NAIROBI: The International Monetary Fund (IMF) said Kenya’s economic performance has remained satisfactory despite headwinds from rising volatility in global markets and domestic security challenges.
IMF said its executive board also approved some in additional funds to bring cumulative amount available under a Stand-by Arrangement and a Stand-by Credit arrangement to 610.7 million U.S. dollars to help cushion Kenya against external shocks. “Real GDP growth has been robust, and, notwithstanding the recent shilling depreciation, inflation has remained within the authorities’ target range.
“External buffers to date have remained adequate,” IMF Deputy MD Min Zhu said in a statement received on Thursday after IMF completed its first review of Kenya’s 688 million dollars precautionary credit arrangement. Kenya’s taking of the precautionary loaning arrangement is part of the measures the government is undertaking to avert a repetition of the shocks that hit its economy in 2011.
The statement came as the shilling exchange rate has been under pressure against the U.S. dollar, largely due to the strengthening dollar in the global currency market. The local currency was firm against the dollar on Monday and Tuesday due to the intervention of the Central Bank of Kenya (CBK).
The CBK market intervention was timely as substantial dollars sold boosted the shilling as the local currency edged closer to its record low of 106.80, set in October 2011. The stability of the shilling exhibited early this week was good for CBK efforts to stabilize the shilling which has witnessed ups and downs in the second half of the year.
The IMF said recent decisive steps by the apex bank to tighten monetary policy are appropriate, noting that these steps will help contain the impact of the recent shilling depreciation on domestic prices and anchor inflationary expectations.
“The central bank remains committed to refraining from intervening in the foreign exchange market except for smoothing excessive exchange rate volatility,” Zhu said. He said Kenya’s commitment to improve the central bank’s stress testing framework is important to address potential risks associated with balance-sheet effects of the recent currency depreciation.
“Efforts to strengthen supervision of banking groups operating outside Kenya are also welcome in light of the rapid expansion of Kenyan banks abroad. “The recent exchange rate volatility puts a premium on monitoring corporate borrowing from abroad,” he said.
Despite forex shocks, the country still faces challenges of insecurity which has led to a decline in tourism numbers, weather related shocks, slow growth in some sectors and difficulties in implementing devolution. Zhu said the Kenyan authorities’ fiscal program for 2015/16 seeks to address persistent security challenges and infrastructure bottlenecks while preserving macroeconomic stability.
Over the medium term, continued efforts are needed to boost fiscal space to accommodate development priorities and an orderly process for devolving fiscal responsibility to lower tiers of government while maintaining public debt sustainability.
Zhu said the IMF board has also approved Kenya’s request for the waivers of the non-observance of the continuous performance criterion on external arrears and the modification of performance criteria for end-September.
He said public financial management reforms and in particular, strengthening capacity at the National Treasury’s Debt Management Office and the introduction of the Treasury Single Account-should be decisively implemented.
“The authorities have taken a number of steps to strengthen expenditure control and improve the efficiency of public spending. However, counties’ access to the CBK overdraft facility could complicate monetary policy implementation,” Zhu cautioned.
