KENYA-ECONOMY: IMF Aid Freeze Hits Where It Hurts

By Moyiga Nduru Reprint | | Print |

Moyiga Nduru

NAIROBI, Aug 6 1997 (IPS) - The decision by the International Monetary Fund (IMF) to halt a 215 million U.S. dollar aid package to Kenya is threatening the country’s economic recovery, experts and politicians here say.

The IMF, which took the decision to stop its aid on Jul. 30, accused Kenya of not doing enough to combat corruption in high places.

Immediately following the Fund’s announcement, the shilling, Kenya’s national currency, fell by more than 10 percent against major foreign currencies. And, it has not recovered since then.

Shocked currency dealers here Wednesday said the shilling is now selling at Shs64 against the dollar, with margins ranging between KSh4 to KSh8 to the greenback.

“There is a widespread panic here. Many business people have been coming to us to buy and sell their dollars, and pound sterlings, as well as their deutschemarks just to be on the safe side,” said a foreign currency hawker at Nairobi’s City Market.

The hawker, who preferred anonymity, told IPS that the U.S. dollar may hit KHs70 this week, a development which he said could affect Kenya’s imports.

“(But) it will augur well for the export-oriented sector as the exchange rate of the Kenya shilling to the main foreign currencies fall,” Francis Gichuhi of Town & Country Securities Limited, wrote in the East African Standard newspaper here on Tuesday.

Playing down the crisis, President Daniel Arap Moi Tuesday urged Kenyans not to panic over the suspension of the aid. He said the amount held back was “insignificant compared to last year’s annual expenditure of Shs13.9 billion (one dollar is equivalent to 64 Kenyan shillings).”

He said the big hole blown in the budget, by the IMF, would be compensated for by the revenue generated from exports of coffee, tea, pryethrum and milk. To avoid similar problems in future, Moi said Africans should not rely on foreign aid and should aim for self-reliance.

It, however, remains to be seen whether the president’s advise will calm the market which is still in a state of panic. The city is awashed with rumours that on Aug. 1, stockbrokers were inundated by calls from foreign investors from the United States and Europe issuing orders for their investments in treasury bonds to be liquidated immediately.

In a statement, made available to IPS this week, the Minister of Finance Musalia Mudavadi said the government had included funds that had been blocked by the IMF as the anticipated aid flows from donors to support this year’s fiscal budget.

“The shortfall could destabilise the economy if it is not properly and urgently addressed in the context of putting in place appropriate fiscal and monetary policies,” said Mudavadi.

The IMF extended to Kenya a three-year structural adjustment loan of 215 million U.S. Dollars in April 1996, but regular payments were conditional on Kenya meeting its promises on reform issues.

The aid was stopped by the IMF in protest over the way the Kenyan authorities had handled a multimillion-dollar financial scandal involving a Nairobi-based firm, Goldenberg International. The Washington-based lending institution is also concerned about alleged corruption in Kenya’s energy sector.

But Moi alleged on Sunday that the decision by the IMF to freeze aid was purely political. He told a delegation of citizens who had called on him at his rural home, outside the capital Nairobi, that he had personally forced through economic reforms often at great political and social cost.

The IMF’s decision came on the heel of a series of anti- government demonstrations in Kenya in which nine people, who came out in the streets with thousands of others to demand constitutional reforms ahead of the proposed end-of-year general elections, were killed by the police last month.

The unrest, which pitted the police against the demonstrators, has hit Kenya’s tourism industry, according to sources at the Kenya Association of Tour Operators (KATO). The industry, which is recovering from years of depression, has reportedly received up to a 10 percent cancellation of bookings by foreign tourists, fearing insecurity and political unrests in Kenya.

Unless tourism, Kenya’s second foreign currency earner after agriculture, picks up soon, speculators and investors may decide to take out their money to avoid loses if political unrests, like the general strike being planned for Aug. 8, persists.

This is, however, not the first time that donors have used the leverage of aid to force the Kenyan government to change its ways. In 1991, President Moi was forced to yield to the donors’ demands to introduce multi-party democracy.

Between 1991 and 1995, figures from the Ministry of Planning and National Development show that Kenya received over four billion U.S. dollars in bilateral and multilateral aid.

However, fears abound here that some donors, like Britain, may follow the IMF to stop aid to Kenya.

Britain’s International Development Minister Clare Short told the British Parliament last week that London would reduce its aid to Kenya unless the government stops cracking down on pro-reform demonstrators.

During the past two years, Britain, which ruled Kenya until independence in 1963, has provided this East African nation with a total amount of Shs2.7 billion in aid annually.