The International Monetary Fund (IMF) terminated Kenya’s access to a Sh152 billion precautionary facility seven months ago which has left the shilling exposed to the turmoil of foreign exchange markets.
Kenya was yet to spend the two-year precautionary facility, which has been crucial in weathering economic shocks from March 2016.
The precautionary facility has stabilised the shilling against the dollar and prevented it from weakening as other African currencies have done during the period. The dollar has remained stable at 103.30 against the dollar yesterday because of remittance inflows and CBK’s liquidity.
CBK and Treasury Quiet on The Matter
CBK and Treasury have not informed the public of the withdrawal of the precautionary facility seven months ago. In the past seven months, CBK has held four monetary policy meetings and on every occasion alluded to the accessibility of the facility as an “adequate buffer against short-term shocks in the foreign exchange market.”
The withdrawal of the facility comes at a time when CS Henry Rotich and other senior Treasury officials are on a road show in the USA and Europe prior to the set issuance of Eurobond in the existing financial year.
With the IMF precautionary facility unavailable, Kenya will now rely on foreign reserves for buffers. However, Kenya’s foreign reserves are at $7.24 billion (Sh700 billion), which is equal to 4.84 months of import cover.
Additionally, investors could demand a higher premium on Eurobond.
“International investors looking at bonds from high yield countries like Kenya will always be looking for the availability of a facility that the country can draw down in the event of a short-term problem. This is added safety that also shows that the country is in good standing with the multi-laterals,” Deepak Dave, Risk Management Expert, Riverside Capital Advisory stated.
IMF is also expected to answer why it took seven months before announcing the decision to withdraw the facility.
IMF representative in Kenya, Jan Mikkelsen, told Bloomberg and Reuters that the facility has not been terminated; rather it has been suspended because Kenya failed to finish a periodic review that would have tackled the government’s non-success to meet the budget deficit reduction threshold attached to the loan agreement.
“There was no agreement on the fiscal adjustment at the time and then I do believe the lengthy election period (later in the year) made it difficult to have a review and complete that in the period that followed,” Mikkelsen said.
IMF had rated the reduction of the country’s fiscal deficit at less than 4 percent of GDP by the close of the fiscal year in June 2019 as a condition to access the precautionary facility.
Nevertheless, an IMF team is in Nairobi to evaluate the likelihood of making a new standby facility accessible to Kenya. The new facility will replace the existing one that expires in March.