Zambia - Public Sector Reform and Export Promotion Credit Project

Report No. PID6766 Project Name Zambia-Public Sector Reform and Export... Promotion Credit Project ID ZMPA35641 Borrower Government of the Republic of Zambia Implementing Agency Ministry of Finance and Planning P.O. Box 50062 Lusaka, Zambia Telex: (965)-42221 Fax: 250586 Date of this PID August 25, 1997 Project Appraisal Date September 22, 1997 Project Board Date December 11,1997 Background Following the resumption of IDA assistance in 1991, there have been six adjustment operations in support of the Government's economic reform program. These ongoing reforms have transformed many aspects of the Zambian economy and helped establish a firmer foundation for the resumption of sustained growth. Major steps have been taken towards restoring macroeconomic stability, liberalizing external trade, deregulating domestic markets, and promoting private sector activity. Specifically, the government's fiscal deficit has been reduced; the exchange rate and interest rates are now market determined; quantitative restrictions on trade have been eliminated and the levels and dispersion of tariffs has been reduced; price controls and restrictions on private-sector involvement have been revoked; and, an ambitious and time-bound program to privatize and/or commercialize the operations of the parastatal sector has already made considerable progress. Despite this progress, growth has been slow to resume. GDP has barely grown since 1990, and consequently per capita GDP has fallen by about a sixth. While droughts in three of the past six years contributed to this stagnation, the phasing and implementation of reforms in some policy areas have slowed recovery. With the reforms supported by the last adjustment loan, some of these issues, especially in the area of trade policy, have been addressed. However, gaps remain in three policy areas. On public sector reform, little has been done to reduce overstaffing, retain skills, restructure ministries and decentralize operations. In expanding exports and investment, obstacles still remain in terms of the anti-export bias due to tariffs on imported inputs, difficulties in acquiring and using land, and the ineffectiveness of promotional mechanisms. And, In delivering public services to the poor, their coordination and integration into an overall poverty reduction strategy remains problematic. In addition, there are pressing financial needs arising from needed personnel reductions in the mining sector that will facilitate the urgently needed privatization of that sector. Objectives This Credit would support the Government's ongoing reform program in five areas, which are related to the goals of the Bank's assistance program  in Zambia, as specified in the most recent Country Assistance Strategy. Specifically, the Credit aims at promoting sustained and broad-based growth by: (i) maintaining macroeconomic stability; (ii) promoting private sector activity by reducing the biases against exports and investment; (iii) improving public sector management by restructuring the civil service and enhancing the transparency of public procurement; (iv) facilitating privatization in the mining sector by assisting with the financial costs of the redundancy program; and, (v) targeting public assistance and services more effectively to the poor. Description This Credit would build upon the reforms supported under the previous adjustment operations -- the Economic and Social Adjustment Credit II. Besides the emphasis on maintaining a stable macroeconomic framework through continued monetary and fiscal restraint, it would support the Government's reforms in four broad areas: (i) Public sector management. This would include steps to: begin the process of restructuring ministries and reforming salary and staffing structures; initiate implementation of a decentralization strategy; and promote greater transparency and accountability in financial management. (ii) Export and investment promotion. To accelerate the supply response, these measures would: compensate for the residual anti- export bias by improving the access of exporters to imported inputs at world prices; reduce the barriers faced by private investors in acquiring and using land; and, improve the institututional basis for investment and export promotion. (iii) Facilitating mining privatization. To ease the transition to private sector ownership of the mining sector, the Government will provide financing needed to pay for the separation costs of the vast bulk of personnel that will remain behind after the productive units have been sold. (iv) Targeting of public services. To ensure that social services and public assistance are delivered to the poor more efficiently and cost effectively, these reforms would: better coordinate such programs; maintain their budget allocations; and, improve delivery mechanisms so that they are better targeted. Environmental Aspects The recommended environmental assessment category is C. The proposed operation would not have any direct environmental impacts. Implementation The Credit would be disbursed through the Bank of Zambia in two tranches. The first, of US$85 million, would include US$40 million designed to facilitate the mining labor reduction program and US$45 million in balance of payments support. The remaining tranche (US$45 million) would be available when specific conditions relating to the reform agenda are achieved. While the Ministry of Finance and Planning would be responsible for coordinating the implementation of the reforms supported under the operation, the specific measures would be formulated and implemented in consultation with the Bank of Zambia, the Cabinet Office, and the Ministries of Legal Affairs; Mines and Minerals Development; Commerce, Trade and Industry; Health, Education, and Community Development and Socal Services. - 2-  Financing The amount of this proposed IDA Credit would be $130 million. As a balance of payment operation, it would finance 100t of the foreign exchange costs of eligible imports. Benefits and Risks This Credit would help meet part of Zambia's balance of payment needs for 1998. In addition, the Bank would play a key role in mobilizing additional resources from the other bilateral and multilateral donors through the CG process. The reforms that would be supported under the Credit would also be central to completing the ongoing transformation of the Zambian economy and in stimulating a sustained private sector investment and export response. The main risks faced by this operation are: (i) the public sector reform effort could falter due to lack of political will and opposition from various interest groups; and (ii) macroeconomic conditions could deteriorate. The first risk is reduced by the high-level commitment to improving public sector management and by designing this component of the operation in close consultation with officials of various government agencies. The risk of macroeconomic stability is mitigated by the Government's recent track record in maintaining fiscal stringency even in the face of adverse domestic and external conditions. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending August 21, 1998. - 3 -