Approved by: Prepared by the staff of the International Development Association (IDA) and the Hassan Zaman and Manuela Francisco (IDA) International Monetary Fund (IMF). and Catherine Pattillo and Eugenio Cerutti (IMF). KENYA: JOINT BANK-FUND DEBT SUSTAINABILITY ANALYSIS Risk of external debt distress High Overall risk of debt distress High Granularity in the risk rating Sustainable Application of judgment No Kenya’s public debt is assessed to be sustainable, reflecting the authorities’ continued policy actions and expected robust export growth in the medium term. The overall and external ratings for risk of debt distress remain high. 1 High fiscal deficits in the past and pandemic-related export and output losses in 2020 had resulted in deterioration of solvency and liquidity debt indicators. Market pressures since the start of Russia’s invasion of Ukraine and the monetary tightening in advanced countries have limited access to commercial borrowing. Compared to the last DSA assessment,2 the projections of debt burden metrics have been revised up, reflecting projected REER depreciation in 2023–2024 to support the needed external adjustment in the presence of balance of payments pressures, increased access to program financing, and higher projected interest expenses. Kenya is facing liquidity challenge in rolling over the June 2024 Eurobond in the context of unfavorable external conditions limiting access to international bond market for the frontier economies. Going forward, Kenya’s debt indicators are forecasted to improve, a stronger fiscal effort during the program helps turn the primary balance into a surplus, albeit gradually for the external debt service-to- exports ratio. The DSA suggests that Kenya is susceptible to export, exchange rate, and primary balance shocks; more prolonged and protracted shocks to the economy would also present downside risks to the debt outlook. A natural disaster shock illustrates the very limited scope for meeting additional financing needs in a stress scenario 1 The DSA analysis reflects a debt carrying capacity of Medium considering Kenya’s Composite Indicator Index of 3.01, based on the IMF’s October 2023 World Economic Outlook and the 2022 World Bank Country Policy and Institutional Assessment (CPIA). 2 See IMF Country Report No 2023/266 published in July 2023. 1 >>> without jeopardizing debt sustainability, underscoring the importance of putting in place the necessary regulatory framework to tap private sector solutions and enable access to concessional green financing. 1. For the purposes of this analysis, the perimeter of public debt covers the debt of the central government, Social Security Fund, central bank debt taken on behalf of the government, and government guaranteed debt (Text Table 1). Debt data include both external and domestic obligations and guarantees: • The external DSA covers the external debt of the central government and the central bank, including publicly guaranteed debt, as well as of the private sector. • The public DSA covers both external and domestic debt incurred or guaranteed by the central government. It does not cover the entire public sector, such as extra-budgetary units and county governments.3 Debt coverage excludes legacy debt of the pre-devolution county governments,4 estimated at Ksh.53.8 billion (0.4 percent of GDP), which is included in the contingent liabilities stress scenario (see below). • The DSA uses a currency-based definition of external debt. There is no significant difference between a currency-based and residency-based definition of external debt, as nonresidents’ direct participation in the domestic debt market is small, estimated at below one percent of total outstanding government securities (Text Table 2). 2. The DSA includes a combined contingent liabilities stress test aimed at capturing the public sector’s exposure to SOEs, PPPs, and a financial market shock. In particular, the stress test incorporates the following shocks (Text Table 1): • 3.1 percent of GDP to capture reported non-guaranteed debt of state-owned enterprises (SOEs) and extra-budgetary units and Public Private Partnerships (PPPs): o With the view of establishing a comprehensive picture of non-guaranteed debt (excluding intergovernmental obligations) of public entities outside the central government, the National Treasury carried out a survey of state corporations in June 2023.5 Survey results showed that 25 of them had non-guaranteed loan obligations (excluding vis-à-vis the government), including overdrafts, equal to Ksh.111.8 billion (0.8 percent of GDP) as of end-June 2023. Out of this sum, about 85 percent was foreign currency denominated. The National Treasury has since operationalized the new Government Investment Management Information System (GIMIS) module, which allows for digital data submission and processing of data by State-owned entities, which will be used for regular 3 County governments have not been allowed to borrow without central government guarantee since 2010 and borrowing requires authorization by the National Treasury (NT), while extra-budgetary units face no such constraint. 4 A new Constitution was approved by referendum in 2010, devolving substantial powers to 47 new county governments. 5 The authorities’ efforts in this area were supported by a Policy and Performance Action (PPA) under the IDA Sustainable Development Finance Policy (SDFP). 2 >>> updates of the data going forward. Taking a conservative approach, the standard calibration of 2 percent for non-guaranteed SOE debt is retained in the stress test.6 o The calibration of the exposure to PPP-related contingent liabilities is the default one, set at 35 percent of the country’s PPP capital stock shock, as reported in the World Bank Database on PPPs. • 0.5 percent of GDP to cover legacy debt of the pre-devolution county governments (see above). • 0.4 percent of GDP to account for government contingent liabilities stemming from letters of support issued to participants in the government-to-government mechanism for importation of fuel products launched in April 2023. 7 Review of the legal arrangements of the new mechanism by the Attorney General of Kenya and IMF staff have established that they do not give rise to government guarantees of private debt under domestic law as defined in the Technical Memorandum of Understanding under the IMF-supported EFF/ECF arrangements. The government is, nevertheless, exposed to calls on the national budget in case prices at the pump are not adjusted to fully passthrough any FX valuation losses under the mechanism to final consumers. It may further have to raise U.S. dollar financing to cover any shortfalls of FX, needed to repay exporters, in the domestic market. • 5 percent of GDP for a financial market shock—a value that exceeds the existing stock of financial sector nonperforming loans of about 4 percent of GDP. 3. Kenya maintains a high standard of debt transparency. Debt statistics bulletins with public and publicly guaranteed (PPG) coverage and medium-term debt management strategies are regularly published, and the Budget Policy Statement and Annual Public Debt Management Report (PDMR) include information about contingent liabilities. Moreover, the External Public Debt Register provides loan-level information about contracted and drawn amounts, interest rate, and currency denomination. 4. Kenya’s overall public debt has increased in recent years. Gross public debt increased from 45.7 percent of GDP at end-2015 to 67.9 percent of GDP at end-2022 (Table 1), reflecting legacy high deficits, partly driven by debt-financed spending on large infrastructure projects, and in 2020-21 by the impact of the COVID-19 global shock. External public debt amounts to about half of Kenya’s overall public debt (Text Table 2). 6 Guaranteed State-owned enterprise (SOE) debt and amounts borrowed directly by the Kenyan government and on-lent to SOEs are included in the public debt stock (see above) and thus not included in the calibration of the contingent liabilities stress test. 7 The scheme, which has an initial duration of nine months and extended for another 12 months to end-2024, includes the issuance of letters of support by the government to domestic oil marketing companies (OMCs) that also benefit the banks, financial institutions, credit insurance providers, lenders and any hedging counterparties providing financing, insurance, refinancing or hedging to the OMC. The fuel is imported on 6-month credit, backed by commercial letters of credit (LOCs) issued by domestic banks and confirmed by international banks. A reasonable estimate of the government contingent liabilities stemming from the new fuel import scheme is around 10 percent of the maximum private sector obligation to fuel exporters or around US$ 400 million (0.4 percent of GDP). 3 >>> Public debt coverage Subsectors of the public sector Check box 1 Central government X 2 State and local government 3 Other elements in the general government 4 o/w: Social security fund X 5 o/w: Extra budgetary funds (EBFs) 6 Guarantees (to other entities in the public and private sector, including to SOEs) X 7 Central bank (borrowed on behalf of the government) X 8 Non-guaranteed SOE debt Public debt coverage and the magnitude of the contingent liability tailored stress test The central government plus social security, 1 The country's coverage of public debt Public debt coverage and the magnitude of the contingent liability tailored stress test central bank, government-guaranteed debt The central government Default plus socialUsed security, for central the analysis 1 The country's coverage of public debt 2 Other elements of the general government not captured in 1. bank, government-guaranteed 0.5 percent of GDP debt 0.5 3 SoE's debt (guaranteed and not guaranteed by the government) 1/ 2 percent of GDP Used for the analysis Default 2 2 Other elements of4 the PPPgeneral government not captured in 1. 