Abstract
IMF Country Report No. 22/232
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IMF Country Report No. 22/232
KENYA
THIRD REVIEWS UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY AND UNDER THE ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY, REQUESTS FOR MODIFICATION OF QUANTITATIVE PERFORMANCE CRITERIA, AND WAIVER OF APPLICABILITY FOR PERFORMANCE CRITERIA—PRESS RELEASE; STAFF REPORT; STAFF STATEMENT; AND STATEMENTS BY THE EXECUTIVE DIRECTOR AND BY STAFF REPRESENTATIVE FOR KENYA
July 2022
In the context of the Third Reviews Under the Extended Arrangement Under the Extended Fund Facility and Under the Arrangement Under the Extended Credit Facility, requests for modification of quantitative performance criteria, and waiver of applicability for performance criteria, the following documents have been released and are included in this package:
A Press Release including a statement by the Acting Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 18, 2022, following discussions that ended on April 22, 2022, with the officials of Kenya on economic developments and policies underpinning the IMF arrangements under the Requests for an Extended Arrangement Under the Extended Fund Facility and an Arrangement Under the Extended Credit Facility. Based on information available at the time of these discussions, the Staff Report was completed on June 29, 2022.
Staff Statement
Statements by the Executive Director for Kenya
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
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Press Release
PR22/266
IMF Executive Board Completes the Third Reviews of the ECF and EFF Arrangements for Kenya Providing a US$235.6 Million Disbursement
FOR IMMEDIATE RELEASE
The IMF Executive Board completed the Third reviews under the EFF/ECF arrangements with Kenya, providing the country with access to SDR 179.13 million (about US$235.6 million).
A strong recovery is underway, although global shocks due to spillovers from the war in Ukraine are creating new spending needs and adding to inflation pressures through rising global fuel, fertilizer, and food prices.
Kenya’s program is delivering resilience by helping the country navigate these global shocks while still meeting the authorities’ targets and continuing to make progress in addressing debt vulnerabilities.
Washington, DC – July 18, 2022: The Executive Board of the International Monetary Fund (IMF) today completed the Third reviews under the 38-month arrangements under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements. The Board’s decision allows for an immediate disbursement of SDR 179.13 million (about US$235.6 million), usable for budget support, bringing Kenya’s total disbursements for budget support so far to about US$1,208.2 million.
Kenya’s EFF/ECF arrangements for a total of SDR 1.655 billion (305 percent of quota or about US$2.34 billion at the time of program approval on April 2, 2021, see Press Release 21/98) aim to support Kenya’s program to address debt vulnerabilities, the authorities’ response to the COVID-19 pandemic and global shocks resulting from the war in Ukraine, as well as to improve governance and support broader economic reforms.
Kenya’s economy has rebounded strongly in a challenging environment and is projected to grow 5.7 percent in 2022. Inflation moved above the Central Bank of Kenya’s (CBK) official target band of 2.5 percent to 7.5 percent in June and is expected to peak this year before easing back within the band in early 2023. Downside risks predominate in the near-term. Uncertainties stem from the war in Ukraine, continuing drought in the semi-arid regions, unsettled global financial market conditions and the political calendar. But Kenya’s medium-term outlook remains favorable.
The very strong tax performance seen in fiscal year 2021/22 has created fiscal space to temporarily cushion part of the impact of rising international fuel prices on households and businesses while still meeting program targets. The program targets agreed at the Second Reviews also accommodated emergency spending needs for drought in the semi-arid regions and security. The approved fiscal year 2022/23 budget broadens tax collection and maintains caref ul expenditure control while protecting social spending.
Kenya’s structural reform agenda, focused on improving governance, has advanced despite some delays. Oversight of state-owned enterprises is being reinforced. New tender documents will allow achieving the longstanding goal of publishing beneficial ownership inf ormation of successful bidders for public procurements. An ongoing audit of COVID-19 vaccine spending and the recently completed comprehensive audit of FY2020/21 spending with a focus on COVID-19 spending will improve transparency and enable follow-up by enf orcement agencies and other stakeholders.
