IMF Institute
Financial Policy Workshops:
The Case of Kenya
International Monetary Fund
Washington, D.C. 1981
Library of Congress Catalog Card Number: 81-4123 AACR2
International Standard Book Number: 0-939934-37-X
Reprinted July 1989
Reprinted (paperback) January 1985
International Monetary Fund
Washington, D.C. 20431
FOREWORD
The workshops presented here comprise an actual case study. The book is intended primarily as a text for the IMF Institute's training course in Financial Analysis and Policy, but it may also be of interest to policymakers at the national level.
Established in 1964 to conduct training courses for officials from financial agencies of the Fund's member countries, the IMF Institute aims to assist principally, but not exclusively, representatives from the developing countries. In recent years, its activities have expanded rapidly to meet the growing needs of these countries for financial and technical assistance with their economic problems. Conducted in English, French, and Spanish, the courses have helped to disseminate knowledge about the statistical framework and techniques of analysis developed by the Fund, as well as to make the Fund's activities and procedures better known; nearly 3,000 officials from 134 countries have participated in over a hundred courses.
The Financial Analysis and Policy course draws heavily on the Fund's techniques of analysis and reflects the Fund's experience with programs of balance of payments adjustment. A policy-oriented course, it focuses on effective demand management policies while stressing the importance of measures to improve supply and to increase saving and investment. It also reviews the statistical framework and the tools of quantitative macroeconomic analysis by presenting studies of the effectiveness of the instruments of monetary, fiscal, and balance of payments policies as related to economic objectives. These workshops represent an effort to illustrate in a practical manner the kind of techniques studied in the course.
I am confident that this publication will prove useful to interested institutions and individuals in Fund member countries, particularly developing countries, by enhancing the understanding of the working of the major financial policy instruments. I hope that this improved understanding will contribute to better management of national economies. It should at the same time promote international monetary cooperation, which is the main purpose of the Fund's existence and which is essential for the orderly development of a world economy that has become increasingly interdependent.
J. de LarosiÈre
Managing Director
International Monetary Fund
PREFACE
This book offers a series of workshops on Kenya that are used as a case study in the IMF Institute's course on Financial Analysis and Policy for officials of the Fund's member countries. They represent a practical application of economic concepts and theories.
Since its inception, the IMF Institute has steadily endeavored to make its courses relevant to the needs of the participants, who are officials of financial agencies of Fund member countries. One way to reach this general objective has been to develop teaching material based on recent country experiences. A major step in this direction was the introduction in the early 1970s of a series of workshops on a specific country used as a case study in the Financial Analysis and Policy courses. This has served to achieve a more appropriate balance between the theoretical and the applied parts of these courses.
The workshops are designed to involve the participants in all phases of work leading to the formulation of a consistent financial program so as to enable them to apply what they have learned to their own countries. Each workshop deals with a particular sector of the economy, provides relevant background information, and contains exercises and questions relating to the statistical data. Some workshops also require the participants to make sectoral forecasts based on assumptions about the “state of the world” and about policies; these forecasts are brought together in a consistent whole in the final workshop. Participants must adjust policies and objectives in order to formulate their own financial programs.
The decision by the Fund to publish the workshops has been taken in response to the increasing number of requests for copies of these workshops, which could not be met because of the confidential nature of some of the material contained in the original version of the workshops. In order to ensure that the published version contains only nonconfidential material, discussions on the content of the workshops have been held with the Kenyan authorities, who have agreed to their publication and have also made valuable suggestions that have been incorporated in the published version.
The workshops presented by the IMF Institute have been changing over the years in the light of the Fund's experience with economic problems of member countries. They will certainly continue to evolve in the future. Therefore, from this point of view, the published version is not a final product.
I wish to stress that these workshops must not be construed as representing necessarily the techniques used by the Fund staff in dealing with member countries. They reflect, however, the general approach utilized by the Fund's economists in their analysis of the economy of a country.
