## _cr1026 - Section 2, 3, and 4 and maintains an exchange system free of restrictions on payments

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### Executive summary and outlook
- Real GDP growth fell from 7 percent in 2007 to 1¾ percent in 2008.
- Staff expects GDP growth to be about 4½ percent in 2010/11, and to stay below potential of 6 percent at least until 2012/13.
- Staff growth estimates:
  - GDP growth around 2¾ percent in 2009.
  - GDP growth to reach 4½ percent in 2010.
  - Baseline medium-term recovery to 6⅓ percent.
- Inflation:
  - Headline inflation peaked at 31.5 percent in May 2008 (old CPI methodology) and stood at 17.9 percent in September 2009 (old methodology).
  - Revised CPI shows headline inflation averaged 12.8 percent in the past two years, compared with the reported average of 22.5 percent.
  - Headline inflation for the 12 months ending October was 6.6 percent (revised series); nonfood inflation was 3.4 percent.
- External and reserves:
  - Current account deficit widened to 7¾ percent of GDP in 2008/09, from 4½ percent of GDP the previous year.
  - Overall balance for 2008/09 registered a deficit US$423 million (1½ percent of GDP).
  - Fund assistance under the RAC-ESF financed about US$207 million; SDR allocations (general and special) by about US$350 million benefited reserves.
  - Gross reserves stood at US$3.2 billion (3¼ months of import cover) at end-June, 2009; foreign reserves reached almost 3.7 months of imports at end-September 2009 (including SDR allocations).
- Fund support:
  - In May 2009, the Executive Board approved a disbursement under the RAC-ESF of SDR 135.7 million (50 percent of quota).
- Fiscal and monetary stance:
  - Broad agreement that fiscal policy in 2009/10 should stimulate the economy while preserving debt sustainability; a deficit of around 6 percent of GDP viewed as appropriate to provide stimulus.
  - Authorities maintain a fiscal anchor of 40 percent debt to GDP and aim to converge back after temporary departure for countercyclical policies.
  - CBK’s countercyclical monetary policies provided ample liquidity; staff recommends shifting focus to safeguarding price stability and considering an eventual switch to inflation targeting.

### Macroeconomic shocks, performance, and outlook
- Nature of shocks (2008–2009):
  - Exogenous shocks: high international food and fuel prices, global and regional slowdown, post-election violence in early 2008, rising international prices of fuel and fertilizer, poor rainfall in October–November 2008 leading to maize shortages.
  - Spillovers from the global financial crisis reduced export growth, tourism receipts, remittances, and private capital inflows.
- Macroeconomic consequences:
  - Real GDP growth fell to 1¾ percent in 2008 from 7 percent in 2007.
  - Fiscal operations in 2008/09 fell short of intended cyclically adjusted stimulus of 2.1 percent of GDP; both nominal revenue and expenditure were below budgeted levels.
  - Planned sovereign bond issue and privatization were postponed due to unfavorable market conditions.
- Outlook and risks:
  - Savings and investment pick up gradually, reaching pre-crisis levels by end-2010/11.
  - Current account deficit projected to decline to 3½ percent of GDP by 2013/14, from 7 percent of GDP in 2009/10.
  - Gradual reserves buildup to 4 months of imports, from 3.7 months currently.
  - Upside risk: improved business confidence and faster-than-expected global recovery.
  - Downside risks: protracted global slowdown, political tensions, delays in infrastructure and structural reforms, and weather-related shocks.

### Fiscal policy, deficit, and debt sustainability
- Stimulus and medium-term path:
  - Planned additional fiscal stimulus estimated at 2.1 percent of (cyclically adjusted) GDP for 2009/10.
  - Staff recommendation: maintain stimulus through recovery but gradually withdraw it to converge towards a medium-term net debt-to-GDP target of 40 percent.
  - Authorities plan to begin gradual withdrawal in 2010/11 and bring the deficit down from 6 percent of GDP to about 4½ percent of GDP by 2011/12.
- Fiscal risks and contingencies:
  - Drought and maize shortfall: additional expenditures estimated at about ¾ percent of GDP.
  - A 1 percent slower-than-projected economic recovery could add an extra 0.1–0.2 percent of GDP to the deficit.
  - Staff recommended the deficit should not exceed 6½ percent of GDP if risks materialize.
- Fiscal projections (central government, percent of GDP):
  - Balance (cash basis, including grants): 2009/2010 -6.0; 2010/2011 -5.4; 2011/2012 -4.3
  - Primary balance: 2009/2010 -3.5; 2010/2011 -2.8; 2011/2012 -1.5
  - Fiscal Impulse (unadjusted): 2009/2010 2.4; 2010/2011 -0.7; 2011/2012 -1.3
  - Fiscal Impulse adjusted for cyclical position: 2009/2010 2.1; 2010/2011 -0.8; 2011/2012 -1.2
- Memorandum items:
  - GDP Growth (in percent): 2009/2010 3.2; 2010/2011 4.6; 2011/2012 5.5
  - Revenue: 2009/2010 22.3; 2010/2011 22.7; 2011/2012 23.2
  - Grants: 2009/2010 1.2; 2010/2011 1.2; 2011/2012 1.4
  - Primary expenditures (excluding foreign financed development spending): 2009/2010 23.8; 2010/2011 23.1; 2011/2012 22.4
  - Total public debt, net: 2009/2010 42.9; 2010/2011 43.6; 2011/2012 43.3
- Selected central government indicators (percent of GDP):
  - Total revenue: 21.6, 22.0, 21.6, 22.3, 22.7 (2006/07–2010/11 series)
  - Total expenditure and net lending: 24.3, 27.3, 26.5, 29.5, 29.3
  - Overall balance (cash basis) including grants: -1.7, -3.4, -3.7, -6.0, -5.4
- Debt indicators:
  - Total public debt, net of deposits: 42.0, 37.2, 40.2, 42.9, 43.6 (2006/07–2010/11 series)
  - NPV of central government debt: 34.8, 28.6, 29.0, 32.0, 33.4
  - NPV of external debt: 15.5, 11.7, 11.2, 11.7, 11.8

### Monetary policy, CPI revision, and liquidity operations
- Policy actions:
  - CBK lowered the Central Bank Rate (CBR) by a total of 125 basis points since mid-2008.
  - Cash Reserve Requirement (CRR) reduced twice to stand at 4½ percent, down from 6 percent in late 2008 (total reduction of 150 basis points referenced elsewhere).
- CPI methodology and implications:
  - Linked-Carli aggregation method (substantial upward bias) was replaced with a geometric mean method.
  - Revised CPI: headline inflation averaged 12.8 percent in the past two years vs. reported average of 22.5 percent; 12-month headline inflation ending October 6.6 percent vs. reported 17.9 percent in September using original methodology.
  - KNBS planned to release a new index in February 2010 using the revised methodology with an updated basket and broader geographical coverage.
- Monetary policy guidance:
  - Past CBK countercyclical easing was appropriate given benign inflation revealed by revised CPI.
  - Staff considers further monetary easing not warranted; policy should progressively refocus on safeguarding price stability.
  - Operational recommendations: use repos/reverse repos and/or foreign exchange sales/purchases for liquidity management; reduce reliance on CRR for active liquidity management; clarify monetary policy intermediate targets and operational actions.
- Operational reforms:
  - Extension of the tenure of repo securities; changes to liquidity forecasting framework; introduction of HRA standing facility.
  - HRA usage limited by delayed settlement agreements and shallow secondary market; wider use could improve liquidity distribution.

