NAIROBI, KENYA, MAR 14 — Kenya now has up to September to implement a raft of measures on its budget and financial sector, if it is to continue enjoying the Special Drawing Right at the International Monetary Fund (IMF).
This follows a six months extension on the IMF $1.5billion stand-by facility which was due to expire this month.
The IMF on Tuesday announced it had approved a six months extension on the facility which include a $989.8 million (about Sh100.3 billion) and $494.9 million (about Sh50.1 billion) 24-month Standby Credit Facility (SCF) for Kenya, after the government placed a request.
“On March 12, 2018, the Executive Board of the International Monetary Fund approved Kenyan authorities’ request for a 6-month extension of the country’s Stand-By Arrangement to allow additional time to complete the outstanding reviews,” the IMF said in a statement Tuesday evening.
The facility was approved in March 2016. It is meant to cushion the country’s economy from external shocks.
IMF had withdrawn Kenya’s access to the facility in June, after the government failed to meet budget-deficit targets.
The Kenyan government has blamed the drought that hit the country last year and the prolonged general elections for increased pressure on its spending.
IMF now wants Kenya to reduce its budget deficit and repeal the interest rates cap law, blamed for a credit crunch in the private sector.
The interest rate cap law came into place in September 2016, after President Uhuru Kenyatta signed the Banking (Amendment) Bill, 2015 into law in August.
The law caps commercial bank’s lending interest at four per cent above the central bank rate, currently at 10 per cent.
Though the move was in good faith, intended to make credit accessible to the common citizen, banks switched their focus to government securities which they see as having higher returns, while profiling majority of the citizens mainly SME’s as high risk borrowers.
Private sector credit growth fell from its peal about 25 per cent in mid-2014 to 1.6 per cent in August 2017, the lowest in the last ten years.
According to the World Bank’s Kenya Economic Update 2017, the slowdown can be attributed to several factors including the impact of liquidity shock in 2015-16, liquidation of three commercial banks and the implementation of the interest rate cap.
Others are inability by small banks to borrow in the interbank market and the rise in non-performing loans.
National Treasury CS Henry Rotich has since promised to implement reforms demanded by the IMF saying his office will reduce by half the government’s budget deficit by June 2021 and repeal or reform the interest rate cap.
“The reviews are expected to be completed by September 2018. Completion of the reviews will enable the Kenyan authorities to have access to funds available under the precautionary SBA,” IMF said.
Kenya has however not drawn down on the two-year IMF facility which is meant to cushion it from economic shocks such as sudden rise in global oil prices and strengthening of the dollar, which traditionally implicate negatively on economies.
Withdrawal of the facility had left the country depending on the foreign reserves for buffers which stood at $7.15 billion (Sh724.3 billion) as of March 1, latest Central Bank of Kenya data shows.
In its latest weekly bulletin, the CBK noted that the shilling exchange rate strengthened against the Pound Sterling and the Euro during the week ending March 1, 2018 but weakened against the US Dollar and the Japanese Yen.
“The weakening of the Kenya Shilling against the US Dollar was mainly fueled by an appreciated dollar following the announcement by the Federal Reserve Chair of the intention to have a gradual increase in US interest rates,” CBK said.