KENYA

The Implications of Loan/Aid Resumption for Poverty Eradication and
Citizens Participation in Kenya

Analysis and Recommendations

Part 1 of 2

Apart from the Working Group, this Paper is endorsed in full or partially by the following development and rights associations and organizations:

• Kenya Council of Non Governmental Organisations (over one thousand registered NGOs)
• Basic Rights Steering Committee (twelve member NGOs and umbrella networks)
• Institute of Economic Affairs
• Eco-news Africa
• Kangemi Women Empowerment Center
• Kenya Human Rights Commission (KHRC)
• Muslims for Human Rights (MUHURI)
• Federation of International Women Lawyers (FIDA)
• ActionAid Kenya (AAK)
• Social Development Network (SODNeT)
• The Collaborative Center for Gender and Developmentss

PROFILE OF THE NGO WORKING GROUP

This policy paper was prepared under the auspices of the NGO working group on the World Bank. The Working Group is an independent, loose coalition of development and rights NGOs established under the umbrella of the Kenya National Council of Non-Governmental Orgnaisations. The Working Group has engaged the World bank on issues of poverty eradication, public accountability and participatory policy-making and was particularly active in influencing the Country Assistance Strategy over 1997/8.

Active members of the NGO Working Group on the World Bank include the National Council of NGOs, Eco-news Africa, Kenya Rural Enterprise Porgramme, ActionAdi Kenya, Aga Khan Foundation and Oxfam (UK and Ireland). In addition, Undugu Society, Kenya Human Rights Commission, Institute for Economic Affairs, Collaborative Centre for Gender and Development, the Social Development Network contributed to the drawing up of this document.

The Working Group acknowledges the support of Sam Mwale, Policy Analyst and World Bank and the Ministry of Finance and Planning staff in the preparation of this policy Paper. The views and recommendations contained in this document nevertheless should be attributed to the NGO Working Group on the World Bank only.

Section One: Executive Summary

Background

The last Policy Framework Paper covering 1996-1998 suffered from weak implementation. Attempts to negotiate a new PFP failed due to the lack of political will on the part of Government of Kenya (GOK) to understand the need and commit itself to implementing the necessary reforms.

The Government is on the verge of developing an interim Poverty Reduction Strategy Paper (PRSP) and Medium Term Expenditure Framework (MTEF) for possible approval in April 2000 in time for incorporation into the June FY 2000-1 budget.

Over the last seven years, Kenya has failed to access US$ 360 million due to a poor management record. It is unclear what the present negotiations may yield in core budgetary support, but it is capital that the Government of Kenya seriously need.

The public perception of these negotiations is not whether World Bank (WB) and International Monetary Fund (IMF) conditionalities have been met, but whether there is in place a transparent and publicly accountable budget management system that is cognisant of the rights of the poor and marginalised to key entitlements.

In the absence of such assurance, successful negotiation between the WB/IMF and government of aid resumption will not have the necessary public confidence and support. In this context, the eradication of absolute poverty, improved governance and economic growth will be at best illusionary and at worst a travesty of international cooperation. The resumption of loans and aid must be tied to an inclusive process and a clear statement of how the interests of wider society will be incorporated. This policy Paper identifies some of the policy considerations that should be taken into account by both the Government of Kenya and the World Bank/International Monetary Fund.

Introduction

a) provoke policy-makers to address the forthcoming aid resumption talks within the context of poverty centered development paradigm, in which the focus is as much on direct actions that reduce poverty as right-sizing macroeconomic management,

b) assist the GOk, the Bank and Imf indentifying the obstacles to effective, accountable and pro-poor loan and aid utilisation within the existing policy environment, and

c) Strengthen public accountability in the GOK and World Bank/IMF negotiations.

Main Recommendations

This Policy Paper makes seventeen key recommendations to the Government of Kenya through the Permanent Secretary, Ministry of Finance nad Planning and two recommendations to the World Bank and international Monetary Fund.

