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«2015 Bilateral debt Multilateral 8000 7000 poverty 6000 goals 5000 sustainability 4000 3000 macroeconomic millennium 2000 1000 0 1995 1996 1997 1998 ...»

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Debt Strategies to Meet the

Millennium Development Goals


development Private & Parastatal



















1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

United Nations

Development Programme

Zambia: Debt StrategieS to meet

the millennium Development goalS

Published for the United Nations Development UN Programme DP (UNDP) Copyright © 2007 by the United Nations Development Programme Alick Nkhata Road P.O. Box 31966 Lusaka, Zambia 10101 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission from the United Nations Development Programme.

Design: Mulumba M. Lwatula, Zedspot Media.

Printing: Mission Press. Ndola, Zambia.

For a listing of any errors or omissions in this report found subsequent to printing, please visit our website at: www.undp.org.zm Zambia: Debt Strategies to Meet the Millennium Development Goals Acknowledgements Preparation team for the Zambia: Debt Strategies to Meet the MDGs Report Coordinators Paul Ladd, Economic Advisor, Bureau for Development Policy, UNDP-New York Abdoulie Sireh-Jallow, Senior Economist & Head, Strategy and Policy Unit, UNDP-Zambia Main Authors and Lead Consultants UNDP Team Elda Chirwa, National Economist Caesar Cheelo, Lecturer and Research Emefa Attigah, Economist Economist, University of Zambia Ilpo Kiiskinen, Communications Officer Jack Jones Zulu, Economic Research Abdirizak Musa, Trade, Debt & Globalisa- Consultant tion Specialist, Johannesburg Regional Initial Consultations Service Centre David Ndopu, Monde Sitwala, Ronald Reviewe

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Preface Zambia’s debt has been brought down to financially sustainable levels as a result of the Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives. The country’s growth and stability records are largely favourable and have been projected by the International Financial Institutions to remain fairly stable over the medium term. However, Zambia continues to face many challenges that will make its progress towards the MDGs more difficult. Economic growth in Zambia has been hampered by many domestic and external factors that have limited its size and quality, and ultimately it has not been ‘pro-poor’.

Moreover, while no longer in a ‘debt trap’ because of extensive debt relief, Zambia may yet find herself in an ‘MDG trap’ because of insufficient access to predictable financing for the MDGs. Domestic resource mobilization and external grants have been limited and the Poverty Reduction Growth Facility conditionalities have continued to restrict both external and domestic borrowing. However, Zambia’s return to creditworthiness – the objective of the HIPC initiative – means that Zambia will need to assess carefully how much it borrows in future and for what purpose. At the same time, more progress needs to be made on increasing Official Development Assistance (ODA) and improving its quality.

To meet these challenges and to ensure that Zambia continues to make progress towards the MDGs, a number of recommendations on debt and development financing have been proposed in the Report.

1. Closer liaison between the national authorities and the international community towards establishing consistency between macroeconomic and debt stability; and sectoral demands for MDGs spending. In its design, the macroeconomic framework should have more information about the sectoral spending requirements for meeting the MDGs as these are more reliable estimates of developmental requirements than macro estimates.

2. The need for international efforts to develop an MDG-consistent debt sustainability framework and provision of time-consistent predictable amounts of ODA.

3. More commitment from the local authorities to allocate resources in consonance with priority MDGs/Fifth National Development Plan areas.

4. Rationalization of domestic resource mobilization, including exploring more meaningful revenue generation options in mining.

5. The need for policy leadership on domestic and external debt management, systems development, capacity strengthening and fostering enabling environments.

The United Nations Development Programme believes that a combination of the foregoing steps will help move Zambia significantly towards meeting the MDGs. I hope that this Report will help to broaden an understanding of the debt sustainability issues and MDGS in Zambia and that the readers will find it useful.

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IVM Integrated Vector Management JCTR Jesuit Centre for Theological Reflection LDCs Least developed countries LICs Low income countries LCMS Living Conditions and Monitoring Survey MAC Ministry of Agriculture and Cooperatives MAP Multi-country AIDS Program MCTI Minister of Commerce, Trade and Industry MDRI Multilateral Debt Relief Initiative MGDs Millennium Development Goals MOE Ministry of Education MOH Ministry of Health MONFP Ministry of Finance and National Planning MTEF Medium Term Expenditure Framework NAC National HIV/AIDS/STD/TB Council NDP National Development Plan NEPAD New Partnership for Africa’s Development NPV Net present value NTEs Non-traditional exports ODA Official Development Assistance P.AY.E Pay-as-you-earn (tax) PEPFAR (US) President’s Emergency Plan for AIDS Relief PPPs Public-Private Partnerships PRGF Poverty Reduction and Growth Facility PRPs Poverty Reducing Programs PRSP Poverty Reduction Strategy Paper PS Priority Survey PSD Private Sector Development SADC Southern African Development Community SAPs Structural Adjustment Programs SOEs State-owned enterprises SSA Sub-Saharan African SWAps Sector-wide approaches TBs Treasury bills TNDP Transitional National Development Plan TOTs Terms of trade UNDP United Nations Development Programme VAT Value-added tax ZASF Zambia HIV and AIDS Strategic Framework ZAMTEL Zambia Telecommunications ZBF Zambia Business Forum ZDHS Zambia Demographic and Health Survey ZESCO Zambia Electricity Supply Company ZRA Zambia Revenue Authority

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Despite many landmark efforts, there is a growing debate about the sufficiency of the various debt strategies to foster the achievement of the MDGs. For instance, though the cancellation of significant proportions of Zambia’s external debt has allowed the country to divert additional resources to priority Poverty Reducing Programs (PRPs)2, 1 the resources needed to achieve the MDGs are likely to far exceed those freed up under the combined debt relief initiatives. And while the Zambian government will most likely continue to make efforts to increase its domestic resource mobilization, fiscal scope for reallocating expenditures within the budget may be considerably constrained3. Hence, in the short- to medium-term Zambia will need to supplement the limited domestic resources with those provided by donors. A key issue will therefore be on what terms Zambia receives these external resources – whether as grants or loans (concessional or market rate) that may build up to be an unsustainable future liability. If the preference is for grant financing to invest in the MDGs, what should Zambia do in the event that grant financing is insufficient or unpredictable? If additional loans are entered into, what would constitute a ‘sustainable’ level of debt in respect of the human development imperative and how could appropriate contraction of loans and the use of loan funds be guaranteed?

