- What are the objectives of the IMF-backed economic program?
- What is the aim of the arrangement under the Resilience and Sustainability Facility (RSF)?
- What were the main findings of the 6th EFF/ECF reviews?
- What is the program doing to help ordinary Kenyans?
- Kenya’s borrowing costs have increased—how is the program reducing debt vulnerabilities? Is Kenya’s debt sustainable?
- How is the country raising more domestic resources? How will this impact the poor?
- What is the IMF’s view on the 2023 Finance Act which included tax hikes that led to nationwide protests in July 2023?
- What is the IMF’s view on fuel subsidies in Kenya?
- What are the IMF’s views on Kenya’s international reserves and exchange rate?
- How is the program advancing the governance and anti-corruption agenda?
What are the objectives of the IMF-backed economic program?
Kenya faces multiple challenges, at a time when global conditions are weighing on economic activity and financial conditions have tightened.
Kenya’s reform program under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF) arrangements was approved by the IMF Executive Board on April 2, 2021, for 38 months and extended by 10 months on July 17, 2023 to allow sufficient time to implement the authorities’ reform agenda and to realize the program’s key objectives. The program was also augmented at the time of the fourth and fifth reviews to partially offset the impact of external shocks on the balance of payment and fiscal positions. In light of ongoing balance of payments pressures resulting from the challenging external environment, a further augmentation of about $941 million was approved on January 17, 2024, in the context of the sixth reviews of the program bringing total IMF funding under the program to about $3.9 billion.
The IMF-supported program aims to help Kenya reduce its debt vulnerabilities, strengthen its fiscal and external buffers, and address multiple challenges, such as the cost-of-living crisis, the impact of climate change, high levels of poverty and inequality, and exchange rate pressures.
These objectives will be achieved through a multi-year fiscal consolidation strategy that involves progressively raising tax revenues while ensuring equity and fairness, as well as carefully prioritizing spending, while protecting priority social and development spending.
The IMF-supported program also supports the government’s broader reform and governance agenda by addressing weaknesses in state-owned enterprises (SOEs), such as Kenya Power and Lighting Company and Kenya Airways; strengthening the country’s anticorruption framework (see examples below); bolstering the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) legal framework; and improving the efficiency of central bank operations.
What is the aim of the arrangement under the Resilience and Sustainability Facility (RSF)?
In addition to financing under the EFF/ECF arrangements, the Board approved on July 17, 2023 a request for an arrangement under the Resilience and Sustainability Facility (RSF) for SDR407.1 million (75 percent of quota; about $542 million at current exchange rate) to support Kenya’s ambitious efforts to build resilience to climate change. Of this, about $60 million was disbursed upon the completion of the first review of RSF on January 17, 2024.
Support under the RSF is expected to help advance Kenya’s adaptation and mitigation efforts, and to reduce the country’s vulnerability to climate related shocks. The authorities have identified high-quality reform measures across four priority areas, including: i) incorporating climate risks into fiscal planning and the investment framework; ii) mobilizing climate-related revenue, including carbon pricing reforms, while strengthening climate-spending efficiency; iii) enhancing the effectiveness of Kenya’s existing frameworks to mobilize climate finance; and iv) strengthening disaster risk reduction and management.
Financing under the RSF will also substitute for more expensive domestic financing, improving public debt dynamics, and help mobilize additional private climate financing.
What were the main findings of the 6th EFF/ECF reviews?
The sixth EFF/ECF reviews focused on a package of mutually reinforcing policies and reforms to cement macroeconomic stability, reduce the fiscal and external pressures and rebuild buffers. This package of policies aims at improving the country’s fiscal and debt position, maintaining price stability, increasing the central bank’s foreign exchange reserves, addressing governance concerns, restoring confidence to ensure effective access to the international bond markets, and advancing structural reforms to create a solid foundation for strong growth.
The review found that the Kenyan authorities have made good progress in implementing their economic reform program, despite a challenging external environment. This should help put the economy on track, to the benefit of the Kenyan people. Despite the good progress, urgent balance of payments needs have emerged, primarily due to the US$2 billion Eurobond maturing in June 2024 as prior expectation of a full rollover via a bond issuance at a reasonable cost is unlikely to materialize under the prevailing global bond market conditions. The additional IMF financing under the EFF/ECF program will alleviate part of this financing pressure.
