Document of

The World Bank

MIUi C'2IJ CtIJ'H. CW{Y ,USE ONLY

Report No. : P- /'7-35 :ZA (P

T-l.e: AGRI C(-ULT-1TRA!, MARLJi ' AN .:

Autlhor: /EGGE, BARNABA&

Ext.- ::35515 Roo,n:J11 U2 ept. :AFfjAG Report No. P-5773-ZA

MEMORANDUM AND RECO4MENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

oF SDR 24.1 MILLION

(USD33.0 MILLION EQUIVALENT)

TO THE

REPUBLIC OF ZAMBIA

FOR AN

AGRICULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT

July 24, 1992

Southern Africa DepartmentAgriculture Operations Division

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 EOUIVALENTS(As of February 1991)

Currency Unit = Zambian Kwacha (ZK)ZK I = USD 0.008

USD I = ZK 125.00

FISCAL YEAR

January I - December 31

WEIGHTS AND MEASJURES

Metric System

ABBREVIATIONS AND ACRONYMS

BoZ Bank of ZambiaDC District CouncilDCU District Cooperative UnionERC Economic Recovery CreditERR Economic Rate of ReturnFINNIDA Finnish Development AgencyFMA Farmers Marketing AssociationFPS Floor Pricing SystemICB International Competitive BiddingINDECO Industrial Development Corporation subsidiary of ZIMCOITs Independent Trader(s)LCB Local Competitive BiddingLST Large-scale TraderMAFF Ministry of Agriculture, Food and FisheriesMCTI Ministry of Commerce, Trade and IndustryMDM Market Development and MonitoringMLG Ministry of Local GovernmentMLIC Marketing and Logistics Information CenterMOF Ministry of FinanceNAMBOARD National Agricultural Marketing BoardNEMIC National Economic Management and Implementation CommitteeNORAD Norwegian Development AgencyPCB Participating Commercial BankPCU Provincial Cooperative UnionPEC Project Executive CommitteePFP Policy Framework PaperPIRC Privatization and Industrial Reform CreditPIU Project Implementation UnitPMA Participating Marketing AssociationPPU Provincial Planning UnitPRE Provincial Roads EngineerPRP Policy Reform PackagePSD Private Sector DevelopmentRDEP Roads DepartmentREC Roads Engineering CreditRIF Rural Investment FacilityRRRM Rural Roads Rehabilitation and MaintenanceRRU Rural Roads Unit in PRESAP Social Action ProgramSECAL Sector Adjustment LendingSMR Strategic Maize ReserveSST Small-scale TraderTA Technical AssistanceTCP Technical Committee on Privatization in ZIMCOZABS Zambia Bureau of StandardsZCF Zambia Cooperative FederationZIMCO Zambia Industrial and Mining CorporationZNBC Zambia National Commercial Bank

FOR OMCIL USE ONLY

REPUBLIC OF Z MBIA

AGRICULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: Government of the Republic of Zambia

Beficiar: Ministry of Agriculture, Food and Fisheries; Bank of Zambia (BoZ);Participating Commercial Banks (PCBs); commercial cooperatives andmarketing associations, private enterprises, and maize mills and ZambiaBureau of Standards.

Amount: SDR 24.1 or USD33.0 million

lUma: Standard IDA terms, with forty years maturity

Onlending Terms: (a) For credit component: BoZ, acting on behalf of the Government ofZambia, to PCBs at BoZ's discount rate or three month savings depositrate, whichever is higher; (b) For technical assistance: Ministry ofFinance to participating commercial cooperatives or farmers associationsas interest free loans.

Financine Plan:

USD Million-

Local Foreign Total

IDA 9.6 23.4 33.0AFDB 5.2 7.3 12.5Government 15.5 - 15.5Commercial Bank 3.5 - 3.5Beneficiaries 3.5 _ 15Total 37.3 30.7 68.0

Rate of ReturnOverall Project 24%Rural Roads Program 22%Medium Term Credit Investments 32%

Staff Appraisal Report: No. 10521-ZAM-Q: IBRD No. 23688

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

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXEC DIRECTORS ON APROPOSED CREDIT TO

THE REPUBLIC OF ZAMBIAFOR AN AGRICULTURAL MARKETING ANDPROCESSING INFRASTRUCTURE PROJECT

1. I submit for your approval the following memorandum and recommendation ona proposed development credit to the Republic of Zambia for SDR 24.1. million, the equivalentof USD33.0 million, on standard IDA terms with a maurity of 40 years to help finance anAgricultural Marketing and Processing Infrastructure Project. The Government of Zambia willprovide USD15.5 million for the Project, and cofinanciers will provide USD19.5 million. TheAfiican Development Bank will provide the equivalent of USD12.5 million of the cofinancing.From the IDA funds of USD 33.0 million equivalent, the Bank of Zambia, acting on behalf ofthe Government of Zambia, will make available approximately USD 16.7 million to participatingcommercial banks (PCBs) for onlending to private enterprises engaged in maize marketing,fertlizer distribution, agro-processing, rural transportation and rural road maintenance. ThePCBs will onlend the credit proceeds in local currency to beneficiaries at positive real interestrates on the basis of actual loan approvals and agreed eligibility criteria. Until interest rates arefully decontrolled on December 1993), they will be reviewed and agreed with IDA on a quarterlybasis.

I. COUNTRY POLICIES AND BANK GROUP'S ASSISTANCE STRATEGY

P llBackground and Recent Developments

2. The Zambian economy suffers from severe and longstanding distortions that willrequire a major structural adjustment effort over an etended period if they are to be overcome.Its major charactersc is heavy dependence on copper and the dualistic structure that has grownup around this dependence. Soon after independence in 1964, the Government sought to gaincontrol of the economy through widespread nationalization. The economy became dominated byparatatals and a one-party system was introduced. Rising copper prices helped the economy togrow steadily at an average rate of 4% per annum during the first decade after independence.Since 1975, however, falling world prices of copper (Zambia's most important export) and thegeneral deterioration in terms of trade, coupled with the failure to develop a diversified economy,caused overall economic decline. Attempts to support continued consumption through borrowingfailed to contribute to economic growth and created an exceptionaly severe debt problem. Percapita GDP is now more than a third below its 1978 level.

3. After several unsuccessfil efforts at reforming the economy, in the late 1970s andearly 1980s, Zambia adopted a comprehensive adjustment program in 1985, with Bank and IMFsupport. This too ran into difficulties in part because of poor fiscal and monetary control. In1987 the Government abandoned it and reversed many of the reforms undertaken in the previoustwo yers. The exchange rate was set at an overvalued level, administrative controls for foreignexchange and imports were reintroduced, privileges were given to some parastatals and otherswere subjected to price controls. The Government also stopped most externd debt service;consequendy the Bank suspended disbursements to Zambia. Support from the donor communitywas progressively withdrawn. The debt overhang continued to grow, and the economy todecline. After a hiatus, Government resumed its policy dialogue with the Bank and Fund in late1988; in a major policy shift, in June 1989, Government abolished all price controls except those

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on maize, mealie meal, fertilizers, pet -oleum and public utilities. Subsequently, agreement wasreached in mid-1989 with the Bank and Fund on a PFP outlining the Government's medium-termdevelopment strategy and objectives for the period 1989-91. The PFP was followed by an annualFund-monitored program for i990. A second PFP covering the period 1991-93 was reviewedby the Committee of the Whole in March, 1991 when the Bank arrears were cleared and a newEconomic Recovery Credit (ERC) for US$210 million was approved on March 5, 1991. Inaddition, Zambia began a rights accumulation program which was approved by the IMF Boardin April 1991. In response to public pressures, a new constitution was introduced allowing formultiparty elections.

4. Government adherence to the agreed economic reforms began to slacken duringthe run-up to the multiparty elections; Government reintroduced price controls (this time,informally), aid public expenditure got out of control as a result, inter alia, of excessive publicsector pay increases and increases in subsidies (maize, fertilizer) to a much higher level thanbudgeted. Because of poor performance, donor support for Zambia was delayed, Governmentdefaulted on its payments to the Bank, and as a result disbursements were again suspended inSeptember 1991.

5. In the October 1991 multiparty elections, a new Government was elected to officeand given a strong mandate for a reform program that includes moving to a full market economyand significantly reducing the role of Government. Specific proposals in the party manifestoincluded privatization of virtually the entire parastatal sector, and the restructuring of the utilitiesthat will remain in public ownership. Since assuming office the new Government has made adetermined start in the 1992 budget; comprehensive reforms have been adopted aimed at bringingthe budget into balance, encouraging exports, liberalizing the economy, cutting back the civilservice and privatizing most of the parastatal sector. As a result of the strong actions by theGovernment, external support has resumed; the Bank arrears were cleared in January 1992, thesuspension was lifted and the second tranche of the ERC was disbursed.

6. The Government's reform program will inevitably be made more difficult by thecatastrophkc drought that has affected all of Southern Africa in the early months of 1992. Thebulk of this year's crop harvest has been lost throughout the country. In Zambia the maize outputis expected to be about one-third of the post-planting estimates, and agricultural GDP will bereduced by over 25%. Substantial efforts are being mounted by the donor community to meetthe cost of the drought, estimated at about US$300 million for Zambia. Because the drought isforcing up prices of maize, to artificially high levels, the Government will use the donor supportto shield the public from the fu1l impact of the drought on maize prices. Agreement has beenreached with neighboring countries on logistical arrangements for large imports of maize. Totalimport requirements are about ten million bags (900,000 metric tons) of maize, plus smallerquantities of other products (e.g., cooking oil). The drought has also directly affected a numberof other food products such as wheat, soya, sugar and oil seed, and non-food agricultural cropssuch as tobacco and cotton; this has had an immediate impact on related agro-industries. Thedrought will also reduce power exports from Zambia's hydro stations and the loss of theserevenues will lead to a sharp increase in domestic power tariffs.

7. Ihere are three major constraints on Zanbia breaking outfrom its ptern ofpasteconomicfailures. First, Zambia has an exceptiownly large debt burden. Total debt at end 1991amounted to US$6.7 billion, of which US$ 2.9 billion is multilateral, US$2.5 billion bilateral,US$ 0.6 billion medium/long-term commercial (including export credits) and US$ 0.7 billionshort term. Excluding the short term debt, Zambia's external debt represents US$766 per head

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of population, one of the highest s.nywhere. Further rescheduling of official debt is expected inmid-1992, and a commercial debt buy-back (with the support of the IDA Debt Reduction Facility)is planned for later in 1992. Alleviating the debt burden is a prime focus of the CG and ParisClub processes, and will require substantial and concerted donor support.

