IMF Lends $508.7 Million to Help Kenya Launch Key Reforms

Kenya's program seeks key reforms in public finance management, tax policy

Backs enactment of new constitution aiming at political transformation

Fiscal adjustment allows priority investment for climate-change issues

The program will help Kenya deal with vulnerabilities that could derail its efforts to accelerate growth, by strengthening the external position and reversing the rise in the debt burden resulting from recent fiscal stimulus.

Kenya’s loan was approved January 31 by the IMF’s Executive Board under the institution’s Extended Credit Facility, and is the largest such loan approved since the IMF’s new financing architecture for low-income countries became effective in mid-2009. The policies supported by the loan strike a balance between fiscal adjustment and making resources available for reforms envisaged in Kenya’s new constitution.

The new constitution, ratified in August 2010, provides for reforms on fiscal decentralization, the public expenditure framework, and land ownership. The constitution also addresses long-standing governance issues by strengthening the judiciary and laying the ground for an overhaul of the public finance management system that would effectively reduce the scope for corruption.

Higher private investment

The improved political environment in Kenya has spurred confidence, and private investment is expected to accelerate and support annual growth rates close to 7 percent over the medium term. Higher private investment will reinforce the ongoing economic recovery, initially driven by fiscal stimulus and benign weather conditions.

Kenya’s economic program will help sustain higher growth rates, with both private and public investment contributing to raise the investment-to-GDP ratio to 25 percent from 20 percent in 2009/10. Public investment will concentrate on

• Shifting sources of energy into geothermal power generation to help Kenya address climate-change issues.

• Participating in East African Community regional projects.

• Selectively eliminating infrastructure bottlenecks.

The loan arrangement will provide an international reserve cushion in anticipation of an expected deterioration of the terms of trade in the next two years (see chart). It will bring the debt-to-GDP ratio below the 45 percent ceiling over a three-year horizon, from the 47 percent of GDP projected for the next fiscal year.

The new framework for expenditure management and control will allow the government to rein in current...