On Kenya’s economy, IMF and World Bank are telling a big, fat lie that will burst

Friday June 3 2016

Finance Cabinet Secretary Henry Rotich (right) with International Monetary Fund first deputy managing director David Lipton in Nairobi on May 10, 2016. The IMF boss said he was impressed with the significant improvement in public infrastructure in the country. PHOTO | EVANS HABIL | NATION MEDIA GROUP

Finance Cabinet Secretary Henry Rotich (right) with International Monetary Fund first deputy managing director David Lipton in Nairobi on May 10, 2016. PHOTO | EVANS HABIL | NATION MEDIA GROUP 

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The World Bank paper that reportedly warned Kenya on borrowings from China has raised more than a few eyebrows. In report after report, the World Bank has been praising the infrastructure investments, and the standard gauge railway line in particular as underpinning its optimistic growth forecasts for the country.

This is the same World Bank which put a report a couple of years ago showing that the standard gauge railway line was a bad idea, the worst of the options available.

In November last year, the International Monetary Fund (IMF) country representative had issued a very categorical statement stating that Kenya’s debt was sustainable.

“Debt in Kenya is classified by the IMF as low-distress risk (and) it is very unlikely that the country will face a situation of distress in the coming years.”

Four months later, a joint statement issued by both the World Bank and the IMF advised the government to “gradually lower the public debt-to-GDP ratio while raising infrastructure investment”.

The IMF has recently announced an increased “precautionary facility” of $1.5 billion. Under this agreement, the government is required to reduce the budget deficit by 3 per cent of GDP. It sounds modest. It is not. The three per cent of GDP is in the order of Sh220 billion. We are now talking austerity.

What is going on? Are we at the risk of debt distress or not? If infrastructure is growing the economy, should it not then generate the resources to repay the loans? If our growth prospects are so good and debt is sustainable, why is austerity necessary? If the economy is so wonderfully resilient, why do we need a humongous precautionary facility?

There is a famous idiom often misattributed to Otto von Bismark (it was in fact by the less famous American poet John Godfrey Saxe) to the effect that if you are a lover of laws or sausages, the less you know about how they are made, the better.

To this list, I would add international development finance. I spent a couple of my youthful years in the early 90s at the World Bank. I have many nauseating memories. One of the earliest involved accompanying a loan appraisal mission to a government agency that the World Bank wanted to participate in the project. The agency was reluctant. I sat there speechless as the task manager (team leader) harangued them for over an hour, finally throwing up his hands and declaring that they were going to “miss the boat”. They did not budge. But we went over their heads and put the component in the project. It was never implemented.

At about the same time, a damning internal evaluation known as the Wapenhans Report concluded that close to 40 per cent of the the projects that the bank was financing failed. In some African countries, the failure rate was over 70 per cent.

The report reviewed 1,800 projects worth $138 billion. This translates to $52 billion wasted, money that borrower countries would pay regardless. I should point out that failure here means failure at implementation, not in terms of achieving the return on investment once completed. On the latter, the reported opinion was that more than half of the completed projects were unsustainable.

The report attributed this failure to what it termed a “loan approval culture” characterised by “pressure to lend, inadequate resources, deficient skills and distorted incentives”.

The World Bank’s management had “clear preference for large-scale projects, which involved large amounts of money at once (and) the number of approved projects and the amounts involved played an important role in the career perspectives of the staff, while efficiency was measured by the number of hours spent to get through the cycle”. In other words, the bigger the project, and the fewer the hours spent preparing it, the more highly the task manager’s performance was rated. The staff were not held responsible for the success of the project. Colloquially, this was referred to as “pushing money through the door”.

In 1996, the World Bank got a new president, James Wolfenson, who set out to reform the institution with the perverse lending culture. His reform initiative aimed to end the perverse lending culture, fight corruption and focus the bank’s lending to ending poverty. Wolfensohn’s reforms caused a lot of upheaval, and achieved little. Five years into his reforms, a commission appointed by the US Congress reported that 55-60 per cent of all the banks projects were still failing, and the failure rate of projects in the least developed countries was in the order of 65-70 per cent. Moreover, the commission found that 80 per cent of the bank’s money went to only 11 big countries out of 145 borrower countries.

As Wolfensohn was shaking up and causing confusion inside the bank, the world was changing.