8. The second major constraint is the hewavy dependence on copper. Copper accountsfor nearly 85% of the country's exports, contributes about 15% of GDP, and is an importantsource of budgetary revenue. The problem is worsened by the poor prospects for copper pricesand a projected sharp decline in copper output around the end of this decade. IDA is givingdirect support to improve the efficiency, profitability and longer-term outlook of copperproduction in Zambia through the Mining Technical Assistance Credit. However, as outlined inthe medium-term strategy expressed in the PFP, it is important for Zambia to diversify itseconomy away from copper, to reduce the high capital and import-intensity of production andconsumption, to improve economic efficiency, and to increase savings and investment rates soas to restore economic growth. Key to the success of this strategy is a reorientation of the policyframework to increase incentives for agricultural production, encourage the private sector boththrough supporting new entry and privatizing the large public sector, and redirecting publicexpenditures to areas that would 'facilitate growth and assist in human resource development.However, the first essential step of this reform program has to be macroeconomic stabilization.

9. The third major constraint, is the dominance of the parastatal sector, theconsequent stifling of competition and initiative, and the imposition of high prices and low qualityin the domestic industrial and agricultural sub-sectors where parastatals have an effectivemonopoly. TMe manufacturing and agro processing parastatals have not kept up with productdevelopments elsewhere. Natural resources (water, forestry, land, fisheries, and wildlife)management and utilization have been inadequate and far below potential. The gemstoneparastat has exploited a negligible portion of Zambia's tremendous potential, with most exportsavoiding official channels such that the earnings were placed directly into foreign banks. Withfew exceptions, the parastatals have been inward looking, and content to rely on the smallZambian market; they have generally failed to diversify the economy or to develop Zambia'snatural advantages to the extent possible. In the public utility sector the position is not muchbetter: the railways are extremely slow and unreliable, the power company has been unable tomaintain a sufficiently steady voltage for the operation of sensitive industrial plants, and thetelecommunications service is substandard in areas important to business.

Macroeconomie and Structural Policies and Strategy

10. Short-Term Stabilization Measures. The progress made over the last three years, inparticular the bold measures in the 1992 Budget, has now put the Government in position bothto deal with the short-tem problems (particularly inflation and the balance of payments) and toaddress the underlying structural issues. The medium-term strategy calls for providing aregulatory framework and incentives to encourage sustainable growth, with emphasis on theprivate sector particularly in agriculture, tourism and gemstone mining; significant strengtheningof physical and social infastructure; increased attention to social and poverty issues;implementation of environmental policies, and a renewed effort in institutional strengthening.

11. The Government's stabUiation policies for 1992-94 are set out in the PolicyFramework Paper (PFP) considered by the Committee of the Whole on March 17. The programobjective set out in the PFP (pre-drought) was to achieve real GDP growth rates of 2% in 1992,3% in 1993 and 4% in 1994, implying a positive real per capita growth by the end of the 1992-

4-4

94 PFP period. These figures will be updated mid-year to reflect the Impact of the drought.Gross investment is planned to grow to about 20% of GDP in 1994, more in line with theexperience of the 1980s. However, investment statistics are particularly inaccurate andconclusions should be drawn with care. This rise in private investment will be facilitated by afiscal policy designed to increase public savings and shift financial resources to the private sector,and a monetary policy seeking to attract savings through a positive interest rate policy. The mostdaunting task is to lower inflation from about 100% in 1991 to 45% In 1992, 15% in 1993 and5% in 1994 (aU on a calendar year basis). The stabilization plan is to achieve a primary budgetdeficit (excluding grants) of no more than 2% of GDP in 1992, full balance in 1993 and a smallsurplus in 1994. Ihe most Important of these measures are the rapid elinination of the prindpalsubsidies (on maize, fertilizer and parastatal deficits), reprioritzing public expendkures,enhancing revenues by broadening the tax base and reducing loopholes (while lowering tax rates)and civil service refonn to create a smaller but more efficient, better paid and motivated staff.Civil service pay will be controlled by maintaining aggregate emoluments at a constant proportionof GDP, with any extra pay raises being offset by savings from redundancies. The success ofGovernment in implementing these measures constitutes the key indicator of its determination torecover control of the economy. A summary of key economic indicators is presented in Annex1.

12. Revenue Measures. The Government's revenue strategy is to simplify andreduce direct taxation and simplify indirect taxation, while lowering protection and encouragingexports. Overall revenues will be increased, mainly by removing tax loopholes and by higherdividends from parastatals.

13. The Govemment has already made a major start on tax reform. Progress onindirect taxes has been good. In the 1991 budget, most imported goods were brought into threetariff bands at 0S%, 30% and 50%, with a few exceptions such as food and fertilizer at zero tax,and minor luxury goods at 100%. Trade distortions were reduced, and Government revenuesenhanced, in the 1992 budget by harmonizing the sales taxes at a uniform rate of 20% on bothimported and domestically produced goods. Petroleum currendy is imported tax-free, but thereis no local oil production and the minimum excise tax on petroleum is 15%. In relation to the1993 budget, the Government's program is to reduce further the highest tariff band so as toreduce the protection offered (see para. 60), but to do this in conjuncfion with smoother operationof the OGL (Open General License) system, and only after the imract on business andemployment has been well-studied. Government plans to raise new revenues from theintroduction of a value added tax, and from the introduction of mandatory dividends fromparastatals.

14. In addition to the above, Government has cut the basic company tax rate from45% to 40% beginning April 1, 1992, offsetting this by phasing out non-cash fringe benefits asdeductible business expenses, and is undertaking a detailed examinaion of the structure ofcompany tax with a view to implementing further reforms in 1993 or 1994. Personal incometaxes were also reformed in the 1992 budget, the main emphasis being a widening of the tax netto tax cash fringe benefits, (such as the housing allowance) to offset a reduction in tax rates andan increase in the tax threshold.

15. Expenditures. The expenditure reduction plan includes reform of the public andparastatal sectors, increased devolution of authority to local governments, better coordination anddetermined control of commitments and expenditures, reprioritizationof expenditure, and phasedelimination of subsidies. The major reductions in spending will be in crop financing and

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subsidies. The change in crop financing is primarily a result of the greater private sector rolein maize purchasing and marketing. The reduction in subsidies comes from elimination of maizetransport subsidies and of fertilizer subsidies and the substantial reduction in maize mealsubsidies.

16. The Zambian public did not generally benefit from the previous Goverment'smaize subsidies as intermediaries bought up the stocks and many families had to buy at parallelmarket prices. The new Government moved fast to correct this situation by a speedy cut in maizesubsidies balanced by a stronger safety net to cushion the impact on the most vwdnerable. In littlemore than a month after taking office, subsidy cuts resulted in price increases for roller meal by103% and breakfast meal by 165%. Further increases were made three months later.Consequently, within its first four months in office, Government had eliminated the subsidy onbreakfast meal (the more refined product) and reduced the subsidy on roller meal (the lessrefined, and hence more nutritious, product) to about 30%. Government removed the remainingsubsidies on roller meal during May, and all into- mill subsidies on domestic production havenow been removed. As a response to the drought, Government will pay a temporary bonus onlocally produced maize delivered in May and June, and pay the cost of transport, handling andstorage for locally produced maize to ease the transition to the new higher prices. The phase-into the higher prices will be achieved by October such Shat the into-mill cost will be at about thelevel that would have applied in a non-drought situation. This w;i then be an appropriate basepoint for the 1993 crop. In addition there will be a program of limited quantities of half priceand free yellow maize to be channelled to the poor (including subsistence farmers severelyaffected by the drought) through local groups supported by the World Food Program and theNGOs, and additionally a 15% subsidy on yellow maize supplied to hammermills, to encourageconsumption of the more nutritious straight-run mealie meal. These poverty-focussed subsidieswill expire by mid-1993. Subsidy reduction is a particularly visible measure of Governmentresolve for economic reform, and becomes a key indicator of progress. Price ctptrols andsubsidies in the fertilizer sector were eliminated in March 1992.

17. Government has already announced a shift in expenditure priorities such that moremoney will be spent on non-wage recurrent expenditures in areas such as equipment and buildingmaintenance. Further, a realistic Public Investment Program (PIP) for 1992-94 has been adopted,and expenditure outside of the PIP will not be authorized except in exceptional circumstances.

18. Monetar and Interest Rate Policies. The Bank of Zambia has established atarget for broad money growth of 25 percent for 1992. This is lower than the year on yearinflation objective (45%) since it is anticipated that it will take some time for inflation todecelerate as monetary policy is tightened. In addition to monetary restraint, Government hasincreased the maximum effective interest rates charged to borrowers to about 70%, which is equalto the inflation rate targeted for the end of the first quarter 1992. As inflation falls during theyear, interest rates charged to customers are expected to decline. To encourage savings, effortswill also continue to be directed at raising bank deposit rates relative to lending rates, particularlythrough reducing the proportion of non-interest bearing deposits placed with the Bank of Zambia.A limited amount of debt-equity swaps will be permitted at conversion rates prescribed by theBank of Zambia.

19. External Sector Policies. The centerpiece of the strategy for expanding non-traditional exports by 10-15% a year over the next decade is an exchange rate policy that alignsthe value of the kwacha closely to the parallel market rate, such that the efficient allocation offoreign exchange is promoted, and to give added incentive to exporters through a liberalized

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export retention scheme. To that end the kwacha was devalued by 30% on January 31, 1992.The Government's plan is to adjust the official exchange rate in installments to a level that willpermit the OGL system to be shifted to a negative list system and steadily broaden the coverageof the OGL. Government has announced complementary reforms to encourage exports throughan improved duty drawback scheme and further development of bonded warehouses. Continueddevelopment of the OGL system is a key test of progress in Zambia's macroeconomic reforms.

20. Longer-Term Development Strategy and Issues. The Government's strategy to restorelong-term growh calls for the creation of an enabling environment conducive to the growth ofthe private sector, so that it can provide most goods and services, and to limit Government's rolein the economy to the provision of essential services; Government regards the most important ofthese to be the development of the basic physical infrastructure and of Zambia's human resources,the provision of social services (and of a social safety net) and the implementation of appropriateenvironmental policies. Government is also aware that for tis strategy to succeed it needs todeal quickly with the overwhelming debt situation.

