The East African (Nairobi)
ANALYSIS
22 January 2008
Posted to the web 22 January 2008
By Jaindi Kisero
A stand-off with Kenya's main bilateral donors is a prospect President Mwai Kibaki appears not to have anticipated.
Yet as the country's economy continued to be engulfed in uncertainty in the wake of the violence that broke out over presidential elections - which most independent observers have described as flawed - all indications were that the country was bracing for a new period of strained relations with its main bilateral donors.
In an unprecedented move, a session of the European Parliament meeting in Strasbourg, France, on Thursday said they would freeze budgetary aid to Kenya until the crisis over President Kibaki's disputed re-election is resolved.
But what is really at stake for Kenya? On paper, and compared with its neighbours - Tanzania and Uganda - Kenya receives very little budgetary support from its European creditors.
Indeed, President Kibaki's administration has in the past two years adopted a fiscal strategy that does not programme non-project aid commitments - instead funding the bulk of its operations from taxes, domestic borrowing and privatisation proceeds.
However, to argue that the threat by the European Parliament to freeze aid to Kenya is of little consequence because most of what the country gets comes in the form of project aid, is to miss the point.
The truth of the matter is that an aid freeze by European countries is likely to impact badly on the execution of this financial year's budget and thus force the government to seek domestic borrowing beyond what was planned when Finance Minister Amos Kimunya presented his budget before the National Assembly in June last year.
With more than 40 per cent of the country's Ksh150 billion ($2.3 billion) development budget funded by donor flows, the freeze is likely to destabilise the government's finances badly - with serious macroeconomic consequences.
As it is, the aid freeze will put at risk large capital expenditure outlays on the roads, education and health sectors, which are heavily financed by the country's European bilateral donors, especially grants.
Although most of what European creditors give Kenya is designated as project aid, the truth of the matter is that the government accesses most of this money in the form of reimbursables - cash refunded to the government by donors to replace what the government has already spent.
Thus, if the aid freeze is effected, one of the biggest sufferers will be the Ministry of Education -one of the largest projects, the Kenya Education Support Programme, is heavily funded by donors, with part of the money going directly to suppliers - what is referred to in jargon as appropriations-in-aid - and the remainder coming in as reimbursed revenues.
This year, about Ksh4 billion ($62.5 million) is expected to go directly to the government in the form of revenues.
Several key projects in the roads sector are also bound to suffer if aid is frozen - most of them in the so-called Northern Corridor that links Kenya to Uganda, Rwanda and other countries of the Great Lakes region.
This year's budget assumed that the government would absorb Ksh14 billion (218.75 million) as appropriations-in-aid from the European Union for the roads sector alone.
In the health sector, the Ksh5.8 billion ($90.63 million) Global Health Fund is at risk because the contributors to the fund are members of the European Union.
Indeed, the European Union is Kenya's second largest creditor after the World Bank, notwithstanding the fact that the country's significant bilateral donors - the United Kingdom, Germany and France - are members of the Union.
The EU is the pacesetter of the aid game. Literally all multilateral aid agencies in Kenya co-operate closely with it, copy its policies and adopt its priorities.
Today, a good proportion of donor-funded projects are subject to co-financing with members of the European Union.
Thirteen EU member states are represented in Nairobi, where it is also the lead donor in the transport sector, with the United Kingdom playing lead donor for legal-sector reforms.
Then there is the fact that most of the European countries at the forefront in criticising Kenya, such as Britain, France, Italy and Germany, are deeply influential players within the World Bank and the International Monetary Fund, where they control voting and veto rights.
In last week's statement by the European Parliament, the EU said it was reviewing its relations with Kenya, and studying which actions to take if current African mediation efforts fail.
"All options are a possibility, including an eventual partial or total freezing of aid," said John Clancy, European Commission spokesman for development and humanitarian aid.
"We are watching developments on the ground to decide what measures should be taken and when," Clancy said, adding that the EU's priority was to support mediation.
Any decision to freeze aid will be taken by the 27 member states on a proposal by the bloc's executive European Commission.
Condemning the violence that has killed hundreds, the lawmakers said the result of the election was not credible and called for a fresh vote if a fair recount were not possible.
The parliament said it was "deeply pre-occupied by the social repercussions of the current economic crisis, its detrimental effect on the country's socio-economic development and the economic consequences for neighbouring countries."
Lawmakers criticised the EU executive for disbursing 40.6 million euros ($61 million) of budgetary aid on December 28, a day after the election. EU Aid Commissioner Louis Michel said the aid had been disbursed before doubts over the results had emerged.
The disputed election has dented Kenya's democratic credentials and rattled donors. Post-election turmoil, in which hundreds have been killed, has hit Kenya's economy as well as supplies to East and Central African neighbours.
On Wednesday, a group of 14 bilateral donors put out a statement in which they warned that they would not conduct "business as usual" with Kenya until President Mwai Kibaki and Raila Odinga reach a political settlement.
"The vote tallying process was seriously flawed and casts doubts over the outcome of the presidential elections," the statement added.
The statement was signed by the United Kingdom, the US, Canada, the European Commission Delegation to Kenya, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Spain, Sweden and Denmark.
The last time Kenya suffered an aid freeze of the magnitude being contemplated was in November 1991, when the country's creditors, meeting under the auspices of the Donor Consultative Group, suspended quick-disbursing aid to the country.
In a rare display of solidarity, not a single bilateral donor broke ranks with the rest of the donor community.
Source: http://www.nationmedia.com/eastafrican/current/News/news210120083.htm
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