IMF: Kenya’s economy picking up but services sector faces challenges

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The International Monetary Fund (IMF) said on FridayKenya’s economy is picking up but the normally resilient services sector continues to face challenges, and the outlook remains uncertain due to COVID-19.

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The IMF released the statement below after conducting a virtual mission in Kenya.

A staff team from the International Monetary Fund (IMF) led by Mary Goodman conducted a virtual mission to Kenya from October 27 to November 17, 2020, to undertake negotiations on a 3½ year Extended Fund Facility (EFF)/Extended Credit Facility (ECF) arrangement.

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At the end of the visit, Ms. Goodman made the following statement:

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Discussions took place against the backdrop of the unprecedented shock that Kenya has suffered due to the COVID-19 pandemic. As elsewhere in the world, the pandemic has disrupted lives and livelihoods and remains a major risk to public health. Actions taken by the Kenyan authorities earlier this year – easing monetary policy, supporting broad-based loan restructuring for borrowers hit by the shock, temporarily cutting tax rates and launching programs to support vulnerable groups – have played an important role in cushioning the impact on the economy. Financial assistance from international financial institutions, including the IMF, has supported this effort. Kenya’s development goals have nonetheless suffered a significant setback, and the country faces an arduous task of returning to a path of sustained and inclusive growth. The shock has also crystallized debt-related vulnerabilities and exposed weaknesses in some state-owned enterprises (SOEs).

Economic activity has started to show signs of recovery. In the second quarter of 2020, real GDP contracted by 5.7 percent year-on-year. Agriculture remained strong thanks to above-average rainfall, but the normally resilient services sector suffered a significant contraction in output. Activity has generally been picking up from the trough in April-May, but with remaining weakness in the tourism and education sectors among others. Kenya’s external accounts have remained resilient due to solid growth in goods exports, particularly horticulture and tea, and in remittances, and due to reduced imports, partly resulting from lower oil prices. Inflation has remained in check at 4.8% year-on-year in October, while financial sector vulnerabilities have been contained and the banking system remains well capitalized overall. Key challenges are reduced government tax revenue and rising public debt, which reached 65.9 percent of GDP in FY19/20.

The mission discussed with the authorities a program to support the next phase of their COVID-19 response. The program would provide resources to protect vulnerable groups and would reduce debt vulnerabilities over time through a multi-year fiscal consolidation centered on raising tax revenues. It would also advance the structural reform and governance agenda and address weaknesses in some SOEs that have been exacerbated by the COVID-19 shock. Finally, it would strengthen the monetary policy framework and support financial stability. The program design would incorporate elements of flexibility to accommodate the high uncertainty about the evolution of COVID-19 and the path of economic recovery.

The mission reached agreement in many areas; discussions on the remaining areas will continue in the coming period. There is broad agreement on the policy objectives that would underpin a Fund-supported program. Remaining issues to firm up include the scope of SOE weaknesses and plans to revise the budget for FY2020/21 to address these and other pressure points as well as some elements of the medium-term strategy. Technical work will continue in the period ahead, with a view to reaching agreement on a program that could be presented to the Fund’s Board in early 2021.”   

The team thanks the authorities for their hospitality and constructive discussions.

The team met with 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; Auditor General, Ms. Nancy Gathungu; and other senior government and CBK officials. Staff also had productive discussions with representatives of the private sector, civil society organizations, and development partners.

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