## 1kenea2024001

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### Executive summary and context
- EFF/ECF-supported program approved in April 2021 and extended by 10 months in July 2023 to April 2025.
- Key near-term pressures:
  - US$2 billion Eurobond maturing in June 2024 unlikely to be fully rolled over in current market conditions.
  - Costly and uncertain international bond market access amid “higher for longer” global interest rates.
  - Social discontent from rising cost of living, regional insecurity, and risks of widespread flooding from El Niño rains.
- Public debt estimated at 73 percent of GDP by end-2023, with debt service consuming about 55 percent of revenues.
- Authorities requested a blended augmentation of access under the EFF/ECF arrangements of 130.3 percent of quota (SDR707.27 million) to be disbursed as budget support upon completion of the sixth and seventh EFF/ECF reviews.

### Recent macroeconomic developments
- Real GDP and growth:
  - Real GDP grew by 5.4 percent in the first half of 2023.
  - Growth averaged 4.8 percent over 2015–19.
  - Staff projects Real GDP growth at 5.1 percent in 2023 and 5.0 percent in 2024; medium term 5.3 percent.
- Inflation and monetary policy:
  - Headline inflation eased inside the target band (2.5–7.5 percent) since July; 6.8 percent y/y in November; CBK core inflation 3.3 percent in November.
  - CBK tightened policy by 375 basis points in 2023, including 200 basis points in December to bring policy rate to 12.5 percent; cumulative tightening since May 2022 noted as 550 basis points in some sections.
  - Staff projects inflation to move up in early 2024 with possible temporary breaches of upper target band.
- External sector and reserves:
  - Current account deficit narrowed; projected around 4 percent of GDP in 2023 and beyond.
  - US$/Ksh depreciated by 20.4 percent y/y (as of December 21, 2023); REER depreciated by 15.8 percent y/y (as of November 2023).
  - FX reserves declined in 2H 2023 but are projected to remain adequate; CBK usable foreign exchange reserves estimated at USD 6.6 billion (3.5 months of import cover) as at end-December 2023.
- Fiscal outcomes:
  - FY2022/23 primary fiscal deficit was 0.6 percent of GDP.
  - Tax shortfall amounted to 1 percent of GDP in FY2022/23 (Ksh.148 billion).
  - Supplementary I FY2023/24 Budget approved; authorities submitted tax policy and administrative measures of 0.9 percent of GDP and non-tax measures of 0.3 percent of GDP on December 15.
- Banking sector:
  - Banking sector profitable though credit and market risks elevated; profitability declined by 4.8 percent y/y in September 2023.
  - Gross NPL ratio rose to 15.0 percent in September 2023 (from 13.7 percent in September 2022).
  - Core and total capital adequacy ratios: 15.3 and 18.6 percent (September 2023); liquidity ratio 49.3 percent.

### Program performance, conditionality, and compliance
- Mixed implementation:
  - All end-June 2023 QPCs met except tax revenue target.
  - Continuous performance criterion on no new external payment arrears breached by about US$0.51 million (0.0005 percent of GDP); amounts settled.
  - MPCC triggered for end-June 2023; IMF Executive Board consultation completed in July.
  - Seven SBs for June–October 2023 not met on time; six implemented with delay; pending-bills SB proposed reset to end-February 2024.
- Prospective modifications:
  - Proposed modifications to end-June 2024 QPCs on primary fiscal balance and net international reserves.
  - Under EFF, end-December 2023 QPC on tax revenues likely to be missed; authorities submitted corrective measures to Parliament.

### Proposed augmentation of Fund access and modalities
- Authorities request:
  - Blended augmentation of 130.3 percent of quota (SDR707.27 million ≈ about US$938 million).
  - Composition: 8.5 percent of quota (SDR46.14 million) under PRGT (ECF); 121.8 percent of quota (SDR661.13 million) under GRA (EFF).
  - Phasing: one-third upon completion of sixth EFF/ECF reviews (8.5 percent PRGT and remaining from GRA), remainder upon completion of seventh reviews (all GRA).
  - Disbursement modality: as budget support via the central bank upon completion of reviews; on-lent to government.
- Fund policy implications:
  - Proposed augmentation would trigger GRA exceptional access (EA) and Policy Safeguards for High Combined Credit (PS-HCC).
  - Staff assesses Kenya meets GRA EA criteria.
  - Enterprise and financial risks to the Fund would increase but implications for GRA and PRGT resources deemed manageable.

### Fiscal strategy, targets, and measures
- Near-term fiscal targets and measures:
  - Authorities to improve the primary balance by an additional cumulative 1.2 percentage points of GDP over FY2023/24–FY2024/25 relative to fifth review levels to offset higher interest payments.
  - Supplementary II FY2023/24 expected by end-March 2024 (proposed SB); target primary surplus 0.7 percent of GDP (compared to 0.4 percent under Supplementary I).
  - FY2024/25 Budget aims for overall fiscal deficit below 4 percent of GDP; by end-April 2024 submit a budget envisaging a 1.2 percentage points of GDP improvement; primary surplus target 1.7 percent of GDP.
- Revenue measures:
  - MTRS approved by Cabinet covering FY2024/25–FY2026/27; aims to increase revenues by about 5 percentage points of GDP over FY2024/25–FY2026/27.
  - Authorities expect first-year MTRS measures included in 2024 Finance Bill; staff baseline assumes early adoption yields about 0.8 percent of GDP in FY2023/24 and conservatively lower yields thereafter.
  - Specific measures: motor vehicle circulation tax, removal of certain interest income exemptions, excise increases on money transfers and telecom data, non-tax fee increases estimated 0.2 percent of GDP (half-year impact).
- Expenditure measures:
  - Expenditure savings targeted: about 0.2 percent of GDP (half-year impact) via investment portfolio rationalization; 0.6 percent of GDP savings in recurrent spending by containing travel, allowances, hospitality and rationalizing non-priority projects.
  - Commit to protect social and developmental spending.
- Medium-term anchor:
  - Debt anchor: PV of overall public debt/GDP of 55 percent by 2029 (authorities’ target approved by Parliament).
  - Maintain fiscal primary balance above debt-stabilizing level over medium term to reach debt anchor.

### Debt sustainability assessment (DSA) and capacity to repay
- Headline DSA finding:
  - Debt is assessed sustainable but at high risk of distress — "sustainable but not with a high probability."
- Key DSA numbers (verbatim from projections):
  - Public debt (percent of GDP), Current DSA:
    - 2023: 73.5
    - 2024: 73.4
    - 2025: 70.4
    - 2026–2027: 67.8
    - 2028: 65.4
  - Primary fiscal balance (percent of GDP), Current DSA:
    - 2023: -0.1
    - 2024: 1.2
    - 2025: 1.7
    - 2026–2027: 1.7
    - 2028: 1.6
  - Gross international reserves (US$ billion), projections:
    - 2022: 8.0
    - 2023: 7.6
    - 2024: 8.1
    - 2025: 9.0
    - 2026: 9.9
    - 2027: 10.6
    - 2028: 11.6
- Stress-test conclusions:
  - External debt vulnerable to export and exchange rate shocks; overall debt vulnerable to primary balance and natural disaster shocks.
  - Combined contingent liability stress test incorporates shocks totaling several percent of GDP (e.g., 3.1 percent of GDP for SOE/PPPs; 0.5 percent for legacy county debt; 0.4 percent for oil scheme contingent liabilities; 5 percent for financial market shock).
- Fund exposure and repayment capacity with augmentation:
  - Total outstanding credit to the Fund (including proposed augmentation but excluding RSF) projected at nearly SDR3.4 billion, or 625.1 percent of quota in 2025.
  - Ratios to GDP and gross international reserves would peak at 4.5 and 55.2 percent in 2024, respectively.
  - Non-RSF debt service to the Fund would peak by 2029 at 4.1 percent of exports and 3.4 percent of fiscal revenues.
  - Staff assesses Kenya’s capacity to repay the Fund as adequate but subject to increased risks since the last review.

### External sector, FX market reforms, and reserves
- External position:
  - Current account deficit projected to stabilize around 4 percent of GDP in 2023 and beyond.
  - Exports underperformed in 2023; expected to recover in 2024 as global growth improves and reforms take effect.
  - Tourism receipts and remittances resilient.
- Exchange rate and FX market reforms:
  - De facto exchange rate arrangement classified as crawl-like; authorities committed to greater exchange rate flexibility.
  - CBK adhered to the Global FX Code; measures to revive interbank FX market: electronic matching system, removal of 20-cent spread limit, allowing FX intermediaries to negotiate market clearing rates.
  - CBK made small net FX purchases in recent months reversing earlier periodic FX sales.
- BoP recording adjustment:
  - Inclusion of reexported oil under the G2G oil import arrangement expected to raise both exports and imports mechanically; preliminary estimates suggest PV of debt-to-exports could improve by about 37 percentage points in 2023 and debt service-to-exports by 3.3 percentage points in 2023, but staff notes no material impact on debt sustainability assessment.

### Financial sector vulnerabilities and macroprudential considerations
- FX exposures and sovereign-bank nexus:
  - Banks’ share of FX deposits/liabilities rising; sovereign debt accounts for almost a third of bank assets.
  - FX lending via swaps and maturity shortening increased rollover risks.
- Stress-test findings:
  - CBK FX-depreciation stress test (17.5 percent nominal depreciation over 6 months):
    - NPLs projected to rise by 16.4 percent.
    - 18 percent of banks would need additional capital.
  - CBK interest-rate stress test (300 basis points increase scenario):
    - Average T-bond yields would increase to 19.7 percent.
    - NPLs would increase to 17.4 percent of gross loans by December 2023.
    - 10 banks, including 3 Tier-1 banks, failed the stress tests; additional capital requirements ~0.43 percent of GDP.
- Specific indicators:
  - FX net open position (NOP) regulatory measures show widening off-balance sheet exposures; regulatory FX NOP widened to –3.1 percent of core capital (2023Q3).
  - Banks with liquidity deficiency or thin buffers accounted for 3 percent of total banking assets; 20 banks accounting for 62 percent of asset base were accessing CBK discount window as of end-September 2023.
- Policy responses:
  - CBK developing ILAAP Guidelines with Fund TA; introduce currency-differentiated LCR and NSFR monitoring.
  - Authorities asked banks with capital shortfalls to provide capital restoration plans and encourage adequate provisioning.
  - Monitor and manage risks from G2G oil import scheme and plan orderly exit.

### G2G oil import scheme: scale, risks, and exit plans
- Scheme activity and scale:
  - Initially 9 months, extended another 12 months to December 2024.
  - By mid-November 2023, oil imports under scheme amounted to about US$3.7 billion and LCs worth over US$784 million were settled.
  - Actual monthly average import volumes fell short of agreed monthly minimums.
- Risks:
  - Potential segmentation of FX market, implications for banks’ FX risks, and disorderly exit risk without an exit strategy.
  - Authorities intend all FX conversions under the scheme to be done at market rates and commit to exit due to market distortions when feasible.

### RSF (Resilience and Sustainability Facility) and climate-related reforms
- RSF arrangement:
  - 20-month RSF from July 2023 to March 2025 with nine Reform Measures (RMs); access level 75 percent of quota (SDR407.1 million) phased across RMs.
  - Kenya’s Updated NDC (2020) estimated mitigation and adaptation financing needs ~US$62 billion (about 6 percent of 2023 GDP per year over 2023–30), almost 90 percent from international sources.
- Implementation progress:
  - First RM—National Framework for Climate Services—approved by Cabinet on November 3, 2023 (completed).
  - Other RMs on track though RM3 (carbon pricing) may take longer; authorities not requesting rephasing of RSF access.
  - Planned TA: fiscal climate scenarios (RM2) requested; CBK and EIB diagnostic review for green taxonomy and disclosures expected by end-June 2024.
- Selected climate measures and timelines:
  - RM2: publish long-term climate scenarios in fiscal risk statement starting FY2024/25 (7th review).
  - RM3: carbon pricing subject to Parliamentary approval (7th review); implementation may take longer.
  - RM4–RM9: green finance taxonomy, climate disclosures, climate budget tagging, net metering/open access regulations with target reviews through 2024–2025.
- FLLoCA program:
  - Development partner funding total: $250.4 million; program runs until end-2026; ninety percent of program funding to be spent at county and community levels.

### Governance, AML/CFT, and SOE reforms
- Governance and AML/CFT:
  - AML/CFT (Amendment) Act 2023 entered into force in September 2023; implementing regulations gazetted; beneficial ownership rules and registries advancing (BRS compliance 44.6 percent as of end-September 2023).
  - Access to Information Regulations republished in October 2023; anticipated parliamentary approval by April 2024.
  - Ethics and Anti-Corruption Commission recovered assets valued at roughly Ksh.23.74 billion (US$200 million) (2018–2023).
- State Corporations (SCs) and SOE reform:
  - Ownership Policy for commercial SCs approved and published in November 2023.
  - NT to complete financial evaluation for fifty SCs using FY2022/23 audited accounts and report to Fiscal Risk Committee by end-June 2024 (SB).
  - Privatization Act 2023 published in October 2023; authorities proposed a list of eleven SOEs for privatization on November 27; High Court suspension issued until February 6, 2024, on implementing section 21(1).
  - KPLC action plan implementation and private sector representation approved; KQ novation of guaranteed external debt completed; Cabinet-approved viable strategy for KQ to be presented by end-April 2024 (proposed SB).

### Key risks and mitigation
- Program risks (tilted to the downside):
  - Worsening external financing conditions, FATF grey-listing risk, export underperformance, adverse weather (El Niño), rise in global oil prices, weaker growth, social discontent, weakening SOE balance sheets, risks from new oil importation scheme, elevated credit and market risks.
- Mitigants:
  - High-level political commitment to reforms.
  - Prospects for additional external financing from development partners (World Bank, regional banks, syndicated loans).
  - Proposed Fund augmentation could catalyze concessional and commercial financing.
  - Authorities’ corrective fiscal and administrative measures (MTRS, Supplementary II, PFM reforms, pending bills strategy).

### Waivers, program modifications, and conditionality changes
- Waivers requested/justified:
  - Waiver of nonobservance for end-June 2023 tax QPC under ECF (corrective measures expected).
  - Waiver of nonobservance of continuous performance criterion on no new external payment arrears (amounts settled).
  - Waiver of applicability for end-December 2023 QPCs under EFF, except QPC on tax revenues (waiver requested).
- Modifications proposed:
  - Deletion of adjustor for extraordinary budget support to SOEs from primary fiscal balance QPC and modification of end-June 2024 QPC.
  - Modification of end-June 2024 NIR floor reflecting higher liabilities to the Fund due to augmentation while gross reserves projected similar to fifth reviews.
  - Establish performance criteria for end-December 2024 and reset structural benchmarks on pending bills to end-February 2024; establish new SBs over January–May 2024.

### Monitoring, data, and program documentation
- TMU definitions and reporting:
  - Primary balance measured cumulatively from July 1 to test dates; NIR floor defined with specific adjustors and caps (US$325 million for end-Dec 2023; US$504 million for end-Jun 2024; US$746 million for end-Dec 2024).
  - Projected program and project loans, grants, commercial borrowing, and FX outflows tableed in US$ millions for test dates.
- Data coverage and improvements:
  - Data provision broadly adequate though capacity constraints remain; ongoing TA and statistical improvements planned (GFS migration to GFSM 2014, IIP publication, improved BOP recording).
  - Planned reconciliation to include oil reexports in BoP.

*Italic: Source: EXECUTIVE SUMMARY and selected chapters/excerpts (1kenea2024001) — IMF staff report.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- The authorities’ EFF/ECF-supported program was approved in April 2021 and extended by 10 months in July 2023 to April 2025.
- Kenya faces a confluence of global, regional, environmental, and domestic political risks, including:
  - Costly and uncertain international bond market access for frontier market economies amid “higher for longer” global interest rates.
  - A US$2 billion Eurobond maturing in June 2024 that is unlikely to be fully rolled over in current market conditions.
  - Social discontent from rising cost of living, regional insecurity, and risks of widespread flooding from El Niño rains.
- Public debt is estimated to have reached 73 percent of GDP by end-2023, with debt service consuming about 55 percent of revenues.

### Recent macroeconomic developments
- Real GDP growth:
  - Real GDP grew by 5.4 percent in the first half of 2023.
  - Growth averaged 4.8 percent over 2015–19 (contextual historical average).
- Inflation and external sector:
  - Agriculture recovery helped inflation ease inside the authorities’ target band since July.
  - The current account deficit has narrowed amid real exchange rate depreciation as non-energy imports declined while tourism receipts and remittances remained resilient.
  - In the absence of major inflows, FX reserves have declined but remain adequate.
- Fiscal outcomes and financing:
  - The FY2022/23 fiscal primary deficit was 0.6 percent of GDP.
  - A significant tax shortfall amounted to 1 percent of GDP in FY2022/23.
  - Preliminary data through end-October suggest gradually improving fiscal performance although taxes through end-November underperformed.
  - Domestic financing costs have risen, reflecting a tighter monetary policy stance, liquidity tightening, and bunching of external financing in the second half of the fiscal year.
- Banking sector:
  - The banking sector is profitable though credit and market risks are elevated.

### Program performance
- Overall implementation was mixed:
  - All end-June 2023 quantitative targets were met except for the tax revenue target.
  - The continuous performance criterion on accumulation of no new external payment arrears was breached; corrective actions have been taken on missed quantitative targets.
  - The Monetary Policy Consultation Clause (MPCC) was triggered for end-June 2023; a consultation with the IMF Executive Board was completed in July.
  - While seven structural benchmarks (SBs) for June–October 2023 were not met on time, six have since been implemented with delay.
  - The end-September SB related to validating and clearing the stock of pending bills outstanding at end-June 2022 is proposed to be reset to end-February 2024 to allow sufficient time given the expanded scope mandated by the Cabinet.
  - The first reform measure under the RSF arrangement was implemented in a timely manner.
- Prospectively:
  - The end-June 2024 quantitative performance criteria (QPC) on the primary fiscal balance and net international reserves are proposed to be modified.
  - Under the EFF arrangement, the end-December 2023 QPC on tax revenues is likely to be missed; the authorities have submitted corrective measures to Parliament to remedy this and to protect the end-June 2024 tax target.

### Policies and reforms
- Core objectives:
  - Restore market confidence, reduce debt vulnerabilities, bolster medium-term prospects, enhance fiscal risk management, strengthen external buffers, and improve governance.
- Fiscal strategy:
  - A stronger fiscal primary balance path is envisaged to stabilize and subsequently bring down debt to the authorities’ debt anchor level by 2029 while strengthening public financial and fiscal risk management.
  - Fiscal consolidation will be anchored by policies to improve spending efficiency and Kenya’s medium-term revenue strategy, while safeguarding social and developmental spending.
- Monetary and exchange rate policy:
  - Monetary policy was tightened further by 200 basis points in December to support external sustainability, mitigate second-round effects on inflation, and facilitate efficient functioning of the FX market.
- Structural reforms:
  - Reforms to improve export competitiveness and revenues are emphasized to safeguard debt sustainability.
  - Advancing the climate agenda (including under the RSF), promoting inclusive growth, and strengthening governance and anti-corruption are highlighted to buttress medium-term prospects.

### Augmentation of access under the EFF/ECF arrangements
- Financing needs and authorities’ request:
  - Urgent balance of payments needs have emerged primarily due to the US$2 billion Eurobond maturing in June 2024 and the unlikelihood of a full rollover at reasonable cost.
  - The authorities are pursuing additional concessional financing (including from the World Bank) and commercial financing (syndicated loans).
  - For the remainder of the gap, the authorities request a blended augmentation of access under the EFF/ECF arrangements amounting to 130.3 percent of quota (SDR707.27 million) to be disbursed as budget support upon completion of the sixth and seventh EFF/ECF reviews.
- Fund policy implications:
  - The proposed augmentation would trigger both GRA exceptional access (EA) and Policy Safeguards for High Combined Credit (PS-HCC).
  - Under Fund policies, staff assesses that Kenya meets the GRA EA criteria.
  - The implications for GRA and PRGT resources from the proposed augmentation are expected to be manageable, but the Fund would be exposed to enterprise and financial risks.

### Program risks and mitigation
- Risks:
  - Program risks are elevated from both global and domestic sources, including tightened global financing conditions and domestic fiscal and external pressures.
- Mitigants:
  - Commitment from the highest political level to necessary policy actions.
  - Good prospects for additional external financing from development partners, which could be catalyzed by a Fund augmentation.

### Mission and approvals
- Approved by Catherine Pattillo (AFR) and Eugenio Cerutti (SPR).
- Mission team composition and consultations included senior government officials (including the President and the CS for National Treasury & Economic Planning), Central Bank of Kenya officials, development partners, private sector representatives, and other stakeholders.
- Discussions were held in Nairobi during October 30–November 15, 2023.

*Source: EXECUTIVE SUMMARY (1kenea2024001) — IMF staff report.*

### 5.      The economy remains resilient amid shocks and a tighter policy stance

### 5.      The economy remains resilient amid shocks and a tighter policy stance

### Macroeconomic performance and inflation
- Real GDP growth:
  - Growth was at 5.4 percent y/y in the first half of 2023.
  - Agriculture rebounded by 6.9 percent and helped lower food inflation.
  - Non-agricultural growth slowed following tightening of policies.
- Inflation:
  - Headline inflation eased inside the target band (2.5–7.5 percent) since July and was at 6.8 percent y/y in November, broadly in line with the program baseline.
  - CBK measure of core inflation eased to 3.3 percent, lowest since September 2022.
  - Fuel inflation remains elevated amid adjustments in administered prices.
- Monetary policy:
  - The Central Bank of Kenya (CBK) tightened the policy rate by 375 basis points in 2023, including the 200-basis-point hike in December to bring the policy rate to 12.5 percent.
  - The CBK has made small net FX purchases in recent months, reversing periodic FX sales earlier in the program in response to shocks.

### Fiscal outturn and revenue measures
- FY2022/23 fiscal outturn:
  - The primary fiscal deficit declined to 0.6 percent of GDP (FY2021/22: –1 percent of GDP).
  - The tax shortfall was contained at 1 percent of GDP.
  - Unpaid bills were lower than estimated at 0.7 percent of GDP following authorities’ efforts since April 2023 to sustain domestic resource mobilization.
- FY2023/24 developments and measures:
  - Preliminary data through end-October suggest gradually improving fiscal performance in FY2023/24 though tax collections continue to lag target.
  - Parliament approved the Supplementary I FY2023/24 Budget in November.
  - Authorities submitted amendments to the tax laws on December 15 introducing tax policy and administrative measures of 0.9 percent of GDP (including the 0.4 percent of GDP committed at the time of the fifth EFF/ECF reviews) and new non-tax measures for 0.3 percent of GDP to offset tax underperformance and support meeting FY2023/24 fiscal targets.

### External sector, exchange rate, and reserves
- Real and nominal exchange rates:
  - The real exchange rate has depreciated to a five-year low.
  - The interbank FX market remains dormant; spreads in the bank-client market remain large.
  - US$/Ksh exchange rate has depreciated by 20.4 percent y/y (as of December 21, 2023).
  - Real effective exchange rate depreciated by 15.8 percent y/y (as of November 2023).
  - Kenya’s de facto exchange rate arrangement is classified as crawl-like.
- FX market reforms:
  - CBK issued a statement of adherence to the global FX code in June 2023 and announced measures to revive the interbank FX market, including implementation of an electronic matching system, removal of the 20-cent spread limit, and allowing FX intermediaries to negotiate market clearing rates.
- Reserves and current account:
  - The current account deficit has narrowed as the real exchange rate adjusts.
  - Imports have declined; tourism has recovered further; remittances remain resilient.
  - FX reserves declined in the second half of 2023, broadly as anticipated given large debt service payments and absence of major inflows.
  - FX reserves are projected to remain adequate, reflecting a gradual buildup amid import adjustments and supported by official flows and commercial borrowings in 2023 and 2024.

### Financial sector, domestic financing, and markets
- Banking sector:
  - Profitability declined by 4.8 percent y/y in September 2023 due to increased provisioning, but remains strong, especially in Tier-1 banks with significant FX business contributions.
  - Capital and asset quality indicators worsened since end-2022, with a marked increase in nonperforming loans (NPLs).
  - Aggregate liquidity ratio remains high, but several banks rely on the CBK discount window.
  - Banks with liquidity deficiency or thin buffers relative to prudential requirements accounted for 3 percent of total banking assets, but 20 banks accounting for 62 percent of asset base were accessing the CBK’s discount window as of end-September 2023.
- Credit and market conditions:
  - Private credit growth remained resilient at 6.4 percent y/y in real terms in November 2023, with strong growth in manufacturing, transport and communication, trade, and consumer durables.
  - Domestic financing conditions tightened since the fifth EFF/ECF reviews; the front end of the treasury yield curve moved up amid tighter liquidity, higher demand for 91-day T-bills, limited external inflows, and perceived uncertainty around financing of the June 2024 Eurobond maturity.
  - In August, CBK introduced a new interest rate corridor around the policy rate and lowered the premium charged for its discount window.
  - A Central Securities Depository (DhowCSD) went live in July to improve operational efficiency in domestic money and debt markets.

### Program performance and structural measures
- EFF/ECF program implementation:
  - Mixed performance: broadly satisfactory adherence to quantitative targets but delays in structural benchmarks (SBs).
  - All but one end-June 2023 quantitative targets were met; one continuous performance criterion was missed.
  - Seven June–October 2023 SBs were not met; six were implemented with delays.
- Key compliance notes:
  - End-June 2023 QPCs met for primary fiscal balance, net international reserves, new domestic debt guarantees, and PV of contracting or guaranteeing new external debt; QPC on tax collection was missed.
  - Continuous performance criterion on no new external payment arrears was missed by about US$0.51 million (0.0005 percent of GDP) due to operational delays; amounts have been settled.
  - Monetary policy consultation clause not observed for end-June 2023; consultation with the IMF Executive Board was completed during the fifth EFF/ECF reviews.
  - AML/CFT amendments submitted to National Assembly in early July (end-June 2023 SB).
  - Review of fuel pricing mechanism conducted by a taskforce; decision communicated on December 11 (end-August 2023 SB). Two recent domestic price decisions on October 15 and November 15 resulted in limited but unbudgeted fuel subsidies (about 0.1 percent of GDP over the two price cycles).
  - Special audit on supplementary budgeting completed on November 30 and published on December 18 (end-September 2023 SB).
  - Pending Bills Verification Committee established in late June and gazetted in late September; SB proposed to be reset to end-February 2024 to allow time to formulate verification and clearance strategy.
  - Of three end-October 2023 SBs: draft Medium-Term Revenue Strategy (MTRS) approved by Cabinet in November; Ownership Policy for state corporations approved and published in November; Supplementary FY2023/24 Budget submitted in October and approved in November, with submission of amendments to the 2023 Finance Act done in December.

### Outlook and risks
- Growth projections:
  - Real GDP growth is projected at 5.1 percent in 2023 (2022: 4.8 percent) and at 5.0 percent in 2024, improving to 5.3 percent over the medium term.
  - 2023 growth driven by agriculture recovery and higher net exports, somewhat dampened by tight policies; 2024 supported by recovery in public investment and expansion in private investment.
- Inflation outlook:
  - Staff projects inflation to move up in early 2024 with possibilities of temporary breaches of the upper end of the target band.
  - Authorities expect fuel inflation to keep inflation around the upper end of the target band in the near term but expect tighter policies to prevent second-round effects; medium-term inflation expected to move toward the center of the target band.
- External balance and reserves:
  - Current account deficit projected to stabilize around 4 percent of GDP in 2023 and beyond.
  - Non-energy imports projected to have declined in 2023; medium-term import recovery expected gradual and in line with growth.
  - Exports underperformed in 2023 due to FX market dysfunction and softer external demand but expected to recover in 2024 as global growth improves and reforms take effect.
  - Tourism receipts and remittances projected to remain robust.
- Risks (tilted to the downside):
  - Worsening external financing conditions could complicate commercial financing plans and pose risks to FX reserves.
  - Risk of being grey-listed by the FATF, which could adversely impact capital inflows.
  - Export underperformance, adverse weather (e.g., El Niño flooding), rise in global oil prices, weaker growth, social discontent, weakening SOE balance sheets, and risks under the new oil importation scheme could undermine fiscal consolidation and BoP stability.
  - Elevated credit and market risks could expose weaknesses at some financial institutions.
  - Upside scenarios: stronger agricultural recovery, earlier bond market access easing BoP pressures, and further reform progress boosting export competitiveness and investment.

### Policy priorities and recommendations
- Reinforce credibility of policies and strengthen buffers through a package of mutually reinforcing policies and reforms to cement macroeconomic stability, maintain debt sustainability, anchor market confidence, and bolster medium-term prospects:
  - Secure a stronger fiscal primary balance path via domestic revenue mobilization and spending rationalization, with the aim of first stabilizing and subsequently putting the debt ratio on a declining path to achieve a PV of overall public debt/GDP of 55 percent by 2029.
  - Strengthen public financial and fiscal risk management.
  - Maintain a tighter monetary policy stance for price stability amid exchange rate depreciation while fast-tracking FX market reforms to ensure external sustainability and build external buffers.
  - Safeguard financial stability given elevated credit and market risks.
  - Advance policies for inclusive growth, climate-related reforms, boosting export competitiveness, and strengthening governance and anti-corruption frameworks.
- RSF (Resilience and Sustainability Facility) reforms:
  - National Framework for Climate Services (RM1) approved by Cabinet on November 3, 2023 to enhance coordination and incorporation of climate information into planning.
  - Carbon pricing reform (RM3) may take longer than envisaged; authorities are not requesting rephasing of related financing.

*Source: IMF staff report excerpt — "5.      The economy remains resilient amid shocks and a tighter policy stance" (chapter/section).*

### 9.      Kenya faces a significant increase in its borrowing cost that, if unmitigated, would

### 9.      Kenya faces a significant increase in its borrowing cost that, if unmitigated, would

### Borrowing costs and fiscal impact
- Interest payments could increase by more than a cumulative 1.4 percentage points of GDP during FY2023/24–FY2024/25, owing to exchange rate depreciation, higher interest rates, and continuation of the recent shortening in the average maturity of domestic debt.
- Rising interest payments (primarily on the external debt) would worsen the outlook for debt sustainability risks in FY2023/24 and beyond.

### Authorities’ offsetting fiscal measures and targets
- Authorities will improve the primary balance target by an additional cumulative 1.2 percentage points of GDP over FY2023/24–FY2024/25 compared to the fifth EFF/ECF review levels to offset higher interest payments.
- Objective: stabilize the debt/GDP ratio in 2024 and put it on a downward trajectory thereafter, with a view to achieving Kenya’s new debt anchor of 55 percent overall debt/GDP in PV terms by 2029.

### Supplementary II FY2023/24 Budget (timing and targets)
- Supplementary II expected to be submitted by end-March 2024 (proposed SB).
- Target primary surplus of 0.7 percent of GDP (compared to 0.4 percent under Supplementary I).
- Measures to achieve the improvement:
  - Increases in non-tax revenues (fees and charges) by about 0.2 percent of GDP (half-year impact), adopted at end-December 2023.
  - Expenditure saving of about 0.2 percent of GDP (half-year impact) via rationalization and execution of the investment portfolio, particularly slow-moving projects.
- Interim commitment: execute spending appropriations under Supplementary I prudently and consistent with the upwardly revised FY2023/24 primary surplus target of 0.7 percent of GDP.

### FY2024/25 Budget (targets and measures)
- FY2024/25 Budget to seek overall fiscal deficit below 4 percent of GDP.
- By end-April 2024 (proposed SB), submit FY2024/25 Budget proposal envisaging a larger improvement in the overall fiscal deficit (1.2 percentage points of GDP).
- Predicated on achieving a higher primary surplus of 1.7 percent of GDP (compared to 0.9 percent of GDP projected at the fifth EFF/ECF reviews) to contain the deficit at 3.5 percent of GDP amid exchange rate depreciation and interest cost pressures.
- Revenue-side measures:
  - Build on tax measures envisaged under the first year of implementation of Kenya’s MTRS and reflect full-year impact of non-tax measures introduced in mid-FY2023/24.
  - Estimated non-tax revenue yield of 0.3 percent of GDP (broadened scope).
- Expenditure-side measures:
  - Contain expenditures for wages (MEFP¶27) and transfers (including public sector entities and subsidies).
  - Improve efficiency of public expenditures with new initiatives (MEFP¶¶26, 28, and 29).
  - Achieve new spending saving of about 0.6 percent of GDP by containing recurrent expenditures (travel, allowances, hospitality) and further rationalizing non-priority projects.

### Medium-term (FY2025/26 and beyond) strategy and debt anchor
- Fiscal strategy centered on firmly reducing debt vulnerabilities and achieving the debt anchor of 55 percent overall debt/GDP in PV terms by 2029 while protecting high-priority service delivery programs.
- Maintain the fiscal primary balance above its debt-stabilizing level over the medium term to achieve the debt anchor.
- Means:
  - Broaden the tax base and improve tax compliance while promoting equity and fairness in the tax regime and containing recurrent expenditures (MEFP¶20).
  - Timely and diligent implementation of the MTRS will be essential to bring Kenya’s tax-to-GDP ratio back to pre-COVID-19 levels.
  - Strong monitoring, preferably by an independent institution (fiscal council), necessitating expanding the current functions of the Parliamentary Budget Office and an operational framework with a well-defined escape clause and correction mechanism.

