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Jubinomics and Kenya’s debt crisis: A private sector view

Five years ago, the Jubilee administration embarked on a dangerous economic course of deficit financing, profligate spending and punitive taxation. Legitimate government suppliers in the private sector were crowded out in favour of tenderpreneurs and briefcase companies. Mysteriously, government agencies with expanded budgets were unable to pay suppliers. The result today: banks are staring at ballooning non-performing loans, tax revenues have fallen steeply and the private sector is dying a slow, painful death. By P. GITAU GITHONGO.

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Jubinomics and Kenya’s debt crisis: A private sector view

The March 9, 2018 handshake between Uhuru Kenyatta and Raila Odinga, silenced many of the critical voices accusing the Jubilee coalition of divisive politics, ethnic bigotry and the disenfranchisement of at least half of Kenya’s population.  In fact, for a brief moment it seemed that the bitter grievances of the disputed August 2017 election, the acrimonious exchanges between political rivals, the threats to the judiciary, the unsolved murder of IEBC’s Chris Msando, and the police killings in the post-election crisis, had been forgotten following the very-closed-door meetings between Uhuru and Raila. As a writer with the Daily Nation gushingly wrote a week later: ‘In the name of that handshake, the shilling has stabilised overnight with the outlook by players in tourism already promising what some experts have christened as the ‘peace dividend’ after an inordinately protracted electioneering period. The stock market is also recovering’. Despite the ceasefire of the handshake, its promised benefits have not cleared the dark clouds hanging over the Kenyan economy, which is now headed into serious difficulties. In fact, at a practical level there appears to be no change in the way the national government runs its day-to-day affairs.

Since coming to power in 2013, the Jubilee administration has been dogged by accusations of profligacy and patronage – most notably in the award of tenders. Policy-making, with senior public officials apparently motivated more by personal interests than by public service, and even outright nepotism and tribalism, spurious contracting in the implementation of policy initiatives in the key sectors of health, agriculture and infrastructure.

Perhaps it is no coincidence that the Jubilee administration has also presided over a massive debt-fuelled increase in annual public spending – KSh 1.2 Trillion to over KSh 2.5 Trillion in 6 years, complemented by a budget deficit approaching Ksh 750 billion (see Table 1). Notably, this growth in spending is at a rate beyond the GDP growth rate and, as far as many critics are concerned, has been partly motivated by the need to accommodate corrupt patronage practices. Spending on infrastructure programmes in particular, seamlessly lends itself to patronage and has been a dominant feature of Jubilee’s tenure, with a range of big-ticket projects in the transport, energy and health sectors. Recurring elements of these projects include secretive feasibility studies, procurement and financing arrangements, as well as questionable labour deployment and land acquisitions – all of which embody the controversial SGR Railway project which has taken up the lion’s share of this spending binge.

Spending on infrastructure programmes in particular, seamlessly lends itself to patronage and has been a dominant feature of Jubilee’s tenure, with a range of big-ticket projects in the transport, energy and health sectors. Recurring elements of these projects include secretive feasibility studies, procurement and financing arrangements, as well as questionable labour deployment and land acquisitions.

Table 1.

Jubilee’s Treasury team however, has maintained that the increase in public spending was and remains necessary to spur economic growth. Treasury has systematically played down the risks from the widening budget deficit in the process. This surge in spending – financed mostly with (Chinese) debt – has also taken centre stage in the cooling relations between the government and development partners, notably the IMF and World Bank. Critical to debate on this spending surge and the risks from a widening budget deficit is its impact on the performance of the Kenyan economy.

In particular, why have key sectors of the economy registered such diminished performance over the past half-decade in the face of this increased spending? Why does so much anecdotal evidence point to growing job-layoffs (an estimated 7,000 formal sector jobs have been lost in the past three years alone)? Even the normally bullish real estate market has shown signs of glut and slowdown over the past three years. The Nairobi Securities Exchange has seen its NSE 20 index climb from slightly over 4,000 in 2013 to a high of 5,400 in 2015, before falling to about 3,400 today. The Stock Exchange, without a single IPO listing since 2014, has seen more than half of all listed companies declare reduced earnings or losses in each of the past two years.

Why have key sectors of the economy registered such diminished performance over the past half-decade in the face of this increased spending? Why does so much anecdotal evidence point to growing job-layoffs (an estimated 7,000 formal sector jobs have been lost in the past three years alone)?

Table 2 below shows Average GDP Growth rates (RHS Scale) over the past 8 years and actual GDP (Using Constant 2009 Prices LHS Scale).

Whereas average GDP growth rates have averaged 5.8 percent over the period shown, the downward trend since 2010 has persisted despite the huge increase in spending – and this is despite GDP-rebasing in 2013 which enhanced the growth rate that year by at least 1%. Both 2013 and 2017 were election years and unsurprisingly, registered the lowest growth rates; but the increased government spending – albeit on long-term projects – appears to have actually had a dampening impact on GDP growth over the period. There are several reasons for this, but three key issues are highlighted here.

1. An unremunerated Private Sector.

Accusations of partisanship and gravy-train policy-making in the award of public tenders and contracts, are not just the grumblings of out-of-favour business-people that lost out on lucrative government business to well-connected or favourably-related individuals. There is a constituency of ordinary hard-working entrepreneurs, professionals and manufacturers increasingly unable to compete against the empowered cartels of tenderpreneurs, influence peddlers and brief-case businessmen. These rogue players currently dominate government contracting – not to mention annual auditor-general reports – making a mockery of procurement guidelines. In some instances they even approach qualified bidders, offering to be embedded in bidding teams (despite the lack of relevant competencies) with a promise of tender success at inflated bids. This patronage-based ‘crowding out’ doesn’t end there. This well-connected class of tenderpreneurs also has perfected the dark art of jumping bureaucratic payment queues, often receiving payments before delivery of goods and services – or even before contracts are signed.

Not by coincidence, legitimate suppliers, service providers, and even farmers, have been experiencing debilitating delays in the settlement of payments and have accumulated massive debts on their credit arrangements and tax obligations. The paradox is that while government department budgets were being ramped up, delays in contract awards and settlement of payments to legitimate suppliers were worsening. This has created a unique set of economic challenges that seems to have been lost in all the discussions on political handshakes.

