IMF and Kenyan Authorities Reach Staff-Level Agreement on a Three-Year, US$2.4 Billion Financing Package

IMF News, February 15, 2021

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Staff-level agreement reached on a combined 38-month program under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements for about US$2.4 billion.
Staff-level agreement is subject to IMF management approval and Executive Board consideration, which is expected in the coming weeks.
Program objectives:
- Support the next phase of Kenya’s COVID-19 response.
- Support a strong multi-year effort to stabilize and begin reducing debt levels relative to GDP.
- Lay the ground for durable and inclusive growth.

IMF staff virtual missions to Kenya: December 9 to 17, 2020 and February 4 to 15, 2021.
IMF mission led by Mary Goodman.
Meetings with Kenyan authorities and officials included:
- Cabinet Secretary for the National Treasury and Planning, Mr. Ukur Yatani.
- Governor of the Central Bank of Kenya (CBK), Dr. Patrick Njoroge.
- Head of the Public Service, Mr. Joseph Kinyua.
- Principal Secretary for the National Treasury, Dr. Julius Muia.
- Deputy Governor of the CBK, Ms. Sheila M’Mbijjewe.
- Other senior government and CBK officials, plus representatives of the private sector, civil society organizations, and development partners.

Kenya was hard hit at the onset of the COVID-19 crisis; growth has been recovering since mid-2020 and heading into 2021.
Real GDP growth is projected to have contracted by just -0.1 percent in 2020.
Inflation reached 5.7 percent in January.
Growth rebound projection: 7.6 percent in 2021, supported by reopening of schools and removal of pandemic containment measures.
Borrower debt-relief rescheduling: borrowers accounting for a total of 54.2 percent of loans had entered rescheduling agreements by end-2020.
Fiscal stance in the near term: authorities decided to pause fiscal adjustment to accommodate health, social, and development spending, complemented by accommodative monetary policy.

The program will:
- Reduce debt vulnerabilities through a multi-year fiscal consolidation effort.
- Center consolidation on raising tax revenues and tight control of spending while safeguarding resources to protect vulnerable groups.
- Advance structural reform and governance agenda, including addressing weaknesses in some SOEs and strengthening transparency and accountability through the anti-corruption framework.
- Strengthen the monetary policy framework and support financial stability.
Recent policy reversals and continuations:
- Earlier temporary personal and corporate income tax cuts and the reduced VAT rate were discontinued at end-December to shore up tax revenues.
- Personal relief on income tax and the lower turnover tax (1%) for small businesses introduced in April 2020 were not reversed.
- Many households and businesses continue to benefit from temporary debt relief agreements with banks.

The strong multi-year consolidation effort aims to deliver a primary balance that would stabilize debt as a share of GDP and put it on a downward path over the course of the program.
Expected fiscal payoff: freeing up resources for private investment and setting a footing for durable growth.
The program is intended to form a strong basis for support from other development partners.

COVID-19 continues to pose risks for the global economy and for Kenya; risks generally remain to the downside and projections are subject to extraordinary uncertainty.
Program incorporates flexibility to recognize near-term uncertainties about tax yields, including challenges in key sectors like hospitality.
As authorities evaluate SOE risks, the program will support plans to develop a strategy to address weaknesses in vulnerable SOEs within the scope of the limited available fiscal space.
IMF team looks forward to close engagement with the authorities to evaluate the evolving landscape and achieve program goals.

Source: IMF press release, February 15, 2021.