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, H IPC debt relief will result in less fiscal space, rather than more. And projected G -8 debt relief w ill only marginally expand fiscal space. Part of the problem is that the Zambian government has little leew ay to choose its ow n fiscalpolicies, despite donor rhetoric about ‘nationalow nership’ ofpoverty-reduction policies. Draw ing on the analysis of a national study, the Country Study also estimates the additional public expenditures that w ould enable Zambia to reach the M DG s. In order to finance these expenditures, it proposes a diversified strategy of increasing tax revenue, expanding the fiscal deficit and obtaining more ODA. Finally, it recommends core elements of an expansionary macro framew ork that could support a seven per cent rate of economic growth (needed to attain M DG #1, i.e., halving extreme income poverty) and buttress the government’s effort to reach the other M DG s. In the process, it seeks to dispel common fears about the possible adverse effects of such fiscal expansion. (...)