## _cr0918 ## Source details **Canonical URL:** [_cr0918](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0918.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0918.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0918.pdf.json) --- ### Executive summary — macroeconomic achievements - Real GDP growth: 6.3 percent in 2006/07 (fourth consecutive year above 4 percent). - Nation-wide poverty: declined from 52 percent in 1997 to 46 percent in 2006 (household survey). - Nonfood inflation: remained stable and below 6 percent despite overall inflation above official target of 5 percent. - Domestic debt: 18.5 percent of GDP. - External current account: widened slightly due to strong domestic investment; overall balance of payments remained in surplus. - Import coverage of international reserves: 3.1 months. - Exchange rates and competitiveness: - Nominal effective exchange rate appreciated by 18 percent since end-2004. - Real effective exchange rate (based on Kenya’s nonfood CPI) appreciated by 24 percent over the past three years. - Monetary management: reserve money growth persistently exceeded program targets; CBK raised the Central Bank Rate by 25 basis points to 8.75 percent in August. ### Governance and structural reforms — progress and gaps - Major legislative/governance actions: - Parliament approved the Miscellaneous Amendments Bill implementing parts of the Governance Action Plan for Building a Prosperous Kenya (GAP), including measures to strengthen prosecutorial capacity and increase the number of judges (LOI, ¶18). Public access to wealth declarations remains restricted. - External audit reports on security-related (Anglo-Leasing) contracts completed and referred to the Kenya Anti-Corruption Commission (KACC); investigations ongoing but no new prosecutions in the past year. - Proceeds of Crime and Anti-Money Laundering (AML) Bill resubmitted to parliament in May (PC); Media Bill 2007 enacted; Political Parties Bill 2007 approved and assented in October; Witness Protection Act 2006 being implemented. - Kenya Revenue Authority (KRA) improved governance and dropped off Transparency International’s bribery index. - PFM and financial sector reforms: - IFMIS operational in four ministries and being phased in across another 20 ministries (structural PC). - Public Procurement Oversight Authority (PPOA) initially not fully operational by end-April (structural PC); corrective action taken—interim Director General and Advisory Board appointed; PPOA operational. - Submission to cabinet of strategy to initiate sale of government and NSSF shares in National Bank of Kenya (NBK) delayed; memorandum submitted in early November to initiate privatization process. - Delays in completing review of the Banking Act and developing a financial sector reform strategy; now priority issues. - Business environment and public service efficiency: - In 2007/08 budget context, 205 business licenses (out of 1,325) to be eliminated and another 371 to be simplified. - Kenya ranked among top 10 reformers in the World Bank’s Doing Business Report 2008. - Kenya won the United Nations’ Public Service Award for introducing performance contracts throughout the public service. ### Missed performance criteria, corrective actions, and staff recommendation - Missed quantitative PCs and benchmarks: - End-June reserve money ceiling missed; end-September reserve money ceiling missed. - End-September net foreign assets floor missed. - Non-accumulation of external payment arrears breached (arrears later cleared). - Missed structural PCs and benchmarks (selected): - Make PPOA fully operational (corrective: PPOA operational with interim Advisory Board and Director General). - Submit to cabinet strategy to privatize NBK (corrective: memorandum submitted in early November). - Complete study of contingent liabilities of 24 parastatals’ accounts (inception report completed in September). - Present to parliament the Controller and Auditor General’s 2005/06 report (presented in September). - Submit to parliament an amendment to the Banking Act (comprehensive revision at an advanced stage). - Complete diagnostic audit of the NSSF (inception report completed in September). - Establish the Privatization Commission (expected by December). - Corrective monetary actions: - Greater interest rate flexibility and improved open market operations to address reserve money overruns (¶6 & 36). - Priority given to meeting reserve money target and addressing net foreign assets shortfall (¶36). - Staff recommendation: - Waivers are recommended for the four missed performance criteria for the third review in view of authorities’ macroeconomic achievements and corrective steps taken. ### 2007/08 policy framework — fiscal stance and public finances - Program alignment: 2007/08 economic program aligned with Vision 2030; authorities’ medium-term framework assumes annual GDP growth of 6-7 percent with upside potential despite Vision target of 10 percent by 2012. - Budgeted fiscal expansion (2007/08): - Expenditure projected to rise by 4.8 percent of GDP in 2007/08, widening the fiscal deficit to 5.4 percent of GDP (commitment basis, including grants) in the initial budget. - Agreed budget deficit projection: 4.8 percent of GDP with net domestic financing at 1.6 percent of GDP. - Development spending composition (percent of GDP; Total revenue, Total expenditure, Recurrent expenditure, Development and net lending, Domestically financed development, Foreign financed development, Grants, Program grants, Overall balance incl. grants and adjustment to cash, Financing, Project loans, Commercial foreign financing, Arrears clearance, Privatization proceeds, Net domestic borrowing): - 2006/07 Est.: Total revenue 20.6; Total expenditure 23.2; Recurrent expenditure 18.5; Development and net lending 4.4; Domestically financed development 3.0; Foreign financed development 1.4; Grants 0.9; Program grants 0.0; Overall balance, incl. grants and adjustment to cash -1.6; Financing 2.0; Project loans 0.6; Commercial foreign financing 0.0; Arrears clearance 0.0; Privatization proceeds 0.2; Net domestic borrowing 1.9. - 2007/08 Budget: Total revenue 20.7; Total expenditure 28.0; Recurrent expenditure 19.6; Development and net lending 8.2; Domestically financed development 3.9; Foreign financed development 3.9; Grants 1.9; Program grants 0.2; Overall balance, incl. grants and adjustment to cash -5.3; Financing 5.3; Project loans 2.2; Commercial foreign financing 1.0; Arrears clearance -0.4; Privatization proceeds 2.2; Net domestic borrowing 1.6. - Staff projection: Total revenue 20.6; Total expenditure 26.8; Recurrent expenditure 19.4; Development and net lending 7.1; Domestically financed development 3.9; Foreign financed development 2.9; Grants 1.5; Program grants 0.2; Overall balance, incl. grants and adjustment to cash -4.8; Financing 4.8; Project loans 1.6; Commercial foreign financing 1.0; Arrears clearance -0.4; Privatization proceeds 2.2; Net domestic borrowing 1.6. - Planned sovereign bond: 1.0 percent of GDP to be issued in early 2008; half of proceeds to finance spending and remainder to clear external arrears on security-related and other contracts. Debt sustainability analysis suggests Kenya’s risk of debt stress is low. - Execution risks and mitigants: - Large spending increase could exert pressures on domestic prices and compromise project quality; authorities will backload expenditures and restrain spending if privatization receipts fall short to keep net domestic financing within target. - Draft organic budget law to be submitted to cabinet to address PFM legal weaknesses; PPP legal and institutional framework work underway. ### Monetary, exchange rate, and CBK operational policies - CBK inflation objective: maintain nonfood inflation below 6 percent through June 2008 (CBK aims). - Monetary targets: - CBK targets: limit annual reserve money growth to 14 percent and broad money to 15 percent by end-December 2007 and end-June 2008. - Easing of end-December reserve money target from 12 percent in the program reflects greater weight to low nonfood inflation. - Recent operational changes at CBK: - Minimum bid threshold for central bank repos reduced from Ksh 50 million to Ksh 20 million. - Repos now count toward bank liquidity requirements. - A late-day repo window was opened. - Interest rates on repos have become more flexible. - CBK fine tuning open market operations; priority to reserve money targets over NFA targets. - Reserve money developments and projection: - Reserve money growth volatile: rose to 18.3 percent at end-October before falling to 16.7 percent on November 1. - Based on the 30-day moving average trend, reserve money expected to meet the end-December target. ### Privatization, PPPs, and structural reform intentions - Privatization receipts in 2007/08 budget (percent of GDP): Safaricom 1.6; Kengen 0.3; Telkom Kenya 0.3. - Ambitious privatization program to include: - Restructuring and preparation for privatization of Telkom and NBK. - Sale of a 41.7 percent government stake in Safaricom and further stake in KenGen after the initial public offering of 30 percent in 2006. - PPPs: - Legal and institutional framework development; consultant’s PPP report completed in September. - PPP unit within Ministry of Finance to be established as a gate keeper to evaluate and monitor PPP projects and reduce fiscal risks. - Consolidated electronic business registry: being established. ### External financing requirements and outlook - Total external financing requirement 2006/07: US$1.3 billion. - Projected total external financing requirement 2007/08: US$2.2 billion. - Drivers of 2007/08 increase: much higher infrastructure spending; wider current account deficit; higher debt service following end of Paris Club consolidation; clearance of arrears on security-related and other contracts. - Manageability assessment: expected to be manageable, supported by donor project commitments, sovereign bond, and private inflows; staff encourages seeking more concessional financing. - External financing resources (selected): - Project support and private financing expected to meet increased requirements; foreign direct investment components highlighted as significant. ### Staff appraisal, risks, and recommendation - Staff view: macroeconomic management and structural reform progress generally strong; need to contain risks from expansionary 2007/08 budget and reduce monetary expansion to contain inflation in an election year (general elections scheduled for December 27). - Structural priorities: broaden PFM reforms; accelerate financial sector reforms including completing Banking Act review and developing a financial sector reform strategy. - Recommendation: staff recommends granting waivers for the four missed performance criteria for the third review. ### Selected indicators (high-level numbers preserved exactly as in source) - Real GDP (selected sequence): 5.9, 6.1, 6.3, 6.0, 6.4, 6.4, 6.4. - CPI, overall (annual average): 11.1, 7.6, 10.2, 5.2, 7.6, 5.0, 5.0. - Reserve money (end of period, annual percent change): 14.0, 14.3, 17.5. - M3 (end of period, annual percent change): 14.9, 13.1, 18.9. - Investment (percent of GDP sequence): 18.2, 20.2, 18.9, 20.7, 21.4, 21.0, 21.6. - Current external balance, incl. official transfers (percent of GDP): -2.0, -3.5, -2.5, -4.0, -4.3, -3.7, -3.6. - Gross international reserve coverage (months of next year imports, end of period): 3.3, 3.3, 3.1, 3.4, 3.2, 3.2, 3.3. - NPV of central government debt (end of period, percent of GDP): 35.6, 34.4, 32.2, 34.1, 31.9, 31.9, 31.4. - Domestic debt, net (end of period, percent of GDP): 18.1, 18.5, 18.5, 18.3, 18.4, 18.0, 17.7. - Total revenue (in billions of Ksh, selected): 311.3, 377.4, 373.0, 425.9, 428.9, 427.2, 483.6, 543.8. - Total expenditure and net lending (in billions of Ksh, selected): 382.8, 456.2, 419.5, 517.9, 580.4, 557.3, 579.9, 659.1. - Nominal GDP (in billions of Kenyan Shillings, selected): 1,543.9, 1,780.3, 1,809.5, 1,982.0, 2,072.4, 2,077.8, 2,322.7, 2,594.0. - Balance of payments, current account (millions of US$ sequence): -426, -656, -1,333, -1,276, -1,381. - Exports, f.o.b. (millions of US$ sequence): 3,501, 3,712, 4,204, 4,792, 5,516. - Imports, f.o.b. (millions of US$ sequence): -6,295, -7,392, -8,870, -9,762, -10,964. - Gross official reserves (end of period, in millions US$): 2,353, 2,723, 3,076, 3,425, 4,010. - Financial soundness indicators (selected percent): Regulatory capital to risk-weighted assets 17.3, 16.6, 16.4, 16.7, 16.3, 16.5, 16.7; Nonperforming loans to gross loans 34.9, 29.3, 25.6, 22.9, 22.7, 21.3, 14.7. - PRGF disbursement schedule (in millions of SDRs): 1st 25.0 (November 2003); 2nd 50.0 (December 2004); 3rd 37.5 (April 2007); 4th 37.5 (November 2007); Total 150.0. *Source: Executive Summary and selected sections (CR/09/18).