Freitag, 14. November 2003

working paper November 2003

Zambia in the HIPC-Initiative - State of the Art in November 2003

• Debt Sustainability and the projections of the Word Bank and the IMF
• Financing of national and multilateral development goals
• The state of the PRSP process
• Topping up of relief at the decision point
• Creditor Participation and litigation attempts by individual creditors
• Current agreement with the Paris Club and agenda for further negotiations
• Germany as a creditor
• Conclusions

1. Debt Sustainability and the projections of the Word Bank and the IMF

On Dec. 8th 2000 the World Bank ank and the IMF have jointly released the results of their deliberations on debt relief for Zambia under the HIPC-2-Initiative. No projections regarding payments over the whole timeframe have been released ever since but only piecemeal and occasionally corrected and updated information. Therefore any projection regarding Zambia's future debt payments relative to its economic output are not definitive.

As compared to a debt service without HIPC a relief of 260m US-$ annually between 2001 and 2005 has been forecasted. 130m annual relief are projected for 2006 through 2015. That is the basis for our own estimation in column (2) below.

Columns (3) and (4) confront these original figures with updated projections and actual payments respectively.[1] The fifth column completes the picture by adding the projection on the debt burden in relation to annual export income as projected by the IMF in spring 2002. [2]

Year	Debt Service			Projection	% of
	preHIPC	post HIPC	de facto	2003	exports
2000			186		20
2001	440	180	129		12
2002	440	180	158		15
2003	445	185		151	13
2004	416	156		211	17
2005	416	156		202	15
2006	194	64		96	7
2007	223	93			9
2008	246	116			9
2009	253	123			9
2010	245	115			9
2011	252	122
2012	252	122
2013	252	122
2014	261	131
2015	261	131

The key messages regarding Zambia's future are:

• Zambia is one of those countries, which absurdly will have to pay more after the HIPC relief than they have been paying by the end of the nieneties. In 1999 - immediately before its HIPC-decision point, Zambia paid 149m US-$ in terms of principal and interest. Its reduced ability to comply with its formal obligations was a direct result of the sharp decrease in the prices for its main export commodities from 1997 to 1998 and the subsequent years. Between 1995 and 1997 the country earned on average an annual 1322 m US-$ through exports, whereas between 1998 and 2001 this income decreased to 978 m. [3]
• In 1995 Zambia for once paid thirteenfold what had been its average debt service through the years before. This was due to a 2.2 bn US-$ loan, which it received from the IMF's Enhanced Stratural Adjustment Facility (ESAF) in order to finance repayments on old obligations towards the Fund. This exceptional loan is being repaid until 2005, which makes the country's overall debt service rise substantially. Under HIPC, the IMF could not make up its mind to an exceptional cancellation of this exceptional loan. The only concession was the "frontloading" of the normal relief under HIPC [4] , which means that the reduction in current debt service to the Fund was a bit higher in early years - and correspondingly lower later on. A result of this frontloading is the rising debt service for the years 2004 and 2005, before finally relief becomes remarkable, and debt service will go down substantially.

This scenario of an ongoing high debt service burden, and some good hope for the future becomes even more high-explosive by the fact that the sympathetic picture for the years past 2005 regarding the relative debt burden is largely the result of very optimistic assumptions for the country's future export income. The following table [5] reveals the export earnings assumed by the Fund and the Bank in their Decision Point document. As early as spring 2002 the original optimistic assumptions of end-2000 had to be adjusted downwards. It is striking, however, in the 2002 revised projections that 2003 and 2004 are the only years for which even more export earnings are foreseen than in the original forcasts. When questioned by the World Bank's Operational Evaluations Department, on which basis these assumptions were actually made, Fund staff refused to reveal them even towards this body of its sister organisation across G street. [6]

Zambia Export Annual Export earnings m US-$ per year
	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Decision point projection	1,036	1,241	1,413	1,506	1,604	1,709	1,821	1,941	2,068	2,204	2,348
Updated projection	861	1,014	1,024	1,125	1,247	1,306	1,315	1,365	1,396	1,461	1,427

As of yet there are no indications that growth projections which, though twice adjusted downwards, might in fact materialise in the week and crisis-prone Zambian economy.