21. Private Sector Development and Public Sector Reform: Government isembarking on a major privtizion program and seeking to make the public utilities moreefficient, and to introduce frther reforms in incentives and in the legal and regulatoryframework, with a view to development of a strong private sector. The privatizadon programaims to put all new copper developments under the control of private investors, to reform ZCCM,and to privatize all other commercially-oriented parastatals, except for the public utilities, (140companies to be divested out of 155 parastatals), over a period of five years. The parastatalreforn program will involve a reassessment of the management, staffing, policies and financesof the public utilities, efficiency measures and establishment of performance targets, andInstitution of an incentive-based regulatory system. CIvs Service Reform is also an importantelement ;Government's plans for a more efficient but smaller public sector. The ncentiveprograntncludes improvements to the incentives offered in the 1991 Investment Act, andsimplification of procedures. It continues the streamlined import and export licensing system,now operated quite efflciently through the commercial banks, and an exchange rate policy thatwill nmove to a smal negative list system by end-1992; and enhanced competitiveness throughfrther cutting of import tariffs. Government is also starting a comprehensive review of businessrelated laws that are out-of-date; a prioritized action plan has been drawn-up to make earlyamendments of Acts that affect the privatization process (ncluding laws regulating the bankingsystem and capital market), and to deal with aUl other business-related legislative modernizatonover a five year period.

22. Physical Infrastructure. The Government intends to put renewed emphasis ona better road system to ensure that crops can be brought to market quickdy, on a more reliablefreight-rail system, and on a better quality telecomsmnications system that is seen as essential forthe development of an outward-oriented and efficient productive sector.

23. Human Resource Strategy. The centerpiece of the human resource strategy isthe rehabilitation and sustainable expansion of the education and health sectors. These sectorshave borne the brunt of the deterioration in fiscal performance in the past, and the country isfaced with a dilapidated and underfunded social infrastructure.

24. in education the new strategy means a sharper focus on improvements in basiceducation with a special emphasis on the provision of much-needed infrastructure, managementcapacity and learning materials. The Government has sought, with success, donor support for

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this. Other activities in education are geared towards ensuring the necessary supply of skilledmanpower for the development needs of Zambia, focussing on key skills relevant for privatesector development.

25. In health the Government is re-emphasizing primary health care and is in theprocess of decentralizing health services to ensure community participation and good governancein the sector. The Government is working with key donor agencies towards developing a fullhealth sector strategy and management set-up to meet the new challenge of a decentralized systemof health delivery. A key area of emphasis is the prevention of AIDS and support for family-based care of AIDS patients. With prevalence of HIV as high as 20 percent in urban areas, thetreatment of opportunistic infections and support for home-based care is important to limit theotherwise devastating effects the AIDS epidemic could have on the human resource base and theeconomy. In mntrition the Government is working towards streamlining management of nationalprograms and futer encouraging the development of local initiatives.

26. The Government is aware of the key role women could play in poverty alleviationand growth of the economy and is focussing social service delivery, particularly education andprimary health care, on women. Government is also working towards removing obstacles forwomen's participation in the labor force, and in their access to credit, and is looking to relievingthe all-important time-constraint on poor women in Zambia.

27. Social Safety Net. Government is taking steps to alleviate the impact of thedrought and of the economic adjustment program on the poor and disadvantaged. SpecificallyGovernment will: (i) implement a transitional subsidy on imported yellow maize to cushion theprice impact of the drought. Some families have lost all means of livelihood as a result of thedrought. Government will channel special assistance through local groups supported by theWorld Food Program and NGOs to ensure that these families can feed themselves and have theseed for next year. Further, Government will assist poorer families for one year only througha small (15%) subsidy on maize supplied to hammermills, in an effort to encourage use ofstraight-run maize because of its greater efficiency and nutritional value. In addition,Government is (ii) using some of the savings from subsidy removal to expand social welfareprograms implemented through the Ministry of Community Development and Social Welfare; (iii)increasing funding for small-scale labor intensive public works (supported by IDA and otherdonors) and other components of the Social Action Program, and converting some of those topaid-work instead of self-help; and (iv) increasing the share of the national budget allocated tobasic social services, with emphasis on primary education and health care and other services ofparticular importance to the low income population. Specific interim targets have been set forthe above. Particular attention will be paid to rural infrastructure. Government plans to heightenpublic awareness of the social action program so as to ensure that more needy people benefit.A program of severance pay and business counselling will be offered to those made redundantthrough the retrenchment program. For the medium-term the various measures to stimulatesmall-scale industry will provide income-earning opportunities in both urban and rural areas.

28. The withdrawal of subsidies on maize meal will have less impact than might beexpected on the poor as most maize meal has been sold on the parallel market at non-subsidizedprices and because special arrangements are being introduced for families financially devastatedby the drought. There appears to be public acceptance of the measures taken. The incomingGovernment had made its plans clear during the election campaign, and it is evident that mostZambians were ready to take the tough actions to stop the long-term economic decline. The

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drought has caused some adaptation of the maize pricing policy in that, with donor concurrence,Government will set the price of imported yellow maize at the price that had been expected if thedrought hal not happened.

29. Environmental Strategy. Zambia has a keen interest in preserving andimproving the physical environment, and there is common acceptance in Government of thepriority this deserves. As an underpopulated country, much of the land has not been affected byman; yet as the most urbanized country in Africa some problems exist and have to be dealt with.The principal issues are first, some deforestation, particularly along the line of rail, caused byland clearance, overcutting of fuelwood, overgrazing and burning. In these same areas this leadsto soil erosion, a problem made worse by the high natural erodibility of Zambia's soil. Second,there Is a local pollution problem from the mines and factories, particularly affecting parts of theCopperbelt and areas adjacent to industrial operations. Although not widespread or affectinglarge numbers, such pollution has to be reduced. More pervasively, the poor control ofagricultural chemicals and inadequate treatment of human and industrial waste has an obviousimpact on water supplies and health. Cholera is a serious issue. And third, in relation towildlife, poaching is rampant, and elephant and rhino are found in numabers only in a fewlocations.

30. The National Strategy for Conservation was prepared in 1986 and provides thebasis for policy and institutional framework and guidelines for improved management ofenvironmental issues in the country. It seeks to define and establish policies, plans, organizationand action to ensure the sustainability of the natural resource, and to maintain biological diversityand the essential ecological processes and life support systems. Specific plans and guidelineshave been drawn up for all sectors, in conjunction with the Intemational Union for Conservationof Nature and Natural Resources. There has been progress in some areas, yet in others,particularly woodfuel cutting, it has not yet been possible to achieve measurable success.

31. The new Government has-reaffirmed its concern for environmental issues throughthe establishment of a Ministry of Environment and Natural Resources and National EnvironmentCouncil (NEC). A new national environmental action plan is in the early stages of preparation,but because of the need for proper quantification of the copper mining and industrial pollutionissues, and the preparation of the natural resources strategy, it is not due for completion until1995.

32. External Capital RequIrements - The Debt Issue. Zambia's external debts areenormous in relation to GNP, and cannot be serviced from Zambia's own export earnings. Thelimited foreign exchange available in recent years for copper investment has led to decliningoutput, and for 1992 (even excluding drought-related imports) the trade balance is expected tobe negative. When taken together with net non-factor services and other payments, the currentaccount deficit, excluding interest payments and official transfers, is estmated at US$287 million;it rises to US$587 million when the extra costs of the drought are included. Debt serviceobligations amount to US$503 mitlion for non-multiaterals and US$260 million for multidaterals,and targeted arrears reduction is US$294 million. Ihus, excluding any change in its officiareserves, Zambia faces a gross financing requirement of US$1644 million including the droughtneeds.

33. While Zambia is putting high priority on a rapid growth in exports to movetoward a better external balance, for as long as the debt overhang persists the external financial

99-

pictur3 will be difficult. The main areas for expected improvement are a modest reduction eachyear in the current accournt deficit and steady reductions in debt service obligations.

34. Donor support for 1992 has been strong. At the end of the CG meeting, therenmaining financing gap was about US$330 million. Additional pledges as of May 14 totalledUS$199 million, not including a possible US$100 million in debt service deferral beingconsidered by the IMF. If this amount is included, the financing gap would be US$31 millionand within range of being closed.

11. BANK GROUP ASSISTANCE STRATEGY

Past Performance and Policy Dialogue

35. Zambia's economy experienced significant decline during the 1970s and 1980s.As low copper prices persisted, the authorities resorted to deficit-financing and externalborrowing to finance consumption. Domestic saving dried up, investment plummeted, the budgetdeficit exploded, and the rate of inflation rose sharply. Effective use of existing productivecapacity was hampered by extensive Govermnent involvement in price regulation, subsidies,exchange rate and trade controls, and production of goods and services through parastatals.Excessive state intervention created serious distortions and imbalances in the economy. Attemptsat policy reform and economic restructuring through diversification (supported by an IndustrialReorientation Credit and an earlier Economic Recovery Credit) in general failed because of aprotracted decline in copper prices, shortfalls in external resource inflows, and poorImplementation performance. Output has continued to decline; real GDP declined by 0.5% in1990 and by 1.8% in 1991. Thus, GDP growth targets set in the first PFP for 1989-93 of 2.2%in 1989, 1.9% in 1990, and 2.8% in 1991 were not achieved.

36. The Government's policy framework has been updated in the PFPs for 1991-93,and 1992-94 which articulate the policies, objectives, strategy and priorities of the country forthe medium-term. At the same time, the Government issued its Public Investment Program forthe period 1992-95 for implementing the framework. At the macro-level, priority is given toeliminating imbalances between demand for and supply of goods and services through structuralchange. Sectorial priorities have been established. -. agriculture, priority is given to smallholderdevelopment by improving the provision of research and extension services, credit, and marketingand storage facilities. The focus in the transport sector is on rehabilitation of existinginfrastructure and provision for adequate maintenance. In the social sectors, priority is accordedto the rehabilitation of infrastructure at the primary-education and primary health-care level soas to improve service delivery. The framework and priorities are consistent with the country'sdevelopment needs and prospects. If fully implemented, they should foster stability, structuralchange, and faster economic growth. The objective is to achieve real GDP growth rates of 2%in 1992, 3% in 1993, and 4% in 1994: 1 Although achievement of these targets will not resultin an increase in GDP per capita until 1994, it will be an improvement in the performance of theeconomy in comparison to the negative rates of growth experienced in the past.

37. Performance targets established in previous PFPs have not been flly realizedlargely because of lapses in fiscal and monetary control by the past Government. For instance,

I/ These targets may have to be revised to take into account the severe impact of the droughton agricultural output in 1992 and to a lesser extent in 1993.

