In its 2021 budget, Zambia allocated more money to debt servicing than the education, health, water, and sanitation sectors combined’
Zambia is a land-locked country in southern Africa and remains the world’s seventh-largest producer of copper, along with strategic minerals like cobalt, nickel, and manganese. Despite this endowment, along with agriculture and wildlife, 54.7% of the population lives in poverty – the average for sub-Saharan Africa is 40%. The advent of Covid-19 undermined trade and exacerbated inequality.
Zambia’s debt accumulation
The majority of Zambia’s debt was written off by 2005 under the International Monetary Fund (IMF) and World Bank’s Heavily Indebted Poor Countries Initiative. The country began to accumulate new debt from 2012 onwards, following the advice of the IMF, World Bank, and regional financial institutions, and a forecasted increase in the price of copper. Zambia borrowed short-term loans to finance infrastructure projects such as building bridges, highways, and hospitals. These projects, however, took longer than the repayment timeframe to return revenue and socioeconomic value. Copper prices failing to reach estimated highs; and COVID-19 emergence in 2020, along with an ongoing climate crisis, meant Zambia faced severe challenges in paying back its loans.
Between 2018 and 2021, debt repayments increased from 20% to 38% of the country’s national budget, just as the allocation of funds towards the health sector declined from 9.5% in 2018 to 8% in 2022. This reflects shrinking fiscal space, with lower allocations to other priorities such as education (which dropped from 17.2% in 2016 to 12.4% in 2022), and a growing debt-servicing bill.
Default and the IMF loan
In November 2020 Zambia became the first African country to default on its foreign debt during the Covid-19 pandemic. Since then, it has signed a USD 1.3 billion loan from the IMF – with stringent conditions- and entered debt-restructuring talks with other creditors. Under the IMF agreement, Zambia must implement austerity measures, which include eliminating fuel subsidies and ‘inefficient public investments to reduce the primary balance deficit from 6% of GDP to a 3.2% surplus by 2025. Revenue gains are expected to be made by cutting electricity subsidies, raising tariffs, and expanding value-added tax (sales tax) to more goods.
These conditions, the IMF argues, will be balanced by higher spending on social protection (including health services). Additionally, Zambia’s external debt payments are expected to decrease from USD 3.1 billion in 2022 to USD 1.1 billion in 2023 if successful debt restructuring negotiations with other creditors take place. In theory, this means Zambia will have more funds to spend on social services, as shown in Zambia’s 2023 budget plans, where health receives a 25% increase this year.
Possible challenges – austerity and impact on the right to health
While the IMF claims a large portion of the money will be directed toward education, health, and social protection, significant improvement in health services requires continuous investment by government. A one-off investment through a loan may not have a long-term impact on the quality of and access to health services as the country is likely to revert to pre-loan spending levels once the loan is exhausted and payments become due.
In addition, loan conditionality and austerity measures are typically regressive in nature, having a disproportionate impact on the most vulnerable members of society further significantly impacting health access. For example, the elimination of fuel subsidies could make transport for people in remote areas more costly, thereby reducing access to health centers. Similarly, increases in electricity tariffs can lead to higher costs for hospitals and clinics trying to provide uninterrupted care, as well as households choosing between food, electricity, and medicine. This will tend to have a disproportionate impact on poorer consumers who pay a larger amount of their household income towards these goods.
These potential concerns are exacerbated by Zambia’s tendency to underspend on budget allocations to health. According to UNICEF, underspending increased from 8% in 2015 to 26.7% in 2020. This happened in conjunction with a worsening economy, and rising debt service costs. Therefore, it is critical that the government improve its budget credibility – in forecasting, allocation, and implementation, and that it is subject to the scrutiny of parliament, independent auditing bodies, civil society, and the public.
Alternatives to austerity? Tax reform is urgently needed
Zambia is resource-rich but loses income through double taxation agreements (DTAs), including from dividends, royalties, and technical fees for companies with subsidiaries in both Zambia and other countries. It also offers preferential corporate tax incentives increasing reliance on employees paying tax to boost government revenue. This dependence on personal income taxes over corporate income taxes worsened in 2022 when the Zambia Revenue Authority reduced the corporate income tax rate from 35% to 30%.
Furthermore, it is estimated that Zambia loses over USD 4.5 billion annually through tax evasion and tax avoidance.
Tax justice organizations have called for cost-benefit analyses on tax expenditures and lost revenue to be carried out and made public, and for DTAs to go through parliamentary approval to enable more public scrutiny. By promoting and prioritizing domestic resource mobilization over austerity as it’s obliged to do under international human rights law, Zambia could better enable the continuous and progressive realization of socioeconomic rights, and in time even reduce its reliance on external financing from loans and aid.
Under international law, Zambia is required to ensure healthcare services are of good quality and available to all without discrimination. An integral part of implementing this means the government needs to allocate and spend adequate resources in the healthcare sector to meet the needs of the population. Zambia’s health spending, budgeted and actual, averaged 8.8% of the budget between 2015 and 2022. This falls well short of the Abuja Declaration’s target of 15%.
A more comprehensive approach is needed. While IMF loans and debt restructuring can have some short-term positive impact on the availability of resources, the accompanying austerity measures will most likely negatively affect healthcare access for vulnerable populations. There is also the concern that other creditors will fail to come to the party on debt negotiations. The Zambian government’s commitment to healthcare financing is positive, but both budget credibility and implementation is lacking. In addition to the need for tax reform, and a reduced reliance on external funding, Zambia and its creditors must consider options that support long-term, inclusive development, climate resilience and strengthen the provision of healthcare and social protection for its people.