Zambia - Multi- Sector Adjustment Credit II

Report No. PIC1831 Project Name Zambia-Multi-Sector Adjustment Credit II (&) Region Africa Sector Economic Management Project ID ZMPA3224 Borrower Government of the Republic of Zambia Implementing Agency Ministry of Finance P.O. Box 50062 Lusaka, Zambia Telex: (965)-42221 Fax: 0586 Date PID Prepared March 24, 1995 Project Appraisal Date November, 1995 Project Board Date April, 1996 Background 1. By 1996, Zambia will have undergone five years of the current stabilization and structural adjustment programs supported by five separate IDA adjustment credits. With the help of these operations, the Zambian economy has undergone major structural and institutional changes. The product market has been fully liberalized, and the exchange and interest rates are now market determined. The large parastatal sector that spans all economic sectors is being privatized gradually. In five years, the privatization initiative will have been largely completed. The public utilities that will still remain in the public sector are being re-organized and forced to operate on commercial basis. The necessary financial and managerial autonomy has been granted to allow them the flexibility to adjust to economic circumstances. 2. Through these policies, stability in some key economic balances has been regained, but the response of the economy in terms of increased output and employment, especially from the private sector, has been limited and uncertain. Real output actually declined between 1991 and 1994 (due in part to poor rains in two of those years). Likewise, open unemployment, particularly for the youth in the major urban concentrations, has risen; and underemployment and low productivity pervade the rural economy. These phenomena have compounded the incidence and severity of poverty in the country. 3. The four previous adjustment operations have supported the Government's efforts to achieve macro economic stability as well as economic reforms in key areas such as market liberalization, privatization, improving social services, and promoting private sector growth. In particular, the Economic and Social Adjustment Credit (FY94) supported efforts to improve the efficiency in existing land markets,  and the adjustment credit proposed for FY95 will support reform in the areas of financial markets, social security, and mining investment. This proposed credit would build on those reforms while adding specific efforts to remove constraints to the absorption of labor. Objectives 4. Taking into account the macroeconomic achievements into account and the outstanding constraints required to promote broad-based and sustainable growth, the adjustment operation under Multi-Sector II aims at: a. maintaining the momentum of the structural adjustment and stabilization policies already put in place; b. continuing the liberalization of urban and rural land and real estate markets; c. removing the regulatory and institutional constraints to labor absorption in the economy, including the informal sector, and facilitating the opportunities for self-employment; and d. supporting policy and institutional measures to promote outward-looking economic growth. Description 5. The operation will address policy and institutional issues in improving labor productivity in and labor absorption into the private sector, particularly agricultural and small and medium scale enterprises. As these sectors will require improved access to resources and inputs such as land and credit, policy measures in these areas will be initiated and supported through the operation. To address the increased absorption of labor, particularly in the agricultural and rural and urban informal economy, the institutional and regulatory constraints will be explored and tackled. Additional institutional and policy support will also be initiated to encourage private sector development and export growth from the non-mining sectors. The operation will also continue the implementation of sound policies to maintain macroeconomic stability and follow-up actions in the areas supported by previous adjustment credits. Environmental Aspect 6. The proposed operation does not have any direct environmental impact. However, the regulatory and institutional reforms relating to land markets will need to recognize the environment implications of the policy changes and avoid policies that could have adverse impact. Implementation 7. While the BOP support will be managed by the Ministry of Finance and the Bank of Zambia, the policy issues will be formulated in consultation with the Ministries of Land; Agriculture, Food and Fisheries; Commerce, Trade and Industry; Home Affairs; Local Government - 2 -  and Housing; Labor and Social Security, and Legal Affairs, and the National Commission for Development Planning. Financing 8. The operation will support part of Zambia's BOP needs for 1996. At the moment US$90 million has been earmarked for the purpose, but the amount may be revised depending on the evolution of the macroeconomic conditions and Zambia's needs. The Bank will also play a key role in mobilizing additional resources from the other bilateral and multilateral donors through the CG process. Benefits and Risks 9. The operation is expected to be central in stimulating supply response and generating a broad-based growth. In spite of the fact that Zambia is endowed with a vast expanse of unused land, obtaining access to land has become a critical constraint to both rural and urban based new economic activities. With this operation, a gradual and consistent approach will be initiated to address the land issues. 10. The success and sustainability of the adjustment operation in Zambia will depend on the extent to which additional jobs are created and on the level of household income they generate. This operation will assist the Government in removing the policy biases to job creation. Moreover, it will support poverty reduction and marshall popular support for the adjustment operations. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. - 3 -