World Bank approves Sh80.2bn loan, targets Kenya Power reforms

The World Bank has given Kenya another Sh80.2 billion to boost the fight against Covid-19 and jumpstart Kenya’s parastatal reforms, starting with cash-strapped electricity distributor Kenya Power.

The loan comes a day after National Treasury Secretary Ukur Yatani unveiled a Sh3.6 trillion budget that it cannot afford unless Parliament approves its request to increase the debt ceiling above the current Sh9 trillion. 

The Bretton Woods institution said on Friday that the loan would help reinforce Kenya’s resilient, inclusive and green economic recovery from the Covid-19 crisis. 

It said the money would support policy reforms that will strengthen transparency and accountability in public procurement and promote efficient public investment spending in Kenya.

“This development policy operation (DPO) supports measures to improve medium-term fiscal and debt sustainability through greater transparency and efficiency in government spending, building on ongoing World Bank support to enhance public finance management systems,” the global lender said in a statement.

Enhance transparency, accountability

It said the loan would help in establishing an electronic procurement platform for the public sector that seeks to make government purchases of goods and services transparent.

“This will help increase accountability in public spending and reduce opportunities for corruption. The support also strengthens public investment management by seeking cost-savings and applying rigorous selection and monitoring and evaluation criteria to all projects,” it said, adding that these measures are expected to yield fiscal savings of up to Sh278 billion.

“The operation prioritises reforms in hard-hit sectors, such as healthcare, education and energy, which have been made urgent by the impacts of the Covid-19 crisis,” said Keith Hansen, World Bank Country Director for Kenya.

“In recognition of the severity of the crisis and need for a comprehensive response, we are supporting the government’s post-Covid-19 Economic Recovery Strategy, which is designed to mitigate the adverse socioeconomic effects of the pandemic and accelerate economic recovery and attain higher and sustained economic growth.”

Strengthen Kenya Power

The policy operation also prioritises energy-sector reforms to improve electricity access and ensure that Kenyans benefit from least-cost, clean energy sources.

Further, the new policy framework will help strengthen Kenya Power’s finances with a new competitive pricing regime.

Kenyans will also benefit from better healthcare and disease prevention, especially for the poorest and most vulnerable households, through National Hospital Insurance Fund (NHIF) governance reforms and the establishment of the Kenya Centre for Disease Control (KCDC) to strengthen disease prevention, detection, and response. 

Reforms will further seek to provide Kenyans with more equitable access to higher education, through a performance-based funding method to reduce the imbalances and inefficiencies created by the existing funding model for universities.

“Stabilising the debt trajectory and reducing high debt costs is a top priority,” said Alex Sienaert, senior economist and task team leader for World Bank Kenya.

“This policy operation supports measures to reduce the budget deficit over time, such as by making public spending more efficient, whilst minimising debt costs by helping to meet the government’s current financing requirements on concessional terms.”

DPOs are used by the World Bank to support a country’s policy and institutional reform agenda to help to accelerate inclusive growth and poverty reduction.

The negative impacts of the Covid-19 crisis have made reforms that improve governance and service delivery, including those covered by this operation for Kenya, even more critical because they create better conditions for Kenya to inclusively and sustainably recover from it.

Loan terms

Financing provided by the World Bank is offered on concessional terms, making it significantly cheaper than commercial loans. The total annual interest and service cost of the Kenya DPO is 3.1 per cent. 

Shackled by outsized debt repayment obligations and a projection of only modest tax revenue growth, Mr Yatani presented a measured expenditure plan, with the hope that economic recovery will provide headroom for more radical policy shifts in the future.

Mr Yatani plans to borrow Sh929 billion to plug the 2021/22 budget deficit, even as he is faced with Sh1.16 trillion in loan repayment obligations in the year, meaning that a third of the budget will be consumed by public debt.

By March, Kenya’s debt stood at Sh7.3 trillion and its repayment is now consuming a third of the budget.

It is not just the World Bank that has come to the aid of the country. Its sister institution, the International Monetary Fund (IMF), recently agreed a 38-month loan programme with Kenya under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF) for Sh257bn ($2.4 billion).

This means the budget has to be in line with certain prescribed fiscal and monetary performance benchmarks, including specific targets on the fiscal deficit, tax revenue, stock of central bank net international reserves and public debt.

As part of the IMF benchmarks, reforms are expected under tax administration, the government procurement process, containment of the public wage bill, restructuring of State Owned Enterprises (SOEs) and rationalisation of public investment projects.