Zambia’s Aid Conditionality: Evaluating Impact and Implications

1. Presentation by Jack Jones ZuluPolicy Analyst—Jubilee-Zambia Jubilee-Zambia National Evaluation Held at the Mulungushi International Conference Centre

2. AID AND CONDITIONALITY:ZAMBIA’S EXPERIENCE • Introduction: • Due to the poor state of the economy since the early 1970s through the 1980s, Zambia has been under an aid regime for over three decades • The main sources of aid in its various forms have been the bilateral Governments and multilateral institutions ( IMF and World Bank ) • Aid to Zambia has mainly been in form of financial assistance , technical assistance, commodity aid,etc • Various donors are motivated by various reasons for granting aid

3. Why Give Aid? • “Foreign aid is a method whereby the United States maintains a position of influence and control over the entire world and supports a great many nations that would otherwise collapse or go over to the communist bloc” ( President John F. Kennedy, 1962 )

4. Definition of Aid • Standard concept for aid definition is the Official Development Assistance (ODA ) • Financial aid includes grants and concessional loans with a grant component • Zambia has received financial aid since the 1970s with a sharp increase being recorded in the mid-1970s and soon after 1991 • In 1992 the disbursements from multilaterals and 22 bilaterals amounted to US$1,479 million, representing 67 percent of export earnings and 77 percent of total public expenditure

5. BOP support, consisting of import support and debt relief accounted for more than half of total aid to Zambia in the early 1990s ( Saasa and Carlson 1996 ) • BOP support in Zambia is mainly linked to the ongoing macroeconomic and structural reform efforts and to a large extent it has been used to service Zambia’s external debt • Since the early 1990s the operations of the IMF and the World Bank have become increasingly tied • IMF loans, though highly concessional through PRGF arrangements, are heavily linked to structural issues ( privatization, user fees,etc ) and macroeconomic reforms (money supply targets,exchange rate,interest rate and inflation management, etc )

6. World Bank loans are tied to issues of governance as well as policy goals linked to poverty reduction and sectoral performance • For example, the World Bank’s CPIA is based on Economic management, Structural policies, Policies for social inclusion and Public sector management and institutions • Issues of governance according to the World Bank are non-political and include accountability, transparency and rule of law, as necessary ingredients for successful economic implementation • Bilaterals on the other hand, insist on human rights ( in 1997 most bilaterals withheld their aid to Zambia because Dr.Kaunda had been barred from contesting Presidential elections in 1996 )

7. We need to underscore one point here:donors using aid as a basis for intervention have been very influential in Zambia’s policymaking processes • Most bilateral donors have tied their aid programmes to a country having an agreement with the IMF ( thus the signaling role of the IMF in aid recipient countries is quite enormous! ) • For example, in 2003 Zambia went off track the IMF-driven PRGF due to fiscal slippages in the budget.This culminated into an aid freeze from the IMF and other donors such as the EU • Zambia is now back on track with the PRGF (New pledges IMF--US$320.41 million, EU—Euro 100 million, World Bank—US$100 million )

8. Please note that tied aid makes a country’s ODA conditional on acquiring specific goods, services and technologies from that country providing aid • From 1981 to 1983, 94 percent of all funds supplied by Switzerland were spent in Switzerland itself • Tying aid raises the cost of many goods,services and works by 15% to 30% on average, and by as much as 40% or more for food aid

9. OECD calculated on this basis that the direct cost of tied aid in 2002 reduced the actual value of total bilateral aid by as much as US$5billion to US$7 billion • According to Gelinas a scholar in Latin America, 80 percent of USAID aid funding to poor countries returns directly or indirectly to the United States

10. AID and Debt Relief Through The HIPC Initiative • Only 8 countries have so far received substantial debt write-off under HIPC • IMF structural adjustment conditionalities are still designed to protect the assets and interests of creditors-they are holding up debt cancellation, forcing deflationary policies on poor countries, and in some cases reversing even the debt service relief offered

11. HIPC is failing to restore countries to debt sustainability even according to its own narrow criteria-19 of the 26 countries (73% ) currently in receipt of assistance will not have sustainable debts even after completing their passage through HIPC • Senegal’s debt service will reach 61% in 2004 and Zambia’s debt service will rise by 92% in 2004( The country paid US$196.5 million in 2003 and this year is scheduled to pay US$377 million )

12. Conditionality: Policy based loans from the Multilateral Institutions • Institution loan Requirements, World Bank 1991: Economic Reform Credit (ERC ) • Phase out maize subsidies • Begin liberalizing maize markets • Limit bank credits • Remove tariff bans • Eliminate surplus civil service World Bank 1992: Privatization and Industrial Reform Credit (PIRC I ) • Harmonize sales tax

13. Reduce tariffs • Retrench 10,000 civil service workers • Enact privatization law • Restructure ZIMCO World Bank 1993 (PIRC ) • Reduce tariffs • Develop plans for land markets • Reform Investment Act • Offer for sale 60 companies • Study plans to privatize ZCCM World Bank (1994): Economic and Social Adjustment Credit (ESAC I ) • Redirect budget to social sectors

14. Eliminate export ban on maize • Begin sale of state owned farms World Bank (1995) Economic Recovery and Investment Project ( ERIP ) • Introduce VAT • Improve budget management procedures • Reform social security • Adopt and implement plans to privatize the ZCCM World Bank (1996 ) ESAC II • Privatize ZCCM • Implement 1995 Land Act • Amend National Housing Policy of 1995

15. IMF 1992-95:Rights Accumulation Programme (RAP ) • Restore macroeconomic stability • Eliminate arrears to international creditors • Implement Economic Recovery Programme in collaboration with multifinance institutions IMF 1995-98 (Enhanced Structural Adjustment Facility (ESAF ) • Quantitative benchmarks:Increase net domestic assets of BoZ • Increase international reserves • Reduce government domestic arrears • Structural performance criteria: reform civil service • Privatize ZCCM

16. World Bank 1999 (Structural adjustment Fund (SAF ) • Structural performance criteria:reform civil service • Gazette banking regulations • Privatize ZCCM IMF and World Bank 2000:Decision Point • Finish privatization of key remaining state owned enterprises, especially ZESCO, ZAMTEL, ZNOC and ZNCB

17. Chronology of IDA Lending 1992-2003

20. Conclusion • What should be noted is that both the Fund and the Bank have todate continued to impose conditionality on Zambia using the HIPC Decision Point Document, PRGF, CAS and PRSC instruments • Financial aid from the IMF and the World Bank and other donors has been tied to the implementation of economic policy reforms • Currently, there is still around 40%-45% of total bilateral aid which remains tied • Financial aid has also been key in the last few years to drive the Post-Washington Agenda of trade and financial liberalisation, marketisation of land, privatization of public water and energy utilities, etc

21. The End!!!! • Thank you for listening in