Tips Treasury CS may learn from Mudavadi's stint 30 years ago

I was a young journalist 30 years ago in July 1993 when I was assigned to cover a workshop on Kenya's debt service obligations. The workshop held at a Nairobi hotel was organised by the Swedish International Development Agency (Sida).

In attendance were senior officials from the ministry of Finance (as the National Treasury was then known), State corporation fat-cats, private sector executives and representatives of development partners. The keynote speaker was then newly appointed Finance minister Musalia Mudavadi. He was 31 years old and the youngest ever picked to head that docket since independence. He'd a small girth unlike today and looked unsure of himself until he got to the podium and gathered enough courage to face his audience.

I liked one thing in Mudavadi and which I still do. He is frank and candid. Unlike many government officials who cloak or sugar-coat bitter facts on the ground, Mudavadi tells it as it is, spelling out the consequences but, thankfully, suggesting the way forward.

Last December, for instance, he frankly told Kenyans to prepare to tighten belts for the next 2-3 years before the economy changes for better. I understand the statement didn't go down well with his two bosses who would want Kenyans to think all is well even as the patient that is the economy remains in the ICU!

Back then, Kenya was in same dire financial situation it is now if not worse. But Mudavadi didn't do what other government officials do - which is to play gymnastics with the truth and paint a rosy but fake picture.

Economy on a drip

The minister bombarded the workshop with facts and figures as they were. He said the country's external debt stood at $5.6 billion. That might sound a small figure in present terms but at the time, it made up 76 per cent of the country's Gross Domestic Product (GDP). Our current debt of Shs 9.29 trillion is about 59 per cent of the GDP. The difference in figures is because at the time, the Kenyan shilling was quite strong at Sh20 to the dollar.

Mudavadi told us that the interest and redemption obligations on the debt amounted to 34 per cent of the country's total earnings from exports of goods and services. Fifty eight per cent of the debt was owed to multi-lateral financial institutions and 28 per cent to bilateral donors. More than 50 per cent of the debt was concessional and the National Treasury was negotiating to have interest rates on the debt brought down from six to 2.5 per cent, Mudavadi told the workshop.

Not to break our hearts, the minister told us he was burning the midnight oil to ensure the debt service ratio didn't exceed 30 per cent and that he had negotiated for an improved debt service maturity period from 24 to 35 years.

To rein in on the debt taking habit, Mudavadi said he was working on measures to put quantitative ceilings on commercial borrowing abroad as well as enforcing fiscal discipline on state corporations by ensuring loans taken brought in tangible value for money. In those days, parastatals literally were cash cows for the politically-connected. In addition, Mudavadi told the workshop, State corporations would be required to pay two per cent annual fee to the Treasury for outstanding debts if borrowed under the Treasury's guarantee.

Free market

Mudavadi also announced what would herald loosening of State shackles on free trade and exchange of currency. In those days, foreign exchange control was in hands of government. It was a criminal offence to be caught with any foreign currency without authority from the Central Bank of Kenya. It had become a tool for political persecution. Security agents would raid premises of those perceived to be anti-government and ransack them for any foreign currency that would automatically lead to prosecution, a jail term and premature end to a political career. In that meeting Mudavadi announced the government would very soon liberalise the money market and leave it to the market forces. He disclosed the same would happen to the trade regime with a specific aim to promote exports instead of heavy reliance on foreign loans as means of bringing in much-needed foreign currency.

Mudavadi also announced formation of a Debt Management Committee to in scrutinise and vet all loan proposals to ensure that the country got loans under the best terms available unlike the previous trend where debts were incurred on the basis of what 'commissions' and kick-backs where there for government negotiators and their political godfathers. Henceforth, foreign debts would only be incurred strictly on need basis and on best concessional terms available in the market, Mudavadi told the workshop.

Not a penny more

But knowing which side of his toast was buttered and by who, Mudavadi told the workshop when the rain began to beat us but conveniently omitted the 'how' and the 'why'.

Until end of 1991, Kenya's balance sheet had remained healthy despite adverse local and international circumstances. Globally, flow of foreign aid to developing countries in the South had suddenly and drastically reduced in the wake of the fall of Communism in 1989. Western countries abruptly had lost interest in Africa and shifted attention to the big and more promising markets opening up in Eastern Europe and the former Soviet Union. After all, blood is thicker than water. Why bother with Africa when the next-door 'prodigal brother' had finally returned home!

The other big problem with Kenya at the time and which had made the donor community flee in droves was run-away corruption. Those were days of mega-corruption like Turkwel George Dam project where fee on 'feasibility studies' alone was more than cost of the actual project! Thanks to graft that knew no boundaries.

Meeting in Paris in November 1991, Kenya's donors resolved to stop further aid inflows until there were tangible efforts to rein in the suffocating corruption and looting of public coffers. They also took advantage of the situation to demand that Kenya opens up the political space and allow multi-party politics. Then President Daniel Moi had vowed multi-party system could only come to the country over his dead body!

As a result of the freeze on donor funding, the country got into unprecedented exposure on debt repayment.

To make the bad situation worse, in came the first multi-party elections in 1992. The previous year, long serving Zambian President Kenneth Kaunda had been sent packing in a multi-party arrangement similar to theone that Kenya was heading to. The big guns in the ruling party Kanu panicked. They were ready to pull down any stop to ensure Kanu remained in power.

Subsequent to stoppage on foreign donor inflows, stories emerged that the government was printing paper money to fund its election campaign. The money was said to be channeled through a gung-ho newly formed outfit called Youth for Kanu 1992 (YK'92). Its officials included then 26-year-old William Ruto, now the President of Kenya. Deputy President Rigathi Gachagua was at the time one of the 20 'Special' District Officers (DOs) recalled from the field and stationed at the office of the President to help ensure Kanu won the election through hook or crook, by force or fire!

Because of the subsequent worthless liquidity in the economy, the inflation rate headed to the skies. The Kenya shilling went berserk at one time exchanging at Sh160 to the dollar! To date, we have never recovered from that dip!

Mr Clean up

Those were the circumstances under which youthful Mudavadi was appointed Finance minister. He was supposed to clean up on the useless paper money circulating in the economy, tackle the consequences of the Goldenberg heist, then convince the donor community that Kenya was worth a second chance. It was a herculean task. He had been tossed into the deep end minus a life jacket and asked to stay afloat the best way he knew how.

Somehow he did manage - and lived to serve another day. His supporters say his next stop could be State House.......of course depending on how he ducks the many sharks in the turbulent waters of Kenyan politics. All the best to the man from Mululu village!