Kenya: Third Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waivers of Nonobservance of Performance Criteria Informational Annex

This paper presents findings of the Third Review under the poverty reduction and growth facility arrangement for Kenya. The sharp spending increase budgeted for 2007/08 could exert pressures on domestic prices and compromise project quality, but the authorities are taking steps to mitigate these risks. Authorities are committed to fully implementing the budget only if nonfood inflation remains low and project quality is maintained. Some aspects of governance have improved, but challenges remain. Structural reforms in public financial management need to be broadened and financial sector reforms accelerated.


This paper presents findings of the Third Review under the poverty reduction and growth facility arrangement for Kenya. The sharp spending increase budgeted for 2007/08 could exert pressures on domestic prices and compromise project quality, but the authorities are taking steps to mitigate these risks. Authorities are committed to fully implementing the budget only if nonfood inflation remains low and project quality is maintained. Some aspects of governance have improved, but challenges remain. Structural reforms in public financial management need to be broadened and financial sector reforms accelerated.

I. Kenya: Relations with the Fund

(As of September 30, 2007)

I. Membership Status: Joined February 3, 1964; Accepted the obligations of Article VIII, Section 2, 3, & 4: June 30, 1994.

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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The current three-year PRGF arrangement was approved on November 21, 2003, in the amount of SDR 175 million (64 percent of quota), of which SDR 112.5 million has been disbursed. 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, which was delayed extensively as a result of governance concerns and eventually completed on April 11, 2007. The arrangement was extended to November 20, 2007 at that time.

VI. Projected Obligations to Fund

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

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VII. Implementation of HIPC Initiative: Not Applicable.

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

IX. Safeguards Assessments

Under the Fund’s safeguards assessment policy, the Central Bank of Kenya (CBK) was subject to a safeguards assessment with respect to the augmentation of access under the existing PRGF arrangement approved on December 20, 2004. The assessment, completed on September 8, 2005, noted that the CBK has taken steps to implement the recommendations of the earlier safeguards assessments and proposed measures to address the remaining vulnerabilities.

X. Exchange Arrangements

The currency of Kenya is the Kenya shilling. Kenya has adopted a unitary exchange rate structure in which the exchange rate is determined in the interbank market. 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 maintains an exchange system that is free of restrictions on the making of payments and transfers for international current transactions. On October 31, 2007, the exchange rate was Ksh 67.00 = US$1.00.

XI. Article IV Consultations

Kenya is on the 24-month cycle for Article IV consultations. The last Article IV consultation was concluded on April 11, 2007.

XII. FSAP Participation

The joint IMF-World Bank Financial Sector Assessment Program (FSAP) missions took place in Nairobi in July and October, 2003.

XIII. Technical Assistance

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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.

II. Kenya: Relations with the World Bank Group

(As of October 9, 2007)

1. Kenya’s development strategy is set forth in the Investment Programme for the Economic Recovery Strategy for Wealth and Employment Creation (IP-ERS), endorsed by the Boards of the IMF and the World Bank in May 2004. The IP-ERS provides a common framework for Bank-IMF support to Kenya’s development efforts in the medium term. The government also launched the preparation of Vision 2030 strategy in October 2006, which highlights Kenya’s aspiration to achieve the status of a middle-income country by 2030.

2. Development strategy and Vision 2030. In supporting Kenya’s development strategy and the development of its Vision 2030, the IMF leads the dialogue on monetary matters and coordinates with the Bank on macro-fiscal issues and reforms in the areas of public expenditure management, governance, financial sector, revenue, trade, public enterprises, and the public wage bill. The Bank takes the lead on monitoring progress on implementation of the IP-ERS, dialogue and lending in the areas of infrastructure, human development, private sector development, rural development, and reforms of the civil service. In non-lending work, the Bank takes the lead on growth and poverty analysis, and sectoral work in the areas of Bank’s lead, while the two institutions coordinate on trade, labor markets, macro-fiscal work, poverty and social impact analysis, and debt sustainability analysis.

