## 1kenea2024003-print-pdf ## Source details **Canonical URL:** [1kenea2024003-print-pdf](https://www.imf.org/-/media/files/publications/cr/2024/english/1kenea2024003-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1kenea2024003-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1kenea2024003-print-pdf.pdf.json) --- ### Executive summary — context and key outcomes - Protests beginning in June 2024 were triggered by revenue proposals in the 2024 Finance Bill; the President withdrew the Bill in late June 2024. - Consequences: tragic loss of lives and injuries; Supplementary FY2024/25 Budget with deep spending cuts approved in July; Cabinet reconstituted in August. - Preceding shocks: COVID-19, global import price and market finance shocks, severe multi-season droughts. - Authorities face a trade-off: meet priority social spending, service large upcoming debt obligations, and boost domestic revenues. - Exceptional BoP operation: repayment of June 2024 US$2 billion Eurobond addressed with a February 2024 Eurobond issuance (US$1.5 billion; coupon 9.75 percent; yield 10.375 percent). - Document date: October 18, 2024. ### Macroeconomic developments - Real GDP growth: - 2023: 5.6 percent. - H1 2024: 4.8 percent y/y. - 2024 program baseline projection: 5.0 percent. - Inflation and monetary policy: - Headline inflation: 3.6 percent (September 2024); January 2024: 6.9 percent. - NFNF (core) inflation: around 3.5 percent. - CBK policy rate lowered by 100 basis points since August to 12 percent (two steps). - External sector: - Current account deficit: 4.0 percent of GDP in 2023 (narrowed). - Diaspora remittances rose 18 percent y/y in H1 2024 (another place: 17 percent y/y H1 2024 referenced). - Real effective exchange rate appreciated by about 2 3.2 percent since January to August level last seen in late 2022. - Program medium-term growth assumption: staff revised to 5 percent (previously 5.3 percent); MTP‑IV projects 7.2 percent by 2027. ### Fiscal outcomes and revenue performance - FY2023/24 fiscal outcome: - Tax revenues grew by 11.3 percent but missed target by close to 2 percent of GDP (about Ksh.329 billion shortfall cited). - Fiscal deficit FY2023/24: estimated 5.3 percent of GDP (0.6 percent of GDP larger than programmed). - Spending carryover to FY2024/25: estimated 1.3 percent of GDP; Supplementary FY2024/25 Budget provisions 0.4 percent of GDP. - FY2024/25 Supplementary Budget targets: - Primary surplus targeted: 1.4 percent of GDP (about 1 percent of GDP lower than envisaged in initial FY2024/25 Budget). - Supplementary closes about half of 1.8 percent of GDP revenue measures withdrawn via additional spending cuts of 0.7 percent of GDP and expects ordinary nontax revenues of 0.3 percent of GDP. - Near-term revenue performance: - Tax revenue in first two months of FY2024/25 declined by 0.8 percent y/y. - Authorities submitted draft Tax Laws Amendment Bill with measures amounting to 0.9 percent of GDP (annual yield). ### Program performance and conditionality - Quantitative performance criteria (QPCs): - End-December 2023: 4 out of 6 QPCs met; missed tax revenues QPC and continuous QPC on no new external payment arrears (waiver granted at sixth reviews). - End-June 2024: QPCs met except fiscal QPCs (primary balance and tax revenues). - End-December 2024: new QPC proposed on ordinary revenues (floor); tax revenue QPC proposed to be indicative. - Structural benchmarks (Jan–Jun 2024, ten SBs): - Met: 1 (end-February SB on MTRS governance). - Not met: 3 (inventory/classification of SCs; FY2023/24 Supplementary Budget; FY2024/25 Budget). - Implemented with delay: 3 (pending bills strategy reports and Petroleum Development Fund governance review). - Rescheduled/proposed reschedule: 3 SBs (financial evaluation of fifty/ seventy SCs expected end-October; Kenya Airways restructuring and Ownership Policy SBs proposed to end-November 2024). - RSF reform measures: - Two additional RMs implemented since previous RSF review (RM2 and RM4 implemented); four RMs due end-September face delays (RM3, RM5, RM6, RM7). ### Banking sector and financial risks - Profitability: banking sector remains profitable. - Asset quality: - NPLs net of provisions are a quarter of capital. - Nonperforming loans: 2024Q2: 13.3 percent; end-2023: 12.3 percent (other passages include 16.3 percent in June 2024 vs 14.5 percent in June 2023—source contains multiple NPL metrics; preserve each as cited). - Loan loss provisioning slowed on expectations of easier monetary conditions. - Capital and liquidity (June 2024): - Core capital adequacy ratio: 16.6 percent. - Total capital adequacy ratio: 19.1 percent. - Liquidity ratio: 53.5 percent (statutory minimum 20 percent). - Other risks: - Banks’ sovereign portfolio significant and unevenly distributed. - Exposure to FX swaps increased, with shorter maturities and more with nonresidents. - Horizontal repo market largely confined to Tier‑1 banks. - Supervisory actions: - CBK developing ILAAP guidelines incl. Foreign Currency LCR and NSFR; proposed minimum capital Ksh.10 billion to encourage consolidation. - IMF macroprudential TA delivered (June–July 2024); FSSR scoping and mission planned. ### Debt dynamics, sustainability, and financing - Public debt levels and key statistics: - Public debt: 73.1 percent of GDP at end-2023. - PV of debt in present-value terms: 68.7 percent of GDP in 2023 (another figure: 68.7 percent PV overall public and publicly guaranteed debt). - Public debt estimated 67.2 percent of GDP by June 2024 on exchange rate appreciation. - Debt service pressures: - Average debt service to revenues ratio exceeding 60 percent during 2024–28. - Ratio of interest payments to revenues (including grants): about 30 percent in 2023; projected average 27 percent over 2024–28. - Kenya faces external debt service averaging around US$4.7 billion annually. - Financing operations and composition: - February 2024 Eurobond: US$1.5 billion (coupon 9.75 percent, yield 10.375 percent) used to partially repay June 2024 Eurobond; amortized 2029–31. - Additional 2024 financing: US$506 million commercial loan from Trade Development Bank; World Bank Development Policy Operation US$1.2 billion; AfDB US$79 million; Germany €60 million. - Fund access adjustments requested: - Restore normal access by reducing total access under EFF/ECF by 40.3 percent of quota (SDR218.73 million). - Augment ECF access by 21.67 percent of quota (SDR117.66 million). - Reduce EFF access by 61.97 percent of quota (SDR336.39 million). - Kenya quota: SDR542.8 million. - Higher PRGT access estimated to lower Fund interest payments by about SDR230 million over 2024–35. - Projected peak outstanding Fund credit (excl. RSF): SDR3.26 billion (600 percent of quota) by end of EFF/ECF; including RSF: SDR3.66 billion (675 percent of quota). - Debt anchor and targets: - Parliament-stipulated debt anchor: overall debt/GDP of 55 percent in PV terms to be reached within 5 years of adoption, thus by 2028 with ±5 percent margin. - Staying within upper limit by 2028 requires average annual primary effort of about 0.3 percent of GDP over the medium term. - Medium-term strategy: cumulative increase in tax revenue by about 1.6 percent of GDP and in non-tax revenue by about 0.2 percent of GDP (from FY2025/26 onward). ### Fiscal policy recommendations and measures - Core objective: anchor macro stability and debt sustainability via mutually reinforcing monetary, financial, and fiscal policies, structural reforms, and concessional external support; prudent debt management emphasized. - Revenue mobilization: - Medium-Term Revenue Strategy (MTRS) to guide domestic revenue mobilization toward an efficient, equitable, and progressive tax regime. - Adopt comprehensive PIT, CIT, and VAT reform plan as envisaged in MTRS (proposed SB end-February 2025). - KRA to adopt/publicize measures for rigorous enforcement of tax arrears and a comprehensive tax arrears management strategy (proposed SB end-November 2024). - Extension of FY2023/24 tax amnesty on arrears proposed until end-June 2025. - Expenditure and PFM reforms: - Reorient spending toward priority social programs, health, education; avoid deep cuts in development spending that impair growth. - Streamline wage bill (including counties and parastatals), intermediate consumption, allowances, payroll system, public procurement, and state corporations. - Implement Treasury Single Account (TSA) and move to accrual accounting; amend PFM Act for in-year revision framework (proposed SB end-December 2024). - Contingency planning: - Identify and be ready to deploy fiscal contingency measures given elevated risks (including potential Supreme Court ruling on constitutionality of 2023 Finance Act). - Monetary and exchange rate policy: - Tight monetary stance near term recommended due to sticky core inflation; maintain exchange rate flexibility and develop FX market, hedging instruments, and reserve accumulation strategy. - Governance and AML/CFT: - Strengthen governance, anti-corruption frameworks (authorities requested governance diagnostic TA), address AML/CFT deficiencies in FATF action plan, and improve beneficial ownership and procurement compliance. ### RSF and climate-related reforms - RSF progress: - RM1 NFCS rollout underway; RM2 climate-change scenarios included in Fiscal Risk Statement (implemented); RM4 green finance taxonomy final draft completed June 2024 and pilot launched early October with ten commercial banks (implemented). - RM3 (carbon pricing) delayed due to socio-political challenges; IMF TA requested. - RM5 (integration of climate risk in project appraisal) underway with World Bank TA; RM6 and RM7 delayed. - RM9 draft climate risk disclosure framework for banking sector released for public consultation in September 2024. - Climate investment needs and targets: - Kenya NDC: 32 percent reduction in greenhouse gas emissions by 2030. - Electricity generation renewables share: 90.9 percent (2024Q2). - Estimated climate-related investment needs: around 6 percent of GDP per year over 2023–30 (source presents "6 percent" spacing preserved). - FLLoCA funding: US$297 million over 5 years from February 1, 2022. - Staff advised careful assessment of environment restoration levy and other green fiscal instruments considering economic incidence, administration, and embedding in comprehensive packages. ### State corporations (SCs), PPPs, and contingent liabilities - SCs and SOE reforms: - 343 state corporations total: 79 commercial GOEs; 264 extra‑budgetary units. - NT preliminary assessment of 271 SCs led to proposals: merge 42 to form 20 SCs; dissolve 9; divest from 16; restructure 6. - Financial evaluation of seventy SCs based on FY2022/23 audited accounts completed; report to Fiscal Risk Committee by end-October 2024. - Cabinet approved divestiture in eleven entities; privatization process affected by High Court ruling on Privatization Act. - Pending bills and arrears: - Pending Bills Verification Committee received claims amounting to Ksh.571.6 billion (3.4 percent of GDP). - Carryovers from FY2023/24: Ksh.218.5 billion cited (cut-off point in source). - Strategy approved by Cabinet on June 11 to clear verified claims over five years starting FY2025/26. - PPPs: - FY2024/25 Budget outlines 37 potential PPP projects amounting to Ksh.1,600 billion (about 9 percent of GDP); Ksh.70 billion expected to be mobilized during FY2024/25. ### Domestic debt market, cash management, and technical assistance - Domestic debt and market developments: - Domestic public debt about 33 percent of GDP at end-2023. - Average time to maturity: 7.4–7.5 years (June 2024 figures 7.5 years; December 2023 8.2 years). - Infrastructure bond issuances and tap sales in Feb and Aug 2024 totaled Ksh.361.7 billion (about US$2.8 billion). - Nonresident participation in tax-free infrastructure bonds elevated exposure to sentiment reversals. - Development measures: - Improve market infrastructure, increase benchmark bond issuance sizes, introduce issuance calendar, and strengthen cash/liquidity forecasting. - IMF TA provided on domestic debt market development and cash management. ### Risks, outlook, and stress tests - Overall risk assessment: risks significantly elevated, dominated by domestic sources. - Key domestic risks: - Continued social discontent and political risks that can derail fiscal consolidation and revenue mobilization. - Downside export risks, contingent liabilities (KQ guarantee call ~US$150 million), Supreme Court legal uncertainty on 2023 Finance Act. - Financial sector vulnerabilities: high NPLs, FX and sovereign exposures. - External risks: - Geopolitical tensions, commodity price volatility, monetary policy miscalibration in major economies, and Red Sea and Middle East disruptions. - DSA and stress tests: - Mechanical DSA signals: high risk of external and overall debt distress. - Combined contingent liability shock calibrated at 10.0 percent of GDP; components include 5 percent GDP for SOE/PPP/pending claims, 0.4 percent legacy county debt, 0.3 percent fuel import mechanism, and 5 percent financial market shock. - Natural disaster stress test: US$1.8 billion increase in public debt and one-off 9 percentage points decline in real GDP growth (calibrated from 2008–11 drought precedent). - Near-term upside: stronger agricultural growth and remittances. ### Program modalities, requests, and staff stance - Authorities request completion of seventh and eighth EFF/ECF reviews and second RSF review; staff supports: - Reduction of EFF access by 61.97 percent of quota (SDR336.39 million). - Augmentation of ECF access by 21.67 percent of quota (SDR117.66 million). - Rephasing of EFF and ECF access consistent with BoP needs. - Redesign QPC on fiscal revenues (new floor on ordinary revenues; tax revenue as indicative). - Waivers requested for nonobservance: end-December 2023 tax revenue QPC; end-June 2024 QPCs on primary balance and tax revenue. - RSF financing: - Staff supports disbursement requests totaling SDR90.4666 million under RSF for two implemented RMs. ### Poverty Reduction and MTP‑IV alignment - MTP‑IV (2023–27) aligns with PRGS and EFF/ECF objectives; launched March 2024. - MTP‑IV targets: - Growth to 7.2 percent by 2027 (MTP aspiration) vs program baseline 5.0 percent. - Job creation: 1.2 million jobs annually. - Fiscal aspiration: overall deficit declining to 2.9 percent of GDP by FY2027/28. - Selected macro table (percent of GDP unless stated; preserved exactly): - Real GDP growth (percent): 2023 Actual 5.6; 2023/24 5.9; 2024/25 6.3; 2027/28 7.2; Program baseline 2024 5.0; 2025 5.0; 2028 5.0. - Total revenue (incl. grants): 2023 Actual 16.7; 2023/24 18.9; 2024/25 19.1; 2027/28 20.0; Program baseline 2024 17.2; 2025 18.0; 2028 19.6. - Public debt, net: 2023 Actual 70.0; 2023/24 65.4; 2024/25 62.7; 2027/28 53.7; Program baseline 2024 63.8; 2025 66.2; 2028 63.7. - Gross official reserves (months current year imports): 2023 Actual 4.0; 2023/24 5.8; 2024/25 5.9; 2027/28 6.1; Program baseline 2024 4.3; 2025 4.4; 2028 4.5. ### Selected operational PFM and reform milestones - Treasury Single Account approved by Cabinet; transition to accrual accounting planned. - e-GP system pilot rolled out in 12 MDAs from July 2024; full roll-out target July 2025. - Unified Human Resource (UHR) system linking payroll and tax: roll-out for entire Public Service by December 2024 (later revised to July 2025 for full implementation in source). - PIMIS pilot in roads, infrastructure, health, education; PIMIS to be populated government-wide by end-June 2025. - Pending bills committee verified Ksh.571.6 billion in claims; Cabinet approved five-year clearing plan starting FY2025/26. *Source: EXECUTIVE SUMMARY; program chapters and annexes — 1kenea2024003-print-pdf.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Widespread protests that started in June were triggered by authorities’ efforts to correct a large tax revenue shortfall in FY2023/24 through revenue raising proposals in the 2024 Finance Bill; some proposals were unpopular or seen as regressive. - The protests resulted in tragic loss of lives and injuries, forced the President to withdraw the Bill, introduced significant spending cuts through a Supplementary Budget in July, and reconstituted the Cabinet in August. - Persistent difficulties in mobilizing revenue coupled with spending rigidities have led to further accumulation of pending bills and necessitated deep cuts in development spending, with potential knock-on effects on growth and debt sustainability. - Preceding large exogenous shocks include COVID-19, global developments impacting import price and affordable access to market finance, and severe multi-season droughts. - Authorities face a complex balancing act: meeting critical spending needs for priority areas (social programs, health, and education), servicing large upcoming debt obligations, and boosting domestic revenues. - Earlier in the year, Kenya addressed exceptional balance of payments (BoP) needs associated with repayment of the June 2024 US$2 billion Eurobond, boosting market confidence, strengthening the shilling, and building reserves. - Fiscal pressures persist, including uncertainty surrounding the constitutionality of the 2023 Finance Act on which the Supreme Court’s decision is awaited. - Date on the document: October 18, 2024. ### Macroeconomic developments - Real GDP growth: - 2023: 5.6 percent (stronger than program baseline). - First half of 2024: slowed to 4.8 percent y/y. - Growth has been largely driven by a recovery in the agriculture sector after two years of droughts. - Inflation and monetary policy: - Headline inflation has eased below the target, but core inflation is sticky. - The central bank has lowered the policy rate in two steps by a total of 100 basis points since August. - External sector: - External current account deficit has narrowed on the back of robust diaspora remittances and weak imports, despite exports underperforming. - Fiscal outcomes: - Planned fiscal consolidation for FY2023/24 did not materialize due to a tax revenue shortfall of close to 2 percent of GDP. - Withdrawal of the 2024 Finance Bill only partially offset the shortfall; additional spending cuts under a Supplementary FY2024/25 Budget (approved in July) were implemented, keeping domestic borrowing needs and costs elevated. - Larger nonconcessional external borrowing in 2024 than programmed at the time of sixth ECF/EFF reviews has increased the debt service burden. - Financial sector: - The banking sector remains profitable, but asset quality has worsened. ### Program performance - Since the sixth EFF/ECF reviews, program performance has significantly weakened amid fiscal policy slippages and delays in reforms. - Quantitative performance criteria (QPCs): - Four out of six end-December 2023 QPCs were met. - Missed QPCs included the QPC on tax revenue and the continuous QPC on no new external payment arrears; a waiver of nonobservance on the latter was granted at the sixth EFF/ECF reviews. - End-June 2024 QPCs were met except for fiscal QPCs (primary balance and tax revenues). - Authorities are seeking waivers of nonobservance of the fiscal QPCs based on corrective action taken through passage of the Supplementary FY2024/25 Budget in July, consistent with program parameters. - Monetary Policy Consultation Clause: - Met for end-December 2023 and end-June 2024. - Adjustment to QPCs: - For the end-December 2024 test date, a new QPC on fiscal revenues is proposed and the current tax revenues QPC is proposed to be monitored as an indicative target. - Structural benchmarks (SBs) due Jan–Jun 2024 (ten SBs): - Met: 1 (end-February SB on governance of the Medium-Term Revenue Strategy). - Not met: 3 (publishing an inventory and classification of state corporations (SCs) as the published document did not meet the objective of the SB; the FY2023/24 Supplementary Budget; and the FY2024/25 Budget). - Implemented with delay: 3 (two SBs on a strategy on clearing the stock of legacy pending bills—a report submitted to the Cabinet in June and published in late July—and the SB on a report on review of the governance framework of the Petroleum Development Fund published in early August). - Expected to be implemented with delay by end-October: 1 (a report on financial evaluation of fifty SCs based on their audited FY2022/23 accounts). - Proposed to be rescheduled to end-November: 2 (the end-April SB on strategic options for restructuring of Kenya Airways and the end-May SB on legal amendments to anchor the Ownership Policy for commercial SCs). - Authorities expect to meet the end-October SB on government involvement in SCs. - RSF arrangement: - Two more reform measures (RMs) implemented since the previous review. - Four RMs expected by end-September face delays: RM3 on carbon pricing; RM5 on integration of climate risk in project appraisal; RM6 on adoption of priority fiscal incentives in selected sectors; RM7 on adoption of two regulations to promote energy efficiency and distributed renewable power generation. ### Policies and reforms (analysis and recommendations) - Core objective: firmly anchor macroeconomic stability and debt sustainability through mutually reinforcing monetary, financial, and fiscal policies, complemented by structural reforms and increased efforts to mobilize external financial support at concessional terms, as well as prudent debt management strategy. - Fiscal stance and revenue mobilization: - Withdrawal of the 2024 Finance Bill necessitated spending compression to contain the deficit. - Spending rationalization remains important to restore public trust and tax morale, but Kenya’s elevated debt vulnerabilities and large debt service obligations call for fiscal consolidation underpinned by additional revenue mobilization to fund priority social and developmental spending needs while ensuring debt sustainability. - The spending cuts in the Supplementary FY2024/25 Budget are considered “stop gap” measures as most cuts are top-down and temporary and thus likely to be reversed. - Authorities have faced spending pressures in the current fiscal year, prompting consideration of additional revenue measures. - Going forward, spending should be reoriented toward priority needs to strengthen social safety nets and accelerate poverty alleviation and human and physical capital accumulation. - Expenditure reforms are needed to free up space for priority needs. - Domestic revenue mobilization guided by the Medium-Term Revenue Strategy that ensures an efficient, equitable, and progressive tax regime remains central to fiscal strategy. - Governance, accountability, and public expenditure management: - Building social and political consensus on revenue strategy requires strengthening accountability, transparency, and efficiency of public expenditure, including reforms on the wage bill and at SCs, and better fiscal risk and debt management. - Timely identification and deployment of contingency measures would be important given elevated risks to fiscal consolidation. - Monetary and external policy: - A tight monetary policy stance in the near term is needed given persistent core inflation above the desired level and to maintain external sustainability. - Further developing the FX market and exchange rate flexibility would cushion against external shocks and safeguard exports and FX reserves. - Governance, anti-corruption, and financial sector: - Strengthening governance and anti-corruption frameworks—staff welcomes the authorities’ request for a diagnostic—addressing financial sector vulnerabilities and AML/CFT deficiencies, and delivering on the climate-related reform agenda would support medium-term potential and attract foreign investment, including climate finance. ### Program access and modalities - Following resolution of the exceptional BoP needs, staff assesses, and the authorities agree, that restoring normal access by reducing the total access under the EFF/ECF arrangements by 40.3 percent quota (SDR218.73 million) is appropriate. - Proposed adjustments: - Augment access from concessional resources under the ECF arrangement by 21.67 percent of quota (SDR117.66 million). - Reduce access under the EFF arrangement by 61.97 percent of quota (SDR336.39 million). - Rationale and expected effects: - A higher access to concessional resources restores the 1:2 PRGT-to-GRA ratio, in line with Fund policies on blended access under a program, resulting in savings on Kenya’s interest payments to the Fund. - Access is proposed to be rephased in line with BoP needs. - Disbursements are proposed for the two RMs implemented since the last RSF review. ### Program risks - Overall risk assessment: risks are significantly elevated, especially from domestic sources. - Key global risks: fallout from geopolitical concerns and miscalibration of monetary policy by major central banks. - Key domestic risks: - Continued social discontent heightens political and implementation risks for needed fiscal consolidation, including domestic revenue mobilization efforts. - Downside risks to exports could undermine debt sustainability and external stability. - Delays in resolving legal uncertainty on key policy matters could exacerbate policy implementation risks, deteriorate market sentiment, raise spreads, and reverse gains in the shilling, adversely affecting debt sustainability. - Risk mitigation: - Timely identification and deployment of fiscal contingency measures as needed. - Maintaining prudent policies, recalibration of access, and a tailored capacity development strategy to help deliver on the reform agenda could mitigate elevated enterprise risks, including financial risks to the Fund. - Success in climate finance mobilization efforts presents an upside to investments in climate resilience. ### Mission and consultations - Approved by: Catherine Pattillo (AFR) and Eugenio Cerutti (SPR). - Mission team: H. Teferra (Head), S. Çakir (IMF Resident Representative in Nairobi), S. Gupta, R. Vermeulen, I. Stuart (all AFR); S. Mirzayev (SPR); G. Pasricha (MCM); S. Hida (FAD); L. Malcherek, D. Robinson, R. Snipeliski (All LEG, joined virtually); D. Tallam and K. K. Tuitoek (Nairobi office), with assistance from F. Morán Arce, M. Nsanzimana, F. Nyankiye (all AFR), R. Prevost (MCM), and E. Muiruri and C. Odwogi (Nairobi office). E. Nyamongo (advisor, OEDAE) joined discussions. - Meetings held in Nairobi during April 2–12, May 9–15, and September 11–16, 2024, and virtually. - High-level contacts included: President of Kenya, Dr. William Ruto; current and preceding Cabinet Secretaries for National Treasury & Economic Planning (Mr. John Mbadi Ng’ongo and Prof. Njuguna Ndung’u); Governor of the Central Bank of Kenya, Dr. Kamau Thugge; and other senior officials, private sector representatives, and development partners. *Source: EXECUTIVE SUMMARY (1kenea2024003-print-pdf).