Kenya's bitter pill in the IMF’s pre-cautionary credit facility

National treasury building

Kenya is once again at the mercy of the dreaded global lender - the International Monetary Fund (IMF).

The country will be kowtowing before the lender of last resort, begging for the renewal of what is basically an ‘unnecessary’ precautionary credit facility.

The extension, done after a review of the country’s macroeconomic situation by some IMF officials who this month are expected to meet National Treasury Cabinet Secretary Henry Rotich and Central Bank of Kenya (CBK) Governor Dr Patrick Njoroge, will hinge on Kenya agreeing to tighten its belt by cutting on expenditure and increase taxes.

The standby facility is given to member countries facing an immediate or potential balance of payments need.

To qualify for the facility, the country has to demonstrate that it has a strong balance of payments.

This means receiving more from the export of its goods and services than it is paying for its imports of the same, technically known as the current account deficit.  

However, Kenya has enough foreign currency reserves to last for about five months. This was captured well by Barclays Africa Chief Economist Jeff Gable.

“I would say that the reserve position of the CBK is - even in the absence of IMF programme, more than comfortable in my mind. So that is not in of itself, an issue for the Shilling,” said Gable after unveiling the 2018 Kenya Economic Outlook in Nairobi. He explained that there are times when the country needs the facility and others when it doesn’t.

But he insisted that the facility sends a strong signal of preparedness to investors. Kenya, it seems, has no such luxury of choice. It desperately needs this stand-by facility. It is a bitter pill that Kenya will have to swallow anyway.

To continue with its massive infrastructure projects which have turbo-charged the country’s economic growth, the Government would have loved to continue chalking up more debts.

Unfortunately, Kenya is running out of that fiscal space.

An agreement to renew the standby credit facility in March will shrink the space even further.

The fact is that the rate at which the country has been piling up debts has been faster than the rate at which the economy has been growing.

This means that a lot of revenue has gone towards debt-servicing as opposed to, for example, buying medical supplies, increasing the number of textbooks in schools, paying pensioners or paying or maintaining hospitals.  

Such a scenario scares investors. And their suspicions must have been piqued in the recent times by reports that credit rating agency Moody’s put Kenya’s B1 rating on review for downgrade.

Moody’s cited “persistent, large, primary deficits and high borrowing costs” which continued to drive government indebtedness higher.

The American rating agency was also worried by Government’s liquidity pressures which the rating agency noted risked rising in the face of increasingly large financing need.

“Moody’s expects that Kenya’s government debt burden, which has risen to 56.4 per cent of GDP in June 2017, up from 40.5 per cent five years ago, will continue to rise due to persistently high primary deficits and borrowing costs,” said Moody’s in a statement released on October 2, 2017.

“Pressures on the government primary balance, which posted a deficit of 5.3 per cent of GDP in the latest fiscal year ending June 2017, come from elevated development spending and weak revenue performance.”

“Unless a decisive policy response is introduced, the upward trajectory in government debt will see debt-to-GDP surpass the 60 per cent mark by June 2018,” added the statement.

And the liquidity pressures seem to be catching up with Kenya.

Kenya recently rescheduled a syndicated loan that it was supposed to pay in October 2017 to later this year.

It has since taken a syndicated loan of Sh77 billion which it will use to repay the October debt.  Kenya is also expected back into the international market to issue another Eurobond.

With the widening fiscal deficit, a small shock like sudden outflow of capital, increase in the global price of oil or strengthening of the dollar, is enough to tilt the scales against Kenya.

That is why even as Kenya tries to court investors, some might decide to hold on to their money. And those who offer their money to Kenya will price it expensively.

 Kenya has no option but to take these costly loans, not only to use them fund infrastructure projects but also ensure its foreign reserves are replenished, according to Standard Chartered Chief Economist Razia Khan.

Prop up the Shilling

Ms Khan noted that most of the country’s reserves have been boosted by the inflows of debt which has helped to prop up the Shilling.

The alternative would have been improved earnings from our exports, but their performance has been but unimpressive. Other main sources of foreign currencies including tourism and diaspora remittances from Kenyans working abroad have also not fetched the country as much foreign currencies.

Debt remains the surest way to topping up our reserves. According to Ms Khan, this is the only way out for Kenya whose fiscal space is fast shrinking.

“Once a country issues a Eurobond, it makes sense to come back to the market to refinance,” explained Khan, noting that Kenya has the advantage of tapping from both external and domestic market. Unfortunately, investors might find Kenya risky.

They might price our credit expensive, and insist we pay them faster. With many debts maturing between 2018 and 2020, it might be disastrous.

That is why Kenya urgently needs the precautionary credit facility from the IMF. This credit facility will be important for Kenya as it sends a signal to investors that Kenya has adequate fire-power.

“If we sign up for an IMF programme, we will be signing up for a requirement of fiscal policy and that will provide reassurance to investors. So the risk premium that we have to pay on our debt declines,” said Khan when launching The Economic Outlook: Global, Regional and Kenya. She said that with the facility, Kenya will have identified itself as a good reformer.

By end of March 2018, Kenyans will know whether or not the IMF will renew the credit facility of about Sh150 billion. Treasury will certainly be pushed to the wall. For so long, they have put off calls fiscal consolidation, ramping up debts to finance mega infrastructures which have in turn contributed to the growth trajectory. Not anymore.

In its latest Budget Policy Statement, Treasury insists the debt is sustainable but flags current expenditure, low absorption of development funding and low revenue collection as some of the issues that make it difficult for the Government to achieve its fiscal targets.

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