IMF encourages Kenya to step up foreign-financed public investment

The IMF said “Kenya’s economy has continued to perform well” with GDP growth reaching 5.9 percent in the first three quarters of 2016, supported by public investment spending.

However, following a visit to the country earlier this month, an IMF team led by Benedict Clements reiterated the organisation’s concerns “regarding the legislated limits on deposit and lending rates introduced last September”.

The team said “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, the team warned interest rate controls “are undermining the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth”.

According to the IMF team, Kenya’s banking system “has remained stable and reforms by the Central Bank of Kenya to strengthen the financial system continue”. The team said it welcomed the authorities’ plans “to accelerate reforms aimed at mobilising revenue to support appropriate delivery of government services at the national and county level, increasing the efficiency, transparency, and accountability of public spending, safeguarding financial stability by enhancing prudential regulation and supervision and deepening structural and governance reforms to improve the business environment”.

In March, the IMF’s executive board approved a 24-month Stand-By Arrangement (SBA) of around $989.8 million for Kenya and a 24-month Stand-By Credit Facility (SCF) of around $494.9m. The IMF said authorities in Kenya “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”.

Sean Nolan, of the IMF’s department for strategy, policy and review, said earlier this year that the organisation’s high level of support for African countries, such as Kenya, was not because they are “countries suddenly entering into stress”. “In fact, Kenya has a big precautionary arrangement with us to help them access the bond markets.”

The African Development Bank said in 2014 that recent discoveries of oil, gas and coal could help propel Kenya to “middle-income country status in the medium term”. The bank said in its Country Strategy Paper for Kenya for 2014-18 (53-page / 1.14 MB PDF) that it wanted to work with development partners and the private sector to “leverage funding” for infrastructure development in Kenya, rather than act as a sole financier.

Meanwhile, Kenya’s economy is set to grow in 2017 boosted by several “key drivers” including a vibrant services sector, enhanced construction and increased public investment in energy and transportation, according to a report from the World Bank published toward the end of last year.

The bank’s ‘Kenya Economic Update’ (196 MB / 102-page pdf), prepared in consultation with the Kenya Economic Roundtable, said the country’s gross domestic product (GDP) is projected to grow above 6% in 2017 and 2018.