* ### Executive Summary ...................................................................................................... ### _cr0918 - Executive Summary ### Solid macroeconomic achievements - Real GDP growth reached 6.3 percent in 2006/07 (fourth consecutive year above 4 percent). - Nation-wide poverty declined from 52 percent in 1997 to 46 percent in 2006 (household survey). - Nonfood inflation remained stable and below 6 percent despite overall inflation above the official target of 5 percent. - Cautious budget execution kept net domestic financing within the program target (a performance criterion). Domestic debt was 18.5 percent of GDP. - The external current account deficit widened slightly due to strong domestic investment, but the overall balance of payments remained in surplus. - Import coverage of international reserves: 3.1 months. - Nominal effective exchange rate appreciated by 18 percent since end-2004; real effective exchange rate (based on Kenya’s nonfood CPI) appreciated by 24 percent over the past three years. - Reserve money growth persistently exceeded program targets; CBK responded by raising the Central Bank Rate by 25 basis points to 8.75 percent in August. ### Uneven progress in governance and structural reforms - Major legislative and governance actions: - Parliament approved the Miscellaneous Amendments Bill implementing parts of the Governance Action Plan for Building a Prosperous Kenya (GAP), including measures to strengthen prosecutorial capacity and increase the number of judges (LOI, ¶18). Public access to wealth declarations remains restricted. - External audit reports on security-related (Anglo-Leasing) contracts completed and referred to the Kenya Anti-Corruption Commission (KACC); investigations ongoing but no new prosecutions in the past year. - Proceeds of Crime and Anti-Money Laundering (AML) Bill resubmitted to parliament in May (PC); Media Bill 2007 enacted; Political Parties Bill 2007 approved and assented in October; Witness Protection Act 2006 being implemented. - Kenya Revenue Authority (KRA) improved governance and dropped off Transparency International’s bribery index. - Public financial management (PFM) and financial sector reforms: - Integrated Financial Management Information System (IFMIS) operational in four ministries and being phased in across another 20 ministries (structural PC). - Public Procurement Oversight Authority (PPOA) initially not fully operational by end-April (structural PC); corrective action taken—interim Director General and Advisory Board appointed, making PPOA operational. - Submission to cabinet of strategy to initiate sale of government and NSSF shares in National Bank of Kenya (NBK) was delayed; memorandum submitted in early November to initiate privatization process. - Delays in completing review of the Banking Act and developing a financial sector reform strategy; these are now priority issues. - Improvements in business environment and public service efficiency: - In 2007/08 budget context, 205 business licenses (out of 1,325) to be eliminated and another 371 to be simplified. - Kenya ranked among top 10 reformers in the World Bank’s Doing Business Report 2008. - Kenya won the United Nations’ Public Service Award for introducing performance contracts throughout the public service. ### Missed targets and corrective actions (summary of Box 1) - Missed quantitative performance criteria and benchmarks: - End-June reserve money ceiling missed; end-September reserve money ceiling missed. - End-September net foreign assets floor missed. - Non-accumulation of external payment arrears breached (arrears later cleared). - Missed structural performance criteria and benchmarks: - Make PPOA fully operational (corrective: PPOA operational with interim Advisory Board and Director General). - Submit to cabinet a strategy to privatize NBK (corrective: memorandum submitted in early November). - Complete study of contingent liabilities of 24 parastatals’ accounts (inception report completed in September). - Present to parliament the Controller and Auditor General’s 2005/06 report (presented in September). - Submit to parliament an amendment to the Banking Act (comprehensive revision at an advanced stage). - Complete a diagnostic audit of the NSSF (inception report completed in September). - Establish the Privatization Commission (expected by December). - Corrective monetary actions: - Greater interest rate flexibility and improved open market operations to address reserve money overruns (¶6 & 36). - Priority given to meeting reserve money target and addressing net foreign assets shortfall (¶36). - Staff recommendation: waivers are recommended for the four missed performance criteria for the third review in view of authorities’ macroeconomic achievements and corrective steps taken. ### Safeguarding macroeconomic stability for 2007/08 - Policy framework and objectives: - The 2007/08 economic program is aligned with Vision 2030; Vision aims for annual GDP growth of 10 percent by 2012, but the authorities’ medium-term framework prudently assumes annual GDP growth of 6-7 percent with upside potential. - Fiscal policy and PFM risks and policies: - Budgeted sharp increase in expenditure: expenditure projected to rise by 4.8 percent of GDP in 2007/08, widening the fiscal deficit to 5.4 percent of GDP (commitment basis, including grants) in the initial budget. - Authorities and staff agreed budget deficit projection: 4.8 percent of GDP with net domestic financing at 1.6 percent of GDP. - Development spending composition (2006/07 est., 2007/08 budget proj., staff proj. presented in Text Table 1): - Total revenue: 20.6, 20.7, 20.6 (percent of GDP) for 2006/07 Est., Budget, Proj. respectively. - Total expenditure: 23.2, 28.0, 26.8 (percent of GDP). - Recurrent expenditure: 18.5, 19.6, 19.4 (percent of GDP). - Development and net lending: 4.4, 8.2, 7.1 (percent of GDP). - Domestically financed development: 3.0, 3.9, 3.9 (percent of GDP). - Foreign financed development: 1.4, 3.9, 2.9 (percent of GDP). - Grants: 0.9, 1.9, 1.5 (percent of GDP). - Program grants: 0.0, 0.2, 0.2 (percent of GDP). - Overall balance, incl. grants and adjustment to cash: -1.6, -5.3, -4.8 (percent of GDP). - Financing: 2.0, 5.3, 4.8 (percent of GDP). - Project loans: 0.6, 2.2, 1.6 (percent of GDP). - Commercial foreign financing: 0.0, 1.0, 1.0 (percent of GDP). - Arrears clearance: 0.0, -0.4, -0.4 (percent of GDP). - Privatization proceeds: 0.2, 2.2, 2.2 (percent of GDP). - Net domestic borrowing: 1.9, 1.6, 1.6 (percent of GDP). - Planned sovereign bond: 1.0 percent of GDP to be issued in early 2008; half of proceeds to finance spending and remainder to clear external arrears on security-related and other contracts. Sovereign bond would only modestly increase NPV of debt. Debt sustainability analysis suggests Kenya’s risk of debt stress is low. - Execution risks: large spending increase could exert pressures on domestic prices and compromise project quality; authorities will backload expenditures and restrain spending if privatization receipts fall short to keep net domestic financing within target. - PFM strengthening: draft organic budget law to be submitted to cabinet to address PFM legal weaknesses and increase accountability and transparency; work on legal and institutional framework for public-private partnerships to reduce fiscal risks. - Monetary, exchange rate, and financial sector policies: - CBK aims to maintain nonfood inflation below 6 percent through June 2008. - CBK targets: limit annual reserve money growth to 14 percent and broad money to 15 percent by end-December 2007 and end-June 2008. Easing of the end-December reserve money target from 12 percent in the program reflects giving greater weight to low nonfood inflation in setting targets. ### Staff appraisal and outlook - Macroeconomic stance: staff views Kenya’s macroeconomic management and structural reform progress as generally strong, while emphasizing the need to contain risks from the expansionary 2007/08 budget and to reduce monetary expansion to contain inflation, particularly in an election year (general elections scheduled for December 27). - Structural priorities: broaden PFM reforms and accelerate financial sector reforms, including completing the Banking Act review and developing a financial sector reform strategy. - Recommendation: staff recommends granting waivers for the four missed performance criteria for the third review, given achievements and corrective actions taken. *Source: Executive Summary (CR/09/18).* ### 18. The CBK is on track to ### 18. The CBK is on track to ### Monetary policy actions and operational changes at the CBK - The minimum bid threshold for central bank repos was reduced from Ksh 50 million to Ksh 20 million. - Repos now count toward bank liquidity requirements. - A late-day repo window was opened. - Interest rates on repos have become more flexible. - The authorities remain fully committed to meeting reserve money targets and are fine tuning their open market operations. ### Reserve money developments and projection - Reserve money growth has been volatile. - After declining through most of October, the growth rate of reserve money unexpectedly rose to 18.3 percent at the end of the month before falling to 16.7 percent on November 1. - Based on the 30-day moving average trend, reserve money is expected to meet the end-December target. - Projection: reserve money expected to meet end-December target (based on 30-day moving average trend). ### Policy actions moving forward (CBK priorities) - improve coordination with the Treasury to reduce the liquidity impact of government use of its CBK overdraft facility; - aim to clear daily auctions by accepting all reasonable bids unless the offer is oversubscribed; and - give priority to reserve money targets over the NFA targets. ### Privatization and structural reform intentions - Privatization Receipts in 2007/08 budget (percent of GDP): - Safaricom1.6 - Kengen0.3 - Telkom Kenya0.3 - The authorities intend to accelerate development of the much-delayed financial sector reform strategy. - The long-term strategy will promote stability and development of the financial system and aim to develop financial services into one of the six economic pillars under Vision 2030. - An ambitious privatization program will include: - restructuring and preparation for privatization of Telkom and NBK; - sale of a 41.7 percent government stake in Safaricom and a further stake in KenGen after the initial public offering of 30 percent in 2006. - A consolidated electronic business registry is being established. ### Governance actions (remainder of 2007/08) and structural reforms - Priority governance actions not requiring legislation: - expand court facilities, hire additional prosecutors, and accelerate training of judges and automation of recording of court proceedings; - make current the web-posting of all procurement contracts above Ksh 5 million; and - audit the Constituency Development Fund, Local Authority Transfer Funds, and other devolved funds. - Continue structural reform agenda, building on recent advances in business licenses, public enterprises, and IFMIS implementation; greater efforts needed to improve the legal framework for PFM, expedite review of the Banking Act, and develop a financial sector reform strategy. ### External financing outlook for 2007/08 - External financing requirements are projected to rise in 2007/08 due to: - higher infrastructure spending; - a larger current account deficit; and - higher debt service following the end of the consolidation period under the Paris Club rescheduling agreement and the clearance of arrears on security-related and other contracts. - It is expected that donor support, particularly for projects, a sovereign bond, and private inflows will fully meet the increased financing requirements. - Staff encourages seeking more concessional financing going forward to safeguard debt sustainability and meet infrastructure needs. ### Staff appraisal: macroeconomic stance and governance - Kenya’s robust economic growth has been underpinned by prudent macroeconomic management and structural reforms. - The authorities have designed an implementation strategy to mitigate risks posed by the 2007/08 budget; commitment to phase development spending in line with available financing and to fully implement the budget only if inflation remains low and expenditure quality is maintained is important. - Staff regrets that further external payment arrears were incurred. - A continued tightening of monetary policy will help secure low inflation; actions to make open market operations more effective have begun to bear fruit and sustained commitment, including to interest rate flexibility, will be needed to achieve the CBK’s reserve money targets. - Progress in governance: significant progress in strengthening legislation, enhancing transparency, and improving governance in the KRA; staff encourages full implementation of the Governance Action Plan and moving forward with investigating and prosecuting high-profile corruption cases. - Authorities should build upon advances in strengthening business regulation and public financial management and accelerate financial sector reform. *Sources: Kenyan authorities; and IMF staff estimates and projections.