Bank Group Strategy

3. A Country Assistance Strategy of reengagement for fiscal 2004–07 was endorsed by the World Bank Board on June 17, 2004. At mid-course, the Bank prepared a Country Assistance Strategy Progress Report (CAS PR) which was discussed by the Bank Board in March 2007. The CAS PR discussed key accomplishments over the last three years, including improved macroeconomic management and growth recovery. It documented challenges such as high income inequality and inequitable access to services, and mixed progress on corruption and some structural reforms. The CASPR emphasized the continued emphasis on growth and poverty reduction as key pillars in the Bank’s engagement, but it also attached enhanced attention to equity and governance:

4. Enhanced focus on equity. Reflecting greater attention to equity, the Bank’s support program more directly targets the poorest people (with continuing attention to the drivers of overall growth). In this regard, analytic work such as the ongoing joint poverty assessment will help the government improve the targeting and use of public resources. Lending will target some poverty hotspots, such as Western Kenya, Nyanza Province, and urban and periurban slums, where about 70 percent of poor Kenyans live. New programs will provide financial and technical resources for poor communities and entrepreneurs to provide economic services and create employment.

5. Enhanced focus on governance. In supporting the government’s Governance Strategy for Building a Prosperous Kenya (GSPK) and Governance Action Plan (GAP), the Bank will focus on transparency initiatives (including transparency in the judiciary, and capacity building in the prosecutorial and judicial services); broadening stakeholder involvement, including additional private participation in infrastructure services such as the ports; accelerating public financial management reforms; and improving governance in high-priority sectors—education, HIV/AIDS, health, and roads. Analytic work in such areas as media development, parliamentary and judicial capacity, and police oversight mechanisms will help lay the foundation for the development and governance agenda beyond this GSPK/GAP and for the next CAS.

6. Continued attention to accelerated economic growth and improved public sector management. A major economic study being carried out by the Bank focuses on how Kenya could raise and sustain growth rates from about 6 percent currently to 10 percent as part of its economic, social and political vision to become a middle income country by the year 2030. This is a multi-sectoral work covering macro-fiscal, infrastructure, trade, human development and financial sector issues, and is being carried out in close collaboration with the government. Meanwhile, the current IP-ERS’s high priority to budgetary and public expenditure reforms is expected to continue despite some delays.

7. Public sector institutional strengthening. An Institutional Reform and Capacity Building (Technical Assistance) Project is helping the government strengthen capacity for budget formulation and execution, public financial management, internal and external auditing, revenue collection and management, and development of improved procurement practices. To increase accountability of the administration to citizens, the project is strengthening parliamentary committees to enable them to fulfill their oversight role. The project will also build the capacity of key ministries to define, measure, and deliver results by supporting the establishment of a system of results-based management, by building capacity for monitoring and evaluation, and by strengthening mechanisms for citizen feedback. To enhance the capacity of the Central Bureau of Statistics and other agencies, the Bank Board approved a Statistical Capacity-Building Project (StatCap) in March 2007. In addition, the Bank is helping to build capacity for monitoring and evaluation through a grant from the Institutional Development Fund.

8. Poverty reduction. In addition to supporting growth, the Bank is also targeting its support to some of Kenya’s poorest communities. The Bank is in the process of preparing a poverty assessment in close collaboration of the government and other donors based on the Kenya Integrated Household Budget Survey. The Arid Lands Resource Management Project Phase Two, effective in September 2003, is using a multisectoral, district based, community driven development approach to reduce poverty in the arid and semiarid districts of Kenya. In August 2006, the World Bank approved a US$60 million additional financing credit for emergency drought interventions in Kenya’s arid and semi-arid lands. The credit will be implemented under the Arid Lands Resource Management Project (ALRMP) II. The Executive Board of the World Bank approved a new operation, the Western Kenya Community Driven Development and Flood Mitigation, in March 2007. The objective of the proposed project is to empower local communities of men and women to engage in sustainable and wealth creating livelihood activities and reduce their vulnerability to flooding.

