NAIROBI, March 8 (Xinhua) — International Monetary Fund (IMF) said Thursday that it has extended Kenya’s standby credit line of 1.5 billion U.S. dollars for six months in an extraordinary move that enables the country to continue reforms.
IMF said in a statement released in Nairobi that the East African nation had requested and was given an extension of six months, from March to September.
It said the standby credit can be tapped to help the country stabilize its balance of payments in case imports weigh on it to a level of exposing the country to external shocks like currency instability.
“Kenya has committed to policies to reduce the fiscal deficit and amend interest rates control. Annual growth could rise further to 6.5 percent within a couple of years, provided that the authorities continue economic reforms, including reducing the fiscal deficit and amending interest rate controls,” the lender said.
Kenya effected lending rates control in 2016 in a move that had led banks to deny credit to the private sector, slowing the sector that contributes enormously to the economy, various studies on the effects of the interest rate capping have noted.
High spending on infrastructure has also stretched the national budget resulting in a widening deficit, said Henry Rotich, the Cabinet Secretary for the National Treasury.
Benedict Clements, the head of the IMF delegation to Kenya, said discussions with Kenyan authorities focused on macroeconomic policies and reforms aiming at ensuring the sustainability of investment-driven, inclusive growth.
Clements said Kenya’s medium-term outlook remains favorable, but headwinds from weak credit growth will weigh on economic activity in the near term.
He said the National Treasury expressed its commitment to significant fiscal adjustments in the coming years that would help address the growing budget deficit and maintain public debt on a sustainable path.
“To that end, the IMF team and the Kenyan authorities agreed that a reduction in the fiscal deficit to 7.2 percent of GDP in 2017/18 and further to 5.7 percent of GDP in 2018/19, from 8.8 percent in 2016/17 would be appropriate. This will be achieved by a combination of revenue measures and contained spending,” said Clements.
The IMF mission welcomed the authorities’ plans to accelerate reforms aimed at increasing the efficiency and transparency of public spending, particularly on development spending and safeguarding financial stability by strengthening capital and liquidity positions of banks and microfinance institutions, promptly addressing the capital and liquidity deficiencies in individual banks and implementing new International Financial Reporting Standards.
Clements said IMF urged the National Treasury to review the interest rate controls introduced in September 2016 with a view to abolishing them or substantially modifying them.
“The controls have contributed to slow overall credit growth to the private sector and lower access to credit by SMEs and individuals. In addition, interest rate controls are undermining the effectiveness of monetary policy aimed at ensuring price stability and supporting sustainable economic growth,” said Clements.