IMF asks Kenya to limit support to SOEs

The International Monetary Fund (IMF) has asked Kenya’s National Treasury to limit its support to struggling state-owned enterprises (SOEs) such as Kenya Airways, as part of new conditions for approving USD2.34 billion worth of Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements for the country. This is according to the IMF’s latest Country Report No. 21/72 (April 2021). According to this, the three-year financing package supports the next phase of Kenya’s COVID-19 response and its plan to reduce debt while advancing broader reforms and governance agendas in some SOEs and strengthening transparency and accountability through an anti-corruption framework. Approval of the ECF/EFF enables the immediate disbursement of about USD307.5 million for budget support. It follows USD739 million in emergency support to Kenya in May 2020. “State-owned enterprises have emerged as an important source of fiscal risk,” the IMF report states. “The profit of public entities outside the budgetary central government declined by a third in FY19/20, to KES62.5 billion shilling (USD578 million) (0.6% of GDP), as many SOEs saw reduced profits and a handful showed large losses. While the deteriorating income position of the SOE sector reduces its contribution to the budget, additional fiscal pressures could arise from SOE debt on-lent or guaranteed by the government.” “For several SOEs, the COVID-19 shock exacerbated pre-existing underlying financial weaknesses,” it noted. “Kenya Airways, which like other airlines was hard hit by the travel restrictions introduced in early 2020, had been accumulating losses since 2015.” By the end of May 2021, Kenya’s National Treasury would prepare an in-depth, forward-looking financial evaluation of the top 15 to 20 SOEs representing the most significant fiscal risks as well as a strategy for addressing financial pressures in the SOE sector, including a framework for deciding on interventions and reforms. They include Kenya Airways, Kenya Railways, the Kenya Airports Authority, Kenya Power, power utility KenGen, the Kenya Ports Authority, and three of the largest public universities. Concrete measures would include completing a draft blueprint by July 2021 with support from the IMF that would identify necessary actions and legal reforms to enhance governance; developing an integrated monitoring and reporting system by September 2021; establishing a performance management monitoring and evaluation framework, and initiating a review of institutional structures. By end-September 2021, an expanded fiscal risk analysis that quantified contingent liabilities from high-risk SOEs would be included in the annual Budget Review and Outlook Paper, the IMF said.