De­mon­eti­sa­tion ex­poses cor­rup­tion in Kenya but fails to elim­i­nate the prob­lem

The National - News - - OPINION - CHAR­LIE MITCHELL

In Septem­ber in Kenya’s re­mote Narok County, 150 kilo­me­tres west of Nairobi, au­thor­i­ties no­ticed a dra­matic surge in wheat pur­chases. Sep­a­rately, at a car deal­er­ship in the bustling cap­i­tal, a man pur­chased a lux­ury car worth Dh272,000 in cash. What unites these two dis­parate trans­ac­tions is the pay­ment method: stacks of now de­funct 1,000 shilling notes. Because on Oc­to­ber 1, on or­ders from the cen­tral bank, Kenya’s largest note be­came worth­less.

In July, au­thor­i­ties an­nounced that all 217 mil­lion 1,000 shilling (Dh35) notes in cir­cu­la­tion had to be re­turned and ex­changed for new ones. The so­called de­mon­eti­sa­tion was de­signed to tackle cor­rup­tion and flush out mil­lions of shillings held over­seas, un­der mat­tresses and in bunkers by cor­rupt of­fi­cials, crim­i­nals, tax evaders and shady busi­ness­men, bring­ing the cash back into the for­mal econ­omy. The pol­icy has, for the most part, done its job. Some 96 per cent of old notes have been ex­changed for new le­gal ten­der, caus­ing far less eco­nomic and so­cial dis­rup­tion than sim­i­lar drives past in In­dia and Nige­ria. And yet the pol­icy has not nearly stamped out cor­rup­tion in Kenya. Rather, with a four-month grace pe­riod to swap their notes, some Kenyans found new and in­no­va­tive ways to bank their il­le­git­i­mate for­tunes.

Noth­ing con­strains de­vel­op­ment in sub-Sa­ha­ran Africa quite like cor­rup­tion. Even in east Africa, which en­com­passes war-rav­aged So­ma­lia and fiercely au­thor­i­tar­ian Eritrea, graft is the big­gest hin­drance to growth. Suc­ces­sive lead­ers have promised to un­tan­gle the com­plex webs of kick­backs in re­source-rich African na­tions, which have emerged al­most across the board fol­low­ing in­de­pen­dence from colo­nial pow­ers. Al­most all have failed.

One of the most re­cent anti-cor­rup­tion war­riors was Uhuru Keny­atta, pres­i­dent of Kenya and the son of its first leader. With its large, young pop­u­la­tion, port city of Mom­bassa, breath­tak­ing land­scapes and vi­brant cap­i­tal, Kenya is es­tab­lish­ing it­self as a re­gional in­vest­ment hub. With the ex­cep­tion of ter­ror­ist at­tacks, in­clud­ing the Jan­uary Al Shabab at­tack in Nairobi that killed 21 peo­ple, Kenya is mostly free of con­flict. Al­ready, it is a hub for east Africa-fo­cused aid or­gan­i­sa­tions and boasts some of the most lux­u­ri­ous ho­tels.

Yet there has long been a thriv­ing un­der­ground econ­omy in Kenya. Ac­cord­ing to Trans­parency In­ter­na­tional – which ranks Kenya 144th out of 180 in its list of most cor­rupt na­tions – 67 per cent of Kenyans think cor­rup­tion has in­creased over the past 12 months. Most damn­ing, per­haps, seven in 10 think the gov­ern­ment is do­ing a bad job in tack­ling it.

It should come as lit­tle sur­prise. In July, Kenya’s fi­nance min­is­ter Henry Rotich was ar­rested on cor­rup­tion charges re­lat­ing to a $610 mil­lion hy­dro­elec­tric dam project. Six years since Mr Keny­atta en­tered of­fice promis­ing to rid the coun­try of graft, scant progress has been made. The de­mon­eti­sa­tion drive is widely viewed in Kenya as a di­rect re­sponse to that crit­i­cism. “You don’t wait un­til the house is burn­ing be­fore you use the fire ex­tin­guisher,” said cen­tral bank gov­er­nor Pa­trick Njoroge, re­flect­ing the sever­ity of the prob­lem.

