## _cr09191

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### Recent developments and exogenous shocks
- Real GDP growth averaged 6 percent over 2004–07, peaking at 7 percent in 2007; growth estimated at 2 percent in 2008 and 3 percent in 2009 (staff/authorities).
- Post-election violence in December 2007: Real GDP contracted by 1.1 percent (year-on-year) in Q1 2008; agriculture and forestry shrank by 4.4 percent in Q1 2008; tourist arrivals down by over 30 percent.
- 2008 continuation of shocks:
  - Rising international fuel and fertilizer prices reduced fertilizer use and mechanized land utilization, contributing to lower maize yields.
  - Poor rainfall in October–November 2008 exacerbated maize shortfalls.
  - Global financial crisis in late 2008 curtailed export growth, tourism receipts, remittances and private capital flows.
- CPI measurement issue: CPI inflation is overstated by a factor of about two owing to methodological problems; STA provided technical assistance and KNBS initiated rebasing/reweighting and a Point of Sale Survey (PSS) in February 2009.

### Balance of payments, reserves, and quantified shock impacts
- Staff estimate of cumulative adverse impact of exogenous shocks on the BOP during 2008/09–2009/10:
  - Range: 4½–7¼ percent of GDP (US$1.4−US$2.2 billion).
  - Staff indicates exogenous shocks are responsible for at least 70 percent of the US$ 1.95 billion (6½ percent of GDP) cumulative deterioration in the BOP during 2008/09−2009/10 compared with 2007/08.
- Decline in net FDI and short-term capital flows represents over 7 percent of GDP and is the single most important driver of BOP deterioration.
- Change in gross official financing (mainly project grants and loans) projected to increase by US$544 million relative to 2007/08.
- Remaining financing gap of about US$201 million for which the authorities seek financing.
- Gross official reserves projected to decline to less than 3 months of imports by end-2009/10 from over 3½ months at end-2007/08; alternatives show reserves as 2.9 and 2.7 months without ESF financing.
- Trade-component examples (staff Alternative A, table excerpts preserved): tea exports impacts include values such as -526, 865, -158, -93; horticulture impacts include -95, -87, -182, -73, -144, -217; net oil components include -101, 452, 351, 402, 823, 1225; maize imports include -56, -55, -112, 49, 13.

### Monetary conditions and inflation
- Exchange rate movements:
  - Shilling depreciated with respect to the US dollar by 24 percent in the year (end-2008 vs prior).
  - Shilling depreciated in real effective terms by about 10 percent since the beginning of 2008.
  - Ksh per US $ exchange rate (end of period) entries include: 62.6; 64.6; 78.3 (Actual as of May 15, 2009).
- Monetary aggregates and interest rates:
  - Broad money growth (projected): 13 percent in 2008/09 and 15.8 percent in 2009/10 (monetary program targets).
  - M3 annual changes series include: 16.0; 18.2; 7.8; 19.3; 18.0; 17.2; 17.2; 17.2 (for successive years shown).
  - As of mid-March 2009, short-term interest rates: 91-day T-bill about 7.4 percent; repo 4.3 percent; interbank 5.5 percent.
  - CBK cut policy rate by a total of 75 basis points and reduced cash reserve requirement by 1 percentage point (as of March 2009).
- Inflation:
  - Headline inflation reached 27.7 percent (end-2008), averaging 26.2 percent for 2008 as a whole.
  - Underlying inflation increased from 5.3 percent at end-2007 to 9 percent in December 2008, then declined.

### Fiscal position, financing gap, and public debt indicators
- Revenue collections below budget in first 9 months of fiscal 2008/09; expenditures also below budget due to slow execution of externally financed projects.
- Domestic financing need arose from postponed sovereign bond issue and privatization and drought mitigation, creating domestic financing of 4 percent of GDP.
- Authorities requested Fund support under the Rapid-Access Component of the ESF in the amount of SDR135.7 million (about US$201 million).
- Official reserves estimated to fall by 23 percent or almost US$800 million between 2007/08 and 2008/09 absent ESF financing.
- Fiscal framework projections and levels:
  - Overall budget deficit (commitment basis) excluding grants: series include -2.7; -5.4; -6.2; -6.8; -6.0; -5.8; -5.4; -5.3 (percent of GDP across years shown).
  - Overall deficit (cash basis) including grants: -1.8; -3.6; -5.2; -5.4; -4.6; -4.4; -4.2; -4.1 (percent of GDP across years shown).
  - Net domestic borrowing (percent of GDP): 2.0; -0.7; 4.0; 4.2; 2.7; 2.5; 2.6; 2.0 (series shown).
  - Authorities plan to borrow about Ksh 109 billion (4.2 percent of GDP) in 2009/10 if sovereign bond issuance does not proceed; authorities hope to issue a sovereign bond of US$500 million (1.5 percent of GDP) in 2009/10 which would reduce domestic borrowing equivalently.
- Public and external debt:
  - At end-2008, nominal public external debt estimated at $6.2 billion (20.4 percent of GDP).
  - Creditor composition: about 60 percent multilateral (47 percent to the World Bank), about 39 percent bilateral (largely Paris Club), under 2 percent commercial creditors.
  - Net domestic debt at end-2008: Ksh 340.4 billion (16.1 percent of GDP).
  - Pay-as-you-go pension claims estimated at Ksh 271 billion (11.8 percent of 2008/09 GDP) from an August 2005 actuarial study.

### Social and humanitarian impact
- Food insecurity increased by about 47 percent to around an estimated 10 million people.
- Government declared a food emergency for an estimated 10 million food-insecure Kenyans and appealed to donors for US$410 million in food and agriculture-related support.
- World Food Program appealed for over US$200 million.
- Government and private sector need to import about one million tons of maize and other cereals between February and August 2009; NCPB expected to import 3 million bags under a USDA commodity credit guarantee.

### Policy response and planned measures
- Immediate policy response:
  - Monetary easing to support activity; CBK cut policy rate and reduced reserve requirement.
  - Fiscal reprioritization and temporary accommodation while protecting key infrastructure and social spending.
  - Trade measures: suspension of VAT and customs duties on imported maize effective February 2009 for six months.
  - Maize subsidy: initial generalized maize subsidy introduced late-2008 was abandoned in early 2009; government and World Bank to develop a well-targeted subsidy program by end-2009.
  - Strengthening financial sector surveillance: CBK stepped up supervision, conducted inspections, requested technical assistance, and tightened reporting standards (including NPLs by sector).
  - Statistical reforms: KNBS to launch new CPI with revised methodology by end-May 2009; PSS launched February 2009.
  - Governance measures: management changes and forensic audit at NCPB; KACC investigations; management changes at KPC.
- External assistance and ESF request:
  - Government requests maximum access of 50 percent of quota via RAC of the ESF (SDR135.7 million, about US$201 million) to rebuild reserves and close financing gap without disrupting domestic financial markets.
  - Disbursement under RAC envisaged to be combined with increased donor support.
- Reserve and exchange-rate strategy:
  - Authorities reaffirm commitment to a market-determined, managed float; interventions limited to smoothing volatility.
  - CBK strategy to gradually rebuild official foreign exchange reserves consistent with a reserve money path to reduce inflation to 5 percent by June 2010.

### Risks to the outlook
- Shocks characterized as large and temporary but amplify vulnerability to further shocks.
- Downside risks include continued weakness in exports, tourism, remittances, and private capital flows tied to global conditions, and extended agricultural shortfalls requiring imports.
- Domestic political risks: tensions within the coalition government could threaten political stability; a breakup could negatively impact growth.
- Staff growth projections: staff project GDP growth around 3 percent in 2009/10; program projections include sequences such as real GDP growth (market prices): 6.7; 3.5; 3.0; 3.1; 5.2; 6.3; 6.5; 6.5 (successive years shown).

### Debt sustainability assessment and policy implications
- External DSA baseline: low risk of external debt distress; key thresholds for a medium performer include NPV debt-to-GDP 40 percent and NPV debt-to-exports 150 percent.
- Selected DSA excerpted outcomes:
  - NPV of PPG external debt (percent of GDP, baseline 2009–2014): 11.8; 11.2; 10.6; 10.9; 11.2; 11.5.
  - Combined shocks raise NPV of PPG external debt (percent of GDP, 2009–2014): 11.8; 14.6; 18.6; 18.6; 18.9; 19.1.
  - NPV of PPG external debt (percent of exports) baseline and combined shocks examples: baseline 47.9; 51.0; 50.5; 51.5; 50.9; 51.0; combined shocks 47.9; 56.9; 69.6; 69.6; 67.6; 66.6.
- Public debt (including domestic) shows greater vulnerability under adverse scenarios:
  - NPV of total public debt-to-GDP was 31.1 percent in 2008 and remains below 35 percent under baseline, but a two-year growth shock or permanently lower growth could raise NPV of debt-to-GDP above 40–48 percent over the medium to long term.
- Policy recommendations from DSA and staff:
  - Sustain macroeconomic stability; exercise a prudent borrowing strategy (use joint Fund-Bank DSA template).
  - Substantial investment in infrastructure to boost productive capacity.
  - Regulatory and governance reforms to improve investment climate and reduce contingent liability risks.
  - Avoid excessive and nonconcessional borrowing as access to external financing expands.

### Staff appraisal and recommendation
- Staff supports the authorities’ request for disbursement under the Rapid-Access Component of the ESF (SDR135.7 million).
- Fund assistance combined with donor support and implementation of authorities’ agreed macroeconomic and structural policies would be consistent with Kenya’s capacity to repay the Fund.
- Expected policy priorities: reduce inflation, rebuild foreign exchange reserves, protect key infrastructure and social spending, and implement structural and governance reforms including a targeted subsidy framework to address the food deficit efficiently.

*Source: Executive Summary and selected sections from IMF staff report for request for disbursement under the Rapid-Access Component of the Exogenous Shocks Facility (Content unit: _cr09191).*

### Executive Summary ......................................................................................................

### Executive Summary

### Recent developments and exogenous shocks
- Kenya’s real GDP growth averaged 6 percent over 2004–07, peaking at 7 percent in 2007.
- The economy entered 2008 with strong momentum but was disrupted by post-election violence in December 2007:
  - Real GDP contracted by 1.1 percent (year-on-year) in Q1 2008.
  - Agriculture and forestry shrank by 4.4 percent in Q1 2008.
  - Tourist arrivals were down by over 30 percent.
- A series of exogenous but temporary shocks in 2008 further stalled recovery:
  - Rising international prices, particularly fuel and fertilizer, reducing fertilizer use and mechanized land utilization and contributing to lower maize yields.
  - Poor rainfall in October–November 2008 that exacerbated maize shortfalls.
  - Global financial crisis in late 2008, curtailing export growth, tourism receipts, remittances and private capital flows.
- The CPI inflation is overstated by a factor of about two due to methodological problems; STA has provided initial technical assistance to resolve problems and change to a new methodology.