### Debt sustainability assessment (DSA) and risks
- Kenya’s public debt is assessed to be sustainable but remains at high risk of distress.
- Baseline PV of external debt/GDP remains below its threshold of 40 percent throughout the projection period; PV of overall debt/GDP falls below its threshold in 2029.
- External debt service burden indicators remain elevated in the near term due to repayment profile and higher borrowing costs but decline as gross financing needs moderate over the medium term.
- DSA indicates external debt is vulnerable to export and exchange rate shocks; overall debt is vulnerable to primary balance and natural disaster shocks.
- Authorities have replaced the nominal debt limit with a debt anchor of 55 percent overall debt/GDP in PV terms (approved by Parliament) and expect to reach it by 2029 (MEFP¶31).

### Revenue mobilization: Medium-Term Revenue Strategy (MTRS)
- First MTRS approved by Cabinet covers FY2024/25–FY2026/27; aims to durably improve revenue collection and enhance tax fairness (MEFP¶¶20 and 23).
- Includes comprehensive package of policy and administrative measures to increase revenues by about 5 percentage points of GDP while promoting equity and fairness.
- Implementation expected to start in early 2024; formal monitoring at ministerial level; proposed end-February 2024 SB for adoption.
- Authorities developed a well-sequenced implementation matrix and intend to include all first-year MTRS revenue measures in the 2024 Finance Bill to be submitted by end-April 2024.
- Staff’s baseline conservatively assumes a lower yield of the MTRS during implementation; baseline already reflects early adoption of some MTRS measures in FY2023/24 expected to account for about 0.8 percent of GDP.

### Public financial management (PFM) reforms and fiscal risk reduction
- Progress in strengthening PFM systems to enhance budget credibility and address leakages (MEFP¶29):
  - Multi-year commitments and digitalization of PFM systems to better manage public investment projects.
  - Adoption of an e-procurement system.
  - Review of institutional objectives of extrabudgetary units to rationalize and eliminate duplication for budgetary savings.
  - Exploring better definition in the context of the 2012 PFM Act of events that can trigger use of article 223, following special audit of supplementary appropriations.
- Pending bills strategy:
  - Inter-ministerial committee established to manage stock of pending bills outstanding at end-June 2022.
  - NT developing a strategy to validate the stock, address PFM weaknesses contributing to accumulation of pending bills, and clear them consistent with fiscal consolidation path (end-September 2023 SB, reset to end-February 2024).
  - Scope expected to broaden to all exchequer obligations, including tax refund claims.
- Fuel pricing governance:
  - EPRA will seek confirmation from NT and MEP of availability of resources for price stabilization before announcing domestic fuel prices every 15th of the month.
  - If price stabilization exceeds budgeted resources, NT must indicate sources of additional financing (budget reallocations, borrowing) and EPRA must communicate financial implications.
  - NT and MEP to review governance of the Petroleum Development Fund by end-March 2024 to ringfence resources for price stabilization and improve transparency (proposed SB).

### Public sector balance sheet, State Corporations (SCs), and SOE risks
- Public sector balance sheet as of end-June 2023 shows significant imbalance between liabilities and financial assets; vulnerable to external shocks (Annex IV).
- About 67 percent of GDP of public sector assets is managed by SCs and SAGAs, but their contributions to the budget (dividends and taxes) were very small in FY2022/23.
- Many entities reported losses in FY2022/23 (0.7 percent of GDP); profits from other entities, excluding CBK and pension funds, reached only 0.6 percent of GDP.
- Extraordinary budget support to SOEs (KQ and KPLC):
  - Authorities remained within programmed envelope (cumulative 1 percent of GDP over FY2021/22–FY2022/23); outturn: 0.3 percent of GDP.
  - As of November 2023, no new direct budget support to KQ or KPLC in the preceding year.
  - Both reported operational profits in first six months of 2023 but incurred losses due to exchange rate depreciation.
  - KPLC implementing Cabinet-approved action plan; shareholders approved private sector representation on its Board.
  - Authorities committed to a viable strategy for KQ approved by Cabinet by end-April 2024 (proposed SB).
  - Novation of KQ’s guaranteed external debt, for which authorities took up servicing obligations, has been completed.
  - Authorities agree to continue least-cost approach to exchequer for any SOE support.

### Governance and oversight reforms for State Corporations (SCs)
- Ownership Policy for commercial SCs published in November 2023 (end-October SB) detailing new governance architecture and legal ecosystem to improve performance and transparency; centralizes ownership and oversight in NT; strengthens Boards’ mandates; establishes guiding principles for public service obligations.
- Updated inventory and new classification of SCs to be approved by Cabinet and published by end-January 2024 (proposed SB).
- To anchor new ownership arrangements, authorities will prepare, with Fund TA, and submit draft legal amendments to Parliament by end-May 2024 (proposed SB).
- Plan to submit regulations for more effective oversight of government investment in SCs by end-June 2024.
- Plan to conduct and publish comprehensive assessment of national government’s continued involvement in SCs and government-linked corporations (end-October 2024 SB).
- Continue expanding publication of SCs’ financial statements and annual reports, Annual Performance Evaluation Reports; strengthen analytical framework for financial evaluation and risks; undertake financial evaluation for fifty SCs using FY2022/23 audited accounts and report to the Fiscal Risk Committee (end-June 2024 SB).

*Source: KENYA — INTERNATIONAL MONETARY FUND (excerpts).*

### 23.      Following publication of the new Privatization Act

### 23.      Following publication of the new Privatization Act

### Privatization actions and legal status
- Following publication of the new Privatization Act in October 2023, the authorities have started preparing for privatization of some SOEs (MEFP¶46).
- Authorities are working on a five-year privatization program under this law and plan to submit it to Parliament by end-December 2023.
- On November 27, the authorities proposed a list of eleven SOEs and government-linked corporations for privatization in accordance with section 21(1) of the Privatization Act, 2023.
- The High Court issued a suspension until February 6, 2024, on implementing section 21(1) and/or any decisions made pursuant to it.

### Enhancing the effectiveness of the monetary policy framework
- Monetary stance tightened to maintain price stability and ensure external sustainability.
- Headline inflation has been sticky in the upper end of the target band since July; on a seasonally adjusted annualized basis, inflation has been going up recently.
- Policy rate changes:
  - CBK tightened the policy rate from 10.5 percent to 12.5 percent in December 2023.
  - The hike brought the ex-ante real policy rate above and the differential with the nominal U.S. policy rate closer to their respective pre-pandemic five-year averages.
- Exchange rate passthrough:
  - Staff estimates exchange rate passthrough to inflation between 0.2 and 0.4 percentage points over a year for a one percent change in the exchange rate.
  - Staff finds evidence of depreciation having somewhat larger passthrough than appreciation.
- Monetary operations and implementation:
  - In August, CBK introduced a new interest rate corridor (±2.50 percent) around the policy rate.
  - As of early December, the interbank rate (operating target) had consistently deviated from the policy rate on most days since the corridor’s introduction, potentially weakening signaling.
  - Authorities intend to improve liquidity forecasts to enhance framework efficiency.
  - Transmission of policy rate hikes to bank lending rates remains low to date; authorities expect implementation of risk-based loan pricing models across the banking sector will help.
  - Launching of DhowCSD and other recent policy changes are expected to catalyze interbank repos, reduce market segmentation, and promote deepening of the domestic debt market.
- Other recent policy adjustments:
  - Lowering of the premium charged over the policy rate for the CBK discount window from 600 basis points to 400 basis points (CBK Banking Circular No. 5 of 2023).
  - Lowering of haircuts applicable to government securities used as collateral for money market transactions (CBK Banking Circular No. 6 of 2023).

### Tackling financial sector vulnerabilities and improving FX market functioning
- FX exposures and sovereign-bank nexus:
  - Banks’ shares of FX deposits and liabilities continue to rise; share of FX loans declined somewhat in 2023Q3 but remained higher than a year ago.
  - Sovereign debt accounts for almost a third of bank assets — sovereign-bank nexus remains elevated.
  - Maturity structure of FX borrowing via swaps has shifted to shorter maturities since easing rules for FX swaps with non-residents.
- Systemic risk observations:
  - FX exposures, sovereign-bank nexus, and domestic interconnectedness are key sources of systemic risks (Annex V and MEFP Section G).
  - CBK stress tests show capital shortfalls in some banks, including up to three Tier-1 banks, in scenarios with large interest rate increases or FX depreciation.
  - Affected banks have been asked to provide capital restoration plans; CBK is monitoring implementation and encouraging adequate provisioning.
- Liquidity and supervisory enhancements:
  - With Fund TA, CBK is developing Internal Liquidity Adequacy Assessment Program Guidelines, to include FX-differentiated Liquidity Coverage Ratio and Net Stable Funding Ratio as monitoring tools.
  - Currently, an unremunerated cash reserve ratio of 4.25 percent applies to a bank’s total domestic and FX deposit liabilities and is filled in shilling.
  - There are no additional capital requirements (higher risk weights) on FX loans, or exposure caps on FX loans (other than indirectly via net open FX position limit).
- Risks to asset quality:
  - Improvements remain contingent on resolution of FX market dysfunction, government pending bills, and the economic recovery.
  - Authorities view the banking sector as stable and resilient, attributing increased FX deposits largely to deposits (escrow) from the government–to–government (G2G) oil import scheme and regional banking expansion rather than expectations-driven demand.
  - Key risks highlighted: credit, interest rate, and cybersecurity risks amid rapid digitalization.

### G2G oil import scheme: scale and risks
- Scheme evolution and timeline:
  - Initially for 9 months, extended for another 12 months to December 2024 (MEFP¶73).
- Financial scale and activity:
  - By mid-November 2023, oil imports under the scheme amounted to about US$3.7 billion and letters of credit worth of over US$784 million were settled.
  - Actual monthly average import volumes fell short of agreed monthly minimums owing to lower demand from Kenyan domestic and regional markets.
- Risks monitored:
  - Potential segmentation of the FX market, implications for banks’ FX risks, and risk of disorderly exit in absence of an exit strategy.
- Regulatory changes affecting FX swaps:
  - CBK Banking Circular No. 7 of 2023 (dated August 29, 2023) reduced the minimum tenor of FX borrowing from nonresidents via swaps to 6 months from 1 year and allowed EAC residents to be eligible for overnight FX swaps with domestic banks (for swaps in which the latter borrow FX).

### External position and exchange rate policy
- Authorities committed to greater exchange rate flexibility and supporting buildup of official reserves (MEFP¶50 and ¶5).
- Kenya’s external position is broadly in line with medium-term fundamentals and desirable policies (Annex III).
- Estimated current account and real exchange rate gaps in 2023 are lower than in 2022, reflecting external adjustments.
- Program reforms aim to keep gross FX reserves above required adequacy levels; greater exchange rate flexibility and addressing FX market distortions would help maintain external balance.

### Bolstering medium-term prospects: exports, governance, and anti-corruption
- Export competitiveness and trade:
  - Kenya’s export competitiveness and complexity remain low; exports-to-GDP ratio nearly halved in the past decade (Annex VI).
  - Per capita exports and complex exports have grown modestly since the 1980s but diverged from East Asia Emerging Market levels; regional peers (Ghana, Rwanda, Tanzania) have narrowed gaps with Kenya’s per capita complex exports.
  - Per capita growth in services exports has been stronger and at higher levels than regional peers.
  - Recommended measures: enhance exchange rate flexibility, improve government effectiveness and regulatory quality, strengthen governance and anti-corruption framework, improve trade policy and information technology infrastructure, and secure progress in trade and investment negotiations to unlock market access and attract FDI.
  - Authorities emphasize focus in upcoming five-year plan on improving value addition, competitiveness, and market access for exports.
- AML/CFT and beneficial ownership:
  - Authorities working to complete high-level AML/CFT action plan addressing shortcomings from the 2022 MER by the Eastern and Southern African Anti-Money Laundering Group.
  - AML/CFT (Amendment) Act 2023 entered into force in September 2023; amendments broaden powers for AML/CFT supervisors and introduce beneficial ownership-related provisions, including definition and reporting, verification, and vetting requirements.
  - Related implementing regulations gazetted; sectoral risk assessments conducted to inform updated National Risk Assessment.
  - CBK separated prudential and AML/CFT supervisory functions and developed risk-based inspection plans for onsite examinations.
  - Kenya Business Registration Services (BRS) contributed to regulatory amendments on beneficial ownership information, and conducts outreach before planned strike-offs of non-compliant companies; Public Procurement Regulatory Authority conducting trainings and issued circulars on uploading awarded contracts containing beneficial ownership information.
- Anti-corruption framework progress:
  - Ethics and Anti-Corruption Commission has made good progress with asset recovery.
  - Significant needs remain in mutual legal assistance, particularly international cooperation.
  - Dedicated anti-corruption courts have reduced backlog of cases.
  - Access to Information regulations and the Conflict-of-Interest Bill (containing Asset and Income Declaration provisions) remain to be approved by Parliament.

### Advancing climate objectives under the RSF arrangement
- RSF arrangement overview:
  - Authorities’ 20-month RSF arrangement runs from July 2023 to March 2025, with nine RMs.
  - Arrangement access level is 75 percent of quota (SDR407.1 million), approved as budget support and phased evenly across the RMs.
  - Kenya’s Updated Nationally Determined Contribution (2020) estimated mitigation and adaptation financing needs about US$62 billion (about 6 percent of the 2023 GDP per year over 2023–30), of which almost 90 percent would come from international sources.
- Implementation status:
  - First reform measure—adoption of the National Framework for Climate Services—has been completed (MEFP Table 3).
  - Other RMs are on track; some will require TA from the Fund, World Bank, and other development partners.
  - Authorities are not requesting any rephasing of RSF access (Table 7b).
- Selected RSF measures and progress:
  - Incorporating climate risks into planning and investment framework:
    - Authorities requested Fund TA (scheduled for January 2024) to include long-term climate scenarios in their fiscal risk statement (RM2).
    - Integration of climate change and disaster risk methodology in project appraisal (RM5) is on track and TA is envisaged.
    - Substantial background work completed on a Green Growth Index and Sovereign Green Bond Framework.
    - Some expenditure types have been tagged for climate budgeting (RM8); supported by green taxonomy and green infrastructure reforms.
  - Mobilizing climate revenue and strengthening efficiency:
    - Implementation of carbon pricing (RM3), initially planned by the second RSF review, could take longer than previously envisaged.
    - Adoption of green fiscal incentives in agriculture, water, and land management sectors (RM6) is being fast tracked.
    - National Green Fiscal Incentives framework expected to be adopted before end–2023, listing options such as carbon taxes, subsidies, ecological fiscal transfers, research grants, and concessional loans.
    - Efforts to approve net metering and open access regulations (RM7) are well advanced; draft net metering regulations circulated for public consultation with aim to gazette by early 2024.
    - Draft open access regulations developed with World Bank assistance.
  - Enhancing effectiveness of frameworks to support climate finance:
    - For green finance taxonomy (RM4) and guidelines for climate-related disclosures in banking (RM9), CBK completed a review of international experiences and approaches.
    - CBK and the European Investment Bank undertook a diagnostic review of existing frameworks, expected to be completed by end-June 2024; initial consultations with commercial banks have started.
- Other climate initiatives:
  - Kenya accesses global climate funds and leverages private climate finance via PPPs in renewable energy.
  - As part of COP27 commitments, authorities are working with the U.K. to fast-track six green investment projects worth approximately US$4 billion, mainly in green energy.
  - Climate Change Act, 2023 revised to set framework for creation and regulation of carbon markets.
  - Authorities working with development partners on Financing Locally Led Climate Action (FLLoCA) Program to empower communities.
- Gender mainstreaming in climate responses:
  - Authorities seek to mainstream gender equality across climate responses, noting women’s higher exposure to climate shocks due to prevalence in agriculture and greater poverty among female-headed households.
  - Climate Change Act, 2023 and National Climate Change Action Plan, 2023–27 seek to mainstream gender equality.
  - FLLoCA Program could promote gender equality by giving communities control over adaptation choices.

### Authorities' views
- Authorities recognize urgency of policy actions amid a difficult and uncertain global backdrop.
- They agree that reducing fiscal and external pressures and building buffers depends on steadfast implementation of a package of mutually reinforcing policies and reforms (detailed in MEFP).
- On tax policy and fiscal consolidation:
  - Emphasize importance of improving Kenya’s tax-to-GDP ratio but highlighted risks of stacking tax measures when cost of living is elevated and non-agricultural economic activity is weak.
  - Support MTRS plan aimed at broadening tax base, promoting fairness, and improving tax administration as critical to growth-friendly fiscal consolidation.
- On budget controls and governance:
  - Agree on need for tightening budget controls, aligning fuel pricing mechanism with budgeted resources, improving PFM systems, reducing fiscal risks, and strengthening monitoring and governance of state corporations.
- On monetary and FX policy:
  - Support proactive monetary stance, evidenced by the 200-basis-point December policy rate hike, and maintaining a tightening bias given inflation risks.
  - Underscore importance of a well-functioning interbank FX market and committed to taking further steps (as announced in December).
  - Agree on continued close monitoring of financial sector risks.

*Italic: Source: 1kenea2024001 - 23.      Following publication of the new Privatization Act (IMF PDF).*

### 38.      The authorities view that strong policy actions to address near-term challenges will

### 1kenea2024001 - 38.      The authorities view that strong policy actions to address near-term challenges will

### Authorities’ outlook and priorities
- The authorities view that strong policy actions to address near-term challenges will help bolster Kenya’s medium-term prospects.
- Near-term upside to growth is seen from agricultural recovery and its spillover to the rest of the economy.
- On the medium term, the authorities are optimistic their efforts will yield results, allowing Kenya to grow at a faster pace than assumed under the program.
- Recognized needs: improving inclusivity and social support mechanisms, addressing climate-related risks, boosting competitiveness, and enhancing governance and anti-corruption framework.
- The authorities appreciate the Fund’s support in capacity building efforts in Kenya.

### Proposed augmentation to close BoP gap
- Authorities request a blended augmentation of 130.3 percent of quota (SDR707.27 million, about US$938 million) to close the residual BoP gap.
- The BoP gap emerged since the fifth EFF/ECF reviews as global capital flows adjust to “higher for longer” global rates and Kenya’s re-access to the Eurobond market remains costly.
- The additional BoP gap is largely due to the maturity of a US$2 billion Eurobond in June 2024.
- The proposed augmentation would help close the residual BoP gap, including for the June 2024 Eurobond maturity, and help contain borrowing cost.
- RSF financing is not intended to cover the BoP gap.

### Financing strategy and external financing composition
- Authorities have selected two lead managers to explore issuance in the Eurobond market at a reasonable cost; market conditions remain difficult.
- Authorities have approached traditional development partners, including the World Bank, for additional concessional financing and a regional development bank for syndicated loans.
- Program financing and external sources:
  - Program baseline assumes US$500 million from syndicated loans in FY2023/24.
  - Authorities may choose to use part of syndicated loan proceeds to partially buy back the outstanding June 2024 Eurobond debt.
  - Program financing in 2024 is stronger than projected at the fifth reviews, reflecting the proposed augmentation and prospective upsizing of concessional financing, including from the World Bank.
  - A recent World Bank statement indicated prospective availability of additional budget and project financing over next three years.

### Access, disbursement modality, and phasing
- The augmentation is proposed to be disbursed as budget support via the central bank upon completion of the sixth and seventh EFF/ECF reviews.
- Requested composition: 8.5 percent of quota (SDR46.14 million) under PRGT (ECF) resources and 121.8 percent of quota (SDR661.13 million) under the GRA (EFF).
- Phasing: one-third of the augmentation to be made available upon completion of the sixth EFF/ECF reviews (8.5 percent of quota from PRGT and the remaining from GRA) and the rest upon completion of the seventh EFF/ECF reviews (all GRA).
- Augmented amounts to be on-lent via the central bank to the government as FY2023/24 budget support; NT and CBK revised their Memorandum of Understanding (MoU) on servicing obligations due to the Fund.
- The proposed augmentation would trigger both GRA EA and PS-HCC:
  - GRA EA triggered by exceeding the normal annual access limit of 200 percent of quota.
  - PS-HCC triggered as both projected annual access and cumulative access would exceed thresholds (200 percent and 600 percent of quota, respectively).
- Staff assesses Kenya satisfies the GRA EA criteria.

### Program financing outlook and prospects
- EFF/ECF arrangements are fully financed, with firm commitments over the next twelve months and reasonable prospects for the remainder of the program.
- Kenya’s financing needs would be met by a combination of concessional and commercial loans in addition to Fund support.
- Potential upside: catalytic effect of Fund augmentation could help mobilize additional concessional and commercial external financing, some possibly materializing in 2024; prospects and timing are uncertain and not included in the program baseline.

### Fiscal safeguards and reviews
- Authorities committed to initiating a fiscal safeguards review before the seventh EFF/ECF reviews.
- With GRA EA and PS-HCC triggered, total budget support would exceed 25 percent of Fund financing, requiring a fiscal safeguards review.
- CBK assessed to have maintained sound external audit and financial reporting practices.

### Risks and mitigation
- Program faces significant risks, particularly near term: heightened global uncertainty, potential implementation challenges from renewed social discontent, and longer than expected lack of Eurobond market access.
- Mitigating factors: possibility of additional concessional and commercial financing, authorities’ performance to date, and high-level commitment to policies including:
  - adopting a second Supplementary FY2023/24 Budget and additional revenue measures consistent with the program and deploying contingency measures (MEFP¶21);
  - sustaining a tightening bias in monetary policy and addressing FX market dysfunction;
  - maintaining close engagement with development partners;
  - adopting a tailored capacity development strategy to support implementation of structural reforms in addition to those supported by the RSF.

### Enterprise, financial, and reputational risks to the Fund
- Enterprise risks are elevated on both sides; implications for GRA and PRGT resources from the proposed augmentation expected to be manageable.
- Proposed augmentation increases Fund exposure to Kenya in the near term, though overall exposure including past financing will decrease over the medium term.
- Proposed augmentation would increase the share of preferred creditor debt by a small margin.
- Failure of the program would pose reputational risks for the Fund; conversely, not supporting Kenya through the augmentation would also raise reputational risks given Kenya’s BoP difficulties.

### Capacity to repay and debt projections
- Kenya’s capacity to repay the Fund is assessed as adequate but subject to increased risks since the last review.
- At end-2022, the share of Kenya’s debt owed to the Fund and other multilaterals was less than half of its total external public debt.
- With the proposed augmentation and prospective World Bank step up, the share of de facto multilateral debt is projected to increase and average at around 60 percent through 2035 under the baseline.
- These ratios are slightly above the average and median but below the 75th percentile (77 percent) for PRGT programs.
- The share of Kenya’s total obligations to the Fund relative to total external public debt service would range between 2 and 21 percent until 2035 (or between 3 and 45 percent of external bilateral and commercial debt service).
- Under the proposed augmentation, the Fund’s share of the additional financing gap over 2024–25 since the fifth reviews would be 44.5 percent.
- The total amount of outstanding credit to the Fund (including the proposed augmentation but excluding RSF) is projected at nearly SDR3.4 billion, or 625.1 percent of quota in 2025.
  - Ratios to GDP and gross international reserves would peak at 4.5 and 55.2 percent in 2024, respectively, both exceeding the 75th percentile of past UCT-quality arrangements for LICs.
  - These ratios are lower than the average or median of the same ratios seen in other disbursing GRA EA programs since 2015.
- Non-RSF debt service to the Fund would peak by 2029 at 4.1 percent of exports and 3.4 percent of fiscal revenues.
- Risks are mitigated by continued access to concessional financing, resilient exports and remittances, positive medium-term prospects, strong track record of servicing debts, and multi-year fiscal consolidation supported by tax policy and other revenue-boosting measures under the program and the authorities’ MTRS.
- Program objective: undertake growth-friendly fiscal consolidation and put public debt/GDP on a steady downward path by bringing the primary balance above its debt-stabilizing level by FY2024/25.
- PV of overall debt/GDP reaching 55 percent in 2029 (the authorities’ debt anchor); any near-term breaches of thresholds are declining over the medium term.

### Waivers, modifications, and new conditionalities
- Proposed waivers, modifications, and new targets for end-December 2024 and structural benchmarks:
  - Under the ECF arrangement, a waiver of nonobservance for the end-June 2023 tax collection QPC as agreed corrective measures are expected to ensure this nonobservance is temporary.
  - Waiver of nonobservance of the continuous performance criterion on no new payment external arrears which have already been settled and corrective actions taken.
  - Under the EFF arrangement, waiver of applicability for the end-December 2023 performance criteria except for the one on tax revenues for which a waiver of nonobservance is requested based on corrective actions taken.
  - For the QPC on primary fiscal balance: deletion of the adjustor (extra-ordinary budget support to SOEs) to the QPC as it was applicable until FY2022/23 and modification of the end-June 2024 QPC, reflecting larger fiscal consolidation.
  - For the QPC on net international reserves: modifications of the end-June 2024 floor—reflecting higher liabilities to the Fund due to the augmentation while gross reserves are projected at levels similar to the fifth EFF/ECF reviews—and the floor on the downward adjustor to mitigate downside risks to reserves.
  - Establishment of performance criteria for end-December 2024.
  - Resetting of the structural benchmark related to a strategy on pending bills to end-February 2024 and establishment of new structural benchmarks over January–May 2024.

_Italic: Source — IMF staff report excerpt (1kenea2024001, selected pages)._

### 48.      The proposed augmentation would trigger procedures and safeguards under both

### 1kenea2024001 - 48.      The proposed augmentation would trigger procedures and safeguards under both

### Exceptional Access assessment (GRA EA criteria)
- Criterion 1: Exceptional balance of payments pressures
  - Met.
  - Kenya facing large BoP pressures over the past few years.
  - Cannot re-access international bond markets at reasonable costs ahead of the June 2024 US$2 billion Eurobond maturity.
  - Kenya among a few frontier and developing economies with a sizeable bond maturity in 2024.
  - Syndicated loans provided some access to external commercial financing but are costly and of shorter maturity.
  - External financing challenges have increased domestic financing costs, diverting scarce resources toward debt service and risking allocation for socially and developmentally important outlays despite authorities’ commitment to fiscal consolidation.
  - Additional external financing needs emerging since the fifth EFF/ECF reviews cannot be met by policy adjustments alone and would require Fund support beyond normal access limits to close the residual financing gap.
  - Absent a Fund augmentation of such scale, economic cost of further adjustment would be significant and appear unwarranted in the absence of a solvency problem.
  - A catalytic Fund augmentation could help lower domestic borrowing costs, create room for social and developmental spending, and strengthen FX reserves.

- Criterion 2: Debt sustainability analysis and safeguards
  - Met.
  - Using LIC DSF, "debt sustainability with high probability" generally corresponds to low or moderate risk of overall public debt distress.
  - Under the program baseline and policy framework, Kenya’s debt is assessed to be sustainable but at a high risk of external and overall debt distress—i.e., sustainable but not with high probability.
  - Kenya has a strong track record of servicing its debt.
  - Staff assessed exposure to commercial debt by end of program period; sufficient commercial debt stock exists which, if restructured after a large adverse shock occurring immediately after the program, would be adequate to restore debt sustainability and ensure sufficient FX to service Fund obligations (see Annex VIII for details in source).
  - Safeguards could be strengthened by:
    - Implementation of medium-term fiscal consolidation that puts debt/GDP on a downward path earlier than the program baseline.
    - Enhancing growth, exports, and FX reserves via broader policies and reforms.
    - Further extension of debt maturity relative to the shock scenario.
    - Possible commitment for a backstop from Kenya’s official bilateral creditors.

- Criterion 3: Prospects of regaining market access
  - Met.
  - Between 2018 and 2021 Kenya issued Eurobonds totaling US$5.1 billion.
  - Since early 2022, Kenya relied on syndicated loans (about US$800 million in FY2022/23 and US$500 million expected in FY2023/24).
  - Sovereign spreads remain elevated relative to pre-Ukraine war levels but broadly tracked median spreads for Sub-Saharan Africa.
  - Despite deterioration in credit risk rating outlook, Kenya retained sovereign credit ratings from the three major global credit rating agencies following demonstrated policy actions.
  - Authorities committed to prudent policy package addressing debt vulnerabilities and medium-term reforms to boost market confidence.
  - Expectation: maintain access to commercial external financing and re-enter international bond markets by 2025, with upside potential for earlier access.

- Criterion 4: Prospect of program success (policy, institutional, political capacity)
  - Met.
  - Highest political level repeatedly shown strong commitment to the EFF/ECF program.
  - Authorities adopted difficult measures to address debt vulnerabilities; track record of implementation despite shocks.
  - Authorities committing to stronger-than-envisaged measures: larger near-term fiscal consolidation, Medium-Term Revenue Strategy (MTRS), containing SOE fiscal risks, significant monetary policy tightening, addressing FX market dislocation.
  - Authorities pursuing policies to reduce debt vulnerabilities, alleviate BoP pressures, manage social protection with World Bank support.
  - Ongoing efforts: strengthen governance, anti-corruption framework, institutions, capacity, and liquidity and debt management with Fund and development partner capacity development.

### Data provision and statistical revisions
- Data provision:
  - Some shortcomings due to capacity constraints but broadly adequate for program monitoring and surveillance.
  - Kenya continues to benefit from capacity development and TA (Annex IX and Informational Annex).
  - Overall quality, timeliness, and coverage of macroeconomic statistics are improving with external support.
- Trade statistics reconciliation:
  - Reconciliation expected with likely upward revision in both exports and imports.
  - Staff learned that trading of petroleum products with regional countries were excluded from Kenya's BoP statistics; inclusion may lead to upward revision in exports and imports.
  - Preliminary assessment: external debt ratios in the DSA would improve relative to exports, but import coverage of FX reserves would become lower while remaining adequate.

### Staff appraisal — macroeconomic outlook and policy priorities
- Growth and inflation
  - Economy remained resilient amid shocks and policy tightening.
  - Growth in the first half of 2023 was robust.
  - Growth projected at 5 percent in 2024.
  - Inflation has eased inside the target band but expected to inch up in early 2024, with fuel inflation (including exchange rate passthrough) projected as the main driver.

- External accounts and exchange rate
  - With higher external financing costs expected to persist, external accounts must adjust.
  - Current account balance expected to improve over the medium term; rebalancing began in 2023.
  - Real exchange rate depreciation in 2023 has helped rebalance toward a sustainable external position.
  - Further exchange rate flexibility and resolving FX market dysfunction should strengthen shock response.
  - External position broadly in line with medium-term fundamentals and desirable policies.

- Monetary policy
  - Monetary policy should proactively maintain price stability and ensure external sustainability.
  - Staff welcomed CBK’s 200 basis points hike in the monetary policy rate in December 2023.
  - Monetary Policy Committee intends to maintain a tightening bias in the near term.
  - Monetary operations should complement policy decisions—align interbank rate with policy rate—and support fiscal consolidation in an orderly way.
  - Introduction of an interest rate corridor around the policy rate is welcomed; authorities should fine tune its operation.
  - CBK should continue steps to strengthen FX reserves.

- Fiscal consolidation and revenue strategy
  - Further front-loaded fiscal consolidation needed to mitigate debt vulnerabilities.
  - Staff commends authorities for strengthening fiscal adjustment to offset higher debt servicing costs amid exchange rate depreciation and higher interest payments.
  - Effective and equitable adjustment requires:
    - Diligent implementation of Kenya’s first MTRS for base-broadening revenue measures and strengthening revenue administration.
    - Improving spending efficiency to make room for social and development spending.
    - Contingency planning, including corrective tax measures and spending offsets, to safeguard fiscal performance amid elevated uncertainties.
  - Management of fiscal risks essential to achieve Kenya’s new debt anchor by 2029.
    - Reform SOEs and strengthen public financial management systems.
    - Broaden fiscal analysis to the entire public sector and strengthen institutional governance for transparency.
    - Carefully manage risks from G2G oil imports scheme and contingent liabilities.
    - Contain PPP risks through budget integration and limits on total stock.
    - Fund stands ready to provide TA.
  - Debt anchor and outlook:
    - Public debt assessed sustainable but at high risk of distress.
    - Staff welcomes medium-term debt anchor of 55 percent of GDP in present value terms and authorities’ commitment to reach it by 2029.

- Social protection and inclusion
  - Strengthening social safety nets is key to sustain social cohesion during fiscal consolidation.
  - Sustaining reforms in the National Safety Net Program (NSNP) will support poverty alleviation and human capital development.

- Financial sector vulnerabilities
  - Authorities should closely monitor and address emerging vulnerabilities.
  - Priorities: resolution of NPLs, continued adequate provisioning, develop and adopt macroprudential policy strategy.
  - Monitor maturity and liquidity mismatches in banks’ FX positions; review prudential regulations, including reserve requirements, to mitigate FX risks with appropriate phasing.
  - Durable resolution of FX market dislocation would mitigate increasing FX exposures in banking sector.
  - CBK should monitor spillovers from banks’ regional expansion and operational risks from digitalization.

