Press Release: IMF Executive Board Completes Fourth Review Under the ECF Arrangement for Kenya and Approves US$110.5 Million Disbursement

IMF News, October 24, 2012

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Canonical URL: Press Release: IMF Executive Board Completes Fourth Review Under the ECF Arrangement for Kenya and Approves US$110.5 Million Disbursement

The Executive Board completed the fourth review of Kenya’s economic program under a three-year arrangement supported by the Extended Credit Facility (ECF).
Approval enables an immediate disbursement of an amount equivalent to SDR 71.921 million (about US$110.5 million).
Total disbursements under the arrangement now amount to an amount equivalent to SDR 344.678 million (about US$529.6 million).
In completing the review, the Executive Board:
- Approved the request for a waiver for the non-observance of the performance criterion on the non-accumulation of external arrears for end-June 2012.
- Approved the modification of performance criteria for the next 12 months to fit the revised macroeconomic outlook.

The Executive Board approved a three-year ECF arrangement for Kenya on January 31, 2011 for a total amount equivalent to SDR 325.68 million (about US$500.4 million), or 120 percent of quota.
The arrangement was augmented on December 9, 2011 for a total amount equivalent to SDR 488.52 million (about US$750.6 million), or 180 percent of quota.

Positive developments noted:
- Economic activity in Kenya is rebounding after slowing down in 2011/12, helped by improved macroeconomic stability, foreign investment in oil and natural gas exploitation, and favorable weather conditions.
- Inflation has declined substantially.
- Net international reserves have increased.
- Public debt is low.
- Pressures on the exchange rate have dissipated.
- Kenya has made progress in reducing its economic vulnerabilities.
Downside risks identified:
- Global uncertainties.
- Spending pressures associated with the upcoming elections.
Policy guidance and conditional comments:
- It will be important to maintain policy discipline to build on the accomplishments so far.

Fiscal policy status:
- Fiscal policy has remained on track.
- Revenue shortfalls in fiscal year 2011/12, arising mainly from the elimination of the VAT withholding regime, were offset by cuts in non-priority current and capital outlays.
Revenue-strengthening measures:
- Authorities are taking measures to strengthen VAT administration.
Recommendation:
- It will be important to resist spending pressures in the run-up to the forthcoming elections.

Central Bank actions and outlook:
- The Central Bank of Kenya’s tight monetary policy stance has helped bring inflation down.
- Given low inflation expectations, the Central Bank cut its policy rate recently, and there may be scope for further monetary easing if economic conditions warrant.
- The Central Bank should watch for new inflationary pressures that may emerge from higher global food and fuel prices.

Reforms progressed:
- The recently-approved Public Financial Management Law will help strengthen expenditure management and control, re-orient spending toward priority sectors, and improve fiscal transparency.
- The new VAT law is being debated in the National Assembly.
Financial sector status and priorities:
- Financial soundness indicators are healthy.
- Further efforts are being made to enhance financial regulation and supervision, deepen financial intermediation, and strengthen the regime against money laundering and terrorism financing.

Risks highlighted:
- Weakened global financial conditions.
- Rising oil prices, which could derail Kenya’s favorable economic performance.
Recommended policy focus:
- Further efforts to build policy buffers to enhance Kenya’s economic resilience and ensure a sustained and strong economic expansion.

Press Release No. 12/396 — October 24, 2012, International Monetary Fund