Eyes on shilling as IMF cushion ends Friday

The shilling could be left exposed to the turbulence of foreign exchange markets and global economic shocks should the International Monetary Fund (IMF) terminate Nairobi’s access to a Sh152 billion ($1.5 billion) precautionary facility that expires in four days.

The IMF in mid-March approved a six-month extension of the forex insurance programme with Kenya, which was due to expire in March.

The Treasury and the Central Bank of Kenya (CBK), in return, promised to repeal the law that controls the cost of loans chargeable by banks within the extended six-month window that expires on Friday. Treasury secretary Henry Rotich’s bid to repeal the law however suffered a blow as Parliament voted to retain the cap on bank interest rates last month.

The IMF insurance is also tied to the Treasury’s fulfilment of the promise it made to cut back on the budget deficit through a raft of measures, including public spending cuts and raising taxes.

The government’s attempt to effect a 16 per cent Value Added Tax (VAT) on petroleum products has however been met with widespread opposition as critics predicted it would derail economic growth. The High Court sitting in Bungoma on Thursday temporarily suspended the new fuel tax pending the hearing of a case filed by a group of youths.

The IMF had said implementation of the economic policy changes would give Kenyan authorities access to the precautionary facility.

“We are still evaluating the implications for the IMF-supported programme,” IMF resident representative for Kenya Jan Mikkelsen told the Business Daily last week in response to queries on the shilling cushion.

The shilling remained stable in Friday’s trading at an average of 100.71 to the dollar, supported by remittance inflows and the CBK’s liquidity mop-up that has helped counter rising demand for the greenback.

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 $8.57billion equivalent to 5.71 months of import cover, well above the minimum recommended four months.

Unlike standard IMF bailout loan programmes, the loan is formally described as a “standby,” meaning Kenya is only allowed to tap the facility in case of an emergency. The precautionary facility has been one of tools that have helped Kenya stabilise the shilling against the dollar-- helping the local currency to buck the general trend of weakening African currencies during the period.

The IMF team met the Treasury and other State officials in the latest round of review last month. The review was expected to see Kenya allowed or denied further access to the standby facility.

In a statement issued last month after the visit, the IMF did not give a position on review of the loan. The Bretton Woods firm, however, said Kenyan authorities “reiterated their commitment to macroeconomic policies that would maintain public debt on a sustainable path, contain inflation within the target range, and preserve external stability.”

“Discussions focused on fiscal policies to achieve the authorities’ fiscal deficit target of 5.7 per cent of GDP in financial year 2018/2019, interest rate controls and structural reforms aiming to ensure the sustainability of investment-driven, inclusive growth,” said the IMF.

The IMF revealed this year that the cautionary loan had been suspended mid-last year before the March 14 expiry date due to failure to meet the agreed fiscal deficit reduction targets. On Friday experts echoed sentiments by Kenyan officials that withdrawal of the programme would not necessarily hurt the shilling but cautioned such a move would have implications for the country’s borrowing profile.

“With high levels of foreign exchange reserves, the Central Bank of Kenya (CBK) can even easily manage a situation where demand is greater than supply on the foreign exchange market for a relatively long period of time, allowing a gradual Kenya Shilling adjustment,” said Citi Research in an outlook. Last month the CBK Governor Patrick Njoroge said the Kenyan economy is well protected against capital outflows and does not need the IMF’s precautionary credit facility.

Dr Njoroge said while the facility would be crucial to providing liquidity to the financial system if necessary, the country’s external position was strong at the moment, underpinned by strong remittances and exports.

“We are confident in terms of our objectives… but at this point, we don’t need the money from that perspective. We have 5.9 months of import cover. We are pretty comfortable in that sense,” Dr Njoroge said. His comments were echoed by Mbui Wagacha, an economist and adviser in the executive office of the presidency.

“I agree with the central bank that we actually don’t need the IMF standby facility, especially when it comes with conditions that we remove the rate cap or increase taxes,” said Dr Wagacha.

The Citi analysts warned, however, that investors are likely to be wary of the Kenyan economy’s exposure to shocks in the absence of the IMF facility, and thus demand a higher premium on the Eurobond.

“In recent years, it has become clear to us that investors in many African countries attach considerable importance to whether a country is on an IMF programme or not. In fact, it seems they attach more importance to this than the sovereign ratings provided by various international rating agencies,” said Citi.