Press Release No. 14/455

Press Release No. 14/455
October 2, 2014

On September, 22, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the 2014 Article IV consultation¹ with Kenya.

Kenya’s economy has continued to expand in a stable economic environment. Credit to the manufacturing sector has picked up and foreign investor interest is growing, notably in the extractive industries. The economy’s growth rate rose to 5 percent in 2013/14 and is expected to gain further momentum in 2014/15, driven by higher domestic and external investment. Inflation remains moderate, but rising food prices and rapid credit growth may fuel inflation expectations. The relatively high external current account deficit (around 8 percent of Gross Domestic Product (GDP) in 2013/14) reflects strong capital imports and a decline in agricultural exports. Following a successful first-time Eurobond issue (US$2 billion) in June 2014, international reserves reached some four and a half months of prospective import coverage. Kenya’s financial sector remains robust, the process of financial inclusion is ongoing, and efforts to develop Nairobi into a regional hub have advanced with Kenya’s recent removal from the Financial Action Task Force’s watch list.

The 2013/14 central government deficit remained broadly unchanged compared to the previous year at about 5¾ percent of GDP. A stronger revenue performance was accompanied by a higher wage bill, rising security spending and the implementation of devolution, which was rolled out at a fast pace. A new quarterly reporting framework for budget execution by counties will help to address transitional challenges for public financial management posed by devolution. Kenya’s debt remains broadly stable and sustainable. The authorities plan a gradual fiscal consolidation with a view to meeting the medium-term convergence criteria specified in the East African Community Monetary Union Protocol.

Kenya’s medium-term growth prospects are favorable, supported by rising infrastructure investment in energy and transportation; the expansion of the East African Community market; deepening financial inclusion, which fosters a more dynamic small and medium-sized enterprise sector; and the positive impact of large-size irrigation projects on agricultural productivity. Nonetheless, Kenya remains vulnerable to weather-related shocks, a further deterioration of security conditions, protracted slow growth in advanced and emerging economies, and difficulties in implementing devolution that could complicate public financial management.

Executive Board Assessment²

Directors commended the authorities for maintaining macroeconomic stability, introducing important market-friendly reforms, and for Kenya’s successful debut Eurobond issuance. Kenya’s economic outlook is favorable, although the country remains vulnerable to exogenous shocks. To mitigate downside risks, Directors encouraged stronger policy buffers and further structural reforms, including to strengthen the business climate and improve security conditions. They noted that this would help to consolidate the gains to date, contribute to poverty reduction, and promote more inclusive growth.

Directors called for continued commitment to fiscal discipline in the wake of challenges emerging from the ongoing process of devolution of government responsibilities. This process should lead to better delivery of services to help alleviate poverty and inequality across counties. Directors agreed that a prudent fiscal stance, consistent with Kenya’s medium-term debt target, will create space for much needed infrastructure investment and priority social spending. Accordingly, Directors supported further revenue mobilization, enhancement of the quality and efficiency of public spending, and better control over the public wage. They also recommended full implementation of public financial management reforms, especially with regard to fiscal devolution and the recent introduction of the Treasury Single Account aimed at strengthening cash management. They supported the authorities’ efforts to reduce fiscal risks by reforming government-owned agencies, and closely monitoring contingent liabilities from state-owned enterprises.

In view of the rise in headline inflation in recent months, Directors encouraged the authorities to monitor the accelerated pace of credit growth, and to stand ready to tighten monetary conditions to anchor inflationary expectations. They also recommended strengthening prudential oversight to prevent a deterioration in the quality of banks’ loan portfolios. Continued efforts to modernize the monetary framework should also help lay the foundation for inflation targeting.

Directors welcomed the rapid increase in financial inclusion, and the authorities’ strong commitment to strengthening prudential and regulatory oversight. In light of the rapid expansion of Kenyan banks in East Africa and other SSA countries, they underscored the need for enhanced consolidated supervision of transnational banks and other systemic groups. Cross-border cooperation with regional supervisors in joint prudential oversight would also be important. Directors commended Kenya’s removal from the Financial Action Task Force (FATF)’s monitoring process and encouraged sustained improvements in the country’s Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework.

