Zambia - Country assistance strategy

Document of The World Bank Report No. 19889-ZA MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF ZAMBIA November 17, 1999 Country Department 2 Africa Region  The last Country Assistance Strategy was dated June 25, 1996 Currency Equivalents Currency Unit = Zambian Kwacha (K) US $1 = K 2,408.96 (as of July 1999) Abbreviations and Acronyms ASIP Agricultural Sector Investment Program CAR Operations Evaluation Department's Country Assistance Review of Zambia CAS Country Assistance Strategy CDF Comprehensive Development Framework COMESA Common Market for Eastern and Southern Africa CPPR Country Portfolio Performance Review DEC Development Economics Vice-Presidency ESAF Enhanced Structural Adjustment Facility ESP Environmental Support Program GDP Gross Domestic Product HOA Heads of Agreement IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund MIGA Multilateral Investmnent Guarantee Agency MMD Movement for Multi-Party Democracy MOF Ministry of Finance NGO Non-Governmental Organization OED Operations Evaluation Department PFP Policy Framework Paper PIRC Privatization and Industrialization Reform Credit PREM Poverty Reduction and Economic Management Network PRSP Poverty Reduction Strategy Paper PSRP Public Sector Reform Program SADC Southern African Development Community SIP Sector Investment Progran SME Small- and Medium-sized Enterprise UNDP United Nations Development Programme ZCCM Zambia Consolidated Copper Mines ZIMCO Zambia Industrial and Mining Corporation ZPA Zambia Privatization Agency ZRA Zambia Revenue Authority Vice Presidents Callisto Madavo, Jean-Louis Sarbib Country Director/Team Leader Phyllis Pomerantz Team Members Laurence Clarke, Hinh Dinh, Colum Garrity, David Kim, Helen Mbao, Kaia Miller, Mushiba Nyamazana, Johannes Zutt  REPUBLIC OF ZAMBIA COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS Executive Summary I. Recent Social and Economic Performance 1 II. The External Environment 6 III. The Government of Zambia's Development Agenda 8 IV. The Bank Group's Country Assistance Strategy (CAS) I I The CAS Process and Links to a Comprehensive Development Framework (CDF) 11 The Challenge Confronting This CAS -Lessons Learned 13 Objectives, Strategic Priorities, and Selectivity 16 Strategic Priority I: Removing Constraints to Sustainable, Diversified Growth 17 Strategic Priority II Improving Governance 20 Strategic Priority III: Increased Access to Basic Services and Direct Poverty 21 Interventions The Bank's Program - Portfolio Management 22 The Bank's Program - Scenarios and Proposed Lending 23 Non-Lending Services 26 Risks and Conclusions 27 Boxes Box 1 Poverty Trends, Social Indicators, and Coping Strategies 2 Box 2 The Basic Steps in the CAS/CDF Process 12 Box 3 Groups Consulted in the CAS/CDF Process 12 Box 4 IDA Lending in Last CAS 12 Box 5 ESW for FYOO-02 26 Box 6 Special Initiatives, Informal Policy Advice, and Technical Assistance 27 Figures and Graphs Graph 1 Aid and Policy 7 Figure 1 Zambia's Emerging Comprehensive Development Framework 9 Tables Table 1 Outcomes Under the Last CAS 13 Table 2 Problem Projects 22 Annexes 29 Annex A2 Country At a Glance 30 Annex B I Selected Indicators of Bank Portfolio Performance and Management 32 Annex B2 Bank Group Program Summary 33 Annex B3 Bank Group Fact Sheet - IFC and MIGA Program 34 Annex B4 Summary of Non-lending Services 35 Annex B5 Poverty and Social Development Indicators 36 Annex B6 Key Economic Indicators 37 Annex B7 Key Exposure Indicators 40  Annex B8 IBRD Loans and IDA Credits in the Operations Portfolio 41 Annex B9 Statement of IFC Investments 42 Annex B10 CAS Program Matrix and Environment Indicators (Appendix) 43 Annex B1I CAS Summary of Development Priorities 54 Annex C Comprehensive Development Framework (CDF) 55 Annex D Client Feedback Survey 61 COUNTRY MAP  i Republic of Zambia Country Assistance Strategy Executive Summary i. When Zambia became independent in 1964, its rich endowment of copper seemed to guarantee a bright future. However, state-dominated economic policies, coupled with falling copper revenues, led to plummeting standards of living. By the early 1 990s, Zambia was among the most heavily indebted and poorest countries in Africa. Following elections in 1991, the new Government embarked upon a far-reaching economic reform program. Despite substantial achievements in liberalization and establishing a market-based economy, sustained growth has remained elusive. Positive growth rates in 1996 and 1997 were followed by a two percent decline in GDP in 1998. A delay in privatizing the copper mines, a steep decline in copper revenues, the heavy debt burden, and diminished external aid flows have limited the Government's ability to reduce poverty. Sustaining reform, achieving consistent growth, and bringing tangible benefits to Zambia's people are the central concerns of the Government and of this CAS. ii. Zambians on average have better access to