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Haemorrhaging Zambia: Underlying sources of the current sovereign debt crisis

Following a stand-off with commercial creditors and protracted but unresolved negotiations with the IMF, Zambia defaulted on its external sovereign debt on 13 November this year. While most commentary has focused exclusively on the government’s sovereign borrowing, our own research has detected massive outflows of private wealth over the past 15 years, hidden away in an obscure part of the country’s financial account. The outflows are most likely related to the large mining companies that dominate the country’s international trade. With many other African countries also facing debt distress, this huge siphoning of wealth from Zambia provides crucial lessons that need to be central in discussions about debt justice in the current crisis. We explain here what we’ve found.

Zambia was already debt-stressed going into the COVID-19 pandemic. The economy was hard hit following the sharp fall in international copper prices from 2013 to 2016, especially given that copper made up about 72% of its exports in 2018 (including unrefined, cathodes and alloys). Following a severe currency crisis in 2015, the government entered into negotiations with the IMF for a balance of payments support loan, but until now they have failed to reach an agreement on the conditions and accompanying programme. There was some improvement in its macroeconomic outlook in 2017 due to rising copper prices, which sent international investors throttling back into optimism.

However, international investors again turned against the country in 2018 in the midst of the global emerging market bond sell-off, which compounded the effects of severe droughts in 2018-19. As a result, the government was already teetering on the edge of default on the eve of the COVID-19 pandemic. The economic fall-out of the pandemic has since pushed the country over the edge (see an excellent analysis here).

Inductive quantitative balance of payments analysis

Most of the commentary on Zambia’s default focuses exclusively on the government’s sovereign borrowing. Our own analysis peers behind this headline focus into the intricacies of financial flows into and out of the economy.

This is part of our ERC-funded project on the political economy of externally financing social policy in developing countries. As the principal investigator, I have focused on researching aid and financial flows related to social protection programmes and their place within broader macroeconomic and political economy dynamics. The rest of the research team (three PhDs: Ana Badillo Salgado, Emma Dadap-Cantal, Benedict Yiyugsah, and one postdoc, Dr Charmaine G. Ramos) have been focusing on how these external dynamics influence the adoption and implementation of social protection programmes.

As one of my main methods, I have been conducting historical-structural inductive analysis of balance of payments and related macroeconomic data. This might be best described as a form of investigative or forensic analysis of the external accounts of the respective case countries, of which Zambia happened to be one.

Financial account anomalies in the post debt-relief period

It is through this analysis that I identified a difficult-to-explain data anomaly on the financial accounts of the Zambian balance of payments that started with the debt relief of the Multilateral Debt Relief Initiative (MDRI) in 2005. The anomaly is a sharp rise in net acquisitions of debt instruments by resident non-financial ‘other sectors’ on the ‘other investment’ account. In other words, Zambian residents – which include the local subsidiaries or affiliates of transnational corporations – were massively increasing their holdings of debt assets abroad even in the midst of debt distress at home.

The magnitude of these acquisitions of debt assets far exceeded the amount of Eurobonds that are now in default (worth $3 billion USD). They started at the same time as the MDRI debt relief, when this category jumped from non-existence in 2003 to over $600 million in 2005 and over $900 million in 2006, more than counteracting the gains of debt relief.[1] These obscure debt asset acquisitions then jumped to almost $1.5 billion in 2007 and peaked at over $5 billion in 2012, over $3 billion in 2015, and over $1.8 billion in 2017. While they subsided in 2018 and 2019, they had already reached over $1.3 billion in the first half of 2020 (based on the latest quarterly reporting).

In proportional terms, these outflows reached peaks of almost 20% of GDP in 2012, 15% of GDP in 2015, and over 7% of GDP as recently as 2017. They thereby siphoned off most of the gains from both the commodity boom of the early 2010s and the government’s borrowing, undermining any hope for achieving external financial stability.

What could such debt assets represent? Local subsidiaries of transnational corporations have been known to borrow heavily offshore, as is commonly discussed in the financialization literature.[2] However, such financial operations would appear as debt liabilities, not as debt assets, so this explanation does not make sense.

