The International Monetary Fund (IMF) has had a reputation for killing a fly with a sledge hammer, taking advantage of fragile states in crisis to impose largely unpopular rules.
Its actions have direct impact on citizens’ pockets such as deregulation, austerity and job cuts, and exchange rate devaluations.
For over two decades now, the global lender has tried to redeem its image with indications that it would not impose sanctions that would hurt social well-being of states - or so we thought.
Apparently, IMF has been lying quietly watching as the Kenyan government digs itself into a financial hole, but the scissor-wielding bank has finally found an opportunity to pounce.
Latching onto Kenya’s failure to reverse an interest-capping legislation and taming its expenditure, the IMF has found a chance to push the Government into slashing its expenditure in a fashion that might be reminiscent of the draconian structural adjustment programmes (SAPs) implemented in 1980s and 1990s.
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Liberalisation
SAPs left in their wake a graveyard of state agencies. Millions of Kenyans were left without livelihoods as IMF and its sister Bretton Woods institution, the World Bank, ruthlessly pushed through a raft of policies aimed at trade liberalisation.
Most developing countries have never forgiven IMF and the World Bank for this.
And Kenya now finds itself in an almost helpless situation where it has to aggressively cut its spending - probably send a few workers home as a result- and broaden its tax base through a series of IMF-backed reforms in what economists call fiscal consolidation.
Over the years, IMF has been crafting this sole plan in complex lingo for National Treasury officials, only fearful that it would attract criticism because of its brutal past.
The Treasury swallowed the soft approach and acknowledged IMF policies in boardrooms but largely ignored the recommendations in practice.
IMF was under no impression that this would go on forever especially since the government was increasing its budget deficit, promising ‘mega projects’ to Kenyans that would lead to even more borrowing.
Last year, while the country was in the political storm and extremely fragile, IMF decided to withdraw a $1.5 billion (Sh150 billion) standby credit facility, a crucial kitty that has contributed to keeping Kenya’s shilling stable.
The withdrawal was, however, not announced as the bank probably feared being seen to try influencing the country’s political process. But this month they decided to come out and take the battle to Treasury’s door.
IMF Country Representative Jan Mikkelsen told news site Bloomberg that it withdrew Kenya’s access to the standby loan in June since adjustments that were needed to meet the targets were “insufficient” and follow-up discussions on the review were postponed due to the long election period.
The timing coincided with Treasury Cabinet Secretary Henry Rotich’s tour of America and Europe seeking Sh200 billion through a sovereign bond and helped spark public outrage against the borrowing, while opening up fears that the shilling was now vulnerable.
Oil prices, Kenya’s biggest imports component in value and a threat to the shilling - which have stayed low since 2014 - are now gaining ground with Oil Producing and Exporting Countries (Opec) bullish that it would hit $70 dollar a barrel.
Kenya has already been labelled a risky borrower by ratings agency Moody’s who downgraded its credit rating. It desperately needs the IMF facility to redeem itself at a time it has dug itself into a refinancing circus.
The ratings downgrade also came at a time the IMF is discussing renewal of the credit facility and could give the bank a bargaining chip to force its tough policies which the government might now be forced to undertake.
The first thing IMF wants to get rid of is the interest rate cap, a populist policy that has turned into a poison pill. The government has been dragging its feet in removing it since the economy is still growing and it would be politically used against it, but the IMF will hear none of it.
The interest rate cap which most poor Kenyans had hoped would help them against ‘greedy’ commercial banks who charged them rates as high as 30 per cent has to go as a condition for Kenya’s continued access to the precautionary credit facility.
This was confirmed by IMF Resident Representative Jan Mikkelsen when he appeared before a committee of the National Assembly.
“That programme expires in March. In the course of the programme, we have a number of reviews in order for this money to continue to be available,” said Mr Mikkelsen.
He told MPs that the second review the IMF attempted to complete early last year in April was not done.
“It was not completed because of shortfalls on the fiscal side and there were also issues related to the interest rate caps. Access to the money was lost due to the failure to complete that review,” added Mikkelsen.
CS Rotich told Financial Times that the government would implement the contentious reforms demanded by the lender of last resort to unlock access to the credit facility set to expire in March.
In addition to cutting spending by half, Rotich promised to “come up with a package of reforms that will help us get out of the current (interest rate cap) arrangement so we can extend credit to the private sector.”
Despite the damage done by the SAPs, Kenya continues to flirt with the IMF. In January 2015, the government approached the IMF for the $1.5 billion standby credit facility.
Kenya did not intend to draw on the facility, just like no reasonable person wants to get sick so they can use their medical insurance cover. But the insurance gives you the confidence to go about your business, assured that in case of any misfortune, help is at hand.
External shocks
Similarly, Kenya would use the facility as cover against external shocks such as drought, spike in the price of oil or a security attack that would trigger a financial crisis where more US dollars would leave the country than come in.
Kenya - which imports more than it exports - would thus be left without enough foreign currency reserves to import fuel used to power the machines in the factories, vehicles on the roads and the tractors on farms.
Without dollars, offices would run out of computers, households would go without bread made from imported wheat or even such mundane stuff as toothpicks.
