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September 19, 2018

Kenya needs IMF support

KICC in Nairobi's CBD. /FILE
KICC in Nairobi's CBD. /FILE

Sovereignty is a very important principle. Unfortunately, sovereignty also doesn’t stop people from doing stupid things: For example, clobber one of your popular young MPs to a pulp and then drag him to court on fake treason charges. It also doesn’t stop MPs from doing irresponsible things, like wail for personal chefs and massages when they have already awarded themselves remunerations that are wildly out of sync with overall income levels in the country.

So I have little time for the MPs currently wailing about the IMF. The IMF is a distraction. Of course Kenya is a sovereign nation, so if you think the country doesn’t need the IMF, then why even bother talking about the fund? I suspect many don’t quite understand the role of the IMF: It is, very simply speaking, a lender of last resort.

This means when either everything has gone wrong or (importantly!) you’ve done lots of things wrong, and there is no other resort, you turn to the IMF. That was also the arrangement back in the 1980s when the IMF rolled out its now infamous structural adjustment programmes (SAP). Nobody went to the IMF for fun – you turn to the fund because you have a balance of payment crisis. If everything is fine, you don’t need them.

If your profligate nephew comes to you broke and asks to borrow cash, you might consider doing so on the basis of him agreeing to a few things he should or shouldn’t do to ensure you get your money back. Do you know for sure that that your recommendations are right and will work? On the other hand, if the nephew is profligate and broke, can he really argue with the conditions you impose even if he thinks they might not help?

What Kenya’s Treasury was discussing with the IMF was an emergency overdraft. This is a voluntary agreement and of course Kenya can turn away from this. Several organisations that lent substantial sums to Kenya would quite like this agreement renewed because they feel that their chances of being repaid are better if Kenya has such an overdraft facility in place. Without it, they would charge more interest on future loans because they perceive a higher risk.

Kenya has also been running a substantial fiscal deficit for several years. Of course the government would not need to reintroduce VAT on fuel products if, say, it had found other ways of raising revenues – or if it had simply spent more closely in line with revenue levels. These are sovereign decisions, as was, for example, the decision to borrow several billion dollars for a financially underperforming and, thanks to corruption, wildly overpriced railway.

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