After Abandoning Ksh.63B IMF Disbursement, Kenya’s Fiscal Future at Stake

The Kenyan government has ceased its Ksh.63 billion IMF disbursement, abandoning existing EFF and ECF agreements while maintaining the RSF. Experts view this as a response to unmet fiscal targets, impacting investor confidence and increasing inflation risk. Kenya is now considering options for a new program, emphasizing capacity building as a preferred strategy for future economic stabilization.

Following the Kenyan government’s decision to abandon a Ksh.63 billion disbursement from the International Monetary Fund (IMF), the existing Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements will cease. Consequently, only the Resilience and Sustainability Facility (RSF), designed to support climate agendas, remains active. The EFF and ECF were intended to assist countries in addressing structural issues that contribute to inflation and provided extended timelines for budget restructuring.

Since entering into an agreement with the IMF in April 2021 for a total of Ksh.467.5 billion under the EFF/ECF, Kenya has utilized Ksh.404 billion, leaving Ksh.63.4 billion unaccessed due to the termination of the program. Experts indicate that the decision was driven partly by Kenya’s failure to meet fiscal targets, with economist Churchill Ogutu noting, “Kenya has not been meeting fiscal targets since 2023 during the sixth review.” However, Kenya’s previous access of 89 percent of the capped amount maintains its eligibility for future funding.

The abandonment of the IMF program has caused tension among investors, as cutting ties with the fund typically leads to market unease. While the Kenyan government seeks a new agreement, the specific terms are yet to be determined. A downturn in investor confidence may incite capital flight and a decrease in the value of the Kenyan shilling, resulting in increased import costs and inflation, thereby raising the cost of living.

In the absence of IMF oversight, which enforces fiscal discipline, there is a risk of economic waste and potential capital outflows from cautious investors. However, Ogutu suggests the new request for a program provides temporary relief. He stated, “From an investor perspective, a country that has an IMF program as an anchor assists in providing economic oversight.”

Looking ahead, Ogutu identifies three strategies Kenya can pursue in the new program: financed, non-financed (capacity building), and insurance-based approaches. He advocates for the capacity-building option, emphasizing the importance of training and peer support that fosters self-reliance. He cautions against choosing a finance-based program, warning of the possibility of stricter conditions that could aggravate existing economic challenges.

Kenya’s decision to abandon the Ksh.63 billion IMF disbursement has significant implications for its fiscal policies and investor confidence. While seeking a new program may offer a temporary reprieve, clarity regarding the terms is essential. The potential shift towards capacity building could foster self-sufficiency, yet transitioning away from financial assistance could pose challenges. Ultimately, the path forward will heavily depend on the strategies adopted to ensure economic stability and discipline.

Original Source: www.citizen.digital