Kenya : Sixth and Final Review Under the Three-Year Arrangement Under the Extended Credit Facility

EXECUTIVE SUMMARY Background: Kenya’s recent reforms have introduced a more comprehensive system of checks and balances, including accountability and transparency in expenditure control and management. In this context, the new government has taken decisive steps towards devolution supported by a renovated institutional framework and solid macroeconomic management. Fiscal policy has focused on sustainability, while allowing for infrastructure investment in key sectors such as roads and power generation, and expanding protection of the vulnerable population. Policies have laid the ground for sustainable economic growth, with domestic and foreign investors expanding their scale of operations in a market-friendly environment. Foreign investment flows have risen and boosted the stock market, allowing for a sustained accumulation of international reserves. Commercial prospects of oil discoveries are promising, and the discovery of aquifers holding a potentially substantial supply of water in Northern Kenya could have a huge impact on the lives of future generations. Kenya leads the way in the process of regional integration, having become the second largest African investor in other Sub-Saharan African countries, with a number of regional banks rapidly expanding operations through the rest of Africa. Financial institutions are moving ahead of schedule in adopted prudential guidelines issued by the central bank in line with international best practices. The International Criminal Court trial of President Kenyatta for crimes against the humanity has been postponed until February 5, 2014. The impact of the September 21 terrorist attack has been limited, so far circumscribed to the tourist sector. Program: The Executive Board approved a three-year Extended Credit Facility (ECF) program for Kenya on January 31, 2011 (120 percent of quota), which was augmented on December 9, 2011, for a total of SDR 488.520 (180 percent of quota). All end-June 2013 quantitative targets were met. NDA and NFA were comfortably within the program bounds. The authorities’ primary fiscal balance outcome was in line with the program, and Priority social expenditure was above the program’s indicative target. The structural benchmark on auditing of compliance with VAT obligations by 50 large taxpayers before June 2013 was fulfilled, and the VAT Act was approved by the Parliament and enacted by the President. Staff views: The staff recommends completion of the review. The authorities have ...