Press Release No. 24/12

IMF Executive Board Concludes 2023 Article IV Consultation, Sixth Reviews of the Extended Arrangements Under the EFF and ECF Arrangements, and First Review Under the Resilience and Sustainability Facility Arrangement for Kenya

January 17, 2024

• Performance under the EFF/ECF arrangements is broadly aligned with the program’s objectives, while the RSF arrangement is supporting the authorities’ climate agenda.
• Steadfast implementation of the package of mutually reinforcing policies and reforms is the key to maintaining macroeconomic stability, strengthening debt sustainability, and building buffers against shocks.
• Near-term policy responses should complement measures needed to bolster Kenya’s medium-term prospects toward a vibrant, inclusive, green, and market-driven economy.

Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded today the 2023 Article IV consultation [1] with Kenya together with the sixth reviews and augmentations of access (SDR707.27 million, about US$941.2 million) under the extended arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF), approved in April 2021 and extended by 10 months in July 2023 to April 2025, and the first review under the 20-month Resilience and Sustainability Facility (RSF) arrangement, approved in July 2023.

The Board’s decision allows for the immediate disbursement of SDR469.25 million (about US$624.5 million) under the EFF/ECF arrangements - which includes an augmentation of access of SDR233.40 million (about US$310.6 million) - and brings total disbursements under the EFF/ECF arrangements to SDR1,978.23 million (about US$2.6 billion). The decision also allows for an immediate disbursement of SDR45.23 million (about US$60.2 million) under the RSF arrangement.

In completing the reviews, the Executive Board also approved modification of program conditionalities, waivers of nonobservance of the continuous performance criterion on no new accumulation of external arrears and the end-June 2023 and end-December 2023 tax revenue targets considering the corrective actions taken by the authorities, and waiver of applicability for all other end-December 2023 performance criteria.

The Kenyan economy remains resilient against a challenging global backdrop even as it recovers from the legacy of the COVID-19 pandemic and the worst multi-season drought over the past two years. The economy expanded by 5.6 percent y/y in the first nine months of 2023, driven by a strong recovery in agriculture which also helped lower both overall and food inflation. Non-agricultural growth, however, slowed amid tighter policies. Fiscal consolidation continued, delivering a stronger primary balance than originally envisaged in FY2022/23, while monetary policy was tightened by 375 basis points in 2023. The external current account balance has improved as real exchange rate depreciated and imports contracted. Exports and remittances remained resilient. While foreign exchange reserves remain adequate, they declined in the second half of 2023 amid debt service payments and limited external financing inflows.

The near-term outlook is one of continued resilience with growth projected at around 5 percent in 2024 amid ongoing adjustments in the fiscal policy and external accounts. Inflation is expected to inch up in the first half of 2024, driven primarily by global oil price volatility and exchange rate passthrough, but to remain contained due to the recent monetary policy tightening and as the authorities strive to deliver a stronger fiscal consolidation to stabilize the overall public debt/GDP in 2024. Notwithstanding the elevated downside risks in the near term, the authorities should be resolute in their actions to help keep confidence anchored.

Kenya’s medium-term prospects are positive and could be buttressed by improving competitiveness, inclusivity, and enhancing governance and anti-corruption framework to support a vibrant and market-driven economy. Progress on the authorities’ climate agenda, including RSF-supported reforms, will not only prepare the country well against future climate shocks, but also help attract climate finance to support these further efforts.

At the conclusion of the Executive Board’s discussion, Ms. Antoinette Sayeh, Deputy Managing Direction and Acting Chair, issued the following statement:

“Kenya’s growth remained resilient in the face of increasing external and domestic challenges. The EFF/ECF and RSF arrangements continue to support the authorities’ efforts to sustain macroeconomic stability, strengthen policy frameworks, withstand external shocks, push forward key reforms, and promote more inclusive and green growth.

