CREDIT POSITIVE

IMF program good for Kenya's fiscal consolidation – Moodys

Implementation risk however, is high given the government's weak track record of fiscal policy effectiveness

In Summary
  • On 15 February, IMF announced that it had reached a staff-level agreement with the government of Kenya (B2 negative) over a Sh263.5billion financing package.
  • The IMF program is set to alleviate liquidity pressure by boosting Kenya's international reserves, and support government fiscal consolidation efforts.
The International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 18, 2013. Photo/REUTERS
The International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington, April 18, 2013. Photo/REUTERS

Kenya's IMF program will support the country's fiscal consolidation efforts, according credit rating firm Moodys.

It however notes that the implementation risk is high given the government's weak track record of fiscal policy effectiveness.

On February 15, the International Monetary Fund announced that it had reached a staff-level agreement with the government of Kenya over a $2.4billion(Sh263.5billion) financing package.

“More immediately, the IMF program will mitigate credit pressures stemming from liquidity risk and over time will support the government's fiscal consolidation efforts in the context of a rapidly rising debt burden,” said Moodys.

 

More immediately, the IMF program will mitigate credit pressures stemming from liquidity risk and over time will support the government's fiscal consolidation efforts in the context of a rapidly rising debt burden
investors at Moodys

The IMF program is set to alleviate liquidity pressure by boosting Kenya's international reserves, and support government fiscal consolidation efforts that the coronavirus pandemic has delayed.

Fiscal consolidation measures will focus on increasing revenue collection, reversing the multi-year trend of declining revenue-to-GDP, and containing spending growth.

A narrowing fiscal deficit would reduce the government's substantial gross borrowing requirements and reduce liquidity risk over time.

In December 2020, the government reversed several tax cuts that it announced as part of a coronavirus relief package in April.

The reversal, according to Moodys, will increase revenue collection in the second half of Kenya's fiscal year, which ends on 30 June 2021, reducing pressure from underperforming tax collection.

Moodys further says the government has scope to boost revenue collection by removing certain tax exemptions and tax waivers.

These exemptions and waivers amount to six per cent of GDP, based on its own estimates, representing a large source of potential additional revenue.

The government expects the fiscal deficit to widen to 8.7 per cent of GDP in the current fiscal year, reflecting lower revenue collection.

Moodys on the other hand forecasts a fiscal deficit equal to 8.2 per cent of GDP, with reduced spending offsetting any revenue shortfalls compared with budget targets.

Over time, the government, with the IMF's help, will likely look to strengthen spending control and improve spending efficiency through public financial management reforms, preventing arrears accumulation and strengthening medium-term budgeting.

The firm also expects fiscal consolidation to be gradual, leaving Kenya's deficits wider than peers over the next few years.

Kenya's large fiscal deficits, along with shifts toward increased issuance of short-term domestic debt and reliance on commercial external financing, are the key drivers of liquidity risk.

Over time, an IMF program that supports a broadening of government revenue and narrowing fiscal deficits would contribute to both stabilising the debt burden and reducing gross borrowing requirements.

Kenya's decision to participate in the G-20 Debt Service Suspension Initiative(DSSI) will provide the government with temporary liquidity relief, reducing the amount of external debt repayments in the very near term.

On November 18 2020, Kenya announced its intension to participate in the Group of 20 DSSI  to defer Sh75.5 billion ($690 million) in debt payments to help it weather the impact of the Covid-19 pandemic on the economy..