According to the Central Bank of Kenya, Non-Performing Loans (NPLs) as a proportion of total lending by commercial banks doubled from 6.1 percent in 2015 to 12.4 percent (or about KSh 265 billion) by April 2018 (see Table 3 below). The Table shows Gross Lending by Commercial Banks as well as the stock of Non-Performing Loans, as well as the stock of Non-Performing Loans expressed as a percentage of Gross Lending by Commercial Banks. Even this 12.4 percent figure could be an under-statement if banks have not been adequately disclosing and providing for non-performing loans – as suggested by the sagas of the collapsed Imperial and Chase Banks.

Table 3

CBK Governor Patrick Njoroge attributes a significant factor in this growth in bad loans to delayed payments owed to the private sector by the national government, government departments and devolved units. CBK data suggests that up to KSh 200 Billion was owed to SME businesses by the national government by the end of the 2017/2018 Financial Year, with as much as KSh 25 Billion worth of those pending bills directly contributing to non-performing loans.

Following an increase in imported grains last year (amid accusations of pre-election giveaways), the National Cereals and Produce Board (NCPB) owed farmers as much as KSh 3.5 Billion by the end 2017 for produce already delivered. In a hard-hitting editorial on 7th August 2018, the Daily Nation averred, ‘The Jubilee government is wallowing, not just in foreign debt, but also in the money it owes local businesses, which it has either crippled or is in the process of ruining’.

According to the Central Bank of Kenya, Non-Performing Loans (NPLs) as a proportion of total lending by commercial banks doubled from 6.1 percent in 2015 to 12.4 percent (or about KSh 265 billion) by April 2018. The Table shows Gross Lending by Commercial Banks as well as the stock of Non-Performing Loans, as well as the stock of Non-Performing Loans expressed as a percentage of Gross Lending by Commercial Banks. Even this 12.4 percent figure could be an under-statement if banks have not been adequately disclosing and providing for non-performing loans.

The Daily Nation’s particular beef was that the Government Advertising Agency (GAA), owed media houses close to KSh 3 billion by the end of FY 2017/2018. About half of the KSh 404 Million paid out by GAA during the year, went to the big publishing houses – Nation Media Group, Standard Newspapers, Royal Media Services, The Star and Media Max Network. Against the KSh 3 billion owed, the distribution of payments to media houses was sufficiently skewed to warrant an investigation by the Office of the Public Prosecutor.

Worryingly as well, the increase in bad loans in the banking sector has come despite the implementation of August 2016 of lending rates ‘caps’, which limit the cost of existing loans to 4 percent of the Central Bank’s Recommended Rate. (See Table 4)

2. A Stifled Private Sector

This environment of pending government bills is also linked to worsening Kenya Revenue Authority (KRA) tax collection performance. This creates a vicious cycle in which the private sector is defaulting on its obligations on account of money owed by the same government. The government has long complained about KRA’s inability to meet its collection targets, complaining instead about ‘revenue leakages’ facilitated by corrupt tax officials. But it fails to acknowledge that its pursuit of tax defaulters is a consequence of the fact that they themselves are owed millions by national and county governments.

The reality is that National Government revenue shortfalls have averaged KSh 90 Billion annually over the past 4 years, despite improved tax collection efficiencies at the KRA. (See Tables 5 & 6 below.) The World Bank estimated that in the 2016/2017 financial year, tax revenue as a proportion of GDP fell to under 17%, the lowest in a decade – with the growth in nominal Tax Revenues outpaced by nominal GDP growth.

Table 5

This reduced growth rate of revenue collection by KRA is at first glance paradoxical considering that over the past 5 years, an unprecedented number of Kenyans have been brought into the tax bracket. A similarly unprecedented range of products and services have been subjected to various new direct and indirect taxes. Over the past five years, several tax measures have been introduced including: 12 percent Rental Income tax for landlords from 2015; successive excise duty and fuel levy increases in 2015, 2016 and 2018; VAT on bottled water and juices; VAT on food served by restaurants as well as piped water; successive increases in excise duties on spirts, cigarettes and mobile telephony; and 50 percent Gaming tax on lotteries and book makers in 2017, among  a host of others. The 16 percent VAT on fuels and fuel oils first awarded in 2013 but deferred over the subsequent years with the exemption set to expire on 1st September 2018, adds a controversial element to this expanded tax net aimed at bringing the growth in VAT collections closer to that of direct taxes such as PAYE and Income Taxes (see Table 6).

Table 6

In his June 2018 Budget statement, Finance CS, Henry Rotich, laid out several new and controversial ‘Robin Hood Tax’ proposals which he declared necessary to fund programmes that are part of Jubilee’s ‘Big 4’ agenda. Prominent among the proposals purportedly designed to protect low-income earners, is a monthly contribution to a nebulous National Housing Development Fund by every employee and employer of 0.5% (capped at KSh 5,000) of the employee’s gross pay. This contribution would be funnelled to the Housing Fund whose mandate will be to build low-cost housing units. Another ‘Robin Hood Tax’ proposal was the levying of 0.05% excise duty on all remittances of KSh 500,000 or more, transferred through banks and other financial institutions; as well as an increase in the excise duty charged on money transfer services by mobile phone providers from 10 percent to 12 percent, all geared to financing Universal Health Care – another Big 4 pillar.

Several of these proposals have been rightly criticised as being unjust and inordinately detrimental to low-income earners. With more than a third of all Kenyans living on less than Ksh 100 per day, a projected VAT-inclusive paraffin price of KSh 105 per litre is simply unreasonable. The curb on logging has already raised the cost of the popular-sized sack of Charcoal to more than Ksh 3,000 in parts of Nairobi, with the 4-kg tin costing more than KSh 150. With electricity prices also being ramped up as the monopoly power distributor Kenya Power struggles to maintain solvency following years of mismanagement, low and middle income earners are clearly big losers. The situation is no better for businesses, notably manufacturers and other high energy consumers. Early this month, the Kenya Association of Manufacturers registered strong objections to the revised energy tariffs which entailed a 36 percent increase in the energy base-cost – before the envisaged 16 percent VAT increase – which KAM argued would have a detrimental effect on the cost of doing business in the country.

With more than a third of all Kenyans living on less than Ksh 100 per day, a projected VAT-inclusive paraffin price of KSh 105 per litre is simply unreasonable. The curb on logging has already raised the cost of the popular-sized sack of Charcoal to more than Ksh 3,000 in parts of Nairobi, with the 4-kg tin costing more than KSh 150. With electricity prices also being ramped up as the monopoly power distributor Kenya Power struggles to maintain solvency following years of mismanagement, low and middle income earners are clearly big losers.

