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July 2003

Kenya set to receive donor funds

The new government's total war on corruption has finally convinced the Bretton Woods institutions to loosen their purse strings.
Deremo Maiko

Kenya is set to put its dubious track record with the Bretton Woods in the past over the coming one month. The International Monetary Fund (IMF) has in a newly released dossier indicated that the over one-decade-long impasse is headed for conclusion.

Its officials have been talking with Treasury in preparation for a new program.

Early this month, IMF Managing Director Horst Kohler in a visit to Kenya gave the strongest hint of good prospects for Kenya. One area that has impressed the Fund is the fight against corruption which has under the past regime of President Daniel arap Moi been the main barrier to aid.

It is obvious the said progress is principally an effort to tackle the Goldenberg conundrum. IMF has on several occasions cut off aid to Kenya over failure to tackle the scandal where billions are believed to have been siphoned from Treasury under various guises. The amount could be as high as Sh130 billion ($1.8 billion). The economic cost has been gargantuan.

A clean bill of health from the Fund is necessary as multi-lateral financiers like World Bank and bilateral donors act on prompting from IMF. Past fallout with Washington has meant automatic stoppage by the whole pack. IMF dropped Kenya from its program over corruption in 1991, 1993, 1997 and finally 2000.

Positive vibes from the Fund come as great relieve to those who feared IMF could prove difficult particularly over the projected Sh62 billion budget deficit- or six per cent of the GDP-which is to a large extent accounted for by a pay rise for civil servants, mainly teachers and soldiers, and expenditure on free education.

The financing gap could increase Government borrowing from the domestic market; the domestic debt overhang is now over Sh162 billion ($2.2 billion) and thus has been crowding out the private sector in over a decade.

But a report by IMF Executive Director for Kenya Imaila Usman, written before the Budget was prepared though, and subsequent utterances by Kohler that the resumption was on the cards have calmed nerves in Nairobi. The Managing Director, who paid his third visit to Kenya, as a matter of fact has congratulated Kenya for diverting resources to fund social services and it is likely his recommendation and that of Usman will carry a lot of weight when the board meets to discuss funding.

According to information available from the Fund, Kenya was indeed supposed to receive disbursements as early as June. A figure of $145 million had been proposed. Another issue has been stalling of the privatisation program as the new Government seeks to formulate a legal framework to guide the process. World Bank has been the main proponent of the process.

The main candidate of divestiture is the inefficient landline monopolist Telkom Kenya, whose exclusivity comes to an end in June next year. Efforts to sell the 49 per cent government stake in the parastatal have in the past flopped as Government officials sought to worm their way into the deal.

Despite this supposed infringement of its conditional ties, the Bank has as usual been soft with Kenya and its local representative Makhtar Diop seems to have hit it off with the new Finance Minister David Mwiraria. Only last month, it released Sh8.5 billion to support free education, marketing in arid areas and some for Government Budget. It is, however, expected to shell out more to support any program agreed between the Government and the IMF.

The World Bank President was scheduled for a visit to Kenya and was expected to send signals on future relationship with Government. All in all, most donors have been positive on the changes that have taken place in the country. Important bilateral donors include the UK Department for International Development (DfID), Swedish International Development Agency (Sida), Danish International Development Agency (Danida) and United States Agency for International Development (Usaid).

Kenya has had a love-hate relationship with the Fund since joining in 1964. In the 1970s, IMF had recommended financial support for the country as the Oil Crisis impacted on its balance of payments. But soon the weather came to the Government's rescue. A severe frost wiped out most of Brazil's coffee during peak season to dramatically turn around the balance of payments position in Kenya.

Kenya rejected the offer until the mid 1980s when falling commodity prices egged her on to take on Structural Adjustment Faculty. Generally, the relationship was cordial as the IMF and World Bank looked the other way as politicians looted state coffers and suppressed the opposition; but the iron curtain came falling souring Kenya's relationship with the US.

In 1991, IMF plugged the aid pipe and would only resume in 1996 after the elections and appointment of Musalia Mudavadi as the Minister for Finance. But the program lapsed after the first year, Kenya having drawn SDR24.93 million (US$19.7 million) out of the SDR149 million (US$117.7 million) of the Enhanced Structural Adjustment Facility (ESAF).

When the Bretton Woods conjured the Poverty Reduction and Growth Facility to replace ESAF, Kenya was offered US$240 million. In yet the fastest flop, Kenya drew only $42 million before the program was suspended in the first quarter.

Under the same program, World Bank had promised Kenya US$150 million. Only $50 million was released as the Government went on to renege on the unusually strict diet of conditionality imposed on it.

There has been talk that the Bretton Woods gave up on Kenya and were waiting for Mr Moi and his corrupt elite to vacate the scene. Kenya's economy is now expected to pick up from the present growth rate of 1.3 per cent as donors and private capitals resume, against a backdrop reinvigorated Government reform program.

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