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However, as reiterated several times in the paper, the growth that has been seen in recent times has failed to translate into meaningful poverty reduction. The poor have been marginalized in the growth process, being unable to gainfully offer their labour in employment since most of the country’s economic activities have anti-poor biases (i.e., are capital intensive and are therefore not pro-poor). In addition, Zambia’s prospects for spurring growth to the levels that are consistent with meeting the MDGs are severely constrained by several factors including: (1) various domestic policy failures (such as the lack of trade and commercial policies and strategies, protracted delays is formulating other policies and strategies, missing or incapacitated institutions, etc); (2) a limited ability to mobilize domestic resource – since tax revenue performance seems to be at its upper limit and non-tax revenues are meager; (3) supply-side rigidities and diversification constraints that impose narrow-based and inadequate growth; (4) domestic and external policy restrictions that limit further domestic and external borrowing; and (5) low external contributions to domestic development financing since FDI and ODA have not performed according to expectation. With all these constraints, the possibility of Zambia not meeting at least some of the MDGs cannot be ruled out.
While no longer heavily indebted, Zambia finds itself in an ‘MDG trap’ as it has insufficient access to financing resources. As already noted domestic resource generation is low and external grants continue to be limited despite the commitment of the Gleneagles G8 Summit. Meanwhile the new Debt Sustainability Framework and PRGF conditionalities do not allow the country to borrow (externally or domestically) to levels that would be adequate for financing development to the extent of achieving the MDGs.
As possible options for mitigating the threats to Zambia’s prospects for meeting developmental objectives, including the MDGs, we make the following recommenda
• Exploring alternative feasible fiscal options: In considering external debt as a source of future financing for the MDGs, the IMF and the national authorities in Zambia should explore alternative feasible fiscal options. Following the extensive debt-relief that Zambia has received, experts believe that there are many fiscal paths that are consistent with avoiding renewed risk of debt distress. The IMF should do more to help Zambia’s policy-makers in exploring the macroeconomic consequences of the various feasible paths. A key question in such assessments should be how effective will any additional spending be? Answers to this question will require integrating the macroeconomic analysis and programs with a consideration of sector-specific and broader development plans.
• Rationalizing permissible new external borrowing: Similarly, more efforts will be required of the national authorities and the IMF to adequately and transparently rationalize the principles and assumptions that govern the levels at which 6 permissible external borrowing has been set. The CPIA approach of the World Bank and the DSF approach of the World Bank and IMF have been criticized for lacking clarity about how far they are integrated into the macroeconomic programs and actually incorporate human development into the programs. There have also been concerns about differential application of the DSF and CPIA system as well as lacking transparency about the CPIA system. All these issues should be resolved by the IMF and for the sake of national acceptance by the national authorities and other national stakeholders.
• Reconsideration of the international definition of debt sustainability:
Although this paper has not provided an explicit understanding or definition of the “right” or sustainable level of debt, it has shown empirically that inconsistencies between macroeconomic program objectives and financing requirements entailed in development plans calls for a reconsideration of the national and global understanding of debt sustainability. International developmental agencies should intensify efforts to formulate a new definition of debt sustainability that fully include consideration of the human development imperative. It should be recognized that while financial viability and absorption effectiveness are important for debt management, increased priority spending and expenditure mixes that strike an appropriate balance between administrative, productive and social sector spending are essential for a far greater outcome, namely human development.
• Appropriate prioritization of poverty reduction spending: In relation to the point above, re-allocating money away from less priority sectors such as defense (which is currently capturing increasingly larger shares of the national budget in the MTEF) to MDG spending such as in health (which is actually losing out
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under the current framework) is strongly recommended as a salient strategy for improving financing to the MDGs. Commitment to the MDGs will have to be backed up in practice by pragmatic steps in allocating more resources to priority MDGs area.
