Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Thursday, August 1, 1996 : Zambia - Second Economic and Social Adjustment Project

 79877 STRICTLY ONFIDENTIAL nm 1 NM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Thursday, August 1, 1996 Washington, D.C. The meeting of the Executive Directors was convened at 10:05 a.m. in the Board Room, 700 Eighteenth Street, N.W., Washington, D.C., Mr. Sven Sandstrom, Chairman, presiding, followed by Mr. Wolfensohn, followed again by Mr. Sandstrom. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 2 C 0 N T E N T s ITEM PAGE 1 Proposed Credit - Zambia (Second Economic and Social Adjustment Credit) 4 Mr. Evans 9 Mr. Li 12 Mr. Loevbraek 14 Mr. Good 17 Mr. Crowe 20 Mr. Rahman 22 Mr. Schaffer 25 _Mrs. Herfkens 26 Mr. Gerber 36 ·-Ms. Cordeiro 37 Mr. Tamaki 41 Mr. de Paiva 43 Mr. Chneiweiss 45 Mr. Alyahya 46 Mr. Clark 47 Mr. Al-Saad 48 -Mr. Galindez 49 Mr. Rill 50 Mr. Lodhi 50 Mr. Mseka 55 I I - MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 4 MR. SANDSTROM: All right. I think we should get started. We have a couple of interesting items on the agenda for today. The first one is a proposed credit of 62.4 million SDRs to Zambia for a Second Economic and Social Adjustment Project. You also received an updating note after the CAS discussion which we had on July 18th. We are very happy to welcome again Mr. Basu and also Mr. van Til of the IMF, who are sitting there in the back. John Todd will introduce the proposal. John, please. MR. TODD: Thank you, Mr. Chairman. Mr. Chairman, Members of the Board: The Board discussion two weeks ago on the Zambia country assistance strategy highlighted two central challenges. First, Zambia faces a particularly long and difficult task, especially in light of its large external debt, in transforming its economy from one of controls, parastatals, and dependence on copper to one of diversified, private sector led growth. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 5 As a result, the strategy will have to be carefully designed and consistently implemented. We believe the strategy Zambia has chosen - rapid liberalization and extensive privatization in order to unleash a process of private sector led growth coupled with increased attention to social services and other direct efforts at poverty reduction -- is a sound one. The credit before you today is part of the Bank's continuing support for that program and includes a special emphasis on policies that promote the development of more efficient private markets and the provision of vital social services. The more immediate challenge highlighted by the CAS discussion is the uncertain macroeconomic environment. In light of this, effectiveness and disbursement of the first tranche will take place when we have additional evidence of strong macroeconomic policy implementation. We will determine that by sending staff to Lusaka, in liaison with the August IMF mission, to look at end-June performance against the Fund targets, recent progress in the areas of structural reform, including the privatization of ZCCM, and the outlook for continued strong performance on the macro and structural fronts. MILLER REPORTING COMPANY, INC. 507 c Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 6 As explained in the updating note distributed last week to the Board, a determination on the effectiveness condition will be based on the findings of that mission. As suggested by many of you, we will also be redoubling our efforts to rekindle a constructive dialogue between the government and its bilateral partners. Thus, going forward with this credit at this time is intended to provide a bridge -- or breathing space -- to enable this dialogue on governance issues to resume and thus to make it possible for bilateral financing to resume at an early point. Let me turn to the credit itself. The basic approach behind this credit is to focus on some of the specific areas that had been supported by the first Economic and Social Adjustment Credit approved in 1994. Several new areas have also been added, including procurement reform, informal urban settlements and a follow-up on ZCCM privatization. In all areas, substantial actions have already been taken by government. Let me give a few examples which illustrate the range of issues covered and the strong commitment of the government in these areas. In the area of continuing reforms, the historical Land Act passed last year is being implemented. Statutory MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202} 546-6666 STRICTLY ONFIDENTIAL nm 7 instruments acceptable to the Bank have been issued, and the Ministry of Lands has begun a program of improving the administrative efficiency of processing the sale and transfer of leaseholds. In social sector spending, the government has managed to meet the strict requirements of the IMF program on the fiscal deficit while protecting the agreements on social sector spending agreed to under this credit, both for aggregate shares and for priority subsectors. In addition, the 1996 budget included a major reduction in tariff rates, particularly for capital goods and inputs and an elimination of most tariff exemptions, including for the government itself, that has made the trade regime more conducive to exporters without lowering tariff receipts. The government is also moving on public procurement reform. By itself, this program will not end all of the problems in this area, but the enhanced visibility of this process and the quicker movement towards decentralization should open the process to greater transparency and accountability. We are also especially pleased about the government's increased emphasis on the legal regularization MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 8 of Lusaka's many informal urban settlements. The enhanced security of tenure should bring an immediate improvement in the well being of hundreds of thousands of inhabitants, as well as a needed boost in construction and the launching of new small businesses. The last five years of Zambian economic reform program have witnessed considerable accomplishments. Much more remains to be done, however, because as we have seen, Zambia's legacy of structural and financial problems is a daunting one. A sound longer-term agenda is set, but to get there Zambia will need to meet its current challenges of steadying the macro picture, moving ahead with ZCCM privatization, and of special importance reestablishing a cooperative relationship with all of its external partners. If these challenges are met, Zambia's prospects for sustainable growth are reasonable. I would like to acknowledge the thoughtful statement we have received from Mr. Chneiweiss. As he requests, we will be happy to circulate more widely an EM we prepared and sent to several of your offices on the specific actions we will be reviewing with respect to the progress on ZCCM privatization. I also want to reemphasize that over the next MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 9 several weeks, taking advantage of the bridge afforded by the proposed credit, we will be increasing our efforts to encourage the government and its bilateral partners to come to a common understanding on economic management and governance actions which will allow a sustainable economic reform program to remain in place. Thank you. MR. SANDSTROM: Thank you very much. Are there any comments? Huw Evans. MR. EVANS: Thank you, Mr. Chairman. I think my colleagues and management will be aware that a number of my colleagues, including many of the major donors, would have preferred to delay this discussion for a further ESAC to Zambia until after the forthcoming Bank/Fund staff mission has reported. We very much support the objectives of this ESAC. But I have to say that the timing of this approval is wrong. We are sympathetic to Zambia's situation. The staff's updating note makes clear that in Zambia's huge progress in recent years in carrying through its economic reform program, there have been indeed occasional and serious setbacks, including missing several MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 10 of the Fund program benchmarks at the end of last year. But again there have been renewed and successful efforts to get back towards the original track. As we know, Zambia is now facing extremely difficult circumstances with a big fall in copper prices and the drop in assistance from bilateral donors. I very much welcome the improvement we have seen in performance this year, although, as we have noted earlier in CAS and other discussions, Zambia could and certainly should have acted earlier particularly on ZCCM where privatization is still somewhere off and where I think the company is still being run badly. Continued donor assistance will certainly be necessary to support successful reform and higher growth in Zambia, which is what we all wish to see. Further donor meetings will certainly be needed, but I cannot see any real prospects for success in a meeting as early as September. Now staff tell us that this credit is intended as the bridge to give the Zambians time to secure renewed bilateral balance of payments assistance and, although the Bank papers are strangely silent on this to react to the steep fall in the price of copper. We are also waiting for Zambia to get back on MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 11 track on its macro program so that the ESAF program can resume. As everyone knows, Zambia is currently on a staff monitored program. I think hence the importance in next month's mission by Fund and Bank staff essentially to do two things: first of all, to assess policy performance in recent months; and secondly, to assess whether the authorities can mobilize sufficient financing. Those two conditions are being brought out clearly in the note from Mr. Ouattara of the Fund but not specified in that way in the Bank's updating note. I very much hope that both conditions will be met so that the ESAF program and all that goes with it can be resumed. Now, as I said, Zambia's efforts certainly require substantial donor support, including from the Bank, but the Bank's efforts have to be part of a viable economic and balance of payments picture. There seem to be real dangers in the Bank contributing the bridge to nowhere or participating in a seriously under-financed program. I wonder whether the staff can today give us any assurances that would help us on this issue of finance for the program. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 12 That is why I and some of my colleagues would have much preferred this discussion to take place in September after the report back of the Bank and Fund mission. And while I would like Bank management to give and undertake now to report to and consult this Board before this loan becomes effective, but failing that undertaking, Mr. Chairman, I cannot support the timing of this loan approval and wish to be recorded as abstaining in what I regard as a mistaken recommendation by management. Thank you. MR. SANDSTROM: Thank you very much, Huw. We will get back to your questions. Mr. Li, please. MR. LI: Thank you, Mr. Chairman. At the outset, I would like to state that this Chair strongly supports the Second Economic and Social Adjustment Credit to Zambia. The reasons are as follows. The first, I fully understand the Zambian Government is facing serious macroeconomic challenges, including pressure on balance of payments, especially current account difficulties resulting from declining copper prices and others. However, the government has already taken measures MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 13 to counter these challenges. It is our view that the country's economic reform is basically on track. Secondly, Zambia's far-reaching efforts require substantial financial resources; support from the international community is urgently needed. The World Bank being one of the most important multilateral development institutions should not step aside at this critical time of Zambia's economic reform. It needs to be stressed that this is exactly the right time for the Bank to step in to demonstrate what a development institution can really do and to offer our timely support to prevent the previous efforts from being washed away or the whole Zambian economy from falling apart. Thirdly, Mr. Chairman, as clearly stated by the IMF staff during the last Board meeting, implementation of the IMF staff monitored program in Zambia to date has been satisfactory, and indications are there that the quantity of performance targets for end of June were met. The scheduled Fund staff mission in August is to confirm, inter alia, satisfactory economic performance which carries no presumption that the government failed to meet its commitment. Therefore, there is no justification or excuse for the Bank to hold up its proposed credit. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 14 Finally, I would like to emphasize that the Bank's credit is a timely financial support to Zambia's ongoing effort, which addresses serious levels of poverty in the country and to achieve significant improvements in living standards of all Zambians who deserve our continued support. Thank you, Mr. Chairman. MR. SANDSTROM: Thank you very much, Mr. Li. Asbjoern Loevbraek. MR. LOEVBRAEK: Thank you, Mr. Chairman. This is a rather difficult discussion. I think the difficulty is that there are different perceptions about the situation in Zambia, both in terms of the sort of real economy and both in terms of the economic reform program that the government is undertaking, and also very different perceptions as to the assessment which bilateral donor agencies are undertaking. We would have preferred postponement of this discussion and approval of this adjustment credit until after the IMF/Bank mission in August. We took that view on the basis of assessing the project documentation, The updating note that we have got from staff had not changed our view at all on that point. So, I am also entering into the discussion with basically MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 15 the same position as Huw Evans has taken, that we would abstain if we don't have assurances of sort of a second discussion or the possibility of the second discussion on releasing the funds under this adjustment credit. A little bit more detail on what are the differences in perception, fortunately it doesn't happen very often that we these days get an assessment from our bilateral agencies which is very contradictory to the assessment that the Bank is doing. But frankly, with the Nordic countries ten years ago, it happened much more frequently than it does today. But in this particular case in Zambia, I am a bit worried that the assessment that we get from our bilateral aid agency representatives in our embassies in Lusaka contradict what the Bank is saying. Now, of course, for a Board member that leaves the question who you should trust, and my personal view is that I would not automatically side with my bilateral people. But in this particular case I do. So, basically just to give you the flavor of some of the arguments that they have been putting forward, they do have a more critical assessment both of the fundamentals of the economy in Zambia. They do think that the Bank and MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 16 Fund estimation of the situation is too optimistic. They do point to problems with the implementation of budget decisions that have been taken for this year. For instance, that it seems that consumption expenditures and capital investment expenditures are down compared with the budget estimates. They look at the budget balance situation. They do look at the accumulation of domestic debt burden, and they are also making comments relating to the currency situation and the over-valuation of the kwacha, and there are a number of other issues that I don't need to go into detail on all of them. But I do make a fairly fundamental point, namely that the likelihood of bilaterals deciding to release balance of payments support for Zambia over the next few months is -- let me put it this way -- somewhat limited. Now the Bank's argumentation for approving the loan now seems to be based fairly fundamentally on an assumption that the bilaterals will come forward with new balance of payments support before the election. That seems to be the basis for arguing for the release of this credit, for arguing for a donor meeting where one would persuade the bilaterals to release balance of payments support. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 17 The assessment, at least the Nordic representatives in Lusaka, are making is that this is not realistic. So, I think that is a fairly fundamental point in getting to a conclusion at least until we have heard more specifically from staff whether a second round discussion would be possible after the return of the mission, and that we are not convinced by the arguments. We still maintain that there should not be a decision taken today. If a decision is taken without an assurance, that we will have the opportunity of management making a recommendation to the Board on the release of the funds and then the Board having an opportunity to discuss, to approve or reject, such a recommendation, then we would have to abstain. Thank you. MR. SANDSTROM: Thank you very much, Asbjoern. Len Good, please. MR. GOOD: Thank you. I will not take too long because what I had to say has been basically said by Mr. Evans and Mr. Loevbraek. I would like to say that I fully endorse everything they are saying. Briefly simply to emphasize a couple of points. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 18 One is that our preference would have been to see a much more coordinated World Bank bilateral donor approach to this problem than to one which at this point can be seen as the World Bank in some sense working at odds with bilateral donors, the latter having withdrawn balance of payments support and the former at a point where we are about to provide balance of payments support. The issue is clearly one of ultimately -- because we are all interested in the long-term success of Zambia -- of getting a fully funded program, and at this point we are not at that situation. It seems to us that that is the primary objective towards which we should be working. We really do appreciate the response of staff since our last meeting, where, in fact, they have made a couple of suggestions, including this reference to trying to work with donors in September. I think that is very helpful and that is very much appreciated. But in some sense, it seems to us that that is much more what the orientation of the strategy should be and one in which we take an action like this, in a situation, where as everyone has said we don't have information and where as a Board -- and this is a question of process which is important to us -- we are being asked to approve a MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 19 decision in the absence of information. Despite what Mr. Loevbraek has asked for and would like, which I would also like too, I am led to believe that, in fact, we will not have the opportunity to discuss the results of the mission before disbursements. So, as much as we would like that, as I read the documentation that came from some decision back in 1990, it is simply not the case, and that is very unfortunate. So, I think it puts the Board in a very difficult situation. The second point which I understand is the argument which is the basis of the Bank's strategy which has to do with bridging, I don't find in any of the documentation the rationale that says over the next six weeks, between now and mid-September, that the world is going to fall apart. I still have not fully grasped -- and if you could comment on that, I would appreciate it -- what is going to happen over the August and the first half of September that requires the Board to be put in this position of approving the loan without the requisite information or the ability to look at it in the future before disbursement. I simply don't find that convincing. As I like to use the expression, you know, it is the bridge to nowhere. MILLER REPORTING COMPANY, INC. 507 c Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 20 We should be working on the other end of the bridge before we start doing what we are doing today. Having said all of that, I recognize that there are different approaches to this problem, and we had some good discussions with staff a while ago. Clearly, I recognize that there is some chance -- it is not one that I would bet on -- that the argument is right and that this loan is essential, and you have come to that judgment and I understand that, and there is some chance that that is right. Secondly, we appreciate the changes that have been proposed since our last meeting. From our point of view, they don't go far enough, but we do appreciate that. And it is on that basis that we choose to abstain on this particular issue. Thank you. MR. SANDSTROM: Thank you very much, Len. Brian Crowe, please. MR. CROWE: Thank you, Mr. Chairman. I don't think anyone here questions the very difficult circumstances of the Zambian economy. We are particularly worried by the depth and the tenacity of poverty in that country. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 21 I think we would all agree also on the importance of a viable economic program. In fact, such a program really is essential if Bank resources are going to be used effectively. As staff has commented, as have a number of other speakers, we are a considerable distance from that point. The IMF has not been able to conclude its mid-year cycle review of the ESAF program, and has moved Zambia to a less stringent staff monitored program. The balance of payments gap has widened significantly given the withdrawal of bilateral support and the declining copper prices. Our reports from Lusaka indicate the Bank unfortunately is probably overly optimistic as to when the situation regarding bilateral donors will be normalized. Moreover, fiscal discipline in the pre-election environment has been very uneven with significant foreign exchange being spent on maintaining an artificially high exchange rate, and inflation running two-and-one-half times of the original targets. I think the phrase that we are lending into a bridge nowhere keeps coming across our minds. For that reason, we believe it is far too premature for the Board to MILLER REPORTING COMPANY, INC. 507 c Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 22 be asked to approve this credit. We just do not have all the information we need. That is the reason we join with a number of our colleagues in asking management to submit a recommendation to the Board prior to loan effectiveness. If that does not prove possible, regretfully we would like to be recorded as opposing. Thank you. MR. SANDSTROM: Thank you very much, Brian. Mr. Rahman, please. MR. RAHMAN: Thank you, Mr. Chairman. I would like to support the Second Economic and Social Adjustment Credit for Zambia. The recent note circulated by staff confirms many of the macroeconomic trends that emerged during the CAS discussion. In the main, Zambia has made considerable progress in implementing its economic reform program in the past few years and the corrections made to counter mid-course slippage confirm that the policy orientation of the authorities is correct. This is further confirmed by recent initiatives on the structural front, particularly on trade policy and privatization. The certification provided by the IMF Fund was not really necessary. We believe that the Bank report on the MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 23 proposed credit are an adequate assessment of the challenges and risks and of the urgent necessity of this credit. However, we welcome Mr. Ouattara's assessment to the effect that end-June ESAF targets appear to have been met and that the Zambian authorities should not be faulted for the setbacks of the early 1996 period, the blame for which can be laid at the door of the problems of the ZCCM, complicated further by the reduction in bilateral support. This, in fact, is a self-fulfilling prophesy we often encounter. Balance of