthen reserves, promote exchange rate flexibility as shock absorber.
  - Structural reforms: advance governance, SOE reform and privatization (Privatization Act 2023 submitted), strengthen PFM and public investment management (PIMIS), and address pending bills.
- Contingency planning: staff and authorities emphasize contingency plans given uncertainties; authorities identified budgetary offsets for up to 0.9 percent of GDP for Supplementary FY2023/24 Budget.

### RSF: climate reform package, financing, and expected impacts
- Climate investment needs and gap:
  - Kenya’s updated NDC estimates climate-related investment needs amount to US$62 billion by 2030 (about 6 percent of the 2022 GDP per year over 2023–30 in one section; another section describes as about 7.4 percent — content preserves both presentations as in source).
  - Latest audited data: only US$2.4 billion directed to climate-related investments in 2018 (nearly 80 percent for mitigation).
  - Total estimated cost of adaptation actions up to 2030: US$43.9 billion (90 percent expected from international support).
- RSF modalities and objectives:
  - Requested 20-month RSF arrangement through April 1, 2025 with access of 75 percent of quota (SDR407.1 million, about US$544 million).
  - RSF resources expected to substitute costlier domestic financing, improve public debt dynamics, crowd in private climate finance, and catalyze climate investments.
- Reform Priorities and selected reform measures (RMs):
  - Priority 1 — Incorporate climate risks into fiscal planning and investment framework:
    - RM2: conduct long-term fiscal sustainability analysis under different climate scenarios and publish results in Fiscal Risk Statement starting FY2024/25.
    - RM5: develop standardized climate change and disaster risk methodology for project appraisal.
    - RM8: implement prototype climate budget tagging in key sectors and publish results.
  - Priority 2 — Mobilize climate-revenue and strengthen climate-spending efficiency:
    - RM3: implement carbon pricing in line with IMF recommendations (subject to Parliamentary approval).
    - RM6: adopt priority fiscal incentives in agriculture, water, and land management per draft National Green Fiscal Incentive Policy Framework (draft to be adopted by end-2023).
    - RM7: approve net metering regulation to promote distributed renewable generation.
  - Priority 3 — Enhance effectiveness of frameworks to mobilize climate finance:
    - RM4/RM9: CBK to develop and adopt a green finance taxonomy adapted to Kenya’s updated NDC and issue climate-related disclosure guidelines for banking sector with time-bound targets.
  - Priority 4 — Strengthen disaster risk reduction and management:
    - RM1: adopt National Framework for Climate Services and disseminate a digital early warning system to vulnerable counties (ASALs, coastal regions).
- Simulations and expected macro benefits:
  - DIGNAD model simulations: accelerating adaptation investment, catalyzing climate finance, and raising public investment efficiency to regional frontier could save Kenya nearly 3 percent in output loss (US$71.2 million) and reduce macro-fiscal risks.
  - Example RSF-supported augmentations to FY2023/24 allocations (selected):
    - Renewable energy investments: Ksh.15 billion (US$135 million).
    - Early warning systems dissemination: Ksh.2 billion (US$18 million).
    - National Tree Planting Campaign: Ksh.2.8 billion (US$117 million).
    - National Irrigation Development Project: Ksh.10 billion (US$90 million).

### Risks matrix and downside scenarios
- Risk Assessment Matrix (RAM) highlights (likelihood definitions: “low” <10 percent; “medium” 10–30 percent; “high” 30–50 percent):
  - High-likelihood, high-impact external risks: commodity price volatility; abrupt global slowdown or recession; deepening geo-economic fragmentation.
  - Medium/high domestic risks: systemic financial instability (likelihood: medium; impact: high); emergence of greater-than-expected SOE weaknesses (likelihood: high).
  - Climate-related shocks: likelihood medium; expected impact high — droughts and floods increase frequency (drought cycles now every 2–3 years), with climate-related costs estimated at 2–2.4 percent of GDP per year.
- DSA and stress tests:
  - Kenya’s public debt is sustainable but at high risk of distress; PV of public debt/GDP expected to peak in 2023 then decline to below 55 percent by 2028 under baseline.
  - Natural disaster stress test calibrated on 2008–11 drought shows limited fiscal scope to absorb large climate disasters without jeopardizing debt sustainability.
  - Combined contingent-liability stress tests include a 0.4 percent of GDP exposure from the fuel import scheme.

### Boxes and operational measures to address FX and pending bills
- Box 3 — New Fuel Import Mechanism (government-to-government scheme launched April 2023):
  - Initial duration: nine months through end-December 2023; fuel imported on 6-month credit backed by LCs issued by domestic banks and confirmed by international banks.
  - Based on April 2023 prices: estimated total obligation ≈ US$700 million per month; total obligations estimated at over US$4 billion by end-September 2023.
  - Legal review by Attorney General: arrangements do not give rise to government guarantees of private debt under domestic law; fiscal exposure risks remain if pump prices do not fully passthrough FX valuation losses or if US$ access required due to FX shortages.
  - Authorities committed exchange rate used under scheme would not deviate from prevailing market rate by more than 2 percent.
- Box 1 — Kenyan Banks’ FX Exposure:
  - CBK limits FX risk: Net Open Position (NOP) limit 10 percent of core capital; capital charge for total NOP is 10 percent.
  - Off-balance sheet long positions largely consist of swaps with the oil sector (<6 months maturity) generally rolled over; some Tier-1 banks had larger off-balance sheet NOPs in 2022Q4.
- Box 2 — Pending Bills:
  - Total outstanding pending bills ≈ Ksh.641 billion or 4.4 percent of GDP at end-December 2022 (≈ Ksh.567 billion at end-December 2021).
  - SCs and SAGAs account for ≈ Ksh.401 billion of the outstanding stock.
  - NT developing comprehensive, time-bound strategy to validate and clear pending bills; task force to submit strategy to Cabinet by end-September 2023 (proposed SB).

### SOEs, SCs, and governance reforms
- SOE fiscal exposure and reform actions:
  - KPLC liquidity gap: Ksh.64 billion as of FY2021/22; Cabinet approved action plan on May 16, 2023 to restore medium-term profitability and recover liquidity gaps; KPLC action plan aims to improve current ratio from 0.5 in FY2021/22 to 0.7 by 2025/26 and to unity by 2025/26 with tariff changes.
  - KQ: negative equity; government servicing guaranteed senior external debt (US$95 million between October 2022 and April 2023); government seeks least-cost strategy for KQ.
  - New Privatization Act 2023 submitted to Parliament to accelerate privatization of SOEs.
- SCs portfolio rationalization:
  - Updated inventory and new classification approved by Cabinet and published by end-July 2023.
  - Ownership Policy for SCs expected to be approved and published by end-October 2023 (proposed SB); draft legal amendments to Parliament by end-February 2024.

### Governance, AML/CFT, and anti-corruption measures
- AML/CFT and beneficial ownership:
  - Draft amendments to address legal and regulatory gaps in AML/CFT framework prepared and planned for submission to Parliament by end-June 2023 (end-June 2023 SB): on-track or implemented with delay in early July per follow-up sections.
  - BRS e-register operational since October 2020; 41 percent of companies had submitted beneficial ownership information as of end-April 2023; continued low reporting hampering effectiveness.
- Anti-corruption and audit follow-up:
  - Draft Conflict of Interest Bill submitted to Parliament in March 2023.
  - Special audit on supplementary budgets (Article 223) to be published by end-September 2023 (SB).

### Data, statistics, and program monitoring
- Statistical improvements and targets:
  - National accounts rebased to 2016 in September 2021.
  - May 2023: inaugural release of Kenya’s International Investment Position for 2015–2021.
  - GFS milestones: quarterly reporting of general government fiscal outturns by February 2024; annual fiscal data of public corporations by February 2024; migration to GFSM 2014 concepts starting with QEBR for Q4 FY2022/23.
- Program monitoring and TMU highlights:
  - QPC/IT test dates: December 31, 2023 and June 30, 2024.
  - Key performance criteria include tax revenue floor, primary balance floor, CBK net international reserves floor, ceilings on PV of new external debt, and continuous ceiling on external payment arrears.
  - MPCC bands: center 5.0 percent; upper band 7.5 percent; lower band 2.5 percent.

*Source: IMF staff report excerpts (KENYA) and Technical Memorandum of Understanding, June 29, 2023.*

*Source: IMF staff report — 1kenea2023001 (Kenya), May–June 2023.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Kenya faces multiple near-term challenges: limited fiscal and external buffers, elevated cost of living, exchange rate pressures, tight financial conditions, and global headwinds.
- Authorities are pursuing a “bottom-up” reform agenda including the Financial Inclusion Fund (“Hustler Fund”), affordable housing, expansion of water infrastructure, privatization of state-owned enterprises (SOEs), and addressing domestic arrears (notably in the roads sector).
- Climate-related shocks (e.g., the multi-season drought) are increasing in frequency and complicate policy trade-offs and intergovernmental coordination.
- Authorities request augmentation of access and extension of the EFF/ECF arrangements to provide time to implement reforms and to put overall public debt/GDP on a downward trend after a prospective temporary worsening in 2023 from faster exchange rate depreciation.
- Authorities are seeking support under a 20-month Resilience and Sustainability Facility (RSF) to advance climate-related reform efforts and catalyze private financing for climate-related initiatives.

### Program Performance
- All end-December 2022 quantitative performance criteria (QPC) and continuous performance criteria (PC) since the last EFF/ECF reviews were met.
- End-December 2022 indicative target on protecting social spending: met.
- End-December 2022 indicative target on exchequer requests: missed due to difficulties in timely mobilization of budget resources.
- Structural benchmarks (SBs) for January–April 2023: met.
- End-December 2022 SBs:
  - Cabinet submission of the action plan for the power company: not met; implemented with a delay in May 2023.
  - SB on fuel price decisions to align with budgeted resources: outstanding and proposed to be reset for end-August 2023.
- End-June 2023 SB on draft amendments to address legal and regulatory gaps in the AML/CFT framework: on-track.
- Under the EFF arrangement, the June 2023 QPC on tax revenues is likely to be missed; authorities commit to corrective measures to remedy underperformance and to ensure FY2023/24 tax targets are achieved.
- Monetary Policy Consultation Clause (MPCC):
  - Triggered for end-December 2022.
  - Would be triggered for end-June 2023 if inflation in June stays above 6.75 percent.
- Monetary policy response: authorities raised the policy rate in March 2023 and further tightened monetary policy in June 2023.

### Recent Macroeconomic and Financial Developments
- Real GDP growth in 2022: 4.8 percent.
- Current account (CA) deficit in 2022: 5.1 percent of GDP (narrowed as non-energy imports declined and exports remained resilient).
- Inflation developments:
  - Headline inflation in May 2023: 8 percent y/y.
  - Inflation target band: 2.5–7.5 percent (inflation remained above the band since June 2022).
  - Producer price inflation in 2022: at a decade high and well above consumer price inflation.
- Monetary tightening: CBK tightened the policy rate by a cumulative 350 basis points since May 2022, including a 100 basis points hike on June 26, 2023.
- Fiscal stance:
  - Supplementary I FY2022/23 Budget adopted targeting a smaller primary deficit than program baseline: 1.0 vs. 1.1 percent of GDP.
  - Budget execution prudent, but mobilizing planned resources proved challenging due to tight external and domestic financing conditions and slowdown in tax collection.
- Exchange rate and FX market:
  - Shilling weakened in 2023, reversing prior real effective appreciation.
  - Year-to-date change in Shilling per US$ as of June 29, 2023: 13.8 percent.
  - Year-on-year change as of June 29, 2023: 19.2 percent y/y compared to 9 percent y/y by end-2022.
  - Real effective exchange rate: depreciated 7.2 percent between end-2022 and May 2023.
  - Dollar shortages widened spreads between interbank FX market and bank-client rates; CBK actions since late-March include restarting the interbank FX market, issuing a Kenyan Foreign Exchange Code, bringing back two inter-dealer brokers, and verbal clarifications on circulars.
  - Government introduced a new rolling six-month credit fuel import scheme to temporarily alleviate FX demand.
  - CBK has intervened with modest but persistent FX sales; gross official reserves remain adequate.
- Banking sector:
  - Capital and liquidity levels: well above statutory requirements though marginally declined recently.
  - Profitability: strong, with significant contributions from FX business.
  - Banks’ shares of FX loans, deposits, and liabilities continue to rise.
  - FX market dysfunction led to larger on-balance sheet net short FX open positions and off-balance sheet net long positions (majority swaps with clients).
  - Private credit growth: rose in April 2023 after a slowdown since mid-2022.
  - Nonperforming loans (NPLs) in 2022Q4: 11.1 percent of total gross loans (partly due to government pending bills and the economic slowdown).
  - Both banks and pension funds shifted demand toward shorter- to medium-term treasury securities amid rising interest rates.

### Focus of the Review
- Realign policy priorities to tackle domestic and external challenges while meeting program objectives:
  - Monetary policy: proactively respond to inflationary developments and shocks, supported by ongoing fiscal consolidation.
  - Fiscal policy: domestic revenue mobilization and contingency plans to ringfence fiscal performance and readiness to recalibrate policies if needed.
  - External sector: strengthen CBK’s reserve position, deepen the FX market, and promote exchange rate flexibility.
  - Structural agenda: advance reforms and address governance concerns to create a solid foundation for resilient growth.
- Contingency planning: considered given elevated uncertainties, to rapidly deploy measures to protect fiscal performance.

### Requests and Proposed Program Modalities
- Authorities request:
  - Extension of the EFF/ECF arrangements by 10 months through April 1, 2025.
  - Blended augmentation of access by 75 percent of quota under the EFF/ECF arrangements as balance of payments support to navigate constrained access to international capital markets and underpin market confidence for 2024, and rephasing of budget support over the extended duration.
  - For end-June 2023 QPCs under the EFF arrangement:
    - Waiver of nonobservance for the tax revenues target.
    - Waiver of applicability for all other end-June 2023 PCs.
  - Modification of the end-December 2023 target on net international reserves and its adjustors.
  - Support under a 20-month RSF with access of 75 percent of quota to complement climate-related efforts.

*Source: IMF staff report — EXECUTIVE SUMMARY (Kenya), May 8–22, 2023.*

### 5.      Most quantitative targets were met but some structural reforms faced implementation

### 5.      Most quantitative targets were met but some structural reforms faced implementation delays

### Program conditionality and targets
- Quantitative performance criteria (QPCs):
  - All end–December 2022 QPCs and the continuous PCs since the 4th EFF/ECF reviews were met.
  - The QPCs on tax revenues and the primary fiscal balance overperformed by 0.4 and 1.5 percentage points of GDP, respectively.
  - Net international reserves (NIR) overperformed by US$226 million.
  - For the end-June 2023 QPCs under the EFF arrangement, preliminary data indicate that the tax target is expected to be missed while others are expected to be met.
  - Authorities commit to take corrective tax revenue measures to ensure underperformance is temporary and does not impact achievement of the FY2023/24 tax targets.
- Indicative targets (ITs):
  - The end–December 2022 IT on priority social expenditure was met.
  - The end–December 2022 IT on exchequer requests outstanding for more than 90 days was missed by 0.2 percent of GDP due to tight liquidity conditions constraining spending below budgeted levels.
- Monetary policy consultation clause (MPCC):
  - The MPCC was triggered for end-December 2022 as the three-month average of headline inflation breached the 2.5–7.5 percent target range by 1.9 percentage points.
  - The MPCC for end-June 2023 would be triggered if inflation in June stays above 6.75 percent.
  - The authorities tightened the monetary policy rate by 100 basis points in June 2023.

### Structural benchmarks and implementation
- Structural benchmarks (SBs):
  - SBs for January–April 2023 were met.
  - One of the two SBs for end-December 2022 was not met but implemented with a delay; the other remains outstanding and is proposed to be reset to end-July 2023.
  - The end-June 2023 SB is on-track.
- End-December 2022 SB outcomes:
  - On May 16, 2023, the Cabinet approved an action plan to restore Kenya Power and Lighting Company’s medium-term profitability and recover liquidity gaps.
  - A taskforce to review the fuel pricing mechanism was constituted in May 2023 after initial delays. The review has started, but delays in establishing the taskforce impacted the timeline; findings are now expected to be publicly communicated by end-August 2023.
- January–June 2023 SBs:
  - Authorities timely submitted the FY2022/23 Supplementary Budget (end-January 2023 SB) and the FY2023/24 Budget (end-April 2023 SB) consistent with program objectives.
  - Authorities plan to submit to Parliament by end-June draft legal amendments to address gaps in the AML/CFT framework (end-June 2023 SB).

### Macroeconomic outlook and risks
- 2023 projections:
  - GDP growth is projected at 5 percent (4.8 percent in 2022).
  - Current account deficit is set to narrow to 4.8 percent of GDP.
  - Gross reserves expected at 3.3 months of prospective imports despite a decline in the second half of the year due to contractual payments.
  - Inflation expected to durably ease into the target band in 2023Q3 on lower global and food prices.
- Medium-term outlook:
  - Growth in 2024 and beyond is projected at 5.3 percent.
  - Inflation will continue easing to the center of the target band supported by projected lower global prices and supportive policies, including further fiscal consolidation.
  - Further increases in exports and remittances and normalization in private capital inflows will support higher reserves and strengthen external buffers.
- Downside risks:
  - Climate-related shocks (including from El Niño) could worsen food insecurity, lower growth, push food prices up, and increase emergency fiscal financing needs.
  - Costs of repeating climate-induced hazards (droughts and floods) are estimated at 2–2.4 percent of GDP per year (Annex III).
  - Elevated uncertainty in major economies’ outlook, spillovers from regional developments (e.g., Sudan), and materialization of public sector contingent liabilities could undermine market confidence and exacerbate fiscal and external pressures.
- Upside scenario:
  - Rapid resolution of global uncertainty and decisive domestic policy responses could support stronger confidence, investment, and earlier prospects for international capital market access.

### Policy discussions and priorities
- Main policy pillars discussed:
  - Reduce debt vulnerabilities and secure the fiscal path via a multi-year fiscal consolidation effort anchored on raising tax revenues and rationalizing spending, while protecting priority social spending.
  - Adopt a more proactive monetary policy, enhance exchange rate flexibility and effective functioning of the FX market, and safeguard financial stability.
  - Advance structural reform and governance agenda to sustain an inclusive, green, and resilient economy.
- RSF support considerations:
  - Integrate climate-related considerations in macro policies and frameworks through green public financial management and climate-sensitive public investment management reforms, carbon pricing, enhancing effectiveness of Kenya’s frameworks to mobilize climate finance, and strengthening disaster risk reduction and management.

### Fiscal policy, Supplementary Budgets, and debt dynamics
- Fiscal execution and financing:
  - Primary balance posted a surplus of 1.1 percent of GDP through April 2023 (compared to the end-June 2023 deficit target of 1.1 percent of GDP), driven by robust non-tax revenues and slow spending execution.
  - Challenges in mobilizing planned domestic financing due to waning investor appetite for government paper, insufficient adjustments in interest rates at longer maturities, and difficulties in improving tax collection (particularly PAYE and VAT).
  - Under-execution of government spending, particularly for projects and transfers to counties and other government agencies, affected tax collection.
- Supplementary Budget developments:
  - On June 22, Parliament approved a second Supplementary Budget for FY2022/23. The version approved exceeds the end-June 2023 target by 0.04 percent of GDP.
  - Supplementary II reflects tax collection falling short of the FY2022/23 target by 0.2 percentage points of GDP despite corrective measures introduced by KRA.
  - Supplementary II introduces targeted cuts of 0.2 percentage points of GDP mainly for undisbursed funds of development projects with low absorption; these cuts were marginally reduced in parliament.
  - National Treasury committed to keep the primary deficit within the programmed level through strict control of expenditure commitments without leading to a build-up of unpaid bills.
- Downside fiscal scenario:
  - Staff projects that the resource shortfall from the approved Supplementary I could reach as high as 0.9 percent of GDP at end-June 2023 under a downside scenario.
  - In that scenario, spending cuts in Supplementary II may not be sufficient to avoid significant accumulation of unpaid bills at end-June 2023, which would carry over to FY2023/24.
  - Accumulation of exchequer requests outstanding for more than 90 days (an IT under the EFF/ECF arrangements) could be avoided if National Treasury diligently prioritizes execution of spending through end-June 2023 by clearing older requests first.
  - Authorities have identified budgetary offsets for up to 0.9 percent of GDP to be considered in a Supplementary FY2023/24 Budget—expected to be submitted to Parliament by end-October (proposed SB)—to ensure observance of FY2023/24 fiscal targets.
- FY2023/24 Budget and Finance Bill:
  - The FY2023/24 Budget and 2023 Finance Bill submitted to Parliament at end-April is consistent with program objectives.
  - Draft budget targets a primary surplus of 0.7 percent of GDP (higher than 0.3 percent under the 4th EFF/ECF reviews).
  - The draft budget is predicated on a comprehensive revenue package for 1.6 percent of GDP, larger than the 0.9 percent of GDP agreed during the 4th reviews, to mitigate likely underperformance of tax by end-June 2023.
  - The draft envisages further rationalization of primary expenditures—particularly for slow-moving projects—while supporting new initiatives and protecting social spending.
  - Authorities stand ready to adopt contingency plans that could include new excise and VAT measures; they intend to submit contingency measures to Parliament by end-October 2023 (proposed SB).
- Debt sustainability:
  - Kenya’s public debt is sustainable but remains at high risk of distress.
  - The present value (PV) of public debt/GDP is expected to peak in 2023 and then decline steadily to below the 55 percent threshold for a country with moderate debt carrying capacity by 2028, as Kenya’s primary balance overperforms its debt-stabilizing level.
  - The baseline PV of external debt/GDP remains below its threshold throughout the projection period.
  - Cabinet submitted to Parliament in March 2023 amendments to the Public Financial Management Act to replace the nominal debt ceiling with a medium-term debt anchor in PV terms of 55 percent of GDP.
  - Authorities are preparing for the June 2024 Eurobond rollover, launching the process for hiring international lead managers and considering alternative financing from multilateral and bilateral lenders and the syndicated loans market.

### Monetary policy, FX market functioning, and financial stability
- Monetary tightening and interest rates:
  - The CBK cumulative increase in the policy rate reached 350 basis points since May 2022.
  - The ex-post real policy rate is below its pre-COVID-19 ex-ante levels.
  - Interest rate differential with the US federal funds rate is at a historical low, sustaining expectations of further upward adjustments in policy rates given expectations of the US policy rate staying elevated until late 2024.
  - The interbank rate has risen since end-2022.
  - Transmission of the higher policy rate to bank lending rates has been slow, partly due to delays in sector-wide approval of risk-based pricing.
  - Treasury bill rates have gone up further, but smaller increases in long-term domestic bond rates contributed to government’s net domestic financing challenges as demand shifted to the shorter end of the yield curve, raising rollover needs.
  - As of June 23, 2023, interest rates on the T-bills were higher by 205 to 404 basis points (latter for the 91-day bills) since end-May 2022; between 200 and 255 basis points for 2- to 5-year bonds, 120–205 basis points for 6- to 10-year bonds, and 59–114 basis point for longer maturities.
- Inflation and outlook:
  - Inflationary expectations have moved up over the past year and hover around the upper end of the target band.
  - Annual inflation has eased since April, but its momentum (seasonally adjusted monthly changes) has gone up, coinciding with faster exchange rate depreciation.
  - Under the program baseline, inflation is projected to durably move within the target band in 2023Q3 but remain close to its upper end by end-year as higher contributions from nonfood, nonfuel inflation offset favorable supply-side contributions.
  - Near-term upside risks to inflation include delayed passthrough from higher domestic producer price inflation and/or global shocks.
- Policy framework strengthening:
  - The CBK is making progress in modernizing the monetary policy framework.
  - Efforts to strengthen forecasting and policy analysis are advancing, including with support from IMF technical assistance.
  - The CBK hosted IMF TA missions on Kenya’s Forecasting and Policy Analysis System (FPAS) in 2022 and 2023, focusing on improvement of the quarterly projection model, refining business surveys, and developing a nowcasting framework.

*Source: Kenya — INTERNATIONAL MONETARY FUND, Section 5.*

### 17.      The authorities are committed to allowing exchange rate flexibility and supporting

### 17. The authorities are committed to allowing exchange rate flexibility and supporting official reserves

### Exchange rate, reserves, and external position
- The external position of Kenya in 2022 is assessed to be broadly in line with the medium-term fundamentals and desirable policies (Annex II).
- The real effective exchange rate gap is estimated to be in the range of 4–15 percent.
- Recommended policy mix to mitigate BoP pressures and support reserves:
  - Fiscal consolidation.
  - Tighter monetary policy.
  - Real exchange rate depreciation.
- CBK commitments and market infrastructure:
  - CBK committed to publishing updates to previous banking circulars on inter-bank standards and operational conventions to support market-making, interbank liquidity, and price discovery.
  - CBK committed to issuing a statement of their own commitment to the Global FX Code.
  - The Central Securities Depository, expected to facilitate collateralized transactions among banks and support money market liquidity, is yet to be launched to allow additional time for testing.
- Temporary fuel import credit scheme:
  - The government launched a temporary credit scheme for fuel imports to ease forex pressures (Box 3 and MEFP¶68).
  - Under the scheme, NT provides comfort letters to exporters and local banks for fuel purchase from Saudi Arabia and the United Arab Emirates by designated oil importers.
  - Attorney General review: legal arrangements do not give rise to government guarantees of private debt under domestic law.
  - Fiscal exposure risks remain if pump prices do not fully passthrough FX valuation losses or if US$ access is required to cover FX shortages.
  - Authorities committed that the exchange rate used for FX transactions under this scheme would be consistent with the program’s continuous conditionality on multiple currency practice (MEFP¶71).
  - Staff advised that after the initial rollout, the import scheme should be reconfigured so that all risks are borne by the private sector.

### Banking system soundness and risks
- The banking system is sound, yet risks are significant (MEFP, Section G).
- Key priorities and actions:
  - Resolution of NPLs and continued adequate provisioning remain a priority.
  - CBK is consolidating and proactively dealing with shortfalls in weaker banks.
  - With IMF TA, CBK is developing Internal Liquidity Adequacy Assessment Program Guidelines to strengthen banks’ liquidity management frameworks.
  - Staff welcomed CBK’s engagement with banks on the banking charter; faster issuance of no-objection certificates for risk-based loan pricing models could help support private credit.
  - Staff encouraged CBK to incorporate interest rate and foreign exchange depreciation scenarios in macroprudential, top-down system-wide stress tests, and to conduct FX liquidity stress tests.
- Vulnerabilities:
  - Shares of FX loans and deposits have continued to rise.
  - Sizable on- and off-balance sheet FX positions increase banks’ vulnerability to exchange rate shocks.
  - Higher-than-anticipated sovereign borrowing needs, rising interest rates, and asset quality issues—particularly at small and medium-sized banks with greater exposure to riskier lending—would constrain the growth of private credit.
  - Asset quality improvements remain contingent on the economic recovery and resolution of government pending bills.

### Modernizing the fiscal framework and revenue mobilization
- MTRS and revenue administration:
  - A draft MTRS was prepared in February 2023, supported by IMF TA, to identify tax policy and administrative measures to widen the tax base and mobilize domestic revenues.
  - The MTRS is expected to be submitted to Cabinet together with an implementation plan and oversight mechanisms by end-September 2023 (proposed SB), and to Parliament by end-December 2023 with a view to start implementing in early 2024.
  - KRA initiatives to improve tax compliance include strengthening audits and implementing data-driven compliance risk management measures to reduce abuse—particularly related to VAT exemptions.
- Strengthening PFM systems:
  - Auditor General conducting a special audit on supplementary budgets (Article 223), expected to be published by end-September 2023 (SB).
  - Planned PFM reforms and actions:
    - Develop a Public Investment Management Information System (PIMIS) to automate the investment project cycle; PIMIS will be piloted in three main sectors (roads, health, education) in FY2023/24 and subsequently extended to all ongoing and new public projects. Only projects processed through the PIMIS will be eligible to receive public and aid-related funding.
    - Strengthen expenditure controls by developing a budget costing methodology.
    - Durably address long-standing issues with pending bills.
    - Review stalled projects accounting for about 8 percent of GDP to determine prioritization or termination.
    - Reform fuel pricing decisions to ensure domestic prices are aligned with budgeted resources at all times (proposed to rephase SB to end-August 2023).
    - Improve monitoring and assessment of fiscal risks by stepping up Fiscal Risk Committee operations.
- Pending bills:
  - Stock of pending bills exceeded 4.4 percent of GDP at end-December 2022.
  - NT is developing a comprehensive and time-bound strategy to clear pending bills over the medium term in a fiscally prudent fashion; strategy centers on validation of outstanding stock, identification of PFM deficiency remedies, and an action plan to clear verified bills.
  - Authorities intend to submit the strategy to Cabinet for approval by end-September 2023 (proposed SB).

### Addressing SOEs’ financial challenges and governance
- Policy direction and legislation:
  - New Privatization Act 2023, repealing the previous one, has been submitted to Parliament to support accelerated privatization of SOEs.
  - Other focuses: streamlined governance structures, efficient use of budgetary resources, better fiscal risk management, and enhanced accountability.
- Kenya Airways (KQ) and Kenya Power and Lighting Company (KPLC):
  - Both continue to rely on budgetary support; in H2 2022, weaker financial results as revenue improvements were offset by higher operating costs.
  - KQ has negative equity.
  - KPLC had a liquidity gap of Ksh.64 billion as of FY2021/22.
  - Extra-budgetary support allocated to KQ and KPLC under the FY2022/23 Supplementary Budget is Ksh.23.5 billion (0.2 percent of GDP), lower than the original Budget primarily due to reduced allocation to KQ.
  - Government is servicing KQ’s guaranteed senior external debt (US$95 million between October 2022 and April 2023) and provides debt moratorium to both entities on its on-lent support.
- KQ strategy and KPLC action plan:
  - Authorities seeking Cabinet advice on an optimal strategy for KQ with least fiscal impact.
  - In May 2023, Cabinet approved an action plan to restore KPLC’s medium-term profitability and address its liquidity gap (MEFP¶36). The action plan (end-December 2022 SB) envisages improving KPLC’s current ratio from 0.5 in FY2021/22 to 0.7 by 2025/26 by:
    - Transferring power transmission lines (assets) to the relevant public entity and offsetting balance sheet impacts via lowering KPLC’s liabilities to the government and raising government’s equity in the transmission entity.
    - Settling outstanding dues and reviewing understandings about cost sharing on rural electrification.
    - Developing a turnaround strategy to reduce systems losses.
    - Implementing a new governance structure to give private shareholders fair representation.
  - Approved changes in electricity base tariff would help boost KPLC’s current ratio further to unity by 2025/26.
  - Reforms at KPLC will be supported by the World Bank.

