IMF Survey: IMF Shocks Loan, Policy Changes Help Kenya's Recovery

IMF News, January 8, 2010

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Kenya’s real GDP growth is projected to accelerate to 3.2 percent in 2009/10, from 2.2 percent in 2008/09.
Growth is likely to be subdued at least until 2011/12 and remains below precrisis rates.
Kenya’s strong growth momentum during the 2004–07 period stalled in 2008 due to post-election violence, high fuel and food prices, and domestic drought affecting maize production.
Official foreign exchange reserves fell by almost $800 million (about 20 percent of the stock of reserves) between mid-2008 and early 2009.
On the capital market, the key share index on the Nairobi Stock Exchange declined by 35 percent in 2008.
The global financial crisis led to steep declines in private capital flows, subdued exports, and weakened tourism receipts.

In mid-2009 Kenya requested IMF financial assistance under the rapid access component of the Exogenous Shocks Facility.
The IMF loan drawdown amounted to $200 million in June 2009 and helped close financing gaps estimated for 2008/09 and 2009/10 while enabling an orderly rebuilding of foreign reserves.

Overall: IMF financing, coupled with policy adjustments and implementation of some structural measures, is contributing to a nascent economic recovery in 2009/10.

Fiscal policy
- Aimed to be countercyclical to mitigate shocks on the poor and vulnerable and to stimulate the economy.
- The 2009/10 budget targeted additional expenditure on infrastructure, food security, and pro-poor programs.
- The government departed only moderately and temporarily from its fiscal anchor of a 40 percent ratio of debt to GDP, leveraging past progress in reducing public debt-to-GDP ratios to create fiscal space.

Monetary policy
- The Central Bank of Kenya pursued a countercyclical monetary stance since the onset of the global financial crisis.
- The policy interest rate and the cash reserve requirement were reduced by a total of 125 and 150 basis points respectively during 2008–09.
- These measures, together with weakening aggregate demand, provided ample liquidity and kept interest rates subdued.
- Growth of monetary aggregates remained below target, and revised consumer price data indicate the inflation environment has been relatively benign.

Financial sector policy
- The central bank stepped up supervision of banks to detect emerging stresses and accommodated urgent financial needs of banks.
- Commercial banks tightened appraisal of new credit facilities, increased monitoring of existing credit portfolios, and limited exposure to foreign currency risks.
- To deepen capital market operations, the minimum capitalization of investment banks and stockbrokers was increased.

Exchange rate policy
- Kenya maintained a floating exchange rate regime with interventions limited to smoothing excessive volatilities and rebuilding reserves.
- This approach supported macroeconomic stability by helping absorb terms-of-trade and other exogenous shocks.

Frontloading infrastructure investment in the 2009/10 budget is welcome, but strong implementation of structural reforms is needed to achieve the government’s vision of making Kenya a middle-income country by 2030.
Fiscal policy implementation
- Enact the Public Finance Management Bill to revise the legal framework for public finance management and ensure appropriate budget execution, accounting, and internal audit.
- Enact the Public Private Partnership Bill to establish a framework for regulating PPP operations and managing associated risks.

Financial sector stability and development
- Address shortcomings in supervisory and regulatory frameworks for both the banking system and the capital market.
- Enact the Banking Act (Amendment) Bill to authorize consolidated supervision and prompt corrective action by the central bank.
- Enact the Deposit Insurance, National Payment System, and Demutualization of the Stock Exchange bills to enhance capital market depth and regulation.

Source: IMF Survey: IMF Shocks Loan, Policy Changes Help Kenya's Recovery (January 8, 2010).