35 percent 0.9 percent of GDP of PPP stock 0.9 1.1 3 5 Financial SoE's debt (guaranteed market and not (the default guaranteed value by the of 5 percent government) 1/of GDP is the minimum value) 5 percent 2 percent of GDP of GDP 2 5 4 PPP Total (2+3+4+5) (in percent of GDP) 35 percent of PPP stock 1.1 8.6 5 1/ (the Financial market The default default shock value of of2% of GDP will 5 percent be triggered of GDP for countries is the minimum whose government-guaranteed 5 value) debt is not percent offully GDP captured under the country's 5 public debt Total (2+3+4+5) (indefinition percent of(1.). GDP) 9.0 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). 5. Most of Kenya’s external public debt remains on concessional terms. Nominal PPG external debt at end-2022 amounted to 34.5 percent of GDP, corresponding to 29 percent of GDP in present value terms (Text Table 2 and Table 1): • Kenya has benefited from sizeable support from multilateral institutions. At end-2022, multilateral creditors accounted for close to 47 percent of external debt, while debt from bilateral creditors represented about 28 percent (Text Table 2). Of Kenya’s bilateral debt, close to 64 percent is owed to non-Paris Club members, mainly loans from China. • The share of commercial debt in total external debt decreased in 2021–22, as the authorities prioritized concessional borrowing during the pandemic after several years of reliable access to global financial markets. Commercial debt (mainly Eurobonds, loans, and export credits) accounted for about 25 percent of external public debt (47 percent of projected external debt services over 2023–25). Eurobonds accounted for 75.5 percent of commercial debt (US$7.1 billion).8 As the international bond markets effectively closed to the frontier economies, Kenya tapped syndicated loan markets in 2022-23, contracting US$800 million on commercial terms. 8 Syndicated loans amounting to €305.4 million claimed by a syndicate of Italian commercial banks in relation to Arror, Kimwarer, and Itare dam projects are disputed and subject to on-going arbitration/court proceeding. The debt service schedule associated with these loans is not included in the DSA baseline, as budget provisions for their servicing are suspended until the matter is determined, but the outstanding amount on these loans is kept in the stock of public debt, following authorities’ approach for reporting PPG debt in national publications (more conservative than prescribed in the LIC DSA Guidance Note). 4 >>> • Kenya has not contracted any collateralized external debt. Guarantees by the central government on debt contracted by other entities amount to around US$1.4 billion and are included in the stock of PPG debt. Debt Stock (end of period) Debt Service 2022 2023 2024 2025 2023 2024 2025 2 (In US$ mln) (Percent total debt) (Percent GDP) (In US$ mln) (Percent GDP) Total 73,625 100.0 67.9 10,804 10,449 8,318 10.0 10.6 7.8 External 37,370 50.8 34.5 3,392 5,149 3,723 3.1 5.2 3.5 Multilateral creditors 17,474 23.7 15.4 642 638 786 0.6 0.6 0.7 IMF 2,399 3.3 2.1 - - - - - - World Bank 11,086 15.1 9.7 - - - - - - African Development Bank 3,492 4.7 3.1 - - - - - - European Economic Community (incl. EIB) 177 0.2 0.2 - - - - - - International Fund For Agricultural Development 225 0.3 0.2 - - - - - - Other Multilaterals 96 0.1 0.1 - - - - - - o/w: Arab Bank For Economic Development In Africa 45 0.1 0.0 - - - - - - Nordic Development Fund 23 0.0 0.0 - - - - - - Bilateral Creditors 10,497 14.3 9.2 1,447 1,376 1,330 1.3 1.4 1.3 Paris Club 3,793 5.2 3.3 430 398 383 0.4 0.4 0.4 o/w: Japan 1,403 1.9 1.2 - - - - - - France (incl. AFD) 774 1.1 0.7 - - - - - - Non-Paris Club 6,705 9.1 5.9 1,017 978 946 0.9 1.0 0.9 o/w: EXIM China 6,557 8.9 5.8 - - - - - - EXIM India 61 0.1 0.1 - - - - - - Bonds 7,100 9.6 6.2 515 2,444 667 0.5 2.5 0.6 Commercial creditors 1,881 2.6 1.7 680 537 698 0.6 0.5 0.7 o/w: Trade and Development Bank 1,728 2.3 1.5 - - - - - - China Development Bank 88 0.1 0.1 - - - - - - Other international creditors 418 0.6 0.4 73 61 50 0.1 0.1 0.0 o/w: Intesa SanPaolo 235 0.3 0.2 - - - - - - ING Bank Germany 23 0.0 0.0 - - - - - - Domestic3 36,254 49.2 33.5 7,412 5,301 4,596 6.8 5.4 4.3 Held by non-residents, total 257 0.3 0.2 - - - - - - T-Bills 5,587 7.6 4.9 - - - - - - Bonds 30,076 40.9 26.5 - - - - - - Loans 591 0.8 0.5 - - - - - - Memo items: Collateralized debt 0 0.0 0.0 - - - - - - o/w: Related 0 0.0 0.0 - - - - - - o/w: Unrelated 0 0.0 0.0 - - - - - - Contingent liabilities 1,417 1.9 1.2 - - - - - - o/w: Public guarantees 4 1,417 1.9 1.2 - - - - - - o/w: Other explicit contingent liabilities 5, 6 n.a. n.a. n.a. - - - - - - Sources: Kenyan authorities; and IMF staff calculations. 1 As reported by Country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as in the DSA. 2 Debt ratios are constructed by converting external debt to Ksh using end-period exchange rate and dividing by Ksh GDP. 3 Includes CBK on-lending to the government of the Ksh-equivalent of the 2021 general allocation of SDRs. 4 Loan guarantees are included in the perimeter of debt covered by the DSA and include undrawn amount of government-guaranteed loan facilities and letters of credit at high risk of being fully utilized 5 Includes other-one off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent liabilities not elsewhere classified (e.g. potential legal claims, payments resulting from PPP arrangements). 6 Capacity constraints currently limit data availability on other explicit liabilities not elsewhere classified. 6. Kenya’s domestic public debt reached 33.5 percent of GDP at end-2022 (TextTable 2 and Table 2). Since end-2021, the yield curve has shifted up and flattened, reflecting the increase in near-term inflationary pressures and related policy adjustments by the Central Bank of Kenya (CBK), and a low transmission of the policy rate to longer-end of the yield curve (Text Figure 1). The successful implementation of authorities’ strategy to lengthen the maturity profile of domestic debt has resulted in a significant decline in the share of Treasury bills in the domestic debt stock (from 35 percent at the end of FY2018/19 to 18.7 percent at the end of FY2021/22) and a notable increase in the average time to maturity 5 >>> of government domestic bonds, excluding T-bills (from 6.3 years at the end of FY2018/19 to 9.1 years at end-December 2022). This has helped alleviate short-term rollover risks, enabling the local market to absorb pressures in 2022. About half of government domestic debt securities are held by pension funds, followed by commercial banks with 47 percent share. Starting in the last quarter of the FY2021/22, domestic debt issuance has taken place mainly at the short end of the maturity spectrum in an environment of elevated inflation and flatter yield curve, increasing the intra-year rollover needs. Yields on government securities increased and the front end of the treasury yield curve continued to move up in the first half of 2023 calendar year amid large gross financing needs and tighter liquidity conditions. The average time to maturity has declined to 7.4 years, reflecting investor preference for the shorter tenor Source: Bloomberg, L.P. securities. 7. Published data on private external debt is available through 2021 and is extrapolated going forward with the net private external debt balance of payments (BoP) flows. The source of pre-2022 data on private external debt is the International Investment Position (IIP) data on “Other sectors”, which includes both the private sector and market profit institutions that are controlled or financed by government (financial and nonfinancial public corporations), published in the IMF’s IIP database. BoP data on net private external debt flows through end-2022 point to a steady upward trend in the stock of private debt as a share of GDP, which is also maintained in projections. 8. Real GDP growth is expected to pick up modestly in 2023 on the way of converging to 5.3 percent over the medium term (Text Table 4): • Real GDP growth is projected to reach 5.1 percent in 2023 and 5 percent in 2024 (latter revised down from the previous DSA) as the need to maintain mutually consistent tighter domestic policy environment weighs on the demand and partly dampens the positive effect from a recovery in the agricultural sector from favorable rains. • Medium-to long-term real GDP growth projections are broadly similar to the previous DSA, at around 5.3 percent. They are supported by the projected productivity growth, an ambitious structural reform agenda, policies to reinforce credit to the private sector, as well as favorable 6 >>> demographic trends.9 The reform agenda of President Ruto’s administration aims at boosting agricultural transformation and inclusive growth; enabling the micro-, small- and medium-sized enterprise (MSME) economy as a private sector growth driver; improving housing and healthcare; promoting the digital superhighway; and supporting the creative economy. Over the medium term, growth is backstopped by the crowding-in effect of fiscal consolidation (i.e., lowering public financing needs would reduce demand-side pressures on domestic interest rates and free up financing for private investment, while privatization of SOEs would raise productivity), which is based on growth-friendly domestic revenue mobilization and spending rationalization measures to anchor debt sustainability. 10 Fiscal consolidation over the medium term will continue to be growth friendly, focusing on a more broad-based and equitable tax system ––as envisaged under the authorities' Medium-Term Revenue Strategy (MTRS) ––improved inclusivity and support under the social safety net programs, and enhanced efficiency of public investments. • Nominal GDP in U.S. dollars is projected to be lower than in the last DSA over the medium term, reflecting REER depreciation in 2023 and 2024. 