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Leaning Against Economic Winds: Zambia's Problems With HIPC
Research Report
By Jack Jones Zulu (Policy Analyst, Jubilee-Zambia)
Monday, 03 November 2003
PREPARED BY:
JUBILEE-ZAMBIA/DEBT PROJECT
Hosted by JCTR
P.O. Box 37774
Lusaka, Zambia
Phone: 260-1-290410 Fax: 260-1-290759
Email: debtjctr@zamnet.zm
Http//www.jctr.org.zm
Introduction/background
In recent months there has been heated debates on Zambia's economic governance
especially as it relates to prudent fiscal management. Being a heavily
donor dependent country with over 40% of its national budget supported
by external resources, Zambia has had no choice but to abide by the Post-Washington
consensus-a new economic doctrine supported by our external financiers,
the International Monetary Fund (IMF) and the World Bank which emphasises
among other things, privatisation of State Owned Enterprises (SOEs), fiscal
discipline in the public sector, trade liberalisation and market deregulation.
A quick analysis of the Post-Washington economic tenets reveals that they
are predicated on the neo-liberal economic framework which epitomises
the market as the best tool to manage scarce national resources among
competing needs.
The IMF and the World Bank are now using the debt relief process to ratchet further free market reforms out of the world's poorest countries. It is also clear that there is little differentiation between countries based on their varying social and economic circumstances. The same policy prescriptions are handed out no matter what the situation in the country (P. Hardstaff, 2003). One-size-fits-all is the catch phrase.
Thus for a country such as Zambia which is seriously plagued with financial problems to qualify for aid, it must be seen to stick to the "expert advice" as given by the International Financial Institutions (IFIs). However, the events of recent months where Government has been embroiled in endless negotiations with trade unions over pay rise have driven a wedge between Government and its external financiers culminating into an aid freeze.
Zambia Sidestepping Donor Conditions?
Government having signed contractual obligations (between April and May
2003) to award civil servants pay rise has been forced to reopen negotiations
with most public unions with a view to reverting to the old salary structures,
as the national budget cannot seemingly absorb salary increments without
adversely affecting other key areas of the economy. At the centre of the
controversy is the projected budget overrun arising mainly from recent
salary increments to government workers. The budget overrun stands at
nearly 10% of the 2003 national budget of K5.9 trillion and according
to the IMF and World Bank-this is a clear sign of economic mismanagement.
Theoretically speaking, if not checked, budget bursts especially in low
growth economies have the potential to throw off course prudent economic
management of inflation, exchange rate and interest rate regimes. This
is a recipe for economic failure.
Union demands versus Donor Conditionalities
On one hand, the unions have vigorously argued that government should
honour its obligations or risk facing court litigations for breach of
contract and miscarriage of social and economic justice. On the other
hand, the donors have decided to withhold aid until Zambia resolves this
economic standoff. The International Monetary Fund (IMF) in particular
has suspended Zambia from its concessional lending window-the Poverty
Reduction Growth Facility (PRGF) as a negative sanction to compel the
country to comply with the agreed upon national economic benchmarks and
targets. Earlier this year the IMF suspended US$100 million poverty reduction
credit after an unexplained US$125 million budget deficit. The World Bank
and the European Union also called for increased fiscal discipline and
withheld budgetary support to Zambia.
According to a Joint Press Release between the Government of Zambia and the IMF of July 2003, "The Government of Zambia has fully explained to the IMF staff team that the wage bill, including housing allowances, is projected to be about K500 billion or 2.5% of the Gross Domestic Product (GDP) above the 2003 budgeted amount of K1, 520 billion. The IMF staff team fully shares the Government's assessment that payment of this large wage bill and related allowances would result in significant pressure on domestic prices, interest rate and exchange rate" (Joint Press Release, 2003). It was further argued that this situation would jeopardise Zambia's recent economic revival which has lifted real economic growth to an average of 4% per year in the last three years after decades of decline.
Thus the Zambian Government has to make hard choices either to honour its contractual obligations to its workers as demanded by public unions and forego donor funding or renegotiate the collective agreement with unions and get going with donor aid.
