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Kenya

Author(s):
International Monetary Fund
Published Date:
June 2009
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I. Recent Developments and Exogenous Shocks

1. Sound economic policies and a favorable external environment contributed to Kenya’s strong economic performance during 2004–07, when real GDP growth averaged 6 percent, peaking at 7 percent in 2007. Significant progress was made in addressing long-standing weaknesses in public finance management, the financial sector, and the business climate. Some progress was achieved on governance related issues; but much still remains to be done.

2. Against this background, the economy entered 2008 with strong momentum that was stalled by violence related to the December 2007 election. The disturbance soured sentiments towards the tourist industry and took a toll on economic activity in agriculture and manufacturing. In the first quarter of 2008, real GDP contracted by 1.1 percent (year-on-year), on account of strong decline in agriculture and forestry, which shrank by 4.4 percent. Tourist arrivals were down by over 30 percent. Inflation also accelerated due to the supply disruptions and dislocations, and an accommodative monetary policy1.

Kenya: Real GDP and Inflation Developments, 2005–08

Source: Kenyan authorties, and staff estimates and projections.

3. The economy was on its way to recovery in the second quarter of 2008 but the recovery was stalled by the onset of exogenous shocks. Real GDP growth initially rebounded to 3.4 percent, balance of payments pressures eased, the currency strengthened due to increased capital inflows associated with the Safaricom IPO, which also strengthened the fiscal position. But this was not sustained through the end of the second quarter, as a series of exogenous but temporary shocks hit the economy, putting severe pressure on domestic prices, the external current account, the fiscal position, exchange rate, and international reserves. The shocks include:

  • Rising international prices, particularly of fuel and fertilizer. This resulted in low utilization of mechanized land and fertilizer, contributing to lower yields and food supplies, particularly maize, the country’s staple crop.

  • Poor rainfall in October–November 2008, which exacerbated the decline in maize production.

  • Global financial crisis; which intensified in the last quarter of the year curtailed export growth, tourism receipts, remittances and private capital flows.

International Commodity Price Indexes; January 2007 = 100

Sources: Fund sources and institutional databases.

II. The Impact of the Exogenous Shocks

4. The exogenous shocks have had a large adverse impact on the balance of payments (Box 1), which has weakened substantially since the first half of 2008/09, and are a primary source of the balance of payments problems. For 2009/10 staff and the authorities project an improvement in the overall balance of payments. While exports earnings, tourism receipts, and remittances would remain depressed, improving terms of trade, largely on account of low oil prices would keep the import bill down, allowing for an improvement in the current account. Moreover, with the expected gradual recovery of the global economy, capital flows are projected to pick up in the first half of 2010, contributing to a modest improvement in the overall balance of payments. But these developments would not be enough to offset the losses incurred in 2008/09. Under these circumstances, the rebuilding of official reserves would be difficult without additional external assistance.

Box 1.The Balance of Payments Impact of Exogenous Shocks

Since the first half of 2008/09, a series of adverse exogenous shocks have affected Kenya and are the primary source of the deterioration of its balance of payments (BOP) and the ensuing financing gap. In 2007/08, Kenya’s current account deficit widened owing primarily to rising oil, fertilizers, and other commodity import prices. Nonetheless, thanks to ample net private capital inflows that more than offset the larger current account deficit, the overall BOP was positive, allowing for an accumulation of reserves. The picture has changed since the second half of 2008. Despite the decline in oil prices, substantially lower private capital flows, subdued exports and tourism receipts, and high drought driven maize imports weakened Kenya’s estimated 2008/09 and 2009/10 balance of payments, eroding official foreign exchange reserves. As discussed below, staff estimates indicate that exogenous shocks are responsible for at least 70 percent of the US$ 1.95 billion (6½ percent of GDP) cumulative deterioration in the BOP during 2008/09–2009/10 compared with 2007/08 (Text Table 1). During this period, gross official financing (mainly project grants and loans) is projected to increase by US$544 million relative to 2007/08 (Text Table 1). There is a remaining financing gap of about US$201 million for which the authorities seek financing.

Staff estimates the cumulative adverse impact of exogenous shocks on the BOP during 2008/09 and 2009/10 at 4½–7¼ percent of GDP (US$1.4–US$2.2 billion). The estimates are obtained from two alternative methods. These methods use the same assumptions about the non-merchandise items and different assumptions about merchandise items. For the non-merchandise items—tourism, remittances receipts and private capital flows, the projected decline relative to 2007/08 is assumed to be driven by the global financial crisis. For the merchandise items, the two methods use different assumptions about the volume of imports and exports. As the non-merchandise items are identical in the two alternatives, the difference between the two estimates of the adverse impact of the exogenous shock reflects differences in trade volume assumptions. The upper estimate, 7¼ percent of GDP, takes into account the full effect of price and volume changes, using projected prices and volumes for 2008/09 and 2009/10 (alternative A). The lower estimate, 4½ percent of GDP, reflects an impact on the trade balance that takes into account price changes only, assuming volumes remain constant at their 2007/08 levels (alternative B). The decline in net FDI and short-term capital flows, the single most important driver of the BOP deterioration, represents over 7 percent of GDP.

Selected Imports and Exports and Capital flows, 2006/07–2009/10,

(in millions of US dollars)

Cumulative Balance of Payments Impact of Exogenous Shocks During 2008/09–2009/10, relative to 2007/08,

(in percent of GDP)

Sources: Kenyan authorities and staff estimates and projections.

The methodology based on a constant volume assumption tends to underestimate the magnitude of the exogenous shocks’ impacts. Specifically, it does not allow for quantity adjustments in response to changing prices, external demand or changing domestic factors, including the drought-driven need for increased maize imports for which the government appealed to donors for support, and the need for higher oil import volumes as the economy grows.

Nonetheless, in both alternatives, the cumulative impact of the exogenous shocks during 2008/09–2009/10 is substantial. As indicated above, it is responsible for the estimated financing gap during the same period, as well as the decline in gross official reserves to less than 3 months of imports by end 2009/10, from over 3½ months of imports at end-2007/08.

Text Table 1.Estimated Impacts of Exogenous Shocks on the Balance of Payments, 2008/09–2009/10

(In millions of US dollars, unless otherwise indicated) 1

Alternative AAlternative B
Projected prices and volumes22007/08 volumes and projected prices2
CumulativeCumulative
2007/082008/092009/102008/09-2009/102008/092009/102008/09-2009/10
I. Goods balance (1)-130248119411541952
Tea exports3120-526865-158-93
Horticulture exports-95-87-182-73-144-217
Coffee exports3-37-51-88-27-47-74
Net oil and oil products-1014523514028231225
Exports-63-73-136-25-52-77
Imports-385254874288751302
Fertilizers imports404281405898
Maize imports3-56-55-1124913
II. Services and transfers (2)-55-125-180-55-125-180
Tourism receipts3-36-79-115-36-79-115
Remittances-19-46-65-19-46-65
III. Net FDI (3)-234-425-659-234-425-659
In percent of 2007/08 GDP-0.8-1.4-2.2-0.8-1.4-2.2
IV. Short-term capital (4)-1064.8-412-1,477-1,065-412-1,477
In percent of 2007/08 GDP-3.5-1.4-4.9-3.5-1.4-4.9
V. Total impact of identified exogenous factors (5)=(1)+(2)+(3)+(4)-1483-714-2197-943-421-1,364
In percent of 2007/08 GDP-4.89-2.4-7.24-3.1-1.4-4.5
VI. Overall net change in the balance of payments (6)-14002-459-1,945-1,4002-459-1,945
In percent of 2007/08 GDP-4.9-1.5-6.4-4.9-1.5-6.4
VII. Net effect of other factors4 (7)=(6)-(5)-3.4255251-544-38-582
In percent of 2007/08 GDP0.00.80.8-1.8-0.1-1.9
Memorandum Items
Change in gross official financing (mainly project grants and loans)1139405544139405544
In percent of 2007/08 GDP0.51.31.80.51.31.8
Gross official reserves (outstanding/projected)3,4432,7962,9992,7962,999
(In months of following year’s imports)3.63.12.93.12.9
Gross official reserves without ESF financing to close the gap264527982,6452,798
(In months of following year’s imports)2.92.72.92.7

The fiscal year runs from July to June. Figures shown reflect changes relative to the reference year 2007/08.

Actual prices or volumes refer to 2007/08 and projected ones refer to outer years.

The impact of the post-election violence is excluded from exogenous shocks. It is estimated that without the post-election disruption to production, tea and coffee exports in 2007/08 would have been 5 percent higher than observed, and maize imports in 2008/09 would have been 10 percent lower than currently projected. Also, the decline in tourism flows registered in the first half of 2008 is attributed to post-election violence.

The net effect of other factors is a residual, reflecting changes in the balance of payments not singled out in the Table. In alternative A where the impact of both price and volume changes is captured, this effect is positive, reflecting in part larger official flows relative to 2007/08. However in alternative B, it is negative because it includes a weaker trade balance effect, not captured as such owing to the constant volume assumption.

The fiscal year runs from July to June. Figures shown reflect changes relative to the reference year 2007/08.

Actual prices or volumes refer to 2007/08 and projected ones refer to outer years.

The impact of the post-election violence is excluded from exogenous shocks. It is estimated that without the post-election disruption to production, tea and coffee exports in 2007/08 would have been 5 percent higher than observed, and maize imports in 2008/09 would have been 10 percent lower than currently projected. Also, the decline in tourism flows registered in the first half of 2008 is attributed to post-election violence.

The net effect of other factors is a residual, reflecting changes in the balance of payments not singled out in the Table. In alternative A where the impact of both price and volume changes is captured, this effect is positive, reflecting in part larger official flows relative to 2007/08. However in alternative B, it is negative because it includes a weaker trade balance effect, not captured as such owing to the constant volume assumption.