* ### 11. RSF Reform Priorities and Reform Measures (RM) _______________________________________________ 62 ### 11. RSF Reform Priorities and Reform Measures (RM) ### Context and overarching challenges - Kenya faces a complex balancing act of ensuring critical spending in priority areas, meeting heavy debt service obligations, boosting domestic revenues, and restoring socio-political cohesion. - The economy showed resilience to large exogenous shocks over the past three years (multi-season droughts, global shocks that increased import costs and closed access to global bond markets), but public debt rose to a multi-decade high level by end-2023. - Periodic protests—most recently during June–July against new tax measures proposed in the 2024 Finance Bill—highlight broader issues of governance and accountability of government spending and borrowing; the President withdrew the Bill in late June. - Significant financing commitments by the World Bank and the Fund, including exceptional EFF access at the time of sixth ECF/EFF reviews, facilitated an earlier-than-expected new Eurobond issuance in February, though at a double-digit yield. The new Eurobond (US$1.5 billion) with a coupon of 9.75 percent (yield: 10.375 percent) was used to partially repay the June 2024 Eurobond in February; the new bond will be amortized over 2029–31. - Recent fiscal developments have elevated risks to debt sustainability, with a large shortfall in tax collections interrupting planned fiscal consolidation and worsening debt vulnerabilities since the sixth EFF/ECF reviews. ### Recent macroeconomic developments — mixed picture - Growth and activity - Real GDP growth recovered to 5.6 percent y/y in 2023 (2022: 4.8 percent), driven by a strong rebound in agriculture (6.5 percent). - Growth slowed in the first half of 2024 to 4.8 percent, driven by a deceleration in the nonagricultural sector; private consumption supported 2023 growth, while overall investment declined for the second year. - Inflation and monetary policy - Headline inflation eased to 3.6 percent y/y in September (January: 6.9 percent) due to deceleration in food and fuel price inflation, base effects, and the shilling’s strength. - Nonfood, nonfuel (core) inflation remained sticky, averaging around 3.5 percent. - Since August, the CBK lowered the monetary policy rate by 100 basis points to 12 percent. - External sector and exchange rate - The current account (CA) deficit narrowed to 4 percent of GDP in 2023, supported by resilient tourism and remittances and a contraction in nonfood imports following real exchange rate depreciation (8.3 percent). - Diaspora remittances rose 18 percent y/y in the first half of 2024 and helped further improve the CA deficit, although exports and imports growth were slower than expected and services exports declined. - A turnaround in market sentiment after the February Eurobond attracted large portfolio inflows; the shilling strengthened and, as of August, the real effective exchange rate had appreciated by about 2 3.2 percent since January to reach a level last seen in late 2022. ### Fiscal performance and revenue developments - FY2023/24 fiscal outcome and revenue shortfall - FY2023/24 experienced a significant tax revenue shortfall, resulting in about 0.6 percent of GDP larger fiscal deficit than programmed. - Tax revenues grew by 11.3 percent but fell short of the target by close to 2 percent of GDP; the shortfall was broad-based and reflected lower yields from policy measures in the 2023 Finance Act, failure to enact amendments to the 2023 Tax Laws (Amendment) Bill, and possible lapses in tax administration. - To limit the impact of the tax shortfall, authorities identified nontax measures (0.6 percent of GDP) that were mostly temporary (e.g., higher dividends and surplus funds from parastatals, including the CBK). - A Supplementary II was approved in early June to rationalize nonpriority development spending (predominantly foreign financed). - Financing, domestic borrowing, and carryovers - Developments resulted in higher domestic financing needs by 0.8 percent of GDP relative to expectations at the time of the sixth EFF/ECF reviews, keeping domestic borrowing costs elevated. - With Supplementary II approved only in early June, authorities managed to meet about half of the additional domestic financing needs through borrowing, resulting in additional pending bills and a significant spending carryover to FY2024/25, estimated at 1.3 percent of GDP; 0.4 percent of GDP has been provisioned in the Supplementary FY2024/25 Budget. - Revenue performance in the first two months of the current fiscal year continued to disappoint, with tax revenue declining by 0.8 percent y/y; strong nontax collection partially compensated, but revenue growth will need to accelerate from its current rate of 6.3 percent to reach targeted growth. ### Policy priorities, reform directions, and recommended measures - Revenue-led fiscal consolidation and consensus building - Authorities recognize the importance of pursuing revenue-led fiscal consolidation to address debt vulnerabilities durably and safeguard external sustainability. - Given the socio-political context, building consensus on domestic revenue mobilization and the fiscal consolidation strategy is urgent and should proceed without delay. - Broader engagement through timely and open communication and public participation on the fiscal consolidation strategy should continue to enhance accountability and renew public support for improving revenue collections. - Governance, anti-corruption, and accountability - Addressing deep-seated governance and anti-corruption challenges is important to restore public trust and strengthen accountability; this will require strong and sustained policy actions. - Expenditure and fiscal risk management - Streamline nonessential spending, improve fiscal risk management, and strengthen external buffers to safeguard debt sustainability while protecting outlays for social and developmental needs that reduce poverty, promote inclusive growth, and enhance climate resilience. - Role of external support - External financial support on favorable terms, including from the Fund, will be important to safeguard debt sustainability and maintain social and developmental spending during the consolidation process. - Short-term measures applied in FY2023/24 - Temporary nontax measures totaling 0.6 percent of GDP (higher dividends and surplus funds from parastatals, including the CBK). - Supplementary budgets (Supplementary II and a later Supplementary FY2024/25 Budget) to rationalize nonpriority development spending and provision for part of spending carryovers. *Source: 11. RSF Reform Priorities and Reform Measures (RM), from the provided IMF chapter content.* ### 13.2 percent for the year. In parallel, the spending compression envisaged in the ### 1kenea2024003-print-pdf - 13.2 percent for the year. In parallel, the spending compression envisaged in the ### Fiscal position, financing needs, and debt - Larger external nonconcessional borrowing, and costlier and shorter-dated domestic issuances than expected at the time of the sixth ECF/EFF reviews have contributed to higher gross financing needs in the near term. - Recent call for an amount of about US$150 million on government guarantees on Kenya Airways’ (KQ) FX-denominated borrowing from local banks would create additional domestic financing needs. - The Supplementary FY2024/25 Budget targets a primary surplus of 1.4 percent of GDP (about 1 percent of GDP lower than what was envisaged in the FY2024/25 Budget). - The initial FY2024/25 Budget targeted a primary surplus of 2.4 percent of GDP, up from 1.7 percent of GDP envisaged at the time of the sixth EFF/ECF reviews. - The withdrawal of revenue measures in the 2024 Finance Bill removed 1.8 percent of GDP in revenue measures. - The Supplementary expects to collect higher ordinary nontax revenues yielding 0.3 percent of GDP. - Nearly half of the financing gap resulting from the withdrawal of the 2024 Finance Bill is expected to be closed through additional spending cuts (0.7 percent of GDP). - Relative to FY2023/24, authorities envisaged about 1.3 percent of GDP rationalization of primary spending through efforts to contain the wage bill, transfers, and intermediate consumption, while further rationalizing nonpriority projects. - Using staff’s projected fiscal year GDP, this effort would amount to about 1 percent of GDP. ### Banking sector and financial risks - Banking sector profitability ratios improved in the first half of 2024, but FX, credit, and sovereign risks are elevated. - Liquidity and capital adequacy ratios are above regulatory minima for the industry, but nonperforming loans (NPL) net of provisions are a quarter of capital. - Nonperforming loans: 2024Q2: 13.3 percent; end-2023: 12.3 percent. - Loan loss provisioning has slowed on expectations of easier monetary conditions going forward. - Banks’ sovereign portfolio remains significant and unevenly distributed, contributing to profits in an environment of higher interest rates but exposing banks to fiscal risks and mark-to-market losses. - Lending rates have adjusted upward as banks implement risk-based pricing. Real private sector credit growth has decelerated. - Banks’ exposure to FX swaps has increased over the past year, is increasingly with nonresidents, and is at shorter maturities. - In August 2023, the authorities reduced the minimum tenor on FX swaps between banks and nonresidents from one year to six months and between residents of Kenya and the rest of the East African Community to overnight. - FX deposits, loans and liabilities declined in the first half of 2024 due to FX valuation effects. - The horizontal repo market is largely confined to Tier-1 banks, reflecting limited ability of other banks to borrow against government securities. ### Program performance—fiscal slippages and delayed reforms - Program performance since the sixth EFF/ECF reviews has significantly weakened, marred by large fiscal slippages and delays in reforms. - Four out of the six quantitative performance criteria (QPC) were met for each test date (end-December 2023 and end-June 2024). - Only one out of the ten structural benchmarks (SB) for January–June 2024 was met amid implementation delays. - End-December 2023 test date: - All but two QPCs were met (exceptions: tax revenues and the continuous QPC on no new external payment arrears). - The primary balance target was met on a cash basis amid nonobservance of the indicative targets on pending obligations and new domestic arrears. - The IT on priority social expenditure was met. The MPCC was met. - End-June 2024 test date: - Both fiscal QPCs (primary balance and tax revenues) were missed; other QPCs were met. - ITs on priority social expenditure and on domestic arrears were met, but the one on exchequer requests outstanding for 90 days or more was not met. - A Supplementary FY2024/25 Budget was approved in late July in line with the revised primary balance. - QPCs on net international reserves, no new domestic debt guarantees, and present value of new external debt contracted and/or guaranteed were met; end-June 2024 MPCC was met. - Continuous conditionality: All are met since the sixth EFF/ECF reviews. - Structural benchmarks and reform updates (selected): - End-January 2024 SB on updated inventory and classification of state corporations was not met as intended scope and legal effect were not achieved. - End-February 2024: SB on Steering Committee for MTRS was met; SBs on pending bills strategy were delayed—strategy approved by Cabinet in June and published in late July. - End-March 2024: Submission of Supplementary II FY2023/24 Budget was not met; submitted April 30 and not consistent with program (about 1 percent of GDP weaker primary balance and projected 1.5 percent of GDP shortfall in tax revenues). - End-April 2024: FY2024/25 Budget submitted April 30 but assessed not met due to need for further consultation to strengthen credibility; SB on strategic options for KQ not met and proposed to be rescheduled to end-November 2024. - End-May 2024: Submission to Parliament of legal amendments for Ownership Policy for SCs not met; public participation continued until June 14, 2024; authorities request reschedule to end-November 2024. - End-June and end-October 2024: As of August, financial evaluation of seventy SCs based on FY2022/23 audited accounts completed; report expected to Fiscal Risk Committee by end-October 2024; end-October SB on reporting government involvement in SCs expected to be met. - Resilience and Sustainability Facility (RSF) arrangement: Two reform measures implemented since last RSF review—incorporating climate-change scenarios in fiscal risks statement (RM2) and green finance taxonomy (RM4). Other RMs due by end-September face delays (RM3, RM5, RM6, RM7). ### Outlook and risks - 2024 growth is projected at 5 percent, above the forecast for median growth in Sub-Saharan Africa (about 4.0 percent). - The current account deficit is projected at around 4 percent of GDP. - FX reserves are projected to rise in 2024, supported primarily by debt-creating inflows and remittances, and remain adequate at around 4 months of prospective import coverage. - Under the program, staff revised medium-term growth projection to 5 percent from 5.3 percent. - The MTP-IV (2023–27) projects medium-term growth surpassing 7 percent by 2027. - Balance of risks tilted to the downside, dominated by domestic risks: - Recent protests triggered by tax proposals increase risks to fiscal consolidation and medium-term revenue mobilization, leading to reliance on more spending cuts. - Unexpected additional spending needs (contingent liabilities including G2G oil importation scheme, KQ, and SCs), worsening regional security, and climate shocks would add fiscal pressures. - Elevated credit and market risks could expose financial sector vulnerabilities. - Delays addressing AML/CFT deficiencies could lead to lower net capital inflows. - External risks include commodity price volatility, geopolitical fragmentation, intensification of Red Sea attacks and tensions in the Middle East, lower trading partner growth, weaker tourism, monetary policy miscalibration in advanced economies, and deterioration in investor sentiment about Kenya. - Near-term upside: stronger agricultural growth and diaspora remittances could cushion the economy. - Medium-term upside: progress on fiscal strategy, structural reforms under MTP-IV and Fund-supported programs, implementation of trade agreements, and success in climate finance mobilization. ### Policy discussions and recommendations - Priority is anchoring macroeconomic stability and debt sustainability through credible fiscal policy and steadfast reforms. - Supplementary FY2024/25 Budget acts as a stop-gap to contain the fiscal deficit while building public consensus for revenue-based consolidation consistent with the MTRS. - Improving revenue mobilization, guided by the Medium-Term Revenue Strategy, remains central to growth-friendly fiscal consolidation that assures capacity to service debt while delivering essential public goods and services. - Policy mix should be complemented by mutually reinforcing monetary, financial, and medium-term policies, including boosting exports and strengthening financial sector resilience. - Build buffers and identify contingency measures (including for the event the Supreme Court upholds the unconstitutionality verdict on the 2023 Finance Act) that can be deployed in a timely manner. - Strengthen governance and anti-corruption framework, address AML/CFT deficiencies, and deliver on the climate agenda under the RSF, including tailored capacity development support from the Fund. *Sources: Central Bank of Kenya; and IMF staff calculations.* ### 0.1 percent of GDP that more than offset the envisaged wage bill savings. Other pressures from the ### 1kenea2024003-print-pdf - 0.1 percent of GDP that more than offset the envisaged wage bill savings. Other pressures from the ### Spending pressures and carryovers - Education and security sector pressures, including for the funding of universities and technical and vocational training, amounting to 0.3 percent of GDP will also need to be accommodated. - Clearance of the spending carryover from FY2023/24 and other pressures amount to some 1.3 percent of GDP. - Development spending accounts for about 60 percent of the unfunded spending carryover from FY2023/24. - Staff has cautioned against deep cuts in development spending—bringing domestically-financed development spending to the lowest level in the past two decades—that may not generate the envisaged savings should existing projects be affected due to the accrual of penalties and fees nor improve debt dynamics due to negative growth effects. ### Constraints on savings and reform scope - Savings from reducing transfers to parastatals may not materialize fully if the affected entities are not sufficiently self-sustaining and in good financial health. - Staff sees scope for more permanent savings from: - Streamlining the wage bill—including for counties and parastatals that would over time allow for significant savings on related transfers; - Intermediate consumption; and - Other recurrent spending through reform of allowances, the payroll system, public procurement, SCs, and other reforms. - These reforms are more likely to materialize in the medium term as the reforms would take some time. ### New revenue measures and near-term financing - Authorities submitted to Parliament a tax laws amendment bill with new revenue measures amounting to 0.9 percent of GDP (annual yield), including: - Rationalizing selected VAT expenditures; - Increasing and realigning excise duties on selected goods and services; and - Increasing specific levies on imports (see MEFP¶14). - These measures will not be sufficient to offset the new spending pressures and clearance of the spending carryovers from FY2023/24, necessitating further measures to preserve the primary balance target. - Authorities are committed to submit a Supplementary II FY2024/25 Budget (proposed new SB for end-January 2025) to deliver the program’s primary balance through additional fiscal measures as necessary. - Authorities are also committed to swiftly address any adverse ruling by the Supreme Court on the constitutionality of the 2023 Finance Act through revenue measures in compliance with the Court’s guidance. ### Medium-term fiscal strategy and targets - The authorities’ medium-term fiscal strategy would need to embark on a renewed revenue-based fiscal adjustment to reduce debt vulnerabilities while providing space for high-priority spending. - Even staying within the upper limit of the band around their debt anchor by 2028 will require an average annual primary effort of about 0.3 percent of GDP over the medium term (¶14). - This effort relies on a steady increase in tax and nontax revenues (cumulatively by about 1.6 and *KENYA INTERNATIONAL MONETARY FUND* ### 0.2 percent of GDP, respectively). ### Kenya: IMF Report Excerpt - Key Findings, Projections, and Policy Recommendations ### Fiscal policy, tax reform, and revenue mobilization - Strengthen accountability and chart a path for a more efficient, equitable, and progressive tax regime to restore public trust, tax morale, and build social consensus on a revenue-based fiscal strategy. - Tax policy design principles: - Carefully design measures to avoid unintended economic and distributional effects. - Resist pressure from vested interests. - Enhance equity and progressivity of the tax regime, guided by the MTRS. - Implementation actions and timing: - Adopt a comprehensive PIT, CIT, and VAT reform plan as envisaged in the MTRS by the Steering Committee (proposed new SB for end-February 2025) as part of preparation for the FY2025/26 Budget. - FY2023/24 tax amnesty on arrears proposed to be extended until end-June 2025. - Authorities commit to KRA adopting and publicizing measures for rigorous enforcement of tax arrears that did not comply with the tax amnesty and a comprehensive tax arrears management strategy (proposed new SB for end-November 2024). - Complementary measures: adequate economic impact assessment of policy choices (including on equity and feasibility), streamlining recurrent spending, enhancing spending efficiency, and enhancing predictability and institutional arrangements for social protection delivery systems. ### Debt dynamics, sustainability, and financing pressures - Debt distress assessment: - Kenya remains at a high risk of debt distress with marked deterioration in debt dynamics since the sixth EFF/ECF reviews. - Ensuring debt sustainability is contingent on timely course correction, revenue-driven fiscal consolidation, and robust export performance over the medium term. - Key debt statistics and drivers: - Public debt increased to 73.1 percent of GDP in 2023 (68.7 percent of GDP in present value terms), the highest level in two decades. - Primary contributors: higher interest rates, real exchange rate depreciation, and a weaker primary fiscal balance than envisaged. - Parliament-stipulated debt anchor: 55 percent of GDP of overall debt/GDP in present value terms should be reached within 5 years of adoption, thus by 2028, allowing for a margin of ±5 percent for unforeseen shocks. - Debt service pressures: - Kenya faces large external and domestic debt service obligations, with average debt service to revenues ratio exceeding 60 percent during 2024–28. - Weaker export performance reduces capacity to meet large external debt service, averaging around US$4.7 billion annually. - Ratio of interest payments to revenues (including grants) was about 30 percent in 2023 and is projected to average at 27 percent over 2024–28. - Recent financing operations and implications: - February Eurobond issuance helped address near-term refinancing pressures but raised external debt servicing needs over the medium term. - Relative to sixth EFF/ECF reviews, weaker primary fiscal balances in FY2023/24 and FY2024/25, the recent call on KQ guarantee, and large domestic debt redemptions in FY2024/25 significantly increase domestic financing needs and prolong elevated near-term domestic borrowing costs. - Heavier reliance on tax-free infrastructure bonds with significant nonresident participation increases exposure to sudden sentiment reversals and exchange rate pressures. - Policy recommendations to restore sustainability: - Urgently implement revenue-based multi-year fiscal consolidation and enhance export growth. - Deliver a stronger primary fiscal balance path over the medium term to offset higher contributions from elevated real interest rates. - Improve debt carrying capacity and implement the Medium-Term Debt Management Strategy. - Seek additional external financing on concessional terms where possible. - Build reserves to mitigate risks, including those from natural disasters. ### Domestic debt market development and cash management - Measures to deepen and develop domestic debt markets: - Clarify delineation of responsibilities among public institutions. - Improve market infrastructure and establish a liquid yield curve by increasing issuance sizes of benchmark bonds. - Strive for tax neutrality across financing instruments. - Introduce an issuance calendar and strengthen communication and transparency with investors. - Strengthen cash/liquidity forecasting capacity to align domestic issuance with revenue and external financing flows, preventing pending bills and spikes in domestic issuances. - Technical assistance: Authorities have received Fund TA on domestic debt market development. ### Public Financial Management (PFM), pending bills, and state corporations - PFM reforms and accounting: - National Treasury implementing Treasury Single Account (TSA) and accrual basis of accounting to improve cash management and fiscal reporting. - PFM strategy for 2023–28 outlines measures to improve accountability and oversight. - Pending bills and legacy issues: - Pending Bills Verification Committee received claims amounting to Ksh.571.6 billion (3.4 percent of GDP). - Cabinet approved clearing verified claims over five years starting in FY2025/26 (end-February 2024 SB); carryovers from FY2023/24 to be cleared during FY2024/25 through additional appropriations and prioritization, with any remaining carryover cleared in the second Supplementary FY2024/25 budget. - Public investment and project reviews: - NT reviewed 437 stalled or underperforming investment projects with estimated cost of Ksh.600 billion (about 3.6 percent of GDP); NT will select projects to continue based on consultations. - State corporations (SCs) reforms and fiscal risks: - FY2024/25 Budget outlines 37 potential PPP projects amounting to Ksh.1,600 billion (about 9 percent of GDP); Ksh.70 billion expected to be mobilized during FY2024/25. - NT undertook financial evaluations of seventy SCs based on FY2022/23 accounts and submitted policy paper recommending consolidation, dissolution/privatization, or reintegration for a number of SCs. - Cabinet approved state divestiture in eleven entities; further privatization agenda to pursue legal recourse after High Court ruling on Privatization Act of 2023. - Strategic options for restructuring KQ to be submitted to Cabinet by end-November (proposed rescheduling); KQ reported a net profit for six months ending June 2024 but remains highly indebted; government guaranteed FX-denominated debt is being serviced by the government. - NT to amend PFM Act to address supplementary appropriation shortcomings (proposed new SB for end-December 2024). - Fiscal risk mitigation for PPPs: Enhance PIM framework and align with PPP practices; Fund stands ready to provide TA. ### Monetary policy, exchange rate, and financial sector stability - Monetary stance and inflation: - Tight monetary policy stance remains appropriate; headline inflation reached target earlier than expected but core inflation remains sticky. - CBK lowered policy rate in two steps since August by a cumulative 100 basis points to 12 percent. - CBK reduced the width of the interest rate corridor in June 2024 and adjusted operational framework to steer the interbank rate toward policy rate. - FX and money markets: - Interbank FX market volumes averaged at 7 percent of total volumes between January and August 2024; FX spreads remain large and volatile. - Staff emphasized exchange rate flexibility, FX market development (including hedging instruments), and strategy for FX reserves accumulation and intervention. - DhowCSD and other measures supporting a rise in interbank repo trades, though still limited among Tier-1 banks. - Under G2G oil importation scheme, activity concentrated in one large bank with sizable government shareholding; imported volumes short of contracted amounts; potential contingent liabilities if Uganda sources fuel imports directly. - Banking sector risks and measures: - Nonperforming loans: 2024Q2: 13.3 percent of gross loans; 2023Q2: 11.9 percent. - FX, sovereign, and credit exposures remain elevated, posing exchange rate, credit, and interest