Journal Issue
Share
Article

Kenya: Staff Report for the 2009 Article IV Consultation

Author(s):
International Monetary Fund
Published Date:
January 2010
Share
  • ShareShare
Show Summary Details

VII. KENYA: RELATIONS WITH THE FUND

(As of October 31, 2009)

I. Membership Status: Joined February 3, 1964; Article VIII.

II. General Resources Account:

SDR millionPercent of quota
Quota271.40100.00
Fund holdings of currency258.5295.25
Reserve position in Fund12.894.75

III. SDR Department:

SDR millionPercent of allocation
Net cumulative allocation259.65100.00
Holdings226.9187.39

IV. Outstanding Purchases and Loans:

SDR millionPercent of quota
Poverty Reduction and Growth Facility
(PRGF) arrangements154.2256.82
ESF RAC Loan135.7050.00

V. Latest Financial Arrangements:

ApprovalExpirationAmountAmount Drawn
Approved
TypeDateDate(SDR Million)(SDR Million)
PRGF11/21/0311/20/07150.00150.00
PRGF08/4/0008/3/03190.0033.60
ESAF04/26/9604/25/99149.5524.93

The last three-year PRGF arrangement was approved on November 21, 2003, in the amount of SDR 175 million. Access was augmented to SDR 225 million at the time of the first review on December 20, 2004, to address the impact of a drought and higher oil prices. In light of a balance of payments improvement and at the request of the authorities, access was reduced to SDR 150 million at the time of the second review. The arrangement expired on November 20, 2007. In May 2009, the Executive Board approved the disbursement of SDR135.7 under the RAC-ESF to address the impact of exogenous shocks and the balance of payments gap.

VI. Projected Obligations to Fund

(SDR million; based on existing use of resources and present holdings of SDRs):

20092010201120122013
Principal2.5016.7215.0018.7530.00
Charges/interest0.751.511.421.341.22
Total3.2518.2316.4220.0931.22

VII. Implementation of HIPC Initiative: Not Applicable

VIII. Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

IX. Safeguards Assessments

An update safeguards assessment of the Central Bank of Kenya (CBK) took place in Spring 2009 with respect to the authorities request for a disbursement under the Rapid-Access Component of the Exogenous Shocks Facility (ESF). The update assessment found increased safeguards risk at the CBK since the 2005 assessment. The report noted that deficiencies found in recent external audits and non-compliance with the benchmark financial reporting framework confirmed that audit oversight is not yet fully effective, and that it has impaired external audit and financial reporting. Steps are being taken by the CBK and the external auditor to strengthen the ongoing 2009 external audit process.

X. Exchange Arrangements

Kenya’s currency is the shilling, which floats against other currencies. The official exchange rate, which is set at the previous day’s average market rate, applies only to government and government-guaranteed external debt-service payments and to government imports for which there is a specific budget allocation. The exchange rate regime is a managed float, in which the U.S. dollar is the principal intervention currency. Kenya has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions, other than restrictions notified to the Fund under Decision No. 144 (52/51). On November 20, 2009, the exchange rate was K Sh 74.5 =US$1.00.

XI. Article IV Consultations

Upon expiration of the PRGF program in November 2007, Kenya has now reverted back to a standard 12-month cycle for Article IV consultations. The last Article IV consultation was concluded on September 10, 2008 (EBS/08/339).

XII. FSAP Participation

A joint IMF-World Bank Financial Sector Assessment Program (FSAP) Update mission took place in Nairobi in September 2009. The staff report on the Financial Sector Stability Assessment (FSSA) is issued to the Executive Board concurrently with the 2009 Article IV Consultation Staff Report.