* ### 28. In view of the authorities’ achievements in macroeconomic management and ### _cr0918 - 28. In view of the authorities’ achievements in macroeconomic management and ### Recommendation - Staff recommends that waivers be granted for the four missed PCs for the third review. ### National accounts and prices (selected indicators) - Real GDP: 5.9, 6.1, 6.3, 6.0, 6.4, 6.4, 6.4 - Consumer price index, overall (annual average): 11.1, 7.6, 10.2, 5.2, 7.6, 5.0, 5.0 - Consumer price index, overall (end of period): 10.9, 6.8, 11.1, 5.0, 5.8, 5.0, 5.0 - Consumer price index, nonfood (annual average): 5.8, 5.9, 3.5, 4.8, 5.0, 5.0 - Terms of trade, goods (- deterioration; based on c.i.f. imports): -5.9, -3.5, -5.5, -1.7, -4.0, -0.3, 0.9 - Ksh per US $ exchange rate (end of period): 73.6,...,69.6 - Nominal effective exchange rate (- depreciation; end of period): 4.0,...,6.0 - Real effective exchange rate (- depreciation; end of period): 6.1,...,8.0 ### Money and credit (selected) - Net domestic assets (end of period): 9.4, 13.7, 16.0 - Net credit to the government (end of period): 5.0, 20.9, 33.3 - M3 (end of period): 14.9, 13.1, 18.9 - Reserve money (end of period): 14.0, 14.3, 17.5 - Velocity (GDP/M3X): 2.5, 2.6, 2.6 ### Investment, saving, and external balances (selected) - Investment: 18.2, 20.2, 18.9, 20.7, 21.4, 21.0, 21.6 - Central government: 4.4, 5.7, 4.4, 6.2, 6.8, 6.3, 6.8 - Other: 13.8, 14.5, 14.5, 14.5, 14.6, 14.7, 14.8 - Gross national saving: 16.2, 16.6, 16.4, 16.7, 17.1, 17.3, 18.0 - Exports value, goods and services: 26.1, 23.7, 23.6, 23.3, 23.1, 23.3, 23.8 - Imports value, goods and services: 35.4, 34.0, 33.2, 33.6, 34.2, 33.6, 33.6 - Current external balance, including official transfers: -2.0, -3.5, -2.5, -4.0, -4.3, -3.7, -3.6 - Gross international reserve coverage in months of next year imports (end of period): 3.3, 3.3, 3.1, 3.4, 3.2, 3.2, 3.3 ### Public debt (selected) - NPV of central government debt (end of period): 35.6, 34.4, 32.2, 34.1, 31.9, 31.9, 31.4 - Domestic debt, net (end of period): 18.1, 18.5, 18.5, 18.3, 18.4, 18.0, 17.7 - NPV of external debt (end of period): 17.5, 15.7, 13.7, 15.9, 13.5, 13.8, 13.7 - Nominal central government debt (end of period): 42.2, 40.0, 37.3, 40.1, 37.0, 37.0, 36.7 - Of which: external debt (end of period): 24.0, 21.4, 18.8, 21.8, 18.7, 19.0, 19.0 ### Central government finances (levels and percent of GDP, selected) - Total revenue (in billions of Ksh): 311.3, 377.4, 373.0, 425.9, 428.9, 427.2, 483.6, 543.8 - Total expenditure and net lending (in billions of Ksh): 382.8, 456.2, 419.5, 517.9, 580.4, 557.3, 579.9, 659.1 - Overall balance (commitment basis) excluding grants (in percent of GDP): -4.6, -4.4, -2.6, -4.6, -6.3, -4.1, -4.4 - Overall balance (commitment basis) including grants (in percent of GDP): -3.3, -3.3, -1.7, -3.5, -4.8, -2.9, -2.6 - Net domestic borrowing (in percent of GDP): 1.8, 1.7, 1.9, 1.6, 1.6, 1.6, 1.5 - Total donor support (grants & loans) (in percent of GDP): 1.9, 2.5, 1.4, 3.6, 3.1, 3.2, 3.5 - Nominal GDP (in billions of Kenyan Shillings): 1,543.9, 1,780.3, 1,809.5, 1,982.0, 2,072.4, 2,077.8, 2,322.7, 2,594.0 - Stock of domestic debt, net (end of period, in billions of Ksh): 280.1, 330.1, 334.7, 362.0, 381.3, 381.3, 418.8, 458.6 - Primary budget balance (in billions of Ksh): 4.0, -13.8, 13.2, -17.5, -59.0, -49.3, -17.7, -13.6 ### Central government financial operations (percent of GDP, selected) - Total revenue: 20.2, 21.2, 20.6, 21.5, 20.7, 20.6, 20.8, 21.0 - Total expenditure and net lending: 24.8, 25.6, 23.2, 26.1, 28.0, 26.8, 25.0, 25.4 - Recurrent expenditure: 19.9, 19.5, 18.5, 19.7, 19.6, 19.4, 18.4, 18.4 - Interest payments: 2.7, 2.4, 2.4, 2.6, 2.4, 2.4, 2.2, 2.1 - Wages and benefits (civil service): 7.3, 7.3, 7.3, 7.4, 7.3, 7.3, 7.3, 7.3 - Balance (commitment basis, excluding grants): -4.6, -4.4, -2.6, -4.6, -7.3, -6.3, -4.1, -4.4 - Grants: 1.3, 1.2, 0.9, 1.2, 1.9, 1.5, 1.2, 1.8 - Balance (commitment basis, including grants): -3.3, -3.3, -1.7, -3.5, -5.4, -4.8, -2.9, -2.6 - Net foreign financing (percent of GDP): 0.0, 0.5, -0.2, 1.7, 1.9, 1.4, 1.3, 1.1 - Net domestic financing (percent of GDP): 1.8, 1.7, 1.9, 1.6, 1.6, 1.6, 1.6, 1.5 ### Monetary survey (June 2006 - December 2007, selected) - M3 (annual percent change): 14.9, 13.1, 13.1, 18.9, 12.5, 17.7, 15.0 - Reserve Money (annual percent change): 14.0, 14.3, 14.3, 17.5, 12.0, 17.0, 14.0 - Net foreign assets (in millions of US$): 2,159, 2,140, 2,378, 2,357, 2,475.5, 2,432.1, 2,521.2 - Net domestic assets (percent change, banking sector): -51.8, -35.0, -52.6, -47.7, -57.5, -48.4, -44.7 - M3 (in billions of Ksh): 605.5, 684.5, 685.0, 719.8, 711.1, 743.9, 758.7 ### Balance of payments (selected, in millions of US$) - Current account (2005/06-2009/10 sequence): -426, -656, -1,333, -1,276, -1,381 - Excluding official transfers: -489, -656, -1,387, -1,318, -1,409 - Exports, f.o.b.: 3,501, 3,712, 4,204, 4,792, 5,516 - Coffee: 134, 152, 170, 184, 201 - Tea: 612, 663, 704, 775, 857 - Horticulture: 472, 550, 620, 691, 780 - Imports, f.o.b.: -6,295, -7,392, -8,870, -9,762, -10,964 - Oil: -1,545, -1,805, -2,147, -2,382, -2,519 - Balance on goods: -2,794, -3,680, -4,665, -4,970, -5,448 - Services (net): 839, 1,215, 1,237, 1,443, 1,660 - Foreign travel credit: 631, 786, 937, 1,035, 1,149 - Income (net): -38, -31, -221, 0, 44 - Credit: 86, 118, 148, 170, 195 - Debit: -124, -149, -171, -160, -151 - Of which: official interest payments: -85, -82, -92, -83, -75 - Current transfers (net): 1,566, 1,839, 2,118, 2,241, 2,362 - Private (net): 1,504, 1,839, 2,064, 2,200, 2,334 - Remittances: 625, 816, 955, 1,012, 1,062 - Official (net): 630, 544, 128 - Capital and financial account: 933, 912, 1,814, 1,605, 1,923 - Capital account (incl. capital transfers): 215, 227, 381, 359, 647 - Financial account: 717, 685, 1,433, 1,246, 1,277 - Overall balance (selected): 506, 255, 481, 329, 542 - Gross official reserves (end of period, in millions US$): 2,353, 2,723, 3,076, 3,425, 4,010 - in months of next year's imports of goods and services: 3.3, 3.1, 3.2, 3.2, 3.3 - Current account balance (excl. official transfers, as a percent of GDP): -2.3, -2.5, -4.5, -3.8, -3.7 - Change in the terms of trade (goods, percent): -5.9, -5.5, -4.0, -0.3, 0.9 ### Financial soundness indicators (Dec 2003 - Aug 2007, selected percent) - Regulatory capital to risk-weighted assets: 17.3, 16.6, 16.4, 16.7, 16.3, 16.5, 16.7 - Nonperforming loans to gross loans: 34.9, 29.3, 25.6, 22.9, 22.7, 21.3, 14.7 - Return on assets: 2.3, 2.1, 2.4, 2.8, 3.2, 2.8, 3.2 - Liquid assets to total assets: 33.2, 32.4, 33.1, 33.1, 33.6, 35.2, 33.3 - Customer deposits to total (non-interbank) loans: 131.6, 135.7, 125.1, 125.3, 127.2, 130.1, 138.4 ### Disbursement schedule under the PRGF Arrangement - 1st disbursement: 25.0 (in millions of SDRs), November 2003 — Condition: Approval of the PRGF arrangement. - 2nd disbursement: 50.0 (in millions of SDRs), December 2004. - 3rd disbursement: 37.5 (in millions of SDRs), April 2007. - 4th disbursement: 37.5 (in millions of SDRs), November 2007. - Total: 150.0 (in millions of SDRs) ### External financing requirements and resources (selected, in millions of US$) - External financing requirements (2005/06–2008/09): -1,335.7, -1,262.3, -2,189.1, -1,929.1 - Current account (excl.official transfers) (2005/06–2008/09): -488.9, -656.3, -1,386.9, -1,317.6 - Scheduled amortization (official): -222.4, -242.4, -263.2, -248.4 - Buildup of gross official reserves: -766.1, -370.2, -353.0, -349.2 - Resources (2005/06–2008/09): 1,335.7, 1,261.3, 2,189.1, 1,929.1 - Program support (committed and tentatively identified): 83.1, 57.7, 131.6, 113.0 - Project support: 316.9, 381.7, 860.4, 947.1 - Private financing (incl. short-term (net) and errors & omissions): 755.1, 704.6, 840.9, 812.7 - Foreign direct investment (component of private financing): 365.7, 622.7, 744.1, 642.7 - Rescheduling of debt: 118.1, 49.7, 0.0, 0.0 ### External debt indicators (2005-2010, selected, in millions of US$) - Stock of external debt by creditor (2005–2010): 5,068, 5,000, 5,236, 5,912, 6,771, 7,389 - Multilateral creditors: 3,144, 3,098, 3,284, 3,515, 3,864, 4,261 - IMF: 158, 146, 252, 243, 227, 196 - World Bank: 2,460, 2,429, 2,462, 2,573, 2,772, 2,982 - Bilateral creditors: 1,615, 1,618, 1,709, 1,906, 2,157, 2,420 - Paris Club: 1,527, 1,522, 1,591, 1,744, 1,943, 2,153 - Stock of external debt by debtor (2005–2010): 5,068, 5,000, 5,236, 5,912, 6,771, 7,389 - Central government: 4,539, 4,464, 4,559, 5,210, 6,045, 6,653 - Debt-service principal payments by creditor (selected): 235, 246, 247, 265, 266, 297 - Debt-service ratios: - Debt-service in percent of current year exports: 6%, 6%, 5%, 5%, 5%, 5% - Debt-service in percent of fiscal revenue: 8%, 7%, 6%, 6%, 5%, 6% ### Actual and projected payments to the Fund (2005–2010, in millions of SDRs) - Principal payments by year: 5.0, 9.2, 6.7, 6.7, 11.7, 16.7 - Charges and interest: 1.5, 1.8, 2.1, 2.1, 2.1, 2.0 - Outstanding Fund credit: 111.1, 101.9, 170.2, 163.4, 151.7, 135.0 - FCO in percent of exports of goods and nonfactor services: 3.1, 2.7, 4.0, 3.3, 2.7, 2.2 - This assumes that the remaining amount of the PRGF arrangement of SDR 37.5 million will be disbursed upon completion of the third review in November 2007. *Sources: Kenyan authorities; and Fund staff estimates and projections.* ### 1. This letter describes recent performance under Kenya’s economic program supported ### This letter describes recent performance under Kenya’s economic program supported by the Poverty Reduction and Growth Facility (PRGF) arrangement and outlines the policies for fiscal year 2007/08 ### Overview and program status - Most of the 13 performance criteria (PCs) for the third review under the PRGF arrangement were met; waivers are being requested for nonobservance of four PCs and for completion of the third review under the PRGF arrangement. - The government believes that the policies set forth are adequate to achieve the objectives of its program and will consult with the Fund on any additional measures, in advance and in accordance with Fund policies. - Kenya will continue to provide the Fund, in a timely manner, all information required to monitor progress in implementing the policies and achieving the objectives of the PRGF-supported program. ### Recent economic developments - Real GDP expanded by 6.6 percent and by 7.1 percent in the first and second quarters of 2007, respectively, driven by manufacturing, tourism, transport and communications, and financial services. - Nonfood inflation remained under 6 percent, but overall inflation rose to 10.6 percent in the year to October due to unexpected increases in food prices. ### Fiscal performance 2006/07 - The overall deficit (commitment basis, including grants) remained at 1.7 percent of GDP, compared to 3.3 percent of GDP under the program. - Revenues increased modestly by 0.4 percent of GDP compared with the program target of 1 percent of GDP, mainly because of the higher inflation outturn. - Core poverty spending was maintained at around 4 percent of GDP. - Delays in hiring some 7,000 teachers kept the wage bill below program levels despite an additional increase of teachers’ salaries that was partially brought forward from 2008/09. - A significant shortfall in privatization receipts was only partially accommodated by program adjustors; cuts in non-priority areas allowed the net domestic financing (NDF) target to be met by a comfortable margin. - Despite improved execution of domestically financed development budget, delays persisted in implementation of foreign financed development projects, in part due to slow procurement. ### Monetary policy and reserves - Reserve money grew by 17.5 percent in the year to June, more than 3 percentage points above the PC under the program. - Broad money expanded by 18.9 percent in the same period. - Interest rates on repos and 91-day treasury bills rose by about 70 to 80 basis points in the first half of the year. - CBK actions to strengthen monetary instruments included lengthening maturity profile of repos in early June, lowering the threshold on repo bids, introducing a second window for late repos, and clarifying that repos count towards liquidity requirements. - In August, the CBK increased the Central Bank Rate by 25 basis points, to 8.75 percent. - Reserve money growth fell to 17 percent by end-September before rising to 18.3 percent at end-October; authorities remain committed to observing the proposed end-December target and CBK is fine tuning open market operations to ensure achievement of this target. - The current account deficit widened slightly in 2006/07 to about 2.5 percent of GDP from 2.3 percent in 2005/06. - The CBK increased foreign reserves sufficiently to maintain 3.1 months of import cover. - Continued strength in the balance of payments resulted in a further appreciation of the Kenyan shilling against most major currencies, albeit at a slower rate than in the previous year. ### External rating and outlook - In September 2007, Standard and Poor’s Ratings Services maintained Kenya’s initial sovereign credit rating of “B+” for foreign currency and “BB-” for local currency long-term sovereign debt, and