IMF and Kenya Reach Preliminary Agreement for $1.1 Billion Funding

Key Takeaway

• IMF and Kenya reached a preliminary agreement for $1.1 billion in funding, including $976 million under an extended fund facility.
• Kenya faces high debt distress with public debt up 20% in 2023 and pending bills at $5.4 billion.
• President Ruto approved a supplementary budget reducing overall spending by 3.3% to address revenue shortfalls and fiscal deficit.

IMF Agreement with Kenya

The International Monetary Fund (IMF) and Kenya have reached a preliminary agreement to unlock approximately $1.1 billion in funding for the East African nation. This staff-level agreement, pending approval by the IMF’s board, will provide Kenya with access to about $976 million under an extended fund facility arrangement. Additionally, an extra $120 million may be disbursed under a Resilience and Sustainability Facility. The IMF stated, "The IMF team and the Kenyan authorities have reached a staff-level agreement on a comprehensive policy package." This policy package aims to address several critical issues, including preserving debt sustainability, maintaining price stability, managing fiscal risks, and addressing financial sector vulnerabilities, while continuing to advance structural reforms.

Debt and Fiscal Challenges

Reducing debt vulnerabilities remains a central objective of the program initially agreed upon in 2021 with the IMF. Kenya is currently at high risk of debt distress, with public debt increasing by 20% in 2023 compared to the previous year. Additionally, pending bills have ballooned to approximately $5.4 billion. The IMF highlighted that a shortfall in tax revenue collection and a deterioration in Kenya’s primary fiscal balance for the financial year ending in June are expected to keep domestic borrowing needs elevated. "As a result, interest payments have increased, putting pressure on public debt even after the latter benefited from a strengthened shilling," the IMF noted.

Budget Adjustments

On Monday, President William Ruto approved the East African nation’s second supplementary budget for the current fiscal year. This budget seeks to reduce the overall budget by 3.3% to 3.85 trillion shillings ($29.7 billion) after nine-month revenue, including appropriations in aid, fell short of the target by 13%. The fiscal deficit for the year ending in June is estimated at 908.6 billion shillings, according to a revised budget approved by parliament last week. The nation plans to finance this gap with 589.3 billion shillings in net domestic financing and 319.3 billion shillings of net foreign loans.