Kenya: IMF Executive Board Concludes 2018 Article Iv Consultation and Establishes Performance Criteria for the Second Review Under the Stand-By Arrangement With Kenya

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On June 13, 2018 the Executive Board of the International Monetary Fund (IMF) concluded the 2018 Article IV consultation [1] and established performance criteria for the second review under the Stand-By Arrangement with Kenya.

Kenya has maintained strong growth in recent years and external imbalances have narrowed, strengthening resilience to shocks. The business environment continues to improve, supporting private investment. However, a severe drought, an extended presidential election, and weak bank lending-due in part to interest rate controls-slowed growth in 2017. In addition, public debt has risen as revenue shortfalls have not been matched by spending cuts. Moreover, interest rate controls continue to hamper lending (especially to small- and medium-size enterprises), growth, and monetary policy.

The Executive Board approved a six-month extension of Kenya's SBA until September 14, 2018 (its SCF expired on March 13, 2018). Since the performance criteria (PCs) for the second review (end-June 2017) are now outdated, new PCs for end-June 2018, a monetary policy consultation clause, and new structural benchmarks were established. The authorities plan to continue treating the SBA as precautionary.

Kenya's medium-term growth prospects are favorable, supported by infrastructure investment and an improving business environment. However, continued strong growth and macroeconomic stability hinge on the implementation of reforms. In addition, headwinds from fiscal consolidation and weak credit growth will weigh on economic activity in the near term. Kenya also remains vulnerable to a deterioration of security conditions, and to external shocks that could spur capital outflows, such as a pullback on investors from emerging markets or tightening global monetary conditions.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for maintaining macroeconomic stability and sustained economic growth in recent years, together with gains in financial inclusion and poverty reduction. While domestic shocks reduced the pace of expansion in 2017, the economy is recovering and medium‑term growth prospects remain favorable. To safeguard the gains achieved, Directors encouraged further reduction of fiscal deficits to preserve debt sustainability; the repeal or significant modification of interest rate controls; and measures to strengthen the financial sector and business environment. The six‑month extension of the Stand‑By Arrangement will give the authorities more time to undertake these critical reforms.

Directors encouraged the authorities to take substantive steps to reduce the fiscal deficit to address Kenya's rising public debt. They commended the authorities on their ambitious plans for fiscal adjustment in 2017/18 and 2018/19 and agreed that the size of the adjustment would help put the public debt ratio on a downward path. Adjustment efforts should focus on both expenditures and revenues to preserve space for planned growth‑enhancing public investment and key social programs, including the authorities' Big Four agenda. Directors welcomed the authorities' planned revenue measures while emphasizing the need for additional steps to meet the deficit targets for both 2017/18 and 2018/19. They stressed the importance of realistic revenue projections to increase fiscal transparency and to avoid ad hoc cuts in public investment and other high‑priority expenditures.

Directors encouraged the authorities to repeal or significantly modify interest rate controls, noting that the controls have slowed growth, reduced access to finance, and hampered the effectiveness of monetary policy. They emphasized that any modification should include the removal of the link between the lending rate cap and the central bank policy rate, the removal of a floor on deposit rates, and an increase of the lending cap to a level that protects consumers from predatory practices.

Directors saw merit in modernizing the monetary policy framework. They recommended that, following the reform of interest rate controls, the Central Bank of Kenya move to establish an interest rate corridor. This would help align the policy rate with the interbank market rate, thus improving the policy rate's signaling role and strengthening the effectiveness of monetary policy.

Directors commended the authorities for the progress made in strengthening the banking supervision framework, and encouraged continued efforts in this area. At the same time, they saw merit in further measures to develop the bank resolution framework and risk‑based AML/CFT supervisory tools.

Directors welcomed the improvements made in strengthening competitiveness and the business environment in recent years and encouraged the authorities to build on the progress made. In particular, they emphasized the importance of implementing public financial management reforms to strengthen governance and anti‑corruption efforts.

It is expected that the next Article IV consultation with Kenya will be held within 24 months, in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

Kenya: Selected Economic and Financial Indicators, 2014/15-2021/22 1/

2014/15

2015/16

2016/17

2017/18

2018/19

2019/20

2020/21

2021/22

Act.

Act.

Prog.

Prel.

Proj.

(Annual percentage change, unless otherwise indicated)

Output, prices, and exchange rate

Real GDP

5.5

5.8

5.6

5.4

5.3

5.9

6.1

6.3

6.5

GDP deflator

9.1

9.0

5.9

5.2

5.1

4.7

4.4

5.2

5.1

CPI (period average)

6.6

6.5

6.4

8.1

5.2

5.5

5.0

5.0

5.0

CPI (end of period)

7.0

5.8

6.5

9.2

5.2

5.4

5.0

5.0

5.0

Core inflation (period average) 2/

4.4

5.4

5.0

4.0

3.9

4.8

4.8

5.2

5.5

Exports volume

6.0

1.7

7.4

3.4

12.8

12.5

9.2

8.6

8.1

Imports volume

3.2

-1.3

4.1

3.4

6.4

6.2

9.4

9.6

8.9

Exchange rate (Kenyan shilling/US$)

92.7

102.1

.

