Why Wind Fall Tax is not the Solution: The Golden Goose Example By Kampamba Shula

Windfall tax
First off before we delve into this subject we must define what Windfall tax actually is.
Windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits. Windfall taxes are primarily levied on the companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses (Collins, 2013).

The Problem
A combination of an excessively investor-friendly copper-mining tax regime, persistent and even tolerated tax  evasion among very high income earners, a low corporate tax take generally, and the  suspected purposeful neglect of taxing the gemstone sector have diminished state tax-revenue mobilization.
Firstly, Zambia does not benefit extensively from mining operations the way it should. All countries that depend on natural resources face the shared challenge of taxation: determining tax levels and administering tax revenues in an effective manner that balances the needs of Government and investors. Mining depletes a valuable natural asset and taxing the mining companies is a way of generating savings that can be redeployed to increase the productive capacity of the rest of the economy, and thereby help sustain the country over the long-term. Despite the revival of the industry post-privatization, the mining industry’s contribution to government revenues in Zambia has remained low.
Earlier this year Finance Minister Alexander Chikwanda signaled that Government was considering introducing new "tax measures" in mining to boost revenues:
"We will introduce measures and relook at the tax system in the mining sector. Our mining sector has not contributed much compared to the rest of the region. So we want to engage local experts and ensure we have the statistics on mineral production and exports, and then we will find modalities to effect new tax measures to increase revenue collection..." (Times of Zambia, 2013)
Windfall Tax
A windfall tax will be introduced to be triggered at different price levels for different base metals. For copper, the windfall tax shall be 25 percent at the copper price of US $2.50 per pound but below US $3.00 per pound, 50 percent at price for the next 50 cents increase in price and 75 percent for price above US $3.50 per pound;
Back in 2009 when the Windfall tax was still applicable the Government removed the upper 2 bands before it eventually scrapped windfall tax altogether.
Windfall is effectively a “revenue-based tax”, meaning that it is applied on the basis of gross revenue, without taking account of costs.
In addition, the windfall tax and the variable profits tax appear to duplicate each other – both being aimed at capturing that part of gross profits which is attributable to price windfalls.  From an economic viewpoint, the variable profits tax is preferable, because it takes account of costs and more closely approximates value-added.  However, there are concerns about the mining companies’ cost data, due to possible transfer pricing.  In addition, the mines apparently reported costs for tax purposes prior to 2008 that are lower than those they claim to be incurring now.  While this may well be true, it gives rise to a need to verify cost information.
Solution
ZRA’s capacity to review and verify cost information is in the process of being built up.  While this is being done, there is a case for a windfall tax based on revenues.  In addition, there is a strong case for independent verification of mining company cost information, and for open public scrutiny.
In 2008 the Economics association of Zambia suggested that “Government should seek to replace it as soon as possible by either the variable profits tax which would consider the cost structures of companies or structure the revenue based tax regime in such a way that the windfall tax will only apply from a price level which takes into consideration the cost structures of companies. The windfall tax should also be a flat rate. Thus the government should in the meantime re-examine the issues of tax deductibility, as well as the price thresholds and tax bands in the current legislation.”
I personally support the intentions of the  general public but windfall tax as it was initially introduced in 2008 does not yet provide the stability and predictability needed to sustain investment in the mining sector.
Much of the difficulty and, indeed, suspicion surrounding mining company representations reflects concerns that they are exaggerating their costs and thereby reducing the potential tax take if taxes are based largely on profits. We know that ZRA is in the process of building up its capacity to review mining company tax returns critically, and would strongly encourage that this continue and be accelerated.
The EITI, as an internationally supported mechanism, appears to have started to help such countries as Nigeria address issues of transfer pricing in their extractive industries.  The initiative is at an early stage in Zambia, and should be pursued with vigor.
The Example
A Farmer has some golden geese which lay golden eggs on his farm, he also has other geese which lay normal eggs. He keeps all the geese in the barnyard with other geese. The golden geese are very stubborn and require sensitive treatment and care; otherwise they refuse to lay as many eggs.
The farmer runs into some debt and needs to borrow money to keep his farm running. An animal care doctor comes to his aid and gives him a loan on condition that he treats the golden geese with even more care and preferential treatment than the other geese. He treats the golden geese well but to his dismay the geese (which are very smart) lays their eggs in cracks in the barnyard in which the farmer cannot reach. The geese then communicate to other geese that take those hidden eggs and go trade them for other assorted items to the Birds.
When the farmer occasionally does get some eggs, the farmer can’t price these eggs any way he would like but sells them at the market price for every ounce of gold eggs he brings. The farmer begins to get frustrated that he is not benefiting and has two options. Firstly he considers whipping and strangling the golden geese to force them to lay more eggs for him and secondly he considers covering the cracks in the barnyard to prevent the geese from sneaking out golden eggs.
He attempts to whip and strangle one of the golden geese and it dies, it lays two eggs then dies.
He tries the second option and he closes the entire cracks in the barnyard such that the geese are forced to lay the eggs out in the open where the farmer can easily pick them up and go sell them. The geese lay the Eggs and the farmer lives happily ever after.
In this story the farmer is the Zambian government, the golden goose are the mining companies. The animal care doctor is the IMF and World Bank who had the Zambian government sign very investor friendly concession in exchange for debt cancellation.
The first option of strangling the golden goose is Windfall tax.
The second option is covering tax loopholes that exist in Zambia’s current Tax laws and empowering ZRA with greater capacity to audit and tax mines properly.
It’s not rocket science to see which one is the better option.

Kampamba Shula | Economist

Economeka Capital

Read More

Zambia Debt Analysis by Kampamba Shula

Zambia Debt Analysis
Recently the Minister of Finance presented the 2014 Budget and estimated the budget deficit to be around 8.5% of GDP. Standard & Poor recently changed their outlook to negative while Fitch Downgraded Zambia’s debt. This and many other recent events called for a fresh review of Zambia’s debt.
Intro
In April 2005, Zambia reached the completion point of the enhanced initiative of Highly Indebted Poor Countries (HIPC Initiative). This resulted in more than 80% of Zambia’s external debt being forgiven (2000 – US$6.5billion, 2004 – US$7.1 billion, 2006 US$0.7 billion). Further, given the prevailing conducive macro-economic environment, domestic borrowing has been on the rise hence threatening the sustainability of domestic debt. (Masengo, 2011)
Fitch Ratings 
On October 28 Fitch Ratings downgraded Zambia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B' from 'B+'. Its foreign currency senior unsecured bond ratings have also been downgraded to 'B' from 'B+'. The Outlook is Stable. Simultaneously, the Short-term IDR has been affirmed at 'B' and the Country Ceiling downgraded to 'B+' from 'BB-'.
The authorities expect a deficit of 8.5% of GDP in 2013, against an expected deficit at the time of the budget of 4.5% and an average of 2%-3% between 2006 and 2011. The overshoot largely reflects overspending on subsidies, which will total 4% of GDP, against 0.7% in the budget. This reflects perennial under-budgeting for subsidies, delays in scrapping the fuel subsidy as well as arrears payments and taking on contingent liabilities of the Food Reserve Agency. Lower-than-expected revenue also contributed towards the deterioration. (Reuters, 2013).
Domestic Financing and Crowding Out
In addition, though it is healthy to borrow domestically, excessive borrowing is distortionary. If the government becomes heavily indebted domestically and inflation and interest rates rise, the government will have to pay high interest to service this domestic debt. Further, in most cases domestic debt cannot be defaulted or rescheduled unlike external debt. This is because domestic debt is mostly held by the banking sector and default may trigger a banking crisis. Domestic borrowing has distortionary effects in the economy when excessively done. It can affect interest rates – heavy borrowing can lead to increased interest rates. It can also lead to “crowding out effect” – where the private sector’s access to finance for investment is shadowed by heavy government borrowing (Masengo, 2011).
It can also result in the ponzi game effect – where there is accumulation of borrowing to service already existing domestic debt (borrowing to pay off maturing debt and interest thereof).

