Hard questions for IMF, World Bank

Experts from the International Monetary Fund (IMF) and the World Bank had been invited to submit presentations on the high cost of living headache that has gripped Kenya at a meeting convened by the National Dialogue Committee that is stewarding the ongoing discussions between the ruling party and the opposition.

But opposition party, the Orange Democratic Party (ODM) would have none of it. The party put out a terse statement rejecting the inclusion of the two multilateral institutions in the talks, arguing that advice by the Bretton Woods Institutions was to blame for the crisis in the first place.

“Their advice has contributed to the problems our nation faces today,” said ODM in a statement signed by secretary-general Oduor Ongwen.

But why would somebody want to make the conditionality regime we have signed with the IMF an agenda item in the highly polarised and dicey discussions between political parties?

I guess that the government saw an opportunity to get a buy-in by the Opposition on the policy prescriptions it has negotiated with the IMF under the current programme.

This was going to be a good forum to allow the experts to vent and engage with the Opposition and advance their standard refrain- the argument that in Kenya’s present economic circumstances, there was no alternative to the IMF prescriptions.

And with the country expecting billions of dollars in new lending from the Bretton Woods Institutions, maintaining placid diplomatic relations with these two lenders had become imperative.

Since we are currently under keen scrutiny by rating agencies and portfolio investors, any sign that our relations with these lenders was becoming strained may end up deepening perceptions that we are not committed to reforms. Me thinks that the opposition shouldn’t have thrown away any opportunity to engage with the IMF and the World Bank. We need to ask them hard questions about the direction this economy is headed and what macro-economic conditions are likely to look like in the medium term.

The other day, the governor of the Central Bank of Kenya, Dr Kamau Thugge, told Parliament that our exchange rate was for a long time over -valued and that the precipitous fall of the shilling we are witnessing is but the true reflection of prevailing demand and supply conditions.

Yet the precipitous fall of the local unit is threatening debt sustainability. As you track the data in that key source of information on the state of government finances- namely- The Monthly Statement of Actual Revenue Receipts and Actual Exchequer Issues, the picture you see is that debt service is almost exploding.

We have reached the point where repayments are consistently absorbing more than 64 percent of ordinary revenues. Clearly, our debt obligations are spiralling out of control.

As Dr Thugge says, we have deliberately allowed the exchange rate to decline so that the currency can find its own level in the marketplace.

The unintended consequence is that we have ended up is a situation where markets now doubt the ability of the government to manage and alleviate hard currency liquidity problems, leading to massive portfolio outflows.

How do you allow your currency to fall so steeply in a low-growth and low private-sector investment environment?

The steep levels of devaluation of our currency we have allowed will only serve to lower private sector productivity since imports of capital equipment are becoming more and more expensive.

In addition to this, the central bank has allowed interest rates to go up ostensibly to contain inflation and limit capital outflows.

Markets have responded by demanding historically high rates on government paper, pushing the cost of debt service to unprecedentedly high levels. Indeed, rising interest rates will make debt harder and harder to service.

It’s like we are being slowly shepherded into a situation whereby we will have no option but to accept a Ghana-type domestic debt exchange program whose centrepiece was forced haircuts on interests on paper held by domestic investors.

The IMF has told us that fuel subsidies are economically inefficient, inequitable, and unsustainable. But in a context of growing public discontent over the cost of living crisis, how do you eliminate subsidies without stirring middle-class frustration and public unrest?

My message to the IMF is the following. First, calibrate your conditions and prescriptions to avoid fuelling political instability. Secondly, do not insist on your prescriptions without looking at the social impact of structural adjustment.

The writer is a former managing editor of The East African.