In exploring this puzzle during fieldwork in Zambia in 2017,[3] we came to understand that the debt assets in question represent an accounting discrepancy that is mostly likely explained by unreported profit remittances by large mining companies in Zambia. Other corporates might have also been involved, although given the conventional wisdom that most things occurring on the external accounts of Zambia are somehow related to the mining majors, it follows that so too were the discrepancies.

The monetary authorities in Zambia have been aware of this anomaly.[4] They admitted to us that they had been trying to figure it out with the help of the IMF. It was not related to private capital flight through banks given that the banking sector is well regulated by the central bank (the Bank of Zambia or BoZ). In contrast, mining companies are not required to report to the BoZ given that they are non-financial firms and hence are not covered by banking regulations, even though they dominate much of the financial activity in the economy, especially on the external accounts.

Indeed, the anomaly itself was a creation of the BoZ based on their observation of discrepancies between their own data versus the reporting of assets held by Zambian residents by the Bank of International Settlements, to which international banks are required to report even when they fall outside Zambian jurisdiction. This led the BoZ to believe that the discrepancies belonged in this category of international debt assets. Technically, however, they should have been reported in the category of errors and omissions or even as profit remittances, although this would have of course raised alarm bells given the magnitude of these flows.

More than just debt relief is needed

The enormous sums involved provide a vital counterperspective to the rise of sovereign borrowing by Zambia. In effect, sovereign borrowing has helped sustain these private outflows, especially once the commodity boom came to an end. Foreigners have profited, much of the wealth of Zambia is now offshore, and yet the Government of Zambia has continued borrowing in a desperate attempt to keep the financial ship afloat despite these massive holes in its hull. Regular Zambians are now paying the price.

The argument for this economic model since the beginning of the century has been, to put it crudely, that Africans are better off being exploited than not being exploited at all, in terms of the extra jobs, investment, demand, and revenue that transnational corporations bring. With governments returning to the spectres of hard adjustment and deep recession, so soon after debt relief and commodity boom were squandered by massive outflows of wealth that open capital accounts facilitated, it is hard to see how this logic retains any credibility. More than just debt relief, a complete rethink of the model is required.

[1] Cancelled multilateral debt was close to $2 billion in both 2005 and 2006 although the actual gains from this were only accrued through reduced interest payments on debt, which only fell by $73 million USD in 2016 and $37 million USD in 2017.

[2] For instance, see Serena JM, Moreno R. 2016. ‘Domestic financial markets and offshore bond financing’. BIS Quarterly Review, September: 81-97. For more critical discussions, see Bortz PG, Kaltenbrunner A. 2018. ‘The International Dimension of Financialization in Developing and Emerging Economies’. Development and Change. 49(2): 375-393; or Kaltenbrunner A, Painceira JP. 2015. ‘Developing countries’ changing nature of financial integration and new forms of external vulnerability: the Brazilian experience’. Cambridge Journal of Economics. 39(5): 1281-1306.

[3] While the PhDs in the project spent four to six months in each of the case study countries conducting political economy process tracing of social protection agendas and programmes, I joined them in each of the countries for a shorter period of time and focused specifically on conducting elite interviews with a range of specialized actors that had technical knowledge and experience over the external financing of domestic spending. These actors included staff from major donors, international organisations, central banks, finance ministries, and other government departments, especially those involved in social protection programmes.

[4] These must remain anonymised given the political sensitivity of these issues.

This article is an abridged and slightly modified version of the full analysis, including detailed data analysis, posted on the Developing Economics blog, which can be found here.

