3. External Economic Concerns
3.1 Debt Relief and Development
The Debt Issue
With view to past experiences, the current measures on debt relief will not go far enough to address the high levels of indebtedness in Zambia. Most of us are aware that Zambia is not new to numerous economic “curative” measures in the form of policy documents and pieces of advice mainly developed with the assistance of the donor community to enable Zambia overcome its economic malaise. But the results from such policies attest to unacceptable effects in all spheres of our lives. One would be quick to ask: what difference would this CG Meeting do for Zambia that it did not do in the last meeting? Does the change of venue for the CG signify a departure from past experiences where promises were made but not delivered? Were the donor pledges made in the last meeting translated into positive goals for our nation? Or is this just another social gathering to exchange ideas in the plush places of our country with no implementation of resolutions? It may be easy for the Zambian Government and the donors to “talk the talk”, but are they prepared to “walk the walk” that would offer the 80% poor Zambians living in abject poverty a chance to exit their deplorable living conditions?
Time is now ripe to evaluate debt relief measures in Zambia. An observation that comes to mind is that these measures have not provided the resources that Zambia needs to solve the extremely serious social and economic problems.
The immediate task of our government should be to check on its poor past economic management in order to stimulate growth that would impact positively and meaningfully on the poor in Zambia.
One thing is certain: Zambia has very little to repay its debt with. Despite our dire financial needs, aid flows to Zambia have been declining drastically. For instance, in 2001 aid flows declined by 20.1% over the 2000 figure (see GRZ Economic Report, 2001) and this is a matter of serious concern to civil society. While assistance in all forms is generally welcome, we note with sadness that most of it is still coming in the form of loans. While loans are not bad per se, we feel that creditors should realize that full repayments of old loans in the Zambian context is infeasible and that enforcing full repayment would create more misery and is, therefore, highly undesirable from the point of view of civil society.
For instance, of the US$317 million recently approved by the International Monetary Fund (IMF) under the Poverty Reduction and Growth Facility (PRGF) to Zambia, over half of the amount (52.6%), or US$167 million, is in form of programme loans to be repaid in the near future. Worse still, some of these loans will go toward repaying old loans, thus moving in a vicious loan cycle with no hope of ever breaking the chain of indebtedness.
Despite our high debts and low export earnings, Zambia has until recently been making huge financial resource transfers to the creditor community in order to remain “credit worthy” in their books. New loans at concessional rates have continued to exceed debt service payments. Our debts are largely obligations to governments and multilateral lending institutions. Civil society does not claim that Zambia’s unsustainable debt is the only major stumbling block to its development. However, it believes that if the debt issue is resolved by way of total cancellation conditioned upon a commitment to use saved resources for poverty eradication and to sound economic management and general financial prudence on the part of our Government, then such a move could result in a significant enhancement of the living standards of our people.
Civil society sees increased debt relief as the most effective way in which the donor community can empower the Zambian Government that is currently facing resource deficits. With significant debt reductions, as opposed to hopes for investments and broadened tax bases (which are long-term goals), our Government can plan into the future with more certainty.
Incidentally, the Transitional National Development Plan (TNDP) that is currently being prepared by the Government could act as a roadmap for a clear future direction. However, to get the full benefits from such a national plan, the government must consult all major stakeholders (civil society organizations, development agencies, members of the opposition, etc.) in its formulation. This will give it the necessary legitimacy and wide acceptability. Such a move would further strengthen the spirit of consultation and participation that the Government ably exhibited during the PRSP process in Zambia.
A report released by Jubilee-Zambia in April of this year showed that during the 1990’s Zambia spent nearly 20% of its GDP on debt service repayments, while on the other hand education and health sectors received between 3% and 2% respectively. Such an imbalance is not only ethically unacceptable but also economically disruptive. It cannot be denied that a healthier and more educated people are likely to be more economically productive and hence provide the government a broader tax base for its revenue. Economists the world over are quick to admit that high levels of debt, as the case is in Zambia, limit a government’s ability to mobilize domestic financial resources needed for investments and development. A government burdened with debt is forced to invest less in economic infrastructure and to a great extent cut its social spending. This certainly detracts from sound investment strategies. Thus unsustainable debt is a major block to long-term, sustainable and integral development.
In the current circumstances, increased debt relief to Zambia is the most immediate and efficient way to mobilize resources for development. Total debt cancellation is not a question of relief but of economic and social justice: to put an end to the ably documented net transfers of wealth from Zambia and other heavily indebted countries to the creditors at the cost of intolerable suffering and human sacrifices. The wealth transfers are facilitated by debt service payments and unfair trade practices. For instance, net financial transfers from the Third World to the developed countries, from 1983 to 1993, totalled approximately US$300 billion1. This debt is increasing steadily, not only in absolute numbers, but also in percentage of the Gross National Product (GNP). The overall Third World debt against GNP ratio reached 27% in 1980 and 38% in 1994.