rate risks. - CBK developing Internal Liquidity Adequacy Assessment Program Guidelines including Foreign Currency Liquidity Coverage Ratio and Net Stable Funding Ratio. - Proposed increase in minimum capital requirements to Ksh.10 billion for banks expected to increase industry consolidation. - Staff recommends enhanced implementation of macroprudential measures and introduction of measures to manage banks’ FX maturity mismatches. - Fund support: macroprudential strategy TA (June–July 2024) and planned Financial Sector Stability Review scoping and mission. ### AML/CFT, governance, and anti-corruption - AML/CFT actions: - Authorities agreed with FATF to an action plan after February “grey-listing”; priority actions include terrorism financing risk assessment, supervisory framework for Virtual Asset Service Providers, and strengthened risk-based supervision of financial institutions and DNFBPs. - CBK conducting stand-alone AML/CFT inspections and applying enforcement measures. - Financial Reporting Center building capacities for supervision of high-risk DNFBPs. - Beneficial ownership and procurement compliance: - Kenya Business Registration Services (BRS) issuing compliance notices and denying services until full compliance achieved; planning strike-offs of noncompliant entities. - BRS pending bill: bill to make BRS regulator of trusts pending Presidential assent. - Public Procurement Regulatory Authority (PPRA) conducting trainings and issuing letters to noncompliant procuring entities; legal review to identify PPRA sanctioning powers underway. - Governance and anti-corruption reforms: - Progress uneven; significant delays in some areas. - Key items: - Access to Information regulations effective through lapse of time. - Ethics and Anti-Corruption Commission: progress on asset recovery but broader challenges persist. - Conflict of Interest bill: tabled before Senate and passed with significant amendments on May 16, 2024; National Assembly rejected Senate amendments and bill referred to mediation committee; authorities committing to full automation and publication of asset declarations of high-level public officials. - Judiciary: need capacity strengthening and adequate infrastructure for efficient adjudication of corruption cases. - Digitization and automation of government records led by Ministry of ICT and Digital Economy; Commission on Administrative Justice awaiting direction. - Authorities requested a governance diagnostic TA to assess corruption vulnerabilities and governance weaknesses. ### Climate agenda under the RSF arrangement and green fiscal measures - RSF reforms progress: - Rollout of National Framework for Climate Services (RM1) underway; strengthened spatial analysis and climate data management via Kenya Meteorological Department’s online platform; rollout in all counties supported by FLLoCA Program. - Climate issues added to the Fiscal Risk Statement (RM2) and integrated into the 2024 Budget Policy Statement (pages 109–116). - Final draft of the Green Finance Taxonomy (RM4) completed in June after public consultation; pilot launched in early October with ten commercial banks; feedback to be incorporated in final taxonomy in 2025Q1. - Remaining RMs and actions: - Carbon pricing (RM3) delayed due to socio-political challenges; authorities to explore feasibility and engage stakeholders; implementation to be complemented with strengthened social safety net (World Bank leading on safety net). - Incorporating climate risks into planning and investment framework (RM5) underway with World Bank TA; insights incorporated into 2024/2025 budget circular; some expenditure types tagged for climate budgeting (RM8). - National Green Fiscal Incentives framework adopted by Cabinet in December 2023; sector-specific adoption pending. - Electricity market open access draft regulations gazetted for public consultation; net metering regulations approved in May to enable consumers to generate and feed excess power back into the grid; framework for net metering agreement yet to be finalized by off-taker (KPLC). - Draft climate risk disclosure framework for the banking sector released in September 2024 for public consultation (RM9). - Environment Restoration Levy proposal: - Proposed levy on imported final products contributing to the waste burden to fund National Environment Restoration Fund for waste management, ecosystem restoration, pollution management, and green technologies. - Staff advised careful upfront economic impact assessment, consideration of multiple taxation risks, tax rates, demand elasticities, administrative and compliance costs, and embedding levies in a comprehensive policy package to fund transition to a circular economy. - Other climate initiatives: - FLLoCA resources supporting conditional transfers to counties for agro-ecological systems and green jobs for youth and women. - Authorities working with development partners and the Fund to scale up access to global climate funds and leverage private climate finance, including PPPs in renewable energy and development of a green climate fund and a Sustainable Development Bond. ### Program modalities, financing, and modifications requested - Program documentation: Letter of Intent (LOI), MEFP, and TMU describe progress and set out future commitments; TMU clarifies program definitions and semi-annual targets. Revised targets for end-December 2024 test date proposed to reflect updated macro-framework. - Request for modifications: - Authorities requesting modifications to total access under the EFF/ECF arrangements, composition of financing, and phasing. - Access considerations: - Success in issuing a Eurobond in February to early buyback a significant share of the 2024 Eurobond, plus financing from Trade Development Bank (US$506 million) and the World Bank (US$1.2 billion in Development Policy Finance), dissipated the exceptional BoP needs anticipated at the time of sixth EFF/ECF reviews. - Staff and the authorities consider access under the EFF/ECF arrangements within the normal access limits (excl. RSF) as sufficient to meet residual BoP needs during the remainder of the EFF/ECF arrangements. *Source: Excerpt from IMF staff report text on Kenya.* ### 40.3 percent of quota (SDR218.73 million) is requested consistent with bringing Kenya’s ### 1kenea2024003-print-pdf - 40.3 percent of quota (SDR218.73 million) is requested consistent with bringing Kenya’s ### Financing request, composition, and phasing - 40.3 percent of quota (SDR218.73 million) is requested to bring Kenya’s cumulative access under the normal limit (600 percent of quota, including the 2020 RCF financing) (Table 7a). - Authorities’ request restores a 1:2 mix of PRGT-to-GRA financing, consistent with Fund policy on blended access. - Reduction of access by 61.97 percent of quota (SDR336.39 million) under the EFF arrangement. - Augmentation of access by 21.67 percent of quota (SDR117.66 million) under the ECF arrangement. - Higher PRGT access estimated to lower interest payments to the Fund by about SDR230 million over 2024–35. - Rephasing of remaining EFF and ECF access is proposed consistent with BoP needs (excl. RSF) and reserve-building (Text Table 2 and Table 7a). - Except for the augmentation at the fifth EFF/ECF reviews, EFF/ECF financing, including remaining amounts, is made available to government as budget support through on-lending in local currency by the CBK. - Proposed disbursements summary (Table 7a and Text Table 2): - Total remaining access (various entries in Table 7a) summing to totals shown as SDR figures and percent of quota (see Table 7a for line-by-line schedule). - Note: Kenya's quota is SDR542.8 million. ### Program conditionality, waivers, and targets - Redesign of the QPC on fiscal revenues: - New QPC (floor) on ordinary revenues (tax and nontax combined, excluding earmarked nontax revenues classified under AiA) effective from end-December 2024 test date. - Tax revenues target redesignated as an indicative target effective from end-December 2024. - Waivers and modifications requested (MEFP Tables 1–2 and TMU): - Waivers of nonobservance for the tax revenues QPC for end-December 2023 and end-June 2024 test dates. - Waiver for end-June 2024 QPC on primary budget balance based on corrective action via passage of the Supplementary FY2024/25 Budget in July. - Modifications of end-December 2024 QPCs on: primary budget balance, net international reserves, and present value of contracting or guaranteeing of new external debt. - Deletion of the adjustor to the QPC on net international reserves related to extraordinary support to Kenya Airways given novation of its guaranteed external debt. - Rescheduling of two SBs and establishment of five new SBs. - RSF financing: - RSF reform measures (RMs) remain as envisaged at RSF approval; phasing is appropriate. - Authorities request disbursements associated with two RMs implemented since the previous RSF review; RSF financing is for budget support and not intended to cover the BoP gap under EFF/ECF. ### Financing assurances and external financing - Remainder of EFF/ECF arrangements (less than six months) is fully financed (Table 6). - In 2024, additional financing secured: - US$1.5 billion Eurobond issuance. - US$506 million in commercial loans from the Trade Development Bank. - World Bank Development Policy Operation: US$1.2 billion. - African Development Bank budget support loan: US$79 million. - Germany: €60 million. - Through the remaining program period, Fund is the only source for budget support under the baseline; non-Fund budget support loans expected to materialize in 2025Q2 (after EFF/ECF expiration). - Upside potentials to external financing (not in baseline) include: AfDB budget support loan, samurai bonds (guaranteed by Nippon Export and Investment Insurance), panda bonds (guaranteed by AIIB), Sustainable Development Bond (World Bank-supported), and bilateral nonconcessional financing. ### Fiscal policy, consolidation, and safeguards - Authorities commit to: - Address debt vulnerabilities via fiscal consolidation to deliver a primary balance that helps reduce debt/GDP in 2024 and stabilize it in 2025 through the Supplementary FY2024/25 Budget and potential second Supplementary Budget. - Preserve primary balance target by offsetting new pressures, including through additional Supplementary Budgets as needed. - Fiscal measures and design: - Revenue-based fiscal consolidation central to reducing debt vulnerabilities and preserving essential public goods and services. - Broadening revenue QPC scope intended to widen authorities’ policy options while retaining centrality of tax measures (ordinary nontax revenue base small). - KRA should enhance data analysis capability by matching internal data between customs and domestic taxes. - Fiscal safeguards review (June 2024) findings: - Gaps in legal framework for in-year expenditure revisions; absence of a TSA limits NT oversight over government bank accounts. - Extrabudgetary units and State Corporations face financial management and control issues. - External audit broadly aligned with international standards but timeliness and internal audit recommendation implementation need improvement. - Authorities to: strengthen legal framework and practices for in-year revisions, develop TSA (Cabinet approval granted earlier), strengthen oversight of extrabudgetary units and SCs, and enhance independent oversight by Ministerial Audit Committees (MACs). ### Debt sustainability, capacity to repay, and Fund exposure - Under Fund policies, the requested augmentation of ECF access triggers enhanced safeguards for debt sustainability and capacity to repay. - At end-2023: - Share of Kenya’s debt owed to Fund and other multilaterals ~50 percent of total external public debt; projected to reach about 62 percent through 2035 under the baseline. - Share of Kenya’s total obligations to the Fund relative to total external public debt service would peak at 14.9 percent until 2035. - No collateralized public and publicly guaranteed external debt. - Projected peak outstanding credit from the Fund (excl. RSF) reaches SDR3.26 billion, or 600 percent of quota by end of EFF/ECF arrangements. - Ratios of outstanding credit (excl. RSF) to GDP and FX reserves would peak at about 3.5 percent and 48 percent in 2025, respectively. - Including RSF, projected Fund credit would reach SDR3.66 billion (675 percent of quota) by end of arrangements with somewhat worse debt ratios. - Fund debt service indicators: - Non-RSF debt service to the Fund would peak by 2029 at about 3.4 percent of exports and 2.4 percent of fiscal revenues. - Debt dynamics and anchor: - Program objective: revenue-driven fiscal consolidation and public debt/GDP on downward path consistent with Kenya’s public debt anchor of 55±5 percent of GDP in present value terms by 2028. - All debt burden indicators on downward path; those currently with breaches expected to fall below thresholds over time. ### Risks, vulnerabilities, and sectoral policies - Program and enterprise risks: - Significant enterprise and reputational risks for the Fund reflecting risks to Kenya’s fiscal policy, debt sustainability, and capacity to repay. - Increased risks since sixth EFF/ECF reviews due to links between Fund program and recent developments and uncertainties around building social and political consensus for credible fiscal consolidation. - Risks to spending measures under Supplementary FY2024/25 Budget are materializing amid new pressures. - Authorities’ revenue measures exposed to elevated risks; mitigation via contingency measures (MEFP¶18) and strengthening external buffer. - Financial sector risks and oversight: - Banks’ FX, sovereign, and credit risks remain elevated; nonperforming loans are high. - Resolution of government’s pending bills would help improve asset quality. - Implementing macroprudential strategy TA and Financial Sector Stability Review recommendations will aid risk mitigation. - AML/CFT, governance, anti-corruption: - Continue work on FATF action plan items; strengthen risk-based supervision of DNFBPs. - Improve compliance with beneficial ownership reporting. - Ensure Conflict-of-Interest bill aligns with international standards; strengthen judiciary capacity for adjudicating corruption cases. - Authorities requested a governance diagnostic; staff welcomes this. - Climate and RSF: - Sustained reform momentum under RSF will support resilience to climate shocks. - Authorities implemented two reform measures since last review and progress on remaining measures; staff welcomes efforts to attract climate finance. ### Macro outlook and staff appraisal - Growth: - Kenya remains among faster-growing regional economies. - 2023 recovery strong (agriculture rebound); 2024 growth projected at 5 percent. - Inflation and monetary policy: - Inflation eased to target faster than expected; baseline projects inflation to stay within target range. - Tight monetary policy stance appropriate; continue data-driven approach with tightening bias in near term; improvements in operational framework welcome. - Fiscal outlook and policy advice: - Spending cuts in Supplementary FY2024/25 Budget insufficient to contain near-term fiscal deficit; additional measures needed. - Deep cuts in development spending and intermediate consumption are not sustainable; careful spending prioritization and rationalization required. - Safeguard social safety nets while pursuing spending rationalization and revenue mobilization. - Contingency plans that do not rely on larger-than-expected borrowing are vital; recourse to non-debt creating resources (revenues and/or divestment from SCs) could mitigate risks. - Debt distress assessment: - Kenya remains at high risk of debt distress; uncertainty around fiscal adjustment elevated debt sustainability concerns. - Worsened medium-term debt dynamics since sixth reviews due to deteriorated revenue outlook, export underperformance, and larger nonconcessional borrowing. - Mitigants: access to concessional and nonconcessional financing, resilience in remittances, strong track record of servicing debts, exchange rate flexibility, adequate FX reserves, and authorities’ commitment to multi-year fiscal consolidation. - Staff support and approvals: - Staff supports authorities’ requests for completion of seventh and eighth EFF/ECF reviews; reduction of EFF access; augmentation of ECF access; rephasing of EFF and ECF access; redesign of fiscal revenue target; modifications of program targets; and waivers of nonobservance for unmet performance criteria. - Staff assesses that the second and fourth RSF reform measures have been implemented and supports disbursement requests totaling SDR90.4666 million under the arrangement. *Source: 1kenea2024003-print-pdf.* ### Annex I. Poverty Reduction and Growth Strategy ### Annex I. Poverty Reduction and Growth Strategy ### Overview and purpose - Summarizes Kenya’s Fourth Medium Term Plan, 2023–27 (MTP-IV), launched in March 2024, which fulfills the Poverty Reduction and Growth Strategy (PRGS) requirements. - The EFF/ECF arrangements and the PRGS are aligned with promoting growth and further reducing in poverty by improving productivity, reducing inequalities, and strengthening resilience through creation of jobs, eradication of hunger, expanding the tax revenue base and building up of foreign exchange reserves through promotion of exports. ### Socio‑economic progress (past 15 years) — key findings - Kenya is one of the faster growing economies in the continent and since becoming a lower middle-income country (LMC) in 2014, Kenya’s per capita income has grown at a faster pace than other LMCs. - Growth underperformed expectations under prior plans, with a notable decline in the shares of the manufacturing sector and exports to national income and high unemployment levels among the youth. - Tax revenues, as a share of GDP, declined during the previous two plans (the only East African Community country with such a decline over the past decade). - Poverty had declined prior to the COVID-19 pandemic but post-pandemic remains higher, along with worsening of undernourishment. Income inequality improved slightly. - Notable improvements: higher life expectancy; lower maternal, infant, and under-5-year mortality rates; increased child immunization; lower HIV prevalence; rise in gross enrolment ratios in secondary schools; improved teacher-pupil ratio; decline in gender gap in education; improved access to clean and safe water; increase in national forest cover. ### Persisting challenges (authorities’ assessment) - Causes of past underachievement include shocks (COVID-19, global geo-political developments, droughts), reliance on rain-fed agriculture and primary commodities, persistently large trade deficit (including from exchange rate misalignment), low domestic savings and investment, below-expectation returns from past debt-financed investments, and institutional failures (consumption subsidies, market failure, weak governance and accountability). - Share of vulnerable people covered by social protection systems declined between FY2019/20 and FY2021/22 due to limited funding. - Kenya’s Sustainable Development Goals Report 2023 performance score: 60.9. ### MTP‑IV objectives, pillars, and implementation approach - MTP-IV purpose: further achievement of Kenya Vision 2030 and targets under the United Nations Sustainable Development Goals 2030 and Africa Union Agenda 2063; aligns with the Bottom-up Economic Transformation Agenda (BETA). - BETA priorities (six objectives): lowering cost of living, eradicating hunger, creating jobs, expanding the tax base, higher foreign exchange reserves, and inclusive growth. - Five core pillars: agriculture; small, medium, and micro enterprises; housing and settlement; healthcare; digital superhighway and creative economy; plus strengthening public institutions. - Five sectors for implementation: finance and production; infrastructure; social; environment and natural resources; governance and public administration. - Examples of launched or enacted measures: Financial Inclusion Fund (“Hustler Fund”); laws to establish framework for affordable housing; moves toward universal healthcare. - Economic transformation focus: capital accumulation (human and physical), market development and regulation, domestic resource mobilization and optimal tax instruments, and digital evolution to improve value addition and market access. ### MTP‑IV medium‑term aspirations and flagship targets - Growth projection in the MTP-IV: medium-term growth improving to 7.2 percent by 2027. - Aspiration to nearly double the manufacturing sector’s share in GDP by FY2027/28. - Job creation target: 1.2 million jobs annually with the share of the formal sector in total employment more than doubling. - Fiscal aspiration: overall deficit declining to 2.9 percent of GDP by FY2027/28 through higher revenue mobilization (National Tax Policy and Medium-Term Revenue Strategy, MTRS) and expenditure prioritization (common payroll system, efficiency of public investment, strengthening public procurement, public private partnership, pension reforms, improved governance at state corporations, identification and mitigation of fiscal risks, Treasury Single Account). - Monetary objective: keep inflation anchored around the target of 5 percent. - External: current account deficit envisaged to widen even as remittances and exports grow; public debt/GDP will decline; FX reserve adequacy projected to go well beyond four months of imports. ### MTP‑IV programs, projects, and reforms (Text Table AI.1) — sector focus highlights - Finance and production: enhance production, value addition, and market access; focus areas include Livestock (leather, leather products, and dairy); crops (tea, edible oils, and rice); textile and apparel; construction materials. - Infrastructure: increase investments (expand irrigation, affordable housing, improve connectivity); focus on transport connectivity; small dams and water pans; affordable housing; communication and broadcasting systems; green energy generation and distribution. - Social: improve quality of life via human capital development and social welfare; focus on universal healthcare coverage; social protection; human capital development; science, technology, and innovation; economic empowerment. - Environment and natural resources: sustainable utilization of culture, heritage, mineral resource, the blue economy and maritime; focus on disaster management; natural resource conservation; sustainable waste management; sustainable exploitation of natural resources and blue economy; tourism promotion and marketing. - Governance and public administration: enhance security capabilities and welfare, strengthen devolution, transform judicial and legal services; focus on citizen services, intra-government services, promoting human rights, judicial transformation, leadership accountability. ### Macroeconomic framework and projections (Text Table AI.2) — selected figures (In percent of GDP unless otherwise mentioned; preserve values exactly) - Real GDP growth (percent): 2023 Actual 5.6; 2023/24 5.9; 2024/25 6.3; 2027/28 7.2; Program baseline 2024 5.0; 2025 5.0; 2028 5.0 - Inflation (average, percent): 2023 Actual 7.7; 2023/24 6.3; 2024/25 5.0; 2027/28 5.0; Program baseline 2024 5.0; 2025 5.0; 2028 5.3; 2028 (alternate column) 5.0 - Investment: 2023 Actual 16.4; 2023/24 20.7; 2024/25 22.7; 2027/28 26.7; Program baseline 2024 16.7; 2025 17.7; 2028 19.8 - Saving: 2023 Actual 12.4; 2023/24 15.3; 2024/25 17.0; 2027/28 20.8; Program baseline 2024 12.8; 2025 13.7; 2028 15.7 - Total revenue (incl. grants) 1: 2023 Actual 16.7; 2023/24 18.9; 2024/25 19.1; 2027/28 20.0; Program baseline 2024 17.2; 2025 18.0; 2028 19.6 - Total expenditure 1: 2023 Actual 22.5; 2023/24 24.2; 2024/25 23.5; 2027/28 22.9; Program baseline 2024 22.8; 2025 22.3; 2028 22.9 - Overall fiscal balance 1, 2: 2023 Actual -5.6; 2023/24 -5.3; 2024/25 -4.4; 2027/28 -2.9; Program baseline 2024 -5.6; 2025 -4.3; 2028 -3.3 - Public debt, net: 2023 Actual 70.0; 2023/24 65.4; 2024/25 62.7; 2027/28 53.7; Program baseline 2024 63.8; 2025 66.2; 2028 63.7 - Current account balance: 2023 Actual -4.0; 2023/24 -5.3; 2024/25 -5.7; 2027/28 -5.9; Program baseline 2024 -3.9; 2025 -4.0; 2028 -4.1 - Gross official reserves (In months of current year's imports): 2023 Actual 4.0; 2023/24 5.8; 2024/25 5.9; 2027/28 6.1; Program baseline 2024 4.3; 2025 4.4; 2028 4.5 - Gross official reserves (In months of next year's imports): 2023 Actual 3.8; Program baseline entries: 4.1; 4.1; 4.2 - Notes: 1 On a fiscal year basis. For example, 2023 refers to FY2022/23 that ended in June 2023. 2 Includes adjustments to cash basis for the FY2022/23 overall fiscal balance. ### Alignment with EFF/ECF arrangements and IMF program stance - MTP-IV goals and strategies broadly aligned with objectives and policy discussions under the EFF/ECF arrangements, supportive of growth, job creation, competitiveness, and efficiency to reduce poverty. - Creating fiscal space is central to the EFF/ECF program to address debt vulnerabilities and enable growth‑friendly social, developmental, and climate‑resilient expenditures. - Emphasis on higher domestic revenue mobilization and expenditure rationalization in MTP‑IV is consistent with the program. Improving governance, anti-corruption, and accountability frameworks is critical to realizing medium‑term revenue goals and better utilization of public resources. - Program baseline projects a more modest medium-term growth of 5 percent (anchored on slower improvements in savings and investments) relative to the MTP‑IV projection of 7.2 percent by 2027. - Exchange rate flexibility and policy efforts expected to keep FX reserves adequate, projected at around four months of import coverage. ### Risk Assessment Matrix — key risks, likelihoods, impacts, and policy responses (selected) - Global growth surprises - Likelihood: Medium; Expected impact: Medium. - Policy responses: Adopt mutually reinforcing monetary and fiscal policy stances; reprioritize spending to support the vulnerable while compressing overall expenditure; greater exchange rate flexibility; accelerate structural reforms. - Monetary policy miscalibration - Likelihood: Medium; Expected impact: High. - Policy responses: Tighten monetary policy; greater exchange rate flexibility; compress expenditure to contain fiscal‑debt impact. - Sovereign debt distress - Likelihood: Medium; Expected impact: High. - Policy responses: Tighten monetary policy and adopt mutually reinforcing fiscal policy; greater exchange rate flexibility; mobilize domestic resources, protect social and developmental spending, and contain negative fiscal-debt impact; accelerate structural reforms. - Commodity price volatility - Likelihood: High; Expected impact: High. - Policy responses: Keep domestic fuel pump prices aligned with global prices while compressing expenditure; if persistent, tighten monetary policy; greater exchange rate flexibility; consult with staff if shock is very large on overarching fiscal consolidation. - Intensification of regional conflicts - Likelihood: High; Expected impact: Medium. - Policy responses: Diversify import sources for key inputs and staples; deploy targeted support to the most vulnerable leveraging existing assistance programs; consider alternative financing mixes, including medium-term syndicated loans. - Cyberthreats - Likelihood: High; Expected impact: Medium. - Policy responses: Continue reforms to strengthen cyber security capabilities at government and private sector levels. - Climate change and adverse weather conditions - Likelihood: Medium; Expected impact: High. - Policy responses: Guard against second-round inflation effects; use targeted programs to help vulnerable groups and reprioritize spending; as necessary, guard against second-round effects on inflation. - Political risks - Likelihood: High; Expected impact: High. - Policy responses: Activate contingency fiscal policy measures as required; accelerate deep-seated reforms including on governance and anti-corruption; build consensus via broad public consultation and effective communication. - Systemic financial instability - Likelihood: Medium; Expected impact: High. - Policy responses: Deploy measures to stabilize the banking sector; execute a plan for outstanding pending bills and avoid accumulation of new pending bills. - Materialization of fiscal contingent liabilities - Likelihood: High; Expected impact: Medium. - Policy responses: Continued assessment of sources of contingent liabilities (e.g., state corporations and government-linked entities, the G2G oil importation scheme); implement least-cost strategies to address SOE financial pressures. - Deterioration in security situation - Likelihood: Medium; Expected impact: High. - Policy responses: Reprioritize fiscal spending to accommodate security needs; maintain policies to improve macro fundamentals (structural and governance reforms). *Source: Annex I. Poverty Reduction and Growth Strategy, MTP‑IV summary and accompanying Risk Assessment Matrix, as provided in the source document.