Directors encouraged the authorities to maintain the momentum of structural reforms and to continue their efforts to remove remaining infrastructure bottlenecks, in order to mitigate vulnerabilities to weather-related shocks and improve competitiveness. Looking ahead, they also underscored the need to put in place an effective framework for natural resource management, in light of recent oil and gas discoveries. While welcoming the ongoing revision of the national accounts statistics, Directors encouraged the authorities to further improve the quality and the scope of information on the balance of payments, social conditions, and the labor market.

	2012/13	2013/14	2014/15	2015/16	2016/17	2017/18	2018/19
	Act.	Prelim.	Projections
National accounts and prices (percentage change; unless otherwise indicated)
Nominal GDP (market prices, in billions of Kenya shillings)	4,497	5,051	5,734	6,525	7,420	8,416	9,504
Real GDP growth (market prices)	4.6	5.0	5.8	6.3	6.5	6.5	6.6
GDP deflator (average) 2	6.7	6.9	7.2	7.0	6.7	6.4	5.9
Consumer price index (annual average) 2	4.6	7.1	6.5	5.2	5.0	5.0	5.0
Consumer price index (end of period) 2	4.9	7.4	5.3	5.0	5.0	5.0	5.0
Import volume growth, goods	6.8	3.6	8.3	11.2	7.6	8.8	8.8
Import value growth, goods	3.2	5.0	11.2	9.2	7.8	8.7	9.6
Export volume growth, goods	8.2	0.7	6.2	10.3	10.0	10.6	10.7
Export value growth, goods	2.8	-5.3	4.1	9.1	10.4	11.1	11.3
Terms of trade, goods, and services (Base year 2000)	-4.2	-6.2	-1.3	1.5	0.6	1.2	0.7
Ksh per US$ exchange rate (end of period)	85.8	87.6
Nominal effective exchange rate (- depreciation; end of period)	1.2	-2.7		…	…	…	…
Real effective exchange rate (- depreciation; end of period)	3.6	1.9		…	…	…	…
Money and credit (percentage change; unless otherwise indicated)
M3 (broad money and foreign currency deposits, end period)	14.2	21.4	…	…	…	…	…
Reserve money	11.7	16.0	…	…	…	…	…
Investment and saving (In percent of GDP; unless otherwise indicated)
Investment	18.7	18.7	22.3	22.6	23.2	23.1	22.8
Central government	6.6	6.2	8.6	8.7	9.0	8.8	8.5
Other	12.1	12.5	13.7	14.0	14.2	14.3	14.3
Gross national saving	10.6	11.0	13.9	14.7	16.1	16.5	16.5
Central government	0.8	0.2	2.1	2.9	3.6	4.0	4.1
Other	9.8	10.8	11.8	11.7	12.5	12.6	12.5

Central government budget (In percent of GDP; unless otherwise indicated)
Total revenue	18.8	19.2	20.5	20.5	20.6	20.9	20.9
Total expenditure and net lending	24.8	25.4	27.2	26.4	26.1	25.8	25.3
Overall balance (commitment basis) excluding grants	-6.0	-6.2	-6.7	-5.9	-5.5	-4.9	-4.4
Overall balance (commitment basis) including grants	-5.5	-5.7	-6.2	-5.5	-5.1	-4.6	-4.1
Primary budget balance	-2.5	-3.0	-3.7	-3.0	-2.7	-2.2	-1.7
Net domestic borrowing	3.8	4.0	2.7	2.8	2.4	2.2	1.5
General government overall balance including grants 3	-5.2	-4.7	-5.7	-5.4	-5.3	-4.8	-4.5
Balance of payments (In percent of GDP; unless otherwise indicated)
Current account balance	-8.1	-7.8	-8.4	-8.0	-7.1	-6.5	-6.3
Current account balance, excl. capital imports and official transfers	-0.2	0.0	0.0	0.4	0.9	1.2	1.3
Exports value, goods, and services	20.8	18.8	18.1	17.9	17.8	17.8	17.9
Imports value, goods, and services	34.1	32.0	32.2	31.6	30.8	30.3	30.0
Gross international reserve coverage
In billions of U.S. dollars (end of period)	6.2	7.5	8.3	9.3	10.3	11.2	12.5
In months of next year imports (end of period)	4.0	4.3	4.4	4.6	4.6	4.6	4.6
Public debt (In percent of GDP; unless otherwise indicated)
Total public debt, gross (percent of GDP)	42.1	42.2	45.8	45.5	45.4	45.0	44.3
Of which: external debt	18.8	19.4	19.0	19.3	19.7	19.7	20.1
Of which: domestic debt, gross	23.4	22.8	26.8	26.2	25.7	25.2	24.2
Total public debt, net of deposits (percent of GDP)	37.6	38.2	40.7	41.3	41.4	41.1	40.5
Sources: Kenyan authorities and IMF staff estimates and projections. 1 Incorporates Staff estimates for pending upward revisions to GDP, which the authorities expect to release in September 2014. Fiscal years are from July 1 to June 30. 2 The consumer price index series was revised in November 2009 based on a new methodology. 3 General government includes central government and county government, and excludes extra budgetary funds (EBFs) and central government units with individual budgets for which regularly published data are not available.

