Big battles with donors to save weak economy

The late President Moi with a world Bank official

In 1993, months after the general election, Kenya’s inflation figures had hit a record high of 50 per cent and the government was going bust.

The Gross Domestic Product (GDP) had stagnated for three years and agriculture — the country’s economic mainstay — had shrunk to an annual growth rate of 3.9 per cent.

To make matters worse, bi-and multi-lateral donors had suspended aid in the wake of the 1992 General Election, whose results had been contested by the opposition.

From 1991, the World Bank and the International Monetary Fund (IMF) had been going back and forth with the government trying to press Kenya to introduce structural adjustment policies to invite investors.

At the time, newly appointed Finance Minister Musalia Mudavadi led a government delegation to Europe on a round of shuttle diplomacy.

The trip took the team to a donor convention in France and later to Britain, where Kenya engaged the lenders in a spirited attempt to convince them that the country was undertaking proposed economic and political reforms.

Mr Mudavadi and his colleagues told donors “there will be no backtracking on reforms this time and that Kenya will turn to dialogue in all areas of difficulty”.

In his book Soaring Above the Storms, Mudavadi says President Daniel arap Moi gave him the carte blanche to negotiate with the donors and his personal commitment that the proposed economic reforms would be implemented.

He further assured donors that Kenyans were aware the reforms would have some painful consequences in some areas, such as ongoing civil service retrenchments meant to reduce the wage bill.

With Moi’s blessings, Mudavadi says, he began to clean the mess in the finance sector created by runway impunity, which also had to do with the Goldenberg scandal.

“It was all chaos … the schemes had been seriously abused. The country was basically bankrupt. It was on this basis the President made the decision to carry out changes at the very top of the CBK,” he writes.

Economic reforms

The government followed through its words with a raft of economic reforms, which entailed privatising State assets, eliminating price controls, removing foreign exchange controls and retrenching civil servants to reduce the wage bill.

Micah Cheserem was head-hunted from Unilever Malawi to head the CBK where he worked with the IMF on a debt restructuring programme.

Soon after, however, inflation hit a record 100 per cent and job creation shrunk to 1.9 per cent. More Kenyans than ever before fell below the poverty line, the inequality gap widened, crime rates and ethnic animosity soared.

Moi termed the Bretton Woods policies dictatorial and suicidal and in 1993 he announced that Kenya was pulling out of the IMF and World Bank economic reform programme.

News that Kenya was going to chart its own path out of the Sh616 billion debt, at the time nearly 90 per cent of the country’s GDP, sent shock waves across the donor community.

Western diplomats believed Moi was bluffing and had made the decision in a moment of anger.

In the months that followed, the relationship between the West and Kenya remained strained as each side held its ground.

Lobby groups

In the background however, Moi’s government had adopted an ad hoc approach to implementing piece meal economic policies within the confines of the recovering economy.

Gradual improvement in economic performance and interventions by lobby groups such as the East Africa Association that represented significant British business interests in Kenya brought the two sides back to common ground.

At the same time, the two large State banks, National Bank of Kenya and Kenya Commercial Bank held massive non-performing loans that were re-structured and came down gradually. KCB was later restructured with the State selling 75 per cent of its stake.