Zambia - Agricultural Marketing and Processing Infrastructure Project

Document of The World Bank MIUi C'2IJ CtIJ'H. CW{Y ,USE ONLY Report No. : P- /'7-35 :ZA (P T-l.e: AGRI C(-ULT-1TRA!, MARLJi ' AN .: Autlhor: /EGGE, BARNABA& Ext.- ::35515 Roo,n:J11 U2 ept. :AFfjAG Report No. P-5773-ZA MEMORANDUM AND RECO4MENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT oF SDR 24.1 MILLION (USD33.0 MILLION EQUIVALENT) TO THE REPUBLIC OF ZAMBIA FOR AN AGRICULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT July 24, 1992 Southern Africa Department Agriculture Operations Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (As of February 1991) Currency Unit = Zambian Kwacha (ZK) ZK I = USD 0.008 USD I = ZK 125.00 FISCAL YEAR January I - December 31 WEIGHTS AND MEASJURES Metric System ABBREVIATIONS AND ACRONYMS BoZ Bank of Zambia DC District Council DCU District Cooperative Union ERC Economic Recovery Credit ERR Economic Rate of Return FINNIDA Finnish Development Agency FMA Farmers Marketing Association FPS Floor Pricing System ICB International Competitive Bidding INDECO Industrial Development Corporation subsidiary of ZIMCO ITs Independent Trader(s) LCB Local Competitive Bidding LST Large-scale Trader MAFF Ministry of Agriculture, Food and Fisheries MCTI Ministry of Commerce, Trade and Industry MDM Market Development and Monitoring MLG Ministry of Local Government MLIC Marketing and Logistics Information Center MOF Ministry of Finance NAMBOARD National Agricultural Marketing Board NEMIC National Economic Management and Implementation Committee NORAD Norwegian Development Agency PCB Participating Commercial Bank PCU Provincial Cooperative Union PEC Project Executive Committee PFP Policy Framework Paper PIRC Privatization and Industrial Reform Credit PIU Project Implementation Unit PMA Participating Marketing Association PPU Provincial Planning Unit PRE Provincial Roads Engineer PRP Policy Reform Package PSD Private Sector Development RDEP Roads Department REC Roads Engineering Credit RIF Rural Investment Facility RRRM Rural Roads Rehabilitation and Maintenance RRU Rural Roads Unit in PRE SAP Social Action Program SECAL Sector Adjustment Lending SMR Strategic Maize Reserve SST Small-scale Trader TA Technical Assistance TCP Technical Committee on Privatization in ZIMCO ZABS Zambia Bureau of Standards ZCF Zambia Cooperative Federation ZIMCO Zambia Industrial and Mining Corporation ZNBC Zambia National Commercial Bank  FOR OMCIL USE ONLY REPUBLIC OF Z MBIA AGRICULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of the Republic of Zambia Beficiar: Ministry of Agriculture, Food and Fisheries; Bank of Zambia (BoZ); Participating Commercial Banks (PCBs); commercial cooperatives and marketing associations, private enterprises, and maize mills and Zambia Bureau of Standards. Amount: SDR 24.1 or USD33.0 million lUma: Standard IDA terms, with forty years maturity Onlending Terms: (a) For credit component: BoZ, acting on behalf of the Government of Zambia, to PCBs at BoZ's discount rate or three month savings deposit rate, whichever is higher; (b) For technical assistance: Ministry of Finance to participating commercial cooperatives or farmers associations as interest free loans. Financine Plan: USD Million- Local Foreign Total IDA 9.6 23.4 33.0 AFDB 5.2 7.3 12.5 Government 15.5 - 15.5 Commercial Bank 3.5 - 3.5 Beneficiaries 3.5 _ 15 Total 37.3 30.7 68.0 Rate of Return Overall Project 24% Rural Roads Program 22% Medium Term Credit Investments 32% Staff Appraisal Report: No. 10521-ZA M-Q: IBRD No. 23688 This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXEC DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF ZAMBIA FOR AN AGRICULTURAL MARKETING AND PROCESSING INFRASTRUCTURE PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed development credit to the Republic of Zambia for SDR 24.1. million, the equivalent of USD33.0 million, on standard IDA terms with a maurity of 40 years to help finance an Agricultural Marketing and Processing Infrastructure Project. The Government of Zambia will provide USD15.5 million for the Project, and cofinanciers will provide USD19.5 million. The Afiican Development Bank will provide the equivalent of USD12.5 million of the cofinancing. From the IDA funds of USD 33.0 million equivalent, the Bank of Zambia, acting on behalf of the Government of Zambia, will make available approximately USD 16.7 million to participating commercial banks (PCBs) for onlending to private enterprises engaged in maize marketing, fertlizer distribution, agro-processing, rural transportation and rural road maintenance. The PCBs will onlend the credit proceeds in local currency to beneficiaries at positive real interest rates on the basis of actual loan approvals and agreed eligibility criteria. Until interest rates are fully decontrolled on December 1993), they will be reviewed and agreed with IDA on a quarterly basis. I. COUNTRY POLICIES AND BANK GROUP'S ASSISTANCE STRATEGY P llBackground and Recent Developments 2. The Zambian economy suffers from severe and longstanding distortions that will require a major structural adjustment effort over an etended period if they are to be overcome. Its major charactersc is heavy dependence on copper and the dualistic structure that has grown up around this dependence. Soon after independence in 1964, the Government sought to gain control of the economy through widespread nationalization. The economy became dominated by paratatals and a one-party system was introduced. Rising copper prices helped the economy to grow steadily at an average rate of 4% per annum during the first decade after independence. Since 1975, however, falling world prices of copper (Zambia's most important export) and the general deterioration in terms of trade, coupled with the failure to develop a diversified economy, caused overall economic decline. Attempts to support continued consumption through borrowing failed to contribute to economic growth and created an exceptionaly severe debt problem. Per capita GDP is now more than a third below its 1978 level. 3. After several unsuccessfil efforts at reforming the economy, in the late 1970s and early 1980s, Zambia adopted a comprehensive adjustment program in 1985, with Bank and IMF support. This too ran into difficulties in part because of poor fiscal and monetary control. In 1987 the Government abandoned it and reversed many of the reforms undertaken in the previous two yers. The exchange rate was set at an overvalued level, administrative controls for foreign exchange and imports were reintroduced, privileges were given to some parastatals and others were subjected to price controls. The Government also stopped most externd debt service; consequendy the Bank suspended disbursements to Zambia. Support from the donor community was progressively withdrawn. The debt overhang continued to grow, and the economy to decline. After a hiatus, Government resumed its policy dialogue with the Bank and Fund in late 1988; in a major policy shift, in June 1989, Government abolished all price controls except those  -2 - on maize, mealie meal, fertilizers, pet -oleum and public utilities. Subsequently, agreement was reached in mid-1989 with the Bank and Fund on a PFP outlining the Government's medium-term development strategy and objectives for the period 1989-91. The PFP was followed by an annual Fund-monitored program for i990. A second PFP covering the period 1991-93 was reviewed by the Committee of the Whole in March, 1991 when the Bank arrears were cleared and a new Economic Recovery Credit (ERC) for US$210 million was approved on March 5, 1991. In addition, Zambia began a rights accumulation program which was approved by the IMF Board in April 1991. In response to public pressures, a new constitution was introduced allowing for multiparty elections. 4. Government adherence to the agreed economic reforms began to slacken during the run-up to the multiparty elections; Government reintroduced price controls (this time, informally), aid public expenditure got out of control as a result, inter alia, of excessive public sector pay increases and increases in subsidies (maize, fertilizer) to a much higher level than budgeted. Because of poor performance, donor support for Zambia was delayed, Government defaulted on its payments to the Bank, and as a result disbursements were again suspended in September 1991. 5. In the October 1991 multiparty elections, a new Government was elected to office and given a strong mandate for a reform program that includes moving to a full market economy and significantly reducing the role of Government. Specific proposals in the party manifesto included privatization of virtually the entire parastatal sector, and the restructuring of the utilities that will remain in public ownership. Since assuming office the new Government has made a determined start in the 1992 budget; comprehensive reforms have been adopted aimed at bringing the budget into balance, encouraging exports, liberalizing the economy, cutting back the civil service and privatizing most of the parastatal sector. As a result of the strong actions by the Government, external support has resumed; the Bank arrears were cleared in January 1992, the suspension was lifted and the second tranche of the ERC was disbursed. 6. The Government's reform program will inevitably be made more difficult by the catastrophkc drought that has affected all of Southern Africa in the early months of 1992. The bulk of this year's crop harvest has been lost throughout the country. In Zambia the maize output is expected to be about one-third of the post-planting estimates, and agricultural GDP will be reduced by over 25%. Substantial efforts are being mounted by the donor community to meet the cost of the drought, estimated at about US$300 million for Zambia. Because the drought is forcing up prices of maize, to artificially high levels, the Government will use the donor support to shield the public from the fu1l impact of the drought on maize prices. Agreement has been reached with neighboring countries on logistical arrangements for large imports of maize. Total import requirements are about ten million bags (900,000 metric tons) of maize, plus smaller quantities of other products (e.g., cooking oil). The drought has also directly affected a number of other food products such as wheat, soya, sugar and oil seed, and non-food agricultural crops such as tobacco and cotton; this has had an immediate impact on related agro-industries. The drought will also reduce power exports from Zambia's hydro stations and the loss of these revenues will lead to a sharp increase in domestic power tariffs. 7. Ihere are three major constraints on Zanbia breaking outfrom its ptern ofpast economicfailures. First, Zambia has an exceptiownly large debt burden. Total debt at end 1991 amounted to US$6.7 billion, of which US$ 2.9 billion is multilateral, US$2.5 billion bilateral, US$ 0.6 billion medium/long-term commercial (including export credits) and US$ 0.7 billion short term. Excluding the short term debt, Zambia's external debt represents US$766 per head  -3- of population, one of the highest s.nywhere. Further rescheduling of official debt is expected in mid-1992, and a commercial debt buy-back (with the support of the IDA Debt Reduction Facility) is planned for later in 1992. Alleviating the debt burden is a prime focus of the CG and Paris Club processes, and will require substantial and concerted donor support. 8. The second major constraint is the hewavy dependence on copper. Copper accounts for nearly 85% of the country's exports, contributes about 15% of GDP, and is an important source of budgetary revenue. The problem is worsened by the poor prospects for copper prices and a projected sharp decline in copper output around the end of this decade. IDA is giving direct support to improve the efficiency, profitability and longer-term outlook of copper production in Zambia through the Mining Technical Assistance Credit. However, as outlined in the medium-term strategy expressed in the PFP, it is important for Zambia to diversify its economy away from copper, to reduce the high capital and import-intensity of production and consumption, to improve economic efficiency, and to increase savings and investment rates so as to restore economic growth. Key to the success of this strategy is a reorientation of the policy framework to increase incentives for agricultural production, encourage the private sector both through supporting new entry and privatizing the large public sector, and redirecting public expenditures to areas that would 'facilitate growth and assist in human resource development. However, the first essential step of this reform program has to be macroeconomic stabilization. 