Zambia - Country assistance review

Report No. 15675 Zambia Country Assistance Review june 3, 1996 Operations fe orl Ba n Acronyms ARC Agricultural Rehabilitation Credit ARER Agricultural Research and Extension Review ASIP Agricultural Sector Investment Program BOZ Bank of Zambia CAS Country Assistance Strategy CG Consultative Group DFC development finance corporation EFF Extended Fund Facility ESAF Enhanced Structural Adjustment Facility ESW economic and sector (research) work INDECO Industrial Development Corporation (industrial development holding parastatal) IRC Industrial Rehabilitation Credit IRP Industry Rehabilitation Project LIBOR London Interbank Offered Rate NAMBOARD National Agricultural Marketing Board NCDP National Commission for Development Planning NGO nongovernmental organization MAFF Ministry of Agriculture, Forestry, and Fisheries MAWD Ministry of Agriculture and Water ODA Overseas Development Assistance PAR Performance Audit Report PER public expenditure review PCR Project Completion Report PFP Policy Framework Paper SAC structural adjustment credit SAL structural adjustment loan SDR standard drawing right SPA Special Program of Assistance for Sub-Saharan Africa SSA Sub-Saharan Africa TA technical assistance VAT value-added tax ZAREP Zambia Agricultural Rehabilitation and Expansion Project ZCCM Zambia Consolidated Copper Mines ZIMCO Zambia Industry and Mining Corporation ZNFU Zambia National Farmers Union ZPA Zambian Privatization Agency The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation June 3, 1996 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Zambia: Country Assistance Review Attached is the report Zambia: Country Assistance Review prepared by the Operations Evaluation Department. This country assistance review (CAR) is the second of a series of "new style" OED studies that will, for each country concerned, evaluate (i) the relevance of the Bank's overall country assistance strategy; and (ii) the efficacy of various lending and nonlending instruments of Bank assistance. The objectives are to establish accountability, derive lessons of experience, and provide recommendations for future actions. In contrast to the case of Ghana, which was the first study in this series, Zambia's attempts at economic reform and resumed growth proved elusive throughout the 1980s. The study finds that, in the early 1990s, reforms supported by the Bank helped to drastically reduce the fiscal deficit and inflation. Also in the 1990s, substantial progress was achieved in the liberalization and deregulation of the economy; privatization of state-owned assets also started in earnest in 1995. But, although economic policy reforms have accelerated since 1991, the unfinished reform agenda is still long and growth has not yet resumed. Per capita income has fallen almost continually since 1973; poverty has increased to the point where, in 1994, some 70 percent of the population lived in households where basic needs are not being met; and life expectancy decreased from 53 years in 1987 to 48 years in 1992. The Bank's overarching objective of poverty alleviation takes on a special meaning in the case of Zambia. The CAR concludes that the Bank's country assistance strategy should focus on all three aspects of poverty alleviation (i.e., labor-creating growth, improved public expenditure, and efficient safety nets), both through its lending and nonlending instruments. Sustained growth will require continuation of progress in the reform agenda, increased attention to economic diversification, and to human and infrastructure constraints. Given the long period of economic deterioration, however, it is important to recognize that recovery will take time, and will continue to require high levels of assistance. The study also recommends continued attention to coordination with other donors, and an increased role for the Resident Mission, particularly in the context of the proposed strategy of sectoral investment projects. A special issue raised by this CAR is the need to continue ESW and portfolio management activities during periods of suspension of disbursements to avoid increasing gaps in knowledge and irreparable damage to ongoing projects even if disbursements are stopped. Attachment Contents Preface E x e c u tiv e S u m m a ry ........................ ............................................. ............................. 7 1. Zambia: Its Economic Development Strategies-Errors and A dju stm en t A ttem p ts...................................................................................... 2 3 A p p ro a c h ........................................................................................................ 2 4 At the Outset of Independence: Government Development .......................... ... . 25 1973-82: Economic Shocks and Delayed Adjustment ....................................... 25 1983 to 1987: Intermittent Structural Adjustment............................................. 26 1987 to 1988: B ack to C ontrols ....................................................................... 27 1989-90: A G radual Return to Adjustm ent...................................................... 28 Adjustment Abandoned Again Before 1991 Elections...................................... 29 After 1991: The New Government Restores Reform Program.................... ...... 29 Zambia's Present Strategy-Continuing the Reform Program ............................. 30 2. Bank Assistance Strategy in the Eighties and Nineties: S hort-T erm and C risis D riven....................................................................... 35 S ou rces of Inform ation................................................................................... . 3 5 Evolution of Bank Strategy Reflected Shift in Priorities................................... 35 Before 1980: Sharing Zambia's Optimism .............................................. 36 From 1980 to 1982: The Bank Re-assessed Zambian Strategy ................ 36 From 1983 to 1986: Bank-supported Structural Adjustment ................... 36 From May 1987 to 1990: Waiting to Resume Adjustment................... ... 37 199 1: T aking a C han ce .......................................................................... 38 1991 to 1994: Focus on Stability and Debt Servicing.............................. 38 1994 and After: Confronting Weak Growth, Poverty .............................. 39 3. Evaluation of Bank A ssistance Strategy........................................................ 41 O v e rv ie w ......................................................................................................... 4 1 M eth o d o lo g y .................................................................................................... 4 1 Relevance, Efficacy and Efficiency are the Main Criteria......................... 41 Evaluation of B ank A ssistance...................................I...................................... 43 R e lev a n c e ............................................................................................... 4 3 E ffi c a cy .................................................................................................. 5 0 E ffi c ien cy ............................................................................................... 5 4 L e s so n s ............................................................................................................ 5 7 This report was prepared by Gladstone Bonnick (Task Manager). Contributors included Moina Varkie (Staff). Bernard Decaux, Eric Shearer, Chandra Hardy, Sulaiman Wasty, and Migara 0. De Silva (Consultants). Alejandra Sarmiento and Sheila Ward provided administrative support. The report was issued by the Country Policy, Industry and Finance Division (Manuel Pefialver, Chief) of the Operations Evaluation Department (Francisco Aguirre-Sacasa, Director) and Robert Picciotto, Director General, Operations Evaluation. 2 4. Econom ic & Sector W ork .............................................................................. 59 O v e rv ie w ......................................................................................................... 5 9 Review of the ESW Program ............................................................................ 61 Economic Memoranda: Most Lacked Carry-Through Proposals............... 61 Public Expenditure Reviews Helped Reduce Public Sector Im balances............................................................... 62 Resource Studies-Analyzed Labor and Financial Markets ....................... 64 Poverty Assessment: Short-Term Actions Identified to Help Vulnerable Groups ........................................................................ 65 Sector W ork, Relevant and Effective....................................................... 66 Suspensions Reduced Staff Hours on Zambia.......................................... 69 Gaps and Other Shortcomings in ESW .................................................... 69 The M ain Lessons ............................................................................................ 69 5. Evaluation of Lending .................................................................................... 73 O v erv iew ......................................................................................................... 7 3 Lending Not Excessive, But Allocation Inappropriate........................................ 77 Allocation was Inappropriate for Long-Term Development Goal.............. 78 Portfolio Performance Compares Unfavorably with the Region and the Bank........................................................................................... 79 Perform ance Trends Deteriorated until 1987............................................ 79 Sectoral Portfolio Perform ance Varied..................................................... 80 Structural Adjustment Operations..................................................................... 83 Eighties' Adjustment Operations Rated Unsatisfactory............................. 84 Adjustment Operations in the Nineties Shift to Diversification, Privatization.......................................................... 86 Evaluation of Ongoing Portfolio ....................................................................... 88 Honors Bank Thematic Concerns, But Lacks Attention to Diversification........................................................................... 91 The Agricultural Sector Investment Program (ASIP) Is the Flagship Project ........................................................................................... 92 ASIP Conditionality................................................................................ 92 Preliminary Assessm ent of ASIP ............................................................. 92 Lessons and Observations................................................................................. 94 6. Bank's Role Critical in Aid Coordination/Mobilization and Debt M anagem ent ................................................................................. 99 Importance of Aid ............................................................................................ 99 History of Aid.................................................................................................. 99 The Aid Relationship...................................................................................... 100 Donors Initially Focused on Their Projects, Ignored Policy Fram ework ....................................................................... 100 Donors Took a Tougher Stance and Improved Coordination in the Late 1980s ......................................................................... 101 3 The Bank's Role in Aid Coordination/Mobilization.......................................... 101 Special Regional Coordination Program of Assistance is Effective......... 101 CG Meetings Have Been the Main Formal Means of Coordination an d M o b iliza tion .......................................................................... 10 1 Sectoral Coordination Should Be Led by the Government ...................... 102 Strengths and Weaknesses of the Bank's Role ................................................. 104 Comprehensiveness, Technocratic Approach is the Main Strength.......... 104 Weaknesses Include Insufficient Field Presence and ESW...................... 104 Aid Coordination Experience Offers Lessons .................................................. 105 Debt Management Assistance Has Reduced the Burden on Zambia ................. 106 7. Progress Towards Objectives of Bank Assistance ....................................... 109 Economic Management Good So Far but Next Steps Unclear.......................... 109 Liberalization H as Been Significant................................................................ 10 Privatization, Slow Initially, Gained Considerable M om entum in 1995............................................................................... I l Diversification Has a Long Way to Go and Needs to Be Emphasized .............. Il Poverty Has Increased, Social Conditions Have Deteriorated........................... 112 Achievements in the Agriculture, Industry, Mining and Social Sectors............. 13 A g ric u ltu re ........................................................................................... 1 1 3 M an u fa ctu rin g ...................................................................................... 1 15 M in in g .................................................................................................. 1 1 7 The Social Sectors-Health & Education.............................................. 121 Conclusions and Recom m endations................................................................. 122 O n K ey Strategic Issues ........................................................................ 122 M ore Effective Instrum ents ................................................................... 124 R e sid en t M ission.......................................... ................................................. 12 5 Boxes 1.1 Z am b ia at a G lan ce .......................................................................................... 2 3 5 .1 S u ccessfu l P rojects ........................................................................................... 8 2 5.2 Agricultural Projects were Mostly Unsuccessful................................................ 83 6.1 Innovations in Aid Coordination for Sectoral Programs................................... 103 6.2 Sweden's Evaluation of Its Aid to Zambia....................................................... 106 Figures 3 .1 R a tio s Z /A ....................................................................................................... 5 6 Tables 1.1 Z am bia B asic D ata ........................................................................................... 2 4 1.2 Principal Economic and Political Events (1963-96) ........................................... 32 1.3 Social Indicators, 1986-95 ................................................................................ 34 3.1 GDP Growth: Projected and Actual (1985-2000) ............................................. 48 3.2 Zambia-Allocation of Staffyears and Commitments and Disbursements per Staffyear in Zam bia Operations......................................................... 54 4 3.3 Africa Region-Allocation of Staffyears and Commitments and Disbursements per Staffyear in Africa Operations ................................... 55 3.4 Ratios of Lending per Staffyear-Zambia/Africa Region .................................. 55 3.5 Comparative Allocation of Staffyears-Zambia and Africa Region ................... 57 4.1 Zambia: Staff Resource Deployment, 1980-1995 .............................................71 4.2 Zambia: Dropped Economic and Sector Work (ESW), 1983-1994 ................... 72 5.1 Bank/IDA Lending Committed to Zambia, 1953-1995 ...................................... 74 5.2 Lending Classified by Major Instruments. FY 1980-1995.................................. 75 5.3 Commitments and Disbursements by Sector, FY 1980-1995 ............................. 76 5.4 Lending to Selected African Countries, 1980-95 ............................................... 77 5.5 Zam bia - O ED O utcom e Ratings ...................................................................... 79 5.6 Zam bia - O ED Sustainability Ratings............................................................... 80 5.7 OED Institutional Development Ratings............................................................ 80 5.8 Sectoral Outcome Ratings for Operations Approved in FY80-95....................... 81 5.9 Ongoing Lending Operations (actual)................................................................ 89 5.10 Lending by IBRD/IDA to Zambia by Objective, FY 1980-1994 ........................ 96 5.11 OED Evaluation of 18 projects (Approved after 1979)......................................98 Preface This is a Country Assistance Review (CAR) of World Bank assistance to Zambia during 1983-95. The CAR is, in effect, an evaluation of the Bank's total assistance program to Zambia during the period, and as such, it has approximately the same relation to the Bank's overall assistance program as OED project audits have to individual Bank projects. But here the country program as a whole, rather than the individual project, is the "unit of account". The twin objectives of the study are to establish accountability and to derive lessons of experience. In contrast to OED's earlier country studies, which comprised a comprehensive historical review of Bank/country relations over many years, the new CARs, beginning with the Ghana study, are highly selective as to time span, sectors, instruments and issues covered. The time focus of the Zambia CAR is on the period 1983-95. The evaluation of the Bank's assistance strategy and the instruments through which it was implemented, uses as the criteria relevance, efficacy and efficiency. The report evaluates in detail the economic and sector work, the lending program, the coordination of aid and the assistance in debt management. Sectoral coverage (limited to agriculture, manufacturing, and mining) and the social sectors (education, health, and poverty) are treated under the instruments and under the chapter on progress toward objectives. Why Zambia During the 1980s and 1990s Zambia had to adjust in response to a permanent decline in resource-based opportunities for development rather than to a temporary cyclical downswing. Also, it was an economy in transition from a centrally planned public sector dominated quasi- socialist economy to a market-oriented private enterprise economy. It has had to cope with a massive debt burden due to the postponement of adjustment through borrowing. Zambia also provided a test of the Bank's assisting in the transition of an underdeveloped mono-export economy into a viable modem economy. The process has only just begun. Sources and Acknowledgments The study is based partly on Bank reports such as Country Program Papers, Country Strategy Papers, Country Assistance Strategy papers, Country Economic Memoranda, Public Expenditure Reviews, Project Completion Reports and Performance Audit Reports, donors evaluations and other reports, the Bank's file record, and the academic literature on Zambian development. It is also partly based on interviews with Zambian officials and private sector spokesmen, as well as interviews with Bank, IFC and IMF staff. Background reports were prepared by consultants on the agriculture, manufacturing, mining, and social sectors. The kind cooperation and valuable assistance of those who contributed their time and efforts to the preparation of this report are gratefully acknowledged. This report was sent to the Government of Zambia for review. The Government's comments were taken into account in the report. Executive Summary Introduction I. Bank assistance to Zambia during the eighties and nineties was characterized by the predominance of adjustment lending, which accounted for over 60 percent of commitments and nearly 80 percent of disbursements-substantially higher than it did in Kenya, Malawi, Tanzania, Uganda and Zimbabwe. Yet Zambia has not been an outstanding case among adjusting countries. The Bank's assistance was marked by frequent interruptions: disbursements were suspended, because of the accumulation of arrears, in 1983, in 1987 for an extended period of nearly three years, and in 1991. Zambia has gone from being an IBRD borrower to a blend country, to an IDA only borrower. It received its first IDA credit in 1978 and has been an IDA only country since 1984. 2. The general conclusion of this evaluation is that, given the nature of Zambia's problems and the government's wavering commitment to reform in the 1980s, there was too much emphasis on policy-based operations, and too much emphasis within policy-based operations on stabilization rather than on long term structural adjustment. A more balanced approach, with a higher share (of a smaller total) going to physical and social infrastructure would have been desirable. Since the election in 1991 of a new government more committed to reform, structural adjustment lending has helped bring inflation under control, while permitting the restoration of discipline in debt management. But privatization, diversification of production, rehabilitation of economic infrastructure and improvement in social services, are taking longer to achieve. Sustainability of the reforms is also an issue, particularly in a pre-election period. 3. Despite improving economic policies in the 1990s, Zambia's economic performance remains poor. The 1994 Consultative Group report noted that "deepening poverty in Zambia is reflected in the deterioration in nearly every major social indicator." Per capita income has fallen almost continually since 1973; poverty has increased to the point where in 1994 some 70 percent of the population lived in households where basic needs are not being met; and life expectancy decreased from 53 years in 1987 to 48 years in 1992. 4. The prolonged suspension of lending between 1987 and 1991, required by Zambia's arrears to the Bank, had a negative impact on many projects, ongoing at the time. Moreover, a rich program of ESW was considerably reduced, adversely affecting the ESW basis of Bank operations after the suspension was lifted. The conclusion drawn from this episode is that some of the negative consequences from prolonged suspensions can be avoided with appropriate actions during the suspension, and that this can increase the efficacy of the Bank's assistance. Bank Assistance Strategy 5. The Bank strategy evolved through the following stages: * Before 1980: the Bank shared Zambia's optimism regarding copper and was uncritical of the Zambian industrial development strategy; 8 * 1980-82: the Bank started to base its strategy on its own diagnosis of the Zambian development problem. a diagnosis which saw the need to reduce dependence on copper, liberalize controls over trade and markets, and reduce public sector dominance in manufacturing, and in financial and other services: * 1983-86: Bank support for Zambia's intermittent reform efforts was mainly in the form of structural adjustment and sector adjustment credits focused on stabilizing the economy; * 1987-90: in response to Zambia's accumulation of arrears (and abandonment of the adjustment program) the Bank suspended disbursements to Zambia but continued its dialogue with the government to try to get the program back on track; * 1991: the Bank helped clear arrears through an innovative strategy and resumed lending to Zambia despite the risk that with impending elections the government would not meet conditions; * 1991-94: Bank strategy emphasized adjustment lending in support of Zambian stabilization efforts and debt servicing; and * 1994 and after: Bank strategy increased its to focus on growth and poverty alleviation, with increasing emphasis on privatization and sectoral investment programs. 6. Early in 1994, the emphasis of Bank assistance strategy shifted toward assisting Zambia in achieving sustainable economic growth and reducing poverty. The strategy also emphasized the new concern in the Region to undertake participatory assessments of Bank projects through systematic client consultation. This is to foster greater local design of sectoral strategies and investment programs, and maximum government and beneficiary involvement and ownership to ensure the sustainability of development impact. While accepting the need to continue support for structural adjustment and to help close the massive financing gap, greater priority was given to improving the enabling environment for private sector growth through investments in infrastructure and human resources and to targeting the poor and vulnerable groups with specific programs in agriculture and social services. 7. Bank strategy in the late nineties is planned around the integrated sector investment operation. The Bank is fully aware of the importance of the bilateral donor community and of the need to continue improving coordination of aid activities to more effectively serve the country. The Agricultural Sector Investment Program and Health Sector Support Project were born of this approach. With the support of the donor community and the diligence of the government these pilot programs hold good promise but they will need close monitoring and attention to aid coordination. Evaluation of the Bank's Assistance Strategy in Zambia Overview 8. The evaluation of the Bank's assistance strategy in Zambia during 1983-95 may be summed up in the following statements: 9 * Bank assistance strategy has been less relevant to the country's long term development than it could have been if it had followed more closely the Bank's excellent diagnosis of Zambia's development problems and prospects. Instead, the strategy overestimated the government's willingness to reform and focused too narrowly on immediate output expansion and price stability, rather than on privatization, policy adjustments for private producers and rehabilitation of economic and social infrastructure. Particularly during the 1980s, long-term relevance was compromised by the nearly exclusive pursuit of short-term stabilization objectives, which remained elusive. * The efficacy of Bank assistance was poor in the 1980s and higher after 1991 when a government more committed to the reforms has been in office. Bank assistance has not helped Zambia to establish a trend of positive GDP growth, much less positive per capita income growth; poverty has increased and social indicators have deteriorated. During the 1980s, the efficacy of the Bank's assistance suffered from the vacillation in application of reforms by the Kaunda government. Under the Chiluba government, reforms supported by IDA lending helped to drastically reduce inflation and to return interest rates to more normal levels, thereby rewarding the government's steadfast commitment to the reform program. But sustainability of the reforms remains an important issue. * Judging from the staffyear resources devoted to client services, the Bank's assistance to Zambia has been conducted with greater efficiency since 1991 than the average for the Africa region. This has been due partly to the predominance of policy-based lending with its shorter gestation time, and partly to the commitment of the government in Zambia to implement agreed reforms. The Bank strategy during the eighties must also be judged as inefficient because of the limited permanent improvements in the policy environment which were achieved. 9. Greater relevance and efficacy of Bank assistance in the future require that the Bank be more realistic in its outlook for Zambian recovery; acknowledge that the political situation may not always be favorable to development; pay more attention to human and infrastructure constraints, consider that international aid may well decline now that Zambia is no longer a "front-line state." and recognize that the deterioration in Zambia's infrastructure after years of neglected maintenance and under-investment, skill deficiencies, and the slow pace of institutional change will all militate against quick recovery. 10. In retrospect, the focus of Bank assistance on structural adjustment lending in the mid- eighties, though relevant to Zambia's need, was over-optimistic concerning the commitment of the government to stay the course. Moreover, the need for coordination among individual operations within the adjustment support group did not receive enough attention at design stage. I1. The suspension of disbursements as a result of Zambia's arrears also had a negative impact of the ongoing portfolio that could have been reduced with appropriate complementary measures. Thus, a lesson of experience is that suspensions of disbursement should be factored in within the Bank's assistance strategy, and the CAS should include provisions to mitigate the effects on the efficacy of Bank operations when suspensions take place (see para. 22 below). 12. The following paragraphs discuss in more detail the assessment of the Bank's assistance strategy. 10 Liberalization Overshadowed by Stabilization Concerns 13. During the 1980s the stabilization concern was primarily that of recovery in the level of industrial output. In 1981, the Bank saw the risk of continued dependence on copper and counseled structural adjustment to reduce dependence on this single export and to develop other non-traditional exports and efficient import substitution in the agricultural and industrial sectors. The essence of the required structural adjustment was the liberalization of the economy from the plethora of controls on production and internal and external trade. The Bank assumed that the measures taken by Zambia at the beginning of 1983 implied an irrevocable commitment to full liberalization, and wished to enhance the credibility of reforms by ensuring that foreign exchange was available to allow output to respond. 14. Since 1991, adjustment lending has been more successful in helping reduce inflation and restore fiscal balances. But more attention needs to be focused on longer-term development issues, as noted by donors at the December 1994 consultative group meeting. Thus, land laws and human resource improvement now seem to be crucial concerns to the next stage of development. Lack ofPolitical Consensus Over Adjustment Impeded Ownership 15. In the 1980s, the Bank missed or ignored the early signs that the national political and social context of the structural adjustment program was inconsistent with its sustainability. There were sharp divisions within the government over development strategy and economic management. At the outset the Ministry of Finance and the Bank of Zambia were the main influences in favor of adjustment; and convinced the President of its merits. He in turn convinced or pushed the cabinet and the party to go along. But there were advisors and powerful political groups who favored the public sector dominated control economy to which they had become accustomed over the previous twenty years. The Bank did not fully appreciate the delicate balance among these opposing forces, and did not pay enough attention to the limited ownership of the reform process outside a narrow group of politicians and senior officials; and was particularly oblivious to the sensitivities of the party and the unions. Thus, the government's commitment to reform should have been doubted when, faced with industrial unrest over public sector pay in early 1985, it slackened its stabilization program; and when it replaced the liberal economic team with economic planners not long after it had announced a revitalized liberalization program. Importance of Other Donors Limited Bank's Influence 16. The influence of other sources of long term finance besides the Bank was also important. The Bank's share in resource flow was relatively small, as seen by the fact that indebtedness to the Bank group accounted for less that one-fifth of total long-term debt. During the period 1986-93 per capita ODA disbursements averaged $33 per annum while disbursements by Bank/IDA averaged $11, and before 1984 the Bank /IDA share was even smaller. (Bank/IDA resources have become increasingly important to Zambia only since 1991.) In the mid-eighties bilateral donors were very influential in Zambian policy making, and, at the same time, they were not particularly supportive of the merits of structural adjustment programs; at times they formed a countervailing influence to that of the Bank in relation to Zambia's development strategy. At the time the need for coordination of donors efforts was still a new idea in the Bank. 11 Sustainable Reform Requires Attention to the Disadvantaged 17. The failure to recognize the risk of reversal of the reform process may have been associated in part with lack of attention to issues of poverty alleviation, and equitable distribution of the burden of adjustment. Thus it was not sufficiently recognized how important the public sector was in providing employment in urban areas and the immense social cost associated with the need to curtail the fiscal deficit. While the deficit had to be reduced, there was also need to protect vulnerable groups. The idea of protecting the very poor from the impact of maize pricing reform could have made pricing policy palatable to the poor and acceptable to the politicians. Unfortunately, the idea of a safety net came much later, and effective pricing policy reform was postponed until a new government was elected in 1991. Adjustment Lending Underestimated The Risks of Reversal 18. In light of the policy reversals in the early 1980s and again in 1987, and although some reforms were continued to good effect, it may be argued that support should have been related to the prolongation of the crucial elements of reform. Adjustment lending to Zambia did not pay enough attention to the risks of policy reversals, and to the fact that the political and public acceptance risks were high. The Refbrm Program of the 1980s May Have Been Underfinanced 19. Some have argued that had external support been more responsive to the deterioration in export earnings in early 1986, the reform process would not have been reversed. The argument is that the new team may not have had to resort to management of the auction to prevent a drastic deterioration in exchange rate and flight from the Kwacha, and that with more adequate supply of imported inputs the economy would have performed better, thereby relieving the government of the worry that it was losing control of the economy. While it is impossible to know what level of financing will induce the optimal rate of reform, it is clear that the reforming government must be assured of sufficient support if they are undertaking politically risky policy nimtiatives. But while the incentive to undertake reforms and to avoid resort to controls have been much greater since 1991 when Zambia has been assured of more adequate resource inflows, it also appears that resources have been more adequate because the new government has been perceived as being more committed to reforms. Thus, it is impossible to conclude from this that the Bank should have provided more support in the 1980s. SALs of the Nineties Avoided Defects of Those of the Eighties 20. Recent structural adjustment operations have gone far to avoid the criticisms made of those of the mid-eighties. There is now more overt concern for the social costs of adjustment and the plight of vulnerable groups. Also there is a more gradual approach to the "demandingness" of conditionality in relation to reforms involving greater political difficulty. Greater attention is now being given to getting wider agreement and understanding of measures leading to greater national and beneficiary ownership of the programs. 21. Bank assistance strategy is continuing to change. Recently it has signaled a gradual shift away from lending for structural adjustment toward support for sector investment programs. The difference from the traditional sector program or project is that the operation covers all projects by 12 all donors in the sector, is prepared by a Zambian task force drawn from the public and private sector, provides for annual reviews and adjustments based on beneficiary consultation and feedback. This approach is expected to enhance the relevance not only of the Bank's program but those of all donors and of the country as well. It does require, however, considerable technical work and aid coordination efforts, most of them in the field. Suspensions. Inadequate Coordination. Absorptive Capacity Constraints Impede Efficacy 22. The repeated build up of arrears to the Bank in 1983, between May 1987 and March 1991 and from September 1991 until January 1992, which lead to three suspensions of disbursements, further reduced the Bank's ability to achieve results. The long suspension beginning in 1987 increased the cost to completion of many projects, including interest cost during construction, and the cost of demobilization and re-mobilization of contractors, and delayed the flow of benefits. In some cases projects were abandoned and investment to that point was essentially lost. In addition, some investors postponed the implementation of their plans. While suspensions of disbursement are inevitable in cases like Zambia's, the Bank could have developed some complementary measures to mitigate negative impacts on the ongoing portfolio. Such measures could include coordination with other donors to ensure that the implementation of high priority projects continues. and continued economic and sector work and supervision. 23. The efficacy of the assistance also suffered as a result of inadequate coordination between the different components of Bank assistance. Thus the importance of price adjustments for maize, to keep its production profitable even though the auction was devaluing the Kwacha and raising the cost of imported inputs, was not given adequate attention. As a result, the resources under the Agricultural Rehabilitation Credit to buy replacement equipment were not used and the quick output increase in agriculture was not realized. 24. Constraints on absorptive capacity also impeded the efficacy of Bank operations throughout the 1980s. Among these constraints are deficiencies in human resources, especially management and the civil service, and physical infrastructure. In recent years, the Bank has sought to compensate for some of these by providing technical assistance, both directly and through coordination of aid from other donors. Also, by assisting in debt management the Bank has been able to reduce the debt service burden on the budget, relaxing the constraint inherent in the shortage of counterpart funds. Bank Assistance Not Uniformly Effective-Non-lending Services Effective, Investment Projects Not 25. Bank assistance to Zambia has not been uniformly effective in all its components. Bank assistance was helpful in relaxing the constraint on the capacity to import and to utilize productive capacity. Investment lending was less effective since a substantial portion of the loans made in the early eighties was canceled. The efficacy of Bank non-lending assistance has been most evident in (non-lending) technical assistance, especially in aid mobilization/coordination and debt management, where, by providing documentation and chairing consultative group meetings, the Bank helped to bring about the significant rise in the ratio of aid from 10 percent of GDP in the 1980s to 30 percent in the 1990s. The Bank has assisted Zambia in rescheduling US$1.5 billion of debt between 1990-1993, resulting in a substantial reduction in debt service; and in obtaining substantial debt relief 13 Evaluation of the Instruments: Economic & Sector Work 26. An overview of Bank ESW on Zambia in the 1980s and 1990s must highlight the following. * Bank ESW identified the three major policy requirements for Zambian development during last fifteen years as liberalization, privatization, and diversification; * Bank ESW has given priority attention to liberalization. Liberalization has been successfully implemented, partly due to the more informed policy dialogue that Bank ESW has made possible; privatization has lagged behind and diversification has remained elusive; * The Bank should study Zambian privatization experience. Land policy and cultural factors also remain to be studied in detail; * The Bank has not done enough ESW on the requirements for diversification of the Zambian economy; although its recent work on "Prospects for Sustainable Growth in Zambia-1995-2005 is a step in the right direction; * Several public expenditure reviews have helped in proposing ways for bringing the public sector deficit under control; * The Bank has done an outstanding assessment of poverty in Zambia in 1994; it is now being used in the design of public policy to mitigate the problem; * Sector work done in context of project identification had significant impact in mining and agriculture. 27. Overall. Bank ESW has been relevant and adequate in the sectors it has covered and the issues it has analyzed. The selection of topics has been appropriate to the Zambian situation, particularly the problems facing the economy. However, the absence of significant Bank ESW to underpin investment promotion and infrastructure planning will limit the feasibility of Bank support in these areas in the near future. Generally, relevance has been reinforced by timeliness in that ESW responded to a need and the output was ready when the government was inclined to consider adjustments in policy. Lending 28. IBRD/IDA commitments to Zambia during FY83-95 amounted to US$1,466.4 million. Disbursements during the same period amounted to US$1,266.9 million. During FY83-91 average annual commitment in constant 1990 prices were US$74.8 million (US$112.2 million if the periods of suspension are excluded). After FY91 the average increased to US$203 million. 29. Adjustment accounted for 67 percent of commitments during FY83-95. Sectoral distribution of lending commitments reflected the importance of structural and other adjustment lending. The distribution among sectors was as follows: multisector, 32 percent; industrial/IDF, 18 14 percent; agriculture. just under 16 percent; financial, 14 percent; social sectors (education and population/health), 9 percent, mining, just under 7 percent; and infrastructure (transportation and water supply), 3 percent. 30. Zambia has gone from being a Bank client to a blend country to an IDA only borrower. The first IDA credit was approved in 1978, and Zambia has been an IDA only client since 1984. Disbursements by IDA rose rapidly during the eighties (except for the period of suspension) to an average of about US$160 million per year since 1991. Net disbursements of IDA have been positive throughout the period into the nineties; averaging US$185 million in the three year period 1991-1993. 