Zambia - Third Development Bank of Zambia Project

DocumeIt aI The World Bank FOR OMCIUL USE ONLY Cp. 1/?S3 -.2,4 Report No. 6310-ZA STAFF APPRAISAL REPORT ZAMBIA THIRD DEVELOPMENT BANK OF ZAMBIA PROJECT November 17, 1986 Industrial and Development Finance Division Eastern and Southern Africa Region This document ha a mtetncted disttibution and may be used by recipients only in the performance of ofllcial dutiea Its contents may not othenrse be discloW without Wodd Bank authorization.  CURAENCY EQUIVALENTS Currency Unit - Kwacha (K) JS$1 - K 6.87 US$0.1456 - K 1.00 The US Dollar/Zambian Kwacha exchange rate is determined by weekly auction. The exchange rate shown above is the result of the auction held on August 30, 1986. WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) 0.62 miles 1 sq kilometer (km2) 0 0e386 sq miles 1 metric ton (tonne) - 1,000 kg - 2,204.6 pounds 1 liter - 1.057 US quarts = 0.22 Imp. Gallon ACRONYMS AND ABBREVIATIONS ADB - African Development Bank AFC = Agriculture Finance Company BOZ = Bank of Zambia DBZ U Development Bank of Zambia ,EG Deutsche Gesellschaft fur Wirtschaftliche Zusammenarbeit Entwicklungsgesellschaft (German Finance Company for Economic Cooperation) DRA 5 Debt Recovery Action Plan EAS Equator Advisory Services EIB = European Investment Bank FMO Nederlandse Financierings Maatschappij Voor Ontwikkelingsladen N.V. (Netherlands Finance Company for Developing Countries) GDP Gross Domestic Product INDECO = Industrial Development Corporation MBA - Master of Business Administration MIS = Management Information System NORAD - Norwegian Agency for International Development NSCB = National Savings and Credit Bank PTA = Preferential Trade Area SEP = Small Scale Enterprise Promotion Ltd. SSE = Small Scale Enterprises T-Bill = Treasury Bill ZADB - Zambian Agriculture Development Bank ZCCM = Zambian Consolidated Copper Mines Limited ZIMCO - Zambia Industrial and Mining Corporation ZNBS - Zambia National Building Society ZNCB = Zambla National Commercial Bank ZNPF a Zambia National Provident Fund ZSIC = Zambia State Insurance Corporation FISCAL YEAR April 1 - March 31  FOX OMCIAL USE ONLY STAFF APPRAISAL REPORT ZAMBIA THIRD DEVELOPMENT BANK OF ZAMBIA PROJECT Table of Contents Page No. Credit and Project Summary ................................... i - iii Basic Data ............................. iv -vi I. INTRODUCTION A. The Industrial Sector .............................. 1 Sector Background I............. ......,.,,, , .. 1 Structure of Industry ...................,.,........ 2 Employment, Labor Productivity and Wages ........... 3 The Policy Framework .................ee....e.e..c 3 Background 3.................. ...oeee.. 3 The New Industrial Policy Regime ............... 4 Foreign Exchange Regime ...........e............ 4 Import Regime .................................. 5 Export Promotion ......te.eeeeeeeeeC 5 Investment Act ............................ Public Sector Investment in Industry ........... 5 Recent Industrial Performance ...... ................ 6 Resource Allocation 6........................* 6 Effect of Policy Changes ....................... 6 Capacity Utilization ........e. 6 B, The Financial Sector .. a eec ........c cc... 7 Financial Institutions ......... eec 7 The Bank of Zambia (BOZ) ....................... 7 The Commercial Banks ....... 7ee...... e 7 Specialized Parastatal Financial Institutions ...... 7 Agricultural Development Banks ..... ................ 8 Structure of Banking System Lending ................ 8 Monetary Policy Developments ... .................... 9 Money, Credit, Inflation and Devaluation .....t.. 9 Interest Rates ....9.eee.e ....... ..ee 9 Effect of the Foreign Exchange Auction on Interest Rates .................... 9 This report is based on the findings of an appraisal mission to Zambia in March-April 1986, composed of Neil C. Hughes, Godfrey Tumusiime and Joseph Owen of RAPID. This document has a retricted distrbution and may be used by reipients only in the perfowmance of their ofki duties. Its contents may not otherwis be disclosed without World Bank authoriation.  Page No. II. DEVELOPMENT BANK OF ZAMBIA ....... ...................... 10 Origin, Objectives and Role .........................,., 10 Ownership ........................ 10 Board of Directors 00*e*00*S ........ .......... 11 Organization and Management ............................ 11 Staff Development and Training ......................... 12 Operating Policies and Procedures .................... 12 Policy Statement .......... 12 Promotion ...... ..,.,............. 13 Appraisal ......, , , , ,.,.......... 13 Supervision 00000., 13 Accounting, Financial Management and Information Systems *.......................... 13 Procurement 0000000000000000000000000000000000000000000. 14 Interest Rate Structure *.................. ........ 15 Operations ....0....... 0 15 Quality of DBZ's Portfolio .................. ..... 15 Resources ....................... , , 17 Financial Results and Condition ........................ 18 Projected Operations and Financing ..................... 19 New Capital Increase ...,....................,.......... 20 Projected Financial Performance ...o .................... 21 III_ THE PROJECT *2***1*.....,...............,............ 21 Bank Group Experience with DBZ ......................... 21 Project Justification and Objectives ...... ............. 22 Project Description **0000@000000 0050000000 0000000o...... 23 Credit Component ....0.........00 ....... 23 Technical Assistance Component ..................... 24 Project Implementation 000...... 00000000000000000.00.0. 24 Reporting Requirements .... 24 Procurement and Disbursement ....................... 