Tuesday, February 1, 2011

IMF Executive Board Approves Three-Year, US$508.7 Million Arrangement Under Extended Credit Facility for Kenya

NAIROBI, Kenya, February 1, 2011

The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement under the Extended Credit Facility for Kenya in an amount equivalent to SDR 325.68 million (about US$508.7 million). The program is aimed at protecting Kenya’s external position, while allowing a gradual fiscal adjustment. The Executive Board’s approval will immediately enable an initial disbursement of an amount equivalent to SDR 65.1 million (about US$101.7 million).

The program is designed to help rebuild Kenya’s international reserves, by supporting the conditions for sustainable growth while preserving macroeconomic stability. It will help address balance-of-payments financing needs and provide a reserve cushion to help the country deal with adverse shocks.

Following the Executive Board’s discussion on Kenya, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, stated:

“Kenya’s economy is bouncing back from the slowdown that accompanied the global financial crisis. Fiscal stimulus has boosted the recovery, especially in construction, and benign weather conditions have supported a rebound in agriculture. The ratification of the new constitution by the August 2010 referendum has spurred confidence as it provides an opportunity to address long-standing social and institutional problems and implement additional reforms, including on fiscal decentralization, the public expenditure framework, and land ownership.

“Sustaining high growth will require addressing remaining macroeconomic vulnerabilities. The ongoing recovery will further weaken Kenya’s external position and the rise in public debt resulting from the fiscal expansion should be reversed. However, fiscal consolidation needs to accommodate the costs of implementing the new constitution as well as high-priority public investments.

“The authorities’ program under the three-year ECF arrangement aims at boosting international reserves and strengthening the fiscal position. The arrangement provides a reserves cushion to reduce vulnerabilities to external shocks, including a projected deterioration of the terms of trade in the next two years. The program will help maintain fiscal discipline as fiscal decentralization gets underway, while keeping inflation low in the context of Kenya’s floating exchange rate regime.

“The program targets a gradual reduction in the central government primary balance through tax reform and strict control of current spending. Tax measures include the reform of the value-added and income taxes to improve coverage and compliance. A successful implementation of constitutional provisions will also address governance issues, by strengthening the judiciary and overhauling the public expenditure management framework. The program will create the fiscal space necessary to implement the constitution, raise infrastructure investment, and protect spending aimed at poverty reduction,” said Mr. Lipsky.

ANNEX

Recent Economic Developments

The Kenyan economy is recovering well from several shocks: two consecutive droughts, social strife, and the global economic downturn. Despite the negative impact of these shocks, economic growth remained strong in 2010, with growth estimated at above 5 percent from 2.6 percent in 2009, driven mainly by a rebound in agriculture and a boost in construction activity, helped in particular by the government’s renewed efforts to upgrade infrastructure.

Kenya’s objective is to achieve higher and more sustainable economic growth, with increased employment opportunities for youth. The Poverty Reduction Strategy Paper aims for real GDP growth of 10 percent in the medium term. Achieving this growth rate will enable Kenya to direct more resources to sectors that benefit the poor, including education and health, and help reduce poverty

Program Summary

The program is aimed at boosting international reserves while adopting a gradual fiscal adjustment over a three-year horizon. Its main objectives are : i) to raise real GDP to close to 7 percent; ii) bring the public debt-to-GDP ratio to below 45 percent over the medium term; and iii) keep inflation at 5 percent while maintaining a floating exchange rate regime.

To this end, the government will scale up investment in the key priority social and economic sectors as well as in critical infrastructures, in particular geothermal power generation to deal with climate-change challenges In addition, structural reforms will be implemented in the area of public financial management, public services, business regulation, and the financial sector.

SOURCE: International Monetary Fund (IMF)