Chapter

11 World Bank– and IMF-Supported Programs: A Zambian Perspective

Author(s):
Laura Wallace
Published Date:
May 1997
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Author(s)
Jacob Mwanza

Zambia’s relationship with the World Bank and the IMF goes back to 1956 and 1965, respectively. However, this long-standing relationship has not been without problems. The major aim of this paper is to provide a critical overview of the performance of the Zambian economy in light of the Bank’s and the IMF’s financial assistance, along with some thoughts on challenges of reform. The overview will focus mainly on the period following the resumption of Zambia’s relationship with the two institutions, which had been severed between 1987 and 1989.

History of Zambia’s Adjustment Programs

The Bank and the IMF argue that the imbalances that Zambia started to experience in the mid-1970s, apart from being direct consequences of the ensuing shocks, were due to inappropriate policies.1 Over-expansionary fiscal and monetary policies, in conjunction with narrow tax bases and poor public enterprise performance, domestic pricing policies biased against agriculture, and overvalued currencies, are some of the policies cited. To correct these imbalances and face up to the challenges of restoring short-term internal and external equilibria and long-term economic development, the Bank and the IMF have urged countries to embark on economic reforms. The IMF-supported stabilization and Bank-supported adjustment programs, irrespective of the country of application, generally comprise two main objectives: macro-economic stabilization and structural reforms.

What has been Zambia’s experience with these adjustment programs? Unlike many other former colonies, Zambia inherited a relatively healthy economy at its independence in 1964.2 This prosperity was directly linked to the booming copper industry. Thus, during the first decade after independence when copper prices were rising and domestic production of copper was increasing, the economy was able to grow at an average of 2.5 percent per annum. However, the first oil shock of 1973, the subsequent decline in copper prices (particularly since 1975), a general deterioration in the country’s terms of trade, and the government’s inability to develop a dynamic, diversified economy all combined to cause overall economic decline.

As a result, in 1973, Zambia adopted its first IMF-supported stabilization package. A total of SDR 19 million was extended to stem the decline in reserves and correct the budget deficit. But a continuing decline in the balance of payments compelled Zambia to enter into a second stand-by arrangement with the IMF in 1976 amounting to SDR 62 million, which involved imposing ceilings on the money supply, overall credit, and especially government credit. In addition, for the first time in the country’s history, a devaluation of its currency, amounting to 20 percent, had to be effected. However, with the closure of the Southern Route,3 due to an intensified war of liberation in Zimbabwe, the program did not yield any significant positive results.

In 1978, Zambia turned to the IMF again for a stand-by arrangement of SDR 317 million. Conditions for this facility included further restrictions on credit expansion and a 10 percent devaluation of the kwacha. However, in spite of the country having met all the conditions and the facility being totally disbursed, a further decline in copper prices and adverse weather conditions necessitated additional assistance. This time, the country went for an arrangement under the extended fund facility (EFF), amounting to SDR 800 million, covering 1981–83. Unlike the first three programs, which were directed at demand management, the EFF arrangement focused primarily on the supply side, namely, promotion of agriculture, mining, and manufacturing. Part of the explanation for this policy change was the tying of the loan to a three-year World Bank investment reorientation program, which was aimed at switching the focus from infrastructure to agricultural and industrial projects.

But by July 1982, Zambia had accumulated payment arrears and overshot the credit ceilings, and its balance of payments deficit had soared, forcing a cancellation of the EFF arrangement. Fortunately for Zambia, however, no sooner had this arrangement been canceled than the country entered into a fourth stand-by arrangement of SDR 270 million in 1983. Conditions for restoring internal balance included ceilings on money supply and credit, reducing the government’s budget deficit to 5.6 percent of GDP, decontrol of prices of most goods, and a wage freeze. As for the external balance, a 20 percent devaluation was effected immediately, followed by a free float of the kwacha. The free float was soon replaced by a crawling peg of the kwacha to a basket of currencies deemed to reflect the major trading partners.

In spite of the above measures, however, the economy continued to falter. As a result, negotiations for yet another stand-by arrangement of SDR 225 million for the period 1984-86 were initiated and successfully concluded. This facility retained most of the measures of its predecessor, but also introduced the system of auctioning foreign exchange (beginning in October 1985)—perhaps the most controversial of the Bank-Fund-supported measures yet. Among other things, disbursement of the donor foreign exchange pledges necessary to sustain the system became erratic. The ensuing political discontent culminated in December 1986 in food riots on the Copperbelt and loss of life. Against this background, the government unilaterally abandoned the Bank-Fund-supported structural adjustment program in May 1987 and introduced its own New Economic Recovery Program (NERP87).

