## 1. The Investment Program for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS)

## Source details

**Canonical URL:** [1. The Investment Program for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0510.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0510.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0510.pdf.json)

---

### Overview and purpose
- The IP-ERS is Kenya’s poverty reduction strategy paper and provides the framework for implementing the government’s Economic Recovery Strategy for Wealth and Employment Creation, issued in June 2003.
- It describes the participatory process, provides an overview of poverty in Kenya, and presents the government’s strategic vision, objectives, and priority actions for stimulating economic growth, reducing poverty, and promoting human development in line with the Millennium Development Goals (MDGs).
- Primary strengths:
  - Strong emphasis on improving governance and restoring the rule of law.
  - Broad participatory preparation process.
  - Focus on results via a comprehensive monitoring and evaluation framework with targets that refer to the MDGs and a time frame for achievement.
- Main shortcomings to be addressed during implementation and in the first Annual Progress Report:
  - Poverty analysis needs strengthening by expanding the information base through surveys and deeper analysis of determinants of poverty.
  - Better prioritization of policy actions to accelerate growth and reduce poverty and more precise identification of core pro-poor spending programs.
  - A sector strategy for health remains to be formulated, and a strategy for education completed to map programs for accelerating MDG achievement.
  - The process for prioritization of public actions should be better articulated and linked to the budget and medium-term expenditure framework.
  - Capacity-building actions and envisaged donor support need to be clearly spelled out.
  - Systems for monitoring poverty outcomes are weak and need strengthening.
  - Future consultation outcomes and poverty diagnoses should be better described, linked to, and reflected in targets, policy priorities, and budget allocations.

### Participatory process
- The IP-ERS is the result of a broad-based participatory process that included consultation with parliament, civil society, nongovernmental organizations (NGOs), private sector representatives, development partners, and other stakeholders.
- Key process milestones and facts:
  - The previous government initiated the draft PRSP process and a national steering committee including stakeholders guided the process.
  - In 2002, consultations were undertaken in 70 districts to establish local priorities; participatory poverty assessments were carried out in ten districts.
  - A draft PRSP prepared in 2002 reflected consultation outcomes but was not formally submitted before December 2002 elections.
  - The National Rainbow Coalition administration presented a first draft strategy at a large workshop in February 2003.
  - The government presented its ERS in June 2003 and prepared an Interim Investment Program presented in November 2003 to the National Investment Conference involving over 2,000 participants.
  - The IP-ERS formed the basis of discussion at the Consultative Group meeting in November 2003 and was submitted to the Bank and Fund for joint staff assessment.
- Observations and recommendations:
  - The IP-ERS does not describe how stakeholder concerns influenced the formulation of the IP-ERS and the economic reform agenda; it could include summaries of the participatory process, differences of views, major issues raised, and how feedback influenced policy priorities and budgetary allocations.
  - A participatory approach will continue to guide implementation; ensuring the National Economic and Social Council becomes fully functional soon is important.

### Poverty diagnosis
- Current evidence base and limitations:
  - Income-poverty evidence is based on the 1997 welfare-monitoring survey; household survey series from the 1990s are not comparable.
  - As a result, information on income poverty trends over the past decade is not available.
  - The Kenya integrated household budget survey is being designed to rectify data gaps, including household income omission in the 1997 survey.
- Analytical gaps and needs:
  - The diagnosis does not establish clear links between policies, slow economic growth, and persistent poverty; more analysis is needed on fundamental determinants of poverty and links with economic activity.
  - Structural reforms mentioned could benefit from ex ante poverty and social impact analysis.
- Nonincome dimensions:
  - The IP-ERS candidly highlights deterioration in mortality, morbidity, and nutrition rates; more attention is needed to understand factors behind these adverse trends to focus key actions.
- Data and future plans:
  - The 2004/05 integrated household budget survey will provide critical data for estimating incidence, depth, distribution, and trends of poverty and will support a comprehensive poverty assessment in 2005/06.
  - Quick-monitoring survey instruments, such as the Core Welfare Indicators Questionnaire every two to three years, are intended to provide rapid feedback.
  - Participatory poverty assessments will combine quantitative and qualitative data.
  - The Poverty Analysis and Data Initiative aims to establish links between data producers, researchers, and policymakers.
  - Poverty maps produced in 2003 improved understanding of geographical variations but are incomplete because North Eastern province was not covered; data from the planned Kenya integrated household budget survey will be used to produce a complete poverty map.