About the author:


Andrew Fischer

Andrew M. Fischer is Associate Professor of Social Policy and Development Studies at the ISS and the Scientific Director of CERES, the Dutch Research School for International Development. His latest book, Poverty as Ideology (Zed, 2018), was awarded the International Studies in Poverty Prize by the Comparative Research Programme on Poverty (CROP) and Zed Books and, as part of the award, is now fully open access (http://bora.uib.no/handle/1956/20614). Since 2015, he has been leading a European Research Council Starting Grant on the political economy of externally financing social policy in developing countries. He has been known to tweet @AndrewM_Fischer

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COVID-19 | Ecuador, COVID-19 and the IMF: how austerity exacerbated the crisis by Ana Lucía Badillo Salgado and Andrew M. Fischer

Ecuador is currently (as of 8 April) the South American country worst affected by COVID-19 in terms of the number of confirmed cases and fatalities per capita. While even the universal health systems of Northern European countries are becoming severely frayed by the nature of this pandemic, Ecuador serves as a powerful example of how much worse the situation is for many low- and middle-income countries, particularly those whose public health systems have already been undermined by financial assistance programmes with international financial institutions (IFIs). The IMF and other IFIs such as the World Bank must acknowledge the role they have played and continue to play in undermining public health systems in ways that exacerbate the effects of the pandemic in many developing countries.

The recent IMF Extended Fund Facility (EFF) Arrangement, signed in March 2019 with the Government of Ecuador, was already the subject of massive protests in October 2019 given the austerity and ‘structural reforms’ imposed on the country (aka structural adjustment). It has also directly contributed to the severity of the pandemic in this country given that health and social security systems were among the first casualties of the austerity and reforms. In particular, the government’s COVID-19 response has been severely hindered by dramatic reductions of public health investment and by large layoffs of public health workers preceding the outbreak of the virus.

From this perspective, even though the IMF has recently moved to offer finance and debt relief to developing countries hit by the COVID-19 pandemic, a much more serious change of course is needed. For this, it is vital to understand its own role ­– and that of other IFIs such as the World Bank – in undermining health systems before the emergence of the pandemic in various developing countries, lest similar policy recipes are again repeated.

The baseline

It is clear that the pre-existing national healthcare system in Ecuador has been replete with problems even in ‘normal’ times. As in most of Latin America, the weaknesses of the healthcare system in Ecuador stem from its segmented and stratified character, with a distinct segregation between three main subsectors – the public, social security, and private sectors. The Ecuadorian Ministry of Health has a weak coordinating and regulatory role over these three subsectors, each of which caters to different beneficiary populations and with clearly distinct quality of services. The public system is the lowest quality and the one accessed by most poor people. Despite claims of universal health, the national system is a far cry from anything approaching genuine universalism.

Moreover, there has been a progressive privatization and commodification of healthcare since 2008. For instance, the building of capacity within the social security system has been undermined by the channelling of health funding via contracts to the private sector, where pricing is also mostly unregulated [1]. More generally, Ecuador has consistently exhibited one the highest out-of-pocket (OOP) health expenditure shares in South America, despite a government discourse and constitutional mandate to deliver free, high quality, public healthcare for all citizens. OOP payments – or direct payments by users at the point of service – reached 41.4% per total health spending in 2016 [2]. They include, for instance, payments for medicine or medical supplies by poor people in public hospitals, as well as payments by middle- and upper-class people for consultations and surgeries. The COVID-19 crisis puts pressure on precisely these aspects of healthcare provisioning, rendering the system prone to systemic failure for the majority of the population, especially in times of economic crisis when the ability of users to pay is severely curtailed.

Crisis and IFIs

These problems in the healthcare system have been exacerbated by the austerity measures of the current government of Lenín Moreno. The measures were introduced in the context of the protracted economic crisis that started in 2014 and have been endorsed by the IMF and other IFIs. Public health expenditure plateaued at 2.7% of GDP in 2017 and 2018, and then fell slightly to 2.6% in 2019, when GDP also slightly contracted (see figure). This was despite the constitutional goal that established an increase of at least 0.5% of GDP per year until 4% was to be reached, which is still far below the 6% of GDP recommended by the Pan American Health Organization [3].


Source: elaborated from the Fiscal Policy Observatory data (last accessed 7 April 2020 at https://www.observatoriofiscal.org/publicaciones/transparencia-fiscal/file/221-transparencia-fiscal-no-163-marzo-2020.html)
* The main component of this expenditure is on non-contributory social protection (social cash transfers).
** It excludes health expenditure of the social security system.

