top of page
Writer's pictureGerminal G. Van

The IMF loaned Kenya $938 million to boost its economic recovery efforts


The International Monetary Fund (IMF) has announced that it will provide an additional $938 million in funding to Kenya to support the country's economic recovery efforts.

This comes as Kenya faces a number of challenges, including rising energy and food import bills, limited foreign exchange reserves, and a looming $2 billion Eurobond repayment due in June 2024.

“The authorities’ strong reform program aims to enhance the policy framework substantially and restore confidence to ensure access to the global bond market,” said Haimanot Teferra, who led the IMF team in Kenya.

The IMF's additional financing will help Kenya to address these challenges and build a more resilient economy. The funding will be used to support the government's reform program, which aims to enhance the policy framework and restore confidence in the economy. It will also help to boost Kenya's foreign exchange reserves, which will make it easier for the country to import essential goods and services.

The IMF's support for Kenya is a welcome boost for the country's economy. The additional funding will help Kenya to address its short-term challenges and build a more sustainable long-term economy.

In May, the IMF had initially agreed to increase its financing package for Kenya to $3.5 billion, extending the program duration by 10 months to April 2025. With the recent agreement, the total support is now lifted to approximately $4.43 billion. Kenya’s 2024 bond market has attracted attention from investors concerned about the country’s debt burden amid challenges like elevated energy and food import bills. President William Ruto has proposed an early repayment of $300 million in December. According to Bloomberg, as of June 2023, Kenya’s public debt stood at 64.4% of GDP in present value terms, exceeding the stipulated ceiling of 60%, as reported by the National Treasury.

The IMF’s funding is expected to be used to support the government’s reform program, which includes measures to improve fiscal discipline, strengthen the financial sector, and promote economic growth; to boost Kenya's foreign exchange reserves, which will make it easier for the country to import essential goods and services; and to provide social protection for vulnerable groups, such as the poor and the elderly. The IMF's funding is expected to be approved by the IMF board in December. If approved, the funding will be disbursed to Kenya in tranches over the next two years.

However, there are three key problems with IMF loans. The first problem is that the loan incentivizes government spending. One of the primary concerns with government spending is the issue of efficiency. When governments allocate funds, there is always a risk of misallocation or waste. Bureaucratic processes, political influence, and a lack of accountability can lead to inefficiencies in spending, resulting in funds being used less effectively than they could be.

The second problem is that the loan will increase the national debt. IMF loans can lead to increased debt for borrowing countries. And this is not an exception for Kenya. This can make it more difficult for countries to repay their debts in the future, which can lead to economic instability.

The third problem is that the loan increases government deficits by easing budget constraints and reducing incentives for fiscal discipline. The availability of IMF loans can sometimes lead to a moral hazard, where borrowing countries become less inclined to implement sound fiscal policies and reduce their budget deficits. They may rely on IMF loans as a safety net, postponing difficult fiscal adjustments until the next crisis arises.

The IMF's support for Kenya is a sign of the international community's confidence in the country's economic prospects. While the additional funding would help Kenya to overcome its short-term challenges and build a more prosperous future, the downside remains substantial, and could potentially outweigh the upside. Kenya is not exempt from government spending, an increase in its national debt, and government deficits. These three elements remain a permanent menace to a growing economy.


Commentaires

Noté 0 étoile sur 5.
Pas encore de note

Ajouter une note

Subscribe to The Lake Street Review!

Join our email list and get access to specials deals exclusive to our subscribers.

Thanks for submitting!

bottom of page