health, education and water than many of their neighbors. However, since the early 1 980s, the quality of social services has declined and poverty has risen. HIV/AIDS incidence is extremely high, at over 19%, and by the year 2000, some 11 percent of children will be orphans, one of the highest percentages in the world. In the late 1990s, the Government has put in place sector investment programs in education and health to try and reverse these trends and is intensifying its HIV/AIDS prevention efforts. Other key development challenges include sound environmental management, improving governance and reforming the public sector, reducing Zambia's extremely high external debt burden, and ensuring the effective application of core labor standards, such as rights of the child, freedom from discrimination, and the right to assembly. iii. The recent efforts to privatize Zambia's copper industry, along with plummeting copper prices, have brought home the need for a profound change in Zambia's economy. Zambia will have to move away from its dependence on copper and gradually rely more on new products and services related to sectors such as agriculture and tourism. Because of the need to incorporate the Bank's CAS within a new long-term development vision for the country, CAS preparation was based on extensive consultations. Early on in the consultations, it became clear that the CAS process could be helpful to Government in initiating a wider Government-led process to forge a common long-term vision and development framework. Although Zambia is not a Comprehensive Development Framework (CDF) pilot country, the experience with sector investment programs, coupled with concerns about aid coordination and the lack of a shared, long-term vision, provided the impetus to the Government to undertake preliminary work on a CDF for Zambia with its development partners. iv. Based on the consultations and the Government's articulated priorities, three strategic areas were identified: removing constraints to sustainable, diversified growth; improving  ii governance; and increasing access to basic services and direct poverty interventions. These strategic areas provide the basic building blocks for the current working version of the CDF matrix. Further work on the CDF will be carried out by the Government together with its external and internal partners and supported during the CAS period. v. The long-term objective of the Bank's work in Zambia is to increase incomes and living standards for the vast majority of Zambians who are poor. The objective of this CAS is to sustain positive growth rates and show that economic reforms are beginning to bring tangible, measurable benefits to the population. The target is an annual growth rate of at least five percent. However, the base case of the CAS assumes a more modest three percent growth rate based on Zambia's history of periodic shocks. This growth rate will not be enough to significantly reduce poverty in the near term. The challenge for this CAS is to get Zambia on a sustainable growth path that directly leads to more rapid growth and poverty reduction in the future. The base case also assumes that privatization of the copper industry will be substantially completed in an expeditious manner and that Zambia would reach the HIPC decision point sometime in calendar year 2000. Zambia would be spared major involvement in regional conflicts, and the overall governance environment would be satisfactory, enabling substantial balance of payments support from the international community. vi. Base case lending over the FYOO-02 period would total about US$375 million, about evenly divided between adjustment and investment lending. The CAS' strategic priorities directly link to the basic elements of the Government's program and its emerging vision (para. iv). The program has been formulated bearing in mind lessons from the consultation process, the Client Feedback Survey, and OED's 1996 Country Assistance Review. All of these point to the need for more Bank outreach, greater flexibility, and more proactivity in detecting and resolving implementation difficulties. Ongoing IDA-supported activities are spread over all three strategic priorities. New lending during the CAS period would be concentrated on removing constraints to diversified growth (two-thirds of new operations and 75 percent of IDA lending amounts). This strategic choice is based on: a) IDA's substantial ongoing involvement in social sector investment programs with other aid partners; b) as shown in the CDF matrix, the priority given by other aid partners to the social sectors and governance; and c) the short-run strategic importance of growth-enhancing investments given the pressing need for growth and diversification. While the strategy is selective, poverty reduction remains at the center. Without laying the foundations for more dynamic, future growth, there is little hope of improving the welfare of the