Journal Issue

IMF Executive Board Concludes 2009 Article IV Consultation with Kenya

International Monetary Fund
Published Date:
January 2010
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IMF Executive Board Concludes 2009 Article IV Consultation with Kenya

On December, 22, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Kenya.1


Kenya’s strong economic performance during 2004–07 which resulted in an average of 6.0 percent real GDP growth per annum stalled in 2008 due to a series of adverse developments, including the global economic crisis. The combined impact of the shocks led Kenya to seek Fund financial assistance under the Rapid Access Component of the Exogenous Shocks Facility (RAC-ESF) in May 2009. A combination of policy adjustments and Fund financing of SDR135.7 million (about US$207 million) were instrumental to improving macroeconomic performance and real growth in 2009/10 is now projected at 3.2 percent, up from 2.2 in 2008/09, despite prolonged drought and its spillover effects.

Fiscal deficit in 2008/09 is estimated at 3.6 percent of GDP, falling short of the intended deficit of 5.9 per cent of GDP due to slow implementation of foreign funded development projects. While preserving debt sustainability, the 2009/10 budget seeks to provide fiscal stimulus with a projected fiscal deficit of 6 percent of GDP. Over the medium term and as growth gets entrenched, the fiscal stimulus is expected to be gradually withdrawn and a convergence towards the target debt to GDP ratio of 40 percent is projected.

Since 2008/09 monetary policy stance has been countercyclical. Central Bank of Kenya (CBK) reduced the policy rate and the cash reserve requirement by a total of 125 and 150 basis points respectively. However, the growth rate of monetary aggregates remained below target, and the recently published revised CPI indicates that the inflation environment has been relatively benign.

The Financial Sector Assessment Program (FSAP) Update Mission, which preceded the Article IV Mission, concluded that the banking sector remains well-capitalized and adequately provisioned. However, it was found that increasing cross border transactions and regionalization would require more sophisticated supervision and regulation. In the capital market, the mission found that poor regulation and inadequate funding are key risks faced by the social security fund and other pension schemes.

The current account deficit widened to 7.8 percent of GDP in 2008/09, compared to 4.5 percent the previous year, reflecting the impact of various shocks. In 2009/10, a moderate narrowing of the deficit, to around 7 percent is projected. The authorities have resumed build up of international reserves, and gross official reserves stood at US$3.7 billion or some 3.7 months of imports at end-October 2009.

Progress on the implementation of structural reforms is slow. The Governance Action Plan (GAP) has been updated, but the Public Finance Management Bill, meant to address some weaknesses in structural fiscal issues, and the Banking Act (Amendment) Bill, which is meant to strengthen the hand of the CBK by authorizing consolidated supervision and prompt corrective action, are yet to be brought before Parliament. Several other pieces of legislation designed to improve economic governance have not been enacted.

Executive Board Assessment

Executive Directors commended the Kenyan authorities for implementing sound macroeconomic policies that are now contributing to a nascent recovery from the recent multiple adverse shocks. Directors cautioned that, given that downside risks remain, it will be important to continue pursuing sound economic policies in order to place the economy on a robust growth trajectory with debt sustainability and low inflation.

Directors agreed that fiscal policy should strike the proper balance between providing economic stimulus and preserving debt sustainability, noting that the 2009/10 budget is broadly appropriate in providing needed stimulus. Directors generally supported contingency plans for the budget to address possible revenue shortfalls. They welcomed the plan to gradually begin the withdrawal of fiscal stimulus in the next budget year and supported strongly the convergence to the public debt target over the medium term. Directors endorsed the introduction of an income support scheme aimed at protecting the vulnerable and poor households.

Directors considered that easing monetary policy had been appropriate given the need to support economic activity. Going forward, they generally recommended that monetary policy focus more acutely on safeguarding price stability; and that available instruments should be employed decisively to achieve this objective. Directors welcomed planned reforms to the monetary operations framework, and recommended that policy objectives be communicated clearly. They also welcomed the release of a revised CPI and plans to release a new series in early 2010, which would enhance the effectiveness of monetary policy.

Directors observed that the managed float exchange rate regime has served Kenya well. They noted staff’s assessment that the real effective exchange rate seems broadly in line with economic fundamentals. Directors supported the authorities’ intention to limit foreign exchange interventions to smoothing excessive short-term volatility and meeting the foreign reserve target.

Directors welcomed the assessment of the FSAP Update that the banking sector is well capitalized and adequately provisioned. While the financial sector has weathered the immediate impact of the global crisis, they concurred that risks remain. Directors commended the authorities for the progress made in implementing the recommendations of the 2003 FSAP. They encouraged expedited implementation of remaining recommendations to address emerging weaknesses related to cross-border transactions and regionalization, and regulation of pension schemes. The Central Bank of Kenya should ensure that provisions and capital buffers remain adequate to deal with future risks.

Directors noted the authorities’ development strategy as laid out in their First Medium-Term Plan under Kenya Vision 2030. They stressed accelerating broad-based structural and governance reforms in order to improve the prospects for rapid economic growth over the medium term. Directors recommended giving immediate priority to reforms of governance, public finance management, and the financial sector. They commended the authorities for the recent passage of the AML legislation, and called for speedy submission of remaining pending bills aimed at consolidating the structural reform agenda. They also supported the authorities’ efforts to enhance trade liberalization and strengthen the EAC regional integration framework.

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

Kenya: Selected Economic and Financial Indicators, 2006/07-2010/11
(Annual percentage change, unless otherwise indicated)
National accounts and prices
Real GDP growth (market prices)
Consumer price index (annual average)110.418.512.58.55.0
Consumer price index (end of period)
Ksh per US $ exchange rate (end of period)262.664.676.374.5
Money and credit
M3X (broad money and foreign currency deposits, end period)17.018.712.514.8
Reserve money (end of period)19.818.24.612.8
(In percent of GDP, unless otherwise indicated)
Investment and saving
Central government4.
Gross national saving15.114.811.011.813.7
Central government2.
Central government budget
Total revenue21.622.021.622.322.7
Total expenditure and net lending24.327.326.529.529.3
Overall balance (commitment basis) excluding grants-2.7-5.2-4.8-7.2-6.6
Overall balance (cash basis) including grants-1.7-3.4-3.7-6.0-5.4
Balance of payments
Exports value, goods and services26.225.426.623.022.1
Imports value, goods and services35.835.940.636.233.5
Current external balance, including official transfers-3.5-4.3-7.8-7.1-5.3
Current external balance, excluding official transfers-3.5-4.5-7.8-7.0-5.3
Gross international reserve coverage
in months of next year imports (end of period)
Public Debt
Total public debt, net of deposits (end of period)
NPV of central government debt (end of period)34.828.629.032.033.4
Of which: NPV of external debt15.511.711.211.711.8
Sources: Kenyan authorities; and IMF staff estimates and projections.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

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