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Statement by Mr. Saho, Executive Director for Kenya, September 22, 2014

Author(s):
International Monetary Fund. African Dept.
Published Date:
October 2014
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Macroeconomic stability and growth has gained traction as structural adjustment and political reforms continue to be deepened in Kenya. This notwithstanding, the authorities continue to foster economic transformation to address the high poverty levels and youth unemployment. On behalf of my Kenyan authorities I thank staff for their constructive engagement with Kenya.

Economic performance and prospects

Although growth is resilient, the economy remains vulnerable to external and internal risks. Kenya’s economy is projected to grow at a much slower pace than initially expected due to poor performance in the tourism sector as a result of the security problems that have threatened tourism with multiple issuances of travel advisories from major tourist destinations. This is despite various measures announced by the government to promote domestic tourism earlier in the year. As a result, the authorities have revised their growth estimates for 2014 to between 5.0-5.5 percent which is lower than the estimate of 5.8 percent in FY2014/15 budget.

Inflation has remained generally stable in the last two years averaging 6.0 percent. However, it increased from 7.7 percent in July 2014 to 8.4 percent in August 2014 reflecting base effect and increases in prices of some food and energy items. The Kenyan shilling is relatively stable against the major foreign currencies supported by foreign exchange inflows through remittances, increased foreign investor participation in the Nairobi Securities Exchange (NSE) and the successful issuance of the debut sovereign bond. Currently, the foreign reserves are about 4.2 months of import cover.

In FY2013/14 total government revenue surpassed its target with tax income making a 70 percent contribution. There was a noticeable increase in foreign debt mainly because of borrowing to finance development activities. In the current fiscal year, the authorities target to increase revenue collection by 15.5 percent, and increase development expenditure consistent with the objective of rebalancing expenditures towards development outlays. The authorities have also set a performance benchmark for absorption of the development budget of at least 80 percent.

The FY2014/15 budget continues implementing the Second Medium Term Plan of the Vision 2030 whose main theme is “Transforming Kenya: Pathway to Devolution, Socio-Economic Development, Equity and National Unity”. To push this agenda forward, the authorities have as their key objectives to enhance the business environment for job creation; improve productivity and competitiveness in domestic and international markets; reduce the cost of living; protect the poor and vulnerable; reduce unemployment among the youth and women; and strengthen devolution.

Fiscal policy and reforms

The authorities are committed to fiscal prudence and debt sustainability. To strengthen revenue mobilization, efforts are ongoing to deepen tax reforms with a focus on the excise and income taxes to widen the tax base. In addition, to enhance efficiency in tax administration, as part of the reform initiative under the Revenue Administration Reform and Modernization Program, the Kenya Revenue Authority (KRA) has introduced a new online tax system that allows taxpayers access to various tax administration services such as updating registration details, filing tax returns, making payments, and monitoring the status of their tax ledgers. Further, to enhance the capacity of tax administration, the authorities are in the process of submitting to parliament, the Draft Inland Revenue Agency Bill and Customs and Border Services Bill to facilitate the reorganization of KRA. In addition, to rationalize expenditure and assure efficiency and value for money, the authorities are planning to roll out e-Procurement by making operational Procure-to-Pay module of the Integrated Financial Management System (IFMIS).

To address the growing wage bill, the authorities have launched the Capacity Assessment and Rationalization of Public Service (CARPS) initiative. The program aims to have a leaner, efficient and responsive public service covering both the national and county levels of government. On September 1, 2014, the biometric registration of civil servants was launched to verify staff on government payroll and their qualifications, and weed out ghost workers.

With the enormous development demands, the authorities are diversifying their financing of development. Recently, they successfully issued a debut sovereign bond to reduce the crowding out of the private sector in the domestic money market. In addition, the government has launched the Annuity Financing Mechanism for road development to provide sustainable means of funding road projects while ensuring faster turnaround in executions. This model is being pursued for roads that may not be viable for conventional tolling through public private partnership. It involves engaging a private entity to finance, design, construct and maintain a road based on an agreed payment modality by the government. This should take funding pressure away from the government to the private sector, and also incentivize contractors to improve the quality and efficiency of their service.

At the same time, the authorities are gearing to implement the parastatal reforms. The Presidential Task Force on Parastatal Reform has proposed mergers and dissolution of various parastatals that would reduce the number of parastatals from 262 to 187. However, to kick start the process two bills have to be passed by parliament; the Government Owned Entities Bill 2014 which is meant to ensure parastatals adopt a leaner and more efficient structure; and the National Sovereign Wealth Fund Bill 2014 that would revamp the government management of its shareholdings in listed companies, and address issues of managing the new found mineral wealth while also seeking to establish a wealth fund. These two bills have been published and are awaiting parliamentary debate.

