IMF Says Kenya Didn't Finish Program Review as Loan Lapses

(Bloomberg) -- Kenyan authorities failed to complete a second review for a $1.5 billion standby arrangement with the International Monetary Fund, according to the lender’s country representative, Jan Mikkelsen.

The Washington-based lender “will remain in close contact with the Kenyan authorities in the near term,” Mikkelsen said in an emailed response to questions, while stressing that the East African economy’s external position “remains strong and foreign exchange reserves are at a very comfortable level.”

Kenyan Treasury Secretary Henry Rotich said Thursday the state allowed the program, which was in place to shield the economy from exogenous shocks to its balance of payments position, to expire without a replacement or extension.

“The IMF will continue to support Kenya’s reform efforts through policy advice and capacity development,” Mikkelsen said.

Kenya, which didn’t draw down on the loan, has narrowed its current-account deficit to below 6 percent and is targeting a budget shortfall of 5.9 percent of gross domestic product in the current fiscal year through June 2019, compared with 7.2 percent last year.

Unmet Targets

The loan was scheduled to expire in March and the IMF extended access for six months to allow Kenya to complete the reviews that had been delayed by protracted elections in 2017.

The IMF can’t afford to be lenient toward Kenya by discussing a new standby arrangement, after the nation failed to fulfill most of the conditions set out in two past programs, according to Jacques Nel, an economist at South Africa-based NKC African Economics.

“If the IMF allowed interest-rate controls to remain in place while approving a new program, the fund would have lost some credibility in future negotiations, so I believe that was a key reason why negotiations failed,” Nel said in an emailed response to questions.

To retain access, Kenya was required to narrow its fiscal deficit to 3 percent of gross domestic product by 2018-19 and to introduce an interest-rate corridor that would help strengthen monetary-policy transmission. The funding shortfall is still wider than the target, and monetary policy has been hampered by commercial lending limits of 400 basis points above the benchmark measure. Other missed targets include reducing debt levels and boosting revenue collection.

“The conditions were not as outrageous as being portrayed, we just came to the end of kicking the can down the road,” said Jared Osoro, director for research on financial markets and policy at the Kenya Bankers Association lobby group.

Economic Strain

Any strain on the economy from not holding IMF insurance will mostly be on the exchange rate, according to Osoro.

The shilling has weakened 0.6 percent to 101.25 against the dollar this week, heading for its biggest weekly decline since May, according to data compiled by Bloomberg. Yields on Eurobonds due 2024 fell 5 basis points to 7.591 percent by 1:00 p.m. in Nairobi, the capital.

“Any stability in the foreign-exchange rate market will be at a huge cost in terms of interventions, and the capacity to intervene has a limit,” Osoro said.

To contact the reporter on this story: Adelaide Changole in Nairobi at achangole2@bloomberg.net

To contact the editors responsible for this story: Paul Richardson at pmrichardson@bloomberg.net, Helen Nyambura, Michael Gunn

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