Kenya requires at least Sh223.7 billion (or $2.1 billion) to bridge the external financing gap opened by the pandemic shock that has exposed the local currency to volatility, the International Monetary Fund (IMF) has said.
This is Sh101.2 billion more than the Sh122.5 ($1.15 billion) the Treasury initially estimated it needed from external sources to deal with the spread of the coronavirus both for purposes of balance of payment (or the shilling’s stability) and any spending related to the disease.
The multilateral lender said the gap had been caused by the fact that Kenya’s, like for many emerging and frontier markets, access to global markets had been drastically cut in terms of ability to issue syndicated loans.
This came when the shilling had lost some value, indicating an even greater need for the balance of payments support.
Exports, foreign direct investment as well as portfolio investments that support the shilling are expected to be constrained, also leading to a fall in the gross domestic product (GDP) growth to the lowest level in more than a decade. “With international financial markets effectively closed to emerging market and frontier issuers such as Kenya, IMF staff expects an external financing gap of about $2.1 billion (2.1 percent of GDP) in 2020,” said the report announcing the release of its Sh78.4 billion financing.
“The Covid-19 shock has given rise to an urgent balance of payments (BoP) financing needs in Kenya. The pandemic is having a pronounced negative impact on the economy, including sharp declines in the services sector and agricultural exports, as well as severe disruptions of supply chains. Staff projects that real GDP growth will drop to 0.8 percent in 2020.”
The IMF has already advanced Kenya Sh78.4 billion ($739 million), meaning the country must look for another Sh145.3 billion ($1.36 billion) if it is to bridge the IMF-projected gap. The World Bank was expected to cover part of the Sh122.5 billion that the Treasury initially sought, but the IMF now reckons much more money is needed adding that the shilling had already weakened due to a retreat to the dollar.
“The shock to emerging market and frontier economies’ access to international capital markets also hit Kenya and is expected to severely constrain new issuance or contracting of new syndicated loans for the remainder of 2020.
The resulting BoP financing need is assessed to be some $2.1 billion in 2020 (2.1 percent of GDP),” it noted. “Reflecting the US dollar’s strong appreciation against most other currencies, the shilling depreciated by 5.4 percent between February 28 and March 24.”