Kenya: Main Economic Indicators, 2012/13–2018/191     2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19   Act. Prelim. Projections                   National accounts and prices (percentage change; unless otherwise indicated)         Nominal GDP (market prices, in billions of Kenya shillings) 4,497 5,051 5,734 6,525 7,420 8,416 9,504 Real GDP growth (market prices) 4.6 5.0 5.8 6.3 6.5 6.5 6.6 GDP deflator (average) 2 6.7 6.9 7.2 7.0 6.7 6.4 5.9 Consumer price index (annual average) 2 4.6 7.1 6.5 5.2 5.0 5.0 5.0 Consumer price index (end of period) 2 4.9 7.4 5.3 5.0 5.0 5.0 5.0 Import volume growth, goods 6.8 3.6 8.3 11.2 7.6 8.8 8.8 Import value growth, goods 3.2 5.0 11.2 9.2 7.8 8.7 9.6 Export volume growth, goods 8.2 0.7 6.2 10.3 10.0 10.6 10.7 Export value growth, goods 2.8 -5.3 4.1 9.1 10.4 11.1 11.3 Terms of trade, goods, and services (Base year 2000) -4.2 -6.2 -1.3 1.5 0.6 1.2 0.7 Ksh per US$ exchange rate (end of period) 85.8 87.6           Nominal effective exchange rate (- depreciation; end of period) 1.2 -2.7   … … … … Real effective exchange rate (- depreciation; end of period) 3.6 1.9   … … … …                 Money and credit (percentage change; unless otherwise indicated)         M3 (broad money and foreign currency deposits, end period) 14.2 21.4 … … … … … Reserve money 11.7 16.0 … … … … …                 Investment and saving (In percent of GDP; unless otherwise indicated)           Investment 18.7 18.7 22.3 22.6 23.2 23.1 22.8 Central government 6.6 6.2 8.6 8.7 9.0 8.8 8.5 Other 12.1 12.5 13.7 14.0 14.2 14.3 14.3 Gross national saving 10.6 11.0 13.9 14.7 16.1 16.5 16.5 Central government 0.8 0.2 2.1 2.9 3.6 4.0 4.1 Other 9.8 10.8 11.8 11.7 12.5 12.6 12.5 Central government budget (In percent of GDP; unless otherwise indicated)       Total revenue 18.8 19.2 20.5 20.5 20.6 20.9 20.9 Total expenditure and net lending 24.8 25.4 27.2 26.4 26.1 25.8 25.3 Overall balance (commitment basis) excluding grants -6.0 -6.2 -6.7 -5.9 -5.5 -4.9 -4.4 Overall balance (commitment basis) including grants -5.5 -5.7 -6.2 -5.5 -5.1 -4.6 -4.1 Primary budget balance -2.5 -3.0 -3.7 -3.0 -2.7 -2.2 -1.7 Net domestic borrowing 3.8 4.0 2.7 2.8 2.4 2.2 1.5                 General government overall balance including grants 3 -5.2 -4.7 -5.7 -5.4 -5.3 -4.8 -4.5                 Balance of payments (In percent of GDP; unless otherwise indicated)     Current account balance -8.1 -7.8 -8.4 -8.0 -7.1 -6.5 -6.3 Current account balance, excl. capital imports and official transfers -0.2 0.0 0.0 0.4 0.9 1.2 1.3 Exports value, goods, and services 20.8 18.8 18.1 17.9 17.8 17.8 17.9 Imports value, goods, and services 34.1 32.0 32.2 31.6 30.8 30.3 30.0 Gross international reserve coverage               In billions of U.S. dollars (end of period) 6.2 7.5 8.3 9.3 10.3 11.2 12.5 In months of next year imports (end of period) 4.0 4.3 4.4 4.6 4.6 4.6 4.6                 Public debt (In percent of GDP; unless otherwise indicated) Total public debt, gross (percent of GDP) 42.1 42.2 45.8 45.5 45.4 45.0 44.3 Of which: external debt 18.8 19.4 19.0 19.3 19.7 19.7 20.1 Of which: domestic debt, gross 23.4 22.8 26.8 26.2 25.7 25.2 24.2 Total public debt, net of deposits (percent of GDP) 37.6 38.2 40.7 41.3 41.4 41.1 40.5   Sources: Kenyan authorities and IMF staff estimates and projections. 1 Incorporates Staff estimates for pending upward revisions to GDP, which the authorities expect to release in September 2014. Fiscal years are from July 1 to June 30. 2 The consumer price index series was revised in November 2009 based on a new methodology. 3 General government includes central government and county government, and excludes extra budgetary funds (EBFs) and central government units with individual budgets for which regularly published data are not available. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

