New tone in IMF’s appraisal of Kenya monetary health puzzling

The International Monetary Fund (or the Fund) announced it had approved the disbursement of some $739 million to Kenya to help the country meet urgent balance of payment needs stemming from the outbreak of the Covid-19 pandemic globally.

The Fund then released a staff report capturing discussions between its visiting delegation and the Kenya government representatives.

From the report, there is a discernible change of tone in the Fund’s assessment of Kenya’s monetary health between now and in March 2018 when a delegation visited to firm up discussions on stand-by arrangements between the Fund and the government for some sort of insurance against “balance of payment” shocks. It turned out Kenya wasn’t so keen, which spooked the Fund into saying a lot of things.

First, they said Kenya was living beyond its means and public finances were in disarray (which is true). After lengthy discussions with the Treasury, they took note of the government’s plans to restore order in public finances and they agreed to narrow budget deficit to a target of 5.7 per cent of GDP in fiscal year 2018/19.

Come 2020, the Fund’s staff noted that the actual deficit came in at a staggering 7.8 per cent of GDP. The staff have since updated their forecast and they now see budget deficit at 7.8 per cent of GDP in fiscal year 2020/21 (which begins in July 1).

Here is the interesting bit. In a separate consultancy report done by the Fund but commissioned by the National Treasury, it says that Kenya’s fiscal forecasts lacks credibility.

The Fund says “on average, revenue has been over forecast by eight per cent in recent years, leading to repeated fiscal slippages and in-year spending curtailments”.

So why wouldn’t they look at the government’s own forecasting with a pinch of salt? But that’s not all. In 2018, they had a critical exchange rate assessment, reclassifying Kenya’s shilling from “floating” to “other managed arrangement”. The Fund even stated that Kenya’s external position was weaker than fundamentals, and went ahead to suggest an overvaluation of about 17.5 percent of the real exchange rate. That’s un-IMF like.

Well, guess what? In 2020, they struck a more reconciliatory tone, urging the Central Bank of Kenya to continue allowing the exchange rate to act as shock absorber (after securing a business deal!).

But a more discernible change in tone is in the debt sustainability assessment. First off is the debt trajectory. In 2018, the Fund talked of public debt as a share of GDP peaking in 2018. That didn’t crystallise. So in 2020, the Fund’s staff have altered their projections and now see the figure increasing through 2022 and thereafter declining over the medium-to-long term.

Nonetheless, the Fund has escalated Kenya’s risk of debt distress from medium to high on account of susceptibility to export and market financing shocks (all Covid-19 related).

It states: “Kenya’s external and public debt vulnerabilities also reflect the high deficits in the past, partly due to large infrastructure projects”, largely alluding to SGR.

Surprisingly, in its 2018 debt sustainability analysis, the Fund was full of praise for the infrastructure projects, noting that “such planned investment in infrastructure will be critical to raise growth and export potential, both of which will support Kenya’s external debt sustainability.”

Additionally, to reduce external debt distress, the Fund, in 2018, expected the government to refinance loans at a longer maturity within a year to limit refinancing risks.

It replayed the same expectation in 2020, only this time the refinancing timeframe is generously stretched to “near-term” (and not a year). The changes in tone can be puzzling. But perhaps this is how they keep the business pipeline active.