Zambia - Second Economic and Social Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-6929-ZA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN THE AMOUNT EQUIVALENT TO SDR 62.4 MILLION TO THE REPUBLIC OF ZAMBIA FOR A SECOND ECONOMIC AND SOCIAL ADJUSTMENT CREDIT JUNE 25, 1996 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Zambia Kwacha (K) US$1=1240.93 FISCAL YEAR January I to December 31 ABBREVIATIONS AND ACRONYMS BOZ Bank of Zambia CBI Cross Border Initiative CEM Country Economic Memorandum CG Consultative Group for Zambia CIR Country Implementation Review CPPR Country Portfolio Performance Review DBZ Development Bank of Zambia ERC Economic Recovery Credit ERIP Economic Recovery and Investment Credit ESAC Economic and Social Adjustment Credit ESAF Enhanced Structural Adjustment Facility GDP Gross Domestic Product IRBD International Bank for Reconstruction and Development IDA International Development Association LUSA Lusaka Stock Exchange MMD Movement for Multiparty Democracy NEAP National Environmental Action Plan PER Public Expenditure Review PFP Policy Framework Paper PIRC Privatization and Industrial Reform Credits PTA Preferential Trade Agreement RAP Rights Accumulation Program RPED Regional Project for Enterprise Development SCC Systematic Client Consultation VAT Value Added T ax ZCCM Zambia Consolidated Copper Mines ZESCO Zambia Electricity Supply Company ZIMCO Zambia Industrial and Mining Corporation ZPA Zambia Privatization Agency ZRA Zambia Revenue Authority  FOR OFFICIAL USE ONLY ZAMBIA SECOND ECONOMIC AND SOCIAL ADJUSTMENT CREDIT Table of Contents Page No. SUMMARY PART I. THE ECONOMY .............................................1 A. Background ............................................1 B. Recent Economic Developmens and Prospects ............................................3 PART 1I. ZAMBIA'S ADJUSTMENT PROGRAM . ..............................5 A. Macroeconomic Management ...........................................6 B. Privatization and Parastatal Management .............................................8 C. Fostering Private Sector Growth .............................................9 D. Investing in Human Resources and other Social Services . .11......................... 1 E. Poverty Reduction and Alleviation ........................................... 12 F. Medium Term Prospects and Financing Plan ..................... ....................... 13 PART III. THE PROPOSED CREDIT ......................................... 13 A. Macroeconomic Management ........................................... 14 B. Fostering Private Sector Growth ............................................ 15 C. Investing in Human Resources and Other Social Services ...................................... 18 D. Poverty Impact ........................................... . 20 E. Environmental Impact ........................................... 21 F. Specific Agreements ........................................... 21 G. Implementation Arrangements ............................................. 22 H. Implementation Assistance ............................................ 23 I. Cofinancing ............................................ 24 J. Program Benefits and Risk ........................................... 24 PART IV. BANK OPERATIONS ........................................... 24 PART V. COLLABORATION WITH IMF ............................................ 26 PART VI. RECOMMENDATION ........................................... 26 This document has a restricted distribution and may be used by recipients only in the performance of their |0oficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEXES A: Zambia - Social Indicators of Development ............ ....................... 27 B. Key Macroeconomic Indicators ................................... 29 C: Balance of Payments ................................... 30 D: Status of Bank Group Operations ................................... 32 E: Matrix of Policy Agreement ................................... 36 F: Zambia at a Glance ................................... 38 G: Evolution of Policy Reform Agreements ................................... 40 H: Proposed Economic and Social Adjustment Credit ................................... 47 I: Supplementary Data ................................... 49 J: Letter of Development Policy ................................... 50 This Operation was prepared by a team consisting of John E. Todd (Principal Country Economist and Task Manager, AFIMI); Lemma Merid (Economist, AF1MI); Lloyd McKay (Senior Economist, AF 1 MI); Eliezer Orbach (Education and Training Specialist, AF1HR); Peter Moll (Economist, AF1AE); Arthur Fields (Procurement Specialist, AFIDS); Sara Gonzalez-Flavell (Senior Counsel, LEGAF); Ellah Chembe (Economist, AF1ZM); George Sikazwe (Disbursement and Procurement Analyst, AIF1ZM) Peggy Chibuye(AFlZM) and Maria Teresa Benito (Research Analyst, AFIMI). Secretarial support was provided by Ms. Ligia Murphy (AFIMI). Ms. Phyllis Pomerantz, (AF1C2) is the Country Operations Manager, and Ms. Katherine Marshall is the managing Department Director.  ZAMBIA SECOND ECONOMIC AND SOCIAL ADJUSTMENT CREDIT SUMMARY Borrower: Republic of Zambia Executing Agency: Ministry of Finance Amount and Terms: SDR 62.4 Million (US$90 million equivalent) on standard IDA terms with 40 years maturity. Description: The proposed adjustment Credit would support Zambia's economic reform program designed to address the serious levels of poverty through promoting widely shared, private sector-led economic growth and improving the delivery of vitally needed social services. In particular, the proposed Credit would support measures that would: (a) more firmly establish a stable macro economic environment; (b) improve the competitive position of exporters and rationalize the structure of effective protection by revising the tariff structure; (b) strengthen markets, in particular by accelerating the implementation of land market reforms approved by Parliament in 1995; and (d) improve the delivery of vital social services by strengthening budget priorities for and within the social sector ministries and by further development and implementation of policy reforms in these areas. Benefits: The main benefits of this Credit will be increased economic growth, employment, and poverty reduction arising from a more competitive private sector (trade and land market reforms), a more efficient public sector (improved budget allocations and procurement reforms), sustained human resource investments, and more effective safety net provisions. These changes should not only increase income and employment opportunities for all groups, they should also lead to increased private savings and investment and expanded non- mining exports in order to increase Zambia's prospects for self reliance and to increased investment in human resources in order to increase Zambia's prospects for sustainable, longer- term economic growth.  - ii - Risks: Most of the risks are due to factors external to the specific reforms supported by this Credit. First, there is always the risk in Zambia of major external shocks, particularly a major drop in copper revenues or another serious drought. Therefore, policies to improve the efficiency of ZCCM, to expand non- mining exports, and to diversify the agricultural sector into more drought-resistant crops are all vital to the long-term success of Zambia's program. More immediately, there is the prospect that deteriorating policy performance in an election year coupled with donor disaffection over issues of political governance could result in a break in external support that could threaten the economic recovery. Economic and political developments will be closely monitored, and the Bank and the other CG members will maintain an active dialogue throughout the year. Disbursement: The proposed credit will be disbursed through the Bank of Zambia. Disbursement will be in two tranches. The first tranche (US$45 million) will be released at effectiveness. The remaining tranche (US$45 million) will be released and disbursed when the conditions of Second Tranche release are satisfied which is expected to be in early 1997. Project ID Number: ZM-PA-3224  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND ECONOMIC AND SOCIAL ADJUSTMENT CREDIT TO THE REPUBLIC OF ZAMBIA 1. I submit for your approval the following report and recommendation on a proposed development credit to the Republic of Zambia for SDR 62.4 million (US $90 million equivalent) in support of its economic reform and structural adjustment program. The Credit would be on standard IDA terms, with an amortization period of 40 years, including a grace period of 10 years. 2. The proposed Second Economic and Social Adjustment Credit (ESAC II) would be the sixth structural adjustment credit to Zambia since the clearance of Zambia's arrears to the Bank in March 1991. Zambia has very large external financing needs due to its high debt service requirements and limited short-term prospects for copper production, Zambia's principal export. In recognition of this need and of the impressive accomplishments of Zambia's economic reform program, the international conimunity has provided exceptional levels of balance of payments support over the past five years. The objective of this Credit is to continue IDA's support of Zambia's program of economic reform. The primary purpose of the Government's economic program is to address the serious levels of poverty in Zambia through measures aimed at promoting widely-shared economic growth and improving the delivery of vitally needed social services. In particular, the proposed credit would support measures that would: (a) more firmly establish a stable macro economic environment; (b) improve the competitive position of exporters and rationalize the structure of effective protection by revising the tariff structure; (c) strengthen markets, in particular by accelerating the implementation of land market reforms approved by Parliament in 1995; and (d) improve the delivery of vital social services by strengthening budget priorities for and within the social sector ministries and by further development and implementation of policy reforms in these areas. I. THE ECONOMY A. Background 3. From Independence in 1964 through the 1980s, Zambia under President Kaunda relied excessively on centralized planning, parastatal enterprises, and international borrowing. The economy's performance was also adversely affected throughout this period by a heavy dependence on copper whose real price and production levels were declining, the latter largely as a result of insufficient investment to increase productivity and output. Zambia undertook several partial economic reform programs during the 1980s, but these had little lasting effect. When elections were called for late 1991, Zambia was suffering from a very large external debt overhang (over US$7 billion), an  - 2- inefficient and highly protected parastatal sector that dominated the economy, continued dependence on copper, steady declines in per capita income (declining by half since 1975), and an unwillingness on the part of Government to take and hold to the policy decisions necessary to change the course of the economy. The election of the opposition party, the Movement for Multiparty Democracy (MMD), was seen as an overwhelming endorsement of MMD's economic reform program. Its objectives were to restore internal and external economic stability, to get the Government and parastatals out of business activity, to promote the private sector, and to focus Government efforts on the creation of a positive enabling environment for the private sector and on the provision of necessary infrastructure and social services. 