Central government budget (In percent of GDP; unless otherwise indicated)
Total revenue	18.8	19.2	20.5	20.5	20.6	20.9	20.9
Total expenditure and net lending	24.8	25.4	27.2	26.4	26.1	25.8	25.3
Overall balance (commitment basis) excluding grants	-6.0	-6.2	-6.7	-5.9	-5.5	-4.9	-4.4
Overall balance (commitment basis) including grants	-5.5	-5.7	-6.2	-5.5	-5.1	-4.6	-4.1
Primary budget balance	-2.5	-3.0	-3.7	-3.0	-2.7	-2.2	-1.7
Net domestic borrowing	3.8	4.0	2.7	2.8	2.4	2.2	1.5
General government overall balance including grants 3	-5.2	-4.7	-5.7	-5.4	-5.3	-4.8	-4.5
Balance of payments (In percent of GDP; unless otherwise indicated)
Current account balance	-8.1	-7.8	-8.4	-8.0	-7.1	-6.5	-6.3
Current account balance, excl. capital imports and official transfers	-0.2	0.0	0.0	0.4	0.9	1.2	1.3
Exports value, goods, and services	20.8	18.8	18.1	17.9	17.8	17.8	17.9
Imports value, goods, and services	34.1	32.0	32.2	31.6	30.8	30.3	30.0
Gross international reserve coverage
In billions of U.S. dollars (end of period)	6.2	7.5	8.3	9.3	10.3	11.2	12.5
In months of next year imports (end of period)	4.0	4.3	4.4	4.6	4.6	4.6	4.6
Public debt (In percent of GDP; unless otherwise indicated)
Total public debt, gross (percent of GDP)	42.1	42.2	45.8	45.5	45.4	45.0	44.3
Of which: external debt	18.8	19.4	19.0	19.3	19.7	19.7	20.1
Of which: domestic debt, gross	23.4	22.8	26.8	26.2	25.7	25.2	24.2
Total public debt, net of deposits (percent of GDP)	37.6	38.2	40.7	41.3	41.4	41.1	40.5
Sources: Kenyan authorities and IMF staff estimates and projections. 1 Incorporates Staff estimates for pending upward revisions to GDP, which the authorities expect to release in September 2014. Fiscal years are from July 1 to June 30. 2 The consumer price index series was revised in November 2009 based on a new methodology. 3 General government includes central government and county government, and excludes extra budgetary funds (EBFs) and central government units with individual budgets for which regularly published data are not available.