Global Policy Forum

By Charles Abugre

The disagreements between these two ministries, both represented by Deputy Prime Ministers, is so sharp that the CIC felt compelled to refer the matter to the two principals of the coalition government, President Mwai Kibaki and Prime Minister Raila Odinga. Word has it that altho ugh the principals were unable to reach an agreement they were perhaps leaning towards the Integrated Bill approach and therefore have ordered the two ministers to consolidate their drafts into a single Bill. This apparent decision has severely irked Kenyan civil society and the taskforce put together to detail out the devolution process and whose advice informed the Bills submitted by the Ministry of Local Government. Their anger is based on the justifiable fear that the Treasury is actively seeking to roll back powers taken from them by the constitution’s strong focus on devolution, participation and service orientation.

If it is true that the two principals are converging around a single Integrated PFM Bill, this position invariably endorses the position that the International Monetary Fund (IMF) has invested heavily in promoting, ever since the referendum which endorsed the constitution. Since at least September 2010, the IMF has pushed two issues related to Public Finance Management – the creation of Integrated Public Finance Management Bill and the creation of a Single Treasury Account. Both of these positions eventually found their way into the IMF Loan Agreement with the Government of Kenya as conditionalities (Structural Benchmarks) that attract penalties if violated without a formal waiver from the IMF Board. Treasury upheld these issues because they favour Treasury. Together with other recommendations, the IMF has intervened in a manner that could be severely detrimental to the devolution process. The IMF’s wading into the constitution implementation process in the way in which they did is highly dangerous as it borders on crude political interference and is a grey area in the IMF’s mandate. I would argue that the IMF needs not be so blatantly anti-devolution in order to ensure that devolution does not create run-away expenditure and indebtedness that could derail macroeconomic stability. Kenyans need to know that behind the Treasury position is the heavy arm of the IMF. The IMF’s position on this should be out in the open and Kenyan citizens deserve to debate its merits.

HOW THE IMF INTERVENED

In early September 2010, barely a month after Kenyans brought their new Constitution into law following a successful referendum, an IMF mission came to town to begin preliminary discussions towards extending a credit facility to Kenya. Among others, the mission broached the idea of a single PFM Act. A follow-up mission took place in November to prepare the Government of Kenya (GoK) to present a loan request to the IMF Board. The Letter of Intent drafted by this mission, signed by the Minister for Finance and the Governor of the Central Bank to the IMF executive director committed the GoK to present a single PFM Bill to parliament. This mission also proposed technical assistance to the Ministry of Finance to enable them prepare this bill. In January 2011, two parallel missions were in town, one to finalise the loan deal and the other a technical team to appraise and recommend a framework for Public Finance Management. The final letter of intent signed by the Minister for Finance and the Central Bank Governor and addressed to Dominique Strauss Kahn, the then Managing Director of the IMF undertook, as part of their core conditions to deliver an Integrated PFM to parliament by end August and to adopt a single Treasury account. These conditions will be reviewed in September as part of other conditionalities that the Government of Kenya committed itself to. You can find these in the Kenya section of the IMF website.

The mission that provided technical assistance for the development of the Integrated PFM Bill submitted its report in March entitled ‘Kenya: Developing an Integrated Legal Framework for Public Financial Management’. The mission met a range of actors except the Devolution Taskforce. Subsequently the IMF provided technical assistance for a drafting group to transform the mission report into a Bill. The draft Bill that Treasury presented to the CIC is the product of these processes.

WHAT THE TECHNICAL ASSISTANCE MISSION RECOMMENDED

The report of the mission was extensive and detailed. It outlined the key sections of an integrated PFM bill, what an integrated budget calendar should be; suggested what the legal framework of the County Government (what they called a sub-national government) should be; and made extensive and detailed recommendations that range from their interpretations of the powers given to the Treasury by the Constitution and many more.

This report leaves no one in doubt that the intention of the mission, and of the IMF, was (and is) to ensure that the powers of the Treasury are as enhanced as possible; that the flexibilities of the county government are as constrained as possible when it comes to the management of public finance and that the management of public finance is as centralised as is possible. The mission made very selective choice of principles of public finance outlined in the constitution, emphasising and amplifying those that are in consonance with the IMF’s beliefs and the mission’s biases and keeping mute or only mentioning in passing those principles they don’t quite like. A few of the mission’s biases and errors are worth mentioning.