observed that the outlook is stable. - Fitch is expected to provide a sovereign credit rating for Kenya in November. - Within sub-Saharan Africa, only mineral-rich countries such as Botswana, South Africa, and Nigeria have higher sovereign ratings. ### Structural and governance reforms - IFMIS is operational in four ministries (Finance, Health, Education, and Planning and National Development)—a PC for end-June—and is being phased in in another 20 ministries out of 43 accounting units; arrangements are in place to roll-out to seven more accounting units. Operational modules include accounts payable, general ledger and purchasing modules. - The Public Procurement Oversight Authority (PPOA) is now operating as intended after the missed end-April PC: an interim Director-General was appointed and Parliament has approved members of the Advisory Board as provided under the Public Procurement and Disposal Act. - A strategy to initiate the sale of the shares of the government and the National Social Security Fund (NSSF) in the National Bank of Kenya (NBK) was submitted to cabinet for approval in early November, rather than end-June (a structural PC). - Financial restructuring of NBK was effected in June through placement of nonnegotiable government bonds and liquidation of the non-performing loan portfolio. - The supervisory agreement between the CBK and NBK was renewed and is expected to remain in force until recapitalization and divestiture by shareholders have been completed. - Under the agreement, NBK would, by end-December 2007, fully comply with provisions of the Banking Act, the Central Bank of Kenya Act, and prudential regulations, unless recapitalization and divestiture by shareholders are not completed. - NBK will not initiate any new transactions that would increase its capital, other than normal trading activities; will seek CBK prior approval for any single operating expense exceeding 1 percent of its 2006 operating expenses; will limit new lending to the amount of loan recoveries; and will submit monthly projections for the following month’s corporate and retail lending to the CBK for approval no later than the 15th of each month. - Establishment of the Privatization Commission has been delayed and is now expected to be in place by December, rather than end-May (a benchmark); recruitment of the Executive Director is ongoing. - The Controller and Auditor General’s Report for FY2005/06 was submitted to parliament in September 2007, rather than end-April (a benchmark); printing delays compounded initial completion delays. - Delays occurred in completing the diagnostic audit of the NSSF and the study of contingent liabilities of 24 other parastatals (benchmarks); consultants delivered an inception report in September, the NSSF audit is now expected to be completed in November, and the parastatals study is expected to be concluded in January 2008. ### Financial sector legal and supervisory reforms - The CBK Act has been amended to extend the objectives of the CBK to include promoting output and employment growth, although price stability remains the overriding objective. - Parliament rejected a planned enhancement of core capital of banks from Ksh 250 million to Ksh 1 billion by 2010; the proposal to increase paid up capital for insurance companies from Ksh 50 million to Ksh 450 million (depending on types of insurance business) was approved. - A comprehensive revision of the Banking Act is expected to be submitted to the first session of the new parliament (after the June benchmark was missed); revisions include mandatory supervisory intervention and prompt corrective actions for inadequately capitalized and failing banks, and consolidated supervision. - Charterhouse Bank has remained under statutory management of the CBK since June 2006; the Ministry of Finance issued notice of intention to revoke the bank’s license in December 2006, the license expired in December 2006 and has not been renewed, and CBK statutory management was extended for 12 months in June 2007. The case is scheduled to come before the Chief Justice in November for further direction. - Recent amendments to the Banking Act have transferred all licensing, supervisory, and resolution powers from the Ministry of Finance to the Central Bank. ### Governance, anti-corruption and legal reforms - Progress on the Governance Action Plan for Building a Prosperous Kenya (GAP): the Miscellaneous Amendments Bill was submitted to parliament in May (a structural PC); after initial rejection of most measures in September, parliament recently approved most of the President’s recommended changes to restore the bill. - The bill includes increasing number of High Court judges from 50 to 70 and Appellate Court judges from 11 to 14. - Retains KACC powers to investigate crimes committed before its establishment and to attach property. - Wealth declarations of public officials will be available to the public upon application by interested persons, but publication requires approval of the responsible commission. - Classification and penalties for corruption-related offences in The Anti-Corruption and Economic Crimes Act 2003 and The Penal code were substantially harmonized; powers, privileges and immunities of the Director and investigators of the KACC were clarified in relation to The Evidence Act, The Criminal Procedure Code and The Police Act. - Proposals to give KACC premises the status of a Police Station and to vest Commission investigators with the rank of Chief Inspector were not enacted; KACC’s powers of investigation vis-à-vis provision of information by suspects and their associates were curtailed. - The Proceeds of Crime and Anti-Money Laundering (AML) Bill was resubmitted to Parliament in May (a structural PC); draft regulations for implementation were developed (an end-June benchmark). The AML bill was in its second reading when parliament was dissolved; the government intends to resubmit the bill in the first session of the new parliament. - Other governance steps: - Chief Justice issued a Legal Notice in February 2007 to prevent constitutional reference applications from acting as automatic stay of proceedings in economic crimes and corruption cases. - The Political Parties Bill 2007 was approved by Parliament and assented to by the President in October 2007. - The Witness Protection Act 2006 is now in force and being implemented. - A Public Complaints Standing Committee was established in June 2007. - With World Bank support, a wireless-based public information hubs network in districts and constituencies is being developed. ### Anti-corruption investigations and justice sector improvements - Title deeds for 179 illegally and irregularly allocated parcels of public land have been surrendered to the Ministry of Lands. - Two Anglo Leasing cases are in court; investigations on other dimensions are ongoing. - Further investigations into five files returned to the KACC by Attorney General's office are at an advanced stage. - An administrative circular has been issued to address multiple suits on the same issue being filed in different courts; procurement for automation of recording of court proceedings is in progress; workshops to sensitize judges and magistrates on new anti-corruption legislation have been held and a training committee is now in place. - External auditors completed reports on security-related contracts in August; the audit reports have been passed to the KACC to facilitate investigation and potential prosecution and are expected to provide a basis for negotiation with creditors on disputed claims under the contracts. ### Public financial management and business environment reforms - All 10 targeted benchmarks of the Public Expenditure Management Action Plan have been met and the risk-based audit approach has been rolled out. - IFMIS operational in four ministries and being phased in in another 20 ministries; criteria for granting exemptions and waivers have been established and await ministerial approval while already being implemented by the Kenya Revenue Authority (KRA). - A final report on developing and implementing a payment plan for pending bills is well advanced; all claims assessed as payable have already been paid. - Quarterly budget execution reports have been published within 45 working days of the end of the quarter. - Licensing reforms: 205 business licenses were eliminated and another 371 simplified under the recently enacted Licensing Laws, bringing totals to 315 licenses eliminated and 607 simplified (out of a total of 1325) since 2006. - A consolidated electronic business license registry is being established to support the Business Regulatory Reform Unit. - The World Bank’s Doing Business Report 2008 records significant improvements in Kenya’s overall ranking, making the country one of the top 10 global reformers in 2006/07; days to start a business fell from 54 in 2006 to 44 in 2007. - Port of Mombasa average clearance time was cut from 17 to 5–7 days aided by the electronic customs system. - The KRA has dropped off Transparency International’s bribery index as a result of governance improvements. *Source: _cr0918 - 1. This letter describes recent performance under Kenya’s economic program supported* ### 25. Our forward-looking governance reform efforts have won international ### _cr0918 - 25. Our forward-looking governance reform efforts have won international ### Governance recognition and public service reforms - Kenya won the United Nations' Public Service Award in the category “Improving Transparency, Accountability and Responsiveness in the Public Service.” - Recognition cited comprehensive introduction of performance contracts across all cadres in the public service, “rapid results” initiatives delivering results in 100 days, and other reforms including performance contracts for government officials. - In September, the Kenyan government was nominated for an international award for improved performance in the public service by the Ash Institute for Democratic Governance and Innovation at Harvard University's John F. Kennedy School of Government. ### Macroeconomic framework (medium term and 2007/08 outlook) - Medium term framework envisages growth rates of about 6½ percent, with Vision 2030 target of 10 percent noted; baseline framework guided by prudence and subject to adjustment if growth exceeds projections. - For 2007/08: - GDP expansion expected at about 6.4 percent. - Inflation expected to decline to 5.8 percent by the end of the fiscal year. - Foreign exchange reserves expected to be maintained at an equivalent of 3.2 months of the following year’s imports by mid-2008. - Current account deficit likely to widen as growth strengthens and foreign-financed project imports increase. ### Fiscal policy and public financial management (2007/08) - Budget stance and objectives: - Widened deficit envisaged at 5.3 percent of GDP (including grants). - Net domestic borrowing requirement limited to no more than 1.6 percent of GDP, in line with PRGF-supported program commitment. - Revenues projected to increase to 20.7 percent of GDP. - Expenditures projected to increase to 28.0 percent of GDP. - Development spending to increase from 4.4 percent of GDP in 2006/07 to 8.2 percent of GDP in 2007/08. - Increase comprises about 1 percent of GDP domestically financed development budget and a tripling of foreign financed spending. - Recurrent budget includes one-off outlays: - general elections: 0.3 percent of GDP - defense: 0.4 percent of GDP - hiring of more teachers: 0.4 percent of GDP - tuition fees for secondary schools: 0.1 percent of GDP - Financing plan for the deficit includes: - project loans estimated at 2.2 percent of GDP, - receipts from sale of shares in KenGen and Safaricom, and the Telkom privatization: 2.2 percent of GDP, - half of proceeds (0.5 percent of GDP) from a planned sovereign bond issue, - domestic borrowing. - One-off restructuring/privatization costs included: 1.0 percent of GDP, partly financed by special purpose bond issuance (0.6 percent of GDP). - Limited program support in budget: 0.2 percent of GDP. - Net domestic debt (including securitization of contingent liabilities from Kenya Telkom) expected to fall from 18.5 percent of GDP in 2006/07 to 18.4 percent of GDP. ### Risks, contingencies, and cash management - Identified risks: - Delays in privatization receipts could lead to increased domestic borrowing and pressure on debt sustainability. - Restructuring costs related to Telkom-Safaricom privatization incurred before receipts realized. - Increased spending could place pressures on domestic prices given infrastructure and productive capacity constraints. - Infrastructure bottlenecks could risk sustained growth. - Mitigating factors and adjustments: - Expectation that some foreign financed development spending will be carried over to 2008/09 due to implementation capacity and supply bottlenecks; outturn of foreign financed development spending likely to be double the 2006/07 level, or about 1 percent of GDP lower than budgeted. - Expected revenue shortfall of Ksh 2 billion from absence of CBK dividends to be offset