Why IMF, CBK haven't been telling Kenyans the truth about our debt

Saturday February 24 2018

PUBLIC DEBT

Jan Mikkelsen - IMF Resident Representative in Kenya - addresses the National Assembly's Budget and Appropriations Committee on February 22, 2018 about the country's rising public debt. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

By DAVID NDII
More by this Author

Four years ago, this column called out the Jubilee administration for fanning a public wage bill hysteria with lies. 

Many Kenyans seemed genuinely bewildered by the government’s position on something that could be easily verified from its own published accounts.

Even now, it continues to fan wage bill hysteria. 

The national government’s wage bill as reported in budget documents is in the order of Sh400billion, up from Sh280bn five years ago, a growth of 43 per cent.

Revenue is projected at Sh1.49 trillion, up from Sh970bn five years ago, a growth of 53 per cent. 

Consequently, wage share of revenue has declined from 29 per cent to 27 per cent. But the administration continues to fan wage bill hysteria. 

PUBLIC DEBT
This year, interest on public debt is budgeted at Sh320bn, up from Sh135bn five years ago, an increase of 137 per cent. 

Interest on foreign debt is projected at Sh90bn up from Sh16bn five years ago, a 460 per cent increase.

Interest cost share of revenue has increased from 14 per cent to 22 per cent.

Five years ago, interest on debt was just under half of the wage bill. It is now 80 per cent. 

The administration insists debt is under control. Wage bill is the problem. Enough said. 

We learned earlier in the week that the $1.5bn IMF precautionary facility was suspended last June. 

INSURANCE POLICY

The government has continued to insist that the facility was still in place.

In its last policy statement issued in January, the Central Bank’s Monetary Policy Committee stated unequivocally that the facility was firmly in place. 

It is not just that the authorities failed to disclose, they did not tell the whole truth. We ought not be surprised, but we should. 

It is useful to explain what the IMF facility is, and why it is important.

The IMF precautionary facility, generally known as a stand-by arrangement, is not a loan per se. 

It is an insurance policy against external shocks, that is, it can only be drawn when the shock occurs. 

An external shock is something that could hit a country’s foreign exchange earnings, thereby undermining its ability to meet its international payments obligations.

A real example is the first Iraq invasion in 1990, which triggered both a tourism and oil price shock out of the blue.

You can also think of a severe drought or disease outbreak hitting our key agricultural exports. 

FOREIGN CURRENCY
There is a misleading opinion by bankers, among others the Chief Economist of Barclays Africa no less, that since Kenya has healthy foreign currency reserves, the IMF facility is not that important.

This is bad economics. The country’s foreign currency reserves do not automatically provide a cushion for the government.

The government pays its external obligations by buying foreign currency like everyone else.

The public debt and other foreign payment obligations are paid from tax revenue.

This is why interest payments are provided for in the recurrent budget. 

An external shock of the kind I have described has two potential adverse effects on the governments external payments.

ECONOMY

First, it would hit revenue. Second, it would cause the shilling to weaken.

The external shock has no effect on the value of the foreign currency payment itself, a $100m debt service obligation remains exactly that. 

But if the shilling depreciates from Sh100 to Sh110 to the dollar on account of the shock, the government will need to raise an extra billion shillings to pay the debt. 

It does not require advanced economic analysis to see how a big tourism shock would do to government revenue — VAT on hotel expenditures, excise tax on beverages, income tax on profits and wages are all affected. 

Moreover, a weakening shilling will also hit the bottom lines of import dependent businesses not directly affected by the initial shock, also hitting government revenue.

If it is severe enough, businesses will default on loans, bad debts will rise hitting the profits of the banks, and government revenues accordingly. 

SYNDICATED LOANS
It should be apparent now that the primary purpose of IMF’s facility is to provide the government with budget support.

Foreign exchange cover is secondary. Even if the country has enough foreign currency reserves, a budget shock would compel government to cut back on expenditures, or to borrow domestically when the economy can least afford it, which would in turn compound and prolong the economic effects of the shock.

Protecting the currency is not an objective, not one that the IMF would subscribe to anyway.

The IMF is a proponent of flexible exchange rates, and the rationale for flexibility is to enable economies to adjust to shocks.

There is also a tautological problem. Our foreign currency reserves are healthy because they include the Eurobond and syndicated loan dollars.

DECEIT

Without these, they would be precarious. Our export earnings have stagnated. The bankers are mixing up their stocks and flows.

It is like taking an overdraft, putting it in a fixed deposit, and then your banker assures your creditors that they don’t have to worry about your cash flow since you have a strong liquidity position. 

Beware of bankers, even bank economists giving policy advice.

The timing of the IMF’s announcement is a matter of public interest. Why now?

If the Central Bank has been lying in the monetary policy statements, it is hard to see how the government would have contradicted its monetary policy statements when marketing the bond to investors.

The IMF may have become aware that the government was not disclosing to the market that the facility was suspended.

For the markets to find out after the fact would have put the IMF in a spot of bother. 

PARLIAMENT
The IMF says that the suspension is that the review of the programme was not completed due to electioneering. 

The truth is that the conditions attached to the facility were ignored with the impunity from the beginning.

Two decades ago, the IMF was a mighty institution in these parts.

The suspension of an IMF programme was a career ending tackle for finance ministers and Central Bank governors.

Today, it is blithely ignored. The IMF country representative was in Parliament the other day hand-wringing and pleading with the House to rein in the government’s debt appetite.

How the mighty have fallen.

If you are thinking that the government tail is wagging the IMF dog, think again.

Two years ago, this column called out the IMF for falsifying our budget accounts to reflect that the first Eurobond was borrowed and spent in FY13/14, while our own accounts reflect it in FY14/15.

FAKING ACCOUNT BOOKS

We wrote to the IMF managing director asking for an explanation.

I raised the issue with a senior Treasury mandarin who gloated that we would not be getting a response.

As I wrote then, the IMF was cooking our books one way, and the Treasury the other.

The reason is, the IMF staff would have been hard put to get the precautionary facility approved by its board with accounts that were not adding up.

The only apparent reason why the IMF would do such a bizarre thing was to push the Eurobond out of the purview of the programme. 

Your government does not have the power to make the IMF do stuff like this. Washington, Wall Street and London (Whitehall and The City) do.

INTEREST
The decision whether a new facility will be extended is due in a matter of days or weeks.  It most likely will be.

The reforms will not be implemented. For the markets, it is of no consequence.

The annual interest on the new Eurobonds is in the order of Sh16bn ($160m).

They do not care whether it comes out of the medicine or baby milk budget. 

If the crunch comes, there will be an IMF bailout, whether there is a programme or not. 

That is the way the cookie crumbles. Its called international finance.

David Ndii, an economist, is currently serving on the Nasa Technical and Strategy Committee where he leads the Nasa policy team. [email protected]; @DavidNdii