Post-debt relief opportunities and challenges for Zambia, A Commentary by Takatoshi Kato Deputy Managing Director, International Monetary Fund

August 3, 2005

A Commentary by Takatoshi Kato
Deputy Managing Director, International Monetary Fund
The Post (Zambia)
August 3, 2005

After almost two decades of economic distress, Zambia's performance has improved significantly in the last five years. Growth reached 5.4 percent in 2004 and averaged 4.5 percent overall. While inflation remains high, it has fallen nearly about one-third from 30 percent five years ago. This important progress reflects improved economic management, which has enabled Zambia to attain the HIPC completion point in April. That will reduce Zambia's external debt by US$ 3.9 billion, with the additional prospect of the complete write-off of debts to Paris Club creditors.

At Gleneagles, the international community has committed itself to significantly enhance resource flows to Africa. These commitments when fully implemented should substantially increase the resources available for Zambia to put in place programs that promote growth, reduce abject poverty, and accelerate progress toward the Millennium Development Goals (MDGs). In other words, Zambia is in a much better position to address its daunting social and economic challenges-as long as it continues to implement the reforms that will build the momentum to greater growth and poverty reduction.

Of course, this means that the international community will have to deliver on its promise to provide more resources. But the ultimate responsibility remains with the people of Zambia and their government—which currently is preparing a development plan expected to be launched in 2006 and covering the period to 2011.

Zambia's recent economic gains demonstrate that a strong commitment to reform and sustained implementation of such policies can produce an economic turnaround. By pursuing politically difficult spending restraint in 2004, the government was able to sharply reduce its borrowing and halt an unsustainable rise in domestic debt. This, in turn, brought lower interest rates and increased the private sector's access to domestic credit.

Against this background, the first policy imperative going forward is to sustain Zambia's hard-won macroeconomic stability. A key to this will be to take steps to further reduce government debt. At the same time, it is critical to advance reforms to broaden the tax base and improve public expenditure management. It is particularly important to expeditiously implement the Public Expenditure Management and Financial Accountability (PEMFA) reforms that were formally launched a few months ago with strong support from Zambia's partners in the international community. These reforms will be crucial to sustain donor confidence as they provide budget support.

The resources made available through debt relief will gradually provide the leeway to tackle some of Zambia's acute social problems, especially if there is a fundamental reorientation of government spending toward pro-poor programs. For example, free basic education has been expanded significantly, but many children are still left out. Expanding access to more children and improving the quality of education they receive will be one of the major challenges in advancing toward the MDGs.

The health system faces severe constraints that prevent many public health needs from being adequately addressed. Staffing levels are insufficient—a problem exacerbated by the massive emigration of health workers to wealthier countries. Donors' response to the capacity problem in health care has been, in part, to set up parallel delivery systems that attract workers from the public sector, thereby bypassing the urgent need for capacity building in that sector. However, to raise staffing levels and equip health centers, the government and its development partners must make major investments. There is also a serious need to scale up the campaign against HIV/AIDS—something the international donors, including the IMF, are prepared to back fully. Success in the health effort is a prerequisite for progress in boosting growth and reducing poverty.

As the needs of education and health are addressed, it is critical that there be a commitment to long-term funding—whether the money comes from the international community or domestic savings. But at the same time, the government must avoid returning to inflationary financing and ideally avoid long-term dependence on external aid.

In the long-run, sustainable economic growth can only be attained by continuing with the reform effort. Zambia has made a start in this direction over the past six years, creating a more market-friendly environment and better economic incentives for the public and private sectors. Now these reforms need to be bolstered by sharply reducing the cost of doing business in Zambia and promoting the economy's external competitiveness.

The next round of reforms would include successfully putting in place the Private Sector Development Initiative, which particularly focuses on reforming the telecommunication sector and labor laws, and the reduction of administrative barriers to business. It would include the Financial Sector Development Plan, which aims to improve access to financial services, especially by medium-sized and small businesses and in rural areas. Finally, there is need for progress in the effort to combat corruption.

Zambia faces daunting challenges. But Zambia's external development partners now have created the opportunity to comprehensively address these challenges. The IMF has supported Zambia's efforts in the past with policy advice, lending and technical assistance; the Fund stands ready to continue to assist Zambia's current and future efforts to reduce poverty.


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