### Poverty reduction strategy
- Structure and rationale:
  - The results-based IP-ERS rests on three pillars: (a) economic growth, (b) equity and poverty reduction, and (c) governance.
  - Pillar details:
    - (a) Economic growth: supported in part by reforms of financial services and an expansion of investments in infrastructure.
    - (b) Equity and poverty reduction: aided by actions to improve the access of the poor to basic services (education, health, and HIV/AIDS) and the revival of agricultural growth.
    - (c) Governance: including strengthening public safety, law, and order.
  - The strategy is broadly consistent with the government’s objective to reduce poverty; special focus on the concerns of the poor in the arid lands is highlighted.
- Recommendations:
  - Identify a limited number of additional priority actions that would have the greatest impact on growth and service delivery to the poor and begin to carefully monitor their impact on poverty trends.
  - Closely monitor the quality of service delivery to poor groups.

### Targets, indicators, and monitoring
- Current status:
  - The IP-ERS defines medium- and long-term goals for poverty reduction linked to the MDGs, establishes indicators of progress, and sets targets for many goals in a detailed matrix.
  - Many targets are medium-term only; some goals have no targets.
- Recommendations:
  - Specify annual targets, disaggregated where possible by gender, to facilitate monitoring and annual IP-ERS progress reports.
  - Specify a short list of key indicators to be monitored in consultation with stakeholders for incorporation into the annual progress report.
  - Develop and institutionalize mechanisms for participatory monitoring and evaluation, focusing on service delivery to the poor.
  - Implement the Statistics Strategic Master Plan to coordinate donor support for data and monitoring.
  - Multidonor Statistical Capacity Building Credit (StatCap), planned for Bank Board approval in 2004, should help establish monitoring systems for regular production and dissemination of data.
  - Develop concrete plans and timetables for reporting key data; development partners would welcome continued quarterly progress reports on budget execution in addition to annual IP-ERS progress reports.
  - Harmonize reporting with the timetable for the budget, medium-term expenditure framework (MTEF), and PRGF reviews to ensure use of government systems and timely partner responses.
- Institutional arrangements:
  - The monitoring and evaluation unit (the secretariat of the National Economic and Social Council) has been established within the Ministry of Planning.
  - Appointment of the members of the National Economic and Social Council is an important next step; the council is expected to oversee IP-ERS implementation and advise on policy and budget management refinements.
  - The government intends to develop a public information access policy specifying types of information to be released and mechanisms for dissemination.

### Macroeconomic framework
- Core objectives and assessment:
  - The IP-ERS emphasizes stimulating economic growth through higher public and private investment while maintaining macroeconomic stability.
  - Core fiscal strategy objectives welcomed by Fund and Bank staffs:
    - Increase pro-poor expenditure—supported by increased donors concessional assistance and grant flows and expenditure restructuring.
    - Contain debt stock within a sustainable and prudent level.
- Gaps and recommendations:
  - The IP-ERS would benefit from a more detailed explanation of factors likely to support a sharp expansion in private and public savings and investment and identification of beneficiary sectors.
  - The high case scenario is predicated on a better response to policy reforms alone; staffs suggest specifying the high case as a faster pace of policy and institutional reforms supported by even larger inflows of concessional assistance with significant grant content.
  - Prepare a detailed medium-term fiscal strategy in the first year of implementation to underpin the MTEF; the fiscal strategy should be consistent with the macroeconomic framework and clearly articulate:
    - Broad fiscal objectives, instruments, and assumptions.
    - Policy toward contingent liabilities (including the National Social Security Fund, the proposed social health insurance scheme, parastatal debt, and unfunded government pension obligations).
    - How shortfalls in revenues or financing would be addressed.
    - The short-term revenue losses associated with trade liberalization.
    - Projected spending on main MTEF categories, disaggregated into recurrent and capital expenditures.
  - Development partners are ready to provide technical support through the public expenditure review (PER) process to further articulate the fiscal strategy.
  - Emphasize improved management of Kenya’s external debt to meet projected high external financing requirements without increasing external vulnerability or jeopardizing debt sustainability; developments in external debt management should be covered in the first annual progress report.