majority of poor Zambians. At the same time, many of the growth-enhancing operations (e.g. the Copperbelt Services Project and the Local Development Fund) will also directly improve the lives of the poor. In addition, IDA will continue to have a strong presence in the social sectors through its economic and sector work program, which includes a social sector strategy and an analysis of public spending priorities and their impact on the poor; work on the HIPC initiative and the use of debt service savings to increase funding for poverty reduction activities; its direct involvement in sector investment programs and HIV/AIDS prevention; and continuing support to the Government on CDF- related work. Because of this, should gaps emerge, IDA will be well positioned to respond quickly with support to the social sectors beyond what is currently planned.  iii vii. Indicators for the base case include clarity on the terms, conditions, schedule and external financing requirements of the ZCCM privatization; substantial adherence to the program in the latest Policy Framework Paper; satisfactory efforts to improve portfolio performance, including achieving the targets for portfolio improvement in FYOO (no more than 10% problem projects; no more than 15% projects at risk; and at least an 18% disbursement ratio) and beyond; implementation of a comprehensive governance program, with specific actions agreed each year; and budget allocations and expenditures in accordance with agreed priorities and spending targets. Over the past few years, Zambia generally has been operating in the base case. However, there have been periods (e.g., the second half of 1998) when delays in critical policy actions have led to temporary lapses into the low case. As a consequence of delays in the ZCCM privatization, Zambia is currently operating in the low case and will do so until there is clarity on the terms, conditions, and schedule for the privatization. Once these are known, IDA will review the situation. Along with other development partners, IDA may need to increase the amount of balance of payments support in the program for the next two years. Any increase in the amount of adjustment lending, and possible consequent increase in the CAS base case program, will be submitted for approval to IDA's Board of Executive Directors. It is the intention of the Zambian Government to achieve a final disposition in the ZCCM matter as soon as possible and to thereafter consistently sustain performance at base case levels or above. viii. Triggers for the low case during this CAS are civil strife, severe governance problems, a reversal of economic reforms, or a failure to satisfactorily dispose of the bulk of the remaining assets of the copper industry in a timely manner, leading to liquidation of ZCCM. In the event of liquidation, an urgent international response would be needed, given the immediate, adverse social and economic implications. This CAS and other development partners' strategies would need to be reformulated in light of the radical alteration in the country's economic environment and development prospects. ix. Zambia's program continues to be high risk. The legacies of the past have all caught up with Zambia and place its economic reform efforts in constant jeopardy. A failure to successfully complete the copper privatization, a further fall in copper prices, governance actions which hinder growth and/or cause a reduction in external support, and social unrest could derail the program. Continuing regional instability and the HIV/AIDS epidemic pose serious new threats. Although the program has been designed with these risks in mind, there is no simple way to minimize or mitigate them. The actions outlined in this CAS - including inter alia HIPC debt relief; implementation of the governance program, including public sector reform; a more aggressive HIV/AIDs control and prevention program; and work on the CDF are some key actions to lessen the risks and restore Zambia to a sustainable growth path. x. The following issues are suggested for Board discussion: * The proposed program's responsiveness to Zambia's development challenges and risks. * The degree of selectivity in new lending. * Reactions and advice regarding the CDF process and the emerging CDF.   