### Impact of the exogenous shocks (balance of payments, reserves, and monetary effects)
- The exogenous shocks are the primary source of the deterioration in Kenya’s balance of payments (BOP) since the first half of 2008/09.
- Staff estimates of the cumulative adverse impact of exogenous shocks on the BOP during 2008/09–2009/10:
  - Range: 4½–7¼ percent of GDP (US$1.4−US$2.2 billion).
  - Staff indicates exogenous shocks are responsible for at least 70 percent of the US$ 1.95 billion (6½ percent of GDP) cumulative deterioration in the BOP during 2008/09−2009/10 compared with 2007/08.
- Key quantified impacts and projections:
  - The decline in net FDI and short-term capital flows, the single most important driver of the BOP deterioration, represents over 7 percent of GDP.
  - Change in gross official financing (mainly project grants and loans) is projected to increase by US$544 million relative to 2007/08.
  - There is a remaining financing gap of about US$201 million for which the authorities seek financing.
  - Gross official reserves are projected to decline to less than 3 months of imports by end-2009/10, from over 3½ months of imports at end-2007/08; without ESF financing to close the gap, projected reserves show as 2.9 and 2.7 months in alternatives presented.
- Trade and components (selected examples from staff estimates, Alternative A):
  - Tea exports impact: series of values shown including -526, 865, -158, -93 (in table context).
  - Horticulture exports impact examples: -95, -87, -182, -73, -144, -217 (in table context).
  - Net oil and oil products: components include figures such as -101, 452, 351, 402, 823, 1225 (in table context).
  - Maize imports shown with impacts such as -56, -55, -112, 49, 13 (in table context).
- Monetary and exchange rate effects:
  - Broad money and aggregate credit growths slowed at end-2008, consistent with lower than projected real income.
  - The exchange rate depreciated with respect to the US dollar by 24 percent in the year (end-2008 vs prior).
  - The shilling depreciated in nominal effective terms in the second half of 2008 and exhibited downward pressure since then.
  - In real effective terms, the shilling depreciated by about 10 percent since the beginning of 2008.
  - Strengthening of the US dollar against other currencies in the CBK foreign assets portfolio contributed to some revaluation loss.

### Policy response, request for disbursement under the RAC of the ESF, and macroeconomic framework
- Authorities’ immediate policy response:
  - Monetary policy eased to support economic activity.
  - Fiscal policy focused on reprioritizing expenditure.
  - Structural measures targeted: improving food distribution mechanisms to improve access to staples for an estimated 10 million food deficient Kenyans; measures to strengthen the banking system to moderate shocks’ impact.
- External assistance and ESF request:
  - The Rapid-Access Component (RAC) of the ESF would assist Kenya to rebuild foreign reserves without disrupting macroeconomic stability and bolster market confidence.
  - Fund support under RAC would be provided in the context of an increase in donor support.
- Medium-term policy commitments by the authorities:
  - Additional macroeconomic and structural policies to reinforce macroeconomic stability, reduce inflation, and rebuild reserves.
  - Introduction of a sustainable and targeted subsidy framework late in 2009 to improve food security for the most vulnerable households.
- Projections and constraints:
  - Recent improvements in Kenya’s terms of trade (largely from lower oil prices) could moderate the shocks’ overall BOP impact.
  - Kenya will need to substantially increase maize imports until at least the third quarter of 2009, when the next food harvest is expected—this will further erode official reserves and put pressure on the exchange rate while exports, remittances, and capital inflows are threatened by the global slowdown.
  - For 2009/10, staff and the authorities project an improvement in the overall BOP as imports decline with lower oil prices and capital flows are expected to pick up in the first half of 2010; however, these improvements will not fully offset 2008/09 losses, making reserve rebuilding difficult without additional external assistance.

### Risks to the outlook
- The shocks are characterized as large and temporary but amplify vulnerability to further shocks.
- Key downside risks include continued weakness in exports, tourism, remittances, and private capital flows tied to global conditions, and extended agricultural shortfalls requiring imports.

### Capacity to repay the Fund
- Assessment in the report supports that Fund assistance under the RAC of the ESF, combined with donor support and implementation of the authorities’ policies, would be consistent with Kenya’s capacity to repay the Fund (detailed indicators and tables provided elsewhere in the chapter).

### Staff appraisal and recommendation
- Staff supports the authorities’ request for disbursement under the Rapid-Access Component of the ESF.
- Implementation of the agreed macroeconomic and structural policies is expected to help achieve the authorities’ economic objectives and to facilitate mobilization of donor support to address the shocks.

*Source: Executive Summary (Content unit: _cr09191 - Executive Summary).*

### 6.      The global financial crisis has

### 6.      The global financial crisis has

### Banking system and capital market: key findings
- Banks’ regulatory capital asset ratio (CAR) was above 18 percent as at-end December 2008.
- All banks met the minimum capital and liquidity requirements.
- Initial stress tests indicate that in the event of a deterioration in loan performance three banks whose CAR’s are just above the required level would need to replenish their capital.
- These three banks account for 13 percent of the total banking system deposit liability.
- Going forward, loan portfolio quality is likely to deteriorate in the months ahead, particularly in banks exposed to the tourism and export sectors.
- Equity prices on the Nairobi Stock Exchange fell by some 40 percent in the second half of the year.
- The exit of foreign investors from the stock exchange was particularly pronounced in the last quarter of 2008.

### Fiscal position and financing gap
- Revenue collections were below the budgeted level during the first 9 months of fiscal 2008/09 (July/June).
- Expenditures were also lower than budgeted because of slow implementation of externally financed projects.
- Postponement of planned sovereign bond issue and privatization, together with the need to finance drought mitigation measures, created the need for domestic financing of 4 percent of GDP.
- The authorities requested Fund support under the Rapid-Access Component of the ESF in the amount of SDR135.7 million, or about US$201 million.
- Official reserves are estimated to fall by 23 percent or almost US$800 million between 2007/08 and 2008/09 in the absence of financing under the ESF.
- The request equals 50 percent of quota and is justified to enable reserve buildup without disrupting the domestic financial market.

### Social impact: drought and food insecurity
- Due to the drought, food insecurity has increased by about 47 percent, and now stands at around an estimated 10 million people.
- Food insecurity has deepened in agricultural areas; in urban areas reduction in disposable income led to declines in household food consumption in outskirts of Nairobi and Mombasa.
- The government declared a food emergency for an estimated 10 million food-insecure Kenyans, and appealed to donors for US$410 million in food and agriculture-related support.
- The World Food Program has appealed for over US$ 200 million.
- Should realized donor support exceed US$133.5 million, the government plans to increase agricultural inputs related imports.

### Inflation, growth, and monetary conditions
- Real GDP growth is now estimated at about 2 and 3 percent for 2008 and 2009, respectively.
- By end-2008, headline inflation reached 27.7 percent, averaging 26.2 percent for the year as a whole.
- Underlying inflation increased from 5.3 percent at the end of 2007 to 9 percent in December (2008), but has since declined.
- As of March 2009, CBK had cut the policy rate by a total of 75 basis points, and reduced the cash reserve requirement by 1 percentage point.
- Short-term interest rates at mid-March stood at about 7.4 percent (91-day T-bill), 4.3 percent (repo), and 5.5 percent (interbank).
- Reserve money remains well below target despite liquidity injections.

### Policy response (measures implemented)
- Mitigation of high food prices:
  - Government introduced a maize subsidy scheme in late 2008; scheme was abandoned in early 2009 when farmers refused to sell to NCPB at below-market prices.
  - Government suspended VAT and customs duties on imported maize to lower market prices.
  - Government began working with the World Bank on a well-targeted subsidy program to be introduced by the end of 2009.
  - Additional fiscal policy measures are planned for the revised 2008/09 budget.
- Declaration of food emergency and donor appeals as detailed above.
- Running down of reserves: CBK did not replace foreign exchange sold to government in Q3 2008 to avoid exchange rate pressure; official reserves continued to decline.
- Easing of monetary policy: accommodative stance beginning early 2008, intensified mid-year and into Q1 2009; policy rate cuts and cash reserve requirement reduction as noted above.
- Enhancing financial sector surveillance: CBK stepped up supervision, conducted a special inspection of a major international bank, introduced additional reporting standards (including NPLs by sector).
- CBK requested technical assistance to develop a contingency plan for the financial sector.
- Banks are tightening credit standards.

### Macroeconomic framework and projections
- Monetary program targets: projected broad money growth of 13 percent in 2008/09 and 15.8 percent in 2009/10.
- Inflation objective: achieve a 5 percent inflation rate.
- Official reserves path under the program: increase gradually from around US$2.6 billion in March 2009 to almost US$3.0 billion by end-June 2010 (with slight intra-period declines in months of imports).
- Exchange rate: authorities reaffirm commitment to a market-determined, managed float with interventions limited to smoothing volatility.
- Fiscal framework:
  - Temporary departure from the medium-term debt-to-GDP ratio path to allow short-run domestic borrowing.
  - Overall budget deficit projected at 5.2 percent of GDP for 2008/09 (originally budgeted 5.3 percent of GDP; 3.6 percent of GDP in 2007/08).
  - For 2009/10, expected fiscal deficit of 5.4 percent of GDP and total net domestic borrowing of about 4.2 percent of GDP in the absence of any sovereign bond issuance.
  - Authorities hope to issue a sovereign bond of US$500 million (1.5 percent of GDP) in 2009/10; if issued, domestic borrowing would be reduced by an equivalent amount.
  - Domestic borrowing on the order of 4 percent of GDP is considered necessary in 2008/09 to protect key expenditures and support aggregate demand.

### Structural, governance, and subsidy reforms planned
- Fiscal sector: focus on improved public financial management and related areas.
- Monetary and financial sector: complete revisions to the CPI methodology, new weights and expanded coverage; undertake the Financial Sector Assessment Program (FSAP) update in Fall of 2009.
- Governance: continue strengthening agenda in the context of the updated Governance Action Plan (GAP).
- Subsidy reform: comprehensive reform of the subsidy program to better target the poor; new program to be introduced by December (2009) with transparency and clearer fiscal implications.
- Current ban on maize exports to be lifted as soon as targeted subsidy program begins to work.
- Food situation to be reassessed in August with a view to extending suspension of import duties on maize imports if needed; plans to maintain a full pass-through of world petroleum prices.