---

### 21. The IP-ERS could have been strengthened by a fuller discussion of the

### Public sector wage policy and civil service reform
- Finding: The IP-ERS lacked a fuller discussion of accompanying public sector wage policies and the civil service reform agenda amid prevailing wage pressures.
- Recommendations:
  - Complete the principal elements of a public sector wage policy and associated civil service reform agenda by the time of the presentation of the budget for financial year 2004/05.
  - Include a more detailed reform agenda in the first annual progress report with specific plans for rationalizing public services.
  - Clearly spell out the main parameters of pension reform.

### Financing requirements and framework
- Finding: The annual progress report did not present a sufficiently clear and complete picture of financing requirements and sources.
- Recommendations:
  - Improve the financing framework by providing detailed coverage of projected annual financing for both the investment program and other government expenditures, broken down by financing source (for example, domestic revenue, expenditure restructuring, domestic borrowing, and external aid).
  - Note that reconciling increased investment with the goal of declining debt ratios may require substantial external support in the form of grants.

### Public Expenditure Management Reform (PER and MTEF)
- Findings:
  - Government committed to opening up PERs to other stakeholders and institutionalizing PERs as regular annual exercises.
  - Historically, PER and MTEF processes have not been effectively used to shift budgetary allocations to priority areas.
  - Progress made in estimating costs of priority programs, most notably in primary education.
- Recommendations:
  - Ensure PER and MTEF results inform budget preparation and preparation of a budget that reflects IP-ERS priorities.
  - Clarify the definition of “core poverty programs” to link expenditure increases to poverty and social welfare targets.
  - Complete the MTEF review so findings can be implemented during next year’s budget cycle and adhere more strictly to the budget preparation calendar to allow more time for ministerial PERs.
  - Strengthen capacity to cost other important IP-ERS programs.
  - Rapidly implement the enhanced financial management action plan developed in consultation with donors.
  - Enact the two bills (public financial management and procurement) not yet passed by parliament and report on adherence to improved public expenditure management in the first annual ERS progress report.

### Financial sector, private sector participation, and trade
- Findings:
  - Need for financial sector reforms to mobilize funds for investment, improve fiscal management, and strengthen governance.
  - Major impediments include outdated infrastructure, deficiencies in the legal framework, and an inefficient judiciary.
  - Government committed to increase private sector participation; recent pickup in private sector investment noted.
- Recommendations:
  - Annual progress report should describe actions to reduce lending spreads and improve access to finance while maintaining market-determined interest rates.
  - Develop, by the end of 2004, an efficient and effective strategy to provide financial services to currently underserved groups, including small and medium size enterprises; recapitalization of development finance institutions should await such a strategy.
  - Annual progress report could outline modes of divestiture (outright sale, concessions, and leasing arrangements) and indicate approaches selected for individual public enterprises to be privatized.
  - Provide more information on costs to the Kenyan taxpayer from parastatal inefficiencies and identify areas where poverty and social impact analysis would inform policy trade-offs.
  - Give more prominence to how a more open trade system could contribute to growth and poverty reduction, based on completion of the government’s trade policy strategy paper; address standards, trade facilitation, and sectoral adjustment.