31. Bank/IDA lending to Zambia has not been excessive from the point of view of Bank/IDA exposure. At June 30, 1994 Zambia accounted for 1.52 percent of credits outstanding to IDA; and 0.21 percent of total loans outstanding to the Bank. Bank/IDA held 22.6 percent of Zambian long- term debt at the end of 1993: a portion requiring between 7 and 10 percent of exports of goods and services to service it during the nineties. Hence, though not excessive Bank/IDA exposure has been associated with some portfolio risk. Because four-fifths of commitments have been for adjustment operations to provide balance of payment support to assist in debt service, Bank/IDA lending has not been excessive in relation to Zambia's capacity to implement projects. 32. Based on project completion (PCR) and audit reports (PAR), the performance ratings available for 18 of the 45 operations approved since 1980 show: * only 44 percent of Zambian operations were judged satisfactory; compared with * 68 percent Bankwide and * 62 percent in the Africa Region. Performance varied across sectors, with all four projects in the energy sector rated satisfactory compared with only one out of six rated satisfactory in agriculture. The successful projects tended to be: * small and not management intensive, * with appropriate technology, * used foreign contractor/consultants, and involved some training of nationals. The unsuccessful projects, mainly in agriculture, were: * dependent on weak administration and management, * required counterpart funds, * suffered from imperfect delegation of authority, and * presented coordination problems among agencies with unclear responsibilities. 15 33. The adjustment operations of the eighties were all rated unsuccessful. although some benefits were achieved; the production objectives were not achieved and the policy objectives were not diligently pursued and were mostly abandoned in 1987. The adjustment operations after 1991 appear to have been successful, both on the policy front, by bringing fiscal and monetary magnitudes under control. and in serving as the basis for the coordinated mobilization of balance of payments support from the larger donor community. Only one project has been evaluated so far; the audit of the Second Economic Recovery Credit (FY91) rated the project outcome as satisfactory. 34. The ongoing portfolio has been evaluated by looking at the supervision ratings where available, by assessing the "demandingness" of each operation on the main determinants of absorptive capacity, and in terms of specified desiderata of a good program. Supervision information is available for 14 operations, and of these I has been rated as highly satisfactory in its implementation, 12 as satisfactory and I as unsatisfactory. 35. The Agricultural Sector Investment Program_(ASIP) represents a major departure from the traditional project approach, and seeks to improve development impact through better coordination among donors, and greater participation by client/beneficianes in identification as well as implementation of the sector program. The ASIP is to be the first in a series of four-year programs of coordinated multilateral, bilateral, and government initiatives supporting the medium-and long- term development of strategic sectors. The project includes components to improve consultation of donors and beneficiaries concerning the policy environment and institutions, to make monitoring and public investment more efficient, to promote private sector participation, and to include pilot schemes. The preliminary assessment of ASIP preparation and implementation has been mixed. The preparation process has allowed wide participation and a greater sense of beneficiary ownership of the projects. However, this has slowed the process, and some organizations complain about inadequate representation of some interested groups, while some donors are still uneasy about the dominant role of the Bank. Bank Assistance in Aid Coordination and Debt Management 36. Since 1989, the Bank's leadership role in the consultative group has been widely praised by Zambia and the donor community. The proximate task of the Bank in the nineties has been to mobilize assistance to close a financing gap, after rescheduling, of over US$1 billion each year. So far, each year the gap has been closed. The role of the Bank has been to provide the documentary and analytical bases for discussions and negotiations. It has also played an advocacy role by educating donors and convincing them of the merit of the structural adjustment efforts to which the Zambian government has been committed since 1991, and elicited their support of this effort by increasing aid and the share of balance of payment support in the aid packages. Much of the aid mobilized by the Bank has gone to service the debt owed to multilateral and other creditors. This has drawn some criticism for diverting resources from social services and infrastructure. More recently the emphasis of aid coordination has been at the sectoral level on avoiding duplication, overloading of public sector management and unrealistic demands on local counterpart funding. 37. The following lessons emerge from the Bank's experience in aid coordination: 16 * CG meetings are useful for mobilizing resources, particularly for heavily aid dependent countries undergoing adjustment. and for bringing donor coalition behind adjustment. * A greater field presence simplifies the process of sectoral aid coordination. It can foster local ownership and allow for more timely contributions to ease project implementation problems. * The debt crisis galvanized greater aid mobilization, but donors do not wish debt management to be the domnant critenon in aid allocation decisions. * In-country aid coordination and management by client countries is as important as coordination among donors- and the institutional framework to serve this end needs to be studied and rationalized. Good aid coordination and management requires clear development goals and strategies. a capacity to identify' and prepare projects, effective project programming and budgeting, and sound monitoring and financial management. * Additional opportunities for Bank-donor collaboration in ESW should be explored, given the favorable recent collaboration on public expenditure reviews and poverty assessments. 38. The Bank assisted Zambia in setting up its debt management system, and in negotiating frequent rescheduling and occasional reduction in its debt By August 1992, due to Paris Club reschedulings and debt cancellations by bilateral creditors. Zambia's debt had fallen by $1.5 billion to $6.5 billion. The nineties have seen a net fall in the interest burden because US$597 million of interest was capitalized and US$76 million forgiven by donors during 1990-93. During the same period, net interest arrears were reduced by US$118 million The interest burden on new commitments will also be lower because the interest rate on new loans has gone down partly as a result of the shift from private toward official creditors. Meanwhile, US$853 million of principal repayments due have been rescheduled. thereby reducing the immediate burden of debt service. 39. Over time, the share of multilateral debt has increased. The Bank is holding a larger share of Zambia's debt and accounts for a larger share of debt service obligations, as a result of the rise in per capita commitments by IDA-an average of $25 a year during 1991-95, up from $12 during 1983-87. This has done much to reduce the burden of Zambian debt as maturing IBRD debt having shorter terms and higher interest rates was followed by new IDA lending on highly concessionary terms. Commercial and short-term debt has been reduced as a result of debt buy- back operations that drastically lowered the exposure of the London Club creditors. In addition, Paris Club creditors have provided significant debt relief. 40. These improvements are not reflected in the usual debt indicators relating debt stock and debt service to GNP and to eNports of goods and services because, in the nineties, the denominators have fallen below the levels in 1980 and in 1989. Nevertheless, Zambia's creditworthiness has been improved and arrears have been reduced. Zambia has access to Bank and IMF resources, and some bilateral donors who had withheld support have been induced to resume. Yet there is concern in some quarters that the Bank's assistance in this area has been self-serving, and has ensured the servicing of Bank debt at the expense of Zambia's growth. But this concern is based on the 17 assumption that without debt service inflows would have remained adequate to generate an improved growth record. This appears doubtful. More fundamentally, there is also concern that Bank preoccupation with debt service has diverted resources and time-including management time-away from development issues, and that the debt situation has been improved at the expense of focusing on real sector issues. 41. The Bank's Resident Mission has recently begun to play an important part in facilitating the delivery of Bank assistance through the lending program, aid coordination and other instruments. The mission is involved in the design of the lending program by assisting ministries and agencies in identification of projects for discussion with missions from headquarters and by helping in the monitoring and supervision of projects during the implementation phase. The mission is especially active in coordination of Bank assistance with the local representatives of bilateral donors and the local UNDP office. Although long understaffed, the Resident Mission has been able to render some support in agriculture and in monitoring the macroeconomic situation. With greater degree of client consultation envisaged in the new sector programs (e.g. ASIP), the mission will need to be strengthened so that the process will not be as critically dependent on missions from Washington to maintain momentum as it has been in the past. Progress Towards Objectives of Bank Assistance 42. Achievement of objectives is the result of many different factors, the most important of which is country performance. Nonetheless, an assessment of the degree to which each objective has been achieved (and the factors affecting the progress) is of essential importance in guiding future bank assistance strategy. The extent to which the objectives of the Bank's assistance strategy have been achieved in Zambia may be summarized as follows: * Economic management has improved considerably, especially in monetary and fiscal discipline since 1992. The primary fiscal deficit has been reduced from 7 percent of GDP at the beginning of the nineties to 1 percent of GDP in 1995. But growth has not been restored, and the sustainability of the reforms still faces serious challenges, particularly in an election year. * Achievements in liberalizing the economic environment for the private sector, beginning with the foreign exchange market, have been significant. * Privatization was slow initially; but gained considerable momentum in 1995. * Diversification of production, and especially exports, has not been significant. * During the period 1984-94, poverty increased in relative and absolute terms. There has been substantial deterioration in the major social indicators during the last fifteen years. * Progress in agriculture has been minimal. Food grain output has declined, but some new crops and flowers for export are now being produced in small quantities. Bank projects were undermined by prolonged suspension of disbursements. 18 * Manufacturing, grown behind tariff protection and dependent on imported inputs, remains plagued by low productivity and low quality output. Moreover, it has been dominated by public enterprises. * Bank support for the rehabilitation of copper mining has had positive results on output and costs. * Bank assistance in education and health has been too recent for evaluation. Conclusions and Recommendations On Key Strategic Issues Privatization and Diversification Need More Attention 43. Liberalization. privatization and diversification are the three prongs of the strategy for renewed growth. But only in the first has substantial progress been made. Recent progress (in 1995) in privatization is a good step forward but much more is needed. And diversification requires a substantial increase in private investment which has not vet taken place. A careful review of the remaining obstacles to this private sector development should be a major element of the Bank's strategy. Growth Requires Investment in Physical and Social Infrastructure 44. Achieving positive GDP growth in Zambia and checking the worsening poverty requires continued investment in physical and social infrastructure. These investments will rely on Bank, and other donors', support. The issue is that the mix of instruments and also the total of Bank/IDA financing, given the level of support from other donors, be consistent with the debt service requirement and the investment implications of the growth target. Coordination and Consistency of Loan Conditions at Macro and Micro Levels Essential 45. The coordination between the macroeconomic conditions of structural adjustment operations and sectoral adjustment/investment projects should concern not only the content but also the pace and sequence of measures. This applies especially to measures affecting pricing policies of outputs and inputs and the removal of subsidies. All three affect the profitability of activities and hence the response of entrepreneurs to opportunities for diversification Need to Develop Entrepreneurs for a Vibrant Private Sector 46. Another serious constraint to private sector development in Zambia is, increasingly, the entrepreneurship, managerial abilities, and skills of the Zambian people. Where are the entrepreneurs'? Among the many factors which impede the development of entrepreneurship and skills in people are the following: declining life expectancy; the burden of work women are already bearing; the traditional barriers to women's access to credit and land ownership; the low level of personal saving due to poverty; the inability of the poor to risk their income sources (the low risk route out of the ghetto, notably the public service, does not lead to entrepreneurship); the high 19 percentage of youth as heads of households due to early deaths of parents; and a lack of knowledge of alternative lines of production. The Bank's CAS should address this set of issues and propose specific measures. Institutions to Serve the Private Sector Must be Developed 47. Institutional development in the public sector is a necessary complement to private sector development. There is a need to specify the role of the public sector, to identify the required complement of private sector service and support institutions, and to provide for meeting this requirement. Institutional development has had limited attention during the last fifteen years, with the result that the usual assessment in Zambia is that most ministries and agencies of government are simply not adequately staffed and supplied with the inputs to discharge their responsibilities effectively. Institutional development is a slow process and should now be given higher priority than hitherto. While privatization is proceeding the government can retain suitable officials in the public service, and re-train them for work in areas where institutional capacity is weak. Bilateral donors Must be Kept Engaged in Zambia's Development 48. Bilateral donors have been an important source of support to Zambia's development, and they will be indispensable to Zambia's future, especially as commercial lending sources have dried up. The issue is how to keep donors engaged now that the geopolitical reasons that justified their help in the past are no longer valid and may not be valid in the future. The answer seems to lie in fully involving donors in decisions on objectives and in the design of arrangements for the most effective use of the assistance they will provide. It may also lie partly in being mindful that the political/public relations benefits may be important to politicians in donor countries, hence the need to allow bilateral donors to play the lead donor role in as many sectors as possible. The Political Implications of Reform Must be Anticipated 49. The political reaction to reform should be carefully studied and anticipated when planning the Bank's assistance strategy. The Bank's approach has often been to focus on the removal of distortions without much thought to the fact that behind each distortion lies a group of beneficiaries who may be expected to oppose the reform. In Zambia, a wide range of subsidies (e.g., on maize- meal, fertilizer) benefit the poor who comprise the majority of the population. The effect of a reform that affects such a large group of people has made the adjustment program politically difficult. In order to avoid a backlash some compensatory benefit with less distortionary impact should be considered. This approach will also favor the sustainability of reforms and investment programs. The reforms should also be accompanied by a suitable dialogue to foster understanding of the rationale behind them. In the absence of these and/or other means of assuaging those affected, there is increasing risk of reversal, particularly in an election year. Careful Assessment of Options and Risks is Crucial in Formulating Strategy 50. In laying out a country and Bank strategy a "one option" approach is inadvisable. The Bank must be prepared to contemplate worse case and best case scenarios. The assumption that donors will always close the financing gap is not only dangerous, it shuts off the search for alternatives. 20 More Effective Instruments ESW 51. The recommendations on ESW are the following: * ESW should be cognizant of, and sensitive to, the political implications of its economic and social policy recommendations. * ESW should avoid excessive optimism in its assumptions and projections. Optimistic assumptions regarding copper prices led to a delay in adjustment efforts in the eighties. There is probably too much optimism in the nineties regarding growth and aid flows. * More attention needs to be paid to the design of strategies for reducing the public sector deficit within the context of adjustment operations, both as regards timing of actions and the monitoring of implementation. * The Bank should continue ESW even when arrears require the suspension of lending. Many ESW tasks were dropped after the suspension in May 1987, and the ESW agenda remained sparse for the next three years. This caused long lapses between updating memoranda on strategic sectors (e.g. agriculture and delayed re-start of operations). * ESW for privatization needs to be strengthened. The lack of prior studies very likely has contributed to the slow pace of progress. Concerns about divestiture were not anticipated. * Greater attention to sequencing of actions will also help to ensure the efficacy of advice and assistance (e.g., liberalization and infrastructure development should go hand in hand; cost recovery solutions to the fiscal problems should be consistent with social concerns; and the public investment plan should be fitted within an agreed medium term development plan). Lending 52. The recommendations for lending are as follows: * Adjustment lending should not be relied on to persuade an indecisive client to undertake a drawn-out reform agenda. * In the Zambian context project success is likely to be favored by small size, appropriate and relatively unsophisticated technology, the inclusion of training assistance, the linking of implementation authority and responsibility, and attention to improvement of complementary services (e.g. extension). * In agriculture and the social sectors pilot projects should be tried whenever there is uncertainty regarding the information/experience basis for project design. 21 * The cost of disbursement suspensions is very high; few projects survive long interruptions m implementation. The Bank should examine the feasibility of measures (such as moth-balling, increased financing from the government or other donors) that may minimize the extent to which a project is impaired by the suspension of disbursement. * In aid coordination and debt management, the Bank should continue to provide assistance even when a suspension in lending is unavoidable. * The new lending instrument of Sectoral Investment Project holds good promise but should be monitored carefully. Further attention should be given to full participation by donors and to avoid the impression of the Bank as a dominant player. Resident Mission 53. The role of the Resident Mission should be further expanded, not only to reflect the general trend in the Bank's greater attention to results in the field, but also in the particular context of a program that relies on expanded aid coordination and sectoral investment programs. In the past, the Resident Mission has been understaffed and decisions have had to rely to heavily on missions from headquarters. 1. Zambia: Its Economic Development Strategies-Errors and Adjustment Attempts Box 1.1: Zambia at a Glance Zambia, which was Northern Rhodesia until independence in 1964, is a fairly large, moderately populated, highly indebted country. For the last twenty years it has a poor record of economic performance and a penchant for starting and stopping adjustment programs. Since 1973 per capita income has fallen almost continually, there has been little GDP growth, and the population has grown rapidly. The poor economic performance largely reflects the declining price and output of copper (the main export earner), rising import prices, frequent droughts, fluctuating policies, and delays in applying adjustment policies. Zambia has also accumulated debt totaling twice its GDP. Annual interest on the debt is many times the its annual GDP growth rate. Domestic savings have been low. And gross investment has been both too little to sustain positive per capita growth and too dependent on foreign savings. Since the mid-seventies, living standards have declined in Zambia. A Consultative Group report in 1994 noted: "deepening poverty in Zambia is reflected in the deterioration in nearly every major social indicator. Nearly 70 percent of Zambians live in households where basic needs are not being met; chronic malnutrition affects 45 percent of all children; and infant mortality has increased to 107 per thousand." In addition, life expectancy at birth, estimated at 53 years in 1987, dropped to 48 years in 1992, reflecting both declining living standards and the rising incidence of AIDS.1 Zambia's standard of living has plummeted despite substantial aid flows. After fifteen years of intermittent attempts at structural adjustment, Zambia in 1992 dedicated itself to a comprehensive set of reforms, attracting renewed commitment of support by the Bank and bilateral donors. The government's overarching goal today is to reduce the country's extreme poverty. But Zambia's difficulties are so great that its current strategy may be too optimistic. Politically, Zambia has been relatively stable since independence. The main threats have come from outside. Zambia became a front-line state, confronting the white regimes to the south, after giving sanctuary to the main black forces opposing apartheid in South Africa. It also faced incursions from the east and west during the wars of liberation in Mozambique and Angola, and during civil strife in Zaire. There have been only two presidents since independence. The first, Kenneth Kaunda, remained in office for 27 years despite several coup attempts. The second, Frederick Chiluba, succeeded to office in a relatively peaceful transfer of power in the 1991 elections. Yet underneath the apparent stability of the Kaunda regime there was constant turmoil that influenced economic policy. Ideologically polarized forces vied to influence Kaunda's decisions as he grew increasingly sensitive to his popularity, while edging toward multiparty democracy in response to the pressure of world opinion. 1. In 1992 about 20 percent ofthe population in major urban areaa of Zambia was estimated to be HIV-positive (Zambia Consultative Group, February 1992). 24 Table 1.1: Zambia Basic Data Area 752,000 kilometers Population 8.3 million in 1992 Population growth rate 3.2%, average during 1980-85, about 3% since 1990 Population density 10.7 per sq. km. (half the Sub-Saharan Africa average) GNP per capita US$450 in 1992 (under 90% of the SSA average) Annual growth of GDP 1.4% average, 1966-94; -0.3% average 1991-94 Total debt/GDP 1.95%, average during 1992-94 Debt service/GDP 19.5 %, average during 1992-94 Debt service/exports 58%, average during 1992-94 Interest on debt/GDP 8%, average during 1992-94 Gross domestic investment/GDP 12%, average during 1991-94 Gross domestic savings/GDP 4%, average during 1991-94 Approach 1.1 The approach is to divide the period under review into a few discrete phases during which Bank strategy was marked by some predominant characteristics. This follows the pattern of the events-driven analysis used in the Bank/Mexico Relations Study (1994). The analysis identifies the crucial events-actions by the client, by the Bank, and by third parties-that affected positively or negatively the willingness of the client to use Bank services and the willingness of the Bank to provide them, which in turn determine the climate of relations between the Bank and the client. The approach is useful for identifying the main phases in the Bank/client relationship over a given period of time. 1.2 The events-driven analysis of Bank/Zambia relations for the period 1980 to 1995 identifies some events associated with the degree of popular support for President Kaunda as reflected in election results and the incidence of riots and civil unrest which decisively affected the country's willingness to deal with the Bank. The main events include the following: * 1981-82-private sources cut-back credit to Zambia, * 1983 October-re-election of Kaunda by an enlarged margin, * 1987 May-reversal of the economic reforms after unrest over price of maize meal, * 1989 September-resumption of relations with Bank/IMF by Zambia as bilateral donor assistance falls to lowest level in four years, * 1991 October-Chiluba replaces Kaunda as president in relatively peaceful elections. 1.3 These events divide the last fifteen years into five phases which can be used to structure the review of Zambia's development strategy. During each phase Zambia was willing or unwilling to follow a path agreeable to the Bank depending on the president's perception of the opportunity costs to him and/or Zambia. Thus when other sources of credit and assistance dried up he was 25 willing to seek Bank support, for in the absence of more attractive substitutes the opportunity cost of seeking Bank support was relatively low. When there was popular resistance to the conditions attached to Bank support, such that Kaunda perceived the political cost to himself as high, he turned away from the Bank. The following review of the evolution of Zambia's development strategies and adjustment attempts bears out this analysis. At the Outset of Independence: Government Development 1.4 For seven years after its independence in 1964, Zambia based its development strategy on copper earnings, which accounted for 90 percent of all export earnings and nearly 50 percent of GDP. The aim was to use the earnings to create a manufacturing sector that would produce import substitutes in a highly protected environment. Zambia developed a large and diversified industrial base under public sector control, but the country's considerable agricultural potential was not tapped. Policies were biased against agriculture. From having been self-sufficient, Zambia had to import food in increasing quantities, and the production of export crops, especially tobacco, declined. 1.5 Rhodesia's unilateral declaration of independence in 1965 created considerable uncertainty regarding Zambia's access to the sea in the south. In response, Zambia invested in transportation and external communications links through Dar Es Salaam (the Tazara railway). In an effort to reduce imports from the south, the country exploited domestic coal and developed new hydroelectric schemes. 1.6 Zambia achieved a moderate rate of economic growth and relative price stability largely due to these strategies, favorable international copper prices, and substantial amounts of bilateral donor assistance in response to the Rhodesian situation. Between 1965 and 1973, GDP growth averaged 2.4 percent a year, with manufacturing growing at 9.8 percent. However, agriculture grew at only 2.0 percent. 1973-82: Economic Shocks and Delayed Adjustment 1.7 After 1973 the Zambian economy contracted, because of both the massive decline in copper export prices and the doubling of import prices (mainly for industrial inputs and oil). A sharp drop in copper production after 1980 also contributed to the shortage of foreign exchange, in turn causing the underutilization of industrial capacity and the postponement of maintenance and rehabilitation of infrastructure. Between 1973 and 1984, real GDP declined an average 1.5 percent a year. With population growing 3.1 percent a year, per capita GDP fell by 35 percent. 1.8 Zambia responded to the downturn by making impromptu, short-term cuts in public expenditures, and by heavy external borrowing. The ratio of debt to GNP jumped from 43.7 percent in 1974 to 94.7 percent in 1977. The total debt tripled between 1973 and 1980 from US$ I billion to US$3 billion. Debt service problems and large commercial arrears ensued. As a reaction to the shortage of foreign exchange, Zambia placed restrictions on foreign exchange and on trade. The government allowed the Kwacha to become overvalued, which discouraged exports, while capital-intensive and import-intensive industry was encouraged by tariff and tax policies. In addition, the government tried to curb inflation using price and interest rate controls. 26 1.9 Meanwhile, the Bank shared Zambian optimism that the copper price downturn was temporary and did not criticize the government's strategy of public-sector-led industrialization which was based on import substitution and depended heavily on imported inputs. The Bank made two program loans to help Zambia cope with the 1973 oil price shock and the collapse of copper prices in 1976, but in general lending continued to be spread over operations in infrastructure, energy, agriculture, education, and financial intermediation. The Bank group increased the rate of lending from just over US$12 million a year before 1972 to US$55 million a year during 1973-82. With the first IDA credit of 1978 Zambia became a client both of the Bank and of IDA. 1.10 When international copper prices continued to be depressed, Zambia's economic strategy became impracticable. In 1980 the government accepted the need for reform and turned to the IMF. But, a 1981 Extended Fund Facility (EFF) was discontinued after only one year, with only SDR 300 million drawn, because of disagreement on an economic reform program for 1982. Notwithstanding several stabilization programs negotiated with the IMF, Zambia did not seriously undertake fiscal and exchange reform, and by 1982 the country had an acute financial and economic crisis. Until then the Zambian approach had been to borrow heavily to postpone economic reform. But when private sources of credit dried up in 1982, Zambia could postpone reform no longer. 1.11 Zambia decided to return to the IMF and the Bank for assistance. The Bank's assistance was contingent on an agreement being reached with the government on a memorandum of development objectives and policies, which would specify the sequence of actions needed to bring about economic adjustments and would be the justification for the lending program. 1983 to 1987: Intermittent Structural Adjustment 1.12 In January 1983 the government formally agreed to such a memorandum and immediately launched a reform program: it devalued the Kwacha by 20 percent against the SDR and raised interest rates. It gave retailers and wholesalers the freedom to raise prices (subject to ex post review) except in the case of a few essential commodities. It gave exporters preferential access to half of their foreign exchange earnings. It increased the price of maize meal by 30 percent and of fertilizer by 70 percent; and it introduced a 4 percent mineral export tax. However, in an effort to force a rescheduling on its debt, Zambia unilaterally suspended payments of its foreign debt. As a consequence of the arrears that resulted, the Bank suspended disbursements of its loans and credits to Zambia in October 1983. 1.13 Following the elections in October 1983, in which President Kaunda was re-elected with an increased margin, the government reopened negotiations with the IMF, the World Bank, and bilateral donors for financial support for the previously agreed adjustment program. This ambitious program started a process of liberalizing domestic prices, of reducing subsidies on food and fertilizer, of adjusting agricultural wholesale prices, of freeing interest rates, and of introducing an exchange rate policy based on a crawling peg and frequent small devaluations. Simultaneously, fiscal policies were tightened up, and the central government's budget deficit was reduced to under 10 percent of GDP in 1984, from 16 percent in 1982. 1.14 Despite the policy improvements, the economy deteriorated in 1983 and 1984 because of a further slide in international copper prices, a dip in aid, and drought. There were also logistical 27 and personnel difficulties involved in implementing the new program, including a lack of enthusiasm from second-level managers and vacillation on the part of President Kaunda himself The government resisted opposition to its policies manifest in student riots in February 1984, but more widespread industrial unrest in the first half of 1985 led it to relax its financial policies. Combined with the decline in export earnings, this softening of financial policies aggravated the country's fiscal and external payments problems. 1.15 Before 1985. Zambia tried to implement elements of a structural adjustment program in a piecemeal way. In October 1985, however, it adopted a comprehensive program with Bank and IMF support, and the World Bank made its first structural adjustment loan to Zambia. (Earlier loans containing adjustment conditionality had been limited, sector-based nonproject loans.) This program represented an effort to revitalize the 1983 reforms. The most significant change was the replacement of the crawling peg exchange rate system with an auction-determined rate system, which produced a devaluation of the Kwacha from K2.2 to K5.15 to the US dollar at the first auction. Another difference was that the discretionary administrative procedures for import licensing and foreign exchange allocation, which were restrictive and inefficient, were scrapped. However, bearing in mind the government's previous tendency to tinker with its programs in response to complaints from various constituencies, the Bank made its support conditional on the government success in bringing the crisis under control, adopting effective reform measures, and diversifying the economy. 1.16 Following ten months of relative stability, during which the Kwacha depreciated gradually from K5 to K8 to the US dollar, the situation deteriorated rapidly in the second half of 1986 as shortfalls in copper exports, and a failure to contain the increase in the money supply, led to a sharp depreciation in the exchange rate. The government, concerned that the depreciation was fueling inflation, intervened in the auction limiting the exchange rate to a specified band. Such interventions undermined confidence in the auction, and the Kwacha tumbled to K19 to the US dollar by the end of 1986. 1.17 GDP growth in 1986 was close to zero, making the 1983-86 adjustment period one of zero growth. Inflation rose, and budgetary and trade deficits widened. The program did help nontraditional exports expand rapidly, and the use of manufacturing capacity also increased as a result of greater domestic demand financed by greater commercial debt and bilateral assistance. But the devaluation of the Kwacha and the government's attempts to reduce the budget deficit by reducing food subsidies resulted in food shortages, rising prices, and food riots during December 1986. 1987 to 1988: Back to Controls 1.18 At the beginning of 1987 the government suspended the foreign exchange auction altogether, and restricted the exchange rate to the range of K9-K 1 2.5/US$ 1. Then, on May 1, 1987, concerned about the rapid devaluation of the Kwacha to K21 to the US dollar and rising social unrest, the president announced that Zambia was abandoning its reform program with the IMF and the Bank, and would pursue its own adjustment program. The new program fixed the Kwacha at K8 to the US dollar; introduced extensive price controls and import restrictions; and limited debt service payments. The strategy was distinctly supply-side in its emphasis. The main priority was increasing output even if this meant increasing the money supply and inflation. 28 Previous government programs, supported by the Bank and the IMF, had tried to contain inflation by controlling demand, even when this limited the expansion of output. Supply expansion meanwhile, was financed partly by withheld debt-service payments. 1.19 Kaunda continued some of the 1985 reforms, and hoped to keep the door open for continued Bank and donor assistance. However, given the rapid buildup in arrears to the Bank, a suspension in loan disbursements was inevitable at the end of May 1987. 1.20 Still, Kaunda kept communications open with the Bank and bilateral donors in an effort to win support for his changes. In a letter to President Barber Conable in August 1987, he asked for Bank comment on his New Economic Recovery Plan (NERP). Conable. meeting with Kaunda in October 1987, responded that the Bank did not believe the NERP could achieve its objectives. 1.21 By a confluence of fortunate circumstances, Zambia's GDP grew by 3.1 percent in 1987. Rains were good, making for a bountiful harvest, and copper prices improved briefly. However, partly as a result of NERP policies, some aspects of the economy deteriorated in 1987. Inflation was exacerbated by the growth in the fiscal deficit, and lax monetary controls. This highlighted the need to tackle other urgent problems-the budget deficit, exchange rate controls, interest rate controls, price controls, and monetary expansion. 1.22 In October Kaunda agreed to discuss program adjustments with a Bank mission, and this marked the beginning of a renewed period of Bank influence over Zambia's development strategy. In January 1988 the Kwacha was pegged to a basket of currencies of Zambia's main trading partners. The auction was re-introduced to allocate foreign exchange but not to fix the rate. However, Kaunda retained most features of the NERP and in September 1988 he sent World Bank President Conable a progress report on it. The Bank's reaction was mixed, seeing some favorable developments, but finding problems of inflation and the budgetary imbalance unsolved. 1989-90: A Gradual Return to Adjustment 1.23 By the end of 1988 the government accepted that, despite the fact that GDP was growing at an annual rate of 5.6 percent, the NERP was not solving the country's major economic problems. In November Zambia devalued the Kwacha by 25 percent and pegged it to the SDR, removed some import restrictions, and took measures that increased monetary reserve requirements and raised interest rates. On the fiscal side, maize meal prices were tripled, and a coupon scheme was introduced in January 1989 to reduce the cost of the subsidy. In March 1989 the government increased the share of export earnings that exporters could use for their own imports. 1.24 In mid-1989 Kaunda announced that the government had devalued the Kwacha by 63 percent, removed all price controls except for maize meal, introduced a dual exchange regime with a market-rate and a government-rate, and changed to an "open general license" import regime. To help palliate the resulting cost-of-living increase, civil service wages were raised by 30 to 50 percent. The Bank of Zambia increased interest rates and reserve requirements, and made it mandatory for parastatals to pay their overdue service on foreign debt in the local currency into the Central Bank. 1.25 These announcements paved the way for an agreement with the Bank and IMF in September 1989 on the economic reform program as set out in a Policy Framework Paper (PFP) 29 covering 1989-93. The agreement was followed by a Consultative Group meeting and a Paris Club agreement on Zambia's foreign debt in July 1990. The policy dialogue between the government and the Bank and IMF culminated in the clearance of Zambia's arrears and a resumption of normal relations in March 1991. In April 1991 the IMF approved a Rights Accumulation Program. According to this, Zambia (the first country to use the program) began to accumulate rights to draw IMF resources to liquidate arrears to the IMF, if the country fulfilled the macroeconomic conditions laid down in the program. Adjustment Abandoned Again Before 1991 Elections 1 26 Zambia again backed off the adjustment program in the months preceding the October 1991 elections. The government gave in to exorbitant wage demands, resorted to expansionary fiscal measures, and boosted maize and other subsidies, while allowing debt service to the Bank to fall into arrears. The Bank suspended disbursements in September 1991. A particular source of disagreement centered on local maize prices. The government said it could not act on the consumer price of maize until after the election, thus reneging on a 30-percent increase promised to bilateral donors in Paris in July 1991. The government also substantially raised civil service salaries, thereby reversing apparent progress in reducing the fiscal deficit. An October public expenditure review mission found subsidies on maize rising rapidly and extrabudgetary pay increases were exacerbating the fiscal deficit. The desired pre-election economic boom did not materialize, and Kaunda's long presidency ended. After 1991: The New Government Restores Reform Program 1.27 With inflation running at over 100 percent a year and GDP declining, the government of President Chiluba soon declared its intention to return to the program that the Kaunda government had started and abandoned. Bilateral donors pledged their support to the new government in facing a devastating drought and in resolving Zambia's arrears with the Bank. The problem created by the drought was resolved by massive food aid during the next year. By the end of January 1992 arrears with the bank had been cleared by a combination of special deposits by bilateral donors, and interim financing provided by Citibank against an IDA comfort letter. 1.28 In February 1992, the government reached an agreement with the Bank and IMF on a PFP for 1992-94. It outlined a comprehensive policy of reforms for stabilizing and restructuring the economy, and stimulating growth. The program focused on three sets of policies-the removal of subsidies, economic liberalization and stabilization, and the privatization of state-owned enterprises. 