Kenya Secures $1 Billion World Bank Loan to Support National Budget
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Loading... - Elizabeth Mutua
- 31 May 2023
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In a significant development, the World Bank has granted Kenya a substantial loan of $1 billion (equivalent to Sh138 billion) as part of the Development Policy Operation (DPO) to provide crucial support for the country's budgetary requirements. This financial facility comes at a crucial time when Kenya is preparing to repay its inaugural Eurobond, valued at $2 billion, which was issued back in 2014.
The issuance of the 10-year sovereign bond in 2014 marked a turning point for the Jubilee administration, as it shifted towards utilizing commercial debt to finance the national budget. The repayment of this bond is in the form of a bullet payment, and the approved World Bank loan will greatly assist Kenya in meeting this financial obligation.
Kenya had initially borrowed $2.75 billion (approximately Sh345.5 billion at current exchange rates) in two tranches: a 10-year bond and a five-year issuance of $750 million. The interest rates on these borrowings were 6.78 percent and 5.87 percent, respectively. However, recent assessments by institutions such as Moody's have raised concerns about Kenya's ability to make timely payments, resulting in a downgrade of the country's creditworthiness to a high default risk status.
Moody's and the International Monetary Fund (IMF) have highlighted the deteriorating funding conditions for Kenya over the past two months. Factors contributing to the challenging situation include low net domestic issuance, which has led to financing shortfalls and delays in government spending.
The World Bank loan is expected to alleviate some of these challenges and assist the government, led by President William Ruto, in meeting the pressing recurrent budget needs. These needs have already resulted in delays in civil servants' salaries in April.
The World Bank, in a statement, explained that the loan aims to provide affordable budgetary financing to support key policy and institutional reforms in Kenya. These reforms align with the country's short-term objective of fiscal consolidation and its long-term goal of achieving sustainable and inclusive growth.
World Bank acknowledged Kenya's resilient economy but also recognized the significant challenges it faces, including the ongoing economic impacts of the Covid-19 pandemic, global repercussions stemming from Russia's invasion of Ukraine, frequent climate shocks, monetary tightening in advanced economies, and vulnerabilities related to debt.
The first phase of policy reforms will focus on creating fiscal space in a sustainable and equitable manner. This includes implementing revenue and expenditure measures to support fiscal consolidation, strengthening the debt management framework, and safeguarding expenditures that benefit the underprivileged population. In the second phase, reforms will prioritize enhancing competitiveness to boost agricultural exports, a sector where Kenya possesses a clear comparative advantage and one that employs a large portion of the country's impoverished population.
The third wave of reforms will aim to improve transparency, accountability, and financial inclusion to foster private sector-driven growth. This will enhance the confidence of the private sector by ensuring a level playing field and promoting trust in the government's commitment to good governance.
The World Bank emphasizes that each of these reform pillars integrates actions to combat climate change and promote inclusivity, two critical areas of focus for this operation.
Keith Hansen, the World Bank's country director for Kenya, commended the government for its dedication to fiscal consolidation, which is crucial for reducing debt vulnerabilities and ensuring long-term growth sustainability.
