Instead of erecting a wall of evidence on Eurobond, Treasury put out spreadsheets

Saturday January 02 2016

Facts matter, but perceptions matter more. This is true around the world and throughout time, but it is especially true during crises.

When a financial crises hits, like the 2007 crisis, what matters most is that confidence is evaporating and must be restored.

In a crisis, ordinary people and many investors cannot distinguish between companies that are insolvent and those that are merely illiquid. What matters are not the facts about company balance sheets, but perceptions of imminent demise. And, of course, the longer and deeper a financial crisis is, the more perception begins to determine facts.

Because restoring confidence is the key to ending a crisis, those who manage such crises speak of trying to create a “wall of cash” that is so large that it eliminates doubt and makes speculation ineffective. Once governments are able to create and advertise this wall of cash, the oxygen is removed from the fire and it begins to ebb.

But a wall of cash is not a substitute for proper regulation before a crisis. That is vital. Good macroeconomic management beforehand also means there is more cash available to build the wall when the need arises.

Once we are in a crisis, we cannot stand around pointing fingers about who did not do what before the crisis began. We need to end it as quickly as possible. The longer it goes on, the higher the wall will need to be, and the more cash it will require.


The principles of managing financial crises have parallels in the management of other crises, and of the day-to-day operations of governments. As the year ends and the Kenya National Treasury reflects on how they could have managed the metastasising Eurobond crisis more effectively, they could do worse than thinking about these principles.

The first principle is that once you are on fire, the only thing you should be focused on is putting out the fire. When confidence is evaporating, you need a wall of cash, or in this case, a wall of evidence. The evidence must be overwhelming, easy to understand and unassailable. A steady drip, drip, drip will not restore confidence.

Crisis managers only regain control over a crisis when they stop reacting and create a fortress that can anticipate whatever comes next.

In the current situation, Treasury has done the opposite. They are constantly reacting (in some cases going as far as to directly respond to a single individual!) and have been providing bits and pieces of information to bolster their case rather than a comprehensive, coherent narrative.

As I write, they have reversed their earlier call for ministries to produce lists of projects funded by the Eurobond, something they were never going to be able to credibly do. The worst thing to do in a crisis, after appearing reactive instead of proactive, is to backtrack and further undermine your credibility.

How could Treasury have handled this situation differently? First of all, the purpose of the Eurobond was to fund the development budget by reducing reliance on domestic borrowing. One could have quibbles with this objective, but the best thing to do in a crisis is to be clear that you did exactly what you said you were going to do.

In this case, Treasury should have immediately shown that the Eurobond was used in lieu of domestic borrowing and funded the development budget in 2014/15.

It would appear that the government spent roughly Ksh260 billion on development last year, not including foreign funded appropriations in aid. If the Eurobond were used for Ksh200 billion of that, as claimed, then Treasury should have immediately come out and said that nearly all development spending in 2014/15 was funded from the Eurobond and identified the main development funding achievements from last year.

They should have equally identified the drop in domestic borrowing. If people could understand where the money went and identify it with the actual development budget, they would be less fixated on the detailed bank transfers. As indicated, though, crisis management requires preparation before the crisis, too.

Treasury has struggled to produce credible documentation after the fact because they did not produce it beforehand. Had Treasury regularly produced and trumpeted the quarterly budget implementation reports they are required to publish, a number of issues might have been clarified before the crisis hit.

Treasury wouldn’t be forced to produce spreadsheets for newspaper adverts, but could refer us back to key documents they had been producing all along.

If they had been pitching a broader set of development investments than just the standard gauge railway and laptops, they would also have had an easier time convincing the public of the use to which they put this money. Good pre-crisis management greatly facilitates crisis management.

The good news? There is still plenty of time to anticipate the next crisis.

Jason Lakin is Kenya country director for International Budget partnership. E-mail: [email protected]