A health care worker gives a vaccine to her colleague in Nairobi, Kenya. An IMF loan in May helped cover the cost of additional health care expenses. (Photo: Dennis Sigwe / SOPA Images / Sipa / Newscom)
March 18, 2021
Kenya’s economy is picking up speed again after the COVID-19 shock, but the pandemic has left a deep mark on the country’s fiscal and debt positions.
Earlier this year, IMF officials and the country’s authorities reached a preliminary agreement on a program to support the next phase of the country’s response to the health crisis.
IMF Country Focus spoke to IMF Head of Mission to Kenya, Mary Goodman, who said the loan will be used to support government reform plans and meet funding needs.
What impact has the COVID-19 pandemic had on Kenya and its economy? And how did the country react?
Like many other countries in the world, Kenya was hard hit by the COVID-19 shock. The disruption of world trade and travel and the measures taken to contain the spread of the virus caused economic activity in Kenya to decline sharply in the second quarter of 2020.
School closings, curfews and restrictions on public gatherings have changed daily life. Some lost their jobs while many more felt the pressures of a loss of income. For the weakest, this pressure created a real plight.
Strong early steps to support the economy in the face of such an unprecedented shock included immediate temporary cuts in income and corporate taxes, a temporary cut in the VAT rate from 16 percent to 14 percent, and changes to the budget for additional spending on health and social protection.
The Kenyan central bank helped cushion the blow by cutting interest rates and injecting liquidity to ensure the smooth functioning of the Kenyan financial system. It also encouraged banks to offer borrowers the option to defer loan payments. The temporary elimination of mobile money transaction fees lowered user costs and promoted the transition from physical cash exchange to a more secure means of payment.
While the shock was great, the impact on economic growth has been curbed. On an annual basis, production growth recovered from -5.5 percent in the second quarter of 2020 to -1.1 percent in the third quarter. Overall, growth is likely to have been close to zero in 2020 and is likely to recover strongly in 2021.
As economic activity picks up, many challenges remain. Public health is still under pressure as the adoption of COVID-19 vaccines has only just begun. Increased poverty has hampered progress in developing the Kenyan Development Goals. Kenya’s budget and debt positions have also deteriorated, adding to the difficulties that existed before the shock.
The IMF provided immediate chemical assistance last May. Why is a fund program needed now when the economy recovers?
In May, the IMF provided $ 739 million in the form of an interest-free loan under the Rapid Credit Facility to help Kenya weather the initial shock. This helped cover the cost of additional spending on health, social protection and accelerating payments to strengthen the economy.
The new program with the IMF will support the next phase of the government’s COVID-19 response. The combination of arrangements under the Expanded Fund Facility and the Expanded Credit Facility will provide $ 2.4 billion of low cost funding over the next three years. Other development partners will also provide significant amounts of concession funding. Without this help, Kenya would have to aggressively cut spending on investment and welfare programs, making it more difficult to achieve a sustainable and inclusive recovery.
Is the IMF proposing budget consolidation for Kenya under the new loan agreement?
With the pandemic continuing to threaten lives and livelihoods, authorities are determined to protect vulnerable groups while creating the conditions for a strong recovery. The program enables the necessary health, social and development expenditures. This is complemented by an accommodative monetary policy.
The program also supports the authorities’ medium-term budgetary consolidation plan. Kenya is at high risk of debt problems and is reducing the budget deficit as the COVID-19 shock wears off. The government has already started to reverse some of the extraordinary measures taken at the start of the shock. This includes the temporary tax cuts that ended in early 2021.
The recently published 2021 Budget Policy Statement provides an overview of Kenya’s priorities and fiscal policy goals. It envisages a multi-year effort through a combination of measures to mobilize revenue and measures to rationalize spending, with the aim of bringing the budget deficit below 4 percent of GDP by fiscal year 2024/25. This will put the government debt to GDP ratio firmly on a downward path.
The effects of fiscal consolidation would need to be mitigated through more efficient spending. Backed by the transparent use of funds, this will help direct government spending to where it is most needed. It will also free up resources for private investment. Together, these steps will help create the conditions for sustained and inclusive growth that should enable Kenya to quickly resume progress on its development goals.