Kenya stares at an economic crisis

President Uhuru Kenyatta with Christine Lagarde, IMF Managing Director. Treasury has to chose between respecting deal with the Fund on petroleum tax or backing out. [Courtesy]

The Government has found itself in a delicate position, balancing between keeping its commitments to international donors and caving in to the public interest.

Two days from today, Kenya might find itself on a path to financial ruin should the International Monetary Fund (IMF) lock it out of a Sh100 billion precautionary credit facility.

Without a deal, Kenya could be in trouble as this could signal to international investors that the country is a 'high-risk' investor destination.

According to an agreement Kenya signed with the bondholders of the $2 billion (Sh200 billion), they are at liberty to recall their outstanding principals with interest if Kenya either leaves the IMF or is ineligible for the fund's resources. This could trigger an economic meltdown.

Standby arrangement

Meeting IMF’s condition for the standby arrangement (SBA) will require Kenya to, among other measures, continue levying the 16 per cent value added tax (VAT) on petroleum. This punitive tax has already kicked up a storm around the country.

Another major demand by the Washington-based institution is the removal of the interest rate cap, a promise that has been thwarted by MPs.

Treasury expects to collect about Sh71 billion from the new fuel tax. This will go a long way in reducing the country’s fiscal deficit - which occurs when a government's total expenditure exceeds the revenue that it generates - from 8.8 per cent of GDP in the 2016/17 financial year to 5.7 per cent of the GDP, as it had promised the IMF.

The Standard has learnt that disassociating with the IMF is no walk in the park.

If Kenya falls out with the Bretton Woods institution, investors who have given Kenya loans running into Sh475 billion might recall their cash.

Crisis meeting

As a result, there has been a flurry of meetings between National Treasury officials and some MPs to avert a crisis.

There are fears that the impending suspension of the IMF-backed fuel levy and Parliament’s rejection of Treasury’s proposal to abolish interest rate controls could see Kenya locked out of IMF’s precautionary credit.

The Eurobond II Prospectus, which was organised by Citibank, JP Morgan, Standard Bank and Standard Chartered Bank, reads: "Holders of the 2028 notes or the 2048 notes…who hold at least 25 per cent in aggregate principal amount of the relevant notes then outstanding may declare such notes to be immediately due and payable at their principal amount together with accrued interest if the issuer (Government of Kenya) ceases to be a member of the IMF or ceases to be eligible to use the general resources of the IMF."

National Treasury Principal Secretary Kamau Thugge said Kenya would neither pull out of the IMF nor become ineligible to receive credit from the fund for failing to meet certain commitments such as the removal of interest rate cap.

Current situation

“What they are saying is not the current situation,” said Dr Thugge, explaining that being denied access to resources is not the same as not having an arrangement with the IMF.

Thugge said that Zimbabwe, for example, was not eligible to receive resources from the IMF as they had accumulated arrears.

“They (Zimbabwe) had not paid the IMF their money,” said the PS.

The transaction advisers to the Eurobond note warned: "In the event of non-renewal of the facility, Kenya may have reduced buffers in the event of any significant exogenous shocks and significant adverse movements in the balance of payments position.

“In addition, statements made by the IMF may contain adverse information that could negatively impact the price of the notes."

 

[More details in the Financial Standard]