Debt Relief and HIPC: Zambi
- Case Study
Zambia is one of the beneficiaries of the World Bank and IMF’s Highly Indebted Poor Countries Initiative (HIPC), set up originally in 1996 to assist the poorest countries by forgiving part of their foreign debts. Originally expected to be a major help to the world’s poorest countries, it was designed to reduce high levels of unsustainable debt and free up resources for poverty eradication.
The reality, as Zambia has discovered, is turning out to be different. Almost two years since the land-locked country in Southern Africa became eligible for debt relief, it still spends more on interest payments to the World Bank and IMF than on health and education for its 10.3 million impoverished citizens. In 2001, Zambia, spent $158 million on debt service repayments, compared to $24 million for health and $33 million for education.
Zambia’s debt crisis became increasingly acute in the 1980s. Caused in part by the oil crisis of 1973 and dramatic fall in the price of copper that followed, the newly independent state began to borrow heavily to finance development. By the 1980s with a deteriorating economic performance and worsening balance of payments, the country entered into a structural adjustment program with the World Bank and IMF.
In 1987, in an effort to induce economic growth under the theme “Growth from Our Own Resources,” former President Kenneth Kaunda restricted debt service payments to 10% of the country’s Gross Domestic Product (GDP) and suspended relations with the IMF. The idea was to limit debt servicing and use the savings to finance desperately needed investments in industry and agriculture. But by unilaterally cutting debt payments, President Kaunda’s defiance of the World Bank and IMF cost the country greatly. Creditors slapped penalties onto the existing debt and reduced foreign aid, causing the overall debt burden to balloon.
When Zambia signed a new agreement with the IMF after a two-year hiatus in June 1989, the debt to GDP ratio was over 200% and led to a period of hyperinflation and the virtual collapse of the currency. In the 1990s, with a change of government and the introduction of a multi-party political system, Zambia set out rapidly down a path of free-market reform, radically overturning the one-party state. As part of the World Bank and IMF’s enhanced structural adjustment program, the country quickly undertook a massive privatization of government-owned enterprises, turning 80% of the economy over to the private sector; the kwacha, the local currency, depreciated as the exchange rate and interest rates were floated; trade barriers were lifted; civil service was restructured and downsized; subsidies were stopped and cost recovery measures in the social sector were introduced.
The result was that inflation fell from 93% in 1991 to 16% in 2002 and the country posted economic growth of 3.5% in 2000, rebounding from a contracting economy in the early 1990s. The social cost though was enormous, as hundreds of thousands of people became unemployed, and fewer people could afford even the most basic of services.
To make matters worse, by December 2000 the country’s debt totaled $7.3 billion and Zambia was barely able to make its payments on its burden. With $606 million in debt payments due in 2001, the country was accepted into the first stage of the HIPC program. On reaching what is called a “decision point”, it immediately received a 50% debt reduction. Normally, countries are first forced to wait till they have qualified by satisfying certain conditions, usually a three-year process, before they actually get debt relief. But in Zambia’s case, not only was the global debt campaign, Jubilee 2000, demanding that HIPC deliver results faster, but creditors knew that the country would simply not be able to meet the payments due in 2001. With that write-off from the multilateral creditors, such as the IMF and World Bank, plus additional debt cancellation from bilateral creditors, debt now stands at $5.8 billion, down from $7.3 billion, saving the country millions of dollars in debt payments every year.
Although this sounds insignificant, projected debt servicing payments remain high at over $100 million dollars per year and Zambia’s economic prospects still look bleak. Total debt is equivalent to approximately $552 for every Zambian, a huge sum considering that the country’s per capita Gross National Income is only $300. And that is millions of dollars that won’t be available to spend on developing the economy of a country where an estimated 80% of the population live under the poverty line, and where, with 20% of the population HIV positive, life expectancy has fallen to 37 years from 54 years.