Debt: The Bigger picture 
Reports by (Masengo, 2011) suggest that Zambia’s domestic debt has become sustainable, owing to the past decades positive developments– external debt cancellation, price and financial system stability. These results have been similar for both revenues with and without grants. The first reason explaining this result is the attainment of the HIPC completion point which led to (and has continued to result in) cancellations of most of the external debt stock. This has freed resources from external debt service towards domestic deficit and project financing. This has also reduced the size of the Government’s total expenditure as it includes external debt service.
Notably, Zambia has embarked on and succeeded in bringing and keeping inflation in single digit levels since sometime in 2006. GDP growth rate has also been consistently above 5% since 2003. Exchange rate stability has been achieved and maintained for relatively long periods. Project financing has been directed towards intended sectors like infrastructure development, citizen’s empowerment and poverty reduction. This, if properly done will enhance economic development and poverty reduction and help break the syndrome of repeated borrowing for the same expenditure.
However, it is important that Zambia continues with its economic diversification efforts so as to reduce dependency on exports of raw copper. There is need to enhance the manufacturing and processing sectors to begin exporting value products in both mining and agriculture. Further the Government needs to widen the tax base to incorporate the informal sector. This will reduce the tax rates and reduce incidents of tax avoidance and tax evasion. Therefore, it is evident that Zambia has continued to make progress in fiscal management and economic development, and indeed performing an analysis of domestic debt sustainability, for quarterly data for the recent period of say 2000 to 2010 would yield more precise and convincing results. However, this study recommends that for Zambia to achieve and maintain a strong form of sustainability for both domestic and indeed external debt, a debt sustainability monitoring office needs to be permanently set up. This office should regularly carry out thorough analysis for sustainability of both domestic and external debt (Masengo, 2011).
Economics Association of Zambia Insight
We are aware that the MoFNP has been conducting Debt Sustainability Analysis to guide the levels of additional loans that the Government contracts. The Ministry has indicated to the EAZ that the DSA conducted in 2007 and confirmed by the Word Bank and IMF in 2008 showed that the country’s debt is sustainable over the period 2007 to 2023. The analysis further indicates that the country can still sustain additional non-concession borrowing of US$1.0 Billion and concessional borrowing of the same amount. According to the Ministry, this analysis was confirmed in the subsequent DSA conducted in 2009 and 2010 (Economics Association of Zambia , 2012).

In line with the recommendations of the JCTR Report in 2007, the EAZ believes that it is in the interest of the country to develop a comprehensive debt strategy and policy that will stipulate when to borrow, at what terms and for what purpose. This should also be reinforced by a policy that debt should not finance recurrent expenditure but only capital expenditure.   Adequate guidelines should also be set regarding the contraction of domestic debt. The Government’s strategy of rolling – over could be defective and a careless way of using public resources (Economics Association of Zambia , 2012).
There is also need to move towards reorganization of the debt offices particularly to centralize borrowing powers, strengthen the monitoring capacity of the debt stock and strengthening of the debt strategy and policy.  In line with this, there is need to improve debt data management systems. As observed by the JCTR report, Zambia does not have a centralized comprehensive domestic debt database. The data is usually inconsistent and has moving figures in certain particular years. This has resulted in the lack of control and monitoring of the debt (Economics Association of Zambia , 2012).
The Economics Association of Zambia is also aware that there are intentions to review the legislation to address issues relating to the weakness in the debt management practices. Among these issues is the inclusion of a provision requiring the Minister to obtain approval and authorization of National Assembly and also to report on:
 The source of the loan
 The extent of the total indebtedness by way of principal and accumulated interest
 Provision made for servicing or repayment of the loan
 All borrowings by any state institution or authority annually
 Provision requiring debt managers’ strict adherence
 Provision for the establishment of a central depository of   original loan agreements
 Setting limits to the indicators such as Public debt/Gross Domestic Product (PD/GDP)
It is the Economics Association view that these proposals be supported by the members of the parliament as they are meant to enhance the debt management system in Zambia

EuroBond
Zambia, which 13 months ago issued its first international debt, is considering the sale of a record $1 billion Eurobond to plug a budget deficit that contributed to a credit downgrade.
Africa’s biggest copper producer will try to contain some spending to reduce the fiscal shortfall to below the forecast of 8.5 percent of gross domestic product for this year, Treasury Secretary Fredson Yamba said in a phone interview from Lusaka, the capital, today. The government this month raised its estimate for the gap from 4.3 percent and is finalizing as much as $250 million in syndicated loans as funding needs are pushed higher by government spending on wages and subsidies.
Yields on Zambia’s $750 million of bonds have climbed 161 basis points since being issued in September 2012 compared with an average 123 basis-point increase for dollar-denominated African debt tracked by JPMorgan Chase & Co. Fitch Ratings yesterday lowered Zambia one step to B, five levels below investment grade. Standard & Poor’s downgraded its outlook to negative on Oct. 25, while retaining its B+ rating.
The sale of a second Eurobond “is one of the avenues available,” Yamba said. “We are looking at various options. We have to go out there and see which is the cheapest source.”
While the southern African country would be able to sell a $1 billion Eurobond, it will be more expensive than its debut securities, Chris Becker, a market strategist at Johannesburg-based ETM Analytics, said by phone. A sale would follow record issuances by African nations, including debut bonds from Rwanda and sales by Ghana, South Africa and Nigeria, with plans by Tanzania, Kenya and Senegal to tap international markets.
Conclusion
Some might say that Zambia should not borrow externally and even as sincere as they may be they are wrong. When the Government borrows locally “Crowing out” happens. This raises the cost of borrowing for private companies. As this research indicates there is room for concessional and non-concessional borrowing.But prudent fiscal and debt management should not be overlooked.

Sincerely
Kampamba Shula
Member of Economics Association of Zambia
Economic Advisory at Economeka Capital



References
Economics Association of Zambia . (2012). THE STATUS OF ZAMBIA’S DOMESTIC AND EXTERNAL DEBT. Lusaka: EAZ.

Masengo, P. C. (2011). DOMESTIC DEBT SUSTAINABILITYANALYSIS. Lusaka: UNZA.

