Document of The World Bank FOR OFFICIAL USE ONLY Report No. 38507 - ZM INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED CREDIT IN THE AMOUNT OF SDR 6.3 MILLION (US$10 MILLION EQUIVALENT) TO THE REPUBLIC OF ZAMBIA FOR A SECOND ECONOMIC MANAGEMENT AND GROWTH CREDIT April 22, 2008 Department; AFTP1 Country Management Unit: AFCS2 Region: Africa 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. ZAMBIA - GOVERNMENT FISCAL YEAR January, 1 ­ December, 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 17, 2007) Currency Unit Kwacha USD1.00 3450 Weights and Measures Metric System ABBREVIATION AND ACRONYMS ABB Activity Base Budgeting AGM Agricultural Marketing ART Anti-Retroviral Therapy BoZ Bank of Zambia CAE Zambia's Country Assistance Evaluation CAS Country Assistant Strategy CEM Country Economic Memorandum CP Cooperating Partners CRB Credit Reference Bureau DFID Department of International Development (UK) EMGC Economic Management and Growth Credit DPO Development Policy Operation DFID Department for International Development EBZ Export Board of Zambia EITI Extractive Industry Transparency Initiative FSAP Financial Sector Assessment Program FSDP Financial Sector Development Plan GDP Gross Domestic Product GRZ Government of the Republic of Zambia HIPC Heavily Indebted Poor Countries HIV/AIDS Human Immunodeficiency Virus Acquired Immunodeficiency Syndrom IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IDA International Development Association IEG Independent Evaluation Group IFI International Financial Institution IFMIS Integrated Financial Management Information System IMF International Monetary Fund iPAF Interim Performance Assessment Framework JASZ Joint Assistance Strategy for Zambia LASF Local Annuities Superannuation Fund LCMS Living Conditions Monitoring Survey MACO Ministry of Agriculture and Cooperatives MDG Millennium Development Goal MoFNP Ministry of Finance and National Planning MoU Memorandum of Understanding MTEF Medium-Term Expenditure Framework NER Net Enrollment Rate NRFA National Road Fund Agency i FOR OFFICIAL USE ONLY PAC Public Accounts Committee PACRO Patent and Registration of Companies Office PE Personal Emolument PER Public Expenditure Review PEMFAR Public Expenditure Management and Financial Accountability Report PHC Preferred Health Center PMEC Payroll Management and Establishment Control PRBS Poverty Reduction Budget Support PREM Poverty Reduction and Economic Management PRGF Poverty Reduction and Growth Facility PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper PSCAP Public Service Capacity Building Project PSM Public Service Management PSPF Public Sector Pension Fund PVA Poverty and Vulnerability Assessment RDA Road Development Agency REER Real Effective Exchange Rate RTSA Road Transport and Safety Agency SAC Structural Adjustment Credit SAG Sectoral Advisory Group SEDB Small Enterprise Development Board SMP Staff Monitored Program SWAP Sector Wide Approach TA Technical Assistance TNDP Transitional National Development Plan WHiP Wider Harmonization in Practice ZDA Zambia Development Agency ZEPZA Zambia Export and Processing Zone Agency ZIC Zambia Investment Center ZNBC Zambia National Building Society ZPA Zambia Privatization Agency ZRA Zambia Revenue Authority ZK Zambia Kwacha Vice President: Obiageli K. Ezekwesili Country Director: Mchael Baxter Country Manager: Kapil Kapoor Sector Director: Sudhir Shetty Sector Manager: John Panzer Task Team Leader: Jos Verbeek This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. ii THE REPUBLIC OF ZAMBIA SECOND ECONOMIC MANAGEMENT AND GROWTH CREDIT TABLE OF CONTENTS Credit And Program Summary..........................................................................................3 I. Introduction..............................................................................................................5 II. Country Context.......................................................................................................6 III. The Government's Program...................................................................................12 IV. Bank Support To The Government's Strategy .....................................................22 V. The Proposed Second Economic Management And Growth Credit...................28 VI. Operation Implementation......................................................................................29 List of Tables Table 1: Key Economic Indicators..........................................................................................8 Table 2: Zambia Selected Indicators: 2006-2010 ................................................................11 Table 3: EMGC II - Credit Milestones.................................................................................29 List of Boxes Box 1: Zambia's Growth ­ Poverty Reduction Potential .....................................................9 Box 2: Good Practice Principles on Conditionality.............................................................24 List of Figures Figure 1: Exchange rates (REER & ZK/USD). .....................................................................6 Figure 2: GDP Growth and Contribution by sector for 1991-1998 and 1999-2007 ...........6 List of Annexes Annex 1: Letter of Development Policy................................................................................36 Annex 2: Performance Assessment Framework 2006-08 ...................................................45 Annex 3: Results Framework and alignment with the strategic priorities of the CASs and FNDP..............................................................................................................................105 Annex 4: Fund Relations Note.............................................................................................109 Annex 5: Country at a Glance.............................................................................................111 List of Appendices Appendix 1: LIC DSA .........................................................................................................113 MAP IBRD No. 33514 The Second Economic Management and Growth Credit was prepared by an IDA team consisting of Anke Reichhuber, Christine Richaud, W. Marie Sheppard, Patricia Palale, Elisabeth Heid, Andrew O. Asibey, Mark Dorfman, Gary Hendricks, Alex Mwanakasale, Pavel Lukyantsau, Paavo Eliste, Ben Gericke, Jonathan Pavluk, Suzanne Morris, Davies Makasa, Susan Mpande, Marjorie Mpundu, Ahmet Soylemezoglu, Mushiba Nyamazana, Kebede Feda, Jos Verbeek, and Ohene Nyanin, Country Manager at the time that the operation was initiated. Valuable inputs were received from various collaborating partners. Peer reviewers were Elena Ianchovichina and Brian T. Ngo. Dotilda Sidibe and Lulu Milinga provided invaluable administrative assistance. 2 CREDIT AND PROGRAM SUMMARY REPUBLIC OF ZAMBIA SECOND ECONOMIC MANAGEMENT AND GROWTH CREDIT Borrower Republic of Zambia. Implementing Agency Ministry of Finance and National Planning. Amount SDR 6.3 million (USD10.0 million equivalent). Terms Standard IDA terms with 40 years maturity and a 10-year grace period. Tranching One Tranche to be released at effectiveness. Description The Credit of USD10 million is the second Development Policy Lending Operation (DPO) to support policy and institutional reforms as outlined in the Country Assistance Strategy (CAS) for FT04-07 (Report No. 27654-ZA). The FY04-07 CAS envisages that over the four-year period of CAS implementation, there could be two multi tranche Development Policy Lending Operations or one multi tranche plus two single tranche DPOs to support CAS implementation. This credit's reform program and objectives aim to facilitate Zambia: · To maintain and deepen Zambia's macroeconomic framework conducive to robust growth; · To strengthen the credibility and institutional capacity of the public sector; · To enhance Zambia's growth opportunities while improving its poverty impact. In addition, the expected results of the Credit are embedded in the CAS for FY08-11 and contribute to its goals and objectives. IDA and the Government of the Republic of Zambia agree that achieving these objectives in part depend on the implementation of specific reforms in the areas of: (i) public sector management; (ii) macro economic management including the reduction of arrears and the establishment of a credit rating bureau; (iii) agriculture; (iv) infrastructure; and (v) business environment. Benefits and Results The actions and outcomes under the development policy operation will help deepen and consolidate the macroeconomic gains that Zambia has registered over the last three years , will contribute to the sustainability of the reform process in the area of public sector management, financial sector development and private sector development. In addition, it will also contribute towards the bridging of a financing gap that exists in the implementation of Zambia's Fifth National Development Plan and it will contribute towards improving 3 aid effectiveness by being part of a harmonized approach to budget support. More specifically the operation aims to contribute to (i) improved management of public resources and credibility of Government vis-à- vis domestic suppliers by reducing arrears; (ii) timely payment of pensions by Zambia's Public Pension Fund (PSPF); (iii) availability of creditworthiness information of borrowers to Commercial Banks; (iv)improved ability to execute in year programs and reduced disconnect between plans and budget execution; (v) improved quality of data maintained in Zambia's civil service Payroll Management and Establishment Control (PMEC) system; (vi) a simplified institutional framework to reduce bureaucratic procedures for businesses; (vii) the reaching of consensus on the roles and mandates of each actor, public and private, in the agricultural marketing sectors; and to (viii) the ability of the road agencies to operate their statutory tasks. Risks Given that the proposed DPO is a one-tranche operation, the main risk is sustainability of the implemented reforms. This is mitigated through the fact that the operation is embedded in a medium term program that is