Document of

The World Bank

FOR OFFIClAL USE ONLY

Repot No. 13842

PROJECT COMPLETION REPORT

ZIMBABWE

STRUCTURAL ADJUSTMENT PROGRAMLOAN 3434-ZIM (IBRD)

CREDIT 2331-ZIM (IDA)

JANUARY 3, 1995

Country Operations DivisionSouthern Africa DepartmentAfrica Regional Office

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 authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Zimbabwe Dollar

Appraisal (October 1991): US$ I = Z$ 5.0Closing (December 1993): US$ 1 = Z$ 6.9

ABBREVIATIONS AND ACRONYMS

AFC Agricultural Finance CorporationAZC Air Zimbabwe CorporationCSC Cold Storage CommissionDANIDA Danish International Development AgencyDMB Dairy Marketing BoardEFF Extended Fund FacilityERS Export Retention SchemeESAF Enhanced Structural Adjustment FacilityESAP Economic Structural Adjustment ProgramESW Economic and Sector WorkFCA Foreign Currency AccountsFER Framework for Economic ReformFY Fiscal Year (see note below)GDP Gross Domestic ProductGMB Grain Marketing BoardIBRD Intemational Bank for Reconstruction and DevelopmentICB International Competitive BiddingIDA International Development AssociationIMF International Monetary FundLDP Letter of Development PolicyM2 Broad MoneyMIU Monitoring and Implementation UnitNOCZIM National Oil Corporation of ZimbabweNRZ National Railroad of ZimbabweOGIL Open General Import LicensePCR Project Completion ReportPFP Policy Framework PaperPSIP Public Sector Investment ProgramPTC Post and Telecommunication CompanySAP Structural Adjustment ProgramSDF Social Development FundZESA Zimbabwe Electricity Supply AuthorityZIC Zimbabwe Investment CentreZISCO Zimbabwe Iron and Steel CorporationZ$ Zimbabwe dollar

FISCAL YEAR OF THE BORROWER

July 1 - June 30

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Otfice of Director-GeneralOperations Evaluation

January 3, 1995

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Zimbabwe -Structural Adjustment Program (Loan 3434-ZIM and Credit 2331-ZIM)

Attached is the Project Completion Report on Zimbabwe - Structural Adjustment Program (Credit233 1-ZIM and Loan 3434-ZIM) prepared by the Africa Regional Office with Part II contributed by theBorrower.

The main objective of the loan and credit was to support the first phase of the Government's five-year (1991-95) structural adjustment program (SAP) in the areas of budget deficit reduction, externaltrade liberalization, and domestic deregulation. The program also included a number of sectoralinitiatives and actions to address the impact of adjustment on the poor.

The overall implementation of the SAP progressed well, despite a severe drought in 1991/92.Trade liberalization and some aspects of deregulation (pricing and marketing reforms) proceeded morerapidly than anticipated, but the drought upset both the fiscal and balance-of-payments targets andundermined the supply response to the program. Other factors, well articulated in the Borrower'scontribution, which negatively affected progress were: the failure to develop and implementexpeditiously a comprehensive strategy for parastatal reform; a poorly defined framework for dealingwith the social dimensions of adjustment; limited institutional capacity; and the lack of coherentcoordination of donor activities and funds.

Although the drought and its aftermath led to great hardships which tested the national resolve,commitment to the adjustment program appears strong. Overall, the project outcome is rated assatisfactory. Institutional development is rated as modest and sustainability as likely.

The PCR is of good quality. Part II provides an excellent assessment of the program'sperformance and implementation lessons.

The planned audit will evaluate recent performance in program implementation, particularly in theareas of civil service and parastatal reform and poverty alleviation aspects.

Attachment

T1his document has a restricted distribution and mnay be used by recipients only in the performnance of their official duties. Its contentsmnay not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

PROJECT COMPLETION REPORT

ZMABWE

STRUCTURAL ADJUSTMENT PROGRAMLOAN 3434-ZIM (IBRD)CREDIT 2331-ZIM (IDA)

TABLE OF CONTENTS

Page No.

Preface iEvaluation Summary iii

Part I Program Implementation Assessment 1

A. Program Objectives and Design 1

- The Need for Economic Policy Reform 1- The Government Response: The Framework for Economic Reform 2- The Objectives and Design of SAP 3- The Specific Conditions for Release of Second Tranche 4- The Role of the IMF 5

B. Achievement of Program Objectives 5

- The Overall Outcome of the Program 5- The Effectiveness of the Operation in Achieving its Specific Objectives 8

C. The Sustainability of the Program Achievements 14

D. The Bank Performance 17

- The Role in Policy Formulation in the 1980s 17- Effectiveness in the Supervision, Monitoring and Implementation of SAP 17- Cofinancing of SAP 17

E. The Borrower Performance 18

- Effectiveness in Preparation and Appraisal of SAP 18- Commitment to the Adjustment Process 18- Effectiveness in Monitoring and Implementation of SAP 19- Effectiveness in Procurement and Disbursement for SAP 19

F. Key Lessons for Subsequent Adjustment Programs 19

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

TABLE OF CONTENTS (CONT'D)

Part II Statistical Annexes 22

Appendices

A. Aide-Memoire of PCR Mission 29B. Borrower's Contribution to the PCR 32C. Miscellaneous Appendices 52

Map

PROJECT COMPLETION REPORT

ZIMBABWE

STRUCTURAL ADJUSTMENT PROGRAM

Ln. 3434 - ZIM (IBRD)

Cr. 2331 - ZIM (IDA)

Preface

This is the Project Completion Report (PCR) for the Structural Adjustment Program inZimbabwe, for which loan 3434-ZIM and credit 2331-ZIM in the amounts of US$ 125 million andUS$ 50 million equivalent, respectively, were approved on January 21, 1992.