### Risks to the outlook
- Global deterioration: worse than anticipated global developments would depress merchandise exports, tourism, remittances, and capital flows, further restraining growth and weakening the balance of payments.
- Growth projection: staff project GDP would grow by about 3 percent in 2009/10.
- Domestic political risks: tensions within the coalition government could threaten political stability; a breakup could negatively impact economic growth.

### Capacity to repay the Fund
- Kenya has a relatively low stock of external debt; debt sustainability analysis places Kenya at a moderate risk of debt distress.
- Assuming strong implementation of supporting policies, the NPV of public and publicly guaranteed external debt is projected at 47.9 percent of exports of goods and services; and 11.8 percent of GDP by end-2009.
- Projected repayment to the Fund will remain under 0.5 percent of exports of goods and services over the medium-term.
- CBK has initiated an update of the safeguard assessment in preparation for the purchase of Fund resources.

### Staff appraisal (summary)
- Kenya experienced a series of exogenous but temporary shocks: high international food, fuel, and fertilizer prices; poor rainfall and poor harvests; the global financial crisis and slowdown in external demand.
- The shocks have resulted in a temporary loss of reserves, eroded achievements of the past five years, weakened macroeconomic stability, and increased vulnerability to further shocks.

*Source: _cr09191 - 6.      The global financial crisis has*

### 26.      The authorities’ initial response to the shocks has been strong, and have

### _cr09191 - 26.      The authorities’ initial response to the shocks has been strong, and have

### Initial policy response and outcomes
- The authorities’ initial response to the shocks has been strong, and have allowed for temporary moderation in the impact.
- VAT and customs duty were suspended to lower the cost of maize imports, and increase food availability.
- Monetary policy was eased to support economic activity, and fiscal policy has been largely accommodating without endangering debt sustainability.
- Together, these policies have allowed Kenya to achieve a moderate level of economic activity during the global economic slowdown.

### Additional macroeconomic and reserve policies
- The authorities have also committed to additional macroeconomic and structural policies designed to reinforce macroeconomic stability, reduce inflation, and rebuild reserves.
- A gradual reserve accumulation path consistent with the desired reserve money growth would ward off undue volatility in the exchange rate, and disruption in the foreign exchange market.
- Reserve accumulation would allow for weathering of future shocks to the economy.
- Fiscal policy would provide a stimulus to the economy and protect key infrastructure and social spending while ensuring sustainable debt to GDP ratio over the medium term.

### Structural and governance reforms
- Staff welcomes the authorities’ commitment to advancing broad-based structural and governance reforms to ensure strong economic growth over the medium and long term.
- Priority will be given to the reforms of public finance management, governance, and financial sector which are much needed to compliment sound macroeconomic policies.
- Introduction of a targeted subsidy framework would address the food deficit in an efficient manner.

### Support for Rapid-Access ESF disbursement and staff recommendations
- Staff supports the authorities’ request for disbursement under the Rapid-Access Component of the ESF, noting that the medium-term outlook is not favorable to the rebuilding of reserves to the pre-crisis level.
- The requested access would help the authorities achieve their economic objectives and close the projected financing gap while enabling the country to get support from other donors.
- The authorities are strongly encouraged to implement their policy package to reduce the economy’s vulnerability to adverse shocks, monitor developments closely, and be ready to take actions that may be needed to strengthen economic performance and bolster market confidence should risks materialize.

*Source: _cr09191 - 26. The authorities’ initial response to the shocks has been strong, and have*

### 30.      There are risks to the macroeconomic program. However, in light of the

### There are risks to the macroeconomic program. However, in light of the authorities’ track record in macroeconomic management, and their commitment to sound policies, the program has a good chance of success.

### Program risks and near-term assessment
- The text states: "There are risks to the macroeconomic program. However, in light of the authorities’ track record in macroeconomic management, and their commitment to sound policies, the program has a good chance of success."

### Key macroeconomic projections (selected)
- Real GDP growth (market prices): 6.7; 3.5; 3.0; 3.1; 5.2; 6.3; 6.5; 6.5 (for successive years shown).
- GDP deflator (average): 5.5; 11.7; 2.2; 0.1; 5.9; 4.4; 4.9; 4.9.
- Consumer price index (annual average): 10.4; 18.5; 11.1; 9.2; 5.0; 5.0; 5.0; 5.0.
- Import volume growth, goods: 10.3; 7.5; 5.8; 6.8; 7.8; 8.5; 8.1; 8.5.
- Export volume growth, goods: 3.9; 10.7; 8.4; 7.1; 9.0; 10.5; 10.6; 11.3.
- Ksh per US $ exchange rate (end of period): 62.6; 64.6; 78.3 (Actual as of May 15, 2009).
- M3 (broad money, end of period) annual changes: 16.0; 18.2; 7.8; 19.3; 18.0; 17.2; 17.2; 17.2.
- Gross international reserve coverage in months of next year imports (end of period): 3.0; 3.6; 3.1; 2.9; 3.0; 3.1; 3.2; 3.2.

### Fiscal outlook — central government (levels and percent of GDP)
- Total revenue (in billions of Ksh): 373.0; 432.2; 512.7; 510.7; 565.1; 629.5; 699.6; 780.0; 869.5.
- Total expenditure and net lending (in billions of Ksh): 419.5; 538.9; 673.0; 653.8; 741.7; 804.8; 866.0; 972.8; 1,082.2.
- Overall balance (commitment basis) excluding grants (percent of GDP): -2.7; -5.4; -6.2; -6.8; -6.0; -5.8; -5.4; -5.3.
- Overall balance (cash basis) including grants (percent of GDP): -1.8; -3.6; -5.2; -5.4; -4.6; -4.4; -4.2; -4.1.
- Net domestic borrowing (in percent of GDP): 2.0; -0.7; 4.0; 4.2; 2.7; 2.5; 2.6; 2.0.
- Grants (in billions of Ksh): 15.5; 25.5; 33.8; 25.0; 35.6; 41.5; 45.8; 42.8; 46.4.
- Financing (in billions of Ksh): 35.5; 59.8; 126.9; 118.5; 141.1; 133.8; 140.6; 150.0; 166.3.
- Nominal GDP (billion Ksh): 1,717.5; 1,986.0; 2,393.2; 2,294.1; 2,604.6; 2,900.5; 3,218.1; 3,594.3; 4,017.0.
- Primary budget balance (percent of GDP): 13.2; -24.0; -70.2; -64.5; -75.0; -59.1; -56.9; -54.0; -64.0.
- Stock of domestic debt, net (end of period, billions of Ksh): 332.3; 332.1; 386.6; 424.4; 533.5; 612.2; 692.6; 784.8; 863.7.
- NPV of total public debt, net (in billions of Ksh): 613.7; 564.7; ... ; 677.1; 840.5; 930.0; 1,041.3; 1,186.2; 1,325.4.
- Total public debt, net (in billions of Ksh): 723.4; 729.8; ... ; 947.7; 1,103.2; 1,182.2; 1,317.8; 1,502.6; 1,674.5.

### Balance of payments and external financing
- Current external balance, including official transfers (percent of GDP): -3.5; -4.6; -6.0; -4.5; -4.8; -4.7; -4.2; -3.7.
- Exports value, goods and services (percent of GDP): 26.3; 24.9; 26.4; 23.8; 21.6; 21.2; 21.8; 22.6.
- Imports value, goods and services (percent of GDP): 36.0; 35.6; 38.9; 34.2; 31.4; 30.6; 30.7; 30.9.
- External financing requirements (2006/07–2009/10, in millions of U.S. dollars): -1,401.0; -2,480.6; -1,373.3; -1,994.7 (for successive years shown).
- Resources (2006/07–2009/10, in millions of U.S. dollars): 1,401.0; 2,480.6; 1,222.5; 1,944.4.
- Program support (committed and tentatively identified) (in millions of U.S. dollars): 59.3; 134.1; 0.0; 0.0.
- Project support (in millions of U.S. dollars): 377.2; 650.9; 834.9; 1,103.2.
- Net FDI (in millions of U.S. dollars): 622.7; 891.7; 658.1; 466.5 (for successive years shown).
- Gross official reserves (end of period, in millions of U.S. dollars): 2,723.2; 3,443.0; 2,795.9; 2,999.4; 3,368.8; 3,865.7; 4,436.0; 5,041.4.

### Monetary and financial indicators
- Central Bank of Kenya: Reserve Money (levels, selected dates): 108.0; 129.4; 152.9; 152.6; 163.6; 155.5; 164.5; 168.7; 184.5; 178.2; 187.2.
- Net foreign assets (CBK, in millions of US$): 2,148.7; 2,461.1; 3,145.2; 2,855.2; 2,566.1; 2,424.4; 2,580.0; 2,630.1; 2,705.1; 2,736.3; 2,766.7.
- Money and Quasi-money (M3, levels in billions of Ksh and annual percent change): levels 522.0; 605.5; 716.0; 736.3; 766.4; 780.6; 771.8; 790.6; 853.3; 850.9; 920.5; annual percent change 18.0; 16.0; 18.2; 16.7; 14.9; 12.0; 7.8; 7.8; 11.3; 9.0; 19.3.
- Financial Soundness Indicators (selected ratios): Regulatory capital to risk weighted assets: 17.3; 16.6; 16.4; 16.5; 18.0; 19.5; 17.4; 18.9. Non-performing loans to gross loans (percent): 34.9; 29.3; 25.6; 21.3; 10.9; 10.5; 9.6; 8.4.

### Public debt and Fund obligations
- Total public debt, net (end of period, percent of GDP): 42.1; 36.7; 41.3; 42.4; 40.8; 40.9; 41.8; 41.7.
- External debt (percent of GDP): 22.8; 20.0; 22.8; 21.9; 19.7; 19.4; 20.0; 20.2.
- NPV of central government debt (end of period, percent of GDP): 34.9; 28.3; 29.9; 31.8; 31.6; 32.2; 33.1; 33.1.
- Outstanding Fund credit (in millions of SDRs): 162.08; 287.42; 270.70; 255.70; 236.95; 206.95; 168.38; 121.24; 79.10; 40.71; 13.57; 0.00.
- Total obligations based on existing and prospective credit (in millions of SDRs): 7.56; 11.73; 18.28; 16.47; 20.14; 31.27; 39.68; 48.03; 42.82; 38.86; 27.44; 13.75.
- Total obligations based on existing and prospective credit (in millions of US dollars): 11.95; 17.99; 28.12; 25.43; 31.20; 48.61; 61.89; 74.91; 66.79; 60.61; 42.80; 21.45.

