VZCZCXYZ0003
RR RUEHWEB

DE RUEHNR #5077/01 3321438
ZNR UUUUU ZZH
R 281438Z NOV 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 5771
INFO RUEHXR/RWANDA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS NAIROBI 005077 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR AF/E, AF/RSA 
DEPT ALSO PASS TO USTR FOR BILL JACKSON 
TREASURY FOR OREN WHYCHE-SHAW 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN KCOR PGOV KE
SUBJECT: IMF MISSION VISITS KENYA, WANTS TO EXTEND PROGRAM AND STAY 
ENGAGED 
 
REF: A. Nairobi 4631, B. Nairobi 4421, C. Nairobi 4321, D. Nairobi 
 
395 
 
¶1. (SBU) Summary:  The IMF wants to remain engaged in Kenya, and has 
therefore temporarily extended until February 2007 its three-year, 
$240 million Poverty Reduction and Growth Facility (PRGF), which had 
been set to expire this month.  It hopes by early 2007 to complete 
the program's second review, badly delayed due to past and ongoing 
concerns about Kenya's commitment to dealing with high-level 
corruption.  To achieve completion of the second review, the IMF is 
asking Kenya to implement a number of governance reforms now in the 
works, achieve progress on key corruption prosecutions, and resolve 
the Charterhouse Bank money laundering saga.  We support the IMF's 
decision to continue its engagement with Kenya, but also strongly 
support its conditionality on governance issues.  End Summary. 
 
--------------------------------------------- ---- 
IMF Mission: Trying to Complete the Second Review 
--------------------------------------------- ---- 
 
¶2. (U) A seven-person mission from the International Monetary Fund 
(IMF) visited Kenya November 1-15, led by David Andrews, Assistant 
Director of the IMF's Africa Department.  The mission briefed 
development partners on November 2, and Nairobi-based IMF Resident 
Representative Scott Rogers provided an out-brief to donors on 
November 20.  Andrews and Rogers also met with the Ambassador and 
Econ/C on November 3. 
 
¶3.  (SBU) The IMF mission came with two purposes.  The first was to 
conduct the annual Article 4 review, overdue by one year.  The 
second more sensitive issue was to negotiate with Kenyan authorities 
on how to complete the second review of Kenya's three-year, $240 
million Poverty Reduction and Growth Facility (PRGF).  As the 
mission arrived, the PRGF, established in November 2003, was due to 
expire having only completed one of the prescribed six reviews.  The 
second review has been delayed by over a year due to serious 
concerns on the part of the IMF and key shareholders (including the 
U.S.; see ref D) about the commitment of the Government of Kenya 
(GOK), and in particular its senior leadership, to fighting 
grand-scale corruption.  The last IMF mission, which visited in May, 
2006, made no progress on issues of governance and corruption 
because GOK interlocuters simply refused to discuss them. 
 
--------------------------- 
Macro: Pretty Clear Sailing 
--------------------------- 
 
¶4.  (SBU) In both the in-brief and the out-brief, donors heard that 
the IMF is generally pleased with Kenya's macro-economic 
performance.  The IMF projects GDP growth will be 6.1% this fiscal 
year (ending in June 2007).  Average annual overall inflation will 
moderate to 7.6% (from 11.1% in June 2006) due to expectations of 
sharply lower food prices and further monetary tightening in the 
months ahead.  The IMF attributes the strong GDP figures in part to 
the strength of the tourism industry and recovery from the drought. 
While recurrent expenditure is expected to be stable, development 
expenditure will rise to 5.8% of GDP (from 4.1%). However, the 
overall fiscal deficit is projected to moderate slightly to 4.4% of 
GDP (from 4.6%). The debt-to-GDP ratio is expected to rise modestly; 
the IMF characterizes it as "manageable." 
 
¶5.  (SBU) In the November 2 briefing, Andrews nonetheless reiterated 
the IMF's consistent view that Kenya's current growth spurt is a 
recovery phase that cannot be sustained without additional 
structural reforms to the economy.  To achieve a sustainable high 
growth path, Andrews said, requires reforms in a number of areas. 
Kenya, he said, was lagging behind in the overall reform effort 
relative to its neighbors in the region. 
 