“Kenya’s performance under the ECF/EFF arrangements have been mixed with adherence to quantitative targets being broadly satisfactory. The authorities have made welcome progress in some key areas, including governance and public financial management. Continued implementation of corrective measures to address missed targets and accelerated reforms will be important.

“The authorities’ commitment to fiscal consolidation while protecting essential social and developmental spending should support efforts to bring down the debt burden toward the new debt anchor of 55 percent of GDP in present value terms by 2029. Implementation of the Medium-Term Revenue Strategy would be key to reverse the erosion in the tax base while promoting equity and fairness in the tax regime and create more space for spending to improve public services. Risks to planned fiscal consolidation should be monitored and contingency plans promptly activated as needed. Effective communication of fiscal policy objectives would support efforts at easing financing pressures.

“Monetary policy has demonstrated its ability to react to inflation shocks and anchor expectations. The Central Bank of Kenya should continue to act decisively to ensure that inflation converges firmly to the target. Strengthening of the monetary policy framework would support price stability and external sustainability. The exchange rate should be allowed to respond flexibly to market conditions. Recent measures at facilitating greater exchange rate flexibility should help ease FX market dysfunction and support a buildup of FX reserves. The banking system is generally sound, but emerging vulnerabilities need close monitoring.

“Unlocking Kenya’s potential and realizing its positive medium-term prospects will require resolute efforts at sustaining structural reforms to support more job creation, poverty reduction, and making the economy greener and more resilient. To this end, boosting export competitiveness; addressing weaknesses in governance and the anti-corruption framework, including on AML/CFT; and improving resilience to climate shocks by further strengthening Kenya’s track record in promoting climate risk considerations in fiscal planning and the investment framework, improving disaster risk management, and attracting more climate finance will be important.”

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They positively noted the resilience of the Kenyan economy despite the ongoing fiscal and external adjustments in a challenging environment. While welcoming the authorities’ commitment to program objectives and the corrective actions taken, Directors noted that program performance has been mixed and called for strengthened implementation going forward. Noting the significant program risks, repeated augmentation requests and difficult market conditions, they underscored that a steadfast implementation of mutually reinforcing prudent policies and reforms, supported by contingency planning, capacity development, and effective communication, remain crucial to build market confidence, reduce poverty and sustain growth. Collaboration with development partners is also paramount, including in Kenya’s financing strategy. Directors generally noted that the assessment of the exceptional access criteria rests on strong program ownership given the highly uncertain environment.

Directors emphasized the importance of further front‑loaded fiscal consolidation efforts to mitigate debt vulnerabilities and to achieve Kenya’s new debt anchor by 2029. In this context, they stressed the need for continued fiscal prudence, supported by domestic revenue mobilization and expenditure rationalization. Strengthening social safety nets and improving efficiency of investment are also crucial. On tax collections, Directors expressed concerns over recent shortfalls and called for urgent implementation of corrective measures, including timely adoption of measures in the Medium‑Term Revenue Strategy. They also reiterated the need for managing fiscal risks proactively including from pending bills and contingent liabilities. Directors encouraged further strengthening of debt management capacity.

Directors welcomed the recent monetary policy tightening to keep inflationary expectations anchored and safeguard external sustainability. They also positively noted efforts to enhance the effectiveness of the monetary policy framework and the efficient functioning of financial markets. Actions towards greater exchange rate flexibility are also important. In that context, Directors encouraged continued institutional and technical reforms targeted at improving the functioning, deepening, and transparency of the FX market. Acknowledging the generally sound condition of the banking system, they underscored the importance of closely monitoring and addressing any emerging financial sector vulnerabilities.

Directors called for fast‑tracking structural reforms to enhance export competitiveness, strengthen public financial management and the state corporations, and address weaknesses in governance and the anti‑corruption framework, including on AML/CFT.

Directors commended Kenya’s progress in reforms supported by the RSF arrangement, encouraged efforts at garnering additional climate finance, and welcomed mainstreaming of gender in climate‑change reforms for inclusive growth and supporting the green transition.

It is expected that the next Article IV consultation with Kenya will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.