1.29 The liberalization measures included the abolition of import and export licenses; a lifting of controls on interest rates; the lifting of price controls; and the lowering and compression of trade tariffs. In September 1992 the government introduced bureaus de change and the official exchange rate was unified in December that year. Domestic asset markets were liberalized with: the introduction of tender-based weekly auctions for treasury bills, the removal of restrictions on commercial banks' lending rates, and the abolition of exchange controls. A privatization act was passed in July 1992, and the Zambian Privatization Agency (ZPA) was created to convert state- owned enterprises to private ownership. 30 1.30 In 1992 the country faced many economic difficulties. The prolonged drought caused a rise in food imports- which diverted foreign exchange from industrial inputs, so industrial capacity could not be utilized. Copper production fell by over 8 percent while international copper prices slipped. High pre-election wage settlements not only contributed to a large government deficit and inadequate control of the money supply, but also increased domestic demand and inflation, continuing the deterioration of the previous two years. By the end of 1992 the government made control of inflation a top priority. In early 1993 it did the following to reduce inflationary pressures: introduced a cash budget system to control expenditures and reduce the deficit, curtailed credit, and rolled over (rather than repay) maturing treasury bills. 1.31 These measures brought inflation down sharply during the second half of 1993, and they were continued in 1994. There was a crowding out of the private sector with the sale of treasury bills, and with an increase in public-sector debt held by commercial banks. To continue stabilizing prices and strengthening public finances, consumer and producer subsidies were substantially reduced. the need to subsidize public enterprises was reduced by privatizing and reforming parastatals. and the size of the civil service was trimmed. The deficit was partly financed by contractors and suppliers who were owed considerable amounts of money by many government departments. Much maize remained unpurchased during the 1993-94 season. This put a severe strain on farmers, who needed cash to pay off loans and buy inputs for the next season, and when the government did buy the grain, it offered to pay the farmers with promissory notes redeemable in Fcbruars 1994. well beyond the usual August-September payment date. 1.32 Currently, state-owned enterprises that are not financially viable are being closed. Parastatals that remain in the public sector, mainly utilities, are being restructured to free them from the need for public subventions and to give them more financial and management independence. The ZPA was restructured in 1994 and approved more than 100 companies for sale during 1995. In 1995, two large loss-making parastatals-Zambia Airways and the United Bus Company of Zambia-were liquidated and the public sector holding company, ZIMCO, was dissolved. Studies will be done on the privatization of Zambia Railways, Zambia Consolidated Copper Mines (ZCCM), and other parastatals in infrastructure and energy. But this progress has not been without difficulties as the government has often hesitated before undertaking these measures and an intense, and at times tense, dialogue with the donor community has been an important factor in the progress. Zambia's Present Strategy-Continuing the Reform Program 1.33 In mid-1995. the Zambian Minister of Finance summarized Zambia's current development strategy for the Bank Board The objective for the next three years is positive per capita growth in a stable macroeconomic environment. But the ultimate objective is to reverse the rising incidence of poverty-today almost 70 percent of Zambians live below the poverty line. 1.34 These objectives are being pursued through a program of reforms that include the following components-a value-added tax, a stronger Zambia Revenue Authority, better handling of ZIMCO's residual assets, less government expenditure in GDP, increased real expenditure on health and education in the budget, a strictly enforced freeze on government hiring, a smaller and more efficient civil service, and more effective use of donor assistance. Government activity will reinforce private sector expansion, by increasing public investment in infrastructure and social 31 services and, by increasing the amount of resources that may be invested, and encouraging their efficient use. Other measures in the reform program include a new land policy, continued privatization, a reduction in regulations, an enhancement of services supporting the private sector, and a new mining policy contemplating ZCCM privatization. 1.35 This summary's resemblance to recent statements of Bank strategy notwithstanding, Bank staff insist that Zambia's strategy is its own; and reflects the work of its few but capable technocrats and the political directorate. Yet, the Zambian strategy addresses the concerns and reflects the views of the Bank, the IMF, and bilateral donors. It is impossible to determine how much of this strategy Zambia really owns, and how much the statement reflects Zambia's deep awareness of its financial dependence on donors. As a new round of elections approaches (in late 1996) the government ownership of this strategy will be put to a strong test. 32 Table 1.2: Principal Economic and Political Events (1963-96), Pre-1983 Zambia Bank 1963- Central African Federation formally dissolves 1964 October-Zambia gains independence with Kaunda as president 1965 November-Rhodesia declares unilateral independence 1966-Zambia, unable to rely on coal from S. Rhodesia, opens Maamba mine with output of 100,000 tons 1967-Bank makes first IBRD project loan to Zambia (project loans continue through 1982) 1968-Kaunda initiates program of self reliance in industry, state ownership, nationalization of firms. UK decides to reduce aid 1971-Copper prices fall, remain low in 1972 1971-Zambia starts to use IMF facilities 1972-Coal production is at peak to reduce energy imports from S. Rhodesia 1973-Oil price crisis hits 1973-Bank makes first program loan to Zambia 1973-74-Copper prices recover 1975-Copper prices fall again and stay low until 1979-80 1976-Copper production peaks at 712,000 tons 1976-Bank makes second program loan 1978-Bank makes first IDA credit and 1979-Second oil price shock occurs Zambia becomes IBRD/IDA blend borrower 1980-Coup attempt made against Kaunda 1980-Copper price recovers 1981 -Zambia's use of IMF resources reaches highest point (SDR 359 million) 1982-Zambia is in full-blown financial crisis 33 1983 and after Zambia Bank 1983 January-Zambia introduces reforms, devalues Kwacha , but stops debt repayments 1983 April-USSR agrees to reschedule Zambia's debt 1983 October-Kaunda re-elected by 1983 October-Bank suspends disbursements by an increased majority 1984 February-Students riot 1984-Copper prices slump 1984-Bank approves Export Rehabilitation Zambian debt to IMF reaches peak & Diversification Project of SDR 754 million 1985-Industrial unrest and public sector 1985-Bank approves Agricultural Rehabilitation strikes dominate first half of year Credit 1986-Copper price slumps again 1986-Bank approves Multi-Sector Credit and Industrial Reorientation Credits. 1987 May 1-Government reverses the economic reform policies agreed with Bank/IMF in 1985 1989 September-Zambia resumes relations with Bank and IMF after reaching agreement on reforms 1990-Consultative Group meeting and Paris Club agreement 1991 March-Arrears to Bank cleared. 1991 March-Arrears to the Bank cleared; IDA approves Recovery Credits 1991 October-Multiparty Movement for 1991 September-Bank suspends disbursements Democracy wins the elections. President Chiluba replaces President Kaunda 1992 January-Arrears are cleared. 1992-Bank lifts suspension on lending, and Prolonged and severe drought occurs approves Privatization & Industrial Recovery Credits I and II 1993-Zambia introduces cash budget and 1993-Privatization and Industrial Reorientation starts to reduce inflation Credit II-PIRC 11 1994-Bank approves Economic & Social Adjustment Credit 1995-Bank approves Agricultural Sector Investment Project and Health and Social Credits 1996-Economic Recovery and Investment Credit- ERIP Table 1.3: Social Indicators, 1986-95 Social Indicators Infant Energy GNP mortality Per capita consumption per Total Population Life rate supply of School enrollment per capita capita population growth rate expectancy (per calories rates (kg of oil Year (US$) (1,000) (percent) (years) 1,000) (per day) (percent) equivalent) Primary Secondary 1986 470 6429 3.2 51.6 84.8 NA 94 17 422.2 1987 300 6945 3.3 52 84 2126. 100 17 412 1988 240 7196 3.3 53 93 2126 103 19 412 1989 290 7490 3.7 53.1 80 NA. 104 19 379.4 1990 390 7840 3.7 53.7 76.6 2026 97 17 379.4 1991-92 420 8110 3.7 49.7 82.1 2077 95 20 378.8 1993 460 8319 3.3 49 106 NA NA 20 379 1994 450 8272 3 48 107 NA NA 20 159 1995 380 8936 3.3 48 103 NA NA 37 149 NA = not available. 2. Bank Assistance Strategy in the Eighties and Nineties: Short-Term and Crisis Driven Sources of Information 2.1 The review of the Bank's strategy does not benefit significantly from an events-driven analysis, there having been only one event that seem to have provoked a shift in its attitude toward Zambia. This event was the introduction of and emphasis on structural adjustment by the Bank at the beginning of the decade of the eighties at a time when there was a drying up of private credit to highly indebted developing countries. This event prompted the undertaking of economic and sector work that took a new and critical look at the development strategy and prospects of clients. A 1981 economic memorandum set out the Bank's independent view of what was the appropriate development approach for Zambia, and provided the focus for the Bank's assistance strategy for Zambia over the longer term. However, the Bank's strategy over the shorter-term has tended to react to changes in Zambia's adjustment efforts, economic performance and attitude toward Bank advice. 2.2 The approach has been to identify the main threads of Bank strategy from these reactions as recorded in statements of its intentions and from its actions. These actions are inherent in decisions about the amount, content, and timing of economic and sector work, and about the amount, distribution by instrument, by objective and by sector, and conditions attached to lending. The intentions have been recorded in a draft 1981 Country Program Paper (CPP) and a 1985 CPP; in Country Assistance Strategy and Operational Program papers for FY88-90 and FY89-91 prepared in August 1987 and June 1988 respectively; in a series of Status Reports prepared in 1988; in Country Strategy Papers drafted in 1992 and 1993, the second serving as the basis for the Country Assistance Strategy (CAS) of March 1994. The Bank's strategy for the period after 1994 was outlined in the minutes of the Loan Committee considering the Proposed Economic Recovery and Investment Promotion Credit in February 1995. A new CAS is being prepared for completion in FY96. Evolution of Bank Strategy Reflected Shift in Priorities 2.3 The Bank's strategy evolved in the following way: * Before 1980: the Bank shared Zambia's optimism regarding copper and did not criticize Zambia's industrial strategy, * 1980-82: the Bank started to base its strategy on its own diagnosis of Zambia's development, a diagnosis which saw the need to reduce the country's dependence on copper, * 1983-86: Bank support for Zambia's intermittent structural adjustment efforts focused on stabilizing output, 36 * 1987-90: in response to Zambia's abandonment of the adjustment program the Bank tried to get the program back on track partly by allowing a prolonged suspension of Zambian access to Bank resources, * 1991: the Bank through innovative strategy helped Zambia to clear its arrears which had resulted in the suspension of lending, and resumed lending to Kaunda despite the risk that with impending elections he would not meet conditions, * 1991-94: Bank strategy emphasized support for Zambian stabilization efforts and debt servicing, * 1994 and after: Bank strategy started focusing on growth and poverty alleviation. Increasing emphasis placed on privatization and sectoral investment programs. Before 1980: Sharing Zambia's Optimism 2.4 From 1967 until 1980, the Bank had an uncritical approach to Zambia's development strategy which emphasized public-sector-led industrialization. The Bank shared Zambia's optimism that the downturn in world copper prices was temporary, and it did not question the advisability of Zambian borrowing to continue the momentum of development. Indeed the Bank approved just under US$500 million in support of Zambia's development during this period, spread over twenty-five operations, including two program loans and numerous project loans in infrastructure, energy, agriculture, education, and financial intermediation. Most of these were IBRD operations. From 1980 to 1982: The Bank Re-assessed Zambian Strategy 2.5 By late 1981 Bank analysis reassessed Zambia's development strategy, and the 1981 CPP stressed the need to diversify exports away from copper in view of its low prices, declining output, and falling reserves of ore. Bank strategy was redesigned to support reforms to expand output in other sectors. The Bank proposed a lending program for FY82-86 of US$160 million IBRD and US$165 million IDA, within which a copper rehabilitation loan of US$70 million was to be the centerpiece and the vehicle to get the government to undertake institutional and policy reforms in other sectors, including agriculture. 2.6 It is clear that the Bank's strategy came to be based on its unilateral analysis of what was right for Zambia. In addition to the two themes of export diversification and policy/market liberalization, there was an undercurrent of concern not to let the economy slide too far. Bank thinking was that some resources would have to be spent on rehabilitating copper mining, since this would continue to be the main source of foreign exchange for some time. At the same time resources would be needed to provide for inputs to allow fuller use of installed industrial capacity. From 1983 to 1986: Bank-supported Structural Adjustment 2.7 In response to Zambia's agreement, in January 1983, to undertake adjustment measures and to introduce reforms to stabilize and liberalize the economy, the Bank made a commitment to support Zambia's efforts. In a 1983 paper on Bank strategy, the issue for the Bank was whether its support should take the form of a structural adjustment loan (SAL). It decided against a 37 comprehensive SAL before FY86 in view of the general weakness of Zambia's planning and finance ministries. Instead, the Bank decided to provide limited, sector-based, nonproject assistance, with conditions set on how the country should tackle the more general issues of economic reform. Given the time required and the analysis needed for lending to the agricultural sector, it was decided that the industrial sector should be tackled first, through a follow-up loan to the Development Bank of Zambia in FY84. 2.8 Meanwhile, the Bank shifted the policy dialogue away from the level of technicians in sector ministries to top officials in the Ministry of Finance, the Planning Commission, and the Bank of Zambia (BOZ). This shift mirrored the increasing importance of macroeconomic matters compared with sector project matters in the dialogue. But the shift was gradual, and during 1984 and 1985 World Bank analysts still believed that sector lending could be used to encourage more general policy reforms. This belief was inconsistent with the lack of centralization and planning in the Zambian government. 2.9 In the 1985 CPP, the Bank reviewed the policy agenda again. At the time the Zambian economy was in crisis from further copper price declines, layoffs, and labor unrest; and the government was vacillating in implementing agreed reforms. The Bank insisted on a full restoration of the liberalization measures that the Government had announced and partly implemented in 1983-84; a comprehensive program of stabilization measures meeting IMF standby conditions; and reforms to reduce the country's dependence on copper exports. In addition the Bank made its lending program conditional on the government's success in bringing the crisis under control, for Bank staff perceived that government commitment to policy reform was weak. The ensuing economic policy dialogue was difficult; but it ended in an agreement on two credits carrying the essential conditionality for structural adjustment-the 1985 Industrial Reorientation Credit (IRC) and the 1986 Economic Recovery Program Credit. From May 1987 to 1990: Waiting to Resume Adjustment 2.10 The Bank's strategy on Zambia was disrupted in May 1987 by the Government's reversal of the economic adjustment program and the accumulation of arrears to the Bank, leading to suspension of Bank lending. A Country Assistance Strategy and Operational Program prepared in July of 1987 stated clearly that the Bank's strategy over the next three years sought to get the adjustment process back on track, and was planned to be in two stages. These were to be: (a) First, to consolidate the gains of the adjustment policies and on the assumption such policies remained in place. At the same time, there was limited lending to projects in social sectors and in infrastructure rehabilitation. This lending was not dependent on macroeconomic or sector policy reforms. (b) Second, to seek an eventual resumption of structural adjustment lending. This strategy involved continuing discussions with the Zambian authorities on macroeconomic policies and other issues, to agree on a policy framework that the Bank could accept and support. 2.11 This dual approach is a standard Bank approach when a policy disagreement exists, but it failed to take into account the fact that Zambia had stopped servicing its debt and had accumulated huge arrears. Thus the first stage was not applied as there was no lending to projects in the social sectors and in infrastructure rehabilitation, and there was no support of the adjustment policies that 38 Zambia had not abandoned. There was no provision in the strategy for the Bank to do anything about the arrears that made suspension necessary, and thereby expedite resumption of adjustment lending. The Bank did not seek a way around the suspension rules or devise a means to satisfy them expeditiously. 2.12 Shortly after the Bank, the IMF, and Zambia once again reached agreement in September 1989, the Bank convened donors to search for a solution to Zambia's arrears. The episode of the arrears clearance suggests the Bank could have acted earlier to find a way to help the Zambians; several donors had offered assistance as early as December 1988. There is reason to believe the Bank delayed acting to enhance its leverage in the policy dialogue with Zambia. The tactic succeeded in securing immediate agreement, but failed to produce long-term commitment. 1991: Taking a Chance 2.13 In 1991, the Bank orchestrated the liquidation of Zambia's arrears to the institution through special contributions by some bilateral donors, the arrangement of short-term interim financing and by committing itself to the expediting the disbursement of funds from renewed lending and from credits that had been suspended. It faced the risk that although President Kaunda had agreed since 1989 to re-institute the reform program and had taken some measures, he may have been unwilling to follow through on politically unpopular measures, like the removal of maize meal subsidy and the withholding of wage increases for public service employees in the months before the elections of October 1991. Although President Kaunda abandoned the reform program in the months before the election, on the part of the Bank it was a risk worth taking. By removing the obstacles to the Bank's and other donors' support the Bank avoided the charge of prolonging for political reasons the economic difficulties created by the shortage of foreign exchange, and put the onus on Kaunda to demonstrate that he was willing to undertake the needed reforms despite the political risks. Besides, the socio-economic climate for the election was more stable than it might have been if the economic situation had been worse. Also, the Bank's actions were a clear signal to whichever party won the elections, that the Bank would be willing to support a reform program as long as the government appeared committed to it. 1991 to 1994: Focus on Stability and Debt Servicing 2.14 The next comprehensive statement of Bank strategy for Zambia was in 1992, after the new government had shown its willingness to pursue a strong adjustment program. The issues raised in it were macroeconomic stability, debt service, financing requirements and aid coordination, and Zambian implementation of the program. These issues defined the focus of Bank assistance over the next four years. The analysis drew attention to the fact that Zambia would need a high level of external support to service its external debt-a theme that has recurred. 2.15 In its lending during this period, the Bank gave the highest priority to providing balance of payments support for debt servicing, and the lowest priority to project financing. The Bank's role in coordinating aid for Zambia was also a high priority, given the need to mobilize bilateral donor support to close the financing gap and to reduce Zambia's external debt. The twice-yearly meetings of the Consultative Group and ad hoc meetings of the Paris Club that had to be organized are indicative of this, and of the importance of such coordination over the last four years. The policy dialogue has been less crucial given the Chiluba government's willingness to take measures to stabilize the economy, to reduce government intervention and restore growth. The Bank's 39 economic and sector work, and policy dialogue with Zambia, focused on the need to reduce inflation, primarily by holding down public sector spending as a way of reducing the fiscal deficit. 1994 and After. Confronting Weak Growth, Poverty 2.16 In March 1994, another strategy statement set out clearly that the Bank's goal for Zambia was to assist the government in achieving sustainable economic growth and reducing poverty. The range of concerns included portfolio performance, beneficiary ownership, donor coordination, balance of payments support for debt service, and new-types of sector lending.2 These concerns were developed into a three-pronged strategy: * to support policy reform and provide balance of payments support through adjustment operations, * to improve the private sector environment through project investments in infrastructure and human resources, * to target the poor and vulnerable groups with specific programs in agriculture and in social services. 2.17 The lending scenario in 1994 was not only based on a continued satisfactory macroeconomic policy performance, the implementation of structural reforms, and an improvement of portfolio performance, but also on future copper prices and certain levels of support from other donors. The strategy specifically made a provision that if the price of copper collapsed further, (beyond the trend projected in the document), or failed to recover as expected, and the shortfall in resources could not be covered by other donors, the Bank would be forced to suspend operations, should the government be unable simultaneously to maintain the adjustment program and service its Bank debt. In addition, the Bank was to go on playing an important role in aid coordination. To help Zambia achieve a sustainable internal balance, the Bank was to provide assistance and chair the Consultative Group on its debt renegotiations. 2.18 As inflation subsided, the dialogue has focused on growth. Increasingly, for all borrowers, the Bank is stressing the need to maximize the development impact of its operations; and the planning, implementation, and follow-up in its Zambia program have changed in consequence. The Bank's economic and sector work on poverty has paved the way for social sector initiatives that are likely to be a higher priority in Bank assistance than in the past, especially since it has become obvious that the economic problems are somewhat intractable. 2.19 Early in 1995 the Bank reconfirmed the appropriateness of adjustment lending as part of the Zambia strategy, envisioning annual adjustment operations. The Region indicated that this approach is in keeping with an agreement reached in the early 1990s with the G-7. This agreement seeks to move Zambia gradually to a stable balance of payments situation through adjustment operations and bilateral debt relief, in order to avoid drastic cutbacks in imports and the strangling of economic growth. 2 The 1994 Agricultural Sector Investment Project (AS[P] was the first new-type sector loan and is considered a flagship loan for future Bank support to Zambia. 40 2.20 The 1995 analysis found Zambia's adjustment program to be on course and the Bank's program evolving in response. While Bank lending will continue to have a significant component of adjustment lending, the emphasis increasingly will be on a bold program of sector investment operations which has been developed to remove constraints on growth and strengthen the economy's supply response. Zambia has completed the Rights Accumulation Program with the IMF, and has been able to clear its arrears with the IMF, thereby restoring access to that organization's resources in support of clients' stabilization efforts. This is expected to reduce the need for the Bank to provide such support in the future. 3. Evaluation of Bank Assistance Strategy Overview 3.1 The evaluation of the Bank's assistance strategy in Zambia during 1983-95 may be summed up as follows: * The Bank's assistance has been less relevant to the country's long term development than it could have been if it had followed more closely the Bank's earlier diagnosis of Zambia's problems and prospects. Instead, the strategy overestimated the government's willingness to reform and focused too narrowly on stabilization. In the process, too little attention was paid to privatization, policy adjustments for private producers, rehabilitation of infrastructure and the maintenance of social services. During most of the 1980s, long-term relevance was compromised by the pursuit of short-term stabilization objectives which remained elusive. * The efficacy of Bank assistance has been mixed. Bank assistance has not helped Zambia establish a trend of positive GDP growth, much less positive per capita income growth. Bank assistance has not solved Zambia's fundamental problems of worsening poverty and deteriorating social indicators. However, the conditions attached to IDA credits drastically reduced inflation and brought interest rates down to more normal levels. * If Bank assistance to Zambia is to be more relevant and useful the Bank must be more realistic in its projections on Zambian recovery. It must acknowledge that the political situation may not always be favorable to development; pay more attention to human and infrastructure constraints; bear in mind that international aid may well decline now that Zambia is no longer a front-line state; and recognize that there can be no quick economic recovery given the deterioration in Zambia's infrastructure after years of lack of maintenance and under-investment. Added to this the country suffers from skill deficiencies, and the pace of institutional change is slow. Methodology Relevance, Efficacy, and Efficiency are the Main Criteria 3.2 Basically the approach to the evaluation of the Bank's assistance is to identify criteria of a good strategy and to judge the strategy as a whole and its components in terms of the extent to which these criteria have been met. The evaluation is conducted on two levels-that of the strategy as a whole, and that of the components, economic and sector work, lending, aid coordination and technical assistance in debt management. Relevance, efficacy, and efficiency are the main criteria used by OED for evaluating the Bank's assistance strategy. 3.3 For any country, the relevance of the Bank's assistance strategy depends on how well it is adjusted to the genuine need of the client, in light of commonly accepted goals of economic growth, stability and poverty alleviation and the resource and technological constraints faced by the client. The relevance of such a strategy also depends on the degree to which it responds to circumstances 42 that are particularly important to the client. In the case of Zambia the large external debt, the role of bilateral donors, the need to coordinate with the IMF, and the incidence of arrears leading to suspension of lending constituted such circumstances. To be relevant the Bank's strategy should also fit into the country's political and social context, which determines a country's priorities and the way a country pursues them. 3.4 Efficacy is the extent to which outcomes have met the objectives; and is judged ex post on the basis of the achievement of objectives. The main question is whether and to what extent operations have had their intended impact. This is difficult to determine since the situation without the Bank's assistance does not exist anymore for comparison, and since the observed situation is usually not only the outcome of the Bank's operations but of many other factors including operations of other donors. To the extent possible, the evaluator should sort out the contributions of these other factors in an effort to get a fair idea of the Bank's contribution to the observed outcomes. Thus, in order to achieve its objectives, Bank strategy must be grounded in a realistic analysis of: (a) what is possible in the physical, social, cultural, political, and international circumstances; (b) what can be done within a specified time; and (c) what constitutes the country's best development options. 3.5 Efficiency is the assessment of outcomes in relation to project inputs when evaluating projects; and is usually evaluated in terms of cost overruns, implementation delays, and economic and financial rates of return. In the case of the assistance program as a whole the focus is on the commitment of the Bank's budgetary and manpower resources in relation to the lending program. Since these are the main inputs made by the Bank in developing its portfolio of loans, efficiency is an important gauge of portfolio quality. 3.6 The Bank also judges its assistance strategy on the basis of the sustainability of benefits and the institutional development impact of its operations. These criteria are important in determining the longer term contribution to national development. These are usually used in the evaluation of specific projects. 3.7 Operationally, the evaluation involves the review of the three main decisions which affect the relevance of the Bank's assistance. These are: (a) How much assistance to provide, (b) The form in which the assistance is provided, (c) The activities/operations within each type, and the timing/sequencing of them. Answers are sought to the questions: a)Was assistance based on realistic assumptions regarding the development opportunities and obstacles? b) Was adequate thought given to peculiar features of the Zambian case? Then the implementation of the assistance program, on which its efficacy in terms of output of benefits will largely depend, is judged mainly on the actual experience in terms of output of goods and services and institutional and policy improvements. The main input is the evaluation of individual projects and programs done by OED and other evaluators 43 Evaluation of Bank Assistance Relevance 3.8 In general, Bank assistance was relevant to Zambia's needs. This was due largely to the realistic diagnosis of Zambia's development problem and prospects. At the same time the relevance of bank assistance tended to be limited by the following: * Too much emphasis on short-term stability and not enough on long-term growth, * An insufficient and unrealistic analysis of the political situation, * Being too optimistic. Realistic Diagnosis of the Zambian Development Problem 3.9 The Bank's 1980/81 diagnosis, and associated recommendations, conformed to the accepted wisdom and were unexceptionable. It clearly focused on what was wrong with the Zambian economic strategy. An attempt was made to be faithful to the diagnosis in the designing of the Bank's assistance, but implementation was not always consistent with relevance. This was the situation in 1986. When implementing structural adjustment credits the Bank diluted conditionality in the interest of rapid disbursement, and the inconsistency between the way some credits were implemented undermined the relevance of others. On the other hand, the diagnosis carried out by the Bank in 1980/81 has proven to be remarkably robust and remains essentially valid in 1996, especially in its emphasis on diversification. It proved ahead of its time in stressing the need for liberalization and privatization to correct the defects of government-led industrialization and trade protection which were popular from the fifties to the seventies in many newly independent countries of Africa and Latin America. Bank Assistance Has Been Responsive to Zambia's External Debt Problems 3.10 The amount and composition of Bank lending, the direction of the Bank's economic and sector work, and the nature of technical assistance and aid coordination have been responsive to Zambia's enormous external debt. Early on, the Bank assisted in developing an adequate debt monitoring system, partly to facilitate the rescheduling of bilateral debt. Throughout 1983-95, the Bank helped reschedule and renegotiate debt with bilateral creditors. The Bank's role in aid coordination was developed largely in response to the need to mobilize support for Zambia's efforts to reduce the burden of its bilateral debt and make it more manageable. As the share of debt to the multilaterals increased, and as arrears in servicing such debt became larger and of longer duration, Bank lending was geared to providing foreign currency for the clearance of arrears so that lending operations could continue. 3.11 At the end of 1994, Zambia's debt totaled US$6.2 billion, of which $3.1 billion was multilateral and $2.7 billion bilateral. Excluding short-term debt, Zambia's external debt is nearly $650 per capita, one of the highest rates in the world. A commercial buyback operation in 1994 reduced the debt by over US$600 million. However, managing Zambia's debt with 44 minimum burden for the country will continue to require substantial and coordinated donor support with the Bank playing a pivotal role. Bank Strategy Has Recognized the Immense Importance of Bilateral Donors 3.12 In order to increase the relevance of its strategy for Zambia's development, the Bank has been careful to recognize the importance of other donors, multilateral and bilateral. Bilateral aid has been significantly larger than multilateral aid, and until 1990 it showed a higher grant element. The Bank wants to avoid overlaps in aid as well as gaps in the combined assistance programs of donors. The important donors in the past (the UK, and the USSR), have as long a history of involvement with Zambia as the Bank, and they have traditionally acted independently of the Bank. But while the Bank may not have had much influence on the amount and content of these donors' aid, it has been able to register most of it, and this has helped in gauging what is required from other sources, including the Bank itself, in order to close the gap associated with investment targets. The Bank has devoted substantial resources to the provision of documentation and to the promotion of the consultative group mechanism for mobilizing and coordinating aid to Zambia, including debt restructuring. Zambia and the donors alike have appreciated this component of Bank assistance. Coordination with the other donors remains a high priority at present. Bank Support Compensated for Zambia's Ineligibility to Access the IMF 3.13 For years, Zambia mainly needed aid to stabilize its economy and the balance of payments. From the early seventies until well into the eighties the IMF was the main provider of such funds. However, Zambia became ineligible to use IMF resources in September 1987 following the accumulation of overdue service payments to that institution; and it did not use IMF resources between 1986 and the end of 1995. Bank lending to Zambia was also suspended in 1987, but unlike the IMF, Bank support was renewed after the clearance of Zambia's Bank arrears in 1991. During the early nineties policy-based lending by the Bank provided mainly assistance to stabilize the economy, thereby playing the role formerly played by the IMF prior to 1987. Bank strategy in Zambia has been characterized by close coordination between the Bank and the IMF. The Bank has mainly provided structural adjustment credits, bearing similar macroeconomic conditions to those of IMF standby agreements. It is reasonable to assume that had Zambia's eligibility to use IMF resources been restored in 1991, Bank policy-based lending would have represented a smaller share of Bank financing to Zambia in the nineties. 3.14 As of December 6, 1995 Zambia's ineligibility to use IMF resources was lifted following clearance of arrears of SDR 830.2 million (about US$1,234 million). The clearance was facilitated by IMF loans totaling SDR 701.7 million (about US$1,043 million) corresponding essentially to the encashment of rights, under Zambia's rights accumulation program, which the Bank helped to arrange in 1991. Under this program, when Zambia met certain macroeconomic conditions for World Bank loans, which were like those under an IMF standby arrangement, the country accumulated rights to have IMF resources in the future which could be used to offset debt to the IMF. Long-term Relevance Was Compromised by Short-term Objectives 3.15 The most visible evidence of Bank assistance is lending. Nearly 70 percent of Bank disbursements to Zambia during 1983-94 were structural adjustment credits. But the relevance of 45 Bank assistance was affected by the relative emphasis between short-term stabilization and structural adjustment. These objectives shifted over time but in generally the focus was on the short term. 3.16 The long-term objectives of Bank assistance in Zambia have been to diversify the sources of foreign exchange in order to reduce dependence on copper, liberalize the environment for the private sector, and reduce the role of the public sector in commercial activities. Bank assistance has only recently returned to these and started to focus directly on poverty. 3.17 In actual implementation, Bank strategy during the early eighties faced a dilemma. The projects in the pipeline reflected the thinking of an earlier time and the goals of diversification and liberalization were not immediately reflected in lending in 1983-84. Instead, the Bank supported infrastructure and credit through development banks, and provided a major loan to rehabilitate copper mining. Finally, after receiving ESW completed in 1984, the Bank approved its Agricultural Rehabilitation Credit (ARC) in mid-1984 and the Industrial Reorientation Credit (IRC) in 1985; but both were de facto structural adjustment credits. 3. 18 Although the goals of Bank strategy were diversification, privatization and liberalization, conditionality in adjustment lending emphasized liberalization. The Bank required that the government report on its market liberalization efforts one year after approval of the Agricultural Rehabilitation Credit which was intended to support the reduction in the role of the marketing parastatal (NAMBOARD), and a cutback in the subsidy to maize and fertilizer. Similarly, conditions attached to the IRC related mostly to freeing the foreign exchange market by establishing an auction and liberalizing the import regime. The Economic Recovery Program Credit approved in June 1986 supported a policy package covering the budget, import tariffs, public enterprise reform, and the maize-meal subsidy in addition to these same liberalization objectives. Liberalization was seen in the Bank as a necessary condition for diversification. 3.19 While these operations all had conditionality requiring liberalization, in 1985/86 the immediate objective of Bank support was to boost capacity utilization and output by providing foreign exchange for imported inputs. The Bank put such emphasis on stimulating an immediate increase in output that disbursement arrangements were biased toward assuring the prompt transfer of resources, even when the government vacillated in taking some liberalization measures. These operations paid little or no attention to export diversification. The ARC provided financing to import agricultural equipment without any restriction as to whether it would be used to produce exports, new or old; and eventually the resources were channeled to imports in general. However, the IRC contained one requirement favoring diversification-that Zambia enact a new investment code to encourage new industries. The new code was enacted, but its purpose was defeated as bureaucratic controls were maintained. 3.20 Only one operation-the Second Coffee Project, which was essentially a credit line to the private-sector for coffee planting-seemed aimed to encourage another export commodity. Unfortunately, although it was approved in early FY87, this project did not become effective until 1992 when disbursements to Zambia resumed, and by then the implementing agency faced an uncertain future, given renewed emphasis on privatization. Also, the credit has been extended to all agro-industrial crops. 3.21 In the early nineties, Bank structural adjustment credits gave highest priority to debt management and liquidation of arrears. Toward the end of the eighties, when the debt had grown 46 alarmingly and arrears to multilateral institutions and other sources had piled up, the Bank saw the need to return to prompt debt servicing to restore Zambia's creditworthiness. In addition to facilitating the clearance of arrears, Bank lending was heavily biased toward support for debt servicing. 3.22 Then in 1993 the Bank, responding to inflationary pressures (and to the absence of a formal arrangement between Zambia and the IMF), made price stabilization the highest priority in its lending. This was reflected in the emphasis on conditionality regarding fiscal and monetary targets acceptable to the IMF. As inflation abated, conditionality shifted toward privatization to promote growth in the manufacturing and agricultural sectors. 3.23 In all these cases, priority was given to short-term stabilization, specifically output expansion, and creditworthiness at the expense of longer term structural change and infrastructure rehabilitation. Judged against the original diagnosis of Zambia's development problems, these short-term objectives made for a less relevant strategy than Zambian development required over the long term. There was no assurance that these priorities would favor greater private investment, rather than inefficient use of resources by the public sector. To the extent that they did not, the result was to increase Zambia's debt to finance greater immediate consumption at the expense of capital accumulation and future growth. 