Key Questions on Kenya

Last Updated: July 19, 2022

Read the key questions regarding the IMF arrangements with Kenya

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How would you describe the overall program?

Kenya has large financing needs due to lasting effects from the COVID-19 pandemic and the global shocks seen in 2022 with the repercussions from the war in Ukraine.

The government has developed a reform program to address these challenges and reduce debt vulnerabilities through a multi-year fiscal consolidation that is centered on increasing tax revenue and carefully controlling expenditures.

The government’s measures and medium-term fiscal framework are set out in the government’s FY2020/21, FY2021/22 and FY2022/23 budgets and the Budget Policy Statements.

The IMF is providing policy advice and financing to support the government’s economic program. Following completion of the Executive Board review on July 18, 2022, US$235.6 million will be disbursed to be used for budget support, bringing the amount provided to US$1,208.2 million from a total of about US$2.34 billion under the IMF-supported arrangements.

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What were the main findings of the 3rd Executive Board review of the IMF-backed program?

The economic recovery is underway. Government revenues have overperformed. In the first half of FY21/22, tax collection overperformed projections by 0.4 percentage points of GDP, and the good performance continued in 2022. Strong policies have put Kenya in a better position to tackle challenges that emerged in 2022.

Global shocks, including from the war in Ukraine, pushed inflation to 7.9 percent in June, even as non-food non-fuel inflation has remained much more modest at 2.9 percent. The Central Bank of Kenya adjusted its monetary policy stance in May 2022 to prevent second-round effects and to anchor inflation expectations as global prices have continued to rise.

Kenya is delivering on its quantitative targets under the program, meeting – and in some cases strongly overperforming – the objectives for tax revenue, the primary balance of the government, international foreign exchange reserves, and limits on the contracting of public debt.

While the medium-term outlook is favorable, near-term risks are tilted to the downside. Steadfast commitment to prudent policies and sustaining consolidation efforts is needed to maintain balance in the macroeconomy and reduce debt vulnerabilities further.

Some parts of the agenda have seen delays. Financial weaknesses in state-owned enterprises Kenya Airways and Kenya Power and Lighting Corporation should be addressed. Additional progress is also needed on the governance agenda, where finalizing audits of COVID-related spending through June 2021 will improve transparency on government spending and enable follow-up by relevant stakeholders. Beginning to publicize on the public procurement website the beneficial ownership information of companies that win new government contracts will deliver on a longstanding goal.

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What has been accomplished so far?

The program has supported Kenya’s response to the COVID-19 pandemic and to the global shocks of 2022.

Kenya has met all the quantitative performance criteria under its IMF program. This review covered targets through end-December 2021.

By broadening the tax base and strengthening tax administration so that those who owe taxes pay taxes, Kenya generated extra revenues, overperforming its objectives by 0.4 percent of GDP in the first half of in FY2021/22. Those extra revenues provided the resources to support additional government spending aimed at protecting Kenyan households – including support to communities afflicted by drought, fertilizer subsidies, and smoothing of price increases as fuel prices in Kenya are gradually brought into line with global levels in 2022.

This performance was accomplished without changing the government’s primary deficit target of -3.4 percent of GDP, ensuring that one of the key goals of the IMF-backed program--reducing debt vulnerabilities--is met. Unsettled conditions in global financial markets in mid-2022 underscore the important goal of putting debt as a share of GDP on a downward trajectory during the program.

A Medium-Term Revenue Strategy now under development that will be set out in the Budget Review and Outlook Paper later in 2022 will provide direction and predictability in tax policy and generate added resources to meet Kenya’s needs.

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What is the program doing to help ordinary Kenyans who are being hit by the higher cost of living and those in drought-affected areas struggling with rising food insecurity?

Protections built into the design of the program work in combination with careful policy choices to protect the vulnerable and support Kenyans in the face of new challenges.

The program has specific provisions to protect social spending even as spending in other areas is rationalized.

Additionally, a flexible approach has been applied in the face of the urgent needs that arose during 2021 in the drought-affected regions. Those needs were accommodated within the program target for FY2021/22 in December 2021, when the primary deficit target was relaxed during the Second review to enable an additional KSh 20 billion (roughly 0.2 percent of GDP) in drought-related support for communities and related security interventions.

 The strong tax revenue performance in FY 2021/2022 provided the resources to support additional government spending aimed at protecting Kenyan households in the face of shocks, including fertilizer subsidies, and smoothing of price increases as fuel prices in Kenya are brought into line with global levels. This was done without exceeding the agreed fiscal deficit targets.

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Kenya’s borrowing costs have increased - how is the program reducing debt vulnerabilities?

Financing conditions in global markets have become much more challenging for frontier issuers as central banks in advanced economies have raised interest rates to reduce inflation.

Kenya is at high risk of debt distress and reducing debt vulnerabilities is a central goal of the IMF-supported program. The path of fiscal consolidation under the authorities’ program will put debt as share of GDP firmly on downward trajectory.

Kenya has outperformed its fiscal targets and the approved FY22/23 budget is consistent with achieving the program’s goals. The authorities also plan to adopt a debt anchor to keep debt in safe ranges in comparison to the size of the economy over the medium term, replacing the nominal debt limit. This will help to guide policies and increase public accountability for achieving the medium-term debt goals.

In the near term, Kenya’s continued strong commitment to its IMF-supported program sends a strong signal of determination to reduce debt risks. Financial support from the IMF and other lenders like the World Bank is provided at favorable terms as part of a borrowing plan that uses judicious mix of concessional and commercial borrowing.

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How is the program advancing the governance and anti-corruption agenda?

Promoting good governance remains an essential part of the Fund’s engagement with the Kenyan authorities. The authorities’ program contains specific commitments to protect public resources and enhance transparency and accountability to reduce corruption risks.

Key elements include:

  • the recent publication of audits of all expenditures in FY20/21 with a special chapter focusing on spending related to COVID-19;
  • promotion of fiscal transparency by adopting new tender documents for public procurements that will enable publishing on the public procurement website beneficial ownership data of companies that are awarded new government contracts; and review of the legal framework for asset declarations of senior public officials and conflict of interest rules. These measures will allow follow-up by enforcement agencies and other stakeholders.
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    If program performance is strong, why were waivers needed for program conditions?

    Performance on quantitative criteria has been strong. Kenya has met all the performance criteria for the 3rd Review, which covers the quantitative criteria with test dates of end-December 2021 and the structural commitments up through the time of the latest Executive Board meeting.

    The request for waivers relates to the timing of the review, not performance under the program. Since the IMF’s Executive Board discussed this review on July 18, 2022, waivers of applicability were needed because final data was not yet available to evaluate the end-June 2022 quantitative criteria. Quantitative criteria with test dates of end-June 2022 will be evaluated in the 4th Review.