Zambia - Prospects for sustainable and equitable growth

Report No. 11570-ZA Zambia Prospects for Sustainable and Equitable Growth August 23, 1993 Country Operations Division Southern Africa Department FOR OFFICIAL USE ONLY i:;ePort No: 1157C ZA ~~ Ty Pc: ~~~ECO '~Rtpor-t No: .1.1570 ZA-~ 44 f~~~~ype': ECO  (Kwacha per U.S. DoUar) bar Kwacha Der U.S. Dollar 1980 .79 1981 .87 1982 .93 1983 1.26 1984 1.81 1985 3.14 1986 7.79 1987 8.89 1988 8.82 1989 12.90 1990 28.90 1991 61.70 i992 171.00 r>fsl1 Ea Lo fo Weigbd and Masum 1 Metric Ton (ronne) = 1000 Kg. or 2,205 pounds oxrmnnWmt d Rkc fir Zfib Had Year January 1 to DDecnmber 31  FOR OMFCIAL USE ONLY BOZ = Bank of Zambia CPI - Consumer Price Index CSO Central Sisties Office DBZ - Developmet Bank of Zambia DC = District Council UDI =. Gro Domestic lIvestment GDP G aross Domestic Product ODS Grs Domestic Saving GNS = Gtross Nadona Saving GRZ = Governt of the Republic of Zambia BUD Harvard Instt for Intelational Development IMF Intaonal Monetary Fund INDECO - ndstra Development Corporation MOF = Ministry of Finance MOB = Ministry of Health QOL = Open Gena Lkes PE Pesna Emoluments PER - Public ExpWdre Review PFP - Policy Famework Pper PIP - Public Investment Program PSM - Public Sector M _anemen RDC C Recurren De e Chare ZAC = Zambia Airways Corporaton ZCCM - Zambia Consolidated Copper Mines Ltd. ZIMCO * Zambia Ldustry and Mining Corporation IThis documt bm a trBsicted dbrbuin and my be and by tciponts only In * peufama= of tb*olllcb dutie Its comtets mgy rm t 0is be d_loe witbout W*Ml Bank auwaidov  General Area (km square) 733000.00 Population (mtIllons), 1990 8.11 Growth Rate (latest decade) 190M1990 3.70 Density (per km square) 10.00 Soclet Indicators Populatfon Charactoristics Crud. Birth Rate (per 1.000) 48.70 Crude Doeath Rate (per 1,000) 14.90 Heatth Infant Mortality (per 1,000 ltve births) 82.10 Populatlon per Physician 7154.00 Population per Nospital Bed 466.00 Incom Distribution (2 of national inco}m) (15-20 years ago) share to top 20X of households 63.00 Share to bottom 20X of housedolds 4.00 Distribution of Lawd Ownership X Owned by Top 10X of Owners 2 Owned by Smallest 10* Acess to Safe Water 2 of Urban Population 76.00 2 of Rurat Population 41.00 Access to Electrieity X of Urban Population X of Rural Population Nutrition Daily Calorie Supply Ccataries per person) 2077.00 Dloy Protein Supply (gram per person) 53.00 Education Adult Illiteracy Rate (2) 27.20 Primary School Enrollment (2 of school-age group) 95.00  Gress tiiroA 1991 ~~~~~~~~~~~~~~.......... .......... . .. ................................................. hwm Grih b (S p.o..,estn prim) Wu it Xof SW 1970.76 1976-61 11-66 M6 19 1969 190 19t ..................... .................................... ............................ .......................................... IPat frb Pralem SU 3 100.0 2.9 1.6 -39 10.0 3.6 4.9 0.8 -4.0 Gros oeetis tw , st 516.5 1.0 -7.3 -6.4 -0.3 -3.0 4.7 -6.9 46.8 73.3 Groe" atiol Winp 517.2 15.0 .14.1 -27.5 .. .. 14.2 -9.9 3719.0 20.9 Cu0 Acont lUl_m 8.0 0.2 .. . ... ... ... lparor of 3 1166 lil.0 33.6 3.2 *7.z -0.5 .5.9 -5.9 -1.4 159 -16.6 IWO ts Gook A Ws IMLO 36.4 -5.3 -6.T -2.4 2. -0.2 -16.2 -6.4 -6.9 OI per ppit 21V (WN 412.6 11.9 3.5 5.9 -7.3 6.0 -0.2 1.3 -2.7 -7.0 output 3W m _ t, ad PC.VBivi2ty 1991 Value Added Vatuo Added Ldo Forc pw Vke ... ........ _........... ..................... _ ........................... P1 X ot Total "Nltios X etototl MX of Avere ........................................ ....................................................................................__.._____. oos* . _..____.. A Urioults 0.6 15.7 o.on 14.7 82.1 106.7 try 1806.5 47.2 , 0.146 29.5 12421.0 160.3 NWsaeotur(ng 1392.4 36.3 0.060 12.2 239.2 296.0 linfng 2m8.6 7.3 0.OS9 11.9 4m.0 60.9 Cwtnstfton 116.7 3.0 0.06 5.3 4437.3 sr.3 Ilavices 1419.? 5.1 o.m ".8 5147.6 6.4 Totol/Avelg* 350.8 100.0 0.494 100.0 77'9.9 Governwus PitUm e .......................................................................... l Wve_mM =........................ ,.... ............. t9N5)3 1Wt t90 ............................................................................ Current seipt. 41.6 16. 234 Cor l _t Expenditures 56. 2n.0 41.7 Currwnt f D ct 15.2 6.2 1. Cap ta fendisure 17.9 7.6 7.5 ............ .................................................. 1V UWI dmotee mUll.'. of US. 2V Grth rae ar clultd frM current series. 3/ ClB dnote bitt ie local cturrey.  Noey, Credit, ad Price ~ ..................* ,. ,... 196 1984 15 196 1 19 1969 1999 199 9 (mitlaln of CUS I outstaning, eN of period) ane SULPLY 1454.0 1704.0 2101.0 4062.0 6266.0 10126.0 16r79.0 24390.0 46451.0 Snk Credit to Ptbec Sector 2W.0 2811.0 M525.0 3487.0 37m.0 5201.0 6489.0 5584.0 3098.0 Rank Credit to Private Setor 1052.0 1220.0 1352.0 1886.0 2497.0 "S7.0 904?.o 14199.0 24291.0 - (pereentase or Index nmadra) osyXsof GW 34.8 34.6 29.7 31.3 31.7 33.7 27.9 19.1 19.6 Genersl Price Index (1985 a 100) 60.6 72.8 100.0 151.8 217.2 337.8 663.5 1390.6 2689.3 Annl Percentag Chwes in: Goenl Price Index 19.5 20.1 37.4 S1.8 43.1 55.S 96.4 109.6 93.4 8ank Credit to Pubtic Sector 15.3 22.9 107.2 -40.1 8.3 37.7 24.8 -13.9 454.0 lank Credit to Private Sector 14.3 16.0 10 39.6 32.3 78.5 103.0 56.9 71.1 bslane. of Papmnts =................................................................................................ ........... .................., .,,.. 1984 1985 1986 1987 1968 1989 1990 1991 (millions of USl) Export of Goods & IFS 963.5 911.0 731.0 919.0 1214.0 1493.0 1342.0 1168.0 Iaport of Goods & iFS -913.3 -936.0 -809.0 -892.0 -1031.9 -1280.4 -1368.9 -1258.0 (of which Patrols.) 21 -t44.1 -134.7 -72.0 -67.0 -62.0 -103.0 -119.0 -83.0 Resource Ga (deficit in-) 50.2 -25.0 -78.0 27.0 182.1 212.6 -26.9 -90.0 Interest Pa Wents (net) -111.6 -67.4 -80.9 -71.0 -75.0 -72.0 -70.0 -371.0 Othw Factor Payments (net) -165.2 -.141.0 -275.1 -273.0 -336.0 -335.0 -262.0 -12.0 not Private Transfers -34.8 -3S.8 0.0 -30.0 -34.9 -27.7 -43.0 -40.0 1tlnc on Curr. Act. ucl. Net Offieial Tranfers 3/ -261.4 -369.2 -43A.0 -347.0 -263.8 -222.1 -401.9 -513.0 Net Official Transfers 10.2 71.0 43.0 105.3 99.9 71.8 295.5 521.0 Blatnc on Curr. Lcet. mncd. not Official Transtfrs -2S1.2 -298.2 -391.0 -241.7 -163.9 -150.3 -106.4 8.0 Dir et Private Foreign Investment 17.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net NLT Bwrrowing 199.4 315.5 261.S 1S1.8 136.0 105.9 63.7 -178.0 Disbursements 257.3 316.6 362.0 154.2 242.0 208.9 159.7 234.0 Amwotiztion -57.9 -1.3 -80.S -2.4 -106.0 -103.0 96.0 -412.0 Subtotsl -34.6 17.3 -109.5 -89.9 -27.9 -44.4 -42.7 -170.0 Other Capital (net) and Capital n.oJ. -449.2 72.8 9.4 -364.3 -334.3 -211.S -387.1 74.1 Inerease in Reserves () 483.8 -90.2 100.1 454.2 362.2 255.9 429.8 95.9 Gross Reserve (end year) S4.2 200.1 70.3 108.8 134.0 116.2 193.1 1864.6 ...................................................................................................................... 