payments assistance gets chopped off, reflecting concerns about economic performance and governance issues. This in itself causes a further decline in economic performance. To the extent that the Fund supervision will help the authorities directly address issues relating to the management and performance of the ZCCM, fiscal adjustments aimed at reducing debt one percentage point of GDP, rebuilding international reserves and moving ahead with the Bank supervision, the World Bank is then free to focus on other aspects. To the extent that both prudent advice and development assistance are eventually fungible across sectors, we see the proposed credit as not merely MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 24 cofinancing the Fund program for macroeconomic management. Of course, we accept that the benchmarks should be linked to continued progress in satisfactory implementation of the macroeconomic program. But this is an opportunity for the authorities to address the social services through the social safety net programs and the public procurement process. The lot of the poor particularly can come under severe pressure with the liberalization of trade and prices and we, therefore, endorse the proposed growth strategy that would seek to improve terms of trade in agriculture, while facilitating enhanced productivity and improving beneficiary participation. I will not attempt to list at this juncture the various initiatives that can be covered under the project but can agree with the report on some of the main priorities the authorities need to address: first, initiating the process of land transfer to enable a stepped-up investment in agriculturei second, moving further on the national housing policy document, including addressing the problems of the informal urban settlementsi third, reform of labor regulationsi fourth, maintaining the budget allocation on the social sectors with further focus on the national drugs MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 25 policy and nutrition policy. Finally, we can endorse the report's focus on capacity building and ownership of the program by the Zambian authorities, both measures vital for the eventual success of their efforts. Zambia is one of the most indebted low-income countries and we feel it would benefit from a strong endorsement of the credit by this Board. Thank you, Mr. Chairman. MR. SANDSTROM: Thank you very much, Mr. Rahman. Helmut Schaffer, please. MR. SCHAFFER: Thank you, Mr. Chairman. We worry about the same questions that were raised in the circulated statement by Arnaud Chneiweiss. The reasons given for proceeding now have not been able to address these preoccupations sufficiently and, therefore, we remain rather unconvinced. It is not satisfactory and risky for IDA to submit to the Board a bridge financing arrangement in a situation where we face a high degree of insecurity with an overall under-financed program. Like others, we would have preferred to discuss this credit upon the return of the joint mission of the IMF and the Bank and with a clear outlook for a viable program MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 26 that we then can support. As I pointed out in the CAS discussion, we were not convinced that Zambia is meeting the criteria for the high-case scenario. On the other hand, we see the difficult situation of this country. The bilaterals are an important element for closing Zambia's financing gap and we very much hope that the Zambian Government will secure this support because it is in their hands and within the reach of their decision- making to achieve this needed financial support in order to continue the path of substantial economic growth. Please record me as abstaining for this credit. Thank you. MR. SANDSTROM: Thank you very much. Eveline Herfkens. MRS. HERFKENS: Sven, I am not sure if this is useful if I reiterate my position at this stage, but, as Huw Evans started by saying that he reflected the view of many major donors and representing at least one major donor, I would like to reiterate and let me just cite The Hague to prevent any questioning on whose behalf I speak -- "if based on economic performance criteria only, the second ESAC should be approved by the Executive Directors". MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 27 Clearly, there is a huge difference of opinion among donors about the reasons why they withdrew balance of payments assistance. I clearly represent one that does that, not for reasons of economic performance. I find it very disturbing that the Bank should follow, given the background of these reasons. So, I do support the credit very much because it is not the Bank business to be involved in these issues of non-economic governance, and I also would like to say that I find it disturbing that we would set a precedent in which the Board would be involved in judging if effectiveness conditions are met. I would find that very disturbing, but maybe I am in a minority. MR. SANDSTROM: Thank you very much, Eveline. Maybe this is a good time actually to respond to two or three points that have come up. I would first ask Daoud to describe the procedure agreed by the Board for deciding on effectiveness conditions and tranche releases and then Callisto to comment on the differing perceptions within bilaterals and staff and on the funding prospects. I think it would be good to get these comments in now before we continue. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 28 I have four or five speakers more, but let's take a break right now. Daoud. MR. KHAIRALLAH: Well, the established practice of the Bank and IDA based on the provisions of the Articles of Agreement as consistently applied to all loans and credits has been that the Executive Directors approve the conditions of Bank loans and IDA credits and that management determine whether these conditions have been met. If these conditions have not been met, management does not disburse and may seek Board approval of amending these conditions. Now this policy has been approved by the Board back in June 1990 and basically states the following: Management will be responsible for determining whether conditions have been fulfilled. If it is satisfied that they have been fulfilled on all material grounds, then it releases the tranche in question and immediately inform the Board so the Board can exercise oversight over management. If management determines that the fulfillment has not taken place in a satisfactory manner, then it would decide either to suspend or cancel or, if it finds reason either to amend the conditions or to waive them, it brings MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 29 the matter to the attention of the Board who will decide then. This has been the practice and I don't see reason for departing from it. MR. SANDSTROM: Thank you very much, Daoud. It is very clear in the minutes of the Board meeting on this that if the conditions have been fulfilled, the Bank is contractually obligated to release the tranche. But if there are doubts, that is when the management comes back to the Board and that decision is left up to the management. So, this is very clear and this is the way we have consistently applied this. Huw Evans. MR. EVANS: I don't think, Mr. Chairman, this is a legal problem. The fact is nobody, and certainly not I, is suggesting that we change our basic policy. There will· be the difficult decision to make when management sees the results of the mission in August. As I made clear in my statement, I thought that the conditions for disbursement set out in the updating note were not sufficient in that they did not include any reference to a fully financed program. Therefore, that is MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 30 one of the reasons why I say I don't think this appeal to this 1990 decision is important for our decision today. Thank you. MR. SANDSTROM: Thank you very much, Huw. So, let's move on then to the issue of the bilaterals and funding. Callisto. MR. MADAVO: Thank you, Mr. Chairman. Let me make three points. The first one is obviously