Global Policy Forum

Preserving Disorder: IMF Policies


By Soren Ambrose*

June 1, 2006

Compared to 20 years ago in Kenya, people live for ten years less on average, more children die in infancy and a greater proportion of those who survive face stunting. Why? Soren Ambrose makes a case for holding the International Monetary Fund (IMF) responsible, arguing that the institution's obsession with low inflation rates - one of the foundations of trade liberalization - starves economies and hurts the poor.

On March 6, Kenya's Assistant Minister for Health, Enock Kibunguchy, told the press that Kenya urgently needs to hire 10,000 additional professionals in the public health sector, blurting out: "We have to put our foot down and employ. We can tell the International Monetary Fund and the World Bank to go to hell."[1]

These are strong words for a high-ranking government official to put on record regarding the most powerful international financial institutions (IFIs), and in particular the IMF, a body whose power extends to being able to call for the withdrawal of virtually all external assistance to a country.

Minister of Health Charity Ngilu had in fact been rumored to have made similar accusations in meetings with IMF officials and civil society representatives; since Kibunguchy's declaration she has confirmed she shares his view. Similar allegations have also been made by several civil society organizations focused on the IMF and on health rights. Indeed, in the last two years a number of organizations have identified IMF restrictions as a serious disincentive to hiring desperately-needed health professionals not only in Kenya, but in many other African and Global South countries as well.

Specific IMF policies, in particular the low ceilings it sets for inflation rates and wage expenditures in borrowing countries, are demonstrably illogical and detrimental. Together with the dubious defense the IMF mounts for maintaining such restrictions, cases like Kenya's provide a strong argument that those controlling the IMF should re-examine the restrictions it places on borrowing governments. The logic of demanding continual decreases in public wage bills is likewise suspect, as are the IMF's routine inflation targets. With increased funding from new sources, improved standards of living are within reach of even the most impoverished countries, if only the IMF would allow it.

The Health Care Crisis

Kenya's health care crisis has been 20 years in the making. Its dimensions are spelled out in the 2004 Poverty Reduction Strategy Paper (PRSP) - a government document written in consultation with the IMF and World Bank and approved by both bodies' boards. Life expectancy declined from 57 in 1986 to 47 in 2000; infant mortality increased from 62 per thousand in 1993 to 78 per thousand in 2003; and under-five mortality rose from 96 per thousand births to 114 per thousand in the same period. The percentage of children with stunted growth increased from 29% in 1993 to 31% in 2003, and the percentage of Kenya's children who are fully-vaccinated dropped from 79% in 1993 to 52% in 2003.[2]

Why this deterioration? As in most African countries, Kenya's health care system was hit hard by the "structural adjustment" policies imposed by the IMF and World Bank as conditions on loans and as prerequisites for getting IFI approval of the country's economic policies. Those policies were introduced in the 1980s, and have left a lasting mark on Kenya's health. As usual with such programs, the emphasis was on cutting budget expenditures. As a result, local health clinics and dispensaries had fewer supplies and medicines, and user fees became more common. The public hospitals saw their standard of care deteriorate, increasing pressure on the largest public facility, Kenyatta National Hospital in Nairobi. As a consequence, that hospital, once the leading health facility in East Africa, began, like so many other African hospitals, to ask patients' families to provide outside food, medicine, and medical supplies. Most beds at Kenyatta and the regional and local hospitals accommodated two patients. Professional staff have taken jobs - some part-time, some full-time, at private healthcare facilities, or migrated to Europe or North America in search of better pay.

An October 2005 communication from an NGO coalition to the November 2005 "High Level Forum on Health MDGs (Millennium Development Goals)" notes that "between 1991 and 2003, the [Kenyan] government reduced its work force by 30%" - cuts that hit the health sector particularly hard.[3] For the period between 2000 and 2002 alone, the government was scheduled to lay off 5,300 health staff.

Those requirements were externally imposed. A World Bank Group document from November 2003, written to justify waiving a loan condition calling for a workforce reduction, notes: "This condition required retrenching 32,000 personnel from civil service over a period of two years. In practice, 23,448 civil servants were retrenched in 2000/01 before the program was interrupted by lawsuits. […] A specific commitment in the updated [agreement] is to reduce the size of the civil service by 5,000 per year through natural attrition."[4] The very same document supports Assistant Minister Kibunguchy's assessment of the sector's current needs - "the health sector currently experiences a staff shortage of about 10,000 health workers." The document, however, draws no connection between the shortage and the insistence on cutting more workers.

