Early Christmas for Treasury as IMF board to release Sh53.2b

The board of the International Monetary Fund (IMF) is tomorrow expected to approve the release of Sh53.2 billion to cash-strapped Kenya for budgetary support and the fight against drought.

The Sunday Standard has learned that the announcement from the IMF’s executive board will be made after its meeting in Washington DC, where it is expected to back the disbursement of the funds, offering a financial lifeline to the William Ruto administration.

A listing of the IMF board itinerary seen by The Sunday Standard confirmed the meeting. “December 19: Kenya- Fourth Reviews Under the Extended Fund Facility and Credit Fund Facility Arrangements,” reads the entry.

“The money will be disbursed if the board approves it,” said a source.

The endorsement comes as a huge relief for President Ruto’s government, whose plan to finance its huge budget deficit is hinged on international partners such as the World Bank and the IMF. 

Global ratings agency Fitch recently downgraded Kenya’s credit rating, dimming the country’s chances of tapping cheap credit on the international market.

New economic managers at the National Treasury led by Cabinet Secretary Njuguna Ndung’u face the uphill task of stabilising government finances and bringing living costs under control.

Treasury is trying to balance its debt portfolio after expensive commercial debts piled up and became expensive to repay, taking up more than 60 per cent of tax revenues.

The local economy has been hit hard by the lingering effects of the coronavirus pandemic and the war in Ukraine, events that have played havoc with global markets and hiked oil and food prices worldwide.

The shilling is on a free fall and hit a new low of 122.9882 against the dollar, according to the Central Bank of Kenya (CBK) on Friday.

Last month, a delegation of IMF staff expressed satisfaction with Nairobi’s economic reforms in the face of a fresh economic slowdown. 

Strong commitment

The multilateral lender said Ruto’s administration has expressed a strong commitment to the IMF-supported programme first inked last year under the previous Uhuru Kenyatta regime.

The lender’s visiting staff said they were satisfied with the progress that the government is making in its economic reform programmes. 

Under the deal, which now awaits endorsement by the IMF management and board, Kenya will access $433 million (Sh53.2 billion), bringing the total IMF support so far in a 38-month financing facility to $1.548 billion (Sh190 billion) under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF). 

The cumulative 38-month arrangement was worth $2.34 billion (Sh287.82 billion) when it was first approved in April last year. 

“The IMF staff team and the Kenyan authorities have reached a staff-level agreement on the fourth review of Kenya’s economic programme under the EFF and ECF arrangements.

“The agreement is subject to the approval of IMF management and the executive board in the coming weeks,” said the team led by IMF Kenya Mission Chief Mary Goodman and Resident Representative Tobias Rasmussen last month. 

“Upon completion of the executive board review, Kenya would have access to SDR 336.54 million (equivalent to about $433 million (Sh53.2 billion), bringing the total IMF financial support under these arrangements to SDR1,202.31 million (equivalent to about $1,548 million, Sh190 billion).”

SDRs (special drawing rights) are monetary reserve currencies created by the IMF to supplement its member countries’ official reserves.

The IMF revealed the latest amount includes proposed augmentation or an additional borrowing request that will see Kenya access SDR162.84 million ($210 million or Sh25.8 billion) to cover external financing needs resulting from drought and challenging global financing conditions. 

Over four million Kenyans lack access to food and water and are facing acute hunger and starvation due to a prolonged drought.  

The IMF projects the Kenyan economy to grow at 5.3 per cent this year amid domestic policy tightening and a global slowdown that are likely to also weigh on growth in 2023. 

The economy grew by six per cent year-on-year in the first half of 2022, supported by services sector activity amid a decline in agricultural output.  

“The economy remains broadly resilient. However, volatile international commodity prices, tighter external financing conditions, higher inflation, global slowdown in growth and continued drought have created a challenging backdrop for economic policymaking,” said the IMF.

There is no free lunch as the IMF’s latest disbursement comes with another dose of its renowned bitter pill of austerity. This includes a fresh demand on the government to cut public spending, which could impact public jobs amid a bulging unemployment crisis. It also includes increasing taxes, a move likely to further burden the already economically strained citizens.

The government has already signalled it is ready to take the IMF’s bitter prescription to get the battered economy back on track. Treasury is separately eyeing a Sh91.9 billion fresh loan from the World Bank as Ruto seeks cheaper sources of cash to support the Budget.

Prof Ndung’u early this month said the World Bank loan will be under “concessional terms” and will help the government manage public debt.

Kenya qualified for this type of financing, technically known as development policy operations or DPO, in 2019 and has since received four such loans from the World Bank, the last one in March this year. “The government has lined up an additional DPO of approximately $750 million (Sh91.9 billion) for the current financial year,” said Ndung’u.

Since 2019, Kenya has received a combined resource envelope of $3.25 billion (Sh398.5 billion) under the four DPOs.  “These resources helped to reduce fiscal pressures by making public spending more efficient and transparent while reducing the fiscal costs and risks,” Ndung’u said.

While recently downgrading Kenya’s long-term foreign-currency issuer default rating to ‘B’ from ‘B+’ Fitch said the downgrade reflects “Kenya’s persistent twin fiscal and external deficits, relatively high debt, and deteriorating external liquidity, and high external financing costs.”

“The government faces elevated external debt service obligations in 2023-2024, including the maturity of a $2 billion (Sh245.8 billion) Eurobond in June 2024, which combined with high current account deficits, will lead to sustained pressure on international reserves,” said Fitch.

The ratings agency said this presently constrains access to international capital markets. A credit rating cut is significant because it may influence a country’s cost of borrowing in the international financial markets.

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