UNIVERSITY OF PENNSYLVANIA - AFRICAN STUDIES CENTER
Zambia: Debt Cancellation Appeal Date distributed (ymd): 001126 Document reposted by APIC
Region: Southern Africa Issue Areas: +economy/development+ Summary Contents: This posting contains a letter from the Zambian government calling on the IMF to grant more comprehensive debt cancellation at its meeting soon to consider the terms to be granted to Zambia under the Heavily Indebted Poor Countries (HIPC) initiative. Current options being considered by the IMF will actually raise rather than lower Zambian debt service payments in the short to medium term, at a time when the country faces catastrophic conditions due to the HIV/AIDS pandemic, the influx of refugees from neighboring countries and other structural obstacles to confronting poverty.
The posting also contains a short statement on the same issue by Jubilee 2000 Zambia (http://www.jctr.org.zm/jubilee2000.htm). For an earlier background report from Jubilee 2000 Zambia see: http://www.africapolicy.org/docs00/zam0003.htm For a call for letters to the U.S. Treasury on the issue see Jubilee 2000 USA (http://www.j2000usa.org)
The statement below was taken from a posting last week in the Breaking-The-Silence egroups discussion: http://www.egroups.com/group/breaking-the-silence
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REPUBLIC OF ZAMBIA MINISTRY OF FINANCE AND ECONOMIC DEVELOPMENT MFA/102/16/63
17th October, 2001
Mr. C.D.R. Rustomjee, Executive Director, IMF Washington, DC, USA
Dear Mr. Rustomjee,
RE: ZAMBIA'S POSITION ON DEBT SERVICE PAYMENTS AFTER HIPC INITIATIVE ASSISTANCE
I write to bring a few important considerations to your attention as the case for Zambia's eligibility for the HIPC Initiative comes up for discussion.
Zambia welcomes the decision by the IMF Board to discuss the issue of rising debt service by some countries after they reach their HIPC decision points, particularly with regard to payments to the Fund after taking into account expected Fund assistance under the HIPC Initiative.
Zambia's debt service obligations on principal repayments on loans to the IMF are projected to rise sharply between 2001 and 2005 upon expiry of the grace period. The IMF has proposed four options for smoothing post-HIPC debt service obligations for Zambia (this smoothing is only tantamount to reducing the 'hump'), namely:-
1. Frontloading of interim assistance under the HIPC Initiative by 75 percent - the debt service under this option will still be above the current debt service and does not therefore address the objectives of the HIPC Initiatives;
2. Rescheduling the SAF Loan to the IMF -- this will only shift the 'hump" of the debt burden to a different period in future. Additionally, the rescheduled loan may not attract any relief;
3. HIPC Initiative Loan- this will not be subject to any further debt relief in future. Bearing in mind that IMF loans are always medium term (five years), this is equally likely to create another hump in future;
4. (a) Blending of HIPC Initiative grants and loans - this option leaves Zambia at current levels of debt service and thus does not translate into any reduction of debt service for Zambia; and
(b) Reduction of Zambia's debt to export ratio to 11.7 percent in 2001, and 8.5 percent in 2005. This variant will leave the debt service to revenue ratio at 23 percent in 2001, and since it will not fall below 15 percent until 2007 it is still insufficient.
Clearly, all the options articulated above, which are outlined in the Fund's Board document EBS/00/202, are targeted at the noble objective of reducing Zambia's debt burden through access to the HIPC Initiative. However, as the abridged notation listed above indicates, it is ironic that Zambia's debt service will actually rise substantially in the short to medium term at precisely the same time that the country cannot afford the amount of debt service that is being proposed by the Fund staff and management. I appreciate that other donors have pledged additional assistance to Zambia during this period. However, there are no guarantees that such assistance will be forthcoming. On this basis, our view is that the proposed options contained in the Board Document fall short of conclusively resolving Zambia's debt burden. Consequently, we reiterate our appeal that nothing short of outright cancellation will address our debilitating debt burden, which severely limits our capacity to address economic growth, widespread poverty, and the HIV/AIDS pandemic.
In the next few paragraphs, I beg your indulgence to set out the basis for our position.
Our first observation proceeds from the acknowledgment that option 4 'b' is the best of the proposals from the IMF. However, its dependence on a dollar level of debt service rather than any standard of sustainability makes it an ad hoc proposition. We believe that this is the ideal opportunity for us to set liquidity based measures of sustainability, such as debt service to exports or debt service to revenue ratios. These are more objective measures for fixing debt relief timing requirements from all creditor groups, and will discount the need for leaving subsequent solutions to ad hoc assessments that might be politically influenced.