The impact of the layoffs and budget slashing in the health sector over the last 15 years was cited recently by Member of Parliament Alfred Nderitu as the primary motivation for his motion of censure against the IMF and World Bank in the Kenyan Parliament. His initiative would insist that any future loans from the institutions get Parliamentary approval.[5]

Clinics Without Nurses

Many African countries have shortages of medical staff because of lack of training capacity; in Kenya this is not the case. Thousands are unemployed or underemployed, eager to take up full time positions.

Both the Kenyan government and the IFIs regularly announce that health spending will increase substantially.[6,7] With all these promises of increased resources for health care, with the World Bank's acknowledgement of a staff shortage, and with all those unemployed nurses, one might expect that the government would waste no time in hiring the thousands of nurses Kenya so desperately needs. And indeed, frequent promises are made by government officials to that effect. But the promises are almost never kept.

According to the Chief Economist in the Ministry of Health, S.N. Muchiri, the reason is that while the IFIs support increased expenditures on health, they forbid spending that money to pay staff wages. This is accomplished through insisting on a ceiling on wage expenditures; in Kenya, the targets are 8.5% of GDP in 2006 and 7.2% by 2008.[8] The IMF doesn't specify that hiring in the health sector specifically must be limited, but when the entire wage bill must be suppressed, the chances of hiring the personnel needed are slim indeed.

So when IFI staffers call for more funding for clinics, as they do in their critique of the government's draft PRSP, they mean buildings, equipment, and medicine.[9] Unfortunately, personnel are required to run the clinics. It is the choice by those institutions to prioritize targets for reduced spending on public salaries and on inflation, says Muchiri, that prevents Kenya from hiring health workers.[10]

Muchiri provides valuable "inside" confirmation of charges made with increasing intensity by civil society organizations over the last two years. Advocates point out that while recent funding initiatives like the Global Fund for AIDS, Tuberculosis & Malaria and PEPFAR have made stemming the most critical health crises in Africa more possible, the IMF's power over borrowers' economic policy and its narrow focus on keeping inflation and payrolls as low as possible is actively discouraging governments from putting the available funds to use.

Numbers, Not People

On one level, it seems like commonsense for an organization like the IMF to seek out ways in which governments can reduce the amount spent on salaries, especially in countries like Kenya, which have had troubles with "ghost employees" on public payrolls in the past. But the self-defeating nature of this quest quickly becomes apparent. If the government were simply expected to identify and eliminate ghost employees, that would obviously lighten the government's burden and enable it to target its resources more wisely.

But the IMF's conditions deal with bottom-line expenditures, not with going to the root of the problem. Kenya's PRSP spells out the implications: "…achieving the 8.5 percent target by 2005/06 will require that any awards to be provided to the civil servants or any additional awards […] will be matched by a proportionate downsizing of the civil service."[11] Any hiring of nurses, for example, would require that some other public employees be eliminated - regardless of how much the nurses may be needed, or how vital the other positions may be. Indiscriminate targeting like this only demonstrates the prioritizing of abstract economic statistical standards over real-life outcomes, including those most likely to have a positive material impact on poverty and on contributing to the overall health of both Kenya's population and the economy.

So if the health budget is to rise - as both the IFIs and the government repeat often - then the PRSP must remind us that: "The fiscal strategy assumes that these health expenditures will be focused on non-wage non-transfer expenditures and will thus enable the rapid increase in basic health services."[12] Indeed, Muchiri reports that funds are often available for facilities or supplies, but not for staff. The result is that more people may seek out health services, but the ministry will actually be less able to provide them because of lack of personnel to administer the drugs or operate the machinery.

Inflation, Inflation, Inflation

But why does the IMF, with its power to exclude a country from the global economy by declaring it "off-track," insist on reducing government payrolls? Adding employees to the government payroll, especially if accomplished with aid money, is considered by orthodox economists like those at the IMF to increase inflationary pressures in a developing country. And an increase in inflation is anathema to the IMF.

The IMF quite openly prioritizes inflation targeting over almost any other factor in the countries where it works. Pressed on the question, as they have been in the debate over health spending, its officials will invariably respond that inflation is a "tax" that hits the poor the hardest.

But is that true? Anis Chowdhury points out that: "The poor have very limited financial assets; they are largely net financial debtors. Thus inflation can benefit the poor by reducing the real value of their financial debt. Meanwhile, the IMF's cure for inflation - raising interest rates - can actually harm the poor because this increases the servicing costs of their current debts. […] The poor fare worse when unemployment rises and persists, especially when there is no adequate safety net or social security system. At the same time, the real value of their household debt rises with falling inflation rates. Hence the poor have more reason to be averse to unemployment and less averse to inflation than the elite in society."[13]

After this seemingly obvious point is made, it seems only too easy to point out that those who stand to lose the most from inflation are those who hold large amounts of money - financiers, investors, bankers. Yes, there are risks to the poor in high and/or persistent inflation, but increases in inflation below a certain point are far more likely to cause pain to those whose incomes depend on relatively minor fluctuations in currency values. For the impoverished, as Chowdhury explains, such increases in inflation are likely to be more beneficial than harmful.