These and other recommendations can be found later in the text, which provides a justification for why the Government and its partners; the World Bank and IMF must act to avoid public skepticism. Six Recommendations for the Process of Developing the Poverty Reduction Strategy Paper (PRSP) and Medium Term Expenditure Framework (MTEF) (Short-term targets up to April 2000)

1. The Government must evolve an acceptable process of negotiation over the sequencing of consultations and scope for participation by the other partners such as civil society, business and the communities in the development of the interim Poverty Reduction Strategy Paper;
2. The Government must work closely with the private and NGO media in developing an interim information disclosure procedure and strategy for building national understanding, scrutiny, and ownership of MTEF/PRSP;
3. The MTEF Secretariat must involve public interest groups on arriving at a workable consensus on a) what affirmative budgetary action should be taken to uplift the condition of the poor and marginalised groups in Kenya, in particular women, ethnic minorities, children and people with disabilities; b) how to widen the legal and fiscal autonomy of local urban, municipal, and county councils to generate and allocate revenue in an accountable manner;
4. The Head of the Civil Service in conjunction with the Directorate of Personnel Management should present a transparent and accountable civil servants retrenchment package that has clearly laid out criteria and procedures for implementation; and is fair, equitable, and open to discussion by the affected groups i.e., lift the ban on the civil servants union so that their interests can be presented and negotiated in the package;
5. World Bank and IMF missions while in Kenya should publicly assure the Government and Kenyans that decreased overall public expenditure and the continuation of user charges in basic social services are not pre-conditions for new aid resumption or new loan arrangements. These policy choices should be opened to public debate and reflect a negotiated outcome between the Government and its people rather one between the Government and international financial institutions;
6. World Bank and IMF missions while in Kenya should publicly affirm their role as poverty reduction agencies rather than institutions preoccupied with macroeconomic changes at the cost of longer-term human capital investment.
   Anything less and the pronouncements by the President (World Bank) and Managing Director (IMF) and their executive policy organs of a shift in policy towards poverty reduction will appear hollow and rhetorical.
   

   Six Recommended Policy Recommendations for the content of the MTEF (medium to longer-term)

7. Ministry of Finance and Planning should explicitly set the standards for domestication as policy and budgetary proposals the various international obligations and well as local initiatives that enshrine a basic rights economic and social development framework within the MTEF;
8. Ministry of Finance and Planning in conjunction with other ministries, should fiscally redress the incomes losses, jobs lost, and social costs such as famine and poverty created by global and domestic market liberalisation in food markets (dumping of sugar, wheat) or manufacturing (dumping of textiles and other finished products).
9. The Ministry of Finance and Planning should enshrine the National Poverty Eradication Plan fiscal element namely, 10% ring-fencing across the line ministries, and the establishment of an autonomous Anti-Poverty Fund (not trust fund) with its own board of directors who are selected on merit from the private sector, government and NGOs;
10. The MTEF must include measures to strengthen the ability of parliamentary committees (public accounts, public investments, and anti-corruption) to prosecute either through the Attorney-General or Kenya Anti-Corruption Authority (KACA) all cases of individuals, firms, and institutions named as being culpable in the public accounts reports from the auditor-generals office;
11. The Estimates Committee should be revived and supported to further scrutinise public expenditure;
12. The MTEF should propose the formation of a budget management subcommittees at District Development Committees that include representatives from the community and resident NGOs in budget allocation, and project prioritisation. This would increase the chance of pro-poor projects receiving a higher share of local and national resources;
13. The MTEF should elaborate a system of desegregating the annual auditor-general's report and analyse at district level, which should be sent back to the budget management subcommittees of all the DDCS, thus making district budgets more transparent and accountable;

    Five Recommended Guiding Principles for the content of the PRSP (Medium to longer-term)

14. The Ministry of Finance and Planning in conjunction with the Poverty Eradication Unit in the Office of the President identify the structural causes (global to local) and policies that sustain the process of impoverishment;
15. The Government must clearly make the link between the National Poverty Eradication Plan (NPEP) framework and the PRSP;
16. The PRSP must elaborate an approach of challenging of poverty eradication from the perspective of enshrining the rights of all Kenyans to universal education, accessible water, food and affordable health as formulated in the NPEP;
17. The Ministry of Finance and Planning must set sound fiscal choices in a transparent manner that priorities productive social programs such as basic health services and education and economic development rather than non-productive expenditure such as the provincial administration. This would avail basic social services expenditure with substantial resources and reduce wasteful expenditure;
18. The Government must include in the preliminary drafts of both documents (MTEF and PRSP) a schedule that sets benchmarks and standards for public participation in formulation;
19. Both documents must be accessible for public debate prior to being tabled in parliament when it resumes in March 2000.