5. The impact of the shocks on monetary and exchange rate developments has been pronounced. At end 2008, broad money and aggregate credit growths slowed, consistent with the lower than projected real income. During the first half of the 2008, the exchange rate appreciated as capital inflows increased. However, by the end of the year, the combined effect of the global financial crisis and the strengthening of the US dollar resulted in increased capital outflows, with the exchange rate depreciating with respect to the US dollar by 24 percent in the year. The strengthening of the US dollar against other currencies in Central Bank of Kenya (CBK) foreign assets portfolio also contributed to some revaluation loss. The shilling has depreciated in nominal effective terms in the second half of 2008, and has shown some downward pressure since then. In real effective terms, it depreciated by about 10 percent since the beginning of 2008.

Monetary Aggregates Growth, 2006–09

Effective Exchange Rates, Jan 2006–Mar 2009

(Jan 2006 = 100)

Source: Kenyan authorities, and Fund staff estimates and projections.

6. The global financial crisis has so far had minimal effects on the banking system, but the impact on the capital market has been pronounced. The banks’ regulatory capital asset ratio (CAR) was above 18 percent as at-end December 2008 and all banks met the minimum capital and liquidity requirements. Initial stress tests indicate that in the event of a deterioration in loan performance three banks whose CAR’s are just above the required level would need to replenish their capital. These three banks account for 13 percent of the total banking system deposit liability. Going forward, however, the quality of loan portfolios is likely to deteriorate in the months ahead, particularly in banks exposed to the tourism and export sectors. In the capital market, as portfolio investor confidence waned in the second half of the year, equity prices on the Nairobi Stock Exchange fell by some 40 percent, in line with developments in major stock exchanges. The exit of foreign investors from the stock exchange was particularly pronounced in the last quarter of 2008.

Stock Exchanges Indices, Jan 1, 2007 = 100

Foreign Investment in Equity, Net Flows in 2008

Millions of Shillings

Sources: National authorities; and staff estimates and projections.

7. The exogenous shocks have weakened the government’s fiscal outlook. After a strong performance in 2007/08 despite the political events of early 2008, revenue collections were below the budgeted level during the first 9 months of fiscal 2008/09 (July/June), reflecting a slowing economy. However, expenditures were also lower than budgeted on account of slow implementation of externally financed projects. Unfortunately, the unfavorable economic environment led to the postponement of planned sovereign bond issue and privatization. Together with the need to finance necessary drought mitigation measures, the postponement has created the need for domestic financing of 4 percent of GDP.

Kenya: Fiscal Developments, 2003/04–2009/10

Source: Kenyan authorities, and staff estimates and projections.

8. The drought and higher food prices have had a pronounced impact on the poor and vulnerable. According to the government and the UN, due to the drought, food insecurity has increased by about 47 percent, and now stands at around an estimated 10 million people. Food insecurity has deepened in the agricultural areas due to the drought, while in the urban areas the reduction in disposable income was an additional factor, resulting in a decline in household food consumption in outskirts of Nairobi and Mombasa.

9. Jointly, the shocks, though temporary, have constrained economic growth and fuelled inflationary pressures. Real GDP growth is now estimated at about 2 and 3 percent for 2008 and 2009, respectively. Headline inflation2, which accelerated in 2008 Q1 due to rising global food and fuel prices, was sustained by pronounced currency depreciation, despite a reduction in the growth of monetary aggregates. By end-2008, inflation reached 27.7 percent, averaging 26.2 percent for the year as a whole. Underlying inflation increased from 5.3 percent at the end of 2007 to 9 percent in December, but has since declined.

III. Policy Response, Request for Disbursement under the RAC of the ESF, and Macroeconomic Framework

A. Initial Policy Response and Request for Disbursement under the RAC of the ESF

10. Several measures were introduced to mitigate the initial impact of the drought on the vulnerable, as well as to moderate the macroeconomic impact of other exogenous shocks.

  • Mitigation of the impact of high food prices. The government introduced a maize subsidy scheme in late 2008. The National Cereals and Produce Board sold maize to millers at below market prices, with the savings passed on to consumers. However, this scheme depended on farmers selling to the National Cereal and Produce Board (NCPB) at below-market prices, which they refused to do. Consequently the scheme was abandoned in early 2009. At the same time, to lower the market price of imported maize, the government has suspended VAT and customs duties. The government has begun working with the World Bank on a well-targeted subsidy program to be introduced by the end of 2009. Additional fiscal policy measures are planned for implementation in the revised 2008/09 budget.

  • Declaration of food emergency. The government declared a food emergency for an estimated 10 million food-insecure Kenyans, and appealed to donors for US$410 million in food and agriculture-related support, As part of the response of the donor community, the World Food Program has appealed for over US$ 200 million, and other donors have indicated their willingness to support this appeal. Should realized donor support exceed US$133.5 million, the government plans to increase agricultural inputs related imports.

  • Running down of reserves. In the wake of the financial crisis in the third quarter of 2008, CBK did not go to the market to replace foreign exchange sold to government to finance external payments, to avoid putting further pressure on the exchange rate. Official reserves therefore continued to decline.

  • Easing of the stance of monetary policy. An accommodative monetary policy stance that began in early 2008 through increased reverse repurchase operations by year, and continued into the first quarter of 2009. As of March 2009, CBK had cut the policy rate by a total of 75 basis points, and reduced the cash reserve requirement by 1 percentage point. Despite these efforts to inject liquidity, reserve money, the CBK’s operational aggregate remains well below target. Nonetheless, short-term interest rates have fallen since December, with 91-day T-bill, repo and interbank rates standing at about 7.4 percent, 4.3 percent and 5.5 percent respectively, at mid-March.

  • Enhancing financial sector surveillance CBK stepped up supervision of all banks, and a special inspection of a major international bank in order to better monitor possible risks to the financial sector arising from the global financial crisis and the economic slowdown. Additional reporting standards, in particular of non-performing loans by sector was introduced.

Text Table 2.Donor Pledge and Other Additional Financing for 2009(millions of US dollars)
Financing gapIdentified Assistance
1 Original BOP financing gap334.5
2 Food Security Appeal1128.5
China3.0
Japan5.0
The United Kingdom, DFiD7.5
The US, USDA83.0
World Bank-managed GFCR Facility230.0
3 World Bank Northern Corridor project5.0
4 Remaining gap3201.0
Sources: Kenyan authorities, and staff estimates and projections.

Assistance identified so far in response to the government and World Food Program appeals.

GFCR stands for Global Food Crisis Response. The European Union will provide US$25 million, and the remaining US$5 million is the World Bank’s own contribution.

This gap is for calendar year 2009 but 25 percent is reflected in the 2009/10 balance of payments.

Sources: Kenyan authorities, and staff estimates and projections.

Assistance identified so far in response to the government and World Food Program appeals.

GFCR stands for Global Food Crisis Response. The European Union will provide US$25 million, and the remaining US$5 million is the World Bank’s own contribution.

This gap is for calendar year 2009 but 25 percent is reflected in the 2009/10 balance of payments.

Kenya: Key short term interest rates, 2007–09

Source: Kenyan authorities, and staff estimates and projections.

11. Despite these policies, the impact of the shocks poses several challenges to the economy. Food price increases are not expected to dissipate at least until after the third quarter, when the long rains are expected to boost food supplies. Thus, there would be need to increase imports of maize through August 2009 to ensure food availability and stabilize domestic prices. This is expected to further erode official foreign exchange reserves and put pressure on the exchange rate, at the time when the prospects for exports, remittances, and capital inflows are being threatened by the global slowdown.

12. Against this background, the authorities have requested Fund support under the Rapid-Access Component of the ESF in the amount of SDR135.7 million, or about US$201 million. The requested access would close the cumulative financing gap estimated for 2008/09 and 2009/10, while enabling Kenya to start rebuilding foreign reserves which are estimated to fall by 23 percent or almost US$800 million between 2007/08 and 2008/09 in the absence of financing under the ESF. The request for 50 percent of quota is justified because it would enable Kenya to step up its reserve build up in a way that does not disrupt the domestic financial market or cause macroeconomic instability. The facility would therefore also enable Kenya to bolster further market confidence in the difficult period ahead.

B. Macroeconomic Framework

13. The authorities recognize that supportive macroeconomic policies and structural reforms are needed to reduce future balance of payments vulnerabilities and set the economy on the path to strong economic growth. Therefore, they plan to implement a set of macroeconomic and structural policies aimed at maintaining macro-economic stability, reigning in inflation and sustaining economic growth and poverty reduction.

Monetary, Exchange Rate, and Financial Sectors Policies

14. Monetary and exchange rate policy would focus on reducing inflation, providing sufficient liquidity to support economic activity while allowing for a gradual build up in official reserves. In the recent past, despite CBK’s countercyclical policy, including lowering of interest rates, the growth of monetary aggregates continue to slow down, signaling uncertainties about money demand. Going forward therefore, the CBK’s monetary program for the rest of 2008/09 and 2009/10 targets money growth at a rate only moderately higher than nominal GDP growth in the short run, while focusing on the objective of achieving a 5 percent inflation rate. The projected broad money growth of 13 percent in 2008/09 and 15.8 percent in 2009/10 would allow for adequate expansion of domestic credit to support economic activity without putting pressure on prices.

15. Consistent with the programmed money supply growth for 2009/10 is a foreign reserve accumulation path that enables CBK to gradually rebuild official reserves without jeopardizing the inflation objective. Under the program, CBK would resume foreign exchange purchases in the market and official reserves would increase gradually, from around US$2.6 billion in March 2009 to almost US$3.0 billion by end-June 2010, though in months of imports, there is a slight decline during the same period.