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Macroeconomic context and recent developments - Real GDP growth: - 5.6 percent in 2023. - 4.8 percent in the first half of 2024. - Growth driven by a strong rebound in the agricultural sector and resilient services: tourism, transport, real estate, financial, and ICT services. - Inflation and monetary policy: - Headline inflation: 3.6 percent y/y (September). - Target level: 5.0 percent y/y. - Nonfood, nonfuel (NFNF) inflation: 3.4 percent in September; averaged around 3.5 percent y/y since October 2023. - Food inflation: 5.1 percent y/y (September); peaked at 15.8 percent y/y in October 2022. - Fuel inflation: 1.1 percent y/y (September); recent high of 15.5 percent in November 2023. - Central Bank Rate (CBR): reduced in two steps since August by a cumulative 100 basis points to 12 percent. - Prior to reductions, CBR had been raised by a cumulative 600 basis points between May 2022 and February 2024. - Exchange rate and reserves: - Shilling strengthened markedly in 2024 following Eurobond issuance and tight monetary policy. - Substantial FX purchases to support reserves buildup by the Central Bank of Kenya (CBK). ### External sector - Eurobond operations and market access: - Issued a Eurobond in February 2024. - Bought back US$1.5 billion of the US$2 billion Eurobond maturing in June 2024. - Settled the remaining US$500 million under this bond in June. - Actions alleviated near-term external liquidity and refinancing risks and supported private external inflows. - Current account: - Current account deficit: 4.0 percent of GDP in 2023 (down from 5.1 percent of GDP in 2022). - Improvements supported by tourism recovery and decline in nonfood imports. - Anticipated stabilization of the current account deficit around 4 percent of GDP in the medium term. - Diaspora remittances: growing at double digit rates in the first eight months of 2024. ### Fiscal developments and public debt - FY2023/24 fiscal performance: - Tax revenues grew by 11.3 percent y/y in FY2023/24 but missed the target by about Ksh.329 billion (about 2 percent of GDP). - Fiscal deficit estimated at 5.3 percent of GDP in FY2023/24. - Fiscal deficit on a cash basis narrowed marginally to 5.3 percent of GDP from 5.6 percent of GDP in FY2022/23; about 0.6 percent of GDP above programmed deficit at sixth EFF/ECF reviews. - Revenue shortfall partly offset by higher ordinary nontax revenue (0.5 percent of GDP) and fees/charges related to immigration and citizen services (0.2 percent of GDP). - Further rationalization of nonpriority projects yielded 1.2 percent of GDP; additional recurrent spending pressures of 0.6 percent of GDP were recognized. - Build-up in unpaid bills and expenditure carryovers to FY2024/25: Ksh.218.5 billion (amount cited up to the point where source text cuts off). - Public debt: - Public debt reached 73.1 percent of GDP in 2023. - Eased to an estimated 67.2 percent of GDP by June 2024 on exchange rate appreciation. - Debt anchor target: overall debt/GDP of 55±5 percent in present value terms by 2028. ### Policy actions, program requests, and conditionality - Legislative and fiscal actions: - FY2024/25 Budget passed with stringent expenditure controls. - 2024 Finance Bill, containing critical revenue-enhancing measures, was not enacted due to nationwide public protests; withdrawal created a significant fiscal gap. - Supplementary FY2024/25 Budget (Supplementary I) passed in late July, entailing additional spending rationalization and consideration of some nontax revenue measures. - Commitment to preserve the primary balance target by implementing new revenue measures through a tax laws amendment bill and further prioritizing and rationalizing spending through a Supplementary II FY2024/25 Budget. - Commitment to use any additional revenue and/or divestment measures during the fiscal year to not let the fiscal deficit worsen from 4.3 percent of GDP amid any new spending pressures. - IMF program requests: - Request completion of the seventh and the eighth EFF/ECF reviews. - Request rephasing and reduction of access under the EFF arrangement by 61.97 percent of quota (SDR336.39 million). - Request augmentation of access under the ECF arrangement by 21.67 percent of quota (SDR117.66 million). - Requested total access under the program: 500 percent of quota (SDR2,714 million). - Following approval of the seventh and eighth reviews, request to make available an amount equivalent to SDR365.28 million (67.30 percent of quota), out of which SDR202.52 million or 37.31 percent of quota as budget support. - Waivers and modifications requested: - Request waivers for nonobservance of: - End-December 2023 QPC on tax revenue. - End-June 2024 QPCs on primary budget balance and tax revenue. - Confirmed met QPCs: - End-June 2024 QPCs on net international reserves, no new domestic guarantees, and present value of contracting or guaranteeing of new external debt. - Continuous QPC on no new external payment arrears. - Request modifications of program conditionalities effective end-December 2024: - Change QPC on a floor on tax revenues to an indicative target. - Introduce a new QPC on a floor on ordinary revenues (tax and nontax revenues, excluding earmarked revenue). - Request modifications of end-December 2024 QPCs for primary budget balance floor, net international reserves floor, and ceiling on present value of contracting or guaranteeing of new external debt, as presented in the attached MEFP. ### Structural reforms, state corporations, and RSF measures - Structural benchmarks (SBs) and implementation delays: - End-February SB: establishment of the Steering Committee to oversee implementation of the Medium-Term Revenue Strategy (MTRS) was met. - End-February SB on strategy for pending bills: approved by Cabinet on June 11, 2024 and published in late July (delayed). - End-April 2024 SB on revision of the Petroleum Development Fund’s governance structure: delayed; a report was published in early August. - End-April 2024 SB on formulation of a new strategy for restructuring Kenya Airways: proposed reschedule to end-November 2024 due to additional time needed. - End-May 2024 SB for legal amendments establishing a new Ownership Policy for state corporations: proposed reschedule to end-November 2024 following longer-than-expected legal drafting. - End-January 2024 benchmark on updated inventory and classification of SOEs: published on July 10, 2024 via revised guidelines; published guideline did not fulfill the SB because it did not specify that such classification would apply for other government purposes as specified in the SB. - End-June SB on financial evaluation of fifty state corporations: evaluation completed based on audited FY2022/23 accounts; findings to be shared with the Fiscal Risk Committee by end-October 2024. - End-October 2024 SB: submit report to Parliament on National Treasury’s involvement or investment in, or funding of, SCs and government-linked companies (commitment to meet). - RSF-supported reform measures (RMs): - Completed two additional RMs since the last review: - Expanding the fiscal risks statement to include climate-change scenarios. - Drafting and circulating a green finance taxonomy for stakeholder consultation. - Request disbursements associated with these two RMs: SDR90.4666 million (16.66 percent of quota) under the RSF arrangement. - Other RMs progressing with some delays, including carbon pricing for which IMF technical assistance has been requested. ### Policy commitments and assurances - Fiscal framework and objectives: - Commitment to multi-year fiscal consolidation supported by domestic revenue mobilization and expenditure rationalization while protecting social and development spending. - Aim to put overall public debt to GDP on a downward trajectory and achieve the debt anchor by 2028 (overall debt/GDP of 55±5 percent in present value terms). - Monetary and structural policy commitments: - Monetary policy to remain focused on maintaining price stability and keeping inflationary expectations anchored, while ensuring external sustainability. - Commitment to advance structural reforms under the EFF/ECF arrangement and RSF to build a climate-resilient economy. - Commitment to strengthen governance reforms in anti-corruption and effectiveness of the AML/CFT framework; requested a governance diagnostic to chart a way forward. - Data and consultations: - Government will consult with the IMF in advance of any necessary revisions to the policies contained in the letter and attached memorandum, in line with IMF policies on consultations. - Government will provide IMF staff timely with all data and information needed to monitor the economic situation and program implementation as agreed under the attached Technical Memorandum of Understanding (TMU) or at the IMF’s request. - Publication authorization: - Government authorizes publication of the Letter of Intent, the attached MEFP and TMU, and the related staff report and supplements after approval by the Executive Board of the IMF. *Letter signed by John Mbadi Ng’ongo, Cabinet Secretary, National Treasury & Economic Planning and Dr. Kamau Thugge, Governor, Central Bank of Kenya (Nairobi, October 18, 2024).* ### 1.3 percent of GDP). As a result, we have missed the end-December 2023 and end-June 2024 ### 1kenea2024003-print-pdf - 1.3 percent of GDP). As a result, we have missed the end-December 2023 and end-June 2024 ### Fiscal position and targets - Missed indicative targets (IT) on non-accumulation of exchequer requests outstanding for more than 90 days for end-December 2023 and end-June 2024. - Missed the IT on domestic arrears for end-December 2023, but met it for end-June 2024. - Revenue collection in the first two months of the current fiscal year: tax collection declined by 0.8 percent (y/y); strict spending control helped contain the impact on the deficit. - End-December 2023 quantitative performance criteria (QPCs): targets on fiscal primary balance, net international reserves, no new domestic debt guarantees, and PV of contracting or guaranteeing of new external debt were met; the one on tax revenues fell short. - For the end-June 2024 test date: met QPCs except for fiscal targets (primary balance and tax revenues). - Indicative targets (ITs): priority social expenditure ITs met for end-December 2023 and end-June 2024; ITs on exchequer requests outstanding for 90 days or more not met due to domestic resource mobilization challenges. - Monetary policy consultation clause (MPCC): met for end-December 2023 and end-June 2024 as three-month averages of inflation were 6.8 percent (end-December 2023) and 4.9 percent (end-June 2024), inside target band of 2.5–7.5 percent. ### Public debt and debt sustainability - Present Value (PV) of overall public and publicly guaranteed debt (gross terms, IMF-World Bank DSA definition) rose to about 68.7 percent of GDP in 2023. - Public debt/GDP ratio: 73.1 percent at end-2023; estimated to have declined to 67.2 percent of GDP by end-June 2024 owing to exchange rate appreciation. - Kenya remains at high risk of external and overall debt distress. - Public debt/GDP ratio projected to decline to the debt anchor of 55±5 percent of GDP in PV terms by 2028, supported by medium-term fiscal consolidation efforts. ### Banking sector and financial stability - Core and total capital adequacy ratios as of June 2024: 16.6 and 19.1 percent, respectively (statutory minimums: 10.5 and 14.5 percent). - Liquidity ratio as of June 2024: 53.5 percent (statutory minimum: 20 percent). - Growth in private sector credit moderated to 4 percent y/y in June 2024 (vs. 12.2 percent y/y in June 2023), reflecting exchange rate appreciation effects on FX loans. - Gross nonperforming loans to gross loans ratio: 16.3 percent in June 2024 (from 14.5 percent in June 2023). - Banks are bolstering provisioning and capital levels in response to increased credit and market risks. ### Macroeconomic outlook (program baseline) - Real GDP growth projection for 2024: 5.0 percent. - Drivers: robust activity in agriculture, services sector resilience, private domestic demand resilience, investment from PPP projects and improved FX market conditions, partly offset by cuts in public capital expenditure. - Inflation: projected to remain within target band; risks from developments in the Middle East affecting global fuel prices and near-term inflationary outlook; tight policies to limit second-round effects on NFNF. - Current account deficit: projected to stabilize around 4 percent of GDP in 2024 (compared to average of 4.8 percent of GDP in 2019–23). - Relative to 2023: moderate recovery in goods imports, higher external interest payments, deterioration in services balance offset by growth in goods exports and diaspora remittances. - FX reserves: will remain adequate. - Medium-term: growth expected to average 5 percent; inflation projected around mid-point of target band; current account deficit stabilizes around 4 percent of GDP. ### Program objectives and policy priorities - Primary policy objective: maintain macroeconomic stability through robust and inclusive growth. - EFF/ECF-supported policy focus: - Fiscal policy: undertake growth-friendly fiscal consolidation to preserve debt sustainability by bolstering revenue through broadening domestic tax base and improving tax compliance, promote equity and progressivity, curtail overall spending, and protect high-impact social and investment expenditure. - Public financial management: increase efficiency and transparency of public spending, including by SOEs. - Governance: enhance institutional oversight, preventive frameworks, accountability, and transparency. - Monetary policy: continue proactive approach to inflation objective; refine policy operations to keep interbank overnight rate close to policy rate; enhance 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. - Structural reforms: improve business environment, governance, investment, employment, gender inclusivity, exports, climate resilience, and potential growth. - Statistics: improve data quality in line with international best practices. ### Structural benchmarks and RSF progress - Structural benchmarks (SBs) January–June 2024: met 1 out of 10. - End-January 2024 SB: Cabinet approval and publication of updated inventory and new classification for state corporations not met; Executive Order gazetted in May with revised guidelines; guidelines published on July 10. - End-February 2024 SBs: Steering Committee for MTRS formed on February 9 (SB met). Report/procedures for clearance of verified pending bills delayed; strategy approved by Cabinet on June 11 and published in July. - End-March 2024 SBs: submission of second Supplementary Budget for FY2023/24 delayed; submitted April 30; President assented to second Supplementary Budget on June 10, 2024. Assessment of Petroleum Development Fund governance published in early August. - End-April 2024 SBs: FY2024/25 Budget proposal and 2024 Finance Bill submitted to Parliament by end-April but SB not met due to need for further amendments; 2024 Finance Bill withdrawn by the President. SB on Kenya Airways restructuring delayed; request to reschedule to end-November 2024. - End-May 2024 SB: legal amendments to anchor new Ownership Policy for commercial SCs expected to be submitted to Parliament by no later than end-November 2024; request to reschedule SB to end-November 2024. - End-June 2024 SB: financial evaluation of seventy SCs based on FY2022/23 audited accounts finalized in August 2024; evaluation report to inform end-October SB on NT’s involvement in SCs and government-linked companies; commit to sending report to Fiscal Risk Committee by end-October 2024; on-track to complete end-October 2024 SB. - Resilience and Sustainability Facility (RSF) arrangement: - Implemented RM2 (fiscal sustainability analysis under different climate change scenarios) and RM4 (draft green finance taxonomy stakeholder consultation). - RM3 (carbon pricing) requires additional time and IMF TA requested. - Progress being made on other RMs. ### Fiscal policy stance and Supplementary FY2024/25 Budget - Fiscal policy aim: resume fiscal consolidation to reduce debt vulnerabilities and rebuild fiscal buffers while balancing social cohesion and equity concerns. - Supplementary FY2024/25 Budget targets: - Overall fiscal deficit: 4.3 percent of GDP. - Primary surplus: 1.3 percent of GDP. - Comparison with sixth EFF/ECF reviews: vs. 3.5 and 1.7 percent of GDP in the sixth EFF/ECF reviews. - Fiscal effort measured as change in primary balance: 1.2 percent of GDP (0.2 percent of GDP higher than sixth EFF/ECF reviews). - Revenue-side adjustments after withdrawal of 2024 Finance Bill (measures totaling 1.8 percent of GDP withdrawn): - Extend tax amnesty on arrears until end-June 2025, to be legislated through amendment to the Tax Procedures Act later this year; expected to yield 0.2 percentage points (ppts) of GDP. - Increase road maintenance fuel levy from Ksh.18 to Ksh.25 per liter (0.2 ppts). - Merge or dissolve 47 state corporations with overlapping or redundant mandates (0.1 ppts); reforms expected to permanently increase SOE dividends by 0.1 percent of GDP. - Leverage technology and digitalization to enhance tax compliance and generate additional yields. - Expenditure-side: Supplementary envisages significant expenditure cuts relative to FY2024/25 Budget as first step to bring fiscal path back on track; envisaged a primary spending adjustment (specific expenditure cuts text cut off in provided content). *Source: 1kenea2024003-print-pdf* ### 1.3 percent of GDP relative to FY2023/24, more than doubling what was envisaged in the ### 1.3 percent of GDP relative to FY2023/24, more than doubling what was envisaged in the FY2024/25 Budget ### Fiscal consolidation measures and spending control - Initial FY2024/25 Budget adjustment aimed to rationalize slow-moving capital projects, wage bill control, lower transfers to state corporations from SOE reforms, and savings in intermediate consumption including cuts in travel, hospitality, training, and medical insurance as expenses shift to the new Social Health Insurance fund. - In response to the withdrawal of the 2024 Finance Bill, additional measures taken to close about half of the resulting financing gap include: - (i) additional wage bill savings (0.1 ppts) from reversal of planned wage increases, a temporary hiring freeze, payroll audit, suspension to fill certain vacancies, and reduction in the number of advisors; - (ii) further cuts to intermediate consumption (0. 2 ppts); - (iii) further rationalization of domestically-financed development spending (0.6 ppts). - Strong commitment to preserving the primary balance target amid spending pressures; pressures related to collective bargaining agreements and funding of education programs are estimated at 0.4 percent of GDP and are already materializing since the Supplementary. - Plan to enact a package of revenue measures by December to offset these pressures; draft Tax Laws Amendment Bill submitted to Parliament with measures drawn from the MTRS expected to yield about 0.9 percent of GDP on an annual basis if they enter into force from December. ### Revenue measures, tax reform and administration - Draft Tax Laws Amendment Bill measures aim to: - rationalize tax expenditures related to final consumer goods; - strengthen tax administration and enhance tax compliance, including extension of the tax amnesty on penalties and interest; - introduce innovative digital solutions: Virtual Electronic Tax Registers (ETRs), advanced analytics, Application Programming Interface (API) management, real time collection of tax, simplified registration, filing, and payment processes; - realign excise rates for selected goods and services; - review scope of specific levies and duties on imports (railway development levy, import declaration fee, export promotion and investment levy). - Medium-Term Revenue Strategy (MTRS) governance: Steering Committee established to adopt comprehensive PIT, CIT, and VAT reform plan to prepare legislative changes for the FY2025/26 Budget (proposed new SB for end-February 2025), aligned with Budget Policy Statement submission by February 15, 2025. ### Carryovers, arrears clearance, and payment discipline - FY2023/24 ended with a sizeable spending carryover of about 1.3 percent of GDP (¶5). - Supplementary FY2024/25 Budget includes an appropriation of about 0.4 percent of GDP for clearance of part of the FY2023/24 carryovers. - Ministries, Departments, and Agencies (MDAs) instructed to prioritize execution of FY2024/25 commitments to clear carryover by end-December 2024, consistent with Public Finance Management Regulations, 2015, Section 42(a). - Plan to submit a second Supplementary FY2024/25 Budget to Parliament for any spending adjustments needed to meet pressures and clear carryovers while respecting programmed primary balance and revenue targets (proposed new SB for end-January 2025); commitment to accelerate legislative process to submit before end-January 2025. - To prevent accumulation of arrears: (i) prioritize clearance of exchequer requests submitted in IFIMIS prior to end-June 2024; (ii) ensure efficient operation of government securities market (¶28) to support liquidity in line with IMF TA recommendations. ### Pending bills verification and arrears strategy - Cabinet established a Pending Bills Verification Committee in September 2023 (effective until September 2024) to scrutinize national government arrears accumulated between end-June 2005 and end-June 2022. - Committee received claims of Ksh.571.6 billion from central government entities and is collecting potential unregistered claims from the public. - Interim report with recommendations for settlement of verified unpaid bills submitted to the NT on April 22, 2024; Cabinet approved a comprehensive, timebound strategy on June 11 with: - measures to address PFM shortcomings that led to accumulation of pending bills and other arrears, including definition of expenditure arrears; - criteria for clearing validated arrears over five years; - schedule and principles for settlement of verified pending bills and other government arrears. ### Fiscal risk management and contingency planning - High uncertainty from global and domestic shocks (war in Ukraine, spillovers from conflict in Gaza, floodings after historic droughts, nation-wide protests) that could depress tax receipts and add spending pressures. - Commitment to garner social and political support for tax and nontax reforms and to reintroduce measures declared null and void by the Supreme Court in compliance with the Court’s guidance. - Fiscal Risk Committee (within the National Treasury) established; inaugural meeting December 2022. Committee to hold quarterly meetings; next meeting October 2024 will analyze materialized fiscal risks during FY2023/24, findings of financial evaluation of seventy SCs, and prepare internal report with quantified fiscal risks and mitigation measures. - Expanded fiscal risk statement for FY2024/25, including climate change risks (¶60). ### Revenue administration reforms at Kenya Revenue Authority (KRA) - Key objectives and progress: - Develop and implement risk-based compliance strategies; RDF and risk profiling tool automated and deployed in June 2024; risk profiles uploaded on KRA Insight platform. - Strengthen KRA audit function: training of computer audit specialists, continuous training on computer-aided audit techniques (10 audit staff trained), advanced MS Excel training, establishment of Audit Quality Review Team structure awaiting approval and resourcing; target to assess audit impact on compliance by end-December 2024. - Strengthen data analytics for compliance risk management: approved data management strategy; integration with third party sources commenced with telecommunications integration to be finalized by June 2025; as of September 2024, 89 percent of betting and gaming firms had been onboarded for real time data acquisition, 60 out of 400 digital credit providers had been onboarded; piloting of integration between KRA and one telecommunication’s system completed. - Reconciliation and migration of taxpayer ledgers from legacy system completed on June 27, 2024; taxpayer registers for LTO, MTO and deregistered companies developed by end-June 2024; cleaning and validation completed and mass migration to iTax system done by June 27, 2024. - Managing exemptions: verification of 75 projects out of 87 tracked by Customs completed; broaden VAT exemption verification at customs to new areas by end-December 2024 (planned March 2024 originally). - Managing tax arrears: tax amnesty for interest and penalties implemented from September 1, 2023, to June 30, 2024; amnesty wrote off penalties and interest for unpaid principal tax accrued up to December 31, 2022, and offered payment plans; tax amnesty to be extended until end-June 2025; KRA to publish strategy for dealing with tax arrears (proposed new SB for end-November 2024). ### Tax refunds, system integration, and processing targets - KRA established dedicated teams at Regional Audit Centers for timely tax refund audits and continuous reconciliation of taxpayer ledgers prior to claim lodgment. - March 2024 amendment: if Commissioner fails to pay approved refund claims within 6 months, taxpayer can utilize refunds to offset outstanding tax debt or future liabilities. - As of September 30, 2024: - outstanding VAT refunds claims (verified and unpaid) of Ksh.15.4 billion; - Ksh.12.5 billion VAT Refunds Adjustments Vouchers (RAVs) issued to taxpayers to offset outstanding tax liabilities (out of which Ksh.6.5 billion RAVs have not been utilized). - KRA developed performance contracts in December 2023 to reduce claim processing time to 60 days (short-term) with medium-term goal 30 days; currently processing time is less than 60 days. - System integration (iTax and iCMS) for real-time confirmation of exports delayed to June 2025 (previously June 2024) due to legal hurdles from dropping the Finance Bill 2024; procurement and implementation plan for the new comprehensive tax platform to be finalized by December 2027; National Treasury to prioritize allocation/transfer of sufficient funds to KRA to meet tax refunds needs in accordance with Government Strategy on Verification and Clearance of Pending Bills. ### Public procurement modernization - Process underway to acquire an e-Government Procurement (e-GP) System that will be end-to-end, with all public procurement and assets disposal transactions undertaken online and fully compliant with the Public Procurement and Asset Disposal Act (PPADA) of 2015 and its Regulations. *Source: Excerpt from the IMF staff report (Kenya) contained in the supplied PDF content.