Moral Hazard: The Politics of Lending in Kenya’s Relationship with the IMF

 A review of the article titled ‘Master or Servant? Common Agency and the Political Economy of IMF Lending’ by Mark S. Copelovitch

For a Kenyan who is worried about the debt appetite of their government and the willingness of the International Monetary Fund (IMF) to feed into that appetite, there is no better time to reflect on the contents of Copelovitch’s article than now. The author looks at arguments that the IMF is the servant of the United States and other powerful member-states or if as others contend that the Fund’s professional staff act independently in pursuit of its own bureaucratic interests.

According to the author, the IMF is a major player in global financial governance and this has been the case for decades now having provided emergency financing to several developing countries facing financial and currency crises or possible failure to meet their international debt obligations. The IMF issued more than $400 billion dollars in loans between 1984 and 2003 with many exceeding the limit the borrowers were eligible for based on their “quota” while others received a smaller share compared to their “quota”. At the same time, conditionality to access credit varied during that period with some having more conditions placed on them than others. Conditions are grouped into two, that is Performance criteria which are mandatory hence have to be implemented in order for credit to be disbursed and Prior actions which are measures a borrower agrees to undertake before loan approval but there are also ‘soft’ conditions that are non-binding. So what are the scholarly arguments for the variations in conditionality?   

Some assert that IMF policies are solidly guided by macroeconomic criteria and concerns about global financial stability, others are of the view that political considerations are a primary factor in lending decisions and that includes being in the good books of the United States, the structure of political institutions in borrower countries as well as bureaucratic motives of the IMF staff. Whereas Nairobi has maintained relatively good relations with the big powers, a final key argument and one that a Kenyan should focus on is the influence of private international creditors on the IMF which only leads to the controversial issue of tapping into international capital markets through Eurobonds.

Copelovitch further opines that the IMF has to deal with a central tradeoff between liquidity and moral hazard when it comes to making lending decisions in that the fund can benefit a country by providing finances (liquidity) needed to service its debts which may also prevent a crisis in one country from becoming a larger systemic problem but on the other hand, IMF loans have the potential to create moral hazard-incentives for borrowers and lenders to take on additional risk in expectation of future bailouts. In insurance, a ‘moral hazard’ can arise from risky actions an individual may take once he or she is insured like reckless driving- Kenya seems to be on this path.

The IMF has endorsed Kenya’s plans to issue another Eurobond which will be the fourth in less than seven years to finance ‘projects’       and service debts. The government has so far not released a list of projects that benefitted from previous Eurobonds hence this could be a language to cover up corruption. However, for the elite in government, borrowing from international markets can provide some leverage in getting additional loans from the IMF if we are to go by studies which have found that IMF loans tend to be larger when a borrower country owes large amounts of debt to private creditors especially commercial banks located within the United States and other major IMF shareholders. JP Morgan, Standard Bank and Barclays Capital have been involved in issuance of Kenya’s Eurobond as lead managers. Are private actors directly or indirectly putting pressure on the IMF to lend to Kenya so that they don’t default on their obligations? Are corrupt figures within the government taking advantage of this ‘loophole’ to borrow and steal while peddling the possibility of default?

The jury is out there and although some have justified Kenya’s continuous borrowing by claiming that there is evidence of infrastructure projects, one can argue that if the Chinese who came and built the SGR or Thika Superhighway had simply wired money the way IMF is doing, those infrastructure projects would be there but simply on paper.  Even though expensive and shrouded in secrecy, we may actually be better off with the Chinese arrangement since there is something to see. You can feel comfortable driving on these highways or taking selfies at the SGR Nairobi Terminus but with the other arrangements, it is the elite who laugh all the way to the bank because all they need is to be seen servicing debts and writing ‘compliance’ reports. Meanwhile, your tax goes up and some will lose jobs in restructuring in addition to other conditionality.

Back to Copelovitch, his findings suggest that in as much as powerful states have great influence over IMF decisions that influence does not lie unilaterally with the United States and even then, it is slightly limited by staff autonomy. Nevertheless, the Fund does indeed act as a servant of its largest shareholders (France, Germany, Japan, the United Kingdom and the United States). Interestingly, the author does not think that distribution of voting to give greater voice to developing countries within the institution will cure the politics because it will simply shift political interests from the former to the latter!

Reference

Copelovitch, M.S. (2010). Master or Servant? Common Agency and the Political Economy of IMF Lending. International Studies Quarterly , March 2010, Vol. 54, No. 1 (March 2010), pp.
49-77.Wiley on behalf of The International Studies Association.