The authorities exhibited prudent budget execution in FY2022/23 amid limited resources due to tight financing conditions (both external and domestic) and slower tax collections. The FY2023/24 budget targets a further reduction in fiscal deficit to help lower Kenya’s debt vulnerabilities. Plans for increasing fiscal revenues and reducing unproductive spending are being put in place, given heightened challenges and uncertainties.
For more details, please refer to the staff report of the sixth review (link when available)
What is the program doing to help ordinary Kenyans?
The flexibility built into the design of the IMF-supported program includes measures to protect the vulnerable and support Kenyans in the face of new challenges.
The program supports ongoing reforms in the National Safety Net Program (NSNP) to strengthen the foundation for effective implementation of social protection to accelerate poverty alleviation and human capital development outcomes by ensuring resources for social protection are adequate and safeguarded in the context of the Kenyan authorities’ fiscal efforts to reduce debt vulnerabilities. Reforms to the NSNP, supported by our sister organization, the World Bank, also aim at ensuring timely, secure, and predictable transfers to all beneficiaries enrolled in the program. The NSNP supports 1.4 million direct beneficiaries and approximately 5 million indirect beneficiaries through cash transfers.
A World Bank analysis suggests that by raising support per household to about Ksh.3,000 per month (one-quarter of average monthly expenditure by poor households), overall social assistance could be higher by 0.1 percent of GDP which could be financed through revenue recycling (i.e., using revenues raised from taxes).
The authorities are also strengthening fiscal controls to curtail wasteful spending, which together with improved tax revenues (see below), will create room for additional priority spending, including on social programs while they also provided temporary support, such as fertilizer subsidies and made provisions for smoothing the impact of price increases as fuel prices in Kenya were gradually brought in line with global levels.
Given Kenya’s vulnerability to climate shocks, reforms under the RSF to adopt the National Framework for Climate Services should help in strengthening disaster risk reduction and management through the dissemination of early warning information to vulnerable counties.
Kenya’s borrowing costs have increased—how is the program reducing debt vulnerabilities? Is Kenya’s debt sustainable?
Kenya's public debt remains sustainable underpinned by the government's ongoing policy measures and the prospects for strong growth, including in exports over the medium term. However, the high risk of debt distress remains, mainly from liquidity risks, and debt dynamics are vulnerable to fluctuations in exports, exchange rates, fiscal conditions, and natural disasters. Consequently, strict adherence to the program's objectives and the execution of structural reforms are imperative to preserve debt sustainability.
Public debt is estimated to have reached 73.2 percent of GDP in 2023 and is projected to gradually decline from 2025. Financing conditions for frontier markets like Kenya remain tight since central banks in advanced economies started raising interest rates to reduce inflation.
Reducing debt vulnerabilities is a central objective of the IMF-supported program. The path of fiscal consolidation under the authorities’ program aims to stabilize debt and subsequently put debt, as a share of GDP, firmly on a downward trajectory by the end of the program and toward the recent Parliament approved new debt anchor of 55 percent of Kenya’s gross domestic product (in present value terms) by 2029. This debt anchor will help to guide policies and increase public accountability.
In the near term, Kenya’s continued strong commitment to its IMF-supported program and the plan to reduce the fiscal deficit further in FY2023/24 is expected to continue to send a strong signal of the authorities’ determination to reduce debt risks. Financial support from the IMF and other development partners like the World Bank is provided at favorable terms as part of a borrowing plan that uses a judicious mix of concessional and commercial borrowing.
How is the country raising more domestic resources? How will this impact the poor?
The authorities are working towards broadening the tax base and strengthened tax administration to improve fairness and equity of the tax regime, and to ensure that those who owe taxes pay taxes. The revenues generated by this effort have so far provided important resources to support additional government spending aimed at protecting Kenyan households in the face of recent domestic and global shocks. These steps have also made it possible to support to communities afflicted by drought and floods, along with necessary fertilizer subsidies, as well as support to improve financial inclusion of the informal sector. Continued fiscal consolidation is also critical to reduce expensive debt and reduce external vulnerabilities, while mobilizing important resources to address Kenya’s developmental needs.
