Press Release No. 96/21

Press Release: IMF Approves Three-Year Loan for Kenya Under the ESAF

April 26, 1996

The International Monetary Fund (IMF) today approved a new three-year loan for Kenya under the enhanced structural adjustment facility (ESAF)¹ equivalent to SDR 149.55 million (about $216 million). This loan will support the Government's economic reform program for 1996-98, which is built on the policy framework paper published by the Kenyan Authorities on February 16, 1996. The first annual loan in an amount equivalent to SDR 49.85 million (about $72 million) will be disbursed in two equal semiannual installments, the first of which will be available on May 15, 1996.

Background

Kenya has achieved a major economic transformation over the last three years. Direct controls on domestic prices, internal marketing, external trade, and the exchange system have been eliminated, and the exchange rate and interest rates are now fully market determined. The government budget deficit (excluding grants) was reduced from 11.4 percent of GDP in 1992/93 to 2.5 percent in 1994/95; money supply growth was brought under control and confidence in the banking system was restored. Real GDP, which had stagnated in 1992-93, has begun to recover, expanding by 3 percent in 1994, and by 5 percent in 1995; moreover, inflation declined from 46 percent in 1993 to 1.7 percent in 1995. The external current account was in near balance in 1993 and in 1994, but a sizable deficit re-emerged in 1995, as imports continued to grow strongly from previously depressed levels. However, the progress in economic reform slowed in 1995, and some setbacks occurred. The budgetary targets for the first half of 1995/96 were not met, mainly because of large off-budget outlays, and the restructuring of key parastatals was delayed.

Medium-Term Strategy for 1996-98 and the 1996 Program

Kenya's economic program for 1996-98, supported by the ESAF loans, focuses on the following key areas: (a) consolidation of the fiscal adjustment; (b) privatization and restructuring of the parastatal sector; (c) avoidance of the recurrence of misuse of public funds; and (d) further development of outward-looking competitive markets. The basic medium-term macroeconomic objectives are to raise the economic growth rate to about 6 percent by 1998; to maintain inflation at 5 percent throughout the period; and to lower the external current account deficit, excluding official transfers, to about 0.8 percent of GDP.

Within this medium-term strategy, the program for 1996 aims at achieving a real GDP growth rate of 5 percent; limiting average inflation to no more than 5 percent; reducing the external current account deficit, excluding official transfers, from 4.2 percent of GDP in 1995 to 1.3 percent of GDP; and increasing gross official reserves to 2.9 months of imports at end-1996. To achieve these objectives, the authorities will reduce the overall fiscal deficit (on a commitment basis and excluding grants) from 2.5 percent of GDP in 1994/95 to 1.9 percent in 1995/96, and further to 1.6 percent in 1996/97. Total revenue is to be reduced in relation to GDP, while the tax base will be broadened. On the expenditure side, allocations for operations and maintenance will be raised to improve the delivery of essential services; outlays for capital expenditures will also be increased. The program aims also at strengthening expenditure control and budgetary management, as well as improving tax administration. The overriding objective of monetary policy will be the pursuit of price stability.

Structural Reforms

The main objectives in 1996 will be to achieve: (a) further progress in privatization and restructuring of a number of key enterprises (e.g., completion of the privatization of Kenya Airways, commercialization of the National Cereals and Produce Board, the contracting out of the management of the container terminal of the Kenya Port Authority in Mombasa, and partial privatization of the telecommunications functions of the Kenya Posts and Telecommunications Corporation); (b) divesture of roughly one-half of the remaining non-strategic enterprises; (c) restructuring of the civil service; and (d) further strengthening of the financial system, inter alia, by making the Central Bank of Kenya more independent and by converting the National Social Security Fund into an autonomous pension fund. Furthermore, the program will focus on establishing transparency and accountability in public finances, with a view to preventing the misuse of public funds and off-budget outlays. The civil service code of conduct will be enforced strictly, no budgetary expenditure commitments will be entered into without Parliamentary approval, all government procurement contracts in excess of K Sh 10 million will be awarded through public tendering, and the recovery of the misused public funds will be pursued vigorously.

Addressing Social Costs

The Government is planning to target poverty measures and to increase the poor's access to social services. The quality and availability of health services are expected to improve, as budgetary resources are reallocated to promote a shift from hospital care to preventive and primary health care. Public resources will also be reallocated from university education toward primary and secondary education, particularly for underprivileged students.

The Challenge Ahead

The key to translating Kenya's recent economic gains to high and sustained economic growth is to enhance the confidence of private investors. Full transparency and strict discipline in public finances must therefore be assured. The authorities are urged to address prevailing concerns of bilateral donors on broader governance issues.

Kenya joined the IMF on February 3, 1964. Its quota² is SDR 199.4 million (about $288 million). Its outstanding use of IMF credit currently totals SDR 248.62 million (about $359 million).