Kevin J. Kelley
19 January 2004
Washington, DC — KENYA'S NEW aid agreement with the International Monetary Fund calls for ambitious government initiatives on domestic borrowing, the wage bill and defence spending, according to a recently published IMF staff report.
The Fund's assessment, completed two months ago but not released until last week, sets forth terms of the three-year, $253 million anti-poverty lending programme that was approved in November. Kenya has already received $36 million under the agreement, with another $36 million to be made available in March, contingent on IMF review of the government's progress toward meeting the programme's goals and conditions.
The 92-page IMF document places emphasis on a radical overhaul of Kenya's financing strategy. For example, the programme envisions elimination of all domestic borrowing by the government by next year. The ensuing gap in financing is to be filled, the report says, by greatly increased reliance on low-interest loans and grants from donors.
Kenya's external financing needs are likely to average $1.3 billion a year, the report says. Overall support from external sources is thus expected to rise from 6.5 per cent of the country's gross domestic product (GDP) to nearly 10 per cent in the 2005-2006 fiscal year.
This strategy carries risks, the IMF acknowledges, noting that budget shortfalls could result if donors do not provide the expected amounts of support.
The Kenyan government is also planning to roll back spending on defence and security, according to a Ministry of Finance memorandum appended to the IMF report. The share of GDP allocated to military and related purposes will drop from 2.3 per cent at present to less than 2 per cent by the start of the 2005-2006 fiscal year, the Ministry of Finance indicates.
Such a cut may not be consistent with the government's simultaneous efforts to strengthen anti-terrorism safeguards. And Kenya's perceived vulnerability to terrorist attacks has already proved damaging to the country's economy, the IMF report points out.
"Overall economic conditions have remained subdued," the IMF says, "owing in part to the negative effects on the tourism industry of the recent terrorism-related travel advisory." The report calculates that GDP was lowered by about 1 per cent last year as a result of that factor.
Disputes among NARC leaders could jeopardise the IMF lending programme, the report warns: "An increase in tensions within the ruling coalition could delay the implementation of reforms" at the heart of the IMF's agreement with the government.
One of those reforms involves cuts in the wage bill. But the IMF report is at pains not to indicate exactly what is expected in that regard.
In vague and carefully worded terms, it calls for "implementation of new mechanisms for setting wages in the public sector that pay close attention to resource constraints and productivity considerations. At another point, the report says reductions in the wage bill can be achieved "through revised modalities for setting public wages and other entitlements, as well as the minimum wage and the ongoing civil service reform."
Action on five key points is to be undertaken by the government in the current year, the report says.
Topping that list is implementation and enforcement of anti-corruption laws, along with steps toward "rebuilding the capacity and integrity of the Kenya Revenue Authority."
A start must be made this year in "restructuring public expenditure in favour of social and economic outlays," the report adds.
The 2004 agenda also includes reform of the financial sector, "particularly the restructuring of the insolvent National Bank of Kenya and the transfer of the licensing authority from the Ministry of Finance to the Central Bank of Kenya."
"Accelerated privatisation of public enterprises" concludes the list of actions the government is expected to undertake this year in keeping with the IMF aid agreement.
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