World Bank Approves USD 1 Billion Loan to Alleviate Kenya's Financial Strain Amidst Drought Crisis

In a bid to assist Kenya in tackling its high debts and a weakening currency, the World Bank has approved a USD 1 billion loan to the country. The loan will be provided through a Development Policy Operations (DPO) instrument, which requires Kenya to implement specific reforms aimed at enhancing fiscal space, improving agricultural competitiveness, and strengthening governance.

According to Aghassi Mkrtchyan, a Senior Economist for the World Bank in Kenya, the government's reforms, supported by the DPO, will play a crucial role in achieving fiscal consolidation. This consolidation is essential for reducing the debt burden and mitigating related risks in a fair and sustainable manner.

The loan comes at a time when President William Ruto, who took office last year, has expressed his commitment to restoring fiscal discipline after witnessing a surge in public debt under his predecessor.

However, President Ruto's proposed tax increase on various economic activities, which is part of the upcoming finance bill to be presented in parliament next month, has faced opposition from civil servants and political opponents.

Kenya became eligible for financing under the DPO instrument in 2019 and has already received four similar loans, with the most recent one granted in March. Under the latest agreement, Kenya has committed to adopting several reforms, including the removal of administrative price-setting for publicly procured cereals and the streamlining of the state's exit from commercial investments, as stated by the World Bank.

Kenya's financial situation has been strained by escalating debt repayments and the severe impact of the worst drought to hit the Horn of Africa in four decades. Moody's, a global rating agency, recently downgraded Kenya's senior unsecured debt rating, as well as its long-term foreign-currency and local-currency issuer ratings. This decision was made due to the increased liquidity risks faced by the government.

Despite these challenges, Kenya's economy is projected to expand by 5.8% in 2023, as stated by the country's central bank in March. This growth forecast marks an improvement from the 4.8% growth experienced in 2022.