### External sector, exchange rate, and reserves
- Current account and balance of payments:
  - Current account deficit widened to 7¾ percent of GDP in 2008/09 from 4½ percent the previous year.
  - Overall balance for 2008/09 registered a deficit US$423 million (1½ percent of GDP).
  - June 2009 Fund assistance under the RAC-ESF amounted to about US$207 million.
- Reserves and SDRs:
  - Gross reserves were US$3.2 billion (3¼ months of imports) at end-June 2009; foreign reserves reached almost 3.7 months of imports at end-September 2009 including about US$350 million of SDR allocations.
  - Kenya’s reserves are below the minimum of 4 months of imports mandated by the CBK Act and below the EAC convergence criterion; staff noted carry costs and liquidity/inflation impacts of reserve purchases.
- Exchange rate developments:
  - Floating/managed float regime; interventions limited to smoothing excessive volatility and building reserves gradually.
  - Over the year to 2009Q3: NEER depreciated by 5 3/4 percent; REER appreciated by almost 6 percent.
  - CPI-based REER appreciated by 13¾ percent between end-2007 and end-September 2009 (using a modified CPI series).
  - Staff’s CGER methods find no evidence of misalignment threatening external stability; some methods yield undervaluations in the 1–9⅓ percent range depending on assumptions.
- External balance projections and metrics:
  - Current account deficit projected to decline to 3½ percent of GDP by 2013/14 from 7 percent in 2009/10.
  - Box 5 assumptions: underlying current account balance -3 % GDP; medium-term nominal growth: 12.5 %; capital grants: 0.7 % GDP.
  - Methodology-derived misalignments: EREER approach: -2.6 percent; ES approach (stabilize ext. debt at 22.8 percent of GDP): -1.1 percent; ES approach (stabilize ext. debt at 32.8 percent of GDP): -6.0 percent; ES approach (stabilize NFA at -39.8 percent of GDP): -9.3 percent.

### Financial sector soundness, supervision, and vulnerabilities
- FSAP Update findings and banking sector metrics:
  - Banking sector remains sound; aggregate capitalization almost 20 percent on a risk-weighted basis (required minimum: 12 percent; Sub-Saharan African average: 17–18 percent).
  - Quality of capital appears good; most capital is core capital (Basel tier 1 less intangible assets).
  - Nonperforming loans (NPL) ratio was 9 percent in August 2009.
  - Rapid credit growth raises concerns about future asset quality deterioration.
  - Macroeconomic stress tests (drought, decline in tourism, protracted global recession, political turmoil) suggest such shocks would not lead to banking system insolvency.
- CBK supervisory response:
  - CBK stepped up supervision at crisis onset; banks tightened credit appraisal, limited foreign currency loans, and reappraised foreign bank relationships.
  - Balance Sheet Analysis found banks improved net foreign currency positions from mid-2008 following reductions in foreign currency liabilities.
- Key vulnerabilities and capacity gaps:
  - Legislative authority and manpower for sophisticated supervision lagging.
  - Pending capital market reforms (corporate governance, demutualization of the NSE).
  - NSSF inadequately managed and overseen; poor regulation and low funding of defined benefit pension schemes could amplify shocks.
  - Increasing regionalization and cross-border transactions heighten need for consolidated supervision; progress slow.
- Pending legislation:
  - Banking, deposit insurance and national payments system bills not yet submitted to Cabinet for final approval.
  - Anti-Money Laundering Bill still in Parliament.
  - Draft national pension strategy and PPP bill pending parliamentary action.

### Public financial management, structural reforms, and governance
- PFM reforms and implementation:
  - IFMIS rolled out to 48 ministries and spending units; budget, procurement and payroll modules not yet deployed.
  - EFT launched covering virtually all payments above Ksh 1 million (about US$13,500); cash payments to civil servants to cease by January 1, 2010.
  - Recommended urgent submission to Parliament of the draft PFM bill and operationalization of a treasury single account.
  - Monitor and manage growth of semi-autonomous agencies and extra-budgetary funds; improve in-year fiscal accounting and reporting; quantify and moderate contingent liabilities.
- Structural progress and gaps:
  - Partial progress in fiscal structural reforms; stalled where legislation required (PFM Bill, Banking Act Amendment).
  - Governance Action Plan (GAP) updated; pilot income support scheme designed to cover 40,000 households in Nairobi, Mombasa and Kisumu.
  - Directors endorsed an income support scheme to protect vulnerable and poor households.
- Recommendations:
  - Priority to reforms of public finance management, governance, and the financial sector.
  - Improve human resources to speed drafting and review of bills.
  - Continue reform of social protection and pension scheme regulation.

### Policy recommendations and staff appraisal
- Fiscal:
  - 2009/10 budget target deficit of around 6 percent of GDP appropriate to provide stimulus; contingency plans for revenue shortfalls welcomed.
  - Gradual withdrawal of stimulus recommended to converge to the 40 percent debt-to-GDP anchor.
- Monetary:
  - Easing by CBK was appropriate during the downturn; with nascent recovery and fiscal stimulus, policy should refocus on price stability.
  - Staff encouraged analytical work on monetary transmission and considering an inflation targeting regime once preconditions are met.
- Financial sector:
  - Staff commends CBK proactive measures and recommends readiness to address emerging weaknesses; ensure provisions and capital buffers remain adequate.
  - Address inadequate regulation and funding of social security and pension schemes; strengthen supervision of cross-border transactions.
- External:
  - Maintain managed float; limit FX interventions to smoothing excessive short-term volatility and meeting reserve targets.
- Statistics and capacity building:
  - KNBS released a revised CPI series in early November; new series planned for February 2010.
  - Data shortcomings persist across national accounts, GFS, monetary and external statistics; staff recommended reforms, enhanced TA and technical engagement.

*Source: IMF staff report excerpts and informational annexes provided in the content unit.*

### Section 2, 3, and 4 and maintains an exchange system free of restrictions on payments

### _cr1026 - Section 2, 3, and 4 and maintains an exchange system free of restrictions on payments

### Executive summary and outlook
- GDP growth and prospects
  - Real GDP growth fell from 7 percent in 2007 to 1¾ percent in 2008.
  - Staff expects GDP growth to be about 4½ percent in 2010/11, and to stay below potential of 6 percent at least until 2012/13.
  - After a moderate recovery in the first half of 2009, near- and medium-term prospects are broadly favorable, but risks remain.
- Inflation and price developments
  - Headline inflation peaked at 31.5 percent in May 2008 (old CPI methodology) and stood at 17.9 percent in September 2009 (old methodology).
  - The inflation series cited uses the old methodology, which overestimates inflation; staff uses a modified series to account for the overestimation.
- External position and reserves
  - Current account deficit widened to 7¾ percent of GDP in 2008/09, from 4½ percent of GDP the previous year.
  - Overall balance for 2008/09 registered a deficit US$423 million (1½ percent of GDP).
  - The deficit was financed in part by a drawdown on reserves and Fund assistance of about US$207 million under the RAC-ESF.
  - Gross reserves stood at US$3.2 billion (3¼ months of import cover) at end-June, 2009.
  - Kenya also benefited from SDR allocations (general and special) by about US$350 million.
- Financial support from the Fund
  - In May 2009, the Executive Board approved a disbursement under the RAC-ESF of SDR 135.7 million (50 percent of quota).
- Fiscal and monetary policy stance
  - Broad agreement that fiscal policy in 2009/10 should stimulate the economy while preserving debt sustainability; a deficit of around 6 percent of GDP viewed as appropriate to provide stimulus.
  - Authorities maintain a fiscal anchor of 40 percent debt to GDP and aim to converge back after temporary departure for countercyclical policies.
  - CBK’s countercyclical monetary policies provided ample liquidity and helped prevent a deeper GDP decline. Staff recommends shifting focus to safeguarding price stability as stimulus is withdrawn and activity picks up, and consideration of an eventual switch to inflation targeting.
- Structural reforms and financial sector
  - Partial progress in fiscal structural reforms, but the reform agenda has stalled in key areas, especially those requiring enactment of legislation.
  - FSAP Update findings broadly concurred with authorities though reservations existed on the banking supervision assessment. CBK’s proactive measures mitigated global crisis impact on banks; remaining risks and vulnerabilities need addressing.