9. The third major constraint, is the dominance of the parastatal sector, the consequent stifling of competition and initiative, and the imposition of high prices and low quality in the domestic industrial and agricultural sub-sectors where parastatals have an effective monopoly. TMe manufacturing and agro processing parastatals have not kept up with product developments elsewhere. Natural resources (water, forestry, land, fisheries, and wildlife) management and utilization have been inadequate and far below potential. The gemstone parastat has exploited a negligible portion of Zambia's tremendous potential, with most exports avoiding official channels such that the earnings were placed directly into foreign banks. With few exceptions, the parastatals have been inward looking, and content to rely on the small Zambian market; they have generally failed to diversify the economy or to develop Zambia's natural advantages to the extent possible. In the public utility sector the position is not much better: the railways are extremely slow and unreliable, the power company has been unable to maintain a sufficiently steady voltage for the operation of sensitive industrial plants, and the telecommunications service is substandard in areas important to business. Macroeconomie and Structural Policies and Strategy 10. Short-Term Stabilization Measures. The progress made over the last three years, in particular the bold measures in the 1992 Budget, has now put the Government in position both to deal with the short-tem problems (particularly inflation and the balance of payments) and to address the underlying structural issues. The medium-term strategy calls for providing a regulatory framework and incentives to encourage sustainable growth, with emphasis on the private sector particularly in agriculture, tourism and gemstone mining; significant strengthening of physical and social infastructure; increased attention to social and poverty issues; implementation of environmental policies, and a renewed effort in institutional strengthening. 11. The Government's stabUiation policies for 1992-94 are set out in the Policy Framework Paper (PFP) considered by the Committee of the Whole on March 17. The program objective set out in the PFP (pre-drought) was to achieve real GDP growth rates of 2% in 1992, 3% in 1993 and 4% in 1994, implying a positive real per capita growth by the end of the 1992-  4-4 94 PFP period. These figures will be updated mid-year to reflect the Impact of the drought. Gross investment is planned to grow to about 20% of GDP in 1994, more in line with the experience of the 1980s. However, investment statistics are particularly inaccurate and conclusions should be drawn with care. This rise in private investment will be facilitated by a fiscal policy designed to increase public savings and shift financial resources to the private sector, and a monetary policy seeking to attract savings through a positive interest rate policy. The most daunting task is to lower inflation from about 100% in 1991 to 45% In 1992, 15% in 1993 and 5% in 1994 (aU on a calendar year basis). The stabilization plan is to achieve a primary budget deficit (excluding grants) of no more than 2% of GDP in 1992, full balance in 1993 and a small surplus in 1994. Ihe most Important of these measures are the rapid elinination of the prindpal subsidies (on maize, fertilizer and parastatal deficits), reprioritzing public expendkures, enhancing revenues by broadening the tax base and reducing loopholes (while lowering tax rates) and civil service refonn to create a smaller but more efficient, better paid and motivated staff. Civil service pay will be controlled by maintaining aggregate emoluments at a constant proportion of GDP, with any extra pay raises being offset by savings from redundancies. The success of Government in implementing these measures constitutes the key indicator of its determination to recover control of the economy. A summary of key economic indicators is presented in Annex 1. 12. Revenue Measures. The Government's revenue strategy is to simplify and reduce direct taxation and simplify indirect taxation, while lowering protection and encouraging exports. Overall revenues will be increased, mainly by removing tax loopholes and by higher dividends from parastatals. 13. The Govemment has already made a major start on tax reform. Progress on indirect taxes has been good. In the 1991 budget, most imported goods were brought into three tariff bands at 0S%, 30% and 50%, with a few exceptions such as food and fertilizer at zero tax, and minor luxury goods at 100%. Trade distortions were reduced, and Government revenues enhanced, in the 1992 budget by harmonizing the sales taxes at a uniform rate of 20% on both imported and domestically produced goods. Petroleum currendy is imported tax-free, but there is no local oil production and the minimum excise tax on petroleum is 15%. In relation to the 1993 budget, the Government's program is to reduce further the highest tariff band so as to reduce the protection offered (see para. 60), but to do this in conjuncfion with smoother operation of the OGL (Open General License) system, and only after the imract on business and employment has been well-studied. Government plans to raise new revenues from the introduction of a value added tax, and from the introduction of mandatory dividends from parastatals. 14. In addition to the above, Government has cut the basic company tax rate from 45% to 40% beginning April 1, 1992, offsetting this by phasing out non-cash fringe benefits as deductible business expenses, and is undertaking a detailed examinaion of the structure of company tax with a view to implementing further reforms in 1993 or 1994. Personal income taxes were also reformed in the 1992 budget, the main emphasis being a widening of the tax net to tax cash fringe benefits, (such as the housing allowance) to offset a reduction in tax rates and an increase in the tax threshold. 15. Expenditures. The expenditure reduction plan includes reform of the public and parastatal sectors, increased devolution of authority to local governments, better coordination and determined control of commitments and expenditures, reprioritizationof expenditure, and phased elimination of subsidies. The major reductions in spending will be in crop financing and  -5- subsidies. The change in crop financing is primarily a result of the greater private sector role in maize purchasing and marketing. The reduction in subsidies comes from elimination of maize transport subsidies and of fertilizer subsidies and the substantial reduction in maize meal subsidies. 16. The Zambian public did not generally benefit from the previous Goverment's maize subsidies as intermediaries bought up the stocks and many families had to buy at parallel market prices. The new Government moved fast to correct this situation by a speedy cut in maize subsidies balanced by a stronger safety net to cushion the impact on the most vwdnerable. In little more than a month after taking office, subsidy cuts resulted in price increases for roller meal by 103% and breakfast meal by 165%. Further increases were made three months later. Consequently, within its first four months in office, Government had eliminated the subsidy on breakfast meal (the more refined product) and reduced the subsidy on roller meal (the less refined, and hence more nutritious, product) to about 30%. Government removed the remaining subsidies on roller meal during May, and all into- mill subsidies on domestic production have now been removed. As a response to the drought, Government will pay a temporary bonus on locally produced maize delivered in May and June, and pay the cost of transport, handling and storage for locally produced maize to ease the transition to the new higher prices. The phase-in to the higher prices will be achieved by October such Shat the into-mill cost will be at about the level that would have applied in a non-drought situation. This w;i then be an appropriate base point for the 1993 crop. In addition there will be a program of limited quantities of half price and free yellow maize to be channelled to the poor (including subsistence farmers severely affected by the drought) through local groups supported by the World Food Program and the NGOs, and additionally a 15% subsidy on yellow maize supplied to hammermills, to encourage consumption of the more nutritious straight-run mealie meal. These poverty-focussed subsidies will expire by mid-1993. Subsidy reduction is a particularly visible measure of Government resolve for economic reform, and becomes a key indicator of progress. Price ctptrols and subsidies in the fertilizer sector were eliminated in March 1992. 17. Government has already announced a shift in expenditure priorities such that more money will be spent on non-wage recurrent expenditures in areas such as equipment and building maintenance. Further, a realistic Public Investment Program (PIP) for 1992-94 has been adopted, and expenditure outside of the PIP will not be authorized except in exceptional circumstances. 18. Monetar and Interest Rate Policies. The Bank of Zambia has established a target for broad money growth of 25 percent for 1992. This is lower than the year on year inflation objective (45%) since it is anticipated that it will take some time for inflation to decelerate as monetary policy is tightened. In addition to monetary restraint, Government has increased the maximum effective interest rates charged to borrowers to about 70%, which is equal to the inflation rate targeted for the end of the first quarter 1992. As inflation falls during the year, interest rates charged to customers are expected to decline. To encourage savings, efforts will also continue to be directed at raising bank deposit rates relative to lending rates, particularly through reducing the proportion of non-interest bearing deposits placed with the Bank of Zambia. A limited amount of debt-equity swaps will be permitted at conversion rates prescribed by the Bank of Zambia. 19. External Sector Policies. The centerpiece of the strategy for expanding non- traditional exports by 10-15% a year over the next decade is an exchange rate policy that aligns the value of the kwacha closely to the parallel market rate, such that the efficient allocation of foreign exchange is promoted, and to give added incentive to exporters through a liberalized  -6 - export retention scheme. To that end the kwacha was devalued by 30% on January 31, 1992. The Government's plan is to adjust the official exchange rate in installments to a level that will permit the OGL system to be shifted to a negative list system and steadily broaden the coverage of the OGL. Government has announced complementary reforms to encourage exports through an improved duty drawback scheme and further development of bonded warehouses. Continued development of the OGL system is a key test of progress in Zambia's macroeconomic reforms. 20. Longer-Term Development Strategy and Issues. The Government's strategy to restore long-term growh calls for the creation of an enabling environment conducive to the growth of the private sector, so that it can provide most goods and services, and to limit Government's role in the economy to the provision of essential services; Government regards the most important of these to be the development of the basic physical infrastructure and of Zambia's human resources, the provision of social services (and of a social safety net) and the implementation of appropriate environmental policies. Government is also aware that for tis strategy to succeed it needs to deal quickly with the overwhelming debt situation. 