IMF questions Kenya’s exchange rate policy amid new funding negotiations

The International Monetary Fund (IMF) has raised concerns over Kenya’s exchange rate policy, questioning the stability of the shilling against the US dollar as the country seeks a new funding arrangement with the lender.

According to Kenya Revenue Authority (KRA) Chairman Ndiritu Muriithi, the Fund believes the shilling’s performance against the dollar is ‘too stable’, and the scope is interfering with monetary policy transmission and inflation targeting.

“One of the things the IMF told us when they were in town two weeks ago is that the exchange rate is too stable, they think it is interfering with the transmission and inflation targeting,” Muriithi said.

He spoke during the release of the ‘Total Tax Contribution of the Kenya Banking Sector 2024 Report’ on Friday.

Fiscal credibility is among the key policy priorities that the lender is considering to actualise the new funding after Kenya prematurely ended its initial $3.6 billion, four-year programme in March.

The programme began in April 2021 and was scheduled to conclude in April this year.

Analysts note that, with these developments in play, the upcoming update from the lender will be closely watched, as it could offer crucial insights into Kenya’s chances of securing a new funding facility.

The revelation follows the conclusion of a two-week IMF mission to Kenya that ran from September 25 to October 9. The team was in Nairobi to assess the country’s economic position and hold initial discussions on the new funding programme.

In its post-mission statement, the IMF said talks focused on a possible reform agenda to underpin a new programme that would enhance fiscal credibility, ensure public debt sustainability, and reduce fiscal, financial and external sector risks.

The Fund also underscored the need to strengthen governance, transparency and efficiency in the public sector. “The IMF staff team made progress in taking stock of the latest macroeconomic and financial sector developments,” the lender said.

Notably, following the conclusion of the mission, further discussions were scheduled to take place from October 13 to October 18, during the IMF Annual Meetings.

Market analysts, however, caution that there is no white smoke yet regarding Kenya’s bid for a fresh funded programme.

They point to the IMF’s emphasis on fiscal credibility as a subtle but firm reminder of the need for greater discipline in budget execution and debt management.

Earlier in the month, the government affirmed its optimism that a new funding programme from the IMF will be established.

Treasury Cabinet Secretary John Mbadi stated that discussions between the government and IMF officials had shown positive progress.

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Speaking during a media briefing, the CS highlighted that his technical team had reported encouraging progress in the negotiations.