2. Financing of national and multilateral development goals

JubileeResearch (London) has identified Zambia as one out of very few HIPCs, which may succeed with financing their debt service and providing enough investment for reaching the Millennium Development Goals (MDG's) out of its current income. [7] This calculation is based on the assumption of continuous high fiscal income. This is calculated by JubileeResearch as slightly higher than by the World Bank and the IMF. Moreover, JubileeResearch expects ODA inflows to rise continuously between 2001 (414 m US-$) and 2006 (668m US-$).

Although the calculated income would in fact allow the country to finance the MDG's, which the organisations has considered as the benchmark for debt sustainability, Zambia is categorized as "unsustainably indebted". This is based on three factors:

• The incalculable macroeconomic losses caused by the HIV/Aids pandemic, which does affect Zambia above average - and which obviously has neither been considered in the organisations own original calculations, nor in those of the IMF and the World Bank.
• Considerable difficulties with the privatisation of state enterprises. Social unrest has accompanied efforts to privatise the biggest Zambian banks, electricity and telecommunication providers over the past months. As a result, President Mwanawasa has declared a halt to further privatisations.[8] However, existing figures do not reveal, inhowfar this inflicts with the income expectations, upon which JubileeResearch has based the presumed attainability of the MDGs.
• Referring to studies undertaken by AFRODAD JubileeResearch points out the growing internal indebtedness, which, like that of some other Southern countries, already outnumbers external public debt.

Zambia certainly is a case for urgent poverty relief: in 1998 72.9% of the population lived under the poverty line and 59.7% in abject misery. [9]

In 2001 Zambia spent 160% more on social investment than in the previous year. A further increase is predicted by the World Bank for the coming years. [10] The Bank's figures certainly reveal a positive trend. However, the very broad and unspecific category "social expenditure" leaves ample space for manipulation; therefore the trend should be taken with a grain of salt.

3. The state of the PRSP process

In April 2002 Zambia presented its definitive PRSP. Recently the fifth review of the financial programme PRGF, which underlies the PRSP process, resulted in a fairly positive view from the IFIs perspective. So there is some renewed hope that after the disruptions which led to the postponement of the completion point past the originally foreseen December 2003, a C.P. somewhere aroound mid-2004 is now envisaged.

The picture, which the Zambian civil society paints of the PRSP process is less unequivocal. In principal it is attested that the new Zambian government, which has taken over earlier this year, has a clear commitment towards poverty reduction. On the other hand, lags in key areas like fresh water provisioning are clearly undeniable. [11]

4. Topping up of relief at the decision point

Given the above figures Zambia would be an obvious candidate for an enhancement of the relief, conceded at the deicisioon point. According to the resolutions of the G8 at their 2002 summit in Kananaskis and subsequently of the Bank and Fund boards, topping-up relief shall support those countries, which turn out to not reach the agreed sustainability target. The target is to have an NPV of total debt not exceeding 150% of the average export earnings in the years immediately prior to the decision point. In spring 2002 the Bank and the Fund had to correct their projections regarding this ratio. At the decision point they had expected to reach the 150% threshold in 2004. However, early 2002 it became clear that income would not materialize as expected (see above). Moreover the expenses for debt service also had to be adjusted marginally. So the new ratio looked as follows [12]:

Zambia: Net Present Value of External Debt in % of annual export earnings:
	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Decision point projection	446	388	346	161	148	140	136	131	125	121	117
Updated projection	477	445	441	212	197	184	181	179	179	177	180

In September 2002 the IFIs had presented calculations for those countries, which might need a topping-up of their debt relief as it was calculated at the decision-point. These calculations were based on the export income in the last year before the assumed completion point - considering, of course, the relief already agreed upon and with an inbuilt safety cushion, assuming that relief would in fact be delayed by one year with a corresponding deterioration of the country's economic situation. For Zambia this exercise resulted in an assumed NPV of debt to export ratio of 152-154%. Correspondingly, the assumed additional relief was only a moderate 15-46m US-$ in NPV terms.

The above table shows clearly that six months earlier the same institutions had identified a substantially higher deviation from the 150% target. This in turn would also have led to a substantially more extensive topping-up.

