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Alternatives
to the Present Framework of Fund Conditionality
Katele Kalumba
Minister
of Finance
Zambia
July 5, 2001
I would like to begin my contribution to this very important subject by
congratulating the organizers of this meeting: the Development Policy Forum
of the German Foundation for International Development (DSE) and the
International Monetary Fund (IMF) for having decided to convene a meeting to
discuss, share experiences and review the Ownership and Conditionality of
economic reforms supported by the International Monetary Fund with a view to
offering an alternative framework or approach.
In many of the poorer developing countries such as Zambia,
structural adjustment programmes with the support or endorsement of the
Bretton Woods financial institutions have been implemented since 1970s with
little success to talk about. In the case of Zambia, we have been implementing
structural adjustment programmes now renamed the Poverty Reduction and Growth
Facility (PRGF) since early 1970s, with no notable improvement in the
viability or sustainability of the balance of payments position or external
debt situation. Before the 1990s, this was mainly blamed on lack of total
commitment on the part of the politicians and bureaucrats. However, since
1990 to date, the politicians and bureaucrats have been implementing the
structural adjustment programmes almost religiously. There has been
Government commitment to the implementation of the economic and structural
adjustment programme, as agreed upon with the IMF and other donor agencies.
In the first few years of its coming into power, the Movement for Multiparty
Democracy (MMD) led government, to which I belong, moved swiftly to implement
all the recommended economic and structural reforms. This was out of our
conviction that in order for the country to move forward, we had no other
alternative, except to implement the adjustment programme in its totality.
These reforms in many other countries have encompassed all the four main
elements usually associated with IMF supported structural reform programmes,
namely, (a) privatisation and parastatal reform programme, (b) market
liberalisation in all sectors of the economy without any exception, (c)
adoption of market-based pricing for food, services and public utilities, and
(d) opening up of trade: no foreign exchange controls, reducing substantially
customs duty, removal of non-tariff barriers to trade and adoption of a
market-determined exchange rate regime.
In Zambia´s case, since 1991 when the Government embarked on fundamental
economic structural reforms, notable policy developments have included (i)
the decontrol of prices, (ii) removal of subsidies, (iii) the decontrol of
interest rates, (iv) the removal of exchange controls and floating of the
Kwacha, (v) the liberalisation the of banking sector, (vi) the removal of
quantitative restrictions on imports and exports, (vii) the compression and
simplification of tariff structure, (viii) implementation of appropriate
monetary and fiscal policies, ix) the privatisation of over 255 companies,
(x) the downsizing of the number of workers in the public sector, and (xi)
the establishment of a capital market. From the list I have given, structural
reforms in Zambia have included all the essential ingredients or
prescriptions deemed necessary for the proper functioning of a market-based
economy by the international financial institutions.
These reforms have been implemented with the full support, and at times,
with threats that if certain specific decisions or actions are not
implemented by the national authorities, then the co-operating partners,
usually led by the IMF, were not going to provide the much needed financial
support that is essential to the successful implementation of the economic
and structural reform programme. This simply means that if the IMF does not
like the package of policies in the homegrown economic programme, then the
IMF Staff would not present the programme to the Executive Board for
endorsement, and therefore in all likelihood, all the other co-operating
partners would not financially support the reform programme. A programme,
which is not financially supported by co-operating partners, has little
chance of succeeding. Usually, as a Government, we are reluctantly made to
review our original policies, programmes and planned actions in order to
accommodate recommendations made by officials from the Bretton Woods
institutions.
At this stage, one might strongly argue that domestic ownership of a
structural adjustment programme becomes questionable. By implication, it also
means that, in certain cases, commitment to the full implementation of the
programme may not be in total anymore, as certain policies are being imposed
from outside. And this may be evident from programme slippages or inability
to implement certain actions as per the agreed timetable or performance
criteria on, for example, total domestic credit expansion or net credit to
the Government. Sometimes, certain policy measures or conditionalities are
never implemented at all. One may attribute failure to implement certain
supposedly agreed upon policy actions to the imposition or insistence by the
Bretton Woods financial institutions on “the conditionalities” that
the politicians and bureaucrats may view as not being in the best national
interest of the local economy and ordinary people. For example, the
insistence on market liberalisation in the agricultural sector in Zambia
without ensuring that the removal of Government intervention is immediately
taken over by a vibrant and financially strong private sector in the
provision of agricultural inputs and extension services, and the purchase of
agricultural produce has brought about misery in the rural areas of Zambia in
the past few years. Under such circumstances, local support for such policies
would best be described as being absent.