It is against such a dismal background that this paper attempts to evaluate Zambia's failure to reach the Highly Indebted Poor Country's (HIPC) Completion Point, which was scheduled for December 2003. The country's failure to reach the Completion Point [1] has been caused mainly by the projected budget overrun. What exactly does this mean for Zambia in terms of its debt stock? And what is the impact of this situation on Zambia's overall efforts to implement the Poverty Reduction Strategy Paper (PRSP)? Are some donor conditionalities frustrating national efforts to fight poverty?
External Debt and Debt Relief
Economic data from Government shows that the total external debt reduced
to US$6,49 billion in 2002 from US$7,12 billion in 2001, representing
a decline of 8.9%. This reduction was largely due to loan repayments and
debt relief under the HIPC Initiative. Regrettably, the external debt
stock has risen to slightly over US$7,2 billion in 2003 from the 2002
figure of US$6,49 billion due to continued borrowing on the international
money markets as well as amounts falling due on principal payments. A
breakdown of the total stock of external debt in 2002 revealed that US$
5,85 billion or 90.3% of the total was owed by Government, US$632 million
or 9.7% by the private sector and parastatals. Further analysis of the
total stock of Government debt indicated that the larger share or 55.3%
was owed to multilateral institutions and amounted to US$3,24 billion,
while debt to the bilateral creditors totalled US$2,61 billion or 44.7%
[2].
Arguably, Zambia's debt and the associated annual debt service payments are unsustainable. If these are not resolved by way of full cancellation so as to unlock resources for sustainable development, Zambia will certainly not attain the Millennium Development Goals (MDGs) as well as the goals of the New Partnership for Africa's Development (NEPAD) which both require substantial financial resources. Zambia's Human Development Index (HDI), a measure of well-being with respect to the longevity of life, knowledge and decent standard of living, has declined over the time. Between 1975 and 1985, the HDI increased despite the onset of economic problems given the cushion that subsidies and free services provided to the population. A sharp reversal occurred after 1985 such that by 1995, the HDI was lower than it was in 1975. Zambia is the only country to have suffered such a reversal among 79 countries for which data going back to 1975 is available (ZHDR 2003).
At a recent United Nations Development Programme (UNDP) sponsored Preparatory Workshop on MDGs held in Lusaka on 1 October 2003, Zambia's case faired extremely poorly on nearly all the MDG targets. If the country is to significantly reverse this worrying trend, first and foremost, it is going to require 100% debt cancellation coupled with increased donor inflows in form of grants to ameliorate the social suffering. Secondly, the country is going to require prudent national planning to ensure that all debt relief resources are optimally utilised.
Poverty Reduction Under the HIPC Framework
The Highly Indebted Poor Country (HIPC) Initiative was first launched
in 1996 by the IMF and the World Bank, with the aim of ensuring that no
poor country faces a debt burden it cannot manage. The Initiative entails
coordinated action by the international financial community, including
multilateral organisations and governments, to reduce to sustainable levels
the external debt burdens of the most heavily indebted poor countries)[3].
Zambia, after a joint assessment of its external debts by the Fund and the Bank was found to be debt unsustainable and thus qualified for interim debt relief under the HIPC Initiative in 2000. It was envisaged that under the enhanced HIPC framework of 1999 countries would be provided with faster, deeper and broader debt relief and to strengthen the links between debt relief, poverty reduction and social policies. A cursory glance at the HIPC Initiative reveals that for a country to be considered for debt relief it must:
- face an unsustainable debt burden, beyond traditionally available
debt-relief mechanisms
- establish a track record of reform and sound policies through IMF-and
World Bank supported programmes; and
- have developed a Poverty Reduction Strategy Paper (PRSP ) through a broad-based participatory process ( an interim strategy is sufficient to begin the process )
Zambia fulfilled almost all these conditions after a track record of structural and macroeconomic reforms over a period of three years which meant that the country had satisfied the conditions as spelt out in the HIPC Decision Point Document. However, the journey to the Completion Point where the country is supposed to receive irrevocable debt relief of US$3.8 billion in nominal terms or US$2.5 billion in Net Present Value (NPV) terms has not been without many hurdles and now appears to be a daunting task for the country's faltering economy.