### Agriculture, employment, education, health, HIV/AIDS, environment, and gender
- Agriculture:
  - Finding: Agriculture recognized as key to growth and poverty reduction; move toward demand-driven research and extension welcomed.
  - Note: 80 percent of maize farmers are net buyers of maize.
  - Recommendation: First annual progress report should describe progress in regulatory and institutional reform, reduction of state enterprise roles in marketing and production, liberalization, disposal of the central Kenya meat commission plant near Nairobi, and support for small scale decentralized private sector abattoirs in the ASAL areas.
- Employment and labor market:
  - Finding: Employment creation a key post-election concern; annex includes objectives but main text lacks detailed labor market policy discussion.
  - Recommendations: Address labor market regulatory reform, job creation strategies and mechanisms, measures to remove labor market rigidities, reforms of minimum wages, and regulatory/financing arrangements to expand small and medium-sized enterprises.
  - Note: Inclusion in the Statistical Master Plan of the labor force survey and other specialized surveys welcomed.
- Education:
  - Findings:
    - Government implemented free primary education in January 2003, resulting in an increase in enrolment of 1.5 million students.
    - Kenya is likely to meet the MDG for education, provided suitable programs for pastoralists and measures to overcome cultural barriers for girls are developed.
    - Kenya already spends a very high proportion of its budget and GDP on education.
  - Recommendations:
    - Include discussion of financing tertiary education in the annual progress report.
    - Implement reforms to improve efficiency of spending and cost recovery in tertiary sector to ensure pro-poor government spending on education.
    - Target building and rehabilitation of primary schools to poorer communities.
- Health:
  - Finding: Government decided to prepare a comprehensive health strategy; decision on national social insurance should await completion of the health strategy paper (scheduled to be completed by the end of 2004).
  - Recommendation:
    - Strengthen the analytical base for the health strategy to evaluate cost effectiveness and targeting of a compulsory national health insurance scheme.
    - Increase funding significantly for clinics serving the poor in urban slums and rural areas in the near term.
    - First annual progress report should discuss main recommendations of the health strategy paper and implementation plans.
- HIV/AIDS:
  - Findings:
    - Multisectoral approach showing results.
    - HIV/AIDS prevalence rate among women attending prenatal clinics declined from a peak of 10.2 percent in 2002 (corrected estimate) to 9.4 percent in 2003.
  - Recommendations:
    - Continue focusing on prevention, especially among vulnerable groups.
    - Strengthen capacity to handle large numbers of patients and ensure equal access to antiretroviral drugs by the poor.
    - First annual progress report should discuss progress in developing measures to increase capacity to use resources effectively for responding to HIV/AIDS.
- Environment:
  - Finding: Treatment of environmental issues needs strengthening; improved environmental management is critical for growth and quality of life.
  - Recommendation: Annual progress report should discuss plans to improve management of water resources, forests, wildlife, soils, and pollution control, drawing on donor-supported studies.
- Gender:
  - Findings:
    - IP-ERS recognizes unequal access for women but says little about implications for growth.
    - Women provide about 70 percent of the labor requirements in agriculture.
  - Recommendation: Next ERS progress report should identify and report on implementation of measures needed to support women to realize their potential and contribute to economic development, building on the World Bank study on gender.

### Governance, anti-corruption, and judicial access
- Findings:
  - Government committed to eliminating corruption, restoring rule of law, and equitable development.
  - Forensic auditors have reviewed financial transactions in some government programs and parastatals.
- Recommendations:
  - Implement forensic auditors’ recommendations to prevent future abuses.
  - Annual progress report should explain how access by the poor to the judicial system will be enhanced, for example through alternative dispute resolution mechanisms.

### Risks to the strategy
- Major risks identified:
  - Weak capacity for implementation and coordination within government; IP-ERS weaknesses partly reflect capacity constraints.
    - Measures: Establish IP-ERS steering committee of all permanent secretaries and the Kenya Government-Donor Coordination Group; deepen donor support for capacity building.
  - Delay in building political consensus behind difficult reforms (e.g., privatization, civil service reform), potentially delaying poverty-reducing reforms; requires technical understanding, communications strategy, and measures for potential losers.
  - Vulnerability to external shocks, including terms of trade shifts (particularly in coffee and tea), security-related events, severe weather, and shortfalls in donor inflows.
    - Recommendation: Further diversify the economy and implement policies and targeted measures to manage and mitigate risks; World Bank, Fund, and partners ready to assist.

### Views of other development partners
- Findings:
  - Development partners broadly endorse the government’s strategy but echo concerns on weaknesses in presentation of fiscal, financial, and parastatal reforms and call for deeper analysis of poverty and inequality dynamics.
  - Partners recommend explicitly addressing inequality and identifying measures to reduce it.
- Recommendations:
  - Demonstrate commitment to pro-poor spending in the forthcoming budget and set specific, time-bound targets for public financial management improvements.
  - Translate IP-ERS priorities into the MTEF and the budget.
  - Develop strategies for health and education to hasten progress toward the MDGs.
  - Develop a concrete program to attract private sector investment.
  - Specify a set of core indicators (linked to the MDGs where appropriate) and annual targets for monitoring and evaluation to facilitate annual ERS review and possible move to budget support by interested donors.

### Recommendation (World Bank and IMF staffs)
- Conclusion: The staffs of the World Bank and the IMF consider that the IP-ERS document provides a sound basis for World Bank and Fund concessional assistance.
- Recommendation: The staffs recommend that the respective Executive Directors of the World Bank and the IMF reach the same conclusion.

