Global Policy Forum

Njonjo Kihuria

Due to difficulties of meeting conditionalities set by the Bretton Woods institutions, lately many African countries have not been able to get either short-term financing from IMF nor long term project funding from the World Bank. The African countries have argued that these conditionalities were unrealistic and did not take into account the environment obtaining in the continent. Businessman and former chairman of the Nairobi Stock Exchange Jimnah Mbaru believes these arguments are valid to a large extent and in this interview with Njonjo Kihuria, argues the case for an African Monetary Fund as a viable alternative.

QUESTION: How did you come by the idea of an African Monetary Fund (AMF)?

JIMNAH MBARU: This idea came about when I was doing my dissertation for the law degree. In that dissertation titled Capital Markets and Economic Development, I was looking at ways of developing capital markets in a way that they can contribute to the economic development of Africa.

In the process of looking at options available, I realised that there were other institutions which were central in providing funding to Government. Beside the bond market, we are still raising money from the World Bank and the IMF and that is why I thought an AMF would provide a good opportunity (for raising funding).

In 1998, when there was a financial crisis in East Asian, Japan proposed the setting up of an Asian Monetary Fund. Japan then argued that this would be closer to the Asian countries and could easily identify potential crisis. Of course the IMF opposed the idea. The idea of a Latin American Fund, which would be closer to those countries' markets, has also been floated in South America. Such funds could also be used in raising domestic resources. So, if we were going to raise domestic resources to finance economic development, an African Monetary Fund, would be a viable institution.

Q: You say viable, but how viable?

A: It may not be viable immediately, but the idea will become quite viable in the next 10 to 20 years. Financial architecture is changing all over the world and the way economic development is financed, is also changing. Twenty years back we did not talk about capital markets as strong institutions. In this country, we did not talk about the bonds market, several years ago, yet today we see the Government is able to raise money through issuance of bonds in the market.

We also realise that the pattern of economic development as recommended by the western world, is not necessarily working in developing countries. What is required is to develop domestic, regional or continental institutions, which can become agents in mobilising resources to support economic development. That is why an AMF will be very viable in the future.

Q: So what would be the major difference between the AMF and the IMF?

A: Fundamentally, the AMF will be located in Africa and will focus only on the continent. The resources within the World Bank today are available to every country in the world and so focus has to keep shifting. When there was a crisis in Asia that is where the focus was, Africa having been abandoned. The same happened when Eastern Europe and Russia was in crisis.

But an AMF will be mandated to deal with African problems without changing focus now and then. It will be much closer to the countries that it is supposed to serve than the IMF. Being closer, it will better understand the problems these countries are going through, be they social problems, economic or political. When it comes up with conditionalities, these will be more realistic, relevant and based on the environment obtaining.

Many African countries have very weak political systems and so there are certain policies that they cannot implement overnight. These include retrenchment in the civil service, which if implemented suddenly, will result in social problems, which could cause the collapse of those political regimes. Unlike the IMF, an African Monetary Fund will understand these weaknesses.

Q: From where and how will such a fund, source finances?

A: When you create an institution like this, you have to have sponsors and all African countries will become members of the Fund through acquisition of shares. This will mean contributions from member countries. There are also some countries within Africa with substantial resources and some of which could be placed as either deposits in this institution. Countries like Botswana, Libya and maybe Mauritius and South African have substantial reserves. Even Kenya has a reserve of about US$1 billion and a portion of that, say 20 per cent, may be placed with the AMF, as a second source.

I also suspect there are other countries that are sympathetic to Africa's, development, including Saudi Arabia, and others with excess reserves, who could provide funding.

The third area is the issuance of bonds denominated in foreign currency in the Euro/dollar market and the international capital markets. Even the IMF itself if it is committed to the economic development of Africa, would be interested in placing some funding into the AMF. There are also many donor countries, NGOs and wealthy individuals that would be interested in supporting economic development in Africa.

Q: Were the IMF to come aboard as a co-funder, will it not just introduce more conditionalities?

A: Judging by the hostility I saw from IMF and World bank on the proposal to set up an Asian Monetary Fund, I do not expect immediate support for the idea from the IMF. African governments are very good captive markets for western banks and institutions and so the IMF will come out fighting hard against the idea. I do not expect much support from IMF, but on the other hand the thinking in the World Bank and IMF is changing. They are more and more trying to rely on the views of those countries they are funding, and they are talking about integration. So, I think over time, the thinking will completely change and IMF will support such and idea.

