6CR Z/I (-I Z - World Bank€¦ · Framework Paper (PFP), updating the PFP distributed in September...

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Docunent of The World Bank FOR OFFICIAL USE ONLY 6CR Z/I (-I Z Report No. P-5483-ZA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 149.6 MILLION ANDAN IDA REFLOWS SWJPPLEMENTAL CREDIT OF SDR 19.4 MILLION TO THE REPUBLIC OF ZAMBIA FOR AN ECONOMIC RECOVERY PROGRAM FEBRUARY 8, 1991 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bank authirization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Transcript of 6CR Z/I (-I Z - World Bank€¦ · Framework Paper (PFP), updating the PFP distributed in September...

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Docunent of

The World Bank

FOR OFFICIAL USE ONLY

6CR Z/I (-I ZReport No. P-5483-ZA

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED DEVELOPMENT CREDIT OF SDR 149.6 MILLION

AND AN

IDA REFLOWS SWJPPLEMENTAL CREDIT OF SDR 19.4 MILLION

TO THE

REPUBLIC OF ZAMBIA

FOR AN ECONOMIC RECOVERY PROGRAM

FEBRUARY 8, 1991

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authirization.

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CURRENCY AND EQUIVALENT UNITS

Currency Unit = Zambian Kwacha (ZK)

ZK/US$ (annual average)

1985 2.711986 7.301987 8.891988 8.221989 12.901990 47.40 (end-December)

FISCAL YEAR

Government 5 January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ADB = African Development BankADF = African Development FundBOZ = Bank of ZambiaCSO = Central Statistics OfficeDBZ = Development Bank of ZambiaEEC = European Economic CommunityHIID = Harvard Institute for International DevelopmentIMF = International Monetary FundKfW = Kreditanstalt fur WiederaufbauMOF = Ministry of FinanceOGL = Open General LicenseODA Overseas Development Administration of the UKPER = Public Expenditure ReviewPFP = Policy Framework PaperPIP = Public Investment ProgramSGS = Societe Generale de SurveillanceSOE = Statements of ExpenditureUSAID United States Agency for International Development

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FOR OFmICIAL USE ONLY

ECONOMC RECOVERY CREDIT

lable of Contents

CREDIT AND PROGRAM SUMMARY . . . . . . . . . . . . . . . . . . . . 1

PART I - COUNTRY POLICIES AND LANK GROUP ASSISTANCE STRATEGY . . . 5

A. Background . . . . . . . . . . . . . . . . . 5B. Recent Economic Performance . . . . . . . . . . . . . . . . . . 7C. Reform Actions Taken . . . . . . . . 10D. Impact of Reforms and 1990 Financial Outcome . . . . . . . . . 13E. Adjustment Issues . . . . . . . . . . . . . . . . . . . . . . . 14P. The 1'licy Frameworkt 1991-93 . . . . . . . . . . . . . . . . 17G. Prospects and Financial Requirements . . . . . . . . . . . . . 20H. Bank Strategy and Operations . . . . . . . . . . . . . . . . . 23

PART 11 -THE PROPOSED CREDIT . . . . . . . . . . . . . . . . . . . 31

A. Credit Objectives . . . . . . . .. . . . . . 31B. Monitored Actions . . . . . . . . . . . . . . . 32C. Project Description . . . . . . . . . . . . . . . . . . . . . 33

PART III - JUSTIFICATIONS AND RISKS . . . . . . . . . . . . . . . . 35

PART IV - RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . 36

ANNEXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

I. Economic Indicators . . . . . . . . . . . . . . . . . . . . . 38II. Status of Bank Group Operations . . . . . . . . . . . . . . 43III. Letter of Development Policy . . . . . . . . . . . . . . . . 45IV. Policy Matrix . . . . . . . . . . . . . . . . . . . . . . . . 58

HAP

This document has a restricted distribution and may be used by recipients only in the performance 2of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ZAMBIA

ECONOMIC RECOVERY CREDIT

CREDIT AND PROGRAM SUMMARY

Borrower s Republic of Zambia

Beneficiary s Republic of Zambia

Amount X IDA SDR 149.6 million (US$210.0 million)IDA Reflows SDR 19.4 million (US$ 27.2 million)

Cofinancing : Germany DM 34 million (US$18.8 million)

The IDA amount includes SDR 48 million (US$67 million)from the Special Allocation provided for in thePresident's Memorandum to the Executive Directorsentitled 'A Review of the Use of IDA Reflows", datedJune 5, 1990. This Memorandum was considered by theExecutive Directors on Thursday, June 28, 1990.Zambia's adjustment program is being supported bydonors under the Special Program of Assistance to Low-Income Debt-Distressed Countries in Sub-SaharanAfrica. In addition to the cofinancing identifiedabove, the African Development Bank has expressedinterest in participating in this IDA operation. Inaddition, the Zambian Government is seekingcofinancing from the Overseas Economic CooperationFund (OECF) of Japan and has made an official requestto the Government of Japan.

Terms a Standard IDA terms, 40-year maturity. with a 10-yeargrace perio

Description s The objective of the proposed operation is to provideimport financing in support of Zambia's economicadjustment program, and, in particular, to assistZambia with its foreign exchange cash flow at the timethat the arrears to the World Bank are being paid.Satisfactory clearance of arrears to the Bank 4nd theFund will be required before signing and effectivenessof the credit. Without the cash flow assistanceprovided by this operation, Zambia would find it verydifficult to clear its arrears to the Bank, and accessto Bank financial and other support would not berestored. As outlined in the Policy Framework Paper1991-93 (PFP), the overall aims of the adjustmentprogram are to stabilize the economy through fiscaland monetary restraint and to restore sustainablegrowth in the medium term through policies ofstructural realignment and improved incentives. Themain structural objectives are to reduce thedependence on copper by encouraging non-traditional

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export growth, to lower the capital and importintensity of production and consumption, to increasesavings and investment levels, and to help reducepoverty by expanding employment and incomeopportunities. Since achieving these objectives willmean substantial restructuring of the economy, acomplementary goal is to protect vulnerable groupsfrom the worst impact of the adjustment.

Good progress has been made in implementing theGovernment's economic reform program. Many of thereforms supported by this Credit are already beingimplemented. This Credit will further those gains bysupporting a number of important structural measures,includings decontrol of maize and fertilizermarketing and pricing; privatization of allparastatals except public utilities and naturalmonopolies; trade liberalization, involving tariffreform, the removal of export restraints, and rapidexpansion of the open general licensing system in thesecond foreign exchange window; and civil servicereform. It will also support the program'smacroeconomic policies and objectives, including amarket-clearing exchange rate, positive real interestrates, lower fiscal deficit and monetary growth,general decontrol of prices, higher savings andinvestment, lower inflation, and improved productiveefficiency.

Benefits X This is Zambia's last reasonable opportunity to set apolicy environment for restructuring without profoundeconomic and social disruption. The present programprovides the basis for sustainable development andmore efficient use of resources. The macroeconomicpolicies are expected to reduce the rate of inflationand provide the stability required for a resumption ofeconomic growth. They should also bring about therealignment of prices and the incentives needed torestructure the economy along the lines of Zambia'scomparative advantage, which lies primarily inagriculture. The dependence on copper should bereduced, as should the capital and import intensity ofproduction and consumption. Savings and investmentrates are expected to rise, and, concomitantly, thehigh consumption ratio to decline. This in turnshould give rise to increased employment and incomeopportunities, and to improved standards of livinggenerally. Substantial efficiency gains are expectedfrom the decontrol of maize and fertilizer marketingand pricing, particularly through increased privatetrading in these items, leading to a more efficientstructure of production, reduced subsidies, andgreater food security. Efficiency gains are also

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expected from privatization of the parastatal sectorand from the increased competition flowing from thetariff reform. Diversification is expected to renderthe economy less susceptible to external shocks.Lastly, Zambia's relations with the internationalfinancial community would be regularized, with allthat implies for future financial and technicalsupport.

Risks 2 There are substantial risks associated with thisprogram. The political changes underway in Zambiagive rise to considerable uncertainty and could slowimplementation of the adjustment program. Forexample, political pressures could make fiscalrestraint more difficult. It seems unliLely, however,that there would be a major turnaround in policy sincethe need for adjustment now seems broadly accepted inthe ccuntry and the commitment is strong. There areserious social risks to the program also, asdemonstrated by the maize price riots of June 1990.The sharp decline in living standards over the past 15years has left large segments of the population on theedge of subsistence, and any further erosion of theirreal incomes could result in social upheaval. Thisrisk is made even more real by the high degree ofurbanization in Zambia. Implementation of the socialaction program and the targeted maize coupon programshould help protect the vulnerable groups, therebylowering this risk. Government's limitedImplementation capacity is another serious risk,especially given the comprehensive nature of theprogram. Technical assistance in economic management,to be provided by the Harvard Institute forInternational Development (HIID), has been arrangedfor the Ministry of Finance and the Bank of Zambia tohelp reduce this risk. This assistance includesadvice on economic management, planning and budgeting,debt management, external aid coordination, andvarious Central Banking functions. There is alsoconsiderable risk that the necessary amount of donorfinancing will not be forthcoming, particularly ifthere is any significant policy backsliding. Frequentdonor coordination meetings and the new donorcoordination consultant in Lusaka shoiuld help providean early warning of such difficulties. Lastly, thereis the risk that because of past over-regulation andexpropriations, the economic agents in Zambia will notrespond promptly to the incentives being offered bythe program. The program includes efforts to convincethe local and foreign business communities that theauthorities are serious about an expanded role forprivate initiative.

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Disbursements s The IDA Credit would be disbursed in two tranches, thefirst for SDR 92.6 million immediately uponeffectiveness and the second for SDR 57 million on orabout August 30, 1991, upon satisfactory fulfillmentof specified conditions. The IDA Reflows Credit wouldbe disbursed immediately upon effectiveness.Disbursement of the large first tra;.che of the IDACredit and the IDA Reflows Credit covering priorexpenditures (retroactive financing) is essential inorder to assist Zambia with its foreign exchange cashflow at the time the arrears to the Bank are paid.The second tranche would be disbursed following normalBank procedures for imports through the Open GeneralLicense (OGL) facility of the dual exchange ratesystem in Zambia.

ATvraisalReport s This is a combined President's Report and Staff

Appraisal Report.

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INTERNATIONAL DEVELOPMENT ASSOCIATION

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT

TO TIE EXECUTIVE DIRECTORS

ON A PROPOSED DEVELOPMENT CREDIT AND

AN IDA REPLOWS SUPPLEMENTAL CREDIT TO

THE REPUBLIC OF ZAMBIA

FOR AN ECONOMIC RECOVERY PROGRAM

1. I submit the following report and recommendation on a proposedIDA Credit of SDR 149.6 million (US$210 million), and an IDA Reflows Creditof SDR 19.4 million (Us$27 million), on standard International DevelopmentAssociation (IDA) terms with 40 years maturity, to the Republic of Zambiain support of the country's Economic Recovery Program. The FederalRepublic of Germany will participate in the financing of this program withDM 34 million in direct cofinancing.

2. An Economic Memorandum on Zambia (Report No. 5000-ZA) wasdistributed to the Executive Directors in April 1986. A second-year PolicyFramework Paper (PFP), updating the PFP distributed in September 1989(Report No. SecM89-1115), was distributed to the Executive Directors alongwith this President's Report to be discussed the same day.

I, COUNTRY POLICIES AND BANR GROUP ASSISTANCE STRATEGY

A. Background

3. The Zambian economy suffers from severe and longstandingdistortions that will require a major structural adjustment effort over anextended period if they are to be overcome. Its major characteristic isthe heavy dependence on a single commodity - copper - and the dualisticeconomic structure that has evolved around this dependence. This industryalone accounts for nearly 85 percent of the country's total exports,contributes about 15 percent of GDP, and is an important source ofbudgetary revenue. As a result of favorable copper prices and output priorto the mid-1970s, a highly capital and import intensive economic structurewas created. The emphasis was placed on import substitution and highprotection of domestic industry. A highly overvalued exchange rate wasmaintained, which provided no incentive for the development of non-traditional exports. In addition, the copper mines set high wagestandards, which became the guideline for the rest of industry. Theattraction of good wages, together with widespread urban consumer subsidies(including free education and health care, and food subsidies), led torapid migration from rural areas, making Zambia one of the mo-t urbanizedcountries in Africa. This, in turn, elicited an urban bias ax, economic and

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social policy to the detriment of the rural and agricultural sectors, bothin terms of incentives and available manpower. At the same time, Zambiaused the high copper earnings to acquire large segments of industry, andstate ownership became widespread.

4. The vulnerability of the Zambian economy due to its heavydependence on copper was vividly demonstrated beginning in the mid-1970s,when the commodities boom of the previous decade came to an end. Worldcopper prices fell sharply at that time and continued to decline in realterms, with occasional, brief exceptions, until 1987. The resultingdeterioration in Zambia's terms of trade, which by 1986 had fallen by about80 percent, threw the economy into a deep recession from which it has yetto recover. A decline in copper production (from about 700,000 tonnes toless than 450,000 tonnes) during this same period exacerbated the effectson the economy of the worsening terms of trade, further highlighting therisks of single commodity dependence.

S. During most of the 1970s and early 1980s, economic policy wasaimed at maintaining consumption levels and living standards, despitedeclining real resource availability. Subsidies were increased sharply,which when combined with declining budgetary revenues, resulted in growingfiscal deficits. External borrowing increased, and when new loans abroadbecame difficult to obtain, reliance was placed on domestic banks tofinance the deficits. Price controls were tightened, and the exchange ratewas kept fixed in an effort to contain inflation. However, theartificially low price encouraged the smuggling of goods to neighboringcountries and, together with the scarcity of foreign exchange, reduced thesupply of goods on local markets thereby further contributing toinflationary pressures. The resulting price distortions (including anovervalued currency and negative real interest rates), together with theanti-agriculture bias described above, contributed to a furthermisallocation of resources, increased capital and Import intensity ofproduction and consumption, and discouraged export diversification. Due tothe growing shortage of foreign exchange, blackmarketeering became endemic.Agriculture, the sector believed to have the greatest growth and exportpotential. stagnated due to a lack of incentives. Low domestic savings andinvestment translated into declining output and productivity, and intorising unemployment.

6. Zambia's per capita real GNP fell by an average of 2.3 percentper annum during the 1970s. In the following decade, real growth exceededthe rate of population growth in only two years (1981 and 1988); as aresult, GNP per capita declined by a further 50 percent during the 1980s.A number of factors account for the low growth in this past decade. Apersistent drought during most of the decade adversely affectedagriculture, while declining ore grades and increasingly inaccessible orereserves, together with manageriai and technical problems in the mines, ledto a somewhat erratic, but steady drop in mineral output. The foreignexchange shortage associated with the drop in mineral exports and thedepressed copper prices adversely affected all sectors of the economy.Capacity utilization declined and economic and social infrastructuredeteriorated due to lack of maintenance and rehabilitation. Also, theshortage of foreign exchange, together with a poor business climate due in

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large part to excessive government control and regulation, reduced theinvestment level significantly.

7. The Zambian Government made several half-hearted attempts atreforming the economy during the 1970s and 1980s, with support from theBank, Fund and bilateral donors. None of these were sufficientlycomprehensive to bring about the structural changes required in thesconomy, however. In most cases they involved slight devaluations of theKwacha and adjustments to interest rates, plus intentions to make a numberof other policy changes subsequently. These further changes were, at best,only partially implemented. Probably the most ambltious attempt at reformwas the Bank/lund-supported program in 1985-87, the main pillar of whichwas adoption of a foreign exchange auction to establish a market rate and asubstantial liberalization of trade. Failure to control the budget deficitand monetary growth undermined the auction, however, and led to greatinstability in the exchange rate. Inflation accelerated and the programwas abandoned by the Government in May 1987 amidst rising populardiscontent. This program was replaced by the Government's own adjustmentprogram which represented a complete turnabout in policies. Price .ontrolswere reintroduced, the exchange rate was fixed at a highly appreciatedlevel (although not to the pte-auction level) and administrative allocationof foreign exchange reinstituted, interest rates were f'xed at highlynegative real levels, and many of the tariff and other measures taken wereeither reversed or weakened. It was thought that inflation could becontrolled by these policies and that the stable exchange and interestwould stimulate economic growth.

B. Recent Economic Performance

8. Although there was positive GDP growth (6.3Z) in 1988, Zambia'seconomic performance continued to deteriorate following the adoption of the1987 policy package. Many of the key economic indicators for the recentyears are summarized in Table 1 below. The 1988 growth was concentrated inagriculture and industry. Favorable weather and higher producer pricescaused a 20 percent jump in agricultural production that year, whileincreased foreign exchange availability due to favorable copper pricesresulted in a 15 percent gain in manufacturing output. Mineral output, onthe other hand, declined by about 9 percent and output in the rest of theeconomy was stagnant. The 1988 trends in agriculture and manufacturing didnot carry over into 1989. All sectors of the economy were stagnant thatyear and there was no growth in real GDP. Foreign exchange earningscontinued to improve as a result of further increases in world copperprices, but these were largely offset by a decline in donor support, dueprimarily to the lack of an adjustment program.

9. Concerns about econonic policy and a lack of incentives led to asharp decline in investment in the 1987-89 period. Gross investment as aratio to GDP fell from nearly 24 percent in 1986 to less than 9 percent in1989. The nationalization of the larger privately owned maize millsfollowing the food riots in December 1986, and the expropriation of someother private companies subsequently, undoubtedly contributed to apessimistic outlook on the part of businessmen. In addition, the surprisepolice searches of business premises and personal residences for

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blackmarket contraband, including both foreign and local currency (anylarge amount of Kwacha found was considered evidence of illegal activityand had to be explained), must also have been a factor. Many businessmen,particularly those of Asian descent, emigrated during this period. in anyevent, with most firms operating substantially bolow capacity, there waslittle incentive to invest.

