Transcript

Transcript of Virtual Media briefing on Kenya’s 7th and 8th Reviews Under the EFF/ECF and RSF Arrangements

November 4, 2024

Speaker: Haimanot Teferra, Mission Chief for Kenya, IMF

Moderator: Pavis Devahasadin, Communications Officer, IMF

Moderator: This is [an] on the record briefing on Kenya's seventh and eighth reviews under EFF/ECF and also review under [the] RSF. Without further ado, I would like to remind you that when you ask your question, please, if possible, turn on microphone and also turn on your video. That will be great. Ms Haimanot Teferra, Mission Chief for Kenya, will begin the session with brief remarks and then we go right into Q&A right away. The transcription of this press briefing will be posted on IMF.org later. We'll share you the link. With our further ado. Haimi, the floor is yours.

Ms. Haimanot Teferra, IMF Mission Chief for Kenya: Thank you, Pavis. Good morning. Good afternoon. Good evening, depending on where you are. So for this roundtable, really what I would like to say is that we had the Board meeting last Wednesday on the seventh and eighth review of the ongoing EFF/ECF-supported program and also the climate resilience facility, which is the RSF Resilience and Sustainability Facility, and review under that program as well. And under those two arrangements, the Board had approved a disbursement of $606 million. And all our reports are already now out on IMF's external website and available for public. So, I don't want to repeat what's in there. So, get to the floor and for questions. Thank you.

Moderator: All right. Well, thank you Haimi. Q&A starts now. If you could please raise your hand and turn on your camera and microphone and ask your question, I will be calling you. Any taker for the first question?

Questioner: So, I hope I'm audible to both of you. So, two questions from me. I think my first is we are coming up to just about six months to the end of the program. I do realize that Kenya has not met some of those targets if we are to look at structural benchmarks. And of course, any extension of this program would be conversations between yourself (IMF) and the Kenyan authorities. Perhaps would you recommend an extension from your end even before we get to those six months, noting that there's a lot of reforms you are seeing that have come along with the programs since approved in 2021? But again, the fear is what happens to all those reforms if Kenya is to terminate that program at the end of the review and call it a day. What happens to the reforms, though? Would IMF then recommended, maybe perhaps, along longer to complete some of those reforms that have, you know, either had delays and whatnot? So that would be my first question on whether IMF would see the scope for extension of the program. My second one is with regards to Kenya joining the IMF governance diagnostics program. I'd like to know what targets IMF sees that Kenya meeting and what would be the repercussions of failing maybe to enact some of the targets if you are part of the program? Thank you.

Moderator: Haimi, would you like to answer two questions now? On the possible extension of the program and governance diagnostics.

Ms. Haimanot Teferra: Sure. On the first question about the structural benchmarks that are not being met. One thing I want to say is, you know, for the seventh and eighth reviews, there were ten structural benchmarks. And we actually say one was met because this is the way we assess in the Fund is when things are made on time, by the scheduled timeline. Right. But in fact, what has happened is, even though many of them are not met by the scheduled timeline, out of the ten, only two were rescheduled. The rest has been implemented with significant delays. But still by the time we went to the Board, these were completed. There were a couple of them that became, in a way, outdated, that are related to the supplemental budget from last time. We know we said them. And really, I think there were a couple of them. So, in that sense, really, there were only two that were rescheduled to the next review. In terms of extension of the program, the issue [is] EFF program cannot be extended, because I think when we did the fifth review, we extended the program to the maximum that is feasible. So, under the current rule, we cannot extend it any further. And so that's what I would like to say. And, you know, the other reforms are under the RSF, but the RSF is as long as there is a new other program, it can continue - doesn't necessarily have to be canceled. Right. The recent changes to the RSF design allows for that. So that's what I would say. On governance diagnostics, I'm not really sure what your question is whether there are going to be targets. Really, the governance diagnostics is not necessarily a program conditionality. This is a request that came from the authorities in terms of thinking about how to address governance comprehensibly. It's a diagnostic, as the name implies, and it will identify as you know, where are the governance weaknesses in institutions that make those institutions susceptible to corruption. And then they will have recommendations. So, it is something that not only us, but all other development partners or even stakeholders within Kenya can look at and think about how to address, including the government. So, again, this is a process that takes eight [months] to a year to really put together several missions and identifying the team to do that. So that's what I would say. Hopefully, that would answer your question. Thank you.

