Haimanot Teferra: Why IMF is happy with President Ruto’s tax measures and parastatal reforms

IMF Mission Chief to Kenya Haimanot Teferra. ILLUSTRATION | JOSEPH BARASA | NMG

The International Monetary Fund (IMF) executive board this week completed the fifth review of its current programme with Kenya, allowing an immediate disbursement of about Sh58 billion ($415.4 million).

The board also approved a 20-month arrangement for Sh77 billion ($551.4 million) to support Kenya’s efforts to build resilience to climate change and catalyse private climate financing.

IMF Mission Chief to Kenya Haimanot Teferra spoke to the Business Daily on why the lender is happy with President William Ruto’s new tax measures, the reforms it has proposed on Kenya Airways and Kenya Power as well as the conditions that have come with its latest round of financing.

The IMF has thrown its weight behind the Finance Act of 2023 which is presently the subject of a court petition. Does IMF see a risk of budgetary dislocation should the Act be thrown out?

The Finance Act is critical in the sense that there is a need to mobilise resources to finance the government’s spending including debt service but also social sector spending.

The Act focuses on the need for domestic revenue mobilisation because as you know in the past Kenya has been able to access markets both externally and domestically and this has now become an extremely expensive source of financing.

In such a situation, a focus on domestic revenue mobilisation to ensure macro stability becomes even more critical and the Finance Act tries to address this.

One of the sticky issues is doubling VAT on fuel to 16 percent. Does IMF have a view on a middle ground?

The standard rate of VAT in Kenya is 16 percent and therefore the change is adjusting to that. At the same time, it is always important to be mindful and assess the impact on vulnerable groups and that has to be addressed.

Fuel subsidies generally are not popular because they are very costly and they are not targeted. So, the way we see it is that the best policy approach is removing the subsidies and ensuring that resources are targeted to the most vulnerable groups to address any impact that comes out of this.

The policy needs to be balanced and not just raise rates but also give targeted support.

What’s the latest regarding the restructuring of State-owned enterprises following the conclusion of the fifth review of the programme?

We understand there is now a new updated inventory and new classification of State-owned enterprises which should be approved by the Cabinet towards the end of 2023.

There is also a draft ownership policy for State-owned enterprises prescribing new governance architecture and legal ecosystem to inform improved performance and transparency which is part of the structural benchmark under the programme for October 2023.

There’s also an analytical framework for financial evaluation and risks from Stat-owned enterprises and government information management systems which is being strengthened.

There’s also a comprehensive assessment of the government’s continued involvement in State corporations.

Did Kenya Power and Kenya Airways feature in any way in discussions of the just concluded fifth review of the programme?

On Kenya Power, we had a structural benchmark for the Cabinet to approve an action plan which has been done and as you know tariffs have been raised to close some of the liquidity gaps.

We expect that with this, the issue of budget transfers will be addressed by the end of the year. On Kenya Airways, there is a fresh policy direction being sought in dealing with its challenges.

What would you say is new or has changed following the review?

In this review, there’s a whole new focus on how to try and durably address pending bills which has economy-wide implications because it affects non-performing loans and repayments.

So, this is an important part of the programme but we now are placing more emphasis and having a clear strategy on how to address it going forward.

So, it is not about adding new issues but re-focusing and re-prioritising the objectives.

How soon will the first disbursement under the Sh78.1 billion Resilience and Sustainability Facility loan hit Kenya’s coffers?

The way the Resilience and Sustainability Facility is designed is a little different from the usual Extended Credit Facility and Extended Fund Facility because you have a number of reform measures, each being associated with financing.

So, to the extent that Kenya implements those reforms in a timely manner, it will be able to unlock disbursement.

It is very difficult to know the exact timing but we have discussed with the authorities when they think they will be able to implement those and we expect the first disbursement to happen by the next review.

What’s your assessment of monetary policy especially the stance taken under the new Central Bank of Kenya Governor who had a jumbo rate hike on his first meeting?

The recent move by the Central Bank of Kenya to raise the policy rate was very appropriate in terms of addressing inflation but also more importantly on external sustainability as it helps build confidence in the Shilling and supports reserve accumulation.

The efforts being made to address foreign exchange dislocation are equally important and we are seeing a recovery in the interbank market it certainly has some way to go but still, it is going in the right direction.

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