Nairobi – Kenya’s IMF Loan Enhanced by Sh162bn on the Strength of Tax Reforms

by | May 24, 2023 | Business, News | 0 comments

Kenya’s financial fortunes are set to rise as the International Monetary Fund (IMF) is granting an additional loan of Sh162.5 billion. This top-up is part of a 38-month programme that Kenya shares with the global lender. The IMF’s decision follows President William Ruto’s strong commitment to the stringent tax policies agreed upon with the Washington-based institution.

This move signifies an increased financial influx into Nairobi, as the city anticipates a total of Sh484.9 billion ($3.52 billion) in loans. This financial aid comes in the wake of Kenya’s request for two additional credit facilities, aimed at bolstering its efforts to strengthen foreign exchange reserves.

The ongoing Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements, approved in April 2021, originally amounted to Sh322.4 billion ($2.34 billion). With the additional Sh162.5 billion, President Ruto’s administration is set to receive an increased funding from the IMF, crucial in battling drought and addressing climate-related concerns.

The IMF, in a staff report, has applauded Dr Ruto’s innovative tax proposals, stating they will assist the government in diminishing its budget deficit.

Haimanot Teferra, the leader of the IMF mission to Kenya, lauded Kenya’s fiscal response in a statement. “The authorities have responded promptly to the challenges. Government spending has been prudent this fiscal year, consistent with available resources,” she said.

Moreover, the draft budget for fiscal year 2023/24 proposes a further deficit reduction from 5.7 to 4.1 percent of GDP, backed by significant new revenue measures. This is in line with the objective of reducing the ratio of debt to GDP.

The Treasury has incorporated several IMF recommendations in the Finance Bill 2023. These include a proposed increase in the value-added tax (VAT) to 16 percent, up from the current 8 percent, as well as a hike in excise duty on items like fake nails, wigs, and betting. The ‘Pay as You Earn’ tax for individuals earning over half a million per month has been raised to 35 percent.

As part of the EFF/ECF programme augmentation, an additional Sh74.4 billion ($544.3 million) has been approved to address unforeseen shocks, such as drought. In the recently completed fifth review, Kenya has also requested around Sh86.9 billion ($636 million) under a new 20-month Resilience and Sustainability Facility (RSF) arrangement.

The overarching aim of the 38-month programme is to assist Kenya in mitigating its debt vulnerabilities by boosting revenues and reducing spending. This includes cutting disbursements to state corporations such as Kenya Airways and Kenya Power.

If approved by the IMF Executive Board, Kenya will receive another Sh56.5 billion ($410 million) from the IMF in July. This will aid in restoring Kenya’s depleting foreign exchange reserves. The disbursement is contingent on approval by the IMF Executive Board, which is anticipated in July.

In addition, Kenya has embarked on a new 20-month programme with the IMF to finance predominantly climate change-related projects. This comes alongside augmentation access of about $544.3 million, aimed at helping the country manage such shocks as drought. If approved, this would take the total IMF financial support disbursed under the EFF and ECF arrangements to Sh275.5 billion ($2,017 million).

In combination with the EFF/ECF augmentations and the RSF support, the total IMF commitment under these arrangements would amount to Sh480.8 billion ($3.52 billion).

Under the new Resilience and Sustainability Facility (RSF) arrangement, which will run concurrently with the EFF/ECF arrangements, Kenya has sought a 10-month extension of the current facility until April 2025.

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