Press Release No. 06/113

Press Release No. 06/113

The following statement was made in Nairobi by Mr. Thomas Krueger, International Monetary Fund Mission Chief to Kenya:

"An IMF mission team visited Nairobi during May 8-22 to continue the discussions for the second review of the program supported under the Poverty Reduction and Growth Facility (PRGF).¹ The mission held discussions with the Minister of Finance, Minister of Justice and Constitutional Affairs, the Acting Governor of the Central Bank of Kenya, the head of Public Service and Secretary of Cabinet, as well as other senior officials from the Ministry of Finance, Central Bank of Kenya and other government ministries and agencies. The team also met with representatives of civil society, trade unions, and the business and donor community.

"Economic growth has strengthened considerably in recent years, and real GDP growth is expected to exceed 5½ percent in 2005/06, the highest growth rate in well over a decade. The mission expressed, however, deep concern about the drought, which has affected some 3.5 million people—but noted also that favorable rains were likely to alleviate the drought effects in coming months. Important progress has been made on structural reforms, including with the divestment of part of the state's holdings in Kenya Electricity Generating Company, the awarding of a concession for Kenya Railways to a private operator, and the implementation of the East African Community common external tariff.

"The mission made good progress in discussions on a macroeconomic framework for 2006/07. Growth is expected to remain robust and inflation is likely to decline markedly as earlier drought-related increases in food prices are reversed. Broad understandings were reached on fiscal policy targets for the coming year as well as on key structural reforms, including in the areas of public expenditure management, and financial sector and public enterprise reform.

"In contrast, discussions on governance issues did not advance as much as the mission had hoped. While welcoming the substantial progress that had been made in recent years, it noted that significant weaknesses still remained, including those highlighted in recent corruption revelations, and their resolution was critical if Kenya is to make rapid progress towards the achievement of the MDGs. Against this background, preliminary discussions were held on a proactive reform program for 2006/07, especially on steps to strengthen prosecutorial capacity. Agreement on a comprehensive governance agenda and commencement of its implementation are key steps for the completion of the second review under the PRGF arrangement."

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¹ 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 the country's Poverty Reduction Strategy Paper. 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 5½ -year grace period on principal payments.