1/ CIS denote local currency units. 2/ Crude and deivatives. 3/ This equtls the total to be financed.  Ierchadso Ewrts (Avere 197-91) .................... ........................................... .......*,................... Value (m ;ll. of WS); X ot Total ....................................... . ............................................................................... 940.4 83.1 CGI)POr ~~~~~~~~~~~~~74.6 6.5 Zinc 15.0 1.3 Manfactured Coom 1Z.6 1.1 All Other Cca.oditla 93.t 8.1 Total 1155.4 100.0 Rate of Exch e (Stll.ng) ...................... ................................................. ..^........... Aravt Averges .................................................. 1986 198 1968 1969 1990 1991 ................................ ................................................................................... USS1.O00CIS I/ 7.7M8 9.519 8.266 13.814 30.289 44.440 CISi.OOuI 0.128 0.105 0.121 0.0M2 0.033 0.015 External Debt, Decebr 31, 1991 =................................................................... =_..... ........._ _.............. ............................................ Pubic Debt, fm . Guaranteed 4954.213 Non-Ibirante-d Private Debt 4 Total Outstading & Disbursed 4958.213 net Debt Service Ratfo for 1991 2Z plercenage Pubtl DObt lnl. uarantee 41.5 onGumranteed Private Debt 0.0 Total Outstandng & Disbursed 41.5 --.................................................................................................. I/ ClS denotes, laol currency uit. 2V Debt service, not of nterest oerned on foreign exchw rerves, as a perenta of Exports of Goods 8 IFS.  I I * I I * I I * I I * I I * . I * 9 I I I I * I I * 1 I * *tw F * I .9 9 I * *m I * ** a I *  * I * I 9 * I I * I I 6 I 6 * I I * I I * I I * S I * 6 6 * S @ . I * I .9 9 I * SWI@ WI * - I I * S I * S I * , I * , I * S I I I * I 8 * I I * I I * I I * S I * I I * I I * I S * I I * I I * I I * 9 I I I I * I I I I I * 9 * I I I * I * I * I * I II (III ii 9 S * I - I f;:i:j : * I  I 1 -*  a  ii  i I *I -I.  PREFACE ................................... i Sumnur andCbntuslo .................. ....... I 1 PART I - REVIEW OF ECONOMIC DEVELOPMENTS 1. Incoue, Output, and nv mnt .................. ....... 10 A. i Evoluton of Lving St rds ........................ 10 B. An Ovravew of conomicP e P..f... ...................... 12 C. Patern and Sources of GDP Growth . ..................... 14 D. nictur1ng.............. . 20 B. Agriculture ....... ...... . .... ............ 21 F. FinancialSystem ........... .. ..... ............. 29 G. AnAnalysi sof ZamblsrGwth Pedonncae ................ 30 2. BalmwofPaymens ..................................... 3S A. MmeCurtAccowun ................................ 3S B. Expots.. . . . . . . .. ... . ..... 36 C. Inaorts ... .. .. . .....40 D. Exwena oowing and Debt Manageen .................... 44 E. Exten Sector Polides 1970-1991 .... . 48 F. Exchnge Rate Policy and M gement ....... .............. 48 G. ImportReguaon .................................. 53 H. Export qho and entives ............ .............. . S7 3. hewn Dstsibutoand Sodal Swim .. ................... 62 A. IncoimeDlslrbeuton .............................. 62 B. SocIIJdklatozs ............................ ... 66 C. IolatlonPreswsres ................................ 71 D. Food Security . ........... . ................... 71 E. Inadequate Supply of Sod Serv ...... . ................ 73 F. PovetyProfie . ............ . ...... 74 G. AdjusabetanddiePo or. ..... ......... 74 H. CboplggwithPoerty ............ 7S  PART - PROPECTS AND CHOICES 4. Cu it -Dlnau and Palty issu ........................ 79 A. j I rDbEimxc ............................. 79 B. Public Secor .................................. 82 C. Socla Policy ..... ... .... ......... . .. ... 84 D. fiStuU ... .... 86 E. ExternalPolicl ............,..... 88 F. PrivateSedot ............ ............ 89 S. Eomic Smouars ...................... . 93 A. Auumptfos ......................... 93 D. xoy eumrra d of Grwth ... ................ 9S - ........... .. ....... .... 95 -effice of resource use . .. ... 99 - .......... * ................. -netln ................ ......... 1o0 C. Agiaurd .. .......... .. 112 D. Fbty .............. 107 6i LaCpulatibs ..................... 112 A. LandtTeaue ............... 112 B. Povert ........ 112 c. Pqn^aWn .......................::. 117 D. DetMaee ...................... 119 E. Eniotf ........................ 122 P. Hedth ............ ....... .............. 124 X. Educaikn ......... ................ 131 AnnexA: A Hitoy of Foreigp Ezdae Markts and Policies In .. bi.....*... 135 Am Bn-I: Propmet fr Non-tradton Exports .. ............... ...... 144 Anne C: Reavld Natonal Accounts Data ........................ .. 175 Annot T consumptio Patterns ad Price Indices............ . ...... . 187 S sdat Appendix .................................. 189  ISM=r and Auhots Ibis report is based on previous economic and sector work and the finding of two misso which visited Zambia in August and October, 1992. Both missions were led by John E. Todd (AF6CO, task mager) and included Changpo Yang ar.i Yvonne Tsi1at (AF6CO). Te second mission al Included Vargha Azad (AFCO), Jan Hendrlk van Leeuwen (contant), Elah Chembe (Resident Mission), Steen Jorgensen and Bert Hofman (AFiPH), and Christna Hartler (desk officer, Swedish International Development Authority). In addtdon, The agriculturo section was writton by Barnabas Zegge (AF6AG), the land section by lain Shubker (AF6AG), and the ficW syem by Simon Bell (AF61E). The report was prepared in consulttdion with a government working group convened for this purpose and chaired by Leonard Nkbata from the National Cmmission for Development Planning. An eadier draft co. to social sector sections was discussed with a group of NGOs and academics under the auspi-.es of UNICEF. ITe mission also spent considerable time with representatives of the private sector, including interviews with over 30 businesses. Assembling the data base and making the economic projections was the responsibility of Vargha Azad (AF6CO). William Easterly (CECMG) served as project advisor. Valuable comments on earlier drafts were received from Gene Tidrick (AI6DR) and Ataman Aksoy (AF6CO). Vince McCullough edieed the final report. Typing and editing was by Ligia Murphy, Georgette Jobnson and Maysue K. Shore (AP6CO).  1. The purpose of this Country Economic Memodum (CEM) is to assess the potent for and requremet of longer-term, s le economic growth in Zambia, particularly as t reates to improving the living standards of the most disadvantaged. 2. The first r'at looks at economic developments in the nearly thirty years since Zabia's dependence, with pardcular emphasis on economic growth, investment, and the balance of payments. It also examines the distribution of Income and profiles poverty In Zambia. 