International Monetary Fund (IMF) team led by Mary Goodman and Tobias Rasmussen and the Kenyan authorities have reached a staff-level agreement on the fourth review of Kenya’s economic program under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements, according to a statement.
The agreement is subject to the approval of IMF management and the Executive Board in the coming weeks, the statement added.
IMF said upon completion of the Executive Board review, Kenya would have access to SDR 336.54 million, equivalent to about US$ 433 million, bringing the total IMF financial support under these arrangements to SDR1,202.31 million or to about US$1,548 million).
This latter amount includes the proposed augmentation of access of SDR162.84 million to cover external financing needs resulting from drought and challenging global financing conditions.
“The Kenyan economy has been resilient in the face of a challenging environment. Real GDP grew by 6 percent year-on-year in the first half of 2022, supported by robust services sector activity notwithstanding a decline in agricultural output.
Food insecurity has increased to severe drought in parts of the country. Higher food and energy prices have pushed up inflation and pressured the external position. At the same time, the peaceful completion of elections has lifted uncertainty and credit to the private sector is expanding.
Staff projects growth at 5.3 percent in 2022 amid domestic policy tightening and a global slowdown that are likely to also 2 weigh on growth in 2023. The medium-term outlook remains favorable, supported by proactive reform efforts by the new government.
“There has been good progress on fiscal adjustment needed to address debt vulnerabilities; though pressures remain elevated. The overall deficit on a cash basis declined from 8.2 percent of GDP in 2020/21 to 6.2 percent of GDP in 2021/22.
This was supported by strong tax revenue, which increased from 12.6 to 13.7 percent of GDP. However, a constrained borrowing environment meant that planned external commercial financing did not materialize.
The lack of funds contributed to 0.7 percent of GDP in unpaid obligations that were carried over to 2022/23. Significant unbudgeted spending in the early months of this fiscal year, much of it for fuel subsidies, pose an additional challenge.
“The authorities are taking forceful measures to further reduce the fiscal deficit. Fuel subsidies were mostly eliminated in September and the variable cost adjustments in electricity prices were reinstated.
“In addition, the new government is in the process of formulating a supplementary budget for 2022/23 that will institute significant spending cuts with a view to modestly reducing the deficit from the previously programmed level of 5.9 percent of GDP while increasing allocations for drought interventions.
“Steadfast progress in revenue mobilization, anchored on the medium-term revenue strategy that is under development, as well as tight spending controls will be important to deliver further deficit reduction and put the debt/GDP ratio firmly on a downward trajectory.
“Proactive monetary policy will help anchor macroeconomic stability. The central bank has promptly tightened monetary policy in the face of heightened inflationary pressures and has signaled determination to keep price expectations anchored.
“Continued vigilance and responsiveness to changing external conditions will alongside exchange rate flexibility be important given the unsettled global environment.
“Looking forward, it will also be important to move ahead with structural and governance reforms. This includes completing efforts underway to publish beneficial ownership information for awarded government contracts, which will be a major step towards greater transparency and accountability.
Reform of financially-troubled state-owned enterprises—including Kenya Airways and Kenya Power and Lighting Company will also be key.
IMF also had productive discussions with a range of government agencies, the private sector, civil society organizations, and development partners.”