- Governance, AML/CFT, and anti-corruption
  - Sustained efforts needed to strengthen governance and anti-corruption framework.
  - Address technical and effectiveness deficiencies in AML/CFT, including risk-based supervision.
  - Increase compliance of companies and public procuring entities with beneficial ownership publication obligations.
  - Further progress needed on anti-corruption framework, including regulations for the Access to Information Act and the Conflict–of–Interest Bill in line with international standards.

### RSF arrangement and program requests
- RSF implementation
  - First reform measure under RSF completed: adoption of the National Framework for Climate Services.
  - Authorities committed to remaining reform measures and garnering additional climate finance; staff welcomes mainstreaming of gender equality in climate response.
  - Staff assesses first reform measure met and supports request for first disbursement under the RSF arrangement.

- Staff recommendations and requests supported
  - Staff supports authorities’ requests for:
    - Completion of the sixth EFF/ECF reviews.
    - Augmentation of access leading to GRA exceptional access.
    - Waivers of nonobservance of performance criteria given temporary nature and corrective actions taken.
    - Waiver of applicability for end-December 2023 performance criteria, except for the QPC on tax revenues, under the EFF arrangement.
  - Recommended next Article IV consultation on the 24-month cycle per Decision No. 14747-(10/96), as amended.

### Box: Medium-Term Revenue Strategy (MTRS) for FY2024/25–FY2026/27 — key points
- Objective and scope
  - MTRS aims to mobilize domestic resources to support the Government Development Agenda and Bottom-up Economic Transformation Agenda, consistent with the Fourth Medium-Term Plan (2023–27) of the Kenya Vision 2030.
  - Targets to gradually raise ordinary revenues by 5 percentage points of GDP during FY2024/25–FY2026/27 through base-broadening policies, strengthened tax administration, and promoting fairness.
  - Cabinet approved MTRS in November 2023; implementation to start in early 2024 and include first package of tax measures in the 2024 Finance Bill.

- Strategic advantages
  - Builds broad consensus on medium-term revenue mobilization consistent with spending needs.
  - Provides comprehensive reform plan considering country circumstances and institutional capacity.
  - Promotes whole-of-government approach and framework for coordinated external support (technical assistance and capacity building).

- Revenue measures and administration reforms
  - Revenue target: raise tax-to-GDP ratio to about 16 percent by FY2026/27.
  - Policy measures:
    - Review and rationalize tax reliefs for income (PAYE, CIT) and VAT.
    - Reduce key CIT and VAT rates while improving PAYE progressivity and harmonizing excise taxation.
    - Introduce new taxes: carbon tax and motor vehicle circulation tax.
  - Administration measures:
    - Improve revenue administration management (staffing, efficiency of tax refunds).
    - Strengthen compliance via risk management, 3rd-party data sharing, improved taxpayer audits, and stronger tax arrears collection.

- Implementation and governance
  - Timely and diligent implementation critical to improve revenue collection and tax fairness.
  - Authorities plan to start implementation in early 2024 and reflect first-year MTRS measures in 2024 Finance Bill.
  - Recommendation: establish formal monitoring process at the ministerial level (end-February 2024 SB) to enhance political commitment, oversight, and rapid resolution of implementation issues.
  - Communication: clarify that all MTRS measures form a coherent package rather than a menu of options to ensure well-sequenced implementation and fair outcomes.

*Source: IMF staff report content provided in the supplied document.*

### Box 2. Kenya: Financing Locally-Led Climate Action (FLLoCA) Program

### Box 2. Kenya: Financing Locally-Led Climate Action (FLLoCA) Program

### Program design and objectives
- Seeks to involve communities most affected by climate change in adaptation initiatives through decentralized climate finance.
- Empowers local communities through existing devolved governance structures by giving them control of their climate adaptation choices — a significant departure from the traditional top-down approaches.
- Aims to ensure that support for climate resilience reaches those most at risk, including women, youth, persons with disabilities, elders, and other traditionally marginalized groups.

### Financing and scope
- The program pools resources from national and county governments, the World Bank, Denmark, Sweden, the Netherlands, and KFW.
- Total development partner funding amounts to $250.4 million.
- The program runs until end-2026.
- Typically, only around ten percent of climate finance reaches local levels; under FLLoCA, ninety percent of program funding will be spent at county and community levels, with a significant portion in the form of performance-based grants.

### Implementation and governance
- Coordinated by the National Treasury.
- Participating institutions include the Ministry of Environment, Climate Change, and Forestry, and the Council of Governors.
- Supports key Ministries, Departments, and Agencies in agriculture, water, and natural resource management at the local level — particularly in environmental risk management.
- Works with a large network of civil society organizations, many of which aim specifically at uplifting women.

### Typical activities and intended benefits
- Community-level activities include:
  - Implementing climate-smart agriculture practices, such as drought-resistant crops, improved irrigation systems, and sustainable land management to increase resilience against changing weather patterns.
  - Dredging waterways, constructing reservoirs, borehole installations, and use of clean energy for water reticulation.
- Program design builds on successful pilots which found that public good investments prioritized by communities through a highly consultative process had direct and indirect benefits, including improved livelihoods, incomes, and food security, new economic opportunities, and fewer conflicts within households, communities, and between neighboring villages.

### Pilot evidence and reach
- The County Climate Change Funds (CCCF), piloted by the Adaptation (ADA) Consortium, financed around 100 public good investments that were prioritized by the communities through a highly consultative process, reaching more than 500,000 beneficiaries across the five counties, most of whom were women.
- Women can play important leadership roles in community-based reform programs, as envisaged under FLLoCA (example: Kenyan community ‘network leaders’ trained by the UN on early warning and early response mechanisms).

*Source: Box 2. Kenya: Financing Locally-Led Climate Action (FLLoCA) Program.*

### Annex I. 2021 Article IV Consultation: Key Recommendations

### Annex I. 2021 Article IV Consultation: Key Recommendations

### Fiscal Policy
- Reduce debt vulnerabilities:
  - Recommendations: Domestic revenue mobilization, expenditure control, higher public spending efficiency, and prudent borrowing to safeguard development spending while reducing debt vulnerabilities.
  - Implementation status: Under Kenya’s Fund-supported EFF/ECF program, authorities took tax policy and administrative measures, improving the tax/GDP ratio by 1.2 percentage points in FY2021/22 but with a shortfall in collections in FY2022/23. Authorities announced sizeable tax measures under the FY2023/24 budget and are undertaking additional measures to offset 2023 tax collection weaknesses. Authorities remain committed to further fiscal consolidation over the medium term.
  - PFM initiatives being finalized: apply a common costing approach for all MDAs; consolidate extra-budgetary agencies; enhance IFMIS to register all multi-year commitments; automate public investment management process; implement a strategy to clear and prevent expenditure arrears.

- Increase tax revenues:
  - Recommendation: Build broad-based understanding of restoring lost ground on tax revenue; implement a medium-term revenue strategy to deliver the anticipated 0.8–0.9 percent of GDP in tax revenue annually in FY2022/23 and FY2023/24.
  - Implementation status: The MTRS has been approved. Ongoing revenue administration reforms include implementing risk-based compliance strategies, strengthening KRA’s audit function, and facilitating timely tax refunds.

- Limit fiscal risks from SOEs:
  - Recommendation: Advance the SOE agenda; ensure financial vulnerabilities at troubled SOEs are mainly covered by cost-saving reforms to protect fiscal resources for priority social and development spending and not undermine debt sustainability.
  - Implementation status: Authorities are improving monitoring and oversight of state corporations (SCs); updating the inventory and classification of SCs; preparing a new ownership policy for SCs. Budgetary support to Kenya Airways (KQ) and Kenya Power and Lighting Company (KPLC) remained within the envelope of 1 percent of GDP over FY2021/22 and FY2022/23. Authorities approved an action plan to restore KPLC’s medium-term profitability and plug the liquidity gap; options for KQ restructuring are being considered.

### Monetary and Exchange Rate Policy
- Maintain price stability:
  - Recommendation: CBK to remain vigilant against second-round effects from shocks to inflation.
  - Implementation status: Inflation rose in 2022, breaching the authorities’ target band (2.5–7.5 percent) from June due to global oil and food price shocks after the onset of war in Ukraine. CBK tightened monetary policy in May 2022. By December 2023, CBK had tightened the policy rate cumulatively by 550 basis points in six steps. Inflation moved back inside the band in July 2023.

- Enhance monetary policy framework effectiveness:
  - Recommendation: Continue modernizing the monetary policy framework in line with the July 2021 White Paper.
  - Implementation status: In early August 2023, CBK introduced an interest rate corridor around the policy rate for the interbank rate to improve transmission. CBK launched a Centralized Securities Depository to enhance money and securities markets functioning. Implementation of risk-based loan pricing is yet to be completed across all banks.

- Maintain external sustainability:
  - Recommendation: Exchange rate flexibility and steadfast fiscal consolidation to keep the external position in balance.
  - Implementation status: Exchange rate depreciated at a faster pace in 2023 after a real appreciation in 2022 due to a generalized strengthening of the U.S. dollar. As of November 2023, the real effective exchange rate was 16.4 percent depreciated from its pre-COVID-19 level in February 2020. CBK periodically sold FX until June 2023.

### Financial Sector Policies
- Risk management:
  - Recommendation: Swift approvals for credit models to avoid perceptions of unnecessary constraints on lending to creditworthy borrowers.
  - Implementation status: As of August 2023, majority of commercial banks, and close to half of Tier 1 banks, have had their risk-based pricing models approved.

### Structural Policies
- Promote sustainable and inclusive growth:
  - Policies aim to maintain macroeconomic stability while pursuing adaptation and mitigation of climate change risks and improving inclusivity via a bottom-up approach to economic transformation.

- Improve governance:
  - Priorities: Combat corruption through more transparent procurement practices, forensic audits and follow-up, implement access to information and asset declaration laws, improve revenue administration and tax expenditure transparency, and strengthen risk-based AML/CFT supervision.
  - Implementation status: Authorities began publishing beneficial ownership information for entities awarded public contracts from November 2022 via the Public Procurement Information Portal; Access to Information Regulations approved in August 2023 (to come into effect upon re-publication); a draft Conflict of Interest Bill submitted to Parliament in May 2023; published results of a forensic audit of COVID-19 vaccine spending up to June 2021 and a comprehensive audit of FY2020/21 expenditures (including a chapter on COVID-19 related spending). As of November 2023, an audit on supplementary budgeting (including under Article 223) was completed. The AML/CFT (Amendment) Act 2023 came into force in September 2023.

### Risk Assessment Matrix — Key Risks, Likelihood, Impact, and Policy Responses
- Abrupt global slowdown or recession:
  - Likelihood: Medium
  - Expected impact: Medium. Could adversely impact growth, spur private capital outflows, pressure the exchange rate, worsen fiscal balances, and raise debt vulnerabilities.
  - Policy response: Adopt mutually reinforcing monetary and fiscal stances; reprioritize spending to support vulnerable while compressing overall expenditure; greater exchange rate flexibility; accelerate structural reforms.

- Monetary policy miscalibration:
  - Likelihood: Medium
  - Expected impact: High. Could trigger capital outflows, hamper sovereign capital market access, depreciate the exchange rate, worsen fiscal balances, and raise debt vulnerabilities.
  - Policy response: Tighten monetary policy; greater exchange rate flexibility; compress expenditure to contain fiscal-debt impact.

- Sovereign debt distress:
  - Likelihood: Medium
  - Expected impact: High. External financing challenges would create fiscal pressures, spur capital outflows, and pressure FX reserves; fiscal balances would worsen and debt vulnerabilities rise.
  - Policy response: Tighten monetary policy and adopt mutually reinforcing fiscal policy; greater exchange rate flexibility; mobilize domestic resources, protect social and developmental spending, contain fiscal-debt impact; accelerate competitiveness-enhancing reforms.

- Commodity price volatility:
  - Likelihood: High
  - Expected impact: High. Higher commodity prices would increase external and domestic imbalances, weigh on inflation and growth.
  - Policy response: Keep domestic fuel prices aligned with global prices while compressing expenditure; if persistent, tighten monetary policy; greater exchange rate flexibility; consult staff if shock is very large on fiscal consolidation objectives.

- Intensification of regional conflicts:
  - Likelihood: High
  - Expected impact: Medium. Could disrupt imports of fertilizer and wheat, raise borrowing costs, and limit non-concessional external financing options.
  - Policy response: Diversify import sources for key inputs and staples; deploy targeted support leveraging existing assistance programs; consider alternative financing mixes including medium-term syndicated loans.

- Deepening geoeconomic fragmentation:
  - Likelihood: High
  - Expected impact: Medium. Could adversely impact growth, spur capital outflows, and pressure the exchange rate.
  - Policy response: Reprioritize spending to support vulnerable while compressing overall expenditure; greater exchange rate flexibility; accelerate structural reforms.

- Cyberthreats:
  - Likelihood: Medium
  - Expected impact: Medium. Could trigger financial instability or widely disrupt socio-economic activities.
  - Policy response: Strengthen cyber security capabilities in government and private sector.

- Extreme climate events:
  - Likelihood: Medium
  - Expected impact: High. Would slow growth, increase food inflation, pressure public spending and current account, and affect vulnerable households.
  - Policy response: Guard against second-round inflation effects; use targeted programs for vulnerable groups and reprioritize spending.

- Political risks:
  - Likelihood: Medium
  - Expected impact: Medium. Unrest could reemerge related to protests over cost of living, taxation, and electoral processes.
  - Policy response: Remain committed to reforms under the program.

- Adverse weather conditions (including El Niño):
  - Likelihood: Medium
  - Expected impact: High. Could reduce agricultural production, slow growth, increase food inflation, pressure public spending and current account, and hurt vulnerable households.
  - Policy response: Use targeted programs for vulnerable groups; reprioritize spending; guard against second-round inflation effects.

- Systemic financial instability:
  - Likelihood: Medium
  - Expected impact: High. Exchange rate swings could trigger capital shortfalls at banks with large FX exposures, causing financial stress and market dislocations.
  - Policy response: Deploy measures to stabilize the banking sector; compress primary spending to avoid accumulation of pending bills.

- Greater-than-expected SOE weaknesses:
  - Likelihood: High
  - Expected impact: Medium. Would create additional fiscal pressures and potential crowding out of private sector.
  - Policy response: Continued financial evaluation of top SOEs; implement least-cost strategies to address SOE financial pressures.

- Deterioration in security situation:
  - Likelihood: Medium
  - Expected impact: High. Would adversely affect tourism recovery, FDI, and portfolio inflows, and growth.
  - Policy response: Reprioritize fiscal spending to accommodate security needs; maintain policies to improve macro fundamentals (structural and governance reforms).

### External Sector Assessment
- Overall assessment:
  - The external position of Kenya in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policies.
  - Potential policy responses: Authorities’ ambitious reform program and mutually reinforcing prudent macroeconomic policies, supported by EFF and ECF arrangements, are expected to improve external position and competitiveness. Programmed fiscal consolidation would strengthen the external sector and support private sector growth, with exchange rate flexibility helping absorb external shocks.

- Foreign assets and liabilities — position and trajectory:
  - Background: NIIP turned negative since the mid-2000s and widened progressively with infrastructure investment. Over the last five years, the NIIP widened by 17 percentage points of GDP, driven by public and private sectors.
  - Total external debt (loans and securities) is estimated at 75 percent of GDP at end-2023, of which 36 percent of GDP is public and 39 percent of GDP is private. Over 89 percent of external private debt is owed by the non-bank sector. Total external assets are estimated at 21.8 percent of GDP, mostly in deposits abroad and reserve assets.
  - Assessment: Negative NIIP is projected to widen further to -73 percent of GDP by 2028.

- Selected 2023 NIIP-related figures (in percent of GDP):
  - NIIP: -66
  - Gross Assets: 22
  - Debt Assets: 20
  - Gross Liab.: 88
  - Debt Liab.: 77

- Current Account:
  - Background: CA deficit was 4.0 percent of GDP in 2023, below the average 5 percent over the preceding three years. CA narrowed in 2023 due to contraction in imports, robust tourism receipts and remittances. Exports of goods underperformed; exports of transportation services fell sharply after completion of large infrastructure projects. Decline in imports mostly due to non-energy imports, especially machinery and equipment, linked to completion of large public investment projects and under-execution of public external borrowing plans.
  - Assessment: CA balance is broadly in line with fundamentals and desirable policies in 2023.
  - Model results: The EBA-lite CA model indicates a CA gap of 0.1 percent of GDP in 2023 based on a CA norm of –4.6 percent of GDP and estimated cyclically adjusted CA of –4.5 percent of GDP. The cyclically adjusted CA includes a 0.6 percentage points of GDP adjustment reflecting temporary decline in non-energy imports in 2023 due to under-execution of externally financed capital spending.
  - Contribution of policy gaps to the CA gap is 0.6 percent of GDP, with public health expenditures, fiscal balance, and private credit growth being main contributors (2.9 percent of GDP combined). The positive relative policy gap reflects: 1) relatively larger deviation of public health expenditures from desirable global policy level than in Kenya; 2) relatively less deviation of fiscal balance from its desirable level in Kenya than the world; 3) relatively more compressed private credit growth in Kenya compared with the world.

- Real Exchange Rate:
  - Background: Medium-term REER appreciation trend tapered from 2020Q1, with REER peak of 148 in 2022Q4. REER is projected to have depreciated about 14 percent since then and to have reached 128 at end-2023. Main driver of past appreciation was positive inflation differential with trading partners as NEER follows a depreciation path more pronounced since the onset of COVID-19. Favorable rainy season that helped bring down inflation to the target band and significant nominal exchange rate adjustment in 2023 resulted in a sharp reversal in REER trend from end-2022.

*1kenea2024001 - Annex I. 2021 Article IV Consultation: Key Recommendations*

### 7.6   percent for 2023. Taking into account the results of the EBA-lite current account (CA) model, staff

### 7.6   percent for 2023. Taking into account the results of the EBA-lite current account (CA) model, staff

### Effective Exchange Rates and REER Assessment
- Staff assesses the REER gap to be in between –1 percent and –7.6   percent, compared with the range of 4–15 percent in the last assessment based on 2022   data.
- Text Figure AIII.2 elements (as reported):
  - CA-Actual-4.0
  - Cyclical contributions (from model) (-)-0.1
  - Additional temporary/statistical factors (-) 2/0.6
  - Natural disasters and conflicts (-)0.0
  - Adjusted CA-4.5
  - CA Norm (from model) 3/-4.6
  - Adjustments to the norm (-)0.0
  - Adjusted CA Norm-4.6
  - CA Gap0.1-0.8
  - o/w Relative policy gap0.6
  - Elasticity-0.1
  - REER Gap (in percent)-1.07.6
- Footnotes:
  - 1/ Based on the EBA-lite 3.0 methodology
  - 3/ Cyclically adjusted, including multilateral consistency adjustments.
  - 2/ Adjustments to reflect: The temporary nature of the decline in non-energy imports by 0.6 due to underexecution of foreign financed capital spending in 2023  (in percent of GDP)

### Capital and Financial Accounts: Flows and Market Access
- Background findings for 2023:
  - Current account deficit primarily financed by debt flows and reserve deaccumulation.
  - Other net investment flows amounted to 1.9   percent of GDP.
  - Annual FDI net inflows remained flat in 2023, averaging to less than one percent of GDP since 2018.
- Assessment:
  - Deterioration in private sector inflows and shortfall in government commercial borrowing amid tighter global financial conditions resulted in deaccumulation of reserves in 2023 despite larger than expected flows from multilateral institutions.
  - Market pressures since the start of the war on Ukraine and ongoing monetary tightening in advanced countries have limited government’s access to commercial borrowing.

### FX Intervention and Reserves Level
- Background:
  - In 2023, gross official reserves (7   percent of GDP) provided an adequate buffer against external shocks, covering 4 months of next year’s imports of goods and services.
  - Reserves declined since 2022, reflecting debt service and other payments amid bunching of external inflows to the first half of 2024 and sales via FX interventions (FXI) during the first half of 2023.
  - Import coverage of reserves improved significantly due to sharp contraction in imports in 2023 and is expected to remain above the 3.5    months, which is also close to the value of the Fund’s   reserve adequacy metric for credit-constrained economies, gradually strengthening over time.
- Assessment and policy-relevant observation:
  - Kenya’s de facto exchange rate arrangement is crawl-like.
  - The CBK engaged in periodic FXI in the first half of 2023 to smooth volatility in the Kenyan shilling.
  - Increasing exchange rate flexibility would help the economy better absorb potential shocks.
- Additional contextual data:
  - Published International Investment Position (IIP) data is available until 2021; it is extrapolated for 2023 with BoP financial flows.
  - Kenya’s de jure exchange rate arrangement is free floating.
  - The bilateral nominal exchange rate against the U.S. dollar (measured as US$ per Ksh.)   depreciated by 7.6 percent y/y by end-2022 and by 20.4 percent y/y as of December 21, 2023.

### Strengthening Fiscal Policy Analysis Through a Public Sector Balance Sheet Approach — Rationale and Observations
- Key problems with current fiscal policymaking:
  - Focus on national government revenues, expenditures, and borrowing can mask risks from other public sector entities (counties, SAGAs, public funds, state corporations).
  - National government can lower reported debt and deficits by shifting obligations or cutting public infrastructure spending.
- Legal and institutional context:
  - PFMA 2012, amended in 2023, mandates the National Treasury (NT) to be custodian of government assets and manage public debt, guarantees, and other financial obligations for sustainable debt control.
  - NT has produced consolidated financial statements for almost all public sector entities, established a fiscal risk management framework, and is implementing a treasury single account and accrual-based IPSAS.
- Benefits of a Public Sector Balance Sheet (PSBS):
  - Consolidates assets and liabilities across the public sector for a comprehensive fiscal perspective.
  - PSBS can produce a static balance sheet and, if extended, an intertemporal PSBS combining discounted future flows with the static balance sheet.
  - Empirical evidence indicates financial markets price government assets and net (financial) worth when pricing sovereign bonds.

### Public Sector Fiscal Indicators and Risks (as of June 2023 / FY2022/23)
- Compensation of employees:
  - National government: declined from 4.3 percent of GDP in FY2019/20 to 3.8 percent of GDP in FY2022/23.
  - SAGAs: increased by 0.6 percent of GDP over the same period.
  - Entire public sector: remained about 8.4 percent of GDP.
  - General government (estimated) at 7 percent of GDP in FY2022/23, constituting 49 percent of tax revenues.
- SAGAs/SCs performance:
  - In FY2022/23, 242 SAGAs/SCs incurred losses amounting to 0.7 percent of GDP (up from 183 entities with losses of 0.5 percent of GDP in FY2021/22).
  - In FY2022/23, 18 SAGAs/SCs reported negative equity, totaling 1.5 percent of GDP.
  - Dividends remitted by CBK and profitable SCs totaled 0.29 percent of GDP, insufficient to cover SAGAs/SCs losses.
- Asset management potential:
  - IMF (2018) estimate: potential revenue increases from improved management of non-financial public corporations and government financial assets could reach up to 3 percent of GDP annually.
  - Commercial corporations’ assets in Kenya are equivalent to about 35 percent of GDP (Consolidated Financial Statements FY2022/23).
  - Dividends from these entities averaged 0.3 percent of GDP from FY2015/16 to FY2022/23; tax contribution was 0.13 percent of GDP in FY2022/23.

### Kenya Public Sector Balance Sheet — Key Aggregates (June 2023, FY2022/23)
- Overall estimated public sector net worth: minus 30 percent of GDP.
- Total public sector assets: 101 percent of GDP.
- Total public sector liabilities: 131 percent of GDP.
- Main components:
  - Non-financial assets: 87 percent of GDP.
  - Financial assets: 14 percent of GDP, comprising:
    - Cash and deposits: 3.1 percent of GDP
    - Debt securities: 1 percent of GDP
    - Equity investment: 2 percent of GDP
    - Receivables: 7.9 percent of GDP
  - Liabilities composition:
    - Government debt securities and loans: 70 percent of GDP
    - Debt securities from SCs: 6 percent of GDP
    - Currency and deposits owed by the CBK and financial corporations: 6 percent of GDP
    - Actuarial pension obligations: 33 percent of GDP
    - Pending bills and other payables, including PPP contracts: 16 percent of GDP
- Cross-holdings across public sector segments: approximately 44 percent of GDP (government equity claims on SAGAs/SCs 36 percent of GDP; government and SAGAs/SCs deposits at the CBK 4.8 percent of GDP; government securities held by SCs and the CBK 1.7 percent of GDP; receivables/payables 1.4 percent of GDP).

### Implications and Recommended Fiscal Policies (drawn from analysis)
- Expand fiscal analysis scope to encompass all assets and liabilities of the public sector to improve transparency and policymaking.
- Reform SAGAs/SCs to separate entities focused on service delivery from commercial operators; this would strengthen governance, monitoring, and facilitate clearer central government fiscal statistics.
- Improve asset management of commercial and non-financial public corporations to capture potential revenue gains (reference potential up to 3 percent of GDP annually).
- Publish fiscal statistics that encompass at least the central government and report on public sector liabilities to support the achievement of the debt anchor at 55 percent of GDP in present value and to prevent buildup of non-debt liabilities.
- Continue migration to GFSM 2014 fiscal statistics and complete publication of consolidated financial statements per perimeter of the public sector.

### Systemic Risks in the Kenyan Banking Sector — FX Exposures and Interconnectedness
- Systemic risk drivers:
  - FX exposures and sovereign-bank nexus, and domestic interconnectedness.
  - Banking system accounts for 72 percent of financial sector assets.
- FX exposure trends and indicators:
  - Share of FX liabilities in total for Kenya at 34.9 percent in 2023Q3, higher than the median of 31.6 percent for emerging and developing economies with available data.
  - FX deposits in the banking system increased in recent quarters (even after excluding depreciation effects).
  - Contributing factors to FX deposit increases: escrow deposits under the G2G oil import scheme, expectations of continued shilling depreciation, FX market dysfunction, and narrowing interest differentials between some Ksh. and US$ deposits.
  - A non-trivial portion of FX loans are in personal loans, real estate, transport and communication, and building and construction—sectors not primarily export-oriented, raising questions about natural hedges.
  - FX borrowers unable to access U.S. dollars have offered repayment in shilling, effectively defaulting and contributing to a rise in NPLs.
- Off-balance sheet exposures:
  - Notable off-balance sheet FX exposures via FX swaps and issuance of letters of credit (LCs).
  - Total FX net open position (NOP) widened to –2.3 percent of total regulatory capital in 2023Q3 from –1.3 percent in 2023Q2.
  - On-balance sheet FX NOP narrowed to –3.5 percent (2023Q2: –6.8 percent).
  - Regulatory FX NOP (short-hand method) widened from –2.1 percent of core capital in 2023Q2 to –3.1 percent in 2023Q3 (regulatory limit: 10 percent).
  - Wide variation among banks: 7.9 percent of banks close to or above the regulatory limit; 13.2 percent of banks over 5 percent.
  - Several banks, including some Tier-1 banks, had large on-balance sheet NOPs offset by large off-balance sheet NOPs.
  - Banks’ FX lending via swaps declined between June and October 2023 as swaps to the oil sector wound down; FX borrowing via swaps remained stable with US$472 million of swaps outstanding as of October 19, 2023.
  - Issuance of LCs for the G2G oil import scheme led to significant increase in off-balance sheet borrowing and lending by LC-issuing banks.

*International Monetary Fund — Kenya country report excerpts (text provided).*

### 4.      FX swaps expose Kenyan banks to rollover risks. Most FX borrowing via swaps by Kenyan

### 4.      FX swaps expose Kenyan banks to rollover risks. Most FX borrowing via swaps by Kenyan banks is from non-residents (and non-East African Community residents), whereas most FX lending via swaps is to Kenyan residents, exposing banks to rollover risks from changes in foreign investor sentiment

### FX swaps and maturity structure
- Most FX borrowing via swaps is with non-residents outside of the EAC; most FX lending via swaps is to residents.
- On maturity:
  - Most outstanding FX borrowing via swaps is of a duration longer than 1 year.
  - Most FX lending via swaps is of a duration less than a year.
- Anecdotal evidence: most swaps to residents are rolled over on maturity.
- Since the August 2023 liberalization of minimum maturity of swaps, new swaps with non-residents (FX borrowing by Kenyan banks) have tilted heavily towards short-term maturities.

### CBK FX-depreciation stress test findings
- Scenario: 17.5 percent nominal depreciation over 6 months.
- Transmission effects projected:
  - NPLs projected to rise by 16.4 percent.
  - Capital deterioration due to increase in net open position.
- Outcomes:
  - 18 percent of banks would need additional capital to meet the regulatory minimum.
  - Total capital requirements were small as a share of GDP (approximately 0.2 percent).

### Sovereign exposures and valuation risk
- Holdings of Government of Kenya domestic debt:
  - Majority is held by domestic financial institutions.
  - Banks’ share of outstanding T-bills declined from 59 percent in June 2021 to 41 percent in September 2023.
  - Banks’ share of outstanding T-bonds declined from 48 percent in June 2021 to 45 percent in September 2023.
  - Pension funds’ share of total outstanding G-secs increased from 31 percent to 33 percent over June 2021 to September 2023; insurers’ share remained the same over that period.
- Composition and concentration:
  - 89 percent of banks’ holdings of G-secs are T-bonds rather than T-bills.
  - Banking sector held 26.8 percent of assets in G-secs in June 2023.
  - 15.8 percent of banks hold over 40 percent of their assets in G-secs.
- CBK interest-rate stress test (June 2023 balance sheet data):
  - Severe scenario: 300 basis points increase in central bank policy rate, transmission via asset valuation and credit channels.
  - Average T-bond yields would increase to 19.7 percent.
  - NPLs would increase to 17.4 percent of gross loans by December 2023 (from 16.2 percent and 15 percent in June 2023).
  - 10 banks, including 3 Tier-1 banks, failed the stress tests.
  - Additional capital requirements were about 0.43 percent of GDP.

### Domestic interconnectedness and concentration risk
- CBK stress tests of borrower concentration:
  - Most banks are vulnerable to default by up to three top borrowers per bank.
  - Nineteen banks failed a stress test with top three borrowers defaulting (using December 2022 data).
  - Capital injection required under that scenario: Ksh.109.4 billion or about 0.8 percent of GDP — the highest capital injection among scenarios in the May 2023 stress tests.

*Source: IMF staff analysis and CBK stress-test results as presented in the Kenya country report excerpt.*

### 1.      Kenya’s case. Kenya’s debt is sustainable but not with a high probability.

### 1kenea2024001 - 1.      Kenya’s case. Kenya’s debt is sustainable but not with a high probability.

### Debt sustainability assessment — headline finding
- Overall assessment: Kenya’s debt is assessed to be sustainable, but the risk of debt distress is high; therefore, debt is sustainable but not with a high probability.
- Context: Using the joint IMF-World Bank Low-Income Country Debt Sustainability Framework (LIC-DSF), “sustainable with high probability” is generally associated with an overall public debt distress rating of low or moderate. For Kenya, mechanical DSA signals plus staff judgment yield a high risk rating despite sustainability in the totality of conditions.
- Sovereign spreads and market access:
  - Sovereign spreads (weighted average of bonds with remaining maturity 1–15 years) stood at 645 basis points as of December 11, 2023.
  - Comparable spreads: 486 basis points in February 2022 (average) and a peak of 1,497 basis points in July 2022.
  - Kenya’s sovereign spreads remain elevated relative to pre-Ukraine war and global tightening levels, broadly tracking the median spreads for Sub-Saharan African countries.
  - International bond market access has been hindered since 2022Q2.

### Recent and projected external financing events and pressures
- FY2022/23: Kenya tapped commercial syndicated loans totaling about US$800 million.
- FY2023/24: Kenya is expected to secure an additional US$500 million in syndicated loans.
- Primary external debt servicing pressure in 2024: the June 2024 US$2 billion Eurobond maturity.
- Baseline expectation: Kenya is expected to regain access to the international bond market by the end of the program (projected normalization of global conditions by 2025 under the Fund’s global view), supporting private sector creditor exposure sufficient to provide program safeguards.

### Analysis under a severe shock scenario (shock materializes at end of program, i.e., 2026; impacts following five years)
- Timing and peak obligations:
  - Obligations to the Fund peak in 2029–31.

- Debt sustainability test (restructurable private claims):
  - Purpose: Assess whether existing private claims at end of EFF/ECF program are large enough that restructuring them could restore debt sustainability under a severe shock.
  - Result: Kenya could maintain external debt sustainability through a debt operation on external commercial debt (debt reduction or maturity lengthening beyond 2031).
  - Outcome: External debt sustainability would improve to a moderate risk rating (i.e., sustainable with high probability).
  - Overall public debt: Would remain sustainable but at high risk of debt distress, reaching below its threshold before the end of the DSA projection horizon.
  - During peak Fund repayment period (2029–31) the gross financing needs to GDP ratio and the total debt service to revenue ratio would be significantly lower than under the current program period.