'Me second part reviews the policy issues raised in the first section and sets out the policy agenda for the 1990s. A number of economic projections are shown based on different assumptions about export growth, improved effciency of input use, and the amount and efficiency of Investment. Finally, some longer-term policy issues are addressed in the context of tAse projections. 3. TIhs report buids on the analysis of two previous CEMs (1984 and 1986), three recent PFPs (1989, 1991, and 1992), the analysis done in preparation for the two recent adjustment credits, and numerous sector reports including a Public Expenditure Review, sector reports on agriculre, transport, energy, and education, and papers on public sector management and debt stMegy. 4. The central issue addressed by this report is whether per capita economic growth is possible in Zambia. There are ample reasons to be pessimistic. Zambia faces daunting obscles. First, the copper sector will continue to require about $150 milion per year (about 4 percent of GDP) in recurring rehabilitation costs In addition to operating inputs just to mainain copper production from existing mines over the decade. Some $500 to 600 million wil be needed over the period 1994-2000 (primarily from foreign investors) to exploit new copper resourc to offset the likely closing of the largest copper mine shortly after the year 2000 This substi investment wiUl be needed just to keep copper production roughly where iti now. Second, the very large xtenal debt means fat ven with generous resheduing and etna assistance and strong growth in non-traditional exprts, Zambia will only be able to afobrd modest growth in imports over the next decade which may constrain the rate of real GDP growth. Third, Zambia begins the process with a deteriorated inrastructure, a poorly developed endowment of human capital, and an overly large and inefficient public sector. None of ihese problems can be fixed quicldy, and all of them will require more Inestme. Add a legacy of over-regulation, a land-locked position, and uncertain regional relatonships, and the reasons for caution in assessing Zambia's growth prospects are clear. S. There are, however, a mmber of reasons for opdmism. Fist, economic efficiency has been so bad that there is considerable scope for economic growth through increased efficiency, even without massive new investment. Second, Zambia does have ample arable land and numerous naual resources (e.g. metals and gemstones). Agricutural growth rates of 7 to 10 percent per year should be possible with the right land policy and price incentives. Thi, Zambia's government is detemined to put economic policies right, to promote the privae sector, to increase public sector efficiency, and to open up export markets. Their commitment to these policies appears strong and genuine. Public support for this approach was evident in the landdide electoral victory of the new government in October 1991 and was confimed in the more recent and equally strong victory in local elections in November 1992.  -i- For these reasons, this rept finds that modest levels of economic growth should be possible, povided there Is contiued policy improvement and generous and creative external support. 6. Te time frame of this report i somewhat longer than t lost recent work on Zambia. be fous In recent yes, pariualy by the World Bank, has been on the clearance of ars (twice) and the genea resumpon of an internationally supported reform program. With tht estiblished, it Is Impota to take a longer perspective. While growth In the short term depends heavily on such factors as copper prices, weather, and external aid flows, longer-tem sustnable growth depends more on export growth and the quantity and quality of Investment becase unless these increase, any short-term increases in growth will not be sstained. A longer perspective also emphasizes the crucial importance of some policy areas (e.g. primay education and family planning) whose Impact on economic growth may be significant only in the longer-term. 7. This report puts the living standards of average Zambians at center stage. Economic growth is not important in itsef. Growth is a means to an end, and the end being sought is the Improvement in the standard of living of all Zambians, in partcular those living at or near sbsistence. To keep thes objectives in mind, all observers of the Zambian scene should be encouraged to monitor the actual living standards and well-being of Individuals, rather than relying only on national economic statistics of questionable quality. We should try to n easure the quality of public services, not just the amount spent on them. We should look at the utrltion&. quality of people's diets and not just at per capita GDP. The performance of a Bank project should be measured by Its impact on the beneficiaries and not on the smoothness Of disb . We should also be asking how the fruits of this development are being shared. A cetain umnvenness is inevitable in any growth process, but if large sections of the most vulnerable do not participate at all (or even suffer losses in real income), then the ultimate objective of widesread improvement in living standards will have been missed. 8. The audience of this report is expected to be the Governmt and private sector of Zambia, donors, and the Bank For the authorities, it is hoped that this report will help them to sort out policy priorities and to set their current policy efforts into a longer term strategic context. For the donors, the report is intended to give a longer-term vision of the exter support Zambia will require, in combination with these internal improvements in economic policy, in order to make economic growth possible. Within the Bank, the intention is to provide a longer-term policy perspective and a sense of economic priorities to assist in the development of the Bank work program in Zambia.  -1- SammWa~nd C2Sbgu 1. The standard of living of most Zamrbans has deteriorated sharply since its peak In the early 1970s. The immediate cause was a drop in copper prices (and an increase in world oJI prices) that reduced Zambia's capacity to import, but the failure of the economy to recover from those shocks has been due primarily to the excessive publicsector role In the economy, with its attendant Inefficiencies and rigidWes. Modest reform efforts In the 1980s began to turn the econmy around. The new governmen, elected in October 1991, has strengthened the focus of (and commimen to) an ambitious economic reform program that could achieve susainable and equitable growth, provided govemnt continues its policies of market liberalization and public sector Improvement, and provided the international cmmunity provides sustained and generous support. Histoi and 8alloud 2. Before Independence in 1964, Zmbia's formal economy was dominaed by the copper sector and heavily controlled by non-Zambians. All but those few Zambians with jobs in the mines or with government were outside the formal economy, predomi In subslsAsce agriutr. The government was committed to using copper revenues to improve public srvices and to bring mare Zambians into the formal sector. Although policies toward the privat sector were relatively liberal and benign at the outset, a growth strateg based on parastatals became increasingly dominant. By the early 1970s, Zambia had become a classic case of a public sector-led economy with excessive controls, parastatal monopolies, and a pro- urban, anti-agricultural bias derived in part from a distust of the private sector based on the colonial experience. 