Section Two

Context

1. Three lost opportunities faced the Government of Kenya, all Kenyan citizens and international finance institutions in 1999. These were the failure to situate poverty eradication as a central strategy for economic growth, to revise debt management strategy and improve governance and basic human rights. The resumption of Government, IMF/World Bank negotiations in 2000 provide yet such another moment to seize these opportunities. Situate Poverty eradication as a central strategy for economic growth
2. The Launch of the National Poverty Eradication Plan 1999-2015 (NPEP) on March 11th 1999 brought five years of policy inertia on the issue of poverty to an end. The launch generated many expectations. The main elements of this visionary Plan were the commitment to reduce existing absolute poverty levels by 20% and a further 10% by 2004 and 2015 respectively, a rights based Social Charter for Integration and declaration of universal primary education and primary health care and accessible water for the poor.
3. In the context of gross inequity and absolute poverty levels of 47% and 29% in rural and urban areas respectively, the launch of the plan was greeted with mixed reactions ranging from skepticism to statements of outright support. Central to the skepticism was the lack of public confidence that this plan could succeed in the context of the mismanagement of public assets, the exclusion of the public from policy-making processes and poverty creating economic policies.
4. As the Government embarks on the development of an interim Poverty Reduction Strategy Paper (PRSP), the paper experience of the NPEP is instructive. The plan has yet to be mainstreamed across line ministries and utilised as a barometer to measure the degree of anti-poverty thrust in other Government policies and laws. The PRSP and MTEF provide an opportunity to bring the NPEP into the centre of ministry of Finance and planning alongside other ministries. To overlook the poverty analysis, goals and strategy of the NPEP would be a fatal mistake and open the PRSP to the accusation of paying "lipservice" to poverty eradication.

   Revise the external and domestic debt management strategy

5. Current fiscal policy (in terms of actual expenditure management) is a substantial contributor to poverty and its growing entrenchment in Kenya. Current monetary policy while aiming to control inflation while raising T-bill rates is inflating the domestic debt, inflating the subsequent interest repayments, and in the process denying both the economically productive sectors of capital and the social investment sectors of development funds. As the discretionary budget resources are reduced by what could termed as fixed costs, such as debt servicing and public service salaries, spending on poverty reduction is adversely affected. There is a very strong correlation between spending on poverty reduction, and the level of debt servicing. There is a strong correlation between spending on poverty reduction, and positive trends in the human development index (HDI).
6. Empirical analysis of the growing debt service load and its impact on government expenditure on social services in the period between 1980 and 1995 proves this point. During this period debt service grew from 3% of GDP and 13% of real budget in 1980 to 32% of GDP and 40% of real budget in 1995. The share of basic social services spending in the real government budget fell consistently from 20% (1980) to 17% (1985) to 13% (1995) rising slightly to 15% (1996) and then falling again to 13% (1997). Yet, these figures overstate the share allocated because they include salaries. When calculated without salaries, the share of the budget for basic social services in 1995 falls to 3.5%, in 1996 it about 5.2%, and in 1997 about 3.3% .

   Table 1: Net Debt Service 1998-1999
   (billions of Kshs)

   
   

   Item	July - November 1998	July - November 1999
   Domestic Interest Paid	Kshs 12.7 billion	Kshs 8.9 billion
   Total foreign debt service	Kshs 7.1 billion	Kshs 6.7 billion
   Foreign principal repayments	Kshs 10.2 billion	Kshs 10.8 billion
   Foreign interest repayments	Kshs 3.4 billion	Kshs 3.0 billion
   Less foreign loan receipts	Kshs 6.4 billion	Kshs 7.2 billion
   Total debt service (1+2)	Kshs 19.8 billion	Kshs 15.6 billion

