UPDATE 2-Kenyan economy likely to grow up to 6 pct in 2013 - IMF

Thu Feb 14, 2013 10:09am EST

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* Growth forecast assumes March vote will be peaceful

* Post-election violence in 2007/8 hurt growth (Adds quotes, details)

By Duncan Miriri

NAIROBI, Feb 14 (Reuters) - The International Monetary Fund expects the Kenyan economy to grow at least 5.5 to 6 pct this year from an estimated 4.5 to 5 percent in 2012, assuming elections in March go smoothly, a senior fund official said.

"Kenya has stayed the course of its economic reforms and this has worked quite well," Domenico Fanizza, who has been leading a mission to Kenya under the IMF's Extended Credit Facility, told a news conference on Thursday.

Kenya has forecast 5 percent plus growth this year.

Fanizza said the presidential election set for March 4 was a risk but said the new constitution could help the country to go through the election peacefully.

"It (2013 growth forecast) is predicated on a smooth election. Given the relative strength of the economy before election, if voting goes without major incidents, I expect investments to pick up," he said.

The east African country could vote in a president accused of crimes against humanity, posing a diplomatic headache for Western capitals and raising the spectre of sanctions. Fanizza said although it was unclear what foreign governments would do in such a case, the economy could still do well.

If presidential hopeful Uhuru Kenyatta wins the poll, Kenya will become the second country after Sudan to have a sitting president facing trial at the International Criminal Court in The Hague.

"Kenya has continued to grow despite the global economic and financial crises like in the Euro Zone," Fanizza said, adding the growth was driven by domestic factors.

The outcome of the last election in 2007 was disputed and the vote was followed by tribal violence which killed more than 1,200 people and displaced about 350,000 from their homes.

The post-election violence convulsed the economy and sent the shilling spiralling lower against the dollar.

Fanizza cited domestic consumption due to growth of the middle class, as well as robust ICT and financial sectors.

He said the government had maintained fiscal discipline while the policy stance had remained cautious.

"Inflationary pressures have been tamed and interest rates have been declining supporting economic activities," he said.

The mission welcomed the Central Bank of Kenya's (CBK) continued vigilance in easing its policy stance by closely monitoring inflation.

CENTRAL BANK VIGILANCE

Kenya's year-on-year inflation rate rose for the first time in thirteen months in January and analysts said it could rise further in the coming months on currency weakness and election-related spending. Inflation rose to 3.67 percent in January from 3.20 percent in December.

The rate of inflation in January was still well within the government's medium-term target of 5 percent, plus or minus two percentage points.

The central bank began cutting the country's high interest rates last July after inflation tumbled from a November 2011 peak of just under 20 percent. The policy lending rate now stands at 9.5 percent.

The IMF recommended that the CBK should continue to build up its hard currency reserves to create a buffer.

The central bank has been using up Kenya's hard currency reserves in the run-up to the poll to support the under-pressure shilling.

"Fiscal policy should remain geared towards lowering the public debt-to-GDP ratio further," Fanizza said.

At end 2012 it was slightly below 44 percent, he said in reference to the debt-to-GDP ratio. He said that can be achieved through expenditure control and improvement of tax collections. (Writing by James Macharia; editing by Ron Askew)

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