21. Private Sector Development and Public Sector Reform: Government is embarking on a major privtizion program and seeking to make the public utilities more efficient, and to introduce frther reforms in incentives and in the legal and regulatory framework, with a view to development of a strong private sector. The privatizadon program aims to put all new copper developments under the control of private investors, to reform ZCCM, and to privatize all other commercially-oriented parastatals, except for the public utilities, (140 companies to be divested out of 155 parastatals), over a period of five years. The parastatal reforn program will involve a reassessment of the management, staffing, policies and finances of the public utilities, efficiency measures and establishment of performance targets, and Institution of an incentive-based regulatory system. CIvs Service Reform is also an important element ;Government's plans for a more efficient but smaller public sector. The ncentive prograntncludes improvements to the incentives offered in the 1991 Investment Act, and simplification of procedures. It continues the streamlined import and export licensing system, now operated quite efflciently through the commercial banks, and an exchange rate policy that will nmove to a smal negative list system by end-1992; and enhanced competitiveness through frther cutting of import tariffs. Government is also starting a comprehensive review of business related laws that are out-of-date; a prioritized action plan has been drawn-up to make early amendments of Acts that affect the privatization process (ncluding laws regulating the banking system and capital market), and to deal with aUl other business-related legislative modernizaton over a five year period. 22. Physical Infrastructure. The Government intends to put renewed emphasis on a better road system to ensure that crops can be brought to market quickdy, on a more reliable freight-rail system, and on a better quality telecomsmnications system that is seen as essential for the development of an outward-oriented and efficient productive sector. 23. Human Resource Strategy. The centerpiece of the human resource strategy is the rehabilitation and sustainable expansion of the education and health sectors. These sectors have borne the brunt of the deterioration in fiscal performance in the past, and the country is faced with a dilapidated and underfunded social infrastructure. 24. in education the new strategy means a sharper focus on improvements in basic education with a special emphasis on the provision of much-needed infrastructure, management capacity and learning materials. The Government has sought, with success, donor support for  -7- this. Other activities in education are geared towards ensuring the necessary supply of skilled manpower for the development needs of Zambia, focussing on key skills relevant for private sector development. 25. In health the Government is re-emphasizing primary health care and is in the process of decentralizing health services to ensure community participation and good governance in the sector. The Government is working with key donor agencies towards developing a full health sector strategy and management set-up to meet the new challenge of a decentralized system of health delivery. A key area of emphasis is the prevention of AIDS and support for family- based care of AIDS patients. With prevalence of HIV as high as 20 percent in urban areas, the treatment of opportunistic infections and support for home-based care is important to limit the otherwise devastating effects the AIDS epidemic could have on the human resource base and the economy. In mntrition the Government is working towards streamlining management of national programs and futer encouraging the development of local initiatives. 26. The Government is aware of the key role women could play in poverty alleviation and growth of the economy and is focussing social service delivery, particularly education and primary health care, on women. Government is also working towards removing obstacles for women's participation in the labor force, and in their access to credit, and is looking to relieving the all-important time-constraint on poor women in Zambia. 27. Social Safety Net. Government is taking steps to alleviate the impact of the drought and of the economic adjustment program on the poor and disadvantaged. Specifically Government will: (i) implement a transitional subsidy on imported yellow maize to cushion the price impact of the drought. Some families have lost all means of livelihood as a result of the drought. Government will channel special assistance through local groups supported by the World Food Program and NGOs to ensure that these families can feed themselves and have the seed for next year. Further, Government will assist poorer families for one year only through a small (15%) subsidy on maize supplied to hammermills, in an effort to encourage use of straight-run maize because of its greater efficiency and nutritional value. In addition, Government is (ii) using some of the savings from subsidy removal to expand social welfare programs implemented through the Ministry of Community Development and Social Welfare; (iii) increasing funding for small-scale labor intensive public works (supported by IDA and other donors) and other components of the Social Action Program, and converting some of those to paid-work instead of self-help; and (iv) increasing the share of the national budget allocated to basic social services, with emphasis on primary education and health care and other services of particular importance to the low income population. Specific interim targets have been set for the above. Particular attention will be paid to rural infrastructure. Government plans to heighten public awareness of the social action program so as to ensure that more needy people benefit. A program of severance pay and business counselling will be offered to those made redundant through the retrenchment program. For the medium-term the various measures to stimulate small-scale industry will provide income-earning opportunities in both urban and rural areas. 28. The withdrawal of subsidies on maize meal will have less impact than might be expected on the poor as most maize meal has been sold on the parallel market at non-subsidized prices and because special arrangements are being introduced for families financially devastated by the drought. There appears to be public acceptance of the measures taken. The incoming Government had made its plans clear during the election campaign, and it is evident that most Zambians were ready to take the tough actions to stop the long-term economic decline. The  - 8- drought has caused some adaptation of the maize pricing policy in that, with donor concurrence, Government will set the price of imported yellow maize at the price that had been expected if the drought hal not happened. 29. Environmental Strategy. Zambia has a keen interest in preserving and improving the physical environment, and there is common acceptance in Government of the priority this deserves. As an underpopulated country, much of the land has not been affected by man; yet as the most urbanized country in Africa some problems exist and have to be dealt with. The principal issues are first, some deforestation, particularly along the line of rail, caused by land clearance, overcutting of fuelwood, overgrazing and burning. In these same areas this leads to soil erosion, a problem made worse by the high natural erodibility of Zambia's soil. Second, there Is a local pollution problem from the mines and factories, particularly affecting parts of the Copperbelt and areas adjacent to industrial operations. Although not widespread or affecting large numbers, such pollution has to be reduced. More pervasively, the poor control of agricultural chemicals and inadequate treatment of human and industrial waste has an obvious impact on water supplies and health. Cholera is a serious issue. And third, in relation to wildlife, poaching is rampant, and elephant and rhino are found in numabers only in a few locations. 30. The National Strategy for Conservation was prepared in 1986 and provides the basis for policy and institutional framework and guidelines for improved management of environmental issues in the country. It seeks to define and establish policies, plans, organization and action to ensure the sustainability of the natural resource, and to maintain biological diversity and the essential ecological processes and life support systems. Specific plans and guidelines have been drawn up for all sectors, in conjunction with the Intemational Union for Conservation of Nature and Natural Resources. There has been progress in some areas, yet in others, particularly woodfuel cutting, it has not yet been possible to achieve measurable success. 31. The new Government has-reaffirmed its concern for environmental issues through the establishment of a Ministry of Environment and Natural Resources and National Environment Council (NEC). A new national environmental action plan is in the early stages of preparation, but because of the need for proper quantification of the copper mining and industrial pollution issues, and the preparation of the natural resources strategy, it is not due for completion until 1995. 32. External Capital RequIrements - The Debt Issue. Zambia's external debts are enormous in relation to GNP, and cannot be serviced from Zambia's own export earnings. The limited foreign exchange available in recent years for copper investment has led to declining output, and for 1992 (even excluding drought-related imports) the trade balance is expected to be negative. When taken together with net non-factor services and other payments, the current account deficit, excluding interest payments and official transfers, is estmated at US$287 million; it rises to US$587 million when the extra costs of the drought are included. Debt service obligations amount to US$503 mitlion for non-multiaterals and US$260 million for multidaterals, and targeted arrears reduction is US$294 million. Ihus, excluding any change in its officia reserves, Zambia faces a gross financing requirement of US$1644 million including the drought needs. 33. While Zambia is putting high priority on a rapid growth in exports to move toward a better external balance, for as long as the debt overhang persists the external financial  99- pictur3 will be difficult. The main areas for expected improvement are a modest reduction each year in the current accournt deficit and steady reductions in debt service obligations. 34. Donor support for 1992 has been strong. At the end of the CG meeting, the renmaining financing gap was about US$330 million. Additional pledges as of May 14 totalled US$199 million, not including a possible US$100 million in debt service deferral being considered by the IMF. If this amount is included, the financing gap would be US$31 million and within range of being closed. 11. BANK GROUP ASSISTANCE STRATEGY Past Performance and Policy Dialogue 35. Zambia's economy experienced significant decline during the 1970s and 1980s. As low copper prices persisted, the authorities resorted to deficit-financing and external borrowing to finance consumption. Domestic saving dried up, investment plummeted, the budget deficit exploded, and the rate of inflation rose sharply. Effective use of existing productive capacity was hampered by extensive Govermnent involvement in price regulation, subsidies, exchange rate and trade controls, and production of goods and services through parastatals. Excessive state intervention created serious distortions and imbalances in the economy. Attempts at policy reform and economic restructuring through diversification (supported by an Industrial Reorientation Credit and an earlier Economic Recovery Credit) in general failed because of a protracted decline in copper prices, shortfalls in external resource inflows, and poor Implementation performance. Output has continued to decline; real GDP declined by 0.5% in 1990 and by 1.8% in 1991. Thus, GDP growth targets set in the first PFP for 1989-93 of 2.2% in 1989, 1.9% in 1990, and 2.8% in 1991 were not achieved. 