There has been much debate lately as to whether or which forms of aid from developed countries to Zambia are truly effective at delivering development. Where the various sides do not disagree apparently is on the need to increase investments in development-related infrastructure by some means, and so that is where I have concentrated my attention. The problem of having aid money coming into the system is that it displaces private capital and is subject to political ideology in its application, leading to waste, inefficiency, and/or corruption. The trouble with not having the aid coming into the system is that its absence will create a shortfall in government revenues such that the existing tax base is insufficient to sustain provision of both social services and infrastructure investments. For as long as the aid continues to come in however, there remains no solid incentive to invest heavily in developing the domestic tax base, and a reliance on the policy of foreign governments to maintain ongoing programmes. I believe that there may be a way out of this trap, one which I hope would be satisfactory to most factions in the aid debate.
The bulk of the money being provided for development purposes is in the form of concessionary loans rather than grants, thus a focus on the portion of capital being contributed which the donors eventually want paid back. The ostensible hope is that after a few decades, they will get their money and Zambia will have reaped the benefits of profitably investing and reinvesting the profits from development projects. Where it all goes wrong is when too much of the original stake gets wasted or stolen, such that the remainder cannot possibly fund enough projects which will grow quickly enough to cover the cost of repayment on schedule however well managed, requiring yet further aid with which to overcome the increased budget deficit. The apparent alternative at that point seems understandably unattractive, being to otherwise raise taxes on the existing domestic economy, further discouraging investment. It is generally agreed that if it were possible, government borrowing that was deemed necessary be done via domestic banks, so as to avoid exchange rate pressures for example, however there simply is not enough money in the Zambian banks to provide the large amounts of credit needed.
I propose that all of these difficulties can be relieved, at least to some degree, by the diversion of some or all of the capital being loaned to the GRZ by other governments into long term deposits in Zambian banks. There it can remain, subject to the same planned eventual withdrawal by the donor after 20 or 30 years, earning enough interest to counteract inflation (they can donate any excess to social services if the interest profits trouble their consciences this time). The increased deposit base will enable those banks to issue credit for all purposes at a rate of 11:1 to domestic borrowers, including the GRZ. Thus each $100 million in deposits by foreign governments can result in an additional $1 billion worth of responsible private sector investments, in addition to the original $100 million required by the GRZ for its own projects (conceivably even still at concessionary terms, though that would affect rates for other borrowers at a 10:1 ratio). Instead of acting as mere brokers between large foreign investors and offshore banks, Zambian banks would be in a position to extend a significant portion of the financing required by the mining, tourism and agricultural sectors being targeted for growth by the GRZ. This would effectively keep a larger portion of the profits from such operations in the country, and thus available for taxation, reinvestment and services. As these new investments mature and begin to show profits, the increased revenues to the GRZ will decrease the need for borrowing and offset potentially higher (non-concessionary) domestic borrowing costs.
I thank you for your time and welcome discussion.
Yakima / USA