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The Central Bank of Zambia

IMF Stabilisation Policies and Structural Adjustment Measures

When lending funds to countries the International Monetary Fund places a number of conditions on the debtor country. This conditionality aims to ensure that the economic environment into which the funds are made available is such that the finance might lead to economic recovery and ultimate repayment of the debt and interest that it incurs. The IMF has a clear view as to the best way that economic recovery may occur. They believe that the inward oriented development policies focusing on import substitution, agricultural self-sufficiency and state control of production have failed to yield any long term benefits. Slow growth, high inflation, consistent balance of payment deficits and a buoyant informal economy being testament to this failure. The IMF saw stabilising the macro economy as essential if growth and development were to occur and the funds lent effectively used. Typically there are four components of the macroeconomic stabilisation:

Abolition or liberalisation of foreign exchange and exchange controls
Devaluation of the official exchange rate
Anti inflation policy targeted at:
- reducing government budget deficit
- raising interest rates to control bank lending
- control wage settlements to below the rate of inflation
- reduce price controls
Encourage foreign direct investment

During the 1980s and 1990s the IMF and its sister organisation the World Bank, in keeping with shifts in political philosophy throughout the industrialised world, considered that macroeconomic stabilisation in tandem with structural adjustment reforms with a more outward oriented approach to trade were key strategies. Export promotion, adoption of free market principles such a trade liberalisation, privatisation and deregulation would lead to a revival of economic growth. Incomes would then trickle down to the poorer members of society. The underlying assumption was that economic growth would lead to economic development and the reduction of poverty.

Between 1983 and 1987 the government of President Kenneth Kaunda operated a structural adjustment programme of the IMF with a view to stimulate growth. Unfortunately, due to inconsistency in implementation and public discontent with the harsh measures such as removal of food subsidies, the programmes failed to accomplish their objectives and were abandoned in 1987.

The 1990s saw a move to a more outward oriented economy centred on a market based system. The newly elected government of Frederick Chiluba in 1991 adopted a structural adjustment programme agreed with the IMF and the World Bank. The current President Mwanawasa has declared his misgivings about the market reform programme imposed by the IMF, saying its implementation has led to poverty, asset stripping and job losses.

Zambia's structural adjustment programme

The reforms that the IMF has required Zambia to follow can be divided into four categories:

Civil Service Reform - the IMF believed that the Civil Service was an expensive bureaucratic organisation that led to a budget deficit and growth in money supply feeding through to high levels of demand-pull inflation. Cutting back in the growth and spending of the civil service has led to an increase in unemployment.
Privatisation - the transfer of state owned assets to the private sector
Bank Restructuring - to improve the supervision, regulation and financial security of commercial banks
Trade Liberalisation - this has three components:
- liberalisation of the Agricultural Sector through reduction of price controls and subsidies and land tenure reform
- elimination of exchange controls and the adoption of a floating exchange rate
- reduction in tariff and non tariff barriers

How successful these reforms are is open to question. There have been widespread criticisms of the suitability of these reforms to poor developing economies and developed countries have been accused of hypocrisy by sanctioning harsh market reforms while retaining their own restrictive market practices. Agricultural market reform, with the removal of subsidies, has led to stagnation in Zambia's agricultural sector and increased rural poverty, while the developed world still heavily subsidises its own agriculture. As a result of enforced public spending curbs, real government expenditure (excluding interest on debt) in the domestic economy including vital infrastructure, health and education spending, fell by almost half through the 1990s. The IMF has set a budget deficit limit of 1.55% of GDP for Zambia, while in 2003, US and UK budget deficits were 3.4%.

The IMF requires poor countries such as Zambia to remove tariffs unilaterally, in contrast to industrialised countries, which wait for trade rounds to reduce their tariffs as part of a multilateral process. Through the privatisation programme, multinational companies have been able to gain access to the Zambian market; although some failing state run enterprises began to operate more effectively after privatisation, many companies collapsed, jobs were lost and welfare programmes originally performed through a parastatal were not continued by private companies. The IMF has recently urged Zambia to open up its financial and telecommunications markets, strong areas of growth for developed economies.

Aid from the World Bank and other bilateral and international creditors and donors is also conditional on meeting the IMF's approval; this also applies to the UK's much-publicised cancellation of Zambia's and other African countries' bilateral debts.

There is no doubt that some sectors of the population have experienced great hardship, notably those made unemployed following the privatisation and the slimming down in the civil service. The IMF's objective of macroeconomic stability has also suffered setbacks due to droughts and the falling price of copper on the world markets. Research by the UK Institute of Development Studies suggests that stabilisation gave rise to a sharp increase in poverty in the early 1990s. However, subsequent growth and good maize harvests has reduced poverty, particularly in rural areas, although this has been accompanied by an increase in inequality. Zambia's key social indicators are now among the worst in Africa and ¾ of its 11 million people live below the poverty line of one dollar a day.

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