by small expected increase in VAT collection and other savings. - Taking adjustments into account, deficit would be lowered to 4.8 percent of GDP, allowing net domestic borrowing to be limited to 1.6 percent of GDP. - A sovereign bond of 1 percent of GDP will be issued, with half of proceeds to finance spending and the remainder to clear arrears on security-related contracts. - Cash management and contingency planning: - Development spending back loaded; roughly 1 percent of GDP of spending contingent on privatization receipts. - Cash plan established for cash ceilings and spending limits to implementing ministries; end-September NDF restricted below planned level. - Expect to issue a supplementary budget early in 2008 to formalize contingency plan and adjust to budget execution. - If privatization receipts and revenues exceed budgeted levels, proceeds will be saved and NDF reduced. ### Sovereign bond issuance - Government expects to issue an international sovereign bond in 2008: - Intended size approximately $300 million in the first or second quarter of 2008. - Proceeds to finance high-return infrastructure projects (0.5 percent of GDP) and to refinance obligations under security-related and other contracts after renegotiation based on the PricewaterhouseCoopers (PWC) audit of the contracts. - Size will be reassessed close to issuance based on market conditions, revenue performance, privatization receipts, and budget execution. - Should bond issue exceed budgetary needs after refinancing, remaining proceeds would be saved. ### Public expenditure management and PFM reforms - Reforms continue under the Strategy to Revitalize Public Finance Management (launched June 2006). - Priority to strengthen legal framework for PFM; draft organic budget law prepared for cabinet approval to improve accountability, transparency, and give Parliament greater oversight. - Procurement and project monitoring improvements: - Procurement improved with establishment of PPOA. - Assistance from Millennium Challenge Corporation to improve procurement process. - Weekly disbursement monitoring via a newly established monitoring working group. - Intensified engagement with donors through portfolio meetings. - Team set up to monitor infrastructure spending through monthly meetings to ensure allocations are spent and project quality maintained. - Efforts to improve data reporting on development spending through appropriations-in-aid. - Launch of Kenya Joint Assistance Strategy in early September to improve donor coordination and harmonization. ### Monetary, exchange rate, and financial sector policies - Monetary policy objectives and targets: - CBK aims to limit annual inflation rate to 5.8 percent by June 2008, provided no recurrence of extreme weather conditions. - Limit annual growth of reserve money to 14 percent and broad money to 15 percent by end-December; targets for June 2008 set at 14 percent (reserve money) and 15 percent (broad money). - Priority to achieve reserve money targets vis-à-vis NFA targets. - Operational measures: - Enhance coordination of monetary and fiscal policy to minimize liquidity impact of short-term fluctuations in net government borrowing from the CBK. - Reduce threshold of a single T-Bill purchase to Ksh 100,000 from Ksh 1,000,000 to encourage smaller nonbank public investors and enhance competition for liquidity. - Aim to clear the repo market in daily auctions by accepting all reasonable bids unless offers are oversubscribed. - Maintain a floating exchange rate regime; foreign exchange interventions limited to smoothing short-term fluctuations unrelated to fundamentals. - Exchange rate competitiveness and productivity: - Continue to monitor real exchange rate developments and external competitiveness. - Measures to tighten monetary stance intended to reduce pressures on real appreciation. - Focus on improving productivity by tackling infrastructure bottlenecks and reducing costs of doing business to offset negative effects of real appreciation on export competitiveness. - Financial sector strategy: - Commitment to developing a financial sector reform strategy based on market principles. - Vision 2030 identifies financial services as one of six key sectors for faster and sustained growth. - Medium-term strategy (2008-2012) expected to be finalized in early 2008 to improve access to financial services, and strengthen efficiency, stability, and governance of the financial system. ### Governance and structural reforms - GAP implementation priorities focus on four areas: (i) prevention; (ii) investigation; (iii) restitution; and (iv) improving governance in priority sectors, with emphasis on administrative and preventive actions to yield measurable short- and long-term improvements. - Short-term priorities (remainder of 2007/08) emphasize measures not requiring legislation: - Expand court facilities and hire additional prosecutors using 2007/08 budget allocation to expedite prosecutions. - Speed up training of judges and automate recording of court proceedings. - PPOA to post procurement contracts above Ksh 5 million awarded during second and third quarters of 2005/06 and to post all subsequently awarded contracts while monitoring ministerial compliance. - Improve accountability through audit and increased stakeholder involvement for CDF and LATF expenditure and other devolved funds. - Ensure security-related organs comply with procurement law. - Privatization and public enterprise reforms: - Ambitious privatization program planned; 2007/08 total privatization receipts expected to amount to 2.2 percent of GDP. - Recent and planned transactions include: - IPO of Kenya Reinsurance Co. completed in July 2007. - Second offer of shares of Mumias Sugar Co. in December 2006. - Restructuring and preparation for privatization of Telkom and NBK to attract strategic investors. - Sale of a 41.7 percent government stake in Safaricom (25 percent of Safaricom shares). - Further stake sale in KenGen after 30 percent IPO in 2006. - Performance contracts for commercial public enterprises to be closely monitored and enforced; accounts to be audited and published timely. - Time-bound restructuring plans to be developed for key agricultural sector entities (sugar companies, Pyrethrum Board of Kenya). - Implement new coffee rules, develop reform strategy for development finance institutions, and review National Cereals and Produce Board operations to improve financial position and sustainability. ### Data, statistics, and business environment reforms - Statistical system improvements: - New Statistics Law led to establishment in February 2007 of the autonomous Kenya National Bureau of Statistics (KNBS), replacing Central Bureau of Statistics. - KNBS to collect, compile, analyze, and publish statistical information with provisions for public access and dissemination. - From August 2007, KNBS began publishing quarterly GDP estimates. - Steps underway to improve fiscal data, including preparation of monthly fiscal summary statistics. - KNBS to launch a new consumer price index based on a new basket derived from recent household survey and update CPI computation methodology. - Government has requested Technical Assistance from the Fund to assist in this area. - Intention to further improve data collection and dissemination, including production of quarterly balance of payments data. - Business environment measures: - Continue to strengthen business licensing reforms, including establishing a consolidated electronic business registry. - Move forward with labor market reforms, including updating legislation to strengthen labor market flexibility and link wage awards more closely to productivity advances. ### Trade policy - Continue pursuing trade liberalization to enhance efficiency and promote growth. - Commitments and objectives: - Implement East African Community (EAC) commitments and pursue deeper regional economic and social integration. - Advocate for further opening up of the EAC to enhance competition and efficiency. - Support efforts to bring the Doha Round to a successful conclusion benefiting all countries. - Seek agreement, with regional partners, on an Economic Partnership Agreement with the EU to ensure favorable and stable market access for Kenya’s exports. *Source: _cr0918 - 25. Our forward-looking governance reform efforts have won international* ### 45. External financing requirements are projected to rise in 2007/08. The total ### _cr0918 - 45. External financing requirements are projected to rise in 2007/08. The total ### External financing requirements and outlook - Total external financing requirement in 2006/07: US$1.3 billion. - Projected total external financing requirement in 2007/08: US$2.2 billion. - Drivers of the 2007/08 increase: - Much higher infrastructure spending. - A wider current account deficit. - Somewhat higher debt service payments following the end of the consolidation period under the Paris Club rescheduling agreement in 2006. - Clearance of arrears on security-related and other contracts. - Medium-term outlook: - External financing needs would remain relatively high, in line with higher infrastructure spending and investment-related imports. - Assessment of manageability: - Meeting projected external financing requirements is expected to be manageable. - Factors supporting manageability: - Stronger economic policies in recent years. - Some progress on governance increasing confidence and donor commitments (particularly for project support). - Stronger private flows following favorable credit ratings. - Enhanced exposure to international financial markets from the debut sovereign bond. ### Public-private partnerships (PPPs) and fiscal risks - Government actions: - Continuing to develop a legal and institutional framework for PPPs that takes adequate account of fiscal risks, including contingent liabilities. - A consultant’s report on PPPs was completed in September. - A PPP unit within the Ministry of Finance will be established to act as a “gate keeper”, evaluating and monitoring PPP projects, with an aim to reduce fiscal risks. ### Central Bank of Kenya (CBK) safeguards and governance - Safeguards assessment status: - A safeguards assessment completed in September 2005 noted steps taken to implement recommendations of earlier assessments and proposed measures to address remaining vulnerabilities. - CBK agreed in principle to recommendations of the follow-up safeguards assessment mission of 2006, including formalizing in a memorandum of understanding with the government the policy on exclusion of unrealized revaluation gains from profit distribution. - The CBK Board of Directors has passed a resolution adopting the recommendation. ### Key fiscal and program performance indicators (selected figures and outcomes) - Cumulative change in net foreign assets of the CBK (various rows in table): examples shown include 11,348; 11,933; 16,194; 14,716; 15,297; 23,401; 20,958; 20,355. - Cumulative change in reserve money of the CBK: examples shown include 15,122; 14,495; 15,397; 18,791; 17,581; 23,653. - Cumulative change in net domestic financing of the central government (excluding specified items): examples shown include 47,778; 36,239; 29,507; 41,328; 34,661; 59,272; 72,058; 45,940. - New contracted or guaranteed nonconcessional external medium- and long-term debt by the central government or the CBK: program targets and actuals shown as 0; 150; 0. - Accumulation of external payments arrears: shown entries include 0; 223; 234 (not met on some test dates). - Memorandum items: - Programmed external budgetary support (in millions of U.S. dollars): 20; 0; 20; ...0 ... 2 0... 