Making of a scandal: Inside the Sh15 billion drought scam

The Kenya National Trading Corporation (KNTC) is to borrow a whopping Sh15 billion from a local commercial bank to fund what ranks as one of the largest and most expansive state-sponsored duty-free imports regime of consumer goods in recent times, The Weekly Review has established.



The money is to be extended to the 58-year-old company in the form of lines of credit, which KNTC will deploy to import rice, cooking oil, sugar, wheat and beans. On top of this, another Sh5 billion worth of credit lines is to be extended to KNTC to import subsidised fertiliser.



The details are contained in a confidential letter to the Ministry of Trade and Industry signed by the Secretary to the Cabinet, Ms Mercy Wanjau, dated November 15, 2022, which was communicating decisions made by a Cabinet meeting held on November 10, 2022.







The name of the specific bank to fund the expensive duty free import programme is not mentioned in the letter, which merely states that the cabinet had approved that funds be borrowed from a ‘government-approved bank’ — implying that the new administration of President William Ruto intends to direct one of the state-controlled commercial banks to provide credit facilities to KNTC.



Major challenges



Considering the size of the facility needed, it is clear that any ‘government-approved bank’ roped in to participate in funding the massive duty-free imports programme is going to face major challenges and risks on compliance with single borrower limit guidelines set by the Central Bank of Kenya. Commercial banks can only lend a described percentage of their capital base to a single customer. Very few banks have the capital to absorb the exposure.



If anything, this is a risk that crystallised in a separate transaction, where a similar arrangement between the government and the Kenya Commercial Bank in 2018 left the lender with a sticky non-performing loan that sits out on its balance sheet to date.



Several questions arise. Where will the dollars to fund this massive programme come from? Indeed, the economy is under the grip of an unprecedented foreign exchange crisis, characterised by historically low levels of forex reserves at the Central Bank of Kenya and a currency that is on a free fall. Are we looking at a return to the regime of foreign exchange allocations to the well-connected?



Does it make economic sense for the government, in the name of stabilising local prices, to commit hundreds of millions in hard currency resources to purchase duty-free consumer goods and risk not only inflation of the foreign exchange crisis but flooding of the local market with a deluge of imports that are bound to disrupt local supply chains?



Duty exemption programmes



The manner and speed with which the new administration of President Ruto is executing what ranks as one of the largest and most complex duty exemption programmes in Kenya’s recent history has raised eyebrows.



Mark you, this is an assignment with high corruption risks, especially because it is being implemented in an area with very weak governance institutions.



The wisdom of giving the responsibility of executing the task of importing billions worth of consumer goods to the KNTC – the hitherto moribund state-owned trading enterprise that used to thrive and only had relevance in the ‘70s and ‘80s, when Kenya was still under the ancient regime of the command economy, price controls and foreign exchange allocation committees – is also controversial.



The experience in the country is that duty-free import programmes of such magnitude only work where there are open and transparent tenders, transparency in commodity sales, transparency of payments and transparency of beneficial owners.



KNTC and other state-sponsored price stabilisation enterprises in Africa have been collapsing under pressure from domestic liberalisation and international trade rules. Where they still exist, their effectiveness is hampered by chronic underinvestment in storage and transport capacity, inadequate commercial trading skills, limited access to finance and weak contract enforcement capacity.



KNTC does not have a balance sheet to support the tax. Its latest audited and published accounts show that total annual income was a measly Sh150 million and a profit of Sh15 million.



Sensational stories abound about well-connected briefcase traders wandering the streets of Dubai and Kuala Lumpur hawking contracts from KNTC to suppliers of cooking oil. Although the evidence may be anecdotal, the fact that the state trading company is not contracting supplies transparently has not helped. KNTC could emerge as a big locus for corruption.



What, exactly, are the items being imported and in what quantities? What is the scope of the duty-free import programme being rolled out by the government? Until recently, the only information in the public domain were the details of Treasury Cabinet Secretary Prof Njuguna Ndungu published in the Kenya Gazette of December 22, 2022.



The notice states as follows: The Cabinet Secretary “directs that 100,000 metric tonnes of brown or mill white sugar may be imported into the country duty-free not later than March 31, 2023”. With regard to maize and rice, the notice says: “The Cabinet Secretary directs that 900,000 tons of white maize and 600,000 tons of milled rice may be imported into the country duty free from February 1, 2023 to August 6, 2023.”



As is evident from this first list of exemptions, there is no mention of involvement of KNTC in the imports. It is a free-for all affair, where any trader can bring in stuff. Inexplicably, the second category of exemptions have not been gazetted as required by the East African Customs Management Act. The list of goods are to be found in a letter dated January 20, 2023 from Ndung’u to then-KRA Commissioner-General Githii Mburu.



The details are as follows: “80,000 MT of beans, 25,000 MT tons of wheat, 200,000 MT of sugar, 125,000MT of cooking oil and 150,000 MT of rice”.



On February 14, KRA put out a circular to its Customs and Border Control department directing them to start allowing duty-free imports of the items listed for exemption in Prof Ndung’u’s letter.



Inexplicably, the duty-free approvals, which will run until January 19, 2024, have been backdated to January 20, implying that even goods that came into the country several weeks before the February 14 internal circular will enjoy duty-free status.



The internal memo signed by Nancy Ng’etich added: “The quantities approved in the referred letter of January 20, 2023, relating to the imports by KNTC do not in any way affect the exemptions previously granted under legal notice.” Several legal questions arise.



First, is it legal to effect duty exemptions without publishing a notice in the Kenya Gazette?



 Secondly, can a letter by the CS for Finance of Kenya vacate what is stipulated in the East African Customs Management Act? But the most blatant lie in the saga was the attempt by KRA to purport to show that the duty-free imports the government has allowed are in line with the provision of the East African Customs Management Act, 2015.



That Act only allows a member to unilaterally declare duty-free imports in the manner Kenya is doing after the President of the country has declared a national crisis, the Council of Ministers has approved, and when the secretariat of the community has gazetted the exemptions. Why are we stoking unnecessary trade wars with other member states of the East African Community?



Last week, a press release put out by the Ministry of Trade and Industry reported that Cabinet Secretary Moses Kuria, had been on a visit to Egypt, where he had extensive conversations with the Cairo-based Afri-Exim Bank on the bank’s import finance facilities to support the KNTC duty-free import scheme.



As a matter of fact, the cabinet memo that came up with the proposal had identified regional banks specialised in commodity financing as another source of money for KNTC. Yet this space is fraught with huge corruption risks.



Several years ago, a son of former Sudanese President Bashir was accused of using influential middlemen with links to Sudan’s government elite to secure contracts from government agencies funded by the country’s revolving lines of credit with the regional lender, PTA Bank.



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