Kenya, IMF agree on economic policies to revive economy

Kenya and the International Monetary Fund (IMF) have recently come to an agreement on economic and structural policies that will span over a three-year period. The aim of this agreement is to help Kenya's pandemic-stricken economy recover and stabilize. Economist Neville Mandimika from Rand Merchant Bank joined CNBC Africa to discuss the implications of this agreement. Mandimika highlighted the debilitating impact of Kenya's current debt burden on its economy. He noted that Kenya's fiscal deficit management and debt-to-GDP ratio have left much to be desired in recent years. The country's debt trajectory has not been promising, with a significant portion of government spending going towards debt servicing costs and contingent liabilities from State-Owned Enterprises (SOEs). The COVID-19 pandemic has further exacerbated Kenya's economic challenges by causing a strain on economic growth and increasing expenditures. As a result, there is a pressing need for reform to address these issues. The IMF agreement aims to provide a policy framework that will help align key economic indicators with more sustainable levels. One of the critical aspects of the agreement is the pace of fiscal consolidation. Currently, Kenya's fiscal deficit is projected to be over 8.5% of GDP, which is considered feasible given the gradual recovery in economic growth. Over the next few years, the focus will be on reducing the deficit, stabilizing the primary balance, and ensuring a sustainable debt-to-GDP profile. In addition, the agreement addresses contingent liabilities from SOEs and includes measures to evaluate the Kenyan shilling to enhance flexibility in the country's balance of payments. The agreement also involves a disbursement of an additional $2.4 billion in financing to support Kenya's operations. However, it is important to note that this funding will not be provided in a lump sum. Rather, disbursements will be subject to periodic reviews to assess the government's adherence to agreed targets. While this additional financing will increase Kenya's debt-to-GDP ratio, the low-cost nature of IMF loans will help mitigate the impact on debt servicing costs. The ultimate goal is to utilize these funds productively to catalyze GDP growth and stabilize key economic indicators. Mandimika emphasized the importance of effective policy implementation over the three-year period. He highlighted potential challenges such as upcoming elections that could disrupt policy continuity. External factors like weather patterns, including droughts and locust invasions, also pose risks to Kenya's economic outlook. Despite these challenges, Mandimika expressed optimism based on successful IMF programs in other African countries. He stressed the need for Kenya to address key risks related to its finances and balance of payments. Mandimika identified uncertainties around the government's Big Four agenda, the impact of the vaccine rollout on economic growth, and fluctuations in commodity prices as major risks to monitor. The upcoming elections will also be a critical factor in determining Kenya's economic trajectory. Overall, the IMF agreement presents a significant opportunity for Kenya to strengthen its macroeconomic fundamentals and pave the way for a more resilient economy in the future.