Press Release No. 24/213

IMF Reaches Staff-Level Agreement with Kenya on Seventh Reviews of the Extended Fund Facility and Extended Credit Facility Arrangements and the Second Review Under the Resilience and Sustainability Facility

June 11, 2024

• IMF and the Kenyan authorities have reached a staff-level agreement on a set of comprehensive policies and reforms needed to complete the seventh reviews of Kenya’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements and the second review under the Resilience and Sustainability Facility (RSF) arrangement.
• Key policy actions entail corrective measures to safeguard debt sustainability, including measures underpinning the FY2024/25 budget to reverse the impact from the fiscal slippage in FY2023/24.
• The medium-term outlook remains favorable predicated on advancing reforms to boost exports and fiscal revenues, rebuild buffers, and strengthen the economy’s ability to withstand external shocks. Structural and governance reforms and sustaining efforts to enhance resilience, including to climate shocks, will also help support macroeconomic stability.

Washington, DC: An International Monetary Fund (IMF) team, led by Ms. Haimanot Teferra, held discussions with the Kenyan authorities in Nairobi during April 2-12 and May 9-15, 2024. The mission continued virtually to finalize key technical aspects of the agreement, including recalibrating access to IMF resources to align more closely with Kenya's current needs following its access to the international bond markets earlier this year.

Upon completion of the seventh review of Kenya’s economic program under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements (see Press Release 21/98), if approved by the IMF’s Executive Board, the total remaining access will be adjusted to 135.55 percent of quota (SDR735.77 million, about US$976 million) which will also include a proposed recalibration of 21.67 percent of quota in access (SDR117.6 million, about US$156 million) toward the zero-interest concessional resources under the ECF arrangement. This will bring the total IMF financial commitment during the duration of the EFF/ECF program to SDR2.71 billion (about US$3.60 billion). In addition, the completion of the second Review under the Resilience and Sustainability Facility (RSF), approved on July 17, 2023, would unlock SDR90.46 million (about US$120 million).

Today, Ms. Teferra issued the following statement:

“The IMF team and the Kenyan authorities have reached a staff-level agreement on a comprehensive policy package needed to complete the seventh reviews of Kenya’s economic program under the EFF/ECF arrangements and the second review of the RSF arrangement. The policy package seeks to preserve debt sustainability and price stability, manage fiscal risks, address financial sector vulnerabilities, and AML/CFT deficiencies while continuing to advance structural reforms to support inclusive and resilient growth. In view of Kenya’s buyback of a significant share of the 2024 Eurobond using proceeds from a new issuance, which alleviated near-term exceptional balance of payment needs, staff and the authorities agreed to bring cumulative access under the EFF/ECF arrangements within the normal limits and a recalibration of access towards the more concessional financing under the ECF, consistent with the Fund’s policy on blended access. The agreement is subject to approval by the IMF’s Executive Board.

“Growth recovered in 2023 with real GDP growing by 5.6 percent, supported by a strong recovery in agriculture and resilience in the services sector following the return of rains after the severe droughts in 2021-22. However, the unfortunate losses of lives, displacement of people, and destruction of infrastructure and agricultural land from the recent floods have strained resources and highlighted the urgent need for comprehensive disaster risk management as well as support from both national and international stakeholders to respond to the immediate needs and to rebuild a more resilient infrastructure. Headline inflation has decelerated to 5.1 percent in May 2024, aided by lower food prices, stabilization of fuel pump prices, appreciation of the exchange rate, and base effects from last year’s electricity tariff adjustments. However, core inflation remains persistent. Refinancing risks associated with the June 2024 Eurobond have dissipated following a successful partial buyback from the proceeds of a new Eurobond issuance in February. Sovereign spreads have returned to mid-2022 levels. Improved market sentiment has fostered a recovery in net capital inflows and contributed to the appreciation of the shilling.

“Despite these positive developments, a significant shortfall in tax revenue collection and deterioration in the primary fiscal balance in FY2023/24 relative to program targets is expected to keep domestic borrowing needs elevated. As a result, interest payments have increased, putting pressure on public debt even after the latter benefited from a strengthened shilling.

“A sizable and upfront fiscal adjustment in FY2024/25 will be needed to correct the course. To this end, the authorities have taken decisive steps towards fiscal consolidation by introducing several measures in the context of the draft 2024/25 Budget and the 2024 Finance Bill. Importantly, the latter centers on measures to broaden the domestic tax base, through rationalization of various tax expenditures, in line with recommendations in the Medium-Term Revenue Strategy. Enhancing tax compliance and increasing the efficiency of expenditures through public expenditure and wage bill reforms, state-owned enterprise restructuring, rationalizing unproductive current spending, and better targeting of subsidies and transfers while ringfencing social and development spending will be key to enhancing the credibility of the consolidation strategy in FY2024/25 and the medium term. Additionally, the social safety nets and the fiscal risk management framework need further strengthening.

“Steadfast implementation of a comprehensive package of mutually reinforcing policies is crucial to maintaining macroeconomic stability, ensuring debt sustainability, bolstering market confidence, achieving the program's objectives, and enhancing Kenya's medium-term prospects. This would also help maintain favorable inflation differentials with trading partners, boost export competitiveness, and mitigate balance of payments pressures.

“The Central Bank of Kenya’s (CBK’s) tight monetary policy stance aimed at anchoring inflation expectations towards its target rate is welcome. The CBK's initiatives to enhance the functionality of the foreign exchange (FX) and money markets have contributed to improved liquidity and better functioning of these markets while CBK’s efforts to build FX reserves will strengthen external buffers. Exchange rate flexibility and further efforts to develop and improve functioning of the FX market would continue to reduce the costs to the real economy from large spreads and excess FX demand, while encouraging capital inflows and reducing outflows. Efforts to strengthen financial sector regulation, supervision and the macroprudential policy framework will be key to reducing financial sector risks.

“The mission welcomed the authorities’ efforts towards increasing the effectiveness of Kenya’s AML/CFT regime and focusing on shortcomings identified in Kenya’s action plan with the FATF, including strengthened risk-based supervision of high-risk sectors. Staff encourages robust coordination among all relevant stakeholders to ensure a comprehensive understanding of ML/TF risks[1] and a targeted approach to combating financial crimes.

“Progress on the climate agenda under the RSF remains strong. The reforms will also create a conducive environment for attracting climate finance. Efforts are underway to scale up access to global climate funds and to leverage private climate finance through various channels, including working with development partners on design of a green climate fund aimed at financing climate-related investments at the local government level and a Sustainable Development Bond.

“The staff team is grateful to the authorities for their hospitality and candid and constructive discussions and reaffirms the IMF’s support for the government’s efforts to implement its economic reform agenda.”

[1] Money Laundering and Terrorism Financing