0... - Privatization receipts: 5,726; 4,000; 18,226; ...4,000...18,226...6,000... - Program exchange rate (Kenya shillings per U.S. dollar): 73.88 (repeated). - External debt service net of rescheduling (in millions of U.S. dollars): 184.7; 194.3; 269.1; ...264.0; 353.6; ...366.7... - Fiscal year note: The fiscal year runs July 1 - June 30. - Exclusions/adjusters and program technical notes: - Figures cumulate from the beginning of the fiscal year 2006/07, which began on July 1, 2006. - The maximum upward adjustment to NDF from shortfalls in privatization receipts is capped at US$140 million or Ksh 10.34 billion. - Ksh 1,779 million in obligations due on June 30, 2007 were not paid on time due to technical factors; amounts owed to Paris Club creditors and one multilateral creditor were paid in July 2007. ### Policy actions, structural benchmarks, and implementation status (selected entries) - Governance: - Resubmit to Parliament the Proceeds of Crime and Anti-Money Laundering Bill consistent with international standards: May 31, 2007 — Met. - Resubmit to Parliament the Statute Law (Miscellaneous Amendments Bill): May 31, 2007 — Met. - Fiscal issues: - Publish quarterly reports based on expenditure returns data no later than 45 days after the end of each quarter: Continuous — Met. - Establish objective criteria for granting tax exemptions and waivers: April 30, 2007 — Met. - Make IFMIS operational in four spending ministries for management of the 2007/08 budget (Ministry of Finance, Ministry of Planning and National Development, Ministry of Health, Ministry of Education): June 30, 2007 — Met. - Complete the study of contingent liabilities of twenty-four parastatals’ accounts: September 30, 2007 — Not met. - Present to Parliament the Controller and Auditor General’s Report for FY2005/06: April 30, 2007 — Not Met. - Make the Public Procurement Oversight Authority fully operational under the Procurement and Disposal Act: April 30, 2007 — Not met. - All procurement, including under PPPs, will continue to be subject to the transparent and competitive procedures established under the Procurement and Disposal Act: Continuous — Met. - Financial sector: - Submit to parliament an amendment to the Banking Act (introducing mandatory supervisory intervention and prompt corrective actions; consolidated supervision): June 30, 2007 — Not Met. - Submit to Cabinet for approval a strategy to initiate the sale of GoK and NSSF’s share in the National Bank of Kenya (NBK): June 30, 2007 — Not Met. - Complete a diagnostic audit of the NSSF to form the basis for restructuring and governance reform: May 31, 2007 — Not Met. - Finalize draft regulations necessary to implement the Proceeds of Crime and Anti-Money Laundering Bill: June 30, 2007 — Met. - Private sector and public enterprise reform: - Include in the finance bill for 2007/08 the elimination of business licenses found not to serve a useful purpose: June 30, 2007 — Met. - Establish the Privatization Commission under the Privatization Act 2005: May 30, 2007 — Not Met. ### IMF program context and operational details (selected items) - PRGF arrangement status and access: - Current three-year PRGF arrangement approved on November 21, 2003 in the amount of SDR 175 million; SDR 112.5 million disbursed. - Access was augmented to SDR 225 million at the time of the first review on December 20, 2004; access was reduced to SDR 150 million at the time of the second review, completed on April 11, 2007. - Arrangement extended to November 20, 2007. - Projected obligations to the Fund (SDR million; based on existing use of resources and present holdings of SDRs): - Principal: 2.00 (2007), 6.72 (2008), 11.72 (2009), 16.72 (2010), 15.00 (2011). - Charges/interest: 0.70 (2007), 2.02 (2008), 1.98 (2009), 1.91 (2010), 1.82 (2011). - Total: 2.70 (2007), 8.74 (2008), 13.70 (2009), 18.63 (2010), 16.82 (2011). - Exchange rate and reserves: - On October 31, 2007, the exchange rate was Ksh 67.00 = US$1.00. - Program exchange rate entries elsewhere in program tables: 73.88 (Kenya shillings per U.S. dollar). *International Monetary Fund — Kenya: Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waivers of Nonobservance of Performance Criteria — Informational Annex (as of December 20, 2007, and related tables and sections provided).* ### 5. Enhanced focus on governance. In supporting the government’s Governance ### _cr0918 - 5. Enhanced focus on governance. In supporting the government’s Governance ### Enhanced focus on governance - Bank focus areas in support of the Governance Strategy for Building a Prosperous Kenya (GSPK) and Governance Action Plan (GAP): - Transparency initiatives (including transparency in the judiciary, and capacity building in the prosecutorial and judicial services). - Broadening stakeholder involvement, including additional private participation in infrastructure services such as the ports. - Accelerating public financial management reforms. - Improving governance in high-priority sectors—education, HIV/AIDS, health, and roads. - Analytic work areas to support governance agenda beyond GSPK/GAP and for the next CAS: - Media development. - Parliamentary and judicial capacity. - Police oversight mechanisms. ### Continued attention to accelerated economic growth and public sector management - Major Bank economic study objective: - How Kenya could raise and sustain growth rates from about 6 percent currently to 10 percent as part of its Vision to become a middle income country by the year 2030. - Study scope: - Multi-sectoral: macro-fiscal, infrastructure, trade, human development and financial sector issues; carried out in close collaboration with the government. - IP-ERS priority: - High priority to budgetary and public expenditure reforms is expected to continue despite some delays. ### Public sector institutional strengthening - Institutional Reform and Capacity Building (Technical Assistance) Project supports: - Strengthening capacity for budget formulation and execution, public financial management, internal and external auditing, revenue collection and management, and improved procurement practices. - Strengthening parliamentary committees for oversight. - Establishing a system of results-based management, capacity for monitoring and evaluation, and mechanisms for citizen feedback. - Statistical capacity and monitoring: - Bank Board approved a Statistical Capacity-Building Project (StatCap) in March 2007. - Bank is helping build capacity for monitoring and evaluation through a grant from the Institutional Development Fund. ### Poverty reduction - Bank actions targeting poorest communities: - Preparing a poverty assessment based on the Kenya Integrated Household Budget Survey in collaboration with government and donors. - Arid Lands Resource Management Project Phase Two (effective September 2003) uses a multisectoral, district based, community driven development approach in arid and semiarid districts. - Financing and projects: - August 2006: World Bank approved a US$60 million additional financing credit for emergency drought interventions under ALRMP II. - March 2007: Executive Board approved the Western Kenya Community Driven Development and Flood Mitigation operation to empower local communities and reduce vulnerability to flooding. ### Sustainable development - Agricultural productivity and natural resource management support: - Agricultural Productivity Project (effective October 2004): transforming research and extension to a demand driven, farmer-led and pluralistic system while supporting associated policy reforms. - Natural Resource Management Project expected to be considered late in March 2007: objectives to enhance institutional capacity to manage water and forest resources, reduce incidence and severity of water shocks in river catchments, and improve livelihoods of communities in co-management of water and forests. - GEF-supported projects: - Multicountry Lake Victoria Environmental Project: establishing institutions for sustainable management of the lake and catchment. - Western Kenya Integrated Ecosystem Management Project: improve soils, water, biodiversity management while raising agricultural productivity. - Wildlife Conservation Leasing Demonstration Project (approved August 2006): motivate and enable landowners to maintain wildlife habitat. ### Education and health - Education support: - Free Primary Education Support Project. - Government implementing a SWAp approved by the Bank Board in November 2006 to: ensure equity of access to basic education; enhance quality and learning achievement; provide opportunities for further education and training; and strengthen education sector management and governance. Initial focus on primary education. - Grant-financed Global Development Learning Network project (effective February 2004) to develop mechanisms for learning and knowledge-sharing among policy makers. - Health support: - Decentralized AIDS and Reproductive Health (DARE) Project: improve mother and child health through integrated delivery of child survival, reproductive health, and HIV/AIDS services. - Bank collaboration with development partners on design of a health sector SWAp following government and Bank review confirming concerns about corruption risks. ### HIV/AIDS - Past and ongoing Bank support: - Kenya accessed Africa Region’s Multi-Country AIDS Program (MAP) via Kenya HIV/AIDS Disaster Response Emergency Project (KHADREP). KHADREP closed end-2005. - The Total War on AIDS Project (TOWA), approved by the Bank Board in June 2007, designed to support implementation of the Kenya National AIDS Strategic Plan 2005–2010. - TOWA focus: - Governance and accountability strengthening. - Coordination of the national program following confirmation by government and Bank reviews of corruption in KHADREP. - Provision of grants to implementing agencies (including local communities and the private sector) to reach vulnerable groups. - Support for National AIDS Control Council and provincial, district, and local-level bodies, and selected line ministries in mainstreaming HIV/AIDS-related activities. - Integration: - Medical response to the HIV/AIDS epidemic will be integrated into the Health SWAp. ### Privatization and private sector participation - IFC and Bank roles: - IFC acted as transaction adviser for concessioning Kenya Railways jointly with Uganda Railways, established October 2006. - Energy Sector Recovery Project supported reform of Kenya Power and Light Company; management transferred to a private company in July 2006. - IFC involved as transaction adviser for restructuring Telkom Kenya Limited. - Expected outcome: - Enhanced role for the private sector in managing key utilities. ### Private sector development - Reforms and projects: - Implementation of recommendations including reform of Kenya’s licensing regime to eliminate unnecessary licenses. - Update of investment climate assessment recently carried out. - Joint Bank- and IFC-supported Micro, Small and Medium Enterprise Project to increase MSME access to finance and business development services. - IFC-supported pilot Small and Medium Enterprises Solutions Center started March 2005 to help MSMEs access financial resources, information, and advice. - IFC-supported multidonor Private Enterprise Partnership for Africa to facilitate small firms’ access to financial and business services. - MIGA support and exposures: - MIGA supporting agribusiness, infrastructure, manufacturing and services sectors. - Total gross exposure from investments sponsored by investors from the Cayman Islands, South Africa, United States is US$58.3 million. - June 2007: Agency provided additional coverage toward expansion of a greenfield sugar factory in western Kenya; financed by the Industrial Development Corporation of South Africa. - FY08: MIGA will continue support in power sector by underwriting the second phase (expansion) of a geothermal project; anticipated gross exposure up to US$200 million. ### Regional integration and trade environment - Regional initiatives and memberships: - 2005: Kenya launched a customs union with Tanzania and Uganda within the East African Community (EAC), including a common external tariff. - Active involvement in Common Market for Eastern and Southern Africa and in negotiations of economic partnership agreements with the European Union. - Trade support: - 2006: Bank prepared a trade report focusing on behind the border supply-side constraints to support implementation of government’s Private Sector Development Strategy. ### Infrastructure development - Bank-supported projects and objectives: - Northern Corridor Transport Improvement Project: financing reconstruction of road network linking Kenya with Uganda, Rwanda, Burundi, and the Democratic Republic of Congo; upgrading Jomo Kenyatta International Airport passenger facilities and security. - Joint concessioning of Kenya’s and Uganda’s railways expected to catalyze regional integration and growth. - Nairobi Water and Sewerage Institutional Restructuring Project (grant-financed, effective September 2004): build institutional and governance framework for efficient, sustainable delivery of water and sewerage services in Nairobi. - EAC Regional Trade and Transport Facilitation Project: supporting railway concessioning and customs reform at the Mombasa port. - Bank review of roads portfolio to improve implementation and ensure economic rationale in project selection. ### Transparency and communications infrastructure - ICT reform outcomes and objectives: - Liberalization of international voice/data market: more than eighteen international gateway licenses awarded over the last 14 months (including for the two mobile network operators); tariffs have fallen by over 50 percent. - Example innovation: Celtel launched in October 2006 a seamless local service across Kenya, Uganda and Tanzania. - Second National Operator license awarded competitively in late 2006 for US$169.7 million. - Telkom Kenya (TKL) being restructured in preparation for privatization. - Government ICT targets (as part of larger program): - (a) tripling the number of telephone lines from 7.5 million to 23 million in three years; - (b) increasing the number of Internet users from 1.25 million to 5 million in three years; - (c) establishing at least one digital village or e-centre in each constituency within this year; - (d) ensuring that every school in Kenya has access to ICT resources by the end of the year; - (e) providing e-government services at district and constituency level. - Bank support: - Transparency and Communications Infrastructure Project supporting enabling institutional/regulatory environment, connectivity, and transparency including e-government applications. ### Financial sector development - Identified needs: - Urgent reform due to relatively high nonperforming loans, wide interest rate spreads, and weak legal and judicial system. - Joint assessments and assistance: - Bank and IMF conducted a joint Financial Sector Assessment Program in 2004 highlighting vulnerabilities. - Financial and Legal Sector Technical Assistance Credit approved October 2004 to support development of financial and legal sector strategies, strengthen regulations and institutions, and establish a bank restructuring and privatization project within the Ministry of Finance. ### Summary of Bank’s Lending Portfolio (As of March 5, 2007) - Portfolio totals: - Total IDA: 989.7 - Total GEF: 4.1 - Total Undisb.: 779.1 - Project-level original amounts in US$ Millions and other figures (as presented): - P085414 2007 National Statistical Capacity Development: IDA 20.5; GEF 0; Undisb. 