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* Says exports have potential to help growth
* Global recovery, weather main threats
By Duncan Miriri
NAIROBI, Feb 2 (Reuters) - Kenya's economy is likely to expand by 5.7 percent in 2011 from an estimated 5 percent growth in 2010, lifted by public spending on infrastructure and private sector growth, the IMF said on Wednesday.
Ragnar Gudmundsson, the International Monetary Fund's representative in Kenya, said the country has the potential to transform itself from a frontier to an emerging market economy within a few years.
"We expect the positive sentiment surrounding Kenya to continue in 2011 and also expect the private sector to remain on a fast-growth track and hence GDP (growth) levels to reach about 5.7 percent in 2011," he told Reuters in an interview.
The Washington-based fund approved this week a $509 million extended credit facility to help Kenya boost its international reserves over a three-year period.
Gudmundsson said the extended credit facility was aimed at balance of payment support, informed by the east African nation's trade outlook.
"We expect terms of trade in the next two years to deteriorate by about 14 percent and what is leading to this is mainly the high oil prices and also a reduction in the prices for tea and coffee by about 12 percent over the two years," Gudmundsson said.
The IMF's move was prompted by a desire to embark on fiscal consolidation after three years of stimulating the economy after multiple shocks hit the tea and coffee producer, he added.
Since 2008, policymakers have put in place a monetary easing cycle and a fiscal stimulus to pull the economy out of a rut, following drought, effects of the global financial crisis and and a bloody post-election crisis at home.
Higher government spending on infrastructure and social sectors during the period has pushed total debt to 45 percent of the economy from around 40 percent in 2008.
"We think that some fiscal consolidation is required to ensure that the debt remains sustainable," Gudmundsson said, adding this financial year's fiscal deficit will be above 7 percent.
"We are calling for gradual fiscal adjustment over three years, reducing the deficit level by about 2.5 percent of GDP in order to accommodate some essential spending."
Areas where the fund and Kenyan officials want to see spending preserved while still maintaining macroeconomic stability include infrastructure, energy, healthcare and education.
The IMF is in agreement with officials on the need for issuance of a debut Eurobond, with its timing being the key lingering question, to ensure Kenya gets a good deal on pricing.
"Kenya's chances of going to the markets for a sovereign bond issue have increased significantly especially following the promulgation of the new constitution which had a positive impact with institutional investors," Gudmundsson said.
"Our initial thought in consultation with the authorities was that the financial year 2012/13 should be an appropriate time to issue such a bond because at that time the constitution will have become fully effective."
The new constitution aims to address social-political problems bedevilling the country through measures like allocation of resources to independent local authorities to ensure equitable distribution of resources.
Key risks facing the Kenyan economy in 2011 include the pace of global recovery, which could cut demand for Kenyan exports, and weather at home with drought reducing farm sector output and energy supplies, Gudmundsson said.
"By the end of the (extended credit facility) programme, we would like to see growth rates of about 6.5-7 percent, coming back to the levels of 2007 because these growth levels are required to have a significant impact on poverty reduction," he said.
"We would like to ensure that these levels are achieved and sustained, not on a start-and-stop basis which unfortunately has been the case in the past." (Editing by George Obulutsa and Stephen Nisbet)