Route to the Completion Point
The road to the HIPC Completion Point is paved with marble stones of conditionalities
and breaking one stone entails suspension from the donor refereed economic
race! While HIPC is clearly linked to the PRSP, as the latter is a derivative
of the former, it is this linkage between the two that is a source of
current economic problems in Zambia. Technically speaking, there is a
very thin line between the Structural Adjustment Programmes (SAPs) of
the 1980s and the PRSPs of the 1990s with the difference lying predominantly
in the area of focus. SAPs were more concerned about economic growth and
stabilisation while the PRSPs are about economic growth but linked to
poverty reduction.
Typically PRSPs come with privatisation of public utilities, deregulation, removal of subsidies (including those that benefit the poor), promotion of exports and foreign investment, and import liberalisation. Although the name has changed, SAP style policies still predominate (P. Hardstaff, 2003). Going beyond this, SAPs were wholly externally imposed while the PRSPs are self-imposed though the IMF and the World Bank have retained their dominant influence and the power of veto.
Any failure by any HIPC country to abide by HIPC triggers (see Jubilee-Zambia HIPC Study of 2003 for detailed discussions on HIPC triggers) results in suspension of donor funding for poverty programmes. The IMF and World Bank have recently blown Zambia off side for violating one trigger-- fiscal prudence in the national budget.
During the spring and summer 2002 meetings of the Fund and the Bank, at least 11 of the 20 countries that qualified for interim debt relief (i.e. some debt relief before they reach "completion point") were denied it because they had not fully implemented the polices required by the World Bank and the IMF.The problem with current IMF backed programmes is that there has been no fundamental departure from past failed policies but instead they have become "add-ons" to the old ones under the guise of the PRSPs. Jubilee-Zambia's contention has been for the total delinkage of the PRSP from the HIPC Initiative, as the latter tends to undermine the former. An important national exercise such as the PRSP aimed at reducing poverty in Zambia and other implementing countries should not be tied and anchored on the HIPC Initiative whose assumptions are notably unrealistic e.g., its export projections are overly ambitious.
While the HIPC Initiative seen from the creditors' standpoint is a comprehensive attempt to effectively deal with debt problems of most poor countries, the reality is that no single country under the Initiative has managed to escape debt unsustainability as promised during its inception nearly eight years ago. Even Uganda, the star pupil of the IMF and the World Bank for more than a decade, is not moving forward well with the HIPC initiative due to poor commodity prices at the international markets.
Thus the HIPC Initiative is not a panacea to debtor problems. The IMF has tried to underplay the failure of HIPC by patting themselves on the back that they have been giving more money to debtors than they have been receiving from the same countries. "Even if all of the external debts of these countries were to be forgiven, most would still depend on significant levels of concessional external assistance, since their receipts of such assistance have been much larger than their debt service payments for many years" [4]. However, from a social standpoint, it is unacceptable to get self-praise from flawed initiatives that are constantly failing people they are meant to help, especially the world's poor. We therefore echo CAFOD's observations on the flaws of HIPC:
The international creditor community's official debt relief mechanism, the enhanced Heavily Indebted Poor Country (HIPC) initiative is in trouble. There are two flaws in the international financial and development communities' flagship instrument for debt relief that seriously affect its accuracy in assessing the affordability of low-income country thresholds.
Firstly, the vicissitudes of international commodity markets mean that-export-to-debt ratios-the HIPC initiative's chief criterion cannot be a reliable indicator for judging debt sustainability.
And secondly, there is asymmetry at the heart of the HIPC framework. The HIPC Initiative's reliance on a narrow conception of debt sustainability is not coherent with broader poverty reduction objectives. Indeed, this is the clear implication of the World Bank's own definition of debt sustainability: a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, without recourse to debt rescheduling or accumulation of arrears and without comprising growth [5].
