Zambia: thinking the unthinkable.

Zambia has been saying what many African countries would like to say but don't because they worry about the consequences--that privatisation is creating unemployment, suffering and delivering few, if any, benefits. The country, as Neil Ford reports, is now reviewing its privatisation policies.

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Zambian President Levy Mwanawasa has informed the IMF that his government is reassessing its commitment to the country's privatisation programme. Although the country had only to continue complying with its plans for economic reform until the end of last year in order to qualify for massive debt relief, the government has reconsidered its position as a result of the impact of the programme upon living standards and employment. A compromise solution may yet be hammered out but Zambia's dilemma illustrates the problems facing the many African countries taking IMF medicine.

It could be thought that the government is considering abandoning its privatisation programme because it has made little progress in selling stakes in parastatals over the past few years, but this would be wrong. A total of 257 out of 280 state owned companies have been sold off since 1992. However, many of these were loss-making commercial ventures and several key utilities, such as telecommunications firm Zamtel and power company Zambia Electricity supply Corporation (Zesco), remain in government hands. The government is also committed to privatising the Zambia National Commercial Bank (Zanaco).

President Mwanawasa's reformist credentials have so far been strong. Upon assuming power, he promised to reduce the level of fraud and increase economic transparency. He ordered an audit of Zanaco--the first ever carried out at a state owned company--after it recorded a loss of 65bn kwacha during the 2000-01 financial year on the back of bad debts, including those owed by Zambia National Oil Company (ZNOC) and copper and cobalt mining firm Roan Antelope Mining Corporation. The bank has now been placed under the supervision of Central Bank of Zambia governor Caleb Fundanga.

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Rising inflation and the gradual depreciation of the Zambian kwacha during the past two years have hit the economy hard. Dollar use has grown as a result of currency fluctuations, so the government has introduced fines for shopkeepers caught doing business in foreign currency in order to increase demand for the kwacha. Falling copper prices and Anglo-American's decision to halt production at the Konkola mine have also affected the economy. Konkola was the country's biggest employer and accounted for 67% of the country's metal exports, while copper and cobalt exports together accounted for 70% of Zambia's exports. Diversification is therefore vital but it is easier said than done.

CHANGING RELATIONS

The Mwanawasa administration's relations with the multilaterals were initially good, despite the growing risk of famine in 2001-02. After the IMF approved $317m to target poverty reduction, finance minister Emmanuel Kasonde responded: "The gesture by the IMF is tremendous testimony to its shift in addressing poverty in least developed countries." He added: "The government will diligently observe the 2002 budget targets and maintain an appropriate tight monetary policy to achieve the inflation target."

However, the government's attitude towards the IMF appeared to change during the course of last year, when the threat of job losses and trade union action prompted President Mwanawasa to announce that he was suspending the privatisation of Zanaco. The government was committed to selling a 51% stake in the bank, after an earlier attempt to sell a 35% minority stake met with little interest. This was unsurprising given the bank's poor past performance and the fact that the minority stake would have given investors little control over how the bank was run.

The IMF country director for Zambia, Mark Ellyne, warned that the failure to proceed with the sell off would prevent implementation of $1bn worth of debt relief. Zanaco is the country's biggest retail bank but employs just 1,440 people at its 43 branches, although it must be remembered than only just over 10% of the population is in formal employment.

The President stepped up his attack upon the reform plans when he complained that increased debt repayments during 2003 would place an intolerable burden upon the economy. He concluded: "The debt is what is going to undermine our development efforts."

When Robert Sharer, the IMF assistant director for Africa, arrived in the country last February for talks with Mwanawasa, he commented: "This administration has made excellent changes although there are many problems which lie ahead and the IMF is ready to help address these problems." However, during the talks Mwanawasa told Sharer that although he agreed with privatisation in principle, economic mismanagement under the previous administration of Frederick Chiluba had compounded the social impact of privatisation.

Mwanawasa added: "There has been no significant benefit to the country. Privatisation has contributed to high levels of poverty, loss of employment and asset stripping. This administration felt that it is necessary and essential to revisit the method by which government exits itself from public property."

In March, even Mwanawasa's support for privatisation in principle was put in some doubt when he commented: "Our past experience has been that privatisation has brought about misery and job losses. If we privatise Zesco, people in rural areas may never get electricity because such a move would not be profitable to a private company."

Unsurprisingly, Mwanawasa's stance was supported by the trade union movement. Joyce Nonde, the president of the Federation for Free Trade Unions of Zambia, said in May that Zambians had lost confidence in the IMF and World Bank, and she also complained that workers' organisations had not been consulted. Despite such opposition, there seems little doubt that the economic restructuring programme will continue, albeit in a slightly altered form.

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The government says that total debt repayments have increased from $200m last year to $300m for 2003 and there is little doubt that the debt has placed it in a Catch 22 situation. While the social impact of Zambia's economic restructuring plans would have been considerable under any circumstances, the fact that belts are having to be tightened still further during the aftermath of one of the worst famines to hit the country in the past century has highlighted the human cost of the programme and encouraged the government to think twice. The food supply situation is finally normalising after a mostly good harvest earlier in the year but the case highlights one of the drawbacks with IMF restructuring plans, which is that they make little provision for unpredictable, large scale catastrophic events, such as the famine which has swept much of central-southern Africa.

Yet if Zambia continues with its privatisation plans, it is in line for enhanced highly indebted poor country (HIPC) status, which would result in the cancellation of just under half its $6.5bn external debt, reducing repayments in the long term. In order to qualify for this relief, the government must continue implementing the programme, including the sale of the Zanaco stake, until the end of this year. If the government halts its economic reforms, banks and other lenders are unlikely to consider any form of debt cancellation. In effect, the government is being asked to reduce social spending and therefore living standards in the short term in order to improve the situation in the longer term.

In June, the government, the World Bank and IMF finally reached agreement on how to deal with Zesco, indicating that compromise solutions are still possible. Commerce and Trade Minister Dipak Patel announced that the power company will now be commercialised rather than privatised. It is to become a profit orientated company, under state ownership but hopefully devoid of political interference.

Ellyne said: "What this essentially means is that the government will not sell any of the shares of state owned Zesco to a foreign investor. They will cede complete control of the company to an independent, competent chief executive, appointed by an independent board of directors. Such people cannot be expected to do the government favours, as was the case in the past." Zesco's reserves had been used by the Chiluba government to fund the wages of civil servants.

Despite his stance in the current dispute, Mwanawasa is generally perceived as being probusiness and his government is attempting to increase foreign investment in the country. Taxes and duties have been lowered for foreign companies operating in the country, particularly for those who develop Zambia's raw materials. Although the country possesses a wealth of raw materials, poor infrastructure and the country's landlocked status have prevented the growth of many industries, with the notable exception of copper mining. The current government's approach also appears to be an improvement on the record of the Chiluba administration. In the face of high inflation, the government has attempted to restrain wage rises and the cabinet agreed to forego a 30% annual rise in June.

The problems facing Zambia are likely to be repeated across Africa over the next few years. Governments are signing up to reform packages that could run smoothly if all goes well but which could result in terrible cuts in government spending if the economy does not perform as well as expected. The benefits of HIPC debt relief certainly seem worth struggling for but it is to be hoped that the IMF will not be more dogmatic than it needs to be in its efforts to secure economic restructuring in return for debt relief.