At the conclusion of the Executive Board’s discussion, Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair, stated:
“Kenya’s economic program supported by the Fund’s Extended Fund Facility and the Extended Credit Facility arrangements is providing an essential policy anchor to debt sustainability and public confidence. Despite the resilient economic recovery, the program remains subject to downside risks, including from deeper disruptions from the war in Ukraine, unsettled global market conditions, and an increase of food insecurity. In this context, the authorities’ continued steadfast commitment to prudent policies and advancing structural ref orms remains essential to maintain macroeconomic stability and safeguard Kenya’s positive medium-term prospects.
“Strong fiscal performance is providing a welcome resilience. Although the authorities are adjusting domestic fuel prices to international levels more gradually, program targets are still being met thanks to strong tax revenues. Nevertheless, more targeted programs to support vulnerable households should accompany the ongoing review of the fuel pricing mechanism and plans for reforms to ensure that pricing actions are always aligned to the approved budget. Looking ahead, the authorities should sustain their fiscal consolidation efforts to reduce debt vulnerabilities, while securing space for needed social and development spending. This requires further improving spending efficiency and undertaking additional tax policy and revenue administration measures drawing from the forthcoming Medium-Term Revenue Strategy.
“The Central Bank of Kenya’s (CBK) recent monetary policy tightening is welcome. The CBK should stand ready to continue to adjust its stance to limit second-round effects from higher food and fuel prices and to keep inflation expectations well-anchored amid a temporary increase of inflation above the target band. The f lexible exchange rate functioned as a shock absorber during the pandemic and should continue to do so against current global shocks, with forex interventions limited to addressing excessive volatility.
“Maintaining the momentum in the authorities’ structural reform agenda is critical. Building on the ongoing efforts to improve the oversight of state-owned enterprises, it is essential to advance the restructuring of Kenya Airways and restore the long-term viability of Kenya Power and Lighting Company. Further improvements in the anti-corruption framework and the AML/CFT agenda as well as an effective follow-up of expenditure audits are needed to enhance transparency and accountability.”
Kenya: Selected Economic Indicators, 2021—2024
Based on fiscal year (i.e., 2021 represents 2020/21).
Kenya: Selected Economic Indicators, 2021—2024
| 2021 Prel. | 2022 Proj. | 2023 Proj. | 2024 Proj. | |
|---|---|---|---|---|
| Output | ||||
| Real GDP growth (%) | 7.5 | 5.7 | 5.3 | 5.5 |
| Prices | ||||
| Inflation - average (%) | 6.1 | 7.3 | 6.9 | 5.1 |
| Central government finances (fiscal year)1 | ||||
| Revenue (% GDP) | 16.0 | 17.5 | 17.2 | 17.7 |
| Expenditure (% GDP) | 24.2 | 25.4 | 23.2 | 22.2 |
| Fiscal balance (% GDP) | -8.2 | -7.8 | -5.9 | -4.4 |
| Public debt (% GDP) | 67.8 | 70.2 | 70.4 | 68.7 |
| External debt (% GDP) | 35.3 | 36.3 | 36.7 | 35.9 |
| Money and Credit | ||||
| Broad money (% change) | 6.1 | 9.7 | 13.4 | 12.1 |
| Credit to private sector (% change) | 8.6 | 12.1 | 13.8 | 12.7 |
| Policy rate, end of period (%) | 7.0 | … | … | … |
| Balance of payments | ||||
| Current account (% GDP) | -5.5 | -5.9 | -5.5 | -5.3 |
| Reserves (in months of imports) | 4.4 | 3.9 | 4.2 | 4.2 |
| Exchange rate | ||||
| REER (% change) | -2.7 | … | … | … |
Based on fiscal year (i.e., 2021 represents 2020/21).
