Abu Dhabi, UAEFriday 15 November 2019

Kenya's demonetisation drive exposes corruption – but fails to eliminate it

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

Kenya's central bank governor Patrick Njoroge backed demonetisation, saying 'you don’t wait until the house is burning before you use the fire extinguisher'. Reuters
Kenya's central bank governor Patrick Njoroge backed demonetisation, saying 'you don’t wait until the house is burning before you use the fire extinguisher'. Reuters

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 so-called 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 journalists and boasts some of the continent’s most luxurious hotels.

Six years since Kenya's President Uhuru Kenyatta entered office promising to rid the country of graft, scant progress has been made. Reutere
Six years since Kenya's President Uhuru Kenyatta entered office promising to rid the country of graft, scant progress has been made. Reutere

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 sitting finance minister, Henry Rotich, was arrested on corruption charges relating to a $610 million hydroelectric dam project, alongside his number two at the treasury.

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 the softly-spoken central bank governor Patrick Njoroge, reflecting the severity of the problem as he announced the plan.

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, while deposits exceeding five million shillings required people to deal directly with the central bank. 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 truly successful, demonetisation needs the support of the wider population. But the new notes sparked a backlash, because 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.

Targeted demonetisation hit the poorest hardest in India after its government declared 500 and 1000 rupee notes void overnight in 2016. Reuters
Targeted demonetisation hit the poorest hardest in India after its government declared 500 and 1000 rupee notes void overnight in 2016. Reuters

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 immeasurable disruption. Unlike Kenyans, with their four-month grace period, millions of 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.

Updated: October 20, 2019 06:41 PM

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