Journal Issue

IMF Executive Board Concludes 2008 Article IV Consultation with Kenya

International Monetary Fund
Published Date:
October 2008
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On September 10, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kenya.1


Kenya’s macroeconomic performance continued to improve until violence erupted in the aftermath of the general elections of December 2007. GDP growth reached 7.0 percent in 2007, the highest in more than two decades. Economic activity weakened, however, in the wake of the political instability in early 2008 and real GDP is expected to have slowed to about 4 percent in 2007/08 (July/June). Inflation increased sharply in recent months, in part related to developments in global food and fuel prices.

The fiscal deficit (including grants) for 2007/08 is estimated at 4.8 percent of GDP. This was below the original budget target, reflecting foremost a strong revenue performance. For 2008/09, the budget envisages a deficit of 5.3 percent of GDP, with spending shifting toward infrastructure and other priority areas.

Monetary policy was tightened in June 2008 to address rising inflationary pressures. For much of 2007/08, reserve money growth had exceeded the authorities’ target and private sector credit growth had also remained robust.

The external current account deficit almost doubled in 2007/08 to 4.6 percent of GDP, due largely to higher oil import prices. Sizable capital inflows contributed to an appreciation of the Shilling against most major currencies and a strengthening of the overall balance of payments position, with gross international reserve increasing to the equivalent of 3.1 months of imports.

An Ex Post Assessment of IMF’s longer-term program engagement with Kenya found that macroeconomic policy during 1993-2007 was generally appropriately designed with sound implementation. The assessment also found, however, that the approach to governance reform was overly reactive and programs were overloaded—even though governance issues deserved the attention. The authorities considered the draft report to be balanced and objective, and noted that conditionality, particularly in the governance area, did not reflect realistic timetables or the constraints of Kenya’s legal system and political environment. Looking forward, the authorities suggested that both sides needed to learn lessons from the past and to aim for a “partnership” rather than a “supervisory” relationship.

Executive Board Assessment

Executive Directors commended the Kenyan authorities for maintaining economic stability in the wake of post-election turmoil in early 2008, and for their sound macroeconomic policies and progress with economic reform in recent years, which have contributed to strong economic growth and poverty reduction. Directors regretted the interruption of economic activity that resulted from the post-election turmoil, but were encouraged that a recovery seems to be underway following the return to political stability.

Directors noted, however, that downside risks remain, particularly from rising food and fuel prices and weakening global demand. They underscored that sound policies and continued structural and governance reforms are essential to maintain macroeconomic stability, restore strong growth, and advance toward the Millennium Development Goals.

Directors supported the focus of the 2008/09 budget on removing growth bottlenecks and improving social cohesion. At the same time, they stressed the importance of fiscal restraint in light of the strong recovery and inflationary pressures, and urged the authorities to accommodate spending priorities within a smaller-than-budgeted deficit. Directors encouraged the authorities to adopt a fiscal anchor based on the ratio of total public debt to GDP in light of the planned sovereign bond issue. They advised that the size, timing, and modalities of the planned international sovereign bond issue be carefully considered to safeguard debt sustainability, and that the proceeds be used for high-return infrastructure projects. In this context, Directors stressed the importance of establishing a comprehensive debt management strategy, and advised the authorities to continue to seek concessional financing as the best source for public investment.

Directors welcomed the recent tightening of monetary policy and the authorities’ readiness to tighten further to prevent the second-round effect of rising food and fuel prices. They urged the authorities to take more decisive steps to reduce monetary growth to rates consistent with their inflation objective. They called for quick action to address the upward methodological bias in the compilation of the consumer price index. Directors supported the authorities’ plans to reform the monetary operations framework, including through the introduction of inflation targeting. However, they stressed that more analytical work is needed and institutional and statistical pre-conditions should be put in place before inflation targeting is adopted.

Directors observed that the managed float exchange rate regime has served Kenya well. They considered that the appreciation of the real exchange rate is broadly consistent with Kenya’s improving economic fundamentals, which have helped to attract financial inflows. Nevertheless, Directors stressed the importance of monitoring developments in competitiveness in view of the widening external current account deficit.

Directors agreed that far-reaching structural reforms and infrastructure improvements will be required to achieve the authorities’ Vision 2030 growth objectives. Priority reforms should include those in the financial sector, public financial management, and the regulatory and trade regimes. Directors believed that public-private partnerships can play a useful role in building Kenya’s infrastructure, provided the contractual arrangements are transparent and the contingent liabilities are fully assessed.

Directors stressed the importance of continued progress on governance and transparency reforms. They welcomed the authorities’ intention to update the 2006/07 Governance Action Plan, under which advances had been made in important areas, including public procurement and business regulation. Directors encouraged more progress in areas where original objectives have not been met, including for wealth declarations and verifications for senior public officials. Further improvements in public financial management would also be important.

Directors broadly concurred with the findings and recommendations of the Ex Post Assessment of Kenya’s long-term program engagement with the Fund. They agreed that macroeconomic policy design under past programs was broadly appropriate and that implementation was generally sound. However, they noted that aspects of the past engagement were disappointing—in particular, the protracted focus on governance issues. Directors were concerned that program conditions on governance were not always macro-critical, did not take into consideration constraints of Kenya’s legal and political systems, or paid sufficient attention to program ownership. Directors welcomed the improved ownership and performance in recent years and believed that the Fund should continue to play a key role in helping the authorities design and implement sound policies. In this regard, they welcomed the consideration being given by the authorities to modalities for future engagement with the Fund, possibly in the context of a Policy Support Instrument.

Directors welcomed the authorities’ decision to publish all reports, including the reports for the 2008 Article IV consultation and Ex Post Assessment of Kenya’s longer-term program engagement with the Fund.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Kenya: Selected Economic Indicators, 2005/06-2009/10
(Annual percentage change, unless otherwise indicated)
National accounts and prices
Real GDP growth (market prices)
Consumer price index (annual average)11.110.418.514.55.0
Consumer price index (end of period)10.911.
Ksh per US $ exchange rate (end of period)69.362.664.6
Money and credit
M3 (broad money, end of period)
M3X (broad money and foreign currency deposits, end period)14.918.919.417.316.0
Reserve money (end of period)14.017.519.615.014.6
(In percent of GDP, unless otherwise indicated)
Investment and saving
Central government4.
Gross national saving16.016.715.415.316.6
Central government0.
Central government budget
Total revenue20.521.722.321.621.6
Total expenditure and net lending25.224.428.327.626.7
Overall balance (commitment basis) excluding grants-4.7-2.7-6.0-5.9-5.2
Overall balance (commitment basis) including grants-3.4-1.8-4.8-4.6-3.8
Balance of payments
Exports value, goods and services26.625.524.925.225.1
Imports value, goods and services35.935.236.639.237.6
Current external balance, including official transfers-2.0-2.4-4.6-6.7-5.4
Current external balance, excluding official transfers-2.3-2.4-4.8-6.7-5.4
Gross international reserve coverage
in months of next year imports (end of period)
Public Debt
Domestic debt, net (end of period)18.419.518.517.718.5
Nominal central government debt (end of period)45.142.338.838.038.6
of which: external debt (end of period)26.722.820.320.320.2
Sources: Kenyan authorities; and Fund staff estimates and projections.
Sources: Kenyan authorities; and Fund staff estimates and projections.

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. 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.

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