As is so often the case, it is easiest to discern the interests of policy-makers not from their rhetoric, but from whose interests are most vigorously protected by their policies - by who "wins" as a result. The IMF's longtime prioritization of inflation over all else lends weight to those who accuse it of using its powers to protect the interests of the wealthy over those of the impoverished, regardless of their rhetoric that maintains the reverse.

IMF official Andy Berg recently admitted as much: "Higher inflation […] tax[es] people who hold cash or whose nominal incomes are fixed." But Berg's next sentence restores IMF ideology, and at the same time exposes its flimsiness: "And this tax discourages private investment and tends to fall on those least able to adapt - in other words the poor."[14] Berg relocates the pain from the rich to the poor, but offers no logic for that move.

Drawing a Reasonable Line on Inflation

To challenge the IMF, the question must be where to draw the line - at what point, to use Berg's phrase, is "inflation out of control," or at risk of spinning out of control? Berg says "in poor countries the danger point is somewhere between 5 and 10 percent." The good news is that this figure is actually less conservative than the standard used in most IMF programs. In most countries with IMF loans, the conditions call for inflation to decline and stay below five percent.[15]

Few economists outside the IMF opt for a level as low even as 10% in defining a healthy rate of inflation for a growing economy in a developing country. Terry McKinley, an economist with the United Nations Development Program (UNDP), declares: "As long as current revenue covers current expenditures, governments can usefully borrow to finance [social] investment. […] Fiscal deficits should remain sustainable as ensuing growth boosts revenue collection. The resultant growth of productive capacities will keep inflation moderate - namely, within a 15 percent rate per year."[16]

There is no room for neutrality in this debate. Adhering to IMF standards in order to avoid trouble will, according to McKinley, likely sabotage any hope of genuine development: "Moderate inflation can, in fact, be compatible with growth. But low inflation can be as harmful as high inflation. When low-inflation policies keep the economy mired in stagnation or drive it into recession, the poor lose out, often for years thereafter, as their meager stocks of wealth are wiped out or their human capabilities seriously impaired. […] Without jobs and income, people cannot benefit from price stability."[17]

Tactfully avoiding mentioning the IMF by name, McKinley argues: "The new 'politically correct' justification for minimizing inflation is that it hurts the poor. However, this misreads the facts: very high, destabilizing inflation (above 40 per cent) definitely hurts the poor; and very low inflation (below 5 per cent) can also harm their interests when it impedes growth and employment."[18]

Rick Rowden points out that Latin American countries and "East Asian tigers" like South Korea grew rapidly despite inflation rates of around 20%.[19] But that was before the IMF moved into the development world in the 1980s, and re-wrote the rules - without any definitive evidence to support their claim that doing so was advantageous to the poor.

The IMF appears to be caught in a classic case of "fighting the last battle." When the IMF started lending to developing countries in the early 1980s, they were afflicted with astronomical, runaway inflation. It still apparently believes that hyperinflation is the most dangerous threat. But hyperinflation has been eliminated almost everywhere (apart from crisis or pariah countries like Zimbabwe); indeed most developing countries now have inflation rates well below 10%, and many below 5%.[20] This is largely as a result of the IMF's hyper-vigilance over the last 25 years. The problem today is not hyperinflation, but IMF-induced stagnation.

More and more economists - outside the IMF - are taking a more complex view of growth and inflation. Rather than insisting that a country have a demonstrated "absorptive capacity" before increasing the flow of revenues, they look at the likely impact of increased flows. In the case of increased spending on health care, not only is employment created (if wage ceilings are set aside), but the population's overall economic capacity improves, and private-sector activity, rather than being discouraged by public funds, is spurred by the increasing availability of resources.

Muchiri, in Kenya's Health Ministry, concurs with McKinley's positions on inflation targeting, and with the view that public spending, especially on healthcare, will encourage growth. He acknowledges that his government has committed to a low inflation target - its "Letter of Intent" to the IMF states: "The monetary program for 2004/05 is designed to reduce underlying inflation to 3.5 percent."[21] And thus far Kenya seems to be meeting that goal.

