- World Bank foresees $12 billion in support for Kenya between 2023 and 2026.
- This financing is subject to approval as East Africa’s economic powerhouse continues to depend on borrowing to bridge budget gaps in the wake of high recurrent expenditures and revenue shortfalls.
- The World Bank said it is fully committed to support Kenya in its journey to become an upper-middle-income country by 2030.
Kenya stands to benefit from up to $12 billion in financing from the World Bank over the next three years, as indicated by the global lender, ensuring continued support for the debt-saddled country.
This is subject to approval, the World Bank noted on Monday, as East Africa’s economic powerhouse continues to depend on borrowing to bridge budget gaps in the wake of high recurrent expenditures and revenue shortfalls. The World Bank stated that it is fully committed to supporting Kenya in its journey to become an upper-middle-income country by 2030.
Over the three fiscal years (Financial years 2024-2026), the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) expect to provide an estimated $4.5 billion, including fast-disbursing operations. Out of this amount, $3 billion is estimated from IDA, and $1.5 billion is from IBRD.
IDA is a development finance institution that offers concessional loans and grants to the world’s poorest developing countries. It is a member of the World Bank Group and is headquartered in Washington, DC. IBRD, on the other hand, is the lending arm of the World Bank Group.
Under the program, the World Bank’s investment arm – IFC, will provide roughly $1 billion in investments, and the Multilateral Investment Guarantee Agency (MIGA) guarantees can amount to around $500 million.
The World Bank’s strong support
The World Bank has been one of Kenya’s strongest partners and the largest provider of development finance. Kenya is now accessing about $2 billion in concessional financing each year. IDA and IBRD commitments together now stand at $8.3 billion, with $4.4 billion available to disburse. IFC’s investment portfolio is $1.2 billion.
MIGA is actively engaged with $424 million in guarantees covering the energy, transport, financial, fintech, and tourism sectors. “So, subject to the World Bank Executive Directors’ approval of new operations, and factors that may affect the Bank’s lending capacity, this implies a total financial package of $12 billion over the three years,” the World Bank said in a statement.
In May of this year, the World Bank approved a Development Policy Operation (DPO) for $1 billion to provide low-cost budget financing along with support for key policy and institutional reforms for Kenya’s near-term objectives of fiscal consolidation, as well as its long-term goal of green and inclusive growth.
According to the World Bank, Kenya’s economy has demonstrated resilience to shocks but continues to face vast challenges, including the lingering economic impacts of the Covid-19 pandemic and the global repercussions of Russia’s invasion of Ukraine.
It is also being impacted by increasingly frequent climate shocks, synchronous monetary tightening in advanced economies, and debt vulnerabilities.
“The government has demonstrated its commitment to fiscal consolidation, which is key for reducing debt vulnerabilities and ensuring long-term growth sustainability,” said Keith Hansen, World Bank Country Director for Kenya.
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World Bank loan just days after IMF $938M programme to Kenya
The announcement by the World Bank came barely four days after augmentation of Kenya’s IMF programme. Last week, IMF announced it had reached a staff-level agreement with Kenya to expand its financing to the country by $938 million.
The agreement immediately unlocks access to a $682.3 million. A staff team from IMF visited Nairobi during October 30 – November 15, and held discussions with the Kenyan authorities for the 2023 Article IV Consultation, the sixth reviews of Kenya’s economic program supported by the IMF’s Extended Fund Facility and Extended Credit Facility.
The EFF/ECF arrangements were approved by the IMF Executive Board on April 2, 2021 and extended by 10 months on July 17, 2023 to support Kenya in maintaining robust and inclusive growth, while preserving macroeconomic stability and debt sustainability.
The mission also considered Kenya’s request for augmentation under the EFF/ECF arrangements.
“The agreement is subject to IMF management approval and consideration by the Executive Board, which is expected in January 2024,” IMF said in a statement.
According to IMF, the tightening global financing conditions for frontier economies and global geopolitical tensions are compounding the challenges from the legacy of the pandemic and multi-season drought, further straining Kenya’s balance of payments and fiscal financing requirements.
The authorities’ strong reform program aims to enhance macroeconomic stability and restore confidence to ensure access to the international bond markets.
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Kenya’s economy showing resilience
Kenya’s economy has demonstrated resilience, with real GDP expanding by 5.4 per cent in the first half of 2023, primarily due to a robust recovery in the agriculture sector following the return of rains.
In the fiscal year 2022/23, the primary deficit came in as expected at 0.6 percent of GDP, reflecting tight expenditure management in light of tax revenue shortfalls.