Upon adoption of NERP87 the Bank suspended loan disbursements to Zambia, which covered over 55 loans and credits, with total commitments in excess of $1 billion. Areas covered by these commitments included energy, transport and communications, rural water supply, education (secondary, higher, teacher training, and technical), commercial and small-holder agriculture, industrial forestry, and fisheries. NERP87 had as its theme “growth from our own resources.” Its main elements included limiting debt service to 10 percent of net foreign exchange earnings, fixing the exchange rate at US$1 to K 8, reintroducing administrative allocation of foreign exchange through the Foreign Exchange Management and Allocation Committee, reintroducing price controls, and a continuous reviewing of policy. But by late 1988, Zambia was facing a rapidly deteriorating fiscal position, inflation was rising, foreign exchange shortages had become chronic, and black market activities were rampant. Severe difficulties were also encountered in servicing the external debt, much of which had been contracted on commercial terms.

Thus, in mid-1989, Zambia embarked on a Fund-Bank-supported (technically4) economic adjustment program aimed at creating a diversified and market-oriented economy. Recognizing the enormous external assistance required, Zambia had to negotiate for resumption of normal relations with its external creditors, which had been severed in the last decade. In July 1990, Zambia’s economic and financial program was endorsed as a Fund-monitored program. Nine months later, in April 1991, the Fund approved a rights accumulation program, up to a maximum of SDR 836.9 million (the level of arrears to the Fund as of July 1, 1990), for the period 1991–94. However, policies went substantially off track in the second half of 1991 resulting in no rights accumulation. The new government (as of November 1991) then worked very hard to bring the program back on track. By the end of January 1992, Zambia had cleared its arrears to the Bank and reduced its arrears to the IMF to the end-1991 level. As a result, disbursements resumed in late 1992. On December 4, 1995, Zambia successfully completed its rights accumulation program and was granted a three-year arrangement under the enhanced structural adjustment facility (ESAF) and a one-year arrangement under the structural adjustment facility (SAF), totaling SDR 883.4 million, covering the period July 1995 to June 1998.

Recent Economic Performance

Clearly, Zambia has been experiencing serious economic difficulties since the first oil shock and collapse of world copper prices in the mid-1970s. Early efforts to restructure the economy proved inadequate. Moreover, the import substitution industrialization strategy that the government of the day adopted in an effort to accelerate growth of the manufacturing sector turned out to be very costly. The state became too entrenched in the running of most economic activities, and the types of industries that emerged were import using rather than import substituting. In the face of declining foreign exchange earnings due to the poor performance of the copper industry, capacity underutilization became the order of the day, leading to shortages of essential commodities and consequently inflation. Afraid that the situation would get out of hand—and in line with the adopted philosophy of Humanism—the state resorted to administrative controls of prices and allocation of resources. Overtime, these also bred their own problems, such as further capacity underutilization, long queues, and corruption.

In 1991, Zambians went to the polls and voted overwhelmingly to change the government. The new government has shown greater resolve to embrace structural adjustment programs, à la the IMF and the Bank. For instance, by 1992 a number of price controls were lifted, the Zambia Privatization Agency was created, the official and market exchange rates were unified, and nearly all subsidies were removed. In 1993, there was a further tightening of monetary policy, mainly to deal with escalating inflation, and a weekly treasury bill tender system was introduced.

By 1994, with the suspension of the Foreign Exchange Act, all forms of controls had been lifted. However, trade liberalization opened a floodgate to all sorts of imports, among them second-hand clothing (Salaula). One notable thing about Salaula is that it led to the demise of many of the local textile industries that had no competitive edge. This prompted the Zambia Association of Chambers of Commerce and Industry to cry “foul.” Its members not only detested the influx of Salaula but also protested that some of the imports flooding the Zambian market were being dumped. The government responded by introducing countervailing duties in the 1994 budget, although due to the cumbersome procedure of invoking them, the duties have never really been applied. Thus, in 1995, the government introduced simpler measures to administer, including suspension of duty on a number of imported raw materials and a value-added tax (VAT). By 1995, the Zambian economy had, de facto, become a market economy par excellence.

Real Output Growth

Since the mid-1970s, Zambia has been experiencing protracted economic stagnation. Over the period 1985–93, while real GDP grew at an average of approximately 1.3 percent per year, the rate of population growth was estimated to have grown at an annual average of 3.2 percent—translating into a decline in GDP per capita of on average 4.6 percent annually. However, after four consecutive years of negative growth, a dramatic increase in real GDP of 6.5 percent was recorded in 1993. Unfortunately, this proved to be very short lived. Real GDP declined by 3.1 percent and 3.9 percent in 1994 and 1995, respectively—largely due to a fall in agricultural, forestry, and fishing sector outputs, resulting from drought, late delivery of inputs, and the high cost of credit.

