During the IMF-Treasury discussions, a review highlighted several met structural benchmarks, with the exception of the qualitative performance criteria for tax collection. However, the deviation observed was smaller than initially anticipated at the time of the reviews. In the wake of December, authorities submitted to Parliament additional tax measures to ensure the June 2024 tax target under the budget is met.

A review of the fuel pricing mechanism was then conducted by a taskforce to ensure price decisions are aligned with budgeted resources and the resulting decision was communicated publicly on 11th of December 2023 in a joint press release by the Cabinet Secretary for the Ministry of Energy and Petroleum and CS for National Treasury. The lengthy process in forming the task force and the publication of its decision resulted in a delayed implementation of the structural benchmarks being met.

This warranted consultation on how to finance domestic price decisions, which resulted in the limited but not budgeted fuel subsidies. The special audit on supplementary budgeting was then completed on 30th November and forwarded to Parliament on 4th December. It was then published on the 18th of December following the legal requirements on the publication timeline.

A Pending Bills Verification Committee was established in late June 2023 with the approval of Cabinet with a mandate to formulate a strategy to verify the stock of pending bills outstanding at the end of June 2022, address the weaknesses in the Public Financial Management (PFM) systems that led to the accumulation of pending bills, and clear the verified stock of pending bills. The structural benchmark is now being proposed to be reset to the end of February 2024 to allow time for the formulation of the strategy.

The review additionally sheds light on the inherent risks involved in Kenya’s attempt to withdraw from the Government-to-Government (G2G) oil deal. Initiated in April 2023, the credit-based oil importation scheme aimed to alleviate foreign exchange (FX) pressures by permitting selected oil import suppliers to bring in oil on credit, supported by letters of credit issued by participating commercial banks. This replaced the previous Open Tender System (OTS), where oil import dues were payable within five days of delivery.

However, the G2G system faced challenges as import volumes fell below the agreed monthly minimums due to reduced demand in both the domestic and regional re-export markets. In response, Kenya is now seeking to exit the G2G deal with Saudi Arabia, acknowledging its failure to alleviate the pressure on the dollar. The IMF is closely monitoring the associated risks of a disorderly exit, emphasising the importance of having a well-defined exit strategy.

As the government contemplates the way forward post the G2G system, it must remain cognizant of stabilising the national currency and reducing the demand for foreign currency. Despite the G2G scheme’s intention to bring down the exchange rate, the Kenyan shilling continues to take a nose dive and currently stands at 160 Shillings against the dollar. Thus, careful consideration of the feasibility of reintroducing the OTS system, which historically accounted for 30% of Kenya’s overall dollar demands, is cardinal to this transition. 

Alternatively, the government ought to explore other means of oil importation while stabilising the Kenyan Shilling and reducing the demand for the US Dollar. A thoughtful transition is imperative to avoid exacerbating the pressures resulting from an increased exchange rate. Balancing the need for stability and fiscal responsibility, the government must navigate this shift with a strategic approach to safeguard the nation’s economic interests.

The review also touches on Kenya’s economy, Kenya Airways (KQ) and Kenya Power and Lighting (KPLC), which have been highlighted as profit-making state-owned enterprises (SOE) thanks to reforms put in place in the first six months of 2023. This is despite the global, regional, environmental, and domestic political risks. However, in the second half of the year, a loss was witnessed due to our currency depreciation.

It has been stipulated that by the end of April 2024 there will be a strategy approved by the Cabinet to help restore KQ’s financial health. All this nonetheless, ought to be at the least financial dent to the exchequer to protect fiscal resources for priority social and development spending and not undermine debt sustainability.

The report applauds the Kenyan Government for stepping in for the two SOEs in settling external debts as follows:

‘The Supplementary Budget for FY2022/23 provided for budgetary support of Ksh.19 billion for Kenya Airways (KQ), excluding the servicing of its guaranteed external debt, and Ksh.2.358 billion for Kenya Power and Lighting Company (KPLC), out of which actual support was Ksh.10 billion to KQ. In addition, the government serviced the debt service payments on KQ’s guaranteed senior external debt, which the airline failed to service, and paid US$95 million in FY2022/23 on KQ’s behalf. Both KQ and KPLC enjoy moratorium on debt service for the amounts owed to the government. At present, KQ has a negative equity and KPLC was facing financial challenges including servicing of its debts. However, with the on-going implementation of the Action Plan, KPLC’s liquidity position is improving. The government is evaluating various strategies and options to turn around the airline with minimal budgetary implications and the least fiscal impact.’

On May, 16th 2023, the Cabinet approved an Action Plan to restore KPLC’s medium-term profitability and cover liquidity gaps, which KPLC shortly thereafter implemented. On November 10, 2023, KPLC shareholders approved an amendment to the company’s memorandum and articles of association to provide for the private sector fair representation in the board in line with the best corporate governance. The KPLC Board has also established a Nomination Committee to ensure that the Board is properly constituted. The onboarding of new directors will also be based on the identified competencies and skills gap at the Board level.

Additionally, there are structural reforms underway for both SOEs powered by the need to strengthen the governance and oversight of the same. This backed the publication of the Privatization Act in October 2023, which had the authorities working on a five-year privatization program. Concurrently, the programmed envelope for extraordinary budget support to SOEs has been active, with tangible results realized by KQ and KPLC.