The loan and credit were closed on December 31, 1993. They were fully disbursed, and thelast disbursement took place in February 1994. Cofinancing of the project was provided byDenmark.

The PCR was prepared by Andrew Goudie, Consultant to AF6CO, Africa Region andreviewed by Lloyd McKay, Task Manager, Fred King, Country Officer, Ataman Aksoy, ActingDivision Chief, AF6CO, and Gene Tidrick, Lead Economist, AF6DR. The borrower providedcomments that are included as an appendix to the PCR.

Preparation of this PCR was begun during the Bank's final supervision mission in April 1994.The borrower contributed to the preparation of the PCR by providing views that are reflected in themission's Aide-Memoire, by preparing its own Evaluation of the project's execution and initialpreparation (see Appendix B), and by commenting on the draft PCR.

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PROJECT COMPLETION REPORT

ZIMBABWE

STRUCTURAL ADJUSTMENT PROGRAM

Ln. 3434 - ZIM (IBRD)

Cr. 2331 - ZIM (IDA)

Evaluation Summary

Introduction.

1. Bank Role prior to SAP. [paragraph 62-63, 69]1/ During the 1980s, the Bank focussedon a program of Economic and Sector Work (ESW), aimed at fostering an awareness of the need fora broad-based economic policy reform. This work, in conjunction with the informal work and adviceprovided by the Resident Mission, was instrumental in assisting the Government in defining itsmacroeconomic and sectoral policy. In particular, the Country Economic Memorandum of 1987 andthe Trade Liberalization Study in 1988 played an important role in the development of policy. TheESW was accompanied by a modest, but increasingly important, lending program that was directed atsupporting infrastructure, family planning and health care and poverty alleviation.

2. The Objectives and Design of SAP. [para. 11] The principal objective of the StructuralAdjustment Program (SAP) was to support the implementation of the initial stage of the Government'sEconomic Structural Adjustment Program (ESAP) in the following four key areas: reduction of thefiscal deficit; trade reform through the establishment of the appropriate exchange rate and theexpansion of the Open General Import License (OGIL) system and Export Retention Scheme (ERS);deregulation of the domestic economy; and alleviation of the impact of adjustment on the poorestsections of the population.2/

3. The Specific Conditions for Release of Second Tranche. [para. 13] Under the operation,there were established six specific policy objectives, for which a satisfactory implementation wasdeemed appropriate for the release of the operation's second tranche:

I/ Paragraph and Section numbers refer to the text in Part 1.

2/ In response to the emergency situation created by the drought, one amendment to the Credit Agrement was made,permitting up to 20% of the Loan and Credit to be expended on foodstuffs. Associated with this aenndment was the tipulationof revised procurement rules in this respect to facilitate the exceeding of the standard ICB limits.

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i) Trade policy: expansion of the unrestricted OGIL system to include, by June 1992, goodsrepresenting 15 percent of the aggregate value of imports during 1991; together with theexpansion of the ERS to permit at least 25 percent of export earnings to be retained;

ii) Fiscal policy: reduction of the fiscal deficit (excluding grants) for FY 1991/92 to no morethan 8.3 percent of GDP, with such deficit being further reduced by the net revenues arisingfrom the measures undertaken since October 1991;

iii) Public enterprise policy: reduction in the overall operational deficit of the major publicenterprises to a maximum of Z$370 million for FY 1991/92;

iv) Public Sector Investment Program (PSIP): implementation of the PSIP for FY 1991/92 tobe satisfactorily undertaken, and the Government to have consulted with the Bank on themajor components of the PSIP for FY 1992/93;

v) Civil Service staffing: the number of positions in the Civil Service to have been reduced by5,000 by June 30 1992; and

vi) Consumer tariffs: Post and Telecommunications Commission and the Zimbabwe ElectricitySupply Authority to have been permitted to adjust consumer tariffs to cover specific costcategories agreed with the Bank.

4. Financing. [para. 12] The SAP was approved by the Board of Executive Directors onJanuary, 23 1992. It included an IBRD Loan of US$125 million and an IDA Credit ofUS$50 million. In addition, cofinancing was subsequently provided by Denmark, in accord with theGrant Agreement of December 29, 1992, which established a Trust Account for DKr. 75 million.

Project Experience and Results. [Section B]

5. There are several factors that render it impossible to isolate the specific impact of the SAP.First, the operation was an integral element of the Government's overall Framework for EconomicReform (FER), and, as such, it was one of several major influences on the economy. Second, thevery severe drought in 1991/92 was undoubtedly a massive exogenous shock that had a majorconstraining influence on the response to the reform program and - to a lesser degree - on theimplementation of the program, itself. A more meaningful analysis of the program is gained from anassessment of the implementation of the policy reforms, together with an assessment of the post-drought recovery.

6. The overall conclusion of the PCR is that the implementation of both the SAP, in particular,and of the Government FER, in general, have progressed well throughout the life of the project, 1992to 1994. From one perspective, the Government program of reform could be defined as gradualist,having now spanned almost a decade since the need for reform was initially identified. It is,however, more appropriate to regard the program as one with two phases: the first phase up to 1990was characterized by efforts to define the most effective reform program through considered studyand preparation; while the second phase, subsequent to the Budget of July 1990 and the establishmentof the FER, was marked by concerted and committed progress in implementing the reform. Whileimplementation was not uniformly rapid across the breadth of the program, it was, nonetheless, fastin some respects and, indeed, accelerated, despite the serious external shocks that hit Zimbabwe atthis time. Progress in other respects has been less effective; in particular, the reform of publicenterprises, the provisions to shield the most vulnerable groups of society, and the containment of thefiscal deficit have been major concerns.