A recurring complaint from the private sector over the past half-decade has consistently been that consumer purchasing power has contracted considerably and that this is being exacerbated by recent and proposed tax measures. The decline in tax revenues despite the increases in tax rates, tax measures and collection efficiencies by KRA (notably year-on-year growth in taxpayers registered on KRA’s I-Tax platform), all but confirms a sharp drop in formal economic activity over the period.

Arthur Laffer who was an adviser to the Nixon/Ford Administration in the mid-1970’s mainstreamed the simple mathematical tautology that there is a point beyond which any increases in tax rates will always result in declining tax revenues. Laffer’s analysis of the US economy at the time recommended a decrease in federal tax rates to boost tax revenues. Rotich’s proposed tax measures risk the same results by further dampening of economic activity as well as greater tax evasion.

3. A Crowded-out Private Sector

The aforementioned slump in tax revenue growth was also partially influenced by the slowdown in bank profitability – which in turn was due to the twin influences of growing bad loans and reduced access to credit by the private sector. These factors are inexorably linked to diminished private sector performance. However, reduced access to credit by the private sector in Kenya is not a new phenomenon; nor are its fundamental causes. Its disruptive influences however, are significant.   Commercial credit to the private sector has contracted from about 24 percent in 2013 to 18 percent by end of December 2015, to about 2.5 percent in June 2018. This is despite the implementation of interest caps in August 2016, disabusing the suggestion that enhanced credit to the private sector was the intended beneficiary of the interest rate caps. In contrast, during the same period annual growth in lending to government averaged 14%.

Table 7

The Banking Amendment Act 2016 proposed by MP Jude Njomo was signed into law by President Uhuru Kenyatta with the same hollow promise of cheaper and more private sector lending by banks that a similar bill by then MP Joe Donde had made in the year 2000. The backgrounds shared notable similarities however – most notably heavy government borrowing. Domestic borrowing was indeed high in the late 1990s – evidenced by the 91-day Treasury Bill on offer with a 21% return in June 1999. By 2000, domestic borrowing was attracting Ksh 22 Billion in annual interest payments.  The stock of domestic debt by June 2000 stood at KSh 164 Billion with new issues representing 17.5 percent of government revenue. By June 2007, with short term Treasury Bill rates down to less than 8 percent, the stock of domestic debt had only risen modestly to KSh 405 Billion representing 22.1 percent of GDP, and attracting interest payments of KSh 37 Billion in FY 2006/2007. By March 2016 however, the stock of domestic debt had jumped to KSh 1.65 Trillion representing close to 27 percent of GDP and was attracting a massive 30 percent of total government revenue in debt service. And that’s not even taking into account external debt which had grown at a similar rate. The stock of domestic debt in March 2018 had reached KSh 2.3 Trillion, attracting more than KSh 350 Billion in annual debt payments.

Arthur Laffer who was an adviser to the Nixon/Ford Administration in the mid-1970’s mainstreamed the simple mathematical tautology that there is a point beyond which any increases in tax rates will always result in declining tax revenues…Rotich’s proposed tax measures risk the same results by further dampening of economic activity as well as greater tax evasion.

In August 2000, Commercial bank lending rates averaged close to 21 percent and deposit rates about 7 percent, providing obvious justification for the Njomo Bill’s popular support. The stock of non-performing loans (NPLs) at the time, was an eye-popping KSh 122 Billion in April 2001, (40 percent of total lending). In June 2018 and despite interest rate caps in place, NPLs represent 12.4 percent of commercial lending with an estimated Ksh 303 Billion in this category.

Table 8

The Parlous state of Kenya’s national accounts – most notably the KSh 5 Trillion stock of public debt and ballooning budget deficit – but also poor performance of the real economy with stagnant exports and tax revenues, suggests that the government cannot afford to be adding to the burden borne by the private sector. It also suggests that the slew of tax measures proposed in Budget 2018 was purely about desperately seeking to finance reckless government spending and not about providing incentives for private sector economic growth. Critically, it also confirms that the interest caps were always really about government access to cheaper domestic borrowing and not about promoting private sector economic activity, which the government appears to be doing its best to stifle.

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Gitau Githongo is a financial consultant based in Nairobi.

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Shopping Mall Economics: A note on the value of the Kenya shilling

What does a recent spat between the IMF and the Central Bank’s Prof Patrick Njoroge, himself a veteran of the Fund, tell us about the state of the Kenya shilling? By DAVID NDII.

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Shopping Mall Economics: A note on the value of the Kenya shilling

Is the Kenya shilling overvalued or not? According to the IMF it is currently overvalued by 17 percent. In an unusually combative response to his former employer the Central Bank governor says that is only off-kilter by 5 percent and accuses the IMF of making Kenya a “guinea pig in its new approach.” The offensive claim, contained in the IMF’s latest report on the country dated October 2018, states as follows:

“The EBA-lite methodology for the exchange rate suggests that the external position is weaker than fundamentals. The current account approach shows that the current account deficit (both actual and cyclically adjusted) are above the norm (the CA gap is -2.5 percent), suggesting an overvaluation of about 17.5 percent of the real exchange rate. This can only marginally be explained by the policy gap. The REER approach also shows a similar-size of overvaluation, equivalent to about 18.0 percent. Again, the policy gap is marginal. Given the continued appreciation of the real exchange rate, the external position is assessed to be weaker than fundamentals. Regarding the last approach, the external sustainability approach, it was not possible to use it as the international investment position data is not yet produced by the authorities.”

This needs a fair amount of disambiguation. EBA is a needless acronym that stands for external balance approach for exchange rate assessment. The methodology is described in an IMF paper published in 2013 as an update of a previous methodology known as CGER. CGER is another needless acronym for consultative group for exchange rate assessment. This EBA thing appears to be what the CBK governor is referring to as a new approach.

The methodological spat is a red herring. Economic models are tools, not oracles. What we have here is workmen quarrelling over tools. Our top three economic mandarins are former IMF staffers. Surely, they can sit together with their colleagues and their models and converge on an assessment as to whether the shilling is overvalued or not?

