IMF Executive Board Completes Fourth Reviews of EFF and ECF Arrangements for Kenya Providing a US$447.39 million Disbursement
IMF News, December 19, 2022
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- Published: December 19, 2022
Key decision and financing
- The Executive Board completed the Fourth reviews of the 38-month arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF).
- Immediate disbursement: SDR336.54 million (about US$447.39 million) usable for budget support.
- Augmentation under the ECF: SDR162.34 million (30 percent of quota, about US$215.81 million).
- Cumulative disbursements under the EFF/ECF arrangements reported as about US$1.655.59 million.
- Total amount under the EFF/ECF arrangements after the augmentation: SDR 1.818 billion (335 percent of quota or about US$2.416 billion).
Macroeconomic outlook and key risks
- Near-term environment:
- Global developments have contributed to rising inflation and slowing growth.
- Kenya’s economy is described as resilient amid a continuing severe drought in some regions.
- Kenya projected to grow 5.3 percent in 2022.
- Inflation moved above the Central Bank of Kenya’s (CBK) target band in June and is expected to peak in early 2023.
- Despite double-digit export growth, the current account is expected to widen on higher global oil prices in 2022.
- Downside risks predominate in the near term; medium-term outlook remains favorable although climate-related risks are elevated.
- Monetary and external:
- The CBK raised policy rates by a cumulative 175 basis points in 2022.
- The Kenyan Shilling continued to depreciate against the U.S. dollar while the dollar strengthened globally.
- Liquidity has declined in the interbank forex market.
- A lower projected path of FX reserves reflects financing shortfalls last fiscal year and planned cuts in foreign-financed projects during FY2022/23.
- Reserves remain adequate at 3 months of imports, gradually increasing over the medium term.
Fiscal and debt developments
- Fiscal performance:
- With progress on fiscal consolidation, public debt has begun leveling off.
- Taxes performed strongly in FY2021/22, while spending was compressed on shortfalls in external commercial financing.
- Primary deficit overperformance: 1.7 percent of GDP (i.e., primary deficit was smaller by 1.7 percent of GDP than programmed).
- Obligations carried over from last fiscal year and an increase in unbudgeted spending in early FY2022/23 increased pressures on the budget.
- The new administration of President Ruto has reasserted Kenya’s commitment to fiscal consolidation, targeting a lower overall fiscal deficit than the original budget.
Structural reforms and governance
- Progress reported:
- Audits of COVID-19 vaccine spending completed and published.
- Begun publishing beneficial ownership information of successful bidders in new procurements.
- Delays and vulnerabilities:
- Progress on addressing financial weaknesses in state-owned enterprises and a planned review of the fuel pricing mechanism were delayed during the political transition.
- AML/CFT legal framework needs strengthening and stepped-up efforts on compliance.
- Urgent need to address vulnerabilities at Kenya Airways and Kenya Power and Lighting Company.
- Need to strengthen the governance framework for state-owned corporations.
- Planned reviews of the fuel pricing mechanism and the audit of extrabudgetary spending are important.
- High vulnerability to climate change calls for multi-faceted policy action.
Policy recommendations and IMF assessment (excerpt from Ms. Antoinette Sayeh statement)
- Fiscal policy:
- Continued strong commitment to fiscal consolidation over the medium term to reduce debt vulnerabilities.
- Additional tax policy measures, anchored in a Medium-Term Revenue Strategy, to secure space for needed social and development spending.
- Improved spending efficiency, revenue administration, and public financial and debt management.
- Monetary and external policies:
- The CBK’s monetary policy stance is welcome; further tightening would limit second-round effects and keep inflationary expectations well-anchored while supporting external adjustment.
- The exchange rate should function as a shock absorber, supported by a well-functioning interbank FX market; forex interventions (sales) should be limited to addressing excessive volatility.
- Continued monitoring of the banking system is important.
- Structural governance and transparency:
- Continue progress on structural reforms and transparency initiatives (e.g., publishing beneficial ownership information for successful bidders).
- Strengthen AML/CFT legal framework and compliance.
- Address SOE vulnerabilities and strengthen governance for state-owned corporations.
- Complete planned reviews of the fuel pricing mechanism and the audit of extrabudgetary spending.
- Climate and inclusion:
- Multi-faceted policy action to address high vulnerability to climate change.
- Continue initiatives to promote inclusive growth.
Selected economic indicators (2021—2024, as reported)
- Output
- Real GDP growth (%): 2021 Act. 7.5; 2022 Proj. 5.3; 2023 5.1; 2024 5.5
- Prices
- Inflation - average (%): 2021 Act. 6.1; 2022 Proj. 7.7; 2023 7.8; 2024 5.7
- Central government finances (fiscal year)1
- Revenue (% GDP): 2021 Act. 16.0; 2022 Proj. 17.3; 2023 17.5; 2024 17.8
- Expenditure (% GDP): 2021 Act. 24.2; 2022 Proj. 23.5; 2023 23.3; 2024 22.1
- Fiscal balance (% GDP): 2021 Act. –8.2; 2022 Proj. –6.2; 2023 –5.8; 2024 –4.4
- Public debt (% GDP): 2021 Act. 67.7; 2022 Proj. 66.6; 2023 67.6; 2024 66.2
- External debt (% GDP): 2021 Act. 35.2; 2022 Proj. 33.3; 2023 34.1; 2024 33.9
- Money and Credit
- Broad money (% change): 2021 Act. 9.0; 2022 Proj. 7.4; 2023 9.4; 2024 (not listed)
- Credit to private sector (% change): 2021 Act. 8.6; 2022 Proj. 12.0; 2023 12.3; 2024 13.3
- Policy rate, end of period (%): 2021 Act. 7.0; 2022 Proj. …
- Balance of payments
- Current account (% GDP): 2021 Act. –5.2; 2022 Proj. –5.7; 2023 –5.4; 2024 –5.3
- Reserves (in months of imports): 2021 Act. 4.5; 2022 Proj. 3.7; 2023 3.0; 2024 3.2
- Exchange rate
- REER (% change): 2021 Act. –2.6
IMF Communications Department press release, December 19, 2022.