The Zambian Economy in

Perspective: The Impact of the

IMF Policies

Presentation By:
Dr. Mark J. Ellyne,
IMF Resident Representative
at the Copperbelt University,
Kitwe, October 25, 2002
 Purpose of the IMF

• Promotes international monetary cooperation.

• Facilitates the expansion and balanced growth
of international trade.
• Promotes exchange stability.
• Assists in the establishment of a multilateral
system of payments.
• Lender for balance of payments problems.
• Provides technical assistance.
2
 Where does the IMF get its
Money?
• Each member government has a quota
subscription.
• Quotas currently total more than US$260
billion.
• Each member’s quota determines its voting
rights.
• Zambia’s quota = US$ 0.46 billion.
3
 To Whom is the IMF
Accountable
• Shareholders = 183 countries

• Country Representatives = Minister of

Finance and Governor of the Central Bank

• 24 Executive Directors represent all

shareholders
4
 What is the IMF Doing about
Poverty
• An estimated 1.2 billion people live on less
than US$1 a day.
• The IMF is working to reduce poverty by
providing low-interest loans and debt relief
to the world’s poorest countries, linked to
the adoption of policies that promote lasting
poverty reduction.
• Money provided through Poverty Reduction
and Growth Facility and HIPC 5
Why has per person real income in Zambia
fallen by over 45% since independence?
Per Capita Real GDP
900
800
Amount in 1994 Constant US $

700

600

500
400

300

200
100

-
64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Period
6
 The continued fall in the price of copper
after 1975 eroded national income.
Purchasing Power of 1 Pound of Copper
350

300

250
US cents per pound

200

150

100

50

0
64

66

68

70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Year

7
As national income declined between 1975 and
1987, the government dramatically increased
foreign borrowing to cover the lost income.
Total External Debt

8,000

7,000

6,000
US $ million

5,000

4,000

3,000

2,000

1,000

-
65

67

69

71

73

75

77

79

81

83

85

87

89

91

93

95

97

99

01
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Period
8
As foreign borrowing failed, the government
began creating more domestic money to cover
declining national income, but this increased
prices and inflation.
Inflation

200

180

160

140

120

100

80

60

40

20

P e rio d

9
Rising Kwacha prices relative to US prices
simply reduced the value of the Kwacha

Movement of Kwacha Prices vs US Dollar Prices

and the K/$ Exchange Rate
4500 6
4000
5

Zambia CPI/USA CPI

3500
3000 4
Kwacha/US$

2500
Zambia CPI/USA CPI 3
2000
1500 2
1000
Kwacha/US$ 1
500
0 -
19 -1
19 -7
19 -1
19 -7
19 -1
19 -7
19 -1
19 -7
19 -1
19 -7
19 -1
19 -7
19 -1
19 -7
19 -1
19 -7
19 -1
20 -7
20 -1
20 -7
20 -1
20 -7
-1
91
91
92
92
93
93
94
94
95
95
96
96
97
97
98
98
99
99
00
00
01
01
02
19

period

10
 Adjustment versus Borrowing
Temporary income Borrow to maintain
decline standard of living

Permanent income Make adjustments to

decline reduce standard of living

Temporary income Save for rainy day.

Increase

Permanent income Adjust to higher

increase standard of living.
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 The Economic Strategy in
Zambia

Stabilization (stop the inflation-depreciation

spiral) through:
• Fiscal deficit reduction

• Monetary stringency

12
 The Economic Strategy in
Zambia
Improving the supply response by:

• Removing price controls

• Privatization of inefficient public enterprises

• Exchange rate liberalization

13
 The Economic Strategy in
Zambia
Correct structural problems by:
• Getting the right structure for the
government budget
• Public expenditure management
• Trade liberalization
• Good governance

14
 The Economic Strategy in
Zambia
Filling the financing gap from:

• Donor aid

• Debt Relief and HIPC

15
 GRZ 2002 Economic Strategy
• Bring down interest rates
– Reduce inflation
– Reduce government borrowing
– Reduce reserve requirements at BOZ
• Improve agriculture and food security
• Move toward HIPC completion point
• Increase social sector expenditure
• Keep KCM operating
• Assist productive sectors with tax policy
16
 OTHER INITIATIVES FOR
2002
• Public expenditure management
– Consolidation of GRZ accounts
– Monitoring of arrears
– A/G produces accts. on time
– Continue IFMIS development
• Improve banking sector
– Sell majority controlling interest in Zanaco
– Improve bank supervision
• Complete oil sector liberalization
• Enhance agricultural productivity
17
 The Heavily Indebted Poor
Countries (HIPC) Initiative
• End-2001: 24 HIPCs qualified for US$ 36
billion in debt relief.
• Provides IMF and World Bank debt relief for
the first time.
• Debt reduction directed to support social sector
policies that alleviate poverty.
• Debt reduction without the right policies, may
not bring poverty reduction.
18
 Zambia and the HIPC Initiative

• Zambia reached the decision point in December 2000,

based on a nominal debt stock of $6,459 million at
end-1999 with a NPV of $3,999 million
• To achieve target of 150% of exports, additional debt
reduction of 62.5% was needed
• Zambia will receive a total debt service relief from all
its creditors worth more than US$ 3.8 billion
(equivalent to US$ 2.5 billion in NPV terms)
• Amount of debt reduction granted also depends on
level of exports
19
 Zambia’s HIPC Triggers
Macroeconomic and structural reforms
• Continue to meet targets under the IMF and WB
lending programs
• Implementation of Integrated Financial Management
Information System (IFMIS) on a pilot basis
• Implementation of Medium Term Economic
Framework
• Concessioning of ZESCO
• Offer to sell majority controlling interest in ZNCB

20
 Zambia’s HIPC Triggers
Poverty reduction
• Adopt PRSP, and 1-year implementation

Progress in education sector

• Increase budget share from 18.5% to 20.5%
• Raise teacher compensation above poverty
line in rural areas
• Increase student retention in outer provinces
21
 Zambia’s HIPC Triggers
Progress in combating HIV/AIDS
• Create National AIDS Council
• Implement HIV/AIDS education program in
ministries
Progress in health sector
• Action plan for malaria prevention
• Transparent mechanism for drug procurement
• Timely release of complete, detailed health data
• Release at least 80% of budget to district Health
Management Boards 22
 The IMF Vision
• Promote sustained non-inflationary economic
growth.
• Be the center for maintaining the stability of the
international financial system.
• Advise members on macroeconomic and
financial policies to safeguard the global public
good.
• Be a forum of international economic and
monetary cooperation.
23