Does Debt Relief Increase Fiscal Space in Zambia? The MDG Implications

Abstract

This Country Study critically examines fiscal policies in Zambia, particularly the effect of recent and projected debt relief on ‘fiscal space’. The study finds that due to associated policy conditionalities and other factors, Heavily Indebted Poor Country (HIPC) debt relief will result in less fiscal space, rather than more. And projected G-8 debt relief will only marginally expand fiscal space. Part of the problem is that the Zambian government has little leeway to choose its own fiscal policies, despite donor rhetoric about ‘national ownership’ of poverty-reduction policies. Drawing on the analysis of a national study, the Country Study also estimates the additional public expenditures that would enable Zambia to reach the MDGs. In order to finance these expenditures, it proposes a diversified strategy of increasing tax revenue, expanding the fiscal deficit and obtaining more Official Development Assistance (ODA). Finally, it recommends core elements of an expansionary macro framework that could support a 7 per cent rate of economic growth (needed to attain MDG #1, i.e., halving extreme income poverty) and buttress the government’s effort to reach the other MDGs. In the process, it seeks to dispel common fears about the possible adverse effects of such fiscal expansion.