However, like for some other countries, Zambia's decision point is being delayed. It can not be ruled out that one of the reasons for the creditors to postpone the relief is their knowledge that in order to bring the country down to a sustainable debt level, far more relief than originally foreseen will be needed. Creditors have repeatedly pointed out that currently there is not enough money in the HIPC trust fund for financing any additional HIPC relief. [13] NGOs have been surprised to read and hear at various occasions that attempts are made to raise the threshold, lowered to 150% at the Cologne summit, back to the original 200-250%. This was prominently done by the IMF in a paper on debt sustainability in HIPCs, when the authors declared that 200-250% had actually been quite alright, and the Cologne 150%'s purpose was only to provide a safety cushion for exceptional and unforeseen situations. The need and eventual extension of this safety cushion was now going to be refined through "stress tests". [14] Given the above projections, this re-interpretation of the Cologne summit's results would have the comfortable effect for the creditors that the largely insufficient relief under HIPC-II would all of a sudden look quite generous.

5. Creditor Participation and litigation attempts by individual

Only to a minor degree of Zambia's debt is owed to non-public creditors: some 30m US-$. Therefore the potential threat through individual creditors litigating for full repayments is not as acute as in other HIPCs. Zambia owes some 62m US-$ (in 2002 NPV terms) to Non-Paris-Club official creditors. Out of these the lion's share of some 38m is owed to China. As of this writing no court cases against the Zambian state have been started by either of these parties. [15]

Zambia itself is owed some 200.000 US-$ by other HIPC. World Bank and IMF have not revealed which other HIPC is the debtor, but only that Zambia has not yet granted equal treatment according to the respective HIPC/Paris Club arrangement.

6. Current agreement with the Paris Club and agenda for further negotiations

The latest Paris Club agreement, signed on Sept. 13th 2002 covered payments due between Jan. 1st 2001 and March 31st 2003. This means that Zambia does currently not have a current agreement with the IMF. Consequently it would be obliged to pay its debt service in full - which it neither can nor does. The surprising thing is that Zambia has so far only received flow reschedulings, although it has been to the Club several times since the formal possibility to receive a debt stock reduction has been created by the Paris Club in 1994.

Therefore the next round of negotiations could start any time. However, it might be logical for the Club to wait for the HIPC decision point to be declared before taking action itself. After that, it is most likely that the bulk of the PC creditors will declare a full cancellation of all their pre-cut-off-date-claims on Zambia. However, the original December 2003 completion point is not being envisaged any more by either the Bank or the Fund. The former already announced a "generous" extension until 2007 (!) of its "Interim Relief" programme for Zambia, allowing for the refinancing of 70% of the relief Zambia could expect from the Bank at the completion point. [16] The IMF, for its part, announced an eventual resumption of its normal programme from June 2004, under the condition that Zambia limits internal new debt and public salary expenditure in line with the IMF's guidelines. [17] Public expenditure had already been at the heart of the breaking up of relations between Zambia and the Fund in 2002, which in turn had led to the missing of the December 2003 completion point.

Zambia's cut-off-date is a very early one: Jan.1st 1983. Therefore the fact that important bilateral official creditors - other than Germany -hold substantial post-cut-off claims on the country can be crucial for the success of Zambia's future "exit solution". Their inclusion or exclusion can make a huge difference regarding future debt sustainability.

7. Germany as a creditor

Until March 6th 2003 Germany has cancelled 188m EUROs of bilateral Zambian debt. This happened on the basis of several flow rescheduling agreements in the Paris Club. As of today Zambia still has a debt of publicly guaranteed and rescheduled export credits of 303m EURO. [18]

8. Conclusions

No meaningful debt reduction for Zambia seems to be within reach via the instruments offered by the creditors. The main reasons for this are:

• In order to only reach the sustainability thresholds established by the HIPC-II initiative, creditors would have to extend relief substantially ("topping-up"). Presently they do not seem prepared to deliver the necessary resources; on the contrary creditors have started to question the sustainability thresholds established in Cologne as eventually unnecessarily low.
• The Zambian government finds itself under considerable pressure from the IFIs, to finance its contractual debt service through expenditure cuts or via additional privatisations. Notwithstanding the fundamental ambiguity of financing current expenditure via asset sales, Zambia's historical experiences with that approach have not been encouraging.
• It is realistic to assume that Zambia will continue to face falling prices for the raw materials, which it exports, particularly for its nr. 1 product, copper. An urgently needed diversification of the economy still has to materialise.
• The IMF and other creditors do insist on receiving the exorbitantly high payments due in 2004 and 2005. Both are crucial years for Zambia, in which the country urgently needs to take strong and necessarily expensive measures to contain the HIV/Aids pandemic, which already threatens to become uncontrollable.