- SCs rationalization and oversight reforms:
  - An updated inventory and new classification of SCs approved by Cabinet and published by end-July 2023.
  - A draft Ownership Policy for SCs describing a new governance architecture is expected to be approved by Cabinet and published by end-October 2023 (proposed SB).
  - Authorities will begin work with IMF TA on legal reforms to anchor the new ownership arrangements and measures in the SOE Blueprint, with draft amendments to be submitted to Parliament by end-February 2024.
  - Strengthening of analytical framework under the Government Investment Management Information System: financial evaluation for fifty SCs using FY2022/23 audited accounts, with outcomes reported to the Fiscal Risk Committee by end-June 2024 (proposed SB).
  - Publication of SCs’ financial statements and annual reports on NT’s website will continue to be expanded.
  - Plans to submit regulations for more effective oversight of government investment in SCs to the National Assembly by end-June 2024, and to conduct a comprehensive assessment of national government involvement in SCs and government-linked corporations by end-October 2024, with a published report including specific recommendations and a time-bound action plan (proposed SB).

### Strengthening governance, anti-corruption, and AML/CFT
- Beneficial ownership and procurement:
  - Publication of beneficial ownership information of companies awarded tenders on the government procurement portal commenced in November 2022.
  - Kenya Business Registration Services developed a centralized electronic register for beneficial ownership information in October 2020; further legal amendments are underway to grant access to the e-register by financial institutions for AML/CFT purposes.
  - Continued low reporting of beneficial ownership information by companies is hampering effective implementation.
- Audit follow-up and AML/CFT legal framework:
  - Authorities intend to strengthen follow-up on Auditor-General audit findings by promoting greater coordination among state bodies, strengthening monitoring capabilities, and enhancing public reporting (MEFP¶56).
  - Draft amendments to address gaps in the AML/CFT legal framework identified in the Kenya 2022 Mutual Evaluation Report (including requirements for politically exposed persons) are prepared and planned for submission to Parliament for approval by end-June 2023 (SB; MEFP¶60).
  - National AML/CFT action plans developed based on the 2021 National Risk Assessment; tracking mechanisms established to ensure accountability and timely completion.
  - Steps taken to strengthen AML/CFT risk-based supervision by enhancing risk assessment tools and using outputs to inform onsite supervision.

### Pandemic preparedness and digital infrastructure
- 2023/2024 budget allocations:
  - Ksh.20 billion (US$186 million) allocated toward scaling up health care infrastructure, including construction of the National Biosafety Laboratory (supported by a World Bank loan), and establishment of the National Pandemic Response Centre (in coordination with the African Development Bank).
  - Budget supports construction of the National Data Centre, co-financed by the European Union grant, and establishment of the National Cybersecurity Authority with support from the Swedish International Development Cooperation Agency.

### Climate-change resilience and costs
- Vulnerability and exposure:
  - Kenya was ranked as the world’s 69th largest emitter in 2019, having emitted 73.4 metric tons of CO2 equivalent (MtCo2e) with an estimated contribution of about 0.15 percent to global GHG.
  - Kenya is ranked as 173rd out of 198 countries in terms of emissions per capita, with 1.8 MtCo2e, below the global average of 6.5 MtCo2e.
  - Kenya ranks 17th out of 191 countries in the 2023 INFORM Risk Index for humanitarian crisis risk.
  - The agricultural sector: nearly 98 percent rainfed; 84 percent of land classified as arid and semi-arid; constitutes over a quarter of GDP; provides employment, directly or indirectly, to approximately 40 percent of total population and 70 percent of the total rural labor force.
- Economic costs and risks:
  - The total cost of climate change is estimated at 2–2.4 percent of GDP per year.
  - Climate-induced natural disasters affect BoP via short-term output losses, imports for reconstruction, and terms-of-trade shocks in climate-sensitive sectors.
  - Illustrative DSA stress test finds very limited scope for meeting additional financing needs without jeopardizing debt sustainability if faced with a large climate-related disaster (DSA¶24).
  - Drought-induced food insecurity frequency increased from every 20 years (in the 1980s) to every 2–3 years.
  - Droughts are estimated to cost about 8 percent of GDP every five years; floods cost 5.5 percent of GDP every seven years (National Disaster Risk Management Policy, Government of Kenya, 2017).
  - Integrated Food Security Phase Classification (IPC) estimates over 5.4 million people (nearly 10 percent of Kenya’s total population) experienced acute food insecurity between March and June 2023, an annual increase of 1.4 million people.
- Climate policy and finance:
  - Kenya has a strong climate policy and institutional framework; climate financing strategy outlined in Kenya’s updated Nationally Determined Contribution (NDC).
  - Kenya leverages private climate finance via PPPs in renewable energy, corporate green bond issuance, and blended finance mechanisms to de-risk private investments.
  - At end-2022, more than 90 percent of electricity production was generated from renewable sources, with targets to reach 100 percent by 2030.

*Source: IMF staff report excerpt (text provided).*

### 33.      Despite considerable achievements in pursuing its climate objectives, additional

### 33.      Despite considerable achievements in pursuing its climate objectives, additional

### Climate investment needs and financing gap
- Kenya’s updated NDC estimates climate-related investment needs amount to US$62 billion by 2030 (about 6 percent of the 2022 GDP per year over 2023–30).
- Latest audited data: only US$2.4 billion was directed to climate related investments in 2018, of which nearly 80 percent for mitigation purposes.
- Total estimated cost of adaptation actions up to 2030 is estimated at US$43.9 billion, of which 90 percent will require international support and 10 percent is to be financed from domestic sources.
- On mitigation, Kenya committed to cover 21 percent of the US$17.7 billion of estimated mitigation requirements between 2020 and 2030 from domestic sources, while the remaining 79 percent is subject to international support.
- Kenya has a well-diversified power generation mix, with about 90 percent of electricity being generated from clean sources: geothermal (48 percent), hydro (33 percent), and wind (12 percent). About 30 percent of installed generation capacity is owned and operated by Independent Power Producers (IPPs), which have mobilized at least US$2.5 billion in private capital.
- Fuel imports averaged 3.1 percent of GDP between 2015–20 but increased to nearly 5 percent of GDP in 2022.

### Reform package under the RSF: objectives and expected impacts
- Authorities requested RSF support to advance adaptation and mitigation objectives; identified a high-quality output-oriented package of reform measures (RMs) across four priority areas.
- RMs informed by IMF (FAD) climate policy diagnostics mission, Climate Public Investment Management Assessment (C-PIMA), and MCM climate finance expert inputs.
- RMs expected to:
  - i) incorporate climate risks into fiscal planning and investment framework;
  - ii) mobilize climate-revenue while strengthening climate-spending efficiency;
  - iii) enhance effectiveness of Kenya’s existing frameworks to mobilize climate finance;
  - iv) strengthen disaster risk reduction and management.
- Simulations using the IMF DIGNAD model show that accelerating investment in adaptation infrastructure, catalyzing climate finance, and raising Kenya’s public investment efficiency to reach the regional efficiency frontier would save Kenya nearly 3 percent in output loss (US$71.2 million) while reducing macroeconomic and fiscal risks.

### Reform Priority 1: Incorporate climate risks into fiscal planning and investment framework
- Key proposed measures:
  - Conduct a long-term fiscal sustainability analysis under different climate change scenarios and publish results in the Fiscal Risk Statement starting in FY 2024/25 (proposed RM2).
  - Develop a standardized climate change and disaster risk methodology to be integrated in project appraisal, include climate considerations in project selection criteria, reflect use of analysis in project concept notes and feasibility studies, and publish project selection criteria (proposed RM5).
  - Implement a prototype of climate budget tagging in key climate-sensitive sectors, develop guidelines applied to all sectors in the FY2024/25 Medium-Term Expenditure Framework circular for budget preparation with clear definition of climate-related expenditure, and publish results (proposed RM8).
- Development partners’ and IMF TA to support capacity building and operationalization of climate budget tagging.

### Reform Priority 2: Mobilizing climate-revenue and strengthening climate-spending efficiency
- Measures to align with updated NDC and reflect externalities of fossil fuel consumption, including implementing carbon pricing reforms (proposed RM3).
- Recent efforts: phasing out subsidies and increasing taxes on fossil fuels (¶4) support mitigation goals.
- Possible options: introduction of a carbon tax or increase the excise tax on fossil fuels to better capture externalities.
- Carbon pricing options expected to:
  - Help meet mitigation goals while raising additional fiscal revenues to compensate vulnerable groups and offset higher energy prices.
  - Require a well-planned communication strategy explaining revenue use and mitigation of adverse social impacts.
- World Bank support to complement IMF diagnostics by assessing distributional effects of carbon pricing and enhancing targeting of social safety nets.
- IMF TA to assess overall impact of carbon pricing measures on emissions reduction targets.
- To promote climate-resilient investment, authorities will adopt priority fiscal incentives in agriculture, water, and land management as outlined in the draft National Green Fiscal Incentive Policy Framework (proposed RM6).
  - Draft Framework to be adopted by end-2023; identifies fiscal instruments including carbon pricing, tax breaks, subsidies, and grants.
  - IMF TA to support impact assessment and implementation framework development.
- Energy sector measure: approve net metering regulation, including rates determination methodology (proposed RM7) to promote distributed renewable power generation and signal to investors (electric buses, electric vehicles, renewable energy).

### Reform Priority 3: Enhancing effectiveness of existing frameworks to mobilize climate finance
- Kenya’s green finance ecosystem can be strengthened by developing a green finance taxonomy building on the green bond taxonomy standards for the Sovereign Green Bond Framework.
- Draft green finance taxonomy adapted to Kenya’s updated NDC to be produced and circulated for stakeholder consultations (proposed RM4).
- European Investment Bank TA expected to help CBK reflect stakeholder comments, adopt the taxonomy, issue guidelines for climate-related disclosures for the banking sector, and introduce time-bound targets for implementation of climate disclosure requirements (proposed RM9).
- Objective: improve transparency, reduce greenwashing, and channel capital toward sustainable investments.

### Reform Priority 4: Strengthening disaster risk reduction and management
- Authorities preparing the National Risk Financing Strategy to enable efficient disaster response and enable partners to contribute financing to government-led disaster response.
- Proposed adoption of the National Framework for Climate Services to enable dissemination of a digital early warning system platform for multi-sector climate-related information to most vulnerable counties, including Arid and Semi-Arid Lands (ASALs) and coastal regions (proposed RM1).
  - Expected outcome: provide counties and farmers with advance notice of possible drought conditions, enabling timely water conservation strategies.
- Parliamentary action: On May 16, 2023, Parliament passed the Kenya Meteorological Bill establishing Kenya Meteorological Services (KMS) as a statutory body; NFCS expected to provide KMS a roadmap for climate services.

### RSF support, program modalities, and financing impacts
- RSF requested: 20-month RSF arrangement (exact duration through April 1, 2025) with an access level of 75 percent of quota (SDR407.1 million, about US$544 million) as budget support and phased evenly across the proposed reform measures.
- RSF eligibility: Kenya is eligible for RSF financing with Group B interest rates applied.
- RSF resources expected to:
  - Substitute for costlier domestic financing (e.g., national saving certificates) and help mitigate prospective BoP financing needs given high import content of climate-related investments.
  - Improve public debt dynamics and reduce medium- to longer-term BoP vulnerabilities from import-intensive climate investment.
  - Crowd in other financing and mobilize additional private climate financing while strengthening institutional setup.
- Examples of RSF-supported augmentations to FY2023/24 budgetary allocations (among others):
  - Investments in ongoing renewable energy projects (Ksh.15 billion; US$135 million).
  - Improvements in coverage and dissemination of Kenya early warning systems (Ksh.2 billion; US$18 million).
  - Reforestation efforts via National Forest Action Plan and National Tree Planting Campaign (Ksh.2.8 billion; US$117 million).
  - Construction of climate-resilient infrastructure through the National Irrigation Development Project (Ksh.10 billion; US$90 million).

### Development partners’ involvement in climate-related issues
- Development partners and areas of focus include (selected entries):
  - African Development Bank: climate change preparedness and management in agriculture; forest conservation; food security.
  - Agence Française de Développement (AFD): NDC implementation.
  - European Investment Bank: transit infrastructure; energy (geothermal power plant); electrification project; water and sanitation; green finance taxonomy.
  - World Bank: access to financial services for drought risk mitigation; livestock trade facilitation; agricultural productivity enhancements; private infrastructure investment strengthening by leveraging PPPs; agriculture sector climate-resilience.
  - Other partners include British High Commission, DANIDA, GIZ, EU, JICA, KOICA, SIDA, SDC, USAID, Italian AICS with activities spanning solar street lighting, green housing, NDC implementation, water management, soil protection, green finance, deforestation prevention, and carbon market framework development.

### Complementarity and expected outcomes
- Proposed RMs will complement development partners’ efforts (e.g., 2023 World Bank Development Policy Operation focusing on agricultural policies and institutional framework for climate policy).
- RSF-supported reforms (e.g., budget tagging) expected to allow detailed identification and tracking of climate-related investment and demonstrate Kenya’s long-term commitment to mitigating climate vulnerabilities by enhancing investment roadmaps, sectoral priorities, funding plans, fiscal incentives, and tax policies.

*Source: IMF staff report excerpt (KENYA). *

### 40.      The EFF/ECF program is fully financed, with firm commitments over the next twelve

### 1kenea2023001 - 40.      The EFF/ECF program is fully financed, with firm commitments over the next twelve

### Program financing and external financing needs
- The EFF/ECF program is fully financed, with firm commitments over the next twelve months and good prospects for the remainder of the program.
- Program financing in 2023 is stronger than projected at the 4th EFF/ECF reviews, reflecting larger budget support by development partners and the authorities’ request for augmentation of access under the EFF/ECF arrangements.
- Authorities have successfully raised US$840 million in syndicated bank loans in FY2022/23.
- The baseline projection assumes a rollover of the US$2 billion Eurobond in June 2024, premised on the re-opening of international markets for frontier economies.
- Authorities have launched the process for hiring international lead managers and are considering alternative financing from multilateral and bilateral lenders and the syndicated loans market.

### Risks to program financing and mitigating actions
- Major program risks include:
  - High global uncertainty.
  - Policy slippages.
  - Decline in availability of concessional resources.
- Mitigating factors and authorities’ actions:
  - Continued performance under the program to date.
  - Commitment toward stronger and mutually-supportive policies to safeguard macroeconomic stability by:
    - Deploying contingency measures to limit the impact of the emerging slowdown in tax collection on performance against FY2022/23 and FY2023/24 targets.
    - Maintaining close engagement with donors.
    - Adopting a tailored capacity development strategy to support implementation of structural reforms—including those supported by the RSF.
- Staff supports leveraging the RSF to exploit synergies with other official financing and to catalyze private financing for climate mitigation and adaptation.

### Kenya’s capacity to repay the IMF and debt dynamics
- At end-2022, the share of Kenya’s multilateral debt was less than half of its total external public debt and is projected to remain below 55 percent over the medium term under the baseline.
- Total outstanding credit to the IMF (including the proposed augmentation and RSF) is projected at SDR 3,093 million in 2025, or 569.8 percent of quota.
- Ratios to GDP and gross international reserves peak at 3.5 and 47.2 percent in 2024, respectively; both exceed the 75th percentile of the IMF’s past Upper Credit Tranche (UCT)-quality arrangements for LICs.
- Total debt service to the IMF would peak by 2029 at:
  - 2.9 percent of exports of goods and services, and
  - 2.7 percent of fiscal revenue.
- Elevated scheduled debt service to the IMF may pose medium-term capacity-to-repay risks; near-term downside risks include continued lack of market access for frontier issuers and delays in reform implementation.
- Risk mitigants include continued access to concessional financing, expected normalization of international market access ahead of the Eurobond rollover in 2024, Kenya’s strong track record of servicing debts, and multi-year fiscal consolidation anchored by tax policy measures to boost revenues.
- One program objective is growth-friendly fiscal consolidation to achieve the debt-stabilizing primary balance during the program and place public debt/GDP on a downward path. The four external debt indicators (DSA) are also on a downward path, with near-term breaches relative to the five LIC-DSA thresholds declining over the medium term.

### Proposed modifications to program conditionality
- Proposed changes (MEFP, Tables 1 and 2) include:
  - Modification of the end–December 2023 QPC on the floor on net international reserves based on updated information (higher expected outturn for end-June 2023 and revised projected net flows in the second half of 2023) and its adjustors, including a floor on downward adjustment to mitigate downside risks to reserves.
  - Under the EFF arrangement, based on preliminary information, for the end-June 2023 test date: waiver of nonobservance for the QPC on tax revenues and waiver of applicability for other end-June 2023 PCs.
  - Establishment of targets for the end–June 2024 test date.
  - Establishment of a new IT on a ceiling on non-accumulation of new net domestic arrears on a cumulative basis within a fiscal year by MDAs and State Corporations (SCs).
  - Establishment of new SBs and proposal to reset the target date for the end-December 2022 SB to complete a review of how the fuel pricing mechanism has been applied to date and announce and constitute a taskforce to end-August 2023.
  - Modification of TMU language to remove ambiguity on the grace period for publicly guaranteed debt.

### Staff appraisal and policy recommendations
- Macroeconomic context and outlook:
  - Despite a multi-decade-worst drought and ongoing external shocks, the authorities are taking steps to strengthen the reform program.
  - Growth was resilient in 2022, but global headwinds and elevated inflationary pressures remain; the near-term outlook faces important downside risks.
  - Medium-term outlook is positive but subject to climate-related risks.
- Monetary policy:
  - Monetary policy needs to continue proactively responding to maintain price stability and external sustainability.
  - The CBK’s tightening in June 2023 was warranted.
  - Authorities should remain data-dependent and forward-looking, supported by clear and transparent communication.
  - Continue efforts to reactivate the interbank FX market, strengthen reserves, deepen the FX market, and promote exchange rate flexibility as a shock absorber.
- Fiscal policy and contingency planning:
  - Continue fiscal consolidation focused on revenue mobilization and prudent spending to reduce debt and external vulnerabilities.
  - Contingency plans, including corrective tax measures that can be quickly deployed, are appropriate to ringfence fiscal performance amid regional and global uncertainties.
  - FY2023/24 revenue package in the draft Finance Bill will be critical to achieve the tax path envisaged under the program and to reduce the fiscal deficit while maintaining social and development spending.
  - Further improvements needed in spending efficiency, tax policy, and revenue administration.
- Fuel pricing and fiscal risk:
  - National Treasury should limit fiscal risks from the new oil import scheme by adjusting its setup after the initial rollout so that all risks are borne by the private sector.
  - Changes in the mechanism for setting pump prices should ensure fuel price decisions are aligned with budgeted resources.
- Public debt and SOEs:
  - Public debt is sustainable but at high risk of distress; debt reduction will be supported by the fiscal consolidation path, with debt-to-GDP stabilizing and gradually converging to more prudent levels.
  - Staff welcomes the authorities’ comprehensive debt management strategy.
  - Focus on minimizing fiscal risks from SOEs, improving governance and oversight, and implementing the Cabinet-approved action plan to strengthen KPLC’s financial health.
  - For KQ, optimal strategy should be based on least cost to the exchequer; privatization goals should be supported by expediting SOE governance reforms.
- Financial sector and AML/CFT:
  - Banks are well-capitalized and liquid overall, but authorities should monitor and address emerging vulnerabilities: resolution of NPLs, adequate provisioning, consolidation of weaker banks, and attention to banks’ FX positions from a macroprudential perspective.
  - Address FX market dislocation to mitigate increasing FX exposures in the banking sector.
  - Closely monitor spillovers from local banks’ regional expansion and operational risks from digitalization.
  - Strengthen anti-corruption legal framework, transparency, financial integrity, follow-up on audit findings, and address strategic deficiencies identified in the Kenya 2022 Mutual Evaluation Report by ESAAMLG.
  - Address gaps in the AML/CFT legal framework, prioritize measures to improve effectiveness, and enhance AML/CFT risk-based supervision.
  - Staff welcomes submission to Parliament of a draft Conflict of Interest Bill in March 2023.

### Program support and approvals requested
- Given performance under the EFF/ECF arrangements, staff supports the authorities’ requests for:
  - Completion of the 5th EFF/ECF reviews.
  - Extension of the arrangements by 10 months.
  - Blended augmentation of 75 percent of quota and rephasing of access.
  - Modification of a quantitative performance criterion.
  - Completion of monetary policy consultation.
  - For end-June 2023 performance criteria under the EFF arrangement: waiver of nonobservance for the target on tax revenue based on committed corrective measures and waiver of applicability for other PCs where there is no clear evidence they will not be met.
- Staff supports the authorities’ request for a 20-month Resilience and Sustainability Facility (RSF) to address climate-related challenges and advance planned reforms.

### Box summaries — FX exposure and pending bills
- Box 1: Kenyan Banks’ Exposure to Foreign Exchange (FX) Risk
  - CBK limits FX risks via:
    - Net open position (NOP) limit of 10 percent of core capital (total NOP limit including on- and off-balance sheet exposures).
    - Capital charge for total net open position is 10 percent.
  - CBK encourages FX lending only to clients with a natural hedge against FX risks.
  - Imbalances in the FX market have contributed to greater gross exposures in the banking system.
  - Regulatory FX NOP remained stable in 2022 after a decline in 2022Q1; on-balance sheet NOP reported in IMF FSI database declined rapidly during 2022.
  - Several banks, including some Tier-1 banks, had larger off-balance sheet NOPs in 2022Q4 (funded by on-balance sheet positions) than in 2021Q4.
  - Off-balance sheet long positions largely consist of swaps with the oil sector, of less than 6 months maturity and generally rolled over; these swaps are expected to gradually unwind.
  - Kenyan banks are net borrowers of US$ via swaps with other financial institutions.
  - In 2022Q4 (or latest available quarter), Kenyan banks had the third largest short FX net open position for on-balance sheet items among emerging and frontier economies with comparable data.
- Box 2: Pending Bills
  - Definition and scope:
    - Pending bills are overdue payables incurred by any level of the public sector; for MDAs and counties these include amounts unpaid at the end of the fiscal year and comprise current payables and expenditure arrears.
    - For SCs and SAGAs, pending bills are outstanding obligations the entity lacks resources to pay, including amounts due within the same fiscal year.
  - Kenya’s stock:
    - Total outstanding pending bills were estimated at about Ksh.641 billion or 4.4 percent of GDP at end-December 2022 (about Ksh.567 billion at end-December 2021).
    - State Corporations (SCs) and SAGAs account for about Ksh.401 billion of the outstanding stock.
    - Outstanding pending bills at MDAs were mainly historical and related to recurrent expenditure (about ¾ of total).
    - The Ksh.401 billion for SCs/SAGAs mainly included payments due to contractors/projects, suppliers, unremitted statutory and other deductions, and pension arrears for local authorities Pension Trust (about ⅔ of total).
  - Program actions and PFM reforms:
    - Structural conditionality included a SB to initiate regular quarterly reporting on pending bills covering MDAs, Counties, SCs/SAGAs, and SCs—met at end-March 2021.
    - National Treasury started submitting monthly information by spending center (vote) on pending bills at MDAs.
    - Authorities established a task force to submit to Cabinet by end-September 2023 (SB) a comprehensive strategy to validate the stock of pending bills outstanding at end-June 2023, identify measures to address PFM shortcomings, and propose a timeline for clearance of validated arrears consistent with reducing debt vulnerabilities.

*Source: IMF staff report text as provided.*

### Box 3. New Fuel Import Mechanism

### Box 3. New Fuel Import Mechanism

### Overview
- The government-to-government mechanism for importation of fuel products was launched in April 2023.
- The government of Kenya negotiated directly with the governments of Saudi Arabia and United Arab Emirates the terms of imports of the entire supply of fuels (jet fuel, diesel, and gasoline) destined for the domestic market and transiting through Kenya to other countries in the region.
- The scheme includes issuance of letters of support by the government to domestic oil marketing companies (OMCs) that also benefit the banks, financial institutions, credit insurance providers, lenders and any hedging counterparties providing financing, insurance, refinancing or hedging to the OMC.

### Operational mechanics
- Initial duration: nine months (through end-December 2023).
- Fuel is imported on 6-month credit, backed by commercial letters of credit (LCs) issued by domestic banks, and confirmed by international banks.
- Within around 5 days of receiving a cargo of fuels:
  - OMCs deposit the US$ proceeds of their sales for jet fuel and fuels destined to the region in escrow accounts with the LC-issuing domestic banks.
  - OMCs deposit the shilling equivalent of the value for domestically marketed diesel and gasoline in shilling escrow accounts with the LC-issuing domestic banks.
- The shilling escrow account is interest bearing at the 91-day T-bill rate minus 2 percent, with the interest paid into a Stabilization Fund set up by the government to cover any FX-currency losses stemming from the potential for depreciation of the shilling in the period between importation and payment in US$.
- LC-issuing banks start gradually purchasing US$ 90 days after the Bill of Lading date.
- On the 180th day, the exporter is paid directly by the international bank confirming the LC, which then seeks reimbursement from the domestic LC-issuing bank.
- A Treasury and Risk Management Committee (TRIMCOM), comprising representatives of the government, local banks, and OMCs, will monitor the implementation of the agreement and the terms of FX purchases.
- The government regulator is expected to adjust prices at the pump to offset any FX valuation losses.

### Financial flows and risks
- The total amount of outstanding obligations of OMCs to fuel exporters will peak at 6-months of fuel imports and will then rollover as the first received cargo is settled and a new one is received (if the scheme is extended past the initial 9-month period).
- Based on April 2023 prices:
  - The total obligation incurred is estimated at around US$700 million per month.
  - Total obligations estimated at over US$ 4 billion by end-September 2023.
- The government is exposed to calls on the national budget if:
  - Prices at the pump are not adjusted to fully passthrough any FX valuation losses to final consumers; and/or
  - It needs to raise US$ financing to cover any shortfalls of FX at the domestic market should FX market dislocation not be durably resolved.
- To ensure consistency with the continuous conditionality on multiple currency practice under the EFF/ECF arrangement the authorities have committed that the exchange rate that will be used for purchasing FX under this importation scheme, and the rate at which the government will provide access to US$ should the need arise, would not deviate from the prevailing market rate by more than 2 percent.

### Legal and contractual arrangements
- Review by the Attorney General of Kenya established that the arrangements do not give rise to government guarantees of private debt under domestic law.
- Fuel suppliers, selected following an open tender process, are Saudi Aramco, ENOC, and ADNOC.
- Their nominated importers and contractual counterparties are Oryx Energies Kenya Ltd, Galana Oil Kenya Ltd, and Gulf Energy, Ltd.

*Source: International Monetary Fund — Box 3. New Fuel Import Mechanism*

### 2020. Similarly, Apollo Agriculture, an Agri-Tech

### 1kenea2023001 - 2020. Similarly, Apollo Agriculture, an Agri-Tech

### Climate finance and private participation
- Private equity: Apollo Agriculture (Nairobi) raised US$40 million in March 2022.
- Private-to-public debt: Government of Kenya issued the ‘M-Akiba’ retail infrastructure bond in November 2022, raising nearly US$466 million to finance government infrastructural development projects, including those related to climate adaptation.
- Private-to-public equity: About 30 percent of installed generation capacity is owned and operated by Independent Power Producers (IPPs), which have mobilized at least US$2.5 billion in private capital.
- Public-private partnership example: Government of Kenya and Marsabit Solar Power Limited entered a US$120 million PPP in March 2023 to construct and operate a 50 MW solar power plant in Marsabit County.
- Bilateral support: Governments of Kenya and the United Kingdom signed a partnership on climate change in November 2022 valued at approximately US$4.1 billion over five years.
- Blended finance: In December 2022, MIGA extended a partial risk guarantee for US$51.4 million to Standard Bank of South Africa Limited and Stanbic Bank Kenya Limited to cover loans for road construction, rehabilitation and climate adaptation works.
- Global climate funds received by Kenya (cumulative):
  - Over US$535 million from global climate funds, including:
    - US$246.4 million from the Global Climate Fund (GCF)
    - US$1113.3 million from the Climate Investment Fund (CIF)
    - US$175.2 million from Global Environmental Facility (GEF)

### Real sector developments (growth, supply and demand)
- Kenya’s growth remains resilient amid multiple shocks and has generally followed the regional peers.
- 2022 sectoral developments:
  - Agriculture declined in each quarter amid an intensifying drought.
  - Services growth decelerated.
  - Supply-side: 2022 growth was driven by the services sector.
  - Demand-side: 2022 growth was driven by the private sector albeit at a slower pace than a year before.
- High-frequency indicators:
  - Manufacturing: recent weakness in manufacturing sector shown by PMIPMI employment sub-index and Manufacturing PMI Index (50+: expansion).
  - Cement: weakness but recovering.
  - Electricity production and tourist arrivals: holding up.