### Sectoral and trade detail (highlights)
- Exports, f.o.b. (in millions of U.S. dollars, selected items): Coffee 142.5; 169.3; 132.8; 118.0; 128.1; 139.7; 156.8; 178.0 (for successive years shown in the table).
- Tea exports (millions of U.S. dollars): 726.8; 754.8; 874.5; 702.9; 724.7; 793.2; 889.8; 1,021.4.
- Horticulture exports (millions of U.S. dollars): 552.0; 739.3; 644.6; 652.5; 746.3; 856.4; 999.3; 1,191.2.
- Imports, f.o.b. (in millions of U.S. dollars, selected): Oil -1,755.1; -2,448.0; -2,485.9; -1,922.8; -2,303.7; -2,629.5; -2,866.9; -3,115.7.

### Program-supporting fiscal and financing operations (selected)
- Project loans (in billions of Ksh or millions USD depending on table context): 10.6; 21.2; 47.7; 40.6; 52.2; 55.7; 60.2; 65.4; 87.3 (tables show project loans across years and contexts).
- Commercial borrowing (planned sovereign bonds): amounts shown in tables include 0.0; 33.6; 0.0; 0.0; 14.4; 16.0; 16.0; 16.0 (as indicated).
- Privatization proceeds and other (selected): 4.0; 76.3; 13.7; 0.0; 6.0; 7.5; 7.7; 2.0; 0.0.

*Sources: Kenyan authorities; and IMF staff estimates and projections.*

### 2008. While the economy showed signs of quick recovery during the subsequent quarter,

### _cr09191 - 2008. While the economy showed signs of quick recovery during the subsequent quarter,

### Impact of the shocks
- Record high fuel and fertilizer prices in 2008 compounded by failure of the short rains in October-November 2008 led to a sharp decline in domestic food supplies, particularly maize.
- An estimated 10 million Kenyans have become food insecure and millions are at risk of starvation.
- The government and the private sector need to import about one million tons of maize and other cereals between February and August 2009.
- The global financial crisis slowed recovery of the tourism sector and reduced remittances and private capital inflows.
- International reserves of the Central Bank of Kenya (CBK) fell to below 3 months of import cover from about 4 months a year ago and are expected to remain under pressure in 2009.
- Difficulty issuing a planned sovereign bond in the international capital market, diminished privatization prospects, and lower revenues produced a substantial financing shortfall for the 2008/9 budget.
- Recession in advanced countries expected to restrain or reduce demand for Kenya’s exports (tea, horticulture, coffee) in 2009 and, if protracted, in the medium-term; tourism earnings, remittances and private capital inflows expected to decline.
- Food shortages have kept inflationary pressure high and are not expected to dissipate until long rains boost food supplies after August.
- Increased maize importation will further erode official foreign exchange reserves and put pressure on the exchange rate while export earnings, remittances, and capital inflows are threatened.
- Kenya likely to face a more difficult time in 2009/10 with low economic growth, increased unemployment and continued high maize prices if rains are inadequate.

### Policies to address the shocks — fiscal, monetary, administrative and structural measures
- Maize subsidy and market policy:
  - Government withdrew the generalized maize subsidy scheme introduced in November 2008 due to diversion of maize from the National Cereal and Produce Board (NCPB) to unintended purposes.
  - A new well-targeted food subsidy program to avoid price distortions and minimize abuse will be developed by December 2009.
  - Intend to eliminate the ban on maize exports imposed in October 2008 by end-December 2009 as the new scheme will not need support of an export ban.
- Trade tax relief:
  - Effective February 2009, the government removed the duty and VAT on maize imports for a period of six months to allow private sector imports at lower cost to bridge the food deficit.
  - The Government will reassess the food situation with a view of granting an extension of duty-free importation of maize, if the situation dictates so.
- Fiscal policy and financing:
  - Financing gap for the financial year ending June 2009 emerged due to revenue shortfall, postponement of planned sovereign bond issuance, and additional drought relief expenditures.
  - Government will close the gap by rationalizing expenditures, cutting non-priority expenditures and increasing domestic borrowing.
  - Overall fiscal deficit (including grants) for 2008/09 is about 5 percent of GDP based on the current implementation rate for foreign financed projects—smaller than budgeted but moderately larger than in 2007/08.
  - Plan to borrow from domestic sources about Ksh 109 billion (4.2 percent of GDP) in 2009/10 to stimulate the economy.
  - Commitment to reduce the debt-to-GDP ratio in the medium term despite temporary increases in domestic borrowing.
- Monetary policy:
  - CBK cut its policy rate—the Central Bank Rate (CBR)—by a total of 75 percentage point since December and lowered banks’ reserve requirement ratio from 6 percent to 5 percent.
  - Revised monetary program for 2008/9 expected to reign in inflation while providing sufficient liquidity and allowing gradual rebuilding of international reserves.
- Statistical and CPI methodology:
  - Kenya National Bureau of Statistics (KNBS) began in February 2009 a Point of Sale Survey (PSS) based on an updated consumer basket to determine price reference period for the new CPI and to finalize CPI rebasing and revision exercise.
  - Expectation to review and audit the implementation of the new series and to launch a new CPI with a revised compilation methodology by end-May 2009.
- Financial sector oversight and legislation:
  - CBK intensifying oversight to ensure banks make adequate and timely provision for bad and doubtful loans; adopting a more proactive approach to surveillance and enforcement.
  - Government will bring the Banking Bill before Parliament before the end of the next Parliamentary session to authorize consolidated supervision and prompt corrective action.
- External sector strategy:
  - As balance of payments starts improving in 2009/10, CBK will pursue a strategy of gradually rebuilding official foreign exchange reserves consistent with a reserve money path that will reduce inflation to 5 percent by June 2010.
  - Maintain a managed-float exchange rate regime; CBK will limit interventions to smoothing excessive short-term volatilities.
  - KNBS committed to undertaking a foreign capital flow survey by October 2009 to track FDI and other capital flows; preparatory work, including sampling frame and trainings, has been done.
- Governance and anti-corruption:
  - Commitment to zero tolerance of corruption and advance governance reforms within updated Governance Action Plan (GAP).
  - Kenya Anti-Corruption Commission (KACC) investigating recent corruption allegations related to sale of maize from NCPB to middlemen.
  - Government instituted management changes at NCPB and launched forensic audit of NCPB operations.
  - Management replaced at Kenya Pipeline Corporation (KPC); procedures changed for allocation of storage space at Kipevu storage facility; KACC investigation launched.
- Public financial management and structural reforms:
  - Priorities: enactment of the Public Financial Management Bill and establishing its enabling regulations; improving treasury cash management (including making operational the treasury single account); strengthening debt management; improving fiscal reporting (including increasing functionality of IFMIS); furthering procurement reforms.
- Contingency: Government stands ready to implement other measures should shocks worsen.

### Request for Fund assistance under ESF
- Government declared the food situation a national disaster.
- Support received: China US$3 million; expect other development partners, including World Bank and AfDB, to channel support through WFP.
- NCPB expected to import 3 million bags of maize under a commodity credit guarantee scheme provided by the United States Department of Agriculture.
- Despite anticipated donor support, additional urgent assistance required, particularly to bolster international reserves.
- Government requests the IMF allow maximum access of 50 percent of quota through the Rapid-Access Component of the Exogenous Shocks Facility (ESF).
- Authorities will continue to engage with the Fund on policy advice and have no intention of introducing new exchange and trade restrictions.
- Will maintain full pass-through of world prices for petroleum products.
- Expect to update Financial Sector Assessment Program (FSAP) following earlier request and request an update of the safeguard assessment for CBK.
- Government authorizes the IMF to make this letter and the IMF staff report available to the public.

### Relations with the Fund and financial arrangements (as of March 31, 2009)
- Membership Status: Joined February 3, 1964; Article VIII.
- Quota: 271.40 SDR million (100.00 percent of quota).
- Fund holdings of currency: 258.55 SDR million (95.26 percent of quota).
- Reserve position in Fund: 12.86 SDR million (4.74 percent of quota).
- SDR Department net cumulative allocation: 36.99 SDR million (100.00 percent of allocation).
- SDR holdings: 0.53 SDR million (1.44 percent of allocation).
- Outstanding Purchases and Loans: PRGF arrangements 162.08 percent of quota, 59.72 (percent?) — original table lists "162.08" and "59.72" under PRGF; preserved as presented.
- Latest Financial Arrangements (selected):
  - PRGF approved 11/21/03 expiration 11/20/07 amount approved (SDR million) 150.00 amount drawn 150.00.
  - Earlier ESAF and PRGF arrangements included amounts and dates as presented in the source.
- The last three-year PRGF arrangement was approved on November 21, 2003 in the amount of SDR 175 million; access augmented to SDR 225 million on December 20, 2004; access reduced to SDR 150 million at second review; arrangement expired November 20, 2007.

### Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- 2009 Principal 10.36; Charges/interest 0.92; Total 11.28.
- 2010 Principal 16.72; Charges/interest 0.88; Total 17.60.
- 2011 Principal 15.00; Charges/interest 0.79; Total 15.79.
- 2012 Principal 18.75; Charges/interest 0.71; Total 19.46.
- 2013 Principal 30.00; Charges/interest 0.59; Total 30.59.

### Safeguards, exchange arrangements, and consultations
- An update safeguards assessment of CBK is underway with respect to the authorities’ request for disbursement under the Rapid-Access Component of the ESF.
- CBK was subject to a safeguards assessment completed on September 8, 2005; the assessment noted steps taken and proposed measures to address remaining vulnerabilities.
- Exchange arrangements: Kenya’s currency is the shilling, which floats against other currencies. The official exchange rate applies only to certain government transactions. The regime is a managed float with the U.S. dollar as principal intervention currency.
- On May 15, 2009, the exchange rate was K Sh 78.3 =US$1.00.
- Article IV consultations: reverted to standard 12-month cycle after PRGF expiration; last Article IV consultation concluded on September 10, 2008 (Country Report No. 08/339).
- FSAP: joint IMF-World Bank FSAP missions in July and October 2003; FSSA issued November 29, 2004; an update of the FSAP is planned for October 2009.

