Kenya’s Finance Bill Withdrawal Raises Concerns Over IMF Targets and Economic Stability


WASHINGTON/TOKYO/SEOUL, June 28 (Reuters) – Kenya’s decision to withdraw support for a contentious finance bill has sparked concerns over the country’s ability to meet International Monetary Fund (IMF) targets, potentially increasing borrowing costs and impacting economic stability, according to investors and analysts.

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The finance bill, which included unpopular taxes on essentials such as bread, vegetable oil, and sugar, as well as levies on mobile-money transfers and certain imports, aimed to raise 346 billion Kenyan shillings ($2.68 billion), equivalent to 3% of the nation’s GDP, according to Morgan Stanley’s Neville Z. Mandimika.

The bill’s withdrawal “will likely result in Kenya missing the 4.7% fiscal deficit target this year and 3.5% target next year as per the IMF programme,” Mandimika noted in a report.

While the IMF has not immediately commented on the change, spokesperson Julie Kozack stated, “Our main goal in supporting Kenya is to help it overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people.”

Kenya entered a four-year loan agreement with the IMF in 2021, followed by additional lending in May 2023 to support climate change initiatives, bringing its total IMF loan access to $3.6 billion. These loans are contingent on regular reviews of Kenya’s economic reforms, which occur every six months.

Earlier this month, Kenya reached a staff-level agreement with the IMF on a seventh review, despite President William Ruto’s warnings of revenue shortfalls prior to abandoning the tax bill. This review theoretically paves the way for a $976 million disbursement, pending IMF board approval.

Giulia Pelligrini, a senior portfolio manager at Allianz Global Investors, indicated that without thorough spending reviews, Kenya’s options to meet fiscal targets are limited, emphasizing that “it’s going to be difficult.”

Following the bill’s withdrawal, Kenya’s sovereign dollar bonds experienced a decline. With eurobond yields surpassing 10%, Morgan Stanley suggested Kenya might have to rely more heavily on local borrowing, increasing domestic borrowing costs.

“The next catalyst for spreads would be statements from the IMF on how the programme will be recalibrated to reflect this new reality,” Mandimika added.

JPMorgan analysts Sthembiso E. Nkalanga and Gbolahan S. Taiwo predict that while the IMF may approve the seventh review, President Ruto faces challenging decisions ahead, particularly regarding fiscal consolidation through spending cuts.

Additionally, JPMorgan noted that Kenya’s Central Bank is unlikely to reduce interest rates before December, maintaining a “higher-for-longer” stance as per its risk assessment from May. This, coupled with limited international market access, is expected to pressure domestic borrowing and elevate costs, as echoed by Moody’s credit rating agency.

Paul Greer, a portfolio manager at Fidelity, remarked that the situation underscores the risks of rapid fiscal reforms, stating, “It’s just an illustration of the limitations of fiscal austerity. Clearly, this was a step too far.”

By Naija247news
By Naija247news
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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