Not only did the Government pull out of the
provision of agricultural inputs and other requisites, but also the
Government withdrew from the purchase of agricultural produce. However, the
private sector companies involved in the purchase of produce do not have the
financial muscle to procure and supply needed inputs throughout the country,
and later on to buy the produce and store it for resale at a later date. The
result, as expected, has been the near collapse of rural type of life in the
countryside. Rural incomes both in nominal and real terms have sharply
dropped. Ultimately, in spite of the uninterrupted implementation of
structural reforms over the past ten years, we have noted also a sharp
increase in the incidence of poverty among the people of Zambia, a situation
that is not politically and socially sustainable. The increase in poverty
levels is evident from the 1998 Living Conditions Monitoring Survey conducted
between November and December 1998 in Zambia, which shows that:
“among the rural strata, small scale farming
households have the highest proportions (84 percent) of persons who are poor.
Non-agricultural households come second with 80 percent of all persons being
poor. Large-scale farming households have the lowest proportion of 16 percent
poor. In general, the proportion of persons who are poor in rural areas is
much higher at 83 percent than urban areas where 56 percent are poor”.
These developments may partly be attributed to the imperfections in the
market of agricultural inputs and produce, whereby the withdrawal of the
Government was not replaced by an equally capable private sector in terms of
coverage and financial resources. In spite of this observed market failure,
which has been acknowledged by both the Government and the international
financial institutions, financial support from co-operating partners to the
agricultural sectors is still tied to non-Government intervention in
agricultural activities. It is a conditionality that is not beneficial to the
large proportion of the people of Zambia. Its national ownership
and support therefore becomes questionable.
Moreover, one may even point to the fact that the programme design on
market liberalisation that called for total Government pull out from input
supply and purchase of produce, and hand over this role to the private sector
that was ill-equipped for the task was inappropriately and hurriedly done.
This was a conditionality for accessing financial support, and the strong
argument for non-Government involvement was that it would reduce Government
expenditures and net Government credit from the domestic banking system.
However, due to programme failure and the resultant impact of shortage of
staple food crops, the Government has actually been forced to fund programmes
targeted at the provision of food relief to a large proportion of the population
year after year.
The same could be said about other conditionalities and programmes such as
the privatisation programme and the public sector reform programme. The prime
objective of the public sector reform programme was to have a lean public
sector capable of delivering a more efficient service and to pay the
remaining civil servants a better and living wage after reducing the number
of workers on the payroll of the Government. Over the years, implementation
has been problematic and has proved more complex than was earlier thought.
First while the number of workers on the Government´s payroll was reduced,
there has been no corresponding increase in workers pay and other conditions
of service. Second, these workers who were retrenched added on to number of
the unemployed and, in most cases, have contributed to the increase in
poverty levels in the country. Furthermore, those who were retrenched under
an aggressive privatisation and parastatal reform programme of state-owned
enterprises have also added to the number of the unemployed, and to the
incidence of poverty among the people in the country. The identified problem
or weakness here is that probably the pace of implementing structural reforms
has been rather too fast. Had the reforms been implemented at a modest pace
and allowed for gradual changes, perhaps the reforms would have resulted in
improved living conditions for the majority of the people.
The foregoing argument is reinforced by the fact that while employees were
retrenched at a very fast pace, the private sector economy was not expanding
at an equally rapid pace in order to create enough jobs to employ all those
who were being retrenched in the Government and state-owned companies. The
point here is, while Government is fully committed to both privatisation and
public sector reform programme with a view to ensuring prudent fiscal
management, in particular to reduce Government expenditures, what has really
not been beneficial is to attach, prescribe or to use the number of employees
to be retrenched as a yardstick to assess the success or the failure of the
public sector reform programme. In addition, the weakness in the IMF approach
to economic reforms has of late been the insistence to micro-manage the
programme, with issues such as that a particular company must be privatised
using a specific mode of privatisation by a particular deadline, which
becomes problematic, and in a way takes away the national authorities
autonomy. Such insistence does not care to analyze or identify beforehand
which segments or groups in society will be better off or worse off as a
result of requesting the Government to implement such a recommended action.