* ### 2020. The developed e-GP system will be interfaced with our Integrated Financial Manageme ### 1kenea2024003-print-pdf - 2020. The developed e-GP system will be interfaced with our Integrated Financial Manageme ### e-GP system and IFMIS integration - The developed e-GP system will be interfaced with our Integrated Financial Management Information System (IFMIS) to process payments of contracted suppliers. - Delays occurred in the roll-out of some e-GP system modules planned for roll-out in July 2024; these modules had not been delivered by the service provider because of the consultative process with supply chain practitioners and iterative feedback incorporation. - A pilot new e-GP system was rolled out in twelve (12) MDAs from July 2024. - Full roll-out target for the entire e-GP system to all the MDAs: July 2025. - Sufficient funds have been set aside for capacity building of system users in procuring entities and within the business community. - Interim arrangement: updated IFMIS e-Procurement module will be used by procuring entities until the new e-GP system is fully rolled out to allow for seamless transition. ### Wage bill control and remuneration reforms - Objective: reduce the ratio of the government wage bill as share of tax revenue to free resources for priority social and development spending. - Measures already implemented: - Wage freeze for FY2021/22 and FY2022/23. - Elimination and streamlining of a number of allowances. - In July 2024, the Salaries and Remuneration Commission (SRC) froze the upward review of salaries for all state officers due to emerging fiscal constraints and budget cuts from the withdrawal of the 2024 Finance Bill. - SRC deferred implementation of the scheduled annual salary review for all other public officers in FY2024/25 until further notice, contingent upon the availability of funding. - Subsequent reversal: SRC decisions have been reversed because of pressures to implement collective bargaining agreements with trade unions; these pressures are to be funded from additional revenue efforts (¶15). Planned further actions to control the wage bill: - Harmonize and rationalize the categories, rates, and rules for allowances. - SRC objective: contain allowances to no more than 40 percent of gross pay overtime. - SRC implemented changes to remuneration of state officers, including linking rewards to performance and reviewing bonus and allowances requests from public institutions. - SRC plans to substantially reduce the number of allowances (from the current 247) to ensure they are well targeted and reflect specific job circumstances and skills. - Several allowances have ceased to be payable and daily subsistence allowance for local travel have been standardised across the country. - Implement a common payroll system linked to IFMIS across MDAs and Counties. - Unified Human Resource (UHR) system rolled out to consolidate Human Resource and Payroll data in the Public Service via a single warehouse. - Since July 2023, the UHR system is linked to Kenya Revenue Authority i-Tax to facilitate filing of PAYE tax element associated with individual employees and total monthly PAYE tax obligation from the State Departments. - Plan to incorporate other deductions to enable all remittances to be sent to respective entities including Pension Funds and other employees’ contributions schemes by December 2024. - UHR system roll-out plan: - Roll out for the entire Public Service by December 2024. - Phase 1: roll out to all MDAs and Counties, commenced September 2023. - Phase 2: roll out to all State Agencies that have adopted the Unified Payroll Numbering (UPN) System—including Teachers Service Commission (TSC). The 349,000 teachers under TSC have been issued with UPN. - Phase 3: issue the UPN to all Commissions and Independent Offices, State Corporations, Public Universities, and Agencies. - Training of trainers and users is underway but encountered delays due to logistical challenges; full implementation of the UHR system is now set for July 2025. - Ensure Collective Bargaining Agreements consider available resources: - SRC will progressively review allowances and benefits in future Collective Bargaining Agreements and align them to the provisions of the Allowances Policy Framework for the Public Service. ### Public Investment Management (PIM) reforms - Objective: improve PIM to deliver value for money in public capital expenditure. Actions under way: - Rationalizing existing projects: - Cabinet decision to thoroughly review 437 stalled or underperforming projects. - MDAs conducted physical audits and submitted analyses to NT for review and validation. - All projects have been reviewed; NT has commenced consultation with MDAs on projects to be cancelled. - NT, through the Office of the Attorney General and Department of Justice, will table a cabinet memo on the final status of all stalled projects, recommending suspension, continuation, or cancellation by end-December 2024. - NT will issue a circular to MDAs to prioritize funding for projects decided for implementation in line with PFM Regulations of 2022 and debt sustainability analysis. - Operationalizing the Public Investment Management Information System (PIMIS): - PIMIS is being piloted in roads, infrastructure, health, and education sectors. - PIMIS will be populated with all ongoing and new projects, covering all other sectors of the government by end-June 2025. - Implementation delayed to integrate aspects of public private partnerships (PPP) and climate change in the PIM framework. - With IMF support, update the PIM-PPP framework to enable capturing PPP projects in PIMIS by January 2025. - PIM department expanded with additional staff and provided capacity development for the trainer of trainers to enhance project appraisal capacity. ### Public Finance Management (PFM) reforms and fiscal governance - Strengthening PFM is a priority to improve cash management and financial/fiscal reporting. - Cabinet has approved implementation of a Treasury Single Account and transition from cash to accrual basis of accounting. - PFM reform strategy 2023–28 and Auditor General findings on supplementary budgets (including under Article 223 of the Constitution) inform measures to strengthen expenditure control and improve efficiency and effectiveness of public spending. Planned milestones: - By end-December 2024, NT will submit to Parliament amendments of the PFM Act to reform the framework for in-year revisions to the budget, including by strengthening conditions and introducing rigorous procedures governing additional spending under Article 223 of the Constitution (proposed new SB for end-December 2024). - Progress made in enhancing IFMIS by creating a functionality in Hyperion module to capture multi-year commitments. - With Cabinet approval, state corporations have been classified in accordance with GFSM (text continues). *Source: 1kenea2024003-print-pdf - 2020. The developed e-GP system will be interfaced with our Integrated Financial Manageme* ### 2014. This exercise involved all stakeholders to ensure the approach was inclusive and the ### 1kenea2024003-print-pdf - 2014 ### State Corporations (SCs) — assessment, reforms, and rationalization - There are 343 state corporations, of which 79 are commercial government owned enterprises, and 264 are Extra-Budgetary Units. - Extra-Budgetary Units composition: - 105 executive agencies - 78 regulatory agencies - 32 public universities - 13 university colleges & postgraduate institutions - 17 tertiary education & training institutions - 4 national referral hospitals - 15 research institutions - By end-December 2024, a comprehensive review of SCs will be completed and a report submitted to Cabinet with recommendations to merge, consolidate, dissolve/wind up or transfer back to MDAs. - The National Treasury (NT) completed a preliminary assessment of 271 SCs (excluding twenty-three earmarked for privatization) to determine viability. Reform plans based on this assessment: - Merge 42 SCs identified as undertaking duplicate or closely related functions to form 20 SCs. - Dissolve 9 SCs and transfer residual functions back to the Ministry/relevant state corporation. - Divest from 16 SCs whose mandate is outdated or performed by the private sector. - Restructure 6 SCs for better performance. - The NT undertook an updated financial evaluation for seventy SCs using their FY2022/23 audited accounts to quantify fiscal risks; outcomes to be reported to the Fiscal Risk Committee by end-October. - NT will conduct triennial assessments as mandated by Section 89(3) of the PFM Act. ### Parliamentary Budget Office, fiscal anchors, and fiscal rules - Intention to strengthen the Parliamentary Budget Office functions, including through IMF TA, to: - Assess macro-fiscal forecasts. - Monitor debt dynamics. - Periodically report to the National Assembly and public on achievement of the debt anchor. - Adoption planned of a well-defined escape clause and correction mechanism. - The amended 2012 PFM Act replaced the 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 percentage points. - The Cabinet Secretary must submit to Parliament a written explanation when the debt anchor is breached. - A taskforce will be formed to propose adjustments to PFM regulations by end-March 2025, based on taskforce recommendations, to operationalize the debt anchor framework. ### Petroleum Development Fund (PDF), fuel pricing, and audit measures - National Treasury and Ministry of Energy and Petroleum assessed PDF governance and published a report in early August (end-March 2024 SB). - Auditor General’s Office will conduct and publish a comprehensive audit of the use of funds in the PDF and the fuel pricing mechanism and recommend actions to strengthen triggers for price stabilization decisions (proposed new SB for end-January 2025). - Triggers for price stabilization decisions will include market prices, exchange rate developments, margins of oil marketing companies, and resources concurrently available in PDF. ### Medium-Term Debt Management Strategy (MTDS) and public debt management - Key components and outcomes: - Reducing domestic refinancing risks: - Ratio of Treasury Bonds to Treasury Bills stable at 88:12 in June 2024. - Average time to maturity of outstanding Treasury Bonds declined to 7.5 years as of June 2024 from 8.2 years in December 2023. - Primary reliance on concessional external financing for FY2023/24 fiscal deficit: - World Bank Development Policy Operations lending: US$1.2 billion. - Performance for Results funding: US$150 million. - Africa Development Bank resources: €73 million. - Issued a 7-year US$1.5 billion Eurobond in mid-February; used proceeds for a partial buyback of June 2024 maturing Eurobond (US$1.443 billion). - Contracted a commercial loan of US$506 million from the Trade Development Bank. - Will continue to rely on concessional financing in FY2024/25 and engage multilateral and bilateral lenders, including via sustainability-linked and samurai bonds. - Will consider non-concessional borrowing only if market conditions improve significantly and remain within program borrowing limits that safeguard debt sustainability. - Broadening reporting of SCs’ nonguaranteed debts: - In PDMR FY2022/23, 25 out of 260 SCs had nonguaranteed debt amounting to Ksh.111,805 million (0.8 percent GDP) as at end June 2023. - Implementation of Government Investment Management Information System (GIMIS) to digitize collection of public finance statistics; over the medium-term coverage and reporting of SCs’ outstanding debt expected to improve significantly. - Market infrastructure and reforms: - Deployment of new Central Securities Depository System (CSD) to transact directly in primary and secondary markets and enable a horizontal repo market. - Policy support to operationalize an over-the-counter automated exchange to complement Nairobi Securities Exchange, promote trading transparency, settlement efficiency, and attract capital to reduce yields and cost of new public debt issues. ### Public-Private Partnerships (PPPs) and contingent liabilities - Approved 39 PPP projects for development; estimated cost US$13 billion (11 percent of 2024 GDP) for 36 of these projects. - Contracted so far: Ksh.136 billion (1 percent of GDP). - Government actions: - Evaluate costs and risks associated with PPPs. - Introduce legal provisions to limit total stock of PPPs and ensure related fiscal costs and contingent liabilities are accounted for. - Requested IMF TA to develop a joint PIPM-PPP Framework; Draft PIM-PPP framework developed. - Launch a new online portal with all active PPP projects and contract summaries (excluding confidential/protected information) by August 2024. - PPP Directorate submitted the second Annual Report on the State of Public Private Partnerships in Kenya for FY2022/23 to Parliament. ### Pension reform and administration - Funded contributory pension for public sector employees (Public Service Superannuation Scheme, PSSS) introduced on January 1, 2021. - Governance reforms: - Monitor and completely separate and delink governance of PSSS from the noncontributory scheme. - Revamp public service pension administration through digitization and re-engineering of pension management system, expected completion by December 2024. - Conduct an actuarial valuation of future obligations of the noncontributory defined benefits pension scheme by December 2024. ### Kenya Kwanza SC policy priorities and SOE performance highlights - New policy priorities: accelerated privatization; streamlined governance with clear roles; efficient budgetary utilization; better fiscal risk management; enhanced accountability. - Commitment to attain debt anchor (PV of overall debt at 55±5 percent of GDP by 2028) through medium-term fiscal consolidation. - KPLC and Kenya Airways (KQ) performance: - KPLC: - Operational revenues up 31 percent y/y through end-December 2023. - Average improvements supported by new base electricity tariffs effective April 2023 and passthrough of variable charges. - Action Plan approved May 2023 to restore KPLC medium-term profitability; governance structure operationalized (approved November 10, 2023). - KQ: - Announced net profit in six-monthly report ending June 2024 for the first time in over a decade. - As of end-December 2023, total outstanding liabilities Ksh.206.8 billion, including Ksh.171.4 billion long-term liabilities and Ksh.35.4 billion short-term liabilities. - Externally guaranteed debt Ksh.58 billion was novated in 2023; government servicing that debt. - Government guarantees of about US$150 million on KQ FX-denominated debt to local banks were called in August; modalities being worked on. - Preparation of proposals for Cabinet approval of strategic options for restructuring KQ in process (end-April SB); SB rescheduling proposed to end-November 2024. ### SOE governance, transparency, and oversight arrangements - Executive Order in May 2024 revised guidelines for terms and conditions of service for SC Board members and staff; included classification of SCs into six categories (see ¶26). - Guidelines published July 10, 2024, but did not fulfill end-January SB requirement to apply across government. - Disclosure and digitalization: - NT uploaded audited financial statements and annual reports for FY2021/22 (160 SCs) and those available for FY2022/23 accounts (115 SCs) by end-September 2024. - Uploaded FY2021/22 and FY2022/23 Annual Performance Contracting Evaluation Reports of SCs. - GIMIS loans module developed to capture SC disbursements and repayments; analytical framework and Financial Evaluation and Risks Analysis module to be integrated by end-December 2024 (with IMF TA support). - Ownership Policy for Government Owned Enterprises (GOEs) approved by Cabinet and published November 2023; centralizes ownership and oversight in NT and strengthens Boards’ mandate. - Submission to National Assembly of draft GOE Bill 2024 delayed; public participation process lasted until June 14, 2024; Bill to be updated and submitted to Cabinet for approval and onward transmission to National Assembly by end-November (proposed rescheduling of the SB to end-November 2024). - Government investments regulations to be submitted to National Assembly for approval by end-November 2024. - Privatization: - Privatization Act, 2023 enacted; implementation suspended after court order on December 4, 2023. - High Court declared the Act unconstitutional on September 24, 2024 due to inadequate public participation; plan to appeal the ruling. - Cabinet approved divestiture of eleven entities on February 14 and June 11, 2024; total of fifteen entities are part of ongoing privatization transactions. - Exploring a privatization mechanism involving consolidation and a fund to manage target companies; timeline contingent on appeal outcome. ### Monetary policy framework and exchange rate policy - Policy objectives: - Maintain headline inflation within target range 5±2.5 percent. - Maintain a flexible exchange rate regime. - Improve monetary policy framework. - Monetary policy actions and indicators: - Policy rate lowered by a total of 100 basis points in August and October (year not explicitly restated). - Headline inflation decelerated from 6.9 percent y/y in January to 3.6 percent y/y in September. - Food inflation decelerated from 7.9 percent y/y in January to 5.1 percent y/y in September. - Fuel price inflation 1.1 percent y/y in September. - NFNF inflation around 3.5 percent since December 2023. - Commitment to adjust monetary policy decisively to anchor expectations and maintain external sustainability; inflation expected to largely remain within target band with risks from international oil price shocks. - FX market and reserve policy: - Kenya FX code issued March 2023; aligned with Global FX Code principles. - As of end-August 2024, 95 percent of banks had confirmed full compliance with the Kenya FX code. - Electronic matching system implemented for wholesale interbank market; circular on December 11, 2023 withdrew the 20-cents indicative bid/offer spread and reaffirmed bank market-making obligations. - Work toward enhancing internal strategy for FX reserve build-up and intervention including objectives, governance, accountability, operational and communication arrangements. - Monetary policy implementation reforms: - New monetary policy implementation framework adopted August 2023 (corridor at CBR ±250 basis points), refined in June 2024 to CBR ±150 basis points. - Discount Window interest rate currently set at CBR+300 basis points (revised from CBR+400 basis points set in August 2023). - DhowCSD system (centralized securities depository) went live July 2023 and supports monetary policy transmission and market infrastructure improvements. - Review of commercial banks’ risk-based loan pricing models completed; all banks have adopted their risk-based pricing models. ### Financial sector resilience and supervision - Policy objectives: safeguard financial stability and expand access to affordable finance; four pillars—customer centricity; risk-based credit pricing; transparency; ethical practices. - Banking sector indicators and measures: - Credit Guarantee Scheme (CGS) loans extended: Ksh.6.3 billion as of June 2024. - Gross NPLs to gross loans ratio: 16.3 percent in June 2024, compared to 14.5 percent in June 2023. - Outstanding restructured loans about 7 percent of gross loans with about 90 percent performing as per restructured terms. - Proposed to increase minimum capital level in a bank to Ksh.10 billion over the medium term. - Supervisory and resilience measures: - Continued enforcement of compliance via onsite and offsite surveillance; monitoring of capital, liquidity, provisioning, and FX exposures. - IMF Financial Sector Stability Review (FSSR) requested; scoping mission in May 2024 and main mission scheduled for November 2024. - IMF TA requested and delivered for a macroprudential policy strategy (mission June 25-July 2, 2024); key recommendations to be implemented expeditiously. - IMF TA in June 2023 to develop ILAAP Guidelines; guidelines to be issued for bank comments by end-October 2024, including currency differentiated LCR and NSFR as monitoring tools. - Emphasis on preserving capital and liquidity buffers, encouraging mergers and acquisitions, and strengthening governance. - Digital credit and sector modernization: - Central Bank of Kenya (Amendment) Act, 2021 empowered CBK to license, regulate and supervise digital credit providers (DCPs); CBK Digital Credit Providers Regulations, 2022 operationalized on March 18, 2022. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kenea2024003-print-pdf.pdf* ### 2022. Accordingly, unregulated DCPs were required to apply for a license from the CBK by ### Kenya — Governance, AML/CFT, Financial Sector Reforms, and Climate Resilience (excerpts) ### Licensing of Digital Credit Providers (DCPs) - Unregulated DCPs were required to apply for a license from the CBK by September 17, 2022; or cease their operations. - As of October 1, 2024, 85 DCPs had been granted licenses. ### Greening Kenya’s Banking Sector - In October 2021, Guidance on Climate-Related Risk Management was issued to help banks manage climate-related risks, invest in climate-friendly activities, and mobilize finance for climate action. - Capacity building workshops for banks’ and CBK staff in risk management and compliance were conducted between February and March 2022. - At end-June 2022, all banks submitted Climate-Related Risk Management Implementation Plans focusing on strategy and governance, with plans to address climate risk management and disclosure components over the medium term. - Banks have submitted quarterly progress reports since end-September 2022. - As part of RSF-related reforms (completion date of April 7, 2024 (7th EFF/ECF Reviews)), CBK developed a draft green finance taxonomy adapted to Kenya’s updated NDC and circulated it for stakeholder consultation. ### AML/CFT Risk-Based Supervision and Enforcement - Prudential and AML/CFT supervisory functions were separated in 2023; focus is on effective implementation of AML/CFT risk-based supervision tools and a standalone manual. - Risk-based onsite inspection plans have been developed for all reporting institutions for 2024 onwards. - To date, 30 AML/CFT on-site inspections have been conducted. - Administrative enforcement actions have included issuance of administrative warnings and monetary penalties; follow-up actions are ongoing and development of indicators to assess the new enforcement policy is in progress. - Four circulars have been issued providing guidance on due diligence and beneficial ownership transparency obligations; enhanced guidance and related outreach and training activities are under development. ### Access to Information and Transparency - Full and effective implementation of the access to information framework is prioritized to enhance transparency and accountability; the Access to Information Regulations are now in force through lapse of time. - The Office of the Ombudsman will create public awareness of the right to access information and provide sensitization and training of public officers on procedures and obligations. - A methodology will be developed to monitor implementation progress of access to information at national and county levels, initially focusing on strategic areas like debt, budget, tax expenditures, PPPs, and procurement. - Information standards will be developed to guide proactive provision of information and processing of information requests. - Commitment to developing Standards for the Digitization and Automation of Records will be renewed; work with county governments to advance legislative actions is planned. ### Public Procurement, Beneficial Ownership, and Data Integration - As of October 2024: - 962 out of over 33,000 procuring entities had registered with the Public Procurement Information Portal (PPIP). - PPIP held 10,458 awarded contracts with beneficial ownership information disclosed, worth a total of Ksh.213.73 billion. - PPRA issues letters to noncompliant procuring entities and conducts trainings to improve understanding of beneficial ownership disclosure obligations. - A legal review is underway to identify and propose enforcement options, including possible administrative sanctions against accounting officers and heads of procurement functions; a compendium of proposed amendments was shared with the NT in September 2024 for consideration. - Integration work is ongoing to connect the PPIP with other government platforms, including the e-GP system (to facilitate automatic generation of contract award reports) and the BRS e-registry (for automatic validation of beneficial ownership information). ### Procurement Monitoring, Central Repository, and Training - Priority actions: - Continuous enhancement of monitoring and data analysis capabilities for 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)), supported by e-procurement rollout and integration with PPIP and other government databases such as IFMIS. - PPRA