The Times of Zambia (Ndola)
April 10, 2005
The International community has recognised that one of the major factors contributing to slow growth and persistent poverty in the poorest countries has been unsustainable external debt burdens, which significantly reduce the resources that can be used to improve social conditions for the poor.
To address this problem, the International Monetary Fund (IMF) and World Bank launched the Highly Indebted Poor Countries (HIPC), initiative in 1996.
In 1999, it was agreed to enhance the HIPC initiative by providing faster, deeper and broader debt relief to eligible countries.
Zambia qualified under the initiative’s export criterion and the debt relief was calculated to bring the net present value (NPV), of external public debt to export ratio down to the HIPC threshold of 150 per cent at the decision point.
In December 2000, Zambia qualified for HIPC debt relief (reaching the ‘decision point’). At that time, creditors participating in the HIPC initiative committed to provide debt relief totaling approximately US$3.8 billion or US$2.5 billion in NPV terms.
Some donors agreed also to provide interim debt relief during the period between the decision point and the completion point; the HIPC debt relief becomes irrevocable.
On April 6 and April 8, 2005, the boards of the World Bank’s International Development Association (IDA) and the IMF respectively agreed that Zambia had met the requirements for reaching the completion point under the enhanced HIPC initiative.
Following up on debt sustainability analysis (DSA), done in 2000, on the basis of Zambia’s end-1999 stock of external debt, a further DSA was undertaken in early 2005, on the basis of the end-2003 debt stock.
Taking into account the full delivery of HIPC assistance and Paris Club creditors’ commitments of debt relief beyond HIPC, the updated DSA indicated that Zambia’s NPV of debt-to-exports ratio stood at 174 per cent as of end-2003, and based on preliminary data had fallen to 140 per cent in 2004.
The DSA also projected that this ratio would fall steadily over the foreseeable future and would remain well below the HIPC threshold of 150 per cent, even in the event of various adverse shocks.
The Net Present Value (NPV), of debt is the discounted sum of all future debt service obligations (interest and principal). It is the measure that takes into account the degree of concessionality of a country’s debt stock.
Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.
The long-term projections also point to a large drop in Zambia’s debt service to export ratio from about 23 percent in 2004 to about 6 per cent in 2005. This ratio would remain at about 6 per cent for the next 10 years, well below the indicative HIPC target of 10-15 percent.
Some Frequently asked Questions and Answers
Question 1: What is the immediate impact of HIPC debt relief on the Zambian economy? Is there a large cash injection that one can expect at the completion point?
Answer: The actual flows of debt relief will be realised over many years, as Zambia’s debt service obligations falling due will be reduced. In fact, since the decision point in December 2000, Zambia had already began to benefit from the interim debt relief provided by IDA, the IMF and some Paris Club creditors, among others.
Assuming that the government can soon reach these agreements on the delivery of debt relief with all its creditors, it was projected in the updated DSA that Zambia would receive an average of nearly US$135 million a year in debt relief during the interim period and because agreements on the delivery of assistance must be concluded with each creditor, the immediate increase in HIPC assistance will be more moderate. Over the long term however, the total benefit will be substantial.
Question 2: Does the attainment of HIPC debt relief mean that Government budget policies can now be relaxed, say by cutting taxes substantially increasing Government expenditures or both?
Answer: Attaining the HIPC completion point does not mean that Government should relax its fiscal policies. It is well known that macroeconomic stability, which is largely dependent on sound fiscal stance, is the key ingredient to an enabling environment for strong economic growth and poverty reduction.
As in the past year, lowering Government’s domestic borrowing needs will ease pressure on inflation and interest rates. For this reason macroeconomic stability and fiscal policies are emphasised in Zambia’s Poverty Reduction Paper (PRSP) and in the 2005-7 medium term expenditure frameworks underlying this year’s budget. Note that in the MTEF, the Government has committed to increasing spending on priority PRPs, even during a period of fiscal consolidation and lower domestic borrowing.
Question 3: How much is Zambia paying back to the IMF and how are these repayments going to be affected by the HIPC debt relief?
Answer: In 2004, Zambia paid the IMF approximately US$260 million and received disbursements under the PRGF, arrangement of about US$248 million. Thus, net payments to the fund amounted to US$12 million in 2004.
In 2005, payments due to the IMF, are about US$270 million. Provided the programme stays on track, Zambia would receive scheduled disbursements under the PRGF arrangement of about $34 million and about US$240 million in HIPC initiative relief would be available from the Fund after the completion point. Thus in 2005, Zambia would not make any net payments to the Fund.
In 2006, payments due to the IMF are about US$200 million and again, these would be more than covered by disbursements under the PRGF of US$32 million so long as the programme stays on track.