While the workshops included in this publication incorporate the comments received from other departments of the Fund, the responsibility for any errors or inconsistencies rests with the IMF Institute.
GÉRARD M. TEYSSIER
Director
IMF Institute
Acknowledgments
The workshop publication project has been carried out by the IMF Institute under the overall direction of Mr. U Tun Wai, Deputy Director, with the assistance of Mr. Ciro Tognetti, Senior Advisor, and has been coordinated by Mr. M. Haris Jafri, Advisor. Many present and former staff members of the IMF Institute have contributed to the drafting of the chapters included in this publication: in particular, Mr. Herbert K. Zassenhaus, Deputy Director (retired); Mr. Andrew Gantt, Chief, English Division; Mr. Chorng-huey Wong, Assistant Chief, English Division; Mr. Øystein Pettersen, Senior Economist; Mr. Jeffrey M. Davis, Senior Economist; Mr. Sotirios Kollias, formerly Senior Economist, at present with the Bank of Greece; and Mr. Ivan A. Bello, Economist.
Valuable comments on the workshops have been received from other departments of the Fund, including the African Department, the Exchange and Trade Relations Department, the Fiscal Affairs Department, the Research Department, and the Bureau of Statistics. Particular mention should be made of the following staff members for their comments: Exchange and Trade Relations Department—Mr. Subimal Mookerjee, Deputy Director, and Mr. Manuel Guitián, Advisor; Fiscal Affairs Department—Mr. Sheetal K. Chand and Mr. Charles Y. Mansfield, Senior Economists, Fiscal Analysis Division; Research Department—Mr. Carl P. Blackwell, Assistant Director, and Mr. Michael C. Deppler, Assistant Chief, Current Studies Division; Mr. George von Furstenberg, Chief, and Mr. Mohsin S. Khan, Assistant Chief, Financial Studies Division; Bureau of Statistics—Mr. Akira P. Nose, Assistant Director; Mr. Arie C. Bouter, Assistant Director, and Mr. Mahinder S. Gill, Assistant Chief, Balance of Payments Division; Mr. Jonathan V. Levin, Assistant Director, Government Finance Statistics Division; and Mr. Jai B. Gupta, Chief, and Mr. Samir I. Fawzi, Assistant Chief, Financial Statistics Division-A. The volume has been edited by Mrs. Ella H. Wright, in consultation with Mr. Norman K. Humphreys, Chief Editor.
CONTENTS
Foreword
Preface
Acknowledgments
1 Introduction to Workshops
Accounting Workshops
Forecasting Workshops
2 Kenya: The General Setting
Economic Structure
Agriculture
Manufacturing, Mining, and Construction
Other Sectors
Economic and Financial Performance
The Period 1964–72
The Years 1973 and 1974
Appendices
I. Map of Kenya
II. Kenya: Selected Economic Data, 1963–74
3 Workshop 1: Monetary and Financial Survey
Presentation of the Statistics
The First Level: Monetary Authorities
The First Level: Deposit Money Banks
The Second Level: The Monetary Survey
The Third Level: The Financial Survey
Issues for Discussion
Monetary Survey for Kenya
Exercises and Issues for Discussion
Tables
1. Line Items on Country Pages of International Financial Statistics
2. Typical Balance Sheet of Monetary Authorities
3. Typical Consolidated Balance Sheet of Deposit Money Banks
4. Typical Monetary Survey
5. Typical Consolidated Balance Sheet of Other Financial Intermediaries
6. Typical Financial Survey
7. Kenya: Summary Accounts of the Monetary Authorities, 1973–77
8. Kenya: Summary Accounts of Commercial Banks, 1973–77
9. Kenya: Monetary Survey, 1973–77
10. Kenya: Changes in Monetary Survey Items, 1973–77
4 Workshop 2: Government Finance Statistics
Principles of Government Finance Statistics