Be­tween June 1 and Septem­ber 30, any­one hold­ing 1,000 shilling notes could ex­change them for new le­gal ten­der. Any­one de­posit­ing more than one mil­lion shillings had to sub­mit de­tailed pa­per­work. Most Kenyans sim­ply swapped their bills at high street banks. The Kenya Rev­enue Au­thor­ity, mean­while, waited in the wings to pounce on those with un­ex­plained wealth. In the four-month pe­riod, there were no ar­rests. Of those con­vert­ing notes, 99 per cent were hold­ing less than one mil­lion shillings. As Mr Njoroge put it, “There are not too many peo­ple with too much money.” That might sound en­cour­ag­ing but it is not. With plenty of time to off­load of their cash, peo­ple ap­pear to have found ways to break up their for­tunes and laun­der small amounts, avoid­ing de­tec­tion all the while.

Sports cars and wheat are the tip of the ice­berg. Ac­cord­ing to Agence France-Presse, some small busi­nesses in Nairobi be­gan clean­ing other peo­ple’s money through their tills, for a cut. Mean­while, within weeks the new notes were tar­geted by crooks. In July, three peo­ple were ar­rested with 100,000 shillings worth of forged notes. Two months later, a group of crooks, among them a Nige­rian and a Con­golese, were ar­rested in the small city of Yatta, 122km from Nairobi, with fake bills.

To be suc­cess­ful, de­mon­eti­sa­tion needs the sup­port of the wider pop­u­la­tion. But the new notes sparked a back­lash, as the de­sign fea­tures a statue of Mr Keny­atta’s fa­ther, Jomo, de­spite Kenya’s 2010 con­sti­tu­tion stip­u­lat­ing that coins and notes should not fea­ture por­traits.

To be clear, Kenya’s de­mon­eti­sa­tion was well-man­aged. It did not cre­ate an eco­nomic shock or send in­fla­tion rock­et­ing. Bil­lions of shillings are now back in cir­cu­la­tion. Some of the now-worth­less $74 mil­lion that was not re­turned will have been in the hands of cor­rupt of­fi­cials and crim­i­nal groups – many of them in other east African na­tions, where the 1,000 shilling bill is used like the US dol­lar to sidestep lo­cal cur­rency fluc­tu­a­tions. Some of the notes, mean­while, will have been held for sen­ti­men­tal value, or by those in ru­ral ar­eas. Im­por­tantly, the tar­geted de­mon­eti­sa­tion did not hit the poor­est hard­est. The same can­not be said for In­dia, which in 2016 de­clared 500 and 1000 ru­pee notes void overnight, caus­ing dis­rup­tion. Un­like Kenyans, with their four­month grace pe­riod, In­di­ans were forced to queue for hours to swap their notes at over­bur­dened and cash-short banks.

In 1984, Nige­ria in­tro­duced a new cur­rency and scrapped old notes, un­der then mil­i­tary ruler – now demo­crat­i­cally-elected pres­i­dent – Muham­madu Buhari. Back then, it caused chaos in the streets and mass in­fla­tion, which even­tu­ally crashed Nige­ria’s debt-rid­den econ­omy. Two years ear­lier, Ghana had ditched its 50 cedi note, birthing a boom­ing black mar­ket for US dol­lars, as Ghana­ians lost faith in their own cur­rency. Many, fear­ing reprisals, burned their cash, re­duc­ing the sup­ply of cedis in the econ­omy.

Clearly Kenya has learned from the ex­pe­ri­ences of other na­tions that dab­bled in de­mon­eti­sa­tion. Un­like in In­dia, Kenya’s pol­icy did not cre­ate hys­te­ria. Un­like in Nige­ria, the macroe­co­nomic shock has been neg­li­gi­ble. But above all, this am­bi­tious project has sim­ply demon­strated how deep the rot of cor­rup­tion goes in east Africa’s eco­nomic pow­er­house.

Because the will of au­thor­i­ties to crack down on em­bez­zle­ment has been matched – if not eclipsed – by the de­ter­mi­na­tion of a con­tin­gent of crooks and thieves to re­tain their ill-got­ten gains.

While the plan was well ex­e­cuted, un­like sim­i­lar drives car­ried out in In­dia and Nige­ria, deep-rooted prob­lems re­main

Reuters

On Oc­to­ber 1, Kenya with­drew its 1,000 shilling notes

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