Zambia entered the enhanced Heavily Indebted Poor Country (HIPC) initiative in November 2000. According to the agreement with the IMF and the World Bank, the country was supposed to have reached the ‘completion point’ – the point at which debt relief would actually be delivered – in December 2003. This would have meant Zambia being relieved of about half of its huge external debt of $6.8 billion.
Despite its good track record for the first two years (according to the Fund and the Bank), Zambia was removed from the Fund’s credit line in April 2003 after it was discovered that the country was not meeting limitations on public sector salaries set by the Fund. Consequently Zambia has been put on a Staff Monitored Programme (SMP) until June 2004, instead of the conventional Poverty Reduction and Growth Facility (PRGF). During this period, should Zambia fail to satisfy the conditions of the IMF/World Bank, the country will not reach the completion point. This means it would have to pay close to $300 million in debt servicing from domestic resources in 2004, with that figure rising in subsequent years.
Breaking the agreement
The Zambian Government is the country’s biggest employer. However, remuneration in the civil service cannot be compared to what persons with similar qualifications in the private sector earn, or even what is earned by civil servants in neighbouring countries. Many professionals have been leaving the civil service to go and work where conditions of service are better. In the hope of retaining its professional staff, the Government introduced a housing allowance system. As a result, the ratio of public sector wages to GDP reached 9%, exceeding the 8% agreed with the Fund in the budget: Zambia was removed from the PRGF and put on a Staff Monitored Programme.
If the Zambian government pleases the IMF, it is likely to cause industrial unrest.
To meet the 8% agreement, in this year’s budget there is no salary increment for any civil servant despite rising price levels linked to increased value-added taxes and import duties. Housing allowances have been reduced to unacceptable levels. No new civil servants are to be employed for the next one and half years despite a shortage of doctors and teachers in government-run institutions. These new measures are supposed to be operational by 1 April.
Life under the Staff Monitored Programme
The Zambian SMP started in July 2003 and runs to June 2004. The Fund has assigned six economists to monitor the Zambian economy. Each one is an ‘expert’ in the real, fiscal, monetary or external sectors. Some of these ‘experts’ are recent college graduates with little or no knowledge of the Zambian economy.
Under a PRGF arrangement, the Fund only makes at most two visits in a year. Under the SMP this increases to at least four visits. Progress in implementing the SMP is monitored monthly. Targets are defined in a technical memorandum of understanding. Under the arrangement the Government has to justify all its expenditures.
A committee chaired by the minister of finance meets once every two weeks. The IMF resident representative attends these meetings as an observer. Also, once a country is on a SMP, it is the IMF staff assigned to monitor that country who represent it on the board.
To graduate out of the SMP Zambia has to meet certain conditions. The main ones are reducing the budget deficit to the agreed upon target of not more than 3 percent of GDP and maintaining a public sector wage to GDP ratio of not more than 8 percent. Additionally Zambia is expected to privatise the remaining public utilities in the energy and telecommunications sectors. To make matters worse the monies realised from the sale of the parastatals must be used for debt servicing and not for investment or consumption purposes.
The Zambian government is at a crossroads. If it pleases the IMF/World Bank by going along with the proposed measures in the letter of intent, it is likely to cause industrial unrest. If it goes with the will of the people, the country will have to pay hundreds of millions of dollars more in debt servicing.