These perspectives do not encourage the Zambian government to keep building on the HIPC process as an instrument to have its enormous debt brought down to a sustainable level. Instead the country should develop its own debt relief strategy, which would need to include the following elements:

• Declaration of an immediate moratorium on all its long-term debt.
• Declaration of the country's readiness to negotiate with all its creditors a realistic and sustainable debt service. To that end the Zambian government by its own initiative invites all its creditors to a debt conference in Lusaka.
• The Zambian government presents its own proposal for organisation and agenda of that conference most important elements which are: (1) consideration by creditors an independent person or institutionthis must not pursue any material interests on either Zambiasside. person/institution is tasked with chairing meeting presenting a final proposal. (2) also suggestion will be assessing economic situation what needs to considered sustainable debt level country.
• The Zambian government will encourage the Zambian civil society, which's debt relief targets it has endorsed recently [19], to undertake a broad based consultative process regarding the country's ability to service any debt in the future.
• The Zambian government will seek political support for this initiative from individual creditor governments, which like f.i. Germany and Ireland respectively, have supported the call for an international insolvency framework or for the full cancellation of HIPC debt; eventually this will be done in co-operation with civil society in these particular countries.

Jürgen Kaiser, erlassjahr.de Nov. 14th 2003

[1] Source: For 2000 und 2001: World Bank: Global Development Finance 2003; for 2002 ff: Jubilee Research: The Real Progress Report on HIPC; London 2003.
[2] For 2000 und 2001: World Bank: Global Development Finance 2003; for 2002 ff: IMF/IDA: The Enhanced HIPC Initiative and the Achievement of Long-Term External debt Sustainability; April 15th 2002; Appendix Table 4.
[3] GDF 2003
[4] Moreover the Fund paid a slightly higher part of the relief out of its own reserves as opposed to the refinancing done through additoonal support from rich member countries; this, however, had no influence on the level of relief, from which Zambia may benefit.
[5] IMF/IDA: The Enhanced HIPC Initiative and the Achievement of Long-Term External debt Sustainability; April 15th 2002; Appendix Table 5
[6] OED: The Heavily Indebted Poor Countries (HIPC) Debt Initiative - an OED Review; Washington Feb. 20th 2003, p. 23
[7] Jubilee Research: The Real Progress Report on HIPC; London 2003. p.70
[8] "I don't support further privatsisation, declares Levy"; The Post (Lusanka) Dec. 6th 2002
[9] Zulu,J.J.: Impact of External debt on Zambia's Sustainable Development; Report by Jubilee Zambia June 26th 2003
[10] IDA: Heavily Indebted Poor Countries (HIPC) Initiative - statistical update; April 11th 2003; table 12B
[11] Poverty levels still high, despite government implementing the Poverty Reduction Strategy Paper for more than a year; Press Statement by Civil Society for Poverty Reduction (SCPR) vom 10.9.03. CSPR is a broad civl society coalition including Jubilee Zambia; it receives support, among others, from the german governbment.
[12] IMF/IDA: The Enhanced HIPC Initiative and the Achievement of Long-Term External debt Sustainability; April 15th 2002; Appendix Table 3; in their April 2003 HIPC interim report Bank and Fund decided to rather shoot the messenger and refrained from revealing any data reagarding the (non-)accomplishemt of the threshold at all.
[13] On Nov. 12th the German World Bank ED, E. Deutscher, while reporting to the Bundestag committee for economic co-operation.
[14] IMF: Debt Sustainability in Low-Income Countries - Towards a Forward Looking Strategy; May 23rd 2003; pt. 14 andparticularly footnote 19.
[15] IDA: Heavily Indebted Poor Countries (HIPC) Initiative - statistical update; April 11th 2003; table 10A
[16] World Bank News 14. Okt. 2003
[17] World Bank News 15.9.03
[18] Government Response to an inquiry by the CDU/CSU parliamentary bench (Antwort der Bundesregierung auf die kleine Anfrage der CDU/CSU-Fraktion vom) 25.7.03 (BT-Drucksache 15/1455), particularly questions 7 and 8.
[19] Finance Minister Maganda during the celebration of the fifth anniversary of Jubilee Zambia in the Holy Cross Cathedral on August 12th 2003.