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Kenya takes IMF bitter pill to end economic crisis

By Dominic Omondi | November 22nd 2020 at 08:00:00 GMT +0300

Kenyans queue to file their tax returns at the Kenya Revenue Authority office in Nakuru town. [File, Standard]

Kenya has agreed to loan conditions set by the International Monetary Fund (IMF) to access new credit as the flow of taxes into government coffers gets sluggish due to the Covid-19 pandemic. 

In a statement issued yesterday, the IMF said Kenyan authorities had agreed on taking up either of the highly conditional extended fund facility (EFF) or extended credit facility from the Washington-based institution.

The disbursement of the facility might result in tax increases and job cuts among some of the loss-making parastatals after the Government agreed to mobilise more taxes and restructure state-owned enterprises (SOEs) that have been weakened by the pandemic.

This comes at a time when official data shows that the Kenya Revenue Authority (KRA) missed its target in the first three months of the current financial year due to the depressed business environment.

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Moreover, more than half of the 247 State corporations reported losses or deficits, hampered by the crippling effects of the pandemic, a recent report from the National Treasury showed. 

Since March 13 when the country reported its first case of Covid-19, thousands of businesses have shut down, made losses, or posted lower profits as they continue to grapple with a battered economy.

IMF and Kenyan authorities are now engaged in negotiation for a three-and-a-half-year credit facility, which will constitute the country’s next response to the pandemic.

In an end-of-mission statement following the virtual meeting between an IMF delegation and various Kenyan authorities, Mary Goodman, an IMF advisor who led the team, confirmed that the two sides had agreed on “many areas” and that discussions on the remaining issues would continue in the near future.

“The programme would provide resources to protect vulnerable groups and would reduce debt vulnerabilities over time through a multi-year fiscal consolidation centered on raising tax revenues,” said Goodman in a statement released on Friday night, Kenyan time.

Fiscal consolidation involves the implementation of policies aimed at reducing debt uptake by either cutting down on spending or raising taxes. 

In the current arrangement, it looks like the two sides have agreed on increasing taxes rather than cutting spending.

Structural reform

The arrangement will also seek to advance the structural reform and address the governance weaknesses in some loss-making state corporations that has been exacerbated by the Covid-19 shock.

“Finally, (the Government) would strengthen the monetary policy framework and support financial stability. The programme design would incorporate elements of flexibility to accommodate the high uncertainty about the evolution of Covid-19 and the path of economic recovery,” said Ms Goodman.

The IMF staff will use the preliminary findings of the virtual visit to prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

National Treasury Cabinet Secretary Ukur Yatani did not respond to our question on the size of the loan.

However, in an earlier statement, the CS had hinted at the ongoing talks.

“We are actively holding discussions with the International Monetary Fund for a programme to anchor our fiscal policy to stabilise our economy and address emerging vulnerabilities,” said Mr Yatani.

It is not also clear when the country will get the loan. Kenya has previously tapped into the EFF, which was established to provide assistance to countries experiencing serious payment imbalances because of structural impediments or slow growth.

This was after the adverse effects of the 2008-09 economic crisis occasioned by the post-election violence and the global financial crisis.

Among some of the measures that Kenya promised to implement included removal of tax exemptions and automation of most tax collection processes to reduce evasion.

Before the pandemic, it appeared that Kenya was negotiating for another stand-by arrangement, which is a kind of insurance against possible deterioration in the country’s external position.

The previous Sh150 billion arrangement came to an end in September 2018 without the country ever using it.

The current overtures to IMF come at a time when the country’s economy is in bad shape, with the Shilling touching an all-time low of 109.3 against the dollar. 

The loan from the IMF, which has already given Kenya around Sh80 billion to combat the health and economic effects of the pandemic, will be used to cover the balance of payments.

Among some of the balance of payment pressures that the loan from the IMF will help the government with is payment of external debts.

By the end of September 2020, Treasury had paid Sh81.5 billion to external creditors, both in principal and interest.

With earnings from tourism and exports not enough, the government is under pressure to get foreign exchange reserves to pay the loans as they fall due.

Tax collection has gone down following a subdued environment where businesses have shut down, slid into the loss-making zone or like in the case of banks which are releasing their results, suffered a reduction in profits.

In the first four months of the current financial calender, KRA collected Sh160 billion less in taxes compared to a similar period between July and October last year. 

The taxman collected a total of Sh426.4 billion in taxes by end of October compared to Sh497.2 billion in the same month last year.

Unfortunately, even with the drop in taxes, the government has had few options on reducing its spending. The government, which also has the burden of stimulating the economy, is expected to spend a total of Sh2.8 trillion by June.

Counties, which are expected to receive Sh316 billion from the Exchequer, have raised an alarm over the delay in disbursement of funds and warned of a looming shutdown.

The Council of Governors through Chairman Wycliffe Oparanya said Treasury had not released county funds for the last three months, hampering service delivery.

“National Treasury must release the equitable share of revenue in compliance with constitutional petition Number 2 of 2019 that the money should be released without undue delay and deductions,” said Mr Oparanya.

Figures released by Treasury on Friday showed that by end of October, the 47 counties had received a total of Sh78.4 billion.

In total, the Exchequer had issued Sh742.7 billion to both levels of government as well as paying debts, pension and subscription to international organisations.  

The IMF and Yatani however noted that there are signs of recovery in the third quarter, following the re-opening of the economy.

The latest Stanbic Bank Purchasing Manager’s Index (PMI), a barometer for the health of the private sector, recorded the fastest growth since the inception of the index in 2014.

According to the index, October marked the best month for Kenya’s private sector since the outbreak of the coronavirus pandemic.

Businesses continued to adapt to the effects of the pandemic, working from home, doing meetings virtually and observing some of the safety and health measures aimed at curbing the spread of Covid-19.

More optimistic

Hotel managers also told Central Bank of Kenya in an earlier survey that they were more optimistic and that business had begun to pick since the economy was re-opened, and domestic and international flights allowed to resume.  

However, there are fears that all these gains might be wiped out by a second wave of the pandemic which is sweeping across the world.

A number of countries, including Kenya’s key export markets, have begun to implement additional lockdown measures and some major export commodities, which had started to improve, have begun to underperform.

Prices of cut flowers have fallen as demand for horticulture sags once again.

Failure to craft a good strategy to deal with the pandemic in poor countries such as Kenya, experts have warned, would see citizens forced to choose between dying of hunger or the disease.

This, they fear, is happening to the country currently with broke Kenyans forced to fend for themselves oblivious of risks of contracting the disease.

Covid 19 Time Series

 


International Monetary Fund Covid-19 Ukur Yatani
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