The failure of the HIPC Initiative to provide the promised "robust exit" from perpetual indebtedness and at the same time to provide debt relief consistent with the human development needs of poor countries raises far wider questions than answers. The Zambian case reinforces evidence from other countries pointing to the need for an urgent review of the debt sustainability targets set by the creditors [6]. According to an article entitled "Zambia Stung By Debt Relief Fraud" (see footnote 5 for more details on the article) it quotes the debt sustainability analysis carried out by the IMF/World Bank staff on Zambia, which shows that:
- Actual debt service payments will increase sharply, from US$136 million
in 1999 to US$170 million in 2000 before peaking at US$235 million in
2002
- Debt service repayments will increase from 24% of government revenue
today to 35% in 2001-02
- Average repayments for 2001-03 will be 46% higher than for 1997-98.
The main cause of the sharp hike in debt service payments over the next few years is an increase in repayments of principal on loans contracted from the IMF in the early 1990s.
Consequences of Missing the Completion Point
It cannot be denied that the success of the Zambian PRSP and MDGs will,
to a greater extent, depend on both domestic and external financial resources.
However, domestic resources in Zambia are inadequate as they depend on
a very small tax base. The formal sector upon which many domestic taxes
are based has been shrinking due to donor-supported retrenchment and privatisation
programmes thereby occasioning massive job losses. Out of the 289 SOEs
that were earmarked for privatisation almost a decade ago, 257 have already
been sold to the private sector resulting in the direct loss of 61,000
jobs (Privatisation: African Experiences, 2002). More jobs are likely
to be lost as Government continues restructuring its central and local
Government institutions.
Zambia is in a very difficult position regarding the extent to which it can achieve the Millennium Development Goals which at the same time explains the declines in the country's human development status. Compared to the 1990 base year, nearly all the indicators had deteriorated by 2000 such that the effort now required to achieve the MDGs is much greater that may have been anticipated at the time of the Millennium Declaration (ZHDR, 2003).
Therefore, the HIPC Completion Point, which was scheduled for 2003, would have gone a long way in releasing the much needed resources for poverty reducing and development programmes. Alas the completion point has eluded the country leaving a lot of development plans in total disarray! But there is even a greater concern that Zambia's inability to attain the completion point in 2003 may result into the country reverting to its pre-HIPC status in which case debt service payments will be nearly three times higher than current levels.
When this researcher visited the Ministry of Finance and National Planning (MFNP) for a scheduled interview with a senior economist in the Department of Planning and Economic Management (PEMD) to ascertain the implications of Zambia's failure to reach the Completion Point, he had this to say:
"Zambia is a case of a so-near-yet-so-far situation. We have complied with all the benchmarks and targets save for one on fiscal management and this has thrown the entire economic programme with creditors off course. The implications of this situation are obvious. Firstly, as a country we have foregone US$3.8 billion, which should have been knocked off our total debt stock had we reached the Completion Point this year. This essentially means that we still remain heavily indebted to the creditors. Secondly and more importantly, the amount of money required to successfully implement the PRSP has been drastically reduced meaning that some poverty reducing programmes have simply been shelved aside. For instance, this year's national budget allocation to the PRSP was K420 billion out of which Government has only managed to mobilise K110 billion. The balance in the national budget was to come from donors who have since imposed an aid freeze. Put differently, the PRSP is slowly being rendered irrelevant as it cannot be implemented and thus national development plans are at best inconsequential if they cannot be implemented or realised".
The Government officer felt that creditors were using stringent conditionalities to frustrate genuine efforts aimed at fighting poverty and the Zambian case exemplifies the whole situation.
When the economist was asked about the IMF and World Bank's stance on the privatisation of the energy company, ZESCO and the Government owned commercial bank, ZANACO, he said, "Government was on course with the privatisation programme. The two parties have agreed in principle that ZESCO will be commercialised meaning the introduction of market-driven logic into the enterprise, and the introduction of commercial goals, values and private sector management orientation. The idea is to let the company run viably and profitably with little interference from the State. This will be made possible through some Statutory Instrument (SI). As for ZANACO the Government has agreed to sell off about 49% shares in the bank while retaining majority shares in order to safeguard national interest".
Normalising Relations with Donors
In an effort to gain IMF approval for its Poverty Reduction and Growth
Facility (PRGF), and therefore win back donor confidence, the government
proposed an interim staff monitored programme (SMP) [7].
