Press Release No. 23/171

IMF Reaches Staff Level Agreement with Kenya on the Fifth Reviews of the Extended Fund Facility and Extended Credit Facility Arrangements and the Resilience and Sustainability Facility

May 23, 2023

• IMF staff and the Kenyan authorities have reached staff-level agreement on economic policies and reforms to conclude the fifth reviews of Kenya’s ECF and EFF arrangements; extension of the program and augmentation of access under those arrangements; and reforms for access under a 20-month Resilience and Sustainability Facility.
• The economy has been strained by a challenging external environment. The planned fiscal consolidation is appropriate, while protecting priority social spending. Exchange rate flexibility and proactive monetary policy will remain critical to preserving macroeconomic stability and supporting market confidence against the backdrop of a challenging global economic outlook and continued uncertainty in international financial markets.
• The medium-term outlook for the Kenyan economy remains favorable. Advancing structural and governance reforms and sustaining efforts to build climate resilience, including by strengthening institutions to deliver and monitor Kenya’s ambitious climate agenda, will help support macroeconomic stability.

Washington, DC: A staff team from the International Monetary Fund (IMF), led by Haimanot Teferra, visited Nairobi during May 9 – 22, 2023, for the fifth reviews of Kenya’s economic program supported by the IMF’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF). The arrangements were approved by the IMF Executive Board on April 2, 2021 (see Press Release No. 21/98). Including augmentation at the time of the fourth reviews, these arrangements provide access to a total amount of SDR1.818 billion (about US$2.43 billion at current exchange rate). The mission also considered Kenya’s request for access under the IMF’s Resilience and Sustainability Facility (RSF) and further augmentation under the EFF/ECF.

At the conclusion of the mission, Ms. Teferra issued the following statement:

“The IMF team and the Kenyan authorities have reached staff-level agreement on (i) the fifth 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 75 percent of quota (SDR407.1 million, about US$544.3 million) given challenging global financing conditions; (iii) an extension of the duration of the EFF/ECF arrangements by 10 months to April 2025 to allow sufficient time for meeting the program objectives; and (iv) a new 20-month Resilience and Sustainability Facility (RSF) arrangement with access also of 75 percent of quota that will run in parallel with the EFF/ECF arrangements until April 2025.

“The agreement is subject to IMF management approval and consideration by the Executive Board, which are expected in July. Upon completion of the fifth reviews by the IMF Executive Board, Kenya would have immediate access to SDR306.7 million (about US$410 million), including from the augmentation of access under the ECF/EFF. This would bring total IMF financial support disbursed under the EFF and ECF arrangements to SDR1,509 million (about US$ 2,017 million). With the EFF/ECF augmentations and the RSF support, the total IMF commitment under these arrangements would be SDR2.633 billion (about US$3.52 billion).

“While the private sector has generally remained resilient, the Kenyan economy has been strained by a challenging environment. Real GDP growth remained robust at 4.8 percent in 2022 despite a contraction in agriculture as the country experienced the worst drought in decades. The government budget has been under pressure from shortfalls in revenue collection and challenging financing conditions. Inflation declined to 7.9 percent in April but remains above the target range. The functioning of the foreign exchange is gradually improving.

“The authorities have responded promptly to the challenges. On the fiscal side, government spending execution has been prudent this fiscal year, consistent with available resources. Moreover, the draft FY2023/24 budget submitted to Parliament proposes to further reduce the deficit from 5.7 to 4.1 percent of GDP, with significant new revenue measures consistent with the objective of reducing the ratio of debt to GDP. Monetary policy has also been tightened, with the central bank policy rate having been increased by 250 basis points over the past year.

“However, significant challenges remain against the backdrop of slow global economic growth and tight financial conditions . While agricultural output is expected to improve and food prices to come down on increased rainfall, the tighter fiscal and monetary environment to maintain macroeconomic stability will continue to weigh on growth in the year ahead. The budget targets for FY2023/24 will require careful control of commitments. Further actions to bring back liquidity to the interbank market for foreign exchange and support exchange rate flexibility is instrumental to secure effective market functioning and backstop the external position. It will also be important to make inroads on the agenda to reform state-owned enterprises and stop the drain on budget resources stemming from, among others, Kenya Airways and Kenya Power and Lighting Company. The policy actions underway in these areas will take some time to bear fruit but will support what remains a favorable medium-term outlook for the Kenyan economy.

“With a view to enhancing Kenya’s capacity to address challenges posed by climate change, the RSF will help bolster long-term structural climate resiliency and adaptation, while also strengthening macroeconomic stability as the economy transitions toward renewable energy. Building on Kenya’s commitments under the Paris Agreement, reforms under the proposed program will include integrating climate-related considerations into budget preparation and public investment frameworks, embedding management of climate risks, including in the financial sector, and enhancing early warning systems. These reforms are expected to catalyze climate finance.

“The staff team is grateful to the authorities for the candid and constructive discussions. The team met with President William Ruto; Cabinet Secretary for the National Treasury & Economic Planning, Prof. Njuguna Ndung’u; Governor of the Central Bank of Kenya (CBK), Dr. Patrick Njoroge; the Principal Secretary for the National Treasury, Dr. Chris Kiptoo; Deputy Governors of the CBK, Ms. Sheila M’Mbijjewe and Dr. Susan Koech; members of the National Economic Council; and other senior government and CBK officials. Staff also had productive discussions with a range of government agencies, the private sector, civil society organizations, and development partners.”