ZAMBIA: Civil society warns against more borrowing

Zambia's decision to keep borrowing could slip the country back into indebtedness even before social expenditure improves, civil society activists have warned.

Zambia had its US$7.2 billion external debt slashed to about $500 million, as a reward for sticking with economic reforms under the Heavily Indebted Poor Countries (HIPC) initiative by the International Monetary Fund (IMF) and World Bank.

This week finance minister Ng'andu Magande announced that the country's external debt stood at $643 million. "Government has, since the [HIPC] completion point in April 2005, contracted eight loans totaling $110.21 million," he told IRIN.

"Negotiations for these project loans had started before the attainment of the completion point ... this includes debts contracted earlier, but which were not part of the debt relief as they were outside the cut-off dates of December 2003 and December 2004."

Civil society has been against the government taking non-concessional loans - carrying normal interest rates and conditions - as opposed to concessional borrowing, which offers poor countries more generous terms.

"This free-riding borrowing is very unhealthy, where a country begins to borrow just after receiving debt relief," Muyatwa Sitali, project officer for debt and trade at the Jesuit Centre for Theological Reflection, a local think-tank, told IRIN.

"Government is risking the country's ability to have a sustainable debt, and we stand a high probability of falling back into unsustainable debt, especially if the contracted loans are from non-concessional sources. It is a threat to Zambia's future debt solution."

Much of the newly acquired debt is owed to China, a major investor in Zambia's mines, and Belgium and the African Development Bank, among others.

Years of high levels of debt servicing meant Zambia could afford minimal social expenditure, but with debt relief the government promised investment in priority areas like education and health as part of a poverty alleviation plan.

Borrowing for development

Magande told IRIN that the government would continue to borrow "for right reasons, to promote development ... we don't qualify for low-interest loans from the International Development Agency [the World Bank's lending arm], as we are no longer regarded as a highly indebted poor country, therefore we have to borrow, but we shall only be contracting concessional loans, as opposed to non-concessional loans."

Most of the money from China is being spent on developing infrastructure like road networks and providing power in rural areas.

Although 15 percent of the 2007 national budget has been allocated to education, and 10 percent to health, critics said little would be invested because much of the budget was still donor-driven.

According to Saviour Mwambwa, programme manager of Civil Society for Poverty Reduction, an umbrella body for various non-governmental organisations, social funding was still minimal because "more priority and resources are allocated to maintaining non-social issues like state house [the presidential residence] and supporting international trips than promoting social protection, and money continues to be misapplied."

Need to be more discerning

A recent report by the Auditor-General said misapplication of public funds was rampant in Zambia, and about $1 million in HIPC funds was unaccounted for by the ministry of Community Development in 2005 alone.

"Even if there is allocation of funds or savings from debt relief, very little trickles down to the poor people," Mwambwa said. "The whole country suffers when funds are misapplied because we still have to pay, even if there is nothing to show for what the loan was used, at expense of improving hospitals, education and our roads."

Mwilola Imakando, president of the Economics Association of Zambia, a civil society organisation, was ambivalent on whether contracting new debt was good or bad for the country, but said there was need to re-examine debt management. Zambia had no watertight debt-management and [debt] contraction strategies in place, and the ministry of finance could make decisions without ratification by parliament.

"If we borrow for investment, borrowing is very good because it can bring returns; but if we borrow to consume, then we shall soon go back to history and have a large stock of debts that we can't repay," Imakando told IRIN.

"Government must focus on investment, and such investment must be properly guided instead of just doing things haphazardly, which results in abuse of funds. We must invest only in facilities that have the capacity to yield returns."