IMF Executive Board Concludes 2018 Article IV Consultation and Establishes Performance Criteria for the Second Review Under the Stand-By Arrangement with Kenya
IMF News, October 23, 2018
Source details
- Canonical URL
- IMF Executive Board Concludes 2018 Article IV Consultation and Establishes Performance Criteria for the Second Review Under the Stand-By Arrangement with Kenya
Other formats
Bibliographic details
- Published: October 23, 2018
Summary findings and context
- On June 13, 2018 the Executive Board of the International Monetary Fund (IMF) concluded the 2018 Article IV consultation and established performance criteria for the second review under the Stand‑By Arrangement with Kenya.
- The Executive Board approved a six-month extension of Kenya’s SBA until September 14, 2018 (its SCF expired on March 13, 2018). The authorities plan to continue treating the SBA as precautionary.
- Recent developments: Kenya has maintained strong growth in recent years and external imbalances have narrowed; however, a severe drought, an extended presidential election, and weak bank lending—due in part to interest rate controls—slowed growth in 2017.
- Public debt has risen as revenue shortfalls have not been matched by spending cuts. Interest rate controls continue to hamper lending (especially to small- and medium-size enterprises), growth, and monetary policy.
Executive Board assessment (key judgments)
- Directors commended authorities for maintaining macroeconomic stability and sustained economic growth, together with gains in financial inclusion and poverty reduction.
- Directors noted the economy is recovering after domestic shocks reduced the pace of expansion in 2017, and that medium‑term growth prospects remain favorable.
- To safeguard gains, Directors encouraged further reduction of fiscal deficits to preserve debt sustainability; repeal or significant modification of interest rate controls; and measures to strengthen the financial sector and business environment.
- The six‑month extension of the Stand‑By Arrangement is intended to give the authorities more time to undertake critical reforms.
Policy recommendations
- Fiscal policy
- Take substantive steps to reduce the fiscal deficit to address rising public debt.
- Focus adjustment on both expenditures and revenues to preserve space for planned growth‑enhancing public investment and key social programs, including the authorities’ Big Four agenda.
- Implement additional revenue measures to meet deficit targets for both 2017/18 and 2018/19; ensure realistic revenue projections to increase fiscal transparency and avoid ad hoc cuts in public investment and other high‑priority expenditures.
- Monetary policy and financial sector
- Repeal or significantly modify interest rate controls, noting they have slowed growth, reduced access to finance, and hampered monetary policy effectiveness.
- Any modification should include removal of the link between the lending rate cap and the central bank policy rate, removal of a floor on deposit rates, and an increase of the lending cap to a level that protects consumers from predatory practices.
- Modernize the monetary policy framework: following reform of interest rate controls, the Central Bank of Kenya should move to establish an interest rate corridor to align the policy rate with the interbank market rate and strengthen the signaling role of the policy rate.
- Continue strengthening the banking supervision framework; take further measures to develop the bank resolution framework and risk‑based AML/CFT supervisory tools.
- Structural and governance reforms
- Build on improvements in competitiveness and the business environment.
- Implement public financial management reforms to strengthen governance and anti‑corruption efforts.
Risks and near‑term outlook
- Kenya’s medium‑term growth prospects are favorable, supported by infrastructure investment and an improving business environment, but continued strong growth and macroeconomic stability hinge on implementation of reforms.
- Headwinds: fiscal consolidation and weak credit growth will weigh on economic activity in the near term.
- Vulnerabilities: deterioration of security conditions and external shocks that could spur capital outflows, such as a pullback on investors from emerging markets or tightening global monetary conditions.
Selected economic and financial indicators (high‑frequency highlights from table)
- Real GDP: 2014/15 Act. 5.5; 2015/16 5.8; 2016/17 5.6; 2017/18 Prel. 5.4; 2018/19 Prog. 5.3; 2019/20 Proj. 5.9; 2020/21 Proj. 6.1; 2021/22 Proj. 6.3; 2022 Proj. 6.5.