The IMF refers to three methodologies: the Real Effective Exchange Rate (REER), the current account and external sustainability approach. Of the three, the REER is the most intuitively understandable and also the one for which we have data. But what is this animal the REER?

The methodological spat is a red herring. Economic models are tools, not oracles. What we have here is workmen quarrelling over tools. Our top three economic mandarins are former IMF staffers. Surely, they can sit together with their colleagues and their models and converge on an assessment as to whether the shilling is overvalued or not?

Suppose bananas are retailing at KSh 100 shillings a bunch in Kenya. The Kenya/Uganda shilling exchange rate is one to ten. At this exchange rate and banana price, 20 percent of bananas are coming from Uganda. Suppose price of Kenyan bananas goes up to KSh 125 a bunch (e.g. because of increase in taxes), and exchange rate remains the same. Ugandans can continue to sell bananas in Kenya profitably at KSh 100 while many Kenyan producers cannot. In fact, Ugandans are likely to hike their price to let us say KSh.110 making Kenya an even more profitable market than their home market. Uganda bananas will flood the market and put Kenyan producers who are not profitable at Ksh. 110 out of the banana business. For the market to remain at the old equilibrium (i.e. 20/80 Uganda/Kenya market share) requires Kenya shilling to fetch USh. 8.00 so that to get USh. 1000 as before, the Ugandans will also have to sell their bananas at KSh125.

Its readily apparent that if our domestic prices go up faster than those of our trading partners, then foreign goods will keep becoming cheaper. But you cannot tell by just looking at the dollar shilling exchange rate. We need to factor in the price movements with every trading partner. The REER is an index that combines the relative exchange rate and price movements of all our trading partners.

If the REER is rising our goods are becoming more expensive. We can expect to import more and export less. If this happens our trade deficit will widen. If the trade deficit continues to widen, we run the risk of defaulting on our international obligations in particular debt service and repatriation of profits and capital. This is where the IMF comes in. The IMF’s mandate is to maintain international financial stability. The IMF is a financial cooperative whose job it is to ensure members do not run into external payments difficulties, and to bail them out when they do, in order to keep global finance and commerce going.

The spat between the IMF and the CBK is therefore about our external creditworthiness. The key indicator for this is the current account balance. The current account balance has two components: trade and income. The trade account I have already mentioned. The income account consists of payments for “factor services” such as interest (use of capital), payments for services of Kenyan troops abroad (labour services) and another component we call unrequited transfers (meaning money we have not earned) such as diaspora remittances and grants. The external account in turn, has a third component, the capital account where, as the name suggest, we record investment transactions.

The spat between the IMF and the CBK is…about our external creditworthiness. The key indicator for this is the current account balance.

This is how it works. Kenya Airways buys an aircraft using a foreign loan. The aircraft is entered in the trade account as an import and simultaneously in the capital account as a capital inflow. The following day it ferries passengers from Lagos to Dubai. The income is recorded in the trade account as a service export. At the end of the month it remits repayment on the loan. The interest is recorded in the income account as a factor service payment and the principal is in the capital account as a capital outflow.

The net of the current account and the capital account are added together to give the overall balance. An increasing overall deficit depletes foreign reserves, while a surplus leads to a build up of reserves. Current account surpluses mean that a country’s savings exceed its investment; it can, therefore, export capital, like China. A current account deficit means that a country is investing more than its savings, in other words, it is importing capital (either debt, FDI, remittances, grants etc).

Chart 1

The country’s creditworthiness thus depends not just on trade but also on other financial flows, that are determined by factors other than trade competitiveness, both economic and non-economic. Complicated stuff.

Both the IMF and CBK agree that the shilling has appreciated, but they disagree on the magnitude. The IMF also implies that the appreciation is a reflection of policy action while the CBK maintains that it is a reflection of market forces. The IMF view translates to accusing the CBK of misleading the public by espousing a monetary policy that claims to target inflation, while in practice it is actually targeting the exchange rate. The IMF’s “smoking gun” is the fact that the NEER has flatlined for the past six years (see Chart).

Recently the IMF re-classified the Kenya shilling from a “floating” (meaning market determined) to “other managed arrangement.” This means the IMF is convinced that the Central Bank is propping up the shilling. What reason would the Central Bank prop up the shilling especially if it undermines the country’s competitiveness and solvency?

Foreign currency debt exposure is one reason. The interest payments on the first Eurobonds issued in 2015 ($185 million a year) has increased by KSh 3 billion, KSh 16 billion to KSh 19 billion on account of the depreciation of the shilling. Translate that to the total interest payments this year which are in the order of $1.4 billion dollars. The shilling has weakened by about three shillings to the dollar since the beginning of the financial year. This translates to a KSh 4 billion squeeze on a government that is already living way beyond its means. The last thing the Treasury wants to hear is that the shilling should be trading at about 120 to the dollar.

Recently the IMF re-classified the Kenya shilling from a “floating” (meaning market determined) to “other managed arrangement.” This means the IMF is convinced that the Central Bank is propping up the shilling. What reason would the Central Bank prop up the shilling especially if it undermines the country’s competitiveness and solvency?

Another reason is pressure to keep low interest rates. Interest rate is the policy instrument in an inflation-targeting monetary policy regime such as we claim to have. Central Banks are given statutory independence to insulate them from such pressure so that they can raise interest rates when they need to, even when it is politically costly for the government. But that does not make Central Banks immune from the pressure to accommodate political objectives of the government of the day. Parliament’s capping of interest rates two years ago is ample demonstration that political pressure on Central Banks is real.

Keeping interest rates artificially low puts pressure on the exchange rate. A weakening currency creates inflationary pressures, which is what the Central Banks are mandated to control in the first place. The Central Banks end up trying to meet incompatible objectives, low interest rates, low inflation and a stable currency.

This is precisely what happened from mid-2009 to September 2011. The Central Bank bent over backwards to accommodate the government’s economic stimulus meant to respond to both the post-election violence and the global financial crisis. Interests rate were driven to the floor. From mid-2010 to mid-2011 the benchmark 90-day Treasury bill rate was kept below 3 percent. The IMF’s charts show how this ended— with a very hard landing. The shilling which had been propped up at about 80 to the dollar, started unravelling in April peaking at KSh100 to the dollar in September. The Central Bank was forced to jack up interest rates in a hurry. By the end of 2011, the T-bill rate was heading to 20 percent.

