May 24, 2024

What’s Next for Kenya After the World Bank Cuts Planned Financial Support?

IMF

Kenya’s ambitious development agenda faces a significant hurdle after the World Bank slashed planned financial support by Sh39.3 billion for the current fiscal year.

This reduction, from the Sh197 billion initially expected, leaves a substantial funding gap. It raises concerns about the country’s ability to achieve its vision of becoming an upper-middle-income nation by 2030.

The World Bank has been a cornerstone of Kenya’s development journey, providing vital financial resources for education, health, infrastructure,, and agriculture.

This support has been instrumental in propelling the country forward, particularly in areas like public service reforms and infrastructure development. 

Kenya receives loans from the World Bank’s IDA and IBRD facilities designed to assist low-income and middle-income countries.

In November 2023, the World Bank announced $12 billion in support to Kenya over the next three years, which could help with the country’s strained finances. The loan package, is expected to be disbursed starting in July 2024.

The World Bank has been Kenya’s largest provider of development finance, and has accompanied the country on its devolution journey since 2013, committing almost $2 billion in financing.

It supports Kenya’s development through low-interest loans, grants and loans, which help finance investments in areas such as education, health, infrastructure and agriculture. The recent budget cuts therefore come as a blow to Kenya’s development plans.

While the World Bank has not publicly stated the specific reasons for the reduction, the organization usually considers a variety of factors when awarding financial assistance.

These factors include a country’s economic and financial stability, structural conditions, the project, and if its loans will be made sustainable.

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The cuts come at a crucial time for Kenya. According to the Medium Term Debt Management Strategy (MTDS) by 2024, Kenya’s current debt stands slightly over Ksh. 10 trillion. Additionally, the country has a budget deficit of Sh4.1 billion.

Kenya is henceforth developing a new way to pay its national debt, shifting the system eastward to generate new revenue. Kenya will have to borrow up to Sh703 billion to fill the Sh4.1 billion fiscal hole. 

Under the budget, the country will borrow Sh377 billion from the domestic market and the remaining Sh326 billion from foreign debt.

Kenya also plans to provide $500 million in samurai bonds in Japan, nature loans, medicine loans and food exchanges.

Kenya is also considering approaching the Asian Infrastructure Investment Bank to provide guarantees to support the issuance of renminbi-denominated bonds.

It’s also planning to raise $500 million (Sh66 billion) through its first-ever bond sale in China.

At the beginning of the year, Kenya’s GDP was projected to grow by 6.0% in 2024, driven by services and household consumption.

The World Bank Group also projected that growth in non-resource-rich countries like Kenya would strengthen to 5.4% in 2024 and 5.7% in 2025. 

The National Treasury said that Kenya’s economic outlook remained promising. It had projected a growth of about 5.5 percent in 2024 and the medium term, supported by prudent fiscal and monetary policies.

Inflation forecasts predicted a strong start to 2024 but were expected to slow down as the year progressed, based on strong government policy.