News

BY GEOFFREY IRUNGU

Welfare programmes announced by President Kibaki could put a strain on the budget and spark a rise in interest rates and inflation if not carefully implemented, the International Monetary Fund warned yesterday. Though the IMF and the World Bank have traditionally favoured increased spending in health and education to benefit the poor, the planned subsidy for secondary schools and the expansion of the coverage mandate of the National Hospital Insurance Fund (NHIF) had opened new areas of possible collision with its donors at a time when relations had appeared to be on the mend. Officials said yesterday that the IMF was keen to work with the Government to ensure the newly announced Sh4.3 billion programme to waive tuition for parents with children in public secondary schools did not result in excessive borrowing in the domestic money market.

The general expectation among analysts is that if the initiative is not adequately covered in the June 2006 budget, the issue could escalate the level of borrowing in the domestic market; thereby increasing interest rates. President Kibaki announced the subsidy on Labour Day, but did not talk about how the Government would raise the required funds. The President had said the subsidy plan was in line with recommendations made in the Sessional Paper No 1 of 2005 in which the government promised to increase the basic education transition rate from eight to 12 years. The school fees waiver was expected to be a hot-button presidential election campaign issue this year with candidates such as Mr Kalonzo Musyoka promising that if elected, he would ensure free access to secondary education but only for needy students.

IMF resident representative, Mr Scott Rogers, however said the plan to increase access to education in secondary schools was a good idea since it would improve transition from primary to secondary schools. The only issue was to manage the subsidy in such a way that it did not adversely affect interest rates and inflation. The subsidy, which amounts to about Sh9,000 per student to just over 4,000 secondary schools, is intended to reduce the burden to the poor households especially given that head teachers have continued to heap extra charges on parents every year. ''We will help in finding a proper financing mechanism for the secondary education to ensure the country maintains macro-economic stability," said Mr Rogers.

Undue concern

Mr James Murigu, the managing director of Suntra Investment Bank, said the proposed subsidy should not cause undue concern about domestic borrowing if the country is able to improve tax collection. "We hope that this subsidy will not have any negative impact on the budget. If everybody pays tax it should not be a big issue," Mr Murigu said. The subsidy should be seen as having an even wider positive impact on the economy in that it amounted to an income increase since parents would not pay Sh9,000 as tuition fees every term - for all households - rather than merely on salaried people as an increase on the basic minimum wage would have done.

Meanwhile, an IMF mission is expected this month to review economic prospects for Kenya for the year 2008 and it is expected that the secondary subsidy directive put out by the president will be among the key issues to be discussed with the government. Also expected to feature in the talks, because of its implications on the budget, is a plan to expand the activities of the National Hospital Insurance Fund to cover retirees and informal sector workers to become members with full benefits. This came to light in President Kibaki's Labour Day speech. The expansion will put pressure on government spending which was the reason that another broader proposal to have NHIF turned into a national social and health security fund was rejected in 2005. Mr Rogers said he was not in a position to comment on the expansion of the NHIF mandate because he was yet to familiarise himself with the issues.

President Kibaki's plan might be viewed as a partial return to the proposal rejected on the basis that the government could not afford it. Because the current IMF programme with Kenya is founded on consultation when major long-term spending decisions are made, the mission this month could take issue with the plan.

The Ministry of Finance opposed the NHIF expansion plan spearheaded by Mrs Charity Ngilu, the Health minister, on the basis that it could force the government to spend over Sh40 billion a year. It was unclear from the President's speech how much more was to be spent on expanded NHIF activities. During the press conference yesterday, visiting IMF deputy director for Africa Department Michael Nowak said that interest rate controls were still a hindrance to development in sub-saharan Africa

Interest rates

In Kenya, the IMF had earlier proposed that Section 44 of the Banking Act - which requires that banks inform the Finance minister before changing their fees and interest rates - be repealed but an attempt to do so was repeatedly resisted by members of parliament. The section states: "No institution shall increase its rate of banking or other charges without the prior approval of the Minister [of finance]." The ministry of finance had proposed that the section be deleted but MPs voted to have it retained putting the government in an awkward situation because it had promised to have it repealed. Eventually the government had no choice and the IMF seems to have understood the tricky situation the Kenyan authorities were in.