WASHINGTON, DC: A staff team from the International Monetary Fund (IMF) led by Mary Goodman conducted virtual missions to Kenya from December 9 to 17, 2020, and from February 4 to 15, 2021 to undertake negotiations on a combined 38-month program under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements.
At the end of the mission, Ms. Goodman made the following statement:
I am pleased to announce that the Kenyan authorities and the IMF mission team have reached an agreement on economic and structural policies that would underpin a 38-month program under the EFF and ECF arrangements for about US$2.4 billion. The staff-level agreement is subject to IMF management approval and Executive Board consideration, which is expected in the coming weeks. The program will support the next phase of the country’s COVID-19 response and the authorities’ plans for a strong multi-year effort to stabilize and begin reducing debt levels relative to GDP, laying the ground for durable and inclusive growth over the years to come.
Kenya was hard hit at the onset of the COVID-19 crisis, but growth has been recovering since mid-2020 and heading into 2021. The authorities’ forceful early actions cushioned the pandemic’s economic impact, and real GDP growth is projected to have contracted by just -0.1 percent in 2020. Inflation remained within the central bank’s target band, reaching 5.7 percent in January, while financial sector vulnerabilities have been contained and the banking system remains well capitalized overall. The external sector proved resilient against the backdrop of the shock, with horticultural exports and remittances performing well. The reopening of schools and removal of pandemic containment measures are expected to underpin a growth rebound to 7.6 percent in 2021, even as some sectors of the economy face continuing headwinds.
The Kenyan authorities have begun to roll back some of their extraordinary economic support measures. With the pickup inactivity, the earlier temporary personal and corporate income tax cuts, as well as the reduced VAT rate, were discontinued at end-December, shoring up tax revenues. To maintain the cushion for the low-income earners and for Micro, Small, and Medium Enterprises (MSMEs), the Authorities did not reverse the personal relief on income tax and the lower turnover tax (1%) for small businesses introduced in April 2020. Many households and businesses continue to benefit from the temporary debt relief agreements reached with their banks, and borrowers accounting for a total of 54.2 percent of loans had entered such rescheduling agreements by end-2020. Overall, the authorities’ decision to pause fiscal adjustment this year will allow accommodating health, social, and development spending to support the recovery, complemented by accommodative monetary policy.
The mission team agreed with the authorities on a program to support the next phase of their COVID-19 response. The authorities’ program aims at reducing debt vulnerabilities through a multi-year fiscal consolidation effort, centered on raising tax revenues and tight control of spending, which would safeguard resources to protect vulnerable groups. It would also advance the structural reform and governance agenda, including by addressing weaknesses in some SOEs and ongoing efforts to strengthen transparency and accountability through the anti-corruption framework. Finally, it would strengthen the monetary policy framework and support financial stability.
The program charts a clear path to reduce the vulnerabilities crystallized by the COVID-19 shock. Building on steps the authorities have already taken, the strong multi-year consolidation effort will deliver a primary balance that would stabilize the debt as a share of GDP and put it firmly on a downward path over the course of the program. This will free up resources for private investment, setting a strong footing for durable growth coming out of this global shock. The program will also form a strong basis for support from other development partners.
COVID-19 continues to pose risks for the global economy and for Kenya. Risks generally remain to the downside, and projections are subject to extraordinary uncertainty. Accordingly, the program incorporates flexibility, including by recognizing near term uncertainties about tax yields due to challenges from the COVID-19 shock in key sectors like hospitality. As the authorities evaluate risks in the SOE sector, the program will support their plans over time to develop a strategy to address weaknesses in vulnerable SOEs within the scope of the limited available fiscal space. The team looks forward to closing engagement with the authorities to evaluate the evolving landscape over the course of this year and achieve the program’s goals.
The mission team is grateful to the authorities for the candid and constructive discussions and their strong efforts to ensure the success of the upcoming program.
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, Mr. 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 the private sector, civil society organizations, and development partners.
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