The International Monetary Fund (IMF) has approved a Sh257 billion loan for Kenya, which will come with a raft of conditions for Nairobi, as the Washington based lender returns to be at the centre of Kenya's economic policy.
The loan would help Nairobi deal with Covid-19 related funding shortages, fund structural reforms as well as address the urgent need to reduce Kenya's debt vulnerabilities.
In a statement on Friday, the IMF said its executive board had approved the 38-month financing plan under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF).
The ECF provides financial assistance to countries with protracted balance of payments problems. The It was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make IMF's financial support more flexible and better tailored to the diverse needs of low-income countries, including in times of crisis.
On its part, the EFF is extended to a country that is facing serious medium-term balance of payments problems because of structural weaknesses that require time to address.
Loans under an extended arrangement have a longer repayment period and are mainly used to help countries implement medium-term structural reforms.
"The three-year financing package will support the next phase of the authorities' COVID-19 response and their plan to reduce debt vulnerabilities while safeguarding resources to protect vulnerable groups," IMF said in a statement.
Treasury Secretary Ukur Yatani said it is the country that walked to the IMF in the midst of the pandemic, and asked for support to deal with the budget gaps. Yatani said all the structural reforms to be implemented were suggested by Kenya and not the IMF, as he moved to dispel fears that the lender was going to start another round of painful structural reforms that hurt Kenya in the Moi regime.
Yatani said some of the parastatals that are lined up for reforms include cash strapped Kenya Airways and Kenya Power, which is also in a dire financial position.
On its part, the says the program would advance the broader reform and governance agenda, including by addressing weaknesses in some state-owned enterprises (SOEs) and strengthening transparency and accountability through the anticorruption framework.
The approval enables immediate disbursement of about Sh33.8 billion ($307.5 million), usable for budget support.
This follows Fund emergency support to Kenya in May 2020 (100 percent of quota, equivalent to Sh81.2 billion ($739 million) at the time of approval.
IMF notes that Kenya was hit hard at the onset by the COVID-19 pandemic.
With a forceful policy response, the economy has been picking up heading into 2021 after likely posting a slight contraction of 0.1 percent in 2020.
"Even with this recovery, challenges remain in the return to durable and inclusive growth, and past gains in poverty reduction have been reversed," the statement reads.
The Covid-19 shock also exacerbated the country's pre-existing fiscal vulnerabilities.
It noted that Kenya's debt remains sustainable, but it is at high risk of debt distress.
To address debt-related risks, Kenya has taken action to hold the fiscal deficit and debt ratios to 8.7 and 70.4 percent of GDP, respectively, this fiscal year.
The statement says fiscal and balance-of-payments financing needs remain sizable over the medium term.
"Support from the G-20 under the Debt Service Suspension Initiative (DSSI) and development partners will contribute to closing the financing gap in 2021 along with financing from capital markets," IMF added.
IMF notes that Nairobi has committed to reduce debt vulnerabilities through a multi-year fiscal consolidation effort centered on raising tax revenues and tightly controlling spending, safeguarding resources to protect vulnerable groups.
"It will also advance the structural reform and governance agenda, including by addressing weaknesses in some state-owned enterprises (SOEs) and strengthening transparency and accountability through the anticorruption framework," the statement noted.
It says the program incorporates flexibility, including by recognising near-term challenges related to tax yields in the current stressed economic environment and possible contingent liabilities from the state owned enterprises sector.
"The authorities' program charts a clear path to reduce debt-related risks. It will bring the primary balance below its debt-stabilizing level during the EFF/ECF arrangements and restore tax revenue – which had been falling even before the Covid-19 shock – back to levels achieved in recent years," Ms. Antoinette Sayeh, the IMF Deputy Managing Director and Acting Chair said in the statement.
"The authorities should continue to provide necessary support to the economy and secure space for social and development spending even as they have appropriately reversed some extraordinary measures, including the temporary tax cuts which ended in January, 2021," she added.
The IMF boss said the near-term reform agenda should also focus on urgent structural policy challenges.
She said as financial weaknesses in some parastatals have emerged as a key source of fiscal risks, the ability to manage these risks should be strengthened while ensuring that any support provided to them is consistent with Kenya's limited fiscal space.
"Fiscal structural reforms should prioritize revenue administration, spending efficiency, and fiscal transparency."