IMF Says Talks With Kenya on Fund-Supported Program Progress

(Bloomberg) -- The International Monetary Fund said there is progress in talks with Kenya for a new program, months after a standby facility for the East African nation ended.

“Significant progress was made during the mission” in December “and discussions on a new fund-supported program are continuing,” said Jan Mikkelsen, the Washington-based lender’s representative in Kenya. “There is no particular timeline.”

The previous program, an insurance-type facility that Kenya would draw from in the event of balance of payment shocks but didn’t, ended in September. The government plans to raise as much as $2.5 billion of Eurobonds, probably before June.

Kenya is likely to get the new facility by end of the first quarter, according to Ty McCormick, an Africa analyst at Eurasia Group Ltd. The IMF may soften its stance on the government removing a rate-cap law that’s impeded credit to businesses and households, and complicated monetary policy, he said in an emailed note Thursday.

“The IMF will likely demand that the caps be removed or substantially modified as a part of the program, something the government will struggle to do given the continued support for this mechanism in parliament, but the action is no longer a pre-condition for an agreement,” McCormick said.

Falling Yields

Alternatively, the Washington-based lender may ask the government to develop plans for generating additional revenue to ensure its budget financing gap keeps narrowing, without undue cuts to development spending, Eurasia said. While Kenya is on track to trim the deficit from 7.2 percent of gross domestic product in 2017-18, it has revised its target for the current fiscal year three times to 6.3 percent from a previous estimate of 5.8 percent.

“Even that is probably overly optimistic, given the disappointing revenue figures reported so far,” McCormick said. The 5 percent fiscal-deficit target for 2019-2020 “is similarly unrealistic, as it was based on overly rosy economic-growth and revenue projections.”

Kenya’s revenue agency collected 681 billion shillings ($6.75 billion) in the first half, against a prorated target of 803 billion shillings.

Yields on Kenya’s 2024 Eurobonds are down 127 basis points this year to 7.04 percent, while the return on 30-year bonds has dropped 110 basis points to 8.7 percent, according to data compiled by Bloomberg.

“There is a clear incentive for the government to wait to go to market until it has an agreement with the IMF,” McCormick said. “However, the recent decline in yields on Kenyan Eurobonds issued in 2014 and 2018 could prompt the government to issue before a deal is finalized, since heightened demand indicates that Kenya’s borrowing costs will be lower than expected.”

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