The debt crisis in Zambia is partly a consequence of fatal economics that uses the maxim of market forces to entrench policies that have more often than not failed to deliver to the people. The debt problem should be seen as a cause and outcome of failed policies that have continued to violate the social and economic rights of the Zambia’s poor by denying them an opportunity to realize their full potential in sustainable human development.
The HIPC Initiative in Zambia
While recent efforts aimed at resolving the debt crisis in Zambia by both government and its cooperating partners are certainly welcome, civil society continues to argue that the enhanced Highly Indebted Poor Country’s Initiative (HIPC) is failing and does not even address the debt problem adequately. The HIPC Initiative uses criteria for assessing debt sustainability that are purely based on simple macroeconomic aggregates, such as exports, while disregarding the human development needs of the poor country. The export projections used by the World Bank and the IMF to calculate the amount of debt relief that will be needed for poor countries have been overly optimistic. In order to limit their own contribution to the Initiative, creditors have easily subscribed to such optimism. The World Bank acknowledges that most of the export projections have not been met because of the dramatic fall in the commodity prices at the world markets.
According to the Jubilee Research (a European based research organization), in 31 out of the 42 HIPC countries the Initiative has failed in several significant ways. This disturbing finding is also echoed by two new reports issued by the World Bank in time for the recent IMF and World Bank spring meetings. The reports from the World Bank show that:
Thus HIPC in its current form cannot be relied upon to release sufficient funds that can be used as financial resources for development needs. It does not deliver debt relief fast enough, since donors frequently tend to get engaged in technical disagreements with recipient countries on shortcomings in the macroeconomic reforms.
- At least 2 of the 5 countries already at the Completion Point do not have sustainable levels of debt according to the HIPC criteria
- At least 8-10 of the 21 countries which are currently between Decision Point and the Completion Point under the Initiative will not have sustainable levels of debt at the Completion Point, according to the same criteria.
The talk around the need for the enhanced HIPC Initiative has mainly focused on the insolvency and economic mismanagement of debtor governments. It hardly pays any attention whatsoever to the important role played by creditors in lending the money and determining how it was used. Civil society feels that debtors and creditors alike should share joint responsibility for the fact that the poor in Zambia, as elsewhere, are paying for the mistakes of the past regimes, and those of the richer countries alike.
HIPC debt relief is only fully released once the debtor government produces a comprehensive Poverty Reduction Strategy Paper (PRSP), which links debt relief resources directly to poverty reduction measures. But debt is an issue that has clear linkages with other major problems in Zambia. These include problems such as poor investment policies, unfair trade practices and low aid flows. To have an impact on these other areas, we do not need to turn away from debt relief but rather recognize significant synergies and approach debt relief in a more holistic way.
If the IMF and the World Bank have been doing their business correctly, why is there still so much poverty around us today? Is it not a paradox that despite the Fund/Bank presence in Zambia for many years, poverty levels have continued rising unabated? (Remember these institutions have been our development and financial advisors for over two decades). This is not, of course, to absolve the various Zambian government regimes from any responsibilities. Civil society feels that we definitely must raise the challenge to recognize co-responsibilities for failures in development plans. For example, recently the Food and Agriculture Organization (FAO) Country Representative in Zambia admitted that the Agricultural Sector Investment Programme (ASIP) was a “total failure” as it failed to address the plight of a common farmer (THE POST, 17/06/02). Yet this programme was highly encouraged and supported by donors. Does this not call for self-introspection by both government and donors alike and a refocus of ideas on current development strategies that have failed to yield the desired results?
Loan Contraction Process
Zambia, like many other poor countries, remains dependent on external financing. And even if poverty reduction is put first and Zambia receives 100% debt cancellation, the country may still need external financing to achieve its national development goals. Clearly, it is important to think of ways to prevent the debts from piling up again to unsustainable and damaging levels. Civil society sees hope in responsible borrowing on the part of our Government and responsible lending on the creditors’ part. In the current situation the bilateral and multilateral creditors decide or influence what the borrower is to use the loan for. At the same time if anything goes wrong, the creditors do not suffer the loss on their investments, as they are still able to get their money back through debt service payments. It appears that they bear no responsibility and carry no risk on their investments or loans. We find this arrangement to be at variance with the free market tenets that state that whoever takes economic decisions must as a matter of fact, also carry financial risks.
In order to promote the responsible borrowing and lending procedures necessary to assure Zambia’s sustainable development in the future, we feel several clear guidelines should be followed. These would ensure that the loan contraction process is open, accountable, and effectively directed. Some suggested guidelines include2:
Monitoring and Evaluation of the Debt Relief
Government should not borrow without prior consultation and authority of the people’s representatives, the Members of Parliament.