36. The Government's policy framework has been updated in the PFPs for 1991-93, and 1992-94 which articulate the policies, objectives, strategy and priorities of the country for the medium-term. At the same time, the Government issued its Public Investment Program for the period 1992-95 for implementing the framework. At the macro-level, priority is given to eliminating imbalances between demand for and supply of goods and services through structural change. Sectorial priorities have been established. - . agriculture, priority is given to smallholder development by improving the provision of research and extension services, credit, and marketing and storage facilities. The focus in the transport sector is on rehabilitation of existing infrastructure and provision for adequate maintenance. In the social sectors, priority is accorded to the rehabilitation of infrastructure at the primary-education and primary health-care level so as to improve service delivery. The framework and priorities are consistent with the country's development needs and prospects. If fully implemented, they should foster stability, structural change, and faster economic growth. The objective is to achieve real GDP growth rates of 2% in 1992, 3% in 1993, and 4% in 1994: 1 Although achievement of these targets will not result in an increase in GDP per capita until 1994, it will be an improvement in the performance of the economy in comparison to the negative rates of growth experienced in the past. 37. Performance targets established in previous PFPs have not been flly realized largely because of lapses in fiscal and monetary control by the past Government. For instance, I/ These targets may have to be revised to take into account the severe impact of the drought on agricultural output in 1992 and to a lesser extent in 1993.  - 10- efforts to reduce macroeconomic imbalances and to lower the rate of inflation have yielded marginal results. While inflation fell from 158% in 1989 to about 100% in 1990, it was much higher than the PFP target of 55%. Inflation rose slightly in 1991, and GDP fell. Compared with a target of 3% in GDP growth, the actual rate was -1.8%. During the second half of 1989 and 1990, some progress was made in bringing public finances and monetary growth under control. Around the middle of 1990, however, significant pay awards and increases in employee allowances and benefits led to a substantial shortfall in the reduction of the budget deficit. The deficit was still 4.2% of GDP in 1990 compared to the PFP target of a surplus of 0.4%. Subsidies on mealie meal rose sharply, and money supply increased by 100%, thus fueling inflation. On the positive side, significant liberalization was achieved through price decontrol, devaluation of the Kwacha, introduction of the OGL system for most merchandise imports, expansion of the export retention scheme, and reduction of the higher tariff band from 100% to 50%. Since taking office in November 1991, the new Government has increased sharply the price of maize meal, eliminated most subsidies, adopted a budget which reduced the deficit from 7% of GDP in 1991 to 2% in 1992, initiated the reform of the tax structure, embarked on a program of public service reform, and adopted a policy of privatizing parastatals. 38. Since the resumption of normal relations in early 1991, policy dialogue between the Bank and IMF on the one hand, and Zambian authorities on the other has been effective except for the issues of maize subsidies and lax fiscal control in the mid-1991 which led to a cessation of donor support and suspension of Bank disbursements. The policy dialogue was maintained however, and relations with the new Government were established quickly, with the aid of several key officials retained by the new Economic team; progress achieved over the past few months has been very positive. The 1992-94 PFP was the product of truly collaborative effort among the Bank, IMF, and Government. With the lifting of the suspension of disbursements on January 31, 1992, Bank lending and economic and sector work have intensified. Supervision work has also been stepped up. The new Government is committed to the adjustment program and has demonstrated this by taking tough actions within a few months of taking office. 39. As part of its strategy to encourage foreign investment and exports the Zambian Government is pursuing stronger regional cooperation. Zambia is the headquarters of PTA, and Zambia is active in cooperating with the development of both PTA and SADCC. The export strategy which is a key to Zambia resolving its balance of payment problems places reliance on local markets. In turn, Zambia has lowered its import tariffs and is working on further reductions, so as to remove any special protection. Continued active involvement of Zambia is anticipated in the Regional Integration Initiative for sub-saharan Africa sponsored by the EC, the Bank and AfDB. Bank Objectives and Assistance Strategy 40. Zambia has to design, finance, and implement its adjustment program under particularly difficult conditions. First and foremost is the very high external debt (including to the Bank and Fund) which would result in debt service ratios near 70% in the absence of rescheduling. Even with extraordinary levels of rescheduling and direct support from the donors and multilateral institutions such as the Bank, import levels are highly constrained and reserve levels at bare minimums. Dealing with the debt issue over the medium term is therefore, a key focus of the Zambian authorities and of the Bank program of assistance. The precariousness of the external financing situation also takes up much of the attention of senior officials in the Government and the Bank. This problem is even more serious this year because of the drought. Another major difficulty is the on again/off again history of the Zambia program (and hence of  - 11 - the Bank program of support) which has created difficulties both in program design and implementation. Our emphasis in recent years has been on the extraordinary financial measures necessary to clear the arrears and restart the program (twice) and to reach an understanding on some basic macroeconomic policy issues. As a result we are starting with a low knowledge base in many areas, and the Government has not had sustained donor support in many sectors. This constrains both program design and implementation; it also results in an emphasis on technical assistance and a particular need to focus our support on a relatively small number of high priority areas. In some sectors, we know enough to get started on priority issues while launching some broader sectoral studies. In other areas, direct Bank support would not be prudent until after the proper sector work has been done. 41. The Bank will continue to play a leading role in assisting the Government to design and Implement the adjustment program, to place the economy on a sustainable growth path, and to mobilize the necessary financial resources. This will be aiccomplished through continued policy dialogue, economic and sector work, adjustment and investment lending operations, and effective aid coordination. The strategy aims to support structural adjustment, while creating a climate conducive to poverty alleviation through sustainable economic growth and the provision of a safety-net to protect vulnerable groups from the adverse impact of adjustment. The strategy implies substantial balance of payments support to help Zambia redress macroeconomic imbalances in the economy, and to reduce its overwhelming debt burden to manageable proportions. To this end, the Bank plans to lend for at least one adjustment operation for each of the next four calendar years. The primary emphasis of the operations will alternate between macroeconomic adjustment and sector adjustment. Each year, the Bank will assess achievements under the ongoing adjustment operation to determine the priority measures to be carried out under the successive operations. Thus, in the earlier years, Bank assistance will be primarily in the form of balance of payments support, supplemented by investment operations in the priority sectors; as identified by the Government these are agriculture, industry, transport and social services. In addition, it is envisaged that IDA would assist Zambia more directly, including through the Debt Reduction Facility, to reduce its debt burden to a more manageable level. 42. The main elements of the Bank's strategy are to support efforts to: - achieve macroeconomic stability and initiate a path of sustainable and equitable growth through elimination of the budget deficit, attainment of a competitive exchange rate, and increasing the allocation of resources to economic and social sectors by restructuring the composition of public expenditure; - ensure sufficient access to imports, and an adequate reserve cushion, through maintenance of an appropriate exchange rate and other measures to encourage exports and to use imports wisely, and through coordination of donor assistance and efforts to secure needed debt elimination and rescheduling; - improve the climate for private sector development through deregulation, provision of infrastructure and privatization of parastatals; - strengthen human resource capacity by rehabilitating the education and health infrastructures and improving the quality of education and health services; and - implement an effective environmental strategy.  - 12 - 43. In the context of this strategy the Bank is providing urgent support to mitigate the effects of this year's drought. Thus the allocation for the proposed credit has been increased to US$200 million and existing and new operations are being reviewed to see if they could provide funding for drought-related activities. The Bank is also actively soliciting donor support for Zambia. 44. The alleiation ofpoverry is central to the Bank's program in Zambia. While the most powerful weapon against poverty in the long run will be sustainable and equitable economic growth, a number of other considerations will play a vital role in combatting poverty. One is the reorientation of public spending to meet the vital human resource needs of the poor, particularly in the areas of primary education, primary health care, and clean water and sanitation. Another is deregulation of the economy to reduce the proliferation of rents going to the relatively advantaged and to open up opportunities for small businesses and small farmers. The availability of credit to all levels, and without gender discrimination, is a vital part of this strategy of increasing opportunities. Similarly, a labor market free of special privileges and barriers to entry will be important if the new growth is to be as labor intensive as possible. Finally, a social safety net (as described in paragraph 28 above) will be important to protect those least able to protect themselves from the disruptions likely to accompany this program, particularly the sharp increases in the prices of vital commodities and the retrenchment of employees in the public and parasta.tal sectors. 45. Women already play a vital role in the Zanbian economy not only as primary caretakers of the family but also as direct laborers at the farm level and, indreasingly, in formal sector employment. To reach high levels of equitable and sustainable growth, however, the barriers to full participation that still exist for women will have to be addressed urgently. Many elements of the Bank's lending and ESW program will be directed at this issue, most particularly our programs in education, health, credit, and deregulation. For example, the Education Rehabilitation project includes a comprehensive gender training and sensitization program, assistance for the design of educational establishments to take better account of the privacy needs of adolescent girls, and a major policy study on the nature and causes of gender disparities in education. The proposed Agricultural Marketing and Processing Infrastructure Project includes specific requirements to ensure that women have equal access to credit facilities. In fact, the majority of beneficiaries of the credit component are expected to be women. 46. The donor community is giving strong support to Government's actions to protect the envirownent (paras. 