4. Zambia's overall economic policy performance has been good, though uneven, over the past four and one half years. In particular, the pace of liberalization has been impressive. Prices have been decontrolled and subsidies eliminated; the exchange rate and interest rates are market determined; quantitative restrictions on imports have been eliminated; and the tariff structure has been compressed and simplified. Parastatal monopolies have ended, crop marketing has been liberalized, and an ambitious privatization program is underway. Not everything has gone smoothly, however. In particular, it took several years before the high rates of inflation could be brought down, and macroeconomic stability is still to be fully achieved. Structural reforms are not yet complete, and some institutional aspects of the program have proven particularly difficult to implement, such as civil service reform. In addition, the private sector has been hard hit by high real interest rates, some sharp drops in the levels of protection from competing imports, deteriorating performance in the copper mines, the difficult transition from public to private sector marketing of maize, and several serious droughts. More fundamentally, the Zambian economy continues to suffer from serious structural problems owing to the legacy of excessive government intervention, a high dependence on copper, an exceptional level of external debt, and vulnerability to drought. As a result, overall economic growth is only just beginning to recover. The economic program has remained on track, however. Despite numerous challenges over the past four years, the Government has consistently demonstrated a firm commitment to the program. This commitment was recognized when Zambia successfully completed a three year Rights Accumulation Program with the IMF in December 1995, and the IMF Board approved a three year ESAF program to continue its support of Zambia's Economic Recovery Program. This was followed in February 1996 by a successful negotiation of a three-year rescheduling agreement with the Paris Club on "Naples terms". 5. The incidence of poverty in Zambia is very high and has been exacerbated by the collapse of the copper industry and the poor economic policies of the 1970s and 1980s. In 1991, about 68 percent of all Zambians were living in households with expenditures below a level sufficient to provide basic needs, and 55 percent of the population did not have sufficient income even to meet basic nutritional needs. Hunger is still reported by the poor as the greatest problem they face. Rural poverty is more prevalent and more severe than urban poverty, but the incidence of urban poverty has increased from 4 percent in 1975 to just under 50 percent in 1994. Unfortunately, the extent of poverty has  - 3- not been reduced and may well have increased since 1991. During the last four years, economic policies have improved the longer-term prospects for growth, but the short- term impact on the economy has been mixed. Some policy changes, for example, the removal of producer and consumer subsidies, have had adverse effects on some of the poor. Many social indicators have worsened over this period. Infant mortality is up from 108 per thousand live births in 1990 to 113 in 1995. Adult illiteracy increased from 25 percent in 1990 to 27 percent in 1995. The level of stunting increased from 41 percent in 1991 to 48 percent in 1993. Moreover, the poor's capacity to improve their own situation is diminished by malnutrition, poor health, and low levels of education. In addition, the prevalence of AIDS has exacerbated the poverty situation and threatens the prospects for economic growth and poverty reduction in the medium-to the long-term. B. Recent Economic Developments and Prospects 6. Several serious problems emerged in 1995 which adversely affected economic performance. The first was the pressure on the financial system associated with the insolvency and eventual closure of Meridien BIAO Ltd., one of the largest commercial banks. The second was the general decline in revenue at Zambia Consolidated Copper Mines (ZCCM) due in part to deteriorating operating performance. And the third was the pressure on the budget due to overspending on defense and government salaries that arose in the second quarter, along with difficulties in tax collection. Two additional problems compounded the already difficult situation. Initial delays in addressing these problems led to substantial delays and shortfalls in donor assistance, and the harvest was once again disappointing due to the premature end of the rains and the reduced plantings by many farmers. 7. The Government did begin to address these policy problems, however. In particular, the Government established tight control over the overall budget and managed eventually to begin rebuilding reserves in the second half of 1995. This helped to restore confidence and encouraged asset holders to stay in local currency, as demonstrated by the overall stability of the real exchange rate and the subsequent decline in interest rates. 8. Some key economic variables for 1994 and 1995 are shown below. Gross domestic product continued to decline in 1995, due primarily to reduced output in agriculture and mining. Inflation remained troubling at near 40 percent, but still well below the levels of 1990-1993. The total budget deficit (including foreign debt service and grants) was 9.7 percent of GDP in 1995. Government spending declined as a percentage of GDP (and in real terms) while the share of spending on the social sectors increased from 28 percent of non-interest domestic spending in 1993 to 35 percent in 1995. Non-traditional exports continued their strong growth, but the current account deficit widened in 1995 due to the disappointing levels of copper production and the increase in imports, caused in part by the need for US$100 million in maize imports.  -4- 1994 1995 GDP Growth -3.1 -3.9 Inflation Rate (Average Yearly) 53.4 34.6 Gross Domestic Investment/GDP 6.9 11.7 Primary Fiscal Surplus/GDP* -0.3 0.7 Government Spending/GDP 28.7 25.1 Current Account Deficit (US$M)** 167.8 371.6 Growth of Non-Metal Exports 51.3 32.5 (% change in current US$) Annualized Nominal T-Bill Interest Rate (91 days) 72.7 41.5 * Excluding grants and external interest payments ** Excluding grants and all interest payments 9. The Government is facing several serious macroeconomic challenges again in 1996. First, fiscal problems again arose in the first two months due to higher than expected domestic interest charges and the front loading of several spending categories, including the cost of national elections. Strong spending cuts were made in March to get the projected fiscal program back in balance, but the IMF postponed the ESAF review discussions in order to allow the time needed for the adjustment to take effect and to be able to then base its review on a full half-year performance. Second, the Govermnent is dealing with the twin challenges of ZCCM, instituting the emergency action plan in order to turn around short-term operating performance and putting in an action plan for the urgently needed privatization. Third, bilateral donors are closely monitoring the Government's actions with respect to macro-economic management, the management and privatization of ZCCM, and governance. The availability of a steady and sufficient supply of balance of payments assistance will depend on the Government's performance in these areas, particularly challenging in an election year. 10. If these challenges are met, the prospects for renewed economic growth in 1996 are good. The growth in GDP is expected to be 6 to 9 percent in 1996, depending on performance in agriculture and mining. (Based on plantings and rainfall to date, preliminary estimates suggest crop production will increase by over 40 percent in 1996.) The government's domestic balance (comparing domestic revenues without grants to domestic expenditure without interest on the external debt and donor financed capital spending) is projected to be in balance or to achieve a small surplus. With strong fiscal and monetary control and with maize prices projected to decline after May, inflation should fall to 10 percent (annualized) by end-1996. Revenue is projected to be maintained at about 16 percent of GDP in 1996, with improvements in tax administration and some broadening of tax base permitting some lowering of tax rates. The improved macro environment, resumption in economic growth, and declining domestic debt service payments will permit larger budget allocations for capital expenditures and social sector  - 5- spending. (Detailed projections are presented in the Key Indicators Table at Annex C.) This general macro framework is described in the recent Policy Framework Paper distributed to the Bank and Fund Boards in December 1995. 11. A critical ingredient for attaining sustaining growth in the medium-term will be the rapid expansion of non-copper exports, both because of the need to reduce dependence on international aid and because export expansion is the most promising source of increased demand to stimulate the growth process in Zambia. Therefore, Zambia's prospects for sustainable economic growth in the medium-term will depend on facilitating expansion in those sectors with good export potential, notably agriculture, agri-business, and tourism, while sustaining the domestic base in other manufacturing. Developments in the mining sector will continue to be important in determining Zambia's prospects for sustainable growth, however, both because of the mining sector's importance as an exporter and because the large size of the mining sector means it will continue to be a key determinant of employment, fiscal revenues, and the growth in demand for domestic goods and services. Restoring health to copper mining will entail both improving the efficiency of existing mines and attracting large quantities of private investment to develop new mines. Privatization of ZCCM will be essential to achieving both of these objectives. Privatization of ZCCM will be neither simple nor easy, however. This is a large and complicated company with a complex arrangement between the Government and the major private minority shareholder (Anglo-American). Many public services in the copperbelt are currently owned and managed by ZCCM. It has also been the flagship of the economy for a long time, and the process of transferring such a large and visible part of the economy to private and foreign shareholders will have to be managed carefully. 12. Overall, Zambia has the advantages of ample arable land and rainfall, significant raw materials, and a liberalized, pro-private sector economic environment. However, it also suffers from the structural imbalances brought on by two decades of economic mismanagement, and a deteriorating infrastructure and human resource base. As a result, even with good policies, increasing investment, rapid privatization (including the mines), and strong donor support, domestic output is projected to grow at only about 4.5 percent per year over the decade following drought recovery in 1996 and 1997. This will permit only modest growth in per capita consumption. Accelerated debt relief and forgiveness could release more resources to be directed towards growth, but sustainable economic growth and poverty reduction will mainly come about through steady policies and consistent action over a number of years.I II. ZAMBIA 'SADJUSTMENTPROGRAM 13. The aim of Zambia's economic program is to achieve a significant improvement in the living standard of all Zambians. The Government recognizes that this will depend l More details on the opportunities for growth and the policies needed to achieve it are discussed in the Prospects for Sustainable Growth in Zambia, scheduled for Gray Cover distribution in late June 1995.  -6- on setting Zambia on a path to sustainable, private sector-led growth. This in turn will depend on achieving and maintaining a stable macroeconomic environment, moving Zambia toward long-term external viability, and substantially upgrading the investment in Zambia's human resources and physical infrastructure. 