Press Release No. 00/45

[Corrects and revises Press Release 00/45 issued at 10:45 a.m. EDT. Correction is limited to the first paragraph of the original press release.]

The International Monetary Fund's (IMF) Executive Board has approved in principle a three-year Poverty Reduction and Growth Facility (PRGF) credit to Kenya totaling SDR 150 million (about US$ 198 million) to support the nation's economic and structural reform program.

A final decision by the IMF Executive Board is pending discussion by the World Bank Executive Board of Kenya's interim Poverty Reduction Strategy Paper (PRSP). The World Bank Board is expected to meet on August 1, 2000 to consider Kenya's PRSP.

Under the PRGF, the first annual loan to Kenya will be equivalent to SDR 30 million (about US$40 million), and the first installment equal to SDR 13.6 million (about US$18 million), which will be available when a final decision by the IMF Executive Board is taken.

In commenting on the Executive Board discussion on Kenya, Stanley Fischer, First Deputy Managing Director and Acting Chairman, made the following statement:

"The Kenyan authorities have pursued generally cautious macroeconomic policies since early 1998 and have made efforts recently to address weaknesses in the governance area, thereby paving the way for an arrangement under the PRGF. In their Letter of Intent, the authorities commit themselves to consolidating these policies and efforts in order to achieve sustained high growth and poverty reduction. In this regard, they have prepared an interim Poverty Reduction Strategy Paper (PRSP) as a basis for the development of a full participatory PRSP and for Fund concessional assistance.

"The authorities' medium-term reform program aims at maintaining macroeconomic stability and promoting growth with poverty reduction. Removing the constraints to growth and poverty reduction requires the continued pursuit of measures to improve governance, firm implementation of appropriate macroeconomic and structural reforms, and significant reallocations of expenditure to priority areas, such as health and education. The planned civil service reform, which would free resources for priority social spending, is consistent with such reallocation.

"Improving governance is an essential element of the poverty reduction strategy. Early passage of the code of ethics and the anti-corruption and economic crimes legislation is especially important in this regard. The authorities are also placing emphasis on improving expenditure management systems and on rationalizing the project roster to increase the transparency and efficiency of government operations. Efforts to strengthen the banking sector are being reinforced, including through the privatization of state-owned banks and the improvement of bank supervision.

"The medium-term program envisages key supply-side measures to help place the economy on a higher growth path. Actions include the removal of distortions in various markets, especially in agriculture, rehabilitation of infrastructure, and improvements in the efficiency and governance of public enterprises. The elimination of virtually all suspended import duties, making the trade regime more predictable and transparent, is welcome. This needs to be followed by the formulation and implementation of a program to rationalize and reduce remaining import duties and exemptions.

"The authorities face the important challenge of addressing the effects of the unfolding drought on food and energy supplies. The Fund stands ready to assist Kenya in these difficult circumstances, in the context of the broader efforts led by the international community," Mr. Fischer said.

ANNEX

Program Summary

Kenya's socioeconomic conditions deteriorated significantly in the 1990s because of stop-go macroeconomic policies, slow structural reform, and pervasive governance problems that resulted in bouts of financial instability, a rapid buildup of short-term debt, and high real interest rates. Since early 1998, the government has been addressing some of the causes of financial instability and low growth. The fiscal deficit (on a commitment basis before grants) has been gradually reduced and is estimated to have been 0.6 percent of GDP in 1999/2000. Monetary policy has been generally conservative. The government has been preparing the ground for key structural reforms in privatization and public service, and since mid-1999 important steps have been taken to address governance problems. These measures have helped increase the confidence of the international community, however investor confidence has been slow to turn around, and real GDP growth declined to 1.4 percent in 1999 from 1.8 in 1998.

Reductions in the fiscal deficit (after an initial increase) and the domestic debt burden will be aimed at sustainably reducing real interest rates and building confidence in the government's fiscal prudence. These efforts will be accompanied by measures aimed at reducing the tax burden (particularly on the poor), improving tax administration, as well as at strengthening expenditure management. Monetary policy will be geared to keeping inflation low, and the exchange rate will remain market determined.

The structural reform program focuses on streamlining the public service, reducing the role of government in commercial activities, and prioritizing public expenditure. The privatization program will focus on key enterprises that provide essential infrastructure services, including the Kenya TELKOM and the Kenyan Commercial Bank. Suspended duties on imports have been eliminated and the authorities are committed to implementing over the program period a tariff reform aimed at reducing domestic protection.

