Kenya is standing in line to secure another Sh136.5 billion loan from the World Bank as it seeks funds to ease the cash flow crisis and boost its dwindling foreign exchange reserves that have taken a hit from the weakening shilling.

The board of the World Bank Group is scheduled to meet on May 26 to approve the $1.0 billion (Sh136.5 billion at current forex rates) to Kenya through its Development Policy Operation (DPO) framework.

DPOs are provided in the form of non-earmarked loans, credits, or grants that support the country’s economic and sectoral policies and institutions.

If approved, the Bretton Woods lender will be expected to wire the billions to the exchequer in a month given that the financing has been budgeted for the financial year 2022/23 ending on June 30.

Among the reforms attached to the proposed funding is the strengthening of domestic revenue mobilisation with a focus on the budding digital economy.

The recently published Finance Bill has proposed the introduction of a Digital Assets Tax at 3.0 percent targeting cryptocurrency and non-fungible tokens.

“Reforms will build on recent improvements in domestic revenue mobilisation by pursuing measures to broaden the tax base given the changing structure of the economy such as taxation of an increasingly digitised economy, capturing of advances in the use of financial derivatives, and ensuring compliance by multinational companies by reducing base erosion and profit shifting,” the programme document states.

The World Bank had initially indicated the potential loan to Kenya was $750.0 million before the ticket size was upsized to $1.0 billion in March 2023 with the programme’s theme changed from the previous ‘Strengthening Economic Management for Resilient and Inclusive Growth’ to ‘Fiscal Sustainability and Inclusive Green Growth Development Policy Operation’.

Unlike the earlier plan, the financing is now expected to place a special focus on climate change mitigation and adaptation.

It comes against the backdrop of the Treasury having published the draft version of the National Green Fiscal Incentives Policy Framework.

Among the proposals in the Draft Policy is the set-up of a green investment bank to provide a range of funding instruments and associated incentives to support the public and private sectors in overcoming barriers to making green investments at scale.

“During the current International Development Association cycle, the World Bank has lined up additional Development Policy Operation financing of $750.0 million for the current financial year. We have been trying to negotiate that to a $1.0 billion but Keith (the World Bank country director) has indicated that this is what is possible at the moment”, said Njuguna Ndung’u, the Treasury Cabinet Secretary, during the launch of the Kenya Economic Update on December 6, 2022.

According to the programme document underpinning the planned financing from the World Bank, the government will be keen to realise three pillars.

The first pillar entails the creation of fiscal space in a transparent and equitable manner; the second pillar focuses on enhancing competitiveness to boost exports in agriculture and the third is on improving governance and financial inclusion to foster a private sector-led growth model.

The World Bank wants the government of Kenya to commit to greater transparency on matters of public debt management.

“The operation will support improved debt sustainability by making the debt management framework more transparent and by requiring the government to engage with Parliament on actionable steps to reduce debt”, the programme document states.

This comes at a time Kenya’s external debt has ballooned by a staggering Sh344.4 billion ($2.58 billion), giving dimension to the impact of a weakening shilling whose exchange rate against the greenback has tanked to a historic low of Sh133.55.

The Central Bank of Kenya data shows that total external debt as of January stood at $37.63 billion (Sh4.7 trillion), where the mean exchange rate was 124.4 against the dollar.