612 A§77- H/+ Dotn of The World Bank FOR O TCAL USONLY Requ No. P-6248-ZA REPORT AND RECOMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPtDEIT ASSOCIATION TO THE EXECUITIVE DIRECTORS ON A PROPOSED RDIT OF SDR 108.9 MILLION TO THE REPUBLIC OF ZAMBIA TO SUPPORT ECONOMIC AND SOCIAL ADJUSTHNT FEBRUARY 15, 1994 MICROGRAPHICS RePort N~o: p- 6248 ZA Type: PR This document has a restited distribution and may be nsed by recipients only In the perfonrance of their official duties. Its contents may not otherwbe be disclosed witbou World Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Zambian Kwacha (K) US$1 - K660 (January 1994) FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS BOZ Bank of Zambia CG Consultative Group for Zambia DCA Development Credit Agreement EC European Community ESAC Economic and Social Adjustment Credit ESW Economic and Sector Work GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund MMD Movement for Multiparty Democracy NCDP National Commission for Development and Planning NGO Non-governmental Organization Ppp Policy Framework Paper PIRC I First Privatization and Industrial Reform Credit PIRC II Second Privatization and Industrial Reform Credit PPM Programme to Prevent Malnutrition PTC Posts and Telecommunications Corporation SDR Special Drawing Rights SIDO Small Industries Development Organization UNDP United Nations Development Programme ZA Zambia Airways ZCCM Zambia Consolidated Copper Mines ZESCO Zambia Electricity Supply Corporation ZIMCO Zambia Industrial and Mining Corporation ZIMOIL Oil Import Parastatal ZPA Zambia Privatization Agency ZAMBIA FOR OmCIAL UsE ONLY ECONOMIC AND SOCIAL ADJUSTINT CREDrT Table of Contents SUMM%ARY ..............................................1 i-i PARr I COUNTRY ASSISTANCE STRAT3GY A. RECENT ECONOMIC AND SOCIAL PERFORAANCB .... ........... 1 B. BXKI ENAL ENVIftONM1ENT ...................................... 5 C. ZAMBIA'S DEVELOPMENT OBJECTES AND POLICES ........ 8 D. BANK GROUP'S ASISTANCE STRATEGY . ............. 9 E. AGENDA FOR BOARD CONSIDERATION ................... 17 PART It THE PROPOSED OPERATION A. POUCY AGENDA ...................... ............. 19 1. Restoring Macro-economic Stability ....... ....... 19 2. Private Sector Supply Response ....... .......... 22 3 Restructuring Social Services ................... 25 B. FEATURES OF THE PROPOSED OPERATION . ............... 30 C. BENEF n ANn D R1S .............................. .. . . 33 D. RECOvENDATION ..... ......................... .. . 34 .~~~~~A ;Wi Lg G ;pa,ea>esrsea.:te pn eponsistin. Lwien MeunDenninsg AP6D O),istheemanaogengen (Senior This docement has a redt*ed ditibution and may be ued by recipients on in the pedbrmaum |of ther of&il duties. rs contents may not otherwis be ditbsed without Woma i Banis authodate M ZAMBIA ECONOMIC AND SOCIAL ADJUSTMENT CREDIT Table of Contents (cont'd) ANNEXES ANNEX I Leter of Development Policy ANNEX II ESAC Policy Matrix ANNEX m Development Objectives and Instruments ANNEX IV 1. Selected Indicators of Portfolio Performance and Management 2. Bank Group Fact Sheet 3. Priority Poverty Indicators 4. Resources and Expenditures 5. Poverty Indicators 6. Key Indicators 7. Note on GDP Estimates 8. Balance of Payments 9. Balance of Payments 10. External Financing Requirements 11. Debt Stock 12. Key Exposure Indicators 13. Status of Bank Group Operations in Zambia 14;. Statement of IWC Investments 15. List of Closed SALs and SECALs 16. Supplementary Data ZAMBIA ECONOMIC AND SOCIAL ADJUSTMENT CREDIT SUMMARY Borrower/Beneficiary: Republic of Zambia Amount: SDR 108.9 million (Ub$150 million equivalent), on standard IDA terms, with 40 years maturity. Description: The objective of the proposed credit is to support implementation of the next phase of Zambia's structural adjustment program. Building on good progress In implementation of the three adjustment credits approved for Zambia over the past three years, the proposed credit would provide balance of payments financing, and would support reforms in the following areas: (i) continuing efforts to restore macro-economic stability; (ii) further actions to generate a supply response through the removal of bottlenecks to exports and agricultural expansion, including development of a market for state land, and (lii) basic policy changes removing structural obstacles to the delivery of vital social services. Benefits: Zambia's ongoing adjustment program is vital to achieving macroeconomic stability, restoring economic growth through a supply response from the private sector, and meeting its external financing requirements. Given Zambia's heavy debt burden, there are no simple, easy or quick solutions to its economic problems. The measures agreed under the proposed credit for maintaining macro-economic stability are essential to consolidate the progress made In containing inflation and lowering interest rates. The measures agreed under the proposed credit for encouraging agricultural expansion and export production remove basic constraints hampering a supply response and if accompanied by macro- economic stability will contribute to a restoration of economic growth, which is projected at 5% per annum over the next five years. The measures agreed under the proposed credit for restructuring social service delivery are essential not only for beginning the longer-term process of increasing investment in human capital, but also for assuring political sustainability of the overall structural adjustment program. -ii- Risks: As with any structural adjustment program, Zambia's program carries with it important risks, including the risk that the program will not be implemented in full and on schedule, and the risk of adverse exogenous factors, particularly weather, low copper prices, low external assistance or Inadequate debt relief. Although the program has caused significant hardship for some sections of the Zambian population, a full-scale political reversal as in 1987 is unlikely, since commitment to adjustment is strong at the highest levels of Government, and the alternatives are not obvious. However, mid-level disagreements and implementation difficulties could cause slippage or even policy impasses. The program requires extraordinary levels of support from the international community, which will only materialize if donors continue to perceive Zambia's overall performance in a highly positive light. In the medium term, a greater degree of sustainability wrill require significant debt relief, including debt forgiveness. DIsbursement: The credit would be disbursed in two tanches of US$75 million each. The first tranche would be disbursed Immediately after effectiveness. The second tranche Is expected to be disbursed six months later, subject to satisfactory fulfillment of the specified conditions. Disbursement would follow standard Bank procedur*.. Sor Imports. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED ECONOMIC AND SOCIAL ADJUSTMENT CREDIT TO THE REPUBLIC OF ZAMBIA 1. I submit for your approval the following memorandum and recommendation on a proposed International Development Association (IDA) credit of SDR 108.9 million (US$150 million equivalent), on standard IDA terms with 40 years maturity, to the Republic of Zambia, in support of its structural adjustment program (SAP). Part I of the document discusses the Borrower's development prospects, economic and social performance, and priorities under the program and presents the Bank Group's country assistance strategy. Part II of the document discusses the proposed operation. 2. The proposed Economic and Social Adjustment Credit (ESAC) would be the fourth structural adjustment credit to Zambia since the clearance of arrears in March 1991. The 1991 Economic Recovery Credit (ERC) emphasized macro-economic stabilization and market liberalization. The June 1992 and June 1993 Privatizatlon and Industrial Reform Credits (PIRC1 and PIRC2) strengthened the stabilization effo;t and shifted the emphasis to privatization and parastatal reform. All three credits contained minor elements for strengthening social services and safety-net programs. This fourth operation is aimed at supporting (i) continuing efforts to restore macro-economic stability; (ii) further actions to generate a supply response to the adjustment program, through the removal of bottlenecks to export production and the development of a market for state land; and (iii) basic policy changes to remove obstacles to the delivery of vital social services that are essential not only for beginning the longer-term process of Increasing investment in human capital, but also critical to assuring the sustainability of the overall structural adjustment program. PART I: COUNTRY ASSISANCE SIRATR GY A. RECENT ECONOMIC AND SOCIAL PERFORMANCE 3. At the time of Independence in 1964, Zambia was one of the more prosperous countries in Africa. However, a combination of deteriorating copper prices, an unwillingness on the part of the Government to adjust, and excessive public sector dominance resulted in a dedine of nearly 50% In per capita Incomes and a dramatic increase in poverty. The Govemment used up its intemational borrowing capacity to support unsustainable levels of consumption and unproductive public sector investments. This left the country with an inappropriate economic structure and an extremely high level of external debt. Various reform efforts were attempted in the 1980s, but were abandoned when the Government abruptly changed course in early 1987. After a two-year hiatus, a policy dialogue with the Bank and IMP resumed in 1989, culminating in resumption of normal relations in March 1991, with the clearance of arrears and approval by the Bank's Board of Executive Directors of the ERC of US$210 -2- million. The commitment of President Kaunda's government to the program was short- lived, and disbursements had to be suspended again In September 1991 because of a policy impasse at mid-year on maize subsidies, resulting in a new accumulation of arrears to the Bank. With the election of the Movement for Multi-party Democracy (MMD) in November 1991, the new Zambian Government under President Chiluba re-af- firmed its commitment to policy reform, cleared arrears to the Bank in January 1992, and agreed a new Policy Framework Paper (PFP) with the Bank and IMP for the period 1992- 94. Consequently, normal disbursements under IDA operations resumed in February 1992. 4. Adjustment Since November 1991, President Chiluba's Government has accomplished an extraordinary turnaround in economic policy. In just a few years, Zambia has dimantled nearly all controls and moved to market-based pricing throughout the economy. Price controls are gone. The exchange rate is based on supply and demand. LWort ad export licgnlg have been eliminated. Interest rate- have been decontrolled. All f including maize, are set entirely by market forces. An ambitious program of privatzation has been launched that has already brought 10% of the commercially oriented parastatals to sale or final negotiations. Tariff rates have been lowered and compressed. Service delivery ministries are being decentralized, and the size of the dvil service is being reduced. S. Considerable progress has also been made in the allocation of public spending. Consumer and producer subsidies which claimed over 10% of the budget just a few years ago, have been eliminated. Subsidies implicit in parastatal pricing have also been eliminated. Parastatals are now self-financing, and their prices are market-determined. The share of expenditure on defens and secr'rity has also been reduced (from 19% in 1990 to 10% in 1993), and the allocation for defense is now shown explicdtly in budget documents. Efforts are also underway to doentat the management of public expenditures to the local agencies of central ministries to improve the delivery of services, as a first step to the full decentralization to district councils. The results of de- centralizing the revenue-generation aspects have been mixed, however, because while some larger coundls have managed to mobilize resources from local sources of taxation, the smaller ones have found the transition difficult and continue to receive subventlons from the central government. 6. l rfm is a vital element In the Government's effort to raise efficiency and restore economic growth. The privatization program covers all parastatahls, approximately 160 companies. All are potentially for sale, with no restrictions on ownership other than those needed to curtail monopolies and encourage broad-based ownership. At least ten of the larger parastatals will be sold through public flotations. In copper mining, Government policy is to rely on private Investment to develop new reserves. A study of the options to privatize the copper company (ZCCM) has just been completed, and the Government expects to use the results to develop a plan setting out the future role of the private sector in copper mining. To date, six parastatals have been fully privatized and flnal negotiations have been cou.pleted on another ten. A further 32 companies have been offered for sale. In 1994, the Government expects to complete sales oi 25 enterprises and to bring another 20 to the point of sale. Z:MCO has been transformed Into a holding company with a limited mandate and will be phased out. -3- The management of parastatals in the process of privatization will be tranfred to a new unit at the Zambia Privatization Agency to ensure that privatization proceeds expeditiously. ZIMCO's former holding companies - INDECO, NIEC and NHDC - ceased operation in March 1993 and are being legally wound up. The public utilities are expected to remain in the public sector for the next few years but since mid-l993 have been freed of political interference in their pricing poilcies and management and rceive no public subventions. 7. Drought: The resourcefulness of the new government was amply demonstrated in their response to the severe drought which struck the region in 1992. Zambia's maize crop fell to one-third of domestic requirements, necessitating additional external assistance of US$300 million and presenting a daunting challenge to external and internal transport and distribution. Zambia, with considerable help from the International community, did well on all counts. The donors responded quickly. The food was distributed on time, transported to where It was needed, and made available to all the population, including those without resources of their own. Working through local committees consisting of NGOs, public servants, and other civic leaders, the Program to Prevent Malnutrition (PPM) was able to reach nearly all vulnerable groups. The result was that famine never happened and there was renewed confidence in the ability of the public and private sectors to work together toward a common goal. 8. StabiIation: Progress on stabilizing the economy has been uneven. In 1992, Infiation was very high (191%) and in the first half of 1993 was increasing at an annual rate of over 200 %. But the money supply has been well contained since June 1993, and inflation has dropped sharply. After July 1993, when the effects of the monetary contraction took hold, the Inflation rate over the next four months fell to below 20% on an annual basis. This was accomplished by holding fast to a cash budget system in the face of considerable political pressure. The accomplishment was not without cost. The resultant monetary contraction created a severe recession just when the economy was struggling to recover from the drought, and even resulted in a short-term appreciation of the exchange rate. The latter was corrected by reducing foreign exchange sales, and the exchange rate has returned to more appropriate le ;els in recent months. As a result, inflation increased somewhat to 4% in December, and 6% in January, but taking an average of the past six months, the annualized rate has dropped to about 40%. Interest rates also fell sharply from over 200% during the summer to below 70% by the end of the year, but are still positive in real terms. 9. Investment: The Government's commitment to adjustment is paralleled by dramatic progress in developing new approaches to investment lending. In agriculture, the Agriculture Sector Investment Project (ASIP) represents an innovative approach to resolving the problem of fragmentation of donor investment assistance. In this integrated sector approach, the entire sector investment program constitutes the project.' It is prepared entirely by local stakeholders and supported by all donors active in the sector. Procurement, accounting, auditing and reporting procedures are being standardized for use by all donors. A similar approach is under preparation in the health sector. It is expected that this approach will become the model for improving implementation and coordinating investment assistance In all sectors. Zambia is also playing a leading role in incorporating systematic beneficiary consultation as a normal -4 part of lending operations, as one of the follow-up activities to the Wapenhans Report. Under this approach, potential beneficiaries from development activities are consulted and their views taken Into account both in developing the activity and during implementation, and the feedback is built into the design of future programs. These initiatives reflect the understanding and commitment of the new government to the principles of a liberalized economy to foster private sector growth and a revitalized public sector aimed at providing services and not employment. 10. Key social indicators worsened during the eighties. School enrollment fell from 96% of school age population in 1985 to 85 in 1991, and infant mortality increased from 95 per thousand live births in 1980 to 107 in 1990. This was due to poor sector policies and declining spending in the social sectors. In early 1993, the Government decided to make demonstrable progress in the delivery of social services a top government priority - - a decision not only warranted by the steqdily worsening poverty throughout the country, particularly in urban areas, but also essential for the sustainability of the overall adjustment program. Already, some key input indicators have improved, such as the number of school places (the rehabilitation of at least 400 schools has been undertaken in the last two years) and supplies for education (300,000 new text books were distributed in 1993) and primary health (funding for drugs have more than doubled in the 1994 budget). Improvements In output indicators are expected as budget allocations and service delivery Improve. Por example, the number of new cholera cases dropped by more than 50% in the 1993/94 rainy season compared to previous years. 11. Overall, since November 1991, Zambia's performance record has been one of strong accomplishment, particularly considering the Government's limited im- plementation capacity, a catastrophic drought in 1992, failing copper prices in 1993, and continued hardship for the bulk of the population. Much remains zo -e done, but the Government has shown a persistent commitment to a strategy of nu..woeconomic stability, economic growth, and pov'vrty reduction based on a dynamic private sector as a source of output and employment growth and a restructured public sector as a source of supporting infrastructure and social services. 12. Sustainability. There are four interlocking determinants to achieving long-term sustainability. First economic growth needs to resume. Domestic policies to maintain the dedine in inflation, improve public sector implementation capacity, and foster the productive potential of both rural and urban areas through improved infrastructure and social services remain central to Improving the prospects for growth. Increased domestic resrouce mobilization, through pro-savings policies and the restructuring of Government revenues and current expenditures, will be critical in increasing domestic savings from its current level of 11% of GDP to 17% by the end of the decade. If Zambia can consistently pursue these policies, it should be able to break inflationary expectations and initiate a virtuous drcle of lower interest rates and higher investment and exports, leading to lower inflation and increased growth. 13. Second continuing political support for the program in Zambia will be needed. This will not be easy to achieve, as the tightness of the resource constraints and the political demands for improvements in living standards will challenge the political ability of the Government to stick to the reform program. The Government continues to enjoy -5- broad political support, but there is growing uneasines3 over the slow response from the economy, aggravated by the drought and the difficulties in containing inflation. Politial sustainabllity will require Improvements in living standards and demonstrable progress towards improved delivery of social s rs ices. 14. Third until growth and adjustment eliminate the external financing gap, the Zambia program will continue to require extraordinary financial support from a broad coaliticn of donors. Given Zambia's debt burden, even the maintenance of economic activity requires very large inflows of foreign aid. The balance of payments position, under the most optimistic scenarios, is expected to remain tight because even under generous Paris Club rescheduling, Zambia will continue to transfer between 10% and 15% of its domestic production abroad as debt service for the remainder of this decade and beyond. Maintaining this external support will require continued strong policy performance. For those bilateral donors whose levels of support are heavily Influenced by governance considerations, it will also require a strong performance by Zambia in these areas. These requirements have been met to date, but there is little margin for error. 15. Finally, if Zambia is to draw back from living perpetually on the brink of unsustainability, debt relief, including debt forgiveness, will be needed. Ju terms of reducing the debt burden, the commercial buy-back operation scheduled for early 1994 wll help, but the major creditors are the Paris Club and the multilaterals. Most donors at the December 1993 CG recognized that further debt relief, including forgiveness of debt, would be needed for the Zambia program to achieve a more robust sustainability. Innovative approaches will need to be examined to ensure that Zambia can make a transition to self-sustaining economic growth wk.le phasing down the currently exceptional levels of external assistance. The basis for such innovative approaches in debt relief will remain Zambia's own efforts to redress its economic problems through an aggressive adjustment program and maximum reliance on its own resources. B. EXTERNAL ENVIRONMENT 16. Zambia's economy remains part;cularly vulnerable to the external environment, including the weather, regional developments, the price of copper, debt-service obligations, and the inflow of foreign capital and aid. Changes in these parameters will continue to influence significantly Zambia's development prospects. 17. Weather: With agriculture playing a key role in the economy, overall growth and rural incomes will continue to be greatly affected by variations in the weather. This was highlighted by the effects of the 1992 drought, which required massive food imports, following, as it did, several years of poor agricultural production. Improving the country's food security depends partly on operating and maintaining an efficient early warning system with respect to grain production and availability. Such a system is currently in operation on a regional basis in collaboration with other members of the Southern African Development Community (SADC). Moreover, with the current policy of encouraging agricultural production, Zambia should normally be a surplus food producer with significant stocks to be used in the case of a national emergency. -6- 18. Regonal development.: As a lnd-locked country, Zambia relies heavily on transport routes through neighboring countries. Thus, collaboration with neighboring counties is of crucial importance. Such issues are being addressed in the context of the SADC and the Preferential Trade Area for Eastern and Southern Africa. Efforts are being made by thes- regional organizations to achieve greater regional Integration. An initiative to encourage cross-border investment and trade is under preparation with the sponsorship of the African Development Bank, the European Community, the IMP, and the World Bank. 19. Copper price: A sharp fall in the price of copper In mid-1993 exerted considerable pressure on the balance of payments. The drop in export eamings created debt-service problems and necessitated higher levels of external assistance. Overall, prices have followed the general trend of the projections, but the present price Is below projections made at the time the World Bank arrears were cleared in 1991, and the price is now projected to remain 648% below previous projections for the remainder of the decade (as shown in the Figure below). A price rebound is now projected to occur in 1995, but turning points are notoriously difficult to project. Even though non-copper expors are projected to grow at nearly 10% in real terms, copper still accounts for over 75% of Zambia's merchandise exports, and Zambia's overall financing requirements will remain critically dependent on the price of copper for the next several years. Figu: Cppe Prie (Currn Us$) 1.4 1.3- 1.2 A (1980-92A 11.1 10 redn 90. 