10. The economy became increasingly unstable during this period(1987-89). Inflation (end of period) rose from about 35 percent in 1986 to64 percent in 1988, and then surged to 154 percent in 1989. Part of the1989 surge in inflation reflected the ending of price control in June, aswell as the currency depreciation and the reduction in subsidies. For themost part though, this acceleration in inflation took place during a period

TABLE 1s ZAMBIA -- KEY ECONOMIC INDICATORS

--------------------------------------------------------- __----------------

1985 1986 1987 1988 1989 1990

Actual Actual Actual Actual Actual Est.----------------------------------------------------------------- __--------

GDP GROWTH RATE 1.9 0.7 2.7 6.3 0.1 0.9CONSUMP./CAPITA GR .. .. .. -8.5 -0.2 -2.4

DEBT SERVICE (IN US$M)(ACCRUAL BASIS)/1 716.9 831.7 923.7 971.2 851.7 912.0

DEBT SERVICE/XGS(ACCRUAL BASIS)/1 74.9 109.9 99.7 79.0 56.1 66.2

GROSS INVESTMENTIGDP 14.9 23.8 13.9 12.3 8.7 14.8NATIONAL SAVINGS/GDP 4.5 10.5 3.0 8.0 5.5 3.6GOVT. REVENUE/GDP /2 22.3 24.7 22.1 18.3 17.7 21.7GOVT. EXPEND./GDP /3 36.7 53.3 33.0 30.4 27.0 29.7GOVT. DEFICIT/GDP

(ACCRUAL) -14.4 -28.6 -10.9 -12.1 -9.3 -8.0(EXCL. GRANTS & INT.) -5.2 -11.8 -2.7 -7.1 -6.1 -4.5

CPI END PERIOD ZCHANGE 58.3 34.6 50.4 64.1 154.3 75.0

REAL EXPORT (GR) /4 .. -30.7 10.4 25.0 22.7 -14.5REAL IMPORT (GR) /5 .. -29.4 3.0 9.4 24.1 0.9CURR. ACCT.(IN USSM)/6 -271.0 -237.0 -242.0 -164.0 -149.0 -340.3CURRENT ACCOUNT/GDP /6 -10.4 -13.4 -10.9 -4.3 -3.1 -8.1

…------------------------------------------------------------------__---_--NOTES:

1/ Does not include reduction of arrears.2/ Includes both revenue and grants.3/ Includes interest payment and net lending.4/ Exports of goods and non-factor service.5/ Imports of goods and non-factor service.6/ Includes official grants.

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of strict price control and fixed exchange and interest rates. Businessmenwere often able to subvert these controls, however, and were pricing theirgoods at the parallel exchange rate which was depreciating rapidly. Inaddition, the Government ran large budget deficits during the period (onaverage 10.8 percent of GDP), financed heavily by borrowing from thedomestic banking system. These deficits were not so much the result ofhigher spending, but rather of lower revenue. Total revenue fell from 23.4percent of GDP in 1986, to 15.8 percent in 1989, with import and incometaxes accounting for most of the decline. As a result of this budgetfinancing, the money supply (M2) grew by 60 percent per annum on averageduring the period, reaching 65 percent growth in 1989.

11. Economic activity was increasingly being shifted to the parallelmarket in the 1987-89 period, and thus out of tChe control of theauthorities. Black-market activities expanded sharply, and the smugglingof goods, particularly essential and subsidized consumer items, toneighboring countries became rampant. There were almost constant shortagesof essential goods on the local market, including vegetable oil, detergentsand, notwithstanding the good harvest6, even maize meal. The pricecontrols left little incentive to produce, and provided strong incentivesto smuggle out what was produced. Confirming data are not available, butunemployment probably increased sharply during this period. The highinflation and declining incomes, combined with the shortages of essentialgoods, caused a sharp increase in cases of malnutrition and deprivationamongst the population.

12. Faced with a seriously deteriorating economic situation, Zambiaresumed its policy dialogue with the Bank and the Fund in late 1988. Ithad become obvious by that time that the adjustment program introduced inHay 1987 was not bringing about the stability and recovery desired. Infact, just the opposite was happening, with inflation accelerating, theparallel market in foreign currency and goods expanding rapidly, andshortages and smuggling increasing. In addition, donor assistance hadfallen dramatically, because ii lack of confidence in the country'sadjustment strategy. There was also mounting discontent internally withthe lack of progress in resolving the nations economic problems. Thegovernment learned several lessons from this experience. First, a properlyvalued exchange rate is an absolutely essential first step in stimulatingthe growth in non-copper exports. Second, the parastatal sector cannot bea dynamic source of growth, and private sector growth will not beforthcoming without substantial deregulation. Third, reducing inflationcannot be done through controls, it requires fiscal and monetary restraint.Fourth, it is difficult to operate in international markets withoutregularizing relationships with the major multilateral institutions andbilateral sources of donor support.

13. When dialogue with the Bank and Fund was resumed, some initialactions were taken in an effort to stop the accelerating inflation.Interest rates and reserve requirements were raised to slow the growth inthe money supply, and the consumer price of maize meal was tripled in orderto lower subsidies and the budget deficit. A coupon scheme was introducedto target the maize meal subsidy to assist vulnerable groups. There wasalso a 25 percent devaluation of the Kwacha at the time. Subsequently,

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agreement was reached with the Bank and Fund on a Policy Framework Paper(PFP) outlining the Government's medium-term development strategy andobjectives for the period 1989-93. The PFP was endorsed by the IDACommittee of the Whole and the IMF Board in September 1989 and was followedby an annual Fund-monitored program for 1990, which was endorsed by the IMFBoard in July of that yeaL. A second PFP covering 1991-93 has been agreedand is being presented to Executive Directors along with this Credit.

C. Reform Actions Taken

14. Within the framework of these policy agreements and the resumeddialogue with the Bank and Fund, the Zambian Government has embarked on amajor economic reform program designed to stabilize the economy, begin therestructuring process, and put the country back on a positive growth path.A number of significant actions have already been taken. Consumer prices,except for maize meal, have been totally decontrolled and are now marketdetermined. Maize meal prices are to be decontrolled by mid-1991.Although still fixed, interest rates have been raised periodically and areexpected to be positive in real terms in 1991. On a compounded annualbasis, interest rates are presently at 53 percent. Although that is belowthe rate of inflation in 1990, inflation is expected to be about 40 percentin 1991 (December-December). There has also been a significant realdepreciation in the exchange rate, partly in conjunction with theintroduction of a dual exchange system in February 1990, involving a secondforeign exchange window based on an open general license (OGL) system (seereal effective exchange rate chart below). By mid-February 1991, the OGLsystem will be fully phased-in (except for a small negative list), and thesecond window rate is expected to clear the market from then on. The firstwindow rate is expected to reach the equilibrium level by end-December,1991. Considerable progres has also been made in reducing inflation,liberalizing import and export procedures, and reducing the dispersion intariff rates.

15. The dual exchange rate system was introduced with theestablishment of an OGL window alongside the "official* administeredforeign exchange window. The rate in this second window was set initiallyat an estimated market clearing level and was to be adjusted at frequentintervals based on supply and demand for foreign exchange in the window.An important objective of this window was to provide incentives to non-traditional exports by providing them with a favorable exchange rate.Activity in the second window got off to a slow start, however, in partbecause monetary restraint suppressed demand, and in part because theshortage of donor flows, which constitute the main source of foreignexchange for the second window, caused the Government to take a verygradual approach to phasing-in the OGL system. Consequently, adjustmentsto the rate were delayed until late in the year. The OGL phase-inaccelerated in the second half of the year, however, and the second windowincluded over 80 percent of all categories of imports (excluding fertilizerand oil) by the end of 1993. Petroleum and fertilizer are to be includedas early as possible in 1991. The second window is supplied by foreignexchange from non-trtditional exports, casual sales of forex to the Bank ofZambia (BOZ), and by donor balance of payments assistance. The miningcompany, ZCCH, still receives its allocation of foreign exchange directly

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from BOZ. Introduction of the second window is a positive development forexporters, who receive the higher exchange rate for their export value,rather than for only 50 percent as was the case under the retention scheme.

16, While the official or first window exchange rate is still notmarket-determined, substantial progress has been made in adjusting therate. The official exchange rate has been depreciated steadily since thecurrent reform program began in mid-1989, as can be seen in the chartbelow. The rate was moved from Kwacha 10 per US$1 at that time to Kwacha43 per US$1 by end-December 1990. However, during that same period,Zambian inflation substantially exceeded international inflation. Adjustedfor relative inflation and expressed in terms of the Kwacha value of thebasket of all currencies, the real depreciation of the official rate wasabout 66 percent, 85 percent if the second window rate is used, betweenmid-1989 and end-December 1990. As regards its closeness to equilibrium,mid-1986 is generally accepted as the point during the foreign exchangeauction when the rate was approximating equilibrium. If one adjusts thatrate for relative prices in the interim, a nominal rate of about 60 wouldappear to be the corresponding rate as of end-December 1990. The chartbelow shows the substantial progress that has been made recently in movingtowards that level since the reform program began. In comparison with 40at the mid-1986 period, the real effective exchange rate index has movedfrom a high of about 100 in mid-1989 to slightly below 60 at the end of1990. As a fraction of the inter-bank goods rate (a better indication ofthe 'market rate than the parallel rate because capital transactions areexcluded), the official rate increased from 17 percent of the inter-bankgoods rate in February 1989 to over 60 percent at the end of 1990.

c1ZAMBIA

REAL EFFECTIVE EXCHANGE RATES. JANUARY 1980 DECEMBER 199140 (W18941140

120 20

100 100

so - so

60 - 60

40 -eE.~s a 40

20 -0

I Otwt_ ewu

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Therefore, considerable progress has been made, more remains to be done,and the Government is on track to complete that process in 3991.

17. Zambia has also improved fiscal performance and tightenedmonetary controls to stabilize the economy. On the fiscal side, theemphasis has been on increasing revenues, while restraining realexpenditure growth. The tax and expenditure measures taken had a favorableimpact on the budget deficit in the first half of 1990, but there was asignificant lapse in the third quarter when a sharp spurt in spendingoccurred (due primarily to a large public sector salary and housingallowance increase, and an increase in military spending). Actions weretaken to contain spending in the fourth quarter, however, and, as a result,the deficit (excluding grants and interest) which had fallen from 7 percentof GDP in 1988 to 6 percent in 1989 is estimated to have fallen to about4.5 percent of GDP in 1990. Similar gains were made in reducing monetarygrowth, from 65 percent in 1989 to about 46 percent in 1990, although thelatter was nearly double the original target for the year. As aconsequence of these measures, inflation declined from 154 percent in 1989to an estimated 75-80 percent in 1990. These gains occurred despite thelarge devaluation of the Kwacha, the decontrol of prices, including severallarge increases in the price of maize meal (the basic food staple inZambia), and the effects of the oil crisis in the latter part of 1990.While inflation was still high and above the original target of 50 percentfor 1990, this outcome represents a significant improvement in a singleyear, given these other factors.

18. A number of sector adju:.tment measures have been taken tocomplement the advances in macroeconomic policy. One of the most importantwas the liberalization of the marketing and pricing of maize and maizeproducts. Past government efforts to control the prices of these items tobenefit the urban consumer have led to gross inefficiencies and high budgetsubsidies, which the country can no longer afford. Production patternswere skewed geographically, and there was excessive emphasis on growingmaize in many areas, to the neglect of more appropriate crops. As a firststep in correcting the problem, the Government announced in September 1990that private traders would be permitted to engage in maize marketing,thereby ending the longstanding monopoly of the cooperatives in this area.Although the controlled prices for maize along the marketing chain stillexist, they are treated more as ceilings or floors and are not alwaysobserved. Concomitantly, the authorities initiated a program to makehammermills available throughout the country, which will allow consumers,traders, and farmers to mill their own maize thereby saving on transportand milling costs. The objective of these changes, and those that are tocome in 1991, is full market-determined production and pricing of maizeproducts.

19. Several advances have been made in external trade policy and inforeign exchange market reform. In a follow-up to the introduction of thedual exchange system and expansion of the OGL coverage of the second windowas described above, the Government has eliminated the administrativeallocation of foreign exchange in the first window. The Foreign ExchangeManagement Committee (FEMAC) has been recently abolished. Essentiallv,therefore, all foreign exchange for imports, except that for ZCCM, the

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export retention market, and the few excluded items (see para. 15), isallocated through the OGL system in the second window. In addition, thedispersion of tariffs has been reduced by lowering maximum tariffs to 50percent (except for a small number of luxury goods) from 100 percent and bythe adoption of a uniform 15 percent minimum tariff. Almost all exemptionsfrom tariffs, except those required by international agreement (e.g.,diplomatic entities), have been eliminated, as have most exemptions fromsales taxes. Moreover, almost all export bans have been removed, (from48 to 4), and export procedures have been greatly simplified, therebyremoving a major constraint to the diversification of exports. Commercialbanks can now issue export licenses, with a minimum of paperwork. Lastly,both the export retention system, whereby exporters are permitted to retainpart (usually 50 percent) of their export receipts in 'foreign exchange, andthe no-'unds import scheme, whereby no questions are asked of importersusing their own funds to bring in goods, have been liberalized. Thecommercial banks are now administering the export retention scheme and thelicensing requirements on no-funds imports have been removed. Whilefurther policy changes are required, these changes represent a substantialliberalization of the trade and payments system in Zambia. Together withthe exchange rate adjustment, they should result in a realignment ofproduction and trade patterns along the lines of comparative advantage andthus raise efficiency.

20. Other significant changes announced recently include:a) initiation of a privatization program that will transfer essentially allparastatals except public utilities and natural monopolies to the privatesector; b) adoption of a parastatal reform program that will lead to theorganizational, managerial and financial restructuring of those parastatalsremaining in public hands; c) introduction of policies to enhance the roleof the private sector, mainly through deregulation and decontrol of privatebusiness activities and the provision of incentives, e.g., by revision ofthe investment code; d) initiation of a civil service reform programdesigned to reduce the size of the establishment, while at the same timeincreasing the remuneration of the remaining public service positions,particularly at the higher responsibility levels where there is a need toattract more qualified people; and e) the adoption of a social actionprogram to protect vulnerable groups during implementation of theadjustment program.

D. Impact of Reforms and 1990 Financial Outcome

21. While these measures have not been in place long enough to bringabout widespread structural change or growth in the economy, some favorablesigns are visible. Non-traditional exports expanded by about 30 percent inreal terms in 1990, in comparison with the 10 percent PFP target, and thesmuggling of goods to neighboring countries has declined substantially.Although the data are still preliminary, there are indications thatinvestment increased as well; however this was based totally on increasedforeign savings as national savings decreased during the year. Economicgrowth in 1989 and 1990 was held back by poor weather affectingagriculture, technical and managerial problems in the mining sector, and alack of incentives in the manufacturing sector.

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22. Zambia's external financial requirements going into 1990 werevery large ($3.3 billion), reflecting high debt service obligations,including arrears, to private, bilateral and multilateral creditors, aswell as a large current account deficit based on projected low copperprices. As part of the adjustment program, a financing plan was developedwhich would have enabled Zambia to meet its import requirements, rescheduleits debts to bilateral creditors and cover its obligations to themultilateral institutions. Debt service payments to other creditors wereexpected to be effectively rescheduled or refinanced including, in somecases, through the provision of new credits. The plan targeted theclearance of arrears to the World Bank in 1990, and Zambia undertook tomeet current obligations falling due to the multilaterals (the IMF fromJuly 1, 1990) and to regularize in late 1990 or early 1991 its arrearsposition with multilateral institutions other than the Bank and Fund. Inaddition to the debt relief, the program included indications of support ofnearly $500 million from the international donor community and $200 millionfrom IDA to help Zambia with its cash flow when the arrears to the Bankwere settled.

23. In the event, copper prices were considerably higher thanprojected ($1.20 per pound vs $0.86 per pound), which nearly eliminated thecurrent account deficit. Moreover, the Paris Club provided exceptionaldebt relief ($2.4 billion). On the other hand, the flows from the donorcommunity were $160 million short of expectations, there was an increase inthe oil bill in the latter months of the year due to the Middle-Eastcrisis, and, in an effort to re-establish trade credit lines, net paymentsof $150 million, which were not in the financing plan, were made to privateand non-Paris Club bilateral creditors. Lastly, because of delays on thepolicy side, the plans for clearing the arrears to the Bank were notcarried out, so those payments were not made (see para. 44 for the revisedplan for clearing the arrears to the Bank). As a result, none of theplanned IDA disbursements took place. Payments to the IMF also fell wellshort of amounts due. Overall, the 1990 balance of payments left thecountry's reserve position unchanged.

E. Adjustment Issues

24. Zambia must address a number of adjustment issues if its economyis to achieve self-sustaining growth. The first task is to restoremacroeconomic stability. With prices still increasing at a high double-digit rate, there remains a serious danger of hyper-inflation if priceexpectations are not suppressed by steady progress in containing the growthin money supply and credit. Such a degree of instability would interferewith the structural adjustments required in the economy and must beprevented. Achieving macroeconomic stability without putting the economydeeper into recession, or without stifling the productive responses neededfor structural chana,e and growth to occur, presents a very difficulteconomic management challenge. The Government's capacity to manage theeconomy has been eroded in recent years by the loss of qualified personnelto the private and parastatal sectors where the rewards are higher. Inaddition, morale among those that have remained in public service is verylow, due largely to the sharp decline in their real wages over the pastseveral years. The issue of economic management is part of the larger

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problem of an oversized and ineffective civil service. Over the yearsZambia's civil service has grown substantially, primarily through thehiring of large numbers of "contracted daily employees', most of whom havebecome more or less permanent. Moreover, numerous ad hoc organizationalchanges have occurred in the public sector without any systematicassessment of the functional implications of these changes. This issuemust be addressed if the Government's capacity for managing the economy isto be adequate and the provision of public services efficient.

25. The large drop in per capita incomes since the mid-1970s,resulting partly from the decline in copper revenue and partly frominappropriate policies discussed above, has taken an especially heavy tollon the more vulnerable groups: small farmers, wage-earners, unemployedwomen, and children. Together with a high rate of population increase andaccelerating inflation in recent years, this has meant that an increasingnumber of people have had to go without the basic necessities of food andshelter. Furthermore, the increasing fiscal constraint and somewhat skewedpublic expenditures have resulted in inadequate outlays on various socialservices: clean water, sanitation facilities, health care (especiallypreventive primary health care), and primary education. There is also ahigh incidence of AIDS in Zambia, the effects of which are not yet fullyrealized or appreciated. The increased population growth, pressure on landand poor safeguards against deforestation and industrial pollution are alsodamaging the environment. The combined result of all these developmentshas increased poverty and morbidity especially among the more vulnerablegroups. The situation could worsen dramatically without macroeconomicimprovement and direct social support. It is especially important to adoptimmediate measures to counteract any negative effects of adjustment on themost vulnerable, at least until widespread per capita income growth can beresumed.

26. Without doubt, the main structural issue facing the Zambianeconomy continues to be that of the high dependence on copper. Thequestionable prospects for the industry world-wide and the fact that Zambiais losing competitiveness due in large part to depletion of reserves,underscores the urgency of reducing this dependence. In the short term,the issue is maintaining competitiveness and financial viability of theindustry, while in the long run it is to develop substitutes for copper, asa source of foreign exchange earnings, production and e-mployment, andbudgetary revenues. Zambia's output of copper is expected to drop sharply,by as much as one-half by the year 2000, and then to fall steadily to theend of the following decade when the country will cease to be a significantproducer of copper unless new deposits are found. It is essential,therefore, that policies and programs be adopted that will diversifyexports and production. In the interim, copper will continue to be amainstay of the economy, and the industry must be made as efficient andproductive as possible.