20.3 - P081712 2007 Total War Against HIV/AIDS: IDA 80.0; GEF 0; Undisb. 81.1 - P074106 2007 Western Kenya CDD/Flood Mitigation: IDA 86.0; GEF 0; Undisb. 88.4 - P095050 2007 Natural Resource Management Project: IDA 68.5; GEF 0; Undisb. 69.7 - P087479 2007 Educ Sec Sup Project (FY07): IDA 80; GEF 0; Undisb. 65.9 - P090567 2006 Inst Reform & Capacity Bldg TA (FY06): IDA 25; GEF 0; Undisb. 22.5 - P072981 2005 GEF W KE Int Ecosys Mgmt SIL (FY05): IDA 0; GEF 4.1; Undisb. 3.2 - P083131 2005 Energy Sec Recovery Project (FY05): IDA 80; GEF 0; Undisb. 76.9 - P083250 2005 Financial & Legal Sec TA (FY05): IDA 18; GEF 0; Undisb. 16.4 - P085007 2005 MSME Competitiveness: IDA 22; GEF 0; Undisb. 19.4 - P049618 2004 Nairobi Wtr & Swg Inst Rst SIL (FY04): IDA 15; GEF 0; Undisb. 3.2 - P082615 2004 Northern Corridor Transport SIL (FY04): IDA 207; GEF 0; Undisb. 180.4 - P082396 2004 Agricultural Productivity Project (FY04): IDA 40; GEF 0; Undisb. 15.8 - P078209 2004 Dev Learning Centre LIL (FY04): IDA 2.7; GEF 0; Undisb. 1.3 - P082378 2003 Free Primary Educ Support (FY03): IDA 50; GEF 0; Undisb. 0.2 - P078058 2003 Arid Lands 2 SIL (FY03): IDA 120; GEF 0; Undisb. 74.4 - P070718 2001 Regional Trade Fac. Project: IDA 25; GEF 0; Undisb. 27.7 - P066486 2001 Decentr Reprod Hlth & HIV/AIDS (FY01): IDA 50; GEF 0; Undisb. 12.3 ### IMF-World Bank collaboration in specific areas - Ongoing collaboration: - Close collaborative relationship in support of structural reforms in Kenya through lending, analytic work, and technical assistance. - Joint assessment: - Bank and IMF staffs jointly prepared a staff advisory note on Kenya’s Annual Progress Reports of the IP-ERS in March 2007. - Macroeconomic division of roles: - IMF leads on monetary issues: monetary policy, inflation target, nominal exchange rate management, and central bank operations. - Bank leads on growth and real sector issues, coordinates with IMF on fiscal policy, debt sustainability, real exchange rate, public sector management, and is conducting growth analytic work in context of Vision 2030. - Budgetary and public expenditure reforms: - Bank leads dialogue on planning, preparation of the medium-term expenditure framework, strategic resource allocation aligned with IP-ERS priorities, expenditure restructuring, stakeholder participation, efficiency issues such as expenditure tracking. - Bank and IMF collaborate on internal audit reform and on the integrated financial management information system. - Revenue collection and administration: - Bank and Fund carried out detailed assessments of customs operations and tax administration respectively. - Fund has provided technical assistance to the Kenya Revenue Authority. - Bank assisted customs department with a time release study of clearing containers. - Fund (through AFRITAC) and Bank collaborated on supporting Kenya Revenue Authority to prepare a reform and modernization plan. - Institutional Reform and Capacity Building TA Project will finance capacity building of the Kenya Revenue Authority. - EAC Regional Trade and Transport Facilitation Project supports customs reform. *Italic: Content derived from the IMF/World Bank country chapter provided.* ### 23. Debt management and debt sustainability analysis. The IMF prepared an external ### 23. Debt management and debt sustainability analysis ### Debt management and debt sustainability analysis - IMF prepared an external debt sustainability analysis in December 2003 and updated it in December 2004. - The Bank and Fund prepared a joint debt sustainability analysis covering both external and domestic public debt in March 2007. - In the context of the Financial Sector Assessment Program, a joint World Bank/IMF initiative supports capacity-building in sovereign debt management and domestic debt market development. - Staff recommendation: draw upon debt management expertise available in the Fund (noted in the IMF Executive Board statement). ### Governance reforms - Governance reforms are a key element of the government's strategy to promote economic growth and reduce poverty. - The Fund’s PRGF supports a deepening of anticorruption measures. - Bank and IMF coordinate closely on governance; jointly participate in the anticorruption donor group monitoring implementation of the government's anticorruption action plan. - IMF staff participated in Governance Missions in June/July 2006 and February 2007. - Board statement observations: - Efforts to fully implement the Governance Action Plan should continue. - More progress is needed in investigating and prosecuting high-profile corruption cases. ### Financial sector reforms - IMF and Bank collaborated on financial sector reforms. - A joint in-depth assessment of the financial sector (banking, insurance, and capital markets) was conducted through the Financial Sector Assessment Program. - Board statement observations: - Monetary policy should remain focused on securing low inflation. - It will be essential that the Central Bank of Kenya achieve its reserve money targets. - The planned sovereign bond would have limited effect on the net present value of Kenya’s debt; authorities should consider allocating a higher share of planned proceeds to debt reduction. ### Privatization and private sector development - The Bank leads dialogue on privatization and regulatory reforms; IMF partners particularly on fiscal implications of parastatal reforms. - Structural performance criterion noted: submission to Cabinet for approval of a strategy to initiate the sale of government and NSSF shares in the National Bank of Kenya. ### Regional integration and trade reforms - IMF and Bank advised on implementation of the common external tariff. - Bank provides technical advice on regional integration issues. - Bank finalized a regional assessment of nonfiscal investment incentives in each of the three states of the EAC, complementing an earlier IMF report on harmonization of incentives for the customs union. - Bank implementing a Regional Trade Facilitation Project to provide political-risk and export insurance for cross-border trade between participating countries. - Bank and African Development Bank implementing the EAC Regional Transport and Trade Facilitation Project, which includes support for customs union implementation and transport facilitation. - Bank and Africa Development Bank prepared a regional integration assistance strategy for East Africa. ### Statistical issues — overview - Provision of Kenya’s economic and financial data is broadly adequate for surveillance and program monitoring, but weaknesses reflect managerial and organizational shortcomings and inadequate resources at the Central Bureau of Statistics (CBS). - Government plans to establish an autonomous National Bureau of Statistics (NBS) to replace the CBS during fiscal year 2006/07 (in line with the new Statistics Law). - The Report on the Observance of Standards and Codes—Data Module (IMF Country Report No. 05/388), published October 31, 2005, stated methodological soundness is uneven; significant improvement required in government finance statistics and national accounts. - Kenya participates in the Fund’s General Data Dissemination System (GDDS) and the GDDS project for Anglophone Africa; metadata and plans posted on the Fund’s DSBB. - AFRITAC East Statistical Advisor has undertaken further assessment of capacity building needs. ### National accounts - Data quality deteriorated significantly due to budgetary and staff constraints at the CBS; GDP is believed to be significantly underestimated because informal sector, nonagriculture subsistence, horticulture, and self-employed professionals are not properly covered. - An STA peripatetic advisor assisted authorities in rebasing national accounts at constant 2001 prices and compiling institutional accounts for general government. - National accounts estimates for 1996–2005 in current and constant (2001) prices have been published. - Quarterly national accounts are being developed with assistance of AFRITAC East. ### Prices and production - No producer, export, or import price indices are produced. - In early 2002, CBS began publication of a new national CPI (covering 13 urban towns), with 1997 as reference year and weights/basket derived from the 1993-94 Household Budget Survey (HBS); indices are produced for lower and middle/upper income groups and Nairobi and other cities; index compiled and published on a timely basis. - Kenya is updating CPI weights using results of the 2004/5 integrated HBS to conform to CPI Manual 2004. - Identified needs: - Review formula used at the elementary aggregate level (current chained average of relatives for “food and non-alcoholic beverage” does not conform with international standards). - Examine treatment of seasonal goods and services. - Assess adequacy of CPI compilation software. ### Government finance statistics (GFS) - ROSC mission emphasized improvements: (i) migration to GFSM 2001 methodology and training of MOF staff; (ii) broaden coverage to include extrabudgetary and social security funds and report general government level; (iii) reconcile fiscal statistics from various sources; (iv) improve information on external financing, particularly expenditure directly financed from abroad; (v) compile and disseminate monthly and quarterly budget execution data. - Since FY 2005/06, Kenya followed a new economic classification of the budget based on GFSM 2001 (with AFRITAC-East assistance); serious delays in reporting emerged due to difficulties establishing budget execution and accounting systems consistent with new classification. - Progress toward moving to IFMIS; important gaps remain in reconciliation of fiscal data from different sources, including MOF units. - Discrepancies in budget outturn data (between deficit/surplus and financing) remain significant; recording of external financing and expenditure directly financed from abroad requires improvement. - Government initiated a project to rationalize/eliminate extrabudgetary funds; progress in compiling consolidated fiscal statistics remains limited. - Country reports data to STA for budgetary central government for inclusion in GFS Yearbook with significant lag—the last data reported were for year ending June 2005. - CBS compiles aggregate annual GFS revenue and expenditure data for budgetary central government based on Controller and Auditor General reports; submission for publication in the 2007 GFS Yearbook reported in GFSM 2001 format using bridge tables from technical assistance missions. - Monthly and quarterly data are regularly reported for inclusion in International Financial Statistics (IFS). ### Monetary statistics - CBK experienced delays implementing the Monetary and Financial Statistics Manual and adopting IMF standardized report forms (SRFs); authorities submitted SRF test data but further progress stalled until 2007 missions. - March 2007 STA mission established the SRF for central bank data, revised reporting form and compilation notes for other depository corporations (ODCs) in line with MFSM, and identified ODC subsector coverage. - Mission found misclassification of several central government deposits as private sector deposits. - Major future issue: expansion of ODC coverage to include Savings and Credit Cooperatives (SACCOS); as of end-March, 2007, there were 3,800 SACCOs, accounting for about 30 percent of the total deposits of the banking system. - Legislation for increased supervision over SACCOs has been prepared and hoped to be enacted shortly. - Monthly data would be generated as part of the supervisory function. - June 2007 follow-up mission conducted a workshop for ODC officials and established a system for reporting Form 1SR to the IMF; new Standardized Reporting System for ODCs’ data to the central bank was finalized. ### External sector statistics - CBS compiles annual balance of payments statistics in Kenya shillings regularly reported to STA, although with considerable delay. - CBK compiles a complete set of annual balance of payments statistics in U.S. dollars, reported to AFR and used for programming and surveillance; the two datasets