### Technical assistance and resident representation
- Extensive technical assistance missions and topics listed (Central Bank Accounting, Government Finance Statistics (GDDS), Customs Administration, Tax Administration, Monetary Operations, Banking Supervision/Deposit Insurance/Legislation, etc.) with dates spanning 2004–2009 as presented.
- The Fund has had a resident representative in Kenya since December 1993. Mr. W. Scott Rogers is the current Senior Resident Representative.

### IMF-World Bank Joint Management Action Plan 2009–10 (selected items and timing)
- Joint products and activities include Poverty and Inequality Assessment (July 2008—June 2009), Public Expenditure Notes (Jan-Feb 2009—June 2009), Article IV Consultation (August 2009—October 2009), FSAP Update (October 2009—December 2009), CPI Statistics Mission (May 2009—August 2009), Bank Supervision (June 2009—September 2009), and other missions and technical assistance scheduled as listed.
- Joint Public and External Debt Sustainability Analysis: April 2009—May 2009.

### Key statistical issues
- KNBS undertook a Point of Sale Survey (PSS) in February 2009 to support CPI rebasing and revision; expectation to launch a new CPI with a revised compilation methodology by end-May 2009.
- KNBS committed to a foreign capital flow survey by October 2009 to track FDI and other capital flows; preparatory work completed.
- Various technical assistance and statistical missions planned or completed: CPI Statistics Mission May 2009 (expected delivery August 2009), Balance of Payments Statistics missions (September 2009—December 2009; February 2010—April 2010), National Accounts Statistics (October 2009—January 2010), and others as listed.

*International Monetary Fund. Staff Report for Request for Disbursement Under the Rapid-Access Component of the Exogenous Shocks Facility. May 15, 2009.*

### 31.      Data provision has some shortcomings, but is broadly adequate for surveillance and

### _cr09191 - 31.      Data provision has some shortcomings, but is broadly adequate for surveillance and

### Data provision — overview
- Data provision has some shortcomings, but is broadly adequate for surveillance and program monitoring.
- Weaknesses in macroeconomic statistics reflect organizational and skill shortcomings, and inadequate resources.
- In line with the new Statistics Law, the government established the autonomous Kenya National Bureau of Statistics (KNBS) in 2007 to replace the Central Bureau of Statistics (CBS).
- Kenya participates in the Fund’s General Data Dissemination System (GDDS) and the GDDS project for Anglophone Africa.
- Metadata and detailed plans for improving the data over the short and medium term are posted on the Fund’s Dissemination Standards Bulletin Board (DSBB).
- Kenya has received Fund technical assistance. Further assessment of capacity building requirements has been undertaken by the AFRITAC East Statistical Advisor.
- Monetary, exchange rate, and some external data are published on a monthly and biannual basis by the KNBS in its Monthly Economic Review.
- Core financial data are also made available to the Fund on a regular basis.
- A detailed account of various sectoral activities and the corresponding statistical data are published annually by the KNBS in its Economic Survey.

### Data ROSC (IMF Country Report No. 05/388) findings
- Published on October 31, 2005, the Report on the Observance of Standards and Codes—Data Module stated:
  - Methodological soundness is uneven across datasets and significant improvement is required in government finance statistics and national accounts.
  - Accuracy and reliability do not receive adequate attention in any of the datasets.
  - Accessibility of the disseminated macroeconomic statistics are adequate, except for the balance of payments statistics.

### National accounts
- Data quality has deteriorated significantly because of budgetary and staff constraints at the KNBS.
- GDP is believed to be significantly underestimated due to inadequate coverage of:
  - the informal sector,
  - nonagriculture subsistence,
  - horticulture, and
  - self-employed professionals.
- An STA peripatetic advisor assisted the authorities in rebasing the national accounts estimates at constant 2001 prices and compiling institutional accounts for the general government sector.
- As a result, national accounts estimates for the years 1996–2005 in current and constant (2001) prices have been published.
- Quarterly national accounts are being developed with the assistance of the AFRITAC East.
- Quarterly GDP estimates are now published.

### Prices and production
- In early 2002, the KNBS (then CBS) began publication of a new national CPI (covering 13 urban towns), with 1997 as reference year and outdated weights and basket of items derived from the 1993-94 Household Budget Survey (HBS).
- Indices are produced for lower and middle/upper income groups in Nairobi and other cities.
- The index is compiled and published on a timely basis.
- No producer, export, or import price indices are produced.
- In March 2008, a TA mission assisted the authorities in identifying methodological issues relating to the measurement of inflation.
- The current methodology of aggregating prices at the elementary level was found to impart a substantial upward bias on CPI measurement.
- In line with STA recommendations, the KNBS plans to switch to a formula consistent with international best practices in 2009, together with a rebasing and reweighing of the CPI basket.

### Government finance statistics (GFS)
- The data ROSC mission emphasized key areas for improvement:
  - migration to the GFSM 2001 methodology;
  - broadening the coverage to include extrabudgetary and social security funds and report on a general government level;
  - reconciliation of fiscal statistics from various sources to limit discrepancies;
  - improve information on external financing, particularly on expenditure directly financed from abroad;
  - compilation and dissemination of monthly and quarterly budget execution data;
  - training of Ministry of Finance (MOF) staff in the GFS methodology.
- Since the beginning of FY 2005/06, Kenya has followed a new economic classification of the budget based on GFSM 2001 (with assistance from the AFRITAC-East).
- Serious delays have emerged in reporting, reflecting difficulties in establishing budget execution and accounting systems consistent with the new classification.
- Existing systems need to be promptly upgraded and made operational to ensure timely reconciliation and monitoring of budget execution.
- Progress has been made toward moving to the IFMIS.
- Important gaps remain in reconciling fiscal data from different sources, including various units within the MOF.
- Discrepancies in budget outturn data (between deficit/surplus and financing) remain significant.
- Recording of external financing and expenditure directly financed from abroad remains an important area for improvement.
- The government has taken steps to initiate a project to rationalize/eliminate extrabudgetary funds, but progress in compiling consolidated fiscal statistics has remained limited.
- The country reports data to STA for the budgetary central government for inclusion in the GFS Yearbook, albeit with a significant lag—the last data reported were for the year ending June 2005.
- The KNBS compiles aggregate annual GFS revenue and expenditure data for the budgetary central government based on detailed data in the reports of the Controller and Auditor General.
- The data submitted for publication in the 2007 GFS Yearbook was reported in GFSM 2001 format, using bridge tables developed by the technical assistance missions.
- Recent steps in migration to GFSM 2001 may help reduce significant differences between KNBS data and the data compiled by the MOF and reported to AFR for surveillance and program monitoring purposes.
- Monthly and quarterly data are regularly reported for inclusion in the IFS.

### Monetary statistics
- Progress has been shown in the implementation of the Monetary and Financial Statistics Manual (MFSM) and development of the standardized report forms (SRFs).
- Authorities submitted SRF test data; however, there has not been further progress.
- In March 2007, a STA mission established the standardized report form for the data on the central bank; reviewed and revised the reporting form and compilation notes for the other depository corporations (ODCs) in line with MFSM data requirements; and identified the coverage of the ODC subsector.
- The mission found misclassification of a number of central government deposits as private sector deposits.
- A major issue for future work relates to the expansion of the coverage of the ODCs to include the 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.
- When implemented, a new bill providing for increased supervision over SACCOs would generate data as part of the supervisory function.
- A follow-up mission in June 2007 conducted a workshop for officials of ODCs and established a system for reporting Form 1SR to the IMF.
- The new Standardized Reporting System for reporting ODCs’ data to the central bank was also finalized.

### External sector statistics
- The KNBS compiles annual balance of payments statistics in Kenya shillings that are regularly reported to STA, although with considerable delay.
- The Central Bank of Kenya (CBK) compiles a complete set of annual balance of payments statistics in U.S. dollars, which are reported to AFR and used for programming and surveillance purposes.
- The two datasets are not entirely consistent; Fund staff has strongly encouraged the authorities to reconcile them.
- More recently, the CBK also started to compile and publish quarterly balance of payments estimates.
- Overall quality of trade data may be reasonably good, but data for other current account and many financial account transactions are rather weak.
- Following liberalization of the exchange system in 1993–94, gaps emerged in coverage.
- The compilation system (other than that used for compiling customs statistics), used since 1994, relies on reports from domestic banks and may result in substantial under-recording of:
  - current earnings, including tourism receipts;
  - investment flows of the private sector;
  - transactions settled via accounts held abroad.
- Present estimates of direct and portfolio investment are believed to be substantially understated.
- Large positive errors and omissions in the central bank data that have emerged in the balance of payments since 1994 give rise to uncertainties as to the potential size of external obligations.
- The MOF compiles data covering public and publicly guaranteed external debt obligations to official and commercial creditors. This database does not take into account nonresident purchases of the government’s domestic currency-denominated debt securities.
- In developing the loan-by-loan debt sustainability analysis (DSA) in 2002, Fund and World Bank staff identified several significant debt data problems that have been addressed by the authorities. Nevertheless, significant debt data management problems remain, along with more general issues in external debt management and its integration in the budget formulation and expenditure management systems.
- To help address these issues, in 2006 a technical assistance mission recommended introducing a foreign investment survey, enhancing the foreign exchange statistics survey, and using a common methodology, including for estimations, in the use of available data in the KNBS and CBK.
- In 2007, a DFID funded enterprise survey failed to materialize.
- There are plans to conduct a foreign investment survey in 2009, which planned DFID-funded and STA external sector missions will support.
- Kenya does not report international investment position statistics to STA.