Financial Sector Reforms

The financial sector has been one of the fastest-growing sectors since liberalization of the economy began. In 1994, even when the major productive sectors registered declines, the financial sector recorded the highest growth—13.8 percent. Over the course of 1994, 23 commercial banks were registered, with 18 of them operational. Also, by 1994, there were 43 Bureaux de Change and 30 nonbank financial institutions operating. As a result, competition became rife. By 1995, three banks had succumbed and had to be placed under receivership. Other notable developments in recent years included the revision of legislation relating to banking and financial services, and the establishment of a capital market.

The enactment of the Banking and Financial Services Act in 1994 is, among other things, aimed at empowering the Bank of Zambia as a lender of last resort and the bankers’ bank. However, the failure of the aforementioned banks put this piece of legislation to a test. It became quite apparent that the central bank’s presumed relative autonomy was yet to emerge.

With regard to the establishment of a capital market, Zambia’s dream of a stock exchange became a reality on February 21, 1994, with the launching of the Lusaka Stock Exchange. Trading began in March 1994, and although business at first was slow, by mid-August over 2 million shares had been traded. Even so, the newness of the concept and continued prominence of commercial banks in providing business finance appear to be among the major factors retarding growth of the market.

Monetary and Credit Policies

The introduction of a weekly treasury bill tender system in January 1993—particularly the addition of 28-day bills to the menu of instruments in March—saw a dramatic increase in interest rates, which had been rising since the beginning of the year when they were decontrolled. The maximum lending rate for commercial banks rose from 85 percent in January 1993 to a peak of 139.3 percent in August 1993. Over the same period the savings rates increased from 51.28 percent to 97.9 percent, and the yield rate on 28-day treasury bills rose to 179.61 percent in August 1993 from 106 percent in March 1993. As expected, the increase in interest rates acted as a double-edged sword. On the one hand, it encouraged savings, but on the other hand, it discouraged investment.

The sale of treasury bills, of course, had fiscal repercussions, with the rise in treasury bill interest rates leading to an increase in national debt. By the end of 1994, national domestic debt had risen from a little over K 40 billion ($104 million) in January 1993 to K 150 billion ($220 million). It peaked at K 247 billion ($265 million) in October 1995, before falling to K 209 billion ($174 million) in March 1996. Such a huge domestic debt means that the government has to come up with more funds when retiring future national debt than would otherwise have been the case. Moreover, the persistently high domestic debt has been a major factor in the sluggish reduction in domestic interest rates and ultimately in inflation. Even so, it should be noted that nominal interest rates have now come down to the 50 percent level—relatively modest in real terms.

Further, the treasury bill tender system appears to have had another effect on the economy. Given the limited nature of Zambia’s financial market and hence its financial base, the system reoriented demand away from the foreign exchange market. A cursory look at the financial market indicates that the treasury bill and foreign exchange markets are not mutually exclusive—they are both patronized by the same economic agents. Thus, it is not by sheer coincidence that as the treasury bill market prospered the kwacha appreciated.

Inflation

The government’s commitment to reducing inflation, as announced in the 1992 budget, was reaffirmed in 1993 when the government declared inflation the “number one enemy” and vowed to observe “principles of sound finance.” Major measures proposed included achieving a balanced budget, completely avoiding borrowing from the central bank, operating the government on a cash basis, and tightening the squeeze on excess bank reserves. These measures were to be complemented by sound exchange and interest rates policies.

Although inflation declined in 1993, it was still very high, averaging 187.1 percent for the year. Factors that contributed to this outturn were price instability during the first half of the year due to liquidity injection spillovers from 1992 public sector wage increases5 and drought relief activities;6 pricing policy changes in petroleum products and electricity; seasonal price changes in agricultural crops and products, particularly maize and its by-products; and persistent depreciation of the kwacha, which raised the prices of imported commodities and the cost of production given the country’s high import dependence.

On the other hand, the drop in inflation experienced during the second half of 1993 came mainly from the Bank of Zambia’s tough stance on money creation and the government’s operation of a cash-based budget. These measures, in turn, contributed to the appreciation of the kwacha, which for the first time in a long time, led to a reduction in prices of some goods and services—particularly those directly related to exchange rate movements. The tough monetary and fiscal stance adopted in 1993 has continued in subsequent years. Consequently, the inflationary situation has generally been better than in the recent past—with inflation now down to an annualized 31 percent (end-November 1996).