27. Another structural distortion in Zambia is the high import andcapital intensity of production and consumption. This is in large part alegacy of the overvalued exchange rate and the negative real interest ratesthat have prevailed in most of the past twenty years. Consumer preferencesfavoring imported goods were instilled when the country had abundant

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foreign exchange, and as long as these preferences are reinforced by lowimport prices and a lack of quality domestic production, import demand iscertain to remain strong. Related is the issue of low national savings andinvestment rates, and concomitant relatively high consumption ratios, whichhave characterized the 2ambian economy, particularly in the 1980s. This isthe result of the low, and declining, per capita incomes during the period,and the lack of incentives to save, e.g., the negative real interest rateson savings. For economic recovery and structural change to occur, bothsavings and investment rates will have to increase significantly.

28. In the interest of keeping the cost of living down for the largeand growing urban population, there has been a strong bias againstagriculture in past economic policies and little incentive for growth anddiversification of the sector. Agricultural producer prices have been keptlow, and farmers have been forbidden to sell their crops abroad wherehigher returns might have been made. Notwithstanding the latter, there hasbeen widespread smuggling of crops, particularly maize, to neighboringcountries. Both producer and consumer prices for maize have been keptuniform throughout the country, and the haulage charges for maize have beenfixed and invariant with respect to distance and road conditions. As aconsequence of these policies, the pattern of production across thecountry, especially for maize, has been badly distorted, adding to thetransport costs and subsidies required to keep food costs low. Farmershave also been receiving a subsidy from government on fertilizer, which isused mostly in maize growing. Because of inadequate incentives for privatetransporters, the collection and distribution of the maize crop has been aperennial problem in Zambia, and the provision of agricultural credit isnever sufficient and poorly administered. Because Zambia's best potentialfor diversification and growth is in agriculture, these issues are ofparamount importance and their resolution is the primary objective of theadjustment effort.

29. Zambia's industrial sector is dominated by parastatals, most ofwhich are economically inefficient and a drain on the economy. The ZambiaIndustrial and Mining Corporation (ZIMCO), the state holding company,manages the government's ownership in some 140 parastatals, ranging in sizefrom the giant mining company, ZCCM, to small bakeries and breweries.There are a number of parastatals outside ZIMCO, mainly utilities. Mostparastatals, the main exceptions being Posts and TelecommunicationsCorporation (PTC), Zambia Airways and Zambia Railways, became financiallyindependent of the government following the decontrol of prices in mid-1989. Nonetheless, the parastatals generally have continued to receivebenefits from the system, such as preference in foreign exchangeallocations, relief from tariffs on imports, various tax rebates, andprotection from foreign, and often domestic, competition. Many areoverstaffed and poorly managed, and would not be able to survive in acompetitive environment. In the interest of efficiency, the parastatalsector should be limited to a core group of public utilities or naturalmonopolies.

30. Notwithstanding the dominance by parastatals, there is a largeprivate sector in Zambia. Essentially all of agriculture and most of thefinancial sector are private, as is an estimated 50 percent of the

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manufacturing sector. Private initiative has been suppressed in Zambia,though, by price controls and excessive regulation. While never verypositive, the "business climate' has worsened recently due to a number ofexpropriations (e.g., the maize mills in December 1986 and more recentlysome tourist facilities along Lake Tanganiyika). Also, the attempt to stemgrowth of the black market and smuggling by arbitrary police raids didnothing to stop these activities, but did send a negative signal to thebusiness community. Consequently, the private sector has not been able, orwilling, to play the positive role in the economy that it could. It willnot be possible for the Zambian economy to work its way out of the currentrecession and effect the longer term structural transformation neededwithout strong investment and growth in the private sector.

31. One additional adjustment issue deserves mention as well. Thisis the need for improvements in the effectiveness of public spending. Therestraint required on government spending during the next few years in theinterest of macroeconomic stability could impact heavily on the provisionof public services. It is important, therefore, that maximum effectivenessbe achieved in the spending that does take place. This means thatrecurrent spending must be concentrated on the provision of high prioritypublic services and that capital spending must be focussed only on the mostproductive public inv-eqtments. For the latter, the emphasis should be onrehabilitation and maintenance of existing assets, rather than the creationof new assets. A comprehensive public expenditure program is needed toguile spending into priority areas.

32. Environment. Unlike many other African countries, environmentalissues have not yet reached a dangerously critical stage in Zambia, and thecurrent adjustment efforts are unlikely to compound the existing problems.If anything, by correcting price distortions, they may retard environmentaldeterioration. Nevertheless, without the necessary correct. efforts,serious environmental damage could reuslt in the medium and long terms.The Government is conscious of the issue and has, in recent years,implemented a number of regulations to reduce environmental damage,including the recent adoption of a comprehensive National ConservationStrategy. An Environmental Protection and Population Act was enacted inJuly 1990.

F. The Policy Framework: 1991-93

33. The PFP, which outlines the Government's development objectivesand strategy, is set against the background of poor prospects for copperprices and a forecast of a sharp decline in Zambia's copper output aroundthe end of this decade. With this in view, the medium-term strategyexpressed in the PFP is aimed at diversifying the economy away from copper,reducing the high capital and import intensity of production andconsumption, improving economic efficiency, and increasing savings andinvestment rates so as to restore economic growth. An essentialprecondition for achieving these medium-term objectives is theestablishment of a more stable macroeconomic environment. Hence, theimmediate objective is to bring the high rate of inflation under control inorder to establish a firm basis for the reforms needed to restructure theeconomy and to restore growth. The Government will have to draw on

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whatever reserves of political support it has in order to implement theintended policy reforms, particularly those involving the removal of long-standing economic subsidies.

34. The main macroeconomic targets for the period 1991-93 include:(i) achieving an average annual real GDP growth of at least 3 percent, withpositive real per capita GDP growth in the later years; (ii) reducingprogressively the rate of inflation from 75 percent in 1990 to 10 percentor less in 1993; and (iii) increasing non-traditional exports by 20 percentin 1991 and by at least 10 percent per annum in real terms thereafter.Given the low starting point, the last is realistic and is essential if theeconomy is to build an export base by the end of the decade.

35. The strategy for achieving macroeconomic stability entails acomprehensive action plan to improve management of the public finances andto strengthen budgetary performance. A substantial reduction in the fiscaldeficit is thus expected on the basis of (a) increasing the revenue/GDPratio, with particular emphasis on non-metal revenue sources, and(b) reducing the real level of non-interest expenditures, whilerestructuring public expenditure in favor of productive purposes. Over thepast several years, expenditures have been tightly constrained, fallingfrom an average of about 41 percent of GDP in the early 1980s to an averageof about 29 percent in 1988-90. Revenues, on the other hand, have declinedeven more sharply than expenditures, from about 25 percent of GDP onaverage in the earlier period, to an average of about 17 percent in thelatter period. The PFP target is to reduce the budget deficit (excludinggrants and interest) from about 4.5 percent of GDP in 1990 to less than 1percent in 1991 and to achieve small surpluses in 1992-93. On theexpenditure side, the emphasis will be on real reductions in personalemoluments, transfers, and subsidies, while increasing expenditures onproductive activities, e.g., recurrent departmental charges in prioritysectors. To reinforce the process of expenditure restructuring and tocontrol extra-budgetary spending, the Government intends to strengthen themonitoring and control of its financial operations. As a first step, theGovernment will revise the Government Accounting Reporting System, with aview to improving commitment management and control. To facilitate theeffort, the IMF provided technical assistance on the provincial accountingsystem in late 1990. The Ministry of Finance recently issued newguidelines concerning the filing of monthly financial reports by allrelevant accounting units and are expected to begin applying the system tothe five largest ministries early in 1991. With regard to revenues, theemphasis in 1991 will be on discretionary tax changes and the developmentof non-copper revenue bases e.g., bringing most fringe benefits within thetax net. The reduced reliance on inflationary Government financing is tobe accompanied by a more stringent monetary policy. Money growth is to belimited to 25 percent in 1991 and to only 10 percent by 1993.

36. To raise economic efficiency, the Government intends to continuethe emphasis on market-determined pricing as a means of allocatingresources and to expand the role of the private sector. The liberalizationof prices is expected to benefit primarily the agricultural sector, thesectar believed to have the highest growth potential, although industryshould benefit as well. In addition, the adoption of positive real

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interest rates should induce the use of more labor-intensive productiontechniques, thereby increasing efficiency. Meanwhile public sectoractivities will be redirected to such areas as infrastructure and humanresources that are complementary to the private sector. Within thisframework, particular attention is to be given to improving the efficiencyof public spending. In order to achieve a more efficient and development-oriented public spending, the Government intends to emphasize maintenanceand rehabilitation of infrastructure, as opposed to new projects, and toprovide increased allocations to agriculture, health. and education.

37. The strategy for diversifying the economy away from copper willinvolve providing appropriate incentives for the development of non-traditional exports and for moving towards a more efficient import-substituting industry. To meet these objectives, the Government intends toreach a market clearing exchange rate in the second window by mid-Februaryand in the first window by end-1991, and to continue to liberalize externaltrade. Government plans for further liberalizing the trade and paymentssystem include expansion of the OGL system to encompass all imports excepta small negative list by mid-February 1991 and added adjustments to thetariff structure to lower protection and increase competition. In light ofprogress achieved so far, the authorities now believe that it should bepossible to unify the two exchange systems at the market clearing rate byend 1991, and this is the target they are aiming at. In addition, theexport retention and no-funds import schemes are being liberalized, asnoted above, and measures are being taken to channel the proceeds from theexport of gemstones, which are thought to have considerable growthpotential, into official channels. The government monopoly in gemstones(marketing, cutting, polishing, etc.) has been abolished, and gemstoneexports have been made eligible for the foreign exchange retention scheme.

38. At the same time, actions are to be taken to improve theefficiency of the copper sector in the use of both domestic and foreignresources. The use of foreign exchange by ZCCM (Zambia Consolidated CopperMines) is being closely monitored, and the Company's investment program isbeing reviewed to ensure that only economically sound and i.igh priorityinvestments are carried out. IDA plans to support this effort through atechnical assistance credit for the mining sector later this year.

39. Programs of Poverty Alleviation and Social Support. Toalleviate the effects of the long term decline in living standards on thepoor and to strengthen mechanisms of social support for the morevulnerable, three types of actions are being taken: policy improvements,direct programs of income and employment generation, and enhancement ofexisting social services. Although some of the adjustment measures, suchas removal of maize meal subsidies and limits on public expenditures, arelikely to have a negative effect on low income groups in the immediatefuture, other components of policy adjustment are expected to have apositive impact on employment and income generation by increasing overalleconomic activity, labor-intensity, non-traditional exports, capacityutilization, and the role of the private sector, especially the informalsector. In addition, the Government has recently eliminated licensing anddocumentation requirements for small-scale enterprises, except for thosethat may have adverse health or public safety implications. This should

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encourage increased small-scale business activities with obvious positiveeffects on employment and incomes at the lower end of the income scale.Since the relevant policy adjustments are already underway, these benefitsshould have already started flowing, at least in a small way, and shouldincrease over time. While the above broad-based benefits gradually buildup, more direct action is needed to provide income and social support inthe meantime. Towards this end, the Government has launched a SocialAction Program (SAP) for 1991-93 as an integral part of its adjustmentstrategy. A major element of the SAP is immediate support for communitiesthat propose small-scale rural and urban works. These communityinitiatives sustain and rehabilitate essential services, generateemployment, and increase incomes. The Government is already supportingthese initiatives through the Micro-Projects Programme, financed by theEuropean Community. Through the IDA-financed Social Recovery Fund project,we plan to expand the scope of the existing program, provide institutionalsupport to allow that expansion, and encourage research on responses topoverty. The Government's economic program also incorporates certainsafeguards for the most vulnerable groups, e.g., the maize security reserveand maize meal coupon scheme. The latter instituted in early 1989, wasdesigned to focus the maize meal subsidy on the poorest. A review of thescheme is to be undertaken early in the PFP period to evaluate itsoperations and increase its effectiveness. Finally, a key component of thegovernment's policy is to strengther. the pre,visions of essential publicservices such as primary health and education through increased budgetaryallocations of recurrent departmental charges in these priority sectors.

G. Prospects and Financial Reguirements

40. Zambia's economic prospects for 1991-93 are limited because theneed to stabilize the economy will limit expansionary growth policies inthe near term, and because some aspects of the structural transformationthat will be needed over the medium-term may restrain the economy's short-term growth potential. Therefore, the best that can be expected is about3.7 percent per annum real GDP growth on average (4.2 percent non-mining,on average) during the period, or less than one percent per annum in percapita terms. Except for an expected rebound in agricultural output fromthe below average performance in 1990, the principal source of growth inthe short-term is expected to be the more efficient use of resources inagriculture and manufacturing. This will in part be the result of outputprices being more in line with the country's comparative advantage, and inpart the consequences of market liberalization leading to more efficientinput markets and resource allocation. For example, the open generallicense system and market-determined exchange rate will improve theallocation of imported inputs, while the decontrol of prices and increasedinvestment incentives through the revised investment code should stimulateprofits and business growth. As real interest rates become positive,credit allocation should be improved. Also, through the liberalizationprogram, the impetus for growth is being shifted to the private sector,with a better balance being struck between the private and public sector,wherein the latter will focus more on the human resource and infrastructurerequirements that are complementary to private sector activities. Much ofthe growth in the short-term is expected to come from increased capacityutilization and a more efficient use of existing resources. Even with a

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rebound in agriculture due primarly to a return to normal rains, theoverall GDP growth projected for 1991 is only 3.1 percent (5.5 percent foragriculture but only 1.3 percent for manufacturing). Even these modestgrowth rates are dependent upon full implementation of the Government'seconomic adjustment program and disbursement of all donor pledges, Anysignificant shortfalls in policy performance or donor disbursements -- orindeed in the amount or pattern of rainfall -- would reduce or eveneliminate the projected growth for 1991.

41. Looking to the medium-term, economic growth will dependincreasingly on expanding the investment ratio to create new capacity andon stimulating the growth of non-traditional exports to cushion theexpected decline in copper-generated foreign exchange receipts. Theachievement of even these modest growth targets will depend critically onthe vitality of the private sector. In agriculture, where rapid migrationto urban areas has prevented the growth of small-scale commercial farming,a more market-oriented peasant farming sub-sector will need to be developedto supplement the growth expected from the large-scale commercialsubsector. The emergence of more small and medium scale businesses will berequired in the manufacturing sector to increase the diversity andcompetitiveness of the sector. Progress has already been made in reducingregulatory barriers (entry and licensing regulations, for instance) andgenerally improving the business climate, but the response thus far hasbeen limited. If the Government continues to implement the adjustmentprogram as planned, the lowering of barriers and improved incentivestructure should elicit a stronger production response.

42. Zambia's resource gap for the period 1991-93 is projected toaverage US$155 million per year. This, when added to average debt serviceobligations of US$1506 million (including debt service in arrears, exceptarrears to the IMF as of June 30, 1990) results in an annual grossfinancing requirement averaging US$1661 million. Arrears to the Bank(US$312 million as of end-1990) are assumed to be cleared in early 1991,and those to the Fund (US$1,170 million as of end-June 1990) in 1994 underthe "rights" approach. Amounts due the Fund in the second half of 1990 butremaining unpaid are assumed to be cleared also in early 1991 (except for$35 million in payments wnich is being deferred until the second half of1991 to help alleviate a severe liquidity gap in the first quarter). Totaldebt service and arrears payments to the Fund over the three years willtotal US$514 million. Although there would be no new drawings as such fromthe IMF over this period, under the "rights" approach (the modalities ofwhich are still being developed), Zambia would accumulate, during the 1991-1993 period, rights to the use of Fund resources, thereby enabling thecountry to clear its arrears to the Fund in 1994. Rights will accumulateonly so long as the adjustment program is implemented satisfactorily andZambia meets current debt service obligations to the Fund.

43. Based on the 1989 PFP, the annual Fund-monitored program for1990 and the prospects for a rights accumulation program for 1991, Zambia'sParis Club creditors agreed to reschedule on Toronto terms maturitiesfalling due from July 1990 to end-December 1991, as well as the arrearsoutstanding at the beginning of the consolidation period. In addition,payment of arrears to the Paris Club creditors on post-cutoff-date debt

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were deferred to the end of 1991 and part of moratorium interest waspostponed. Assuming deferral of most non-multilateral debt service in 1992and 1993 as well, Zambia's external financing requirements after debtrelief will still average nearly US$721 million per annum during the1991-93 period. (See Table 3 in Annex I). Of this amount, about US$202million per annum could be expected to come from IDA, mostly in 1991through a heavily front-loaded program designed to assist Zambia with itscash flow when the arrears to the Bank are cleared. (Details of the IDAlending program are discussed below in paragraphs 49-56.) With only some$30 million per annum expected from private sources, about US$500 millionwould have to come each year from donor aid programs and other multilateralagencies. All of these resources will need to be in the form of grants orhighly concessional credits, and a substantial portion will have to be incash or other highly liquid and untied form.

44. Zambia's most serious external financing problem is in 1991,when the arrears to the Bank are to be cleared and when there are stilllarge payments to the IMF. Obligations to the Bank and Fund ($400 million--including clearance of arrears--and $273 million, respectively) aloneamount to $673 million. Also, it is expected that $65 million net (almostall ZCCM) will be paid to private creditors, and $87 million to Paris Clubcreditors as required by last years rescheduling. After taking all ofthese factors end the targeted reserve increase of US$35 million intoaccount, the external financing requirements in 1991 are estimated at$1,092 million. The financing plan that has been worked out for the yearincludes disbursements of $414 million from IDA, $200 million of which isto be timed so as to assist Zambia with its cash flow when the arrears arepaid, and $640 million from bilateral and other multilateral donors,including about $85 million directly from bilateral donors to assist theZambians in settling the arrears to the Bank. The clearance of arrearsoefore disbursement of new IDA funds will be made possible by a bridge loancurrently being negotiated between the Government of Zambia and the Bank ofEngland. The donors have pledged this amount within the framework of theConsultative Group (CG). Of the $555 million in addition to the directpayment of the Bank arrears, some US$200 million is to be in the form ofinvestment (project) financing. The remnining $355 million, part of whichis carry over from the 1990 program, is expected to be in quick-disbursingbalance of payments support. Private sources are expected to provide about$40 million during the year.

