The IMF’s Executive Board has just completed the fifth review of Kenya’s economic reform programme supported since January 2011 by an Extended Credit Facility.
As a result, about $100 million will shortly be disbursed to the Central Bank, bolstering Kenya’s foreign exchange reserves. This will bring total disbursements to date under the facility to about $650 million.
This is a significant amount, which currently represents more than 10 per cent of Kenya’s international reserves. Kenya’s good performance has been underpinned by strong economic policies.
The successful political transition now offers the opportunity for a decisive breakthrough on the road towards becoming an emerging market economy.
Kenya faced a number of challenges in the last few years, from the 2007-08 political violence to the global financial crisis, from repeated droughts to regional security threats.
On the positive side, the country embarked in August 2010 on the implementation of an ambitious Constitution that responds to the political, social, and economic aspirations of the Kenyan population.
While these factors contributed to substantial pressures on the Budget, fiscal discipline was preserved through a combination of expenditure restraint and revenue mobilisation.
As a result, we have seen since 2010 a marked reduction in the country’s primary fiscal deficit — from 3.8 per cent of GDP in 2010 to 1.5 per cent in 2011 and 2.2 per cent in 2012 — which in turn has led to a decline in Kenya’s public debt to GDP ratio.
The ratio stood at 46 per cent in 2010. It now stands at 43 per cent and is projected to decline to 41 per cent by 2015.
Monetary policy also came under significant pressure, particularly in 2011, when high international commodity prices, a drought in the Horn of Africa, and strong domestic demand caused inflation to reach close to 20 per cent.
The response of the CBK was firm, with a resolute tightening of policy that succeeded in bringing inflation back on track, restoring stability to the currency, and slowing private sector credit expansion to sustainable levels. The recent easing of policy is now consistent with low inflation expectations and a gradual pick-up in lending to spur economic activity.
These sound economic policies have contributed to lifting Kenya’s economic growth to an average of five per cent over the last three years, keeping pace with the robust growth in Sub-Saharan Africa, the second fastest growing region in the world.
Moreover, support for innovation has led to breakthroughs in financial inclusion and access to credit, which are essential to creating new jobs, raising productivity and diversifying the economy.
Kenya’s growing role as a financial services hub, its strong human capital base, recent discoveries of mineral wealth and the prospects of an integrated EAC market are also generating considerable interest outside the country.
Over the last year, foreign direct investment was up by close to $500 million, performance on the stock exchange was boosted by foreign capital inflows, and remittances reached record levels, all of which seem remarkable in an environment of political uncertainty.
With the smooth political transition underway, and in a context of strengthened macroeconomic conditions, the stage is set to unleash Kenya’s growth potential, further attract foreign investment, and lay the basis for transforming the country into an emerging-market economy.
Challenges remain if we are to achieve these ambitious goals, and preserving economic stability remains as fundamental as ever.
Gudmundsson is the IMF Resident Representative.