Even as Kenya’s Debt situation continues to worsen, the country has been forced to look elsewhere for extra funding to supplement its shrinking cash reserves. International financial institutions such as the International Monetary Fund (IMF) have been more than willing to help. However, to what extent is the funding from the IMF helping to make Kenya’s financial situation any better?
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The IMF’s Intervention
On January 17th, 2024, the IMF, through executive board, announced that it had granted Kenya a loan of about $941 million (about Ksh 150 billion), with an immediate disbursement of $624 million. The agreement for this extension of funding by the IMF was reached back in November 2023 following the 6th review of the extended borrowing agreements that commenced on April 2021.
The January announcement follows a review of the amount disbursed as a result of the adjustment of currency fluctuations. In a statement following the executive meeting, the Deputy Managing Director and Acting Chair of the board Ms. Antoinette Seyah, praised Kenya’s resilience in the face of external and domestic challenges, especially given the efforts put in towards implementing positive change in the areas of governmental and public financial management.
These IMF funds could not have come at a better time for the country. Kenya is currently running low on its dollar currency reserves which inhibits its ability to engage in international markets. Being cash-strapped for dollars has hampered with Kenya’s import transactions, such as those of its domestic oil market. In a nutshell, the IMF funds are meant to ease liquidity challenges and sustain macroeconomic stability in the country. The IMF cited a legacy of COVID-19, a predisposition to an adverse climate, a cost of living crisis, a weaker shilling, and increased poverty levels as some of the reasons for the unstable economic condition in Kenya, hence the need for external financial intervention from their end.
The Kenyan government has been feeling the heat of the current situation from all corners. It rapidly becomes unpopular domestically for its unpopular economic policies that are seemingly geared towards squeezing as much money from its citizens as possible. However, the bigger problems for the country stem from external actors. A 10-year Eurobond worth $2 billion (Ksh 306 billion) which was issued back in 2014 is set to mature in June 2024 and its repayment is occurring at a time when the country is facing massive liquidity challenges.
President Ruto had pledged to pay off a $300 million installment of the loan’s repayment in his State of the Nation address back in November 2023, perhaps calming the nerves over the country’s ability to settle its external debts.
Securing funding from the IMF is meant to help Kenya ease the pressure on its dollar reserves as well as maintain the cash flow of its foreign currency (particularly the US Dollar). Nonetheless, by taking loans to stabilize the operational capacity of the Kenyan market, the Kenyan government is treading on choppy waters. In a classical case of borrowing Peter to pay Paul, it is inadvertently engaging in a high-risk affair that could end up driving it closer to economic capitulation.
Debt is not a bad thing to have but once it becomes unsustainable, a vicious death spiral begins where the government involved has to take up even more debt just to perform its basic functions. That never ends well and there are many examples to prove this point, take Greece, Argentina, and Zimbabwe.
A Breakdown of Kenya’s IMF Loan.
The IMF offers funding to its members in the form of Special Drawing Rights (SDRs), a funding model calculated from the IMF’s joint valuation of the major global currencies. Each country is allotted access to SDRs based on its quota contributions to the IMF. The disbursement of funding from the IMF takes various funding facilities.
Kenya’s recent loan is structured under the following loaning facilities;
- The Extended Credit Facility (ECF): This funding model is provided to Low-Income Countries (LICs) with medium-term balance of payment problems under the Poverty Reduction and Growth Trust. It is geared towards helping in building resilient macroeconomic positioning for the countries involved.
Countries must demonstrate a strategic effort toward achieving macroeconomic sustainability that can be measured quantitatively with structured benchmarks and policy reviews.
It has a repayment period of about 3-5 years.
- The Extended Fund Facility (EFF): It is a funding program that provides financial assistance to countries facing serious medium-term balance of payments. It is built on a strong conditionality on policy commitments to address institutional and economic weakness and hence, guaranteeing macro-economic stability.
Policy reviews are undertaken between the recipient state and the IMF to quantitatively measure the progress in implementing structural measures that align with the program’s objectives.
