IMF sets tough new terms for Kenya to access credit

Kenya will have to meet tough new conditions to access a $1.5 billion (Sh151 billion) emergency credit facility from the International Monetary Fund (IMF).

The country will be expected to, among other things, trim its budget deficit by 3 per cent if it is to access the global lender’s credit facility. A budget deficit means the Government cannot meet its obligations from its tax revenues. In the last financial year, the government had a budget deficit of around Sh500 billion.

These conditions mean that the country might be forced to escalate its revenue collection activities, even as it cuts back on its expenditure. Kenya’s budget deficit currently stands at around 9 per cent but the government projects it to move down to 6 per cent.

In March this year, the fund approved Kenya’s application for a total of Sh151 billion ($1.5 billion) in a precautionary credit facility. Precautionary arrangements are used when countries do not intend to draw on approved amounts, but retain the option to do so should they need it.

With this amount, Kenya is now the largest beneficiary of such an insurance-like credit facility from the Bretton Woods Institution. Kenya can access this facility in two years.

The country will also have to manage its debt that has been growing to unsustainable levels. Between 2014 and 2015, for example, the country’s debt increased by Sh680 billion to stand Sh3.16 trillion. The IMF, which has gained some notoriety in some quarters for insisting that emerging countries cut back on some of their expenditure before they can access its emergency loans, will also expect Kenya to rein in its debt.

“We agreed with the authorities that continued reforms are needed to sustain economic growth and spread its benefits to the population. In particular, it will be important to undertake a growth-friendly reduction in fiscal deficits over the medium term to maintain debt sustainability and reduce external current account deficits,” said IMF First Deputy Managing Director David Lipton, who is on an official visit to Kenya.

Taxation regime

Already, the Government has stopped all new infrastructural projects in what it says is a bid to help it concentrate on completing ongoing projects. Most of the infrastructural projects have been funded through medium-term debt arrangements.

The IMF reckons that while funding infrastructural projects through debt is good for the country’s long-term growth prospects, it could turn unsustainable in the short or medium-term. Lipton lauded Kenya’s efforts to strengthen revenue mobilisation, review its expenditure priorities and increase the quality of expenditures.

Kenya and the IMF discussed a number of reforms including reducing deficits. Kenya gave its commitment to reduce the budget deficit by 3 per cent. Among other things, Kenya is expected to improve its business environment by reforming its taxation regime, improving its supervisory role in the banking sector which has been on the spot in recent times.

National Treasury Cabinet Secretary Henry Rotich said that the government had given its commitment to most of these conditions. He said banking supervision had improved so as to inject much-needed confidence in the sector.

In the coming financial year, except in the critical areas of education, health and security, the Government will not hire new civil servants. Moreover, all promotions will be frozen as the Government tries to reduce its ballooning wage bill.