Reuters. (2013, October 28). Fitch Downgrades Zambia to 'B'; Stable Outlook. Retrieved October 30, 2013, from Reuters: http://www.reuters.com/article/2013/10/28/fitch-downgrades-zambia-to-b-stable-outl-idUSFit67460520131028

http://www.bloomberg.com/news/2013-10-29/zambia-considering-1-billion-eurobond-after-rating-cut.html

Read More

Zambia 2014 Budget Analysis by Kampamba Shula

2014 Budget Analysis

On the 11th October 2013 , the honorable Finance minster presented the 2014 Budget address to the national assembly.This is an analysis based on  the information in the Address. All Graphs and Calculations belong to to the author and no claim can be made by any who choose to use the analysis in this article.

Overview of the Global and Domestic Economy Sectors in 2013

The global economy continues to recover slowly with global growth projected at 2.9%.This underscores the slowdown in emerging markets like Brazil, Russia, China and India whose growth in the recent years has been a pillar of the global economy. Weaker growth in the United States and the extended effects of the Eurozone recession have looked to further undermine global growth.

Sub-Saharan Africa’s performance has been relatively stronger in light of this with a real Gross Domestic Product (GDP) projected at 5%.

Commodities

Commodity prices have generally been lower in 2013 compared to 2012 partly due to lower demand form emerging Market like China and increased supply by copper producers like Chile. Copper prices fell from an average of US$7,960 per metric tonne in 2012 to US$7,416 between January and September 2013 (see graph above).

Zambia’s GDP growth is projected to remain strong above 6%.This is on the backdrop of strong performance in the mining, construction,manufacturing ,transport and communication sectors. With the decline in agricultural output, this projected out turn is lower than our budget forecast of above 7 percent

Inflation

In 2013, monetary policy focused on achieving an end-year inflation of 6 percent. As at end-September, 2013, inflation remained above target at 7 percent, following inflationary pressures largely associated with the removal of fuel and maize subsidies. To address these inflationary challenges, the Bank of Zambia raised the Policy Rate over the first half of the year to 9.75 percent from 9.25 percent in December, 2012. To complement this, the Central Bank undertook aggressive open market operations to curb money supply growth.

Lending rate

Average commercial bank lending rates have remained relatively stable at 16.5 percent as at end-September, 2013. The Government still believes that these rates are unacceptably high and are holding back domestically financed investments.

Exchange Rate

With regard to the exchange rate, this has stabilized at around K5.4 to the US dollar, reflecting improvement in the supply of foreign exchange during the third quarter of 2013.

Exports of gemstones, cement, electricity, sugar, tobacco, cotton lint, maize and maize seed all registered strong growth and this demonstrates the increased diversification and resilience of the Zambian economy

Gross International Reserves as at end-September 2013 stood at US$2.7 billion, about US$200 million higher than a year earlier, translating into 3 months of import cover.

With regard to fiscal policy, Government undertook measures to address long-standing structural challenges relating to fuel and maize subsidies as well as distortions in the public service pay structure. This was done to reinforce fiscal prudence, as well as enhance productivity for better public service delivery. As a result of these developments, the projected fiscal deficit for 2013 will be 8.5 percent of GDP, compared to the budget estimate of 4.5 percent.

Macroeconomic objectives

The Sixth National Development Plan has been revised to align it with the PF Government’s development agenda.

Macroeconomic objectives for 2014 are to:

a) Achieve real GDP growth of above 7 percent;

b) Create at least 200,000 decent jobs;

c) Attain end year inflation of no more than 6.5 percent;

d) Increase international reserves to over 3 months of import cover;

e) Maintain a fiscally sustainable public external debt level so that debt service and amortization do not exceed 30 percent of domestic revenues;

f) Increase domestic revenue collections to over 21 percent of GDP; and

g) Limit domestic borrowing to 2.5 percent of GDP and contain the overall deficit to no more than 6.6 percent of GDP

To ensure that Government is able to better capture the jobs created in the economy; data collection will be strengthened so that comprehensive labour market information at national and sub-national levels can be produced in a timely manner

Agriculture, Forestry and Fisheries

In the 2012/13 farming season, crop and livestock production had mixed results. The outbreak of army worms at the time of planting and lower than normal rainfall in the southern half of the country led to reduced maize output.

More regrettable was the significant decline in cotton production due to poor pricing in the previous year. Burley tobacco, soya beans, wheat and sunflower however, were among the crops which registered higher production levels. The livestock sub-sector has continued to grow in 2013, with cattle numbers increasing by 10 percent to almost four million and the number of poultry increasing by 18 percent to over 92 million.

Tourism Sector

Zambia successfully co-hosted the United Nations World Tourism Organisation’s 20th General Assembly this year. This is because Government provided targeted tax incentives for the tourism sector in 2013. In addition, Government heavily invested in expansion and rehabilitation of infrastructure at the Harry Mwaanga Nkumbula International Airport, as well as in road infrastructure and social amenities in Livingstone.

Government intends to build on this raised international profile to achieve its development targets for tourism. These include the promotion of product diversification and further investment in tourism infrastructure, including the Kenneth Kaunda International Airport. The aim is to diversify the tourism base by improving accessibility to our national parks, heritage sites and natural attractions. Government will also continue to streamline licensing procedures and enhance capacity in the hospitality industry.

Government has already introduced the hologram to protect income rights of musicians and film makers. In 2014, Government will also complete work on national film policy.

Manufacturing Sector

Government released K106.9 million to the Development Bank of Zambia to support the financing needs of industry, particularly Small and Medium Scale Enterprises. These enterprises also benefited from the resumption of funding through the Citizens Economic Empowerment Fund.

The linkages between the manufacturing and agriculture sectors have been strengthened through the rehabilitation of Nitrogen Chemicals of Zambia.

The removal of customs duty on most electrical and mechanical industrial equipment in 2013, allowed manufacturers to import major capital items at relatively lower costs. As a result of this measure and other initiatives under the Private Sector Development Programme, the manufacturing sector is expected to grow by 4.3 percent in 2013.

In 2014, Government will continue to promote the diversification of manufactured products, especially those with export market potential by, among other things, accelerating the development of the Multi-Facility Economic Zones. The Government remains committed to facilitating value addition in manufacturing with a view to exploiting regional and international export markets and creating more jobs for our youths

Mining Sector

Mining sector performance in the first half of 2013 remained positive. Copper production increased by 13.2 percent in the first half of 2013 to over 374,000 metric tonnes, compared to production over the same period in 2012. This was due to improved mining production techniques, the opening of Lubambe mine and ramping up production at Mulyashi copper mine. On the basis of this performance, copper production from large scale mines is projected to exceed last year’s production level.

Local auctioning of gemstones commenced this year. Government will continue to encourage this initiative and urge small scale gemstone miners to use this approach so that they get better value for their gemstones. Local auctioning will also improve Government’s ability to collect appropriate revenues from the sub-sector.

Private Sector Development

Government will continue to implement reforms aimed at building and enhancing a sustainable legislative and regulatory environment for private sector-led growth. This will include the continuation of business registration and licensing reforms. Key among these are the establishment of provincial one-stop shops for business registration, and the decentralisation of certain elements of the filing procedures for registration to Local Authorities to reduce the cost of doing business.