to coordinate and provide continuous training to procuring entities, law enforcement agencies and other stakeholders to facilitate data sharing and develop tailored analysis functionalities. ### Audit Follow-up and Accountability - Steps to enhance follow-up and implementation of Auditor-General’s audit findings and recommendations, including from completed audits of COVID-19 spending: - Promote greater coordination and collaboration among state institutions involved in the audit and accountability cycle, including law enforcement agencies. - Strengthen follow-up and implementation systems, consolidate monitoring capabilities and structures, and integrate them with social accountability and participatory frameworks. - Enhance public reporting, including publishing a summary of NT’s Internal Auditor-General Department’s annual reports. - Enhance coordination during Parliamentary review of audit reports to strengthen follow-up and implementation of Parliamentary recommendations. - Provision of the above measures into the new PFM Act (paragraph 30). ### Asset Declarations, Conflict of Interest, and Ethics Enforcement - The draft Conflict of Interest Bill: - Approved by the Senate in May 2024 (with amendments); National Assembly rejected these amendments in July and the bill was referred to a mediation committee. - Aims to require high-level officials to (i) file information regarding disclosure of interests and assets beneficially owned, (ii) enable online publication of declarations of assets (except confidential data for safety/privacy), and (iii) include dissuasive sanctions to prevent noncompliance, including filing of inaccurate information. - Going forward: work to achieve full automation of asset declarations for all public officials; the Bill should include a robust enforcement framework and ensure that the Ethics and Anti-Corruption Commission (EACC) is granted implementation and enforcement authority. ### EACC Asset Recovery and International Cooperation - EACC accomplishments from 2018 to 2023 include: - Recovery of 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. - Completion of 33 investigations into illegally acquired and unexplained wealth in the last fiscal year. - Initiation of 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. - Recognized challenges in cross-border cases; plans to strengthen Mutual Legal Assistance and broader International Cooperation frameworks and consider strengthening the EACC’s team to function effectively within existing MLA and IC frameworks. - A governance diagnostic assessment for Kenya has been requested to identify governance weaknesses associated with corruption vulnerabilities. ### Judiciary Capacity and Case Management for Corruption Cases - Measures taken: - 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. - Anti-corruption and Economic Crimes Division is a specialized court within the High Court handling corruption-related cases. - Ongoing priorities: appropriate training for magistrates and judges; addressing adjournment-related delays via Court Users Committee and Bar Bench; need for more High Court judges for effective case management. - Infrastructure and equipment shortages persist, particularly outside Nairobi; work is underway to put in place video conference and filming capabilities in courtrooms. ### Supplementary Budget Oversight - Steps to provide accountability and transparency on supplementary budget spending by MDAs: - Facilitated the Auditor-General with necessary support and access to records for requisitions (demand) and disbursements (supply) to conduct a special audit on mechanism, efficiency, and effectiveness of supplementary budgeting, including under Article 223 of the Constitution. - The audit report was published in December 2023; its recommendations, including criteria for approval of requests for additional funding, will be incorporated into the amended draft PFM Act. ### Continued AML/CFT Reforms and DNFBP Supervision - Kenya is addressing AML/CFT deficiencies identified in the FATF action plan; a multi-stakeholder group led by the FRC has allocated specific requirements under each action item to complete the action plan ahead of its May 2026 deadline. - Action items are at various stages of completion; the first set (parts of Immediate Outcomes 1, 10 & 11) are due in January 2025. - Ongoing measures include: - Reviewing CFT regulations. - Raising awareness on sectoral risk assessments and the updated National Risk Assessment (published on the FRC’s website). - Completing a TF risk assessment and related guidance; developing a legal framework for virtual asset service providers; deploying tools to fast-track ML/TF investigations. - Strengthening AML/CFT risk-based supervision of DNFBPs through off- and on-site examinations of high-risk sectors. - FRC coordination with supervisors of casinos and the real estate sector to follow up on remedial actions from onsite inspections. - Customized risk-based supervision manual for all DNFBP sectors and development of supervisory and risk-profiling tools for Dealers in Precious Metals and Stones (DPMS), Trust and Company Service Providers (TCSPs), and Accountants. - Sending statistical questionnaires to conduct risk assessments informing supervisory actions. - Joint onsite inspections planned between November 2024 and March 2025. - Sectoral risk assessment of all DNFBP sectors to update understanding of ML/TF risks. ### Beneficial Ownership Transparency and BRS Compliance - Kenya Business Registration Services (BRS) efforts and compliance status (as of early October 2024): - 49.7 percent of companies were compliant. - 60 percent of companies on the BRS register are currently considered to be compliant (with compliance obligations under the Act). - Existing companies are expected to be fully compliant by end-June 2025, supported by denial of services by BRS until submission requirements are met. - BRS will begin to issue compliance notices starting in November 2024 and will enhance its system to facilitate compliance and enforce administrative sanctions for noncompliance with beneficial ownership filing requirements. - BRS is testing these features with a projected go-live date of summer 2025. - BRS is responding to increasing access requests for beneficial ownership information by supervisors, competent authorities, and reporting entities; outreach sessions to high-risk sectors and reporting entities continue. ### Building Resilience to Climate Change and RSF Reforms - RSF-supported reforms progress: - RM1 (National Framework for Climate Services (NFCS)) was completed in November 2023; rollout is ongoing in all 47 counties supported by the Financing Locally-Led Climate Action (FLLoCA) Program. - NFCS sets out governance structures for improved collaboration in climate planning and response strategies. - Spatial analysis and climate data management strengthened through the Kenya Meteorological Department’s online platform; training of county directors of meteorological services undertaken; all counties have established local-level systems; capacity-building will be extended to the ward level in line with FLLoCA. - Fiscal and PFM measures supporting climate agenda: - Long-term climate-related fiscal risk scenarios (RM2) were developed and included in the 2024 Budget Policy Statement—to be included in fiscal risk statements going forward. - Integration of climate change and disaster risk methodology in project appraisal (RM5) is on track with ongoing World Bank TA; insights incorporated into the 2024/2025 budget circular; development of regulations informed by the TA report is underway. - A climate and disaster risk screening tool has been designed to ensure projects include climate elements in assessment criteria; associated changes to the Public Investment Management Information System (PIMIS) will follow. - Climate budgeting tagging (RM8) is progressing with IMF TA; a review of scope, institutional frameworks, and integration potential was completed and climate budget tagging guidelines were circulated to departments in July 2024. - Fiscal incentives and regulatory reforms for low-carbon, climate-resilient development: - Electricity sector reform (RM7): draft open access regulations were gazetted in February 2024 for public consultation and submitted to the Cabinet Secretary for Energy for finalization and gazettement after stakeholder engagement. - Net metering regulations were gazetted in May 2024 and its regulatory impact assessment has been done; the net metering regulation would promote adoption of renewable energy technologies, reduce electricity costs, and enhance energy security. The framework for net metering agreement has yet to be finalized by off-taker (KPLC). - The National Green Fiscal Policy Incentives Framework (NGFPF) was adopted in December. - FLLoCA program funding specifics: - Total funding amounts to US$297 million over a period of 5 years, with effect from February 1, 2022. *Source: Excerpts from the referenced IMF country document.* ### 2023. The framework provides for a wide range of tools including subsidies, ecological fiscal ### 1kenea2024003-print-pdf - 2023. The framework provides for a wide range of tools including subsidies, ecological fiscal ### Green fiscal policy tools, carbon pricing, and green fiscal incentives - Framework tools include: subsidies, ecological fiscal transfers (biodiversity credits), research grants, a national debt-for-climate and debt-for-nature swaps framework (which has been developed), and concessional loans. - A formal communication was sent to all sectors requesting proposals outlining priorities under the Green Fiscal Incentives Policy options. - The government approached the IMF for TA with design of a carbon tax (RM3). - The World Bank will assist in considering reform options for recycling proceeds from carbon taxes towards social protection, biodiversity/ecosystems protection, and landscape restoration. - RSF Reform Measures relevant to mobilizing climate-revenue and strengthening efficiency: - RM3: Subject to Parliamentary approval, National Treasury to implement carbon pricing in line with IMF recommendations to better reflect the externalities of fossil fuel consumption and to achieve emissions reduction targets in line with the updated NDC. 7th EFF/ECF Reviews (April 7, 2024) 1/ - RM6: National Treasury to adopt priority fiscal incentives in agriculture, water, and land management sectors, as listed in the draft National Green Fiscal Incentive Policy Framework. 8th EFF/ECF Reviews (September 30, 2024) 1/ ### Climate resilience of the financial sector and green finance taxonomy - With assistance from the European Investment Bank (EIB), a Kenya Green Finance Taxonomy (KGFT) was developed (RM4) and public consultation completed. - The KGFT initially focuses on climate change mitigation and adaptation and is intended to classify economic activities as green or environmentally sustainable and guide banking and market participants. - The draft KGFT drew from Kenya’s Nationally Determined Contributions (NDCs) under the UNFCCC and other National Climate Policy Documents. - A diagnostic review of existing disclosure requirements was completed in June (with the EIB). - The draft Climate Risk Disclosure Framework for the banking sector was issued for public consultation in September 2024. - The CBK is on track to adopt the taxonomy and issue guidelines for climate-related risk management disclosures in the banking sector by March 2025 (RM9). - RSF Reform Measures relevant to 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 the draft for stakeholder consultation. Met - RM9: CBK to (i) adopt a green finance taxonomy adapted to Kenya’s updated NDC and reflecting stakeholders’ comments, (ii) issue guidelines for the implementation of climate related disclosures for the banking sector in line with international best practices, and (iii) introduce time-bound targets for the implementation of climate disclosure requirements. 9th EFF/ECF Reviews (February 15, 2025) ### FLLoCA Program and other climate-related programs and financing - The FLLoCA Program (collaboration across national government MDAs, county governments, and development partners) supports agricultural adaptation, community-led water management, natural resource management, investments in new local green enterprises, and disaster risk management. - Parliament approved county government allocations of US$60 million, and the KfW component will provide US$34 million to support agro-ecological systems, and green jobs for youth and women. - The World Bank assessed the program as moderately satisfactory; efforts are underway to improve disbursement and implementation rates. - Currently, 34 counties have received their first County Climate Resilience Investment (CCRI) grant; remaining counties will receive grants soon after meeting PforR conditions. ### Oil import arrangement, FX implications, and exit intentions - New oil import arrangement introduced in April 2023 and extended to December 2024 replaced the previous open tendering system; it provides six-month credit for oil imports backed by letters of credit issued by participating commercial banks. - In 2023, actual import volumes fell short of agreed volumes under the arrangement due to lower regional and domestic demand. - A supplemental Variation Agreement (VA) signed on September 1, 2023 extended the period to lift remaining 2023 volumes until end of 2024 and extended the initial agreement by twelve months with more favorable costing terms. - Uganda National Oil Company (UNOC) acquired an import license from EPRA and will import diesel (AGO) and petrol (PMS) only for the Ugandan market; the first cargo expected towards end of June 2024. - Under the arrangement: Kenya will be importing one cargo less for PMS and AGO each and the number of cargoes under G2G will drop from 8 to 6 in a month. - The government intends to exit the oil import arrangement because of distortions it created in the FX market and increased rollover risk of private sector financing facilities supporting it. - Commitments: all FX conversions done as part of the oil scheme will be done at market rates; regulations on the fuel pricing formula will be amended to specify passthrough of the exchange rate risk component and any other risks that may materialize. ### Data quality, statistical improvements, and dissemination - Policy objective: produce and disseminate high-quality economic statistics as foundation for evidence-based decision making. - Kenya National Bureau of Statistics’ Strategic Plan 2023–27 aligns with Kenya Vision 2030, the Bottom-up Economic Transformation Agenda, the Fourth Medium Term Plan, Africa Agenda 2063, the EAC Vision 2050 and the Sustainable Development Goals. - Recent and planned statistical enhancements: - Launched 2023/24 Housing Survey (second since 2011/12). - Work continues to improve and expand national accounts and price statistics, including with IMF TA. - Reassembled interdepartmental Technical Working Group (TWG) on Government Finance Statistics (GFS). - Expected reporting improvements and timelines: - Reporting of general government fiscal outturns on a quarterly basis by February 2025. - Annual fiscal data of the public corporations’ sector (including financial and nonfinancial corporations) by February 2025. - Migration of the fiscal framework to GFSM 2014 based concepts, starting with the QEBR for second quarter of FY2024/25. - Reviewed the GFS Public Sector Institutional Table in March 2024 and refined the list of extra-budgetary units to expand coverage of quarterly statistics to central government by end-August 2024. - External sector statistics improvements (including oil re-exports and related imports, and associated financing flows) are underway via a joint committee comprising Kenya National Bureau of Statistics, CBK, Energy and Petroleum Regulatory Authority, and Kenya Revenue Authority; an IMF TA request has been made. ### Program monitoring under EFF/ECF and RSF: performance criteria, targets, and monitoring framework - Monitoring will use periodic performance criteria, continuous performance criteria, Monetary Policy Consultation Clause, and indicative targets as set out in Table 1; structural benchmarks are set out in Table 2; detailed definitions and reporting requirements are in the Technical Memorandum of Understanding (TMU). - Commitment: During the program period, the government will not introduce or intensify restrictions on payments and transfers for current international transactions or introduce or modify any multiple currency practice without the IMF’s prior approval; will not conclude bilateral payments agreements incompatible with Article VIII of the IMF Articles of Agreement; nor introduce or intensify import restrictions for balance of payments reasons. - Ninth reviews of the arrangements will take place on or after March 15, 2025. - The EFF/ECF program establishes quantitative performance criteria for December 31, 2024 including: - The primary balance of the national government including grants, cash basis (floor). - Ordinary revenue of the national government (floor). - The stock of net official international reserves (NIR) of the CBK (floor). - Present value of contracting or guaranteeing of new external debt by the national government and the CBK (ceiling). - New domestic guarantees granted by the national government or assumption of SOE debt not reflected in the primary balance (ceiling). - Continuous quantitative performance criterion: accumulation of public and publicly guaranteed external debt arrears (ceiling). - Indicative targets for December 31, 2024 include: - Tax revenue of the national government (floor). - Change in the stock of national government exchequer requests outstanding for 90 days or more (ceiling). - Zero accumulation of national government’s net domestic payment arrears on a cumulative basis within the fiscal year (ceiling). - Priority social spending of the national government (floor). - TMU specifies the primary balance measurement, ordinary revenue definitions, NIR calculation, and adjustors. Key numerical program elements and data points in the TMU and tables (exact values preserved in source tables) include: - Programmed project loans and grants cumulative from July 1, 2024 to End-Dec. 2024: Project loans and grants 275 (Millions of U.S. dollars); Project loans (revenue component) 214; Project grants (revenue component) 61. (Table 1) - Program Exchange Rates (Rates as of February 4, 2021) sample entries: U.S. Dollar 109.8647 (Kenyan Shillings per currency unit); SDR 157.464 (Kenyan Shillings per currency unit). (Table 2) - Monetary Policy Consultation Clause bands for End-Dec. 2024: Upper band 7.5 (percent), Center point 5.0 (percent), Lower band 2.5 (percent). (Table 3) - Priority social spending floor: Dec. 2024 Priority social spending 257,824 (Ksh. millions). (Table 5) - Stock of arrears (Ksh. billions) FY2022/23 Jun. 490.0; FY2023/24 Dec. 610.0; FY2023/24 Jun. 364.2. Memorandum items such as Exchequer requests outstanding for more than 90 days: 0.0 (Jun. FY2022/23), 71.2 (Dec. FY2023/24), 66.4 (Jun. FY2023/24). (Table 4) - Table 1 (Quantitative Performance Criteria and Indicative Targets) and Table 2 (Structural Benchmarks) record program outturns and statuses for a range of fiscal, monetary, and public debt targets (detailed exact values and met/not met status are preserved in the source tables). - Table 3 (RSF Reform Measures) lists RM1–RM9 across four Reform Priorities and indicates timing/targets and met or proposed/rescheduled status for reforms including climate budget tagging (RM8), climate risk analysis in the Fiscal Risk Statement (RM2), green finance taxonomy (RM4/RM9), and regulatory approvals for net metering and electricity market rules (RM7). ### TMU definitions, debt ceilings, present value calculations, and reporting obligations - Definitions included in the TMU: - Net domestic financing and net external financing components used to measure the national government primary balance on a cash basis. - Ordinary revenue definition: sum of national government tax revenue and nontax revenue excluding “Ministerial Appropriation in Aid” (RML, RDL, PDL). - NIR calculation: gross official international reserves less official reserve liabilities; gross reserves components and exclusions enumerated. - NIR adjustors: upward/downward adjustments related to deviations in program loans, program grants, project loans/grants revenue components, and commercial/semi-concessional borrowing; downward adjustments capped at US$690 million for the end-December 2024 test date (all measured cumulatively from end-June 2023). - Present value (PV) ceiling on contracting or guaranteeing of new external debt: - PV calculated by discounting future debt service using unified discount rate of 5 percent. For debts with grant element equal or below zero, PV equals nominal value. - Program reference rate for six-month US$ SOFR is 0.04 percent; fixed spreads for other benchmark rates are specified (e.g., spread of six-month Euro EURIBOR over six-month US$ SOFR is –56 basis points). - An adjustor of up to 5 percent of the external debt ceiling set in PV terms applies for changes in financing terms; cannot be applied when deviations are from increases in nominal total debt contracted or guaranteed. - Debt Management Operations (DMOs) treatment and PV savings calculations use a 7 percent discount rate for DMOs. - Exceptions: certain loan obligations related to Kenya Airways that replace previous guarantees and result in PV savings are excluded from the performance criterion. - Ceiling on accumulation of public and publicly guaranteed external payment arrears is defined as a cumulative flow in gross terms from January 1, 2021 and applies continuously; definition excludes arrears subject to renegotiation or rescheduling. - Ceiling on new domestic guarantees granted by the national government covers all guaranteed commitments for domestic currency borrowing from residents and nonresidents and guarantees extended by any SOE. - Reporting and data dissemination obligations: - National Treasury and CBK to provide specified information at frequencies and deadlines in TMU Table 6 (monthly, quarterly, weekly items with reporting deadlines such as "Within 20 days after month end", "Within 45 days after quarter end", "Within 7 working days after the end of the week"). - Data items to be reported include detailed components of the primary balance, public debt stock and auctions, gross official international reserves components, official reserve liabilities, stock and movements in pending bills and exchequer requests, and SOE support execution, among others. *Source: IMF staff summary of the Kenya program documents and Technical Memorandum of Understanding as presented in the supplied content.* ### 5. Other Indicators ### 5. Other Indicators ### Reporting and Timeliness (selected indicators) - 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 nonconcessional 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 ### Debt Sustainability Summary and Risk Assessment - Public debt is assessed to be sustainable, with the assessment being finely balanced and hinging on prompt resolution of fiscal uncertainties, successful and timely delivery of the multi-year fiscal consolidation and achievement of robust export growth. - Mechanical signals for Kenya’s risk of external and public debt distress remain high. - Risk ratings: - Risk of external debt distress: High - Overall risk of debt distress: High - Granularity in the risk rating: Sustainable - Application of judgment: No - DSA prepared by IMF and IDA staff; Approved by Catherine Pattillo (IMF/AFR); Eugenio Cerutti (IMF/SPR); and Manuela Francisco and Hassan Zaman (IDA). - Date: October 18, 2024 ### Recent Developments and Implications for Debt Dynamics - Kenya tapped international bond markets in February 2024 to address immediate external liquidity pressures from the US$2 billion Eurobond maturing in June 2024. - Near-term fiscal balance is weaker and medium-term revenue mobilization is more gradual, resulting in costlier domestic borrowing. - External debt service indicators have deteriorated due to continued export and revenue underperformance. - Over the DSA horizon, contingent on implementation of program policies, debt indicators are forecast to improve: fiscal effort helps improve primary surplus in FY2024/25 and external debt service-to-exports ratio improves gradually. - Kenya is susceptible to export, exchange rate, and primary balance shocks; prolonged shocks would present downside risks to the debt outlook. - Risks to securing socio-political buy-in for revenue-based medium-term fiscal consolidation are significantly elevated. - Additional spending rationalization intended to offset about half of the deficit impact from the withdrawal of the 2024 Finance Bill is subject to considerable risks. - A natural disaster shock illustrates limited scope for meeting additional financing needs in a stress scenario without jeopardizing debt sustainability; highlights need for regulatory framework to tap private sector solutions and access concessional green financing. ### Public Debt Coverage (per DSA) - Perimeter covers central government, Social Security Fund, central bank debt taken on behalf of the government, and government guaranteed debt. - External DSA covers external debt of the central government and the central bank, including publicly guaranteed debt, as well as private sector external debt. - Public DSA covers external and domestic debt incurred or guaranteed by the central government; does not cover entire public sector (e.g., extra-budgetary units and county governments). - Debt coverage excludes legacy debt of the pre-devolution county governments, estimated at Ksh.53.8 billion (about 0.4 percent of GDP), which is included in the contingent liabilities stress scenario. - The 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 as of end-2023 but has increased somewhat in the first three quarters of 2024. ### Combined Contingent Liabilities Stress Test (tailored shocks) - Overall tailored contingent liability shock calibrated at 10.0 percent of GDP (sum of components listed below). - Components: - 5 percent of GDP to capture reported nonguaranteed debt of SOEs, pending claims, extra-budgetary units and PPPs. - National Treasury survey: nonguaranteed loan obligations equal to Ksh.111.8 billion (0.7 percent of GDP) as of end-June 2023. - PPP-related contingent liabilities calibrated at 1.1 percent of GDP (default calibration). - Pending bills: Committee received about Kshs.660 billion in claims; verified about Ksh.100 billion. Contingent liability shock includes two-thirds of received claims (Ksh.435 billion or 2.5 percent of GDP) in pending bills. - 0.4 percent of GDP to cover legacy debt of the pre-devolution county governments. - 0.3 percent of GDP to account for contingent liabilities from letters of support