*Source: IP-ERS submission and joint staff assessment materials as summarized in the provided content.*

### 1. The Investment Program for the Economic Recovery Strategy for Wealth

### 1. The Investment Program for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS)

### Overview and purpose
- The IP-ERS is Kenya’s poverty reduction strategy paper and provides the framework for implementing the government’s Economic Recovery Strategy for Wealth and Employment Creation, issued in June 2003.
- It describes the participatory process, provides an overview of poverty in Kenya, and presents the government’s strategic vision, objectives, and priority actions for stimulating economic growth, reducing poverty, and promoting human development in line with the Millennium Development Goals (MDGs).
- Primary strengths:
  - Strong emphasis on improving governance and restoring the rule of law.
  - Broad participatory preparation process.
  - Focus on results via a comprehensive monitoring and evaluation framework with targets that refer to the MDGs and a time frame for achievement.
- Main shortcomings to be addressed during implementation and in the first Annual Progress Report:
  - Poverty analysis needs strengthening by expanding the information base through surveys and deeper analysis of determinants of poverty.
  - Better prioritization of policy actions to accelerate growth and reduce poverty and more precise identification of core pro-poor spending programs.
  - A sector strategy for health remains to be formulated, and a strategy for education completed to map programs for accelerating MDG achievement.
  - The process for prioritization of public actions should be better articulated and linked to the budget and medium-term expenditure framework.
  - Capacity-building actions and envisaged donor support need to be clearly spelled out.
  - Systems for monitoring poverty outcomes are weak and need strengthening.
  - Future consultation outcomes and poverty diagnoses should be better described, linked to, and reflected in targets, policy priorities, and budget allocations.

### Participatory process
- The IP-ERS is the result of a broad-based participatory process that included consultation with parliament, civil society, nongovernmental organizations (NGOs), private sector representatives, development partners, and other stakeholders.
- Key process milestones and facts:
  - The previous government initiated the draft PRSP process and a national steering committee including stakeholders guided the process.
  - In 2002, consultations were undertaken in 70 districts to establish local priorities; participatory poverty assessments were carried out in ten districts.
  - A draft PRSP prepared in 2002 reflected consultation outcomes but was not formally submitted before December 2002 elections.
  - The National Rainbow Coalition administration presented a first draft strategy at a large workshop in February 2003.
  - The government presented its ERS in June 2003 and prepared an Interim Investment Program presented in November 2003 to the National Investment Conference involving over 2,000 participants.
  - The IP-ERS formed the basis of discussion at the Consultative Group meeting in November 2003 and was submitted to the Bank and Fund for joint staff assessment.
- Observations and recommendations:
  - The IP-ERS does not describe how stakeholder concerns influenced the formulation of the IP-ERS and the economic reform agenda; it could include summaries of the participatory process, differences of views, major issues raised, and how feedback influenced policy priorities and budgetary allocations.
  - A participatory approach will continue to guide implementation; ensuring the National Economic and Social Council becomes fully functional soon is important.

### Poverty diagnosis
- Current evidence base and limitations:
  - Income-poverty evidence is based on the 1997 welfare-monitoring survey; household survey series from the 1990s are not comparable.
  - As a result, information on income poverty trends over the past decade is not available.
  - The Kenya integrated household budget survey is being designed to rectify data gaps, including household income omission in the 1997 survey.
- Analytical gaps and needs:
  - The diagnosis does not establish clear links between policies, slow economic growth, and persistent poverty; more analysis is needed on fundamental determinants of poverty and links with economic activity.
  - Structural reforms mentioned could benefit from ex ante poverty and social impact analysis.
- Nonincome dimensions:
  - The IP-ERS candidly highlights deterioration in mortality, morbidity, and nutrition rates; more attention is needed to understand factors behind these adverse trends to focus key actions.
- Data and future plans:
  - The 2004/05 integrated household budget survey will provide critical data for estimating incidence, depth, distribution, and trends of poverty and will support a comprehensive poverty assessment in 2005/06.
  - Quick-monitoring survey instruments, such as the Core Welfare Indicators Questionnaire every two to three years, are intended to provide rapid feedback.
  - Participatory poverty assessments will combine quantitative and qualitative data.
  - The Poverty Analysis and Data Initiative aims to establish links between data producers, researchers, and policymakers.
  - Poverty maps produced in 2003 improved understanding of geographical variations but are incomplete because North Eastern province was not covered; data from the planned Kenya integrated household budget survey will be used to produce a complete poverty map.

