In January 2024, the International Monetary Fund (IMF) concluded its 2023 Article IV consultation with Kenya, alongside reviews of the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements and the first review under the Resilience and Sustainability Facility (RSF) arrangement.

The IMF reported that Kenya’s performance under the EFF/ECF arrangements met program objectives, while the RSF supported the country’s climate agenda. They emphasised the need for a coordinated set of policies and reforms to maintain macroeconomic stability, strengthen debt sustainability, and build resilience against shocks. They also stated that short-term policy responses should support measures aimed at enhancing Kenya’s medium-term prospects for a vibrant, inclusive, green, and market-driven economy.

The IMF noted that the Kenyan economy showed resilience despite global challenges such as the COVID-19 pandemic and drought. Economic growth reached 5.6% year-on-year in the first nine months of 2023, driven by a robust recovery in agriculture, although non-agricultural growth slowed due to tighter policies. Fiscal consolidation efforts continued, resulting in a stronger primary balance than anticipated, while monetary policy was tightened in 2023. The external current account balance improved, although foreign exchange reserves declined in the latter half of 2023 due to debt service payments and limited external financing.

The near-term outlook projected continued resilience with around 5% growth in 2024, supported by ongoing fiscal and external adjustments. Inflation might increase in the first half of 2024 due to global oil price volatility and exchange rate fluctuations but was expected to remain contained. Kenya’s medium-term prospects were positive, contingent on improvements in competitiveness, inclusivity, governance, and anti-corruption measures, along with progress on the climate agenda.

The Executive Board highlighted the need for steadfast implementation of prudent policies and reforms to build market confidence, reduce poverty, and sustain growth. They stressed the importance of front-loaded fiscal consolidation efforts to mitigate debt vulnerabilities, supported by domestic revenue mobilisation and expenditure rationalisation. Strengthening structural reforms, particularly in export competitiveness, governance, and anti-corruption frameworks, was deemed crucial for Kenya’s economic transformation.

The IMF review identified several vulnerabilities in Kenya’s financial sector, including the rising share of FX deposits and liabilities in banks, which posed risks due to the sovereign-bank nexus. Despite a decline in FX loans, sovereign debt still accounted for a significant portion of bank assets. Stress tests revealed potential capital shortfalls in some banks, particularly in scenarios with large interest rate increases or FX depreciation. The authorities were addressing these risks by implementing measures such as developing Internal Liquidity Adequacy Assessment Program Guidelines for banks. Additionally, they were monitoring the G2G oil import scheme, which could impact FX market segmentation and banks’ FX risks.

To improve the functioning of the FX market and bolster medium-term prospects, the authorities committed to greater exchange rate flexibility and supporting the buildup of official reserves. They aimed to enhance Kenya’s export competitiveness by improving government effectiveness, regulatory quality, and governance frameworks, along with trade policy and IT infrastructure enhancements. Efforts to strengthen the AML/CFT framework and enhance beneficial ownership transparency were also underway.

In advancing climate objectives under the RSF Arrangement, Kenya was implementing various measures, including incorporating climate risks into planning and investment frameworks, mobilizing climate revenue, and strengthening existing frameworks to support climate finance. The authorities were also mainstreaming gender equality in climate change responses and recognized the importance of strong policy actions to address near-term challenges, which they believed would bolster Kenya’s medium-term prospects. They were optimistic about achieving faster growth by improving inclusivity, addressing climate-related risks, boosting competitiveness, and enhancing governance and anti-corruption frameworks, with support from the IMF.

The review outlined a proposal for Kenya to receive additional financing from the IMF to address balance of payments (BoP) challenges and upcoming debt maturities, particularly a US$2 billion Eurobond due in June 2024. The authorities planned to access this financing through a blend of concessional and commercial loans, including syndicated loans and potential Eurobond issuance. The proposal involved augmenting the Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements with the IMF.

The review also highlighted two significant initiatives in Kenya: the Medium-Term Revenue Strategy (MTRS) and the Financing Locally-Led Climate Action (FLLoCA) Program.

• Medium-Term Revenue Strategy (MTRS):
  • Kenya developed its first MTRS for FY2024/25–FY2026/27 to mobilise domestic resources supporting the Government Development Agenda and Bottom-up Economic Transformation Agenda.
  • Aligned with Kenya Vision 2030, the MTRS aimed to raise ordinary revenues by 5 percentage points of GDP by expanding the tax base, improving tax administration, and promoting fairness.
  • The strategy emphasised whole-of-government commitment, comprehensive reform plans, and coordinated external support for tax system reform. Key measures included reviewing and rationalising tax reliefs, reducing key corporate and value-added tax rates, and enhancing tax compliance.
• Financing Locally-Led Climate Action (FLLoCA) Program:
  • FLLoCA focused on decentralised climate finance to empower local communities in climate adaptation efforts, deviating from traditional top-down approaches.
  • It pooled resources from various sources, including national and county governments, international donors, and development partners.
  • The program aimed to ensure that climate resilience support reached those most vulnerable, including marginalised groups, by allocating ninety per cent of funding to county and community levels. Activities included implementing climate-smart agriculture practices, improving water management, and promoting clean energy use at the local level.

Both initiatives signified Kenya’s commitment to sustainable development, inclusive growth, and climate resilience through innovative strategies and partnerships.