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United Nations Development Programme (UNDP)

Does debt relief increase fiscal space in Zambia? The MDG implications

Country Study number 5

John Weeks1, Terry McKinley2

International Poverty Centre
United Nations Development Programme (UNDP)

September 2006

SARPN acknowledges the UNDP as a source of this document: www.undp.org/povertycentre
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This Country Study critically examines fiscal policies in Zambia, particularly the effect of recent and projected debt relief on 'fiscal space'. The study finds that due to associated policy conditionalities and other factors, HIPC debt relief will result in less fiscal space, rather than more. And projected G-8 debt relief will only marginally expand fiscal space. Part of the problem is that the Zambian government has little leeway to choose its own fiscal policies, despite donor rhetoric about 'national ownership' of poverty-reduction policies. Drawing on the analysis of a national study, the Country Study also estimates the additional public expenditures that would enable Zambia to reach the MDGs. In order to finance these expenditures, it proposes a diversified strategy of increasing tax revenue, expanding the fiscal deficit and obtaining more ODA. Finally, it recommends core elements of an expansionary macro framework that could support a seven per cent rate of economic growth (needed to attain MDG #1, i.e., halving extreme income poverty) and buttress the government's effort to reach the other MDGs. In the process, it seeks to dispel common fears about the possible adverse effects of such fiscal expansion.

Introduction

This Country Study examines fiscal policy in Zambia, and how expenditure and taxation could be used to accelerate growth and reduce poverty. Since 1990, fiscal policy has been closely linked to debt servicing and constrained by external loan conditionalities. Throughout the 1990s and 2000s, government expenditure was derivative, in effect, from the servicing of external debts.

This inversion of social priorities has had a debilitating effect on growth, poverty reduction and combating the HIV/AIDS pandemic. However, in mid-2006 it appeared that the debt burden had been reduced to less than US$ one billion, relieving this constraint.3 Surprisingly, and regrettably, the net fiscal gain from debt relief has been marginal because of the external policy conditionalities linked to the relief and associated ODA.

If policy conditionalities set by external agencies were more flexible, Zambia could potentially fully achieve all of the MDGs by 2015. The most challenging would be the poverty reduction goal (MDG #1) because it would require robust growth well above historical rates. Meeting the MDGs would also require a substantial increase in government expenditure, supported by donors and lenders and a radical change in their approach to conditionality.

In its MDG progress report for 2005, the UNDP categorised achieving the MDGs as 'likely' for five goals, 'potential' for three, and 'unlikely' for two. While this record represented a substantial improve~ent from the prospects in 2003 (when the corresponding numbers were zero, eight and two, respectively), it implied that half of the MDGs might not be achieved (UNDP 2005).

A recent careful and thorough study of the resource cost of achieving the MDGs provides a rough but reliable estimate of the fiscal effort that the government must undertake (Mphuka 2005).4 On the basis of this study and an analysis of the potential for expanding fiscal space over the years 2006-2015, this Country Study proposes a financing package that could realise the MDGs. To lay the basis for the discussion of financing, this Study first considers debt and the balance of payments.


Footnotes:
  1. Professor Emeritus, School of Oriental and African Studies, University of London.
  2. Senior Researcher and Acting Director, International Poverty Centre, United Nations Development Programme.
  3. In early 2006, the Ministry of Finance and National Planning estimated that on the assumption of full implementation of G-8 debt cancellation, the total debt stock would fall to US$ 747 million, of which Paris Club bilateral debt would be US$ 110 million, bilateral non-Paris Club US$ 280 million, and multilateral US$ 356 million. The only creditors that Zambia would owe over fifty million dollars would be the European Investment Bank (25 per cent of the US$ 747 million), China (20 per cent), Russia (15 per cent), and the International Fund for Agricultural Development (11 per cent). IMF and World Bank debts would be completely cancelled. The source for these numbers is information provided by the ministry.
  4. For a global approach to MDG costing whose methodology has informed this study, see Kakwani and Son 2006.


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