Exchange Rate Policy

For policymakers, one of the major challenges has been exchange rate stability—and in that regard, Zambia has pursued virtually all types of exchange rate regimes (see Table 1).

Table 1.Zambia’s Exchange Rate Regimes
PeriodPolicy
1964–1971Rate fixed to the pound sterling
1971: Q4–1976: Q2Rate fixed to the U.S. dollar
1976: Q3–1983: Q3July, pegged to the SDR with occasional devaluations
1983: Q3–1985: Q3July, SDR link substituted by a crawling peg on a basket of currencies of trade partners
1985: Q4–1987: Q2Foreign exchange auction; Dutch auction; two-tier auction
1987: Q3–1989: Q4May, fixed rate, initially to the U.S. dollar and since Nov. 1988 to the SDR, with occasional devaluations
1990: Q1–1991: Q3February 1990, dual exchange rate system with frequent small devaluations
1991: Q4–1992: Q3April 1991, two windows unified; crawling peg continued
1992: Q4–1992: Q4October 1992, Bureau de Change, two windows
1992: Q4–1993: Q4December, two windows unified; flexible exchange rate system
1994: Q1–Free market exchange rate; Exchange Control Act suspended
Source: World Bank, Industrial Reorientation Project, No. 10846, Attachment 10 (updated) (Washington: World Bank, 1992), p. 86; and Zambia, Ministry of Finance.
Source: World Bank, Industrial Reorientation Project, No. 10846, Attachment 10 (updated) (Washington: World Bank, 1992), p. 86; and Zambia, Ministry of Finance.

Starting in the 1970s, the type of import substitution industrialization strategy that Zambia pursued made the economy extremely sensitive to changes in the supply of foreign exchange. In a bid to rationalize the supply of foreign exchange, the government resorted to administrative allocation mechanisms that led to overvaluation of the exchange rate, foreign exchange shortages, and, ultimately, overheating of the economy. Initial attempts at liberalization and realignment of the exchange rate through devaluation only helped to instigate a stagflationary situation.

The new government that took office in November 1991 began a sustained liberalization of the exchange rate system and pursued a flexible exchange rate policy. An important step was the introduction of the Bureau de Change system in October 1992. Initially, the Bureau de Change system was to cater for small business transactions, as only earnings from non traditional exports were channeled through the system. The bulk of the transactions were to be channeled through the Bank of Zambia under the Open General License system, established in 1990. This meant, de facto, that there were two foreign exchange windows—the Bureau window, where the exchange rate was supposed to be market determined and the Bank of Zambia window, where an official exchange rate reigned. Two months later, the two windows were unified and a flexible exchange rate system was adopted. Most of the remaining impediments to establishment of a free foreign exchange market were removed in January 1994 when the Exchange Control Act was suspended, and on November 30, 1994, the Open General License system was discontinued.

However, the fully liberalized foreign exchange market was received, especially at the beginning, with mixed feelings. On the one hand, people were excited about their newfound freedom in carrying out foreign exchange transactions openly and with ease. On the other hand, two major concerns were raised. First, there were fears that indiscriminate liberalization of the market, especially when the neighboring countries were still restrictive, would stimulate and accelerate capital flight.7 Second, the relatively small growth in Zambia’s exports has continued to raise doubts about the stability and hence sustain ability of the system. The mining industry, the country’s main source of foreign earnings, has been fraught with operational problems. Under these circumstances, donor inflows would have been the alternative source of foreign exchange. However, lately, this too has become precarious. As a result, the behavior of the kwacha/U.S. dollar exchange rate has become quite unstable (see Table 2).

Table 2.Kwacha/U.S. Dollar Exchange Rate(End of period).
YearBank of Zambia Base RateBanks’ Bureau Rates
199166.4566.45
1992184.21180.27
1993647.38667.70
1994680.81703.37
1995950.52937.96
1996
Jan.977.18995.97
Feb.1,098.641,116.08
Mar.1,201.401,224.37
Dec.1,270.001,291.00
Source: Zambia, Ministry of Finance.
Source: Zambia, Ministry of Finance.

External Debt Service

Zambia continues to face serious balance of payments problems owing to three major factors: the country is too dependent on copper exports for its foreign exchange earnings (over 80 percent); the economy is highly import dependent, making it hypersensitive to fluctuations in the foreign exchange market; and the country has to contend with a huge external debt service burden.

