News Release: IMF Says "Kenya’s Economic Reform Has Started To Produce Results”

Kenya’s economic reform has started to produce results: Following considerable pressures in the second half of 2011, inflation has started to decline, the shilling has stabilized, overall public debt is trending downward, and economic growth has continued despite the drought in the Horn of Africa and the sovereign debt crisis in Europe.

Nevertheless, risks have heightened and challenges remain: A turn for the worse in global economic and financial conditions could dampen Kenya’s growth prospects and widen the external current account deficit. Therefore, policies should bring domestic demand growth in line with that of supply in order to improve the external position. The current tight monetary policy stance should continue until there is clear evidence that expectations of low inflation have taken hold.

Policy performance remained in line with the program during the second half of 2011: The fiscal deficit was lower than projected thanks to strict expenditure control, and the shift in monetary policy during the last quarter of 2011 allowed for an accumulation of international reserves beyond projected levels. Moreover, the new Public Financial Management Bill was submitted to the Commission on the Implementation of the Constitution, allowing for the consideration of this landmark piece of legislation by the National Assembly.

Economic prospects for 2012 remain favorable: with gross domestic product (GDP) projected to grow at above 5 percent if the impact of the drought recedes, security conditions improve, and smooth implementation of the new Constitution proceeds. Continued fiscal consolidation and tight monetary policy will bring inflation back to single digits, keep domestic demand under control, and reduce the current account deficit, laying down the conditions that would allow for an eventual decline in interest rates.

Looking forward: sustained efforts to promote exports and invest in transport and energy infrastructure will help accelerate growth and strengthen the external position. Clear prioritization of investment projects is warranted to ensure Kenya’s debt dynamics remain strong.

The authorities and the mission agreed, ad referendum, on economic policies and reforms to maintain macroeconomic stability and promote growth prospects while ensuring debt sustainability. In particular:

• Monetary policy will aim to achieve low and stable inflation: Commitment to a tight stance will bring the rate of growth in credit to the private sector to sustainable levels that are compatible with a reduction in the current account deficit.
• The CBK will continue accumulating international reserves: as inflation declines in order to build a buffer to cope with possible external shocks. The CBK will remain fully committed to a floating exchange rate regime for the shilling.
• Fiscal consolidation efforts will continue: in the remainder of 2011/12 and in 2012/13. Non-priority outlays will be limited in order to create space for development spending, pro-poor expenditures will be protected, and revenue mobilization will be supported by the implementation of the new VAT Law and ongoing efforts to strengthen tax administration.
• Policies for the financial sector will focus on banking supervision and close monitoring of credit risk: promoting competition and deepening the financial sector through the demutualization of the Nairobi Securities Exchange, and accelerating ongoing efforts to combat money laundering and terrorism finance.

“The Executive Board of the IMF is tentatively scheduled to consider completion of the third program review under the ECF arrangement in April 2012. Upon approval the IMF would disburse the third tranche of the loan for an amount of about US$110 million, bringing disbursements under the arrangement to SDR 272.75 million (about US$440 million).”

The Executive Board originally approved Kenya’s three-year ECF arrangement in January 2011 in an amount equivalent to SDR325.68 million (about US$509 million), and in December 2011 approved an increase in access to an amount equivalent to SDR 488.52 million((about US$760 million).

Domenico Fanizza

Leader

IMF Mission To Kenya