DO LOANS RATHER THAN GRANTS ENCOURAGE GREATER RESPONSIBILITY FROM NATIONAL GOVERNMENTS?

EURODAD Annual Conference 27^th – 30^th November, 2001, Kandersteg, Switzerland

OPENING REMARKS

I would like to thank the European Network on Debt and Development (EURODAD) for inviting me to the 2001 Annual Conference and more especially for giving me the opportunity to make a presentation on the topic mentioned above.

I was excited when I received the request to present on this topic and was very eager to give examples from one corner the world to another to show that the answer is a big NO.  But after some reflections, I found it realistic to talk about Zambia, my country of origin, residence and work.

But I should also mention here that narrowing such an important topic to a country situation is risky because then only a small picture is given.  However, and more importantly, such a focused presentation would allow us to get clear implications of loans at country level and thereby give us good grounds for discussion, a learning process and a chance to exchange ideas.

In presenting this topic, I look at four issues namely terms and concepts, guiding points, country socio-economic context, the implications and results and finally I conclude.

DESCRIPTION OF TERMS

Loans and Grants
I am sure that as we are gathered here, we all have a common understanding of the terms mentioned above but for the purpose of this discussion, I describe loans as external financial or non-financial assistance received by a national government from another government or lending institution and is required to pay back with interest and grants as a donation given to a country by another government or an institution and is not required to pay back in any form.  To me, the major difference between the two terms is that for loans, the “pay back” notion applies explicitly while for grants it is “sorry” or “well done” notion that is applied.  Though I think it is also important to express my observation that in the current global political context, grants are influenced by commercial interest.  Grants come as a result of complying with some conditionality attached to economic reform such as privatisation, investment, trade and currency liberalisation.

Government Responsibility
I also feel that one of the description that this group should particular attention to is how I describe  “National Government Responsibility:” For me, a responsible national government is one that through its local, national and international obligations is able to provide and meet the basic and essential needs of its majority citizens.  At the moment, I strongly feel that this definition cannot be applied to my national Government –  where 80% of the citizens are classified poor.

GUIDING POINTS

Premises

• Loans and grants are more of tools in the foreign policies of most developed countries and international financial institutions for their own development than strategies to assist the poor and heavily indebted nations in the world.

• All kinds of financing be it local or international are capable of addressing all types of national and global crises if only the needs and the potentials of the people targeted are taken as the main focus.

 Flowing from the question “Do loans rather than grants encourage greater Government responsibility, I would like to put forward the following 6 key assertions:

1. Responsibility: To who? The creditor or to those in whose name the grant or loan comes?
   
2. Responsibility:  Is largely determined and influenced by the conditions attached to the loan or the grant.
   
3. Loans promote conditionality from above but grants would provide an opportunity to develop conditionality from below.
   
4. The obligation to repay a loan with interest coupled with stringent conditionality makes government responsibility a difficult issue to realise compared to grants, which on the face value do not have to be returned.
   
5. Neither loans nor grants can promote Government responsibility.  Responsibility is dependent other key factors – political, economic and institutional set-up of that particular country.
   
6. Government responsibility is a must be home grown even before we talk about loans or grants.

PROMOTING GREATER NATIONAL GOVERNMENT RESPONSIBILITY THROUGH LOANS RATHER THAN GRANTS?  THE CASE OF ZAMBIA

Zambia’s prevailing Socio-economic Situation
Zambia is a landlocked country located in the centre of Sub-Saharan Africa, bordering Angola, Namibia, Malawi, Zimbabwe, Tanzania, Mozambique and the Democratic Republic of Congo.   It has an estimated population of between 10.5 and 11 million people.

Economically, the country has high inflation (was 30.1% as of the end of 2000), declining and unstable value of currency, low GDP, low production levels (for example, the production of copper, the main export declined by 3.5%), poor terms of trade for both traditional and non-traditional exports and high unemployment level

These conditions are worsened by a heavy debt stock of US6.3billion of which 55% is owed to multilateral institutions and 33% to bilateral creditors.  Debt service in the previous year 2000 was US160m, up from US133m in 1999.  Fifty-three percent (53%) of this year’s budget was financed by external resources and this is dependent upon Zambia meeting the conditions attached to HIPC packaged.

According to the Living Conditions Monitoring Survey of the Government’s Central Statistics Office, head count poverty levels are now at 72.9%, rural poverty has reached 90% and the World Bank estimates that 82% of Zambians live under a poverty line of one US dollar a day.