14. Zambia has already accomplished most of the liberalization necessary to establish a sound economic environment for private sector growth and is well along in its efforts to privatize the parastatals and to redirect government to support private sector growth through more efficient provision of infrastructure and social services (para. 4). Many of these reforms were supported by the previous IDA adjustment operations as detailed in Annex G, including market reforms supported by the Economic Reform Credit (1991); privatization and business related legislation changes supported by the two Privatization and Industrial Reform Credits (1992 and 1993); social spending increases, land market legislation, and the cessation of budgetary outlays for Zambia Airways in the 1994 Economic and Social Adjustment Credit (ESAC); and reforms in mining and social security and the establishment of a VAT in the 1995 Economic Recovery and Investment Project (ERIP). As a result, within the fiscal area, most of the policy measures are in place, and the emphasis is shifting to administrative strengthening in revenue collection and expenditure management with the support of the IMF and several bilateral donors. In the financial area, most policy measures have been taken, and the focus is shifting to initiating a market in term finance and strengthening domestic financial institutions (areas to be supported by a forthcoming Enterprise Development Credit). Reforms in the mining sector are being supported under the existing adjustment credit (ERIP), an existing Mining TA credit, and a recently approved technical assistance operation. Continuing policy reforms in many key sectors are increasingly being supported under sector investment programs (SIPs). Health and agriculture SIPs are under implementation, and roads and education SIPs are being prepared. 15. The current economic reform program builds on these accomplishments. The current status of Zambia's economic reform program, along with future actions, is summarized below under four general headings: a) macroeconomic management; b) privatization and parastatal management; c) initiatives to foster private sector growth; and d) investment in human resources and other social sector initiatives. A. Macroeconomic Management 16. The domestic fiscal deficit (comparing revenue without grants to expenditure without external interest and foreign financed capital) has continued to fall since 1992, and it will be essential to sustain this achievement and to strive for greater efficiencies in the use of fiscal resources. Over the next three years (1996-98), the Government aims to achieve a continued decline in the total deficit (comparing revenue inclusive of grants to expenditures inclusive of foreign debt service and foreign financed capital expenditures), bringing it down from 2.7 percent in 1995 to a near balance in 1996, and then maintaining modest surpluses in 1997 and 1998. This will be achieved by pursuing tight expenditure policies while broadening the tax base and reducing distortions in the tax  - 7- system. Donor assistance is expected to be sufficient to cover all expected scheduled external debt service obligations and a large share of capital expenditures. This will permit the Government to reduce its stock of domestic debt, thereby allowing an expansion in private sector credit. 17. The Government's objective is to increase revenue to about 17 percent of GDP in 1997 (and eventually to 18 percent after the year 2000), while at the same time continuing to reduce distortions in the tax system. The major tax policy change in 1995 was the introduction of a value-added tax (VAT) on July 1. During 1996 to 1998, policies will be considered to broaden the tax base and to reduce evasion. The personal income tax will include non-cash benefits in the base. Most customs duty exemptions, including for Government purchases, have been eliminated as part of the 1996 Budget. The Government will continue to strengthen the Zambia Revenue Authority in order to increase the effective tax yield. 18. The share of total government expenditure in GDP is projected to drop from 28.7 percent in 1994 to below 20 percent in 1998, primarily because of reductions in interest payments. The structure of public expenditure is undergoing a fundamental transformation as Zambia redefines the role of government in light of the previous failed efforts at government intervention, declining resources, and the deterioration in Zambia's infrastructure and human resource base. Therefore, despite the overall reduction in the share of GDP going to government, the real level of expenditure for social services and infrastructure will increase, in part because of projected economic growth. The expenditure program will be designed in such a way as to facilitate the implementation of the Sector Investment Programs (SIPs) and therefore to make more effective use of external project assistance. The allocations within the social sectors will change in favor of those activities and operations that most effectively reach the poor, thus building on actions supported by the 1994 adjustment operation (ESAC). The Government will continue to improve expenditure management through strict monitoring of expenditure commitments by ministries and departments. A system is also being put in place which will make monthly budget releases more predictable, and an action plan to strengthen the public procurement process is being implemented. 19. The objectives for monetary policy are to build on the achievements in reducing inflation and to maintain a stable financial environment conducive to financial deepening. Inflation is expected to fall below 10 percent by 1997. As macroeconomic stability is consolidated and the economy recovers, there will be a growth in demand for real balances, and this should permit real growth in the money supply without re-igniting inflation. 20. With import and foreign exchange controls removed (with support from previous adjustment operations), focus on the external sector is shifting to establishing a viable long-term balance of payments position. This requires developing the capacity to withstand external shocks from fluctuations in such variables as the weather and copper prices, as well as reducing Zambia's dependence on copper receipts and donor assistance  - 8- through strengthening non-copper exports (for which trade policy reforms discussed in paras. 40 to 42 below will be important). Building external reserves will be a key element of this strategy along with the maintenance of a market-determined exchange rate. Bank of Zambia operations in the exchange market will be aimed at achieving the desired accumulation of reserves and smoothing sharp short-term fluctuations in the exchange rate. Reserves will not be used to defend an exchange rate which appears out of line with market fundamentals and the longer-term goal of external viability. B. Privatization and Parastatal Management 21. Zambia is making rapid progress on the privatization program which will eventually transfer all 160 parastatal companies to private ownership. More than half of those are scheduled for sale by the end of 1996. As of end March 1996, 40 companies had been sold or liquidated, and total receipts were at US $43 million. As part of the program, the Government has enacted a sound legal framework, established a semi- autonomous privatization agency, and closed the previous parastatal management holding companies (with support from two IDA adjustment operations and bilateral sources). Companies, while they are being privatized, have full autonomy on operational matters and pricing policies, but they are only allowed to undertake emergency rehabilitation or quick pay-back investments that will be fully funded out of earnings prior to divestiture. They are not permitted to enter new lines of business, and the Government is not providing them any financial support. The Government is also moving to reform those parastatals, mainly the public utilities (such as electric power, telephone, and the oil pipeline and marketing companies), that will remain in the public sector for the next few years. These enterprises are to remain autonomous in their pricing policies and management decisions, and the Government has withdrawn all financial support. The Government has established regulatory agencies and has concluded negotiating performance contracts with these utilities. The Government has requested IDA's continued support for this privatization program to prepare companies, including ZCCM, for sale. A new IDA credit (ERIP TA) approved by the Board in early June will provide about US$16 million to support ZPA's activities and the privatization of ZCCM. 22. Mining remains a critical sector. Private sector capital and management will be essential to improving efficiency and maintaining production of existing mines and to replacing these mines with new ones and thus to moving Zambia to a more self-reliant external position (para. 11). The process of privatizing ZCCM is underway with the appointment of the Government Mining Privatization Team and the appointment of legal and merchant banking advisors. (These efforts are a major focus of the current adjustment operation, ERIP.) A specific action plan to privatize ZCCM, a condition of Second Tranche Release under ERIP, has been adopted by Government. Rapid progress in implementing that plan will be essential. In the interim, improving the operating efficiency and production levels at ZCCM will be a vital determinant of economic performance in 1996.  - 9- C. Fostering Private Sector Growth 23. Zambia's business climate has improved markedly over the past four years in response to liberalization, deregulation, and the beginnings of privatization, but overall economic growth has not yet accelerated. In a survey of manufacturing firms as part of the Bank's Regional Program for Enterprise Development in July and August 1994, very few firms mentioned government regulations, uncertainty about government policies, or access to foreign exchange as priority concerns. The problems they did mention most frequently were access to credit, poor and overpriced infrastructure, and competition from imports. In particular, the survey revealed that the trade regime was still an obstacle to potential exporters and to many producers for the domestic market. The Government addressed these problems by a general reduction in customs duties, coupled with the removal of most exemptions, as part of the 1996 Budget, including payment of customs duties by government itself. 24. There has been considerable progress in reforming Zambia's rmancial system. Consistent with the policy of relying on the private sector for capital formation and credit decisions, specialized financial institutions currently owned by the Government are being privatized or liquidated, and no new budget funds are being provided to them. The Development Bank of Zambia is being converted to an apex institution to on-lend to the private sector through commercial banking institutions external funds available on a concessional basis to the Zambian Government. These initiatives are being supported under previous adjustment operations and through a proposed Enterprise Development Project which is was appraised in June 1996. The next steps include further modernization to the banking legislation, strengthening the income position of the Bank of Zambia (BOZ), and increasing the capacity of BOZ to supervise the operations of commercial banks and other financial institutions. 25. Increased reliance on private markets for the efficient allocation of resources requires that the Government promote and facilitate the development of deep and well functioning private markets. Improved supervision of financial institutions is one key aspect of this. For another, the Government will implement by the end of 1996 all aspects of the 1995 Land Act, including setting up of the Land Tribunal, in order to provide an active and efficient market in land already under leasehold, to make unused land available to new investors, and to provide a quick and fair process for the conversion of customary land to leasehold status. Similarly, the process of granting legal recognition to informal urban settlements will be resumed in order to increase the security of inhabitants and to stimulate new investment. In a related area, Government will begin the implementation of the National Housing Policy adopted in 1995, including getting Government, currently a major owner of residential housing, out of the housing business; working to reduce the legal requirement for the private sector to provide housing to employees; facilitating the creation of savings co-operatives; and reviewing the regulations covering housing standards regulations.  - 10- 26. Since 1991, the Government has introduced several policy changes affecting the labor market. In 1991, Zambia amended the article in the Employment of Women, Young Persons and Children Act to allow night work by women in industrial undertakings, thereby reducing discrimination against women in the labor market. It has also started a process to repeal the article prohibiting women from working underground in the mines, the main formal sector employer in Zambia. In 1992, as part of the privatization program, the Government addressed issues relating to redundancy and retrenchment in firms subject to privatization, payment of redundancy packages, and establishing social safety nets, including training in entrepreneurship and business development. In 1995, it introduced regulations regarding pension funds and selected a management company to administer the public pension fund. However, there are still legal issues that inhibit smooth functioning of the labor market. Because of the existence of several legally mandated fringe benefits and allowances, including the provision of housing or housing allowances, labor cost in Zambia is relatively high. This has stifled job creation and restricted the competitiveness of Zambian firms. In addition, laws hinder the employment of labor for casual work because such employment becomes permanent, with all the attendant benefits, if it exceeds three days. Where collective bargaining is the rule for determining wages and other benefits, agreement reached at the sectoral level applies to all enterprises in the sector, regardless of size and capacity to pay. To address these problems, the Government has started a process to amend the Employment and the Industrial and Labor Relations Acts. 27. Infrastructural weaknesses have become a major deterrent to private sector growth and investment in Zambia. Zambia has a fairly extensive trunk road network, but maintenance has been poor, and the smaller feeder roads are in particularly bad shape. To address this issue, the Government has launched a major program to rehabilitate the road system. A Task Force on Maintenance and Rehabilitation, established in 1992 as a stop gap measure, has succeeded in focusing attention on road rehabilitation throughout the country. Public spending is being allocated to avoid further deterioration and to improve those components of the road network shown to be economically justifiable. The Government has also adopted a sustainable long-term roads financing plan based on increased contributions from road users and has set up a Roads Fund. The National Roads Board, with members from the private sector, administers these funds and sets the priorities for road maintenance. As part of the 1995 Budget, the Fuel Levy was increased to K30 per liter to help finance the Roads Fund, and this has been increased to K40 (about 3 US cents) in 1996. To support the Government in these reforms, a Road Sector Investment Program, supported by IDA and several other donors, is under preparation. 28. Zambia's geographic isolation and long-standing inward orientation have inhibited the country's ability to integrate in new ways into the international economy. Information gaps, plus other weaknesses in specific key markets, argue for prudent public sector initiatives to facilitate private sector development in Zambia. However, it is essential that these approaches be driven by private sector demand, as free as possible from political interference, and modest in their administrative requirements. Within the Ministry of Agriculture, the emphasis will be on research and extension, feeder roads, and  - 11- a new Rural Development Fund designed to help finance new investments for small- holders (all supported by aid partners as part of the Agricultural Sector Investment Program). Some other specific options which are being explored are: programs to accelerate private participation in agricultural marketing; initiatives to encourage out- grower operations by agri-business and commercial farmers; matching grant programs to encourage upgrading by industrial firms; consolidation of existing agencies whose purpose is to support private sector development (e.g., combining the Export Board of Zambia and the Zambia Investment Center); and the provision of term finance (at market rates of interest), with the funds retailed through commercial banks via an apex institution. D. Investing in Human Resources and other Social Services 29. Improving the delivery of social services has a positive impact not only on people's current standard of living, but also on their ability to contribute to long-term growth. The Government's objective is to reverse the decline of the past 15-20 years in the delivery of social services and thus to achieve this double impact. However, the Government's ability to do so has been constrained by unclear policies, shrinking financial resources, and poor institutional mechanisms. Newer and clearer policy directions are now required -- in part in order to match the profound changes taking place in the country's economy. The Government has begun to formulate the necessary policies and guidelines in these areas and to put in place the required mechanisms. This work is being supported in part under the Health Sector Investment Program. A similar program is under preparation for the education sector. 30. Overall budget provision to the social sectors is improving, although still not adequate. Increased resources for the social sectors will not achieve the desired objective, however, if the institutions delivering social services are weak and inefficient. Many of these institutions require increased administrative capacity. The Governnent has begun addressing this issue through the Public Service Reform Program and through decentralization in some ministries. Sector investment operations are being developed in key sectors both to coordinate donor assistance more effectively and to focus internal and external support on building strong and effective domestic institutions capable of delivering vital public services. Technical assistance is being provided to the Public Sector Reform Program, mostly from bilateral sources. Once the Government's plans are firmed up, additional IDA assistance could be made available. 31. The Government has made remarkable achievements in mitigating the adverse impacts of a series of droughts since 1992 and has initiated several social safety net programs addressing the needs of vulnerable groups and those exposed to adverse economic shocks. In the future, the Government will concentrate on: (i) sustaining the process of devolution of program design and implementation to local community-based groups; (ii) increasing the financial and technical support to existing programs; (iii) expanding labor-based infrastructure maintenance in urban and rural areas; and (iv) reforming the Public Welfare Assistance Scheme to gain greater community and non-  - 12- Governmental involvement. The Ministries of Community Development and Social Services, Health, and Education are working together to introduce health and education cost support for children coming from poor households. E. Poverty Reduction and Alleviation 32. The most powerful mechanism for the reduction of poverty in the long-term continues to be achieving broad-based economic growth. Consequently, there is a need to foster economic growth generally while at the same time addressing poverty reduction objectives whenever possible. Zambia's development strategy will thus emphasize adopting a growth and macroeconomic strategy that includes expanded opportunities for all income levels and facilitates the poor's response to those reforms, with a particular emphasis on investing in human resources and improving safety net programs. 33. Some of the specific elements of this pro-poor growth strategy are: (i) improving the real returns to agriculture by sustaining terms of trade improvement; (ii) ensuring better market access for small farmers by improving market information systems and accelerating the feeder roads program; (iii) improving agricultural productivity by reducing women's time constraint (e.g., by improving their access to clean water); (iv) facilitating the linkage between the commercial and emergent farming sector and the smallholder sector through out-grower schemes and better focused research and extension programs; (v) promoting labor-based public works in road maintenance and rehabilitation; and (vi) improving beneficiary participation in program design and implementation (as was done in the development of the urban water supply project and the health and agriculture investment operations). Investing in human resources by providing more adequate and reliable social services, as discussed above, will contribute to Zambia's long-term prospects for growth and will also immediately improve the quality of life for recipients. Zambia can improve social services primarily by putting sound policies, sufficient funding, and appropriate delivery mechanisms in place. A Poverty Alleviation Task Force has been established to improve the coordination and implementation of poverty-related activities and to act as an infornation resource center. F. Medium Term Prospects and Financing Plan 34. One of the most challenging aspects of Zambia's economic reform program is to establish a viable and self-reliant balance of payments that is compatible with Zambia meeting its external obligations and achieving modest economic growth. This is particularly difficult because Zambia faces both a deteriorating current account deficit due to the limited short-term prospects for copper exports as well as an exceptional level of external debt, nearly half of which is multilateral. Mining exports (which account for about 85 percent of Zambia's total exports) are likely to be lower in real terms (i.e., in terms of the ability to purchase imports) in the year 2000 than they are now, even with good policy implementation and successful privatization (although copper exports could recover after 2005 with sufficient new investment). Thus, even with maximum efforts to expand other exports and to limit the growth in the demand for imports, modest levels of  - 13- economic growth will mean an increase in the current account deficit during the coming decade. At the same time, Zambia's external debt of nearly twice annual GDP will require substantial payments even with successful negotiations with creditors. Zambia is a severely indebted low income country and a prime candidate for exceptional debt relief both to provide more resources to growth and to reduce Zambia's excessive reliance on external assistance. Thus achieving both economic growth and an eventual movement towards greater self-reliance will require extraordinary levels of donor grant assistance and debt forgiveness for some considerable time, which will in turn require a particularly close partnership with the international community. 