9. The adjustment in the primary fiscal balance is expected to remain on track with commitments under the Fund-supported program (Text Table 4): • In FY2022/23, challenges in mobilizing budgeted resources impeded the implementation of the Supplementary Budget, approved in February 2023. This necessitated the passage of a second Supplementary Budget to offset the anticipated revenue shortfall and introduce expenditure saving—mostly related to undisbursed budgeted resources for projects —so as to contain the primary fiscal deficit to 0.6 percent of GDP. The shortfall in FY2022/23 net domestic financing or tax collection was smaller than previously expected, limiting the amount of unpaid bills that were carried over to FY2023/24. To avoid accumulation of arrears (i.e., unpaid bills for more than 90 days), the authorities have plans in place to prioritize execution of spending. They have constituted a Pending Bills Verification Committee and are now expected to come up with a strategy by end- February 2024 (reset structural benchmark) on validation and clearance of verified pending bills and addressing the shortcomings in public financial management that gave rise to pending bills. • In FY2023/24, the authorities are committing to target a stronger primary balance of 0.7 percent of GDP through a second Supplementary Budget by end-March 2024 (new structural benchmark) to anchor debt sustainability, while protecting social spending (Text Tables 3 and 4). This is predicated on a comprehensive revenue package, including 1.6 percent of GDP of measures approved under the Budget and additional measures submitted to parliament in December 2023 to make up for the impact of tax collection shortfall in FY2022/23 and the first five months of FY2023/24, and additional non-tax revenues. The authorities also commit to further rationalizing primary expenditures with immediate effect —particularly for slow-moving projects—while supporting new initiatives (e.g., Hustler Fund) and protecting social spending. The impact of the 9 Climate-related risks are not explicitly modeled in the baseline. Their effect is, instead, captured in the natural disaster stress test scenario. 10 The Kenya Kwanza administration has prioritized the privatization of SOEs that can operate as market producers . 7 >>> clearance of any unpaid bills from FY2022/23 will be offset through increased revenues and controlled expenditures. • Going forward, the overall deficit is expected to decline to below 4 percent of GDP over the medium term (Text Table 5), reflecting continued efforts to strengthen tax compliance in line with the priority areas identified under Kenya’s MTRS and streamline primary expenditures—particularly for wages, stalled investment projects, and transfers to public sector entities, a number of which are slated for privatization or merger—while improving public investment management and budgetary controls.11 The medium-term target of the primary surplus to stabilize overall public debt-to-GDP ratio improved from the last DSA and is estimated at about 0.2 percent of GDP, which does not lead to future threshold breaches. The improvement is due to stronger primary balance in the earlier years of the projection horizon. This is consistent with safeguarding debt sustainability, while relaxing somewhat the budget constraint on social and developmental spending over the long run. FY16/17 FY17/18 FY18/19 FY19/20 FY20/21 FY21/22 FY22/23 FY23/24 Proj. (Ksh. Millions) Social spending 256,253 305,275 345,956 380,051 407,905 434,585 443,218 518,449 Social protection 15,489 18,329 26,669 25,554 26,031 26,194 25,987 27,564 Education 219,010 269,534 295,555 314,027 337,524 359,130 370,729 452,372 Health 21,754 17,412 23,732 40,470 44,350 49,260 46,502 38,512 Memo item: (Percent of GDP) Social spending 3.2 3.4 3.5 3.6 3.6 3.4 3.1 3.2 Source: Authorities data and estimates. Note: Fiscal year GDP is estimated as average of its values in the calendar years it spans. 10. Macro-fiscal assumptions underlying the DSA baseline scenario include an estimate of the authorities’ climate-related public investment. The forecast is benchmarked by the latest available data of 2.6 percent of GDP in 2018. It includes an additional climate investment of around 0.25 percent of GDP per year, supported by the IMF’s Resilience and Sustainability Facility (RSF) and the World Bank’s climate- oriented financing (see ¶27 below), as well as from other financing from development partners. 12, 13 Fiscal constraints in the short run limit the government’s capacity for increasing public spending to accommodate additional climate-related needs. Against this backdrop, scaling up climate related investments will require additional focus on improving the efficiency of public spending, attracting highly concessional external climate financing, and encouraging private sector participation in reaching Kenya’s ambitious climate objectives (see ¶27). 11 The MTRS will provide the blueprints for achieving the authorities’ objective of increasing revenue mobilization by 8 percentage points of GDP by 2030, while supporting global competitiveness and prosperity consistent with Kenya’s Vision 2030. 12 The RSF disbursements would substitute more expensive domestic debt, thus improving debt dynamics by helping reduce the present value of debt and debt servicing burdens. 13 Economic benefits of successful mitigation and adaptation strategies will be incorporated at a later stage. 8 >>> 2023 2024 2025 2026 2027 2028 Long-term 1/ Nominal GDP (Ksh billion) Current DSA 15,184 17,064 18,905 20,985 23,215 25,660 62,386 Previous DSA (July 2023) 15,179 17,041 18,920 21,019 23,273 25,754 63,199 Real GDP (growth) Current DSA 5.1 5.0 5.3 5.3 5.3 5.3 5.3 Previous DSA (July 2023) 5.0 5.3 5.3 5.4 5.4 5.4 5.4 Inflation Current DSA 7.7 7.0 5.2 5.4 5.0 5.0 5.0 Previous DSA (July 2023) 7.8 6.6 5.4 5.4 5.0 5.0 5.0 Revenue and grants (percent of GDP) Current DSA 18.0 19.1 19.4 19.5 19.5 19.5 19.5 Previous DSA (July 2023) 18.0 18.3 18.1 17.9 18.1 18.2 18.8 Overall fiscal balance (percent of GDP) Current DSA -5.3 -4.1 -3.3 -3.2 -3.2 -3.3 -4.6 Previous DSA (July 2023) -5.1 -4.1 -3.7 -3.6 -3.7 -3.7 -3.7 Primary fiscal balance (percent of GDP) Current DSA -0.1 1.2 1.7 1.7 1.6 1.5 0.5 Previous DSA (July 2023) -0.2 0.8 1.0 1.1 1.0 1.0 0.5 Public debt (percent of GDP) Current DSA 73.5 73.4 70.4 67.8 65.4 63.1 49.3 Previous DSA (July 2023) 70.6 68.5 66.9 65.1 63.5 61.6 48.3 Current account (percent of GDP) Current DSA -4.0 -4.1 -4.2 -4.2 -4.2 -4.1 -3.9 Previous DSA (July 2023) -4.8 -5.0 -5.0 -5.0 -5.0 -4.8 -4.5 Non-interest current account (percent of GDP) Current DSA -2.3 -1.9 -2.0 -2.2 -2.3 -2.3 -2.4 Previous DSA (July 2023) -3.2 -3.4 -3.4 -3.4 -3.5 -3.4 -3.3 Exports of goods and services (growth) Current DSA -3.3 9.5 9.4 8.6 8.5 8.4 9.3 Previous DSA (July 2023) 9.1 10.0 10.2 9.2 9.2 8.9 9.6 Sources: Kenyan authorities and IMF staff estimates. 1/ Average 2029-43. 11. The path of nominal public debt-to-GDP ratio is revised up from the last DSA, reflecting projected REER depreciation in 2023 and 2024, the proposed further augmentation of the IMF program, and additional commitments expected by the World Bank in 2024. 2022 real GDP growth was at 4.8 percent and the projected REER depreciation in 2023 –24 has lowered the forecasted US$- value of nominal GDP. In addition, the authorities have requested access to additional Fund resources via augmentation of the existing EFF/ECF arrangements by about US$938 million (130.3 percent of quota or SDR707.27 million).14 The World Bank financing envelope is expected to be upsized in 2024 than what was assumed in the previous DSA with additional financing expected over the medium term. 15 Shortfalls in external project financing in FY2021/22 and FY2022/23 are not expected to be compensated going forward. Although the authorities’ borrowing plan (Text Table 6) continues to provide ample space for the shortfall, financing assumptions underpinning the DSA baseline are more conservative. Reflecting 14 Based on US$/SDR exchange rate as of December 11, 2023. 15 See the World Bank’s November 20, 2023 Statement. 9 >>> consistent under-execution of borrowing plan, DSA financing assumptions are in line with the recent history of project disbursements and performance in terms of investment absorption capacity. In the case of commercial borrowing, as the return of frontier economies to international bond markets is expected to be slow, DSA baseline assumes significantly less Eurobond and syndicated loan issuance until the end of 2024. Overall, while possibility of borrowing beyond the baseline remains a risk, the fiscal adjustment under the program and the authorities' medium-term debt anchor (55 percent PV of overall debt to GDP ratio) mitigates it. 12. To support economic recovery, the CBK has lent the equivalent of the full amount of the 2021 US$740 million general allocation of SDRs to the government in local currency to meet financing needs in FY2021/22 and FY2022/23. In the DSA, the amounts lent are recorded as domestic debt at face value.16 2022 2023 2024 2025 2026 2027 2028 Projections Real GDP growth (percent) 4.8 5.1 5.0 5.3 5.3 5.3 5.3 CPI inflation, average (percent) 7.6 7.7 7.0 5.2 5.4 5.0 5.0 1 Overall fiscal balance (percent of GDP) -6.4 -5.6 -4.3 -3.5 -3.3 -3.4 -3.5 Primary balance (percent of GDP) 1 -1.0 -0.6 0.7 1.7 1.7 1.6 1.6 Current account balance (percent of GDP) -5.2 -4.0 -4.1 -4.2 -4.2 -4.2 -4.1 Exports of goods and services (US$ billion) 13.8 13.4 14.6 16.0 17.4 18.9 20.5 Exports of goods and services (growth; percent) 17.1 -3.3 9.5 9.4 8.6 8.5 8.4 Gross international reserves (US$ billion) 8.0 7.6 8.1 9.0 9.9 10.6 11.6 Sources: Kenyan authorities and IMF staff estimates and projections. 1 Fiscal years (e.g., 2022 refers to FY 2021/22). 