Kenya is a colony of Bretton Woods system despite sovereignty claims

World Bank President Ajay Banga shakes hands with President William Ruto during the closing session of the New Global Financial Pact Summit in Paris on June 23, 2023. [AFP] 

As the fiscal year starts, there seems to be a sigh of relief at the hierarchy of Treasury with the unlocking of about Sh161.8 billion (US$1.25 billion) credit facility from the World Bank.

This after days of stalemate with both the World Bank and the International Monetary Fund (IMF) over public debt disclosures and a supposed insider report on questionable governance practices.

From available media reports, it took the intervention of President William Ruto meeting with World Bank Group President, Ajay Banga, to unlock the facility. It is interesting how such a facility easily finds itself in headline news six decades into self-rule.

This confirms that Africa, and most of the developing world remains a colony of the Bretton Woods system despite noisy claims of sovereignty.

While poor nations may exercise forms of democracy by voting in regular general elections, the real governance and leadership trajectory in these countries is highly influenced by those who control the purse.

Ultimately, it is economic power that determines the real outcomes and behavior of elected leaders among poor and developing nations. As this column has consistently intimated, President Ruto continues to bow to the very Bretton Woods system that he still continues to blame for economic woes of the so called global south.

Bretton Woods Failures

Critiques of the Bretton wood system, advanced through the two core institutions – the World Bank and IMF, argue that they perpetuate the instruments of neo-colonialism. Three main areas of criticism are on unequal voting power, conditional lending and establishment of a dependency cycle. Voting power in both institutions is based on financial contribution quotas that grant western economies unfettered control.

For instance, the appointment of the President of the World Bank is an exclusive preserve of the United States while the President of the IMF is from among the European member states based on an unwritten “gentleman’s agreement” since their founding in 1945. Implicitly therefore, western philosophies dictate the modus operandi for the two entities, sometimes dictating macroeconomic, fiscal policies, and contractual agreements for key project in countries they loan.

In Kenya, some of the toxic taxes hitting households hardest were conditionalities in loan facilities of the two entities, like VAT on petrol and petroleum products. Several tax and tax administration procedures proposed by Treasury, but declined by the Finance and Planning Committee of Parliament in Finance Act 2026 were driven by the two entities. Even with Parliamentary pushbacks, some measures still found their way into the Act like card payment related taxes.

On conditional lending, the policies of these institutions are mostly predatory, leading to the third criticism of creating a dependency cycles among borrower nations. I remember sometimes back having a candid discussion with a senior treasury insider deeply involved in processing payments of debt facilities from the two institutions.

According to him, it is sometimes extremely difficult to determine the actual debt obligation because at the point payment, you do not know which currency they would request you to pay in. This is because their payments are designed through multi-currency portfolios that eliminates any exchange losses on their part, effectively transferring all currency losses to the borrower country.

For example, if Kenya receives the current facility in dollars, it is not automatic that the repayment will be dollar denominated. The bank reserves exclusive rights to request payment in any other currency if at the date of payment dollar exchanges in the market are not in their favor.

Last year, I had the privilege of sitting in a panel convened by the civil society to debate the public debt challenge in the country where a world bank representative was a panelist. In his formal comments at the panel, he unambiguously confirmed that the bank never takes any losses in any loan facility it arranges. Whatever the case, the bank will always recover its money.

In financial lingua, this means that these are possibly the only lenders in the world that do not assume any credit risks in their operations. Even in instances where they are compelled to write-off debt obligations to poor countries, this happens in exchange of broader geo-political and economic interests of their main shareholders. This hegemony, while may have been intended for good of the global economy, its practicability after reconstruction of European economies ravaged by World War II may be unsuitable to other regions.

For example, contestations around their effectiveness have revolved around clustering target countries under generalities that ignore or assume peculiar needs of individual countries. Even within the same geographic regions, countries differ on democratic values, cultural and economic ideologies, levels of development, demographics and aspirations for the future. Yet, the core of the majority of their portfolios are designed using generalized models for cluster countries.

Options out

Given, there are practical realities that keep the country trapped in this unfair system. Part of the facilities we seek from them are to provide cushions against foreign currency reserves. This is due to our economic structure that perpetually operates as a net importer without a robust exports market. As a matter of necessity, government intervention becomes inevitable to preserve macroeconomic stability.

Unfortunately, there are no strategic responses to steer the country from this trap. In the medium and long-term, the country can only emasculate itself by cultivating exports to enhance forex reserves. At the moment, diaspora remittances dominate as the top forex earner for the country. Such cannot be the default economic policy for a country that seeks to dominate the region and promotes itself as the gateway for global capital flows in the region.

This brings us to the recent attempts to seek alternative currency denominated facilities, mainly the Renminbi (RMB) or Chinese Yuan for simplicity. While Treasury claims this as a genius move of the Ruto administration, they forget that this may have nothing to do with their initiatives but a master stroke from Beijing to complete internalization of the RMB.

For proper context, the most intriguing discourse of real economics that I have ever learned in class was the geo-economic politics of internationalization of the Renminbi. My International Finance Seminar Professor back in 2014 was the leading academic voice in Beijing on the need for China to disentangle itself from a highly dollarized system. At the time, China and most Asian tigers were struggling with excessive dollar reserves due to a huge export market. As the word’s factory, China had to find an alternative to dollar accumulation.

The Obama administration in the US had taken policy initiatives that were charging China seigniorage tax through negative real returns on huge Chinese holdings of the US Treasury bills. This also doubled as a capital flow from a poor to a rich nation. While fighting for recognition of Renminbi as part of international currencies at the IMF on account of its economic size, Beijing was exploiting its economic mighty to influence policy choices within Asian neighbors.

At the time, only about two Yuan denominated facilities had successfully been issued by Beijing. The Belt and Road Initiative (BRI) was part of the strategic interventions to internationalize Yuan. Thus, the Kenyan transition of part of Chinese dollar denominated loans into Yuan denominated facilities legitimizes and serves the interests of Beijing more than Kenya. It is no surprise that Beijing is fast opening doors for other African countries to convert their dollar denominated portfolios.

From where I sit, we are just pawns in a game that we do not understand as a country. It’s simply a shift from one hegemony into another. However, that should not surprise anyone. The geo-economic and political order of today has no mercy for anyone or country that lacks strategic foresight!