16. The authorities reaffirmed their commitment to a market-determined exchange rate. CBK will continue to maintain a managed float exchange rate regime to allow the exchange rate to reflect the economic fundamentals with interventions limited to smoothing out excessive volatilities in the exchange rate, and rebuilding reserves as indicated above.

17. To address the increased risks to the financial sector, the CBK is intensifying its oversight to ensure that banks are correctly classifying loans and making adequate and timely provision for bad and doubtful loans. CBK will continue to monitor carefully the liquidity conditions while implementing appropriate measures to deal with any perceived stress in the banking sector. In this regard, CBK has asked for technical assistance in developing a contingency plan for the financial sector. In the meantime, the banks are tightening their credit standards to mitigate the risks.

Fiscal Policy

18. The fiscal framework aims to strike the right balance between supporting growth and maintaining medium-term debt sustainability. Recent progress made in reducing public debt to GDP ratios gives the government some room to increase domestic borrowing in the short run to accommodate revenue and financing shortfalls. Thus, in line with the recommendations of the 2008 Article IV consultation, there would be a temporary departure from the medium-term debt-to-GDP ratio path, but smaller fiscal deficits over the medium term as the economy recovers would ensure debt sustainability. An updated debt sustainability analysis shows that Kenya continues to face low risk of debt distress despite the increased borrowing in the short run. Moreover, under the proposed monetary program, and considering the flight to safety by commercial banks, there is limited risk that increased government borrowing would crowd out credit to the private sector, which is likely to remain weak in the short run.

19. In response to the financing shortfall noted earlier, the authorities plan to reprioritize expenditures and increase domestic borrowing. A freeze on recruitments has been announced; some projects have been deferred to the next financial year, and some recurrent expenditures, such as those on travel and goods and services, have been cut. However, given the magnitude of the shortfalls and even with drought intervention mostly financed by donors, domestic borrowing on the order of 4 percent of GDP is considered necessary in 2008/09 to protect key expenditures on infrastructure and poverty reduction, as well as to support aggregate demand against the backdrop of a slowing economy. Nevertheless, the overall budget deficit is projected at 5.2 percent of GDP, slightly lower than the originally budgeted 5.3 percent of GDP, but higher than the 3.6 percent of GDP in 2007/08. For 2009/10, facing a similarly unfavorable economic outlook, the authorities intend to continue allowing automatic stabilizers to operate, with an expected fiscal deficit of 5.4 percent of GDP and total net domestic borrowing of about 4.2 percent of GDP in the absence of any sovereign bond issuance. The authorities continue to hope that they will be able to issue a sovereign bond of US$500 million (1.5 percent of GDP) in 2009/10 to finance key infrastructure projects. Should this issuance take place, which may prove difficult, they would reduce domestic borrowing by an equivalent amount.

C. Structural and Governance Policies

20. The macroeconomic framework would be supported by appropriate structural and governance reform policies, to improve long-term growth potential. The major areas of focus, as indicated in the authorities’ Letter of Intent are fiscal, monetary, financial and governance reforms. In the fiscal sector, they plan to focus on improved public financial management and related areas. On monetary and financial sector issues, they plan to complete revisions to the CPI that takes into account international best practice in terms of methodology, as well as new weights and expanded coverage of items in the basket. They also plan to undertake the Financial Sector Assessment Program (FSAP) update in the Fall of 2009. There are also plans to continue strengthening the governance agenda in the context of the updated Governance Action Plan (GAP).

21. A comprehensive reform of the subsidy program to more effectively target the poor is also planned. The new program to be introduced by December would better target the poor, reduce the impact of food prices on the vulnerable, and be transparent in its operations and implications for fiscal costs. In addition, the current ban on maize exports would be lifted as soon as the targeted subsidy program begins to work. The food situation would be reassessed in August with a view of extending the current suspension of import duties on maize imports, if needed, and there are also plans to maintaining a full pass-through of world petroleum prices.

IV. Risks To The Outlook

22. Staff projects that economic growth is likely to remain low in 2009/10. While barring abnormal weather, agriculture is expected to rebound from the poor harvest in 2008, export, remittances and capital flows are likely to remain depressed in line with global developments; constraining domestic demand and growth. Therefore, risks to the outlook are tilted to the downside and staff currently project that GDP would grow by about 3 percent in 2009/10. Worse than anticipated global economic developments would create substantial headwinds, further depressing merchandise exports, tourism, remittances, and capital flow. These would further restrain growth and weaken the balance of payments.

23. There are also risks from the domestic political situation, as tensions within the coalition government could threaten political stability. While the coalition has provided some stability for economic recovery, there have been tensions about the terms of the power-sharing arrangement in recent times. In addition, the coalition is yet to start to address key constitutional and electoral issues which fuelled the violence, as well as the thorny issues of land grievances. A breakup of the coalition could create further political tensions, which would impact negatively on economic growth.

V. Capacity to Repay the Fund

24. Kenya has adequate capacity to repay the Fund. The country has a relatively low stock of external debt, and the debt sustainability analysis places Kenya at a moderate risk of debt distress. Assuming strong implementation of the supporting macroeconomic polices for the program, the NPV of public and publicly guaranteed external debt is projected at 47.9 percent of exports of goods and services; and 11.8 percent of GDP by end 2009. Projected repayment to the Fund will remain under 0.5 percent of exports of goods and services over the medium-term. In preparation for the purchase of Fund resources, CBK has initiated an update of the safeguard assessment.

VI. Staff Appraisal

25. Kenya has been hit by a series of exogenous but temporary shocks. These include high international food, fuel, and fertilizer prices, and poor rainfall subsequently resulting in poor harvests; the global financial crisis and the associated slowdown in global external demand. The shocks have resulted in a temporary loss of reserves, eroded the achievements of the past five years, weakened macroeconomic stability and increased vulnerability to further shocks.

26. The authorities’ initial response to the shocks has been strong, and have allowed for temporary moderation in the impact. VAT and customs duty were suspended to lower the cost of maize imports, and increase food availability. Monetary policy was eased to support economic activity, and fiscal policy has been largely accommodating without endangering debt sustainability. Together, these policies have allowed Kenya to achieve a moderate level of economic activity during the global economic slowdown.

27. The authorities have also committed to additional macroeconomic and structural policies designed to reinforce macroeconomic stability, reduce inflation, and rebuild reserves. A gradual reserve accumulation path consistent with the desired reserve money growth would ward off undue volatility in the exchange rate, and disruption in the foreign exchange market. Reserve accumulation would allow for weathering of future shocks to the economy. Fiscal policy would provide a stimulus to the economy and protect key infrastructure and social spending while ensuring sustainable debt to GDP ratio over the medium term.

28. Staff welcomes the authorities’ commitment to advancing broad-based structural and governance reforms to ensure strong economic growth over the medium and long term. Priority will be given to the reforms of public finance management, governance, and financial sector which are much needed to compliment sound macroeconomic policies. Introduction of a targeted subsidy framework would address the food deficit in an efficient manner.

29. Staff supports the authorities’ request for disbursement under the Rapid-Access Component of the ESF, noting that the medium-term outlook is not favorable to the rebuilding of reserves to the pre-crisis level. The requested access would help the authorities achieve their economic objectives and close the projected financing gap while enabling the country to get support from other donors. The authorities are strongly encouraged to implement their policy package to reduce the economy’s vulnerability to adverse shocks, monitor developments closely, and be ready to take actions that may be needed to strengthen economic performance and bolster market confidence should risks materialize.

30. There are risks to the macroeconomic program. However, in light of the authorities’ track record in macroeconomic management, and their commitment to sound policies, the program has a good chance of success.

Table 1.Kenya: Selected Economic Indicators, 2006/07-2013/2014
2006/072007/082008/092009/102010/112011/122012/132013/14
EstimateProjections
(Annual percentage change, unless otherwise indicated)
National accounts and prices
Real GDP growth (market prices)6.73.53.03.15.26.36.56.5
GDP deflator (average) 15.511.712.210.15.94.44.94.9
Consumer price index (annual average) 110.418.511.19.25.05.05.05.0
Consumer price index (end of period) 111.129.38.65.45.05.05.05.0
Import volume growth, goods10.37.55.86.87.88.58.18.5
Import value growth, goods23.618.45.3-5.412.811.811.011.7
Export volume growth, goods3.910.78.47.19.010.510.611.3
Export value growth, goods9.317.56.3-0.110.912.314.415.7
Terms of trade, goods-5.8-5.19.51.2-3.1-1.40.51.0
Ksh per US $ exchange rate (end of period) 262.664.678.3
Nominal effective exchange rate (- depreciation; end of period)5.93.0
Real effective exchange rate (- depreciation; end of period)14.27.8
Money and credit
M3 (broad money, end of period)16.018.27.819.3
M3X (broad money and foreign currency deposits, end period)17.018.713.015.8
Reserve money (end of period)19.818.27.613.8
(In percent of GDP, unless otherwise indicated)
Investment and saving
Investment19.115.715.917.218.118.719.320.6
Central government4.66.77.99.19.39.38.89.1
Other14.59.08.08.18.89.410.511.5
Gross national saving15.711.19.912.713.314.115.116.9
Central government2.01.61.92.63.43.73.64.0
Other13.79.48.010.19.910.311.412.9
Central government budget
Total revenue21.721.822.321.721.721.721.721.6
Total expenditure and net lending24.427.128.528.527.727.527.126.9
Overall balance (commitment basis) excluding grants-2.7-5.4-6.2-6.8-6.0-5.8-5.4-5.3
Overall balance (cash basis) including grants-1.8-3.6-5.2-5.4-4.6-4.4-4.2-4.1
Net domestic borrowing2.0-0.74.04.22.72.52.62.0
Total donor support (grants & loans)1.52.42.93.43.43.33.03.3
Balance of payments
Exports value, goods and services26.324.926.423.821.621.221.822.6
Imports value, goods and services36.035.638.934.231.430.630.730.9
Current external balance, including official transfers-3.5-4.6-6.0-4.5-4.8-4.7-4.2-3.7
Current external balance, excluding official transfers-3.5-4.8-6.0-4.5-4.8-4.7-4.2-3.7
Gross international reserve coverage in months of next year imports (end of period)3.03.63.12.93.03.13.23.2
Public Debt
Total public debt, net (end of period)42.136.741.342.440.840.941.841.7
of which: external debt22.820.022.821.919.719.420.020.2
NPV of central government debt (end of period)34.928.329.931.831.632.233.133.1
of which: NPV of external debt15.611.611.411.310.510.711.311.6
Domestic debt, net (end of period)19.316.718.520.521.121.521.821.5
Sources: Kenyan authorities; and IMF staff estimates and projections.

