New IMF facility will not stabilise Kenya's debt level - Fitch

Kenya will find it difficult to tame its rising debt vulnerability without readjusting its fiscal policy, Fitch Rating has said.

In its latest outlook, the credit rating firm said even with the planned $2.3 billion (Sh255 billion) from IMF, implementation of the fiscal adjustments necessary to stabilise debt levels may prove difficult given challenging political circumstances. 

Last week, National Treasury Cabinet Secretary, Ukur Yatani told Bloomberg that the government is seeking an IMF programme under the lender's extended fund facility as part of a plan to support the country after the pandemic hit public revenue. 

''Kenya’s government has an inconsistent record on fiscal consolidation and implementation of IMF programmes, and there is a general election in 2022, which will add to political difficulties associated with reining in the deficit,'' Fitch said. 

According to the agency, political pressure for higher budget transfers to counties from the central government could add to the difficulty of curbing expenditure, while the debate around the Building Bridges Initiative and its proposed constitutional changes will detract the government from public finance reforms. 

It adds that the pandemic shock will also present challenges to Kenya’s fiscal consolidation efforts, lowering tax revenue and increasing social vulnerabilities.

Kenya’s recent robust growth, averaging 5.6 per cent annually in 2015-2019, was associated with high levels of public expenditure, particularly capital expenditure, adding that a lingering pandemic shock and fiscal consolidation could weigh on medium-term growth.

''Nonetheless, the scale of adjustment necessary to stabilise public debt would be relatively modest,'' Fitch said. 

During the previous assessment of the rating in June, Fitch indicated that if the general government deficit were brought down to 5-6 per cent of GDP on a sustainable basis, this could lead to positive rating action.

It has since raised the forecast, indicating that the deficit will widen to 8.3 per cent of GDP in the fiscal year to June 2021 (FY21) from 7.4 per cent in FY20, reflecting the timing of the pandemic shock relative to the fiscal year and election-related spending pressures.

''We expect that Kenya will not face significant difficulties obtaining funding. Financing plans for the FY21 budget originally included Eurobond issuance sometime in 2020, but these plans were scrapped in the face of the pandemic,'' Fitch said. 

In addition to the IMF’s RCF, the National Treasury has increased domestic debt issuance to help finance the FY21 fiscal deficit.

The rating firm says, if a loan agreement with the IMF is secured and implemented, it could ease Kenya’s financing burden by providing access to relatively cheap funding.

It could also provide reassurance to private-sector investors, enabling Kenya to issue debt on cheaper terms.

Recently, Kenya said it is considering whether to reverse its initial decision not to participate in the G20’s Debt Service Suspension Initiative (DSSI), saying that it could conserve spending of around $640 million (around 0.6 per cent of GDP).

''Kenya’s potential benefits from DSSI participation could vary significantly depending on whether the scheme is extended beyond its current deadline of June 2021,'' Fitch said. 

It added that participation in the DSSI would be unlikely to have implications for the rating unless it extended to cover liabilities to private creditors, which so far has not been the case for any DSSI participant.