Although Zambia’s external debt has declined from its peak of $7.1 billion in 1992 to its current (end-1996) level of $6.2 billion, the situation is of great concern to the government and country as a whole (see Table 3). External debt as a proportion of GDP stands in the neighborhood of 200 percent—and given that export earnings are far less than GDP, this shows a serious lack of capacity to repay the debt. To illustrate, in 1991, external debt-service payments, excluding arrears, were equal to about 60 percent of the country’s exports while external debt amounted to 560 percent of the exports of goods and services. In 1995, debt service totaled 328.9 million compared to the 1994 debt-service position of $301.8 million. Zambia’s huge debt also has implications for resource allocation. Debt repayment diverts resources away from domestic development activities, which further erodes the country’s capacity to repay the loans.

Table 3.Zambia’s Total External Debt(In billions of U.S. dollars)
1990199119921993199419951996
4.6684.3407.0706.8356.4996.4006.200
Sources: Bank of Zambia; Zambia, Ministry of Finance; and Zambia, National Commission for Development Planning.
Sources: Bank of Zambia; Zambia, Ministry of Finance; and Zambia, National Commission for Development Planning.

Resolution of the external debt situation has yet other complications, which arise mainly from the various interconnections among debt, exchange rates, and interest rates. For instance, although devaluation is aimed at increasing international competitiveness, it increases the local currency value of external liabilities and the budgetary costs of servicing the external debt. Variable interest rates, upon which most of the debt contracts are based, also add to the cost of repayment when they increase.

In addition, such a large debt burden has the potential to lead to undue donor influence on macroeconomic policy. Zambia’s foreign exchange earnings from copper exports are estimated at about $1 billion annually, whereas nontraditional exports, though increasing, are still substantially low with respect to the country’s foreign exchange requirements. Thus, the donor community has been—and still is—a major source of foreign exchange, providing about $900 million annually. Unfortunately, donors impose conditions on both the source and use of those imports and link the support to macroeconomic policy performance. Lately, there have been shortfalls in donor balance of payments support, with serious repercussions on net international reserves, net claims on government, and net domestic assets benchmarks. This has arisen mainly because of donors invoking some of the conditionality clauses.

Fiscal Policy Developments

After many years of running fiscal deficits Zambia registered a fiscal surplus in 1993, although the surplus was, apparently, achieved at the expense of postponing certain payments—making the surplus, as some analysts have pointed out, a “suppressive surplus.”8

However, it is fair to say that the government also took some stringent fiscal measures to stem the hitherto omnipresent deficits. These measures, which date back to the 1992 fiscal year, were augmented in 1993 when the government adopted a cash-based budget. The aim was to ensure that the primary balance was maintained throughout the fiscal year. This called for backing all intended expenditures with revenue. The cash budget and a zero balance on a cash basis at the end of the year has continued to be the major guiding principle for fiscal policy. To this end, the preliminary budgetary outturn for 1995 indicates a surplus of K 3.9 billion on the overall balance on a cash basis.

Even so, the government has had to face a number of difficulties, with some slippages that threatened macroeconomic stability. Fiscal slippage was largely caused early in 1995 by the government’s attempt to bail out the ailing Meridien BIAO Bank, and later in the year by its commitment to pay depositors of the liquidated Meridien BIAO Bank and the other two banks under receivership (Commerce Bank and African Commercial Bank). There was also a lot of pressure on the budget, given the need to settle domestic arrears amounting to K 11.5 billion. Finally, revenue collections continued to fall short of expenditure, posing difficulties to manage the cash budget on a daily basis. This prompted the government to move away from the daily cash budget setup to a monthly cash budget, whose key feature was bridge financing from the Bank of Zambia. The goal was to facilitate the planning and orderly release of budgetary funding to line ministries and provinces.

On the revenue side, the increase in total domestic revenue during 1995 can be attributed to government efforts to step up revenue collection in order to meet growing expenditure. New tax measures included the introduction of the VAT (pegged at 20 percent across the board), the imposition of a 5 percent import declaration fee, and the increase in taxes on some goods and services. The government also stepped up tax administration and enforcement measures.

On the expenditure side, the government has made expenditure reduction the main focus of its fiscal reform. Noninterest expenditure as a percentage of GDP was to be reduced from 16 percent in 1991 to 14 percent in 1992. However, for a variety of reasons, including drought relief, this target could not be met. Instead, actual expenditure rose to 31 percent of GDP and, unfortunately, this trend of actual expenditure exceeding budgeted expenditure has continued.