But, says Muchiri: "3.5 percent is too low for an economy that is supposed to grow by 5 percent. A certain level of inflation is healthy - you can't grow otherwise." This recognition moves Muchiri to criticize officials of a nearby country who have told him they must limit expenditures on health care - even refusing funds from the GFTAM - in order to prevent any risk of inflation rising. That line of thinking is clearly reflected in the recent statements by Kibunguchy and Ngilu.

But Finance Ministers who have committed to the IMF's inflation targets, and in many cases made those targets the centerpiece of their macroeconomic policy, are deeply reluctant to do anything that might raise that rate. Not only would doing so risk IMF disapproval and blacklisting, but it would also be seen as reversing a position they have publicly, and politically, committed to. Until this logjam is broken, a higher quality of life - even life itself - will continue to elude many thousands.

Muchiri counts as a significant victory the recent concession made by the IMF, after substantial negotiations, that Kenya could hire more health professionals if it could find donors willing to provide extra funds who themselves were comfortable with the impacts - economic and otherwise - that hiring additional health staff might have. It is this concession that recently allowed Kenya to announce that it will use funds from the Clinton Foundation, PEPFAR, and the GFATM to hire upwards of two thousand new nurses and other health professionals.[22] Unlike with previous pledges, advertisements for the positions are now appearing in newspapers.

But the very existence of these policies, and the fact that he must invest so much in winning exceptions to them, cause Muchiri to reflect on his experiences of watching mothers and children die in hospitals for lack of surgeons or a lack of capacity to offer preventive care, and speculate that the IMF and World Bank could reasonably be charged with genocide. "The only difference from what happened in Rwanda is they don't use pangas [machetes]. They use policies."

About the Author: Soren Ambrose is Coordinator, Solidarity Africa Network, Nairobi, Kenya. He is also associated with the Washington-based 50 Years Is Enough Network, which in April convened a meeting to launch an international campaign to shrink or eliminate the IMF (for more information write This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; see related commentary, by Ambrose and Walden Bello, at

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[1] Elizabeth Mwai, "Ignore the World Bank on health, says minister," The Standard (Nairobi), March 7, 2006.

[2] Republic of Kenya, "Investment Programme for the Economic Recovery Strategy for Wealth and Employment Creation, 2003-2007 - March 12, 2004 - Revised." Published by International Monetary Fund as "Kenya: Poverty Reduction Strategy Paper," IMF Country Report #05/11 - January 2005, p. 9. Subsequent citations as "PRSP."

[3] "A joint NGO statement to the High Level Forum on Health MDGs," October 2005, p. 3.

[4] International Development Association (World Bank Group), "Kenya - Economic and Public Sector Reform Credit - Release of Second Tranche - Waiver of Two Conditions and Amendment of Development Credit Agreement," November 20, 2003, para. 33, p. 10.

[5] "Plans to Censure WB, IMF," Kenya Times, March 14, 2006.

[6] PRSP, p. 18

[7] PRSP, p. 21

[8] PRSP, p. 19.

[9] International Monetary Fund, "Kenya: Joint Staff Assessment of the Poverty Reduction Strategy Paper," Country Report #05/10, January 2005, para. 33, p. 10.

[10] S.N. Muchiri, Chief Economist, Ministry of Health, Republic of Kenya: Interview with author, March 21, 2006, Nairobi, Kenya. All of Muchiri's quote come from this interview.

[11] PRSP, p. 20.

[12] PRSP, p. 21.

[13] Chowdhury, Anis. "Poverty Reduction and the 'Stabilisation Trap' - The Role of Monetary Policy," University of Western Sydney draft available from This e-mail address is being protected from spambots. You need JavaScript enabled to view it Cited in Rick Rowden, "Changing Course: Alternative Approaches to Achieve the Millennium Development Goals and Fight HIV/AIDS," ActionAid International USA, September 2005, p. 30.

[14] Berg, Andy. "An interview with Andy Berg on the macroeconomics of managing increased aid inflows," IMF Civil Society Newsletter, February 2006.

[15] Rowden, p. 30.

[16] Terry McKinley, "MDG-Based PRSPs Need More Ambitious Economic Policies," United Nations Development Programme - Policy Discussion Paper, p. 4.

[17] McKinley, pp. 14-15.

[18] McKinley, p. 16.

[19] Rowden, p. 31.

[20] Rowden, p. 21.

[21] Republic of Kenya, letter to Rodrigo de Rato, Managing Director of the IMF, December 6, 2004. Published by the IMF as "Kenya-Letter of Intent, Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding."

[22] See Lucas Barasa, "2,210 jobs lined up for nurses," Daily Nation, August 9, 2005, and Francis Openda, "State to Hire 1,420 More Health Workers," The Standard (Nairobi), October 12, 2005 -

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.