### Table of Common Indicators (as of April 14, 2009) — selected entries and data-quality assessments
- Exchange Rates — Date of latest observation: 4/14/09; Date received: 4/14/09; Frequency of Data: D; Frequency of Reporting: D; Frequency of publication: M.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: 4/14/09; Date received: 4/14/09; Frequency of Data: D; Frequency of Reporting: D; Frequency of publication: M.
- Reserve/Base Money — Date of latest observation: 4/14/09; Date received: 4/14/09; Frequency of Data: D; Frequency of Reporting: D; Frequency of publication: M.
- Broad Money — Date of latest observation: 2/28/09; Date received: 3/15/09; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M; Data Quality—Methodological soundness: LO, LO, LO, LO; Data Quality—Accuracy and reliability: LO, LO, O, O, NO.
- Central Bank Balance Sheet — Date of latest observation: 4/14/09; Date received: 4/14/09; Frequency of Data: D; Frequency of Reporting: D; Frequency of publication: M.
- Consolidated Balance Sheet of the Banking System — Date of latest observation: 2/28/09; Date received: 3/15/09; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M.
- Interest Rates — Date of latest observation: 3/30/09; Date received: 4/15/09; Frequency of Data: D; Frequency of Reporting: D; Frequency of publication: M.
- Consumer Price Index — Date of latest observation: 2/28/09; Date received: 3/15/09; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M.
- Revenue, Expenditure, Balance and Composition of Financing—General Government — Date of latest observation: 3/2009; Date received: 4/2009; Frequency of Data: NA; Frequency of Reporting: NA; Frequency of publication: NA; Data Quality—Methodological soundness: LNO, LNO, LNO, LO; Data Quality—Accuracy and reliability: LNO, LO, LO, LO, NO.
- Revenue, Expenditure, Balance and Composition of Financing—Central Government — Date of latest observation: 3/2009; Date received: 4/2009; Frequency of Data: Q; Frequency of Reporting: I; Frequency of publication: Q.
- Stocks of Central Government and Central Government Guaranteed Debt — Date of latest observation: 3/30/08; Date received: 4/2009; Frequency of Data: M; Frequency of Reporting: Q; Frequency of publication: Q.
- External Current Account Balance — Date of latest observation: 12/2008; Date received: 2/2009; Frequency of Data: M; Frequency of Reporting: A; Frequency of publication: A; Data Quality—Methodological soundness: O, LO, O, LO; Data Quality—Accuracy and reliability: LNO, LO, LO, LO, LO.
- Exports and Imports of Goods and Services — Date of latest observation: 12/2008; Date received: 2/2009; Frequency of Data: M; Frequency of Reporting: Q; Frequency of publication: A.
- GDP/GNP — Date of latest observation: 2008 Q3; Date received: 2/2009; Frequency of Data: M; Frequency of Reporting: A; Frequency of publication: A; Data Quality—Methodological soundness: O, LNO, LNO, LO; Data Quality—Accuracy and reliability: LNO, LO, LNO, LO, LNO.
- Gross External Debt — Date of latest observation: 3/30/08; Date received: 4/2009; Frequency of Data: M; Frequency of Reporting: Q; Frequency of publication: Q.

### Debt Sustainability Analysis — methodology and key assumptions
- The debt sustainability analysis (DSA) was prepared jointly by Bank and Fund staffs in accordance with the standardized methodology for low-income countries based on the general framework approved by the Executive Boards of the Fund and the World Bank in April 2005.
- The DSA indicates that the risk of external debt distress is low; risks are somewhat greater for public debt, particularly in the event of lower growth.
- Kenya is classified as a medium performer in terms of the quality of its policies and institutions as measured by a three-year average of Kenya’s score on the World Bank’s Country Policy and Institutional Assessment (CPIA) index.
- For a medium performer, the indicative thresholds for external debt sustainability are:
  - an NPV of debt-to-GDP ratio of 40 percent,
  - an NPV of debt-to-exports ratio of 150 percent,
  - an NPV of debt-to-revenue ratio of 250 percent,
  - a debt service-to-exports ratio of 20 percent, and
  - a debt service-to-revenue ratio of 30 percent.
- The DSA uses updated data provided by the authorities, available data on private sector debt, and estimates by the staffs, and uses non-reconciled debt data and a single discount rate.
- The DSA consists of two parts—external and fiscal:
  - The external DSA covers external debt of the central government (including parastatal borrowing with a government guarantee) and the central bank, and includes estimates of private sector debt.
  - The fiscal DSA covers total debt—external and domestic—incurred or guaranteed by the central government.
- Key macro and fiscal assumptions:
  - Average annual real GDP growth of 4.7 percent for 2008 through 2014.
  - Average growth during 2008-09 is projected at 2½ percent, followed by an average growth of about 5½ percent during 2010–14, and just above 6 percent during 2015–29.
  - An additional scenario assumes real growth for 2010–14 as one standard deviation lower than in the baseline; average real growth for 2010–14 in this scenario is just over 2½ percent.
  - Average inflation of about 7 percent for 2009–14 as measured by a GDP deflator, falling to 5 percent for the 2015–29 period.
  - A constant real exchange rate is assumed during the medium term, with some appreciation in the longer run. Nominal exchange rates are from the World Economic Outlook (WEO).
  - The non-interest external current account deficit (CAD) rises to about 6.3 percent of GDP in 2008, then falls to an average of about 4 percent of GDP by 2014 and to 0.9 percent of GDP during 2015–29.
  - The trade deficit declines from almost 13 percent of GDP in 2008 to just over 3½ percent of GDP over the forecast period.
  - Fiscal assumptions include broadly constant revenue as a share of GDP (about 21.5 percent); domestically financed development spending increasing from just about 4.8 percent of GDP in 2008 to about 6.0 percent by 2029; a constant wage bill of 6.4 percent of GDP; and a decline in other recurrent spending from 7.4 percent of GDP in 2008 to 6.0 percent of GDP over the long-term.
  - The primary fiscal deficit was 2.3 percent of GDP in 2008 and gradually declines to 1.0 by the end of the forecast period.
  - Interest on short-term public domestic debt is assumed at 8 percent; medium- and long-term domestic debt carry an assumed interest rate of about 10.5 percent.
  - New domestic borrowings consist of a quarter of short-term debt and three-quarters of medium- and long-term debt, with the latter having an average maturity of about 7 years.
  - The NPV of domestic debt is assumed to be equal to its face value.
  - New external borrowing as a share of GDP declines temporarily to 1 percent in 2008 (from about 2 percent of GDP in 2007), then rises to an annual average of about 2½ percent during 2009–14, followed by a decline to just over 1½ percent by the end of the forecast period.
  - New external borrowing assumptions include annual sovereign bond issuance of $200 million during 2010–14.
  - Annual external sovereign bond issuance rises beginning in 2015 to about $500 million by 2029; assumptions on terms include an 8 percent interest rate and a bullet amortization in year ten (implying a nine year grace period on principal payments).
  - Continued eligibility for concessional borrowing from IDA is assumed.
  - The only debt relief assumed under the DSA is an existing swap agreement with Italy, which would cancel about Euro 44 million in external obligations in 2015.

*Source: IMF staff report content in _cr09191 - 31.      Data provision has some shortcomings, but is broadly adequate for surveillance and*

### 5.      At end-2008, nominal public external debt was estimated at $6.2 billion

### _cr09191 - 5.      At end-2008, nominal public external debt was estimated at $6.2 billion

### External debt stock and composition
- At end-2008, nominal public external debt was estimated at $6.2 billion (20.4 percent of GDP).
- Creditor composition:
  - About 60 percent of this debt was to multilateral creditors (including 47 percent owed to the World Bank).
  - About 39 percent of the debt was owed to bilateral creditors (largely the Paris Club).
  - A small share (under 2 percent) was owed to commercial creditors, some of which was for disputed security-related contracts, and in arrears (see para 8).
- Kenya has regularly met obligations to most creditors; limited external borrowing has produced more manageable debt ratios than many low-income country peers.
- Kenya was considered under the Enhanced HIPC Initiative but did not qualify for HIPC relief because debt levels were below the HIPC Initiative thresholds.

### External arrears and disputed claims
- Kenya’s end-2008 external arrears of about $91 million were to commercial creditors and remain under dispute.
- Arrears stem from non-payment on commercial credits for security-related contracts (often referred to as the “Anglo-Leasing” scandal).
- Authorities’ actions:
  - Disputing validity of claims based on contracts not being fulfilled.
  - Obtained an external audit to determine value of goods and services provided.
  - Intend to renegotiate amounts owed based on completed audit results.
  - Once agreement is reached, expected to refinance these payments through commercial bank loans initially; part of planned sovereign bond issuance proceeds could be used to finance arrears clearance.

### Domestic debt and contingent liabilities
- Kenya’s net domestic debt stood at Ksh 340.4 billion at end-2008, or 16.1 percent of GDP.
- Since 2003, domestic debt has gradually declined as percent of GDP due to:
  - Strong economic growth,
  - Prudent fiscal policies,
  - Lower interest rates,
  - Despite primary surpluses below historical averages and realization of some one-off contingent liabilities.
- Contingent liabilities and pension claims:
  - Government launched a study of contingent liabilities in 24 parastatals and the National Social Security Fund; results will be incorporated into future debt sustainability analyses.
  - Pay-as-you-go pension scheme for civil servants accumulated claims estimated at Ksh 271 billion (11.8 percent of 2008/09 GDP) in an August 2005 actuarial study.
- Maturity structure:
  - About 70 percent of Kenya’s domestic debt is long-term borrowing with maturities extending up to 20 years.
- Fiscal data note:
  - Fiscal data are based on a July-June fiscal year and are converted to calendar year data for the purposes of the DSA; averaging fiscal year data into calendar year data explains differences with Tables 2a and 2b in the staff report.

### External debt sustainability (baseline and stress tests)
- Baseline assessment:
  - Under the baseline scenario, Kenya’s external debt indicators show a low risk of debt distress.
  - Initial debt ratios are well below all indicative thresholds for a medium performer and decline somewhat through the forecast period.
  - External borrowing projected to rise sharply over 2007–10, then new obligations fall gradually as a share of GDP thereafter.
  - Concessionality of new borrowing is slightly higher than in the past.
  - Improvement in baseline reflects favorable export growth and improved trade balance projections relative to longer-term historical performance.
  - Growth of output and exports projected to regain momentum once the global economy starts recovering from the ongoing financial crisis.
  - Infrastructure investments (financed partly through an assumed increase in external assistance) and structural reforms expected to boost productivity and support export and overall growth.
- Alternative scenarios and stress tests:
  - Kenya remains under indicative debt stock and debt service thresholds under all alternative scenarios and stress tests.
  - Extreme combined shock (2010–14) effects (compare baseline to combined shocks):
    - NPV of public external debt as a share of GDP: Baseline 14½ to Combined shocks 19 percent (text: from 14½ to 19 percent).
    - NPV of debt-to-exports: Baseline almost 57 to Combined shocks 67½ percent (text: from almost 57 to 67½ percent).
    - NPV of debt-to-revenue: Baseline 54 to Combined shocks 71 percent (text: from 54 to 71 percent).
  - Despite immediate worsening, three debt stock measures improve later and end only somewhat worse than baseline by end of projection period.
  - Combined shock also raises debt service-to-exports and debt-service-to-revenue ratios.
  - Lower growth for 2010–14 shows external debt indicators only marginally above baseline.
  - “Historical” scenario (10-year average performance) yields debt ratios better than baseline because historical annual average of non-debt creating inflows exceeds baseline by almost ¾ percentage points of GDP a year, reducing borrowing needs.