The devolution process

Despite facing various challenges at the initial stages of implementing a devolved government system, my authorities are committed to making devolution work. For the challenges related to the PFM system, the authorities are committed to facilitate the county governments strengthen their PFM systems so that they can achieve value for money in the use of public resources. In addition, while the Constitution stipulates an allocation to county governments of not less than 15 percent, in the current financial year the national government is allocating 43 percent of the most recently audited revenues approved by parliament to ensure adequate financing of devolved responsibilities. Furthermore, the Division of Revenue Bill and County Allocation Bill have been assented to, allowing for timely disbursement of funds to the counties in this fiscal year.

Monetary and financial policies

The Central Bank of Kenya (CBK) continues to pursue prudent monetary policy to compliment fiscal policy in order to maintain price stability. Although overall inflation has remained above the 7.5 percent upper bound of the prescribed range for the second consecutive month, the Monetary Policy Committee (MPC) at its meeting on September 3, 2014 retained the CBR at 8.5 percent on the basis of the absence of any fundamental structural pressures on inflation. However, the CBK has undertaken to pursue a tightening bias in the money market through monetary policy operations to continue anchoring inflation expectations. It will also keep vigilant on any domestic or external developments that may impact on price stability and take timely action should shocks materialize.

To maintain monetary policy credibility, the authorities are committed to modernizing the monetary policy framework. It is important to note that Kenya is serving as a pilot project in the IMF project on “Monetary and Exchange rate policies for LICs” where the IMF is collaborating closely with the central bank to modernize the practice of monetary policy. The project has led to the training of CBK staff on Forecasting and Policy Analysis System (FPAS) which captures the authorities’ views of the monetary transmission mechanism and shocks impacting on the economy in line with best practices in emerging markets. CBK is in the process of institutionalizing this framework.

As financial inclusion continues to deepen, efforts are being made to mitigate credit risks emanating from micro-loans. A mass education campaign has been launched, targeting the new users of mobile banking micro-loan facility (M-shwari). In addition, micro-loans issued under the M-Shwari facility are subject to Credit Reference Bureau Regulations, 2013. Section 50 of the Credit Reference Bureau Regulations (issued as Subsidiary Legislation in January 2014) provides the timeframe during which all non-performing loans must be reported to the credit bureau for listing.

Starting January 2015, all banks are required to maintain a minimum capital requirement (Tier II) of 14.5 percent from the current 12 percent. This follows the issuance of revised guidelines on prudential capital adequacy ratios by CBK in January 2013 to strengthen the regulatory framework for commercial banks. According to the guidelines, banks are required to hold a capital conservation buffer of 2.5 percent over and above the prevailing minimum ratios. This increases the minimum core capital to risk weighted assets and total capital to risk weighted assets requirements to 10.5 and 14.5 percent respectively. The main aim is to enable the institutions withstand future periods of stress. Further, in the recent Financial Stability Report, CBK has indicated its intentions to raise the minimum ratios further to make the banking industry move to the level of other markets in the region such as South Africa and Nigeria.

The Kenya Banks’ Reference Rate (KBRR) became effective July 8, 2014. The CBK and Kenya Bankers Association are monitoring the implementation of the KBRR and the Annual Percentage Rate (APR) frameworks by commercial banks. So far there are indications that new and existing loans are benefiting from the KBRR framework. The average premium that commercial banks charge above the KBRR on commercial mortgages averaged 3.05 percent while that on corporate loans (1–5 years) was 4.09 percent by end August. These frameworks are designed to improve transparency in credit pricing and promote full disclosure of bank charges on new loans thereby supporting an increase in the supply of affordable credit to support investment.

NSE is now operating as a demutualized entity. This demonstrates commitment to transparency and good corporate governance.

Enhancing the business environment and regional integration

The authorities are focusing on enhancing the business environment to strengthen economic activity and create jobs. They have prioritized addressing security challenges. In this regard, they are building on the security modernization program initiated in the last financial year to strengthen the security system. They have in the FY2014/15 budget focused interventions to recruitment and training of police officers, security infrastructure development, and housing and medical scheme for security personnel. In addition, the authorities are working to improve productivity and enhance overall competiveness by investing in transport and logistics networks including, modernizing Jomo Kenyatta International Airport, improving efficiency of Port of Mombasa, increasing energy production, and widening the coverage of road networks.

Further, in the context of regional integration various joint infrastructure projects have been initiated to ease doing business in the East African region. Already Kenya, Uganda and Rwanda have put in place the singe tourist visa and a single customs territory. A standard gauge railway from Mombasa to Kigali and Juba through Kampala is being designed to facilitate regional trade and the financing of the first segment has been secured. In addition, to improve the efficiency of the Port of Mombasa, the Kenya National Electronic Single Window System has been launched. Further, the LAPPSET project that covers Kenya, Uganda, Rwanda, South Sudan and Ethiopia is expected to foster transport links and give the region a competitive edge in global maritime trade.

Conclusion

My authorities value the Fund’s policy advice and technical assistance. Therefore, they will continue to engage with the Fund and also seek the support of development partners as they implement their ambitious economic transformation agenda. My authorities are committed to maintaining macroeconomic stability and deepening structural reforms to create a favorable business environment that will support strong and inclusive growth

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