Up to 2007/08, GDP Deflator and Consumer Price Index are overestimated.

Actual as of May 15, 2009.

Sources: Kenyan authorities; and IMF staff estimates and projections.

Up to 2007/08, GDP Deflator and Consumer Price Index are overestimated.

Actual as of May 15, 2009.

Table 2a.Kenya: Central Government Financial Operations, 2006/07–2013/14 1/
2006/072007/082008/092009/102010/112011/122012/132013/14
ActualEst.BudgetStaff

Projection
Staff

Projection
Projections
(In billions of Kenyan shillings, unless otherwise indicated)
Revenue373.0432.2512.7510.7565.1629.5699.6780.0869.5
Income tax131.5165.5194.0193.3217.8242.6269.9301.6337.2
Import duty (net)27.532.936.536.541.644.848.851.856.6
Excise duty56.461.972.968.975.284.294.7104.8116.0
Value-added tax96.3111.9133.9128.6141.3158.7176.2198.7222.2
Investment income6.63.15.77.96.77.58.39.210.3
Other28.429.834.738.141.045.750.756.663.3
Ministerial and Departmental Fees (AIA)26.427.135.137.441.446.151.257.263.9
Expenditure and net lending419.5538.9673.0653.8741.7804.8886.0972.81,082.2
Recurrent expenditure339.2403.4471.7467.5497.7529.6579.3649.5709.6
Interest payments42.547.956.753.966.174.883.896.1102.3
Domestic interest36.942.249.447.858.066.774.181.788.3
Foreign interest due5.75.77.26.18.28.19.714.314.0
Wages and benefits (civil service)127.3146.0162.0158.8173.6189.5203.8227.7254.4
Civil service reform1.40.80.20.10.20.20.20.20.2
Pensions, etc.20.424.127.126.130.034.438.842.746.5
Other119.0139.7171.4179.8178.2178.9200.8225.5242.5
Defense and NSIS 2/28.744.950.848.949.651.851.857.363.5
Pending bills-0.10.03.60.00.00.00.00.00.0
Development and net lending80.3135.5198.3183.2240.7271.6302.7319.1368.3
Domestically financed53.590.3113.3115.2150.3157.6178.3192.5216.2
Foreign financed26.142.981.265.687.8111.6122.0124.2149.7
Of which: financed by sovereign bonds0.033.60.00.014.416.016.016.0
Net lending1.42.32.12.42.62.42.42.42.4
Pending bills-0.70.01.60.00.00.00.00.00.0
Drought Development Expenditure0.00.00.00.00.00.00.00.00.0
Civil Contingency Fund0.00.02.02.02.32.52.82.82.8
Drought expenditures0.00.01.01.01.01.21.31.41.6
Balance (commitment basis, excluding grants)-46.5-106.7-160.2-143.1-176.7-175.3-186.4-192.8-212.7
Grants15.525.533.825.035.641.545.842.846.4
Food/debt relief grants 3/0.00.40.00.00.00.00.00.00.0
Project grants15.521.333.825.035.641.545.842.846.4
Program grants0.03.80.00.00.00.00.00.00.0
Balance (commitment basis, including grants)-31.0-81.2-126.4-118.1-141.1-133.8-140.6-150.0-166.3
Adjustments to cash basis1.69.3-0.4-0.40.00.00.00.00.0
Balance (cash basis, including grants)-29.4-71.9-126.9-118.5-141.1-133.8-140.6-150.0-166.3
Financing35.559.8126.9118.5141.1133.8140.6150.0166.3
Net foreign financing-3.16.358.823.626.147.652.555.887.4
Project loans10.621.247.440.652.255.760.265.487.3
Program loans0.01.30.00.00.00.00.00.00.0
Commercial borrowing 4/0.00.033.60.00.014.416.016.016.0
Repayments due-16.7-16.5-16.6-17.5-20.9-22.5-23.7-25.6-15.8
Change in arrears0.7-0.3-6.10.0-5.20.00.00.00.0
Rescheduling / debt swap2.20.00.50.50.00.00.00.00.0
Privatization proceeds and other 5/4.076.313.70.06.07.57.72.00.0
Bank restructuring costs 6/-20.0-1.10.00.00.00.00.00.00.0
Expenditure arrears securitization costs0.0-0.1-0.10.00.00.00.00.00.0
Telkom restructuring costs (cash) 7/-8.80.00.00.00.00.00.00.0
Bank restructuring financing 6/20.01.10.00.00.00.00.00.00.0
Telkom/KPRL refinancing2.5
Net domestic financing34.7-13.954.592.3109.078.780.492.278.9
Financing gap (stat. discrepancy for outturns)-6.212.10.00.00.00.00.00.00.0
Memorandum items:
Nominal GDP1,717.51,986.02,393.22,294.12,604.62,900.53,218.13,594.34,017.0
Primary budget balance13.2-24.0-70.2-64.5-75.0-59.1-56.9-54.0-64.0
Stock of domestic debt, net (end of period)332.3332.1386.6424.4533.5612.2692.6784.8863.7
NPV of total public debt, net613.7564.7677.1840.5930.01,041.31,186.21,325.4
Total public debt, net723.4729.8947.71,103.21,182.21,317.81,502.61,674.5
Sources: Kenyan authorities; and IMF staff estimates and projections.

Fiscal year runs from July to June.

Includes a one-time allocation for payment of security-related arrears of Ksh 2 billion in 2007/08 budget.

Includes debt relief from a debt swap deal with Italy.

Includes planned sovereign bonds.

In 2008/09, this includes repayment from parastatals of expenditures that are pre-financed during 2008/09 by the central government budget.

Operation consists of recapitalization of National Bank of Kenya and financing this through issuance of a special purpose bond.

Operation consists of recapitalization of Kenya Telkom on account of its pension obligations and restructuring operation and financing this through cash injection.

Sources: Kenyan authorities; and IMF staff estimates and projections.

Fiscal year runs from July to June.

Includes a one-time allocation for payment of security-related arrears of Ksh 2 billion in 2007/08 budget.

Includes debt relief from a debt swap deal with Italy.

Includes planned sovereign bonds.

In 2008/09, this includes repayment from parastatals of expenditures that are pre-financed during 2008/09 by the central government budget.

Operation consists of recapitalization of National Bank of Kenya and financing this through issuance of a special purpose bond.

Operation consists of recapitalization of Kenya Telkom on account of its pension obligations and restructuring operation and financing this through cash injection.

Table 2b.Kenya: Central Government Financial Operations, 2006/07–2013/14 1/
2006/072007/082008/092009/102010/112011/122012/132013/14
ActualEstimateBudgetStaff