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efforts to reduce macroeconomic imbalances and to lower the rate of inflation have yieldedmarginal results. While inflation fell from 158% in 1989 to about 100% in 1990, it was muchhigher than the PFP target of 55%. Inflation rose slightly in 1991, and GDP fell. Comparedwith a target of 3% in GDP growth, the actual rate was -1.8%. During the second half of 1989and 1990, some progress was made in bringing public finances and monetary growth undercontrol. Around the middle of 1990, however, significant pay awards and increases in employeeallowances and benefits led to a substantial shortfall in the reduction of the budget deficit. Thedeficit was still 4.2% of GDP in 1990 compared to the PFP target of a surplus of 0.4%.Subsidies on mealie meal rose sharply, and money supply increased by 100%, thus fuelinginflation. On the positive side, significant liberalization was achieved through price decontrol,devaluation of the Kwacha, introduction of the OGL system for most merchandise imports,expansion of the export retention scheme, and reduction of the higher tariff band from 100% to50%. Since taking office in November 1991, the new Government has increased sharply the priceof maize meal, eliminated most subsidies, adopted a budget which reduced the deficit from 7%of GDP in 1991 to 2% in 1992, initiated the reform of the tax structure, embarked on a programof public service reform, and adopted a policy of privatizing parastatals.

38. Since the resumption of normal relations in early 1991, policy dialogue betweenthe Bank and IMF on the one hand, and Zambian authorities on the other has been effectiveexcept for the issues of maize subsidies and lax fiscal control in the mid-1991 which led to acessation of donor support and suspension of Bank disbursements. The policy dialogue wasmaintained however, and relations with the new Government were established quickly, with theaid of several key officials retained by the new Economic team; progress achieved over the pastfew months has been very positive. The 1992-94 PFP was the product of truly collaborativeeffort among the Bank, IMF, and Government. With the lifting of the suspension ofdisbursements on January 31, 1992, Bank lending and economic and sector work have intensified.Supervision work has also been stepped up. The new Government is committed to the adjustmentprogram and has demonstrated this by taking tough actions within a few months of taking office.

39. As part of its strategy to encourage foreign investment and exports the ZambianGovernment is pursuing stronger regional cooperation. Zambia is the headquarters of PTA, andZambia is active in cooperating with the development of both PTA and SADCC. The exportstrategy which is a key to Zambia resolving its balance of payment problems places reliance onlocal markets. In turn, Zambia has lowered its import tariffs and is working on furtherreductions, so as to remove any special protection. Continued active involvement of Zambia isanticipated in the Regional Integration Initiative for sub-saharan Africa sponsored by the EC, theBank and AfDB.

Bank Objectives and Assistance Strategy

40. Zambia has to design, finance, and implement its adjustment program underparticularly difficult conditions. First and foremost is the very high external debt (including tothe Bank and Fund) which would result in debt service ratios near 70% in the absence ofrescheduling. Even with extraordinary levels of rescheduling and direct support from the donorsand multilateral institutions such as the Bank, import levels are highly constrained and reservelevels at bare minimums. Dealing with the debt issue over the medium term is therefore, a keyfocus of the Zambian authorities and of the Bank program of assistance. The precariousness ofthe external financing situation also takes up much of the attention of senior officials in theGovernment and the Bank. This problem is even more serious this year because of the drought.Another major difficulty is the on again/off again history of the Zambia program (and hence of

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the Bank program of support) which has created difficulties both in program design andimplementation. Our emphasis in recent years has been on the extraordinary financial measuresnecessary to clear the arrears and restart the program (twice) and to reach an understanding onsome basic macroeconomic policy issues. As a result we are starting with a low knowledge basein many areas, and the Government has not had sustained donor support in many sectors. Thisconstrains both program design and implementation; it also results in an emphasis on technicalassistance and a particular need to focus our support on a relatively small number of high priorityareas. In some sectors, we know enough to get started on priority issues while launching somebroader sectoral studies. In other areas, direct Bank support would not be prudent until after theproper sector work has been done.

41. The Bank will continue to play a leading role in assisting the Government todesign and Implement the adjustment program, to place the economy on a sustainable growthpath, and to mobilize the necessary financial resources. This will be aiccomplished throughcontinued policy dialogue, economic and sector work, adjustment and investment lendingoperations, and effective aid coordination. The strategy aims to support structural adjustment,while creating a climate conducive to poverty alleviation through sustainable economic growthand the provision of a safety-net to protect vulnerable groups from the adverse impact ofadjustment. The strategy implies substantial balance of payments support to help Zambia redressmacroeconomic imbalances in the economy, and to reduce its overwhelming debt burden tomanageable proportions. To this end, the Bank plans to lend for at least one adjustment operationfor each of the next four calendar years. The primary emphasis of the operations will alternatebetween macroeconomic adjustment and sector adjustment. Each year, the Bank will assessachievements under the ongoing adjustment operation to determine the priority measures to becarried out under the successive operations. Thus, in the earlier years, Bank assistance will beprimarily in the form of balance of payments support, supplemented by investment operations inthe priority sectors; as identified by the Government these are agriculture, industry, transport andsocial services. In addition, it is envisaged that IDA would assist Zambia more directly,including through the Debt Reduction Facility, to reduce its debt burden to a more manageablelevel.

42. The main elements of the Bank's strategy are to support efforts to:

- achieve macroeconomic stability and initiate a path of sustainable and equitablegrowth through elimination of the budget deficit, attainment of a competitiveexchange rate, and increasing the allocation of resources to economic andsocial sectors by restructuring the composition of public expenditure;

- ensure sufficient access to imports, and an adequate reserve cushion, throughmaintenance of an appropriate exchange rate and other measures to encourageexports and to use imports wisely, and through coordination of donorassistance and efforts to secure needed debt elimination and rescheduling;

- improve the climate for private sector development through deregulation,provision of infrastructure and privatization of parastatals;

- strengthen human resource capacity by rehabilitating the education and healthinfrastructures and improving the quality of education and health services; and

- implement an effective environmental strategy.

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43. In the context of this strategy the Bank is providing urgent support to mitigatethe effects of this year's drought. Thus the allocation for the proposed credit has been increasedto US$200 million and existing and new operations are being reviewed to see if they couldprovide funding for drought-related activities. The Bank is also actively soliciting donor supportfor Zambia.

44. The alleiation ofpoverry is central to the Bank's program in Zambia. While themost powerful weapon against poverty in the long run will be sustainable and equitable economicgrowth, a number of other considerations will play a vital role in combatting poverty. One isthe reorientation of public spending to meet the vital human resource needs of the poor,particularly in the areas of primary education, primary health care, and clean water andsanitation. Another is deregulation of the economy to reduce the proliferation of rents going tothe relatively advantaged and to open up opportunities for small businesses and small farmers.The availability of credit to all levels, and without gender discrimination, is a vital part of thisstrategy of increasing opportunities. Similarly, a labor market free of special privileges andbarriers to entry will be important if the new growth is to be as labor intensive as possible.Finally, a social safety net (as described in paragraph 28 above) will be important to protect thoseleast able to protect themselves from the disruptions likely to accompany this program,particularly the sharp increases in the prices of vital commodities and the retrenchment ofemployees in the public and parasta.tal sectors.

45. Women already play a vital role in the Zanbian economy not only as primarycaretakers of the family but also as direct laborers at the farm level and, indreasingly, in formalsector employment. To reach high levels of equitable and sustainable growth, however, thebarriers to full participation that still exist for women will have to be addressed urgently. Manyelements of the Bank's lending and ESW program will be directed at this issue, most particularlyour programs in education, health, credit, and deregulation. For example, the EducationRehabilitation project includes a comprehensive gender training and sensitization program,assistance for the design of educational establishments to take better account of the privacy needsof adolescent girls, and a major policy study on the nature and causes of gender disparities ineducation. The proposed Agricultural Marketing and Processing Infrastructure Project includesspecific requirements to ensure that women have equal access to credit facilities. In fact, themajority of beneficiaries of the credit component are expected to be women.

46. The donor community is giving strong support to Government's actions to protectthe envirownent (paras. 30 and 32). IDA is providing assistance in particular to industrialpollution in Kafue, to improved agricultural practices, and (through ESMAP) support formeasures to reduce the impact of fuelwood cutting. The major local company, NCZ (a fertlizermanufacturer and a recipient of past IDA funds), has brought all the local factories together todraw-up an integrated action plan, for ensuring that the industrial waste water is treated beforeit reaches the river. This plan is awaiting donor finance (US$1-2 m). A review of miningpollution issues is included in the IDA work program. Donors are placing special emphasis onwater quality. Support for the natural resources conservation program is planned in the IDAwork program, but it is also expected to get renewed emphasis as Government actively promotesthe country's tourism potential.

Lending Program and Economic and Sector Work

47. Zambia's withdrawal rights under Bank loans and IDA credits were suspendedbetween May 1, 1987 and March 1991 on account of accumulated arrears. The Economic

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Recovery Credit, approved by the Board in March 1991, marked the resumption of normal Bankoperations in Zambia. Relations were interrupted again in September 1991 when disbursementswere suspended because of arrears. The suspension was lifted at the end of January 1992 andnormal operations resumed again. These interruptions account, in part, for the relatively lowvolume of lending during the period 1985 - 1991. Details of the Bank's lending program duringthis period are presented in Table 1. In March 1991, IDA provided the second economicgecovery credit of US$210 million to Zambia, which was disbursed in two tranches. Since 1984,IDA committed a total of US$464 million to Zambia for adjustment operations and investmentprojects. The credits supported the Government's economic recovery and adjustment program,agricultural development, rehabilitation of infrastructure, strengthening of institutional capacity,and establishing a social recovery fund.

48. The recent dialogue between Bank staff and Government representatives hasculminated in an agreed approach to priority sectors for Bank assistance. These includeagriculture, industry, mining, transport, and social services. Assistance in these sectors wouldcomplement balance of payments support. The Government's goal is to generate rapid economicgrowth, with equity, through increased investment in the productive sectors and human resourcesand infrastructure development. A high rate of economic growth is essential for povertyreduction, and for the development of human resources and infrastructure as well as for progressin income distribution. Investments in productive sectors, and for human resources andinfrastructure development, would be supported by efforts to enhance efficiency and effectivenessin the public sector so as to promote private sector development.

49. Over the next four years, the Bank's lending and economic and sector work(ESW) programs will constitute the main vehicles for implementing the strategy described above.Among the areas covered by recent ESW are agriculture, industry, financial sector, energy, thesocial sector and environment. In the next four years, ESW will cover agriculture, mining,public expenditure, education, public sector management, environment, population, health andnutrition, gender issues, natural resources, and fertilizer distribution. A poverty assessment isplanned to be completed In FY94. It will be preceded by an analysis of data gathered under workinitiated in FY92 for the preparation of the Country Economic Memorandum (CEM), to be issuedin early 1993, and which will have the alleviation of poverty as a central focus. These activitieswill culminate in the formulation of a strategy for Bank assistance toward poverty reduction inZambia. 1hree major activWies dealing with the environment are included in the ESW programfor the next three years. (Paragraphs 30-32 above give a brief description of the central concernin this area.) Within the agriculture sector program a natural resources s4dy Is to be carriedout in FY93. It will be supplemented by stdies on the environmental Impact of mining operationsand an overall environmental strategy study in FY94. The Bank ESW program also includes astuy on women in development, scheduled to be completed in FY94, which should broaden ourunderstanding of these issues and help us develop a more comprehensive picture of the problemswomen face and the steps that must be taken. The results of the study, together with lessonslearned from the various other related studies and operations, will be used in strengthening theBank's assistance strategy for enhancing women's participation in development activities in theproductive and social sectors.