are not entirely consistent and reconciliation is a priority. - CBK started to compile and publish quarterly balance of payments estimates. - Trade data quality may be reasonably good, but data for other current account and many financial account transactions are weak. - Post-liberalization (1993–94) gaps: compilation system relies on reports from domestic banks, potentially leading to underrecording of current earnings (including tourism receipts), private sector investment flows, and transactions settled via accounts held abroad. - Estimates of direct and portfolio investment are believed to be substantially understated. - MOF compiles public and publicly guaranteed external debt obligations to official and commercial creditors; database does not account for nonresident purchases of government’s domestic currency-denominated debt securities. - In the 2002 loan-by-loan DSA, Fund and World Bank staffs identified several significant debt data problems that authorities have addressed, but significant debt data management problems remain and need integration into budget formulation and expenditure management systems. - January-February 2006 mission recommended: introduce a foreign direct investment survey, enhance foreign exchange statistics survey, and use a common methodology across CBS and CBK (including for estimations). - Workers’ remittances estimates are now included in the CBS annual BOP following mission advice. - GDDS website plans: dissemination of methodology documentation; joint MOF/CBK/CBS work on external debt; compilation of international investment position data. ### IMF Executive Board and PRGF-related outcomes (Press Release No. 07/265; November 16, 2007) - IMF Executive Board completed the third and final review under the three-year PRGF arrangement and approved a disbursement equivalent to SDR 37.5 million (about US$59.3 million), bringing total disbursements under the arrangement to SDR 150 million (about US$237.4 million). - Board approved waivers for nonobservance of four performance criteria and one prior action, including: - One quantitative performance criterion on CBK reserve money. - One quantitative performance criterion pertaining to non-accumulation of new external payment arrears. - One structural performance criterion on submission to Cabinet for approval of a strategy to initiate sale of government and NSSF shares in the National Bank of Kenya. - One structural performance criterion on making the Public Procurement Oversight Authority fully operational under the Public Procurement and Disposal Act. - Prior action related to dissemination of information on procurement contracts. - PRGF chronology and access changes: - Original PRGF approved November 21, 2003 in amount equivalent to SDR 175 million (about US$276.9 million). - December 20, 2004: Executive Board approved augmentation of access under PRGF of SDR 50 million (about US$79.1 million). - Arrangement extended to April 30, 2007 to allow time to complete second review. - Additional extension to November 20, 2007 approved on April 11, 2007, along with reduction in access by SDR 75 million (about US$118.7 million), consistent with an improvement in Kenya's external position. - Remaining disbursements were rephased, bringing total available under the arrangement to SDR 150 million (about US$237 million). - Board and staff observations: - Kenyan economy growing strongly with sound macroeconomic management and progress in structural reforms; external position strengthened. - Sharp increase in spending envisaged in 2007/08 budget entails risks; authorities plan to backload development spending and fully implement budget only if inflation remains low and project quality maintained. - Temporary accumulation of external payment arrears is regrettable. - Business regulation streamlined and public financial management strengthened (advances in IFMIS implementation and continuous progress in public enterprise reform). - Further efforts needed to improve legal framework for public finance management and accelerate financial sector reform. *Prepared by World Bank staff; questions may be addressed to Colin Bruce, Country Director, Kenya, at 5368+3441, or Praveen Kumar, Country Economist, at X-36347.* ### 3. Notable progress has been made in implementing the main components of the ### 3. Notable progress has been made in implementing the main components of the reform program ### Progress on reform implementation - Significant progress in tackling governance weaknesses; strengthening fiscal policy for stability and growth; enhancing public financial management; strengthening the financial sector; progress in productive sector and public enterprise reforms, and the privatization program. - Business environment improved substantially, including halving the number of days to start a business. - Implementation of the Governance Action Plan for Building a Prosperous Kenya deepened with the enactment of the Miscellaneous Amendments Bill. - Ongoing business license reforms are expected to further improve Kenya’s doing business indicators. ### Program implementation and performance criteria - Program implementation supported by the PRGF arrangement remained on track: most of the 13 performance criteria (PCs) for the third review under the PRGF arrangement were met. - Two quantitative and two structural PCs were not observed on time; appropriate corrective measures have been taken. - Specific PC developments: - The end-June quantitative PC on the reserve money of the Central Bank of Kenya (CBK) was missed; authorities initiated measures to tighten monetary policy since August and slowdown the annual reserve money growth within its target range. - The continuous PC on the non-accumulation of external arrears was breached by a negligible margin, but all arrears have been cleared since then. - The structural PC on making the Public Procurement Oversight Authority (PPOA) operational was not met at end-April, but it is now fully operational with an interim Advisory Board and Director General. - The end-June PC on the submission to the Cabinet of a strategy to initiate the privatization of the National Bank of Kenya (NBK) was not met, but the strategy was submitted in November. - Given achievements and commitment, the authorities requested completion of the Third Review of the PRGF-supported program and granting of the associated waivers. ### Recent economic developments and outlook - Growth and inflation: - GDP expanded above 6 percent in the 2006/07. - Growth was broad-based with strong performance in manufacturing, tourism, transport and communications, and financial services. - Nonfood inflation was contained at below 6 percent. - Overall inflation rose to 10.6 percent (y/y) at end October due to increases in food prices. - Fiscal performance: - Overall deficit (commitment basis, including grants) was reduced to 1.7 percent of GDP, compared to the program target of 3.3 percent of GDP. - Sovereign ratings: - Standard and Poor maintained Kenya’s sovereign credit rating of “B+” for foreign currency and “BB-” for local currency long-term sovereign debt. - Outlook: - Authorities expect real GDP to continue growing at a robust level and inflation to decline significantly. - GDP expansion expected at about 6-7 percent, supported by favorable weather, strong tourism demand, and recent robust income growth. - Inflation expected to decline to 5.8 percent by the end of the fiscal year. - Current account deficit likely to widen as growth strengthens and foreign-financed project imports increase. - Financial inflows should allow foreign exchange reserves to be maintained at an equivalent of 3.2 months of imports by mid-2008. - Risks and challenges: - Economy remains vulnerable to exogenous shocks. - Government faces challenges in improving effectiveness of key public institutions, increasing breadth and quality of infrastructure, improving external competitiveness, sustaining high economic growth, and reaching the MDGs by 2015. ### Fiscal policy and debt management - Authorities committed to fiscal consolidation and limiting recourse to domestic financing while accommodating expenditure increases for productivity-enhancing infrastructure and poverty-reducing programs to support ERS and Vision 2030. - Priority spending areas: - Roads, energy and other projects identified in the Vision 2030. - Introduction of free tuition for public secondary schools. - Scaling up spending on preventive health care. - Agricultural development. - Implementation measures: - Improve procurement processes and monitoring to preserve quality of spending. - Deepen PFM reform implementation and promote public-private partnerships (PPPs). - Confidence that the NDF target will be observed and that donors’ concessionnal financing will continue increasing to complement domestic revenue collection. - Steps taken to improve aid coordination and harmonization, including the recently launched Joint Assistance Strategy; improved data reporting on development spending; and intensified portfolio and disbursements monitoring. - Sovereign bond: - Favorable international credit ratings provide an opportunity to issue a sovereign bond of about 1.0 percent of GDP, with proceeds to finance high return development projects and to settle external arrears on previously disputed contracts. - Authorities are receiving TA from the Fund on how best to proceed with the issuance of the bond. - Debt sustainability: - Kenya has managed its debt relatively well and has regularly met its obligations to most creditors. - Limited external borrowing has resulted in more manageable debt ratios than most low-income country peers. - The joint IMF-World Bank debt sustainability analysis (DSA) found Kenya’s debt to be low and sustainable. ### Monetary, exchange rate and financial sector policies - Monetary objectives and operations: - Main objective is to continue maintaining low inflation levels. - CBK committed to meeting its reserve money targets. - Continue to fine tune open market operations and promote interest rate flexibility. - Improve coordination with the Treasury to reduce liquidity impact of government use of CBK overdraft facility. - Stimulate participation of smaller public investors in T-bills purchases. - Maintain a floating exchange rate regime and monitor real exchange rate developments to preserve external competitiveness. - Financial sector development: - A long term strategy for financial sector development is being formulated. - A medium-term development strategy expected to be finalized in early 2008 will include reforms to improve access by majority of Kenyans to financial services and enhance governance, efficiency and stability of the financial system. - Authorities committed to accelerating public financial enterprise reforms and developing a financial sector reform strategy based on market principles. - Expanded access to financial services highlighted as key to achieving growth objectives. ### Structural reforms - Governance: - Tackling governance weaknesses remains a top priority. - Kenya Governance Action Plan (GAP) well received by citizens, private sector and cooperating partners. - Implementation of GAP pillars will be deepened with emphasis on prevention, investigation, restitution, and improvement of governance in priority sectors. - Priority on administrative and preventive actions expected to yield measurable short-run improvements in governance and anti-corruption efforts. - Priority governance actions that do not require legislation include expanding court facilities, hiring additional prosecutors, accelerating training of judges, automation of recording court proceedings, auditing Constituency Development Fund and Local Authority Transfer Funds and other development funds. - Private sector development and trade: - Promoting private sector led growth remains a priority. - Authorities committed to continuing streamlining Kenya’s business licensing system and promoting a more open trade regime. - Trade liberalization to be pursued to enhance efficiency and strengthen growth prospects. - Kenya to implement in full East African Community (EAC) commitments and push for further steps to open up the EAC to enhance competition and efficiency. - Kenya active in the Doha Round and supports efforts to bring the Round to a successful conclusion. ### Conclusion - Sound macroeconomic policies and deepened structural reforms have contributed to robust growth, reduced poverty levels, and established a good track record in program performance. - Authorities committed to continue delivering on the Economic Recovery Strategy, Vision 2030 and the Governance Action Plan. - Authorities confident that the Fund would continue to play a positive and catalytic role in supporting the country’s development strategy. - Authorities intend to remain engaged with the Fund through an appropriate program to be determined after the general elections scheduled for 27 th December 2007. *Source: _cr0918 - 3. Notable progress has been made in implementing the main components of the (PDF).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0918.pdf_