3. The result was that, in the first ten years of Independence - when copper prices were Increasing, investment was high, and nearly all exter signs were positive - Zambi's economy grew by only 2.4 percent, well below the rate of population growth. Some impressive gains were made in providing public services, but the groundwork was not id for sustainable growth, and the limited flexibility inherent in a public sector-led economy (especialy with low public sector management capacity) was to prove Zambia's undoing in the decade that followed. 4. The severe detearioron in Zambia's terms of trade in the latter half of the 1970s (together with the reduction in copper output) severely restricted the avalability of foreign exchange and reduced economic growth. Necesary adjusme were not made. Expecting good dmes to reur, the reaction was to borrow heavily, to increase the share of income going to consumption, to resist exchange-rate depreciation, and to increase distortions caused by direct controls and parastatal dominance. A private sector-led economy might have been forced to make rapid and large adjustmes. Unftnaly, Zambia's economy could not (and did not) adjust, and the resut was one of the world's worst economic growth performances over the past 17 years. 5. Ihe big effect of the terms of trade shock was the strikng fail in national income, more than 30 percent in 1975 alone. (See Chapter 1.) Experience of other countries suggests that Zambia's terms of trade deterioration in the mid-1970s would account for a drop of about one percent a year in output growth. In fact, average anmnal GDP growth feU from 2.4 percent in the first decade after Independence (already a disappointment given the high level  -2- of expots and Investment) to 0.7 perceat a year in the next 1S years. This larger fal sem to have been due to the Inherent inflexibility In an economy dominatd by the public sector, and to the refusal of the govenmet to me the necesary adjustms. Moreover, the epeience of other counties sugget tt policy deficiencies In Zambia would account for a shortfall of more than 2 pecent a year throughout the endre period. ITerefore, in explining Zambia's dramatic drop in nationra incme, deteriorating terms of trade are the main culprit. But it Is natonal g j that determines the long-term well-being of nations, and here the main problem has been poor policy. In terms of national gojj, the main question is not why there was a drop In GDP growth after the mid-1970s but why GDP growth was so low throughout the period. With proper economic policies, GDP growth could have been S percent in the first decade ae Independence and 4 percent In the more difficult decade that followed. Supporting that point, output growth did Improve modesly in the late 1980s, despite a declining rate of investmwnt, because of some pari but important policy liberalizations and improveme in the availability of foreign exchange. 6. The blac of pa has been a major deteminant of t>e level and pattem of economic growth In Zambia. Zambia is heavily dependent on copper export earings. Non- metal exports have been limited by an overvued exchange rate and by policies that discouraged production of export products where Zambia appears to have a comparative advantage, pardtularly in the agdcultural sector. (See Chapter 2.) The fall In copper proceeds has been due to declines in both production and price. The world copper price divided by the average cost of traded manufactured goods declined by 63 percent from 1970 to 1985. 7. Zambia's economy was highly dependent on Imports for consumer goods as well as Intemediate and capital goods during the copper boom. This dependency restricted growth Prospects as import capacity decreased. Most Import reduction was in consumer goods, but Imports of intemeda and capital goods also declined. Zambia's import dependence (measured by the import/GDP ratio) is now below the average for Sub-Saharan Africa. 8. Zambia debt Is one of the highest relative t ntional output and exports. Substantil borrowing was done in the late 1970s and early 1980s to offset lower copper ekports. Unfortunaely, the loss In exports was so large that even Zambia's huge borrowings (over $500 million a year in 1983-87) was not enough to msainain real imports. Moreover, much of the borrowing went for consumption (or, more excly, it permitted conSUMPtion to be higher than it otherwise would have been) and so did not contribute to economic growth or to debt-svicing capacity. Inability to adequately service the debt caused the debt stock to continue to increase in the 1980s, even after most borrowing had ceased. Although generous reschedWing and increashigly soft terms should keep the debt service/export ratio to just over 30 percent over the next five years, the large debt stock will have to be addressed more directly If Zambia is ever to achieve sustinable and self-sufficient growth. 9. The consequences of eral shocks and poor economic performance have been felt by all Zamblans and by al parts of the economy. Formal sector real wages have faUen to less than half of their peak levels. There has been greater equality In wage distrbution in the formal sector but only because higher wages have fallen more rapidly than lower wages. Ionnal sedor eaings have also fallen sharply. Povery over time is not easily measured in Zambia due to the poor quality of the data, but it appeas that both the extent and severity of poverty have been incrang, at least over the past decade. This is confirmed in related social niators, such as those on malnutrition and infant mortality. The quantity and quality  -3- of social sevices have also suffered both ftom dhe decline In real resources and the inadequacies of public-setor management, including spending too much on salaries and new capital projects and too lte on rehabilitation of existing facilities and provision of operadng supplies. Within sectors, there has been :io bigb a percentage allocated to largely urban high-cost subsectors, such as hospitals and universities, and too little on more essentW and widespread services provided in primary health and education. Currnt &Wic Issues 10. The guiting principles of economic policy in Zambia should be to promote private sector growth and to establish a more efficient and equitably focused public sector. The first requirement of both wiUl be to reduce inflation, and the key to that will be for the Zambian government to live within its means. Beyond that, the major public sector Issues will be prvatization, public sector mmanamen (including wage policy), promotion of free and open markets, and the provision of vital public services. 