An injection into the economy of at least Sh115 billion expected from the World Bank and the International Monetary Fund (IMF) will enable the country weather the coronavirus storm.
Tuesday, Central Bank Governor Patrick Njoroge announced that the government had appealed to the Bretton Woods institutions for the rescue package, in the form of budget support, to help it deal with the cash crisis occasioned by the pandemic.
The money is expected to come in at different times between now and the end of April or early May.
The promise of support comes at a time when the economy is already taking a beating from reduced activity following several measures announced by the government to contain the pandemic.
The situation is set to get worse when the government announces a total lockdown following a sharp increase in infections this week.
According to Dr Njoroge, the first emergency support request is for about Sh5 billion ($50million), which will go directly to the Ministry of Health.
“The request has already been sent in and so we expect something in the order of $50 million dollars (Sh5 billion) in the very near term,” Dr Njoroge said during an online press conference.
The National Treasury is also working with the IMF for another Sh35 billion emergency assistance.
“This is assistance that does not have the conditionalities of programmes. This is emergency assistance and it is directed to emergencies. It may be something in the order of $350million (Sh35billion) and a lot of this could be directed to budget support,” the governor said.
In addition, the government is also working with the World Bank in the context of its Development Policy Operation (DPO) for an additional Sh75 billion ($750million).
A DPO is an assistance programme given by the World Bank to its clients and can come in the form of a loan, a grant or credit. The assistance is disbursed rapidly to help the borrower to address their financing requirements.
Kenya is among several other countries lining up for support to deal with the economic shocks brought about by the outbreak.
Dr Njoroge would not reveal the terms attached to the loans, or how much in total Kenya is seeking to deal with the pandemic.
He said the details would be revealed at a press conference scheduled in the next few days when the government announces its measures to protect the economy from crumbling under the weight of lockdowns.
“What I was doing here is signalling that those facilities are coming. In the context of announcements of the fiscal measures which will happen very shortly, in a matter of days, the details in terms of the amounts will be confirmed at that briefing,” he said.
The World Bank recently advanced Kenya about Sh8 billion to fight locusts and deal with the Covid-19 pandemic and this will be the second batch of disbursements.
The global lender said in March the Covid-19 financing facility would make available $50 million (Sh5 billion) and the Contingency Emergency Response Component of Transforming Health Systems for Universal Care Project would give the additional $10 million (Sh1 billion).
Kenya had a budget shortfall of at least Sh1 trillion by end of February, according to latest government books showing tax collections. With the virus shutting down many sectors of the economy, the government will need all help it can get to keep services running.
The CBK also said it has enough forex reserves of about $8.25 billion (Sh825 billion) that can take care of Kenya’s import bill for the next five months.
This buffer is expected to help the country deal with foreign exchange and dollar price movements in the coming days.
“This is an adequate buffer against short term shocks and this is one of the reasons why we have always said we need insurance and this is why we have been working with the IMF to put together a precautionary programme that will provide us with some insurance against some extreme shocks,” Dr Njoroge said.
The CBK boss was speaking at a live online press conference to journalists working from home and elsewhere yesterday as the banking sector regulator moved to enforce the social distance rule.
The other major challenge facing Kenya’s economy is the volatility of the Kenyan shilling, which has lost against the dollar in the last one week.
This promises to make Kenya’s exports more expensive and make exporters earn less for similar quantities of products.
CBK said it was counting on the rest of the government to come up with a solid fiscal package to protect the whole economy, save jobs, and shield enterprises from the impact of the virus.
“The dollar has surged against all currencies and we have also seen the shilling also depreciate,” Dr Njoroge said.
He, however, partly blamed the weakening of the shilling on some currency dealers who he says misunderstood CBK’s move to buy dollars from the market.
CBK announced that it planned to buy up to Sh40 billion worth of dollars from the Kenyan market in the next four months, pushing up local demand for the greenback. This has seen banks push up the asking prices way above Sh109 during inter-day trading sessions, pushing the mean to above Sh106.
Dr Njoroge said CBK had since intervened to minimise volatility. The shilling has moved from an average exchange rate of Sh102 against the dollar in the last one week, to an average of Sh106.6 during Tuesday’s trading session.
The banking sector regulator said a drop in the crude oil prices on the international market would help reduce the import bill and neutralise the depreciation of the shilling. Oil accounts for 20 percent of Kenya’s imports.
The peak for Kenya was about $86.8 per barrel in October 2018.
This dropped to $69.9 in December last year. It further dropped to $52.4 per barrel at the beginning of March and is now $26.5 per barrel.
“You can see that there are significant savings from this that the economy can actually have if the price has fallen by 50 per cent for 20 per cent of your imports,” Dr Njoroge said.
He, however, said if the crisis persists for a long time, then the remittances will take a hit.
“Remittances will very much depend on the duration of the crisis. At this moment we do not expect them to move significantly,” he said.
CBK said banks are putting in place business continuity plans and preparing to deal with the impact of the virus on the sector.
“This cloud will pass and when it is done we need to recover,” he said.
Dr Njoroge said several sectors of the economy among them the horticulture sector will take a hit.
“Places like the Netherlands are destroying flowers. We are concerned about the workers in the sector as well,” DR Njoroge said. He said the CBK has also taken actions to help the economy brave the corona virus pandemic with inflation not being a concern anymore.
“Concern is really about output. Impact is pushing through all growth drivers. For instance the shut down on flights has direct impact. Airports are empty, cancellations in hotel bookings affect us directly,” he said.
He said the country should consider redirecting some of the imports away from China, which has been hit by the virus. But this will need more work and it may be more expensive.
“We do not know how long this crisis will last so we have to take an educated guess. Before, we had a baseline scenario, with growth at 6.2 per cent for 2020. But clearly that scenario no longer holds,” Dr Njoroge said.
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