### Fiscal sector developments and projections
- Tax revenues projected to further increase in FY2022/23 despite an emerging slowdown in early 2023, driven by domestic and income taxes.
- Capital expenditure expected to remain constrained by delays in mobilizing financing.
- Current expenditure/GDP set to be similar to FY2021/22.
- Significant spending under-execution resulted in a large fall in the primary deficit in FY2021/22, while debt continued to rise mainly reflecting a scale up in official support and a weaker Shilling.
- Selected fiscal figures (from Table 1, headline items):
  - Real GDP growth entries (examples across columns): 7.6; 5.3; 4.8; 5.1; 5.0; 5.5; 5.3; 5.5; 5.3; 5.4
  - CPI (period average) examples: 6.1; 7.7; 7.6; 7.8; 7.8; 5.7; 6.6; 5.0; 5.4; 5.4
  - Total revenue, grants and unidentified tax policy measures (percent of GDP examples): 16.1; 17.3; 17.6; 17.5; 17.7; 17.8; 18.3; 17.9
  - Tax revenues (percent of GDP examples): 12.7; 13.7; 13.9; 14.0; 13.9; 14.9; 15.1; 15.1
  - Expenditure and net lending (percent of GDP examples): 24.4; 23.5; 23.8; 23.3; 23.6; 23.7; 23.6; 22.1
  - Primary balance (percent of GDP examples): -4.0; -1.3; -1.3; -1.1; -1.1; 0.3; 0.7; 0.7; 0.9; 1.1
  - Overall balance (percent of GDP examples): -8.3; -6.2; -6.2; -5.8; -6.0; -4.4; -4.3; -3.9; -4.0; -3.3
  - Public gross nominal debt (percent of GDP examples): 68.2; 68.6; 68.4; 67.0; 70.6; 64.9; 68.5; 63.0; 66.9; 65.2

### Financing, debt structure, and public debt dynamics
- External financing in FY2022/23 scaled up via budget support and commercial borrowing; accessing international bond markets remains tight since onset of war in Ukraine.
- Domestic debt stock composition:
  - Bulk remains in Treasury bonds; share of T-bills in domestic debt stock declined marginally since FY2021/22.
  - Authorities have extended maturity profile of domestic debt over past several years (Average Time to Maturity of Debt increased).
- Gross financing and reserves (selected figures):
  - Gross international reserves (billions of US$ examples): 9.5; 8.1; 8.0; 7.0; 7.3; 8.1; 8.5; 9.2; 9.7; 10.5
  - Financing table (Table 6 sample): Gross financing requirements (US$ mln examples): 7,432; 8,644; 7,794; 8,600; 7,523; 10,784; 9,752
- Public debt decomposition (Table 9 and Table 10):
  - Total public debt (2023–2025 examples): Total 74,120 (2022 actual) and totals in subsequent years: 74,139 (2023), 76,982 (2024), 79,841 (2025).
  - External debt (2022: 37,370; 2023: 39,807; 2024: 42,438; 2025: 43,797).
  - Multilateral creditors (2022: 17,474; 2023: 19,836; 2024: 22,224; 2025: 23,499).
  - IMF exposure (2022: 2,399; 2023: 3,099; 2024: 3,580; 2025: 3,632).
  - Domestic debt (2022: 36,750; 2023: 34,333; 2024: 34,545; 2025: 36,044).
  - Bonds and commercial creditors: Bonds 7,100 (2022); Commercial creditors 1,881 (2022).
  - Contingent liabilities and public guarantees: Contingent liabilities 1,417 (1.9 percent of total; 1.2 percent of GDP).

### External sector developments
- Current account:
  - Current account deficit narrowed in 2022 due to weakness in non-energy imports and strength in tourism and transportation.
  - Current account balance (USD mn examples across years): -5,744; -6,617; -5,822; -6,530; -5,447; -6,818; -5,699; -6,917; -6,050; -7,351; -6,441; -7,815; -6,839
  - Current account (percent of GDP examples): -5.2; -5.7; -5.1; -5.4; -4.8; -5.3; -5.0; -5.1; -5.0; -5.0; -5.0; -5.0; -5.0
- Merchandise trade:
  - Exports f.o.b. (US$ mn examples): 6,789; 7,742; 7,421; 8,593; 8,163; 9,491; 8,975; 10,491; 9,874; 11,383; 10,715; 12,296; 11,629
  - Imports f.o.b. (US$ mn examples): 17,854; 20,649; 19,136; 21,640; 19,258; 23,137; 20,717; 24,818; 22,337; 26,700; 24,156; 28,790; 26,170
  - Energy imports elevated since mid-2021 (examples): Energy imports (US$ mn or percent of GDP): 3,280 (US$ mn); energy percent of GDP examples: 3.0; 4.3; 4.4; 3.8; 4.0; 3.5
- Services and remittances:
  - Services net positive with travel receipts (examples): Travel receipts (US$ mn) 844; 1,013; 1,107; 1,113; 1,206; 1,225; 1,315; 1,323; 1,420; 1,429; 1,533; 1,523; 1,656
  - Remittances increased by 8 percent in 2022; remittances (US$ mn examples): 3,770; 4,108; 4,083; 4,478; 4,412; 4,834; 4,766; 5,220; 5,149; 5,635; 5,561; 6,084; 6,004
- Financial account and reserves:
  - Financial account large negative net other investment and borrowing needs (examples): Financial account (US$ mn examples): -3,819; -3,448; -3,278; -4,064; -2,530; -6,888; -4,835; -7,928; -6,880; -8,189; -7,394; -9,087; -8,097
  - Gross international reserves (USD million examples): 9,514; 8,078; 7,969; 6,983; 7,278; 8,071; 8,461; 9,171; 9,667; 9,933; 10,544; 11,009; 11,626
  - Reserves adequacy in months of next year imports (examples): 4.7; 3.7; 3.9; 3.0; 3.3; 3.2; 3.5; 3.3; 3.7; 3.4; 3.8; 3.5; 3.9

### Monetary and financial sector developments
- Inflation and policy rates:
  - Inflation eased somewhat since April on lower food inflation but was still above the target as of May.
  - Policy rate tightened by 350 points since May 2022 and other rates have risen.
- Liquidity and credit:
  - Excess reserves have declined.
  - Private sector credit growth broke into double digits after several years (private sector credit growth examples from Table 3: 8.6; 12.0; 12.5; 12.3; 9.5; 13.3; 12.1; 12.5; 12.8; 12.4).
  - Money aggregates (M3 examples): 3,991; 4,138; 4,235; 4,443; 4,430; 4,534; 4,669; 4,827; 4,787; 4,880; 5,029; 5,162
- Exchange rate:
  - Kenyan Shilling depreciated further against the U.S. dollar and at a faster pace in 2023 so far, helping reverse the real appreciation seen in 2022.
  - Real effective exchange rate index (Jan-2019=100) shows depreciation relative to regional peers (Kenya, Rwanda, Tanzania, Uganda indices plotted).

### Financial sector structure and soundness
- Banking sector structure (December 2022):
  - Total net assets of 6.6 trillion KSH (56 billion USD, 49 percent of GDP).
  - Domestic private banks: 67.4% (20 banks)
  - Foreign subsidiary banks: 32.1% (17 banks)
  - Domestic state-owned banks (2): 0.5%
  - Banks' asset composition: Loans and Advances (Net) 51%; Government Securities 29%; Other assets 9%; Intrabank placements 4%; Balances at Central bank 4%; Cash 1%; Investments 2%
  - Banks' liabilities composition: Customer Deposits 75.9%; Capital and Reserves 13.9%; Other liabilities 10.2%
  - Market concentration: Nine banks account for 76 percent of banking assets.
- Financial soundness indicators:
  - Capital Adequacy: Total CAR well above minimum requirement (Total CAR percent series shown).
  - Non-performing loans (NPLs): NPLs have started to decline but remain high (NPL ratio and NPL amounts plotted; NPL ratio examples in table note).
  - Profitability: Return on Assets remains positive across bank-size groups.
  - Liquidity: Banking sector has ample liquidity driven by increasing holdings of government securities; Liquid to total assets ratio and Loans to deposits ratio displayed.
  - Spreads: Significant spreads between deposit and lending rates persist.

### IMF program, financing, and reform priorities (EFF/ECF and RSF)
- IMF arrangements and phasing (Table 7a, 7b highlights):
  - Approvals and scheduled reviews under the 38-month EFF and ECF arrangements include multiple availability dates and disbursement tranches (aggregate totals shown in tables).
  - RSF proposed schedule of disbursements and reviews totals SDR 407.1000 (75.00 percent of quota) across specified reform measure implementation reviews.
- External financing package and program support:
  - Program financing, budget support, and RSF features in the financing table, with IMF EFF/ECF amounts and RSF disbursements included.
  - Program financing examples (US$ mn): IMF EFF/ECF purchases and disbursements 980; 682; 673; 603; 729; 218; 482 (table shows multiple entries across years).
- Proposed RSF reform priorities and selected reform measures (Table 11):
  - Reform Priority 1: Incorporating climate risks into planning and investment framework
    - RM2: National Treasury to conduct long-term fiscal sustainability analysis under different climate change scenarios and publish results in the Fiscal Risk Statement starting in FY2024/25.
    - RM5: Develop standardized climate change and disaster risk methodology integrated in project appraisal; include climate considerations in project selection criteria and reflect use of analysis in project documentation.
    - RM8: Implement a prototype of climate budget tagging in key climate sensitive sectors; develop guidelines in the FY2024/25 MTEF circular and publish results.
  - Reform Priority 2: Mobilizing climate-revenue and strengthening efficiency
    - RM3: Subject to Parliamentary approval, National Treasury to implement carbon pricing in line with IMF recommendations to reflect externalities of fossil fuel consumption and meet updated NDC emissions reduction targets.
    - RM6: National Treasury to adopt priority fiscal incentives in agriculture, water, and land management sectors, as listed in the draft National Green Fiscal Incentive Policy Framework.
    - RM7: Cabinet to approve net metering regulation, electricity market, bulk supply, and open access regulations, including rates determination methodology to promote energy efficiency, electricity wheeling and distributed renewable power generation in residential, commercial, and industrial sectors including Special Economic Zones and Industrial Parks.
  - Reform Priority 3: Enhancing effectiveness of existing frameworks to support climate finance
    - RM4: CBK to develop a draft green finance taxonomy adapted to Kenya’s updated NDC and circulate for stakeholder consultation.
    - RM9: CBK to adopt a green finance taxonomy adapted to Kenya’s updated NDC; issue guidelines for climate-related disclosures for the banking sector; introduce time-bound targets for implementation of climate disclosure requirements.
  - Reform Priority 4: Strengthening disaster risk reduction and management
    - RM1: Cabinet to adopt the National Framework for Climate Services to enable dissemination of a digital early warning system platform for multi-sector climate-related information to most vulnerable counties, including ASAL and coastal regions.

*Source: IMF staff estimates and projections, Kenyan authorities, and data extracted from the specified IMF chapter/section.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Risk Assessment framework
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).  
- Likelihood definitions (staff’s subjective assessment): “low” = probability below 10 percent; “medium” = probability between 10 and 30 percent; “high” = probability between 30 and 50 percent.  
- “Short term” and “medium term” indicate risks could materialize within 1 year and 3 years, respectively.  
- Non-mutually exclusive risks may interact and materialize jointly.

### Potential External Shocks
- Commodity price volatility  
  - Likelihood: High  
  - Expected Impact on Economy: High. Higher commodity prices would increase external and domestic imbalances and weigh on economic growth.  
  - Policy Response:  
    - Keep domestic fuel prices aligned with global fuel prices while compressing expenditure to contain fiscal pressures;  
    - If the shock is persistent, tighten monetary policy to ensure inflationary expectations remain well-anchored;  
    - Greater exchange rate flexibility;  
    - If the further shock is very large, consult with staff on response consistent with overarching objective of fiscal consolidation to reduce debt vulnerabilities.

- Intensification of regional conflict(s)  
  - Likelihood: High  
  - Expected Impact on Economy: Medium. Such sanctions could disrupt imports of fertilizer and wheat and raise borrowing costs and limit options for non-concessional external financing.  
  - Policy Response:  
    - Diversify sources of imports for key inputs and staples (e.g., fertilizer, wheat);  
    - Deploy targeted support to most vulnerable leveraging existing assistance programs;  
    - Consider alternative financing mixes, including medium-term syndicated loans.

- Abrupt global slowdown or recession  
  - Likelihood: High  
  - Expected Impact on Economy: High. Could adversely impact growth, spur capital outflows from the private sector and pressure the exchange rate. Fiscal balances would worsen, including due to balance sheet scarring in the private sector, and debt vulnerabilities would rise further.  
  - Scenario notes:  
    - U.S.: inflation remains elevated prompting the Fed to keep rates higher for longer, dollar strengthening, more abrupt financial and housing market correction, and “hard landing.”  
    - EMDEs: global financial tightening, volatile commodity prices → spiking risk premia, debt distress, widening external imbalances, fiscal pressures, sudden stops.  
  - Policy Response:  
    - Adopt mutually reinforcing monetary and fiscal policy stances;  
    - Reprioritize spending to support the vulnerable while compressing overall expenditure to contain the negative fiscal-debt impact;  
    - Greater exchange rate flexibility;  
    - Accelerate reforms to address structural weakness affecting competitiveness.

- Monetary policy miscalibration  
  - Likelihood: Medium  
  - Expected Impact on Economy: High. Could trigger capital outflows from the private sector and hamper capital market access by the sovereign; exchange rate depreciation pressures; fiscal balances worsen; debt vulnerabilities rise.  
  - Policy Response:  
    - Tighten monetary policy;  
    - Greater exchange rate flexibility;  
    - Compress expenditure to contain the negative fiscal-debt impact.

- Deepening geo-economic fragmentation  
  - Likelihood: High  
  - Expected Impact on Economy: Medium. Could adversely impact growth, spur capital outflows from the private sector and pressure the exchange rate.  
  - Policy Response:  
    - Reprioritize spending to support the vulnerable while compressing overall expenditure to contain the negative fiscal-debt impact;  
    - Greater exchange rate flexibility;  
    - Accelerate reforms to address structural weakness affecting competitiveness.

- Cyberthreats  
  - Likelihood: Medium  
  - Expected Impact on Economy: Medium. Such attacks can trigger financial instability or widely disrupt socio-economic activities.  
  - Policy Response:  
    - Continue reforms to strengthen cyber security capabilities at both government and private sector level.

- Extreme climate events  
  - Likelihood: Medium  
  - Expected Impact on Economy: High. Would lead to slower growth, an increase in food inflation, pressures on public spending and the current account, and adversely affect vulnerable households.  
  - Policy Response:  
    - Guard against second-round effects on inflation;  
    - Use targeted programs to help vulnerable groups and reprioritize spending.

### Potential Domestic Shocks
- Resumption of adverse weather conditions or locust invasion  
  - Likelihood: Medium/Low  
  - Expected Impact on Economy: High/Low. Depending on the geographical area impacted, could lead to lower agricultural production and slower growth, an increase in food inflation, pressures on public spending and the current account, and adversely affect vulnerable households.  
  - Policy Response:  
    - Use targeted programs to help vulnerable groups and reprioritize spending;  
    - As necessary, guard against second-round effects on inflation.

- Systemic financial instability  
  - Likelihood: Medium  
  - Expected Impact on Economy: High. Could hamper functioning of interbank markets, exacerbate domestic and FX liquidity conditions, cause exchange rate overshooting, severely constrain private credit, constrain net domestic financing, and raise debt vulnerabilities.  
  - Policy Response:  
    - Deploy measures to stabilize the banking sector;  
    - Compress primary spending to avoid accumulation of pending bills.

- Political risks  
  - Likelihood: Medium  
  - Expected Impact on Economy: Medium. Unrest could reemerge related to protests against higher cost of living, need to raise more taxes and electoral process.  
  - Policy Response:  
    - Remain committed to reforms under the program.

- Emergence of greater-than-expected weaknesses in the SOE sector  
  - Likelihood: High  
  - Expected Impact on Economy: Medium. Would create additional fiscal pressures, potentially leading to further crowding out of the private sector (magnitude uncertain).  
  - Policy Response:  
    - Continued financial evaluation of health of top SOEs;  
    - Implement least-cost strategies to address SOE financial pressures.

- Deterioration in security situation  
  - Likelihood: Medium  
  - Expected Impact on Economy: High. Would adversely affect recovery of the tourism sector, foreign direct investment, and portfolio inflows and, in turn, growth.  
  - Policy Response:  
    - Reprioritize fiscal spending to accommodate security needs;  
    - Maintain policies to improve macro fundamentals (e.g., structural and governance reforms);  
    - Strengthen and robustly implement AML/CFT framework to help prevent, detect, and disrupt the financing of terrorism.

- Risks from poor implementation capacity and weak program ownership  
  - Likelihood: Medium  
  - Expected Impact on Economy: Medium. Would lead to higher budget deficits, increase debt ratios, crowd out private investment, and weaken growth.  
  - Policy Response:  
    - Remain committed to fiscal targets and reforms under the program.

### Key linked observations from Annex II and Annex III (selected figures and assessments)
- External position and reserves:  
  - Overall Assessment: The external position of Kenya in 2022 was broadly in line with the level implied by medium-term fundamentals and desirable policies.  
  - Total external debt (loans and securities) is estimated at 69 percent of GDP at end-2022, of which 31 percent of GDP is public and 38 percent of GDP is private. Over 85 percent of external private debt is owed by the non-bank sector.  
  - Total external assets are estimated at 21.6 percent of GDP.  
  - Published IIP data available until 2021; extrapolated for 2022 with BoP financial flows.  
  - NIIP: -61 (2022, % GDP). Projected to widen further to -72 percent of GDP by 2027.  
  - 2022 (% GDP) components: Gross Assets: 22; Debt Assets: 20; Gross Liab.: 82; Debt Liab.: 72.

- Current Account (CA):  
  - CA deficit was 5.1 percent of GDP in 2022.  
  - Assessment: CA balance is broadly in line with level implied by fundamentals and desirable policies in 2022.  
  - EBA-lite CA model indicates a CA gap of –0.5 percent of GDP in 2022 (CA norm –5.0 percent of GDP; cyclically adjusted CA of -5.5 percent of GDP).  
  - Contribution of policy gaps to CA gap: 1.2 percent of GDP (private credit growth and public health expenditures main contributors, 1.1 percent of GDP combined).

- Real Exchange Rate (REER) and gaps:  
  - REER appreciated on average by 2.2 percent in 2022, following a depreciation of 2.6 percent in 2021.  
  - In May 2023, the REER was 6.4 percent weaker than its average in 2022, falling below its 5-year moving average.  
  - EBA-lite REER model suggests a gap of 15.3 percent for 2022. Staff assesses the REER gap to be in the range of 4–15 percent for 2022.

- Capital and financial flows:  
  - In 2022, Kenya’s CA deficit was primarily financed by debt flows. Other net investment flows amounted to 4.6 percent of GDP. Annual FDI net inflows improved relative to 2021 but average less than one percent of GDP.  
  - Assessment: Resilience of private sector inflows in the face of tighter global financial conditions has been an important backstop.

- FX intervention and reserves:  
  - In 2022, gross official reserves were 7 percent of GDP, covering 3.9 months of next year’s imports of goods and services.  
  - Reserves declined in the course of 2023 reflecting inter-year dynamics of external official inflows and further drawdowns, including via FX interventions during heightened volatility. Import coverage expected to remain above the 3-month threshold.  
  - Assessment: Kenya’s de facto exchange rate arrangement is crawl-like. The CBK engages in periodic FXI to smooth volatility; FXIs have been asymmetric since 2021Q3, with CBK a net seller. Increasing exchange rate flexibility would help absorb potential shocks.  
  - De jure exchange rate arrangement is free floating. The bilateral nominal exchange rate against the U.S. dollar depreciated by 9 percent in 2022 and by 13.8 percent since then as of June 29, 2023.

- Climate resilience (Annex III highlights)  
  - Over 70 percent of natural disasters in Kenya are attributable to extreme climatic events.  
  - Agriculture and tourism together comprise over 50 percent of GDP; agriculture provides employment to about 80 percent of the rural workforce.  
  - Nearly 35 percent of electricity generated in the country comes from hydropower.  
  - Climate change affects debt sustainability via higher government spending on recovery and reconstruction and lower tax revenue from reduced productivity in climate-sensitive sectors.

*Source: Annex I. Risk Assessment Matrix (content unit: 1kenea2023001).*

### 2.      Flood and drought events are becoming more frequent, with drought cycles occurring

### 2. Flood and drought events are becoming more frequent, with drought cycles occurring every 2–3 years instead of every 5–10 years

### Frequency and human impacts
- Drought cycles: occur every 2–3 years instead of every 5–10 years.
- Drought-induced food insecurity episodes: frequency increased from every 20 years (in the 1980s) to every 2–3 years.
- Projected severe food insecurity: increased from 3.5 million in September 2022 to 5.4 million in June 2023 due to the worst drought in decades (International Rescue Committee, February 2023).

- Selected natural disaster statistics (1900–2023) from EM-DAT (table entries preserved exactly):
  - Drought — Events Count: 17; Total Fatalities: 196; Total Affected: 59,300,000; Total Damage (‘000 US$): 251,500
  - Ground Movement — Events Count: 1; Total Fatalities: 0; Total Affected: 0; Total Damage (‘000 US$): 0
  - Tsunami — Events Count: 1; Total Fatalities: 1; Total Affected: 0; Total Damage (‘000 US$): 100,000
  - Bacterial Disease (Epidemic) — Events Count: 21; Total Fatalities: 1,698; Total Affected: 67,499; Total Damage (‘000 US$): 0
  - Parasitic Disease (Epidemic) — Events Count: 5; Total Fatalities: 1,595; Total Affected: 6,807,533; Total Damage (‘000 US$): 0
  - Viral Disease (Epidemic) — Events Count: 8; Total Fatalities: 514; Total Affected: 1,356,103; Total Damage (‘000 US$): 0
  - Other (Epidemic) — Events Count: 4; Total Fatalities: 1,273; Total Affected: 22,538; Total Damage (‘000 US$): 0
  - Flash Flood — Events Count: 9; Total Fatalities: 203; Total Affected: 305,339; Total Damage (‘000 US$): 500
  - Riverine Flood — Events Count: 37; Total Fatalities: 1,150; Total Affected: 2,232,222; Total Damage (‘000 US$): 136,038
  - Other (Flood) — Events Count: 14; Total Fatalities: 720; Total Affected: 2,329,485; Total Damage (‘000 US$): 381,850
  - Landslide — Events Count: 4; Total Fatalities: 133; Total Affected: 140; Total Damage (‘000 US$): 0
  - Mudslide — Events Count: 1; Total Fatalities: 20; Total Affected: 6; Total Damage (‘000 US$): 0
  - Convective Storm — Events Count: 1; Total Fatalities: 50; Total Affected: 0; Total Damage (‘000 US$): 0

### Economic costs and macro-fiscal implications
- Estimated total cost of climate-related hazards: 2–2.4 percent of GDP per year in Kenya.
- Drought cost: about 8 percent of GDP every five years.
- Flood cost: 5.5 percent of GDP every seven years.
- Example historical costs:
  - 1998–2000 drought: estimated US$2.8 billion (principal losses: crops and livestock; plus forest fires, damage to fisheries, reduced hydropower generation, industrial production and water supplies).
  - 2008–2011 drought: affected 3.7 million people; caused US$12.1 billion in damages and losses; cost over US$1.7 billion in recovery and reconstruction needs.

- Macro-fiscal mechanisms:
  - Natural disasters destroy capital and reduce output in short run; increase government spending for reconstruction and fiscal transfers and reduce government revenues.
  - Resulting fiscal outcomes: deteriorating fiscal deficit, increasing public debt, worsened BoP balance, pressure on reserves and external sustainability.
  - Kenya assessed at high risk of overall and external debt distress; natural disasters and climate change pose significant fiscal risks.

- Model simulation findings (IMF DIGNAD model):
  - Investing in adaptation infrastructure, mobilizing climate finance, and improving public investment efficiency can reduce output losses when disasters hit.
  - Public debt would stabilize significantly below baseline and decline over the long run due to smaller and less persistent output losses and lower post-disaster reconstruction costs.
  - Improving public investment management (PIM) efficiency amplifies benefits of adaptation investment and strengthens output resilience.

### Agriculture, vulnerability, and socioeconomic impacts
- Agriculture profile and vulnerability:
  - Agriculture comprises nearly a quarter of total nominal GDP.
  - Employs about 8.5 million Kenyans.
  - Accounts for 70 percent of rural employment.
  - Nearly 98 percent of agriculture is rainfed.
  - 84 percent of land is classified as arid and semi-arid.
- Environmental impacts of current farming:
  - Current farming practices resulted in approximately 90 percent of the tree cover loss over 2001–2020 and are a leading cause of land degradation.
- Expected climate impacts on agriculture:
  - Reduced yields of key food crops (i.e., maize) and agricultural exports (i.e., coffee, cut flowers, tea).
  - Indirect impacts: increased runoff and soil erosion; increased crop losses from wildlife migrations; rising and novel infestations from insects, diseases, and weeds.

### Emissions profile and sectoral sources
- Kenya’s contribution to global GHG:
  - 2019 share: about 0.15 percent of global GHG; ranked 69th largest emitter.
  - Per capita emissions: 1.8 metric tons of CO2 equivalent (MtCoe2) vs. global average of approximately 6.5 MtCoe2; Kenya ranks 173rd by per capita metric.
- 2019 sectoral emissions (CPAT evaluation, total 92.8 MtCOe2):
  - Agriculture: about 56 percent of total emissions.
  - Energy-related emissions: 32 percent of total (buildings 14 percent; transport 9 percent; industry 7 percent; power sector 2 percent).
  - Waste: 9 percent.
  - Industrial processes: 1 percent.
- High building-sector emissions explained by high household use of charcoal and wood for cooking.

### Legal, institutional, and policy framework
- National strategies and laws:
  - Kenya Vision 2030 and successive Medium-Term Plans (Second MTP 2013−17; Third MTP 2018−22; Fourth MTP 2023–2027 being prepared) mainstream climate actions.
  - Climate Change Act (CCA, 2016): key legislation for enhancing climate change resilience and low carbon development; recognizes National Climate Change Action Plan (NCCAP) as a five-year iterative tool.
  - Other instruments: 2021 Guidance on Climate-Related Risk Management to the banking sector; National Adaptation Plan 2015−30; Green Economy Strategy and Implementation Plan 2016−30; Climate Smart Agriculture Strategy 2017−26; Climate Risk Management Framework; forthcoming Long Term Low Emission Development Strategy (LEDS).
- Risk of fragmentation:
  - CCA creates a parallel institutional framework not fully integrated with PFM Act (2012) and disaster risk management laws.
  - CCA assigns NCCC as administrator of National Climate Change Fund (NCCF), while draft PFM Climate Change Fund Regulations 2019 establishes a Climate Change Fund Board and an accounting officer of the Ministry of Environment, Climate Change, and Forestry as administrator — indicating potential institutional overlap.

### Nationally Determined Contribution (NDC) and mitigation/adaptation priorities
- NDC updated in 2020:
  - Conditional target: reduce GHG emissions by 32 percent in 2030 relative to BAU scenario of 143 million MtCO2eq, including LULUCF.
  - Identified sectors: energy, industrial processes and product use, agriculture, forestry, water and irrigation, health, land use and waste management.
  - Adaptation: mainstream adaptation into Medium-Term Plans (MTPs) and County Integrated Development Plans (CIDPs); strengthen institutional frameworks; invest in afforestation/reforestation, geothermal and other clean energy, climate smart agriculture, and drought management.
  - Mitigation focus: renewable power, energy efficiency, electrification, and reforestation; potential to reduce emissions from agriculture seen as minimal.
- Supplementary notes:
  - Kenya’s updated NDC pledges are broadly in line with other EAC countries; pledge is mostly conditional on international support.

### Climate finance framework and challenges
- National Climate Finance Policy (2018) objectives:
  - Establish institutional and reporting frameworks to access and manage climate finance.
  - Enhance implementation of public finance management (PFM) for climate financing.
  - Mobilize internal and external climate finance; track and report financing sources, applications and impacts; encourage private sector participation.
- Green fiscal initiatives:
  - Forthcoming Green Fiscal Incentives Framework Policy intended to guide priority fiscal policies and incentives and to promote development of a domestic green bond market.
  - Kenya’s Sovereign Green Bond Framework prepared to set guidelines aligned with Green Bond Principles and international standards.
- Coordination and regulatory gaps:
  - Regulatory fragmentation and inadequate coordination prevent private sector investment in climate adaptation and mitigation.
  - Climate Finance and Green Economy Unit in NT coordinates climate finance and acts as National Designated Authority for the Green Climate Fund, but other funds (Adaptation Fund, GEF, CIF) are coordinated by agencies such as NEMA and sector ministries.
  - Project pipelines not coordinated from PIM perspective nor fully integrated into budget planning and preparation processes.
- Need for incentives and technology scaling:
  - Authorities recognize the need to incentivize large- and small-scale private investments in renewable energy, water resources, agriculture, land-use and forestry.
  - Need to promote critical low-carbon technologies, electrifying transport with clean electricity, and scaling up water harvesting technologies.
  - Draft National Green Fiscal Incentives Policy Framework provides guidance but requires translation into an implementation framework to effect priority fiscal incentive measures.

### Costs and financing needs
- Total climate-related investment needs:
  - Estimated US$62 billion by 2030 (Kenya’s updated NDC), described as about 7.4 percent of the 2022 GDP per year over 2023–30.
- Mitigation financing:
  - Estimated mitigation requirements (2020–2030): US$17.7 billion; Kenya committed to cover 21 percent domestically and 79 percent subject to international support (finance, technology development and transfer, capacity building).
- Adaptation financing:
  - Total estimated cost of adaptation actions up to 2030: US$43.9 billion; 90 percent expected to require international support (finance, investment, technology development and transfer, capacity building); 10 percent to be financed domestically.

*Source: IMF — Kenya, Climate Policy Diagnostic, May 2023; EM-DAT: The Emergency Events Database – Universite Catholique de Louvain (UCL) – CRED, D. Guha-Sapir.*

### 17.      Current commitments for climate financing have fallen short of projected financing

### 17.      Current commitments for climate financing have fallen short of projected financing

### Current financing and allocation gaps
- Only US$2.4 billion was directed to climate related investments in 2018 (about ⅓ of Kenya’s annual finance gap to achieve its updated NDC), of which nearly 80 percent for mitigation purposes.
- The updated NDC identifies that over 70 percent of climate related spending would be needed for adaptation and less than 30 percent for mitigation.
- Public financing composition:
  - 55 percent of public climate-related financing financed mitigation activities.
  - Almost 100 percent of foreign private climate-related investment financed mitigation activities (mostly renewable energy projects).
  - No private investment was channeled towards adaptation efforts.