Our second observation is that if the fundamental objective of the Enhanced HIPC Initiative is poverty reduction, then the proposals in their current form, which translate into higher or unchanged debt service levels, are inconsistent with the spirit of the entire Initiative, and indeed that of the Poverty Reduction and Growth Facility (PRGF). The inconsistency is heightened by the fact that debt service to the Fund, which is the architect and sponsor of the HIPC Initiative and the PGRF, will rise substantially following the Decision Point.
Our next observation is that the proposals as they stand fail to appreciate the peculiar characteristics of Zambia's debt problem. Unlike other similar affected countries, the ballooning of Zambia's debt service to the Fund originates from the clearance of arrears during the Rights Accumulation Programme. In our view, this is an irrefutable demonstration of our commitment to meeting our international obligations. More importantly, we believe that it demonstrates our capacity to diligently pursue Fund-supported programmes, a process that requires considerable political will and economic discipline. A related aspect of this consideration is that since 1992, Zambia has undertaken far reaching economic and structural reforms. This is not an easy process to go through. Ironically, however, and as many experts acknowledge, Zambia has done far much more on the ground than it has ever been given credit for.
We believe it would be unfair to judge commitment to reform with a broad brush, or on the basis of a genetic perspective. Additionally, if the PRGF and PRSP process is to get off to any start, it will require tangible commitment of resources. It will be difficult to get the process going, let alone started, if our resources are to be diverted to higher repayments to creditors, among whom will be the Fund, the driver of the PRGF/PRSP process.
We must also not forget the urgency and desperation of Zambia's present economic status. Although the economic and structural reform process has been comprehensive, life has not been getting any easier for most Zambians. Presently, the country is far from attaining its overarching goal of Sustainable Human Development (SHD) as defined by the World Summit on Social Development in 1995. In fact, out of the 101 countries for which data on trends in the Human Development Index (HDI) were available, Zambia was the only country for which the HDI value in 1998 was lower than in 1975.
In addition to the general decline in the quality of life I have just outlined, access to social services has become more difficult to larger sections of Zambia's households. The percentage of the population afflicted by poverty has grown from 70 in 1996 to 73 in 1998. Poverty, in terms of both the headcount index and the poverty gap, increased during the nineties. In short, well over four fifths of Zambia's population lives on less than a dollar a day.
The other element of Zambia's desperate economic and social situation is the levels of affliction by disease, mainly HIV/AIDS. In 1999, the estimated DALE for Zambia was 30.3 years. [DALE refers to healthy life expectancy or disability-adjusted life expectancy. It is calculated by subtracting years of ill health, weighted according to severity, from the expected overall life expectancy to give years of healthy life as developed by the WHO in its World Healthy Report 2000.] There are only three countries out of 191 WHO member countries that have a lower value of DALE than Zambia: Malawi (29.4 years); Niger (29.1 years) and Sierra Leone (25.9 years). According to WHO's Epidemiology and Burden of Disease Team, healthy life in these countries is dropping to levels that have not been seen since medieval times!
In comparison with the Sub-Saharan African average of 7.8 percent, HIV prevalence in Zambia, especially among women attending antenatal clinics was as high as 24.4 percent in 1997.
All these elements of the state of life in Zambia point to three inter-locking and viciously interactive forces: deep deprivation manifested in high levels of poverty and low access to basic social services; disease, manifested by the reduced life expectancy and the prevalence of HIV/AIDS infection, and debt, manifested by increasing levels of debt servicing.
The critical link in this vicious circle is debt, because its pervasive effect strangles all other efforts to make meaningful investment in strategies to counteract the deprivation and disease. Currently, debt-servicing expenditure is the single largest item in Zambia's budget. In recent years, debt service expenditure far outstrips expenditures on education, health and other social sectors. For instance, between 1993 and 1996 expenditure on education was 2.5 percent of GDP, on health 2 percent and other social sectors 5.3 percent. However, expenditure on debt service alone accounted for 10.3 percent of GDP.
Furthermore, the IMF's own debt sustainability analysis revealed that "Zambia's external debt burden would not be reduced to sustainable levels before the middle of the next decade. The base scenario indicated that the ratio of the net present value of debt to exports, which was estimated at 510 percent at end of 1998, would remain above 250 percent until 2005 and would not fall below 25% of exports of goods and services until 2004, and it would then still be equivalent to about 35 percent of government revenue and about 30 percent of expenditure.