Financing conditions continue to be challenging. With a tightening of monetary policy in June and tighter liquidity conditions, yields on government bonds have experienced a notable upward trend.
The external current account deficit has narrowed, driven by a recovery in the tourism sector to pre-Covid-19 levels, resilience in remittances, reductions in imports, and a real exchange rate depreciation.
Headline inflation has fallen within the target range of 2.5–7.5 percent since July.
“Despite continued commitment to the implementation of the IMF-supported economic program, which is broadly on track, uncertainty looms over Kenya’s effective access to international bond markets,” the IMF said.
This uncertainty is exerting substantial pressure on liquidity, primarily due to the sizeable Eurobond maturing in 2024.
Against this backdrop, the authorities are actively mobilizing additional financing from their development partners, the IMF, and commercial sources while concurrently intensifying their efforts to enhance macroeconomic policies and implement structural reforms.
“Steadfast implementation of a package of mutually reinforcing policies remains key to sustaining macroeconomic stability, anchoring market confidence, continuing to deliver on the program’s objectives, and bolstering Kenya’s medium-term prospects,” the IMF noted.
Read also: The IMF boosts Kenya’s economy with close to $1 billion amid pressure from maturing Eurobonds
IMF take on Kenya’s debt and fiscal stance
Currently, Kenya’s debt stands at $71.2 billion, with debt repayment consuming the country’s foreign exchange reserves. As of last week, usable foreign exchange reserves were $6.785 million, according to Central Bank of Kenya data, indicating 3.6 months of import cover.
Meanwhile, remittance inflows in October 2023 totaled $355.6 million, compared to $332.6 million in October 2022, marking an increase of 6.9 percent.
“The cumulative inflows for the 12 months to October 2023 totaled $4,165 million compared to $3,996 million in the same period in 2022, an increase of 4.2 per cent. The US remained the largest source of remittances into Kenya, accounting for 54 per cent in October 2023,” CBK said.
A tighter fiscal stance is envisaged under the IMF program to help reduce debt vulnerabilities and achieve a present value of debt to GDP of 55 per cent, the authorities’ debt anchor, by 2029.
This will entail the timely implementation of reforms to broaden the domestic tax base and improve tax compliance. These reforms are critical for achieving the authorities’ revenue objectives of reversing the trajectory of the tax revenue-to-GDP ratio while promoting equity and fairness in the tax regime.
Rationalization of Kenya’s expenditure
According to financial experts, expenditure rationalization will need to continue, with a focus on enhancing the efficiency of public investments, better targeting of subsidies and transfers, addressing weaknesses in state corporations, and the digital delivery of public services.
The social safety nets and fiscal risk management framework need further enhancement. “The mission welcomed the Central Bank of Kenya’s steps to modernize the monetary policy framework and improve the functioning of the FX market,” the IMF said.
The recent introduction of an interest rate corridor centered around the policy rate, aimed at guiding the interbank rate, is anticipated to enhance the transmission of monetary policy.
Additionally, initiatives like the DhowCSD and other policy adjustments are expected to stimulate interbank repos, potentially minimizing market fragmentation.
Further efforts to improve the functioning of the FX market and greater exchange rate flexibility would reduce costs to the real economy from large spreads and excess FX demand, while encouraging capital inflows and reducing outflows.
Credible and mutually reinforcing policies would also help maintain favorable inflation differentials with trading partners, boost export competitiveness, and mitigate balance of payments pressures.
Efforts, including strengthening the macroprudential policy framework, will be key to reducing financial sector risks.
“On the upside, should investor confidence recover fully, a virtuous cycle of inflows could stabilize the exchange rate and bring down inflation faster than expected,” the IMF said.
An enhanced rebound in agriculture could bolster growth, help reduce inflation further, while earlier than expected market access would ease financing constraints. Further progress with reforms that improve the business environment, and that support a market and rules-based economy, would reinforce this upside risk.
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Fiscal policy shift on domestic front
On the domestic front, the key downside risk is that the policy shift currently underway, if it loses momentum, could erode confidence and lead to increased FX demand, putting further pressure on the exchange rate.
Key downside risks from external shocks, such as higher commodity prices, a slowdown in trading partners’ demand, and a worsening of external financing conditions, could weigh on the prospects of rebuilding external buffers.
Progress on the climate agenda under the RSF remains strong. Fast-tracking the reforms will also create a conducive environment for attracting climate finance, experts said.
Kenya’s government has selected Citi and South Africa’s Standard Group to advise it on how to handle a $2 billion Eurobond that matures in June 2024.