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7. The drought-induced recession has had such a major short-term depressive impact on thesupply response to the implementation of the FER, it is difficult to determine the effectiveness of thereforms in establishing a sustainable long-term growth trend. The agricultural sector has reboundedstrongly from its trough of 1992, and recovery of the industrial sector began in the second half of1993.

8. The Risks to Program Sustainability. [Section C.] To date, the Government has shownitself to be committed to the implementation of the reform program, and has withstood the extremepressures imposed by the drought without major amendment to its basic strategy. However,considerable risks remain:

(a) The management of public sector expenditures. The impact of continuing high levels ofpublic expenditure on the macroeconomy remains the primary risk to the adjustment program.Private sector development will be put at serious risk without the curtailment of publicexpenditures: notably, expenditures directed to supporting the parastatals, the public sectorwage bill, and defense-related activities;

(b) The management of the social costs of adjustment. The measures to address thetransitional costs have been inadequate. Immediate measures both to mitigate the most seriousimpacts and to promote the creation of employment opportunities at the micro level arecritical to maintain support for reform;

(c) The rate of private investment and the efriciency of capital utilization. If high levels ofprivate investment are not sustained, and if there is not a significant improvement in theefficiency with which capital is utilized, industrial competitiveness will not be enhancedappropriately to sustain accelerated growth in an open economy;

(d) The deregulation of the market. With unemployment becoming an increasingly centralissue, the role of the small-scale formal and informal sectors enterprises in creatingemployment opportunities has become more crucial. The development of these sectors - and,hence, the social stability of the program - will be put at risk without more decisive moves toderegulate further at the micro level;

(e) The development of export markets. Having now moved rapidly to establish an economythat is subject to international competition, sustained growth will depend on promoting exportsto maintain an external equilibrium and to generate growth;

(f) The prospect of continuing regional stability. With political uncertainties persisting in theregion there is a continuing risk to economic development.

9. Supply Response. These concerns with regard to the future sustainability of the programappear to have contributed to a more muted supply response than would have been desired at this timeof the program's implementation. In view of this weaker response, the issues surrounding the socialcosts of the adjustment have become all the more pressing, in order both to meet the needs of themost vulnerable groups and to ensure the continuing acceptability and sustainability of the economicreform process itself. Without decisive and well directed policy development in these fields, thesustainability of the program would, indeed, be problematic.

10. Effectiveness and Commitment of Government to Reform. [para. 68-69] In the late1980s, Zimbabwe was not in a state of crisis and was deemed creditworthy by the externalcommunity. Thus, while the Government acknowledged that major economic reforms werenecessary, it did consider it possible to spend some time undertaking necessary preparatory analysis.

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Such preparatory work might have been undertaken much earlier; nonetheless, the fundamentalapproach of analyzing options and preparing before acting can not be faulted. Indeed, this processplayed a most important role in the development of the internal political consensus and in assisting theGovernment in taking full ownership of the program. This ownership has been reflected in theconsiderable commitment to the implementation of the reform program. Indeed, reforms in pricedecontrol, marketing and trade liberalization proceeded more quickly than was originally planned.Some elements of the adjustment have, however, been less effectively implemented and remain a highpriority for the coming year: notably, in the adjustment of the public sector finances in general, andof the parastatals, in particular, and in the commitment to addressing the social dimensions ofadjustment. The overall conclusion is, however, one of the Government displaying a seriouscommitment to reform, both in undertaking the preparation and design of the program, and in thisfirst phase of its implementation.

11. Effectiveness in Project of SAP. [paras. 63-64, 70-72] The monitoring andimplementation of SAP has been conducted through the Monitoring and Implementation Unit (MIU)of the Ministry of Finance. It would be helpful to develop a more systematic and regular reportingsystem for informing the participating donor community of progress. Both the procurement anddisbursement aspects of the project were satisfactorily undertaken by the Reserve Bank and theResident Mission. The Statement of Expenditures procedures worked efficiently and effectively andthe Reserve Bank was successful in establishing the necessary systems to facilitate the process.

12. Specifically, the second tranche review mission (September 1992) concluded that theimplementation of the reform program had progressed well in most areas, despite the intervention ofthe drought. Two waivers to the Loan Agreement were sought and granted. These were with respectto the progress in the reduction of the overall fiscal deficit, and in the reduction of the parastataldeficits; in both cases, the financial overruns were directly attributable to the impact of the droughtand the legitimate response that the Government pursued. The tranche was, consequently, released inOctober 1992.

Summary of Key Lessons Learned. [Section F.]

13. The primary lessons from the Zimbabwe experience may be summarized as follows:

14. Preparation and Ownership are Important. One of the strengths of the approach to reformhas been the analysis and policy design that has been initiated prior to the implementation of reform.Moreover, in building an internal consensus and in establishing a clear ownership of the program, theGovernment has been able to maintain a high level of commitment as the phased reforms have beenput in place. While this fundamental approach has been successful, a more rapid move to initiate thepreparatory work would have been beneficial and would have facilitated, faster introduction of thereform measures, themselves. The Bank effectively contributed to design through formal andinformal economic and sector work but ownership rightly remained with government and this can betime consuming.

