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

EXECUTIVE SUMMARYBackground: Kenya's recent reforms have introduced a more comprehensive systemof checks and balances, including accountability and transparency in expenditurecontrol and management. In this context, the new government has taken decisivesteps towards devolution supported by a renovated institutional framework and solidmacroeconomic management. Fiscal policy has focused on sustainability, whileallowing for infrastructure investment in key sectors such as roads and powergeneration, and expanding protection of the vulnerable population. Policies have laidthe ground for sustainable economic growth, with domestic and foreign investorsexpanding their scale of operations in a market-friendly environment. Foreigninvestment flows have risen and boosted the stock market, allowing for a sustainedaccumulation of international reserves. Commercial prospects of oil discoveries arepromising, and the discovery of aquifers holding a potentially substantial supply ofwater 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 secondlargest African investor in other Sub-Saharan African countries, with a number ofregional banks rapidly expanding operations through the rest of Africa. Financialinstitutions are moving ahead of schedule in adopted prudential guidelines issued bythe central bank in line with international best practices. The International CriminalCourt trial of President Kenyatta for crimes against the humanity has been postponeduntil February 5, 2014. The impact of the September 21 terrorist attack has beenlimited, 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 augmentedon December 9, 2011, for a total of SDR 488.520 (180 percent of quota). All end-June2013 quantitative targets were met. NDA and NFA were comfortably within theprogram bounds. The authorities' primary fiscal balance outcome was in line with theprogram, and Priority social expenditure was above the program's indicative target.The structural benchmark on auditing of compliance with VAT obligations by 50 largetaxpayers before June 2013 was fulfilled, and the VAT Act was approved by theParliament and enacted by the President.Staff views: The staff recommends completion of the review. The authorities haveconsented to publication of the staff report and Letter of Intent and its attachments.