IMF Wraps Up Kenya Reviews Under Fund, Credit, Resilience

• The Executive Board's decision to complete the reviews enables a combined disbursement of around US$606 million to support the authorities' efforts to rebuild fiscal and external buffers, including to enhance resilience to climate shocks.
• Resolution of the exceptional external financing pressure earlier this year has revived market confidence, aided stabilization of the shilling, and enabled a faster buildup of foreign exchange reserves. However, large revenue shortfalls in FY2023/24 and pushback against revenue measures owing to governance concerns pose a challenge to the ongoing fiscal consolidation efforts.
• The Kenyan authorities face a difficult balancing act of boosting domestic revenues to protect critical spending in priority areas while meeting heavy debt service obligations. Delivering on this would call for improving governance and transparency to restore public trust in the effective use of public resources.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded today the seventh and the eighth reviews under the extended arrangement under the Extended Fund Facility (EFF) and the arrangement under the Extended Credit Facility (ECF), approved in April 2021, and a review under the Resilience and Sustainability Facility (RSF) arrangement, approved in July 2023, with Kenya.

The EFF/ECF arrangements aim to support Kenya's program to address debt vulnerabilities while safeguarding resources for priority social and developmental needs; build resilience to shocks; improve governance and transparency; and support broader economic reforms to realize the country's medium-term potential. The RSF arrangement aims to reinforce Kenya's strong efforts to address climate-related challenges and catalyze further private climate finance.

The Executive Board's decision allows for the immediate disbursements of SDR365.28 million (about US$485.8 million) under the EFF/ECF arrangements and SDR90.47 million (about US$120.3 million) under the RSF arrangement. In addition, following the resolution of exceptional financing needs earlier this year, the Board approved a reduction in the total access under the EFF/ECF arrangements from exceptional access, approved in January 2024 (see PR24/12 ), to within the normal access limits and a rebalancing of access toward the zero-interest ECF arrangement. Together with the recent changes to the IMF's charges and surcharges policy , these adjustments would lower Kenya's interest payments to the IMF.

Under the EFF/ECF arrangements, total IMF financial commitment stands at SDR2.714 billion (about US$3.61 billion), of which SDR2.343 billion (about US$3.12 billion) has been approved for disbursement. For the RSF arrangement, the corresponding amounts are SDR407.1 million (about US$541.3 million) and SDR135.70 million (about US$180.4 million), respectively.

In completing the reviews, the Executive Board recognized that the resolution of the exceptional external financing pressure earlier this year has revived market confidence, supporting shilling stabilization and facilitating faster buildup of reserves. However, the fiscal consolidation efforts have faced headwinds following a sizable tax revenue shortfall in FY2023/24 and withdrawal of the 2024 Finance Bill after widespread public protests. Nevertheless, the EFF/ECF program has delivered on reducing inflation, strengthening external buffers, and stabilizing the exchange rate. In addition, the Board approved waivers of non-observance for the end-December 2023 tax revenue and the end-June 2024 primary budget balance and tax revenue targets based on the corrective action taken through the passage of the Supplementary FY2024/25 Budget, which together with medium-term fiscal consolidation would help reduce debt vulnerabilities, a core objective of the program. The Board also completed review under the RSF arrangement and approved the disbursements associated with two reform measures implemented.

The Board emphasized that sustaining progress requires improving the quality of fiscal adjustment, addressing fiscal and financial sector vulnerabilities, advancing governance reforms, and implementing the structural agenda, including climate-related reforms. Continued efforts to support the vulnerable population, broadening the socio-political support for reforms, and ensuring agile policymaking will also be necessary.

At the conclusion of the Executive Board's discussion, Ms. Gita Gopinath, First Deputy Managing Director of the IMF and Acting Chair, made the following statement:

"Kenya's economy remains resilient, with growth above the regional average, inflation decelerating, and external inflows supporting the shilling and a buildup of external buffers, despite a difficult socio-economic environment.

"The EFF/ECF and the RSF arrangements continue to support the authorities' efforts to anchor macroeconomic stability, reduce debt vulnerabilities, promote reforms, and mitigate climate-related risks.

"Performance since the last reviews of these arrangements has weakened. While accumulation of foreign exchange reserves and inflation were better than expected, the fiscal performance fell significantly short of the targets. The revenue and export underperformances increased debt vulnerabilities. Implementation of several reforms was also delayed.

"In this context, a difficult adjustment path lies ahead. A credible fiscal consolidation strategy remains central to addressing debt vulnerabilities while protecting social and development spending. Reforms to make the tax regime more efficient, equitable, and progressive as well as strengthening accountability, transparency, and efficiency of public finances will help garner political and societal support for reforms. Clearly communicating the necessity and benefits of the reforms is paramount.

"Given the elevated risks around the fiscal strategy, policymaking needs to be agile. Contingency planning remains critical, with policies adapting to evolving outcomes to safeguard stability and ensure that program objectives continue to be met.

"The Central Bank of Kenya's decisive actions have supported price stability and external sustainability, including through institutional changes to improve the functioning of the monetary policy operational framework and the money and foreign exchange markets. Exchange rate flexibility is vital to improve resilience to external shocks and competitiveness. Addressing banks' deteriorating asset quality and emerging risks requires close monitoring and strengthened oversight.

"Fast-tracking key reforms would raise medium-term potential. In particular, addressing deficiencies in governance, anti-corruption frameworks, and AML/CFT, including leveraging the requested governance diagnostic, is essential for garnering public trust and enhancing policy credibility, and for attracting fresh investments, including finance to build climate resilience."