9. Sustainable development. The Bank is supporting measures to increase agricultural productivity and competitiveness through lending and analytical work. The Agricultural Productivity Project, which became effective in October 2004, is assisting the transformation of Kenya’s research and extension system to a more demand driven, farmer-led and pluralistic system, while supporting associated policy reforms. In addressing the challenges of natural resource management, the Executive Board of the World Bank is expected to consider a new operation, the Natural Resource Management Project, late in March 2007. The objectives of the project are to enhance the institutional capacity to manage water and forest resources, reduce the incidence and severity of water shocks in river catchments, and improve the livelihoods of communities participating in the co-management of water and forests. Meanwhile, the ongoing multicountry GEF-supported Lake Victoria Environmental Project is helping to establish institutions for the sustainable management of the lake and its catchment area. The GEF-supported Western Kenya Integrated Ecosystem Management Project seeks to improve management of soils, water, and biodiversity, while raising the productivity of agriculture. The GEF-supported Wildlife Conservation Leasing Demonstration Project, approved recently on August 2006, seeks to motivate and enable landowners to maintain wildlife habitat on their land.

10. Education and health. In education, the Bank is supporting the government’s strategy through the ongoing Free Primary Education Support Project. The government is implementing a SWAp, approved by the Bank Board in November 2006, designed to: ensure equity of access to basic education; enhance quality and learning achievement; provide opportunities for further education and training; and strengthen education sector management and governance. This will support the entire sector, but with an initial focus on primary education and the development of acceptable strategies for the other subsectors of the education system. This will lay the groundwork for future support to the sector through SWAps or poverty reduction support credits. The grant-financed Global Development Learning Network project effective in February 2004 is helping to develop enhanced mechanisms of learning and knowledge-sharing among policy makers. In health, the Bank is supporting the government’s strategy through the ongoing Decentralized AIDS and Reproductive Health (DARE) Project, which seeks to improve mother and child health through more integrated delivery of child survival, reproductive health, and HIV/AIDS services. The Bank has continued to work in collaboration with development partners on the design of a health sector SWAp following recent government and Bank review which confirmed concerns about corruption risks.

11. HIV/AIDS. The Bank has been supporting the government’s program to control HIV/AIDS. Kenya was the first country to access funds under the Africa Region’s Multi-Country AIDS Program (MAP) through the Kenya HIV/AIDS Disaster Response Emergency Project (KHADREP). The KHADREP closed at the end of 2005, and a new project (The Total War on AIDS Project - TOWA) approved by the Bank Board in June 2007 is designed to support implementation of the Kenya National AIDS Strategic Plan for 2005–2010. This focuses on governance and accountability strengthening, the coordination of the national program following confirmation by government and Bank reviews of corruption in KHADREP, and the provision of grants to implementing agencies (including local communities and the private sector) to reach vulnerable groups. Through the TOWA and following progress in addressing governance and anticorruption issues in HIV/AIDs, the Bank would support the National AIDS Control Council and its provincial, district, and local-level bodies, as well as selected line ministries in the mainstreaming of HIV/AIDS-related activities. As noted above, the medical response to the HIV/AIDS epidemic will be integrated into the Health SWAp.

12. Privatization and private sector participation. The Bank group is supporting several initiatives aimed at promoting private sector participation in the economy. The IFC was the transaction adviser for concessioning the Kenya Railways jointly with Uganda Railways, established in October 2006. The Energy Sector Recovery Project is supporting the reform of the Kenya Power and Light Company whose management was transferred to a private company in July 2006. IFC is also involved as a transaction adviser for the restructuring of Telkom Kenya Limited. All these actions should lead to an enhanced role for the private sector in managing these key utilities.