30 and 32). IDA is providing assistance in particular to industrial pollution in Kafue, to improved agricultural practices, and (through ESMAP) support for measures to reduce the impact of fuelwood cutting. The major local company, NCZ (a fertlizer manufacturer and a recipient of past IDA funds), has brought all the local factories together to draw-up an integrated action plan, for ensuring that the industrial waste water is treated before it reaches the river. This plan is awaiting donor finance (US$1-2 m). A review of mining pollution issues is included in the IDA work program. Donors are placing special emphasis on water quality. Support for the natural resources conservation program is planned in the IDA work program, but it is also expected to get renewed emphasis as Government actively promotes the country's tourism potential. Lending Program and Economic and Sector Work 47. Zambia's withdrawal rights under Bank loans and IDA credits were suspended between May 1, 1987 and March 1991 on account of accumulated arrears. The Economic  - 13 - Recovery Credit, approved by the Board in March 1991, marked the resumption of normal Bank operations in Zambia. Relations were interrupted again in September 1991 when disbursements were suspended because of arrears. The suspension was lifted at the end of January 1992 and normal operations resumed again. These interruptions account, in part, for the relatively low volume of lending during the period 1985 - 1991. Details of the Bank's lending program during this period are presented in Table 1. In March 1991, IDA provided the second economic gecovery credit of US$210 million to Zambia, which was disbursed in two tranches. Since 1984, IDA committed a total of US$464 million to Zambia for adjustment operations and investment projects. The credits supported the Government's economic recovery and adjustment program, agricultural development, rehabilitation of infrastructure, strengthening of institutional capacity, and establishing a social recovery fund. 48. The recent dialogue between Bank staff and Government representatives has culminated in an agreed approach to priority sectors for Bank assistance. These include agriculture, industry, mining, transport, and social services. Assistance in these sectors would complement balance of payments support. The Government's goal is to generate rapid economic growth, with equity, through increased investment in the productive sectors and human resources and infrastructure development. A high rate of economic growth is essential for poverty reduction, and for the development of human resources and infrastructure as well as for progress in income distribution. Investments in productive sectors, and for human resources and infrastructure development, would be supported by efforts to enhance efficiency and effectiveness in the public sector so as to promote private sector development. 49. Over the next four years, the Bank's lending and economic and sector work (ESW) programs will constitute the main vehicles for implementing the strategy described above. Among the areas covered by recent ESW are agriculture, industry, financial sector, energy, the social sector and environment. In the next four years, ESW will cover agriculture, mining, public expenditure, education, public sector management, environment, population, health and nutrition, gender issues, natural resources, and fertilizer distribution. A poverty assessment is planned to be completed In FY94. It will be preceded by an analysis of data gathered under work initiated in FY92 for the preparation of the Country Economic Memorandum (CEM), to be issued in early 1993, and which will have the alleviation of poverty as a central focus. These activities will culminate in the formulation of a strategy for Bank assistance toward poverty reduction in Zambia. 1hree major activWies dealing with the environment are included in the ESW program for the next three years. (Paragraphs 30-32 above give a brief description of the central concern in this area.) Within the agriculture sector program a natural resources s4dy Is to be carried out in FY93. It will be supplemented by stdies on the environmental Impact of mining operations and an overall environmental strategy study in FY94. The Bank ESW program also includes a stuy on women in development, scheduled to be completed in FY94, which should broaden our understanding of these issues and help us develop a more comprehensive picture of the problems women face and the steps that must be taken. The results of the study, together with lessons learned from the various other related studies and operations, will be used in strengthening the Bank's assistance strategy for enhancing women's participation in development activities in the productive and social sectors. 50. Economic reform measures were initiated under the earlier Economic Recovery Credit and continued under the recent Economic Recovery Credit. The reform program will be further assisted by Privatization and Industrial Reform Adjustment Credit (PIRC) and the parallel Technical Assistance Credit (PIRCTA). On the basis of an assessment of the achievements in macroeconomic and structural reform under the three operations, additional measures will be proposed for the Multi-Sector Adjustment operation included in the lending program for FY94 and subsequent adjustment operations.  - 14 - Table 1. Zambla -Comosition of IDA Lendina FY8S-91 Board Approval Credit Sector/ProJect Date Amount X of Total (USS Mn) Adiustment Onerations 79.0X Industrial Reorientation 10/85 20.0 Industrial Reorientation (SAP) 10/85 42.0 Agricultural Rehabilitation 10/85 10.0 (SAF) Recovwry Program 6186 50.0 Recovery Program 3/91 209.0 Privatization & Industrial 6/21 200.0 Reform Eni 0.5X Tazama PipeLine Rehabilitation 9/85 3.1 rifcutture 6.0% Coffee II 11/86 20.4 Research and Extension 12/86 13.0 Fisheries Development 11/84 7.1 Industr 3.0X Fertilizer Industry 2/86 10.0 Restructurirg Development Bank of Zarbia 1/87 10.0 Social Services 3.0X Social Recovery Fund 4/91 20.00 Transport 3.0X Fourth Railways 3/85 20.00 Technical Assistance 5.5X Technical Assistance II 4/86 8.00 Mining Technical Assistance 6/91 21.00 PIRC Tochnical Assistance 6/21 10.00 TOTAL 673.60 100.0X  - 15 - 51. Concurrent with the PIRC, the Bank will provide assistance to agriculture, education and infrastructure through the Agricultural Marketing and Processing, Education Rehabilitation, and Infrastructure Engineering projects in FY92 and FY93. These operations will be followed by others in FY94 in Petroleum Sector Rehabilitation and Agriculture Diversification with Telecommunications and Public Sector Management as reserve projects. The FY95 program includes an Industrial and Financial Adjustment Credit, a Health and Nutrition project, and a Power Rehabilitation project, with financial intermediation, Natural Resources Management and further railways project in reserve status. Finally, in FY96, Bank operations will include a follow-on Multi-Sector Adjustment Project, and support for Agricultural Research and Extension and Transport Rehabilitation; community development, small-scale mining, and natural resource preservation and development are the reserve projects. Details of these elements of the program are noted in Annex IV. The design of the IDA lending program reflects the three-year hiatus in Bank operations and the extraordinary foreign exchange needs of the past two years, including the clearing of over US$300 million in debt service arrears to the Bank and meeting the extra demands of the current drought which will cost US$300 million in 1992 alone. As a result, the commitment level was an unusually high US$240 million in FY91 and wilt be US$210 million in FY92 with this operation. The level of new commitments is expected to fall to an average of US$120 million per year for the period FY93-96. 52. IEC and MIGA: IFC's portfolio in Zambia consists of ten investments for a total gross commitments of US$106.6 million; one of IFC's larger in the Southern Africa region. While quite diversified (mining, agriculture and manufacturing), this portfolio has not performed well in recent years; the bleak economic situation and heavily regulated policy environment adversely affected most investments. IFC however, expects that with the recent policy changes and the anticipated large privatization program, prospects for existing and new investments will improve (particularly in agriculture and in companies being privatized). IFC is keeping in close touch with the Zambian authorities and the Bank on progress on the privatization program. Zambia has been a member of MIGA since 1988 and has paid up its subscription. MIGA has as yet no outstanding investment guarantee on Zambia. Aid Coordination and Relations with the IM 53. The coordination of donor assistance has been central to the Bank's program in Zambia because of the extraordinary efforts needed to clear arrears and restart the program (twice) and because of the very large external financing needs of Zambia that are due to falling copper revenues and the large debt burden. Formal Consultative Group Meetings have been held in April and July of 1990, March 1991, and March 1992. In addition informal donor meetings have been held in Paris several times a year to provide urgent updates and opportunities for donor consultation. Regular informal briefings of Executive Directors and their staff are also held at both the Bank and the Fund. A considerable donor consultation process has also been established in Lusaka to coordinate the amounts of assistance and of donor policies at the sector level, with different donors takdng the lead role in different sectors. Finally, ihe SPA meetings have provided a useful forum for the overall coordination of donor amounts and the discussion of general donor coordination issues such as the use of counterpart funds. 54. All of the major donors and multilateral institutions are supporting Zambia's economic reform program. This support, as expressed at the latest CG and SPA meetings, has been strong and unanimous. The broad agreement on policy has meant that an increasing amount of donor assistance is now available as general balance of payments support, and that the project assistance is increasingly being coordinated within an overall agreed program of donor support.  - 16 - 55. A Fund-monitored program was endorsed by the BME Board in June 1990. In April of 1991, the Fund Board approved the first ever "rights arrangement" with Zambia which established conditions under which Zambia would gradually accumulate rights to withdrawals of IMF resources such that after three years, the accumulated rights could be used to withdraw enough resources to clear completely Zambia's arrears to the IMF, which were over US$1 billion in mid-1990. Due to poor fiscal performance, Zambia did not qualify to accumulate rights in 1991. A revised "rights arrangement" program is scheduled to be reviewed by the IMF Board in July. Criteria for Monitoring Progress 56. Despite policy reversals, Zambia has made generally good progress in economic reform since 1989, and remarkable progress since the new Government came to power. Yet a great deal remains to be done. In addition to the major emphasis now being placed on private sector development, privatization and parastatal reform, futher structural measures are needed on macroeconomic issues, such as foreign exchange, external tariffs, taxation and controlling inflation. The financial sector needs modernizing, and greater focus has to be placed on encouraging exports, particularly in non-traditional sectors. All sectors (agriculture, transport, local government, energy, and social services) need to address issues that were neglected during the post-Independence years. Civil Service reform is an important component of the reform program as it addresses the public sector's ability to formulate and implement these reforms. The Government's PFP and the Bank's country assistance strategy seek to address these needs. However, the magnitude of the challenges faced by Zambia is so great that economic adjustment and achievement of Zambia's full potential will be a lengthy process. Substantial foreign assistance, ncluding debt relief, will continue to be required to provide essential inputs and those consumer goods that cannot be competitively produced domestically, to develop the nation's human resources, and to strengthen the basic infrastructure. 