IMF Approves US$252.75 Million PRGF Arrangement for Kenya

The Executive Board of the International Monetary Fund (IMF) today approved a three-year Poverty Reduction and Growth Facility (PRGF) arrangement for Kenya in an amount equivalent to SDR 175 million (about US$252.75 million). As a result of the approval, Kenya can draw an amount equivalent to SDR 25 million (about US$36.11 million) under the arrangement immediately.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board's discussion on Kenya, Anne Krueger, First Deputy Managing Director and Acting Chair, stated:

"Kenya's economic program, which is to be supported by the PRGF, reflects the authorities' strong commitment to break with Kenya's past record of uneven economic performance in order to raise living standards and reduce poverty in an environment of macroeconomic stability. The comprehensive reform agenda outlined in the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) seeks to address Kenya's major macroeconomic vulnerabilities and lays the groundwork for strong economic and employment growth and poverty reduction. During the coming months, the government intends to expand the ERSWEC into a full Poverty Reduction Strategy Paper (PRSP), in the context of a broad-based consultative process. To realize the ambitious objectives set out in the ERSWEC, sustained implementation of the reform agenda will be needed. Bold reforms will also be essential to encourage significant private investment and to mobilize adequate donor support for the reforms.

"Important objectives of the government's economic strategy include fiscal consolidation to reduce the domestic debt to a sustainable level, and the restructuring of spending in favor of priority poverty reduction outlays and investment. To achieve these objectives the program appropriately includes a range of measures. These include: (a) strengthening revenue performance through a speedy rebuilding of the integrity and capacity of the Kenya Revenue Authority and rationalization of the tax system; (b) reducing the wage bill as a share of total expenditure by reforming the wage setting mechanism for public servants and continuing civil service reforms; and (c) restructuring the parastatal and financial sectors to increase efficiency and reduce the government's contingent liabilities.

"The authorities have placed the anticorruption strategy at the top of their policy agenda. They have already taken significant steps in their fight against corruption, with the passage of key governance legislation in May 2003 and the setting up of institutions to enforce the legislation. They have also taken bold steps to strengthen the judiciary. These reforms, if implemented consistently and supported by strong enforcement of the rules and regulations, will have a positive impact on the efficiency of resource allocation and support higher economic growth," Ms. Krueger stated.

ANNEX

Recent Economic Developments

With the exception of inflation and the external current account position, macroeconomic outcomes in the three-year period 2000/03 covered by the last PRGF arrangement were well below expectations. Real GDP growth averaged less than 1.0 percent in the three-year period. Average consumer price inflation slowed down to 2.7 percent in 2002/03 from 5.9 percent in 1999/2000. The overall fiscal deficit before grants was substantially larger than initially projected and net domestic financing expanded to 5.0 percent in 2002/03 from 0.3 percent of GDP in 2000/01, partly on account of a drop in revenue. Domestic debt increased to 25.0 percent of GDP at end-June 2003 from 19.6 percent of GDP at end-June 2001. The external current account deficit (before grants) narrowed markedly, reflecting in part a contraction in investment; and gross international reserves declined to 2.7 months of imports in 2002/03 from 3.3 months in 2002/01. This weak economic performance was mainly the result of persistent governance failures and the slow pace of reforms.

Program Summary

The main objective of the Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) is to reduce poverty by promoting strong economic and employment growth. The program for 2003/04-2005/06 aims at creating strong opportunities for productive employment through the rebuilding of sound governance structures, addressing the country's major economic vulnerabilities, particularly the weak budgetary position, large domestic debt, and distressed financial system.; and reforming the parastatal sector, labor markets and the trade system to foster a more competitive private sector.

Under the program, the recovery in economic growth is expected to gain momentum over the medium term. Based on the sustained implementation of fiscal consolidation and restructuring, as well as the governance reforms, inflows of donor budgetary assistance are expected to resume. Real GDP growth is forecast to pick up to 3.9 percent in 2005/06 from 1.2 percent in 2002/03. Government investment is also expected to pick up to 7.6 percent of GDP in 2005/06 from 3.6 percent in 2002/03.

The macroeconomic framework for 2003/04 is based on a modest real GDP of 1.9 percent , reflecting in part the negative effects of the terrorism-related travel ban, which is expected to lower GDP by slightly over 1 percent in 2003; a significant dissipation of price pressure; and a modest buildup in international reserves to about 2.8 months in import cover.

The authorities' fiscal program aims at restoring debt sustainability, while providing increased resources for priority poverty reduction spending and the realization of the medium-term development objectives. The restructuring of the total debt and expected inflows of grants and concessional external finance would facilitate the achievement of both the overall development and debt sustainability objectives. A reorientation of public expenditure as well as improvements in public expenditure management is required to put the economy on a sustainable, rapid, and poverty-reducing growth path.

Comprehensive tax reforms are under way to improve the neutrality, simplicity, and revenue-yielding capacity of the system. They focus on a combination of actions to improve tax administration and to broaden the tax base.

The Economic Recovery Strategy for Wealth and Employment Creation (ERSWEC) outlines the authorities medium-term development policies. It is expected that the ERSWEC will be expanded into a full PRSP. This strategy aims at tackling poverty by expanding the opportunities available to the poor for productive employment and at improving the quality of life of the poor. As most of the poor live in rural areas, the focus will be on reforming the agricultural sector and encouraging the growth of medium and small-scale enterprises.

The government has placed its anticorruption strategy at the top of its reform agenda and has embarked on a major strengthening of Kenya's governance and anticorruption institutions. This agenda includes an enforcement of the Anti-Corruption and Economic Crimes as well as the Public Officers Ethics Legislations enacted in May 2003; the institution of mechanisms for implementing those legislations, the establishment of an anti-corruption commission which will be responsible for investigating alleged corruption cases.

Kenya joined the IMF on February 3, 1964. Its quota is SDR 271.40 million (about US$391.97 million). Its outstanding use of IMF resources totals SDR 57.60 million (about US$83.19 million).