The IMF is broadly supportive of the government’s use of policy tools and its reform agenda to stabilise the economy. Indeed, in March 2016, the Fund approved USD1.5bn in fresh financing, with the funds made available through a stand-by arrangement (SBA) of around USD989.8mn and a stand-by credit facility (SCF) of around USD494.9mn. Financing under both arrangements is for a 24-month period. Kenya has immediate access to around USD757.5mn, with the remaining funds to be disbursed in four tranches following semi-annual programme reviews by the IMF. However, the Kenyan authorities will see the facility as essentially a “precautionary” measure, rather than a fund to be drawn down.
Fiscal consolidation plan will not upset the current high GDP growth trajectory
Also in March 2016, the Treasury announced supplementary spending plans that introduce net cuts to the budget of around -USD404.34mn. However, the government claims that fiscal plans will not interrupt the nation’s “still strong" economic growth, driven by expansion in the construction and agricultural sectors and by a recovery in tourism. EH expects GDP growth of around +6% in both 2016 and 2017, compared with an annual average +5.4% in the ten-year period to end-2015. Kenya will remain one of the faster growing economies in Sub-Saharan Africa (see chart).
The current account registers high deficits but external debt is comfortable
Euler Hermes expects the East African Community (EAC) will grow in importance for Kenya as regional integration deepens, particularly as Mombassa remains the largest regional port and Uganda and Tanzania already account for a combined 23% of Kenyan exports. However, in addition to large fiscal deficits, a further structural imbalance occurs in the external accounts. Large shortfalls in the current account balance (see chart) reflect the economy’s vulnerability to local (climatic and security) and global developments. The latter include commodity demand and internationally-determined commodity prices, which have an impact on both sides of the trade balance as Kenya exports soft commodities but is an importer of crude oil.
External debt levels (debt/GDP is around 25% and debt/export earnings 119%) also require careful management, although servicing of external debt obligations is low (debt service/export earnings around 4%) and foreign exchange reserves cover between four and five months of imports.