13. As part of the restructuring of Kenya Airways (KQ), the Government of Kenya has begun servicing the guaranteed portion of KQ external debts, which the company can no longer service. The authorities also report to have completed the novation process of the guaranteed external loan. As a result, public and publicly guaranteed debt includes the sum of the principal of these obligations and the remaining government guarantee on other KQ external loans (US$638 million as of December 2022) in place of the US$750 million government guarantee of KQ debts recorded previously. 17 14. The current account deficit is projected to improve to 4 percent of GDP in 2023 and stabilize around 4.2 percent over the medium term: • Current account deficit narrowed in the first three quarters of 2023, reflecting broad based decline in both energy and non-energy imports amid real exchange rate depreciation and completion of some large infrastructure projects. Exports of goods and services have slowed as the demand 16 In the last DSA, these loans entered the calculation in present-value terms with a grant element of 39.4 percent. A review of the loan agreements has since determined that the principal repayments are effectively indexed to the Ksh/SDR rate, making them non-concessional. 17 The total includes the undrawn amount of government-guaranteed loan facilities and letters of credit by local banks, due to the high likelihood that they would be fully utilized. 10 >>> from traditional agricultural export markets was subdued and transportation services saw a sharp contraction. Tourism receipts exceeded pre-pandemic levels and together with robust remittances supported external balance. • Over the medium term, the expected stabilization of the current account deficit is warranted, primarily through adjustments in imports, as capital flows continue to adjust to “higher for longer” global interest rates. The improvement in the current account will be supported by the further fiscal consolidation and robust goods exports and tourism receipts, continued exchange rate flexibility, and by the gradual normalization of global commodity and financial market conditions. Export growth stands to benefit from Kenya’s improving business environment, leveraging on existing trade and investment agreements, and the new administration’s policy priorities to increase the share of manufacturing (including agro-processing) and services (including tourism and financial sector) in the economy.18 In addition, export growth will be supported by policies to enhance agricultural productivity, including focus on farmer-led irrigation, efforts to modernize Kenya’s food systems, and greater value chain integration. Services are projected to gradually increase over the medium term, as the tourism sector realizes its full potential. Remittances are also projected to remain robust over the medium term. The private sector current account deficit is expected to improve too and to be financed by a diversified set of sources, including foreign direct investment (FDI) and financial and non-financial corporate borrowing. 15. As part of a continuing commitment to reduce external debt-related vulnerabilities, the public sector gross financing needs will be met with a balanced mix of external and domestic financing. For external financing, Kenya is expected to continue to primarily rely on multilateral loans in 2024. The authorities’ external borrowing program, set out in Text Table 6, is in line with the authorities’ commitments under the IMF-supported EFF/ECF arrangements. These include an overall ceiling on the present value of newly contracted or guaranteed external public debt, which is also a performance and policy action (PPA) under the World Bank’s Sustainable Development Finance Policy (SDFP). 19 The cumulative external borrowing program through end-December 2024 is consistent with planned drawings of concessional and non-concessional loans in FY2022/23 and FY2023/24. The borrowing program continues to provide space for the US$1.1 billion external commercial financing, which did not take place in FY2021/22, and US$5 billion for debt management operations, both of which have been put on hold in light of the current challenging market conditions for frontier markets and are not reflected in the DSA baseline. A successful execution of the debt management operations would significantly lower liquidity risks related to the debt service profile. The authorities have significantly stepped up their efforts and selected two lead managers to explore the scope of issuing in the Eurobond market at a reasonable cost but likely for a small amount. In parallel they are exploring alternative sources of financing from multilateral 18 Kenya is a member of the East African Community Customs Union and the African Continental Free Trade Area. It has signed an Economic Partnership Agreement (EPA) with the UK and has started bilateral implementation of European Union-East African Community EPA. In 2022, Kenya and the United States launched Strategic Trade and Investment Partnership that aims, inter alia, to increase investment, promote sustainable and inclusive economic growth, and support African regional economic integration. 19 One FY2022 PPA sought to improve debt management by ensuring that the government limits the present value of new external borrowing to US$5.6 billion in FY2021/22, except if this limit is adjusted by the World Bank to a) reflect any material change of circumstances or b) in coordination with the IMF, in particular in line with adjustments in the IMF Debt Limit Policy. The PPA was observed by a wide margin. 11 >>> and bilateral lenders and the syndicated loans market. Kenya’s external position is backstopped by its gross international reserves, which, despite a projected decline in 2023, remain at adequate levels. Import coverage of reserves is expected to remain above the 3-month threshold, which is also close to the value of the IMF’s reserve adequacy metric for credit -constrained economies, and gradually strengthen over time to 4.2 months of imports of goods and services over the medium term.20 Looking beyond 2024, sizable external commercial debt will be falling due in 2025-26 and Kenya is expected to continue to tap global capital markets to roll over them over. 16. The realism tools flag some optimism compared to historical performance, reflecting a structural break with past trends based on the policies underpinning the authorities’ ambitious reform program (Figure 4). While protecting social spending, the baseline scenario assumes an improvement of the fiscal primary balance of 3.1 percentage points of GDP over three years in 2023–25, which falls in the bottom half of the top quartile of the distribution for LICs. Staff is of the view that this is realistic and in line with the authorities’ plan for fiscal consolidation under the program, as reflected in the draft Supplementary FY2023/24 Budget, their careful management of expenditures to achieve fiscal targets in the face of heightened pressures, and their medium-term plans to strengthen tax revenues and streamline recurrent expenditures—particularly for wages and transfers to public sector entities —while improving public investment management and budgetary controls. The authorities’ commitment to fiscal consolidation, including actions taken during the pandemic to broaden the tax revenue base, which have delivered resilience by creating fiscal space to cover unanticipated needs resulting from Russia’s invasion of Ukraine (e.g., gradual approach to adjusting domestic fuel prices during 2022), and actions taken to compensate for expenditure pressures in FY2022/23, while reducing the primary balance below the initially budgeted levels, provide assurances that the fiscal adjustment under the program is achievable. The return of real GDP growth to its long-term potential, following the strong recovery from the COVID–19 shock in 2021, explains the near-term growth trajectory during planned fiscal consolidation. Export growth is projected to be higher than in the recent past, as exports of goods and services recover from the 2020 global shock. The projection for private investment incorporates the weaker outturn in 2022, revised view of the impact in 2023 from the tightening in monetary policy and projected external adjustments in 2023 and over the medium term. 20 In the near term, reserves are bolstered by increased support from multilateral institutions for the ambitious government reform agenda (see ¶11), while over the medium-term they are expected to benefit from the crowding-in effect of fiscal consolidation on private sector external borrowing (see ¶8). 12 >>> PV of New Debt from Volume of New Debt Jul 1, 2021 to Dec 31, from Jul 1, 2021 to PPG external debt 2024 (Program Dec 31, 2024 Purposes) USD million Percent USD million Percent By sources of debt financing 19243.0 100 13401.8 100 Concessional debt, of which 12995.3 68 7524.5 56 Multilateral debt 8954.4 47 5240.8 39 Bilateral debt 4010.9 21 2265.9 17 Other 0.0 0 0.0 0 Non-concessional debt, of which 6247.7 32 5877.3 44 Semi-concessional 1228.1 6 857.8 6 Commercial terms 5019.5 26 5019.5 37 By Creditor Type 19243.0 100 13401.8 100 Multilateral 9459.1 49 5584.5 42 Bilateral - Paris Club 2116.5 11 1281.0 10 Bilateral - Non-Paris Club 2484.6 13 1391.6 10 Other 5182.7 27 5144.7 38 Uses of debt financing 19243.0 100 13401.8 100 Infrastructure 9244.8 48 7110.0 53 Social Spending 5806.7 30 3346.2 25 Budget Financing 2259.3 12 1409.7 11 Other 1932.2 10.0 1536.0 11.5 1/ Contracting and guaranteeing of new debt. The present value of debt is calculated using the terms of individual loans and applying the 5 percent program discount rate. For commercial debt, the present value is defined as the nominal/face value. 17. Kenya’s debt carrying capacity is assessed as medium (Text Table 7). The debt carrying capacity determines the applicable thresholds for the PPG external and total public debt sustainability indicators used in the assessment. It is informed by the value for Kenya of the Composite Indicator (CI) Index of 3.01,21 which incorporates data from the IMF’s October 2023 World Economic Outlook (WEO) macroeconomic projections and the 2022 World Bank's Country Policy and Institutional Assessment (CPIA). The marginally higher CI score relative to the last published DSA is on account of the stronger projected path of import coverage of reserves. 