THE ROLE OF THE MINISTRY OF LOCAL GOVERNMENT IN DEVOLUTION: In the mission’s view local government ministry’s role is political and administrative aspects of devolution. With this characterisation, Devolution Taskforce was effectively boxed – it had no role in financial devolution.

ROLLING – BACK AND AMPLIFYING PERCEIVED POWER LOST BY THE TREASURY: In virtually every aspect of public finance management the mission report seeks to curtail powers given by the constitution to other parts of government. In relation to Parliament’s role in budget making, it recommends ‘regulating changes that parliament can make to national budget’. For the counties it recommends ‘defining budget documents to be presented to the County assemblies, who should present , and changes that county assemblies can make’. It also recommends that a county single account should be ‘prescribed by Treasury’ (national government). On borrowing it recommends that Treasury should ‘impose a golden rule on borrowing on the County’ and that authority to ‘grant guarantees on County borrowing should vested in the Treasury’. It proposes that Treasury should have oversight power over all accounting, auditing and procurement functions ‘within every county treasury’. They prefer that all accounting and auditing staff be employed by the Treasury. They recommend that Treasury (national government) be vested with the power to ‘collect, consolidate, disperse and publish county level financial and non-financial performance information’… It recommends that the PFM Act ‘elaborate on the significant powers given to the Treasury to oversee the PFM system.’ There are loads and loads of these types of recommendations.

The mindset behind these types of recommendations is one of centralisation and central CONTROL. This in my view fundamentally undermines the spirit and letter of the constitution, the expectation by the millions of Kenyans who have suffered the consequences of centralised power that at long last power will be decentralised.

Selective amplification of financial management principles. The principles that the IMF report and which are reflected strongly in the draft Integrated Finance Management Bill choose to project are transparency, stability, fiscal responsibility and accountability. Missing across the document are those principles that make the Kenyan constitution stand out as unique, including the principle that PFM should be judged by its impact on wellbeing and equitable; the principle that the public have the right to know and to participate at all levels of public finance management; the principle that the management of public finance should be devolved and participatory. Wherever ever one of these is mentioned it is claimed that they are general rather than specific principles. This is nonsense of course as any principle can be quantified only to some extent and the level of that extent depends on the effort one puts into quantifying it. The purpose is clear, to project those principles which sit well with the IMF and jettison those that do not conform with centralised management ethos and cohere with narrow purpose for public finance management

A fundamental misreading or deliberate undermining of the Constitution? In my view, the IMF has fundamentally misread the 2010 Constitution of Kenya in several respects. First, the term ‘sub-national government’ tends to refer a level of government that in terms of hierarchy is subservient to a higher hierarchy. The Kenyan constitution in my view is clear that there the sovereign power of the people is exercised at 2 levels of government – national and county (Article 1 (4) and that the government at these 2 levels are “distinct and inter-dependent and shall conduct their mutual relations on the basis of consultation and cooperation”(Article 6(2)). The mindset behind the draft Integrated PFM Bill is one that subjugates the County to the National. This is plainly unacceptable.

The principals may well want to avoid violating an IMF conditionality by suggesting an Integrated Bill. If so, this Bill will be a considerably voluminous one indeed and will take very tricky drafting in order to preserve the distinct powers of the County, spell out how the 2 levels will cooperate an collaborate without one subsuming the other and how the desire of the people for participatory, devolve, transparent and accountable government working solely to improve services and the quality of lives of the people, a Constitution they fought so hard to bring about, will be preserved.

But of course I recognise the IMFR’s need to ensure prudent management of public finance in order to preserve the monetary system, stable prices and exchange rates. Could this could be achieved without undermining the most ground-breaking constitution on the African continent? It will be a tragedy if the principals were to reach a consensus which unknowingly rolls back what the people fought for – devolved and accountable power.

KENYA’S OBLIGATIONS TO THE IMF

Kenya is a member of the International Monetary Fund (IMF). It joined in February 1964. The IMF is a voluntary association, a bit like a credit union where members pool resources to bail each other out in times of trouble and for the greater good of all. The specific purpose of the IMF is to promote international cooperation on monetary affairs by enabling members to consult and collaborate on international monetary problems with the aim of bringing about ‘balanced growth of international trade, orderly economic growth and employment, with reasonable price stability’, including exchange rate stability. Cooperation also seeks to avoid a repetition of the competitive devaluation that contributed to the great depression in the 1930s. As a member of this credit union, Kenya knowingly submitted itself to play by its rules.

