A staff team from the International Monetary Fund (IMF), led by Benedict Clements, visited Kenya from February 19 to March 2, 2018, to conduct the 2018 Article IV consultation and hold discussions on continued IMF support to Kenya, including the authorities' request for an extension of the current SBA.
At the end of the visit, Mr. Clements released the following statement:
"Kenya's economy continued to perform well in 2017 despite a severe drought and a prolonged election period; however, real GDP growth is estimated to have slowed to 4.8 percent for the year as a whole. Growth was mainly supported by public investment spending and solid non-agriculture sector performance. Inflation has declined to below the mid-point of the authorities' target range, reflecting a substantial decline in food inflation and appropriate monetary policies. Annual headline inflation declined to 4.5 percent in February from 6.3 percent in 2016. The banking system has remained stable, and the Central Bank of Kenya (CBK) has continued to strengthen the financial system through its reform program.
"The external current account deficit rose to an estimated 6.4 percent of GDP in 2017 from 5.2 percent in 2016, reflecting higher imports, including fuel. The exchange rate has remained stable and foreign exchange reserves have risen to US$7.1 billion as of end-January 2018 and are sufficient to withstand any potential near-term external shocks.
"Discussions focused on macroeconomic policies and reforms aiming at ensuring the sustainability of investment-driven, inclusive growth. Kenya's medium-term outlook remains favorable, but headwinds from weak credit growth will weigh on economic activity in the near term. With elections over and weather conditions returning towards normal, growth is expected to increase to 5½ percent in 2018. Annual growth could rise further to 6½ percent within a couple of years, provided that the authorities continue economic reforms, including reducing the fiscal deficit and amending interest rate controls.
"Elevated fiscal deficits in recent years have raised public debt vulnerabilities. The authorities expressed their commitment to significant fiscal adjustments in the coming years that would help address these vulnerabilities and maintain public debt on a sustainable path. To that end, the IMF team and the authorities agreed that a reduction in the fiscal deficit to 7.2 percent of GDP in 2017/18 and further to 5.7 percent of GDP in 2018/19, from 8.8 percent in 2016/17 would be appropriate. This will be achieved by a combination of revenue measures and contained spending.
"The mission welcomed the authorities' plans to accelerate reforms aimed at (i) increasing the efficiency and transparency of public spending, particularly on development spending; and (ii) safeguarding financial stability by strengthening capital and liquidity positions of banks and microfinance institutions, promptly addressing the capital and liquidity deficiencies in individual banks, and implementing new International Financial Reporting Standards (IFRS).
"The IMF team urged the authorities to review the interest rate controls introduced in September 2016 with a view to abolishing them or substantially modifying them. The controls have contributed to slow overall credit growth to the private sector, and lower access to credit by SMEs and individuals. In addition, interest rate controls are undermining the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth.
"The authorities requested a six-month extension of the SBA that expires on March 13, 2018 to allow more time to complete the outstanding reviews of the IMF-supported program. In support of this request, the authorities have committed to policies to achieve the program objectives, including reducing the fiscal deficit and substantially modifying interest controls. Discussions on the details of these policies will continue in the coming weeks. The SBA extension will be presented to the Executive Board before its expiration on March 13, and outstanding program reviews could be completed by September 2018. The team thanks the authorities for their hospitality and constructive discussions.
"The team met with the President, Uhuru Kenyatta; Cabinet Secretary for the National Treasury, Henry Rotich; the Governor of the CBK, Patrick Njoroge; the Principal Secretary for the National Treasury, Kamau Thugge; the Deputy Governor of the CBK, Sheila M'Mbijjewe, and other senior government and CBK officials. Staff also had productive discussions with parliamentarians, civil society organizations, representatives of the private sector, and development partners."