21 The CI captures the impact of various factors through a weighted average of an institutional indicator, real GDP growth, remittances, international reserves, and world growth. All inputs are in the form of 10-year averages across 5 years of historical data and 5 years of projection. 13 >>> Country Kenya Debt Carrying Capacity Medium Classification based on Classification based on Classification based on the two Final current vintage the previous vintage previous vintage Medium Medium Medium Medium 3.01 2.98 3.02 Note: The current-vintage Composite Indicator Index is based on the IMF’s 202 3 October World Economic Outlook and the 2022 World Bank Country Policy and Institutional Assessment (CPIA). Calculation of the CI Index Components Coefficients (A) 10-year average values CI Score components Contribution of (B) (A*B) = (C) components CPIA 0.385 3.75 1.45 48% Real growth rate (in percent) 2.719 4.92 0.13 4% Import coverage of reserves (in percent) 4.052 37.75 1.53 51% Import coverage of reserves^2 (in percent) -3.990 14.25 -0.57 -19% Remittances (in percent) 2.022 3.68 0.07 2% World economic growth (in percent) 13.520 2.89 0.39 13% CI Score 3.01 100% CI rating Medium Applicable thresholds APPLICABLE APPLICABLE EXTERNAL debt burden thresholds TOTAL public debt benchmark PV of total public debt in PV of debt in % of percent of GDP 55 Exports 180 GDP 40 Debt service in % of Exports 15 Revenue 18 18. Besides the six standardized stress tests, the analysis includes three tailored stress tests. The combined contingent liabilities stress test is described in paragraph 2 above and the natural disaster stress test is outlined in the Climate Change Risks section below. The market financing shock is applied to countries with market access, such as Kenya. It assesses rollover risks resulting from a deterioration in global risk sentiment, temporary nominal depreciation, and shortening of maturities of new external commercial borrowing. 19. External debt burden indicators in terms of exports and revenues breach respective thresholds under the baseline, giving rise to a mechanical high-risk signal (Table 1, Table 3, and Figure 1). The PV of PPG external debt-to-exports solvency indicator remains above the threshold (180 percent) through 2029, while the debt service-to-exports liquidity indicator exceeds its threshold (15 percent) through 2034. The solvency indicator gradually declines as exports recover; the long-term trend 14 >>> decline in the liquidity indicator is interrupted by Eurobond repayments in 2024 and 2028 and the rollover of external bank loans coming due in 2025–26 and 2028. The projected rollovers of maturing commercial financing also push the external debt service-to-revenue ratio above its sustainability threshold (18 percent) in the same years. The PV of PPG external debt as a share of GDP remains well below the 40 percent indicative threshold throughout the projection period (Table 1 and Figure 1). Reflecting fiscal consolidation efforts and a borrowing mix that favors concessional borrowing, this solvency indicator is expected to decline from 31.7 percent in 2023 to 15 percent in 2043. The external debt burden indicators are higher than projected in the last DSA, reflecting the level effect of lower GDP in US$ in 2023–24, the REER depreciation in 2023 and 2024, further increase in interest expenses of external loans with floating interest rates and increased support by development partners (¶11). 20. Standard stress test results highlight the sensitivity of debt burden indicators in terms of exports and exchange rate depreciation (Figure 1 and Table 1). Specifically, under the most extreme shock scenario (shock to export growth), the PV of debt-to-exports and the debt service-to-exports ratios breach the threshold over the entire medium-term projection period. Under the most extreme scenario involving one-time depreciation, the debt service-to-revenue ratio can potentially breach the threshold through 2031. 21. The market financing pressures module ranks market liquidity risks as moderate (Figure 5). Kenya’s EMBI spread has widened above the threshold of 570 basis points (589 basis points as of December 20, 2023, having come down from the highs reached in the runup to the 2022 elections). On the plus side, gross financing needs are below the threshold (14 percent of GDP) that indicates high risk. Fiscal consolidation efforts under the IMF-supported EFF/ECF arrangements would help keep gross financing needs below the threshold. As is the case for other emerging and frontier economies, financing risks are affected by global liquidity conditions. Persistent deterioration in global market conditions would exacerbate financing risks for Kenya. The shift in the deficit financing mix toward domestic resources calls for monitoring, given the elevated levels of domestic interest rates. 22. The PV of total public debt-to-GDP ratio remains above the 55 percent benchmark—for a country rated at medium debt-carrying capacity—through 2029, giving rise to a mechanical high- risk signal (Figure 2 and Table 2). Public sector debt is projected to peak in 2023 at 68 percent of GDP (PV terms), followed by a steady decline. Supported by fiscal consolidation under the program, including revenue mobilization measures, the PV of public debt-to-revenue ratio (380 percent in 2023) is projected to be about 168 percent by 2043. 23. Standard stress tests indicate that the PV of debt-to-GDP ratio is likely to remain above its indicative benchmark for most of the projection period under these scenarios (Figure 2 and Table 4). This is also the case in the historical scenario, in which key variables are kept at their historical averages, underscoring the importance of the authorities’ ambitious reform agenda to reorient the economy to private-sector and export-oriented growth drivers to durably reduce debt-related vulnerabilities. Under 15 >>> the most extreme standard shock scenario (primary balance shock),22 the PV of the public debt-to-GDP ratio would breach the 55 percent benchmark for a country with medium debt-carrying capacity through 2036. 24. Kenya is highly vulnerable to climate change shocks, especially floods and droughts, which might affect debt dynamics. The total cost of climate change is estimated at 2–2.4 percent of GDP per year in Kenya. 23 This is largely due to the climate-sensitive nature of Kenya’s economy, with agriculture, water, energy, tourism, and wildlife sectors playing an important role in it. Climate change can affect debt sustainability indicators through the negative impact on the fiscal deficit and balance of payments, short- term output losses from destruction of capital and the possibility of long-term scarring from productivity losses in climate-sensitive economic activities, as well as inflationary pressures that can further erode purchasing power. Specifically: • The expected increase in the frequency of natural disasters would destroy capital and reduce output in the short run and can have a long-term impact on the level of GDP (see results from the natural disaster stress test below). Climate change can disrupt agricultural activities, leading to reduced crop yields, livestock losses, and decreased agricultural productivity over the long run. This can hinder overall economic growth, contribute to food insecurity and rural poverty and increase inflationary pressures from food prices. • Government spending needs would rise with reconstruction costs and fiscal transfers to support those affected, while the disruptions of economic activities would simultaneously reduce government revenues. This would worsen fiscal deficits, which in the absence of corrective measures would translate into higher levels of public debt. • The balance of payments will also be under pressure from the import component of reconstruction spending and terms-of-trade shocks stemming from price pressures in climate-sensitive economic activities (e.g., agriculture and tourism). However, private and public spending on reconstruction also holds the promise of replacing obsolete production capacity with state-of-art technologies that can spur long-term growth. The current macro baseline does not explicitly model the effect of climate change, beyond the broad view on growth prospects of the economy, which embed the average effect of climate change in historical series. 24 The impact of climate change is, instead, accounted by a customized natural disaster stress test. 25. A natural disaster stress test for Kenya illustrates the risks to debt sustainability of an extreme climate event. The standard natural disaster stress test is informed by the 2008–11 drought, 22 See next section for a discussion of the natural disaster custom stress scenario, which has an even bigger impact on debt burden metrics. 23 National Policy for Disaster Management in Kenya, Government of Kenya, 2017. 24 This reflect the fact that (i) quantifying the exact impact of climate change on economic variables is challenging due to the inherent uncertainty associated with climate models and the complex interactions between climate and economic systems; (ii) projecting the future economic impacts of climate change requires concerted effort to compile comprehensive data that will take time to put in practice. 