45. While the debt relief provided under the auspices of the ParisClub is favorable and useful, it will not be sufficient to resolve Zambia'slonger-term external debt service problem. While the average terms of thedebt are more favorable, the rescheduling exercise pushes the debt probleminto the future. After the economy has been stabilized and the immediateimplementation problems are resolved, the longer-term debt issue will needto be addressed. The debt forgiveness that several don..rs have indicatedas available will have to be realized and a 'workout" program for theprivate debt designed and implemented. This would be possible only in acontext where Zambia is servicing its priority debt.

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H. Bank Strateyv and Operations

46. The Bank has played an important role in assisting Zambia withthe design and initial implementarion of the current adjustment program.The program's objectives and strategy, as outlined in the PFP, areappropriate given the country's economic situation and developmentprospects. In addition, the policy framework that the Government hasadopted is consistent with these objectives and with the strategy. Ifimplemented rigorously, the program should bring about the requiredstabilization and structural changes in the economy, and restore economicgrowth over the medium-term. It merits the support of the internationalcommunity, and during the past several months, the Bank has convenedseveral meetings of the international donor community to raise thefinancing required for the program.

47. The Bank's strategy is to support Zambia's adjustment programbyt (a) developing and implementing an IDA lending program consistent withthe country's objectives, priorities, and requirements, and coordinatedwith the programs of other donors; (b) providing, through economic andsector work (ESW), the analytical framework for making the keymacroeconomic and sector policy and investment decisions needed under theprogram; (c) formulating macroeconomic and sectoral strategies and programsfor capacity building within government, including the development oftechnical assistance packages where needed for this purpose; (d) workingwith the Government and the international donor community to ensureadequate financing for the program and to improve aid coordination; and(e) helping the Government to design programs for protecting vulnerablegroups during the adjustment period, for alleviating poverty generally, andfor protecting the environment.

48. Composition of IDA Lendina FY85-90. Due to arrears on servicepayments to the Bank, Zambia's withdrawal rights under Bank loans and IDAcredits were suspended on May 1, 1987, and the country was placed in no;~_-accrual status on August 15, 1987. Consequently, IDA has not lent .oZambia since January 1987, when the Agricultural Research and Exter1s4.Credit became effective. The composition of IDA lending to Zambia IT -reFY85-90 period is shown in Table 2. A large proportion of this lendin4 wasquick-disbursing balance of payments funding aimed at supporting theprevious adjustment program, in particular to sustain the foreign exchangeauction system that was introduced in October 1985 with the view tobringing about a market-determined exchange rate. The main focus of IDA'sinvestment lending during this period was on the agricultural sector wherethe objectives were to improve the delivery of services to smallholders andto assist Zambia develop its good potential in agricultural exports. TheFisheries project was seen as a means of providing a good source of proteinfor the population, as well as generating employment and business

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Table 2: Zambia - Composition of IDA LendinQ FY85-90

Board Credit XApproval Amount of

Sector Date (US$ million) Total

Adjustment operations 57.1Industrial Reorientation 10/85 20.0Industrial Reorientation (SAF) 10/85 42.0Agricultural Rehabilitation (SAF) 10/85 10.0Recovery Program 6/86 50.0

Energy 1.4Tazama Pipeline Rehabilitation 9185 3.1

Agriculture 19.0Coffee II 11/86 20.4Research and Extension 12/86 13.0Fisheries Development 11/84 7.1

Industry 9.4Fertilizer Industry Restructuring 2/86 10.0Development Bank of Zambia 1/87 10.0

Transport 9.4Fourth Railways 3/85 20.0

Technical Assistance 3.7Technical Assistance II 4/86 8.0

TOTAL 213.6 100.0

opportunities in some of the poorer areas of the country. In the transportsector, IDA's emphasis was on assisting Zambia improve the operationalefficiency of the railways on which nearly all of the country'sinternational trade, and much of its domestic trade, depends. Increasingthe availability of credit to small and medium enterprises has been themain objective of IDA's support to the industrial sector, although thegains have been quite limited due to adverse macroeconomic situation andthe negative business climate that have prevailed during most of theperiod. IDA's support to the energy sector involved engineering work onrehabilitating the oil pipeline that connects Zambia's refinery at Ndolawith the port of Dar-es-Salaam. This pipeline, which was leaking badly andposing a serious environmental threat, carries all of the nation's oilsupply and is critical to continued functioning of the economy. On thebasis of the work done under this project, the pipeline was rehabilitatedwith financing from the African Development Bank. IDA's second free-standing technical assistance project was designed to provide economicmanagement assistance to the key ministries and to Bank of Zambia. In the

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event, part of the assistance to be provided under the project was acquiredunder grant financing and then the suspension of Zambia's withdrawal rightsprevented further implementation of the project.

49. Future Country Lending Operations. The mtin objectives of theAssociation's projected balance of payments lending to Zambia will be tocontinue supporting the policy reform program, including those policiesaimed at export diversification, fiscal restructuring, public sectormanagement (civil service) reform, and the privatization program. The mainobjectives of the investment or project lending will be to raise theefficiency of agricultural production and marketing; to developagricultural exports; to maintain a high level of efficiency in the miningsector, on which the country is and will remain heavily dependent; and toalleviate poverty by supporting the delivery of social services (health andeducation) and by generating employment opportunities in the informal andsmall enterprise sectors. The level and orientation of IDA's lending toZambia will depend heavily on continued good progress on the economicadjustment program. Assuming that the adjustment program remains on track,the emphasis will be on quick-disbursing balance of payments support forthe first two years of the FY91-95 period, after which it will shift toinvestment lending. As a result of the adjustment effort, Zambia isexpected to require less balance of payments support in the later years ofthis period.

50. The proposed Economic Recovery Credit is the first in a seriesof three adjustment operations planned for the IDA 9 period. Subsequentoperations include an Industry and Trade Adjustment Credit in FY92 (laterin calendar 1991) and a Multisector Adjustment Credit in FY93. Eachsuccessive operation will be scaled down in amount, and balance of paymentssupport from IDA is programed to decline as the emphasis is shifted toinvestment projects. Nevertheless, balance of payments support is expectedto constitute about two-thirds of IDA lending over the IDA 9 period andslightly less than 50 percent for the five year FY91-95 period. By thefourth year of this latter period, however, i.e., subsequent to the IDA 9program, balance of payments lending is expected to be a considerablysmaller proportion of the total.

51. IDA's investment lending will focus initially (FY91) on miningand the social action program. A technical assistance credit to the miningsector will aim at improving efficiency and management in the copperindustry, paving the way for a rational phase-down of the industry ascopper reserves become exhausted later this decade, and opening the sector,both the copper industry and other minerals, to private investors. Giventhe continued importance of the copper industry to the economy, it isessential that its efficient operation be assured until such time as otherexports and substitute sources of production are developed. Also in FY91,a project to support the Social Action Program is planned. Using NGO's andlocal communities and institutions as much as possible, this project wouldbe aimed at improving the delivery of health and education services,enhancing food security, supporting women in development programs andexpanding employment opportunities through small community-based, informalsector projects and small enterprise development.

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52. IDA's longer term lending program in Zambia would continue theemphasis on agriculture by working with the Government to strengthenresearch and extension, in particular to implement the ongoing Research andExtension project, and to improve agricultural marketing. The latter wouldbe achieved with support from an IDA Credit emphasizing, inter alia, policyand institutional reforms, improved infrastructure and services in ruralareas, improved access to credit for smallholders, and incentives for thedevelopment of small-scale rural processing activities. This would befollowed by IDA support to assist Zambia expand agricultural exports,mainly through the provision of export credits and enhanced facilities forexporting, and to improve land use policies and programs Subsequent IDA-supported investments would focus on extending the work Initiated by theSAP in improving health and education delivery systems, and onrehabilitating infrastructure, particularly the railroads and highways,which are in a seriously deteriorated state.

53. IDA assistance to Zambia on the adjustment and sectoral programswill be accompanied by a broad, but well-focused, effort to address thesocial aspects of economic development and the allocation of poverty. thiswork has already been initiated through the Social Action Program (SAP)prepared by the Government, with Bank support. It places a heavy emphasison human resource development and in particular on inclusion of women-in-development programs as components to all of our activities in the country.We expect to work with government and non-governmental organizations toincrease the effectiveness of health service delivery systems and ofeducational programs, especially as they affect the poorer segments of thepopulation. An important aspect of this work will be efforts to arrest thespread of malnutrition and undernourishment among children and olderadults. Under this general heading, we intend also to work with theauthorities through our support of the Social Recovery Fund (describedabove in para. 39) to maximize employment through a variety of productivecommunity-based public works type projects and to ensure food security byincreasing the production of basic food staples. Associated with our workin the health sector, we will assist the Government with a family planningprogram to slow the rate of population growth.

54. IDA's disbursements of $414 million to Zambia in 1991 would bemade available from heavily front-loading Zambia's IDA-S allocation, froman additional extraordinary allocation from IDA, from use of the IDA-reflows program to assist debt-distressed countries with IBRD interestpayments, and from the drawing down of undisbursed credits. The IDAdisbursements in 1991 include the following. The first disbursement ofUS$200 million includes US$130 million from the first tranche of thiscredit, US$27 million from the reflows supplemental, US$30 million from thesecond tranche of the previous Economic Recovery Credit (Cr. No. 1720-ZA),and US$13 million in reimbursement of expenditures made under previous IDAinvestment credits. The other policy-based lending includes US$80 millionfrom the second tranche of this credit and US$95 million from the firsttranche of the next adjustment credit. In addition, we expect US$39million in ongoing project lending. With Zambia's obligations to the Bankfor the year at $400 million, there would be a small net inflow to Zambiaof about $14 million for the year.

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55. Based on projected population growth, IDA commitments to Zambiafor adjustment (balance of payments) support during FY91-93 period,including the IDA 9 and "extraordinary" allocation, would amount to aboutUS$13.8 per capita per annum. In addition, IDA would provide a further$5.7 per capita of project assistance per annum during this period. Asmentioned above, however, the three year IDA program would be heavilyfrontloaded, with adjustment lending alone amounting to $25.0 per capita inFY91. Of this amount, $17.0 would come from IDA 9 proper, and theadditional $8.0 would be from the "extraordinary" allocation. Investmentlending, not frontloaded. would add another $5.7 per capita in that fiscalyear. Zambia's extraordinary allocation would amount to $67 million.While this per capita IDA allocation is high, it is not without precedent.During IDA-8, several countries received similarly high per capitaallocations (three-year averages and/or annual peaks): Burundi, CAR,Guinea, Mauritania, Senegal and Togo. Despite the very large disbursementsprojected for 1991, IDA's net transfer to Zambia that year will still beonly slightly positive because of the debt service and arrears owed theinstitution. Net transfers from IDA would be positive, but also onlyslightly, in 1992 and 1993.

56. The size of the Bank's lending program will depend on thestrength of Zambia's adjustment program. In the area of macroeconomicpolicy, the key indicators will be reducing inflation, keeping an openforeign trade system with a market-determined exchange rate, and minimizingGovernment interference in the economy. The other major determinant willbe the Government's commitment to protecting the low income population asindicated by the budgetary allocations to essential human services (e.g.primary health and education), the support to the Social Action Program,and the efficient operation of the maize meal coupon program. Each sectorwill have its own indicators of program strength. Of particular importancewill be the continued movement towards price decontrol in agriculture andtowards privatization of parastatals in the industrial sector. A completelapse of government commitment to the reform program with a cessation offull debt service to the Bank and Fund which would result in a suspensionof all new lending. If serious weaknesses in macroeconomic policy were todevelop but debt service commitments were being met, this would likelyresult in a suspension or deferral of policy-based lending. This is anunlikely combination in the short-term, however, because Bank policy-basedlending is such a critical component of Zambia's external financing planand hence of their ability to service international creditors. With regardto investment lending, the amounts and sectors mentioned above constitute abase case. The exact amount and timing of these projects brought forwardwill depend on the overall strength of the program, the success of therelevant sectoral dialogue, and our assessment of implementation capacity.

57. Economic and Sector Work. Since May 1, 1987 when Zambiaabandoned the previous adjustment program and IDA suspended operations dueto non-payment of debt service, ESW has been focussed almost exclusively onthe macroeconomic policy dialogue. The objective during this period was toget the adjustment program back on track so that the structural changesrequired in the economy would go ahead. In the years immediately prior tothat time, IDA was involved in an intensive ESW program, much of which isstill valid and expected to underpin the future IDA strategy and lending in

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Zambia. On the macroeconomic side, this earlier work included the designof the adjustment program, particularly the undertaking of studies relatedto the development of the auction system and completion of a PublicExpenditure Review. On the sector side, it included the development of amaster plan for research and extension, plus considerable policy (e.g., onproducer prices) and institutional (e.g., structure and functions of theMinistry of Agriculture) review In the agricultural sector. It alsoincluded a study of various options for protecting the poor from theadverse effects of the adjustment process, which eventually led to theadoption of the maize meal coupon system. An energy sector assessment wascompleted, as was an indepth review of the industrial sector, both of whichcontain considerable material of use in the present structvral adjustmenteffort.

58. In early 1989, when it became clear that the Go'i.ernment wasprepared to adopt an acceptable adjustment program, IDA resumed its ESWprogram. The primary goal of this work has continued to be to provide theanalytical underpinnings for the economic adjustment program and lendingoperations. Consequently, ESW has focussed on the design of the presentadjustment program, including development of the OGL system, the trade andtariff reform programs, and an update of the earlier Public ExpenditureReview. This PER work laid the foundation for improved sectoralallocations in Zambia's 1990 and 1991 budgets and for a Public InvestmentProgram that was presented to, and supported by, the Consultative Group ata meeting convened by the Bank in July 1990. The policy aspects of thisrecent ESW led to Bank, Fund and Government agreement on PFPs and annualadjustment programs for 1990 and 1991. An updated PIP, covering the period1991-93, is under preparation. In addition, IDA's recent ESW has focusedon assisting the Government to design and prepare for implementation theprivatization and parastatal reform programs and initiating work on civilservice reform to complement that of the Government and other donors.

59. On the sector side, recent ESW has included reviews of theagricultural and transport sectors, some preparatory work on mining sectorissues and development with Government and other donors of the SocialAction Program. The latter involved working with the health and educationsectors entities, and included reviews of food security and maize mealcoupon issues.

60. The Bank has worked closely with the Government and the Fund toassess the needs, prepare a program, and arrange financing for technicalassistance in economic management and program implementation, i.e., incapacity building. This work resulted in technical assistance programs forboth the Ministry of Finance and the Bank of Zambia. Assistance ineconomic management to the MOF is to be provided by the Harvard Institutefor International Development (HIID), financed by the UNDP and severaldonors and administered by the Bank. This assistance is designed tostrengthen the analytical capacity in key economic management areas,including macroeconomic policy formulation and control, debt management,external aid coordination and planning and budgeting. The IMF is providingdirectly assistance to the MOF in budget control. Also, the IMF and acouple of donors are providing assistance to the BOZ in a number oftechnical and managerial areas, including foreign operations, bank

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supervision and control, and systems and procedures. Bank staff have beenproviding assistance directly in civil service reform, in privatization andparastatal reform, in public expenditure rationalization, and in tradereform.

61. Efforts are also underway to raise production capacity in themajor sectors of the economy. This is particularly so in the agriculturalsector where the Bank has worked closely with USAID in helping theGovernment design and implement new marketing and pricing policies. Anumber of studies on aspects of the ongoing liberalization program arecurrently underway. These include the design of a new geographically-differentiated floor producer pricing system, an assessment of maize stocksand storage capacity, and preparatory work on how the strategic maizereserve will operate. In addition, consideration is being given to ways ofmaking voluntary repayment of agricultural credit more effective. With theliberalization of the marketing system, credit collection through thecooperatives (when the crop is purchased) will cover only a portion of thecrop, depending on the extent to which farmers use other marketingchannels. Consequently, agricultural credit procedures will need to berevised somewhat, and new attitudes towards credit will need to beengendered. Further capacity building programs in agriculture and in thetransport sector are expected from the sector reviews currently underpreparation. Such programs will be formulated in the other sectors of theeconomy as the Bank's operations in those sectors resume.

62. In the next few years, ESW will continue to focus on capacitybuilding and poverty alleviation. The major effort currently underway toimprove economic management and program implementation, including the civilservice reform program, will be an important component of future ESW. Theobjective of the civil service reform is to increase capacity generally ingovernment by improving remuneration and benefits and by instilling agreater sense of professionalism. It will also analyze how best toimplement the Government's decentralization program, including ways tostrengthen resource mobilization, implementation capacity, and expenditurecontrol at the local level. W specific to the sectors will also havecapacity building as a main focus. In addition to completing the reviewsin the agricultural, transport, and mining sectors, reviews are planned inthe telecommunications, industrial, and financial sectors. Assessments ofthe education and health sectors are to be an integral part of the Bank'sSAP work. This latter is an essential part of the Bank's program toalleviate poverty as well. ESW also includes a food security study and apopulation, health, and nutrition survey, both of which are orientedtowards poverty alleviation. The main focus of our environmental work willbe in the agriculture sector. The Agricultural Sector Strategy paper willexamine several key environmental issues, including deforestation, soildegradation, and fertilizer usage. A workshop is scheduled for this May inZambia to focus national attention on these issues and to assure a broadinput into the strategy paper. A technical assistance grant from Japan isintended to improve institutional support in this vital area.

63. Future ESW on macroeconomic issues will include an overallreview of recent economic developments and the adjustment program. It willset forth the Bank's assessment of the directions the adjustment effort

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should take in the future and the policy and program changes necessary toachieve the Government's development objectives. Also planned is a follow-up public expenditure review which will focus on improving the alignment ofpublic expenditures with the country's priorities and on strengthening thedelivery of public services.

64. Cooperation with the IMF. The Bank and Fund have workedtogether closely on the economic adjustment program, and the cooperationhas been very good. Every Bank and Fund mission has had significantparticipation by the other institution, except for strictly sector missionsfrom the Bank. The two recent PFPs have been joint products of the Bank,Fund and Government. The Fund has made substantive inputs to the Bank'sPER, mining sector, parastatal reform and other work. Likewise, the Bankhas had significant input to the Fund's annual programs.