Kenya: Selected Economic Indicators, 2021—2024
| 2021 Prel. | 2022 Proj. | 2023 Proj. | 2024 Proj. | |
|---|---|---|---|---|
| Output | ||||
| Real GDP growth (%) | 7.5 | 5.7 | 5.3 | 5.5 |
| Prices | ||||
| Inflation - average (%) | 6.1 | 7.3 | 6.9 | 5.1 |
| Central government finances (fiscal year)1 | ||||
| Revenue (% GDP) | 16.0 | 17.5 | 17.2 | 17.7 |
| Expenditure (% GDP) | 24.2 | 25.4 | 23.2 | 22.2 |
| Fiscal balance (% GDP) | -8.2 | -7.8 | -5.9 | -4.4 |
| Public debt (% GDP) | 67.8 | 70.2 | 70.4 | 68.7 |
| External debt (% GDP) | 35.3 | 36.3 | 36.7 | 35.9 |
| Money and Credit | ||||
| Broad money (% change) | 6.1 | 9.7 | 13.4 | 12.1 |
| Credit to private sector (% change) | 8.6 | 12.1 | 13.8 | 12.7 |
| Policy rate, end of period (%) | 7.0 | … | … | … |
| Balance of payments | ||||
| Current account (% GDP) | -5.5 | -5.9 | -5.5 | -5.3 |
| Reserves (in months of imports) | 4.4 | 3.9 | 4.2 | 4.2 |
| Exchange rate | ||||
| REER (% change) | -2.7 | … | … | … |
Based on fiscal year (i.e., 2021 represents 2020/21).
Title page
KENYA
THIRD REVIEWS UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY AND UNDER THE ARRANGEMENT UNDER THE EXTENDED CREDIT FACILITY, REQUESTS FOR MODIFICATION OF QUANTITATIVE PERFORMANCE CRITERIA, AND WAIVER OF APPLICABILITY FOR PERFORMANCE CRITERIA UNDER THE ARRANGEMENT UNDER THE EXTENDED FUND FACILITY
June 29, 2022
EXECUTIVE SUMMARY
Context. Kenya’s economy has been rebounding strongly in a challenging environment. Global shocks from the war in Ukraine and related trade disruptions—alongside more challenging financing conditions for frontier markets due to a normalization of monetary policy in advanced economies—will impact the external position in the near term. Inflation is set to increase, albeit temporarily, with the pass-through of global price shocks. Domestically, shortfall in rains and the continuing drought in the semi-arid regions are adding to uncertainties and pressuring vulnerable groups. The authorities view their IMF-supported program as a key policy anchor in the face of these shocks. While surging global fuel prices have made containing the cost of recently granted fuel subsidies urgent, Kenya’s strong fiscal performance provides scope to cushion the adjustment to these shocks without exceeding program deficit targets. Strong performance of tax revenues is a key driver of this resilience. Policy tradeoffs will remain difficult, however, heading into August elections.
Program performance. All quantitative performance criteria (PCs) and one of the two indicative targets (ITs) for end-December were met comfortably. The IT on social priority spending was missed on a brief delay in executing some wage payments. One of four structural benchmarks (SBs) was met, while others saw delays. A supplementary FY2021/22 Budget consistent with the program objectives was submitted to parliament (end-January SB). The SB on adoption of new tender documents to enable the publication of beneficial ownership information for awarded tenders (end-March) was implemented with delay in April. Submission of a FY2022/23 Budget consistent with the program objectives (end-April) was implemented with delay as some tax-enhancing measures were submitted in May and June. The end-May SB on publication of a forensic audit of COVID-19 vaccine spending up to June 2021 and a comprehensive audit of expenditures in FY2021/22 with a chapter on COVID-19 spending was not met and ongoing audits likely will be completed by end-June and published by mid-July.
Requests. The Kenyan authorities request a) waiver of applicability for the end-June 2022 PCs for the Extended arrangement under the Extended Fund Facility (EFF); b) modification of the PC on net international reserves (NIR) for end-June 2022 and end-December 2022; and c) establishment of three new SBs related to (i) issuance of a National Treasury circular presenting an action plan for development of a Medium-Term Revenue Strategy (end-August 2022); (ii) completion of a review of how the fuel pricing mechanism has been applied to date and constitution of a taskforce to oversee the progressive elimination of the fuel subsidy within the first half of FY2022/23 and to ensure that fuel pricing actions are at all times aligned to the approved budget (end-July 2022); and (iii) submission of an action plan on Kenya Power and Lighting Company (KPLC) by end-July 2022 to restore KPLC’s medium-term profitability and fully cover financing gaps through end-Dec 2023.