### Background and recent developments
- Pre-2008 performance
  - Kenya achieved average real GDP growth of 6 percent in 2004–07, peaking at 7 percent in 2007.
  - Progress was made on financial sector structural issues and some improvements in public financial management and governance.
- Political and institutional context
  - The 2008 coalition government faces challenges forming consensus on key structural reforms, implementing recommendations from the enquiry into post-election violence, and enacting a new constitution.
- Recent Fund engagement and methodological issues
  - At the 2008 Article IV Consultation, Directors encouraged anchoring fiscal policy on total public debt to GDP and improving monetary operations and CPI methodology.
  - A revised CPI series was issued in early November (prior to February 2010 planned new CPI series); staff uses a modified series to adjust for overestimation.

### Multiple shocks and their impact (2008–2009)
- Nature of shocks
  - Exogenous shocks included high international food and fuel prices, global and regional slowdown, post-election violence in early 2008, rising international prices of fuel and fertilizer, and poor rainfall in October–November 2008 leading to maize shortages.
  - Spillovers from the global financial crisis reduced export growth, tourism receipts, remittances, and private capital inflows.
- Macroeconomic consequences
  - Real GDP growth fell to 1¾ percent in 2008 from 7 percent in 2007.
  - Headline inflation peaked at 31.5 percent in May 2008 and declined to 17.9 percent by September 2009 (old methodology).
  - Fiscal operations in 2008/09 fell short of intended cyclically adjusted stimulus of 2.1 percent of GDP; both nominal revenue and expenditure were below budgeted levels.
  - The planned sovereign bond issue and privatization were postponed due to unfavorable market conditions.
- Monetary policy responses and financial conditions
  - Central Bank of Kenya (CBK) lowered the Central Bank Rate (CBR) by a total of 125 basis points since mid-2008.
  - Cash Reserve Requirement (CRR) reduced twice to stand at 4½ percent, down from 6 percent in late 2008.
  - Short-term rates (interbank, repo, reverse repo) at all-time lows reflecting ample liquidity, while lending and treasury bill rates remained around pre-crisis levels.

### Balance of payments, external financing, and RAC-ESF support
- Deterioration and financing needs
  - The overall balance of payments weakened after mid-2008, with the current account deficit widening to 7¾ percent of GDP in 2008/09.
  - Private capital flows declined sharply, contributing to a 2008/09 overall balance deficit of US$423 million (1½ percent of GDP).
- Fund assistance and reserve outcomes
  - June 2009 Fund assistance under the RAC-ESF amounted to about US$207 million.
  - The RAC-ESF disbursement provided some breathing space while global growth and commodity price outlooks improved relative to the authorities’ request time.
  - Gross reserves were US$3.2 billion (3¼ months of imports) at end-June, 2009.
- Continuing vulnerabilities
  - Prolonged drought during 2009 weakened agricultural output and hydroelectric power generation, necessitating increased maize and petroleum imports.
  - Progress on structural reforms remained slow.

### Policy discussions and priorities (summarized)
- Fiscal policy
  - Consensus for countercyclical fiscal stimulus in 2009/10 while preserving debt sustainability; around 6 percent of GDP deficit seen appropriate.
  - Authorities committed to a 40 percent debt to GDP ratio anchor and expected medium-term convergence after stimulus withdrawal.
- Monetary policy
  - Staff supports CBK’s countercyclical measures that provided liquidity and lowered interest rates.
  - Recommendation to shift focus toward price stability as the fiscal stimulus is withdrawn and economic activity recovers.
  - Staff advises considering pre-conditions for a move to inflation targeting to better anchor monetary policy.
- Financial sector vigilance
  - CBK proactive measures mitigated global crisis effects on banks; remaining financial system risks need to be addressed.
- External and competitiveness issues
  - Real exchange rate (after correcting for overestimated CPI) has appreciated and the current account widened, reflecting fundamental factors.
  - Reserves comfortable but below levels of Kenya’s EAC partners.
- Structural reform acceleration
  - Implementation has been partial in the fiscal domain and stalled where legislation is required. Faster progress is needed to improve competitiveness and raise growth.

*Source: IMF country report sections provided in the content unit.*

### 9.      Macroeconomic performance and adjustment to the various exogenous shocks

### 9.      Macroeconomic performance and adjustment to the various exogenous shocks

### Recent macroeconomic performance and shocks
- Disbursement: SDR135.7 million under the RAC-ESF was disbursed to help close the estimated cumulative financing gap for 2008/09 and 2009/10 and rebuild reserves.
- Reserves: Foreign reserves reached almost 3.7 months of imports at end-September, including the US$350 million of general and special SDR allocations.
- Inflation: Overall and food inflation declined. The decline in food inflation was aided by large imports of maize which filled domestic supply gaps and stabilized prices.
- Fiscal actions: Authorities increased expenditures on infrastructure and pro-poor programs, supporting aggregate demand.
- New challenge: A prolonged drought has increased imports of maize and fuel above earlier assumptions at the time of the RAC-ESF.

### Structural and governance reform progress
- Achievements:
  - Revised CPI series based on a new methodology released in early November.
  - A pilot income support scheme (part of a comprehensive vulnerability program covering 40,000 households in Nairobi, Mombasa and Kisumu) has been designed.
  - GAP updated and some improvements in transparency and access to government information, for example in public procurement.
- Outstanding items:
  - The PFM Bill and the Banking Act (Amendment) Bill have not yet been brought before Parliament.
  - Private capital flows survey postponed to early 2010.

### Outlook and growth projections
- Near-term: Economic growth projected to remain subdued in 2009 and early 2010; agriculture prospects worsened due to lower-than-expected rainfall.
- Staff growth estimates:
  - GDP growth around 2¾ percent in 2009.
  - GDP growth to reach 4½ percent in 2010.
  - Baseline medium-term recovery to 6⅓ percent.
- Medium-term external and reserve outlook under baseline:
  - Savings and investment pick up gradually, reaching pre-crisis levels by end-2010/11.
  - Current account deficit projected to decline to 3½ percent of GDP by 2013/14, from 7 percent of GDP in 2009/10.
  - Gradual reserves buildup to 4 months of imports, from 3.7 months currently.
- Risks:
  - Upside: improved business confidence and faster-than-expected global recovery.
  - Downside: protracted global slowdown, political tensions affecting investor confidence, delays in infrastructure and structural reforms, and weather-related shocks.

### Spillover effects (summary from Box 2)
- Spillovers from world growth and trading partners explain much of the EAC downturn and recovery patterns.
- For Kenya:
  - Downturn came early in 2008 due to external shocks amplified by adverse domestic developments.
  - 2009 mild recovery premised on improved terms of trade and recovery of net private capital flows.
- Regional response: Monetary and fiscal easing across EAC; growth rebound expected in 2010 and 2011, but full catch-up to pre-crisis levels may take at least a few years.

