The Managing Director,
International Monetary Fund,
Re: IMF Condoning Corruption Practices and Bad Governance in Tanzania
On September 01, 2008 the local media including the Government of Tanzania owned Daily News reported that the IMF Director Mr. Dominique Strauss-Khan backs President Kikwete’s handling of the Bank of Tanzania External Payment Arrears scandal. The paper states that “The International Monetary Fund (IMF) has supported the government for measures taken in dealing with over 133bn/- embezzlement of Bank of Tanzania (BoT) External Payment Account (EPA). The IMF Managing Director, Mr Dominique Strauss-Khan, lauded the government in dealing with the EPA scam during talks with President Jakaya Kikwete at the Omni Shoreham Hotel here over the weekend. The Daily News quotes you as telling President Kikwete that:
“We’re greatly satisfied and congratulate you for the way you handled the issue. This thing can happen anywhere in the world. What is important is the way it is being handled. And you have handled it very well, with competence and professionalism of the highest order. The EPA case is now closed in as far as IMF is concerned.”
I have visited the IMF website and I did not see any press release on your meeting with President Kikwete. Assuming the Tanzania government newspaper reporting of your meeting with President Kikwete is correct, your statement amounts to condoning grand corruption in Tanzania. President Kikwete’s and the government’s handling of the External Payment Arrears Account scandal is neither competent nor professional. The government has not been transparent in informing the public about the looting of public funds through the EPA Account. The perpetrators of the scam in the Bank of Tanzania, the Ministry of Finance and the fraudulent owners of the debt assignee local companies that robbed the government of 133 billion shillings (USD 113 million) have not been taken to court.
In his speech before the Parliament of Tanzania on 21 August, 2008, President Kikwete stated that suspects in the EPA account embezzlement scandal that fail to return the looted funds by October 31 this year, will face criminal prosecution. Those who are able to return stolen money may not be taken to court. The President has apparently pardoned criminal suspects before charging them in a court of law contrary to the constitution and the laws of Tanzania. Moreover the people behind the companies that embezzled funds have not been identified to the public.
The President informed the Parliament that the committee he appointed to probe the EPA scandal has managed to collect Tanzania shillings (Tsh.) 53.73 billion out Tsh. 90.36 embezzled by 13 companies and is expected to collect Tsh. 64.84 billion by end of October 2008. The recovered funds have not been deposited in the EPA Account at the Bank of Tanzania, but deposited in a special account of unnamed financial institution. Moving the EPA account from Bank of Tanzania to a commercial bank will prevent auditors to certify if indeed the funds stolen from the EPA account have been recovered. Moreover it is the stated policy of the government that all of its accounts should be moved from commercial banks to the Bank of Tanzania. It is therefore surprising and suspicious that the funds recovered from the looting of the EPA account should be deposited outside the Bank of Tanzania. In any case one of the major functions of the Central Bank is the banker of the government.
The more disturbing decision is that the EPA Account in the Bank of Tanzania has been closed and the activities of settling external payment arrears have been transferred to the Ministry of Finance. The government still recognises and is eager to settle the remaining EPA debt of USD 233 million despite the recommendation of the Ms Lazard Freres – the Lead Advisor of the Debt Buyback Programme that most of the remaining debts of USD 233 million were time-barred and should not be acknowledged by BOT and the Ministry of Finance. Of this remaining debt only USD 14 million was for creditors who refused to settle at the discount rate of 12 cents to a dollar, the maximum offered by M/s Lazard Freres on behalf of the Bank of Tanzania during the debt buyback exercise.
The external debt management capacity was built in the Bank of Tanzania and not the Treasury. The embezzlement of TShs. 133 billion was not the result of lack of capacity but premeditated action by the Governor of Central Bank (a former employee of the IMF) most likely under instruction from senior politicians to defraud the Bank and the government. The government refused to interrogate the late Governor Balali in 2006 after the original discovery by Deloitte and Touche, the auditor of the Bank of Tanzania 2005/06 accounts, of fraudulent payments of USD 30 million to Kagoda Agriculture Limited.