.

.

.

.

.

.

Real effective exchange rate (depreciation, -)

6.0

1.5

.

.

.

.

.

.

.

Money and credit

Broad money (M3)

18.4

8.1

10.5

6.0

.

.

.

.

.

Reserve money

14.9

4.9

10.8

2.4

.

.

.

.

.

Credit to non-government sector

18.3

8.9

6.0

1.5

.

.

.

.

.

Policy rate

10.0

10.5

.

.

.

.

.

.

.

M3/GDP (percent)

43.8

41.1

40.9

38.9

.

.

.

.

.

NPLs (percent of total gross loans)

5.7

n.a.

.

.

.

.

.

.

Central government budget

Total revenue and grants

19.4

18.8

21.0

18.9

19.9

20.8

20.8

20.8

20.7

Tax revenues

16.4

15.9

17.0

16.1

16.0

17.2

17.3

17.4

17.5

Non-tax revenues

2.5

2.4

3.4

2.4

3.4

3.1

3.0

2.9

2.7

Grants

0.5

0.4

0.5

0.3

0.5

0.5

0.5

0.5

0.5

Expenditure

28.0

26.5

27.9

27.9

28.0

27.4

26.2

25.9

25.2

Current

19.3

19.3

19.9

19.5

21.4

20.8

19.7

19.3

19.0

Capital

8.7

7.2

8.0

8.4

6.6

6.6

6.5

6.6

6.2

Unidentified measures

0.0

0.0

0.0

0.0

0.6

0.9

1.4

1.6

1.1

Primary balance

-5.4

-4.1

-3.8

-5.6

-3.2

-0.5

1.5

2.1

1.3

Overall balance

-8.4

-7.3

-6.9

-9.0

-7.5

-5.7

-4.0

-3.5

-3.5

Excluding SGR (phase 1) related spending

-6.3

-6.5

-6.0

-7.6

-6.7

-5.2

-3.6

-2.9

-3.5

Excluding grants

-8.8

-7.7

-7.5

-9.4

-8.0

-6.2

-4.5

-4.0

-4.0

Net domestic borrowing

4.3

3.3

4.3

4.1

4.1

1.8

3.8

3.9

3.5

Public debt 3/

Public gross nominal debt

47.9

52.9

52.5

58.3

60.7

60.2

57.7

57.2

54.5

Public net nominal debt

43.7

47.0

49.4

52.6

55.5

56.1

55.8

55.3

52.6

of which : external public debt

23.6

26.0

26.1

30.4

31.2

32.5

30.6

28.5

25.6

Public gross debt, PV

43.5

45.5

48.8

53.0

58.0

60.2

58.4

55.6

53.7

Public net debt, PV

39.4

39.6

45.7

47.2

52.8

56.1

56.4

53.6

51.8

Gross domestic debt

24.3

27.0

26.4

28.0

29.5

27.8

27.1

28.7

28.9

Investment and saving

Investment

19.9

24.3

20.9

17.4

17.0

18.5

19.5

20.3

20.2

General government

8.7

7.2

9.6

8.5

6.7

6.6

6.5

6.4

6.2

Nongovernment

11.2

17.1

11.3

8.9

10.3

11.8

13.1

13.8

14.1

Saving

10.0

20.0

15.4

12.0

10.3

12.0

13.4

14.1

14.0

General government

-0.4

-0.8

2.1

-0.8

-1.3

0.5

2.0

2.6

2.3

Nongovernment

10.4

20.8

13.3

12.8

11.6

11.5

11.4

11.5

11.7

External sector

Exports (goods and services)

17.0

15.9

17.1

15.2

16.1

16.7

17.1

17.4

17.4

Imports (goods and services)

-31.3

-24.0

-25.6

-24.1

-25.9

-25.9

-26.0

-26.4

-26.5

Current account balance (including grants)

-9.9

-4.3

-5.5

-5.5

-6.7

-6.4

-6.2

-6.2

-6.3

Gross international reserves

In billions of US$

7.2

8.3

8.9

8.6

8.9

9.1

9.9

10.5

11.4

In months of next year imports

5.3

5.7

5.3

5.0

4.7

4.5

4.4

4.3

4.3

Memorandum items:

GDP at current market prices

Billion of Kenyan shillings

5,849

6,734

7,435

7,556

8,305

9,260

10,255

11,249

12,827

US$ billion

62.7

67.4

72.0

73.0

79.2

86.8

93.8

101.6

110.7

GDP per capita (nominal US$)

1,439

1,504

1,562

1,583

1,671

1,782

1,875

1,976

2,096

Sources: Kenyan authorities and IMF staff estimates and projections.

1/ Fiscal years are from July 1 to June 30.

2/ Excluding food and fuel.

3/ Excludes guaranteed debt and other contingent liabilities.

[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 summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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