### Fiscal policy stance and projections
- Stimulus size and intent:
  - Planned additional fiscal stimulus estimated at 2.1 percent of (cyclically adjusted) GDP for 2009/10.
  - Stimulus financed mainly through higher domestically-financed development spending, targeting key infrastructure projects.
- Measures to improve foreign-financed capital expenditure execution:
  - More frequent monitoring and review of projects.
  - More active engagement of development partners through regular review meetings.
  - More rigorous selection criteria for inclusion of new projects in the budget.
- Staff recommendation:
  - Maintain stimulus through recovery but gradually withdraw it to converge towards a medium-term net debt-to-GDP target of 40 percent.
  - Authorities plan to begin gradual withdrawal in 2010/11 and bring the deficit down from 6 percent of GDP to about 4½ percent of GDP by 2011/12.
- Fiscal risks and contingencies:
  - Drought and maize shortfall: additional expenditures on food security and drought mitigation estimated at about ¾ percent of GDP.
  - A 1 percent slower-than-projected economic recovery could add an extra 0.1–0.2 percent of GDP to the deficit.
  - Planned recurrent expenditure savings of about ⅓ percentage points of GDP may not be fully realized.
  - Staff recommended the deficit should not exceed 6½ percent of GDP if risks materialize.
- Fiscal projections (central government, percent of GDP unless otherwise indicated):
  - Balance (cash basis, including grants): 2009/2010 -6.0; 2010/2011 -5.4; 2011/2012 -4.3
  - Primary balance: 2009/2010 -3.5; 2010/2011 -2.8; 2011/2012 -1.5
  - Fiscal Impulse (unadjusted for cyclical position; - = fiscal withdrawal)2/3/: 2009/2010 2.4; 2010/2011 -0.7; 2011/2012 -1.3
  - Fiscal Impulse adjusted for cyclical position: 2009/2010 2.1; 2010/2011 -0.8; 2011/2012 -1.2
  - Memorandum items:
    - GDP Growth (in percent): 2009/2010 3.2; 2010/2011 4.6; 2011/2012 5.5
    - Revenue: 2009/2010 22.3; 2010/2011 22.7; 2011/2012 23.2
    - Grants: 2009/2010 1.2; 2010/2011 1.2; 2011/2012 1.4
    - Primary expenditures (excluding foreign financed development spending): 2009/2010 23.8; 2010/2011 23.1; 2011/2012 22.4
    - Total public debt, net: 2009/2010 42.9; 2010/2011 43.6; 2011/2012 43.3
  - Notes:
    - 1/ Fiscal year runs from July to June. The fiscal projections for 2010/2011 and 2011/2012 reflect the authorities' medium term budget path.
    - 2/ Measured as change in primary balance.
    - 3/ Assumes potential GDP growth of 5 percent and a cyclical elasticity of the primary balance of 0.2.
- Debt sustainability:
  - Kenya’s public and external debt indicators show a low risk of debt distress under the May 2009 debt sustainability analysis baseline.
  - Total public debt indicators are more vulnerable under shocks, especially a GDP growth shock.

### Monetary policy assessment and CPI revision
- CPI revision (Box 3 findings):
  - Revised CPI shows headline inflation averaged 12.8 percent in the past two years, compared to the reported average of 22.5 percent.
  - The linked-Carli aggregation method (substantial upward bias) was replaced with a geometric mean method.
  - Headline inflation for the 12 months ending October was 6.6 percent, compared with a reported 17.9 percent in September using the original methodology.
  - Nonfood inflation was 3.4 percent.
  - KNBS will release a new index in February 2010 using the revised methodology with an updated basket and broader geographical coverage.
- Monetary stance and recommendations:
  - Past CBK countercyclical easing was appropriate given a benign inflation environment revealed by the revised CPI.
  - Staff considers further monetary easing is not warranted; policy should progressively refocus on safeguarding price stability.
  - Given ample bank liquidity, a strengthening economy, and fiscal stimulus, further easing could increase future inflationary pressures.
  - Staff welcomes the revised CPI and supports development of a comprehensive revised CPI to assess policy effectiveness.
- Operational/implementation issues:
  - Weak transmission: Lending rates have declined only slightly and remain high due to structural impediments weakening transmission between the CBR and market rates.
  - CRR usage: CBK has been using the CRR instrument to inject liquidity; adjustments to the CRR are not ideal for active liquidity management.
  - Communication: Monetary policy statements lack clarity with respect to monetary targets and specific operational actions.
  - Authorities actions: Developing a model to better understand the monetary transmission mechanism and plan to share preliminary results in early December.
  - Interim framework: Broad money remains the nominal anchor and reserve money the operational target; an inflation targeting regime could be considered once pre-conditions are met.
  - Staff encouraged use of repos/reverse repos and/or foreign exchange sales/purchases for liquidity management.

### Financial sector soundness
- FSAP Update mission findings:
  - Banking sector remains sound despite economic weakness.
  - Aggregate capitalization is almost 20 percent on a risk-weighted basis.
    - Required minimum: 12 percent.
    - Sub-Saharan African average: 17–18 percent.
  - Quality of capital appears good, with most being core capital (Basel tier 1 capital less intangible assets).
  - Nonperforming loans (NPL) ratio was 9 percent in August 2009, low relative to 2007.
  - Rapid credit growth raises concerns about future asset quality deterioration in a slowing economy.
  - Macroeconomic stress tests (drought, decline in tourism, protracted global recession, political turmoil) suggest such shocks would not lead to banking system insolvency.

*Source: IMF staff report excerpt titled "9.      Macroeconomic performance and adjustment to the various exogenous shocks."*

### 23.      Direct effects of the global financial crisis were partially contained by CBK’s

### _cr1026 - 23.      Direct effects of the global financial crisis were partially contained by CBK’s

### CBK supervisory response and immediate financial-sector outcomes
- CBK banking supervision stepped up supervision at the onset of the crisis to detect immediate stress.
- Commercial banks:
  - Introduced stricter appraisal of new credit facilities and close continuous monitoring of existing credit portfolios.
  - Some banks limited foreign currency loans and reappraised relationships with foreign banks to limit exposure to foreign exchange risk.
- Staff study finding (Box 4): largely due to these policies, banks were able to reduce their risk and vulnerability to exchange rate shocks.

### Balance Sheet Analysis (Box 4) — Kenya, Tanzania and Uganda: sectoral balance responses
- Method:
  - Limited Balance Sheet Analysis (BSA) applied to banking system balance sheets using annual (2001–2008) and monthly (January 2007–May 2009) data.
  - Analyzed assets and liabilities of five sectors: the central bank, the government, the banking system, the corporate sector and households.
  - Derived net financial position (NFP) and net foreign currency position (NFCP).
- Definitions:
  - NFP = overall financial assets minus financial liabilities; a large negative position indicates solvency problems.
  - NFCP = foreign currency assets minus foreign currency liabilities; a large negative (positive) position indicates vulnerability to exchange rate depreciation (appreciation) risks.
- Key findings for Kenya:
  - Central bank holds positive net foreign assets (implying a loss in book local currency value in the event of exchange rate appreciation).
  - Other sectors exposed to interest and exchange rate shocks.
  - Public sector financial position deteriorated after mid 2008 due to higher levels of domestic financing.
  - Banks improved their net foreign currency position from mid-2008 following substantial reduction in foreign currency liabilities, especially loans.
  - Corporate private sector net foreign currency position improved; net financial position also improved as nonrenewal of credit lines and tightening of lending standards reduced corporate liabilities.
  - Household positions deteriorated as household assets—mainly deposits—fell.

### Financial-sector deepening and key vulnerabilities
- Developments since 2003 FSAP:
  - Microfinance institutions and banks expanded in lower-income market segments, increasing competition for the SACCO sector.
- Key risks and capacity gaps:
  - Legislative authority and manpower for sophisticated, rigorous supervision are lagging.
  - Capital market reforms (corporate governance, demutualization of the NSE) are pending.
  - NSSF is inadequately managed and overseen; a systemic event affecting the fund could constrain government response due to fiscal limits.
  - Poor regulation and low funding of defined benefit pension schemes could amplify financial shocks.
  - Increasing regionalization, rising foreign entry, and regional transactions heighten need for more sophisticated regulation; progress in cross-border and domestic consolidated supervision is slow.

### Pending legislation and policy actions
- Several bills yet to be submitted to Cabinet or enacted, including:
  - Banking, deposit insurance and national payments system bills (not yet submitted to Cabinet for final approval).
  - Anti-Money Laundering Bill is still in Parliament.
- Risks of delay:
  - Without passage, supervision and control of the financial sector remain constrained.
- Pension and related reforms:
  - Finalization and implementation of draft national pension strategy present an opportunity to ensure NSSF compliance with outsourcing legal requirements and reform the Civil Service Pension Scheme.