issued under the government-to-government fuel importation mechanism launched in April 2023 (estimated around US$400 million or 0.3 percent of GDP). - Default 5 percent of GDP for a financial market shock (exceeds existing stock of financial sector nonperforming loans of about 3.6 percent of GDP). ### Background on Debt Stocks and Composition (selected figures) - Gross public debt reached to 7 3.1 percent of GDP at end-2023. - External public debt amounts to 55 percent of Kenya’s overall public debt (Text Table 2). - Nominal public and publicly guaranteed (PPG) external debt at end-2023 amounted to 40.4 percent of GDP, corresponding to 32.1 percent of GDP in present value terms. - At end-2023, multilateral creditors accounted for close to 50 percent of external debt; bilateral creditors represented about 24 percent of external debt. Of bilateral debt, close to 66 percent is owed to non-Paris Club members, mainly loans from China. - Commercial debt accounted for about 26 percent of external public debt and about 47 percent of projected external debt services over 2024-26. Eurobonds accounted for 70 percent of commercial debt (US$7.1 billion). - In February 2024 Kenya issued a new Eurobond (7-year, US$1.5 billion at a coupon rate of 9.75 percent) and bought back nearly three-fourths of a US$2 billion Eurobond maturing in June 2024. - In early 2024 Kenya contracted US$506 million commercial loans from Trade Development Bank with average maturity of 6 years. - Larger than programmed external nonconcessional borrowing in 2024 consumed a large portion of the space under the borrowing limits performance criterion. ### Domestic Debt and Market Conditions (selected figures) - Kenya’s domestic public debt reached to about 33 percent of GDP at end-2023. - About half of government domestic debt securities are held by institutional investors (more than one third by pension funds; remainder by insurance companies and parastatals); commercial banks hold 47 percent share. - Average time to maturity declined to 7.4 years. - Infrastructure bond issuances and tap sales in February and August 2024 totaled Ksh.361.7 billion (about US$2.8 billion) and were oversubscribed, including from nonresident investors. ### Underlying Macroeconomic Assumptions and Projections (selected) - Real GDP growth projected at 5 percent in 2024 and for the medium and long term. - Projections slightly revised down from previous DSA due to slower recovery in capital accumulation, low execution rate of foreign-financed projects, and limited space for borrowing. - Nominal GDP in U.S. dollars projected slightly higher than in last DSA over the medium term, reflecting revised REER path for 2024 and 2025 offsetting downward revision to the deflator. - Medium-to long-term growth supported by projected productivity growth, structural reform agenda, policies to reinforce credit to private sector, and favorable demographic trends. - Fiscal consolidation over the medium term expected to be growth friendly and inclusive, focusing on a more efficient, equitable, and progressive tax system under the Medium-Term Revenue Strategy (MTRS), improved inclusivity and support under social safety net programs, and enhanced efficiency of public investments. ### Selected Macroeconomic Indicators (Text Table 3: 2022–28) - Real GDP growth (percent): 2022 4.; 2023 5.6; 2024 5.0; 2025 5.0; 2026 5.0; 2027 5.0; 2028 5.0 - CPI inflation, average (percent): 2022 7.6; 2023 7.7; 2024 5.0; 2025 5.3; 2026 5.1; 2027 5.1; 2028 5.0 - Overall fiscal balance (percent of GDP)1: 2022 -6.2; 2023 -5.9; 2024 -5.6; 2025 -4.3; 2026 -4.0; 2027 -3.6; 2028 -3.3 - Primary balance (percent of GDP)1: 2022 -1.0; 2023 -0.6; 2024 0.1; 2025 1.4; 2026 1.5; 2027 2.1; 2028 2.4 - Current account balance (percent of GDP): 2022 -5.0; 2023 -4.0; 2024 -3.9; 2025 -4.0; 2026 -4.1; 2027 -4.1; 2028 -4.1 - Exports of goods and services (US$ billion): 2022 13.9; 2023 12.6; 2024 13.2; 2025 14.3; 2026 15.6; 2027 16.9; 2028 18.3 - Exports of goods and services (growth; percent): 2022 17.2; 2023 -8.9; 2024 4.9; 2025 7.8; 2026 9.2; 2027 8.2; 2028 8.5 - Gross international reserves (US$ billion): 2022 8.0; 2023 7.3; 2024 8.2; 2025 8.9; 2026 9.7; 2027 10.4; 2028 11.1 *Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA).* ### 7. Fiscal assumptions are predicated on delivery of the strong medium-term primary ### 7. Fiscal assumptions are predicated on delivery of the strong medium-term primary ### FY2023/24 fiscal outturn and implications - The planned fiscal consolidation in FY2023/24 did not materialize; the year ended with a fiscal deficit larger than programmed by about 0.6 percent of GDP amid an estimated 1.8 percent of GDP tax revenue shortfall. - Shortfall drivers: - Broad-based lower yields from the policy measures in the 2023 Finance Act. - Failure to garner political support to enact amendments to the 2023 Tax Laws Bill (submitted to Parliament in mid-December). - Potential lapses in tax administration. - Authorities’ measures to limit deficit impact: - Identified nontax measures yielding 0.6 percent of GDP (mostly temporary: higher dividends and surplus funds from parastatals, including the CBK). - Approved a second Supplementary FY2023/24 Budget (Supplementary II) in early June to rationalize nonpriority development spending (predominantly foreign financed). - Financing and carryover consequences: - About 0.8 percent of GDP higher domestic financing needs relative to expectations at the time of the sixth EFF/ECF reviews, keeping domestic borrowing costs elevated. - With Supplementary II approved in early June, authorities met just over half of additional domestic financing needs through new debt issuances in June, leading to accumulated pending bills. - Total spending carryover to FY2024/25 is estimated at 1.3 percent of GDP. - Selected FY2023/24 fiscal statistics (Text Table 5, percent of GDP) - Revenues and grants: 8.3 (Dec Actual), 19.0 (6th Rev.), 19.0 (Suppl. I), 18.3 (Suppl. II Est.), 17.2 (Est.) - Tax revenue: 6.4 (Dec Actual), 15.1 (6th Rev.), 15.1 (Suppl. I), 13.5 (Suppl. II Est.), 13.2 (Est.) - Nontax revenue: 1.9 (Dec Actual), 3.7 (6th Rev.), 3.7 (Suppl. I), 4.5 (Suppl. II Est.), 3.8 (Est.) - Expenditure and net lending: 10.8 (Dec Actual), 23.8 (6th Rev.), 24.4 (Suppl. I), 24.0 (Suppl. II Est.), 22.8 (Est.) - Interest payments: 2.6 (Dec Actual), 5.4 (6th Rev.), 5.7 (Suppl. I), 5.3 (Suppl. II Est.), 5.3 (Est.) - Overall balance including measures (cash basis, incl. grants): -1.3 (Dec Actual), -4.7 (6th Rev.), -5.3 (Suppl. I), -5.7 (Suppl. II Est.), -5.3 (Est.) - Primary balance incl. grants: 1.4 (Dec Actual), 0.7 (6th Rev.), 0.4 (Suppl. I), -0.4 (Suppl. II Est.), 0.1 (Est.) - Financing net domestic financing: 1.3 (Dec Actual), 3.0 (6th Rev.), 2.8 (Suppl. I), 4.1 (Suppl. II Est.), 3.8 (Est.) - Memorandum (Ksh. Billions): PC on tax collection: 1,058 (Dec), 2,428 (6th Rev.), 2,428 (Suppl. I); PC on the primary balance: 64 (Dec), 105 (6th Rev.), 105 (Suppl. I) ### FY2024/25 measures, targets, and near-term risks - Budget actions and targets: - Draft FY2024/25 Budget and 2024 Finance Bill submitted to Parliament contained revenue and spending measures to bring fiscal path back to meet debt anchor: overall debt/GDP of 55±5 percent in present value terms by 2028. - The 2024 Finance Bill was withdrawn in late June amid strong opposition to proposed revenue measures. - In July, a Supplementary FY2024/25 Budget was approved with additional expenditure cuts to compensate for about half of the foregone revenue (1.8 percent of GDP) from the withdrawn 2024 Finance Bill. - The Supplementary FY2024/25 Budget targets a primary surplus of 1.4 percent of GDP (about 1 percent of GDP lower than envisaged in the FY2024/25 Budget). - Specific adjustments: - Revenue side: authorities expect higher ordinary nontax revenues from increased levies and fees, and SOE dividends yielding 0.3 percent of GDP. - Spending side: envisaged 1.3 percent of GDP rationalization of primary spending (contain wage bill, transfers—focus on parastatals—and intermediate consumption; further rationalize nonpriority projects). Using staff’s projected fiscal year GDP, this effort would amount to about 1 percent of GDP. - About half of the financing gap from the withdrawn Finance Bill is closed through additional spending cuts (0.7 percent of GDP). More than 90 percent of spending cuts relative to the FY2024/25 Budget falls on domestically financed development spending. - Risks and recent performance: - Revenue in the first two months of FY2024/25 underperformed; tax revenues declined by 0.8 percent (y/y). - Authorities proposed revenue measures amounting to 0.9 percent of GDP (annual yield) via a tax laws amendment bill, but these are insufficient to offset new spending pressures. - Authorities committed to submit a Supplementary II FY2024/25 Budget by end-January 2025 and to address any adverse Supreme Court ruling on the constitutionality of the 2023 Finance Act through revenue measures in compliance with Court guidance. - Spending cuts face risks due to top-down across-the-board nature and emerging spending pressures: - Collective bargaining agreements: 0.1 percent of GDP. - Education and security sectors: 0.3 percent of GDP. - Clearance of FY2023/24 spending carryover: 0.9 percent of GDP. - Total new spending pressures: 1.3 percent of GDP. - Savings from reducing transfers to parastatals may not materialize fully if entities are not self-sustaining and in good financial health. ### Medium-term fiscal strategy, debt sustainability, and PFM reforms - Revenue-based consolidation needed: - From FY2025/26, a renewed revenue-based fiscal adjustment is required: cumulative increase in tax revenue by about 1.6 percent of GDP and in non-tax revenue by about 0.2 percent of GDP. - Staying within upper limit of the band around the debt anchor by 2028 requires an average annual primary effort of about 0.3 percent of GDP over the medium term. - Debt-stabilizing context and targets: - With the primary balance averaging about 1.4 percent of GDP over the next decade, above the debt-stabilizing level (estimated at about 0.2 percent of GDP surplus over a 10-year horizon, due to favorable interest-growth differential), public debt-to-GDP ratio remains on a firmly downward path. - The debt anchor: overall debt/GDP of 55±5 percent in present value terms by 2028 (Parliament stipulated target to be reached within 5 years of adoption). - Public financial management (PFM) and expenditure efficiency priorities: - Transition to a Treasury Single Account (TSA) to strengthen cash management, avoid excessive borrowing, compromised commitments control, and delayed transfers. - Address inefficiencies in public procurement (noted as an unusually high percentage of GDP) and complex, weakly enforced public sector wage bill rules leading to payroll ceiling breaches. - World Bank DPOs support structural reforms to improve budget efficiency and transparency, increase space for public investment, including at subnational level. - Strengthening accountability, building a more efficient, equitable, and progressive tax regime to restore public trust and tax morale is emphasized. - Social spending (Text Table 6, Ksh. Millions and percent of GDP) - Social spending levels (Ksh. Millions): 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: 514,016; FY24/25 Proj.: 513,206 - Social protection (Ksh. Millions): FY23/24: 26,792; FY24/25 Proj.: 28,163 - Education (Ksh. Millions): FY23/24: 445,982; FY24/25 Proj.: 450,799 - Health (Ksh. Millions): FY23/24: 46,502; FY24/25 Proj.: 41,242 - Memo item: Social spending (percent of GDP): 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; FY24/25 Proj.: 2.9 ### Climate-related public investment assumptions - Baseline includes climate-related public investment estimate: - Benchmark: 2.6 percent of GDP in 2018. - Additional climate investment included: around 0.25 percent of GDP per year, supported by IMF’s Resilience and Sustainability Facility (RSF) and the World Bank’s climate-oriented financing, as well as other development partner financing. - Constraints and implications: - Short-run fiscal constraints limit capacity to increase public spending for additional climate needs. - Scaling up climate investments requires improving public spending efficiency, attracting highly concessional external climate financing, and encouraging private sector participation. - Climate-related risks are not explicitly modeled in the baseline; their effects are captured in the natural disaster stress test scenario. ### Debt dynamics, external financing, and borrowing envelope - DSA revisions and debt outlook: - Nominal public debt-to-GDP ratio path revised up from last DSA due to revised fiscal adjustment path and elevated interest costs, despite 2023 real GDP growth outturn of 5.6 percent (better than previous DSA projection). - Near-term exchange rate appreciation and a faster deceleration in inflation increased the forecasted U.S. dollar value of nominal GDP, offsetting some debt stock increase; medium-term exchange rate path remains similar to previous DSA. - External financing adjustments: - Kenya expected to primarily rely on multilateral development loans in 2024–25; World Bank disbursements expected similar to previous DSA. - Total IMF program access revised down by about US$297 million as near-term exceptional BoP needs dissipated following a Eurobond issuance in February. - Composition change: ECF access up by US$159 million; EFF access reduced by US$456 million. - Shortfalls in external project financing continued in FY2023/24 and are forecast to remain subdued in FY2024/25 in line with consolidation plan rationalizing foreign-financed projects. - Kenya expected to continue tapping global capital markets to rollover maturing external commercial financing and exploring alternative sources including sustainability linked and climate adaptation bonds. - Concessional borrowing and borrowing space: - Cumulative external loan contracting (excluding IMF) from the program start amounted to about US$7.8 billion (PV terms) by end-June 2024, leaving about US$1.2 billion (PV terms and excluding the space accorded to liability management operation) space for additional new borrowing until end of the program. - Relying on concessional borrowing would allow meeting financing needs while remaining within the ceiling set by the performance criterion on new external borrowing. - Authorities’ indicative borrowing plan is ambitious and has a history of under-execution; large nonconcessional external issuance would breach program borrowing limit unless structured as liability management operations. - The authorities’ external borrowing commitments are anchored by an overall ceiling on the present value of newly contracted or guaranteed external public debt under the IMF-supported EFF/ECF arrangements (also a PPA under the World Bank SDFP). - The US$1.5 billion Eurobond issued in 2024 is accommodated in the debt limit target. *Source: Kenyan authorities and IMF staff estimates.* ### 17. Relative to the previous DSA, reliance on domestic debt is higher, reflecting the ### 17. Relative to the previous DSA, reliance on domestic debt is higher, reflecting the ### Debt composition, recent actions, and financing risks - Reliance on domestic debt has increased due to recent fiscal slippages and additional domestic financing needs; this is projected to keep domestic rates elevated longer and interest payments higher, contributing to higher debt levels and potentially crowding out the private sector. - Heavier reliance on tax free infrastructure bonds with significant nonresident investor participation exposes Kenya’s debt to sudden sentiment reversals and exchange rate pressures. - The CBK lent the equivalent of the full amount of the 2021 US$740 million general allocation of SDRs to the government in local currency to meet financing needs in FY2021/22 and FY2022/23; in the DSA these amounts are recorded as domestic debt at face value. - Kenya has been servicing guaranteed portions of Kenya Airways (KQ) external debts; novation completed. As a result, public and publicly guaranteed debt includes: - Remaining government guarantee on other KQ external loans: US$589 million as of December 2023 (in place of the US$750 million government guarantee of KQ debts recorded previously). - On the FX-denominated debt to local banks: out of a US$225 million government guarantee, about US$150 million was called in August; authorities intend to issue tradable local currency securities to settle the called amount. ### External position and current account projections - Current account developments: - Current account deficit narrowed to 4.0 percent of GDP in 2023, reflecting declines in energy and non-energy imports, real exchange rate depreciation, and completion of large infrastructure projects. - Current account deficit is projected at close to 4 percent of GDP in 2024 as fiscal consolidation weighs on import growth. - In the first half of 2024, remittances grew 17 percent y/y, supporting the current account while export and import growth was below expectations. - Over the medium term, the current account deficit is projected to stabilize around 4 percent of GDP, supported by fiscal consolidation, robust goods exports and tourism receipts, continued exchange rate flexibility, and gradual normalization of global commodity and financial market conditions. - FX reserves are projected to remain adequate with import coverage at around 4.2 months over the medium term. ### Debt carrying capacity, composite indicator, and classification - Kenya’s debt carrying capacity is assessed as Medium. - Composite Indicator (CI) Index: 3.02. - CI components and contributions (10-year average values used): - CPIA coefficient 0.385, 10-year average 3.75, contribution 1.45 (48%). - Real growth rate coefficient 2.71, 10-year average 0.94, contribution 0.13 (4%). - Import coverage of reserves coefficient 4.05, 10-year average 238.81, contribution 1.57 (52%). - Import coverage of reserves^2 coefficient -3.99, 10-year average 15.06, contribution -0.60 (-20%). - Remittances coefficient 2.02, 10-year average 3.79, contribution 0.08 (3%). - World economic growth coefficient 13.52, 10-year average 2.91, contribution 0.39 (13%). - CI Score 3.02 (100%); CI rating Medium. ### Stress tests and market financing signals - Standard stress tests: - External debt burden indicators in terms of exports and revenues breach respective thresholds under the baseline, yielding a mechanical high-risk signal. - PV of PPG external debt-to-exports solvency indicator remains above its threshold (180 percent) through 2030. - Debt service-to-exports liquidity indicator exceeds its threshold (15 percent) through 2037. - External debt service-to-revenue ratio falls below its threshold (18 percent) starting in 2029. - 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. - Market financing pressures module: - Kenya’s EMBI spread was 552 basis points as of October 11, 2024 (below the LIC-DSF threshold of 570 basis points). - Gross financing needs are below the threshold of 14 percent of GDP that indicates high risk. - The shift toward domestic financing requires monitoring given elevated domestic interest rates; persistent global deterioration would exacerbate financing risks. ### External debt outlook (selected figures) - PV of PPG external debt as a share of GDP is projected to decline from 30 percent in 2024 to 16 percent in 2044, reflecting fiscal consolidation and a borrowing mix favoring concessional borrowing. - The solvency and liquidity indicators show gradual decline as exports recover and revenue measures yield results over the medium term. ### Public debt sustainability - PV of total public debt-to-GDP ratio remains above the 55 percent benchmark through 2029, generating a mechanical high-risk signal. - Public sector debt is projected to peak in 2025 at 64 percent of GDP (PV terms), followed by a steady decline supported by medium-term fiscal consolidation driven by revenue mobilization measures. - 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 under these scenarios. - In the historical scenario (key variables set at historical averages), public debt settles on an explosive trajectory. - Under the most extreme standard shock (primary balance shock), the PV public debt-to-GDP ratio would breach the 55 percent benchmark through 2040. ### Domestic debt vulnerabilities and indicators - Domestic debt vulnerabilities have increased due to revenue underperformance and growing domestic financing needs; reflected in high real domestic yields, declining maturities, and accumulation of pending bills and carryovers. - Large and upcoming domestic debt maturities over the next twelve months raise domestic financing risks. - LIC DSF Domestic Public Debt Indicators show Kenya’s domestic debt and domestic debt service will remain well above the median of LIC DSF countries during the DSA projection horizon. - Domestic debt service to revenues: - Peaked at 43 percent in 2023 and is projected to remain at 43 percent until 2025, driven in part by large maturing domestic securities. - Falls toward 30 percent by 2030, remaining above the LIC median. ### Climate change risks and natural disaster stress test - Kenya is highly vulnerable to climate change shocks (floods and droughts); total cost of climate change estimated at 2–2.4 percent of GDP per year in Kenya. - Channels through which climate change affects debt sustainability include higher reconstruction and fiscal transfer spending, reduced government revenues, output losses from capital destruction, long-term productivity scarring in climate-sensitive sectors, and inflationary pressures. - The DSA baseline does not explicitly model climate change effects; instead, a customized natural disaster stress test is used. - Natural disaster stress test calibration (informed by 2008–11 drought precedent): - Assumes US$1.8 billion increase in public debt. - One-off 9 percentage points decline in real GDP growth (pro-rated from the 2008–11 episode). - Standard 3.5 percentage points shock on exports growth. - Results illustrate very limited scope for meeting additional financing needs in the stress scenario with semi-concessional or commercial external financing without jeopardizing debt sustainability. - The stress test underscores the need to expedite institutional reforms and capacity building to improve public investment efficiency, reduce leakages, and promote private climate investments. ### Policy implications and priorities highlighted in the analysis - Deliver on the medium-term fiscal consolidation strategy to keep gross financing needs below risk thresholds and to reduce public debt vulnerabilities. - Monitor the shift in financing mix toward domestic resources given elevated domestic interest rates and large domestic maturities. - Expedite institutional reforms and capacity building to improve public investment efficiency, reduce leakages, and promote private climate investments to mitigate natural-disaster-related financing needs. - Preserve social spending while achieving fiscal adjustment and revenue mobilization to stabilize debt dynamics and support export-oriented growth. *Source: Excerpt from IMF DSA chapter for Kenya.