15. Fiscal, Monetary and Exchange Rate Policy must be Coordinated and Share the Task ofMacro Management. The importance of a coherent and comprehensive program of macroeconomicreform is clearly demonstrated by the Zimbabwe experience. With less fiscal deficit reduction thanwas expected, a more substantial monetary adjustment was imperative in order to retainmacroeconomic equilibrium, and this dampered private sector investment and the supply response.

16. The Control of Government Expenditure is Central. A significant acceleration in the rateof adjustment of expenditure would have facilitated a loosening of monetary policy and, thereby, amore rapid and more marked supply response to structural adjustments. High levels of Government

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expenditure, and associated high inflation and high interest rates, constrain the rate of private sectordevelopment.

17. Structural Reforms of Parastatals is Often Difricult and Hence Requires PriorityAttention. The implementation of parastatal reform revealed important shortcomings: while the pricederegulation and adjustment were rapidly and appropriately undertaken, the programs to enhanceenterprise efficiency and competitiveness through more fundamental structural adjustment of theenterprises were very slow to be implemented. In view of the long lags entailed in the structuralreform process, it would have been advisable to have accorded the structural reforms to increaseefficiency equal importance in implementation with price reform. Greater clarity is required indefining the role of the parastatals; notably, the social functions (e.g. fulfilling the Government'sstrategic grain strategy) that they are expected to perform and the transparency with which thesefunctions are financed. Moreover, improvements to managerial capacity were necessary, such as amore appropriate salary structure and through the attracting of established proven managers from theprivate sector.

18. Deregulation is Important to Achieve a Supply Response. Major inhibitions to theestablishment and trading of enterprises prevail at the micro level. Only with the rapid elimination ofsuch constraints - especially, those under local authority control - will the small-scale and informalsectors be empowered to respond to the macroeconomic measures that have been taken to establish anappropriate business environment. In view of the employment-generating strengths of these sectors,such steps are especially important. In general, the reform program has had a Central Governmentfocus and would have benefitted from a parallel concern for local Government constraints overeconomic activity.

19. Market Based ERS is Better than OGIL. External trade reform suggests that theestablishment of a market-determined exchange rate such as that inherent in the ERS system shouldtake precedence in the reform process. In contrast to the OGIL system, the tradeable ERS retentionsprovide a freely operating market, with a market-determined rate that has progressively become morerepresentative of the whole economy as the scheme has expanded. It provides a self-financing marketmechanism, together with an in-built incentive to exporters.

20. Protecting Social Services and Ensuring Access by the Poor is Important for MaintainingSocial Achievements and Sustaining Support for Reform. It is apparent that a more integratedapproach to the design and implementation of the economic reform program and of social policywould have facilitated a more rapid and effective response to ameliorating the social impact of theadjustment program. The poor initial anticipation of the impact of economic reform, together withthe inadequacy of the analysis of the most appropriate and feasible response, was a majorshortcoming. Real social expenditures, were not as effectively maintained as they should have beenand more attention should have been given to ensuring continued access to social services by thepoor. Informed and systematic analysis of the priorities and effectiveness of social expenditure shouldhave received more attention.

PROJECT COMPLETION REPORT

ZIMBABWE

STRUCTURAL ADJUSTMENT PROGRAM

Ln. 3434 - ZIM (IBRD)

Cr. 2331 - ZIM (IDA)

Part I. Program Implementation Assessment

A. Program Objectives and Design

The Need for Economic Policy Reform.

1. In the years following Independence, the primary objective of the Government's economic andsocial development strategy was the rapid reduction in the degree of social and racial inequalitythroughout the country. In particular, in view of the limited extent to which the black population hadbeen integrated into the formal economy prior to Independence, there was a strong focus in thestrategy on investment in human resources and the development of social programs. At the time ofIndependence in 1980, the country had been tightly controlled at the center and was heavily inward-looking, largely stemming from the period of sanctions from 1965-1980 that had necessitated anextreme self-sufficiency. In the immediate post-Independence period, the public sector continued toplay a dominant role in economic activity through direct investment in the productive sectors, theprovision of subsidies for rural development, the continuation of foreign exchange and price controls,and the continued regulation of private investment.

2. In the 1980s, the principal achievements of the Government in promoting development wereundoubtedly in the social field. This is clearly illustrated by contrasting the primary social indicatorsin 1990 with those of 1980: primary school enrollment increased from 1.2 million to 2.2 million;secondary school enrollment increased from 74,000 to 671,000; infant mortality declined from86 deaths per thousand births to 47; the immunization rate for children increased from 25 percent to82 percent; and the rate of growth of population fell to 2.8 percent per annum in the early 1990s.As a consequence of this progress, Zimbabwe's social indicators are now significantly ahead of otherSub-Saharan African countries, and compare favorably with other developing countries.

3. While there were, indeed, major advances towards fulfilling the social objectives, theeconomic development of the country proved to be more elusive, with stagnant living standardsthroughout the decade. In particular, the annual average rate of growth of GDP between 1980-90 was3.2 percent, about the same as the population growth rate.

4. This relatively disappointing growth performance was attributable to many factors:particularly, the continuing controls over domestic trade, prices, and the allocation of foreignexchange, and the dominant role of the public sector, with its constraining impact on private sectordevelopment. At that time, there was considerable concern surrounding the low level of privatecapital expenditure, and its impact on future productivity and competitiveness. More recent evidencesuggests that the investment estimates over this period may have understated the true level of capitalexpenditure, and that, in fact, the rate of capital expenditure grew rapidly after 1985. It is apparentthat investors did respond both to the favorable elements in the economic environment in the late1980s and early 1990s - such as the liquidity of enterprises, the favorable tax incentives and thenegative real interest rates - and in the expectation of the implementation of an economic reformprogram - especially, in anticipation of exchange rate devaluation. Thus, while investment appears tohave recovered over the late 1980s, it is now apparent that the efficiency with which this capital wasutilized was poor, producing a low output-capital ratio, and that it was also relatively capitalintensive.