Questioner: Two questions from me, Haimi. First is, if you look at the chart on quantitative performance criteria, December 2022 to December 2024. And you zero in on fiscal targets. I noticed a shift from tax revenue to ordinary revenue. All along have been using tax revenue. And I have struggled to make sense of this adjustment. And I would just like some clarity as to why that is the case. My second question piggybacks on what asked earlier. Now that we are very clear that the ECF/EFF cannot be extended because of course it has maxed out. What options are on the table? Would it be consideration of another Funded-program or a precautionary arrangement? Thank you.

Moderator: I would like to read the question [that] relates to what [was] just asked. "As a follow up to the question on what happens after the current arrangement run out, have the authorities initiated talks on what is next? If not, when can we expect discussion and what is next to start? "

Ms. Haimanot Teferra: So, let me first start with the QPC and I will come to the next, one of the next options. You were right that QPC; we have adjusted from tax revenues to ordinary. And so let me just quickly clarify. First, you know, every review gives us a chance to revisit any targets we set, but also the design of the program. And we have had many changes. Maybe sometimes the people do pay attention, like when it comes to, for example, the NRR target, also in terms of limiting the downward adjustments and things like that. So, it's in the same vein that we have looked at this. And one thing that came from the authorities consistently is that the tax revenues they take time - sometimes for them to introduce or to adjust because of the process that it takes. And they felt that ordinary revenues. But these are not what you call the AIA (Appropriations in Aid) because Appropriations in Aid are generally, are earmarked in a sense. Right. So, but there are others, tariffs and things like that, that would allow them, that also contributes to revenue - - that we should include that. When we look at the revenue base, tax revenues still remain a large part of that. But, providing them some wiggle room in a sense to include what they've asked is what we've done in a way. So still the tax revenues are part of that ordinary revenues. But if you look at the TMU, it's very clear that we exclude AIA, just to be clear. So, what is really included in the new QPC is things that are untaxed but are not earmarked, which is very small amount. It's just to give them a bit of wiggle room because they've asked for that. So that's the change that you see. But it's not in substance, it's not a significant change. And just to make sure that because we are not taking into account AIA as well.

On the next options -- what's the next plan? Again, you know, this is a discussion we will have to have with the authorities. They have indicated that they want to continue engagement with the Fund. In what form? Again, decision will have to come later on as we assess the situation. Whether we go with a funding or a precautionary. To go for a precautionary arrangement, the country cannot have present balance of payment. Unless the authorities are able to mobilize resources from others, the balance of payment needs will be there, [so] having a precautionary, the likelihood of that might be very limited. But again, this is something that we will have to take up on in the coming months as the program comes to an end.

Questioner: What's your comment on Kenya's talks with Abu Dhabi for a 1.5 billion loan in budgetary support?

Ms. Haimanot Teferra: Sorry. Can you say what do you mean by what is our [comment]?

Questioner: Would the IMF be opposed to Kenya raising this funding from the UAE?

Ms. Haimanot Teferra: On UAE. We don't really comment on individual loans or bilateral discussions. One thing we actually have a discussion whenever the authorities consider any type of loan is that given the debt vulnerabilities of Kenya, whatever they try to contract has to help bring down the debt, reduce the vulnerabilities, and bring down the debt dynamics. So, it's in that context that we're looking at, but also that's also very much dependent on what they managed to do on the fiscal framework. Their ability to strengthen the fiscal framework matters as much because that also tells us about their capacity to service this debt. In the report that we've published, the Debt Sustainability Analysis, clearly shows that debt vulnerabilities have increased, particularly on the external debt side. Also, you see that the debt service to export and revenue ratios have worsened. So, in that context, any anything that makes this worse becomes a problem very soon, given where Kenya's debt situation is. So, we look at it in that context. And to the extent that any loans address the vulnerabilities, I think it is fine for any loans that they get can be used to retire a more expensive loan. For example, if the UAE terms are better than an existing expensive loan and they use those to retire the more expensive loans, I think that that also something that we think it's a good idea. But if they are borrowing on a very expensive loan to finance budget, then it becomes [or[makes things worse. So, we have to balance it in that sense, thinking about exactly what it is used for, what are the terms, and how does it improve then the debt dynamics that currently Kenya has. Thank you.

