Zambia’s economic sovereignty: Turning the USAID freeze into an opportunity

The recent US government funding freeze has sent shockwaves through low- and middle-income countries, including Zambia, that have long depended on international aid to implement their social and economic programs. The funding freeze could lead to downsizing or closure of critical programs, placing the most vulnerable populations at risk of declining health and well-being.

The US government has been a major funder of key sectors such as health, education, agriculture, and infrastructure. According to the Center for Global Development (CGD), Zambia received nearly ZMW 13 billion (around 2.3 percent of GDP) in bilateral Overseas Development Assistance (ODA) in 2023 – 70 percent of that from the US. This funding was directed toward various programs and initiatives as supplementary off-budget support (spending outside the national budget). In the 2024 National Budget, US allocations of ZMW 817.6 million represent a seemingly modest 0.5% of our total budget—but constitute a critical 3.9% of the health sector funding. When combined with off-budget support of approximately ZMW 11 billion, the potential financing gap becomes not just concerning but potentially catastrophic for our most vulnerable citizens.

This aid disruption couldn’t come at a more challenging time. Zambia continues to contend with a constrained fiscal space, largely owing to debt service payments, soaring borrowing costs on global financial markets, and sluggish economic growth. Compounding this scenario are the ripple effects of recent shocks—COVID-19, droughts, energy crises, and escalating geopolitical tensions—that have slowed Zambia’s economic recovery and narrowed its tax base, potentially jeopardizing the progress made in domestic revenue mobilization and fiscal sustainability. This means that Zambia still has to rely on external resources to supplement its budget, including support from the US government.

While this abrupt withdrawal threatens essential services and economic programs, it also presents a watershed moment for Zambia to accelerate its path toward financial independence and sustainable economic growth. The chasm left by the US government’s withdrawal from the global stage can not be swiftly filled by other cooperating partners and locally mobilized resources. The antidote to navigating this unpredictable financial landscape lies in developing robust public financial management (PFM) frameworks that will ensure public resources are effectively mobilized and used prudently, leading to better public service delivery and sustainable economic growth. Key elements of PFM frameworks include  laws, policies, strategies, institutions and tools designed to enhance how governments mobilize and spend public funds. These systems help ensure that public resources are used effectively and citizens have a say in how their tax Kwachas are spent.

The government is acutely aware of the nonviability of external resources, particularly in these turbulent geopolitical waters. In response, proactive measures have been taken to significantly boost domestic revenue mobilization and improve how it manages public finances. Recent legislative reforms, such as the Public Debt Management Act of 2022, alongside advancements in fiscal management systems like the Integrated Financial Management Information System (IFMIS), the transition to Output Based Budgeting (OBB), the establishment of a Treasury Single Account (TSA), and the digitization of government processes, have all been instrumental in enhancing financial governance and improving fiscal performance. 

And the reforms are working. Despite substantial challenges and multiple economic setbacks, the government has kept spending under control. While the budget deficit increased slightly from 5.7% of GDP in 2023 to 6.4% in 2024, the reality is that without the robust safeguards provided by the PFM reforms, the deficit would have widened even further.

But more needs to be done to strengthen the link between national economic planning and PFM ecosystems: 

1. Transform mining sector fiscal regime: Mineral wealth must benefit all Zambians through transparent, equitable taxation frameworks that seal loopholes while remaining competitive.
2. Explore innovative strategies for taxing the informal economy: With more than 80% of Zambia’s workforce engaged in informal sectors, implementing thoughtful solutions, such as creating better-integrated ecosystems, could significantly improve compliance and broaden our tax base while also enhancing social protections. For example, ZRA could integrate economic subsystems to improve the visibility of financial transactions and enable taxation of all business activities, including those in the informal sector.
3. Leverage cutting-edge analytical tools: Machine learning and AI are now essential for tax administration, helping authorities identify taxable activities, detect revenue leakages, and improve compliance. Enhanced financial intelligence, innovative auditing, and stronger institutional frameworks can better address resource leakages, including illicit financial flows.
4. Strengthen governance systems, focusing on anti-corruption measures: Every Kwacha lost to corruption is a Kwacha stolen from essential services. Enhancing transparency and strengthening key institutions like ZRA, the Financial Intelligence Commission (FIC), the Anti-Corruption Commission (ACC), the Economic and Financial Crimes Court (EFCC), and other Law Enforcement Agencies(LEAs) will curb loss through graft.
5. Intensify results-based economic management and development: Tying resource allocation directly to measurable outcomes will ensure that limited funds generate maximum impact for citizens. This also entails effective implementation and assessment of key economic policies, such as the 8NDP, the Integrated Public Financial Management Reform Strategy for 2024-2027, and the National Decentralization Policy of 2023.

By fortifying PFM foundations, addressing leakages, maximizing domestic revenue, and ensuring every Kwacha is spent effectively, Zambia can emerge stronger and more resilient than ever before. Other African countries with strong PFM frameworks have been better equipped to withstand external shocks. South Africa’s Public Finance Management Act (1999) anchors accountability through clear rules on budgeting and reporting, earning the country a top-three global ranking for fiscal transparency in a 2024 IMF evaluation. Uganda’s IFMIS has improved budget execution and oversight by enabling real-time financial tracking. These systems not only strengthen fiscal resilience but also support more integrated development planning, aligning national priorities with budgets and enabling data-driven revenue and spending decisions.

The withdrawal of US funding is undoubtedly detrimental, but this crisis also offers an opportunity to finally break the cycle of dependency that has constrained our national potential for generations. True sovereignty comes not just through political independence but through fiscal self-determination.