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KENYA: IMF deal heralds return to international debt markets

Table of Contents

  • Reforms under Kenya’s three-year USD 2.4bn deal with the International Monetary Fund (IMF) face political constraints.
  • The Treasury’s fiscal consolidation strategy seems slow but may be gambling on a strong economic recovery and leeway provided by continued pandemic uncertainty.
  • In fact, the IMF program could be an ideal precondition to underpin Nairobi’s pending return to the Eurobond market.

On 15 February, the International Monetary Fund (IMF) announced that it had reached staff-level agreement with Kenyan authorities for a three-year USD 2.4bn financing package. While the targets concerning fiscal consolidation seem to contradict very recent statements by the treasury, references to “extraordinary uncertainty” due to the pandemic and the need to “protect vulnerable groups” could give Nairobi considerable leeway to have its cake and eat it too. In fact, getting the IMF’s seal of approval may be part of a grand strategy to reassure investors ahead of a pivot to international debt markets.

The agreement refers to a combined 38-month program under the IMF’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements. Its stated main aim is to reduce “debt vulnerabilities through a multi-year fiscal consolidation effort, centered on raising tax revenues and tight control of spending[…]” and by delivering “a primary balance that would stabilize debt as a share of GDP and put it firmly on a downward path over the course of the program.”

Such goals seem to contrast with the treasury’s 2021-2024 medium-term debt management strategy, submitted to parliament on 11 February. Whilst stating a commitment to reduce fiscal deficits, this would only kick in towards the end of the IMF program: for FY2021/22, a deficit of 8.9% of GDP is penciled in, which is only envisaged to narrow to 3.5% by FY2024/25. Until then, the treasury advocates for raising the KSH 9tn (USD 82.1bn) debt ceiling last modified in 2019 by an unspecified amount. As public debt stood at KSH 7.3tn (USD 66.6bn) at end-2020, equivalent to 65.6% of GDP, the treasury’s strategy thus appears to gamble on outpacing a rising debt load with a strong economic rebound (a bullish 7.6% growth rate is expected for 2021).

The treasury’s planning reflects domestic political incentives, which remain fundamentally misaligned with the IMF’s fiscal retrenchment agenda. In the short term, the government remains preoccupied with pushing through a contentious constitutional amendment bill containing the reform proposals of the Building Bridges Initiative (BBI). The bill is currently before the 47 council assemblies a majority of which will need to approve it before the bill moves on to the national assembly, followed by a costly referendum expected in mid-2021. Yet parties will remain in campaign mode as the August 2022 general election will be looming on the horizon.

As analyzed earlier, the political timetable therefore suggests there is a strong incentive on the Kenyan side to renege on any commitments to spending cuts. The clues for such an approach to work may lie in references to “extraordinary uncertainty” surrounding the economic outlook given the persistence of the Covid-19 pandemic and the need to “protect vulnerable groups”. The latter provides a pretext to maintain high spending on President Uhuru Kenyatta’s ‘Big Four’ legacy agenda (focusing on food security, affordable housing, manufacturing, and universal healthcare). Once the IMF has signed off on a program, the Fund might be vested in seeing a success story and may be lenient when assessing key performance indicators in upcoming reviews.

Why, then, turn to the IMF now?

Notwithstanding political constraints, it may be argued that the timing for the IMF deal could be almost ideal, resting on a fundamental reassessment of the external financing landscape in Nairobi. Evidence of that shift became apparent when Kenya, in January, reversed its earlier position by acceding to the G20/Paris Club Debt Service Suspension Initiative (DSSI). Spurred by Cote d’Ivoire’s successful Eurobond sale in November 2020, it appears as though DSSI membership has largely lost its presumed negative impact regarding financial market access. That is provided it is not perceived as prelude to a more comprehensive debt restructuring request under what may be dubbed ‘DSSI 2.0’ – formally known as the Common Framework for Debt Treatments beyond the DSSI – as recently requested by Chad, Ethiopia and Zambia.

While Kenya specifically exempted private creditors from its debt service suspension request, by end-January it had managed to negotiate a reported USD 378mn debt service waiver from China. Having thus pushed all the right buttons to calm private investors, committing to an official IMF program could now serve as the icing on the cake that would pave the way for Kenya’s pending return to the Eurobond market. In fact, the medium-term debt strategy aims to reverse the foreign-to-domestic net-borrowing ratio from 21:79 previously to 57:43. Over the remainder of FY2020/21, ending in June, and in FY2021/22, the treasury may sell Eurobonds totaling USD 2.3bn.

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KENYA: IMF deal heralds return to international debt markets

Reforms under Kenya’s three-year USD 2.4bn deal with the International Monetary Fund (IMF) face political constraints. The Treasury’s fiscal consolidation strategy seems slow but