Infrastructure Development

Transport and Communications Infrastructure

In 2014, Government will continue to implement the Link Zambia 8000 programme. Under this programme, which commenced last year, work is progressing well on over 1,500 kilometres of roads. These include the Pedicle; Mongu-Kalabo; Kalabo-Sikongo-Angola border; Kasama-Mporokoso-Kaputa; Mbala-Nakonde; Mansa-Luwingu; Chipata-Chadiza-Katete; Chama-Matumbo; Isoka-Muyombe-Chama; Kitwe-Chingola; and the Leopards Hill-Chiawa roads as well as the bottom road from Munyumbwe to Chaanga. The programme is expected to promote development of local contracting capacity and create 24,000 jobs throughout the country. Already, 16,000 workers, mainly youths, have been employed.

His Excellency the President launched the Pave Zambia 2000 programme in September this year and work has commenced in Chawama in Lusaka and Petauke in Eastern Province. The Government will scale up this programme in 2014 to cover all the provinces. Once fully operational, this programme will generate income for up to 20,000 workers.

In addition to township roads, the Lusaka 400 programme was launched this year with the aim of decongesting the capital city by constructing 400 kilometres of link roads. I am pleased to report that work on this project has progressed significantly with over 150 kilometres of roads to be completed by the end of this year. This programme is expected to be completed by 2016.

Energy

Government continues to work with the private sector to increase installed electricity generation capacity and improve the transmission infrastructure. The extension of the Kariba North Bank Power Station will add 360 megawatts of hydro power to the installed capacity. By the end of this year, 180 megawatts will be added and the balance will come on stream in 2014. In addition, the Ndola Energy heavy fuel generating project is nearing completion and will contribute 50 megawatts by the end of this year.

With respect to Itezhi-tezhi, financing has been secured and works have progressed, whilst for the Kafue Gorge Lower power station, the tender process to engage a strategic equity partner is in progress. Itezhi-tezhi is expected to come on stream in 2015 with 120 megawatts, while the Kafue Gorge Lower power station with the capacity of 750 megawatts is expected to come on stream in 2019.

Two provincial fuel depots will be completed this year and a third in 2014, with installations in other provinces to follow thereafter. While efforts to upgrade Indeni Oil Refinery will continue in 2014, Government will also explore other options including construction of a new refinery with sufficient capacity to meet the ever increasing demand of our robust economy with surpluses for export.

Health Sector

Government remains committed to bringing affordable and quality health care as close to the family as possible. Accordingly, Government will continue to develop regional hubs to decentralise storage and distribution of medical drugs and supplies to better ensure their availability to all Zambians. Two hubs, in Chipata and Choma have already been established with two more in Mongu and Kasama planned for 2014. In 2014, Government will procure specialised medical equipment and requisite supplies for tertiary level hospitals to ensure non-interruption of services and reduce the number of referrals abroad. Further, Government will continue investing in district hospitals, especially for those districts that are currently not served with first level referral services and will also continue with its programme of constructing 650 health posts.

Education and Skills Development

Government will accelerate the re-introduction of the primary and secondary school system; promote the teaching of life skills to enable learners cope with the demands of self-employment in the labour market; promote the teaching of science and mathematics subjects; construct more technical schools and provide laboratory equipment.

With regard to tertiary education, Government will increase the number of students accessing quality and affordable university and college education by:

a) expanding student accommodation, lecture rooms and libraries at the University of Zambia, the Copperbelt University and Mulungushi University;

b) continuing with the development of infrastructure at Chalimbana and Palabana universities in Lusaka Province, Paul Mushindo and Robert Kapasa Makasa universities in Muchinga Province, Mukuba University on the Copperbelt and Kwame Nkhrumah University in Central Province; and

c) commencing the construction of Luapula University in Luapula Province and King Lewanika University in Western Province.

Monetary and Financial Sector Policies

The Bank of Zambia will maintain price and financial system stability by continuing to implement monetary policy through its interest rate targeting framework. Further, it will strengthen the regulatory framework governing the financial sector by updating and harmonising legislation.

Government will continue to maintain a flexible exchange rate regime with the Bank of Zambia only intervening to smoothen short term volatility. Additionally, the Bank of Zambia will continue to build international reserves to over 3 months of import cover.

Public Financial Management Reforms

With regard to public procurement, the Zambia Public Procurement Authority has already been transformed from an executing institution to an oversight and regulatory institution with procurement functions decentralised to spending agencies.

Therefore, under the Public Financial Management Reforms, Government will accelerate the establishment of a Treasury Single Account to enhance Government’s ability to oversee its accounts and avoid the accumulation of idle funds. Currently, Government is using the Treasury Single Account to fund personal emoluments, transfers to grant aided institutions and capital programmes. Beginning 2014, this will be extended to funding other categories of expenditure.

2014 Budget

Government proposes to spend a total of K42.68 billion or 30.7 percent of GDP. This will be financed through domestic revenues of K29.54 billion as well as grants of K2.63 billion from our cooperating partners. The balance of K10.51 billion will be met through foreign and domestic borrowing.

Allocations

General Public Services

Government has set aside K10.73 billion or 25.1 percent of the Budget for General Public Services which includes allocations for infrastructure development for the new districts, inter-governmental fiscal transfers and debt payments. Combined, these three account for 56.5 percent of this allocation.

Economic Affairs

Government has allocated K11.94 billion to economic sectors, representing 28.0 percent of the Budget.

·         Key interventions include the countrywide construction of dip tanks and silos for which an allocation of K231.9 million has been provided. The target is to increase the number dip tanks to combat animal disease and increase grain storage capacity to 1.3 million metric tonnes by the end of 2014. In addition, K80.9 million has been allocated to develop irrigated agriculture.

·         K500 million for the Farmer Input Support Programme to facilitate the provision of affordable crop and livestock inputs for our small scale farmers.

·         To secure and maintain the 500,000 metric tonnes of strategic food reserves, K1.0 billion has been set aside in the 2014 Budget.

·         K6.07 billion or 14.2 percent of the Budget has been allocated to the transport sector to construct, rehabilitate and maintain road, rail, water and air infrastructure.

·         K5.13 billion of this is earmarked for the Link Zambia 8000 Programme, PAVE Zambia 2000 project, the Lusaka 400 project and feeder roads in the rural areas.

·         With regard to the rail subsector, Government has allocated K339.8 million to recapitalise TAZARA and rehabilitate Zambia Railways Limited. The quality of rail travel for both goods and the public will improve and the negative impact on the nation’s roads from heavy commercial traffic will be mitigated.

·         K250 million for other critical interventions in the transport sector. These include the procurement of radars to bring our air safety levels to world standards, and dredging equipment and water vessels to improve water transport in the country.

·         In the energy sector, K550 million has been set aside for the power rehabilitation project under Zesco while K65 million has been allocated for the Rural Electrification Programme.

Education

·         K8.61 billion or 20.2 percent of the Budget on education. Out of this amount, K1.28 billion will go towards the construction of education infrastructure which will include 53 new secondary schools and the upgrading of 220 basic schools into secondary schools. Government will also construct an additional 150 primary school classrooms in the rural areas with corresponding 150 teacher houses, by using the community mode method.

