Kenya: IMF sets new loan conditions, limiting choices of next government

By Herald Aloo
Posted on Saturday, 6 August 2022 00:30

A shop owner hold bags depicting presidential candidate Raila Odinga of the Azimio la Umoja (Declaration of Unity) coalition and William Ruto, Kenyan deputy president and presidential candidate for the United Democratic Alliance (UDA) and Kenya Kwanza political coalition, in the town of Kibigori, Kisumu county, Kenya 30 July 2022. REUTERS/Baz Ratner

The International Monetary Fund (IMF) has based its loan to Kenya on three new conditions, which do not match the populist approach of the leading presidential aspirants - signalling a potential conflict between the multilateral institution and Kenya's new government.

These three conditions, known as structural benchmarks, include implementation of national tax policy, scrapping fuel subsidies and a push for Kenya Power to fully bridge its fiscal gap by 2023.

These are fresh conditions added to the 38-month $2.34bn (KSh276bn) loan deal Kenya signed in April 2021 under the special drawing rights (SDR) that is currently being settles in tranches and will spill over to the next administration.

The Kenyan authorities requested the “establishment of new quantitative performance criteria for relevant indicators for June 2023 and the establishment of three new SBs (Structural Benchmarks) related to issuance of a national treasury circular presenting an action plan for development,” said the IMF’s deputy managing director Antoinette Sayeh after approving an additional $235.6m loan to Kenya last month.

However, the demands will make things more difficult for Kenya’s top two presidential aspirants, Raila Odinga and William Ruto, who have both promised interest-free loans, lower prices for basic commodities like flour and concessional loans to small and medium-sized enterprises (SMEs).

Blueprints

In his economic blueprint, deputy president Ruto blamed economic giants such as Safaricom for hurting Kenyans through “mandatory transfer charges, high interest on M-Shwari loans and predatory lending” that exposes Kenyans to “unending debt cycles”. He has vowed to bring Safaricom’s financial services under the regulation of the Central Bank of Kenya.

Pushing a bottom-up economic model, Ruto says his administration will focus on SMEs. Ruto’s proposed programmes include food distribution through three policies: the Nyayo education schemes, Nyumba Kumi (ten-household cluster) food distribution schemes and the Chakula Mashinani (far-flung) food distribution schemes.

Similarly, if elected, Raila says he would establish “loan funds at concessional rates” give “options for loan guarantees” through accessible and affordable credit facilities and deliver cash transfers of KSh6,000 per month to each vulnerable household. Focusing on the social safety net, Raila is additionally promising to review taxes and levies on petroleum products.

The IMF’s conditions and the rising in the central bank lending rate to 7.5% in May, however, may make policy implementation difficult.

In the detail

The IMF programme is aimed at helping Kenya address its limited fiscal space. High levels of government expenditure have caused public debt to rise, currently 70% of gross domestic product.

At the top of the IMF’s action plan is the elimination of the fuel subsidy and implementation of the national tax policy, which seeks to expand the tax base and revenue targets, which may impact previously untaxed sectors including informal business and agriculture. This may have a ripple effect of increasing the prices of basic commodities, such as flour.

We [Kenya] are currently closed out of the international markets. That close out is measured at approximately $2.5bn per annum. Pushing a populist agenda now would mean leaning more on the domestic market, which would trigger a runaway negative feedback loop.

The IMF also wants the minimum value-added tax on petroleum products to reach at 12%, up from the current 8%. It recommends that all goods should be taxed at 16% and the preferential rate should not be lower than 12%.

Most subsidies will however cease if the IMF presses its way to ease pressure on Kenya’s resources. The Bretton Woods institutions already warned Kenya against a planned 15% power bill cut, arguing that it will worsen Kenya Power’s financial woes. The first 15% power reduction implemented in January lowered the utility’s revenue by an estimated KSh.26.3bn per annum, according to the IMF.

At the moment, Kenya has committed to honour the IMF’s demands but it remains to be seen how the next administration will manage it. Kenya is currently finding it difficult to secure loans from the international market, partly due to recent reports about the country’s declining foreign-exchange reserves.

“We [Kenya] are currently closed out of the international markets. That close out is measured at approximately $2.5bn per annum. Pushing a populist agenda now would mean leaning more on the domestic market, which would trigger a runaway negative feedback loop,” says Aly-Khan Satchu, an economist and investment expert at Rich Management.

Weighty conditions

When Kenya resorted to the IMF concessional loans after bilateral debts from lenders such as China turned expensive, the institution gained a large say in shaping the government’s policies, praising Kenya’s economy on one hand but also pushing hard-hitting reforms. The demands linked to these loans have previously contributed to tax hikes, expenditure cuts and job losses at financially troubled state corporations undergoing structural reforms.

But another dilemma to the incoming regime is how to address external debt. Deputy president Ruto has maintained that Kenya can manage its massive debt stock and does not need to renegotiate with partners such as the IMF.

“What we cannot entertain as a country is a position that we cannot service our debt…. that we need to go out there and renegotiate our debt. I think that will send the wrong signal,” Ruto said during the July presidential debate that Raila did not attend.

On the other side, Raila previously lobbied for the renegotiation of loan terms during his campaign.

“This [loan issue] is going to be the first order of business for any new administration. We have run out of fiscal room. Manifesto promises of increased spending are dead in the water. In fact, the government will need to reduce fiscal spending in real terms from day one,” says Satchu.

He adds: “The IMF loans are generous in terms of the applicable borrowing rate. Negotiations with bilateral creditors, China and eurobond holders are the key to this issue.”

Loan repayment to Chinese lenders, who have been reluctant to offer African countries debt relief, accounted for 81% of the KSh90.26bn that Kenya’s national treasury spent on servicing bilateral debt in the nine-month period through March 2022.

The international bond market is equally not making foreign loans to Kenya cheap. The treasury suspended issuing eurobonds early this year due to the high rates it would have to pay in interest.

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