The International Monetary Fund (IMF) has expressed concerns over Kenya's plan to secure a $1.5 billion loan from the United Arab Emirates (UAE), citing potential foreign exchange risks and debt distress. The IMF's communications director, Julie Kozack, advised against the loan, noting that it exceeds the commercial borrowing cap and could exacerbate Kenya's already high risk of debt distress.

The loan, which is expected to be disbursed in phases, has a seven-year term and an interest rate of 8.25 percent. Kenya's National Treasury CS, John Mbadi, defended the loan, stating that it is cheaper than the Eurobond issued in February, which had an interest rate of 10.7 percent. However, the IMF's concerns highlight the need for a comprehensive fiscal strategy to reduce debt vulnerabilities and address emerging fiscal challenges.

Kenya's debt to the IMF is already one of the largest in Africa, with a total outstanding credit of $3.022 billion. The country ranks third amongst African nations with the highest debts to the International Monetary Fund. The proposed loan from the UAE has raised concerns about Kenya's ability to manage its debt, particularly in light of the country's recent fiscal challenges.

The loan is part of a growing bilateral relationship between Kenya and the UAE. In February, the two countries signed a comprehensive economic partnership agreement (Cepa) aimed at increasing trade between Kenya and the Asian market, including the Middle East. Kenya was also one of the first African countries to engage in bilateral trade talks with the UAE in 2022, seeking to bolster its oil market.

The news of the proposed loan has had a modest impact on the Kenyan currency, which declined in value relative to the US dollar in late October before stabilizing at around 129 shillings per dollar. The loan's potential impact on the Kenyan economy and its debt sustainability will be closely watched in the coming months.

The IMF's warning highlights the need for Kenya to adopt a more sustainable approach to its debt management, particularly in light of its growing debt burden. As the country navigates its fiscal challenges, it will be essential to balance its need for external financing with the risks associated with debt distress. The IMF's concerns serve as a timely reminder of the importance of prudent fiscal management and the need for a comprehensive strategy to address Kenya's debt vulnerabilities.