50. Economic reform measures were initiated under the earlier Economic RecoveryCredit and continued under the recent Economic Recovery Credit. The reform program will befurther assisted by Privatization and Industrial Reform Adjustment Credit (PIRC) and the parallelTechnical Assistance Credit (PIRCTA). On the basis of an assessment of the achievements inmacroeconomic and structural reform under the three operations, additional measures will beproposed for the Multi-Sector Adjustment operation included in the lending program for FY94and subsequent adjustment operations.

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Table 1. Zambla -Comosition of IDA Lendina FY8S-91

BoardApproval Credit

Sector/ProJect Date Amount X of Total(USS Mn)

Adiustment Onerations 79.0X

Industrial Reorientation 10/85 20.0

Industrial Reorientation (SAP) 10/85 42.0

Agricultural Rehabilitation 10/85 10.0(SAF)

Recovwry Program 6186 50.0

Recovery Program 3/91 209.0

Privatization & Industrial 6/21 200.0Reform

Eni 0.5X

Tazama PipeLine Rehabilitation 9/85 3.1

rifcutture 6.0%

Coffee II 11/86 20.4

Research and Extension 12/86 13.0

Fisheries Development 11/84 7.1

Industr 3.0X

Fertilizer Industry 2/86 10.0RestructurirgDevelopment Bank of Zarbia 1/87 10.0

Social Services 3.0X

Social Recovery Fund 4/91 20.00

Transport 3.0X

Fourth Railways 3/85 20.00

Technical Assistance 5.5X

Technical Assistance II 4/86 8.00

Mining Technical Assistance 6/91 21.00

PIRC Tochnical Assistance 6/21 10.00

TOTAL 673.60 100.0X

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51. Concurrent with the PIRC, the Bank will provide assistance to agriculture, educationand infrastructure through the Agricultural Marketing and Processing, Education Rehabilitation, andInfrastructure Engineering projects in FY92 and FY93. These operations will be followed by othersin FY94 in Petroleum Sector Rehabilitation and Agriculture Diversification with Telecommunicationsand Public Sector Management as reserve projects. The FY95 program includes an Industrial andFinancial Adjustment Credit, a Health and Nutrition project, and a Power Rehabilitation project, withfinancial intermediation, Natural Resources Management and further railways project in reservestatus. Finally, in FY96, Bank operations will include a follow-on Multi-Sector Adjustment Project,and support for Agricultural Research and Extension and Transport Rehabilitation; communitydevelopment, small-scale mining, and natural resource preservation and development are the reserveprojects. Details of these elements of the program are noted in Annex IV. The design of the IDAlending program reflects the three-year hiatus in Bank operations and the extraordinary foreignexchange needs of the past two years, including the clearing of over US$300 million in debt servicearrears to the Bank and meeting the extra demands of the current drought which will cost US$300million in 1992 alone. As a result, the commitment level was an unusually high US$240 million inFY91 and wilt be US$210 million in FY92 with this operation. The level of new commitments isexpected to fall to an average of US$120 million per year for the period FY93-96.

52. IEC and MIGA: IFC's portfolio in Zambia consists of ten investments for a totalgross commitments of US$106.6 million; one of IFC's larger in the Southern Africa region. Whilequite diversified (mining, agriculture and manufacturing), this portfolio has not performed well inrecent years; the bleak economic situation and heavily regulated policy environment adversely affectedmost investments. IFC however, expects that with the recent policy changes and the anticipated largeprivatization program, prospects for existing and new investments will improve (particularly inagriculture and in companies being privatized). IFC is keeping in close touch with the Zambianauthorities and the Bank on progress on the privatization program. Zambia has been a member ofMIGA since 1988 and has paid up its subscription. MIGA has as yet no outstanding investmentguarantee on Zambia.

Aid Coordination and Relations with the IM

53. The coordination of donor assistance has been central to the Bank's program inZambia because of the extraordinary efforts needed to clear arrears and restart the program (twice)and because of the very large external financing needs of Zambia that are due to falling copperrevenues and the large debt burden. Formal Consultative Group Meetings have been held in Apriland July of 1990, March 1991, and March 1992. In addition informal donor meetings have been heldin Paris several times a year to provide urgent updates and opportunities for donor consultation.Regular informal briefings of Executive Directors and their staff are also held at both the Bank andthe Fund. A considerable donor consultation process has also been established in Lusaka tocoordinate the amounts of assistance and of donor policies at the sector level, with different donorstakdng the lead role in different sectors. Finally, ihe SPA meetings have provided a useful forum forthe overall coordination of donor amounts and the discussion of general donor coordination issuessuch as the use of counterpart funds.

54. All of the major donors and multilateral institutions are supporting Zambia's economicreform program. This support, as expressed at the latest CG and SPA meetings, has been strong andunanimous. The broad agreement on policy has meant that an increasing amount of donor assistanceis now available as general balance of payments support, and that the project assistance is increasinglybeing coordinated within an overall agreed program of donor support.

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55. A Fund-monitored program was endorsed by the BME Board in June 1990. In Aprilof 1991, the Fund Board approved the first ever "rights arrangement" with Zambia which establishedconditions under which Zambia would gradually accumulate rights to withdrawals of IMF resourcessuch that after three years, the accumulated rights could be used to withdraw enough resources toclear completely Zambia's arrears to the IMF, which were over US$1 billion in mid-1990. Due topoor fiscal performance, Zambia did not qualify to accumulate rights in 1991. A revised "rightsarrangement" program is scheduled to be reviewed by the IMF Board in July.

Criteria for Monitoring Progress

56. Despite policy reversals, Zambia has made generally good progress in economicreform since 1989, and remarkable progress since the new Government came to power. Yet a greatdeal remains to be done. In addition to the major emphasis now being placed on private sectordevelopment, privatization and parastatal reform, futher structural measures are needed onmacroeconomic issues, such as foreign exchange, external tariffs, taxation and controlling inflation.The financial sector needs modernizing, and greater focus has to be placed on encouraging exports,particularly in non-traditional sectors. All sectors (agriculture, transport, local government, energy,and social services) need to address issues that were neglected during the post-Independence years.Civil Service reform is an important component of the reform program as it addresses the publicsector's ability to formulate and implement these reforms. The Government's PFP and the Bank'scountry assistance strategy seek to address these needs. However, the magnitude of the challengesfaced by Zambia is so great that economic adjustment and achievement of Zambia's full potential willbe a lengthy process. Substantial foreign assistance, ncluding debt relief, will continue to be requiredto provide essential inputs and those consumer goods that cannot be competitively produceddomestically, to develop the nation's human resources, and to strengthen the basic infrastructure.

57. Progress in implementing this long term swategy will be evaluated on the basis of thefollowing three criteria. Ihefirst is the Government's ability to implement macroeconomic policies(monetary, fiscal and exchange rate policies) that can accomplish and sustain financial stabilizadon,measured against the achievement of targets for inflation, the fiscal deficit and credit expansion. Thesecond criterion is the Government's success in public sector reform, including progress in divestingitself of parastatals and in reforming public utilities, (to be judged against the volume of privatizationsand performance and financial targets for the remaining public utilities), and also civil service refornand the improved delivery of vital social services. The thrd is future growth and diversification ofthe economy, measured against an expected decline in dependence of the economy on copper forexport earnings and government revenues and against more rapid private sector growth. The policyframework should encourage private sector investment and continued rehabilitation and developmentof the social and economic infrastructure.

58. Successful implementation of this adjustment program depends on three key factors.First, is the need for sustained commitment of the Zambian authorities to program implemenmion.Lack of commitment and policy reversals have contributed to implementation failure in the past. Thisrisk is minimized by the new Government's decisive actions to-date and the strong mandate itreceived on the basis of Its unambiguous manifesto detailing its economic strategy. Second, is theneed for substantial debt relief and highly concessional external assistance to be extended to Zambia,to ensure adequate fimancial resources are available for the adjustment program particularly given theeffects of this drought. The Bank is appealing to donors to make extraordinary efforts to increasetheir commitments to support the Zambian program and food import requirements. Third, successful

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implementation of the adjustment program wil require restraint and sacrifices on the part of allZambians. Lack of mass support for the program could impede its implementation, and the safetynet provisions are critical as wfll be the Government's ability to present and explain its policiesclearly. The criteria noted above for monitoring performance should help ensure that the programremains on track. If the Government were to abandon the key elements of the reform program theBank's lending strategy would be to reduce the support almost to zero, as we do not see howZambia's economy in such a situation could support meaningful projects.

Im. THE PROJECT

Sector Background

59. Development of the agriculture sector has been identified as a critical component ofthe IMP/Bank supported structural adjustment program in Zambia, since it has the greatest potentialfor producing a rapid growth response in the early stages of the program and also provides asustained source of export earnings in the medium and long term. Past performance in this sectorhas been disappointing, largely because of Government policies which included nationalization ofmaize mills, establishment of parastatals and government-controlled cooperatives, regulated markets,price controls, and subsidies. The cost of pursuing these distortionary policies hds been substantial,both in direct expenditure and foregone growth. A real agricultural growth rate of 3.5 percent peryear between 1970 and 1988 was slightly below the population growth rate of 3.7 percent and farbelow the sector's growth potential. The strategy also distorted production patterns and hindered thedevelopment of private sector capacity to provide maize marketing and fertilizer distribution servicesin the country.

60. Recognizing the shortfalls in past policies, the new Government has adopted anIMP/Bank supported structural adjustment program to improve the macroeconomic conditions in thecountry. Ile most important features of this program with regard to the agricultural sector are fiscalpolicy reforms that reduce government expenditutes on subsidies, most of which are agriFulture-related subsidies; the monetary policy that restricts overall money supply will severely restrictagricultural sector access to seasonal credit; and an external sector policy that corrects exchange ratedistortions, improving the export potential for agricultural goods. In addition, the Governmentinitiative to support private sector development, parastatal reform, and an increase in non-copperexports, will result in major changes in the agriculture sector. As part of the structural adjustmentprogram, the Government has already made considerable progress in implementing agriculturalpricing policy reforms which include (i) substantially reduced maize subsidies; (ii) elimination offertilizer and transport subsidies and decontrol of fertilizer prices with effect from March 4, 1992;and (iii) liberalization and decontrol of road haulage rates for maize and fertilizers.