Moreover, such specificity and detail in economic reform programmes often
tend to create wrong signals among the national leadership and people that
perhaps the Bretton Woods financial institutions do not care much about what
happens to the living conditions of the people, as long as their objectives
of constraining domestic demand, total domestic credit, net credit to the
government, building international reserves and meeting all external debt
service obligations were being observed.
Time has come to focus on basic principles if the IMF has to successfully
play its global financial role. They must acknowledge that structural
adjustment programmes generate `transitional poverty` in the process of
correcting distortions in the macro-economy and hence must focus on how to
mitigate this poverty. They must help countries focus on economic development
and growth measured by improvements in the real economy. They must design in
a broadly consultative way, technically sound economic policy advice to
countries and pay adequate attention to the contingencies of political
implementation of any policy.
Alternative Framework for IMF Programmes
From the forgoing analysis, it is clear that the modes
operandi of the IMF programmes needs to be revisited or modified. While the
IMF should remain fully committed to ensuring the viability or sustainability
of all countries´ external sectors, it should equally become concerned with
the achievement of the domestic economy’s internal core objectives of
ensuring full employment of labour and improving the living conditions of the
people. In the case of Zambia,
the ultimate objective is to improve the living conditions of all the
citizens. In order to ensure that the concerns of the IMF and the country are
given equal importance, it becomes necessary that only general performance
criteria should be agreed upon between the host Government and the IMF. The
details on the projected performance of the economy or microeconomics of the
domestic budget, monetary aggregates, real sector and external sector should
be left to the governments to determine what is the best way to attain the
broad performance criteria. For example, on fiscal management, the IMF should
be satisfied with agreeing on domestic fiscal balance, revenue effort and
expenditure as a ratio of GDP. The details on each one of these broad
aggregates should be left to the national authorities. However, the
Government should still be held fully accountable to observe the agreed upon
broad aggregates for assessing whether implementation of an economic reform
programme is on track or not. Such programmes should come out from an
exhaustive consultative process among all the national stakeholders.
A programme delivered in such a way would really ensure that the
Government is committed and accountable for both programme successes as well
as programme failures. Equally, the Bretton Woods institutions would be
spared of the blame that they are the ones bringing about misery and
significant increases in the incidence of poverty in the countries in which
they have been imposing reform programmes. In this regard, my suggestion is
that IMF assistance to needy countries be tied to the country implementing
successfully the broad programme objectives and macroeconomic aggregates, as
opposed to observing very specific and detailed monetary, fiscal and external
targets, which when sometimes combined, do not translate into the development
of an economy.
Streamlining Conditionalities and Enhancing Policy Dialogue
This then brings me to the next issue of streamlining the
IMF conditionalities and enhancing policy dialogue. We have noted, that a
multiplicity of conditionalities is not helpful to the achievement of the
main objectives of any programme. This is especially important when you have
the IMF, the World Bank and bilateral donors, all imposing or working out
their own conditions, which in many instances, tend to contradict each other
or are crosscutting. A multiplicity of conditions tends to reduce the
concentration of the implementing agency or ministry, as it has to attend at
the same time to too many conditions from too many donor organisations. This
is especially the case with structural reform conditionalities. The number of
quantitative and structural conditionalities should be kept to the barest
minimum, must be measurable, able to stand the test of time and not subject
to change at the whim of the donor institution, as is usually the case with
most structural conditionalities by the bilateral countries.
On the question of promoting policy dialogue, it is very cardinal to the
successful formulation of policies that both partners would agree upon and
work to achieve. Imposing policies on a weak partner requiring financial
assistance does not lead to achievement of projected results most of the
time. Therefore, in the interest of accountability, transparency and
ownership the co-operating partners must take time to exhaustively explore
all the alternatives available to them before agreeing on what option should
be implemented. Again here, only general policy framework should be agreed
upon, while detailed programmes should be left to national governments to
work out. I am sure that a programme developed along the above suggestions
has much better chance of succeeding than a programme imposed by the
financing institution. Policy dialogue must be promoted. In this regard, to a
certain extent, the preparation of the Poverty Reduction Strategy Papers
(PRSP), through a consultative process of all the stakeholders will go some
way in promoting national ownership of economic and structural reform
programmes. We are very hopeful, that multilateral and bilateral co-operating
partners will whole-heartedly support the policy recommendations that will
come out of the consultative process among all the stakeholders.
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