• Formulating internal debt management strategy: The importance of Zambia’s own debt strategy cannot be overemphasized. Zambia’s past experiences with external debt suggest that the national debt management authorities should take serious steps to finalize the DMS as the basis for loan contraction. Development of the strategy should follow a fully inclusive consultative process, which will ensure transparency, accountability and national acceptance, and will help to reduce corruption, bribery, fiduciary risks and leakages related to external debt and loan contraction. In addition, accounting for the funds released from debt relief efforts such as the MDRI, which is highly development oriented in principle, and ensuring that such funds are applied to the property MDGs expenditure areas they are meant for will be critical elements of the overall debt management 6 strategy in Zambia.
• Sustaining macroeconomic stability: The authorities supported by the IFI should continue with efforts to keep the country on a stable growth path. Macroeconomic stability (with low inflation and low lending interest rates) will reduce the costs of domestic debt servicing and will potentially make it more financially viable to increase domestic borrowing for investment.
• Furthering Research: Many domestic debt relief proposals have been variously made, including proposals for domestic debt restructuring as the basis for further domestic borrowing domestically and outright domestic debt reduction initiative (similar to the HIPC). Given the on-going debate about the viability and appropriateness of domestic debt relief (with fears by some that such options may increase the liquidity in the system and thereby endanger macroeconomic stability), there is need for further research in this area.
• Addressing domestic imbalances and inconsistencies: Domestically, many imbalances need further redressing. For instance, now that private investments in the mining sector have fully taken root, the government should explore options for closing the tax benefits (rebates, holidays, etc.) that have been given to mining companies and use the extra taxes for additional financing to the FNDP/MDGs.
• More on tax policies: Still on the domestic front, tax policy should be revised towards transforming the tax system to a more progressive one. Tax revision options may include increasing taxes on luxury imports, improving the progressiveness of consumptive taxes such as VAT and of direct taxes such as P.AY.E, and so on.
• Paying attention to specific sectors: In agriculture, given the large number
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of rural poor persons and households that depend on the sector for a livelihood and considering the need to increase decent employment and the growth/poverty elasticity, prioritization of the agriculture sector should be realized through greater public investments into the sector, ensuring to improve the technology of agricultural inputs such as seeds, fertilizers, pesticides, vaccines, etc. and enhance the technical competences of agricultural and related systems (such as extension service systems, micro-financing and credit systems, transport systems, cooperative systems for enhancing markets access, etc.).
• Sustaining private sector development: The notable progress towards creating private-public partnerships and enhancing capacity for private investments, export trade and domestic trade through efforts such as the Private Sector Development Program and Zambia ’s involvement with the Integrated Framework for Trade Related Technical Assistance is commendable and should be continued in the interest of furthering capacity strengthening in the various sectors and institutions.
6 • Enhancing donor support: Externally, in relation to ODA the role of donors should be to foster an effective scaling up of aid. They should use their greater resource endowment and information advantage to push for the government to muster a strong will in making hard political spending choices and establishing appropriate institutions and conditions for the effective and efficient use of additional aid. However, donors should also provide time-consistent prior information about when resources will be made available and likely volumes so that this information can be effectively incorporated into medium-term planning and budget processes. Donors should also ensure a fair degree of predictability that committed aid will be converted into disbursed aid.
• Signalling of the IMF: The IMF also has an important role to play in setting the international size, pace and sequencing of ODA. As the main IFI changed with signalling, the IMF should send clearer and sharper signals to donors on the speed at which aid levels can be scaled up without compromising macroeconomic stability and without resulting in a further decrease in the efficiency and effectiveness of aid. In this respect, the conservative aid assumptions inherent in IMF’s PRGF programs bear the risk of being misconstrued by donors as a signal to withhold aid or reduce commitments on grounds that the country does not possess the right environment for absorbing additional ODA.
• Costing the MDGs: Related to the above, the national authorities jointly with their developmental partners should continue with efforts to understand the true costs of developmental commitments and plans such as the FNDP and MDGs.
FNDP/MDGs resource mobilization efforts should be guided by insights on the real costs of plans, programs and initiatives.
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