As Zambia enters a new phase in its 56-year membership of the International Monetary Fund, an academic paper by Professor Oliver Saasa provides an excellent analysis of the country’s past dealings with the Washington D.C. based institution. MakanDay and Finance Uncovered, a UK based journalism organisation has edited the paper for concision and clarity.
Zambia and the IMF have had a long and sometimes turbulent relationship. Since becoming a member of the Fund in September 1965, successive governments in the southern African country have sought and agreed to several emergency financial-support programmes, most of them lasting less than 24 months.
The early years
The first IMF stabilisation package focused mainly on planning and managing demand in the economy. It consisted of the 1973/74 so-called stand-by agreement. The programme, though observed by the government, did not lead to any noticeable improvement in the country’s domestic and external economic situation.
The second IMF stand-by programme was effected in 1976/77 and involved a financial injection into the Zambian economy of SDR19 million (1). The conditions again focused on improved demand management and as in the case of the first programme, no positive effects were realised.
The third and longer IMF Programme, also demand management-focused, was the 1978 to 1980 SDR250 million (2) stand-by facility. The programme performance criteria included a limited domestic credit expansion being limited and a devaluation of the national currency. Despite the government meeting all the conditions and the total IMF funds disbursed, Zambia’s GDP registered a negative growth rate during the period.
The fourth arrangement with the IMF was the SDR800 million (3) Extended Programme which covered a three-year period from 1981-83. Whereas the first three IMF Programmes were directed more towards demand management, the fourth one focused primarily on the supply side policies for the promotion of agriculture, mining and manufacturing. Due to a variety of shocks which included extreme weather conditions, poor copper and cobalt prices, and declining mineral outputs, the government failed to meet the IMF conditions, leading to its cancellation halfway (in 1982) after only SDR300 million (4) was purchased.
It was in the 1983-85 period when a more comprehensive and notorious IMF/World Bank Structural Adjustment Programme was undertaken. It covered a much wider range of “structural” economic policies. These facilities were also complemented by the World Bank Structural Adjustment lending which focused on promoting non-traditional exports.
Due to what was seen as unacceptable social effects of the liberalisation reform measures, the government succumbed to trade union pressure and unilaterally abandoned the IMF/World Bank Structural Adjustment Programme in May 1987. It replaced structural adjustment with its own New Economic Recovery Programme (NERP) which reversed most of the liberalisation measures.
But Zambia’s economic woes deepened as it continued to accumulate arrears on its international debt obligations. The government was forced by circumstances to resume talks with the IMF and the World Bank in 1989. The consultations resulted in the return to structural reforms. International governments and international financial institutions – known as bilateral donors– consequently acted to clear Zambia’s arrears with International Development Association (IDA).
The Chiluba years
The newly-elected administration of President Frederick Chiluba came into power in 1991. Under closer guidance from the IMF and World Bank and with the benefit of hindsight from the international response to the country’s noncompliance with the Breton Woods structural reform measures, Chiluba opted to go all the way in implementing tough fiscal, exchange rate, and financial sector reforms. This approach, rested on three main policy pillars: Namely, the removal of subsidies, economic liberalisation and stabilisation as well as the privatisation of the public sector enterprises.
A World Bank-funded Team (the ‘Harvard Team’ as it was affectionately called - drawing the name from the US university from which the members were largely sourced) was put together and camped at the Ministry of Finance for several years to ‘help’ the government take and implement policies.
Price controls were removed, the exchange rate; interest rates on loans were liberalised; and regular auctions of treasury bills initiated. The privatisation process also moved faster. Import controls were also abolished with very few exceptions.
Ironically, the new Government of Chiluba, evidently enjoying the ‘honeymoon period,’ managed to implement measures that were vehemently resisted during the Kaunda era. The Government was made to understand that it was only through the austere measures and fiscal discipline that the country could find itself out of its economic distress.
But by early 2000s, the country had suffered from a serious and protracted debt crisis. It was alleviated when a large portion of its debt stock was cancelled. The debt crisis originated from the 1970s with the debt overhang emerging in the 1980s when economic performance started to deteriorate rapidly and the balance of payments position worsened.
The debt situation was actually exacerbated by the government’s cancellation of the IMF Stabilisation Program in May 1987 that resulted in the suspension of external financing by donors. During that period, Zambia accumulated external payments of over US$2 billion.
Zambia failed to service its debt from its own resources. Consequently, the country’s debt was being serviced by cancellation and forgiveness, rescheduling (so-called Paris Club debt),further borrowings from the “soft window” (IMF and the World Bank); and grants(multilateral and bilateral donors).
As of 2001, the World Bank and the IMF combined accounted for 84.5percent of Zambia’s total multilateral debt and 46 percent of the country’s total external debt stock, a state of affairs that placed the two Breton Woods institutions at a vantage point, given their stakes, in influencing the search for remedial action.
Zambia qualified as part of the Heavily Indebted poor Countries(HIPC) Initiative after which the World Bank Group’s International Development Association IDA) and the IMF agreed in December 2000 to support a comprehensive debt reduction package for Zambia under the enhanced HIPC.
The enhanced HIPC Initiative was expected to help Zambia to advance its poverty reduction programmes and stimulate economic growth and the Poverty Reduction Growth Facility (PRGF) became an integral component of the HIPC arrangements to address the country’s economic malaise.
Following Zambia’s HIPC Decision Point, the country received financing assurances from creditors holding about 97 percent of its total debt. The World Bank, the IMF, the Africa Development Bank, the European Commission, and Paris Club creditors then provided interim relief. Japan and the United Kingdom actually cancelled a significant part of Zambia’s bilateral debt in early 2005 prior to the attainment of HIPC Completion Point, as indication of goodwill to the country from the ‘bilaterals’.
Now in 2021 a new chapter in Zambia’s relationship with the IMF is being written.
The IMF Special Drawing Rights (SDR) is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.
The SDR to US Dollar rates below are based on current exchange rates
1. 19 million IMF Special Drawing Rights = 464,557,612.50 Zambian Kwacha
2. 250 million IMF Special Drawing Rights = 6,112,617,926.39 Zambian Kwacha
3. 800 million IMF Special Drawing Rights = 19,559,814,804.74 Zambian Kwacha
4. 300 million IMF Special Drawing Rights = 7,335,084,496.28 Zambian Kwacha
The paper titled Use of Conditionality by International Financial Institutions to Encourage Privatization and Liberalization: The Case of Zambia was published in 2006.
Prof. Saasa is an economist and lecturer at the University of Zambia.