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CBK moves to cushion shilling after IMF talks for $1.5b loan stall



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The Central Bank of Kenya has launched an aggressive dollar-purchase plan to cushion the shilling after the IMF failed to give an assurance over renewal of the suspended $1.5 billion standby credit facility.

A delegation of the International Monetary Fund failed to announce a renewal of the standby loan after concluding a visit to Nairobi on Wednesday.

“Discussions will continue in the coming period,” said the IMF statement indicating that there were unresolved differences with the government.

“Technical work will continue to firm up underpinnings of the plan, which could be supported by a Fund arrangement,” it concluded.

The three-year standby loan is intended to protect the Kenyan shilling against external shocks and raise the country’s credibility in the eyes of international lenders.

The Central Bank (CBK), on the same day that the IMF team concluded its mission in the country, issued a circular to all chief executives of commercial banks announcing that it would start buying US dollars from the lenders to boost its foreign exchange reserves. The regulator committed to buy up to $100 million each month from commercial banks, for a three-month period (March-June).


“The minimum amount for these purchases will be $1 million, and will be transacted at the prevailing market rate and at CBK’s discretion,” said William Nyagaka, the bank’s director, financial markets department.

“This will bolster CBK’s preparedness to deal with the heightened global volatility and uncertainties. CBK sees an opportunity for such purchases given the developments unfolding in the global markets and economy,” he added.

The IMF team, led by Benedict Clements, was also in Kenya for negotiations over a new precautionary three-year standby arrangement and its financial and economic policies.

The standby facility was suspended 17 months ago after the government failed to meet the IMF’s reform agenda, including scrapping of controls on the cost of loans and imposition of value added tax on petroleum products. The government has since removed controls on the cost of bank loans and introduced eight per cent VAT on all petroleum products.

An attempt by The EastAfrican to get clarification from CBK on whether the dollar purchases were informed by the government’s failure to secure the IMF’s standby facility proved unsuccessful.

“Most of these questions seem to be better directed to the IMF,” said Wallace Kantai, assistant director at the Governor’s office and the Bank’s Head of Communications.

The IMF declined to clarify its position regarding the standby facility.

“I have nothing to add to the statement at this point,” said Tobias Rasmussen, the IMF Kenya Resident Representative.

Ukur Yatani, Kenya’s CS for the National Treasury did not respond to our calls by the time of going to press.

The IMF has introduced new conditions for disbursement of the standby loan, including reduction of the rising fiscal deficit and implementing tax and expenditure reforms that do not hurt private sector investments and stifle economic growth.

According to Mr Clements, there was a general agreement with the government on a plan to cut wastage, boost revenues, and reduce budget deficit to below four per cent of GDP by the 2022/2023 fiscal year.

Kenya’s forex reserves declined to $8.4 billion (5.11 months of import cover) during the week ending February 27 from $8.5 billion (5.17 months of import cover) in the week ending February 20, according to CBK data.

The yields on Kenya’s 10-year Eurobond climbed to around 4.8 per cent from around 4.5 per cent in the same period, according to CBK’s weekly economic indicator report.

Public debt hit Ksh6.04 trillion ($60.4b) in December 2019 from Ksh5.27 trillion ($52.7b), putting the national budget plan at risk due to rising cost of debt service payments.

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