·         Included in the education sector infrastructure budget is K404.3 million for university and other tertiary infrastructure, in particular student hostels at the University of Zambia, Copperbelt and Mulungushi Universities while an additional K395.3 million has been provided for operational grants for universities, student tuition and bursaries.

Health

·         9.9 percent of the Budget, or K4.23 billion on health services in 2014. Within this amount, K245.7 million is provided for the construction and rehabilitation of district hospitals, health centres, training schools and the upgrading of tertiary health care.

·         In order to enhance the availability of essential drugs and medical supplies, the budget in 2014 for these items has been increased by 24.3 percent to K738.7 million from K594.1 million in 2013. A further K66.6 million has been provided for medical equipment including the specialised equipment I mentioned earlier.

Public Order and Safety

·         K2.12 billion. To begin to redress the deplorable conditions in our prisons, K21.9 million has been allocated for expanding and improving prison infrastructure with a further K22.6 million allocated to prison farms so as to improve the nutrition of in-mates.

·         K27.2 million to procure digital forensic equipment and a mobile forensic laboratory, among others.

·         A total of K661.0 million has been allocated for housing and community amenities. Of this amount, K417.8 million has been budgeted for the provision of safe water and sanitation in both rural and urban areas.

Social Protection

·         K1.18 billion for social protection programmes in 2014. A large part of this increase arises from higher allocations to the Public Service Pension Fund, which will receive K754.2 million, in addition to the employers’ contribution.

Revenue Estimates and Measures

Revenue Measures

·         Increase excise duty on airtime from 10 percent to 15 percent.

·         Duty on clear beer from 40 to the duty rate of 60 percent. The revenue gain from these measures is K514.8 million.

·         Increased the property transfer tax rate from the current 5 percent to 10 percent. The measure is expected to generate an additional K100 million.

·         Charge at the rate of 0.2 percent of the value transferred on money transfer service to a recipient within or outside the Republic of Zambia. This measure will bring to the Treasury K180 million.

Rationalisation of the Tax System

·      Expand the Value Added Tax base by shifting several categories of zero rated goods and services to the standard rated category. This will generate a revenue gain of K151 million.

·      To equalize tax treatment between branches and subsidiaries and prevent tax avoidance, I propose to extend the withholding tax to profits distributed by branches of foreign companies. This will generate additional revenues of K1 million.

·       withholding tax on payments to non-residents on royalties, management and consultancy fees is at 20 percent

·      Withholding tax on commissions, public entertainment fees and payments made to non-resident contractors to 20 percent. This measure will result in a revenue gain of K71.7 million

·      Change the taxation of rental income by reducing the withholding tax to 10 percent from 15 percent and make this a final tax. As such, turnover tax on rental income shall not be applicable.

·      As a way of further stimulating the booming property sector, which is a source of employment creation, It has been propose to exempt from withholding tax interest arising from the debenture part of a property linked unit paid to Zambian investors in any Property Loan Stock Company listed on the Lusaka Stock Exchange.

·      In order to broaden the tax base, I propose to introduce a withholding tax of 20 percent on winnings from gaming, lotteries and betting and make it a final tax.

Streamlining of Tax Incentives

Any investor, foreign or local, who pledges to invest at least half a million United States dollars in a priority sector or product, as declared under the Zambia Development Agency Act, is entitled to tax incentives. In particular, they are exempt from paying duty for the first five years, are entitled to a five year income tax holiday and benefit from a further five years of preferential income tax rates.

Align the sectors declared as priority under the Zambia Development Agency Act to the Revised Sixth National Development Plan

Current PAYE Regime Income Band	Tax Rate
0 - K2,200 per month	0%
K2,201 – K3,000 per month	25%
K3,001 – K5,900 per month	30%
Above K5,900 per month	35%

Proposed PAYE Regime Income Band	Tax Rate
0 - K3,000 per month	0%
K3,001 – K3,800 per month	25%
K3,801 – K5,900 per month	30%
Above K5,900 per month	35

                                                                    

 Non Tax Revenues

·         As part of its comprehensive land reform programme, Government has launched the Integrated Land Management Information System whose benefits, among others, are to strengthen the administration of land and regularise land ownership through surveying and titling of land country wide. This measure will improve certainty of land location and ownership, enhance security of tenure for both customary and state land, improve transparency in land transaction procedures and increase revenue collection among others.

·         Toll fees collected from toll gates based on the Road User Pay principle is one of the most sustainable sources of financing for the roads. The Government has embarked on tolling of selected major roads whose proceeds will be channelled to the rehabilitation and maintenance of roads country wide. Tolling of commercial traffic will commence before the end of this year using the existing weigh bridge infrastructure.

·         Revise upwards various fees and fines to bring them to appropriate cost recovery levels of providing the respective services. These fees include those collected by the Ministry of Lands. Natural Resources and Environmental Protection, Ministry of Information and Broadcasting Services, Ministry of Mines, Energy and Water Development and Ministry of Home Affairs. These measures will take effect from 1st January, 2014.

·         Government will raise an estimated K550 million from these non-tax measures in 2014.

Short Comings (Authors view)

This Budget is a decent attempt at creating equity in resource allocation, that being said they are some shortfalls.

In my personal view there are certain short comings in this budget which need to be addressed in this budget.

Public sector reforms

Public sector pay has been characterised by distortions in salary levels and inequities in other conditions of service. In 2013, Government has fast-tracked the implementation of the reforms, especially to benefit the lower paid public workers.

Review of public pensions

Enhancement of the public service performance management system and the creation of a public service credit union to replace the various loan schemes  that are currently in place need to be managed with the utmost prudence.

Pension Reforms

A good pension system should subscribe to the basic principles of affordability, sustainability, portability, wide coverage and adequacy. The current pension systems, particularly the public pensions, clearly fall short of these principles. The public pension funds for instance, are fiscally unsustainable, not transferable between jobs and are unable to meet the minimum living requirements of retirees. Over the medium to long term, Government will implement wider reforms.

The Public Service Pension Fund has huge deficits that are projected at K2.9 billion in 2014, K2.6 billion in 2015 and K2.8 billion in 2016. Given that the Public Service Pension Fund is wholly owned by Government, it means that these deficits have to be funded from tax payers’ money. Against the backdrop of significant fiscal challenges that we are experiencing to mobilise sufficient resources for development, pension reforms can no longer be avoided.

Government intends to implement changes to the Public Service Pension Fund that will include changing the retirement age; revising the basis for calculating the pensionable emoluments and reviewing the commutation factors. My concern is here is that if the retirement age is increased, the number of job openings will reduce for incoming graduates and other workers. In essence this could change labour demographic dynamics in a negative way.

Agriculture

The allocation of K500 Million and K1 Billion to the FISP and FRA respectively heavily skews agricultural finance to none research oriented projects. A little portion of this money could have gone into strengthening the research capacity. More research can be done in disease and crop marketing. However the constructing multi-purpose dams and irrigation schemes to limit dependence on rain-fed agriculture is a welcome initiative.

