Debt: Another bittersweet $244m IMF loan to Kenya

By Herald Aloo
Posted on Wednesday, 11 May 2022 15:52

Motorists queue for fuel at the Rubis fuel station, amid the nationwide petrol and diesel shortage, in the central business district of Nairobi, Kenya April 13, 2022. REUTERS/Thomas Mukoya

Kenya is set to receive another $244m (KSh28bn) from the IMF in a loan deal laced with tough conditions that will see its citizens grapple with hard-hitting structural reforms and prompt job losses.

The loan is part of the $2.34bn Special Drawing Right (SDR) approved in April 2021 on the condition that Kenya keeps in check its expenditure and huge debt, which is currently in excess of KSh8.2tn ($70.7bn), equivalent to 70% of GDP.

“Upon completion of the Executive Board review, Kenya would have access to SDR179.13m (equivalent to about $244m),” IMF Mission Chief to Kenya Mary Goodman said in a statement.

The $244m loans, which according to the IMF now bring the total amount loaned under the program so far to about KSh135bn ($1.17bn), are meant to help the country weather rough economic terrain. The last tranche, which was issued in May 2021, was $410m.

However, given Kenya’s limited fiscal space, the loan is dependent on tough measures to keep the country’s expenditure under control.

Conditions

Part of the conditions of the IMF loan is that the government is required to limit its public university expansion.

According to the latest Kenya Economic Survey’ report, this will reduce development expenditure for the State Department of University Education by 70%, from KSh4bn in 2020/21 to KSh1.2bn in 2021/22.

  • The University of Nairobi has cut faculties to around 11 from 35 and plans to trim further its current 324 courses.
  • Moi University has closed five campuses in the latest reforms. The two have a combined workforce exceeding 12000.
  • Kenya Airways, which was earmarked for restructuring following the IMF deal, has upped its turnaround measures, trimming flights and routes, slashing salaries and cutting the workforce – but is still far from returning to its former glory.

The national carrier’s pay-cut strategy has however been met with stiff opposition from aviation workers who have put up a spirited fight in courts, which may deny KQ the much-needed revenues as flights resume.

At Kenya Power, the management announced that it will send home an estimated 20% of staff to save about KSh5.3bn from May through June 2023. The utility is also reviewing costly power purchase agreements and 36 existing insurance policies in an effort to streamline revenue performance.

Through the reforms, the Treasury is targeting to shrink the budget deficit by at least Ksh300bn ($2.59bn) in the current financial year ending in June – an ambitious plan since the country spends about 60% of its tax revenue to service maturing debts.

Compromises

Worse, the lofty reforms come at a time when the country’s employment in the private sector is moving at a slow pace amid heightened tax measures and surging inflation, forcing households to dig deeper into their pockets. The last salary increment was in 2018 when the country’s inflation was 4.7% compared to the current 6.47%.

Kenya must have a proper tax policy on the most efficient format for raising taxes which can guide the country’s fiscal policies.

As such, the IMF has agreed to some compromises. “Kenya was able to put up a spirited fight on the continuation of the state-backed fuel subsidy and IMF backed down. It shows there is a wiggle room due to the current high cost of living,” says Ken Gichinga, chief economist at Mentoria Economics. “This will deliver good outcomes for Kenyans and within a reasonable IMF framework.”

“But Kenya must have a proper tax policy on the most efficient format for raising taxes which can guide the country’s fiscal policies. This will aid in fixing Kenya’s monetary policies because inflation and employment are inversely related,” he says.

The IMF, which has remained influential in shaping Kenya’s fiscal policies, has backed the country’s aggressive tax raise on essential items, such as cooking gas, flour, fuel and bottled water, citing strained treasury coffers.

It has also urged low-income countries like Kenya to tighten monetary policies and increase lending rates to save local currencies from depreciation, associated inflation pressures and costlier loans as commercial banks push lending rates beyond the current 7%.

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