By Lindah Kiyeng
The International Monetary Fund (IMF) has approved a two-year standby loan worth Sh150 billion for Kenya to be used in case of unforeseen circumstances in the next two years.
Precautionary arrangements are used when countries do not intend to draw on approved amounts, but retain the option to do so should they need it.
The fund consists of a standby loan worth about $990 million and a standby credit of $495 million.
IMF Deputy Managing Director and Acting Chair Min Zhu said the decision by the IMF executive board follows Kenya’s commitment to only use the credit facility in the event of exogenous shocks with a negative impact on balance of payments.
“Kenya’s recent growth performance still remains strong plus the positive outlook. Even with the positive policy steps undertaken under the current Fund-supported program, the economy still remains vulnerable to shocks, reflecting less favourable global financial market conditions, in addition to continued security threats and potential extreme weather events,” said Zhu .
The Central Bank of Kenya calmed volatility in the markets last year after hiking its benchmark lending rate by 3 percent to 11.50 percent; a healthy move which enabled them to increase foreign reserves without turning to the IMF standby loan.
IMF has also noted that the Central Bank of Kenya expressed commitment to gradually reduce inflation to the mid-point of its target range (5 to 2.5 percent).
Zhu added that, “the authorities are taking actions to preserve financial stability. These include steps to strengthen micro and macro prudential stress testing and the capital adequacy assessment framework, and develop a legal and operational crisis management system.”
Following the progress; the new precautionary arrangements would provide a policy anchor for continued macroeconomic and institutional reform, and would help mitigate the impact of potential exogenous shocks if they were to materialize.
So far this year, the shilling has been firm, appreciating by about 0.6 percent against the U.S. dollar according to CBK statement.
At the end of last year, Kenya had an estimated growth for 2015 at between 5.8 to 6.0 percent, lower than originally expected but still higher than the 2014 figure of 5.3 percent.
The IMF however noted that cutting the budget deficit was a key step to contain risks, while still supporting major infrastructure projects and providing essential health and education needs.
According to the Finance Ministry draft figures, Kenya’s budget deficit for the financial year 2015/16 ending on June 30 is forecast at 8.1 percent of gross domestic product, falling to 6.9 percent in 2016/17.
Kenya has reduced its spending in recent years to build a modern railway system, roads and electricity plants, driving up the deficit and unnerving investors.
The IMF monitors the global economy, and its core goal is to economically strengthen its member countries.
Sustained improvement in the quality of macroeconomic statistics and strengthening the business climate will be key to promoting transparency and evidence-based policy making, in addition to supporting inclusive growth.
The National Treasury forecasts fiscal deficit will decline to 4.1percent of Gross Domestic Product (GDP) by fiscal year 2018/2019 from 8.9percent in fiscal year 2014/2015.