Zambia’s case demonstrates the limitations of HIPC, which was primarily created to bring a country’s annual debt payments down to an amount that could be sustained by its export earnings. If Zambia stays “on track” by adhering to World Bank and IMF prescriptions, and reaches its HIPC completion point, it should receive full debt relief, cutting its debt stock by an estimated $3.8 billion. The World Bank estimates that at that level, debt payments will be equal to 150% or less of the country’s export earnings and it can sustain its debt. However, that ratio that has already proved unsustainable in countries that have reached their HIPC completion point, perhaps partly because it doesn’t take into account the amount a country needs to spend on social needs and development.
Zambia’s experience has highlighted several factors that need to be taken into account in the HIPC process:
Limits on trade Some less developed markets will impose limits on the various aspects of trade. These can include: The degree to which a stock price can rise/fall each day; the number of shares an investor can buy in a single trade or own in a single listed company; the degree to which a foreign investor can access the market; etc. These rules serve a variety of purposes, e.g. limiting stock market volatility, preventing someone cornering the market, and making sure that there is a “level playing field.”
1.) Over-reliance on one commodity export.
Like many other countries in sub-Saharan Africa, Zambia’s economy has long been reliant on one commodity export, in this case, copper. Today, copper exports still account for up to 80% of Zambia’s export earnings. Since copper is almost the only thing that Zambia sells overseas, when copper sales decline, Zambia is left without the foreign exchange it needs to pay its debt.
In March 2000, in an effort to make its mining sector more efficient, Zambia sold a majority stake in its largest copper mine, Konkola, to one of the world’s biggest mining companies, Anglo American Plc. But the price of copper has continued to slump to a 14-year low and the country’s output has fallen from 860,000 metric tonnes in 1970 to 260,000 metric tonnes in 2000. Since copper prices have sunk so low, Anglo American has told the Zambian government it is no longer profitable to keep operating the mine. The company wants to shut the mine or sell it off. The closure of the mine would throw thousands out of work, putting an even greater burden on the cash-strapped government. This is making it harder than ever for Zambia to make its debt payments.
Everyone agrees Zambia needs to diversify its economy and donor-sponsored conferences have been in held Livingstone, Ndola and Lusaka to discuss this, but no one is quite sure how to go about it. Under colonial rule, the country’s development primarily took place along the railway lines leading to the copper mines, leaving huge pockets of the country underdeveloped. In the 1960s, financed with copper revenue, the government tried unsuccessfully to create new industries and jobs in agriculture and manufacturing.
Agriculture and tourism are now cited as the arenas where Zambia has the most “comparative advantage,” but it’s not clear where the needed investment will come from to modernize these sectors, and, while northern countries maintain agricultural tariff barriers, which markets Zambian produce can actually reach.
Without finding a way to diversify its economy and produce more sectors that can export products and bring money into the country, Zambia will continue to struggle to earn enough funds to pay its foreign debt. With Zambia’s copper industry barely operational and little other investment taking place, it looks unlikely that the debt relief on offer is going to be adequate to get the country out of its current poverty trap.
2.) Including civil society groups in drawing up a Poverty Reduction Strategy forces change in economic policies.
The creation of the IMF and World Bank’s mandatory Poverty Reduction Strategy Paper (PRSP), a condition for HIPC, has forced governments to include a human dimension in their economic polices. This document must be drawn up in order for the country to qualify for any debt relief. It is intended to serve as blueprint for the country’s development and should be written in consultation with NGOs and civil society.
In Zambia, local NGOs were very active in the first draft of the document and many of their main recommendations were included in the final PRSP that was approved by Parliament in May 2002. It’s “not a panacea to the country’s problems, but at least helps us to engage more Zambians in the economic governance of their country and demand people-centered priorities,” says Besinati Mpepo, representative for the Civil Society for Poverty Reduction Coalition.
Already, President Mwansawasa, elected last year, has announced he will abolish school fees and reintroduce universal primary education. For the last decade, with the introduction of user fees and increasing poverty, caused both by structural adjustment policies and the impact of HIV/AIDS, many children can’t afford to go to government schools. One-third of primary school aged children and two-thirds of secondary school aged children are not in school. And according to a report released in 2001 by Oxfam and the Jesuit Centre of Theological Reflection (JCTR) the result has been that Zambian households, on average, have been spending twice as much on primary education as the government.
3.) The debt relief offered often isn’t enough to fund poverty alleviation plans.
