Treasury goes for UAE loan as IMF cautions of debt situation

Kenya is moving forward with plans to secure a Sh193 billion ($1.5 billion) loan from the United Arab Emirates (UAE). This is despite the International Monetary Fund (IMF) urging caution due to concerns that this could exacerbate the country’s debt situation. 

To address these concerns, sources cited by Bloomberg indicate that the Abu Dhabi loan will be disbursed to Kenya in tranches, ensuring compliance with borrowing limits set under the four-year IMF programme that concludes in April, reported Bloomberg. 

Kenya is expected to access about Sh91 billion ($700 million) at the beginning of next year, with the remainder to be disbursed later, although timelines are subject to change, reported Bloomberg. 

President William Ruto’s government reckons that the loan will provide a crucial buffer against a budget crisis, particularly as the Kenya Revenue Authority (KRA) has consistently missed its revenue targets.

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The National Treasury is now attempting to reintroduce some proposals through the Tax Laws (Amendment) Bill, projected to yield only Sh174 billion instead of the earlier target of Sh346 billion. 

The success of these proposals remains uncertain amid ongoing resistance to increased taxes.

The IMF had earlier warned of a difficult path ahead for Kenya as it disbursed $606 million (Sh78.1 billion) to support the government’s budgetary needs.

Earlier this month, IMF Mission Chief for Kenya Haimanot Teferra, highlighted that if the terms of the UAE loan are more favourable than existing costly loans, it could be beneficial. 

Teferra cautioned that borrowing at high rates to finance the budget could worsen the situation.

“We need to carefully consider how the funds are utilised, their terms, and how they affect Kenya’s current debt dynamics,” Teferra remarked.

The IMF also revealed this week that its Deputy Managing Director Nigel Clarke is scheduled to visit Kenya next month as the Bretton Woods institution continues to pressure the government to expand the tax base and implement reforms to curb its borrowing appetite, given the limited capacity for new loans. Clarke’s visit on December 9 and 10 will involve meetings with government officials and key stakeholders, said the IMF. 

Director of the IMF Communications Department Julie Kozack noted that Kenya’s government faces a complex balancing act between urgent spending needs in social programmes, health, and education while managing rising public debt and increasing domestic revenue.

She reiterated that the UAE loan discussions with Kenya or any new borrowing should align with a comprehensive fiscal strategy to mitigate debt vulnerabilities amid ongoing fiscal challenges. While discussing the recent reviews of Kenya’s performance, IMF First Deputy Managing Director Gita Gopinath remarked earlier:

“Fiscal performance has significantly fallen short of targets, leading to increased debt vulnerabilities. The IMF has noted that a “credible fiscal consolidation strategy remains essential for addressing these vulnerabilities while safeguarding social and development spending.” “Reforms to enhance the efficiency, equity, and transparency of the tax regime are critical to garnering political and societal support.”