25 Special Account ....................... 25 Project Benefits and Risks ......................... 25 IVe AGREEMENTS REACHED AT NEGOTIATIONS ..., .................. 26 ANNEXES 1. ZAMBIA: Structure of Interest Rates .,.........,.,.... 28 2. DBZ: List of Shareholders ...... ........................ 29 3. DBZ: Organizational Chart ...... ........................ 30 4. DBZ: Statement of Operating Policies ..... .............. 31-33  Page No. 5. DBZ: Debt Recovery Action Plan Methodology ............. 34 6. DBZ: Summary of Operations, December 31, 1985 .......... 35 7. DBZ: Analysis of Loan Approvals, December 31, 1985 36-37 8. DBZ: Balance Sheets, 1982-86 ........................... 38 9. DBZ: Income Statements, 1982-86 39 10, DBZ: Assumptions Underlying Financial Projections 40-43 11. DBZ: Projected Operations, 1987-91 44 12. DBZ: Projected Sources and Uses of Funds, 1987-91 ...... 45 13. DBZ: Projected Net Cash Generation *,,,,,,,**,**,**,,,. 46 14. DBZ: Projected Balance Sheets, 1987-91 ................. 47 15. DBZ: Projected Income Statements, 1987-91 ...... ....... 48 16. DBZ: Projected Financial Ratios, 1987-91 ............... 49 17. DBZ: Proposed Capital Structure, 1987-91 o.o.o..o....... 50 18. DBZ: Schedule of Disbursements ., 51  ZAMBIA THIRD DEVELOPMWEN BANK OF ZAMBIA PROJECT Credit and Project Summary Borrower: Republic of Zambia Beneficiary% Development Bank of Zambia (DBZ) Amount: SDR 8.3 million (US$10.0 million equivalent) Terms: Standard IDA terms Terms of Relending: The borrower would onlend the about US$8.9 million investment component of the credit to DBZ at an interest rate equal to the Bank rate at the time of negotiations (i.e. 8.23%), for subloans denominated in foreign currency, and at a variable rate equal to the treasury bill (T-bill) rate plus 22 for subloans denominated in Kwacha. DBZ would repay the Credit to the borrower in accordance with the aggregate of the repayment schedules for subloans. Subloans would not exceed 15 years with appropriate grace periods not to exceed 4 years. DBZ would provide sub-borrowers with the option of denominating the subloan repayments (i) in US dollars at a fixed rate equal to the Bank rate plus a 4% spread; (ii) in kwacha at a variable rate equal to the sum of the 1-bill rate plus a 2% foreign exchange risk premium, plus a spread of not less than 4%. The borrower would pass on the US$1.1 million technical assistance portion of the credit to DBZ as a long-term subordinated loan, which would be considered as quasi-equity for the purpose of calculating DBZ's debt-to-equity ratio. Retroactive financing up to an amount of SDR 250,000 would be made available for expenditures made before the date of loan signing but after October 31, 198f, under the technical assistance component. Project Description: The credit would finance the long-term foreign exchange portion of the capital investment require- ments of productive sector subprojects approved by DBZ, for modernization, expansion or restructuring of existing enterprises, and to a lesser degree for new investment subprojects. The credit would also finance the establishment of a computerized financial and management information system at DBZ, technical assistance to Implement the new system and train staff in its use, as well as staff training in project evaluation and supervision, both in Zambia and abroad.  - il - Project Benefits and Risks: The propcsed project would provide term resources to the productive sectors in Zambia to rehabilitate industrial and agro-industrial enterprises, develop manufactured and other non-traditional exports, and increase production in all productive sectors. It would thus help accelerate growth and increase employment in Zambia and would complement the positive impact of the policy reforms already taken by the Government and supported by IDA. The investment component of US$8.9 million Is expected to support productive investments totalling about US$20 million. The project would also enable IDA to help DBZ, the main term-lending institution in Zambia, to increase its effectiveness as a term-lending institution by mobilizing additional resources, upgrading the quality of its portfolio, and increasing the effectiveness of financial and msnagement decision-making. Continued IDA support would enhance DBZ's capability to mobilize additional foreign capital and other resources from bilateral institutions and would enable it to play a more significant role in assisting the recovery of Zambia's productive sectors. There are two major risks to this project. One is the possible deterioration of Zambia's economic situation. Such a risk is, however, limited, so long as Zambia continues to follow the stabilization program supported by the IMF and the policy reforms and actions envisaged by IDA and other donors to increase the resource transfer and accelerate economic growth in Zambia. A second risk is a continued deterioration of DBZ'a arrears position. This risk is being reduced as DBZ takes the actions supported by the proposed credit to improve loan collections and to resolve its portfolio problems. These should insure that DBZ will remain an effective term-lending institution that promotes economically sound investment projects.  - iii - Financing Plan PY86/91 (US$ million) Amount % Commercial :.iks $ 16.0 15.4 Non-Bank F: .Anci8l Institutions 18.0 17.3 DBZ-Share Capital 7.3 7.0 DBZ-Retained Earnings 4.7 4.5 IFC 6.0 5.8 FMO 5.0 4.8 IDA (DBZ III) 10.0 9.6 BIB 8.0 7.7 Total DBZ Financing $ 75.0 72.1 Beneficiaries Own Funds 29.0 Z7.9 Total ProJect Cost $104.0 100.0 Estimated Disbursements IDA Fiscal Year 1987 1988 1989 1990 1991 1992 -