Zambia - Program Loan Project

11numet nf- A L T- Ts I I The World Bank rILf LUPT FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT ZAMBIA: PROGRAM LOAN (LOAN 911-ZA) March Qi 1Q77 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of the!r offii.lI duitie- Its eontents m-y not otherwie he diselosed without World Rank authorization.  CCnD (%VE1f'f AT I ICE fkJI V a OFFW '.JICIAi1.-i WkL J OJL N LY a PROGRAM PERFORMANCE AUDIT REPORT "7A DT A flnflrDAn, ^CA1I /fA1l Al n ZIA,LD.L:M rOG.R'I1r1 LOuN (LOAI' 911-ZA) TADLE OF CONTENTS Page No. Preface Data Sheet Highlights PROGRAM PERFORMANCE AUDIT MEMORANDUM Background -2 Fluctuations in Copper Prices and the Timing of the Loan 2 - 3 Disbursement and Supervision 3 4 Procedures for Withdrawal of Counterpart Funds 4 Policy Understandings 4 5 Conclusions 5 Chart I Attachment: Completion Report Introduction A.1 Economic Situation Preceding the Program Loan A.1 - A.3 Objectives A.3 A.4 Implementation and Counterpart Funds A.4 A.6 Disbursement Procedures A.7 A.8 Conclusions A.8 A.10 This document hua a ratrictd disuibution and may be used by recipienu only in the perfowrmnco %d ifft. AA&ai iint. &tinm i fwnt nVharwimm b_ dlad without WM Dak authorIntio  PROGRAM PERFORMANCE AUDIT REPORT ZAMBIA: PROGRAM LOAN (LOAN 911-ZA) PREFACE This ReDort covers an audit of experience under Program Loan (Loan 911-ZA) to Zambia. Loan 911-ZA, for US$30 million, was approved on June 14; 1973. was sianed on June 18, 1973 and became effective on June 29, 1973. The final disbursement was made in June 1974- bringing total disbursement under to Loan to US$12.5 million. In agreement with the ^.ovrnment of Znmhbia tha hbalnre amount of US$17.5 million was cancelled. This audit is based on review of relatdrl tinoeiimnt-s , n and dli,iscusicion withI the Bankr sa1-ff and complements the Completion Report prepared by the Eastern Afr;rl PRegional nffice. Comments on the Report were received from the Borrower.  PROGRAM PERFORMANCE AUDIT REPORT ZAMBIA: PROGRAM LOAN (LOAN 911-ZA) DATA SHEET Amounts (in US$ mln) Aso 12/341/76 Original Disbursed Cancelled Repaid Outstanding Loan 911-ZA 30.00 12.50 17.50 - 12.50 Project Data Original Plan Actual or Est. Actual Conception in Bank Dec. 1972 Board Approval 6/14/73 Loan Agreement 6/18/73 Effectiveness 6/29/73 Loan Closing 6/30/74 June 1974 Mission Data Month, No. of No. of Date of Year Weeks Persons Manweeks Report Identification 11/72 1 12/72 Preparation 1/73 3 Preappraisal/Negotiations 5/73 1 Supervision I 11/73 3 2 6 12/73 In addition, there were two other missions, one (one man, two weeks) in August 1973 to discuss disbursement procedures, and one (two men, one week) to discuss arrangements for cancellation. Follow-on-Project Loan 1322-ZA of US$30.00 million, signed September 17, 1976 for Second Program Loan Proiect.  PROGRAM PERFORMANCE AUDIT REPORT ZAMBIA: PROGRAM LOAN (LOAN 911-ZA) HIGHLIGHTS The audit focuses on the problem of providing a program loan to a country heavily dependent upon a single commodity for its foreign exchange earnings and resources for development expenditure. The loan was intended to provide resources to assist Zambia to carry out a reduced development program at a time when low copper prices had imposed a severe financial constraint on the economy. At the time the loan was made the Government embarked upon a number of policy measures including a wage freeze and increases in prices of agri- cultural products. More than half the Loan was cancelled because rising copper prices reduced the country's need for such support. Other points of interest are: - problems in disbursement of the Loan (para. 13 of PPAM and paras. 8, 11-13 of PCR); and - role of counterpart funds (naras. 14-15 of PPAM and para. 9 of PCR).  PROGRAM PERFORMANCE AUDIT MEMORANDUM ZAMBIA: PROGRAM LOAN (LOAN 911-ZA) 1. This memorandum reports on an audit of performance under Bank Loan 911-ZA for US$30.0 million which was signed in June 1973; an amount of US$12.5 million was disbursed by June 1974, and, in agreement with the Government of Zambia. the balance amount of US$17.5 million was cancelled in June 1974. The audit is based on information contained in the Project Completion Report (PCR) prepared by Bank staff in the East Africa Regional Denartment (Attach- ment A), supplemented by information contained in Bank files and reports, and discussions with Bank staff concerned. 9. Since program loans are mpnat fn protect as far as nrarticabhlp tfli development process in a country facing serious resource and, in particular, balance of payments constraints, their purpose and objectives have to be reviewed in the light of the country's economic structure and development objectiveS, -nA the onomicnl 4polcies t- pursues to support these oDjectives. In addition, in the case of the particular loan to Zambia, procedural prob- l-ems arose relating- tA dbursement of the loan anA wiuthdrawal of counterpart funds. Background 3. Zambia is a landlocked country which became independent in 1964, and LdI Ullt: of | the hig h g *est peL cata L iLcUesb 1i11 Llth rtgoll. lilth economy is dominated by the copper industry. On an average, copper contributes 25-30% of the country's G.D.P., 90-95% of its exports and (in a good year up to) 50% of government revenues. Zambia provides about 16% of the world's copper exports. In spite of its substantial share in the world copper trade, Zambia has little or no control over international copper prices which are determined by transactions on the London Metal Exchange (LME). Between 1970 and 1975, copper prices slumped and peaked twice and had a significant impact on the course of the Zambian economy. 4. Since production and export of copper is in the modern sector, its dominant role in the economy has been a major influence in the characteristic economic development of Zambia. This is visible in a marked tendency for concentration of development (and population) in the copper-belt and along the railroad line linking the copper-belt in the north and west with major urban centers and export points. 5. Substantial disparities in income exist between the "modern" sector and the "traditional" sector (largely divided between urban and rural). Agriculture is estimated to contribute less than 12% to G.D.P. There is a division between commercial and traditional agriculture, and large disparities exist in value added per worker between the two sectors. About 50% of the labor force is estimated to be in the subsistence sector, but because of emigration the proportion is declining. There has been a substantial growth of urban centers and a net migration from the countryside to the towns - about 35/O of Zambia's population is in 10 towns with a poDulation exceeding 50,000.  -2- 6. The major economic policy issues confronting Zambia are, first, how to use resources from copper to diversify the economy and reduce dependence upon one commodity; the sharp fluctuations in copper prices in recent years have added urgency to this problem. The second issue is how to narrow the gap between urban and rural incomes by improving output in the traditional agricultural sector. OLthLer development obJectLives include ra ls