- FX liquidity test (reserves and domestic financing after shock + restructuring):
  - Assumptions: Debt restructuring and the shock at end of the EFF/ECF program lead to loss of market access from 2026 through 2031 and a temporary significant drop in private capital inflows.
  - Reserve objective: Maintain reserves above 3 months of imports cover.
  - Domestic debt ceiling: Domestic borrowing should not exceed past historical peaks in percent of GDP.
  - Result: A debt operation as described, together with a significant but feasible external adjustment, would allow Kenya to keep reserves at adequate levels and provide sufficient FX to repay the Fund.
  - Domestic debt path: After decreasing during the program, the stock of domestic debt would increase steeply post-shock but would remain below 2022 levels.
  - Domestic financial sector capacity: Kenya’s domestic financial system (combined assets of commercial banks, insurance, and pension funds standing at 68 percent of GDP) held about 97 percent of government’s domestic debt in 2022; non-resident holdings are small and have declined. The sector is judged deep enough to absorb additional domestic financing needs during the post-shock period, aided by program-created space ahead of the shock.

- Private creditor shares under baseline:
  - In 2025, share of debt to external commercial creditors to total public external debt is 16.4 percent.
  - Debt service to external commercial creditors averages 33 percent of public external debt service during 2026–30 and 40 percent during 2031–36.

### Capacity development (CD) priorities and past impact
- Past two years: CD aligned with the Fund-supported program focused on tax policy, revenue administration, Public Financial Management (PFM), financial sector oversight, statistics, and AML/CFT.
- Positive impacts:
  - Reduced tax exemptions and broadened tax base contributing to an increase in tax/GDP.
  - Improved PFM systems: creation of a budget preparation manual and better liquidity and expenditure management.
  - Strategy development: SOE reform strategy and Medium-Term Revenue Strategy (MTRS).
  - Effectiveness of past technical assistance rated highly in most areas.
- Key CD priorities going forward (excerpt of objectives):
  - Public Financial Management: develop comprehensive, credible, policy-driven budget preparation; enhance Public Investment Management (PIM); tighten commitment controls; improve fiscal reporting coverage and quality; enhance asset and liability management; identify, monitor, and manage fiscal risks; implement SOE reform strategy.
  - External Sector Statistics: improve promptness of annual BoP statistics in IFS; work toward regular quarterly submissions; improve data quality on external private debt; publish official IIP statistics annually and progress toward quarterly IIP.
  - Tax Policy and Revenue Administration: strengthen governance and core functions; support MTRS design and implementation; emphasize taxpayer compliance, data-matching compliance risk management, ICT operationalization; modernize property tax; reduce tax expenditures.
  - Real Sector Statistics: support compilation of quarterly GDP by expenditure at current and constant prices; develop import and export price indices.
  - Monetary and Macroprudential Policy: modernize monetary policy framework and operations; integrate FPAS into monetary policy decision making; develop macroprudential tools (heatmaps, network analysis, financial soundness indicators).
  - Macro-Fiscal Policy: assist in implementing RSF reform measures including carbon pricing, climate budget tagging, climate risk analysis.
  - Financial Supervision and Regulation: enhance risk-based supervision and Basel II/III implementation; strengthen nonbank supervision.
  - Debt Management: assist in development of an efficient and liquid domestic bond market.

### Authorities’ program performance, requests, and commitments (Letter of Intent highlights)
- Economic environment: Kenya faced volatility in fuel prices, regional instability spillovers, war in Ukraine effects, tighter financial conditions, commodity volatility, and difficult external environment; recovered from prolonged drought but faced El Niño flooding.
- Recent growth: real GDP grew by 5.4 percent y/y in the first half of 2023 driven by agricultural rebound.
- Program performance (end-June 2023):
  - Quantitative performance criteria (QPCs) met: primary fiscal balance, net international reserves, no new domestic guarantees, and present value of contracting or guaranteeing of new external debt.
  - Indicative targets (IT) met: priority social spending and exchequer requests outstanding for 90 days or more.
  - Tax revenues were below end-June 2023 QPC floor; corrective measures proposed; waiver of nonobservance sought under ECF arrangement (previous waiver under EFF had been approved).
  - Monetary policy consultation clause (MPCC) triggered as inflation was above target band; consultation completed during fifth EFF/ECF reviews in July 2023.
  - Continuous performance criterion miss: no new external arrears missed by a small margin due to payment voucher processing delays; amounts settled and waiver requested.
  - Structural benchmarks (SBs) for June–October 2023 were delayed but mostly implemented; one SB requested to be reset to end-February 2024.
- Requests to the Fund (December 21, 2023):
  - Augmentation of access amounting to 130.3 percent of quota (SDR707.27 million) to be used as budget support via the central bank in FY2023/24.
  - Augmentation split: GRA resources 121.8 percent of quota (SDR661.13 million) and PRGT resources 8.5 percent of quota (SDR46.14 million).
  - Waiver requests: applicability waiver for end-December 2023 targets (except tax revenues nonobservance waiver requested).
  - Modification requests: end-June 2024 QPCs on the primary fiscal balance and net international reserves.
  - Fiscal safeguards assessment to be initiated by time of 7th EFF/ECF reviews as required for exceptional access for budget support.
  - CBK and National Treasury to sign an MoU clarifying responsibilities for timely servicing of obligations to the Fund related to additional financing.
- Policy commitments:
  - Multi-year fiscal consolidation supported by domestic revenue mobilization and expenditure rationalization to put overall public debt/GDP on a downward trajectory and achieve debt anchor: present value of overall public debt to GDP ratio of 55 percent by 2029.
  - Monetary policy to focus on price stability, resisting second-round effects, and anchoring inflation expectations.
  - Actions to support external sustainability, safeguard reserves, and promote efficient operation of the foreign exchange market.
  - Continued implementation of RSF reforms to build climate resilience.
  - Commitment to consult with the IMF in advance of any necessary revisions and to provide timely accurate data per the TMU.

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

### 1.      The Kenyan economy remains resilient. The economy registered a 5.4 percent

### The Kenyan economy remains resilient.

### Economic performance and sectoral developments
- Real GDP growth: registered a 5.4 percent year-on-year growth in the first half of 2023.
- Agriculture: 6.9 percent rebound in the agriculture sector, contributing to reduced food inflation.
- Services: financial sector grew 9.7 percent; ICT sector grew 7.7 percent.
- Global environment: rapid monetary tightening in major economies raised borrowing costs and limited frontier economies’ access to international bond markets.
- Political context: bipartisan discussions are underway to ease political tensions, enhance stability, and bolster confidence.

### Inflation and monetary policy
- Headline inflation: eased within the target range of 2.5–7.5 percent since July 2023 but remained sticky in the upper part of the band as of November.
- Drivers of easing: onset of rains reduced food prices; NFNF inflation softened reflecting tighter monetary and fiscal policies.
- Offsetting risks: high global energy costs and exchange rate pass-through.
- Policy action: Central Bank Rate (CBR) raised by a cumulative 550 basis points since May 2022 to anchor inflation expectations and mitigate second-round effects.
- Market effects: tightening monetary stance and banking sector liquidity conditions caused yields on government papers to rise at a faster pace.

### External sector and current account
- Current account deficit: narrowed in 2023 and is anticipated to be roughly 4 percent of GDP in 2023 and the medium term.
- Contributors to narrowing: recovery of tourism receipts to pre-COVID-19 levels and declines in non-energy imports.
- Trade performance: lower imports improved the trade balance; goods exports underperformed due to lower global demand and suspension of coffee trading licenses affecting coffee exports.
- Services and remittances: tourism rebounded faster than anticipated; receipts from transportation services declined markedly; remittances remained robust.
- Drivers: decline in imports reflected lower global fuel prices, slowdown in capital goods imports after large infrastructure projects, and rationalization of public investment pipeline.
- Outlook risks: policy tightening and exchange rate realignment, alongside initiatives to attract FDI and enhance exports, expected to curtail and stabilize the current account deficit.

### Fiscal outcomes FY2022/23 and FY2023/24 adjustments
- Primary balance FY2022/23: primary deficit stood at 0.6 percent of GDP at end-June 2023 against a program target of 1.1 percent of GDP.
- Revenue shortfall FY2022/23: tax shortfall of Ksh.148 billion (1 percent of GDP) despite Rapid Revenue Initiatives (RRIs), driven by weaker non-agricultural activity, slow execution of budgeted spending (affecting VAT and PAYE), and weakening tax compliance.
- Unpaid bills carryover: roughly Ksh.100 billion (0.7 percent of GDP) at end-June 2023 due to slow expenditure execution.
- FY2023/24 instruction: MDAs instructed to clear carryover on a “first charge” basis in FY2023/24 to avoid accumulation of arrears (spending obligations outstanding for more than 90 days).

### Revenue performance and corrective measures
- Revenue shortfall through end-November: preliminary data indicate tax collection likely to fall short of the end-December program target by Ksh.80 billion or 0.5 percent of GDP.
- Causes of underperformance: slower mobilization of income taxes (PAYE and CIT), excise shortfalls from weaker activity in banking, construction, and ICT; disruptions from El Niño; underexecution of transfers to counties and public sector institutions; and underexecution on projects affecting VAT.
- Legislative package (submitted December): tax policy and administrative measures totaling 0.9 percent of GDP (partial year impact).
  - Tax policy measures: adoption of a motor vehicle circulation tax; removal of several exemptions on interest income; reduction of selected tax expenditures on VAT and import duties; increase in excise rates for money transfers and telecommunication data services.
  - Tax administrative measures: enforcement of VAT on exempt supplies; collection of debt under dispute; completion of audits on ongoing cases; improvement of audits of VAT refunds; strengthening taxation at source for financial sector; improvements of customs declaration for consolidated cargos.
- Corrective action requirement: a waiver of non-observance will be required based on remedial actions described.

### Supplementary FY2023/24 Budget
- Overall fiscal deficit target under Supplementary: 5.5 percent of GDP (versus 4.3 percent of GDP under approved budget and 5.6 percent of GDP in FY2022/23).
- Reasons for deterioration: higher cost of servicing debt due to a weaker Shilling and higher interest rates; clearance of carryover from FY2022/23; unanticipated spending pressures in education, security, and social sectors related to new education model, modernization of police, and climate needs.
- Financing assumptions: upscaling of 2023 World Bank DPF and of the current EFF/ECF arrangement and IMF support through the Resilience and Sustainability Facility (RSF) to reduce reliance on more expensive financing sources.

### Debt vulnerabilities and trajectory
- Debt vulnerabilities: remain elevated amid exchange rate depreciation and higher borrowing costs.
- Public debt PV: Present Value (PV) of overall public and publicly guaranteed debt projected to rise to about 68 percent of GDP (largely from valuation effects due to faster exchange rate depreciation in 2023).
- Medium-term projection: PV of debt projected to decline to the recently approved debt anchor of 55 percent of GDP in PV terms.

### Financial sector soundness
- Capital adequacy (as of September 2023): core and total capital adequacy ratios were 15.3 and 18.6 percent, respectively (statutory minimums are 10.5 and 14.5 percent).
- Liquidity ratio: 49.3 percent (statutory minimum 20 percent).
- Private sector credit growth: 12.2 percent compared to 11.6 percent in March 2023; strong credit growth in manufacturing, transport and communication, trade, and consumer durables.
- Asset quality: Gross Non-Performing Loans to Gross Loans ratio increased from 13.7 percent in September 2022 to 15.0 percent in September 2023.
- FX exposures: have risen; banks working to bolster provisioning and capital levels.

### Macroeconomic outlook (baseline)
- Short-term growth: real GDP expected to grow at 5.1 percent in 2023 and 5.0 percent in 2024 under the program baseline.
  - Drivers: recovery in agriculture; private domestic demand resilience; tighter policy offsetting some domestic demand; investment supported by PPP focus and improved FX conditions.
- Inflation outlook: projected to remain under pressure from global fuel prices and exchange rate depreciation; recovery in agriculture expected to contain domestic food price inflation; tighter policies limit second-round NFNF effects.
- Current account projections: projected to improve to about 4 percent of GDP in 2023 and stabilize around similar levels in 2024 (from 5.2 percent of GDP in 2022); trade balance and primary income balance expected to worsen in 2024 amid recovery in goods imports and higher external interest payments, offset by services strength and remittances growth.
- Medium-term averages: growth expected to average 5.3 percent under the program baseline; inflation to return to the mid-point of the target band; current account deficit to stabilize at around 4.2 percent of GDP.
- Role of private sector: expected to be the main medium-term growth driver, benefiting from growth-friendly fiscal consolidation and competitiveness, business environment, inclusivity, and market efficiency improvements.

### Program objectives, performance, and policy priorities
- Primary policy objective: maintain macroeconomic stability through robust and inclusive growth, supported by the EFF/ECF arrangements.
- Main program focus:
  - Fiscal policy: growth-friendly fiscal consolidation, broaden domestic tax base, improve tax compliance, protect high-impact social and investment expenditure, curtail overall spending.
  - Public financial management: increase efficiency and transparency of public spending, including by SOEs.
  - Governance: enhance oversight, preventive frameworks, accountability, and transparency.
  - Monetary policy: proactive stance to meet inflation objective, refine policy operations to keep interbank overnight rate close to policy rate, support interbank and FX market functioning.
  - Access to affordable finance: transform banking sector around customer centricity, risk-based credit pricing, transparency, and ethical banking.
  - Financial stability: enhance prudential regulation and supervision, strengthen operational tools amid rising complexity and risks.
  - Structural reforms: improve business environment, governance, investment, employment, gender inclusivity, exports, climate response, and potential growth.
  - Statistics: improve data quality to support policymaking, transparency, and accountability.
- Program performance summary:
  - Quantitative targets: met except end-June 2023 tax collections target and continuous performance criterion on no new external payment arrears.
  - Structural benchmarks: six of seven June–October 2023 SBs implemented with delays; one proposed to be reset.
  - Specific QPC outcomes: end-June 2023 targets on fiscal primary balance, net international reserves, no new domestic guarantees, and PV of contracting or guaranteeing of new external debt met; taxes target fell short and expected to be missed at end-December 2023.
  - External arrears: missed continuous performance criterion on no new external payment arrears by US$0.51 million due to a payment voucher processing delay; arrears cleared by November 6th.
  - Corrective measures: end-of-day reconciliation of payment vouchers; strengthen SOE debt reporting compliance.
  - MPCC: triggered for end-June 2023 as three-month average inflation was 7.9 percent (outside 2.5–7.5 percent band); consultation with IMF Board completed in July.

### Fiscal policy direction
- Policy stance: pursue deficit reduction through broadening the revenue base consistent with the Medium-Term Revenue Strategy (MTRS, ¶23) and containing non-priority expenditures while enhancing social safety nets with development partner support.
- Objective: place debt-to-GDP ratio on a downward path over the medium term to reduce vulnerabilities, lower financing risks, and facilitate expansion of private sector credit.

*Source: 1kenea2024001 (excerpt).*

### 14.      The cost of our debt obligations is now projected to increase significantly more than

### 1kenea2024001 - 14.      The cost of our debt obligations is now projected to increase significantly more than

### Rising interest costs and fiscal impact
- Interest payments projected in Supplementary I FY2023/24: Ksh.919 billion (compared to Ksh.775 billion in the Budget), equivalent to an increase of about 1 percent of GDP.
- Main driver: foreign interest obligations rising from Ksh.147 billion in the Budget to Ksh.273 billion in the Supplementary Budget.
- Conclusion: additional fiscal adjustment required to contain the widening fiscal deficit and maintain debt burden at sustainable levels.

### Fiscal consolidation commitments and targets
- Commitment to reach new debt anchor of 55 percent of GDP in PV terms by 2029 (as indicated by Parliament within 5 years).
- Additional frontloaded improvement in the primary surplus relative to the 5th review of the EFF/ECF arrangements: 0.4 and 0.8 percentage points of GDP in FY2023/24 and FY2024/25, respectively.
- FY2023/24 fiscal stance: contain fiscal deficit to 4.7 percent of GDP by targeting an improvement in the primary surplus relative to the Supplementary Budget.
- FY2024/25 budget proposal targets: overall fiscal deficit of 3.5 percent of GDP and a primary balance surplus of 1.7 percent of GDP (compared to 4.0 and 0.9 percent of GDP at the time of the 5th reviews).

### Measures to achieve FY2023/24 and FY2024/25 primary balance improvements
- Revenue-side measures:
  - Additional non-tax measures initiated via delegated legislation; expected effective after public consultation.
  - Non-tax measures submitted to Parliament in December (fees/charges related to immigration, citizen services, and land ownership transactions) expected yield: 0.2 percent of GDP.
  - Planned adoption of tax measures under first year of MTRS to be reflected in 2024 Finance Bill; conservatively expected to yield 0.3 percent of GDP.
  - Full-year impact and broadening of FY2023/24 non-tax measures to achieve total non-tax revenue yield of about 0.3 percentage points of GDP.
- Expenditure-side measures:
  - Careful execution of investment spending, targeting savings of about 0.2 percentage points of GDP relative to capital spending envelope under approved Supplementary FY2023/24 Budget.
  - Additional savings targeted for about 0.6 percent of GDP in recurrent spending (covering arrears such as travels, allowances, and hospitality) and non-priority capital projects.
- Timing and procedural actions:
  - Submission to Parliament of Proposed Supplementary II FY2023/24 Budget by end-March 2024 to reflect additional savings.

### Cashflow, arrears management, and contingent steps
- Strong commitment to avoid accumulation of arrears (program Indicative Target).
- Planned actions to manage cashflow and arrears:
  - Ensure efficient operation of government securities market (IMF technical assistance expected in first half of 2024).
  - Prioritize clearance of FY2022/23 spending carryover and exchequer requests submitted in IFIMIS three months prior to each test date (end-December 2023 and end-September 2024).
  - Limit carryover to FY2024/25 of exchequer requests introduced in IFIMIS after April 1, 2024, with corresponding FY2024/25 budget appropriation, consistent with Public Finance Management Regulations, 2015, Section 42(a).
  - If needed, instruct MDAs to prioritize execution of FY2024/25 commitments to clear potential carryovers by end-September 2024.
  - Submit to Parliament by end-October 2024 a Supplementary FY2024/25 Budget to ensure clearance of carryovers does not undermine fiscal targets.

### Pending bills and arrears stock
- FY2022/23 accumulation of arrears: about Ksh.100 billion (Ksh.77.5 billion in pending bills and Ksh.27 billion of oil and fuel subsidies arrears).
- Amount already settled: about Ksh.40 billion in September 2023; remainder planned to be settled during this fiscal year.
- Cabinet-established Pending Bills Verification Committee (effective until September 2024) to verify stock and recommend settlement actions; interim report expected by end-December 2023.
- National Treasury to publish comprehensive, timebound strategy with proposed end-February 2024 SB.

### Revenue mobilization and tax administration reforms
- Medium-Term Revenue Strategy (MTRS) implementation:
  - First MTRS to be implemented starting early 2024; MTRS to be submitted to Parliament with the 2024 Budget Policy Statement by February 2024.
  - Governance: establish formal monitoring process at ministerial level by end-February 2024 (proposed end-February 2024 SB).
  - Expected yield: first-year tax measures conservatively 0.3 percent of GDP; second-year MTRS measures to yield about 0.4 percent of GDP in FY2025/26.
- KRA reform milestones and targets:
  - Full roll-out of risk-differential framework (RDF) and risk profiling tool for compliance reviews and audits by June 2024.
  - Full roll-out and use of case management tool in processing all cases by June 2024.
  - Strengthen audit function initiatives: training and audit quality review teams by end-June 2024; computer audit specialist training with advanced MS Excel techniques by June 2024.
  - Data analytics and taxpayer register:
    - Integration with telecommunication companies commenced and to be finalized by June 2024.
    - Taxpayer register of LTO, MTO and deregistered companies expected by end-December 2023.
    - By June 2024, clean data for all taxpayers with other incomes except employment income.
  - VAT exemption verifications: completed verification of 27 provisions on VAT exercises; broaden customs VAT exemption verification by end-March 2024.
- Tax refund processing improvements:
  - Implement risk-profiling tool by December 2023 to identify high-risk cases for prepayment audits.
  - Establish dedicated teams for continuous reconciliation of taxpayer ledgers by December 2023.
  - Develop performance contracts by December 2023 aiming to reduce claim processing time to 60 days, with medium-term goal of 30-day processing time.
  - System integration (iTax and iCMS) for real-time export confirmation by February 2024.
  - Procurement and implementation plan for new integrated system finalized by December 2024.

### Expenditure control, wage bill, and payroll reforms
- Wage bill control measures and targets:
  - Implemented wage freeze for FY2021/22 and FY2022/23; eliminated and streamlined allowances.
  - SRC objective: contain allowances to no more than 40 percent of gross pay overtime; plan to substantially reduce number of allowances from current 247.
- Unified Human Resource (UHR) system:
  - UHR linked to KRA i-Tax since July 2023 for PAYE facilitation.
  - Plan to incorporate other deductions and enable remittances to respective entities by July 2024.
  - Roll-out phases:
    - Phase 1: roll out to all MDAs and Counties implemented in September 2023.
    - Phase 2: roll out to all State Agencies with UPN, including Teachers Service Commission (TSC); 349,000 teachers under TSC have been issued UPN.
    - Phase 3: issue UPN to all Commissions and Independent Offices, State Corporations, Public Universities, and Agencies by July 2024.
  - Objective: roll out UHR for entire Public Service by July 2024.
- Collective Bargaining Agreements: SRC to progressively review allowances and benefits in future agreements and align to Allowances Policy Framework for Public Service.

### Public investment management (PIM) and procurement reforms
- Project rationalization:
  - Cabinet decision to review 437 stalled or underperforming projects; MDAs submitted analyses to NT, expected finalization end-February 2024.
  - NT to table cabinet memo recommending suspension, continuation, or cancellation; issue circular to prioritize funding for projects in FY2024/25 budget and beyond.
- PIMIS operationalization:
  - Pilot in roads, infrastructure, health, and education sectors.
  - PIMIS to be populated with all ongoing and new projects (including PPPs) and cover all sectors by end-June 2024.
  - PIM department to expand with additional staff by March 2024.
- Public procurement reform:
  - Acquisition of end-to-end e-Government Procurement (e-GP) System; piloting in twelve (12) MDAs.
  - Full roll-out of new e-GP system to all MDAs from July 2024.
  - Interim use of IFMIS e-Procurement module until e-GP fully rolled out.

### Public Finance Management (PFM) reforms and milestones
- Expenditure control and legal/procedural reforms:
  - By end-June 2024, Cabinet Secretary to submit proposal to National Assembly to enhance legal procedures for use of supplementary appropriations under Article 223.
  - By end-April 2024, enhanced IFMIS will enable registration of all multi-year commitments in IFMIS and updated PFM regulations 2015 (article 56); MDAs to register multi-year commitments starting with FY2024/25 Budget.
- Extra-Budgetary Units (EBUs) review:
  - By end-March 2024, prepare updated and complete list of EBUs following GFSM 2014.
  - By end-December 2024, complete comprehensive review of EBUs and submit report to Cabinet with recommendations.
- PFM reform strategy:
  - NT to approve PFM reform strategy 2023–28 by end-February 2024 to provide roadmap for strengthening budget credibility, transparency, and integrating cross-cutting policies.

### Fiscal risk management and contingency planning
- Fiscal Risk Committee (within National Treasury) established; inaugural meeting December 2022; last meeting October 31, 2023; will hold quarterly meetings.
- Plan to expand fiscal risk statement for FY2024/25 to include climate change-related risks (¶64).
- Contingency planning:
  - Any tax revenue shortfall relative to program targets to be compensated by additional revenue policy measures drawn from MTRS work (with IMF support).
  - Ready to further curtail non-critical spending if necessary to offset spending pressures.

*Source: 1kenea2024001 - 14.*

### 30.      We are taking decisive steps to ensure that decisions on domestic fuel prices are

### 30.      We are taking decisive steps to ensure that decisions on domestic fuel prices are 

### Fuel pricing and Petroleum Development Fund governance
- Eliminated overall subsidies on March 15, 2023, and cross-subsidies on May 15, 2023.
- Established a taskforce in October 2023 (members from NT, Ministry of Energy and Petroleum, and EPRA) to review the fuel pricing mechanism and provide recommendations to align fuel pricing decisions with budgeted resources.
  - Taskforce findings publicly communicated on December 11, 2023 through a press release.
- National Treasury and Ministry of Energy intend to perform and publish an assessment of the governance structure of the Petroleum Development Fund and recommend actions to strengthen its management (proposed end-March 2024 SB).
- Commitment to transition to a low-carbon economy by avoiding fossil fuel subsidies going forward, consistent with requests for access under the IMF’s Resilience and Sustainability Facility (RSF).

### Budgeting, accounting, and IFMIS reforms
- In Kenya, budgets are appropriated on an annual basis; commitments within a Financial Year are reversed at the end of the Financial Year and recaptured at the beginning of the subsequent FY as opening balances.
- Government of Kenya currently uses cash basis of accounting.
- IFMIS captures annual commitments which lapse at the end of a FY; IFMIS has implemented commitment controls based on annual cash plans.
- IFMIS Cash Planning module enables entities to manage expenditures and provides visibility of monthly commitments within a fiscal year.
- Proposed SCOA migration based on GFSM 2014 supports accrual accounting.
- Implementation of budget reforms such as budget costing and planning module in IFMIS will enhance realistic medium-term budgeting and expenditure commitments through the cash plans.
- Hyperion Planning module will be able to lock in the medium-term projections and commitments.

### Implementation of the 2023 Medium-Term Debt Management Strategy (MTDS)
- Key components and actions:
  - Reducing domestic refinancing risks:
    - Ratio of Treasury bonds to Treasury bills increased from 85:15 in December 2022 to 88:12 in September 2023.
    - Average time to maturity of outstanding Treasury bonds declined to 7.4 years from 8.9 years in December 2022.
  - Primary reliance on concessional external financing for financing the FY2023/24 fiscal deficit.
    - Negotiating with the World Bank to increase expected Development Policy Operations lending and funding under Performance for Results.
    - Resources from the Africa Development Bank expected to be Euro 88 million.
    - Rolling over of the Eurobond maturing in 2024 is a major challenge; processes underway.
    - National Treasury procured international lead managers and counsels in September 2023 to pave the way to tap the international bond market when opportune.
    - Pursuing alternative sources from multilateral and bilateral lenders and the syndicated loans market; issued a mandate and close to concluding negotiations with Trade Development Bank for a syndicated loan arrangement.
  - Strengthening the legal framework for PFM:
    - Amended 2012 PFM Act replaced nominal debt limit of Ksh.10 trillion with a debt anchor at 55 percent of GDP in present value (PV), with an allowance of ±5 percent; Cabinet Secretary required to submit to Parliament a written explanation when the debt anchor is breached.
    - Forming a taskforce (Attorney General's Office, CBK, Parliamentary Budget Office, NT) to present recommendations through PFM regulations or legal measures on an operational framework for achieving the debt anchor by end-March 2024.
    - Intend to strengthen the functions of the Parliamentary Budget Office to assess macro-fiscal forecasts, monitor debt dynamics, and periodically report to the National Assembly and public on achievement of the debt anchor.
    - Will adopt a well-defined escape clause and correction mechanism.
  - Broadening reporting of State Corporations (SCs) non-guaranteed debts (excluding debt to government already captured):
    - In the Public Debt Management Report (PDMR) of FY2022/23, reported debt information from various SCs as at end June 2023.
    - Twenty-five (25) out of 260 SCs had non-guaranteed debt amounting to Ksh.111,805 million (0.8 percent GDP).
    - National Treasury wrote to all SOEs to submit debt status; 53 responded with only 25 indicating outstanding debts.
    - Implementing Government Investment Management Information System (GIMIS) to digitize and ease collection of public finance statistics; over the medium-term coverage and reporting of SCs’ outstanding debt expected to improve significantly.
  - Reforms to deepen domestic debt securities market:
    - Deployed new Central Securities Depository System (CSD) to transact directly in primary and secondary markets and enable launch of an active horizontal repo market to increase liquidity.
    - Will support operationalization of an over-the-counter automated exchange to complement the broker-intermediated Nairobi Securities Exchange to promote trading transparency and settlement efficiency, attract capital, and eventually reduce yields and cost of new public debt issuance.

### Public Private Partnerships (PPPs)
- Will carefully evaluate costs and risks associated with PPPs; ensure only projects with the highest socio-economic returns are chosen and fully integrated into the PIM planning and monitoring framework.
- NT to develop a joint PIPM-PPP Framework by December 2023 in alignment with PFM (PIM) Regulations, 2022; framework to establish a high-level committee of General Directors of the NT to determine the most suitable procurement method for large public projects (traditional on-budget procurement or PPP).

- PPP Directorate actions:
  - Strengthen reporting on risks in collaboration with contracting authorities and in alignment with the PPP Act.
  - Maintain an online public register of all active PPP projects and publish summaries of all PPP contracts and the contracts themselves, excluding confidential or protected information.
  - Submitted the 2nd Annual Report on the State of Public Private Partnerships in Kenya for FY2022/23 to Parliament, including Fiscal Commitments and Contingent Liabilities for PPP Projects.

### Pension reform
- Introduced on January 1, 2021 a funded contributory pension scheme for public sector employees: Public Service Superannuation Scheme (PSSS).
- Will monitor and completely separate and delink governance of the 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 facilitate timely pensions payments; re-engineering to provide an end-to-end ERP solution.
- Conduct an actuarial valuation of future obligations of the non-contributory defined benefits pension scheme by December 2024.

### State-Owned Enterprises (SOEs) policy priorities and FY2022/23 support
- New SOE policy priorities: accelerated privatization process; streamlined governance structures with clear roles; more efficient utilization of budgetary resources; better management of fiscal risks; enhanced accountability.
- SOE sector continued to require extraordinary support in FY2022/23; cumulative support over FY2021/22 and FY2022/23 remained within provided program space.
  - Supplementary Budget for FY2022/23 provided Ksh.19 billion for Kenya Airways (KQ) (excluding servicing of guaranteed external debt) and Ksh.2.358 billion for Kenya Power and Lighting Company (KPLC).
  - Actual support was Ksh.10 billion to KQ.
  - Government serviced KQ’s guaranteed senior external debt, paying US$95 million in FY2022/23 on KQ’s behalf.
  - Both KQ and KPLC enjoy moratorium on debt service for amounts owed to government.
- KQ currently has negative equity; KPLC faced financial challenges including debt servicing but liquidity position improving with Action Plan implementation.
- Government evaluating strategies to turn around KQ with minimal budgetary implications and least fiscal impact.

### SOE financial evaluations and fiscal risk monitoring
- Earlier financial evaluations identified cumulative Ksh.383 billion liquidity gap over five years for 18 SOEs (excluding Kenya Airways); gap expected to be primarily covered via SOEs’ cost-saving measures reflected in FY2021/22 results.
- National Treasury updating financial evaluation by end-June 2024 for fifty State Corporations (SCs) using FY2022/23 audited accounts to quantify fiscal risks; outcome to be reported to the Fiscal Risk Committee by end-June 2024 (SB).

### Kenya Power and Lighting Company (KPLC) Action Plan and measures
- Action Plan to restore KPLC’s medium-term profitability and cover liquidity gaps (end-December 2022 SB) approved by Cabinet on May 16, 2023; implementation underway.
- On November 10, 2023 KPLC shareholders approved amendment to memorandum and articles to provide private sector fair representation on the board:
  - Class A: Ordinary Shares held by Shareholders other than those held by the National Treasury.
  - Class B: Ordinary Shares held by the National Treasury.
  - Holders of Class A shares (49.9 percent) entitled to elect four (4) directors.
  - Holder of Class B/The National Treasury shares (50.1 percent) entitled to appoint five directors.
  - Board established a Nomination Committee; onboarding of new directors based on identified competencies and skill gaps; use of independent consultants for nominations.
- KPLC commitments under the Action Plan:
  - By end-December 2024, transfer all transmission assets/lines to Kenya Electricity Transmission Company (KETRACO) and pay through on-lent loans from the government 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 current 22.4 percent to 14.4 percent by end-June 2025 (broken down into reduction of 5 percent on commercial losses, 2 percent on technical losses and 1 percent on transmission losses).
  - By end-December 2024, establish a new governance structure at KPLC to give private shareholders fair representation reflecting the shareholding structure.
- Estimate: with support from the new tariff structure, continued passthroughs of variable costs, and effective and timely implementation of the Action Plan, KPLC’s liquidity gap will see an accelerated reduction by FY2025/26, excluding any major investments in new assets, and its quick ratio will improve to unity.
- No envisaged risks from KPLC’s restructuring on KETRACO and REREC.