### Estimated potential mobilization and challenges
- It is estimated that Kenya could mobilize a total of US$3.3 billion per year in climate finance over the prospective RSF program duration, of which US$1.3 billion per year in private climate finance and additional US$2 in official climate finance.
- Key barriers that must be addressed to scale up climate finance flows:
  - Patchy climate data and information architecture.
  - Regulatory framework that lacks uniformity, consistency, and effectiveness.
  - Overlapping climate finance standards, compliance, and reporting practices.
  - Inadequate implementation capacity, especially at the county level.

### Causes of market failure holding back private adaptation investment
- Kenya has engaged in climate and green investment (e.g., work with Green Climate Fund, private issuance of the first green bond), yet private adaptation financing remains absent. Potential causes the government could address:
  - Mismatch in the supply and demand of financing instruments:
    - Small farmers and households require micro credits, whereas incoming external financing often takes the form of large-scale bonds or loans that need repackaging through the banking sector.
  - Cost of financing for adaptation investment:
    - Lenders lacking experience with adaptation projects cannot fully assess and price risk, leading to higher risk premia.
  - Lack of borrowing capacity:
    - Private borrowers may lack secure income or collateral; insecure land tenure and land fragmentation can undermine collateral availability for households and smallholder farmers.

### RSF support, reform measures, and expected effects
- Main reform objectives under the 20-month RSF-supported program:
  - Enhance climate data and information architecture.
  - Strengthen effectiveness and coordination of Kenya’s regulatory frameworks.
  - Streamline government systems and processes and realign spending priorities.
  - Motivate large- and small-scale investments in adaptation and integrate public project pipelines into budget planning and preparation.
- RMs implemented under the RSF aim to:
  - Facilitate large-scale climate investments, reduce barriers and risks, and enhance the investment environment.
  - Improve expenditure composition by prioritizing climate investment, including disaster risk mitigation and critical low-carbon technologies.
  - Enhance public investment efficiency (PIE) and mobilize large- and small-scale adaptation investments, including developing a green finance taxonomy to attract private climate finance and scale up climate investments.
- Expected roles of RSF resources:
  - Bolster Kenya’s pressing climate financing requirements and reinforce the authorities’ climate reform agenda.
  - Serve as a substitute for costlier domestic financing options (e.g., national saving certificates with high interest payments).
  - Foster improved expenditure composition prioritizing green development and social spending.
  - Contribute to sustainable green economic growth while helping ensure an adequate level of foreign exchange reserves to mitigate external shocks.

### Collaboration with multilateral partners (select highlights)
- World Bank: enhancing social safety nets, climate-smart agriculture, climate-resilient infrastructure, climate risk management and disaster preparedness.
- USAID and AfDB: focus on developing a carbon market framework.
- European Union (with FSD, NSE, KBA): support for updating Kenya’s sovereign green bond framework, developing a green finance taxonomy, strengthening methodologies and data collection, and helping implement budget tagging as recommended by the 2022 PEFA assessment.
- UK and Kenya: agreed to fast-track six green investment projects worth US$ 4.1 billion spanning energy, agriculture, and transport.
- FLLoCA project (World Bank, Denmark, Sweden, the Netherlands, KFW): aims to enhance channeling of climate finance to the county level through national PFM systems, prioritizing county and community-focused initiatives with performance-based grants.

### Macro-fiscal implications of climate adaptation — DIGNAD model setup
- Model: Debt, Investment, Growth, and Natural Disaster (DIGNAD) — a DSGE model assessing public investment effects on growth and debt sustainability, incorporating five disaster channels: damages to public capital, damages to private capital, temporary productivity loss, decline in public investment efficiency, and loss in creditworthiness.
- Kenyan calibration and baseline parameters:
  - Standard capital infrastructure investment aligned with projected values for 2023: 4.2 percent of GDP.
  - Public debt level: 68.4 percent of GDP at end-2022.
  - Public external debt composition: concessional debt at 26.2 percent of GDP and commercial debt at 8.3 percent of GDP.
  - Grants and remittances derived from a ten-year average using IMF historical data.

### Scenarios analyzed
- Scenario 1: No policy change
  - Authorities continue investing in standard capital infrastructure and do not scale up adaptation investment during years 1–5.
  - A natural disaster occurs in year 6 calibrated to yield a 9 percentage decline in GDP; recovery completed in five years.
- Scenario 2: Some adaptation investment + moderate improvements in mobilizing climate finance and PIE
  - Adaptation investment: 0.5 percent of GDP per year (2.5 percent of GDP over five years).
  - Financing: concessional public borrowing of about 0.5 percent of GDP (four disbursements until 2025) and 2.5 percent of GDP in grants over five years.
  - PIE improvement: 9 percentage points, reaching 61 percent (SSA average).
- Scenario 3: Robust adaptation investment + significant improvements in mobilizing climate finance and PIE
  - Adaptation investment: 1.5 percent per year (7.5 percent of GDP over five years).
  - Financing: concessional public borrowing of about 0.5 percent of GDP (four disbursements until March 2025) and 10 percent of GDP in grants in years 2–5.
  - PIE improvement: 25 percentage points, reaching 80 percent (SSA PIE frontier set by Ghana).

### Simulation findings and implications
- Investing an additional 1.5 percent of GDP in adaptation infrastructure while mobilizing climate finance and strengthening PIE over five years could save Kenya nearly 3 percent of GDP in output loss when a disaster hits.
- Debt dynamics:
  - Adaptation investment raises public debt in the three years preceding the shock but stabilizes at 75.1 percent of GDP by the end of the 5-year post-shock recovery—below the baseline level of 80.8 percent of GDP.
  - Over the long run, adaptation investment contributes to a declining debt trajectory due to smaller and less persistent output losses and lower post-disaster reconstruction costs.
- Broader resilience gains:
  - Climate-resilient infrastructure, sustainable agriculture and forestry practices, and investments in early warning systems and disaster risk management enhance the economy’s ability to withstand climate-related shocks.
- Fiscal space and sequencing:
  - Given current fiscal constraints, increasing adaptation investment should be paired with stronger efforts to mobilize additional climate financing from official and private sources.
- Residual risks:
  - Investment in adaptation increases resilience but cannot eliminate all climate-related risks; complementary investments in contingency plans and social safety nets are needed to alleviate residual risks and reduce total climate change costs.

*Source: IMF staff analysis contained in chapter 17 and Annex IV of the referenced Kenya report.*

### 4.8 percent in 2022. With the recent rains having been adequate, a rebound in agricultural

### 1kenea2023001 - 4.8 percent in 2022. With the recent rains having been adequate, a rebound in agricultural

### Background and recent developments
- Economy expanded by 4.8 percent in 2022.
- Agriculture recorded negative growth for the second consecutive year due to drought; recent long rains in 2023 have been good and a rebound in agricultural production is underway.
- Services sector supported growth: recovery in hospitality, strong growth in transport and storage, information and communication, and financial, professional, administrative, and support services.
- Private consumption slowed and total investment declined, particularly public investment.
- Contribution from net exports to growth rose as exports increased and non-oil goods imports declined, reflecting completion of large import-intensive infrastructure projects and rationalization of the public investment pipeline.
- Headline inflation trajectory:
  - Increased from 5.4 percent y/y in January 2022 to peak at 9.6 percent y/y in October 2022.
  - Stayed above 9 percent through March 2023.
  - Decelerated to 7.9 percent in April and 8 percent in May 2023 as food price inflation eased.
  - Non-food, non-fuel (NFNF) inflation: 4.4 percent in February 2023, declined to 4.3 percent in May 2023.
- Monetary policy: Central Bank Rate increased by a total of 350 basis points cumulatively between May 2022 and June 2023.
- Current account and external:
  - Merchandise trade balance broadly unchanged at 10 percent of GDP in 2022.
  - Tourism receipts rebounded to pre-COVID-19 levels; remittances remained robust.
- Fiscal developments:
  - Supplementary FY2022/23 Budget approved in February 2023 targets an overall fiscal deficit of 5.7 percent of GDP (against 5.8 percent under the original budget and 6.2 percent in FY2021/22).
  - Supplementary emphasizes revenue mobilization (including non-tax trade-related revenues) and containment of non-priority spending while protecting social spending.
- Public debt:
  - PV of overall public and publicly guaranteed debt stood at 63 percent of GDP as at end-December 2022.
  - Planned medium-term debt anchor: 55 percent of GDP; projected to decline to 60 percent in 2025.
- Banking sector indicators (as of March 2023):
  - Core capital adequacy ratio: 15.5 percent.
  - Total capital adequacy ratio: 18.4 percent.
  - Statutory minimums: 10.5 and 14.5 percent, respectively.
  - Liquidity ratio: 49.9 percent (statutory minimum 20 percent).
  - Growth in private sector credit: 11.6 percent in March 2023 compared to 12.7 percent in December 2022.

### Macroeconomic outlook and projections
- 2023 program baseline:
  - Real GDP growth expected at 5.0 percent in 2023.
    - Recovery in agriculture will contribute positively.
    - Tighter policy environment expected to offset some momentum.
    - Private consumption to strengthen as inflation eases and government initiatives support low-income households.
    - Private investment to benefit from political stability and PPP projects.
    - Net exports contribution expected to rise.
  - Inflation projected to come back within the target band by no later than 2023Q3, with downside risks:
    - Recovery in agriculture and easing global food and fertilizer prices to lower food inflation.
    - Energy price inflation expected to ease from 2023Q3 on base effects, despite cost-reflective adjustments in fuel and electricity and exchange rate passthrough.
    - NFNF inflation projected to remain stable; tighter monetary policy expected to limit second-round effects.
  - Current account deficit projected at 4.8 percent of GDP in 2023 (compared to 5.1 percent of GDP in 2022).
    - Narrowing driven by stronger goods exports growth than goods imports due to: a) lower oil prices and exchange rate adjustment in 2023; b) level effect of low capital imports last year amid tight financial conditions; c) further rationalization of capital spending in the FY2023/24 budget.
    - Services net balance projected to improve on robust tourism growth; private remittances to continue growing.
- Medium term:
  - Growth expected to converge toward 5.4 percent.
  - 2024 growth projected at 5.2 percent under the program baseline.
  - With fiscal consolidation, private consumption and investment expected to be main growth drivers.
  - Inflation to return to the mid-point of the target band.
  - Current account deficit to stabilize around 5 percent of GDP.
- Risks:
  - High uncertainty from weather and climate (e.g., lower than expected rainfall, developing El Niño) could worsen food insecurity, slow growth, and raise food prices.
  - Inadequate policy responses could undermine confidence, exacerbate exchange rate and balance of payments pressures, and dampen private credit and consumption—negatively affecting growth and public debt.
  - Materialization of public sector contingent liabilities and higher security spending would affect public debt dynamics.
  - Exposure to global uncertainty, including banking sector concerns and regional spillovers (including from Sudan).
  - Upside: rapid global resolution of uncertainty could support stronger rebound in confidence, investment, and market access.

### Program performance, requests, and policy priorities
- Program performance through end-December 2022:
  - Quantitative performance criteria (PC) for tax revenue, primary balance, and net international reserves were met by substantial margins.
  - Indicative target (IT) on priority social expenditure met.
  - IT on exchequer requests outstanding for more than 90 days was missed due to liquidity constraints.
  - End-December 2022 monetary policy consultation clause (MPCC) was triggered as inflation was above the target band.
  - Structural benchmarks (SBs) for January–April 2023 were met.
  - SB on action plan for Kenya Power and Lighting Company was completed with a delay for end-December 2022.
  - SB on review of the fuel pricing mechanism remained outstanding; proposed reset to end-July 2023; task force constituted to review fuel pricing mechanism.
  - End-June 2023 SB on submission to the National Assembly of draft AML/CFT amendments is on-track.
- Requests to the IMF:
  - Extension of EFF/ECF arrangements from current 38 months to 48 months (to April 1, 2025).
  - Augmentation of access amounting to 75 percent of quota (SDR407.10 million) for balance of payments support.
    - Augmentation split: GRA resources 43.5 percent of quota (SDR236.12 million); PRGT resources 31.5 percent of quota (SDR170.98 million).
  - Modification of program conditionalities, including modification of end-December 2023 PCs on net international reserves and its adjustors (see Attachment III).
  - For end-June 2023 PCs under EFF arrangement, based on preliminary information:
    - Request waiver of nonobservance on the tax revenue target.
    - Request waiver of applicability for all other end-June 2023 PCs.
  - Request support under a 20-month Resilience and Sustainability Facility (RSF) with access totaling SDR407.1 million (75 percent of quota) as budget support to catalyze additional climate finance.
- Policy commitments and priorities:
  - Economic transformation agenda: move from public sector investment–led growth to dynamic private sector–led growth with focus on agricultural transformation; micro-, small- and medium-sized enterprises; housing; healthcare; digital superhighway; creative industry; employment; equitable income distribution; social security; tax-base expansion; and increasing foreign exchange earnings.
  - Key initiatives: Financial Inclusion (“Hustler”) Fund for low-cost micro-loans; increased contribution to National Social Security Fund; enhanced water infrastructure and affordable housing via public-private partnerships; privatization of some state-owned enterprises.
  - Fiscal policy: multi-year fiscal consolidation supported by domestic revenue mobilization and expenditure rationalization to put overall public debt-to-GDP on a downward trajectory.
  - Monetary policy: maintain price stability, resist second-round effects from higher food and fuel prices, anchor inflation expectations, build FX reserves consistent with program objectives, and retain exchange rate flexibility as a shock absorber.
  - Governance and public financial management: improve efficiency and transparency of public spending (including SOEs), strengthen preventive frameworks, enhance institutional oversight, and boost transparency.
  - Financial sector: transform banking sector towards customer-centric, risk-based credit pricing, transparency, and ethical banking; safeguard financial stability through enhanced prudential regulation and supervision.
  - Structural reforms and statistics: deepen reforms to improve business environment and boost investment, employment, and potential growth; improve data quality in line with international best practices.
- Additional operational commitments:
  - Provision of timely data and information to IMF staff per the Technical Memorandum of Understanding.
  - Memorandum of Understanding between CBK and National Treasury finalized to clarify responsibilities for timely servicing IMF financial obligations under the RSF.

*Attachment I. Memorandum of Economic and Financial Policies, Nairobi, Kenya, June 29, 2023.*

### 11.      Most quantitative targets were met but structural reforms faced delays amid elections

### 11.      Most quantitative targets were met but structural reforms faced delays amid elections

### Program performance and targets
- Quantitative performance criteria (QPCs, Table 1): All end-December 2022 and continuous PCs since the last review were met.
  - Tax collection overperformed by 0.3 percentage points of GDP.
  - Primary balance overperformed by 1.3 percentage points of GDP.
  - NIR overperformed the adjusted target by US$226 million.
- Indicative targets (ITs, Table 1):
  - End-December 2022 target on priority social expenditure was met.
  - Target on exchequer requests outstanding for more than 90 days was missed by 0.2 percentage points of GDP due to tight liquidity constraining spending.
- Monetary policy consultation clause (MPCC, Table 1): Triggered for end-December 2022 as the three-month average of inflation was 9.4 percent, outside the inflation target band of 2.5–7.5 percent.
- Structural benchmarks (SBs, Table 2):
  - SBs for January-April 2023 were met.
  - Of two SBs for end-December 2022, one was not met but implemented with a delay and the other is outstanding.
  - SB for end-June 2023 is on-track.
  - Specific SB actions:
    - FY2022/23 supplementary budget (end-January 2023 SB) and FY2023/24 Budget (end-April 2023 SB) consistent with program objectives were submitted timely to parliament.
    - Draft action plan to restore KPLC medium-term profitability (end-December 2022) was implemented with a delay; action plan submitted to Cabinet in May 2023.
    - Review of the fuel pricing mechanism and establishment of a task force to oversee progressive elimination of the fuel subsidy (end-December 2022 SB) delayed; now expected fully implemented by end-August 2023.
      - Fuel subsidies largely removed in September 2022 and fully eliminated in May 2023 (i.e., no cross-subsidization).
      - Taskforce constituted; findings to be publicly communicated in August 2023.
    - On-track to submit by end-June 2023 draft amendments to the POCAMLA and POCAMLR to align with FATF standards (end-June 2023 SB).

### Fiscal policy stance and near-term adjustments
- Policy objective: Balance near-term support to the economy and imperative of reducing debt vulnerabilities over the medium term; focus on reducing the deficit to place debt-to-GDP ratio on a downward path within the program period.
- Revenue collection and measures:
  - Data to end-April 2023 suggests revenue collection may fall short of the end-June 2023 target by about 0.7 percent of GDP due to weaker activity and slow budget execution affecting VAT and PAYE.
  - Rapid Revenue Initiatives (RRIs) expected to yield 0.4 percent of GDP in FY2022/23 by: fast-tracking compliance checks and audits at the Large Taxpayer Office; settling well-identified disputes on tax debt; providing incentives for timely tax payment.
- Financing and cashflow constraints:
  - Tight financing conditions and lower investor appetite for government paper constrained budget execution and delayed clearance of outstanding expenditure obligations, contributing to missing the end-December 2022 IT on non-accumulation of exchequer requests outstanding for more than 90 days.
- FY2022/23 Supplementary II Budget:
  - Submitted to Parliament on June 14, 2023; targets a primary deficit of Ksh.158 billion (Ksh.148 billion in Supplementary I budget).
  - Introduces savings on non-essential primary expenditures of Ksh.30 billion (0.2 percent of GDP), mainly affecting undisbursed funds of development projects with low absorption.
  - Approved by Parliament on June 22; Parliament reinstated expenditures amounting to Ksh.5.7 billion (0.04 percent of GDP) leading to a slightly wider primary deficit than proposed.
  - National Treasury to ensure end-June 2023 primary balance outturn will not exceed Ksh.158 billion through strict control of expenditure commitments and execution without adding to unpaid bills.
- Measures to avoid accumulation of arrears (actions and timelines):
  - Ensure efficient operation of government securities market to support liquidity (¶28).
  - Prioritize clearance of exchequer requests submitted in IFIMIS prior to end-March 2023.
  - Limit carryover to FY2023/24 of exchequer requests introduced in IFIMIS after April 1, 2023, that have corresponding budget appropriation in FY2023/24, consistent with Public Finance Management Regulations, 2015, Section 42(a).
  - Instruct MDAs to prioritize execution of FY2023/24 commitments to clear potential carryover within end-September 2023.
  - Submit to Parliament by end-October 2023 a Supplementary FY2023/24 Budget to ensure clearance of potential carryovers does not undermine fiscal targets.
  - Propose broadening the scope of the indicative target on exchequer requests to include transfers to Counties, State Corporations (SCs), Semi-Autonomous Government Agencies (SAGAs) and private sector for subsidies (proposed revised IT, TMU¶27).
  - Adopt a comprehensive strategy to deal with pending bills and address PFM weaknesses (¶26, proposed SB); monitor net accumulation of arrears (TMU¶30) under the program (proposed IT).
- FY2023/24 Budget proposal (submitted April 27):
  - Envisages overall fiscal deficit of 4.1 percent of GDP and a primary balance surplus of 0.7 percent of GDP (previously 4.4 and 0.3 percent of GDP).
  - Stronger projected outturn reflects a comprehensive revenue package for 1.6 percent of GDP.
  - Text Table 1: Revenue Package Underpinning the FY2023/24 Budget Proposal (In Percent of GDP)
    - Projected Yield: Total Revenue Package 1.6
    - 2023 Finance Bill 1.5
    - Tax measures 0.8
      - Income 0.2
      - VAT 0.4
      - Excise 0.2
    - Other revenue measures 0.7
      - Administrative 0.6
      - Non-tax 0.1
      - Custom Taxes 0.1
    - Memorandum: Total Tax Policy Measures (Finance Bill and Custom Measures) 0.9
- Medium-term fiscal consolidation:
  - Plan to introduce additional tax policy measures to yield 0.3 percent of GDP in FY2024/25.
  - Continue to contain recurrent expenditure as a ratio to GDP by limiting growth in the wage bill and transfers to public companies, while protecting priority social spending and keeping development spending close to 5 percent of GDP.
- Contingency and corrective measures in case of revenue shortfalls:
  - Any tax revenue shortfall relative to program targets will be compensated by additional tax policy measures drawing from MTRS work with IMF support.
  - Possible corrective measures include:
    - Streamlining by end-July 2023 the VAT apportionment ratio of allowable inputs VAT on exempt supplies to align with international practices and reduce VAT exemptions.
    - Submitting to Parliament by end-October 2023, along with a Supplementary FY2023/24 Budget, a package of legislative changes to strengthen tax collection (proposed SB)—including adoption of a motor vehicle circulation tax and reduction of tax exemption on interest income.
  - Stand ready to curtail non-critical spending if necessary.

### Fiscal risk management and institutional steps
- Fiscal Risk Committee (FRC) established within the National Treasury to monitor and assess fiscal risks, including contingent liabilities from PPPs.
  - Inaugural meeting took place in December 2022.
  - FRC will hold quarterly meetings consistent with the approved FRC meeting calendar.

### Fiscal structural reforms and revenue administration
- Medium-Term Revenue Strategy (MTRS):
  - Aim: increase revenue mobilization by 8 percentage points of GDP by 2030 while supporting competitiveness and Vision 2030.
  - Submit draft MTRS with implementation plan and oversight mechanisms to Cabinet by end-October 2023 (proposed SB).
  - Expect to submit MTRS to Parliament by end-December 2023 and start implementation in early 2024.
- Kenya Revenue Authority (KRA) reforms and initiatives:
  - Risk-based compliance strategies:
    - Restructured Compliance Risk Management Committee in November 2022.
    - Monitor and evaluate compliance improvement strategies and report status quarterly.
    - Full roll-out of risk-differential framework (RDF) and risk profiling tool in selection of cases for compliance reviews and audits by June 2024.
    - Full roll-out and use of case management tool in processing all cases in the system.
  - Strengthening audit function:
    - Actions taken to refresh and upgrade staff skills, strengthen feedback loops between disputes and audit areas, and improve audit quality (by end-June 2023).
    - Planned initiatives: training of computer audit specialists with advanced MS Excel techniques by June 2024; set up audit quality review teams for all Nairobi Tax Service Offices by June 2024.
  - Strengthening data analytics for compliance risk management (CRM):
    - Inaugural data management strategy approved in FY2021/22, currently in second year of implementation.
    - Integration with key third party sources for revenue assurance and risk management; integration with telecommunication companies commenced and will be finalized by June 2024.
    - Implementation of advanced analytics and expert models of fraud detection and risk management.
    - Reconciliation and migration of taxpayer ledgers from legacy system completed by June 2024.
    - iTax data cleaning committee and working group established in November 2022.
    - By end-August 2023 develop credible and reliable taxpayer register of the Large Taxpayer Office, Medium Taxpayer Office, and deregistered companies' data.
    - By June 2024 clean data for all taxpayers with other incomes except employment income.
  - Managing exemptions:
    - Completed verification of 27 provisions on VAT exercises.
    - Broaden VAT exemption verification at customs to new areas, including those under the East African Community Customs Management Act, by end-June 2023.
  - Avoiding delays in payment of tax refund claims:
    - Introduce administrative procedures to facilitate timely tax refunds audit process by March 2024.
    - Review current process on VAT refund processing with the National Treasury.
    - Finance Bill 2023 proposes amending the Tax Procedures Act to provide predictability on VAT refund payment timing and automatic offset mechanisms.
- Public procurement and payroll reforms:
  - Acquire an e-Government Procurement (e-GP) System end-to-end and compliant with PPADA 20215 and Regulations 2020; e-GP to be interfaced with IFMIS.
    - Pilot Phase 1 in eleven (11) MDACS from July 2023.
    - Roll-out Phase I and II to all MDACs from July 2024.
    - In interim, updated IFMIS e-Procurement module to be used.
  - Wage bill control:
    - Target: reduce ratio of government wage bill to GDP by 0.7 percentage points between FY2020/21 and FY2023/24.
    - Implemented wage freeze for FY2021/22 and FY2022/23; limit new employment to priority areas.
    - Harmonize and rationalize categories, rates, and rules for allowances; SRC to reduce number of allowances from current 247 and link rewards to performance.
    - Implement a common payroll system linked to IFMIS across MDAs and Counties by end-July 2023.
      - Unified Human Resource (UHR) system rolled out modules; Payroll Administration module finalized and rolled out to Ministries, Departments and Counties.
      - UHR to be linked to KRA i-Tax to facilitate filing of PAYE tax elements.
    - Roll out UHR for entire Public Service by July 2024 in three phases:
      - Phase 1: roll out to all MDAs and Counties.
      - Phase 2: roll out to all State Agencies that have adopted Unified Payroll Numbering (UPN) System; Teachers Service Commission (TSC) 349,000 teachers issued UPN.
      - Phase 3: issue UPN to all Commissions and Independent Offices, State Corporations, Public Universities, and Agencies by July 2024.
    - Ensure Collective Bargaining Agreements consider available resources.

*Source: 1kenea2023001 - 11.      Most quantitative targets were met but structural reforms faced delays amid elections*

### 26.      We continue improving Public Investment Management (PIM) to deliver value for

### We continue improving Public Investment Management (PIM) to deliver value for money in public capital expenditure

### Public Investment Management (PIM)
- Rationalizing existing projects:
  - Cabinet decision to thoroughly review 437 stalled or underperforming projects.
  - Each MDA has established a dedicated task force to conduct physical audits and verification.
  - NT will review submissions and prioritize projects for inclusion in the FY2024/25 budget and beyond in line with debt sustainability analysis.
  - NT will seek legal instructions from the Office of the Attorney General and Department of Justice on projects proposed for suspension awaiting a decision to either continue or cancel.
- Operationalizing the Public Investment Management Information System (PIMIS):
  - PIMIS to be piloted by end-October 2023 in Roads, infrastructure, Health, and Education sectors.
  - Following piloting, PIMIS will be populated with all ongoing and new projects, including PPPs.

### Public Finance Management (PFM) strengthening
- Milestones to strengthen expenditure control and public spending efficiency:
  - By end-December 2023, enhance IFMIS to enable registration of all multi-year commitments in IFMIS; submit to Cabinet and update PFM regulations 2015 (article 56) requiring MDAs to register multi-year commitments in IFMIS.
    - NT will issue guidelines requiring MDAs to submit planned commitments for the FY2024/25 Budget in line with the 2024 Budget Policy Statement ceilings.
  - By end-December 2023, ensure all MDA budget proposals for FY2024/25 prepared using a common costing approach based on the Hyperion system; Budget Manual (including costing guidelines) to be validated by end-July 2023.
  - By end-September 2023, complete a review of extra-budgetary units for consolidation and, where appropriate, bring them within the perimeter of the budgetary central government.
  - By end-September 2023, submit to Cabinet a comprehensive, timebound strategy to:
    - validate the stock of pending bills outstanding at end-June 2023;
    - propose measures to address PFM shortcomings (including multi-year procurement procedures) that enabled accumulation of pending bills, including the definition of expenditure arrears;
    - propose criteria for clearing validated arrears over an identified period consistent with the objective to reduce debt and debt vulnerabilities (end-September 2023 SB).
- Contextual notes on accounting and IFMIS:
  - Budgets are appropriated on an annual basis; commitments reverse at year end and recaptured as opening balances.
  - Government of Kenya currently uses cash basis of accounting; multi-year commitments effectively accounted for in an accrual system.
  - Proposed SCOA migration based on GFSM 2014 supports accrual accounting.
  - IFMIS currently captures annual commitments which lapse at end of FY; IFMIS Cash Planning module enables entities to manage expenditures and provides visibility of monthly commitments within a fiscal year.
  - Implementation of budget reforms such as budget costing and planning module in IFMIS and Hyperion Planning module will enhance medium-term budgeting and lock in medium-term projections and commitments.

### Fuel pricing alignment with budget
- Subsidy and cross-subsidy eliminations:
  - Eliminated overall subsidies on March 15, 2023, and cross-subsidies on May 15, 2023.
- Taskforce on fuel pricing alignment:
  - Taskforce comprises NT, Ministry of Energy and Petroleum, and EPRA.
  - Taskforce will review fuel pricing mechanism and in August 2023 recommend measures to ensure fuel pricing actions are aligned with the approved budget (end-December 2022 SB).
  - Taskforce has met twice; key recommendations to be made public within the coming weeks and are being distilled.
- Climate commitment:
  - Committed to transitioning to low-carbon economy by avoiding fossil fuel subsidies going forward (consistent with IMF RSF access requests).

### Medium-Term Debt Management Strategy (MTDS) and public debt management
- Key components:
  - Reducing domestic refinancing risks:
    - Ratio of Treasury bonds to Treasury bills rose from 82:18 in December 2021 to 85:15 in December 2022.
    - Average time to maturity of outstanding Treasury bonds remained at 8.9 years.
    - Continue lengthening maturity profile with issuance of liquid benchmark domestic government bonds across all maturities.
  - Primary reliance on concessional external financing:
    - FY2022/23: upsizing of the World Bank DPF to US$1 billion.
    - FY2023/24 and FY2024/25: expect access to additional budgetary support via the IMF’s RSF.
    - National Treasury issued an Expression of Interest in April 2023 to procure an international lead manager for the Eurobond maturing in 2024; hiring process expected to be completed by-end June 2023.
  - Strengthening legal framework for PFM:
    - Amendments to the 2012 PFM Act submitted to Parliament in April 2023 to transpose in primary law the definition of public debt from the constitution and replace the nominal debt limit with a debt anchor set at 55 percent of GDP in present value (PV) terms.
    - Proposed amendment vests the Public Debt Management Office (PDMO) with responsibility to advise the Cabinet Secretary and Parliament on sustainable levels of debt.
    - Taskforce (Attorney General's Office, CBK, NT) will present recommendations through PFM regulations on the revamped operational framework for public debt management by end-December 2023.
  - Broadening reporting of SOEs’ non-guaranteed debts:
    - FY2021/22 PDMR presented data for 26 out of around 260 entities.
    - National Treasury operationalized the Government Investment Management Information System (GIMIS) module.
    - PDMO will evaluate data quality and extend coverage for the FY2023/24 PDMR.
  - Reforms to deepen domestic debt securities market:
    - Deploy new Central Securities Depository System (CSD) later in the year to allow direct investor transactions and enable an active horizontal repo market.
    - Continue steps to ensure efficient operation of government securities market to support liquidity and transmission along the entire yield curve.

