IMF team in Nairobi to review lending programme

A delegation from the International Monetary Fund will be in Nairobi starting Wednesday to review its lending programme to Kenya.

The team will be headed by the mission chief to Kenya, Domenico Fanizza, who is based at the IMF’s headquarters in Washington DC. Resident representative of the fund, Ragnar Gudmundsson, said the delegation will be in Nairobi up to March 12.

“This will be the third performance review under the extended credit facility (ECF) programme,” said Mr Gudmundsson in an interview on the sidelines of the just ended East Africa Community summit in Arusha.

The IMF has so far lent Kenya about Sh98.4 billion ($1.2 billion) under the ECF programme, which goes to boost Central Bank of Kenya (CBK’s) foreign exchange reserves.

The loans have helped to stabilise the shilling which came under severe pressure at the height of the global financial crisis in 2008 and late last year when it depreciated to an all-time-low of 107 units to the dollar.

The delegation will meet Treasury and CBK officials, MPs, private sector and civil society representatives. Mr Gudmunsson said the delegation will mainly focus on implementation of conditions set during signing of the loans.

They include amendment of the Value Added Tax (VAT) to boost revenue collection by eliminating exemptions offered to producers of sensitive consumer goods. They will also review progress of the public finance management bill, which will define taxation and borrowing powers between the central government and county administrations under the devolved system of government.

The bill has generated heat between Treasury and the Ministry of Local Government, with the main point of contention being the extent of freedom that county governments will have to spend and incur budget deficits.

Incur budget deficits

Mr Gudmunsson said the IMF officials will also discuss Treasury’s supplementary budget estimates for this year and projections for the 2012/13 budget.

The delegation comes at a time when inflation appears to be on a downward curve, while the shilling has stabilised at the 82 units to the dollar range.

“The key now is to reduce volatility of the shilling,” said Mr Gudmunsson. A key recommendation of the fund is that Kenya should lower demand for imports, which have exerted pressure on the shilling by widening the gap between foreign exchange inflows and the imports bill.

High demand for imports has widened the current account deficit to 10 per cent of GDP (nearly Sh300 billion) by last year, which is targeted to fall to about eight per cent in the next budget.

This, the IMF said, can be achieved by maintaining a tight monetary stance to reduce demand for loans by the private sector used to finance the imports.

By September last year, loans to the private sector were growing at 37 per cent which reduced to about 30 per cent in three months to December after CBK’s aggressive interest rate increases.

Mr Gudmonsson said Kenya’s economy could only sustain a growth rate of loans to the private sector of “about 20 per cent,” indicating that the IMF will be calling for maintenance of high interest rates to curb demand for debt.

Source: www.businessdailyafrica.com

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