The IMF seems to believe that, left to market forces, the shilling will depreciate in real terms. The IMF’s REER chart covers eight years, from 2010 to 2017. A longer timespan does not necessarily support this contention (see Chart). My chart goes back to the beginning of the liberalized regime in 1994. What do we see? The shilling has been appreciating in real terms since it was liberalized. Overall it has appreciated 157 percent, by 9 percent per year on average. This could mean that the Government has been propping up the shilling all these years, or that market forces are not working the way the IMF expects.

Chart 2

Many Kenyans have observed that we have become an importing country. One also hears policymakers lamenting that we are losing our markets in the region and blaming all manner of things. There is no mystery to it.

My [assessment is that] the shilling has been appreciating in real terms since it was liberalized. Overall it has appreciated 157 percent – by 9 percent per year on average. This could mean that the Government has been propping up the shilling all these years, or that market forces are not working the way the IMF expects.

But is the Central Bank propping up the shilling? That we cannot be able to tell that easily. There are lots of moving parts. It can also be on account of some trading partners manipulating their currencies: China, for example, is regularly accused of maintaining an artificially weak currency. China has a big weight in our REER and it’s been growing over time.

The ultimate question is whether it is sustainable. There are two parts to this, financial and economic. The widening trade deficit has been plugged by remittances and portfolio inflows (money flowing into the stock exchange and government securities), not all of it honest money, and lately, government commercial borrowing, the ubiquitous eurobonds and syndicated loans. As long as these keep flowing, the show can go on.

Why are we told the economy is growing and yet we cannot feel it? This is the shopping mall economy. How long can we keep that going?

The economics is a different story. It is not good for employment and equity. It is part of the answer to the question that Kenyans keep asking: why they are told the economy is growing and they are not feeling it. This is the shopping mall economy. How long can we keep that going? Your guess is as good as mine. Governments are known to manipulate currencies and to distort financial markets generally. The IMF is known to (a) have more faith in market forces than warranted and (b) get the workings of those market forces wrong. What to do?

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70 Years After the UN’s Declaration on Human Rights, the Struggle Continues Against Poverty, War, Disease – and Whistleblowers

The UN’s internal benchmark of success is the amount of money raised, not the successful execution of a programme. War and poverty remain necessary for the functioning of a system of phantom projects characterised by waste, mismanagement and corruption. And since the Iraq Oil-for-Food scandal of the early 2000s, in which billions went missing and the perpetrators scot-free, senior management has waged a silent war against its own whistleblowers. Who will police the world’s watchdog? By RASNA WARAH

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70 Years After the Un’s Declaration on Human Rights, the Struggle Continues Against Poverty, War, Disease - and Whistleblowers

The resignation last month of the Executive Director of the United Nations Environment Programme (UNEP), Erik Solheim, after an internal audit found that he had misused funds from the organisation, has been construed as a sign that the UN is serious about tackling wrongdoing within its ranks. However, this high-profile case should not distract us from the fact that waste, fraud and corruption are rarely punished in the UN system, and that the majority of offenders get away scot-free.

Solheim is accused of spending nearly half a million dollars on unnecessary travel within a period of less than two years. The audit showed that between May 2016 and March 2018 he spent 529 days travelling and only stayed in Nairobi, where UNEP has its headquarters, for about 20 per cent of the time.

Much of this travel was wasteful. For instance, in July 2016, he travelled to Paris for a one-day official meeting but decided to stay on in the French capital for a whole month (at taxpayers’ expense). In the following two months, he travelled for 42 days to 24 destinations. One official trip to Addis Ababa was routed through Oslo in his home country Norway, even though the Ethiopian capital is just a two-hour flight from Nairobi. The audit report also showed that Solheim was not the only culprit – other senior managers at UNEP have been accused of spending a whopping $58.5 million on travel alone over a two-year period – and this, from an organisation that advocates for the reduction in the use of fossil fuels.

Solheim is accused of spending nearly half a million dollars on unnecessary travel in less than two years. Between May 2016 and March 2018 he spent 529 days travelling and only stayed in Nairobi, where UNEP has its headquarters, for 20 percent of the time.

This blatant abuse of taxpayers’ money is not new at the UN and Solheim’s conduct is hardly unique. The differences between Solheim’s case and others are: one, his case managed to reach the internal investigation stage, which only happens when there is political will to carry out such an investigation; two, the findings of the investigation were made public, which is usually not the case; the case against him was strong because the trail of misused funds could be traced through flight and hotel bookings, which is not normally the case when deceptive UN managers make UN money disappear without a trace.

One common way of diverting or stealing funds in the UN is to create phantom projects. Let me give you a personal example. Sometime in 2009, my boss at the United Nations Human Settlements Programme (UN-Habitat) called me into his office to tell me that he urgently needed to spend $100,000 of donor money before the end of the year because if he didn’t, he’d have to return the funds to the donor country. So he appointed me to manage a $100,000 project that would result in a book on cities for which he said he would hire consultants from abroad to research and write such a book. The consultants (some of whom were friends of the boss’s boss) were hired and a phantom book project was created.

Two months later, the book project was “closed” (without my knowledge, yet I was supposedly heading the project) even though no manuscript or book had materialised. When I realised that the project was fake and that money may have been diverted to a personal project, I reported the matter to the project/funds manager (a junior officer, essentially a bookkeeper, who had no say in how money in the organisation was spent and who only followed the instructions of her bosses). There was no response and within hours of my email, the process of eliminating me from the organisation began. I suffered retaliation, threats of non-renewal of contract and a whole range of psychological warfare tactics that eventually made me leave the organisation. I realised then that I had inadvertently become a “whistleblower”.

One common way of diverting or stealing funds in the UN is to create phantom projects. Millions of dollars have disappeared from the UN’s coffers through such opaque practices, the fiddling of books, and even downright theft, but few of the culprits are reprimanded, fired or even identified.

When I eventually took UN-Habitat to task through the UN Ethics Office – which was created in response to the Oil-for-Food debacle in Iraq, and which is mandated to look into whistleblower cases – I was enmeshed in a labyrinth of doublespeak and obfuscation that convinced me that the UN Ethics Office was created to muzzle and suppress whistleblowers so that the UN’s reputation would not be tarnished. I got no support from the office; on the contrary, I was told, both by the Ethics Office and UN-Habitat’s senior bosses, that the whole thing was a figment of my imagination. I have had to live with that “gaslighting” humiliation for the last nine years.