aligned with the country's own development strategy and is undertaken in conjunction with all donors, which are providing budget support. Political Risk. The outcome of the elections in the fall of 2006 has shown that the current regime is susceptible and vulnerable to populous ideas. This can affect the attention needed to stay the course with the ongoing economic reform efforts to further strengthen the effectiveness of the public sector and the commitment to work towards a more private sector friendly economic environment. To mitigate these challenges some of the macroeconomic and public sector management areas supported by the proposed operation are also supported, though from a different angle, by the IMF's PRGF arrangement. Macroeconomic stability. Even though fiscal discipline has taken root in Zambia, ineffective public expenditure management processes and populist tendencies can generate risks for macroeconomic performance. External Developments. The country is vulnerable to terms of trade shocks and droughts. The upsurge in copper prices might re-ignite the hope that Zambia once more can count on the copper sector for economic success. A reoccurrence of a drought would harm the recent gains in food security and could see a surge in the need for food imports. Malaria and HIV/AIDS pandemic. Malaria and HIV/AIDS remain the most significant health threat to Zambia's population and hence to its prosperity. The impact of these diseases is increasingly visible in all spheres of Zambia's society and economy. With prevalence rates remaining in double-digit figures, the potential damage is enormous. Operation ID Number ZM-PE-P074445 4 PROGRAM DOCUMENT FOR A PROPOSED SECOND ECONOMIC MANAGEMENT AND GROWTH CREDIT TO THE REPUBLIC OF ZAMBIA I. INTRODUCTION 1. This program document presents a proposed Development Policy Operation (DPO) to the Government of the Republic of Zambia (GRZ) for SDR 6.3 million (USD10 million equivalent) to finance a second Economic Management and Growth Credit (EMGC II) to support the Government's reform program in support of Zambia's Fifth National Development Plan (FNDP). The proposed operation is part of a collective effort by the Government of the Republic of Zambia (GRZ) and Poverty Reducing Budget Support (PRBS) donors1 to provide predictable and performance related annual budget resources to support the Government's effort to implement its Poverty Reduction Strategy (PRS)/Fifth National Development Plan (FNDP), which covers the period 2006- 10. 2. The focus and scope of the FNDP covers numerous important areas for Zambia's development, which are reflected in the Performance Assessment Framework (PAF) (see Annex 2), which is jointly prepared by GRZ and PRBS donors. This credit selectively assists the economic reform efforts of GRZ in three areas. The included areas from the PAF are (i) public sector with a focus on reforms that strengthen management of public resources and improve quality and accuracy of data maintained in Zambia's civil service Payroll Management and Establishment Control (PMEC) system; (ii) macro economic management with a focus on reducing arrears to general contractors and to Zambia's public service pension fund (PSPF), and on improving Zambia's credit culture; (iii) wealth creation with a focus on developing a market friendly Agricultural Marketing Act (AGM), ensuring that the newly created road agencies are appropriately staffed, and on assisting GRZ to reduce bureaucratic procedures that negatively affect the investment and business practices of the private sector. 3. Economic management reforms in each of these areas are to contribute to prolongation of the durable improvements made in the country's macroeconomic environment, enhance its growth opportunities, and improve the poverty reduction impact of Zambia's growth. These actions build on and expand upon past achievements and lessons learned in the area of economic management that were supported by a two tranche Economic Management and Growth Credit (EMGC) of USD40 million approved in December 2004 and fully disbursed in December 20052. The EMGC was the first of two DPOs that were identified in the baseline lending scenario of the Country Assistance Strategy (CAS) for FY04-07 to assist GRZ with policy and institutional reforms. The proposed operation is in many ways a continuation of the previous DPO as it aims to maintain and expand on the positive strides made. In addition, the proposed operation is 1The PRBS donor group comprises DFID (UK), the African Development Bank, the European Commission, Finland, Germany, Netherlands, Norway, Sweden, and IDA. 2See appendix 1 for an overview of the credit release milestones of the EMGC and its outcomes. A full overview of EMGC I can be found in its Implementation Completion Report No. 36495. 5 also to extend Zambia's track record of policy and institutional reform and thus sets the stage to move towards a programmatic approach under the new CAS FY08-11 to support the policy and institutional reform agenda identified in the FNDP and incorporated in the PAF. 4. In addition, the proposed operation builds also on an earlier three-tranche Fiscal Sustainability Credit of USD170 million approved in May 2001 and fully disbursed in June 2002 and complements implicit budget support provided under the Multilateral Debt Relief Initiative (MDRI), which became effective in July 2006. Other critical inputs to the proposed operation are provided through the Public Service Management Project approved in January 2006 and a variety of economic sector work (ESW). The ESW includes a Public Expenditure Management and Accountability Report (PEMFAR), a Country Economic Memorandum (CEM), an Investment Climate Assessment (ICA), a Foreign Investment Advisory Services' (FIAS) Administrative Barriers to Investment, a Poverty and Vulnerability Assessment (PVA), as well as the diagnostic work on pro-poor growth undertaken by the Poverty group in PREM. In addition, the credit draws on reports and evaluations carried out by GRZ such as Zambia: Public Financial Management Performance Report and Performance Indicators. II. COUNTRY CONTEXT 5. Recent Economic Developments. Macro economic performance supported by the IMF's Poverty Reduction and Growth Facility (PRGF) has been positive with the notable exemption of the exchange rate, which appreciated sharply in November 2005 and has shown a certain degree of volatility since then (see figure 1). GDP growth has remained robust in 2007; inflation has remained in single digits, and high copper prices and additional debt relief through the Multilateral Debt Relief Initiative (MDRI) have improved Zambia's external position significantly. See table 1 for Zambia's key economic indicators. Figure 1: Exchange rates (REER & ZK/USD); Figure 2: GDP Growth and Contribution by sector for 1991-1998 and 1999-2007 REER (LHS) Kwacha/US$ (RHS) 200 7000 Kwacha/Euro (RHS) 190 6500 2.4 1998-07 Services, etc 180 1.1 6000 ) changex 170 0.5 1991-98 001= 5500 E Manufacturing 160 o 0.1 5000 97 150 Eur -1.4 0.3 4500 & Mining and quarrying 19 140 4000 $ anJ( 130 et 1.0 3500 US Construction 120 Ra -0.4 x 3000 per 110 0.3 ndei 2500 Agriculture 100 0.3 R 2000 acha E 90 0.1 E 1500 Kw Net indirect taxes R 80 0.4 70 1000 nali 4.62 GDP Growth 60 500 0.1 50 0 Nom Jan- Ma S ep- Jan- Ma S ep- Jan- Ma S ep- Jan- Ma S ep- Jan- Ma S ep- Jan- Ma S ep- Jan- Ma S ep- Jan- Ma S ep- Jan- -1.5 -0.5 0.5 1.5 2.5 3.5 4.5 y- y- y- y- y- y- y- y- 00 00 00 01 01 01 02 02 02 03 03 03 04 04 04 05 05 05 06 06 06 07 07 07 08 Source: IMF, CSO, BoZ, and Staff estimates 6 6. Zambia is experiencing a robust growth period with positive broad based GDP growth for nine consecutive years. GDP growth has been particularly strong in construction and services, while mining has shown a very strong rebound during these last nine years. This experience contrasts sharply with the early period of reform in 1991-1998 (see figure 2). Consequently, the overall poverty headcount has declined from 73 percent in 1998 to 64 percent at the end of 2006.3 Even though this decline is less than needed to reach the poverty related Millennium Development Goal (MDG), the decline is a welcome outcome after many decades of decreasing incomes and increasing poverty. Real GDP growth is estimated to have equaled 5.7 percent for 2007 and GDP growth for 2008 is projected to remain around 6 percent as rainfall has been favorable and production of copper is to rebound from a small contraction in 2007. 7. These positive growth and poverty developments are supported, and for a large part driven, by favorable external developments. Zambia's terms of trade improved over 100 percent since 2004. This has lead to an enormous improvement in the current account balance (including grants) from a negative seven percent of GDP in 2004 to a projected positive balance of around 3 percent in 2006. The main source of this improvement is the exceptional rise in copper prices since 2003 by approximately 300 percent. This, combined with a recovery in copper production, has allowed growth of export proceeds to outperform increases in imports. Imports rose sharply during this period as well triggered by rising fuel costs and imports of mining related investment goods in particular. Non-copper exports have also grown rapidly amounting to a USD1.2 billion for 2007, up from USD330 million in 2000. As a result, overall export levels in 2006 amount to USD4.5 billion, more than six times the level of exports in 2000. 8. These improvements in the external situation have resulted in a much needed increase in international reserves which stood at 2.5 months of imports at the end of 2007. Reserves are still at a relatively low level, but up from less than 1 month of imports at the beginning of this millennium. The favorable external developments have also impacted the kwacha, which has been appreciating in real effective terms by approximately 8 percent annually in 2003 and 2004, and appreciated excessively in the second half of 2005. Even though in 2005, no serious negative impact on Zambia's competitiveness had become evident as the nominal appreciation occurred in November/December 2005, the profitability of producers of non-copper exports has been negatively affected. The depreciation of the kwacha in nominal as well as real terms in the second half of 2006 (see Figure 1) has helped restore some of their viability. This can be seen from a still healthy increase in export revenues by the non-copper sector. 