IMF Reaches Agreement with Kenya on Credit Facility

The International Monetary Fund (IMF) has announced that it has reached a staff-level agreement with Kenya on the fifth review of the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements, as well as the Resilience and Sustainability Facility (RSF). The agreement was reached during a visit to Nairobi by the IMF team led by Haimanot Teferra. The arrangements, which were approved by the IMF Executive Board in April 2021, provide Kenya with access to a total amount of SDR1.818 billion (equivalent to approximately US$2.43 billion).

As part of the agreement, the IMF team and the Kenyan authorities have agreed on several key points. These include an augmentation of access under the EFF/ECF totaling 75 percent of quota (SDR407.1 million or about US$544.3 million) due to challenging global financing conditions. The duration of the EFF/ECF arrangements will also be extended by 10 months, allowing sufficient time for meeting the program objectives. Additionally, a new 20-month RSF arrangement will be established with access also amounting to 75 percent of quota, running parallel to the EFF/ECF arrangements until April 2025.

The agreement reached between the IMF and Kenya is subject to IMF management approval and consideration by the Executive Board, which is expected to take place in July. Upon completion of the fifth review by the IMF Executive Board, Kenya will have immediate access to SDR306.7 million (approximately US$410 million), including the augmentation of access under the ECF/EFF. This will bring the total IMF financial support disbursed under the EFF and ECF arrangements to SDR1,509 million or US$2,017 million. With the EFF/ECF augmentations and the RSF support, the total IMF commitment under these arrangements will amount to SDR2.633 billion or US$3.52 billion.

The Kenyan economy has faced challenges, but the private sector has generally remained resilient. Despite a contraction in agriculture due to severe drought, real GDP growth in 2022 remained robust at 4.8 percent. However, the government budget has been under pressure due to 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 market is gradually improving.

The Kenyan authorities have responded promptly to these challenges. On the fiscal side, government spending execution has been prudent, consistent with available resources. The draft budget for the fiscal year 2023/24 proposes further deficit reduction and significant new revenue measures to reduce the debt-to-GDP ratio. Monetary policy has also been tightened, with a 250 basis points increase in the central bank policy rate over the past year.

However, significant challenges remain, including slow global economic growth and tight financial conditions. While agricultural output is expected to improve with increased rainfall, the tighter fiscal and monetary environment will continue to weigh on growth in the coming year. The budget targets for FY2023/24 will require careful control of commitments. It is crucial to bring back liquidity to the interbank market for foreign exchange and support exchange rate flexibility to ensure effective market functioning and stabilize the external position.

Reforms in state-owned enterprises, including Kenya Airways and Kenya Power and Lighting Company, are necessary to stop the drain on budget resources. Although these policy actions will take time to yield results, they will contribute to a favorable medium-term outlook for the Kenyan economy.

The newly established RSF aims to enhance Kenya’s capacity to address the challenges posed by climate change. The program will focus on bolstering long-term structural climate resiliency and adaptation while strengthening macroeconomic stability.