Several things were going on at the same time. First, aid was losing ground to private capital. Second, China emerged. Third, George Bush and the war on terror happened.

The rise of private capital and emergence of China blew Wolfensohn’s mushy reforms out of the water, as the bank’s scramble to remain relevant pushed it back into the big infrastructure projects that their mostly corrupt client governments and big business wanted, and could now get financed commercially and/or by China if the World Bank did not oblige.

For the Bush administration, the bank came in handy for the reconstruction of Iraq and “nation-building” in Afghanistan, an intention the Bush Administration made quite clear with the appointment of ultra-hawkish neo-conservative Paul Wolfowitz to replace Wolfensohn. This was familiar territory, as this what the World Bank and the IMF had been during the cold war- appendages of US foreign policy, blindly lending money to autocrats and puppet regimes to keep them out of Moscow’s sphere of influence.

In 1982, a senior IMF staffer Erwin Blumenthal documented Zaire’s Mobutu Sese Seko’s kleptocracy and advised international lenders that money lent to Mobutu would be stolen and never repaid. By then, Mobutu had already borrowed, stolen and squandered $5 billion and been through four Paris Club debt restructuring. Following the report, the World Bank and IMF lending to Mobutu surged. World Bank lending alone increased from $25 million a year to peak at close to $250 million per year in the late 80s just before the fall of the Berlin Wall, following which it fell to zero within three years.

In 1947, the US lent the Netherlands $400 Marshal Plan money in exchange for giving Indonesia Independence. The nationalist Sukarno administration played the East-West balancing act until the early 60s when it veered left and was promptly overthrown by General Suharto in a Washington backed coup.

For the next three decades, Suharto was to become the darling of the IMF and World Bank, in the course of which he accumulated a personal fortune estimated at $35 billion. Other corrupt despots benefitted from the largesse; Romania’s Nicolae Caesescu, Chile’s Augusto Pinochet and of course our very own Daniel arap Moi.

During the Mobutu regime, the Bretton Woods institutions churned out report after report showing that the Zaire economy was in great shape, and the new loan that they were doling out was just what was needed to take it to even greater heights.

Recently, President Obama showed up in these parts talking a lot of eloquent nonsense, including declaring Ethiopia a democracy. As this column observed, Obama’s mission here was to prop up his flailing counterterrorism strategy, and we alongside Ethiopia are key planks of that strategy. If despots have to be appeased, and a blind eye turned to a missing billion here and there, so be it. The last thing the Obama administration needs is the Jubilee administration to implode as it might if the truth about our Eurobond money were to come out.

My good friend Bitange Ndemo recently declared that our Eurobond could not possibly have been stolen since an IMF mission had recently visited the country and “did not report anything amiss”. This is the same IMF that recently announced that the government has properly accounted for the money, even though their accounts and those of the government report the Eurobond proceeds in different years. In the IMF’s accounting, we spent the money before we received it. Why would a whole IMF Deputy Managing Director come here to tell a stupid lie?

Economics Nobel Laureate Joseph Stiglitz, then World Bank Chief Economist, a job he quit in a huff, recounting how he unsuccessfully sought to engage the IMF on how to deal with the Asian financial crisis, had this to say: “The older men who staff the fund – and they are overwhelmingly older men – act as if they are shouldering Rudyard Kipling’s white man’s burden. IMF experts believe they are brighter, more educated, and less politically motivated than the economists in the countries they visit. In fact, the economic leaders from those countries are pretty good in many cases brighter or better-educated than the IMF staff, which frequently consists of third-rank students from first-rate universities. Trust me.”

He added. “I’ve taught at Oxford University, MIT, Stanford University, Yale University, and Princeton University, and the IMF almost never succeeded in recruiting any of the best students.”

Stiglitz was not the first renowned intellectual to be exasperated thus. In his retirement speech three years earlier, after a couple of frustrating years trying to mainstream environmental sustainability in the World Bank, pioneering ecological economist Herman Daly recommended “a few antacids and laxatives to cure the combination of managerial flatulence and organisational constipation’’ as well as “new glasses and a hearing aid”.

So, why would a whole Deputy Managing Director of the IMF lie? Geopolitics, self-preservation, arrogance of power, and mediocrity.