Kenya: 2006 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Requests for Extension and Rephasing of the Arrangement, Reduction in Access, and Waiver of Performance Criteria—Informational Annex
Author: International Monetary Fund
Publication Date:
04 May 2009
eISBN:
9781451821239
Language:
English
Keywords:
ISCR; CR; food price inflation; twelve-month inflation rate; price; government; inflation rate; exchange rate; e-government application; private sector; governance strategy; central government; Government finance statistics; HIV and AIDS; debt management
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Three years of broad-based economic recovery in Kenya brought GDP growth to nearly 6 percent in 2005/06, its highest in two decades. This 2006 Article IV Consultation focuses on how to sustain Kenya’s recent strong economic growth. It argues that this would require accelerating structural reforms and upgrading infrastructure, while preserving macroeconomic stability. The report recommends completion of the Second Review under the Poverty Reduction and Growth Facility (PRGF) arrangement, extension of the arrangement to November 20, 2007, and a reduction and rephasing of access.

Abstract

Three years of broad-based economic recovery in Kenya brought GDP growth to nearly 6 percent in 2005/06, its highest in two decades. This 2006 Article IV Consultation focuses on how to sustain Kenya’s recent strong economic growth. It argues that this would require accelerating structural reforms and upgrading infrastructure, while preserving macroeconomic stability. The report recommends completion of the Second Review under the Poverty Reduction and Growth Facility (PRGF) arrangement, extension of the arrangement to November 20, 2007, and a reduction and rephasing of access.

Appendix I—Relations with the Fund

(As of January 31, 2007)

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

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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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 March 6, 2007, the exchange rate was K Sh 69.4=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 December 6, 2004 (www.imf.org).

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. Scott W. Rogers is the current Senior Resident Representative.

Appendix II—IMF-World Bank Relations

(As of March 5, 2007)

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 in October 2006, which highlights Kenya’s aspiration to achieve the status of a middle-income country by 2030.

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 administration, 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

A Country Assistance Strategy of reengagement for fiscal 2004–07 was endorsed by the World Bank Board on June 17, 2004. The Bank’s strategy was formulated to promote in a carefully sequenced program of growth and poverty reduction. At mid-course, the Bank has prepared a Country Assistance Strategy Progress Report (CAS PR) (to be discussed by its Board on March 27, 2007). The CAS PR discusses key accomplishments over the last three years, including improved macroeconomic management and growth recovery. It documents challenges such as high income inequality and inequitable access to services, and mixed progress on corruption and some structural reforms. In an environment where governance challenges are paramount, it also strives to maintain the balance between dealing effectively with governance and corruption, and continuing to provide vital assistance to the poor.

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.

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.

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 will 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. This priority area of work is being informed by a Country Integrated Fiduciary Assessment which the Bank prepared in 2005 in close collaboration with the government and other partners to help strengthen budget preparation and execution, strategic resource allocation, procurement, and financial management.

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 has prepared a Statistical Capacity-Building Project (StatCap) scheduled for Board presentation in March 2007. In addition, the Bank is helping to build capacity for monitoring and evaluation through a grant from the Institutional Development Fund.

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 recently concluded 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 additional financing operation would help finance the costs associated with: (a) scaling up both geographically and substantively the successful drought management and long term livelihood activities of the Arid Lands project in 28 districts; (b) reimbursing eligible and audited non-food expenditures associated with the severe drought which has affected the arid and semi-arid districts of Kenya over the last year; and (c) scaling up the drought contingency fund which is operating under the current credit and has been depleted due to the extended nature of the drought. The Executive Board of the World Bank will consider a new operation, the Western Kenya Community Driven Development and Flood Mitigation, late 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. Progress towards achieving the project development objectives will be monitored through such indicators as: (a) the number of men and women actively participating in decision making at community and district levels; (b) percent of community and youth investment projects rated satisfactory or better by participating communities; (c) percentage increase in real income of households in project intervention areas; and (d) percentage reduction of financial cost induced by average annual flooding in the Budalangi flood plain.