Millions of dollars have disappeared from the UN’s coffers through such opaque practices, the fiddling of books, and even downright theft, but few of the culprits are reprimanded, fired or even identified. (Even Solheim was allowed to quietly resign.) On the contrary, whistleblowers find themselves out of a job or demoted.

For instance, senior UN officials implicated in the scandalous UN Oil-for-Food Programme in Iraq are still walking around freely, enjoying their UN perks and benefits. A 2005 investigation led by Paul Volcker – who was appointed by the then UN Secretary-General Kofi Annan after a series of exposés about money being diverted from the programme appeared in the media – found that billions (yes, billions!) of dollars had been lost through a network that included Saddam Hussein, dubious foreign companies and individuals who paid bribes or received kickbacks to participate in the programme and UN employees who received bribes or chose to look the other way. Not one person identified as having fraudulently benefitted from the programme – it was supposed to help the Iraqi people cope with the sanctions imposed after Saddam invaded Kuwait – has been charged with this crime in any national court. (Saddam Hussein was eventually tried and executed by a kangaroo court, not for diverting funds from the programme, but for crimes he had committed against the Iraqi people.)

Meanwhile, the UN simply noted the findings of the Volcker investigation and UN member states continued with business as usual. Besides, by the time the findings of the Volcker investigation were made public, the United States and Britain, two of the five veto-holding powers in the UN Security Council, were embroiled in an illegal war in Iraq, which diverted the public’s attention from one of the biggest scams the world has ever witnessed.

The Oil-for-Food Programme put a huge dent in the UN’s reputation because of the scale of the theft, but this particular UN-managed initiative only got exposed because there were people within the organisation, such as Michael Soussan, author of Backstabbing for Beginners, and Rehan Mullick, a database manager, who were willing to blow the whistle on wrongdoing within the programme. Many smaller-scale thefts are taking place every day under the noses of UN bosses, and sometimes with their collusion.

The reason why such thefts and cover-ups are so common in the UN is that UN agencies are often deliberately vague about how they spend their money. A NORAD-commissioned investigation in 2011 found that most of the UN agencies surveyed had difficulty explaining where their money had gone or to which specific projects, and that information about expenditure was either limited or fragmented.

The Oil-for-Food Programme put a huge dent in the UN’s reputation because of the scale of the theft, but this particular UN-managed initiative only got exposed because there were people within the organisation, who were willing to blow the whistle on wrongdoing within the programme. Many smaller-scale thefts are taking place every day under the noses of UN bosses, and sometimes with their collusion.

When internal investigations are carried out, it usually means that things have gone out of hand (or that enough people in the organisation are pissed off and are complaining), which is what happened with Solheim at UNEP and also at the UN’s refugee agency in Uganda recently. An internal audit of UNHCR’s operations in Uganda found that the agency wasted tens of millions of dollars in 2017 by overpaying for goods and services, awarding major contracts improperly and failing to prevent fraud and waste. In addition, thousands of blankets, wheelbarrows and solar lamps meant for South Sudanese refugees went missing. The UN agency also entered into inappropriate arrangements with Ugandan government officials. For instance, it paid the Office of the Prime Minister $320,000, ostensibly to buy a plot of land to expand the government’s refugee-handling capacity; yet the Office of the Prime Minister could not produce a title deed to prove ownership and the land is now being used as a parking lot.

Part of the problem is that UN agencies are expected to monitor, evaluate and audit their own programmes and projects – the poacher as game-keeper. Donors to the UN expect the global body to report on the the projects they fund. This is problematic because it means that UN agencies can easily manipulate their monitoring and evaluation reports to suit their own agendas, needs and funding requirements. Besides, success is often measured by how much money was raised and spent, not on whether the project achieved its goals. There is, therefore, a desire to spend large amounts of money in the quickest way possible – even if it means travelling first class to a vague conference in a distant part of the world.

An internal audit of UNHCR’s operations in Uganda found that the agency wasted tens of millions of dollars in 2017…Thousands of blankets, wheelbarrows and solar lamps meant for South Sudanese refugees went missing. The UN agency paid the Office of the Prime Minister $320,000 to buy a plot of land to expand the government’s refugee-handling capacity. Yet the Prime Minister’s office could not produce the title deed to prove ownership. The plot is now a parking lot.

Moreover, a project is not “closed” because it was successful (which should be the ultimate aim of any project); rather, it remains “ongoing” even when the situation on the ground has changed (which explains why there are still UN peacekeepers in Haiti even though the civil conflict there ended years ago). No one wants to know how many people’s lives improved significantly as a result of the project or why the crisis that led to the project keeps recurring.

This explains why, year after year, the UN fabricates or exaggerates a humanitarian crisis in some part of the world. A few years ago it was Somalia; today it is Yemen. No one wonders why, if the UN has been so successful in stemming the scourge of war around the world the refugee crisis today is bigger than it was when the UN was established. To avert a humanitarian crisis in Yemen, would it not have been wiser to sanction Saudi Arabia for going to war with Yemen or to sanction the United States, the main supplier of arms to Saudi Arabia?

But these are the uncomfortable questions that UN bureaucrats – and the power wielders at the UN Security Council – do not worry too much about as they travel in luxury around the world to some god-forsaken country whose people will never be lifted out of misery because the UN will not have it any other way: too many UN jobs depend on people remaining poor, hungry and homeless.

What can be done to reverse this situation? Well, for starters, as the world celebrates the 70th anniversary of the Universal Declaration of Human rights on 10 December, there has to be an honest discussion about whether the UN has fulfilled its mandate of promoting peace, human rights and development around the world. A scorecard would indicate success in some areas (e.g. smallpox eradication and child vaccination programmes) but dismal failures in others (e.g. wars in Iraq, Syria and Yemen and genocides in Rwanda and Srebrenica). If the UN cannot prevent wars and suffering, then what is its purpose?

As the world celebrates the 70th anniversary of the Universal Declaration of Human rights on 10 December, there has to be an honest discussion about whether the UN has fulfilled its mandate of promoting peace, human rights and development around the world.

Secondly, we need to democratise the UN Security Council, which is currently the bastion of only five veto-holding countries – the United States, Britain, France, China and Russia – which also happen to be the world’s leading weapons manufacturers and suppliers and who, therefore, have a vested interest in conflicts outside their borders. These countries decide which countries can go to war and which can’t (which is why no sanctions were imposed on the United States and Britain when they went to war in Iraq). All permanent members of the UN Security Council should have an equal say in matters concerning global security, and should be working towards preventing wars, not starting them.