9. After years of weak fiscal policy implementation, the authorities have improved overall budget execution and reduced their domestic financing needs drastically. The main adjustment was made in 2004, when domestic borrowing was reduced from 5.1 percent of GDP in 2003 to 0.8 percent of GDP. This has crowded in credit resources available to the private sector and reduced yields on bonds and T Bills significantly. In 2006, the overall fiscal deficit was 2.9 percent of GDP, while the preliminary outcome 3The Poverty and Vulnerability Assessment (Report No 32573-ZM), which is based on the LCMS02/03, estimates poverty at 55 percent of the population. However, the LCMS06, which is dynamically comparable to the LCMS98 but not to the LCMS02/03, provides the figures quoted in the text. 7 for 2007 was 0.2 percent of GDP. The decrease in the deficit in 2007 was caused in part by higher revenues, in particular from the mining sector, as well as from delays encountered in the implementation of capital projects. Table 1: Key Economic Indicators Annual data 2003 2004 2005 2006 2007est. Real Economy /1 GDP Growth (constant prices) 5.1 5.4 5.2 6.2 5.7 Agriculture growth (constant prices) 5.0 4.3 -0.6 2.4 1.9 Mining growth (constant prices) 3.4 13.9 7.9 11.8 -1.4 Public Finances /1 Government revenues, (% of GDP) of which 24.9 23.7 23.0 21.5 23.4 Domestic Revenues (% of GDP) 18.0 18.2 17.4 16.9 18.7 Government expenditures (% of GDP) of which 30.9 26.7 25.7 23.1 24.6 Wages and salaries (% of GDP) 8.4 7.8 7.6 7.2 7.8 Interest payments (% of GDP) 3.9 3.5 2.7 1.9 1.7 Government overall balance (% of GDP) of which -6.6 -1.7 -2.6 -2.9 -0.2 Domestic financing (as % of GDP) 5.1 0.8 1.9 1.9 -0.1 Prices, Interest Rates, Terms of Trade, and Exchange Rates /2 Inflation CPI (end of period, y/y, % change) 17.2 17.5 15.9 8.2 8.9 T-bill yield (90 days, end of period, %) 30.0 18.3 15.3 9.1 11.4 Lending rate (end of period, %) 36.0 29.8 27.6 21.6 18.3 Change in Terms of Trade (period average, %) .. 34.7 10.4 55.2 7.9 Real Effective Exchange Rate (end of period, y/y,% change) /3 -1.0 4.1 69.4 -17.0 6.8 Nominal Exchange Rate (K/US$, end of period) 4645.5 4771.3 3509.0 4406.0 3844.0 External Developments /1 Exports of goods (US$, millions) of which 1090 1847 2278 3929 4594 Copper exports (US$, millions) 607 1075 1516 3029 3407 Imports of goods (US$, millions) 1393 1872 2161 2636 3611 Current account balance, incl. grants (% of GDP) -9.3 -7.0 -4.4 3.0 -2.5 Reserves as months of imports of goods 1.3 1.1 1.5 2.2 2.5 External Debt Developments External Debt (% of GDP) 156.5 126.8 86.0 8.8 9.9 1/ Figures for 2007: IMF and World Bank Staff forecast 2/ Figures for 2007: based on last available observation i.e.September 30 3/ INS-IMF ReeR, increase indicates appreciation; 2007 12 months figure as of end of June 4/ 2005 is still before MDRI. 2006 includes MDRI. Sources: CSO, BoZ, IMF and Bank Staff estimates 10. The reduction of the fiscal deficit has taken the fiscal angle out of inflation. Tight monetary policy, assisted by lower food prices, due to a recovery in food production after the drought during the 2004/5 planting season, has reduced inflation to single digit for the first time in over three decades in 2006. Inflation at the end of 2006 stood at 8.2 percent, significantly lower than the 15.9 percent recorded for inflation at the end of 2005. Inflation has remained subdued and equaled 8.9 percent at the end of 2007. The reduced domestic borrowing requirements by the public sector has allowed strong domestic credit expansion. At the end of 2007, loans and advances to the private sector by commercial bank equaled 11.2 percent of GDP up from 7.2 percent of GDP at the end of 2005. 8 11. Macroeconomic outlook. The Government's FNDP supported by the 2008-10 Medium Term Expenditure Framework (MTEF)4 identifies as targets for its macroeconomic framework: (i) achieve economic growth of at least six percent per annum; (ii) reduce inflation to no more than five percent; (iii) limit domestic borrowing to allow for further expansion of domestic resources available to the private sector; and (iv) increase the coverage of official gross reserve to at least three months of imports in 2008, reaching comfortable levels of four to five months of imports by the end of 2009. This is to be supported by improving financial and exchange rate stability, while sustaining a viable balance of payments, and external and domestic debt position (see Table 2). See Box 1: Zambia's Growth and Poverty Reduction Potential for a more detailed discussion. Box 1: Zambia's Growth ­ Poverty Reduction Potential During 1999­2007 real GDP grew at an average rate of 4.6 percent a year. This stronger performance has not translated into significant declines in poverty. This can be seen in Figure A: the overall poverty headcount has declined from 73 in 1998 to 64 at the end of 2006. While the depth and severity of poverty fell rapidly during the 1990s, this downward trend has tapered off, suggesting that the poorest population has not benefited considerably from recent growth. One explanation for the weak growth-poverty relationship is that recent growth has been concentrated in mining, construction and whole sale and retail trade which are rather capital intensive and urban based and which are less pro-poor than the expansion of agriculture (see figure B and C). Figure A: Growth and Poverty, 1991-2006* Shared Growth Prospect 100 310 Zambia's prospects for growth and poverty reduction over the next decade 90 290 a) ) depend on both exogenous factors and %( 80 270 ach w policy and institutional measures. A K computable equilibrium model (CGE), which ount 70 250 C was developed for the Country Economic dae 60 230 9941( ati Memorandum (CEM), completed in FY05 H and expanded for the Pro-Poor Growth Study ytre 50 210 cap by the PREM Poverty group, simulates the 40 190 re ov P growth and welfare impact of both exogenous P P 30 170 changes and alternative Government policies GD over the next ten years (2006-2015). Under 20 150 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 the base case scenario, Zambia is projected to grow at an annual average rate of 6.0 percent, National Headcount (LHS) which is equal to the projected growth path National Rural (LHS) National Urban (LHS) for the Fifth National Development Plan. Poverty headcount at 1US$ a day GDP Per Capita (RHS) The simulation results provide several Source: FNDP and Central Statistical Office useful insights. First, continuing on a growth path driven by capital intensive and urban-based activities, poverty is projected to decline to approximately 62 percent by 2010. For a more rapid decline in poverty rates, there is a need to focus on expanding those sectors that create employment and income opportunities for the poor, in particular in the rural areas. Hence, the need to focus on the agricultural sector, traditional and nontraditional crops, which have strong potential to be exported. This is the most effective way to enhance inclusive growth (see Figure B and C). The pro-poor 4In November of every year, the Ministry of Finance and National Planning issues a so-called Green Paper, which articulates its fiscal framework for the following three years. The Green Paper also includes since 2005 indicative expenditure allocations by head for Personal Emoluments (PE) and other PE related expenditures and non-PE expenditures. 9 outcomes of agricultural expansion would be greatly enhanced if market access through investment in (feeder) roads were increased on a large scale. Improving the condition of the road network and extending the network to remote areas is a key step not only to increasing growth but also to ensure growth reduces rural poverty. Therefore, successful implementation of the FNDP based strategy could further reduce poverty by another 2-3 percentage points by 2010. Even under this scenario, Zambia will not be able to halve poverty until after 2030. This is not sufficient; Zambia needs to move to a much higher growth path--estimated to be between 9-10 percent per annum--to reach this particular MDG. Figure B and C: Alternative Growth Paths - Growth incidence curves & Poverty reduction curves within agriculture 5 Base projection (6%) 75 Copper (+1%) 4 ht ) grow %( 70 tnuoc ure 3 Staples (+1%) Cash crops (+1%) adeh 65 penditxe ytr 2 Agriculture (+1%) annual ove With improved P 60 market access age erv A 1 Base projection (6%) 55 2001 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Years 0 0 10 20 30 40 50 60 70 80 90 100 Ranked expenditure percentiles A recently completed country study** exploring what the constraints are in Zambia to inclusive growth found that despite a positive, relatively broad-based and stable growth record in recent years and immense untapped potential in agriculture, mining and services, Zambia's poverty rates have not declined significantly and remain high. It concluded that income growth is limited by the absence of positive coordination externalities due to poor access to domestic and international markets, inputs, extension services and information. High indirect costs ­ most of which attributable to infrastructure service-related inputs into production including energy, transport, telecom, water, but also insurance, marketing and professional service ­ undermine Zambia's competitiveness, limit job creation and therefore serve as a major constraint to inclusive growth. The study also mentioned that continued real appreciation is another serious threat to the competitiveness of export-oriented and import-competing sectors and to job creation. Consequently, for Zambia to stay competitive and sustain the growth momentum, the study mentions that it will be critical to improve productivity ­ including the productivity of its labor force, and to lower indirect production costs related to basic