However, the collapse in public investment in the health sector has been far more dramatic, falling by 64% from 2017 to 2019, or from USD 306 million in 2017 to USD 110 million in 2019 [4]. Such reductions would have been largely borne by the public health system and constitute expenditures that are vital for a COVID-19 response, such as the construction of hospitals and the purchase of medical equipment.

It was in this context that the IMF Extended Fund Facility (EFF) was agreed and signed in March 2019. Within the framework of this programme, the government implemented a large layoff of public healthcare workers (including doctors, nurses, auxiliary nurses, stretcher-bearers, social workers, and other healthcare workers). The layoffs continued throughout 2019, despite protests by the National Syndicate of Healthcare Workers of the Ministry of Health [5], [6], [7]. It is difficult to know the exact number of layoffs because of the fragmented functioning of the health system, although within the Ministry of Public Health alone, 3,680 public health workers were laid off in 2019, representing 4.5% of total employment in this Ministry and 29% of total central government layoffs in that year [calculated from 8]. Similar reductions in the social security sector were announced in 2019 for 2020, although we have not yet been able to find any data on these reductions.

Thus, it is not a surprise that Ecuador is currently doing so poorly in handling the COVID 19 crisis. The retrenchment of the public health system together with an already weak and retrenched social protection system coupled for the perfect storm. But even more worrying is that, in the face of the pandemic, the government paid 324 million USD on the capital and interest of its sovereign ‘2020 bonds’ on 24 March instead of prioritizing the management of the health crisis. This decision was taken despite a petition on 22 March by the Ecuadorean assembly to suspend such payments, along with a chorus of civil society organizations lobbying for the same [9] [10]. The government nonetheless justified the payment as a trigger for further loans from the IMF, World Bank, Inter-American Development Bank, and Andean Financial Corporation [11]. This is especially problematic given that Ecuador has been hard hit by the collapse of oil prices and, as a dollarized economy, its only control over money supply and hence hope for economic stimulus rests on preventing monetary outflows from the economy (and encouraging inflows).

The payment is also paradoxical given that the IMF and the World Bank are currently calling for the prioritization of health expenditure and social protection and for a standstill of debt service, and have announced initiatives for debt relief and emergency financing [12] [13]. Nonetheless, despite such noble rhetoric, it appears that the precondition for such measures continues to be the protection of private creditors over urgent health financing needs.

Atoning for past and present sins on the path to universalism

The COVID-19 pandemic undoubtedly exposes the inadequacies of existing social policy systems in developing countries and the urgent need of moving towards more genuinely universalistic systems. Ecuador is exemplary given that it has until recently been celebrated as a New Left social model even while its national health system has remained deeply segregated and increasingly commodified.

However, while the IMF and other IFIs have emphasised the importance of placing health expenditures in developing countries at the top of the priority list in the context of the COVID-19 pandemic [12], they have not acknowledged their own continuing roles in undermining these priorities. Indeed, their messaging is often contradictory, given that both the IMF and the World Bank have also repeatedly insisted that developing countries must persist with ‘structural reforms’ during and after the pandemic [13] [14]. In other words, there is no evidence that the course has been reset. As one way to induce a reset, it is important that they acknowledge the roles they have played and continue to play in undermining public health systems and universalistic social policy more generally, lest they continue to repeat them despite the switch to more noble rhetoric.

