The Executive Board of the International Monetary Fund (IMF) today approved an SDR135.7 million (about US$209 million) disbursement under the Exogenous Shocks Facility (ESF) to help Kenya recover from the negative impact of higher food and international fuel and fertilizer costs, and the slowdown in external demand associated with the global financial crisis.
The disbursement was approved under the rapid-access component of the ESF, a facility designed to provide policy support and financial assistance to low-income countries facing exogenous but temporary shocks. It is available to countries eligible for the Poverty Reduction and Growth Facility (PRGF)—the IMF’s main instrument for financial assistance to low-income countries—but that do not have a PRGF-supported program in place. Financing terms are equivalent to a PRGF arrangement and are more concessional than under other IMF emergency lending facilities.
Kenya’s economic recovery after political disturbances in early 2008 has been cut short by a range of factors, including the impact of rising international prices for food, fuel, and fertilizer. Further economic strain was exerted by falling global demand that has translated into weaker export growth and lower tourism receipts, remittances and private capital flows.
Food insecurity in Kenya has also increased as high fuel and fertilizer costs led to lower agricultural yields, and poor rainfall in October-November 2008 further reduced food supplies, especially of the main staple, maize. The number of people affected by food insecurity has risen by 47 percent to around 10 million, according to the government and the United Nations.
In sum, these shocks have weakened Kenya’s balance of payments, threatened macroeconomic stability, and reversed progress on poverty reduction made during the previous five years. The IMF estimates the adverse effects of these shocks on Kenya’s balance of payments at 4½–7¼ percent of GDP—a cumulative total of US$1.4–$2.2 billion over the 2008/09 and 2009/10 fiscal years. Economic growth, which averaged 6 percent from 2004–2007, is estimated at just 2 percent in 2008 and 3 percent in 2009.
The Kenyan authorities have responded swiftly by easing monetary policy to support economic activity, reprioritizing public spending and acting to strengthen the banking system. They have also focused on improving food distribution to ensure better access to staple foods, and are working with the World Bank to introduce a well-targeted food subsidy program by the end of 2009. However, substantial increases in maize imports until at least the next food harvest in the third quarter of 2009 are expected to further erode foreign reserves and increase pressure on the Kenyan shilling.
Following the Executive Board’s discussion of Kenya, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, stated:
“Kenya’s strong economic performance in recent years has been stalled by a series of exogenous shocks—drought; increases in international food, fuel and fertilizer prices; and the global downturn. These shocks have slowed economic growth, raised inflation, weakened the currency, and resulted in the loss of international reserves.
“The authorities have responded to the shocks swiftly. Monetary policy has been eased to support economic activity; and fiscal policy has been accommodating without endangering debt sustainability. Structural policies have focused on improving the food distribution mechanism for better access to staples, as well as on measures to strengthen the banking system. Nonetheless, there are significant risks arising from rainfall dependency, a deeper and more prolonged global downturn, and the domestic political situation. Economic policies should stand ready to respond if necessary to ensure fiscal sustainability and price stability.
“Economic policies in 2009/10 will focus on reducing inflation, rebuilding foreign exchange reserves and strengthening the basis for a return to robust sustainable growth. Fiscal policy will provide a stimulus to the economy and protect key infrastructure and social spending while ensuring that public debt levels remain sustainable over the medium term.
“Broad-based structural and governance reforms will aim to ensure strong economic growth over the medium and long term. Priority should be given to strengthening governance by developing an implementation plan for the updated Governance Action Plan, improving public financial management, and implementing financial sector reforms. Introduction of a targeted subsidy framework will address the food deficit in an efficient manner.
“In support of the authorities’ policies, the IMF’s Executive Board has approved Kenya’s request for disbursement under the Rapid-Access Component of the Exogenous Shocks Facility. Fund support will enable Kenya to close its financing gap while improving the prospects for additional donor support,” Mr. Lipsky stated.