Press Release: IMF Executive Board Completes Second Review Under the PRGF Arrangement for Kenya and Approves US$ 56.8 Million Disbursement
April 11, 2007Press Release No. 07/66
The Executive Board of the International Monetary Fund (IMF) today completed the second review of Kenya's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review enables the release of an amount equivalent to SDR 37.5 million (about US$56.8 million), bringing total disbursements under the arrangement to SDR 112.5 million (about US$170.4 million).
In completing the review, the Board approved waivers for the nonobservance of five performance criteria. These included two quantitative performance criteria, one on reserve money and one on the accumulation of new external payments arrears; and three structural performance criteria, one against the imposition of controls on banks' fees and charges, one on the issuance of new guidelines for wage arbitration by the Industrial Court, and one on completion of the asset declaration of ministers, permanent secretaries, and heads of state bodies.
The Executive Board also approved the authorities' request for an extension of the arrangement to November 20, 2007. Consistent with the improvement in Kenya's external position, the Executive Board also approved the authorities' request for a reduction in access by SDR 75 million, and rephasing of remaining disbursements under the arrangement, bringing the total amount available under the arrangement to SDR 150 million.
The Executive Board approved the three-year arrangement on November 21, 2003 (see Press Release No. 03/201), in an amount equivalent to SDR 175 million. On December 20, 2004, the Executive Board approved an augmentation of access under the PRGF arrangement by SDR 50 million (see Press Release No. 04/270). The arrangement was subsequently extended to April 30, 2007 to allow time to complete the second review (see Press Release No. 07/37).
Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Chair, said:
"Kenya's macroeconomic performance has improved markedly since 2004. The authorities are to be commended for their prudent macroeconomic policies and structural reforms, which have helped contain domestic debt, increase international reserves, and strengthen the financial sector.
"Going forward, sustaining strong growth and macroeconomic stability will require continued fiscal discipline to further reduce domestic debt, while increasing priority spending on infrastructure and poverty reduction. To this end, untapped external concessional resources should be explored, revenue efforts enhanced, and public expenditure management strengthened. Priority reforms include operationalizing the Integrated Financial Management Information System in key ministries and making the Public Procurement Oversight Authority fully functional. An appropriate legal and institutional framework for Public Private-Partnerships should be put in place to minimize related fiscal risks.
"Financial sector reforms need to be accelerated to safeguard macroeconomic and financial stability. Recent efforts to allow greater interest rate flexibility and the enactment of the Banking Amendment Bill are welcome steps, but further reforms are needed, including divesting shareholdings in state-influenced financial institutions, expediting the passage of the Anti-Money Laundering Bill, amending the Banking Act to align Kenya's legal and regulatory framework with best international practices, and developing a financial sector reform strategy.
"The managed float exchange rate regime in conjunction with reserve money targeting has served Kenya well. However, maintaining competitiveness would require faster structural reforms and infrastructure improvements. Reserve money targets would need to be tightened in the months ahead to safeguard macroeconomic stability.
"While recent governance reforms have strengthened institutions and increased transparency, including in the procurement process, the legislative agenda on governance is unfinished and more progress has to be made in the investigation and prosecution of prominent corruption cases. Forceful implementation of the Governance Action Plan for Building a Prosperous Kenya will be crucial to improve governance and root out corruption.
"The Executive Board noted the Kenyan authorities' failure to ensure the accuracy of information provided to the Board on nonconcessional borrowing and external payments arrears, which resulted in a noncomplying disbursement following the conclusion of the first review under the PRGF arrangement in December 2004. The Board took note of the authorities' explanation for the provision of inaccurate information. In view of the prompt corrective actions taken to improve debt management practices, and the authorities' commitment to the objectives of the program, the Executive Board decided to waive the two incidents of nonobservance of the continuous performance criteria that gave rise to the noncomplying disbursement," Mr. Portugal said.