35. Zambia's external financing needs for 1996 were discussed at the Consultative Group (CG) Meeting held in Bournemouth, U.K. in December 1995. The need for balance of payments assistance in 1996 was estimated to be about US$450 million, less whatever rescheduling assistance Zambia might receive from the Paris Club. Based on preliminary indications of carry-over and possible new assistance, the meeting concluded that Zambia's external financing needs could be met in 1996, provided policy performance was sound. In particular, new donor assistance was quite clearly and strongly predicated on good governance performance as well as sound economic policies. Those concerns were reiterated at an informal donors meeting in Paris on April 19, 1996. Improvements in the performance of ZCCM, a fair and open election process, and vigorous actions to combat corruption are considered to be key actions by the international aid community. Recent decisions by the Government, most particularly the adoption of constitutional changes that would prohibit the previous President from contesting this year's elections, have resulted in the withholding of most bilateral balance of payments assistance. In the short-term, the program can be maintained with existing resources, but a positive relationship with the bilateral donors will need to be reestablished if the continuing financial requirements of the program are to be met. III THE PROPOSED CREDIT 36. This proposed Credit would be the sixth adjustment operation for Zambia in the past six years. Zambia's economic reform program is mature and well advanced. As a result, many key reforms have been accomplished, and many are being supported by other investment and adjustment operations. The emphasis now is on consolidation and implementation of these reformns. The central theme of the proposed operation is the reduction of poverty through widely-shared economic growth and the alleviation of poverty through enhanced delivery of social services. It will follow up on many of the elements supported in the (first) Economic and Social Adjustment Credit (1994). It will explicitly support important actions in three of the four parts of Zambia's Adjustment Program described above -- macroeconomic management, fostering private sector growth, and investing in human resources and other social services. The fourth, privatization and parastatal management, has been supported by previous adjustment operations (PIRCs in 1992 and 1993 and ERIP in 1995) and by technical assistance credits. Within this credit, maintaining fiscal balance and strengthening procurement policy are key aspects of macroeconomic management. Actions to directly support  - 14- private sector growth include tariff reform, implementing the Land Act of 1995, and early steps in regularizing informal urban settlements and reforming labor market policy. Finally, support for ongoing human resource and other social sector initiatives will involve improving the allocation of budget resources to and within these sectors and clarifying and implementing sound policies. These elements were chosen to complement ongoing efforts; their inclusion is intended to clarify policy directions and/or accelerate implementation of key policy changes. A. Macroeconomic Management 37. The overall objective in this area is to maintain a stable macroeconomic environment. The specific fiscal and monetary targets for 1996 were developed in the context of the ESAF-supported program (approved by the IMF last December). However, a Fund mission in February was unable to complete discussions concerning the mid-term review of the ESAF arrangements. Following that mission, policy adjustments were made, and preliminary indications are that policy performance strengthened considerably in March. A mission visited Lusaka in late April to complete the Article IV discussions and to take stock of the macroeconomic situation. The Article IV consultation is expected to be reviewed by the IMF Board in early July. Given satisfactory performance against revised targets, the mid-term ESAF review should be concluded early in the second half of the year. Continued satisfactory implementation of an acceptable macroeconomic framework will be essential for Second Tranche Release. 38. Within necessarily tight fiscal limits, it is particularly important that money be well spent. This has two aspects. First, the distribution of actual disbursements both to and within sectors should reflect the government's development priorities. The particular targets for the social sectors are discussed below and in Annex A of the Letter of Development Policy. Second, it is essential that the process for spending these monies be open, transparent, and accountable in order to achieve maximum value for money. In that regard, strengthening the public procurement process is an increasingly pressing priority. This strengthening is important both to get more and better public services for a given level of spending and to ensure that local producers understand they are to compete solely on the basis of price and quality. This strengthening will also reassure donors that their assistance is being used as carefully as possible and for the purposes intended. As part of that program, the Government has initiated through the Zambia National Tender Board (ZNTB) a consultation process with the major clients and users of public procurement in Zambia to discuss how best to improve timeliness, transparency, and accountability. The Government has also adopted a time-bound action plan covering both the short-term (1996) and longer-term agenda for strengthening the process of public procurement. This includes decentralizing the implementation of public procurement to individual ministries and local governments as quickly as possible, training and institutional strengthening for both ZNTB and the Ministerial Procurement Units (MPUs), and providing stronger and more effective oversight of important procurement decisions. Satisfactory implementation of those portions of the plan scheduled for completion in 1996 will be a condition of Second Tranche Release.  - 15- B. Fostering Private Sector Growth 39. Continued progress on privatization will be an important component of the Government's program. In particular, the privatization of ZCCM will be essential both to improve management of existing mines and to attract the capital needed to exploit new opportunities. The action plan recently adopted by the Government presents a credible strategy for rapid privatization of ZCCM while pursuing the most promising new venture, Konkola Deep, as a separate private sector-directed project. Satisfactory progress in implementing that action plan will be a condition of Second Tranche Release. 40. In spite of the abolition of import controls and a substantial reduction in the top customs duty rates since 1991, Zambia's trade regime at the end of 1995 still made it difficult for non-traditional exporters, and for many import competing enterprises, to be competitive. Many basic materials, capital goods (other than those exempt as part of incentives granted on a project-by-project basis by the Investment Center) and intermediate goods faced customs duties of 20 and 30 percent when sourced outside COMESA (Common Market for East and Southern Africa). This made it very difficult for exporters that use a large amount of imported materials or intermediate goods to be competitive. An export duty drawback system can never provide fully effective relief from the costs of taxes on inputs. Even if it did provide a timely cash refund (or an effective duty exemption system was implemented for exporters), exporters would still be indirectly disadvantaged by the impact of customs protection on the equilibrium exchange rate. At the same time, many import substituting activities had lower nominal protection on their outputs (because of exemptions, smuggling, and the 60 percent concession on COMESA imports) than the customs duty rates paid on inputs. 41. To address these difficulties, an integrated package of customs duty reductions and the removal of most exemptions was implemented with the 1996 Budget. This package was the result of a review by policy makers in Zambia, with inputs from the private sector, tax administrators (the Zambia Revenue Authority), and Bank and IMF staff. The package was designed with political economy and administrative feasibility issues taken into account. As part of this package, the Government has reduced customs tariffs on most goods by 15 percent (resulting in a tariff structure ranging from 0 to 5 percent for most capital goods and basic materials, 15 percent for intermediate goods, and 25 percent for final products). This will provide exporters with access to inputs at near- world market prices without recourse to duty drawbacks and thereby strengthen their competitiveness. The alternative of a flat customs duty was considered, but for it to be low enough to resist pressures for widespread exemptions, it would not have yielded sufficient revenue. It would effectively have become a two-tiered structure -- 0 and 15 to 20 percent -- with the revenue impact of the higher rates continually in danger of further erosion from smuggling and more exemptions. Moreover, exporters would still not be able to get relief, and import substitution activities that face competition from COMESA- sourced, duty exempt, or smuggled goods would also still be at a disadvantage.  - 16- 42. Revenue will be maintained by significantly eliminating existing tariff exemptions and by keeping the 5 percent import declaration fee in place for 1996. A review of customs duty exemptions was undertaken with the view to removing as many exemptions as possible without violating international agreements. As a result, the Government will pay duty on its imports, there will be no more investment exemptions (and existing ones will be allowed to lapse), goods imported by returning residents will not be exempt unless they have been abroad for 5 years (and cars will not be exempt even then), duty exempt cars (e.g. from diplomats) will not be resold to non-exempt persons without paying duty and charities will pay duty and get a refund (to contain abuse). Ad hoc exemptions provided in 1995 will be allowed to lapse, and custom duty exemptions and refunds will be limited to exporters, miners (under S169 of 1996), firms that can prove damage from tariff anomalies (under S123 of 1994), and approved providers of health, education, and humanitarian services. No new exemptions will be provided in 1996 (except for time bound commodity specific relief to address national emergencies) as a condition of Second Tranche Release. The Government will also continue to ensure that the Zambia Revenue Authority has the resources necessary to provide duty drawback credits in a timely manner. 43. Transferring land under leasehold in Zambia has long been hampered by outmnoded legislation and slow processing, and the process for converting customary land into leasehold has not been well defined. The Parliament of Zambia passed legislation in 1995 (the 1995 Lands Act), and the focus is now on implementing that legislation and improving administrative performance within the Ministry of Lands. Timely implementation of the Act is important to make land available to new investors and to permit existing farmers to convert more easily to leasehold status while protecting those currently under customary tenure. 44. The Government has prepared drafts of rules and regulations for the implementation of the Lands Act of 1995, including the Land Development Fund, the Lands Tribunal and Administration. The Land Development Fund is intended to enable the Ministry of Lands and local Councils to improve infrastructure, such as feeder roads, which is needed to facilitate the development of land not yet under cultivation in instances of clearly identified market failure. The Lands Tribunal is a specialized roving court to which any grievance concerning land, including grievances against the administrative authorities, may be brought for redress. The "administration" section of the regulations covers various definitional and procedural aspects of the Lands Act. The Ministry has simplified and streamlined the procedures involved in the conversion of land from customary tenure to leasehold. These revised procedures were issued as a Land Circular dated April 12, 1996. The Ministry has undertaken to make substantial progress in implementing all aspects of the Lands Act of 1995 by the end of 1996 as a condition of Second Tranche Release. This will include the appointment of members and the first sitting of the Lands Tribunal to adopt internal operating procedures. 