A let-up in the ongoing ‘bitter pill’ economic reforms could backfire and erode investor confidence, the International Monetary Fund(IMF) has warned as it urged the State to press on with the fiscal restructures.
The multilateral lender said any slip-up on Kenya’s “market and rules-based economy” reforms would have negative implications on the forex market.
A ‘market and rules-based economy’ is a free market concept where voluntary exchange and the laws of supply and demand provide the sole basis for the economic system, without government intervention.
“On the domestic front, the key downside risk is that the policy shift now underway, if it loses momentum, could erode confidence and lead to increased forex demand and further pressures on the exchange rate,” the IMF said in a statement on Thursday.
As part of a deal with IMF President William Ruto has over the past months shifted to free market economy policies, including scrapping subsidies on key items such as fuel and electricity—a position that continues to draw public uproar and build political heat amid concerns over the high cost of living.
The IMF, however, cautioned Kenya against letting up on the reforms saying such policies would help maintain favourable inflation gaps with trading partners while boosting export competitiveness while mitigating balance of payments pressures.
“Should investor confidence recover fully, a virtuous cycle of inflows could stabilise the exchange rate and bring down inflation faster than expected. An enhanced rebound in agriculture could bolster growth, and help reduce inflation further, while earlier-than-expected market access would ease financing constraints.
Further progress with reforms that improve the business environment and that support a market and rules-based economy would reinforce this upside,” the IMF observed.
The IMF complicates matters for Dr Ruto’s government, which faces growing pressure over the high cost of living.
This week, the State was forced to stabilise fuel prices by up to Sh19.82 per litre, handing some slight relief to consumers.
Despite the public uproar, IMF maintained that Kenya tightened its fiscal stance with a focus on digitisation of government services, enhanced efficiency of public investments, and better targeting of subsidies.
“A tighter fiscal stance is envisaged under the programme to help reduce debt vulnerabilities and achieve a present value debt to GDP of 55 percent, the authorities’ debt anchor, by 2029,” said The IMF mission chief to Kenya Haimanot Teferra in the latest commentary on staff-level agreement.
“Expenditure rationalisation will need to continue, with a focus on enhanced efficiency of public investments, better targeting of subsidies and transfers, addressing weakness in state corporations, and digital delivery of public services,” she said.
The sentiments point to the continued push by the IMF for Kenya to tighten its fiscal stance even further as debt vulnerabilities become elevated.
Some of the measures to enhance efficiency in public investments are already underway with the National Treasury tightening checks that public projects must pass before being funded. The Treasury has also been dropping some of the projects.
State corporations such as Kenya Power and Kenya Airways have also been targeted in streamlining their operations and addressing weaknesses that have made them reliant on the exchequer.
Other State corporations, which have had bloated payrolls, have also been on the IMF’s radar.
The government has also been digitising most of its services to enhance efficiency and also cut the rampant corruption that was being witnessed in services such as those buying land, and acquiring passports.