57. Progress in implementing this long term swategy will be evaluated on the basis of the following three criteria. Ihefirst is the Government's ability to implement macroeconomic policies (monetary, fiscal and exchange rate policies) that can accomplish and sustain financial stabilizadon, measured against the achievement of targets for inflation, the fiscal deficit and credit expansion. The second criterion is the Government's success in public sector reform, including progress in divesting itself of parastatals and in reforming public utilities, (to be judged against the volume of privatizations and performance and financial targets for the remaining public utilities), and also civil service reforn and the improved delivery of vital social services. The thrd is future growth and diversification of the economy, measured against an expected decline in dependence of the economy on copper for export earnings and government revenues and against more rapid private sector growth. The policy framework should encourage private sector investment and continued rehabilitation and development of the social and economic infrastructure. 58. Successful implementation of this adjustment program depends on three key factors. First, is the need for sustained commitment of the Zambian authorities to program implemenmion. Lack of commitment and policy reversals have contributed to implementation failure in the past. This risk is minimized by the new Government's decisive actions to-date and the strong mandate it received on the basis of Its unambiguous manifesto detailing its economic strategy. Second, is the need for substantial debt relief and highly concessional external assistance to be extended to Zambia, to ensure adequate fimancial resources are available for the adjustment program particularly given the effects of this drought. The Bank is appealing to donors to make extraordinary efforts to increase their commitments to support the Zambian program and food import requirements. Third, successful  - 17- implementation of the adjustment program wil require restraint and sacrifices on the part of all Zambians. Lack of mass support for the program could impede its implementation, and the safety net provisions are critical as wfll be the Government's ability to present and explain its policies clearly. The criteria noted above for monitoring performance should help ensure that the program remains on track. If the Government were to abandon the key elements of the reform program the Bank's lending strategy would be to reduce the support almost to zero, as we do not see how Zambia's economy in such a situation could support meaningful projects. Im. THE PROJECT Sector Background 59. Development of the agriculture sector has been identified as a critical component of the IMP/Bank supported structural adjustment program in Zambia, since it has the greatest potential for producing a rapid growth response in the early stages of the program and also provides a sustained source of export earnings in the medium and long term. Past performance in this sector has been disappointing, largely because of Government policies which included nationalization of maize mills, establishment of parastatals and government-controlled cooperatives, regulated markets, price controls, and subsidies. The cost of pursuing these distortionary policies hds been substantial, both in direct expenditure and foregone growth. A real agricultural growth rate of 3.5 percent per year between 1970 and 1988 was slightly below the population growth rate of 3.7 percent and far below the sector's growth potential. The strategy also distorted production patterns and hindered the development of private sector capacity to provide maize marketing and fertilizer distribution services in the country. 60. Recognizing the shortfalls in past policies, the new Government has adopted an IMP/Bank supported structural adjustment program to improve the macroeconomic conditions in the country. Ile most important features of this program with regard to the agricultural sector are fiscal policy reforms that reduce government expenditutes on subsidies, most of which are agriFulture- related subsidies; the monetary policy that restricts overall money supply will severely restrict agricultural sector access to seasonal credit; and an external sector policy that corrects exchange rate distortions, improving the export potential for agricultural goods. In addition, the Government initiative to support private sector development, parastatal reform, and an increase in non-copper exports, will result in major changes in the agriculture sector. As part of the structural adjustment program, the Government has already made considerable progress in implementing agricultural pricing policy reforms which include (i) substantially reduced maize subsidies; (ii) elimination of fertilizer and transport subsidies and decontrol of fertilizer prices with effect from March 4, 1992; and (iii) liberalization and decontrol of road haulage rates for maize and fertilizers. 61. While the policy environment is improving, obtaining faster production response and better efficiency in the sector will require, inter alia: (i) stimulation of private sector investment in agricultura marketing, input distribution, maize milling, and rural transportation; (d) attainment of market-determined prices for maize; (iii) investnent in rehabilitation of rural roads leading to major production areas; and (iv) financial sector reforms comprising gradual removal of distordons in interest rate structure to achieve positive real interest rates, elimination of Government guarantees for loans to cooperatives and parastatals, limiting net borrowing by the Government from the banking system, and development of appropriate financial instruments to meet the needs of the infant agribusiness enterprises. These will be supported under the proposed Project.  - 18 - Flnancial Sector 62. The financial sector has also been subjected to Government interventions (e.g., interest rate controls and credit subsidies) with severe consequences for lending to the agriculture sector. A combination of financial and agriculture sector policies has made lending to agriculture, particularly agricultural marketing and processing, commercially unattractive to banks. In order to ensure credit to the agriculture sector, the Government in recent years has provided government guarantees for loans to agribusiness firms for purchase of the maize crop. This has led to an erosion of credit discipline in the sector and large budgetary costs to the Govenmment, since the credit risk is borne by the Government and not the lending institution. On the other hand, loans made by commercial banks to the agriculture sector in which the banks themselves bear the risk have performed well (eighty-five percent recovery on loans to small farmers and considerably higher for commercial farming operations) as a result of prudent lending and close supervision. By taking advantage of current reforms in both the financial and agricultural sectors, this Project will facilitate the reintroduction of sound lending practices in the agriculture sector by providing targeted credit to the sector, through the commercial banking system at commercial lending rates. 63. Financial Sector Reform. Although there is no formal financial sector strategy for Zambia, several reforms in the financial sector are being initiated and will be implemented under various stabilization and structural adjustment programs supported by the Bank and IM. These reforms, taken together, constitute a financial sector reform program with the following major elements: (i) under the stabilization program, the IMF is working closely with Zambian authorities to bring inflation under control, primarily through elimination of subsidies and controlling the money supply with mandatory reserve and liquidity requirements and higher interest rates; (ii) establishment of a capital market (i.e., stock exchange), scheduled for 1993, to facilitate greater flexibility in monetary control and mobilization of domestic resources; (iii) as part of the structural adjustment program, the Government has initiated reforms to improve the ability of the banking system to play an effective role in supporting its privatization program, by strengthening the regulatory ability of the Bank of Zambia, modernizing the banking laws, and encouraging greater competition through removing financial monopolies (e.g., insurance industry, pension funds and housing mortgages). 64. The proposed Project will support and deepen the implementation of the above initiatives. It will facilitate the elimination of subsidies related to maize and fertilizer marketing; provide for a monitorable time-bound plan of action for achieving market- determined interest rates; provide, before interest rate decontrol is implemented, an effective mechanism for periodic adjustment of interest rates to ensure that they remain positive in real terms under changing economic conditions; contribute to the promotion of a viable banking system by requiring PCBs to remain financially sound; and eliminate the financial distortions associated with government loan guarantees to cooperatives and parastatats. Project Objectives 64. The proposed Project will aim to increase agricultural output in response to recently adopted economic reforms. It will assist Zambia to transform its highly regulated financial system, and its inefficient maize marketing and milling, fertilizer distribution, and rural transportation systems into competitive and efficient ones. It will also facilitate the reduction of government involvement in the financing of maize and fertilizer purchases and leave this to the commercial banking sector. TIhe principal objectives of the Project are to: (i) support and deepen the implementation of financial reforms initiated under testabilization and structural adjustment program; (ii) stimulate private sector participation in these activities; (iii) commercialize these activities by drastically reducing government  19 - involvement, making them more responsive to free market prices and commercial bank financing and less dependent on budgetary subsidies; (iv) rehabilitate rural roads and transportation facilities that are essential for increased agricultural production; (v) rehabilitate, on a pilot basis, about 20,000 ha of abandoned or underutilized commercial farms in areas of high production .potential; and (vi) promote women's access to credit and job opportunities generated by the Project. Project Description 65. The Project, to be implemented over five years, will consist of five components: (i) Private Sector Development (PSD) will support increased private sector participation in rural maize marketing and milling, input supply, rural transportation, and rural road maintenance by lending for working and investment capital to private enterprises, independent cooperatives or farmers associations, and labor-intensive road contractors. Credit for PSD will be channelled through the Bank of Zambia (BoZ) to participating commercial banks (PCBs) at the BoZ discount rate or three month deposit rate available to the general public, whichever is higher, and onlent to final project beneficiaries on terms and conditions agreed between BoZ and PCBs (51 percent of total cost). (i) Rural Roads Rehabilitation and Maintenance (RRM) wiUl support rehabilitation of about 1,000 km of rural roads in Central, Lusaka, and Southern provinces, which will become major sources of maize supply when market liberalization and price decontrol are fully implemented, and provide institutional and financial support to strengthen the capacity for road maintenance in the office of the Provincial Roads Engineer (PRE) by establishing a rural roads unit (RRU) in each of the three provinces (30 percent of total cost). (iii) Market Development and Monitoring (MDMl) wiUl provide support to the Marketing and Logistics Information Center (MLIC) for the collection, analysis, and dissemination of market information and for providing training seminars to private traders; and to Zambia Bureau of Standards (ZBS) for establishing and monitoring standards for animal feed, maize, and vegetable oils (2 percent of total cost). (iv) A Policy Reform Package (PRP) will support the creation of an environment conducive to the successful achievement of project objectives by enhancing the profitability of project investments and deepening policy reforms and institutional improvements initiated under the ongoing Economic Recovery Credit (ERC), the recendy approved Privatization and Industrial Reform Credit (PIRC), and the proposed Roads Engineering Credit (REC). This will be achieved through supporting the removal of subsidies and price controls on fertilizer, maize, and the transportation of these two products; the enactment of privatization legislation; the leasing of public grain storage facilities to the private sector; and increased autonomy and accountability for cooperatives and maize mills (0 percent of total cost). (v) Technical Assistance will be provided to support the implementation of PSD, RRRM, and PRP by providing professional management teams to selected independent cooperatives or marketing associations; roads engines, and a contractor training specialist; a market informaion specialist for MLIC; a grading and standards specialist for ZBS; monitoring and evaluation consultants; annual project auditing  -20 - consultancy; a maize export study to determine Zambia's export opportunities; and short-term consultants for running seminars and workshops for private traders (17 percent of total cost). 