IMF Concludes Kenya Visit, Urges Govt to Scrap Rate Caps

A team from the International Monetary Fund (IMF) visited Kenya from April 3 to 13, 2017, to review and hold discussions on the country’s US$989.8 million 2 year Stand-By Arrangement (SBA) and a US$494.9 million   Standby Credit Facility (SCF)  (SBA/SCF).

“The first review was completed on January 25, 2017. The Kenyan authorities have indicated that they will continue to treat both arrangements as precautionary, and do not intend to draw on the new SBA and SCF arrangements unless exogenous shocks lead to an actual balance of payments need.” said IMF in a statement.

At the end of the visit, the team led by Mr. Clements released a statement part of which has been captured below;

“Kenya’s economy has continued to perform well, with real GDP growth reaching 5.9 percent in the first three quarters of 2016, up from 5.6 percent in 2015. Growth was supported by public investment spending, favorable weather in the first half of 2016, and a pick-up in tourism. Inflation has increased to 10.3 percent in March, reflecting the reduced supply of key staple food items as a result of the drought, but is expected to decline as agricultural production returns to normal levels with the onset of the long rains. The banking system has remained stable, and reforms by the Central Bank of Kenya (CBK) to strengthen the financial system continue.

“The external current account deficit (on a 12-month basis) narrowed to 5.5 percent of GDP in 2016 from 6.8 percent in 2015, reflecting lower oil prices, improved tea and horticulture exports, and increased remittance inflows. The exchange rate has remained stable and foreign exchange reserves have risen to US$7.8 billion (equal to 5.1 months of import cover) as of end-March 2017. The banking system has remained stable.

“Discussions focused on macroeconomic policies and 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. To that end, the IMF staff team urged the authorities to achieve the fiscal deficit target envisaged under the program for 2016/17, which accommodates a substantial increase in foreign-financed public investment.

“The team urged the authorities to move forward with the substantial reduction in the budget deficit envisaged for 2017/18 and beyond, which will help put the debt on a declining path as envisaged under the program. The team also welcomed the authorities’ plans to accelerate reforms aimed at (i) mobilizing revenue to support appropriate delivery of government services at the national and county level; (ii) increasing the efficiency, transparency, and accountability of public spending; (iii) safeguarding financial stability by enhancing prudential regulation and supervision; and (iv) deepening structural and governance reforms to improve the business environment.

ON RATE CAPS

“The IMF team reiterated its concerns regarding the legislated limits on deposit and lending rates introduced last September. Preliminary information suggests that these controls have had unintended negative consequences on the availability of financing for small and medium-sized enterprises, with the risk of reversing the remarkable increase in financial inclusion observed in recent years. In addition, interest rate controls are undermining the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth.

“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.”