To ensure that its members comply with their obligations, the IMF is mandated by Article 4 of its Constitution to conduct periodic surveillance on their economic and financial policies and to provide advice on corrective measures. This is the so-called Article 4 Review. Countries may take or leave the advice, unless you are borrowing from it. Rich countries often politely acknowledge the advice and politely ignore them or if they feel annoyed enough, may even tell the IMF off as the George Bush era politicians in the US tended to do regularly. However if a country is borrowing from the Fund, their flexibility to ignore advice is constrained by conditionalities that the governments undertake to fulfill. The undertaking, called a Letter of Intent, is often drafted by IMF staff and signed on behalf of the country by the Minister of Finance and the Central Bank Governor. Violating these conditions can be costly, including paying a fine. It can also be costly in terms of the country’s credit rating as the IMF plays the role of a credit rating agency for the poorest countries for whom the big private credit rating agencies find too unattractive to border with. Kenya is one year into a three-year loan from the IMF and is therefore bound by conditionalities they committed to.

THE IMF’S MANDATE

Once a country signs up to be an IMF member it has to recognise the IMF’s legitimate area of interest, i.e. to ensure that countries do not build up unsustainable imbalances in their fiscal (expenditure-revenue), monetary (money demand-money supply) and foreign (imports-exports) accounts. These three accounts feed into each other. Deficits in the fiscal account will have to be financed often from borrowing. Government borrowing from domestic sources can lead to unsustainable domestic debts, or contribute to inflation or may even undermine private investment and ultimately orderly economic growth. Inflation does not only lead to hardships it also drives up the cost of loans and the cost of paying back loans through the effect on interest rates or the exchange rate, although mild inflation can also be good for domestic producers. Massive government deficits, according to IMF analysis, can also spill over into imports and if imports grow faster than exports (which is often the case in the short run), the Balance of Payments (BOP) deteriorates.

The deficit in the BOP will need to be plugged, usually through external borrowing, which if not kept within reasonable limits can risk a sovereign debt crisis of the type we are witnessing today in the United States and the European Union or of the type Africa witnessed in the heady days of structural adjustment programmes. When governments can’t pay their debts and do not wish to anger their creditors or risk not having access to further loans in the short run, they ultimately call in the IMF to help bail them out. Governments may also borrow from the IMF to boost their foreign reserves so as to protect the value of their currencies, sustain imports in times of unexpected dip in export earnings and assure creditors that they can pay their debt.

The IMF’s ultimate concerns are that: A country is able to pay its debts to its foreign creditors; that its domestic prices are stable in order to protect the value of capital – foreign and domestic – and that foreign capital has the freedom to move in and out. It is in relation to the first concern (ability to pay debts) that governments are made to prioritise external debt servicing in their budgets. This is why the IMF is sometimes referred to as debt collectors for foreign banks and governments. It is in relation to the second objective (low inflation) that the IMF and others have pushed for Central Bank Independence and Central Banks have been encouraged to narrow down their policy objectives mainly towards managing inflation, often the expense of the ‘orderly growth and employment’ they are supposed to be looking after. It is in relation to the third objective (free capital movements) that the IMF has encouraged the liberalisation of the capital account and privatisation of state enterprises in many countries.

CONTESTED POLICY BIASES

It must be added that although there is some agreement among economist broadly about what is not good – unsustainable debts, very high inflation and sustained inflationary expectations, large fiscal deficits etc. Disagreements abound when it comes to the details of how much of what is bad or even how best to get to what may be good. The IMF has too often got it wrong promoting austerity in economic downturns. The IMF has also changed its tune on policy matters too many times. For example, pushing austerity and liberalisation of capital controls on poor countries, recommending the exact opposite to rich countries went they went into crisis, and reverting to original form when marginal European countries like Greece, Iceland and Ireland went into crisis. But the greatest criticism of the IMF is the fact their policies fail far too often to bring about the expected ‘orderly growth and employment’. Instead they make the poor pay to rescue, or sustain the profits of, bankers and other creditors. Preserving the monetary system often tends to be at the cost of livelihoods of the poor and social harmony in general.

CROSSING BOUNDARIES AND BEING DISPROPORTIONATE

There are two key points here. First, the IMF has a legitimate right to take measures to ensure that governments manage their public finance in a manner that is consistent with their obligations as members of the IMF. The second is that, be that as it may the steps it takes must satisfy two conditions. The first condition is that those steps are squarely within its mandate. The second condition is that the steps taken or proposed must be proportional to the Fund’s purpose. Under Kenya’s 2010 Constitution, there is a third precondition which is that the decision making process must be transparent and participatory.

