Refusal to Renew Precautionary Credit Facility May Result in Shilling Depreciation

Major concerns are in place that the shilling may depreciate and investor confidence in the country decline which may lead to reduced foreign investment and stunting economic growth.

This comes after the announcement by the Treasury not to renew the 99-billion-shilling Precautionary Credit Facility with the International Monetary Fund (IMF) which caused some uncertainty around the future of the economy, with the current facility having ended on Friday 14^th September 2018.

Cytonn Investments, in their weekly report, noted that while the facility was a nice to have, there was no immediate threat to the economy as a result of the failure to renew the IMF facility, due to sufficient forex reserves of USD 8.5 billion, equivalent to 5.7 months of import cover.

The report also stated that the stability of the shilling having appreciated 1.9 percent year-to-date despite the government has not drawn down on the IMF facility and the expected narrowing of the current account deficit to 5.4 percent of GDP by the end of the year, from 5.8 percent in June 2018, according to the CBK could be reasons for minimal or no threat to the economy as a result of the facility.

In addition to this, the report says that according to IMF representative Jan Mikkelsen, Kenya’s external position remains strong and foreign exchange reserves are at a comfortable level, therefore, the government should continue with its efforts to work on a fiscal consolidation plan aimed at narrowing the fiscal deficit to 5.7 percent of GDP from 7.2 percent of GDP in the FY 2017/18 and further to around 3.0 percent of GDP by FY 2021/22.

This can be achieved through revenue enhancement measures, which will, in turn, lead to reduced dependency on debt in a bid to reduce Kenya’s public debt burden.

“Therefore, despite the possible implications of failure by the government to renew the precautionary credit facility, we perceive no immediate adverse effects on the economy. However, the government needs to work on the conditions set by the IMF since the improvement in these areas stands to benefit the economy with or without the IMF precautionary credit facility,” read the report.

The International Monetary Fund (IMF) concluded their review under a precautionary Stand-By Arrangement (SBA) where it stated that their mission to assess the Kenyan economy achieved significant progress, but remained uncertain whether Kenya’s access to the standby facility would be extended.

The Executive Board of the IMF was set to make a decision on Friday 14^th September, on whether or not to grant Kenya access to a precautionary credit facility of 99 billion shillings having extended a similar facility of the same amount in March 2016.

The program expired on September 14^th, 2018 after being extended from 14^th March 2018, and the Treasury announced that it would not renew the precautionary credit facility with the IMF despite having requested an extension of the same in March 2018, arguing that the country had kept macroeconomic fundamentals stable, occasioned by the low inflation levels and stable shilling.

Possible economic implications should the Government not take advantage of the IMF’s precautionary credit facility, Cytonn report gave some possible economic implications that included the depreciation of the Kenya Shilling, adverse movements in the balance of payments position and reduced investor confidence.