- Selected numerical time-series excerpts from DSA tables/figures (preserved as in source):
  - NPV of PPG External Debt (In percent of GDP, threshold=40)
    - Baseline: 11.8, 11.2, 10.6, 10.9, 11.2, 11.5 (2009–2014)
    - Combined shocks: 11.8, 14.6, 18.6, 18.6, 18.9, 19.1 (2009–2014)
  - NPV of PPG External Debt (In percent of exports, threshold=150)
    - Baseline: 47.9, 51.0, 50.5, 51.5, 50.9, 51.0 (2009–2014)
    - Combined shocks: 47.9, 56.9, 69.6, 69.6, 67.6, 66.6 (2009–2014)
  - PPG External Debt Service (In percent of exports, threshold=20)
    - Baseline: 3.5, 3.3, 3.3, 3.2, 3.1, 2.9 (2009–2014)
    - Combined shocks: 3.5, 3.4, 3.7, 3.9, 3.7, 3.4 (2009–2014)

### Public debt sustainability (including domestic debt)
- Baseline assessment:
  - Inclusion of domestic debt substantially increases the NPV of public debt-to-GDP.
  - NPV of total public debt-to-GDP at 31.1 percent in 2008 remains broadly stable before gradually trending down toward end of forecast period.
  - Throughout projection period, NPV of total public debt remains below 35 percent under baseline.
  - NPV of debt-to-revenue ratio stays around 150 percent during 2009–2029.
  - Debt service-to-revenue ratio (including debt service on longer-term domestic and external debt) increases to 26½ by 2012 from 25 percent in 2008, then gradually declines over time.
- Alternative scenarios and stress tests:
  - A two-year growth shock leads to:
    - NPV of debt-to-GDP ratio rising to 48 percent by 2029.
    - NPV of debt-to-revenue ratio rising to over 200 percent during the second half of the forecast period.
    - Debt service-to-revenue ratio rising to around 30 percent by 2029.
  - Permanently lower growth would:
    - Increase NPV of debt-to-GDP beyond 40 percent.
    - Raise debt service-to-revenue ratio close to 30 percent, though NPV of debt-to-revenue would remain below 250 percent.
  - Lower growth for 2010–14 results in considerably higher long-term debt indicators (e.g., by end of forecast period NPV of debt-to-GDP ratio would be 49 percent).
  - Scenario with primary balances unchanged from 2009 also increases NPV of debt-to-GDP ratio.
- Policy implication highlighted:
  - Importance of expanding productive capacity in the medium term, in addition to a prudent borrowing approach, to avoid a rising debt burden.

### Conclusions and policy recommendations
- External debt conclusion:
  - Reflecting limited reliance on external borrowing and expected improvement in macroeconomic performance, Kenya faces a low risk of external debt distress.
  - All external public debt indicators remain below relevant country-specific debt burden thresholds.
  - Standard stress tests show initial upward trends but do not breach thresholds during projection period.
- Public debt conclusion:
  - When all public debt is considered, DSA shows greater risk of unfavorable debt developments, especially under a shock to GDP growth.
  - Temporarily lower GDP growth would set NPV of public debt-to-GDP, NPV of debt-to-revenue, and debt service-to-revenue on a sharply increasing trend.
  - Potentially large but unreported contingent liabilities pose additional risks to public debt sustainability.
- Key policy recommendations:
  - Sustain macroeconomic stability.
  - Substantial investment in infrastructure.
  - Regulatory and governance reforms to improve the investment climate.
  - Prudent borrowing strategy to avoid excessive and nonconcessional borrowing as Kenya gains greater access to external financing.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 16.      The staffs continue to encourage Kenya to use tools such as the joint Fund-Bank

### _cr09191 - 16. The staffs continue to encourage Kenya to use tools such as the joint Fund-Bank DSA template to develop a prudent borrowing strategy

### Debt strategy recommendations and vulnerabilities
- Staffs encourage Kenya to use the joint Fund-Bank DSA template to develop a prudent borrowing strategy to maintain both external and fiscal debt sustainability.
- Efforts noted: workshop in 2007 and the recent joint Bank-Fund technical assistance mission on debt management.
- Strategy elements to consider:
  - Total concessionality and interest costs of Kenya’s borrowing.
  - Maturity structure.
  - Steps to help guard against volatility from shocks (e.g., droughts) or fluctuations in external assistance.
  - Possible further build-up in international reserves as a shock-guarding strategy.
  - Better understanding of holdings of shilling-denominated debt by non-residents to guide vulnerability assessment and reduction.

### Key DSA findings, indicators, and stress tests (selected)
- The most extreme stress test is defined as the test that yields the highest ratio in 2019.
  - In figure b. it corresponds to a Combination shock; in c. to a Exports shock; in d. to a Combination shock; in e. to a Terms shock; and in picture f. to a Combination shock.
- Representative indicator snapshots and projections (selected figures preserved exactly as in source):
  - External debt (nominal) series (annual entries include):
    - 2006: 26.8
    - 2007: 24.7
    - 2008: 22.0
    - 2009: 24.7
    - 2010: 22.2
    - 2011: 20.8
    - 2012: 20.7
    - 2013: 21.0
    - 2014: 21.0
    - 2015: 21.0
    - 2019: 18.0
  - o/w public and publicly guaranteed (PPG):
    - 2006: 24.9
    - 2007: 22.8
    - 2008: 20.4
    - 2009: 23.3
    - 2010: 21.2
    - 2011: 19.6
    - 2012: 19.5
    - 2013: 19.8
    - 2014: 20.0
    - 2019: 18.0
  - Change in external debt (selected):
    - 2006: -4.5
    - 2007: -2.1
    - 2008: -2.8
    - 2009: 2.7
    - 2010: -2.5
    - 2011: -1.5
    - 2012: -0.1
    - 2013: 0.3
    - 2014: 0.0
    - 2019: -0.4
  - Identified net debt-creating flows (selected):
    - 2006: -5.0
    - 2007: -4.0
    - 2008: 1.9
    - 2009: 1.4
    - 2010: 2.7
    - 2011: 2.3
    - 2012: 2.0
    - 2013: 1.3
    - 2014: 1.0
    - 2019: -0.1
  - Non-interest current account deficit (selected):
    - 2006: 2.0
    - 2007: 3.7
    - 2008: 6.3
    - 2009: 1.1
    - 2010: 3.1
    - 2011: 3.4
    - 2012: 4.6
    - 2013: 4.5
    - 2014: 4.3
    - 2019: 3.6
  - Exports and imports (selected percent of GDP or series):
    - Exports (selected): 25.9, 26.1, 27.2, 24.6, 21.9, 21.0, 21.1, 22.1, 22.6, 24.0, 25.2
    - Imports (selected): 35.1, 36.2, 40.2, 34.8, 32.0, 30.5, 30.3, 30.5, 30.8, 29.6, 28.8
  - Net current transfers (negative = inflow) (selected):
    - 2006: -7.0
    - 2007: -6.4
    - 2008: -6.3
    - 2009: -6.1
    - 2010: 1.0
    - 2011: -6.5
    - 2012: -5.4
    - 2013: -4.9
    - 2014: -4.7
    - 2019: -4.8
  - Endogenous debt dynamics (selected):
    - 2006: -4.7
    - 2007: -4.0
    - 2008: -2.2
    - 2009: -0.4
    - 2010: -0.6
    - 2011: -0.7
    - 2012: -0.9
    - 2019: -0.8
  - PV of external debt (selected years):
    - 2019: 11.6
    - 2029: 13.2
    - intermediate years include 12.2, 11.8, 12.1, 12.5, 12.5, 12.8, 11.2
  - PV of PPG external debt (selected years):
    - 2019: 10.0
    - 2029: 11.2
    - intermediate years include 11.8, 11.2, 10.6, 10.9, 11.2, 11.5, 12.5
  - PV of PPG external debt in percent of government revenues (selected):
    - 2019: 45.0
    - 2029: 52.0
    - intermediate years include 53.8, 52.1, 49.1, 50.3, 52.1, 53.7, 59.3
  - Debt service-to-exports ratio (in percent) (selected):
    - 2006: 6.5
    - 2007: 5.8
    - 2008: 5.1
    - 2009: 4.5
    - 2010: 4.2
    - 2011: 4.0
    - 2019: 2.9
  - PPG debt service-to-exports ratio (in percent) (selected):
    - 2006: 5.5
    - 2007: 4.8
    - 2008: 4.2
    - 2009: 3.5
    - 2010: 3.3
    - 2011: 3.3
    - 2019: 2.7
  - Total gross financing need (billions of U.S. dollars) (selected):
    - 2006: 0.3
    - 2007: 0.4
    - 2008: 1.7
    - 2009: 0.9
    - 2010: 1.6
    - 2011: 1.7
    - 2019: 0.5
  - Non-interest current account deficit that stabilizes debt ratio (selected):
    - 2006: 6.5
    - 2007: 5.7
    - 2008: 9.0
    - 2009: 0.6
    - 2010: 7.1
    - 2011: 5.9
    - 2019: 0.1

### Key macroeconomic assumptions and metadata (selected)
- Real GDP growth (in percent) (selected series):
  - 2006: 6.4
  - 2007: 7.0
  - 2008: 2.0
  - 2009: 3.7
  - 2010: 2.4
  - 2011: 3.0
  - 2012: 4.0
  - 2013: 5.0
  - 2014: 6.3
  - 2019: 6.5
  - 2029: 6.1
- GDP deflator in US dollar terms (change in percent) (selected):
  - 2006: 12.8
  - 2007: 12.2
  - 2008: 9.7
  - 2009: 4.8
  - 2010: 9.0
  - 2011: -4.4
  - 2019: 3.9
- Effective interest rate (percent) (selected):
  - 2006: 2.0
  - 2007: 2.0
  - 2008: 1.7
  - 2009: 1.8
  - 2010: 1.0
  - 2011: 1.4
  - 2019: 1.6
- Grant element of new public sector borrowing (in percent) (selected):
  - 2015 onward: 41.8, 33.2, 33.1, 33.1, 38.0, 39.6, 36.4, 51.3, 40.2, 39.2
- Government revenues (excluding grants, in percent of GDP) (selected):
  - 2006: 21.1
  - 2007: 22.2
  - 2008: 22.2
  - 2009: 21.9
  - 2010: 21.5
  - 2011: 21.7
  - 2019 average: 21.5
- Aid flows (in billions of US dollars) (selected):
  - 2006: 0.2
  - 2007: 0.3
  - 2008: 0.4
  - 2009: 1.4
  - 2010: 2.3
  - 2011: 3.2
  - 2019: 15.1
  - 2029: 47.9
  - o/w Grants (selected): 0.2, 0.3, 0.4, 0.4, 0.5, 0.6, 0.6, 0.6, 0.7, 1.0, 2.8
  - o/w Concessional loans (selected): 0.0, 0.0, 0.0, 1.0, 1.8, 2.5, 3.4, 4.5, 5.7, 14.1, 45.1
- Grant-equivalent financing (in percent of GDP) (selected):
  - 2015 onward: 2.6, 2.3, 2.2, 2.0, 2.1, 2.1, 2.1, 1.7, 1.9