Projection
Staff

Projection
Projections
(In percent of GDP, unless otherwise indicated)
Revenue21.721.821.422.321.721.721.721.721.6
Income tax7.78.38.18.48.48.48.48.48.4
Import duty (net)1.61.71.51.61.61.51.51.41.4
Excise duty3.33.13.03.02.92.92.92.92.9
Value-added tax5.65.65.65.65.45.55.55.55.5
Investment income0.40.20.20.30.30.30.30.30.3
Other1.71.51.41.71.61.61.61.61.6
Ministerial and Departmental Fees (AIA)1.51.41.51.61.61.61.61.61.6
Expenditure and net lending24.427.128.128.528.527.727.527.126.9
Recurrent expenditure19.820.319.720.419.118.318.018.117.7
Interest payments2.52.42.42.42.52.62.62.72.5
Domestic interest2.12.12.12.12.22.32.32.32.2
Foreign interest due0.30.30.30.30.30.30.30.40.3
Wages and benefits (civil service)7.47.46.86.96.76.56.36.36.3
Civil service reform0.10.00.00.00.00.00.00.00.0
Pensions, etc.1.21.21.11.11.21.21.21.21.2
Other6.97.07.27.86.86.26.26.36.0
Defense and NSIS 2/1.72.32.12.11.91.81.61.61.6
Pending bills0.00.00.20.00.00.00.00.00.0
Development and net lending4.76.88.38.09.29.49.48.99.2
Domestically financed3.14.54.75.05.85.45.55.45.4
Foreign financed1.52.23.42.93.43.83.83.53.7
Of which: financed by sovereign bonds0.01.40.00.00.50.50.40.4
Net lending0.10.10.10.10.10.10.10.10.1
Pending bills0.00.00.10.00.00.00.00.00.0
Drought Development Expenditure0.00.00.00.00.00.00.00.00.0
Civil Contingency Fund0.00.00.10.10.10.10.10.10.1
Drought expenditures0.00.00.00.00.00.00.00.00.0
Balance (commitment basis, excluding grants)-2.7-5.4-6.7-6.2-6.8-6.0-5.8-5.4-5.3
Grants0.91.31.41.11.41.41.41.21.2
Food/debt relief grants 3/0.00.00.00.00.00.00.00.00.0
Project grants0.91.11.41.11.41.41.41.21.2
Program grants0.00.20.00.00.00.00.00.00.0
Balance (commitment basis, including grants)-1.8-4.1-5.3-5.1-5.4-4.6-4.4-4.2-4.1
Adjustments to cash basis0.10.50.00.00.00.00.00.00.0
Balance (cash basis, including grants)-1.7-3.6-5.3-5.2-5.4-4.6-4.4-4.2-4.1
Financing2.13.05.35.25.44.64.44.24.1
Net foreign financing-0.20.32.51.01.01.61.61.62.2
Project loans0.61.12.01.82.01.91.91.82.2
Program loans0.00.10.00.000.00.00.00.0
Commercial borrowing 4/0.00.01.40.00.00.50.50.40.4
Repayments due-1.0-0.8-0.7-0.8-0.8-0.8-0.7-0.7-0.4
Change in arrears0.00.00.30.00.20.00.00.00.0
Rescheduling / debt swap0.10.00.00.00.00.00.00.00.0
Privatization proceeds and other 5/0.23.80.60.00.20.30.20.10.0
Bank restructuring costs 6/-1.2-0.10.00.00.00.00.00.00.0
Expenditure arrears securitization costs0.00.00.00.00.00.00.00.00.0
Telkom restructuring costs (cash) 7/-0.40.00.00.00.00.00.00.0
Bank restructuring financing 6/1.20.10.00.00.00.00.00.00.0
Telkom/KPRL refinancing0.1
Net domestic borrowing2.0-0.72.34.04.22.72.52.62.0
Financing gap (stat. discrepancy for outturns)-0.40.60.00.00.00.00.00.00.0
Memorandum items:
Nominal GDP (billion of Ksh)1,717.51,986.02,393.22,294.12,604.62,900.53,218.13,594.34,017.0
Primary budget balance0.8-1.2-2.9-2.8-2.9-2.0-1.8-1.5-1.6
Stock of domestic debt, net (end of period)19.316.716.218.520.521.121.521.821.5
Total public debt, net42.136.741.342.440.840.941.841.7
Sources: Kenyan authorities; and IMF staff estimates and projections.

Fiscal year runs from July to June.

Includes a one-time allocation for payment of security-related arrears of Ksh 2 billion in 2007/08 budget.

Includes debt relief from a debt swap deal with Italy.

Includes planned sovereign bonds.

In 2008/09, this includes repayment from parastatals of expenditures that are pre-financed during 2008/09 by the central government budget.

Operation consists of recapitalization of National Bank of Kenya and financing this through issuance of a special purpose bond.

Operation consists of recapitalization of Kenya Telkom on account of its pension obligations and restructuring operation and financing this through cash injection.

Sources: Kenyan authorities; and IMF staff estimates and projections.

Fiscal year runs from July to June.

Includes a one-time allocation for payment of security-related arrears of Ksh 2 billion in 2007/08 budget.

Includes debt relief from a debt swap deal with Italy.

Includes planned sovereign bonds.

In 2008/09, this includes repayment from parastatals of expenditures that are pre-financed during 2008/09 by the central government budget.

Operation consists of recapitalization of National Bank of Kenya and financing this through issuance of a special purpose bond.

Operation consists of recapitalization of Kenya Telkom on account of its pension obligations and restructuring operation and financing this through cash injection.

Table 3.Kenya: Monetary Survey, 2006–10
Jun-06Jun-07Jun-08Sep-08Dec-08Mar-09Jun-09Sep-09Dec-09Mar-10Jun-10
Projections
(Billions of Kenyan shillings)
Central Bank of Kenya (CBK)
Net Foreign assets158.2163.7202.6208.7199.1193.4206.4218.3229.1218.9215.8
In millions of US$2148.72461.13145.22855.22566.12424.42580.02630.12705.12736.32766.7
Net domestic assets-50.3-34.3-49.6-56.1-35.5-37.9-41.9-49.6-44.6-40.7-28.6
Net domestic credit-37.0-16.8-20.7-12.7-1.5-6.2-4.1-10.8-2.20.214.5
Government (net)-15.8-3.5-27.7-15.10.00.93.44.76.17.58.8
Commercial banks (net)-23.4-15.74.50.0-4.0-9.7-10.0-18.1-10.8-9.83.1
Other items (net)-13.2-17.5-28.9-43.4-34.0-31.6-37.8-38.8-42.4-41.0-43.1
Reserve Money108.0129.4152.9152.6163.6155.5164.5168.7184.5178.2187.2
Currency outside banks67.278.183.685.493.788.098.7100.7107.3107.1114.3
Banks reserves40.851.269.367.269.967.565.767.977.271.172.9
Other Depository Corporation Survey
Net foreign assets32.059.188.753.959.972.985.591.699.298.099.0
In millions of US$434.6888.51377.8736.8771.3913.91068.71103.91171.61225.41269.3
Reserves40.851.269.367.269.967.565.767.977.271.172.9
Credit to CBK23.415.7-4.50.04.09.710.018.110.89.8-3.1
Net domestic assets441.9504.3603.6644.2664.2659.7690.0690.7737.6744.2816.9
Domestic credit535.1601.5727.0788.7806.0826.1856.0874.9933.7950.21036.9
Government (net)133.7160.6161.1165.1155.3167.2186.9189.6192.3195.0205.9
Other public sector12.212.510.112.211.87.410.412.612.27.610.7
Privates sector389.3428.4555.8611.4638.9651.5658.7672.7729.2747.5820.3
Other Items (Net)-93.3-97.2-123.4-144.5-141.8-166.4-165.9-184.1-196.1-206.0-220.0
Total deposits538.0630.2757.1765.3797.9809.7851.2868.4924.8923.1985.7
Depository Corporation Survey
Net Foreign assets190.2222.7291.3262.6259.0266.3291.9309.9328.3316.9314.8
In millions of US$2583.33349.64522.93592.03337.43338.33648.73734.03876.73961.74036.0
Net domestic assets415.0485.6549.4596.8642.1639.8658.1659.2703.8713.2785.3
Domestic credit521.5600.3701.8776.0808.5829.5861.8882.1942.3960.21048.3
Government (Net)117.9157.2133.4149.9155.3168.1190.2194.3198.4202.5214.8
Other Public Sector12.212.510.112.211.87.410.412.612.27.610.7
Private Sector*391.4430.7558.3613.9641.4654.0661.2675.2731.8750.1822.8
Other Items (Net) *-106.5-114.7-152.4-179.3-166.4-189.7-203.8-222.9-238.5-247.0-263.0
Money and Quasi-money (M3)522.0605.5716.0736.3766.4780.6771.8790.6853.3850.9920.5
M3 plus Residents’ Foreign Curr. Deposits (M3X)605.2708.4840.7859.3901.1906.1950.0969.11032.11030.21100.1
M3X plus Nonbank Holdings of Govt. Debt (M4X)765.6884.41028.61051.21091.91101.71173.41215.71301.91323.11408.0
Memorandum items:
(Annual percent change)
Money and Quasi-money (M3)18.016.018.216.714.912.07.87.411.39.019.3
M3 plus Residents’ Foreign Curr. Deposits (M3X)15.617.018.717.215.911.713.012.814.513.715.8
M3X plus Nonbank Holdings of Govt. Debt (M4X)15.815.516.314.512.49.514.115.619.220.120.0
Reserve Money14.219.818.214.54.21.67.610.512.814.613.8
Currency Outside Banks13.316.27.06.7-2.33.618.117.914.421.615.8
NFA22.917.130.816.41.46.70.218.026.819.07.8
NDA of the banking sector12.517.013.117.522.913.919.810.59.611.519.3
Domestic credit12.315.116.922.923.219.822.813.716.615.821.6
Government (net)5.033.3-15.1-6.513.04.742.629.627.720.512.9
Credit to private sector14.510.029.633.927.226.718.410.014.114.724.4
Other Items Net11.47.732.845.024.345.333.724.443.330.229.1
Money multiplier (M3X/RM)5.65.55.55.65.55.85.85.75.65.85.9
Money Velocity (GDP/M3X)2.62.52.42.32.32.32.32.32.32.32.3
Table 4a.Kenya: Balance of Payments, 2006/07–2013/14(In millions of U.S. dollars, unless otherwise indicated)
2006/072007/082008/092009/102010/112011/122012/132013/14
Est.Prel.Projections
Current account-849.3-1,410.4-1,769.8-1,458.3-1,870.2-2,084.1-2,090.9-2,034.5
Excluding official transfers-849.3-1,465.2-1,759.4-1,436.1-1,848.0-2,061.8-2,068.7-2,012.2
Exports, f.o.b.3,834.84,506.64,789.34,782.95,303.15,958.06,813.77,880.9
Coffee142.5169.3132.8118.0128.1139.7156.8178.0
Tea726.8754.8874.5702.9724.7793.2889.81,021.4
Horticulture552.0739.3644.6652.5746.3856.4999.31,191.2
Imports, f.o.b.-7,777.9-9,212.3-9,701.4-9,181.1-10,359.4-11,585.0-12,856.8-14,360.3
Oil-1,755.1-2,448.0-2,485.9-1,922.8-2,303.7-2,629.5-2,866.9-3,115.7
Other-5,902.7-6,739.2-7,108.5-7,162.2-7,955.8-8,851.9-9,882.4-11,132.9
of which: Special: Maize & sugar-132.3-100.0-257.4-224.8-164.5-176.6-185.9-191.7
Balance on goods-3,943.1-4,705.7-4,912.1-4,398.2-5,056.3-5,627.0-6,043.1-6,479.4
Services (net)1,568.61,455.11,219.51,064.61,222.41,445.71,682.61,936.2
Credit2,611.63,037.43,052.62,852.23,154.23,527.53,936.44,383.8
of which: foreign travel credit 1/731.6686.1649.9606.8713.4856.11,000.21,134.7
Debit-1,043.0-1,582.3-1,833.1-1,787.6-1,931.8-2,081.9-2,253.7-2,447.6
Balance on goods and services-2,374.5-3,250.6-3,692.6-3,333.6-3,833.8-4,181.3-4,360.5-4,543.2
Income (net)-84.3-45.6-29.8-40.5-61.6-77.1-96.5-96.5
Credit86.2149.1120.2116.5110.9122.8137.1154.3
Debit-170.5-194.7-150.0-157.1-172.5-199.9-233.6-250.8
of which: official interest payments-97.0-85.7-86.5-97.1-115.7-145.5-180.3-197.1
Other-73.4-109.0-63.6-60.0-56.9-54.4-53.3-53.6
Current transfers (net)1,609.51,885.81,952.71,915.72,025.22,174.32,366.12,605.2
Private (net)1,609.51,831.01,963.11,938.02,047.52,196.62,388.32,627.5
of which: remittances816.1952.8933.8906.8963.81,036.01,127.01,239.2
Official (net)0.054.8-10.4-22.3-22.3-22.3-22.3-22.3
Capital and financial account1,036.72,101.4974.51,690.32,266.52,603.12,699.92,662.0
Capital account (incl. capital transfers)223.9325.9319.7440.7562.9635.6587.1627.8
Financial account 2/812.81,775.5654.81,249.61,703.61,967.52,112.82,034.2
Net FDI622.7891.7658.1466.5534.5644.2703.3767.5
In Kenya682.5994.4677.6490.5558.5668.2727.3791.5
Abroad-59.8-102.7-19.5-24.0-24.0-24.0-24.0-24.0
Net Portfolio investment-22.6-36.5-10.3-2.23.47.48.59.6
Liabilities1.26.18.910.412.916.617.819.2
Assets-23.9-42.6-19.2-12.7-9.5-9.2-9.4-9.6
Net other investment212.8920.37.0785.31,165.81,315.81,401.11,257.1
Official, medium and long term-5.1163.4331.3464.6723.6798.4763.7976.8
Inflows246.4428.4573.2718.81,010.01,092.41,135.41,403.3
Program loans0.020.00.00.00.00.00.00.0
Project loans153.3325.0515.1662.5753.7836.1896.01,180.8
Commercial loans20.90.00.00.0200.0200.0200.0200.0
Government guaranteed/parastatal72.283.558.156.356.356.339.422.5
Outflows-251.4-265.1-241.9-254.2-286.4-294.0-371.7-426.5
Private, medium and long term-18.140.423.915.940.0107.497.747.9
Energy financing19.348.758.454.060.060.060.042.1
Kenya Airways33.127.1-47.6-50.925.297.088.359.6
Other-70.4-35.413.112.8-45.2-49.6-50.5-53.8
Short-term capital and errors and omissions 2/235.9716.5-348.2304.8402.1410.1539.6232.4
of which: commercial banks-453.9-485.1304.8-200.6-158.6-227.0-186.7-179.0
Overall balance187.4691.1-795.3232.0396.3519.0609.0627.5
Financing items-187.4-691.1795.3-232.0-396.3-519.0-609.0-627.5
Reserve assets (gross)-370.2-719.8647.1-203.5-369.3-497.0-570.3-605.3
Use of Fund credit and loans to the Fund (net)59.354.8-8.7-17.3-27.0-22.0-38.7-22.2
Change in arrears 3/69.9-26.00.0-61.40.00.00.00.0
Rescheduling /debt swap53.60.06.10.00.00.00.00.0
Remaining gap0.00.0150.850.30.00.00.00.0
Memorandum items:
Gross official reserves (end of period)2,723.23,443.02,795.92,999.43,368.83,865.74,436.05,041.4
(in months of following year’s imports of goods and services)3.03.63.12.93.03.13.23.2
Current account balance (excl. official transfers, percent of GDP)-3.5-4.8-5.9-4.5-4.7-4.6-4.2-3.7
Current account balance (including official transfers, percent of GDP)-3.5-4.6-6.0-4.5-4.8-4.7-4.2-3.7
Change in reserves due to valuation (“-” represents loss)104.280.8
Import volume growth, goods (percent)10.37.55.86.87.88.58.18.5
Import value growth, goods (percent)23.618.45.3-5.412.811.811.011.7
Export volume growth, goods (percent)3.910.78.47.19.010.510.611.3
Export value growth, goods (percent)9.317.56.3-0.110.912.314.415.7
Change in the terms of trade (goods, percent)-5.8-5.19.51.2-3.1-1.40.51.0
Public and publicly guaranteed external debt (percent of GDP)22.820.022.821.919.719.420.020.2
Sources: Kenyan authorities; and IMF staff estimates and projections.