3.24 A more balanced lending program-one with more support for infrastructure, for privatization and private investment in the productive sectors, and for the social sectors-would have had greater relevance to Zambia's long-term development. Clearly, infrastructure deficiencies impeding agriculture were well known. This is not to say policies were not in need of change, rather, a core program of investments in which the benefits were not strongly compromised by defects in the policy environment could have been an important component of the lending program, while still reserving resources to compensate the government for making appropriate policy adjustments. This approach, which was and is fairly common in the Bank, was not seriously considered for Zambia until the prolonged suspension of operations in 1987-91. Yet it would have ensured some enduring benefit from a larger share of Bank resources, even if the government had reversed the adjustment policies. The Bank's Political Analysis Was Unrealistic 3.25 The Bank was unrealistic in its assumptions regarding the political consensus in favor of reform, and the strength of the commitment in favor of structural adjustment. This lack of realism adversely affected both the relevance and the efficacy of Bank efforts. The Bank seems to have assumed that because Zambia was a single-party state the government was strong. Bank analysts were late in recognizing the weakness of the government, especially the president, in facing the unions' demands and public opposition to cost of living increases and economic reforms. At times, decisions to introduce reform, reached by the cabinet, were stopped or reversed by the president when the political stakes were high. 3.26 The result was that the Bank was frequently caught by surprise, for instance in 1986, 1987, 1989, and 1991, when economic reforms were reversed shortly after being launched, and so had no measurable impact. There were several tell-tale signs that the Bank should have read. For example, in April 1986 the president appointed a new economic team composed of individuals who had a long record of opposing reforms. These people should not have been expected to implement reform policies. By contrast, in 1982 when Zambia's economic difficulties had come to a head, the 47 president signaled commitment to reform by appointing three pro-reform individuals as finance minister, governor of the Bank of Zambia, and economic advisor. During 1983 and 1984, the government, with Bank and IMF assistance, designed a broad program of policies and measures to strengthen economic management and create an environment conducive to economic growth and diversification. 3.27 These episodes raise the question of how the Bank evaluates the political temperature of a country. Clearly the Bank needs to do more expert monitoring and analysis of the political situation, and develop sensitivity to the political power of those likely to be affected by reforms. In general, the Bank should try to design measures that at least partly compensate affected groups. This may mean that, in order to get some rather than no policy change from the government, the Bank may recommend policy packages that are less than optimal economically but which are more feasible politically. The Bank did not consider this alternative enough during its perennial confrontation with Zambia over maize-meal pricing, for instance, or over the downsizing of the civil service. 3.28 Timing is also an important consideration. Political leaders are often unwilling to take unpopular measures just before an election. Thus, it should not have been surprising that Kaunda abandoned the austerity program that had been agreed with the Bank seven months before the 1991 elections. In the future, the Bank should consider carefully whether to provide assistance shortly before an election and avoid providing it with conditions that the government predictably will not meet. This is particularly important again in 1996 as the next election draws near. Bank Strategy Tends to Be Too Optimistic 3.29 There was and still is a tendency toward excessive optimism in forecasts regarding growth. This is perhaps due to a superficial analysis of the sources of growth and an underestimation of the factors that may impede the response to policy reforms. In a country where agriculture depends on rainfall and droughts are frequent, where economic activity is dependent on foreign exchange to finance imported inputs, and where the policy environment still does not favor entrepreneurs, Bank forecasts for the next five years call for positive per capita growth, at a rate achieved in only two years since 1985. This is unlikely to happen in the yet-unsettled policy environment (Table 3.1). 48 Table 3.1: GDP Growth: Project and Actual (1985-2000) GDP Growth % Year Projected Actual 1985 3.4 1.9 1986 2.0 0.7 1987 2.5 2.7 1988 3.0 6.3 1989 3.4 -1.0 1990 1.9 -0.5 1991 2.8 -1.8 1992 3.9 -2.5 1993 4.9 6.5 1994 4.0 -5.1 1995 1.5 - 1996 6.0 - 1997 6.0 - 1998 5.0 - 1999 5.0 - 2000 5.0 Sources: PFP December 9, 1986; PFP August 8, 1989; ExFPF February 27, 1992; President's Report for Economic Recovery and Investment Promotion Technical Assistance Credit, Report No. P-6897. 3.30 The Bank seems to assume that the Zambian economy has fully adjusted to the decline in copper. This is doubtful, for apart from the immense debt that has accumulated there is also an enormous backlog of infrastructure maintenance that will increasingly impair production. Recently the Bank has been calculating a "financing gap" based on estimates of foreign exchange needed to service the country's large debt and to attain growth targets, and on estimates of inflows from exports and from donors. But the requirement for meeting economic growth should include that needed to catch up on the maintenance of infrastructure. If not, although the financing gap may be closed, the productive capacity of the economy may decline as the infrastructure continues to deteriorate. 3.31 Excessive optimism has led to a "one option" approach by the Bank. This approach assumes that aid from bilateral donors (including debt reschedulings) will be adequate to cover a financial gap associated with a specific growth target, and that, at the same time, the country's multilateral debt can be fully serviced. The future of Zambia is seen to hinge on unlimited, permanent donor generosity. Indeed, to fulfill such an approach, donor generosity must increase to compensate for any future decline in copper earnings. 3.32 Alternative options can be worked out depending on which of the three variables-bilateral donor support, multilateral support, and/or the rate of Zambia's economic growth-is assumed to be fixed. One could assume, for instance, that there will be a limit in multilateral and bilateral donor support, and then deduce from that what would be a realistic level of growth and investment. The advantage of devising several options (however unpalatable some of them may be) is that a range of strategies can be considered for dealing with a specific concern, which is based on more realistic expectations. 49 3.33 By contrast, under a single option approach debate is focused on what policy changes the bilateral and multilateral donors will consider adequate as conditions for a given level of support. Such an approach assumes that the link between support and growth is guaranteed to come out as predicted. Meanwhile, the question of what policy and other factors will be adequate to bring about target levels of growth has received less attention. In particular it is too readily assumed that the investment required per unit of additional output will decline. This is unrealistic because the existing infrastructure is deteriorating, and in addition, different infrastructure is needed to serve a more diversified, private-sector-led economy. Investment in new skills is also required. Thus, there is the risk that while donor support may be adequate to service debt, growth performance may continue to be disappointing-a result again of a strategy not being fully relevant to Zambia's needs. Recent Efforts to Foster Greater Client Orientation 3.34 At its fiftieth anniversary the Bank emphasized that six "guiding principles" would shape the institution's focus and effectiveness: * selectivity, * partnership, * client orientation, * results orientation, * cost effectiveness, and * financial integrity. Of these, selectivity and client orientation tend to enhance relevance. Client orientation, for example, involves responding to the real needs of clients and facilitating their participation in the design and implementation of programs. 3.35 Since November 1992, the Southern Africa Department, which includes Zambia's Country Operations Division, has attempted to strengthen client orientation through consultation. The department's goal is to obtain feedback from clients at the policy dialogue, economic and sector work, project preparation, and implementation stages. Comment from all clients is welcome, but particularly so from the government and the direct beneficiaries of Bank-financed operations. In FY94 the department required all operations submitted to the Board to include client consultation. 3.36 The Zambia Social Recovery Project approved in 1991 involved a survey of beneficiaries on three occasions. The Southern Africa Department found such surveys greatly improved the speed and quality of project implementation. The University of Zambia now has the expertise to do surveys of beneficiaries. This augurs well for the relevance of the Bank's assistance to Zambia. 50 Efficacy 3.37 The efficacy of the Bank's assistance to Zambia has not matched the overall effort made as represented by the level of loan commitments. The most positive influences on efficacy have been: * additional resources which have raised GDP, * improvements in the stability of the economic environment. Meanwhile, the following had a negative impact on efficacy: * Adjustment lending did not induce sustained structural adjustment, * Measures were not taken during suspensions of disbursements to mitigate impact on ongoing projects, * Inadequate technical advice, * Limited capacity on the part of Zambia to benefit from the assistance, * Insufficient ownership of the program by Zambia. Bank Assistance Has Not Turned the Zambian Econom1, Around, but Has Kept GDP from Falling Further 3.38 The efficacy of Bank assistance in achieving growth and stability in Zambia has been mixed. The economy has not yet established a trend of positive GDP growth. much less positive per capita income growth, but it has achieved considerable price stability. Poverty is increasing, and the deteriorating social situation in the country has not yet been reversed. In short, Bank assistance has not brought about a turnaround, much less a solution to Zambia's fundamental problems. 3.39 Yet Bank assistance has been of positive value-the situation in Zambia would have been worse without the Bank. To judge the efficacy of the Bank assistance program a counterfactual would be helpful. But, none is available. It is difficult to identify the level of well-being that would exist in Zambia in the absence of all external assistance, and the difference that the Bank's contribution to external assistance has caused. Given the import dependence of industrial production, the availability of foreign currency has been the biggest constraint on Zambia's economic performance since the early seventies. Hence, a rough idea of the contribution of Bank financing may be developed by looking at the relationship between GDP and foreign exchange inflows, and at the contribution of Bank disbursement in relation to those inflows. A rough estimate is that each dollar of foreign exchange supported two of GDP. Hence, if the Bank's quick-disbursing financing accounted for 5 to 6 percent of GDP, it could have enhanced GDP by 10 to 12 percent in the years in which structural adjustment funding was disbursed. 3.40 One operation, the Mining Rehabilitation Credit, has been assessed as having had a significant impact in stopping the decline in copper production and in improving efficiency. Both had a salutary effect on the net foreign exchange earnings of copper To the extent that this helped 51 relieve the foreign exchange constraints on output, Bank assistance to mining may have increased output generally and not just in the sector. Adjustment lending did not lead to Adjustment 3.41 The view that Bank support came too much in the form of quick-disbursing credits that did not support adjustment focuses on the Kaunda government's tendency to jettison adjustment measures that proved unpopular. It sees the failure of structural adjustment as due to the fact that Zambia obtained resources before applying the policies long enough for them to be effective. If support had been disbursed less quickly the Zambian government might have stayed the course. 3.42 One problem in the eighties was that bilateral donors were not fully behind structural adjustment, and so Zambia could ignore pressure to sustain reforms. They could always turn to the bilaterals for support. This situation changed in the early nineties, as bilateral donors generally started supporting structural reforms. Because the Chiluba administration has stayed the course, the matter has not been tested, but it is fair to say that any strategy to link the flow of resources to Zambia's reform efforts will be more successful than previously. Prolonged Suspension Without Complementary Measures Undermined Efficacy 3.43 The Bank suspended its lending operations to Zambia three times. The first occasion, in October 1983, was short and did not interrupt relations in a significant way. The second occasion, in May 1987, lasted until March 1991. Third, in September 1991 disbursements were again suspended. On this occasion the suspension lasted until early 1992. 3.44 The long second suspension, lasting almost four years, clearly reduced the efficacy of the Banks assistance program. Investment lending was particularly vulnerable, since implementation was delayed even more. Also, a large number of loans made in the early eighties were canceled, after minimal disbursement. In fact, the average disbursement lag of 50 percent or more for the International Development Association, IDA's agricultural projects was due mainly to the suspension of IDA disbursements from 1987 to 1991. Two other IDA agricultural operations did not survive the suspension of disbursements. Suspension of disbursements also led to delays in projects in other sectors and to higher costs. 3.45 Some of the negative effects of the suspensions included: * a setback for the rehabilitation and adjustment plan for copper, * a setback for the restructuring plan for agriculture, * an undermining of the viability of several projects in agriculture, * a delay in the drafting of a new investment code, * a delay in the restructuring of INDECO (the government's industrial development holding company), * a compromise on the progress in industrial restructuring. 52 3.46 When public investment projects slowed down during the suspensions, project costs rose. These costs included the interest paid during construction, the cost of hiring and firing contractors, and delays in project benefits. Abandoned projects represent a loss of the investment up to that point. However, the Bank was not totally ineffective during these periods; some economic and sector work was done, although on a reduced scale. Meanwhile the fact that many studies on Zambia were dropped partly reflected Bank reorganization. Dialogue with Zambia continued however. This helped the eventual turnaround of policy and the preparation of arrangements for paying the arrears and resuming disbursements. 3.47 Some of the negative effects of suspension could have been avoided by providing more time and technical assistance to help in the shut-down and mothballing of projects where necessary. While there is evidence that the Bank did try to mobilize support from other donors in some cases so that project implementation could continue, donors can be lobbied more effectively to assist. 3.48 Once the disagreement over policy was resolved and Zambia took a number of adjustment measures in 1990, the Bank began an effort to help the country pay its arrears. In March 1991, under an innovative procedure in which the Bank coordinated the efforts of several donors, the arrears were cleared. The Bank identified funds available to clear arrears, and even played a major role arranging a Bank of England bridge loan of US$200 million. The Bank approved and disbursed an IDA credit on the same date to repay the bridge financing, completing the transaction in forty minutes. Zambia was restored to accrual status and was once again eligible for the disbursement of existing loans and credits and for new operations. 3.49 In December 1991, shortly after President Chiluba was elected, the US government decided to contribute $10 million to help Zambia pay its arrears to the Bank. The Bank saw this as evidence that the donor coalition was being restored; it had been in disarray as a result of the third suspension in September 1991. As of mid-January 1992, Zambia was overdue by US$50.5 million to the IBRD and by $1.2 million to IDA. Its withdrawal rights were reinstated on January 30, 1992, making it eligible to draw on US$80 million tranche of the Economic Recovery Credit. Helped by a Bank letter of support, a bridge loan was provided by Citibank for US$43 million; the funds were disbursed and repaid on the same day. 3.50 The innovative approaches of 1991 and 1992-interim financing, coordinated donor support, and provision of a supportive letter-suggest that the Bank can act to help clients overcome arrears problems and avoid the disruption of a prolonged suspension. However, guidelines do not exist to tell Bank staff when to use such means. Withholding help in liquidating arrears may have produced some leverage for getting an agreement with Zambia, but it did not produce genuine commitment. Lack ofAdequate Technical Packages Undermined Implementation 3.51 The Bank had general solutions to Zambia's ills, but frequently it did not have adequate technical packages of operationally feasible measures and projects. The general solution to dependence on copper was diversification; the solution to the negative private sector environment was liberalization; and the solution to public sector dominance was privatization. However, the specific actions, policy measures, and investments needed to bring about diversification of the economy were never adequately explained. Technical advice offered to Zambia to help it implement the policies was not always suitable and not adequate. (Zambia's agriculture was a notable example). The upshot was that the necessary infrastructure, additional resources, and 53 technical skills necessary for a solution were never identified in time or submitted to timely study. In the case of liberalization, studies on industry and agriculture in the mid-eighties identified which rules and arrangements had to be changed. The Bank was therefore able to make these the object of specific conditionality in its lending. Toward the mid-nineties an attempt was made to identify steps in privatization, but initially the efforts were mainly off-the-cuff rather than based on economic and sector work; conditionality to induce privatization has been limited to the establishing of a privatization agency and the setting of arbitrary targets for the number of public enterprises converted to private ownership. Recently, conditionality on privatization has been well defined and successful. Such actions as the closure of ZIMCO and Zambian Airways, and the selling of the first 10 percent of parastatals were clearly understood; and have been implemented by the Zambian authorities. Zambia's Limited Absorptive Capacity Has Also Reduced Efficacy 3.52 Constraints on Zambia's capacity to absorb Bank advice and finance have limited the results of operations in Zambia. Among these constraints are deficiencies in: (a) the development strategy and policies, (b) human resources (especially in management skills in the civil service); and (c) physical infrastructure. The Bank has tried to increase Zambia's capacity, particularly in the public sector, through economic and sector work, and the provision of technical assistance, and financial support for relevant projects in education/training and infrastructure. For example, the Specialized Training Study undertaken by the Education and Manpower Development Division of the Bank's Eastern and Southern Africa Region in 1986, assessed the supply and demand for skilled labor in the civil service, parastatals, and the private sector in the region, and recommended strategies to bridge the gap. The study recommended that in the short to medium term, agricultural education and training have the highest priority in order to implement the government's sectoral policy. A companion piece of Bank economic and sector work (Report No. 5727-ZA, 1986) examined wage policy issues. This study concluded that continued wage reductions would increase the possibility of a deterioration in the performance of government workers, and eventually lead to a breakdown in the provision of public services. Greater Ownership Would Have Strengthened Efficacy 3.53 During the eighties, there was no consensus in the Zambian government regarding economic liberalization. Many officials had grown up in an environment of public sector dominance in commercial activity and of private sector regulation. The Bank's emphasis was bound to ruffle some feathers in the government. Given the president's strategy of maintaining control by playing rivals against each other, the risk of reversal of the agreements on liberalization was probably greater than of a reversal of a strategy emphasizing diversification, involving investments rather than a change of rules. Hence, there was a need to foster greater Zambian ownership of the liberalization strategy. By the early nineties even Zambian officials came to accept the merits of liberalization, with the result that ownership has not been an issue. 3.54 Similarly the Bank's economic and sector work, and dialogue on privatization, has not been adequate to foster understanding and a sense of ownership by the Zambians on this issue, and so this has also been an area of slow progress. The slowness partly reflects the fact that it is in the nature of privatization that the private sector be willing to acquire what the public sector wants to shed. But the slowness also reflects a less than total commitment to privatization because of a lack of consensus in the government. Moreover, many officials employed in public enterprises are not 54 particularly keen to change the status quo. Clearly, effective ownership by all, including those directly affected, requires that adequate compensation be planned and discussed prior to the announcement of privatization. Also, since privatization has not been a universal solution in other countries, another way to increase commitment to the idea would be to do a study establishing the policy's merit in each case. Such an analysis has only recently started in Zambia. 3.55 The Bank's new approach in such sector investment projects as the Agricultural Sector Investment Program (ASIP), with its intensive client consultations, is likely to result in more effective ownership of projects and policies by the Zambians. Increasingly, the Bank is encouraging the Zambian government and beneficiaries of projects to become more involved. Efficiency 3.56 Efficiency relates the outcome of the strategy to the resources that have been used to produces that outcome. Ideally, the output should be a measure of the impact of the Bank program or operation on well-being in the client country, but this concept of output is elusive and impossible to measure. Proxy measures of the efficiency of the Bank is the level of lending committed and disbursed during a year in relation to the number of staffyears of Bank manpower used to generate them. These are measures of the efficiency of the portfolio, in that lending adds to the assets of the Bank. 3.57 Four measures of efficiency are derived by using total commitments and total disbursements as proxies of output in relation to staffyears devoted to lending and staffyears devoted to client services (including lending, supervision, country economic and sector work, and aid coordination and technical assistance). Table 3.2: Zambia--Allocation of Staffyears and Commitments and Disbursements per Staffyear in Zambia Operations FY 1989 1990 1991 1992 1993 1994 1995 ZAMBIA Total S-Yrs 6.2 10.5 16.3 17.4 19 23.2 24.8 Client Ser. 5.1 9.9 15.8 16.7 18.3 22.1 22 Lending 0.1 3.2 9.8 7.2 7.8 9.1 9.3 CESW 2.4 1.9 3.2 3.5 4.1 6 3.9 T.Commit 0 0 288.2 247.7 183.5 198 192.7 T. Disb. 4.7 2.2 207.2 101.1 164.4 185.7 191.5 T. Com./Len 0 0 29.4 34.4 23.5 21.8 20.7 T. Disb./Len 47 0.7 21.1 14.0 21.1 20.4 20.6 T.Com/C1. 0 0 18.2 14.8 10.0 9.0 8.8 T.Disb/Cl. 0.9 0.2 13.1 6.1 9.0 8.4 8.7 Total Commitments and Disbursements are in US$ million. Total Commitments and Disbursements per Staffyear devoted to lending or client services are in USS. 55 Table 3.3: Africa Region-Allocation of Staffyears and Commitments and Disbursements per Staffyear in Africa Operations FY 1989 1990 1991 1992 1993 1994 1995 AFRICA Total S-Yrs 856.6 864 875.2 930.1 943.7 966.8 902.1 Client Ser. 727.3 643.5 632.2 693.6 711.9 738 659.6 Lending 234.1 250.8 226.5 241.3 221.8 212.5 214.4 CESW 166.4 143.1 142.1 167.7 175.1 180.8 136.6 T.Commit 3924.7 3933.9 3394.2 3973.6 2817.3 2807.9 2284.3 T. Disb. 2474 2788 2849 2551 2619 3196 2796 T. Com/Le 16.8 15.7 15.0 16.5 12.7 13.2 10.7 T. Disb./Le 10.6 11.1 12.6 10.6 11.8 15.0 13.0 T.Com/C1. 5.4 6.1 5.4 5.7 4.0 3.8 3.5 T.Disb/C1. 3.4 4.3 4.5 3.7 3.7 4.3 4.2 Total Commitments and Disbursements are in US$ million. Total Commitments and Disbursements per Staffyear devoted to lending or client services are in US$. 3.58 Data for the period 1989 to 1995 inclusive allows the comparison of the Zambia operations with those of the Africa region. Total commitments per staffyear devoted to lending to Zambia during the period FY91 to FY95 inclusive was $26 million, while disbursement per staffyear devoted to lending was $19 million. Total commitments per staffyear devoted to client services to Zambia during the same period was $12 million and total disbursements per staffyear for the same purposes was $9 million. Meanwhile for the Africa Region the comparable figures for total commitments per staffyear devoted to lending was only $14 million and disbursements per staffyear was under $13 million. Similarly, total commitments and disbursements per staffyear devoted to client services by the Africa Region were significantly less than the figures for Zambia set out above. Table 3.4: Ratios of Lending per Staffyear-Zambia/Africa Region FY 1989 1990 1991 1992 1993 1994 1995 RATIOS Z/A R TCom/Le 0 0 1.96 2.09 1.85 1.65 1.94 R TDisblLe 4.45 0.06 1.68 1.33 1.78 1.36 1.58 R TCom/Cl 0 0 3.40 2.59 2.53 2.35 2.53 R TDisb/Cl 0.27 0.05 2.91 1.65 2.44 1.94 2.05 56 Figure 3.1: Ratios Z/A 4 a Series1 3 a Series2 2 O Series3 1 LOSee41 1 2 3 4 5 6 7 Series I = Total Commts./Staffyears devoted to lending; Series 2 = Total Disbs./Staffyears devoted to lending; Series 3 = Total Conmts./Staffvears to client services; Series 4 = Total Disbs./Staffyears to client services. Numbers on horizontal axis represent the years 1989 to 1995. 3.59 The greater efficiency of the Zambia operations since 1991 apparently during this period was due to the larger lending program and the greater share of lending devoted to rapid disbursing policy based loans. It also reflects the greater commitment of the Zambian government to the adjustment/stabilization package, thereby fulfilling more promptly the conditions attached to these loans. This situation is in contrast to the period before 1991 when lending to Zambia had suffered from frequent and sometimes prolonged suspension. 3.60 The greater efficiency of the Zambia operations during the nineties relative to the Africa Region may be partly explained by the greater share of client services in total staff years. Zambia operations regularly allocated over 90 percent of staff time to client services compared with about 75 percent by the Africa Region. This allowed a greater percentage of staff time to be spent on lending, supervision and economic and sector work on Zambia operations'than the Region as a whole was able to allocate. The lower figures for the Region may have been due to the incidence of civil wars and other factors which disrupted lending in Sierra Leone, Liberia, the Gambia, etc. 57 Table 3.5: Comparative Allocation of Staffyears-Zambia and Africa Region F' 1989 1990 1991 1992 1993 1994 1995 ZAMBIA Total S-Yrs 6.2 10.5 16.3 17.4 19 23.2 24.8 Client Ser. 5.1 9.9 15.8 16.7 18.3 22.1 22 Lending 0.1 3.2 9.8 7.2 7.8 9.1 9.3 CESW 2.4 1.9 3.2 3.5 4.1 6 3.9 Prj. Superv. 1.8 2.9 1.9 5.4 5.5 5.9 8.1 % Total S-Yrs. Client Ser. 82 94 97 96 96 95 89 Lending 2 30 60 41 41 39 38 CESW 39 18 20 20 22 26 16 Prj. Superv. 29 28 12 31 29 25 33 AFRICA Total S-Yrs 856.6 864 875.2 930.1 943.7 966.8 902.1 Client Ser. 727.3 643.5 632.2 693.6 711.9 738 659.6 Lending 234.1 250.8 226.5 241.3 221.8 212.5 214.4 CESW 166.4 143.1 142.1 167.7 175.1 180.8 136.6 Prj. Superv. 175 199.9 209.8 235.2 265.4 268.6 235.4 % Total S-Yrs. Client Ser. 85 74 72 75 75 76 73 Lending 27 29 26 26 24 22 24 CESW 19 17 16 18 19 19 15 Prj. Superv. 20 23 24 25 28 28 26 Years are FY. Lessons 3.61 It is likely that efficiency of Zambia operations will fall as the importance of structural adjustment loans in total lending is projected to decline and staffyear-intensive operations emphasizing a more participatory approach in project identification and design becomes more commonplace. Moreover, the overhead use of human resources, i.e. staffyears not used for client services, bears watching. It should be studied by the Region to determine whether or not it is too high and, if so, to see how it may be lowered without impairing long-term efficiency. 59 4. Economic & Sector Work Overview 4.1 The Bank's economic and sector work (ESW) on Zambia has been relevant in the sectors it has covered and the issues it has analyzed. However, there have been important gaps in its scope. Overall, the Bank has studied only sonic of the right issues. While in general the Bank's ESW has been of a high standard, some sector work has been too theoretical to be of much practical assistance in the design of operations. However, an increasing involvement of government officials and donors in ESW in recent years is having a good effect on the ownership and relevance of ESW studies, and on the implementation of their recommendations. 4.2 An overview of Bank ESW on Zambia in the 1980s and 1990s highlights the following * Bank ESW identified three major policy areas for Zambian development during last fifteen years-liberalization, privatization, and diversification; * Bank ESW gave priority attention to liberalization. Liberalization has been successfully implemented. This is partly due to the more informed policy dialogue that Bank ESW made possible. * The Bank has done little or no ESW on privatization in Zambia. Privatization, initially slow has made good strides recently. The Bank should see what are the lessons from the Zambian experience. * Similarly no in-depth study of the requirements for diversification of the Zambian economy has been done. Diversification of the Zambian economy has not progressed much. Moreover, dialogue between Bank and government officials regarding diversification opportunities and constraints is not making much headway. Yet the government is doing investment promotion with the Bank's blessing. * The Bank has done several public expenditure reviews. This work has helped in bringing the public sector deficit under control. * The Bank has done a thorough assessment of poverty in Zambia in 1994. This is now being used in the design of public policy to mitigate the problem. * Sector work done in the course of identifying projects for investments has been particularly useful in mining and agriculture. 4.3 In sum, Bank ESW on liberalization contributed significantly to the adjustments in the policy environment for industry and agriculture during the period under review. However, the absence of significant Bank ESW to underpin investment promotion and infrastructure planning limited the relevance of the Bank's work. 60 4.4 When Bank ESW focused on the liberalization of the policy environment, this was a relatively easy subject. The laws, rules, and regulations governing business activities are mainly written, and even unwritten procedures are open to observation. In addition, by means of economic analysis, it is possible to predict the effects of policy measures, and this helps in the design of policy-related operations. On the basis of its experience in other countries the Bank can work out what policies work best. By contrast, ESW to promote investments and to plan what the complementary infrastructure should be is relatively difficult. It requires an attention to detail, and depends on experience with a particular client. What will work in Zambia in this area cannot be determined by a theory about what works elsewhere. 4.5 The Bank concentrated on liberalization issues in Zambia because of its belief that resources were misallocated as a result of price distortions. In 1983-86 the Bank seemed convinced that by liberalizing access to foreign exchange, and liberalizing prices and trade, exports would be diversified. But the reality was that state-owned enterprises were all-important and increased their output to satisfy domestic demand by using idle installed capacity more fully, but they did little to diversify. The most important distortion preventing a diversification of production was public sector involvement in production and commerce in less than free competition with the private sector. Effective liberalization required privatization. Actually, Bank ESW justified privatization on grounds of efficiency; state-owned enterprises in Zambia were inefficient. 4.6 Bank ESW did not study the Zambian environment to find out and advise the government about the many issues that normally arise in privatization exercises. In its day-to-day work, no government has the expertise to predict what all the problems will be when it comes to privatizing a sector that dominates manufacturing. The Bank has provided advice and monitored privatization elsewhere, and has gained some experience. Meanwhile, during the nineties the Bank included conditionality on privatization in the Economic Recovery Credit, Privatization and Industrial Reorientation Credits I & II, and the Economic and Social Adjustment Credit for Zambia. In mid- 1995 (after three years), the sale of thirteen companies out of 160 companies had been completed (accounting for 6 percent of the value of turnover of the companies for sale). 4.7 Privatization involves the transfer of state-owned enterprises to the private sector through gift, sale, management buyouts, contracting out operations, or conversion into worker or consumer cooperatives. To go ahead with privatization the right legislation needs to be in place and much other legal work needs to be done since many state-owned enterprises operate under special laws. Accounting information on companies also needs to be updated, especially in relation to the companies' assets and liabilities; and attention must be given to contingencies, like severance payments to workers. Other important privatization issues also need to be studied. For instance, privatization by sale to the domestic private sector diverts private savings away from other investment opportunities in the sector in order to change asset ownership. So unless the public sector re-invests the proceeds, total investment in the economy may fall. Another alternative- privatization by sale to foreigners-avoids the sacrifice involved in local private investment but such a move may be controversial politically. Also, the issue of whether the proceeds of privatization should be used to amortize foreign debt rather than for public is a matter that is worth studying. 4.8 To diversify its economy, Zambia required information on what were realistic opportunities for new lines of production and for expansion of some existing lines as well as on the constraints which needed to be relaxed for the opportunities to be realized. A government needs this kind of information to convince investors, to make its own investments in related 61 infrastructure, and to create an enabling policy environment for private investors to take decisions. This is the role that Bank ESW needed to play in Zambia's development in the early eighties, but generally it did not do this. 4.9 The Bank reviewed Zambia's expenditure policies on several occasions, to facilitate the work of the Consultative Group, to mobilize external finance, and to achieve economic stabilization. But it did not do this work to help Zambia identify areas for infrastructure investment and thus assist in the country's economic diversification. This aspect of Bank ESW was a natural follow-up to its liberalization focus, since liberalization frequently involves changes in taxes and tariffs that have a potential impact on public sector deficit and the macroeconomic balances. 4.10 Bank assessment of the poverty situation in Zambia based on household surveys has been useful in the planning of programs targeted to the very poor. The Bank's ESW was timely, and of high quality. It was not easy work based on the application of accepted theory, in which the Bank has a comparative advantage, but the Bank accepted the challenge of doing it. The degree of beneficiary consultation and field work, and the involvement of Zambian social workers and sociologists makes this ESW an example of how the Bank can still be relevant and credible in assistance of this kind. Largely on the basis of recent Bank ESW, the government has decided to address the issue of poverty by improving the quality and accessibility of social services. Review of the ESW Program 4.11 Economic and sector work on Zambia in the eighties and nineties mainly consisted of five types of studies: (a) country economic memoranda; (b) public sector expenditure reviews- (c) sector studies; (d) resource studies; and (e) poverty assessments. In addition, ESW connected to lending operations and evaluation included appraisal reports, president's reports, strategy papers, project completion reports, and performance audit reports. This section will focus on the five types of studies not directly connected to lending. Economic Memoranda: Most Lacked Carry-Through Proposals 4.12 Four country economic memoranda were completed in 1981, 1984, 1986, and 1993. All were in broad agreement on the diagnosis of the Zambian economic problem, but they differed in their optimism regarding economic recovery, and in the extent to which they laid out a strategy for relaxing the binding constraints to growth, as opposed to identifying the requirements for a resurgence of growth. 4.13 The 1981 report, written while the Bank still regarded the problem of international copper prices to be temporary, concluded that: "A significant upsurge in growth can be obtained mainly by increasing longer term external borrowing, so as to expand imported inputs..." But it recognized that such borrowing would have to be carefully monitored and the external resources productively used. In addition the report counseled strengthening the management of the external debt servicing process. 4.14 The 1984 memorandum, had the benefit of later insights on the debt burden and the copper outlook, as well as on the government's 1983 reform program and a number of later Bank studies. It underscored the need to reschedule debt service obligations and restructure debt away from 62 short-term instruments to long-term concessional loans. It saw as "mandatory.. that economic policies be changed in such a manner that they lead not only to resumed growth and diversification of production and exports, but also to a lessening of the capital and import dependence of the economy." It recommended continued devaluation of the Zambian Kwacha, given the country's urgent need to expand the range of internationally competitive goods and encourage nontraditional exports. The report concluded that, even with the recommended policies, exports would probably not increase by more than 1 to 2 percent a year in real terms between 1984 and 1990, and that imports meanwhile would still be a serious constraint on economic growth, which could recover to 2 to 2.5 percent a year. 4.15 The 1986 memorandum analyzed development prospects for the various sectors, to identify the measures in addition to the post-1982 reforms that would be needed for sustained medium-term growth. While concurring with the previous report on the need for exceptional debt relief and export diversification, this report was much more optimistic regarding growth prospects for the remainder of the decade-suggesting a target of 3.1 percent a year as achievable. However, the memorandum's realism is called into question by the fact that this target would require a 50-percent rise in the investment/GDP ratio and a substantial increase in domestic saving within a few years. The 1986 report attempted to identify the opportunities for growth in agriculture, but was less precise about the medium-term prospects for manufacturing. Such prospects, it said, "hinge on a triad of rehabilitation, restructuring, and reorientation." Meanwhile major structural change was expected to result from a "rationalization" of public sector operations. However, how the rationalization was to be achieved was not spelled out. In addition, while mentioning that the obstacles to exporting manufactured goods are serious, the report fails to identify what should be done to overcome them. Thus this piece of ESW did not seem to achieve its objective so far as the manufacturing sector was concerned. 4.16 The 1993 memorandum addressed the issue of whether per capita economic growth is possible in Zambia. Finding ample reasons for pessimism and few for optimism, the authors decided that what was important was improving the standard of living of all Zambians, and particularly of those living, at or near subsistence level. It agreed with earlier memoranda in seeing longer term growth as depending on export growth and on the quantity and quality of investment. However, it put more emphasis on investment in people, specifically in education and health. 