Kenya is proceeding with plans to secure a Sh193 billion ($1.5 billion) loan from the United Arab Emirates (UAE) despite concerns raised by the International Monetary Fund (IMF) regarding the country’s growing debt burden. The IMF has urged caution, warning that the loan could further strain Kenya’s fiscal situation, but sources familiar with the deal have confirmed that the loan will be disbursed in tranches to comply with borrowing limits set under Kenya’s ongoing four-year IMF program, which concludes in April 2024.
Tranche Disbursement to Ensure Compliance
According to Bloomberg, the UAE loan will be issued in stages, with Sh91 billion ($700 million) expected to be disbursed early next year. The remainder of the funds will be released in subsequent tranches, though the precise timing is still subject to change. This approach is designed to ensure Kenya remains within the borrowing limits outlined by the IMF while providing much-needed financial support to manage its budget deficit.
Kenya’s government has emphasized that the UAE loan will provide a crucial buffer as the country faces a growing budget crisis. The Kenya Revenue Authority (KRA) has consistently fallen short of its revenue targets, creating a shortfall in the government’s ability to fund public services and development projects.
Additional Loans and IMF Support
In addition to the UAE loan, Kenya has secured a Sh26 billion ($200 million) loan from the African Development Bank (AfDB) and is in discussions with the World Bank for a new loan of Sh97 billion ($750 million). Raphael Owino, Director General of the Ministry of Finance’s Public Debt Management Office, stated that these loans, combined with IMF support, are crucial for stabilizing the country’s finances.
“We are working closely with our international partners to ensure that we have the necessary financial resources to support our budget, even as we implement measures to improve revenue collection,” said Owino.
Concerns Over Rising Debt
Despite the influx of loans, the IMF has continued to raise concerns about Kenya’s rising public debt. The IMF’s mission chief for Kenya, Haimanot Teferra, has acknowledged that the UAE loan could be beneficial if the terms are more favorable than existing, high-interest loans. However, Teferra warned that borrowing at high rates to finance the budget could exacerbate Kenya’s debt vulnerabilities.
“We need to carefully consider how these funds are utilized, the terms of the loan, and how they impact Kenya’s overall debt dynamics,” said Teferra. “If the terms of the loan are not favorable, it could worsen the country’s fiscal situation.”
IMF’s Pressure for Fiscal Reform
The IMF has been closely monitoring Kenya’s fiscal performance, which has significantly fallen short of targets. Earlier this year, the IMF disbursed $606 million (Sh78.1 billion) to support Kenya’s budgetary needs. However, the IMF has emphasized the need for Kenya to implement more robust fiscal reforms, including expanding the tax base and improving tax collection efficiency.
In response to the IMF’s concerns, President William Ruto’s government has faced challenges in introducing new tax measures. The government recently withdrew the Finance Bill 2024 in the wake of protests by Generation Z, who criticized the proposed tax hikes. The government is now working on a revised version of the Tax Laws (Amendment) Bill, which is expected to raise Sh174 billion, significantly lower than the initial target of Sh346 billion.
Balancing Fiscal Needs with Debt Sustainability
IMF officials have stressed the need for Kenya to strike a balance between meeting urgent social spending needs—such as health and education—while also managing the rising public debt. IMF Deputy Managing Director Nigel Clarke is scheduled to visit Kenya next month to hold discussions with government officials and key stakeholders. His visit, set for December 9-10, will focus on Kenya’s fiscal challenges and the country’s ability to manage its borrowing in a sustainable way.
Julie Kozack, Director of the IMF Communications Department, noted that Kenya’s government faces a delicate balancing act in managing its fiscal health.
“Kenya’s fiscal performance has significantly fallen short of expectations, leading to increased debt vulnerabilities,” Kozack said. “A credible fiscal consolidation strategy is essential for addressing these vulnerabilities while safeguarding social and development spending.”
The IMF continues to urge Kenya to enhance the efficiency, equity, and transparency of its tax regime, which will be critical to garnering political and public support for future reforms.
Looking Ahead
As Kenya moves forward with securing the UAE loan and pursuing additional financial support from international partners, the government will need to navigate a complex fiscal environment. The successful implementation of fiscal reforms and the efficient use of borrowed funds will be crucial in stabilizing the country’s finances and ensuring long-term economic growth.