Kenya walks tightrope as IMF rules out re­view of $1b standby of­fer

The lender wanted the VAT on fuel, re­duced govt spend­ing and scrap­ping of in­ter­est-rate caps

The East African - - FRONT PAGE - A JOINT RE­PORT

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

The 16 per cent 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 conditionalities. Al­ready par­lia­ment had reached a mid­dle ground on the in­ter­est-rate cap by re­mov­ing the cap on de­posits.

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

“The sec­ond re­view of the Imf-sup­ported pro­gramme has not been com­pleted, and the pro­gramme will ex­pire to­day. The IMF team will re­main in close con­tact with the Ken yan author­i­ties in the near term,” The IMF’S res­i­dent rep­re­sen­ta­tive for Kenya, Jan Mikkelsen, told this news­pa­per.

“Look­ing at the tax rev­enue pro­jec­tions for this fis­cal year, it will be an up­hill task to achieve fis­cal con­sol­i­da­tion through this.”

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 ex- pire 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

Ji­bran Qureshi, re­gional econ­o­mist at Stan­bic Bank Kenya

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.

Pic­ture: File

A queue at a petrol sta­tion in Nairobi af­ter im­ple­men­ta­tion of a 16 per cent levy trig­gered a fuel shortage.

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