Kenya needs to remain on the long-term path of economic reform that ensures a stable macroeconomic environment and promotes growth prospects, the International Monetary Fund (IMF) has recommended.
While pointing out that economic reforms had started to produce desired results with the shilling stabilising, inflation easing and the public debt trending downward, the IMF mission, led by Domenico Fanizza also noted that risks that could dampen the growth prospects still abound.
“Therefore, policies should bring domestic demand growth in line with that of supply in order to improve the external position,” Fanizza said.
The Fund projects that Kenya’s economy is poised to continue growing by five percent in 2012 but could do much better if the government sustains its efforts to promote exports and invest in infrastructure development.
“The economy is not growing at full potential but we think that it has the potential to grow on a sustained basis of six to seven percent per year and these are the rates that are required to make meaningful in-depth into poverty reduction,” Fanizza said.
Fiscal consolidation will also be key going forward to address the macroeconomic vulnerabilities and create ‘space for development spending’.
The implementation of the new Value Added Tax (VAT) law is one such measure that should enhance the government’s revenue base in order to create the fiscal space for investments that will generate higher growth prospects, the institution stressed.
The mission was in the country for the third review under the three-year Extended Credit Facility (ECF) arrangement where it pointed out that the country needs to maintain its tight monetary stance until there’s concrete evidence that inflation is coming down.
This calls for the government to monitor not only the headline inflation but also the non-food and non-fuel inflation before any loosening of the policy stance can be considered.
The Fund favours a tight stance to bring the rate of growth in credit to the private sector – which it believes is responsible for the runway inflation and widening current account deficit- to sustainable levels.
“If the current stance of monetary policy is maintained, we believe that the policy target of getting to single digits inflation levels in the second half of 2012 is within reach,” Fanizza added.
But even as these efforts are sustained, the IMF hopes to continue assisting the government to deal with the challenges threatening the macro-economic stability through the disbursement of additional funds build up its foreign exchange reserves.
Fanizza disclosed that the IMF Executive Board would disburse the third tranche of the ECF loan amounting to $110 million (Sh9.1 billion) by mid April. This will bring the total amount released under the arrangement to $440 million (Sh36.5 billion).