XIII. Technical Assistance

DepartmentPurposeTime of Delivery
STAROSC MissionJanuary 2005
MFDMonetary Framework, Monetary Operations, and Banking SupervisionOctober 2005
FADRevenue AdministrationNovember 2005
FADAFRITAC East Semi-Autonomous Agencies and EBFs/Fiscal Reporting MissionMarch 2006
FADHQ Mission: Strengthening the Budget and Reporting SystemAugust 2006
FADAFRITAC East TA: Revision of Public Finance Management ActOctober/November 2006
MCMAFRITAC East TA: Review of Risk-Based Supervision ManualNovember/December 2006
MCMMonetary Operations TAJanuary 2007
STAExternal Debt Statistics WorkshopFebruary / March 2007
FADAFRITAC East TA: Customs AdministrationJuly 2007
FADFiscal ROSCJuly 2007
MCMPayment SystemsFebruary 2008
STAConsumer Price StatisticsMarch 2008
MCMMonetary Operations/BankingApril 2008
STANational AccountsApril 2008
FADAFRITAC East TA: BudgetMay 2008
STA/MCMFinancial Soundness IndicatorsJune 2008
FADBudgetingJuly 2008
MCMBond-Pricing Techniques WorkshopJuly 2008
FADAFRITAC East TA: Regional PFM Advisor: Budget and Tax reviewAugust 2008
FADAFRITAC East TA: Customs Administration
MCMPayment SystemsAugust 2008
STAAFRITAC East TA: Monetary and Financial StatisticsAugust 2008
FADTax Administration WorkshopNovember 2008
FADPFM and Fiscal DecentralizationNovember 2008
STAReweighing and Rebasing of CPIDecember 2008
STAProducer Price Index compilationDecember 2008
MCMRisk based SupervisionJanuary 2009
MCMCapital Market Regulation and SupervisionMarch 2008
FADSeveral missions on fiscal decentralization, customs administration, and public finance management2009-2010
LEGMissions on Anti-Money Laundering legislation and the Banking Law2010
MCMSeveral mission on monetary operations, bank supervision, payments system and capital market development2009-2010
STASeveral missions on national accounts, CPI, and external sector statistics2009-2010

XIV. Resident Representative

The Fund has had a resident representative in Kenya since December 1993. Mr. W. Scott Rogers is the current Senior Resident Representative.

VIII. Kenya: Joint Bank- Fund Management Action Plan 2009–10

TitleProducts/ActivityProvisional timing of mission (if relevant)Expected delivery date
I. Mutual Information on Relevant Work Program
Bank Work Program in the next 12 monthsA. Strategy and Analytical Work
Staff Advisory Note on the Medium-Term (2008-12) Strategy for National TransformationNo mission needed
Agricultural Policy ReviewTo be decidedCompleted
Parliament’s Role in GovernanceCompleted
Police Oversight MechanismsCompleted
Economic Update (half-yearly)December 2009
Public Expenditure ReviewMarch 2010
B. Country Assistance StrategySeptember 2009December 2009
C. Ongoing and New Projects
Several projects on public sector reforms including legal and judicial, capacity building, agriculture, natural resource management, transportation, energy, urban services, small and medium scale enterprises, education and health (including HIV/AIDS)SeveralOngoing
Fund Work Program in the nextA. Missions
12 monthsArticle IV ConsultationOctober 2009December 2009
Financial Sector Assessment Program (FSAP) UpdateOctober 2009December 2009
Staff Visit to discuss a possible IMF-supported programApril 2010June 2010
B. Analytical Work
2009 Article IV Mission Analytical Papers:(i) Spillover Effects of the Global Crisis; (ii) Global Financial Crisis and Adjustment to Shocks in Kenya, Tanzania and Uganda - A Balance Sheet Perspective; (iii) Reserve Adequacy in East AfricanOctober 2009December 2009
Fund Work Program in the nextAFR-MCM Project on EAC financial market integrationNo mission neededOngoing
12 months continuedKenya’s Retail Price Responses to World Oil PricesNo mission neededFebruary 2010
C. Technical Assistance
Legal issues
Anti Money Laundering Diagnostic MissionFebruary 2010April 2010
Central Banking Law assessment
Fiscal sector issues
Customs Administration (several missions)October 2009July 2010
Fiscal Decentralization (several missions)October 2009July 2010
Public Finance Management
Tax Review Policy
MTEF and program budgetingDecember2009
Monetary and financial sector issues
Monetary operations
Payments system regulatory and oversight issuesMarch 2009Completed
Capital markets / securities supervisionJuly 2009September 2009
Risk based supervisionFebruary 2009Completed
Development of Primary and Secondary markets
Nonbank money transfer systemFebruary 2009Completed
Statistical Issues
CPI Statistics MissionMay 2009August 2009
National Accounts StatisticsOctober 2009January 2010
Balance of Payments StatisticsFebruary 2010April 2010
II. Request for Work program Inputs (as needed)
No outstanding request
III. Agreement on Joint Products
Joint productsPublic and External Debt Sustainability AnalysisApril 2009May 2009
Financial System Stability AssessmentSeptember 2009December 2009
Joint Staff Advisory Note (JSAN) on Medium Term Development Plan / Vision 2030October 2009December 2009

IX. Kenya: Key Statistical Issues

Data provision has some shortcomings, but is broadly adequate for surveillance and program monitoring. Weaknesses in macroeconomic statistics reflect organizational and skill shortcomings, and inadequate resources. In line with the new Statistics Law, the government established the autonomous Kenya National Bureau of Statistics (KNBS) in 2007 to replace the Central Bureau of Statistics (CBS).