The foreign travel credit is comprised of two components, recorded tourism inflows and an estimate of additional under-reported tourism receipts.

Historical figures include errors and omissions.

Starting in 2008/09, change in arrears reflects the amounts in the budget. For earlier years, there are differences with the fiscal sector tables (Tables 2a and 2b) because the government’s budget presentation does not show changes to arrears associated with disputed security-related contracts.

Sources: Kenyan authorities; and IMF staff estimates and projections.

The foreign travel credit is comprised of two components, recorded tourism inflows and an estimate of additional under-reported tourism receipts.

Historical figures include errors and omissions.

Starting in 2008/09, change in arrears reflects the amounts in the budget. For earlier years, there are differences with the fiscal sector tables (Tables 2a and 2b) because the government’s budget presentation does not show changes to arrears associated with disputed security-related contracts.

Table 4b.Kenya: Balance of Payments, 2006–14
200620072008200920102011201220132014
Est.Projections
Current account-563.1-1,106.4-2,018.6-1,097.9-1,755.5-2,002.4-2,181.4-2,028.6-2,074.8
Excluding official transfers-625.6-1,161.3-2,018.6-1,075.7-1,733.3-1,980.2-2,159.2-2,006.4-2,052.6
Exports, f.o.b.3,516.04,123.04,972.24,599.14,970.75,631.46,281.27,339.78,412.4
Coffee138.3166.4155.2114.6120.3133.4143.9165.6186.4
Tea654.9692.6923.8719.9688.5755.5825.2944.51,086.5
Horticulture508.2607.5763.3615.7687.6802.3907.91,086.31,291.0
Imports, f.o.b.-6,926.6-8,550.2-10,267.3-8,636.2-9,741.6-10,998.9-12,193.1-13,551.2-15,203.1
Oil-1,745.3-1,919.5-3,051.2-1,716.9-2,125.5-2,479.1-2,777.3-2,955.0-3,273.9
Other-5,032.4-6,594.7-7,132.3-6,825.1-7,518.2-8,417.9-9,310.1-10,486.5-11,815.4
of which: Special: Maize & sugar-96.3-137.4-101.1-275.3-158.8-171.8-183.0-189.7-194.2
Balance on goods-3,410.5-4,427.1-5,295.1-4,037.1-4,770.9-5,367.4-5,911.9-6,211.5-6,790.7
Services (net)1,322.01,708.61,384.91,013.91,122.91,333.01,571.01,807.92,078.5
Credit2,308.62,940.63,255.82,731.72,982.63,339.73,730.64,158.74,627.0
of which: foreign travel credit 1/628.6831.4673.3566.1651.0781.2937.51,068.41,206.8
Debit-986.6-1,232.0-1,870.9-1,717.8-1,859.7-2,006.8-2,159.6-2,350.8-2,548.5
Balance on goods and services-2,088.6-2,718.5-3,910.2-3,023.2-3,648.0-4,034.4-4,340.9-4,403.7-4,712.2
Income (net)-59.3-106.9-11.4-21.8-59.4-63.5-90.4-102.4-90.3
Credit84.1108.8141.3127.2105.5116.5129.3145.2163.6
Debit-143.4-215.8-152.7-149.0-164.9-180.0-219.7-247.6-253.9
of which: official interest payments-108.2-85.9-85.5-87.4-106.7-124.6-166.4-194.2-200.1
Other-44.7-129.9-67.2-61.6-58.2-55.4-53.2-53.4-53.8
Current transfers (net)1,584.81,719.01,903.11,947.01,951.82,095.62,249.82,477.52,727.7
Private (net)1,522.31,664.21,903.11,969.31,974.12,117.82,272.12,499.72,750.0
of which: remittances709.6922.5983.0884.7928.9998.61,073.51,180.41,298.0
Official (net)62.554.80.0-22.3-22.3-22.3-22.3-22.3-22.3
Capital and financial account904.01,929.91,542.9912.62,144.52,451.02,741.42,683.82,671.2
Capital account (incl. capital transfers)222.9323.8207.2436.9494.2609.3641.9605.6650.7
Financial account 2/681.11,606.01,335.7475.71,650.31,841.72,099.42,078.22,020.5
Net FDI505.5974.0656.7466.9466.1616.5673.1734.7801.7
In Kenya543.01,074.8701.1490.9490.1640.5697.1758.7825.7
Abroad-37.5-100.8-44.3-24.0-24.0-24.0-24.0-24.0-24.0
Net Portfolio investment-20.6-23.8-27.1-6.90.47.18.19.210.4
Liabilities3.00.810.510.210.816.117.318.620.0
Assets-23.6-24.6-37.6-17.2-10.4-9.0-9.2-9.4-9.7
Net other investment196.2655.8706.115.71,183.81,218.11,418.21,334.31,208.5
Official, medium and long term-69.3177.251.7326.7870.1789.3767.1866.51,004.7
Inflows176.5437.4305.6560.31,157.11,058.81,101.81,275.21,448.9
Program loans0.020.00.00.00.00.00.00.00.0
Project loans118.1300.1245.6504.1900.8802.6845.61,052.71,226.4
Commercial loans20.910.40.00.0200.0200.0200.0200.0200.0
Government guaranteed/parastatal37.5106.960.056.356.356.356.322.522.5
Outflows-245.8-260.2-253.9-233.6-287.0-269.5-334.7-408.6-444.3
Private, medium and long term-128.6100.1-4.755.7-29.8110.1104.890.6-1.6
Energy financing10.028.568.848.060.060.060.060.023.1
Kenya Airways-29.595.7-41.4-53.9-47.998.395.680.932.1
other-109.0-24.1-32.161.6-41.8-48.2-50.8-50.3-56.8
Short-term capital and errors and omissions 2/394.1378.5659.1-366.7343.5318.6546.2377.1205.4
of which: public net (includes trade credit)0.00.00.083.0-83.00.00.00.00.0
of which: commercial banks-164.4-9.945.6-413.2-92.9-289.7-200.6-213.4-134.9
Overall balance340.9823.4-475.7-185.4389.0448.6560.0655.2596.4
Financing items-340.9-823.4475.7185.4-389.0-448.6-560.0-655.2-596.4
Reserve assets (gross)-595.3-939.6480.257.0-364.4-426.6-532.4-610.9-596.4
Use of Fund credit and loans to the Fund (net)0.0118.6-4.5-17.4-24.6-22.0-27.6-44.30.0
Change in arrears 3/147.2-2.40.0-61.40.00.00.00.00.0
Rescheduling /debt swap107.20.00.06.10.00.00.00.00.0
Remaining gap0.00.00.0201.10.00.00.00.00.0
Memorandum items:
Gross official reserves (end of period)2,415.33,354.92,874.72,817.73,182.13,608.74,141.14,752.05,348.4
In months of following year’s imports3.03.33.32.92.93.03.13.23.3
Change in reserves due to valuation (“-” represents loss) 4/6.140.4-337.3
Current account balance
(Percent of GDP, excluding official transfers)-2.8-4.3-6.7-3.6-4.8-4.6-4.6-3.9-3.6
(Percent of GDP, including official transfers)-2.5-4.1-6.7-3.7-4.8-4.7-4.6-3.9-3.6
Import volume growth, goods (percent)10.510.24.96.86.88.88.18.09.1
Export volume growth, goods (percent)-4.111.99.57.26.911.19.911.311.4
Sources: Kenyan authorities; and staff estimates and projections.