### Exchange rate regime, external stability, and reserves (Box 5 and paragraph 26–27)
- Exchange rate policy:
  - Floating exchange rate regime intended to remain market-determined; interventions limited to smoothing excessive volatility and gradually building international reserves.
- Recent movements:
  - Over the year to 2009Q3:
    - NEER depreciated by 5 3/4 percent.
    - REER appreciated by almost 6 percent.
  - CPI-based REER appreciated by 13¾ percent between end-2007 and end-September 2009 (using a modified CPI series).
- Competitiveness and misalignment assessment:
  - Staff’s REER and external stability analysis finds no evidence of misalignment or threat to external stability (CGER methods yield undervaluations in the 1– 9⅓ percent range for some methods; results depend on assumptions).
  - Trade data suggest Kenya has maintained its share of world exports despite REER appreciation.
- Reserves and policy stance:
  - SDR allocations, about US$350 million, will go to reserves buildup.
  - Kenya’s reserves are below the minimum of 4 months of imports mandated by the CBK Act and below the EAC convergence criterion.
  - Staff agreed with authorities’ desire to build reserves but noted the need to be mindful of:
    - Carry cost of reserves.
    - Liquidity impact of purchases on monetary aggregates and inflation.
- Additional metrics cited (Box 5 assumptions and methods):
  - Key assumptions: underlying current account balance -3 % GDP; medium-term nominal growth: 12.5 %; capital grants: 0.7 % GDP.
  - Methodology-derived misalignments and norms include:
    - EREER approach: -2.6 percent.
    - ES approach with stabilize ext. debt at 22.8 percent of GDP: -1.1 percent.
    - ES approach with stabilize ext. debt at 32.8 percent of GDP: -6.0 percent.
    - ES approach with stabilize NFA at -39.8 percent of GDP: -9.3 percent.
  - Notes:
    - 22.8 is the 2008 average external debt-to-GDP of PRGF-eligible countries and roughly the same as Kenya's external debt at end-Sept 2009.
    - 32.8 is the 2008 average ext. debt-to-GDP of SSA excl. South Africa and Nigeria.
    - -3.3, -4.4, -5.2 appear as current account norm and REER misalignment results in the box figures.

### Public financial management, structural reforms, and governance
- IFMIS and payment reforms:
  - IFMIS rolled out to 48 ministries and spending units, leaving only 4 to be covered; budget, procurement and payroll modules not yet deployed.
  - EFT launched at beginning of October; covers virtually all payments above Ksh 1 million (about US$13,500).
  - By January 1, 2010, all cash payments to civil servants will cease.
- Recommended PFM reforms (staff):
  - Urgent submission to Parliament of the draft PFM bill to revise legal framework for public finance management.
  - Improve treasury cash management (including making operational the treasury single account).
  - Monitor and manage growth of semi-autonomous government agencies and extra-budgetary funds.
  - Improve coverage, reliability and relevance of in-year fiscal accounting and reporting.
  - Adopt policies to quantify and moderate contingent liabilities.
- PPP and procurement:
  - Authorities plan to submit a PPP bill to Parliament; interim regulations issued under a law on specialized procurement.

### Monetary policy framework, liquidity operations, and transmission
- Recent operational reforms:
  - Extension of the tenure of repo securities.
  - Changes to liquidity forecasting framework for better estimates of monetary conditions.
  - Introduction of HRA (standing facility) intended to be used in the interbank market.
- Challenges and staff observations:
  - HRA usage limited by delayed issuance of settlement agreements raising counterparty risk concerns.
  - Several banks still learning; shallowness of the secondary market necessitated deep haircuts when using the facility.
  - Staff view: wider use of HRA could improve distribution of liquidity among banks.
  - Authorities optimistic that HRA usage will increase over time.

### Growth outlook, fiscal stance, and staff appraisal (VI. STAFF APPRAISAL)
- Macro outlook and risks:
  - Kenya’s robust expansion since 2003 was cut short by shocks in 2008, including the global financial crisis; direct effects on the domestic financial system were modest.
  - Economy shown signs of recovery, but pace of growth projected below potential at least until 2011/12.
  - Downside risks: a deeper or more protracted global downturn or deteriorating domestic economic and political conditions could lower growth.
- Fiscal policy guidance:
  - 2009/10 budget targets a deficit of around 6 percent of GDP; broadly appropriate to provide stimulus.
  - Given risks to revenue and expenditure, additional expenditure could be needed; an increase in the deficit by about ½ percentage point of GDP could be warranted.
  - Medium-term objective: convergence back to the fiscal anchor after temporary departure to accommodate cyclical developments.
- Monetary policy guidance:
  - Easing of monetary policy by CBK was appropriate during the downturn.
  - With nascent strengthening of private sector activity and ongoing fiscal stimulus, focus should shift to safeguarding price stability.
  - Release of a revised CPI is welcome; planned release of a new series in February would facilitate monitoring of price developments.
  - Monetary policy intermediate targets need clearer statement and decisive use of available instruments.
  - Reforms of the monetary framework, including analytical work on transmission and consideration of moving to an inflation targeting regime once prerequisites are met, are welcome.

*IMF staff report content (chapter/section as provided).*

### 37.      The financial sector has so far weathered the immediate impact of the global

### _cr1026 - 37.      The financial sector has so far weathered the immediate impact of the global

### Financial sector resilience and remaining risks
- Findings:
  - "The financial sector has so far weathered the immediate impact of the global crisis well, but risks remains."
  - "The assessment of the FSAP mission that the banking sector remains well-capitalized and adequately provisioned is reassuring."
- Policy recommendations / actions:
  - "Staff commends the CBK for proactive measures which mitigated the impact of the global financial crisis on the balance sheet of banks, and recommend that it stands ready to address any emerging weakness going forward."
  - "CBK would need to continue engaging with banks to ensure that provisions and capital buffers remain adequate to meet future risks."
- Remaining risks to address expeditiously:
  - "inadequate regulation and funding of social security fund and other pension schemes"
  - "the regulation and supervision of cross border transactions"
  - "risks from increasing regionalization"

### External sector and exchange rate
- Findings:
  - "While the external current account deficit has increased, there appear to be no major risks to external stability."
  - "The appreciation of the real exchange rate seems broadly in line with economic fundamentals, with strong capital inflows financing the current account deficit and foreign reserves increasing."
- Policy guidance:
  - "Under these circumstances, foreign exchange market interventions should remain limited to smoothing excessive short-term volatility and meeting the foreign reserve target."

### Structural and governance reforms for medium- and long-term growth
- Priority reforms:
  - "Priority should be given to the reforms of public finance management, governance, and financial sector which are much needed to complement sound macroeconomic policies."
- Institutional capacity:
  - "Improvement of human resource to facilitate the speedy drafting and review of new bills is essential."
- Social protection:
  - "The introduction of an income support scheme aimed at protecting the vulnerable and poor households would address food deficit in an efficient manner."

*Source: _cr1026 - 37–39*

### 40.       It is recommended that the next Article IV consultation be held on the standard

### _cr1026 - 40. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Fiscal sector developments
- Recommendation: The next Article IV consultation be held on the standard 12-month cycle.
- Revenue and expenditure trends (selected):
  - Total revenue (percent of GDP): 21.6, 22.0, 21.6, 22.3, 22.7, 23.2, 23.5, 23.8 (2006/07–2013/14 series in Table 2a/2b).
  - Total expenditure and net lending (percent of GDP): 24.3, 27.3, 26.5, 29.5, 29.3, 28.7, 28.6, 28.3.
  - Overall balance (commitment basis) excluding grants (percent of GDP): -2.7, -5.2, -4.8, -7.2, -6.6, -5.5, -5.0, -4.6.
  - Overall balance (cash basis) including grants (percent of GDP): -1.7, -3.4, -3.7, -6.0, -5.4, -4.3, -3.4, -3.0.
- Financing composition (2006/07–2009/10, billions Ksh and percent of GDP shown in tables):
  - Net domestic borrowing and net foreign financing detail provided in Table 2a: Net domestic borrowing examples: 2.0, -1.1, 3.0, 4.5, 3.2, 2.1, 1.3, 0.8 (selected years).
  - Total donor support (grants & loans): 1.5, 2.5, 2.1, 3.2, 3.1, 3.2, 3.5, 3.8 (billions Ksh or percent of GDP as in table context).
- Public debt metrics (Table 1 / memorandum items):
  - Total public debt, net (end of period): 42.0, 37.2, 40.2, 42.9, 43.6, 43.3, 42.0, 40.5 (percent of GDP for listed years).
  - NPV of central government debt (end of period): 34.8, 28.6, 29.0, 32.0, 33.4, 33.5, 32.7, 31.4 (percent of GDP).
  - Of which: NPV of external debt: 15.5, 11.7, 11.2, 11.7, 11.8, 11.9, 12.1, 12.3 (percent of GDP).

