An International Monetary Fund (IMF) mission, led by Mr. Domenico Fanizza, visited Nairobi from February 4-14, 2013 to carry out the fifth review under the three-year Extended Credit Facility (ECF) arrangement approved in January 2011.
The mission met with Minister for Finance Hon. Robinson N. Githae, Professor Njuguna Ndung'u, Governor of the Central Bank of Kenya (CBK), other senior government officials, and representatives of the private sector, civil society and development partners. The team wishes to thank the authorities for their warm hospitality, the close collaboration, and the constructive discussions.
At the conclusion of the visit, Mr. Fanizza issued the following statement:
"Kenya has stayed the course in its economic reforms. Despite the ongoing electoral campaign, the still difficult global conditions, and the high cost of security operations in Somalia, fiscal discipline has been maintained, monetary policy has remained cautious, and structural reforms have progressed. The results have been favorable. Inflationary pressures have been tamed. Economic growth has kept a good pace, notwithstanding the slowdown of exports to and tourism from Europe.
International reserves are on the rise, and the current account position has significantly improved - once we exclude capital imports that have surged notably because of oil exploration. The public debt-to-gross domestic product (GDP) ratio has declined, despite the large budgetary costs of implementing the new Constitution, preparing the upcoming elections, and the recent wage increases in the civil service. Financial inclusion is moving fast, providing the opportunity to reach millions of people who until recently did not have access to financial services.
Interest rates have started to decline, providing support to economic activity. Rising foreign investment has sustained the strong performance of the stock market.
These results are encouraging, but much remains to be done. Policies need to continue to reduce Kenya's vulnerabilities in a context of heightened domestic electoral uncertainty and a weak global economic outlook. Therefore, discussions focused on further strengthening the foundations for sustained, higher, and more inclusive growth to improve the living conditions for all Kenyans. In particular:
- The mission welcomes the CBK's continued vigilance in easing its policy stance, closely monitoring inflation expectations and anticipating possible price shocks. Monetary operations should seek to manage liquidity effectively, leading interbank rates to further converge to the central bank policy rate.
- The CBK should continue to build up its international reserves to buffer the external position. The mission welcomes the CBK's commitment to its floating exchange rate regime.
- Fiscal policy should remain geared towards lowering the public debt-to-GDP ratio further. Improved expenditure control should allow social and development expenditures to rise, as non-priority spending falls. Revenue mobilization efforts should benefit from the ongoing value-added tax (VAT) audits of large taxpayers, import duty compliance checks, and strengthened verification procedures for excise tax payments. The mission encourages the authorities to implement the Treasury Single Account, build public financial management capacity at the county level, and seek approval of the new VAT Bill by the new National Assembly as soon as possible.
- Financial sector stability should be enhanced by new prudential regulations and consolidated supervision of regional banking groups. Deepening of the financial sector should be supported by the demutualization of the Nairobi Stock Exchange, as well as efforts to set up a Real Estate Investment Trust and establish a Futures and a Commodities Exchange.
The fifth program review under the ECF arrangement is tentatively scheduled for consideration by the IMF Executive Board in April 2013. Upon approval the IMF would disburse the fifth tranche of the loan for an amount of about US$110 million, which would bring total disbursements under the arrangement to SDR416.60 million (about US$640 million).
The Executive Board originally approved Kenya's three-year ECF arrangement in January 2011 in an amount equivalent to SDR325.68 million (about US$500 million), and in December 2011 approved an increase in access to an amount equivalent to SDR 488.52 million (about US$750 million--see Press Releases No. 11/22 and No. 11/457).