Approved for 3-4 years and can be restructured based on economic performance.
- The Resilience and Stability Fund (RSF): It is offered to countries that face prospective longer-term structural challenges such as the risks associated with climate change. It is meant to support policy reforms that mitigate against such challenges.
RSF is offered alongside other Upper Credit Tranche Quality Policies (UCT funding programs) such as ECF and EFF. Each reform to address underlying issues is measured and reviewed alongside other UCT programs.
It has a minimum duration of about 18 months and 20-year maturity.
The IMF’s total disbursement to Kenya under the ECF/EFF arrangements stands at SDR 1.978 billion (US$ 2.6 billion), including the SDR 707 million (US$ 941 million) disbursed under the current loan deal. Kenya also received a disbursement of SDR 45.23 million (US$60.2 million) under the recent loan deal.
A More than Occasional Dalliance with Debt
The IMF remains the go-to bailout ‘helper’, a sort of ‘get out of jail card’ for countries with pilling debt distress such as Kenya. Kenya has had to ask at least three times for exceptional access to borrow more than its limit from the IMF in the recent past. In this case, the funding from the IMF will be crucial in helping Kenya to steady the ship by providing a cash buffer that allows the country to focus on servicing its debt vulnerabilities. The over-dependence on such avenues of external financing leaves countries such as Kenya, which have a massive appetite for unsustainable public indebtment, on an insatiable high.
Kenya’s total debt as of June 2023 stood at Ksh 10.2 trillion or about 70% of GDP, against the IMF-set threshold of 50%. Furthermore, the debt servicing to revenue ratio stands at 101.4%, which is indicative of a government expenditure highly constrained by the servicing of debt, much of which is external. The uncertainty surrounding the repayment of the Eurobond set to mature this year seems to be fading away given the IMF’s intervention but the country’s economy will continue to be under the cosh, even as more debt obligations are expected to mature in 2024.
Kenya has been taking measures to ease the burden of the repayment of debts as well as cooling off its economy which, clearly needs to blow off some steam. Firstly, it is supposedly undertaking a slew of domestic reforms that will stabilize the situation, reduce inflation, and more importantly, improve Kenya’s position on the global credit facilities giving it more global financial markets. Many of her developing counterparts, particularly in Africa such as Ethiopia and Ghana have previously defaulted on external loans something which has helped build a negative image for investors towards the emerging economies markets.
Kenya’s concerted efforts towards ensuring that its Eurobond dues are paid in full should help reinvigorate investor confidence in the country. The Kenyan government is so convinced of this outcome that it announced a reissue of a buyback of these bonds to the tune of US$500 million. Furthermore, the Kenyan government has also reduced borrowing from the domestic market to ease pressure on interest rates and reinvigorate the Kenyan shilling.
Kenya’s Debt Situation.
Why should the country be in such a situation in the first place? Why put ourselves in between a rock and a hard place, as we continue to wallow deeper in debt? How did debt move from being a tool for enabling tomorrow’s development today to becoming a burden that weighs heavy upon our shoulders? Is the Kenyan government doing enough to absolve itself from the possibly dire consequences of being under debt distress?
Despite the praise from the IMF, the Kenyan government does not seem to be relenting on its spending on its recurrent expenditure. Of the Ksh 3.7 trillion allotted in Kenya’s budget for the Financial year 2023/24, Ksh 2.5 trillion is gobbled up by recurrent expenditure with a huge chunk of about Ksh 1.1 trillion going towards the payment of salaries. The Kenyan government has been quick to shift the burden of the current economic stature which is crippled with the repayment of debts incurred by it in the first place upon the ‘common mwananchi’ by burgeoning the tax bracket.
The message is as clear as day, the government has the luxury to incur debt at its terms but the risk and the burden of repayment lies with the hardworking Kenyan, struggling to make ends meet and put food on the table.
From one ordinary Kenyan to another, in whose hands are we safe?
Read More: How a squabble over oil importation is fueling a regional feud between Kenya and Uganda.
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