- CPI (period average): 2014/15 6.6; 2015/16 6.4; 2016/17 8.1; 2017/18 5.0.
- Core inflation (period average, excluding food and fuel): 2014/15 4.0; 2015/16 3.9; 2016/17 4.8.
- Policy rate: 2014/15 10.0.
- Credit to non‑government sector (annual change): 2014/15 18.3.
- NPLs (percent of total gross loans): 2014/15 5.7.
- Total revenue and grants (percent of GDP): 2014/15 19.4; 2015/16 18.8; 2016/17 21.0; 2017/18 18.9; 2018/19 Prog. 19.9; 2019/20 Proj. 20.8; 2020/21 Proj. 20.7; 2021/22 Proj. 20.7.
- Tax revenues (percent of GDP): 2014/15 16.4; 2015/16 15.9; 2016/17 17.0; 2017/18 16.1; 2018/19 Prog. 16.0; 2019/20 Proj. 17.2; 2020/21 Proj. 17.3; 2021/22 Proj. 17.4; (further projection) 17.5.
- Expenditure (percent of GDP): 2014/15 28.0; 2015/16 26.5; 2016/17 27.9; 2017/18 27.4; 2018/19 Prog. 26.2; 2019/20 Proj. 25.9; 2020/21 Proj. 25.2.
- Primary balance (percent of GDP): 2014/15 -5.4; 2015/16 -4.1; 2016/17 -3.8; 2017/18 -5.6; 2018/19 Prog. -3.2; 2019/20 Proj. -0.5; 2020/21 Proj. 2.1; 2021/22 Proj. 1.3.
- Overall balance (percent of GDP): 2014/15 -8.4; 2015/16 -7.3; 2016/17 -6.9; 2017/18 -9.0; 2018/19 Prog. -7.5; 2019/20 Proj. -5.7; 2020/21 Proj. -4.0; 2021/22 Proj. -3.5.
- Public gross nominal debt (percent of GDP): 2014/15 47.9; 2015/16 52.9; 2016/17 52.5; 2017/18 58.3; 2018/19 Prog. 60.7; 2019/20 Proj. 60.2; 2020/21 Proj. 57.7; 2021/22 Proj. 57.2; 2022 Proj. 54.5.
- Public net nominal debt (percent of GDP): 2014/15 43.7; 2015/16 47.0; 2016/17 49.4; 2017/18 52.6; 2018/19 Prog. 55.5; 2019/20 Proj. 56.1; 2020/21 Proj. 55.8; 2021/22 Proj. 55.3.
- External public debt (percent of GDP, of which): 2014/15 23.6; 2015/16 26.0; 2016/17 26.1; 2017/18 30.4; 2018/19 Prog. 31.2; 2019/20 Proj. 32.5; 2020/21 Proj. 30.6; 2021/22 Proj. 28.5; 2022 Proj. 25.6.
- Public gross debt, PV (percent of GDP): 2014/15 43.5; 2015/16 45.5; 2016/17 48.8; 2017/18 53.0; 2018/19 Prog. 58.0; 2019/20 Proj. 58.4; 2020/21 Proj. 55.6; 2021/22 Proj. 53.7.
- GDP at current market prices: Billion of Kenyan shillings 2014/15 5,849; 2015/16 6,734; 2016/17 7,435; 2017/18 7,556; 2018/19 8,305; 2019/20 9,260; 2020/21 10,255; 2021/22 11,249; 2022 12,827.
- GDP at current market prices: US$ billion 2014/15 62.7; 2015/16 67.4; 2016/17 72.0; 2017/18 73.0; 2018/19 79.2; 2019/20 86.8; 2020/21 93.8; 2021/22 101.6; 2022 110.7.
- GDP per capita (nominal US$): 2014/15 1,439; 2015/16 1,504; 2016/17 1,562; 2017/18 1,583; 2018/19 1,671; 2019/20 1,782; 2020/21 1,875; 2021/22 1,976; 2022 2,096.
Source: IMF Communications Department — Press Release No. 18/293, October 23, 2018.