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. Achievements under the project will be measured by indicators tracking changes in organizations and their performance, in the health of the natural resource base, and in welfare of participating communities. 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.

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. The Bank and the Government of Kenya have agreed to undertake the following steps to strengthen governance in the health sector: (a) improving procurement practices, including publishing on websites information on all contracts; (b) establishing a transparent vetting system to pre-qualify companies doing business with the MOH to address conflict of interest and fraudulent companies; (c) blacklisting companies found to have been involved in corruption; (d) rolling out and using IFMIS in the MOH; (e) establishing a functional risk-based internal audit system, with the MOH ministerial audit committees providing oversight effectively; and (f) developing a community-based system for managing and financing local-level health facilities, using the Ministry of Education’s successful textbook program as a model.

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. The KHADREP closed at the end of 2005, and a new project (The Total War on AIDS Project - TOWA) is being 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. The TOWA is expected to be presented for Board consideration by June 2007. As noted above, the medical response to the HIV/AIDS epidemic will be integrated into the Health SWAP.

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.

Private sector development. The investment climate assessment of 2003/04 and the Kenya Growth and Competitiveness study have provided a greater understanding of the obstacles to private sector development in Kenya and the policies needed to address them. 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 is planned for June 2007. 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. The Multilateral Investment Guarantee Authority is supporting private sector development through international comparisons of competitiveness, through the provision of technical assistance and capacity building services to the country’s investment promotion intermediaries, and through the offer of political risk guarantees to foreign investors entering the country.

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.

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 is supporting a review of roads portfolio with a view to improve implementation of road projects and ensuring good economic rationale in selection of projects.

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.

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

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

Joint assessment of the IP-ERS progress report. The staffs of the Bank and the IMF have jointly prepared the staff advisory note on Kenya’s Annual Progress Reports of the IP-ERS. This document will be distributed to the Boards of the Bank and the IMF for information.

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.

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. A joint Bank-IMF Public Expenditure Management Assessment and Action Plan was completed in May 2004. The Bank, the IMF, and other development partners have used the public financial management performance measurement framework developed by the Public Expenditure Financial Assessment (PEFA) secretariat to monitor progress in Kenya’s in public financial management. This will form part of the strengthened approach to support reforms of public financial management. The Bank and the IMF collaborate on issues related to internal audit reform and on the integrated financial management information system.

Strengthening revenue collection and administration. The Bank and the Fund have recently 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.

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 are preparing a joint debt sustainability analysis covering both external and domestic public debt. 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.

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.

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.

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.

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.

Appendix III—Statistical Issues

The quality and timeliness of Kenya’s economic and financial data are 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.

1. 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.

2. 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.

3. 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

4. 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.

Prices and production

6. 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.

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 GFSM2001 (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. 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.

9. Kenya 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 2004. 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. Kenya’s submission for publication in the 2006 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. Kenya also reports regularly monthly and quarterly data for inclusion in the IFS.

Monetary statistics

10. The CBK has a delay in the implementation of the Monetary and Financial Statistics Manual 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 30 percent of the total deposits of the banking system. A follow-up mission is planned for mid-2007.

External sector statistics

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. 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.

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.

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 raise concerns 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. 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.

To help address these issues, the January-February 2006 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 CBS and CBK.

Kenya: Table of Common Indicators Required for Surveillance

(as of October 16, 2006)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

These columns should only be included for countries for which a Data ROSC (or a Substantive Update) has been prepared.

Reflects the assessment provided in the data ROSC, published on October 31, 2005, and based on the findings of the mission that took place during January 2005, for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Kenya: 2006 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, and Requests for Extension and Rephasing of the Arrangement, Reduction in Access, and Waiver of Performance Criteria: Staff Report; Staff Supplement and Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Kenya
Author: International Monetary Fund
Volume/Issue:
Volume 2009: Issue 137
Publisher:
International Monetary Fund
ISBN:
9781451821239
ISSN:
1934-7685
Pages:
117
DOI:
https://doi.org/10.5089/9781451821239.002