Zambia debt crisis


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Zambia debt crisis

  1. 1. <ul><li>Jubilee-Zambia debt forgiveness campaign </li></ul>
  2. 2. <ul><li>At independence in 1964, Zambia’s economy was heavily dependent on the mining sector, the mainstay of the economy. * </li></ul><ul><li>Government focused chiefly on this sector, neglecting traditional ones, because it was a rich source of revenue that allow the enjoyment of one of the highest levels of growth in Sub-Sahara Africa favorable cooper prices and high mineral production. * </li></ul><ul><li>The political and economic model developed at the time was inward-oriented, and centered in state-ownership (mining companies were nationalized), underdevelopment of agriculture, and consumer subsidies led to outflow of foreign exchange. * </li></ul><ul><li>Vulnerability was then sown in this decade. * </li></ul><ul><li>* (Andersoon, 11-15) </li></ul>
  3. 3. <ul><li>The first oil crisis (1973/74) and subsequent world’s recession set-in Zambia and crumbled down the economic system whose model was any longer effective, and consequently curbed drastically government’s revenues cooper prices were vulnerable to fluctuations, and fell sharply, while oil prices went up threefold. * </li></ul><ul><li>The second oil crisis (1979/80) hit again the cooper-oil trade terms à trade balance turned negative for the first time, reserves and real wages reduced sharply. * </li></ul><ul><li>Private employment decreased, government took action: expansionary public employment policy, volume of subsidies increased, state-owned companies (mining)’s losses covered via budget led to budgetary difficulties. * </li></ul><ul><li>* (Andersson, 16-17) </li></ul>
  4. 4. <ul><li>In less than one generation Zambia shifted from being one of the richest country of the region to become one of the poorest. * </li></ul><ul><li>The economic crisis was worsened by mismanagement of resources and corruption. * </li></ul><ul><li>In 1978, Zambia received first financial assistance from IMF: for 2 years, restore balance of payment equilibrium, reduce inflation rate, reduction of aggregate domestic demand. * </li></ul><ul><li>However, subsidies increased, food import as consequence of 2 years of drought à led back to budgetary difficulties. * </li></ul><ul><li>* (Andersson, 17-18) </li></ul>
  5. 5. <ul><li>From 1980 some policies reorientation were taken: the government embarked on the Structured Adjustment Program (SAP), that led to auction of foreign currency; embarked on a Food Program, and broke away from IMF’s financial assistance program. * </li></ul><ul><li>SAP: consisted of freeze on wages and government employment, lower subsidies to keep consumption low; modest money supply.  However, foreign interest payment increased. * </li></ul><ul><li>Meanwhile, switch from administrative control to open-market threatened the ruling elite, which was the operator of the economy. * </li></ul><ul><li>* (Andersson, 19) </li></ul>
  6. 6. <ul><li>The rapid depreciation of exchange rate is considered to be the triggering point of high inflation and prices, for which the government sold large amount of foreign currency that led to uncertainty; excessive borrowing from commercial banks to purchase local currency that caused a sharp depreciation of it. The system was not sustainable in the long run. * </li></ul><ul><li>In 1987 Zambia abandoned the SAP, and introduced a New Economic Recovery Program: system partly old-command-economy, with growth through liberalization attempts with country’s own resources. * </li></ul><ul><li>* (Andersson, 20) </li></ul>
  7. 7. <ul><li>The government assumed that the fall in copper prices was a temporary blip, so it made risky decisions. It did break away from the serious structural adjustment policies prescribed by the IMF and WB, and instead started to borrow money on the international financial markets. From this period onward Zambia’s large debt was built up. * </li></ul><ul><li>  </li></ul><ul><li>However, the indebtedness has its roots back in the 1970’s, when the then president of the country Kenneth Kaunda refused to cooperate with apartheid in South Africa. As a consequence, economic and social hardship upset due to the inevitable requirement to host refugees from neighboring countries, forcing the government to borrow a great deal (Donnelly, 2005-2006). </li></ul><ul><li>* (Andersson, 30) </li></ul>
  8. 8. <ul><li>By 2004, Zambia’s debt amounted USD $ 7.1 billion: throughout the decade, the government geared around 20% of GDP towards debt service (interests), and budgeted only 3% of GDP for education and health (JCTR, 2003). </li></ul><ul><li>  </li></ul><ul><li>The structural adjustment policies imposed by these institutions exacerbated the economic decline and social hardship. Among the measures: privatization of para-statals that led to harsh impact on employees; trade liberalization based on closing industries and opening market; rising fee for health and education due to cutbacks in budget (Donnelly, 205). </li></ul>
  9. 9.
  10. 10. <ul><li>Catholic Churches along with other religious and laymen groups led vigorously a great social movement that pledge for Zambia’s debt cancellation for being economically exhausting, political destabilizing and ethically unacceptable (Donnelly , 204). </li></ul><ul><li>  </li></ul><ul><li>Being supported by the Jesuit Centre for Theological Reflection in Lusaka, the campaign’s moral message was widespread quickly. The pledge was not only for the cancellation of the unbearable debt, but also for the creation of mechanisms that guarantee the right use of the freed resources, to gear them chiefly towards poverty reduction programs, and avoid diversion due to high level of corruption, mismanagement, inefficiency that have reflected from independence Zambia’s poor governance (JCTR 2003) . </li></ul>
  11. 11.
  12. 12. <ul><li>For this purpose, Jubilee-Zambia launched two proposals: the legal establishment of the debt mechanism and the legal explanation of debt contraction process. The first one is conceived to assure the effectively poverty-oriented and transparent management of resources, targeting HIPC freed funds and monitoring their allocation and distribution; and the latter, to avoid falling back into deep debt again (JCTR 2003). </li></ul><ul><li>In 2005, supported by the heartily –decisive campaign initiated decades ago, Zambia qualified to be one of the eligible countries to benefit from High Indebted Poor Countries (HIPC) Initiative launched by IMF and WB. By 2006, Zambia’s foreign debt was considerably slashed to less than USD $ 1 billion (JCTR 2003). </li></ul>