61. While the policy environment is improving, obtaining faster production response andbetter efficiency in the sector will require, inter alia: (i) stimulation of private sector investment inagricultura marketing, input distribution, maize milling, and rural transportation; (d) attainment ofmarket-determined prices for maize; (iii) investnent in rehabilitation of rural roads leading to majorproduction areas; and (iv) financial sector reforms comprising gradual removal of distordons ininterest rate structure to achieve positive real interest rates, elimination of Government guaranteesfor loans to cooperatives and parastatals, limiting net borrowing by the Government from the bankingsystem, and development of appropriate financial instruments to meet the needs of the infantagribusiness enterprises. These will be supported under the proposed Project.

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Flnancial Sector

62. The financial sector has also been subjected to Government interventions (e.g.,interest rate controls and credit subsidies) with severe consequences for lending to the agriculturesector. A combination of financial and agriculture sector policies has made lending to agriculture,particularly agricultural marketing and processing, commercially unattractive to banks. In order toensure credit to the agriculture sector, the Government in recent years has provided governmentguarantees for loans to agribusiness firms for purchase of the maize crop. This has led to an erosionof credit discipline in the sector and large budgetary costs to the Govenmment, since the credit riskis borne by the Government and not the lending institution. On the other hand, loans made bycommercial banks to the agriculture sector in which the banks themselves bear the risk haveperformed well (eighty-five percent recovery on loans to small farmers and considerably higher forcommercial farming operations) as a result of prudent lending and close supervision. By takingadvantage of current reforms in both the financial and agricultural sectors, this Project will facilitatethe reintroduction of sound lending practices in the agriculture sector by providing targeted credit tothe sector, through the commercial banking system at commercial lending rates.

63. Financial Sector Reform. Although there is no formal financial sector strategy forZambia, several reforms in the financial sector are being initiated and will be implemented undervarious stabilization and structural adjustment programs supported by the Bank and IM. Thesereforms, taken together, constitute a financial sector reform program with the following majorelements: (i) under the stabilization program, the IMF is working closely with Zambian authoritiesto bring inflation under control, primarily through elimination of subsidies and controlling the moneysupply with mandatory reserve and liquidity requirements and higher interest rates; (ii) establishmentof a capital market (i.e., stock exchange), scheduled for 1993, to facilitate greater flexibility inmonetary control and mobilization of domestic resources; (iii) as part of the structural adjustmentprogram, the Government has initiated reforms to improve the ability of the banking system to playan effective role in supporting its privatization program, by strengthening the regulatory ability ofthe Bank of Zambia, modernizing the banking laws, and encouraging greater competition throughremoving financial monopolies (e.g., insurance industry, pension funds and housing mortgages).

64. The proposed Project will support and deepen the implementation of the aboveinitiatives. It will facilitate the elimination of subsidies related to maize and fertilizer marketing;provide for a monitorable time-bound plan of action for achieving market- determined interest rates;provide, before interest rate decontrol is implemented, an effective mechanism for periodic adjustmentof interest rates to ensure that they remain positive in real terms under changing economic conditions;contribute to the promotion of a viable banking system by requiring PCBs to remain financiallysound; and eliminate the financial distortions associated with government loan guarantees tocooperatives and parastatats.

Project Objectives

64. The proposed Project will aim to increase agricultural output in response to recentlyadopted economic reforms. It will assist Zambia to transform its highly regulated financial system,and its inefficient maize marketing and milling, fertilizer distribution, and rural transportation systemsinto competitive and efficient ones. It will also facilitate the reduction of government involvementin the financing of maize and fertilizer purchases and leave this to the commercial banking sector.TIhe principal objectives of the Project are to: (i) support and deepen the implementation of financialreforms initiated under testabilization and structural adjustment program; (ii) stimulate private sectorparticipation in these activities; (iii) commercialize these activities by drastically reducing government

19 -

involvement, making them more responsive to free market prices and commercial bank financing andless dependent on budgetary subsidies; (iv) rehabilitate rural roads and transportation facilities thatare essential for increased agricultural production; (v) rehabilitate, on a pilot basis, about 20,000 haof abandoned or underutilized commercial farms in areas of high production .potential; and (vi)promote women's access to credit and job opportunities generated by the Project.

Project Description

65. The Project, to be implemented over five years, will consist of five components:

(i) Private Sector Development (PSD) will support increased private sector participationin rural maize marketing and milling, input supply, rural transportation, and ruralroad maintenance by lending for working and investment capital to privateenterprises, independent cooperatives or farmers associations, and labor-intensiveroad contractors. Credit for PSD will be channelled through the Bank of Zambia(BoZ) to participating commercial banks (PCBs) at the BoZ discount rate or threemonth deposit rate available to the general public, whichever is higher, and onlentto final project beneficiaries on terms and conditions agreed between BoZ and PCBs(51 percent of total cost).

(i) Rural Roads Rehabilitation and Maintenance (RRM) wiUl support rehabilitation ofabout 1,000 km of rural roads in Central, Lusaka, and Southern provinces, whichwill become major sources of maize supply when market liberalization and pricedecontrol are fully implemented, and provide institutional and financial support tostrengthen the capacity for road maintenance in the office of the Provincial RoadsEngineer (PRE) by establishing a rural roads unit (RRU) in each of the threeprovinces (30 percent of total cost).

(iii) Market Development and Monitoring (MDMl) wiUl provide support to the Marketingand Logistics Information Center (MLIC) for the collection, analysis, anddissemination of market information and for providing training seminars to privatetraders; and to Zambia Bureau of Standards (ZBS) for establishing and monitoringstandards for animal feed, maize, and vegetable oils (2 percent of total cost).

(iv) A Policy Reform Package (PRP) will support the creation of an environmentconducive to the successful achievement of project objectives by enhancing theprofitability of project investments and deepening policy reforms and institutionalimprovements initiated under the ongoing Economic Recovery Credit (ERC), therecendy approved Privatization and Industrial Reform Credit (PIRC), and theproposed Roads Engineering Credit (REC). This will be achieved through supportingthe removal of subsidies and price controls on fertilizer, maize, and the transportationof these two products; the enactment of privatization legislation; the leasing of publicgrain storage facilities to the private sector; and increased autonomy andaccountability for cooperatives and maize mills (0 percent of total cost).

(v) Technical Assistance will be provided to support the implementation of PSD, RRRM,and PRP by providing professional management teams to selected independentcooperatives or marketing associations; roads engines, and a contractor trainingspecialist; a market informaion specialist for MLIC; a grading and standardsspecialist for ZBS; monitoring and evaluation consultants; annual project auditing

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consultancy; a maize export study to determine Zambia's export opportunities; andshort-term consultants for running seminars and workshops for private traders (17percent of total cost).

66. Total project costs are estimated at US$68.0 million. IDA will finance all technicalassistance costs, about 65 percent of road rehabilitation costs, and 40 percent of credit lent byparticipating commercial banks. Government will finance the local cost component of the roadrehabilitation costs, part of the credit cost, and the recurrent costs representing in all about 41 percentof the total local costs. All AfDB funds will be earmarked to finance 40 percent of the credit to thePCBs. The costs and financing plan for the Project are provided in Schedule A. Procurement anddisbursement details are provided in Schedule B. Ihe timetable of key processing events is providedin Schedule C. The status of Bank Group operations in Zambia and the statement of IPC investmentsare provided in Schedule D.

Project Implementation

67. The Project will be implemented over a five year period. Planning andimplementation of each component will be carried out by the respective line agencies under thecoordination of the Project Planning Unit of the Planning Division of the Ministry of Agriculture,Food and Fisheries. The line agencies that will have direct responsibility for implementing theproject components are: the Roads Department (REDP), through PREs and RRUs, for roads; TheBank of Zambia and PCBs for the credit component; ZABS for standards and grading; the Ministryof Agriculture Food and Fisheries (MAFF), through the MLIC, for market development, monitoring,and training; and the Ministry of Finance (MOF) and participating independent commercialcooperatives or marketing associations for marketing technical assistance.

Project Sustainability

68. Sustainability of this Project is contingent upon the continuation and deepening of theGovernment's economid reform program, particularly in the agriculture, financial and transportsectors. These reforms will provide a sustainable basis for the development of the private sector tospearhead economic growth and efficiency in the economy. The Government is committed topromotion of private entrepreneurs in all spheres of the economy and it will not pre-empt or inhibitbusiness opporauities. To this end, the Government has stared implementing the Investment Act of1991 which provides for an improved climate for private investment and private sector activity. ThisProject provides an initial attempt to promote private sector activities in agribusiness and to deepenthe existing finmcial sector reform by privatizing and rationalizing the financing of maizeprocurement and fertilizer distribution in the country. This will minimize the distortions and fiscalburden inherent in financing these activities through the Government budget.

Lessons Learned from Previous Bank/IDA Involvement

69. Bank Group financial assistance to agriculture has included thirteen projects and oneSECAL operation. Main project objectives have included increased production of crops, livestock,fisheries and forestry and raising incomes of beneficiaries(mainly smallholder producers). However,these projects were implemented under a hostile policy environment (characterized by extreme maketdistortions, price controls and subsidies) and inadequate rural transport infrastructure. The resultantdisincentives impeded the achievement of project objectives. Project implementation was also marredby delayed procurement, slow disbursements, inadequate staffing and delayed auditing of projectaccounts. In view of this, considerable upfront actions to improve the project policy environment

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were required during the processing of this Project. These included: elimination of fertilizer subsidies(March 1992), decontrol of road transport rates for maize and fertilizers (April 1992), liberalizationof domestic marketing of maize and distibution of fertilizers (April 1992), elimination of maize andmaize meal subsidies (October 1992), and establishment of a leasing arrangement for public grainstorage facilities (June 1992). It should be noted that drought-related subsidies on Imported maize totargeted groups winl remain in place until the effects of the current drought are overcome. Zambia'scompliance with audit covenants has been particularly unsatisfactory and notice was served on theGovernment to institute full compliance. All agricultral projects must be in compliance with auditrequirements before Board presentation of this Project. The Government has hired a private firm ofauditors to bring up-to-date the audit backlog of all Bank Group-supported agricultural projects.There is adequate private audit capacity in the country through international audit firms based inZambia to complete this task. Project funds will be used to provide private audit consultancy forproject acounts on the basis of an automatically renewable contract (unless the auditor's performanceis unsatisfactory).

lRationale for IDA Support

70. There is a general agreement that the agriculture sector has the greatest potential torespond quickly to the economic reforms supported by the Bank and IMF. If the anticipatedaccelerated growth is to materialize, increased investments are required. These will be providedthrough the proposed financial support to the private sector. This support is consistent with theIMB/Bank-supported stabilization program, as it will rationalize the financing of purchasing maizeand fertilizers, both of which have substantially contributed to fiscal and monetary imbalances in thepast. It will also be consistent with the thrust of IFC's lending strategy in Zambia which hassupported investments in agricultural production and agribusiness or agro-based industries (e.g.,teatiles, fertilizer mamufacture). Increased investments in agriculture will be essential to obtain theanticipated response to the policy reforms. Experience elsewhere has shown that followingliberalization of the financial sector, commercial banks are likely to reduce lending to agriculturewhere transaction costs and risk are higher than in other sectors. Financial institutions in Zambia havelittle experience in lending to small-scale agribusiness enterprises engaged in trading commodities.Commodites in transit are not suitable for collateral purposes and these firms are therefore likely tobe perceived as high risk for lending purposes. Hence, if the expected agricultural growth is tomaterialize, targeted lending as proposed under this Project, will be required during a transitionperiod until commercial banks have had time to develop suitable financial instruments and providethe necessary financial support to agriculture. Such support is consistent with the Bank's guidelineson Financial Sector Operations. Finally, the reforms being undertaken by the new Government mayaffect vested interests and be difficult to implement unless firmly supported by the Bank under thisand similar projects.