### Kenya Airways Plc (KQ) financial position and restructuring
- KQ recorded a lower operating loss in 2022 of Ksh.5.6 billion driven by revenue growth despite increases in direct operating costs.
- Passenger numbers increased by 68 percent to 3.7 million in 2022; capacity increased by 75 percent, though both not yet at pre-Covid-19 levels.
- Increased fuel prices and forex losses on a depreciating Kenyan Shilling caused a large provision on dollar-denominated loans; net losses rose from Ksh.16 billion in 2021 to Ksh.38 billion in 2022.
- In first six months of 2023, KQ recorded operational profit but net losses due to FX losses.
- As of end-June 2023, KQ had total outstanding liabilities of Ksh.302 billion, including government claims on past and ongoing support; Ksh.177 billion long-term liabilities; short-term liabilities Ksh.125 billion (composition: fuel 14 percent, landing fees 39 percent, leases 16 percent, payroll 13 percent, taxes/statutory dues 17 percent).
- Company in a negative equity position of Ksh.133 billion.
- Detailed business restructuring action plan (May 2022) put on hold to reassess least-cost approach for budget.
- Government objective that KQ be weaned off budgetary support by December 2023; Ministry of Roads and Transport and NT instructed in November 2022 to review restructuring strategies and recommend optimal strategy with least fiscal impact.
- Draft Cabinet Memorandum with strategic options submitted May 2023; Cabinet made suggestions for further discussions.
- Decision expected by end-April 2024 (proposed SB); new plan to be implemented and financial resources committed if needed within fiscal consolidation path to reduce Kenya’s PV of overall debt to GDP to 55 percent by 2029.
- Meanwhile, 2023 government financial support limited to payments under guaranteed senior external debt.

### Government actions to stem fiscal risks from KQ investment
- Novation of government guaranteed loans totaling about US$485.5 million (current balance: about US$365 million) completed; GoK effectively taken over the loan and continues to service obligations.
- Government directed KQ to onboard a consultant to support onboarding an equity investor; procurement of the consultant in final stage and should be completed by end of December 2023 with aim of closing deal by end of June 2024.
- Exploring a privatization mechanism consolidating target companies and setting up a fund to manage them; engaging consultants who delivered a similar model in Romania to advise; model meant to package both profit-making and loss-making entities to share interest; decision on the model by end of June 2024.

_Italic: Source: 1kenea2024001 - 30.      We are taking decisive steps to ensure that decisions on domestic fuel prices are_

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

### 1kenea2024001 - 44.      Rationalization  of  the  SCs  portfolio  will  be  prioritized  going  forward  and  we  remain

### Rationalization of State Corporations (SCs) portfolio and governance
- Revise ongoing strategy (Blueprint) to align with new policy priorities to efficiently integrate and sequence reform measures across the broader SCs reform agenda.
- By end-January 2024: secure Cabinet approval and publication of an updated inventory and a new classification of SCs to apply across government, in line with the National Treasury Strategy for Improving Financing Oversight of State Corporations (proposed SB).
- Continuous disclosure: upload audited financial statements and annual reports of SCs as received from the Auditor General. By end-August 2023, uploaded audited financial statements and annual reports for FY2020/21 of 60 SCs and FY2021/22 reports of the 42 largest SCs.
- Uploaded FY2020/21 and FY2021/22 Annual Performance Contracting Evaluation Reports of the SCs and will continue to upload such annual reports.
- Under Government Investment Management Information System (GIMIS): developed a loans module to capture disbursements and repayments of SC loans data.
  - By end-June 2024: develop an 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 from SCs, including guarantees and contingent liabilities. Technical assistance support will be needed.
- 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.
- Ownership Policy for Government Owned Enterprises (GOEs):
  - Approved by Cabinet on November 3, 2023, and published subsequently in the same month (end-October 2023 SB).
  - Details a new governance architecture and legal ecosystem to improve performance and transparency, centralizing ownership and oversight functions in NT, outlining government rationale for state ownership, strengthening Boards of Directors’ mandate while safeguarding them from political influence, and establishing guiding principles for SCs’ public service obligations.
- Legal reforms roadmap:
  - Begin work on legal reforms necessary to anchor new ownership arrangements, corporate governance requirements, and measures in the Ownership Policy, the SOE Blueprint and the SOE Strategy, assisted by Fund TA.
  - Submit a draft GOE Bill and other necessary legal amendments to the National Assembly, once approved by Cabinet, by end-May 2024 (proposed SB).
- Comprehensive assessment of national government’s continued involvement/investment/funding in SCs and government-linked corporations (GLCs):
  - Start with 50-100 SCs, based on selection criteria.
  - NT will prepare a report that will (i) include specific recommendations for privatization and/or divestment, as well as for mergers, liquidations or dissolutions, transfers to counties and reversions to government departments, (ii) identify and propose solutions for main legal and operational challenges and bottlenecks to implement the recommendations, and (iii) establish a time-bound action plan for execution.
  - The report will be published and submitted to the National Assembly by end-October 2024 (SB).
  - Continue triennial assessments as mandated by Section 89(3) of the PFM Act.

### Government investments regulations and privatization
- Government investments regulations:
  - Prepare regulations to govern budgetary resource allocation to government investments; monitoring performance of such investments; and management of fiscal risks emanating from those investments.
  - By end-June 2024: submit the regulations to the National Assembly for approval.
- Privatization efforts:
  - Privatization Bill 2023 enacted into law (Privatization Act, 2023); Privatization Act 2005 repealed.
  - Expectation that privatization processes will be streamlined and carried out more efficiently under the new law.
  - Next five-year Privatization Program under the new law to be approved by Cabinet and submitted to the National Assembly by end-December 2023.

### Monetary policy: objectives, recent stance, and reforms
- Policy objectives:
  - Maintain headline inflation within target range 5±2.5 percent.
  - Maintain a flexible exchange rate regime.
  - Further improve the monetary policy framework.
  - Monetary policy consultation clause (MPCC) with a 5 percent ±2.5 percent band; consultation with IMF Executive Board triggered if inflation falls outside the band (TMU ¶24).
- Recent monetary stance and inflation dynamics:
  - Tightened monetary policy over past one and half years to maintain price stability consistent with inflation target.
  - Headline inflation decelerated to 7.3 percent in July (first time within target band since June 2022) from a peak of 9.6 percent in October 2022.
  - Overall inflation declined to 6.9 percent in October and to 6.8 percent in November 2023; inflation remains sticky in upper part of target band since July due to elevated energy prices.
  - Central Bank Rate (CBR) increased by 550 basis points cumulatively since May 2022, of which 375 basis points in 2023.
  - Non-food, non-fuel inflation declined from a peak 4.4 percent in March 2023 to 3.3 percent in November 2023.
- Forward guidance and risks:
  - Expectation that food contribution to headline inflation will decline with agricultural recovery; fuel price pressures expected to remain in near term.
  - Overall expectation that inflation will largely remain within the target band but risks include international oil price shocks and exchange rate passthrough.
  - Commitment to adjust monetary policy proactively to mitigate second-round effects from global prices, exchange rate adjustments, and other shocks; ensure monetary policy operations are consistent with program to support macroeconomic stability, government financing needs, external sustainability, and FX reserves adequacy.
- Exchange rate and FX market measures:
  - Support for a flexible exchange rate system as external shock absorber.
  - Kenya FX code issued in March 2023, aligned with Global FX Code; leading principles include Execution, Governance, and Risk Management and Compliance.
  - Two foreign exchange inter-dealer brokers active in the interbank FX market to support price discovery.
  - Banks submitted self-assessments and board approved implementation plans by June 30, 2023; full compliance with Kenya FX code expected by December 31, 2023.
  - CBK issued commitment to Global FX code in July 2023.
  - Implemented an electronic matching system and issued a circular on December 11, 2023, withdrawing the circular setting the 20-cents indicative bid/offer spread in the interbank market and reaffirming market making obligations.
  - Market participants expected to trade FX at freely negotiated rates within prudential limits.
  - CBK commits to maintaining adequate reserves consistent with program objectives and strengthening Kenya’s external buffers.
- Monetary policy framework reforms:
  - Continued progress since removal of interest rate caps in late 2019, anchored on July 2021 white paper “Modernization of the Monetary Policy Framework and Operations.”
  - Refining macroeconomic modeling and forecasting frameworks: CBK strengthened forecasting framework and MPC surveys; hosted IMF TA missions on FPAS; focus on quarterly projection model, business surveys, and nowcasting framework.
  - August 9, 2023 MPC adoption: new monetary policy implementation framework based on inflation targeting and introducing an interest rate corridor around the CBR set at ± 250 basis points; interbank rate to closely track the CBR.
  - Discount Window facility adjustments: applicable interest rate reduced from 600 basis points above CBR to 400 basis points above CBR to improve access.
  - Implementation of Centralized Securities Depository System (CSD) DhowCSD: go-live date July 31, 2023; expected benefits include improved monetary policy transmission, operational efficiency, market deepening, STP, full transfer of collateral for repo transactions, and enhanced liquidity distribution.
  - Completed review of commercial banks’ risk-based loan pricing models to improve transmission to bank lending rates.
  - Continued efforts to adapt and improve monetary policy communication.

### Financial sector: objectives, conditions, and reforms
- Policy objectives:
  - Safeguard financial stability and expand access to affordable finance.
  - Promote sustainability and resilience of the Kenyan financial sector 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 private sector expanded broadly steadily during pandemic and accelerated with recovery; moderated recently with tightening financial conditions.
  - Credit Guarantee Scheme (CGS), launched December 2020 for MSMEs: total loans extended stood at KSh.6 billion as September 2023.
  - Ratio of gross non-performing loans (NPLs) to gross loans: 15 percent in September 2023 compared to 13.7 percent in September 2022.
  - Outstanding restructured loans amount to about 7    percent of gross loans with about 90 percent of the restructured loans performing as per restructured terms.
  - Credit risk expected to remain elevated in short and medium term; banks exposed to interest rate and FX risks from rising rates and exchange rate depreciation pressures.
  - CBK stress tests focus on credit risk, FX risks, and climate change risks from drought shock; results show banking sector resilience to major shocks from credit and climate change risks.
  - Current capital, liquidity and provisioning levels are adequate; enforcement of compliance continues via onsite and offsite surveillance.
- Strengthening resilience and supervision:
  - Preserve capital and liquidity buffers; closely monitor FX exposures to strengthen financial system resilience.
  - Encourage banks to strengthen governance and business models, pursue mergers and acquisitions, and other capital strengthening efforts.
  - Monitor FX loans, deposits, and on- and off-balance sheet exposures to identify potential liquidity risks and strengthen contingency policies.
  - Conducted FX liquidity stress tests and shared results with IMF.
  - Received IMF TA in June 2023 to develop Internal Liquidity Adequacy Assessment Program (ILAAP) Guidelines.
  - Planned guidelines will include currency differentiated Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as monitoring tools.
- Financial stability policy framework and TA:
  - Intend to request an IMF Financial Sector Stability Review (FSSR) expected to start in May 2024 to provide a diagnostic review of key financial sector components, including regulation, supervision, safety nets, and financial statistics.
  - CBK to develop by end-June 2024 a macroprudential policy strategy covering existing powers and tools; request dedicated IMF TA.
- Ongoing reform momentum under CBK’s Banking Sector Charter:
  - Banking Sector Resilience: increased consolidations and combinations; regional expansion including acquisitions in Democratic Republic of Congo, Rwanda, and Tanzania; microfinance banking sector transformation via acquisitions mobilizing additional capital.
  - Central Bank of Kenya (Amendment) Act, 2021 on Digital Credit Providers (DCPs):
    - Became effective December 23, 2021; empowered CBK to license, regulate and supervise DCPs.
    - CBK Digital Credit Providers Regulations, 2022 operationalized March 18, 2022; unregulated DCPs required to apply for license by September 17, 2022 or cease operations.
    - As of September 2023, 32 DCPs had been granted licenses.
  - Greening Kenya’s Banking Sector:
    - October 2021: issued Guidance on Climate-Related Risk Management to support banks in managing climate-related risks and mobilizing finance for climate action, aligned to Nationally Determined Contribution (NDC).
    - Capacity building workshops February–March 2022.
    - By end-June 2022, all banks submitted Climate-Related Risk Management Implementation Plans; quarterly progress reports submitted since end-September 2022.
    - As part of RSF-related reforms (completion date of April 7, 2024 (7th EFF/ECF Reviews)), CBK is developing a draft green finance taxonomy adapted to Kenya’s updated NDC to be circulated for stakeholder consultation (see ¶67).

*Source: 1kenea2024001 - 44. Rationalization of the SCs portfolio will be prioritized going forward and we remain (excerpt).*

### 57.      We have taken steps to strengthen AML/CFT risk-based supervision for banks.  Using

### 1kenea2024001 - 57.      We have taken steps to strengthen AML/CFT risk-based supervision for banks.  Using

### AML/CFT risk-based supervision for banks
- Conducted sectoral and institutional risk assessments for all reporting institutions under the CBK to determine their ML/TF risk profiles using AML/CFT offsite supervision tools.
- Institutional risk assessment results have been used to inform development of risk-based AML/CFT onsite inspection plans for all institutions from June 2023 onwards.
- CBK has fully separated its prudential and AML/CFT supervisory functions and completed ten stand-alone AML/CFT onsite inspections since January 2023.
- Implemented a stand-alone AML/CFT supervision manual to inform a risk-based approach; manual includes a new enforcement strategy covering administrative sanctions, monetary penalties, and directives to undertake corrective actions in view of changes introduced by the AML/CFT (Amendment) Act 2023.
- Continued implementation of measures to enhance AML/CFT risk-based supervision informed by the Kenya Mutual Evaluation Report 2022 recommendations and findings of the updated National Risk Assessment.

### Governance: Access to information and operationalization
- Access to Information Regulations were republished in October 2023 and resubmitted to Parliament, awaiting final approval; approval is anticipated by April 2024.
- Will develop, with an initial focus on debt, budget, tax expenditures, PPPs, and procurement:
  - (i) a methodology to monitor implementation progress of access to information at the national and county levels, and
  - (ii) information standards to guide proactive provision of information and processing information requests.
- Will develop Standards for the Digitization and Automation of Records and work with county governments to advance legislative actions needed to give full force and effect to the access to information framework.

### Beneficial ownership transparency in public procurement
- As of September 2023, 842 out of over 33,000 procuring entities had registered with the Public Procurement Information Portal (PPIP).
- PPRA issued two circulars in 2023 reminding procuring entities of obligation to upload awarded contracts containing beneficial ownership information to the PPIP.
- Configured PPIP to require capturing of beneficial ownership information before publication of a contract.
- As of November 2023, a total of 13,003 contracts worth Ksh.355 billion have beneficial ownership information published through the PPIP.
- PPRA conducted 13 trainings for 569 procuring entity users in 2023; developed a training calendar to expand access to training resources.
- Expect compliance to improve further as we approach the end of FY2023/24 by the end of June 2024.

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

### Audit follow-up and accountability
- Will take steps to enhance follow up and implementation of the Auditor-General’s audit findings and recommendations, including audits of COVID-19 spending.
- Will explore measures to:
  - (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.
- Will enhance coordination during the Parliamentary review process of audit reports to strengthen follow up and implementation of Parliamentary recommendations.

### Asset declarations and conflict of interest framework
- Finalized review to align asset declarations and conflict of interest legal framework with international standards and best practices.
- A draft Conflict of Interest Bill was approved by Cabinet and submitted to Parliament in March 2023.
- If enacted in its current form, the Conflict-of-Interest Bill would require high-level officials to:
  - (i) file information regarding disclosure of interests (including financial, contractual and corporate) and assets beneficially owned;
  - (ii) enable online publication of declarations of assets, including assets beneficially owned, and conflict of interest — except confidential data for personal and family safety and privacy reasons (e.g., account numbers, personal identification numbers);
  - (iii) impose dissuasive sanctions to prevent noncompliance, including filing of inaccurate information.
- Will work to achieve full automation of asset declarations for all public officials.

### Ethics and Anti-Corruption Commission (EACC) asset recovery (2018–2023)
- Recovered assets, both movable and immovable, valued at roughly Ksh.23.74 billion (US$200 million).
- Efforts to forfeit corruptly acquired assets worth about Ksh.40.78 billion (US$350 million), currently in litigation across Kenyan courts.
- Completed 33 investigations into illegally acquired and unexplained wealth in the last fiscal year.
- Initiated 24 civil recovery lawsuits targeting assets worth Ksh.7.78 billion (US$60 million).
- Asset recovery of approximately Ksh.940 million (US$8 million) through legal and alternative dispute resolution channels.
- Examining ways to strengthen Mutual Legal Assistance and broader International Cooperation frameworks and consider strengthening EACC’s team to function effectively within existing MLA and IC frameworks.

### Judiciary capacity to adjudicate corruption-related cases
- In October 2022, 127 special magistrates with mixed jurisdiction were appointed to oversee corruption and economic crimes cases at the lower level to address backlog; training remains a priority.
- The Anti-corruption and Economic Crimes Division is a specialized court within the High Court handling corruption-related cases.
- Delays in court cases are being addressed through Court Users Committee and Bar Bench, though more High Court judges need to be appointed for more effective case management.
- Working towards putting in place video conference and filming capabilities in courtrooms despite shortages in digital equipment and infrastructure.

### Supplementary budget accountability
- Will provide accountability and transparency on supplementary budget spending by MDAs to ensure consistency between expenditure plans and outcomes.
- Facilitated the Auditor-General with necessary support and access to 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.
- The audit was completed in November and the report was published in December (end-September 2023 SB).

### AML/CFT framework strengthening and related measures
- Strengthening the AML/CFT legal framework in line with FATF standards:
  - AML/CFT (Amendment) Act 2023 entered into force in September 2023; revises 17 pieces of legislation to address shortcomings identified in ESAAMLG’s 2022 Mutual Evaluation Report, including broadening powers of AML/CFT supervisors and introducing beneficial ownership-related obligations and TF preventive measures.
  - Gazetted new implementing regulations in October 2023: Proceeds of Crime and Anti-Money Laundering Regulations (POCAMLR), Prevention of Terrorism (Implementation of the United Nations Security Council Resolutions on Prevention and Suppression of Terrorism) Regulations, and POCAML (Criminal Assets Recovery Fund) Regulations.
  - Published CFT/CPF-related regulations in November 2023.
- Strengthening beneficial ownership transparency of companies and other legal persons:
  - Electronic register (e-register) live since October 2020; as of end-September 2023, BRS’ efforts resulted in a 44.6 percent compliance rate for existing companies submitting beneficial ownership information.
  - Existing companies are expected to be fully compliant by end-June 2024.
  - BRS will conduct further outreach activities in 2023Q4 and then begin to strike off non-compliant companies and prevent access to BRS online services until submission requirements are met.
  - AML/CFT (Amendment) Act 2023 provides BRS with additional administrative sanctioning and strike-off powers.
  - BRS finalized amendments to the Companies Beneficial Ownership Regulations and drafted new Limited Liability Partnerships (Beneficial Ownership Information) Regulations; both were gazetted in October 2023.
  - Envisaged amendments will provide access to beneficial ownership information for AML/CFT reporting institutions and their regulators.
- Addressing key deficiencies and capacity building:
  - Almost fully completed all 16 items of the high-level action plan to address deficiencies highlighted in the 2022 MER.
  - Conducted five sectoral ML/TF risk assessments and aiming to complete updating of the NRA before end-December 2023.
  - Revised supervision manuals to introduce a risk-based approach; all AML/CFT supervisors started to undertake stand-alone AML/CFT supervision.
  - FRC commenced inspections of casinos and real estate agents and started a registration drive to increase registrations of DNFBPs.
  - Developed tools to strengthen parallel financial investigations and exchange of financial intelligence; awaiting confirmation to join the Egmont Group of Financial Intelligence Units in Q1 2024.
  - Continued AML/CFT capacity building initiatives for competent authorities and reporting institutions on MER and NRA deficiencies and will conduct additional trainings on sectoral risk assessment findings.

### Building resilience to climate change and green reforms
- RSF-supported reforms progress:
  - Under Reform Priority 4: Strengthening disaster risk reduction and management: adoption of a National Framework for Climate Services (RM1) completed with Cabinet approval of the cabinet memorandum; Kenya recognized by WMO in the IGAD region for adopting the framework and implementation roadmap.
  - Three IGAD member states and Sierra Leone have requested technical assistance from Kenya.
- Climate analysis and PFM integration:
  - To include long-term climate scenarios in the fiscal risk statement (RM2) requested timely assistance from the IMF; will publish results in FY2024/25.
  - Integration of climate change and disaster risk methodology in project appraisal (RM5) on track but requires additional technical assistance.
  - Development of Kenya’s Green Growth Index (GGI) and Sovereign Green Bond Framework has been completed.
  - Climate sensitive expenditures have been tagged for climate budgeting (RM8); supported by ongoing work on green taxonomy and green infrastructure reforms.
- Electricity sector reform and green incentives:
  - Progress on approving net metering and open access regulations (RM7); draft net metering regulations circulated for public consultation with aim of gazetting by early 2024.
  - Developed draft open access regulations with World Bank assistance; to be adopted after a Regulatory Impact Assessment.
  - Progress ahead of schedule on adoption of green fiscal incentives in agriculture, water, and land management sectors (RM6); National Green Fiscal Policy Incentives Framework (NGFPF) expected to be adopted before the end of the year.
  - Work progressing on carbon pricing and taxes, subsidies, ecological fiscal transfers (biodiversity credits), research grants, national debt-for-climate and nature swaps framework, and concessional loans; anticipate implementation of carbon pricing in line with IMF recommendations (RM3) could take longer than originally envisaged.
  - World Bank to assist with options for recycling proceeds from carbon taxes towards social protection, biodiversity/ecosystems protection, landscape restoration, Financing Locally Led Climate Action (FLLoCA), resilience building, and climate proofing of assets.
- Green finance taxonomy and disclosures:
  - As a first step towards developing a green finance taxonomy (GIFT) for Kenya (RM4) and issuing guidelines for climate-related disclosures in the banking sector (RM9), CBK completed a review of international experiences and approaches.
  - Working with European Investment Bank (EIB) to complete a diagnostic review of the Kenyan financial system’s existing green taxonomy and disclosures by end-June 2024; initial consultations with commercial banks have started.
- Financing Locally Led Climate Action (FLLoCA) Program:
  - Targets local communities and channels pooled resources from national departments, county governments, and development partners (World Bank, KfW Development Bank, governments of Denmark, Sweden, and the Netherlands) directly to counties via performance-based PforR conditional transfers (County Climate Institutional Support (CCIS) and County Climate Resilience Investment (CCRI)).
  - Typical activities: agricultural adaptation, community-led water management, natural resource management, catalyzing investments in local green enterprises, disaster risk management.
  - Achieved through policy, legal and regulatory reforms at national and county levels; capacity strengthening; increased access to climate finance; support to community-led initiatives; green technology diffusion; enhanced transparency and accountability; and prediction, preparation and prevention of climate-related emergencies, shocks and disasters.

### Other initiatives: interim oil import arrangement (April 2023)
- Introduced a new oil import arrangement in April 2023 to ease FX pressures; replaced the previous open tendering system where oil import dues were payable upon five days of delivery.
- New arrangement based on a master framework between Kenya and three national oil exporters from the Gulf provides for six-month credit for oil imports, backed by letters of credit issued by participating commercial banks.
- In the first 6 months, actual average monthly import volumes fell short of the monthly minimums agreed under the arrangement due to lower demand domestically and from regional reexports markets.
- Initial agreement was extended for another twelve months to December 2024 with more favorable costing terms; the extension reduces the risk of materialization of contingent liabilities due to shortfall in actual imports.
- Government intends to exit the oil import arrangement due to market distortions and increase in rollover risk of private sector financing facilities supporting it, and remains committed to private market solutions in the energy market.
- Committed that all FX conversions done as part of the oil scheme will be done at market rates.
- Will amend regulations on the fuel pricing formula to specify passthrough of the exchange rate risk component and any other risks that may materialize.

*Source: 1kenea2024001 - 57. We have taken steps to strengthen AML/CFT risk-based supervision for banks. Using (IMF PDF).*

### 74.      Policy objectives. We view the production and dissemination of high-quality economic

### 1kenea2024001 - 74. Policy objectives. We view the production and dissemination of high-quality economic

### Policy objectives
- Production and dissemination of high-quality economic statistics are viewed as the foundation for evidence-based decision making for good policy formulation, monitoring and evaluation.
- Commitment to continue improving availability, quality, coverage, and timeliness of statistics.

### Data coverage, quality, and timeliness
- New statistical censuses and sample surveys undertaken or released:
  - 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
- National accounts statistics:
  - Released in September 2021, updated to a base period of 2016.
- International Investment Position:
  - Inaugural release in May 2023 covering 2015 to 2021.
- Household Expenditure Survey:
  - Preparing to undertake next survey; was delayed due to COVID-19.
- Government Finance Statistics (GFS) interdepartmental committee:
  - Reassembling the committee to revitalize and enhance capabilities.
  - Expected outputs (timing and scope):
    - (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.
    - (iv) Review the GFS Public Sector Institutional Table by end-February 2024 to refine the list of extra-budgetary units with a view to expand coverage of quarterly statistics to central government by end-March 2024.
- Central Bank of Kenya (CBK) survey activity:
  - Introduced a new survey of agriculture sector in July 2022 to generate high frequency agriculture sector data and complement CEOs, market perception, and hotel industry surveys.
- Balance of payments (BOP) reconciliation plans:
  - Plan to reconcile BOP statistics to properly reflect oil reexports and related imports, and associated financing flows, including those contracted under the oil importation scheme.

### Program monitoring under EFF/ECF and RSF
- EFF/ECF program monitored by periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, and indicative targets as set out in Table 1.
- Structural benchmarks for the EFF/ECF program are set out in Table 2.
- Detailed definitions and reporting requirements are contained in the Technical Memorandum of Understanding (TMU) attached to the memorandum.
- Program restrictions during the program period:
  - Government will not introduce or intensify restrictions on payments and transfers for current international transactions or introduce/modify multiple currency practices without IMF prior approval.
  - Will not conclude bilateral payments agreements incompatible with Article VIII of the IMF’s Articles of Agreement.
  - Will not introduce or intensify import restrictions for balance of payments reasons.
- Review dates:
  - Seventh review on or after May 7, 2024.
  - Eighth review on or after October 30, 2024.
  - Ninth review on or after March 15, 2025.
- Under the RSF arrangement, progress monitored through reform measures detailed in Table 3.

### Key quantitative performance criteria and indicative targets (Table 1) — selected figures
- Units: In billions of Kenyan Shillings, unless otherwise indicated.
- Fiscal targets (Primary budget balance of the national government, - = deficit; floor):
  - 4th Rev. Adjusted: -158.0
  - Outturn: -150.8
  - Status: -83.0 Met
  - 5th Rev. Outturn Status: 63.9
  - 5th Rev. Proposed: ......55.1
  - Proposed: 104.9 156.2
- Tax revenue (floor):
  - 4th Rev. Adjusted: 2,035
  - Outturn: 2,035 1,887 Not met
  - 5th Rev. Outturn Status: 1,058 ......2,428 2,428 1,288
- Monetary targets (Stock of central bank net international reserves (floor, in millions of US$)):
  - 4th Rev. Adjusted: 4,393
  - Outturn: 4,908 5,153 Met
  - 5th Rev. Outturn Status: 3,575 ......3,375 2,422 2,377
- Public debt targets:
  - Public and publicly-guaranteed external payment arrears (in millions of US$, ceiling):
    - 4th Rev. Adjusted: 0 0 0 Met 0 0.51 Not Met 0 0 0
  - New domestic guarantees granted by the central government (ceiling):
    - 4th Rev. Adjusted: 5 50 Met 5 ......5 55
- PV of contracting or guaranteeing of new external debt (ceiling, in millions of US$):
  - 4th Rev. Adjusted: 11,766
  - Outturn: 6,766 2,762 Met
  - 5th Rev. Outturn Status: 13,340 ......14,471 14,471 15,101
- Indicative targets:
  - Priority social expenditures of the national government (floor):
    - 4th Rev. Adjusted: 421 421 441 Met 211 ......426 501 258
  - Change in stock of national government exchequer requests outstanding for 90 days or more (ceiling):
    - 4th Rev. Adjusted: 0 0 0 Met 0 ......0 0 0
  - Ceiling on non-accumulation of net domestic arrears (ceiling, on a cumulative basis within the fiscal year):
    - ..............0......0 0 0
- Monetary policy consultation clause (upper/center/lower band, annual, percentage points):
  - Upper band: 7.5 7.5 7.5 ......7.5 7.5 7.5
  - Center inflation target (annual, percentage points): 5.0 5.0 7.9 Not met 5.0 ......5.0 5.0 5.0
  - Lower band: 2.5 2.5 2.5 ......2.5 2.5 2.5
- Memorandum items for adjustors:
  - Programmed amount of new debt issuance for PV-reducing, debt management operations: 5,000 ...0 ...5,000 ......5,000 5,000 5,000
  - Nominal value of contracting or guaranteeing of new external debt under new PV ceiling (in millions of US$): 16,963 16,963 5,872 ...19,474 ...21,275 21,275 23,200
- Notes and special instructions (selected):
  - For program performance prior to the June 2023 test date, see IMF Country Report Nos. 2022/232, 2022/382, and 2023/266.
  - For program monitoring, calculated as end of period. Excludes encumbered reserves.
  - Targets are cumulative flows from July 1 of each year to June 30 of the following year except for national government exchequer requests outstanding for 90 days or more that are cumulative since July 1, 2020.
  - Cumulative since June 30, 2021 for PV contracting/guaranteeing limit; discount rate of 7 percent used in PV calculations.
  - Compliance on inflation evaluated based on the 12-month annual inflation average of the latest three months.
  - For the purpose of the program, the floor on tax revenue excludes specified tax categories.

### Current and proposed structural benchmarks under the EFF/ECF arrangements (Table 2) — selected measures and timings
- State-Corporations (SCs) Restructuring and Governance:
  - Cabinet approval and publication of an Ownership Policy for SCs describing new governance architecture and legal ecosystem:
    - Target date: End-October 2023
    - Status: Not met, Implemented with delay
    - Macro-Criticality: SOE governance
  - Cabinet approval of strategy options for restructuring Kenya Airways:
    - Target date: End-April 2024
    - Status: Proposed
    - Macro-Criticality: Reduce fiscal risks related to SOEs
  - Cabinet approval and publication of an updated inventory and a new classification of SCs across government:
    - Target date: End-January 2024
    - Status: Proposed
    - Macro-Criticality: SOE governance
  - Submit to Parliament legal amendments to anchor the new SCs Ownership Policy:
    - Target date: End-May 2024
    - Status: Proposed
    - Macro-Criticality: SOE governance
  - National Treasury (NT) to complete financial evaluation for fifty SCs using FY2022/23 audited accounts and report to the Fiscal Risk Committee:
    - Target date: End-June 2024
    - Macro-Criticality: Reduce fiscal risks related to SOEs
  - NT to submit to Parliament and publish a report comprising a comprehensive assessment of national government’s involvement in SCs with recommendations and time-bound action plan:
    - Target date: End-October 2024
    - Macro-Criticality: Reduce fiscal risks related to SOEs
- Budget and Revenue Collection:
  - Review of fuel pricing mechanism, public announcement and constitution of taskforce to oversee progressive elimination of fuel subsidy within first half of FY2022/23:
    - Target date: End-August 2023
    - Status: Not met, Implemented with delay
    - Macro-Criticality: Provide clarity on fuel pricing policy and avoid unfunded subsidy costs.
  - NT to submit to Cabinet strategy to validate outstanding pending bills and clear verified pending bills over the medium term:
    - Target date: End-September 2023
    - Status: Not met. Proposed to be reset to end-February 2024
    - Macro-Criticality: Strengthen budget practices and address outstanding arrears
  - NT to submit to Parliament a supplementary budget for FY2023/24 with tax measures:
    - Target date: End-October 2023
    - Status: Not met, Implemented with delay
    - Macro-Criticality: Ensure fiscal consolidation consistent with program objectives.
  - Submit draft of the MTRS with implementation plan to Cabinet:
    - Target date: End-October 2023
    - Status: Not met, Implemented with delay
    - Macro-Criticality: Increase compliance and tax revenue
  - NT to strengthen MTRS governance by establishing a Steering Committee at ministerial level:
    - Target date: End-February 2024
    - Status: Proposed
    - Macro-Criticality: Increase compliance and tax revenue
  - NT to release report with procedures and rules for clearance of pending bills and other government arrears:
    - Target date: End-February 2024
    - Status: Proposed
    - Macro-Criticality: Strengthen budget practices and address outstanding arrears
  - NT and Ministry of Energy to assess governance of the Petroleum Development Fund and recommend actions:
    - Target date: End-March 2024
    - Status: Proposed
    - Macro-Criticality: Provide clarity on fuel pricing policy and avoid unfunded subsidy costs.
  - NT to submit to Parliament a second Supplementary FY2023/24 Budget consistent with programmed deficit and revenue targets:
    - Target date: End-March 2024
    - Status: Proposed
    - Macro-Criticality: Ensure fiscal consolidation consistent with program objectives.
  - NT to submit to Parliament a budget and finance bill for FY2024/25 consistent with programmed deficit and revenue targets:
    - Target date: End-April 2024
    - Status: Proposed
    - Macro-Criticality: Ensure fiscal consolidation consistent with program objectives.
- Governance, Anti-Money Laundering, and Anti-Corruption:
  - Submit draft amendments to POCAMLA and POCAMLR to align with FATF standards:
    - Target date: End-June 2023
    - Status: Not met, implemented with a delay
    - Macro-Criticality: Strengthen AML preventive tools to fight corruption.
  - Conduct and publish a special audit on supplementary budgeting mechanisms, including under Article 223 of the Constitution:
    - Target date: End-September 2023
    - Status: Not met. Implemented with a delay
    - Macro-Criticality: Reduce fiscal risks and strengthen budget controls.

