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The International Monetary Fund yesterday dropped key lending conditions it has been demanding of President Kibaki’s government in a move that signalled a major shift in the balance of power between Kenya and one of its most important financiers.

While the decision by the Fund’s board to unlock loans worth nearly Sh4 billion ($56.8 million) will boost the budget, it represents a new show of confidence in the country’s efforts to implement economic reforms. The lifting of the conditions mean that millions of bank customers will be winners because the Fund has left it free for the government to decide whether or not to implement the In Duplum Rule that forces banks to stop charging interest rates once the outstanding interest amount owed equals the principal borrowed.

The banks also waived requirements that the government should not implement some sections in the Banking Act, which seek to limit commercial banks for increasing their charges arbitrarily and without informing the Central Bank of Kenya, the banking regulator.

Millions of workers represented by unions will also benefit from the waiver of an aid condition that required the Government to stop the Industrial Court from fixing wages. Also dropped is a requirement that would have forced all civil servants to declare their wealth. “Kenya’s macroeconomic performance has improved markedly since 2004. The authorities are to be commended for their prudent macroeconomic policies and structural reforms, which have helped contain domestic debt, increase international reserves, and strengthen the financial sector,” Mr Murillo Portugal, the deputy managing director and chair said in a statement.

He said sustaining strong growth and macroeconomic stability would require continued fiscal discipline to further reduce domestic debt, while increasing priority spending on infrastructure and poverty reduction.

“Untapped external concessional resources should be explored, revenue efforts enhanced, and public expenditure management strengthened, if the country is to achieve the required economic growth,” he added. However, though the entire civil service will not declare wealth, IMF’s Resident Representative in Kenya, Mr Scott Rogers, yesterday said the government was still expected to pass a law to force senior government officials to do so.

He said there were already moves to ensure that this was implemented through an amendment of the law by Parliament. The IMF said it expected a completion of the asset declaration process by ministers, permanent secretaries, and heads of parastatals. This is expected to be among the issues that the IMF will look into when it returns in September or October for a review of the progress in reforms that the government has made since the disbursement of the just approved funds.

The softening of the Funds stance towards Kenya comes at a time when President Kibaki’s government has been making bold steps in making the country less dependent on donor funding in its budget.

This is after five years of being constantly shunned by the International community in the West because of perceived levels of corruption in the public service. In the government circles, there have been strong sentiments against the Fund, the World Bank and major western government that has prompted the government to seek closer ties with China and India.

The government last year hired Standard & Poors, the global ratings agency to rate its finances in preparation for the launch of an international bond. The Fund, by vetting the economic policies of its member countries, traditionally acts an international rating agency for governments. However, increasingly in Africa, countries are aggressively seeking an international rating. The Fund had in the last two years taken a tough stance on Kenya over the pace of its economic and public governance reforms and suspended its lending programme.

While the Fund was pushing for these liberal economic reforms, it did not appeal to the Parliament, which refused to accede to attempts to repeal the laws. These reforms—which supported a free market—ran counter to the populist mood in the country. In a briefing to the press at the IMF offices in Nairobi, Mr Rogers said higher rates of economic growth would be needed for Kenya to fulfil the millennium development goals which have fixed seven per cent as the minimum growth level required to reduce poverty by half by 2015.

Further reforms were required in the banking sector especially in relation to supervision so that the CBK discretion is reduced and its relationship with banks more rule-based rather discretionary, he said. “The point at which the CBK intervenes will be clear and the nature of such intervention will be well stipulated in regulations,” Mr Rogers said. The IMF stated said that divestiture of government shareholding in state-linked banks was needed, which means that the State is expected to sell its stake at the Kenya Commercial Bank and National Bank .

Other required measures are speeding up the passage of the Anti-Money Laundering Bill.

“The managed float exchange rate regime in conjunction with reserve money targeting has served Kenya well. However, maintaining competitiveness would require faster structural reforms and infrastructure improvements. Reserve money targets would need to be tightened in the months ahead to safeguard macro-economic stability,” the IMF statement said.

It noted that though recent governance reforms — such as enactment of laws against economic crimes — have strengthened institutions and increased transparency, the legislative agenda on governance is unfinished and more progress has to be made in the investigation and prosecution of prominent corruption cases.

Kenya was also faulted for failure to ensure the accuracy of information provided to the Board on commercial borrowing and external payment arrears. The nature of commercial loans has been controversial with information on it largely unavailable.

The IMF approval comes hardly a month after the new Central Bank governor Prof Njuguna Ndungu said he would pursue a market-based monetary policy on such matters as interest rates and foreign exchange. The governor stressed that CBK would not take the IMF word blindly and would only engage multilateral institutions as advisers.

The Sh4 billion package approved on Wednesday is part of the Sh17.7 billion package endorsed in November 2003 and brings the total disbursements so far to Sh12 billion ($170 million. That leaves only Sh5.7 billion undisbursed following the second review of Kenya’s economic performance. The first review, done in November 2004, led to the suspension of a three-year poverty reduction and growth facility, a soft lending avenue for low-income countries.

PRGF-supported programmes are supposedly based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programmes are consistent with a comprehensive framework for macro-economic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 per cent and are repayable over 10 years with a 5 and a half-year grace period on principal payments.

Despite IMF’s statement that the process is negotiated, a former finance minister Chris Okemo is on record complaining that the IMF normally forced Kenya like many countries to sign “on the dotted line” without much negotiation on the conditions. Another review of Kenya’s progress in implementing the conditions that were waived will be done in September and October.