Abstract

This book, written by the staff of the IMF Institute, offers a series of workshops on Kenya that are used as a case study in the Institute's course on Financial Analysis and Policy for officials of IMF member countries. The workshops combine theory and practice for a better understanding of the use of major financial policy instruments in the management of national economies.

Financial Policy Workshops:

The Case of Kenya

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. 0ystein 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 Guitian, 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