11. The central cause of inflion has been fiscal deficits. Tricks or technical solutions will not wort Zambia must contain spending and ensure adequate revenue to eliminate public sector borrowing from the banking sector. Spending on subsidies (apart from drought alleviation) has already been reduced and should be eliminated, particularly subsidies to parastatls, such as Zambia Airways. Budget provisions for input and output credit in the agriculture sector should be ended, except for the costs of a modest strategic reserve for maize. Wage spending should be held to about 4 percent of GDP, with savings from retrenchment used to provide higher wages for skilled workers. Spending on defense and paramilitary forces should be kept to a minimum. Some areas of public spending will require more resources, (for example, primary health and education, water and sanitation, and infastructure.) Most of the extra resources for these should came frcm reduced spending elsewhere and increased user fees, but some small increases in the revenue/GDP ratio may be necesary. In any case, structura reforms in the area of taxes and tariffs that might substantialy reduce revenues should be avoided, particularly in the short-term when reducing ifion has priority. Improved budgetary planning, monitoring, and control procedures will also be required. The move to cash budgeting in 1993 will help, but strengthening of monitoring and control mechanisms will sfill be necessary. 12. MainhinIg a market based ex,z=bant (together with condnued liberalization of administrative barriers to export) is another essential ingredient if Zambia is to achieve sustinable economic growth. An overvaued exchange rate has been a major cause of inefficiency in the past 15-20 years, because it led to a plethora of administraive controls on imports and provided insufficient incentives for expanding non-metal exports. Considerable progress has been made in the past few years, and Zambia now has one of the most liberal foreign exchange regimes in Africa, with an exchange rate that is based on market forces and appears to be balancing supply and demand. Given the need for continued import compression and export expansion, it is essential to avoid any overvaluation of the Kwacha, because that would likely result in the re-imposition of administrative controls, cut off the anticipated non-metal export boom before it started, and send a powerful signal to the private sector that governmaent is not prepared to see the reform process through. 13. The excessive role of the public sector was a major reason for the low efficiency of investment and the inability of the economy to adjust to terms-of-trade shocks. Reducing that  .4- role, therefore, is another priority of the new goveraments economic refom program. It contains two principal elements - privtizatlon and deregulation. 14. Improves management efficiency, not so much because managers will be suddenly smarte but because the new and stronger incenives are likely to induce more efficient behavior. The dsrtcoming of parastatal management in Zambia are pardcularly evident in their failure to adapt to changing market signals and their inability to shed mes opaing costs when necary. Privaization should also increase feign investent and ease of new entry. Existing businesses, especially those operating with some success, may be more attractive to investors an starting a project from scratch. Moreover, transferring parastls to the private sector, sometimes including breaking up an enterprise Into several companies, should help to break the effective monopoly of some firms. Opening up the metal mining sector to private sector capial and experdse will be particularly Important if the sector's efficiency is to continue to improve and if the necesary capital is to be found to replace declnn ore deposi. To maintain copper production from existing mines, US$150 miSlion a year wilt be needed for rehabilitation and operating puts over the next decade, some US$500 to US$600 million wil also be needed (mainly from foreign investors) to exploit new copper resources. 15. DKreua wil be particularly Important because the government has played such a major role in regult industry in Zambia over the years. Moreover, the major loser from over regulation has often been the new businesses, often beginning in the informal sector, which have the potenti to be a major source of new growth and poverty alleviation because of more appropriate labor costs and greater flexibility in production technique and Import dependence. Further deregulation wiUl not be easy, however, because the obvious steps have already been taken. In price control, for example, the price limits have been elisr aed and the Prices and Income Commission abolished. For other regWulo interventions, however, reducing the heavy hand of gov ent will mean rewriting long and complicated sectons of Zambian law. This will require skilled labor, including both substantive expertise and legal drafting skills. Considerable training and some short-term technical assistance wil be needed. In some cases, new areas of reguladon may have to be added. For example, with the privatization of natural monopolies and high transport costs often undercuting the role of Imports as a source of market discipline, regulations to assure a competitive market place will be needed. In some cases, quality standards may have to be developed to aid export markedng, but only if these do not become a tool for a cartel building and exclusion of newcomers and small producers. 16. In addition to changing what govemment does, it wil be critical to improve the efficiency of how governent does the jobs it reins. This has three principal elements - parastatal reorm, public sector mangement, and Improving the composition of spending. 17. Many will remain permanently in the public sector, including most utilities which would be difficult to prvatze under present cirance. For these, the challenge wil be to achieve effective commercialization - that is, operating as nearly as possible as if privaized while retning enough public sector control and accountability to prevent abuse of market-power. Intermediate organizations, such as INDECO, should be abolished. They have added little over te years and have resisted a pdvate sector-led strategy and reliance on market forces in the setting of prices and wages.  -S- 18. Zamba"s lac ks adequate capaity to implement mjor policy chges fective and to dliver useM public goods ad service. There are too many employees, partcurly at lower leves; wge are weRl below equivalent pay In the prvae sctor r profe1ssi and skllfed positions; nd the managnt systems do not make the best use of eveo tng ponel. The govnment has made a start in addressing these problems and has adopted a far-rching =Wi1Iuator __MUn M reform agenda In mplen this, the fcs shoud not be only on retechmet, but should emphasize dveloping a profssional cadre of public servns committed to serving public neds. Pofesionalizatio will require wage u for sprior performa and strog management systems i central minstries and at distridt levels. Effectiv management systms in tum will req inased Incentives and beter manaqn informati so th proams and budget can be moniored by senior managers. improvemens are also needed in cm nication and coordinaton. In shor, the government has put too uch emphasi on its role as employer and too lite on its effectivensin sevndg the publc thuh efficien plograms and quaity seice divery. 19. The o aKQl ofin ojt ic ikpn in Zambia has been Wwving in recent yeas, but much more could be done. The emphasis sWuld be on human resource developmen and infrastuctur,both vil to t rswuption of private secor growth. Spending on the military, overseas On, and subsidies to pataas should be kept as low as Possible to ensure spending on vital services (such as prmary health, watr and , primy educaton, and road _e ) can be incrased above th curnty inadequat levels. Withi sectors, ther should be less for the University Taching Hospital nd more for pdmary health care, less fr bulding new roads and more for m, lea for new bloom and more for i ag e efficecy of curnt ail car usage. No budget cu are eas, but these rellcao are enti for growth. (See Chapter 6 for more details on heath nd education and the Bank's recent Puic Expedit Review (Grey Covet Report No. 11420-ZA) for other secto. nfsur Improvement cm cut costs to Producers and consums, thus Ilncraig the profitabbility of Zambia's b and reducing the cost of living to conume. In the longer tem the key to Zambias foture b a heathy and well-educated workorce. Wihout that, dtere will be no substan increase in living stads. The problem is that these invmn take tim. All the more reason to st now, as quiy as possible, to stOp the erosion in Ihman reources. Begnning impwv_ would also be a major boost to the political acceptability of the progm. Zambi may not be able to doue overall per caa consmption very soon, but it could more easily make dramtc and visible ovem In e health and education of its people. This wold be an ecellent place to start in delivering the bft of eoonomic reform. 20. Tho fital major poliy priority is creating the proper evionume for curaing the private secomr. In particular, this mn manag forelgn exhe resources, makIng sure sufficient land is avaiable for new fm and busises, and enng appropdate incentives and itional support to enourage a big Inrase in the quantit and qulity of private investmet. Togethor with population plicy, the provion of vital public services, and proper stewardship of the eavionent, the success of the iitatives will detme th qualiy of life for Zambia over the coming decades. 21. EomLe zmU iludes pmong exports, dependene on impors, managig debt sernice, and making more efbctiv use of ernal . Ibes Wil be patcularly important becs mport avallability will be lmited even under the best of *ci . ITe goal is for nery a doubling in real GDP by the year 2002. Gim the limitations of exUt copper mines and resources, ther Is no way copper exports can double  by then Indeed, it will take considerable effort just to keep copper output constant. External ass is already at exceptional levels. Debt service payments (as a percentage of the huge debt stock) are already rescheduled down about as low as possible. Therefore, two key policy piories wil have to be encouragemet of nontraditional exports and mnmization of dependence on imports, if growth is to proceed under these foreign exchange constraints. At the center of each of these wiU be maintenmce of a market-based exchange rate and the avoidance of the invitable polcl pressures to resist decreases in the cost of foreig excage. Also important for promoting exports are an effective duty drawback system, improvements in infrastructure, and increased availability of export financing. Discouraging the import of luxury consumer goods is understadale and worthwhile, but It would best be done by excise taxes and other broader forms of indirect taxation rather than by tariffs which are often evaded or which encourage artificial and inefficient domestic industries. 22. Short-term debt priorities include the continued pursuit of the most libr terms availe from Paris Club creditors, the establishment of a Qargely donor-fianced) buy-out of commercial debt, and the use of one or both of these techniques to deal with non-Paris Club bilate debt, which Is currently not being serviced. Later in the 1990s, the debt service burden will increase as the amortization of rescheduled Paris Club debt and the repayment of the IMF rights program disbursement, begin. Creative approaches to moderating these burdens wil probably be necessary to ensure sufficient imports for growth over this period. It would be desirable to deal with these longer-term issues as soon as possible for two reasons. First, considerable uncertainty surrounds any estimate of Zambia's copper proceeds, and there is very littde cushion of margin for error in our projections. Zambia's creditworthiness for public and private sector lending (so vital to an increase in foreig investment) will be threatened if Zambia's longer term foreign exchange viability is in doubt. 23. On the donor relations side, the priorities are to keep the balpayment s uppo from failing off too quickdy and to make more effective use of project assistance (including tedhnical assice). There is a feeling among many donors that balance of payments support should only be temporary for meeting the extra balance of payments pressures associated with a one time structual adjustment program. That argument would appear to be less relevant in the case of Zambia. The primary reason for balance of payments support in Zambia is to permit the minimum import growth necessary for a sustained growth padt over the medium- term, given the limited prospects tur copper exports and high levels of debt service. In other words, Zambia's import capacity will be highly constraned over the next 10 years, even if there are major efforts to economize on imports and to expand non-metal exports. (See Chapter 5.) Without some considerable balance of payments suppor throughout the period, import availability will be so constained that the needed economic growth will not take place. On Zambia's side, strong policy performance will be necessary to justify this support, most Importany in containing inflation in the short term. Improvements in the management and budgetng of donor balance of payments support will also be necessary. 