### Money, credit, and prices
- Broad money and deposits (M3X, end period, annual percent change): 17.0, 18.7, 12.5, 14.8, 15.2, 15.9, 15.9, 15.9 (2006/07–2013/14 series in Table 1).
- Reserve money (end period, percent change): 19.8, 18.2, 4.6, 12.8, 3.4, 26.7, 26.7, 26.7.
- Broad money growth stabilized since late 2008 (Figure 2 caption).
- Private sector credit:
  - Private sector credit growth has been declining (Figure 2 caption).
  - Credit to private sector (MILLIONS/percent series shown in Monetary Survey and charts).
- Interest rates and yields:
  - Daily interbank and repo/reverse repo rates shown; money market rates described as low but yields on medium and long-term treasury securities have diverged from short-term rates (Figure 2 captions).
- Inflation indicators (Table 1):
  - Consumer price index (annual average): 10.4, 18.5, 12.5, 8.5, 5.0, 5.0, 5.0, 5.0.
  - Consumer price index (end of period): 11.1, 29.3, 8.9, 7.0, 5.0, 5.0, 5.0, 5.0.
  - GDP deflator (average): 6.3, 9.1, 12.4, 9.0, 5.3, 5.3, 5.3, 5.3.
- Monetary aggregates and banking-sector liquidity (Table 3 highlights):
  - M3X (billions Ksh): 605.2, 708.4, 840.7, 859.3, 901.1, 906.1, 935.0, 971.6, 1,022.7, 1,052.7, 1,073.3 (selected series).
  - System liquidity described as strong following a dip during the crisis (Figure 4 caption).

### External sector and balance of payments
- Trade volumes and values (Figure 3 and Table 4a/4b):
  - Import volume growth, goods and services: 9.3, 6.4, 7.8, 5.1, 2.1, 7.1, 8.5, 7.4 (2006/07–2013/14 series).
  - Export volume growth, goods and services: 5.5, 10.7, 4.0, 2.9, 7.5, 8.3, 9.4, 10.3.
  - Import value growth, goods and services: 22.3, 23.4, 3.9, -3.3, 8.5, 10.6, 11.5, 10.3.
  - Export value growth, goods and services: 19.9, 1.8, -3.0, 11.5, 12.5, 14.7, 15.8, 0.0.
- Current account and reserves:
  - Current external balance, including official transfers (percent of GDP): -3.5, -4.3, -7.8, -7.1, -5.3, -5.3, -4.6, -3.6 (Table 1).
  - Gross official reserves (end of period, billions US$): 2,723.2, 3,443.0, 3,219.0, 4,049.0, 4,557.2, 5,079.5, 5,661.6, 6,372.2 (Table 4a memorandum).
  - Reserve coverage, months of next year imports (end of period): 3.0, 3.5, 3.3, 4.0, 4.0, 4.0, 4.1, 4.2.
  - Reserves have recovered (Figure 3 caption).
- External inflows:
  - Foreign travel receipts rebounded in 2009 (Figure 3 caption).
  - Remittances growth stalled (Figure 3 caption).
  - Export commodity prices (Coffee and Tea) have been on an upward trend (Figure 3 caption).
- Balance of payments summary (Table 4a / 4b projections and levels):
  - Current account (millions US$) examples: -850.4, -1,288.5, -2,302.0, -2,283.4, -1,953.1, -2,213.7, -2,120.4, -1,865.6 (2006/07–2013/14 series in Table 4a).
  - Exports, f.o.b. (millions US$): 3,834.8, 4,543.9, 4,657.2, 4,555.1, 5,051.9, 5,685.9, 6,523.9, 7,560.1 (selected series).

### Financial markets and banking system soundness
- Banking system indicators (Table 6 and Figure 4):
  - Regulatory capital to risk-weighted assets: 16.3, 17.0, 18.0, 18.9, 20.3, 19.8, 20.2, 19.8 (Dec-05 through Aug-09 series).
  - Non-performing loans to total gross loans: 24.4, 20.2, 10.6, 9.0, 8.9, 9.0, 9.0, 9.2 (Dec-05 through Aug-09 series).
  - Return on assets (ROA): 2.4, 2.7, 3.0, 2.8, 3.3, 3.1, 3.1, 3.0 (series).
  - Liquid assets to total short-term liabilities: 42.0, 44.0, 40.0, 37.0, 37.0, 37.0, 40.6, 40.9.
- Key messages:
  - Despite the financial crisis, capitalization remains stable (Figure 4 caption).
  - Nonperforming loans remain stable due to tightened credit standards (Figure 4 caption).
  - Profitability remains strong and the stock market is gradually rebounding (Figure 4 captions and indices).

### Selected macroeconomic indicators and projections (Table 1 highlights)
- Nominal GDP (market prices, billions Ksh): 1,724, 1,963, 2,255, 2,536, 2,793, 3,103, 3,475, 3,897 (2006/07–2013/14 series).
- Real GDP growth (market prices): 6.7, 4.3, 2.2, 3.2, 4.6, 5.5, 6.3, 6.5 (percent).
- Real GDP per capita growth: 4.1, 1.7, 0.0, 1.4, 2.8, 3.7, 4.5, 4.7 (percent).
- Investment and saving (percent of GDP):
  - Investment: 18.5, 19.1, 18.9, 18.8, 19.1, 19.1, 20.0, 21.0.
  - Gross national saving: 15.1, 14.8, 11.0, 11.8, 13.7, 13.7, 15.4, 17.4.
- Public finance memoranda:
  - Primary budget balance (billions Ksh): 13.2, -19.5, -23.6, -75.0, -103.9, -87.8, -78.0, -45.7, -26.4, -17.0 (series including projections).

### Relations with the Fund, program context, and technical engagement
- Membership and financial position (as of October 31, 2009):
  - Quota: 271.40 (SDR million), 100.00 percent of quota.
  - Fund holdings of currency: 258.52 (SDR million), 95.25 percent of quota.
  - Reserve position in Fund: 12.89 (SDR million), 4.75 percent of quota.
- Recent financial arrangements and usage:
  - PRGF arrangements noted; last three-year PRGF arrangement approved on November 21, 2003; expired November 20, 2007.
  - In May 2009, disbursement of SDR 135.7 under the RAC-ESF was approved.
- Projected obligations to the Fund (SDR million, projected): Principal: 2.50 (2009), 16.72 (2010), 15.00 (2011), 18.75 (2012), 30.00 (2013). Charges/interest: 0.75, 1.51, 1.42, 1.34, 1.22. Total: 3.25, 18.23, 16.42, 20.09, 31.22.
- Safeguards and central bank oversight:
  - An update safeguards assessment of the Central Bank of Kenya (CBK) in Spring 2009 found increased safeguards risk since 2005; deficiencies in external audits and non-compliance with benchmark financial reporting framework noted.
- Exchange arrangements:
  - Kenya's currency is the shilling, floats against other currencies; managed float with the U.S. dollar as principal intervention currency.
  - On November 20, 2009, the exchange rate was K Sh 74.5 =US$1.00.
- Article IV consultations:
  - Kenya reverted to a standard 12-month cycle for Article IV consultations upon expiration of the PRGF program in November 2007.
  - The last Article IV consultation was concluded on September 10, 2008 (EBS/08/339).

### Joint Bank–Fund engagement and technical assistance priorities
- Joint Bank–Fund Management Action Plan 2009–10 covers:
  - Analytical work (e.g., Public Expenditure Review, Financial Sector Assessment Program update, Public and External Debt Sustainability Analysis).
  - Technical assistance and capacity-building in customs administration, fiscal decentralization, public finance management, monetary operations, bank supervision, payments systems, CPI and national accounts statistics, and anti–money laundering legislation.
  - Key timing examples: Article IV Consultation mission October 2009 (expected delivery December 2009); FSAP Update October 2009 (expected delivery December 2009); Balance of Payments Statistics TA February 2010 (expected delivery April 2010).
- Resident representation:
  - The Fund has had a resident representative in Kenya since December 1993; current Senior Resident Representative: Mr. W. Scott Rogers.

