IMF urges Kenya to limit spending as agreed in loan deal

The International Monetary Fund (IMF) will insist that Kenya adheres to agreed spending cuts in its first assessment of the Government’s fiscal stance under a Sh150 billion ($1.5 billion) standby-loan agreement.PHOTO: COURTESY

The International Monetary Fund (IMF) will insist that Kenya adheres to agreed spending cuts in its first assessment of the Government’s fiscal stance under a Sh150 billion ($1.5 billion) standby-loan agreement.

IMF officials will be in the capital, Nairobi, later this month to examine whether the Treasury is complying with commitments made under the precautionary financing facility arranged in March, said Armando Morales, the Washington-based lender’s representative in Kenya.

One of the conditions for the Government of East Africa’s biggest economy is for it to narrow its budget deficit to below 7 per cent of gross domestic product over the term of the facility, which it can tap when hit by exogenous shocks. Kenya projects its funding gap widening to 9.3 per cent of GDP in the year through June 2017, from 7.9 per cent in 2015-16.

‘DIFFICULT CONVERSATIONS’

“The IMF is not aware of any shift by the Government” away from plans to reduce its deficit to below 7 per cent, Morales said by phone from the capital, Nairobi, Wednesday. “An agreement would have to be reached on the way forward after this assessment,” he said of Kenya’s continued access to the facility.

The Treasury intends to spend Sh2.3 trillion ($22.7 billion) during this fiscal period, 28 per cent more than it did last year. It plans to borrow Sh225 billion locally and another Sh462 billion from external creditors to plug the shortfall. The Government is considering a second Eurobond, after raising $2.82 billion in a debut sale in 2014.

The deficit has been widening since President Uhuru Kenyatta became president in 2013 as his government ramps up financing for infrastructure projects, including a Sh320 billion ($3.2 billion) railway between the capital and the port-city of Mombasa that’s Kenya’s biggest public investment since attaining independence in 1963.

The 54-year-old is preparing for a second and final term at elections scheduled for August 8, 2017. The budget shortfall was 6.7 per cent of GDP just before he was elected. Kenya will have “difficult conversations” later this month with the IMF team on budget cuts before the vote, Jibran Qureishi, an economist for East Africa at Stanbic Holdings Ltd, said by phone from Nairobi.

“Chances of cutting back spending are slim,” he said. “Governments tend to overspend to regain power. Cutting back will not be easy. It’s a very difficult balancing act.”

A decision to provide regional county governments with Central Bank of Kenya overdraft facilities may also raise public spending and could stoke inflationary pressure, according to Mark Bohlund, Africa and Middle East economist for Bloomberg Intelligence.

“The risk is that the taps have opened ahead of the elections,” Bohlund said by phone from Nairobi. Spending in the counties will be geared toward winning elections and presents “a bit of a fiscal conundrum,” he said. “The incentive is to win elections, rather than improve health care or education.”

Differences with the IMF on budget cuts “may make it more difficult for Kenya to access the facility if need be,” Bohlund said.