Agreed Actions

71. Agreement has been reached in principle with Government and PCBs on mechanisms,terms and conditions, and eligibility criteria applicable for channelling of credit. Eligibility criteriafor participation in the TA package by independent cooperatives and marketing associations have alsobeen agreed with the Government. Procurement of technical assistance for maize marketing has beendone before Board presentation under ongoing TA Credit II. Evidence of significant progress to clearthe audit bacldog of all Bank and IDA supported projects in Zambian agriculture has been firnishedby the Government. All audit covenants have been met as part of effectiveness conditionality for thisCredit. The Government has agreed to meet the following conditions for disbursement; () ensurethat each bank that wants to participate in the credit component satisfies the eligibility criteria

-22 -

established by the Government and IDA; (ii) submit a detailed program budget for the first year ofthe emergency roads repair program; (iii) establish the Rural Roads Unit and appoint a roads engineerin each PRE office as a condition of disbursement for the entire road rehabilitation and maintenanceprogram; (iv) submit a satisfactory rural roads policy statement as a condition of disbursement forthe entire road rehabilitation and maintenance program; (v) permit cooperatives to operateautonomously starting from the 1992/93 marketing season and amend the Agricultural Marketing Actto reflect this autonomy as a condition of disbursement to cooperatives; (vi) establish project accountsfor RRRM and MDM and ensure that an initial quarterly deposit is made in each account byGovernment, as a condition of disbursement to these components; (vii) signing of a satisfactorysubsidiary loan agreement by each participating commercial bank; and (viii) signing of a satisfactorysubsidiary technical assistance agreement by each participating marketing association or cooperative.In addition, assurances were obtained during negotiations that the Government would: (i) makesignificant progress toward attaining market-determined interest rates by (a) adjusting them on aquarterly basis to approximate the projected domestic rate of inflation for the quarter with effect fromthe third quarter of 1992, and (b) decontrolling interest rates at all levels by December 31, 1993; (ii)review domestic interest rates on a quarterly basis, submit such review to IDA for comments, andimplement the said quarterly adjustment of interest rates, taking into account the Association'scomments; (iii) carry out a maize export study to determine Zambia's export opportunities with theregion by June 30, 1994; (iv) liberalize the export of maize with effect from the 1993/94 marketingseason; (v) take all measures to remove price controls on domestically produced white maize at alllevels of the maize marketing system not later than October 31, 1992; (vi) foster competition byauthorizing each INDECO group mill to set prices for its maize meal independently not later thanJanuary 31, 1993; (vii) employ short-term consultants to implement the project monitoring andevaluation system not later than January 31, 1993; and (viii) prepare and submit to IDA for approvala Monitoring and Evaluation plan for the Project not later than March 31, 1993, and implement theplan promptly thereafter.

Environmental Impact

72. Only one component could have a direct effect on the environment: the rural roadscomponent. The road rehabilitation works are not expected to have any adverse effect on theenvironment. On the contrary, a favorable impact would result from improved and engineered roaddrainage systems. No new construction or major realignment is envisaged; hence, activities will beconfined to existing rights-of-way. All tender documents will provide for reinstatement and seedingof burrow-pits. This will reduce the risk of residual pools along roads with resultant health hazards.Physical damage to the environment by heavy equipment and spillage of fuel and lubricants associatedwith machinery-intensive methods will be negligible.

Program Objective Categories

73. The Project will have a favorable Impact on rural poverty alleviation throughincreased crop production and non-farm incomes earned from employment in rural road maintenanceprograms and marketing activities. Household food security will also increase with increasedproduction, more efficient distribution of food, and better employment opportunities. Women inZambia's agriculture sector play vital roles as farmers, managers, decision makers, and farmlaborers. Women constitute the majority of traders in the food distribution system in the country andthey are likely to be the major beneficiaries of the Project. One important social advantage associatedwith labor intensive methods of road maintenance is the increased opportunity for the participationof women in supplying labor to such programs. Experience in the NORAD-finded program inNorthern Province and the FINNIDA-funded program in Lusaka Rural District has shown high levels

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of participation by women who have proved to be the most reliable and capable workers. Increasednon-farm incomes by women are likely to result in improved household food security since they arethe major food providers for their families.

Project Benefits

74. The achievement of project objectives will facilitate agriculture's supply response tothe improved policy environment resulting from the country's adjustment program. The Project willenable both farmers and rural enterprises to respond to the improved incentive structure by increasingagricultural production. The principal benefits of the Project will be increased agriculturalproduction, reduced transport costs and reduced crop/input losses stemming from an improved policyenvironment, a change in production patterns, and rehabilitation of rural transport infrastructure.Increased production, savings and efficiency gains, together with the new employment opportunities,will significantly reduce food costs, improve household food security, and increase incomes tofarmers and rural enterprises.

Risks

75. The Project's main risk lies in the possible gap between the Governrment'scommitment to reforms, especially those aimed at improving the incentive structure for farmers andprivate enterprises, and its capability to implement them. This risk will be minimized by improvingthe Government's implementation capacity during the transition period through a strong technicalassistance component.

76. I am satisfied that the proposed Credit will comply with the Articles of Agreementof the Association and recommend that the Executive Directors approve it.

Lewis T. PrestonPresident

Attachments

Washington, D.C.July 24, 1992

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Schedule A

Estimated Costs and Financing Plan

Proec Cst Sulmmta

Eroject Comonents Proje Co st-USD Million-

Local Foreign Total

Private Sector Development 20.4 10.5 30.9

Rural Road Rehab. & Maintenance 3.6 10.9 14.5

Market Dev. and Monitoring 0.1 1.6 1.7

Technical Assistance 12 L7

Total Base Costs 27.3 26.7 54.0

Physical Contingencies 0.4 1.2 1.6

Price Contingencies 9. a 12.4

TOTAL PROJECT COSTS 37.3 30.7 68.0

Financing Plan

~~USD Million-

Local Foreign Total

IDA 9.6 23.4 33.0

AfDB 5.2 7.3 12.5

Government 15.5 - 15.5

Commercial Banks 3.5 3.5

Beneficiaries

Total 37.3 30.7 68.0

-25 -

Scbedule BPage 1 of 2

Procuremen

Summay of Proposed Procurement Arrangements(USID milllon)

Procurement methodrIectelemnt ICB LCB Other NBF Total

1.1 Rural road repairs - 3.0 - 0.1 3.1(3.0) (3.0)

1.2 Rural road maintenance - 5.0 - 5.1 10.1(5.0) (5.0)

2. Qg&d:2.1 Equipment - - 1.5 1.5

3. Lb&3.1 Vehicles and farm rehabilitation - - 4.1 7.4 11.5

(4.1) (4.1)3.2 Maize (by mills and traders) - - 8.0 10.9 18.9

(8.0) (8.0)3.3 Fertilizer (by stockists/distributors) 4.6 4.0 8.6

(4.6) (4.6)4A Consultancies-

4.1 Technical assistance/training - 7.1 - 7.1CT-1) (7.1)

5. MJ.laneous:S.1 Refinacing PPF 0.1 - 0.1

(0.1) (0.1)5.2 Reimbursing TA U (ongoing) - - 1.2 - 1.2

(1.2) (1.2)5.3 Recurrent costs - - - 5.9 5.9

Total 8.0 25.1 34.9 68.0(8.0) (25.1) (33.0)

Nabo:(1) FiguPs in panesi rpret IDA financig.(2) NBF Not Bank-financed.(3) IDA fing subtotals do not add to total becas, of oming.(4) - meam not applicable

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Schedule BPage 2 of 2

IDA DisbursementsAmount of theCredit Allocated % of(Expressed in Expenditures

Category SDR Equivalent) to be Financed

(1) Civil Works for: 65%

(a) Emergency Road Repairs 2,190,000(b) Others 2,810,000

(2) Sub-loans for: 40% of Sub-loans

(a) Vehicles, Trailers and 3,000,000Equipment

(b) Maize 3,650,000(c) Fertilizers 2,780,000(d) Equipment for Farm 150,000

Rehabilitation(3) Consultants' Services for: 100%

(a) Maize Marketing 3,285,000@b) Others 3,650,000

(4) Training 1,015,000 100%(5) Refunding of Project 50,000 Amounts due

Preparation Advance pursuant toSection 2.02 (c) ofthe CreditAgreement

(6) Unallocated 1,520,000

TOTAL 24,100,000

Estimated Bankl/DA Disbursement Schedule(USD million)

Projet Year FY 93 FY 94 PY 95 FY 96 FY97 pY 98 FY99

Annual dibursemnt 2.0 6.0 8.0 6.0 6.0 3.0 2.0

Cumulaive annual

Disbusemet (USD million) 2.0 8.0 16.0 22.0 28.0 31.0 33.0

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Sche,ul,e C

ZambiaAgricultural Marketing and Processing Infrastructure Project

Timetable of Key Processing Events

(a) Time taken to prepare: 16 months(b) Prepared by: Barnabas K. Zegge (Irask Manager), lain Shuker (Economist),

Chaim Helman (Division Chief)(c) First MlA Mission: September 1991(d) Appraisal Departure: March 1992(e) Negotiations: May 20, 1992(t) Planned date of effectiveness: September 15, 1992(g) List of relevant PCRs and PPARs: None

