•The faculty is also expected to help President William Ruto's government meet high recurrent budget needs that saw civil servants' pay delayed in April.
•The global lender said Kenya’s economy has demonstrated resilience to shocks but continues to face vast challenges.
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The World Bank has approved a $1 billion (Sh138 billion) loan for Kenya as part of Development Policy Operation (DPO) for budgetary support.
The facility is a big boost to the country at the time it is expected to retire the first Eurobond worth $2 billion issued in 2014.
The country is expected to make the bullet payment to retire the 10-year sovereign bond whose issuance in 2014 signalled the Jubilee administration’s turn to commercial debt to fund the budget.
Kenya took up $2.75 billion (Sh345.5 billion at today’s rates) in two tranches consisting of a 10-year paper and a five-year issuance ($750 million), at interest rates of 6.78 per cent and 5.87 per cent respectively.
Several institutions including Moody's have recently cast doubt on Kenya's ability to pay, downgrading the country's creditworthiness to high default status.
The rating agency together with the International Monetary Fund (IMF) said Kenya's funding conditions have deteriorated considerably over the past two months, with very low net domestic issuance contributing to financing shortfalls and delays in government spending.
The facility is also expected to help President William Ruto's government meet high recurrent budget needs that saw civil servants' pay delayed in April.
"This facility aims at providing low-cost budget financing to support key policy and institutional reforms for Kenya’s near-term objectives of fiscal consolidation as well as its long-term goal of green and inclusive growth," World Bank said in a statement.
The global lender said Kenya’s economy has demonstrated resilience to shocks but continues to face vast challenges including the lingering economic impacts of the Covid-19 pandemic, the global repercussions of Russia’s invasion of Ukraine, increasingly frequent climate shocks, synchronous monetary tightening in advanced economies, and debt vulnerabilities.
The first bundle of policy reforms will target the creation of fiscal space in a sustainable and equitable manner, including revenue and expenditure measures to support fiscal consolidation, strengthening the debt management framework, and protecting pro-poor expenditures.
These will be augmented by a second set of reforms that improve competitiveness to boost agricultural exports, which is both a powerhouse sector where Kenya has a clear comparative advantage and the sector employing most of Kenya’s poor.
Transparency and accountability will be strengthened through a third wave of reforms to improve governance and financial inclusion for private sector-driven growth by strengthening the confidence of the private sector in the government’s commitment to a level playing field.
The lender says that each of the three pillars contains actions for combatting climate change and improving inclusion, important crosscutting focus areas of the operation.
“The government has demonstrated its commitment to fiscal consolidation, which is key for reducing debt vulnerabilities and ensuring long-term growth sustainability,” said Keith Hansen, World Bank country director for Kenya.
The government’s multi-sectoral reform programme supported by the DPO stems from its long-term sustainable and inclusive growth agenda.
In agriculture, the reforms supported by the DPO will reduce distortions in agricultural markets by eliminating administrative price setting for publicly procured cereals.
The reforms will also create an institutional framework for the effective management of agricultural soils and water by approving the National Agricultural Soil Management Policy.
Equally critical is support to Kenya’s agricultural exports through upgrading phytosanitary and food safety standards.
In governance, the DPO supports an important set of initiatives to promote objective decision-making through the Conflict-of-Interest Bill, to streamline the state’s orderly exit from commercial investments through amending the State-Owned Enterprises Privatisation Act, and to improve access to climate change information and mandate public consultations on the government’s climate change initiatives.
“The government’s reforms, supported by the DPO, will help to achieve fiscal consolidation, which is essential for reducing the debt burden and related risks, in an equitable and sustainable manner by safeguarding social spending while supporting much-needed revenue and expenditure measures,” said Aghassi Mkrtchyan, senior economist for the World Bank in Kenya.
Early this month, Kenya defended poor Moody's rating, saying things are looking up.
National Treasury PS Chris Kiptoo told the press that the country is expecting a capital injection of close to Sh200 billion by the end of June.
He added that the amount would be used prudently to clear maturing loans and meet recurrent and development budget needs.
Kiptoo revealed that the country was expecting $300 million (Sh41.5 billion) as part of an external loan plan and a further $1 billion.
According to him, the amount from World Bank will largely be used to ease the cash flow crisis and boost its dwindling foreign exchange reserves that have taken a hit from the weakening shilling.
The country is also in the market for the fifth Eurobond of close to $2 billion amid threats of high-interest rate due to poor credit status.
The country's total debt was recorded at Sh9.4 trillion at the end of March, accounting for over 60 per cent of the country's Gross Domestic Product (GDP).