0.8 u 0.7 0.0 0.5 . . . . . 1980 1982 1984 1980 1958 1990 1992 1994 1990 1998 200 20. External assistanice: Over the next five years.. substantiall foreign aid will be needed to finance Zambia's public investment. In later years, however, a larger share of the Investment will be financed out of domestic savings, whic-h are projected to increase from 11% of GDP to 17%/ by the end of the decade. These targets are achievable because there Is scope for increasing public sector saving by increasing -7- revenuea and restrair.ing expenditure on consumption and because non-traditional export growth should eventually permit a better balance between exports and imports. However, policies to stimulate private saving will take time to have an impact, though an increasing share of domestic saving will eventually come from this sector. External assistance needs are particularly difficult to predict in Zambia's case because of the heavy dependence on copper, the large debt service burden and the practice of major creditors of dealing with debt relief issues in a short-term time horizon. 21. Bilateral donor support for Zambia: The maintenance of extraordinary levels of bilateral financial support depends on those donors perceiving Zambia as performing strongly not only on economic issues but also on non-economic issues. This was the case following the successful democratic transition in November 1991. However, the introduction of a state of emergency early in 1992 caused a number of bilateral donors to see Zambia in a different light. In the latter half of 1993, bilateral donor concerns about corruption, particularly allegations of drug trafficking at high levels of government, threatened to reduce donor support substantially. In January 1994, the Government made a number of personnel changes and proposed new procedures for handling such issues in the future. These include changing the Anti-Corruption Commission procedures so that it will report to Parliament as well as the President and making public the substantive findings of the Commission, including where no basis has been found for legal action. Bilateral donors have expressed willingness to participate in a Consultative Group meeting in March 1994 aimed inter aliU at closing the remaining financing gap for 1994 of some US$100 million. 22. Debt reliet When Zambia approached the international community in 1989, it was clear that exceptional measures would be needed if Zambia were to meet its international obligations and still have sufficient imports to achieve sustainable growth. Rather than reduce the stock of debt, Zambia's creditors opted in 1991 to deal with the immediate financial needs with exceptional levels of balance-of- payments assistance and a Rights arrangement which would defer payment of the IMF arrears until 1995. The Paris Club added generous debt rescheduling. As a result, Bank arrears were paid in full, and most Fund arrears ($1.2 billion) were deferred under the Rights arrangement. This allowed the resumption of assistance to Zambia's adjustment program without an exceptional (and potentially time- consuming) alteration in international debt policies. 23. With an outstanding debt of about US$7 billion, Zambia is one of the most indebted countries in Sub-Saharan Africa. In 1990, only Mozambique, Tanzania and Somala had higher debt-to-GNP ratios in Sub-Saharan Africa. Zambia's position has deteriorated further since 1990 due to the fail in national output and the depreciation of the local currency. The debt-to-export ratio is about 6 to 1. Since 1991, Zambia has benefitted from debt relief and rescheduling opera'ions, but the debt-service ratio is still high, particularly in light of the dwindling export earnings from copper. In 1991, the debt service ratio was exceptionally high - 51.4% of exports - due to the need to clear arrears with the World Bank to facilitate the resumption of operations. In 1992 and 1993, the debt service ratio still amounted to an average of a third of export revenues, even after rescheduling. -8- 24. About 43% of Zambia's debt is owed to multilateral creditors, including the World Bank Group and IMP. The Fund, with 43% of total multilateral debt, stands as the major creditor, while IDA and IBRD account for 24% and 11%, respectively. The rest is shared by nine other multilateral creditors. Most of the non-multilateral credit is owed to bilateral donors mainly belonging to the Paris Club. USSR, China, Saudi Arabia and Iraq are the major non-Paris Club creditors. Short-term credit accounts for about 12% of the total debt. On the other side, 77% of the debt is owed by the Government; borrowing by public corporations, including ZCCM and ZIMOIL, amounted to 12%. 25. When In 1991 the World Bank arrears were cleared and the IMP's Rights arrangement was set up, no decisions were taken as to how Zambia's debt situation would be addressed later in the decade when Paris Club debt repayments are scheduled to increase and when the IMF Rights disbursement will need to be repaid. Options for this next round of debt policy decision-making will need to be assessed over the coming year and a dialogue resumed on these topics. 26. The arrangement made in 1991 is still functioning, but it has been strained by the 1992 drought, the 1993 fall in the copper price, and the growing donor difficulty of justifying increased aid budgets to their legislatures. Keeping this external financing strategy in place will be one of the biggest challenges to the success of the program. On the one hand, Zambia needs all of this assistance just to keep going. Any substantial shortfall would lead to debt service arrears, further reductions in aid, and eventual suspension. On the other hand, the exceptional levels of support being asked of IDA and the donors will require an equally exceptional level of performance by Zambia, both in terms of policy and implementation. The Bank will monitor both the degree of donor support and the progress on debt discussions. Our efforts will be directed at helping to clarify the choices for the International community between assistance and debt relief while keeping an open dialogue between these partners and the Zambian authorities to ensure that the quality of the government program merits the external support being requested. C. ZAMBIA'S DEVELOPMENT OBJECIIVES AND POLICIES 27. The objectives of Zambia's development program are to achieve sustained economic growth while alleviating poverty. To achieve these objectives, the Government is pursuing a policy of structural adjustment that combines trade policy reforms, deregulation, and exchange rate adjustment aimed at enhancing the competitiveness of the non-copper sectors with stabilization policies designed to restore fiscal and balance of payments equilibrium and price stability in one of the most comprehensive adjustment programs in Africa. Efforts are being made to downsize the public sector and to enhance its efficiency, while stimulating private sector development. The Government eliminated subsidies, decontrolled prices, and revised business-related laws, rules and regulations. Zambia has completely decon- trolled the exchange rate with the establishment of bureaux de change, freed interest -9- rates, reduced the budget deficit (excluding grants and Interest) from about 7% of GDP in 1991 to 3% in 1992, and retrenched 12,000 redundant public employees. These achievements were made despite the devastating drought of 1992. 28. Given the substantial deterioration in the living standards over the past 18 years, the Govemment has recognized that it cannot continue to undertake the necessary stringent economic measures without ensuring that the bulk of the population begin to experience an improvement in welfare levels. Initial findings from the ongoing Poverty Assessment indicate that the adverse Impact on the urban poor has been particularly severe. The welfare decline, combined with the expectations associated with political liberalization, means that the political sustainability of the whole nform program still hangs in the balance. 29. The Government's sector strategies reflect how sectoral issues can help to address the problem of growth with poverty alleviation. Agriculture is pursuing a dual strategy of clearing remaining obstacles to commercial farming (such as developing a market for State land) while helping small-scale producers with inproved access to research and extension. Infrastructure is focusing on two critical bottlenecks for Zambia's development: urban service delivery and improvements in road infrastructure. Industry and energy will focus on the remaining policy areas for reform in mining, financial sector and the public utilities while aiming to help rehabilitate key supportive services such as power and energy supplies. 30. While the measures taken to promote agriculture, exports, and the private sector generally should lead to sustainable and indeed rapid growth in key sub- sectors of the economy, this impact will neither be widely spread nor dramatically apparent in the short term. Focusing on improvements in delivery of urban and social services can provide some short-term alleviation. More broadly, a safety-net that builds on the successful approach to alleviating the impact of the 1992/93 drought (a combination of labor-intensive infrastructure rehabilitation with transfers for the indigent poor) with a reorientation of social services to provide responive services at the delivery point (the health center, the primary school, the community water system), will offer tangible evidence that less government can also mean better government in precisely those areas that are critical to the welfare and economic prospects of the poor in Zambia. Budget restructuring and a reorientation of Government delivery capacity to getting results in the field through decentralization and a partnership with successful NGOs and the private sector will improve the distribution of social welfare significantly and quickly and will lay the basis for the longer-term economic participation of the poor in Zambia's recovery and growth. D. BANK GROUP'S COUNTRY ASSIANCE STRATEGY 31. The goal of the Bank's strategy for Zambia is to assist the Government to achieve sustainable economic growth and to reduce poverty. This transates Into a three-pronged strategy of direct asistance aimed at: (a) supporting policy reform and providing balance of payments support through adjustment operations; (b) improving the enabling environment for private sector growth through project -10- investments in infrastructure and human resources; and (c) targeting the poor and vulnerable groups with speclfic programs in agriculture and sodal services. These interventions are mutually supportive and reinforcing. The Bank has supported the formulation and implementation of Zambia's SAP through a combination of adjustment and project lending, and formal and informal economic and sector work. In addition, the Bank strategy includes a leadership role in aid coordination in terms of catalyzing and facilitating constructive solutions to Zambia's external financig problems with other donors and financing partners. To help achieve a sustainable external balance, the Bank is both a major provider of assistance and is chairman of the Consultative Group. 32. Status of Policy Daogue. The policy dialogue since 1991 has been excellent due to the new govemment's understanding of, and commitment to, an economic reform program based on private sector market allocation of resources and by the new government's willingness to move boldly where the previous government had been tentative. There have, however, been occaslonal differences of view on timing and emphasis. In some cases, as in the early days of parastatal reform, when the Government was considering the repeal of whole secdons of regulatory law, the Bank found itself counseling a slower pace of reform. In some cases, as with the wage decisions in 1992, the Bank felt that the Government went further than was necessary to assure political support for the program. In some cases, as with the social dimensions of adjustment discussions In 1992, the Bank was Initially unable to persuade the Government of the critical importance of the issue for the overall success of the adjustment program. In some cases, there were differences in viewpoint as to how quickly reforms could be effectively implemented or how quicldy mid-level disagreement within Government as to the implementation of policies could or should be overcome. Overall, however, the policy dialogue is frank and extremely collaborative. 33. Portfolio Implementation: As of January 1994, there were a total of 14 Bank- financed projects and 2 IFAD-financed projects under implementation. Of the total portfolio of US$545 million, there was an undisbursed balance of US$298 million as of December 31, 1993, including US$183 million of investment credits. The overall portfolio performance ratings improved slightly in the past year. Most of the projects in the portfolio were approved over the past three years following the clearance of arrears in 1991. The remainder (those approved before 1987) were seriously delayed by the suspension of disbursements. The start-ups of two recent projects were considerably delayed because of the Government's failure to meet effectiveness conditions in time. 34. The implementation of the IDA-financed projects is being carried out with maximum Govemment and beneficiary involvement and ownership to ensure the sustainability of the intended development impact. The first Country Portfolio Performance Review (CPPR) was held In February 1993, and the recommendations are being implemented. A second CPPR Is scheduled for March 1994. The main reasons for ineffective implementation are procurement difficulties, non-availability of counterpart funds and general weak capacity of the civil service. To address these Issues (1) a seminar for project staff on procurement and disbursements was held -11- and regular follow-up visits by Bank procurement staff are taking place; (2) Bank guidelines have been distributed and discussed with all project implementers; (3) the number of higher level staff in the Bank's Resident Mission have been increased, with more specific responsibility for facilitating implementation; (4) computerized project management is being promoted and task managers and project staff trained in ItU use; and (5) complex projects have been restructured (e.g. Railways IV and Agicultural Research and Extension) and non-performing project cancelled (e.g. Fisheries). 35. Portfolio management strategy aims to (1) Improve supervision of ongoing operations and (2) promote Government leadership in design and implementation through joint Government/Bank/donor reviews, either annual or mid-project, and through the integrated sector approach. The Zambia program is also consistently applying systematic beneficiary consultation to ensure the relevance of planned and ongoing project interventions to the poor, and to achieve better results on the ground. To strengthen Implementation capacity, projects are designed with the object of drawing on and developing local resources to the maximum extent. To strengthen the public sector more broadly, the Government has adopted a Public Service Reform Program with support from several donors. For its part, the Bank i8 financing the Financal and Legal Management Upgrading Project and the Bank (following a Government request) is considering adding a Public Sector Management Project to the lending program. 36. For the future, adjustment lending will continue to be a major part of our program (along with donor coordination) because of the extensive macro-economic reform agenda and the pressing balance of payments requirements. We expect to submit an average of one adjustment operation a year. Over time, given strong economic performance by Zambia and appropriate debt relief, the amount of adjust- ment lending can be scaled down gradually. 37. The tining and sequencing of Zambia's reform program reflects steady progress in dealing with a huge bacldog of problems: MAt the outset of the program in 1991, the Government gave priority to macro- economic stabilization and market liberaliiation, and thiswas the focus of IDA!s ERC. The Government's reform efforts then shifted to privatization and parastatal reform, while attempting to strengthen the stabilization effort in the midst of the century's worst drought. These efforts were supported by PIRCI (1992) and PIRC2 (1993). While continuing efforts to restore macro-economic stability and encourage a private sector response, the Government during 1993 launched a major effort to deal directly with structural constraints to the delivery of social services and the strengthening of the social safety net, as well as to develop sector investment programs in agriculture and health. These efforts would be supported by the proposed ESAC and by sector investment credits from IDA. -12- a In the coming year, the Government plans to focus on policy reforms In mining and the financial sector, in particular to assist the Government to attract private capital and management Into the mining sector through privat- izatlon of ZCCM and new private sector ventures and to provide support for broadening and deepening the capital market by reforming policies on development finance and contractual savings institutions. It also plans to expand the sector investment approach to environment and education. PFor 1995, It Is expected that the reform agenda will continue with reforms in sectors already covered, with Increased emphasis on removing the regulatory and institutional constraints to labor absorption, including expanding opportunities for the informal sector and self-employment, and further expansion of the sector investment approach to other sectors such as water supply. 38. Continuity of balance of payments assistance plays an unusually important role because Zambia has limited capacity to adjust to a shortfall in external financing. Liquid reserves are only about one month's worth of Imports, and sometimes less. Reducing the level of Imports is not easy because a large fraction is needed for the minimum requirements of the copper mines. Imports not needed for copper production and not funded by donor project funds are only about US$700 million. Thus, a shortfall of US$100 million in external financing - with no change in debt service - would force a 15% decrease in available imports, which would put the economy in a tailspin. Therefore, any substantial and prolonged shortfall in extemal financing can be expected to result in debt service arrears which will, in tum, lead to an unraveling of the remaining external support. 39. The short-run policy measures supported by adjustment operations will be followed up and deepened in economic and sector work (ESW). For instance, the policy measures proposed under ESAC to improve social service delivery are based on prior preparation work in the health and education sectors and will be supplemented by sector work and sector investment operations in health and education to taclde the intra-sectoral longer-run measures. Similarly the export measures and the land reform measures supported by ESAC will be followed up in the agriculture sector investment program. 40. In moving to a greater reliance on the private sector, the Bank has supported considerable sector work on how to remove and improve business regulation and has provided considerable policy and financial support to the privatization program. To help promote greater private sector response (including for the poorer segments of society), ESW will be carried out on agriculture, small-scale enterprise development, employment services and natural resource management. On the broader issues of public sector management, the Bank will contribute sector work and projects both across the board and in specific sectors. Support for improved social services will be through support of major 'break-through" policy changes in budget allocations and ministerial organizations (such as in the proposed ESAC) followed up by sector work and sector investment projects. In support of the program of targeted Interventions, ESW will also be carried out on the impact of AIDS and education sector reform. -13. 41. Poverty alleviation is being integrated into most operations and the participatory Poverty Assessment will provide more detailed recommendations for overal strategy and individual operations. The cross-cutting nature of gender issues in Zambia have been analyzed in a gender Issues paper. This work has Important implications for education, health, agriculture, urban services and entrepreneur development. For example, the curriculum development being supported by the IDA-financed Education Rehabilitation Project is analyzing the existing curriculum for gender bias. Environmental issues have been addressed in an informal natural resource study and in the ongoing environmental action plan process. A draft Is currently undergoing a participatory review involving stakeholders at local and regional levels. The priority areas are water and land management. Water issues include industrial pollution from the mines, urban water supply and sanitation, and watershed management. Environmental concerns have been built into several projects, e.g. the Education Rehabilitation Project (sanitation and hygiene education), and the Social Recovery Project (e.g. the requirement of latrines in school rehabilitation) and the Mining Technical Assistance Project (e.g. the review of mining pollution and regulation issues). Based on this review the draft will be revised and finalized in PY94. The Environmental Action Plan will ensure that environmental concerns are incorporated into al future operations, including a proposed integrated environment sector project that would also follow up directly on the findings of the action plan. Improvement in publc service performance will be followed up by sector-specific activities in agriculture, social sectors and local government (included In the respective sector investment projects), as well as in a possible Public Sector Management Project. Targeted interventions wil form an integral part of the agriculture and social sector projects, supplemented with financing for community. based interventions in the follow-up to the ongoing Social Recovery Project. 42. A lending program for the period FY94-98 of US$816 million for 18 operatiom is proposed. On a per capita basis, IDA lending to Zambia was only $12 for the period 1988-92 because of the suspension in the early years, but it was $26 for the period 1991-93 because of the arrears clearance and the drought. This was well above countries of comparable size and level of program development. This is projected to fall to $18 for FY95-97 which is comparable to the lending programs of Ghana, Gambia, Mozambique, and Uganda on a per capita basis. The high level of IDA lending proposed is related to the large scale of Zambia's financing requirements, which in turn derive from Zambia's high debt service burden and declining copper revenues. 43. The high level of lending proposed is predicated upon strong performance by Zambia, including continued satisfactory macroeconomic policy performance, imple- mentation of structural reform, and steady improvement of portfolio performance. Macroeconomic policy performance would be measured against the benchmarks agreed with the IMP. In the structural reform area, the key expectations in defining good performance are that Zambia will continue to rely on markets for the setting of all prices, including exchange and Interest rates, acAelerate the privatization program so as to divest most of the parastatal sector over the next four years, liberalize the market for state land, develop infrastructure, improve the delivery of social services, increase the operating efficiency of remaining utilities, broaden and deepen capital -14- markets, and move to an integrated sector approach for donor-funded investment projects. The impact of these structural reforms would be more difficult to measure, since progress will only become perceptible over the long-term, but the focus wiJl be on exports, investment, and the business dlimate. The main measure of portoio performance will be the trend in disbursements. 