services. Carefully crafted monetary and fiscal policies will also be critical in responding to the real appreciation pressures. Improving the quality and access to secondary and tertiary education is essential if the poor are to benefit from future growth of the non-farm economy. ---------------------------------- * These official poverty estimates are based on the Priority Surveys (1991, 1993) and Living Conditions Monitoring Surveys (1996, 1998, 2004, and 2006). GDP per capita is based on National Accounts of CSO. ** E. Ianchovichina and S. Lundstrom, What are the Constraints to Inclusive Growth in Zambia? Washington, D.C., World Bank mimeo, 2008 12. The fiscal program as specified in the MTEF 2008-10 and the proposed new PRGF program for 2008-11, envisages the need to reduce further net domestic financing to anchor stabilization. Increased tax revenues, through higher taxes mainly from the mining sector, and increased VAT revenues, will facilitate a further reduction in domestic borrowing. Scaling up by bilateral donors is not foreseen until 2008-2009 when many bilateral agencies are to revisit their multi year programs. Major increases in public 10 investment to support the FNDP investment program will have to be financed from additional domestic resources e.g., increased mining revenues, or from debt service savings made available by HIPC and MDRI. 13. Monetary policy will need to remain firm to ensure that the gains made in inflation translate into a further reduction of inflation to international comparable levels. In addition, a large portion of the Bank of Zambia's (BoZ) holdings of non-marketable Government securities has recently been converted into marketable securities. This will increase BoZ's capacity to carry out open market operations with an aim to sterilize excess liquidity. 14. Debt sustainability. Zambia reached HIPC completion in April 2005 and became eligible for the Multilateral Debt Relief Initiative as of July 1, 2006. This has greatly reduced Zambia's external debt obligations, which currently stand at less than ten percent of GDP. Nevertheless, Zambia will need to remain prudent with regard to its external borrowing strategy in order to not fall back. The Government is preparing a debt management strategy that encompasses external as well as domestic debt and has recently completed a validation of its on-lending operation. Both activities aim to assist GRZ to maintain a viable level of indebtedness. Table 2: Zambia Selected Indicators: 2006-2010 Annual data 2007 2008 2009 2010 Est. Proj. Proj. Proj. Real Economy GDP Growth (constant prices) 5.7 6.2 6.3 6.5 Inflation (e.o.p.) 8.9 7.0 5.0 5.0 Public Finance Government overall balance (% of GDP) -0.2 -1.1 0.9 0.4 Total domestic financing (as % of GDP) -0.1 -0.1 -1.5 -0.9 External Developments Current account balance, incl. grants (% of GDP) -2.5 -2.1 2.0 -1.0 Reserves as months of imports of goods 2.5 3.2 4.7 5.5 External Debt Developments NPV of External Debt (as % of GDP) 6.0 5.6 5.7 6.1 Source: MTEF 2008-10; LIC DSA, IMF PRGF and Staff estimates 15. A Low Income Countries Debt Sustainability Analysis (LIC-DSA) was completed in 2007 as part of the IMF's Article IV consultations. It concluded that Zambia faces a low risk of debt distress.5 At the end of 2006, to al large extent because of HIPC and MDRI, Zambia's NPV of public external debt was estimated to equal 16 percent of exports and 6 percent of GDP at the end of 2006. Zambia's external debt ratios are projected to remain well below the risk threshold for the period covered by the LIC DSA i.e., 2007-27. The NPV of total public debt equaled 25.9 percent of GDP at the end of 2006. In the baseline scenario of the LIC DSA, Zambia's public debt is expected to 5See Appendix I for the full LIC DSA. 11 decline over the 20 year projection period. The NPV of domestic debt would decline from 18.6 percent of GDP in 2006 to 10.4 percent by 2027. Because of this and the decline in external debt, the NPV of public debt to GDP is projected to drop to 16 percent by 2027. The sensitivity analysis as well as alternative scenarios, including a more rapid decline in copper prices, shows that the outlook for public debt sustainability is benign. III. THE GOVERNMENT'S PROGRAM 16. Introduction. GRZ has articulated its long term development objectives in the National Vision 2030, which stipulates that Zambia wants to become "a prosperous middle income country by the year 2030." The vision calls for economic and expenditure policies plus institutional reforms that accelerate growth and leads to sustained poverty reduction. The FNDP, covering 2006-10, is an important tool in reaching the goal set by the National Vision 2030.6 The topic of the FNDP is "Broad Based Wealth and Job Creation through Citizenry participation and technological Advancement," with a strategic focus on developing Zambia's economic and human infrastructure. 17. Zambia's FNDP covers over twenty economic and social sectors. It identifies macroeconomic stability, including proper public expenditure management and financial accountability processes as a pre-requisite, while recognizing governance, HIV/AIDS, environment, and gender as cross cutting issues. The FNDP states further that `good governance' plays a critical role in realizing the objectives set in the FNDP. Accountability, political and administrative, as well as financial and budgetary, are all seen as important building blocks that will help the nation improve governance and contribute to a reduction in corruption. Improvements in administrative and financial and budgetary accountability are anchored in two pillars of public sector reform, i.e. Public Sector Management reform and Public Expenditure Management and Financial Accountability programs. 18. The Government's program identifies the need to make Zambia's growth more inclusive. The FNDP has identified two critical areas on which public expenditure programs should focus if growth is to be accelerated and reach the poor more strongly. These two main areas are: (i) strengthening Zambia's physical and human infrastructure, with a particular focus on (rural) roads; and (ii) enhancing agriculture and rural development. These priorities need to be accompanied by reforms that improve the business and investment climate in Zambia and strengthen public sector management to ensure effective delivery of public services. 19. Recognizing that accelerating the pro-poor impact of growth will require supporting diversification of the economy, the growth and poverty reduction strategy articulated in the FNDP focuses in particular on supporting rural development, especially agriculture, encouraging linkages between agriculture and agro-processing, stimulating tourism, and strengthening Zambia's manufacturing base through investment promotion, 6The Fifth National Development Plan and its accompanying Joint Staff Advisory Note, Report No. 40127-ZM, were discussed in August 2007 with the Executive Board. 12 development of the small and medium enterprise (SME) sector, and economic empowerment. The FNDP recognizes the importance of a well functioning financial sector geared not only towards providing financial services to the established business sector, but also to the SME sector, which is hampered by a relatively unknown credit history. 20. The FNDP, supported by the Performance Assessment Framework (PAF), jointly prepared by GRZ and its cooperating partners, including IDA, identifies four areas that are crucial to a successful implementation of the FNDP and which lend themselves to direct budget support. These broad areas are: (i) public sector reform; (ii) macroeconomic management; (iii) wealth creation; and (iv) social equity. 21. The remainder of this section will discuss the Government's program that deals with reforms in those four areas and identify the prior actions supported by the proposed credit. A. Improving Public Sector Management 22. In the early 1990s, the Government identified that its public service was bloated, inefficient, ineffective, and inadequately responsive to the needs of the public. In addition, it was characterized by poor discipline and inadequate professionalism and accountability, resulting in poor service delivery. To redress this situation, the Government embarked on implementing the public service reform program (PSRP) in 1993 as a systematic long-term measure to reform the public service. In 2000, the Government commenced the implementation of the Public Service Capacity Building Project (PSCAP) in order to facilitate, sustain, and revitalize the reform efforts. The initial phase focused on rightsizing and pay reform; improved financial management, accountability and transparency; improved capacity of the judicial and legal systems; and decentralization and participatory governance. 23. In 2003, GRZ acknowledged the need to focus on three main aspects of its PSRP i.e., (i) Public Expenditure Management and Financial Accountability (PEMFA); (ii) Public Sector Management (PSM); and (iii) Decentralization as means to improve the accountability, transparency, efficiency and effectiveness of its expenditure programs and service delivery. For each of these broad areas strategies were prepared, implementation plans developed, and institutional structures to monitor and facilitate implementation put in place. 24. Strengthening public service management. GRZ has completed its rightsizing/restructuring exercise (i.e., ensuring that ministries and institutions have staff complements that are appropriate to their agreed mandates and affordable). Under the FNDP, it now embarks on the rightsizing/restructuring of provinces and districts as well as local authorities. The restructuring of provincial and district administration is supported under the PAF. In 2006 and 2007 a comprehensive implementation plan, which includes the development of strategic plans, organization structures, and results oriented job descriptions, has been developed. It is expected that over the next two years several provinces and districts will be restructured. 