### Poverty reduction strategy
- Structure and rationale:
  - The results-based IP-ERS rests on three pillars: (a) economic growth, (b) equity and poverty reduction, and (c) governance.
  - Pillar details:
    - (a) Economic growth: supported in part by reforms of financial services and an expansion of investments in infrastructure.
    - (b) Equity and poverty reduction: aided by actions to improve the access of the poor to basic services (education, health, and HIV/AIDS) and the revival of agricultural growth.
    - (c) Governance: including strengthening public safety, law, and order.
  - The strategy is broadly consistent with the government’s objective to reduce poverty; special focus on the concerns of the poor in the arid lands is highlighted.
- Recommendations:
  - Identify a limited number of additional priority actions that would have the greatest impact on growth and service delivery to the poor and begin to carefully monitor their impact on poverty trends.
  - Closely monitor the quality of service delivery to poor groups.

A. Targets, indicators, and monitoring
- Current status:
  - The IP-ERS defines medium- and long-term goals for poverty reduction linked to the MDGs, establishes indicators of progress, and sets targets for many goals in a detailed matrix.
  - Many targets are medium-term only; some goals have no targets.
- Recommendations:
  - Specify annual targets, disaggregated where possible by gender, to facilitate monitoring and annual IP-ERS progress reports.
  - Specify a short list of key indicators to be monitored in consultation with stakeholders for incorporation into the annual progress report.
  - Develop and institutionalize mechanisms for participatory monitoring and evaluation, focusing on service delivery to the poor.
  - Implement the Statistics Strategic Master Plan to coordinate donor support for data and monitoring.
  - Multidonor Statistical Capacity Building Credit (StatCap), planned for Bank Board approval in 2004, should help establish monitoring systems for regular production and dissemination of data.
  - Develop concrete plans and timetables for reporting key data; development partners would welcome continued quarterly progress reports on budget execution in addition to annual IP-ERS progress reports.
  - Harmonize reporting with the timetable for the budget, medium-term expenditure framework (MTEF), and PRGF reviews to ensure use of government systems and timely partner responses.
- Institutional arrangements:
  - The monitoring and evaluation unit (the secretariat of the National Economic and Social Council) has been established within the Ministry of Planning.
  - Appointment of the members of the National Economic and Social Council is an important next step; the council is expected to oversee IP-ERS implementation and advise on policy and budget management refinements.
  - The government intends to develop a public information access policy specifying types of information to be released and mechanisms for dissemination.

B. Macroeconomic framework
- Core objectives and assessment:
  - The IP-ERS emphasizes stimulating economic growth through higher public and private investment while maintaining macroeconomic stability.
  - Core fiscal strategy objectives welcomed by Fund and Bank staffs:
    - Increase pro-poor expenditure—supported by increased donors concessional assistance and grant flows and expenditure restructuring.
    - Contain debt stock within a sustainable and prudent level.
- Gaps and recommendations:
  - The IP-ERS would benefit from a more detailed explanation of factors likely to support a sharp expansion in private and public savings and investment and identification of beneficiary sectors.
  - The high case scenario is predicated on a better response to policy reforms alone; staffs suggest specifying the high case as a faster pace of policy and institutional reforms supported by even larger inflows of concessional assistance with significant grant content.
  - Prepare a detailed medium-term fiscal strategy in the first year of implementation to underpin the MTEF; the fiscal strategy should be consistent with the macroeconomic framework and clearly articulate:
    - Broad fiscal objectives, instruments, and assumptions.
    - Policy toward contingent liabilities (including the National Social Security Fund, the proposed social health insurance scheme, parastatal debt, and unfunded government pension obligations).
    - How shortfalls in revenues or financing would be addressed.
    - The short-term revenue losses associated with trade liberalization.
    - Projected spending on main MTEF categories, disaggregated into recurrent and capital expenditures.
  - Development partners are ready to provide technical support through the public expenditure review (PER) process to further articulate the fiscal strategy.
  - Emphasize improved management of Kenya’s external debt to meet projected high external financing requirements without increasing external vulnerability or jeopardizing debt sustainability; developments in external debt management should be covered in the first annual progress report.

