Zambia became one of the world’s most impoverished countries in the world after reckless lending by western banks caused decades of debt and stagnation. Eventually global campaigning secured debt cancellation but not before the country was forced to accept various free market conditions.
In the nineteenth century Zambia was ruled indirectly by the British who pitted different tribes against each other to retain control between 1889 and 1953 leaving a legacy which undermined the chances of development. Zambia was incorporated into the white minority-dominated Federation of Rhodesia in 1953 before gaining independence in 1964. The new country was heavily dependent on copper exports and the economy was further undermined by isolation from its neighbours as a result of supporting independence movements in other parts of Africa and opposing white minority rule in Rhodesia and South Africa.
In the 1970s the price of copper fell whilst the price of oil rose. This meant Zambia had to borrow money to keep the economy running. This borrowing meant that between 1970 and 1980 Zambia’s debt rose from $800 million to $3.2 billion. Most of this money was lent to Zambia by Western banks who believed that lending to countries was a 'safe' option because countries cannot go bankrupt.
At the end of the 1970s a crisis began when the US started to increase interest rates. It now became almost impossible for Zambia to pay back the loans. The IMF then intervened in 1983, lending Zambia the money to pay back their creditors. Private banks were facing a crisis of their own making after lending recklessly to countries around the world, so the IMF was effectively providing a bank bailout.
By 1985 Zambia’s debt stood at well over 300% of national income. Despite the fact the money would flow straight back to the West the IMF could demand various conditions in exchange for making these loans. These included large cuts in spending on public services, trade liberalisation and privatization. Combined with high debt repayments and falling copper prices, these free market conditions made the Zambian economy shrink for most of the 1980s and 1990s, making it ever harder to pay the debt.
By 2004 external debt had reached roughly $7 billion. Due to austerity, ordinary people suffered two decades of falling incomes. This would be hard in any country, but was especially tough for the majority of Zambians whose opportunities to make a living are constantly under threat from droughts, external economic circumstances and diseases like Aids and malaria. The November 2010 UN Human Development Index score for Zambia was worse than it would have been in 1970.
HIPC helping and hindering
Thanks to protests and petitions around the globe, it was agreed the world’s poorest countries would get some debt relief through a scheme known as the Heavily Indebted Poor Countries (HIPC) initiative. The debt relief programme undemocratically demanded harmful policies such as privatisation of services and austerity for the countries taking part. One consequence of this in Zambia was that teachers were denied a living wage. When the Zambian parliament voted against an IMF-enforced privatisation of a bank, debt relief was once again delayed.
Throughout the many years it took for Zambia to complete HIPC, debt repayments continued costing between $160 and $250 million per year, more than spending on health and education combined. Zambia finally completed HIPC in April 2005 and had around $4 billion of debt cancelled. Despite this, in November that year drought lead to food shortages affecting over a million people.
Debt relief has freed up a lot of money that was previously earmarked for debt servicing. This has since been used more constructively for education, health and social welfare investments. For example the government began providing free anti-retroviral drugs (ARVs) to 100,000 Zambians in June 2005. User fees for healthcare and primary education, which were introduced as part of ‘austerity’ imposed by the IMF in the early 1990s, could now be dropped for primary schools nationwide and for healthcare in rural areas. Reduced external debt payments allowed more to be spent paying off domestic debt, which stimulated the economy. Since debt cancellation and with increasing copper prices, Zambia’s economy has grown by an average of 6 per cent a year.
Vulture funds and irresponsible banks cause further problems
In 1999 vulture fund Donegal International bought a $44 million debt Zambia owed the government of Romania for just $3.2 million. Debts owed to private creditors were not included in the HIPC scheme, even if they originated with a public lender such as the Romanian government.
Donegal pursued the Zambian government for the debt, eventually reaching an agreement that Zambia would pay $16 million of the $44 million. However when Zambia missed a payment Donegal demanded the full $44 million through a British court case. The court refused to sanction an enforcement of payment of the $44 million and criticised Donegal for dishonesty. However Zambia was still made to pay $17.5 million.
In 2010 Jubilee Debt Campaign secured a law in the UK Parliament banning vulture funds from suing HIPC countries for debts in UK courts. Whilst initially introduced for just a year, the law was made permanent in 2011. The UK Treasury estimates it will save some of the poorest countries £145 million over six years. However courts in Jersey and other British Overseas Territories and Crown Dependencies can still be used by vulture funds.
There are many other examples of rich country businesses helping to loot Zambia of its resources. In 2007 UK courts ruled that a group of London lawyers had helped former Zambian President Frederick Chiluba launder £23 million which he had robbed from state coffers. Zambia’s experience shows that debt cancellation is vital but if poverty is to be effectively tackled finance must be properly regulated to ensure responsible behaviour.
Don't let Vulture Funds swoop in Jersey, May 2011, here >>
World Development Movement, Zambia: Condemned to debt - How the IMF and World Bank have undermined development (2004), here >>
Last Updated May 2011