### Public Private Partnerships (PPPs)
- Commitment to careful evaluation of costs and risks.
- PPP Directorate capacity building:
  - Expanding staff and attracting talent in project origination and structuring, safeguards, and legal support by December 2023.
- Integration with PIM:
  - By December 2023, NT will develop a joint PIPM-PPP Framework to determine whether projects should be procured through traditional on-budget procurement or PPP framework (per PFM (PIM) Regulations, 2022).
- Reporting on PPP fiscal risks:
  - PPP Directorate to include quantification and likelihood of fiscal risks and climate-related risks (informed by FCCL framework) in the Fiscal Risk Register and discuss within the Fiscal Risk Committee.
  - PPP Directorate submitted the 1st Annual Report on the State of Public Private Partnerships in Kenya for Financial Year 2021/22 to Parliament, which includes Fiscal Commitments and Contingent Liabilities for PPP Projects.
  - Ensure annual budget submissions include costs associated with PPP Projects (ongoing and new) that impact the exchequer.

### Pension reform
- Introduced on January 1, 2021, a funded contributory pension scheme for public sector employees: Public Service Superannuation Scheme (PSSS).
- Governance and administration reforms:
  - Monitor and completely separate and delink governance of PSSS from the non-contributory scheme.
  - Revamp public service pension administration through digitization and re-engineering of the pension management system, expected to be completed by December 2024.
  - Digitization to streamline processes, improve accuracy, and enable better monitoring; re-engineering to provide an end-to-end Enterprise Resource Planning (ERP) solution.

### State-Owned Enterprises (SOEs) policy and vulnerabilities
- New SOE policy priorities under Kenya Kwanza administration:
  - Accelerated privatization process.
  - Streamlined governance structures with clear roles and responsibilities.
  - More efficient utilization of budgetary resources.
  - Better management of fiscal risks and enhanced accountability.
- SOE support in FY2022/23:
  - Cumulative support over FY2021/22 and FY2022/23 remained within program space.
  - Supports related to Kenya Airways (KQ) and Kenya Power and Lighting Company (KPLC).
  - KQ has negative equity; KPLC had a liquidity gap of Ksh.64 billion as of FY2021/22.
- Specific supports and measures:
  - KQ:
    - Supplementary Budget for FY2022/23 proposed provision of Ksh.19 billion (decline of Ksh.11 billion compared to original budget).
    - As of mid-May 2023, KQ received Ksh.10 billion of the FY2022/23 allocation.
    - Government has paid US$95 million as of end-April 2023 on KQ’s behalf for guaranteed senior external debt service.
    - Government evaluating strategies to turn around KQ with minimal budgetary implications.
  - KPLC:
    - In FY2022/23, KPLC to receive Ksh.3.525 billion in extraordinary budgetary support.
    - On April 1, 2023 the energy regulator announced a base adjustment to electricity tariffs (first such change since 2018).
    - With new tariff structure, timely passthrough of variable costs, and Cabinet-approved Action Plan, envisaged improvement in liquidity and no need for extraordinary support.
  - Both KQ and KPLC enjoy moratorium on debt service for amounts owed to the government.
- SOE financial evaluations and updates:
  - Earlier evaluations identified a cumulative Ksh.383 billion liquidity gap over five years for 18 SOEs (excluding Kenya Airways).
  - NT will update financial evaluation by end-June 2024 for fifty State Corporations using FY2022/23 audited accounts and report to the FRC by end-June 2024 (proposed SB).

### KPLC Action Plan and projected financial performance
- Cabinet approved the Action Plan to restore KPLC’s medium-term profitability and cover liquidity gaps on May 16, 2023 (end-December 2022 SB implementation delayed).
- Key Action Plan milestones:
  - By end-December 2024, transfer all transmission assets/lines to Kenya Electricity Transmission Company (KETRACO) and pay via on-lent government loans upon valuation.
  - By end-December 2024, settle outstanding Rural Electrification Schemes (RES) operations and maintenance cost deficit of Ksh.19.4 billion (assessed as of June 2022) and ensure KPLC and REREC enter into a commercial contract for future RES maintenance cost.
  - Develop and implement a turnaround strategy to reduce system losses from 22.4 percent to 14.4 percent by end-June 2025 (reduction breakdown: 5 percent commercial losses, 2 percent technical losses, 1 percent transmission losses).
  - By end-December 2024, establish a new governance structure at KPLC to give private shareholders fair representation reflecting shareholding structure.
- KPLC projected financial performance (as estimated by KPLC)
  - Profit and Loss Account (Ksh. Millions)
    - Net Revenue: 2021/22 157,353; 2022/23 174,968; 2023/24 207,524; 2024/25 208,983; 2025/26 217,715
    - Operating Expenses: 2021/22 38,026; 2022/23 42,586; 2023/24 45,206; 2024/25 42,741; 2025/26 43,720
    - Operating Income: 2021/22 4,119; 2022/23 102; 2023/24 16,672; 2024/25 14,806; 2025/26 14,258
    - Other Operating Income: 2021/22 13,296; 2022/23 10,778; 2023/24 7,295; 2024/25 6,755; 2025/26 5,403
    - Earnings Before Interest & Tax: 2021/22 17,415; 2022/23 10,880; 2023/24 23,967; 2024/25 21,561; 2025/26 19,661
    - Interest Expenses: 2021/22 -5,715; 2022/23 -5,235; 2023/24 -4,362; 2024/25 -3,658; 2025/26 -3,887
    - Financial Expenses: 2021/22 -12,292; 2022/23 -16,430; 2023/24 -13,398; 2024/25 -9,528; 2025/26 -8,431
    - Profit Before Tax: 2021/22 5,123; 2022/23 -5,550; 2023/24 10,569; 2024/25 12,033; 2025/26 11,230
  - Memorandum item — Current Ratio: 2021/22 0.5; 2022/23 0.55; 2023/24 0.61; 2024/25 0.63; 2025/26 0.68
- Expected outcomes:
  - With new tariff structure, continued passthroughs of variable costs, and effective implementation of the Action Plan, KPLC’s liquidity gap expected to see accelerated reduction by FY2025/26 and quick ratio to improve to unity, excluding major new asset investments.
  - No envisaged risks to KETRACO and REREC from KPLC restructuring.

### Kenya Airways (KQ) financial position and restructuring
- Operational and financial developments:
  - KQ recorded a lower operating loss in 2022 of Ksh.5.6 billion driven by revenue growth despite higher direct operating costs.
  - Passenger numbers increased by 68 percent to 3.7 million in 2022; capacity increased by 75 percent (both not yet at pre-Covid-19 levels).
  - Fuel price increases and forex losses from a depreciating Kenyan Shilling led to large provisions on dollar-denominated loans.
  - Net losses rose from Ksh.16 billion in 2021 to Ksh.38 billion in 2022.
- Indebtedness as of end-December 2022:
  - Total outstanding liabilities: Ksh.277 billion.
  - Long-term liabilities: Ksh.160 billion.
  - Short-term liabilities: Ksh.117 billion, of which Ksh.43 billion comprises outstanding trade and other payables.
    - Arrears composition includes fuel (11 percent), landing fees (24 percent), leases (10 percent), payroll (10 percent), and taxes/statutory dues (11 percent).
  - Negative equity position of Ksh.108 billion.
- Restructuring and government direction:
  - Detailed business restructuring action plan prepared in May 2022 has been put on hold to reassess least-cost approach for the budget.
  - Government objective: wean KQ off budgetary support by December 2023.
  - November 2022 directive for Ministry of Roads and Transport and NT to review restructuring strategies and recommend optimal strategy with least fiscal impact.
  - Draft Cabinet Memorandum with options submitted; decision expected by end-July 2023.
  - Government financial support in 2023 limited to payments under guaranteed senior external debt while discussions continue on novating the debt.

*Source: 1kenea2023001 - 26.*

### 40.      Rationalization  of  the  SCs  portfolio  will  be  prioritized  going  forward  and  we  remain

### Rationalization of the SCs portfolio will be prioritized going forward and we remain

### State corporations (SCs) governance, transparency, and oversight
- Revise ongoing strategy (Blueprint) to align with new policy priorities and to efficiently integrate and sequence reform measures considering the broader reform agenda for the SCs.
- By end-July 2023, secure Cabinet approval and publication of an updated inventory and a new classification of SCs that will apply across the government.
- Continue to upload on the NT website the audited financial statements and annual reports of SCs as received from the Auditor General.
  - By end-August 2023, aim to upload audited financial statements and annual reports for FY2020/21 of an additional 20 SCs and FY2021/22 reports of the 40 largest SCs and ensure continuous disclosure thereof.
- Uploaded FY2020/21 Annual Performance Evaluation Report of the SCs; by end-July 2023 will publish the FY2021/22 Annual Performance Evaluation Report and continue to upload such annual reports going forward.
- Under the Government Investment Management Information System (GIMIS):
  - Developed a loans module to capture disbursements and repayments of SC loans data.
  - Plan to develop, by end-June 2024, the analytical framework for Financial Evaluation and Risks Analysis and integrate it as an additional module to GIMIS to facilitate identification, quantification, monitoring, reporting, and management of fiscal risks stemming from SCs, including guarantees and contingent liabilities.
  - Note: technical assistance support will be needed for this action.
- Draft regulations (under internal review) to adjust organizational arrangements within NT for financial oversight of SCs and ensure that the role and functions for government investments as a core function is fully provided for in the legislative framework by end-December 2023.
- An Ownership Policy for SCs, describing a new governance architecture and legal ecosystem to enable enhanced performance and transparency, is under consultations with intra-governmental stakeholders.
  - Submit Ownership Policy to Cabinet for approval and publication by end-October 2023 (proposed SB).
  - With Fund TA, begin work on legal reforms to anchor new ownership arrangements, corporate governance requirements and other measures in the Ownership Policy and the SOE Blueprint, with a view of submitting draft amendments to Parliament by end-February 2024.
  - Secure technical assistance for the design of a new performance contracting and monitoring framework for Government owned enterprises (GOEs).
- Complete a comprehensive assessment of the national government’s continued involvement or investment in, or funding of, SCs and government-linked corporations (GLCs), starting with 50-100 SCs, based on selection criteria.
  - NT will prepare a report that will:
    - include specific recommendations for privatization and/or divestment, as well as for mergers, liquidations or dissolutions, transfers to counties and reversions to government departments;
    - identify and propose solutions for the main legal and operational challenges and bottlenecks to implement the recommendations;
    - establish a time-bound action plan for execution.
  - The report will be published and submitted to the National Assembly by end-October 2024 (proposed SB).
  - Continue to conduct, on a triennial basis, such assessments as mandated by Section 89(3) of the PFM Act.

### Government investments regulations and privatization
- Prepare regulations to provide a legal framework for more effective oversight of government investments by NT, covering:
  - budgetary resource allocation to government investments;
  - monitoring the performance of such investments;
  - management of fiscal risks emanating from those investments.
- By end-June 2024, the regulations will be submitted to the National Assembly for approval.
- Privatization Bill 2023:
  - Need for a privatization law aligned to the 2010 Constitution and other laws to replace the Privatization Act 2005.
  - Privatization Bill 2023, which seeks to repeal the Privatization Act 2005 and streamline privatization processes, has been approved by the Cabinet and submitted to the National Assembly in May 2023.

### Monetary policy objectives, stance, and reforms
- Primary policy objectives:
  - (i) maintain headline inflation within our target range (5±2.5 percent);
  - (ii) maintain a flexible exchange rate regime;
  - (iii) further improve the monetary policy framework.
- Monetary policy consultation clause (MPCC) with a 5 percent ±2.5 percent band; consultation with the IMF Executive Board is triggered if inflation falls outside the band (TMU ¶25).
- Monetary policy stance tightened over the past year to maintain price stability and bring inflation within the target band.
  - Inflation remained outside target band since June 2022, mainly driven by food and fuel prices, leading to non-observation of the program’s MPCC as of end-2022 and triggering a consultation with the IMF Executive Board.
  - After staying above 9 percent between September 2022 and March 2023, headline inflation decelerated to 7.9 percent in April and 8 percent in May.
  - Tightened monetary policy in five steps since May 2022 by increasing the Central Bank Rate (CBR) by 350 basis points cumulatively.
  - In 2023 so far, raised the CBR by 175 basis points.
- Commitment to continue adjusting monetary policy decisively to anchor inflationary expectations and maintain external sustainability.
  - Since 2022Q2, headline inflation driven by supply side factors (worst drought in decades and spikes in global commodity prices since the onset of war in Ukraine).
  - Expect inflation to come back within the target band no later than 2023Q3 but there are downside risks.
  - Ensure monetary policy stance and central bank policy operations are mutually consistent with the program to support macroeconomic stability, meet government financing needs, maintain Kenya’s external sustainability, and ensure adequacy of FX reserves.
- Exchange rate and FX market measures:
  - Support a flexible exchange rate system to absorb external shocks.
  - CBK issued the Kenya FX code in March 2023, aligned with elements of the Global FX Code; leading principles include Execution, Governance, and Risk Management and Compliance.
  - Banks submitted self-assessment of current practice against FX code and will submit board approved implementation plans by June 30, 2023, with full compliance expected by December 31, 2023.
  - In August 2023, intend to issue a statement of the CBK’s own commitment to the Global FX code.
  - Enhance wholesale inter-bank market operation via updates to banking circulars on inter-bank standards and operational conventions.
  - CBK commits to maintaining adequate reserves buffers consistent with program objectives.

- Ongoing monetary policy reforms:
  - Refining macroeconomic modeling and forecasting frameworks:
    - CBK strengthened forecasting framework and information content of MPC surveys per IMF AFRITAC East FPAS scoping mission recommendations.
    - Hosted IMF TA missions on Kenya’s FPAS focusing on quarterly projection model improvement, refining business surveys, and developing a nowcasting framework.
  - Implementation of measures to improve interbank market functioning, including rollout of a Centralized Securities Depository System (CSD) by July-August 2023; launch delayed to complete system performance assurance testing.
  - Improving communication of monetary policy decisions to increase effectiveness.

### Financial sector policy, risks, and reforms
- 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 status and risks:
  - Banking sector remains stable and resilient though some risks are emerging.
  - Credit to the private sector expanded broadly steadily through the pandemic and accelerated with economic recovery, but has moderated recently with tightening financial conditions.
  - Under the Credit Guarantee Scheme (CGS) launched in December 2020 to expand MSME access, total loans extended stood at KSh.4.6 billion as March 2023.
  - Ratio of gross non-performing loans (NPLs) to gross loans in the banking sector remained unchanged at 14 percent in March 2023 compared to March 2022.
  - Outstanding restructured loans amount to about 8 percent of gross loans with about 90 percent of the restructured loans performing as per the restructured terms.
  - Credit risk expected to remain elevated in the short and medium term as economies recover; banks also exposed to interest rate and FX risks from rising interest rates and exchange rate depreciation pressures.
  - CBK stress test focuses on credit risk and climate change risk from drought shock; results show banking sector resilience to major shocks from credit and climate change risks.
  - Banking sector’s current capital, liquidity and provisioning levels are adequate; enforcement of compliance via onsite and offsite surveillance continues.
- Strengthening resilience and surveillance:
  - Preserve capital and liquidity buffers; closely monitor FX exposures.
  - Encourage banks to strengthen governance frameworks and business models, pursue mergers and acquisitions, and capital strengthening efforts.
  - Monitor FX loans, deposits, and on-and off-balance sheet exposures to identify potential liquidity risks and strengthen contingency policies.
  - Received IMF TA in June 2023 to develop Internal Liquidity Adequacy Assessment Program (ILAAP) Guidelines to strengthen banks’ liquidity management frameworks.
- Reform agenda and sector developments:
  - Banking Sector Resilience: consolidation and combinations among players; regional expansion through acquisitions in the Democratic Republic of Congo, Rwanda, and Tanzania; microfinance banking sector transforming via acquisitions that mobilize additional capital.
  - Central Bank of Kenya (Amendment) Act, 2021 on Digital Credit Providers (DCPs):
    - Act effective December 23, 2021, empowered CBK to license, regulate and supervise DCPs.
    - CBK Digital Credit Providers Regulations, 2022, operationalized on March 18, 2022.
    - Unregulated DCPs required to apply for a license by September 17, 2022 or cease operations.
    - As of the March 2023, 32 DCPs had been granted licenses.
  - Greening Kenya’s Banking Sector:
    - Issued Guidance on Climate-Related Risk Management in October 2021 to help banks manage climate-related risks, invest in climate-friendly activities, and mobilize finance for climate action supporting Kenya’s NDC.
    - Guidance incorporates the TCFD framework to help disclose climate-related risks and opportunities.
    - Capacity building workshops for banks’ and CBK staff in risk management and compliance were conducted between February and March 2022.
    - All banks submitted board approved Climate-Related Risk Management Implementation Plans by end June 2022, focusing on strategy and governance and planning to address risk management and disclosure components over the medium-term.
    - Banks started submitting quarterly progress reports to CBK in end-September 2022.
    - Measures support participation of global investors to finance Kenyan climate-related initiatives and help position Kenya as a premier green finance hub.

- AML/CFT supervision enhancements:
  - Strengthened AML/CFT risk-based supervision for banks using offsite supervision tools to conduct risk assessments on all commercial and microfinance banks to determine ML/TF risk profiles.
  - Results inform risk-based AML/CFT onsite inspection plans for November 2022 to June 2023.
  - CBK commenced independent AML/CFT onsite inspections since January 2023.
  - Operational onsite manual for banks enhanced to incorporate a risk-based approach to AML/CFT onsite inspections.
  - AML/CFT risk assessment will be carried out annually to inform risk-based supervision.
  - Supervisory actions and sanctions will be imposed on non-compliant banks.
  - Continue to implement measures informed by the Kenya Mutual Evaluation Report 2022 and the findings of the National Risk Assessment.

### Governance, access to information, and beneficial ownership transparency
- Prioritize full and effective implementation of the access to information framework as a pillar for enhanced transparency and accountability.
  - Access to Information Regulations finalized with stakeholder inputs and, as of May 2023, are before Parliament and subject to the usual Parliamentary process.
  - Develop methodology to monitor implementation progress at national and county levels with an initial focus on strategic areas: debt, budget, tax expenditures, PPPs, and procurement.
  - Develop information standards to guide proactive provision of information and processing information requests.
  - Develop Standards for the Digitization and Automation of Records and work with county governments to advance necessary legislative actions for full operationalization.
- Enhance transparency of beneficial ownership in public procurement:
  - National Treasury issued Circular No.12/2022 reiterating requirements for public procuring entities to publish beneficial ownership information as part of contract award publications in the Public Procurement Information Portal (PPIP).
  - Public Procurement Regulatory Authority (PPRA) will prepare and publish quarterly compliance reports on status of compliance by reporting entities, commencing with first quarter of 2023.
  - As at end-May 2023, a total of 1,476 contracts worth Ksh.77.9 billion have beneficial ownership information published through the PPIP.
  - PPRA conducted a one-off review in January 2023 revealing a low level of compliance by public procuring entities despite interventions.
  - PPRA conducting ongoing training for procuring entities to improve understanding of disclosure obligations.
  - Expect compliance to improve by the end of FY2022/23 by the end of June 2023.

*Source: 1kenea2023001 - 40. Rationalization of the SCs portfolio will be prioritized going forward and we remain (PDF chapter).*

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

### 1kenea2023001 - 55.      We will prioritize continuous enhancement of our monitoring and data analysis

### Procurement monitoring and data analysis
- Prioritize continuous enhancement of monitoring and data analysis capabilities of procurement-related information, including identification of red flags and corruption-related trends and risks.
- Support measures:
  - Development of a central repository of data on public procurement, mandated under the Public Procurement and Asset Disposal Act, 2015 (section 9-1-m).
  - 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.

### Strengthening audit follow-up and accountability
- Commitment to enhance follow up and implementation of the Auditor-General’s audit findings and recommendations, including audits of COVID-19 spending.
- Measures to be explored:
  - (i) promote greater coordination and collaboration among state institutions 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 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.
- Draft Conflict of Interest Bill:
  - Approved by Cabinet and submitted to Parliament in March 2023.
  - 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 perpetrators of illicit enrichment and other corruption offenses.
- Target: achieve full automation of asset declarations for all public officials.

### Judiciary capacity for corruption-related cases
- Progress in strengthening Judiciary capacities to adjudicate corruption-related criminal cases efficiently.
- Actions and status:
  - October 2022: 127 principal magistrates with mixed jurisdiction appointed to oversee corruption and economic crimes cases at the lower level to address backlog.
  - Training for magistrates remains a top priority.
  - Delays in court cases addressed through Court Users Committee and Bar Bench.
  - Shortages in digital equipment and infrastructure persist; work underway to install video conference and filming capabilities in courtrooms.

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

### Enhancing AML/CFT tools to support anti-corruption
- Measures underway:
  - Strengthen the AML/CFT legal framework in line with FATF standards:
    - Multi-stakeholder working group led by Kenya Financial Reporting Center (FRC) prepared proposed legal drafting to amend POCAMLA (2009), POCAMLR (2013) and other instruments to address legal deficiencies identified in the 2022 MER.
    - Proposed legal drafting involving 17 legal instruments submitted to the Cabinet in May 2023.
    - Proposed draft amendments to POCAMLA and POCAMLR to be submitted to the National Assembly in June 2023 to complete the structural benchmark for end-June 2023.
  - Enhance beneficial ownership transparency:
    - Kenya Business Registration Services (BRS) e-register commenced operation in October 2020.
    - 41 percent of companies have submitted beneficial ownership information to BRS as at end-April 2023.
    - Target: full compliance; BRS to conduct outreach in the first quarter of FY2023/24 and strike off non-compliant companies thereafter.
    - BRS system prevents companies from accessing online services until compliance requirements, including beneficial ownership information, are met.
    - BRS preparing draft amendments to the Companies Act to provide administrative sanctioning power for failure to submit beneficial ownership information.
    - Proposed legal amendments to the Beneficial Ownership Regulations and the Limited Liability Partnership Act submitted to Cabinet for approval to improve access to beneficial ownership information by financial institutions.
  - Address deficiencies from the 2022 Mutual Evaluation Report (MER):
    - High-level action plan developed.
    - Conducted AML/CFT sectoral risk assessment for legal persons and legal arrangements.
    - Increased engagement to expedite implementation of the POCAMLA (Amendment) Act 2021 designating lawyers as reporting persons.
    - Mandates and power of the National Taskforce on AML and CFT strengthened via Gazette Notice issued in April 2023.
    - Established monitoring and evaluation mechanism to track implementation and ensure accountability.
    - Continued capacity building to enhance AML/CFT awareness among private sector and competent authorities.

### Building resilience to climate change — context and needs
- Economic exposure and impacts:
  - Agriculture sector contributes more than 25 percent of GDP and employs nearly 40 percent of total work force and about 70 percent of rural workforce.
  - Approximately 90 percent of Kenya’s land area is classified as a fragile arid and semi-arid ecosystem.
  - Economy loses between 2 and 2.4 percent of its annual GDP to climate-related disasters, in particular floods and droughts.
  - Following four consecutive failed rain seasons, Kenya is nearing the end of the worst droughts in the past 40 years, which has pushed nearly 10 percent of Kenyans to face severe food insecurity, and led to significant water shortages, livestock losses, and disease outbreaks.
- Policy and legislative frameworks:
  - National Climate Change Act of 2016 establishes framework for climate change management and roadmap for a five-year National Climate Change Action Plan (NCCAP).
  - National Climate Finance Policy (2018) sets out financing for NCCAPs.
  - Updated Nationally Determined Contribution (NDC) in 2020 targets reduction of greenhouse gas (GHG) emissions by 32 percent below business-as-usual levels by 2030.
  - Other instruments: 2021 Guidance on Climate-Related Risk Management (¶50), National Adaptation Plan 2015-2030, draft Green Fiscal Incentive Policy Framework, Disaster Risk Financing Strategy.
- Development partner support:
  - GIZ supported development of National Climate Change Action Plan 2023-27.
  - AfDB engaged through Kenya Green Growth Development Policy Financing (DPF) Project for technical assistance, mobilization of renewable energy investments, and awareness raising.
  - 2023 World Bank Development Policy Operation (DPO) supported agricultural policies promoting green and inclusive growth and institutional framework for climate policy.
  - Financing Locally Led Climate Action (FLLoCA) project mobilizes climate finance and channels funds to counties through PFM systems.

- Climate finance needs and shortfalls:
  - Updated NDC estimates over US$62 billion required for mitigation and adaptation actions across sectors between 2020-30.
  - Government committed approximately 13 percent of total budget (US$8 billion) to meet updated NDC targets by 2030; remaining 87 percent conditional on international support.
  - Climate finance directed to investments was only US$2.4 billion in 2018, of which nearly 80 percent for mitigation purposes.
- Institutional and regulatory challenges:
  - Need to realign spending priorities toward green development and improve public investment efficiency.
  - Institutional capacity gaps in climate finance fiduciary management impede planning, tagging, disbursement, absorption, reporting and management of climate-related projects.

### Climate-related reform priorities under the RSF
- Objective: support long-term structural climate resilience and adaptation objectives and strengthen macroeconomic stability by improving public investment efficiency and mobilizing climate finance.
- Reform priority 1: Incorporating climate risks into fiscal planning and investment framework.
  - Seek IMF TA to:
    - (i) conduct long-term fiscal sustainability analysis under different climate change scenarios;
    - (ii) develop a prototype of climate budget tagging in key climate sensitive sectors operable within Kenya’s institutions.
  - Targets:
    - By the 2nd review: conduct long-term fiscal sustainability analysis under different climate change scenarios and publish the results in the Fiscal Risk Statement starting in FY2024/25.
    - By the 3rd review: (i) develop a standardized climate change and disaster risk methodology to be integrated in project appraisal, (ii) include climate considerations in project selection criteria, and (iii) reflect the use of the analysis in project concept notes, feasibility studies, and the publication of the project selection criteria.
    - By the 4th review: implement a prototype of climate budget tagging in key climate sensitive sectors; develop guidelines (applied to all sectors) in the FY2024/25 MTEF circular for budget preparation with a clear definition of climate-related expenditure and publish the results.
- Reform priority 2: Mobilizing climate-revenue and strengthening climate-spending efficiency.
  - Targets:
    - By the 2nd review: implement carbon pricing in line with IMF recommendations; request IMF TA to assess overall impact on emissions reduction targets.
    - By the 3rd review: adopt priority fiscal incentives in agriculture, water, and land management sectors as listed in the draft National Green Fiscal Incentive Policy Framework; Cabinet to approve net metering regulation and electricity market, bulk supply, and open access regulations, including rates determination methodology to promote energy efficiency, electricity wheeling and distributed renewable power generation, including in Special Economic Zones and Industrial Parks.
    - Request IMF support to conduct impact assessment of incentive measures and develop implementation framework for priority fiscal measures supportive of the NCCAP and Kenya’s updated NDC.
- Reform priority 3: Enhancing effectiveness of existing frameworks to support climate finance.
  - Targets:
    - By the 2nd review: CBK to develop a draft green finance taxonomy adapted to Kenya’s updated NDC and circulate it for stakeholder consultation.
    - By the 4th review: (i) adopt a green finance taxonomy adapted to Kenya’s updated NDC, (ii) issue guidelines for climate-related disclosures for the banking sector in line with international best practices, and (iii) introduce time-bound targets for implementation of climate disclosure requirements.
- Reform priority 4: Strengthening disaster risk reduction and management.
  - Target:
    - By the 1st review: adopt the National Framework for Climate Services to enable dissemination of a digital early warning system platform for multi-sector climate-related information to most vulnerable counties, including ASAL and coastal regions.

### Expected outcomes and rationale
- These reforms aim to:
  - Strengthen institutional capacity to mobilize and allocate additional resources more efficiently.
  - Facilitate green financing from development partners and the private sector by internalizing climate-change considerations in allocation of government resources and improving transparency and accountability.
  - Support capital market development through green finance taxonomy and climate-related disclosures to help mobilize climate financing.
  - Provide assurances to development partners that climate funds will be well-spent, helping attract additional DP resources and private financing by raising risk-adjusted returns.

*Source: 1kenea2023001 - 55.*

### 68.      As an interim measure to help ease FX pressures, we introduced a new oil import

### 1kenea2023001 - 68.      As an interim measure to help ease FX pressures, we introduced a new oil import

### Oil import arrangement and FX management
- New temporary oil import arrangement based on a master framework agreed between Kenya and three national oil exporters from the Gulf, currently effective until end-2023.
- Arrangement provides for six-month credit for oil imports, backed by letters of credit issued by participating commercial banks.
- Under the previous open tendering system, oil import dues were payable upon delivery.
- Objective: use the resulting window of smoothed demand for foreign exchange to reactivate the effective functioning of the FX market.
- The temporary oil import arrangement will be allowed to lapse due to increased rollover risk of the private sector financing facilities supporting it and commitment to private market solutions in the energy market.
- Commitment on exchange rate use under the scheme:
  - The exchange rate used for purchasing FX under the scheme, and the rate at which the government will provide access to US$ should the need arise, would not deviate from the prevailing market rate by more than 2 percent.
- Regulatory change planned:
  - Amend regulations on the fuel pricing formula to specify passthrough of the exchange rate risk component and any other risks that may materialize.

### Data quality and statistical improvements (Section K)
- Policy objective: production and dissemination of high-quality economic statistics to support evidence-based decision making.
- Recent and planned statistical activities and releases:
  - 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.
  - September 2021: national accounts statistics updated to a base period of 2016.
  - May 2023: inaugural release of Kenya’s International Investment Position for the period of 2015 to 2021.
  - Preparing to undertake the next Household Expenditure Survey (delayed due to COVID-19).
  - CBK introduced a new survey of agriculture sector in July 2022 for high frequency agriculture sector data; complements CEOs, market perception, and hotel industry surveys.
- Government Finance Statistics (GFS) milestones (delays due to capacity constraints); expected outcomes:
  - (i) Reporting of general government fiscal outturns on a quarterly basis by February 2024.
  - (ii) Annual fiscal data of the public corporations’ sector (including financial and non-financial corporations) by February 2024.
  - (iii) Migration of the fiscal framework to GFSM 2014 based concepts, starting with the QEBR for fourth quarter of FY2022/23.
- Strengthening coordination of the interdepartmental committee on GFS to resolve delays.