Q: What would be the advantages of an AMF?

A: An AMF would become the regional lender of the last resort before a country could approach IMF, whenever a need to borrow short-term funds arose. An AMF would come up with realistic conditionalities relevant to the African situation and in any case, a new pecking order would emerge for African countries in need of funds, particularly at times of financial crisis. An AMF specialising in lending to African countries would be able to respond rapidly to impending crisis and thus avert the same. In this spirit, an AMF would have detected early enough, the onslaught on the South African Rand last year.

Thirdly, an AMF, would provide competition in the supply of services to smaller and medium African countries in particular. Competition between such a fund and the IMF would ensure that these countries receive the most competitive service in form of emergency financing, technical support and advise in development of the banking and the financial systems. It would be best suited to assess the financial needs and risk profiles of these countries.

An institution like the AMF, would contribute substantially to the development of African Capital markets, where it would emerge as a major player with its potentially huge reserves.

Q: But would it have teeth?

A: Currently, many African countries have no voice in the IMF and the World Bank, due to their limited voting rights. In many ways, the Bretton Woods institutions and even the WTO are seen as controlled by the Unites States government. An AMF would give African countries a voice within the major international financial institutions and forum. The "federalist argument" where every member's voice counts, is crucial in the emerging world economic order.

An AMF would assist African countries where necessary to negotiate with the Bretton Wood institutions, as it would have well-trained and equipped personnel and manpower. It would in fact provide a back up for any African country, which has no choice, but to borrow from IMF.

Q: What would be the limitations of an AMF?

A: Many African countries do not have sufficient resources let alone funds to spare and the major challenge of such a fund will be getting the countries to be committed. Many countries may not be able to contribute substantially. There will be problems of deciding where it will be located, we may have management problems; who will be the chief executive and how will African countries determine this etc. But if they adopt the concept of meritocracy, that will work.

The major problem would, however, be politicisation. If it is over-politicised and people are appointed on the basis of politics instead of merit, it might end up with a very weak leadership and thus be unable to perform its appointed task.

Q: What will it take for the idea to be realised?

A: For the idea to be realised you have to get five or six strong countries within Africa, with a country like South Africa initially being the sponsor. Then countries like Nigeria, Botswana, Libya, and maybe Kenya could support it. This will become the nucleus countries that will push the idea forward. Even the IMF is driven by major western countries, with the US leading the pack.

Q: How would an AMF relate to the Nepad?

A: Nepad is supposed to be a partnership between African countries and the western donors, where the African countries have promised to ensure good governance, prevalence of democracy, elimination of corruption and an enabling environment for investment in their countries. On the other hand, the western partners are to agree to come and invest in the continent, be willing to give Africa more aid, be willing to write off a lot of debts. That partnership is based on that understanding.

An African Monetary Fund will be one of the institutions that will be created as a way of getting foreign funds into the continent. It can also be used as a way of providing what you call peer-supervision, among the central banks and the ministries of finance within the countries themselves. The way Nepad is saying it will use peer-pressure to ensure good governance, is the same way an AMF would be used to provide the peer-pressure.

Q: What has been the problem in African central banks?

A: The main problem with central banks in Africa, is that they are not clear about their mandates. Many central banks in Africa today think their mandate is to control inflation through monetary policies. That is what the western governments have taught them to believe. But the primary role of a central bank, is to support economic development, but central banks in Africa, have refused to adopt this mandate, in favour of the narrow one which they can easily fulfil. This way they are judged on a very small criteria.

When you start to expand the mandates of central banks the way the new constitution is proposing to do to make them agents of economic development, that is when policies will be introduced to ensure the central bank plays an important role. The central bank will have to play a central role in ensuring that virtually every sector from Jua Kali to transport and housing, has access to enough funding.

Q: Can competition between a nascent AMF and the more established IMF be fair?

A: Definitely, it would be unfair and in fact I do not expect there to be competition in the short-run. But when it is fully developed with a substantial deposit base of about US $100, it will serve the smaller countries such as Burundi, Comoro Islands, Rwanda, Swaziland, and Seychelles, which IMF may not want to bother with. At a later date, these countries will have an option of either going directly to IMF or to the AMF. But the point here is that as long as the IMF know that these countries have access to funding from elsewhere, it will start improving on the quality of its services. They will start responding in a more realistic, more understanding and practical manner.

In the short-run it will however be quite difficult unless we protect the AMF by saying that before a country goes to the IMF, it has to first try to obtain funding from the AMF.

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