4.17 The 1993 memorandum identified two key policy priorities-encouragement of nontraditional exports and minimization of dependence on imports-as indispensable for growth in the following ten years, in view of the country's likely foreign exchange constraints. It claimed that without considerable balance of payments support throughout the period, growth in per capita GDP would not take place. The report provided no grounds for optimism, but it examined the prospects for nontraditional exports in Zambia and provided practical advice on how to develop these exports in the near term. Thus, the 1993 memorandum does not share the shortcomings of earlier memoranda that tended to identify the requirements for growth without analyzing whether the requirements could be met, and without laying out a strategy to do so. Public Expenditure Reviews Helped Reduce Public Sector Imbalances 4.18 The Bank has done at least five Public Sector Expenditure Reviews (PERs) and related studies in Zambia since 1982. The aim of the reviews was to help the government restore a balance in its budget and balance of payments, and regain growth that is equitably distributed. The reviews proposed: (a) sharp reductions in public spending to achieve a budget surplus; (b) 63 significant reallocation in the budget to support priority sectors and programs; (c) a shift in the composition of expenditures in favor of recurrent operating expenses and away from the wage bill, while increasing salaries to the skilled and upper grades; and (d) a strengthening of management by linking economic planning and monitoring more closely with budgeting. In practice, such proposals meant reducing consumer subsidies and more emphasis on cost recovery. Agricultural services, education, health, road maintenance, and development administration were designated as core areas where cost-efficiency could be enhanced. Essential activities to receive additional resources were to be identified within core areas, while services in noncore sectors were to be reduced. The 1992 PER made detailed recommendations for cutting the costs of services in the core sectors-education, health, and agriculture. It also suggested downsizing the military, and integrating donor counterpart funds in the general budget. 4.19 Some of the major findings in the 1987 PER related to the investment program. This was also the subject of a World Bank 1990 Public Investment Program report. According to the 1987 PER, large increases in investment would be required by the state-owned enterprises that control much of Zambia's essential infrastructure. However, both the PER and the Bank's 1990 report suggest that a core investment program that could fit within available resources would have to be one that forgoes all new investment and which concentrates funds on vital rehabilitation programs. Rehabilitation of the copper sector was accorded highest priority, and other investment issues were reconsidered. The main recommendations of the 1992 PER were: (a) there should be no further public investment in the manufacturing sector; (b) the Zambia Consolidated Copper Mines (ZCCM) should stick to a basic investment program of US$480 million; (c) Zambia Railways should focus on its core business as a freight railway and end its passenger services; and (d) Zambia Airways should consider cutting its intercontinental services and budget for some low- volume passenger African destinations. 4.20 Bank ESW on public sector finances in Zambia has been closely linked to the Bank's stabilization/structural adjustment assistance, and the impact and efficacy of the ESW, in turn, has directly depended on the government's commitment to the reform program. Thus, efficacy was compromised when the government abandoned the reform program in 1987 and when the government ignored budget restraint and distributed maize subsidies and increased public sector salaries before the election in 1991. The situation changed when the Chiluba government was elected. Immediately after taking office in 1991, it reduced subsidies of maize and fertilizer, and said it would cut the budget deficit from 7 percent of the GDP in 1991 to 2 percent in 1992. The government also announced that it would take other measures consistent with Bank recommendations in its Public Sector Expenditure reviews and related economic and sector work. A 1992 drought interfered with these declared objectives. However, the impact of ESW was renewed shortly after, as evidenced in a Zambian Ministry of Finance circular dated August 9, 1993, which said, "The policies and priorities of the Government are to be found primarily in two documents, the Economic and Financial Policy Framework Paper (PFP) 1992-94 and the Public Investment Program (PIP) 1993-95. It is of vital importance that budget submissions are consistent with the policies in these documents." The effectiveness of the PER and related ESW will improve once the Zambians participate fully in these documents' preparation. A move toward this end is reflected in the fact that the Zambian team now prepares a background paper based on terms of reference agreed with the Bank. 64 Resource Studies - Analyzed Labor and Financial Markets ESW on Labor, Training, and Wages suggested reversal of "Narrow the Gap" Policy 4.21 Bank ESW has also examined Zambian resources. In 1986, two studies focused on labor. The first-Zambia: Wage Policy and the Structure of Wages and Employment-was carried out in collaboration with the Prices and Incomes Commission of Zambia, and formed part of a larger Bank-sponsored study of government wage policies in Africa. In Zambia, the study was particularly important because of government and parastatal influence on wages and labor relations in the formal sector, (including the formal private sector), and because of the size and strength of the trade unions. The study examined the real wage losses among different worker groups and the effectiveness and consequences of the government's policy of "narrowing the gap," i.e.: reducing skills/wage differences. It concluded that civil servants' pay as a whole had eroded significantly and that senior civil servants in particular had fared badly in the previous fifteen-year period. The conclusions were similar for the private sector, with higher skill categories of workers becoming relatively worse off The implications of these conclusions for pay policy, in achieving and maintaining the desired skill mix in government and in modernized industries,-that the government should abandon its attempt to narrow the gap and train more skilled people-were spelled out in the country economic memorandum on Zambia five months later. 4.22 The second study-Zambia: Specialized Training Study- assessed supply and demand for skilled manpower in the civil service, parastatals, and the private sector, and recommended cost-effective ways of closing the skills gap. The study noted that effort and financing were too thinly spread over all kinds of training, and that some was obsolete. It recommended that in the short- and medium-term, agricultural education and training should have priority. Business education and management training should follow with training in accountancy a priority at all levels. This last need was addressed under the Financial and Legal Management Upgrading Project, which was supported by an IDA credit in 1993. 4.23 The recommendations of these 1986 studies did not immediately influence Zambian policies. Some recommendations had to be repeated in other Bank ESW. For example, the 1987 PER recommended that the reform program include "increased salaries at the upper grade levels of the civil service to improve the retention and motivation of skilled staff." Public sector staffing and the structure of incentives were still issues that were being addressed in the Bank's public sector management review in 1991. The impact of this ESW and related advice was delayed in part because the government was concerned with political repercussions. It feared the repercussions of staff cutbacks in the civil service, even when this obviously involved cutting back redundant staff. Additionally, the government feared increasing higher level salaries while keeping lower level pay fixed in the face of rapidly rising prices caused by a devaluation of the Kwacha and maize subsidy reductions. Efficacy of Bank ESW in this area had to wait for a change in the political climate. This occurred in October 1991. Financial Sector Report of 1993: Highlighted Outdated Legislation and Interest Rate Policy 4.24 Unlike many African countries that nationalized their commercial banking sectors, Zambia left most of its banks in private hands. (Only the National Commercial Bank, representing about 30 percent of total banking business, is wholly government owned.) However, with a history of substantial government involvement in the economy, Zambia has a large number of government- 65 owned nonbank financial institutions, including development banks, the export/import bank, the postal savings bank, and others. 4.25 Zambia's financial sector became the subject of Bank ESW in The Financial Sector Development report of 1993. This report principally focused on state-owned banks in Zambia. It raised two questions about to the Bank of Zambia-its lack of independence from the Ministry of Finance, and the outdated legislation governing the Zambian Central Bank's operations. The lack of independence was reflected in the Bank of Zambia's weekly auction of treasury bills, done for fiscal purposes but which resulted in high interest rates and a sharp reduction in credit to the private sector. Meanwhile Zambia's development finance institutions were found to have been impaired by inflation, a devaluation of the Kwacha, and interest rate policy. They also faced a continuous deterioration of their portfolios. The main recommendation made to most of the institutions was that interest rates should be increased to reflect market rates. In addition, the report suggested that the private sector be free to hold foreign currency-denominated assets. The report covered money and capital market developments. Fortunately, it considered the sequencing of reforms. It emphasized that the most urgent matter is legislative reform of the financial sector, with an amendment of the Bank of Zambia Act, and the Banking Act, and a new securities law highest on the agenda. 4.26 Experience indicates that it will be some time before the report, given its scope and the number of its recommendations, has a discernible impact on Zambian policy. As with some of the public sector expenditure review recommendations, a consensus has still not been reached among donors regarding the financial report's proposals. Thus, while the World Bank is critical of the treasury bill auction, and has been focusing on ways to narrow the risk premium on yields, the IMF is opposed to any deviation from the Treasury's current auction policies. There is agreement that nominal and real interest rates have been falling, and that if the drop continues, it will eliminate the problem of high interest rates for the treasury bills that crowd out private sector credit.. Nevertheless, other aspects of the report are unlikely to have significant effect as long as the multilateral financial advisors disagree. Meanwhile, the policy of pursuing financial liberalization before controlling the fiscal deficit is, supported by the World Bank and the IMF, but it has been criticized by academics. However, other aspects of the study-a revision of the Banking Act and the Financial Institutions Act-are uncontroversial, and in 1994 the government announced that it would implement them. Other points raised in the report form the basis for Bank lending operations. Poverty Assessment: Short-Term Actions Identified to Help Vulnerable Groups 4.27 In 1994 a thorough assessment of poverty in Zambia was published by the Bank. This assessment focused on actions that would ensure that the poor share more quickly in the benefits of reform by increasing their human capital and productivity. It also identified short-term actions to provide a safety net to vulnerable groups and recognized that the high population growth rate hinders poverty reduction. The methodology employed in the assessment included a participatory component, as well as a household survey. The assessment found that the poor lack productive assets-such as oxen, storage facilities, and farm implements-and that their human capital is reduced by malnutrition, poor health, and low educational levels. In urban areas poverty is aggravated by inflation, poor services, overcrowding, and inadequate sanitation. The main recommendations of the assessment seek to raise the growth of smallholder agriculture, by improving rural infrastructure and technology and supporting private marketing and storage. For the urban poor, the main objective is removing obstacles to micro-enterprise development, 66 improving basic urban services, and access to education and health. The assessment also recommends a program of labor-intensive public works to provide a safety net to vulnerable groups. 4.28 Since the Bank has had little direct involvement in the social sectors over the past decade, and the government's social sectors reforms are recent, there has been a lot of scope for collaboration, and joint learning as a result of Bank ESW and government efforts. There has also been collaboration with donors on poverty assessments as they have more experience than the Bank in the social sphere in Zambia. However, the current shortage of resources, and the scale of the poverty problem in Zambia mean that the government will still have to leave a significant part of the problem to NGOs and other donors who have a history of involvement in the field. This will require much consultation between the Bank and other participants in the endeavor, and the particular impact of Bank ESW will be difficult to discern. Work such as the poverty assessment will no doubt form part of the information base for numerous complementary poverty reduction projects by a wide range of institutions. Sector Work, Relevant and Effective Agricultural Sector Recommendations Were Eventually Adopted 4.29 The World Bank undertook two major studies, in 1983 and 1984, to help the Kaunda government to effect fundamental policy, institutional, and strategic changes in the agriculture sector. An Agriculture Research and Extension Review, (ARER) became a prime source for the Policy Options and Strategies for Agricultural Growth report issued the following year. The 1984 paper was prepared with the cooperation of Zambian officials. 4.30 The ARER correctly identified the "critical shortage of appropriately qualified and experienced Zambian professional staff' as well as the inadequate training of numerous "technical and support staff." It also underlined the unsatisfactory conditions of public service in agriculture, in comparison with state-owned enterprises, as well as in privately-owned and foreign companies and the lack of coordination among the various branches of the Ministry of Agriculture and Water (MAWD). the review also drew attention to the need for greater funding of current expenditures; and the lack of appropriate extension information for the vast majority of smallholders. In addition, it found that "the current reorganization of research around commodity and specialist research teams and adaptive research planning teams, and of extension along training and visits lines are initiatives in the right direction and deserve full support." The Review cautioned against excessive cost of the training and visits in areas of considerable population dispersion. 4.31 Policy Options and Strategies for Agricultural Growth followed the 1983 Economic Memorandum by only two months, but it did not reflect the latter's cautious optimism about the government's policy reform performance and intentions. Instead, it argued convincingly that Zambia has a remarkable, but woefully underexploited, agricultural potential. 4.32 This rather theoretical paper did not analyze Zambia's rural finance or farm credit system. Only in the paper's, concluding chapter is there a reference to such subjects, where donors are exhorted to include credit studies and surveys in the future. Also, the paper does not mention staffing problems which the 1983 agricultural review found so urgent. The paper says the main policy issues in Zambian agriculture relate to "marketing and pricing, parastatal efficiency, 67 resource allocation, and land tenure", and it recommends changing traditional or customary land tenure arrangements-which are confined to certain areas-to ninety-nine-year leaseholds. This proposal has not been endorsed in such an enthusiastic way by subsequent research. Meanwhile the paper referred briefly to the need for cooperation between the Ministry of Agriculture and the Ministry of Lands, 4.33 In another case, it was found that the conclusions of the World Bank study, An Agricultural Pricing and Parastatal Performance Study, published in June 1985, are consistent with a Zambian government paper, Restructuring in the Midst of Crisis (May 1984), and with the priority recommendations of the Bank in a 1984 Policy Options report on Zambia. 4.34 In 1991 the Bank updated the 1984 agriculture sector strategy. The 1991 version included comments made at an agriculture strategy workshop held in Zambia earlier in the year to review and discuss the draft report. 4.35 This 1991 paper and the Zambian workshop associated with it, preceded, and formed the basis of the Agricultural Sector Investment Program (ASIP) approach that the present government agrees with and that is the Bank's flagship operation in Zambia's agricultural sector at present. It is important that the principal reports of the Bank on agriculture in the mid-eighties presage the concern of the Bank's agriculture staff over the lack of donor coordination to the country. However, it took ten years to translate this concern into action. Almost seven years elapsed since the major 1984 review of Zambia's agriculture before anything was done. This long delay stemmed in part from a delay in adopting a new approach. 4.36 Bank sector work in agriculture during the eighties undoubtedly had an impact on policy in Zambia. In 1984, with the help of consultants financed by an IDA credit, the government, formulated a fifteen-year strategy for agricultural research and extension. This strategy became the foundation for an IDA credit (ZAREP) two years later. A 1992 Organization for Economic Cooperation and Development paper said, "the impetus for reform came primarily from external sources, notably Zambia's creditors and donors... For its part, the government defended itself ..by blaming the need for reform on external sources: the IMF, the World Bank, bilateral donors..... Although the government eventually made the World Bank's principal recommendations for Zambian agriculture-the liberalization of agricultural marketing, a lifting of price controls, and the reduction of maize and fertilizer subsidies-its policies, the customary classification of Bank reports as "for official use only" limited their distribution among Zambians, and consequently their political impact. Zambia's private sector, for instance, took no part in either the drafting of the reports or their review. Mining: Recommendations of Loan-Financed Technical Studies Implemented 4.37 Mining sector work in Zambia has mainly been done in the context of project identification and evaluation. As a result this work has been both relevant and effective. Extensive analysis of Zambian mining was done when the Export Rehabilitation and Diversification Copper Project was appraised in 1983. The Bank loan for this project included US$2.2 million for technical studies. These studies, focused on maximizing ZCCM's operations, and included a review of mining operations; proposals for improving mining and metallurgical operations; a plan to close uneconomical mines; a comprehensive program for the maintenance and replacement of mining equipment; cost/benefit analyses of investments; and a plan to modernize the mining sector's purchasing and accounting systems. ZCCM management accepted most of the recommendations, 68 and they were implemented, albeit with varying degrees of success. In 1991, Zambian copper was again analyzed and issues relating to the sector were thoroughly updated during appraisal of a ZCCM technical project. Also, the June 1992 OED audit of the Export Rehabilitation and Copper Project provided detailed information on ZCCM and the copper industry. 4.38 In addition to these technical studies, economic reports have extensively covered copper mining sector issues such as the economy's dependence on a single commodity; the need for diversification; the need for copper mining rehabilitation and restructuring while diversification is implemented; and the foreign exchange resources generated by copper exports and taxation of copper as source of revenue. Two country economic memoranda in the mid-eighties and a 1993 report provided details on these issues from a macroeconomic viewpoint. In line with the arguments of the Bank's recent economic memorandum, the Bank's strategy in relation with Zambian copper has changed, moving from attempts to improve ZCCM's efficiency through restructuring to deliberate efforts to privatize the state company partly or wholly. One of the conditions of the 1993 Privatization and Industrial Reform Credit II was that Zambia study the privatization options for ZCCM. The study was completed, and in early 1995 the government issued a statement on mining policy that provides for the sector's development by private investment, and for privatizing ZCCM. 4.39 Significant sector work on coal was done on the occasion of the appraisal of the Maamba Collieries Project. The 1982 Energy Assessment Mission reviewed several aspects of the coal sector-the resources , operations, the demand, coal substitution, pricing, and institutional aspects-and made recommendations that partly led to the financing of the Coal Engineering Project. In contrast, little in-depth sector work seems to have been done on gemstones, although this matter was analyzed in a superficial way in a 1991 Bank Technical Assistance project. Studies on Industry Helped Reorient Policy in 1985 4.40 The most important sector work done on Zambian industry was the 1984 Bank Industrial Sector Report. This work which included a sample survey of manufacturing firms, revealed that Zambian manufacturing was highly dependent on imported inputs and spare parts, and indeed imported about half of its inputs. Furthermore, metal imports accounted for 81 percent of all manufacturing inputs. This report proved particularly useful to the government and had a big impact on the government's 1985 policy reorienting industry. 4.41 In mid-1985, when Zambia launched a new industrial strategy, the keystone of the reform was changing the country's foreign exchange regime to allocate foreign exchange more efficiently, and encourage exports and efficient import substitution. At the same time, the country's import licensing system was also abolished. The government also paid some attention to the inefficiency within the Industrial Development Corporation-INDECO. Bank ESW had called attention to this inefficiency, and one of the conditions of the FY86 Industrial Reorientation Project was a plan to restructure, or phase out, poorly performing public enterprises. 4.42 Further industrial sector work was done in the context of operations in the nineties. The 1992 and 1994 Privatization/Industrial Reform Credits, emphasized that the crux of the new industrial reform process was privatization. However, there is no indication that any Bank study preceded the 1990 government announcement that it was beginning a privatization program. Although divestiture of some enterprises in INDECO's portfolio was mentioned at the time of the Bank's Industrial Reorientation Credit in 1986, it was not carried out. Only in 1991 were four 69 state-owned corporations put up for sale, and only in 1992 was INDECO phased out. The lack of ESW has been reflected in the fact that results on the privatization front have not been significant. 4.43 The lesson seems to be that the integrity and speed of a privatization program can only be maintained if the concerns about divestiture are anticipated, and dealt with directly and in a transparent manner. The program has been the subject of intense political debate and even controversy. While one cannot blame the Bank entirely for this situation, it must be observed that the policy is one that has been largely sold to the Zambian government by the Bank. Moreover, the Bank has not participated actively in the necessary dialogue to answer concerns. Suspensions Reduced StaffHours on Zambia 4.44 Staff resources deployed on Zambia ESW averaged 151 staff weeks a year during 1983- 94. This means less than four full-time staff worked on all ESW for Zambia, including economic memoranda, sector studies, resource studies, and preparatory work for Consultative Group meetings. The figure is low compared with other Sub-Saharan African countries, and reflects the drastic reduction in ESW during 1988 and 1989. (See Table 4.1.) 4.45 Suspension of disbursements to Zambia during 1987-92 significantly interfered with Bank ESW. This can be seen in the percentage of projects dropped from the work program each year. The brief suspension in 1983 was associated with a 33-percent drop rate in FY84. The rate fell to zero in the next two years, but it climbed back to an average of 83 percent a year during FY87-89. This rate fell by a half in 1990, however, only to rise again during the brief suspension in 1991. Since then the rate has fallen again. (See Table 4.2.) Gaps and Other Shortcomings in ESW 4.46 There are some topics that are important in Zambia which have not yet been the subject of Bank ESW. Land policy, cultural factors, and an adequate strategy for a land-locked country have not yet been studied in detail. Another topic is Zambia's export strategy. Here the Bank recommends that research should be backed up by market access studies, given Zambia's geographical disadvantages. Moreover, the Bank's recommended development strategy currently has a rural emphasis. However, given the increased urbanization of the population, a more urban- based strategy would be appropriate. Another topic, in the health sector, is AIDS which is altering the age distribution and dependency status of the population, with relatively young children having to function as heads of households. The implications for child education, and the development of income sources for young household heads therefore needs attention. 4.47 Finally, mention must be made of the fact that forecasts of GDP growth in Zambia tended to be optimistic. Table 3.1 is illustrative. The Main Lessons 4.48 Some of the main lessons from the review of Bank ESW in Zambia over the last fifteen years are: 70 * The momentum of ESW should not be reduced because of a suspension of disbursement, as this makes a resumption of the assistance program difficult. * The effectiveness of public expenditure reviews is enhanced by the involvement of the client in the work. * ESW that is about long-term development ought to be at the core of the Bank's assistance strategy. It should identify the major requirements for development and ensure that these requirements are adequately studied and reviewed over time, so that a continuing and deepening dialogue on development policy can take place. * Sector work done in the context of lending operations tends to be relevant to the needs of the client and highly effective since the recommendations stand a good chance of being implemented. * It is crucial that sector work be practical and that it take account of the technological circumstances of the client. The work must develop and identify adequate technical solutions to problems. 4.49 Given the limited capacity of the client to do its own economic and sector work Bank ESW is crucial to the progress of major policy reforms. As in the case of diversification and privatization little progress is likely to be made in the absence of preparatory ESW. Table 4.1: Zambia: Staff Resource Deployment, 1980-1995 StaffResource Deployment (staff weeks) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Country Economic and Sector Work (ESW) - - - 33 147 105 119 351 11 47 172 63 198 315 251 178 Lending - - 104 112 392 440 315 423 106 6 550 598 321 521 236 1433 Supervision 123 185 372 237 320 237 342 214 120 - - 366 69 175 80 38 Techncal Assistance - - - - - - - - - 85 87 68 - 22 - 58 Total 123 185 477 381 858 782 776 988 237 138 808 1095 587 1032 568 1707 72 Table 4.2: Zambia: Dropped Economic Sector Work (ESW), 1983-1984 Droppped Year Percent Completed Active Number Percent Total 1983 0 1 0 0 0 1 1984 33 1 1 1 33 3 1985 0 0 2 0 0 2 1986 0 2 1 0 0 3 1987 72 4 1 13 72 18 1988 100 0 0 5 100 5 1989 80 1 0 4 80 5 1990 40 1 2 2 40 5 1991 50 0 2 2 50 4 1992 33 1 5 3 33 9 1993 25 0 6 2 25 8 1994 50 - 7 7 50 14 Zambia: Percentage of Dropped ESW between 1983 and 1994 100 90 80 70 60 u50 40-40 30 20 10 0 Year Percnt 5. Evaluation of Lending Overview 5.1 The evaluation of Bank lending to Zambia seeks to determine whether the amount was appropriate, whether the type of lending and sectoral allocation were the best for the country, and whether the resulting portfolio has been of high quality. Quality of portfolio is judged on the basis of whether the outcomes are satisfactory or unsatisfactory; on whether the benefits of the operations are likely or unlikely to be sustainable, (or are uncertain), and on whether the impact of the assistance on institutional development is substantial, moderate, or negligible. The main conclusions are as follows: * Structural adjustment lending predominated; but substantial structural adjustment was not achieved until the nineties when a new administration had been elected. Adjustment lending to serve stabilization objectives allowed Kaunda's administration to draw down Bank financing while vacillating in commitment to growth promoting reforms. * The efficacy of project lending during the eighties was undermined by the long suspension after May 1987. * Portfolio performance in Zambia compares unfavorably with that of the Africa region and the Bank in general; and it deteriorated until 1987. OED rated as of satisfactory outcome 60 percent of rated operations accounting for 72 percent of the value of commitments to Zambia as of September 1995. However, only 36 percent of the 11 projects approved during 1983-95 were given a satisfactory rating. Ten of these projects were approved before 1987. Meanwhile the rating for sustainability is poor, with only 17 percent approved during 1980-95 having a rating of likely to be sustainable. * Successful projects tended to be small and did not involve many management or technical skills. Unsuccessful projects shared a heavy dependence on weak administration and management, and suffered from insufficient budgetary allocation and unclear delegation of authority, as well as uncertainty regarding the policy environment. * The ongoing portfolio shows improvement, but is too optimistic regarding absorptive capacity constraints, especially regarding skills, management and supervision. Attention to training and appropriate sequencing of operations to avoid human resource bottlenecks seems essential, and preferable to reliance on technical assistance. * The flagship of the ongoing lending program, Agricultural Sector Investment Program (ASIP), is essentially a pilot project involving a new participatory approach to development planning and implementation. It will require intensive supervision if lessons are to be learnt from the ASIP program. 74 5.2 In current dollars, IBRD and IDA commitments to Zambia during FY83-95 amounted to US$1,466.4 million. Disbursements during the same period amounted to US$1,266.9 million. No loans were committed during the suspension of operations in 1988, 1989, and 1990. Lending committed before 1983 amounted to $624.6 million. Table 5.1: Bank/IDA Lending Committed to Zambia, 1953-1995 Period Total Commitment (million $) 1953-1972 171.5 1973-1982 520.4 1983-1990 356.3 1991-1995 1110.12 5.3 However, in 1990 constant dollars, (wholesale prices in industrial countries being the deflator), average annual Bank/IDA commitments during FY83-95 totaled US$114.3 million, compared with US$87.1 million during FY67-FY82. The period FY83-95 falls into two subperiods coinciding with the Kaunda and Chiluba regimes. During FY83-91 (the Kaunda subperiod) average annual commitments in constant 1990 prices were US$74.8 million, but would have been US$112.2 million if the period of suspension of lending were excluded in calculating the average. In either case the average lending increased dramatically after FY91 (the Chiluba subperiod), to US$203 million. 5.4 Among lending instruments, adjustment accounted for 67 percent of commitments during FY83-95. Specific investment projects amounted to 7.5 percent, and the sector investment and maintenance investments represented 11.5 percent of total commitments for all instruments. Technical assistance accounted for 3.5 percent of commitments. Lending to financial intermediaries, which was discontinued after 1985, accounted for less than 1 percent of commitments. (See Table 5.2.) 5.5 Sectoral distribution of lending commitments reflected the importance of structural and other adjustment lending. The distribution among sectors was as follows: multisector, 32 percent; industrial/Industrial Development Finance (IDF), 18 percent; agriculture, just under 16 percent; financial, 14 percent; social sectors (education and population/health), 9 percent; mining, just under 7 percent; and infrastructure (transportation and water supply), 3 percent. (See Table 5.3.) Table 5. 2: Lending Classified by Major Instruments, FY 1980-1995; (Millions of US $) Instrument Fma-iiiailei laiteniedury Sector Adjusiment Siruciural Adjusunent Specific ivesitment Sector & Mainteiance Technical Assistaiie Sum of Sum tf Period Lending (Fil.) Lending (SAD) Lending (SAL) Lending (SiL) I ending (SIM) Lending (TA L) Total Dis. L/C 5 . Sum of L/C Sum of LIC Sum of lJC Sum of L/, Sum of IJC Skum of IJC $loal Total Dis. $ Total Dis. 5 Tolal Dis. 5 Total Dis. $ Total Dis S 1980-82 1640 22.50 -- - - 12.00 29.00 48.70 65.00 740 11.70 8450 /23 20 1983-86 - - 236.20 222.00 - - 48.70 59.50 18.50 19.10 l1.00 12.30 3/450 312 91) 1987-90 - 10.00 - - - 11.30 33.40 - - - - // 30 43 40 1991-94 - - 290.70 347.70 318.80 397.20 19.70 100.00 8.20 33.00 14.30 39.50 65/ 90 9/740 1995 - -na 13.70 n.a 6300 na 116.00 - - na 19270 Total 16.40 3250 526.90 569.70 318.80 41090 91.70 284.90 7540 233.10 32 70 63 50 1062.00 1593.90 Source Word Blank 1[inaieal Daabase liC = Loans/Creds, Dis - )iburseienls Table 5.3: Commitments and Disbursements by Sector, FY 1980-1995 (Millions of US$) Sector Population/ Public Sum of Sum of Period Agriculture Education Energy Financial Industrial/DF Mining Multi-Sector Health Sector Transport Water Total L/C Dis. Sum Sun Sum Sunt Sum Sumn Sum Sum Sum S111m Total Total Of Total So Total of Total o UC Total of Total Sum of Total On Total Sn Total Sn Total Su Dis. o Dis. L/C Dis. UC S Dis. UC Dis. Dis. L/C Dis. L/C $ Dis. L/C $ Dis. tJC$ Dis L/C $)is. LC$ $ $ S 1980-82 13.5 36.5 9.5 25 7.4 11.7 14.9 15 - - - - - - - - - - 39.2 40 - - 845 1282 1983-86 63 64.5 - - 3.2 3.1 69.9 62 17.2 14.3 71.9 75 62.9 58 - - - - 10.9 20 15.3 16 3145 3129 1987-90 11.3 33.4 - - - - - - - 10 - - - - - - - - - - - - 11.3 43.4 1991-94 8.2 33 4.3 32 - 30 50.6 128 241 238 10.7 21 318.8 397.2 14.2 20 3.4 10 0.2 8.5 - - 651.9 917.4 1995 n.a 60 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a 13 n.a 86 n.a n.a n.a n.a n.a 33 na Total 96 167 /4 57 10.6 45 136 205 259 262 83 96 381.6 455.2 14.2 20 3.4 10 50.3 69 15.3 16 1,062 1,401.90 Source: World Bank Financial Database L/C = Loans/Credits; Dis.= Disbursements 77 Lending Not Excessive, But Allocation Inappropriate 5.6 IBRD/IDA lending to Zambia was not out of line with lending to other countries in the region during the eighties, although it may have become so during the nineties. Table 5.4 shows that Ghana (at $14.25 per capita per year), Kenya (at $13.80), and Zambia (at $13.50) were the leading recipients of Bank group assistance among the seven countries during 1983-95. Malawi, Zimbabwe, and Uganda formed a middle group, receiving between $9 and $12, and Tanzania was last with under $7. During 1991-95 Zambia was the leading recipient at $24.68, well ahead of Ghana at $16.40 and almost double the group comprising Zimbabwe, Uganda, and Malawi. Table 5.4: Lending to Selected African Countries, 1980-95 IBRDIIDA Commitments Per Capita Year Zambia Ghana Kenya Malawi Tanzania Uganda Zimbabwe 1980 7.10 5.10 11.60 2.30 7.40 5.70 0.00 1981 4.50 2.60 7.70 19.00 5.00 1.30 14.70 1982 10.20 0.00 7.30 1.70 3.90 8.20 0.00 1983 3.20 6.30 10.30 8.40 2.40 9.10 30.90 1984 15.00 10.20 10.70 14.70 1.70 8.80 11.90 1985 7.70 9.70 1.90 6.30 2.10 5.10 1.20 1986 20.40 12.10 5.50 14.30 4.10 0.00 0.00 1987 5.90 14.70 2.20 8.80 5.30 2.10 1.10 1988 0.00 19.70 6.40 11.20 3.70 10.90 8.20 1989 0.00 18.10 10.10 9.90 8.40 8.90 12.20 1990 0.00 12.50 8.30 16.50 21.00 13.90 1.50 1991 33.10 20.70 11.40 11.80 5.40 16.50 6.30 1992 25.30 18.10 13.00 22.40 9.60 15.20 31.30 1993 21.40 21.50 4.20 8.10 12.80 12.50 17.50 1994 23.90 5.10 2.30 2.70 7.10 14.20 8.10 1995, 19.70 16.60 2.20 13.70 0.40 4.30 0.00 5.7 Despite the increase in average commitments in constant terms, and the level of lending in relation to other East African countries, the World Bank has been criticized for not lending Zambia enough. The argument centers on net transfer of resources. Net transfers from IBRD were negative or nearly zero for much of 1980-93. Meanwhile, net transfers from IDA were positive, rising from $2 million in 1980 to a peak of $199 million in 1991. Together, net transfers by IBRD and IDA averaged about zero during 1980-93. Net transfers were negative during 1980-84, positive in 1986 and 1987, and about zero during 1988-90. They were again negative in 1991 at $145 million, as Zambia paid up arrears to the Bank, then they turned positive again in 1992 and 1993. The Bank has been sensitive to this criticism and has recently been trying to maintain positive net transfers. 5.8 The criticism of inadequate lending in the eighties has some validity but rests on speculation regarding alternative political economy scenarios. Most lending in 1985-87 was to provide foreign exchange support for output expansion and so stabilize the economy, but the injection of resources was inadequate to head off a foreign exchange crisis at the time. The argument is that, in 1986, a sufficiently large transfer could have prevented the massive depreciation of the Zambian Kwacha in the exchange rate auction. By the same token, it could have helped avoid the large import price increase that stifled the output response and led to a rapid 78 rise in the cost of living, provoking a popular outcry against the adjustment measures. Moreover, if the depreciation of the Kwacha had been less drastic, those in favor of exchange controls in the government might not have been able to convince the president to abandon the adjustment program agreed with the Bank and IMF in 1985. 5.9 Those who make this argument that Bank lending in the eighties was not enough, also say the lending was not much in relation to Zambia's capacity to implement projects. Because commitments to Zambia have been mostly for adjustment operations to provide balance of payments support, lending has not made significant demands on Zambia's capacity to implement projects. While it is true that Zambia has not had difficulty absorbing the small amount of project lending it has received since 1986, it probably could not have absorbed much more without difficulties, especially since the civil service lacked (and still lacks) managerial and technical skills. 5.10 Those who think that lending to Zambia has not been enough point to the fact that Bank exposure is low. In mid 1994, Zambia accounted for 1.52 percent of development credits outstanding to IDA, and 0.21 percent of total loans outstanding to the IBRD. The Bank has been an important source of finance for Zambia, holding 22.6 percent of its long-term debt, (outstanding and disbursed), at the end of 1993. As for low exposure, this has been associated with a fairly high portfolio risk. The debt service burden, (total debt service as a percentage of exports of goods and services), has been in the 30-50 percent range in the nineties, (with the debt service to the Bank being about 7 percent), and there have been arrears in the service of Bank debt during the eighties and early nineties. 5.11 The criticism that Bank lending to Zambia has been too low carries little weight in the period after 1990. The predominance of adjustment lending has meant that absorptive capacity has not limited the effectiveness of this level of lending. In addition, after most the backlog of arrears was liquidated, the net transfer became increasingly positive. Allocation was Inappropriate for Long-Term Development Goal 5.12 The allocation of lending among instruments was inappropriate in light of the long-term objective of restructuring the Zambian economy to reduce dependence on a single export. Structural adjustment lending was done at the expense of investment lending but did not succeed in achieving policy change. IBRD/IDA lending from 1983 was to have supported the long term objective of diversification, via liberalization of the economic environment and the privatization of state-owned enterprises. The lending program inadequately addressed the physical infrastructure and manpower constraints associated with a diversification of the economy. 5.13 Structural adjustment lending was used during the mid-eighties to encourage stabilization and support a quick increase in production, at the expense of assuring sustained policy change and institutional improvements. This arose because the Bank allowed tranches to be drawndown before loans conditions were fulfilled and measures sustained. Neither the stabilization nor the adjustment objectives were well served. In the early nineties, rapidly disbursing structural adjustment lending was allowed to serve the needs of debt servicing and stabilization. Fortunately the new government was committed to change and did not abandon adjustment. The price stabilization objective was achieved, but structural adjustment was delayed, and full recovery of the economy now faces infrastructure constraints. 79 Portfolio Performance Compares Unfavorably with the Region and the Bank 5.14 This section focuses on OED's evaluation of completed projects and programs in Zambia. It describes portfolio performance by sector and lending instruments and, based on a review of project completion reports (PCRs), and performance audit reports (PARs), attempts to delineate the significant factors associated with the Bank's portfolio performance in Zambia. It also discusses the status of the Bank's current portfolio in the country, and concludes with lessons of experience and implications for future Bank lending. Performance Trends Deteriorated until 1987 5.15 PCR-PAR performance ratings are available for forty completed operations in Zambia as of September 1995; the operations represent comnuitments of US$2061.8 million. OED outcome ratings were satisfactory for 60 percent of the operations, accounting for 72 percent of the value of commitments. Of the 11 approved during FY83-95, only four (or 36 percent) were given an outcome rating of satisfactory. Ten of these rated projects were approved prior to 1987. One may conclude that performance deteriorated at least up until 1987. 