### Public sector debt sustainability (selected)
- Public sector debt (selected):
  - 2006: 42.8
  - 2007: 39.6
  - 2008: 40.4
  - 2009: 43.5
  - 2010: 41.3
  - 2011: 40.6
  - 2019: 41.4
  - 2029: 37.5
- o/w foreign-currency denominated public debt (selected):
  - 2006: 24.9
  - 2007: 22.8
  - 2008: 20.4
  - 2009: 23.3
  - 2010: 21.2
  - 2011: 19.6
  - 2019: 20.6
  - 2029: 18.0
- PV of public sector debt (selected):
  - 2019: 32.8
  - 2019 (o/w foreign-currency denominated): 11.5
- Gross financing need (selected):
  - 2019: 11.5
  - 2029: 10.4
- PV of public sector debt-to-revenue and grants ratio (in percent) (selected):
  - 2006: 80.6
  - 2007: 71.9
  - 2008: 132.8
  - 2009: 139.4
  - 2019: 150.2
  - 2029: 136.4
- Debt service-to-revenue and grants ratio (in percent) (selected):
  - 2006: 29.6
  - 2007: 26.9
  - 2008: 25.1
  - 2009: 25.3
  - 2019: 22.8
  - 2029: 19.4

### Stress and sensitivity analysis (high-level)
- Tables present alternative scenarios and bound tests for 2009-2029, including:
  - A1. Key variables at their historical averages in 2009-2029.
  - A2. New public sector loans on less favorable terms in 2009-2029.
  - A3. Alternative Scenario: Growth lower by one standard deviation 2010-2014.
  - B1–B6 bound tests including shocks: lower real GDP growth, lower export growth, US dollar GDP deflator shock, lower net non-debt creating flows, combination shocks, one-time 30 percent nominal depreciation in 2010.
- Example sensitivity outcomes (selected):
  - PV of debt-to-GDP ratio under baseline and stressed scenarios shows increases under A2 and combination shocks across projection years (tables list year-by-year percent outcomes).
  - Debt service-to-revenue and debt service-to-exports ratios display higher peaks under combination and deflator shocks (tables present year-by-year percent outcomes).

### IMF support, recent shocks, and policy guidance (Press Release No. 09/191)
- IMF Executive Board approved an SDR135.7 million (about US$209 million) disbursement to Kenya under the Exogenous Shocks Facility (ESF) rapid-access component.
- Purpose: help Kenya recover from negative impacts of higher food and international fuel and fertilizer costs, and slowdown in external demand associated with the global financial crisis.
- IMF estimates the adverse effects of these shocks on Kenya’s balance of payments at 4½–7¼ percent of GDP—a cumulative total of US$1.4–$2.2 billion over the 2008/09 and 2009/10 fiscal years.
- Economic growth estimates:
  - Growth averaged 6 percent from 2004–2007.
  - Estimated at 2 percent in 2008.
  - Estimated at 3 percent in 2009.
- Food insecurity: number of people affected rose by 47 percent to around 10 million (government and UN estimates).
- Kenyan policy responses noted:
  - Eased monetary policy to support economic activity.
  - Reprioritized public spending.
  - Actions to strengthen the banking system.
  - Focus on improving food distribution and plans with the World Bank for a well-targeted food subsidy program by end-2009.
  - Expectation of substantial increases in maize imports until at least the next food harvest in the third quarter of 2009, with implications for foreign reserves and the Kenyan shilling.
- Mr. John Lipsky (First Deputy Managing Director and Acting Chair) emphasized:
  - Need for policies to be ready to respond to ensure fiscal sustainability and price stability.
  - 2009/10 policy focus: reducing inflation, rebuilding foreign exchange reserves, strengthening basis for return to robust sustainable growth.
  - Fiscal policy: provide stimulus and protect key infrastructure and social spending while ensuring public debt sustainability over the medium term.
  - Structural and governance reforms priority areas: developing an implementation plan for the updated Governance Action Plan, improving public financial management, implementing financial sector reforms, and introducing a targeted subsidy framework to address the food deficit efficiently.
- Fund support role: ESF rapid-access disbursement will help close Kenya’s financing gap and improve prospects for additional donor support.

*Sources: Country authorities and staff estimates and projections; Press Release No. 09/191 (May 29, 2009).*

### 1.  My Kenyan authorities thank management and staff for the constructive policy

### _cr09191 - 1.  My Kenyan authorities thank management and staff for the constructive policy

### Recent economic developments and shocks
- Kenya experienced robust real GDP growth of 7 percent in 2007 anchored on reforms under the Economic Recovery Strategy.
- A succession of exogenous shocks—high fertilizer and fuel prices of 2008, the current global economic slowdown, and the severe drought of 2008—led to a sharp slowdown:
  - real GDP growth slowed to 3.5 percent in 2007/08 and 3.0 percent in 2008/09 from 6.7 percent in 2007.
  - growth is projected to remain at around 3 percent for 2009/10.
- Inflation dynamics:
  - CPI inflation eased to 27.7 percent in December 2008 from a peak of 31.5 percent in May 2008 (noting that the CPI inflation is overstated by a factor of about 2 because of methodological problems).
  - Annual growth in broad money supply was 14.9 percent in December 2008.
  - Expansion in net domestic assets was 22.9 percent, attributed to increased domestic credit to the private sector.
- Balance of payments and reserves:
  - external current account deficit estimated to widen to 6.0 percent of GDP in 2008/09 from 4.6 percent in 2007/08.
  - foreign exchange reserves declined from $3,443 million (3.6 months of imports cover) in 2007/08 to an estimated $2,796 million in 2008/09 (3.1 months of imports).
  - international reserves projected to recover only slightly to about $3,000 million (2.9 months of imports) in 2009/10 compared to a statutory requirement of 4 months import cover.
- Humanitarian impact:
  - an estimated 10 million people have become food insecure with many more at risk of starvation.

### Authorities’ assessment of monetary and financial developments
- The authorities contend that the Central Bank of Kenya’s (CBK) countercyclical policy was unambiguous and supported recovery by:
  - advising Safaricom-receiving banks to open interbank lines while capping interbank rates,
  - providing reverse repo to banks facing liquidity shortages,
  - dampening interest rates and providing necessary liquidity to the banking system.
- Other dynamics affecting liquidity and money demand included the Safaricom IPO skewing liquidity distribution across banks and increased global uncertainty leading economic agents to be risk averse and reduce demand for real balances.
- The authorities note limited exposure to the global financial crisis but some exposure to regional markets; banks and authorities are closely monitoring the situation.

### Fiscal policy stance and measures
- Overall budget deficit expanded from 3.6 percent of GDP in 2007/08 to a projected 5.2 percent in 2008/09 due to revenue shortfalls and expenditure adjustments.
- Net domestic borrowing expected to be much larger than anticipated due to postponed issuance of a foreign currency denominated bond and inability to proceed with privatization.
- Main fiscal challenges: resettling people displaced during the elections unrest, ensuring adequate supply of fertilizer and seed, and continuing maize imports.
- Fiscal measures and priorities:
  - anchor fiscal policy on net domestic financing while mobilizing external financing for food relief and containing domestic borrowing to ensure medium-term debt sustainability;
  - rationalize expenditures while safeguarding key infrastructure projects and spending on vulnerable groups;
  - mobilize additional revenue through strengthening tax administration, especially for excise taxes and VAT to recoup revenue losses;
  - withdraw generalized maize subsidy in preference for a well-targeted food subsidy program in late 2009 to avoid price distortions and minimize abuse;
  - freeze public sector recruitment for the financial year and freeze capital spending where projects have not yet commenced;
  - seek technical assistance to improve tax administration.
- The authorities state any further revenue shortfalls will be met by corresponding cuts in spending and that they have no intention of further loosening the fiscal stance beyond the target for net domestic borrowing.

### Monetary and exchange rate policy actions
- Immediate monetary policy aims at easing liquidity:
  - policy rate (the central bank rate) lowered to 8 percent;
  - bank reserve requirements reduced to 5 percent.
- Monetary policy is anchored on restoring international reserves to the statutory requirement of 4 months import cover at an appropriate time, with partial sterilization of liquidity to be consistent with the inflation target in the medium-term.
- Exchange rate policy is market-determined; authorities will maintain this framework with interventions limited to smoothing short-term volatile fluctuations.

### Structural reform agenda
- Key objective: improve competitiveness by removing impediments to the business environment and creating an efficient and effective public sector.
- Progress and measures:
  - implementation of the Governance Action Plan (GAP), including strengthening the legal platform to fight corruption, operationalizing the public complaints standing committee, and developing an implementation plan for GAP;
  - adoption of risk-based auditing and roll-out of IFMIS;
  - reforms to business licensing;
  - financial sector reforms in microfinance, insurance, banking and capital markets (Microfinance Act now operational);
  - planned measures: adequate provisioning, proactive surveillance and enforcement via the Banking Bill, increase minimum capital requirements for banks in the next two years, enact Savings and Credit Cooperatives (SACCOs) and national payments bills, and sell more shares of the National Bank of Kenya to the private sector.

### Risks, financing need, and authorities’ request
- Downside risks: high food prices, weakening global demand and commodity prices, and worsening drought (large humanitarian need).
- To alleviate external account pressure and increase international reserves and market confidence, the authorities request disbursement under the rapid-access component of the Exogenous Shock Facility (ESF), viewing the shocks as sudden and temporary and expressing confidence that commitment to their medium-term development strategy will aid recovery.
- The authorities consider Fund support crucial to meet developmental challenges in the context of the global financial crisis and economic contraction and remain ready to take additional measures if circumstances warrant.

*Source: _cr09191 - 1. My Kenyan authorities thank management and staff for the constructive policy*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09191.pdf_