Statement at the Conclusion of an IMF Staff Mission to Kenya

Press Release No. 08/159
July 2, 2008

An International Monetary Fund (IMF) staff mission, headed by Mr. Thomas Krueger, visited Kenya during June 23-July 2, 2008, to conduct discussions for the 2008 Article IV consultation. The mission met with Prime Minister Raila Odinga, Finance Minister Amos Kimunya, Central Bank Governor Njuguna Ndung'u, and other senior government officials, as well as with representatives of the business community, labor unions, civil society and Kenya's development partners.

The mission issued the following statement in Nairobi today:

"Economic growth in 2007 reached 7 percent, the highest growth in over two decades. This owed much to sound macroeconomic policies and progress on structural reforms—and Kenya also benefited from a favorable external environment. The strong momentum was interrupted, however, by the post-election turbulence in early 2008. This left a severe human toll and its economic effects were evident not only in Kenya, where tourism, agriculture, and transport were particularly affected, but also in the region as transport links were interrupted.

"With the formation of the grand coalition government, the economy is regaining its footing. While a full recovery in some sectors is likely to take time, including in tourism, the economy as a whole is already rebounding. Overall, we expect GDP to grow by some 4 percent in 2008—a respectable result given the events of the first quarter.

"The fiscal deficit in 2007/08 (July/June) is likely to have remained within the original budget target. With buoyant domestic revenues, this allowed some additional expenditures to meet new spending needs emerging in the wake of the political turbulence. Looking ahead, it will be important that fiscal continues to safeguard macroeconomic stability. Accordingly, the mission discussed the case for keeping the 2008/09 deficit (in relation to GDP) below the level in the previous year, thereby stabilizing public debt in relation to GDP. With a solid domestic revenue base, this should be achievable even while addressing recovery-related spending needs and accommodating higher outlays for much needed infrastructure projects.

"Rising world prices for food, fuel, and fertilizer pose new challenges for policymakers, not just in Kenya but also in most other countries. The government has already announced several steps aimed at alleviating the near-term impact. We also discussed the possibility of designing measures more specifically targeted at the poorest segments of the population and, in the case of farmers, at improving access to credit. It is important that these measures do not undermine macroeconomic stability or distort prices in a way that would hamper a longer-run supply response—an area where many see significant potential for Kenya.

"We support the Central Bank of Kenya's (CBK's) recent actions to tighten monetary policy. Indeed, the CBK needs to be prepared to take further steps if this proves necessary to forestall second-round effects of rising food and energy prices on overall inflation. Inflation has clearly increased, even though the official consumer prices index (CPI) imparts a substantial upward bias. The mission looks forward to expeditiously implementing steps that would bring the CPI-compilation in line with international best practice.

"The government's Vision 2030 sets out rightly ambitious longer-run objectives, with Kenya aiming to reach middle-income status. Achieving these objectives will require further structural reforms but also public spending to address crucial supply bottlenecks. The mission was encouraged by the widespread recognition that this needs to take place within a framework that has the private sector as the engine of growth and preserves macroeconomic stability. Strong growth will also require a highly competitive tradable sector. The mission agrees that improving competitiveness depends foremost on addressing supply bottlenecks and structural reforms—with progress all the more urgent in light of the strong exchange rate. On structural reforms, much has already been achieved in recent years, including with improvements in public procurement and the streamlining of business licensing requirements. Some of these steps formed part of the Governance Action Plan for 2006/07, and we look forward to its update. We also note the intense public debate concerning the sale of a property in the course of recovering a debt owed to the Central Bank of Kenya; the swift initiation of steps aimed at providing a full public account and taking follow up actions, as needed, is welcome."



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