Zambia blazes own economic trail, but does recovery lie ahead? Some economic sectors benefit, but foreign exchange still scarce

A little more than a year ago, Zambian President Kenneth Kaunda caused a stir in the international finance community by abandoning an economic austerity program designed by the International Monetary Fund. Since then, Mr. Kaunda's own austerity plan has apparently fared better than most foreign finance experts and many Zambians thought it would.

The plan - which limits payment of debt servicing to 10 percent of export earnings, gives some business sectors priority access to foreign exchange, and has spurred efforts to diversify the economy away from copper and into agriculture and mining of precious stones - has not begun to solve Zambia's serious financial woes.

But, according to the government, it has brought growth to two key sectors of the economy - agriculture and manufacturing. And there have been no violent riots over shortages of basic goods such as those in the copper belt in late 1986 that led Kaunda to abandon the IMF plan - even though shortages continue.

Since breaking with the IMF, Zambia has seen economic growth at an annual rate of approximately 2 percent, according to preliminary government figures.

``When Kaunda announced the new program,'' says a market vendor, ``we said to ourselves: `Here is an African leader who displays Africa's will to do it alone.'''

If the Zambia plan succeeds, say Western observers, there is fear among foreign lenders that other African nations - some of which are feeling adverse effects of IMF programs - will follow suit. ``Zambia's experiment is going to be a big shock to the IMF and others who are skeptical about our plan. It is quite remarkable that the country has been able to achieve some measure of growth without the IMF program,'' says Vernon Mwaanga, a former Cabinet minister who is now a prominent businessman.

Manufacturing and agriculture are said to have benefitted greatly by having priority access to foreign exchange earnings, which are now allocated by the Foreign Exchange Management Committee (FEMAC). This committee took over from an IMF-designed weekly foreign exchange auction system. Together with a poorly managed economy and a dire shortage of foreign exchange, the auctions sent the value of the country's currency into a nose dive, leading to shortages which sparked the riots.

Still, not everyone agrees the economic program has been successful. In the long-term, says a Western diplomat, ``It looks like the country's economy, under the new plan, is being driven to an intolerable situation.''

The nation faces an annual inflation rate that runs over 50 percent and a burdensome budget deficit. Annual population growth rate is among the world's highest at 3 percent. And foreign exchange is scarce.

Because this is an election year, it would be particularly troublesome for the Kaunda plan to fail. Although there is no active opposition to the President, who has ruled since independence in 1964, last year's riots showed the situation can become volatile.

Caleb Fundanga, a former economics lecturer at the University of Zambia who is now attached to the Cabinet office in charge of the economy, wants more changes.

``I think parastatals [state-run companies] are a sick industry and need rehabilitation. ... We need to increase prices of maize and reduce subsidies. We have to spend money elsewhere and kill inflation pressures caused by the budget deficit. Our public sector also needs to be trimmed a lot,'' says Mr. Fundanga.

Shortages of essential goods are rampant. Price controls on some basics and subsidies on maize meal (the staple food) keep farmers' prices low and give them little incentive to produce more. The black market is everywhere, despite a shutdown early this year of about 187 businesses suspected of black-market dealings.

Zambia's rigid price controls are criticized by Western diplomats and donor agencies who say they hamper economic growth. But Patrick Chisanga, an official involved with setting prices and incomes, argues that the price controls are aimed at protecting the low-income group, especially the urban dwellers.

Most of the funds which had been made available by donor countries to prop up the foreign exchange auction system and assist with Zambia's balance of payments were dropped after the break with the IMF. Zambia is in arrears on its debts and debt servicing to the IMF, the World Bank, and other agencies and countries. It cannot therefore reschedule its debts, and currently only a small amount of bilateral aid and grants is trickling in.

For years Zambia had depended on export earnings from copper for about 90 percent of total earnings. When world copper prices rose to record highs for about four months last year, Zambia got a breather.

But copper reserves are running out. And efforts to earn foreign exchange by diversifying the economy are hampered by the smuggling of key commodities to neighboring countries.