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MAJOR CONCERNS RELATING TO THE ZAMBIAN ECONOMY

A Civil Society Perspective



for the Consultative Group Meeting held on 7th July 2002 at Mulungushi Conference Centre

Contact: cspr@zamnet.zm

[Printer friendly version - 102Kb ~ 1 min (26 pages)]

Executive Summary

Civil society recognizes that a strong economy and good governance are major prerequisites to achieve poverty reduction. Good economic governance entails a sound macroeconomic policy environment, institutional reforms, an enabling environment for business and investment, and transparency and accountability in the mobilization, allocation and use of resources. The prevailing lack of resources can be significantly mitigated through prioritization and prevention of corruption and misuse. But Zambia today is embedded in the global economy so that its development prospects are also dependent on the external environment.

With the major structural changes since 1991 the private sector now dominates productive economic activity, making Zambia one of the most open economies in Africa. But with view to the high population growth rate of 3.1%, the positive economic growth rates over the last three years may not be sufficient to sustainably reduce poverty. The inflation rate is continuing to be high (18-20%), and exchange rate volatility remains a problem. Zambia’s cooperating partners pledges in the 2000 CG meeting have not yet been fulfilled. With the resulting increase in government borrowing, interest rates have risen to unacceptably high levels of up to 55%, rendering private sector borrowing marginal. Zambia’s external debt stock has increased to $7.3 billion dollars in 2001, and its external debt service payments increased by 13.5%. Low prices of copper and cobalt led to Zambia’s terms of trade deteriorating by 3.8% in 2001, with a current account deficit reaching $743 million. The withdrawal of Anglo American Corporation (AAC) from Zambia's Konkola Copper Mines (KCM) will add to these problems in 2002. High inflation, volatile exchange rates, and very high commercial bank interest rates do not provide for a sanguine business environment. Civil society urges Government to reduce deficits and inflation. Interest rates should be closer to the inflation rate. Government should work closely with the private sector to arrive at reasonable tariffs for electricity and fuel. Government’s efforts to counter dollarization are supported.

The budget is an important instrument for resource allocation. But apparently, Government has not been adhering to the approved budget. Parliament and civil society do not adequately participate in the budget preparation and scrutiny of disbursements. Also, the budget does not give priority to new investments or allocations for districts. Civil society demands that Civil society be given an opportunity to scrutinize budget allocations before passing Parliament, the Auditor General’s report be published in time, with the Auditor General be given constitutional powers for prosecution, and the Auditor General’s Office be decentralized to establish a presence throughout the country. Finally, Government should ensure that the donors fulfil their pledges.

With the latest crisis in the mining sector, the issue of economic diversification has again become a primary concern. Civil Society supports the recommendations made in a recent workshop, such as the establishment of a Copperbelt Diversification Authority; Focus on value adding production of goods and services; Concentration on sectors with high-growth potential in the short and medium term; Optimizing Zambia’s participation in the global market; Conducting studies on feasibility and prioritization of development in the Copperbelt; A cluster approach to sector/sub-sector development; Decentralized implementation of economic diversification; Concurrent harmonized selective implementation of export processing zones (EPZs) and tax free zones, based on a model that does not comparatively disadvantage local suppliers of the EPZ.

The regional disparities in living conditions are alarming. Civil society urges Government to move pragmatically forward with decentralization, ensuring popular participation, awareness and endorsement.

Current measures on debt relief are not sufficient to address the high levels of indebtedness in Zambia. The question is, what difference would this CG Meeting do for Zambia that it did not do in the last meeting, apart from the change of venue? Are the Zambian Government and the donors prepared to put in place tangible solutions to poverty reduction? While Zambia has very little to repay its debt, aid flows to Zambia have been declining drastically. Assistance is still mainly coming in the form of loans. The current imbalance between debt service repayments and, for example, expenditure in the education and health sectors, is not only ethically unacceptable but also economically disruptive. Creditors should realize that a full repayment of old loans is infeasible and would create more misery. A cancellation tied to conditions to tackle poverty eradication by means of sound economic management could result in a significant enhancement of living standards.

Civil society sees that the enhanced Highly Indebted Poor Country’s Initiative (HIPC) is failing and does not even address the debt problem adequately. The HIPC criteria are purely based on macroeconomic aggregates and disregard human development needs. Export projections have been overly optimistic, as became apparent with the dramatic fall in the commodity prices at the world markets. Thus HIPC in its current form cannot be relied upon to release sufficient funds in time that can be used as financial resources for development needs. Discussions on HIPC Initiative have focused on the insolvency and mismanagement of debtor governments, but not to the role played by creditors in lending the money and determining how it was used. Debtors and creditors should share responsibility for the mistakes of the past regimes in the country, and for those of the richer countries alike.

Even if Zambia receives 100% debt cancellation, it remains dependent on external financing. It is important to prevent debts from piling up again, by responsible borrowing of the Government and responsible lending of the creditors. Currently, creditors bear no responsibility and carry no risk on their investments or loans. Civil Society therefore proposes the following guidelines for the loan contraction process: Government should not borrow without prior consultation and authority of the people’s representatives, the Members of Parliament. Loans should be linked to a “productivity conditionality”: Non-income generating purposes should be exclusively funded through grants, indirectly income-generating projects such as infrastructure development should be financed by concessional loans with long grace periods, and only directly income-generating projects such as putting up industries should be financed by commercial loans, but with low interest rates. If the programme fails, borrowers and lenders should share the risk. The government should never be forced to use money that is earmarked for other sectors, such as education and health, for the repayment of loans.

In order to ensure proper use of debt relief and external financing in general, civil society urges government to put in place a clear and effective monitoring mechanism that would bring government ministries, civil society organizations, and Members of Parliament together in the monitoring process. The appropriate monitoring and evaluation would ensure that the internal disbursement of debt relief is carried out in an open, accountable and transparent manner, and reaches the intended targets. Further, the utilization of the funds is evaluated in terms of their impact, and the monitoring systems itself is checked for its efficiency.

Poverty reduction in Zambia is, to a large extent, dependent on international trade and globalization in general. So far, Zambia benefits very little from globalization because of barriers to trade (both non-tariff and tariff barriers) and overproduction of similar commodities by competing poor countries. And developed countries respect the principles of free trade only when it benefits them, with high tariff barriers prevailing e.g. in the textile and clothing sectors, and continued export subsidies in agriculture. Regional integration may have certain advantages, but Zambia should not have been pressured prematurely into groupings such as the Common Market for Eastern and Southern Africa (COMESA). Zambia’s PRSP is based on the doubtful assumption that the economy will grow from increased exports. Despite its economic growth during the last three years, Zambia has recorded a deterioration in human development indices. There is urgent need for the developed countries to open up their markets and to establish a true and fair coherence among their aid, trade and debt policies.

Civil Society agrees with the core principles of New Partnership for Africa’s Development (NEPAD), of responsibility and ownership, with an emphasis on democracy, transparency, good political and economic governance, the rule of law and human rights as fundamental factors of human development and its call for mutual responsibilities and obligations. In order to enhance the likelihood of success, civil society calls for early implementation of this initiative. Civil society urges cooperating partners to timely and adequately offer external action in the form of debt relief, an increase in development assistance, more foreign direct investment, and greater market access for our commodities, along with the reduction of agricultural subsidies.

Table of Contents
 
1.  Introduction
2.  Internal Economic Concerns
3.  External Economic Concerns
4.  Conclusion
 



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