Kenya eyes new IMF programme as Sh301b arrangement nears end

With the current International Monetary Fund (IMF) Sh301 billion programme set to expire in April, the Kenya Kwanza government is exploring options for a successor arrangement to ensure continued economic support. 

The existing programme, approved in 2021, during the reign of former President Uhuru Kenyatta, was designed to help Kenya recover from the economic impact of the pandemic and address debt vulnerabilities. 

Both officials and the IMF have acknowledged the expiring programme played a significant role in providing financial assistance and guiding essential economic reforms.

They reckon a new arrangement would provide much-needed relief for the cash-strapped Kenya Kwanza administration, particularly as local revenues decline in a struggling economy.

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The IMF has previously emphasized the necessity for swift reforms, including the expansion of the tax base—an approach that may be challenging for taxpayers and triggered the deadly Gen Z-led June protests amid rising living costs.

“A difficult adjustment path lies ahead. A credible fiscal consolidation strategy remains central to addressing debt vulnerabilities while protecting social and development spending,” said First Deputy Managing Director of the IMF Gita Gopinath.

Dr Thugge also addressed concerns regarding the potential impact of declining foreign aid on the economy and Kenyan shilling, particularly following President Trump’s recent order to halt all foreign aid, including to Kenya. 

Last year, the US Agency for International Development (USAID) allocated Sh19.2 billion ($149.4 million) to its Kenya programmes, down from Sh32.4 billion ($251.5 million) the previous year.

However, Dr Thugge indicated that he does not expect any immediate shocks to the Kenyan shilling due to this decline in foreign aid adding that only a significant shortfall in remittances could hurt the local currency.

In a bid to stimulate credit growth, the CBK he said has focused its investigation on five major banks.  The Monetary Policy Committee (MPC) recently lowered the Central Bank Rate (CBR) by 50 basis points to 10.75 per cent and reduced the Cash Reserve Ratio (CRR) to 3.25 per cent.

 “The Committee observed that while the CBR has been lowered significantly, lending rates have only seen a marginal decline,” Dr Thugge noted.

“With these measures, banks are expected to take the necessary steps to further reduce their lending rates, thereby stimulating credit growth and supporting economic activity.”

To ensure compliance, the CBK has initiated on-site inspections of the selected banks to assess their adherence to the Risk-Based Credit Pricing Model (RBCPM) and confirm that they are passing on the benefits of reduced funding costs to borrowers.

“Any bank that fails to extend these benefits will face penalties as stipulated by law,” warned Thugge.

Recent amendments to the Banking Act allow for fines of up to Sh20 million or three times the value of any undue benefits accrued due to non-compliance.

This crackdown comes amid increasing pressure from the government to address high lending rates, which have become a significant concern for businesses and consumers alike.

President William Ruto has urged banks to lower their rates to stimulate economic activity and support struggling businesses.

Despite the CBK’s efforts to ease monetary policy, and Ruto’s pleas, the impact on lending rates has been limited. 

The average lending rate remained relatively high in December, even after multiple rate cuts even as credit to the private sector shrunk.

The banking sector argues that various factors, including the cost of funds, credit risk assessments, and operational costs, continue to influence lending rates.

The CBK’s action is the latest attempt to ensure that the benefits of its monetary policy measures are effectively passed on to borrowers, to stimulate credit to the economy.