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World Development Movement

Zambia: condemned to debt

How the IMF and World Bank have undermined development

April 2004

By Lishala C. Situmbeko and Jack Jones Zulu

SARPN acknowledges the World Development Movement as the author of this report.
Further details on the WDM can be obtained from: http://www.wdm.org.uk/campaign/colludo/resources.htm
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Executive Summary

Despite the disadvantage of being land-locked, Zambia was once one of the wealthiest countries in sub-Saharan Africa. This began to change in the early 1970s. After the oil crisis (increasing the price of imports) and relative commodity price collapse (reducing the revenue from exports), Zambia had to turn to the International Monetary Fund (IMF) and World Bank for assistance. So began some thirty years of Bank and Fund intervention in the Zambian economy. In return for loans, Zambia was required to implement Bank and Fund endorsed economic policies over three decades. Unfortunately, this period is a sad story of increasing debt, economic stagnation or collapse, and social crisis.

After the external economic shocks suffered in the early 1970s, Zambia’s total external debt rose from US$814 million to US$3,244 million by the end of the decade. The situation then further deteriorated with Zambia’s external debt more than doubling to US$6,916 million by the end of the 1980s. By the late 1990s the debt crisis in countries such as Zambia led to the creation of the much vaunted Heavily Indebted Poor Countries (HIPC) initiative.

Unfortunately, the relief that Zambia is getting under the HIPC initiative is proving to be inadequate in removing its debt burden. By the start of 2003, Zambia had received only 5 per cent of the debt service reduction committed to it under HIPC. Even when it has reached completion point, Zambia’s debt service will continue to rise. As Zambian Finance Minister Peter Magande has pointed out, “Zambia’s current levels of debt even after it receives its full quota of debt relief as defined in the decision point document under HIPC initiative will continue to be unsustainable.”1

Just as worrying as Zambia’s continuing debt crisis is the fact that the HIPC initiative is being used as another lever with which the IMF and World Bank can wield influence over Zambia’s economy. In return for debt relief, Zambia must implement economic policies, such as privatisation and cuts in public spending, that meet with Bank and Fund approval. The conditions tied to the HIPC initiative are just the latest in a long line of ‘free market’ policy interventions that have included: trade liberalisation; investment deregulation; privatisation; cutting or abolishing subsidies; laying-off civil service staff; public sector wage cuts or freezes and reduced state intervention in the agricultural sector.

Yet a close examination of economic and social indicators suggests the kind of policies being foisted on Zambia by these institutions over the past twenty years have been a dismal failure. For example, trade liberalisation, a key plank of Bank and Fund economic orthodoxy, has been disastrous for Zambia’s manufacturing sector. Textile manufacturing has been one sector particularly badly hit. The lowering of tariffs on textile products, and particularly the removal of all tariffs on used clothes, led to large increases in imports of cheap, second-hand clothing from industrialised countries. The Zambian textile industry could not compete with these imports, and the sector has all but vanished.

There were more than 140 textile manufacturing firms in 1991, but this had fallen to just eight by 2002. Ramesh Patel, director of SWAPP Ltd commented, “We used to have factories everywhere, but Ndola is a ghost town now. We are one of the lucky ones who have managed to survive, but there’s no comparison. We used to supply retailers with 3.5 thousand tons of clothing annually; we’re down to less than 500 tons now. We had 250 employees eight years ago; we’re down to 25 now.”2

Agricultural liberalisation has had a similarly poor record. A 2000 World Bank study acknowledged that the removal of all subsidies on maize and fertilizer under World Bank/IMF structural adjustment loans led to “stagnation and regression instead of helping Zambia’s agricultural sector.”3 And the United Nations Conference on Trade and Development (UNCTAD) concluded that, in Zambia, “Agricultural credit and marketing by the private sector turned out to be uneven and unpredictable, and once market forces had eliminated the implicit subsidies to remote and small farmers, many farmers were left worse off.”4

Privatisation was one of the strongest features of IMF and World Bank conditionality from 1992 onwards. But despite attracting praise from the Bank for the ‘success’ of its privatisation programme, the reality is that privatisation has had a very mixed record in Zambia. Although some failing state run enterprises have been transferred into private hands and are now operating more effectively; post-privatisation, many companies have collapsed, jobs have been lost and welfare programmes originally performed through a parastatal have not been continued by private companies.

