IMF’s terms for a New Sh75 billion Kenya Loan are Conditional on Reforms

When the first review of the agreed-upon policy reform measures is carried out in November, Kenya will not use its new $544.3 million, or about Sh75.3 billion, loan facility with the International Monetary Fund (IMF).

Following the conclusion of the fifth review of the ongoing programme with the fund, which has now been extended through April 2025, the IMF reached a staff-level agreement with the Kenyan government for a new loan under the Resilience and Sustainability Facility (RSF) on May 22.

Kenya’s progress toward integrating green finance into its budget-making process and the steps taken to lessen the risks associated with climate change will be evaluated, among other things.

Kenya obtained the RSF loan as a result of the devastating drought and famine that caused the agricultural sector, the backbone of its economy, to contract for two years in a row, in 2021 and 2022, by -0.4% and -1.6%, respectively.

“Reforms under the proposed programme will include integrating climate-related considerations into budget preparation and public investment frameworks, embedding management of climate risks, including in the financial sector, and enhancing early warning systems.

“These reforms are expected to catalyse climate finance,” the IMF Staff Level Agreements states concerning the reform conditions attached to the new Sh75.3 billion loan.

It only took the Treasury six months to release the Draft Green Fiscal Incentives Policy Framework, which included a recommendation that the government establish a green investment bank to offer funding options and incentives to support both the public and private sectors.

The proposed framework also states that the government will create a roadmap for the implementation of a carbon tax.

Kenya will be attempting to learn from South Africa’s experience in adopting carbon taxes.

“While carbon taxes can operate across many sectors, their focus and impact are often concentrated in the power sector. Several middle-income countries have implemented taxes of varying degrees of ambition over the last decade. South Africa was the first African country to introduce one in 2019 when it set a price of $8.35 per tonne of carbon dioxide,” the Draft Green Fiscal Incentives Policy Framework states.

Kenya will not be required to make any principal repayments during the 10.5-year grace period that follows the 20-year repayment period of the new Sh75.3 billion loan facility from the IMF.

The loan will also have a variable interest rate with an initial point of 4.8 percent, which is 100 basis points higher than the fund’s rate for special drawing rights.

These conditions are based on Kenya’s placement in the Group B group of nations that are qualified to use RSF loans.

The IMF’s lowest rate for an RSF loan would be 4.3 percent, which is half a percentage point higher than the special drawing rights rate the fund has set.

Due to its income level and ability to combine both concessional and non-concessional financing to meet its funding needs, Kenya was not eligible for this low rate.

By obtaining the RSF loan, Kenya was able to extend its current IMF program beyond its original expiration date of June 2024 to the new date of April 2025.

This extension was deemed necessary due to the requirement that a country be enrolled in an IMF program that will run concurrently with financing from the RSF window in order to be eligible for funding through the RSF window.

After the fifth review of the current program came to a close, Kenya is now awaiting the IMF board’s approval to withdraw Sh56.7 billion.

Following Bangladesh, Barbados, Costa Rica, Jamaica, and Rwanda as the other five countries to use the IMF’s RSF loan facility, Kenya is now the sixth nation worldwide and the second in Africa to do so.

The first review of Rwanda’s RSF loan was completed by the IMF Executive Board on May 24, allowing the country to receive an immediate disbursement of $98.6 million, or roughly Sh13.6 billion.