IMF gives Kenya Sh12 billion to help cope with the severe drought in the Horn of Africa

By Ben Kinyanjui

The International Monetary fund (IMF) will give Kenya Sh12 billion loan to help the country cope with the severe drought in the Horn of Africa as well as higher food and fuel prices.CBK Governor Prof Njuguna Ndung'u insisits inflation will fall to seven per cent by next year

In its regular review of the country’s economy, the IMF said Kenya was pushing through with an ambitious structural reform agenda while preserving the basis for strong growth.

The new release of loan money is part of a total release to Kenya of around $312 million (Sh26 billion) under its three-year Extended Credit Facility arrangement with the IMF.

The IMF’s Executive Board also raised Kenya’s loan ceiling under the arrangement to around $760 million (Sh63 billion) if needed.

IMF First Deputy Managing Director David Lipton says Kenya’s economy has continued to expand despite the challenges posed by the drought in the Horn of Africa, higher than expected food and fuel prices, and the uncertain global environment.

“The authorities are taking decisive measures to address these imbalances and to preserve macroeconomic stability,” Mr Lipton said.

Since the beginning of 2011, Kenya has been hit hard by the drought in the Horn of Africa, creating a humanitarian emergency.

At the same time, higher international commodity prices and continued strong domestic demand have boosted inflation and swelled the current account deficit, creating additional balance of payments risks.

The fund says after a delayed response, the authorities have moved swiftly by adjusting their policies to reduce the pressure on the balance of payments, stem inflationary expectations, and stabilize the exchange rate.

“Because the external financing requirements cannot be met by policy adjustment alone, the authorities have requested financing from development partners and the IMF,” said the fund in a statement.

It also revealed that international development partners have pledged around $450 million (Sh37 billion) to assist the country to respond to the drought.

However the country is still facing high inflation, which 19 percent last month though rate had slowed due to the on-going rains that have boosted food supply, a major driver of inflation in the last six months.

“Food and fuel prices have remained higher than anticipated, and exchange rate depreciation has led to higher inflation expectations and faster core inflation,” says the fund.

“The authorities’ economic program plans additional adjustment in monetary and fiscal policies to strengthen the external position while preserving the basis for strong growth.”

According to IMF, the policies will focus on gradually bringing the growth in domestic demand in line with that of available resources, in order to curb inflation and lower the external current account deficit.

“Monetary policy will bear the brunt of the adjustment to rein in domestic demand,” says the statement.

“The Central Bank has raised its policy rate substantially and will seek to keep a tight stance to bring inflation down to seven percent, which is the upper bound of its inflation target range, by end-2012, helped by a reduction in international food and fuel prices.”

However, fiscal policy will continue to focus on medium-term consolidation, and will front load the adjustment to temper domestic demand.

It says priority social spending programs as well as public investment in critical infrastructure projects will be safeguarded.

“In particular, investment in geothermal and energy projects as well as rail and road infrastructure will continue to be priority in order to remove bottlenecks to growth,” says the fund.