The patchy record of past sell-offs has resulted in the one-size-fits-all privatisation programme being doubted even at the highest levels. In 2003, the Zambian President, Levy Mwanawasa, said, “[The IMF’s privatisation programme] has been of no significant benefit to the country … privatisation of crucial state enterprises has led to poverty, asset stripping and job losses.”5

The real impact of these core IMF and World Bank policies: trade liberalisation, agricultural liberalisation and privatisation, can clearly be seen in Zambia’s economic and social performance. Zambia’s economic record since the oil price shocks of the 1970s has been woeful. Real GDP per capita fell from US$1455 in 1976 to US$1037 by 1987, an average of –3.6 per cent per year. This decline stabilised or even reversed from 1987 to 1991, before the economy entered a massive recession again in 1992, the year an extensive reform programme began. By 2000, real GDP per capita had fallen to US$892.

The IMF has even failed to achieve one of its core aims for intervention – to stem temporary balance of payments problems. Statistics from the United Nations Development Programme (UNDP) suggest that Zambia’s trade deficit has actually increased through the 1990s. At the start of the decade the difference between imports and exports was around –5 per cent of GDP, but since 1994 its range has tended to be between –9 and –15 per cent. Not surprisingly, employment has suffered. Formal manufacturing employment fell from 75,400 in 1991 to 43,320 in 1998. Paid employment in mining and manufacturing fell from 140,000 in 1991 to 83,000 in 2000. Paid employment in agriculture fell from 78,000 in 1990 to 50,000 in 2000 and employment in textile manufacturing fell from 34,000 in the early 1990s to 4,000 in 2001.

Economic decline has been mirrored by a social decline. For example, the proportion of the population classed as undernourished, having a calorie consumption below their minimum energy requirement, has increased from 45 per cent in 1990 to 50 per cent in 2001. Without radical change, it looks increasingly unlikely that Zambia will achieve most of the Millennium Development Goals (MDGs) by the globally agreed target date of 2015. In fact, the indicators for eradicating hunger, achieving universal primary education and reducing child mortality are actually in reverse, so, if current trends continue, these goals will never be met.

Overall, Zambia’s level of human development has been in freefall in comparison to other countries. In 1990 it was ranked 130 on the UNDP’s Human Development Index, falling to 163 in 2001. Although very poor in 1990, Zambia was ranked as one of the most developed countries in sub- Saharan Africa. It is now one of the poorest.

Such a dismal performance has led to widespread dissatisfaction with Bank and Fund policies. Yet time and again public protest has simply been ignored while ‘more of the same medicine’ has been prescribed. This exposes the fundamental lack of democracy in World Bank and IMF intervention in Zambia.

A recent example of this democratic deficit is the required privatisation of Zambia’s state electricity company (ZESCO) and state bank (ZNCB) in return for debt relief. The Government initially agreed to implement these measures, but the prospect of these privatisations provoked large scale public resistance. Following a major protest march in Lusaka, the Zambian Parliament voted for a motion urging the government to rescind their decision to privatise ZNCB.

Following this opposition the Government decided to reverse its earlier commitment to sell off these companies. The IMF responded immediately by announcing that Zambia risked forfeiting US$1 billion in debt relief if it did not go ahead with the privatisation. IMF resident representative Mark Ellyne said, “If they [the government] don’t sell, they will not get the money.”6 The Government was forced to ignore its own Parliament and go back on its decision not to privatise ZNCB.

Another condition for receiving debt relief has been to curb public spending. This has forced the Government to abandon plans to provide a living wage to public sector workers. The IMF will not let the Government increase its budget deficit from 1.55 per cent to 3 per cent.

By way of comparison, the projected 3 per cent Zambian budget deficit contrasts with a 2003 US budget deficit of 3.4 per cent (projected to rise to 4.1 per cent in 2004) and a projected UK budget deficit of 3.4 per cent. In fact the IMF recently criticised the UK government for planning to increase its budget deficit to this level, which met with a curt response.

A UK Treasury spokesman said, “We are not going to accept a stability pact from the IMF, the European Commission or anybody else” and that the IMF had an “ideological opposition” to public spending.7 Unfortunately, Zambia does not have the same luxury of being able to ignore the IMF.

Recent criticism of the undemocratic nature of IMF and World Bank policies has been met – both by these institutions and the UK government alike – with the response that the Zambian people chose these policies through their ‘participatory’ Poverty Reduction Strategy Paper (PRSP) process.