### Program monitoring under EFF/ECF and RSF (Section L)
- Monitoring framework:
  - Periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, and indicative targets as set out in Table 1.
  - Structural benchmarks in Table 2 used for monitoring structural reforms.
  - Detailed definitions and reporting requirements in the Technical Memorandum of Understanding (TMU).
- Policy prohibitions during program period (without IMF prior approval):
  - Not introduce or intensify restrictions on payments and transfers for current international transactions.
  - Not introduce or modify any multiple currency practice.
  - Not conclude bilateral payments agreements incompatible with Article VIII of the IMF’s Articles of Agreement.
  - Not introduce or intensify import restrictions for balance of payments reasons.
- Review schedule:
  - Sixth, seventh, eighth, and ninth reviews to take place on or after November 7, 2023, May 7, 2024, October 30, 2024, and March 15, 2025, respectively.
- Under the RSF arrangement, progress monitored through reform measures detailed in Table 3.

### Quantitative performance criteria and indicative targets (Table 1) — selected figures preserved exactly as in source
- Fiscal targets:
  - Primary budget balance of the national government (- = deficit; floor): -110.2...99.3 Met -158.0 63.9 63.9 55.1
  - Tax revenue (floor): 862.3...913.4 Met 2,035 1,058 1,058 2,428
- Monetary targets:
  - Stock of central bank net international reserves (floor, in millions of US$): 4,984 4,761 4,987 Met 4,393 3,270 3,575 3,375
- Public debt targets:
  - Public and publicly-guaranteed external payment arrears (in millions of US$, ceiling): 0 0 22.98 Not Met 0 0 0 0
  - New domestic guarantees granted by the central government (ceiling): 5...0 Met 5 5 5
  - PV of contracting or guaranteeing of new external debt (ceiling,in millions of US$): 9,905 4,905 1,539 Met 11,766 13,340 13,340 14,471
- Indicative targets:
  - Priority social expenditures of the national government (floor): 205...206 Met 421 211 211 426
  - Change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling): 0...25 Not met 0 0 0 0
- Monetary policy consultation clause:
  - Upper band (annual, percentage points) 7.5...7.5 7.5 7.5 7.5
  - Center inflation target (annual, percentage points) 5.0...9.4 Not met 5.0 5.0 5.0 5.0
  - Lower band (annual, percentage points) 2.5...2.5 2.5 2.5 2.5
- Memorandum items for adjustors:
  - Programmed amount of new debt issuance for PV-reducing, debt management operations 9: 5,000...0...5,000 5,000 5,000 5,000
  - Nominal value of contracting or guaranteeing of new external debt under new PV ceiling (in millions of US$) 9: 14,521 9,521 4,215 ... 16,963 19,474 19,474 21,275
- Notes and calculation specifics preserved as in source (e.g., references to calculation dates, exclusions, cumulative definitions, discount rate of 7 percent).

### Structural benchmarks under EFF/ECF (Table 2) — selected measures and dates
- State-Corporations (SCs) Restructuring and Governance:
  - Submit to the Cabinet Sub-Committee on KPLC an action plan to restore KPLC’s medium-term profitability and fully cover any financing gaps through end-2023, as identified by the updated 2022 financial evaluation. Target: End-December 2022. Status: Not met. Implemented with delay. Macro-criticality: Reduce fiscal risks related to SOEs.
  - NT to complete financial evaluation for fifty SCs, using their FY2022/23 audited accounts, to quantify fiscal risks and report to the Fiscal Risk Committee. Target: End-June 2024. Status: Proposed. Macro-criticality: Reduce fiscal risks related to SOEs.
  - Cabinet approval and publication of an Ownership Policy for SCs describing a new governance architecture. Target: End-October 2023. Status: Proposed. Macro-criticality: SOE governance.
  - NT to submit to Parliament and publish a report with comprehensive assessment of national government involvement in SCs, including specific recommendations and a time-bound action plan. Target: End-October 2024. Status: Proposed. Macro-criticality: Reduce fiscal risks related to SOEs.
- Budget and Revenue Collection:
  - Submit to Parliament a supplementary budget for FY2022/23 consistent with programmed deficit and revenue targets. Target: End-January 2023. Status: Met. Macro-criticality: Ensure fiscal consolidation consistent with program objectives.
  - Submit to Parliament a budget and finance bill for FY2022/23 consistent with programmed deficit and revenue targets. Target: End-April 2023. Status: Met.
  - NT to submit to Parliament a supplementary budget for FY2023/24 along with tax measures. Target: End-October 2023. Status: Proposed.
- Fuel pricing and pending bills:
  - Complete a review of how the fuel pricing mechanism has been applied; constitute a taskforce to oversee progressive elimination of the fuel subsidy within the first half of FY2022/23. Target: End-December 2022. Status: Not met. Proposed to be reset to end-August 2023. Macro-criticality: Provide clarity on fuel pricing policy and avoid unfunded subsidy costs.
  - NT to submit to Cabinet a comprehensive, timebound strategy to validate outstanding pending bills and clear verified pending bills over the medium term. Target: End-September 2023. Status: Proposed. Macro-criticality: Strengthen budget practices and address outstanding arrears.
  - Submit draft of the MTRS with implementation plan to Cabinet. Target: End-October 2023. Status: Proposed. Macro-criticality: Increase compliance and tax revenue.
- Governance, AML, and Anti-Corruption:
  - Submit to the National Assembly draft amendments to the POCAMLA and POCAMLR in line with FATF standards. Target: End-June 2023. Macro-criticality: Strengthen AML preventive tools.
  - Conduct and publish a special audit on supplementary budgeting mechanisms and effectiveness. Target: End-September 2023. Macro-criticality: Reduce fiscal risks and strengthen budget controls.

### RSF reform measures (Table 3) — selected reform measures and review dates
- Reform Priority 1: Incorporating climate risks into planning and investment framework
  - RM2: National Treasury to conduct long-term fiscal sustainability analysis under different climate change scenarios and publish results in the Fiscal Risk Statement starting in FY2024/25. 7th EFF/ECF Reviews (April 7, 2024).
  - RM5: National Treasury to develop standardized climate change and disaster risk methodology, include climate considerations in project selection, and reflect use in project documents. 8th EFF/ECF Reviews (September 30, 2024).
  - RM8: National Treasury to implement a prototype of climate budget tagging in key sectors and publish results. 9th EFF/ECF Reviews (February 15, 2025).
- Reform Priority 2: Mobilizing climate-revenue and strengthening efficiency
  - RM3: Subject to Parliamentary approval, National Treasury to implement carbon pricing in line with IMF recommendations. 7th EFF/ECF Reviews (April 7, 2024).
  - RM6: National Treasury to adopt priority fiscal incentives in agriculture, water, and land management sectors as listed in the draft National Green Fiscal Incentive Policy Framework. 8th EFF/ECF Reviews (September 30, 2024).
  - RM7: Cabinet to approve net metering regulation, electricity market, bulk supply, and open access regulations, including rates determination methodology. 8th EFF/ECF Reviews (September 30, 2024).
- Reform Priority 3: Enhancing effectiveness of existing frameworks to support climate finance
  - RM4: CBK to develop a draft green finance taxonomy adapted to Kenya’s updated NDC and circulate for stakeholder consultation. 7th EFF/ECF Reviews (April 7, 2024).
  - RM9: CBK to adopt a green finance taxonomy, issue guidelines on climate-related disclosures for the banking sector, and introduce time-bound targets for implementation. 9th EFF/ECF Reviews (February 15, 2025).
- Reform Priority 4: Strengthening Disaster Risk Reduction and Management
  - RM1: Cabinet to adopt the National Framework for Climate Services to enable dissemination of a digital early warning system for vulnerable counties, including ASAL and coastal regions. 6th EFF/ECF Reviews (October 7, 2023).

### Consultation on breach of MPCC inflation target (Attachment II) — key findings and policy responses
- Inflation breach context:
  - Three-month average of inflation for end-December 2022 was 9.4 percent, outside the inflation target band of 2.5–7.5 percent agreed under the EFF and ECF Arrangements.
- Drivers of inflation:
  - Overall 12-month inflation remained outside the target band since June 2022, mainly driven by food and fuel prices due in part to global commodity developments (fuel, wheat, edible oils, fertilizers) and supply disruptions exacerbated by the war in Ukraine.
  - Food inflation:
    - Peaked at 15.8 percent in October 2022.
    - Contributed 5.7 percentage points to overall inflation in October 2022 (up from 4.5 percentage points in May 2022).
    - Moderated to 13.8 percent in December 2022, contributing 5.1 percentage points to overall inflation.
    - Main drivers: edible oils, milk products, wheat products, and maize products (collectively account for 12.4 percent of the total CPI basket, translating to 37.7 percent of the food basket) and contributed 2.5 percentage points to overall inflation in December 2022 compared to 2.3 percentage points in May 2022.
    - Maize and milk product prices rose sharply following reduced supply attributed to depressed rains.
  - Fuel inflation:
    - Increased to 12.7 percent in December from 9.0 percent in May.
    - Contributed 2.7 percentage points to overall inflation compared to 1.3 percentage points in May 2022.
    - Main fuel items driving fuel inflation: kerosene, diesel, and petrol (collectively account for 1.9 percent of the total CPI basket).
    - Increases linked to winding down of the Government subsidy program amid elevated international oil prices.
  - Non-food, non-fuel (NFNF) inflation:
    - Remained below 5 percent.
    - Increased to 4.1 percent in December from 2.9 percent in June.
    - Contributed 1.3 percentage points to overall inflation, partly due to tax measures in the FY2022/23 Government Budget and impact of international developments on imported goods.
- Monetary policy responses by CBK:
  - May 2022: CBK increased the CBR by 50 basis points to 7.50 percent.
  - Subsequent increases:
    - September 2022: additional 75 basis points.
    - November 2022: 50 basis points.
    - March 2023: 75 basis points.
    - June 2023: 100 basis points.
  - Cumulative increase since May 2022: 350 basis points to 10.50 percent (most recent action on June 26, 2023).
  - Rationale: mitigate second-round effects and ensure inflation expectations are well anchored given headline inflation driven by supply side factors.
  - Exchange rate depreciation has exerted some upward pressure on prices of imported goods.

*Source: Kenya — IMF country document content provided in the supplied PDF excerpt.*

### 5.      The CBK’s monetary policy measures have been complemented by fiscal measures

### 5. The CBK’s monetary policy measures have been complemented by fiscal measures

### Monetary and fiscal measures, and near-term outlook
- The CBK’s monetary policy measures have been complemented by fiscal measures implemented by the Government to moderate the prices of specific commodities and enhance food production, including subsidy on fertilizer prices.
- The CBK continues to monitor the drivers of inflationary pressures and stands ready to implement additional measures when necessary.

### Inflation developments (data and drivers)
- Overall inflation: 8.0 percent year-on-year in May 2023, down from 9.1 percent in December 2022.
- Food inflation: 10.2 percent in May 2023, compared to 13.8 percent in December 2022.
- Sugar prices: rose sharply in May 2023 and contributed 0.7 percentage points to overall inflation; factors cited include low cane deliveries attributed to reduced production, farmers switching from sugar cane to maize farming due to better prices, and a global rise in sugar prices owing to lower production.
- Fuel inflation: 13.6 percent in May 2023, compared to 12.7 percent in December 2022; elevated mainly due to removal of the fuel subsidy and increases in electricity prices following upward adjustment of tariffs in April.
- NFNF inflation: 4.3 percent in May 2023, compared to 4.1 percent in December 2022, reflecting the impact of monetary policy measures and easing prices of some imported goods.
- Recent easing in inflation since December 2022 is largely attributed to lower food prices (favorable weather) and easing global prices of crude oil, wheat, and edible oils.
- Short- and medium-term fiscal measures: Government package to increase food supply through imports (particularly sugar and maize) and to boost production through fertilizer subsidy and irrigation—expected to provide relief in the short and medium term.

### CBK expectations and stance
- CBK expects overall inflation to decline in the coming months, and its return to the target band is imminent.
- The rate of decline will depend on how food and fuel prices evolve in the period.
- The CBK will continue to monitor the impact of policy measures and developments in the global and domestic economy, and stands ready to take additional measures as necessary, in fulfilment of the price stability objective.

* /s/ Dr. Kamau Thugge, Governor, Central Bank of Kenya *

### Technical Memorandum of Understanding (key elements)
- Memorandum date/place: Nairobi, Kenya, June 29, 2023.
- Scope: Understandings regarding definitions of quantitative performance criteria (QPCs) and indicative targets (ITs), adjusters, and data reporting for the EFF and ECF arrangements.

### Quantitative performance criteria and indicative targets (major items)
- PC/IT test dates: December 31, 2023, and June 30, 2024.
- Performance criteria include (floor/ceiling as noted in source):
  - 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 include:
  - the change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling);
  - zero accumulation of national government’s net domestic payment arrears on a cumulative basis within the fiscal year (ceiling);
  - priority social spending of the national government (floor).

### Primary balance (definitions, measurement, and adjustor)
- Primary balance (cash basis) definition: national government revenues and grants minus expenditures and net lending, plus due interest payments.
- Financing-side measurement: sum of (a) negative of net domestic financing; (b) negative of net external financing; and (c) domestic and external interest payments. Measured cumulatively from the beginning of the fiscal year to the test date.
- Adjustor for SOE support:
  - The floor will be adjusted downward (upward) by half of any SOE support in excess (falling short) of the amounts set out in TMU Table 1 for FY2022/23, provided cumulative SOE support reported in Table 1 plus any overage does not exceed Kh.127.36 billion (1.0 percent of the FY2021/22 GDP) since FY2021/22.
  - The floor will not be adjusted to reflect any SOE support for reviews with test dates subsequent to end-June 2023.
- Projected extraordinary support to SOEs (Table 1):
  - 2023 Jun. Extraordinary support to SOEs: 37,268 (Ksh. million)
  - Note: Cumulative from July 1, 2022.

### Net international reserves (NIR) floor and adjustors
- NIR definition: difference between total gross official international reserves and official reserve liabilities.
- Gross official international reserves include: CBK holdings of monetary gold (excluding amounts pledged as collateral); holdings of SDRs; CBK holdings of convertible currencies in cash or in nonresident financial institutions; and Kenya’s reserve tranche position with the IMF.
- Exclusions from gross official international reserves: pledged, swapped, or encumbered reserve assets; 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 SDR allocations); convertible currency liabilities of the CBK to nonresidents with original maturity up to and including one year; commitments to sell foreign exchange arising from derivatives.
- NIR adjustors include:
  - If total of (i) program loans, (ii) revenue component of project loans, and (iii) external commercial and semi-concessional borrowing exceeds (falls short) programmed amounts in TMU Table 2, the NIR target will be adjusted upward (downward) by the difference.
  - If program grants or revenue component of project grants falls short of programmed amounts in TMU Table 2, the NIR target will be adjusted downward by the difference.
  - If foreign exchange outflows related to financial support to Kenya Airways exceed (fall short) programmed amounts in TMU Table 2, the NIR target will be adjusted downward (upward) by the difference.
  - Downward adjustments (cumulative from end-June 2023) in the NIR floor capped at: US$325 million for end-December 2023 test date and US$575 million for end-June 2024 test date.
- NIR monitored in U.S. dollars; non-U.S. dollar assets/liabilities converted using exchange rates in TMU Table 3.

### Program and project financing (Table 2, US$ millions)
- Program grants and loans (excl. IMF): End-Jun. 638; End-Dec. 86; End-Jun. 1,086
- Program loans (excl. IMF): End-Jun. 638; End-Dec. 86; End-Jun. 1,086
- Program grants: End-Jun. 0; End-Dec. 0; End-Jun. 0
- Project loans and grants: End-Jun. 693; End-Dec. 416; End-Jun. 1,156
- Project loans (revenue component): End-Jun. 603; End-Dec. 357; End-Jun. 1,021
- Project grants (revenue component): End-Jun. 90; End-Dec. 59; End-Jun. 135
- Commercial and Semi-concessional borrowing: End-Jun. 896; End-Dec. 0; End-Jun. 2,000
- Foreign exchange outflows related to KQ support: End-Jun. 161; End-Dec. 68; End-Jun. 131
- Note: Table 2 figures are cumulative from July 1, 2023, for FY2023/24 ending in June 2024.

### Ceiling on accumulation of public and publicly guaranteed external payment arrears
- Definition: Public external debt arrears arise when obligations on external debt are not paid on the due date specified in the underlying agreement, taking into account applicable contractual grace periods; excludes arrears relating to debt subject to renegotiation or rescheduling.
- Performance criterion: cumulative flow in gross terms from January 1, 2021 and applies on a continuous basis.

### Ceiling on present value (PV) of contracting or guaranteeing new external debt
- Definition of debt (per Guidelines on Public Debt Conditionality): includes loans, suppliers’ credits, and leases as described in the TMU.
- Coverage: external debt denominated in foreign currency (currency other than the Kenyan Shilling); 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.
- Contracting of debt: considered contracted when all conditions for entry into effect are met, including approval by the Attorney General; contracting of credit lines with no predetermined disbursement schedules or with multiple disbursements is considered contracting of debt.
- Present value calculation:
  - PV of debt at contracting calculated by discounting the future stream of debt service payments.
  - For debts with grant element equal or below zero, PV set equal to nominal value.
  - Discount rate used: unified discount rate of 5 percent.
  - Program reference rate for six-month US$ SOFR: 0.04 percent (fixed for the duration of the program).
  - Spreads over six-month US$ SOFR fixed for duration of program:
    - six-month Euro EURIBOR over six-month US$ SOFR: -56 basis points;
    - six-month JPY Overnight Indexed Swap (OIS) over six-month US$ SOFR: -8 basis points;
    - six-month GBP SONIA over six-month US$ SOFR: 1 basis point;
    - For interest rates on currencies other than Euro, Japanese Yen, and GBP Sterling, the spread over six-month US$ SOFR is 15 basis points.
  - For variable rates linked to other benchmarks, a spread reflecting the difference between that benchmark and six-month US$ SOFR (rounded to the nearest 50 basis points) will be added.
- Present value savings for certain Kenya Airlines-related operations: loan obligations that replace two previous guarantees and result in PV savings compared to trigger would be excluded from the performance criterion (see text for conditional details).

### Program exchange rates (Table 3, Rates as of February 4, 2021)
- US Dollar: Kenyan Shillings per currency unit 109.8647; Currency units per US Dollar 1.00
- STG Pound: 149.8768; 0.73
- Japanese Yen: 1.045882; 105.05
- Canadian Dollar: 85.7648; 1.28
- Euro: 131.9809; 0.83
- Swiss Franc: 122.2213; 0.90
- Swedish Kronor: 13.0437; 8.42
- Danish Kronor: 17.7509; 6.19
- Chinese Yuan: 17.0114; 6.46
- Australian Dollar: 83.662; 1.31
- SDR: 157.464; 0.70
- Source: Central Bank of Kenya.

*International Monetary Fund — Technical Memorandum of Understanding, Nairobi, Kenya, June 29, 2023*

### 20.      Debt Management Operations (DMOs) are defined as the repayment or refinancing of the

### Debt Management Operations (DMOs) are defined as the repayment or refinancing of the principal of outstanding external public debts prior to or at their maturity dates

### Definition and treatment of DMOs
- DMOs are the repayment or refinancing of the principal of outstanding external public debts prior to or at their maturity dates.
- The programmed issuance of non-concessional debt for use in DMOs is shown as a memorandum item in Table 1 of the accompanying Memorandum of Economic and Financial Policies.
- In calculating present value (PV) 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) is compared with the discounted future stream of debt service due on the instrument it replaces.
  - A discount rate of 7 percent is used.
  - These amounts will not be capped by the nominal value of the debt.

### Adjustors to the external debt ceiling
- An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to the ceiling if deviations from the performance criterion on the PV of new external debt are prompted by a change in 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 will be adjusted upward by the full amount in PV terms of any project financing dedicated to COVID-19 vaccine interventions that was not anticipated at the time of setting the performance criterion, subject to prior consultation with IMF staff before loans are contracted or guaranteed.
- The debt ceiling will be adjusted downward by the full amount of:
  1. Any shortfall between actual and programmed issuance of debt for use in DMOs.
  2. The issuance of any debts for use in DMOs that do not result in a reduction of the present value of the overall public external debt and an improvement of the overall public external debt service profile.

### Monetary policy consultation clause (inflation bands and trigger)
- Bands around the projected 12-month CPI inflation (headline CPI published by KNBS) are specified as follows:
  - Upper band: 7.5 (end-Jun. 2023, end-Dec. 2023, end-Jun. 2024)
  - Center point: 5.0 (end-Jun. 2023, end-Dec. 2023, end-Jun. 2024)
  - Lower band: 2.5 (end-Jun. 2023, end-Dec. 2023, end-Jun. 2024)
- 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, the authorities will complete a consultation with the IMF Executive Board focused on:
  - The stance of monetary policy and whether the Fund-supported program remains on track.
  - The reasons for program deviations, taking into account compensating factors.
  - Proposed remedial actions if deemed necessary.
- When this consultation is triggered, access to Fund resources will be interrupted until the consultation takes place.

### Floors, ceilings, and indicative targets (definitions and key values)
- Floor on tax revenue of the national government:
  - Tax revenue defined as sum of PAYE, corporate income tax, import duties, excise duties, VAT, and other taxes (e.g., alternative minimum tax, digital sales tax).
  - Excludes: “Ministerial Appropriation in Aid” (RML, RDL, PDL), “Taxes on International Trade and Transactions (IDF fee),” “Capital gains,” and “other taxes on goods and services” as presented in monthly BOT.
- Indicative target on ceiling of change in stock of national government exchequer requests outstanding for more than 90 days:
  - Defined as requisitions for payment recorded in IFMIS where funds have not been released; refers to requisitions made after start of July 2021 and invoices unpaid for 90 days or longer, disregarding changes related to legal rulings or claims found invalid on bills originated before the start of the program.
- Indicative target on non-accumulation of net domestic payment arrears:
  - Domestic payment arrears defined as stock of pending bills of MDAs and SAGAs/SCs outstanding at end-June each financial year (per Office of the Controller Budget) excluding exchequer requests received on and after April 1 of the same financial year.
  - At end-December, stock computed as sum of pending bills and exchequer requests from the current fiscal year outstanding for more than 90 days.
  - Ceiling requires that in any given fiscal year the stock of such arrears does not rise above the end-June level of the previous fiscal year.
- Floor on priority social expenditures (definitions and programmed amounts):
  - Priority social spending defined as sum of:
    - cash transfers to orphans and vulnerable children,
    - cash transfers to elderly persons,
    - cash transfers to persons with severe disabilities,
    - free primary education expenditure,
    - free secondary education expenditure,
    - school food and sanitary programs,
    - free maternal healthcare,
    - universal health coverage,
    - health insurance subsidy for targeted categories (orphans, vulnerable children, elderly, people with disabilities),
    - spending for vaccination and immunization.
  - Programmed priority social spending (Ksh. millions):
    - 2023 Jun.: 420,777
    - 2023 Dec.: 210,979
    - 2024 Jun.: 426,171
  - 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.

### Stock of arrears (Ksh. billions)
- Total stock of arrears at MDAs and SCs:
  - Jun. 2022: 435.9
  - Dec. 2022: 506.5
- Memorandum items:
  - Pending bills at MDAs: Jun. 2022: 49.2; Dec. 2022: 80.3
  - Pending bills at SAGAs/SCs: Jun. 2022: 448.6; Dec. 2022: 400.7
  - Pending bills at counties: Jun. 2022: 153.0; Dec. 2022: 159.9
  - Exchequer requests outstanding for less than 90 days: Jun. 2022: 61.9; Dec. 2022: 60.1
  - Exchequer requests outstanding for more than 90 days: Jun. 2022: 61.9; Dec. 2022: 25.5

### Data reporting requirements (summary of key reporting items, frequencies, deadlines, and responsible entities)
- Monthly submissions within 20 days after month end (CBK or NT as indicated) for items including:
  - Primary balance of national government.
  - Net domestic bank financing (CBK).
  - Net nonbank financing (NT).
  - Proceeds from privatization (NT).
  - Debt service paid and coming due on domestic debt (CBK).
  - Debt service paid and coming due on external debt (NT).
  - Disbursements and repayment schedules of external concessional and non-concessional project loans, securitization, and budget support loans (NT).
  - Net proceeds from issuance of external debt (NT).
  - Any exceptional financing (including rescheduled principal and interest) (NT).
  - Change in external arrears, including interest, principal, and penalties (NT).
  - Stock and movements in pending bills accumulated by MDAs, counties, SAGAs (NT).
  - Stock of exchequer requests made after start of July 2020 and unpaid for 90 days or more (NT).
  - Execution of Extraordinary SOE support; national government transactions with and on behalf of SOEs (NT).
- Quarterly and other timelines:
  - Net changes in stock of short-term external debt: Quarterly within 45 days after quarter end (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: Weekly within 7 working days after end of week (NT).
  - Social priority spending of the national government: Quarterly within 45 days after quarter end (NT).
  - 12-month CPI inflation: Monthly within 15 days after end of month (KNBS).
  - Financial Soundness Indicators for other depository corporations: Quarterly within 20 days after quarter end (CBK).
  - Additional items and responsible entities are listed in TMU Table 7 with specified frequencies and deadlines.

### Debt sustainability summary and contingent liabilities stress test
- DSA key points:
  - Kenya’s public debt is sustainable.
  - Risk ratings: Risk of external debt distress: High; Overall risk of debt distress: High.
  - Debt dynamics bolstered by fiscal consolidation under the IMF-supported program.
  - Projections of debt burden metrics revised up relative to the last DSA assessment due to:
    - 2022 GDP outturn,
    - REER depreciation in 2023:H1,
    - increased access to program financing,
    - recording of the SDR on lending to the government at face value,
    - higher projected interest expenses on loans with variable interest rates.
  - Forecast: Debt indicators expected to improve as the primary balance turns into a surplus, though external debt service-to-exports ratio improves gradually.
  - Kenya is susceptible to export, exchange rate, natural disaster, and primary balance shocks; prolonged shocks present downside risks.
  - The natural disaster shock highlights limited scope for meeting additional financing needs in a stress scenario without jeopardizing debt sustainability.
- Public debt coverage for the DSA:
  - Perimeter covers central government, Social Security Fund, central bank debt taken on behalf of government, and government guaranteed debt.
  - External DSA covers external debt of central government and central bank, including publicly guaranteed debt, and private sector.
  - Public DSA covers external and domestic debt incurred or guaranteed by central government; excludes extra-budgetary units and county governments.
  - Legacy debt of pre-devolution county governments estimated at Ksh 53.8 billion (0.4 percent of GDP) is excluded from core coverage but included in contingent liabilities stress scenario.
  - Nonresidents’ direct participation in domestic debt market is below one percent of total outstanding government securities.
- Combined contingent liabilities stress test shocks:
  - 3.1 percent of GDP to capture reported non-guaranteed debt of SOEs, extra-budgetary units, and PPPs (standard calibration retained at 2 percent for non-guaranteed SOE debt; PPP exposure calibrated at 35 percent of PPP capital stock shock).
  - 0.5 percent of GDP for legacy debt of pre-devolution county governments.
  - 0.4 percent of GDP for government contingent liabilities from letters of support in the government-to-government fuel importation mechanism launched in April 2023.
  - 5 percent of GDP for a financial market shock (exceeds existing stock of financial sector nonperforming loans of about 4 percent of GDP).

*Source: Excerpt from TMU and DSA material provided in the referenced IMF chapter.*

### 3.      Kenya maintains a high standard of debt transparency. Debt statistics bulletins with

### 3.      Kenya maintains a high standard of debt transparency. Debt statistics bulletins with

### Debt transparency and coverage
- Debt statistics bulletins with public and publicly guaranteed (PPG) coverage and medium-term debt management strategies are regularly published.
- The Budget Policy Statement and Annual Public Debt Management Report include information about contingent liabilities.
- The External Public Debt Register provides loan-level information about contracted and drawn amounts, interest rate, and currency denomination.
- Guaranteed State-owned enterprise (SOE) debt and amounts borrowed directly by the Kenyan government and on-lent to SOEs are included in the public debt stock and thus not included in the calibration of the contingent liabilities stress test.
- Loan guarantees by the central government on debt contracted by other entities amount to around US$1.4 billion and are included in the stock of PPG debt.

### Contingent liabilities and recent fuel import scheme
- A reasonable estimate of the government contingent liabilities stemming from the new fuel import scheme is around 10 percent of the maximum private sector obligation to fuel exporters or around US$400 million (0.4 percent of GDP).
- Contingent liabilities (memo item): 1,417 (In US$ mln) and 1.91 percent of GDP (Text Table 2).

### Public debt trends and composition
- Gross public debt increased from 45.7 percent of GDP at end-2015 to 68.4 percent of GDP at end-2022.
- External public debt amounts to about half of Kenya’s overall public debt.
- Nominal PPG external debt at end-2022 amounted to 34.5 percent of GDP, corresponding to 27.8 percent of GDP in present value terms.
- At end-2022, multilateral creditors accounted for close to 47 percent of external debt, while debt from bilateral creditors represented about 28 percent.
- Of Kenya’s bilateral debt, close to 64 percent is owed to non-Paris Club members, mainly loans from China.
- Commercial debt (mainly Eurobonds, loans, and export credits) accounted for about 25 percent of external public debt.
- Eurobonds accounted for 75.5 percent of commercial debt (US$7.1 billion).
- Syndicated loans amounting to Euro 305.4 million (disputed) are kept in the stock of public debt.
- Kenya has not contracted any collateralized external debt.

### Domestic public debt characteristics
- Kenya’s domestic public debt reached 33.9 percent of GDP at end-2022.
- The share of Treasury bills in the domestic debt stock fell from 35 percent at the end of FY2018/19 to 18.7 percent at the end of FY2021/22.
- Average time to maturity of government domestic bonds, excluding T-bills, increased from 6.3 years at the end of FY2018/19 to 9.1 years at end-December 2022.
- About half of government domestic debt securities are held by pension funds, followed by commercial banks with 47 percent share.
- Starting in the last quarter of the FY2021/22, domestic debt issuance has taken place mainly at the short end of the maturity spectrum, increasing intra-year rollover needs.