[1] http://cdes.org.ec/web/wp-content/uploads/2016/01/privatizaci%C3%B3n-salud.pdf
[2] https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(19)30841-4/fulltext
[3] https://www.cepal.org/es/publicaciones/45337-america-latina-caribe-la-pandemia-covid-19-efectos-economicos-sociales
[4] https://coyunturaisip.wordpress.com/2020/03/28/los-recortes-cobran-factura-al-ecuador-la-inversion-en-salud-se-redujo-un-36-en-2019/
[5] https://www.eluniverso.com/noticias/2019/03/06/nota/7219694/trabajadores-publicos-salud-denuncian-despidos-masivos
[6] https://www.elcomercio.com/actualidad/recorte-personal-contratos-ocasionales-ecuador.html
[7] https://www.elcomercio.com/actualidad/despidos-trabajadores-ministerio-salud-evaluacion.html
[8] https://www.observatoriofiscal.org/publicaciones/estudios-y-an%C3%A1lisis/file/220-n%C3%BAmero-de-servidores-p%C3%BAblicos-del-presupuesto-2018-2019.html
[9] https://www.elcomercio.com/actualidad/asamblea-suspender-pago-deuda-coronavirus.html
[10] https://ww2.elmercurio.com.ec/2020/03/24/la-conaie-pide-al-gobierno-suspender-el-pago-de-la-deuda-externa/
[11] https://www.bourse.lu/issuer/Ecuador/34619 (first link under the notices section)
[12] https://www.imf.org/en/News/Articles/2020/04/03/vs-some-say-there-is-a-trade-off-save-lives-or-save-jobs-this-is-a-false-dilemma
[13] https://www.worldbank.org/en/news/speech/2020/03/04/joint-press-conference-on-covid-19-by-imf-managing-director-and-world-bank-group-president
[14] https://www.worldbank.org/en/news/speech/2020/03/23/remarks-by-world-bank-group-president-david-malpass-on-g20-finance-ministers-conference-call-on-covid-19

This article is part of a series about the coronavirus crisis. Read all articles of this series here.

About the authors:

Ana LucíaAna Lucía Badillo Salgado is a PhD researcher at the ISS focusing on the political economy of social protection reforms in Ecuador and Paraguay, in particular the role of external actors in influencing social policymaking. She is also a Lecturer at Leiden University College. mug shot 2

Andrew M. Fischer is Associate Professor of Social Policy and Development Studies at the ISS and the Scientific Director of CERES, The Dutch Research School for International Development. His latest book, Poverty as Ideology (Zed, 2018), was awarded the International Studies in Poverty Prize by the Comparative Research Programme on Poverty (CROP) and Zed Books and, as part of the award, is now fully open access (http://bora.uib.no/handle/1956/20614). Since 2015, he has been leading a European Research Council Starting Grant on the political economy of externally financing social policy in developing countries. He has been known to tweet @AndrewM_Fischer

Micky Mouse economics: how trade theory fails but policy still sells its fairytale benefits by Irene van Staveren

Income inequality is rising globally. Trade has not delivered on its promises. Statistics and econometric analyses begin to show this failure in the global south as well as in the global north. However, IMF economists and the Trump administration stick to the usual policies of ‘workers, just get more education’ and ‘tax cuts for the rich are good for workers’. These policies are inconsistent with the evidence of increasing inequality. When even some filthy rich Americans see this and oppose their own tax cuts, it’s time that IMF economists begin to give consistent policy advice too—to the benefit of workers worldwide.


Worldwide, economic inequality is on the rise—both in incomes and in wealth. See, for example, the first World Inequality Report, published in December 2017. The problem occurs within developing as well as developed countries. And it occurs at a global scale: the world’s richest households get richer at a much faster rate than the global poor, while globally, middle class incomes are stagnating. The only decline in inequality we see is between developing countries as a group and developed countries as a group. But those are just country-level statistics not reflected in the everyday reality of people.

A related problem is the decreasing share of wages in national income. Again, this trend occurs in both developing and developed nations. In other words, the labour share in national income declines and the capital share in national income increases, with China being among the countries showing the strongest trend of this rising factor income inequality.

A logical question, then, is whether this trend is indeed problematic, or perhaps is inevitable for economic growth. If the rich would be more productive than the poor, thereby contributing more to economic development, as neoliberal policy-makers believe and would have us believe, rising inequality is perhaps the price to pay if we want economies to grow out of poverty. According to the dominant economic theory, the answer to the question is yes: let the rich be free to make money because by doing so, they stimulate the economy, create jobs, and let employees benefit too.

This is exactly what Donald Trump promises with his tax cut policy for the rich and large firms. The hardworking American would see his annual wages rise by a few thousand dollars if his boss’ tax bill is cut. So, when Scrooge McDuck gets richer, all inhabitants of Duckburg benefit, according to neoclassical economic theory.

