- How would you describe the overall program?
- What were the main findings of the 4th Executive Board review of the IMF-backed program?
- What has been accomplished so far?
- What else is being done to tackle Kenya’s fiscal challenges?
- 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?
- Kenya’s borrowing costs have increased - how is the program reducing debt vulnerabilities?
- What caused the decline in the path of international reserves and what is the IMF advice on the exchange rate?
- How is the program advancing the governance and anti-corruption agenda?
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 of 2022, including repercussions from the war in Ukraine.
Kenya’s reform program to meet these challenges and reduce debt vulnerabilities involves a multi-year fiscal consolidation centered on increasing tax revenue and carefully prioritizing expenditures while safeguarding resources to protect vulnerable groups. The program also advances the broader reform and governance agenda by addressing weaknesses in state-owned enterprises (SOEs) and strengthening the country’s anticorruption framework. Finally, it strengthens the monetary policy framework and supports financial stability.
The IMF is providing policy advice, financing, and capacity development technical assistance to support the government’s economic program.
Following the Executive Board review on December 19, 2022, US$ 447.39 million will be disbursed to be used for budget support. In completing the Fourth Review under the IMF-supported program, the Board also approved an augmentation under the ECF arrangement of SDR 162.34 million (30 percent of quota, about US$ 215.81 million). This increase in IMF concessional financing brings the total amount under the EFF/ECF arrangements to SDR 1.818 billion (335 percent of quota, about US$ 2.416 billion), useable for budget support.
What were the main findings of the 4th Executive Board review of the IMF-backed program?
Kenya has remained resilient in the face of global shocks and drought, and the Ruto administration has shown strong commitment to Kenya’s IMF program and securing macroeconomic stability.
Kenya outperformed its fiscal targets by wide margins in FY2021/22 (tax revenue and the primary balance outperformed by 0.8 and 1.9 percentage points of GDP, respectively). With global markets disrupted and uncertainty around the elections, financing shortfalls (see below) constrained spending. As a result, the overall fiscal deficit came in well below target at 6.2 percent of GDP in FY2021/22.
Facing significant pressure due to carryover from last year and unbudgeted spending from early in FY2022/23, the incoming administration took bold action to hold this year’s deficit below the budgeted level. They decisively cut fuel subsidies and announced cost savings of 1.7 percent of GDP, while protecting spending for the most vulnerable. To lock in gains and reduce debt vulnerabilities, the program’s fiscal targets now reflect the authorities’ more ambitious tax revenue and primary deficit targets.
Global shocks pushed inflation to 9.5 percent in November. Foreign exchange reserves remain adequate, but with reduced capital inflows their buildup going forward will be more gradual. The Central Bank of Kenya (CBK) has tightened its monetary policy stance three times since May to prevent second-round effects and keep inflation expectations anchored. Further tightening would prevent inflation from taking hold and support external sustainability. Exchange rate flexibility, supported by a well-functioning interbank foreign exchange market, would act as a shock absorber in helping the economy ride through global shocks.
Progress on the structural reform agenda saw some delays amid political uncertainty around the election period. By beginning to publish beneficial ownership information of entities awarded public contracts in November, Kenya delivered on a longstanding goal. An action plan for Kenya’s Medium‑Term Revenue Strategy (MTRS) was issued in August. However, the planned review of the fuel pricing mechanism and the action plan to restore the profitability of Kenya Power and Lighting Company (KPLC) were delayed.
The medium-term outlook is favorable, but risks remain in the near-term Kenya also remains highly vulnerable to climate change. In this difficult environment, prudent and mutually reinforcing macroeconomic policies remain essential along with resolute structural reforms.
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. It also provided a welcome anchor in a period of uncertainty around national elections. Debt has begun to stabilize around 68 percent of GDP, well below the previous projections.
Kenya has met all the quantitative performance criteria under the fourth review and strongly overperformed in several areas including tax revenue, the primary balance of the government, and limits on the contracting of public debt. Targets on priority social expenditure also overperformed by 35 billion Shillings (0.2 percent of GDP). This review covered targets through end-June 2022 under Kenya’s IMF-supported program.
By broadening the tax base and strengthening tax administration so that those who owe taxes pay taxes, Kenya generated Ksh. 103 billion (0.8 percent of GDP) in extra revenues, substantially overperforming the objectives set when the program was approved (April 2021). Those extra revenues are providing resources to support additional government spending aimed at protecting Kenyan households in the face of recent global shocks. This included support to communities afflicted by drought, fertilizer subsidies, and smoothing of fuel price increases in 2022 as prices in Kenya were gradually brought into line with global levels.
