Press Release No. 14/455

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Kenya

October 2, 2014

On September, 22, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the 2014 Article IV consultation¹ with Kenya.

Kenya’s economy has continued to expand in a stable economic environment. Credit to the manufacturing sector has picked up and foreign investor interest is growing, notably in the extractive industries. The economy’s growth rate rose to 5 percent in 2013/14 and is expected to gain further momentum in 2014/15, driven by higher domestic and external investment. Inflation remains moderate, but rising food prices and rapid credit growth may fuel inflation expectations. The relatively high external current account deficit (around 8 percent of Gross Domestic Product (GDP) in 2013/14) reflects strong capital imports and a decline in agricultural exports. Following a successful first-time Eurobond issue (US$2 billion) in June 2014, international reserves reached some four and a half months of prospective import coverage. Kenya’s financial sector remains robust, the process of financial inclusion is ongoing, and efforts to develop Nairobi into a regional hub have advanced with Kenya’s recent removal from the Financial Action Task Force’s watch list.

The 2013/14 central government deficit remained broadly unchanged compared to the previous year at about 5¾ percent of GDP. A stronger revenue performance was accompanied by a higher wage bill, rising security spending and the implementation of devolution, which was rolled out at a fast pace. A new quarterly reporting framework for budget execution by counties will help to address transitional challenges for public financial management posed by devolution. Kenya’s debt remains broadly stable and sustainable. The authorities plan a gradual fiscal consolidation with a view to meeting the medium-term convergence criteria specified in the East African Community Monetary Union Protocol.

Kenya’s medium-term growth prospects are favorable, supported by rising infrastructure investment in energy and transportation; the expansion of the East African Community market; deepening financial inclusion, which fosters a more dynamic small and medium-sized enterprise sector; and the positive impact of large-size irrigation projects on agricultural productivity. Nonetheless, Kenya remains vulnerable to weather-related shocks, a further deterioration of security conditions, protracted slow growth in advanced and emerging economies, and difficulties in implementing devolution that could complicate public financial management.

Executive Board Assessment²

Directors commended the authorities for maintaining macroeconomic stability, introducing important market-friendly reforms, and for Kenya’s successful debut Eurobond issuance. Kenya’s economic outlook is favorable, although the country remains vulnerable to exogenous shocks. To mitigate downside risks, Directors encouraged stronger policy buffers and further structural reforms, including to strengthen the business climate and improve security conditions. They noted that this would help to consolidate the gains to date, contribute to poverty reduction, and promote more inclusive growth.

Directors called for continued commitment to fiscal discipline in the wake of challenges emerging from the ongoing process of devolution of government responsibilities. This process should lead to better delivery of services to help alleviate poverty and inequality across counties. Directors agreed that a prudent fiscal stance, consistent with Kenya’s medium-term debt target, will create space for much needed infrastructure investment and priority social spending. Accordingly, Directors supported further revenue mobilization, enhancement of the quality and efficiency of public spending, and better control over the public wage. They also recommended full implementation of public financial management reforms, especially with regard to fiscal devolution and the recent introduction of the Treasury Single Account aimed at strengthening cash management. They supported the authorities’ efforts to reduce fiscal risks by reforming government-owned agencies, and closely monitoring contingent liabilities from state-owned enterprises.

In view of the rise in headline inflation in recent months, Directors encouraged the authorities to monitor the accelerated pace of credit growth, and to stand ready to tighten monetary conditions to anchor inflationary expectations. They also recommended strengthening prudential oversight to prevent a deterioration in the quality of banks’ loan portfolios. Continued efforts to modernize the monetary framework should also help lay the foundation for inflation targeting.

Directors welcomed the rapid increase in financial inclusion, and the authorities’ strong commitment to strengthening prudential and regulatory oversight. In light of the rapid expansion of Kenyan banks in East Africa and other SSA countries, they underscored the need for enhanced consolidated supervision of transnational banks and other systemic groups. Cross-border cooperation with regional supervisors in joint prudential oversight would also be important. Directors commended Kenya’s removal from the Financial Action Task Force (FATF)’s monitoring process and encouraged sustained improvements in the country’s Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework.

Directors encouraged the authorities to maintain the momentum of structural reforms and to continue their efforts to remove remaining infrastructure bottlenecks, in order to mitigate vulnerabilities to weather-related shocks and improve competitiveness. Looking ahead, they also underscored the need to put in place an effective framework for natural resource management, in light of recent oil and gas discoveries. While welcoming the ongoing revision of the national accounts statistics, Directors encouraged the authorities to further improve the quality and the scope of information on the balance of payments, social conditions, and the labor market.