   Source: Central Bank of Kenya: January Economic Review at www.centralbank.go.ke

7. It appears that the GOK has pursued a two-track debt management strategy in the 1990,s whose results seem to have entrenched rather than reduced poverty. The strategy consists of what appears to be concerted effort to reduce the external debt load, while at the same time increasing the domestic debt load. Table 1 above shows the level of debt payments in the first half fiscal year 1998/99 and 1999/2000. In FY 1998/99, domestic interest payments (Kshs 12.7 billion) exceeded total foreign debt service (Kshs 7.1 billion). In FY 1999/2000, domestic interest payments (Kshs 8.9 billion) exceeded total foreign debt service (Kshs 6.7 billion). Table 2 below shows external debt to have declined by nearly 10 percent from 78.5% (1992/93) to 69% (1998/99) of total outstanding public sector debt in the 1990s. At the same time domestic debt rose from 21.5% (1992/93) to 31.6% (1998/99) of total outstanding debt.

   Table 2: Outstanding Public Sector Debt and Interest Payments
   (billions of Kshs)

   Item	1992/93	1993/94	1994/95	1995/96	1996/97	1997/98	1998/99
   Total debt	481.62	452.56	484.48	445.44	455.60	465.40	480.04
   Domestic	103.62	108.24	117.04	109.32	130.80	145.54	159.06
   External	378.00	344.32	367.44	358.92	324.80	319.36	332.16
   Total interest	277.20	46.66	31.82	37.24	34.82	43.28	32.78
   Domestic	18.62	37.36	22.58	25.92	25.56	36.82	27.36
   External	9.10	9.30	9.24	11.32	8.26	6.46	5.42

   Source: Institute of Policy Analysis and Research (IPAR) Macroeconomic Databank

8. Domestic debt in now more important in terms of its contribution to poverty than external debt. The domestic debt strategy pursued in the 1990s, is in the words of IPAR "a questionable approach and a shorthand for creeping under development" The strategy is questionable because the borrowed monies from the public are used in non-productive ways, further reducing economic productivity growth prospects, and tax revenues are used to pay local creditors at an extremely high socio-economic opportunity cost. The domestic debt management strategy is starving the entrepreneurs and the business community of scarce capital. Monies borrowed from the public are used to either service external debt or pay salaries and other recurrent expenditure; activities that do not in any way contribute to increased productivity in the economy. As a result of this policy, the Kenyan economy has become a depressed non-performing economy with excess capacity .
9. The proportion of government expenditure (from tax revenues) used to meet interest payments to local creditors, who are mainly commercial banks, speculators, and other financial institutions, is almost equal to the entire development budget in the budget. Thus schools, health centres, and other forms of social and physical infrastructure remain unequipped, undermanned, and poorly maintained in order to meet the domestic debt interest payments. Public institutions are run down to the wire, because scarce resources have been diverted to meet domestic debt repayment. That domestic debt repayment takes so much of the total budget provides reason for believing that a substantial reduction in the domestic debt would release sizable resources for the development budget, far more that external debt relief would. It is important that actual aid resumption is based on a sustainable achievement of the previously agreed upon macroeconomic and governance conditionalities, plus government budgetary commitments placing poverty reduction at the centre of its economic recovery strategy.