13 25. The PAF will also support the Government's efforts to institute service delivery charters as a means to ensure that all ministries and institutions are managing performance effectively within an agreed framework, and are taking action to bring their service delivery up to those standards. The Ministry of Lands and the Department of Immigration will pilot the service delivery charters and formally adopt them in 2008. Additional institutions will be identified over the next two years to develop and adopt service delivery charters as a means to improve and strengthen service delivery by the public administration. 26. Another important component under public service reform is progress with the preparation and implementation of a comprehensive pay policy. Pay levels for civil servants remain an issue of contention, as they are considered inadequate and inconsistent with performance, meaning the public service is unable to attract and retain essential technical and professional staff. A diagnostic study with a focus on these issues has been initiated and will be undertaken and completed in 2008. This is to translate into a new and adopted public service pay policy in 2008, whose implementation will commence soon thereafter. An important supporting step to be completed in 2008 or early 2009 is a job evaluation of all public servants. 27. Building on the achievements under EMGC I, the operationalizing of the Payroll Management and Establishment Control (PMEC) system will focus on improving direct access by human resource departments of line ministries and their department. All the line ministries were brought into the system in 2005. However, at the time access was limited to officers at Zambia's Cabinet Office. The PAF foresees that central spending agencies will be able to access the PMEC system directly from their location. In 2006 and the first part of 2007, the Zambia Police, Public Service Management Division, Ministry of Finance and National Planning, Ministry of Works and Supply, Ministry of Home Affairs, and Ministry of Agriculture and Cooperatives have been connected directly to the PMEC system from their own location. This should lead to improved quality and timeliness of the data in the Payroll and Establishment Management Control system. This process is to continue and by 2009, about 23 central spending agencies and six provinces are to be directly connected to the main PMEC system. 28. Public finance management. The Government's program in the area of public expenditure management supported by the PAF focuses on budget execution, internal and external accountability, and clearing of arrears, with an aim to improve the credibility of the budget process and to measure progress of the PEMFA program that GRZ is implementing as part of the underlying principles used by the cooperating partners to evaluate Zambia's readiness to receive budget support (see section IV: Collaboration with other donors). 29. The specific indicators chosen to monitor budget execution are: (i) percent of quarterly budget releases are between 95 and 105 percent of the budget allocation identified in the spending agencies quarterly allocation plan. In 2006, over 70 percent of agencies should have received their budget releases between these limits up from a low 25 percent in 2005. This is to rise to 80 percent in 2007 and to 90 percent in 2008. 14 However, due to a revenue shortfall of close to one percent of GDP, which was caused by an unanticipated appreciation of the kwacha in the first half of 2006, and measures introduced during the last quarter of 2006 to reduce bunching of releases at the end of the year, quarterly releases compared to expenditure plans submitted at the beginning of the year were off by a large margin. The result was that this indicator only improved to 28 percent, well off its intended target of 70 percent; (ii) percentage of expenditure variance between original budget and total expenditure for selected sectors. The baseline value stood at almost 20 percent for this indicator in 2005. Given that MoFNP has revised its financial management system to include all aid inflows into its 2007 budget, no benchmarks have initially been set in the PAF. However, this indicator improved to 15.6 percent in 2006, indicating that the execution of the budget approved by parliament is improving; and (iii) percent of heads that has calculated annual expenditure7 between 95 and 105 percent of total annual funding. In 2005, this number stood at 27 heads out of 49, which equals 55 percent. In 2006, this indicator improved to 69 percent i.e., 34 out of 48 heads. To strengthen further the monitoring of the execution of the budget, the Government revised its quarterly budget execution report. The revised quarterly budget execution report includes now an analysis of budget provision, releases, and expenditures. 30. To improve the effectiveness of the annual external audit report, the Government has agreed for the period that the PAF covers, i.e., 2006-08, to act on 95 percent of the recommendations of the Public Accounts Committee (PAC) in parliament. Indeed, for 2006 all recommendations by the PAC on the 2004 annual audit report have been acted upon. 31. Government has struggled for some time to find the financial resources to clear arrears with its contractors. Many of the arrears stem from the less than optimal commitment control system that was operational before 2004. The Government program includes reduction of arrears from a level of ZK533 billion in 2005, which is equal to 1.6 percent of GDP, to zero by 2009. The decline in arrears in 2006 to ZK491 billion, which is equal to 1.2 percent of GDP, was less than anticipated in the PAF for 2006. However, during 2007, government reduced these arrears to ZK370 billion, or 0.8 percent of GDP The budget for 2008 and the MTEF/Green paper for the period 2008-2010, reconfirm Government's commitment to reduce supplier arrears to negligible levels. The approved 2008 budget has a provision of ZK350.5 billion to further dismantle the arrears with suppliers of goods and services. 32. To reduce the ability of new arrears to accumulate, the Government has embarked on an implementation plan that will strengthen the commitment control system by integrating the following stand alone financial management modules, the activity based budgeting, funding, and cash flow forecasting and expenditures modules, into the overall Financial Management System. 7In Zambia, total releases do not include fees and donor funding that comes to a spending agency outside of the budget. However, these figures are reconciled on an annual basis by the office of the accountant general. 15 33. Performance under EMGC I. With support from EMGC I, the government, in its effort to improve the functioning of the public sector undertook several actions in the area of civil service reform. Government transferred the payroll for civil servants to the, at that time, newly introduced PMEC system; a new annual performance appraisal system was implemented for all management positions, which made annual salary increments dependent on employee performance, and cabinet approved the new structure of those ministries that had not finalized their restructuring plans. This was part of a reform program to ensure that functions and structures of the Government would meet better the demands of a market-oriented economy. 34. To increase the credibility of the budget process and its execution, parliament approved the revised Finance Act that strengthens Zambia's financial management and accountability. MoFNP has since then prepared implementation regulations to make the new act operational. A major effort is being made to create a Treasury Department within the MoFNP. Once the Treasury Department has been established, one of the first tasks it will take on is to gradually move towards a single treasury account for Government resources, which will reduce vulnerability to corruption and improve cash management. MoFNP has continued to prepare MTEF/Green Paper in the 4th quarter of each calendar year by which the ministry outlines a three-year forward looking fiscal framework. This includes not only the impact of the projected macro framework on the fiscal position but also articulates indicative budget ceilings per head, including ceilings for personal emoluments. 35. The ministry also submitted a proposal to the Constitutional Review Committee (CRC), which among others would allow presentation of the budget to parliament prior to the start of the fiscal year for which it is prepared and would restrict retroactive approval of supplementary appropriations. In the interim, cabinet continues to fund unbudgeted expenditure requirements to the limits of the contingency resources indicated in the budget or only after cabinet has approved any changes, by finding compensatory funding within the approved budget resources. The reduction of general arrears, excluding pension arrears, has progressed and has been reduced from 2.6 percent of GDP at the end of 2004 to 1.6 percent at the end of 2005 during the EMGC I implementation period.8 36. Although not directly supported through the EMGC I operation, government made progress with the introduction of the Integrated Financial Management Information System (IFMIS), which was, however, part of the HIPC program. After a protracted period, the contract to rollout the IFMIS was signed at the end of 2006. Implementation, supported through the joint donor PEMFA project, has started and piloting of the system has been expanded from the four spending agencies initially targeted to eight. A prototype of the system has been developed and the initiation of the IFMIS system in the pilot spending agencies has commenced 8Note that under EMGC I, the reduction of arrears was treated as an issue of correcting macroeconomic imbalances. Since the level has been reduced significantly, the issue is now being assessed as one of budget execution. 