The national Constitution should be amended by inserting a clause that reads something like this: “Government shall not borrow, guarantee or raise a loan on behalf of itself or any other public institution, authority or person except as authorized by or under an Act of Parliament”. Public scrutiny could prevent irresponsible borrowing.
Loans should be linked to a “productivity conditionality” ensuring that loans are used for activities that generate sufficient resources for repayments.
Responsible borrowing and lending requires that the type of finance be adjusted to its spending purpose. A distinction could be made among three different purposes of external financing namely:
External grant finance for non-income generating purposes: Finance for non-income generating purposes, such as humanitarian and disaster assistance, and the provision of basic and universal education and health, should be provided in the form of grants. At the very least and only in special circumstances should highly concessional loans be used.
External concessional finance for indirectly income-generating projects: The construction of roads and bridges and other infrastructure development projects should be financed by concessional loans with long grace periods. Repayments should not fall due before the loan starts to generate income.
Commercial loans for directly income-generating projects: Loans for putting up industries, for example, should be financed by commercial loans, but with low interest rates. In the event a particular country’s economic climate becomes adverse, the loans should be converted into grants to enable an economic recovery. There should be a risk assessment by borrowers and lenders and if the programme fails, borrowers and lenders should share the risk. The government of the debtor country should not bear full responsibility as the case is now, and be obliged to repay a disproportionate share of the loan. Moreover, 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 feels that it is necessary that government puts in place a clear and effective monitoring mechanism to prevent the abuse of public funds. This is a matter of utmost urgency. In line with that, Jubilee-Zambia has been for some time proposing the establishment of a “Debt Mechanism.” This is a legally structured arrangement that would bring relevant government ministries, key and credible civil society organizations, as well as Members of Parliament together in the monitoring process. The idea is to create an open enough system that provides transparency, accountability and participation in the management of the public resources freed up through debt relief.
It is true that the government of Zambia, in responding to the need for the monitoring and evaluation of the HIPC resources, constituted the HIPC Expenditure Monitoring Team in September of last year. Civil society and other organizations drawn from different backgrounds have been invited to sit on this team. But until to date nothing concrete has happened in terms of the actual monitoring. Numerous delays and bureaucratic difficulties have prevented effective and necessary steps to be put in place. Moreover, such a system must be seen in the wider context and framework of the Poverty Reduction Strategy Paper, since debt relief and the PRSP are currently inseparable.
The appropriate monitoring and evaluation would have several important consequences, among which would be:
3.2 Trade and Globalization
- q The internal disbursement of debt relief is carried out in an open, accountable and transparent manner, and ensures that such funding reaches the intended targets.
- The utilization of the funds is evaluated in terms of their impact on the development goals set by the government in its various plans, both short-term and long-term.
- The monitoring systems itself is checked to see if it is delivering on its promises.
Globalization is a dynamic and complex process, as well as a highly contradictory and ambiguous process. Clearly, as experienced in recent years, it opens up great opportunities for some, but not for others. It also bears high risks depending on where one is situated. Therefore any discussion of economic governance must also address the topic of globalization. Furthermore, it is impossible to separate issues of poverty reduction from globalization.
The issues of globalization are of course much wider than simply trade, and include those of technology, communication, labour markets, culture, etc. But for our purposes here, we will focus briefly only on the issue of trade.
It is important to acknowledge that poverty reduction in Zambia is, to a large extent, dependent on international trade. As a poor nation we have to produce and sell our commodities in the world markets. But several significant barriers restrict access to these markets. Zambia and many other developing nations stand to benefit very little from globalization because of barriers to trade (both non-tariff and tariff barriers) and overproduction of similar commodities by poor countries which are competing for the same markets. The standards set by developed countries in the export market are frequently unattainable by poor countries. Non-tariff barriers such as quality demands and controls are mostly used to prohibit and restrict third world exports. For the most part, these are highly unacceptable and unjustified.
Poor countries’ trade disadvantages are even more evident when one considers the history of relationships. It appears that the developed countries respect the principles of free trade only when it benefits them. In the textile and clothing sectors, for example, where underdeveloped countries have a comparative advantage, the industrialized countries have maintained high tariff barriers. A major UNCTAD study in 1992 revealed that in these two fields “the industrialized countries, in violating principles of free trade, are costing the developing countries an estimated US$50 billion a year -- nearly equal to the total flow of foreign assistance”3.
Overall, it is estimated that unequal trade currently costs the underdeveloped countries about US$500 billion per year. Africa in general and Zambia in particular gets very little value for its products as they are usually in raw form and thus fetch less money on the world markets. Therefore, there is the need to invest in appropriate technologies to process our products and hence add value to them which ultimately will enhance their pricing structures.