The foreign travel credit is comprised of two components, recorded tourism inflows and an estimate of additional under-reported tourism receipts.

Historical figures include errors and omissions.

Starting in 2008/09, change in arrears reflects the amounts in the budget. For earlier years, there are differences with the fiscal sector tables (Tables 2a and 2b) because the government’s budget presentation does not show changes to arrears associated with disputed security-related contracts.

Preliminary figures.

Sources: Kenyan authorities; and staff estimates and projections.

The foreign travel credit is comprised of two components, recorded tourism inflows and an estimate of additional under-reported tourism receipts.

Historical figures include errors and omissions.

Starting in 2008/09, change in arrears reflects the amounts in the budget. For earlier years, there are differences with the fiscal sector tables (Tables 2a and 2b) because the government’s budget presentation does not show changes to arrears associated with disputed security-related contracts.

Preliminary figures.

Table 5.Kenya: External Financing Requirements and Resources, 2006/07–2009/10 1/(In millions of U. S. dollars)
2006/072007/082008/092009/10
External financing requirements-1401.0-2480.6-1373.3-1994.7
Current account (excl.official grants)-849.3-1465.2-1769.8-1458.3
Scheduled amortization (official)-251.4-265.1-241.9-254.2
IMF payments, gross0.0-4.5-8.7-17.3
Change in arrears, net69.9-26.00.0-61.4
Change in gross official reserves (- is buildup)-370.2-719.8647.1-203.5
Resources1401.02480.61222.51944.4
Program support (committed and tentatively identified)59.3134.10.00.0
IMF59.359.30.00.0
Program loans0.020.00.00.0
African Development Bank (ADB)0.00.00.00.0
IDA0.020.00.00.0
Other0.00.00.00.0
Program grants0.054.80.00.0
Project Support377.2650.9834.91103.2
Project loans153.3325.0515.1662.5
Project grants223.9325.9319.7440.7
Government-guaranteed, commercial loans93.183.558.156.3
Private financing, net160.7543.2825.9785.0
of which, foreign direct investment622.7891.7658.1466.5
Errors and omissions657.11069.0-502.40.0
Rescheduling / debt swap53.60.06.10.0
Remaining gap0.00.0-151-50
Sources: Kenyan authorities and staff estimates and projections.

The fiscal year is July/June.

Sources: Kenyan authorities and staff estimates and projections.

The fiscal year is July/June.

Table 6.Financial Soundness Indicators, 2003–08
2008
Dec-03Dec-04Dec-05Dec-06Dec-07Mar-08May-08Dec-08
Capital
Regulatory capital to risk weighted assets17.316.616.416.518.019.517.418.9
Regulatory Tier 1 capital to risk weighted assets16.316.216.016.416.818.316.216.9
Asset Composition and Quality
Non-performing loans to gross loans134.929.325.621.310.910.59.68.4
Non-performing loans net of provisions to total capital60.752.740.128.615.115.515.411.3
Earnings and Profitability
Return on assets (annualized)2.32.12.42.83.03.63.22.8
Return on equity (annualized)23.222.025.028.627.533.333.725.2
Liquidity
Liquid assets to total assets33.232.433.130.535.136.138.634.4
Liquid assets to total short-term liabilities48.941.540.644.440.240.241.037.0
Sensitivity Analysis
Net open positions in FX to capital12.08.06.07.15.47.07.35.6
Source: Central Bank of Kenya

The ratios were computed using gross non-performing loans and gross loans.

Source: Central Bank of Kenya

The ratios were computed using gross non-performing loans and gross loans.

Table 7.Kenya Indicators of Capacity to Repay the Fund, 2008–19
Projections
20082009 32010201120122013201420152016201720182019
Fund obligations based on existing credit
(in millions of SDRs)
Principal6.7210.3616.7215.0018.7530.0025.0020.0015.0011.250.000.00
Charges and interest0.840.920.880.790.710.590.450.330.260.190.160.16
Fund obligations based on existing and prospective credit
(in millions of SDRs)
Principal6.7210.3616.7215.0018.7530.0038.5747.1442.1438.3927.1413.57
Charges and interest0.841.371.561.471.391.271.110.890.680.470.300.18
Total obligations based on existing and prospective credit 1
In millions of SDRs7.5611.7318.2816.4720.1431.2739.6848.0342.8238.8627.4413.75
In millions of US dollars11.9517.9928.1225.4331.2048.6161.8974.9166.7960.6142.8021.45
In percent of exports of goods and services20.150.250.350.280.310.420.470.510.400.320.200.09
In percent of debt service3.334.796.685.396.057.838.978.816.635.173.291.50
In percent of quota2.794.326.746.077.4211.5214.6217.7015.7814.3210.115.07
In percent of gross international reserves0.420.640.880.700.751.021.161.240.990.790.500.22
Outstanding Fund credit 1
In millions of SDRs162.08287.42270.70255.70236.95206.95168.38121.2479.1040.7113.570.00
In millions of US dollars256.28440.69416.47394.75367.11321.70262.62189.10123.3763.4921.160.00
In percent of exports of goods and services3.116.015.244.403.672.802.011.280.740.340.100.00
In percent of debt service71.42117.4298.9483.6571.2151.8238.0522.2512.245.421.630.00
In percent of quota59.72105.9099.7494.2287.3176.2562.0444.6729.1515.005.000.00
In percent of gross international reserves8.9115.6413.0910.948.876.774.913.141.820.830.250.00
Memorandum items:
Exports of goods and services (millions of US dollars)8,2287,3317,9538,97110,01211,49813,03914,71916,62218,77621,15423,840
Debt service (millions of US dollars)3593754214725166216908501,0081,1731,3011,429
Quota (millions of SDRs)271271271271271271271271271271271271
Gross international reserves (millions of US dollars)2,8752,8183,1823,6094,1414,7525,3486,0206,7757,6258,5839,660
GDP (millions of US dollars)30,22929,76436,28042,62147,44352,08157,58762,48267,79373,55579,80786,591
Source: Fund staff estimates and projections.

Includes possible ESF disbursement of 135.7 million SDR, 50% of quota, in 2009

Total debt service includes IMF repurchased and repayments.

April 1 - December 31, 2009

Source: Fund staff estimates and projections.

Includes possible ESF disbursement of 135.7 million SDR, 50% of quota, in 2009

Total debt service includes IMF repurchased and repayments.

April 1 - December 31, 2009

Appendix. Letter of Intent

Nairobi, May 15, 2009

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. Strauss-Kahn:

In response to bold economic and structural reforms implemented by the Government over the Economic Recovery Strategy (ERS) period, 2003–07, the Kenyan economy staged a remarkable recovery with real GDP growth reaching 7 percent in 2007, up from 0.5 percent in 2002. This growth rate, which compared well with those achieved by most reforming countries in sub-Saharan Africa, had a positive impact on the welfare of Kenyans, with per capita income rising from about US$ 350 in 2002 to over US$ 700 by 2007.