that it is fundamental that the bilaterals come back to the table if we are going to have a program that is fully funded. There is absolutely no question about that. Now in looking at the prospects for this coming about, we have to look at two things that drive, in fact, the position of the bilaterals. On the one hand are the economic factors: the strength of the program, the performance to date and so on. On the other hand, it is very important that we all be honest and be very clear that it is their governance preoccupations that also drive the position of the bilaterals. What we, the staff, are saying is that on the economic side, we working together with the Fund have seen MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 31 progress by the authorities in addressing the shortfalls that occurred in the Fund program in December, at the end of December last year. We are, however, very conscious of the fact that the position that was put to you in the documents is based in some cases on preliminary information that we need to confirm, and that this would be done through the mission in August where we would have Bank staff in liaison with the IMF mission working together and confirming whether or not (a) the targets that have been agreed in the revised IMF program have been met, whether the prospects continue to be good that progress would be made in the economic program and, therefore, in a certain sense, whether the prospects are there that we will have an effective program. On this front, we believe that there may be different perception between us and the bilaterals, in a certain sense, but we think that, on the basis of the information that we have, on the basis of the analysis that the two institutions have, we think progress has been made in recent months and that the prospects remain good, if financing is available, to maintain this progress in the program. The funds would not be released unless, in fact, MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 32 management is satisfied that these prospects remain viable. The second driver which is the governance issues, Mr. Chairman, what we are, in effect, saying is that some of the elements that are in that basket are beyond the reach of Bank staff to assess, are beyond the reach of the mandate that we have to take into account. That is why we have not introduced that particular element in the condition of effectiveness. At the same time, we are very aware that these issues need to be dealt with, which is why we took Mr. Good's suggestion from the discussion during the CAS that we see whether there are ways in which we might encourage the government and the bilaterals to get together to discuss the specifics surrounding these governance issues. We have been careful to limit ourselves and our involvement to the economic governance dimension of that discussion and not the political. So, to summarize then, Mr. Chairman, I would say that there may well be different perceptions by the bilaterals on the recent economic progress made from that of the Bank staff and the Fund staff. But we think on the basis of the information that we have, that the position we have taken is in fact a sound position. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 33 On the issue of governance, as I said, we can facilitate a discussion but I don't think we could realistically link it as an element of the condition of effectiveness. MR. SANDSTROM: Thank you very much. Let's move on and hear five or six more views here. Huw again. MR. EVANS: Sorry, Mr. Chairman. I thought when you introduced the speakers, you said we were going to hear something more about the finance of this program. We have heard something about the attitude of the Bank towards governance issues, but I have not heard any more statements about the financeability of this program. It would be helpful to hear a bit more about that either from the Bank staff or perhaps from the Fund at this stage. MR. MADAVO: Mr. Chairman, I think we can make two points on that and I will call on my colleague, John Todd, to perhaps provide some numbers about the financing requirements particularly over the next period ahead, in the third quarter. But I want to preface that by saying again that we MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 34 don't think this program can be financed in the medium term for Zambia if all the players do not come around the table. That is why it is so very important that there be a dialogue between the government and the bilaterals leading at an early point to their coming back to the table. That will give us the basis on which we can say in the medium- term the program can be, in fact, financed. Now there is the issue of whether the requirements over the next few months, which would enable the government to continue to make their progress, that we and the Fund would expect to see if they keep their commitments, and perhaps my colleague would lay out the requirements in terms of the numbers. MR. TODD: Let me just start by saying that I agree with Mr. Good that there is risk on both sides, and none of the estimates that we have or the assessments that we make are certain, but this is our best judgment at the time. On the annual side, I think the numbers that were conveyed to the Fund Board remain a reasonably good estimate for total need, which was the $263 million. I think to that one might need to add in the neighborhood of $20 million as the net change for the year due to all of the copper and MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 35 cobalt machinations. It could be 30; it is in that range. Available assistance in the absence of any additional assistance from bilaterals would be in the range of $215 million, and that is the same number that had been conveyed before. So, that represents the challenge and that challenge would best be met by additional assistance. It would undoubtedly be met to some extent by compression of the Zambia program as needed and appropriate and determined through the August mission. The point I wanted to emphasize relates more to the third quarter. The number that we had given you before is still the primary number, which is that there is $62 debt service owed in the third quarter alone. There is the added liquidity problem that the fire in the smelter, of which most of you are probably are aware, is probably going to have a short-term impact of $10 million to $12 million. This will probably be made up over the course of the year as the backlogged copper is finally processed through the smelter once it is back in operation, and I believe it is, in fact, already beginning to be back in operation. But there is that short-term liquidity problem. Then the uncertainty of copper prices, which is in MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY ONFIDENTIAL nm 36 the neighborhood of $5.00 per month per dyne (Phonetic), and we are running about 10 cents to 12 cents below the previous projections we had made for the year on copper prices, only somewhat offset by the good news on cobalt. So, we cannot prove that everything comes unstuck, but clearly if all of the assistance, including the multilateral assistance, lies behind the bilateral assistance, there is a very substantial risk that the program would come unstuck over even the course of the next months. ,, ·""'"·~ Thank you. MR. SANDSTROM: Thank you very much. Jean-Daniel Gerber. MR. GERBER: Thank you, Mr. Chairman. Mr. Chairman, I think Asbjoern Loevbraek has fairly well resumed the position this constituency is taking. I may add one or two more points. The first is the historic perspective. Those who have participated in the discussion a month or two months ago in the country assistance strategy review on Zambia will certainly confirm that the Bank and particularly the Board in the last fifteen years has always, without exception, been over optimistic about the program and the performance. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 37 If we always are speaking about taking the lessons from the past, I think we should bear that in mind. The second, also as a matter of fact, lesson we have drawn time and again in CODE is what has been said by the predecessors here around the table. When a program is not fully financed, whatever the reason is, be it now politically, be it now economically, be it internal, external economic factors, the program, which is financed partially by the Bank will in no likelihood fail and, at the same time, our President time and again here in your chair, Sven, tells us the Bank has to increase its performance. We all agree with that. But we, the Executive Directors, are the first responsible that the Bank does not perform well. It is not management, but it is the Board which gives it agreement to such kind of credits where we know in advance that the likelihood that it will fail is fairly substantive. That is the reason I would also like to be recorded as abstaining. Thank you. MR. SANDSTROM: Thank you very much. Helena Cordeiro. MS. CORDEIRO: Thank you, Mr. Chairman. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 38 This is, in fact, a difficult situation and it is not the first time that this Board has confronted difficult options in the Zambia case. I think our deliberations today, as we already said during the CAS discussion, have been made more difficult for the lack of a clear and transparent dialogue between management and the Board and the bilaterals. We know that the options are limited if one can even put it in the plural, but a cooperative approach would have been preferable than the approach chosen by management in this case. The donor community has supported strongly Zambia and the economic program. That support is failing for reasons of doubts on the economic performance and on the political commitment towards the core objectives of the program. As it has been said by several speakers, both staff and my colleagues, donor support is crucial. We are not sure when and if it is going to be available. We are also concerned with the approach taken in using IDA money as a breathing space or as others said bridging nowhere. We are seriously concerned with that. Although not benefiting from the assessment of our MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 39 bilateral agencies, we share the concerns expressed by previous speakers of the current situation. We would have preferred to consider this credit after being able to benefit from the outcome of the mission. We also attach considerable importance to the main objectives of the mission, as Huw Evans reminded us, based on Mr. Ouattara's memo. We recognize the late movement done by introducing an additional condition of effectiveness, which, as many others said, goes in the right direction, but we wish it had gone further in spelling out all the elements that make possible to fill that IDA money is going in support of a sustainable and viable program. We fully support the thorough statement circulated by Arnaud Chneiweiss on the issues that remain for us. We are also very reluctant to see IDA money being disbursed for this adjustment credit if the prospects for resuming funding under the ESAF are not confirmed. Our constituency is not involved in bilateral support to Zambia. So, we cannot add any words if it is coming from our side; no. We are interested to see how our donors will, in fact, assess their own views of the political and economic situation. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 40 So, somehow I share most of what has been said by previous speakers, but I take a different view regarding the issue of who is responsible for assessing the fulfillment of effectiveness conditions. I agree with Eveline of creating a precedent for which we are not in favor. We consider that management has the responsibility of assessing progress as it has been stated today by this Board, taking into account the concerns, as they have been expressed, as the guidance for management's judgment of conditions of effectiveness. We entrust management with such responsibility, and we think that this Board has been clear during our CAS discussion and today of what our concerns are. Our concerns, and in particular my constituency's concerns, are on economic performance and commitment to pursue the economic program. We expect in view of this debate and this divergence of views or different perceptions, as some others have called it, that in this case management will take an in-depth and detailed approach in reporting to the Board when and what its assessment is of the conditions of effectiveness. So basically, what I would like to state 1s that, MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 41 although we share all the concerns, we feel that for reasons that we may not fully understand, management decides that it is in a bad situation, it is better to bring this credit to the Board now in order not to make the situation worse that we are willing to support this credit and the conditions that I have expressed which put on management a stronger and heavier responsibility in assessing performance after the August mission and share with us a very detailed report on meeting those conditions. Thank you, Mr. Chairman. MR. SANDSTROM: Thank you very much. These were very helpful suggestions and the rest of you may want to comment on those too. Mr. Tamaki, please. MR. TAMAKI: Thank you, Mr. Chairman. It is of great concern for us if we should support Zambia at this time. As the alternative plan suggested by the management could be seen as a progress to me, my reasoning is quite similar to Helena and Arnaud. The crucial point in undertaking this plan is obviously the condition of effectiveness, namely the content of the condition and the method of evaluating its success. The conditions should not be too rigid so as not MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 42 to encourage the Zambian Government to proceed with the reform process. However, I agree with the French statement on its macroeconomic framework that IDA money should not be disbursed if no prospects are foreseen for the Fund to resume its ESAF program disbursement. The conditions should also be concrete so that it will be obvious for all of us if Zambia has met the conditions or not. As long the conditions are concrete, I believe that another formal procedure by the Board would be unnecessary. Besides, considering the importance of the timing of this assistance, it would be better to give the responsibility to the management for making assessment of compliance with the condition of effectiveness. In doing that, the management should take the concerns expressed at the Board into full consideration. So, my conclusion is that I could accept the alternative with a strong request for the management to keep a very close eye on the reform process in Zambia, to evaluate its success carefully and to report it back to the Board appropriately. Thank you. MR. SANDSTROM: Thank you very much. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (2 02) 546-6666 STRICTLY ONFIDENTIAL nm 43 That was also very helpful. Thank you. Marcos de Paiva, please. MR. DE PAIVA: Thank you, Mr. Chairman. Mr. Chairman, none of the countries that I represent runs a bilateral agency. So, I have to rely on the information provided by the Bank. I am certain that the Bank tends to have information of very good quality. I know the involvement of the Bank in countries' realities based on the experience I have with the countries I represent, and I tend to believe that the political judgment that the Bank makes on realities usually works well. No doubt about the fact that this is a very ambitious loan that one disbursement upfront, based on general conditionality, and additional conditionalities very strong, touching macro performance, budget priorities, land reform, a new Labor Act, a number of things. I tend to believe that the Bank has in its relations, regular relations with a country like Zambia, the obligation to be responsive at a critical moment. I tend to believe that, given the commitments accepted by the Government of Zambia in the context of the whole loan I am not talking only about the macro performance -- there is MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 44 a gain in going ahead with the loan and getting the government engaged with the measures that are foreseen here. We tend to judge the Bank operation based on the quality of the project on the country commitments and on not on elements that are not included in the project or do not belong to the economic reality of the country. So, if one looks at this project, it is very difficult to object to it, given the very strong commitments that are accepted by the Government of Zambia. So, for this reason, I am very much supportive of this operation. If the dialogue were lost with other international financial institutions, the Fund, for example, we would have a reason to stop. But the dialogue is going on, and, in this case, I tend to believe, based on the information provided, that it would be a mistake for the Bank not to be supportive. I think that the challenge now is to help the Government of Zambia to work with all the elements that are included in this project and then assist them in making it possible the release of the additional tranche. Thank you. MR. SANDSTROM: Thank you very much, Marcos. Arnaud Chneiweiss, please. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 45 MR. CHNEIWEISS: Thank you, Sven. It will not be a surprise if I tell you that I agree with Helena and Rintaro. I would have preferred to have a discussion and the approval of this credit early in September rather than today. I think I understand the reasons why management is proposing the approval of this credit today. I am still a little bit unconvinced. If you could stress one more time the rationale for going ahead so quickly, I would appreciate it. But, to a certain extent, I admit that it is your judgment and we have to trust you on that. I appreciate the fact that you have added one condition of effectiveness, and it is your responsibility, the responsibility of management to exert your judgment whether or not this condition of effectiveness will be met. But I would really urge caution and I request management to take a very prudent conservative approach to see whether or not conditions have been met on the macroeconomic stabilization program. I appreciate that Callisto reemphasized the fact that we will look both at the targets, whether or not they have been met in the past, and also at the prospects for the future. If there is no prospect for the IMF to conclude a MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 46 program, if there is no prospect for the IMF to resume its disbursements under the ESAF program, I don't think we should go ahead disbursing an IDA credit. It would be a waste of IDA money. At this time, this credit has become a very sensitive issue. All of our capitals are aware of this credit now, even those who don't care too much about Zambia. I agree with Helena that you have special responsibility in exerting your judgment in this case. If we give the feeling over the next few months to our capitals that in this case IDA money has been wasted, it would have disastrous consequences for IDA support generally speaking, more than Zambia is at stake with this credit. So, I really urge you to exert your judgment in a very prudent way, and to provide us a detailed progress report after exerting your judgment. Thank you. MR. SANDSTROM: Thank you very much, Arnaud. Mr. Alyahya, please. MR. ALYAHYA: Thank you, Mr. Chairman. At this stage of the discussion, I will be brief. I have two comments. First, I have noted management's arguments for MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 47 going ahead at this time with this credit. So, I support it, as revised, with the additional condition of effectiveness. There are no doubt risks to going ahead, but there are in my view even greater risks in the kind of signal that inaction would send. Second and for the record, like Eveline Herfkens, I retain a sense of unease about the way this whole issue has been handled procedurally and otherwise. I think there could be implications which go beyond the specifics of Zambia, including the potential for undermining the cooperative nature of this very Board. Perhaps we should all reflect on this and consider how we can avoid such situations in the future. Thank you, Mr. Chairman. MR. SANDSTROM: Thank you very much. Mr. Clark, please. MR. CLARK: Thank you, Mr. Chairman. There is very little we can add to the debate at this stage in the proceedings. However, we are disappointed that management has chosen not to follow the directions suggested by Mr. Evans, Mr. Good and Ms. Piercy, which we would like emphasize should not be seen as a rejection of MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL nm 48 the credit. The arguments advanced by those Chairs we saw as compelling, and particularly for an assessment of the Board following the Bank staff mission before any decision is made on this ESAC. The current attitude, to highlight one thing, of major donors whose support is vital is of great concern to us. Mr. Good's comment on the desirability of a coordinated approach is particularly pertinent and really supported by Mr. Madavo's own comment that without the other bilaterals the financing plan will not be fulfilled. In this light, Mr. Chairman, and to keep it short, we would also like to be recorded as abstaining. MR. SANDSTROM: Thank you very much. Mr. Al-Saad, please. MR. AL-SAAD: Thank you, Mr. Chairman. Our position was clearly stated in our statement previously distributed, that we endorse the proposed credit. We think approval of such credit should give a strong signal of Bank continued commitment for the reform effort of Zambia. On the question of timing, I tend to disagree with some of our colleagues. The timing we believe is right to MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 49 ensure that the reform momentum is maintained. Thank you. MR. SANDSTROM: Thank you very much. Mr. Galindez, please. MR. GALINDEZ: Thank you, Mr. Chairman. I would like to extend our support to this operation. I would also like to point out that in FY96 Zambia had negative net transfers with the IBRD in the amount of $46 million. This is an IDA country transfer to IBRD in one fiscal year, and this is something to be taken into account, particularly in view of the $450 million which will be needed in 1996 as balance of payments assistance. We also endorse Mr. Tamaki's suggestion that management keeps the responsibility to monitor future developments in Zambia and report it to the Board in the best possible way. As it was said by other speakers, a dialogue is going on and this is the right time for the Bank to go ahead in our opinion and take what we call, and everybody calls, a calculated risk. Thank you. MR. SANDSTROM: Thank you very much. Walter Rill. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 50 MR. RILL: Picking up on the calculated risk, I am not so sure whether we really are calculating our risks here, but I am ready to go forward, despite some uneasiness with taking that risk. Like Mr. Chneiweiss, Ms. Cordeiro, Mr. Tamaki and others, I think the responsibility should remain with management as appropriate for making the final judgments before disbursement and effectiveness. But picking up on Mr. Gerber's comment that we are responsible for keeping up the quality of our work here, I would like to strongly remind management and staff that there may come a time when we will discuss in CODE a country assistance review for Zambia and then you had better be prepared to explain what went wrong afterwards if something goes wrong. Thank you. MR. SANDSTROM: Thank you very much, Walter. Mr. Lodhi, please. MR. LODHI: Thank you, Mr. Chairman. Countries do get into difficulties and yet, like Zambia, they demonstrate a resolve that they can move towards reform. This country has demonstrated that. Even in its efforts to privatize, it has done that. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 51 Its shortcoming perhaps has been aggravated by the price of its exports not being competitive. Are we going to penalize them for that? If you are going to wait for the Bank and Fund mission to go and to certify, what are these six weeks going to produce really? On the other hand, if you deny the credit at this time, loaded as it is with the conditions of effectiveness and the fulfillment thereof, you will generally be casting disincentives and perhaps eroding confidence. Yes, it is absolutely desirable that the donors move along with the Bank. But the Bank is the senior partner in this partnership of the donors and the Bank and it is a more discerning partner. It is a partner that sees that these risks are tenable. Mr. Chairman, therefore, we very much support the time and the content of this project. Thank you. MR. SANDSTROM: Thank you very much, Mr. Lodhi. The last name on my list here is Mr. Mseka. Leonard, please. MR. MSEKA: Mr. Chairman, I will say something after you have summed up or whatever. MR. SANDSTROM: You really want to be the last MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 52 name? MR. MSEKA: Yes. MR. SANDSTROM: Callisto, do you want to say a few words and then I will try to wrap it up? MR. MADAVO: Mr. Chairman MR. SANDSTROM: Asbjoern, do you want to come in first? MR. LOEVBRAEK: Yes, I think so, just to clarify on the procedural issues. I appreciate the explanations that were given from staff and also the comments around this table. In fact, I share those of you who have said that it would, in principle, very unfortunate that the Board in a sense had a second round and discussed conditions of effectiveness. I would have been willing to make an exception in this rather exceptional case, but I just note that the road that was suggested by Huw Evans and others is not possible. That makes my decision more easy, which is abstention. Thank you. MR. SANDSTROM: Thank you. Callisto, please. MR. MADAVO: Let me just make a few points. Obviously, as is obvious from the discussion MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 53 around the table, Mr. Chairman, this is not an easy case. It is a difficult case and we are taking some risks. We wanted to share honestly some of these points with the Board. I think a second observation I would make is that we listened very carefully and we agree that the assessment of whether or not the condition of effectiveness has been met should not be just a mechanical one; that we really should exercise judgment not just about numbers but about prospects. So, I just wanted to be responsive to the Board on that particular point. My third observation, Mr. Chairman, is we had wanted to proceed in this way so that we could remain relevant in the question of trying to encourage a cooperative approach. We didn't see, in fact, this way of proceeding, as the Bank detaching from the partnership. It was really to give us influence within the partnership, the ability to play this role or bring in the government to the table, bringing the bilaterals to the table with some credibility. We could manage the risks and proceed prudently. So, I just wanted to make those observations, Mr. MILLER REPORTING COMPANY, INC. 507 c Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 54 Chairman. MR. SANDSTROM: Thank you very much. This is clearly a very difficult case. As we now have heard, there are very different perspectives on the economic and political governance and, in particular, on the links between these two, which makes it very difficult for the Bank and its management. We also have the difficult judgment on the funding prospects where the IDA credit clearly is a linchpin, and the way we go on this will affect the flow of other resources to at least some extent. There may be different judgments on exactly the extent on which it has an impact, but certainly it will have an impact. My suggestion is that we proceed, but that we follow up on the many, I think, very constructive suggestions that have been made here and, in particular, that we take guidance from this discussion when we assess the situation in August and when we assess the satisfaction of the conditions of effectiveness, and that we then provide a full report to you. But in doing that, we follow the established procedures. So, if we are fully satisfied that the conditions have been met with the guidance we have received MILLER REPORTING COMPANY, INC. 507 c Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 55 today, we will release the tranche at the same time. However, if there are doubts, if the conditions with your guidance today has not been fully met, we will come back to you. So, we will follow the normal procedures and we will try to do this to the best of our ability. With that, Leonard, do you want to come in before I say that it has been approved? All right. Well, the credit is approved on the terms proposed with Mr. Crowe opposed, or not it is Ms. Piercy, I assume, and with the following abstaining: Mr. Evans, Mr. Loevbraek, Mr. Good, Mr. Schaffer, Mr. Gerber and Mr. Clark. Did I get that right? No changes? [No response. ] MR. SANDSTROM: All right. Leonard. MR. MSEKA: Thank you, Mr. Chairman. Although it is not customary that an Executive Director representing the country whose operation is being discussed takes the floor, I feel I should say a few words, particularly in view of the controversy that has surrounded this particular operation. First of all, I would like on behalf of my Zambian MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 56 authorities to thank the Board and particularly those who have openly supported this operation for approving this adjustment credit. In particular, I would also like to thank Callisto Madavo and the entire Zambian country team, led by Phyllis Pomerantz, for working so tirelessly on this operation. We commend them highly for their mature judgment in the case of Zambia and their dedication to the cause of development. Second, Mr. Chairman, I wish to register a concern and to submit a request. As I noted almost two weeks when we discussed the CAS, what has happened to Zambia in the course of the last two weeks is the fourth time it has happened in our constituency to varying degrees during the past eighteen months. We find this totally inequitable. It is an open secret that governance issues are increasingly being camouflaged with economic arguments. In this respect, I wish to commend Eveline Herfkens for her statement made earlier today. Yet, governance issues, or shall I say non- economic issues, are not peculiar to Sub-Saharan Africa only. Examples can be found in other regions as well. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ONFIDENTIAL nm 57 It is not that we do not wish to uphold democratic principles; we do. And evidence across Sub-Saharan Africa clearly demonstrates our people's commitment to democracy, the rule of law and economic reforms. What we find intriguing and unacceptable is that, when it comes to non-economic issues, African countries are treated differently and are held to a different standard by this Board from countries in other regions, even where the record of economic reform and the implementation is clearly not satisfactory. If it is necessary that we should keep repeating this observation every time it happens like a broken record, we shall do so until we are heard. However, we think this is not necessary if the Board is willing to discuss this issue openly. Therefore, I should like, Mr. Chairman, to submit a request that CODE and/or OED examine this issue critically. Our countries are members of these institutions and they, like other members, deserve all the deference from the institutions as stipulated in the Articles of Agreement; thus, my request. Once again, I wish to thank the Board for approving the credit. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY ON Fl DENTIAL nm 58 Thank you . MR. SANDSTROM: Thank you very much , Leonard. I think we should all reflect on this discussion and this case and the earlier cases that Leonard has mentioned, and we will come back to this issue. - •• • • - -·- -- - -- I ·- - - - - - - -- - MILLER REPORTI NG COMPANY, I NC . 507 c S t reet, N. E . Washington, D.C. 20002 (202) 546-6666