MEMORANDUM OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE REPUBLIC OF ZAMBIA I. Recent Social and Economic Performance 1. Background. When Zambia became independent in 1964, its rich endowment of copper seemed to guarantee a prosperous future. The reality has been vastly different. By 1991, the country was heavily indebted and one of the poorest in Africa. State-dominated economic policies, coupled with falling copper revenues beginning in the mid-1 970s, led to plummeting standards of living. Piecemeal economic reforms in the 1980s were not sustained. Following the accumulation of arrears, Bank and IMF lending was suspended between 1987 and March 1991, and again in September 1991. In November 1991, the Movement for Multiparty Democracy (MMD), a broad coalition party opposing the previous regime, won the national elections. The new Zambian Government cleared arrears to the Bank, and a Rights Accumulation Program was successfully concluded in 1995 to clear arrears to the IMF. Over the last seven years, the Zambian Government has implemented a far- reaching economic reform program, but has not yet been able to achieve sustainable growth. Growth resumed in 1996 and 1997, but was followed by a two percent decline in GDP in 1998. A delay in privatizing the copper mines, falling copper revenues, the heavy debt burden, and governance issues which adversely affected external aid flows have tested the Government's commitment to economic reform and limited its ability to foster growth and bring prosperity to its citizens. Despite these challenges, Zambia reached agreement with the Bank and the-IMF on a new Policy Framework Paper and the IMF approved a new three-year ESAF arrangement in March 1999. Sustaining reform, achieving consistent growth, and bringing tangible benefits to Zambia's citizens, the vast majority of whom are poor, are the central concerns of the Zambian Government and this CAS. 2. Poverty and Social Services. The majority of Zambians are poor, although data suggest a slight lessening in the depth and severity of poverty since the reform program began. Income distribution has also become somewhat more equitable (Box 1). Apart from South Africa, Zambia is the most urbanized country in Southern Africa, and public sector and mining layoffs are exacerbating poverty in urban areas. Most of the urban poor live in squatter settlements with few public services, and live off informal trading. Rural poverty is more prevalent and deeper and is closely associated with geographic isolation. The farther a community is from "the line of rail" (the rail corridors linking the copper-producing region, the Copperbelt, with Lusaka and the rest of Southern Africa), the more likely it is to be poor and lacking in basic services. Less than a quarter of the rural population has access to safe water, and a fifth lives more than 20 km from public transport. The Southern, Northern, Eastern, and Copperbelt provinces account for almost 60 percent of the core poor, while the more sparsely populated and distant Western and Luapula provinces have the greatest incidence of poverty. Female-headed households are more likely to be among the poor. Customary law still inhibits women's equitable access to economic resources, particularly land and inheritances. 3. Although Zambians on average still have better access to health, education, and safe water than many of their neighbors, social and poverty indicators have deteriorated since the early 1980s, and the quality of services has declined. AIDS has reached epidemic proportions: HIV/AIDS incidence is extremely high at over 19 percent and is the major factor behind increasing rates of infant, child and  2 maternal mortality, as well as declining life expectancy. By the year 2000, some 11 percent of children under 14 years will be orphans - one of the highest percentages in the world. Child-headed households are growing in number, especially in urban areas. AIDS has become more than a health issue - it is now a multisectoral development issue in need of urgent attention. Another emerging social problem is the recent increase in refugees fleeing war in Angola and the Congo. Zambia currently has over 150,000 refugees within its northern and western borders and has appealed to the international community for humanitarian assistance. Box 1: PovertyTrends, Socia Indicators and Coping Strategies Poverty Trends (%) Social Indicators (latest available, 1991-97) 1991 1993 1996 Zambia SSA* National Incidence 69.7 73.8 69.2 Literacy (%/6) 78 57 Depth* 62.2 60.6 53.2 Gross Primary Enrollment (%) 89 75 Severity (Core Poor) 46.6 40.5 32.3 Female Primary Enrollment 86 67 Rural Poor (% rural pop.) 88.0 92.2 82.2 Infant Mortality (per 1,000) 113 90 Urban Poor 48.6 44.9 46.0 Ife Mortancy (yers) 43 52 Female-Headed Households 76.9 81.1 73.2 Life Expectancy (years) 43 52 Income Distribution 0.59 0.51 0.50 Child Malnutrition (%) 29 27 (Gini Coefficients) HIV/AIDS Prevalence (%/6) 19 8 *Average distance from poverty line *Sub-Saharan Africa Coping Strategies of the Poor * Abandoning homes to move to unspoiled virgin soils and going back to "slash and bum" shifting cultivation * Reducing food intake or substituting inferior foods (e.g., wild fruit, pumpkin, sweet potatoes, wild caterpillars) * Reducing household items/assets * Begging, informal borrowing, food for work, piecework, walking long distances (90k+) to sell handicrafts Recommendations for Self Reliance and Income Generation (by residents in a poor rural community) e Work hard * Fix the roads, government only to assist * Form fanner groups; do not concentrate on maize only