Kenya, IMF long-standing talks for $1.5b loan collapse

Kenya’s talks with the International Monetary Fund (IMF) for the renewal of a $1.5 billion standby credit facility have collapsed.

This follows the exit of Treasury’s two senior-most officials in an anti-corruption purge, leaving the country exposed to economic shocks.

The EastAfrican has learnt that an IMF delegation expected in Nairobi in July cancelled the visit after Treasury Secretary Henry Rotich and his Principal Secretary Kamau Thugge were charged with corruption offences.

Collapse of the talks left in abeyance the renewal of the standby credit facility intended to cushion the Kenyan shilling, which last week depreciated to a four-month low against the US dollar.

The two-year standby loan facility, which expired in September last year, is intended to cushion the shilling against external shocks and raise the country’s credibility in the eyes of foreign lenders.

The IMF team cancelled the trip at the last minute after Mr Rotich and Mr Thugge were placed at the centre of a fraudulent Ksh46 billion ($460 million) contract that the Treasury awarded to an Italian company, CMC di Ravena, for construction of two mega dams.

Mr Rotich had in May this year said that he expected to conclude talks with the IMF over renewal of the loan in two months.

“They did not come,” said Geoffrey Mwau, the Treasury’s director-general in-charge of budget, fiscal and economic affairs, while declining to disclose reasons for cancellation of the visit.

Being in good books with the IMF is considered a plus as it gives comfort to foreign lenders, who are currently holding in excess of $26 billion Kenyan debt.

Talks

The new Treasury Principal Secretary Julius Muia in an interview said plans are underway to re-engage the IMF, with the possibility of resuming talks next month.

The new Treasury officials will be laying the groundwork for fresh discussions with the IMF during the Fund’s annual meetings in Washington starting October 14-20.

“We’re arranging for a detailed engagement with the IMF during its annual meetings in Washington starting from October 14, from there they will be coming in November, which is when we will kick off discussions in a structured manner,” Mr Muia told The EastAfrican.

The IMF country representative to Kenya Tobias Rasmussen did not respond to our e-mails by the time of going to press.

Kenya initially secured the two-year IMF precautionary facility in March 2016. It expired in March last year, but was extended up to September.

The IMF, however, suspended the programme in September after the country failed to meet key conditions for its renewal including the removal of controls on the cost of bank loans and the introduction of a 16 per cent VAT on petroleum products.

The VAT on fuel was introduced but shortly thereafter cut that to eight per cent in the wake of massive public resistance.

Rate caps

Negotiations between Kenya and the IMF over the programme started going south after the country enacted a law in 2016 that put a ceiling on the interest rates that banks charge on loans at four percentage points above the prevailing central bank rate (CBR).

The law also provided a minimum interest payable on deposits held in interest-earning bank accounts at 70 per cent of the policy rate.

The IMF directed that the country abolishes the legislation, arguing that it reduced the flow of credit to the SMEs.

However, in October last year Kenya’s Parliament voted to retain the ceiling on lending rates at four percentage points above the prevailing CBR, but removed the minimum deposit rate of 70 per cent of the benchmark lending rate.

That, however, did not appease the IMF which demanded removal of the cap on lending rates. Parliament also rejected amendments in the Finance Bill 2019 that sought to remove interest rate controls.

The EastAfrican has learnt that the controlled interest rate regime is still a thorny issue between Kenya and the IMF, putting the renewal of the precautionary facility at a risky state.

“This is going to be a subject of discussion in Washington during the IMF annual meetings,” said Mr Muia, adding, “We will talk within the framework of what is happening in the country.”

In March, Kenya’s High Court ruled that the provisions of the Banking (Amendment) Act 2016, which introduced the caps were unconstitutional and gave the National Assembly 12 months to review the legislation.

Eurobond

In May, the National Treasury, during issuance of the third Eurobond valued at $2.1 billion in London, made a renewed commitment to free credit to the private sector, even with rate caps in place, and to reduce the fiscal deficit to as low as five per cent in the current fiscal year (2019/2020) from 7.2 per cent in the 2017/2018 fiscal years as part of new conditions to return to the IMF programme.

It is also understood that the government’s progress in promoting financial inclusion helped it win back the confidence of the IMF to restore the country to the precautionary facility programme.

So far, Kenya’s official foreign exchange reserves have dropped to a four-month low in the week to September 26, making it the first time that they fell below $9 billion since the sale of the third Eurobond in May.

The reserves stood at $8.985 billion, the lowest level since May 23 when they stood at $7.981 billion, according to Central Bank of Kenya data.

The decline in foreign reserves started on July 18 when the figure stood at $9.74 billion and has continued every week to date.

“We are now clear about the situation and we are in close discussions with CBK about it,” said Mr Muia.

Data by Trading Economics shows that Kenya’s forex reserves declined to $13.18 billion in June from $13.36 billion in May.

The country’s reserves have averaged $4.76 billion from 1995 to 2019, reaching an all-time high of $13.36 billion in May 2019 and a record low of $853 million in November 1995.

In August, diaspora remittances which account for the largest share of Kenya’s foreign inflows declined for the second month in a row.

The remittance inflows for August fell 4.5 per cent to $214 million from compared with $224 million in July 2019.