5. Irrespective of the precise trend in capital expenditures, economic reform was essential toenhance the efficiency with which all economic resources - and, particularly, capital expenditures -were being utilized. The lack of private sector development and efficiency was seen as attributable tothree key factors: firstly, the underlying weakness of the macroeconomy and the perceived risk thatthis created for potential private investors; secondly, the extensive and intensive nature of theregulation in the domestic economy; and, thirdly, the restricted access to foreign exchange. Not onlydid these weaknesses hamper the development of the formal sector, but they equally impacted on thedevelopment of the informal sectors of the economy.

6. Throughout the 1980s, the Government fiscal deficit stood in excess of 10 percent of GDP,increasing inflationary pressure in the economy and potentially crowding out private investment.Furthermore, while the current account of the balance of payments was effectively managed throughextensive controls over the allocation of foreign exchange, thereby preventing any damaging build-upof external debt, this severely constrained the flow of imports.

The Government Response: The Framework for Economic Reform.

7. Towards the end of the 1980s, it became apparent that, while there was no major economiccrisis imminent, the prevailing economic development strategy was not achieving its desired economicobjectives. In consequence, a revised strategy was developed with the launching of the Frameworkfor Economic Reform (FER) in 1991. This program of reform specifically seeks to address the keypolicy constraints that had hindered economic development throughout the 1980s and, thereby,establish sustained higher growth and employment. The principal secondary objectives were theenhancement of public sector efficiency and the enhancement of private sector development.

8. Within this broad framework, the FER has five key policy goals:

i. reduction of the fiscal deficit and reform of monetary policy;ii. trade liberalization;

iii. deregulation of the domestic economy to promote private sector activities;iv. sector specific policy initiatives; andv. measures to alleviate the transitional costs of the reform program on the most vulnerable

groups of society.

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These fundamental objectives have not undergone any radical revision since their inception in 1991.

9. The FER, therefore, specifically embodies a move away from the comprehensive system ofdirect economic controls and regulations that had characterized both the pre-Independence period andthe immediate post-Independence period of 1980-90, to a fundamentally different economic structurewith a far greater reliance on market forces and indirect instruments of economic management.Moreover, through this strategy, the Government is seeking to promote higher levels of investment inthe private sector in order to accelerate GDP growth in excess of the rate of growth of population,while, at the same time, implementing the appropriate policies to ease the transitional social costs ofthe adjustment process.

10. In one important respect, the primary objective of the immediate post-Independence period -namely, the implementation of rapid steps to reduce the substantial imbalances in social and racialequality - remains of central importance. However, the FER acknowledges that this would be mostrapidly and most appropriately achieved through an improvement of the economic investment climatein order to accelerate growth and enhance the creation of employment opportunities. In addition, theFER explicitly recognizes that the necessary levels of investment expenditure would need to begenerated by the private sector, with its access to the required technological knowledge and to therequisite finance. Specifically, the strategy acknowledges that the attracting of direct foreign privateinvestment requires not only a pro-active investment regime, but a secure legal framework and aminimum degree of domestic regulation.

The Objectives and Design of SAP.

11. The principal objective of the Structural Adjustment Program (SAP) was to support theimplementation of the initial stage of the Government's Structural Adjustment Program, including thesteps already taken over the March 1991 to December 1991 period and the proposed steps for the first9 months of 1992. In providing finance in the form of import support, the SAP directly sought tocontribute to the adjustment process by alleviating the immediate external finance constraint. Withrespect to the policy objectives, the operation sought to support the following four key areas:

i) Fiscal Policy: the fiscal deficit would be reduced by at least 3 percentage points of GDP inthe 1991/92 fiscal year. This adjustment would be accomplished without major tax revenueincreases, but rather through the rationalization of current and capital expenditures in accordwith the overall objectives of the Government's Structural Adjustment Program;

ii) External Trade Policy: trade policy reform would focus on three elements: first, theprogressive movement towards an appropriate exchange rate; second the share of the value ofimported goods financed through the OGIL would be increased, and the ERS rate would beincreased; and, third, the tariff structure would be rationalized;

iii) Domestic Regulatory Policy: deregulation of the domestic economy would be effectedthrough, first, the continuance of steps to remove price controls on all goods included in theOGIL; second, the elimination of trading and transport restrictions, especially those affectinggrain movements; and, third, the further streamlining of legislation relating to investmentapprovals and labor retrenchment procedures;

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iv) The Social Dimensions of Adjustment: the impact of the adjustment program on the poorestsections of the population would be alleviated through sectoral initiatives and specific actions.Specifically, the Social Development Fund would be established providing fee exemptions forthe poorest in society, fiscal incentives for training would be reviewed, and the capacity ofexisting training institutions to assist in the alleviation of unemployment would bestrengthened.

12. The SAP was approved by the Board of Executive Directors on January, 23 1992. It includedan IBRD Loan of US$125 million and an IDA Credit of US$50 million. In addition, wassubsequently provided by Denmark, in accord with the Grant Agreement of December 29, 1992,which established a Trust Account for DKr. 75 million. Further, parallel financing was provided asfollows: African Development Bank (US$171.0 million); Canada (US$2.4 million); European Union(US$10.0 million); Japan (US$16 million); Norad (US$5.3 million); United Kingdom(US$27.3 million); Germany (US$17.3 million); United States (US$5.0 million) and Sweden(US$18.3 million).