Risks to the program. The outlook is subject to significant downside risks. In the near-term, uncertainty remains elevated due to the COVID-19 pandemic, the economic fallout of the war in Ukraine, and the upcoming 2022 elections. Against this backdrop, the program is delivering resilience and providing flexibility to address continuing challenges (COVID-19 vaccination and SOE restructuring needs) while achieving program objectives.
Approved By:
Catherine Pattillo (AFR) and Eugenio Cerutti (SPR)
The mission team consisted of M. Goodman (head), T. Rasmussen (Resident Representative), V. Crispolti, S. Gupta, J. Weiss, F. Nyankiye (all AFR), L. Bounader (FAD), P. Iossifov (SPR), M. Bazarbash (MCM), A. French, J. Duasing, R. Snipeliski (all LEG), D. Tallam and K. Tuitoek (IMF Resident Representative in Nairobi office), with assistance from R. Kumar, F. Morán Arce (AFR), C. Odwogi, and E. Muiruri (IMF Resident Representative in Nairobi Office). The Executive Director, Ita Mannathoko and Advisor James Garang (both OED) participated in the discussions. Discussions were held in Nairobi and remotely from Washington, D.C. during March 31–April 22, 2022. The team met with Cabinet Secretary for the National Treasury and Planning, Mr. Ukur Yatani; Governor of the Central Bank of Kenya (CBK), Dr. Patrick Njoroge; Head of the Public Service, Dr. Joseph Kinyua; the Principal Secretary for the National Treasury, Dr. Julius Muia; Deputy Governor of the CBK, Ms. Sheila M’Mbijjewe; and other senior government and CBK officials. Staff also had productive discussions with representatives of leading contenders for the upcoming presidential election, the Parliamentary Budget Office, the private sector, civil society organizations, and development partners as part of their usual practice of taking stock of economic conditions at the country level.
Contents
CONTEXT
RECENT ECONOMIC DEVELOPMENTS
PROGRAM PERFORMANCE
MACROECONOMIC OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Managing Pressures from Global Fuel Prices While Reducing Debt Vulnerabilities
B. Advancing the Structural Reform Agenda
C. Enhancing the Monetary Policy Framework and Safeguarding Financial Stability
PROGRAM ISSUES AND RISKS
STAFF APPRAISAL
BOXES
1. The War in Ukraine: Channels of Transmission to Kenya
2. Tax Performance in FY2021/22
3. Cost of Fuel Subsidies Under Different Scenarios
FIGURES
1. Real Sector Developments
2. Fiscal Sector Developments
3. Budget Financing
4. External Sector Developments
5. Monetary and Exchange Rate Developments
TABLES
1. Selected Economic Indicators, 2020-2026
2a. Central Government Financial Operations 2020/21-2024/25 (Billions of Kenyan Shillings)
2b. Central Government Financial Operations 2020/21-2024/25 (Percent of GDP)
3. Monetary Survey Dec. 2020–Jun. 2023
4a. Summary Balance of Payments, 2020–27 (In millions of U.S. dollars)
4b. Summary Balance of Payments, 2020–27 (In percent of GDP)
5. Financial Soundness Indicators of the Banking Sector
6. External Financing Requirements and Sources, 2020–27
7. Access and Phasing Under the Extended Fund Facility and the Extended Credit Facility Arrangements
8. Indicators of Fund Credit, 2020–34
9. Decomposition of Public Debt and Debt Service by Creditor, 2021–23
10. External Borrowing Plan, July 1, 2021–June 30, 2023
ANNEXES
I. Risk Assessment Matrix
II. Comments on CBK’s Discussion Paper on Central Bank Digital Currency
APPENDIX
I. Letter of Intent
Attachment I. Memorandum of Economic and Financial Policies
Attachment II. Technical Memorandum of Understanding
