By Eva Otieno, Strategist, Africa Research, Standard Chartered Bank
On April 2nd, the International Monetary Fund (IMF) Executive Board approved a 38-month, USD 2.34 billion, Extended Credit Financing (ECF)/Extended Fund Facility (EFF) for Kenya with an immediate disbursement of USD 307.5 million.
The IMF approval followed Kenya’s earlier decisions to undo Covid-related tax relief measures. These included revising corporate and personal income taxes up to 30% from the 2020 rate of 25%.
Kenya also agreed to participate in the Debt Service Suspension Initiative (DSSI). The DSSI may provide some relief on foreign currency debt service payments.
That said, the IMF Extended Credit Facility /Extended Fund Facility loan is not a normal loan that Kenyans are used to.
First, it is very concessional, and second, it is a loan granted to a government with the aim of reducing its public debt by containing the government’s borrowing.
This is made possible by the strict conditions that the IMF attaches to its loans also technically known as ‘performance criteria’. The performance criteria helps the IMF ECF/EFF program meet its objectives which include supporting the Kenya government’s COVID-19 response while reducing debt vulnerabilities via multi-year fiscal consolidation centered on raising tax revenues.
Indeed, the pace of fiscal consolidation seems to be growth-friendly given that Kenya can gradually reduce its fiscal deficit to 3.6% of GDP in FY25 from 8.7% of GDP in FY21. Some countries with IMF-funded facilities are required to reach a primary surplus even sooner than implied by Kenya’s fiscal consolidation path.
The IMF takes governance seriously and the recent IMF report has a breakdown of how the USD 739 million Rapid Credit Financing (an emergency assistance facility) was used.