Kenya has reached a staff-level agreement to receive $976 billion (about Kes126.4 billion) from the International Monetary Fund (IMF). However, the agreement which was announced on Tuesday, is subject to approval by the IMF's Executive Board.

According to an update from the IMF, if the Board approves the second review of Kenya's Resilience and Sustainability Facility, the country would gain immediate access to $120 million.

"The policy package seeks to preserve debt sustainability and price stability, manage fiscal risks, and address financial sector vulnerabilities," noted Ms. Haimanot Teferra, the head of the IMF team in Kenya.

"The unfortunate losses of lives, displacement of people, and destruction of infrastructure and agricultural land from the recent floods have strained resources and highlighted the urgent need for comprehensive disaster risk management as well as support from both national and international stakeholders to respond to the immediate needs and to rebuild a more resilient infrastructure."

This funding is part of a larger $3.6 billion lending agreement that Kenya initially secured in April 2021. The deal has been critical in supporting Kenya's economic resilience and sustainability, especially during periods of financial turbulence in the region.

Kenya's financial health has been strained since 2022 due to persistent liquidity woes. Despite these difficulties, IMF said Kenya has continued to show resilience by successfully issuing a new $1.5 billion Eurobond in February.

This move, though costly, was critical in helping to buy back an older Eurobond in part that is set to mature this month.

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Eurobond potential default

IMF noted that the successful issuance of the Eurobond played a crucial role in alleviating investor concerns about a potential default. It also restored foreign investor confidence in Kenya's economy and contributed to the strengthening of the Kenyan shilling against the US dollar.

Nevertheless, the IMF has cautioned that the economic outlook remains challenging for the country. The primary fiscal balance is expected to worsen in the 2023/24 financial year, exacerbated by shortfalls in tax collections.

Consequently, Kenya's domestic borrowing needs are projected to remain high, which will increase interest payments and put additional pressure on public debt. The IMF noted that despite the recent strengthening of the shilling, these fiscal pressures are likely to persist.

"Enhancing tax compliance and increasing the efficiency of expenditures through public expenditure and wage bill reforms, state-owned enterprise restructuring, rationalizing unproductive current spending, and better targeting of subsidies and transfers while ring-fencing social and development spending will be key to enhancing the credibility of the consolidation strategy in FY2024/25 and the medium term," the IMF explained.

Kenya's current agreement with the IMF has been extended and expanded over time, reflecting the ongoing adjustments needed to address the country's evolving economic conditions. The current review, the seventh under this program, is a part of the continued cooperation between Kenya and the IMF in addressing persistent fiscal challenges.

In parallel with the IMF support, Kenya has also secured financial assistance from the World Bank. Last week, the Central Bank of Kenya governor announced that part of a $1.2 billion World Bank budget support loan would be used to make a $500 million payment on a Eurobond maturing this month.

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