The Specific Conditions for Release of Second Tranche.

13. The Letter of Development Policy identified a wide range of policy measures that theGovernment was committed to introduce in parallel with the processing of the Bank operation. Morespecifically, under the operation, there were established six specific policy objectives, for which asatisfactory implementation was deemed appropriate for the release of the operation's second tranche:

i) Trade policy: the expansion of the unrestricted Open General Import License (OGIL) systemto include, by June 1992, goods representing at least 15 percent of the aggregate value ofimports during 1991; together with the expansion of the Export Retention Scheme (ERS) topermit at least 25 percent of export earnings to be retained;

ii) Fiscal policy: the reduction of the fiscal deficit (excluding grants) for FY 1991/92 to nomore than 8.3 percent of GDP, with such deficit being further reduced by the net revenuesarising from the measures undertaken since October 1991 (the increase in the minimum tariffto 10 percent; an additional 10 percent tariff applied to imports covered by the OGIL; andthe elimination of the manufacturer's rebate);

iii) Public enterprise policy: the reduction in the overall operational deficit of the major publicenterprises3/ to a maximum of Z$370 million for FY 1991/92;

iv) Public Sector Investment Program (PSIP): the implementation of the PSIP for FY 1991/92to be satisfactorily undertaken, and the Government to have consulted with the Bank on themajor components of the PSIP for FY 1992/93;

v) Civil Service staffing: the number of positions in the Civil Service to have been reduced by5,000 by June 30 1992; and

3/ For this purpose, the following ten enterprises were included: NRZ, GMB, CSC, DMB, CMB, AZC, ZISCO, AFC,

NOCZIM, and ZESA.

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vi) Consumer tariffs: the Post and Telecommunications Comrnission and the ZimbabweElectricity Supply Authority to have been permitted to adjust consumer tariffs to coverspecific cost categories agreed with the Bank.

The Role of the IMF.

14. The first program between the IMF and the Government was established with the agreementof the Extended Fund Facility in January 1992. Subsequently, in September 1992, this agreementwas amended with the IMF approving a new three year program of parallel arrangements under theEnhanced Structural Adjustment Facility (ESAF) and the Extended Fund Facility (EFF), with the firstyear program covering the period July 1992 to June 1993. The second annual arrangement, coveringthe program year October 1993 to September 1994, was approved by the Executive Directors of theIMF in February 1994. Under the first year program, a total of SDR 133.8 million was dispersed.

15. Both the IMF program and the Structural Adjustment Program of the World Bank weredesigned explicitly to support the implementation of the Government's Framework for EconomicReform and, in consequence, there was strong complementarity between the two programs. Indeed,the first tripartite Policy Framework Paper (PFP) was presented to the Bank's Committee of theWhole in July 1992, with the second PFP being distributed in January 1994.

B. Achievement of Program Objectives.

The Overall Outcome of the Program.

16. There are several factors that render it impossible to isolate the specific impact of theStructural Adjustment Program. First, the operation was an integral element of the Government'soverall Framework for Economic Reform, and, as such, it was one of several major influences on theeconomy. It would not, therefore, be meaningful to attribute the combined impact of the policyreforms to the SAP alone. Thus, from this perspective, it is more appropriate to assess the globalimpact of the combined policy measures, in conjunction with the substantial and various forms ofsupportive external funding.

17. Second, any external shock necessarily complicates the analysis of the impact of the internaleconomic policy reform program. In the context of Zimbabwe, the very severe drought in 1991/92was undoubtedly a massive exogenous shock that certainly had a major constraining influence on theresponse to the reform program and - to a lesser degree - on the implementation of the program,itself. Consequently, it is not even feasible to isolate the combined impact of the policy reformprogram and its associated financing. A more meaningful analysis of the program is gained from anassessment of the implementation of the policy reforms, together with an assessment of the post-drought recovery and the degree to which its sustainability and strength appear to result from thereform process.

18. The overall conclusion of the PCR is that the implementation of both the StructuralAdjustment Program, in particular, and of the Government economic reform program, in general,have progressed well throughout the life of the project, 1992 to 94.

19. From one perspective, the Government program of reform could be defined as gradualist,having now spanned almost a decade since the need for reform was initially identified. It is,however, more appropriate to regard the program as one with two phases: the first phase up to 1990was characterized by efforts to define the most effective reform program through considered studyand preparation; while the second phase, subsequent to the Budget of July 1990 and the establishmentof the FER, was marked by concerted and committed progress in implementing the reform. Thebasic five year time horizon of the FER, defined in order to establish the primary reforms, would notappear to warrant the description gradualist in the Zimbabwe context. While implementation was notuniformly rapid across the breadth of the program, it was, nonetheless, strikingly fast in somerespects and, indeed, accelerated, despite the serious external shocks that hit Zimbabwe at this time.Specifically, trade liberalization and pricing and marketing reforms proceeded more rapidly thanoriginally planned. Progress in other respects has been less effective; in particular, the reform ofpublic enterprises, the provisions to shield the most vulnerable groups of society and the containmentof public expenditure have been major concerns.

20. The remainder of this section assesses the impact of the reform program on macroeconomicdevelopments (see Appendix D. 1)

21. Economic Growth. Following the introduction of the FER in early 1991, the earlyindications were that its impact was indeed positive, with GDP growth accelerating to almost5 percent in 1991 (see Appendix D.2). In addition, investment rose to about 22 percent of GDP,suggesting that the central focus of the FER on the promotion of private sector activity, did have thepotential to accelerate growth sufficiently to raise living standards.