5.16 The percentage of satisfactory outcomes rises to 44 if approvals for FY80-FY82 are included. However, even with this percentage, the Bank's portfolio performance in Zambia since 1980 compares unfavorably with the Bankwide satisfactory average of 68 percent and with the Africa Region's satisfactory average of 62 percent Table 5.5: Zambia - OED Outcome Ratings Number Percent Value $m Percent Satisfactory Outcome Adjustment Loans 4 57 361.6 71 Non-Adjustment Loans 20 70 400.1 73 Total 24 60 761.7 72 Unsatisfactory Outcome Adjustment Loans 3 43 145.5 29 Non-Adjustment Loans 13 39 149.3 27 Total 16 40 294.8 28 TOTAL RATED 40 1,056.5 5.17 OED sustainability ratings are available for twenty projects, all but two approved during FY80-FY95. Of the eighteen approved during FY80-FY95 only three (or 17 percent) were given a sustainability rating of likely. The majority, twelve (or 67 percent), were rated uncertain, and the remaining three were rated unlikely. 80 Table 5.6: Zambia - OED Sustainability Ratings Number Percent Value $m Percent Likely Sustainability Adjustment Loans 0 0 0 0 Non-Adjustment Loans 3 21 22.4 11 Total Likely Sustainabilitv 3 42 22.4 28 Uncertain Sustainability Adjustment Loans 3 75 353.1 76 Non-Adjustment Loans 9 64 76.1 38 Total Uncertain Sustainability 12 38 429.2 39 Unlikely Sustainability Adjustment Loans 1 25 111.5 24 Non-Adjustment Loans 2 14 103.7 51 Total Unlikely Sustainability 3 17 215.2 32 TOTAL RATED 18 100 666.8 99 5.18 Institutional development ratings are also available for the twenty operations with sustainability ratings. Of the eighteen approved during FY80-FY95, only four (or 20 percent) had a substantial impact on institutional development. The majority, ten, had a moderate impact, and the remaining six had negligible impact. Table 5.7: OED Institutional Development Ratings Number Percent Value $m Percent Substantial ID Adjustment Loans 0 0 0 0 Non-Adjustment Loans 5 33 15.6 8 Total Substantial ID 5 25 15.6 2 Moderate ID Adjustment Loans 3 60 353.1 76 Non-Adjustment Loans 7 47 84.6 42 Total Moderate ID 10 50 437.7 66 Negligible ID Adjustment Loans 2 40 111.5 24 Non-Adjustment Loans 3 20 102.0 50 Total Negligible ID 5 25 213.5 32 TOTAL RATED 20 100 666.8 100 Source: TMW/MIS, BESD, OED Database. Sectoral Portfolio Performance Varied 5.19 Portfolio performance in Zambia varied across sectors. Only energy, agriculture, and multisector operations were represented by more than one operation, and the sample of projects rated is not necessarily representative of the population of all projects. All four projects evaluated in the energy sector had satisfactory outcomes, with a likely sustainability and a substantial institutional development impact. Conversely, only one of the five projects in agriculture turned 81 out to be satisfactory, and all had doubtful sustainability and modest or negligible institutional development impact. Finally, the sustainability of the two satisfactory, (out of three), multisector program and policy loans was judged as uncertain and their institutional development impact as modest. 5.20 Sector-specific issues that account for variations in sectoral performance trends include (a) institutional development, and the extent to which it influences project management; (b) staff development; (c) timeliness in project implementation and the building up of capacity; and (d) degree of project complexity and specificity of objectives. Table 5.8: Sectoral Outcome Ratings for Operations Approved in FY80-95 Number Number Percent Sector Satisfactory unsatisfactory. Satisfactory Agriculture 1 4 20 Education 1 0 Energy 4 100 Finance 1 1 50 Industry 1 0 Multi-sector 2 1 67 Transport 1 0 Water 1 0 ALL 8 10 44 5.21 The lessons from this short review of the successful and unsuccessful projects in Zambia are: * Systems (e.g., extension) should be modified to reflect the conditions and constraints specific to the country. * Project design needs to allow for a realistic implementation period. * Design should take full account of the limitations in implementation capacity -a small, manageable project is preferable to a large unmanageable one. Pilot projects deserve more attention than they have received up to now. * The institutional system for delivery of credit is as important as the funding. * Training is essential both as a way of overcoming a shortage of skills and as an incentive to the civil service. * The additional burden on the project's official manager, administrator, or technician should be fully considered in planning implementation. * Appraisal must pay attention to institutional weaknesses. * Implementation authority and responsibility should be properly matched. 82 Box 5.1: Successful Projects Of the eighteen operations that were approved after 1979 and evaluated by OED, eight have been classified as successful. Four of the successful operations are energy projects, accounting for 100 percent of energy operations. It is worth noting the common features shared by these energy operations. All four were small, with the amount committed by IBRD/IDA varying from US$3.1 million to US$6.6 million. The range of disbursements is even smaller-US$2.6 million to US$4.1 million-because the two larger operations involved considerable underspending. All four were also essentially studies with a component of overseas training for Zambians. The studies were done by foreign contractors/consultants. Bank staff generally did the identification and design work, but the need for the projects was accepted by the Zambian government. The studies provided information that helped the government technocrats solve problems they faced without placing additional demands on their scarce local staff, or depending much on local management once contracts with the foreign consultants were signed. Meanwhile supervision by Bank staff compensated for any shortfall in local management. None of the projects required much local counterpart financing or significant institutional support over a long period. All tended to involve individual activities that could lead to a decision about a follow-on project, but which would not set in train a continuing set of activities. So they were not susceptible to the administrative weaknesses and technical deficiencies of the Zambian public sector. The single successful agricultural project was the Smallholder Dairy Development Project, approved at the end of 1981. It involved a small commitment of US$7.5 million, of which US$6.0 million was canceled because of unavailability of the main input -cross-bred dairy cattle. The project had other handicaps: government preparation was not adequate, counterpart funds were delayed, and interagency coordination within the government was poor. Nevertheless, the project was successfully implemented in a redesigned-scaled-down version. Milk collection and sales even surpassed the targets of the much larger original project. The success of this project seems attributable to some factors shared with the energy projects above. * First of these was the small size. This meant that a minimal additional burden was placed on the managerial and technical manpower of the agencies involved. * Second, training was provided both to the farmers through extension services, and to the government workers involved, improving their technical capability, and giving them an incentive to accept the additional burden associated with the project. In addition, there were factors not shared with the energy projects. For example, * The appropriateness of the technology as local strains were cross-bred and milk was sold in its fresh or sour state instead of pasteurized. * The absence of pricing policy problems. * Attention to marketing of product and supply of inputs-the project invested in daily collection of milk and in milk-selling outlets and supplied concentrate feed and veterinary drugs at cost. 83 Box 5.2: Agricultural Projects were Mostly Unsuccessful Four of the five agricultural projects evaluated by OED were rated unsatisfactory. The Agriculture Rehabilitation Project was not classified as an Agriculture project, being in essence policy- based lending in support of reforms in pricing and marketing. The others supported supply-side investments; and all four were approved and implemented before the present government was elected to office. The Southern Province Agricultural Development and the Eastern Province Agricultural Projects were similar in most respects, but they also had much in common with the Fisheries Development Project. Their primary objective was to raise the output of major crops and livestock by improving extension services, and providing greater access to credit and better input supply, and by doing research. Overall, the projects achieved little relative to their objectives. Despite the shortcomings. the projects involved some on-farm research trials and helped to strengthen research-extension links, and to establish the training and visiting extension system. Where technical assistance components were involved, the targets were usually met. Also, there was substantial progress in construction work, (e.g. in storage facilities and livestock crush pens). Little construction work was done, however, in fish-processing and -marketing facilities and extension staff housing. Also on the plus side: many farmers adopted improved technology for growing maize, and 1,200 fishermen and fishing scouts were trained. However, farm credit remained unutilized because of institutional deficiencies, and benefits have not been sustainable in the absence of adequate funding of recurrent costs. These projects faced some disadvantages in common that largely account for their unsatisfactory performance: There was heavy dependence on weak administration and management, inadequate extension capability and delivery, insufficient budgetary allocation for the local counterpart funds, cumbersome and bureaucratic procurement procedures, imperfect delegation of authority, and poor coordination and unclear delineation of responsibilities among involved agencies. Another important factor was the climate of uncertainty regarding government's pricing and marketing policies. A counterpart of the above was the persistent Bank optimism about the feasibility of success in these circumstances. Structural Adjustment Operations 5.22 The Bank has supported adjustment operations under both the Kaunda and the Chiluba administrations. Seven adjustment operations have been initiated-three under the first government and four under the second. The objectives and policies of the adjustment operations have been roughly the same. Some progress was made both in the eighties and the nineties, but the two periods' outcomes have differed in at least one important way. During the last two years, the government has had more success than its predecessor in bringing inflation under control, through strong fiscal policy. 5.23 The adjustment operations of the eighties were (a) the Agricultural Rehabilitation Project, (ARP) approved in FY85; (b) the Industrial Reorientation Project, approved in FY86; and (c) the Economic Recovery Program, approved in FY86. 5.24 Although these operations were not called adjustment operations, they all supported Zambia's policy and institutional reforms by providing the foreign exchange needed for the country's recovery and diversification effort. In addition to reforms to restore macroeconomic stability, the Bank supported structural measures in three productive sectors-mining, industry, and agriculture-to ensure a positive response in terms of production. 84 5.25 The FY85 ARP was a hybrid. The project's principal objective was to significantly increase production, particularly in maize, but the project was designed in such a way that it also supported policy reforms, as adjustment operations try to do. At the same time it provided foreign exchange for the importation of tractors and other agricultural implements. The underlying aim of the project was the elimination of agricultural subsidies and the liberalization of production and marketing of maize, maize meal, and fertilizer. Implementation of the reforms went as scheduled, and tranche release proceeded without delays. 5.26 The Industrial Reorientation Project, prepared shortly after the ARP, was designed to reverse the overvaluation of the currency by introducing a foreign exchange auction. This led to massive devaluation that had serious implications for the ARP. Following the fall of the Kwacha, the price of maize remained fixed far below what was necessary to keep pace with the rising cost of foreign exchange, with the result that private investment in imported tractors and other agricultural implements was no longer profitable. 5.27 The 1986 Economic Recovery Program, which was a structural adjustment loan in everything but name, provided an additional, badly needed US$50 million for the foreign exchange auction and supported policies affecting the budget, import tariffs, public enterprise reforms, foreign exchange administration, and the maize meal subsidy. The program rewrote the ARP's covenants on the maize meal subsidy, moving the date for eliminating the subsidy from May 1987 to the end of that year. 5.28 Late in 1986, the government decided to accelerate the elimination of the maize meal subsidy in order to reduce the fiscal deficit, twice announcing the measure and then backing down before finally implementing the decision in December. Without concurrently raising the retail price to help the millers, the decision caused shortages and then nationwide food riots, resulting in deaths and vast property damage. In response to the riots, the government abandoned the Bank/IMF support adjustment policies. Eighties'Adjustment Operations Rated Unsatisfactory 5.29 The outcome of these adjustment operations was rated unsatisfactory. OED found that the ARP achieved neither of its main objectives, as it failed to raise maize production significantly, and left the agricultural sector highly dirigiste. On the Industrial Reorientation Project, OED noted that the reforms were reversed only 18 months after their inception and had no measurable impact. The project completion report oft the Economic Recovery Program also concludes that the adjustment measures which were supported were not given enough time to work through the economy before the government abandoned the reform effort in May 1987. Sustainability was rated unclear for all three. Institutional development impact was rated negligible for the Industrial Reorientation and the Economic Recovery Credits, and partial for the ARP. 5.30 Bank analyses have pointed to many factors for these operations' performance. On the positive side, later evaluations have found the individual reform packages practicable, with adequate ownership by the government; and the basic aim of the strategy, objectives, and support policy instruments appropriate. Progress was made in some areas, for instance the financial performance of state-owned enterprises improved. However, the lack of consistency between each of the adjustment operations and the excessive optimism of the overall stabilization/adjustment approach constituted major weaknesses. As mentioned above, maize pricing policies and exchange rate policies did not have a consistent impact on the profitability of investing in maize production. 85 The foreign exchange reform was not supported enough by the conditions set for monetary and fiscal policies, as the government was indecisive and inept in reducing the deficit. The Bank was overly optimistic in its assessment of the determination and courage of the political leadership to carry out the reforms. It also failed to include in project design, compensation or a safety net for those who would bear the brunt of reforms. Furthermore, it underestimated how serious the constraints were to a prompt agricultural supply response, and overestimated the feasible speed of industrial growth, and diversification, when entrepreneurship was lacking, technology was outdated, skilled labor was in short supply, and infrastructure was poor. Earlier Evaluations of 1985 Structural Adjustment Program 5.31 We have the benefit of two earlier evaluations of adjustment programs in Zambia by former Bank staff. Both devoted special attention to the 1985-87 period. 5.32 Ravi Gulhati in Impasse in Zambia, The Economics and Politics ofReform, (World Bank/EDI Development Policy Case Series, No. 2, 1989) noted that the 1985 decision to liberalize credit and foreign exchange markets (including the delicensing of imports) was made in the middle of a financial crisis and was soon reversed. Although the need to depreciate the currency and to get to positive interest rates was urgent, he questions whether liberalization on the scale attempted was the right move at the time. He suggests that liberalization of the markets for credit and foreign exchange should have followed (rather than preceded) a much greater control of the budget and underlying inflationary pressures. In addition, given that Zambia's balance of payments was subject to a large measure of uncertainty, it would have helped greatly if at the outset of the auction, the Bank of Zambia had had a comfortable margin of foreign exchange reserves and access to a substantial amount of external loans. This was clearly not the case," Gulhati says. 5.33 In addition, Gulhati found that: (a) The main thrust of policy packages was to stabilize the economy and regain financial balance. The objective of securing reasonable growth of GDP took a back seat. The objective of poverty alleviation or equitable distribution of the burden of adjustment was also given short shrift. This scheme of priorities looked odd against the background of protracted decline in the Zambian economy, strong pressures of a rapidly growing population, and competing pressure groups within the polity who were greatly concerned about the distribution of the economic pie. (b) Targets agreed by the government were based on assumptions which proved inaccurate about terms of trade, resource transfers from abroad, and copper exports. Targets reflected what was desired for swift correction of financial imbalances. Neither party expected swift supply side responses in production and exports. (c) Measures to enhance efficiency focused on distortions. Little was done to reduce the incidence of nonprice obstacles to smallholder production; e.g., to provide better marketing channels, improved technical packages, and appropriate physical infrastructure. (d) The idea of protecting vulnerable groups in urban areas from the impact of higher maize prices was late. The public sector tried to shore up urban employment while 86 production and productivity declined, but this proved financially ruinous and was inconsistent with the need to curtail the fiscal deficit. (e) The process underlying reforms was flawed. There was limited ownership outside a narrow group of politicians and senior officials. (f) A lack of adequate external support also undermined reforms. 5.34 In Ben King's retrospective study of the Zambian Adjustment Program some of the findings question the operational policies and practices of the Bank generally, and are not specific to Zambia. The main questions and lessons include the following: (a) Given the history of broken promises on reform in Zambia, and the evident limited political and public commitment to adjustment, a more cautious approach to providing assistance for adjustment, particularly in 1980-87 would seem to have been called for. (b) Internalization of the reform process is critical. (c) A sector approach focusing on agriculture and gradually moving toward a broader reform effort as the country's willingness grew may have been more successfil than a full-blown adjustment program. (d) Due to the lack of implementation capacity in Zambia, a slower pace of adjustment was called for. (e) The Bank should not rely exclusively on quick-disbursing lending for policy refbrm. In some cases, agreement on policy reform would be more appropriate in the context of project or sector lending not necessarily requiring disbursing balance of payments support. (f) Quick-disbursing "tide-you-over " lending may be particularly inappropriate when the political and public-acceptance risks are high. (g) Concessions to blunt criticism, such as targeted assistance to those most adversely affected by the reform, may have helped to ensure the program's political sustainability. Adjustment Operations in the Nineties Shift to Diversification, Privatization 5.35 There have been five major adjustment operations since the restoration of disbursements. These are: (a) The Recovery Credit, approved in 1991, (b) The Privatization/Industrial Recovery Credit I (PIRC I), approved in 1992, (c) The Privatization/Industrial Recovery Credit II (PIRC II), approved in 1993, 87 (d) The Economic and Social Adjustment Credit, approved in 1994. (When disbursements to Zambia were resumed in 1991, the Bank allowed draw down of the final tranche of the Economic Recovery Credit that had been suspended since May 1987), (e) The Economic Recovery and Investment Credit, approved July 1995. 5.36 These credits reflect a shift in emphasis for adjustment policy, away from increasing the output of a public-sector-dominated production system. The shift aimed to develop noncopper exports and to pursue efficiency by privatization. The shift has been gradual, partly to protect vulnerable groups from the burdens of adjustment. 5.37 The Recovery Credit approved in 1991 sought to encourage nontraditional export growth, lower capital and import intensity of production and consumption, and increase investments and savings-objectives shared with adjustment operations of the eighties. Another objective- assisting Zambia with its foreign exchange cash-flow while arrears to the Bank were being paid- was not shared with earlier operations. The objective of protecting vulnerable groups from the worst impacts of adjustment was specifically mentioned. The conditions attached to this credit reviewed the issues of maize pricing and subsidies, tried to address the fiscal deficit by limiting banking credit to the government, and hinted at future emphases by setting a target for the sale of state-owned enterprises. This is the only nineties SAL that has been evaluated by OED. The outcome has been rated as satisfactory, sustainability as unlikely, and institutional development impact as negligible. 5.38 The next three operations involved more decisive change in the direction of structural adjustment. The Privatization/Industrial Recovery Credit supported market liberalization, major new initiatives in private sector development, privatization, and parastatal and civil service reform. The centerpiece of the reform was privatization: enactment of the Privatization Act was a condition of effectiveness. Other conditionality covered the social safety net and targets for parastatal reform and privatization. The follow-on PIRC II provided balance of payments support for the next stages of Zambia's parastatal reform and privatization program, which was the key component of Zambia's structural adjustment program. The Economic and Social Adjustment Credit approved in FY94 was to support continuing efforts to restore macroeconomic stability, to remove bottlenecks to exports and agricultural expansion, and to overcome obstacles to the delivery of vital social services. Its central concerns were to ensure adequate government spending and efficiency in the social sectors, and to amend land laws and develop a land market. 5.39 A cursory evaluation of the nineties adjustment operations shows that they have resulted in the expeditious transfer of foreign exchange, since the Zambian Government has demonstrated considerable enthusiasm in meeting the conditions for tranche release. Available data on the major economic indicators show that after some delay the adjustment program has brought the fiscal and monetary magnitudes under control, and that inflation has been substantially reduced. 5.40 An alternative approach is to look for lessons in the evaluations of the earlier adjustment attempts, and see to what extent these have been reflected in the design of the nineties programs. The adjustment operations of the nineties have gone far toward avoiding the strongest criticisms of Gulhati and King. There is overt concern for the social costs of adjustment and the plight of vulnerable groups. In the overall lending program, quick-disbursing adjustment operations are not 88 being used to address many sectoral issues. Instead, sector investment operations are being used to support part of a comprehensive program by means of appropriate policy and other conditionality. In addition, greater attention is being given to mobilizing and coordinating support from many donors to ensure adequate adjustment resources. 5.41 Another approach to evaluation comes from the OED study Structural and Sectoral Adjustment- World Bank Experience, 1980-92, which identifies the following as conditions for successful adjustment: * Recognizing the diversity of economic and political structures and the administrative capabilities of adjusters. * Working closely with the adjuster in developing a program supported by appropriate economic and sector work, and engaging in a healthy policy dialogue; * Avoiding attempts to reforms over a wide front simultaneously, especially when the adjuster is handicapped by political, social, and administrative constraints; and * Laying emphasis on ensuring positive net resource transfers, especially in countries having high debt overhang; adjusting the level of resource transfers to compensate for exogenous shocks so as to keep the program on track. 5.42 The adjustment operations of the nineties have been mindful of these concerns, especially in returning Zambia to positive net transfers, recognizing administrative weaknesses and addressing them through training, and developing a mutually agreed program supported by sector work and dialogue. 5.43 Some of the lessons identified by Gulhati and King seem to have continued relevance to the design of new reform exercises, especially as regards the role and attitude of governments: * Policy packages have to be localized and perceived as indigenous initiatives. * Much more effort needs to be made to build consensus among influential actors and to educate the public. The imperative of securing a consensus may require further altering the technical design of policy packages to accommodate vested interests without undermining the main thrust of the reform. * In the absence of progress in the international machinery, the reforming government must assure itself of sufficient reserves before undertaking risky policy initiatives. Many worthwhile initiatives have collapsed as a result of insufficient liquidity to cope with unforeseen developments. Evaluation of Ongoing Portfolio 5.44 The ongoing portfolio is made up of seventeen operations. Table 5.9 below shows the amounts and approval dates. 89 Table 5.9: Ongoing Lending Operations (actual) Fiscal Credit Year Number Project Title Credit Board Date 91 C2269 Mining TAS 21.0 06/13/91 91 C2273 Social Recovery Project 48.7 06/19/91 92 C2405 Privatization /Ind. R 200.0 06/30/92 92 C2406 PIRC/TA 10.0 06/30/92 93 C2422 Agricultural Marketing & Processing 33.0 09/08/92 93 C2429 Education Rehabilitation. I 32.0 10/27/92 93 C2515 Transport Engineering 8.5 06/17/93 93 C2523 PIRC II 100.0 06/24/93 94 C2535 Financial & Legal Management Upgrading. 18.0 07/13/93 94 C2577 Economic & Social Adjustment 150.0 03/10/94 94 C2621 Petroleum Sector Rehabilitation 30.0 05/31/94 95 C2660 Health Sector Support 56.0 11/15/94 95 C2698 Agricultural Sector Investment 60.0 03/30/95 95 C27250 Urban Restructuring & Water Supply 35.0 05/16/95 95 C27550 Social Recovery II 30.0 06/28/95 95 C25771 Economic & Social Adjustment II 13.7 12/08/94 96 C27640 Economic Recovery & Investment Promotion 140.0 07/11/95 Source: Bankwide Lending Operations Database 5.45 There is no preferred method of evaluating the ongoing portfolio. This study uses three means. The first is based on the Form 590 Supervision Status Ratings; the second seeks to identify how demanding each project is on the main determinants of absorptive capacity; and the third examines each project in terms of specified Bank themes. (i) Do Form 590 Ratings Show Satisfactory Portfolio? 5.46 The analysis based on the Form 590 judges the quality of the ongoing portfolio at the last supervision on the basis of the overall ratings of implementation status, management performance and availability of funds. Clearly, this approach is not applicable to planned projects and to projects not yet subject to supervision. Supervision information is available (as of mind 1995) for fourteen projects of the ongoing portfolio. Of these one has been rated by Bank staff as highly satisfactory in its implementation, twelve as satisfactory and one as unsatisfactory. The general conclusion is that the portfolio is satisfactory in terms of its implementability. This conclusion should be accepted, though, with reservations based on the "disconnect" between projects evaluated by OED during FY90-FY94, which showed a 36-percent difference between the share of projects rated satisfactory during the last supervision year and the share of projects rated satisfactory after completion. This "disconnect" shows the optimism in supervision ratings. 5.47 The Zambia Social Recovery Project (FY91), rated highly satisfactory, was rapidly implemented and achieved a 70 percent disbursement ratio only three years into the project, that is, halfway through the planned implementation period. This performance has been attributed to systematic use of client consultation to improve implementation arrangements and enhance development effectiveness. 90 5.48 Supervision data on management performance show that ten operations had a two rating, one had a three rating, and only three had a one rating at mid-1995; this was only a slight improvement over the previous year. The ratings on the availability of funds were better; seven projects had a one rating, while seven had a two rating. Availability of local counterpart funds has not impaired portfolio performance. Weaker management notwithstanding, the portfolio is satisfactory, though more intensive Bank supervision and some technical assistance to strengthen management may need to be considered. (ii) Does the Portfolio Consider Absorptive Capacity Constraints? 5.49 Another way of trying to judge the portfolio is to examine each project in terms of the demands it makes on the main factors determining absorptive capacity, and to judge which factor may be an obstacle in portfolio implementation. The factors are: decision-making at the policy level, management, institutional change, skills and research, (for instance, in the ability to do studies, and surveys, and to draft laws and regulations). Analysis of the requirements of the seventeen ongoing projects, indicates that eight require policy decisions; eight require institutional change; fifteen will make heavy demands on management; eight will be demanding of skilled workers; and eleven will require research/planning/legal drafting skills. ESW regarding the shortage of management and research capability in the public sector,(specifically the major findings and recommendations of the 1992 and earlier Public Expenditure Reviews) show that the portfolio is likely to run into absorptive capacity constraints arising from the shortage of managerial and research/planning/legal skills. This is consistent with the data from the Form 590 supervision reports. 5.50 Legislation envisioned in the portfolio-privatization legislation, control of monopolies, reform of taxation, land legislation, companies legislation, financial sector legislation and prudential legislation for banks and near banks-will significantly burden the scarce resources in these areas, especially when the associated regulations are considered. The Financial and Legal Management Upgrading Credit (FY93) provides training and other assistance for these purposes. (iii) Does the Portfolio Reflect Dominant Bank Themes? Honors Bank Thematic Concerns, But Lacks Attention to Diversification 5.51 The Bank at any given time has certain priorities depending on how it is interpreting its mission in development. The appropriateness of its portfolio depends in part on whether and how the portfolio supports these priorities. While the Bank has not abandoned its long-standing objective to promote economic growth, three themes are of great importance in contemporary Bank support: (a) alleviating poverty by directly addressing issues relevant to the poor; (b) creating a strong private sector in a liberal, market-directed economy; and (c) enhancing the role of women in development. In addition, an appropriate portfolio must address issues that are important to the particular client. In the Zambian case, the shortage of skills, the rundown state of infrastructure, and the weakness of institutions suggest that training, institutional development, and rehabilitation of economic infrastructure will be essential to a good portfolio. Recently, the theme of ownership and beneficiary participation has also been stressed as important to the Bank's effectiveness. It is notable that recently diversification has not been prominent among the major themes in the Zambian portfolio. 91 5.52 The ongoing portfolio has been looked at to judge its balance in terms of the Bank's current priorities. Several projects have components aimed at the poor. The 1991 Recovery Credit provides for the evaluation of the maize meal coupon system, and the Privatization/Industrial Restructuring Project has a social safety net as a condition of release of the second tranche. The 1992 Education Rehabilitation project includes rehabilitation of primary schools in poor areas. Meanwhile the 1995 Urban Restructuring and Water and the Social Recovery II projects are aimed to benefit the poor directly. The private sector/liberalization issues are dealt with by the 1991 Recovery Credit, Mining Technical Assistance Support (TAS), ASIP, Agriculture Marketing and Processing Project, and Privatization and Industrial Recovery Credit (PIRC) II. 5.53 At least six projects include training in accountancy. The Agricultural Marketing and Processing, ASIP, and the Social Recovery II projects include aspects aimed at improving the development of women; the latter operation cites enhancing the role of women in development as one of the program's two objectives. Four operations specifically address deficiencies of economic infrastructure, and four have clearly identifiable institutional development components. ASIP, Urban Restructuring and Water, and Social Recovery II all provide for beneficiary participation, with the latter project providing a beneficiary assessment monitoring component and funding for community initiatives. This brief glance at portfolio content suggests that there has been a provision for the main themes. However, more attention could have been paid to the sequencing of operations that could have benefited from each other's output. The Agricultural Sector Investment Program (ASIP) Is the Flagship Project 5.54 The ASIP, as it represents a dramatic departure from the traditional project approach, merits detailed review and a preliminary evaluation. It has seven special features that differentiate it from traditional projects: (a) it covers the entire country's agricultural program, (b) it is prepared by a Zambian Task Force whose members are drawn from both public and private sectors; (c) it is to be implemented within the institutional framework of the Ministry of Agriculture, Forestry, and Fisheries, without separate project units; (d) donors' procedures for procurement, reporting, accounting, and auditing will be standardized to the extent possible: (e) the use of long-term expatriate technical assistance will be kept to a minimum and short-term technical assistance will be hired on demand from the ASIP implementors; and (f) it has built-in flexibility that allows for annual reviews and adjustments; and (g) it is embedded in public sector reforms in the agricultural sector aimed at increasing decentralization and encouraging participation by beneficiaries. 5.55 The ASIP has four main components: (a) policy and institutional improvements in marketing, trade, and pricing, food security, and land use and land tenure; (b) public investments; (c) private sector development, including the creation of an enabling environment and incentives, and the development of financial and other input services; and (d) pilot investment schemes such as, small-scale investments in rural communities that employ matching grants, the privatization of government farms, and the promotion of new technologies. 5.56 The total cost of the ASIP has been set at US$350 million; the IDA credit approved in March 1995 will provide US$60 million of this total. This component will finance civil works for rehabilitation of research stations, and creation of agricultural training colleges, laboratories, and office buildings. About US$10 million of IDA financing for the rural investment fund will provide grants to smallholder farmer groups to assist in buying inputs and making capital investments. In addition, the credit will finance consultant services, mainly short-term. 92 ASIP Conditionality 5.57 Besides the sectoral and policy reforms, the government agreed to fulfill thirteen conditions (including some which are particular to the program): maintaining an agricultural sector steering committee, and engaging an independent institution to carry out annual impact evaluations, beneficiary consultations, and sector analyses included in progress reports to IDA and the donors. Other conditions serve the privatization agenda, e.g., privatizing or liquidating Lima Bank, and advancing state farm privatization. 5.58 This range of conditionality suggests that the Bank has not modified its early eighties stance of trying to procure general reform through project and sector operations. This approach to fundamental themes of development strategy through sectoral operations could be useful where there is an umbrella operation specific to the theme, through which component parts of the strategy can be coordinated. In the absence of this umbrella it is questionable whether themes such as privatization will get the comprehensive attention which they deserve. Preliminary Assessment ofASIP 5.59 A preliminary evaluation of the ASIP approach comments on the ASIP planning process3 (as distinct from some issues on substance summarized below). Based in part on the private views of insiders, including the Finance Ministry, the evaluation makes the following points: * Donors were possibly over-involved in a locally based exercise. * Certain key groups were under-represented: the ZNFU (the farmers union) and the private sector in general, parliamentarians, and the MMD National Executive Committee. * Subsistence and emergent farmers were somewhat neglected; little attention was paid to the ASIP's effects on poverty. * In the reorganized Ministry of Agriculture, Forestry, and Fisheries, ministry staffers should be used, rather than an independent team of consultants. * Participants' real commitment to liberalization was doubtful, given proposals for continued government involvement in input supply and maize marketing and the delay in privatizing Ministry of Agriculture, Forestry, and Fisheries (MAFF)-controlled institutions until 1997. 5.60 Nevertheless, the report acknowledges that "ASIP is envisioned as a dynamic process that will pass through many more iterations." It expresses hope that the plan "to take ASIP to the people" and to have it reviewed post-appraisal by the farmers union, Parliament, and Multi-party Movement for Democracy (MMD, the ruling party) policymakers, will make ASIP truly participatory. Mano Consultancy Services 1994; Commodity Chain Study, An Analysis ofProducer-Consumer Chains for Maize, Wheat and Soybean. Lusaka (report to the Government of Zambia). 93 5.61 With respect to some key substantive issues, the Mano report highlights the following: * On finance and credit, the short term impact of the commercial credit policy may be severe, although smallholders will be able to adapt in the medium term. * Pressure against subsidies may shift lending from villagers towards the larger emergent farmers. This possibility needs examination. * The ASIP approach on research and extension: appears to be based on the ongoing ZAREP project, even before the latter has been evaluated. Some different, non- MAFF approaches underway in the country need to be considered as possible alternatives. * The ASIP's concern to alleviate poverty and provide food security for vulnerable groups has not been supported with specifics. 5.62 This is not the only source of criticism of the ASIP. One of the principal Zambian collaborators said that in Zambian eyes the ASIP was the Bank's program-tried to provide too much guidance, and, in addition, "some Bank staff are not good listeners." He concluded that Zambia would probably have done the same things without Bank pressure, but would have felt true ownership. He thought that there was not enough local participation due to a sense of urgency caused by the Bank. In addition, many donors have been critical of the Bank's dominant role. 5.63 At the same time, the OED mission heard some positive comment regarding the ASIP. The officer of one of the key bilateral donor programs asserted that they were quite satisfied with the Bank's leading role. While feeling that the process was a bit hurried, the officer commented, the donor would be happy to back the project and close its bilateral program supervision, assuming transparent reporting. The donor was satisfied that during the preparation of the project donor representatives in Zambia had met to review most aspects of the program, including strategies to harmonize procurement policies. ASIP May Be Falling Short on Participation 5.64 The hallmark of the ASIP is that it provides for decision-making by both the client/beneficiaries and the donor/supporters. But is it unlikely to be effective in achieving real participation. To what extent has participation been mentioned and the concept pinned down in the project documentation? What views did the mission pick up in interviews on how much the matter of participation has influenced operations and whether it is effective? 5.65 According to the World Bank President's Report, ASIP provides for participation in three ways-at program preparation, by having a broadly-based Zambian-led task force; at monitoring and evaluation, by introducing systematic client/beneficiary consultation; and continuously, by providing resources directly to communities for locally initiated and implemented projects. The list of actions in the letter of intent on Zambian sectoral development says systematic client/beneficiary consultation will involve "adjusting the Central Statistical Office questionnaire (on crop production) to include beneficiary feedback and impact assessment." Such participation will be achieved by appending an additional questionnaire to the existing survey. The letter says nothing regarding how the allocation of the US$27 million rural investment fund will be decided. 