13. Private sector development. The Bank and IFC are supporting implementation of their recommendations, including a far-reaching reform of Kenya’s licensing regime that will result in the elimination of numerous unnecessary licenses. An update of the investment climate assessment has recently been carried out. A joint Bank- and IFC-supported Micro, Small and Medium Enterprise Project aims to increase MSME’s access to finance and to business development services. A three-year IFC-supported pilot Small and Medium Enterprises Solutions Center, which started operations in Kenya in March 2005, will help MSMEs access financial resources, information, and advice through a single integrated service center. The IFC-supported multidonor Private Enterprise Partnership for Africa will facilitate small firms’ access to financial and business services. MIGA is supporting the country’s agribusiness, infrastructure, manufacturing and services sectors. The total gross exposure from these investments, sponsored by investors from the Cayman Islands, South Africa, United States, is US$58.3 million. In June 2007, the Agency provided additional coverage toward the expansion of a greenfield sugar factory in western Kenya. This is a south/south investment, financed by the Industrial Development Corporation of South Africa, and aims to rejuvenate the economy of the sugarcane industry in the Kisumu region. In FY08, MIGA will continue its support of the power sector in Kenya by underwriting the second phase (expansion) of a geothermal project that it is currently insuring. The anticipated gross exposure for this investment is up to US$200 million and would be the Agency’s single largest project in Africa.

14. Regional integration and improvement of trade environment are priorities of the government. In 2005, Kenya launched a customs union with Tanzania and Uganda in the context of the East African Community (EAC), which includes a common external tariff. Kenya is also actively involved in negotiations and activities of the Common Market for Eastern and Southern Africa, and in negotiations of economic partnership agreements with the European Union. A trade report focusing on behind the border supply-side constraints was prepared by the Bank in 2006 and is being used in the implementation of Private Sector Development Strategy of the government.

15. Infrastructure development. The IP-ERS recognizes the lack of adequate physical infrastructure as a major impediment to private sector development in Kenya. The Bank is supporting the government’s investment program through the Northern Corridor Transport Improvement Project, which is financing the reconstruction of the road network that links Kenya with Uganda, Rwanda, Burundi, and the Democratic Republic of Congo. The project is also helping to upgrade Nairobi’s Jomo Kenyatta International Airport to improve passenger facilities and airport security. The joint concessioning of Kenya’s and Uganda’s railways is expected to be a major catalyst to regional integration and growth. The grant-financed Nairobi Water and Sewerage Institutional Restructuring Project, which became effective in September 2004, aims at building a strong institutional and governance framework that will promote efficient and sustainable delivery of water and sewerage services in Nairobi. The EAC Regional Trade and Transport Facilitation Project is supporting railway concessioning and customs reform at the Mombasa port. In the context of growth analytical work, the Bank carried out a review of roads portfolio with a view to improve implementation of road projects and ensuring good economic rationale in selection of projects.

16. Transparency and communications infrastructure. The government has been pursuing an ambitious program of ICT reforms. Liberalization of the international voice/data market was achieved with the award of more than eighteen international gateway licenses over the last 14 months, including for the two mobile network operators. Consequently, tariffs have fallen by over 50 percent and critical local market innovations are taking place (for example, Celtel launched in October 2006 a seamless local service across Kenya, Uganda and Tanzania). In late 2006, the Second National Operator license was awarded competitively for US$169.7 million. Telkom Kenya (TKL), currently a state-owned monopoly, is being restructured in preparation for privatization. As part of the larger program to realize its ICT vision, the government is seeking to create an enabling environment for achieving the following specific goals: (a) tripling the number of telephone lines from 7.5 million to 23 million in three years; (b) increasing the number of Internet users from 1.25 million to 5 million in three years; (c) establishing at least one digital village or e-centre in each constituency within this year; (d) ensuring that every school in Kenya has access to ICT resources by the end of the year; and (e) providing e-government services at district and constituency level. Through a Transparency and Communications Infrastructure Project, the Bank is supporting investments in three areas—the enabling institutional and regulatory environment, connectivity, and transparency–including e-government applications.