After the completion of the special audit, Governor Balali who was on sick leave in the United States was dismissed but was not interrogated. The government Director of Communications in the State House categorically stated that the government had no reason to interrogate Governor Balali.
The embezzled funds through the EPA Account were financed by government bonds issued to the Bank of Tanzania. The logical step would be to use the recovered funds to repay the government bond holder rather than treat the funds as recurrent revenues. The government has however decided to allocate the recovered funds to subsidise agriculture inputs and provide additional capital to the Tanzania Investment Bank. The governance structure of the Tanzania Investment Bank does not ensure proper utilization and recovery of loans and can be another conduit of corruption and misuse of public funds.
In its surveillance activities, the IMF should have raised a red flag on the large increase in government medium and long-term borrowing through a large increase in government bonds outstanding particularly when it was carrying out its Fifth Review of the Three year Arrangement under the Poverty Reduction and Growth Facility. The IMF Review of Tanzania PGRF published in March 2006 did not raise any question on the abnormal increase in the stock of government bonds in the third quarter of 2005 that was partly used to finance the embezzlement of the EPA account.
The looting of the public funds through the EPA account took place when the IMF and other multilateral financial institutions were cancelling external debts of Tanzania through the Multilateral Debt Relief Initiative. Before the IMF, the World Bank and the African Development Bank granted multilateral debt relief, they should have requested information on the status of other external debt including the external payment arrears.
In July 2007, the Official Opposition in the Parliament of the United Republic of Tanzania proposed a Parliamentary Select Committee to investigate the misuse of public funds, corruption and illegal activities in the Bank of Tanzania. The government successfully resisted forming a Parliamentary Select Committee and will certainly use the blanket endorsement of the IMF Managing Director to argue that governance problems in general and the EPA embezzlement scandal in particular have been resolved.
The appropriate and transparent process to conclude the EPA Account saga is not to close the account and transfer it to the Treasury, but to continue the suspension of transactions, revisit and in general accept the 2004 recommendations of M/s Lazard Freres. The government and the Central Bank should develop a strategy to settle the USD 14 million debts whose creditors did not accept to settle at a discount of 12 cents to a dollar.
The IMF has a history of condoning corruption in Tanzania. In 2002, the IMF condoned the purchase of the BAE radar despite grand corruption allegations. The UK Serious Fraud Office has discovered that BAE paid 12 million dollars in Swiss accounts of Mr. Sailesh Vithlani, a Tanzania government agent and middleman in the radar deal. The BAE radar deal was finalised when Tanzania was in the process of qualifying for the Extended Heavily Indebted Poor Country (HIPC) Initiative. The IMF and the World Bank had the power to prevent the radar deal. One of the HIPC condition was that the government should not contract new debts at commercial interest rates. The financing of purchasing the radar was through Barclays Bank. IMF officials certified the financing terms of the purchase of the BAE radar did not violate the HIPC terms despite the inflated price. In any case the radar was too expensive compared to alternatives proposed by International Civil Aviation Organization (ICAO) experts. It is believed that the IMF and the World Bank decided to keep quiet because BAE a large Trans National Corporation with the support of the British Prime Minister and an international commercial bank were involved in the deal.
It is high time for the IMF to show that it is serious in supporting Tanzania to fight grand corruption. Tanzania development partners have noted that “there have been no significant examples since Tanzania’s independence in 1961 of successful prosecutions, punishments or recovery of assets involving senior public officials, politicians or business people involved in Grand Corruption.” In its discussion of the fourth review of Tanzania Policy Support Instrument the IMF Executive Board should review the implementation of the recommendations of the Audit of the EPA account and confirm the recovery of the looted funds and revisit the recommendations of Lazard Freres that the remaining debts of USD 233 million were time-barred and should not be acknowledged by the government. It should also look at the governance structure of the Tanzania Investment Bank that according to the President will be capitalised by the recovered EPA funds and its efficacy as an effective development bank. The PSI seal of approval for good financial governance may be eroded if the IMF is perceived to be condoning and approving corrupt practices.
Prof. Ibrahim Haruna Lipumba
- President Jakaya M. Kikwete, – United Republic of Tanzania.
- IMF Executive Directors.
- Tanzania Development Partners.