However, in 2008, the economy suffered major shocks that threatened to reverse the gains we had achieved over the ERS period. Post-election violence in early 2008 impacted negatively on key sectors of our economy such as tourism, manufacturing, transport and agriculture, resulting in a year-on-year decline in real GDP of 1 percent in the first quarter of 2008. While the economy showed signs of quick recovery during the subsequent quarter, these hopes were diminished as the country was buffeted by record high fuel and fertilizer prices. These shocks were compounded by the failure of the short rains in October-November 2008, resulting in a sharp decline in domestic food supplies, particularly, maize—a key staple food for our population. Consequently, an estimated 10 million Kenyans have become food insecure and millions are at risk of starvation. The government and the private sector need to import about one million tons of maize and other cereals between February and August 2009. At the same time, the economy began to feel the adverse effects of the global financial crisis which has slowed recovery of our tourism sector and reduced remittances and private capital inflows.

Impact of the shocks

These shocks have put severe pressure on our fiscal position, the balance of payments and the exchange rate. The international reserves of the Central Bank of Kenya (CBK) have fallen to below 3 months of import cover from about 4 months a year ago and are expected to remain under pressure in 2009.

The global financial crisis has made it difficult to issue a planned sovereign bond in the international capital market to finance our development expenditures. This, together with diminished prospects for privatization receipts and lower revenues arising from a weaker economy, has given rise to a substantial financing shortfall for the 2008/9 budget.

Recession in advanced countries is likely to restrain, if not reduce, demand for Kenya’s exports, including tea, horticulture and coffee in 2009 and, if protracted, in the medium-term. Moreover, tourism earnings, remittances and private capital inflows are expected to decline. These developments will, notwithstanding the decline in oil and fertilizer prices, put further pressure on our external balance of payments, exchange rate and official foreign exchange reserves in 2008/9.

These shocks are threatening to derail our economic recovery and pose substantial challenges for our macroeconomic policy management. Inflationary pressure associated with food shortages remains high and is not expected to dissipate at least until the long rains are received to boost food supplies after August. Thus, increased importation of maize will further erode our official foreign exchange reserves and put pressure on the exchange rate at a time when our prospects for exports earnings, remittances, and capital inflows are being threatened by the negative impact of the global financial crisis

While we are yet to feel the full impact of the global financial crisis—especially its second round effects on the real economy, Kenya is likely to face a more difficult time in 2009/10 with low economic growth, increased unemployment and continued high prices for maize if rains become inadequate. We are thus faced with the task of finding solutions to sustain the economy and protect the livelihood of the poor.

Policies to address the shocks

Given our commitment to maintaining macro-economic stability, reigning in inflation and sustaining growth crucial for poverty reduction, we had to take immediate action to mitigate the impact of the shocks arising from drought, higher world prices of food, fuel and fertilizer, and the global financial crisis. We have taken concerted fiscal, monetary and administrative/structural measures and will be implementing additional measures in the coming year:

  • The Government has withdrawn the generalized maize subsidy scheme introduced in November 2008 in response to rising maize prices and partially liberalized the maize market in Kenya. Because of design flaws, the scheme led to diversion of maize from the National Cereal and Produce Board (NCPB) to unintended purposes. Going forward, a new well-targeted food subsidy program that avoids price distortions and minimizes opportunities for abuse will be developed by December 2009. As the new scheme will not need the support of an export ban, we intend to eliminate the ban on maize exports imposed in October 2008 by end-December 2009.

  • Effective February 2009, the government removed the duty and VAT on maize imports for a period of six months to allow the private sector to import maize at lower cost to bridge the food deficit. The Government will reassess the food situation with a view of granting an extension of duty-free importation of maize, if the situation dictates so.

  • On the fiscal front, the government is taking action to protect critical expenditures and boost economic activity while ensuring medium-term debt sustainability. Because of the revenue shortfall, the postponement of the planned sovereign bond issuance, and additional expenditures for drought relief, a financing gap for the financial year ending June 2009 has emerged. The government will close the gap by rationalizing expenditures, cutting non-priority expenditures and increasing domestic borrowing. The increased borrowing is necessary to maintain expenditures on key infrastructure projects and poverty reduction, as well as to support economic activity in the face of the adverse impact of the global financial crisis. Despite the higher domestic financing, the overall fiscal deficit (including grants) for 2008/09 is about 5 percent of GDP based on the current implementation rate for foreign financed projects—smaller than budgeted but moderately larger than in 2007/08. We recognize the downside risk of a larger-than-projected revenue shortfall. Should this risk materialize, we would take further actions such as reprioritizing expenditures to keep within the current target for net domestic borrowing. For 2009/10, we will continue to stimulate the economy. To this end, we plan to borrow from domestic sources about Ksh 109 billion (4.2 percent of GDP), which we believe can be accommodated by the domestic financial market. Despite these temporary increases in domestic borrowing, we remain committed to reducing the debt-to-GDP ratio in the medium term.

  • In the monetary area, to ease the liquidity situation, the CBK has cut its policy rate—the Central Bank Rate (CBR)—by a total of 75 percentage point since December and lowered banks’ reserve requirement ratio from 6 percent to 5 percent. Going forward, the revised monetary program for 2008/9 is expected to reign in inflation, while providing sufficient liquidity to support economic activity and allowing for a gradual rebuilding of international reserves.

  • In view of the challenges in gauging monetary policy under the current methodology of measuring the consumer price index, the Kenya National Bureau of Statistics began in February 2009 to undertake a Point of Sale Survey (PSS) based on an updated consumer basket. These price data are needed to determine the price reference period for the new CPI, and to finalize CPI rebasing and revision exercise. We expect to review and audit the implementation of the new series; and thereafter to launch a new CPI with a revised compilation methodology by end-May 2009.

  • To address the increased risks to the financial sector, the CBK is intensifying its oversight to ensure that banks are making adequate and timely provision for bad and doubtful loans, and taking an increasingly proactive approach to surveillance and enforcement. The government will bring the Banking Bill before Parliament before the end of the next Parliamentary session—enacting this bill would strengthen the hand of the CBK by authorizing consolidated supervision and prompt corrective action, which will be crucial if asset quality deteriorates.

  • Regarding the external sector, as the balance of payments starts improving in 2009/10, the central bank will pursue a strategy of gradually rebuilding the official foreign exchange reserves consistent with the reserve money path that will reduce inflation to 5 percent by June 2010. We will maintain a managed-float exchange rate regime, which has served Kenya well in terms responding to external shocks. The CBK will continue to limit its interventions in the foreign exchange market only to smoothing excessive short-term volatilities. In view of the importance of closely monitoring the transactions in the balance of payments as the impact of the global financial crisis unfolds, the KNBS is committed to undertaking a foreign capital flow survey by October 2009 to track foreign direct investment and other capital flows. Already preparatory work including identification of sampling frame and trainings has been done.

  • We are committed to zero tolerance of corruption. In this regard, the Government will continue to advance governance reforms within the context of updated Governance Action Plan (GAP). Recent corruption allegations related to the sale of maize from the National Cereal and Produce Board (NCBP) to middlemen are being investigated by the Kenya Anti-Corruption Commission (KACC). In the meantime, the Government has instituted changes in the management of NCPB and launched forensic audit of NCPB operations that will inform further actions. With regard to mismanagement of the distribution of fuel associated with the State-owned Kenya Pipeline Corporation (KPC) and private petroleum dealers, the Government has taken swift corrective actions. It replaced the management at KPC and changed the procedures for allocation of storage space to oil suppliers at the Kipevu storage facility, and the KACC has launched an investigation.

  • We will continue to pursue structural reforms to improve our long-term growth potential. Our priority will be given to the enactment of the Public Financial Management Bill and establishing its enabling regulations; improving treasury cash management (including making operational the treasury single account); strengthening debt management; improving fiscal reporting (including increasing the functionality of IFMIS); and furthering procurement reforms.

The Government stands ready to implement other policy measures should the shocks turn out to be worse than expected.

Request for Fund assistance under ESF

The Government has declared the food situation a national disaster. The WFP has completed a comprehensive assessment of the food situation and the interventions required. So far, we have received support from China of US$3 million and we expect other development partners, including the World Bank and the AfDB, to channel their support through the WFP mechanism to help mitigate the food problem. The NCPB is expected to import 3 million bags of maize under a commodity credit guarantee scheme provided by the United States Department of Agriculture. A number of other donors are providing support through existing portfolio with the aim of improving domestic agricultural productivity in a sustainable manner.

Despite these anticipated increases in donor support, the challenges outlined earlier require additional urgent assistance, particularly with regard to bolstering our international reserves. We therefore request that the IMF allow the Kenyan government the maximum access of 50 percent of quota through the Rapid-Access Component of the Exogenous Shocks Facility (ESF) to address these challenges. Further, we will continue to engage with the Fund on policy advice and have no intention of introducing new exchange and trade restriction. Similarly, we will maintain full pass-through of world prices for petroleum products. We expect to update the Financial Sector Assessment Program (FSAP) following our earlier request. We also request an update of the safeguard assessment for the Central Bank of Kenya.

The Government of Kenya authorizes the IMF to make this letter and the IMF staff report available to the public, including through the IMF internet website.

Sincerely yours,
/s//s/
Uhuru M. KenyattaNjuguna Ndung’u
Deputy Prime Minister and Minister for FinanceGovernor
Central Bank of Kenya

The CPI inflation is overstated by a factor of about two, due to methodological problems. STA has provided initial technical assistance to resolve the problems; and to change to a new methodology. See (Country Report No. 08/339).

The interpretation of inflation statistics is complicated by methodological problems that lead to substantial overestimation, as explained above (see footnote 1).

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