The IMF’s annual article IV consultations with the Kenyan government show that the country is on track to overcome the impact of the political crisis in early 2008, but takes a cautious stance towards the planned sovereign bond issue.
The summary of the IMF’s Article IV consultations with Kenya contains few surprises: GDP growth is estimated to slow from 7% in 2007 to 4% due to the economic impact of the political crisis, and both food and fuel prices have pushed up prices significantly. Good revenue collection has kept the fiscal deficit for the last fiscal year, 2007/2008, at 4.8% (including grants), below the original target, but it is scheduled to widen to 5.3% in the current fiscal year. As a consequence of high fuel prices, the current account nearly doubled in 2007/2009 to 4.8% of GDP. The Kenyan shilling had been bolstered by the continued strong capital inflows, even though the widening current account deficit requires close attention to local competitiveness. Going forward, the IMF urges the Kenyan government to maintain fiscal prudence to offset inflationary pressures, and to prioritise spending within a smaller than budgeted deficit.
The IMF’s assessment confirms that Kenya has weathered the fallout from the political crisis reasonably well, and latest Kenya National Bureau of Statistics (NKBS) figures also show a recovery in GDP growth in the second quarter of 2008 (Kenya: Kenya’s Inflation Rate up to 28.2% in September 2008, GDP Growth Recovers in Q2 ). But the economic environment is likely to remain challenging: High fuel, energy and food prices are a concern for Kenya, and the slowdown in global growth, exacerbated by the financial crisis in the US, creates less supportive global conditions. However, growth in Kenya’s East African Community (EAC) neighbours Uganda, Tanzania and Rwanda is expected to remain strong, which will help to maintain demand for Kenyan products.
Interesting to note: The IMF appears clearly reluctant on the planned sovereign bond issue. In a previous commentary, Deepak Dave had already expressed doubts over it (Kenya: Kenya Sovereign Bond Plans: Solving Budgetary Problem, or Just Storing up Trouble? ), and global conditions are not very supportive at the moment. The IMF also emphasises the need to address overall debt sustainability systematically. In contrast to e.g. Ghana, which issued a USD750m sovereign bond in 2007, Kenya has not been considered a Heavily Indebted Poor Countries (HIPC) and therefore, even though it had several debt reschedulings, had not been eligible for a write off of multilateral debt under the Multilateral Debt Relief Initiative (MDRI) of the IMF and the World Bank in late 2005. The IMF thus recommends looking for concessionary loans – which the Kenyan government, in its frequent disputes with donors over governance concerns, probably finds too restrictive.
In its review, the IMF credited the Kenyan government with sound macroeconomic policies and progress in economic reforms in the past years that helped the recovery of Kenya’s economy, and with maintaining economic stability during the political crisis in early 2008. However, in order to achieve the ambitious targets of the Vision 2030, the government will need to implement extensive structural reforms and infrastructure projects – seemingly obvious steps, but often seriously undermined in its execution by entrenched corruption.
The IMF also reviewed its engagement with Kenya over the period from 1993 to 2007. Macroeconomic policy and implementation did not raise any major issues, but governance was, unsurprisingly, a concern: Whereas the IMF found that governance reforms were ‘overly reactive’, the Kenyan authorities in turn criticized that conditionalities in this area had been unrealistic for Kenya, both regarding the timeframe of the implementation, but also against the constraints in Kenya’s legal and political system.
Disbursements under Kenya’s last Poverty Reduction and Growth Facility, the IMF’s concessionary loan facility, had been delayed repeatedly, and it appears unlikely that either side will want to pursue this instrument again. Instead, the Article IV consultations notice alludes to a Policy Support Instrument, i.e. an unfunded monitoring agreement that serves to reassure other lenders. Interestingly, the Kenyan government has also finally agreed to make all IMF reports, including the annual Article IV consultations, public – so far, only the press notices had been published.
The IMF’s notice on its annual Article IV consultations can be found here: http://www.imf.org/external/np/sec/pn/2008/pn08127.htm
|
Subscribe to this comment's feed
Show/Hide comment form