*Source: IP-ERS submission and joint staff assessment materials as summarized in the provided content.*

### 21. The IP-ERS could have been strengthened by a fuller discussion of the

### _cr0510 - 21. The IP-ERS could have been strengthened by a fuller discussion of the

### Public sector wage policy and civil service reform
- Finding: The IP-ERS lacked a fuller discussion of accompanying public sector wage policies and the civil service reform agenda amid prevailing wage pressures.
- Recommendation:
  - Complete the principal elements of a public sector wage policy and associated civil service reform agenda by the time of the presentation of the budget for financial year 2004/05.
  - Include a more detailed reform agenda in the first annual progress report with specific plans for rationalizing public services.
  - Clearly spell out the main parameters of pension reform.

### Financing requirements and framework
- Finding: The annual progress report did not present a sufficiently clear and complete picture of financing requirements and sources.
- Recommendation:
  - Improve the financing framework by providing detailed coverage of projected annual financing for both the investment program and other government expenditures, broken down by financing source (for example, domestic revenue, expenditure restructuring, domestic borrowing, and external aid).
  - Note that reconciling increased investment with the goal of declining debt ratios may require substantial external support in the form of grants.

### Public Expenditure Management Reform (PER and MTEF)
- Findings:
  - Government committed to opening up PERs to other stakeholders and institutionalizing PERs as regular annual exercises.
  - Historically, PER and MTEF processes have not been effectively used to shift budgetary allocations to priority areas.
  - Progress made in estimating costs of priority programs, most notably in primary education.
- Recommendations:
  - Ensure PER and MTEF results inform budget preparation and preparation of a budget that reflects IP-ERS priorities.
  - Clarify the definition of “core poverty programs” to link expenditure increases to poverty and social welfare targets.
  - Complete the MTEF review so findings can be implemented during next year’s budget cycle and adhere more strictly to the budget preparation calendar to allow more time for ministerial PERs.
  - Strengthen capacity to cost other important IP-ERS programs.
  - Rapidly implement the enhanced financial management action plan developed in consultation with donors.
  - Enact the two bills (public financial management and procurement) not yet passed by parliament and report on adherence to improved public expenditure management in the first annual ERS progress report.

### Financial sector, private sector participation, and trade
- Findings:
  - Need for financial sector reforms to mobilize funds for investment, improve fiscal management, and strengthen governance.
  - Major impediments include outdated infrastructure, deficiencies in the legal framework, and an inefficient judiciary.
  - Government committed to increase private sector participation; recent pickup in private sector investment noted.
- Recommendations:
  - Annual progress report should describe actions to reduce lending spreads and improve access to finance while maintaining market-determined interest rates.
  - Develop, by the end of 2004, an efficient and effective strategy to provide financial services to currently underserved groups, including small and medium size enterprises; recapitalization of development finance institutions should await such a strategy.
  - Annual progress report could outline modes of divestiture (outright sale, concessions, and leasing arrangements) and indicate approaches selected for individual public enterprises to be privatized.
  - Provide more information on costs to the Kenyan taxpayer from parastatal inefficiencies and identify areas where poverty and social impact analysis would inform policy trade-offs.
  - Give more prominence to how a more open trade system could contribute to growth and poverty reduction, based on completion of the government’s trade policy strategy paper; address standards, trade facilitation, and sectoral adjustment.