65. Aid Coordination and Co-financing. The Bank has been veryactive during the past two years in keeping the donors informed onprogress, soliciting their advice on major issues, and mobilizing supportfor the Zambia program. This has included briefings for donorrepresentatives in Lusaka at the end of nearly every macroeconomic missionand a series of informal donor meetings in Paris to discuss the evolvingadjustment program and its financing requirements. Formal ConsultativeGroup meetings were held in Paris in April and July 1990 to raise fundingfor the 1990 annual program. Also, a number of briefings have been held inWashington for the Executive Directors of those donor countries on theConsultative Group for Zambia to keep them abreast of developments and toseek their support for the program. Input from the donors on adjustmentissues has been very valuable, as has their assistance in the dialogue withthe Zambian authorities. The Bank has been active also in coordinatingefforts to implement the Social Action Program (SAP), although progress inthis area has been less than desired. By placing a staff member in theresident office in Lusaka with specific responsibility for coordinatingthis program, the Bank expects to accelerate implementation in the comingmonths. Under the auspices of the SPA, the Bank has worked with donors toharmonize procurement and disbursement procedures in an effort tofacilitate the flow of resources in support of the adjustment program.

66. Past Bank lending operations have attracted large amounts ofcofinancing, and this is expected to continue under the present program.The ERC is being cofinanced by Germany, whose representatives participatedin the appraisal, and both the African Development Bank and the JapaneseGovernment have expressed interest in cofinancing with it as well. TheBank's Social Recovery Fund is also expected to attract considerablecofinancing interest; several donors (EEC, Nordic countries) are alreadyfinancing parallel activities. In addition, nationals from the donorcountries have participated in much of the Bank's sector work through useof the trust fund arrangements provided by them.

67. Summary Assessment. Zambia has reached the point where this isits last reasonable chance for adjustment without profound economic andsocial disruption. Time is running out for the structural changes to takeplace before the country's copper resources become exhausted and theeconomy is faced with an excruciatingly tight foreign exchange constraint.

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The Zambian Government and people seem now to be aware that policy andstructural change are urgently needed; and they seem to be prepared to makethe sacrifices required. The program that has been agreed is comprehensiveand should be effective, if implemented rigorously and consistently.Experience to date on implementation has been satisfactory, although therehave been slippages. With the movement to political pluralism in fullswing and elections scheduled for later in 1991, and given the fragileeconomic management capacity, the program is subject to extraordinaryrisks. Moreover, this is the most recent of a number of attempts atreform, and should it fail, as did the others, adjustment will have such anegative image in the country that future attempts would be even moredifficult. The alternative, however, of not going ahead with adjustment atthis time is even more alarming. The economy would continue to deteriorateand per capita incomes would fall further, with all that that implies forsocial and political stability.

68. The Bank's assistance strategy as outlined above is commensuratewith both the magn.tude of the problem and the efforts by the Governmentand the rest of the donor community. It addresses the key adjustmentissues and is an essential part of the financial support the country needsto carry out its reform program. It assumes that the Government willcontinue on the adjustment path. Should this not be the case, the Bank'sstrategy would, of course, be reassessed and modified appropriately, asdiscussed above in paragraph 56.

I-. THE PROPOSED CREDIT

A. Credit Obiectives

69. The proposed Economic Recovery Credit and IDA Reflows Creditwill support the implementation of macroeconomic and sectoral reformmeasures needed to stabilize the economy and to bring about the economicrestructuring that will pave the way for self-sustained economic growth inthe future. Zambia has met the requirements of the IDA Reflows program inthat it is an IDA-only country implementing a satisfactory adjustmentprogram, has an IBRD debt service burden, has been making significanteffort (US$30 million over the past several months) to meet that burden,and will be current with the Bank at the time of signing. The Government'sLetter of Development Policy (Annex III) sets forth the specifics of thereforms supported by this Credit. The major reforms are summarized in thepolicy matrix (Annex IV). Many of the recent reforms are summarized inparagraph 14 above. With regard to future actions, the credit will supportprogress in the following policy areas:

(i) The ongoing macroeconomic stabilization program implementedunder IMF monitoring and including;

a. a unified market-clearing exchange rate by end-1991,

b. positive real interest rates in 1991,

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c. a budget deficit, excluding interest and grants, ofless than 1 percent of GDP in 1991 and surpluses insubsequent years of the PFP period,

d. monetary growth of no more than 25 percent in 1991,falling to 10 percent by 1993, and

e. inflation of no more than 40 percent in 1991, droppingto 10 percent or less in 1993;

(ii) Liberalization in the agricultural sector, including fulldecontrol of maize and fertilizer pricing and marketing;

(iii) Impl?mentation of measures to support the Government'sSocial Action Program.

(iv) Trade liberalization, including expansion of the OGL systemto almost all import categories, reduced constraints onexports, and a more uniform level of tariff protection;

(v) Expansion of the role of the private sector in the economy;

(vi) Restructuring of the gublic sector, includingprivatization, divestiture, and closing down loss-makingoperations, and reorienting of public spending in order toimprove efficiency of expenditures, with particularemphasis on civil service and parastatal reform; and

B. Monitorable Actions

70. All conditions for Board presentation of this Credit have beenmet. Signing of the Credit Agreement is conditional on satisfactoryclearance of arrears to the Bank. There are no separate conditions ofeffectiveness for this Credit. It has been agreed with the ZambianGovernment that the availability of the second tranche, envisioned forabout August 30, 1991, will be contingent upon satisfactory overallprogress in implementing the adjustment program as described in the Letterof Development Policy, particularly the macroeconomic aspects, and theundertaking of the following specific actions, all in a manner satisfactoryto the Association. The specific actions to be completed before the secondtranche release have been indentified on the basis of the followingcriteria: they contribute significantly to the adjustment process and/orform essential building blocks for future actions, are easily monitored,and can be completed within the specified time, i.e., by August 1991.

(i) The Open General License system will be expanded to includemost imports other than petroleum and petroleum products(except for a short negative list agreed with theAssociation).

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(ii) The amount of net banking credit to the government at theend of the first quarter of 1991 will not exceed K4.725billion.

(iii) Market-determined prices for maize and maize meal will beestablished. Price ceilings will be removed, providedsupplies are adequate (as defined in a supplementalletter). Limits on maize handling subsidies specified inthe 1991 Budget will not be exceeded.

(iv) All restrictionstprohibitions on exports will be removed,with the exception of maize, maize products, petroleum andpetroleum products, fertilizer, and ivory, and(b) exemptions from import duties and sales taxes willcontinue to apply only to those imports receiving suchexemptions as of January 1, 1991 i.e., no backsliding fromrecent reforms.

(v) A Public Investment Program (PIP) consistent with all otheraspects of the adjustment program will be approved andunder implementation.

(vi) A physical survey of public employees will be conducted toensure that only bona fide employees conducted are beingpaid salaries (projected savings of 3-5 percent ofpersonnel costs).

(vii) At least (six) parastatals will be offered for sale to theprivate sector.

(viii) An evaluation of the efficiency of the maize meal couponsystem in assisting vulnerable groups will be completed.

C. Proiect Description

71. Borrower and Credit Amount. Of the US$210 million that has beenallocated to the proposed Credit, US$143 million would come from Zambia'sIDA 9 allocation and the balance, US$67 million, from an extraordinaryallocation by IDA to assist debt-distressed countries that are followingacceptable adjustment programs and have large arrears to the Bank. Anadditional US$27 million is being provided from the IDA reflows program toassist Zambia when the payment of interest on outstanding IBRD loans ismade. The amount of funding provided by IDA would be an appropriateresponse to support Zambia's economic reform program, and is consistentwith the 1991 financing plan and the contributions of other donors,including generous debt relief provided by the Paris Club. Without thiscontribution from the Bank, the reduction in imports associated withrepayment of the Bank arrears would be excessive and unsustainablepolitically. Several donors (Germany, Japan and the AfDB) have expressedinterest in cofinancing this operation. The Borrower would be the Republicof Zambia.

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72. Disbursement and Procurement. An important objective of thiscredit is to assist Zambia with its cash flow when the arrears to the Bankare paid, i.e., to prevent a sharp decline in imports. The payment to theBank required at the time will amount to about US$332 million, of whichabout US$85 million will be covered directly by donor contributions. IDAwould expect to disburse $200 million at the time the arrears are cleared,with the balance of $47 million coming from the Government's own foreignexchange earnings. The Zambian authorities have paid a total of around$30.8 million against their payment obligations to the Bank, bringing theirtotal contribution to settling the arrears and remaining current with theBank to about $78 million. As regards IDA's proposed disbursement of $200million, $130 million would come from the first tranche of this Credit, $30million would come from the second tranche of the 1986 Recovery Credit, $27million would come from the IDA reflows program and the remainder, about$13 million, would come from disbursements against expenditures incurredunder ongoing investment credits. Some of the ongoing investment creditshave been implemented notwithstanding the suspension of Zambia's withdrawalrights, sometimes by donors, and sometimes by the project entity concerned,e.g., Zambia Railways. IDA would reimburse those expenditures financed byZambia's own resources.

73. Disbursement would be in two tranches; the first tranche, ateffectiveness, would be for $130 million, or 62 percent of the creditamount. This entire tranche, together with the entire US$27 million IDAreflows allocation, would be retroactive financing, for expendituresincurred after the date (September 19, 1989) that the first PFP wasendorsed by the Committee of the Whole (COW). The proceeds of thistranche, along with the other disbu-sements making up the $200 millionmentioned above, would assist Zambia with its cash flow when it pays thearrears to the Bank.

74. The second tranche would be available on or about August 30,1991. The first US$30 million of this tranche would be deposited into aSpecial Account in a commercial bank abroad and disbursements from thisaccount would continue as eligible applications are received. It isestimated that the entire credit would be disbursed by December 1991.Disbursement of the second tranche would be contingent upon a satisfactorysecond quarter 1991 review of the adjustment program and agreement on anyfurther actions needed to ensure achievement of the program targets. Thecredit would reimburse 100 percent of the foreign exchange cost of generalimports, minus those on the usual negative list. No more than 25 percentof the Credit proceeds may be used for the procurement of petroleum orfoodstuffs. In line with IDA's procedures, all contracts exceeding US$5million would be subject to international competitive bidding (US$500,000for the second tranche) and for amounts below this, the purchasers ownprocurement procedures would be deemed sufficient. Statement ofexpenditures may be used for purchases costing less than $500,000.Documentation requirements would be in line with those specified under thegeneral IDA-administered SPA program. The Zambian Government uses SGS forpre-shipment import verification services and imports financed under theCredit would be inspected by SGS.

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75. Program Manaxement and Monitorlng. The adjustment program willbe managed by the Economic Monitoring and Implementation Unit, which ischaired by the Minister of Finance and composed of members from theMinistry of Finance and the National Commission for Development Planning,Cabinet Office, Bank of Zambia, ZCCM, Central Statistics Office, and othergovernment ministries and agencies. It is to be assisted by an expatriatemanagement advisory team provided by the Harvard Institute forInternational Development (HIID). The Bank of Zambia will be responsiblefor managing the monetary aspects of the program, including the budgetingand use of foreign exchange. Bank staff will work with staff of the DMF tomonitor the management and implementation of the program to ensure thateverything possible is done to make the program a success.

III. JUSTIFICATION AND RISKS

76. This Credit will underpin Zambia's current economic reformprogram and thereby enhance the prospects of success of the reform effort.It is an integral part of the financing plan as set forth in the PFP.Without this Credit the financing plan would not be filled, and theadjustment program would likely fail. Other donors would probably withdrawtheir support because of inadequate financing for the program. Importswould be inadequate to sustain GDP even at present levels, and politicalsupport for economic reform would quickly dissolve. Per capita incomeswould revert to the downward trend of the past several years. Also, timeis running out on Zambia in the sense that reform must take place whilethere are still copper revenues to sustain the economy. Adjustment willeventually occur, but it will be much more painful for the Zambian people,and costly for those wishing to help, once the wealth from copper is nolonger available.

77. This operation is an unusually risky one. The possibility ofpolitical setbacks is high. Zambia is moving towards pluralism, withelections scheduled for the early fall 1991. As a result of many years offalling per capita incomes and the perceived slow pace of reform, thepresent administration is likely to be especially sensitive to charges thatit is not doing enough for the people. Consequently, there will be strongpressures for providing benefits outside the budget and delaying anyadjustment that threatens to exact burdens or impinges on welfare in anyway. Political stability may well be threatened by some aspects of theadjustment program itself, such as the planned increases in the maize priceand the possibility of higher unemployment as the economy restructures,including the envisaged civil service staff reductions. It is important tonote, however, that the Government held firm to the program, despite therioting that occurred last June as a result of the maize price increases.Improvements in the distribution and marketing systems envisaged under theprogram should help to contain maize consumer price increases, andcontinued monitoring and improvements of the coupon system will also becrucial to cushion the adverse impact of higher maize prices among thepoor. Similarly, the SAP is expected to give priority to the creation ofnew employment opportunities through sound public works projects.

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78. There is also a serious risk that the reform pro&zam will not bemanaged effectively. Some recent actions by the Government, including thelarge salary and housing allowance granted to public sector employeesoutside the budget, the extra-budget spending in general, and the periodiclarge increases in maize prices, all reinforce the view that theauthorities are not able to manage the economy in a manner consistent withthe reform objectives. To address this risk, a technical assistanceprogram in economic management has been formulated and the HarvardInstitute for International Development has been chosen to provide suchassistance. Management assistance is being provided to the main economicmit.istrios under this program, while additional technical and managerialassistance is being provided to the Bank of Zambia by the IMF and somedonors.

79. There is the additional risk that sufficient financial supportfor the program will not be forthcoming. The challenge of resolvingZambia's debt and arrears problem, while at the same time assuring adequateexternal resources consistent with the growth targets of the program, isvery difficult and complex. There is the danger also that unforseenexternal shocks, such as the recent oil crisis, could worsen the country'sfinancial situation and render the financing plan unachievable. To allowfor the possibility of such shocks, the financing plan is based onconservative projections for the price of copper; the cushion, however, isnot as large as it was in the 1990 program. Lastly, there is thepossibility of shortfalls in donor assistance such as was experienced inthe annual program for 1990. The Consultative Group process is being usedintensively to ensure adequate financing for the program and to see thatthe financing is properly coordinated.

80. By focusing attention on improving the Government's capacity forprogram implementation through technical assistance, training, andinstitutional reforms for more effective economic management, the prospectsof the program staying on track are much improved. The last meeting of thedonors confirmed the commitment of all parties to an external financingplan that will permit Zambia to meet its short-term external obligationsanA its import needs. However, better program monitoring by theGovernment, more concerted and coordinated actions by donors, and morefrequent supervision and review by the Bank, will be needed to keep up themomentum of the reform effort. Restoring Zambia's relations with externalcreditors and ensuring positive flows of external resources to Zambia willbe a continuing objective of CG process. Frequent meetings of theGroup will be necessary to cootdinate donor support for the program, togenerate the external resources needed to permit Zambia to meet itsinternational commitments, to undertake the investment needed torestructure the economy, and to raise capacity utilization in theproductive sectors.

IV. RECOMMENDATION

al. I am satisfied that the proposed IDA Credit would comply withthe Articles of Agreement of the Association and recommend that theExecutive Directors approve the Credit.

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82. I am also satisfied that the proposed Supplemental Credit wouldcomply with the Articles of Agreement of the Association and recomend thatthe Executive Directors approve the Supplemental Credit.

Barber B. ConablePresident

Attachments

Washington, D.C.February 8, 1991

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- 38 -ANNEX IPage 1 of 5

TAKE 1: ZAIA -- WV e IC IlICATr

_ __.....__.____.,.......,_...___....._.__ .......... __.____ ._......................................... .__....... _ . I___........................ -_ ---------------------

145 196 1"6 1966 1690 1,40 1941 1942 1993Aetual Actual Actual Actual Actual EAtimt. Pteo. Pfoj. Proj.

.__._ ..........__ ... _-----___.______--*-------------------------------------_------------------------------------------------------................................................................. ____

CDP ROVhM RATE 1.4 0.7 2.7 6.3 0.1 0.9 3.1 3.7 4.3MtINZ? .* .. -9.4 8.4 4.4 -4.4 -1.2 0 0N4INING .. .. .. 6.6 -1.0 0.4 4.2 4.4 4.8

CDY CFKyAv RArS .. .. .. 25.5 7.2 -11.7 -3.7 2.4 3 6QDY/CAPIT RA .. .. .. 21.2 3.5 -14.7 -4.9 -1.1 0.1TOTAL. CONSLOP./CAPtTA CR .. .. ., -6.5 -0.2 -2.4 -3.5 1.8 -2.8

ODM SMVICE (IN Us"P(ACCRUAL SASZS)/1 716.4 631.? 925.7 971.2 851.7 906.0 926.0 831.0 739.0

OUT SRVICEMSX,(ACatUAL SASIS)/1 74.0 100.9 ".r7 79.2 56.5 65.6 70.7 88.1 58.4

GROSS NVEUTHUT/GOP 14.4 23.6 13.9 12.3 6.7 14.6 16.6 20.7 21.7O0MTIC SAVINDS/GDP 14.7 27.6 16.5 16.6 14.1 15.2 16.0 17.7 19.8NATIONAL SAVINQS/4DP 4.- 10.5 3.0 4 £0 5. 0.7 2.1 4.3 7.3MAR. NATL.. SAVS. RATIO .. .. .. 0.5 0.0 0.6 -0.4 0.9 0.8

OWVT. RU&DAJ/ODP /2 22.3 24.7 22.1 18.3 17.7 21.4 26.0 25.0 24.5GOWv. e8PUQITRE/C1OP /3 36.7 53.3 33.0 30.4 27.0 29.5 29.4 27.9 25.6GOVT. OmICIT/QDPACXSUAL -14.4 -23.6 -10.4 -22.1 -9.3 -4.0 -4.0 -3.0 -1.1OM. atPMTS a ZN1o T -5.2 -11.8 -2.7 -7.1 -6.1 -4.5 -0.5 0.4 0.4

EXPORT atOWTI RATE /4 .. -19.9 24.3 33.2 22.1 -11,5 -11.4 -3.6 2.7NONMAL EPOR QR .. -16.7 9.6 24.7 -13.0 33.5 24.0 13.6 14.2ESPORIh/QOF 3J.4 39.3 39.0 30.5 20.8 29.1 33.4 36.9 87.7

WUT FaROVN RATE /5 .. -16.2 13.3 15.2 15.1 6.7 0.6 -0.6 4.1REAL IMPORT GROWTN4 RATE /6 .. -2".4 3.0 9.4 24.1& 0.4 -3.3 -4.2 0.6IMPOMT/Cop 32.0 36.4 34.7 2S.5 21.6 25.4 34.0 33.6 40.0COT. ACCT. (N USIm) -271.0 -2J.0 -242.0 -164.0 -144.0 -340.3 -44J.? -431.9 -435.60.SET ACCOtMT/CDP -10.4 -13.4 -10.4 -4.3 -3.1 -7.0 -13.5 -1S.0 -15.1

~MGRNU IT8:ICOR .. .. .. .. .. 9.5 4.6 5.0 4.8IMPRT ArICm .. .. .. .. .. 1.0 -1.1 -1.1 0.1

NOYi: 1/ IT OMU NOT DICLLSE R11IO VO A1REARS.2/ rT ICL O 0Th m4W A RAN.3/ IT INCLUL0 Du V T PA AN IT U LDIS.4/ IXPORiS, P.0.. IN Cl@ T UlN.S/ vI9owYs. C.I.P. IN CLWiT USO.6/ DORUrTS OP 00006 M NWAC1OR $11WC O9LATWD BY MNk.

