IMF Boosts Loan to Kenya to Help Cope With Regional Drought

Kenya hit hard by Horn of Africa drought, faces humanitarian emergency

Monetary policy to bear brunt of adjustment to rein in domestic demand

New value-added tax law ready to go to cabinet before end of 2011

In its regular review of the country’s economy, the IMF said Kenya was pushing through with an ambitious structural reform agenda while preserving the basis for strong growth.

The new release of loan money is part of a total release to Kenya of around $312 million under its three-year Extended Credit Facility arrangement with the IMF. The IMF’s Executive Board also raised Kenya’s loan ceiling under the arrangement to around $760 million if needed.

IMF First Deputy Managing Director David Lipton noted in a statement after the extra financing was approved December 9 that Kenya’s economy has continued to expand despite the challenges posed by the drought in the Horn of Africa, higher than expected food and fuel prices, and the uncertain global environment. “The authorities are taking decisive measures to address these imbalances and to preserve macroeconomic stability,” Lipton stated.

Drought emergency

Since the beginning of 2011, Kenya has been hit hard by the drought in the Horn of Africa, creating a humanitarian emergency. At the same time, higher international commodity prices and continued strong domestic demand have boosted inflation and swelled the current account deficit, creating additional balance of payments risks.

After a delayed response, the authorities have moved swiftly by adjusting their policies to reduce the pressure on the balance of payments, stem inflationary expectations, and stabilize the exchange rate. Because the external financing requirements cannot be met by policy adjustment alone, the authorities have requested financing from development partners and the IMF (see chart). International development partners have pledged around $450 million to assist Kenya directly in response to the drought.

Inflation, which reached an annual rate of around 19 percent in November 2011, is still above the Central Bank of Kenya’s target range but has run at a much slower pace in recent months. Food and fuel prices have remained higher than anticipated, and exchange rate depreciation has led to higher inflation expectations and faster core inflation.

The central bank has responded by raising its policy rate by a cumulative 11 percentage points since October 2010 in order to reverse inflationary pressures, pushing...