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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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Zambia is currently a beneficiary of preferential market access initiatives such as the Generalized System of Preference (GSP) and the US African Growth and Opportunity Act (AGOA). However, it has not been able to realize the potential benefits available in the initiatives. For instance, according to US import data, the impact of AGOA on Zambian exports has been insignificant. This comes as no surprise since most Zambian exports already benefited from duty-free status under the US GSP and, even before being AGOA eligible, Zambia was unable to fully exploit its GSP quota. Zambian producers have not been able to access the US market for agricultural produce since the required pest risk assessment has not yet been completed. In addition, trade information on opportunities and international requirements is generally scanty among the relevant local authorities and agencies, and thus does not reach potential exporter enterprises and individuals.

Reinforcing and strengthening the overstretched human and institutional capacity within the Zambian trade administration is of primary importance. This will also help to address the weaknesses in the formulation of trade policies and strategies and to improve support of export industries. Identifying trade-related constraints and proposing actions to be taken within efforts such as the Private Sector Development (PSD) program and the DTIS Action Matrix will be important for improving internal human resource and institutional capacity. The serious supply-side constraints alluded to above, including poor infrastructure, limited capacity of Zambian producers to meet quality and safety standards, and lack of a clear government export strategy, significantly hamper the realization of Zambia’s full export potential; hence, these need to be further looked at and addressed.

Export Prospects In the current trade setting, the IMF has used various export assumptions in its debt sustainability analysis (IMF, 2005) to project Zambia’s export performance up to 2023.

As reflected in the relevant parts of Table 3.5 below, the IMF has been optimistic about

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Zambia’s trade prospects in the future.

In terms of assumed export value, the IMF anticipated an annual average of US$1,360 million over 2000-2004 compared to an average actual outturn of US$1,073 million annually during the same period. Similarly export growth rates were estimated at 12 percent per year during 2000-2004 by the IMF compared to an actual outturn of 6 percent per year over 2000-2003. The IMF has perhaps been too optimistic about Zambia’s export performance prospects, especially considering that the average exports to GDP ratio has actually declined from 32 percent during 1995-1999 to 27 percent during 2000-2005. Moreover, the earlier-mentioned supply-side constraints in the 3 domestic economy coupled with Zambia’s lack of trade policies and strategies simply underscore that the IMF’s views and assumptions about strong export growth over the medium term are perhaps slightly too optimistic.

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* Average figures are for 2000-2003 and 2001-2003, respectively to avoid the upward bias in actual export growth outturn that would have resulted had 2004 figures been included (there was a significant positive and transient shock on exports in 2004).

Source: constructed from authors’ recalculation of MOFNP and IMF data On the other hand, the assumption that annual export growth will over the long term (2014-2023) slow down to 4 percent seems a bit too modest. The IMF argument is that major investment in mining (coupled with high copper prices during 2004-2006) and agriculture will spur export growth before the growth eventually slows down to 4 percent per annum.

39 Zambia: Debt Strategies to Meet the Millennium Development Goals

While the past and current high international copper prices are appreciated as a significant factor in export performance, following on the assertion by Weeks and McKinley (2006) a point of caution concerning the assumed prospects for mediumterm export growth is perhaps in order. The considerable instability of copper prices over the medium term should induce greater caution in the way that export projections for Zambia are made. Figures 3.3 and 3.4 illustrate this point, showing that between 1961 and 2004 copper prices increases were rarely sustained for periods of more that two years.

3 80

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-40 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

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60 40 20 0 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2004

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Being highly dependent on copper mining, Zambia will remain persistently exposed to the vulnerability of international economic shocks in copper prices. Without diversification, export incomes will continue to be uncertain. Moreover, the mines in Zambia are now largely in private ownership and government has been rather unimaginative about mobilizing additional revenue from the new mining enterprises.

Instead, there has been a rush for privatization and the creation of an enabling environment for foreign direct investment (FDI) with the government giving discretionary tax concessions to foreign investors in the mining sector. These generous tax incentive, rebates, breaks, holidays, etc have persisted in the sector.

3 With significant new activities in mining, one would expect the government to see the sector as an important source of fiscal revenue. However, recent developments suggest that the government appreciation or perhaps understanding of the revenue importance of mining is limited. In February 2007, China and Zambia launched a copper mining partnership whereby the Zambian government established a special economic zone for Chinese investors in the Copperbelt town of Chambishi. Within the zone, Chinese firms are exempted from import duties and value added taxes.

Perhaps the impetus for such decisions comes from the factor that China has reported commitment to writing off millions of dollars worth of Zambia’s debt, to build schools and a sports stadium, train agricultural experts and provide a loan for road construction equipment. Indeed, Chinese president Hu also promised US$ 800 million worth of new Chinese investment in mining, manufacturing and agriculture in Zambia during this year (2007). Thus, despite the favourable sectoral performance in the recent past (pushed by high investments, increased copper prices and greater production) and its sizable contribution to GDP, this sector is currently not appreciated as a viable option for domestic resource mobilization. This result is actually exacerbated by the political choices that reflect the sometimes myopic design of domestic commercial and tax policies.

