The IMF has approved a $700 million financing package for Kenya that the East African country’s authorities plan to use as insurance against external shocks. This financing is precautionary, as Kenya plans not to draw on it unless the balance of payments comes under pressure.
The financing package involves ‘blended access’ – combined general and concessional resources comprising a $504.3 million Stand-By Arrangement and a $194 million arrangement under the Stand-By Credit Facility. The move makes available a total of $543 million up front, with the remainder available in two equal tranches upon completion of semi-annual programme reviews.
According to the IMF, Kenya’s rising income and a track record of access to international markets justifies the country’s eligibility for blended access financing. The frontloaded access is consistent with risks to the outlook tilted to the downside in the near term, in case the economy is affected by a sudden shift in global investors’ risk sentiment, a deterioration of security conditions, or large weather-related shocks.
The new financing package thus represents an effort to tailor existing Fund facilities to the specific insurance needs of the country. This is the first financing package of this type approved by the Fund for a frontier market in sub-Saharan Africa.
Kenya has consolidated macroeconomic stability in recent years: growth has been robust, inflation contained, debt has remained sustainable, and reserve buffers have increased. Kenya has implemented reforms in a market-friendly environment, attracting strong interest from foreign investors operating across East Africa.
As a result, Kenya has consolidated its status as a successful frontier market. A Eurobond debut issue of $2bn in June 2014 was the largest in sub-Saharan Africa so far, followed by a $750 million re-tap in December at yields 100 basis points lower than at original issuance.
Annual capital inflows have reached about 10 percent of GDP in recent years, lifting international reserve cover to 4 ½ months of prospective imports. Banks are more intensively using medium-term credit lines for small and medium-sized enterprises’ project financing.
The economy expanded by 5.3 percent in 2014 boosted by construction, manufacturing, and retail trade, despite poor rains constraining agriculture growth and security concerns affecting tourism significantly. GDP growth is projected to rise to 6.9 percent, lifted by implementation of the first stage of a regional railway project.
Inflation declined to 5.5 percent in January from 6 percent in December, well within the central bank inflation target range, reflecting lower electricity costs and helped by Kenya’s investment in geothermal power generation coming on stream. Geothermal generation capacity doubled in the second half of 2014, an overall increase of 18 percent in Kenya’s generation capacity, bringing the unit electricity cost down by 25 percent in recent months.