The International Monetary Fund (IMF) has declined to raise Kenya’s credit facility, citing a number of short-term shocks to the economy.
In its latest review on the eligibility of member countries to the Poverty Reduction and Growth Trust (PRGT), the IMF cited drought, reduced credit extension and the August elections as some of the reasons that informed its decision.
“Kenya faces several significant downside risks to growth: If the current drought continues, it will hurt growth while fueling food price inflation; bank credit has slowed from 18 per cent in 2015 to four per cent in 2016, as interest rate caps have reduced bank profitability – putting downward pressure on private investment,” said the IMF in a working paper.
The global lender warned that if the effects from a spike in inflation materialise, Kenya could be forced into “monetary tightening” with negative growth implications.
Other risks included an impending fiscal consolidation, potential increase in the volatility of global capital flows and security threats.
“These risks, if materialised, could restrict the country’s ability to borrow from international markets. As Kenya’s GNI (gross national income) per capita is currently only 13 per cent above the relevant income entry threshold, negative shocks could lead to a decline below the threshold,” said the global lender.
“Kenya has experienced episodes of significant GNI per capita volatility in the past. In view of these developments, staff do not recommend graduation from PRGT eligibility at this time,” it added.
This means that Kenya’s precautionary credit will remain at Sh150 billion.
The country can draw on this facility in case of a balance of payment emergency caused by external shocks, such as weakening of the Shilling. The PRGT is a concessional lending facility for low-income countries. Kenya was one of six countries that, although not in debt distress, were not proposed for graduation as “they currently face other serious short-term vulnerabilities.”
The other countries were Bhutan, Republic of Congo, Cote d’Ivoire, Honduras and Guyana.