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The Executive Board of the International Monetary Fund (IMF) has completed the third review under a three-year arrangement under the Extended Credit Facility (ECF) for Kenya. The completion of the review enables the disbursement of SDR 71.921 million (about US$ 110.9 million), which will bring the total disbursement under the arrangement to SDR 272.757 million (about US$420.7 million). The Executive Board’s decision was taken on a lapse of time basis.
Kenya’s economic reform program has started to yield results, as the authorities have taken decisive measures to address inflationary and external balance pressures. As a result, inflation is abating, the shilling has strengthened, international reserves are on the rise, the debt-to-GDP ratio is declining, and the government securities market is functioning more smoothly. More importantly, economic growth has held up in 2011, decelerating only slightly from 2010, despite the severe drought in the Horn of Africa and the higher food and fuel prices.
Performance under the program was favorable through end-2011. The fiscal outcome was in line with the program, thanks to strict expenditure control. International reserves exceeded the target, monetary policy remained appropriately tight, and government spending to protect the poor was above the program threshold. The authorities also made good progress with their structural reform efforts in the areas of public financial management and tax reform. Pension reform and the reform of the pay for civil servants have recently advanced.
Looking forward, stronger growth is expected in 2012 as the effects of the external shocks abate. Monetary policy will aim to achieve low and stable inflation, and the Central Bank of Kenya (CBK) will continue accumulating foreign reserves in order to build a buffer to cope with future external shocks.
Fiscal consolidation will continue and non-priority outlays will be limited to create space for infrastructure spending and for implementing fiscal decentralization as envisaged by the new Constitution. The new VAT law will help revenue mobilization. Policies for the financial sector will focus on banking supervision, close monitoring of credit risk, and moving forward with opening up the stock exchange.
The uncertain global environment outlook—in particular the European sovereign-debt crisis and the risk for further increases in oil prices—could affect Kenya by dampening growth and widening the deficit of the external current account. Thus, policies should continue to aim at ensuring that domestic demand grows in line with supply to reduce the external imbalance and keep inflationary pressures in check.
The three-year SDR 325.68 million (about US$ 502.4 million) ECF arrangement with Kenya was approved by the IMF’s Executive Board on January 31, 2011 (see Press Release No. 11/22). The Executive Board subsequently approved augmentation of financing under the ECF arrangement to SDR 488.52 million (about US$ 753.6 million) on December 9, 2011.
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