### Key statistical issues
- Data provision: Broadly adequate for surveillance and program monitoring but has shortcomings.
- Underlying causes of weaknesses:
  - Organizational and skill shortcomings.
  - Inadequate resources.
- Institutional change:
  - 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).

*Source: Staff Report for the 2009 Article IV Consultation — Informational Annex (Prepared by the African Department; Approved December 7, 2009).*

### 41.      The Report on the Observance of Standards and Codes—Data Module (IMF Country

### The Report on the Observance of Standards and Codes—Data Module (IMF Country Report No. 05/388)

### Participation and data dissemination
- Kenya participates in the Fund’s General Data Dissemination System (GDDS) and the GDDS project for Anglophone Africa.
- Metadata and detailed short- and medium-term improvement plans are posted on the Fund’s Dissemination Standards Bulletin Board (DSBB).
- Kenya has received Fund technical assistance; further assessment of capacity building requirements undertaken by the AFRITAC East Statistical Advisor.
- Monetary, exchange rate, and some external data are published monthly and biannually by the KNBS in its Monthly Economic Review.
- Core financial data are made available to the Fund on a regular basis.
- KNBS publishes an annual detailed account of sectoral activities and statistical data in its Economic Survey.

### 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 poor coverage of the informal sector, nonagriculture subsistence, horticulture, and self-employed professionals.
- An STA peripatetic advisor assisted rebasing national accounts estimates at constant 2001 prices and compiling institutional accounts for general government.
- 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 AFRITAC East assistance; quarterly GDP estimates are now published.

### Prices and production
- In early 2002 KNBS (then CBS) began publication of a new national CPI covering 13 urban towns, with 1997 as reference year and weights derived from the 1993–94 Household Budget Survey (HBS).
- Indices produced for lower and middle/upper income groups in Nairobi and other cities.
- CPI is compiled and published on a timely basis; no producer, export, or import price indices are produced.
- March 2008 TA mission identified methodological issues: current aggregation at the elementary level imparted a substantial upward bias on CPI measurement.
- In line with STA recommendations, KNBS released a revised series consistent with international best practices in November 2009.
- KNBS planned to publish a new series in February 2010, with rebasing and reweighing of the CPI basket.

### Government finance statistics (GFS)
- ROSC mission emphasized improvements needed: (i) migration to GFSM 2001 methodology; (ii) broaden coverage to include extrabudgetary and social security funds and report on a 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; (vi) train Ministry of Finance (MOF) staff in GFS methodology.
- 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 reflect difficulties in establishing budget execution and accounting systems consistent with the new classification; existing systems need prompt upgrading to ensure timely reconciliation and monitoring.
- Progress toward moving to the IFMIS noted, but important gaps remain in reconciling fiscal data across MOF units.
- 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.
- Government initiated a project to rationalize/eliminate extrabudgetary funds; progress in compiling consolidated fiscal statistics has remained limited.
- Kenya reports budgetary central government data to STA for inclusion in the GFS Yearbook with significant lag—the last data reported were for the year ending June 2005.
- KNBS compiles aggregate annual GFS revenue and expenditure data for budgetary central government based on Controller and Auditor General reports.
- Data submitted for publication in the 2007 GFS Yearbook was reported in GFSM 2001 format using bridge tables developed by TA missions.
- Monthly and quarterly data are regularly reported for inclusion in the IFS.

### Monetary statistics
- Progress in implementing the Monetary and Financial Statistics Manual (MFSM) and developing standardized report forms (SRFs).
- Authorities submitted SRF test data; subsequent progress stalled.
- March 2007 STA mission: established SRF for central bank data; reviewed and revised reporting form and compilation notes for other depository corporations (ODCs); identified ODC subsector coverage; found misclassification of some central government deposits as private sector deposits.
- Major future issue: expand ODC coverage to include Savings and Credit Cooperatives (SACCOS).
- As of end-March, 2007, there were 3,800 SACCOs, accounting for about 30percent of the total deposits of the banking system.
- A new bill providing for increased supervision over SACCOs would generate supervisory data when implemented.
- 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 finalized.
- No ongoing TA at the time of reporting; Kenya could benefit from participating in the monetary module of the next phase DFID project commencing in 2010 if needed.

### External sector statistics
- KNBS compiles annual balance of payments statistics in Kenya shillings that are regularly reported to STA with considerable delay.
- Central Bank of Kenya (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; Fund staff have strongly encouraged reconciliation.
- CBK started compiling and publishing quarterly balance of payments estimates.
- Trade data quality may be reasonably good; data for other current account and many financial account transactions are rather weak.
- Post-1993–94 exchange system liberalization, compilation system (other than customs statistics) relies on domestic bank reports and may substantially under-record:
  - current earnings, including tourism receipts;
  - private sector investment flows;
  - 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 central bank data since 1994 give rise to uncertainties on the potential size of external obligations.
- MOF compiles public and publicly guaranteed external debt obligations to official and commercial creditors; this database excludes nonresident purchases of government domestic currency-denominated debt securities.
- In the 2002 loan-by-loan debt sustainability analysis (DSA), Fund and World Bank staff identified significant debt data problems that authorities have addressed.
- Efforts continue to strengthen external debt management and integrate it into budget formulation and expenditure management.
- June 2009 Medium-term Debt Strategy: government committed to strengthening capacity and indicated that during the 2009/10 financial year, both domestic and external debt databases at the CBK and Ministry of Finance will be linked through the fiber-optic cable network.
- 2006 TA recommended: introduce a foreign investment survey, enhance foreign exchange statistics survey, and use a common methodology (including estimations) across KNBS and CBK data.
- A 2009 DFID-funded enterprise survey failed to materialize.
- Plans to conduct a foreign investment survey in 2010, with planned DFID-funded and STA external sector missions to support.
- Kenya does not report international investment position statistics to STA.

### Key statistics and sample data-quality assessments (as of November 10, 2009)
- Exchange Rates: Date of latest observation 11/10/09; Date received 11/09/06; 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 11/10/09; Date received 11/09/06; Frequency of Data D; Frequency of Reporting D; Frequency of Publication M.
- Reserve/Base Money: Date of latest observation 11/10/09; Date received 11/09/06; Frequency of Data D; Frequency of Reporting D; Frequency of Publication M.
- Broad Money: Date of latest observation 9/30/09; Date received 10/15/09; 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 11/10/09; Date received 11/09/06; Frequency of Data D; Frequency of Reporting D; Frequency of Publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 9/30/09; Date received 10/15/09; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Consumer Price Index: Date of latest observation 10/31/09; Date received 11/10/09; 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 6/30/2009; Date received 10/09; 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 6/30/2009; Date received 10/09; 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 6/30/2009; Date received 10/09; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- External Current Account Balance: Date of latest observation 6/30/2009; Date received 10/09; 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 6/30/2009; Date received 10/09; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication A.
- GDP/GNP: Date of latest observation 6/30/2009; Date received 10/09; 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 6/30/2009; Date received 10/09; Frequency of Data M; Frequency of Reporting Q; Frequency of Publication Q.

### Macroeconomic context and Fund engagement (Public Information Notice No. 10/02, December 22, 2009)
- Kenya’s average real GDP growth 2004–07: 6.0 percent per annum.
- Growth stalled in 2008 due to adverse developments, including the global economic crisis.
- Kenya sought Fund financial assistance under the Rapid Access Component of the Exogenous Shocks Facility (RAC-ESF) in May 2009.
- Fund financing provided: SDR135.7 million (about US$207 million).
- Real growth in 2009/10 is projected at 3.2 percent, up from 2.2 in 2008/09, despite prolonged drought and its spillover effects.
- Fiscal deficit in 2008/09 is estimated at 3.6 percent of GDP.