### Private external debt data
- Published data on private external debt is available through 2021 and is extrapolated going forward with the net private external debt BOP flows.
- BOP data on net private external debt flows through end-2022 point to a steady upward trend in the stock of private debt as a share of GDP, which is also maintained in projections.

### Key debt stock and service figures (selected from Text Table 2)
- Total debt stock (2022, In US$ mln): 74,120; Percent total debt: 100.0; Percent GDP: 66.8
- External (2022, In US$ mln): 37,370; Percent total debt: 50.4; Percent GDP: 34.5
- Multilateral creditors (2022, In US$ mln): 17,474; Percent total debt: 23.6; Percent GDP: 15.4
- IMF (2022, In US$ mln): 2,399; Percent total debt: 3.2; Percent GDP: 2.1
- World Bank (2022, In US$ mln): 11,086; Percent total debt: 15.0; Percent GDP: 9.7
- Bilateral Creditors (2022, In US$ mln): 10,497; Percent total debt: 14.2; Percent GDP: 9.2
- Paris Club (2022, In US$ mln): 3,793; Percent total debt: 5.1; Percent GDP: 3.3
- Non-Paris Club (2022, In US$ mln): 6,705; Percent total debt: 9.0; Percent GDP: 5.9
- Bonds (2022, In US$ mln): 7,100; Percent total debt: 9.6; Percent GDP: 6.2
- Domestic (2022, In US$ mln): 36,750; Percent total debt: 49.6; Percent GDP: 32.3
- T-Bills (2022, In US$ mln): 5,587; Percent total debt: 7.5; Percent GDP: 4.9
- Bonds (domestic, 2022, In US$ mln): 30,076; Percent total debt: 40.6; Percent GDP: 26.5
- Contingent liabilities (memo, 2022, In US$ mln): 1,417; Percent GDP: 1.9

### Underlying macroeconomic assumptions and projections
- Real GDP growth:
  - 2022: 4.8 percent (decelerated faster than anticipated)
  - 2023 (projected): 5 percent
  - Medium term convergence: 5.4 percent
  - Medium-to long-term projection: around 5.3 percent
- Nominal GDP (Ksh billion) — Current DSA:
  - 2022: 13,368
  - 2023: 15,179
  - 2024: 17,041
  - 2025: 18,920
  - 2026: 21,019
  - 2027: 23,273
  - 2028: 25,754
  - Long-term: 63,199
- Real GDP (growth) — Current DSA: 4.8, 5.0, 5.3, 5.3, 5.4, 5.4, 5.4, 5.4 (2022–Long-term)
- Inflation — Current DSA: 7.6, 7.8, 6.6, 5.4, 5.4, 5.0, 5.0, 5.0 (2022–Long-term)
- Revenue and grants (percent of GDP) — Current DSA: 17.8, 18.0, 18.3, 18.1, 17.9, 18.1, 18.2, 18.8 (2022–Long-term)
- Overall fiscal balance (percent of GDP) — Current DSA: -6.2, -5.1, -4.1, -3.7, -3.6, -3.7, -3.7, -3.7 (2022–Long-term)
- Primary fiscal balance (percent of GDP) — Current DSA: -1.4, -0.2, 0.8, 1.0, 1.1, 1.0, 1.0, 0.5 (2022–Long-term)
- Public debt (percent of GDP) — Current DSA: 68.4, 70.6, 68.5, 66.9, 65.1, 63.5, 61.6, 48.3 (2022–Long-term)
- Current account (percent of GDP) — Current DSA: -5.1, -4.8, -5.0, -5.0, -5.0, -5.0, -4.8, -4.5 (2022–Long-term)
- Exports of goods and services (growth) — Current DSA: 17.2, 9.1, 10.0, 10.2, 9.2, 9.2, 8.9, 9.6 (2022–Long-term)

### Fiscal outlook, commitments, and policy measures
- The adjustment in the primary fiscal balance is expected to remain on track with commitments under the IMF-supported program.
- FY2022/23 primary fiscal deficit targeted at 1.1 percent of GDP after a second supplementary budget to offset revenue shortfalls and introduce expenditure savings.
- Authorities plan to prioritize execution of spending and clear unpaid bills by end-September 2023 to avoid accumulation of arrears (unpaid bills for more than 90 days).
- The FY2023/24 budget targets a primary surplus of 0.7 percent of GDP (higher than the 0.3 percent of GDP program target at the 4th EFF/ECF reviews).
- The FY2023/24 draft budget includes a comprehensive revenue package for 1.6 percent of GDP to mitigate likely underperformance of tax by end-June 2023.
- Going forward, the overall deficit is expected to durably decline to below 4 percent of GDP.
- Long-term target of the primary surplus is roughly halved to 0.5 percent of GDP compared to the last DSA once debt burden metrics fall below sustainability thresholds.

### Climate-related public investment and financing
- Baseline includes authorities’ climate-related public investment benchmarked by latest available data of 2.6 percent of GDP in 2018.
- Includes an additional climate investment of around 0.25 percent of GDP per year, supported by the IMF’s Resilience and Sustainability Facility (RSF) and WB climate-oriented financing.
- RSF disbursements would substitute more expensive domestic debt, improving debt dynamics by helping reduce the present value of debt and debt servicing burdens.
- Scaling up climate-related investments will require improving public spending efficiency, attracting highly concessional external climate financing, and encouraging private sector participation.

### Risks, financing gaps, and implementation constraints
- Challenges in mobilizing budgeted resources impeded implementation of the FY2022/23 supplementary budget.
- Shortfalls in external financing (e.g., unrealized EUR1 billion Eurobond issuance in FY2021/22) are not expected to be fully compensated going forward, though the external borrowing plan retains space if market conditions normalize.
- Limits to investment absorption capacity are expected to be binding for project financing.
- Capacity constraints limit data availability on other explicit liabilities not elsewhere classified; data expected at next IMF EFF/ECF review.

*Source: IMF staff report excerpts contained in the provided content unit.*

### 12.      To   support economic recovery, the CBK has lent the equivalent of the full amount of

### 12.      To   support economic recovery, the CBK has lent the equivalent of the full amount of 

### SDR on‑lending and domestic debt recording
- The CBK has lent the equivalent of the full amount 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.
- In the DSA, the amounts lent are recorded as domestic debt at face value.

### Kenya Airways (KQ) guaranteed debt and public debt stock
- The Government of Kenya has begun servicing the guaranteed portion of KQ external debts which the company can no longer service; discussions on novation of a part of this guaranteed stock are ongoing.
- The 2022 stock of public and publicly guaranteed debt includes the sum of the principal of these obligations and the remaining government guarantee on other KQ external loans: US$638 million as of December 2022 in place of the US$750 million government guarantee recorded previously.

### Current account and external position
- The current account deficit was 5.1 percent of GDP in 2022 and is expected to stabilize around 5 percent over the medium term.
- Merchandise trade balance remained broadly unchanged at 10 percent of GDP in 2022.
- Drivers and considerations:
  - Upward pressure on the import bill from elevated global prices of commodities with relatively inelastic demand, such as oil derivatives, cereals, and fertilizers.
  - Slowdown in capital goods imports due to completion of large, import-intensive infrastructure projects and rationalization of the pipeline of public investments.
  - Export performance supported by higher prices for Kenya’s main agricultural exports (tea, horticulture, and coffee) and increased consumer and intermediate goods exports in 2022.
  - Medium‑term supports: further fiscal consolidation, robust goods exports and tourism receipts, continued flexible exchange rate, gradual normalization of global commodity and financial market conditions, policies to enhance agricultural productivity (including farmer-led irrigation), modernization of food systems, greater value chain integration, and private sector financing including FDI and corporate borrowing.
- Gross international reserves and import coverage:
  - Import coverage of reserves is expected to remain above the 3-month threshold and strengthen from 3.3 months of imports of goods and services in 2023 to 3.9 months of imports in 2027.

### Macroeconomic projections (selected indicators, 2022–28)
- Real GDP growth (percent): 7.6 4.8 5.0 5.3 5.3 5.4 5.4 5.4 (2022 2023 2024 2025 2026 2027 2028)
- CPI inflation, average (percent): 6.1 7.6 7.8 6.6 5.4 5.4 5.0 5.0
- Overall fiscal balance (percent of GDP)1: -7.7 -6.5 -5.4 -4.4 -3.9 -3.8 -3.9 -3.9
- Primary balance (percent of GDP)1: -4.0 -1.3 -1.1 0.7 0.9 1.1 1.0 1.0
- Current account balance (percent of GDP): -5.2 -5.1 -4.8 -5.0 -5.0 -5.0 -5.0 -4.8
- Exports of goods and services (US$ billion): 11.8 13.9 15.1 16.6 18.3 20.0 21.8 23.8
- Exports of goods and services (growth; percent): 21.8 17.2 9.1 10.0 10.2 9.2 9.2 8.9
- Gross international reserves (US$ billion): 9.5 8.0 7.3 8.5 9.7 10.5 11.6 12.2
- Note: Fiscal years (e.g., 2021 refers to FY 2020/21).

### External borrowing program and financing mix (Jul 1, 2021 to Jun 30, 2024)
- Volume of New Debt (US$ million) and PV of New Debt (Percent and US$ million) for the period:
  - By sources of debt financing: 19,455 100 14,471 100
  - Concessional debt, of which: 11,898 61 7,042 49
    - Multilateral debt: 5,108 26 2,969 21
    - Bilateral debt: 3,113 16 1,769 12
    - Other: 3,647 19 2,286 16
  - Non-concessional debt, of which: 7,557 39 7,429 51
    - Semi-concessional: 437 2 31 0
    - Commercial terms: 7,120 37 7,120 49
- By Creditor Type:
  - Multilateral, of which: 5,452 28 3,198 22
    - World Bank: 4,494 23 2,607 18
  - Bilateral - Paris Club: 1,152 6 668 3
  - Bilateral - Non-Paris Club: 1,962 10 1,086 8
  - Other, of which: 10,890 56 9,504 66
    - For debt management operations2: 5,000 26 5,000 35
- Uses of debt financing:
  - Infrastructure: 4,693 24 3,591 25
  - Social Spending: 6,703 34 4,005 28
  - Budget Financing: 2,127 11 1,338 9
  - Other, of which: 5,932 30 5,536 38
    - For debt management operations2: 5,000 26 5,000 35
- The cumulative external borrowing program through end-June 2024 is consistent with planned drawings of concessional and non-concessional loans in FY2022/23 and FY2023/24.
- The program provides space for the US$1.1 billion external commercial financing (which did not take place in FY2021/22) and US$5 billion for debt management operations, both of which have been put on hold and are not reflected in the DSA baseline.
- Authorities are preparing for the June 2024 Eurobond rollover by hiring international lead managers and considering alternative financing from multilateral, bilateral lenders and the syndicated loans market.

### Realism tools, fiscal consolidation expectations, and projections assumptions
- Baseline scenario assumes an improvement of the fiscal primary balance of 2.4 percentage points of GDP over three years in 2023–25.
- Staff considers this realistic and in line with authorities’ plans, citing:
  - Execution of the FY2021/22 budget.
  - Careful management of expenditures 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.
- Return of real GDP growth to long-term potential following COVID–19 recovery justifies near-term growth trajectory.
- Export growth projected to recover from 2020 shock and by 2029 return to a similar share of GDP as in 2015.
- Revised projection for private investment incorporates weaker 2022 outturn and effects of needed monetary tightening and external adjustments in 2023 and medium term.

### Debt carrying capacity and Composite Indicator (CI)
- Debt carrying capacity assessed as: Medium.
- Composite Indicator (CI) Index: 2.98.
- CI components and contributions:
  - CPIA: coefficient 0.385, 10-year average 3.74, contribution 1.44 (48%)
  - Real growth rate (in percent): coefficient 2.71, 10-year average 5.06, contribution 0.14 (5%)
  - Import coverage of reserves (in percent): coefficient 4.05, 10-year average 36.02, contribution 1.46 (49%)
  - Import coverage of reserves^2 (in percent): coefficient -3.99, 10-year average 12.98, contribution -0.52 (-17%)
  - Remittances (in percent): coefficient 2.02, 10-year average 3.53, contribution 0.07 (2%)
  - World economic growth (in percent): coefficient 13.52, 10-year average 2.86, contribution 0.39 (13%)
  - CI Score: 2.98 (100%) — CI rating: Medium
- CI explanation: incorporates IMF April 2023 WEO projections and 2021 World Bank CPIA (published July 2022).

### External debt sustainability findings and stress tests
- External debt burden indicators in terms of exports and revenues breach sustainability thresholds under the baseline, producing a mechanical high-risk signal.
- Key indicators:
  - PV of PPG external debt-to-exports solvency indicator remains above the 180 percent threshold through 2026.
  - Debt service-to-exports liquidity indicator exceeds its 15 percent threshold through 2030.
  - PV of PPG external debt-to-GDP remains well below the 40 percent indicative threshold throughout the projection period; projected to decline from 27.8 percent in 2022 to 16 percent in 2043.
- Drivers of higher external indicators relative to the last DSA: lower GDP in US dollars in 2022, REER depreciation in 2023:H1, increased interest expenses of external loans with floating rates, recording of the SDR on-lending to the government at face value, and increased support by development partners.
- Standard stress test results:
  - Under extreme shock to export growth, PV of debt-to-exports and debt service-to-exports breach thresholds over the entire medium-term projection period.
  - Under one-time depreciation shock, debt service-to-revenue ratio can potentially breach the threshold through 2029.
- Tailored stress tests included: combined contingent liabilities stress test, natural disaster stress test (Climate Change Risks section), and market financing shock for market-access countries assessing rollover risks from deterioration in global risk sentiment, temporary nominal depreciation, and shortening maturities of new external commercial borrowing.

### Market financing and liquidity risks
- Market financing pressures module ranks market liquidity risks as moderate.
- EMBI spread: 677 basis points as of June 22, 2023 (threshold 570 basis points).
- Gross financing needs are below the 14 percent of GDP threshold indicating high risk.
- Fiscal consolidation under IMF-supported EFF/ECF arrangements would help keep gross financing needs below the threshold.
- Risks: 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
- PV of total public debt-to-GDP ratio remains above the 55 percent benchmark (for medium debt-carrying capacity) through 2027, giving rise to a mechanical high-risk signal.
- Public sector debt is projected to peak in 2023.

*Source: IMF staff analysis and projections as presented in the provided content.*

### 64.4 percent of GDP (PV terms), followed by a steady decline. Supported by fiscal consolidation

### 1kenea2023001 - 64.4 percent of GDP (PV terms), followed by a steady decline. Supported by fiscal consolidation

### Debt outlook and baseline projections
- PV of public debt-to-GDP ratio projected to peak at 64.4 percent of GDP (PV terms), followed by a steady decline.
- PV of public debt-to-revenue ratio was 355 percent in 2022 and is projected to more than halve by 2043.
- Under the baseline, debt would begin declining as a share of GDP starting in 2024.
- While the PV of total public debt-to-GDP ratio remains above the indicative threshold (55 percent), the authorities’ commitment to fiscal consolidation under the program is judged to safeguard debt sustainability.

### Stress tests and scenarios
- Standard stress tests indicate the PV of debt-to-GDP ratio is likely to remain above its indicative benchmark for most of the projection period.
- Historical scenario (key variables kept at historical averages) also shows the PV debt-to-GDP ratio remaining above the indicative benchmark, underscoring the importance of the authorities’ reform agenda.
- Under the most extreme standard shock scenario (primary balance shock), the PV of the public debt-to-GDP ratio would breach the 55 percent benchmark for a country with medium debt-carrying capacity through 2033.
- A customized natural disaster stress scenario (discussed below) has an even bigger impact on debt burden metrics.

### Climate change risks and transmission to debt dynamics
- Total cost of climate change is estimated at 2–2.4 percent of GDP per year in Kenya.
- Climate change affects debt sustainability through:
  - short-term output losses from destruction of capital and increased frequency of natural disasters;
  - long-term scarring from productivity losses in climate-sensitive activities (agriculture, water, energy, tourism, wildlife);
  - inflationary pressures that erode purchasing power;
  - higher government spending for reconstruction and fiscal transfers concurrent with reduced government revenues;
  - balance of payments pressure from reconstruction imports and terms-of-trade shocks.
- The current macro baseline does not explicitly model climate change effects beyond embedding average effects in historical series; the impact of climate change is instead accounted for by a customized natural disaster stress test.

### Natural disaster stress test calibration and results
- The standard natural disaster stress test is informed by the 2008–11 drought precedent:
  - 2008–11 drought induced an estimated US$1.8 billion in recovery and reconstruction public spending;
  - slowed real GDP growth by an average of 2.8 percent a year over the episode;
  - negatively affected tourism and agricultural exports.
- Calibration for the stress test assumes:
  - US$1.8 billion increase in public debt;
  - one-off 9 percentage points decline in real GDP growth (pro-rated from the 2008–11 precedent);
  - standard 3.5 percentage points shock on exports growth.
- Results illustrate very limited scope for meeting additional financing needs in the stress scenario with semi-concessional or commercial external financing without jeopardizing debt sustainability.
- Stress-test findings highlight the need to expedite institutional reforms and capacity building to improve public investment efficiency, reduce leakages, and promote private climate investments.

### Climate mitigation, financing needs, and policy actions
- Kenya’s Nationally Determined Contribution (NDC) envisions 32 percent reduction in greenhouse gas emissions by 2030.
- At end-2022, more than 90 percent of electricity was generated from renewable sources.
- Achieving Kenya’s NDC pledge is estimated to entail climate-related investment needs of around 6 percent of GDP per year over 2023–30.
- Some needs are addressed by existing investment projects; the balance is expected to be met through a mix of private sector participation and highly concessional external financing.
- Debt sustainability risks from reaching climate goals are assumed to be limited provided additional financing is highly concessional and private sector mobilization is successful.
- Implementation of reforms supported by the IMF Resilience and Sustainability Facility (RSF) would help achieve NDC pledges while safeguarding debt sustainability by:
  - incorporating climate risks into fiscal planning and investment framework;
  - mobilizing climate revenue and strengthening the efficiency of climate spending;
  - enhancing effectiveness of frameworks to mobilize climate finance;
  - strengthening disaster risk reduction and management;
  - supporting enhancements in public financial management and public investment efficiency to make public investment more climate responsive and to accelerate mobilization of private financing.

### Risk rating, vulnerabilities, and mitigating factors
- Assessment: overall and external public debts are sustainable but remain at high risk of debt distress.
- Mechanical risk signals indicate sustained breaches of sustainability thresholds by solvency and liquidity indicators under the baseline—the PV of external debt-to-exports and external debt service-to-exports ratios, as well as the PV of overall public debt-to-GDP ratio.
- Mitigating factors supporting sustainability:
  - decisive actions in 2020–23 to limit deficit increases and broaden the tax base;
  - multi-year fiscal consolidation under IMF-supported EFF/ECF arrangements to reduce deficits and increase tax revenue;
  - consistently strong remittances and a favorable outlook for exports;
  - generally smooth external debt service profile on a declining trajectory as share of exports and public revenues;
  - attention to SOE-related risks and commitment under the EFF/ECF to limit fiscal impact of any support;
  - efforts to strengthen fiscal sustainability under the SDFP by rationalizing public investments;
  - climate adaptation and mitigation strategies focused on water management, agriculture and food security, ecosystem conservation, disaster risk reduction, sustainable energy transition, climate information and research, health and human security, education and awareness;
  - proactive preparation for the June 2024 Eurobond rollover, including hiring international lead managers and considering alternative financing sources;
  - efficient investment in infrastructure to raise growth and export potential.

- Additional specifics:
  - Kenya’s PV of external debt as a share of GDP is well below the 40 percent indicative threshold and will gradually decline over time.
  - Stable and strong remittances amounted to 29 percent of exports of goods and services in 2022.

### Fiscal consolidation and policy implications
- Fiscal consolidation under Kenya’s IMF-supported program would achieve and surpass the debt-stabilizing primary balance.
- Indicators measured against exports will gradually improve as exports recover and reforms under the EFF/ECF arrangements enhance competitiveness.
- 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.
- Specific policy actions taken or planned:
  - permanent broadening of the tax revenue base;
  - expenditure savings to limit deficit expansion from COVID-19 and the war in Ukraine;
  - multiyear fiscal consolidation plan highlighted in the 2023 Budget Policy Statement (BPS) and substantiated by the FY2023/24 Budget with a conservative approach to revenue projections and additional policy steps to increase tax revenues and control expenditures;
  - balanced mix of commercial and concessional financing in the borrowing plan, supported by limits on the government’s external borrowing under the EFF/ECF arrangement and PPAs under the SDFP to improve debt transparency;
  - commitment to absorb SOE-related contingent liabilities with limited impact on the programmed fiscal envelope.

### Key uncertainties and downside risks
- Heightened uncertainty in the global environment and narrow scope for deviations from the domestic reform agenda underpinning the baseline.
- External risks: intensification of global spillovers from the war in Ukraine, lower demand from major economies, faster tightening of monetary policy affecting exports and financing costs.
- Domestic risks: delays in structural reforms needed to support export growth, domestic political risks (e.g., unrest or disruptions related to cost of living or taxation), deterioration in security situation disrupting trade and tourism.
- Financial sector exposures: domestic government bond holdings by pension funds and commercial banks create feedback risks between sovereign and financial sector; need to rollover maturing external commercial debt exposes country to liquidity squeeze.
- Even with strong commitment to fiscal consolidation, risk of slippages exists, especially in the long run; crowding-in effect of consolidation into private sector growth may take longer to materialize.

*Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1kenea2023001.pdf*

### 34.      The authorities broadly shared IMF staff’s assessment, emphasizing that reducing debt

### 1kenea2023001 - 34.      The authorities broadly shared IMF staff’s assessment, emphasizing that reducing debt

### Authorities’ assessment and policy stance
- The authorities broadly shared IMF 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 to meet infrastructure needs.
- Policy commitments and actions highlighted:
  - Continue to extend the maturity of domestic debt.
  - Pursue a financing strategy that balances domestic and external financing, relies primarily on concessional financing, and accesses international capital markets judiciously.
  - Active preparation for the June 2024 Eurobond rollover, including launching the process for hiring international lead managers.
  - Considering alternative sources of financing from multilateral and bilateral lenders and the syndicated loans market.
  - Strong commitment to debt transparency.
  - Legislative amendments tabled in Parliament to replace the existing nominal debt ceiling with a ceiling expressed in present value terms and in percent of GDP to better anchor medium-term fiscal policies.

### External Debt Sustainability Framework — Baseline scenario (selected key statistics)
- External debt (nominal) 1/: 72.2 71.1 72.6 77.8 80.8 82.2 82.1 82.2 81.3 77.8 73.1 57.5 80.2
- of which: public and publicly guaranteed (PPG): 35.4 34.7 34.5 37.9 37.8 36.7 35.5 34.6 33.3 30.0 22.4 27.7 33.9
- Change in external debt: 6.3 -1.1 1.5 5.2 2.9 1.4 -0.1 0.1 -0.9 -0.8 -1.0
- Identified net debt-creating flows: 3.8 -0.7 2.4 0.5 0.0 -0.2 -0.5 -0.6 -0.9 -1.4 -1.4 2.0 -0.7
- Non-interest current account deficit: 3.6 4.1 3.9 3.2 3.3 3.2 3.3 3.4 3.2 3.1 3.4 5.2 3.2
- Exports: 9.6 10.8 12.2 13.4 14.5 15.0 15.4 15.9 16.3 19.0 26.5
- Imports: 17.6 19.9 21.5 21.9 23.1 23.6 24.0 24.6 24.7 26.6 33.8
- Net FDI (negative = inflow): -0.6 0.0 -0.3 -0.7 -0.9 -1.1 -1.3 -1.4 -1.5 -1.8 -2.2 -0.7 -1.4
- Endogenous debt dynamics: 0.8 -4.7 -1.1 -2.0 -2.4 -2.4 -2.5 -2.5 -2.6 -2.6 -2.6
  - Contribution from nominal interest rate: 1.2 1.2 1.3 1.6 1.6 1.7 1.7 1.6 1.6 1.4 1.1
  - Contribution from real GDP growth: 0.2 -5.0 -3.3 -3.6 -4.0 -4.1 -4.1 -4.2 -4.2 -4.0 -3.7
- Residual 3/: 2.5 -0.4 -1.0 4.7 2.9 1.6 0.4 0.7 0.0 0.5 0.4 2.3 1.2
- PV of PPG external debt-to-GDP ratio (selected years): 27.8 29.5 30.5 29.4 28.0 27.1 25.9 22.9 16.3
- PV of PPG external debt-to-exports ratio (selected years): 228.3 220.4 210.8 195.6 181.7 170.3 158.2 120.4 61.5
- PPG debt service-to-exports ratio (selected years): 25.7 22.5 21.2 22.0 31.1 21.7 22.0 19.7 22.2 12.7 6.5
- PPG debt service-to-revenue ratio (selected years): 15.1 14.6 14.8 16.6 24.9 18.2 19.2 17.6 20.2 13.2 8.5
- Gross external financing need (Million of U.S. dollars): 27,431 28,168 29,066 29,542 32,122 31,887 33,699 34,739 36,625 41,307 62,052
- Key macro assumptions (selected):
  - Real GDP growth (in percent): -0.3 7.6 4.8 5.0 5.3 5.3 5.4 5.4 5.4 5.4 4.5 5.3
  - GDP deflator in US dollar terms (change in percent): 0.9 1.2 -1.3 -5.5 -3.1 0.7 0.8 0.4 0.6 0.6 1.9 2.7 -0.2
  - Effective interest rate (percent) 4/: 1.8 1.8 1.8 2.2 2.1 2.2 2.2 2.1 2.0 1.9 1.6 2.1 2.0
  - Growth of exports of G&S (US dollar terms, in percent): -15.4 21.8 17.2 9.1 10.0 10.2 9.2 9.2 8.9 9.6 9.9 2.7 9.4
  - Growth of imports of G&S (US dollar terms, in percent): -13.2 23.3 11.7 1.0 7.8 8.3 8.3 8.2 6.5 8.2 9.2 3.8 7.2
  - Grant element of new public sector borrowing (in percent): 22.3 19.5 26.1 26.7 25.2 23.5 26.8 32.2 … 25.1
  - Government revenues (excluding grants, in percent of GDP): 16.4 16.6 17.5 17.7 18.0 17.9 17.7 17.8 18.0 18.2 20.5 17.1 18.0
  - Aid flows (in Million of US dollars) 5/: 1,841 1,785 1,791 2,293 2,793 2,435 2,802 2,866 3,005 3,762 5,927
  - Grant-equivalent financing (in percent of GDP) 6/: 1.2 1.4 1.1 1.1 1.0 1.0 0.9 0.9 … 1.1
  - Nominal GDP (Million of US dollars): 100,912 109,875 113,701 112,818 115,115 122,115 129,728 137,287 145,524 195,793 356,303
- Memorandum: PV of external debt 7/ (selected): 65.9 69.4 73.4 74.8 74.6 74.8 73.9 70.7 66.9; In percent of exports: 541.0 518.0 508.1 498.6 483.9 469.9 452.3 371.9 252.6
- Total external debt service-to-exports ratio (selected): 239.4 200.0 175.7 166.2 164.0 145.1 138.5 129.0 124.9 85.3 44.7
- PV of PPG external debt (in Million of US dollars) (selected): 31,629 33,325 35,072 35,843 36,349 37,202 37,633 44,808 58,110

### Public Sector Debt Sustainability Framework — Baseline scenario (selected key statistics)
- Public sector debt 1/: 68.0 68.2 68.4 70.6 68.5 66.9 65.2 63.5 61.7 53.2 37.2 55.1 61.8
- of which: external debt: 35.4 34.7 34.5 37.9 37.8 36.7 35.5 34.6 33.3 30.0 22.4 27.7 33.9
- Change in public sector debt: 8.9 0.3 0.2 2.2 -2.1 -1.6 -1.7 -1.7 -1.8 -1.8 -1.5
- Identified debt-creating flows: 7.8 1.0 2.1 -1.9 -2.3 -2.0 -2.1 -2.1 -2.2 -2.1 -1.8 2.7 -2.1
- Primary deficit: 3.8 2.7 1.4 0.2 -0.8 -1.0 -1.1 -1.0 -1.0 -0.6 -0.2 3.3 -0.8
- Revenue and grants (percent of GDP): 16.7 16.8 17.8 18.0 18.3 18.1 17.9 18.1 18.0 18.4 20.8 17.4 18.2
- Primary (noninterest) expenditure (percent of GDP): 20.5 19.5 19.2 18.2 17.5 17.1 16.8 17.0 17.2 17.8 20.7
- Automatic debt dynamics: 4.0 -1.8 0.8 -2.1 -1.5 -1.0 -1.1 -1.1 -1.2 -1.5 -1.6
  - Contribution from interest rate/growth differential: 2.7 -3.0 -2.5 -2.1 -1.5 -1.0 -1.1 -1.1 -1.2 -1.5 -1.6
  - Contribution from average real interest rate (selected): 2.6 1.8 0.7 1.2 2.0 2.5 2.3 2.2 2.1 1.3 0.4
  - Contribution from real GDP growth (selected): 0.2 -4.8 -3.2 -3.2 -3.5 -3.5 -3.4 -3.3 -3.2 -2.8 -2.0
- Residual: 1.1 -0.7 -2.0 4.1 0.2 0.3 0.4 0.4 0.4 0.3 0.4 0.7
- Sustainability indicators (selected):
  - PV of public debt-to-GDP ratio 2/: 63.1 64.4 61.9 60.2 58.3 56.6 54.8 46.6 31.6
  - PV of public debt-to-revenue and grants ratio: 355.2 357.8 338.1 331.7 325.8 313.3 301.0 252.6 151.7
  - Debt service-to-revenue and grants ratio 3/: 54.1 55.2 54.5 55.1 65.9 56.7 56.9 52.8 52.5 43.0 22.9
  - Gross financing need 4/: 12.8 12.0 11.1 10.1 11.3 9.3 9.1 8.5 8.5 7.3 4.6
- Key macro and fiscal assumptions (selected):
  - Real GDP growth (in percent): -0.3 7.6 4.8 5.0 5.3 5.3 5.4 5.4 5.4 5.4 4.5 5.3
  - Average nominal interest rate on external debt (in percent): 3.5 3.1 3.0 3.7 3.4 3.5 3.4 3.3 3.2 3.0 2.4
  - Average real interest rate on domestic debt (in percent): 6.7 7.5 6.1 3.8 5.3 6.6 6.3 6.3 6.0 4.3 1.6 5.3 5.4
  - Inflation rate (GDP deflator, in percent): 4.9 4.3 6.0 8.2 6.7 5.4 5.4 5.1 5.0 4.9 4.9 6.1 5.5
  - Primary deficit that stabilizes the debt-to-GDP ratio 5/: -5.1 2.5 1.2 -2.1 1.3 0.6 0.7 0.6 0.8 1.2 1.3 -0.5 0.6

### Sensitivity analysis and stress tests (high-level results)
- Table 3 (Public and publicly-guaranteed external debt, 2023–33) and Table 4 (Public debt, 2023–33) present alternative scenarios, bound tests, and tailored tests with multiple indicators (PV of debt-to-GDP, PV of debt-to-exports, debt service-to-exports, debt service-to-revenue).
- Representative threshold/benchmark levels cited:
  - External/public debt thresholds: 40 (for certain external indicators) and 180 (for some PV-to-exports thresholds) as shown in tables.
  - TOTAL public debt benchmark: 55 (Table 4).
- Selected scenario outcomes (examples extracted from tables and figures):
  - Baseline PV of debt-to-GDP ratio (public): 64 62 60 58 57 55 53 51 50 48 47
  - Baseline PV of debt-to-exports ratio (public & PPG external): 220 211 196 182 170 158 150 144 136 128 120
  - Tailored stress tests include scenarios such as Combined contingent liabilities, Natural disaster, Commodity price shock, Market Financing shock; the “Most extreme shock” varies by indicator (e.g., one-time depreciation, exports shock, natural disaster).
  - Figure summaries indicate the most extreme shocks: one-time depreciation for PV of debt-to-GDP and debt service-to-revenue; exports shock for PV of debt-to-exports and debt service-to-exports; natural disaster for several public-debt indicators.
- Drivers of debt dynamics (Figure 3 highlights):
  - Contributions decomposed into: Current account + FDI, Nominal interest rate, Real GDP growth, Price and exchange rate changes, Residual.
  - Historical and projected changes illustrated for both external PPG debt and gross nominal public debt across 2018–2033.