What is the IMF’s view on the 2023 Finance Act which included tax hikes that led to nationwide protests in July 2023?
We empathize with the very difficult economic conditions facing the people of Kenya, and we were deeply saddened that some protests became violent. The discontent reflected existing concerns about the rising cost of living, alongside efforts to remove fuel subsidies and increase in the electricity tariff. The events underscore the importance of more targeted social spending, after a careful assessment of the impact of the 2023 Finance Act on the vulnerable.
The FY2023/24 Budget and 2023 Finance Act go a long way to reduce Kenya’s debt vulnerabilities but there are tradeoffs. These are compounded by the challenging external environment, including tighter financing conditions and volatile international commodity prices.
These tradeoffs can be mitigated by protecting and enhancing social and development expenditures. In this regard, the authorities’ social initiatives, including the Financial Inclusion Fund (“Hustler Fund”), affordable housing, and the expansion of water infrastructure respond to these social needs.
What is the IMF’s view on fuel subsidies in Kenya?
Fuel subsidies are a) typically inefficient as they crowd out more productive government spending, b) poorly targeted because they benefit disproportionally those who are better off, and c) costly if increases in international fuel prices are not fully passed through into retail fuel prices for an extended period of time ).
Reforms of fuel subsidies are, therefore, essential to make better use of budgetary resources for pro-poor and development spending—including for education, health, and social protection. Reforms are also difficult given the need to raise awareness and public buy-in that they will benefit more from the reallocation of government spending than they will lose from the subsidy removal. Reform efforts must therefore focus on putting together credible packages of measures that are then used to build support for reform.
Given Kenya’s limited fiscal space, we welcome the authorities’ decision to remove fuel subsidies in early 2023 and support the ongoing efforts to improve targeted support to cushion the vulnerable from the increases in retail fuel prices. Any domestic fuel price stabilization effort at times of spikes in global prices should be temporary and in line with resources available in the Petroleum Development Fund that is set up for such purposes and financed through a levy.
What are the IMF’s views on Kenya’s international reserves and exchange rate?
Kenya’s reserves remain adequate although import coverage declined slightly in 2023 due to lower net external financing inflows before the expected gradual improvement from 2024 onward.
The augmentation of financing under the IMF-supported program that was approved at the conclusion of the sixth reviews in January 2024 will ease some pressures on official reserves, facilitate timely servicing of external debt, and help catalyze additional support from Kenya’s development partners.
A tight monetary policy stance and exchange rate flexibility help mitigate the pressures from global shocks, support competitiveness, and protect foreign exchange reserve buffers.
How is the program advancing the governance and anti-corruption agenda?
Promoting good governance remains an essential part of the IMF’s engagement with the Kenyan authorities. The authorities’ program contains specific commitments to protect public resources, enhance transparency and accountability to reduce corruption risks, and better manage SOEs.
Key elements include:
- In November 2023, the authorities published a new Ownership Policy for commercial state corporations (SCs). This policy introduces a revamped governance structure and legal framework that aligns with international norms, with the goal of enhancing performance and transparency. Key features include the centralization of ownership and oversight roles within the National Treasury, a clear explanation of the government's reasons for state ownership, the strengthening of the Boards of Directors' authority while protecting them from political interference, and the establishment of fundamental principles for SCs to fulfill public service obligations.
- Publication of beneficial ownership information for companies and additional measures, including through capacity building, to ensure public procuring entities continue to comply with the publication requirements.
- Strengthening efforts to follow-up on audit findings of the Auditor-General by promoting greater coordination among state bodies, including law enforcement agencies, enhancing monitoring capabilities, and improving public reporting.
- Addressing gaps in the AML/CFT legal framework as identified in the Kenya 2022 Mutual Evaluation Report. To this effect, the amendments to the AML/CFT laws entered into force in September 2023, revising several key pieces of legislation. Amendments introduce broadened powers for AML/CFT supervisors, preventive measures for terrorism financing, and new beneficial ownership-related provisions, including a definition of beneficial ownership and reporting, verification, and vetting requirements.