I first met Benno Ndulu, the former governor of the Bank of Tanzania, in 2009 when I was managing editor of the East African.
What struck you when you met him was his massive intellect and rare capacity to offer fresh and new insight into the burning economic issues of the day. I consider him one of the sharpest central bankers in the region.
Prof. Ndulu was in Nairobi this week to speak at a memorial lecture in honour of yet another respected economist and long-serving director of the Central Bank of Kenya, the late Prof Francis Mwega.
What I found insightful in Prof. Ndulus’ presentation was his analysis of the macro- economic impact of the huge loans we have been taking from China and other foreign countries to fund infrastructure projects.
Here is how he argued his case. First, that loans and grants for budget support have sharply decreased in recent times.
Secondly, that the region is witnessing unprecedented activity in large infrastructure projects that are mainly financed by China.
Thirdly, that since most of these Chinese loans partly come in kind, activities around the infrastructure projects are not injecting liquidity into the macro economies of East Africa.
His conclusion: The region’s macro economy is suffering from a sharp decline in what he calls ‘‘liquidity injecting financing’’.
In brief, his point is that while we are spending the borrowed billions to fund huge infrastructure projects, the multiplier effects on the macro economy are neither being felt nor experienced.
I think that the phenomenon Prof Ndulu describes is what explains why the Kenyan government has been having problems paying its local contractors and suppliers on time. The foreign contractors have to be paid first.
It could also explain the perennial fights between county governments and the National Treasury over delays in Exchequer releases.
When you don’t pay local suppliers and contractors on time, the impact is felt by the commercial banking system that has lent them money.
It should, therefore, not surprise that we are witnessing a spike in non-performing loans within the banking system.
Today, the accepted wisdom is that the reason we are seeing a drop in the flow of credit to the private sector in Kenya is the impact of interest rates capping law in Kenya.
If you agree with this notion, how then do you explain the fact that Tanzania and Uganda, despite not having interest rate caps, are also experiencing a similar drop in the take- up of credit?
Clearly, this is but a simplistic explanation to a very complex problem. The elephant in the room is the sharp decline in liquidity-injecting financing brought about by the spike in these Chinese and Chinese-type loans, which do not stimulate positive multiplier effects in the macro economy.
Loans that are given in kind are not liquidity-injecting. Prof Ndulu argued that where foreign firms dominate in securing large infrastructure projects, the macro economy experiences what he describes as large leakages in multiplier effects, especially since most of the imported materials for the Chinese-funded projects are exempt from duties and taxes.
As the share of the development budget rises and the country absorbs more Chinese Exim Bank-type loans, these leakages become more pronounced.
In a sense, this might be the explanation why expansionary development spending under the regime of former president Mwai Kibaki was more impactful.
We saw an unprecedented increase in revenue collection, low interest rates, and spectacular GDP growth, especially during the early years of his first term.
The mountains of foreign debts we have accumulated are not stimulating positive multiplier effects in the economy. We have taken too many expensive Chinese loans. The big question is this: Where will the dollars to service these expensive loans come from?
As we all know, domestic rail-road services are non-tradeable services. They don’t earn you the dollar revenues you need to repay the principal and interest on the dollar obligations.
Since our economy constantly runs a merchandise trade deficit, it means that the little export earnings from coffee, tea, tourism, flowers, and diaspora remittances are what we will have to rely on to pay the Chinese.
When you find yourself in a situation where you no longer depend on export earnings to repay loans and have to incur debt to repay debt, you are nearing bankruptcy even if the cheerleaders from the IMF keep hoodwinking you into believing that you are still within debt sustainability thresholds that they craft for you.