* ### 32. Kenya’s Nationally Determined Contribution (NDC) envisions 32 percent reduction in ### 1kenea2024003-print-pdf - 32. Kenya’s Nationally Determined Contribution (NDC) envisions 32 percent reduction in ### Climate objectives, current status, and financing needs - Kenya’s Nationally Determined Contribution (NDC) envisions 32 percent reduction in country’s greenhouse gas emissions by 2030. - In Kenya, more than 90 percent of electricity is generated from renewable sources (2024Q2: 90.9 percent). - Kenya has leveraged private climate finance through PPPs in renewable energy projects, corporate green bond issuance, several blended finance mechanisms to de-risk private sector investments, and active engagement in global climate funds. - Estimated climate-related investment needs to achieve Kenya’s NDC pledge: around 6 percent of GDP per year over 2023–30. - Some investment needs are addressed by existing investment projects; the remaining balance is expected to be met through a mix of private sector participation and highly concessional external financing. - Example cited of active World Bank lending operations with more than 20 percent climate co-benefits include “Off-grid Solar Access Project for Underserved Counties”, “Climate Smart Agriculture Project”, “Financing Locally Led Climate Action Program”, “Additional Financing for Coastal Region Water Security and Climate Resilience Project”, “Kenya Urban Support Program”. ### Role of IMF Resilience and Sustainability Facility (RSF) and reform measures - Debt sustainability risks from reaching climate goals are assumed limited if: - additional, highly concessional climate financing is mobilized, and - private sector solutions supported by market incentives are delivered. - Authorities are implementing reform measures (RMs) under the IMF’s RSF arrangement to: - incorporate climate risks into fiscal planning and investment framework; - mobilize climate revenue and strengthen the efficiency of climate spending; - enhance effectiveness of Kenya’s existing frameworks to mobilize climate finance; - strengthen disaster risk reduction and management. - RSF-related reforms aim to: - make public investment more climate responsive through public financial management enhancements and public investment efficiency improvements; - provide signals to investors, support establishing a pipeline of bankable projects, and accelerate mobilization of private financing. - Example policy: National Green Fiscal Incentives Policy Framework, adopted in December 2023, sets out options for promoting low-carbon, climate resilient, and environmentally sustainable practices (including carbon pricing and electric and hybrid modes of transportation). ### Debt sustainability assessment — status and indicators - Overall and external public debts are sustainable but remain at high risk of debt distress; assessment is finely balanced and contingent on: - successful and timely delivery of multi-year fiscal consolidation, and - achievement of robust export growth in the medium term. - Mechanical risk signals indicate sustained breaches of sustainability thresholds by solvency and liquidity indicators under the baseline scenario: the PV of external debt-to-exports and external debt service-to-exports ratios, and the PV of overall public debt-to-GDP ratio. - Authorities committed to deliver fiscal consolidation in line with the program that significantly surpasses the debt-stabilizing primary balance; debt would begin declining as a share of GDP starting in 2027. - Key points on indicators and fiscal stance: - PV of total public debt-to-GDP ratio remains above the indicative threshold (55 percent), but authorities’ medium-term fiscal consolidation commitment safeguards debt sustainability. - Kenya’s PV of external debt as a share of GDP is well below the 40 percent indicative threshold and will gradually decline over time. - Borrowing plan relies on a balanced mix of commercial and concessional financing, supported by limits on government external borrowing under the EFF/ECF program and PPAs under the SDFP, which support debt transparency improvements. ### Mitigating factors and fiscal buffers - Factors mitigating risks to debt sustainability: - Commitment to corrective actions should the Supreme Court upholds the unconstitutionality ruling on the 2023 Finance Act. - Consistently strong remittances supporting external sustainability. - Favorable outlook for exports supported by policy measures to boost export competitiveness. - External debt service indicator on a clear declining trajectory; authorities plan to further optimize if market conditions are favorable. - Close attention to SOE risks and commitment under IMF-supported EFF/ECF arrangements to limit deficit impact of any fiscal support (e.g., via offsets). - Ongoing efforts to strengthen fiscal sustainability under the SDFP by rationalizing public investments on the basis of rigorous criteria. - Climate adaptation and mitigation strategies focused on water management, agriculture and food security, ecosystem conservation, disaster risk reduction, sustainable energy transition, climate information and research, health and human security, and education and awareness. - Improved efficiency investment in infrastructure expected to raise growth and export potential. - Gross financing needs beyond 2024 are on a clear declining trajectory over the projection period. - Authorities’ commitment to absorb fiscal costs associated with materialization of SOE-related contingent liabilities with limited impact on the programmed fiscal envelope. - Remittances amounted to 33 percent of exports of goods and services in 2023. ### Capacity, reform potential, and thresholds - Kenya’s current debt carrying capacity is assessed as medium with a CI score of 3.02, up from 3.01 in the previous DSA. - Threshold to upgrade to strong capacity category is a CI score of 3.05. - Strong policy measures and structural reforms—especially on the PFM front—could increase CPIA and CI scores and mitigate debt sustainability risks. - EFF/ECF program incorporates reforms: PFM measures to avoid future accumulation of expenditure arrears and a medium-term strategy to strengthen revenue administration, plus measures to improve budgeting process, fiscal risk management, and fiscal transparency. - Implementation of the new PFM reform strategy 2023–28 aims to strengthen budget credibility and expenditure efficiency. ### Risks to the baseline and downside scenarios - Baseline risks have increased due to a more challenging socio-political context that constrains delivery of required fiscal adjustment. - Key downside risk channels: - Domestic policy slippages: narrow scope for deviation; execution of policy commitments has become more challenging. In absence of medium-term revenue and spending measures offsetting the impact of the withdrawn 2024 Finance Bill, ensuring debt sustainability might not be feasible. - Further exports underperformance would pose external sustainability risks. Kenya faces large annual external debt service obligations, averaging US$4.7 billion annually over the medium-term. - Causes of exports underperformance could include: lower demand from major economies; delays in domestic structural reforms; recent rapid appreciation of the shilling; domestic political risks or deterioration in security disrupting trade and tourism. - Intensification of spillovers from global geopolitical conflicts could persistently raise investor concerns about frontier economies and increase the cost of financing. - Domestic government bond holdings by pension funds and commercial banks expose the economy to feedback between sovereign and financial sector risks. - Need to rollover maturing external commercial debt exposes the country to liquidity-squeeze risks. - Crowding-in effect of fiscal consolidation into private sector growth might take longer to materialize. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kenea2024003-print-pdf.pdf* ### 41. The authorities broadly agreed with IMF staff’s assessment, emphasizing that ### The authorities broadly agreed with IMF staff’s assessment, emphasizing that addressing elevated debt vulnerabilities remain key policy priority ### Authorities’ assessment and commitments - Emphasized that addressing elevated debt vulnerabilities remain key policy priority. - Reaffirmed commitment to arresting debt buildup and meeting the medium-term debt anchor. - Approved the Supplementary FY2024/25 Budget with additional spending cuts following the withdrawal of the 2024 Finance Bill. ### Financing strategy and external financing - Prioritize concessional financing in the immediate term until market conditions allow borrowing at reasonable costs. - Exploring new financing instruments in coordination with multilateral and bilateral development partners, including sustainability linked bonds and credit enhancements to support debt sustainability. - Emphasized determination to extend the maturity of domestic debt and pursue a financing strategy that balances domestic issuance and external financing, avoiding crowding out domestic private sector and accumulation of domestic arrears. - Highlighted significant remittances inflows as a stable source of foreign exchange that increases Kenya’s debt repayment capacity but is not directly captured by the DSA metrics. ### Domestic measures and market development - Taking measures to eradicate impediments to efficient intermediation and market development supported by the IMF’s technical assistance. - Building a diverse and resilient investor base to ensure stable and less costly financing. ### External Debt Sustainability Framework — selected baseline figures (2021–44) - External debt (nominal): 70.3, 71.7, 84.2, 78.1, 82.9, 86.5, 85.5, 83.5, 81.6, 77.4, 72.5, 62.6, 80.9 (in percent of GDP for years shown). - Public and publicly guaranteed (PPG) share of external debt: 34.7, 34.6, 40.4, 38.4, 37.0, 37.4, 35.3, 33.9, 32.8, 29.0, 21.3, 30.0, 33.0 (in percent of GDP). - Change in external debt: -1.4, 1.4, 12.4, -6.1, 4.8, 3.6, -0.9, -2.0, -1.9, 0.0, -2.6 (in percent of GDP for years shown). - Identified net debt-creating flows: -0.7, 1.9, 8.0, -0.5, -0.8, -1.1, -1.1, -1.1, -1.1, -1.2, -1.8, 2.3, -1.0 (in percent of GDP). - Non-interest current account deficit: 4.1, 4.0, 2.5, 2.4, 2.1, 2.2, 2.3, 2.4, 2.5, 2.6, 2.5, 4.7, 2.4 (in percent of GDP). - Exports: 10.8, 12.1, 11.7, 10.9, 11.7, 12.8, 13.3, 13.5, 13.8, 14.8, 16.5 (in percent of GDP across years shown). - Imports: 19.9, 21.3, 20.4, 19.0, 19.8, 21.2, 21.7, 21.9, 22.1, 23.0, 24.1 (in percent of GDP across years shown). - Net current transfers (negative = inflow): -5.6, -5.7, -6.5, -6.1, -6.5, -6.8, -6.8, -6.8, -6.7, -6.7, -6.7, -5.3, -6.6 (in percent of GDP). - Net FDI (negative = inflow): 0.0, -0.3, -0.2, -0.6, -0.8, -1.0, -1.1, -1.2, -1.3, -1.6, -2.0, -0.6, -1.2 (in percent of GDP). - Endogenous debt dynamics: -4.7, -1.8, 5.8, -2.3, -2.1, -2.3, -2.3, -2.2, -2.2, -2.2, -2.4 (in percent of GDP for years shown). - Contribution from nominal interest rate: 1.2, 1.0, 1.5, 1.5, 1.9, 1.9, 1.9, 1.7, 1.7, 1.4, 1.1 (in percent of GDP). - Contribution from real GDP growth: -5.0, -3.3, -4.2, -3.8, -3.9, -4.2, -4.1, -4.0, -3.9, -3.6, -3.5 (in percent of GDP). - PV of PPG external debt-to-GDP ratio (selected projection values): 32.1, 29.8, 30.4, 31.0, 29.5, 28.1, 26.8, 22.5, 16.2 (in percent of GDP across projection years shown). - PV of PPG external debt-to-exports ratio (selected): 274.8, 274.2, 260.2, 241.9, 222.3, 208.1, 195.0, 152.5, 98.1 (in percent). - PPG debt service-to-exports ratio (selected): 22.5, 21.4, 26.9, 40.5, 31.9, 29.8, 27.3, 27.0, 22.0, 16.7, 11.6 (in percent). - PPG debt service-to-revenue ratio (selected): 14.6, 15.4, 18.8, 25.2, 20.6, 20.4, 18.9, 18.6, 15.5, 12.6, 9.8 (in percent). - Gross external financing need (Million of U.S. dollars): 28,119, 28,949, 27,855, 31,173, 30,994, 31,939, 32,637, 34,026, 34,452, 40,222, 60,711. - Real GDP growth (in percent): 7.6, 4.9, 5.6, 5.0, 5.0, 5.0, 5.0, 5.0, 5.0, 5.0, 4.7, 5.0 (across years shown). - Nominal GDP (Million of US dollars): 109,875, 114,449, 108,039, 121,769, 122,196, 121,677, 126,983, 135,752, 145,470, 197,974, 371,090. ### Public Sector Debt — selected baseline figures (2021–44) - Public sector debt (percent of GDP): 68.1, 67.8, 73.1, 67.0, 68.8, 68.8, 66.6, 64.1, 61.9, 55.8, 40.4, 58.4, 62.5 (across years shown). - Of which: external debt (percent of GDP): 34.7, 34.6, 40.4, 38.4, 37.0, 37.4, 35.3, 33.9, 32.8, 29.0, 21.3, 30.0, 33.0. - Of which: local-currency denominated (percent of GDP): 33.4, 33.1, 33.1, 32.7, 33.2, 32.2, 31.7, 31.4, 31.2, 30.1, 29.0, 26.7, 26.7. - Change in public sector debt: 0.3, -0.3, 5.3, -6.1, 1.7, 0.0, -2.2, -2.5, -2.2, -1.2, -2.1 (in percent of GDP for years shown). - Primary deficit (percent of GDP): 2.7, 1.4, 0.6, -0.6, -1.5, -1.8, -2.3, -2.5, -2.0, -0.6, -0.2, 3.1, -1.4. - Revenue and grants (percent of GDP): 16.8, 17.1, 16.9, 17.7, 18.4, 19.0, 19.5, 19.8, 19.9, 19.9, 19.8 (values shown across years). - Automatic debt dynamics (percent of GDP): -1.7, 0.2, 6.3, -0.8, -0.1, 0.0, 0.1, 0.0, -0.1, -0.7, -1.7. - PV of public debt-to-GDP ratio (selected projection values): 68.7, 63.0, 64.0, 63.7, 61.2, 58.6, 56.2, 49.7, 35.5 (in percent). - Debt service-to-revenue and grants ratio (selected): 55.2, 56.0, 60.6, 63.7, 62.5, 61.4, 58.1, 55.7, 49.0, 47.1, 29.4 (in percent). - Gross financing need: 12.0, 11.0, 10.9, 10.6, 10.0, 9.9, 9.1, 8.6, 7.7, 8.7, 5.6 (in percent of GDP across years shown). - Real GDP growth (in percent): 7.6, 4.9, 5.6, 5.0, 5.0, 5.0, 5.0, 5.0, 5.0, 5.0, 4.7, 5.0 (across years shown). ### Sensitivity analysis and stress tests — key points - Table 3 and Table 4 present sensitivity analyses for key indicators of public and PPG external debt, 2024–34, including alternative scenarios, bound tests, and tailored tests. - Examples of baseline vs. alternative projections (PV of Debt-to-GDP Ratio and PV of Debt-to-Exports Ratio): - Baseline PV of Debt-to-GDP Ratio (selected 2024–34): 30, 30, 31, 30, 28, 27, 26, 25, 24, 23, 23. - A1. Key variables at historical averages in 2024–2034 (selected): 30, 31, 33, 34, 36, 37, 40, 42, 43, 44, 46. - Tailored stress tests include combined contingent liabilities, natural disaster, commodity price, and market financing scenarios with impacts shown across 2024–34. - For public debt (Table 4), baseline PV of Debt-to-GDP Ratio (selected 2024–34): 63, 64, 64, 61, 59, 56, 55, 53, 52, 51, 50. - Benchmarks and thresholds are applied; bold values in sensitivity tables indicate breaches of thresholds. ### Market-financing and domestic debt indicators - Figure 5 notes Market financing indicators: Maximum gross financing needs (GFN) and EMBI spreads (EMBI spreads correspond to data available as of October 11, 2024). - Gross external financing need (Million of U.S. dollars) repeated: 28,119; 28,949; 27,855; 31,173; 30,994; 31,939; 32,637; 34,026; 34,452; 40,222; 60,711. - Domestic debt indicators (Figure 6) show Domestic Debt to GDP Ratio, Domestic Debt Service to Revenues Incl. Grants, and Net Domestic Debt Issuance series with historical realizations and projections through 2034. *Source: IMF staff estimates and projections; country authorities (extracted from the provided IMF content).* ### 1. Increasing rains and floods in Kenya underscore Kenya’s vulnerability to ### 1kenea2024003-print-pdf - 1. Increasing rains and floods in Kenya underscore Kenya’s vulnerability to climate change ### Climate vulnerability and recent impacts - Kenya experienced warmer-than-average temperatures in early 2024 in the context of abnormal global weather conditions. - Temperatures rose by 6°C above the normal temperatures in Nairobi. - The forecast for March–May 2024 predicted above-average rainfall in most parts of the country, which could extend to June to June before the cold season begins. - Since the last week of March, heavy rains and floods affected many parts of the country, characterized by increased water levels in rivers, infrastructural damages, livestock and property losses, and restricted access to population centers. - Early statistics show: - more than 13 people have died; - nearly 20,000 people—nearly 4,000 households—have been affected by adverse weather conditions; - an estimate of 15,000 being displaced due to heavy rains and flash floods during March and April 2024. - Counties affected include Marsabit, Turkana, Tana River, Garissa, Kirinyaga, Muranga, Kiambu, Meru, Kisumu, Nairobi and Kitui, among others. - The Kenya Meteorological Department expected ongoing rains to remain enhanced to January 2024 and could last until April (short-rain season Oct–Dec forecast had 38 counties affected). ### Adaptation policies, commitments, and priority resilience areas - National Forest Policy (approved late 2023): - provides a framework for improved forest governance, resource allocation, monitoring and evaluation, partnerships, and collaborations between national, county governments and non-state actors; - strengthens engagement of local communities in management and conservation and enhances forestry’s role in climate change response, including climate adaptation. - National Landscape and Ecosystem Restoration Strategy is under development, contributing to Kenya’s commitment to restore: - 5.1 million hectares of degraded land by 2030; - 10.6 million hectares of degraded forests and rangelands by 2032. - Social protection enhancements to reduce climate vulnerability: - advancing a new Social Protection Bill mandating national and county governments use the Enhanced Single Registry (ESR) as the national targeting system; - scaling up emergency cash transfers to households affected by climate and other shocks. - Shirika Plan in development to provide better access to public services, including WASH, to Kenya’s over 550,000 refugees, many located in Kenya’s arid and semi-arid ASAL region. ### Mitigation policies and green finance initiatives - Sovereign Green Bond Framework approved in January 2024 (developed with World Bank and IFC support) to access green, blue, social, and sustainability bonds and articulate governance arrangements for funds raised. - Central Bank of Kenya published the Draft Kenya Green Finance Taxonomy (KGFT) in March 2024 to standardize understanding, disclosure, and reporting of green finance. - Kenya preparing to issue Africa’s first sovereign sustainability-linked bond (SLB) in late 2024, consistent with its 2024 Medium-Term Debt Management Strategy; SLB includes pre-determined sustainability performance goals, including on climate. - Policy progress on green transport: advancement of the Railways Bill (2024) to strengthen urban public transport. - Legislative and regulatory steps: - Climate Change (Amendment) Act, 2023 enacted; provides for establishment of a publicly accessible carbon registry and a Designated National Authority to manage the registry. - Draft carbon markets regulations were being consulted and expected to be ratified by early 2024. - Draft Green Fiscal Incentive Policy Framework under refinement, proposing sector-specific fiscal actions across agriculture, forestry, water, energy (including clean cooking), and waste management, including consideration of a carbon tax and green investment bank. ### Climate financing, carbon markets, and mobilization challenges - Mobilizing climate financing remains a challenge; unlocking access to carbon markets is highlighted as a growing opportunity. - World Bank and Kenya Private Sector Alliance launched the Carbon Market Guidebook for Kenyan Enterprises in April 2024 to help enterprises navigate carbon markets. - The Government of Kenya identified carbon (credit) markets as a key tool to address Kenya’s climate financing gap and support fiscal consolidation in the medium term. - Kenya CCDR recommendations for mobilizing climate finance include: - enhancing national financial and institutional capacity to mobilize climate finance; - conducting climate risk management of the financial sector; - developing a roadmap for greening the financial sector; - developing data infrastructure to inform green finance decisions; - 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. ### World Bank engagement and financed projects - World Bank developments and operations: - World Bank Board approved a US$1.2 billion Development Policy Financing operation (P500912) during FY24 to generate synergies between growth and climate agendas by promoting green urban transport, unlocking natural capital through climate finance, uplifting vulnerable populations, restoring ecosystems, strengthening climate-smart social protection, and promoting access to WASH for refugees. - Second Kenya Urban Support Program (P177048) approved June 2023 and signed December 2023; GoK committed to implement guidelines to integrate resilience into urban planning and infrastructure investments. - City Climate Finance Gap Fund financing supported development of the Mombasa Climate Change Action Plan launched in November 2023; next phase technical assistance to support implementation roadmap and pre-feasibility studies. - Kenya Water, Sanitation and Hygiene Program for Results (P179012) supports National Water and Sanitation Investment Program; 80 percent of the project financing will generate climate co-benefits by providing sustainable access to improved climate resilient water services and sanitation, lowering emissions from waste. - Kenya Green and Resilient Expansion of Energy (GREEN) Program Phase 2 (P180465) under a Multiphase Programmatic Approach to increase capacity for energy trade and renewable integration; financing supports installation of the first battery energy storage system of up to 200 MWh for load shifting and grid stability; includes Green Climate Fund financing. - Second Additional Financing for Kenya Water Security and Climate Resilience Project (P181345) approved in FY24 with more than 20 percent climate co-benefits. ### Macro-fiscal and development implications (Annex I highlights) - Kenya CCDR (launched November 17, 2023) indicates: - 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. - Short-rain season forecasts (Oct–Dec) projected above average rainfall with 38 counties affected and elevated disease outbreak likelihood due to El Niño conditions. - Persistent challenge: absence of a robust coordination mechanism for steering climate-positive development; CCDR recommends operationalizing inter- and intra-governmental coordination, clarifying institutional mandates on climate finance and carbon markets, and operationalizing the National Climate Change Fund. ### Program performance and implementation status (statement by Executive Director) - Program context and performance: - four out of six end-December 2023 QPCs were met except the target on tax revenue and the continuous QPC on no new external payment arrears which were missed (a waiver on nonobservance of the latter was granted at the sixth EFF/ECF reviews). - all end-June 2024 Quantitative Targets (QTs) were met, except fiscal targets on the primary balance and tax revenues which were missed. - targets on net international reserves (NIR), domestic guarantees, present value (PV) of contracting or guaranteeing of new external debt, and the continuous QPC on no new external payment arrears were met. - Monetary Policy Consultation Clause (MPCC) for test dates end-December 2023 and end-June 2024 was met due to a supportive monetary policy stance and declining food prices. - Structural benchmarks (SBs) implementation through end-September 2024: - only one out of ten SBs due through end-September 2024 was met; - three others implemented with delay and one expected to be implemented soon; - three SBs not met; - two SBs proposed for rescheduling to allow additional time for implementation. - delays largely reflect implementation challenges; authorities propose rescheduling and corrective measures, and remain committed to program reforms. *Source: 1kenea2024003-print-pdf - 1. Increasing rains and floods in Kenya underscore Kenya’s vulnerability to climate change* ### 5. Implementation of the reforms measures (RMs) under the RSF is progressing well. ### 5. Implementation of the reforms measures (RMs) under the RSF is progressing well. ### Implementation progress under the RSF - Since the approval of the program in July 2023, the authorities have implemented three out of nine reform measures under the arrangement. - Two RMs were achieved under this review; one RM was achieved under the last review. - RM2: Benefiting from Fund TA, the authorities have integrated the effects of climate change into the Fiscal Risk Statement, with analysis from this exercise being incorporated into the 2024 Budget Policy Statement. - RM4: A pilot application of the Kenya Green Finance taxonomy was launched with 10 commercial banks. ### Program reviews and requests - Authorities seek Executive Directors’ support in completion of the combined seventh and eighth reviews under the EFF/ECF arrangements and associated waivers, and the completion of the review under the RSF. ### Macroeconomic environment and outlook - Real GDP: - Expected to grow by 5.1 percent in 2024 compared with 5.6 percent in the previous year. - Expected to remain strong at 5.0 percent in 2025. - Growth in H1 2024 supported mainly by agriculture and services; resilience of services and agriculture and improved exports expected to support outlook. - Risks: - Significant downside risks include spillovers of ongoing geopolitical tensions and the pace of monetary policy easing in major economies. - Inflation and external sector: - Headline inflation remains within the target range of 2.5–7.5 percent and continues to decline to below the mid-point of the band. - Non-Food-Non-Fuel (NFNF) inflation stabilized at low levels. - Improved agricultural harvests led to significant reduction of food prices. - Current account narrowed to 4.0 percent of GDP in 2023 due to improved tea and horticulture exports, increased tourist arrivals, and remittance inflows. - CBK FX reserves accumulated from 3.8 in 2023 to 4.1 months of import cover. ### Fiscal and debt management policies - Fiscal consolidation: - Authorities committed to a fiscal consolidation path consistent with the MEFP and LOI. - The FY2024/25 Supplementary Budget is expected to lower the fiscal deficit from 8.3 percent of GDP in FY2020/21 to 4.3 percent of GDP. - Present-value-of-debt to GDP ratio targeted to move toward the anchor of 55 percent by 2028. - Revenue mobilization: - Intensified domestic revenue mobilization via tax policy, administrative, and non-tax measures, guided by the Medium-Term Revenue Strategy (MTRS). - Revenue underperformance since the start of FY24/25 attributed to the June-July protests and tight financial and monetary conditions. - Tax revenues growth remains strong despite slippages. - Expenditure and PFM: - Authorities committed to earmarking resources for education, health, and social protection. - Strengthening public finance management by implementing the Treasury Single Account (TSA) and accrual basis of accounting. - Efforts to crowd-in private sector via Public-Private Partnerships (PPP), reduce extra-budgetary units, and expedite SOE reforms. - Debt strategy: - Commitment to stabilize debt to GDP in the near-term and place it on a downward trajectory to reach the 55 percent PV-of-debt anchor by 2028. - Continued leverage of concessional external financing to contain debt service costs. ### Monetary, exchange rate, and financial sector policies - Monetary policy: - CBK maintained a tightening stance—raising policy rates by 300 percentage points cumulatively in 2023—to curtail aggregate demand and reduce inflation. - Inflation on a downward trend since January 2024 and now comfortably below the mid-point of the target range; core inflation remains low and stable. - Following the firm decline in inflation, the CBK has commenced interest rate cuts but remains attentive to global and domestic developments. - Exchange rate and market functioning: - CBK committed to a flexible exchange rate system to help absorb external shocks. - Reforms underway include: (i) refining macroeconomic modeling and forecasting frameworks; (ii) a new monetary policy implementation framework to enhance transmission; (iii) improving access to the Discount Window; (iv) measures to improve interbank market functioning including implementation of a Centralized Securities Depository System (CSD); and (v) adapting and improving monetary policy communication. - Financial sector: - Banking sector capital adequacy and liquidity ratios remain strong. - Government Credit Guarantee Scheme (CGS) has increased credit uptake. - Authorities attentive to rising non-performing loans driven by high borrowing costs from sustained monetary tightening. ### Structural, governance, and transparency reforms - Governance and anti-corruption: - Strengthening governance and anti-corruption policies remains high on the reform agenda. - Authorities requested the Fund to conduct a Governance and Corruption Diagnostic to identify vulnerabilities and recommendations. - SOE and state corporation oversight: - Continued adherence to programmed envelope for extraordinary budget support to SOEs and government-linked companies. - Financial evaluations conducted for 72 state corporations; authorities developing next course of action. - Policy paper developed recommending consolidation, dissolution/privatization, or reintegration of some SCs into line ministries. - AML/CFT: - Authorities committed to address deficiencies to expedite exit from the FATF grey list. - Accelerated implementation of the FATF action plan, including completion of a terrorism financing risk assessment, adoption of a supervisory framework for virtual asset service providers, and strengthened AML/CFT risk-based supervision of financial institutions and DNFBPs. - CBK commenced stand-alone AML/CFT inspections and enforcements and intensified outreach and capacity building. ### Conclusion - Authorities remain committed to the EFF/ECF supported program objectives to maintain macroeconomic stability, preserve fiscal and debt sustainability, and build buffers against future shocks. - They view Fund support under the EFF/ECF and RSF arrangements as catalytic and critical to their Vision 2030 blueprint and the administration’s bottom-up development model. - Authorities look forward to Executive Directors’ support to conclude the seventh and eighth EFF/ECF program reviews and related requests, and the second RSF review. *1kenea2024003-print-pdf - 5. Implementation of the reforms measures (RMs) under the RSF is progressing well.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1kenea2024003-print-pdf.pdf_