44. The high level of IDA lending proposed is also predicated on other donors also providing equivalently high levels of assistance. Zambia's exceptional needs wil gradually be phased down as export growth and debt relief gradually estabLsh a more sustainable balance of payments. No high or low lending scenarlos are presented in Zambia's case, since the only realistic scenarios are (O) a strong Zambia performance accompanied by large-scale international support, indluding IDA's, or (ii) a performance that does not warrant, or is not accompanied by, large-scale international support, In which case there will be an inability to meet external debt service payment, including IDA's, and a cessation of international assistance, including IDA!s. 45. Aid coordination is thus central to IDA's strategy, and IDA has played a key role in the coordination of donor assistance since 1989. This effort has been pursued In the context of Consultative Group meetings, the SPA meetings, and regular contacts with individual donors. The CG provides a forum for reviewing program performance and financing requirements. The integrated sector approach will provide a vehide for coordinating donor assistance initially in agriculture and health, and eventually all sectors. 46. The downside scenaio: Bilateral donor support for the Zamblan program Is currently strong, but the sustainability of external financing remains fragile, since with Zambia's heavy debt burden, full financing of the program requires both extraordinary performance by Zambia and extraordinary levels of bilateral donor support. A significant risk exists that the program could at some point face an unresolvable financing gap, due to plunging copper prices or donor cutbacks. In such a situation, IDA would try to work with ail parties to resolve the crisis and to minimize the long-term harm. Discussions would be held with the Zambian government to resolve any policy disputes holding up external assistance, to keep as much as possible of the adjustment program in place despite funding shoralls, and to manage external debt service so as to minimize further disruptions in assistance. Assuming the economic program continued to merit support, IDA would review with donors their decisions on funding levels to ensure that donors understood the difficulties of yet another arrears workout. Finally, as in previous years, there would be close consultation with the IMP as to whether prudent and timely action by the IDA or the IMF could resolve the financing gap. If these efforts were to fail, and international assistance was insufficient to enable Zambia to continue its adjustment program and meet extemal debt obligations, Zambia would start to accumulate arrears inter alia with IBRD, IDA and the IMP, most new assistance would effectively cease, and a fresh effort to develop a debt workout for Zambia would be necessary. -15- 47. Exposure. Zambia's total external debt has decreased slightly in recent years as most assistance has been on grant terms and some bilateral debt has been forgiven. Zambia plans to eliminate nearly US$500 million In private sector debt through a buy-back operation expected to begin in the coming months. The composition of Bank debt has changed dramatically in recent years. In 1990, Zambia owed US$376 million to IBRD and US$346 million to IDA. Assuming the lending program described above, Zambia's debt to IBRD by end-1995 will be reduced to below US$150 million while the debt to IDA will have increased to about US$1.3 billion. 48. Growth prospects: The Zambian economy has the potential to generate a positive rate of growth in 1994 if stabilization measures succeed. A growth rate of about 5% is possible over the next five years, provided that the constraints to bringing more land under cultivation are reduced, the balance of payments needs are met, and the policy environment continues to improve. In the short-term, improvements in allocative efficiency and increased land utilization will be major contributors to this growth. In the longer-term, continuing this rate of growth will rest on increased investment and human resource development, including Investment in new mines, such as Konkola Deep. 49. Most of the growth In the early years will come from increased production in agriculture and services, including tourism and financial services. As the privatization program gets underway, manufacturing should follow in the later years. Accelerated agricultural growth will require removal of existing constraints to increasing productivity, viz., inadequate technical support services, neglected rural infrastructure, and poor access to inputs, especially for women. Making available additional land will be essential for the high rate of economic growth assumed in the projections. Government strategy in agriculture emphasizes promotion of increased productivity and diversification, particularly in the smallholder sub-sector, by redirecting research and extension services to drought-resistant crops, increasing access to financial services, Improving rural infrastructure (especially feeder roads), strengthening agricultural information services, and rehabilitating and expanding veterinary services. Some parts of the manufacturing sector may not be profitable with the new price structure, but some existing and new manufacturing sector capacity can be expected to contribute to economic growth, provided sufficient credit is available to the private sector and constraints to exports are addressed. Mining output from existing mines, especially of copper, is expected to grow modestly in the early years as efficiency increases, but keeping mining output from falling in the longer-term will require substantial investments in opening up new mines. 50. The chart below shows the turn-arounds that will be required in investment, domestic savings, the budget deficit, and the current account balance in order to achieve this level of growth. -16- Zambia's Adjustment Path 25 20 iI - - 'nvetmetIGOP 15 _,, so 'Doamneo savin.s p 10- *~Iftsls SurplusJGDP 0 .5 -10 *..Curret Acouont O2 I I I I AotU PI, i I Id .20 1980 1988 1980 1090 1991 1992 1993 1994 1906 2000 51. Overall, total investment is projected to rise from 13% of GDP in 1991 to 22% and domestic saving from 11% of GDP to 17% by the end of the decade. These are ambitious targets, but both of these increases are essential. The increase in investment will be necessary for long-term economic growth since increases in efficiency can only go so far. The increase will not be easy. While the overall investment level is similar to levels reached in Zambia's past, the increase in private investment would be unprecedented. However, the targets are consistent with the higher efficiency, profitability, and retained earnings expected in the private sector (including newly-privatized parastatals), and with continued progress in fiscal performance. The projected Increase in domestic savings will be equally essential to achieving long-term, sustainable growth if Zambia is to gradually decrease its reliance on external assistance and foreign Investment. Zambia has been takdng strong measures to increase the rate of domestic savings, including decreasing the federal deficit and moving to market-determined interest rates, which have become strongly positive in real terms. Improvements in domestic financial institutions are also underway, starting with the decontrol of the domestic insurance industry in 1993 and the establishment of a small stock market expected early in 1994. 52. Assuming that the annual rate of population growth declines from the current 3.2% to 3.0% during this period, average GDP per capita consumption could increase by at least 1.0% per annum, even with the projected increase in savings and investment. While this in itself would not result in dramatic improvements in living standards, it would reverse decades of economic decline and start a process of long- term sustainable economic growth. 53. Coordination with the 1 is dose. Balance of payments needs are jointly agreed among the Bank, the IMP and the Zambian Government as part of the CG -17- process. Bank proposals on trade and investment incentives are kept consistent with the program's fiscal targets. Exchange rate and foreign exchange management policies are determined in part by periodic Joint Evaluation Mission in which IDA, IMP and key bilateral donors participate. Fiscal and monetary targets are agreed with the IMP and the Bank. There is broad agreement that controlling lnflation is an essential precondition for making progress on economic growth and poverty alleviation, and these targets are accepted as essential by all parties. 54. FC and M1GA Activities: The existing portfolio of IPC is US$39 million in five projects. In recent years IPC activities have concentrated on restructuring the existing portfolio. There are still a number of investments that require restructuring and IPC's first priority is to ensure that existing companies are operating on a satisfactory basis. The Gcvernment's current strategy of emphasizing the role of the private sector and of embarking on a privatization program should allow a resumption of IPC investment activity. In the first instance, IPC will support, where appropriate, the privatization program. IPC could potentially provide privatization and restructuring advisory services, play a role In attracting appropriate sponsors and technical partners and contribute direct equity and loan finance. As the investment climate improves, IPC will selectively investigate new opportunities, espedally new foreign exchange-earning projects. IPC has an existing investment In the mining sector, and if Government allows private capital investment in the sector, there will be opportunities for additional IPC participation. The Govemment requested FLAS to undertake an Investment diagnostic study focusing on the Investment Code and institutional impediments to investment. A PIAS mission visited Zambia during October 1992 and provided preliminary recommendations to Government for a review of the Investment Code and conducted a follow-up mission in April 1993. A report on the overall investment environment is under preparation. B. AGENDA FOR BOARD CONSIDERATION 55. The recent Bank assistance program in Zambia has been exceptional for several reasons, including the complex process of clearing over US$300 million in debt service arrears to IDA/IBRD, the launching of the Rights arrangement with the IMP, additional support to help Zambia cope with the catastrophic drought of 192, the extraordinary balance of payments financing needed to meet Zambia's heavy external debt burden and the decline in copper prices. These special characteristics are vital to understanding and evaluating the Bank Group's strategy for Zambia. 56. Level of Support. Assuming continuing strong performance by Zambia, the level of balance-of-payments assistance required by Zambia is expected to remain high for several years, even with strong efforts to promote exports and to use imports more efficiently, due to the high level of debt service and the limited prospects for copper revenues in the near term. This was recognized by the international community when the financing plan for Zambia was formulated in 1990. To reach self-sustaining development in the next decade, Zambia wDI need to encourage substantial new private investment in exports, including new copper mines, and the external creditors should consider innovative approaches to reducing *18- Zambia's debt burden. In the meantime, the Bank will continue its role as leader of the donor community to ensure that both the total amount and the relative shares of external assistance are appropriate, and to facilitate constructive discussion of debt relief issues. 57. Adjustment Effort. Does Zambia's performance warrant the extraordinary level of support from IDA and the international community? Zambia's living standards fell dramatically between 1975 and 1990, while the pace and scope of domestic policy reform in the last three years has been exceptional. Many of these measures have been poliffcally difficult. The ending of all price subsidies and controls, the severe monetary crunch of 1993 (on top of the drought in 1992), and the paring down of formal sector employment in government and parastatals have all exacted a high personal price for economic adjustment. It is unlikely that Zambia would be able to continue this strong reform program if living standards were to be depressed further. At this time, most of the key stab{ilzation and liberalization measures have been taken or ambitious programs in these areas have been launched. What is needed now Is the slower-paced but equally essential process of improving public sector capacity, accelerating the privatization process, and repairing and extending infrastructure. These may entail less dramatic and visible "strokes of the pen", but they are just as important in achieving a healthy climate for economic growth. 58. Balancing Zmphasi on Economic and Social Policies. Achieving sustainable economic growth is essential if meaningful progress is to be made against poverty in Zambia, but Zambia will also need to give priority to improving social service delivery. It is the most effective way to bring widespread and dramatic Improvements in living standards, especia.iy for the poor, and the quality of these services has deteriorated markedly in recent years. In addition, without increased Investment in human resources, it will not be possible to achieve significant increases In per capita production. 59. DA's share of the financing burden: It is expected that IDA's share of external assistance will continue in the 35% - 45% range (25% - 30% if rescheduling Is counted as assistance). IDA's stance is that of being willing to meet a reasonable share and to take a leadership position in helping solve Zambia's external financing requirements, but IDA is not willing to fill in for every shortfall in donor assistance to keep the program financed. Unexpected developments, either adverse Oike a drought) or favorable (such an unexpected increase in copper prices) would entail proportionate increases or declines in proposed IDA assistance. 60. Risks. There are considerable risks in the Zambia program. The high level of reliance on balance of payments assistance and the high debt service burden mean that any significant policy shortcoming or disagreement with donors could result in an Interruption In assistance causing an interruption in debt service and a complete unraveling of international support. The long and steep decline in living standards means that the population will not be patient for long If the present Government does not deliver some immediate tangible benefits, and this could result either in Government relaxing the fiscal restraint or reduclng civil liberties, either of which .19- could be disastrous for continued donor support. Zambia also remains vulnerable to external developments, such as a decline In copper prices or an interruption in the southern transport corridor. With the help of the international community, Zambia is taking strong measures to address these sources of risk, and performance to-date has merited the exceptional levels of support it has received, but the Zambia program will continue to need very close monitoring. On the positive side, Zambia has accomplished an unprecedented peaceful political transition, managed to deal with the worst drought of the century, and dramatically transformed the economy from state domination to private markets in three years. The opportunity is now at hand to begin to see some positive results from these efforts, and the Bank can play a critical role in this transition. PART m THE PROPOSED OPERATION 61. The purpose of this fourth adjustment operation since the clearance of Bank arrears in 1991 is to provide critical balance of payments support and to assist policy reforms In three priority areas: (i) continuing efforts to restore macro-economic stability; *ii) further actions to generate a supply response to the adjustment program, through the removal of bottlenecks to export production, and the development of a market for state land; and (ii) basic policy changes to remove obstacles to the delivery of vital social services that are essential not only for beginning the longer-term process of increasing investment in human capital, but also critical to assuring the political sustainability of the overall structural adjustment program. A. POIICY AGENDA 1. Restoring macro-economic stability 62. Fiscal and Monetary Management: A key flaw in Zambia's macro-economic performance has been a failure to contain inflation, which reached 191% in 1992 and was increasing at an annual rate of over 200% through July of 1993 when the effects of the monetary contraction took hold. The rate over the next four months fell to below 20%o on an annual basis. This was accomplished by holding fast to a cash budget system in the face of considerable political pressure. Maintaining a stable price regime is central to improving Zambia's competitive position in the international market, promoting investment in productive activities, and improving the social well-being of the people. Reducing the annual inflation rate is one of the most effective instruments for protecting the most vulnerable groups in the society. This will require a concerted and sustained effort. If Zambia can make this adjustment smoothly and hold to its current course, it should be able to break inflationary expectations and initiate a virtuous circle of lower interest rates, higher investment, and export growth, leading to even lower inflation. -20- 63. As with previous adjustment credits, there is agreement on mactoeconomic aggregates, including the size of the fiscal deficit and the speed of reserve money growth. These are consistent with agreements reached between the IMP and the Government. The primary deficit (excluding grants and interest) was below .1/2% of GDP for the second half of 1993 and is expected to be about zero for the first half of 1994. 64. Expenditure control Previous periods of macro-economic stability have been achieved, only to have inflation resume because of unplanned spending, such as subsidies to parastatals or wage increases. To the extent that potential sources of fisal indiscipline can be identified in advance, specific agreements with the Bank on limiting these increases can strengthen the Cabinet's resolve in holding to a fisal strategy. Subsidies to public utilities were a major problem in 1992 and early 1993, and agreements under the previous adjustment operation strengthened the hand of those working to limit such subsidies. Expenditure control will focus on four areas. (a) Government is no longer interfering in the commercial zrice settingAo parastatals. Automatic price adjustment mechanisms have been put in place in key parastatals, such as ZIMOIL, ZESCO ad the Posts and Telecommunications Corporation to ensure that collections cover costs. (b) To remove the possibility of indirect subsidies to parastatals, the Government has eliminated ZIMCO's access to dividends from the profitable parastatals and thus forced all future subsidies to go directly through the budget and hence to be consistent with the agreed fiscal and monetary program. The Government agreed to limt spending on Zamba Aira (including Government loans) to Kwacha 2.5 billion in 1993. It will be critical to limit future public support of Zambia Airways, to make all such support a transparent part of the budget process, and to move rapidly to upgrade the management and efflciency of the airline to achieve commercial viability or to discontinue operations. The Government has already provided IDA with a short-term financing plan for Zambia Airways that includes preliminary financial and operating accounts for 1993 and 1994. A condition of second tranche release is that Government has adopted a financial plan for Zambia Airways that is satisfactory to IDA, and consistent with the need to avoid direct and indirect support for the airline from public funds. (c) The containment of public sector wage increases remains a priority. In 1993, after a long and difficult negotiation, Government agreed to a 50% increase for all Government workers effective September 1. Even when combined with previous income tax reductions, the increase was well below the rate of inflation and was offset by additional taxes and expenditure changes. Continued restraint will be needed. A Presidential Commission to review public sector salaries and conditions of service submitted its report in November 1993. Implementation of its recommendations are the subject of fiscal targets agreed with the IMP. -21- (d) While maize subsidies are no longer a budgetary drain, pubic it1vvment in ro marketing still needs to be reduced. The Government has decided that the requirements of the agricultural sector should be met largely from the commercial banking system, now that the marketing system has been fully liberalized. The Government does not set consumer or mill prices for this (or any other) crop, although a minimum Indicative floor price was set for maize in 1993. Further efforts will be made to facilitate private storage and marketing arrangements for maize to avoid substantial crop spoilage. Some limited Government purchase will be needed, but this will be met within existing fiscal and monetary targets. 65. Efforts to increase revenues will also be Important, including the full payment to the Treasury of all parastatal dividends payable to government. ZIMCO Is now legally required to endorse directly to Treasury all parastatal dividend checks received, and a separate monitoring section of the newly-constituted Revenue Authority Is being established to monitor those payments. 66. Fiscal monitoring and control procedures. As part of its efforts to control Inflation, the Government adopted a cash budgeting system in 1993. Uxnder this arrangement, the Government incurs expenditures only when It has the necessary revenue, and all spending departments must adhere to the budgeted expeniditure levels. In the event that additional expenditure is required, it has to be fully financed by additional tax revenue or by cuts in expenditure elsewhere. This system has worked well in controlling the aggregate level of spending. Other changes in monitoring and audit procedures have reinforced this cash budgetary system. For the coming year, as agreed in the Letter of Development Policy, the Government plans to build on recent progress and attack the remaining problems including delays In producing audited statements; difficulties In reconciling sub-head budget allocations and releases; and incomplete Integration Into the budget of resources from donor projects and some countervalue funds. Specific measures include: The budget format has been revised in the 1994 budget .o facilitate the adoption of a uniform system between budget presentation and budget monitoring. * A system has been put in place to permit the Budget Department to track ministerial expenditure on major categories within two weeks of the completion of a month. * To introduce improvements on an ongoing basis, a Task Force on Improving the Efficiency of Government Expenditure will be formed early in 1994. The Task Force will include high-level representation from key ministries and a full-time secretariat, with a mandate to identify ways to conduct essential public business more efficiently. Implementation of those recommendations will begin during the second half of the year and continue during the preparation of the budget for 1995. -22- 2. PrIate Sector Supply Response 67. The Government is committed to a policy of relying primarily on the prlivate sector as the source of economic growth. To facilitate this, it needs to do less of those things that hamper or compete with the private sector and more of those things that complement and assist the growth and efficiency of the private sector, including aligning relative prices with actual costs and benefits. Considerable progress has been made in this area, and as a result, the climate for the private sector has improved dramatically in the past few years with decontrol of prices, deregulation of markets, and the beginning of disengagement of Government from commercial activities. A number of current reform efforts are under way, induding a new Companies Act, decreased regulations and increased access to credit for small- scale producers, and a major effort to reform business taxation. The supply response has been disappointing, however, In part because It was impeded In 1992 by the exceptional drought and in 1993 by the belated fiscal and monetary crunch. In spite of the progress that has been made to liberalize the economy, however, it has become apparent that some constraints on private sector growth remain. Reforms supported by this credit are aimed at the two most critical of these - developing a market for State Land and improving incentives for non-traditional exporters. 