Agriculture

Agriculture has long been recognized as the area offering immediate and great potential for diversification and sustainable economic and social development. This stems from the observation that Zambia has a total land area of 75 million hectares, out of which about 24 million hectares is arable land (i.e., suitable for agriculture production). However, out of these 24 million, only about 2 million are under cultivation annually and slightly over 10 million are used for grazing. Under normal circumstances the country receives adequate rainfall that can support a variety of rainfed crops, and approximately 45 percent of the fresh water resources in the Southern African subregion are found in Zambia.9

However, the agriculture sector’s performance has remained below its full potential.10 During the 1994/95 crop season, a prolonged drought resulted in large declines in yields of most crops—exacerbated by an inadequate supply of inputs, the high cost of credit, and poor marketing arrangements. Agriculture, forestry, and fishing production declined further by 11.3 percent that season. The substantial decline in food crops output resulted in a grain shortage, prompting the need for imports. The government turned to donors for assistance in the form of commodity aid to meet part of the shortfall.

Reasons for unrealized potential include excessive government intervention and control of markets (during the reign of the previous government), and inadequate provision of essential public services. Marketing of most commodities was for a long time a preserve of either parastatals or government-appointed agents. In an effort to eliminate some of these excesses, the government embarked on agricultural reform, making the sector as a whole the “project”—the first time Zambia had tried the sector-based approach—to ensure better coordination and efficient resource allocation.

The Agricultural Sector Investment Program is a four to five year program. The proposed strategies include liberalization of markets with the government playing only an indirect and supportive role, crop diversification to facilitate appropriate crop rotation, development of the livestock subsector, emphasis on the provision of services to smallholder producers, better provision of infrastructure, improved access to inputs and markets for outlying regions, improvement of the economic status of women (through restructuring of agricultural research, extension, credit, and land tenure policies), judicious and full utilization of land suitable for agriculture, assisting farmers to deal with natural disasters, and placing the emphasis on sustainable agriculture.

Industry

From independence through the early 1980s, Zambia’s industrialization strategy revolved around state ownership and direction of important industrial enterprises, major public investments in intermediate sectors (e.g., chemicals, fertilizers, and cement) and consumer durables (e.g., automobile assembly), restriction of foreign competition through import licensing and tariffs, and promotion of import substitution industrialization through high levels of protection, investment controls, restrictive licensing, and other regulatory devices. The resources for the strategy were expected to come from the mining industry’s foreign exchange earnings and tax revenues.

However, Zambia’s industrial growth has not been very impressive. The index of industrial production (with 1980 as base year) has been negative, dropping to –7.6 percent in 1991. Capital expenditure as a percentage of GDP (in constant 1977 prices) has remained very small (about 3 percent) and has generally been declining. Similarly, gross fixed capital formation (in constant 1977 prices) continues to be a small proportion of GDP, ranging from 5.5 percent to 10.3 percent over the period 1987 to 1992. In short, the industrial sector is characterized by low capacity utilization, declining labor productivity, high capital intensity, and import dependence—in the past compounded by critical foreign exchange shortages. In 1995, real output in this sector declined by 4.5 percent, largely due to low capacity utilization of plants and machinery, which averaged 25 percent.

The poor performance notwithstanding, the previous and present governments have long recognized the importance of the industrial sector, as exemplified by the Industrial Development Act (1977) and Investment Acts (1986 and 1991). The 1991 Act sets strict ground rules on expropriations and other forms of government intervention in investment decisions, provides guarantees against nationalization of foreign-owned enterprises, and provides for the establishment of the Investment Centre (which promotes, coordinates, and monitors investments, as well as serving as a one-stop support facility to investors).

Parastatals and Privatization

Although Zambia had a very prosperous economy at independence, control and direction were concentrated in foreign private hands. This prompted the state to nationalize what it termed the “commanding heights” of the economy. By the 1990s, about 80 percent of industrial and commercial activities were controlled by the parastatal sector. Over 150 parastatals had been established—ranging in size from the giant mining company (the Zambia Consolidated Copper Mines) to breweries and small bakeries.

However, state-owned enterprises often had to contend with conflicting social and commercial objectives. At the insistence and directive of the government, many companies had to sell their goods at below-market prices, subsidize the public—particularly urban workers and dwellers—and employ more workers than needed to ameliorate unemployment. In addition, decision making tended to be overcentralized. This, coupled with a bureaucratization of management, led to the emergence of inefficient companies that could not perform.

In response, in 1992, the government embarked on a rigorous privatization exercise to scale down the government’s direct initiative in economic activities and administrative load; reduce government budgetary costs arising from subsidies and capital expenditure; promote competition and improve the efficiency of enterprise operations; encourage wide ownership of shares; promote the growth of capital markets; stimulate local and foreign investment; and raise capital income for the treasury. By November 1994, 14 state-owned enterprises had been privatized, and by December, the program had realized more than K 15 billion. The program gained momentum in 1995 when a total of 30 companies were privatized through management buyouts and public flotation on the Lusaka Stock Exchange.