22. The onset of the drought in 1991/92 rapidly induced a severe domestic recession thatdominated economic development for the next 18 months. As a result, GDP fell by almost 8 percentin 1992, with the agricultural and forestry sector collapsing by 21 percent and manufacturingdeclining by almost 10 percent. Necessarily, this had a severe impact on both incomes and thepurchasing power of those incomes. In the agricultural sector, output fell to its lowest level since1983, with production in the cotton, maize and sugar sectors declining by between 70 and 75 percentand with 25 percent of the nations' cattle herd lost as a direct result of the drought. In themanufacturing sector, the drastic declines in the availability of agricultural raw materials, togetherwith a severe contraction in domestic demand, led to the gains of the previous four years beingoverturned. This situation was, moreover, exacerbated by shortages of power and water and by thetight control of credit policy that was necessitated by inflationary developments.

23. The drought necessitated the importation of 2.5 million tons of food and the establishment ofa program for the free distribution of food to 40 percent of the population. In addition to this freefood distribution, the Government sought to alleviate the worst effects of the drought and re-establishrecovery through the distribution of agricultural inputs to smallholder farmers and through theconcessionary refinancing of debts of commercial and smallholder farmers.

24. While the impact of the drought-induced recession of 1992 continued into the first half of1993, the good rains did, nonetheless, lay the foundation for a rapid recovery. However, with thecontinuing impact of the shortfalls in domestic demand, together with a tight monetary policy andhigh interest rates, economic recovery was only firmly established in the second half of the year.Consequently, provisional estimates for 1993 suggest GDP growth of only 2 percent. Withmanufacturing anticipated to show a continuing contraction of almost 9 percent, there was, however,

a strong recovery in the agricultural sector with growth of 25 percent. In particular, cotton increasedproduction by 300 percent over the previous season, while tobacco recorded a record level of output.

25. Thus, with the drought-induced recession having had a major short-term depressive impact onthe supply response to the implementation of the FER, it is difficult to determine the effectiveness ofthe reforms in establishing a sustainable long-term growth trend. The agricultural sector reboundedstrongly with good rains in 1992/93 and recovery of the industrial sector began in the second half of1993.

26. Fiscal and Monetary Policy. Having averaged around 13 percent throughout the 1980s,inflation accelerated rapidly to 29 percent by the end of 1991, as price controls were relaxed andinflationary pressures became evident. The fiscal deficit and depreciation of the exchange rate in1991 added to the inflationary pressure. Moreover, with the onset of the drought in 1991/92,inflation accelerated rapidly due to the drought-induced shortages, and on account of the ending ofconsumer subsidies and further price decontrol. Consequently, the consumer price index acceleratedto 46 percent in 1992, with half of this increase attributable to food (29 percent of the consumptionbasket) for which prices rose by 71 percent.

27. The Government addressed this severe inflationary trend primarily through a sharp tighteningof monetary policy and the raising of interest rates. In particular, in the fiscal year to June 1993,broad money (M2) increased by only 15 percent, compared to a 27 percent growth of nominal GDP.With the increased need for Government borrowing to finance the drought-affected fiscal deficit,credit to the private sector increased by only 7 percent over this same year. Consequently, havingpursued a policy throughout the 1980s of maintaining the growth of M2 in line with the growth ofnominal GDP, the ratio of M2 to GDP fell sharply from 32 percent in 1989 to 24 percent in 1993.With the pursuance of such a tight policy, prime bank lending rates rose from 20/25 percent in 1992to 30/45 percent in the first half of 1993, before falling back somewhat in the second half of the year.Nonetheless, real interest rates remained above 10 percent, causing considerable concern for theimpact on investment incentives, in addition to the impact that low credit availability had on theworking capital and investment financing needs. While the strictness of the monetary policyundoubtedly delayed economic recovery, it was successful in bringing inflation down. From the peakin August 1992, inflation fell steadily to a level of 20 percent by the end of 1993.

28. As was noted above, the establishment of an appropriate fiscal policy was a central objectiveof the SAP and it is considered in detail in the next section.

29. External Trade Account. While good progress was made in many respects in 1991, as notedabove, serious stabilization problems emerged in the middle of 1991 with regard to the externalaccount. In consequence, the current account deficit increased from 3.8 percent of GDP in 1990 to8.4 percent in 1991, largely as a result of the very rapid growth in imports in response to the pent-updemand that was released by the program of trade liberalization and to the lax monetary policy. TheGovernment responded by devaluing the official exchange rate by 35 percent in the third quarter of1991 in order to restore stability and external confidence in the reform program. Once again, theimpact of the drought overwhelmed the policy reforms in this field in 1992, with the value of exportsfalling by 15 percent. While the imports of non-drought related goods fell sharply due to therecession, imports of drought related products amounted to US$400 million, with the result that thecurrent account deficit rose sharply to 15 percent of GDP in 1992.

30. In 1993, Zimbabwe suffered a second major external shock with the sharp deterioration in theterms of trade. Thus, while export volumes increased by 12 percent, the value of exports was onlymarginally increased. In particular, tobacco prices fell by 35 percent. Despite stagnant exportearnings, depressed import levels due to the recession and a drop in drought-related imports led to asharp fall in the current account deficit to around 5 percent of GDP in 1993.

The Effectiveness of the Operation in Achieving its Specific Objectives.