It is important to note that the decision point in 2000, the IMF was committed to providing HIPC debt relief to Zambia amounting to approximately US$703 million. As of end December 2004, 75 per cent of the IMF HIPC debt to Zambia had been provided.
As a member of the IMF in good standing, Zambia retains access to the use of IMF resources under the usual terms and conditions agreed by the IMF members in consultation with the Zambian government. Note that under the current three year PRGF arrangement, the Government has agreed that its new external borrowings would only be conducted on concessional (SOFT) terms.
Question 4: What is the current status of the Government’s programme supported by the PRGF and other donors? What happens if Zambia subsequently fails to meet PRGF targets?
Answer: Performance under the current three-year programme, which began in mid 2004, has been good through end December 2004. The economy continued to grow at a solid rate and despite much higher than expected fuel prices; inflation fell below the programme target. Baring a major food shortage, the economic situation should continue to improve in 2005, if macro economic policies and structural reforms continue to be implemented as planned.
After the completion point, HIPC debt relief is provided irrevocably. So even if the PRGF supported programme goes off track, nothing can happen to the HIPC debt relief.
Question 5: Some people say that Zambia’s external debt should be seen as “odious” – debt contracted by corrupt governments without benefits to the population at large – and thus that it should be written off completely. Why not just write it off?
Answer: The issue of what is referred to, as “odious” debt is controversial. International law and common sense suggests that one needs to be very careful about reneging on a country’s sovereign debt by simply classifying it “odious”.
Of the stock of Zambia’s debt at the end of 2003, 56 percent was owed to multilateral creditors and 43 percent was owed to Paris Club creditors.
These loans were used perhaps not always in the most efficient manner – to provide roads and other physical and social infrastructure, schools, hospitals and several times during the last two decades, to cushion the country against severe external shocks.
There is much discussion at the moment about the possibility of providing further debt relief beyond the HIPC initiative. One will have to wait to see where it leads.
The international community will have to fund any additional future debt relief and this should not come at the expense of reduced aid flows.
Question 6: How do we ensure that the resources released by HIPC debt relief go towards poverty reduction programmes?
Answer: The public, through their elected representatives, civil society, the press and academia must seek to ensure that the Government has in place transparent systems of budgeting and public expenditure management so that Government resources are used effectively.
In Zambia the move to what is called “activity based budgeting” has increased awareness of where public expenditures are directed.
The Government together with the support of the donor community has embarked upon an ambitious work plan to reform public expenditure management and accountability (PEMFA), that aims to greatly strengthen these critical elements of governance. Public support of anti corruption initiatives is essential to ensure that public funds were not misused.
Question 7: What restrictions will put on new Government external borrowing after the completion point?
Answer: Under the current PRGF arrangement, the Government has a declared policy of not contracting or guaranteeing non-concessional external loans.
It is expected that this policy will be maintained under the new PRSP-national Development Plan to be prepared by the end of 2005.
Ultimately, future Government borrowing should be made on the basis of clear guidelines enshrined under the constitution and public finance legislation that would provide for transparency and accountability in Government loan transactions.
Question 8: What are the methods of delivering HIPC debt Relief?
Answer: There are three basic modalities for delivering HIPC debt relief. First, creditors can write off the whole part of the outstanding debt. Second, creditors can provide grants to pay for debt service (or forgive debt service) as it falls due.
Third, the creditor can refinance the outstanding (or the debt service as it falls due on very soft terms.) Note that only the first method of delivering debt relief lowers the nominal stock of debt. In every case, however, debt service obligations are reduced, and it is these savings that can be directed to poverty reduction programmes.
Question 9: If Zambia attained the HIPC completion point by the end of 2005, how immediate would the impact be? This is in view of the US$3.9 billion debt write off would not be felt until 2019?
Answer: The estimated US$3.9 billion of HIPC debt relief would not be given to Zambia in one lump sum. It is the total value of all the debt relief (that is reductions in debt service payments) over time.
For some long-term loans, debt relief could be provided over a period of time of as much as 30 to 40 years. In the case of the IMF, 75 per cent of its HIPC assistance was provided during 2001-03 and nearly all of the rest will be delivered in 2005.
Over the next 20 years, HIPC assistance would average nearly US135 million a year.
In addition to its direct financial impact, reaching the completion point sends a strong signal to the world that Zambia has entered a new phase in its development.
Zambia will have broken with the past – a long period in which growth was hampered by an unsustainable burden of debt. Moreover, attaining the completion point has itself required economic reforms, which have brought significant gains in economic performance – particularly in the last five years and improved prospects for the future.