Poverty Reduction Strategy

The program's strategy, which is closely linked to the recently initiated medium-term expenditure framework (MTEF), was worked out in consultation with stakeholders from civil society and is expected to be fully developed by May 2001, in the context of the full Poverty Reduction and Strategy Paper (PRSP). Expenditure reallocations toward priority sectors need to be defined, in close consultation with stakeholders (especially the poor), in the full PRSP and subsequently incorporated in the 2001/02 MTEF. The planned public service reform and the envisaged reductions in the debt service burden are expected to provide room for additional resources to be allocated to poverty reduction programs over the medium term. In the meantime, the fiscal program for 2000/01 focuses on a few key poverty reduction measures and some intraministerial reallocations aimed at improving the targeting of existing expenditure.

Kenya joined the IMF on February 3, 1964 . Its quota² is the equivalent of SDR 271.40 million (about US$359 million). Its outstanding use of IMF financing currently totals the equivalent of SDR 78 million (about US $103 million).

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¹ On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Kenya, an interim PRSP sets out a preliminary framework in a statement by the government and the participatory process is underway. It is understood that all policy undertakings in the government's statement beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement.
PRGF loans carry an interest rate of 0.5% a year, and are repayable over 10 years with a 5 ½-year grace period on principal payments.
² A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.

