An International Monetary Fund (IMF) mission led by Mr. Mauro Mecagni visited Nairobi from June 25 to July 9 to conduct the 2014 Article IV Consultation discussions1. The mission met with Hon. Henry Rotich, Cabinet Secretary of the National Treasury, Professor Njuguna Ndungu, Governor of the Central Bank of Kenya, the Speakers of the Senate and the National Assembly, senior government officials, and representatives of civil society, the private sector and development partners. The mission team wishes to thank the authorities for their warm hospitality, the excellent collaboration, and the high quality discussions.
At the conclusion of the mission, Mr. Mecagni issued the following statement:
"Kenya's economy has continued to grow, with a pick-up in credit to the manufacturing sector and renewed foreign investor interest, notably in the extractive industries. Inflation remains within the central bank's target band, reflecting the implementation of sound monetary policy, and has contributed to the stability of the country's currency. Following a successful sovereign bond issue, international reserves have reached a level of more than five months of import coverage. Kenya's expanding financial sector remains robust, and the ongoing process of financial inclusion has opened up the possibility of extending credit at more affordable rates to small and medium-sized enterprises. Efforts to develop Nairobi into a regional hub for financial services have advanced with the strengthening of the Anti-Money Laundering/Combating the Financing of Terrorism framework and Kenya's recent graduation from the Financial Action Task Force's monitoring process. At the same time, the economy faces some challenges, notably low rainfall and security-related concerns that have affected tourism.
"Despite good revenue performance, the 2013/14 central government deficit remained unchanged in percent of GDP on account of higher wages, security spending and larger transfers to counties. Kenya's debt remains sustainable, and gradual fiscal consolidation will help ensure that the country is on track to meet the convergence criteria specified in the East African Monetary Union Protocol.
"Devolution is a major undertaking that holds great promise for the Kenyan population. It provides the opportunity to foster inclusive growth, increase job creation and address inequality. While considerable progress has been made during the first year of devolution--with much-needed investments in health, roads and access to water in specific counties--accountability, compliance with the legal framework and implementation capacity need to be further strengthened to effectively maximize the benefits of devolved resources, improve the provision of public services and mitigate fiscal risks. Budget preparation and execution mechanisms are being developed, and oversight by the National Treasury and independent constitutional offices is contributing to greater transparency and accountability in public finances.
"Kenya's strong reform record and economic performance in recent years has laid the ground for sustainable growth that would enable the country to reach its ambitious Vision 2030 development targets. In this setting, policies need to consolidate macroeconomic stability, address infrastructure gaps, and support the integration of Kenya in the global economy. As the country remains vulnerable to risks such as weather-related shocks and potential volatility in capital flows, focusing policies on the following priorities would help strengthen resilience and support sustained growth:
Maintaining a prudent fiscal stance consistent with Kenya's medium-term debt targets while pursuing a shift in the composition of expenditure towards development priorities. In that regard, controlling the wage bill at both national and county level and improving the quality and efficiency of public spending will be essential to create fiscal space for well-targeted social programs and increasing infrastructure investment. Investing in irrigation, energy, and transport infrastructure remains a priority to improve competitiveness and unlock the country's growth potential. Continued efforts to mobilize domestic revenue are also required to fund these priorities.
Strengthening capacity-building in public financial management. This is key to ensure that the high expectations linked to devolution are met, and underscores the importance of making the Intergovernmental Fiscal Relations Department fully operational. Priority areas are the implementation of the Treasury Single Account, the adoption of the Public Financial Management (PFM) Act regulations, a formal agreement between the central government and counties on outstanding liabilities, and stronger oversight on the use of public resources. Enhancing the government's cash management system is of paramount importance to avoid undue pressure on payment flows and interest rates, and reduce borrowing costs for the government and the private sector.
Improving liquidity forecasting will support continued prudent monetary policy, which should stand ready to anticipate changes in inflation expectations in taking monetary policy decisions. Maintaining a strong foreign exchange reserves position with exchange rate flexibility will further help cushion the impact of potential shocks.
Supporting the expansion of Kenyan banks, with continued efforts in consolidated supervision of systemic groups and cross-border cooperation with regional supervisors in information sharing, joint prudential oversight and resolution procedures.
Accelerating the regional integration process will contribute to positive investor sentiment and the diversification of Kenya's export base. Commitment to the East African Monetary Union Protocol's convergence criteria supports the integration process.
Effective natural resource management of recent oil and gas discoveries. Once confirmed to be commercially viable, these have the potential to further accelerate economic growth and reduce drought-related and geopolitical risks. A sound fiscal framework consistent with the PFM Act, including transparent management rules and the full integration of these resources into the budget is required for Kenya to fully realize this potential.
"On its return to Washington D.C., the team will prepare a staff report that is tentatively scheduled for discussion by the Executive Board in late September."
1 The completion of the Article IV Consultation is subject to the discussion by the IMF Executive Board.