China-financed highway around Nairobi, Kenya: government program includes public investment on infrastructure (photo: Ding Haitao/Xinhua/Corbis)
BLENDED ACCESS FINANCING
This financing is precautionary, as Kenya plans not to draw on it unless the balance of payments comes under pressure.
The financing package approved by the Board involves “blended access”—combined general and concessional resources comprising a $504.3 million Stand-By Arrangement and a $194 million arrangement under the Stand-By Credit Facility. The move makes available a total of $543 million up front, with the remainder available in two equal tranches upon completion of semi-annual program reviews.
Kenya’s rising income and a track record of access to international markets justifies the country’s eligibility for blended access financing. The frontloaded access is consistent with risks to the outlook tilted to the downside in the near term, in case the economy is affected by a sudden shift in global investors’ risk sentiment, a deterioration of security conditions, or large weather-related shocks.
The new financing package thus represents an effort to tailor existing Fund facilities to the specific insurance needs of the country. This is the first financing package of this type approved by the Fund for a “frontier” market—second-generation emerging market country—in sub-Saharan Africa.
Strong record
Kenya has consolidated macroeconomic stability in recent years: growth has been robust, inflation contained, debt has remained sustainable, and reserve buffers have increased. Kenya has implemented reforms in a market-friendly environment, attracting strong interest from foreign investors operating across East Africa.
As a result, Kenya has consolidated its status as a successful frontier market. A Eurobond debut issue of $2 billion in June 2014 was the largest in sub-Saharan Africa so far, followed by a $750 million re-tap in December at yields 100 basis points lower than at original issuance.
Annual capital inflows have reached about 10 percent of GDP in recent years, lifting international reserve cover to 4 ½ months of prospective imports. Banks are more intensively using medium-term credit lines for small and medium-sized enterprises’ project financing.
The economy expanded by 5.3 percent in 2014 boosted by construction, manufacturing, and retail trade, despite poor rains constraining agriculture growth and security concerns affecting tourism significantly. GDP growth is projected to rise to 6.9 percent, lifted by implementation of the first stage of a regional railway project.
Inflation declined to 5.5 percent in January from 6 percent in December, well within the central bank inflation target range, reflecting lower electricity costs and helped by Kenya’s investment in geothermal power generation coming on stream. Geothermal generation capacity doubled in the second half of 2014, an overall increase of 18 percent in Kenya’s generation capacity, bringing the unit electricity cost down by 25 percent in recent months.
Policy anchor
The new precautionary financing arrangements would provide a policy anchor for continued macroeconomic and institutional reforms, and help to mitigate the impact of potential exogenous shocks while these reforms are being pursued, thereby supporting continued strong growth and durable poverty reduction.
The main features of the government’s program are
• Maintaining a sustainable medium-term debt path consistent with regional convergence commitments, while preserving fiscal space to implement an ambitious public investment program that includes reducing infrastructure bottlenecks;
• Strengthening public financial management by improving cash and debt management, embarking on parastatals reform, and adopting a strong legal framework for natural resource management;
• Transitioning to a fully fledged inflation-targeting framework by further improving the monetary policy framework and enhancing the central bank’s liquidity management;
• Addressing financial sector vulnerabilities stemming from rapid credit growth and rising cross-border operations by Kenyan banks; and
• Upgrading data quality to emerging market standards, by adopting a five-year action plan to adhere to the IMF’s Special Data Dissemination Standard.
The new arrangement therefore supports the authorities’ efforts to further strengthen their macroeconomic management and pursue more inclusive growth, carefully balancing a scaling up of infrastructure investments towards critical transport and energy infrastructure with maintaining debt sustainability and financial stability.
The program recognizes that the room for fiscal policy to adjust for demand management purposes is limited in the near term by the ongoing devolution process and the authorities’ commitment to infrastructure projects. However, a significant improvement in security conditions as response of the authorities’ ongoing efforts would boost growth over the medium term.
Low oil prices could also induce higher-than-envisaged domestic demand. The new precautionary financing arrangements aim at helping to secure the gains made so far, insure against underlying risks, and continue the momentum to implement the reform agenda.
Rail project
On the path to economic integration, Kenya has started implementation of the first phase of the Standard Gauge Railway linking Mombasa and Nairobi. The project is expected to result in both shorter freight delivery time and lower transportation costs, boosting regional trade.
The authorities expect a significant increase in freight rail traffic following a large share of road traffic shifting to railways use as cost differential materializes. The government of Kenya will finance 10 percent of the $4 billion rail project, with the remainder financed by Exim Bank China through two separate loans, to be repaid from future rail revenues.