Kenya: Selected Economic and Financial Indicators, 1995-2004                                                       1995 1996 1997 1998 1999 2000   2001   2002 2003 2004           Est. program                                                       (Annual percentage change, unless otherwise indicated) National income and prices                         Real GDP (factor cost) 4.8 4.6 2.3 1.8 1.4 1.5   3.1   4.4 5.5 6.0 Real GDP per capita 2.1 2.0 -0.1 -0.7 -1.1 -1.0   0.7   2.1 3.4 3.9 Nominal GDP (in billions of shillings) 465 527 621 699 731 776   845   923 1,011 1,112 GDP deflator 10.8 8.2 15.2 10.6 3.1 4.7   5.7   4.5 3.8 3.8 Consumer price index (annual average) 1.5 9.0 11.2 6.6 3.5 5.2 1/ 5.0   4.5 4.0 4.0 Consumer price index (end of period) 6.9 10.8 8.3 2.5 8.0 4.2 1/ 4.5   4.0 4.0 4.0                           External sector                         Exports, f.o.b. (in U.S. dollars) 29.6 8.3 -1.1 -2.3 -12.8 8.3   4.9   6.4 6.5 7.0 Imports, f.o.b. (in U.S. dollars) 30.6 -2.6 13.3 2.9 -13.3 13.7   13.6   -2.4 11.3 0.7 Export volume 16.6 10.9 -10.0 -2.0 -5.2 4.6   5.7   5.6 5.5 5.9 Import volume 32.2 2.2 1.1 -3.2 -6.3 6.2   15.6   -3.2 9.4 -1.0 Terms of trade (- deterioration; based on c.i.f. imports) -3.2 2.6 2.0 -5.0 -1.4 -3.3   0.9   -0.1 -0.8 -0.7 Nominal effective exchange rate (- depreciation; end of period) -21.3 3.9 -3.8 -1.2 -10.3 -7.5 2/ ...   ... ... ... Real effective exchange rate (- depreciation; end of period) -18.3 12.3 1.9 0.2 -4.7 -5.8 2/ ...   ... ... ...                           Government budget 3/                         Domestic revenue 16.3 2.6 20.3 7.1 -6.5 11.9   9.6   9.9 9.7 9.6 Total expenditure and net lending 11.6 13.8 14.1 1.1 -6.6 15.8   7.5   7.8 9.5 9.5                           Money and credit                         Net domestic assets 4/ 5/ 28.7 6.5 7.4 4.3 2.5 4.9   4.5 6/ ... ... ... Net credit to the government 4/ 1.2 -1.6 3.3 -0.4 -1.2 0.8   -3.6 6/ ... ... ... Credit to the rest of the economy 4/ 5/ 20.9 11.5 12.6 9.0 5.3 8.9   11.4 6/ ... ... ... M3 (broad money, excluding foreign currency deposits) 12.5 15.9 9.8 3.1 2.8 7.4   7.8 6/ ... ... ... M3X (M3 plus foreign currency deposits) 14.1 15.9 11.9 3.4 4.3 7.5   8.3 6/ ... ... ... M4X (M3X plus nonbank holding holdings of government paper) ... 14.1 14.9 4.9 7.2 8.0   8.0 6/ ... ... ... Velocity (GDP/M3) 2.1 2.0 2.1 2.3 2.4 2.4   ...   ... ... ... Interest rate (90-day treasury bill; end of period) 18.3 22.3 26.3 10.7 20.9 11.0 7/ ...   ... ... ...                             (In percent of GDP, unless otherwise indicated) Investment and saving                         Investment 21.8 20.4 18.6 17.2 15.9 16.0   19.9   19.4 23.4 24.5 Central government 5.9 5.1 4.8 4.3 3.7 3.4   3.8   4.3 4.7 4.9 Other 16.0 15.3 13.8 12.9 12.2 12.5   16.1   15.0 18.7 19.6 Gross national saving 17.4 19.5 15.0 13.1 13.4 12.7   13.8   15.4 17.5 20.4 Central government 5.9 4.0 3.0 4.3 4.3 3.7   4.3   5.0 5.3 5.4 Other 11.5 15.4 12.0 8.8 9.1 9.0   9.5   10.4 12.2 14.9                           Government budget 3/                         Domestic revenue 29.3 26.0 27.2 26.9 23.9 24.8   25.0   25.1 25.1 25.1 Total grants 1.2 1.0 0.8 0.7 0.7 1.7   1.5   1.0 0.9 0.8 Total expenditure 30.4 29.9 29.6 27.6 24.5 26.3   26.0   25.6 25.5 25.5 Overall balance (commitment basis)                         Including grants 0.1 -2.9 -1.6 0.0 0.1 0.2   0.5   0.5 0.4 0.4 Excluding grants -1.1 -3.9 -2.4 -0.7 -0.6 -1.5   -1.0   -0.5 -0.5 -0.4 Overall balance (cash basis, including grants) -0.4 -1.7 -1.0 -0.3 -0.9 -0.2   0.5   0.5 0.4 0.4 Domestic debt (net) ... ... ... 20.5 21.4 19.2   17.3   15.0 12.6 10.6 Privatization receipts 0.8 0.2 0.3 0.0 0.8 0.9   0.5   0.5 0.3 0.0                           External sector                                                   Current external balance, including official transfers -4.4 -0.9 -3.6 -4.1 -2.6 -3.3   -6.1   -3.9 -5.8 -4.1 Current external balance, excluding official transfers -5.7 -2.1 -4.2 -4.8 -3.2 -4.5   -7.7   -5.0 -6.7 -5.0 Net present value of external public debt (in percent                     of exports of goods and nonfactor services) 195 175 162 154 154 126   116   108 101 96 Scheduled external debt service, including the Fund                     (in percent of export of goods and services) 24.9 24.3 22.4 23.5 28.4 24.2   20.4   13.2 11.0 9.0                             (In millions of U.S. dollars, unless otherwise indicated)                           Overall balance of payments -135 447 -37 67 -22 -150   -54   64 -7 -63 Financing gap ... ... ... ... ... 387   255   220 190 124 External debt (end of period) 8/ 6,280 6,172 5,950 5,760 5,534 5,371   5,264   5,344 5,461 5,553 External payments arrears (end of year) 92 67 104 25 115 -115   0   0 0 0 Gross international reserves (end of year) 458 855 788 783 791 870   1,046   1,311 1,475 1,522 (in months of next year imports) 1.6 2.7 2.5 2.8 2.6 2.5   3.1   3.5 3.8 3.7 Average exchange rate (K Sh/US$) 51.4 57.1 58.0 61.8 70.4 ...   ...   ... ... ...                                                     Sources: Kenyan authorities; and IMF staff estimates and projections. 1/ 12-month period ended May 2000. 2/ 12-month period ended April 2000. 3/ Data are on fiscal-year (July-June) basis; 1998 refers to fiscal year 1998/99. 4/ Changes in percent of beginning-of-period money stock (M3). 5/ There is a break in the series in 1998, as the definition of net domestic assets and credit to the private sector has changed. 6/ Fiscal year ending June 30, 2001 7/ End-May. 8/ Public and publicly guaranteed debt.