45. The Government has recognized that slow processing of land transfers and applications for conversion from customary land to leasehold is stifling the market and  - 17- hampering the development of the private sector. In order to improve its operating efficiency, the Ministry of Lands has undertaken to obtain objective measures of its performance, and to set targets for improvement. To this end, the Ministry of Lands executed a baseline survey of its administrative performance. On the basis of the survey, the Ministry of Lands has developed a set of performance objectives which it wishes to accomplish in 1996, including shortening the mean time lapses in the lease issuance process and reducing the backlog in processing numbered properties. Achieving these improvements in efficiency will serve as a condition for the Second Tranche Release. Monitoring of these objectives during 1996 will be done through regularly revisiting the baseline survey. The Ministry will also design a more comprehensive statistical reporting system for monitoring its progress in forthcoming years. 46. Zambia has long had a tradition of employer-provided housing and other mandated fringe benefits. As a result, the Government is the largest landholder in Zambia, and the requirements for tied housing impede labor mobility and discourage the development of private housing. The Ministry of Local Government has prepared, and Cabinet has approved, a National Housing Policy document which states, among other things, that the Government intends ultimately to divest itself of its tied housing in order to promote the private housing sector. To this end, the Ministry of Local Government and Housing, together with the Ministry of Works and Supply, will establish the modalities for the disposal of the housing stock in 1996. The Ministry intends to undertake a study of the regulatory framework governing housing, including building codes and health regulations, in order to make them appropriate for a large subset of urban housing. These policies are reflected in the Letter of Development Policy. 47. In 1980, 58 percent of Lusaka residents lived in urban settlements considered as "informal", i.e., without formal title available to the inhabitants. These settlements are classified as either squatter, upgrading, or site and service. By 1990, this number had increased to 70 percent. There are two broad categories of informal settlements: those which are illegal because they have not been "recognized" by the local city council, and those which have been "recognized" but which have not yet been "declared", that is, duly surveyed, numbered and approved by the Ministry of Local Government and Housing. Only after "declaration" may formal title be issued to property owners. The "unrecognized" communities could potentially be subjected to removal. Due to this uncertainty, very few residents in such areas have access to vital services such as water, electricity and roads. Nevertheless these "unrecognized" settlements are long-standing and permanent in nature. The communities which have been "recognized" but not declared may stay put, and they frequently do receive services from the Lusaka City Council, donors and NGOs, but the lack of formal title prevents them from obtaining bank loans to improve their properties. Full legalization, i.e., "recognition" followed by "declaration", would provide a powerful impetus for economic growth and would significantly improve the living conditions of thousands of middle- and lower-income Zambians without substantial public outlays.  - 18- 48. Accordingly, an action plan has been adopted with specific goals for 1996 and beyond, and the Government has undertaken to take all actions in its power to move forward with the process of recognition and declaration of informal urban settlements as a condition of the Second Tranche Release. 49. In the area of labor regulation, the conclusions of the Tripartite Council (comprising Government, employer, and union representatives) on labor legislation (particularly on reducing the legal requirements for private employers to provide housing) have been reflected in the revised Employment Act submitted to the Cabinet Legislation Committee in April 1996, and the revised Industrial and Labor Relations Act will be submitted to the same Committee later in the year as a condition of Second Tranche Release of the proposed credit. The amendment of the Employment Act will repeal the article relating to the provision of housing or housing allowance by the employer (thereby making the labor law consistent with the National Housing Policy) and will relax the definition of casual labor in order to accommodate the short, intermittent and geographically shifting demand for labor by such industries as construction. These changes will reduce the housing related cost and improve the absorption of labor in the economy. The amendments to the Industrial and Labor Relations Act will enable each enterprise to have separate collective bargaining, as opposed to the sector-wide bargaining mandated by current law, so that labor benefits will be commensurate with the capacity of each enterprise to pay thus facilitating market entry. C. Investing in Human Resources and Other Social Services 50. Budget allocations to the social sectors will continue to be an important part of the Government's economic reform program. The overall budget provisions to the social sectors, and particularly the specific allocations to key areas within those sectors, are still inadequate. Despite some increases in the percentage allocations to these areas, the delivery of some key services has continued to deteriorate as a result of shrinking total revenues. The Government wishes to halt this deterioration and to begin increasing the level and quality of social services. In order to do so, it identified and singled out several critical inputs necessary for the delivery of these services and increased the budget allocations made to them for 1994 and 1995. However, disappointing revenue collections, as well as over-runs in non-priority areas and inadequate budget release practices, prevented the Government from disbursing the allocated funds as planned. New ways are being sought to protect, and gradually to increase, public spending for critical inputs and services. As a start, the Government has retained the overall share of the social sectors in the national budget in 1996. Moreover, it has protected, and in some cases increased, the allocation to priority areas such as drugs and the recurrent costs of running district clinics in the Ministry of Health, books and study materials in the Ministry of Education, chemicals for the treatment of water in the Ministry of Local Govermment and Housing, program funds in the National Food and Nutrition Commission, and counterpart funds which are necessary to sustain key donor-funded projects. The Government has also prepared a policy statement on the operation of the Cash Budget with a set of clear, transparent guidelines for budget releases. During the  - 19- year, it will release funds in accordance with the authorized budget and with these guidelines. Government spending in the social sector in 1996 will be at least 34 percent of non-interest domestic expenditure, and proposed expenditure levels for specific social sector categories are specified in the Letter of Development Policy. Actual disbursements are being monitored on an on-going basis and will be reviewed by IDA prior to Second Tranche Release. This will ensure that the percentage shares for health, education, water and sanitation sectors, and social safety nets set out in the budget will be maintained and that the absolute amounts allocated for the small but critical inputs to service delivery (such as drugs) as set out in Annex A of the Letter of Development Policy will be fully disbursed. 51. The improved delivery of social services depends also on clear policies and specific plans for implementation. Three areas of policy are of particular concern in this operation. First, the Ministry of Health needs a national policy on drugs, which will clarify its objectives with respect to the provision of drugs and its strategies regarding drug procurement. The present inefficiencies in the procurement, distribution, and use of drugs in Zambia must be addressed quickly if the broader health sector reforms are to succeed. To that end, the Ministry has started working on a National Drug Policy in the context of its Health Sector program. Second, the institutions in the area of nutrition are fragmented, weak, and grossly under-funded, and the Government lacks a clear national policy on nutrition. Third, the Government has recently made some effective use of NGOs in the provision of public services, but the relationship has been difficult at times. In order to improve this relationship and to make better use of NGOs, particularly in the provision of welfare and safety net programs, the Government has initiated a series of activities to formulate a policy statement with respect to their role. Several aid organizations that are particularly interested in increasing the delivery of social services through NGOs have agreed to provide technical and financial support for a participatory policy formulation effort between the Government and the NGOs. Completing the nutrition study and adopting suitable policy recommendations in these three areas will be a condition of Second Tranche Release. 52. The Government is dealing with other important social issues, formulating not only policies and strategies, but also detailed implementation plans. One example refers to the inability of very poor families to pay school fees and medical care fees. The Ministries of Education and Health have formulated policies to ensure that these poor families are not denied access to education and health services. These policies are to be implemented by the ministry of Community Development and Social Services through its Public Welfare Assistance Scheme. However, the policies are not operational yet because of the lack of targeting guidelines and implementation mechanisms. Both the guidelines and the mechanisms will be introduced this year. Work has already started on the development of a Vulnerability Profile which will serve as the basis for the formulation of the targeting guidelines. Another example refers to difficulties experienced by the Ministry of Education in controlling the number of trained and untrained teachers in its employ, and containing and budgeting adequately for personal emoluments. The Ministry has formulated a strategy consisting of a better collection and  - 20- maintenance of teachers records, stricter monitoring of the establishment register, the use of pupil-to-teacher norms in the creation of new posts, and several other measures. This strategy will be implemented in 1996. Government's current and planned actions in these areas are indicated in the Letter of Development Policy. D. Poverty Impact 53. This Credit will improve the prospects of the poor in Zambia by supporting the Government in its effort to stay the course on economic policy, including the provision of funds for human resource investment and other social services. With stable policies and good rain, it is expected that economic output will increase sharply in 1996 (after two successive years of decline) thus expanding real income and employment opportunities. Continued success against inflation will also tend to benefit the poorer groups. The improved tariff regime will benefit exporters who tend to be more labor intensive. Regularizing informal urban settlements will greatly improve the security of many of the urban poor and will further expand employment opportunities in the construction area. However, there are also areas of concern. For example, unless carefully handled and closely monitored, the acceleration of the conversion of customary land to leasehold could result in the loss of land rights by smallholders, as influential individuals living under customary tenure extend their boundaries, proceed to obtain leasehold tenure, and possibly sell the leasehold to prospective developers. The effective implementation of the Land Act, particularly the Land Tribunal, is intended to safeguard against this possible loss of rights by smallholders. As with the two previous adjustment credits, client surveys will be used to monitor some of the specific impact of this program upon the poor. Poverty monitoring surveys were taken in December 1994 and 1995, and a similar one is planned for December 1996. In addition, a monitoring system to measure progress in meeting the Government's internal goals in these areas will be set up (as mentioned above in the case of the Ministry of Lands), and the Ministry of Finance will collect and report on these results as part of its reporting to the Bank under this Credit. 