But the incorporation of civil society viewpoints in the final PRSP did not extend to the macroeconomic policies in the PRSP. Despite its poor record, the IMF and World Bank were unwilling to backtrack or renegotiate the macroeconomic framework that had been imposed on Zambia throughout the 1980s and 90s. The IMF’s existing Poverty Reduction Growth Facility (PRGF) programme formed the basis of this aspect of the PRSP, and so in effect overrode any macroeconomic discussions within the PRSP process. The result was the so-called ‘participatory’ PRSP ‘endorsing’ a predictable mixture of wholesale privatisation, trade liberalisation and fiscal stringency.

Despite the relatively receptive attitude from civil society regarding the PRSP process in Zambia, it is still clearly influenced by donors in its inception and development and by the fact that the Bank and Fund Boards have the final sign-off to ‘approve’ it. Also, the PRSP is not the only document that defines conditionality. Zambia cannot access the HIPC initiative unless its government has negotiated a ‘Decision Point’ document with the IMF and World Bank and has agreed a ‘Letter of Intent’ for an IMF PRGF programme.

The undemocratic imposition of policies on Zambia has also undermined its ability to engage effectively in multilateral fora such as the World Trade Organisation (WTO). As the WTO was being created in 1994 through the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), Zambia was already being required to unilaterally reduce its tariff barriers, rendering meaningless some of the results of the WTO process. Zambia’s bound rates on goods at the WTO, agreed as part of the Uruguay round, are all in the range of 35 to 60 per cent. The vast majority are 40 to 45 per cent. Yet the actual tariffs practised since the Bank and Fund required trade liberalisation in the early 1990s are: 0, 5, 15 and 25 per cent, well below what was negotiated in the WTO. Most of this liberalisation happened before 1994, and none as part of a multilateral process. None of the WTO negotiated rates will ever be applied under the four tariff line system devised with the IMF.

In contrast to industrialised countries, which wait for trade rounds to reduce their tariffs as part of a multilateral process, the IMF and World Bank require poor countries such as Zambia to liberalise unilaterally. This effectively takes away their bargaining chips in any subsequent negotiations. So there is little point in developed country Ministers – such as the UK Trade Secretary or the UK Development Secretary – telling poor countries such as Zambia to make the most of the multilateral system and stand up for their rights in the WTO when, through the IMF and World Bank, these same developed countries are unfairly pushing poor countries into unilateral liberalisation.

In conclusion, while there is no doubt that pre-IMF/World Bank Zambian economic policy would have had its flaws, and while it is possible to lay some of the blame for Zambia’s post-IMF/World Bank economic and social problems at the door of government corruption, there is no escaping the responsibility the IMF and World Bank, and their political masters, must shoulder for their interventions.

This report clearly demonstrates that the IMF and World Bank’s involvement in Zambia has been unsuccessful, undemocratic and unfair. The evidence suggests that the past twenty years of IMF and World Bank intervention have exacerbated rather than ameliorated Zambia’s debt crisis. Ironically, in return for debt relief, Zambia is required to do more of the same. The country has been condemned to debt.

If the downward spiral is to be broken, and the MDGs are to be achieved, radical action must be taken. The evidence presented in this report points to two obvious conclusions. It is time to cancel Zambia’s debt. And it is time to fundamentally rethink the role of the IMF and World Bank. It is not acceptable that these institutions have effective control over policymaking in countries like Zambia. Policies need to be developed which are genuinely home grown alternatives that put the Zambian people, especially the poor, first.

The responsibility for this change lies with industrialised country governments such as the UK. The UK Development Secretary (Hilary Benn) sits on the Board of the World Bank and the UK Chancellor of the Exchequer (Gordon Brown) sits on the Board, and Chairs the Finance Committee, of the IMF. Fundamental change in these institutions can only come from these political decision-makers. As the holders of power in the IMF and World Bank, it is the industrialised countries who must take action if they are to turn their development rhetoric into meaningful results.


Footnotes:
  1. The Post. (2003). Zambia’s debt will continue to be unsustainable. The Post, Lusaka. 04/11/03.
  2. Jeter, J. (2002). The Dumping Ground As Zambia Courts Western Markets, Used Goods Arrive at a Heavy Price. Washington Post Foreign Service. 22/04/02.
  3. Deininger, K. and Olinto, P. (2000). Why Liberalization Alone Has Not Improved Agricultural Productivity in Zambia: The Role of Asset Ownership and Working Capital Constraints. World Bank, Washington, DC.
  4. UNCTAD. (2002). Economic development in Africa. From Adjustment to poverty reduction: What is new? United Nations Conference on Trade and Development, Geneva, United Nations, New York and Geneva.
  5. BBC. (2003). Zambia to re-think privatisation. BBC News on-line. 11/02/03.


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