IMF Executive Board Completes First Review Under the Stand-By Arrangement and Standby Credit Facility Arrangement for Kenya

IMF News, January 25, 2017

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Canonical URL: IMF Executive Board Completes First Review Under the Stand-By Arrangement and Standby Credit Facility Arrangement for Kenya

Executive Board completed the first review of Kenya’s performance under the program supported by the Stand-By Arrangement (SBA) and an Arrangement under the Standby Credit Facility (SCF) on January 25, 2017.
The 24-month SBA/SCF has a combined total access of SDR 1.06 billion (about US$1.5 billion).
The SBA/SCF was approved by the IMF’s Executive Board on March 14, 2016 (see Press Release No. 16/110).
Kenyan authorities indicated they will treat both arrangements as precautionary and do not intend to draw on the SBA and SCF arrangements unless exogenous shocks lead to an actual balance of payments need.

Findings:
- Real GDP growth increased in 2016.
- Inflation remains within the target range.
- The current account deficit has narrowed.
- The macroeconomic outlook is described as overall positive, including robust growth and reduced external imbalances.
Quoted assessment by Mr. Tao Zhang, Deputy Managing Director and Acting Chair: “Kenya’s economy has continued to perform well. Real GDP growth increased in 2016, inflation remains within the target range, and the current account deficit has narrowed. The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances.”

Findings:
- Interest rate controls are likely to reduce access to credit, weighing on growth.
- Interest rate controls complicate monetary policy and adversely affect banking sector profitability, especially for small banks.
- Although adverse effects are manageable in the near term, if maintained, they could potentially pose a risk to financial stability.
Recommendations:
- It is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector.
- Establishing a formal interest rate corridor remains a priority for strengthening the monetary policy framework.
- Given delays in adopting such a corridor because of uncertainties created by interest rate controls, it will be important to conduct liquidity operations to realign interbank rates to the policy rate as economic conditions permit.

Recommendation:
- The envisaged fiscal consolidation that targets a 3.7 percent of GDP deficit by 2018/19 is critical to maintain a low risk of debt distress while preserving fiscal space for development priorities.
Advice:
- Continued public financial management reforms, aimed at upgrading the efficiency of public spending and expenditure control, are key to strengthening fiscal policies and institutions.

Actions noted:
- Authorities are taking actions to strengthen financial stability and to enforce reporting requirements.
- Steps include implementing the action plan on banking regulation and supervision to enhance capacity to monitor credit and liquidity risks and limit insider lending.

Recommendations:
- Continued improvements in macroeconomic statistics and acceleration of governance reforms will be essential to reinforcing efficiency, transparency, and accountability.

IMF Communications Department, Press Release No. 17/23