31. There were four primary objectives of the SAP, as were outlined in paragraph 11 above.

32. Fiscal Policy. The original target under the FER was to establish a strong downward trendin the aggregate budget deficit as a proportion of GDP, from the peak of 10.6 percent in 1990/91 to5.0 percent by 1994/95 (see Appendix D.3). While a consistent reduction has not been achieved, thisis largely attributable to the impact of the expenditure measures deemed essential during the droughtof 1992, which were equivalent to 2.7 percent and 4.6 percent of GDP in 1991/92 and 1992/93,respectively. As a consequence of these expenditures and the low revenues attributable to therecession, the deficit rose sharply to 11.2 percent of GDP in 1992/93, having declined to 7.6 percentin 1991/92. Thus, while monetary policy was strongly tightened over the 1992/93 year, fiscal policywas relatively loose, with significant expenditure overruns being deemed necessary by both theGovernment and donor community. With substantial shortfalls in the disbursement of externalassistance, leading to a relatively low inflow of counterpart funds, the fiscal deficit necessitated aheavy overrun in the domestic borrowing requirement of the Govermnent relative to the originalprogram. As noted above, this had a major impact on the availability of private sector credit.

33. The planned deficits for 1993/94 and 1994/95 of 5.8 percent and 3.4 percent, respectively,were designed to re-establish the original trend, and, if these projections were to be fulfilled, theadjustment could be seen as on track. However, the provisional estimates for 1993/94 suggests that,although expenditures have been significantly compressed, the deficit remains high and the 5.8percent target will not be reached.

34. Specifically, with regard to the second tranche condition under the SAP, it was concluded atthe time (October 1992) that the 1991/92 deficit had exceeded the tranche condition by one percentagepoint of GDP. In view of the extenuating circumstance of the drought, the condition was waived forsecond tranche release. In fact, the revised data subsequently indicated that the 1991/92 deficit of 7.6percent of GDP was only marginally in excess of the tranche condition (that is, 7.2 percent aftertaking the account of the post-Budget measures in 1991), despite the impact of the drought-relatedexpenditures .4/

35. Government expenditure was instrumental in four respects in dampening the supply responseto the program of economic reforms that were in train. First, high fiscal deficits contributed to thehigh inflation rates over 1992/93 and this cut real incomes and domestic demand, thus exacerbatingthe subsequent recession in domestic production and employment. Second, interest rates rose sharply

4/ It is unclear in the President's Report why the deficit condition was stated as 8.3% of GDP, with the condition beingfurther reduced following the post-Budget measures in 1991. The LDP stated the 1991/92 projection as 7.2% of GDP,including all the 1991 measures.

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to counter the inflationary trends, potentially constraining investment. Third, the high levels of creditextended to the public sector to finance the deficit effectively crowded out credit to the private sector.Finally, the maintenance of high expenditure levels prohibited a more rapid decline in tax rates, and,thus, reduced the incentive implications of lower corporate and personal taxation. Thus, from boththe perspective of domestic consumption and investment, the high levels of public expenditure haveacted to dampen the supply response of the private sector. There is, therefore, an urgent need tomore rapidly curtail public expenditures to facilitate private sector development.

36. Within this aggregate program, the SAP focussed on three fiscal elements: parastatal reform,Civil Service reform, and the PSIP. In each case, the objective was to enhance the efficiency withwhich expenditures were deployed and to contribute to the macroeconomic adjustment in the fiscalaccounts. The importance of parastatal reform is evidenced by the fact that operating losses in1991/92 were equivalent to almost 2 percent of GDP (financed partly from the budget and partlythrough Government-guaranteed credit), while public sector wages and salaries were equivalent toover 30 percent of total Central Government expenditure or 13.2 percent of GDP (see AppendixD.4). The other key drain on the fiscal account - but which was not an explicit focus of the SAP -was defense expenditure, which totalled 5.4 percent of GDP in 1991/92.

37. Civil Service Reform. Within the FER, it was originally programmed that there would be a25 percent reduction in the number of civil servants - excluding the health and education sectors -phased over the subsequent four years (see Appendix D.5). In this way, the Government wage billwould be reduced from 17 percent of GDP in 1990/91 to 13 percent in 1994/95, equal to the levelprevailing in 1986/87.

38. While the second tranche condition under the SAP was more than achieved, with 7000 postsbeing eliminated by June 30, 1992, compared to a target of 5000, the subsequent progress of thereform has been more problematic. Indeed, by the end of June 1993, only 10,000 posts had beeneliminated, compared to a targeted 12,000. The delay in policy implementation in 1992/93 was, inpart, due to the Government's reluctance to add further to an already serious employment problem,attributable not only to the drought and the recession in the world economy, but to the numbers ofschool leavers that were entering the labor market.

39. It is, perhaps, questionable whether it was appropriate for the policy to have focused on thereduction in the number of posts, rather than the aggregate size of the public sector wage bill. Inview of the difficulty of determining whether the posts that were eliminated were originally staffed,and, thus, whether the elimination of a post actually led to cost savings, it may have been moreappropriate to have focused on the aggregate wage bill. On the other hand, such a focus might haveposed further problems for the retention of key skilled personnel, if wage levels had been severelydepressed. Certainly, a more aggressive approach to the overall reform of the civil service structurewould have been desirable.

40. Parastatal Reform. In 1991, it was clear that the parastatal enterprises were in need ofsubstantial reform. Not only were they a major burden on the fiscal account, but the inefficiency oftheir operations was having a detrimental impact on the competitiveness of private sector enterprises,in general. Moreover, their monopoly status precluded the participation of private sector competitorsand the enhancement of efficiency through competition. Consequently, the Government initiated aprogram to reduce the support to parastatals to Z$40 million by 1994/95 to improve their efficiencyand encourage private sector development.