Moderator: Next question. Any taker? Please go ahead.

Questioner: So, I think for me is the way forward, and I think the IMF did mention that revenue raising method becomes the best way to discuss the inability of the budget cuts. And you did highlight some of those spending pressures we've seen - that some carryovers from the last financial year, there are also negotiations into collective bargaining agreements with a big part of the civil service. And also, you also did note some funding around health and in education. In terms of going forward, we already seen that tax [inaudible] amendment bill that's now proposed mentioned in your report, and we also know sometime next year you should see a new finance bill, Finance Bill in 2025. In the context of the developments that we did see around June, July, with that injection of the new taxes, I know you speak about a very delicate balance in how you push tax reforms. And again, noting [inaudible] the tax [inaudible] amendment very much mimic the same or almost like-for-like some of those recommendations that existed before, do you see the government this time around having some success in getting that? I think the World Bank has talked about political capital. I don't know the terms you might have. Do you feel the government now has some leverage in terms of pushing through these reforms this time? [inaudible]

Ms. Haimanot Teferra: Frankly, I think the judgment is for the authorities to make that. They know that the social and political context they operate in. I think at the end of the day, what is very important is when we're talking about revenue mobilization, we're not always talking about raising taxes. I think there's always this misunderstanding that when we're talking about revenues means raising taxes. Frankly, I think Kenya has some scope in terms of broadening the base. There are quite significant revenues that are lost to the tax expenditures. There are some that they need to be protected, but I think they need to revisit that. And this is really also part of their Medium-Term Revenue Strategy. It's out there that the sequencing of tax matters. So, I think it's making the system more efficient and making sure that it's an equitable, progressive [system], but also everybody also doing their part will be very important. And as part of that [is] also public - the government has to show more accountability and transparency in terms of public finance. Because that's when people will understand why revenue mobilization is important, why the government's role in terms of delivering public services is needed, while also servicing the debt that has been accumulated over the years as well. So, it is a delicate balance, but at the end of the day, they felt that this is the right time to go back to the public, identifying measures where they felt that they will have acceptability. And we will have to see; it has to go through the consultation process. And what is required to see the outcome.

Questioner: I have heard you say you see room for broadening the tax base. I know already we've seen the strain. Which are areas do you see as providing adequate potential for broadening the tax base apart from what you've stated, accountability in also the use of public resources?

Ms. Haimanot Teferra: I don't want to go into [the] details. I mean, I will tell you, for example, I'll reference to you the MTRS. MTRS has all the areas because it's much more detailed. That's one place. Also, I would reference to you what the selected issues paper we published last January, which really looks at Kenya in the context of the EAC; why the tax revenues have been declining and really where the base has been shrinking and why. Right. So, I mean, those are it's out in the public. I think I would read the reference to you rather than going through a detailed analysis. But there is already analysis out there. They know what it is and that it would require really rethinking. And, in fact, what's very important also when it comes to any type of revenue mobilization is policy predictability is very important. So, start thinking ahead and planning and communicating two, three years ahead is very important. The MTRS is supposed to do that. But the sequencing of that is also very much important. So, I think that's what I can say.

Questioner: I was privileged to attend the IMF meetings and there was a lot of debate about equity and bringing Africa to the table. Actually, we saw the extra seat that sees representation from Africa.  Today, I don't know whether you got wind of comments from our finance minister who felt that we were not treated with a lot of dignity during those those meetings. Do you have anything to say to that?