Tourism Sector

Value added Standard rate for the supply of All distinct tourism services including game viewing, bungee jumping, and Pre-booked tour packages booked after 1 January, 2014, could possibly hurt the tourism Industry depending on the elasticity of such services

Manufacturing Sector and SMEs

It appears that incentives for investors remain skewed towards big corporations with finance to qualify for MFEZ and ZDA tax incentives. The portion of finance allocated to the growth of SMEs is at K106.9mil is relatively small What SMEs need is not only finance but a healthy environment that fosters their growth. In this regard some more key incentives for SMEs could be implemented to cushion some of their costs. SMEs hire their most people in the labour force and will help create the much needed Job growth.

There was not sufficeient finance allocated to the value addition process, especially in agriculture and copper.

Infrastructure

K618.5 million from the Eurobond proceeds was earmarked for track rehabilitation and procurement of rolling stock for Zambia Railways. Progress has been lethargic due to procurement delays and administrative bottlenecks. This sort of management of infrastructure funds is not prudent and serves to undermine the completion of earmarked projects. The reason Eurobond money was under the auspice that the projects had already been identified. A bureaucratic procurement process doesn't help at all.

References

2014 Budget Address by the Minister of Finance

London Metal Stock exchange

Bank of Zambia

Central statistics Office

Read More

Critique of IMF by Kampamba Shula

Critique of IMF Loan Conditionality

What is Conditionality?

Conditionality is most often associated with aid money. International organizations, such as the International Monetary Fund (IMF) and World Bank, or individual countries can use conditionality when lending money to another country. The donor country requires that the country receiving the funds adhere certain rules directing the use of funds (Investopedia, 2013).

Conditionality in its broad sense covers both the design of IMF-supported programs—that is, the macroeconomic and structural policies—and the specific tools used to monitor progress toward the goals outlined by the country in cooperation with the IMF (IMF, 2013).

Over time, the IMF has been subject to a range of criticisms, generally focused on the conditions of its loans. The IMF has also been criticized for its lack of accountability and willingness to lend to countries with bad human rights record.

On giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. These policies tend to involve:

·                   Reducing government borrowing - Higher taxes and lower spending

·                   Higher interest rates to stabilize the currency.

·                   Allow failing firms to go bankrupt.

·                   Structural adjustment. Privatization, deregulation, reducing corruption and bureaucracy.

The problem is that these policies of structural adjustment and macro-economic intervention often make the situation worse.

For example, in the Asian crisis of 1997 (Giancarlo Corsetti, 1999), many countries such as Indonesia, Malaysia and Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However, these policies caused a minor slowdown to turn into a serious recession with higher unemployment.

In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a decline in investment in public services which arguably damaged the economy.

Exchange Rate Reforms

When the IMF intervened in Kenya in the 1990s (ukessays, 2007), they made the Central bank remove controls over the flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldman scandal). Critics argue this is another example of how the IMF failed to understand the dynamics of the country that they were dealing with - insisting on blanket reforms.

The economist Joseph Stiglitz has criticized the more monetarist approach of the IMF in recent years. He argues it is failing to take the best policy to improve the welfare of developing countries saying the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community."

Free Market Criticisms of IMF

As well as being criticized for implementing 'free market reforms' others criticize the IMF for being too interventionist. Believers in free markets argue that it is better to let capital markets operate without attempts at intervention. They argue attempts to influence exchange rates only make things worse - it is better to allow currencies to reach their market level (Mutume, 2001).

Lack of Transparency and involvement

The IMF have been criticised for imposing policy with little or no consultation with affected countries.

Jeffrey Sachs, the head of the Harvard Institute for International Development said:

"In Korea the IMF insisted that all presidential candidates immediately "endorse" an agreement which they had no part in drafting or negotiating, and no time to understand. The situation is out of hand...It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people. (Khor, 1998)"

Faced with strong criticism for its expansive and erroneous use of conditionality, and in the wake of a financial crisis, the International Monetary Fund (IMF) approved in 2002 a set of guidelines to inform its use of structural conditionality. The Conditionality Guidelines committed the Fund to reduce the overall number of conditions attached to Fund lending and ensure that those attached respected and were drawn from nationally developed poverty plans in recognitions that developing country ownership is instrumental for successful development (Pereira, April 2008).

The IMF’s own Independent Evaluation Office (IEO) issued a study in January 2008 which concluded that the Fund dramatically increased both the number of structural conditions and their intrusiveness in recipient countries’ domestic affairs.

The IMF Conditionality Guidelines and their limited view of ownership is having serious social consequences. The Fund continues to push for privatisation and liberalisation of poor nations’ economies, interfering with decisions which should be freely taken by countries according to domestic priorities and needs. In Mali the IMF and the World Bank forced the reform and privatisation of the cotton sector despite opposition. The reforms went ahead and now cotton farmers face an even harder future. A quarter of all IMF structural conditionality still promotes privatisation and liberalisation reforms, which have proven to be highly sensitive and often have had disastrous consequences for the poor.

Copper mining in Zambia perfectly illustrates this point. The IMF backed the privatization of the complex copper mining sector and introduced fiscal reforms to attract transnational corporations. Many of the reforms were far from the IMF field of expertise. This process has yielded far less poverty

reduction and respect for environmental standards than was predicted (Pereira, April 2008).

The practice of attaching conditions to grants and loans has been widely criticised for being ineffective, undermining ownership and imposing inappropriate policy choices. Civil society, academics and southern governments agree that conditionality is an infringement on national sovereignty and has not been effective in inducing economic policy reform. But even the World Bank and the International Monetary Fund – the world’s leading advocates of economic policy conditions – agree that conditionality has failed to create incentives for policy reform.

The IMF holds the global monopoly on assessing countries’ macroeconomic health, which in developing countries is measured by being “on-track” with an IMF programme, typically a Poverty Reduction and Growth Facility  (PRGF). Thus, IMF conditionality hardly ever is contested by other donors, which perceive it as a scarce and necessary service for their own disbursement decisions. Moreover, the technical complexity of macroeconomic policies which the IMF addresses has also often dissuaded civil society groups from voicing criticism of the Fund’s measures (Pereira, April 2008).

The Fund attaches two different types of policy conditions to its loans in poor countries – quantitative and structural. Quantitative conditions are macroeconomic targets determining, for example, the level of fiscal deficit a government is allowed to run up or the permitted level of domestic credit. Structural conditions, on the other hand, push for institutional and legislative policy reforms within countries. They include, for example, trade reform, price liberalisation and privatisation.

IMF Conditionalities for the Least Developed Countries

The controversial issue of the Fund’s conditionality originates from Article V (“Operations and Transactions of the Fund”), Section 3 of the Fund’s Articles of Agreement, which broadly presents the conditions governing use of the Fund’s resources. Briefly, Section 3(a) states that the Fund: “shall adopt policies on the use of its general resources (…) and may adopt special policies for special balance of payments problems, that will assist members to solve their balance of payments problems in a manner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund.”

This means that, prior to the release of any financial resources to its members, the Fund requires that certain constraints, widely known as “conditionalities”, are imposed in the form of compliance with both Fund rules and Fund-suggested (practically mandated, in the case of poor countries) policy guidelines and adjustments. These “monitoring techniques” provide the framework with which the Fund ensures solvency safeguards while targeting temporary balance of payments’ problems.

