IMF loan to support economic recovery in Kenya
March 18, 2021
Kenya’s economy is now accelerating after the shock of COVID-19, but the pandemic has left a deep imprint on the country’s fiscal and debt situation.
Earlier this year, staff and the country’s authorities reached a tentative agreement on a program to support the next phase of the country’s response to the health crisis.
IMF country focus spoke with IMF Kenya Chief of Mission Mary Goodman, who explained that the loan would be used to support government reform plans and help meet financing needs.
What has been the impact of the COVID-19 pandemic on Kenya and its economy? And how did the country react?
Like many other countries around the world, Kenya has been hit hard by the shock of COVID-19. The disruption of global trade and travel, and the containment measures put in place to limit the spread of the virus, led to a sharp contraction in economic activity in Kenya in the second quarter of 2020.
School closures, curfews and restrictions on public gatherings have transformed daily life. Some lost their jobs, while many others felt the pressure of a loss of income. For the most vulnerable, this pressure has translated into real difficulties.
The first aggressive actions to support the economy in the face of such an unprecedented shock included immediate temporary cuts in personal income tax and corporate income tax, a temporary reduction in the tax rate. on the added value from 16% to 14% and the budget to cover additional expenditure on health and social protection.
The Central Bank of Kenya has helped cushion the blow with interest rate cuts and cash injections to keep Kenya’s financial system running smoothly. He also encouraged banks to offer borrowers the option to defer repayments on their loans. The temporary elimination of fees for mobile money transactions has reduced costs for users and facilitated the transition from physical exchange of cash to a more secure means of payment.
As a result, while the shock has been significant, the impact on economic growth has been contained. On a year-over-year basis, output growth picked up from -5.5% in the second quarter of 2020 to -1.1% in the third quarter. Overall growth in 2020 would probably have been close to zero and it is expected to rebound strongly in 2021.
As economic activity picks up, many challenges remain. Public health is still under pressure with the start of the deployment of COVID-19 vaccines. Rising poverty has delayed progress towards Kenya’s development goals. Kenya’s fiscal and debt situation also worsened, adding to the challenges that existed even before the shock.
The IMF provided emergency pandemic support last May, why is a Fund program needed now as the economy recovers?
In May, the IMF provided $ 739 million in the form of an interest-free loan under the Quick Credit Facility to help Kenya weather the initial shock. This helped cover the cost of additional health and social protection expenses and accelerate payments to support the economy.
The new program with the IMF will support the next phase of the government’s response to COVID-19. Combining agreements under the Extended Financing Facility and the Extended Credit Facility, it provides for low-cost financing of $ 2.4 billion over the next three years. Other development partners will also provide substantial amounts of concessional finance. Without this aid, Kenya would have to aggressively cut investment spending and social programs, making it more difficult to achieve a sustainable and inclusive recovery.
Is the IMF proposing fiscal consolidation for Kenya under the new loan agreement?
As the pandemic continues to threaten both lives and livelihoods, authorities are determined to protect vulnerable groups while paving the way for a strong recovery. The program allows for the necessary health, social and development spending. This is complemented by an accommodating monetary policy.
The program also supports the authorities’ medium-term fiscal consolidation plan. Kenya is at high risk of debt distress and reducing the budget deficit is critical as the COVID-19 shock wears off. The government has already started to reverse some of the extraordinary measures introduced at the start of the shock. This includes temporary tax cuts, which ended in early 2021.
The recently released 2021 Fiscal Policy Statement provides an overview of Kenya’s fiscal policy priorities and targets. It envisions a multi-year effort through a combination of revenue mobilization and expenditure rationalization measures that will reduce the budget deficit to less than 4% of GDP by fiscal year 2024/2025. The public debt / GDP ratio will therefore be firmly on the downside.
The impact of fiscal consolidation should be mitigated through more efficient spending. Supported by a transparent use of funds, this will help ensure that government spending is channeled where it is most needed. It will also free up resources for private investment. Together, these measures will help create the conditions for sustainable and inclusive growth, which should enable Kenya to quickly resume progress towards its development goals.