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Kenya enters Sh262.5 billion deal with IMF to fight Covid

MONEY & CAREERS
By Fredrick Obura | February 16th 2021

NAIROBI, KENYA: Kenya has entered a multibillion deal with the International Monetary Fund aimed at responding to the next phase of Covid-19 and reducing debt levels.

The three-year Sh262.5 billion loan deal follows an assessment by the IMF team led by Mary Goodman between December and February 4.

"Kenyan authorities and the IMF mission team have reached agreement on economic and structural policies that would underpin a 38-month program under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements for about US$2.4 billion.
“The staff-level agreement is subject to IMF management approval and Executive Board consideration, which is expected in the coming weeks,” he said adding that the program will support the next phase of the country’s COVID-19 response and the authorities’ plans for a strong multi-year effort to stabilize and begin reducing debt levels relative to GDP, laying the ground for durable and inclusive growth over the years to come.

Kenya was hard hit at the onset of the COVID-19 crisis, but growth has been recovering since mid-2020 and heading into 2021. The authorities’ forceful early actions cushioned the pandemic’s economic impact, and real GDP growth is projected to have contracted by just -0.1 per cent in 2020. Inflation remained within the central bank’s target band, reaching 5.7 per cent in January, while financial sector vulnerabilities have been contained and the banking system remains well capitalised overall. The external sector proved resilient against the backdrop of the shock, with horticultural exports and remittances performing well. The reopening of schools and removal of pandemic containment measures are expected to underpin a growth rebound to 7.6 per cent in 2021, even as some sectors of the economy face continuing headwinds.

The Kenyan authorities have begun to roll back some of their extraordinary economic support measures. With the pickup in activity, the earlier temporary personal and corporate income tax cuts, as well as the reduced VAT rate, were discontinued at end-December, shoring up tax revenues. To maintain the cushion for the low-income earners and Micro, Small, and Medium Enterprises (MSMEs), the Authorities did not reverse the personal relief on income tax and the lower turnover tax (1 per cent) for small businesses introduced in April 2020. Many households and businesses continue to benefit from the temporary debt relief agreements reached with their banks, and borrowers accounting for a total of 54.2 percent of loans had entered such rescheduling agreements by end-2020.

The authorities’ decision to pause fiscal adjustment this year will allow accommodating health, social, and development spending to support the recovery, complemented by accommodative monetary policy.

The mission team agreed with the authorities on a program to support the next phase of their COVID-19 response.

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