In all, we are therefore saying that Zambia's proposal for debt relief under the HIPC Initiative is insufficient in terms of-
(a) Reducing the overall debt burden;
(b) Sustaining ability to service the remaining debt;
(c) Releasing more funds fur enhancing the productive sector as a whole and private sector development in particular; and
(d) Improving internal capacity to generate and sustain proactive intervention in tackling deprivation, disease and infrastructure development.
We consider that debt relief would be more significant for Zambia if the Paris Club creditors and other bilateral creditors offered a stock-of-debt operation under Cologne 'Terms at Decision Point rather than in future. Our proposal is therefore that: -
(a) The Paris Club Creditors give Cologne terms and those offering 100 percent write-off on eligible debt at Decision Point; or
(b) Co-operating Partners and Zambia create a Multilateral Debt Service Fund to assist Zambia with grants in the interim (between 2001 and 2005) to enable Zambia to meet debt service due to multilateral institutions. This would also assist Government to reduce its indebtedness to the Bank of Zambia [Currently the Government has to borrow from the Bank of Zambia (Bridging Loan Account - US$315 million) whenever debt service to the multilaterals and other creditors is due. Paris Club debt service is done from the cumulative escrow account.] This has been successfully done in a number of HIPCs, such as those for Uganda, Tanzania and Mozambique.
Our earnest appeal is that the HIPC Initiative should release resources to support comprehensive development and long-term economic growth in Zambia. Failure of the HIPC lnitiative to respond to this challenge in Zambia's case will negate all the work that has gone into this effort, and raise serious questions about the credibility of the HIPC Initiative in general.
Formidable as the challenges we have presented in this paper may appear, we are convinced that they are not insurmountable. We have come a long way, and Zambia has many factors in its favour; among them a stable constitutional democracy, a liberalised economy and considerable natural and mineral resources, all burnished by a vibrant civil society and a tremendously mobilized grassroots with commendable resilience and maturity. What we now need more than ever before is the support of our co-operating partners, including multilateral institutions to make a frontal attack on the challenges that face us.
In asking for this support, we are aware that we have established firm political will and a comprehensive institutional framework for good governance and fighting corruption at all levels. We therefore believe that little will be gained by applying the "good governance criteria" to Zambia's present social and economic crisis. Our political, social and economic stability, including our regional peace negotiation are not results of accidents, but are products of real investment on our part. We therefore, believe that a peace dividend is a moral as much as it is an economic necessity for Zambia at this time.
We believe in the vision espoused by the leadership of the Fund and the Bank, which states:-
"We believe in one world, and poverty is a threat to global security and welfare. The purpose of our institutions is to help our member countries develop their human potential and productive resources, thereby building the foundations for sustainable growth. Recent history shows that countries that pursue the right policies, operating in a growing world economy, and with the right support, can achieve rapid economic growth and reduce poverty. An enhanced partnership between the Bank and the Fund is essential to the success of this effort".
I trust the considerations of Zambia's case will take all the extenuating factors presented here into account.
Dr Katele Kalumba, MP
MINISTER OF FINANCE AND ECONOMIC DEVELOPMENT
Statement from Jubilee 2000 - Zambia, November 21, 2000:
"Jubilee 2000 -Zambia echoes Minister Katele Kalumba's call for outright cancellation and pledges its intensive efforts to put in place the "debt mechanism" that will assure any freed-up resources go toward poverty reduction.
Because we believe that this poverty reduction should be our number one priority -- and not paying back ever-higher levels of debt servicing -- we have joined in the PRSP process along with a wide range of very competent and committed members of civil society. It would indeed be a tragic irony if this PRSP cooperative effort -- an effort strongly pushed by the IMF and highly praised by the United States -- would now be de-railed by the IMF through its approval of only minimal relief and by the United States through its insistence on delaying tactics.
The socioeconomic situation in Zambia is quite perilous and therefore adequate debt relief is an urgent necessity. Speaking as responsible members of civil society here, we want to make clear our own commitment to work for the proper poverty reduction measures through our close monitoring of future debt relief.
We say to our friends in the United States, give us a chance -- this is the crucial moment!"
Chrispin Mphuka, National Coordinator of Jubilee 2000 - Zambia November 21, 2000
Message-Id: <200011261415.JAA17683@server.africapolicy.org> From: "APIC" <email@example.com> Date: Sun, 26 Nov 2000 09:05:57 -0500 Subject: Zambia: Debt Cancellation Appeal
Editor: Ali B. Ali-Dinar
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