Kenya is likely to pay more for development loans due to corruption in the public sector.
According to the World Bank, lack of transparency and weak institutional reforms are increasing Kenya’s risk profile.
This could increase interest rates on development loans and shorten repayment periods.
It will also make it harder for the Government to secure bailout loans at low-interest terms, prompting Treasury to procure expensive commercial debt to cut the fiscal deficit.
According to the Bretton Woods institution’s 2017 edition of the Country Policy and Institutional Assessment index, Kenyaperformed poorest in public sector management and institutions, eroding the gains the country made in other measures such as improving the business and trade environment.
“Corruption and institutional reforms carry the biggest weight in how the World Bank assesses countries’ performances and in turn the level of development assistance they receive,” explained the World Bank’s chief economist for Africa, Algert Zeufack.
“Studies have shown sustained reforms in the public sector and stronger institutions have the biggest impact on achieving broad economic improvement,” he said.
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In key measurements such as property rights and rule-based governance, Kenya’s performance remained stagnant, scoring three out of six.
Similarly, the country's performance on transparency, accountability and corruption in the public sector ranked lowest at three while the quality of public administration stood at 3.5.
This eroded gains made in monetary and exchange rate policy and maintaining a stable business regulatory environment where Kenya was ranked at 4.5 and four respectively.
“The index reflects the progress countries have made in improving the business environment and making situations conducive for more development finance,” explained Mr Zeufack.
“An improvement in score directly translates to the level of development finance countries receive,” he said.
This is of concern because the World Bank and the African Development Fund constitute the largest chunk of external financing to Kenya through concessional windows.
In addition, Kenya’s reclassification as a lower middle-income country has led to stiffer conditions for borrowing International Development Association (IDA) funds - shortening a lifeline the country has enjoyed for decades.
In the current financial year, Kenya has factored in Sh71 billion in IDA loans, representing 36 per cent of the Sh197 billion that Treasury expects from multilateral lenders to fund the budget.
Concessional external loans are priced at a fixed rate of 0.75 per cent, with a 30-year or 40-year repayment period and a 10-year grace period.
Earlier this year, the World Bank approved a Sh5 billion line of credit to Kenya to help the State design interventions targeted at boosting small and medium enterprises (SMEs) through bridging the gap between industry, enterprise innovators and academia.
The loan is targeted at providing 250 SMEs in the trade and manufacturing sectors with additional financing and capacity building to access global markets.
Seven tech boot camp providers and 640 students in tertiary institutions will also benefit from the project.
The first tranche of Sh11 billion will be disbursed next year even as the global lender said the Sh5 billion project bears a substantive risk.
In 2011, the World Bank-funded Kazi Kwa Vijana was scuttled after a forensic audit revealed that State officials had pilfered millions from the Sh4.3 billion grant.