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Like many other low-income countries, Zambia’s heavy indebtedness was a result of a complex interrelationship of political, economic and social factors. The mounting public debt was linked to domestic pressures and policy failures such as the public sector’s huge desire to borrow to finance developmental programs and to address seemingly transient external shocks. Concerning the former, it was common in the 1970s and 1980s to take advantage of cheap petrol dollars and other sources of finance on international money markets and borrow for domestic investments. Zambia and other low income countries borrowed heavily in order to deliver pre-independence promises and to expand 4 development programs. It is worth noting that some of the loans from international money markets were meant to close perpetual deficits in the balance of payment (BOP) current accounts. While it is generally argued by some observers that some of Zambia’s borrowings were wasted on consumption activities and ‘white elephant’ projects such as subsidising loss-making state-owned enterprises (SOEs), others have argued that some of the loans were prudently invested in the development and expansion of the human capital, physical infrastructure and water reticulation systems, among many other things.
Zambia’s heavy indebtedness also stems from exogenous forces that were beyond the government’s control (e.g., persistent droughts, the above-mentioned high price volatility on international commodity markets and resultant poor terms of trade (TOTs), and the worsening political environment in the region, especially in the 1970s23). In fact, Zambia’s huge external debts can readily be traced to the external price shocks of the 1970s than to anything else. And the subsequent occurrences of regional and global recessions, increases in interest rates on international money and capital markets, accumulation of repayments arrears (since copper prices continued with their downward spiral) exacerbated the mounting debt problem and transformed it into a crisis. Over time, the country could not sufficiently cover its import needs using export earnings.
The result was further borrowings from both bilateral and multilateral lenders. Thus, by the end of the 1980s, the country had one of the highest per capita debts and was one of the most highly indebted countries in the world. Its debt stock increased rapidly, rising from US$3.3 billion in 1980 to US$6.9 billion in 1990. There was a further dramatic increase in external debt after 1987 when the Government of Zambia broke ranks with 23 It is important to note the huge political role the country played in the liberation struggles in Southern Africa in the early 1970s and 1980s. Being surrounded by eight neighbours most of whom were waging liberations wars in the latter part of the 1970s and early 1980s, Zambia actively supported these liberation struggles particularly against the racist regimes in South Africa, Zimbabwe, Namibia, Angola and Mozambique. A study by the Jesuit Centre for Theological Reflection (JCTR, 2000) estimated that Zambia incurred a total debt of US$5.3 billion in opposing the Apartheid system of governance and that is besides the human loss and physical infrastructure damaged through bombings from foreign aggressors.
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the IMF and World Bank citing adverse effects of their structural adjustment programs on the Zambian people.
In this sense, it is clear that the debt crises were not confined to domestic issues of domestic policy failure, lacking good governance or piecemeal economic reforms, but also originated from significant external shocks that were poorly addressed by domestic authorities and the international financial institutions.
From SAPs to PRSPs For over twenty years, the IMF and the World Bank have been requiring poor countries to implement a wide range of economic and social policy reforms, such as trade liberalisation, investment deregulation and privatisation in return for low interest rate loans.
4 For example, according to the IMF, trade liberalization has been a key element of Fund supported programs over the past twenty years. These Structural Adjustment Programs (SAPs) were also supported and fostered by the World Bank. Several studies and policy discussions have questioned the appropriateness of policy prescriptions being foisted on developing countries, with many observers contending that the SAPs were contributing to increased inequality and marginalization of the poor. Empirical reports have repeatedly pointed out that these policies have been dominant in the poorest countries during the past two decades, a period of severe economic decline in sub-Saharan Africa and stagnation in Latin America (see, Situmbeko and Zulu, 2004; Sachs, 2002; Torero, 2003; Goldzimer, 2003; Situmbeko and Musamaba, 2002; Action Aid, 2002).
SAPs were eventually replaced by new strategic plans (so called PRSPs) drawn up by developing countries themselves. While in principle the PRSPs are meant to be developed by national governments in consultation with developmental partners such civil society and the international community, there are widely held concerns that in practice, the IMF and World Bank have retained their dominant influence and the power of veto.
For instance, PRSPs typically require privatisation of public utilities, right-size of the public sector, deregulation, removal of subsidies (including those that benefit the poor), promotion of exports and foreign investment, and import liberalisation (where it has not happened already). Many observers feel that these are imposed on domestic economies as conditionalities that should happen irrespective of the views of domestic stakeholders.
In this regard, many argue that although the name has changed, SAP-style policies still predominate.
Debt Relief Measures for Zambia: the HIPC Initiative This sub-section looks at and tries to clearly understand the conceptual framework through which debt relief is granted. A slight historic perspective is useful for building the discussion.
The HIPC Initiative was first launched in 1996 by the IMF and the World Bank, with the aim of ensuring a permanent exit from unsustainable debt. The Initiative was
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thus intended to deal comprehensively with the overall external debt burden of eligible countries, reducing it to a sustainable level within a reasonably short period of time.
Under the initiative, a country would be considered to have achieved external debt sustainability when it was expected to be able to meet its current and future external debt-service obligations in full, without recourse to debt relief, rescheduling of debts, or the accumulation of arrears, and without compromising growth. In this sense, the international community had increasingly recognized that the unsustainable external debt of heavily indebted poor countries was becoming one of the sources of slow economic growth, persistent poverty, and weak social policies in these countries. Against this backdrop, the HIPC Initiative was established as an effort for coordinated national and international actions to reduce to sustainable levels the external debt burdens of all 4 the Heavily Indebted Poor Countries (or HIPCs).
