Kenya’s Post-IMF Disbursement Strategy: Exploring New Fiscal Pathways

Kenya has abandoned Ksh.63 billion of IMF disbursement, ceasing the current EFF and ECF programs while retaining the RSF. Economic experts warn of investor concern and potential capital flight, urging the government to consider capacity-building strategies in new arrangements to ensure self-reliance and maintain stability.

The Kenyan government’s recent decision to abandon the Ksh.63 billion disbursement from the International Monetary Fund (IMF) marks a notable shift in its fiscal strategy. This move follows their request to initiate a new program aimed at enhancing the country’s fiscal policies, thereby ceasing the current Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements. Consequently, only the Resilience and Sustainability Facility (RSF) remains active to support Kenya’s climate initiatives.

Initially, in April 2021, the IMF had agreed to provide Ksh.467.5 billion under the EFF/ECF programs. To date, Kenya has accessed Ksh.404 billion, resulting in a forfeiture of Ksh.63.4 billion due to the program’s discontinuation. Experts suggest that this decision stemmed from Kenya’s inability to meet the fiscal targets mandated by the IMF or the potential loss during the ninth review stage.

Economist Churchill Ogutu from the financial consulting IC Group highlighted that Kenya’s failure to meet its established fiscal benchmarks since 2023 could have jeopardized the funding from the ninth review. Despite the termination of the program, Kenya has drawn 89 percent of the total IMF cap, allowing for potential qualification for additional funding within the forthcoming arrangement.

However, the discontinuation of ties with the IMF induces concern among investors regarding financial market stability. The subsequent request for a new program, although pending clarity on terms, serves as a temporary palliative measure. A significant worry is that declining investor confidence could encourage capital outflow, leading to depreciation of the Kenyan shilling, subsequently increasing import costs and inflation, thereby escalating the cost of living.

Economist Ogutu indicated that the request for a new program could alleviate immediate investor concerns. He outlined three prospective strategies for Kenya’s new program: financed, non-financed (capacity building), and insurance-based. He recommends that Kenya focuses on a capacity-building approach, which emphasizes self-reliance through training and peer-learning, warning that adopting a finance-based model may impose stricter adherence to conditions.

In summary, Kenya’s decision to forgo the Ksh.63 billion IMF disbursement underscores the challenges it faces in fiscal management. As it seeks a new program, the options of capacity building may provide a pathway toward enhancing self-reliance. Investors remain cautious, and the risks of economic instability loom if ties with the IMF are severed without a solid replacement plan. Therefore, careful evaluation of future programs is critical for sustaining investor confidence and economic stability.

Original Source: www.citizen.digital