16 >>> which caused widespread losses and damages creating a need for recovery and reconstruction public spending estimated at US$1.8 billion, slowed real GDP growth by an average of 2.8 percent a year, and negatively affected tourism and agricultural exports (see Kenya: Post Disaster Needs Assessment). The calibration assumes US$1.8 billion increase in public debt, one-off 9 percentage points decline in real GDP growth, pro-rated from the 2008–11 precedent to account for the more diversified nature of the economy, and the standard 3.5 percentage points shock on exports growth (overall exports of goods and services grew over the 2008–11 episode). Results illustrate the very limited scope for meeting additional financing needs in the stress scenario with semi-concessional or commercial external financing without jeopardizing debt sustainability (see Tables 3 and 4). This highlights the need to expedite institutional reforms and capacity building to improve public investment efficiency, reduce leakages, and promote private climate investments. 26. Kenya’s Nationally Determined Contribution (NDC) envisions 32 percent reduction i n country’s greenhouse gas emissions by 2030. At end-2022, more than 90 percent of electricity was generated from renewable sources. Kenya has also made significant strides in leveraging private climate finance through various channels—including public private partnerships (PPPs) in renewable energy projects, corporate green bond issuance, several blended finance mechanisms to de-risk private sector investments, and active engagement in global climate funds. 27. Achieving Kenya’s ambitious climate objectives would require private sector participation and mobilization of additional tax revenues and concessional resources. Achieving Kenya’s NDC pledge is estimated to entail climate-related investment needs of around 6 percent of GDP per year over 2023–30.25 Some of these needs are addressed by existing investment projects,26 with the balance is expected to be met through a mix of private sector participation and highly concessional external financing. 28. Debt sustainability risks from reaching the climate goals are assumed to be limited, as authorities’ efforts, beyond making the existing investment pipeline more climate responsive, will be contingent on mobilizing additional, highly concessional, climate financing and private sector solutions supported by market incentives. The implementation of reforms supported by the requested IMF Resilience and Sustainability Facility (RSF) would help achieve NDC pledges while safeguarding debt sustainability by: (i); incorporating climate risks into fiscal planning and investment framework; (ii) mobilizing climate revenue and strengthening the efficiency of climate spending; (iii) enhancing effectiveness of Kenya’s existing frameworks to mobilize climate finance; (iv) strengthening disaster risk reduction and management. By supporting enhancements in Kenya’s public financial management framework and improvements in public investment efficiency, RSF-related reform measures will help Kenya make public investment more climate responsive. They would also provide strong signal to 25 See Kenya’s Nationally Determined Contribution 2020-30. 26 For example, active WB lending operations with more than 20 percent climate co-benefits include “Off-grid Solar Access Project for Underserved Counties”, “Climate Smart Agriculture Project”, “Financing Locally Led Climate Action Program”, “Additional Financing for Coastal Region Water Security and Climate Resilience Project”, “Kenya Urban Support Program “etc. 17 >>> investors, support establishing a pipeline of bankable projects, and accelerate mobilization of private financing. 27 29. Kenya’s overall and external public debts are assessed sustainable but remain at high risk of debt distress. The mechanical risk signals indicate sustained breaches of sustainability thresholds by solvency and liquidity indicators under the baseline scenario —the PV of external debt-to-exports and external debt service-to-exports ratios, as well as the PV of overall public debt-to-GDP ratio. A number of additional considerations mitigate the mechanical risk signals, supporting the analysis: • The decisive actions already undertaken in 2020-23 to limit the increase in the deficit from global shocks (pandemic, geopolitical conflicts) and to broaden the tax base; • The multi-year fiscal consolidation under the IMF-supported EFF/ECF arrangements which aims to decisively reduce deficits and increase tax revenue; • The consistently strong performance of remittances, which supports external sustainability, paired with a favorable outlook for exports that will be supported by strong policy measures to boost export competitiveness; • External debt service profile is on a clear declining trajectory beyond 2024 as share of exports and public revenues, which authorities plan to further optimize if market conditions are favorable; • Close attention to evaluating risks at SOEs and the commitment under the IMF-supported EFF/ECF arrangements to limit the impact on the deficit of any fiscal support (e.g., via offsets); • Ongoing efforts to strengthen fiscal sustainability under the SDFP by rationalizing public investments on the basis of rigorous criteria; • Climate adaptation and mitigation strategies, with focus on water management, agriculture and food security, ecosystem conservation, disaster risk reduction, sustainable energy transition, climate information and research, health and human security, education and awareness, can help curb and cushion climate risks, limiting the impact on debt ratios; and • The authorities’ proactive preparation for the June 2024 Eurobond rollover. They have hired international lead managers and are also exploring alternative sources of financing from multilateral and bilateral lenders. The negotiations with regional banks to contract syndicated loans are advancing. • The authorities amended PFM act to adopt DSA’s threshold of 55 percent overall debt to GDP ratio in PV terms as the medium-term debt anchor to underpin fiscal policy and provide additional policy credibility. 27 For example, the National Green Fiscal Incentives Policy Framework, to be adopted by end-2023, is expected to include fiscal and economic mechanisms, that could be used to promote climate-friendly investments, including carbon pricing and electric and hybrid modes of transportation. 18 >>> • Looking ahead, efficient investment in infrastructure will raise growth and export potential, both of which will support Kenya’s external debt sustainability. 30. Fiscal consolidation under Kenya’s IMF-supported program would achieve and surpass the debt-stabilizing primary balance. Debt would begin declining as a share of GDP starting in 2025. Indicators measured against exports will also gradually improve as the recovery of exports takes hold and reforms under the IMF-supported EFF/ECF arrangements and upcoming World Bank DPO enhance competitiveness. Given the magnitude of mechanical threshold breaches under the baseline, consolidation efforts would need to be sustained over the medium term to restore fiscal space and reduce debt-related risks. Of note: • While the PV of total public debt-to-GDP ratio remains above the indicative threshold (55 percent), the authorities’ commitment to fiscal consolidation un der the program safeguards debt sustainability. Important actions have already been taken to permanently broaden the tax revenue base, alongside expenditure savings. The multiyear fiscal consolidation plan highlighted in the 2023 Budget Policy Statement (BPS) and substantiated by the FY2023/24 Budget is premised on a more conservative approach to revenue projections and a commitment to additional policy steps to increase tax revenues and control expenditures under the EFF/ECF arrangements with the specific objective of anchoring debt sustainability. • Kenya’s PV of external debt as a share of GDP is well below the 40 percent indicative threshold and will gradually decline over time. Kenya’s external debt indicators are expected to gradually improve as fiscal consolidation progresses, exports recover as the global shocks dissipate, and Kenya makes progress to unlock its substantial export potential. • Kenya’s borrowing plan relies on a balanced mix of commercial and concessional financing that contributes to reducing debt risks, supported by limits on the government’s external borrowing under the EFF/ECF arrangements and PPAs under the SDFP, which also support steps to improve debt transparency. 31. Debt sustainability is also supported by stable and strong remittances, manageable and steadily declining gross financing needs and the authorities’ commitment to insulate the public sector balance sheet from SOE-related contingent liabilities. While the protracted breaches of most debt burden indicators are a source of concern, there are mitigating factors that help support the debt sustainability assessment. The gross financing needs beyond 2024 is relatively small and on a clear declining trajectory over the projection period, signaling a strengthening in debt servicing capacity. The authorities’ commitment to absorb the fiscal costs associated with materialization of SOE -related contingent liabilities with a limited impact on the programmed fiscal envelope will help avoid further deterioration in the public sector balance sheet. Stable and strong remittances, amounting to 29 percent of exports of goods and services in 2022, would also continue to be an important source for foreign currency receipts going forward. 32. Strong reform measures could help Kenya elevate its debt carrying capacity, improving debt outlook and assessment significantly. Kenya is currently assessed to have a medium debt carrying capacity with a CI score of 3.01, slightly below the 3.05 required to be upgraded to strong category with 19 >>> correspondingly higher debt burden thresholds. As the authorities embark on strong policy measures and structural reforms, especially on the PFM front this could help increase its CPIA and CI score, further mitigating risks to debt sustainability in coming years. To this end, the authorities’ EFF/ECF arrangements incorporate two structural benchmarks—PFM measures for avoiding future accumulation of expenditure arrears and a medium-term strategy to strengthening revenue administration —as well as several ongoing measures to improve budgeting process, fiscal risk management, and fiscal transparency. Combined with implementing the new PFM reform strategy 2023-2028, these measures will strengthen budget credibility and expenditure efficiency. 