Press Release No. 15/29
February 2, 2015
On February 2, 2015, the Executive Board of the International Monetary Fund (IMF) approved a SDR 352.82 million (about US$497.1 million) Stand-By Arrangement and a SDR 135.7 million (about US$191.2 million) arrangement under the Stand-By Credit Facility1 (SBA/SCF) for Kenya for a combined SDR 488.52 million (about US$688.3 million or 180 percent of Kenya’s quota).
The one-year arrangements would provide a policy anchor for continued macroeconomic and institutional reforms, and help to mitigate the impact of potential exogenous shocks while these reforms are being pursued, thereby supporting continued strong growth and durable poverty reduction.
The Executive Board’s decision makes available a total of SDR 379.96 million immediately (about US$535.3 million), and the remainder in two equal tranches upon completion of semi-annual program reviews. The authorities plan to treat the arrangements as precautionary, and do not intend to draw on the SBA/SCF unless external shocks lead to an actual balance-of-payment need.
Following the Executive Board’s discussion on Kenya, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, made the following statement:
“The Kenyan authorities’ prudent macroeconomic policies and major institutional and economic reforms of recent years have contributed to macroeconomic stability, higher growth, and increased external buffers. Nonetheless, the economy remains vulnerable to shocks arising from Kenya’s growing integration into global markets, security concerns, and extreme weather events. In this context, the new arrangements with the Fund provide a policy anchor for continued reforms, and would mitigate the impact of shocks if they materialize, supporting continued strong growth and poverty reduction.
“The planned scaling up of infrastructure investments under the authorities’ economic program will lift Kenya’s growth trajectory by removing bottlenecks to private sector activity and fostering regional integration, provided public debt remains on a sustainable path. In this regard, the authorities’ commitments to containing current spending and mobilizing additional revenue are welcome.
“Continued reforms to public finance management, in particular the full implementation of the treasury single account, the adoption of a borrowing framework for counties, and the close monitoring of contingent liabilities, will be key to containing fiscal risks in the period ahead.
“The Central Bank of Kenya (CBK) has made remarkable progress in bringing inflation toward the mid-point of its target range, aided in part by falling energy prices. Nevertheless, the CBK should remain vigilant and act as needed to head off any pressure from rapid credit growth and the envisaged scaling up of infrastructure spending.
“The authorities are appropriately taking steps to strengthen the prudential oversight of a rapidly growing financial sector. Implementing prudential guidelines for bank capital, strengthening the CBK’s stress-testing framework, and improving the supervision of expanding cross-border operations will be critical to boost the soundness of domestic banks.
“The authorities should also continue improving the quality of economic statistics, especially as regards the balance of payments, social indicators, and the labor market. More comprehensive and timely data in these areas would facilitate the policymakers’ assessment of Kenya’s progress in reducing remaining vulnerabilities.”
Recent economic developments
Real GDP growth remains robust, supported by strong credit growth and a dynamic investment environment. The economy expanded by 5.3 percent year-on-year in real terms during the first three quarters of 2014, reflecting strong activity in construction, manufacturing and retail trade. However, poor rains have constrained agriculture growth, and security concerns have adversely affected tourism. Annual growth is expected to remain above 5.3 percent in 2014 reflecting the increase in geothermal energy generation capacity and the commencement of activities related to the Mombasa-Nairobi standard gauge railway project.
Inflation has begun to ease. After exceeding the authorities’ target range (5±2.5 percent) in July and August, headline inflation continued to decline and reached 6.0 percent in December. This reflects lower electricity costs as a result of Kenya’s investment in geothermal power generation coming on stream as well as lower international oil prices.
Strong private inflows and the proceeds from Kenya’s international bond placements lifted international reserve cover. Gross international reserves stood at US$ 8.0 billion (4.4 months of prospective imports) at end-December 2014. In December 2014, the authorities re-opened their June debut sovereign issuance, raising an additional US$750 million split between five-year (US$250 million) and 10-year (US$500 million) maturities, with yields about 100 basis points lower than at original issuance. The current account deficit remains high, reflecting strong capital-goods imports, though mitigated by the decline in oil prices.
Overall market conditions are broadly favorable. The Kenyan shilling remains on a broadly stable path of gradual depreciation vis-à-vis the US dollar, largely reflecting developments in international financial markets. In recent months, however, the interbank rate deviated, at times significantly, from the policy rate, reflecting changes in liquidity conditions, with volatility explained by devolution-related flows of government deposits at the Central Bank of Kenya.
Kenyan banks continue to expand domestic credit, provide access to new borrowers, and increase their operations beyond Kenyan borders. The banking sector remains profitable and well-capitalized, but provisions are lately lagging behind a pickup in NPLs, which moderated slightly in September (5.4 percent of total loans). Credit growth (25 percent) continues to outpace deposit growth (20 percent) reflecting a more intensive use of medium-term mostly concessional foreign currency lines for small and medium enterprises (SME) project financing. Financial inclusion has increased, with 75 percent of the population having access to formal or informal financial services at end-2013.
The new precautionary Fund arrangements would provide a policy anchor for continued macroeconomic and institutional reforms, and help to mitigate the impact of potential exogenous shocks while these reforms are being pursued, thereby supporting continued strong growth and durable poverty reduction. The authorities’ economic program focuses on the following policies:
• Maintaining a sustainable medium-term debt path consistent with regional convergence commitments, while preserving fiscal space to implement the ambitious public investment program aimed at (i) supporting economic development; (ii) minimizing vulnerabilities to weather-related shocks; and (iii) reducing infrastructure bottlenecks;
• Taking decisive steps to strengthen public financial management, including to contain fiscal risks from Public Private Partnerships (PPPs) and the devolution process;
• Further modernizing the monetary policy framework, to facilitate the transition to a fully-fledged inflation targeting framework;
• Improving financial oversight to address financial sector vulnerabilities stemming from rapid credit growth and fast expansion of cross-border operations by Kenyan banks;
• Upgrading data quality to strengthen policy making, address gaps, and facilitate transition to frontier/emerging market status.