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The Nairobian

Kenya gets IMF approval but report warns security needs tightening

Business

By James Anyanzwa | Oct 07, 2014

Nairobi; Kenya: The International Monetary Fund (IMF) has given a thumbs-up to Kenya's progress in implementing economic reforms but warned that the country remains highly vulnerable to deteriorating security conditions, weather-related shocks and difficulties in implementing devolution.

The report indicates that although the Jubilee Government started the process of devolution at a fast pace, introducing a reporting framework that allows for monitoring progress and challenges, however, coupled with a dispute over implementation of the devolved system of Government has sparked calls for a referendum by governors who are demanding more resources be channelled to the grass-roots.

The IMF reckons that difficulties associated with the implementation of the devolved system of government could complicate the government's public finance management systems.

In its assessment of Kenya's economic and political reforms, the Fund also cautioned against the protracted growth in advanced and emerging economies which could impact on Kenya's export and tourism earnings.

In a statement, the Fund noted that rising food prices and rapid credit growth might fuel inflationary pressures.

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Latest data from the Kenyan National Bureau of Statistics (KNBS) showed that the overall month-on-month inflation for September dropped to 6.6 per cent from 8.36 per cent in August due to a decline in the cost of kerosene and electricity.

The Fund also recommended strengthening of prudential oversight to prevent deterioration in the quality of banks' loan portfolios.

However, the IMF Board commended the Kenyan authorities for maintaining macroeconomic stability, introducing important market-friendly reforms, and for the country's successful debut Eurobond issuance.

"Kenya's economic outlook is favourable, although the country remains vulnerable to exogenous shocks," says IMF.

To mitigate downside risks, the directors noted that Kenya must institute stronger policy buffers and enhance its structural reforms, including strengthening the business climate and improving security conditions.

They noted that this would help consolidate the gains made, reduce poverty and promote more inclusive growth.

The IMF also called for continued commitment to fiscal discipline in the wake of challenges emerging from the ongoing process of devolution of government responsibilities, saying the process should lead to better delivery of services to help alleviate poverty and inequality across counties.

The Fund called for further revenue mobilisation, enhancement of the quality and efficiency in public spending, and better control over the public wage.

It supported efforts to reduce fiscal risks by reforming government-owned agencies, and closely monitoring liabilities from State-owned enterprises.

According to IMF, Kenya's medium-term growth prospects are favourable, supported by rising infrastructure investment in energy and transportation, the expansion of the East African Community (EAC) market, deepening financial inclusion, which fosters a more dynamic small and medium-sized enterprise sector and the positive impact of large-size irrigation projects on agricultural productivity.

"The economy's growth rate rose to five per cent in 2013/14 and is expected to gain further momentum in 2014/15, driven by higher domestic and external investment," says IMF.