An action plan for developing Kenya’s Medium‑Term Revenue Strategy was issued in August 2022. The MTRS will identify tax policy and administrative measures to continue widening the tax base and mobilize domestic revenues while improving fairness in the tax system.
Domestic fuel prices are being brought into line with developments in international markets, with petrol subsidies fully eliminated in September 2022, and modest cross-subsidization to support kerosene and diesel, which are more heavily used by the vulnerable.
The financial system has remained well capitalized, and credit growth is picking up. The CBK has published a White Paper setting out its plans to modernize Kenya’s monetary policy framework, and work is underway to enhance liquidity in Kenya’s interbank markets.
What else is being done to tackle Kenya’s fiscal challenges?
Steps are being taken to strengthen budget processes and controls and fiscal risk management. A special audit by the Auditor General on supplementary budgeting—including under Article 223 of the Constitution––is planned to be published by end-September 2023. A Fiscal Risk Committee (FRC) has been created to manage and mitigate fiscal risks across the public sector.
Given limited fiscal space, the new administration is prioritizing reforms at state corporations. Key areas include identifying cost-saving reforms at KQ and KPLC to make them financially stronger and strengthening governance and oversight of state corporations.
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?
The flexibility built into the design of the program includes 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. In FY2021/22, social expenditure overperformed its target by 0.2 percent of GDP.
This year, to respond to rising food insecurity, the FY2022/23 Supplementary Budget plans to allocate an additional KSh.10.2 billion (0.07 percent of GDP) in drought-related spending, of which nearly 60 percent is intended to finance food provision.
Delivering strong tax revenues also creates room for additional priority spending, including on social programs. It also allowed smoothing of price increases as fuel prices in Kenya are brought into line with global levels and temporary fertilizer subsidies.
Kenya’s borrowing costs have increased - how is the program reducing debt vulnerabilities?
Financing conditions in global markets became much more challenging for frontier-market issuers like Kenya after central banks in advanced economies started raising 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 a downward trajectory. With Kenya outperforming its fiscal targets so far, actual debt-to-GDP is stabilizing at lower levels than originally projected.
The authorities 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 and the plan to reduce the fiscal deficit for FY2022/23 below the originally budgeted level 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.
What caused the decline in the path of international reserves and what is the IMF advice on the exchange rate?
Kenya’s reserves will remain adequate although import coverage is projected to decline in 2023 due to lower external financing before beginning to gradually increase from 2024.
Compared to the third EFF/ECF reviews, the path of FX reserves has been revised downward. Public external borrowing was substantially lower in FY2021/22, resulting in less FX inflows. Borrowing of EUR 1 billion (around US$1.1 billion), originally planned as an Eurobond issuance, did not take place against a broad erosion of investor confidence toward frontier market debt. Borrowing for project implementation was also lower by US$ 0.7 billion due to delays. In addition, to rationalize spending in FY2022/23, public investment plans are being scaled back (nearly US$ 1 billion). Finally, the outlook for net private capital flows has been revised on expectations that tight global financial conditions will persist in 2023.
The IMF’s augmentation of access amounting to SDR 162.34 million (about US$ 215.81 million) in this review will ease pressures on official reserves, helping Kenya to respond to drought and food security needs by partially offsetting the shortfalls in external financing and catalyzing additional support from Kenya’s development partners.
Kenya’s ongoing discussions with development partners could positively impact fiscal financing prospects and further support reserve accumulation.
Proactive monetary policy and exchange rate flexibility would mitigate the pressures from global shocks, supporting competitiveness, and protecting FX reserves buffers.
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, enhance transparency and accountability to reduce corruption risks, and better manage SOEs.
Key elements include:
• beginning publication of beneficial ownership information of entities awarded public contracts (started November 2022), which delivers on a longstanding commitment;
• audits of COVID-related spending through June 2021 (completed July 2022);
• plans to bring Kenya’s AML/CFT legal framework in line with Financial Action Task Force standards by end-June 2023;
• fully operationalizing Kenya’s access to information framework and submitting a new Conflict of Interest law in line with best practice to strengthen integrity and asset disclosure by public officials by end-2022:
• a planned special audit on supplementary budgeting—including under Article 223 of the Constitution—to provide accountability and transparency for spending undertaken outside the approved budget and identify trends and risks in spending authorized under supplementary budgets (the Auditor General plans to complete this by end-September, 2023); and
• a new Ownership Policy to enhance the ownership and governance architecture of state corporations.