Treasury tests limit for shilling support funds

Kenya’s capacity to deal with another rapid depreciation of the shilling could be severely weakened in the next two years after the IMF warned that Treasury has nearly exhausted its quota of currency-support interest-free loans.

The Central Bank of Kenya (CBK) turned to the International Monetary Fund (IMF) for loans at the height of the 2008 global financial crisis and again late last year when the shilling depreciated to an all-time-low, on both occasions managing to stave off a currency crisis whose biggest impact on the economy is a surge in commodity prices.
The IMF says that Kenya will now have to increase its export capacity to shield the shilling fr

m decline if the country is hit by another shock in the next two years.

This could leave the shilling exposed to speculative attacks since Kenya’s exports have lagged far behind a rapid growth in the import basket in the past decade.

“Kenya is now close to the maximum limit on access to concessional, interest-free financing from the IMF,” said the IMF country representative, Ragnar Gudmundsson in an interview.

“If Kenya needs additional financing from the Fund, it would need to be provided on more expensive, non-concessional terms.”
Under the IMF’s extended credit facility (ECF) concessionary lending, Kenya is allowed to access up to 300 per cent of its quota at the fund, currently equivalent to about Sh35.3 billion ($420.7 million).

Mr Gudmundsson said Kenya has so far accessed up to 280 per cent (about Sh99 billion or $1.2 billion) of its quota, meaning it has only about 20 per cent of its interest-free lending quota left.

If Kenya exhausts its concessionary quota before 2014, then it will only access loans from the IMF at a basic rate of 1.14 per cent, or it may be forced to borrow from other international lenders at more punitive rates.

Stability of the shilling has a direct bearing on the rate of inflation, given Kenya’s position as a net importing country.

A weak shilling inflates the prices of imported commodities such as fuel, which in turn feeds into the economy through higher production costs.

Any slip of forex reserves below an equivalent of four months of import cover sends a signal to currency speculators that the country could be unable to meet the imports bill.

The IMF warns that a rapid depreciation of the shilling could erode the standard of living by affecting Kenya’s ability to pay for imports.

“If adverse shocks or policy slippages create new balance of payments needs, IMF concessional support would not be available as a cushion and the burden of adjustment would fall on policies with an impact on economic activity and living conditions,” the IMF had stated in its January country report. Kenya can however secure stability of the shilling by nurturing a stronger export base to increase import-financing dollar inflows.

“With the implementation of sound macroeconomic policies as outlined in the authorities’ economic reform programme, a need for additional financing before 2014 should not emerge, provided the country does not suffer from un-anticipated external shocks,” said Mr Gudmundsson.

The Kenya National Bureau of Statistics showed that Kenya’s trade deficit to November last year stood at Sh1.1 trillion, double 2010’s full-year deficit.