By acknowledging the existence of two broad types of structural reforms, the Fund tacitly admits the existence of double standards with regard to conditionalities. The first cluster, based on the Fund’s core areas of expertise, tackles macroeconomic scenarios via policies that aim to ensure stabilization of exchange rate practices, as well as reduce balance of payments and financial or monetary problems. Such policies could also include measures such as tax reform, fiscal responsibility, banking and monetary reforms and exchange rate flexibility.

The second cluster, involving a much enlarged scope of Fund conditionality, advocates “policies aiming more generally at improvements on the economy’s underlying structure – its efficiency and flexibility – to foster growth, and facilitate adjustment to exogenous shocks.”5 This is where the Fund arrogates to itself the right to engage in much broader reforms including trade liberalization, pricing and marketing, labour market reorganization and generic institutional or regulatory changes.

This enlarged scope of Fund involvement, through its conditionalities, should be urgently reviewed and circumscribed by the Fund’s existing legal provisions and guidelines. For instance, the mandate to establish “adequate” solvency safeguards should not be interpreted as giving the Fund an unlimited mandate to prescribe all-encompassing structural reforms on a Fund member.6

A restrictive interpretation of the Fund’s mandate is supported by the IMF Guidelines on Conditionality, which emphasize that conditionality objectives must be strictly related to resolution of balance of payments problems, in conformity with the Fund’s Articles and in a manner that establishes “adequate” safeguards for the use of Fund resources. In other words, “adequate solvency safeguards” to address balance of payments problems should not extend to trade, labour and regulatory policies.

This crucial distinction between Fund “demands” and “suggestions” is not resolved by other language regarding Fund conditionalities. While ownership of and capacity to implement a programme is acknowledged to be the sole responsibility of a member country, the Fund is supposed to only be guided, but not bound by the same principle of ownership.

This wording ensures that the Fund is shielded from external criticism on legal grounds, since sole responsibility is borne by the borrowing government. The same guidelines provide unlimited scope for the Fund to apply conditionalities even though a borrowing least developed country might have different policy preferences and priorities, e.g. with regard to trade and poverty reduction policies. Hence, “adequate safeguards” allows the Fund to demand reforms even though they are not supported by the Fund’s own core mandate.

Such conclusion is further buttressed by Paragraph 8 of the same Guidelines, asserting that the Fund “is fully responsible for the establishment and monitoring of all conditions attached to the use of its resources” and, even more candidly under the “Principles Underlying the Guidelines on Conditionality”, which state that the “need for ownership implies selectivity: approval of the use of Fund resources depends in particular on the Fund’s assessment that the member is sufficiently committed to successful implementation”

With regard to Fund trade policy conditionalities in low-income countries, proper regard to social and political goals as well as the specific circumstances of members has not been given, contrary to the spirit of Paragraph 4 of the Guidelines. This is especially relevant for the one size fits all approach or policy reform homogeneity characteristic of Highly Indebted Poor Countries (HIPC) and PRGF programmes, including trade policy reforms; such policy conditionalities also seem insensitive to the challenges of correct policy sequencing, particularly for low-income borrowing countries (Guilherme, 2008).

As correctly acknowledged by key Fund documents, trade policy conditionalities have little to do with the Fund’s traditional mission or areas of expertise, and represent an obvious deviation from the Fund’s “core” legal mandate to provide assistance to countries with balance of payments problems. Instead of focusing on exchange rate issues, balance of payments concerns or financial and monetary analysis, the Fund has turned to trade policy reforms, streamlining trade policy administration, government revenue, governance and customs administration reforms, all pushed through on the basis of dubious efficiency improvement claims.

Finally, it should be emphasized that imposition of cross-conditionalities by the Fund is prohibited; nevertheless, in the recent past, the Fund has made specific requests for the least developed countries to undertake unilateral commitments towards further trade liberalization within the WTO or via regional trade agreements, drastically restricting a least developed country’s sovereign right to pursue its own interests. As the Fund demands that its conditionalities not be subject to decisions taken by countries in other multilateral frameworks, it seeks to be “primus inter pares”, relegating other international organizations and commitments to “secondary status”.

Notwithstanding the ongoing debate on coherence, it appears doubtful that lending arrangements with IMF member countries have complied with existing Fund rules. Such deviation from the core mandate of the Fund also raises the likelihood of resource misallocation and failure to provide proper oversight of the international economy.

Case Study: Cameroon

The Fund continues to push for privatisation and liberalisation of poor nations’ economies, interfering with decisions which should be freely taken by countries according to domestic priorities and needs. Among the loans approved during last three years, almost a quarter of all conditions required policy reforms related to privatising or liberalising. This represents virtually no change with regards to the share of privatisation and liberalisation related conditions found in loans approved between 2003 and 2004.  

In Cameroon six out of the fifteen conditions attached to their PRGF in 2006 contained some sort of privatisation in the telecommunications, postal and airline sectors, one condition required price liberalisation and subsidy removal for the national oil company SONARA, and two conditions required restructuring of the public postal enterprise. According to the Fund’s arguments, privatisation should lead – amongst other effects – to increased transparency and good governance in the sectors privatised. Unfortunately, the privatisation process of the Cameroon’s airline company shows that expected benefits in theory do not always translate into reality (Pereira, April 2008).

In September 2007 a joint delegation of the International Monetary Fund (IMF) and the World Bank arrived in Cameroon to discuss the implementation of the three-year economic programme signed between the two institutions and the Cameroon government. The meetings were expected to handle technical issues on the execution of the public investment budget, the implementation of the fiscal reforms and progress in the privatisation process – particularly focusing on financial sector reform with emphasis on the privatisation of Crédit Foncier. Not content with the push made to the financial sector, the joint delegation was also reported to have successfully mounted pressure on President Paul Biya, to re-launch the privatization process of the Cameroon Airlines, Camair, which the President had put on hold. Local newspapers reported that the offer from the First Delta Air Services-led consortium had finally been selected. However, the privatization process was halted following a late submission of a better offer from an US group, Valiant Airways. This group was strongly backed by the US Ambassador to Cameroon and the Prime Minister. Later it was found that the bidder, Valiant Airways, was a fake and that the company was unknown to the American Federal Aviation Authority and other international organisations. Since the privatization started in February 2005, Camair’s debt and losses have mounted. In general the privatization project has been cast in shadows. The attempt to privatise Cameroon Airlines clearly shows that processes leading up to privatisation are not necessarily respectful of minimum good governance standards, unless regulatory measures intended to ensure transparency are in place. Once again, pressure from the IMF to privatise may have not yield the expected results but may have worsened the company’s situation.

