Retracing Kenya’s love-hate relationship with global lenders

International Monetary Fund (IMF) headquarters in Washington, DC. [AFP]

“Will Kenya be Africa’s next disaster?” asked The Economist in 1997 when the International Monetary Fund (IMF) cut aid to Kenya for the third time.

Since the 1980s, Kenya’s dalliance with the Washington-based institution has been both passionate and devastatingly sour.

To some Kenyans, IMF is seen as the manipulative lover who comes with many conditions but whom you cannot leave because you depend on them for survival. 

To others, the Bretton Woods institution is simply a “dealer in economic misery” because poor countries are damned if they borrow from it and damned if they don’t.

By the 1980s, Kenya was drawing heavily from IMF on its SDR account.

SDR refers to the unconditional reserve assets of various IMF members, which can be used to make payments in foreign exchange. In the period of the failed coup of 1982, the Bretton Woods Institutions had frozen aid to the country. Kenya badly needed the money as the coup had worsened the economy.

IMF loans are viewed as a “seal of approval” by international investors.

To resume the funding, Kenya made a series of promises to IMF, including curbing domestic borrowing, improving import incentives and reducing budget and current account deficit.

Today, Kenyans online are camping on IMF’s social media pages, pleading with the Fund not to advance the country any more money.

Between 1980 and 1987, IMF identified Kenya among the only 12 sub-Saharan African countries with no external debt arrears, an unbelievable fete compared to today’s debt load of over Sh8 trillion (both domestic and external).

The first major fallout with the IMF can be traced back to between 1990 and 1991 after the infamous Paris Group’s consultative meeting.

At a two-day meeting spearheaded by then-Vice President, the late George Saitoti the Kenyan delegation held talks with representatives of donor countries and agencies.

The meeting had been organised by the World Bank to assess Kenya’s economic performance over the past few years and review the country’s demand for additional funding.

In attendance were over 30 representatives of major creditor nations and multilateral financial institutions.

The Kenyan delegation presented a report titled “Kenya’s Reforms: Policies, Plans and Outcomes,” detailing parastatal reforms and new policies to reduce government spending.

This did not prevent donors from imposing a two-year suspension of aid.

By the mid-1990s, IMF was still conducting a series of reviews on the country on the sectoral reforms, with top executives constantly jetting into the country.

In 1995, it said it was keenly monitoring the Goldenberg case before it could resume any negotiations for a three-year development programme.

This was the period of the infamous Enhanced Structural Adjustment Facility (ESAF), a $220 million (Sh23.5 billion in today’s exchange rate) facility with a 0.5 per cent annual interest over a 10-year period. The facility had a grace period of five years.  

Just like the current conditions, IMF said outstanding issues were mainly structural and revolved around privatisation because donors did not want the government to continue bailing out ailing parastatals.

Corruption, “disguised as good governance” in IMF’s words, was also a key issue for the Bretton Woods institution.

Noting the IMF’s freeze of aid to Kenya in 1997, The Economist further described the country as “increasingly badly run,” with “infrastructure from phones to roads crumbling.”

The freeze and conditions also coincided with the clamour for multiparty democracy and the second liberation that gave impetus to the rise of a vibrant opposition. There was also the clamour for fair elections and constitutional chaege.

“They have found an ally from a new quarter, the IMF,” wrote The Economist.  

“Frustrated at Kenya’s failure to curb the corruption that has eaten away its economic stability, the IMF presented the then Kanu administration with a list of “good governance demands” for continuing the $220 million loan.

“The government refused to comply, so the IMF cut off the cash,” added the highbrow publication. The Economist further noted that for the first time, the IMF had “explicitly used such political criteria to weigh the case for new lending.”

To the opposition, Kenya’s economy was “insolvent” as far as the IMF was concerned.In Parliament, opposition leaders such as the late John Michuki and Njehu Gatabaki sensationally claimed that that the IMF and World Bank were running the country, with the economy insolvent, claims then Finance Minister Musalia Mudavadi denied.

Referring to The Economist’s article, Michuki claimed that Kenya had been given 111 conditions by the IMF for the approval of the loan.

Following the freeze, the government moved swiftly, announcing a slash in the 1997/1998 financial year expenditure accompanied by revenue measures sufficient to address the shortfall.

Mudavadi said market forces in the foreign exchange and domestic money markets would address the impact of the shortfall expected to support the balance of payment.

“I’m very pleased the IMF has finally recognised the enormous problem of governance in the country,” said Dr Richard Leakey, the then secretary-general of the Safina Party, who would some years later be tapped to lead the “Dream Team.” The team was meant to spearhead economic recovery in the new millennium.

It was also expected to placate donors and get foreign aid flowing again the restructuring of other deteriorating sectors, including finance and agriculture and the revival of the crumbling infrastructure.

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