Financial Programming And Policy: The Case of Kenya

By Christopher K. Kiptoo
October 2007
The objective of this technical paper was to develop a framework that integrates all the four macroeconomic accounts, with internal consistency checks based on the financial programming framework. To achieve this objective, a number of data consistency checks were constructed within the financial programming framework (FPF) and the economic implications for each of them given. The manner in which the links in the consistency checks came about was derived statistically. The same framework was used to develop a forecasting scenario. The FPF was therefore used in this paper as a general approach to inform and tie together the various sectors in a consistent manner, while incorporating the Kenyan-specific factors. In this way, not only did financial programming serve as an ex ante consistency check on important macroeconomic aggregates but also provided an ex post monitoring tool.
The results of the consistency checks undertaken in chapter three revealed that virtually all the inter-account consistency checks, which were 41, in total failed to hold. To be more specific, all the ten inter-account consistency checks between the national accounts and balance of payments failed to reveal consistency except in the case of exports of services. Similarly, all the eight inter-account consistency checks between the statement of government operations and balance of payments failed to hold. In the same vein, all the three inter-account consistency checks between the statement of government operations and the depository corporations survey failed to reveal consistent results. Finally, all the thirteen inter-account consistency checks between the deposit corporations survey and the balance of payments did not reveal consistent results except in the case of monetary Gold. The results from the use of flow of funds, which was used an ultimate consistency check also produced results that were mixed. While all vertical consistency checks in the flow of funds failed, some horizontal checks failed to hold.
Based on these results, the paper concluded that there is still a lot of work to be done in Kenya to render the data from different sources consistent. In this respect, the paper made a number of recommendations. Among them was that the relevant institutions should comprehensively examine each specific item in all of the four macroeconomic accounts with a view to making sure that the compilers of such data capture all transactions by all institutional sectors as required.
The financial programming exercise carried out in chapter four involved making projections of developments in the Kenyan economy for the period 2006-08 based on the assumption that existing policies remain unchanged. The results of this baseline scenario provided a benchmark for assessing the impact of the policy package included in a program scenario. Its principal aim was to show whether existing problems were likely to remain broadly constant, to be resolved without explicit intervention by the authorities, or to worsen over time. The conclusion drawn from these results was that unless an active program is put in place for Kenya, the country’s economic situation, though impressive from the domestic front, may be undermined by the developments in the external sector and to a small extent the fiscal front.
The paper therefore recommended that an active program should be put in place to address the external sector as well as the fiscal problems that are likely to worsen over time in Kenya. The paper also recommended that the program should address the country’s fiscal problems that also seem to likely to worsen overtime if the current existing fiscal policies remain unchanged. The objective of the program should therefore be to achieve sustainable current account balance, non-inflationary growth as well as fiscal discipline.