Case Study: Mali

Bypassing ownership: imposed cotton sector privatisation in Mali Mali is one of the world’s poorest countries and its economy is heavily reliant on the cotton sector. Since the 1990s, the World Bank and the IMF have pressed for the privatization of the Malian cotton sector and liberalisation of its pricing system, tying cotton prices to world market values. These reforms coincided with a period when the cotton prices were, and still are, heavily distorted by heavy subsidised production in developed countries. In 2005 Malian President Amadou Toumani Touré opposed the reforms and spoke out against Bank and Fund conditions. He said “true partnership supposes autonomy of beneficiary countries in requesting aid and in determining its objectives… Often programmes are imposed on us, and we are told it is our programme… People who have never seen cotton come to give us lessons on cotton… No one can respect the conditionalities of certain donors. They are so complicated that they themselves have difficulty getting us to understand them. This is not a partnership. This is a master relating to his student.”

According to the World Bank and the IMF the reform was expected to improve management and increase cotton prices while decreasing the cost of farm inputs. The results could not have been gloomier. Data from the World Bank for 2005-06 cotton sales show that farmers were producing at a loss. The immediate impacts were a collapse of households’ purchasing power and increasing poverty and food insecurity. Long term effects include migration and price falls in the cereal sector as a consequence of farmers switching crops. The Oxfam study Kicking the habit: How the WB and the IMF are still addicted to attaching economic policy conditions to aid predicts economic losses of 2 to 4% of Mali’s GDP. The reforms supported by the World Bank and the IMF, occasionally by means of crossconditionality – identical conditions imposed by both institutions - have endangered the farmers’ livelihoods and Mali’s poverty reduction strategies more broadly. A villager from Wacoro complained that “before, at harvest time, a part of the income was given to the women. But this year, that was not the case. On the contrary, the livestock we have accumulated over many years had to be sold to enable us to cover our food costs, in particular the purchase of cereals. As a result, we have almost nothing left in terms of savings to protect us from the difficult times to come.”

Some bilateral donors are currently backing the introduction of support funds, having realised the importance of the cotton sector and the impact of its highly volatile prices. This fund should help to compensate price differences from one year to the other. Several donors support this initiative; however, the World Bank and the IMF remain in an uncomfortable silence.

Case Study: Zambia

Zambian mining: toughening the tax regime Back in the 1990s, the World Bank insisted that as a condition on their finance that the state-owned Zambia Consolidated Copper Mines (ZCCM) should be privatized. The IMF backed the privatization of ZCCM through the three-year ESAF (Enhanced Structural Adjustment Facility) and one-year SAF (Structural Adjustment Facility) Loans approved in 1995.30 Subsequently ZCCM was chopped into several smaller companies and sold to private investors between 1997 and 2000.

Ahead of privatisation, the Washington-based IFIs advised the Zambian government that, in order to bring in investment, the country should make itself attractive by developing an “investor-friendly” regulatory regime. The World Bank and the International Monetary Fund then used Zambia’s dependence on their funding and debt relief to withdraw many of the controls that the state had previously established on company behaviour. The IFIs continued imposing conditions even when the privatisation deals were done, including one-sided “development agreements” granting tax exemptions to foreign investors and all sorts of benefits not normally granted in the national legal framework. In its 2004 PRGF agreement with Zambia, the IMF required the government to “define a policy for the granting of tax concessions.” The consequence of this condition was that royalties raised by the Central Government represented just 0.2% of their revenues. This deadly combination has prevented the increase of the profits in the Zambian mining sector translating into an increase in the standards of living of the population in these areas.

As a result of the privatization formal employment has decreased. Several structural adjustment programs have also affected the informal sector. Additionally the communities of the Copperbelt now face acid rain, heavy metals pollution, silting and other environmental problems which not only affect peoples’ health, but also their capacity to grow their own food.

Conclusions and Recommendations

The Fund has failed to implement its own Conditionality Guidelines. Even after the 2005 review, which showed limited progress in implementing the Guidelines, the Fund has not taken further steps to address this failure and streamline conditions. One of the main conclusions of the 2005 review was that: “numbers of structural conditions have not shown much of a decline.” Beyond the numbers, the principles of ownership and tailoring to national circumstances should entail refraining from placing controversial conditions which may be highly sensitive for some national constituencies and may lead to domestic tensions and social unrest. On this front, the Conditionality Guidelines are too limited. The CG defines the principle of ownership as the “willing assumption of responsibility for a program of policies, by country officials who have the responsibility to formulate and carry out those policies.” The Fund considers ownership is sufficient when there is enough “buying” by country officials of policy reforms designed by Fund economists. This deviates from the concept of genuine ownership as understood by civil society groups and recipient governments, which would require recipient governments and their citizens to take the lead in designing and prioritizing policy reforms.

The IMF’s limited view of ownership is having serious social consequences. In Mali the IMF and the WB forced the reform and privatisation of the cotton sector despite opposition. The reforms went ahead and now cotton farmers face an even harder future. A quarter of all IMF structural conditionality still promotes privatisation and liberalisation reforms, which have proven to be highly sensitive and often have had disastrous consequences for the poor. Altogether, a third of the Fund’s structural conditions contain some sort of sensitive policy reforms – including privatisation and liberalisation, but also regressive reforms to the taxation systems or strict ceilings on national expenditures which may constrain the government’s ability to invest in much needed basic services.

Copper mining in Zambia perfectly illustrates this point. The IMF backed the privatization of the complex copper mining sector and introduced fiscal reforms to attract transnational corporations. Many of the reforms were far from the IMF field of expertise. This process has yielded far less poverty reduction and respect for environmental standards than was predicted. The Fund cannot afford to continue turning a blind eye to reality and implementing just a few incremental measures to reform its conditionality policy. The Fund’s strategy so far has yielded poor results, aggravating the institution’s general difficulties. If the IMF is serious about undertaking a broader and deeper reform which is to culminate in an agreement on the Fund’s mandate and corporate governance before the end of this year, and increasing legitimacy among its membership, it will have to seriously address conditionality as one of its most dangerous Achilles heels.

Bibliography

Giancarlo Corsetti, P. P. (1999). What caused the Asian Financial and currency crisis. New York: Federal Reserve Bank of New York.

Guilherme, R. S. (2008). IMF Conditionalities for the Least Developed Countries. Policy Brief No. 19.

IMF. (2013, April 2). IMF Conditionality. Retrieved June 26, 2013, from http://www.imf.org: http://www.imf.org/external/np/exr/facts/conditio.htm

Investopedia. (2013, January 1). Conditionality. Retrieved June 26, 2013, from http://www.investopedia.com/terms/c/conditionality.asp: http://www.investopedia.com/terms/c/conditionality.asp

Khor, M. (1998, December 4). IMF policies make patient sicker. Retrieved June 26, 2013, from http://www.twnside.org.sg/: http://www.twnside.org.sg/title/sick-cn.htm

Mutume, G. ( 2001, Mar 18). Criticism of IMF gets louder. Retrieved June 26, 2013, from http://www.twnside.org: http://www.twnside.org.sg/title/louder.htm

Pereira, N. M. (April 2008). The IMF maintains its grip on low-income governments. Brussels: European Network on Debt and Development.

ukessays. (2007, April 4). Criticism Of The International Monetary Fund Economics Essay. Retrieved June 26, 2013, from http://www.ukessays.com/: http://www.ukessays.com/essays/economics/criticism-of-the-international-monetary-fund-economics-essay.php

Read More