-28 -

Schedule DPage 1 of 2

ZambiaAgricultural Marketina and Processing Infrastructure Project

Statement of IFC Investmentsas of February 29, 1992

invest FY Obligor Type of Business Loan Equity TotalNumber

USD Million

216-ZA 1972

250-ZA 1973 Zambia Bata Shoe Shoes 2.1 0.2 2.3

307-ZA 1975

394-ZA 1978 Century Products Ltd. Plastic Wrap 0.9 0.2 1.1

324-ZA 1976 Dov't Bank of Zambia Dov't. Finance 0.5 0.5

632-ZA 1982 Ehanol Co. of Zambia Chem/Petochem 3.7 0.6 4.3

1001-ZA 1988 Gwembe Valley Dev't. Food/Food Proc. 3.7 0.8 4.5

1132-ZA 1989 Masstock (Zambia) Food/Food Proc 8.2 8.2

527-ZA 1980

721-ZA 1985 Kafue Textiles Texdles 10.7 10.7

743-ZA 1985 Mpongwe Dv't. Co. Food/Food Proc. 1.8 0.3 2.1

709-ZA 1984 Zambia Hotel Prop. Tourism 22.4 22.4

483-ZA 1980

600-ZA 1982 ZCCM Mining 53.1 53.1

Total Gross Commitments 106.6 2.6 109.2

Less: Cancelations, teminatons, exchangeadjustments, repayments, writ-ooffs, andsales

61.7 1.6 63.3

Total commitments hold by IFC 44.9 1.0 45.9

Total undisbursed 6.5 0.0 6.5

Total disbursed 38.4 1.0 39.4

-29 - Schedule DPage 2 of 2

ZambiaAgricultural Marketing and Processing Infrastructure Project

Status Of lank Growp Operstions In ZAJIAPFDUR25 - Sumury Statummet Of Lons w1 IDA Credits(LA dit, as of 4/3092 - NIS date as of 06/05/92)

................... ..........................................

By ComtryCountry ZAMBIA

bauovt in USS million(ioss cancel loticns)

Loan or Fiscal Undis- CtosingCredit No. Year Borroier Purpose a IDA hused Date...... .... ..... ....... ....-- ...... .....

Credits

19 Credits(s) csed 467.6

C14370-am 1984 ZAMBIA FORESTRY III 22.40 7.79 09/30/92(R)C15290-ZAN 1985 ZAWIA FISHERIES 7.10 7.73 12/31/91CR)C15750-ZAN 1985 ZAMBIA RUYS. IV 20.00 23.85 0630/92(R)C16790-ZAN 1986 ZAMIA TAS II 8.00 6.96 12/31/92C17430-ZAN 1987 ZAMBIA COFFEE II 20.40 22.48 06/30/95C17460-ZAN 1987 ZAMBIA AGR. RES.& EXT. 13.00 13.29 12/31/95C17530-ZAN 1987 ZAMBIA Daz III 10.00 11.37 06/30/92C22690-ZAN 1991 ZAMBIA MINING TAS 21.00 20.37 06/30/97C22730-ZAN 1991 ZAMBIA SOCIAL RECOVERY PROJ 20.00 16.16 07/31/97

TOTAL mader Credits a 9 141.90 130.00

Lowis

28 Loans(s) closed 582.13

All closed for ZAMBIA

fOTAL tutor Looms J 0

T0TAL*** 582.13 609.66of ffhkh repaid 355.58 1.06

TOTAL held by Bank & IDA 226.55 608.60Amdunt sold 28.58

of which repeid 28.58

TOTAL urdisbursed 130.00

Notes:

* Not yet effectivee* Not yet signed*-*' Total Approved, Repetzents, and Outstandigw balanee represent both active wd Inactive Lois and Credits.(R) ndicates fonnlly revised Closing Date.(S) indicates SAL/SECAL Loans and Credits.

The Net Approved and Bank Repaywents are historical value, all others are iarket value.

The Signing, Effective, eid Closing dates are based upon the Loan Departrmnt offical data and are not takenfrom the Task Budget file.

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Schedule E

Action Pkzn to Accelerate Disbursements In Zambia

The disbursement record for loans to Zambia has been extremely poor in recentyears. Zambia's withdrawal rights were suspended between May 1987 and March 1991 andagain between September 1991 and February 1992, preventing disbursements in these periods.In periods when Zambia was not under suspension, disbursement was still slow as a result ofpoor implementation capacity and procurement procedures in the Government. A summary ofthe portfolio status in Zambia is presented in Schedule D, Page 2. In order to acceleratedisbursements in Zambia, the Bank is supporting a technical assistance project to increasecapacity within the Government to manage projects in the long run. In addition, the Governmenthas agreed to hire private sector consultants to monitor and evaluate projects, thus increasing theGovernment's capacity to manage projects more efficiently in the short run.

The Agriculture Division (AF6AG) has a plan to improve the implementationperformance of its portfolio. This program will require closer monitoring of projectimplementation, and will require action on the part of the Government if implementation is notproceeding as expected. The Government will be informed of actions needed to improveimplementation, and will be required to act on these requests or face penalties, such as suspensionof disbursements. It is the division's policy that projects will not be allowed to remain rated atan unsatisfactory rating (a level of 3) for more than one year. ITese procedures will improveimplementation performance, and therefore, accelerate disbursements. If found successful, theseprocedures will be adopted across all sectors in AP6 countries.

This project in particular, has addressed the issue of ensuring accelerateddisburements by taking the following steps; (i) requiring the Government of Zambia to hireprivate consultants to develop and execute a monitoring and evaluation program for the project;(ii) placing as much of the implementation responsibility as possible in the hands of the privatesector and providing them with the correct incentives to perform these functions efficiently; (iii)laying out a detailed supervision plan; and (iv) requiring the employment of consultants in theearly stages of project implementation.

-31 -

Annex 1Page 1 of 2

Zambia: Economic Indicatrs., 1989-94

1989 1990 1991 1992 1993 1994

Projete

(In rieret chune

Real GDP -1.0 -0.5 -1.8 2.0 3.0 4.0

Rel non-mining GDP -1.7 -0.7 -0.7 2.1 3.1 4.1

Real per capita GDP -4.4 3.9 5.1 -1.4 -0.5 0.5

Real onsumptin per capita -10.1 -3.0 -2.8 -4.9 -5.6 0.2

Terms of tradeo' 9.4 -1.1 -7.3 -8.8 -6.9 -3.8

Consumer prices (end peiod) 158.0 105.0 95.0 45.0 15.0 5.0

Export volume 3.1 6.8 -17.4 7.6 4.8 3.5

Copper 8.4 2.0 -14.8 40.1 2.2 2.3

Non-coppe -14.9 27.9 -27.1 39.2 12.5 6.6

Import VOIUme!' 8.4 15.9 -11.5 11.3 -3.1 1.5

Real exchange rate (d iation -) 32.3 -16.4 -9.9

Money Supply (M2) 65.3 45.8 98.1 25.0 10.0 5.0

ain oercent of GDP)

Grms domestic savings 13.7 16.6 12.0 12.6 14.0 14.5

Gross national savings 6.0 13.8 15.3 18.2 16.9 15.2

Central Govt. -4.9 -1.8 1.2 5.2 3.1 3.8

Nongoveameat 10.9 15.6 14.1 13.0 13.9 11.4

Unrequited Uansfes and net fador -7.7 -2.8 3.3 5.6 2.9 0.7income1

Gros domestic investment 9.9 17.3 135 19.5 20.0 20.5

Central Govt 4.7 5.4 7.3 4.9 4.5 4.7

Nongovemment 5.3 11.9 6.2 14.6 1S.5 15.8

ConSuption 86.3 83.4 88.0 87.4 86.0 85.5

Central GOVt. 14.1 11.1 10.3 10.5 10.8 10.9

Nongovenment 72.2 72.3 77.7 77.0 75.2 74.7

Extnal curent accounet -4.0 -3.5 1.8 -1.3 -3.1 -5.3

Metal sector 18.0 16.9 15.7 11.8 9.9 9.1

Nonmetal seOCor -22.0 -20.4 -14.0 -13.1 -13.0 -14.4

- 32 -

Page 2 of '

1989 1990 1991 1992 1993 1994

Projeted

Goverment domestic revenue 17.1 17.6 17.0 17.5 17.7 18.0

Governmen ants- 2.1 3.8 6.8 8.2 3.3 2.3

Govrment eWxnditure 29.5 29.1 30.9 27.7 23.4 21.4

Govenment defict

Acoral basis -10.3 -7.7 -7.1 -2.0 -2.3 -1.1

Acual excluding 6.6 -4.2 6.5 -1.4 - 0.5gants and interh

Domestic financing of govenunt 6.4 2.6 6.1 2.5 -0.3 -1.0dect (not)

an =rgent of eaoot of oods and s a

Debt sevce (pocrual)f 58.0 60.2 65.2 66.2 61.7 51.5

Extnal hnteret (accrual) 28.9 28.3 30.8 32.1 29.3 26.2

an D

Commeci banik lending rate 35.0 40.0 46.0 51.0 - -

(end of peiod)

Sour: Zambia Policy Frmework Paper, 1992-94

2 Copper price (UsDAlb): 1.29 1.21 1.06 0.90 0.90 0.88

23 Impost volume growth in 1992 is inflated by emaergency ma impos and resockdg of fetizerand petroleu; these htors serve to deprs import volume grow h I1993.

A Assuming that bulk of extemal financing gap is filed wlth gnuts.

Exludes payment of smart.

Prteiminay Bslimate

IBRD 23688

ZAMBIA , r TANZANIAAGRICULTURAL MARKETING AND PROCESSING zr

INFRASTRUCTURE PROJECT s/.

PROJECT AREA TRUNK AND MAIN ROADS( I(/ J

5 @ ~~~~PROVINCE CAPITALS SECONDAR YOR DISTRICT ROADS Qnnw r

V * ~~~NATIONAL CAPITAL r RIVERS ' 1°M8 At ~~~~PROVINCE BOUNDAWES INTERNATIONAL BOUNDARES , N RTHERN| )

b--%,1 ~~~~~ ~~~~~~~ZAIRE & v49@ 2 QJof n std is o h _. xvsws

5tos3nwwontrotecitiptoorBeoNC NRTH- J Chingoi /%« /1

webbwndcf l ) ~~WESTERN LA th5y ̂

L \S~~; < <Fo i> ny 21-/ tsz4?Po

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~_i IA N D OA 9 -(K .W A

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~NAMIBIA MGO S veEr

* l N ^ , | | ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~April 1992