The UNDP Human Development Report 2000 ranks Zambia as one of the poorest countries in the world and further describes Zambia as one of the only country whose current value of Human Development Index is lower than it was in 1975.  In Zambia, life expectancy is approximately 37 years from 54 years at the end of the 1980s.  The WHO reported in 2000 that the estimated “health life expectancy” for a Zambian born today is 30.3% - the 4^th lowest in the world.

Malaria, tuberculosis, malnutrition and AIDS are the major factors affecting life expectancy.  Over 20% of the adult population is HIV infected.  About 60% of the children are malnourished, up from 47% in the early 1990s and under-five mortality is 202 out of 1000 live births.  Over 600 000 children are orphans and a projection in the few years of 1.6 million makes Zambia the most orphaned country in the world.  One third of the primary school age group (7-13) and 75% secondary school age group of girls are not in school.

Drawing from this information, one can rightly conclude that Zambia is facing serious financial, economic and social crises.  How can loans than grants encourage greater Government responsibility in this case?

PART ONE:  THE EXPERIENCE – LOANS AND GOVERNMENT RESPONSIBILITY

1. Responsibility

I have asked this question deliberately so that as a group we can look at two key issues:

a) Who finally benefits from a loan in one case and a grant in another?

b) Conditions on which loans are procured and grants are given.

1.a. To Who?

As a country in unsustainable debt situation, but still obliged to service debts, our national government’s responsibility is to the creditors.  Every year, Zambia services debts at the expense of its national needs in order to fulfil the agreement signed with the creditors and in order to be eligible for further borrowing.  Zambia has been paying more as debt service than its budgetary allocation to both the health and education sectors. For instance, the debt service for last year, 2000 (US160m) is 50% to 60% of total social sector expenditures.  Zambia runs health centres in both urban and rural areas without any medication, insufficient workforce, for instance there is one fully trained doctor for every 200 Zambians!  There are no learning materials in schools and teachers receive very low wages equivalent to US3O a month, strikes and boycotts have become the order of the day.

The Official Journal of the European Communities (1996) recognises debt service as the major impediment to effective budget support, and I add, consequently to the implementation of the budget because there are hardly any resources left to utilise after servicing debts.  This concern has been clearly revealed in a study entitled “The Reality of Aid, 1997/8:  The EU and Africa.”  In this study, it is revealed that most HIPC governments spend over one-fifth of their revenues and 15% of their total expenditures on debt service.  These figures have been devastating economically and socially to Zambia (as shown in the socio-economic section)

The second important point here is that for Zambia large amounts of balance of payments (BOP) support from the international community over the past decade has been used to service old debts to the same creditor institutions and governments.  So Zambia borrows in order to service debts so that it can borrow again!  In the current Zambian context, loans have not been encouraging greater national responsibility but have actually been blocking responsibility for both economic and social development.   Roads are in a poor state.  Support services to sectors such as agriculture and small business are no longer there.  Therefore, total cancellation of debt and more grants would enable our government to break the chains of indebtedness, thereby promoting Government focus on national development.

I conclude that loans can only encourage great responsibility where the debtor country is able to make real returns on the loans and these returns are truly seen to contribute to both social and economic development of a country and that the country is also able to pay back when the loan is due without threatening the country’s survival.

1.b Who Benefits?

For a long time now, the Government of Zambia strives to sustain its budget through borrowing, thereby worsening the already huge external debts.  What a vicious circle!  But this is a “responsibility that our the Government can not ignore.  The risks are too high.  For example, due to the austere results of the IMF and World Bank SAP policies on the Zambian people, the Government stopped the programme in 1983, 1987 and 1990 resulting in the accumulation of arrears, both bilateral and multilateral lending to Zambia was cut.  When the arrears were cleared in 1991, lending from both creditors resumed.

The key expectation from the creditors, which is an abnormal expectation to me as a Zambian citizen is that as a poor country, we are obliged to keep current on our international debt payment even at the cost of considerable national disruption.   Zambia’s annual debt service payments average between US142m and US168m while the budgetary allocations to the health and education sectors range between US70m and US76m.  This is a blind expectation!  For Zambians, it is difficult to see or feel government’s responsibility because it has been failing to meet our aspirations and to implement policies that are supported by broad national consensus.

But in case of grants, it most unlikely that the Zambian government would have been parting away with the so much needed resources because the obligation to repay does not necessary apply or even to comply with demands that are unrealistic domestically.  I am using necessary because from experience, grants do also come with some form of conditions.

