Kenya left in the lurch after IMF deal crumbles

Kenya has proposed to halve its value added tax on fuel and seeks to adopt austerity measures as it strikes a middle ground following its failure to renew a $1 billion standby facility with the International Monetary Fund.

The VAT on fuel, cutting down on government spending and removal of caps on bank interest rates were among the conditions Kenya had promised to meet to continue enjoying the facility that serves as an insurance policy for lenders.

In March, Kenya had agreed to implement the IMF condition. Already parliament had reached a middle ground on the interest rate cap condition by removing the cap on deposits.

Hours before Kenya’s concessions, the IMF had announced that there would be no more reviews for this insurance programme which expired last week Friday (September 14), leaving the Kenyan economy exposed to shocks that can erode foreign reserves.

“The second review of the IMF-supported programme has not been completed, and the programme will expire today (September 14). The IMF team will remain in close contact in the near term, and the IMF will continue to support Kenya’s reform efforts through policy advice and capacity development,” the IMF’s resident representative for Kenya Jan Mikkelsen told The EastAfrican.

“Since the programme will expire today, there are no more reviews for this programme,” added Mikkelsen.

President Uhuru Kenyatta on Friday announced a raft of measures that appear to meet halfway some of the IMF conditions. A debate on the supplementary estimates is expected to offer a cut in government expenditure that will reduce pressure on revenues collected.

“I have proposed to halve the 16 per cent VAT so that we can alleviate the suffering of Kenyans. Further, with the realisation that our funding gap is still a challenge, I have proposed wide-ranging cuts in government spending, as well as austerity measures,” President Kenyatta said, adding that any further delay in the implementation of the proposed tax measures would compromise his government’s ability to deliver.

On Thursday, President Kenyatta rejected an amended version of the Finance Bill that had sought to postpone the removal of tax relief on petroleum products.

The revelation that Kenya would not renew the IMF facility has seen the shilling weaken 0.6 per cent to 101.25 units against the dollar in the week, heading for its biggest weekly decline in three months.

At the same time, yields on Eurobonds due in 2024 were trading at 7.591 per cent. Already, Kenya has burnt through $1 billion reserves in the past four months. Central Bank data shows that the country’s reserves dropped to $8.56 billion last week from $9.5 billion in April.

But even as the National Treasury put on a brace face insisting that the country could survive without the IMF-support facility, the economic fundamentals paint a diffident picture with swelling public debt, rising inflation, falling credit to the private sector, declining revenue collections and the depreciating shilling being issues of national concern.

Higher risk premium

A government source told The EastAfrican that the government was not sure whether the IMF would be willing to resume talks over the stalled budgetary support programme.

“We have forex reserves that can meet the demand for the next five to six months but if we see our reserves are diminishing we cannot sit back and wait for six months. We will start negotiations soon, but if our reserves are still strong, we will wait until the next IMF talks, which usually come around November; still, I do not think talks on this facility are on the agenda,” the source told The EastAfrican.

The two-year (March 2016-March 2018) facility was approved by the IMF board to help Kenya deal with external shocks that distort the country’s balance-of-payments position.

The programme was extended by six months after Kenya delayed completion of its programme reviews due to the elections last year.

“There is nothing unique about a programme ending. We had a successful two-year programme, which is now coming to an end and we will continue to engage with the Fund with a view to entering into a new arrangement or relationship. We can still engage the IMF and get back into it if we think it is necessary,” National Treasury Cabinet Secretary Henry Rotich said.

“We should be relying less and less on IMF facilities because we have come of age in macroeconomic management and are able to go to the international capital markets with or without the Fund,” Mr Rotich added.

Analysts now say that the lapse of the programme shows Kenya’s shortsighted nature and a blow to the country’s sovereign credibility, coming at a time of growing concern over its debts.

Jibran Qureshi, regional economist at Stanbic Bank Kenya, said that this new development now raises concerns as to what extent Kenya will be able to raise external debt in international capital markets going forward.

“While we acknowledge that Kenya currently does not face a balance-of-payments crisis and hasn’t since 2011 arguably, it is never been about the money, but rather the confidence the market, and especially foreign investors, place in IMF involvement. We have seen that in Zambia recently. Hence, it will not be surprising if investors penalise Kenya by demanding a higher risk premium, the next time they tap the international capital markets,” Mr Qureishi said.

The recalling of parliament is also meant to bring back the Finance Bill to its original conformity, which was to include new tax measures that had been booted out.

Even as Kenya signals a future renegotiation of the either the precautionary facility, Policy Support Instrument or any other programme, the performance criteria will not be too dissimilar.