SOUCE: ZAMBIA CSO. OM ADI STAP UtOrIN .

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- 39 - ANNEX IPage 2 of 5

Table 2. Zaai: OSlanco of hy_rpsn, 196"

1o66 19 19M7 1916 190 1900 1991 19to 1993

Proi ctiono

(In milliene of US$)

Trade alanc-o 37.2 16.9 95.5 266.0 36. 1 187.2 -21.0 -49.7 -67.1Export., f.o.b. 670.6 69.3 607.5 1155.7 1410.7 1249.2 1098.3 1060.3 1066.7

Of which: copper 677.7 573.7 73.7 962.7 123.3 1069.0 662.6 003.9 602.7other metals 120.1 04.0 65.6 90.6 106.? 94.9 127. 122.1 132.5nnc l _ t 73.0 60.0 65.9 02.2 70.6 94.5 116.0 134.2 1S3.5

Imports, c.i.1. -eSS.7 -61.4 -m7.0 -46.9 -1022.6 -11S2.1 -1119.3 -1110.0 4115S.6metal sector -172.6 -291.3 -233.1 -279.0 -472.6 4354.7 -450.2 -345.9 -364.7Fertilisar -39.6 -29.2 -44.7 -47.1 -72.6 -49.0 -56.1 -54.6 -54.0Petroleum -121.6 -71.6 -67.2 -61.6 -106.1 -141. -130.1 -133.2 -157.3Other -499.4 -69.4 -426.9 -401.3 474.2 -465.3 -46.0 -876.0 -599.9

Service (net) -328.0 -363.7 -412.5 -498.5 -560. -s77.7 -SU.3 -503.9 -494.9Interest -266.1 -06.2 -341.0 -409.0 -402.8 -40.9 -40.6 _367.6 -a37.6

Interest pa.ynts -274.7 -316.4 -49.1 -42.7 -427.7 o4,.S -467.4 -417.9 -416.1Metl eetor -63.6 -36.5 -8.2 -34.4 -31.1 -25.3 -44.6 -41.1 -36.4Other -191.0 -279.9 412.9 -369.3 4.6 -2.2 -392.6 -376.6 -361.7

Inter"t receipts 6.6 6.2 7.5 14.7 24.9 20.6 2. 30.1 30.8Other factor 1.5 1.4 -2.3 -2.0 0.1 0.1 0.1 0.1 0.1

MoteI sector 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0other 1.8 1.4 -2.3 -2.0 0.1 0.1 0.1 0.1 0.1

Nonfactso (net) -5.5 -4.09 -. 5 -4.8 -176.1 -1U69 -119.6 -116.2 -107.1R*eei;Pt 79.3 50.1 5 1.1 59..0 6.3 9.3 115.5 131.4 150.2ftPaoftes -1".7 -97.0 -119.6 -14.5 .-261.4 -26.2 -4 .1 -247.6 -2s7.4

Mete, Ieetop -12.2 -10.0 -22.0 -13.1 41. 43 -. 1 -26.1 -26.9 -26.0Other -125.46 -7. -97.6 -12.4 -280.4 -227.1 -200.0 -220.7 -229.3

Unreited tranef e 15.1 100.0 753 65.0 44.2 100.3 105.6 121.7 126.5Privateo -3.3 -4.3 -30.0 45.0 -27.6 44.7 -7.6 -2.0 -20.9

Note I setor -28.4 -23.0 -0.0 -3.0 -27.o -1.0 -27.0 -25.0 -20.9Other -14.9 -17.2 0.0 0.0 0.0 4.7 0.0 0.0 0.0

Official 5U.4 145.2 106.8 09.9 72.0 14.0 135.4 145.7 147.8

Current *accut -270. 7 -M. -241.7 -165.7 -14.8 -40.3 -443.7 -41.9 -435.0Motel etor 506. 271. 460.2 710.1 67.3 706.7 551.7 467.0 405.2Other -776.7 -50.4 -2.9 -7. -1s.6 -1044.0 -978.5 -919.0 -021.0

Nonwn.tery capitel -100. -4.7 -204.6 -141.2 -71.3 -6.4 -276.1 -80. 1 -221.8Pub I;c a etor (et.) -13.2 4.6 -137.2 -91.0 -165.6 -207.4 -213.1 -2"6.4 -1.$

Olebursoeento 106.4 219.0 106.1 l14.1 49.5 42.6 70.1 77.2 . 70.2AmOrtiastion -267.0 -2M.8 -240.8 -245.2 -212.6 -260.2 -2M.6 4-1. -256.0

MoteoI ctor (not) 130.0 29.6 -73.6 -5.2 -4.0 -4.6 -96.4 -94.1 -63.9Diabureeset 19.6 61.9 2.2 42.1 47.3 3A.1 0.0 0.0 0.0A.ortiatiOn -6.5 41.1 -100.7 .8.3 -4.3 W.0 -9.4 -94.1 -6.9

Other (Including ebort-toes) -72.1 -15.. 6.2 6.1 .3.2 -11.2 36.0 27.6 27.9Error. and emissions- -6.3 -101.9 -17.0 46.8 -1.9 20.6 0.0 0.0 0.0

Overall balance -46.4 -478.4 -46.2 47.5 -as.7 666 -n1o.0 73.1 457.6

Soures: Za2bia* euthoritles; and fl esf estimte.

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ANNEX I- 40 - Page 3 of 5

Table 3. Zambia: External Financing Requiresens, 1990-93

(In tillons of U.S. dollars)

1990 1991 1992 1993tot. Projections

Cutrent account (excluding interest andoffictal transfers) -35 -140 -160 -164

Debt service -1,522 -2,948 -831 -739Nonmultilaterals -1,139 2,184 -567 -475

Scheduled obligations -394 -366 -35S -301Interest on arrears and service on

rescheduled obligations -129 -203 -212 -174Reduction of arrears to nonmultilaterals 1/ -616 -1,618 - -

multilateral$ -383 -764 -264 -264World Sank -89 -400 -89 -91Debt service IDA -2 -2 -4 -6Debt service ISRD -87 -86 -85 -85Reduction of arrears - -312 - -

IMF -238 -273 -122 -119Repurchases -121 -60 -6 -3Charges -111 -121 -116 -116Reduction of arrears - -92 -

Other multilaterals -56 2t -91 -53 -54

dross financing requirementS -1,557 -3,088 -991 -903

Use of reserves - 35 _ _

IhRD, increase In arrears 76 -

IMF, increase in arrears 201 -

Other, 3/ incroase in arrears 136 - - -

Debt relief on nonmulttlatital debt eorvice 1 818 2,031 433 391Arrears 616 1,563 - -Current debt service 202 468 433 391

Requirements after debt relief and arrnareaccumulated to sultilaterals -326 -1,092 -558 -512

Identitied financing 326 1,092 569 546Normal flows 205 4/ 203 224 211

Private inflows 32 38 28 28

SPA cofincncing 89 4/ 353 220 205

World Bank arrars fiancing - 84 - -

World Sank - 414 97 96tDA - 367 74 i5ftb Oitenslon - 41 23 21

financing gap after rescheduling - - -11 -34

Sources: Zaablon author' tle; and staff estim.tes.

lj/ Includes any further aceum ultion of rrears to nonmultilateral creditors peondireschoduling.

2/ Assume Zambia has stayed current with other multilaterals in 1990.T/ Wonsutilateral. non-Paris Club creditors.4/ The distribution between SPA and normal flows has yet to be finalized.

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ANNEX I- 41 - Page 4 of 5

ZAfB IATable 4: Social Indieacors of Development, 1990

HUMAN tSL2C(ISha grueb. mrsm, of papda6wTOW(ains i 1989) MAi 3.6 4.8 7984 481 29. 667

15-6 u _lS ^7 63° j0 3sz 35.3 30

A,p - aZ ,ewse mm . 674 362 t3

, o. 964 4 4z9 6 0 56° 31.°i7°Agosp dq ib4ay m .~ 0.65 07Famaha, p. 10 100 '- ''

Urban pr .numb.. 94Ral _ 113P slow*. 3.0.7 . 2.0 2.1

Tc Wi S d = S0 7469 ~~~~~~~~~~~~~~~~~~~~1.4. 67 131l2 2<4

F~~~~~~~~~~~~J 6.6l 27: 7. 3.90 1t27

RS *- ~~~~~~~~~~~pr *-em .. . .

Prwtkm 8.1 63 1p 5m S 2,9 3.4 99 Li

E__So =3=e pe6ywm 45

Sdledsn:.u 3,623 83..

FuLit_

LAbwftm(1S-" ~ ~ ~ ~ ~ ~ 64 67596 697 3.80 3.87

Tou tp i fa ?S6 733g 23.^ 3654

D _-(0 )/w (1549) .4K 64 .

FRudo 37J' 314i

*ifln -" 10 awl"

Utba eIW*Womm .. 101 ..

j _an7 mw pih. _ _sah 1210 _4. 7. _8._

1998 I&$6.3 z7TakIbimnDIa 6 4 9 .71 244

FASMals* 8. 289 7 33.1 30.RuAlnWI 223~

Fimw inwUs dd sUmEK fr 98 833 2~. z4Sduah yarn nu.plrnt av.43 3..lt3 .. .. .1

IAMMto oh RUN CURum thn q. 5H73 73 2.6 n699 21.3

mftdbw Kiu b 131 34 3. 6. 3.

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-42-ANiNEX IPage 5 o f 5

WS L^BATable 4: Social Indicat-ors of Development, 199o

INCOM A." POV'K

G>i.SP prt apuA (M * 989) USS ?, ISO55 390 330 330 1. JX

SbA w b 20f d 4

rq

-^ai4_q~~~~~~~~~~o too I8 1i : : ::

t -, 197941~~~~~~~~svd 0 K3o 132 sU 33u^ §.nuiv~~ ~ ~ alii 2 3 2§ 2.~14,;

A= jUob dU I perbwa _d .. _4

Fodand _w SdGW . 1.9 34.A_.MFzbeaqo *°~~~~~~MOG01wi-l 464 533J 379. l0.3 3;a.1 U43.7

1'q ^ _ dCDt _ ~~~~~~~ ~ ~~~~~~~3.9 4.3 ...

Invousew uspo eqiss 402 ,Et iw- wql* km ....

I.SrYVTIf Wh#AL

%ldwer % ato 33......

Accm to hab d 0. _ .(_ 1 2 bl:oww 61dq^t~58 54 4 t

OrAR _w" T _wwT_) d_m .. _ 5§. 1&4 21A 27.5

G~~~~~~~~~~~~~~~~~~~~~~l ffiet 10 30 8 |,

* ~~~3.0 3 4

Tq:_ d_y_ .. ~~~~~~~~~~~~~~~~~~~~~4 40 2;3.

PuIs WI w4 ;d _ .. 9m 99.9 76A 67.1

~~~~~~~~~~~~~~~~~~~~~~~b sl5&4 1 4 6 3..reiS_ ~~~ ~~~~~~pr th P*9 21.9 1 -.4 * 2 20.4 7&9

_am 4 it beemend , ,mmomabowII

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~ 43 ~ ANNEX IIPage 1 of 2

ZUIB. StatMt of IfC Inatmt

(a of Set 30, 1990)

I.nt Tpe ofumber FT Obin o u hal..., [AU hu1ty Total

-…--- --4 U llloa----

216U 1972250U 1973 lia ta SheM Sho 2.1 0.2 2.3

7-U 1975394-U 1978 W P Ut Ltd Platie rap 0.9 0.2 1.1

324-U 1976 O't ankof d ia "'t liumn 0.5 0.5

2-U 1982 tbaol Co oflia CW.ehtrocs 3.7 0.6 4.3

1001-A 138 ub Wallo ht Food/h d Pr 3.7 0.8 4.5

1132-U 19 h1tock (tlmia) o ood Po 8.0 8.0

527-U 1980721-U 1185 Khim Ttil, WTil 10.7 10.7

T43-U 85 #IPM tCo Fro lood PM 1.8 0.3 2.1

709-U 1O4 tabia botl Pr Twin 21.0 21.0

48U 1180mOU 1m12 ICCZ aCnd" 53.1 53.1

Total beou Cmitu 105.0 2.6 107.6

UN: C ellatiu, tnatiou,_ - , npta,

pite-of, ad sla 50.0 1.6 51.6

totl casm tms ed by 1IC 55.0 1.0 56.0

Toal 1uihrse 6.5 0.0 6.5

Tt DIaid 4.5 1.0 49.5

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- 44 - ANNEX IIPage 2 of 2

A. Status of Bank Group Operations in ZWIAsuary Statement of Loans and IDA Credits

(as of 12/30/90)

Aozint in USa S llion41n. cancellation)

Loan or Fiscal Undis- ClosinoCredit No. Year Borrower Purpose Biank IO A buried Date---------- ...... -------- ------- ... l -- - - -- - -- -

Credits

12 Credits(s) closed 150.94C11930-ZAN 1982 ZAMBIA Ai. IIISo.PROV.I 1.00 15.24 1213118'CF0020-ZAN 1983 ZAMBIA RURAL W/SUPPLY 6.00 3.49 04/30/68C13620-ZAN 1983 ZAMBIA C14370-ZAN 1984 AMBIA RFRREAtlSSIJIl ill A 941 W/111C15290-ZAN 1985 ZAMBIA FISHERIES 7.10 9.51 06/30190C15750-lAN 1985 ZAMBIA RIYS.IV 20.00 26.61 06/30190(R)C16620-ZAN 1996 ZAMBIA FERTI. RESTR. 10.00 2.79 12/31/90C16790-IAN 1986 ZAOBIA TAS 11 9.00 9.53 12/31192C17200-ZAN(S) 1986 ZAMBIA RECOVERY CREDIT 50.00 30.63 06/30/90C17430-ZAN 1987 ZAMBIA COFFEE 11 20.40 23.73 06/30/95S C17460-ZAN 1997 ZAMSIA ASR. RES.& EIT. 13.00 15.16 12/31/95C17530-ZAN 1987 ZAMBIA 381 III 10.00 11.65 06130/92

TOTAL nuaber Credits s 12 194.9 169.70Loans

29 Loans(s) closed 5Q2.13All closed for ZAMBIA

TOTAL nuber Loans - O

TOTALIf 512.13 345.74of which rpaid 205.92TOTAL held by Bank I IDA 376.21 345.74Amount sold 20.56

of which repaid 28.5S

TOTAL undisbwrd 169.7?

Notes:

5 Not yet effective* Not vet siq,eda" Total Aoproved. Repaysmstlo Outstandinq balance represnt both active and inactive Las and Credits.(R) indicates foreallv revihu Clsing ate.(S) inditatn SAL/SECAL Loamat Credits.

The Net Approved and Bank Rpavments are historical value, all others are market value.The Sionina, Effective. and Closinq datn are based upon the Lo Departnt offical data ad are not takimfrom the Task Budet file.

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FEBRUARY 1, 1991

ZAMBIA - ECONOMIC RECOVERY CREDITLETTER OF DEVELOPMENT POLICY

Office of the MinisterMinistry of FinanceP. 0. Box 50062Lusaka, Zambia

Mr. E. V. K. JaycoxVice PresidentAfrica RegionThe World Bank

Dear Mr. Jaycox:

1. The purpose of this letter is t:) inform you of the progressmade so far in implementing the ecc iomic recovery program as setout in the Policy Framework Paper for 1989-1993 and to outlinethe measures which we intend to take to strengthen and deepenthe reform process in the coming year. This letter marks yetanother milestone in our efforts supported by the World Bank andthe donor community to address the constraints to economicrecovery in Zambia.

2. As you know, Zambia resumed its policy dialogue with theBank and the Fund in late 1988, and subsequently, agreement wasreached on a Policy Framework Paper (PFP). The PFP, which wasendorsed by the IDA Committee of the Whole and the IMF Board inSeptember 1989, outlines my Government's medium-term developmentstrategy and objectives for the period 1989-93. In addition, anannual Fund-monitored program for 1990 was approved by the IMFBoard in July 1990. This program specifies macroeconomic andstructural targets for 1990. Within the framework of these twopolicy agreements, we have taken a number of significantactions designed to stabilize the economy and to initiatestructural reforms, with the goal of putting the country back ona positive growth path in the early 1990s. In the same context,a financing plan to enable us to meet our import requirements,to clear arrears to the Bank, and to resume normal relationswith the international financial community was agreed upon atmeetings of the Consultative Group on Zambia in April and July.It is within this context that we seek to strengthen our reformefforts through the proposed Economic Recovery Credit from IDA.

3. The PFP is set against the background of poor prospects forcopper prices and a forecast of a sharp decline in Zambia'scopper output around the end of this decade. With this in view,

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the Government's medium-term strategy as expressed in the PFPis aimed at diversifying the economy away from copper, reducingthe high capital and import intensity of production andconsumption, improving economic efficiency, and increasingsavings and investment rates so as to restore economic growth.The main macroeconomic targets continue to be those contained inthe original PFP for the period 1990-93s simular to (i)achieving an average annual real GDP growth of at least 3.5percent over the period, with positive real per capita GDPgrowth in the later years; (ii) reducing progressively the rateof inflation from 154 percent in 1989 (December to December) to15 percent or less in 1993; and (iii) increasing non-traditionalexports by at least 10 percent per year in real terms. Thesemacroeconomic targets and the underlying economic policies willbe revised and up-dated annually in the light of our experiencein implementing the adjustment strategy.

4. Our strategy for achieving macroeconomic stability consistsof three major elements, namely: a substantial reduction of thefiscal deficit, restraint on monetary growth, and a moreefficient allocation of resources. Over the past several years,government expenditures have been tightly constrained, fallingfrom an average of about 41 percent of GDP in the early 1980s toan average of about 29 percent in 1988-89. While additionalexpenditure reductions may no doubt be possible in some areas,any significant further decreases are likely to affect undulyessential government services. Therefore, we intend to pursue afiscal strategy of expenditure restructuring and greaterreliance on domestic resource mobilization. Unfortunately,revenues have declined even more sharply than expenditures,falling from about 25 percent of GDP in the early 1980s to anaverage of about 16 percent in 1988-89. We believe that thereis room for additional revenue mobilization, and we haveintroduced new revenue measures in the 1991 budget. Theseinclude further measures for broadening the taxation of incomes,especially of fringe benefits and allowances. In addition, weare instituting a minimum tariff duty of 15 percent, eliminatingmost exemptions from tariff duties and sales taxes, andcontinuing the programs begun this year to enhance collectionsof customs duties and the company income tax. Increases indomestic resource mobilization will also reduce the reliance onbank financing of the budget and thus help us to bring down therate of inflation. Indeed, it is our expectation that theGovernment will reduce net domestic financing of the budgetdeficit from 3.8 percent of GDP in 1990 to 0.2 percent in 1991.