Social Impact of Adjustment

As is well known, structural adjustment implies fundamental changes in the structure of the economy and in the welfare of the people. However, as the process unravels, certain sections of the population are likely to bear more than their share of the burden of adjustment. Recently, opposition political parties and the Labour Movement have criticized adjustment programs precisely on this point.

Equity and sustainable development demand that the vulnerable in society be protected. Until fairly recently, however, very little attention—let alone resources—was directed toward this goal. It is disheartening to note that most of the resources to ameliorate the impact of social adjustment have come from or been initiated by donors.11

Health

Until the change of government in 1991, Zambia was characterized by free universal health care. This had to change, as the health care system had virtually collapsed. There were acute shortages of drugs and medical supplies; the health infrastructure was in a state of disrepair; and morale of the health providers was at an all-time low owing to poor remuneration and working conditions. As a result, there was an exodus of medical doctors, with the number of doctors dropping from 621 in 1991 to 537 in 1992.

In 1992, the new government embarked on restructuring the health sector. The program is based on the principle that every able-bodied person residing in Zambia and earning an income should contribute toward the maintenance of their health, with an emphasis on primary health care. Additional measures, including introduction of medical fees and legislation to allow the establishment of private clinics and hospitals, were introduced in 1993. The quest for improving health care services is ongoing. In nominal terms, government allocations to the health sector have been increasing from 8 percent in 1993 to 14.3 percent in 1996.

Education

The education sector—with an adult illiteracy rate of over 30 percent—has experienced similar problems to those observed in the health sector: dilapidated physical infrastructure; lack of equipment; shortage of qualified teachers; poor conditions of service, and hence low morale with a staff exodus; high teacher-student ratios; and donor dependence.

The government’s major reform objectives include providing every eligible child with a good quality education, universal primary education, and carrying out and maintaining quantitative and qualitative improvements in tertiary education. To this end, in 1992, the government vowed to rehabilitate and maintain institutions of learning; provide learning materials, school desks, and equipment; and expand primary schools ending at Grade 4 to upper primary schools, particularly in rural areas.

Progress, however, has proved to be slow and highly demanding in resource terms, prompting the government to introduce additional measures in 1993. These included decentralization, encouragement of community and private sector participation in providing education services, and establishment of a subcommittee of the national Social Sector Rehabilitation and Maintenance Task Force. Other measures raised the nominal allocation to education from 9.8 percent to 13 percent of total government expenditure, and included cost-recovery and cost-sharing schemes at all learning institutions. The latter took the form of user charges levied by Parent-Teacher Associations, boarding fees at secondary schools, and loans to university students.

In 1994, a further impetus was given to decentralization as district education management boards and school management boards were asked to take full responsibility for teachers, pupils, education infrastructure, school furniture, and learning materials. Only functions such as policy formulation, curriculum development, standard settings, and evaluation were to be performed at the ministry headquarters. Accordingly, the government increased the budgetary allocation to the ministry from 13 percent to 15 percent of the total national budget, and in 1995, the allocation went up to 19 percent.

Employment and Unemployment

The first few years following Zambia’s political independence were marked by rapid increases in formal sector employment—jumping some 46.1 percent between 1964 and 1975. The rapid rise was basically due to highly favorable foreign exchange earnings from copper exports, which enabled the country to embark upon a number of public capital projects that helped create jobs.

However, as the balance of payments situation deteriorated in the mid-1970s, employment opportunities began to dwindle. The economy’s inability to cope with the level of imports was accompanied by excess plant capacities, in turn leading to reduced demand for formal sector employment. The situation was made worse by rapid population growth and, by extension, rapid labor force growth. Thus, the government’s plans to increase formal sector employment by 20,000 persons annually from 1980–84 could not be realized. During that period, the labor force grew at 3.8 percent a year while the economy was merely growing at 0.2 percent a year.

The poor economic performance of the 1980s, unfortunately, has continued in the 1990s. Making matters worse, the labor force has continued to grow at a fast rate—about 4 percent annually. Current economic reforms, before yielding intended results, are likely to add to the pool of the unemployed. Already, in the first half of 1994 a total of 3,669 workers were declared redundant.

Reflections on Economic Reform

What are the lessons for reform? First, it appears that stabilization measures are easier to implement than structural adjustment measures. This stems from the observation that the latter requires striking and maintaining a careful balance between tight and expansionary monetary and fiscal policies. Moreover, during the stabilization phase, a number of problems—including unemployment and an output squeeze from high interest rates—are apt to get worse. Thus, poverty alleviation measures need to be instituted simultaneously to take care of those segments of society who are likely to fall through the cracks of adjustment, as it were. This, I am afraid, seems to be quite an elusive objective.