We need to democratise the UN Security Council, which is currently the bastion of only five veto-holding countries, which also happen to be the world’s leading weapons manufacturers and suppliers and who, therefore, have a vested interest in conflicts outside their borders.

Thirdly, the UN’s internal oversight system needs to be overhauled. The UN’s internal justice systems, including the UN Ethics Office, should be abolished in favour of an external, independent mechanism that can provide the checks and balances that the UN so desperately needs. This mechanism, possibly in the form of a tribunal, would also allow UN whistleblowers to present their cases without fear of retaliation. Such a mechanism would, hopefully, also permit perpetrators of crimes committed by UN personnel to be brought to justice in national courts, rather than the current system that gives immunity to UN employees implicated in crimes and wrongdoing (which means they cannot be tried in any court, not even in their own country).

The UN cannot – and should not be allowed to – police itself. Given all the scandals at the UN, I think it is time an independent entity be entrusted with the responsibility of watching the world’s watchdog.

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Fake It till You Make It Nations and Bling Bling Economics: Debt, Dictatorship and Underdevelopment

Once upon a time, financial recklessness was the preserve of resource-rich nations. Now, resource-poor African nations, their thoughtless leaders seduced into taking printed money circulated by the US Federal Reserve after the global financial crisis a decade ago, have become the new sultanates of debt distress. DAVID NDII ponders a different path.

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Fake It till You Make It Nations and Bling Bling Economics: Debt, Dictatorship and Underdevelopment

Not too long ago, Angola opened an embassy in Nairobi on a quite well-appointed address on Redhill Road in the diplomatic suburb of Gigiri, a road I use frequently. You couldn’t miss it. It had an outlandish gate and a black granite signboard with gold lettering. I was rather intrigued that Angola would need such a large embassy in Kenya. I have made a point of observing how much activity was going on there— very little. I passed there the other day and lo and behold, the outlandish gold lettered black granite signboard was gone, replaced by a more modest one announcing the Botswana High Commission. The Angolan foray would have cost no less than $10 million, and I would imagine that Kenya was not the only country that Angola had spread its diplomatic footprint. What has changed?

Angola has squandered the oil bonanza of the last decade. Angola is Africa’s second-biggest oil producer after Nigeria, with a daily output of 1.6 million barrels of crude and 18 million cubic metres of natural gas. There is an economic principle that windfall earnings should be saved. Angola did not save. Instead, it leveraged the oil boom to pile up debt. Angola is China’s biggest debtor in Africa, owing US$ 23 billion accounting for about a fifth of Africa’s debt to China.

If Angola had set a windfall benchmark at $50 per barrel, its nest egg for the five and a half year oil boom (April 2009 to May 2014) would have been in the order of $100 billion on crude oil alone ie. excluding natural gas. A conservative investment yielding 5 percent a year would be earning Angola $5 billion a year to invest in infrastructure or whatever else it chooses. This is how Norway got rich on oil. Norway’s sovereign wealth fund, the worlds largest, is now worth a trillion dollars. If Norway was to pay dividends from the fund to its 5.2 million citizens, each would get US$9,000 a year.

There is an economic principle that windfall earnings should be saved. Angola did not save. Instead it leveraged the oil boom to pile up debt. If Angola had set a benchmark of $50 per barrel of petroleum, its windfall for the five and a half year oil boom (April 2009 to May 2014) would have been in the order of $100 billion on crude oil alone… A conservative investment yielding 5 percent a year would be earning Angola $5 billion a year to invest in infrastructure or whatever else it chooses.

They say once bitten twice shy. Not Zambia. When I was a college student eons ago, Zambia was a case study on how not to manage an economy. Zambia rode the post independence commodity boom into middle income status by the early seventies. At $600, Zambia’s income per person was one-third higher than the Sub-sahara Africa average. In Nairobi, Zambia’s heydays are represented by its well-appointed embassy property on Nyerere Road, overlooking Uhuru Park. When commodity prices receded from the late seventies, Zambia plugged its finances by borrowing – and borrowed itself into poverty. Over the next decade, Zambia’s foreign debt increased seven-fold, from one to seven billion dollars. By the mid-90s when it got HIPC (Highly Indebted Poor Countries) debt relief, average income adjusted for inflation was half of the mid-1970s level.

Zambia rode the post independence commodity boom into middle income status by the early seventies. When commodity prices receded from the late 1970s, Zambia plugged its finances by borrowing – and borrowed itself into poverty.

Copper prices surged again in the 2000s peaking in 2011 at $4.60 a pound, about the same in inflation-adjusted terms, as at the 1970s peak. In 2012, against the backdrop of retreating copper prices, Zambia debuted in the Eurobond market, borrowing $750 million. It also borrowed heavily from China. Copper prices have fallen again and Zambia is in debt distress. The eurobonds are now trading at around15 percent yield, almost three times the debut bonds 5.6 percent yield at issue. What this means is that the bonds for which investors paid $94 are now trading at $34. It means that Zambia is now effectively locked out of any more borrowing in the sovereign bond market. Will Zambia turn around its finances before the bonds are due for re-financing? Doubtful.

Zambia is only slightly less dependent on copper now than it was in the 1970s. Copper still accounts for two-thirds of exports. Zambia has no shortage of low-hanging fruit in terms of diversification options: it has plenty of idle arable land and underexploited tourism potential. Chile was once as copper dependent as Zambia. In fact, copper still accounts for half of Chile’s exports. But Chile has diversified its economy and worked its way up to being the first Latin American country to be admitted to the OECD club of rich countries. Interestingly, Chile has become a wealthy country without following the Asian Tiger holy grail of export manufacturing, but rather by diversifying to services and agricultural exports. Its other key exports are agricultural including horticulture, wine and fish, especially farmed salmon.

Chile was once as copper dependent as Zambia. Copper still accounts for half of Chile’s exports. But Chile has diversified its economy and worked its way up to being the first Latin American country to be admitted to the OECD club of rich countries. Interestingly, Chile has become a wealthy country without following the Asian Tiger holy grail of export manufacturing, but rather by diversifying to services and agricultural exports.

