IMF Urges Kenyan Spending Restraint as Agreed in Loan Deal

  • Nation agreed to cut spending in $1.5 billion standby pact
  • Lender to meet with government officials later this month

The International Monetary Fund will insist that Kenya adheres to agreed spending cuts in its first assessment of the government’s fiscal stance under a $1.5 billion standby-loan agreement.

IMF officials will be in the capital, Nairobi, later this month to examine whether the Treasury is complying with commitments made under the precautionary financing facility arranged in March, said Armando Morales, the Washington-based lender’s representative in Kenya.

One of the conditions for the government of East Africa’s biggest economy is for it to narrow its budget deficit to below 7 percent of gross domestic product over the term of the facility, which it can tap when hit by exogenous shocks. Kenya projects its funding gap widening to 9.3 percent of GDP in the year through June 2017, from 7.9 percent in 2015-16.

“The IMF is not aware of any shift by the government” away from plans to reduce its deficit to below 7 percent, Morales said by phone from the capital, Nairobi, Wednesday. “An agreement would have to be reached on the way forward after this assessment,” he said of Kenya’s continued access to the facility.

‘Difficult Conversations’

The Treasury intends to spend 2.3 trillion shillings ($22.7 billion) during this fiscal period, 28 percent more than it did last year. It plans to borrow 225 billion shillings locally and another 462 billion from external creditors to plug the shortfall. The government is considering a second Eurobond, after raising $2.82 billion in a debut sale in 2014.

The deficit has been widening since Uhuru Kenyatta became president in 2013 as his government ramps up financing for infrastructure projects, including a $3.2 billion railway between the capital and the port-city of Mombasa that’s Kenya’s biggest public investment since attaining independence in 1963. The 54-year-old is preparing for a second and final term at elections scheduled for Aug. 8, 2017. The budget shortfall was 6.7 percent of GDP just before he was elected.

Kenya will have “difficult conversations” later this month with the IMF team on budget cuts before the vote, Jibran Qureishi, an economist for East Africa at Stanbic Holdings Ltd, said by phone from Nairobi.

“Chances of cutting back spending are slim,” he said. “Governments tend to overspend to regain power. Cutting back will not be easy. It’s a very difficult balancing act.”

‘Open Taps’

A decision to provide regional county governments with Central Bank of Kenya overdraft facilities may also raise public spending and could stoke inflationary pressure, according to Mark Bohlund, Africa and Middle East economist for Bloomberg Intelligence.

“The risk is that the taps have opened ahead of the elections,” Bohlund said by phone from Nairobi. Spending in the counties will be geared toward winning elections and presents “a bit of a fiscal conundrum,” he said. “The incentive is to win elections, rather than improve health care or education.”

Differences with the IMF on budget cuts “may make it more difficult for Kenya to access the facility if need be,” Bohlund said.

While the central bank forecasts economic growth of 6 percent this year, expansion may be slower at 5.8 percent, Yvonne Mhango, a sub-Saharan Africa economist at Renaissance Capital Ltd., said in an e-mailed note, citing decelerating credit growth following the government’s decision to reintroduce interest-rate caps.

“The upcoming August elections pose a downside risk,” she said.

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