IMF Petition: Kenyans are not saying they don’t need loans, they are saying the loans get squandered

In the wake of IMP Petition in which Kenyans are petitioning the IMF to withdraw the Shs 255 billion loan, there are those who are arguing that loans are necessary. This Facebook post is one of those, “If you want to buy a dairy Cow today there are two options, you save for 20 months and buy it in the 21st month or you get a loan today buy that cow start earning and pay the loan in 25 months ( taking into account the interest) that’s the economics of debt. As you sell the milk your productivity grows and by the time you complete paying the loa,you will be wealthier compared to a person who decided to save for 20 months. You can use the proceeds of milk to help you Clear the debt. If we continue criminalising debts , we are not only hurting the economy but also misleading young people by discouraging them from taking loans”.

Before we delve into the misuse of the loans, there is another angle to look at when loans are considered. As the writer said, loans have the potential to accelerate personal growth and wealth, but that’s not always the case. The other way to look at the loans is as explained by this comment, “Assuming the cow costs shs 100K, so you can save 5k per month for 20 months and have full ownership and guaranteed earnings, but if you go the debt way, 100k loan with a repayment of between 6-8k per month for 20 months,you end up losing money”. Alright, the comment is simplistic, for it doesn’t account for current value of money neither does it account for the economic activities enabled by having the 100K in advance.

That is, if you were to be saving shs 5K a month in order to get the required 100K 20 months later, you wouldn’t be engaged in the desired economic activity between now and the next 20 months, for you do not have the capital to engage in that economic activity. However, when the 100K is advanced to you right now, you are able to engage in an economic activity that should be able to generate the required monthly repayments. In this second scenario, the shs 5K you ought to have been saving can still be saved for other future bills/investments.

The problem arises when the repayment is exorbitant as is usually the case. For example, if the cow is worth shs 100K but instead of the bank having it’s future value set at shs 160K as is the case when the repayment is at 8K a month, they triple or even quadruple that future value of the cow, thereby demanding you to make somewhere between shs 15K to 20K a month in repayments. That’s when a smart investor decides to save shs 5K month instead of give some bank an extra shs 15K just because they advanced you shs 100K.

But it isn’t the overpricing of interest on loans that Kenyans are talking about, it is the misuse of the said loans once given. There are two ways the government of Kenya is misusing the loans: 1. by inflating the cost of the projects and 2. by directly diverting the funds to private pockets and unnecessary expenditure.

Redirecting the funds to unnecessary expenditure was a hot topic when the first COVID-19 funding was issued (see the BBC article titled Coronavirus in Kenya: Fearing ‘money heists’ amid pandemic). “The report was a breakdown of how 1.3bn Kenyan shillings ($12.2m; £9.8m), mostly donated by the World Bank, was used in the fight against the coronavirus pandemic. What caught the attention of the parliamentary committee and Kenyans at large was the cost of some of the items procured or leased. It showed that 42m shillings was used to lease ambulances, 4m shillings went on tea and snacks, and 70m shillings on communication”, wrote the BBC.

Money has been donated to install mobile clinics, but we haven’t had those clinics to date. Projects particular dams have been fully funded, but most of those projects have since stalled. It therefore goes without saying that the donor funds are being diverted or used in unnecessary expenditure.

On inflation of costs, we have had comparisons between big project constructions in Kenya vs similar constructions in other African countries. SGR for example drew criticism when it was realised that Ethiopia spent about the same amount of money to construct a railway system that’s twice as long as Kenya’s SGR – even when the Ethiopian railway is an electric one. On road, The Standard wrote that “what is raising questions, however, is the huge cost of the road which will amount to roughly Sh900 million per kilometre”. As Kenya’s road construct tend towards shs 1 billion a kilometer, similar roads in neighboring countries average at around shs 100 million, a ten times difference. The Standard explain, “According to the World Bank, the average price per kilometre of road in the Democratic Republic of Congo is Sh34 million while in Ethiopia, it’s Sh 83 million. But in Mombasa, the new 25.8 kilometre Dongo Kundu bypass, whose first phase was recently opened by Uhuru, will cost Sh40 billion or Sh1.5 billion per kilometre”.

Despite these obvious stats and evidences, those supporting the borrowing spree still had this to say, “I am yet to see any empirical analysis showing how the money we get through loans as a country gets misused or how the cost of our infrastructure is more expensive than the cost of infrastructure elsewhere. If you truly want to engage in a logical conversation, give data. Too many words mean nothing if you don’t have the numbers to support your harangues. If I were you and I wanted to discuss debt, being very clear in my mind that debt is inevitable, I would discuss the issue of opportunity cost. Google what that means”.

This blindlessness comes at a time when the president himself has said Kenya loses roughly shs 730 billion a year to corruption, an amount of money that’s almost three times the amount IMF has currently approved to loan Kenya. That is, if Kenya could seal all the corruption loopholes, she wouldn’t need cheap loans like the expected shs 255 billion.