I will argue that in relation to the manner in which it intervened on the power relations issues in the management of Kenya’s public finance under the 2010 Constitution, the IMF may have stepped into or even beyond the grey area of its mandate and that many of the recommendations of its technical mission which have guided Treasury’s position on the PFM bill, may also have over-stepped the boundaries of proportionality.

MEDDLING IN POLITICS?

The IMF’s role in ‘governance’ matters is contentious, so much so that an Executive Board Guidance had to be established in 1997 to guide the Fund in its dealings with member governments. In this Guidance Note, the Board upheld the view that the primary concern of the Fund is with macroeconomic stability, external viability, and orderly economic growth in member countries. Therefore, the Fund’s involvement in governance should be limited to economic aspects of governance. The contribution that the Fund can make to good governance should be in relation to two areas: (1) improving the management of public resources through reforms covering public sector institutions (e.g., the treasury, central bank, public enterprises, civil service, and the official statistics function), including administrative procedures (e.g., expenditure control, budget management, and revenue collection); (2) supporting the development and maintenance of a transparent and stable economic and regulatory environment conducive to efficient private sector activities (e.g., price systems, exchange and trade regimes, banking systems and their related regulations).

‘Within these areas of concentration, the Fund should focus its policy advice and technical assistance on areas of the Fund’s traditional purview and expertise i.e. issues such as institutional reforms of the treasury, budget preparation and approval procedures, tax administration, accounting, and audit mechanisms, central bank operations, and the official statistics function. Similarly, reforms of market mechanisms would focus primarily on the exchange, trade, and price systems, and aspects of the financial system. In the regulatory and legal areas, Fund advice would focus on taxation, banking sector laws and regulations, and the establishment of free and fair market entry (e.g., tax codes and commercial and central bank laws).

The Guidance Note was categorical that ‘the Fund’s judgments should not be influenced by the nature of a political regime of a country, nor should it interfere in domestic or foreign politics of any member’.

Applied to the Kenyan case, the Fund clearly had the mandate to give advice on all the aspects of public finance management above. It should give that advice in the political context in which it operates. That political context, as defined by the constitution, includes a unique situation of 2 levels of government each independent of the other, and none subjugated to the other but who must collaborate and cooperate t bring about responsible management of public finance based on the principles outlined in Chapter 12 of the constitution. The IMF team failed to appreciate this uniqueness and therefore sought actively to create a political regime different from that outlined in the constitution. The IMF team may have over-stepped their boundaries but actively seeking to re-write power relations among different parts of government as well as entities created by the constitution. Their advice tantamount to promoting centralisation of decision making and central control over public resource against the Constitutional ethos of devolution and participation.

Could the IMF’s desire for fiscal prudence and stability be achieved without undermining devolution? There is no reason why not. The devolution taskforce provided one mechanism to achieve that which is the Inter-governmental fiscal relations Act – the body that brings together the key actors in the management of public finance to agree parameters, define reporting and coordinating and collaborating mechanisms for the larger good. There is no particular reason to assume that consensus could not be reached through this structure favouring prudent management, including the management of debt whilst being consistent with the letter and spirit of the constitution. The IMF Mission that advised Treasury chose the lazy route of not engaging with the political structure as it is but rather seeking to create a political structure which the people rejected but which seems consistent with their values of financial management.

Is there the need for more than one Act to regulate public finance management? In my humble opinion, the answer is YES, for the simple reason that the County Government Structure is new. It requires new structures, new ways of doing things, new planning and budget processes that are consistent with the expectations of participatory and accountable governance.

The management of money is what will make or break the devolution process and the expectations of Kenyan citizens for transparent, participatory and service oriented government. It will take detailed crafting to deliver these expectations whilst ensuring prudent resource management. This is what the Devolved Government PFM Bill delivers rather impressively. The difficulty of simply trying to pull the two Bills together is the fact that they are derived from different mind-sets about governance – one is centralising power, the other is dispersing power. Something has to give and as is clear in the draft Integrated Bill, centralisation trumps.

If a government based on devolution and the dispersal of power is to be given a chance, the IMF’s role in political horse-trading in Kenya should be curtailed.

* Charles Abugre is the Africa Regional Director of the UN Millennium Campaign. The opinions expressed in this article are entirely personal and should not be attributed to the United Nations.