World Bank approves $1 billion to provide low-cost budget financing for Kenya

The World Bank Group Board of Directors approved a Development Policy Operation (DPO) for $1 billion to provide low-cost budget financing along with support to key policy and institutional reforms for Kenya’s near-term objectives of fiscal consolidation as well as it’s long-term goal of green and inclusive growth.

Kenya’s economy has demonstrated resilience to shocks but continues to face vast challenges including the lingering economic impacts of the COVID-19 pandemic, the global repercussions of Russia’s invasion of Ukraine, increasingly frequent climate shocks, synchronous monetary tightening in advanced economies, and debt vulnerabilities. The DPO will support Kenya to institute a raft of policy reforms across three pillars. The first bundle of policy reforms will target the creation of fiscal space in a sustainable and equitable manner, including revenue and expenditure measures to support fiscal consolidation, strengthening the debt management framework, and protecting pro-poor expenditures. These will be augmented by a second set of reforms that improve competitiveness to boost agricultural exports, which is both a powerhouse sector where Kenya has a clear comparative advantage and the sector employing most of Kenya’s poor. Transparency and accountability will be strengthened through a third wave of reforms to improve governance and financial inclusion for private sector driven growth by strengthening the confidence of the private sector in the government’s commitment to a level playing field. Each of the three pillars contains actions for combatting climate change and improving inclusion, important cross-cutting focus areas of the operation.

“The government has demonstrated its commitment to fiscal consolidation, which is key for reducing debt vulnerabilities and ensuring long-term growth sustainability,” said Keith Hansen, World Bank Country Director for Kenya. “At the same time, the government implemented measures to protect the livelihoods of the most vulnerable, including through lifeline electricity tariffs that guarantee access to low-cost electricity for vulnerable households, protecting social safety nets, and creating opportunities for the poor through the Financial Inclusion Fund as part is its ‘Bottom-up Economic Transformation Agenda’.”

The government’s multi-sectoral reform program supported by the DPO stems from its long-term sustainable and inclusive growth agenda. In agriculture, the reforms supported by the DPO will reduce distortions in agricultural markets by eliminating administrative price-setting for publicly procured cereals. The reforms will also create an institutional framework for effective management of agricultural soils and water by approving the National Agricultural Soil Management Policy. Equally critical is support to Kenya’s agricultural exports through upgrading phytosanitary and food safety standards.

In governance, the DPO supports an important set of initiatives to promote objective decision making through the Conflict-of-Interest Bill, to streamline the state’s orderly exit from commercial investments through amending the State-Owned Enterprises Privatization Act, and to improve access to climate change information and mandate public consultations on the government’s climate change initiatives.

“The government’s reforms, supported by the DPO, will help to achieve fiscal consolidation, which is essential for reducing the debt burden and related risks, in an equitable and sustainable manner by safeguarding social spending while supporting much needed revenue and expenditure measures,” said Aghassi Mkrtchyan, Senior Economist for the World Bank in Kenya. “The operation combines these measures with important initiatives to improve productivity and exports of Kenya’s agriculture sector, and governance reforms for more inclusive and green growth driven by private investments.”