94 5.66 There is a participatory chain in ASIP that stretches from the Bank and other donors through the government to the ultimate beneficiaries. As with all other projects, the crucial links are those between donor and government, and between government and beneficiaries. Attention to the links between government and beneficiary, to permit more effective participation by the latter, is necessary if the latter is going to have a sense of ownership and responsibility in programs that will improve their relevance and efficacy. In both cases, effective participation means that all parties can influence the decisions affecting them. 5.67 Program preparation using a Zambian-led task force with wide membership by beneficiaries, officials, and donors has worked well so far. The cost has been in slower preparation, but it is believed that program content is widely acceptable as a result. However, this reviewer doubts that appending an additional questionnaire to the crop survey will achieve systematic beneficiary consultation. The arrangement regarding beneficiary consultation can and should be monitored and revised with experience. Questions on the form may be designed by officials or consultants, but a more informal interchange in which beneficiaries themselves identify their concerns may also be useful. This interchange should be led by extension officers rather than statistical survey workers. As for the rural investment fund, one would have misgivings about leaving its design to consultants, since consultants are likely to have a tight timetable for preparing a report, when what may be needed is a gradual definition of the system through trial and error. Effective participation will have to include beneficiaries in allocation decisions. 5.68 The shift from top-down planning to genuine participation will be difficult and slow in Zambia. Great care has to be exercised to avoid undermining participation. The shortage of officials poses a problem. When the Bank suggests that consultants have to be used to compensate for the shortage of officials, some Zambians feel they are losing control to consultants. When the Bank sends twenty-one people to participate in program design, some Zambians and others feel the process is Bank-dominated and the program just another Bank project. The letter of intent for Zambia's sector development, drafted by the Bank for signature by Zambia, can become suspect. Clearly, genuine participation will require a more profound rethinking of Bank processes and procedures than has been done so far. Lessons and Observations 5.69 Some of the lessons identified by Gulhati and King are still relevant to the design of new reforms, especially as regards the role and attitude of governments: * Policy packages have to be localized and perceived as indigenous initiatives. * Much more effort needs to be made to build consensus among influential actors and to educate the public. The imperative of securing a consensus may require further altering the technical design of policy packages to accommodate vested interests without undermining the main thrust of the reform. * In the absence of progress in the international machinery, the reforming government must assure itself of sufficient reserves before undertaking risky policy initiatives. Many worthwhile initiatives have collapsed as a result of insufficient funds to cope with unforeseen developments. 95 5.70 Bank analyses of the early adjustment operations found that progress was made in some areas, for instance in improving parastatal financial performance. However, the lack of consistency between each of the adjustment operations and the excessive optimism of the overall stabilization/adjustment approach represented major weaknesses. As mentioned above, maize pricing policy and exchange rate policy did not have a consistent impact on the profitability of investing in maize production. The foreign exchange reform was also inadequately supported by the loan conditions set for monetary and fiscal policies, as the government was indecisive and inept in reducing the deficit. The Bank was overly optimistic in its assessment of the determination and courage of the political leadership to carry out the reforms. It also failed to include compensation or a safety net in project design for those who would bear the bnmt of the reforms. The Bank also underestimated how serious the constraints were to a prompt agricultural supply response, and overestimated the feasible speed of industrial growth and diversification when entrepreneurship was lacking, technology outdated, skilled labor in short supply, and infrastructure poor. 5.71 The adjustment operations of the nineties have been mindful of the conditions for successful structural adjustment set out in the OED study Structural and Sectoral Adjustment - World Bank Experience, 1980-92, especially in returning Zambia to positive net transfers, recognizing administrative weaknesses and addressing them through training, and developing a mutually agreed program supported by sector work and dialogue. Table 5.10: LeAding by IBRD/IDA to Zambia by Objective, FY 1980-1994; (Million US $) Program Objective Environmentally Period Environment Economic Management Sustainable Not Classified Poverty & Human Private Sector Sum of Sum of DevenE oilo e NResource Development Development Total Dis. L/C $ Development Total Dis. Sum of UC Total Dis. Sum of UC Total Dis. Sum of UC Total Dis. Sum of UC Total Dis. Sum of UC Total Dis. Sum of UC $ S S $ S $ 1980-82 4.9 6.6 - - - - 63.6 80 13.5 36.5 - - 84.5 128.2 1983-86 - - 134.8 133 52.4 61.5 4.3 4.3 40 42.1 82.8 72 314.5 312.9 1987-90 - - 3.2 20.4 - - - - 8 13 - 10 11.3 43.4 1991-94 - - 613.2 763.4 10.7 51 - - 28 103 - - 651.9 917.4 Total 4.9 66 751.2 916.8 65.8 117.6 67.9 84.3 89.5 194.6 82.8 82 1,062 1,401.90 Source: World Bank Financial Database LJC = Loans/Credits; Dis. = Disbursements 97 Total Disbursment during 1980-82 Sum of Loans/Credits during 1980-82 TAL TAL FIL FIL 9%L 18% SIL 14% SIL 23% SIM SIM 50% 58% Total Disbursements during 1983-86 Sum of Loans]Credit5 during 1983-86 SIM TAL SIM TAL SIL % 3% 4% 15% SIL 19% SAD SAD 76% 71% Total Disbursements during 1987-90 Sum of Loans]Credits during 1987-90 0% 0% FIL 23% SIL SIL 77% 100% Total Disbursementa during 1991-94 Sum of Loans/Credits during 1991-94 SIM TAL SIM TAL 1% 2% SIL 4% 11% SAD 38% SAL 45% 49% SAL SIL 43% 3% F[L-Financial Intermediary Lending; SAD-SectorAdjustment Lending; SAL-Structura Adjustment Lending; SIL=Specific Invesuneni Lding, SIM-Sector Maintenance Lending; TAL-Technical Assistance Lending Table 5. 11: OED Evaluation of 18 Projects (Approved after 1979) .Time Cost .Institutional Commuittment Cancel Approved OED ID Project Description Tin ot Rating Sustamnability* Isiuonl AR Sector Comten Cacl Apvd Overrun Overrun ImpactA (mil. $) (mil. $) (FY) C 1193 Southern province agricultural 0. 50 -16.90 U UNL NEG Agriculture 18. 00 12. 36 81 development project C 1196 Smalfholder dairy development project -0. 59 -7. 87 S UNC MOD Agriculture 7. 50 6. 03 81 C 1251 Fifth education project -0. 34 -25. 27 U UNC MOD Human Resources 25.00 14. 97 82 C 1333 Maamba coal engineering project 2.25 3.70 S UNC SUB Energy 4.30 0.20 83 C 1362 Rural water supply 1. 66 - U UNL NEG Water & Sanitation 16.00 1.99 83 C 1437 Industrial forestry project-third phase 2. 00 64. 09 U UNL NEG Agriculture 22. 40 3. 69 84 C 1529 Fisheries development project 0. 00 -7. 21 U UNL MOD Agriculture 7. 10 5. 64 84 C 1545 Agricultural rehabilitation project 0. 00 - U UNC MOD Agriculture 35. 00 1. 00 85 Tazama pipeline rehabilitation C 1627 eine re t 1.08 - S LIK SUB Energy 3. 10 0.50 85 engineering project C 1630 Industrial Reorientation 0. 00 -4. 00 U UNL NEG Program & Policy 62. 00 0. 54 85 C 1662 Fertilizer industry restructuring project 0. 00 38. 75 U UNC MOD Industry 10. 00 0. 00 86 C 1720 Economic recovery credit - - U UNL NEG Finance 50. 00 0. 00 86 C 2214 Second economic recovery credit - - S UNC NEG Program & Policy 247. 20 0. 00 91 L 1923 Second development bank project - - S LIK MOD Finance 15. 00 0. 07 80 L 2001 Eastern province agricultural - -15. 25 U UNL MOD Agriculture II. 00 4. 42 81 development project Indeni refinery modification engineering L 2151 roect 3.96 - S UNC SUB Energy 5. 10 2.58 82 project L 2152 Petroleum exploration promotion project 0. 50 -1.70 S LIK SUB Energy 6. 60 1. 71 82 1, 2391 EiF&xori Rehabilitation & Diversi/ication 0. 00 2. 10 S UNC MOD Program & Policy 75. 00 3. 08 84 UNC-Uncertain; UNL-Unlikely; LIK-Likely NEG-Negative; MOD-Moderate; SUB-Substantial 6. Bank's Role Critical in Aid Coordination/Mobilization and Debt Management 6.1 The coordination and mobilization of aid, and technical assistance in debt management, are two instruments that have been important and even ground-breaking in the Bank's work in Zambia. Precise means of evaluation of these two instruments have yet to be developed, but even a preliminary review may provide guidelines on how to improve these instruments in Zambia and elsewhere. 6.2 In the last decade, the Bank played a crucial role in mobilizing donor support for Zambia, through an unusually active dialogue with the donor community and the client country. The growth of gross Overseas Development Assistance (ODA) disbursements to Zambia shows the Bank's effort. Average gross ODA grew from about US$650 million per year for 1984-86 to US$1,330 million for 1991-93. Importance of Aid 6.3 The importance of aid flows to Zambia cannot be overstated. At its peak in 1992, the disbursements from multilaterals and 22 bilaterals amounted to US$1,479 million, or about US$130 per capita. They represented about 32 percent of GDP, 67 percent of export earnings, and 77 percent of total public expenditure. Taking into account external debt service and debt relief, net transfers of ODA from all sources to Zambia averaged about US$313 million per year during 1991-93. 6.4 The donor community is large and influential in Zambian affairs. Several donor agencies work in Zambia. At one stage there were 150. Leading bilateral donors have included Germany, Japan, Sweden, the UK, the US, Canada, Denmark, Finland, the Netherlands, and Norway. In the 1970s, the UK was the major donor. The major donor for the last five years has been Japan, accounting for about 20 percent of total bilateral assistance. History of Aid 6.5 Zambia has received external assistance since its independence in 1964, benefiting from UK aid that aimed to help former colonies make the transition to independent states. Other donors, motivated by geopolitical concerns, wished to support a front-line state facing hostile regimes and liberation struggles in neighboring states. During the first decade of independence, annual ODA averaged about US$38 million, but as the liberation struggles intensified, and Zambia's economic situation worsened, because of deteriorating terms of trade, gross ODA disbursements increased to an average of US$430 million during the next decade. 6.6 Aid flows remained high during 1983-87, especially after 1985 when the Bank and the IMF were supporting Zambia with structural adjustment programs. The large inflow of aid failed to bring about sustainable reforms, but added considerably to Zambia's external debt. Growth of aid stopped during 1987-91 when Bank disbursements were suspended because of arrears. 100 Although several key bilateral donors also stopped disbursements, gross ODA inflows still averaged about US$460 million during 1987-89. 6.7 After the 1989 agreement between Zambia and the Bank/IMF on a Policy Framework Paper, the donor community turned its attention to Zambia's debt and substantial arrears to international creditors. In March 1991, under an innovative procedure involving the coordinated efforts of several donors, Zambia's arrears with the Bank were cleared, a special program was established for dealing with arrears to the IMF over the next four years, and relations with donors were normalized. Overseas aid poured into Zambia following the installation of President Chiluba's government in November 1991 under a system of multiparty democracy, and in view of an improved government stance on economic policy, private sector development, and poverty alleviation. The support assisted in the hardships caused by the prolonged drought of 1992 and in keeping the country from falling into arrears. The Aid Relationship Donors Initially Focused on Their Projects, Ignored Policy Framework 6.8 In the 1970s there was a mismatch between the government's aim of industrialization in towns, and the rural bias of most bilateral donor assistance. The Zambian government had access to international capital markets and was able to borrow abroad to pursue its own investment priorities. The donors-in pursuit of geopolitical objectives, and attracted to Kaunda's humanist development philosophy-saw their role as one that addressed Zambia's economic inequalities. They focused on projects in the rural areas and social sectors, while ignoring policy issues and imbalances in the macroeconomy. 6.9 Aid up to the early 1980s set few conditions and involved little coordination. It consisted mainly of project support. Bilateral donor assistance for the most part was conceived and provided in a policy environment that was quite lax and without the government's full commitment. As project preparation and implementation problems mounted, bilateral donors bypassed the government's centralized decision-making system and increasingly assumed full responsibility for planning, preparing, and implementing their own programs. In the absence of any donor coordination or aid management by the Zambians, donors took the initiative without a framework for setting national priorities. 6.10 Meanwhile, the Zambians, faced with budgetary pressures, had an incentive to maximize the number of donor projects with little regard for their contribution to long-term development or consistency with government strategy. Subsectors that were not donor priorities were neglected. Funds devoted to projects were sometimes not included in the budget because planning was weak and local ministerial staff were not involved in the aid absorption process. These problems led to a waste of resources on nonviable projects, hampered the implementation of good projects, and undermined sustainability of the flow of benefits. Thus, for example, although there were 180 separate donor funded projects in agriculture by 1988 involving about US$130 million per year in assistance to the sector, the impact was minimal, thanks to inappropriate policies, lack of local ownership, poor aid coordination, and a shortage of counterpart funds. 101 Donors Took a Tougher Stance and Improved Coordination in the Late 1980s 6.11 By the mid-1980s, a fundamental change in the aid relationship was started by multilateral donors, who increasingly focused on policy reforms and formal conditions for assistance. As Zambia's indebtedness mounted, donors were unwilling to provide further support without major reforms. Not long afterwards donors started to discuss, at international meetings and in Zambia, the need to coordinate and to support programs and priorities articulated by governments. Ideas on how to promote sectoral coordination in Zambia and the concept of a lead donor started circulating in 1990. At the time the lead donor role for education was assigned to Sweden, health to the Netherlands, and water supply and sanitation to Germany and Norway. The tasks of a lead donor were to assist the government in preparing sectoral investment programs, analyze policies and institutions, recommend levels and composition of donor support, and assist in donor coordination. The concept, particularly of full donor coordination, did not quite take hold until 1992 when serious coordination efforts were explored for the agriculture and health sectors, within a context of planned Bank operations. The Bank's Role in Aid Coordination/Mobilization 6.12 The Bank's role has evolved at three levels-the regional, national, and sectoral The Bank has played an active part and been applauded for its performance in the first two. It has been a slow leader in the third and has been criticized for its prominence. Special Regional Coordination Program ofAssistance is Effective 6.13 At the regional level, the Bank formally launched the Special Program of Assistance (SPA) for Sub-Saharan Africa at a donor conference in 1987. Although empirical and methodological problems make it difficult to assess its true impact, the SPA appears to have improved the flow of resources to eligible countries. Real net ODA disbursements to SPA recipients have risen from an annual average of US$5.3 billion during 1981-86 to US$9.1 billion during 1987-92. The SPA has been particularly effective in mobilizing support for adjustment programs, and for promoting the standardization and simplification of the terms and conditions of such assistance. In Zambia, the SPA forum has effectively linked with the Consultative Group forum, with the latter including in its discussions and agenda some of the SPA initiatives, e.g. the SPA objective of coordinated donor support for sector investment programs. CG Meetings Have Been the Main Formal Means of Coordination and Mobilization 6.14 At the country level, CG meetings chaired by the Bank have been the main formal means of donor coordination. Meetings have an important symbolic role, providing an opportunity for taking stock of Zambia's progress in adjustment and for engaging all parties in an open dialogue. They also provide political backing for the reformers in the government and for pushing the pace of reforms. Donors feel that the Bank is more ready to talk with them on economic matters because of the need to prepare and share economic memoranda at CGs. The CG process may have contributed to recent donor collaboration on public expenditure reviews and poverty assessments. The Bank's leadership role in the CGs has been widely praised in the donor community, particularly during the difficult period of the early 1990s when the Bank took the initiative to first orchestrate the clearance of Zambia's arrears and then keep the donor program on track. 102 6.15 The Bank's resource mobilization role in the CGs has been particularly challenging because the adjustment program since 1991 has required the absolute commitment of both the Zambians (to meet conditionality) and the donors (to bridge the financing gap). Donors have been reluctant to make long-term concessions because of their own budget cycles and the uncertainty of the Zambia program. The Bank's role has been complicated by the bilateral donors' substantial power, which has been strengthened by the CG process. For example, in 1993 many donors broke their financial commitments to Zambia over governance concerns, specifically the state of emergency declared in March of that year and the government's failure to act on allegations that two ministers were engaged in drug trafficking. Large financing shortfalls occurred until donors renewed pledges in 1994 when the concerned officials were dismissed and the government embarked on drafting a new code of ethics. While donors have been willing to provide large amounts of resources in recent years (or perhaps because of this) they continue to have reservations regarding the sustainability of the reform program, and on governance issues. Sectoral Coordination Should Be Led by the Government 6.16 Until recently the Bank did not attempt seriously to coordinate aid at the sectoral level. However, in recent years, considerable efforts have gone into a coordinated and integrated approach for the health and agriculture sector. In agriculture, the Bank's Agriculture Sector Investment Program (ASIP) is the pivot around which sectoral coordination is taking place. A Zambian task force comprised of private- and public-sector representatives was involved in its preparation. The Bank has tried to limit itself to a catalyst role, but has faced conflicting pressures-a desire to promote local ownership on the one hand, and a need to offset institutional weaknesses in public sector management and to maintain the momentum of the process on the other. However, in the health sector, the Health Sector Support Project has been driven by the Ministry of Health, which prepared a plan for all donor contributions to the sector and adopted a very open and transparent approach with donors. 6.17 Donors and the Government have commended the Bank's sectoral coordination initiatives in these two sectors, although they were critical of the Bank's dominant role during the preparation of ASIP. Missions from headquarters-with their size, frequency, and sense of urgency-have not helped to correct the perception of heavy-handed and excessive Bank intervention. Many officials and donor representatives consider that more discreet and continuous interventions by a strengthened Resident Mission would be preferable. Bank staff have been sensitive to the criticisms and a deliberate attempt has been made to play down the image of the Bank as a lead donor in agriculture by supporting the assumption by UNDP of responsibility for chairing monthly meetings on the agriculture program, and by the Institute of African Studies at the University of Zambia for monitoring sector performance. 103 BOX 6.1: Innovations in Aid Coordination for Sectoral Programs The proposed Agricultural Sector Investment Program (ASIP) is among the first of a new generation of projects which attempt to improve aid effectiveness through reduced fragmentation of donor support and increased local participation in project preparation and implementation. The approach with its associated benefits and risks can be generalized as follows: Main Characteristics * It is sector-wide in coverage. * It is prepared largely by local stakeholders. * It is supported by all donors involved in the sector (no separate donor investments are allowed outside ASIP). * It minimizes the use of long-term expatriate technical assistance. * It involves harmonization of donors' implementation procedures (such as for procurement, reporting, accounting and auditing). Potential Benefits * A cohesive framework and combined resources for implementation of a public agricultural sector investment program, which reflect a shared vision of sectoral priorities. * Improvements in the effectiveness and cost-efficiency of public sector management by replacing numerous separate projects in the public expenditure program with one single operation. * Improvements in capacity building and sustainability because local stakeholders are in the "drivers seat". Potential Risks * During preparation: inadequate capacity at line ministry to manage and coordinate the task; tendency by donors and Bank to force the pace of preparation thereby undermining ownership and sustainability; failure to fully carry all the donors on board; failure to incorporate local stakeholders at the provincial and district levels. * During implementation: failure of donors to dovetail their projects into the program; inadequate funding of the Government share of local costs; failure to decentralize decision making to local levels. 104 Strengths and Weaknesses of the Bank's Role Comprehensiveness, Technocratic Approach is the Main Strength 6.18 The Bank's main strength is its comprehensive grasp of the economic aspects of Zambia's short-term management and long-term development problems.4 This grasp, plus Bank facility in dialogue, has fostered greater donor understanding of the structural reform process through which Zambia must pass to achieve stability and growth. 6.19 Another strength is the Bank's technocratic approach, which gives it the confidence of donors of various ideological persuasions and of successive donor administrations. This confidence allows the group of donors to find common ground for coordinated support. 6.20 Yet another strength has been the Bank's experience in selecting the best forum to deal with particular aspects of aid coordination and mobilization. This has been the case with the SPA and Zambia CG initiatives (and close collaboration between the two). Weaknesses Include Insufficient Field Presence and ESW 6.21 There is valid criticism that the CG meetings remain inaccessible to the majority of affected officials, because the meetings are generally held far away. Thought should be given to meeting in Zambia, where local donor operatives and officials could participate. Locally held CGs may foster a greater sense of ownership, and bring a different perspective more favorable to sectoral coordination. 6.22 ESW has not been used to full advantage to study the aid coordination process. Zambia's own aid coordination remains a largely neglected and misunderstood aspect of public sector management, lacking integration with planning and the budgetary process, and Bank ESW has not shed much light on this area. There is no comprehensive database on aid flows; Bank ESW could provide assistance in developing one. 6.23 Bank ESW particularly has not concerned itself with the macroeconomic effects of aid. The Bank's attitude seems to be that aid, largely devoted to debt rescheduling, has helped gradually reduce debt. The aid has probably has not resulted in a significant expansion of money and has not generated inflation. Studies by other evaluators have suggested that aid has been spent in part on imports, mitigating inflationary effects. However, to the extent that not all aid that flows into the country goes back out as debt service or payment for imports, the effect has been to increase reserves, and to generate pressure for the appreciation of the Kwacha. One evaluation suggests In the nineties, the Bank ESW has been concerned about the adequacy of foreign exchange to permit overseas debt service and to finance enough imports to support economic activity. Bank calculations of the foreign exchange gap provide the goal for aid donors fill. These calculations seemed particularly critical in mobilizing aid to clear arrears in 1991 so that disbursements of approved loans could continue. 105 that aid does cause a real appreciation, but aid-supported policies result in an offsetting nominal devaluation. It is unclear which of these tendencies was dominants Aid Coordination Experience Offers Lessons 6.24 The following lessons emerge from the Bank's experience in aid coordination: * CG meetings are quite useful for mobilizing resources, particularly for heavily aid dependent countries undergoing adjustment, and for bringing donor coalition behind adjustment. * A greater field presence simplifies the process of sectoral aid coordination. It can foster local ownership and allow for more timely contributions to ease project implementation problems. * The debt crisis galvanized greater aid mobilization, but donors do not wish debt management to be the dominant criterion in aid allocation decisions. * In-country aid coordination and management by client countries is as important as coordination among donors; and the institutional framework to serve this end needs to be studied and rationalized. Good aid coordination and management requires clear development goals and strategies, a capacity to identify and prepare projects, effective project programming and budgeting, and sound monitoring and financial management. * Additional opportunities for Bank-donor collaboration in ESW should be explored, given the favorable recent collaboration on public expenditure review and poverty assessments. * Standardization of donor procedures should be explored. Recently the ASIP and the Health project have found that harmonizing procedures greatly facilitates the absorption of aid. Secretariat for Analysis of Swedish Development Assistance (Howard White and Tove Edstrand); The Macroeconomics of Aid: Case Studies for four countries. Report 7, Ds 1994: 115, Ministry of Foreign Affairs, Sweden. 106 Box 6.2: Sweden's Evaluation of Its Aid to Zambia Objectives ofSwedish aid initially political emphasized rural and social development Sweden's support from the beginning emphasized rural development in the fields of agriculture and health, with the objective of improving rural living standards. Finding that education and other social infrastructure were largely neglected, Sweden supported higher education initially, but since 1980 emphasis has been redirected toward primary education in rural areas. In the 1970s Sweden also provided technical assistance and infrastructure projects and from the 1980s provided import support. Technical assistance and infrastructure support have largely been discontinued, although Sweden continues to co-finance a macro-economic team at the Ministry of Finance. Achievements Have Been Positive but Not Outstanding * Production targets for the agricultural sector support were not reached. Programs in agriculture were complicated and over ambitious and never worked well. * Effectiveness of Swedish aid to help the poor has been hampered by the political environment, which favored urban over rural populations. * Impact of aid on income distribution was limited. Inequality may have been reduced as a result of the sharp increase in urban poverty. * Support to macroeconomic management has been successful. Swedish Aid Along with Other Aid Shares Some Undesirable Side Effects * Long term aid flows probably support an overvalued exchange rate which acts as a disincentive to necessary resource shifts toward the export sector. * Aid may undermine the domestic tax effort of the government. * Aid may lower the domestic savings rate. Lessons * It is best to concentrate on simple but basic components of social and economic infrastructure, education and health. This should be done within sectoral ministry programs and not in the form of integrated rural development programs. * Donor assistance to production should be directed to create an enabling environment for the private sector. * To be sustainable support to public institutions should be linked to civil service reform. * SIDA should continue to coordinate with other donors, and further concentrate its efforts to develop professional competence and provide more analytical input into fewer activities. * Since the mid-eighties aid has been provided under tight ex ante conditionality, but Sweden sees merit in ex post conditionality which would allow aid as general budget support to reward a government showing commitment to good governance. Debt Management Assistance Has Reduced the Burden on Zambia 6.25 Bank assistance in the management of Zambia's external debt has to be judged on the basis of improvement in the profile of the debt, although it is impossible to measure the Bank's inputs or to identify hQw much of the improvement is attributable to it. 107 6.26 By August 1992, due to Paris Club reschedulings and debt cancellations by bilateral creditors, Zambia's debt had fallen by $1.5 billion to $6.5 billion. The nineties have seen a net fall in the interest burden because US$597 million of interest was capitalized and US$76 million forgiven by donors during 1990-93. During the same period, net interest arrears were reduced by US$118 million. The interest burden on new commitments will also be lower because the rate on new loans has gone down partly as a result of the shift from private toward official creditors. Meanwhile, US$853 million of principal repayments due have been rescheduled, thereby the immediate burden of debt service. The future burden of the debt will also be lightened by the shift from private to official and partly from the shift within official toward more concessional financing. The grace period of new commitments doubled during 1990-93, from over four to just under ten years, again reflecting the shift to official sources, since the grace period of private lending declined during this period. 6.27 Over time the structure of Zambia's debt has been changed, with Bank assistance. The share of multilateral debt has increased. The Bank is holding a larger share of Zambia's debt and accounting for a larger share of debt service obligations, as a result of the rise in per capita commitments by IDA-an average of $25 a year during 1991-95, up from $12 during 1983-87. This has done much to reduce the burden of Zambian debt by replacing maturing IBRD debt having short terms and higher interest rates with new IDA lending on highly concessionary terms. Commercial and short-term debt has been reduced as a result of debt buy-back operations that drastically lowered the exposure of the London Club creditors. In addition, Paris Club creditors have provided significant debt relief 6.28 These improvements are not reflected in the usual debt indicators relating debt stock and debt service to GNP and to exports of goods and services (in the nineties the denominators have fallen below the levels in 1980 and in 1989). Nevertheless, Zambia's creditworthiness has been restored and arrears have been reduced. Zambia has access to Bank and IMF resources, and some bilateral donors who had withheld support have been induced to resume. 6.29 Yet this has not occurred without criticism of the role the Bank has played. Some in Zambia still believe the debt service curtailment in 1987-89 was the appropriate approach. They suggest that paying off arrears and continuing full debt servicing postponed investment in infrastructure and diverted management attention to debt service, both delaying recovery. The implied criticism is that the Bank has failed to deal realistically with Zambia's debt overhang, and has misplaced priorities-focusing on restoring creditworthiness rather than recovery of economic growth, and emphasizing servicing of the debt rather than debt forgiveness. 6.30 The Bank has limited leverage in procuring forgiveness of Zambia's debt by the bilateral donors, who made some concessions in this direction already during the early nineties. It seems unfair to suggest that the Bank has been unrealistic about Zambia's debt overhang. While the Bank has increased its share of Zambia's long-term debt, the projection of Zambia's long term debt obligations indicate that principal and interest payments due to bilateral official creditors in 2003 will be three times the amount due to multilateral creditors. Clearly, further reduction of debt depends heavily on the bilateral donors' willingness to forgive debt. Furthermore, the forgiveness of debt by the Bank (and other multilaterals) is not within the Bank's management's power and must await a consensus among its members. 7. Progress Towards Objectives of Bank Assistance 7.1 The extent to which the objectives of the Bank's assistance strategy have been achieved may be summarized as follows: * Economic management in Zambia has improved considerably, especially in monetary and fiscal discipline since 1992. The primary fiscal deficit has been reduced from 7 percent of GDP at the beginning of the nineties to 1 percent of GDP in 1995. But growth has not been restored and the sustainability of the reforms faces serious challenges, particularly in an election year. * Achievements in liberalizing the economic environment for the private sector, beginning with the foreign exchange market, have been significant. * Privatization has been slow, but has accelerated in 1995. * Achievement in diversifying production and especially exports in Zambia has not been significant. * During the period 1984-94, poverty increased in relative and absolute terms. There has been substantial deterioration in the major social indicators during the last fifteen years. Economic Management Good So Far but Next Steps Unclear 7.2 The primary fiscal deficit has been reduced from 7 percent of GDP at the beginning of the nineties to 1 percent of GDP in 1995. At the same time inflation has been reduced from over 100 percent per year during the four year period 1988-92 to 35 percent in 1994. The government continues to use a cash budget approach which eliminates excess domestic spending over revenues. Maize and fertilizer subsidies have been eliminated. As of the beginning of 1995 some 12,000 public sector workers have been retrenched. 7.3 There have been significant improvements in the budgeting process, partly brought about with the help of the Bank's public expenditure reviews (PERs). The government's objective is to operate a balanced overall domestic budget starting in 1995. The 1995 budget benefited from much greater dialogue than previously between the ministry of finance, the planning office and sector ministries; and from clearer definition by the Cabinet of the parameters and procedures for budget preparation. A multi-year program approach to budgeting has been adopted for sectors for which a long-term strategy has already been articulated (e.g., health and agriculture) or where such a strategy is in an advanced stage of preparation (e.g., education). The first year of the public investment program and,the capital budget are now more properly linked than formerly. More emphasis is now placed on rehabilitation and maintenance, and the removal of infrastructure bottlenecks. Greater authority is being devolved to local governments; allocations to provinces being based on objective indicators (e.g., school enrollment, number of farm households, and the level of poverty). 110 7.4 Now that most of the more obvious corrections to macroeconomic management have been agreed and implemented, the next steps are neither evident nor fully agreed among major advisors. Some Bank staff believe that in Zambia today many correct macroeconomic policies are being pursued in the midst of a stagnant real sector, with severe and increasing unemployment, malnutrition, and increasing absolute poverty levels. Rapidly deteriorating infrastructure and exorbitant real interest rates, largely due to excessive government borrowing, are seen as factors retarding growth in productive private sector investment. Hence Bank staff emphasize the importance of reduction in the scale of government. Clearly, it is urgent and important that the debate be expanded and deepened to reach consensus regarding the directions to be taken in macroeconomic management in the near future. 7.5 Among other governance issues corruption was of concern to donors shortly after the change of administration in 1991. As late as 1993 Bank briefs mentioned corruption was an intractable problem. Since then there appears to have been a decline in corruption in public sector management, an area of concern by the donor community. With the promise that the Ethics and Anti Corruption Bills would be presented to Parliament, all donors were satisfied the Government had delivered on its commitments on governance issues (1994 CG). But both sustainability and deepening of economic reforms, and governance issues, still cloud the future, particularly in 1996, which is an election year. Liberalization Has Been Significant 7.6 There have been significant achievements in liberalizing the economic environment for the private sector, beginning with the foreign exchange market. Restrictions on the foreign exchange market have been progressively lifted since 1990, resulting in a diminishing role for the parallel market as shown by a shrinking premium. Few, if any, distortions remain in the foreign exchange market. The Export Retention Scheme started in 1984 had allowed exporters to retain 50 percent of earnings for their own use within 6 months. In 1992 the retention rate was raised to 100 percent and exporters were permitted to trade in retentions. Foreign exchange bureaus were allowed to open in October 1992 and the Bank of Zambia began to sell directly to them in June 1993. The auction was re-introduced by the Bank of Zambia in December 1993 and is held three times per week. Banks are required to submit their quotes on the morning of the auction, specifying the amount of foreign exchange they are willing to buy or sell and the rate at which they are willing to do business. Later in the same morning notification is given of the outcome of the auction, and the transfer of funds takes place two working days later. The re-introduction of the auction was a central part of the Bank of Zambia's attempt to develop an active interbank foreign exchange market. 7.7 Interest rates have been completely freed. The Bank of Zambia has ended all interventions in credit allocations and interest rates, recently reducing the high reserve and liquidity requirements for commercial banks. A Treasury Bill auction has been established, thereby eliminating the use of the bills' rate as a means of setting interest rates generally. 7.8 In the area of trade, all restrictions on imports and exports have been removed. Duty exemptions have been reduced. The highest tariff rate has been reduced from 100 percent to 40 percent; and a mechanism for relief from tariff anomalies has been adopted. The duty drawback 6 From Mwanawina/White: Swedish Balance of Payments Support for Zambia. Ill system was simplified; and began making significant payments in 1994. The government has liberalized the licensing for small-scale enterprises and simplified the procedures. It has also started to foster a land market, initially by creating in 1994 the legal basis for a market in leasehold land and to facilitate subdivision of land and property. Privatization, Slow Initially, Gained Considerable Momentum in 19957 7.9 Privatization was slow before 1995. The Privatization Act was passed and became operational in July 1992; and the Zambia Privatization Agency(ZPA) has been established. A Privatization Trust Fund to receive the shares of some public enterprises prior to disposal to the private sector was set up in June 1993. It received the shares of Chilanga Cement Company and the Rothmans Zambia Ltd. held by Government; and re-sold these shares to the public in 1995. Of the 160 state-owned companies, all eligible for sale under the privatization program, negotiations were concluded to sell 23 companies and the sale of 13 was completed at the beginning of 1995. At the end of December 1995 the companies/units privatized had risen to 60; with negotiations completed for another 12 and heads of agreement signed for another 30. Meanwhile, the portfolio had been increased so that a further 108 companies/units were in various stages of preparation. 7.10 Privatization of mining got underway with a study of the options to privatize Zambia Consolidated Copper Mines (ZCCM). The study has been completed, and the government has established a Mining Privatization Unit. Discussions are underway with potential private investors. The government is trying to combine the privatization strategy with a strategy to develop the Konkola deep-mining project. 