68. Land Markets: Although Zambia has an abundance of land, difficulties in securing appropriate land continue to be a serious constraint for new Investments in manufacturing, tourism and agriculture. Over 93% of available land is held under "customary tenure", primarily through the tribal and local government structures. Putting this land to commercial use will take time and will require thorough consultation. Most of the rest of the land is "State Land". Ownership resides in the State, but Individuals and companies can acquire various forms of long-term leaseholds. Therefore, the short-term agenda for making more land available for investment, and the focus of this operation in this area, will be on improving the efficiency and liquidity of the market for leaseholds on State Land, while longer-term efforts address the politically and socially more complicated subject of customary land. The proposed measures supported by this credit aim at providing a short-term stimulus to developing land markets on State Land while building up institutional capacity for longer-term reforms. The ongoing parallel market transactions on State Land clearly indicate that market forces already exist and only need to be freed from Government intervention to operate more efficiently and pervasively. This alone should have a significant impact on output as available estimates Indicate that Zambia's land requirements for investment can easily be met from under-utilized "State Land" for the foreseeable future. 69. Legal and Regulatory Framework: Existing laws do not recognize any value to undeveloped land. They also require State consent before any transaction in land can be carried out, and transaction prices are subject to Government approval. These provisions prevent leaseholders from using undeveloped land as collateral and inhibit investments. The proposed credit would support preparation and enactment of a package of land market reforms to improve these markets. (Condition of second tranche release.) Currently, the underlying principles of land taxation are not clear, and its contribution to Government's revenue is minimal. The level of the property -23- transfer tax discourages investors from investing in property development for resale and has entailed the mushrooming of illegal transactions, depriving the State of significant tax revenue. To fadlitate the development of markets for State Land leaseholds, the Government has announced in the 1994 Budget that the transfer tax will be reduced and a comprehensive study of land taxation begun. 70. Government arms: It is estimated that the Government and parastatal companies own enough under-utilized and poorly managed farms in prime agricultural areas to satisfy the current demand for land. The proposed credit would support the privatization and sub-division of State-owned farms. (Condition of second tranche release.) Given the weak institutional environment and the constrained budgetary resources of the Ministry of Agriculture and the Ministry of Lands, the Government has decided to launch its land privaftzation effort on a pilot basis. The lessons derived from this pilot scheme would then be used to extend the privatization of State-owned farms to the rest of State Land. Areas of special concern to be addressed in the pilot scheme are: laying out plots according to sound land-use principles and commercial viability; introducing market forces in land valuation and allocation; and setting up mechanisms to ensure participation of various categories of land users, including women. 71. Setflement; Development of land markets as well as further integration in an orderly fashion of the traditional land users into a more modern agriculture will require the design of a comprehensive settlement policy. Past settlement programs and land allocation have been undertaken on a large scale without clear objectives and in the absence of adequate financial resources for program management. The Government has embarked on a program to clarify priorities, develop criteria for opening up new farm blocks, and identifying targeted beneficiaries. 72. Instfttonal Capacity Building: The most critical step in any land delivery system is to identify vacant and/or under-utilized land. As of now, there is no proper registry of land available to investors, for agricultural, commercial or industrial use. Furthermore, the land allocation procedures set up by the Ministry of Lands ignore important land uses, such as tourism, wildlife and national parks, to the detriment of the environment. The Land Identification Committee will be made operational by April 1994 and its membership enlarged to include other key Ministries. Finally, a central administrative structure will be made responsible for developing a comprehensive land policy based on national consultation. 73. Promotion of Non-Traditional Exports Improving the efficiency of international trade and promoting non-traditional exports are policy priorities for restoring economic growth in Zambia. The current US dollar value of copper exports is below that of 1970, and copper still accounts for 75% of total exports. From the beginning of the 1990s, the Government has initiated a number of trade-supportive reforms. They include a more appropriate macroeconomic policy framework, particularly with regard to the exchange rate and the foreign exchange allocation system, and also trade-specific measures, mainly the expansion of the export -24- retention scheme for exporters of non-traditional goods; the simplification, reduction and narrowing of the tariff structure; and the parallel improvement of the tax structure. 74. However, in spite of these achievements, some policy constraints faced by Zambian exporters have not been corrected. First, the remaining protection still makes it more attractive to produce for the domestic market than for export, although the adjustment of the exchange rate has brought about a better balance in this regard. Second, import duties and sales tax paid on inputs Increase the cost for domestic producers and exporters compared with producers in other countries who have access to inputs at world prices. Finally, an exporter has to go through cumbersome procedures without export financing mechanisms. The need of Zambian exporters for access to export finance is being addressed in separate operations funded by the European Union to create an export revolving fund. 75. Government has reduced the level and dispersion of tariff rates. The maximum rate has been reduced from 100 to 40 percent. The govemment has adopted a long-term action plan in this area under which the maximum rate will be zeduced to 20 percent by 1997. This gradual approach is necessitated by the need to avoid sharp revenue reductions and to ease the manufacturing sector into the new price environment. In the meantime, improving the duty draw back system and moving to a value added tax will help exporters to avoid any added penalties from these remaining tariffs. 76. Introducing a system to rebate taxation for exporters (customs duties and sales taxes) on imported inputs will enhance the competitiveness of Zambia's non- traditional exports and increase the attractiveness of export-oriented investments. Many exporters rely heavily on imported inputs for their activity (e.g. spare-parts, seeds, fertilizers and packaging materials). Most of these inputs are not covered by Zambia's caTrent duty drawback scheme. Even for those inputs which are covered, the system is cumbersome, so that very few producers actually claim the drawback. Under this credit, the coverage of the duty drawback system will be extended to include all imported raw materials and intermediate inputs for exporters. Procedures for claiming the drawback will be simplified and the computation changed to a credit system based on physical input/output coefficients rather than a refund system. (Condition of second tranche release.) 77. Reforming domestic taxation on production is also a priority. As there is no value-added tax system in Zambia, producers cannot always get rebate for the taxes they pay on domestic goods and services incorporated In their output. Since many other countries apply that type of system, Zambian producers are put in a disadvantageous position. The adoption of a value-added system is also urgently needed to (a) increase the tax-base in Zambia (producers have to be registered to get tax deduction), (b) avoid double-taxation on productive activities, and (c) shift the tax burden from producers to consumers. An implementation plan for introduction of a value-added tax system, as proposed by the Tax Policy Task Force, has been adopted. -25- 78. Minimizing the use of discretionary exemptions on Imported capital goods Is also necessary to consolidate the reforms and to protect the revenue base. The existence of widespread discretionary exemptions on payment of customs duties and sales tax in Zambia renders the tariff structure inefficient with regard to revenues and resource allocation objectives. The granting of Ministerial exemptions to industrial and commercial organizations was discontinued in 1990. However, a significant number of exemptions are still granted as a result of the 1991 Investment Act. The new Investnent Act, enacted in August 1993, also entitles a wide range of activities to exemption from customs duties and sales taxes on machinery and equipment. While exemptions are necessary to promote investment, they will no longer be granted on a discretionary basis. As agreed in the Letter of Development Policy, ministerial exemptions will continue to be limited to charitable organizations, and industrial and commercial exemptions will be dealt with in the contexi of the Investment Act. Strict criteria have been defined so that all such exemptions will be automatic and transparent. The awards of all exemptions will be published in the Government Gazette by Statutory Instrument. The broader issue of limiting further exemptions granted to new businesses is being addressed in the context of the Regional Cross-Border Initiative. 3. Resructuring Social Services 79. Background: Throughout 1992, as the new Zambian Government implemented an aggressive program of trade and monetary liberalization and deregulation of the economy, the Bank and the other donors urged the Government to give more attention to improving the delivery of social services and to strengthening the social safety net. The Government's response to these urgings was limited and the impact of the stabilization and adjustment measures was severe, particularly on the urban poor. 80. By early 1993, however, the Government had concluded, in agreement with the Bank, that the political sustainability of the overall adjustment program depended in part on making demonstrable progress in social service delivery and strengthening the social safety net. The Government therefore decided to give high priority to making visible progress in improving the delivery of social services, particularly to vulnerable groups, and asked the Bank not only to assist in longer term institution building and capacity enhancement but also to explore -in the context of the next adjustment operation (i.e. the currently proposed ESAC) the possibility of identifying and removing structural constraints to the delivery of social services. Throughout 1993, progress was made on both fronts. Longer-term sectoral programs are being developed in education, health, water supply and sanitation. In addition, basic policy constraints to the improvement of social service delivery, on which progress could be made in the short run, were also identified, including: a. the decentralization of budgetary and implementation authority to lower levels of Government; -26- b. devolutlon of some activitles to existing community groups or NGOs; (based on the recent successful drought relief program); c. budget restructuring for health, education, water supply and existing safety net activities; d. the revision of Implementation polides in selected social sectors; and e. selective implementation of the civil service reform program. The comuton theme of the changes is to ensure decision-making authority and resources are shifted from central administrators to service providers who are in a better position to see what needs to be done. Thus in the same way that policies and structures and regulations governing macro-economic decision-making and the productive sectors had become centralized, top-down, rigid and unresponsive to the real needs of the economy, social service delivery was hampered by an analogous set of constraints, with a similar set of vested Interests committed to preserving the status quo. The Government has therefore undertaken, with the Bank's assistance under the proposed credit, to remove these basic constraints. 81. Improving the delivery of social services is part of an integrated strategy of adjustment, growth and poverty reduction. The inclusion of structural change rela' d to social sectors In an adjustment operation is appropriate In the particular drcumstances of Zambia because significant structural improvements in service deliveiy are both feasible and necessary in the short-term. The actions involved are structural in nature: the actions already taken and the agreed conditionality were all developed by the sector ministries in question by Identifying obstacles to the ongoing reform program requiring action outside their ministry's purview, whih could be accomplished in the short-term and still have long-term Impacts. The actions agreed are feasle because a combination of revised budget allocations in 1994 and break- throughs In improving delivery mechanisms, particularly in health and water supply, has good prospects of making a dramatic difference in the quantity and quality of these vital services. Such short-term Improvements are necessary for the success of the overall adjustment -program because the benefits of a resumption in economic growth will be modest and unevenly shared at the outset, yet the political sustainability of adjustment depends in part on demonstrating benefits to a broad spectrum of Zambians. 82. Achieving long-term sustainable Improvements in social services will requie more than changing budget shares and delivery mechanisms. Long-term investments in physical facilities and implementation capacity will also have to be made. For that reason, actions taken under this credit will be supplemented by sector investment operations in health, education, water supply and local government management. 83. Actions for decentralization of responsibty for service delvery have been decided in three sectors: -27- a. In order to move decision-maldng authority In health doser to service providers, the Government has undertaken a major re-orgnization of the Ministry of Health. The re-organization Included shifting the responsibility for delivering health services to autonomous District Health Management Boards and changing the role of the Provincial level of the Ministry to one of support to these Boards and provision of technical and financial audits. District staff have been trained In bo*tom-up planning techniques, accounting, and budgeting. A pilot program is currently underway using donor funds allocated to all districts based on simple health plans. b. In education, where decentralization is proceeding more slowly, deconcentration from the center to the Provincial level is being deepened with increased budgetary authority for Provincial Education Officers. c. In water and sanitation, the Government has established a Progam Coordinating Unit responsible for coordination and policy development, ensuring the separation of water resource management and water supply and sanitation functions; separation of regulatory/supervisory and executive functions; devolution of responsibility for service delivery to local authorities, inc!uding the establishment of autonomous public-owned enterprises; and promotion of user and community participation, hygiene education; and Improved cost recovery. These changes are reflected in the Letter of Development Policy and in the 1994 budget. 84. Devolution to non-governmental organizations: In the area of protecting vulnerable groups, Zambia had great success in delivering relief services in response to the 1992/93 drought through the Program to Prevent Malnutrition (PPM). That Program worked through committees at local levels consisting of NGOs, public servants and other civic leaders. Other positive experiences In reaching vulnerable groups have been accomplished by the Program for Urban Self Help and the Social Recovery Program. The Ministry of Community Development and Social Services has set up a Public Welfare Assistance Scheme to serve the indigent poor that also relies on local committees for its implementation. The Government has decided to institutionalize PPM and the use of NGOs to enhance the capacity to deliver services related to the social safety net. These programs and their implementation mechanisms have been endorsed in the letter of Development Policy and have been allocated funds in the 1994 budget. 85. Budget Restructurig: To ensure that the decentralization of decision-making authority is accompanied by access to budget resources, major budgetary changes have been made. The principal problems in the past have been (1) an Insufficient share of social sectors in total spending, as social sector ministries have tended to lose out in the annual inter-ministerial budget struggle; (2) a tendency for sodal sectors to suffer disproportionately when budget cutbacks are made; (3) a tendency for primary services to receive a smaller share of already-low sectoral allocations; (4) within recurrent expenditures, a crowding-out of non-salary expenditures; and (5) -28- Insufficlent priority to rehabilitation programs in the capital budget. The agreed actions to deal with these problems involve a fundamental restructuring of the Government budget, including: a. Level: Inter-ministerial agreement has been reached to maintain an appropriate share of the budget for social sectors as a matter of national priority. This agreement is reflected in the Letter of Development Policy and in the 1994 budget. Implementation of these decisions is a condition of Second Tranche release. b. Composition: Within the overall budgets for health education and safety net activities, the 1994 budget allocation supports critical inputs into the delivery of social services such as money for drugs and other non-personnel recurrent costs for primary education and district health services (primary health care), and for operation and maintenance in the water and sanitation sectors. c. Process: Budget management procedures are being revised to reflect the developments taking place in the decentralization program. In the past, even when money was allocated to the social sector ministries, service delivery has been hampered by an unreliable flow of resources from the Budget Office to service delivery points. This is being addressed in the 1994 budget by sub. warranting budget for recurrent departmental charges to provincial education officers, specifying line items for budgetary independent district health boards and providing funds for grants to units that have a positive track-record of supporting community-based safety net activities such as the PPM and the Social Recovery Program. 86. To help ensure that these decisions are not only implemented but become a normal feature of the budget decision-making, it is a condition of Second Tranche release that actual budget releases to the social sectors in 1994 be in accordance with the Letter of Development Policy and in particular: (a) that expenditur.ts In the health, education and water supply and sanitation sectors and for soc.al safety nets do not drop below the shares set out in the budget; and (b) that at least half of the budgeted amounts for the following budget sub- heads have been released to the implementing agencies, that is: (i) the public welfare assistance scheme; (ii) the Social Recovery Program; (iii) recurrent departmental charges or sub-heads related to primary education in the provinces; (iv) grants to district health management teams; (v) recurrent Departmental charges for drugs, and (vi) operation and maintenance expenditures in the water and sanitation sectors. 87. The Government is also taking steps to ensure that the socal sectors become self-financing to a greater degree. In health, work is ongoing on social health Insurance schemes, and tertiary facilities have been made independent entities with -29- full managerial and financial autonomy. With the improvements in primary health care through the delivery of the basic district package and Improved management and cost-recovery, these facilities will no longer be the drain on budgetary resources that they have been in the past. In education, the Government is committed to increasing cost-recovery at tertiary facilities to cover at least one third of the cost. And in water supply and sanitation, the principle of cost-recovery has been accepted. 88. Revisions to implementation policies in social sectors a. Sdal Services. To support the reforms outlined above, the Government is revising policies to improve coordination as the systems become more decentralized. These policy revisions are included in the Letter of Development Policy. In health the Government is in the process of revising the health code and sub-sectoral policies relating to human resources and drugs to reflect the ongoing reform program this is likely to be completed by mid 1994. In education the Govemment is revising sub-sector policies including that for vocational and technical education. In the water sector, the major principles of future sector policies are generally agreed and will be formally adopted in 1994. In nutrition regulations relating to micronutrient deficiencies, including iodine, Vitamin A and iron deficiencies, are being revised . The national coordinating body, the National Food and Nutrition Commission has received substantial increases in funding for 1994, which, along with filling the senior staff complement, will facilitate the fulfillment of its mandate. b. Safety Nes. The Ministry of Labor is reviewing the activities of the National Provident Fund with a view to establishing a National Social Security System for formal sector employees. The new program under the Ministry of Commerce, Trade and Industry, geared toward providing training and counseling for retrenched civil servants and parastatal employees has begun, and will be reviewed in 1994. 89. Public Sector Management Reform: While civil service reforms would improve the efficiency of all public services, including agriculture and infrastructure, there is a unique opportunity to link elements of the ongoing Public Service Reform Program with the changes taking place in the social sectors. Two specific items of the Public Service Reform Program will be key to improving service delivery in the short run and are addressed under this credit: (1) levels of severance pay, and (2) linking pay to performance and retaining skilled professionals. To ensure better pay and service conditions for those that would remain in a more efficient civil service, there is a need to protect the budget from the potential impact of severance pay for those laid off. Therefore, the Government has agreed (as a condition of Second Tranche release) to develop a revised package of severance benefits for public servants that will permit the efficient restructuring of employment within the public sector. Another major obstacle to improved service delivery is the lack of incentives for better performance for civil servants and the fact that highly skilled professionals are leaving the public sector. To address this, the Government (as a Second Tranche condition) has agreed to adopt, and begin to implement, a program pertaining to -30. incentives to attract and retain highly skilled professionals and to linldng performance to pay, and, where appropriate, a revised job classification system in order to reconcile it with such program. B. FEATURES OF THE PROPOSED CRED1T 90. Borrower and Credit Amount. The Borrower for the proposed Credit is the Republic of Zambia, and the credit amount proposed is SDR 108.9 million (equivalent to US$ 150 mUlion). This amount is necessary to maintain the momentum of the reform program and to provide sufficient imports to permit some resumption in economic growth. It is based on an overall external financing plan worked out with the Government and the IMP for 1994 and complements the substantial assistance already pledged by donors during the Consultative Group meeting in December 1993. Several donors expressed an interest in co-financing or parallel financing this operation in December. 