The loan agreement between Kenya and the United Arab Emirates (UAE), which will provide Kenya with KSh 193 billion, has been hailed as a crucial step in addressing the country’s fiscal deficit for the 2024/25 budget.
However, the disbursement of this loan will not be immediate, and Kenya’s financial challenges are unlikely to be resolved in one go.
The funds will be delivered in phases, with the first tranche of approximately KSh 90 billion expected in January 2024.
Subsequent disbursements will depend on further negotiations between the Kenyan government and UAE financiers.
This approach to the loan, which is spread over time, reflects Kenya’s ongoing financial management strategy, as well as the influence of international institutions, particularly the International Monetary Fund (IMF).
One of the main reasons for the phased disbursement is the IMF’s stringent limitations on borrowing by Kenya.
The IMF, which has already expressed concerns over Kenya’s increasing reliance on external debt, has set a cap on the country’s annual foreign borrowing at KSh 168 billion.
This constraint is aimed at preventing Kenya from accumulating unsustainable levels of debt, especially in dollar-denominated loans, which pose risks due to fluctuating exchange rates.
Although the UAE loan is seen as a more affordable alternative to Eurobonds, which carry higher interest rates (for instance, Kenya’s Eurobond issued earlier this year had an interest rate of 10.375%), the IMF’s caution on external borrowing remains a key factor in the phased disbursement structure.
The UAE loan, which comes with an 8.2% interest rate, is seen as a welcome financial relief for Kenya.
The country has faced delays in receiving anticipated IMF funds and has had to cancel planned tax hikes, which exacerbated the budget deficit.
In response, the government sought the UAE loan as a means to bridge the fiscal gap.
However, the delayed disbursement of the loan funds may affect the government’s ability to address its immediate financial needs, particularly as the country grapples with mounting public debt and fiscal pressures.
The loan also highlights Kenya’s growing financial and strategic relationship with the UAE, which has been a key partner in various sectors, including oil supply agreements and infrastructure development.
While the UAE’s financial support is important, the phased release of funds also underscores the challenges that Kenya faces in managing its public finances.
The fact that the IMF must oversee the loan’s disbursement and ensure it aligns with fiscal sustainability requirements indicates the delicate balance Kenya must strike in securing external funding while avoiding further exacerbation of its debt vulnerabilities.
The government will need to remain vigilant in managing its debt portfolio.
The phased disbursement may not provide the immediate relief needed to stabilize the economy, but it offers Kenya the flexibility to access the funds in stages, which may reduce the risk of a debt crisis in the short term.
The government’s ability to manage this loan effectively will be a critical factor in determining whether it can achieve fiscal stability while maintaining relations with international lenders like the IMF and the UAE.
