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IMF: Kenya On The Right Economic Policy Path

The International Monetary Fund (IMF) has applauded Kenya’s economic policies that show its economic growth rise from 2.6 percent in 2009 to 5.6 percent in 2010.

The institution’s mission team was in the country to conduct the first review under the Extended Credit Facility (ECF) of $ 508.7 million (Sh 41.8 billion) led by Mr. Domenico Fanizza. They met with the Prime Minister, the Deputy Prime Minister and Minister of Finance, the Central Bank Governor, and other government officials.

IMF says the ECF is expected to help Kenya deal with vulnerabilities that could derail its efforts to accelerate growth, by strengthening the external position and reversing the rise in the debt burden resulting from recent fiscal stimulus.

The ECF was extended to Kenya on the premise of “the new constitution, ratified in August 2010,” which “provides for reforms on fiscal decentralization, the public expenditure framework, and land ownership.

The constitution also addresses long-standing governance issues by strengthening the judiciary and laying the ground for an overhaul of the public finance management system that would effectively reduce the scope for corruption,” the institution says.

In the conclusion of the IMF mission to Kenya, Fanizza said Kenya’s economic reform program is off to a good start; driven by strong agricultural production and a dynamic private sector. “The growth was broad-based and the sharing of its benefits was supported by policies to promote financial inclusion.”

He pointed out that prospects for 2011 remain strong, with signs of continued investments in all sectors of the economy, although recent inflationary pressures and insufficient rains present downside risks that will need to be addressed in the coming months.

On the ECF program he said the performance has been satisfactory. “The fiscal outcome is likely to be better than projected and the direction of monetary policy remained appropriate.”

The government’s good progress with their structural reform efforts and reaffirmation for commitment to the program, and its adaptation of a new public financial management law covering all levels of government to strengthen its expenditure control and increase accountability was applauded, too.

The Kenyan government has a challenge to curb inflation and to strengthen the external position in response to the widening of the current account deficit, Fanizza, adding “The focus of the monetary policy should thus be on controlling demand pressures in order to preserve macroeconomics stability.”

From the two week review IMF proposed the Central Bank of Kenya (CBK) to be empowered to take appropriate measures against commercial banks which gets into trouble to strengthen the fiscal position which will also allow for the preservation of sustainable debt dynamics. “Welcome efforts to broaden financial inclusion and deepen the financial markets will need to be supported by strengthened banking supervision and enhanced regulatory framework,” Fanizza said.

IMF’s resident representative, Ragnar Gudmundsson said improved political environment in Kenya has spurred confidence, and private investment is expected to accelerate and support annual growth rates close to 7 percent over the medium term. Higher private investment will reinforce the ongoing economic recovery, initially driven by fiscal stimulus and benign weather conditions.

In responding to high rising fuel prices, Gudmundsson said public investment should concentrate on shifting sources of energy into geothermal power generation to help Kenya address climate-change issues; participating in East African Community regional projects; and selectively eliminating infrastructure bottlenecks.

Nevertheless, IMF points out that the loan arrangement will provide an international reserve cushion in anticipation of an expected deterioration of the terms of trade in the next two years. It will bring the debt-to-GDP ratio below the 45 percent ceiling over a three-year horizon, from the 47 percent of GDP projected for the next fiscal year.

Kenya’s program will focus initially on the central government, but will expand to encompass the general government before fiscal decentralization takes place.

Some of the fiscal measures under the program will include introduction of a modern value-added tax law and appointment of a tax reform commission that will oversee the simplification of the tax code to improve administration and compliance as well as increase use of concessional foreign financing that will help reduce the government’s reliance on domestic financing.

The Central Bank of Kenya will focus on its medium-term inflation target of 5 percent, taking into consideration the impact of rapid progress on financial inclusion on monetization and financial deepening.

Under the ongoing program, the central bank will also purchase foreign exchange as needed to achieve the foreign reserve target while maintaining the floating exchange rate regime; enhance coordination of monetary and fiscal policy to minimize liquidity volatility; and tighten monetary policy promptly if the inflation target is threatened by the eventual lagged impact of increased liquidity on consumer prices.

About Robert Okemwa Onsare

Robert Okemwa Onsare
Robert Onsare is pursuing Electronics Technology at the University of Eastern Africa, Baraton. He is a Cluster Strategy trained facilitator by Kenya's National Economic and Social Council (NESC). Mr Onsare has been an incubation student at the University of Nairobi, School of Engineering, FabLab, a venture project of the university and Massachusetts Institute of Technology (MIT). He is a member of the African Technology Policy Studies Network (ATPS) and a published poet. Mr Onsare is based in Kenya.

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