41. The Report on the Observance of Standards and Codes—Data Module (IMF Country Report No. 05/388) published on October 31, 2005 stated that methodological soundness is uneven across datasets and significant improvement is required in government finance statistics and national accounts. Accuracy and reliability do not receive adequate attention in any of the datasets, while accessibility of the disseminated macroeconomic statistics are adequate, except for the balance of payments statistics.

42. Kenya participates in the Fund’s General Data Dissemination System (GDDS) and the GDDS project for Anglophone Africa. Metadata and detailed plans for improving the data over the short and medium term are posted on the Fund’s Dissemination Standards Bulletin Board (DSBB). Kenya has received Fund technical assistance. Further assessment of capacity building requirements has been undertaken by the AFRITAC East Statistical Advisor.

43. Monetary, exchange rate, and some external data are published on a monthly and biannual basis by the KNBS in its Monthly Economic Review. Core financial data are also made available to the Fund on a regular basis. A detailed account of various sectoral activities and the corresponding statistical data are published annually by the KNBS in its Economic Survey.

National accounts

44. Data quality has deteriorated significantly because of budgetary and staff constraints at the KNBS. GDP is believed to be significantly underestimated, as important and increasing parts of the economy, such as the informal sector, nonagriculture subsistence, horticulture, and self-employed professionals are not properly covered. An STA peripatetic advisor assisted the authorities in rebasing the national accounts estimates at constant 2001 prices and compiling institutional accounts for the general government sector. As a result, national accounts estimates for the years 1996–2005 in current and constant (2001) prices) have been published. Quarterly national accounts are being developed with the assistance of the AFRITAC East. Quarterly GDP estimates are now published.

Prices and production

6. In early 2002, the KNBS (then CBS) began publication of a new national CPI (covering 13 urban towns), with 1997 as reference year and outdated weights and basket of items derived from the 1993–94 Household Budget Survey (HBS). Indices are produced for lower and middle/upper income groups in Nairobi and other cities. The index is compiled and published on a timely basis. No producer, export, or import price indices are produced. In March 2008, a TA mission assisted the authorities in identifying the methodological issues relating to the measurement of inflation. The current methodology of aggregating prices at the elementary level was found to impart a substantial upward bias on CPI measurement. In line with STA recommendations, the KNBS released a revised series that is consistent with international best practices in November 2009. They plan to publish a new series in February 2010, with rebasing and reweighing of the CPI basket.

Government finance statistics (GFS)

7. The data ROSC mission emphasized a number of key areas in GFS compilation that should be improved, including: (i) migration to the GFSM 2001 methodology; (ii) broadening the coverage to include extrabudgetary and social security funds and report on a general government level; (iii) reconciliation of fiscal statistics from various sources to limit discrepancies; (iv) improve information on external financing, particularly on expenditure directly financed from abroad; (v) compilation and dissemination of monthly and quarterly budget execution data; and (vi) training of Ministry of Finance (MOF) staff in the GFS methodology.

8. Since the beginning of FY 2005/06, Kenya has followed a new economic classification of the budget based on GFSM 2001 (with assistance from the AFRITAC-East). However, serious delays have emerged in reporting, reflecting difficulties in establishing budget execution and accounting systems consistent with the new classification. To ensure timely reconciliation and monitoring of budget execution, the existing systems would need to be promptly upgraded and made operational. Progress has been made toward moving to the IFMIS. There are still important gaps in ensuring proper reconciliation of fiscal data from different sources, including from various units within the MOF. The discrepancies in budget outturn data (between deficit/surplus and financing) remain significant, and the recording of external financing and expenditure directly financed from abroad is still an important area for improvement. The government has taken some steps to initiate a project to rationalize/eliminate extrabudgetary funds, but the progress in compiling consolidated fiscal statistics has remained limited.

9. The country reports data to STA for the budgetary central government for inclusion in the GFS Yearbook, albeit with a significant lag—the last data reported were for the year ending June 2005. The KNBS compiles the aggregate annual GFS revenue and expenditure data for the budgetary central government based on detailed data in the reports of the Controller and Auditor General. The data submitted for publication in the 2007 GFS Yearbook was reported in GFSM 2001 format, using bridge tables developed by the technical assistance missions. The recent steps taken in the migration to GFSM 2001 may help reduce the significant differences between KNBS data and the data compiled by the MOF and reported to AFR for surveillance and program monitoring purposes. Monthly and quarterly data are regularly reported for inclusion in the IFS.