The trickle-down effect: A fantasy

But institutional economists know, since Thorstein Veblen published his Theory of the Leisure Class in 1899, that such a trickle-down effect is a fantasy. The rich protect their vested interests and manage to change the institutional environment in such a way that they benefit as much as possible. Today’s statistics prove him right. The globalised economy of today, in which low-skilled jobs move around following the location choices of capital, and medium-skilled jobs get replaced by machines, the production factor labour is on the losing end everywhere.

To my surprise, this view suddenly receives support from researchers at the IMF in a working paper and in other IMF publications. They state that investment in the world’s stock of capital has become cheaper over time due to technological development. And, of course, the low interest rate in the developed world has helped too. As a consequence, more and more labour is being replaced by relatively cheap machines and software. Hence, however hard an employee or subcontractor works to add even more to the increasing labour productivity, it does not pay out in a higher wage or fee. Moreover, newly created jobs tend to be increasingly flexible jobs—a euphemism for insecure as well as low paid jobs.

This lack of power of labour over total income generated in the economy affects workers worldwide. In China, for example, wage growth is under pressure because the export products are not sold in a competitive world market to the highest bidder. Rather, the entire production process is contracted by oligopolistic multinationals controlling global value chains.

This means that just a few big companies control a whole sector, ranging from food to electronics and from personal care products to sports brands. They pay very low prices for the goods produced in local Chinese-run factories thanks to the threat to end the contract with the factory and move to another factory that keeps wage demands better in control. So, when a few big multinationals outsource their production through global value chains, local contractors, factories, sweatshops and workers are on the losing end.

So, the IMF has in fact admitted that technological development and globalisation disadvantages workers in both the developed and the developing world. This is nothing new for labour economists and development economists, but it is interesting to see this assessment coming from a mainstream and influential development institution.

Interestingly, this view goes against the dominant trade theory which has found strong support in the IMF. This theory predicts that trade is beneficial for low-skilled workers in developing countries—not only in terms of numbers of jobs but also through rising wages. The same theory also predicts that although low-skilled workers would lose jobs in developed economies, the middle class, relying on medium-skilled labour, would benefit.

Well, the disappointment expressed in populist votes by these middle class workers in the US, Europe and other western countries shows that also that prediction has not come true. The only benefit of trade for them is lower consumer prices of imported products—but what is the benefit of cheaper consumer goods if you don’t have sufficient income to buy them?

Of course wages in China have risen enormously over the past two decades. But China’s capital income has risen faster, alongside the capital earnings of shareholders of multinationals who are largely located in the developed world.

So, what was the policy advice that the IMF report came up with? What was the conclusion of the IMF in the face of evidence provided by their in-house researchers promoting this dominant theory that trade and elite development would simultaneously benefit workers and the poor? Amazingly (or not), the IMF’s report’s main conclusion was that workers worldwide should keep on investing in their education. As if one had advised the passengers of the Titanic to move up a deck to stay safe.


What surprises me most is that it has apparently not occurred to the IMF economists that there is a gap between their recommendation and the findings from their own study. I almost feel sorry for those poor IMF researchers. How attached the IMF economists are to out-dated theories. When will they open their eyes for the benefits of shifting taxation from labour income to capital earnings? Or to the disadvantages of free trade of goods and free capital flows when at the same time labour migration is severely restricted?

Perhaps they should watch the short YouTube video by a Disney heiress, Abigail Disney, who informs us about the immoral and ineffective tax cuts for the rich in the US. She states how appalled she is that her already relatively low tax bill is cut even further. She is convinced that this will not help middle class Americans in any way, let alone those with low incomes without access to affordable healthcare. In conclusion, if such rich individuals in the entertainment industry can relinquish their Scrooge McDuck personas to see through the rhetoric, IMF economists should do so too.

Picture credit: Fibonacci Blue. Photo has been edited by cropping and applying a filter.


Irene van Staveren is Professor of Pluralist Development Economics at the ISS. Professor Van Staveren’s field of research included feminist economics, heterodox economics, pluralist economics and social economics. Specifically, her field of expertises lie in ethics and economic philosophy.