Successful implementation of measures under the SMP will result in Zambia
concluding a new PRGF with the IMF in early 2004 which should then pave
way for reaching the Completion Point sometime in 2004 (see Government
Green Paper 2004-2006). The SMP programme does not differ significantly
from the PRGF, except that the Fund measures and assesses economic performance
on a monthly basis.
In another related interview by a South African based media organisation, IRIN, which spoke to the Director of Planning and Economic Management at the Ministry of Finance and National Planning, he had this to say:
"We are on right track. By December we should have reached all of the benchmarks and parameters we have set for ourselves. This will hopefully signal to the IMF that we are serious about budget control. So far there has been two assessments and the feedback has been promising," the Director told IRIN.
At a recent Jubilee-Zambia Debt Forum under the theme "Why Did Zambia Miss the HIPC Completion Point?" the World Bank Country Representative had this to say "Zambia has not missed the Completion Point but merely delayed reaching it due to unsatisfactory economic performance". He went on to say that Zambia's Completion Point was a "floating" one and the country's ability to reach it depends entirely on its willingness to comply with the IMF sponsored economic programmes. While this may sound like good news to the country, Jubilee-Zambia's concern however, is that "floating objects" may never be reached especially if the "economic currents" are too strong for a debtor country to keep abreast with! As a debt campaigner, Jubilee-Zambia prefers dealing with fixed "goal posts" rather than shifting ones because the latter has always proved to be elusive and therefore difficult to realise.
Conclusion
While Zambia remains suspended from the PRGF, it is encouraging however;
that the World Bank through its country representative early in October
2003 assured the Zambian government that the country will continue receiving
limited debt relief despite the delay to get to the completion point.
After all it is said that "half a loaf is better than none at all"
and therefore this news should cheer the nation as government tries to
put its economic act together to ensure the completion point is reached
before the end of 2004. However, Zambia's miss of the HIPC completion
point this year is a serious setback in the national efforts to mobilise
financial resources for poverty reduction. If the current "aid freeze"
by donors is not lifted immediately, Zambia may find itself in a similar
situation like "Alice in Wonderland" who dreamed that she was
running very fast but when she woke up she was in the same position!
Ultimately, at the centre of missing the HIPC Completion Point is the poor Zambian man, woman and child who are going to feel the impact of such a policy failure through lack of resources for social and economic development. Jubilee-Zambia takes strong exception to any misapplication of resources in the national budget by Government. Jubilee-Zambia therefore continues to lobby for a "Debt Mechanism" that assures accountable and participative management of all debt relief resources.
In the same vein Jubilee-Zambia does not agree with creditors' piecemeal initiatives of dealing with Zambia's debt crisis. HIPC, as Jubilee-Zambia has consistently argued in various studies, is not resolving the country's debt overhang which is frustrating national efforts aimed at reinvigorating the economy for sustainable development.
Recommendations
Zambia's failure to reach the completion point is two-sided. Firstly,
it is a sign that there has been, to some extent, poor economic management
by the Zambian Government. Secondly, it also shows that the creditors
have a portion of blame to bear for setting highly unrealistic benchmarks
for Zambia that are not in tandem with reality in our unique setting.
In light of the arguments from this paper we propose as a way forward
the following:
- Clearly from a social and ethical dimension, the poor should not be
made to suffer further as a result of government's perceived differences
with its creditors. For instance, the donor demands of fiscal discipline
in government do not take cognisant of the fact that the civil servants
who are the main implementers of the PRSP in Zambia have for a long
time been under paid. How then are they expected to own the process
of the PRSP if their morale is low? We therefore call for in-depth study
of overall wage patterns in the civil service that will speak to the
current high cost of living in the country
- Jubilee-Zambia would like to emphasise that the fundamental principle
of debtor protection means that respect for the basic human rights (such
as access to decent education, access to healthcare, access to safe
and clean water, etc.,) of millions of Zambians should take priority
over repayment of debts to comparatively wealthy creditors, especially
when capital on these debts has already been repaid a number of times
over
- There is urgent need to renegotiate IMF/World Bank's emphasis on unrealistic
economic targets. No country can and indeed has ever developed by creating
more poor people on its societal strata by denying those who are in
dire need. Jubilee-Zambia therefore calls for an evaluation of all social
conditions in the country e.g., the high unemployment levels, high poverty
levels, high incidence of the HIV/AIDS pandemic, etc. These indicators
should be used as a basis for determining country targets and benchmarks
- Government should get its act together by ensuring that there is accountability,
transparency and openness in the management of public affairs, especially
critical financial matters. Jubilee-Zambia therefore continues to call
for a Debt Mechanism
- To the extent that Completion Point is not achieved, then debt service
payments will increase (see Government Green Paper 2004-2006). This
situation clearly shows that HIPC is failing and is technically unsound
as it compounds the already heavy load of debt that Zambians are carrying.