33. The assessment is subject to heightened uncertainty in the global environment and a narrow scope for deviations from the domestic reform agenda underpinning the baseline. Kenya is exposed to heightened risks to the global outlook through international trade and financing channels. Intensification of global spillovers from Russia’s invasion of Ukraine could drive persistent investor concerns about the prospects of frontier economies and increase the cost of financing. Exports could underperform the baseline on account of a) lower demand from major economies due to shocks or policy measures (e.g., potentially further tightening of monetary policy to address concerns on inflation); and b) delays in domestic structural reforms needed to support medium-term export growth. Domestic government bond holdings by pension funds and commercial banks expose the economy to feedback between sovereign and financial sector risks, while the need to rollover maturing external commercial debt exposes the country to risks from a liquidity squeeze. Domestic political risks (e.g., any unrest or disruptions due to concerns on cost of living, rising tax burden, etc.) or any deterioration in the security situation could disrupt trade and tourism. Even with the strong commitment by authorities to fiscal consolidation, there is a risk for slippages especially in the long run. Finally, crowding-in effect of the fiscal consolidation into private sector growth might take longer to materialize. 34. The authorities broadly agreed with IMF staff’s assessment, emphasizing that addressing and reducing debt vulnerabilities remain key policy priority. They reaffirmed their commitment to fiscal adjustment to arrest elevated debt vulnerabilities, while also recognizing the need to meet infrastructure needs with sustainable financing. The authorities emphasized their strategy to prioritize concessional financing in the immediate term as the international markets remain effectively closed to frontier economies but remain focused on restoring Kenya’s access to capital markets as soon as conditions allow. In coordination with their financial advisors, they are actively assessing their options to tap the markets this fiscal year. The authorities emphasized their determination to extend the maturity of domestic debt and pursue a financing strategy that balances domestic issuance and external financing, avoiding crowding out domestic private sector. They expressed confidence that adoption of the debt target of overall debt to GDP ratio of 55 percent in present value terms will better anchor their medium-term fiscal policies. 20 >>> The authorities are expected to adjust trade statistics to reflect oil import and reexports properly. Under the Government-to-Government (G2G) oil import arrangement three Kenyan Oil Marketing Companies (OMCs) own cargo upon delivery by international oil companies to Kenya’s Mombasa port. Upon taking the ownership of the oil cargo, Kenyan OMCs sell about 62 percent of imported oil domestically and reexport about 38 percent to the regional countries. The change of ownership between a resident and non-resident is central to BoP recording. As the Kenyan OMCs own the cargo and carry out the risks and rewards before selling it to non-residents, this portion of oil imports should be captured in the BoP trade balance properly. As the Kenyan authorities adjust BoP data recording accordingly, exports and imports will increase. This will have no material impact on the current account dynamics, however, the metric on reserves in months of import coverage will deteriorate. Export related external debt burden indicators in DSA will improve mechanically. Preliminary estimates suggest these changes would mechanically improve PV of debt-to-exports (about 37 percentage points in 2023) and debt service-to-exports (3.3 percentage points in 2023) ratios in the DSA, allowing both indicators remain below respective thresholds by the end of projection horizon (Box Figure 1). These mechanical improvements would have no material impact on Kenya’s debt servicing capacity. As such, while correct BoP data reporting is welcome development, it would not have an impact on staff’s assessment of Kenya’s debt sustainability. Baseline Reexports included 21 >>> Actual Projections Average 8/ Historical Projections 2020 2021 2022 2023 2024 2025 2026 2027 2028 2033 2043 External debt (nominal) 1/ 72.2 71.1 73.5 83.2 91.8 89.6 87.3 85.6 83.0 71.1 55.3 57.6 81.7 Definition of external/domestic debt Currency-based of which: public and publicly guaranteed (PPG) 35.4 34.7 34.5 40.5 42.4 40.4 38.8 36.7 35.0 29.5 18.8 27.7 35.7 Is there a material difference between the No two criteria? Change in external debt 6.3 -1.1 2.3 9.7 8.6 -2.2 -2.3 -1.7 -2.6 -2.0 -2.3 Identified net debt-creating flows 3.8 -0.7 2.5 -0.1 -1.2 -1.3 -1.4 -1.4 -1.5 -1.5 -1.1 2.0 -1.3 Non-interest current account deficit 3.6 4.1 3.9 2.3 1.9 2.0 2.2 2.3 2.3 2.3 2.8 5.2 2.2 Deficit in balance of goods and services 7.9 9.1 9.3 7.7 8.0 7.7 7.7 7.8 7.7 7.2 6.4 9.9 7.6 Exports 9.6 10.8 12.2 12.3 14.9 15.1 15.2 15.4 15.5 16.9 20.9 Debt Accumulation Imports 17.6 19.9 21.5 20.0 22.9 22.8 22.9 23.2 23.2 24.0 27.2 Net current transfers (negative = inflow) -4.9 -5.6 -5.7 -6.1 -7.0 -6.9 -6.7 -6.7 -6.7 -6.4 -5.6 2.0 35 -5.2 -6.6 of which: official 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.0 0.0 1.8 30 Other current account flows (negative = net inflow) 0.6 0.5 0.3 0.8 0.9 1.2 1.2 1.2 1.3 1.5 2.1 0.5 1.2 1.6 Net FDI (negative = inflow) -0.6 0.0 -0.3 -0.3 -0.7 -1.0 -1.3 -1.3 -1.5 -1.8 -2.1 -0.7 -1.3 1.4 25 Endogenous debt dynamics 2/ 0.8 -4.7 -1.1 -2.2 -2.4 -2.3 -2.3 -2.4 -2.3 -2.0 -1.7 Contribution from nominal interest rate 1.2 1.2 1.3 1.7 2.1 2.2 2.0 2.0 1.9 1.6 1.1 1.2 20 Contribution from real GDP growth 0.2 -5.0 -3.3 -3.9 -4.5 -4.5 -4.4 -4.3 -4.2 -3.6 -2.9 1.0 Contribution from price and exchange rate changes -0.6 -0.9 0.9 … … … … … … … … 15 Residual 3/ 2.5 -0.4 -0.1 9.8 9.8 -0.9 -0.9 -0.3 -1.1 -0.5 -1.3 2.4 1.1 0.8 of which: exceptional financing 0.0 -0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.6 10 0.4 Sustainability indicators 5 PV of PPG external debt-to-GDP ratio ... ... 29.0 31.7 35.8 33.8 31.8 29.9 28.3 23.3 13.9 0.2 PV of PPG external debt-to-exports ratio ... ... 238.2 256.9 240.3 224.0 209.9 194.3 182.1 137.9 66.6 0.0 0 PPG debt service-to-exports ratio 25.7 22.5 21.5 24.9 36.0 25.1 24.9 21.1 23.3 15.5 7.9 2023 2025 2027 2029 2031 2033 PPG debt service-to-revenue ratio 15.1 14.6 15.3 17.3 28.5 19.8 19.6 16.9 18.8 13.6 8.3 Gross external financing need (Million of U.S. dollars) 27,431 28,168 29,130 28,105 30,252 30,032 31,478 32,050 33,788 38,229 56,805 Debt Accumulation Grant-equivalent financing (% of GDP) Key macroeconomic assumptions Grant element of new borrowing (% right scale) Real GDP growth (in percent) -0.3 7.6 4.8 5.1 5.0 5.3 5.3 5.3 5.3 5.3 5.3 4.5 5.3 GDP deflator in US dollar terms (change in percent) 0.9 1.2 -1.3 -9.2 -13.6 2.6 2.6 1.7 1.8 1.8 1.6 2.7 -0.5 Effective interest rate (percent) 4/ 1.8 1.8 1.9 2.2 2.3 2.5 2.5 2.4 2.4 2.4 2.1 2.1 2.4 External debt (nominal) 1/ Growth of exports of G&S (US dollar terms, in percent) -15.4 21.8 17.1 -3.4 9.5 9.4 8.6 8.5 8.4 9.3 9.3 2.7 7.8 of which: Private Growth of imports of G&S (US dollar terms, in percent) -13.2 23.3 11.6 -11.0 3.7 7.8 8.3 8.3 7.5 8.0 8.8 3.8 5.8 100 Grant element of new public sector borrowing (in percent) ... ... ... 18.5 25.2 28.0 26.3 30.6 23.5 26.8 #DIV/0! ... 25.9 90 Government revenues (excluding grants, in percent of GDP) 16.4 16.6 17.1 17.7 18.8 19.1 19.2 19.2 19.2 19.2 19.8 17.0 19.0 Aid flows (in Million of US dollars) 5/ 1,841 1,785 1,730 1,874 3,203 2,726 2,734 2,651 2,804 3,654 2,449 80 Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 0.9 1.8 1.3 1.2 1.0 1.0 1.0 ... ... 1.1 70 Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 23.6 28.7 32.8 31.1 36.5 28.6 32.9 ... ... 31.2 60 Nominal GDP (Million of US dollars) 100,912 109,875 113,701 108,521 98,398 106,317 114,768 122,852 131,684 186,619 372,056 Nominal dollar GDP growth 0.6 8.9 3.5 -4.6 -9.3 8.0 7.9 7.0 7.2 7.2 7.0 7.3 4.8 50 40 Memorandum items: 30 PV of external debt 7/ ... ... 68.0 74.4 85.2 83.0 80.4 78.8 76.4 64.9 50.5 In percent of exports ... ... 558.5 603.0 572.1 550.4 529.7 512.7 491.2 384.7 242.0 20 Total external debt service-to-exports ratio 239.4 200.0 176.0 189.2 188.7 167.4 158.3 146.1 141.2 97.4 49.3 10 PV of PPG external debt (in Million of US dollars) 32,987 34,374 35,192 35,896 36,545 36,702 37,265 43,413 51,696 0 (PVt-PVt-1)/GDPt-1 (in percent) 1.2 0.8 0.7 0.6 0.1 0.5 0.7 -0.9 2023 2025 2027 2029 2031 2033 Non-interest current account deficit that stabilizes debt ratio -2.7 5.2 1.5 -7.4 -6.7 4.2 4.4 4.0 4.8 4.3 5.2 Sources: Country authorities; and staff estimates and projections. 0 1/ Includes both public and private sector external debt. 2/ Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms. 3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 22 >>> Actual Projections Average 6/ 2020 2021 2022 2023 2024 2025 2026 2027 2028 2033 2043 Historical Projections Public sector debt 1/ 68.0 68.2 67.9 73.2 73.3 70.3 67.8 65.4 63.1 54.0 38.2 55.1 63.7 of which: external debt 35.4 34.7 34.5 40.5 42.4 40.4 38.8 36.7 35.0 29.5 18.8 27.7 35.7 Definition of external/domestic debt Currency-based of which: local-currency denominated 33.46 Change in public sector debt 8.9 0.3 -0.3 5.3 0.0 -3.0 -2.5 -2.4 -2.3 -1.8 -0.6 Is there a material difference Identified debt-creating flows 7.8 1.0 2.1 -2.0 -2.5 -2.5 -2.5 -2.4 -2.3 -1.8 -1.2 2.7 -2.1 No between the two criteria? Primary deficit 3.8 2.7 1.4 0.1 -1.2 -1.7 -1.7 -1.6 -1.5 -0.5 -0.3 3.3 -1.1 Revenue and grants 16.7 16.8 17.3 17.9 19.1 19.4 19.5 19.5 19.5 19.5 20.1 17.4 19.3 of which: grants 0.2 0.3 0.2 0.2 0.3 0.3 0.3 0.2 0.2 0.2 0.3 Public sector debt 1/ Primary (noninterest) expenditure 20.5 19.6 18.6 18.1 17.9 17.7 17.8 17.8 18.0 18.9 19.9 20.7 18.2 Automatic debt dynamics 4.0 -1.8 0.7 -2.1 -1.3 -0.8 -0.8 -0.8 -0.8 -1.3 -1.0 of which: local-currency denominated Contribution from interest rate/growth differential 2.7 -3.0 -2.5 -2.1 -1.3 -0.8 -0.8 -0.8 -0.8 -1.3 -1.0 of which: contribution from average real interest rate 2.6 1.8 0.7 1.1 2.2 2.9 2.7 2.6 2.5 1.6 1.0 of which: foreign-currency denominated of which: contribution from real GDP growth 0.2 -4.8 -3.2 -3.3 -3.5 -3.7 -3.5 -3.4 -3.3 -2.8 -2.0 80 Contribution from real exchange rate depreciation 1.2 1.2 3.2 ... ... ... ... ... ... ... ... 