Kenya seeks IMF emergency loan as shocks loom

IMF managing director Christine Lagarde (left) with Treasury Cabinet Secretary Henry Rotich at the Treasury Building in Nairobi January 2, 2014. Photo/Billy Mutai

What you need to know:

  • Kenya has asked the International Monetary Fund (IMF) for an emergency loan it plans to use in responding to looming economic shocks.
  • Treasury secretary Henry Rotich says the credit line is necessary to keep economy on stable path.
  • IMF chief Christine Lagarde said Kenya’s growth in recent years had been robust and had laid the foundation that can be used to lift the country to a middle-income status.

The Treasury has asked the International Monetary Fund (IMF) for an emergency loan it plans to use in responding to looming economic shocks.

The loan, which is part of the agenda that the Kenya government is expected to discuss with visiting IMF chief Christine Lagarde, strengthens the Washington-based lenders’ hand in Kenya’s public policy after a decade of decline.

Treasury Cabinet Secretary Henry Rotich says in a briefing to President Kenyatta that the loan, which the IMF is to disburse as a lender of last resort, will be priced on commercial terms – signalling its possible impact on Kenya’s external debt burden.

“We are recommending that we request the IMF for significant access to a blend precautionary facility to help cushion us against unexpected external and internal shocks that Kenya remains vulnerable to,” Mr Rotich says in his note to the President.

Though packaged as a form of insurance that Kenya does not have to take, the terms of the loan are similar to those that the Central Bank of Kenya (CBK) applies while lending to commercial banks as a lender of last resort.

IMF lending on commercial terms means Kenya can only access the money at a higher price that is intended to encourage thrift and sound financial management by the borrower.

Kenya’s turning to the precautionary lending arrangement is part of the measures the Kenyatta government is taking to prevent a recurrence of the shocks that hit its economy in 2011 after the CBK failed to adequately respond to the combination of internal and external shocks.

The resulting turbulence shook the Kenyan economy to its core, pushing the shilling to a historic low of Sh107 to the dollar within 12 months. At one point during the crisis, more than Sh17 billion worth of hard currency exited the Kenyan markets in just one month.

The Treasury wants to keep the IMF money in the General Reserve Account (GRA), from where it can be drawn in the event of short-term balance of payment shocks.
The account has been in place for decades and has been used by countries like Zimbabwe to deal with similar shocks.

“Considering that we have almost exhausted our Poverty Reduction and Growth Trust (PRGT) window, we need to make a strong case to the IMF managing director for a blend precautionary facility that involves PRGT and the General Resources Account, which is non-concessional,” Mr Rotich says in the note to the President.

Mr Rotich’s proposal comes a few months after Kenya concluded the $750 million Extended Credit Facility (ECF) in support of foreign exchange reserves. The ECF is one of the three credit lines that the IMF established under its Poverty Reduction and Growth Trust established in 2010.

Mr Rotich wrote to the President ahead of his meeting with Ms Lagarde Monday evening in the coastal city of Mombasa.

Ms Lagarde said, in a speech to the private sector in Nairobi, that the Kenyan economy’s advancement has increased its exposure to the global shocks.

“Going forward, as Kenya becomes more integrated in the global economy, it is bound to be exposed to external shocks — through spillovers from trading partners’ economies or volatility in international financial markets,” the IMF chief said, adding that building a strong foreign reserve position and lowering the country’s debt burden would increase the country’s resilience to the shocks.

The planned cut in US’s economic stimulus programme — tapering — is expected to cause volatility in global financial markets – hitting hard countries that are more integrated into the world economy such as Kenya.

“As financial conditions in advanced economies normalise, the risk of heightened volatility in financial markets may create new challenges in emerging economies,” Ms Lagarde said.

Mr Rotich says in his note to President Kenyatta that recent IMF assistance has enabled Kenya to stabilise her economy and build macro-economic buffers such as the current 4.3 months’ worth of forex import cover, a healthier balance of payment position and a relatively stable exchange rate of between Sh85 and Sh86 to the dollar.

During Monday’s meeting with the visiting IMF chief, Mr Rotich delivered a less buoyant message that the economy would not grow in the range of 5.5 to 6.0 per cent he had announced shortly after he took charge of the Treasury mid last year.

It will instead expand by 5.0 per cent, he said without stating any reasons for the downgrade.

Ms Lagarde said Kenya’s growth in recent years had been robust and had laid the foundation that can be used to lift the country to a middle-income status.

“Kenya has fully embraced opportunities afforded by technology in enhancing financial inclusion and now boasts the highest share of population with access to financial services in Sub-Saharan Africa [at] more than 70 per cent,” said Ms Lagarde.

“This development has particularly empowered the younger generation to take advantage of new opportunities.” 

The IMF chief said Kenya needs to build on the recent growth momentum, with emphasis on the “Three C’s”, namely, completing fiscal devolution, closing infrastructure gaps, and continuing regional integration.

She welcomed the interest by foreign investors to finance major projects, such as the construction of a modern railway line and the expansion of geothermal power generation.

“These types of financing should be encouraged, provided that they remain consistent with a sustainable debt position,” said Ms Lagarde.

Kenya’s journey to a middle-income status had begun but would take longer, she said, adding education for girls was also important.

“I would like to touch on a subject that is dear to me—education. Kenya’s record in providing universal primary education is impressive, especially for girls. Going forward, it is crucial that girls have this access at the secondary and university levels,” said Ms Lagarde.

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