Monetary statistics

10. Progress has been shown in the implementation of the Monetary and Financial Statistics Manual (MFSM) and development of the standardized report forms (SRFs). The authorities submitted SRF test data; however, there has not been further progress. In March 2007, a STA mission established the standardized report form for the data on the central bank; reviewed and revised the reporting form and compilation notes for the other depository corporations (ODCs) in line with MFSM data requirements; and identified the coverage of the ODC subsector. The mission found misclassification of a number of central government deposits as private sector deposits. A major issue for future work relates to the expansion of the coverage of the ODCs to include the Savings and Credit Cooperatives (SACCOS). As of end-March, 2007, there were 3,800 SACCOs, accounting for about 30percent of the total deposits of the banking system. When implemented, a new bill providing for increased supervision over SACCOs would generate data as part of the supervisory function. A follow-up mission in June 2007 conducted a workshop for officials of ODCs and established a system for reporting Form 1SR to the IMF. The new Standardized Reporting System for reporting ODCs’ data to the central bank was also finalized. There is no ongoing TA, but, if needed, Kenya can benefit from participating in the monetary module of the next phase DFID project that will commence in 2010.

External sector statistics

11. The KNBS compiles annual balance of payments statistics in Kenya shillings that are regularly reported to STA, although with considerable delay. In addition, the Central Bank of Kenya (CBK) compiles a complete set of annual balance of payments statistics in U.S. dollars, which are reported to AFR and used for programming and surveillance purposes. The two datasets are not entirely consistent, and Fund staff has strongly encouraged the authorities to reconcile them. More recently, the CBK also started to compile and publish quarterly balance of payments estimates.

12. Although the overall quality of trade data may be reasonably good, data for other current account and many financial account transactions are rather weak. Following the liberalization of the exchange system in 1993–94, gaps emerged in coverage. The compilation system (other than that used for compiling customs statistics), used since 1994, relies on reports from domestic banks and may result in a substantial under-recording of current earnings, including tourism receipts; investment flows of the private sector; as well as transactions that are settled via accounts held abroad.

13. Present estimates of direct and portfolio investment are believed to be substantially understated. The large positive errors and omissions in the central bank data that have emerged in the balance of payments since 1994 give rise to uncertainties as to the potential size of external obligations. The MOF compiles data covering public and publicly guaranteed external debt obligations to official and commercial creditors. This database does not take into account nonresident purchases of the government’s domestic currency-denominated debt securities. In developing the loan-by-loan debt sustainability analysis (DSA) in 2002, Fund and World Bank staff identified several significant debt data problems that have been addressed by the authorities. Efforts to further strengthen external debt management and its integration in the budget formulation and expenditure management systems continue. In its June 2009 Medium-term Debt Strategy, the government expressed its commitment to strengthening capacity. Also, it indicated that during the 2009/10 financial year, both the domestic and external debt databases at the CBK and Ministry of Finance will be linked through the fiber-optic cable network.

14. To help address these issues, in 2006 a technical assistance mission recommended introducing a foreign investment survey, enhancing the foreign exchange statistics survey, and using a common methodology, including for estimations, in the use of available data in the KNBS and CBK. In 2009, a DFID funded enterprise survey failed to materialize. There are plans to conduct a foreign investment survey in 2010, which planned DFID-funded and STA external sector missions will support.

15. Kenya does not report international investment position statistics to STA.

X. Kenya. Table of Common Indicators Required for Surveillance

(As of November 10, 2009)

Date of latestDate receivedFrequency ofFrequency ofFrequency ofMemo Items7
observationData6Reporting6publication6Data Quality—Methodological soundness8Data Quality—Accuracy and reliability9
Exchange Rates11/10/0911/09/06DDM
International Reserve Assets and Reserve Liabilities of the Monetary Authorities111/10/0911/09/06DDM
Reserve/Base Money11/10/0911/09/06DDMLO, LO, LO, LOLO, LO, O, NO
Broad Money9/30/0910/15/09MMM
Central Bank Balance Sheet11/10/0911/09/06DDM
Consolidated Balance Sheet of the Banking System9/30/0910/15/09MMM
Interest Rates211/10/0911/09/06DDM
Consumer Price Index10/31/0911/10/09MMM
Revenue, Expenditure, Balance and Composition of Financing3—General Government46/30/200910/09NANANALNO, LNO, LNO, LOLNO, LO, LO, LO, NO
Revenue, Expenditure, Balance and Composition of. Financing3—Central Government6/30/200910/09QIQ
Stocks of Central Government and Central Government Guaranteed Debt56/30/200910/09QQQ
External Current Account Balance6/30/200910/09MAAO, LO, O, LOLNO, LO, LO, LO, LO
Exports and Imports of Goods and Services6/30/200910/09MQA
GDP/GNP6/30/200910/09MAAO, LNO, LNO, LOLNO, LO, LNO, LO, LNO
Gross External Debt6/30/200910/09MQQ

Other Resources Citing This Publication