The International Monetary Fund (IMF) has approved a Sh78.7 billion loan in a boost to Kenya’s war on the Covid-19 pandemic with a warning to the country against forgetting its high debt levels.
IMF Deputy Managing Director and acting chair Tao Zhang stressed that the pandemic would be “very severe” to the Kenyan economy which was already taking a beating.
In a statement released on Wednesday after the lender’s Executive Board concluded talks on the approval of the loan, Zhang said the pandemic had heavily reduced Kenya’s growth and was creating fiscal and external financing needs.
“The COVID-19 pandemic has delivered a large economic shock to Kenya. The pandemic has impacted nearly all facets of the economy -- particularly tourism, transport, and trade -- and led to urgent balance of payments and fiscal financing
Zhang said the loan, drawn under the Rapid Credit Facility (RCF), would enhance liquidity to help Kenya cover its balance of payments gap this year and provide “much-needed resources” for fiscal interventions to protect public health.
It would also support households and firms affected by the pandemic and “catalyse” financing from other donors.
According to the IMF, the RCF provides low-access, rapid and concessional financial assistance to low income countries facing an urgent balance of payments need. It is provided in instances such as shocks, natural disasters, and emergencies resulting from fragility. “It (the credit facility) will allow them maintain an adequate level of international reserves and help provide the budget financing needed to respond to the pandemic,” added Zhang.
Treasury CS Ukur Yattani welcomed the approval, saying it would help the National Treasury address gaps in Kenya’s budget implementation.
“We immensely thank the IMF Executive Board for approving $739 million disbursement to Kenya to address the impact of the Covid-19 pandemic. This support will enable National Treasury address gaps in our budget implementation,” he said in a tweet.
The IMF also advised Sate to resume fiscal consolidation plans once the crisis lessens to reduce “macroeconomic vulnerabilities” after pausing fiscal consolidation to address the Covid-19 pandemic.
The IMF, however, noted that the government had taken “decisive action” to respond to the impact caused by the pandemic and had committed to resume fiscal consolidation to reduce debt vulnerabilities.
“A pause in the authorities’ fiscal consolidation plans to accommodate Covid-19 related measures is appropriate. These measures should be temporary and well-targeted.”
“Once the crisis abates, it is critical that the authorities resume their pursuit of a growth-friendly medium-term fiscal adjustment, including raising revenues as a share of GDP to reduce debt vulnerabilities,” said Zhang.
He noted that the Central Bank of Kenya (CBK) has taken various measures to maintain sufficient liquidity in the financial sector but said the apex bank should be on standby.
“It should continue to stand ready to further support the economy and financial sector’s health, as necessary, while ensuring that policy decisions are data-driven. The CBK should also continue to allow the exchange rate to act as a shock absorber,” said Zhang.
To account for Covid-19 related funds, the IMF said the government planned to conduct “independent post-crisis auditing” of Covid-19 related expenditures and publish the results.
The credit facility comes after Kenya’s special drawing rights (SDR) at the IMF were recently doubled to Sh75 billion from an equivalent of Sh37 billion.
The SDR is a world reserve asset whose value is based on a basket of five major international currencies that are widely used in transactions and exports.
They include the US dollar, euro, Chinese yuan, Japanese yen and the pound sterling.
The Sh75 billion will be used for balance of payments, including importing critical commodities such as medical supplies, oil and fertiliser, as well as paying external loans.
“This is all to cushion us against external shocks. And we are doing it for balance of payments; money to balance our budget,” said Mr Yatani.