- Kenya’s new loan will be disbursed through an instrument called Development Policy Operations (DPO).
- The loan will support key policy and institutional reforms that will help Kenya institute financial solutions in the short-term.
- Kenya is expected to institute reforms creating fiscal space, improving agricultural competitiveness, and improving governance.
The World Bank Group has approved a $1 billion loan to Kenya to support its budget as East Africa’s largest economy ploughs through one of its toughest economic conditions. The new financing will be disbursed through an instrument called a Development Policy Operations (DPO). The credit will support key policy and institutional reforms in the country. The planned reforms will help the nation institute financial solutions in the short-term.
Kenya is expected to institute reforms in her fiscal space, improve agricultural competitiveness and streamline governance. The East African powerhouse qualified for financing under the DPO in 2019 and has since received four such loans, the last in March.
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“The government’s reforms, supported by the DPO, will help to achieve fiscal consolidation, which is essential for reducing the debt burden and related risks, in an equitable and sustainable manner by safeguarding social spending while supporting much needed revenue and expenditure measures,” said Aghassi Mkrtchyan, a senior economist for the World Bank in Kenya.
He added that the operation combines these measures with important initiatives to improve productivity and exports of Kenya’s agriculture sector, and governance reforms for more inclusive and green growth driven by private investments.
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According to the World Bank, Kenya has demonstrated resilience to economic shocks over the past few years. However, the country is reeling from impacts of Covid-19, Russia-Ukraine war, climate shocks and global recession.
The country’s finances have been under strain from rising debt repayments. For instance, annual interest payments on domestic debt alone have surged to $4.85 billion this year from $1.28 billion nearly a decade ago. Data from Kenya’s Central Bank shows that total external debt as of January stood at $37.63 billion, as the local currency exchanged at 124.4 against the dollar.
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A severe drought across East Africa has also hit Kenya’s economy hard. A total of 23 out of 47 counties have been grappling with severe drought threatening the lives of about 4.5 million people.
But, since his assent into power last year, President William Ruto sought restore financial discipline through a raft of measures. He is, however, receiving a tonne of backlash from the general public over some of these measures. This is especially on his proposal to raise taxes on a wide range of economic activities under Finance Bill 2023. The proposed tax measurers are under consideration by Kenya’s Parliament.
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“The government has demonstrated its commitment to fiscal consolidation, which is key for reducing debt vulnerabilities and ensuring long-term growth sustainability,” the World Bank Country Director for Kenya Keith Hansen said.
Under the World Bank DPO, Kenya will receive support to institute a raft of policy reforms across three pillars. The first is targeting creation of fiscal space in a sustainable and equitable manner. This move will encompass revenue and expenditure measures to support fiscal consolidation. It also seeks strengthening the debt management framework, and protecting pro-poor expenditures.
Under the second pillar, the reforms will be improving competitiveness to boost agricultural exports. Agriculture remains of of Kenya’s giant industry employing most of Kenya’s poor.
Reforms on governance and financial inclusion
Transparency and accountability will be under the third wave of reforms. And the goal is to improve governance and financial inclusion for private sector-driven growth. This will be by strengthening the confidence of the private sector in the government’s commitment to a level playing field.
Each of the three pillars contains actions for combating climate change crisis. Adverse effects of climate crisis are partly to blame for causing Kenya’s worst drought in a-half-a-century.
“The government has demonstrated its commitment to fiscal consolidation, which is key for reducing debt vulnerabilities and ensuring long-term growth sustainability.
The government has implemented measures to protect the livelihoods of the most vulnerable, including through lifeline electricity tariffs that guarantee access to low-cost electricity for vulnerable households, protecting social safety nets, and creating opportunities for the poor through the Financial Inclusion Fund as part is its ‘Bottom-up Economic Transformation Agenda,” Hansen noted.