Second, it is important to recognize that while inappropriate policies invariably result in poor economic performance, good policies can do little more than permit, or at most, encourage an improved economic performance. Economic reform is not only about “getting prices right”—such as a favorable exchange rate, positive real interest rates, appropriate incentives for farmers, a sustained fiscal balance, and a positive external trade picture—it is also about establishing an institutional framework to support “correct” policies.

Third, it is important to realize that in Zambia the reform process faces other complications:

  • The economy’s structure, with its heavy dependence on copper, makes short-term gains in the mining sector from economic reform extremely difficult, thus serving as a brake on economic growth for the economy as a whole.

  • With close to 50 percent of the population living in urban areas, Zambia is one of the most urbanized countries in sub-Saharan Africa. This dictates that the social consequences of reform should be taken into account at an early stage of the program.

  • Adopting a “big bang” approach to liberalization has its weaknesses and strengths. Policy sequencing, evaluation, and monitoring become quite complicated. On the other hand, hindsight knowledge seems to suggest that had the government waited to undertake some of the reforms, it most probably would not have had the courage to do so, given the population’s impatience with awaiting the delivery of the goods.

Fourth, there is an urgent need to seriously look into Zambia’s debilitating debt. Currently, Zambia’s external debt stands at $6.4 billion, or about K 141 billion, in real terms. This works out to be about 65 times the size of the country’s GDP. It also means that every Zambian owes the international community approximately $700, making Zambia the most indebted country in per capita terms. The foregoing amply demonstrates the country’s inability now and in the foreseeable future to repay such a huge debt. And as long as this issue remains unresolved the country’s development prospects will continue to be stifled.

Fifth, another issue impinging on Zambia’s future prospects is economic management. With sound economic management, a number of problems, particularly those relating to resource misallocation, could be tackled effectively. For instance, the successes the country has scored in the last two years in dampening inflation and liberalization can be maintained only if there is good management. Similarly, the government’s recently announced measures to stimulate industry will require judicious implementation. Unfortunately, we are in an election year, and electioneering might sway government efforts from development issues.

In conclusion, Zambia’s prospects for economic recovery and sustainable development critically depend on sound economic management and external support. Moreover, there is a need for more deliberate actions geared toward accomplishing a clearly defined vision.

The author expresses his gratitude to Denny Kalyalya for assisting in research and preparatory work for this paper.

See, for example, Lionel Demery, “Structural Adjustment: Its Origins, Rationale, and Achievements,” in From Adjustment to Development in Africa: Conflict, Controversy, Convergence, Consensus? ed. by Giovanni Andrea Cornia and Gerald K. Helleiner (New York: St. Martin’s Press, 1994), pp. 25–48; Gerald K. Helleiner, “From Adjustment to Development in Sub-Saharan Africa: Consensus and Continuing Conflict,” pp. 3–24 in the same book; Michael Roth, “Structural Adjustment in Perspective: Challenges for the 1990s,” in Democratization and Structural Adjustment in Africa in the 1990s, ed. by Lual Deng, Markus Kostner, and Crawford Young (Madison, Wisconsin: African Studies Program, University of Wisconsin-Madison, 1991).

Zambia is a landlocked country, with an estimated population of 9.2 million inhabitants. Nearly 60 percent of the population is concentrated in four provinces (Southern, Central, Lusaka, and Copperbelt), along what is traditionally referred to as “the line of rail.” The majority of the population lives on agriculture, which accounted for 18 percent of GDP, in real terms, in 1994.

This is the rail route through Zimbabwe.

Given Zambia’s ineligibility for IMF or World Bank financial support.

The government, under pressure from the public sector unions, awarded unbudgeted across-the-board salary increases of 50 percent.

In 1992, Zambia and other Southern African countries experienced one of the severest droughts in recent history.

Information to prove or disprove this remains scanty.

For instance, the government—afraid of fueling inflation and having decided to liberalize crop marketing, but faced with a poor private sector response—decided to issue promissory notes to farmers for their produce.

See C. Mab-Zeno, C. Mudenda, and others, Zambia: Natural Resource Study (Washington: World Bank, 1993).

See Zambia, Ministry of Agriculture, Food, and Fisheries, A Framework for Agricultural Policies to the Year 2000 and Beyond (Lusaka: MAFF, 1992).

See D.H. Kalyalya and G.N. Muuka, “Structural Adjustment, Macroeconomic Demand Management, Food Policy Reform and Its Impact on Rural and Urban Poverty in Zambia: Lessons, Prospects, and Options,” paper presented to a regional seminar on Integration of Poverty Alleviation Strategies into Economic Policies, Malawi, Blantyre, July 11–21,1994.

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