91. The relatively large allocation of IDA resources proposed for this operation is justified given Zambia's large external financing requirements as a result of depressed copper prices and high debt service obligations. This continued leadership role for the Bank will be essential if the remaining external financing gap for 1994 is to be filled. No disbursement would be made from this credit until the Bank is satisfied that the external financing needs in 1994 will be fully met (CondLitin of e-ffectfyeaWs. 92. DIsbursement and Procurement: This credit in the amount of US$150 million will assist Zambia in meeting its external financing requirements during 1994. The credit will be disbursed through the Bank of Zambia. The Government will establish a Special Account in a commercial bank into which US$20 million of the credit will be deposited. The disbursement will be in two tranches. The first tranche, at effectiveness, will be in the amount of US$75 million. The second, which will be disbursed approximately six months after the first, will consist of the remaining US$75 million. (The release of the second tranche will be contingent upon the fulfillment of the monitorable conditions listed below and displayed in Annex 3.) 93. This credit will reimburse Zambia for 100 percent of the foreign exchange costs of general imports, exclusive of those on the negative list. The Procurement processes are standardized, with an emphasis on competition in tendering and strengthened pre-shipment inspection system (PSI). These factors should achieve conmpetitive price results. All procurement for values of US$2.0 million and above will follow simplified ICB procedures with mandatory use of standard tender documents. Procurement by the public sector below US$2 million will follow sttindard government procedures which have been found acceptable by the Bank. Private sector procurement within the same range of value will be undertaken In accordance with established commercial practice, provided that such procedures are acceptable to IDA. Procurement of imported commodities will follow special si:uplified competitive bidding procedures. The public sector procedure calls for bid prices linked to the market price on the shipment date. The private sector may -31- import commodities directly from a broker using spot or market prices depending on delivery date requirements. Pre-shipment inspection will be required for all procurement. Any exceptions to the above procedures will require a waiver agreed to by the Government and the Bank. The Bank of Zambia will be responsible for coordination and monitoring of procurement and will submit quarterly status reports to IDA for review. All procurement following simplified ICB procedures will be subject to prior review in accordance with IDA guidelines. The Bank of Zambia will maintain relevant documents for all procurement. These documents representing other methods of procurement will be made available to IDA upon request for ex- post review. The project account, special account and statements of expenditure will be independently audited and the resulting audit report submitted to IDA within six months of the end of Zambia's fiscal year. 94. Poverty and Environmental Impact: The proposed operation helps remove key obstacles to poverty reduction. The operation sets the stage for growth without inflation by providing the necessary framework for poverty reduction, especially as the reforms proposed will help ensure increased economic activity and help remove past biases in favor of capital-intensive growth. The proposed land reforms will help ensure an efficient land market which would help the small-holder farmers (who constitute almost 90 percent of the poorest Zambians). These reforms would also help women who are discriminated against by the current system. Non-traditional exports promoted by the proposed changes in the trade regime include agricultural products and should therefore help the continued improvement in the terms of trade for small-holder farmers, as even the poorest farmers grow significant amounts of cash crops. Finally, the improvement of essential social service delivery would be the first step towards an integrated poverty reduction strategy. The improvements in social service delivery with a special emphasis on primary services will help close the gender gap that has opened up over the eighties. The impact of the operation on the environment would be limited but positive. The improvements in land policy are likely to lead to better land management practices. Similarly, improvements in health services and water and sanitation policies and institutional set-up would help address the most severe environmental problems of the peri-urban slum areas. 95. Program Management and Monitoring: The reform program would continue to be managed by the Economic Affairs Monitoring Unit, which is chaired by the Minister of Finance and composed of members from the Ministry of Finance, the National Commission for Development Plannin& Cabinet Office, Bank of Zambia, ZCCM, Central Statistics Office, and other Government ministries and agencies. The management of the program would be assisted by a coordinator. At each stage, the overriding condition would be that Zambia retains satisfactory overall performance on the macro-economic program, including compliance with specific monetary and fiscal targets set after review and agreement with the IMP. The choice and wording of tranche release conditions for this operation have been based in part on lessons reflected in the Project Completion Report for the Economic Recovery Credit, particularly the advisability of avoiding unnecessary specificity. Systematic client consultation will be conducted under the operation using the 1993 Participatory -32- Poverty Assessment as a baseline and carrying out a beneficiary assessment of the impact of the measures envisaged under the Credit. The assessment would involve both suppliers and users cf social services, and the private business community. 96. There is one condition of effectiveness: i.e. that the Government has provided evidence of having secured sufficient commitments to cover substantially Zambia's external financing gap for 1994. 97. Conditions for release of the Second Tranche funding are: a. SLveance Bgnefts: The Government has furnished to the Association a revised package of severance benefits for public servants that will permit the efficient restructuring of employment within the public sector. b. Duty Draw-back Scheme: The Government has furnished to the Association evidence that the Government has adopted a revised duty drawback scheme with the following features: (a) simplicity, automaticity and transparency of procedures; (b) a shift from a refund to a credit system based on input/output coefficients (c) expansion of product coverage to include all imported raw materials and intermediate inputs; (d) a plan to ensure dissemination of information and publicity about the revised system; and (e) a time-bound action plan satisfactory to Association for implementing the scheme. c. Spending in the Social Sectors: The Government has satisfied the Association that its spending in the social sectors in 1994 has been in accordance with the Program and in particular I. that expenditures in the health, education and water supply and sanitation sectors and for social safety nets have not dropped below the shares set out in the budget; and ii. that at least half of the budgeted amounts for the following budget sub-heads have been released to the implementing agencies, that Is: (a) the pubkic welfare assistance scheme; (b) the Social Recovery Program; (c) recurrent departmental charges or sub-heads related to primary education in the provinces; (d) grants to district health management teams; (e) recurrent Departmental charges for drugs, and (f) operation and maintenance expenditures in the water and sanitation sectors. d. Public Service Incentives: The Government has adopted and started to implement a program acceptable to the Association pertaining to incentives to attract and retain highly skilled professionals and to linking performance to pay, and where appropriate has revised its job classification system in order to reconcile It with such program. e. Amendments to Land Laws: The Government has (a) enacted amendments to land laws whose objectives shall be to (i) remove the notion that land has no value, (ii) facilitate the sub-division of land, (iii) failditate real estate trading -33- and other related transactions, and (iv) reduce land and property transfer tax; and (b) implement policy measures to provide for the sub-division and sale of State farms. f. Financial Plan for Zambia Airways: The Government has adopted a financial plan for Zambia Airways satisfactory to the Association, consistent with the need to avoid direct and indirect support for the airline from public funds. C. BENEFBIS AND RISKS 98. The proposed credit would have a major short-term impact on Zambia's growth and poverty reduction prospects. The policy reforms supported would help lower inflation, improve private sector incentives, and improve social service delivery, measures that would help private sector growth. Social service delivery improvements will improve the delivery of social services directly and together with the expansion of financing for existing, proven, safety net activities would directly benefit the majority of the population. This is important both in its own right to begin to reverse the negative trends of the past but also to help ensure the political sustainability of the program. The past deterioration in living standards and the expectations generated by the successful political transition could lead to major social disruptions if the general population does not see short-run positive impacts of the program. These changes are expected to benefit women relatively more, because they entail the reversal of discriminatory practices in land tenure issues and social service delivery. 99. The operation would help fill Zambia's financing gap for 1994. Without this credit it is unlikely that other donors would continue their extraordinary levels of support, and debt service arrears would re-emerge, resulting in further cut-backs in donor support pushing the economy into a sharp reverse. At the Consultative Group meeting in December, Zambia's total external financing needs were esfimated at US$1.2 billion for 1994. Existing rescheduling agreements will provide US$275 million and projects and commodity assistance US$350 million, leaving a need for balance of payments support of US$575 million. With this credit, total IDA balance of payments support will be US$225 million. At the December CG, donor balance-of- payments support was estimated at US$200-250 million, leaving an unfinanced gap of about US$100-150 million. Donors agreed to meet again in March to search for ways of closing the financing gap. Filling the external financing gap for 1994 is a conditiot of effectiveness of the proposed Credit. 100. Because the proposed operation is so closely related to the overall adjustment process, its risks are very much of the same nature as those for the adjustment process as a whole. In summary, the operation faces political, external and implementation risks. The political risk arises from the pressure on the Government that will grow as more people are affected by restructuring to slow down or reverse some of the reforms. Nevertheless, the Govemment has demonstrated conviction and determination in reforming the economy. Their ownership of and commitment to this program is obvious and genuine and has been demonstrated frequently and -34- consistently in the past few years by the enthusiastic pace and scope of ti .lr reform program. The Government's comprehensive program of improving social service delivery will also help to mitigate this risk. The external risk relates to Zambia's precarious external financing position and large debt burden. The Bank is playing a key role in mobilizing the donor resources required to support Zambia's reforms, but there is always a risk that a substantial donor shortfall will make debt service payments impossible. Finally, the proposed operation faces technical risks, such as a possible revenue slump in the early stages of implementation of VAT; or a lagging supply response due to a fluctuating exchange rate or other export constraints not addressed (for administrative capacity reasons) by this credit. Although corrective action would be initiated, fiscal or foreign exchange imbalances could develop before the corrections became effective. D. RECOMMENDATION 101. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. February 15, 1994 ZAMBIA ECONOMIC AND SOCIAL ADJUSTMENT CREDIT (ESAC) ANNEXES ARM I OFFCE OF THE MINIbER °f 21 MINISTRY OF FINANCE P.O. BOX 50062 LUSAKA MFAL/102/12/734 18th January, 1994 Mr. Edward V.K. Jaycox Vice President, Africa Region The World Bank 1818 H Street NW, WASHINGTON DC 20433. Dear Mr. Jaycox, RE: ZAMBIA-ECONOMIC AND SOCIAL ADJUSTMENT CREDIT (ESAC) - LETTER OF DEVELOPMENT POLICY. 1. In early 1992 the Government reached agreement with the World Bank and the IMF on a Policy Framework Paper (PFP) setting out the main objectives of restoring Zambia's economic growth prospects by moving the economy towards private sector initiative and free market principles, and reversing the progressive decline in the performance of Zambia' s social sector, s delivery system of the past two decades. We outlined the extensive reforms necessary to achieve these aims, including a sharp reduction in the size of the public sector and a comprehensive programme of privatisation. 2. Despite initial delays, progress is being made in implementing the privatisation and parastatal reform programme. This was the focus of the First and Second Privatization and Industrial Reform Credits (PIRC I and PIRC II) approved by IDA in June 1992 and June 1993 respectively. Structural improvements in delivering social services are underway, but progress has been affected by the need to reduce Government spending to control inflation. We recognise that the task of reforming the Zambian economy, including its social sectors, will require determined and persistent effort on our part, as well as continued support from the donor community, including from the World Bank Group. 3. The purpose of this Letter is to up-date you on progress made on the implementation of the Economic Recovery Programme, and to inform you about our policies and programmes, particularly in the areas of macro-economic stability, private sector promotion and improving social service delivery for which we seek IDA assistance through the ESAC Credit. AEX I Page 2 of 21 Recent Develoments 4. Much has been accomplished in the two years since the MMD Government came to office. However, in the midst of liberalisation, Zambia experienced the worst drought in this century which made it difficult for the economy to stabilise in 1992. This notwithstanding, Government made the reduction of inflation again its main priority for 1993. Recent evidence shows that the Government is finally succeeding in reducing inflation: monthly rates have dropped from 15 percent in June to 2.5 percent in August, 3.7 percent in September, 0.1 percent in October, and to a negative 1.6 percent in November, 1993. Macro-economic stability is at last within reach. 5. Reaching financial stability has not been easy. The decline in the real supply of credit reduced the demand for imports and domestic goods. This process was reinforced by the sharp rise in yields on Treasury Bills which began to divert demand to kwacha- denominated financial assets. With the sharp reduction in inflation in August 1993, real interest rates on these assets became highly positive. The combined effect of the credit squeeze and the increase in interest rates then led to fluctuation in the value of the kwacha. These developments placed strains on farmers, exporters, manufacturers and ZCCM. The Government has started the process of easing credit somewhat with the result that interest rates have declined significantly. The market for foreign exchange also reacted swiftly by a significant depreciation of the Kwacha, thus easing strains on the productive and export sectors. 6. The credit squeeze is being deepened by ZCCM' s payments difficulties following the decline in copper and cobalt prices, forcing the mining company to accumulate payment arrears to suppliers and to Government which have a multiplier effect. With Government operating on a Cash Budget basis, the decline in revenue led to cuts in expenditure. The Zambian economy is undergoing a severe contraction. Government recognises this and is implementing measures to ease the supply of private sector credit. This will begin to unlock the unpaid debts which will ease the serious financial diff -ulties experienced by otherwise sound companies. 7. The policies that the Government intends to follow in 1994 will center around promoting growth with stability. Our strategy continues to emphasise the market-determined allocation of resources and putting in place conditions necessary to stimulate private sector activity. The Government will continue to disengage from areas where the private sector has a comparative advantage. Reforms in the financial and exchange rate systems introduced in 1993 will have a positive impact on business and consumer confidence giving impetus to private sector investment. In order for Zambia to reverse its long economic decline and restore growth on a sustainable basis, national savings and investment will have to increase. This requires a further reduction in the public sector AEX I Page 3 of 21 deficit and to encourage private sector savings. 8. Government has made a major effort to deal with the poor state of the country's infrastructure. The Public Investment Programme (PIP) 1993-1995 gives emphasis to the rehabilitation of existing capacity and infrastructure. The Government's intention is to restore positive per capita growth in 1994, and encourage labour- intensive activities, such as smallholder agriculture and small- scale industry, so that employment will grow along with GDP. The latter will require improvements in productivity, continued liberalisation to encourage capital inflow, and further opening up of market opportunities so that all Zambians can participate to the limit of their resources and abilities. Critical to this effort will be the generation of confidence in the sustainability of the Government's programmes. 9. The Government believes that better delivery of social and economic services is important and feasible. To make this possible, Task Forces for Social Sector Rehabilitation and Roads' Maintenance were created. However, budgetary cutbacks of 1993 curtailed the Government's ability to implement its social programmes. To overcome this problem, the Government is committed to improving budget allocations in 1994. Government is also requiring beneficiaries to contribute through payment of user fees in order to further augment resources to these sectors. The low income population will be protected from these fees. 10. Reversing inflation was the most challenging policy issue for 1993. The 1993 budget set the Government's objective to reduce inflation through a combination of fiscal and monetary policies. To achieve this, sales and excise tax rates were raised and tax holidays on investment removed. Expenditures were cut. As a result, inflation which reached an annualised rate of 280 percent during the first half of 1993 dropped to an annualised rate of 47.8 percent in the July-September, 1993 period. The annualised rate in the last quarter of 1993 was 10.5 percent. This was achieved through a continued deceleration of reserve money -- driven by continued tight fiscal policy and the reduction of Bank of Zambia credit to parastatals. 11. The sharp reduction in inflation occurred because Government disavowed printing money to cover its revenue short-falls. The introduction of the cash budget in 1993 saw for the first time a Government in Zambia imposing strict financial restraint on itself. The results were salutary. The primary budget balance (excluding interest payments and grants), programmed to be zero percent of GDP, turned into a surplus in the first ten months of 1993. The Government is committed to maintaining similar budgetary restraint for the foreseeable future. This means that any expenditure request outside the budget will only be met after equivalent revenue measures have been taken. AM= I Page 4 of 21 12. Improvement irn fiscal management was also a result of other measures. First, the cash budgeting system was supplemented by c'.ose monitoring of revenues and expenditures. Second, the 1993 budget introduced comprehensive tax reforms. Third, improved audit of parastatals led to higher tax revenue. 13. The fiscal management and monitoring system will need further strengthening. For instance, while the Treasury has operated on a cash basis, it is evident that elsewhere, especially at provincial and district levels, this has not been the case. Commitments in excess of available cash resources have been made. It is Government's intention to correct these weaknesses in 1994. Further improvements will include reviewing the format of the Yellow Book with a view to: (i) ensuring completeness in capturing donor-funded projects; (ii) unifying budget codes with release numbers so as to facilitate comparison of releases and expenditures with budgeted amounts by head and sub-head; (iii) eventually presenting operation and maintenance expenditures separately from other recurrent costs; (iv) providing adequate sectoral and sub-sectoral breakdown of budgeted amounts, releases and expenditures; (v) bringing domestic debt service and similar expenditures "above the line", thereby improving the way the budget reflects Government commitments; and (vi) adequately planning the seasonality of inflows of revenues and of expenditures. It is intended that much of this work will be completed in 1994. 14. The Government has started to implement the decentralisation component of the Public Service Reform Programme. This is being done by assisting ministries with significant operations in the provinces, i.e. Education, Health, Works and Supplies, Agriculture, Food and Fisheries, Home Affairs, Energy and Water Development and Local Government and Housing to plan the deployment of their resources to ensure equitable spatial distribution. It will also entail the development of allocative criteria based on the levels of service provision and infrastructure endowment. The criteria used in the draft budget for 1994 to determine spending provisions to provinces constitute a first step in this direction. 15. Several public utilities made large losses in 1992/1993 which had a negative impact on the budget and money supply. Measures to reduce losses were taken and we have required our public utilities, including the Zambia Electricity Supply Corporation (ZESCO), the Posts and Telecommunications Corporation (PTC), Zambia Railways (ZR) and municipal water companies to adjust their prices. ZESCO and ZR have increased their tariffs significantly in June, 1993. In addition, parastatal companies have adopted a policy of frequent price adjustments. Both petroleum and electricity prices were adjusted several times in 1993. 