### RSF Reform Measures (Table 3) — selected reform measures and target 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.
    - Review/Target: 7th EFF/ECF Reviews (April 7, 2024)
  - RM5: National Treasury to (i) develop standardized climate change and disaster risk methodology for project appraisal, (ii) include climate considerations in project selection criteria, and (iii) reflect analysis use in project documents.
    - Review/Target: 8th EFF/ECF Reviews (September 30, 2024)
  - RM8: National Treasury to implement prototype of climate budget tagging in key climate sensitive sectors, develop guidelines in the FY2024/25 MTEF circular, and publish results.
    - Review/Target: 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 to reflect externalities and achieve emissions reduction targets in line with the updated NDC.
    - Review/Target: 7th EFF/ECF Reviews (April 7, 2024)
    - Note: Implementation of RM3 could take longer than originally envisaged.
  - RM6: National Treasury to adopt priority fiscal incentives in agriculture, water, and land management sectors as listed in draft National Green Fiscal Incentive Policy Framework.
    - Review/Target: 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 to promote energy efficiency and distributed renewable power generation.
    - Review/Target: 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.
    - Review/Target: 7th EFF/ECF Reviews (April 7, 2024)
  - RM9: CBK to (i) adopt a green finance taxonomy adapted to Kenya’s updated NDC reflecting stakeholders’ comments, (ii) issue guidelines for climate related disclosures for the banking sector, and (iii) introduce time-bound targets for implementation of climate disclosure requirements.
    - Review/Target: 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 platform to most vulnerable counties, including ASAL and coastal regions.
    - Status: Met

### Technical Memorandum of Understanding (Attachment II) — selected points
- Location and date: Nairobi, Kenya, December 21, 2023.
- Purpose: Sets out understandings between Kenyan authorities and the IMF regarding definitions of quantitative performance criteria (QPCs) and indicative targets (ITs), their adjusters and data reporting requirements for the EFF and ECF arrangements.
- Definition of National Government (GoK) for program purposes:
  - Corresponds to the budgetary national government encompassing national executive, legislative and judicial powers covered by the National Budget, specifically including Parliament, national judiciary, executive including Ministries, Departments, Agencies (MDAs), and Constitutional Commissions and Independent Offices.
- Quantitative performance criteria established for December 31, 2023; June 30, 2024; and December 31, 2024 cover:
  - Primary balance of the national government including grants, cash basis (floor).
  - Tax revenue of the national government (floor).
  - Stock of net official international reserves (NIR) of CBK (floor).
  - Present value of contracting or guaranteeing of new external debt by the national government and the CBK (ceiling).
  - Accumulation of public and publicly guaranteed external debt arrears (continuous ceiling).
  - New domestic guarantees granted by the national government or assumption of SOE debt not reflected in the primary balance (ceiling).
  - A monetary policy consultation clause (band).
- Indicative targets set for the same dates cover:
  - Change in 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).
- Note on ceiling for PV of new external debt:
  - This unified ceiling replaces separate ceilings on nominal value of contracting and guaranteeing of new external concessional and non-concessional borrowing used in prior reviews, reflecting IMF Debt Limits Policy reforms effective June 30, 2021.

*Source: Attachment II and sections 74–77 of the supplied IMF chapter text.*

### 5.      The national government primary balance on a cash basis is defined as national

### 5.      The national government primary balance on a cash basis is defined as national

### Definition of the national government primary balance (cash basis)
- The national government primary balance on a cash basis is defined as national government revenues and grants minus expenditures and net lending, plus due interest payments.
- For the purpose of the program, any financial support transaction of the national government with and on behalf of SOEs with negative equity as of end-June 2020 would be recorded as a transfer to an entity outside the national government regardless of whether the national government acquires a claim on the SOE.
- All operations such as debt swap or exchange of financial assets between the national government and SOEs with negative equity as of end-June 2020 would be recorded as a reduction in net lending and an increase in grants to SOEs.

### Measurement of the primary balance for program purposes (financing-side, cumulative)
- For program purposes, the national government primary balance on a cash basis will be measured from the financing side as the sum of:
  - (a) the negative of net domestic financing of the national government;
  - (b) the negative of net external financing of the national government; and
  - (c) domestic and external interest payments of the national government.
- The national government primary balance will be measured cumulatively from the beginning of the respective fiscal year until the test date:
  - July 1, 2023, to December 31, 2023 (for end-December 2023 test date),
  - July 1, 2023 to June 30, 2024 (for end-June 2024 test date),
  - July 1, 2024 to December 31, 2024 (for end-December 2024 test date).

### Components: Net domestic financing (defined)
- Net domestic financing of the national government comprises:
  - (1) net domestic bank financing (including items such as credit to the national government from commercial banks and the CBK, including the overdraft facility and on-lending of part of the SDR General Allocation to the national government; changes in bank holdings of national government debt; and drawdown of national government deposits held at commercial banks or the CBK);
  - (2) net domestic nonbank financing (such as changes in non-bank holdings of national government debt and other obligations);
  - (3) proceeds from privatization; and
  - (4) any other borrowing securitized by, or otherwise to be repaid with national government revenue.

### Components: Net external financing (defined)
- Net external financing of the national government at actual transaction exchange rates is defined as the sum of:
  - disbursements of external project loans, including securitization;
  - disbursements of budget support loans;
  - the negative of principal repayments due on all external loans;
  - net proceeds from issuance of external debt;
  - any exceptional financing (including rescheduled principal and interest on external debt);
  - net changes in the stock of short-term external debt; and
  - any change in external arrears including interest payments.

### Components: Domestic and external interest payments (defined)
- Domestic and external interest payments of the national government are defined as the due interest charges on domestic and external national government debt.

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

### Adjustors to the NIR floor and caps on downward adjustments
- Adjustors to the target for NIR:
  - If the total of (i) program loans, (ii) the revenue component of project loans, and (iii) external commercial and semi-concessional borrowing (excluding for payments of principal of existing debt with the proceeds from newly issued debt for debt management purposes (¶20)) exceeds (falls short) the programmed amounts set out in TMU Table 1 below, the target for NIR will be adjusted upward (downward) by the difference;
  - If program grants or the revenue component of project grants falls short of the programmed amounts set out in TMU Table 1, the target for NIR will be adjusted downward by the difference;
  - If foreign exchange outflows related to financial support provided to Kenya Airways exceeds (falls short) the programmed amounts set out in TMU Table 1 below, the target for NIR will be adjusted downward (upward) by the difference;
- Downward adjustments (all measured cumulatively from end-June 2023) in the NIR floor will be capped at:
  - US$325 million for the end-December 2023 test date,
  - US$504 million for the end-June 2024 test date, and
  - US$746 million for the end-December 2024 test date.

### Monitoring currency conversion for NIR
- NIR is monitored in U.S. dollars, and, for program monitoring purposes, assets and liabilities in currencies other than the U.S. dollar shall be converted into dollar equivalent values, using the exchange rates as specified in TMU Table 2.

### Projected program and project loans, grants, commercial borrowing, and foreign exchange outflows related to Kenya Airways (Table 1; US$ millions, cumulative)
- Program grants and loans (excl. IMF):
  - 2023 End-Dec.: 86
  - 2024 End-Jun.: 1,636
  - 2024 End-Dec.: 0
- Program loans (excl. IMF):
  - 2023 End-Dec.: 86
  - 2024 End-Jun.: 1,636
  - 2024 End-Dec.: 0
- Program grants:
  - 2023 End-Dec.: 0
  - 2024 End-Jun.: 0
  - 2024 End-Dec.: 0
- Project loans and grants:
  - 2023 End-Dec.: 416
  - 2024 End-Jun.: 846
  - 2024 End-Dec.: 373
- Project loans (revenue component):
  - 2023 End-Dec.: 357
  - 2024 End-Jun.: 756
  - 2024 End-Dec.: 321
- Project grants (revenue component):
  - 2023 End-Dec.: 59
  - 2024 End-Jun.: 89
  - 2024 End-Dec.: 52
- Commercial and Semi-concessional borrowing:
  - 2023 End-Dec.: 0
  - 2024 End-Jun.: 500
  - 2024 End-Dec.: 0
- Foreign exchange outflows related to KQ support:
  - 2023 End-Dec.: 68
  - 2024 End-Jun.: 124
  - 2024 End-Dec.: 60
- Note: Cumulative from July 1, 2023, for the end-December 2023 and end-June 2024 test dates, and cumulative from July 1, 2024 for the end-December 2024 test date.

### Program exchange rates (Table 2; Rates as of February 4, 2021)
- Kenyan Shillings per currency unit / Currency units per US Dollar:
  - US Dollar: 109.8647 / 1.00
  - STG Pound: 149.8768 / 0.73
  - Japanese Yen: 1.045882 / 105.05
  - Canadian Dollar: 85.7648 / 1.28
  - Euro: 131.9809 / 0.83
  - Swiss Franc: 122.2213 / 0.90
  - Swedish Kronor: 13.0437 / 8.42
  - Danish Kronor: 17.7509 / 6.19
  - Chinese Yuan: 17.0114 / 6.46
  - Australian Dollar: 83.662 / 1.31
  - SDR: 157.464 / 0.70

### Ceiling on accumulation of public and publicly guaranteed external payment arrears
- 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 any applicable contractual grace periods.
- The definition excludes arrears relating to debt subject to renegotiation (dispute or ongoing renegotiation) or rescheduling.
- External debt is defined on a currency basis.
- The performance criterion on the public and publicly guaranteed external debt arrears is defined as a cumulative flow in gross terms from January 1, 2021 and applies on a continuous basis.

### Ceiling on the present value (PV) of contracting or guaranteeing of new external debt — definition of debt
- For program purposes, the definition of debt is set out in paragraph 8(a) of the Guidelines on Public Debt Conditionality in Fund Arrangements attached to Executive Board Decision No.15688-(14/107), adopted December 5, 2014.
- “Debt” is understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of financial and nonfinancial assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
- Primary forms of debt include:
  - (i) loans (including deposits, bonds, debentures, commercial loans and buyers’ credits, repurchase agreements and official swap arrangements);
  - (ii) suppliers’ credits; and
  - (iii) leases (debt is the present value at inception of all lease payments expected to be made during the period of the agreement excluding payments that cover operation, repair, or maintenance).

### Arrears, penalties, and damages
- Under the definition of debt, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt.
- Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Coverage of external debt for the ceiling
- External debt is any debt contracted or guaranteed by the public sector denominated in foreign currency (currency other than the Kenyan Shilling (Ksh.)).
- Public sector external debt includes:
  - foreign-currency denominated obligations of the GoK, and
  - foreign-currency denominated obligations of the CBK contracted on behalf of the national government (excluding newly contracted financing from the IMF and the General SDR allocation).
- A ‘guaranteed debt’ is an explicit promise by the public sector to pay or service a third-party obligation (involving payments in cash or in kind).
- External debts in currencies other than the U.S. dollar will be converted in U.S. dollars at program exchange rates (Table 2).

### Contracting of debt and treatment of credit lines
- A debt is considered contracted when all conditions for its entry into effect have been met, including approval by the Attorney General.
- Contracting of credit lines (which can be drawn at any time and entered into effect) with no predetermined disbursement schedules or with multiple disbursements will also be considered contracting of debt.

### Performance criterion (ceiling) on PV of new external debt contracted or guaranteed
- A performance criterion applies to the present value (PV) of new external debt contracted or guaranteed by the public sector.
- The ceiling applies also to debt contracted or guaranteed for which value has not yet been received, including private debt for which official guarantees have been extended.
- Loan obligations between the GoK and the creditors of Kenya Airlines that (i) replace two guarantees previously provided by GoK to the same lenders; (ii) result in present value savings compared to the debt obligations that GoK would have had to assume had the two guarantees been triggered are excluded from the PC.
- In the calculation of the present value savings, the discounted future stream of payments of debt service due on the newly issued debt instrument (including all costs associated with the operation) will be compared with the discounted future stream of debt service due on the instrument it replaces using a discount rate of 7 percent, the interest rate assumed for rollover of commercial debts in Kenya’s Debt Sustainability Analysis (DSA), and these amounts will not be capped by the nominal value of the debt.

### Present value calculation rules
- The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.
- For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt.
- The discount rate used is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).
- The grant element of external debts in currencies other than the U.S. dollar will be calculated in U.S. dollar terms at program exchange rates (Table 2).
- For any debt carrying a variable interest rate as benchmark plus fixed spread, the PV would be calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract.
- Program reference rate and fixed spreads (remain fixed for the duration of the program):
  - Program reference rate for the six-month US$ Secured Overnight Financing Rate (SOFR) is 0.04 percent.
  - Spread of six-month Euro EURIBOR over six-month US$ SOFR is -56 basis points.
  - Spread of six-month JPY Overnight Indexed Swap (OIS) over six-month US$ SOFR is -8 basis points.
  - Spread of six-month GBP SONIA over six-month US$ SOFR is 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.
- Where the variable rate is linked to a benchmark other than six-month US$ SOFR, a spread reflecting the difference between the benchmark rate and the six-month US$ SOFR (rounded to the nearest 50 basis points) will be added.

### Debt Management Operations (DMOs)
- Debt Management Operations are defined as the repayment or refinancing of the principal of outstanding external public debts prior to or at their maturity dates.
- The programmed issuance of non-concessional debt for use in DMOs is shown as a memorandum item in Table 1 of the accompanying Memorandum of Economic and Financial Policies.

### Adjustors to the debt ceiling
- An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies to this ceiling, in case deviations from the performance criterion on the PV of new external debt are prompted by a change in the financing terms (interest, maturity, grace period, payment schedule, upfront commissions, management fees) of a debt or debts.
- The adjustor cannot be applied when deviations are prompted by an increase in the nominal amount of total debt contracted or guaranteed.

### Additional adjustments to the debt ceiling
- The debt ceiling would be adjusted upward by the full amount in PV terms of any project financing dedicated to COVID-19 vaccine interventions that was not anticipated at the time of setting of the performance criterion. Authorities will consult with IMF staff on any planned external concessional borrowing for this purpose and the conditions before the loans are contracted or guaranteed.
- The debt ceiling will be adjusted downward by the full amount of:
  - (1) any shortfall between the actual and programmed issuance of debt for use in DMOs, and
  - (2) the issuance of any debts for use in DMOs that do not result in a reduction of the present value (present value savings) of the overall public external debt and an improvement of the overall public external debt service profile.
- In the calculation of the present value savings from DMOs, the discounted future stream of payments of debt service due on the newly issued debt instrument (including all costs associated with the operation) will be compared with the discounted future stream of debt service due on the instrument it replaces using a discount rate of 7 percent, and these amounts will not be capped by the nominal value of the debt.

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

### Monetary Policy Consultation Clause (inflation bands and consultation trigger)
- The bands around the projected 12-month rate of CPI inflation (headline CPI published by the Kenya National Bureau of Statistics) are specified in TMU Table 3.
- If the observed average of the 12-month rate of CPI inflation for the three months preceding the test date falls outside the lower or upper bands specified in TMU Table 3, the authorities will complete a consultation with the IMF Executive Board which would focus on:
  - (i) the stance of monetary policy and whether the Fund-supported program remains on track;
  - (ii) the reasons for program deviations, taking into account compensating factors; and
  - (iii) proposed remedial actions if deemed necessary.
- When the consultation with the IMF Executive Board is triggered, access to Fund resources will be interrupted until the consultation takes place.

### Monetary Policy Consultation Clause bands (Table 3; Percent values)
- end-Dec. 2023 / end-Jun. 2024 / End-Dec. 2024:
  - Upper band: 7.5 / 7.5 / 7.5
  - Center point: 5.0 / 5.0 / 5.0
  - Lower band: 2.5 / 2.5 / 2.5

*Source: Excerpt from the program Technical Memorandum of Understanding (TMU) and related program documentation.*

### 25.      Tax revenue of the national government are defined as the sum of personal income tax

### 25.      Tax revenue of the national government are defined as the sum of personal income tax 

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

### Indicative target on the ceiling of the change in the stock of national government exchequer requests outstanding for more than 90 days
- Definition of outstanding exchequer requests:
  - invoices for goods or services provided to the national government;
  - national government transfer obligations to counties (including for pension and equitable share), State Corporations (SCs) and Semi-autonomous Governmental Agencies (SAGAs), and private sector subsidies;
  - requisitions for payment received in the Integrated Financial Management Information System (IFMIS) but corresponding funds from the exchequer account have not been released.
- Coverage for the program ceiling:
  - refers to requisitions made after the start of July 2021 and invoices unpaid for 90 days or longer;
  - disregards any changes related to legal rulings or claims found invalid on bills originated before the start of the program.

### Indicative target on ceiling of non-accumulation of net domestic payment arrears
- Definition of national government domestic payment arrears:
  - stock of pending bills of MDAs and SAGAs/SCs outstanding at end-June of each financial year (as reported in the National Government Budget Implementation Review Report from the Office of the Controller Budget),
  - not inclusive of national government exchequer requests (¶ 26) received in the IFMIS system on and after April 1 of the same financial year (i.e., requests outstanding for less than 90 days at end-June).
- End-December computation:
  - sum of the stock of pending bills as reported in the National Government Budget Implementation Review Report from the Office of the Controller Budget and exchequer requests from the current fiscal year outstanding for more than 90 days (TMU Table 4).
- Ceiling requirement:
  - the program ceiling for zero accumulation of net domestic payment arrears 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.

### Indicative target on the floor of the priority social expenditures of the national government
- Definition of priority social spending of the national government (sum of):
  - cash transfers to orphans and vulnerable children,
  - cash transfers to elderly persons,
  - cash transfers to persons with severe disabilities,
  - free primary education expenditure,
  - free secondary education expenditure,
  - school food and sanitary programs,
  - free maternal healthcare,
  - universal health coverage,
  - health insurance subsidy for targeted categories (i.e., orphans, vulnerable children, elderly, and people with disabilities),
  - spending for vaccination and immunization.
- The floor on priority social spending is defined as the programmed amounts set out in TMU Table 5.

### Key statistics — Table 4. Kenya: Stock of Arrears (Ksh. billions) FY2022/23
- Dec. / Jun.  
  - Total stock of arrears at MDAs and SCs: 506.5  490.0
- Memorandum:
  - Pending bills at MDAs: 80.3  123.9
  - Pending bills at SAGAs/SCs: 400.7  443.6
  - Pending bills at counties: 159.9  160.2
  - Exchequer requests outstanding for less than 90 days: 60.1  77.5
  - Exchequer requests outstanding for more than 90 days: 25.5  0.0
- Source: Kenyan authorities

### Key statistics — Table 5. Kenya: Priority Social Spending (Ksh. millions)
- 2023 / 2024 (Jun. / Dec. / Jun. / Dec.)
  - Priority social spending: 420,777  210,979  500,630  257,824
- 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.
- Source: Kenyan authorities.

### Data reporting requirements (summary)
- National Treasury (NT) and Central Bank of Kenya (CBK) to provide information at the frequency and within the reporting deadlines specified in TMU Table 6 and to transmit promptly any data revisions.
- Selected reporting items, frequency, and deadline highlights:
  - Primary balance of the national government: Monthly — Within 20 days after month end. — Responsible: CBK.
  - Net nonbank financing of the national government: Monthly — Within 20 days after month end. — Responsible: NT.
  - Disbursements and repayment schedule of external concessional and non-concessional project loans, including securitization: Monthly — Within 20 days after month end. — Responsible: NT.
  - Stock of exchequer requests made after the start of July 2020 and unpaid for 90 days or more: Monthly — Within 20 days after month end. — Responsible: NT.
  - Stock of Treasury Bills and Bonds: Quarterly — Within 45 days after quarter end. — Responsible: NT.
  - Auctions of T-bills and T-bonds via primary dealers (weekly auction details): Weekly — Within 7 working days after the end of the week. — Responsible: NT.
  - CBK’s holding of monetary gold, holdings of SDRs, and CBK holdings of convertible currencies: Monthly — Within 20 days after the end of the month. — Responsible: CBK.
- For any information relevant for assessing performance but not specifically defined in the memorandum, the authorities will consult with Fund staff.

*Source: Excerpt from IMF staff report content unit 1kenea2024001 (Kenya) included in the supplied PDF content.*

### 5. Other indicators

### 5. Other indicators

### Reporting requirements and data providers
- Currency in circulation: Monthly; Within 20 days after month end. — CBK
- Required and excess reserves: Monthly; Within 20 days after month end. — CBK
- Concessional and non-concessional medium- and long-term external debt contracted or guaranteed by the national government and CBK: Monthly; Within 20 days after month end. — NT
- Accumulation of national government external debt arrears: Monthly; Within 20 days after the end of the quarter. — NT
- Social priority spending of the national government: Quarterly; Within 45 days after quarter end. — NT
- Grants to national government entities and total subsidies: Quarterly; Within 20 days after month end. — NT
- Guarantees issued by the national government to counties, public enterprises, and all parastatal entities: Monthly; Within 20 days after the end of the quarter. — NT
- Stock of guarantees extended by the national government: Monthly; Within 20 days after the end of the quarter. — NT
- 12-month CPI inflation: Monthly; Within 15 days after the end of the month. — KNBS
- Financial Soundness Indicators (core and expanded) for other depository corporations: Quarterly; Within 20 days after quarter end. — CBK
- Balances in domestic currency and US$ held in escrow accounts, and exchange rates used to purchase US$, under the government-to-government fuel importation scheme in the domestic banking system: Monthly; Within 20 days after the end of the month. — EPRA

### Relations with the Fund — key numerical data and arrangements (as of November 30, 2023)
- Membership Status: Joined: February 3, 1964; Article VIII
- Quota: 542.80 SDR Million; Percent Quota: 100.00
- IMF’s Holdings of Currency (Holdings Rate): 1,510.27 SDR Million; Percent Quota: 278.24
- Reserve Tranche Position: 13.40 SDR Million; Percent Quota: 2.47
- SDR Department net cumulative allocation: 779.90 SDR Million; Percent Allocation: 100.00
- SDR holdings: 360.36 SDR Million; Percent Allocation: 46.21
- Outstanding Purchases and Loans (SDR Million; Percent Quota):
  - RCF loans: 542.80; 100.00
  - ECF Arrangements: 535.34; 98.63
  - Extended Arrangements: 980.84; 180.70
- Latest Financial Arrangements (Date of Expiration; Amount Approved; Amount Drawn):
  - EFF Apr 2, 2021 Apr 1, 2025: 1,484.56; 980.84 (SDR Million)
  - ECF Apr 2, 2021 Apr 1, 2025: 740.89; 528.15 (SDR Million)
  - RSF Jul 17, 2023 Mar 31, 2025: 407.10; 0.00 (SDR Million)
- Outright Loans — RCF: Date Drawn May 11, 2020; Amount Approved 542.80; Amount Drawn 542.80 (SDR Million)
- Overdue Obligations: None overdue
- Projected Payments (SDR Million, based on existing use of resources and present holdings of SDRs):
  - 2023 Principal: 7.19
  - 2023 Charges/Interest: 68.32
  - 2023 Total: 7.19
  - 2024 Principal: 0.00
  - 2024 Charges/Interest: 68.22
  - 2024 Total: 68.32
  - 2025 Principal: 82.55
  - 2025 Charges/Interest: 66.05
  - 2025 Total: 150.77
  - 2026 Principal: 204.00
  - 2026 Charges/Interest: 61.18
  - 2026 Total: 270.05
  - 2027 Principal: 276.19
  - 2027 Total: 337.37

### Safeguards, exchange rate, and consultations
- Safeguards assessment (Central Bank of Kenya — CBK): Update completed September 2019; found sound external audit and financial reporting practices, active Board oversight, effective operational controls; CBK has implemented most 2019 recommendations. Draft amendments to the CBK Act prepared in consultation with IMF largely address safeguards recommendations and await submission to Parliament.
- Exchange rate arrangement: Kenya's currency is the Kenyan Shilling. De jure arrangement: free floating; de facto classification: crawl-like. Kenya accepted obligations of Article VIII, Sections 2, 3, and 4 with effect from June 30, 1994.
- Article IV Consultation: Last concluded December 17, 2021. Kenya is on a 24–month Article IV cycle.
- Resident Representative: Mr. Selim Cakir — Since July 2023.

### Technical assistance (selected 2022–23 deliveries)
- Fiscal Affairs Department (FAD): Develop Capacity in Data Analytics (2023); MTRS – Review Progress (2023); Governance (2023); Fiscal Reporting (2023); Climate Diagnostics (2023); Managing natural resource wealth: Skills development Plan and Progress of reforms (2023); Expand fiscal statistics (2023); Workshop for preparation of MTRS (2023).
- AFRITAC East: Implementing the Budget Preparation Manual (2023); Budget Preparation Manual (2022); Operationalizing the Fiscal Risk Committee (2022); Migrating to accrual IPSAS and review of Consolidated Financial Statements (2022); Developing a strategy for SOE oversight at the NT (2022); SOE Financial Evaluations (Workshop) (2022); Coordinated Border Management (2022); Developing EI Compliance Improvement Plan (2022); Desk Review of the draft SCOA (2022); Kenya-TA-PPI- Further development of XMPI (2023); National Accounts training of new staff (2023); NAC - Institutional Sectors (2023).
- Monetary and Capital Markets Department (MCM): Finalization of FMI self-assessment and review of oversight framework (2023); Refining the quarterly projection model (2023); Refining the Business Surveys and Nowcasting Framework at the CBK (2023); Basel III liquidity standards and leverage ratio (2023).
- Statistics Department (STA): Government Finance Statistics (2023).

### Statistical issues — assessment and priorities (as of November 30, 2023)
- General: Data provision broadly adequate for surveillance and program monitoring, with shortcomings due to capacity constraints. Further methodological improvements desirable for real, fiscal, and external sector statistics.
- National Accounts:
  - GDP rebased to 2016 from 2009; revision released September 2021.
  - Revision objectives: implement recommendations of 2008 SNA, incorporate new data since 2009; ISIC Rev 4 used.
  - Benchmarking and technical support: East AFRITAC and Statistics Sweden; peer reviewed by IMF.
  - Surveys/censuses used: 2015/2016 KIHBS, ISS 2017, CIP 2016 and 2017, NPISH 2019, informal transportation survey, 2016 MSMES, COE 2016, Income tax data, 2016 ICBT, 2019 KPHC.
  - Routine data for annual GDP: MSIP, monthly survey of hotels, annual labor enumeration, administrative sources (government accounts, customs, income tax, VAT returns from KRA, MOA, ministry of environment and forestry, ministry of mining and petroleum, Insurance Regulatory Authority, CBK, Kenya Ports Authority).
  - Supply and Use Tables (SUT) compiled as part of the revision; SUT informs national accounts estimates until next revision.
- Price Statistics:
  - CPI weights derived from 2015/16 KIHBS updated from 2005/06 KIHBS; base year updated to February 2019 from February 2009.
- Government Finance Statistics (GFS):
  - East AFRITAC collaborates to support compilation and dissemination of GFS and PSDS based on GFSM 2014 to meet EAMU Protocol requirements.
  - GFS reported at General Government level; work to reduce discrepancies, improve stock data, and quality of GG data. Process to extend coverage to public corporations is in initial stages.
  - Quarterly Public-Sector Debt disseminated for certain instruments of Budgetary Central Government; data reported at face value and not nominal value.
- Monetary and Financial Statistics:
  - Compiled broadly in line with the Monetary and Financial Statistics Manual.
  - CBK reports monthly SRFs for central bank and other depository corporations (ODCs); monetary data published in International Financial Statistics.
  - CBK expanded ODC coverage to include SACCOs and microfinance banks; developing OFCs data (insurance corporations and pension funds). Expanded ODC submitted monthly; insurance and pension funds data undergoing STA review.
  - CBK reports some Financial Access Survey indicators (commercial bank branches per 100,000 adults; ATMs per 100,000 adults).
- Financial Sector Surveillance:
  - Kenya does not participate in CDIS and CPIS.
  - CBK reports FSIs quarterly: 11 core and 11 encouraged indicators for deposit takers; household debt to GDP ratio reported. FSIs for other financial corporations and nonfinancial corporations not reported.
- External Sector Statistics:
  - KNBS compiles annual BOP on BPM6 in Kenyan shillings and reports to STA; CBK compiles monthly BOP in U.S. dollars reported to AFR and used for programming and surveillance; datasets harmonized quarterly.
  - CBK reports monthly international reserves data to STA; National Treasury reports quarterly external debt statistics to the World Bank.
  - Trade data: formal trade coverage good; adjustments include informal trade and electricity. Trade data excludes reexported oil and corresponding oil import portion; authorities to undertake data reconciliation.
  - Trade in services data weak due to reliance on ITRS with a large element of unclassified inflows and outflows.
  - Improvements in IIP statement: preliminary IIP developed with TA missions (October 7–18, 2019 and May 24–June 4, 2021); revised IIP statement published May 2023 covering 2015–21.
- Data Standards and Quality:
  - Kenya participates in the Enhanced General Data Dissemination System; disseminates data on the NSDP. Timeliness needs improvement.
- Reporting to STA:
  - General Government data reported to STA in GFSM 2014 format and disseminated in the GFS Yearbook.
  - Monthly and quarterly GFS data regularly reported for inclusion in IFS.
  - Monetary data for central bank and ODCs regularly reported for inclusion in IFS.
  - Annual balance of payments data, BPM6, regularly reported to STA.

### Common Indicators Required for Surveillance — selected entries (Table 1)
- Exchange Rate: Latest Observation 11/30/2023; Date Received 11/30/2023; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest Observation 10/31/2023; Date Received 11/30/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Reserve/Base Money: Latest Observation 10/31/2023; Date Received 11/30/2023; Frequency of Data D/M; Frequency of Reporting M; Frequency of Publication M
- Broad Money: Latest Observation 10/31/2023; Date Received 11/30/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Central Bank Balance Sheet: Latest Observation 10/31/2023; Date Received 11/30/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Consolidated Balance Sheet of the Banking System: Latest Observation 9/30/2023; Date Received 10/30/2023; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A
- Interest Rates: Latest Observation 11/30/2023; Date Received 11/30/2023; Frequency of Data D; Frequency of Reporting D; Frequency of Publication NA
- Consumer Price Index: Latest Observation 11/30/2023; Date Received 11/30/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Latest Observation 9/30/2023; Date Received 10/23/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication NA
- Stocks of Central Government and Central Government-Guaranteed Debt: Latest Observation 9/30/2023; Date Received 10/30/2023; Frequency of Data A; Frequency of Reporting A; Frequency of Publication NA
- External Current Account Balance: Latest Observation 9/30/2023; Date Received 11/6/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication NA
- Exports and Imports of Goods and Services: Latest Observation 9/30/2023; Date Received 11/6/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- GDP/GNP: Latest Observation 12/31/2022(A) 6/30/2023(Q); Date Received 5/3/2023 10/5/2023; Frequency of Data Q/A; Frequency of Reporting Q/A; Frequency of Publication Q/A
- Gross External Debt: Latest Observation 5/31/2023; Date Received 7/30/2023; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M
- International Investment Position: Latest Observation 12/31/2021; Date Received 5/3/2023; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A

### Debt sustainability analysis — main findings and risks
- Overall assessment: Kenya’s public debt is assessed to be sustainable, reflecting authorities’ continued policy actions and expected robust export growth in the medium term. The overall and external ratings for risk of debt distress remain high.
- Factors contributing to past deterioration: High fiscal deficits in the past and pandemic-related export and output losses in 2020.
- Recent pressures: Market pressures since the start of the war in Ukraine and monetary tightening in advanced countries have limited access to commercial borrowing.
- Projections and revisions:
  - Projections of debt burden metrics revised up compared to the last DSA assessment due to projected REER depreciation in 2023–2024, increased access to program financing, and higher projected interest expenses.
  - Kenya faces liquidity challenge in rolling over the June 2024 Eurobond given unfavorable external conditions limiting access to international bond market for frontier economies.
  - Going forward, debt indicators are forecasted to improve with a stronger fiscal effort during the program turning the primary balance into a surplus, albeit gradually for the external debt service-to-exports ratio.
- Vulnerabilities and stress scenarios:
  - Kenya is susceptible to export, exchange rate, and primary balance shocks.
  - More prolonged and protracted shocks would present downside risks to the debt outlook.
  - A natural disaster shock illustrates very limited scope for meeting additional financing needs in a stress scenario without jeopardizing debt sustainability.
  - The DSA underscores importance of regulatory framework to tap private sector solutions and enable access to concessional green financing.
- DSA technical details:
  - Debt carrying capacity: Medium, considering Kenya’s Composite Indicator Index of 3. 01, based on IMF’s October 2023 World Economic Outlook and the 2022 World Bank Country Policy and Institutional Assessment (CPIA).
  - Reference: See IMF Country Report No 2023/266 published in July 2023.
  - Joint Bank-Fund Debt Sustainability Analysis risk ratings:
    - Risk of external debt distress: High
    - Overall risk of debt distress: High
    - Granularity in the risk rating: Sustainable
    - Application of judgment: No

*Source: KENYA — STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION, SIXTH REVIEWS UNDER THE EXTENDED FUND FACILITY AND EXTENDED CREDIT FACILITY ARRANGEMENTS, REQUESTS FOR AUGMENTATIONS OF ACCESS, MODIFICATION OF PERFORMANCE CRITERIA, WAIVER OF NONOBSERVANCE OF PERFORMANCE CRITERIA, WAIVER OF APPLICABILITY OF PERFORMANCE CRITERIA, AND FIRST REVIEW UNDER THE RESILIENCE AND SUSTAINABILITY FACILITY ARRANGEMENT—INFORMATIONAL ANNEX (December 22, 2023).*

### 1.      For the purposes of this analysis, the perimeter of public debt covers the debt of the

### 1.      For the purposes of this analysis, the perimeter of public debt covers the debt of the

### Debt perimeter and coverage
- Perimeter covers the debt of the central government, Social Security Fund, central bank debt taken on behalf of the government, and government guaranteed debt (Text Table 1).
- Debt data include both external and domestic obligations and guarantees.
- The external DSA covers the external debt of the central government and the central bank, including publicly guaranteed debt, as well as of the private sector.
- The public DSA covers both external and domestic debt incurred or guaranteed by the central government. It does not cover the entire public sector, such as extra-budgetary units and county governments.
- Debt coverage excludes legacy debt of the pre-devolution county governments, estimated at Ksh.53.8 billion (0.4 percent of GDP), which is included in the contingent liabilities stress scenario.
- DSA uses a currency-based definition of external debt; nonresidents’ direct participation in the domestic debt market is estimated at below one percent of total outstanding government securities (Text Table 2).

