A team from the International Monetary Fund (IMF), led by Benedict Clements, visited Kenya from July 23 to August 2, 2018 to hold discussions on the second review under a precautionary Stand-By Arrangement (SBA).
On March 14, 2016, the Executive Board of the International Monetary Fund (IMF) approved a SDR 709.259 million (about US$989.8 million, or 131 percent of Kenya’s quota) 24-month Stand-By Arrangement (SBA). The first review of the SBA was completed on January 25, 2017 (see Press Release 17/23). On March 12, 2018, the Executive Board of the International Monetary Fund approved the Kenyan authorities’ request for a 6-month extension of the SBA to September 14, 2018 to allow additional time to complete the outstanding reviews (See Press Release 18/85).
During their visit, the team met with the Cabinet Secretary for the National Treasury and Planning, Mr. Henry Rotich; the Governor of the Central Bank of Kenya (CBK), Dr. Patrick Njoroge; the Principal Secretary for the National Treasury, Dr. Kamau Thugge; the Deputy Governor of the CBK, Ms. Sheila M’Mbijjewe, and senior government and CBK officials.
Staff also had productive discussions with representatives of the private sector and development partners.
At the end of the visit, Mr. Clements said:
“Kenya’s economy has continued to perform well, with real GDP growth accelerating to 5.7 percent in the first quarter of 2018, from 4.9 percent in 2017. The acceleration of growth is being driven primarily by strengthened confidence following the conclusion of the prolonged election period, favorable weather conditions, and a continued recovery in tourism. Inflation has remained within the authorities’ target range (5+/-2.5 percent) since July 2017 as better weather conditions have brought down food inflation. Headline CPI growth was 4.3 percent y/y as of June 2018, while core inflation remained low at 3.6 percent y/y.
“Fiscal targets for FY2017/18 under the program were met. The budget deficit for the fiscal year ending in June 2018 was KSh614.6 billion (equivalent to 7.0 percent of GDP), within the target under the program. This represents a significant tightening from the previous year’s deficit of 9.0 percent of GDP. However, revenues significantly underperformed, coming in 2.2 percent of GDP lower than program targets. To meet the deficit target in this context, the authorities rationalized expenditures.
“The current account deficit has started to adjust in 2018 after widening to 6.7 percent of GDP in 2017 (from 5.2 percent in 2016). The increase in the current account deficit was mainly driven by higher food imports and weaker agricultural exports—due to the drought—and higher fuel imports, with the latter owing to rising global oil prices. The lower current account deficit so far in 2018 is due to strong agriculture exports, rising transfer inflows, and lower capital goods imports following the completion of the Mombasa-Nairobi phase of the SGR project. Reflecting these favorable external developments, the exchange rate has remained stable and foreign exchange reserves currently stand at about US$8.8 billion (equal to 5.1 months of projected imports for 2018) as of end-July 2018.
“The banking sector in aggregate remains well-capitalized and liquid. However, the banking system’s non-performing loans remains high at 12 percent in June 2018, though declining in recent months. Higher non-performing loans have been driven by weaker economic activity in 2017, and delayed payments from the government and private sector.
“Discussions focused on (i) fiscal policies to achieve the authorities’ fiscal deficit target of 5.7 percent of GDP in FY2018/19; (ii) interest rate controls; and (iii) structural reforms aiming to ensure the sustainability of investment-driven, inclusive growth. The authorities reiterated their commitment to macroeconomic policies that would maintain public debt on a sustainable path, contain inflation within the target range, and preserve external stability.
“Significant progress was made during the visit, and discussions will continue in the coming weeks. The team thanks the authorities for their hospitality and constructive discussions.”