16. Government also introduced a broad programme of financial liberalisation. Since January 1993, interest rates have been decontrolled through the operations of a Treasury Bill tender AM=K I Page 5 of 21 system. This mechanism is working well. Interest rates rose rapidly up to July 1993, due to reserve money increases. Once that was brought under control, nominal interest rates have fallen. Market forces are determining interest rates. After peaking at around 379 percent in early July 1993, the annual compound yield on 91-day Treasury Bills had declined to 79 percent by mid-November 1993. Interest rates are now strongly positive in real terms, This development which is normal during the early phases of economic stabilisation is encouraging institutional investors and individuals to hold Kwacha-denominated financial assets. By encouraging a switch from consumption to savings, the rise in real interest rates has also had a positive impact on inflation. The exchange rate system has also been liberalised over the year. Conditions now exist for the complete removal of the remaining exchange controls in early 1994. Revenues 17. Domestic revenues did not perform as expected in 1993. In spite of the tax changes introduced in 1993 as part of a phased programme to broaden the tax base while instituting broad-ranging tax reductions, tax compliance remained weak. The credit squeeze in the economy also contributed to the weak revenue position as most companies were not able to meet their tax obligations due to financial difficulties. The appreciation of the Kwacha between August and October also meant lesser revenues coming in than originally expected. As a result, the tax/GDP ratio declined, dropping from about 19 percent in 1991 to 15.5 percent in 1992, and to an estimated 13 percent in 1993. Zganditures 18. With the cash budget in place, the brunt of fiscal adjustment in 1993 was borne on the expenditure side. This was required to accommodate higher expenditures for maize purchases and a 50 percent salary increase within a budget in which resources fell short of expectations. While Government has not succeeded in shifting expenditures away from personal emoluments towards recurrent departmental charges and capital expenditure to the extent it had anticipated, for the first time in many years, the shortfall in Government expenditure on these items has not been covered by printing money. This policy will be maintained in 1994. 19. Government had intended to transfer responsibility for running .and financing local government affairs to the district councils, while maintaining limited support only to smaller councils, beginning in mid-1992. Because of their limited resource base, this could not be fully achieved. It is, however, Government's intention to pursue its original objective in 1994. District councils are now free to set charges for the services they provide. AM= I Page 6 of 21 Objectives and Nacroeconomic Frameworks 1994-1995 20. The Government's objective is to achieve GDP growth of 4 percent in 1994 and 5 percent in 1995 and 1996 which will permit a modest increase in per capita income. The higher level of growth should be possible because Zambia has in place policies to stimulate increased investment. There is also adequate good quality agricultural land and unutilised capacity in the industrial sector. Access by the private sector to credit and foreign exchange is improving. These factors are being supplemented by improvements in the allocation and efficiency of public spending, continued market liberalisation, and reductions in Government regulation. Public Service Reform. 21. The Government's aim is to have a smaller, more efficient, and better paid civil service. To achieve this, the Public Service Reform Programme (PSRP) was launched on 2nd November, 1993. The process of re-organisation of Cabinet Office has begun. For the PSRP to be meaningful and have a positive impact, the Government will attempt to re-negotiate with unions the severance pay packages to the retrenchees. Once the costs of retrenchment are met, the savings realised from personnel reductions will be used to improve the conditions of service, especially for skilled and professional officers. For this purpose, the Government intends to adopt in 1994 a programme to enhance incentives to attract and retain these highly skilled officers and linking performance to remuneration. The recently-completed report of the Presidential Commission to Review Civil Service Salaries and Conditions of Service can also help in this regard. Finally, Cabinet Office has begun to review the institutional reform initiatives of the Social Sector Task Force under which the social sector ministries have initiated their own reform programme. fxoort Growth and Private 8ector Develgmnet 22. The objective of our macroeconomic policy is to achieve financial stability and sustainable growth so as to raise living standards in Zambia. The Government considers that the structural transformation of the Zambian economy requires an export-friendly macroeconomic environment, sound social and economic infrastructure, and efficient Government. The ESAC will focus on policy reforms for export development, macro-economic stability, private sector growth and improved delivery of social services. Export Dpvelomg t and Trade. 23. Stimulating non-traditional exports is critical to diversifying the Zambian eoonomy and promoting job creation. Hence, we accord high priority to improving incentives for exporters. We began by liberalising the exchange regime through the introduction *1 AMNU I Page 7 of 21 of bureaux de change, widening the export retention market and converting the OGL into a negative list. Exchange rates are now unified and market-determined. There is virtually unrestricted access to foreign exchange for current transactions. Lastly, to make foreign investment more attractive in Zambia, the full outward transfer of dividends has been allowed. The result of these efforts has been a return of confidence in the Kwacha. Government is now preparing the repeal of the Exchange Control Act. The severe credit squeeze contributed to the appreciation of the Kwacha for some time. More recently, the value of the Kwacha has depreciated again. 24. Zambia will continue to work with SADC and PTA to promote regional trade. The PTA preferences are already being applied. Vigilance is needed, however, to ensure that these preferences are not abused. In this connection, efforts will be made to co-ordinate within the Southern Africa region incentives for investment. The Government recognises that the benefits of these trade arrangements will be of a longer term nature as the whole economy of southern Africa expands. For Zambia, the principal short and medium-term objective is to reform its own system of trade and exchange. This will provide Zambia's miners, farmers, and industrialists with the capacity to compete effectively in the sub-region and more broadly in the international community. 25. Since promoting non-traditional exports is viewed as important for restoring economic growth, the Government initiated a number of reforms. These include the export retention scheme; the simplification, reduction and narrowing of the tariff; and a revision of trade taxation. These reforms represent progress, since the general level of protection had been significantly reduced and the tax base for import sales taxes and local sales taxes has been harmonized, thus, eliminating discrepancies between domestic and trade sales taxes. 26. Nonetheless, steps are needed to create a better system of incentives for exporters. Four main issues are being addressed: (i) the impact of tariff and fiscal reforms on effective protection; (ii) the incapacity of the duty drawback system to ensure duty-free access by exporters to imported inputs; (iii) how to cope with a loose system of exemptions of duties paid on capital goods; and (iv) lack of institutional capacity to manage trade and related issues, such as the reconciliation of customs duties with customs revenue collected. We have already simplified the schedule of external tariffs and reduced the highest tariffs to 40 percent. The new reforms will have the effect of stimulating greater competition and efficiency. AM= I Page 8 of 21 27. In specific terms, the Government intends to:- a) strenathen the management and administ-ation of the Customs Department: The Government has started to strengthen the administration of tax collection of the Customs Department which should not only lead to higher revenues but also deal effectively with those who attempt to evade the payment of import duties. The newly-established Revenue Authority will absorb the Customs Department and should permit attracting high-quality staff. Technical assistance has been requested to supplement the Authority's efforts. The already more vigorous tax administration efforts began to show their results in October, 1993. b) improve the system of tax rebate for exporters (customs duties and sales taxes) on imported inputs: The Government intends to extend the coverage of the duty drawback system to include all the physical inputs, and to include both direct and indirect exporters and will simplify the procedures for claiming the drawback by giving responsibility to a single and autonomous institution within the Customs and Excise Department, and changing the computation procedures through a move towards an exemption system rather than a re-fund system. c) Minimise the use of discretionary practices in the granting of exeptions on imported canital aoods: The existence of widespread discretionary exemptions on payment of customs duties and sales tax renders the tariff structure inefficient with regards to fiscal revenues and resource allocation objectives. While exemptions are necessary, they will no longer be granted on a discretionary basis. Ministerial exemptions will continue to be limited to charitable organisations, and industrial and commercial exemptions will be dealt with only in the context of the Investment Act. Strict criteria will be defined so that exemptions under the Investment Act will be automatic and transparent. The awards of all exemptions will be published in the Government Gazette by Statutory Instrument. d) reform domestic indirect taxation: As there is no type of value-added system in Zambia, producers cannot always get rebate for the taxes they have to pay on domestic goods and services incorporated in their output. The Government will design a value-added system suiting Zambian conditions in 1994 to be implemented in 1995. 8 AM= I Page 9 of 21 Private Sector Development. 28. The Government attaches great importance to policies for the development of the private sector. Recent measures include full remittance of profits and guarantees against interference and expropriation. The Investment Centre has become operational. We intend to review its operations to ensure that it focusses on investment promotion and operates effectively as a facilitator for prospective investors. Guidelines have been published to help investors understand Zambia's regulations. In 1993 export and import licensing requirements were abolished. 29. We are also completing a comprehensive revision of key laws governing business activity which were outdated and restrictive. In this respect, the Companies Act and the are being amended and the bills will be presented at the next sitting of Parliament. A Securities Act has been enacted and came into force on 17th December, 1993 while the Bank of Zambia Act has already been amended. It is hoped that a competition bill to forestall the emergence of private monopolies as the extensive network of public momopolies is dismantled through the privatisation process, will be presented at the next sitting of Parliament. 30. The Economic Recovery Programme will open new opportunities for Small-Scale Enterprises (SSEs) so they can help absorb layoffs likely to result from the privatisation process. The Government has initiated a review of the constraints hampering these enterprises. The objective is to develop a programme of specific measures to reduce and streamline the regulatory requirements for SSEs - including for small-scale mining - and for providing access to credit. The organisation and set-up of the two promotional bodies for SSE development - the Small Industries Development Organisation (SIDO) - and the Village Industries Services (VIS) will be reviewed. Land Policy. 31. The Government recognises that the issue of the legal status of land is important for new investments in our country where one of the most abundant resources is land. Currently, the law does not permit freehold possession of land. Unimproved land is regarded as having virtually no value and is, hence, of little use for the purpose of collateral. About 90 percent of the land is subject to customary communal usage rights, the remainder being effectively owned and administered by the Government. The issue of land tenure is complex. Although leasehold will likely remain the mode of land tenure, there are some aspects of land ownership and land registration and transfer which have to be addressed in order to facilitate the development of an efficient market for state land. 32. The land reform programme which the Government intends to carry out aims at achieving the twin objectives of developing the 9 ANJUE I Page 10 of 21 land markets o0h State Land and building institutional capacity for land delivery and land reform. The Government has begun implementation of a pilot scheme on subdivision of State-owned farms for commercial use. In addition, the Government has approved draft amendments to land laws and regulations, to allow valuation of land, free transfer and subdivision of land under statutory leasehold, and reduction of the land property transfer tax. 33. The Government is currently preparing, and in early 1994 will (1) approve the terms of reference for a study of a comprehensive land settlement policy which will include minimising involuntary resettlement and payment of appropriate compensation; (2) fully operationalise the Land Identification Committee: (3' approve terms of reference for a study which will assess ways of decentralising, at District Council level, the issuing of urban and rural title deeds, the registration of land transfers and the collection of land fees; and (4) introduce changes in the law to abolish the distinction arising from the classification of Land Reserves and Trust Land on the one hand and State land on the other, recognise the holding of land on customary tenure, and establish a land Development Fund. The Fiancial SyAtem. 34. The success of our efforts to develop a robust private sector depends on the ability of the financial system to mobilise and allocate resources efficiently. For this reason, the Government accords high priority to modernising the banking sector and putting in place a small capital market. A good start has been made on the legal reform side with revisions to legislation related to the banking system. In the area of monetary policy we expect the recent introduction of the. Treasury-Bill tender system and the growth of secondary markets in these instruments will assist in providing greater depth to the money market. In addition, the Government has launched reviews of the Development Bank of Zambia (DBZ), Lima Bank and Eximbank to identify how these institutions can be restructured to meet the need for sound term-financing. We intend to act on these reviews by early 1994. 35. Government has taken steps to develop a small but efficient capital market. With the help of the International Finance Corporation (IFC), and financing from the Privatization and Industrial Reform Technical Assistance Credit (PIRCTA), we engaged consultants to identify the requirements for a simple over-the- counter (OTC) type market. We expect to have this in operation early in 1994. The PrLvatimation and Parastatal Reform Prourume. 36. The reform of the parastatal sector is vital to the Government's strategy to restore efficiency and growth -in the economy. The privatisation programme covers nearly all parastatals. 10 AM= I Page 11 of 21 The scheduled programme is spread over a five-year period involving 150 commercially-oriented companies. In addition, we plan to offer for sale ZCCM and the Metals Marketing Corporation of Zambia (MEMACO) as well as the public utilities. We expect at least 10 companies over the period of the programme will be sold through public flotations in Zambia. 37. With regard to the copper sub-sector, Zambia wi'll rely on private investment to develop new copper reserves. We have started a study of the options for privatising ZCCM and MEMACO. Based on the results of this study, we expect to adopt a strategy and plan of action for this purpose by May, 1994. .38. As regards privatisation, sales agreements for six tranche I companies have been signed and legal transfer arrangements have so far been completed for 2 companies. Progress in preparing a further eight companies for sale is on schedule. Invitations for bids for the last five companies have to be re-advertised as bids for these companies were not found acceptable. Twelve tranche II companies are also in the process of privatisation. These include large and profitable companies such as breweries, cement and metal fabricating companies. They also include three companies to be handed back to their former owners. Overall, in 1994 ZPA intends to complete the sale of at least 1S enterprises, and to bring a further 20 enterprises to the point of sale. 39. ZIMC0 has been transformed into an investment holding company responsible for representing the State's interests in public enterprises until their sale. ZIMCO no longer establishes companies itself, nor will it authorise or finance new investments or lend to subsidiary companies or guarantee their borrowing from third parties, including from other companies within the ZIMCO group. The role of ZIMCO is being phased out. Thus parastatal dividends are paid directly to Government. The role of ZIMCO is being reviewed further. Steps are being considered to further restructure the management of ZIMCO parastatals consistent with the objective of achieving a more rapid completion of the privatisation programme. In particular, the supervision of parastatals undergoing privatisation will be transferred from ZIMCO to a new unit in ZPA. 40. Companies that are not expected to be financially viable will be closed down. Government is now commissioning in-depth viability reviews of the more important loss-making enterprises. We are particularly concerned to resolve the problems of Zambia Airways (ZA) which is in critical financial condition. In this regard, the Cabinet decided that ZA will not close but should be restructured so that it becomes a viable airline. The restructuring is addressing the need for increasing the operational efficiency of the airline, reducing the routes to be operated as well as equipment and retrenchment of staff and management. ZA is presently preparing a comprehensive financial plan for 1994/S and a complete statement of its 1993 financial operations that will permit the 11 ANN I Page 12 of 21 Government to. consider the options for continued direct and indirect public sector support in early 1994. 41. Government attaches great importance to the reform of those public utilities that are expected to remain in the public sector. Government will ensure that these enterprises are free of all outside interference in their pricing policies and management and that they do not receive any public subventions. To this end, the adoption of an automatic price and tariff adjustment mechanism will allow the public utilities to become financially viable. They are expected to bring their prices, within 12 months, to a level where they cover all costs, including cost of capital, and provide an acceptable return. 42. However, to ensure that the automatic price adjustment mechanism is not abused by the utilities at the expense of consumers, because of their natural monopoly position, we plan to establish a regulatory framework for reviewing pricing policies on the basis of incentive-based formulae that incorporate efficiency measures and performance targets. In this regard, tenders are now being invited for a study on the establishment of regulatory framework for the major utilities like ZR, ZESCO and Posts and Telecommunications Corporation (PTC). Long-term regulatory arrangements for the public utilities will be put in place by December, 1994. The Social 8ector Reform Proarame. 43. Social conditions in Zambia have declined substantially over the past twenty years. As examples, infant mortality which had declined to 80 per 1,000 live births by 1981, increased to 107 in 1987-91, and primary school gross enrollment ratios have fallen from 96 percent in 1985 to 88 percent in 1991. A number of factors are responsible for impeding effective delivery of social services. Among them are the excessive centralisation, organisational probl..ms, limited implementation capacity in Government ministries, shortage of qualified personnel, poor regional distribution of staff (80 percent of all physicians work in 4 provinces along the line of rail), shortage of financial resources and inadequate maintenance. 44. The Government has taken steps to reverse the declining trend in social sector service delivery. The basic thrust consists of decentralisation of service delivery, including de-concentration of service delivery in health and education, devolution of safety net measures to local groups, mostly NGOs, and re-structuring the water and sanitation sector. In order to prepare Government efforts toward more effective delivery of social services, a study was commissioned to review the policy and regulatory framework, and issues of implementation of programmes in health and nutrition, water supply and sanitation, and for women, children and youth. 12 ANEX I Page 13 of 21 45. The Government believes that there is substantial opportunity to meet social goals by restructuring the pattern of expenditure. To accelerate the delivery of social services, the Government will increase expenditure in the social sectors to restore and maintain their share to the level of 1984, the last year for which their shares were at an acceptable level. Education has suffered significantly from decline in resource allocation, even though the number of children has risen sharply. Similarly, in the fields of water supply and sanitation critical expenditures - such as those for maintenance - declined very significantly. It is also Government' s intention to increase real expenditures on social safety net activities. A larger proportion of safety net programmes funding will be grants to NGOs. 46. Thus, in the 1994 budget, the Government will ensure an allocation of resources, in accordance with its priorities, especially: - i) increase the share of the total budget allocated for health to at least 13 percent; and the Ministry of Health will allocate 9 percent of its budget as grants to district health management teams, and 9 percent for drugs under RDCs; (ii) increase the share of the total budget allocated for education to at least 15 percent, including special allocation for ensuring distribution of books; and the Ministry of Education will make allocation of 5 percent of its budget to primary education RDCs under a sub- warrant to Provincia' Education Officers; (iii) allocate at least 2 percent of the total budget to the Ministry of Community Development and Social Welfare for financing such activities as the Public Welfare Assistance Scheme, the Programme Against Malnutrition, and the Peri-Urban Self-Help Programme catering to vulnerable groups. The resources will be channelled partly through qualified NGOs which are able to account accurately and responsibly for the use of public funds. The latter requirement will be included in agreements which the Government will enter into with NGOs. (iv) increase the share of the total budget allocated for Water Supply and Sanitation in the Ministry of Local Government and Housing to at least 1.8 percent and in the Ministry of Energy and Water Development to at least 1.4 percent, of which at least 4 percent will be allocated to operations and maintenance. 47. These allocations will require a major reorganisation of expenditure. Accordingly, the share in the budget of personal emoluments, grants and other payments, missions abroad, and 13 ANNU I Page 14 of 21 overseas travel and purchases will be reduced. In 1993 the Government established budget heads for each of the defence and security wings to introduce transparency and permit better control of these expenditures. This is achieving its purpose. It is Government's intention to keep military expenditure under control and it will aim at reducing it in real terms over the next three years. Capital expenditure will be expanded in 1994, with resources concentrated on a core programme of rehabilitating economic and social infrastructure and on completing ongoing projects. 48. Furthermore, attempts will be made in 1994 to initiate pilot programmes in several ministries to move away from incremental to programme budgeting. This will be achieved by linking budgetary allocations with well-defined objectives and targets, and by introducing realistic norms for costing. By 1995, the budgeting of these ministries will be based on this approach and in 1996 will be framed in a forward budgeting context, thereby taking into account the projected financial implications of programmes and projects two years in advance. Assistance will be provided to these ministries from 1995 onwards to facilitate the evaluation of the effectiveness of the implementation of their budget in achieving their objectives and targets. 