### Contingent liabilities stress test (combined)
- The DSA includes a combined contingent liabilities stress test capturing public sector exposure to SOEs, PPPs, and a financial market shock. Shocks incorporated:
  - 3.1 percent of GDP to capture reported non-guaranteed debt of state-owned enterprises (SOEs) and extra-budgetary units and Public Private Partnerships (PPPs).
    - National Treasury survey (June 2023) found 25 state corporations with non-guaranteed loan obligations equal to Ksh.111.8 billion (0.8 percent of GDP) as of end-June 2023; about 85 percent was foreign currency denominated.
    - Standard calibration of 2 percent for non-guaranteed SOE debt is retained in the stress test.
    - Calibration of exposure to PPP-related contingent liabilities set at 35 percent of the country’s PPP capital stock shock, as reported in the World Bank Database on PPPs.
  - 0.5 percent of GDP to cover legacy debt of the pre-devolution county governments.
  - 0.4 percent of GDP to account for government contingent liabilities from letters of support issued under the government-to-government fuel importation mechanism launched in April 2023.
    - A reasonable estimate of the government contingent liabilities 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).
    - Legal review established the arrangements do not give rise to government guarantees of private debt under domestic law as defined in the Technical Memorandum of Understanding under the IMF-supported EFF/ECF arrangements, but the government remains exposed to budget calls if pump prices do not fully pass through FX valuation losses.
  - 5 percent of GDP for a financial market shock—a value that exceeds the existing stock of financial sector nonperforming loans of about 4 percent of GDP.
- Default shock note: The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition.

### Debt transparency and reporting
- Kenya publishes debt statistics bulletins with public and publicly guaranteed (PPG) coverage and medium-term debt management strategies.
- Budget Policy Statement and Annual Public Debt Management Report (PDMR) include information about contingent liabilities.
- External Public Debt Register provides loan-level information about contracted and drawn amounts, interest rate, and currency denomination.
- Kenya maintains a high standard of debt transparency.

### Recent public debt trends and composition
- Gross public debt increased from 45.7 percent of GDP at end-2015 to 67.9 percent of GDP at end-2022 (Table 1).
- External public debt amounts to about half of overall public debt (Text Table 2).
- Nominal PPG external debt at end-2022 amounted to 34.5 percent of GDP, corresponding to 29 percent of GDP in present value terms (Text Table 2 and Table 1).
- Creditor composition at end-2022:
  - Multilateral creditors: close to 47 percent of external debt.
  - Bilateral creditors: about 28 percent of external debt; close to 64 percent of bilateral debt is owed to non-Paris Club members, mainly loans from China.
  - Commercial debt accounted for about 25 percent of external public debt (47 percent of projected external debt services over 2023–25).
  - Eurobonds accounted for 75.5 percent of commercial debt (US$7.1 billion).
  - Kenya has not contracted any collateralized external debt.
  - 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.
- Syndicated loans: Kenya tapped syndicated loan markets in 2022-23, contracting US$800 million on commercial terms.

### Domestic public debt and yield curve dynamics
- Domestic public debt reached 33.5 percent of GDP at end-2022 (Text Table 2 and Table 2).
- Yield curve developments since end-2021:
  - Yield curve shifted up and flattened due to increase in near-term inflationary pressures and related policy adjustments by the Central Bank of Kenya (CBK), and low transmission of the policy rate to the longer end of the yield curve.
  - Share of Treasury bills in domestic debt stock declined from 35 percent at end-FY2018/19 to 18.7 percent at end-FY2021/22.
  - Average time to maturity of government domestic bonds, excluding T-bills, increased from 6.3 years at end-FY2018/19 to 9.1 years at end-December 2022, later declining to 7.4 years as domestic issuance shifted to shorter maturities.
  - About half of government domestic debt securities are held by pension funds; commercial banks hold a 47 percent share.
  - Yields on government securities increased and the front end of the treasury yield curve moved up in the first half of 2023 amid large gross financing needs and tighter liquidity; investor preference shifted to shorter tenor securities.

### Private external debt data
- Published private external debt data available through 2021 and extrapolated with net private external debt BoP flows.
- Pre-2022 private external debt source: IIP data on “Other sectors”.
- BoP data through end-2022 show steady upward trend in private external debt as a share of GDP, maintained in projections.

### Underlying macro and fiscal assumptions
- Real GDP growth projections:
  - Real GDP growth projected to reach 5.1 percent in 2023 and 5 percent in 2024.
  - Medium-to long-term real GDP growth converging to 5.3 percent.
- Drivers: projected productivity growth, ambitious structural reform agenda, policies to reinforce credit to the private sector, favorable demographic trends, and fiscal consolidation crowding-in private investment.
- Nominal GDP in U.S. dollars projected to be lower than in the last DSA over the medium term, reflecting REER depreciation in 2023 and 2024.
- Fiscal adjustment and debt-stabilizing targets:
  - FY2022/23: primary fiscal deficit contained to 0.6 percent of GDP after two Supplementary Budgets; Pending Bills Verification Committee constituted with strategy expected by end-February 2024 (reset structural benchmark).
  - FY2023/24: authorities commit to target a stronger primary balance of 0.7 percent of GDP through a second Supplementary Budget by end-March 2024 (new structural benchmark), predicated on a comprehensive revenue package including 1.6 percent of GDP of measures approved under the Budget and additional measures submitted to parliament in December 2023.
  - Overall deficit expected to decline to below 4 percent of GDP over the medium term.
  - Medium-term target of the primary surplus to stabilize overall public debt-to-GDP ratio estimated at about 0.2 percent of GDP.
- Fiscal reform priorities: growth-friendly domestic revenue mobilization (MTRS), spending rationalization, protect social spending, improve public investment management, and privatization/merger of select public sector entities.

*Sources: Kenyan authorities; and IMF staff calculations.*

### 10.      Macro-fiscal assumptions underlying the DSA baseline scenario include an estimate of the

### 1kenea2024001 - 10.      Macro-fiscal assumptions underlying the DSA baseline scenario include an estimate of the

### Climate-related public investment assumptions
- Baseline benchmark: latest available data of 2.6 percent of GDP in 2018 for authorities’ climate-related public investment.
- Additional climate investment included in forecast: around 0.25 percent of GDP per year.
- Financing sources envisaged: IMF’s Resilience and Sustainability Facility (RSF), World Bank’s climate-oriented financing, and other financing from development partners.
- Short-run fiscal constraint: fiscal constraints in the short run limit the government’s capacity for increasing public spending to accommodate additional climate-related needs.
- Scaling-up requirements: improving efficiency of public spending, attracting highly concessional external climate financing, and encouraging private sector participation to reach Kenya’s climate objectives.

### Social spending and composition (FY2016/17–FY2023/24)
- Social spending (Ksh. Millions) by fiscal year:
  - FY16/17: 256,253
  - FY17/18: 305,275
  - FY18/19: 345,956
  - FY19/20: 380,051
  - FY20/21: 407,905
  - FY21/22: 434,585
  - FY22/23: 443,218
  - FY23/24 Proj.: 518,449
- Social protection (Ksh. Millions):
  - FY16/17: 15,489
  - FY17/18: 18,329
  - FY18/19: 26,669
  - FY19/20: 25,554
  - FY20/21: 26,031
  - FY21/22: 26,194
  - FY22/23: 25,987
  - FY23/24 Proj.: 27,564
- Education (Ksh. Millions):
  - FY16/17: 219,010
  - FY17/18: 269,534
  - FY18/19: 295,555
  - FY19/20: 314,027
  - FY20/21: 337,524
  - FY21/22: 359,130
  - FY22/23: 370,729
  - FY23/24 Proj.: 452,372
- Health (Ksh. Millions):
  - FY16/17: 21,754
  - FY17/18: 17,412
  - FY18/19: 23,732
  - FY19/20: 40,470
  - FY20/21: 44,350
  - FY21/22: 49,260
  - FY22/23: 46,502
  - FY23/24 Proj.: 38,512
- Memo item: Social spending (Percent of GDP) by year:
  - FY16/17: 3.2
  - FY17/18: 3.4
  - FY18/19: 3.5
  - FY19/20: 3.6
  - FY20/21: 3.6
  - FY21/22: 3.4
  - FY22/23: 3.1
  - FY23/24: 3.2

### Fiscal and public debt developments
- Nominal public debt-to-GDP path revised up from last DSA due to:
  - Projected REER depreciation in 2023 and 2024 lowering forecasted US$-value of nominal GDP.
  - Proposed further augmentation of the IMF program.
  - Additional World Bank commitments expected in 2024.
- Authorities requested additional Fund resources via augmentation of existing EFF/ECF arrangements by about US$938 million (130.3 percent of quota or SDR707.27 million).
- Public and publicly guaranteed debt adjustment for Kenya Airways (KQ): includes principal of obligations and remaining government guarantee on other KQ external loans (US$638 million as of December 2022) in place of the previously recorded US$750 million guarantee.
- Central Bank of Kenya action: CBK lent the equivalent of the full amount of the 2021 US$740 million general allocation of SDRs to the government in local currency for FY2021/22 and FY2022/23; in the DSA these amounts lent are recorded as domestic debt at face value.

### Selected macroeconomic assumptions and projections (calendar year basis)
- Nominal GDP (Ksh billion), Current DSA:
  - 2023: 15,184
  - 2024: 17,064
  - 2025: 18,905
  - 2026–2027: 20,985
  - 2028: 23,215
  - Long-term: 25,660 62,386
- Real GDP (growth), Current DSA:
  - 2023: 5.1
  - 2024: 5.0
  - 2025: 5.3
  - 2026–2027: 5.3
  - 2028: 5.3
  - Long-term: 5.3
- Inflation, Current DSA:
  - 2023: 7.7
  - 2024: 7.0
  - 2025: 5.2
  - 2026–2027: 5.4
  - 2028: 5.0
  - Long-term: 5.0
- Revenue and grants (percent of GDP), Current DSA:
  - 2023: 18.0
  - 2024: 19.1
  - 2025: 19.4
  - 2026–2027: 19.5
  - 2028: 19.5
  - Long-term: 19.5
- Overall fiscal balance (percent of GDP), Current DSA:
  - 2023: -5.3
  - 2024: -4.1
  - 2025: -3.3
  - 2026–2027: -3.2
  - 2028: -3.2
  - Long-term: -3.3
- Primary fiscal balance (percent of GDP), Current DSA:
  - 2023: -0.1
  - 2024: 1.2
  - 2025: 1.7
  - 2026–2027: 1.7
  - 2028: 1.6
  - Long-term: 1.5 0.5
- Public debt (percent of GDP), Current DSA:
  - 2023: 73.5
  - 2024: 73.4
  - 2025: 70.4
  - 2026–2027: 67.8
  - 2028: 65.4
  - Long-term: 63.1 49.3
- Current account (percent of GDP), Current DSA:
  - 2023: -4.0
  - 2024: -4.1
  - 2025: -4.2
  - 2026–2027: -4.2
  - 2028: -4.2
  - Long-term: -4.1 -3.9
- Exports of goods and services (growth), Current DSA:
  - 2023: -3.3
  - 2024: 9.5
  - 2025: 9.4
  - 2026–2027: 8.6
  - 2028: 8.5
  - Long-term: 8.4 9.3

Note: All numeric series are verbatim from the DSA tables; previous DSA comparators are reported in the original text.

### Current account, reserves, and external financing strategy
- Current account deficit projections:
  - Projected to improve to 4 percent of GDP in 2023 and stabilize around 4.2 percent over the medium term.
- Drivers of recent current account narrowing (first three quarters of 2023):
  - Broad decline in both energy and non-energy imports amid real exchange rate depreciation and completion of some large infrastructure projects.
  - Slowdown in exports of goods and services due to subdued demand from traditional agricultural export markets and contraction in transportation services.
  - Tourism receipts exceeded pre-pandemic levels; robust remittances supported external balance.
- Medium-term support for current account stabilization:
  - Adjustments in imports, fiscal consolidation, robust goods exports and tourism receipts, exchange rate flexibility, and gradual normalization of global commodity and financial market conditions.
  - Export growth supported by business environment improvements, trade and investment agreements, and policy priorities to increase the share of manufacturing and services.
  - Agricultural productivity policies (farmer-led irrigation, food systems modernization, value chain integration).
  - Remittances projected to remain robust.
- Gross international reserves (US$ billion), projections:
  - 2022: 8.0
  - 2023: 7.6
  - 2024: 8.1
  - 2025: 9.0
  - 2026: 9.9
  - 2027: 10.6
  - 2028: 11.6
- Import coverage of reserves: expected to remain above the 3-month threshold and gradually strengthen over time to 4.2 months of imports of goods and services over the medium term.
- External financing mix and constraints:
  - Public sector gross financing needs to be met with a balanced mix of external and domestic financing.
  - Kenya expected to continue to primarily rely on multilateral loans in 2024.
  - DSA baseline assumes significantly less Eurobond and syndicated loan issuance until the end of 2024 due to slow return of frontier economies to international bond markets.
  - Cumulative external borrowing program through end-December 2024 consistent with planned drawings of concessional and non-concessional loans in FY2022/23 and FY2023/24; US$1.1 billion external commercial financing and US$5 billion for debt management operations are on hold and not reflected in the DSA baseline.
  - Successful execution of debt management operations would significantly lower liquidity risks related to the debt service profile.
  - Authorities have selected two lead managers to explore Eurobond issuance at a reasonable cost but likely for a small amount; parallel exploration of alternative financing from multilateral and bilateral lenders and syndicated loans.

### Realism assessment, fiscal consolidation, and reforms
- Baseline fiscal adjustment: assumes improvement of the fiscal primary balance of 3.1 percentage points of GDP over three years in 2023–25.
- Realism tools: flag some optimism compared to historical performance, reflecting a structural break based on the authorities’ ambitious reform program.
- Staff view: the adjustment is realistic and in line with authorities’ fiscal consolidation plans and medium-term tax revenue strengthening, recurrent expenditure streamlining (wages and transfers to public sector entities), and improvements in public investment management and budgetary controls.
- Authorities’ prior actions: broadened tax revenue base during the pandemic and gradual adjustment of domestic fuel prices during 2022 are cited as evidence of capacity to manage pressures while protecting social spending.

### Debt carrying capacity, stress tests, and external debt sustainability findings
- Debt carrying capacity classification: Medium.
- Composite Indicator (CI) Index value: 3.01.
- CI informed by IMF’s October 2023 WEO projections and 2022 World Bank CPIA.
- Applicable external debt burden thresholds (from Text Table 7):
  - PV of debt in % of Exports: 180
  - PV of total public debt in percent of GDP: 55
  - PV of debt in % of GDP: 40
  - Debt service in % of Exports: 15
  - Debt service in % of Revenue: 18
- Stress tests included:
  - Six standardized stress tests plus three tailored stress tests: combined contingent liabilities stress test; natural disaster stress test (outlined in Climate Change Risks section); market financing shock for countries with market access (assesses rollover risks from deterioration in global risk sentiment, temporary nominal depreciation, shortening of maturities of new external commercial borrowing).
- External DSA baseline signals:
  - External debt burden indicators in terms of exports and revenues breach respective thresholds under the baseline, producing a mechanical high-risk signal.
  - PV of PPG external debt-to-exports solvency indicator remains above the threshold (180 percent) through 2029.
  - Debt service-to-exports liquidity indicator exceeds its threshold (15 percent) through 2034.
  - The solvency indicator gradually declines as exports recover; liquidity indicator trend interrupted by Eurobond repayments in 2024 and 2028 and rollover of external bank loans coming due in 2025–26.

*Source: Authorities data and IMF staff estimates as presented in the DSA text.*

### 2028. The projected rollovers of maturing commercial financing also push the external debt service-

### 2028. The projected rollovers of maturing commercial financing also push the external debt service-

### External debt outlook and indicators
- Projected rollovers of maturing commercial financing push the external debt service-to-revenue ratio above its sustainability threshold (18 percent) in the same years.
- The PV of PPG external debt as a share of GDP remains well below the 40 percent indicative threshold throughout the projection period.
- Reflecting fiscal consolidation efforts and a borrowing mix that favors concessional borrowing, the PV of PPG external debt is expected to decline from 31.7 percent in 2023 to 15 percent in 2043.
- External debt burden indicators are higher than in the last DSA due to:
  - Lower GDP in US$ in 2023–24,
  - REER depreciation in 2023 and 2024,
  - Further increase in interest expenses of external loans with floating interest rates,
  - Increased support by development partners (¶11).

### Market financing and liquidity risks
- Market liquidity risks are ranked as moderate.
- Kenya’s EMBI spread: 589 basis points as of December 20, 2023 (above the threshold of 570 basis points).
- Gross financing needs are below the high-risk threshold of 14 percent of GDP.
- Fiscal consolidation under the IMF-supported EFF/ECF arrangements would help keep gross financing needs below the threshold.
- Risks noted:
  - Financing risks are affected by global liquidity conditions; deterioration would exacerbate financing risks for Kenya.
  - Shift in the deficit financing mix toward domestic resources requires monitoring given elevated domestic interest rates.

### Public debt sustainability (public sector)
- The PV of total public debt-to-GDP ratio remains above the 55 percent benchmark for a country rated at medium debt-carrying capacity through 2029, generating a mechanical high-risk signal.
- Public sector debt projected to peak in 2023 at 68 percent of GDP (PV terms), followed by a steady decline.
- PV of public debt-to-revenue ratio: 380 percent in 2023, projected to be about 168 percent by 2043.
- Under the most extreme standard shock scenario (primary balance shock), the PV of public debt-to-GDP would breach the 55 percent benchmark through 2036.
- 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, including in the historical scenario.

### Stress tests and vulnerabilities
- Standard stress tests highlight sensitivity to exports and exchange rate depreciation:
  - Under the most extreme shock to export growth, the PV of debt-to-exports and debt service-to-exports ratios breach thresholds over the entire medium-term projection period.
  - Under a one-time depreciation extreme scenario, the debt service-to-revenue ratio can potentially breach the threshold through 2031.
- Natural disaster custom stress test (informed by 2008–11 drought) calibration:
  - Assumes US$1.8 billion increase in public debt,
  - One-off 9 percentage points decline in real GDP growth (pro-rated),
  - Standard 3.5 percentage points shock on exports growth.
- Results show very limited scope for meeting additional financing needs with semi-concessional or commercial external financing without jeopardizing debt sustainability.

### Climate change risks and fiscal implications
- Kenya is highly vulnerable to climate change shocks (floods and droughts), which may affect debt dynamics.
- Total cost of climate change is estimated at 2–2.4 percent of GDP per year in Kenya.
- Channels through which climate change affects debt sustainability:
  - Short-term destruction of capital and output losses; potential long-term GDP level impact.
  - Disruptions to agriculture leading to reduced crop yields, livestock losses, lower productivity, higher food-price inflation.
  - Increased government spending for reconstruction and transfers while revenues fall, worsening fiscal deficits and public debt.
  - Balance of payments pressure from reconstruction imports and terms-of-trade shocks in climate-sensitive sectors.
- Natural disaster stress test underscores limited financing options without jeopardizing sustainability and highlights need for institutional reforms and capacity building to improve public investment efficiency, reduce leakages, and promote private climate investments.
- Kenya’s NDC: 32 percent reduction in greenhouse gas emissions by 2030.
- At end-2022, more than 90 percent of electricity was generated from renewable sources.
- Achieving NDC pledge estimated to entail climate-related investment needs of around 6 percent of GDP per year over 2023–30.
- Debt sustainability risks from reaching climate goals assumed limited if additional financing is highly concessional and private sector solutions are mobilized.

### Policy recommendations, program support, and reform priorities
- IMF Resilience and Sustainability Facility (RSF)-supported reforms would help achieve NDC pledges while safeguarding debt sustainability by:
  - Incorporating climate risks into fiscal planning and investment frameworks;
  - 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 public financial management enhancements and public investment efficiency to make public investment more climate responsive and to signal bankable projects to mobilize private financing.
- Ongoing and recommended policy actions:
  - Fiscal consolidation under IMF-supported EFF/ECF arrangements, including revenue mobilization measures and expenditure control.
  - Diversified borrowing mix favoring concessional financing; limits on government external borrowing under EFF/ECF and PPAs under the SDFP.
  - Expedite institutional reforms and capacity building to improve public investment efficiency and reduce leakages.
  - Rationalize public investments on the basis of rigorous criteria (SDFP).
  - Monitor SOE risks and commit to limit fiscal impact of SOE support via offsets.
  - Authorities’ preparatory actions for the June 2024 Eurobond rollover: hiring international lead managers and exploring multilateral and bilateral financing; negotiations with regional banks for syndicated loans are advancing.
  - Amendments to PFM act to adopt DSA’s threshold of 55 percent overall debt-to-GDP ratio in PV terms as medium-term debt anchor.

### Mitigating factors, risks, and outlook
- Mitigating factors supporting debt sustainability assessment:
  - Decisive actions in 2020-23 to limit deficit increases and broaden tax base.
  - Multi-year fiscal consolidation under IMF-supported arrangements.
  - Strong remittances and favorable export outlook with reforms to boost competitiveness.
  - External debt service profile on a declining trajectory beyond 2024 as share of exports and revenues.
  - Ongoing PFM and revenue administration reforms, including structural benchmarks under EFF/ECF.
  - Stable remittances: amounting to 29 percent of exports of goods and services in 2022.
- Risks and uncertainties:
  - Heightened global uncertainty and narrow scope for deviations from domestic reform agenda.
  - Exposure to global spillovers from the war in Ukraine and global market conditions affecting financing costs.
  - Exports could underperform due to lower external demand or delays in domestic reforms.
  - 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 Kenya to liquidity squeeze risks.
  - Domestic political risks and security deterioration could disrupt trade and tourism.
  - Risk of fiscal slippages over the long run; crowding-in effect on private-sector growth from fiscal consolidation may take longer to materialize.

### Debt-carrying capacity and reform impact
- Kenya assessed with medium debt-carrying capacity with a CI score of 3.01, slightly below the 3.05 required to be upgraded to strong category.
- Strong policy measures and structural reforms, especially in PFM, could raise CPIA and CI score, mitigating debt sustainability risks.
- EFF/ECF arrangements include structural benchmarks on PFM (avoiding future arrears) and a medium-term strategy to strengthen revenue administration.
- Implementation of the new PFM reform strategy 2023-2028 expected to strengthen budget credibility and expenditure efficiency.

### Authorities’ views
- Authorities broadly agreed with IMF staff’s assessment and emphasized reducing debt vulnerabilities as a key policy priority.
- They reaffirmed commitment to fiscal adjustment while meeting infrastructure needs with sustainable financing.
- Strategy emphasizes prioritizing concessional financing in the immediate term and restoring market access when conditions allow.
- Authorities are actively assessing market options in coordination with financial advisors and aim to extend maturity of domestic debt while balancing domestic issuance and external financing to avoid crowding out the private sector.
- Authorities expressed confidence that adopting the debt target of overall debt to GDP ratio of 55 percent in present value terms will better anchor medium-term fiscal policies.

*Source: IMF Kenya DSA chapter excerpt (content unit 1kenea2024001).*

### Box 1. Impact of Changes in Data Reporting on DSA indicators

### Box 1. Impact of Changes in Data Reporting on DSA indicators

### Adjustment to trade and balance of payments (BoP) recording
- Under the Government-to-Government (G2G) oil import arrangement three Kenyan Oil Marketing Companies (OMCs) own cargo upon delivery by international oil companies to Kenya’s Mombasa port.
- Upon taking ownership of the oil cargo, Kenyan OMCs sell about 62 percent of imported oil domestically and reexport about 38 percent to the regional countries.
- The change of ownership between a resident and non-resident is central to BoP recording. As the Kenyan OMCs own the cargo and carry out the risks and rewards before selling it to non-residents, this portion of oil imports should be captured in the BoP trade balance properly.
- As the Kenyan authorities adjust BoP data recording accordingly, exports and imports will increase.

### Impact on external position metrics
- The adjustment will have no material impact on the current account dynamics.
- The metric on reserves in months of import coverage will deteriorate (no numerical adjustment provided in source text).

### Mechanical effects on DSA sustainability indicators
- Export-related external debt burden indicators in the DSA will improve mechanically.
- Preliminary estimates suggest these changes would mechanically improve:
  - PV of debt-to-exports by about 37 percentage points in 2023.
  - Debt service-to-exports by 3.3 percentage points in 2023.
- Staff note that these mechanical improvements would allow both indicators to remain below respective thresholds by the end of the projection horizon (referenced Box Figure 1).
- These mechanical improvements would have no material impact on Kenya’s debt servicing capacity.

### Staff assessment and policy implication
- Correct BoP data reporting is a welcome development.
- However, the changes would not have an impact on staff’s assessment of Kenya’s debt sustainability.

### Selected DSA headline figures (as presented in Box tables)
- External debt (nominal), select years: 2020: 72.2; 2021: 71.1; 2022: 73.5; 2023: 83.2; 2024: 91.8; 2025: 89.6; 2026: 87.3; 2027: 85.6; 2033: 83.0; 2043: 81.7.
- Exports (percent of GDP), select years: 2020: 9.6; 2021: 10.8; 2022: 12.2; 2023: 12.3; 2024: 14.9; 2025: 15.1; 2026: 15.2; 2027: 15.4; 2033: 15.5; 2043: 20.9.
- Imports (percent of GDP), select years: 2020: 17.6; 2021: 19.9; 2022: 21.5; 2023: 20.0; 2024: 22.9; 2025: 22.8; 2026: 22.9; 2027: 23.2; 2033: 23.2; 2043: 27.2.
- PV of PPG external debt-to-exports (select values shown in table): 238.2; 256.9; 240.3; 224.0; 209.9; 194.3; 182.1; 137.9; 66.6.
- PPG debt service-to-exports (select values shown in table): 25.7; 22.5; 21.5; 24.9; 36.0; 25.1; 24.9; 21.1; 23.3; 15.5; 7.9.
- Gross external financing need (Million of U.S. dollars), select years: 27,431; 28,168; 29,130; 28,105; 30,252; 30,032; 31,478; 32,050; 33,788; 38,229; 56,805.
- Nominal GDP (Million of US dollars), select years: 100,912; 109,875; 113,701; 108,521; 98,398; 106,317; 114,768; 122,852; 131,684; 186,619; 372,056.
- Real GDP growth (in percent), select years: 2020: -0.3; 2021: 7.6; 2022: 4.8; 2023: 5.1; 2024: 5.0; 2025: 5.3; 2026–2030: 5.3 (repeated); 2033: 4.5; 2043: 5.3.

*Source: Box 1. Impact of Changes in Data Reporting on DSA indicators (excerpts from staff report tables and text).*

### 1.     Kenya’s vulnerability to climate change has in the recent months been underscored

### 1kenea2024001 - 1.     Kenya’s vulnerability to climate change has in the recent months been underscored

### Climate vulnerability and recent forecasts
- Forecasts for the short rainy season (October–December) indicate 38 counties likely to be affected by floods.
- Most parts of the country will experience above average rainfall; North-Eastern, Eastern and Coast regions will be most affected.
- Rainfall will be driven by the current El Nino conditions; ongoing rains are likely to remain enhanced until January 2024 and could last until April.
- Temperatures are expected to be warmer than above average in most parts of the country and cooler than average in parts of the Northeast and Coastal region.
- The likelihood of disease outbreaks remains high.
- Climate impacts vary spatially according to biophysical conditions and concentrations of population and economic activity.
- Human costs and channels of impact highlighted:
  - high disease burden due to insufficient access to safe water and sanitation services and air pollution;
  - displacement due to droughts and floods;
  - decline in labor productivity due to heat stress, especially on outdoor activities.
- Household coping behavior: reductions in consumption, especially in rural areas and among the poorest.

### Government adaptation policies and priority resilience actions
- International and national frameworks and outcomes:
  - Africa Climate Summit (ACS) held in Nairobi in September 2023; Government of Kenya signed the Nairobi Declaration.
  - Third National Climate Change Action Plan (NCCAP) (2023–27) and the National Long-term Low Emissions Development Strategy (LTS) (2022–50) were launched during the ACS.
- Nairobi Declaration priorities emphasized in the report:
  - decarbonizing the global economy for equality and shared prosperity;
  - investment to promote sustainable use of Africa’s natural assets for low carbon development;
  - comprehensive response to the incipient debt crisis outside default frameworks to create fiscal space for development and climate action;
  - prioritizing and mainstreaming adaptation into development policymaking and planning.
- NCCAP priorities include sector-specific adaptation and mitigation actions; energy priorities include development of new renewables (geothermal, solar, wind) and new biofuel plants with private sector engagement by 2028.
- Identified enabling policy and institutional measures to mobilize climate finance (per Kenya CCDR):
  - enhancing national financial and institutional capacity to mobilize climate finance;
  - conducting climate risk management of the financial sector;
  - developing a roadmap for greening financial sector;
  - developing data infrastructure to inform green finance decision;
  - prioritizing a portfolio of investments considering climate/biodiversity targets, macro-fiscal situation, debt management strategy, and access to capital markets;
  - expanding public-private-partnerships for priority investment;
  - optimizing use of grant and concessional finance to catalyze private sector investments;
  - initiating a program to pilot test and scale innovative instruments.
- Institutional gaps noted:
  - absence of a robust coordination mechanism for steering climate positive development;
  - need to operationalize a mechanism for inter- and intra-coordination among national, county and municipal government;
  - need to clarify institutional mandates on climate finance and carbon markets and operationalize the National Climate Change Fund.

### Government mitigation policies and priority areas to reduce GHG emissions
- Major initiatives and legislative actions:
  - Africa Green Investment (AGI) initiative launched at COP28 in Dubai.
  - National Landscape and Ecosystem Restoration Strategy (NLERS).
  - Green Fiscal Incentive Policy Framework (GFIPF) under refinement; includes sector-specific fiscal actions across agriculture, forestry, water, energy (including clean cooking) and waste management, and proposals such as a carbon tax and green investment bank.
  - Climate Change (Amendment) Act, 2023 enacted in September 2023; provides for establishment of a publicly accessible carbon registry and a Designated National Authority to manage the registry.
  - Carbon markets regulations drafted and expected to be ratified by early 2024; capacity building and technical assistance needed for operationalization.
- Kenya’s emissions profile and targets:
  - Kenya contributes less than 0.1 percent of global greenhouse gas emissions annually.
  - GHG emissions estimates: 56.8MTCO2e in 1995; 93.7MT CO2e in 2015; projected to reach 300MTCO2e by 2050 in a scenario of no intervention (per Kenya’s draft Long-Term Strategy).
  - Emissions by sector: agriculture 40 percent; 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.
  - Updated NDC targets a 32 percent reduction in GHG emissions by 2030 relative to a business-as-usual scenario of 143MtCO2e (compared to 30 percent in the first NDC).
- Energy sector status and opportunities:
  - 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 declining: from about a third of installed capacity (contributing about 20 percent of generation in 2015) to about a fifth of installed capacity and contributing around 10 percent of generation.
  - Kenya is connected to regional hydropower resources via the Kenya-Ethiopia Interconnector and benefits from regional energy trading through the Eastern Africa Power Pool.
  - At current costs Kenya has an opportunity to meet electricity needs almost entirely from green energy sources and at affordable costs.
- Forestry, land restoration, and other mitigation measures:
  - Government program to increase tree cover to 10.6 million hectares, up from the current level of 7.2 million hectares.
  - Reforestation, if combined with improved agricultural productivity, lower demand for biomass-based energy for cooking, tenure security, and mobilized financing (including via carbon markets), could enable Kenya to meet NDC commitments and potentially offer carbon credits on international markets.
  - Need for accelerated transition from biomass-based energy for cooking to sustainably produced cleaner fuel options.
  - Integration of climate considerations into Agricultural Sector Transformation and Growth Strategy 2019–29 recommended to augment resilience and productivity while contributing to emissions reduction.
- Urban mitigation priorities:
  - Develop comprehensive national urban transport policy framework.
  - Prioritize integrated multi-modal public transport systems, improve public transport and non-motorized transport (sidewalk and bicycle lane), shift from car-centric to people-centric approach.
  - Adopt battery electric vehicles (BEV) in conjunction with mass rapid transit to contribute to decarbonization.
  - Apply low-carbon approaches in supplying affordable housing in urban areas.
  - Resilient, greener cities require high levels of human, technical and financial resources and institutionalized knowledge and participatory governance.