Definition of Government
Measurement of Government Transactions
Cash Principle
Gross vs. Net Treatment of Receipts and Payments
Consolidation
Classification of Government Transactions
Basic Distinctions
Revenue
Grants
Expenditure
Lending Minus Repayments
Financing
Debt
Issues for Discussion
Government Finance Statistics for Kenya
Coverage
Central Government Budgetary Procedures
Statistical Tables
Exercises
Issues for Discussion
Chart
1. Analytical Framework for Classification of Government Transactions
Tables
1. Kenya: Units of General Government
2. Kenya: Government Accounts and Funds
3. Kenya: Sources of Data
4. Kenya: Nonfinancial Public Enterprises
5. Kenya: Public Financial Institutions
6. Kenya: Government Finance Statistics Tables, Fiscal Years 1973–77
Appendix
Government Finance Statistics Tables
5 Workshop 3: Balance of Payments Statistics
Presentation of the Statistics
Principles of Compilation
Classification of Items
Major Sources of Data
Analytic Breakdown
Exercises and Issues for Discussion
Balance of Payments Data for Kenya
Exercises and Issues for Discussion
Tables
1. Standard Components of the Balance of Payments
2. Kenya: Standard Presentation of the Balance of Payments, 1968–76
3. Kenya: Analytic Presentation of the Balance of Payments, 1969–76
6 Workshop 4: Flow of Funds
Flow-of-Funds Accounts
Basic Structure and Analytical Uses
Relations with the Monetary Survey, Government Finance Statistics, and Balance of Payments Statistics
National Income Accounts and Flow of Funds of a Hypothetical Economy
Exercises
National Accounts and Flow of Funds of Kenya, 1976
Exercises
Issues for Discussion
Tables
1. Transactions and Changes in Balance Sheet: Household Sector
2. Transactions and Changes in Balance Sheet: Business Firms Sector
3. Transactions and Changes in Balance Sheet: Government Sector
4. Changes in Balance Sheet: Banking Sector
5. Transactions and Changes in Balance Sheet: Foreign Sector
6. Summary of Income and Flow-of-Funds Accounts
7. Summary Balance Sheets of the Central Bank and the Commercial Banks of the Hypothetical Economy
8. Kenya: Selected National Accounts Data, 1975–76
9. Kenya: Summary of Central Government Budgetary Operations, Fiscal Years 1976 and 1977
10. Kenya: Expenditure and Lending Minus Repayments by Economic Type for Budgetary Central Government, Fiscal Years 1976 and 1977
11. Kenya: Monetary Survey, December 1974–June 1977
12. Kenya: Summary Accounts of the Monetary Authorities, December 1974–June 1977
13. Kenya: Summary Accounts of the Commercial Banks, December 1974–June 1977
14. Kenya: Balance of Payments Summary, 1976
15. Kenya: Income-Expenditure and Financial Transactions, 1976
16. Kenya: Transactions and Changes in Balance Sheet of the Private Sector, 1976
17. Kenya: Summary of Income and Flow-of-Funds Accounts, 1976
7 Workshop 5: The Polak Model: An Application
The Model
Definitions of Variables and Estimation of Parameters
Statistical Definitions of Variables
Statistical Data on Variables
Estimation of k and m
Use of Model for Forecasting and Policymaking
Forecasting
Monetary Policy
Exercises
Issues for Discussion
Appendices
I. Kenya: Statistical Data on Variables, 1968–76
II. Kenya: Ratios of Imports to Income and of Money to Income, 1968–76
Chart 1. Time Trends of M/Y and MO/Y
III. Regression Results, 1968–76
8 Workshop 6: Projection of Monetary Aggregates
Recent Monetary Developments in Kenya
Projections
Supply of Money and Quasi-Money
Demand for Money and Quasi-Money
Projections with a Simultaneous Equation Model
Exercises
Issues for Discussion
Tables