Luckily, Kenya faced no such risks by the time it approached the IMF. As IMF itself puts it, a country like Kenya had “a potential but not immediate balance of payments need.”
So the government simply applied for a pre-cautionary arrangement.
“Our economy remains vulnerable to exogenous shocks. Kenya’s growing financial integration in global markets, while creating new financing opportunities has increased vulnerabilities to shifts in investors’ risk perceptions,” said Rotich and the then Central Bank Governor Njuguna Ndung’u in a letter to IMF President Christine Lagarde.
That was around the time there were frequent attacks by Al Shabaab, with European governments advising their citizens against visiting Kenya. Tourism, one of the country’s main foreign exchange earners, was battered.
“The incidence of security threats and international terrorism affecting our country, and the increasing frequency of weather-related shocks, represent additional challenges,” the officials added.
IMF agreed to the precautionary arrangement, but with conditions. Tough conditions. After all, every lender wants to be sure that the borrower has the ability to repay a loan.
And the government agreed to each of them. First, it promised to narrow its fiscal deficit - the difference between the money it spends and the money it generates in taxes - to below four per cent of gross domestic product (GDP).
It would also get more people into the tax net, remove most of the tax reliefs such as on maize flour, milk, bread and cooking oil, and also find a way of taxing the informal sector.
“Consistent with our commitments to meet the EAMU convergence criteria on fiscal deficit and debt targets, we intend to adopt additional revenue raising measures that would allow us to reduce gradually the overall fiscal deficit to about four per cent of GDP by 2018/19,” the government said.
“Our fiscal anchor is to maintain gross public debt below 45 per cent of GDP in present value terms, which is below the EAMU convergence criterion of 50 per cent.”
The government promised to always ensure that 30 per cent of its expenditure went to development activities including building roads, railways and energy projects.
Recurrent expenditure, such as salaries and administrative costs, would take up the remaining 70 per cent.
“This will be pursued in particular by containing the wage bill,” said the letter.
The government said it had put in place a hiring freeze for the (except for priority sectors such as education, health and security). It was also in the process of finalising a staff rationalisation and remuneration policy.
Wage bill
“Specifically, based on recent biometric staff audits, by end-March 2015, we will complete a report on personnel audits including a time bound action plan for the national and county governments aimed at rationalising personnel to avoid overlapping positions,” it said.
The government, it seems, did not think the pledges would be difficult to achieve. After all, a year before, President Uhuru Kenyatta had kicked off a serious discussion on the wage bill.
While unveiling a national dialogue on the public wage bill, he noted that the “growth in public sector wage bill is unsustainable and unacceptable.”
He is reported to have ordered all the civil servants to accept a pay cut or go home.
The President and his deputy William Ruto led the way by announcing that they would take a 20 per cent pay cut while Cabinet and Principal Secretaries would take a 10 per cent cut.
Towards the end of 2015, the government unveiled a restructuring process that would see at least 40,000 civil servants purged from the payroll in what was aimed at addressing the ballooning wage bill.
Through the then Devolution Cabinet Secretary Anne Waiguru, an attempt was made to get rid of ghost workers from the books of the national and the 47 county governments.
A plan to merge a number of parastatals was also mooted but despite several meetings and conferences, nothing has come of it.
Unfortunately, the government reneged on almost all of the promises. In the 2016/17 financial year, the fiscal deficit stood at 8.9 per cent, and Treasury projects it to fall to 7.2 per cent in the financial year ending June 2018.
Clearly, this is way above the four per cent that Rotich promised IMF in 2015. Moreover, the country’s debt as a fraction of the GDP stood at 55 per cent at the end of 2016 and is projected to climb to 60 per cent.
In other words, Kenya has been snapping up debts faster than the rate at which it has been producing goods and services. As such, most of what Kenya produces goes into repayment of debts in interest and principals.
Borrow more
And with Kenya getting less earnings from its exports, it is forced to go back into the international market to borrow more to repay its dollar-debts such as the Eurobond of 2014.
This development started worrying IMF. It kept reminding Kenya that it to do something about its increasing debt levels. It warned of the dangers of the newfound appetite for dollar-denominated loans.
Treasury promised to act, but went on with its borrowing spree. IMF just watched, and waited for the opportune time. Then in September 2016, Kenyan legislators signed into law the Banking Amendment Act, 2016 that capped interest rates that banks could charge on loans.
Kenya had crossed the line, in IMF’s eyes. In its review of the Sh150 billion facility in June last year, IMF pushed for “stronger fiscal policy” and removal of the law which it believes has contributed to the poor credit to the private sector, thus slowing economic growth.
It froze Kenya’s access to the credit facility until the review is completed.
“When the consultation is triggered, access to fund resources would be interrupted until the consultation takes place and the relevant programme is completed,” reads the agreement Kenya signed with IMF. As you read this, consultations are ongoing. If, God forbid, there is an exogenous shock, Kenya cannot access the $1.5 billion. The facility, however, remains active until March 18.
With the IMF now firmly in control, implementations of the harsh fiscal policies are not likely to be as half-hearted as they have been. We might as well see another round of SAPs.
