IMF cites inflation risk in Kenya dealWednesday July 14 2021
The International Monetary Fund (IMF) will pause funding to Kenya under the three-year $2.4 billion programme agreed in February should the country’s three-month average inflation breach Central Bank of Kenya (CBK) targets.
The IMF said, in its country report released last month, the government agreed to a monetary policy consultation clause, targeting inflation breaches as part of the memorandum of understanding that guided the programme.
The CBK maintains an inflation target of five percent plus or minus 2.5 percentage points, with one of its core mandates being ensuring price stability.
The IMF report details a series of test dates — pegged as of the end of March, June and December this year and June 2022 — when the average 12-month inflation rate of the preceding three months will be measured to check if it breached the CBK target.
Should the measure exceed or fall below target, the CBK will be required to enter into consultations with the IMF, to assess the reasons and work out remedial measures.
“The authorities will complete a consultation with the IMF Executive Board which would focus on: the stance of monetary policy and whether the Fund-supported programme remains on track; the reasons for programme deviations, taking into account compensating factors; and proposed remedial actions if deemed necessary,” said the IMF.
“When the consultation with the IMF Executive Board is triggered, access to Fund resources will be interrupted until the consultation takes place.”
Kenya’s inflation in the past year has, however, remained firmly within the target range despite the economic shocks caused by the Covid-19 pandemic, averaging 5.19 percent between June 2020 and June 2021. It has not breached the upper target limit since August 2017, while the lower target was last breached in May 2007.
The monetary policy clause is one of many contained in the funding agreement, covering a wide range of economic parameters including debt, public finance and state corporation reforms.
The global lender detailed a number of wider monetary policy reforms that the Central Bank of Kenya has proposed to undertake, which include refining its macroeconomic modelling and forecasting frameworks and improving the communication of monetary policy decisions to make them more effective.