Historically, financial recklessness on this scale was the preserve of resource-rich African countries. But the disease has spread all over the continent. Resource-poor countries such as Ethiopia and Kenya are now just as reckless as the resource-cursed. In the past, resource-poor countries simply did not have access to the money to steal or finance megalomania. When they tried to do so by domestic borrowing and printing money, the macroeconomic feedback loop quickly kicked in and wreaked financial havoc. Moi learned this lesson. Mugabe did not. He ended up with a hyperinflation for the ages, and the demise of the Zimbabwe dollar.

There are two reasons why resource-poor countries have also caught the disease: the 2008 global financial crisis, and China.

Since the global financial crisis, which began in 2007 and properly set in the next year, the financial markets have been awash with money churned out by the US Federal Reserve and other central banks, thereby depressing interest rates to near zero, prompting money managers to go looking for better returns in emerging markets in what is known in market lingo as “hunting for yield”. Aggressive salesmen were everywhere scouting for and massaging the egos of potential borrowers. When Kenya set out to debut in the Eurobond market it indicated that it would raise a $500m “benchmarking” bond whose proceeds were to retire a syndicated bank loan borrowed two years before, and which was the only foreign loan in Kenya’s books at the time. By the time the issue was going to the market, it had grown fourfold to $2 billion. By the time it closed, the government had borrowed $2.8 billion.

Within weeks of the successful debut, the treasury mandarins were talking of Sukuks (Islamic bonds) and Samurais (Japanese Yen denominated bonds), like children accidentally locked inside an ice cream parlour. Other than the syndicated loan repayment of $600 million there is no trace of anything financed with the money.

Since the global financial crisis, the financial markets have been awash with money churned out by the US Federal Reserve and other central banks, thereby depressing interest rates to near zero, prompting money managers to go looking for better returns in emerging markets. Aggressive salesmen were everywhere scouting for and massaging the egos of potential borrowers. Africa Rising.

China is getting more than its fair share of flak for Africa’s debt distress. The fear of the Dragon is over the top. Unlike the Western banks and markets which are embedded in the Western power structure, China will have little recourse when countries default. It cannot run them through the mill we saw “the troika” run Greece when it went into debt-distress in 2009. The head of China Export and Credit Insurance Corporation, known as Sinosure was recently quoted lamenting the poor quality of China’s infrastructure loans abroad. He went on to disclose that the agency is already a billion dollars out of pocket on Ethiopia’s new railway, whose preparation he termed “downright inadequate”. “Ethiopia’s planning capabilities are lacking, but even with the help of Sinosure and the lending Chinese bank it was still insufficient.”

It has also been reported that China may offload its infrastructure loans to the secondary market. The plan is to sell the loans to the Hong Kong Mortgage Corporation which will in turn repackage them, dice them up and sell them to investors, thereby releasing liquidity back to the primary lenders such as China Exim Bank to make more loans.   This is not funny. First, the lenders admit that they have made dud loans. Then they follow this with an announcement that they will sell the same to investors. It is a scheme such as this, which mixed up low risk and high risk (a.k.a sub-prime) mortgage loans into securities known as Collateralized Debt Obligations (CDOs) that precipitated the erstwhile mentioned global financial crisis. More poignantly, the Dragons debt trap diplomacy as it’s been called, begins to look uncannily like hunting for yield.

That is the supply side. On the demand side, you have African leaders who have no ideas of their own. From import substitution industrialization, to neoliberal orthodoxy in the 80s, to poverty reduction strategies and now infrastructure-led growth, they wander thoughtlessly from one aid paradigm to the next, all the while living up to Fanon’s prediction that they were destined to become “a transmission line between the nation and capitalism.”

The bigger problem is delusions of grandeur. Seemingly every one of these African big men has a Lee Kwan Yew complex. Even Uhuru Kenyatta, a man who couldn’t run an orderly kindergarten in a children’s park if his life depended on it, is prone to bouts of megalomania during which he comically dons military fatigues and goes around doing General Park Chung-hee skits.

On the demand side, you have African leaders who have no ideas of their own. From import substitution industrialization, to neoliberal orthodoxy in the 80s, to poverty reduction strategies and now infrastructure-led growth, they wander thoughtlessly from one aid paradigm to the next, all the while living up to Fanon’s prediction that they were destined to become “a transmission line between the nation and capitalism.

Africa has its economically successful nations: Botswana, Namibia, Mauritius, Cape Verde and the Seychelles. What do these successful African nations have in common? First, they are all small. Three of them are small island nations. Namibia is large geographically, but its population is only 2.5 million people. Second, they are also successful democracies. The five are consistently the highest ranked African countries in democracy league tables such as the Economist’s Democracy Index and the Freedom House Index.

Why are Africa’s small countries more politically and economically successful than the big ones?

Size matters. It is easier to build a small nation than a big one. Small islands are natural nations, hence it should not surprise that all the small island nations are successful. Madagascar is Africa’s sole big island nation, and it is not successful at all.

The big African countries are almost invariably very ethnically diverse. Recently, someone on social media asked me why benevolent dictatorship cannot work in Africa the way it worked in South Korea. My answer was a question: what tribe will the dictator be? He has not responded. Proponents of developmental autocracies fail to recognize that the East Asian countries are old nations, not the arbitrary colonial creations that African countries are. Korea is a culturally homogenous society with unified dynastic rule going back to 900 AD, and a political history, known as the Three Kingdoms, going back another millennium. The Thai Kingdom dates back 700 years.

Proponents of developmental autocracies fail to recognize that the East Asian countries are old nations, not the arbitrary colonial creations that African countries are. Korea is a culturally homogenous society with unified dynastic rule going back to 900 AD, and a political history, known as the Three Kingdoms, going back another millennium. The Thai Kingdom dates back 700 years.

Ethiopia is Africa’s oldest nation-state, and the only one that is not a colonial creation. It is also one of the largest and most diverse(100 million people, over 80 officially recognized ethnic groups). After the Derg’s reign of terror, Ethiopians adopted a constitution based on a loose ethnic federation. But Meles Zenawi could not resist the allure of the developmental autocrat. He borrowed and built like a man possessed but the economic miracle did not materialize, and Ethiopians, tired of autocracy without prosperity, took to the streets. The edifice has unravelled. The leadership is coming to terms with a historical fact that the rest will be reckoning with sooner or later: political development precedes prosperity.

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