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September 20, 2018

Kenya insists it will implement reforms to extend IMF deal

National Treasury CS Henry Rotich. FILE
National Treasury CS Henry Rotich. FILE

National Treasury CS Henry Rotich has promised to implement contentious reforms demanded by the IMF fund to extend a frozen $1.5bn emergency standby facility that expires next month. 

Rotich told the Financial Times that he will halve the government’s budget deficit by June 2021 and repeal or reform an 18-month-old cap on bank lending rates that has resulted in a massive fall in loans to the private sector. 

Read: We are concerned about Kenya's debt burden, IMF tells MPs

The announcement comes two days after the IMF said that Kenya’s access to the standby facility, which is designed to alleviate a balance of payments crisis, had been suspended since last June. The fund had blocked access because it had been unable to conduct a review amid a prolonged political crisis over disputed presidential elections. 

Kenya’s finance minister has promised to implement contentious reforms demanded by the International Monetary Fund to extend a frozen $1.5bn emergency standby facility that expires next month. 

Henry Rotich told the Financial Times that he will halve the government’s budget deficit by June 2021 and repeal or reform an 18-month-old cap on bank lending rates that has resulted in a massive fall in loans to the private sector. 

The announcement comes two days after the IMF said that Kenya’s access to the standby facility, which is designed to alleviate a balance of payments crisis, had been suspended since last June.

The fund had blocked access because it had been unable to conduct a review amid a prolonged political crisis over disputed presidential elections. 

“We don’t need the IMF resources at the moment but we need a precautionary or insurance arrangement,” Rotich said. “So we’d definitely like to continue with the same facility.” 

He said he would curb spending and boost revenue to reduce the budget deficit from 8.9 per cent last June to 4 per cent by June 2021 and “come up with a package of reforms that will help us get out of the current [interest rate cap] arrangement so we can extend credit to the private sector”. 

Jan Mikkelsen, the IMF’s Kenya resident representative, said the two reforms were “key” to extending the facility. 

An IMF team is in Nairobi to discuss how the programme could be renewed. 

Kenya is East Africa’s dominant economy and for many years until 2017 was one of the best performers in the region.

But last year growth slowed to an estimated 4.8 per cent from 5.8 per cent in 2016 because of the political crisis, a severe drought and the fall in lending to the private sector. The ratio of Kenya’s debt to gross domestic product has swollen from 42 per cent in 2012 to about 51 per cent. 

Ministers and investors are now optimistic, however, that the economy will recover quickly with both the drought and political crisis seemingly over. On Wednesday Kenya priced its first 30-year US dollar sovereign bond, a $1bn issuance, along with a $1bn 10-year US dollar bond. Traders said that the 8.25 per cent coupon rate on the 30-year paper was high but not excessive. 

Rotich said the fact the bonds were seven times oversubscribed showed “the credit story of Kenya remains positive”. He added that about a quarter of the bonds would be used to pay off debt and the rest spent on development projects.

However, analysts are sceptical that Mr Rotich will be able to deliver on either reform. 

Razia Khan, chief Africa economist at Standard Chartered, said the “need for fiscal consolidation is fully realised” at the finance ministry. 

“Whether this is taken on board by all actors in Kenya is a different matter,” she said. “There will have to be a broader buy-in that this is the way to go.” 

Aly-Khan Satchu, an investment analyst in Nairobi, said: “So far we’ve seen no willingness from the government to bring the deficit under control. He’s got to slash a few things and so far I’ve never seen him wield a knife.” 

Eliminating the interest rate cap, passed by parliament despite opposition from the government and central bank, will also be tricky, according to Anzetse Were, an independent economist. “There are political issues around it despite it making technocratic sense,” she said. “Many Kenyans won’t understand why it’s not needed and the opposition will jump on it.”

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