17. Financial sector development. The IP-ERS identifies the urgent need to reform the financial sector in Kenya, which is beset with a relatively high level of nonperforming loans and wide interest rate spreads, and operates within a weak legal and judicial system. To support the government’s reform agenda, the Bank and the IMF conducted a joint Financial Sector Assessment Program in 2004 that highlighted the vulnerabilities of the financial sector. A Financial and Legal Sector Technical Assistance Credit that was approved by the Bank’s Board in October 2004 is supporting the development of financial and legal sector strategies, the strengthening of financial and legal sector regulations and institutions, and the establishment of a bank restructuring and privatization project within the Ministry of Finance that will guide the process of divesting the state’s holdings in banks.

Summary of Bank’s Lending Portfolio

(As of March 5, 2007)

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IMF-World Bank Collaboration in Specific Areas

18. The IMF and World Bank staffs maintain a close collaborative relationship in supporting structural reforms in Kenya through lending, analytic work, and technical assistance.

19. Joint assessment of the IP-ERS progress report. The staffs of the Bank and the IMF jointly prepared a staff advisory note on Kenya’s Annual Progress Reports of the IP-ERS in March 2007.

20. Macroeconomic work. The IMF leads the analysis and dialogue on monetary issues such as monetary policy, inflation target, nominal exchange rate management, and central bank operations. The Bank coordinates with the IMF on issues related to fiscal policy, debt sustainability, real exchange rate, public sector management etc. and takes the lead on growth and real sector issues. The teams are currently consulting on the growth analytic work being carried out by the Bank in the context of Vision 2030.

21. Budgetary and public expenditure reforms. The Bank and IMF work closely to support government efforts in budgetary and public expenditure reforms. The Bank leads the dialogue on planning, the preparation of the medium-term expenditure framework, strategic resource allocation (particularly aligning budgetary allocations with the priorities laid out in the IP-ERS), expenditure restructuring, enhanced stakeholder participation, and issues related to efficiency of public spending, such as expenditure tracking. The Bank and the IMF collaborate on issues related to internal audit reform and on the integrated financial management information system.

22. Strengthening revenue collection and administration. The Bank and the Fund carried out detailed assessments of customs operations and tax administration respectively. The Fund has been providing technical assistance to the Kenya Revenue Authority. The Bank assisted the customs department in carrying out a time release study of clearing containers through customs. The Fund (through AFRITAC) and the Bank collaborated closely in supporting the Kenya Revenue Authority to prepare a reform and modernization plan. The Institutional Reform and Capacity Building Technical Assistance Project will finance capacity building of the Kenya Revenue Authority. The EAC Regional Trade and Transport Facilitation Project is supporting reform of customs.

23. Debt management and debt sustainability analysis. The IMF prepared an external debt sustainability analysis in December 2003, which it updated in December 2004. The Bank and Fund prepared a joint debt sustainability analysis covering both external and domestic public debt in March 2007. In the context of the Financial Sector Assessment Program, a joint World Bank/IMF initiative is being undertaken to support capacity-building in the area of sovereign debt management and domestic debt market development.

24. Governance reforms. Governance reforms are a key element of the government’s strategy to promote economic growth and reduce poverty. The Fund’s PRGF supports a deepening of anticorruption measures. The Bank and the IMF coordinate closely on approach to governance matters in Kenya. They jointly participate in the anticorruption donor group, which is monitoring the implementation of the government’s anticorruption action plan. IMF staff also participated in the Governance Missions in June/July 2006 and February 2007.

25. Financial sector reforms. The IMF and Bank are collaborating on financial sector reforms. They have conducted a joint in-depth assessment of the financial sector (banking, insurance, and capital markets) through the Financial Sector Assessment Program.

26. Privatization and private sector development. The dialogue on privatization and regulatory reforms is led by the Bank, and the IMF is a partner in this policy dialogue, particularly on issues of the fiscal implications of parastatal reforms.

