Kenya failed to honour 11 conditions agreed upon with the International Monetary Fund (IMF), including restructuring Kenya Airways and spending of billions of shillings collected from fuel levies, costing the country Sh110 billion ($850.9 million) in funding.
The Treasury opted for a new funding programme from the IMF after the termination of a final review of an existing facility that would have unlocked the Sh110 billion, exposing the country to a budget-financing gap.
Kenya failed to reach a deal with the IMF over getting a strategic investor for KQ to support capitalisation, reduce debt and expand operations.
It also breached an agreement with the fund to restrict the use of fuel levy cash to subsidise petrol, kerosene and diesel prices, and curb diversion to other expenditures.
The multilateral lender has revealed that the four-year funding package was terminated prematurely because Kenya failed to meet 11 of the 16 conditions, including placing curbs on spending, bolstering tax collection and settlement of suppliers’ dues.
The multi-billion-shilling funding, which was signed in the wake of the Covid-19 economic hardships, ends on April 1.
The expiry of the facility without the final disbursement will leave Kenya with a budget financing gap amid a cash crunch.
Kenya has requested a new funding programme from the IMF, a signal that the country is seeking fresh terms or conditions.
“The understanding regarding the 9th EFF/ECF reviews is based on an assessment of performance under the programme and reasonable prospects for forward-looking commitments to help achieve the programme’s objectives prior to its expiration,” said the IMF.
“We’ll engage with the Kenyan authorities on their request for a new programme and will provide more details about the requested new programme in due course.”
The Extended Credit Facility (ECF), which provides financial assistance to low-income countries (LICs) with balance of payments problems, was signed in April 2021.
The Kenya facility had nine reviews, with the last one terminated prematurely, which led to the loss of the last tranche of Sh110 billion.
Under a $3.6 billion (Sh468 billion) funding programme signed in 2021, Kenya had 16 obligations introduced over the period.
“Since the sixth EFF/ECF reviews, programme performance has significantly weakened amid fiscal policy slippages and delays in reforms,” the IMF said about the eighth review, adding that nation had met five of the 16 conditions.
This included curbs on spending and bolstering tax collection, but the government failed to meet the obligations.
President William Ruto’s administration tried to bring in new taxes last year but backed down after deadly protests forced the withdrawal of the Finance Bill.
It also failed to meet IMF deadlines on the restructuring of KQ in a review that would have seen the tapping of a strategic investor to aid the turnaround of the national carrier.
The government, which has a 48.9 percent stake in the airline, previously informed the IMF that the preparation of proposals for Cabinet approval of strategic options for restructuring KQ would be complete by the end of November last year after moving the initial deadline from April.
The IMF sees the injection of new capital into KQ as critical to the sustainability of the company despite the airline flying back into profitability in the six months to June.
Kenya also failed to satisfy the IMF on the use and control of proceeds from the Petroleum Development Fund, which was chiefly meant to offer subsidies to petrol, diesel and kerosene consumers when prices spiked.
Motorists pay Sh5.40 per litre of petrol or diesel for the fund.
The IMF wanted the fund to be ring-fenced and ensure it is used to ease pump prices in efforts to curb inflationary pressures.
Auditor-General Nancy Gathungu had earlier flagged the diversion of Sh22.7 billion from the fund for road projects in breach of the law.
Kenya fell afoul of the IMF over the unsettled pending bills.
Business owners have accused national and county governments of delaying suppliers’ payments worth more than Sh665.0 billion, pushing small traders into bankruptcy.
The government had a campaign pledge of securitization as a way of clearing the country’s troubling pending bills headache.
Kenya’s decision to forego the Sh110 billion came in the wake of a string of fundraising plans aimed at plugping the hole in the budget.
Last month, the country bought back some of its Eurobonds and issued longer-dated securities, and said it would use the balance of about $950 million to retire expensive syndicated loans owed to the Trade and Development Bank.
It is also expecting the full disbursement of a $1.5 billion loan from the United Arab Emirates that was initially supposed to be staggered over two tranches.
Last year, Treasury Cabinet Secretary John Mbadi said the IMF “expressed some reservations” that the UAE loan may expose Kenya to foreign-exchange risks and that the amount was beyond its commercial-borrowing ceiling for the current fiscal year.
“The Kenyan authorities and IMF staff have reached an understanding that the ninth review under the current extended fund facility and extended credit facility programs will not proceed,” the IMF said Monday in a statement following a staff visit.