70 Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 60 Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50 Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40 Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 30 Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Residual 1.1 -0.7 -2.4 7.3 2.5 -0.5 0.0 0.0 0.0 0.0 0.6 0.3 0.9 20 10 Sustainability indicators 0 PV of public debt-to-GDP ratio 2/ ... ... 63.9 68.2 67.2 64.0 61.4 59.1 56.9 48.1 34.0 2023 2025 2027 2029 2031 2033 PV of public debt-to-revenue and grants ratio … … 370.3 380.3 352.0 330.1 315.1 303.5 292.2 247.3 168.7 Debt service-to-revenue and grants ratio 3/ 54.1 55.2 56.0 55.2 68.9 58.0 55.5 50.5 50.9 43.6 26.6 Gross financing need 4/ 12.8 12.0 11.0 10.1 11.9 9.5 9.2 8.2 8.4 8.0 5.1 Key macroeconomic and fiscal assumptions Real GDP growth (in percent) -0.3 7.6 4.8 5.1 5.0 5.3 5.3 5.3 5.3 5.3 5.3 4.5 5.3 Average nominal interest rate on external debt (in percent) 3.5 3.1 3.0 3.7 3.7 3.4 3.3 3.3 3.2 3.4 2.7 2.9 3.4 Average real interest rate on domestic debt (in percent) 6.7 7.5 5.9 3.7 5.5 8.0 7.6 7.7 7.4 4.8 4.9 5.3 6.4 Real exchange rate depreciation (in percent, + indicates depreciation) 4.0 3.8 10.1 … ... ... ... ... ... ... ... 0.2 ... Inflation rate (GDP deflator, in percent) 4.9 4.3 6.0 8.1 7.0 5.2 5.5 5.1 5.0 4.9 1.6 6.1 5.5 Growth of real primary spending (deflated by GDP deflator, in percent) -0.2 2.9 -0.1 2.0 3.7 4.0 6.2 5.4 6.3 5.8 8.3 3.7 5.4 Primary deficit that stabilizes the debt-to-GDP ratio 5/ -5.1 2.5 1.7 -5.1 -1.2 1.3 0.8 0.8 0.8 1.2 0.4 -0.3 0.2 PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government plus social security, central bank, government-guaranteed debt . Definition of external debt is Currency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years. 23 >>> Projections 1/ 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 PV of Debt-to GDP Ratio Baseline 32 36 34 32 30 28 28 26 25 24 23 A. Alternative Scenarios A1. Key variables at their historical averages in 2023-2033 2/ 32 33 35 36 38 40 42 44 46 48 49 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 32 37 37 35 33 31 30 29 28 26 25 B2. Primary balance 32 38 40 38 36 34 34 33 32 31 30 B3. Exports 32 38 41 39 36 35 34 32 31 29 28 B4. Other flows 3/ 32 38 39 37 35 33 32 31 29 28 27 B5. Depreciation 32 47 40 38 35 33 33 31 30 29 28 B6. Combination of B1-B5 32 40 40 38 36 34 33 32 30 29 28 C. Tailored Tests C1. Combined contingent liabilities 32 39 37 35 33 32 31 31 30 29 28 C2. Natural disaster 32 41 40 39 37 36 36 36 36 36 35 C3. Commodity price 32 36 34 32 30 28 28 26 25 24 23 C4. Market Financing 32 41 38 36 34 32 31 30 29 28 26 Threshold 40 40 40 40 40 40 40 40 40 40 40 PV of Debt-to-Exports Ratio Baseline 257 240 224 210 194 182 174 166 156 146 138 A. Alternative Scenarios A1. Key variables at their historical averages in 2023-2033 2/ 257 221 230 241 247 255 267 277 284 288 293 0 257 177 147 121 93 69 50 32 15 -1 -13 B. Bound Tests B1. Real GDP growth 257 240 224 210 194 182 174 166 156 146 138 B2. Primary balance 257 253 263 250 233 220 212 204 195 185 176 B3. Exports 257 306 381 358 334 314 301 286 268 250 234 B4. Other flows 3/ 257 257 257 241 225 211 202 192 180 168 158 B5. Depreciation 257 240 203 190 175 163 156 148 140 132 125 B6. Combination of B1-B5 257 298 255 306 285 268 256 243 229 213 200 C. Tailored Tests C1. Combined contingent liabilities 257 261 247 233 218 205 198 191 183 173 165 C2. Natural disaster 257 261 250 240 228 220 216 213 208 202 198 C3. Commodity price 257 240 224 210 194 182 174 166 156 146 138 C4. Market Financing 257 240 224 210 195 183 175 166 157 146 137 Threshold 180 180 180 180 180 180 180 180 180 180 180 Debt Service-to-Exports Ratio Baseline 25 36 25 25 21 23 16 18 17 16 16 A. Alternative Scenarios A1. Key variables at their historical averages in 2023-2033 2/ 25 30 22 23 20 23 18 21 21 22 23 0 25 30 20 19 15 17 10 10 7 5 3 B. Bound Tests B1. Real GDP growth 25 36 25 25 21 23 16 18 17 16 16 B2. Primary balance 25 36 26 27 23 25 18 20 20 19 18 B3. Exports 25 43 37 38 33 36 25 29 29 27 26 B4. Other flows 3/ 25 36 26 26 22 24 17 20 19 19 18 B5. Depreciation 25 36 25 24 20 23 15 17 16 15 14 B6. Combination of B1-B5 25 41 33 33 29 31 22 26 25 24 22 C. Tailored Tests C1. Combined contingent liabilities 25 36 26 26 22 24 17 19 18 17 17 C2. Natural disaster 25 37 26 26 23 25 18 20 19 19 18 C3. Commodity price 25 36 25 25 21 23 16 18 17 16 16 C4. Market Financing 25 36 25 25 21 24 16 21 21 16 15 Threshold 15 15 15 15 15 15 15 15 15 15 15 Debt Service-to-Revenue Ratio Baseline 17 28 20 20 17 19 13 15 14 14 14 A. Alternative Scenarios A1. Key variables at their historical averages in 2023-2033 2/ 17 24 17 18 16 19 14 17 18 19 20 0 17 24 16 15 12 14 8 8 6 5 3 B. Bound Tests B1. Real GDP growth 17 30 22 21 18 20 14 16 16 15 15 B2. Primary balance 17 28 21 21 19 21 15 17 17 17 16 B3. Exports 17 29 21 21 18 20 15 17 17 17 16 B4. Other flows 3/ 17 28 20 21 18 20 14 16 16 16 15 B5. Depreciation 17 38 26 25 21 24 17 19 17 17 16 B6. Combination of B1-B5 17 29 21 22 19 21 15 17 17 17 16 C. Tailored Tests C1. Combined contingent liabilities 17 28 20 20 18 20 14 16 15 15 15 C2. Natural disaster 17 28 20 20 18 20 14 16 16 16 15 C3. Commodity price 17 28 20 20 17 19 13 15 14 14 14 C4. Market Financing 17 28 20 20 17 19 14 17 17 14 13 Threshold 18 18 18 18 18 18 18 18 18 18 18 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the threshold. 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. 3/ Includes official and private transfers and FDI. 24 >>> Projections 1/ 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 PV of Debt-to-GDP Ratio Baseline 68 67 64 61 59 57 55 53 51 50 48 A. Alternative Scenarios A1. Key variables at their historical averages in 2023-2033 2/ 68 72 73 75 77 78 80 81 82 83 83 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A B. Bound Tests B1. Real GDP growth 68 70 72 70 69 68 68 67 67 66 66 B2. Primary balance 68 72 76 74 71 69 67 65 63 61 59 B3. Exports 68 69 70 68 65 63 61 59 56 54 52 B4. Other flows 3/ 68 70 69 66 64 61 59 57 55 53 51 B5. Depreciation 68 70 65 61 57 54 51 48 45 42 39 B6. Combination of B1-B5 68 70 73 70 68 66 64 62 60 58 56 C. Tailored Tests C1. Combined contingent liabilities 68 76 72 70 67 65 63 61 59 57 55 C2. Natural disaster 68 79 77 76 75 74 74 74 73 73 72 C3. Commodity price 68 68 65 63 62 61 60 60 59 59 59 C4. Market Financing 68 67 64 61 59 57 55 53 51 50 48 TOTAL public debt benchmark 55 55 55 55 55 55 55 55 55 55 55 PV of Debt-to-Revenue Ratio Baseline 380 352 330 315 303 292 282 273 264 256 247 A. Alternative Scenarios A1. Key variables at their historical averages in 2023-2033 2/ 380 378 378 386 395 402 409 416 421 425 428 0 55 52 45 43 40 43 39 40 40 40 40 B. Bound Tests B1. Real GDP growth 380 369 369 360 356 351 348 345 343 340 338 B2. Primary balance 380 379 395 379 366 354 344 334 324 314 305 B3. Exports 380 364 363 347 334 322 312 301 290 280 269 B4. Other flows 3/ 380 365 356 340 328 316 306 295 285 275 265 B5. Depreciation 380 367 336 313 294 276 260 245 230 216 203 B6. Combination of B1-B5 380 366 378 362 350 338 327 317 307 298 288 C. Tailored Tests C1. Combined contingent liabilities 380 397 373 358 345 334 323 313 304 294 285 C2. Natural disaster 380 415 399 391 386 382 380 377 375 373 371 C3. Commodity price 380 355 336 325 318 312 309 307 305 304 303 C4. Market Financing 380 352 330 315 304 293 283 274 264 255 247 Debt Service-to-Revenue Ratio Baseline 55 69 58 55 51 51 43 44 44 44 44 A. Alternative Scenarios A1. Key variables at their historical averages in 2023-2033 2/ 55 70 61 59 55 56 50 52 53 54 55 0 55 52 45 43 40 43 39 40 40 40 40 B. Bound Tests B1. Real GDP growth 55 72 64 62 58 59 51 54 55 56 57 B2. Primary balance 55 69 64 66 57 57 51 55 56 55 54 B3. Exports 55 69 58 57 52 52 45 46 46 46 46 B4. Other flows 3/ 55 69 59 57 52 52 44 46 46 45 45 B5. Depreciation 55 66 58 55 50 51 43 43 43 42 41 B6. Combination of B1-B5 55 67 61 64 55 55 48 51 51 50 50 C. Tailored Tests C1. Combined contingent liabilities 55 69 68 60 54 54 50 52 51 51 48 C2. Natural disaster 55 75 70 66 61 62 56 59 60 61 61 C3. Commodity price 55 69 58 56 51 52 46 48 49 50 51 C4. Market Financing 55 69 58 56 51 51 44 47 47 43 43 Sources: Country authorities; and staff estimates and projections. 1/ A bold value indicates a breach of the benchmark. 2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP. 3/ Includes official and private transfers and FDI. 25 >>> 26 >>> 27 >>> 28 >>> 29 >>> GFN 1/ EMBI 2/ Benchmarks 14 570 Values 12 589 Breach of benchmark No Yes Potential heightened liquidity needs Moderate 1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon. 2/ EMBI spreads correspond to data available as of December 20, 2023. PV of Debt-to GDP Ratio PV of Debt-to-Exports Ratio 45 300 40 250 35 30 200 25 20 150 15 100 10 5 50 0 2023 2025 2027 2029 2031 2033 0 2023 2025 2027 2029 2031 2033 Debt Service-to-Exports Ratio Debt Service-to-Revenue Ratio 40 30 35 25 30 20 25 20 15 15 10 10 5 5 0 0 2023 2025 2027 2029 2031 2033 2023 2025 2027 2029 2031 2033 Baseline Market financing Threshold Sources: Country authorities; and staff estimates and projections. 30 >>>