Lender shocks market with revelation that it blocked Nairobi’s access to Sh152bn facility 7 months ago
The Kenyan shilling has been left exposed to the turbulence of foreign exchange markets after it emerged that the International Monetary Fund (IMF) stopped Nairobi’s access to a Sh152 billion ($1.5 billion) precautionary facility seven months ago.
Kenya was yet to draw down on the two-year facility, which has been a key component in the country’s ability to weather economic shocks since March 2016.
The precautionary facility has been one of tools that have helped Kenya stabilise the shilling against the dollar – making the local currency to buck the general weakening of most African currencies during the period.
The shilling remained stable yesterday at an average of 101.30 to the dollar, supported by remittance inflows and the CBK’s liquidity mop-up that has helped counter rising demand for the dollar.
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Neither the Central Bank of Kenya nor the National Treasury made public the IMF’s withdrawal of access to the facility seven months ago.
The two institutions did not respond to queries on the matter by the time of going to press.
The IMF resident representative in Nairobi, Jan Mikkelsen, in a statement released Tuesday night said two reviews of the precautionary facility that were scheduled for July and December last year “could not be completed on schedule as agreement could not be reached on stronger fiscal policies, and discussions were postponed due to the prolonged election period. Kenya continues to have access to resources since June subject to policy understandings to complete the outstanding reviews.”
An IMF staff team is currently in Nairobi to discuss a possible renewal of the program.
The CBK has in the past seven months held four monetary policy committee meetings, and on each occasion has cited availability of the facility as an “adequate buffer against short term shocks in the foreign exchange market”.
Withdrawal of the facility leaves foreign reserves as the only buffer now available to the CBK to protect the shilling in the currency market.
Kenya’s foreign reserves however still stand at a formidable $7.24 billion, equivalent to 4.84 months of import cover.
The IMF’s disclosure, seven months after it suspended the facility, comes at a time when senior Treasury officials, including CS Henry Rotich are on a roadshow in the US and Europe ahead of the planned issuance of a new Eurobond in the current financial year.
Investors are however likely to be wary of the economy’s exposure to shocks in the absence of the IMF facility, and thus demand a higher premium on the Eurobond.
“International investors looking at bonds from high yield countries like Kenya will always be looking for the availability of a facility that the country can draw down in the event of a short term problem. This is added safety that also shows that the country is in good standing with the multi-laterals,” said Deepak Dave, a risk management expert with Riverside Capital Advisory.
The IMF is however expected to face intense questioning over its decision to wait for seven months before making public its decision to block access to the facility.
Mr Mikkelsen had Tuesday morning told Reuters and Bloomberg news agencies that while the facility has not been discontinued, access to it was suspended after Nairobi failed to complete a periodic review that would have addressed, among other things, the government’s failure to meet the budget deficit reduction threshold attached to the loan agreement.
“There was no agreement on the fiscal adjustment at the time and then I do believe the lengthy election period (later in the year) made it difficult to have a review and complete that in the period that followed,” Mr Mikkelsen said.
The IMF had pegged reduction of Kenya’s fiscal deficit to less than four per cent of GDP by the fiscal year ending June 2019 as part of the condition for access to the facility.
The budget financing gap has instead remained stubbornly high at 8.9 per cent, a trend attributed to the perennially high recurrent expenditure bill and the heavy spending on projects ahead of last year’s General Election.
An IMF team is however in Nairobi to assess the possibility of awarding Kenya a new standby facility to replace the current one that expires next month. If successful, Kenya could be back in the fund’s good books within a matter of days.
Mr Mikkelsen said earlier this month that the fund considers the fiscal deficit to be too high at current levels, and unsustainable and that debt accumulation is as a result too fast for their liking.
Other than debt and fiscal; consolidation, the IMF is also likely to be pushing for a review of the rate cap law during its meetings with CBK and Treasury officials, having been a strong critic of the law that was put in pace in August 2016.