The International Monetary Fund (IMF) has lauded Kenya’s macroeconomic stability and reduced external imbalances. The Bretton Woods institution said Kenya’s planned fiscal consolidation, targeting a 3.7 per cent of GDP deficit by 2018/19 from 7.8 per cent in 2015/16 period, remains critical to maintain a low risk of debt distress while preserving fiscal space for development priorities.
IMF however noted interest rate controls imposed in August, 2016, are likely to reduce access to credit, weighing in on growth. IMF was against the passing of the controls from the onset.
In addition to calling for removal of interest rates controls, IMF reiterated the importance of setting formal interest rate corridor so as to strengthen the monetary policy framework. “Kenya’s economy has continued to perform well. Real GDP growth increased in 2016, inflation remains within the target range, and the current account deficit has narrowed,” said the Executive Board Deputy Managing Director and Acting Chair Mr Tao Zhang.
“The macroeconomic outlook is overall positive, including robust growth and reduced external imbalances. However, interest rate controls are likely to reduce access to credit, weighing on growth. They also complicate monetary policy and adversely affect banking sector profitability, especially for small banks”
Although the adverse effects of the controls are manageable in the near term, Mr Zhang said that if maintained, they could potentially pose a risk to financial stability. “Therefore, it is essential to remove these controls, while taking steps to prevent predatory lending and increase competition and transparency of the banking sector,” he said.
This comes after IMF Executive Board completed the first review of Kenya’s performance under the programme supported by the Stand-By Arrangement (SBA) and an arrangement under the Standby Credit Facility (SCF).
Under both programmes, Kenya has access to $1.5 billion (Ksh150 billion) to manage currency fluctuation. During the visit, Treasury reiterated on its commitment to only use the $1.5 billion in the event of adverse currency movement arising from deteriorating balance of payments.