24. The problem with ject assistance is not the amount but the efficiency. At more than $200 million a year, project assistance from bilatera and multilateral sources represents over 5 percent of GDP. Assuming that much (and possibly most) of this would be considered inve_tment, this is a large share of total investment in Zambia. Looking at it from a fiscal pespective, tota project assistace represents nearly 20 percen of public expenditure, including provincial and local goverment Therefore, it is essentia tat these funds be allocated to priority uses and applied efficiently. Unfortnately, tat has not always been the  -7- case. Too often this assistance has been supply driven (that is, responding more to donor intcrests than Zambia's needs), poorly coordinated (oth with other donors and with government strategies and programs), and excessively fiagmented. Ther are more thn 100 separate donor-funded projects In agriculture alone, so it Is not surprising that govemnt has little idea of what is going on In many of these. They are often directed by the donors, sted by the donors, and contrbute litde to the development of Zambia's public sector capacity. The most serious shortcoming of this assistance, however, Is that too oen it Is not part of a coordinated strategy. Ideally, government should develop, with advice from donors, an overall strategy of public resource allocation across sectors and of public sector involvement within the major sectors (as Is being done in the health sector). Donors would then be asked to fit their assistance within these strategies. In some cases, there would be only one 'project" In each sector, and all donors who wanted to participate would co-finance it. Assistance outside that project would not be accepted. In other cases, individual projects would remain separate but would be identified components of a comprehensive sector strategy. In either case, more coordination among donors and more strategic leadership from government will be required. 25. Agdicultr has the greatest growth potental of any sector in the Zambian economy over the short and medium term. Arable land is plentiful, and yields are not neady as high as they could be. Zambia is using only 1.2 million hectes of a total 9 million hectares in available arable land. Nearly one million additional hectares is available in already exiting commerci farms alone. Two-thirds of Zambia's land is under customary (traditional) tenure, where the user has no exclusive rights. This makes capital improvements difficult, particularly for emergent farmers (those moving out of subsistence operation towards commercial operation) from whom much of the growth in the next decade is expected to come. Much of the state-held land Is not available for commercil fauming because it has nOt been properly surveyed. Therefore, the short-term priorities are to make better use of unused land aready in commerci fiarms and to accelerate the surveying proc tO make more land available on a leasehold basis. In the longer term, Zambia will need a thorough review of the management of customary land to see what changes will be required to ensure that land availability does not constrain the growth in agricultural output in the next decade. 26. Increased efficiency of ew is expected from more appropriate price incentives and the greater likelihood that they will be followed because most of the new investment will be coming from the private rather than the public sector. Direct finacial incentives (tariff-free imports and tax holidays) should not be necessary, provided the rest of the business environment is positive. Better by far is to work for a uniform tax system with a broad base and low rates, emphasizing indirect taxation over direct income taxes. 27. An increased amount of new investment will be a prerequisite for tainable economic growth in Zambia. The investment/GDP ratio was high in Zambia in the copper boom of the late 1960s and 1970s, but it has declined below the average for Su-Sabara Africa. If the quantity of investment is to be increased significantly over the long term, adequate opporunities and finance will be required. Opporunities should be there, provided the privatization program goes forward, the exchange rate remain at market levels, deregulation continues, and ifrastructure is improved. Finance may pose a bigger chalenge. The first step is for government to stop preempting available credit by cuing the deficit and eliminating the need for public borrowing from the baking system hIcreased direct freign ivestment and improved retaned earnings for existing busies wil awlso help, but Zambia's financial system will need to generate more savings, paricularly widh a long tetm  -8- maturity. Slower inflation will help by stabilizing long-term expectations, but the diversity of fiacial siions and hntruments will also need to be expanded. This will ensure an adequate pool of financial resources for private sector investment expansion, so necessry for longer term sugainable growth. _WIaeidTs nugmI 28. Economic growth is possible in Zambia under the right assumptions. A key assumption of the base case scenario presented in Chapter 5 is that economic policy continues to improve. Other key assumptions are that the copper price recovers to 88 cent a pound by 1995 ad then ises by six cents year to reach $1.20 a pound by 2000; copper output stays rocghly constant as rehabilitation Investments keep production up In the shorttem and the development of Konkola Deep offsets the decline from the N*hanga open pit In the edium-term; nontraditional exports triple by the year 2002; investment as a share of GDP ris from 13 percent In 1991 to 26 percent in 2002, mostly from increased private investment; and lnflation is brought down to 7 percent a year by 1B98 as government deficit borowing is eliminated. 29. On these assumptions (and with contnued strong support from the donors), Zambia's national output can grow at over. 5 percent a year for the next decade (following a strong wcovety from the drought in 1993). Agriculture would be the fastest growing sector at over 7 percent amuaully, primarily due to expanding the land area under cultivation, but also due to Improved efficiency in crop selection and location and improved yields. Total Imports are projected to grow at over 3.5 percent a year in real terms. Thus the import elasticity would be around 70 percent The incremental capital output ratio would be between 4 and 5 for most of the period. Ppulation growth is projected to decline from its current rate of 3.2 percent to 3.0 perent a year by 2002. Together with an increasing investment/GDP ratio, this would mean that per capita consumption would only grow at about one percent per year. 30. Information is inadequate to make specific projections on employment growth or on reducing poverty. Employment, however, should grow at least as fast as output in the private sector, as deegultion Increases oppornities for the informal sector. Rural poverty should be reduced shaiply with Increases in agricultural output and land availability being much higer than popaion growth. Equaly important to the well-being of the low income popuatiWon should be dramatic increases that will be possible in the delivery of vital social services such as health, education, water, and sanitation. 