IMF raises concerns over Kenya's $1.5 billion loan deal with UAE [Video]

The International Monetary Fund (IMF) has expressed concerns over Kenya's recent negotiations with the United Arab Emirates (UAE) for a $1.5 billion loan.

According to National Treasury CS John Mbadi, the loan will have an interest rate of 8.25 per cent and a 7-year tenor.

On the other hand, Central Bank of Kenya Governor Kamau Thugge projects that Kenya's economic growth will increase by 5.5 per cent in 2025.

IMF's apprehension to the loan was highlighted by Abebe Selassie, IMF’s Director for Africa, during a reecent interaction with the media.

According to Selassie, the main issue revolves around the overall cost of borrowing.

He emphasised that it’s crucial for countries to maintain a healthy weighted average cost of borrowing.

When borrowing costs soar to 8%, 9%, or even 10%, it can outpace the economic growth rates of those countries.

This imbalance can rapidly lead to debt problems, not just for Kenya, but for any nation.

Selassie stressed the importance of concessional financing, which offers lower interest rates, to help regions meet their development goals without incurring unsustainable debt.

The IMF’s concern isn't about any single loan but the aggregate cost of the country’s debt.

If a new loan increases the average borrowing cost significantly, it could spell trouble for a country's financial stability in the long run.

The IMF's said that countries often find themselves in deeper financial difficulties due to high borrowing costs.

Context and Implications

The government aims to use the UAE loan to fix the widening fiscal deficit projected to reach 4.3% of GDP for the current financial year, up from an earlier estimate of 3.3%.

The increased deficit is largely attributed to the withdrawal of planned tax hikes and delays in receiving funds from the International Monetary Fund (IMF) due to unmet conditions following recent protests against the government.

Kenya has formally engaged the IMF to conduct a comprehensive governance and corruption diagnosis across all ministries and public institutions, in hopes that this will unlock the delayed IMF disbursement.

Kenya's economic situation has been precarious, with its debt-to-GDP ratio climbing to nearly 72% in 2023, partly due to currency depreciation and high domestic debt servicing costs.

The government has been actively seeking alternative financing sources after facing challenges with Eurobond issuances, which have come with steep interest rates, such as a recent Eurobond issued at 10.375 per cent.

The UAE's involvement is not new; Kenya has been strengthening ties with the Gulf nation, including agreements for oil supply on favorable credit terms and a broader economic partnership aimed at enhancing trade and investment opportunities across various sectors such as logistics and healthcare.