Wednesday, 19 September 2018

How important is foreign "assistance" to Zambia?

Yesterday Zambians woke to the news that the United Kingdom had frozen aid funding to the country. This follows allegations of corruption amounting to some $4mn in the administration of the country's Social Cash Transfer (SCT) programme. The SCT is meant to benefit the poorest of the poor in Zambia. Other donor countries (known formally as "cooperating partners") have since followed suit. Ireland, Finland and Sweden have announced the suspension of their own aid initiatives to the country. The president has since called for a speedy inquiry and in the interim dismissed the Minister responsible for overseeing the SCT. 

The diversion of money meant for the poor is definitely something to be upset about. And I, like many other Zambians, are angry that something like this happened. My intention, however, with this post is not to defend the despicable acts of those who were involved in the spiriting away of SCT money. Rather, my intention is to take the opportunity presented by this week's happenings, as ghastly and as indefensible as they are, to engage a long-running narrative on the importance of foreign assistance to Zambia.

Discussions about "cooperating partners" in Zambia often take place under the presumption that foreign aid is gravely important in funding our day-to-day operations as a country. For example, the huge sense of public panic seen this week following withdrawals and threatened withdrawals of donor funding betrays a presumption of such importance. Some are arguing that the president's uncharacteristically swift reaction to the SCT scandal is itself illustrative of the degree of the financial importance of our cooperating partners.

But how important are donor funds for our finances? To get a sense of the orders of magnitude, I have looked at each and every budget address since 2007 (2007 being the earliest date for when budget addresses are available on the National Assembly's Website).

In presenting the national budget to parliament, the Minister of Finance, among other things, presents estimates of expenditure for the year ahead in addition to estimates of revenue that will support such expenditures. Revenue sources are split into two major parts: (1) Total Domestic Revenues and Domestic Financing and (2) Total Foreign Grants and Financing. It's the latter segment that is of importance to this post.

Below I construct several series showing percentage shares of different segments of donor assistance in the total budget. [Ideally I should construct these series using realized quantities as opposed to forward looking estimates (2018 appears in the below series because it's an estimate made in 2017). Sadly, the budget speech rarely contains information detailing expenditures and revenues for the previous year. Information on realized quantities is supposed to be contained in the Annual Financial Reports prepared by the Ministry of Finance. Sadly only 4 of these are available on the Ministry's website. In any case, looking at the 4 available financial reports, one gets the sense that any differences between estimates and realized quantities are small].

Figure 1 below shows the percentage of the total national budget that is due to the donors. The figure shows that in total, donors supported about 30% of the budget in 2007 and this has come down somewhat to settle at around 20% -- which is the average over the 11 year period. Stated differently, the information in Figure 1 shows that the people of Zambia, on average, funded 80% of their country's operations over the period 2007 to 2018.

Figure 1: Total Foreign Assistance as a percentage of the total budget
Source: National Budget Speeches, 2007 to 2018

The information in Figure 1 is a little misleading. Total foreign assistance is made up of two parts -- a part that is given as a grant to government (given "free of charge") and another part that involves loans that are to be paid back. So we shouldn't really think of the loans as "assistance" because we are borrowing that money ourselves and are going to pay it back in the future -- and it's presumably a win-win because the donors stand to earn a return on the transaction. (You wouldn't say your bank was "assisting" you in granting you a mortgage to buy a house).

Figure 2 disaggregates total assistance into a grant component and a loan component. As before, the blue line is total assistance. The orange line shows the pure grant component (given "free of charge") that one can think of as pure assistance. The gray line shows the loan component that I argue is quid pro quo and is not to be thought of in the same way as one would think of a grant.

Figure 2: Different components of total assistance as a % of the total budget
Source: National Budget Speeches, 2007 to 2018

Figure 2 shows that the grant component of aid in the total budget has declined from about 20% in 2007 to 3% in 2018. Subsequently, the component due to donors loaning us money that we will eventually pay back has increased from about 10% in 2007 to somewhere between 15% and 20% in 2017/18. Figure 2 shows that increasingly we are largely effectively self-financing our budget  -- the grant component in the national budget has come down to very low single digits. And it's also quite likely that we could do away with the entire grant component if we set our spending priorities right as a country.

Figure 3 below is a different representation of the information in Figure 2. It shows the percentage split between grants and loans in the total donor "portfolio". Figure 3 shows that the loan component has become increasingly important for donors in their dealings with the country. They've reduced the share of grants in their "assistance" programmes and ramped-up the loan component -- a component that we as a country will eventually pay back. This can hardly be thought of as assistance or aid in the everyday usage of these terms. 

Figure 3: Components of the portfolio of donor "assistance"
Source: National Budget Speeches, 2007 to 2018

To conclude, donor assistance, in as far as funding our national budget is concerned, is not as significant as implied by every day conversations around this topic. The part of such assistance that can be thought of in purely altruistic terms (the grant component) has declined from a double digit budget share in 2007 to a very low single digit share in 2018. It's very likely that we can do away with this component if we got our spending priorities right as a country. 

I also acknowledge that donor assistance, in as much as it may not be important for the overall budget, is important for certain sectors. Anecdotal evidence suggests that a non-trivial portion of public expenditure on education and health is funded by the donors (difficult to pin down exact magnitudes given the aggregated nature in which this information is presented in the budget). Second, donors are also important in funding civil society organisations that play a vital role in safeguarding democratic tenets in the country.