Therefore, It is only through unconditional financial assistance that governments in poor countries can have the freedom to seek active involvement of the people and together, be responsible for identifying the needs, plan, implement and monitor their development.  Loans have not encouraged this development virtue in Zambia.

1.c. Conditionality Attached

Since 1978, Zambia has been depending on IMF, World Bank and the Consultative Group of donors for external financial support.  With the World Bank and IMF as the main creditors, lending and to a certain extent grants, have been tied to one main conditionality – the implementation of the Structural Adjustment Programme (SAP).  Conditionality has been in two main forms;

1) stabilisation measures – public sector wage freeze, reduced price subsidies and currency devaluation.

2) Long term-adjustment policies – broad export promotion, economic liberalisation, privatisation of state and parastatal assets.  Both the IMF and the World Bank have been closely monitoring these macroeconomic and structural performance benchmarks.  Through cross conditionality amongst funders, the bilateral donors have also closely tied their assistance to the IMF and World Bank agreements!  According to me, this is a dangerous syndicate!

The implementation of these conditionalities has been at the cost of considerable economic, political and more seriously, social declining conditions.  Our Government is expected to continue with these policies even when there is clear lack of demonstrable economic and social benefits.  Thus, even after implementing non-stop SAP in Zambia for 10 full years, the country shows the results mentioned above!  The food basket survey conducted by the Jesuit Centre for Theological Reflection (JCTR) for the past decade clearly shows how the purchasing power of Zambians has been reducing drastically in comparison to incomes earned.  The cost of living keeps rising while the standards of living are reducing.

1.d. Implications and Results of Conditionality

There are basically 6 main outcomes of conditionality attached to loans that have adversely affected the Zambian people such that most of them are now classified poor, economically and socially.  They no longer take an active role in economic activities and cannot decide and determine their national destiny.  These are:

• Whereas aiming to solve the foreign exchange problem, devaluation and liberalisation of the local currency (kwacha) has resulted in increased debt service amounts and a widened financial constraint for the national budget – 53% of Zambia’s national budget for this year was externally financed!  This automatically increases the burden of external payment and the dependence on external resources has been worsened poor terms of trade as well as low in flow of grants. 

• Rapid liberalisation has robbed majority of the citizens of their livelihoods such as agriculture, fisheries and industrial business and this right has been given to commercial interests of mainly foreign investors. Privatisation has led massive unemployment - high unemployment levels – only 476,347 formal jobs in 2000, increase in the cost of social services such as health and education.  More and more Zambians are joining the poverty group and cannot access basic services.

• Trimming of public service and expenditure has led to closing of essential offices of Government such as the National Commission for Development and Planning (NCDP).  Because of the absence of such an important unit in government, the Zambian government has failed to foster a genuine development strategy in the last 10 years – no national development plan.  More dangerous, creditors have taken over the role of determining the direction of development for the country.  Our national government has assumed the mere responsibility of implementing these imposed strategies.  Where is our national responsibility and sovereignty?  As Peter Henriot, Director of JCTR, was once quoted as saying that Zambia seemed to be suffering from two kinds of droughts: natural and policy.

• The main obligation and unbreakable expectation of meeting the conditionality of donors has turned our national government into a recipient of development policies and strategies than an initiator of indigenous development plans based on real ideological conviction.  From my perspective, there has not been serious commitment to the current development policies except as a means to access more donor funding.  The level of government responsibility for development, especially towards the indigenous people is simply not there.

• This could be the main possible reason that despite massive external aid, since the 1990, after the shift from one party system to multiparty democracy, there have been very little positive results achieved.  The social economic indicators give evidence to this fact.  One asks where have we gone wrong?  The response to this is that with escalating debt burden, servicing of debt and fulfilment of donors conditionality, it has practically become impossible to talk about national development!  More emphasis has been placed on the reduction of external debt than on increasing domestic capacities to arrive at a situation where we can borrow and pay back on favourable terms.

• Zambia is far from fulfilling the World Bank and IMF criteria for a country with “sustainable external debt”.  Zambia compromises its human and economic development to meet its debt obligations.  Secondly, the GDP of Zambia is very low because of poor terms of trade, low investment, huge external debts and high debt service.  Thirdly, in order to access the total HIPC debt relief resources of US2.5billion, the Zambian government must more importantly fulfil the several adjustment arrangements under the PRGF – privatise the remaining parastatal entities of electricity and largest commercial bank.  But can our government realistically manage to meet these demands and the secondly, are these terms national priorities for the people in Zambia?

