INTERNATIONAL - The International Monetary Fund approved $1.23 billion of emergency funding for Kenya and Uganda, saying the coronavirus pandemic is likely to exact a severe toll on the two East African economies.
The loans bring to more than $10 billion the IMF has disbursed to African nations to help them combat the virus. Kenya’s government is negotiating with bilateral and multilateral creditors to delay debt-service payments due this year as it shores up funds it needs for health-care.
Those discussions are taking place as the Institute of International Finance coordinates talks on debt relief for emerging markets.
The IMF’s $739 million Rapid Credit Facility will boost Kenya’s international reserves to help cover balance of payments shortfalls this year. It will also provide resources to boost public health and support for households and companies hit hard by the crisis, the IMF said in an emailed statement. The 10-year facility carries no interest and has a 5½-year grace period.
“The impact of Covid-19 on the Kenyan economy will be severe,” the IMF said. “The sudden shock has left Kenya with significant fiscal and external financing needs.”
The pandemic has damaged almost all sectors of the region’s biggest economy. Agriculture, which accounts for about a third of overall output, has been hit hard with a plunge in the export of cut flowers, fruits and vegetables. Tourism, the third-biggest foreign-exchange earner after remittances and farm shipments, has dried up.
While the move to pause fiscal-consolidation plans amid the pandemic is appropriate, the IMF urged Kenyan authorities to pursue growth-friendly measures, such as strengthening revenue collection, once the crisis subsides to reduce debt vulnerabilities.
Temporary Measures
Authorities should also continue to “allow the exchange rate to act as a shock absorber,” the IMF said. The Central Bank of Kenya enabled the shilling to depreciate to a record low of 107.65 per dollar on April 24, bringing losses from the start of the year to 5.5%.
Kenya’s reserves will climb to about $8.48 billion with the fresh cash, which will help with debt obligations that are due, such as interest payments on some Eurobonds, according to Churchill Ogutu, head of research at Nairobi-based Genghis Capital.
“We don’t price in large-scale shilling support by the apex bank in light of the ‘go-ahead’ from the IMF that the exchange-rate adjustments can act as a shock absorber,” Ogutu said. “That said, IMF support is a positive news event that will also anchor an upswing in the price of the international sovereign bonds in the near-term.”
In Uganda, where strict surveillance measures have helped limit the spread of the virus, the pandemic has added to the challenges posed by heavy rains and an ongoing locust invasion, the IMF said. As in Kenya, a temporary widening of the fiscal deficit is justified to allow for a response against the crisis, it said.
“Despite a temporary worsening of debt indicators and heightened vulnerabilities, public debt is expected to remain sustainable,” the IMF said as it announced a $491.5 million loan to Uganda.
Africa’s biggest coffee exporter had public debt of $13.5 billion at the end of 2019 and foreign creditors accounted for about 65% of that. The government projects a budget deficit at 8.7% of gross domestic product by the end of June.
The World Bank estimates Kenya’s public debt will increase to about 6.4 trillion shillings ($60.3 billion) this fiscal year, or 63.1% of GDP, from 5 trillion shillings four years ago, when it was equivalent to 53.8% of GDP.