49. Within each sector, significant intra-sectoral, geographic and age-specific reallocations will be made. Thus, emphasis is being placed on basic education, primary health care and preventive health services. Maternal and child health and family planning services are also given high priority. More effective delivery of services in rural areas will be achieved through allocating more resources to local health service outlets and district and provincial health institutions. 50. Due to the crucial role that primary education plays, the Government plans to raise the share of primary education. Strengthening vocational/technical training is critical to equipping labor-market entrants for gainful self-employment. To achieve this objective, the share of such trade schools will rise. These measures are critical for the achievement of the objectives of the Economic Recovery Programme as well. The Government is re- casting the Public Investment Programme (1994-1996) to give more emphasis to rehabilitation of technical education and vocational training institutions. The above phanges in resource allocation represent the first step in giving high budgetary priority to delivering social services. 51. Measures will be taken to address domestic resource mobilisation. A large proportion (36 percent) of educational and health expenditure is currently borne by households, donors and NGOs. There is, however, still room to expand the non-government share by instituting cost-sharing schemes. Existing schemes will be strengthened, while the Government will also promote the role of the private sector in providing social services. In the case of the 14 AMNX I Page 15 of 21 health sector, cost recovery will not continue to be pursued in the current ad hoc manner, but only as an integral part of the implementation of the health reforms. 52. In higher education, the Government is implementing a scheme of cost-recovery such that student contributions make up 25 percent of the financing of higher education. As part of this plan, the Government will institute loan schemes and community work schemes to help students from lower income groups meet this financing requirement. PoDulation Policy. 53. Zambia's population was 8.3 million in 1990 and growing at an annual rate of 3.2 percent. A high fertility rate of 7.2 coupled with a declining mortality rate estimated in 1990 at 11.7 per 1,000 accounts for the high rate of population growth. These trends suggest that Zambia's population could double in the next twenty years if the rate of growth remains constant. With half of the population being under fifteen years of age, there is a high dependency ratio and a greater demand for school places and health services than the country can afford. Moreover, the widely dispersed population makes it difficult to provide social services in a cost-effective manner. 54. In recognition of these problems, the Government has adopted a national population policy. Its components include measures for reducing the rate of population growth; supply of information and contraceptives to ensure that couples make informed decisions about the size of their families; and the provision of maternal and child health services to help reduce infant, child, and maternal mortality. 55. The Government will accelerate the implementation of the policy through the action plans that have been developed with the support of UNFPA and several bilateral donors. Family planning services will be included in the basic package of services under the health programme. Eduuation. 56. Success in education and training is central to the Economic Recovery Programme. Revitalisation of the educational system is being accorded high priority. The strategy includes the increased provision of resources for rehabilitating schools; providing desks, adequate textbooks and other educational materials; improving of pre-service and in-service teacher training; reforming the examination system; improving the management of education; and promoting community involvement in curriculum development. 57. The main areas of concern are financing of education, the shortage of qualified teachers, the rehabilitation of facilities, 15 AM= I Page 16 of 21 increasing access, and improving quality. This requires increased allocation of resources for education. Liberalisation of the printing and supply of textbooks is being encouraged. 58. The process of decentralisation in the education sector will start shortly. By December, 1993 the Government will have completed the revision of its education funding mechanism so that funds released for provincial education will be sub-warranted directly to Provincial Education Officers. In addition, during the first half of 1994 the Government will complete a process of establishing autonomous School Management Boards as part of the decentralisation of responsibility, resources and authority. oalh 59. In addition to a run-down physical infrastructure, cholera, dysentery, malaria, tuberculosis and AIDS epidemics have become a major threat to the health of the people. Both infant and child mortality rates have risen in recent years. Among the constraints militating against service delivery are shortage of drugs and other medical supplies, and organisational weaknesses. Most health activities are carried out at the District level. However, decisions were made at the central level. 60. Government policy gives high priority to primary health care, Cost-sharing will be introduced in rural areas so that the revenue collected can supplement Government resources. Private sector involvement in the development of health services will be encouraged. A health insurance scheme is to be introduced for those with ability to pay. A program to prevent malnutrition is underway for distribution of free or subsidized food to the needy. Non- governmental organizations are involved in the distribution through food-for-work activities. Our medium-term plan focusses on restructuring the Ministry of Health with a district focus; rehabilitating health training institutions and providing teaching aids to meet the needs of field staff; rehabilitating hospitals and health centers; controlling the epidemics of cholera, dysentery, malaria, tuberculosis, immunisable communicable diseases, and AIDS; and providing drugs, medical supplies, and contraceptives. 61. The Government will pursue the process of decentralisation in the health sector with vigour. To this end, the Government has -established full budgetary autonomy for District Health Boards and Hospital Boards. The Government will also alter the method of disbursing funds to the health sector in line with the decentralisation programme; especially, the District Health Management Boards will submit plans for their activities to the Ministry of Health for consolidation. Based on the consolidated plan, the Ministry of Finance will allocate resources to a control account specifically for district health activities, the controlling officer for which will be the Permanent Secretary for Health, the latter becoming responsible for disbursing these funds 16 ANEX I Page 17 of 21 directly to the District Health Management Boards. 62. During the first half of 1994, the Government intends to initiate the process of streamlining the Public Health Acts and other relevant medical acts to reflect the Government's new approach to health and health care. By mid-1994, the Government expects to complete guidelines on health financing and restructuring of the Ministry of Health, complete the development of its drug policy, the human resources strategic plan and policy, and its nutrition policy. 63. Previously, AIDS was considered to be only a health issue, but the spread of the disease and the resulting disability and death are making it clear that multi-sectoral interventions are necessary. The Government is currently developing its Medium-Term Programme (MTP) for AIDS prevention and alleviation. Implementation of the Programme will involve both public and private sector agencies. The Government will ensure sufficient funding for the Programme's implementation. Nutritign 64. Nutrition activities have suffered from a serious lack of policy guidance and coordination. Several worthwhile programs are ongoing, implemented mainly by NGOs, including the PAM network (see below), local nutrition groups an volunteer agencies. Policy .development and changes in regulations are ongoing in the area of micronutrient deficiencies, including iodine and iron deficiencies. The national coordinating body, the National Food and Nutrition Commission (NFNC), suffers from a shortage of funds and personnel, and unclear mandates and terms of reference. To rectify these weaknesses, the Government will develop and adopt a National Nutrition Strategy, ensure sufficient funding for NFNC and resolutions of its personnel problems, and consolidate the progress made on iodination of salt. Water and Sanitation. 65. The water supply and sanitation sector is in disarray and service delivery is inadequate. The number of people served is limited: some 55 percent have safe water, while about 48 percent have reasonably adequate sanitation facilities. The results include cholera epidemics and dysentery. The sector suffers from unclear and overlapping responsibilities of various organisations using a highly centralised approach, lack of institutional and financial capacity, and insufficient human resources. 66. In order to address these shortcomings in the sector, the Government plans to pursue the following policies for the future:- - separation of water resources management and water supply and sanitation functions; 17 AMK I rage 18 of 21 - within the water supply/sanitation sector, separation of regulatory and supervisory roles from executive functions; - devolution of executive functions (planning of programmes and projects, their implementation, and operation and maintenance) to local authorities, which include autonomous publicly-owned enterprises, the formation of which the Government is encouraging; - more user and community participation, including hygiene education; - full cost recovery for commercial users and high-income consumers; and - training and incentive measures for human resource development. 67. The Government has already initiated steps leading to a reorganisation of the sector and a deconcentration of responsibility for service delivery. The Government supports the formation of commercially-managed water and sanitation enterprises. 68. To address the general structural and policy problems of the sector, an Inter-Ministerial Programme Coordination Unit (PCU) and a supporting Water Sector Development Group (WSDG) have been established. They will develop operational plans, strategies and investment programmes to guide the future development of the sector. The Government is also addressing the issue of operation and maintenance. For this purpose, the Water and Sanitation Committee of the Social Sector Task Force is taking steps to accelerate rehabilitation and maintenance. 69. Following the adoption of the principles for future sector policy and an increase in the sector's share of the national budget, the Government's next step will be the implementation of the first phase of the PCU-WSDG work programme by mid-1994. The first phase emphasises the development of the sectoral strategy, assessment of needs, preparation of an indicative medium-term investment programme, assistance to the Ministry of Local Government and Housing to monitor construction programmes and operational support to local authorities, and detailed planning of technical assistance for institution building. During the second phase, emphasis will shift to assistance in institution building, training and technical assistance, that is the transformation of the WSDG into a central service organisation for local authorities and enterprises requiring assistance. 70. The Government has also adopted a policy for increasing the share of domestic financing of investment. With the shares of thec national budget devoted to water zupply and sanitation rising as 18 AM= I Page 19 of 21 foreseen, 25 percent of the sector's investment programme will be financed from internal revenues. This should help in ensuring a better integration of projects in the sector into the Government's budget than is normally the case when domestic revenues finance a smaller percentage of the project costs. This integration will stimulate the provision from the budget of adequate funding for project operation and maintenance. Social Safety Net and Poverty Alleviation. 71. While economic adjustment measures will in the long-run benefit all sections of the population through the general improvement in economic growth, it is recognised that in the short- run some measures may increase economic hardship. For example, the retrenchment in the civil service will cause dislocation. There is, therefore, need to cushion vulnerable groups from the adverse effects of adjustment. There is also need to help the most disadvantaged, which include widows, the handicapped and orphans. Other programmes to mitigate the transitional costs of the Economic Recovery Programme tend to improve access of vulnerable groups to social and economic services and food. These Social Safety Net Activities are being pursued by the Ministry of Community Development and Social Services, Cabinet Office, and by NCDP and several of them are already supported by donors and NGOs. Public Welfare Agssitance Scheme. 72. An amount of K1 billion was allocated to the Ministry of Community Development and Social Services for expenditure in 1992 as targeted assistance to the needy. K449 million was spent through local non-governmental organisations with had the capacity to identify the needy. This relatively low disbursement rate reflected the new Ministry's start-up problems. Sufficient experience has been gained since then on which a smooth implementation of the Public Welfare Assistance Scheme (PWAS) from 1993 onwards can be based. 73. The PWAS will be strengthened enabling outreach from district capitals and improving target. Disbursements will be higher in real terms in 1994 compared to 1993. NOO and Comuiity-ba&ed Activities 74. The Programme to Prevent Malnutrition (PPM) coordinates the distribution of food to the needy and reflects collaborative efforts between the World Food Programme, the Government and NGOs. During 1992, over 58,000 tons of maize were distributed. Many NGOs are distributing food through "food-for-work" programmes which have the benefit of improving rural infrastructure. The Government has restructured PPM into a semi-independent agency, the Programme Against Malnutrition (PAM). The implemented structure of PPM will 19 ANNE I Pase 20 of 21 be maintained while PAM will change the focus from drought relief to drought recovery and development. A similar programme has been run by the Project Urban Self-Help (PUSH) in urban areas which will continue beyond 1993. PAM, PUSH and other NGOs providing support to vulnerable groups have received funding through the Ministry of Community and Social Welfare. This funding will increase in 1994 and coordination among programmes will be improved. The successful Social Recovery Programme implemented by the Microprojects Unit of NCDP finance community-based social, rehabilitation in more than 400 infrastructure communities across Zambia. The disbursements from the programme will be increased in 1994 and the Fiscal Funding to the programme will increase. Xntreprezeurial Develg2nt_ and Training for Retrenched nlovees. 75. The Government recognises the need to prepare retrenched employees through training to take up alternative self employment and business ventures. The Establishment Division at Cabinet Office is implementing the training programme which includes pre-training to identify those who could be developed as entrepreneurs; a training phase which includes business opportunity identification, project formulation and management; and a post-training stage of helping trainees to launch and consolidate their ventures. A similar programme is ongoing for employees laid-off due to the privatization programme. Fund are being sought from the donor community to augment Government resources in 1994. Overal Proame KNamenont 76. The Economic Recovery Programme imposes formidable challenges for successful implementation. For these reasons, and due to the need to coordinate the multiple policy initiatives from the different ministries and agencies of Government, we have entrusted the management of the overall programme to the Technical Committee of Economic Ministers which is chaired by myself. 77. Arrangements are being made to enhance the Government's capacity to coordinate effectively the various arms of Government in achieving the economic and social objectives under the ESAC. An example is the ongoing review of safety net activities, developing recommended for a better coordination including an institutional reform of the Ministry of Community Development and Social Welfare. Impact Monitoria@ 78. The Government intends to monitor periodically the impact of macro-economic and social sector reforms at the community level through conducting a series of qualitative and participatory appraisals, a methodology which was beneficially applied under the Social Recovery Project. Beneficiary assessments and rapid rural appraisal methods will be used for this purpose. The former will permit combining conclusions derived from a single locally-specific 20 AM=U I Page 21 of 21 Impact Monitoring 77. The Government intends to monitor periodically the impact of macro-economic and social sector reforms at the community level through conducting a series of qualitative and participatory appraisals, a methodology which was beneficially applied under the Social Recovery Project. Beneficiary assessments and rapid rural appraisal methods will be used for this purpose. The former will permit combining conclusions derived from a single locally-specific experience to one at the national level. 78. The ESAC will help meet an important portion of Zambia's external financing needs for 1994 and stimulate reform and economic revitalisation. IDA's support is also essential to help us mobilize the assistance of other donors. Yours sincerely, Ronald D. S. Pensa, MP MINI 0P IXNINCO ZAMBIA - ESAC MATRIX OF SPECIFIC PERFORMANCE IMICAIORS ObJsetlWlAmea status Supported by ESAC Thnig A. INmo nand Sta_zatlon F%16~n objeorfwme am f toontral kiNfltin and omuateesawgsnarsconond franawoxk fow The pdna, fisa deficit dowm tm 3S In 92 toS 1% OP In 93. Oa:Wvd Pftepa a ew anred ef| Dowd 1. ontm and ficd polpo by e8rnatkv mobs subsidies. seducnin subsddes ito prastatale and me financ ln tfor ZambA Airwa P_ enatbn r-wd.0moupubdic mtr ne in.cs ugtgsyemad that voxdd kidcude preibmniiy nw fisc mtng e s Iw_ed b eona l oatsg ate f meonoafftion of Truesty and BOQZ ecownits rcsswesing paemsta l t thwex quata of 1994. audits. dflaton ratexoeded tbain st half of 993 but snce icluding detal on tbs sot_ce of 01n annud ratea ofiaonhs com down t ust o wr 20 peret flawn nt a tkne- u*d actiOn p- oows*u at best lb rnt two Vwam that wm I inclde dataled with spec_d s of external Adopt inanil PI fwr Zambia Sod Alway satsc ob T_rnow support for lbtshe fro8 m pubfic I ndto d ct 2. Exe al omt Exchange ratb now -dw e iof e,IaNe lection and th _meban, of Suwass de Chln_ Trade n m to complement exchang rateao fa belaw. fRsn*nt ap,reiatio of e and rto due to impact of n tesy onmob o amaui but mucloddse un*ed to reesre dwet lgtW r fiscal polsy and rduced empha Ist mnem I biaoffuxsals Exteal Istn neef hewbn hh d w say atomne lb. currant P d e1 PNof in seamed Effectiwns lel in lb. fomeessAIe fu*_ax. #uffitiant aca-Ien to cow Io 194 extra financi g Cl-# u II Pa8e 2 of 5 .' S ]]~II 11" III i 111 1;it11111 1 C app_tOa off (an to d ld lw whoa oWbctis shl be to P _tin il rmov-eithe notion tuit land has no end,. factatel estate at SWd other relad tranactimons n 0'. educe lendIW and pipes nbraw n snd (b) poloy neasure tD prvie for tMe sub-dsonn sale of stat fanuL Enact a _mmuab to ud las as _ n Second above. Trench. Trade Pelonv Foregn Troia ha bea proorsevly Meaizad. t __asna Mquramat haw been aboda. lTh aveage twiff, dipeaond _dioretonsy walve habn bwduced. We*oet duse and es tax haw bean rtnunad. Export basishave been aboisadW.exceptfor healhssM loin.E s Renmov all rwhestions on make Negotiaton reteion a ms been Intiuted an ths exange r sXPerts. Adopt a rovwled duty dfrawbkscem Second with the folowing ftu (a Tfanche abuplolty. auuomdotiy mid anepasency of prceduaes lb) a dft from a ufumd to a credit syteim based on bwut ooffts; I expnsion ef product oag tD tmdiat ps II l a plbn to en disseaftelon of infonadn and pub§y abot doe ed tec end (a) a thnss4ound action plan sdeatl IDoyt the Asociation for Sub_nt a _mebm acnn for Bfad r adoption of vwineadded tax.P U~enami dsf_d; -- I 41~~~~~~~aU AINKIl II Pag. 4 of 5 . j . . . .. . IL ,gIIiII IS. I~~dg uii I! *) I a f P,*b Wefa AssiBtw_ Sal. id NSO. INl 8eebl SRs PC " fomsol PAsowmy Plegm (W tuoemmo d.putnwntald I nor su4ieads rilted to pim aeduasim In the omAncS CM r -its to iitd i "D a s aoid M awrcant Depintmuta chage fwr d4mg expaiutmau in doe water supply NWd App ssctoC Appeuw li tie ,uorgs*atbio of Cd*wit Neigoth itn Office MMd I) mote mlanunusmu for Cabwt 011. to pmaii saappt for ti dooentba*n bitNwe of th easd sot_*ebf tto Gowimnsut wEM adapt mi stwrtto Secn Impm a a pof a acepta Xtols Tfane Assookstlon pu,tahdn to hiootlasdto pretsulsmi mid to Iucngf prfuw eew to pay. mid reied lbs job dnciasliatn systm. In adrto Aucnnl twt aa II Ft_ I~~~~~~~~~~~~~U AIEIII Page 1 of 2 i i 4 1 t))i 3 ' i i3l~I i3)ii i Ik. ANNEX III Page 2 of 2 :I 21 & U~~~ di AN~ Ii ~ I. in ii~~~~v pagp I of 16 SELECED INDlCATORS OF FOWRLIOl FERFOMANCE AND MANAGIMNUt - IadImUor PY91 FY92 FY93 FY94 Porqclit Pa~~~~~~~~~~~I7muPaPnP r~~~~~~~~~~~~~~~~~~~~~~~~~~(wg Nwmbet o projects under buplemena 17 14 U 1 AVera bnAPlentatlo perid (yearvt 7.9 6.9 6.1 c8 Pecent of projects ated 3 at 4 Develmopent Objectves 29.4 14.3 7.1 7.1 Overal Status5 35.3 21.4 7.1 7.1 Caned daing PY 0 2 0 1 Avg. ratngs Development *ectist 2.06 1.93 1.K6 1.K6 Ovell Status 2.19 2.07 1.86 1.86 Dbbuement ratio (%) 17 8 8.7 13.2 DVb nsemet sla (%) 31 52 21 36 M Orum item: V% competed projects rated unsatifactory' Phffa M4_ genia Supervisio resources (total aw)' A22.4 203.7 226.6 323.4 Avrae suporv swsor4et 7.2 14.6 16.2 23.1 Supervisinrsoc by ltio (in) Percent headquarters 20 96.4 98.9 82 Peret esdent mwssin 0 3.6 lI 18 Supvn esou by atng cate (swsoject)' Projects rated 1 at 2 9.9 15.8 18.6 23.2 Projects ated 3 at4 2.3 10 21.9 21.6 Memorandum tem: date of neot CPPR Al 194 t Avea age of prtjcts in to Bank's co y portflio. 2 Etent to whib the poj will moot its de pmt objcd (so OD 13.05, Annex DQ, hf vm*x 4f bhpk um. n samary (Amwt 590). 3 Aessent of overall performan of the pjct bae on the ratings given to indivil atso of proect implemnn man(agmet, availab y of fiud, complia with la cvena ) and to d&eloxm bjecdva (se OD 13.05, Annex D2, 1rparon of WWwvo S bmnwy (Fow S90). The overl swn is not given a better ratng dn that O to project devlopmet objees. 4 RAWo of di_$ W ftduing th yar to 0th un tw bance of the BaWcks portf at the begolng of the year vesm at p ts on. 5 Por aU p compig th Bak's country portbo, th peretg diffe e bowee adual cum tv dumntsM nd the cumutiv dsursOMen ates as SWCAi in do 'OdSl SARIM Forcas or, if the la aots hv ben mode, In th "Rvised Fbqor tWo ((Comptd am (((Cumave Estmae - Cumultiv Acua /CumUde Mm e ty pot didsrsemnt lag is efihlb the weogtd avep of disburement lag for projats eag dao aks ountry potlio, wbhre the wegts us ar th rec v proje sa s in th tA cmulae d isbursement a i it, For current PY only fm the OED dataase. 7 paed Y(P94). ZAMBA - BnkGp Fa *Sed nRiDA Lending PFpa,Fe P 98 pust Comnst Planned FY91 PY92 FMY93 FY9 PY95 PY96 FY97 FY98 Coumdbns mnWNone) AgcJ4ui e 17.0 21.1 22.2 Indshyzy& ThL 7.5 4.5 0 Pwerg 15, Pom 7.7 lablic SecrMang. 9.0 11.1 and 4.4 10.5 24.5 Hu1n Rescus 7.2 16.4 I5.8 23.1 153 14.8 Euvhormnet 11.1 263 _ Multi-Sector 85.3 9S.S 62.2 75.8 52.6 C9.2 49.1 51.9 TOTAL 100,0 100.0 100.0 .0 00 10.0 100.0 100.0 1-ha hubmw M%) Ad)antz Crdits 853 95.5 62.2 75.8 2.6 69.2 49.1 51.9- Invstme Credt 14.7 4.5 37.8 24.2 47.4 30.8 509 48.1 OTHE - - ' ' ' - ' g Paymuts (UN_M M) 164.4 51.9 57.0 541 49.1 42.0 34.3 28.0 N h n_d mi( mi ns) 180.1 35.5 29.1 272 29 23.0 207 19.4 o Page 3 of 16 2yW~~~~~~~Aa sow p w- m- W sm 4DIA 6 POVERT Lppw pevaty lmi b. .. t-30 L4e povaty Us bolt. .. - 9.. H.dm ui %dP* .. * 54 GNP papt1 S 20s 50 40 310 330 1.610 SHORT TERMO ICONM IICATORS tasullod urba W*p kw . .. ... Runr otrn ..u.. C4nAunw mprk ina 19*-100 3 9 1,43. 44W4 .. - 7.....9 t tb..n ...... 