------------------------------ 
Governance: The Unifying Theme 
------------------------------ 
 
¶6.  (SBU) Governance was the unifying theme of the mission's visit, 
according to Resrep Scott Rogers, who described the discussions in 
this area as frank and "very productive." The common reference point 
for the dialogue was a recently completed World Bank assessment of 
governance in Kenya.  That document, in turn, focused its analysis 
on the GOK's Action Plan on Governance, a lengthy compendium of 
ongoing and planned measures and reforms across many sectors 
designed to enhance the institutional capacity of the country to 
prevent, investigate, and prosecute corruption cases.  When the IMF 
mission visited in May, the GOK was unwilling even to share the 
draft document.  Rogers reported that in its discussions with the 
 
GOK, the IMF mission pushed to incorporate specific measures from 
the Action Plan for into conditionality for completion of the second 
review.  Which measures are chosen and on what timetable, we 
inferred, will be subject to ongoing negotiations between the IMF 
and the GOK.  But Rogers indicated they are likely to include 
reforms to the judicial process to prevent unnecessary delays in the 
prosecution of high-level graft cases, greater transparency for the 
wealth declarations of senior GOK officials, and increasing the 
number of judges in the judiciary.  (Note: There are currently only 
56 high court and appeals court judges in Kenya.  End note). 
 
--------------------------------------------- --------- 
IMF Wants Action on Prosecutions and Charterhouse Bank 
--------------------------------------------- --------- 
 
¶7.  (SBU) Also critical to successful completion of the second 
review, according to Rogers, is forward movement on prosecutions of 
senior-level GOK officials in the Anglo-Leasing series of 
procurement scams.  Although a great deal of evidence has come to 
light, much of it publicly, Kenya's anti-corruption investigators 
and its Department of Public Prosecutions have been unable to agree 
on moving case files against 12 senior officials into the courts for 
prosecution (ref A).  The ensuing gridlock has generated the 
well-founded perception among the public and donors that there is a 
systemic absence of political will within the GOK to bring the 
perpetrators of grand-scale corruption to justice. 
 
¶8.  (SBU) Another prerequisite for completion of the second review 
is satisfactory handling by the GOK of the Charterhouse Bank money 
laundering and tax evasion scam (ref B).  Thus far, the bank remains 
closed and under Central Bank of Kenya-appointed statutory 
management.  While the statutory manager and the CBK are being 
aggressively challenged in court by Charterhouse's owners and their 
proxies, the Minister of Finance has thus far refused to resolve 
definitively the situation by revoking the bank's license and 
authorizing the CBK to liquidate it.  According to Andrews and 
Rogers, the IMF mission received assurances from Minister of Finance 
Amos Kimunya that Charterhouse will not be allowed to reopen.  The 
current plan is simply to let the license expire when it comes up 
for annual renewal at the end of the year, and liquidate the bank 
thereafter.  (Comment: We believe Charterhouse is likely to 
challenge this decision in the courts, dragging out the saga.  End 
Comment.) 
 
------------------------------------- 
Next Steps: Hoping to Extend the PRGF 
------------------------------------- 
 
¶9.  (SBU) Assuming these various conditions are met and agreed upon 
between the GOK and the IMF, the plan is to bring the Article 4 
review and the second review of the PRGF to the IMF Board in late 
January or early February.  Meanwhile, on November 19, the PRGF was 
extended until the end of February.  If the second review is 
completed and approved by the Board in January or February, then a 
second, longer extension of the program woud be requested, and the 
IMF would then try to complete the 3rd review in June or July for 
approval by the IMF Board in October 2007. 
 
--------------------------- 
Comment: IMF on Right Track 
--------------------------- 
 
¶10. (SBU) The IMF wants to complete the second review and keep the 
PRGF alive as a means of maintaining engagement and oversight going 
into Kenya's national elections, expected to be held in late 2007. 
We agree with this reasoning and therefore support the temporary 
extension and determination to complete the second review early next 
year.  But we also strongly agree with the IMF's conditions for 
completion, namely meaningful movement on the Anglo-Leasing 
prosecutions, implementation of key elements of the Governance 
Action Plan, and definitive resolution of the Charterhouse Bank 
scandal.  Closing and liquidating Charterhouse and moving against 
its owners is in our view a litmus test of the GOK's willingness to 
police Kenya's financial sector and combat corruption. 
 
¶11.  (SBU) Unfortunately, there is no guarantee the GOK will be 
willing to meet any or all of these conditions.  GOK officials have 
become increasingly resistant to foreign advice and conditionality, 
emphasizing the GOK's ability to self-fund its operations through 
tax collection and local borrowing.  Many also often cite China as 
an alternative source of assistance -- typically with few or no 
conditions.  Further, the recent reappointment of two ministers 
forced to resign less than a year ago for their involvement in the 
Anglo-Leasing and Goldenberg mega-scandals is but the latest signal 
 
that in an election year, efforts against grand-scale corruption may 
take a backseat. 
Ranneberger