Standard Chartered Bank: What the IMF SDR approval means for Kenya

The International Monetary Fund (IMF) has proposed a substantial $650 billion increase to the existing Special Drawing Rights (SDR) reserves, which would triple the current SDR reserves, effectively boosting the IMF's international reserve assets for member countries worldwide. Kenya, a nation grappling with mounting debt, is one of the countries poised to benefit from this proposal. CNBC Africa recently interviewed Eva Wanjiku Otieno, Principal, Africa Strategy at Standard Chartered Bank, to delve into the implications of this development for Kenya's economy. The increase in SDR reserves allocated by the IMF is expected to significantly bolster Kenya's foreign exchange reserves, potentially adding around $740 million to the country's coffers. This infusion of funds could provide a much-needed boost to Kenya's liquidity ratios and aid in managing its foreign currency debt obligations. Additionally, Kenya has also been a beneficiary of the Debt Service Suspension Initiative (DSSI) relief, further easing the pressure on its foreign currency debt servicing. However, despite the positive outlook brought about by the IMF's proposal, concerns loom regarding Kenya's debt-to-GDP ratio, which currently stands as one of the highest in East and Central Africa. While the SDR allocation presents an opportunity for Kenya to strengthen its fiscal position and stabilize its debt, there are apprehensions about the government's potential inclination to further borrow in light of the additional reserves becoming available. The country's citizens have expressed reluctance towards increased borrowing, calling for prudence in fiscal decisions. Otieno emphasized the importance of distinguishing between the SDR allocations and the ongoing IMF-funded program that Kenya is part of, which includes the Extended Credit Facility and Extended Fund Facility. While the SDR allocations are anticipated to be disbursed without stringent conditionalities, the funded program aims to guide Kenya towards fiscal consolidation over the next 38 months. This consolidation is crucial in narrowing Kenya's fiscal deficits and stabilizing its escalating debt. Moreover, Otieno highlighted the potential risks associated with increased government spending, particularly in relation to initiatives such as the Building Bridges Initiative and support for state-owned enterprises (SOEs). The rationalization of expenditure towards SOEs is deemed essential in curbing excessive spending pressures and ensuring fiscal discipline within the government. Additionally, uncertainties surrounding economic growth persist, with projections being revised downward due to the ongoing challenges posed by the COVID-19 pandemic and the emergence of new variants. Standard Chartered Bank's economic growth forecast for Kenya stands at 5.3 percent for 2021, reflecting the cautious approach adopted by some financial institutions in light of the prevailing uncertainties. While the IMF had initially projected a growth rate of 6.3 percent, factors such as the third wave of COVID-19 infections and the complexities surrounding the reopening of economic activities pose downside risks to Kenya's growth trajectory. In conclusion, the IMF's approval of the SDR allocation holds promise for Kenya's economy, offering a pathway towards bolstering foreign exchange reserves and addressing debt stabilization. However, prudent fiscal management, cautious borrowing practices, and strategic economic reforms will be imperative for Kenya to harness the full potential of this opportunity and navigate the challenges lying ahead.