IMF pushes for further budget cuts

President Uhuru Kenyatta with the International Monetary Fund chief Christine Lagard. [Dominic Omondi, Standard]
The International Monetary Fund (IMF) has prescribed more dose of austerity measures even as it pushes Kenya to abolish interest rate controls.

In its latest review of the country’s economic outlook, an IMF team that was in the country for two weeks said Kenya needs to further tighten its expenditure and remove the ceiling on interest rates banks can charge on loans.

Treasury Cabinet Secretary Henry Rotich has since proposed the review of the Banking Amendment Act 2016 which introduced the controls by criminalising lenders that charged loans at more than four percentage points above the rate set by Central Bank of Kenya, the Central Bank Rate.

The IMF team lauded National Treasury for narrowing the gap between its revenues and its expenditure- technically known as fiscal deficit- to seven per cent of the Gross Domestic Product (GDP) in the financial year that ended June 30.

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Treasury has promised to bring it further down to 5.7 per cent of GDP in the current financial year. This has already seen taxpayers hit with new punitive taxes and the government freeze procurement of new projects.

A fiscal deficit of 5.7 per cent and removal of interest controls would certainly get Kenya back into IMF’s good books.

Kenya’s access to the precautionary standby arrangement of about $1.5 billion was taken away after the Jubilee government went on a borrowing spree to finance infrastructural projects, a situation that saw public debt dangerously careen past the 50 per cent-of-GDP threshold.  

Rotich and Central Bank of Kenya Governor Patrick Njoroge asked for a six-month extension promising to reduce fiscal deficit and substantially modify interest controls.

President Uhuru Kenyatta has vowed to fight corruption and wastage in what is aimed at ensuring the success of the fiscal consolidation being fronted by the IMF. Already, development projects worth Sh410 billion have not been uploaded on IFMIS, as Treasury begins to implement the President’s directive that only new projects related to 'Big Four' will be initiated.

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The IMF team, led by Benedict Clements, was in the country from July 23 to August 2, 2018. They held discussions with senior officials, the Treasury and Central Bank of Kenya on the second review under a precautionary Stand-By Arrangement (SBA).

“Discussions focused on (i) fiscal policies to achieve the authorities’ fiscal deficit target of 5.7 per cent of GDP in FY2018/19; (ii) interest rate controls; and (iii) structural reforms aiming to ensure the sustainability of investment-driven, inclusive growth,” said Clements.

“The authorities reiterated commitment to macroeconomic policies that would maintain public debt on a sustainable path, contain inflation within the target range, and preserve external stability.”

The team was concerned over the high number of bad loans, with most Kenyans struggling to service.

Kenya’s banking system’s non-performing loans, said Clement, remained high at 12 per cent in June 2018. He blamed the high NPLs on the weaker economic activity in 2017 as well as delayed payments from the government and private sector.

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They noted that the economy had turned a corner after a dismal 2017 which was characterised by drought, a prolonged electioneering that made investors jittery and low credit uptake.

“Kenya’s economy has continued to perform well, with real GDP growth accelerating to 5.7 per cent in the first quarter of 2018, from 4.9 per cent in 2017. The acceleration of growth is being driven primarily by strengthened confidence following the conclusion of the prolonged election period, favourable weather conditions, and a continued recovery in tourism,” said Clements.

Other macroeconomic indicators such as inflation and exchange rate were also given a thumbs up by the Bretton Woods institution.

The current account deficit- where the value of the goods and services it imports exceeds the value of the goods and services it exports- has also improved after a dismal 2017 in which massive imports of food items such as maize saw the current account deficit widen.

Higher fuel also played a part in the widening of the current account which rose to 6.7 per cent of GDP in 2017 from 5.2 per cent in 2016. However, this has started to change in 2018.

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“The lower current account deficit so far in 2018 is due to strong agriculture exports, rising transfer inflows, and lower capital goods imports following the completion of the Mombasa-Nairobi phase of the SGR project.”

And with the Shilling remaining stable against major currencies- it is currently trading at 100.3 against the US Dollar, the Fund also lauded the country’s stable exchange rate.

International Monetary FundTreasury Cabinet Secretary Henry RotichCentral Bank of KenyaGross Domestic Product