IMF Staff Concludes Visit to Kenya

IMF News, March 7, 2018

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A staff team from the International Monetary Fund (IMF), led by Benedict Clements, visited Kenya from February 19 to March 2, 2018 to conduct the 2018 Article IV consultation and hold discussions on continued IMF support to Kenya, including the authorities’ request for an extension of the current SBA.
End-of-Mission press releases convey preliminary findings; the views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
The authorities requested a six-month extension of the SBA that expires on March 13, 2018 to allow more time to complete the outstanding reviews of the IMF-supported program.

Real GDP growth is estimated to have slowed to 4.8 percent for 2017 as a whole.
Growth drivers in 2017: public investment spending and solid non-agriculture sector performance.
Annual headline inflation declined to 4.5 percent in February from 6.3 percent in 2016, reflecting a substantial decline in food inflation and appropriate monetary policies.
The banking system has remained stable; the Central Bank of Kenya (CBK) has continued to strengthen the financial system through its reform program.
With elections over and weather conditions returning towards normal, growth is expected to increase to 5½ percent in 2018.
Annual growth could rise further to 6½ percent within a couple of years, provided that the authorities continue economic reforms, including reducing the fiscal deficit and amending interest rate controls.
Headwinds: weak credit growth will weigh on economic activity in the near term.

The external current account deficit rose to an estimated 6.4 percent of GDP in 2017 from 5.2 percent in 2016, reflecting higher imports, including fuel.
Foreign exchange reserves have risen to US$7.1 billion as of end-January 2018 and are sufficient to withstand any potential near-term external shocks.
The exchange rate has remained stable.

Elevated fiscal deficits in recent years have raised public debt vulnerabilities.
Authorities expressed commitment to significant fiscal adjustments to help address vulnerabilities and maintain public debt on a sustainable path.
IMF team and authorities agreed that a reduction in the fiscal deficit to 7.2 percent of GDP in 2017/18 and further to 5.7 percent of GDP in 2018/19, from 8.8 percent in 2016/17, would be appropriate.
Planned fiscal adjustment to be achieved by a combination of revenue measures and contained spending.

Accelerate reforms to:
- increase the efficiency and transparency of public spending, particularly on development spending; and
- safeguard financial stability by strengthening capital and liquidity positions of banks and microfinance institutions, promptly addressing capital and liquidity deficiencies in individual banks, and implementing new International Financial Reporting Standards (IFRS).
Review the interest rate controls introduced in September 2016 with a view to abolishing them or substantially modifying them. Rationale:
- The controls have contributed to slow overall credit growth to the private sector, and lower access to credit by SMEs and individuals.
- Interest rate controls are undermining the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth.

The authorities requested a six-month extension of the SBA that expires on March 13, 2018 to allow more time to complete the outstanding reviews of the IMF-supported program.
In support of this request, the authorities have committed to policies to achieve the program objectives, including reducing the fiscal deficit and substantially modifying interest controls.
The SBA extension will be presented to the Executive Board before its expiration on March 13, and outstanding program reviews could be completed by September 2018.
Background: On March 14, 2016, the Executive Board of the IMF approved a SDR 709.259 million (about US$989.8 million) 24-month Stand-By Arrangement (SBA) and a SDR 354.629 million (about US$494.9 million) 24-month Standby Credit Facility (SCF) for Kenya, for a combined SDR 1.06 billion (about US$1.5 billion, or 196 percent of Kenya’s quota). SCF arrangements cannot be extended beyond 24 months. The first review was completed on January 25, 2017 and second and third reviews were not completed.

The team met with: the President, Uhuru Kenyatta; Cabinet Secretary for the National Treasury, Henry Rotich; the Governor of the CBK, Patrick Njoroge; the Principal Secretary for the National Treasury, Kamau Thugge; the Deputy Governor of the CBK, Sheila M’Mbijjewe; and other senior government and CBK officials.
Staff also had discussions with parliamentarians, civil society organizations, representatives of the private sector, and development partners.

IMF. "IMF Staff Concludes Visit to Kenya", March 7, 2018.