A lot can be said about commercial policy inconsistencies:

• There is nothing by way of policy or strategy to foster change to domestic capital structures over time. This is to the extent that local economic agents are permanently excluded from firm ownership (Kane Consult et al, 2005) and presumably, from the recent high capital returns in mining and commercial agriculture22;

22 Only the communication industry has been “ring-fenced” so that the government has instituted a piece of legislation that makes it mandatory for foreign communication firm’s to transform their shareholding structure. Over time such firms are statutorily required to assume a structure with 51 percent capital ownership in Zambian hands and the minority 40 percent of capital in foreign ownership. Of course, given the political strategic importance of communication (with the largest mass-media establishment belonging to the Government), there is the strong possibility that the move to institute this requirement in the communication industry only was politically motivated.

41 Zambia: Debt Strategies to Meet the Millennium Development Goals

• There are also widespread anecdotal claims by observers such as the Zambia Business Forum (ZBF) that with weak and ill-enforced labour laws and regulations, coupled with foreign enterprises or inventors that are very selective about the type of labour they hire domestically, foreign firms setting up in Zambia often tend to take on mostly unskilled domestic labour; the higher paying, skills-intensive jobs are mainly reserved for foreign workers. And with little synchronization between the labour authorities and immigrations authorities, skilled foreign workers are often able to acquire these jobs without meeting work permit requirements;

• Similarly, other anecdotal claims are that investment capital requirements are not 3 monitored or enforced so that any foreigner who manages to enter the country can stay on as an investor. And as already seen, enforcement of immigration regulations is too porous to stay the situation;

• Profit repatriation regulations are hazy, poorly communicated when they exist and almost never enforced (Kane Consult et al, 2005).

These elements, among many others, all contributed towards limiting Zambia’s trade, revenue generation and economic participation prospects.

In relation to the price instabilities reflected in Figure 3.4, since Zambia is significantly dependent on imports of crude oil to satisfy its petroleum fuel demand, the oil price instabilities mean Zambia will also frequently face adverse oil price shocks and will often import fuel inflation.

In addition, the continued dependence on rain for cropping in agriculture coupled with the frequent occurrence of droughts relegates the country to being extremely vulnerable to food insecurity. Between 1991 and 2007, Zambia experienced five droughts of varying intensity in the 1991/92, 1993/1994, 1994/1995, 2000/01 2001/2002 and 2004/2005 agricultural seasons (World Bank, 2007; Kalinda and Sikwibele, 2006).

Overall, the macroeconomic context reveals that although Zambia has achieved relative stability and sustained growth for about eight years, many challenges and imbalances still exist. Internally, a host of factors such as structural (supply-side) rigidities, public sector incapacities and lacking commercial policies, gross inequalities in rewards to factors of production, and political interference all add to hampering prospects for improving diversification, broad-based export performance and poverty reduction. In addition, the country’s lopsided economic structure makes the economy vulnerable to external economic and natural shock. The macroeconomic context is therefore less optimistic than what is suggested in the assumptions and projections of many macroeconomic programs.

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4 Public Debt and Fiscal Contexts The public debt and fiscal aspects are the main considerations in many macroeconomic programs and framework as they establish financial viability. Thus, to understand in what ways and to what extent international and national policies and programs incorporate development and poverty reduction goals into their frameworks, it is important to look at public debt and fiscal aspects.

Public debt (also known as government debt or national debt) is money or credit owed by any level of government; either central, federal, municipal, or local government.

As the government represents the people, public debt can be seen as an indirect debt of the taxpayers. Public debt is often categorized as domestic (or internal) debt, owed to lenders within the country and external (or foreign) debt, owed to foreign lenders.

Governments usually borrow by issuing securities such as government bonds and bills.

However if credit worthiness is eroded so that domestic and external agents prefer not to invest in government bonds and bills, countries sometimes resort to borrowing directly from commercial banks, bilateral creditors or international financial institutions (IFIs).

In Zambia all government liabilities, including deferred pension payments and delayed payments for goods and services the government has contracted for but not yet paid are understood as part of public debt.

Another common division of public debt is in terms of duration: debt of one year or less is generally considered to be short term debt while debt of more than ten years is long term debt; medium term debt falls anywhere in the middle of these two forms.

The ensuing parts of this section consider the Zambian experiences with and future outlook of public debt, both external and domestic.

4.1 Zambia’s External Debt Crisis and a Partial Resolution This section considers external debt in terms of: a brief historical overview of the origins of external debt; the history and outcomes of debt relief and macroeconomic adjustment efforts; the quantity and structure of external debt before and under HIPC and MDRI relief (including consideration of key debt and creditor indicators); and other key considerations surrounding external debt.

What Were the Causes of the External Debt Crisis?

In the 1970s and 1980s, Zambia experienced serious economic misfortunes characterised by falling international copper prices, rising oil prices and increasing macroeconomic instability, which significantly dampened the country’s ability to meet its social and economic ambitions. The history of Zambia’s economic misfortunes and emerging macroeconomic and socio-economic issues is well documented in the literature (see

43 Zambia: Debt Strategies to Meet the Millennium Development Goals

Bigsten and Kayizzi-Mugerwa, 2000; Langmead et al (ed), 2006) and is therefore not repeated in any elaborate way here. We focus instead on the origins of external debt and the related debt crisis.

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