16 37. EMGC II supported measures. Under the public sector management component the proposed operation has supported the further roll-out of the PMEC system to another six central spending agencies. The proposed operation has assisted GRZ in the area of public finance management with the implementation of the following two milestones: · (i) MoFNP has ensured more predictability of budget execution by providing to 34 out of 49 budget heads with annual calculated expenditures of between 95 percent and 105 percent of the total funding for fiscal year 2006; and · (ii) MoFNP has reduced domestic arrears to suppliers with: (i) stocks diminishing from ZK532.8 billion at the end of 2005 to equal or less than ZK491.8 billion at the end of 2006; (ii) ZK147 billion released to further pay down the arrears in 2007; and (iii) a commitment expressed in the 2008-2010 MTEF/Green paper and the 2008 budget to reduce these arrears to negligible levels by 2009. B. Macroeconomic Management. 38. Government and cooperating partners are aware of the importance that the macroeconomic environment has for growth and poverty reduction. Zambia's macroeconomic environment has improved significantly over the last three years with inflation in the single digits for the first time in almost three decades and a budget deficit below three percent. The Government has indicated that maintaining and building on these achievements is an important objective of the FNDP. The IMF has provided assistance to GRZ through its PRGF arrangement to reach this positive position. The PRGF arrangement has formally expired in September 2007. GRZ has indicated that it has reached agreement with the IMF on a new (low access) three-year PRGF arrangement that is to be discussed with the IMF executive board in the second quarter of 2008. 39. Financial sector development. Zambia's financial sector is characterized by relatively high cost of borrowing, thin capital markets, the absence of financial services in most of the rural and peri-urban areas, and a relatively poor payment culture. Zambia's Financial Sector Development Plan (FSDP), which builds upon the recommendations of the Financial Sector Assessment Program (FSAP), focuses therefore on developing capital markets, enhancing the role of micro finance, developing of rural finance, strengthening of banking and non-bank financial institutions, and introducing mechanisms to monitor debtor's payment history. Zambia's credit culture, which has been undermined by non-timely servicing of financial obligations, is seen as one serious shortcoming. To overcome this deficiency, the authorities have taken the initiative and prepared the legal and regulatory regime that allows for the operation of a private sector credit reference bureau. The PAF for 2006 monitored this initiative and by the end of 2006, a credit reference bureau was established. The credit reference bureau is now in the process of signing service level agreements with commercial banks and financial institutions to govern the sharing and treatment of information. 40. Public Service Pension Fund. As articulated in the FNDP (and in the program document of EMGC I), the two public sector pension funds, i.e. PSPF and Local 17 Annuities Superannuation Fund (LASF) are both insolvent, although both hold some assets and are owed sizeable amounts in contribution arrears.9 However, to correct the imbalance between contribution and benefit accrual rates, article 124 of the Constitution, which specifically protects accrued benefits, will need to be revised. These needed revisions are included in the proposed amendments to the Constitution prepared by the Constitutional Review Commission (CRC). Once adopted, a revision of benefits can be implemented and PSPF and LASF can be put on a sound financial footing. To ensure that PSPF can continue to pay benefits until the amendments have been adopted, MoFNP has agreed to: (i) to reduce annually during the 2007-09 period its contribution arrears to PSPF; and (ii) not accumulate any significant new pension arrears. 41. Performance under EMGC I. As noted previously, the Government maintained a satisfactory macro economic framework during the implementation of the EMGC I supported measures. EMGC I supported various measures to improve the soundness of the financial system. This include, finalizing the FSDP, resolving state-owned NBFIs, strengthening the governance structure of the Bank of Zambia, and improving Zambia's overall credit culture. In each of these areas the authorities made progress: The FSDP continues to be the guiding strategy for Zambia's financial sector, the state-owned NBFIs are being supervised by the supervision department of the Bank of Zambia and progress is being made to bring them under the Companies Act; and the legal and regulatory regime that allows for the operation of a private sector credit reference bureau has been adopted. 42. In addition to the program supported by EMGC I, the Government finalized the sale of Zambia National Commercial Bank (ZNCB) in early 2007. The privatization of ZNCB was initiated under the HIPC completion program and substantively completes the liberalization of the financial sector in Zambia. 43. EMGC I assisted the authorities with increasing awareness on the need to reform the civil service pension system. Without having actuarial fair benefit levels, the civil service pension funds will face serious financial shortcomings in the medium term. In the mean time, PSPF and LASF have taken measures to reduce their administrative costs and the authorities have agreed to a phased pay down of their contribution arrears such that benefits can continue to be paid out. EMGC I also assisted the National Pension Scheme Authority (NAPSA) to improve its corporate governance and to put in place additional safeguards with regard to its investment policy. 44. EMGC II supported measures. In the area of macroeconomic management the proposed EMGC II operation will support the authorities with the implementation of the following two benchmarks: · (i) The Bank of Zambia has issued a license for the creation of Credit Reference Bureau; and 9See Appendix one of the EMGC program document, No. 29294 ZA, for a detailed description. Note that both funds are closed to new entrants. New civil service hires join the National Pension Scheme Authority (NAPSA), which was established in 2000 and serves the private sector and the new hires in the civil service. 18 · (ii) The Ministry of Finance and National Planning has implemented a phased reduction of arrears of contributions owed by the Government to the Public Service Pension Fund with: (i) stocks diminishing from ZK 464 billion at the end of 2005 to equal or less than ZK 388 billion at the end of 2006; (ii) ZK 112 billion released to further pay down arrears in 2007; and (iii) a commitment expressed in the 2008-2010 MTEF/Green paper and the 2008 budget to reduce these arrears to negligible levels by the end of 2008. C. Wealth Creation 45. The theme of the FNDP is broad based wealth and job creation through citizen participation and technological advancement, while the strategic focus is economic infrastructure and human resource management. The component of wealth creation therefore focuses primarily on agriculture, infrastructure, and private sector development, while the social equity component highlights the need for improvements in health, education, and HIV/AIDS outcomes. 46. Agriculture. Agriculture features prominently in Zambia's FNDP is seen to hold great promise for accelerating poverty reduction (see also Box 1: Zambia's growth and poverty reduction potential). The FNDP will pay particular attention to the top priority programs that were identified in the agricultural sector which include: irrigation development; agricultural infrastructure and land development; livestock development; agricultural services and technology development; and fisheries development. At the same time, the FNDP acknowledges that Zambia needs to improve its agricultural productivity and market competitiveness in order to increase and sustain sector's contribution to growth and poverty reduction. Notwithstanding, it should also be noted that the agricultural sector has contributed significantly to Zambia's overall economic diversification, while the sector itself has also diversified and has increased production in a variety of crops such as cotton, coffee, tobacco, and horticultural and floricultural products. The recent impressive performance of agricultural exports has been largely driven by private outgrower schemes which involve about 1/3 of country's smallholder households companies and large export oriented commercial farms. 47. Several actions have been identified in the FNDP to improve the sector's ability to contribute more effectively to growth and poverty reduction. The main milestones identified for inclusion in the PAF for 2006 are: (i) the need to increase the allocation from GRZ's budget to investment programs of the Ministry of Agriculture and Cooperatives (MACO) from a meager ZK23.3 billion in 2005 to ZK88 billion in 2006 and indicative figures of ZK226, and ZK193 billion in 2007 and 2008 respectively; (ii) to improve access to additional land that can be used for agriculture through the provision of infrastructural services such as connection to the electricity grid, roads and water, and irrigation services. The basic infrastructure for this exercise has been developed in 2006, opening up an additional 50 thousand hectares annually for agriculture in 2007 and 2008; (iii) to define the roles and responsibilities of the public and private sector when it comes to Zambia's agricultural marketing system. To accomplish this task, a new Agricultural Marketing Act is being developed. In 2006, the Act has been drafted and all required 19 consultations concluded. The Act has been submitted to all line ministries in 2007, with adoption by parliament and implementation substantially starting in 2008. 