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Alarm lapse in IMF facility could hand State blank cheque to borrow

By Dominic Omondi | Published Sat, September 15th 2018 at 00:00, Updated September 14th 2018 at 21:08 GMT +3
The logo of the International Monetary Fund (IMF) at the organization's headquarters in Washington.

In summary

  • New development leaves lender with only an advisory role, with most of its preconditions now likely to go unheeded by the debt-hungry government
  • Already, markets have reacted negatively to the move not to renew Sh100b arrangement

With Kenya losing access to the Sh100 billion precautionary loan from the International Monetary Fund (IMF), experts fear this could open the floodgates to a new wave of extravagant State spending. 

With the end of the $989 million (Sh99 billion) stand-by credit facility, IMF will now remain around in an advisory capacity with no real power to dictate terms on government spending or borrowing.

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This leaves President Uhuru Kenyatta’s administration with an unexpectedly free hand to borrow and spend as it wishes.

This is especially so considering that the Jubilee regime has racked up Sh3.7 trillion in debt in five years, which experts say was only kept in checked by the perceived meddling of the IMF.  

The Washington-based lender’s Nairobi Representative Jan Mikkelsen told Weekend Business yesterday despite the facility ending, relations between Kenya and the 194-member fund would continue.   

“The IMF team will remain in close contact with the Kenyan authorities in the near-term and the IMF will continue to support Kenya’s reform efforts through advice and capacity development,” said Mikkelsen. But without its big stick, IMF’s advice to the Government is likely to be just that, advice. Although the IMF’s role remains advisory, it would be catastrophic for Kenya to exit from the Bretton Wood institution.

For example, according to an agreement Kenya signed with the holders of the $2 billion (Sh200 billion) Eurobond, they are at liberty to recall their outstanding principals with interest if Kenya either leaves the IMF or is ineligible for the fund’s resources. This could trigger a financial crisis.

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Johnson Nderi, a corporate finance manager at ABC Capital, reckons Kenya does not have the leeway to spend as it wishes.

“We are even in a worse condition. If we become reckless and one Eurobond investor calls their note and another one follows, things will be bad,” he explained, noting that Kenya is now like a motorist “driving around without insurance.” In the two and half years since March 2016 that Kenya has had a facility with the lender of last resort, IMF’s team of economists has regularly been monitoring the country’s economic performance.    

“The process involves a comprehensive review of the member’s economy, including the causes and nature of the balance of payments problems and an analysis of the policies needed to achieve a sustainable balance between the demand for, and the availability of, resources,” says IMF on its website.

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Kenyan authorities are yet to approve the publication of the last staff report three months since IMF’s Executive Board, a decision-making body, concluded a summary of the reviews and forwarded it to Treasury and Central Bank of Kenya officials.

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