When the IMF and the World Bank jointly adopted the HIPC Initiative in September 1996, they formulated and prescribed strong programs of macroeconomic adjustment and structural reforms, which they ensured were carried out as close to prescription as possible.
The HIPC Initiative was enhanced in 1999, which culminated in the approval of a strengthened HIPC Initiative, designed to deliver deeper debt relief more rapidly to a wider range of countries. As the measurement of sustainable debt, the HIPC initiative focused almost exclusively on the ratio of the net present value (NPV) of a country’s debt to its exports, and ignored the human cost of repaying the debts. Countries were only eligible for consideration for HIPC if the ratio of the NPV of their debt was greater than 150 percent of earnings from exports of goods and services. They also had to be poor with a per capita income below US$785 and eligible for IDA-only borrowing terms from the World Bank.
A string of conditions had to be met before countries could reach the “decision point” in the HIPC process and three years of successful implementation of reforms were normally required before the country reached “completion point”, when irrevocable debt relief was conferred by the creditor institutions. In this light, many observers felt that with the advent of HIPC, the World Bank and IMF had yet another route through which to push structural adjustment since not only were policies such as privatisation, investment deregulation and trade liberalisation being attached to the provision of new loans, their implementation had also now become a central feature of HIPC debt relief. During the spring and summer of 2002, it was reported that at least 11 of the 20 countries that qualified for interim debt relief (i.e. some debt relief before they reach ‘completion point’) were being denied it because they had not fully implemented the policies required by the World Bank and IMF.
Thus, while the far reaching debt relief initiatives (discussed further below in the Zambian context) are duly noted as positive occurrences, the conditionalities have been equally repeatedly pointed out as negative facets. In this regard, although it is
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important to push for further relief from the unpayable debts of the poorest countries, it is perhaps also critical to foster the de-linking of debt relief and debt cancellation from the sometime constrictive and inappropriate economic policies pushed by the IMF and World Bank.
Another major criticism that has been leveled against the HIPC initiative is that it does not provide deep enough relief. In using only debt-to export or debt-to-revenue ratios, the IMF and the World Bank both set the ratios too high to be serviced sustainably and also failed to consider vital ongoing obligations such as key social imperatives in education, health and infrastructure spending that must be met by the poorest countries. Its stringent macroeconomic and structural conditionality is also difficult to observe especially for countries that are faced with the HIV/AIDS pandemic, 4 which requires increased public spending for its control. The HIPC initiative further had overly ambitious assumptions and projections about growth as reflected in decision point documents that in most cases were not in tandem with economic performance of poor countries. Under these circumstances, HIPC cannot be expected to provide a “robust, long-term exit from unsustainable debts.” As noted by CCZ, EFZ and ZEC (2006, p. 1) “some of our detractors and pessimists alike dismissed our calls for ‘total debt cancellation.’ They saw a mission that was bound to fail, as no creditor would entertain ‘debt cancellation.’ However, the moral case for debt cancellation prevailed. Today not only is debt cancellation a reality for Zambia, but for many African countries as well. We note that the cancellation of Zambia’s external debts from US$7.1 billion in 2004 to US$502 million in 2006 is a culmination of unrelenting pressure by a wide range of civic and faith organisations in the global Jubilee movement, government’s commitment to donor conditionality and the sacrifices made by the people of Zambia.” This amplifies that civil society played an important role in achieving debt relief.
The levels of awareness in Zambia about the debt problem and the role of civil society in championing the campaign to bring down the debt are evidenced in the public opinion poll undertaken by M and N Associates Limited at the request of the Jubilee-Zambia Campaign and CCJP/JCTR Debt Project in 2001/2002 (Jubilee-Zambia, 2002).
HIPC and MDRI Impacts: the Stock of External Debt and Debt Repayment Outturns Through consistent international pressure mainly from civil society and national governments to re-look at the debt problems and prescribed solutions, the thinking on external debt solutions gradually changed to include more outward looking options for debt reduction. As seen above, eventually the HIPC Initiative was formulated and spearheaded as the “new” international option for debt reduction. In December 2000, the Executive Boards of the IMF and the International Development Association (IDA) agreed that Zambia had met the conditions to reach its Decision Point under the enhanced HIPC Initiative. The Fund and IDA thus defined a set of conditions for Zambia
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to reach the Completion Point24 at which time the debt relief committed at the decision point would become irrevocable25. At the Decision Point, Zambia became eligible for debt relief in the amount of US$3.9 billion over time (or US$2.5 billion in net present value (NPV) terms)26. Based on a debt sustainability analysis (DSA) using end-1999 data, the full delivery of this assistance would reduce the ratio of the NPV of Zambia’s external public sector debt to exports to 150 percent—the threshold for sustainability under the enhanced HIPC Initiative. Employing the principle of equal burden sharing, all creditors would reduce the NPV of their claims on Zambia by a common reduction factor of 62.6 percent after full use of the traditional debt relief mechanisms. For the IMF and IDA, the resulting commitments amounted to US$602 million and US$488 million in NPV terms, respectively.
4 During the interim period between the decision and completion points, the IMF provided debt relief of US$452 million in NPV terms, while IDA provided relief of US$98 million (IMF, 2005a). Zambia has also benefited from interim assistance granted by the African Development Bank (AfDB), the OPEC Fund for International Development, the European Union (EU), and the Paris Club creditors. Total HIPC Initiative assistance to Zambia was in excess of US$380 million in NPV terms during the interim period and the Paris Club creditors provided interim relief beyond HIPC Initiative assistance.