54. In the social sectors, some proposed measures will have a direct impact on poverty whereas others will affect living standards more indirectly. Measures aimed at increasing budget provisions to the social sectors will impact poverty directly. Increases in the Ministry of Health's allocation to drugs and related targets for health expenditures in rural districts will directly increase the availability of basic and supplementary drugs at district hospitals and clinics. Increases in the allocation to the Public Welfare Assistance Scheme in the Ministry of Community Development will allow a larger number of people to receive needed care in local clinics and will also reduce the number of children who do not go to school due to inability to pay school fees. Finally, policy and institutional reforms in the social sectors will help the Government to create an institutional environment where the poor can be helped more effectively, but it may be some time before the impact of those improved services can be measured.  - 21- E. Environmental Impact 55. Addressing the issues related to the environment has been a vital part of Zambia's economic reform program. The Government completed a National Environmental Action Plan and is now preparing an environmental support program for possible IDA financing. This proposed credit does not have an environmental focus, but most of the specific effects should be positive. For example, making the market for land more orderly and efficient and regularizing informal urban settlements should increase the incentives of current tenants to conserve the land's value and will facilitate delivery of clean water and sanitation services. The primary environmental concerns arise fundamentally from the broader economic growth this Credit is intended to promote. In particular, increased land tenure security would encourage greater production in the agricultural sector and have implications for soil erosion and water management. Tariff reform and the ZCCM privatization should encourage new investments in manufacturing and mining which could have significant environmental impact if appropriate environmental impact assessments are not carried out and pollution regulations are not in place and in force. These issues are being addressed in the context of the development of an environmental support program. F. SpeciflcAgreements 56. A summary of the specific conditions for Second Tranche Release under the proposed ESAC II is presented below and in Annex E. All of these are expected to be met by early 1997. Specifying clearly the precise definition of satisfactory performance in several key areas over the year should help the Government to monitor their program during 1996 and should reduce uncertainty as to the requirements for continued assistance. To this end, the criteria that will be used in evaluating these tranche release conditions have been spelled out in the Letter of Development Policy and in some cases amplified in the Minutes of Negotiation. 57. Release of the Second Tranche will require maintenance of a satisfactory macroeconomic environment, satisfactory performance in implementing the overall program as described in the Letter of Development Policy, and the following proposed specific conditions: (a) The Government will have completed those portions of the Public Procurement Action Plan scheduled for completion in 1996 (para. 38); (b) The Government will have made satisfactory progress in carrying out the action plan for the privatization of ZCCM (para. 39). (c) The Government has maintained its policy of limiting new customs duty exceptions to time bound, commodity specific relief to address national emergencies (paras. 40-42);  - 22- (d) The government will have taken all necessary actions to implement the Land Act, No. 29 of 1995, including appointing of members and holding the first sitting of the Lands Tribunal to adopt its internal operating procedures as provided for in Part IV, Section 23 (2) of the Lands Act of 1995 (para. 44); (e) The government will have increased its efficiency in the processing of leasehold applications, including shortening the mean time lapses in the lease issuance process and reducing the backlog in processing numbered properties (para. 45); (f) The government will have taken all actions in its power to foster and promote regularization of informal urban settlements, as described in the Letter of Development Policy (para. 47-48); (g) The Government will have presented draft amendments to the Industrial and Labor Relations Act to the Cabinet Legislation Committee that will allow collective bargaining at the enterprise level (para. 49); (h) The Government spending in the social sectors in 1996 will be at least 34 percent of non-interest domestic expenditure, and the expenditure levels for specific categories of the social sectors, as provided in Annex A of the Letter of Development Policy, will have been met (para. 50); (i) The Government will have continued to make progress in strengthening policies in the social sectors (Para. 51). In particular, Government will have: (i) adopted a comprehensive national drug policy which addresses the issues listed in paragraph 69 in the Letter of Development Policy; (ii) completed a study on the National Commission for Food and Nutrition as outlined in the Letter of Development Policy and, based on this study, made decisions with respect to the role, management, and funding of the Commission; and (iii) based on consultations with NGOs, adopted a policy document on improving collaboration with NGOs. G. Implementation Arrangements 58. The proposed Credit of US$90 million will assist Zambia in meeting its external financing requirements during the second half of 1996 and in 1997. The Credit will be disbursed through the Bank of Zambia. Disbursement will be in two tranches. The first tranche in an amount of US$45 million will be released at effectiveness; the remaining US$45 million will be released when the conditions of Second Tranche release are  - 23- satisfied, which is expected to be about January 1997. Simplified Disbursement Procedures under Adjustment Credits will apply. The Borrower will open an account in the Central Bank. Upon IDA notification of tranche release for each tranche, proceeds of the credit will be deposited by IDA in this account at the request of the Borrower. If after deposits in this account, the proceeds of the credit are used for ineligible purposes (to finance items imported from non-member countries, or goods or services in the standard negative list), IDA will require the borrower to either (a) return that amount to the account for use for eligible purposes; or (b) refund the amount directly to IDA, in which case IDA will cancel an equivalent undisbursed amount of credit. Although routine audit of the account will not be required, IDA reserves the right to require it. As has been successful with previous adjustment operations, the Ministry of Finance will be responsible for the overall implementation and monitoring of reforms supported by ESAC II. This will involve continuing the monitoring and implementation unit already established, and revising its terms of reference accordingly. 59. Because of the links between the various components of the economic reform program being supported by the proposed Credit and the issues of poverty, income growth, and welfare improvement, it will be important for both the Bank and the Government to focus closely on the effectiveness of these programs and the impact that they are having on the intended beneficiaries, particularly the poor in Zambia. The ongoing poverty monitoring surveys discussed in paragraph 53, the surveys of Zambian enterprises being undertaken under the Regional Project for Enterprise Development (RPED), and additional monitoring mechanisms currently being established (e.g. that by the Ministry of Lands) are all part of this continuous assessment. These surveys have been and will continue to be supplemented by mission visits to enterprises and discussions with associations representing the private sector. In order to define the baseline from which the impact of the reforms can be measured, a survey will be undertaken to define on a sample basis the baseline status of the major target groups affected by the ESAC II program. In addition to this survey-based monitoring, the overall impact of this operation will be measured through a small set of key performance indicators. (See Annex H for more details.) The particular performance indicators to be maintained as part of the implementation of this project will include: a) budget allocations to the social sectors; b) non-traditional exports; c) inflation and real interest rates; and d) the efficiency of processing land transactions. H. Implementation Assistance 60. Administrative capacity remains a constraint on the ability of the Zambian Government to achieve the objectives of its economic recovery program. The Bank has been assisting the Government's efforts to upgrade this capacity while also being mindful that the direction of this program must remain firmly in Zambian hands. Several Bank projects are directed primarily at capacity building, including the Financial and Legal Management Upgrading Project (which includes administrative strengthening of public procurement), the Privatization and Industrial Reform Technical Assistance Project, the Transport Engineering Project and the recent Economic Recovery and Investment  - 24- Promotion Technical Assistance Project. All investment projects have major components addressing capacity issues, particularly the sector investment operations in health and agriculture (and under preparation in roads and education). Considerable use has also been made of the Implementation Development Fund in building capacity in advance of project investments. I. Cofinancing 61. Donors will continually be made aware of the subject matter and timing of this operation in case any would like to co-finance, but the indications from the most recent CG meeting were that donors would be making their own arrangements for balance of payments assistance. J. Program Benefits and Risk 62. The main benefits of this Credit will be increased economic growth, employment, and poverty reduction arising from a more competitive private sector (trade and land market reforms), a more efficient public sector (improved budget allocations and procurement reforms), sustained human resource investments, and more effective safety net provisions. These changes should not only increase income and employment opportunities for all groups, they should also lead to increased private savings and investment and expanded non-mining exports in order to increase Zambia's prospects for self reliance and to increased investment in human resources in order to increase Zambia's prospects for sustainable, longer-term economic growth. Most of the risks are due to factors external to the specific reforms supported by this Credit. First, there is always the risk in Zambia of major external shocks, particularly a major drop in copper revenues or another serious drought. Therefore, policies to improve the efficiency of ZCCM, to expand non-mining exports, and to diversify the agricultural sector into more drought-resistant crops are all vital to the long-term success of Zambia's program. More immediately, there is the prospect that deteriorating policy performance in an election year coupled with donor disaffection over issues of political governance could result in a break or a significant drop in external support that could threaten the economic recovery. Economic and