Key Questions on Kenya

Last Updated: June 23, 2021

Read the key questions regarding the IMF arrangements with Kenya

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What is the new program?

Kenya has large financing needs on account of the adverse effects that the COVID-19 pandemic has created.

The government has developed a medium-term reform program to address the challenges, articulated by the fiscal framework laid out in the recent Budget Policy Statement.

The IMF is providing policy advice and financing to support the government’s program.

What are the goals of Kenya’s new program?

The central objective of the authorities’ economic program, supported by arrangements under the IMF’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF), is to gradually stabilize public debt and put it on a downward path. The budget deficit will be reduced over time (as the COVID-19 shock eases) through a combination of revenue mobilization and spending rationalization measures.

This gradual approach is needed to strike a balance between near-term support for the economy and laying the ground for durable and inclusive growth over the years to come. Absent such a strong multi-year approach to contain debt and reduce debt vulnerabilities, there will not be sufficient resources in the near-term to support vulnerable groups or much needed higher spending in areas like health.

The program also includes measures to promote greater transparency in public accounts, strengthen the anticorruption framework, and addressing weaknesses in key state-owned enterprises.

More details of the authorities’ program can be found in the Staff Report.

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What were the findings of the first review?

On June 23rd the IMF Executive Board completed the first reviews of the EFF/ECF arrangements with Kenya, allowing for an immediate disbursement equivalent to US $407 million for budget support. This amount is part of the total US$2.34 billion financing available under Kenya’s EFF/ECF arrangements.

The Kenyan authorities have shown strong commitment to their reform agenda in challenging circumstances and are acting to reduce debt vulnerabilities while maintaining support for the economic recovery. The IMF is working with the authorities to support the next phase of Kenya’s COVID-19 response, address the urgent need to consolidate fiscal balances and improve governance.

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What has been achieved in the first three months of the IMF-supported program?

First, the authorities have decided to accelerate their COVID-19 vaccination program. Achieving the ambitious targets will depend on the availability of vaccines worldwide, and the IMF program is designed to support expanding vaccinations.

Second, the draft FY21/22 budget carries forward the fiscal consolidation effort that is required to reduce debt vulnerabilities. It also secures space for needed social and development spending and maintains support to key economic sectors affected by the pandemic.

Third, as part of their strategy to address the financial difficulties of state-owned enterprises (SOEs), the authorities have undertaken financial evaluations of 18 SOEs with the largest fiscal risks and one more is being finalized. This will provide a solid basis to identify least-cost approaches to address financial challenges at these SOEs and improve their oversight and management

Finally, important progress in the area of governance is being made with the recent publication of comprehensive audits of COVID-19 spending, and the planned disclosure of beneficial ownership information of companies that are awarded procurement contracts. These initiatives will help strengthen fiscal transparency and accountability in the use of public resources. Going forward, effective follow-up by the appropriate institutions on the findings of the audits will be essential to bolster the credibility of the governance agenda.

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How will Kenya’s new IMF program advance the governance and anti-corruption agenda?

Promoting good governance remains an essential part of the Fund’s engagement with the Kenyan authorities.

Notably, the authorities’ program contains specific commitments to safeguard public resources and enhance transparency and accountability to reduce corruption risks. Key elements include:

  • the recent publication of audits of all COVID-19 related expenditures in FY19/20;
  • promotion of fiscal transparency via publishing procurement information including beneficial ownership data of companies that are awarded procurement contracts;
  • review of the current legal framework for asset declarations of senior public officials and conflict of interest rules.
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    Does it make sense for the IMF to lend to Kenya and increase its debt burden when the country is already at high risk of debt distress?

    A central focus of the authorities’ program supported by the EFF/ECF arrangements is a strong multi-year effort to reduce debt and debt vulnerabilities, laying the ground for durable and inclusive growth over the years to come.

    The authorities intend to resume fiscal consolidation as the COVID-19 crisis abates through a combination of revenue mobilization and spending rationalization measures. Their program would bring the overall fiscal deficit below 4 percent of GDP by FY24/25 helping put the debt level (debt/GDP) on a downward trajectory.

    The USD 2.34 billion EFF/ECF arrangements with the IMF – together with additional financing from development partners and capital markets and G-20 support under the Debt Service Suspension Initiative (DSSI) – will help meet Kenya’s significant medium-term financing needs including to support their COVID-19 response. The alternative to this financing is much sharper fiscal consolidation or much more expensive borrowing on commercial terms.

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    What are the IMF's views on the recently published COVID-19 audits? What more needs to be done?

    The recent publication of audits of COVID-19 spending is an important step towards strengthened fiscal transparency and accountability and a strong signal of Kenya’s commitment to improved governance in the use of public resources. It is an important commitment made in connection with Fund support under the EFF/ECF arrangements approved in April and under last year’s Rapid Credit Facility

    At the beginning of June, Kenya published two important audits: a specialized forensic audit of the use of COVID-19 funds by national government entities and a consolidated audit of total national government spending in FY19/20. The latter is an annual exercise and is not specifically focused on COVID-spending. These reports add to the information generated by earlier audits of healthcare procurement at the Kenya Medical Supplies Authority (KEMSA) and on the use of COVID-19 funds by county governments.

    The COVID-19 funds audits identified violations of the Procurement Act and the Public Finance Management Act by the ministry of health, KEMSA and referral hospitals. Having this information in the public domain should support effective follow-up by the appropriate institutions in Kenya. This should include addressing shortcomings in control and oversight, as well as actions to further investigate and sanction administrative and criminal violations.

    The EFF/ECF-supported program will continue to advance the governance and anti-corruption agenda. Reforms to the public procurement framework that will further enhance fiscal transparency and help prevent corruption are also underway.

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    Why have public sector wages been frozen?

    The draft FY21/22 budget carries forward the fiscal consolidation effort that is needed to reduce debt vulnerabilities. The authorities’ multi-year fiscal consolidation plan follows a balanced approach centered on revenue mobilization and careful control of government spending to create space for needed development and social spending. To ensure that the public sector wage bill remains in line with the overall effort needed to reduce debt vulnerabilities, the authorities intend to lower the wage to GDP ratio by about 0.5 percentage points by FY23/24 via continued restraint in hiring and wage awards, improved wage-bill management, and harmonization and rationalization of allowances; currently the wage bill represents 22 percent of total current spending and absorbs over a third of tax revenues. While these are challenging policy choices, the alternative to containing public sector wage growth is lower room for social and development spending or further accumulation of public debt.