5. To improve economic efficiency, we intend to placeincreased emphasis on market-determined pricing as a means ofallocating resources and providing incentives for the privatesector. The liberalization of prices which was initiated inJune 1989 is expected to be of particular benefit toagriculture, which is the sector with the highest growth

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potential, although much of the industrial sector should alsobenefit. In addition, the adoption of positive real interestrates should induce the use of more labor-intensive productiontechniques, thereby increasing efficiency. Interest rates havealready been increased to 43 percent (which is equivalent to a53 percent annual rate on a compounded basis). Furtheradjustments to interest rates will be made if necessary so as toachieve positive real rates (defined relative to the projectedrate of inflation) early in 1991.

6. Late in 1989, the Government adopted a priority PublicInvestment Program (PIP) for the period 1990-1993. Theinvestment projects in the PIP were selected according toeconomic criteria, rather than simply on the basis of theavailability of donor funds, and the size of the program wasconsistent with the projected availability of resources. We areupdating this program on the same criteria. Within thisinvestment framework, particular attention is being given toimproving the efficiency of public spending by emphasizing themaintenance and rehabilitation of infrastructure and thecompletion of ongoing projects, as opposed to undertaking newprojects. In cases where new projects are clearly justified,priority is being given to projects that support private sectordevelopment activities and those aimed at providing essentialpublic services. In support of these investments, increases inrecurrent departmental charges, (RDCs) to these priority sectorswill be needed. The 1990 and 1991 budgets have made someimprovements in these allocations, particularly for agriculturalextension in 1990 and for road maintenance in 1991, but more isneeded. Preparation of the annual capital expenditure programwill continue to be based on the PIP, and the PIP will providethe basis for mobilizing donor support. No new capital projectswill be undertaken outside the framework of the PIP.

7. Regarding the Government's exchange rate policy the kwachawas devalued by 49 percent in local currency terms in June 1989,and we began to adjust the rate periodically thereafter. By theend of the year, the cumulative devaluation had been brought to100 percent, although still below the 1541/ percent increasein the CPI over the same period. A dual foreign exchange systemwas introduced in February 1990, with the establishment of asecond foreign exchange window. The exchange rate in thiswindow (K40 per US$1) was set to approximate a market clearingrate and is to be adjusted according to market conditions.Although no adjustment were made in the early months because ofthe surplus that existed in that window, the rate began to move

1/ The official CPI overstates the actual inflation in 1989because it is based on official prices most of which weredecontrolled in June 1989. Actual transactions beforedecontrol were often at higher then official prices.

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later in the year and ended the year at K47 per US$1. The ratein the first window, the "of ficial" rate, continues to beadjusted with the view to reaching the market clearing rate bymid-1992. As of the end of September 1990, the official ratehad reached K43 per US$1 from the starting point of K22 per US$1at the beginning of the year.

8. Our strategy for diversifying the economy away from copperinvolves providing appropriate incentives for the development ofnon-traditional exports and for moving towards a more efficientimport-substituting industry. In order to meet both objectives,the Government is committed to moving stead±Iy towards a unifiedmarket clearing exchange rate as described above and to reducingsignificantly the existing restrictions on external trade. Thelatter will involve a reduction in the scope of administrativeallocation of foreign exchange and the implementation of atariff reform program which will significantly reduce thedispersion of tariff rates and the exemptions from tariffs andsales taxes. We have already dissolved the Foreign ExchangeManagement Committee (FEMAC), which for the period May 1987through November 1990 allocated foreign exchange, and havereduced the number of export prohibitions to include only maize,petroleum, fertilizer, ivory, and liberalized the licensingprocedures for exports. The government has also liberalized thegemstone industry by ending the government monopoly on thepurchase and export of gemstones. In addition, gemstone minerswill be entitled to 50 percent export retention, and the auctionsystem for gemstones will be re-introduced.

9. It is also important that there be, an appropriateallocation of resources between the copper and non-coppersectors. In this regard, actions are being taken to improve theefficiency of the copper sector in the use of both domestic andforeign resources. The use of foreign exchange by ZambiaConsolidated Copper Mines (ZCCM) is being closely monitored, andthe Company's investment program is being reviewed regularly toensure that only high priority investments are carried out. Aplan to ensure an orderly phase-down of the industry later inthis decade as copper resources become exhausted will be agreedwith the Bank in the context of the proposed Mining SectorTechnical Assistance project. Implementation of this cost-cutting and phase-down plan for the mining sector is extremelyimportant. By the same token, we plan to take measures topromote small-scale mining activities, which have substantialexport potential for Zambia. We also plan to address theproblems of small-scale mining in the context of the above-mentioned IDA Project.

10. With a view to further rationalizing the incentivestructure, the Government abolished all direct and indirectprice controls in June 1989, except for those on maize andfertilizer. Producer prices for maize have been raised

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regularly to provide production incentives, and consumer pricesfor maize meal have been increased in order to lower the burdenof subsidies on the budget. These measures have had a positiveimpect. Subsidies declined from 4.5 percent of GDP in 1988 to2.9 percent in 1989, largely as a result of the partial passingon of handling costs through the increases in maize prices.Including the last increase in June 1990, the maize price hasbeen raised by 93 percent since January 1989 while the facevalue of the maize coupon (which was introduced in January 1989to protect vulnerable groups from the effects of higher prices)has been raised by about 100 percent.

11. In addition, we have made a start on cost recovery byintroducing user fees for secondary and higher education and forcertain medical services. The Government intends to extend itscost-sharing strategy to other services and sectors in an effortto spread the burden of providing these services to thebeneficiaries. In this regard, it has been our policy to passthrough changes in world oil prices to domestic prices so thatthose prices would reflect the costs to the nation. For thatreason, domestic oil prices have been increased three times in1990 by a cumulative 350 percent. In order to restore theliquidity of the oil trading company (ZIMOIL), the consumerprice has been increased to the equivalent of a $40 per barrelcrude oil price.

12. We are now estimating money supply (M2) growth at 46percent for 1990, which is significantly less than the 65percent growth rate recorded last year. Performance on themonetary front would have been very much better were it not forthe fiscal slippages referred to above and a greater thananticipated demand for credit by the agricultural sector.However, because of certain cost-push pressures, notably theincreases in fuel prices, it is unlikely that inflation can becontained much below 80 percent in 1990, though this doescompare favorably with last year's inflati.)n rate of 154percent.

13. With regard to fiscal performance, estimates indicate afiscal deficit (on a commitment basis) of 9.5 percent of GDP in1989 compared with 12.1 percent in 1988. On a cash basis, theprimary deficit (excluding grants) was about 7.1 percent of GDPin 1988 and 6.1 percent in 1989. We expect that the 1990 budgetout-turn will show a deficit of (4.5) percent of GDP.

14. Building on the progress achieved so far under the PFP, theGovernment has sought to deepen and extend the adjustment effortin the form of a Fund-monitored program for 1990. I am glad toreport that review of Zambia's performance under the program forthe period up to end of June showed that we had succeeded inmeeting most of the program's quantitative benchmarks, the mainexception being the level of gross foreign reserves. However,

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the targets for GDP growth and inflation have had to be revised.Poor weather conditions, and the increases in the price of oilas a result of the Gulf crisis, are likely to limit GDP growthto about 1 percent in 1990. We intend to continue reducing therate of growth of money supply and to control fiscal spendingmore tightly in order to make sure that there is no slippage onthe inflation target of 40 percent for 1991. We feel verystrongly that as long as the macroeconomic instability persists,implementation of the program will remain difficult, and pricestabilization will be harder to achieve, thus reducing savingsand investment and, thereby, the prospects for longer-termeconomic recovery.

15. As regards the exchange rate, the second window, which isoperating under an Open General Licensing (OGL) system, is beingexpanded by making additional import categories eligible underthe OGL. You may recall that under the original schedule, mostimport categories were to be transferred to this window by June1990. As noted earlier, import categories included in thewindow by end-December 1990 represented about 85 percent oftotal imports excluding oil and fertilizer. In addition,payments for services, remittances of dividends, and royaltiesare exchanged at the second window rate. We have had to becareful not to expand the coverage of the window too rapidlybecause of a serious delay in the financing from the donors whohad indicated support for the window. Some donors had to awaitrescheduling under the Paris Club and/or closing of thefinancing gap, while others needed assurances that theprocurement and accounting procedures under the OGL wereappropriate. These concerns, I am glad to report, have now beenlargely settled, and we have been urging donors to acceleratethe flow of resources in support of the second windowoperations. In view of these setbacks, the deadline forcompleting the transfer of nearly all (95 percent excluding oiland fertilizer) import categories into the second window has nowbeen moved to [March 31, 1991]. We intend to take theappropriate actions to ensure that this deadline is met, butthis will again depend on the inflow of donor support. Allimports except those on a short negative list agreed with theBank will be available on an OGL basis.

16. Although we met the quantitative benchmarks for fiscalrevenue and domestic bank lending in the first half of 1990, themid-1990 increases in civil service salaries and housingallowances have strained the budget. We have tried to offsetmost of this additional spending by reductions elsewhere, aswell as by the introduction of additional revenue measures inthe 1991 budget. We are determined to monitor budgetarycommitments carefully to prevent any similar problems in 1991.Instructions to this effect have already been sent to the lineministries. In the meantime, we shall continue our efforts toimprove budgeting and coordination between budgeting and

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planning in order to promote the efficiency of public sectorspending. To this end, the process of preparing the capitalbudget derived from the PIP will also be strengthened. Thecapacity for program implementation should benefit considerablyfrom the various technical assistance efforts now underway andplanned, including that from the Harvard Institute forInternational Development in economic management and thatexpected from the IMF in the Budget Office on improving theprocedures for collecting and utilizing budget data.

17. Continued implementation of the above measures shouldensure the macroeconomic environment necessary to bring aboutstability in the short run and a resumption of economic growthin the medium-term. These efforts must also be complemented bythe appropriate sectoral policies, however. In particular,measures to stimulate agricultural growth, increase theefficiency and competitiveness of the industrial sector,stimulate the growth of a viable private sector, and reformpublic enterprises will be necessary to provide the impetus foreconomic recovery.

18. Zambia's greatest potential for growth and diversificationlies in agriculture. In the past, this potential was suppressedby inadequate incentives associated with an urban bias ineconomic policy and by inadequate public services to the sector,especially for smallholders. The agricultural services thatwere provided have been focussed excessively on maizeproduction. Moreover, their effectiveness has been constrainedby a declining ratio of non-wage to wage recurrent expenditures,resulting in insufficient logistical support for the provisionof these services. Our reforms in this area are aimed atincreasing recurrent departmental expenditures so that researchand extension services to smallholders may be expanded andextended to crops other than maize. In line with our masterplan for research and extension, we are devoting a higherproportion of these resources to the smallholder sector and tocrops other than maize.

19. As regards agricultural sector policies, we recently,decontrolled the pricing and marketing of all crops, exceptmaize, as part of our price liberalization program. There is afloor price at which the Government stands ready to purchasethese crops, however, as a safety net for producers. Thesecrops are now trading at prices above floor prices and privateentrepreneurs are actively engaged in this trade. Maize andfertilizer pricing and marketing have remained problem areas.The prices of these items have continued to be subject toofficial ceilings and to be uniform geographically andseasonally. In addition, the review of road haulage chargeshave often been delayed for long periods and these have remainedfixed for long periods at inadquate levels and with no allowancefor distance or road condition. Consequently, the truckingcompanies have had little incentive to transport these items.As a consequence, the marketing of maize and distribution offertilizer have been highly inefficient and costly. In the

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interest of keeping the consumer price low and to move maizefrom outlying areas, the Government has bean heavily subsidizingthe interprovincial transport of maize and fertilizer.

20. In September 1990, we took the first steps towards fulldecontrol of the maize marketing and fertilizer distributionsystems. Maize marketing was liberalized and the producer priceof maize, which was originally established as a ceiling price,has been turned into a floor price by market forces. Privateconcerns, millers, producers, and agents are now permitted tocompete with the cooperatives within the margins set by theproducer price and the into-mill price. This is an importantfirst step in that it permits competition and a greater role formarket forces. As part of our gradual transition to fulldecontrol of maize and maize meal prices, the Government willcontinue to permit market forces to gradually increases theseprices in order to avoid a sudden, large price rise whenofficial controls are ended. We have also established, atGovernment expense, a strategic grain (maize) reserve of 2.5million bags, or about 3 months marketed consumption. Thisreserve is intended to protect against shortages and excessiveprice increases in the initial period after decontrol. We areimplementing an extensive hammermill programme to provide smallcommunities with maize grinding facilities to lower the cost ofmaize milling and transport, and to expand the options availableto local producers and consumers. The consumer is now able tobuy maize directly from the farmer and have it ground locally,saving considerably on the cost of this basic staple. Roadhaulage rates for transporting maize and fertilizer will bedecontrolled by the end of May, 1991.

21. A number of other steps are required to smooth thetransition to complete decontrol of maize pricing and marketing.A regionally differentiated floor pricing system, withoperational guidelines, needs to be formulated. The purpose ofthese floor prices is to provide a safety net for smallholderswithout generating uneconomic production of maize in areas farfrom the major consuming centers. A physical inventory of maizestocks will be required to ascertain the levels of these stocks,which is thought to be high due to the favorable harvests in1988 and 1989. It is important to have ample stocks of maizewhen the decontrol begins so that prices do not rise toosharply. If stocks and expected prod wction aLe not adequate,the Government will endeavor to secure sufficient imports sothat maize process can be decontroled without unwarranted priceincreases. Arrangements for the ownership and leasing ofstorage facilities must be put into place and a list of storagefacilities available to private traders needs to be madeavailable. Also, an agricultural market information system willbe established to monitor and disseminate market information tothe trading community. Collecting, analyzing and disseminatingsuch information will be the responisbility of the soon-to-be-established Agricultural Market Information Center (AMIC). Thiscenter will also monitor trade (international) in grains,performance of the floor pricing system and the operations of

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the maize strategic reserve. An action program has been agreedwith IDA to implement these various steps, all of which will becompleted prior to the date that the decontrol becomes official.

22. The pricing of fertilizer will also be decontrolled by1991. Private trading in fertilizer, including importing, hasbeen allowed since September, but is unlikely to becomeeffective as long as the final price remains subsidized. Oncethe price is decontrolled, it will be profitable for privatetraders and individuals to import and trade in fertilizer incompetition with Nitrogen Chemicals of Zambia (the localproducer and currently sole importer) and the cooperatives. Weexpect that this will substantially improve the marketing anddistribution of fertilizer, as well as lower its cost. Aphysical inventory of fertilizer stocks will be completed priorto decontrol and imports arranged as necessary to ensure thatadequate stocks are available to prevent excessive price risesduring the transition to the decontrolled situation.

23. With the envisaged decontrol of maize and fertilizer pricesand of road haulage rates and the phasing out of transportsubsidies, the only subsidy remaining will be that associatedwith the maize coupon scheme to assist vulnerable groups. Aperformance review of this scheme, aimed at improving itsadministration and effectiveness, is planned for early in 1991.We plan to further our reform of agricultural marketing througha project with the Bank which will provide for investments ininput distribution, rural agro-processing and transportation,and extend the market information system to other crops.

24. With the objective of encouraging competition and improvingresource allocation in the economy, we have decided to eliminateexcessive protection and to reduce tariff dispersion. Thedegree of protection has been determined largely by importrestrictions arising from the administrative allocation offoreign exchange. Once the OGL system is fully in place, importtariffs and a competitive exchange rate will play the key rolein determining the degree of protection. Given the importanceof import tariffs in fiscal revenue, any proposed changes to thetariff schedule must take the revenue effects into account. Atpresent, import taxation includes an import duty, that rangesfrom zero to 100 percent and 20 percent sales tax across theboard. The import sales tax is based on the import value plusduty multiplied by an up-lift factor of 1.25. As a result,total rates range from zero to 150 percent.

25. Our aim in undertaking the tariff reform, is to create amore uniform, low-level tariff regime which will expose domesticenterprises to both internal and external competition. Toaccomplish this, all discretionary exemptions that are notrequired to reciprocate international agreements (e.g.diplomatic mission imports) will be eliminated. The necessarylegislation to this effect has been published along with the1991 budget. Where such exemptions cannot be eliminated forlegal reasons, they will not be renewed once they lapse. The

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tariff dispersion has been compressed by applying a minimum dutyof 15 percent (although with no sales tax on some items) on allzero-rated import items, with the exception of petroleum,fertilizer, medicaments and medical equipment, and polyetheleneand propylene used in the production of mealie meal bags, and bylowering the maximum import duty to 50 percent, except for somenon-essential goods such as cigarettes, beer, jewelry, andcosmetics. The up-lift factor used to calculate the sales taxon imports has been lowered to 1.2. With a 20 percent sales taxapplied to most imports, the total import tax now ranges from 15to 86 percent in most cases. These measures were announced inthe 1991 Budget and are effective from November 16, 1990.

26. An action plan to complete the longer-run tariff reformprogram will be elaborated by May 1991, with the view toimplementing the next phase of reform within the context of the1992 Budget. It is envisaged that this second phase will entailfurther reductions in the number and level of tariffs. Thisrestructuring exercise will need to be accompanied by theadoption of a harmonized general sales tax applicable to bothimported and domestically produced goods, thus avoiding areduction in total revenue and leaving the tariff to functionprimarily as the main instrument for providing protection todomestic producers.

27. An enhanced role for the private sector is essential forthe success of Zambia's adjustment effort. The measures beingtaken under the current adjustment program, including the macrostabilization effort, further price decontrol, exportliberalization, privatization of parastatals, and exchange rateadjustment and liberalization, should work in this direction byimproving incentives and restoring confidence in the privatesector. However, a major increase in private investment willalso require an improvement in the less attractive businessclimate that has arisen from past regulation and control ofprivate sector activity in Zambia. Reversal of this adverseclimate will require strong measures to reassure privateentrepreneurs that their activities and assets are safe fromfuture Government interference. To this end, the Governmentwill issue a major policy statement on the role of the privatesector in the economy early in 1991 along with a revisedInvestment Code with more liberal provisions on depreciationrules and the remittance of dividends. The aim of such astatement will be to dispel doubts on Zambia's commitment to amarket-based free enterprise system. This statement will spellout more explicitly the Government's stand on such issues asexpropriation and profit remittances. To further promoteprivate, foreign investment, we have adopted the MIGA agreementwhich provides safeguards for external investors.