political developments will be closely monitored, and the Bank and the other CG members will maintain an active dialogue throughout the year. IV. BANK OPERATIONS 63. The Bank's 1994 Poverty Assessment (PA), prepared with significant donor and Government involvement, provides a focus for Zambia's development objectives and frames the priorities of the Bank's assistance strategy for Zambia. The Bank is pursuing a three-pronged strategy to assist the Government in implementing the PA's action plan in Zambia: creating a stable macroeconomic environment favorable to growth; promoting private sector development and greater public sector efficiency; and targeting assistance to poor and vulnerable groups. Under the first prong of this strategy, Zambia has achieved some notable successes, and on balance, seems to have emerged from the most  - 25- difficult first stages of its economic transition. Yet Zambia's high debt burden and limited prospects for copper exports in the short term means that continued reform and balance of payments support will be needed for the next decade if economic growth is to be achieved. Under the second prong, past reforms have resulted in the economy being now among the most liberal in Africa. IDA is supporting activities through specific investment projects and sector investment operations (SIPs) to improve public sector efficiency and is helping to increase the private sector's role in the economy through continued support for the privatization program and through new initiatives aimed at providing enterprises with the information, technology, and term finance to adapt to the new business environment. In addition, IDA anticipates assisting the Government to arrest environmental deterioration and to put in place an effective environmental management system as a prerequisite of growth in Zambia. 64. To help target assistance to poor and vulnerable groups (the third prong of the strategy), stabilization and budget control conditions supported by IDA adjustment lending include protection of core expenditure items which provide services to the poor. Similarly, the Bank's investment lending emphasizes supporting community-based development initiatives, integrating growth and poverty reducing activities better within sectors, improving the delivery of services to the poor, and linking poverty reducing activities across sectors. 65. The Bank's program in Zambia includes adjustment lending, investment lending, economic and sector work, and aid coordination. Yearly Bank adjustment operations have been aimed at strengthening macroeconomic stabilization and market liberalization, supporting privatization and parastatal reform, reducing structural constraints on the delivery of social services, and strengthening the social safety net. In addition, IDA supports fifteen investment operations in agriculture, health, education, urban water and sanitation, and social recovery, and in technical assistance in mining, the petroleum sector, transport engineering, privatization and financial and legal reform. The Bank is now shifting its investment lending towards SIPs, whose aim is to increase public efficiency by avoiding the overlap, inconsistency, and administrative overload associated with a large number of separate donor-funded projects within each sector. As umbrella operations in which the Government takes the lead, SIPs are expected to promote dynamic growth both broadly, through improving the efficiency of service delivery within the sector, and in a targeted way, by financing pilot projects with a more immediate impact on the poor. They also provide long-term capacity building within the sector. SIPs have been approved in health (1994) and agriculture (1995). Future IDA investment operations will consist predominantly of similar operations under preparation in roads, environment, education and power, as well as a small number of narrowly targeted operations to achieve needed short-term gains not best addressed under the SIPs. 66. The Bank's economic and sector work will include broader studies to provide some of the analytical underpinning for the economic reforms. Recent examples of such work are the Policy Framework Papers (PFPs), the Public Expenditure Reviews (PERs), and the Prospects for Sustainable Growth paper. In addition, a Poverty Assessment has  - 26- provided additional insights into the breadth and nature of poverty in Zambia, explored the impact of the reform program on the poor and recommended further reforms and targeted investment programs. As Zambia is one of the most heavily indebted of the low income countries, considerable attention will continue to be paid to analyzing the country's prospects for further debt relief, and Zambia is one of the countries highlighted in the joint Bank-Fund study on Debt Sustainability for Heavily Indebted Poor Countries. Aid coordination will continue to figure prominently in the Bank's strategy. This includes: supporting the aid coordination that takes place in Lusaka under the leadership of the Government; chairing the Consultative Group which meets in Paris each year; and providing country consultations on Zambia in each Special Program of Assistance for Africa (SPA) meeting. V. COLLABORATION WITHIMF 67. The programs of the Bank and Fund have been closely coordinated since assistance to Zambia resumed in 1991. Balance of payments needs are jointly agreed among the Bank, the Fund, and the Government as part of the PFP and the Consultative Group processes. Bank proposals on trade and taxation policy, priority expenditures, and structural policy benchmarks are kept consistent with the program's fiscal targets, and the Fund's policy benchmarks are developed in close consultation with the Bank. The fourth Policy Framework Paper was approved by the Bank and Fund Boards in December 1995. Also in December, Zambia successfully completed its Rights Arrangement Program with the Fund, and the Fund Board approved a three year ESAF program. The mid-term review of the SAF/ESAF Program is scheduled for September 1996. VI. RECOMMENDATION 68. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association, and I recommend that the Executive Directors approve it. James D. Wolfensohn President by Gautam Kaji June 25, 1996  - 27 - Anmex A Page I of 2 Zambia - Social Indicators of Development MOr Sam4r . 11ien/ccem rretP Neut L_ _ es_ single__ __ _ kigM Ar Unit of srsmamte Saharn Lov- Liaas Indicator measure 19704S7 980-85 1989.94 Africa inceme fr7w Priority Povertv Indicators POVERTY Upper poverty line local curr. . .. 8.481 Headcount index * of pop. .. .. 86 Lower pover,y line local curr. . - 5.910 Headcoumt index % of pop. .. .. 76 GNP percapnta USs 600 350 350 500 390 1.670 SHORT TERM INCOlE INDICATORS Ursldlled urban wags local ur. .. .. .. .. - _ Unsk3led mral wages Rurud terms of us-da Conswoerpneeuidex 1987-100 9 46 12.764 _ Lower 'ne .. 45 4.277 .. .. Foa - 6 .. .. - Urban Rural .. 46 4.676 SOCIAL INDICATORS Public expenditure on basic socal scrvics % of GDP . .. 3.4 Gro enrollment rons Primary %a Nc age pop. 97 100 104 71 105 104 Male ' 105 106 109 77 112 105 Female - 88 94 99 64 98 101 Mor1irv Inant morulity per thou. live births 100 88 10J 92 55 36 Under 5 anaxity .. .. 178 161 101 47 Immunurnion M1eales * age grup 55.0 76.0 51.4 86.2 77.4 DPr .. 47.0 79.0 53.5 89.1 3LO Cild mlonuution (under-5) 24.1 26.5 26.3 _ 38.2 Life expectancy TotW e 47 51 47 52 63 67 Female. advay ge 3.3 2.3 0.9 3.5 2.4 6.4 Toul fertdity tm births per woman 6.9 6.9 6.0 5.9 33 127 Mammal mortality rte per 100.000 live biths _. 29 .. - Supplementary Poverty Indicators Expendi-res on socdi secuity % of totwl govt exp, 0.6 2.1 6.0 Social secrity covaage % mon. scow pop. .. - .. _ Acs to safe water total % of pop. 42.0 53.6 5J.9 Urban 86.0 70.0 76.2 Rura 16.0 41.0 42.3 .. _ Access to health car .. 70.0 .. Population growth rate GNP per capita growth rate Development dlamondb 6+, (aveng onuaL percent) a04 a(uda. peree) Lif xpecy 4 - ~~~~~~ ~~~~GNP Gems 2 - I - I CFI cLIII 1970-75 1980-t5 1989-94 1970-75 198045 1989.94A to s waow C Zambia Zambia - Low-incomeL.' L See the tedcnical notL. pJ8U7. b. r1 deveJopment diamond. buaed on four key indicators. shows the avemne Ievl of developmnt in the country compared with its incnme group. Seo in n.ducaoa.  - 28 - Annex A Page 2 of 2 Zambia - Social Indicators of Development Moest Same re snJnome rro!f New Latest singl year recezu 5O M lhigher Unit of esrat Saharan 'La income Indicator measure 1970-75 198045 1989.94 Africa income *Oup Resources and Expenditures fUMAN RESOURCES Population (mre"1994) thousands 4,841 6.862 9.203 571.902 3.182.21 1.096.881 Age dependency mnuo rano 0.96 1.04 0.98 0.94 0.66 0.63 Urban % of pop. 34.8 40.9 42.9 30.6 28.3 55.9 Poputiaon gmwth rate annual % 3.1 3.6 2.9 2.8 1.7 13 Urban 5.8 4.1 3.4 4.9 3.2 2.7 Labor force thousands 2.134 2.860 3.841 254.50 1.590.533 4S8.647 Agriculture % of labor force 78 75 75 65 67 36 Industy S 8 8 9 14 26 Femate 45 45 45 41 39 40 Labor partcipation ates Total % of pop. 44 42 42 44 50 4S Female 20 19 19 37 41 36 NATURAL RESOURCES Arec thou. sq. km 752.61 752.61 752.61 24273.83 40.391.42 40.594.43 Density pop. per sq. Jn 6.43 9.12 1 1.81 22.90 77.44 26.66 Agricultwallnd V. of land ara 47.08 47.33 47.45 50.61 52.42 41.05 Change in agnculural land annual % 0.04 0.09 0.00 0.01 0.16 -1.38 Agiculeural land under irrignson V 0.05 0.08 0.13 0.86 17.84 11.40 F* vsuant woodland thou. sq. km - 359.31 323.01 5323.14 7.632.00 5.969.25 Deforestanon (aet) % change. 1980-90 *- - 1.06 INCOME Household income Share of wop 20% of households V. of income .. - 50 Shre of boaiom 40% of horseho 12 .. _ Share of bottom 20% of households _ - 4 .. _ _ EPmDRE Food % ofGDP 22.7 25.8 .. _ _ _ Staples 5.9 5.5 .. _ _ Meat, fish, milk. chlee eggs 10.0 12.8 - _ .. Cmal imports bouLmeric tclics 164 201 353 14.051 36.922 68.936 Food aid in ceras 5 116 535 5079 816 5,771 Food production per cpta 1987 =100 153 103 112 102 115 102 F= =liz consumption kgta 1.5 2.3 2.4 5.3 58.5 463 ShamwofsgricuinareinGDP %*ofGDP 13.1 13.1 31.4 19.5 27.6 14.0 Hoing % ofGDP 5.8 7.6 _.. Averge household sizc persons per household 4.0 .. 5.5 Urban .. .. 5.9 Fxed investment: housing S of GDP 4.8 03 .. Fuel and power % of GDP 1.9 3.1 _ Energyconsumptionpercapita kg of oil equv. 383 231 140 251 373 1,602 Housholds with eloctcity Urban S of households _ .. 39.0 . - Rural _ _ 11.0 - - - Trasport and communiLtioa S of GDP 3.9 3.8 .. .. _ Fixd invesinent wanport equipent 6.0 1.7 - Total road Iegth thou. km 36 37 37 D1EVrMENT iN HUMAN CAPITAL ealth Populanon per physician persons 13,486 7.269 11,431 .. .. 3.064 Populaion per nurse 1,698 758 610 . - - Populaion per hospital bed 300 288 _ 1316 1.034 592 Oral rehydyroon herapy (under-S) * of cases _ .. 90 37 38 - Education Grss crl1ment ratios Scondary * of school age pop. 15 1 _ 24 48 63 Female 10 13 .. 23 42 62 Pupil-teacher tio: primary pupils per teeher 41 49 .. 40 39 Pupil-zacher ratio secondary 23 23 _ 20 Pupils reshing pade 4 * of cohon 96 100. - Rcpera rw: prinmay O. toftK earoll 2 2 ..- - liacy % ofpop.(apg150) _ 33 22 53 35 _ Feiale % offeuL.(agel5.4) .. 41 29 54 46 - Newsoaoer circulation per thou. pop. 22 14 8 12 .. 236 World Bank Inernutional Economics Depurtnait, Aprl 1996  - 29 - Annex B Page 1 of I Key Macroeconomic Indicators, 1994-2005 ----- Actual------- -Estimated- --------- - - --------- - ------------------------ Projected-------------------------------------------------- 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 OUTPUT Real .rowth raits of Gross Domestic Product 1- -3.1% -3.9% 8 3% 7 6% 4 9% 4 9% 4 0% 3 9% 3 7% 4 6% 5 5% 4 4% Real per capnita growth rates of Gross Domestic Product -5 9% -6 7% 5.6% 4 9% 2 3% 2.2% 1 3% 1.4% 13% 2 1% 3 0%i 2 0% Total Consumption 3.2% -I 2% -0 5' 2 7% 0 3% 09% 1 6% 1 5% I 4% 1.0% 1 0% 0 6%b Pnvate Consumption 2.2% -0 1% -0 2% 1 6% 0 1% 0 8% 1 6% 1 5% 1 4% 0 8% 0 8%o 0 4% INVESTNI ENT As percent ofGDP. Total Invesiment 6.9% 11 7% 12 0% 12 8% 14.4% 16.6% 18 1% 18.9% 19 1% 17.9% 18 7% 18 6% Government 3.6% 3.5% 3 8% 4 0% 4 1% 4 3% 4 5% 4 7% 4.9% 5 2% 5 2% 5 4% Private Investment 3.3% 8.2% 8.2% 8.9% 10.3% 12.3