A second area of concern is Zambia’s traditionally high level of domestic debt. Although the servicing cost of domestic debt has started to decline recently due to lower interest rates, the volume of government securities issued is still rising4. Zambia remains vulnerable to interest rates rises which would significantly increase the cost of servicing its internal debt, notwithstanding the growth and poverty reduction benefits that can be realised from the targeted use of government borrowing. This could further squeeze out priority investment areas as identified in Zambia’s Fifth National Development Plan (FNDP) 2006-2010.

This study explores the above issues with the following question in mind: In respect of both external and domestic debt, how can the concept of debt sustainability place development and poverty reduction aims at its center, in addition to financial viability?

Overall, the study therefore seeks to understand the level and quality of financing and particularly, indebtedness that Zambia would be able to sustain and use productively without compromising its ability to finance the MDGs and without building up an initial IDA-14 allocation. It is estimated that additional net resources from the International Development Association (IDA) will amount to US$6m during the period of IDA-14; while debt service savings to the International Monetary Fund (IMF) will amount to US$86m over 2005-07.

2 Most of these additional expenditures have been in the areas of infrastructure, support for small-scale farmers and food security, and increased expenditures in the social sectors – especially education (MOFNP, 2004a).

3 Weeks and McKinley (2006) have provided various insights into the nature and extent of fiscal space restrictions post HIPC debt relief.

4 Internal debt servicing costs represented over 11% of total government expenditure in 2004 (MOFNP, 2004b).

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The rest of the paper is structured as follows: the rest of Section 1 considers the various dimensions of poverty and human development in Zambia as well as some of the strategies for addressing the challenges; Section 2 looks at the cost estimates of required financing of the FNDP poverty goals and for achieving the MDGs; in Section 3, Zambia’s macroeconomic situation is explained, in retrospect and prospect; in Section 4, Zambia’s public debt record and future outlook are considered in terms of both external and domestic debt; Section 5 discusses the prospects for future development financing and debt sustainability in Zambia; and Section 6 concludes and offers some recommendations.

1.1 Poverty and Human Development in Zambia Having committed to the MDGs in 2000, Zambia has pursued various strategies and plans for addressing poverty and other salient developmental issues since 2002. From the implementation of a Poverty Reduction Strategy Paper (PRSP) during 2002 to 2004, which was extended into a Transitional National Development Plan (TNDP) in 2005, the country is moving ahead to implement the FNDP, which was finalized in December

2006. It is envisaged that the FNDP will be implemented from 2007 as the mechanism for continuing to guide the country towards spurring economic and sustained human development. Many are optimistic that the FNDP will assist the country to effectively address and ultimately triumph over its Millennium human development challenges.

To date however, Zambia’s progress towards achieving the MDGs has been relatively slow. In its progress report for 20055, the UNDP categorized Zambia’s prospects for achieving the MDGs as ‘likely’ for four goals, ‘potential’ for three, and ‘unlikely’ for two. Although this represents a considerable improvement from the prospects reflected in the 2003 status report – wherein three of the goals were seen as ‘likely’ to be achieved, two had ‘potential’, and two were ‘unlikely’ – it nevertheless implies that there is a possibility of not achieving half of the MDGs (see Annex 2 for detailed categorization 5 UNDP (2005)

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of the MDGs in 2003 and 2005).

Arguably, the most challenging MDG would be the poverty reduction goal (goal number 1) because it would require robust and pro-poor growth well above historical rates. In spite of implementing the PRSP and TNDP, which contributed to the positive 1 economic growth trends6, the country is yet to register notable declines in income poverty. The Living Conditions and Monitoring Survey (LCMS) IV of 2004 (CSO, 2005) shows that about 68 percent of the population fell below the national overall poverty line of K111,747 per month (approximately US$25), implying that this proportion of the population were unable to meet the cost of acquiring the minimum level of consumption on food, shelter, health, education and so on. This further meant failure and incapacity of a significant proportion (68%) of the population to attain US$0.83 (less than a dollar) a day. On the other hand, extreme poverty7, which was set at an income expenditure of K78,233 (or US$18) per month or US$0.58 a day, covered about 53 percent of the population. The depth of poverty (defined as the average gap between the expenditure of the poor and from the poverty line) and severity of poverty (the square of the poverty gap of each poor individual from the poverty line, reflecting core-poverty) were also high in 2004; at the national level these stood at 36 and 23 percent, respectively in the year in reference.

1.2 Income Poverty Trends Since 1990 Since the time that far reaching economic reforms were ushered in during 1991/92, Zambia’s overall income poverty situation has remained virtually the same with only marginal improvements (see Fig 1.1 below). While the depth of poverty (P1) and severity of poverty (P2) have declined steadily over time, extreme poverty – mimicking the overall poverty trend – has only marginally declined below the 58 percent level of 1991 to 52 percent in 2004. This means that over 13 years, extreme poverty has only declined by six percent.

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