   Improve governance and basic human rights

10. Over the past decade, each year, the budget (full 28-30% of GDP) has been expended on activities that do not increase the economy's productive capacity, create economic opportunities for the people of Kenya, or enable upward social and economic mobility for those in poverty. The general population and the poor in particular have paid an enormous price for the mistaken debt management policies pursued by the government over the past decade. At the same time, there has been lax fiscal and administrative management resulting in scarce public resources being used in paying for salaries and recurrent expenditure on a non-productive and overstuffed public service, subsidies to non-performing public enterprises, and outright theft and misuse of public resources. The office of the controller and auditor-general, which does post-expenditure auditing, highlights such incidences, every year, but little action is taken. The parliamentary committees, i.e., the public accounts committee (AC), and public investments committee (PIC) also produce reports that show billions of shillings that were either stolen, misappropriated, used in unauthorised expenditures, unaccounted for from advances, or not collected as revenue. Rarely is anyone prosecuted for such actions . Basic physical infrastructure and public institutions have been run down to the point of near collapse.
11. In the 1990s, there sere more people who had little or no access to basic health facilities because these were run down, closed, or did not have adequate drugs, equipment, and staff. By the end of the decade, gross enrolment in primary education had declined by nearly a third, from 95%in 1989 to 78% or lower in 1996 as a result of run down and poorly equipped schools as well as poverty-stricken parents unable to pay the required school fees . The same could be said for food production that has been adversely affected in some areas by ethnic tension and clashes, limited access to productive technologies and extension, and poor infrastructure that reduces access to markets. Millions of Kenyans have little or no access to basic social services .
12. It is also clear that despite being a signatory to the World Summit for Social development goals and targets for poverty eradication, Kenya is far from meeting these in key areas such as education and health. Primary education is still not yet universal at the beginning of target year 2000, nor do we have 80% of school-age children completing primary education. On the health front, as a result of AIDS, and growing poverty life expectancy is below the target of 60 years by 2000. It is unlikely that mortality rates for infants and children under five have been reduced by one third of the 1990 level, nor are they anywhere near 50 to 70 per 1,000 live births. Increased poverty as well as policy changes affecting access to health care have impacted on this. Nor has the government allocated 20% of the national budget as part of its share of the 20:20 compact to basic social programmes even after developing a National Poverty Eradication Plan.
13. As a result of the situation described above, several NGOs involved in working with the poor have come up with a campaign that seeks to enshrine basic needs such as education, food security, health, shelter, and water as basic constitutional rights . The campaign's objective is to ensure that by guaranteeing of basic needs by the state as basic rights, the interests of the poor will not only come to the top of the agenda but also become enforceable. The basic human rights approach provides the possibility for a coherent framework for development, and confronts poverty directly by putting the concerns of people living with poverty and marginalisation at the forefront of the nation's development agenda .
14. At the same time, insecurity has increased sharply in the 1990s, beginning with the ethnic clashes in parts of Rift Valley. Currently, insecurity is pervasive in nearly half of Kenya's landmass . Several districts are badly affected ranging from the cattle-rustling and ethnic conflict between the Pokots, Marakwets and Turkanas in the North-West Rift to banditry and cattle rustling Laikipia, Isiolo, Nyambene and Samburu in the Central Northern Kenya as well North Eastern Province, Tana River, and northern coast regions. In the densely populated areas, violent crime attributed to increased poverty is also growing. In urban areas, police swoops accompanied by allegations of torture, arbitrary police killings, arrests of innocent people as well as confiscation of legally obtained property in the slums and areas inhabited by refugees or ethnic minorities is on the increase.
15. Poverty and insecurity make very bad bedfellows and can severely affect the country's political, social, and economic stability. The growing inability of the security forces and administration to provide security, or respond to those who are under attack, greatly diminishes the little confidence the people have in it. If a link can be shown between poor fiscal management and the inability of the government to provide security for its people, then this matter should be addressed as a matter of urgency. The inability of the public sector to deliver services (including security) despite its overstuffing and the amount of budgetary resources it consumes makes civil service reform a very urgent task. The pace has been slower than expected, probably because of the inadequate compensation to those who will be retrenched as well as cumbersome procedures of releasing large numbers of civil servants. Still, it is important that the retrenching is carried out as soon as possible because of the resource savings that could be invested in basic social services, and the expected increase in the quality of service delivery from a restructured public service.
16. Confidence in the judiciary has been similarly diminished. Executive appointment of Chief Justice has been a subject of public controversy since the late 1980s. appointments to this position by the President of the last two occupants have tended to bypass senior judges considered to have greater experience and personal integrity. The judiciary lacks fiscal autonomy, and is often overlooked in terms of budgetary resources, particularly in favour of education, health, and the office of the President, and yet it is crucial to inculcating and maintaining the rule of law in the country.
17. The constitutional impasse continues to dominate policy debates and erode public confidence in the government's political willingness to reduce powers of the executive, increase the scope of basic human rights, and create a new social contract with its citizens. It is a source of potential widespread conflict. Yet, economic reforms must be integrated with political reforms if Kenya is to achieve and economic recovery.

    Part Two