Ensuing from this, Jubilee-Zambia strongly calls for total delinkage
of HIPC from the PRSP
- Jubilee-Zambia is concerned that current approaches to resolving the
debt crisis of developing countries, especially Zambia, allow creditors
including the IMF and the World Bank to contravene national sovereignty
of independent states by imposing harsh economic conditions e.g., the
demand for privatisation of national assets (ZANACO and ZESCO) even
when such a move is not in the interest of the poor. In light of this,
Jubilee-Zambia calls upon the creditor community to implement measures
for cancelling debt which are far more radical than allowed under the
enhanced HIPC including cancellation of 100% of the clearly unpayable
debts owed by Zambia and other HIPC countries to the IMF and the World
Bank
- The development of the PRSP in Zambia and elsewhere offers a rare window of opportunity through which funds can be released to fight poverty and the HIV/AIDS pandemic. This process has the potential to enable delivery systems and interventions to be developed in wider consultation with other stakeholders including the international institutions and civil society. Yet the current standoff between Zambia and its donors is denying the PRSP of the much-needed resources for uplifting the welfare of the poor whom the process is intended to help. Jubilee-Zambia therefore recommends that the PRSP be allowed to go forward in order to meet the critical needs in the country while the difficulties around the "floating" completion point continue to be resolved
References
- Government of Zambia and IMF Staff Mission (2003), Joint Press Release
No. 03/132, Washington, D.C.
- Government of Zambia, (2003), 2004-2006 Medium-Term Expenditure Framework
and The 2004 Budget, Ministry of Finance and National Planning, Lusaka
- Hardstaff, P., (2003), How IMF and World Bank Policies Tied to Debt
Relief are Undermining Development: Penalising the Poor-How Conditionality
Works, London
- Hardstaff, P., (2003), How IMF and World Bank Policies Tied to Debt
Relief are Undermining Development: Expanding the Free Market Frontier,
London
- Labour Resource and Research Institute, (2002), A Report on "Privatisation:
African Experiences"
- Mashele, P., (2003) New Strategies of the International Financial
Institutions and the Post Washington Consensus: More Hope for Development?
Paper prepared for the Conference on Globalisation and Socio-Economic
Development in Small Economies of Africa, Lusaka
- UNDP, (2003), Zambia Human Development Report (ZHDR): Eradication of Extreme Poverty and Hunger in Zambia: An Agenda for Enhancing the Achievement of the Millennium Development Goals
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Footnotes
[1] The Completion Point is the stage at which after Zambia has implemented
the PRGF successfully, the country will receive a stock of debt relief
and the bulk of the assistance under the Enhanced HIPC Initiative. For
as long as there is no PRGF and let alone its successful implementation,
then the Completion Point will not be attained (see Government Green Paper
2004-2006).
[2] See Government of Zambia Economic Report, 2002 pages 45-49
[3] See www.imf.org/external/np/exr/facts/hipc.htm
[4] See www.imf.org/external/np/exr/facts/hipc.htm
[5] The Human Development Approach To Debt Sustainability Analysis
For The World's Poor, CAFOD Policy Papers, 2003
[6] See www.afrol.com/News/zam004 debt relief.htm article entitled
"Zambia Stung By Debt Relief Fraud"
[7] Under the SMP, Zambia has to implement certain policy measures
between July and December 2003 so as to address the slippages experienced
during the first half of 2003. These measures include increased spending
on Poverty Reduction Programmes and controlling the wage bill.
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