Updated: March 1, 2021
The International Monetary Fund (IMF) on Tuesday gave a positive assessment of the economy of Kenya, saying that real GDP growth in 2019 stood at 5.9 percent, driven by the continued resilience of the service sector, while external buffers remained healthy, with foreign exchange reserves increasing to $9.1 billion.
“This helped offset a slowdown in agriculture due to delayed rains in the first half of the year and excessive rains later in the year. Headline inflation averaged 5.2 percent in 2019 and stood at 6.4 percent in February 2020, mainly driven by food prices,” said Benedict Clements who led an IMF staff team to Kenya from February 19 to March 3, 2020.
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“The external current account deficit narrowed further to 4.6 percent of GDP from 5.0 percent in 2018, mainly due to lower imports of capital goods and petroleum products, which more than offset a decline in goods exports (e.g., in tea and coffee). Remittances remained strong. External buffers are healthy, with foreign exchange reserves increasing to US$9.1 billion (5.4 months of imports) at end-2019,” Clements added in a statement at the end of the mission.
The mission was to conduct the Article IV consultation discussions with the Kenyan authorities and undertake negotiations on a new precautionary three-year Stand-By Arrangement/Stand-By Credit Facility.
The team met with President Uhuru Kenyatta, Cabinet Secretary for the National Treasury, Mr. Ukur Yatani; Governor of the Central Bank of Kenya (CBK), Dr. Patrick Njoroge; Head of the Public Service, Mr. Joseph Kinyua; the Principal Secretary for the National Treasury, Dr. Julius Muia; Deputy Governor of the CBK, Ms. Sheila M’Mbijjewe; and senior government and CBK officials. Staff also had discussions with representatives of the private sector, civil society organizations, and development partners.
Clements said although food inflation remained elevated (averaging 8.4 percent between April 2019 and February 2020), it was expected to decline with normalizing weather.
According to the IMF team, the banking sector in kenya remains well-capitalized and liquid.
“The system’s core and total regulatory capital to risk-weighted assets stood at 16.8 and 18.8 percent, respectively, as of December 2019. Liquidity risk has eased with improved distribution of liquidity across all banks. Lending to the private sector started to gain momentum in 2019, reaching 7.3 percent year-on-year in January 2020.
“Credit is expected to rise further following the removal of interest rate controls in November 2019. The ratio of nonperforming loans has declined from its peak of 12.9 percent in April 2019 to 12.0 percent in December and should continue to fall with the recent repayment of pending bills, recovery efforts by banks, and higher credit growth. The banking system has been gradually consolidating, with two significant mergers and acquisitions transactions finalized in 2019.”
The IMF team added that the fiscal deficit rose slightly in FY2018/19 to 7.7 percent of GDP and nominal public debt reached 62.1 percent of GDP.
The team said the Kenyan authorities target a “reduction of the budget deficit to 6.3 percent of GDP in FY2019/20, with revenue boosted by dividend transfers from state-owned enterprises and expenditure curtailed by a reduction in inefficient spending. Important progress was made on reducing the stock of pending bills from previous years”.
Discussions between the IMF and Kenyan authorities focused on the policies needed to support Kenya’s ambitious reform agenda, which aims to further bolster Kenya’s strong and inclusive growth, the IMF team said.
“The discussions covered revenue and expenditure policies needed to reduce the deficit this fiscal year and achieve further fiscal consolidation over the next three years to reduce debt vulnerabilities while preserving high-priority, growth-enhancing public investment and social spending; public financial management reforms to increase the efficiency, effectiveness, transparency, and accountability of public spending; transformation of the banking system through the Banking Sector Charter to further strengthen financial stability and increase access to financing, including for small businesses; modernization of the monetary policy framework; steps to improve governance and strengthen the anti-corruption framework; and reforms to boost growth and improve gender inclusiveness,” the team added.