*Source: Excerpts from The Report on the Observance of Standards and Codes—Data Module (IMF Country Report No. 05/388) and related sections in the cited IMF country report.*

### 5.9 per cent of GDP due to slow implementation of foreign funded development projects. While

### _cr1026 - 5.9 per cent of GDP due to slow implementation of foreign funded development projects. While

### Fiscal policy, deficit, and debt sustainability
- 2009/10 budget projects a fiscal deficit of 6 percent of GDP aimed at providing fiscal stimulus while preserving debt sustainability.
- Over the medium term, fiscal stimulus is expected to be gradually withdrawn and a convergence towards the target debt to GDP ratio of 40 percent is projected.
- Directors endorsed the introduction of an income support scheme aimed at protecting the vulnerable and poor households.
- Central government budget indicators (percent of GDP):
  - Total revenue: 21.6 (2006/07), 22.0 (2007/08), 21.6 (2008/09), 22.3 (2009/10), 22.7 (2010/11)
  - Total expenditure and net lending: 24.3 (2006/07), 27.3 (2007/08), 26.5 (2008/09), 29.5 (2009/10), 29.3 (2010/11)
  - Overall balance (commitment basis) excluding grants: -2.7 (2006/07), -5.2 (2007/08), -4.8 (2008/09), -7.2 (2009/10), -6.6 (2010/11)
  - Overall balance (cash basis) including grants: -1.7 (2006/07), -3.4 (2007/08), -3.7 (2008/09), -6.0 (2009/10), -5.4 (2010/11)
- Public debt (end of period):
  - Total public debt, net of deposits: 42.0 (2006/07), 37.2 (2007/08), 40.2 (2008/09), 42.9 (2009/10), 43.6 (2010/11)
  - NPV of central government debt: 34.8 (2006/07), 28.6 (2007/08), 29.0 (2008/09), 32.0 (2009/10), 33.4 (2010/11)
  - Of which: NPV of external debt: 15.5 (2006/07), 11.7 (2007/08), 11.2 (2008/09), 11.7 (2009/10), 11.8 (2010/11)

### Monetary policy and inflation
- Since 2008/09 monetary policy stance has been countercyclical: Central Bank of Kenya (CBK) reduced the policy rate and the cash reserve requirement by a total of 125 and 150 basis points respectively.
- Growth rate of monetary aggregates remained below target.
- The recently published revised CPI indicates a relatively benign inflation environment.
- Directors recommended that monetary policy focus more acutely on safeguarding price stability and that available instruments be employed decisively.
- Money and credit indicators:
  - M3X (broad money and foreign currency deposits, end period): 17.0 (2006/07), 18.7 (2007/08), 12.5 (2008/09), 14.8 (2009/10), 15.2 (2010/11)
  - Reserve money (end of period): 19.8 (2006/07), 18.2 (2007/08), 4.6 (2008/09), 12.8 (2009/10), 3.4 (2010/11)
- Consumer price index (annual average): 10.4 (2006/07), 18.5 (2007/08), 12.5 (2008/09), 8.5 (2009/10), 5.0 (2010/11)
- Consumer price index (end of period): 11.1 (2006/07), 29.3 (2007/08), 8.9 (2008/09), 7.0 (2009/10), 5.0 (2010/11)

### Financial sector and FSAP findings
- The Financial Sector Assessment Program (FSAP) Update Mission concluded that the banking sector remains well-capitalized and adequately provisioned.
- The FSAP noted that increasing cross border transactions and regionalization would require more sophisticated supervision and regulation.
- In the capital market, poor regulation and inadequate funding are key risks faced by the social security fund and other pension schemes.
- Directors commended progress in implementing recommendations of the 2003 FSAP and encouraged expedited implementation of remaining recommendations related to cross-border transactions, regionalization, and regulation of pension schemes.
- Directors advised the Central Bank of Kenya to ensure that provisions and capital buffers remain adequate to deal with future risks.

### External sector and reserves
- The current account deficit widened to 7.8 percent of GDP in 2008/09, compared to 4.5 percent the previous year, reflecting the impact of various shocks.
- For 2009/10, a moderate narrowing of the deficit to around 7 percent is projected.
- Authorities have resumed build up of international reserves; gross official reserves stood at US$3.7 billion or some 3.7 months of imports at end-October 2009.
- Balance of payments indicators (percent of GDP):
  - Exports value, goods and services: 26.2 (2006/07), 25.4 (2007/08), 26.6 (2008/09), 23.0 (2009/10), 22.1 (2010/11)
  - Imports value, goods and services: 35.8 (2006/07), 35.9 (2007/08), 40.6 (2008/09), 36.2 (2009/10), 33.5 (2010/11)
  - Current external balance, including official transfers: -3.5 (2006/07), -4.3 (2007/08), -7.8 (2008/09), -7.1 (2009/10), -5.3 (2010/11)
  - Current external balance, excluding official transfers: -3.5 (2006/07), -4.5 (2007/08), -7.8 (2008/09), -7.0 (2009/10), -5.3 (2010/11)
  - Gross international reserve coverage in months of next year imports (end of period): 3.0 (2006/07), 3.5 (2007/08), 3.3 (2008/09), 4.0 (2009/10), 4.0 (2010/11)

### Structural reforms and governance
- Progress on implementation of structural reforms is slow.
- The Governance Action Plan (GAP) has been updated.
- The Public Finance Management Bill and the Banking Act (Amendment) Bill have not yet been brought before Parliament.
- Several other pieces of legislation designed to improve economic governance have not been enacted.
- Directors recommended giving immediate priority to reforms of governance, public finance management, and the financial sector.
- Directors commended the recent passage of the AML legislation and called for speedy submission of remaining pending bills aimed at consolidating the structural reform agenda.
- Directors supported authorities’ efforts to enhance trade liberalization and strengthen the EAC regional integration framework.

### Executive Board assessment and recommendations
- Executive Directors commended Kenyan authorities for implementing sound macroeconomic policies contributing to a nascent recovery.
- Directors cautioned that downside risks remain and emphasized the importance of continuing sound economic policies to achieve robust growth with debt sustainability and low inflation.
- Directors agreed the 2009/10 budget is broadly appropriate for providing needed stimulus, supported contingency plans for revenue shortfalls, and welcomed the plan to gradually withdraw fiscal stimulus in the next budget year.
- Directors considered easing monetary policy appropriate to support economic activity but recommended refocusing on price stability going forward.
- Directors observed that the managed float exchange rate regime has served Kenya well and supported limiting foreign exchange interventions to smoothing excessive short-term volatility and meeting foreign reserve targets.

### Selected economic and financial indicators (2006/07–2010/11)
- Real GDP growth (market prices): 6.7 (2006/07), 4.3 (2007/08), 2.2 (2008/09), 3.2 (2009/10), 4.6 (2010/11)
- Ksh per US $ exchange rate (end of period, actual as of November 20, 2009): 62.6 (2006/07), 64.6 (2007/08), 76.3 (2008/09), 74.5 (2009/10), ...
- Investment (percent of GDP): 18.5 (2006/07), 19.1 (2007/08), 18.9 (2008/09), 18.8 (2009/10), 19.1 (2010/11)
  - Central government investment: 4.6 (2006/07), 6.6 (2007/08), 7.0 (2008/09), 9.2 (2009/10), 9.6 (2010/11)
  - Other investment: 13.9 (2006/07), 12.5 (2007/08), 11.8 (2008/09), 9.6 (2009/10), 9.5 (2010/11)
- Gross national saving (percent of GDP): 15.1 (2006/07), 14.8 (2007/08), 11.0 (2008/09), 11.8 (2009/10), 13.7 (2010/11)
  - Central government saving: 2.0 (2006/07), 1.7 (2007/08), 2.3 (2008/09), 2.3 (2009/10), 3.3 (2010/11)
  - Other saving: 13.1 (2006/07), 13.2 (2007/08), 8.7 (2008/09), 9.4 (2009/10), 10.4 (2010/11)

*Source: _cr1026*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1026.pdf_