I conclude that loans, through the conditionality cannot promote greater government responsibility to manage all available internal and external financial resources to contribute to economic and social prosperity of its people.  Loans through conditionality oblige governments to be responsible and answerable to external institutions and creditors than local constituencies who elect them.

PART TWO:  THE WAY OUT

2. Enhancing Government Financial and Development  Responsibility in Poor Countries

It is my strong belief that external support, whether in form of loans or grants can not necessary promote greater government responsibility both to the creditors and to its people.  Greater financial responsibility is only assured in the presence of key factors such as listed below:

2.1.    Institutional Arrangement

It is important for a borrowing government and its creditors to ensure that there is a good and strong national institutional structure to facilitate effective funding, loan negotiation and monitoring.  Currently, Zambia lacks this component and as such, loans are procured in a non-transparent manner, accountability is not assured and utilisation is difficult to monitor.  The minister of finance is responsible for all loan negotiations and agreements.  There is no meaningful involvement of parliament and sometimes, even the Ministry of Finance and Economic Development in the negotiations of loans.  This is what has made it easy for our leaders to use external support more on non-developmental purposes such as the Presidential Slash Fund and Presidential Housing Initiative.

As civil society, we do appreciate steps taken by Zambia’s creditors and donors in making certain political and constitutional reforms as a conditionality for their support.  Conditionality in form of greater transparency, involvement of civil society, accountability, respect of human rights and anti-corruption are really in the interest of the nation and people as a whole.

2.2.    Political Will

Government responsibility is largely a political issue. The nature of government responsibility for national development is greatly determined by the level of political willingness exhibited by a particular government.  For instance, despite the importance and urgency of investing in human capital and social development of the country, Government’s spending in critical areas such as poverty reduction and basic social needs shows gross under funding.  Each year, the Auditor General’s Report, the national Government’s accounting and auditing branch, continues to show huge financial misuses and cases of unaccountability.  Up to date, Government has failed to give a satisfactory story on how the privatisation proceeds have been utilised – money has gone missing and no one in government is responsible!

2.3.    Public Involvement

Initially and up to date, public involvement in the nation’s financial and development issues were seen as interference by our national government.  With great effort, civil society has proved to be a necessary to national progress.  It makes government more responsible and accountable.  In Zambia, only a small proportion of the population was aware that Zambia was a heavily indebted country as late as the early 1990s.  People cannot see how they have benefited from the loans or even the economic policies that Government has been pursing.  Access to information is not guaranteed and the public is generally not aware when and why Zambia acquires a loan but are required by government to be heavily involved in paying it back – through heavy taxes and budgetary cuts on social spending!  This is the crucial role that Jubilee-Zambia has to continue playing – bringing the debt issue to every Zambian household door step, clearly show how debt and national mismanagement is making every Zambian’s life difficult and more importantly what we can do about this.

2.4.    The Role of the International Institutions

To me, it is very difficult to figure out the good that international institutions and governments mean through their external support.  To date, I am convinced that their support has been largely undermining the development of my country and the strengths of the local people and at the same time promoting the dependency syndrome and much more serious allowing for resources to be misused.   Year after year, the international community continues to ignore and reject conditionality from below – the call for totally cancel Zambia’s debts need for more grants and importance of national development strategies.

I do not think that the role of international creditors and institutions must be to design and determine our development destiny.  But their positive role should aim at supporting national development plans as desired by majority people in that particular country.  Therefore, the desired role of the international institutions in poor and heavily indebted countries like Zambia must be to move along with these countries in pursuing and accomplishing nationally identified goals especially in terms of reducing poverty and attaining sustainable economic and social development.  It is important that international community begin to respect and respond positively to conditionality from below

If loans have not induced development, and if people in poor countries think that debt cancellation and more grants are the best answers to national development, the international community must direct their support in that form – they must begin to move with the signs of time!

CONCLUSION

Coming from a poor and heavily indebted country, I do not see how loans can promote greater government responsibility especially in terms of development because of other determining factors as discussed.  Total and unconditional debt cancellation, grants and a just international world order - in trade, investment and development ideology on the other hand, would be the best form of external support now, but these should be accompanied by national responsibility of good governance and an indigenous development strategy.  Without these factors, external support would definitely go to waste.  I am personally convinced that: Loans take away the freedom to be responsible as a government and as a nation!

By Charity Musamba – Co-ordinator
Jubilee-Zambia

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