A team from the International Monetary Fund (IMF), led by Benedict Clements, visited Kenya from October 19 to November 3, 2016, to conduct discussions on the first reviews under a precautionary Stand-By Arrangement and a Stand-By Credit Facility (SBA/SCF).

On March 14, 2016, the Executive Board of the International Monetary Fund (IMF) approved a SDR 709.259 million (about US$989.8 million) 24-month Stand-By Arrangement (SBA) and a SDR 354.629 million (about US$494.9 million) 24-month Standby Credit Facility (SCF) for Kenya, for a combined SDR 1.06 billion (about US$1.5 billion, or 196 percent of Kenya’s quota) (see Press Release No. 16/110). 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.

At the end of the visit, Mr. Clements released the following statement:

“Kenya’s economy has continued to perform well, with real GDP growth reaching 6.1 percent in the first half of 2016, up from 5.6 percent in 2015. Growth was supported by favorable weather conditions, public investment spending, lower global oil prices, and a pick-up in tourism. Inflation has remained within the government’s target range, at 6.5 percent in October, despite a spike in food prices in recent months. The external current account deficit (on a 12-month basis) declined to 5.5 percent of GDP by September 2016 from 6.8 percent in 2015. This decline reflected mainly the lower oil prices, improved tea and horticulture exports, and increasing remittance inflows. The exchange rate has remained stable and foreign exchange reserves have risen to US$8.2 billion (equal to 5.3 months of next year’s imports) as of end-September 2016. The banking system has remained stable. 

“Discussions focused on macroeconomic policies and structural reforms aiming to ensure the sustainability of investment-driven, inclusive growth. There was broad agreement that macroeconomic policies would need to be prudent to maintain the sustainability of public debt on a sustainable path, contain inflation within the target range, and preserve external stability. To that end, the mission urged the authorities to maintain the fiscal deficit on a declining path as envisaged under the program. The mission welcomed the authorities’ plans to accelerate structural reforms aimed at (i) strengthening the efficiency and transparency of public spending, (ii) improving the monetary framework to facilitate the transition towards a modern inflation targeting framework, (iii) reinforcing banking supervision and regulation to ensure financial stability, and (iv) improving the quality of macroeconomic statistics, including fiscal reporting.

“The IMF team expressed concern that the recent amendments to the Banking Act that set limits on deposit and lending rates are likely to have an adverse impact on Kenya’s economy. While these amendments aim to reduce the cost of borrowing and increase the return on savings, international experience shows that interest rate controls are ineffective and give rise to unintended negative consequences. These include reduced access to financing for small and medium-sized enterprises, and an increase in informal and predatory lending at much higher interest rates. Interest rate limits could also reverse the remarkable increase in financial inclusion that has benefited a large proportion of Kenya’s population. These adverse effects could lead to lower economic growth and undermine efforts to reduce poverty. In addition, interest rates limits undermine 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 mission team thanks the authorities for their hospitality and cooperation and for constructive discussions.”

The team met with the Cabinet Secretary for the National Treasury, 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; members of the CBK Monetary Policy Committee, and senior government and CBK officials. Staff also had productive discussions with parliamentarians, representatives of the private sector, and development partners.