27. Regional integration and trade reforms. The IMF and the Bank both provided advice on the implementation of the common external tariff, and the Bank is providing technical advice on regional integration issues. The Bank has finalized a regional assessment of nonfiscal investment incentives in each of the three states of the EAC, complementing an earlier IMF report that advises on the harmonization of incentives in the context of the customs union. The Bank is implementing a Regional Trade Facilitation Project aimed at providing political-risk and export insurance for cross-border trade between participating countries. The Bank together with the African Development Bank is implementing the EAC Regional Transport and Trade Facilitation Project. This project includes support for implementation of the customs union, and institutional and investment support to facilitate transport in the region. The Bank with the Africa Development Bank has prepared a regional integration assistance strategy that will set out priorities for regional interventions in East Africa.

Prepared by World Bank staff. Questions may be addressed to Colin Bruce, Country Director, Kenya, at 5368+3441, or Praveen Kumar, Country Economist, at X-36347.

III. Kenya: Statistical Issues

1. The provision of Kenya’s economic and financial data is broadly adequate for surveillance and program monitoring. Weaknesses in macroeconomic statistics reflect managerial and organizational shortcomings, and inadequate resources provided to the Central Bureau of Statistics (CBS). In line with the new Statistics Law, the government plans to establish an autonomous National Bureau of Statistics (NBS) to replace the CBS during the fiscal year 2006/07.

2. 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.

3. 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 have been posted on the Fund’s Dissemination Standards Bulletin Board (DSBB). Kenya received Fund technical assistance in this regard, and further assessment of capacity building requirements has been undertaken by the AFRITAC East Statistical Advisor.

4. Monetary, exchange rate, and some external data are published on a monthly and biannual basis by the Central Bank of Kenya (CBK) 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 CBS in its Economic Survey.

National accounts

5. Data quality, which was previously reported as good, has deteriorated significantly because of budgetary and staff constraints at the CBS. 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. 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.

Prices and production

6. No producer, export, or import price indices are produced. In early 2002, the 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 and Nairobi and other cities. The index is compiled and published on a timely basis. No producer, export, or import price indices are produced.

7. Kenya is making progress in updating the weights of their CPI using the results of the 2004/5 integrated HBS. This would facilitate a revamping of the CPI to conform to international standards, as outlined in the CPI Manual 2004. There is a need to review the formula used at the elementary aggregate level, as the NBS currently uses for the “food and non-alcoholic beverage” product group, a chained average of relatives and this does not conform with international standards. Also, there is a need to examine the treatment of seasonal goods and services and the adequacy of the CPI compilation software.

Government finance statistics (GFS)

8. 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 and training of Ministry of Finance (MOF) staff in the GFS 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; and (v) compilation and dissemination of monthly and quarterly budget execution data.

9. 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 upgraded and made operational. Some 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.

10. 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 CBS 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. Submission 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 CBS 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 International Financial Statistics (IFS).

Monetary statistics

11. The CBK has experienced delays in the implementation of the Monetary and Financial Statistics Manual and adoption of the IMF’s 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 central bank data, 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 30 percent of the total deposits of the banking system. Legislation for increased supervision over SACCOs has been prepared and it is hoped that it will be enacted shortly. Monthly data would also be generated 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.

External sector statistics

12. The CBS compiles annual balance of payments statistics in Kenya shillings that are regularly reported to STA, although with considerable delay. In addition, the 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. As the two datasets are not entirely consistent, reconciliation should be a priority. More recently, the CBK also started to compile and publish quarterly balance of payments estimates.

13. 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. This may result in a substantial underrecording of current earnings (including tourism receipts), investment flows of the private sector, and transactions that are settled via accounts held abroad.

14. Estimates of direct and portfolio investment are believed to be substantially understated. 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 staffs identified several significant debt data problems that have been addressed by the authorities. Nevertheless, significant debt data management problems remain, along with more general issues in the area of external debt management and its integration in the budget formulation and expenditure management systems.

15. The January-February 2006 mission recommended introducing a foreign direct investment survey, enhancing the foreign exchange statistics survey, and using a common methodology, including for estimations, in the use of available data in the CBS and CBK. Workers’ remittances estimates are now included in the CBS annual BOP following the advice of the mission. The GDDS website has identified plans for dissemination of documentation of methodology, joint work by Ministry of Finance, CBK, and CBS on external debt, and compilation of international investment position data.