- IMF staff and the Kenyan authorities have reached staff-level agreement on economic policies and reforms to conclude the sixth reviews and augmentation of Kenya's ECF and EFF arrangements; the first review under the Resilience and Sustainability Facility; and the 2023 Article IV Consultation.
- Performance with respect to the program's targets and reform objectives remained broadly in line with program objectives.
- Further policy actions will be needed to help rebuild buffers, curb inflation and rising debt vulnerabilities, and strengthen the economy's ability to withstand external shocks.
A staff team from the International Monetary Fund (IMF), led by Haimanot Teferra, visited Nairobi during October 30 - November 15, 2023, and held discussions with the Kenyan authorities for the 2023 Article IV Consultation, the sixth reviews of Kenya's economic program supported by the IMF's Extended Fund Facility (EFF) and Extended Credit Facility (ECF), and the first Review under the Resilience Sustainability Facility (RSF). The EFF/ECF arrangements were approved by the IMF Executive Board on April 2, 2021 and extended by 10 months on July 17, 2023 (see Press Release Nos. 21/98 and 23/171) to support Kenya in maintaining robust and inclusive growth while preserving macroeconomic stability and debt sustainability. The SDR407.1 million RSF was approved by the IMF Executive Board on July 17, 2023 (see Press Release No 23/171 ) to support Kenya's ambitious efforts to build resilience to climate change.
The mission also considered Kenya's request for augmentation under the EFF/ECF arrangements. If approved by the Executive Board of IMF, including augmentations, the EFF/ECF arrangements would provide access to a total amount of SDR2.93 billion (about US$3.88 billion at current exchange rate). Under the EFF/ECF augmentations and the RSF support, the total IMF commitment under these arrangements over the duration of the program would be SDR3.34 billion (about US$4.43 billion).
At the conclusion of the mission, Ms. Teferra issued the following statement:
"I am pleased to announce that the IMF team and the Kenyan authorities have reached staff-level agreement on (i) the sixth reviews of Kenya's economic program under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements; (ii) an augmentation of access under the EFF/ECF totaling 130.3 percent of quota SDR 707.3 million, about US$938 million); and (iii) the first review of the RSF.
"The agreement is subject to IMF management approval and consideration by the Executive Board, which is expected in January 2024. Upon completion of the sixth reviews by the IMF Executive Board, Kenya would have immediate access to SDR 514.48 million (about US$682.3 million), including from the augmentation of access under the EFF/ECF arrangements (SDR469.25 million) and first review of RSF (SDR45.23 million). This would bring total IMF financial support disbursed under the EFF/ECF and RSF arrangements to SDR2.02 billion (about US$2.68 billion).
"The tightening global financing conditions for frontier economies and global geopolitical tensions are compounding the challenges from the legacy of the pandemic and multi-season drought, further straining Kenya's balance of payments and fiscal financing requirements. The authorities' strong reform program aims to enhance macroeconomic stability and restore confidence to ensure access to the international bond markets.
"The economy has displayed resilience, with real GDP expanding by 5.4 percent in the first half of 2023, primarily due to a robust recovery in the agriculture sector following the return of rains. In the fiscal year 2022/23, the primary deficit came in as expected at 0.6 percent of GDP, reflecting tight expenditure management in light of tax revenue shortfalls. Financing conditions continue to be challenging. With a tightening of monetary policy in June, and tighter liquidity conditions, yields on government bonds have experienced a notable upward trend. The external current account deficit has narrowed, driven by a recovery in the tourism sector to pre-COVID-19 levels, resilience in remittances reductions in imports and a real exchange rate depreciation. Headline inflation has fallen within the target range of 2.5-7.5 percent since July.
"Despite continued commitment to the implementation of the IMF-supported economic program which is broadly on track, uncertainty looms over Kenya's effective access to international bond markets. This uncertainty is exerting substantial pressure on liquidity, primarily due to the sizeable Eurobond maturing in 2024. Against this backdrop, the authorities are actively mobilizing additional financing from their development partners, the IMF, and commercial sources while concurrently intensifying their efforts to enhance macroeconomic policies and implement structural reforms.
"Steadfast implementation of a package of mutually reinforcing policies remains key to sustain macroeconomic stability, anchor market confidence, continue to deliver on the program's objectives, and bolster Kenya's medium-term prospects. A tighter fiscal stance is envisaged under the program to help reduce debt vulnerabilities and achieve a PV debt/GDP of 55 percent, the authorities' debt anchor, by 2029. This will entail timely implementation of reforms to broaden the domestic tax base and improve tax compliance. These are critical for achieving the authorities' revenue objectives of reversing the trajectory of the tax revenue-to-GDP ratio while promoting equity and fairness in the tax regime. Expenditure rationalization will need to continue, with a focus on enhanced efficiency of public investments, better targeting of subsidies and transfers, addressing weakness in state corporations, and digital delivery of public services. The social safety nets and fiscal risk management framework need to be further enhanced.
"The mission welcomed the Central Bank of Kenya's (CBK's) steps to modernize the monetary policy framework and improve the functioning of the FX market. The recent introduction of an interest rate corridor centered around the policy rate, aimed at guiding the interbank rate, is anticipated to enhance the transmission of monetary policy. Additionally, initiatives like the DhowCSD and other policy adjustments are expected to stimulate interbank repos, potentially minimizing market fragmentation. Further efforts to improve the functioning of the FX market and greater exchange rate flexibility would reduce the costs to the real economy from large spreads and excess FX demand, while encouraging capital inflows and reducing outflows. Credible and mutually reinforcing policies would help maintain favorable inflation differentials with trading partners, boost export competitiveness, and mitigate balance of payments pressures. Efforts, including to strengthen macroprudential policy framework will be key to reduce financial sector risks.
"On the upside, should investor confidence recover fully, a virtuous cycle of inflows could stabilize the exchange rate and bring down inflation faster than expected. An enhanced rebound in agriculture could bolster growth, help reduce inflation further, while earlier than expected market access would ease financing constraints. Further progress with reforms that improve the business environment, and that support a market and rules-based economy would reinforce this upside risk. On the domestic front, the key downside risk is that the policy shift now underway, if it loses its momentum, could erode confidence and lead to increased FX demand and further pressures on the exchange rate. Key downside risks from external shocks in the form of higher commodity prices, a slowdown in trading partners' demand, and a worsening of external financing conditions could weigh on the prospects of rebuilding external buffers.
"Progress on the climate agenda under the RSF remains strong. Fast-tracking the reforms will also create a conducive environment for attracting climate finance.
"The Article IV discussions complemented the program by focusing on assessing Kenya's public sector balance sheet, benchmarking its revenue performance to peers, exchange rate passthrough to inflation and examining medium-term structural issues related to export competitiveness. Responses to near-term challenges should be complemented by actions to anchor confidence and improve medium-term prospects for growth, export competitiveness, governance and the anti-corruption framework for an inclusive, green, and vibrant economy.
"The staff team is grateful to the authorities for their hospitality and candid and constructive discussions and reaffirms the IMF's support for the government's efforts to implement its economic reform agenda."