While regional integration, with the consequent development of trade relationships, is theoretically advantageous in Africa, the arrangements must be subjected to very serious evaluation. Judging from recent experiences, civil society is sceptical about Zambia’s chances of benefiting strongly from regional economic groupings such as the Free Trade Area (FTA) under the Common Market for Eastern and Southern Africa (COMESA). The playing field in terms of tariffs among member states is still a contentious and unresolved issue. Zambia should not have been pressured to rush into these groupings. It should have been possible to have waited and moved cautiously before ratifying trade agreements that have proved so far to offer very little to the nation.
In Zambia’s current Poverty Reduction Strategy Paper (PRSP), the assumption is made that our economy will grow from increased exports. Yet orthodox growth models from past experience have shown that they do very little to reverse poverty trends. It is incorrect to assume and argue that economic growth will necessarily and automatically lead to development. During the last three years Zambia has been recording economic growth, but paradoxically this has been accompanied by a deterioration in the human development indices.
Experience has also shown that it is very difficult for poor countries like Zambia to influence the terms of trade in its favour. Hence there is urgent need for the developed countries to open up their markets. We are aware that the newly-inaugurated trade initiative of the United States of America (USA), the Africa Growth Opportunity Act (AGOA), if implemented in the spirit of true openness, might address the trade imbalance between poor countries like Zambia and the rich and powerful countries in the North. But it needs very serious examination who exactly in the poor countries benefits from such changes.
The country which played a central in its formulation, the USA, is undermining AGOA as an initiative. This is because the new initiative fails to address the lack of coherence among the aid, trade and debt policies of the United States. For instance, subsidized agricultural production and export dumping by the United States continues to undermine opportunities for African producers. African small-holders see their markets ruined and household incomes decline as a result of cheap imports. In the light of this gloomy scenario, will it be the small-scale entrepreneurs and farmers oronly the already rich elite who will benefit from the AGOA initiative? For Zambia, civil society believes that is too early to answer that question without much deeper examination of the structural implications of AGOA.
We reiterate our call that agriculture subsidies by developed countries should be curbed and reduced. With the majority of the poor in Zambia relying on agriculture, this is one precondition that will ensure poverty reduction . Export subsidies used by the EU to reduce prices of their food exports, for instance, do undercut prices for our farmers. In other words, agriculture subsidies have killed an opportunity for poor people to break the poverty trap.
Other initiatives like the European Union’s “Everything but Arms” do not seem to make life easy for poor countries like Zambia. In fact, the “Everything but Arms” initiative can be classified as the “everything but agriculture” because of the way the EU has protected its agricultural markets.
In conclusion, civil society wants to make the following points:
3.3 New Partnership for Africa’s Development (NEPAD)
- The developed countries should open up their markets more rapidly and fully in order to effectively benefit poor countries like Zambia, making the terms of trade more favourable and less biased toward rich country advantages.
- The developed countries should drop their heavy subsidization of agricultural products and the practice of dumping their surplus production in poor countries.
- Zambia should re-evaluate its participation in regional trade arrangements, to assure that such arrangements really do serve the Zambian people both in the short-term and in the long-term.
A road map for sustained economic growth and poverty eradication lays out a unified vision and development strategy for the continent, to place African countries, including Zambia, on the path of accelerated growth and poverty eradication. Civil Society agrees with the core principles in 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. Among its most challenging and gratifying features is its call for mutual responsibilities and obligations.
Civil society notes that concrete commitments are expected at various levels, such as between African countries and their development partners. In order to enhance the likelihood of success and wider operationalisation of NEPAD, civil society calls for unequivocal support by the cooperating partners for early implementation of this initiative. While Zambia and other African countries shoulder the responsibility and leadership for the implementation of NEPAD, the need for international solidarity cannot be overstated in this forum. For our part as civil society, we urge cooperating partners to timely and adequately offer external action in the form of deeper debt relief and an increase in development assistance. More foreign direct investment and greater market access for our commodities is needed, along with the reduction of agricultural subsidies which continue to disadvantage developing African producers.
Civil society in Zambia, therefore feels that the G8 summit held in Canada recently, the UN conferences on Financing Development, the World Summit on Sustainable Development later this year in Johannesburg, as well as this CG meeting with our cooperating partners today, are occasions for concrete and tangible commitments by Africa `s development partners.
- World Bank, World Bank Debt Tables, 1982-83,1989-90,1992-1993
- Civil society is indebted to Jubilee Netherlands and to Jacques B Gelinas author of ‘ Freedom From Debt’ for some of these brilliant ideas and suggestions
- UNDP, Human Development Report 1994, p.66