31. ZambIs cuTren rate of population growth is not compatible with long-term economic gowth and significant Improvements in health and education. The low prevalence of Contracepive use (9 percent) creates a vicious cycle of population pressures that lead to poorer public srvices per capita, which in turn lowers incentives to have fewer children. Zambia must take Immediate steps to pem citld spacing through provision of family planning services. Major increases in per capita incomes wiUl not be possible unless the rate of population growth is substantially reduced. In the short-term, this will have negligible impact on output as most of the reduction will be in the number of children. Such a reduction, however, wi lower the dependency ratio, thereby significantly allowing Improved nutrion and health cae for all.  -9- 32. On health, the government has proposed a fudamental hift towards a basic package of quality health care as close as possible to people's homes. Inertia In the preset systm i strog, however, and teriary care facilities still take a large share of health resource. In eucation, the Qoverment has taken steps to ensure donor fuding for critical inputs to prmary education and has developed a policy framework. The government's commitmet to educatin and health will need to be demonstrated by improved budget alocati f the quant and quality of services are to be increased. Household food securty and nutrition remain a erious concern in Zambia with chronic malmurition well above the rae in counties at similar levels of development. For economic growth and improved agricultura production to translate Ito lower malnutrition, will require development of a consistent policy, increased capacity building for key insiutions, and a combination of agriculuWal diversification and nutrition i'nforatdon interventions. 33. In summary, the prospects for Improving living standards on a long-term sustainable basis in Zambia are limited by the constraints on foreign exchange availability, due In turn to the rnning down of the copper resources and the debt service burden, and by the legacy of inapropriate public policies which have resulted In a deteriorated infrastructure, an efficient public sector, inappropriate public spending priorities, and a private sector only beginning to look beyond the vagaries of public sector controls to taking profiable advantage of emerging market signals. Ihe Impetus for growth in the short-term will have to be greater efficiency brought on by incraed reliance on market prices, reduced regulation, incased land avalability, and improved utilization of existing unused capacity In those sectors consistent with Zambia's comparative aivantage, with the areas of great promise being agriculiture and non-traditional exports. In the longer-term, the primary challenges will be to develop Zambia's human capital, to deal with the debt burden, to increase the rate of domestic inveutment, and to reduce the rate of population growth.  -10- I. lENCOM E OUTM ANItIVE- A. The Evotuion atLLilgihards 1.1 Living standa"ds for the average Zambian have been decreasing since about 1970. Figure 1.1 below shows on a per capita basis domestic production (GDP) and nationa income (GNY), adjusted for inflation. Table 1.1 shows additional data. Looking farst at per capita consumption, we see a gradual but steady decrease sin 1970. Gross national income has an even sharper decrease implying that consumption has represented an increasingly higher fraction of national income. In fact, consumption increased from 56 percent of ONY in 1970 to a high of 102 percent in 1985. In terms of constant 1977 Kwacha, per capita GNP fell by 40 percent from its peak, and per capita GNY fell by 60 percent. The decrease in GNY can be divided into two parts: the decrease in domestic production and the decrease in the terms of trade. These are also shown in Table 1.1. Domestic output has increased, but not as fast as population. In fact, real domestic production (GDP) never increased as fast as popuation in any of the five year periods shown. Zambia's net terms of trade decreased sharply in the 1970s but more gradually in the 1980s. Table 1.1 Ou and Mios of Kwaca in Censtant 177 Prim 1965 1970 1975 1980 1985 1990 Real GDP 1619.3 1743.3 1959.5 1995.8 2044.5 2213.6 Real GNP 1494.3 1598.5 1802.4 1886.1 1740.6 2043.7 Real GNY 1980.6 2481.0 1828.5 1810.7 1664.4 2193.1 Real Totl Consumption 1183.0 1389.5 1410.7 16353 1697.0 1654.6 Popuation (000's) 3700.0 41S9.0 4846.0 5647.0 6753.0 8111.0 Per Capita Real GDP 437.6 419.2 404.4 353.4 302.8 272.9 Per Capta Red GNP 403.9 384.3 371.9 334.0 257.8 252.0 Per Capita (NY 535.3 S96.S 377.3 320.6 246.5 270.4 Per Capita Rea 319.7 334.1 291.1 289.6 251.3 204.0 Consumption__ _ _ _ __ _ _ _ __ _ _ _ _ _ _ _ _ _ Consumpo/ONY 59.7 56.0 77.2 903 102.0 75.4 Iwestmet/GDP 36.7 49.3 51.9 22.0 12.8 15.3 Terms of Tade 178.5 256.6 111. 102.3 89.4 76.3 (1977=100) Rel Imports (GNPS Millions of 77 USS 859.0 1323.2 1530.1 1443.0 702.7 750.6 _ = .. ..  Fig 1 1: e Cka Output & lnptd (coimtun 1977 F*es 500.0 400.0 300.D0_ - = v 200.0 1965 1970 1975 1980 1995 1990 -P P Capa GDP o* Pue C SpaHP Pel Ca  -12- 1.2 lanplomet and Red Earnigs Dvelopmet. lho decin in red earg st in ear ta the declin in per capita income. Real earning In the fornm sector ro by 2.7 percet per yea duing 1965-70, but by 1975 I gin bad all but disppud and aftR 1975, rea wages fell shaply Crable 1.2). b 1991, avage real eaings (wages and emoluments)wer only 30 prcent of the 1975 leve, with a low of 25 pecen for the _ced=g -sector. The rativo gain In agrictual wages over 1975-85 was lost In the lattor part of te 1980s. Despithe tsteep decline in fomal sector re earnings, cn of employee as a share in ai incomme ually rose from 57 pecent In 1975 to 63 percet in 1991 becas employment grew fster income and bocae the hionf sector (which acly has higer average eaings) grow far than the formal ser. 1.3 Ihe wage structu In the formal sector was nreasingly compressed over this perod of decline In wages. Whereas by 1990 the maximm basic unionized wage had declinod to 12 parco of ls 1974 level, the minimum basc wage had only deciied to about 20 perce of the 1974 level. The same pattern could be obseved within the public sector where the decline In wag was much less for the lower-income brackets. Tabs ii