66. Total project costs are estimated at US$68.0 million. IDA will finance all technical assistance costs, about 65 percent of road rehabilitation costs, and 40 percent of credit lent by participating commercial banks. Government will finance the local cost component of the road rehabilitation costs, part of the credit cost, and the recurrent costs representing in all about 41 percent of the total local costs. All AfDB funds will be earmarked to finance 40 percent of the credit to the PCBs. The costs and financing plan for the Project are provided in Schedule A. Procurement and disbursement details are provided in Schedule B. Ihe timetable of key processing events is provided in Schedule C. The status of Bank Group operations in Zambia and the statement of IPC investments are provided in Schedule D. Project Implementation 67. The Project will be implemented over a five year period. Planning and implementation of each component will be carried out by the respective line agencies under the coordination of the Project Planning Unit of the Planning Division of the Ministry of Agriculture, Food and Fisheries. The line agencies that will have direct responsibility for implementing the project components are: the Roads Department (REDP), through PREs and RRUs, for roads; The Bank of Zambia and PCBs for the credit component; ZABS for standards and grading; the Ministry of Agriculture Food and Fisheries (MAFF), through the MLIC, for market development, monitoring, and training; and the Ministry of Finance (MOF) and participating independent commercial cooperatives or marketing associations for marketing technical assistance. Project Sustainability 68. Sustainability of this Project is contingent upon the continuation and deepening of the Government's economid reform program, particularly in the agriculture, financial and transport sectors. These reforms will provide a sustainable basis for the development of the private sector to spearhead economic growth and efficiency in the economy. The Government is committed to promotion of private entrepreneurs in all spheres of the economy and it will not pre-empt or inhibit business opporauities. To this end, the Government has stared implementing the Investment Act of 1991 which provides for an improved climate for private investment and private sector activity. This Project provides an initial attempt to promote private sector activities in agribusiness and to deepen the existing finmcial sector reform by privatizing and rationalizing the financing of maize procurement and fertilizer distribution in the country. This will minimize the distortions and fiscal burden inherent in financing these activities through the Government budget. Lessons Learned from Previous Bank/IDA Involvement 69. Bank Group financial assistance to agriculture has included thirteen projects and one SECAL operation. Main project objectives have included increased production of crops, livestock, fisheries and forestry and raising incomes of beneficiaries(mainly smallholder producers). However, these projects were implemented under a hostile policy environment (characterized by extreme maket distortions, price controls and subsidies) and inadequate rural transport infrastructure. The resultant disincentives impeded the achievement of project objectives. Project implementation was also marred by delayed procurement, slow disbursements, inadequate staffing and delayed auditing of project accounts. In view of this, considerable upfront actions to improve the project policy environment  -21 - were required during the processing of this Project. These included: elimination of fertilizer subsidies (March 1992), decontrol of road transport rates for maize and fertilizers (April 1992), liberalization of domestic marketing of maize and distibution of fertilizers (April 1992), elimination of maize and maize meal subsidies (October 1992), and establishment of a leasing arrangement for public grain storage facilities (June 1992). It should be noted that drought-related subsidies on Imported maize to targeted groups winl remain in place until the effects of the current drought are overcome. Zambia's compliance with audit covenants has been particularly unsatisfactory and notice was served on the Government to institute full compliance. All agricultral projects must be in compliance with audit requirements before Board presentation of this Project. The Government has hired a private firm of auditors to bring up-to-date the audit backlog of all Bank Group-supported agricultural projects. There is adequate private audit capacity in the country through international audit firms based in Zambia to complete this task. Project funds will be used to provide private audit consultancy for project acounts on the basis of an automatically renewable contract (unless the auditor's performance is unsatisfactory). lRationale for IDA Support 70. There is a general agreement that the agriculture sector has the greatest potential to respond quickly to the economic reforms supported by the Bank and IMF. If the anticipated accelerated growth is to materialize, increased investments are required. These will be provided through the proposed financial support to the private sector. This support is consistent with the IMB/Bank-supported stabilization program, as it will rationalize the financing of purchasing maize and fertilizers, both of which have substantially contributed to fiscal and monetary imbalances in the past. It will also be consistent with the thrust of IFC's lending strategy in Zambia which has supported investments in agricultural production and agribusiness or agro-based industries (e.g., teatiles, fertilizer mamufacture). Increased investments in agriculture will be essential to obtain the anticipated response to the policy reforms. Experience elsewhere has shown that following liberalization of the financial sector, commercial banks are likely to reduce lending to agriculture where transaction costs and risk are higher than in other sectors. Financial institutions in Zambia have little experience in lending to small-scale agribusiness enterprises engaged in trading commodities. Commodites in transit are not suitable for collateral purposes and these firms are therefore likely to be perceived as high risk for lending purposes. Hence, if the expected agricultural growth is to materialize, targeted lending as proposed under this Project, will be required during a transition period until commercial banks have had time to develop suitable financial instruments and provide the necessary financial support to agriculture. Such support is consistent with the Bank's guidelines on Financial Sector Operations. Finally, the reforms being undertaken by the new Government may affect vested interests and be difficult to implement unless firmly supported by the Bank under this and similar projects. Agreed Actions 71. Agreement has been reached in principle with Government and PCBs on mechanisms, terms and conditions, and eligibility criteria applicable for channelling of credit. Eligibility criteria for participation in the TA package by independent cooperatives and marketing associations have also been agreed with the Government. Procurement of technical assistance for maize marketing has been done before Board presentation under ongoing TA Credit II. Evidence of significant progress to clear the audit bacldog of all Bank and IDA supported projects in Zambian agriculture has been firnished by the Government. All audit covenants have been met as part of effectiveness conditionality for this Credit. The Government has agreed to meet the following conditions for disbursement; () ensure that each bank that wants to participate in the credit component satisfies the eligibility criteria  -22 - established by the Government and IDA; (ii) submit a detailed program budget for the first year of the emergency roads repair program; (iii) establish the Rural Roads Unit and appoint a roads engineer in each PRE office as a condition of disbursement for the entire road rehabilitation and maintenance program; (iv) submit a satisfactory rural roads policy statement as a condition of disbursement for the entire road rehabilitation and maintenance program; (v) permit cooperatives to operate autonomously starting from the 1992/93 marketing season and amend the Agricultural Marketing Act to reflect this autonomy as a condition of disbursement to cooperatives; (vi) establish project accounts for RRRM and MDM and ensure that an initial quarterly deposit is made in each account by Government, as a condition of disbursement to these components; (vii) signing of a satisfactory subsidiary loan agreement by each participating commercial bank; and (viii) signing of a satisfactory subsidiary technical assistance agreement by each participating marketing association or cooperative. In addition, assurances were obtained during negotiations that the Government would: (i) make significant progress toward attaining market-determined interest rates by (a) adjusting them on a quarterly basis to approximate the projected domestic rate of inflation for the quarter with effect from the third quarter of 1992, and (b) decontrolling interest rates at all levels by December 31, 1993; (ii) review domestic interest rates on a quarterly basis, submit such review to IDA for comments, and implement the said quarterly adjustment of interest rates, taking into account the Association's comments; (iii) carry out a maize export study to determine Zambia's export opportunities with the region by June 30, 1994; (iv) liberalize the export of maize with effect from the 1993/94 marketing season; (v) take all measures to remove price controls on domestically produced white maize at all levels of the maize marketing system not later than October 31, 1992; (vi) foster competition by authorizing each INDECO group mill to set prices for its maize meal independently not later than January 31, 1993; (vii) employ short-term consultants to implement the project monitoring and evaluation system not later than January 31, 1993; and (viii) prepare and submit to IDA for approval a Monitoring and Evaluation plan for the Project not later than March 31, 1993, and implement the plan promptly thereafter. Environmental Impact 72. Only one component could have a direct effect on the environment: the rural roads component. The road rehabilitation works are not expected to have any adverse effect on the environment. On the contrary, a favorable impact would result from improved and engineered road drainage systems. No new construction or major realignment is envisaged; hence, activities will be confined to existing rights-of-way. All tender documents will provide for reinstatement and seeding of burrow-pits. This will reduce the risk of residual pools along roads with resultant health hazards. Physical damage to the environment by heavy equipment and spillage of fuel and lubricants associated with machinery-intensive methods will be negligible. Program Objective Categories 73. The Project will have a favorable Impact on rural poverty alleviation through increased crop production and non-farm incomes earned from employment in rural road maintenance programs and marketing activities. Household food security will also increase with increased production, more efficient distribution of food, and better employment opportunities. Women in Zambia's agriculture sector play vital roles as farmers, managers, decision makers, and farm laborers. Women constitute the majority of traders in the food distribution system in the country and they are likely to be the major beneficiaries of the Project. One important social advantage associated with labor intensive methods of road maintenance is the increased opportunity for the participation of women in supplying labor to such programs. Experience in the NORAD-finded program in Northern Province and the FINNIDA-funded program in Lusaka Rural District has shown high levels  -23 - of participation by women who have proved to be the most reliable and capable workers. Increased non-farm incomes by women are likely to result in improved household food security since they are the major food providers for their families. Project Benefits 74. The achievement of project objectives will facilitate agriculture's supply response to the improved policy environment resulting from the country's adjustment program. The Project will enable both farmers and rural enterprises to respond to the improved incentive structure by increasing agricultural production. The principal benefits of the Project will be increased agricultural production, reduced transport costs and reduced crop/input losses stemming from an improved policy environment, a change in production patterns, and rehabilitation of rural transport infrastructure. Increased production, savings and efficiency gains, together with the new employment opportunities, will significantly reduce food costs, improve household food security, and increase incomes to farmers and rural enterprises. Risks 75. The Project's main risk lies in the possible gap between the Governrment's commitment to reforms, especially those aimed at improving the incentive structure for farmers and private enterprises, and its capability to implement them. This risk will be minimized by improving the Government's implementation capacity during the transition period through a strong technical assistance component. 