7.11 In the financial sector the government has opened the insurance industry to private companies, and is drafting a new insurance law, ending the public sector monopoly of the insurance industry. It has approved the inclusion of the export/import bank (Eximbank) and the Lima Bank, state-owned suppliers of term finance, in the 1995 tranche of companies for privatization. Diversification Has a Long Way to Go and Needs to Be Emphasized 7.12 Achievement in diversifying production and especially exports in Zambia has not been significant. Although the share of non-traditional exports has risen from 10 percent to 15 percent of total exports during the last decade, the earnings from non-traditionals is still very small; and the growth continues to be constrained by an anti-export bias that is inherent in tariff policy and by a lack of sustained real depreciation in the exchange rate. In addition, the scenario of expansion of non-traditional exports envisaged in the 1993 report has not been realized in the last two years. This is not surprising since the constraints identified in the report could not have been relaxed in such a short time. These constraints include: inadequacies in the geological information and gem- marketing system, lack of investment and experienced management in tobacco, need for irrigation of cotton, capacity constraint and aging plant in the case of cement, and the length of the growing period in the case of coffee. This section has been updated on the basis of information received from Zambia's Ministry of Finance in March 1996. 112 7.13 During the latter half of the eighties the share of mining in GDP declined marginally compared with its share during 1975-84. The shares of agriculture and manufacturing increased slightly during corresponding periods. However, these changes cannot be said to reflect the diversification strategy that was started in the first half of the eighties. 7.14 On the government's side, diversification is seen in political terms. The Zambia Agricultural Sector Letter of Development Policy at Annex I of the same Staff Appraisal Report (SAR) mentions that "In view of difficulties in growing and marketing crops such as maize in some regions, Government is encouraging farmers to expand their crop portfolio so as to improve their income base by growing high value crops which can easily be marketed and require less external inputs and take into account agro-ecological considerations." After mentioning some possibilities, the letter goes on to say that the diversity in outputs will help reduce risk by broadening income sources. The letter reflects all the concerns of the original argument for economy-wide diversification, but it is couched in terms of how individuals are affected. It seems that the government should be careful not to relegate diversification to an aside rather than the essential of the development strategy. 7.15 Recently, diversification has been re-visited in Bank ESW, but it has not been given sufficient consideration in view of its importance. The 1993 report-Prospects for Sustainable and Equitable Growth-specifically analyzed the prospects for non-traditional exports. The products studied comprised more than the 70 percent of the then current non-traditional exports. These include gemstones, tobacco, cotton, cement, engineering products, coffee, cut flowers, and maize. In the ASIP StaffAppraisal Report of March 1995, while reviewing macroeconomic performance in Zambia since 1964, it was admitted that Zambia continues to be vulnerable to the vicissitudes of international copper prices. The report also noted that Zambia's large urban population, and the potential market for exports in Southern Africa should encourage diversification toward higher-value crops such as sunflower, soybean and cotton, and livestock. The same SAR also identified a US$6 million subprogram to support efforts by the private sector to diversify into non-traditional exports. It also recommended support for pilot schemes in specialized technical services in extension, management assistance, adaptive research, quality improvements, and control measures. It also said private entrepreneurs or associations should be assisted in carrying out pre-investment studies, outreach programs, training, market research, and promotion activities. It added financing would be provided for working capital and short-term investments. Poverty Has Increased, Social Conditions Have Deteriorated 7.16 During the period 1984-94, poverty increased in relative and absolute terms. There has been a substantial decline in social conditions over the past 15 years. Recent surveys indicate that absolute poverty afflict over two-thirds of the population. According to the Poverty Surveys of 1991, about 71 percent of the population was poor (80 percent in rural areas and 45 percent in urban areas). Preliminary data from the same survey in 1993 indicated that 90 percent of the rural population and 57 percent of the urban population were poor. As an example of the decline in social conditions, the infant mortality rate which had declined to 80 per 1,000 live births in 1981 increased to 107 by 1994. Primary school enrollment ratios have fallen from 96 percent in 1985 to 84 percent in 1994. 7.17 The outlook for an early reduction in poverty is not good. The last Country Economic Memorandum (CEM) said that 40 percent of the population will still be poor under the best of 113 circumstances. Projections of employment growth suggest that urban poverty will increase over the next five years. This suggests that other strategies, including safety nets in towns will be needed. While liberalization in agriculture involving removal of price controls is expected to improve the plight of medium and large scale farmers over the medium to long-term, the immediate disruptions in the marketing system resulting in non-collection of crops have harmed poor farmers. 7.18 The Bank had some involvement in the social sectors over the past decade. The two Social Recovery Credits included funds for small community-based projects in health, nutrition and education. There were five loans to education before 1982, but only one since then. The sixth and most recent (FY93) project, Education Rehabilitation, focused on the repair and expansion of primary schools, qualitative renewal, and the strengthening of professional and administrative support. The first credit for a Health Sector Support project was made in 1995. 7.19 Structural adjustment programs of the 1980s paid little or no attention to the situation in the social sectors. This lack of attention has been corrected in the programs of the nineties. It has been the experience in Zambia that structural adjustment programs need to address poverty issues directly. Stabilizing the balance of payments and providing incentives for growth has not provided immediate relief for the poor. It has been seen as necessary to provide safety nets as a short-term palliative, but poverty is too widespread and deep-seated for safety-nets which are not a long term solution. Increasingly the effective answer is believed to lie in improving the productivity of the poor and increasing their access to social and economic services. Thus the dilapidated state of the health and education systems constitutes a major impediment to the reduction of poverty. 7.20 The government has said that a key objective is to reverse the substantial decline in social conditions in Zambia. In fulfillment of its agreement under the Bank's Economic and Social Adjustment Credit to redirect budget resources to the social sectors the government has increased the social sector share of the budget from 28 percent in 1993 to 33 percent in 1994. Achievements in the Agriculture, Industry, Mining and Social Sectors Agriculture Performance of the Agricultural Sector has been poor 7.21 Despite its favorable endowment of arable land and relatively inexpensive labor the Zambian Agricultural Sector has not grown since the mid-eighties. The trend in the production of major food crops since the late eighties has been downward. For instance the production of maize which had increased substantially between the early and late eighties has fallen back almost to its 1981 level; the officially marketed output falling to less than a half that recorded in the late 1980s. Total land area cultivated has declined during the first half of the nineties. Maize production has been adversely affected by marketing and price uncertainty, drought, shortage of credit. The shift from maize has been partly offset by the increase in plantings of other major crops, e.g. groundnuts, beans, sorghum and millet. Some export crops-tobacco and cotton-remain below late 1980 levels; but one other, flowers, seems to be gaining ground. 7.22 Zambian agriculture seems to be in a transitional phase in which it is adjusting to the dismantling to the earlier policy environment of controls over marketing and pricing as well as the 114 system of input and output subsidies. However, restrained credit availability and cutbacks in public expenditures have impeded farmers efforts to mobilize resources. Bank Assistance in Modifying the Policy Environment for Agriculture has had Significant but not Necessarily Benign Short-Term Impact on the Sector 7.23 From the early 1980s the Bank had encouraged the Kaunda government to move Zambia gradually away from a highly regimented and subsidized system that had been responsible for deeply entrenched distortions. Despite difficulties in obtaining wider support for the reforms, there was tangible movement towards a more market-oriented strategy from 1983 through 1987. Unfortunately, the attempted reform of the market for maize meal led to riots in 1987, which panicked the government into an almost complete reversal of the reform program. 7.24 In 1992 the policy dialogue was resumed; and by the end of 1994, prices and trade in all farm products and inputs had been effectively decontrolled and de-nationalized, subsidies on fertilizer and on maize meal had been removed; and budgetary provisions for subsidizing interest on farm loans were slated to dry up completely by 1996. A number of parastatal corporations were due to be dismantled. 7.25 It is difficult to discern any kind of relation between the Bank's commendable sector policy work and the "agricultural" projects approved during the eighties. Even the first "time-slice, sub- sector"-wide project (Research and Extension-ZAREP-see above) was based on completely unrealistic assumptions, which became evident less than a year after its inception. In the 1980s there was an evident lack of continuity in the Bank, reflected in failure to follow up on certain key issues from one policy document to the next-an unfortunate consequence of personnel turnover. Bank Lending Has Not Been Very Helpful in Agricultural Development 7.26 The Bank and IDA have made a total of 15 loans and credits to Zambia since 1968 that were officially classified as "agriculture". Of these, only six were approved from 1984 to 1992. Of the total, seven projects have had only completion reports (PCR) reviewed by OED, and five have been "audited" (PAR) (Table 2). Only four of these 12 projects were rated as "satisfactory"; only the latest of these, approved in 1981, was evaluated for sustainability, and it was classified as "uncertain". 7.27 The Staff Appraisal Report (SAR) for the Research and Extension Project (see below) stated quite frankly that the Bank's accomplishments in the agriculture sector with projects approved and initiated prior to 1984 was dismal. It said that the program consisted of seven projects (some of which were not yet completed by 1984, however): "[two] for industrial forestry, two for livestock/dairy development, two for tobacco production, one for coffee production, two for area-based agricultural development (in Eastern and Southern Provinces).... The first livestock loan was canceled in 1973 at GRZ request because of pricing problems and poor management. The dairy project.. encountered initial implementation problems, was scaled down...and is now progressing well. The first and second industrial forestry projects were relatively well-executed.... The two tobacco farming projects were unsuccessful in meeting their objectives.. because of managerial and pricing problems. The coffee project has also been hampered by cost overruns, shortages of foreign exchange and counterpart funds, and management deficiencies. The progress of the two area-based.. projects, which have substantial research and extension components, has 115 been slowed down by delays in recruitment of technical assistance personnel, inadequate funding, and lengthy procurement procedures...." 7.28 The damage from the prolonged disbursement suspension between 1987 and 1991 to the four ongoing "agriculture" projects-three of which had just started-was grave in view of the fact that the GRZ could not make up for the interrupted cash flow from IDA. Only two survived to be resuscitated in 1992. Lessons 7.29 By the early 1980s Bank staff responsible for Zambia had learned certain lessons, foremost among them that: * enclave projects cannot succeed in a hostile policy and institutional environment: * balance-of-payments support loans, irrespective of the "conditionalities" attached, had not achieved significant improvement in the sectoral policy environment; * pushing a reluctant government into an accelerated reform pace can be counter- productive; and, * unrealistic Appraisal Reports and Board presentations with respect to the policy and institutional risks not only jeopardize project effectiveness but even tend to impair, rather than strengthen, the lending pipeline. Manufacturing 7.30 After decades of protectionist policies, heavy state involvement and general economic decline, the manufacturing sector remains plagued by low productivity and low-quality output. During the ten years 1983-1993, the index of manufacturing production grew annually by 0.5 percent only, i.e. not faster than in the previous ten years. A majority of manufacturing sub- sectors showed negative growth rate (textiles, paper and products, chemicals, non metallic mineral products). 7.31 The only important sub-sector which showed positive growth was food, beverages and tobacco with 3.1 percent annual growth in 1983-1993. Since 1993 production of woven cloth has declined by 50 percent, while in the garment industry production has declined even more dramatically, due to the massive importation of used clothing. 7.32 The share of manufacturing in total GDP grew from 19 percent in 1983 to 28.7 percent in 1993; but this was due to a significantly slower growth of other sectors of GDP. The structure of manufacturing has changed little with traditional sub-sectors (food, beverage and tobacco) still contributing more than half of value added in 1993. Manufacturing remains hampered by the lack of diversification from import substitution to export activities and lack of investment (except in some export-oriented industries). 116 7.33 Employment in manufacturing practically stagnated, rising only from 59,800 in 1983 to 60,300 in 1991; and its share in total employment declined from 12.7 percent to 12.2 percent in same period. In 1991, average real earnings in manufacturing were 25 percent of the 1975 level. 7.34 Parastatals remain the largest single group of manufacturing enterprises and they still employ about half of the total manufacturing work force. Progress in privatization since 1991 did not alter this picture at least significantly, at least until 1995. 7.35 Capacity utilization is low in all industries-on average just below 50 percent. The major constraints as identified in a 1994 survey of firms are lack of credit, insufficient demand, competition from imports and high interest rates. Infrastructure has been mentioned also as a constraint. As a consequence of the long run, downward trend of investment including in maintenance in the Zambian economy, infrastructure is generally in a very poor condition. Currently, infrastructure is highly inadequate for manufacturing companies that aim to conduct their business according to modern standards. The most serious problems are caused by inadequate electricity, roads, telephones and security. 7.36 Investment has been very low for most firms in recent years. Generally, only the largest firms have made investments of any significance, but even for these companies figures are low. 7.37 As a result of the ongoing process of deregulation, many constraining and distorting regulations have been lifted or not enforced. For example, since the minimum wage has not been adjusted to take full account of inflation, it is now of no practical importance. Regulation of the access to foreign exchange has been more or less completely removed and foreign exchange is now basically freely available at the going market rates. The general impression is that Government regulations are not severe obstacles to firms' operations or their plans for expanding their activities. 7.38 The Bank supported the removal of many of these regulations and restrictions through a series of industrial reform credits. These include the Industrial Reorientation Project approved in October 1985, to which the manufacturing sector responded with real growth of over 8 percent during the ensuing year through fuller use of existing capacity. Later, through two Privatization and Industrial Reform Credits (PIRC I & II) the Bank supported further liberalization and the transformation of the government's major industrial parastatal Zambia Industry and Mining Company (ZIMCO) into a holding company. However, the privatization program experienced initial static inertia due to the learning curve; the pessimism in the public perception and the general underlying legalities associated with sale of companies given the country's statutes. Although, Zambia enacted a new Investment Act in 1993 as required under the PIRC II, the Investment Center took longer than expected to become an effective one stop clearing house for investors. Eventually, the center implemented the new system of incentives and investors are now responding well to it. Lessons * Privatization, more politically controversial than expected, must overcome inertia and a slow learning curve; but it is a major priority and Bank assistance can be eventually effective. 117 * Valuation of assets of enterprises to be privatized has been misunderstood by politicians, civil servants and the general public. * Transparency in transactions is essential to successful privatization. * The stimulation of investment when stabilization considerations demand curtailment of credit and public expenditure is an important problem in the strategy that the Zambians and the Bank have agreed. Yet a more viable strategy does not seem available. * Undoubtedly, new opportunities for the private sector have been created, but entrepreneurs are in short supply. A system that has seen public sector domination of the economy for so many years tended to directed bright young talent into the public service rather that into private industry. It will take a few more years to change career preferences of young Zambians. Mining Copper 7.39 In 1984, as part of a US$300 million export rehabilitation and diversification program, the Bank extended a loan of US$75 million to rehabilitate copper mining. The Bank assisted in arranging cofinancing of approximately US$90 million from AFDB and EEC. Prior to then, the International Finance Corporation (IFC) had approved two mining sector investments, one in 1979 for an expansion of a cobalt plant (US$28 million) and the other in 1981 for an expansion of a metallurgical plant (US$29 million). 7.40 In the course of the rehabilitation program financed in 1984, it became clear that Zambia Consolidated Copper Mines' (ZCCM's) operations suffered from a shortage of skills. Negotiations for a technical assistance project were completed in 1987, but further processing was discontinued when the Bank suspended lending to Zambia until in 1991, when a $ 21 million Mining Sector Technical Assistance project was finally approved. The project was broadened to include the entire mining sector and focused on strategic and mining policy issues (including divestiture) as well as on improving operations of ZCCM, Maamba Collieries and the gemstone mines. Results Achieved under the Rehabilitation Program were Significant 7.41 ZCCM made significant progress in translating the agreed policy measures under its Rehabilitation Program into specific actions. In particular, the company closed the Kansanshi open pit mine, Konkola No. 3 shaft, and Chambishi mine. Two concentrators, a smelter and a refinery were placed on care and maintenance. Mining operations were rationalized by reducing mining divisions from 8 to 5, In addition ZCCM made efforts to improve performance standards and productivity levels at its mining and metallurgical operations. 7.42 Under the project ZCCM reorganized the managerial structure in 1986. Authority in operational matters was transferred from Lusaka to the copper-belt in a more decentralized system, while corporate planning, financial aspects and political functions were retained in Lusaka. The planning function was strengthened with the Corporate Planning Department. 118 7.43 Technical studies completed in 1984/85 focused on optimizing the totality of ZCCM's operations (i.e. mining, concentration and metal extraction), and on developing appropriate management information and procurement systems, to enhance the effectiveness of the investment and operation decision making-process. Most of the consultants' recommendations were accepted by management and implemented, albeit with varying degree of success. 7.44 The project supported ZCCM's adoption of a new manpower policy, and its effort to address some of training deficiencies. Nevertheless, the anticipated throughput of engineers and technicians was not sufficient to cover technical needs, and shortage of well-trained personnel persisted. 7.45 The rehabilitation program helped to halt ZCCM's declining trend of copper production which stabilized at around 470 000 tons in 1986-1988, largely as a result of new equipment and spares purchased and of improvements in management and planning. However, the level of production was far below the level anticipated (about 600 000 tons on average in 1986-88 which was very optimistic) due to continuing depletion of existing reserves with no new discoveries, middle management weakness and certain skills shortages; and the impact on production of a shortage of operating funds due to lack of foreign exchange and relatively low copper prices. 7.46 In spite of the lower than anticipated level of production, ZCCM managed to reduce unit costs. Production costs in US c/lb fell from 55.2 in 1983 to 52.3 in 1988. ZCCM succeeded in reducing the work force from 57,676 in 1983 to 54 ,130 in 1988 i.e. by about 6 percent. Output per man year, however, declined from 10 tons in 1983 to 8.7 tons in 1988. 7.47 Bank support for ZCCM's rationalization of mining and metallurgical facilities and improvement of operating efficiency was fully justified, given the vital importance of the sector for the country's economy. Without the Project approved in 1984 and closed by end 1988 (on schedule), copper production would have continued to decline. The re-estimated financial rate of return was 11 percent, which is satisfactory. The recalculated economic rate of return was 18 percent, which is also satisfactory. 7.48 Although copper production was stabilized at around 470,000 tons in 1986-88 largely as a result of equipment and spares financed by the Bank loan, production declined again in 1984-93 and for the first time fell below 400,000 tons in 1994. The Bank financed Project had thus a limited "shot in the arm" impact. 7.49 The project was aptly designed technically, but the need for new ore reserves development did not receive the emphasis it deserved. Although steps have been taken to rationalize production, mining and processing operations have only been partially optimized. Despite commitments under the 1984 Bank financed operation and the 1991 Technical Assistance Project, ore reserve and resource development have been neglected. 7.50 The reorganized corporate structure, although improved, did not fully achieve the expected increase in divisional managerial authority and accountability for production, productivity and financial results, inter alia, because of the de facto centralized management of the company. 7.51 Capacity utilization and labor productivity have been declining. ZCCM's training requirements, even at the present much lower production levels, remain unsatisfied. 119 Sustainability is Uncertain Because of ZCCM's Financial Weakness 7.52 ZCCM's financial performance has been materially affected by the declining production levels and world prices, the fiscal regime, excessive external debt, and operating inefficiencies. ZCCM direct production costs are internationally competitive, but after including interest charges, high debt repayment and taxes, ZCCM is in a much less competitive situation. ZCCM's precarious financial position and illiquidity, and the pervasive organizational and operational shortcomings, imply that ZCCM's sustainability is uncertain. Privatization of ZCCM is a Difficult but Important Decision 7.53 The Bank's strategy in dealing with ZCCM changed since 1990, moving from attempts to improve ZCCM efficiency through "restructuring" to efforts to privatize partly or wholly the company. In 1992, the new government embarked on a restructuring program of ZCCM. All non- mining activities were to be privatized. However, the government felt that the issues were far more complex than for other privatizations because of the size and importance of ZCCM and the impact of ZCCM on employment in particular areas. The second privatization and industrial reform credit of 1993 requested the provision to IDA of a report on the privatization options for ZCCM. This report was submitted in June 1994; and options for privatization of ZCCM are still being studied by the government. Lessons 7.54 The first lesson is that when a firm dominates an economy, like ZCCM does, the decision to privatize becomes complex and difficult. ZCCM's foreign exchange revenues are overwhelmingly the country's main source of foreign exchange and its tax payments are a substantial part of the Government's tax receipts. Furthermore, a major part of subsectors of the economy (power, railroads, coal, etc.) are to a large degree suppliers to ZCCM. This creates complex trade-offs between ZCCM on the one hand and the Government and the rest of the economy on the other, and makes decision-making difficult. 7.55 The second lesson is the slowness in getting large inbred organizations with strong corporate cultures to accept and adopt the technical assistance provided (e.g. through the Bank technical assistance project approved in 1991). Recapitalization of a public enterprise without solid progress in revamping the corporate culture as reflected in management practices and operations procedures is unlikely to promote sound industrial mining entities. 7.56 Intrusive state intervention in the decision-making process and policy-induced distortions (e.g. poor fiscal, monetary and foreign exchange policies) not only tend to undercut the contribution of public enterprises to sectoral development and economic growth, but also have detrimental effect on the financial viability and sustainability. Coal 7.57 In March 1983, a Maamba Coal Engineering Project received a US $ 4.3 million IDA credit. The project had been identified by a Bank's energy assessment mission which visited Zambia in January-February 1982. The objective of the project was to foster the substitution for expansive oil products and to provide low-cost energy to meet the growing demand from the industrial and other consumers. The project had three basic components: (a) a feasibility study for 120 the assessment of coal demand and rehabilitation of the service complex; (b) procurement of critical spare parts needed to keep the mine complex operating during the study period; and (c) training of key technical persons. 7.58 However, production never reached the expected level of 700,000 tons. It amounted to 524,000 tons in 1988, 395,000 tons in 1989 and 330,000 tons in 1990. Owing to lower economic activities in Zambia, and major customers (such as ZCCM) having revised their coal demand to a lower level, the overall demand declined. The other important factor was the inability of the railways to provide adequate number of rail cars and locomotives for the transport of coal. 7.59 The project was rated "satisfactory" since it achieved its physical objective to rehabilitate the mine, improve quality of coal and put in place, after extensive training and three years of expatriate technical assistance, effective Zambian managers. However, sustainability was uncertain due to declining demand and lack of transport means. Moreover, operating difficulties occurred again in 1990/91. Problems included the long-term breakdown of a dragline (the main stripping tool) and the lack of availability of dump trucks and spare parts. MCL was again in need of major rehabilitation investments in order to remain operational. 7.60 Thus, despite more than ten years of efforts by the Bank (through two projects) and the AFDB, the coal industry's structural problems have not been solved. Bank involvement started under the wrong assumption that high petroleum prices of 1982 would persist and thus facilitate substitution by coal. However, oil prices have drastically declined since then, and coal is now much more expensive. The lesson is that one should not hesitate to adjust to reality even at the cost of "reviewing" project costs and objectives. A second lesson is that mining projects should pay utmost attention to infrastructure requirements (e.g. railways) and major consumers plans (copper mining). Gemstone Mining 7.61 The Mining Sector Technical Assistance project provided US$ 0.8 million to study operational, financial and marketing problems of gemstones mining which had suffered under past restrictive government policies. The aim was to develop measures to strengthen artisan mining in Zambia. The project was also to provide assistance in setting up a gemstone auction system and in monitoring the functioning of a new private gemstone marketing system. IDA funds ($ 150 000) have been provided recently to the Export Promotion Bureau to improve miners' technical skills and assist them in obtaining better prices for gemstones. 7.62 The gemstone mining sector is in a state of stagnation at the present time. There are production and marketing problems. There have been four main constraints to production: (i) lack of mechanical mining equipment; (ii) insufficient credit financing; (iii) inadequate training of small-scale miners; (iv) insufficient geological information about the mining areas. 121 7.63 Resolving the inadequacies of the marketing system could be the single biggest step towards formalizing the unrecorded gemstone sales. Legal sales channels does not offer the flexibility and convenience of illegal traders who, continue to capture most of the sales. Liberalizing the trade, for instance by selling trading licenses to foreign as well as local buyers would greatly increase the number of buyers to whom small mines could sell their products legally and thus create a competitive buying environment and a legal alternative to the current system. Recent Bank Assistance 7.64 For a number of years, Bank staff was concerned by prospects for gemstones exports, with a potential for diversifying and increasing trade revenues. However, in 1991 Bank assistance was for the first time offered through the Mining Sector Technical Assistance Project. A study of small scale/gemstone mining was to assist with better defining marketing and needed technical measures. The Export Promotion Board (EPD) is now aiming at improving marketing practices and providing technical assistance to potential exporters. The Bank has recently provided $0.25 million to EPD precisely to support such assistance to the gemstone sector. Results achieved through this program are not yet available. The Social Sectors-Health & Education Bank Assistance to Education Has Had Minimal Impact 7.65 After making four loans to education before 1980, the Bank made only two loans since then. A fifth loan made to education in 1982 to support the expansion of junior secondary schools was a casualty of the suspension of disbursements in 1987. The credit was closed in 1988 with US$15 million undisbursed out of the US$25 million. A 1992 project supported the rehabilitation and expansion of primary schools and the provision of learning materials. 7.66 Little progress is attributable to these projects. OED evaluation classified the fifth loan with the third and fourth as lacking in focus and spread too thinly over a wide range of activities. The Education Rehabilitation project has helped to build some schools, helped education services and had a modest impact on skills training. Health 7.67 The Bank provided assistance to the health sector in Zambia under the Lusaka Sites and Services Project in 1974, and financed nurses training under the Fourth Education Project in 1976. A 1983 Population, Health and Nutrition survey by the Bank led to the appraisal in 1988 of a First Family Health project which was shelved because of the suspension of disbursements at the time. It was not until November 1994 that the Bank approved a Health Sector Support project designed to address the problems of the broken down health infrastructure and the shortages of trained medical personnel, drugs and equipment in the Primary Health Care system. The project is an ambitious sector investment program, built around a plan by the ministry of health and supported by many donors. Like the Agricultural Sector Investment Program the health project emphasized effective participation by donors and beneficiaries in the identification and design. 122 Conclusions and Recommendations On Key Strategic Issues Privatization and Diversification Need More Attention 7.68 Liberalization, privatization and diversification are the three prongs of the strategy for renewed growth. But only in the first has substantial progress been made. Recent progress (in 1995) in privatization is a good step forward but much more is needed. And diversification requires a substantial increase in private investment which has not yet taken place. A careful review of the remaining obstacles to this private sector development should be a major element of the Bank's strategy. Growth Requires Investment in Physical and Social Infrastructure 7.69 Achieving positive GDP growth in Zambia and checking the worsening poverty requires continued investment in physical and social infrastructure. These investments will rely on Bank, and other donors', support. The issue is that the mix of instruments and also the total of Bank/IDA financing, given the level of support from other donors, be consistent with the debt service requirement and the investment implications of the growth target. Coordination and Consistency of Loan Conditions at Macro and Micro Levels Essential 7.70 The coordination between the macroeconomic conditions of structural adjustment operations and sectoral adjustment/investment projects should concern not only the content but also the pace and sequence of measures. This applies especially to measures affecting pricing policies of outputs and inputs and the removal of subsidies. All three affect the profitability of activities and hence the response of entrepreneurs to opportunities for diversification. Need to Develop Entrepreneurs for a Vibrant Private Sector 7.71 Another serious constraint to private sector development in Zambia is, increasingly, the entrepreneurship, managerial abilities, and skills of the Zambian people. Where are the entrepreneurs? Among the many factors which impede the development of entrepreneurship and skills in people are the following: declining life expectancy; the burden of work women are already bearing; the traditional barriers to women's access to credit and land ownership; the low level of personal saving due to poverty; the inability of the poor to risk their income sources (the low risk route out of the ghetto, notably the public service, does not lead to entrepreneurship); the high percentage of youth as heads of households due to early deaths of parents; and a lack of knowledge of alternative lines of production. The Bank's CAS should address this set of issues and propose specific measures. 123 Institutions to Serve the Private Sector Must be Developed 7.72 Institutional development in the public sector is a necessary complement to private sector development. There is a need to specify the role of the public sector, to identify the required complement of private sector service and support institutions, and to provide for meeting this requirement. Institutional development has had limited attention during the last fifteen years, with the result that the usual assessment in Zambia is that most ministries and agencies of government are simply not adequately staffed and supplied with the inputs to discharge their responsibilities effectively. Institutional development is a slow process and should now be given higher priorit" than hitherto. While privatization is proceeding the government can retain suitable officials in the public service, and re-train them for work in areas where institutional capacity is weak. Bilateral donors Must be Kept Engaged in Zambia's Development 7.73 Bilateral donors have been an important source of support to Zambia's development. and thev will be indispensable to Zambia's future, especially as commercial lending sources have dried up. The issue is how to keep donors engaged now that the geopolitical reasons that justified their help in the past are no longer valid and may not be valid in the future. The answer seems to lie in fully involving donors in decisions on objectives and in the design of arrangements for the most effective use of the assistance they will provide. It may also lie partly in being mindful that the political/public relations benefits may be important to politicians in donor countries, hence the need to allow bilateral donors to play the lead donor role in as many sectors as possible. The Political Implications of Reform Must be Anticipated 7.74 The political reaction to reform should be carefully studied and anticipated when planning the Bank's assistance strategy. The Bank's approach has often been to focus on the removal of distortions without much thought to the fact that behind each distortion lies a group of beneficiaries who may be expected to oppose the reform. In Zambia, a wide range of subsidies (e.g.. on maize- meal, fertilizer) benefit the poor who comprise the majority of the population. The effect of a reform that affects such a large group of people has made the adjustment program politically difficult. In order to avoid a backlash some compensatory benefit with less distortionary impact should be considered. This approach will also favor the sustainability of reforms and investment programs. The reforms should also be accompanied by a suitable dialogue to foster understanding of the rationale behind them. In the absence of these and/or other means of assuaging those affected, there is increasing risk of reversal, particularly in an election year. Careful Assessment of Options and Risks is Crucial in Formulating Strategy 7.75 In laying out a country and Bank strategy a "one option" approach is inadvisable. The Bank must be prepared to contemplate worse case and best case scenarios. The assumption that donors will always close the financing gap is not only dangerous, it shuts off the search for alternatives. 124 Take measures to Mitigate the Negative Impact of Prolonged Suspensions of Disbursement 7.76 It has been seen that prolonged suspension of disbursements significantly compromise the efficacy of operations. The Zambia experience shows that arrangements can be devised to reduce the negative impact and even, at times, to reduce the duration of suspension. More Effective Instruments ESW 7.77 The recommendations on ESW are the following: * ESW should be cognizant of, and sensitive to, the political implications of its economic and social policy recommendations. * ESW should avoid excessive optimism in its assumptions and projections. Optimistic assumptions regarding copper prices led to a delay in adjustment efforts in the eighties. There is probably too much optimism in the nineties regarding growth and aid flows. * More attention needs to be paid to the design of strategies for reducing the public sector deficit within the context of adjustment operations, both as regards timing of actions and the monitoring of implementation. * The Bank should continue ESW even when arrears require the suspension of lending. Many ESW tasks were dropped after the suspension in May 1987, and the ESW agenda remained sparse for the next three years. This caused long lapses between updating memoranda on strategic sectors (e.g. agriculture and delayed re-start of operations). * ESW for privatization needs to be strengthened. The lack of prior studies very likely has contributed to the slow pace of progress. Concerns about divestiture were not anticipated. * Greater attention to sequencing of actions will also help to ensure the efficacy of advice and assistance (e.g., liberalization and infrastructure development should go hand in hand; cost recovery solutions to the fiscal problems should be consistent with social concerns; and the public investment plan should be fitted within an agreed medium term development plan). Lending 7.78 The recommendations for lending are as follows: * Adjustment lending should not be relied on to persuade an indecisive client to undertake a drawn-out reform agenda. 125 * In the Zambian context project success is likely to be favored by small size, appropriate and relatively unsophisticated technology, the inclusion of training assistance, the linking of implementation authority and responsibility, and attention to improvement of complementary services (e.g. extension). * In agriculture and the social sectors pilot projects should be tried whenever there is uncertainty regarding the informationlexperience basis for project design. * The cost of disbursement suspensions is very high- few projects survive long interruptions in implementation. The Bank should examine the feasibility of shut- down strategies (e.g. timing, moth-balling, interim financing) that may minimize the extent to which a project is impaired by the suspension of disbursement. * In aid coordination and debt management, the Bank should continue to provide assistance even when a suspension in lending is unavoidable. * The new lending instrument of Sectoral Investment Project holds good promise but should be monitored carefully. Further attention should be given to full participation by donors and to avoid the impression of the Bank as a dominant player. Resident Mission The role of the Resident Mission should be further expanded, not only to reflect the general trend in the Bank's greater attention to results in the field, but also in the particular context of a program that relies on expanded aid coordination and sectoral investment programs. In the past, the Resident Mission has been understaffed and decisions have had to rely to heavily on missions from headquarters. -―』‘-―『→’,---―→→뻐＝꽈―&-‘∼4』．--，·，