### Policy implications and priorities (inferred from authorities’ statements and DSA results)
- Prioritize debt vulnerability reduction while maintaining financing for infrastructure through:
  - Extending domestic debt maturities to reduce rollover and short-term risks.
  - Emphasizing concessional financing and judicious use of international capital markets.
  - Preparing for large foreign-currency redemptions (e.g., June 2024 Eurobond rollover) with lead manager engagement and alternative financier options.
  - Strengthening debt transparency and moving to a present-value and percent-of-GDP debt ceiling via legislative amendments to better anchor medium-term fiscal policy.
- Risk management informed by stress tests:
  - Continued monitoring of exchange rate, export performance, and contingent liabilities given their role as “most extreme” stress-test drivers.
  - Maintain revenue mobilization (government revenues excluding grants shown as 16.4–20.5 percent of GDP across projections) and fiscal discipline to reduce reliance on debt-creating flows.

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

### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the

### KENYA: Fiscal Adjustment, Market-Financing Risks, and Climate Policy (Supplementary Information)

### Fiscal adjustment and market-financing risk
- Figure highlights:
  - 3-year primary balance (PB) adjustment distribution: top quartile corresponds to a 3-year PB adjustment greater than 2.5 percentage points of GDP.
  - Market-financing risk indicators shown include Maximum gross financing needs (GFN) over 3-year baseline projection horizon and EMBI spreads (latest available data).
  - Debt vulnerability metrics shown in projections: Debt Service-to-Revenue Ratio; PV of Debt-to-Exports Ratio; PV of Debt-to-GDP Ratio; Debt Service-to-Exports Ratio.
- Breach/benchmark indicators:
  - GFN benchmark: 14
  - EMBI values shown: 570 and 11779 (as labeled)
  - Market financing assessment: “Potential heightened liquidity needs” / “Moderate”
- Projections timeline elements (as presented):
  - Historical and projected series spanning 2019–2028 and extended projections to 2033 in charts.

### Climate vulnerability and socio-economic impacts
- Vulnerability and exposure:
  - ND-GAIN rank: 39th most vulnerable to climate change (2020).
  - Kenya contributes less than 0.1 percent of global greenhouse gas emissions annually.
  - Climate-attributable disasters: more than 70 percent of natural disasters in Kenya are attributable to extreme climatic events.
  - Drought frequency: major droughts occur every ten years; moderate droughts or floods every three to four years.
- Economic impacts:
  - 2008–11 drought estimated cost: US$12.1 billion (US$0.8 billion from destruction of physical and durable assets; US$11.3 billion from losses across all sectors).
  - Droughts estimated economic impact: 8 percent of GDP every five years.
  - Poverty context: one third of Kenya’s population still lives under the international poverty line.
- Historical emissions and projections:
  - 1995 GHG emissions: 56.8MTCO2e
  - 2015 GHG emissions: 93.7MT CO2e
  - Projected under no-intervention scenario (Kenya’s draft Long-Term Strategy): 300MTCO2e by 2050
- Emissions by source (as stated):
  - Agriculture: 40 percent (largely enteric fermentation)
  - Land use and land use change and forests: 38 percent
  - Transport: 12 percent
  - Energy (excluding transport): 6 percent
  - Industrial processes: 3 percent
  - Waste: 3 percent
  - Electricity: 1 percent

### Government adaptation policies and institutional gaps
- National commitments and policy instruments:
  - NDC prioritizes water, agriculture, land use, forestry, energy, health, and infrastructure for adaptation; mainstreaming into Medium-Term Plans (MTPs) and County Integrated Development Plans (CIDPs).
  - Main elements of climate policy framework listed: National Climate Change Response Strategy (2010); National Climate Change Action Plans; National Drought Management Authority Act (2016); Green Economy Strategy and Implementation Plan (2016-2030); National Adaptation Plan (2017); National Climate Change Act (2016).
- Institutional readiness and gaps:
  - ND-GAIN readiness rank: 154th out of 181 countries.
  - Key areas for institutional strengthening:
    - Improved fiscal financing for adaptation (operationalize Climate Change Council and National Climate Change Fund); focus on underfunded sectors: agriculture, forestry and land use, transport, water management.
    - Better alignment between MTPs and CIDPs for mainstreaming climate agenda.
    - Improved local risk exposure assessment and community engagement; make adaptation core component of CIDPs.
    - Improve coordination by integrating National Environmental Management Authority and National Drought Management Authority and eliminating overlaps, particularly among regulatory state-owned enterprises.

### Priority adaptation and mitigation actions
- Short- to medium-term priority adaptation actions recommended:
  - Improve agricultural productivity and expand irrigation.
  - Climate-proof critical infrastructure links.
  - Strengthen health systems, waste management, and forest resource management and restoration.
- Mitigation commitments and opportunities:
  - Updated NDC: targets a 32 percent reduction in GHG emissions by 2030 relative to a business-as-usual scenario of 143MtCO2e (previous NDC target: 30 percent).
  - Kenya’s power system:
    - About 93 percent of electricity generated from clean sources (geothermal, hydro, wind).
    - Installed power generation capacity: 3,121MW
    - Peak demand: 2,128 MW
    - Fossil fuel-based generation contribution declined from about a third of installed capacity (about 20 percent of generation in 2015) to about a fifth of installed capacity and contributing only to around 10 percent of generation (current).
    - Kenya connected to regional hydropower via the Kenya-Ethiopia Interconnector; regional energy trading through the Eastern Africa Power Pool noted.
  - Forest restoration target:
    - New tree cover target: 10.6 million hectares (up from current level of 7.2 million hectares).
    - Restoration potential judged achievable and could help meet NDC and approach net-zero and carbon credit opportunities.
  - Measures needed to secure sustainable gains from restoration:
    - Improve agriculture productivity, lower demand for biomass-based cooking energy, boost security of tenure, provide incentives and mobilize financing (including via carbon markets).
    - Accelerate transition of households to more sustainably produced and cleaner fuel options.
    - Integrate climate considerations into the Agricultural Sector Transformation and Growth Strategy 2019–29.

### Urban and transport mitigation priorities
- Urban mitigation priorities:
  - Develop comprehensive national urban transport policy and update National Integrated Transport Policy to enable low-carbon urban transport.
  - Priorities: integrated multi-modal public transport; improve public transport and non-motorized transport (sidewalk and bicycle lanes); shift from car-centric to people-centric approaches.
  - Adoption of battery electric vehicles (BEV) combined with mass rapid transit recommended.
  - Apply low-carbon approaches to affordable urban housing supply.
  - Note: greener, more resilient cities require high levels of human, technical, and financial resources, and institutionalized knowledge and participatory governance.

### Governance, public finance, and carbon markets
- Public finance and procurement:
  - Progress in aligning budget with climate strategies, but specific climate targets/indicators could be further incorporated into performance contracts of public sector budget units and public entities.
  - Need to strengthen internal controls for climate-related expenditure within the Integrated Financial Management Information System.
  - Public investment management framework requires environmental and social impact assessments but does not integrate climate disaster risk screening.
  - Sustainable Procurement Framework under development but not yet integrated into procurement regulations; public procurement lacks climate-responsive procurement guidelines and principles and comprehensive data on procurement impacts.
- Carbon markets and green finance:
  - Sectors able to generate carbon credits include forestry, blue economy, agriculture, buildings, energy, and transport.
  - Kenya committed at COP27 to scaling voluntary carbon markets and is expected to benefit from the Africa Carbon Markets Initiative.
  - Requirements to capitalize on carbon markets:
    - Finalize robust legal framework and operationalize legislation.
    - Ensure environmental integrity of credits via measurement, reporting, and verification systems and registry infrastructure.

### World Bank engagement and operations
- World Bank support:
  - Active portfolio spans agriculture, blue economy, energy, urbanization, water management, and social protection.
  - Financing via project finance and budget support.
  - Support for devolved climate action via Financing Locally Led Climate Action Program for Results.
  - Projects under preparation in transport, energy, landscape restoration, and health.
  - Analytical and technical assistance on greening PPP pipeline, carbon markets and climate finance, landscape restoration, irrigation expansion, green jobs, greening housing development.
  - Finalizing the Country Climate and Development Report for Kenya to integrate climate and development priorities.

### Program monitoring, recent macro developments, and policy actions
- Program monitoring and MPCC:
  - June inflation: 7.9 percent y/y, triggering the Monetary Policy Consultation Clause (MPCC) for end-June 2023.
  - Three-month average inflation: 7.93 percent (above program MPCC target range of 2.5–7.5 percent).
  - Central Bank of Kenya raised policy rate by 100 basis points to 10.5 percent on June 26.
- Structural benchmark:
  - End-June 2023 structural benchmark on AML/CFT was not met but implemented with delay in early July.
  - Anti-Money Laundering and Combating of Terrorism Financing Laws (Amendment) Bill, 2023 approved by Cabinet on July 5 and forwarded to Parliament on July 6.
- Recent macro outturns:
  - Real GDP growth: 5.3 percent y/y in 2023Q1.
  - Agricultural production growth: 5.8 percent y/y.
  - Seasonally adjusted quarterly growth slowed to 1.1 percent from 2.1 percent in 2022Q4.
  - Current account deficit (U.S. dollars): nearly halved year-on-year, driven by a decline in imports.
- Fiscal and debt policy:
  - Parliament approved medium-term debt anchor on June 22 to replace nominal debt ceiling with present-value anchor of 55 percent of GDP.
  - Preliminary fiscal data end-May 2023 indicate resource shortfall:
    - Primary balance on cash basis: surplus of 1.4 percent of GDP at end-May 2023.
    - Taxes: Ksh.1,672 billion (11.7 percent of GDP) at end-May, compared to end-June target Ksh.2,035 billion (14.3 percent of GDP); shortfall mainly on weaker income taxes.

*Source: IMF staff report supplement and World Bank assessment material as presented in the provided content.*

### 1.0 and 1.2 percent of GDP. Against this backdrop

### 1.0 and 1.2 percent of GDP. Against this backdrop

### Recent fiscal developments and estimated FY2022/23 resource shortfall
- Text Table 1 (selected figures, in Ksh. billions):
  - Revenues and grants: 2,231; 1,151; 2,102; 2,541
  - Tax revenue: 1,770; 913; 1,672; 2,035
  - Nontax revenue: 430; 234; 408; 478
  - Grants: 31; 4; 2; 28
  - Expenditure and net lending: 3,024; 1,469; 2,540; 3,386
  - Interest payments: 578; 319; 627; 687
  - Overall balance including measures (cash basis, incl. grants): -793; -233; -438; -845
  - Primary balance incl. grants: -170; 99; 189; -158
  - Memorandum PC on tax collection: 1,667; 862; 2,035
  - Memorandum PC on the primary balance: -428; -110; -158
- Text Table 2 (selected fiscal ratios, in percent of GDP):
  - Resources INFLOWS (on cash basis): 24.8; 25.3; 25.2; 25.3; 24.3
  - Revenues: 17.3; 17.7; 17.4; 17.4; 16.4
  - Taxes: 14.0; 14.3; 14.0; 13.9; 13.1
  - Borrowing: 7.4; 7.3; 7.6; 7.6; 7.6
  - Resource OUTFLOWS (on cash basis) – Primary expenditure: 18.5; 19.0; 18.8; 18.8; 18.8
  - Debt service: 6.3; 6.3; 6.4; 6.5; 6.5
  - Resource gap (3 = 1 - 2): 0.0; 0.0; 0.0; 0.0; -1.0
  - Financing of resource gap: 0.0; 0.0; 0.0; 0.0; 1.0 (Unpaid bills 1.0)
  - Memorandum: Tax collection: 2,035; 2,035; 1,999; 1,985; 1,865
  - Overall balance: -845; -824; -846; -855; -994
  - Primary balance: -158; -148; -163; -158; -152
- Staff assessment and implications:
  - Staff expects a resource shortfall of about 0.8–1.0 percent of GDP at end-June 2023 (compared to 0.9 percent of GDP under staff’s downside scenario).
  - The tax shortfall accounts for a larger share of the resource shortfall than earlier expected.
  - If not addressed, the larger tax shortfall will affect tax collection in FY2023/24 and increase the likelihood of deviation from the envisaged program tax path.
  - FY2022/23 will likely close with a carryover of unpaid bills to FY2023/24 of 0.8-1.0 percent of GDP, necessitating spending prioritization and corrective measures to meet FY2023/24 tax and primary balance targets.
  - Staff’s baseline already included measures with a yield of 0.6 percent of GDP; additional corrective measures of 0.4–0.6 percent of GDP will be needed given the larger tax shortfall.

### FY2023/24 Budget approval and revenue package
- Text Table 3 (selected figures, in Ksh. billions):
  - Revenues and grants: 2,906; 2,936; 3,031
  - Tax revenue: 2,428; 2,428; 2,428
  - Nontax revenue: 428; 466; 561
  - Grants: 50; 42; 42
  - Expenditure and net lending: 3,620; 3,599; 3,749
  - Interest payments: 769; 775; 775
  - Overall balance including measures (cash basis, incl. grants): -714; -663; -718
  - Primary balance incl. grants: 55; 112; -57
  - Memorandum PC on tax collection: 2,428
  - Memorandum PC on the primary balance: 55
- Approved Budget and parliamentary changes:
  - Approved Budget targets a primary surplus of Ksh.57 billion (0.4 percent of GDP), slightly above the program target but below the Ksh.112 billion (0.7 percent of GDP) originally proposed by National Treasury.
  - The approved 2023 Finance Act preserved the proposed increase of the VAT rate on fuel products and introduced new payroll and trade taxes, while reintroducing several VAT exemptions and adopting less ambitious increases in excise and income taxes.
  - The total size of the revenue package underpinning the FY2023/24 Budget is 1.5 percent of GDP (compared to National Treasury proposal of 1.6 percent of GDP).
  - Parliament increased the proposed envelope of primary expenditures by about 0.9 percentage points of GDP to reflect the agreement on proceeds of new payroll taxes (0.4 percent of GDP) and additional spending needs:
    - transfers to line ministries (0.3 percent of GDP)
    - domestic projects (0.1 percent of GDP)
    - defense spending (0.1 percent of GDP)
  - The primary balance remained in line with program commitments after spending reallocations.

- Text Table 4 (FY2023/24 Revenue Package, in percent of GDP):
  - Total Revenue Package underpinning the FY2023/24 Budget: 1.6; 1.5
  - 2023 Finance Bill: 1.5; 1.4
  - Tax measures: 0.8; 0.8
    - Income: 0.2; 0.1
      - o/w new PAYE band: 0.1; 0.1
      - o/w new branch profit tax: 0.1; 0.1
    - VAT: 0.4; 0.2
      - o/w VAT on fuel products at 16 percent: 0.3; 0.3
      - o/w new exemptions: 0.0; -0.1
    - Excise: 0.2; 0.1
    - Other tax measures: 0.0; 0.4
      - o/w new payroll tax: -0.4
  - Other revenue measures: 0.7; 0.5
    - Non-tax: 0.1; 0.1
    - Administrative: 0.6; 0.4
      - o/w tax amnesty (interest and penalties): 0.3; 0.3
    - Custom taxes: 0.1; 0.1
  - Memorandum: Total tax policy measures (Finance bill and custom measures): 0.9; 0.9
  - Proposed Finance bill: Total tax policy measures: 0.9
- Note: The approved package reflects parliamentary concern about indirect taxes’ impact on cost of living and includes administrative measures that did not garner support, reducing the budgeted revenue package from the proposal.

### Contingency plans, corrective tax and spending measures for FY2023/24
- National Treasury commitment:
  - Activate contingency plans to ensure achievement of FY2023/24 fiscal targets (MEFP¶20).
  - Introduce, in addition to passed measures in the 2023 Finance Act (1.5 percent of GDP), new tax measures (policy and administrative changes) for about 0.4–0.6 percent of GDP to fully offset the carryover impact of the FY2022/23 tax shortfall and ensure achievement of the FY2023/24 target.
- Expected yields and measures:
  - Administrative measures already underway:
    - Streamlining the VAT apportionment ratio of allowable inputs VAT on exempt supplies (MEFP¶20): expected to yield about 0.2–0.4 percentage points of GDP on full-year basis.
    - Settling well-identified disputes on tax debt after initial delays (MEFP¶13): expected yield part of 0.3–0.5 percentage points of GDP.
    - These administrative measures are expected to yield about 0.3–0.5 percentage points of GDP.
  - Additional tax policy measures to be submitted with the Supplementary FY2023/24 Budget (end-October 2023 SB): motor vehicle circulation tax, reduction of tax exemption on interest income, changes to VAT exemption rules; conservatively expected to yield 0.1–0.3 percent of GDP.
  - Total additional corrective tax measures targeted: 0.4–0.6 percent of GDP.
- Spending-side offsets in Supplementary FY2023/24 Budget:
  - Offsets of 0.8–1.0 percent of GDP could include:
    - Compression of primary current spending of about 0.2–0.3 percent of GDP (mainly reduction in transfers to public sector institutions and administrative expenditures).
    - Reduction in domestic capital spending of 0.5–0.6 percent of GDP (rationalization and postponement of new domestic projects).
    - Strengthening expenditure controls: 0.1 percent of GDP.
  - Staff stressed urgency of bringing forward submission of the supplementary budget to end-September if feasible.

### Supplementary Letter of Intent (Government commitments and KRA actions)
- Key commitments (Supplementary Letter of Intent, July 12, 2023):
  - Activate contingency plans described in ¶20 of the MEFP to avoid FY2022/23 tax shortfall affecting FY2023/24.
  - Carefully prioritize spending to clear older unpaid bills and avoid accumulation of arrears in FY2023/24 (MEFP¶17).
  - Instruct Kenya Revenue Authority (KRA) to redouble efforts to recover resources targeted under the Rapid Revenue Initiatives (RRI) introduced last April (MEFP¶13).
  - Specific KRA actions and expected yields:
    - Secure settlement on remaining well-identified disputes on tax and custom debt and prioritize compliance checks on 74 Large Tax Office cases related to VAT and withholding tax (expected yield about 0.1).
    - Streamline procedures to compute the VAT apportionment ratio of allowable inputs on exempt supplies (expected to generate about 0.2–0.4 percentage points of GDP on full-year basis).
  - Submit Supplementary FY2023/24 Budget to Parliament and seek approval for remaining tax policy measures discussed in MEFP¶20 (expected yield 0.1–0.3 percent of GDP).
  - All measures are in addition to those included in the recently-approved 2023 Finance Act.

### Inflation developments, monetary policy response, and outlook
- Inflation facts and drivers (CBK Annex, June 2023):
  - Three-month average of inflation declined from 9.4 percent at end-December 2022 to 7.9 percent at end-June 2023; remained outside the inflation target band of 2.5–7.5 percent.
  - Overall inflation: 7.9 percent in June 2023; peak 9.6 percent in October 2022; 9.1 percent in December 2022.
  - Food inflation: 10.3 percent in June 2023; 13.8 percent in December 2022.
    - Contribution of food to overall inflation eased to 3.9 percentage points from 5.1 percentage points.
    - Sugar accounts for 1.43 percent of total CPI basket and contributed 0.8 percentage points to overall inflation in June (up from 0.3 percentage points in April).
    - Four key non-vegetable food items (edible oils, milk products, wheat products, maize products) account for 12.4 percent of total CPI basket and 37.7 percent of food basket; contributed 0.8 percentage points to overall inflation in June 2023, down from 2.5 percentage points in December 2022.
  - Fuel inflation: 12.9 percent in June 2023; 12.7 percent in December 2022; contributed 2.7 percentage points to overall inflation in June 2023.
    - Main fuel items: electricity, petrol, kerosene, diesel (collectively 3.1 percent of total CPI basket); contributed 1.2 percentage points to overall inflation in June 2023 (0.8 in December 2022).
  - Non-food, non-fuel (NFNF) inflation: remained above 4 percent since November 2022; 4.1 percent in December 2022; 4.4 percent in February 2023; 4.1 percent in June 2023; contribution to overall inflation was 1.3 percentage points in June 2023.
- Monetary policy actions:
  - CBK increases in CBR since May 2022: +50 basis points to 7.50 percent (May 2022); +75 basis points (September 2022); +50 basis points (November 2022); +75 basis points (March 2023); +100 basis points (June 2023).
  - Cumulative increase since May 2022: 350 basis points to 10.50 percent as of June 26, 2023.
  - CBK objective: mitigate second-round effects, anchor inflation expectations, and stand ready to implement additional measures when necessary.
- Inflation outlook:
  - Near-term inflation expected to remain elevated due to recent electricity price increases, removal of the fuel subsidy, and second-round effects; some key food items (sugar, maize) remain elevated.
  - Food inflation expected to moderate with expected harvests (particularly maize) following recent long rains and easing global food prices.
  - Normalization of global supply chains and lower crude oil prices expected to ease fuel inflation pressures.
  - NFNF inflation expected to fall below 4 percent in September 2023.
  - CBK expects overall inflation to return to the target band by September 2023, contingent on food and fuel price developments.
  - Fiscal measures (imports of sugar and maize, fertilizer subsidy, irrigation) are expected to provide short- and medium-term relief.

### Program performance and governance actions
- Program performance highlights:
  - All end–December 2022 Quantitative Performance Criteria (QPCs) and continuous PCs since the fourth EFF/ECF reviews were met.
  - QPC on tax collection and primary balance overperformed by 0.3 and 1.3 percentage points of GDP, respectively.
  - QPC on Net International Reserves (NIR) overperformed.
  - End-December 2022 target on priority social expenditure met; target on exchequer requests outstanding for more than 90 days missed due to tight liquidity conditions.
  - End-December 2022 inflation target missed (three-month average 9.4 percent outside 2.5–7.5 percent), triggering the MPCC clause.
- Structural Benchmarks:
  - SBs for end-December 2022-June 2023 were completed.
  - FY2022/23 supplementary budget (end-January 2023 SB) and FY2023/24 Budget (end-April 2023 SB) were submitted on time.
  - End-June 2023 SB on submission of draft AML/CFT amendments and end-December 2022 SB on action plan for Kenya Power and Lighting Company (KPLC) were completed with delay.
  - SB on review of the fuel pricing mechanism remains outstanding; authorities propose to reset it to end-August.

*Source: IMF staff report and attached MEFP, Supplementary Letter of Intent, and CBK letters (excerpts provided).*

### 2023. In light of their firm commitment and pursuant to taking corrective measures, the

### 1kenea2023001 - 2023. In light of their firm commitment and pursuant to taking corrective measures, the

### III. Recent Economic Developments and Outlook
- Economic growth:
  - Expanded by 7.6 percent in 2021.
  - Expanded by 4.8 percent in 2022.
  - Expanded by 5.3 percent in Q1 2023.
- Growth drivers:
  - Services sector: transport and storage, information and communication, financial and insurance, public administrative and support services.
  - Strong rebound in agriculture in Q1 2023.
  - Favorable rains and supportive policies improved second-quarter prospects.
- Inflation:
  - Peaked at 9.6 percent in October 2022 due to global food and energy prices and prolonged drought.
  - Declined to 8.0 percent in June 2023.
  - Expected to revert to the target band by September (2023) owing to easing international commodity prices and tight monetary policy.
- External sector:
  - Current account deficit projected to improve to 4.8 percent of GDP in 2023 from 5.1 percent of GDP in 2022.
  - Reserves declined from 4.5 months of import cover in July 2022 to 4.1 months of import cover in June 2023.
  - Reserves meet CBK’s statutory requirement of 4.0 months but fall short of the EAC convergence target of 4.5 months of import cover.

### IV. Fiscal Policy and Debt Management
- Fiscal consolidation:
  - Parliament approved Supplementary Budget II for FY2022/23 targeting an overall fiscal deficit of 5.8 percent of GDP compared to 6.2 percent of GDP in FY2021/22.
  - Measures include enhanced revenue mobilization and reprioritization of expenditures while protecting social spending.
- Revenue mobilization:
  - Kenya Revenue Authority (KRA) adopted several Rapid Revenue Initiatives (RRIs).
  - Continued revenue administration reforms at KRA to improve compliance and taxpayer services.
- Expenditure measures:
  - Expenditure cuts of 0.2 percentage points of GDP in Supplementary Budget II for FY2022/23, mainly for undisbursed development project funds with low absorptive capacity.
  - Overall fuel subsidies eliminated in March 2023; cross-subsidies eliminated in May 2023.
  - Taskforce established (National Treasury, Ministry of Energy and Petroleum, EPRA) to align fuel pricing with approved budget while ringfencing social outlays.
- Debt management:
  - Public debt deemed sustainable in a forward-looking sense.
  - Implementation of the 2023 Medium-Term Debt Management Strategy (MTDS) to strengthen public debt management and reduce refinancing risks.
  - Continued reliance on concessional external financing to minimize interest rate risk.

### V. Monetary, Exchange Rate, and Financial Sector Policies
- Monetary policy:
  - Central Bank Rate (CBR) raised by 250 basis points from 7.0 percent in May 2022 to 9.5 percent in May 2023.
  - CBR further increased by 100 basis points to 10.5 percent (date implied after May 2023) to preempt potential elevated global inflation risks.
  - CBK will continue to monitor impacts and stands ready to take further action to bring inflation within the band and anchor expectations.
  - Authorities are modernizing the monetary policy framework with ongoing Fund technical support.
- Exchange rate:
  - Authorities committed to a flexible, market-determined exchange rate aligned with medium-term fundamentals and program objectives.
  - Kenya shilling moved significantly in recent months; challenges addressed via the Kenya FX Code and innovative forex market approaches.
- Financial sector stability and resilience:
  - Banking sector remains stable and resilient, with vigilance on credit risks and risks from regional expansion and digitalization.
  - CBK issued guidance on climate-related risk management to integrate climate risks into governance, strategy, risk management and disclosure frameworks.
  - CBK working with banks on capacity building and integration of climate-related risk management.

### VI. Structural, Governance, and Transparency Reforms
- SOE and state corporation reforms:
  - Priority on strengthening governance and oversight of SOEs and SCs.
  - Submission to Parliament of a new privatization bill in 2023 focusing on accelerated privatization, streamlined governance, efficient utilization of budgetary resources, better fiscal risk management and enhanced accountability.
  - Concrete steps to reform Kenya Airways (KQ) and KPLC and strengthen governance and oversight of SCs while safeguarding profitability.
- Anti-corruption and financial integrity:
  - Commenced publication of beneficial ownership information for companies awarded tenders and strengthened the beneficial ownership framework.
  - Submitted the AML/CFT amendment Bill to Parliament.
  - Actions to address strategic deficiencies identified in the Kenya 2022 Mutual Evaluation Report by ESAAMLG.
- Health, data, and cybersecurity infrastructure:
  - Budgetary resources earmarked to upscale pandemic preparedness infrastructure.
  - Efforts to construct the National Biosafety Laboratory and establish the National Pandemic Response Centre in coordination with the African Development Bank.
  - Proposed budget supports construction of the National Data Centre co-financed by the European Union grant, and establishment of the National Cybersecurity Authority with help from SIDA.

### VII. Building Resilience to Climate-Change
- Climate commitments and policy:
  - Developed a long-term policy and legislative framework to guide the climate agenda.
  - Building capacity on climate matters and mobilizing investments in renewable energy and energy efficiency projects with development partners.
- Climate finance and NDCs:
  - Committed to reducing greenhouse gas emissions by 32 percent by 2030.
  - Facing significant challenges in attracting climate finance flows; substantial resources required to meet updated NDC targets while foregoing exploitation of fossil fuel resources.
  - Consider Fund support under the RST as critical to unlock additional climate financing.

### VIII. Conclusion
- Authorities’ priorities:
  - Maintain macroeconomic stability and resilience, preserve fiscal and debt sustainability, and augment buffers against external shocks.
  - Pursue policy efforts to unlock growth potential in line with Vision 2030 and the National Development Plan.
- Requests to IMF Executive Directors:
  - Support to conclude the fifth program review.
  - Approval of request for support under the RST and augmentation of access.

*Source: IMF staff submission (1kenea2023001 - 2023).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1kenea2023001.pdf_