Ms. Haimanot Teferra: I think, frankly, the headlines don't do justice to what he was saying. Frankly, what he was saying is it is embarrassing to go and ask for money when we have the capacity to mobilize the resources we need in Kenya to meet our financing needs. I think I would rather focus on that than some of the headlines decided to pick on. But really the substance of what he was saying is something I also myself agree - that Kenya does have the capacity to mobilize the resources. Really, what we are doing here at the Fund, or the program, is to give them the bandwidth [and] the time they need while they are doing that. So, I think that's what I would say.

Questioner: I don't know whether you have any sort of comments on whether he can see any tangible impact in terms of Africa's case being made at the IMF, following the creation of that third seat on the Executive Board. Just a follow up to that, what do you expect or what you can expect from the fact that the region now has more representation on that Board?

Ms. Haimanot Teferra: I mean that's not really for me as a Kenya mission chief to have to say. But one thing I will tell you is this is a long time coming. This has been a request of the idea that the African finance ministers and governors, as far back as, I don't know, 2008/2009. So, I think it's a major milestone to have a voice and representation at the Board, another chair for the region.

Moderator: On that issue, we could come back to you with more information, or you can send queries to me and to the team who works on that aspect of the addition to the Board. We have a couple of minutes left. One or two. Any two-hander for those who still have questions. In the meantime, I can also send the Select Paper that Haimi mentioned earlier - the Select Paper from January. I will send that for your background in term of the room, how to make the system more efficient. I think that paper discusses that, and I'll send everyone around for background. Final question. I think I saw your hand briefly. You want to come back in?

Questioner: Just want to come back on one. This is more for context because that is that bit of more details on that report. And this regards to the revision in terms of the phasing of the remaining access and also the total access. Of course, following discussions with authorities, we agreed to come back to no more than 40% of the quota. And that is well explained in terms of the reasoning. I was just curious in terms of the discussion. How did that discussion go in that we would speak to the extraordinary access from the IMF? But at the same time, we are also seeking some external financing, some of which might be commercial linked. [We had] that question on the UAE. [inaudible]. I'm just wondering on the IMF's side, in terms of agreeing to it, I would think that we feel as much as we can come back and give it relatively to any commercial loan entity [inaudible]

Moderator: I think you're breaking up a little bit. Would you like to repeat?

Questioner: Yeah, pretty sure. I hope I'm not breaking now. I can take that again.

Moderator: It's better. It broke up. I think a few last sentences that you were saying.

Questioner: It's just understanding why perhaps that discussion led in a way of reducing our access from the IMF. Well, you know, we are still in the hunt for external financing, some of it being commercial, while perhaps retaining the above normal access would still keep us within closer to concessional terms vis-a-vis going for, you know, a Eurobond or UAE loan that might be closer to a 10% coupon perhaps.  What was the context of that discussion? And where perhaps did Kenya and the IMF agreed to, you know, limiting that to normal access while there's a scope for more.

Ms. Haimanot Teferra: Look, first, IMF lending is grounded on balance of payment need. We normally do balance of payments support, not a budget support. Any budget support has to be also grounded in balance of payment. When we approved exceptional access because it had implication on the balance of payment need coming from the Eurobond maturing. So, when we don't have that exceptional financing need, where the balance of payment has improved significantly, where the exchange rate has stabilized, and reserves have built up, that exceptional balance of payment need is no longer there. So, we cannot make a case when there is one just on the basis of budget need. Budget need by itself does not translate into a Fund financing. Just to be clear. Okay. So it is in that context that we look at the external sustainability. In fact, many times our lending in the past, more and more recently is only to the budget. But our really lending is usually to CBK to boost the external buffers and reserves. Right. So anyway, that is what I would say and not doing a budget financing.

Moderator: Thank you, Haimi, for that very important clarification. I think we are at time. We'd like to thank everyone for being here joining this conference. If you have any further questions, just let me know. Again, the transcript of this press briefing will be posted online later. In any case, I would like to say thank you for keeping engaging with us. I think it's important for us to work with you forward. And Haimi you have any parting note you would like to say?

Ms. Haimanot Teferra: Just to say thank you for your questions. And we remain engaged and will continue to provide, from time to time, information as things progress. Thank you.

Moderator: Thank you, everyone. Have a good evening and a good day.