### Agriculture, employment, education, health, HIV/AIDS, environment, and gender
- Agriculture:
  - Finding: Agriculture recognized as key to growth and poverty reduction; move toward demand-driven research and extension welcomed.
  - Note: 80 percent of maize farmers are net buyers of maize.
  - Recommendation: First annual progress report should describe progress in regulatory and institutional reform, reduction of state enterprise roles in marketing and production, liberalization, disposal of the central Kenya meat commission plant near Nairobi, and support for small scale decentralized private sector abattoirs in the ASAL areas.
- Employment and labor market:
  - Finding: Employment creation a key post-election concern; annex includes objectives but main text lacks detailed labor market policy discussion.
  - Recommendations: Address labor market regulatory reform, job creation strategies and mechanisms, measures to remove labor market rigidities, reforms of minimum wages, and regulatory/financing arrangements to expand small and medium-sized enterprises.
  - Note: Inclusion in the Statistical Master Plan of the labor force survey and other specialized surveys welcomed.
- Education:
  - Findings:
    - Government implemented free primary education in January 2003, resulting in an increase in enrolment of 1.5 million students.
    - Kenya is likely to meet the MDG for education, provided suitable programs for pastoralists and measures to overcome cultural barriers for girls are developed.
    - Kenya already spends a very high proportion of its budget and GDP on education.
  - Recommendations:
    - Include discussion of financing tertiary education in the annual progress report.
    - Implement reforms to improve efficiency of spending and cost recovery in tertiary sector to ensure pro-poor government spending on education.
    - Target building and rehabilitation of primary schools to poorer communities.
- Health:
  - Finding: Government decided to prepare a comprehensive health strategy; decision on national social insurance should await completion of the health strategy paper (scheduled to be completed by the end of 2004).
  - Recommendation:
    - Strengthen the analytical base for the health strategy to evaluate cost effectiveness and targeting of a compulsory national health insurance scheme.
    - Increase funding significantly for clinics serving the poor in urban slums and rural areas in the near term.
    - First annual progress report should discuss main recommendations of the health strategy paper and implementation plans.
- HIV/AIDS:
  - Findings:
    - Multisectoral approach showing results.
    - HIV/AIDS prevalence rate among women attending prenatal clinics declined from a peak of 10.2 percent in 2002 (corrected estimate) to 9.4 percent in 2003.
  - Recommendations:
    - Continue focusing on prevention, especially among vulnerable groups.
    - Strengthen capacity to handle large numbers of patients and ensure equal access to antiretroviral drugs by the poor.
    - First annual progress report should discuss progress in developing measures to increase capacity to use resources effectively for responding to HIV/AIDS.
- Environment:
  - Finding: Treatment of environmental issues needs strengthening; improved environmental management is critical for growth and quality of life.
  - Recommendation: Annual progress report should discuss plans to improve management of water resources, forests, wildlife, soils, and pollution control, drawing on donor-supported studies.
- Gender:
  - Findings:
    - IP-ERS recognizes unequal access for women but says little about implications for growth.
    - Women provide about 70 percent of the labor requirements in agriculture.
  - Recommendation: Next ERS progress report should identify and report on implementation of measures needed to support women to realize their potential and contribute to economic development, building on the World Bank study on gender.

### Governance, anti-corruption, and judicial access
- Findings:
  - Government committed to eliminating corruption, restoring rule of law, and equitable development.
  - Forensic auditors have reviewed financial transactions in some government programs and parastatals.
- Recommendations:
  - Implement forensic auditors’ recommendations to prevent future abuses.
  - Annual progress report should explain how access by the poor to the judicial system will be enhanced, for example through alternative dispute resolution mechanisms.

### Risks to the strategy
- Major risks identified:
  - Weak capacity for implementation and coordination within government; IP-ERS weaknesses partly reflect capacity constraints.
    - Measures: Establish IP-ERS steering committee of all permanent secretaries and the Kenya Government-Donor Coordination Group; deepen donor support for capacity building.
  - Delay in building political consensus behind difficult reforms (e.g., privatization, civil service reform), potentially delaying poverty-reducing reforms; requires technical understanding, communications strategy, and measures for potential losers.
  - Vulnerability to external shocks, including terms of trade shifts (particularly in coffee and tea), security-related events, severe weather, and shortfalls in donor inflows.
    - Recommendation: Further diversify the economy and implement policies and targeted measures to manage and mitigate risks; World Bank, Fund, and partners ready to assist.

### Views of other development partners
- Findings:
  - Development partners broadly endorse the government’s strategy but echo concerns on weaknesses in presentation of fiscal, financial, and parastatal reforms and call for deeper analysis of poverty and inequality dynamics.
  - Partners recommend explicitly addressing inequality and identifying measures to reduce it.
- Recommendations:
  - Demonstrate commitment to pro-poor spending in the forthcoming budget and set specific, time-bound targets for public financial management improvements.
  - Translate IP-ERS priorities into the MTEF and the budget.
  - Develop strategies for health and education to hasten progress toward the MDGs.
  - Develop a concrete program to attract private sector investment.
  - Specify a set of core indicators (linked to the MDGs where appropriate) and annual targets for monitoring and evaluation to facilitate annual ERS review and possible move to budget support by interested donors.

### Recommendation (World Bank and IMF staffs)
- Conclusion: The staffs of the World Bank and the IMF consider that the IP-ERS document provides a sound basis for World Bank and Fund concessional assistance.
- Recommendation: The staffs recommend that the respective Executive Directors of the World Bank and the IMF reach the same conclusion.

*Source: _cr0510 - 21. The IP-ERS could have been strengthened by a fuller discussion of the (IMF/World Bank staffs’ assessment).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr0510.pdf_