A team from the International Monetary Fund (IMF), led by IMF assistant director Africa Mauro Mecagni, visited Kenya this month and reached a staff-level agreement on a programme that could be supported by the IMF through a stand-by arrangement and stand-by credit facility (SBA/SCF).
“Kenya’s economy remains robust, supported by strong credit growth and a dynamic investment environment. Inflation has declined in the last two months and remains within government’s target range,” Mecagni says.
He adds that a gradual depreciation of the Kenyan shilling mostly reflects developments in international currency markets and international reserves stand at 4.9 months of prospective import coverage, boosted by proceeds from the successful June 2014 sovereign bond issuance.
Investment in power generation, in particular geothermal energy, is already translating into lower electricity costs for firms and households.
“However, difficult security conditions are having a dampening effect on the tourism sector. The initiation of the standard gauge railway (SGR) project is a major step for Kenya and for the region as it will boost integration across East Africa by reducing transport costs significantly, bringing down the cost of doing business and improving standards of living for the population, helping Kenya move closer to the medium-term goals outlined in its Vision 2030 plans,” he notes.
The SGR’s initial construction work will contribute to higher gross domestic product (GDP) growth, projected to rise to 6.9% in 2015 from 5.3% this year.
Equipment imports for the SGR project, combined with continued investment in oil exploration, are expected to keep the external current account deficit relatively high at around 8.5% of GDP in 2015, albeit a slight decline from a projected 9% deficit in 2014 owing to lower international oil prices.
“Fiscal policy will aim at preserving debt sustainability, while providing room for the execution of the SGR project. To accommodate additional investment spending, government is committed to containing the wage bill over the medium term,” he points out.
He adds that keeping current spending under control and redoubling tax collection efforts will also release additional resources to bolster national security, expand the social safety net, and reduce the fiscal deficit over the medium term in line with the East African Community convergence criteria for monetary union.
Prudent fiscal policies will also contribute to an orderly consolidation of devolution.
“The mission and the Kenyan authorities reached the staff level agreement on an economic programme that could be supported by an SBA/SCF arrangement, which the authorities intend to treat as precautionary. This arrangement will serve an insurance purpose, providing Kenya with access to IMF resources in the event of exogenous shocks,” he says.
He adds that the programme will accommodate the SGR project and other initiatives launched by government to remove hurdles to growth, while reducing vulnerabilities and preserving a sustainable debt position.
The programme builds on Kenya’s ambitious reform agenda by supporting successful fiscal devolution while strengthening fiscal risk assessments, reinforcing the coordination of debt, cash and liquidity management functions between the Treasury and the central bank, strengthening central bank independence and improving the quality of economic statistics.
The staff level agreement is subject to review by the IMF’s management and its executive board. Consideration by the executive board is tentatively scheduled for late January 2015.