The Reduction of Fiscal Space in Zambia?Dutch Disease and Tight-Money Conditionalities
AbstractDuring 2005-2006, appreciation of the Kwacha, Zambia?s currency, had a significant negative impact on public income. This exchange-rate effect received little notice in the debate over macroeconomic policy. The appreciation reduced fiscal space largely because of binding IMF conditionalities on monetary polices. The fiscal effect had two major revenue components: a fall in the domestic-currency income equivalent of official development assistance and a fall in trade taxes. In 2005, the negative effect on the public budget of the Kwacha appreciation was largely balanced by the positive impact on reducing external debt service. This positive impact ended, however, with debt relief and was almost zero after 2005. Obviously, these revenue effects, though little noticed, had negative implications for Zambia?s ability to achieve the MDGs. The Zambia experience underscores some important general lessons. It indicates, for example, the necessity to coordinate fiscal, monetary and exchange-rate policy in order to achieve sustained growth, employment generation and poverty reduction. Most important, this experience is also a clear example of the dysfunctional consequences of having low-inflation targets rule monetary policy. In the context of currency appreciation, setting limits on the domestic money supply prevents effective exchange-rate management. This necessarily creates, as a by-product, larger fiscal deficits and, consequently, more public borrowing. And these negative fiscal consequences could significantly constrict the resources that some developing countries need to achieve the MDGs.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Policy Centre for Inclusive Growth in its series Country Study with number 14.
Date of creation: Jan 2008
Date of revision:
Publication status: Published by UNDP - International Poverty Centre, January 2008, pages 1-16
The Reduction of Fiscal Space in Zambia?Dutch Disease and Tight-Money Conditionalities;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-09 (All new papers)
- NEP-CBA-2008-02-09 (Central Banking)
- NEP-DEV-2008-02-09 (Development)
- NEP-MAC-2008-02-09 (Macroeconomics)
- NEP-PKE-2008-02-09 (Post Keynesian Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fynn, John & Haggblade, Steven, 2006. "Potential Impact of the Kwacha Appreciation and Proposed Tax Provisions of the 2006 Budget Act on Zambian Agriculture," Food Security Collaborative Working Papers 54475, Michigan State University, Department of Agricultural, Food, and Resource Economics.
- Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-48, December.
- Fynn, John & Haggblade, Steven, 2006. "Potential Impact of the Kwacha Appreciation on Zambia Agriculture," Food Security Collaborative Policy Briefs 54617, Michigan State University, Department of Agricultural, Food, and Resource Economics.
- Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Pattillo, 2004.
"Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa,"
IMF Staff Papers,
Palgrave Macmillan, vol. 51(s1), pages 126-160, June.
- Catherine A. Pattillo & Stephen A. O'Connell & Christopher Adam & Edward F. Buffie, 2004. "Exchange Rate Policy and the Management of official and Private Capital Flows in Africa," IMF Working Papers 04/216, International Monetary Fund.
- Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Andre Lyra).
If references are entirely missing, you can add them using this form.