48. Infrastructure. It is clear that for a country as large as Zambia, which is also landlocked, a well-designed and maintained road network is of critical importance to link its communities and to minimize the impact of transport cost on its overall competitiveness. The FNDP, therefore, has put its strategic focus on improving the road network. To improve the predictability of financing and strengthen implementation capacity, three new road agencies, each assigned with a specific task, were created. The National Road Fund Agency (NRFA) is responsible for the coordination and management of the road financing functions, including collection, disbursement, management, and accounting of Zambia's road fund; a Road Development Agency (RDA), which is tasked with the management responsibility of the public/proclaimed network, and which includes planning, programming, implementation, monitoring and overall supervision of all road works in the country; and a Road Transport and Safety Agency (RTSA), will be responsible for implementing policy on road transport and traffic management, road safety and enforcement of laws regulating road transport, traffic safety, and axle load control in the country. In addition, this agency is responsible for planning, programming, implementation, and monitoring and evaluation of road transport regulations and approved safety programs. 49. An important step to have the agencies operate effectively is to ensure that vacancies in the new agencies are filled. Under the PAF for 2006-08, it was agreed this is a priority and that by the end of 2006, 80 percent of all posts will be filled and that from 2007 onwards all posts will be occupied. The PAF also monitors kilometers of roads upgraded, rehabilitated, and kilometers of unpaved roads maintained. 50. The FNDP also puts emphasis on the need to further enhance the performance and access of other infrastructure service delivery sectors such as water and sanitation, electricity and telecommunications. Hence, policy improvements and investments are taking place in these sectors as well. However, the PAF for 2006-08 does not include indicators to monitor their development partly because of the need to make sure that the process remains manageable for Government, and partly because Government and PRBS donors agreed that, the road transport is of a critical importance for Zambia's development.10 51. Private Sector Development (PSD). In order to reduce the cost of doing business in Zambia and to increase participation by Zambians in the economic process, GRZ has undertaken some legislative and institutional initiatives: 52. The Zambian Development Agency (ZDA) has taken on the responsibilities of the Zambia Investment Council (ZIC); Zambian Privatization Agency (ZPA); Zambian Export and Processing Zone Agency (ZEPZA); Small Enterprise Development Board 10This does not preclude the inclusion of other infrastructure service delivery sectors into the PAF at a later stage as the process is of revising and extending the PAF with an additional year of coverage takes place on an annual basis and thus allows for a revision of priorities. 20 (SEDB); and Export Board of Zambia (EBZ). The Act establishing ZDA was passed in 2006 and a workplan has been developed for removal of barriers to export and setting up a business. In addition, the Patent and Registration of Companies Office (PACRO) was reengineered so as to streamline the business registration process. The Lusaka PACRO office is operating more efficiently and two pilot offices will be completed by end 2008. The Tourism and Hospitality Act was passed, and the Ministry of Tourism and Natural Resources is currently working on the accompanying Statutory Instruments (with the support of IDA and PEP IFC) so as to streamline licensing for tourism related businesses. These efforts will combine to reduce the length of time it takes to establish a business by 2008 from level of 35 days in 2005 by at least seven days. 53. The Citizen's Economic Empowerment Act has been passed by parliament, and a Citizen's Economic Empowerment Authority has been established and a plan for information and communication will has been put in place. 2007 and 2008 will focus on establishing its fund and making it operational. 54. Performance under EMGC I. Even though there were no credit release milestones under the previous lending operation, several relevant initiatives to EMGC II were supported. For example, the Government in collaboration with IDA and other Cooperating Partners organized a private sector development forum to assess progress made on the PSD reform program and recommend measures to improve its efficacy. As a result, the PSD Reform Program was revised and the number of working groups reduced from twelve to three, in an effort to increase focus and expedite results. 55. EMGC II supported measures. In the area of agriculture, the proposed EMGC II operation has supported · The Ministry of Agriculture and Cooperatives with the drafting and finalization of consultations with stakeholders on an agricultural marketing act. 56. In the area of infrastructure, the proposed EMGC II operation has supported · The strengthening of Government's capacity to address identified bottlenecks to development in the management of the road infrastructure by filling 80 percent of the staffing vacancies of the National Road Fund Agency, the Road Development Agency, and the Road Transport and Safety Agency. 57. Reducing administrative barriers is a priority in the area of private sector development and therefore the proposed operation has supported · (i) the establishment of the Zambia Development Agency and its taking on the responsibilities of the former Zambia Investment Center, Zambia Privatization Agency, Zambia Export and Processing Zone Agency, Small Enterprise Development Board, and Export Board of Zambia; and (ii) the development of an implementation plan for the ZDA to accomplish further progress in the areas of removal of barriers to export and setting up of businesses). 21 D. Social Equity 58. Health sector. A healthy, well educated population, which is aware of HIV/AIDs prevention and treatment, is critical to ensure positive long-term per capita growth and poverty reduction. To improve the chances of Zambians to live healthy lives several initiatives have been incorporated in Zambia's FNDP and a number of indicators for health have been included into the PAF. These indicators focus on assisting the vulnerable and disenfranchised in Zambia, by improving the percentage of institutional deliveries; increasing the percentage of fully immunized children under one year of age in the 20 worst performing districts; improving the utilization of Preferred Health Care (PHC) facilities; and ensuring that an increasing amount of the health budget is released to the district level.11 59. Education. Zambia implemented a policy of free access to primary education in 2003 and this has resulted in increases in net enrollment for the affected grades 1-7. However, some districts have not done as well as others. The FNDP acknowledges this issue and is targeting those districts that still have net enrollment rate (NER) of less than 80 percent. In 2005, 10 districts out of 72 still had a NER of less than 80 percent. In addition, girls leave school earlier than boys and pupil teacher ratios in several districts are very high, e.g., in 2005 in 12 districts pupil teacher ratios stand at over 100. The PAF supports actions included in the FNDP to address these shortcomings and to gradually improve completion rate for girls and reduce the number of districts with pupil teacher ratios of over 100 for grade 1-4.9 60. HIV/AIDS. The human toll of AIDS for families and communities in Zambia is startling. Even though levels of infection have stabilized, the sheer number of people living with HIV/AIDS is astounding. The FNDP states that estimates put the prevalence rate at 16 percent among the 15-49 years age group. About 1 million Zambians are infected with HIV, of which over 200,000 are in need of anti-retroviral therapy (ART). About eight percent of boys and 17 percent of girls aged 15-24 are living with HIV and 40 percent of infants born to HIV infected parents are HIV infected. The PAF supports the effort by the authorities to increase the number of people tested and number of people accessing Anti-Retroviral drugs. 61. Given the presence of several donors, including IDA and the nature of the interactions in the area of social equity, the proposed operation does not to have any release milestone in the area of social equity. IV. BANK SUPPORT TO THE GOVERNMENT'S STRATEGY 62. Link to the Country Assistance Strategy. The FY04-07 CAS, discussed with the board in March 2004, is explicitly rooted in a results framework, which links the objectives of the predecessor of the FNDP, i.e., the Transitional National Development 11See Annex 2 - PAF for the specific values for each of the indicators for health, education, and HIV/AIDS. 22 Plan (TNDP), to specific outcomes to be supported by IDA. The focus of IDA activities under the FY04-7 CAS were structured around three strategic priorities: (i) Sustained Economic Growth Anchored in a Diversified and Export-Oriented Economy; (b) Improved Lives and Protection of the Vulnerable; and (c) Efficiently and Effectively Managed Public Sector. The FY08-11 CAS, which is proposed to be discussed in conjunction with the proposed EMGC II, aligns itself with the FNDP and proposes selective interactions in four priority areas. These four areas are: (i) macro economic management; (ii) infrastructure development; institutional capacity; human capital development. 63. Both CASs state that a DPO depends on upfront actions and results and be the instrument to initiate and support policy and institutional reforms. Table 4 lists the proposed credit release milestones. Section III describes in detail how the milestones relate to the FNDP and the PAF. Annex 3 explicitly identifies how the key areas of reform are aligned with each priority area of the CASs and FNDP. The full Performance Assessment Framework (PAF) for 2006-08 identifies clearly the link for each indicator with the FNDP. 64. Collaboration with other donors. A Memorandum of Understanding (MoU) that guides the process for providing Poverty Reduction Budget Support (PRBS) to GRZ was signed in mid 2005 between GRZ and CPs. In addition to IDA, the following CPs- Netherlands, Norway, Sweden, United Kingdom, and European Commission-signed the MoU. Since then, Finland, Germany and the African Development Bank have formally joined The proposed operation is part of this joint effort and all proposed release milestones are part of the PAF, which has been prepared jointly with GRZ and cooperating partners (see also Box 2: Good Practice Principles on Conditionality). 