IMF Shocks Loan, Policy Changes Help Kenya's Recovery

• Author: Iyabo Masha
• Position: IMF African Department

Kenya’s $200 million June 2009 drawdown from an IMF facility designed to buffer economies from shocks caused by events beyond their control allowed the country to close financing gaps that opened up during 2008.

Kenya’s strong growth momentum during the 2004-07 period stalled in 2008 due to a series of adverse developments (see Chart 1). Recovery from post-election violence that had disrupted agricultural and manufacturing production was cut short by high fuel and food prices. In addition, high maize imports due to domestic drought weakened the external position.

The global financial crisis led to steep decline in private capital flows, and subdued exports and tourism receipts (see Chart 2) all contributed to a further weakening of the external position. Official foreign exchange reserves fell by almost $800 million (about 20 percent of the stock of reserves) between mid-2008 and early 2009, increasing the country’s vulnerability to further shocks. On the capital market, there was substantial capital outflow from the Nairobi Stock Exchange, where the key share index declined by 35 percent in 2008 alone.

Domestic policy adjustments and improvements in the world economy helped Kenya turn in a better economic performance this year, the IMF said in its regular assessment of the country’s economy. As a result, Kenya’s real GDP growth is now projected to accelerate to 3.2 percent in 2009/10, from 2.2 percent in 2008/09. However, some important tasks, especially in the implementation of structural reforms, remain unfinished.

IMF financing, coupled with appropriate policy adjustments and implementation of some structural measures, is contributing to the nascent economic recovery in 2009/10. However, the economy is still growing at below its precrisis rates, and growth is likely to be subdued at least until 2011/12.

Financing gaps

In mid-2009 Kenya requested IMF financial assistance under the rapid access component of the Exogenous Shocks Facility, a loan program designed to help low-income countries cope with emergencies caused by events beyond their control. The $200 million loan helped Kenya to close the financing gaps estimated for 2008/09 and 2009/10 while enabling an orderly rebuilding of foreign reserves.

Kenya’s policy adjustments to address the effects of the economy’s 2008 shocks have focused on four key areas.

Fiscal policy: The fiscal framework sought to strike the right balance between adjusting to...