The Executive Board of the International Monetary Fund (IMF) has completed the fifth review under a three-year arrangement under the Extended Credit Facility (ECF) for Kenya.1 The completion of the review enables the disbursement of an amount equivalent to SDR 71.921 million (about US$108.5 million), which will bring total disbursements under the arrangement to SDR 416.6 million (about US$628.2 million). The Executive Board’s decision was taken on a lapse of time basis.2 In completing the review, the Executive Board also granted a waiver for the nonobservance of the continuous performance criterion on new central government and central government guaranteed external payment arrears.
Kenya has stayed the course in its economic reforms, with good results. Inflationary pressures have been tamed. Economic growth has kept a good pace despite the slowdown of exports to and tourism from Europe. International reserves are on the rise and the deficit of the external current account has shrunk significantly—excluding capital-goods imports that have surged because of oil exploration. The public debt-to-gross domestic product ratio has declined, despite the large budgetary costs of implementing the new constitution, preparing for the March elections, and the recent wage increases in the civil service.
Performance under Kenya’s economic program was favorable through end-December 2012. The fiscal outcome was in line with the program, international reserves exceeded the target, while monetary policy was eased appropriately. The authorities have also made good progress with their structural reform efforts in the areas of public financial management and tax reform. Financial sector reforms and the reform of the pay for civil servants have also recently advanced.
Stronger growth is expected in 2013 supported by good weather conditions. With firmer expectations of low inflation, there is scope for further monetary easing, although the Central Bank of Kenya will need to remain vigilant to the risks of possible adverse shocks or a reversal of capital flows. Fiscal consolidation should continue by lowering non-priority expenditures and boosting revenue mobilization through improvements in tax administration, the introduction of a new value-added tax law and a financial transaction tax. Financial soundness indicators have remained favorable. Nevertheless, policies should focus on closely monitoring the health of the banking system and adapting banking supervision to growing regionalization, while the government seeks to complete the demutualization of the Nairobi Stock Exchange.
Looking forward, the risks from global financial and economic conditions have lessened. In addition, the prospects for commercially-viable oil discoveries could further improve the medium- to long-term outlook, which will require policies to promote diversified and balanced growth to avoid excessive reliance on natural resources.
The three-year SDR 325.68 million (then about US$508.7 million) ECF arrangement with Kenya was approved by the IMF’s Executive Board on January 31, 2011 (see Press Release No. 11/21). The Executive Board subsequently approved augmentation of financing under the ECF arrangement to SDR 488.52 million (then about US$760.6 million) on December 9, 2011 (see Press Release No. 11/457).