Although the World Bank and IMF have endorsed Zambia’s PRSP, they still warn that the cost and too much deviation in economic policies may threaten to delay Zambia’s effort to reach “completion point” and receive full debt relief. “Some of the core goals and targets of the PRSP appear too ambitious. Targets and indicators need to be refined further to ensure that they are realistic and can be monitored within the allotted time frame,” IMF resident representative Mark Ellyne said in an interview in July with United Nations Integrated Regional Information Network (UNIRIN).
The PRSP plan would cost $1.2 billion for 2002-2004, a sum far greater than the money available from debt relief. According to the PRSP, debt service payment relief should amount to $773 million, but with donor assistance in decline over recent years from $539 million in 1999 to $376 in 2001, it is not certain yet where the needed money will come from. Besina Mpepo, who represents more than 90 Zambian NGOs, worries that without the means to pay for these initiatives, the country will continue to have to borrow for consumption, a continuation of policies that led to the debt crisis in the first place. “I don’t think Zambia should borrow more money to finance projects that we know will not result in an economic return,” she said. “My fear is we will continue to just hand over more power to creditors, which in the long runs is not in our interest. I believe we should only accept grants rather than continue to borrow.”
However, while the IMF may find the amount of spending on social needs set out in the PRSP to be too ambitious, for many critics it is not enough. For example, it requires an increase in spending in the education sector from 18.5% in 1999 to 20.5% of the budget in 2003. According to Jubilee Zambia, part of the global campaign to cancel debt, this hardly looks adequate to actually meet the needs. The same they argue is true in the health sector, where increased attention on drug availability, the HIPC condition is welcome; but they also argue that without increased wages to health workers, who were on strike for a large part of 2001, the quality of health care will not substantially improve. They also argue that much of the conditionality attached to HIPC is still the same as the structural adjustment programme that has only added to the high levels of poverty. Ultimately, the question remains: who in fact determines the priorities of poverty reduction, the Zambian government and civil society through the PRSP process or the multilateral financial institutions through the HIPC conditions?
4.) The active participation of civil society and transparency in monitoring HIPC and the PRSP is crucial.
Tracking savings from debt relief and ensuring it does find its way to the social sector is already proving to be difficult, according to Charity Musamba from Jubilee Zambia. The HIPC Monitoring Team, set up by the Ministry of Finance, is intended to be independent of the government, and report directly to the Minister of Finance, who will then determine what information becomes public. Although they have agreed to allow civil society participation, it is still not clear what their terms of reference will be and how this process will actually work. “So far the team lacks financial support and access to vital information necessary for proper monitoring and evaluation” Musamba said, adding that her other concern is how much the appointed team actually knows about HIPC process and the PRSP to be effective.
The participation of civil society groups has been an important step in strengthening the relationship between the public at large and the government. But the crucial mechanism, advocated by Jubilee Zambia, is to ensure that Parliament becomes more actively involved in the country’s international agreements and financial borrowing. Under the current constitution, the executive branch of government has free rein to negotiate and make agreements over the country’s finances, hindering the role of Parliament to act as a check and balance and furthering limiting public debate and transparency.
While the impact of the drought and the AIDS pandemic continue to exacerbate the country’s woes, the limitations of HIPC, whether to bring Zambia’s debt levels down to sustainable levels, or significantly reverse the current cycle of poverty, is apparent. And as long as substantially more debt is not cancelled, Zambia, like many others countries in Sub-Saharan Africa will continue to spend a large part of its precious foreign exchange on debt servicing, while neglecting the needs of its people.
In its current form, HIPC is unlikely to provide the needed funds to finance development but it has managed to put the issue of poverty on the agenda. In a significant reversal of policy, under HIPC, distinct from the enhanced structural adjustment program, countries are encouraged to increase their share of social spending.
Mounting criticism of HIPC from African governments and NGOs has led to demands that debt relief be directly to poverty alleviation and measured by a country’s commitment to the UN millennium development goal to half poverty by 2015. Other alternatives to HIPC have been proposed, by African leaders who, under the New Partnership for African Development (NEPAD), argue that HIPC countries should not pay more than 10% of tax revenues to debt repayments.