14wan SOCIAL IDICATORS public V*Uwmm on bo l MW soc %*(GDP 3 ., PiWAuy %51A.97 95 70 113 100 Ma * 59 105 9 ?4 12 106 Fae. * 46 3 91 40 106 9 .Uaulity Wtammtt tsliIh 121 f 104 104 70 40 t ndwS mw* - - 176 17 9 53 Maul. %apwSAp s o0 40 73 70 DPIr * - 4 35 1 74 Cluld .nIAu M (wAwS) 24 23 LAfe _ fAn ToWl 44 49 49 St a 67 ?a.aJmfualm iul 10 1.07 L O 1.06 0.95 1.03 TOa &4 ra b . 6.4 3.7 3.3 .mesri ..talky 0 t 100.0 s t - , Population rot s nt at uQtaty rat Priuuy enmet (p) (ef IMbk) (lnS 6-- 250 120+ 200 ~~~~~~~~~100 4 80 3 60 - ~~~~ 20 0 - - -- 0 hI I nTudWe 'O7s mid O 160. .1470. mmaod6f id 70s - LAW g= Pape 4 of 16 Zasubia Rtesewm AndEpmlr 1 =_~~~~~~~~~~ Si .. _ . - Md~~ae' 9~~W'~ 4MM L~~~ apsd IV.MA.W ay O(Rm Popmwa4. (Mf_tu9) 3A14 4.61 2t19 48JV2 3.127,36 773.83 AP. *ipe.cy Vo 0.32 0.97 1.07 0d 0." 0 71 I.Awn I%dP 23J 234.2 $1.0 28. 40.1 3.9 PwaiMaan p1w4 mwl 2.9 it 33 v 3.9 i9 1.9 I.,';: * 33 5 6 5.5 5.0 $: 3 . LAbor forn (IS.6) 1*7 1AS 2,76 203.94 t.441404 343 4.rsAhiUW % (b'(o 79 .. .. . Fe-we 3* U 29 27 33 31 ,,vj " _.. 12. .. .fNAtUVL OLt,Czs .Arm *J a. Lkm RCZS 2 753 2324 2t2 3=2 23.90 Wi? pup,w l 5.0 I.n I0.0 20.0 77.0 31.0 A.W d laU A %(l*fln 5 47.1 47.4 51.0 47.4 41.8 ch unp a4s wmft WA Now%0.1 0.0 0.1 0.0 0.0 0.0 *iAti*'taM ,tws unP 0.0 0.1 0.1 5i 13.7 1'6 Fn so wadl * k 306 299 28 445? 9.197 3394 DCAao (ftK) _% 4 4.1 4.0 . M'COMZ $mof top :0f _(oaw 43 Sa tm 40% tbemoadMI it~ 4 - -- Sham a(bo 20% (b * ..4* ... .%( 5. mis. *L - lOOI20 12., _ C£ -F, dm isu 45. to00 78 34.00i A.81 Food Aid in * - S 3 2A71 69 4.047 Food pnwu~ por w0ft 1979;1-100 100 U3s 2 94 122 lo0 tr_uizx inin maoo 2.0 1ltO I 14t4 47. 9A.2 Shw otu=famarw a GOP %adb-F 143 13.1 15.7 29.3 38.7 Hmg %oop 5.8 .6 . . _ A'04ZS b.i d ux pm b.e .. 4 -, tu^u_ ~~~~%dOD? _ 4. 0.3 .. - Tudanel L - i 9 3.1 L-mvsx _t m kg4( . 464 133 379 I 350 149 moumb" Wft -War;&a- - . U~~~~ ~ ~ ~ ~~~ S * _ _ _ TrtmpoA d co__ %SD? -9 38 % t 3. 3.. fix wr tr i * 4 .0 1.7..... 7OW 'W a41b * 37.259 - csi-STmT LY4 HLWAN CAr,fAL HaMi 'Am= to haa" ae em . ?PwAgm Pw *tU 1.401 13.486 lu . . ?wu=eaga pw sv LM * on 1a3 ?smmta&m pu havol b1S *300 t132S l0 309 &-VW to u& % - 42.0 520 3. 74 Ltm S _"0 I"0 74.3 79. RuM I" * _4 41.0 24W 2 Orald *_tk y('W) _ n7 35 32 Sa,iday % dwd.4p Ps 7 1i 20 IS 44 FmrJ * .3 10 14 14 27 Pupskat4iN W .1 prinay PV1 pilw 5t 4 44 39 39 25 .N" P4 row: '"d * 19 23 2. 20 Pupi1a mdw mgAm 4 %a _ f f. 94 _ REMWru :MW7 %uftmal a" 2 2 . . Uliqa4 %% 4 p (AV -) .. . 27 Si 39 Fbtois c% afplSatI) . . 32 a 52 N4ewmaocnWCAi 1nL Pt L 7 217 . S.>DA: Watd Soni !1a Em t_D. .Ap_il 1593 POVERTY INDICATORS IW15m U iWI mura u,m :.ss mc wsu-tOtl m,tuss_ in* ftaEl l itel|l e, Warn Ja- VtW tL. #o _UP rgtrLm St n .. as1 6 .. .. .. .. j ,. Face _tuoebgdd tsubi" T1.S . . 5M.A .. .. S "so a Fe ..et . n a .. ..* * 0 0 Poem -siiad Y Sl.l 42 35.9 *. *. *. .. .* .. S4.Z 42r 49.4 Perm of f*bMMV l.mm/ kusm Se tem Esiau al e ta _ * _ *_tea 1 u. V U. .. .. .. .. .. .. .. .. .. Leoset 4 6 3 .. .. .. .. .. .7 tA 6.4 omt 4a .. t. . 4 j; szt 0. 10. lt .4 ISt. *ese 1_ .. 7.1 ... .. ... . slont m S0S 9 4 .. . H .. 3.1 stomt m Ss Ss St ~~~~~~61 ("a) 44.3 3.1S 43. ot_t t aS 5 as .. .. .. .. .. 00 .0 Urn UUSSMt 1eein~l~ per Pus 74 5 M m du an as Usd1. Usrdtmelap per 1 US? 49 46 so m Sm2 slid GofflumeP 6.46 6.40 .59 4 . 0.226 Life E*ptwq at Uiet 40.1 S.5 40.3 49.? vomm l_ ofmmel W (1m Mt.) W (1 lint* ArIa itSty 1W (1974 set.) 9 .0 Uawwmt mom, W.v ii 2S ibild Uaieerilieun 2(197) 6142 cildbI mmialIas if *0 4? 6("M1 de "mm W~~~~~~~~~~~~69 32633 *~~~~~~~~~~~1 .. 91. B0 Umr's= : am n or t . t) 4 U 3 4 20 r ~ *:i sa *:i s XW r 5"0 64 s et_ hW W so U#... IN to -- ~ 4.0 5.A 5 4.? 5.4' S30S.2 S:A 5 noears. laAtdt CPS a 1sw 3A Size. WI "S 1 I time I e-tl_m etam w _ per atd.. ah *mte em seteIme we IIm Wm d__fer mu . *a Wt Aver'so of mm"", PT ib PS ocot Cm, oo w wtpt swvw lAM4w5 hl "nor C0ID ::o::C'le d 111_OW tmm CID,e I is it od wth sm1 mm Pretls ,uss tUS. _m. cmwi'v a Z sw Ime"-. _y n9tt2. ,*, t Lw ~ ifa- keto heCk m s asp0 Same ht I ltewtr liWi thdow khveritv Poes. keend O.*.* 92 AclU. ithe State ,O she VnEe ,Ii*m "go. eferd lbiverltv Pram , tad a... ".g eem*. lidw ead Csua*iem adj A tng to6le, Fee SNOOD &W*, Pqa ft. 2, 19. reed Stedim 6rap, olaasaq em Pover tw. int_lSt O ptM CsWM 1.; J` 1 4. PO 6 of M ZANSIA--KEY INDICATORS Sase Case ProJection ..................................... .................................................................................... ....- - *-Actuat ................. Pre .. Piojected.. 1980 1988 1989 1990 1991 1992 1993 1994 1M9 ?00.) Real Growth Rates: Gross Domestic Product (COP) 3.0X o 6.3X *1.0X 0.5X -1.8J *10.0X 12.3X 5.3X 4.37 5.TS Gross Oomest1c trome (cDy) Z.87X 11.4X *14.0X 5.9X 2.3X 11.8X 7.0S *0.7? 4.4X 6.67 Real Per Capita la"Ath Ratess Gross Domestic Product (GOP) -0.3 2.5X 4.7X 4.1X 5.0X .13.27 9.1X 2.1X 1.4X 2.7% Total Consutption -4.1X 2.4X -6.17 -18.5X 12.2X 13.2X *2.9S1 0.6X -1.8X -0.4X Private Consumpti0n 9.3X 6.8X -13.1X -22.1X 16.2X 12.3X -1.2X 4.07 -2.271 1.9X Debt Service (LT+ST1f F): I/ Debt Servfce (USSN) 2 .. 3 1.9 711.3 801.0 791.0 743.0 652.0 617.0 588.0 687.0 Debt Service / Exports (CUPS) 2/ .. 61.97 47.6X 59.7X 67.0X 62.3X 60.7X 67.6X 58.5X 39.3X1 Debt Servico / GOP .. 20.7X 16.4X 21.6A 20.6X 1T.5% 14.9X 11.9X 9.7X 8.4X Interest Burden (LT+ST+INF)s Interest (USS) 221.2 423.4 427.0 318.9 378.0 315.0 314.0 250.0 200.0 211.0 Interest I Exports (GNCS) 13.8X 34.9X 28.6X 23.8X 3M.4X 26.4X 29.2X 27.4X 19.9X 12.1X Interest / GDP 5.7X 11.7X 9.8X 8.6X 9.9S 7.47 7.2X 4.8X 3.37 2.6X Gros Investment / GOP 23.3X 11.4X 9.91 15.57 13.07 15.0X 14.1X 17.2X 18.37 Z1.AX ICORs (5-yr end1ng year shown) 3/ 77.00 5.90 6.40 8.00 12.40 .8.70 -28.80 15.80 4.80 4.10 Domestic Savings / GOP 19.3X 16.4X 14.8X 14.8X 11.67 6.47 9.1X 7.9X 10.9X I7.2X SOP Resource oalance / GOP 4/ -4.0S 5.07 4.9X1 0.7X 1.47 *8.6X *5.0S *9.31 *7.46 4.4X SOP Current Account alance / GOP 5/ -14.0X -7.2X -5.1X -10.5X *12.0S *16.8 -12.9X -14.7X -10.87 -7.17 Marginal Domestic Savings Rate 0.78 0.54 0.86 1.84 2.20 2.10 O.9f S.9 0.71 0.65 Govorraunt Investment / GOP .. 4.7S 4.77 5.5X 4.7X 5.AX 4.8S 6.1X 6.77 7.6X Gcverrunt Savings GOP -9.87 -8.01 -4.11 -1.0X 0.5 S.97X 6.67 12.47 14.21 13.07 Private Investment / GOP .. 6.7X 5.3X 10.07 8.3 9.4X 9.37 11.1X 11.67 14.07 Goverrment Rev e/ GOP 24.07 18.87 19.27 21.97 23.5X 31.7 22.07 2.7 27.37 24.77 Goverant Expenditures / GDP 44.31 27.37 28.87 29.3X 30.4 28.4X 21.27 22.17 20.37 19.67 Sudg. Def. (-) or Surplus / GOP -20.3X -8.57 -9.61I .7.41 -7.1X 3.37 0.8X 5.6X 7.0X S.1X Consumer Price Index (7 growth) 11.7X 55.67 96.37 109.X 93.X 226.11 147.571 46.8 10.0 5.07X GOP Deftator (7 growth rate) 11.87 42.81 102.07 113.77 97.5 226.1 147.57 46.87 10.01 5.07 Real Exchane Rate (1987.100) 232.3 155.7 205.8 173.4 153.6 161.6 170.? 179.6 179.6 179.6 Term of Trde index (1987100) .. 136.1 150.1 132.7 114.1 106.6 88.8 81.0 80.5 99.2 Export (GNFS)/Voluse Growth bate 6/ .3.1X -5.9X -1.4X 15.9X -16.61 9.17X-2.0X -2.2X 2.7X 16.1X Exports COUFS) / GOP 41.4 34.2X 32.07 34.77 30.4 2.1X 24. 17.4X 16.57 21.37 imports GOUfS) Volu Growto at .. 0.2 25.0 1.17X1 10.171 24.17117.87 5.2X -1.63 5.8X tIports COGFS) / GOP 45.4X 26.97 27.61 35.47 32.27 37.X 30.17 27.4X 24.57 25.a SOP Current Balance, CUS) -544A.6 -23.2 -222.4 -388.2 -461.1 14.0 .568.0 466.0 -658.0 58U.0 Met Reserves CUSSN) .. Reserves LeveItUSSM) 78.0 134.0 116.0 1"9.0 185.0 280.0 290.0 330.0 410.0 570.0 Net Reserves (months fupsts) 1.0 t.0 1.0 1.6 1.6 1.? 2.1 2.3 2.9 3.0 ........................... .................................................................. 0.-.--.-.- Note: All ratios are caceulated from data in urrent prices nd exchange rates. ICCO nd growth rates are based an constant price dats. 1. #LT# dwnotes long-term debt; WST" denotes short-term debt. 2. Figure show debt service bf ore rescheduling. 3. Incremental capitat output ratios with a 5-year period. 4. "OP" denotes "Batlnce of Pa)ments. S. Current account balance is before offiefet transfers. 6. Goods and nonfactor servfess. ANX I Page 7 of 16 Note on GDP Estlmate 1. All of the GDP estimates in this report use the official GDP estimates prepared by the Central Statistics Office. "Real" values use a base year of 1977. Perceived deficiencies in that data led to a consultancy in 1991 to prepare a new GDP series. Based on that work, a number of revised series have been sugested and are under consideraon. The IMF currently uses their own revised series for their internal papers, and the GDP numbers in this year's budget address by the Ministry of Finance were clarly from a revised series. 2. These new estimates have two advantages. First, the base year is 1985 insbta of 1977 which results in more contemporanous weights for the diffe nt sctors. The differece can be important. Using the old series, the drp in tota GDP in 1992 because of the drought was over 10 percent whereash nw series shows a drop of only about 5 percent. The diffence is due to t higher share of agrlcultur in l977 th in 1985. Th other advaonge of the now series is that the methotology takWs bete account of h ifomal sector in esmating growth rates. 3. Unforunatewy, thes now esm are neither complet nor official. They are not complote in that they do not have a fl set of esmates for publlc and privae investment (and consumption) in both real and nominal terms. They are not official because CSO has not published a new historical series based on the now numbes. In fact, the nw numbes themselves have boen undergoing rvisons as the methodology used by the consultant is reviewed. 4. For those reasons, this report condaues to use the old official estmats. We expect that by the dtie the n Policy Framework Paper is prepared later this year, we shall all be using a common set of GDP _imtes based on the rewised methodology and using 1985 as the bass year. ANNEX IV Pagp 8 of 16 ZAMBIA BALANCE OF PAYMENTS (USS millions in current prices) Base Case Projection .....................~.............................................. Pr t.........................te .......................................................................................................... * ---^---Actual . --- ----Preo. .*---Proj ected .-------- 1980 1988 1989 199 1W1 1992 1993 1994 1996 2000 ................ ........................................... ........................... A. Exports of GNFS 1/ 1608.4 1214.4 1493.2 1342.6 1165.0 1193.0 1074.0 913.0 1005.0 1749.0 1. Merchandise (FOB) 1456.9 1155.4 1410.1 1263.6 1082.0 1110.0 950.0 804.0 870.0 1542.0 2. Non-Factor Services 151.5 59.0 83.1 79.0 83.0 83.0 124.0 109.0 135.0 207.0 8. Inports of GNFS 176S.0 1032.0 1281.0 1369.0 1220.0 1559.0 1295.0 1396.0 1452.0 2110.0 1. Merchandise 2/ 1114.0 788.0 90.0 889.0 949.0 1273.0 97.0 107n.0 1102.0 17m. 2. Non-factor Servfces 65t.0 244.0 380.0 480.0 271.0 284.0 324.0 324.0 350.0 353.0 C. Resource Balance *1S6.6 182.4 212.2 -26.4 *55.0 *366.0 *221.0 *4U.0 -447.0 -361.0 0. Net Factor Incom *205.0 410.7 *406.9 318.9 *366.0 *315.0 *314.0 *250.0 *200.0 *211.0 1. Factor Recefps 16.2 t2.? 20.1 0.0 3.4 0.0 0.0 0.0 0.0 0.0 2. Factor Pa ¶mnts 221.2 423.4 427.0 318.9 369.4 315.0 314.0 250.0 200.0 211.0 a. Total Interest Paid (ORS) 3/ 141.8 11.5 76.0 76.5 306.7 164.7 .. .. b-. interet due 141.8 11.5 211.2 328.7 378.0 165.8 314.0 250.0 200.0 211.0 C. Other Factor Pyments and discrep 79.4 411.9 215.8 *9.8 *8.6 149.2 0.0 0.0 0.0 0.0 t. Not Current Transfers .183.1 *34.9 *27.7 *42.9 *40.1 -33.0 *33.0 *33.0 *11.0 *11.0 1. Current Receipts 2.5 0.6 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 a. Workers remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. Other current Traonf 2.5 0.6 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2. Current Paymnts 185.6. 35.5 28.1 42.9 40.t 33.0 33.0 33.0 11.0 11.0 F. Current Account 81ance 1. Before offfefat capital grents 544.6 -263.2 222.4 -38.2 -41.1 .714.0 -56.0 -766.0 .658.0 5a3.0 2. 0fffblat capital grants 7.2 99.9 71.8 295.5 488.0 636.0 328.0 480.0 533.0 559.0 3. After offiefal capital "gnts -537.4 *163.3 -150.6 *92.7 26.9 -78.0 -240.0 -286.0 -123.0 *24.0 0. Long Term Capital nf lows 162.8 16.2- .401.4 -757.8 *261.4 *190.6 *55.t 68.0 -131.0 *S1.9 1. Diroet Investmet 61.7 0.0 0.0 0.0 0.0 0.0 7.0 15.0 131.0 148.0 2. Net LT Borrowing (ORS) 390.9 228.4 -54.1 -292.5 -24.1 -190.6 -62.8 53.0 -262.0 -229.9 a. Disbursements 602.9 24.2 212.5 164.8 353.3 233.0 273.0 420.0 126.0 140.0 b. Repaymets Oue 212.0 15.8 266.6 457.3 377.6 423.6 335.8 367.0 388.0 369.9 3. Other LT Inflows (net) *289.9 *212.2 .347.3 -465.3 -23.3 0.0 0.0 0.0 0.0 0.0 H. total Other ttem (net) 371.1 179.3 610.9 752.6 203.S 363.6 305.8 256.0 294.0 145.9 1. Not Short-Torm Copitat 4/ 345.6 243.0 718.4 829.4 323.4 363.6 303.8 258.0 294.0 145.9 a. Interest Arroes .. .. .. .. .. .. b. Other not ST capitatl .. .. .. .. .. .. .. 2. Capital flows n.e.f. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 3. Errors and amission 25.5 -63.7 -107.5 -76.8 -121.9 0.0 0.0 0.0 0.0 0.0 t. Change In Not Reserves 3.6 -32.2 -58.9 97.9 31.0 95.0 -10.0 -40.0 .40.0 .40.0 1. Mot Credit from the IW 5/ -28.3 71.8 T0. 8T.3 n37.7 39.4 -n.S -20.0 0.0 105.2 2. Reserves Change n.e.1. 31.8 -104.0 .129.6 10.6 68.7 -55.6 62.8 -20.0 .40.0 65.2 3. Escrow accoawt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 .......................................................................................................................... 1. Goods an nonfactor servis. 2. frig on fiaports up to 19W ae .., ad afterwards we C.I.F. 3. "ORS" dnotes Debt Reporting Sevice. 4. Includes redction In arre rd debt relief. S. Includes overdue obl1gatiom. . ................ AM= IV Pase 9 of 16 *-------.- Actual .. ---. -- Prel. -- Prolectd. 1980 1988 1989 19 1991 1992 1993 199; 199 2000 ........................................................................................................................... J. As Shares of G0P (current USS)s 1. Resources atan.e *4.02 5.0X 4.9X -0.7X -1.4X -8.6X -5.0X -9.3X *7.4X -4.42 2. Interest Pay ent (LT+IMF+ST) 5.7X 11.72 9.8% 8.62 9.6X ?.4X 7.2x 4.82 3.3X 2.62 3. Current Aceount Balance *14.0X 7.2X -5.12 -10.5X *12.0X -16.82 *12.9X .14.7K -10.82 -?.I% 4. LT capital Inflow (F.2G0) 4.22 0.42 *9.2X *20.5 -6.82 -4.52 *1.3X 1.32 *2.22 -1.02 5. Net Credit from the IMF *0.7X 2.02 1.62 2.42 -1.0X *0.9X -1.72 *0.4X 0.02 .1.3X K. Foreign Exchange Reserves: 1. Gross Reserves (excluding gold) 78.0 134.0 116.0 193.0 185.0 280.0 290.0 330.0 410.0 570.0 2. Gold (and-yea London price) .. .. .. .. .. .. .. 3. Gross Reserves (including gold) .. .. .. .. .. .. .. 4. Not Resorves (in months imports) 1.0 1.0 1.0 1.6 1.6 1.7 2.1 2.3 2.9 3.0 L. Exchg Raes 1. Zn Nominal Term (LCU/USS) 6/ a. Primary (Offficil) Rate A at Averg*e o.79 8.266 13.814 30.289 64.640 171.000 460.000 600.000 682.610 801.800 End-of-Year 0.803 10.000 21.640 42.J00 84.000 315.500 530.000 620.820 706.790 811.900 b. Ga Convrwsin Factor 0.789 8.266 13.814 30.289 4.640 171.000 460.000 600.000 62.610 801.800 2. In Real Term (bae 1987u108) a. NU (PAC estfostes)C3 change) I/ 9.70X 7.302 *0.702 S.70M 2.10X 4.312 0.50X 3.432 3.04X 2.49X b. tndx Real Exchange Rate (USS/LCU) 232.3 155.7 205.8 173.4 153.6 161.6 170.7 179.6 179.6 179.6 N. Nemor u.m tem OP (current U#15) 3884.0 3632.0 4345.0 3704.0 3830.8 4248.0 4387.0 5202.0 6077.0 8227.0 N. Optional Detaits for RIS-X 1. Total Factor Pavuents .. .. .. .. .. .. a. Government lntest b. Private Sector Intest .. .. .. .. .. .. . c. Profit an Di0ret Forefon .. .. .. .. .. .. .. nvestm nt 2. Officale Capitel Grants .. .. .. .. .. .. .. -. a. For Sudgetary Finwmlnu.. .. . .. .. .. .. .. b. To Extra-tudgetry Entitit (OPS .. .. .. .. .. .. .. C.... 3. Covernmnnt Net L Borrowing .. .. .. .. .. .. .. .. a. i sbwusements .. .. .. .. .. .. .. b. Repaymonts .. .. .. .. .. .. .. .. .. 4. Private Not LT Sorroing .. .. .. .. .o .. .. .. .. . a. Disfursments .. .. .. .. . .. . . .. b. Repayments .. .. .. .. .. .. . ............................................................... .................... ..................... ................ 6. "LCW" demotes local currency units. 7. "NUV* deotes the unit value Index of menufctured expert from selected fnrAtriatlaed cowtries (France, Germnny, Japan, U.K., and U.S.) to developing country expressed in US$. Page 10 of 16 ZUANA: txternal financing RequIrements 1991.9 (In millions of U.S. doltars) 1991 1992 1993 1994 1995 1996 1. Current acowit, oxcluding interest and official transfers 9 *399 *254 -516 .501 .458 2. Debt service obtlgations 791 *743 '652 -617 -601 -5sa ormultilaterats -462 *502 *.39 *406 393 3°S Scheuletd obligations -33. .48t1 363 *327 -312 *314 Paris Ctub creditor n 212 .400 -277 -231 -224 *222 Other -122 -81 *86 .92 U 92 interst on arrears and servico of rescheduled obligatfom t128 .21 7$6 -9 .81 *82 Paris club creditors - 7?8 8 -59 *62 -65 -6? Other -50 *13 *1? -17 *16 -15 Nultilaterats -329 -241 213 ^211 -208 *192 World ank U88 -79 *82 U?8 ?5 .?1 INf - m -95 *68 65 4 -32 Other aultilaterals -69 o6? -63 -60 -89 *89 3. Targeted reeetf an of arrears 1/ -1050 -183 -26 -96 *1189 -5 xNcualttllaterls 833 t103 68 78 ... . Paris Club creditors .76 *103 68 78 ... . other -75? 0 ... ... Nulttlitrols -21? -80 94 *20 -1189 *5 Vorld lnk -253 -39 ... ... ... ZIP 20 632 *2 20 *1189 Other multiteurats 16 -9 .32 4. Change in et interNatonal 2/ reseres, ex. IMF (incroese * ) 31 -9 -10 40 -40 .40 (*/W gros r1eserve) 11 .17 *10 -40 -40 -40 S. Gross finaifng roquirement to 12.3*4 ) -101 .1449 -942 *121 -2331 1091 6. Debt relitf 3/ 1158 551 340 271 1474 106 Parfs Club ar-dftors m 501 247 210 189 54 Other 863 50 93 65 1285 52 T. Finncing requirwunt after arrears acwmulation end debt relief C a 5*6) -643 -68 *602 -996 -857 -985 S. Identfffed poissble disburseents 73 8 Ga9 02 901 350 350 World lank (nwmroj Ut) 202 145 143 284 o. ... 8OP pp0rt from other dor 264 326 155 22 . Commodity assistance 76 246 90 50 50 so (psize) .. 146 40 . ... ... (Non-mmis) 76 100 50 50 50 50 Project assstano 244 191 234 300 300 300 Suppltis, prfvate el bhort-tens captel. Mt .47 -59 .20 -15 0 0 9. Financing ruir_mit, afte dentififed dishursements andW ddbt rotI fd 0 -96 Ot 0? 631 .-.-.-........... --.-...........................-.............. Soure IS* oF 2of 0 i, nW Fud Sta"ff estiates. 1/ Elutdi terseT furthr NcsnuStlOn of arer we nuvMUilarals pendin conclusion of resohedlng dissifom. 2 In 19M, de not inclul e cted shift of UJS2 million fn gpas resere fom th an of Zaia to th c£ommelt banks wiar pmeac fa mnSing OIL f and 0h rtention ecoa. V insu deferl and tAorr esm uio n tfOA of arrers to nmlttlatertts pendin conclusion of fet discusiom A18= IV Pae 11. of 16 Zai: ebt Stock * 1930 ................... US UUU0i t*ecosw Total 0.ot SteaM. tW of "e. 7103 total Sot SeifYio 38 total Sot asX of Gro NotIol Psoot 421.0 totaSob? as S of tzxt of 0d * e9fe" 9. Dobt ouvi*eo aS of 6*Ot of oos avt Svc"Oe 32.6 Najo. Crodtto.' sIlatovt 8r9 *21 of 1ich: Paris Ct;b 28 7. loi*-pars Ctli 7 3.1 Multi tatifal 3016 ~~~~~~~~~~43.0 of Weft: IDA 74.0 tMw 1304. oth1 . 2 8.4 S~eptIee'. 13 1.9 Lob 'do Club a 1,. *At term a. ^1 *Jbgt eton 0942.1 Gein. fed lo 48 8.0 UK w 4.? Pf'0 US so 5.4 USA 3. at..d tO.3 From ti .11 IUrg~ 11, 1.8 Itaty 11 1.6 Ssit Arabia *1.1 I 'eq 74 1.0 Can_"lth 0_"m C0 a O.9 mtseu 6t 0.9 *"w1 O.d a n. Ps.'otawae 6 1. @tJof 11.6 * Alt te" a"e eattt fr fe d 0i103. After 14nk oujItit. Source : Bank of Zambia A= TV Paga 12 016 KEY EXPOSURE INDICATORS 18 1989 1990 1991 1992 ORa USf At Q t}m Total Debt Outsuanding (IDO) a 6839 6716 7260 7279 704 Dtsbuuements a/ 242 209 160 338 286 Total Debt Sevice (TDS) a/ 182 193 195 586 352 Debt and DebtB Svice lndicators IDOIXGS 542 421 503 624 577 TDOIGNP 212 169 263 211 37 TDSIXGS 15 14 14 51 29 Coucassbusl#flJO 27 24 31 36 39 IBDIC Exposue Indicators E3RDbDSlblcD DS W *Ne& 0 2 59 30 Pref. Crd/Publc DS MRD/D9XGS Neg. 0 0.3 29.5 8.7 IlERDPortf0o Share 7.4 7.5 7.4 5.1 4.1 MIGA MIGA Guarantees *Neg. = n*eUble a/ Indudes public and publicly guaranteedd debt, private nonguaranteed debt, use of IMF credits, and short- term capital. bW PubLic DS defined as TDS as in (a) above. Source: The World Bank, Wodd Debt Tables files. Papo 13 of 16 Run Time$ 02/09/9 at 1s.18.52 ZAMBIA Status Of Bank Group Operations In MBIA PFDBR25 - Sumury Statement Of Loa nod IDA Credfts (LOA data as of 1/30/94 * MIS data as of 02/09/94) .................................................... By Coentry CoWtry ZAMBIA Amout in Us mItIon (les$ cuttationa) Lon or Fiscal UAdle Clsing Credit No. Y"r Borrower Purpose Bank IDA bursied Oate ................... ..... ................ ....... ........... .... .. ... .... . .... ......... ....... Credits 22 Credits(s) ctosed 500.04 C14370-ZA 19846 ZAMBIA FOPt I II 22.40 5.57 09/30/93(R) C157so-ZAN 195 ZAMBIA RWS.IV 12.20 12.86 06/30/94(R) C16790*ZAN 1986 ZANIA TAS II 8.00 4.49 12/31/94(3) C-1430-ZAM 1967 ZAMBIA COFf tl 20.40 21.17 06/30/9 C17460-ZAL 1987 ZAMBIA AR. A11.&1 XT. 13.00 10.41 12M1AMR) C22690*ZAN 1991 ZAMIA MINING TAS 21.00 15.16 06/30/97 C22730-ZAN 1991 ZAMBIA SOCIAL RECOVERY POJ 20.00 8.90 O?/31/7 C24050*ZAM(S) 1992 ZAMBIA PRIVATIZATlWNIND. 3 200.00 6.06 0630/94 C24060ZAN 1992 ZAMBIA PIRC TECIICAL AltS 10.00 7.69 12/31/9? C24220'ZAN 1993 ZAMBIA MTG. a PRC0E. 33.00 25.65 06/30/99 C24290-ZAN 1993 ZAMBIA EDUCATION RIMS. t 32.00 28.0s 06/30/96 C25150-ZAN 1993 ZAMBIA TRANSPORT INGINCEtN 8.50 8.54 06/30/9? C25230-ZAM(s) 1993 ZAIA PIRC II 100.00 99.37 06/O3/9 C24052-NzCS) 1994 ZAMBIA PRIVATIZATIOtl/D. R 16.84 16.69 03/23/94 C25231-ZARCS) 1994 ZAMBIA PIRC UI 10.00 9.65 06/30/95 C253SO-ZAN 1994 ZAMBIA FINANCIAL & LEGAL VA 18.00 17.64 06/30/99 TOtAL rber CredIts a 16 545.34 29.14 Los 28 LousCs) clos 582.13 All close for ZANIA TOTAL abor Loa a 0 TOTAL*' 582.13 1.045.)? of iAich rpid 415.99 2.34 TOTAL held by Bk & IDA 16.14 1,043.0) Anuwt sold 28.58 of which repid 28.58 TOTAL widisbwsed 296.14 Notes: ..................................... * Not yet effective Not yet signed " Total Approved R. and Otstawding bance repreent both ative e#d inoctiv Loa en Crifts. CR) indicats folly rese Clo Dote. (S) indic SALECAL Lo a Credits. The Net Approved and B Rpsye.nt re historical vatlu, all others ae mwket value. Thes Signing, Efective, an Closinr dats ar bas Wm the Loon kpartmnt off feet data W are not tae from the Tak Budet file. ANNE LV Page 14 of 16 ZAMBIA: Statement of IFC Investments as of December 31, 1993 Gross Camitemt- !m 01 LOA EQUTY TOMA FY aa;.m Brm .... VW a= ----- 1991183 Zu. OE PROPER LTD. TOURZ 22.4 -.- 22.4 1988 KWS8TO=K CZAMI&A) rO/Org'O 8.7 -.- 8.? 3flcEMCZ 1987 GUES VAILEY DEVELOMT l0W/PFOOD 3.7 0.8 4.5 RSS 1984 MPONU DEVELO SKT COR. POWP1FOOD 1.8 0.3 2.1 PsINw 1984180 KAPUE T-.TXL- TXT= 10.7 10.7 1982811 ETHANOL cIANY OF ZAMBIA CUIPEROCUM 3.7 0.6 4.3 1982/80 ZCQi InIN 53.1 -. 53.1 1978175 CENTURY PRODUCT LTD. PLASIC WP 0.9 0.2 1.1 1978 DU IAN or ZAIIA DBZ LO >NT FINA -.- 0.5 0.5 1973/72 ZA1IA BATA SHOE SHOES 0.3 TOTAL GROSS COM RIT TS 1A07.1 2.8 "l1 LESS: CANCZATIIS, DCNAE ADJUSTWNTS, PAUNTS8 RITE-CFFS, & SYNDICATE SALES 78.8 81.2 NT IPC cC89TENT 28.3 0.2 28.5 TOTAL UNDISBURSD 6.5 0.0 6.5 TOTAL DISBURSED 21.8 0.2 22.0 L: WMD414ARWSCSOI . ZAM AM= IV pige-15 of 16 ROM Tftl: 01/18/94 at 14.57.54 Statut Of So* Grou erewti0u In ZAIA PfOsa258 * List of Closud tLs wi Secsal ........................... - --.---.------.-.-............................................... - Sy Coutry Coli.try: UMIA mait in USW ulit (tl comettations) Loan or ffcal Urfs- ClosigW Credit No. Your Sorrows Put"" km IDA brued Dote ..... ....................... ............ ....... ........... .... .. ... .... . .... ......... ....... C1545O-ZAN 1965 ZAMIA A66I EMS. 24.15 .00 06/31/1965 CA0050LZAM 1966 ZAIIA AGRI AM. 9.65 .00 06/30/1988 CAOO4O -ZA 1966 ZAIA IMB.1110111ATION 41.00 .00 1ZI1/196S C16300-ZAN 1986 LWIIA IN.RIVITATIN 19.46 .00 12/31/1966 C1720-ZM 1966 ZAMIA 3I l t =0 50.00 .00 0/01991(3) C22140-ZAM 1991 ZAIA RtMIIT CRUIT 210.00 .00 0601992 C22141-*Z 1991 U A uhh CEIt 27.20 .00 063019 C2214-ZZN 1992 ZAJIA RCM? CEBIT 10.00 .00 0601/1993 C24051-ZAM 1993 ZWIA PRIVATIZATIlIS. I 20.66 .00 03/23/19 L23910-ZA9 1964 ZIA cow Km & Dive 7.93 .00 09/30/19W Total ZLJA M.9 413.54 .00 Page 16 o1fs ZAMBIA ECONOMIC AND SOCIAL ADJUSTMENT CREDlT SUPPLEMENTARY DATA TIMETABLE OF KEY EjVENT (a) Time taken to prepare : 8 months (b) Operation prepared by : Ministry of Finance and National Commission for Development Planning (c) Project identification : April 1993 (d) Project Preparation : September 1993 (e) Appraisal mission : November 1993 () Negotiations : January 1994 (g) Planned date of effectiveness : March 1994 (h) Relevant PCRs and Project Performance Audit Reports PK& Export Rehabilitation and Diversification Project (Ln 2391-ZA) June 1991 Industrial Rehabilitation Project (Cr 1630-ZA) June 1991 Economic Recovery Credit (Cr 1720-ZA) June 1992 Second Economic Recovery Credit (Cr 2214-ZA) June 1993 Prgiect Perfornunce Audit ftqffiZ Export Rehabilitation and Diversification (Ln 2391-ZA) June 1992 (#10847) Industrial Reorientation Credit (Cr 1630-ZA) June 1992 (#10846)