28. We have already taken steps to increase privateparticipation in the Zambian economy. Measures aimed atdivesting the ownership and management of many public sectorenterprises have been initiated in order to promote competition,reduce the managerial burden on the Government, and enlarge the

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sCpOe for private sector activities. In May 1990, my Governmentannounced its intention to sell to the public up to 49 percentof its shares in many parastatals. Our eventual goal is to selloutright or at least transfer majority ownership of allparastatals except public utilities and other strategicindustries. To this end, we have established a [Task Force] todevelop the modalities and mechanisms for implementing this newpolicy initiative. We expect the first offering to be madebefore June 1991.

29. In the medium term, parastatals will remain important inthe Zambian economy, accounting as they do for 50 percent ofindustrial output, excluding mining. An important concern,therefore, is the continued efficiency of the parastatals whichwill remain in the public sector, at least for some time as theprivatization programme proceeds. As you know, a program forrestructuring the parastatals has already been agreed with theBank. A group of 14 parastatals has already been identified forin-depth review as the first stage of this program. The aim isto increase their efficiency in order to improve the prospectsof their eventual privatization.

30. It is our intention that these reviews proceedexpeditiously, so that most will be completed by [May 19911.The actual restructuring of these enterprises in accordance withthe recommendations of the Consultants is to be completed nolater than end-1991. In addition, because of the substantialsubsidies required by Zambia Railways and the PTC, thesecompanies will be subject to a thorough economic assessment witha view to their restructuring or other disposition. Similarly,the operations of Zambia Airways, which is a large drain on ourforeign exchange resources, will be reviewed as a matter ofutmost urgency to ensure that its activities reflect theeconomic value of this scarce resource. It is our intentionthat this review be completed no later than June 30, 1991. Inkeeping with our policy of reducing the size of the publicsector, no new parastatals will be established in commerciallyoriented activities that are best left to private sectorinitiative.

31. The success of our reform program will ultimately depend onthe Government's implementation capacity. In recent years, theeffectiveness of Zambia's civil service has suffered from theloss of skilled personnel as a result of a large secular declinein real wages. Even after the recent increases, the salaries ofsenior civil servants in real terms is still no more than (50]percent of what it was in 1980. Such erosion of incomes hasobviously had significant adverse effects on the morale andperformance of the civil service as a whole. At the same time,the size of the public service (i.e., civil service pluscontracted daily employees) remains too large. The number ofgovernment employees has outstripped the capacity of governmentto provide the recurrent departmental charges needed to make thepublic service productive and efficient. There are also othershortcomings in the system arising from the lack of

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institutional and organizational linkages among the variousorgans of government which adversely affect the capacity of thesystem to deliver services and to manage the policy-makingprocess.

32. To address the problems associated with the public servicehighlighted above, the government has embarked on a concertedprogram of public service management reform. The centerpiece ofthis program will be the enhancement of incentives to motivateand retain key personnel in technical and managerial positionswhile reducing the size of the public service. Our strategy inthis undertaking will involve identifying high prioritygovernment functions and key sectors and targeting ourefficiency improvement efforts on these areas to ensure improvedpublic service performance. In low priority subsectors, theemphasis will be on the progressive reduction in real terms ofthe allocations for wages and benefits.

33. In light of the recent adjustments to civil servicesalaries and housing allowances, the immediate fiscal objectiveof the government will be to freeze the aggregate expenditureson public service remuneration during FY91 at the currentnominal levels [plus the normal 8 yercent bracket creep].Consistent with this objective, we intend to introduce the firstphase of the public service reform program by identifying andeliminating all "ghost" workers from the government payroll byMay 1991. In addition, all areas of obvious redundancies inpublic employment, most of which are found at the lower end ofthe public service pay scales, will be eliminated by November1991. The savings realized from these measures - estimated at7 to 10 percent of public sector remuneration would be availableto enhance salaries for senior professional, technical andmanagerial staff.

34. In the meantime, we will undertake a careful assessment ofgovernment's implementation capacity, identify optimal staffingneeds and levels, and areas for further redundancies. Earlyretirement and retrenchment plans will be prepared. In order toensure effective implementation of this exercise, the Governmentwill appoint a senior official to coordinate and supervise thecivil service reform program.

35. The economic decline of the past fifteen years has resultedin a significant deterioration of living standards, particularlyamong the poorest segments of society. In addition, some of themore vulnerable groups may be adversely affected by elements ofthe current adjustment program, notably the decontrol of pricesof essential commodities such as maize meal and the containmentof fiscal outlays during the tran3itional period. To addressthe problems confronting the poor and to cushion the impact ofthe economic adjustment program, we have launched a SocialAction Program (SAP) for 1990-93 as an integral part of ouroverall adjustment strategy.

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- 57 - ANNEX IIIPage 13 of 13

36. The SAP aims to improve the availability of social servicesand employment opportunities for the poor. It will rendersupport through simple, labor-intensive, community-basedprojects that can provide jobs and improve living standards.Further, we have organized a process that expeditesimplementation of other broader social sector initiatives. Thisprocess involves an SAP Facilitator responsible for bringingtogether priority projects in each of the SAP sectors andcoordinating donor support for them. In line with the SAP'sobjective of generating additional employment, with effect fromNovember 16, 1990, we have streamlined the licensingrequirements for small-scale enterprises, though registrationwill be retained, primarily for data gathering purposes. Small-scale investors will be allowed to start operations once a smallregistration fee is paid. In addition, the Government hasabolished the requirement that prospective entrepreneursadvertise their intention to establish a business so that othersmay object to the application. We will also be working toimprove the targeting of the maize coupon system so that itsupports the most needy without entailing increased budgetarycosts.

37. We are confident that implementation of the measures andactions outlined above will serve us well in our restructuringprogram. Many of these actions will require continued effortand adjustment on the part of all Zambians. They are essential,however, to achieving the macroeconomic stability we aim for andto laying the foundations for longer term diversification andgrowth of the economy.

38. Mr. Jaycox, let me reiterate once again, my Government'scommitment to these reforms. But as you know, for these measuresto succeed, we require full and timely support of theinternational community. The proposed IDA credit will go a longway towards meeting our financial needs this year, and we lookforward to continued support from IDA in the months ahead.

Yours sincerely,

Gibson G. Chigaga, SC, M.P., MCC.Minister of Finance and NationalCommission for Development Planning

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ANNEX IVZAMBIA: ECONOMIC RECOVERY CREDIT Page I of 6----------------------------------

MATRIX OF POLICY ACTIONS

I. MACROECONOMIC STABILITY_______________________

Objective: To restore a stable macroeconomic onvironment in the economy needed to permit the orderly--------- restructuring of the economy that will pave the way for self-sustained growth.

ISSUES ERC ACTION PROGRAM/STRATEGY CREDIT SUPPORT MEASURES

1. Despite actions to stabilize the 1. Achievo stable macroeconomic condi- A. Board Proesntationeconomy, the rate of inflation tions through pursuit of tight ------------------romaine too high, at an fiscal and monetary policioe Agrement on on acceptable fiscalestimated S0X for 1990. consistent with reducing rate of and monetary program as contained

Inflation to 40 percent In 1991, In the L-tter of Development Policy.20 percent in 1992, and 10 percent,in 1993. B. Effectiveness

2. The second window Introduced 2. Expand the operation of the 0GL Nonin Feb. 1990 has been *xpand- 2nd window o that al importsing slowly, progres needs (except for ms 11 neative list) C. Further Actionsto be made to move all Imports are under th system. ----------------------to an OGL system. 1. Satisfactory performanc on the 1991

program. The measure of adequate fiscalS. Fiscal performance rnans wenk 8. Enhance fiscal performance through and monotery control to be monitored

largely because of lnoffectivo tighter budgetary controls and will be that net banking credit to the Cmechnisvm for control of further reductions In subsidies. government in the first quarter of 1991budgetary expenditures. *shll not oxceed K 4726 billion.*

a Asterisks Indicate second tranche relesse conditions.

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ANNEX IV

it. AMICULTURE Page 2 of 6

Objective: Devolopment of on Internationally comp.titive agricultural sector that provides for food socurityand generates future export growth in accordance with the country's comparative advantage.

ISSUm ERC ACTION PROORM/STRATEGY CREDIT SUPORT lEASURES

1. Low farm productivity In seallboldsr 1. Increase ogricultural productivity through: A. 0ord Pre_etationagriculture resulting from the u of -- - -------- -poor twchnoly and Inadequate or (1) lmproving managoemnt and delivery of 1. Initiate measures toward tho rtorm ofinappropriate nputs, support services, esp. reserch and miz" pricing and markting, i.e. stock-

extenslon, and credit; taking of the quantity and quality of2. Poor quality of and Inadequate (It) raising tfticency of marketing and maize; clarifiction of ownership of

linkes g aon agricultural upport distribution of Inputs; grain storag facilities; and establish-soevi e (research, exnsion (itl) lpoving incentive Structure through mont of appropriato institutions formarketing, Input supply cre 4 t rural appopriat pricing and distribution managing the mize stratOgic reserve.transportation end *gro-proceing). systoem; and

(tv) Increasing budgetary allocations B. Effectiv ento priority progrnm.-- -

a. Inapproplate pricing policlo which NnHe.have diteortd incentive structures andproduction ptterns *.g. subsidie on 2. Developmnot of now ources of growth and C. Further Actonsmize and ftrtilizers - national diversification of production through-uniform prices for maize ndW fertillizrs. 1. Satisfactory progress on Implementation

(1) removing maize related ubidies; of maize and fortilizer price decontrol4. Ineffectiv morketing and distribution (Ii) Itensifying ongoing res arch and and liboralization of marketing arrange-

systems due to controlc on privt maten son pIngram; and onte, including:forestry, wildlife, and lack of (iii) ncourag special proram for (a) As an ssentisl stop towards takingnviromant policy supports to xport crops suh a other actions (given below), adequat

cotton, tobcco, oil eeds c. increases in the into-mill price ofsei*z and the consumer price of ma*z

S. Policy reforms for s_alIholder agriculture meal products so at to limit cost of MizeaImed at: bandling subsidies to the level specified

in tho 1991 budget. If supplies (including(v) ligning i_put/output prices to available Imports) *re adequate, full

market value by et-linating sub- decontrol of esize price.*sidie. nd pan-territorial pricing (b) adoption of a system of floor pro-througb a regionally diffrentiated ducer prices (FPS) for maize, which are

(11) liberalizing producer price related to export parity price andfor mise and fertiliszr; and differentiated sesonally *nd

(Mii) encouraging greter participation geographicaily;by the privat sCetor in product (c) decontrol of fertilizer prices;*trkting Including export and ilport (d) appointing an agent to eange onupply (fertilizer import marketing) behalf of tho Government a Maizeand agricultural proc sing, Strategic Reserv (MSR); and.9. millng. (a) allowing private sctor to establish

freely new maize mills of any cpepcity.

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AN.AEX LVIII. TRADE POLICY Page 3 of 6

Objective: Diversifying the export base of production, rducing the import Intensity in consumption *nd production, and improving------- the efficiency of import substitution activities.

- -_______ - _ __--- __ _------------------------- -------- _----------_- _ _

ISSUES ERC ACTION PROGRAM/STRATEGY CREDIT SIRPORT MEASU*ES_ ---- ------- - _--_--_--- -- --- _---- ---- _ _- _-- -_--

1. Continued overvaluatton of the *x- 1. Attainment of a merket clearing exchange rote; A. Board Presentation

2. establish on OCL syeten for all Import 1. Continued adjustment of second windowcatgorIes except for a lImited negative exchange rote towards goat of morkot

2. Inefficient aduinistratlve *llosc- li#t; cloating rate by March 1991.tion of foreign exchange.

a. remove oxport bans and simplify export B. Effectivenes3. Otstorted Incentive for export procedures;

and import substitution activities None.especially reguiltions and bans on 4. reduce tariff dispersion and xcessiveexport., and excessive protection protectior to domestic industry; C. Further Actions.of industries and vartations Intariffs. S. eliminat tartff exmptions except for 1. Expand the mm of OL system to include

those required by International egr_o.ents. 11 ;mport catgories (I.o. all but asm agreed ngaptiv list) other thanpetrolem nd petrolem productns.

2. FurnIsb evidence satisfactory to IDA thatIt has removd: (a) all restrictions onexports with the xception of m_ize,Mizet products, petrolem and petroleumproduct., fertilizer *nd Ivory; and (b)all exemptions from Import duties and salestaxes excet those in effect as ofJanuary 1, 1991 .

3. Introduction of a minimum levy of 16ton *II but a few zero-rated Import item,reduction of the up-lifit factor (usd tocalculete the sales tax) to 1.20; lower themaxim Import levy from IMU to UX withth exception of * few luxury items, andeliminate mt discretionary exemptionsfrom custom duties nd sales taxes.

4. Agreent o4n a sor, program for thonext phas of the tariff reformprogram to be introduced withths 1992 dgeot.

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ANNEX IVPa-ge -4 of -6

IV. PUBLIC SECTOR

Objective: Improve the efficiency and effoctiveness of public expenditures through improved ollocation end management of pubtic investment andthe capacity for delivery of service.

ISSUES ERC ACTION PROGRAM/STRATECY CRED!T SUPPORT MEASURES

1. Structure of public expenditures 1. Focus public expendituros on priority A. Soard Presentationinappropriate In the light of public investmont program, and re truc- -------

devolopment priorities. ture recurront oxpendituroe to enhance 1. Increased 1991 budgetary allocrtiona Inthe delivery and provision of essentitl reel torms by 6! for education and by

2. Capacity of public service to manage services, osp. health, oducation, 1IOi for road maintenanco.

conditions of service. Improv tho implementation capacity B. Effectivenesof the public osrvice through strongth-

8. The sixe of public aervice remains oning the planning and budgeting functions Wona.too lare in relation to capacity of th government; and through technicalof government to provide appropriate assistance and training. C. Further Actionsrecurrent departmntal expondture_s.

S. Reform the public servico to restoer 1. Complete and furnish to IDA a satis-sa laioney and or hi by neevelng ffctory Public Investment Proram for* larle. GOp. of higher-l*vo 1staff, 1991-1993 eonsistent with the prograe androduce the sie of contract delly nsuro tbht no nw investment projects are_mploye and retrenchment of civil undertaken outside the fram_ork of the PIP..servants.

2. Carry out a physical survey of public*eployoes satisfactory to IDA to ensure salory :payments to only bonefIds employee and tostrenthen fiscal control.o

3 Undertake creful ssessment of govenment'sImplementation e pacity in priority sectorsidentify optima sItffing neds and levelsand areas 'For further redundancies.

4. Agreement on the work program and timetableto formulate cost-effective osrly retire-ment prograss and discharg procedures foretaff subject to rotrenchment.

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ANNEX LVPage 5 of 6

V. PARASTATAL/PRIVATE SECTOR_________________________

Objectiveo The object;ve is to improve the economic and financial viability of parastatals, eliminate government budgetary support

--------- for the sector, and increase their contributions to government revenues, while strengthening their ability to compete

domestically and Internationally. ¢iven the need to boost pr;vate investment, it will also be necessary to enhance therole of private sector through privatization of public enterprises, elimination of special advanta9es to parastatals, andcreating an enabling environment for more private sector participation in the economy.

ISSUES ERC ACTION PROGRAM/STRATEGY CREDIT SUPPORT MEASURES

1. Predominance of parastatals in the 1. Review the manaement and financial A. Board Presentationeconomy has been a drain on govern- performance of the parastatals ------------------ment expenditures through subsidies end the overall parent/subsidiary 1. Announce government commitment to priva-and other budgetary transfers to relationships with a view to Improving tization program for most parastatals.have reduced consumer incomes and efficiency and overall performance.impeded private sector development. S. Effoectiveness

2. Reduce government subsidies and -------2. Over extension of parastatals has introduce guidolines to make para- None.

strained the Government's * nagerial statals more autonomous and financiallycapacity. accountablo on en individual basis. C. Further Actions

3. Dominance of the industrial sector 3. Remove barriers to privato sector 1. Develop modalities and mechnisms for theby parastatals has constrained the participation in tho oconomy. Government's policy of transferring majorityemergency of an Internationally ownership of olf parastetels except publiccompotitivo privato setor. 4. Accelorato the process and expand utilities and other strategic industries

the scope of privatization. to the private sector.

2. Employ consultants, under terms of reforencesatisfactory to IDA, to carry out the socondphase of the parastata l reform program covering14 enterprises, tho list of which has beenagreed with IDA.

3. Complete review for restructuring orothor disposition of Zambia Railways,ZPTC, and Zambia Airways.

4. Eliminate public sector monopoly in insurance.

6. As a first important step, provide evidencesatisfactory to IDA, that government hasoffered for sale to the private sectorat least six parastatals.s

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ANNEX 1VPage 6 of 6

VI. SOCIAL ACTION PROGRAM

Objective: To ensure that the poor and the socially vulnerable groups participato in and benefit from tho adjustment program while- -- amoliorating the transitional cost of such adjustment on the poor.

ISSUES ERC ACTION PROGRAM/STRATEGY CREDIT SUPPORT MEASURES…………_… _-- -… - ------------------------------------------------ -----____________________________ _____________________________

1. Continued economic decline has 1. Continue and improve targeted programs for A. Board Presentationreduced real Income and incrensed maize mal coupon to cushion the impact of ------------unemployment and vulnerability of price decontrol of mize on tha poor. None.the poor.

2. Implement special income gonerating B. Effectiveness2. Deterioration of essential services activities for the vulnerable -- the --------------

as a result of declines In bud- youth, women-headed households, and None.getary aIlocation- for health, the urban poor, special nutritioneducation, roads and rural intre- programs, and public works, etc. C. Further Actionsstructure. _-- ___

8. Restructure public expenditures torefloect higher allocations for educa- 1. Complete, under terms of referencetion, health and social services, acceptable to IDA, an evaluation of the

efficiency of the maize meal coupon4. Remove barriers to Informal sector system in assisting vulnerable groups.*

entrepreneurial activities.2. Ensure adquate budgetary provision of

resources for education, health, sanitationand services aimed at the poor and vulner- 'able groups.

8. Agree with donors and the Bank on approp-riate schedule for implementing theGovernmnt's Social Action Progrm.

4. Replace licensing requirements withregistration requ;reants for small-scale entrprise.

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