IMF Staff Concludes Visit to Kenya

IMF News, August 3, 2018

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Real GDP growth accelerated to 5.7 percent in the first quarter of 2018, from 4.9 percent in 2017.
Growth drivers identified: strengthened confidence following the conclusion of the prolonged election period, favorable weather conditions, and a continued recovery in tourism.

Inflation has remained within the authorities’ target range (5+/-2.5 percent) since July 2017.
Headline CPI growth was 4.3 percent y/y as of June 2018.
Core inflation remained low at 3.6 percent y/y.
Improvement in food inflation attributed to better weather conditions.

Fiscal targets for FY2017/18 under the program were met.
The budget deficit for the fiscal year ending in June 2018 was KSh614.6 billion (equivalent to 7.0 percent of GDP), within the target under the program.
This represents a significant tightening from the previous year’s deficit of 9.0 percent of GDP.
Revenues underperformed, coming in 2.2 percent of GDP lower than program targets.
To meet the deficit target amid weaker revenues, the authorities rationalized expenditures.
Discussions focused on fiscal policies to achieve the authorities’ fiscal deficit target of 5.7 percent of GDP in FY2018/19.

The current account deficit widened to 6.7 percent of GDP in 2017 (from 5.2 percent in 2016) but has started to adjust in 2018.
Drivers of the 2017 widening: higher food imports and weaker agricultural exports—due to the drought—and higher fuel imports owing to rising global oil prices.
Factors contributing to the lower current account deficit in 2018: strong agriculture exports, rising transfer inflows, and lower capital goods imports following the completion of the Mombasa-Nairobi phase of the SGR project.
Foreign exchange reserves currently stand at about US$8.8 billion (equal to 5.1 months of projected imports for 2018) as of end-July 2018.
Reflecting favorable external developments, the exchange rate has remained stable.

The banking sector in aggregate remains well-capitalized and liquid.
The banking system’s non-performing loans remains high at 12 percent in June 2018, though declining in recent months.
Higher non-performing loans were driven by weaker economic activity in 2017, and delayed payments from the government and private sector.
Discussions included interest rate controls as part of the policy dialogue.

A team from the IMF, led by Benedict Clements, visited Kenya from July 23 to August 2, 2018 to hold discussions on the second review under a precautionary Stand-By Arrangement (SBA).
On March 14, 2016, the Executive Board approved a SDR 709.259 million (about US$989.8 million, or 131 percent of Kenya’s quota) 24-month Stand-By Arrangement (SBA).
The first review of the SBA was completed on January 25, 2017.
On March 12, 2018, the Executive Board approved the Kenyan authorities’ request for a 6-month extension of the SBA to September 14, 2018 to allow additional time to complete the outstanding reviews.
End-of-Mission press releases convey preliminary findings; views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.

Maintain macroeconomic policies that:
- keep public debt on a sustainable path;
- contain inflation within the target range; and
- preserve external stability.
Achieve the fiscal deficit target of 5.7 percent of GDP in FY2018/19 through appropriate fiscal measures and continued expenditure rationalization given revenue shortfalls.
Address elevated non-performing loans in the banking system to strengthen financial sector resilience.
Continue structural reforms to ensure the sustainability of investment-driven, inclusive growth.

Significant progress was made during the visit, and discussions will continue in the coming weeks.
The IMF team met with: the Cabinet Secretary for the National Treasury and Planning, Mr. Henry Rotich; the Governor of the CBK, Dr. Patrick Njoroge; the Principal Secretary for the National Treasury, Dr. Kamau Thugge; the Deputy Governor of the CBK, Ms. Sheila M’Mbijjewe; and senior government and CBK officials.
Staff also had productive discussions with representatives of the private sector and development partners.

IMF Communications Department — End-of-Mission press release dated August 3, 2018.