### Human, social, and economic costs; historical impacts
- ND-GAIN ranking: Kenya ranked 39th most vulnerable to climate change (2020).
- More than 70 percent of natural disasters in Kenya attributable to extreme climatic events.
- Major droughts occur every ten years; moderate droughts or floods every three to four years.
- The 2008–11 drought estimated cost: US$12.1 billion (US$0.8 billion destruction of physical and durable assets; US$11.3 billion losses across all sectors) (Kenya Post Disaster Needs Assessment 2008–11 Drought).
- Droughts estimated economic impact: 8 percent of GDP every five years.
- One third of Kenya’s population still lives under the international poverty line.
- Policy recommendation focus areas for short- to medium-term climate and development gains:
  - agricultural productivity;
  - expansion of irrigation;
  - climate-proofing critical infrastructure links;
  - health;
  - waste management;
  - forest resource management and restoration.

### World Bank and financing engagements
- Kenya Country Climate and Development Report (CCDR) released November 2023 recommends operationalizing coordination mechanisms and clarifying institutional mandates on climate finance and carbon markets.
- Under a business-as-usual scenario, inaction could dampen real GDP by 1.3 to 2.4 percent by 2023 and 3.6 to 7.3 percent by 2050 under different climate futures compared to the baseline.
- Second Additional Financing for Kenya Water Security and Climate Resilience Project (P181345) approved in FY24; it has over 20 percent climate co-benefits.

*Source: 1kenea2024001 (excerpt of IMF Kenya country material).*

### 11.      Strengthening Policy and Institutional Structures for Addressing Climate Change. Kenya has

### 11.      Strengthening Policy and Institutional Structures for Addressing Climate Change. Kenya has

### Operationalizing the climate policy planning and implementation framework
- Kenya has developed a strong climate policy framework, including a Climate Change Act.
- Key actions recommended to operationalize a whole-of-government approach:
  - incorporate the NDC targets into the MTPs, sectoral plans, and urban plans;
  - provide guidance in Budget Circulars for aligning proposed programs and projects with the NDC targets;
  - streamline and strengthen the monitoring and evaluation of climate targets.
- To address limited horizontal (between government agencies) and vertical coordination (particularly for sectors decentralized as part of the Constitution), advance implementation of institutional coordination platforms by:
  - operationalizing the National Climate Change Council and Climate Change Units;
  - elaborating the governance, resource mobilization, and investment arrangements for the National Climate Change Fund and the County Climate Change Fund.

### Climate change as a cross-cutting public finance issue
- Progress and gaps:
  - There has been progress in aligning the budget with climate change strategies and providing information on climate-related objectives.
  - Specific climate targets and indicators could be further incorporated into the performance contracts of public sector budget units and public entities implementing climate-related programs.
  - More work is needed on systems of internal controls to ensure compliance with climate-related expenditure, particularly in the Integrated Financial Management Information System.
  - The public investment management framework requires environmental and social impact assessments for public investment projects, but it does not integrate provisions for climate disaster risk screening.
  - The authorities are developing a Sustainable Procurement Framework, but it has not yet been integrated into procurement regulations.
  - The public procurement framework does not include climate-responsive procurement guidelines and principles.
  - There is no comprehensive data to inform understanding the extent to which public procurement advances or impacts climate and sustainability objectives.

### Accessing carbon markets for expanded green finance
- Sectors with potential to generate carbon credits: forestry, blue economy, agriculture, buildings, energy, and transport.
- Strategic positioning:
  - Enabling high-quality carbon credits could favorably position Kenya in carbon markets.
  - At COP27, Kenya announced its commitment to scaling voluntary carbon markets.
  - Kenya is one of the African countries expected to benefit from the new Africa Carbon Markets Initiative, which aims to support the rapid growth of carbon credit generation and associated jobs.
- Revenue potential and legal framework:
  - Bilateral carbon trades under the Paris Agreement could potentially provide substantial revenues for Kenya, particularly if prices reflect the opportunity cost of additional mitigation action.
  - A recent amendment to the Climate Change Act outlines a framework for decision-making related to participation in carbon markets.
  - Capitalizing on carbon markets will require the Government of Kenya to finalize the formulation of a robust legal framework to provide the necessary legal basis for carbon markets and to operationalize the legislation.
- Environmental integrity and measurement:
  - Ensuring environmental integrity of carbon credits will require development of infrastructure for measurement, reporting, and verification systems and registry infrastructure.

### World Bank engagement and operations with climate co-benefits
- Portfolio focus:
  - The World Bank’s climate elements span agriculture, blue economy, energy, urbanization, water management, and social protection.
  - Financing is provided through a mix of project finance and budget support.
  - The World Bank supports devolution of climate action via the Financing Locally Led Climate Action Program for Results.
- Projects and technical assistance under preparation include transport, energy, landscape restoration, and health.
- Analytical and technical assistance includes work on greening the PPP pipeline, carbon markets and climate finance, landscape restoration, irrigation expansion, green jobs, greening housing development, and more.
- The World Bank is finalizing the Country Climate and Development Report for Kenya, integrating climate change and development considerations to prioritize actions for boosting adaptation and maintaining low emissions while delivering broader development goals.
- Active World Bank operations producing more than 20 percent climate co-benefits (listed as presented in source):
  - Kenya Urban Support Program
  - Kenya: Off-grid Solar Access Project for Underserved Counties
  - KenGen Guarantee Program
  - Marine Fisheries and Socio-Economic Development Project
  - Kenya Social and Economic Inclusion Project
  - E-  National Ag. and Rural Inclusive Grow
  - Kenya-Climate Smart Agriculture Project
  - Second Kenya Informal Settlements Improvement Project
  - Accelerating Reforms for an Inclusive and Resilient Recovery DPF
  - Financing Locally Led Climate Action Program
  - Additional Financing for Coastal Region Water Security and Climate Resilience Project
  - Accelerating Reforms for an Inclusive and Resilient Recovery DPF 2
  - National Agricultural Value Chain Development Project (NAVCDP)

*Source: 1kenea2024001 - 11.      Strengthening Policy and Institutional Structures for Addressing Climate Change. Kenya has*

### 10.      The IMF’s credit outstanding to Kenya at end-December 2023 was SDR 2.1 billion. The

### Kenya — IMF Credit Outstanding and Proposed Augmentation (end-December 2023)

### IMF credit outstanding and repayment schedule
- IMF credit outstanding to Kenya at end-December 2023: SDR 2.1 billion.
- Origins of exposure:
  - SDR 980.8 million: purchases under the 2021 EFF arrangement.
  - SDR 535.3 million: disbursements under the 2021 ECF arrangement.
  - SDR 542.8 million: under the 2020 RCF loan.
- Upon completion of the sixth review—considering the proposed augmentation—and the first disbursement under the RSF, Kenya’s credit outstanding would increase to SDR 2.6 billion by end-January 2024.
- Repurchases/repayments timing:
  - Repurchases under the EFF arrangement and repayments under the RCF loan will begin in 2025.
  - Repayments under the ECF arrangement and the RSF arrangement will begin in 2026 and 2034 respectively.
- Repurchases and repayments amounts:
  - SDR 82.6 million in 2025.
  - SDR 204.0 million in 2026.

### Impact on Fund exposure and concentration
- After the scheduled EFF purchase upon completion of the sixth review:
  - Kenya would become the Fund’s 12th largest GRA borrower.
  - Kenya’s credit outstanding would account for 1.4 percent of total Fund credit.
- Credit concentration:
  - Exposure to the top five borrowers would decline slightly from 68.6 percent to 68.3 percent following the EFF purchase.
- Precautionary balances (PB) and exposure:
  - Fund GRA exposure to Kenya after the EFF purchase would amount to only 5.7 percent of PBs, rising to 9.1 percent when GRA credit to Kenya peaks (assuming the current level of precautionary balances at end-July 2023).

### Access levels and peak exposure scenarios
- Kenya’s EFF access following proposed augmentation:
  - Proposed access for Kenya under the EFF (with augmentation): 395.3 percent of quota.
  - Proposed access under the ECF arrangement: 145 percent of quota.
  - Total access under current arrangements (EFF+ECF): 540.3 percent of quota.
  - Median access for other GRA exceptional access arrangements since 2008: close to 730 percent of quota.
- Total Fund exposure peak (assuming all proposed purchases and disbursements made as scheduled):
  - Peak at 715 percent of quota during March-September 2025 (including RCF, ECF and RSF).
  - Increase from 378 percent of quota at end-December 2023 to 472 percent of quota at end-January 2024 upon completion of the sixth review under the EFF/ECF and first review under the RSF.
  - Excluding the RSF, credit outstanding would peak at 640 percent of quota and remain above 600 percent until October 2026.
  - Considering GRA only (EFF arrangement), credit outstanding would peak at 395.3 percent of quota.

### Capacity to repay indicators and comparative position
- Peak and benchmark comparisons:
  - Many of Kenya’s capacity to repay indicators would exceed corresponding benchmarks applicable to PRGT-eligible countries.
  - With the proposed augmentation, total credit outstanding (excluding the RSF) is projected to peak at 4.5 percent of GDP and 55.2 percent of gross international reserves in 2024, both exceeding the 75th percentile of the Fund’s past Upper Credit Tranche (UCT)-quality arrangements for LICs.
  - Non-RSF debt service to the Fund would peak by 2029 at:
    - 4.1 percent of exports.
    - 3.4 percent of fiscal revenues.
  - These debt service measures are both well above the top quartile of past IMF UCT-quality arrangements for LICs.
- Comparative medians for GRA exceptional access cases:
  - Kenya’s peak exposure in terms of GDP and of total external debt are below the median.
  - Peak exposure in terms of international reserves is somewhat above the median.
  - Peak debt service to the Fund in terms of exports of goods and services and of total external debt service are below the median.
  - Peak total external debt service in percent of goods and services is marginally above the median.
- Risks and mitigants:
  - Elevated scheduled debt service levels may pose medium-term capacity-to-repay risks.
  - Mitigants include continued access to multilateral concessional financing and a strong track record of servicing debts.

### Impact on Fund liquidity, income, and PRGT resources
- Fund liquidity:
  - Forward Commitment Capacity (FCC) as of December 6, 2023: SDR 163.6 billion.
  - With the proposed EFF augmentation, FCC would decline by 0.4 percent from that level.
  - Kenya is not a member of the Financial Transactions Plan (FTP); no additional second-round impact on FCC.
  - Upon completion of the sixth review, the GRA’s liquidity as measured by FCC will be reduced by the amount of the augmentation and the Fund’s remaining lending capacity will fall by 0.4 percent.
- Income risks and charges:
  - Fund income from Kenya projected to account for about 2 percent of total lending income in FY2024 (based on a desk survey scenario as of September 2023).
  - Total GRA charges and fees for Kenya projected at SDR 116 million for 2024.
  - SDR 116 million accounts for 8.6 percent of the Fund’s current residual burden-sharing capacity of SDR 1.35 billion (as of December 6, 2023).
  - If Kenya were to accrue arrears on charges and surcharges, the Fund’s burden sharing mechanism would be sufficient to cover such arrears.
- PRGT subsidy, loan resources, and credit risk:
  - Proposed ECF augmentation: SDR 46.14 million (8.5 percent of quota).
  - Impact on PRGT subsidy and loan resources would be small given the augmentation’s size, but PRGT credit risk would increase.
  - PRGT exposure to Kenya:
    - PRGT credit outstanding at about SDR 1.1 billion at end-November 2023 (about 6 percent of total PRGT credit outstanding).
    - Kenya is the third largest PRGT borrower.
    - Kenya’s existing and prospective PRGT loans amount to about one-fourth of the balances in the PRGT reserve accounts.

### Enterprise, reputational, and program risks; assessment
- Enterprise and non-financial risks:
  - Enterprise risks are elevated on both sides.
  - Failure of augmented arrangements to reduce debt risks, mobilize sufficient financing, and deliver sustainable growth would pose reputational risks to the Fund.
  - The augmentation would increase the share of preferred creditor debt by a small margin.
- Risk mitigation:
  - Continued implementation of a credible policy package and catalytic effect of Fund financing.
  - Full program implementation by the authorities and close engagement with official and private creditors are essential.
- Program assessment and macro framework projections:
  - The proposed augmentation would help Kenya meet urgent balance of payments needs arising since the fifth review, including the reduced likelihood of full rollover of the US$2 billion Eurobond maturing in June 2024.
  - Program targets and projections:
    - Primary balance of the central government: from a deficit of 0.6 percent of GDP in FY2022/23 to a surplus of 0.7 percent of GDP in FY2023/2024; stabilize in the medium term at a surplus of 1.7 percent of GDP.
    - Public debt: peak at 73 percent of GDP in 2024 and decline to 63 percent of GDP in 2028.
    - Current account deficit: stabilize at 4.2 percent of GDP in the medium term.
    - Fund financing would cover 39 percent of the total financing gap during the life of the program.
    - Under the program baseline, Kenyan authorities are expected to regain international bond market access by 2025.
- Overall conclusions:
  - The proposed EFF/ECF augmentation would increase Fund exposure but have a limited impact on Fund liquidity and PRGT resources.
  - Kenya’s capacity to repay the Fund is assessed as adequate but subject to increased risks since the fifth review, notably from delays in reform implementation, lower-than-projected financing from other creditors, shocks to export growth, and exchange rate depreciation.
  - Risks are mitigated by concessional financing access and Kenya’s strong track record of servicing debts; residual risks must be weighed against the reputational cost of not supporting an on-track program facing urgent balance of payments needs.

*Source: IMF staff assessment (extract).*

### 25.      Strong program implementation and materialization of financing from other creditors

### 25.      Strong program implementation and materialization of financing from other creditors

### Key analytical finding
- Adequate capacity to repay depends on:
  - robust and durable program implementation;
  - continued growth-friendly fiscal consolidation; and
  - efforts to boost exports and international reserves.
- Credible reform implementation is key for mobilizing resources from other official and private creditors, including regaining access to global bond markets.

### Proposed Access and Phasing Under the Extended Fund Facility and the Extended Credit Facility (Table 1a) — selected entries and totals
- Approval (April 2, 2021): 141.13 SDR millions (26.00 percent of quota) under GRA; 75.99 SDR millions (14.00 percent of quota) under PRGT; Total Available Purchases and Loans 217.12 SDR millions (40.00 percent of quota).
- June 20, 2021 (Completion of first reviews): 198.12 SDR millions (36.50 percent of quota) GRA; 86.85 SDR millions (16.00 percent of quota) PRGT; Total 284.97 SDR millions (52.50 percent of quota).
- November 7, 2023 (Completion of sixth EFF-ECF and first RSF reviews): 360.41 SDR millions (66.40 percent of quota) GRA; 108.83 SDR millions (20.05 percent of quota) PRGT; Total 469.25 SDR millions (86.45 percent of quota).
- May 7, 2024 (Completion of seventh reviews): 647.02 SDR millions (119.20 percent of quota) GRA; 62.69 SDR millions (11.55 percent of quota) PRGT; Total 709.72 SDR millions (130.75 percent of quota).
- Total (sum of scheduled entries in table): 2,145.69 SDR millions (395.30 percent of quota) GRA; 787.04 SDR millions (145.00 percent of quota) PRGT; Total Available Purchases and Loans 2,932.73 SDR millions (540.30 percent of quota).

### Schedule of Reviews and Disbursements Under the RSF Arrangement (Table 1b) — selected entries and totals
- Board approval: July 17, 2023 — 0.00 SDR millions (0.00 percent of quota).
- November 7, 2023 (Reform measure 1 implementation review): 45.23 SDR millions (8.33 percent of quota).
- May 7, 2024 (Reform measures 2, 3, and 4 implementation reviews): each 45.23 SDR millions (8.33 percent of quota); note: authorities anticipate RM3 could take longer but are not requesting rephasing.
- October 30, 2024 (Reform measures 5, 6, 7 implementation reviews): two entries of 45.23 SDR millions (8.33 percent) and one entry of 45.23 SDR millions (8.48 percent) respectively.
- March 15, 2025 (Reform measures 8 and 9 implementation reviews): each 45.23 SDR millions (8.48 percent of quota).
- Total under RSF schedule: 407.10 SDR millions (75.00 percent of quota).

### IMF Financial Arrangements and Fund Exposure, 1988-2045 (Table 2) — salient points
- Kenya’s quota is SDR 542.8 million (noted elsewhere).
- EFF arrangement approved April 2021: SDR 1,248.4 million, augmented in the fifth review to SDR 1,484.6 million and currently to SDR 2,145.7 million.
- ECF arrangement approved April 2021: SDR 407.1 million, augmented in the fourth review to SDR 569.9 million, in the fifth review to SDR 740.9 million, and currently to SDR 787.0 million.
- Series of projected Fund exposure lines show outstanding Fund credit rising through 2024 and into the medium term under existing and prospective credit projections (figures and italics used in source tables).

### Decomposition of Public Debt, 2022-25 (Table 3) — selected stock figures (US$ mln)
- Total public debt:
  - 2022: 73,625
  - 2023: 70,822
  - 2024 (projection): 70,962
  - 2025 (projection): 73,856
- External debt:
  - 2022: 37,370
  - 2023: 39,152
  - 2024: 41,032
  - 2025: 42,429
- Multilateral creditors (external):
  - 2022: 17,474
  - 2023: 19,374
  - 2024: 23,414
  - 2025: 24,936
- IMF exposure within multilateral:
  - 2022: 2,399
  - 2023: 2,778
  - 2024: 4,927
  - 2025: 5,098
- Bonds (private creditors):
  - 2022: 7,100
  - 2023: 7,100
  - 2024: 5,100
  - 2025: 5,400
- Domestic debt:
  - 2022: 36,254
  - 2023: 31,670
  - 2024: 29,930
  - 2025: 31,427
- Memorandum: Multilateral debt as percent of external debt:
  - 2022: 46.8
  - 2023: 49.5
  - 2024: 57.1
  - 2025: 58.8
- Multilateral debt as percent of GDP:
  - 2022: 15.4
  - 2023: 17.9
  - 2024: 23.8
  - 2025: 23.5

### Decomposition of Public Debt and Debt Service by Creditor, 2023-25 (Table 4) — selected items (US$ mln and percents)
- Total debt stock (2023): 73,625 (100.0 percent total debt).
- External debt (2023): 37,370 (50.8 percent of total debt).
- Multilateral creditors (2023): 17,474 (23.7 percent of total debt).
- Bilateral creditors (2023): 10,497 (14.4 percent of total debt).
- Bonds (2023): 7,100 (9.6 percent of total debt).
- Domestic (2023): 36,254 (49.2 percent of total debt).
- Contingent liabilities / public guarantees (2023): 1,417 (1.9 percent of total debt).
- Debt service flows shown by creditor category in the table for 2023–25, with annual external debt service (public) figures in the memorandum table.

### Capacity to Repay Indicators (Table 5) — selected projections and indicators (SDR millions and ratios)
- Fund Obligations Based on Existing and Prospective Credit (millions of SDRs) — totals by year (selected):
  - Total obligations (millions of SDRs):
    - 2023: 73.4
    - 2024: 121.4
    - 2025: 249.6
    - 2026: 371.2
    - 2027: 436.6
    - 2028: 600.0
    - 2029: 715.7
  - In U.S. dollars (millions) corresponding annual totals are listed in the table (e.g., 2023: 97.9; 2024: 161.4; 2025: 333.5).
- Percent of quota for Total Obligations:
  - 2023: 13.5
  - 2024: 22.4
  - 2025: 46.0
  - 2026: 68.4
  - 2027: 80.4
  - 2028: 110.5
- Outstanding Fund Credit Based on Existing and Prospective Credit (millions of SDRs) — selected years:
  - 2023: 2,051.8
  - 2024: 3,669.8
  - 2025: 3,800.1
  - 2026: 3,596.1
  - 2027: 3,319.9
  - 2028: 2,873.8
- Outstanding Fund Credit as percent of quota:
  - 2023: 378.0
  - 2024: 676.1
  - 2025: 700.1
- Outstanding Fund Credit as percent of GDP:
  - 2023: 2.5
  - 2024: 5.0
  - 2025: 4.8
- Net Use of Fund Credit (disbursements and purchases vs repayments) shows disbursements and scheduled repayments by year with exact SDR values in the table.
- Memorandum items (selected):
  - Nominal GDP (millions of U.S. dollars): 2023: 108,436; 2024: 98,398; 2025: 106,317; subsequent annual projections up to 2045 are listed in the table.
  - Exports of goods and services (millions of U.S. dollars): 2023: 13,382; 2024: 14,647; 2025: 16,028; subsequent annual projections are listed.
  - Gross international reserves (millions of U.S. dollars): 2023: 7,554; 2024: 8,067; 2025: 9,042; subsequent annual projections are listed.
  - Government revenue (millions of U.S. dollars): 2023: 19,434; 2024: 18,804; 2025: 20,703; subsequent annual projections are listed.
  - Average exchange rate: SDR per U.S. dollars 0.75 for 2023–2025 and 0.74 in later years per table.

### Impact on GRA Finances (Table 6) — selected metrics (as of 12/6/2023; in millions of SDR unless otherwise noted)
- Current one-year Forward Commitment Capacity (FCC): 163,636.8
- Impact of augmentation on FCC: -661.1 (in percent of current one-year FCC: -0.4)
- Fund GRA credit outstanding to Kenya upon augmentation approval (projected): 1,341.3 (in percent of current precautionary balances: 5.7; in percent of total GRA credit outstanding: 1.4)
- Fund GRA credit outstanding to top five borrowers: 63,540.0 (in percent of current precautionary balances: 270.3; in percent of total GRA credit outstanding: 68.6; in percent upon augmentation approval: 68.3)
- Kenya's GRA charges/surcharges remaining in 2023 in percent of residual burden sharing capacity: 0.0
- Fund's precautionary balances (as of end-October 2023): 23,511 (memorandum item)
- Fund's residual burden-sharing capacity: 1,353.8 (memorandum item)

### Visual and comparative analysis (figures referenced)
- Figures in the source present comparisons of Kenya’s debt and Fund exposure against other exceptional access and PRGT cases, including:
  - Debt Ratios for Exceptional Access Arrangements (total external debt, public external debt, external debt service, total public debt) with Kenya reflecting end-2023 data.
  - Time series of projected credit outstanding path under EFF, ECF, RCF, and RSF.
  - Credit concentration of Fund GRA exposure showing Kenya at 6.6 percent of total credit outstanding (finance-department-based share) alongside other countries.
  - Capacity to Repay indicators compared to Upper Credit Tranche arrangements for PRGT countries, with Kenya’s CtR series plotted relative to medians and interquartile ranges for comparator groups.

### Policy implications and recommended priorities (drawn from text and tables)
- Maintain strong program implementation to ensure adequate capacity to repay and to reduce financial risks to the Fund.
- Continue growth-friendly fiscal consolidation to support debt sustainability trajectories reflected in the projections.
- Prioritize reforms and credible implementation to mobilize resources from other official and private creditors and to regain access to global bond markets.
- Monitor and manage GRA liquidity implications of augmentation given the -661.1 impact on FCC and concentration of Fund exposure among top borrowers.

*Source: IMF staff estimates and Kenyan authorities as presented in the chapter "25. Strong program implementation and materialization of financing from other creditors" (1kenea2024001).*

### 1. Our Kenyan authorities appreciate the fruitful engagements with staff during the mission on

### Our Kenyan authorities appreciate the fruitful engagements with staff during the mission on

### Program request and context
- Authorities request an augmentation of access amounting to 130.3 percent of quota (SDR707.27 million with SDR661.13 million from the GRA and SDR46.14 million from the PRGT), modifications of program conditionalities, and associated waivers.
- Request motivated by additional fiscal and balance of payments financing gaps resulting from challenging external environment, including unfavorable global financial conditions, negative spillovers from the war in Ukraine and Sudan, and tensions in the Middle East.

### Program performance (II)
- All end-June 2023 Quantitative Targets (QTs) were met, except the target on taxes which was missed.
- Met QTs: primary fiscal balance, net international reserves (NIR), no new domestic guarantees, and present value (PV) of contracting or guaranteeing of new external debt.
- Missed tax target due to significant revenue shortfalls from subdued activity in key revenue-contributing sectors, with some shortfalls continuing through end-December 2023.
- Corrective measures introduced in the 2023 Finance Bill and submitted to Parliament in December 2023, including:
  - Tax policy measures: adoption of a motor vehicle circulation tax; removal of several exemptions on interest income; reduction of selected tax expenditure on VAT and import duties; increase in excise rates for money transfers.
  - Tax administrative measures: improvements in enforcement of VAT on exempt supplies; collection of debt under dispute; completion of audits on ongoing cases and improvements of audits of VAT refunds; strengthening taxation at the source for financial sector; improvements of custom declaration for consolidated cargo.
- Continuous performance criterion on non-accumulation of external arrears was missed by a small margin due to administrative delays in processing payments for two loans.
  - Corrective action: end-of-day reconciliation of request and actual settlement of debt service payments; planned strengthening of compliance of debt reporting by state-owned-enterprises (SOEs).
- Indicative Targets (ITs): end-June 2023 targets on priority social expenditure and exchequer requests outstanding for more than 90 days were met.
- Monetary Policy Consultation Clause (MPCC) triggered for end-June 2023 as three-month average inflation of 7.9 percent was outside the target band of 2.5–7.5 percent. Subsequent CBK actions saw inflation decline in July 2023 to within the target band through December 2023.
- Structural Benchmarks (SBs): six out of seven SBs were implemented albeit with delay; end-September SB on strategy to validate and clear stock of pending bills outstanding at end-June 2022 was not met.
  - Pending Bill Review Committee gazetted in September 2023, commenced work in November 2023, expected to complete and present findings to Cabinet by February 2024. Scope broadened to include tax refund claims.
- RSF reforms: Reform Measure on the National Framework for Climate Services approved by Cabinet in November 2023.

### Recent economic developments and outlook (III)
- Real GDP growth:
  - Grew by 5.6 percent in the first three quarters of 2023 compared to 5.2 percent over the corresponding period in 2022.
  - Real GDP estimated to have grown by 5.7 percent in 2023.
  - Real GDP expected to remain strong at 5.3 percent in 2024.
- Sector contributions:
  - Agriculture sector grew by 7.0 percent in the first three quarters of 2023 owing to favorable weather conditions.
  - Services sectors remained resilient benefiting from post-pandemic recovery.
- Inflation:
  - Headline inflation declined from 9.1 percent in December 2022 to 6.6 percent in December 2023, within the target range of 2.5–7.5 percent.
  - Three-month average inflation was 7.9 percent at end-June 2023 (prompting MPCC).
  - Inflation drivers: exchange rate depreciation pass-through, elevated international oil prices; El-Nino rains helped food inflation decline; NFNF inflation softened due to tighter monetary conditions.
- External sector and reserves:
  - Current account deficit expected to narrow from 5.2 percent of GDP in 2022 to 4.1 percent of GDP in 2023.
  - FX inflows remained weak amid significant foreign debt service payments.
  - CBK usable foreign exchange reserve buffers estimated at USD 6.6 billion (3.5 months of import cover) as at end December 2023, below statutory target of 4 months of import cover.
  - Decline in imports reflected trends in global energy prices and slowdown in capital imports after completion of major infrastructure projects.
  - Traditional exports of tea, coffee, and horticulture underperformed in line with subdued global demand.

### Fiscal policy and debt management (IV)
- Fiscal consolidation commitment: authorities remain committed to sustained fiscal consolidation to place public finances on a stronger footing.
- Primary fiscal balance: maintained within program target at 0.6 percent of GDP at end-June 2023 against a target of 1.1 percent of GDP.
- Revenue measures and reforms:
  - Aggressive implementation of tax, non-tax, and administrative measures as part of Medium-Term Revenue Strategy (MTRS) and Revenue Administration Reforms (RAR).
  - Planned submission of MTRS to Parliament by February 2024 and strengthening governance through formal monitoring at ministerial level.
  - Commitments to strengthen KRA’s audit function, manage exemptions, and resolve delays in payment of tax refund claims.
- Expenditure management:
  - Rationalizing expenditure execution while prioritizing social spending and reducing pending bills.
  - Commitment to strengthen the Public Procurement System (PPS) via acquisition of an end-to-end e-Government Procurement (e-GP) System and to strengthen Public Finance Management (PFM) to improve expenditure controls.
- Fuel subsidies:
  - Eliminated overall subsidies on March 15, 2023, and cross-subsidies on May 15, 2023.
  - Taskforce established comprising National Treasury, Ministry of Energy and Petroleum, and EPRA to review fuel pricing mechanism and align decisions with budgeted resources.
- Debt strategy:
  - Committed to placing public debt on a firm downward trajectory over the medium term via implementation of the 2023 Medium-Term Debt Management Strategy (MTDS).
  - Debt anchor: replaced the nominal debt limit with a debt anchor of 55 percent of GDP in present value (PV) to be achieved by 2029.
  - Recent weakening of the shilling and higher borrowing costs have increased interest payment on debt by around 1 percent of GDP.
  - Closed international bond markets have constrained fiscal space.

### Monetary, exchange rate, and financial sector policies (V)
- Monetary policy:
  - CBK maintained a tight monetary policy stance over the past one and half years to entrench price stability.
  - At December 2023 MPC meeting, CBK raised its policy rate by a further 200 basis points to preempt second-round effects and anchor inflation expectations.
  - CBK committed to decisively adjust monetary policy as warranted.
- Ongoing CBK reforms to improve policy transmission and market functioning:
  - Refining macroeconomic modeling and forecasting frameworks.
  - Developing a new monetary policy implementation framework.
  - Improving access to the Discount Window.
  - Implementing measures to improve functioning of the interbank market including a Centralized Securities Depository System (CSD).
  - Improving transmission to bank lending rates by reviewing commercial banks’ risk-based loan pricing models.
  - Continuing to adapt and improve communication of monetary policy decisions.
- Foreign exchange market reforms:
  - Commitment to strengthen foreign exchange market efficiency and support a flexible exchange rate as shock absorber.
  - Reforms already introduced: issuance of the Kenya FX code in March 2023; implementation of electronic matching system in the wholesale inter-bank market and issuance of related circular in December 2023.
- Financial sector stability:
  - Banking sector remains stable and resilient, but authorities attentive to elevated credit and market risks.
  - Plans to enhance surveillance, preserve capital and liquidity buffers, and closely monitor FX exposures.
  - Authorities intend to request an IMF Financial Sector Stability Review (FSSR).
  - Continued reform momentum: CBK’s Banking Sector Charter objectives include bolstering resilience and greening of the banking sector, and reviews to the CBK Act.

### Structural reforms (VI)
- SOE and state corporation governance:
  - Structural reforms to strengthen governance and oversight of SOEs and state corporations remain high priority.
  - New privatization Act published October 2023; authorities working on a five-year privatization program under this law.
  - Continued extraordinary budget support within programmed envelope to SOEs and government-linked companies.
  - Early benefits from reforms at Kenya Airways (KQ) and Kenya Power and Lighting Company (KPLC): both reported operational profits in the first six months of 2023 without recourse to the Treasury.
- Anti-corruption and AML/CFT:
  - AML/CFT (Amendment) Act 2023 became law.
  - Authorities working to enhance AML/CFT action plan to address shortcomings in the 2022 Mutual Evaluation Report by the Eastern and Southern African Anti-Money Laundering Group and to strengthen AML/CFT risk-based supervision framework.

### Building resilience to climate change (VII)
- RSF-supported reforms:
  - Adoption of the National Framework for Climate Services approved November 2023 to strengthen collaboration among regional and national institutions for climate information services.
  - Authorities continue to access global climate funds and leverage private climate finance to bolster resilience to climate shocks.

### Conclusion and requests (VIII & summary)
- Authorities remain committed to maintaining macroeconomic stability and resilience, preserving fiscal and debt sustainability, and building buffers against shocks.
- View Fund-supported programs as instrumental to unlocking additional support and serving as an important policy anchor for Vision 2030 and the administration’s bottom-up development model.
- Seek Executive Directors’ support to conclude the sixth EFF/ECF program reviews and related requests, and the first RSF review.

*IMF staff report: Kenyan 2023 Article IV consultation, sixth reviews of EFF/ECF and first RSF review (excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kenea2024001.pdf_