76. I am satisfied that the proposed Credit will comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Lewis T. Preston President Attachments Washington, D.C. July 24, 1992  -24- Schedule A Estimated Costs and Financing Plan Proec Cst Sulmmta Eroject Comonents Proje Co st -USD Million- Local Foreign Total Private Sector Development 20.4 10.5 30.9 Rural Road Rehab. & Maintenance 3.6 10.9 14.5 Market Dev. and Monitoring 0.1 1.6 1.7 Technical Assistance 12 L7 Total Base Costs 27.3 26.7 54.0 Physical Contingencies 0.4 1.2 1.6 Price Contingencies 9. a 12.4 TOTAL PROJECT COSTS 37.3 30.7 68.0 Financing Plan ~~USD Million- Local Foreign Total IDA 9.6 23.4 33.0 AfDB 5.2 7.3 12.5 Government 15.5 - 15.5 Commercial Banks 3.5 3.5 Beneficiaries Total 37.3 30.7 68.0  -25 - Scbedule B Page 1 of 2 Procuremen Summay of Proposed Procurement Arrangements (USID milllon) Procurement method rIectelemnt ICB LCB Other NBF Total 1.1 Rural road repairs - 3.0 - 0.1 3.1 (3.0) (3.0) 1.2 Rural road maintenance - 5.0 - 5.1 10.1 (5.0) (5.0) 2. Qg&d: 2.1 Equipment - - 1.5 1.5 3. Lb& 3.1 Vehicles and farm rehabilitation - - 4.1 7.4 11.5 (4.1) (4.1) 3.2 Maize (by mills and traders) - - 8.0 10.9 18.9 (8.0) (8.0) 3.3 Fertilizer (by stockists/distributors) 4.6 4.0 8.6 (4.6) (4.6) 4A Consultancies- 4.1 Technical assistance/training - 7.1 - 7.1 CT-1) (7.1) 5. MJ.laneous: S.1 Refinacing PPF 0.1 - 0.1 (0.1) (0.1) 5.2 Reimbursing TA U (ongoing) - - 1.2 - 1.2 (1.2) (1.2) 5.3 Recurrent costs - - - 5.9 5.9 Total 8.0 25.1 34.9 68.0 (8.0) (25.1) (33.0) Nabo: (1) FiguPs in panesi rpret IDA financig. (2) NBF Not Bank-financed. (3) IDA fing subtotals do not add to total becas, of oming. (4) - meam not applicable  -26 - Schedule B Page 2 of 2 IDA Disbursements Amount of the Credit Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed (1) Civil Works for: 65% (a) Emergency Road Repairs 2,190,000 (b) Others 2,810,000 (2) Sub-loans for: 40% of Sub-loans (a) Vehicles, Trailers and 3,000,000 Equipment (b) Maize 3,650,000 (c) Fertilizers 2,780,000 (d) Equipment for Farm 150,000 Rehabilitation (3) Consultants' Services for: 100% (a) Maize Marketing 3,285,000 @b) Others 3,650,000 (4) Training 1,015,000 100% (5) Refunding of Project 50,000 Amounts due Preparation Advance pursuant to Section 2.02 (c) of the Credit Agreement (6) Unallocated 1,520,000 TOTAL 24,100,000 Estimated Bankl/DA Disbursement Schedule (USD million) Projet Year FY 93 FY 94 PY 95 FY 96 FY97 pY 98 FY99 Annual dibursemnt 2.0 6.0 8.0 6.0 6.0 3.0 2.0 Cumulaive annual Disbusemet (USD million) 2.0 8.0 16.0 22.0 28.0 31.0 33.0  -27 - Sche,ul,e C Zambia Agricultural Marketing and Processing Infrastructure Project Timetable of Key Processing Events (a) Time taken to prepare: 16 months (b) Prepared by: Barnabas K. Zegge (Irask Manager), lain Shuker (Economist), Chaim Helman (Division Chief) (c) First MlA Mission: September 1991 (d) Appraisal Departure: March 1992 (e) Negotiations: May 20, 1992 (t) Planned date of effectiveness: September 15, 1992 (g) List of relevant PCRs and PPARs: None  -28 - Schedule D Page 1 of 2 Zambia Agricultural Marketina and Processing Infrastructure Project Statement of IFC Investments as of February 29, 1992 invest FY Obligor Type of Business Loan Equity Total Number USD Million 216-ZA 1972 250-ZA 1973 Zambia Bata Shoe Shoes 2.1 0.2 2.3 307-ZA 1975 394-ZA 1978 Century Products Ltd. Plastic Wrap 0.9 0.2 1.1 324-ZA 1976 Dov't Bank of Zambia Dov't. Finance 0.5 0.5 632-ZA 1982 Ehanol Co. of Zambia Chem/Petochem 3.7 0.6 4.3 1001-ZA 1988 Gwembe Valley Dev't. Food/Food Proc. 3.7 0.8 4.5 1132-ZA 1989 Masstock (Zambia) Food/Food Proc 8.2 8.2 527-ZA 1980 721-ZA 1985 Kafue Textiles Texdles 10.7 10.7 743-ZA 1985 Mpongwe Dv't. Co. Food/Food Proc. 1.8 0.3 2.1 709-ZA 1984 Zambia Hotel Prop. Tourism 22.4 22.4 483-ZA 1980 600-ZA 1982 ZCCM Mining 53.1 53.1 Total Gross Commitments 106.6 2.6 109.2 Less: Cancelations, teminatons, exchange adjustments, repayments, writ-ooffs, and sales 61.7 1.6 63.3 Total commitments hold by IFC 44.9 1.0 45.9 Total undisbursed 6.5 0.0 6.5 Total disbursed 38.4 1.0 39.4  -29 - Schedule D Page 2 of 2 Zambia Agricultural Marketing and Processing Infrastructure Project Status Of lank Growp Operstions In ZAJIA PFDUR25 - Sumury Statummet Of Lons w1 IDA Credits (LA dit, as of 4/3092 - NIS date as of 06/05/92) ................... .......................................... By Comtry Country ZAMBIA bauovt in USS million (ioss cancel loticns) Loan or Fiscal Undis- Ctosing Credit No. Year Borroier Purpose a IDA hused Date ...... .... ..... ....... ....-- ...... ..... Credits 19 Credits(s) csed 467.6 C14370-am 1984 ZAMBIA FORESTRY III 22.40 7.79 09/30/92(R) C15290-ZAN 1985 ZAWIA FISHERIES 7.10 7.73 12/31/91CR) C15750-ZAN 1985 ZAMBIA RUYS. IV 20.00 23.85 0630/92(R) C16790-ZAN 1986 ZAMIA TAS II 8.00 6.96 12/31/92 C17430-ZAN 1987 ZAMBIA COFFEE II 20.40 22.48 06/30/95 C17460-ZAN 1987 ZAMBIA AGR. RES.& EXT. 13.00 13.29 12/31/95 C17530-ZAN 1987 ZAMBIA Daz III 10.00 11.37 06/30/92 C22690-ZAN 1991 ZAMBIA MINING TAS 21.00 20.37 06/30/97 C22730-ZAN 1991 ZAMBIA SOCIAL RECOVERY PROJ 20.00 16.16 07/31/97 TOTAL mader Credits a 9 141.90 130.00 Lowis 28 Loans(s) closed 582.13 All closed for ZAMBIA fOTAL tutor Looms J 0 T0TAL*** 582.13 609.66 of ffhkh repaid 355.58 1.06 TOTAL held by Bank & IDA 226.55 608.60 Amdunt sold 28.58 of which repeid 28.58 TOTAL urdisbursed 130.00 Notes: * Not yet effective e* Not yet signed *-*' Total Approved, Repetzents, and Outstandigw balanee represent both active wd Inactive Lois and Credits. (R) ndicates fonnlly revised Closing Date. (S) indicates SAL/SECAL Loans and Credits. The Net Approved and Bank Repaywents are historical value, all others are iarket value. The Signing, Effective, eid Closing dates are based upon the Loan Departrmnt offical data and are not taken from the Task Budget file.  - 30 - Schedule E Action Pkzn to Accelerate Disbursements In Zambia The disbursement record for loans to Zambia has been extremely poor in recent years. Zambia's withdrawal rights were suspended between May 1987 and March 1991 and again between September 1991 and February 1992, preventing disbursements in these periods. In periods when Zambia was not under suspension, disbursement was still slow as a result of poor implementation capacity and procurement procedures in the Government. A summary of the portfolio status in Zambia is presented in Schedule D, Page 2. In order to accelerate disbursements in Zambia, the Bank is supporting a technical assistance project to increase capacity within the Government to manage projects in the long run. In addition, the Government has agreed to hire private sector consultants to monitor and evaluate projects, thus increasing the Government's capacity to manage projects more efficiently in the short run. The Agriculture Division (AF6AG) has a plan to improve the implementation performance of its portfolio. This program will require closer monitoring of project implementation, and will require action on the part of the Government if implementation is not proceeding as expected. The Government will be informed of actions needed to improve implementation, and will be required to act on these requests or face penalties, such as suspension of disbursements. It is the division's policy that projects will not be allowed to remain rated at an unsatisfactory rating (a level of 3) for more than one year. ITese procedures will improve implementation performance, and therefore, accelerate disbursements. If found successful, these procedures will be adopted across all sectors in AP6 countries. This project in particular, has addressed the issue of ensuring accelerated disburements by taking the following steps; (i) requiring the Government of Zambia to hire private consultants to develop and execute a monitoring and evaluation program for the project; (ii) placing as much of the implementation responsibility as possible in the hands of the private sector and providing them with the correct incentives to perform these functions efficiently; (iii) laying out a detailed supervision plan; and (iv) requiring the employment of consultants in the early stages of project implementation.  -31 - Annex 1 Page 1 of 2 Zambia: Economic Indicatrs., 1989-94 1989 1990 1991 1992 1993 1994 Projete (In rieret chune Real GDP -1.0 -0.5 -1.8 2.0 3.0 4.0 Rel non-mining GDP -1.7 -0.7 -0.7 2.1 3.1 4.1 Real per capita GDP -4.4 3.9 5.1 -1.4 -0.5 0.5 Real onsumptin per capita -10.1 -3.0 -2.8 -4.9 -5.6 0.2 Terms of tradeo' 9.4 -1.1 -7.3 -8.8 -6.9 -3.8 Consumer prices (end peiod) 158.0 105.0 95.0 45.0 15.0 5.0 Export volume 3.1 6.8 -17.4 7.6 4.8 3.5 Copper 8.4 2.0 -14.8 40.1 2.2 2.3 Non-coppe -14.9 27.9 -27.1 39.2 12.5 6.6 Import VOIUme!' 8.4 15.9 -11.5 11.3 -3.1 1.5 Real exchange rate (d iation -) 32.3 -16.4 -9.9 Money Supply (M2) 65.3 45.8 98.1 25.0 10.0 5.0 ain oercent of GDP) Grms domestic savings 13.7 16.6 12.0 12.6 14.0 14.5 Gross national savings 6.0 13.8 15.3 18.2 16.9 15.2 Central Govt. -4.9 -1.8 1.2 5.2 3.1 3.8 Nongoveameat 10.9 15.6 14.1 13.0 13.9 11.4 Unrequited Uansfes and net fador -7.7 -2.8 3.3 5.6 2.9 0.7 income1 Gros domestic investment 9.9 17.3 135 19.5 20.0 20.5 Central Govt 4.7 5.4 7.3 4.9 4.5 4.7 Nongovemment 5.3 11.9 6.2 14.6 1S.5 15.8 ConSuption 86.3 83.4 88.0 87.4 86.0 85.5 Central GOVt. 14.1 11.1 10.3 10.5 10.8 10.9 Nongovenment 72.2 72.3 77.7 77.0 75.2 74.7 Extnal curent accounet -4.0 -3.5 1.8 -1.3 -3.1 -5.3 Metal sector 18.0 16.9 15.7 11.8 9.9 9.1 Nonmetal seOCor -22.0 -20.4 -14.0 -13.1 -13.0 -14.4  - 32 - Page 2 of ' 1989 1990 1991 1992 1993 1994 Projeted Goverment domestic revenue 17.1 17.6 17.0 17.5 17.7 18.0 Governmen ants- 2.1 3.8 6.8 8.2 3.3 2.3 Govrment eWxnditure 29.5 29.1 30.9 27.7 23.4 21.4 Govenment defict Acoral basis -10.3 -7.7 -7.1 -2.0 -2.3 -1.1 Acual excluding 6.6 -4.2 6.5 -1.4 - 0.5 gants and interh Domestic financing of govenunt 6.4 2.6 6.1 2.5 -0.3 -1.0 dect (not) an =rgent of eaoot of oods and s a Debt sevce (pocrual)f 58.0 60.2 65.2 66.2 61.7 51.5 Extnal hnteret (accrual) 28.9 28.3 30.8 32.1 29.3 26.2 an D Commeci banik lending rate 35.0 40.0 46.0 51.0 - - (end of peiod) Sour: Zambia Policy Frmework Paper, 1992-94 2 Copper price (UsDAlb): 1.29 1.21 1.06 0.90 0.90 0.88 23 Impost volume growth in 1992 is inflated by emaergency ma impos and resockdg of fetizer and petroleu; these htors serve to deprs import volume grow h I1993. A Assuming that bulk of extemal financing gap is filed wlth gnuts. Exludes payment of smart. Prteiminay Bslimate  IBRD 23688 ZAMBIA , r TANZANIA AGRICULTURAL MARKETING AND PROCESSING zr INFRASTRUCTURE PROJECT s/. PROJECT AREA TRUNK AND MAIN ROADS( I(/ J 5 @ ~~~~PROVINCE CAPITALS SECONDAR YOR DISTRICT ROADS Qnnw r V * ~~~NATIONAL CAPITAL r RIVERS ' 1