1. Kenya: Monetary Survey, 1973–77
2. Kenya: Summary Accounts of the Monetary Authorities, 1973–76
3. Kenya: Selected Statistical Data, 1966–76
9 Workshop 7: Revenue Forecasting
Preparation of Data
Tax Revenues and Bases
Adjustment of Tax Revenue to Current Structure Basis
Nontax Revenue
Statistical Estimation
Specification of Functional Relationships
Taxes on Income, Profits, and Capital Gains
Sales Tax
Import Duties
Excise Duties
Minor Taxes
Estimation Results
Taxes on Income, Profits, and Capital Gains
Sales Tax
Import Duties
Excise Duties
Minor Taxes
Exercises and Issues for Discussion
Tables
1. Kenya: Central Government Tax Revenue, Fiscal Years 1968–77
2. Kenya: Suggested Proxy Bases for Tax Revenues
3. Kenya: Data on Proxy Bases, Calendar Years 1967–77
4. Kenya: Budget Estimates of the Revenue Effects of Discretionary Tax Measures, Fiscal Years 1969–77
5. Kenya: Ratios of Actual to Estimated Tax Revenue, Fiscal Years 1969–77
6. Kenya: Central Government Nontax Revenue, Fiscal Years 1972–77
7. Kenya: Actual and Predicted Values for Selected Equations, Fiscal Years 1968–77
8. Kenya: Revenue Estimates of Discretionary Tax Measures, Fiscal Year 1978
9. Kenya: Budget Estimates of Tax Revenue, Fiscal Year 1978
Appendices
I. Kenya: Worksheet for Proportional Adjustment Method
II. Kenya: Summary of Tax System, July 1977
10 Workshop 8: Balance of Payments Forecasting
The External Sector in Kenya
Structure of the Foreign Sector
Recent Balance of Payments Developments
Methodology for Balance of Payments Forecasting
Imports
Exports
Other Items
Guidelines for Forecasting Balance of Payments in Kenya
Trade Account
Other Items
Exercises and Issues for Discussion
Tables
1. Kenya: Total Imports by Economic Category, 1973–77
2. Kenya: Direction of Trade, 1973–77
3. Kenya: Composition of Exports, 1973–77
4. Kenya: Balance of Payments Summary, 1973–77
5. Kenya: Actual and Predicted Values for Selected Equations, 1965–76
6. Kenya: Estimated Import Equations
7. Kenya: Agricultural Production and Exports, 1973–76
8. Kenya: Semiannual Indicators of Developments in Program Period, 1976–78
Charts
1. Kenya: Import Ratios, 1970–77
2. Kenya: Import Prices, 1970–77
3. Kenya: Services and Unrequited Transfers, 1970–77
4. Kenya: Nonmonetary Capital Flows, 1973–77
Appendix
Kenya: Selected Variables Influencing Balance of Payments, 1965–77
Kenya: Data on Selected Variables Influencing Balance of Payments, 1965–77
Table A. Kenya: Quarterly Changes in Balance of Payments Components, 1976–77
Table B. Kenya: Services and Transfers, 1973–77
Table C. Kenya: Nonmonetary Capital Flows, 1973–77
11 Workshop 9: Financial Programming
Nature of Financial Programming
Techniques for Formulating a Financial Program
Steps in the Financial Programming Exercise
Objectives and Policy Criteria for Kenya's Extended Facility Program
Policy Implementation and Economic Performance in Kenya in 1975–76
Economic Developments in Kenya in 1977
Production, Expenditure, and Prices
Balance of Payments
Public Finance
Money and Credit
Exercise and Issues for Discussion—A Hypothetical Financial Program for Kenya in 1978
Tables
1. Kenya: Total Availability and Use of Resources, 1974–78
2. Kenya: Selected National Accounts Data, 1975–77
3. Kenya: Sectoral Origin of Gross Domestic Product, 1974–77
4. Kenya: Balance of Payments Summary, 1976–77
5. Kenya: Summary of Central Government Budgetary Operations, Fiscal Years 1976–78
6. Kenya: Monetary Survey, 1973–77
7. Kenya: Summary Accounts of the Monetary Authorities, 1973–77
Appendix
Kenya: Selected Statistical Data, 1966–77
Answers to Exercises