Kenya: IMF withholds loan and China agrees to cancel debts

The IMF has been forced to postpone the release to Kenya of the second tranche of its so-called Poverty Reduction and Growth Facility (PRGF) loan - reports Kenya’s daily newspaper, "The Nation". Talks between the IMF, Kenyan officials and elected representatives are reported to have broken down on the 19th January. There has been no formal statement issued by the IMF. In July and October 2000 the IMF provided a total of $247 million to President Daniel Arap Moi’s government under its PRGF facility. In addition Kenya is due $400 million of savings due to Paris Club restructuring of payments arrears.

The Nation also reports that on the same day, Chinese Ambassador Du Qiwen announced that China had pledged to cancel Kenya’s debt; set up a special fund for human resource development; and address the trade imbalance between the two countries.

On departing Nairobi, the IMF team, led by Jose Fajgenbaum, is understood to have set a condition for the disbursal of the second tranche of funding: that the Kenyan Parliament agrees legislation for a Code of Ethics and Economic Crimes. The legislation would make Dr. Richard Leakey’s proposals for an Anti-Corruption Authority operative. In a series of reversals to Dr.Leakey’s proposed anti-corruption reforms, the Kenyan constitutional court recently declared the Authority’s prosecution proposals illegal. It appears that Fund officials, in discussions with the Parliamentary Finance Committee were adamant that no further lending would be made available until anti-corruption Bills were passed. However, under the Kenyan constitution, Bills shelved by Parliament must be set aside for six months before they can be reintroduced for debate.

At the same time Kenya has reneged on the IMF’s privatisation conditions. In October 2000 in a widely reported speech to thousands of Kenyans, President Daniel Arap Moi announced that the Kenyan government would not meet IMF conditions for the privatisation of public assets. "Caution must be exercised" he announced "in devolving the state-owned corporations to the private sector lest the government loses its assets" - a reference to the privatisation of Telkom Kenya. Privatisation of state assets is a major condition of IMF loans. There have also been disputes between the Kenyan government and western donors over the restructuring of Kenya Power and Lighting Company (KPLC). President Daniel Arap Moi has refused to fire KPLC managing director Samuel Gichuru and to revamp the state owned body’s management – despite private commitments that he would do so to both Horst Kohler of the IMF and James Wolfensohn of the World Bank. KPLC is expecting to benefit from $50 million in budget aid provided by the World Bank; and an additional $30 million – under the IMF’s Poverty Reduction and Growth Facility.

Observers note that the arrival of the half of the Poverty Reduction and Growth Facility loan did little for economic growth in Kenya in 2000. Growth is expected to reach 0.9% compared to growth of 1.2% in 1999. However the withdrawal of the second tranche of lending is likely to lead to an immediate budget deficit of US$700 million, according to Africa Intelligence. A deficit of that size is likely "to plunge the economy straight into chaos". It may lead to a rise in interest rates, with Treasury bond rates having risen from 10% to 15% in just a few weeks. It is also likely that the Kenya Shilling will be further devalued as the government turns to borrowing on local markets.