23 Box 2: Good Practice Principles on Conditionality Principle 1: Reinforce Ownership · The proposed operation draws directly from the Performance Assessment Framework (PAF), which was jointly prepared by representatives of the Ministry of Finance and National Planning (MoFNP) and Poverty Reduction Budget Support (PRBS) donors. The PAF itself is linked to priorities and actions spelled out in Zambia's new Poverty Reduction Strategy Paper (PRSP)/Fifth National Development Plan (FNDP), which covers 2006-10. As was done for the PRSP/FNDP, all indicators selected for the PAF were discussed in the relevant Sectoral Advisory Groups (SAG), which consist of Government officials, representatives of Non-Government Organizations (NGO), civil society, business organizations, and donors. The SAGs are also the main forum used by GRZ to discuss the PRSP/FNDP and progress with its implementation. · The PAF builds on the interim PAF12 (iPAF), which was developed in 2005, and which included several actions of the previous EMGC operation. Its implementation was generally satisfactory. In addition, the previous EMGC operation disbursed both tranches although the second tranche disbursed with some delay. The implementation of the iPAF and the previous EMGC operation together with the broadly satisfactory implementation of the Poverty Reduction and Growth Facility of the IMF provides an adequate track record. · The PRSP/FNDP, the PAF, and other ongoing reform efforts, in particular in the area of public sector management, have benefited extensively from IDA and other joint analytical work. For example the Country Economic Memorandum (CEM), Poverty and Vulnerability Analysis (PVA), and the Public Expenditure Management and Financial Accountability Report (PEMFAR) have all influenced the supported reforms including the PAF and ongoing TA projects. Principle 2: Agree up front with the Government and other financial partners on a coordinated accountability framework · IDA's support is summarized in a brief and focused policy matrix and draws all its proposed measures from the PAF used by all PRBS donors providing budget support. Note that the PAF is for three years and as such provides an accountability framework for the years 2006-08 and will be of a rolling nature. In addition, the cooperating partners which are part of the Wider Harmonization in Practice (WHiP) group, which includes IDA, are preparing a Joint Assistance Strategy for Zambia (JASZ) as a response to the new PRSP/FNDP in order to further increase aid coordination and reduce transaction cost to GRZ. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances · Building on what has been articulated under principle one and two; IDA's budget support operation is part of the support provided by all PRBS donors. As such, the bi-annual reviews agreed upon by GRZ and the PRBS donors are used to agree on the content of the forward-looking PAF, the performance under the PAF, and the aid modalities that GRZ can expect for its upcoming fiscal year. The first two issues mentioned are part of the discussions that take place in June of each year, while the announcement of the expected aid modalities in the form of budget support are communicated during the October review. Principle 4: Choose only actions critical for achieving results as conditions for disbursement · All proposed IDA release milestones are chosen from the PAF. The total indicators monitored through the PAF are 34 of which eight are proposed to guide IDA's disbursement under this operation. The 12Note that IDA did not use the iPAF for disbursing its funds as the previous EMGC operation which provided IDA's budget support for 2004 and 2005 through two tranches was already in place. EMGC I was prepared before other cooperating partners, except the EU, were ready to provide direct budget support. IDA was however a full partner in the preparation of the iPAF. 24 milestones chosen are those that overlap with the objectives of the CAS and the PRSP/FNDP and are thus critical to support the results agenda under the CAS. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support · Building on what is stated under principle 3, IDA announces in conjunction with all other PRBS donors its expected amount for budget support for GRZ's next fiscal year at the October PRBS review meeting. These dates are chosen indeed to allow GRZ to prepare its budget knowing the amounts it can expect as budget support. · The PAF is a mix of process and outcome indicators (see Annex 2 (with process indicators mostly identified for the first year, i.e. 2006, as a means to pave the path to reaching the results, which are identified in accompanying outcome indicators in the outer years. 65. The MoU identifies two categories of performance that are important for disbursement. First, performance is measured against so-called underlying principles. These comprise of: (i) GRZ's commitment to fight poverty, including through a pattern of public expenditure consistent with poverty reduction priorities as identified in Zambia's National Development Plan; (ii) GRZ's commitment to peace, democratic principles, the rule of law, good governance and integrity in public life, including the fight against corruption; (iii) GRZ's commitment to public financial management reforms as witnessed by satisfactory progress with the PEMFA program; (iv) GRZ's commitment to pursuing sound macro-economic policies, as is shown by a positive IMF assessment of overall macro-economic performance. Second, performance against specific process and outcome indicators as specified in the PAF. The PAF itself does not include indicators related to the underlying principles.13 66. The MoU allows each donor to decide how much it will disburse against the underlying principles and/or against all or a subset of indicators spelled out in the PAF. At present there are 34 indicators and milestones included in the PAF. For each of the indicators and milestones a baseline figure for the year 2005 has been included as well as outcomes for the years 2006, 2007, and 2008. The targets for the outer two years may be revised based upon performance for the year 2006. The proposed IDA operation is linked explicitly to eight release milestones out of 34 indicators identified in the PAF for 2006 (see table 4: EMGC II - credit milestones). 67. Preparation and review process of PAF. The PAF for 2006-08 was jointly prepared with GRZ, in particular with staff of MoFNP, and PRBS donors, including IDA. Extensive consultations took place with the Sectoral Advisory Groups (SAGs), which consist of Government officials, representatives of Non-Government Organizations (NGO), civil society, business organizations, and donors. The SAGs are also the main forum used by GRZ to discuss the PRSP/FNDP and progress with its implementation. All PRBS donors at the October 2006 review meeting endorsed the final version of the PAF. 13The PAF does include indicators that measure macro economic performance and public expenditure management but the underlying principles include a wider set of indicators and actions on which the donors evaluate the performance of the Government. 25 68. The Government and the PRBS donors meet twice a year to review performance in relation to the agreed PAF for the previous year, and to agree the contents of the PAF for the next year. The joint review meetings take place each year in June and October: a. The June review meeting focuses on the PRBS donors and Government coming to a joint view on performance, which serves as the basis for commitments for the next budget year. The review is based on the National Development Plan's Annual Review, the annual Public Expenditure Management and Financial Accountability (PEMFA) progress reports, Quarterly Budget Execution Reports and related information, plus the national audits; b. The October review meeting focuses on dialogue on forward planning and budgeting and agreement on the PAF for the next budget year. This dialogue is based on the annual Financial Reports of the previous budget year, the Annual PEMFA Evaluation and the ceilings in the annual budget for the next budget year, as specified in Zambia's MTEF Green Paper. During this Review meeting, each member of the PRBS Group confirms the volume of its commitment. During this review meeting, Government and PRBS donors agree on the PAF for the next budget year, and any PRBS donor i.e. IDA, intending to provide a floating element will confirm against the new PAF the specific milestones, indicators and/or targets that will trigger, when met, an immediate disbursement at the relevant review meeting in the following year. The first review of the full PAF took place in June 2007 and its evaluation is attached to the program document as Annex 2.. 69. Collaboration with the IMF. The achievements of the proposed EMGC II goals are strengthened by IDA's close collaboration with the IMF. Benchmarks designed to improve the management of public expenditure through greater financial discipline and accountability complement the IMF's support for revenue mobilization and expenditure control. The IMF's structural policy benchmarks are again developed in close consultations with IDA and also stress the complementarities between the two programs. The IMF PRGF program was approved in June 2004 and expired in September 2007. An understanding has been reached between the IMF and the authorities on a new three-year arrangement, which is expected to be presented to the IMF's executive board in the second quarter of 2008. 70. Relationship to other IDA operations. IDA has several operations and ongoing knowledge based activities that overlap with the areas covered by the proposed operation. In the area of Public Sector Reform IDA has in place a TA operation, Public Service Management Program14 assisting GRZ in the area of civil service and pay reform as well as with reforms in the area of public expenditure management and financial 14The PSM project in the amount of USD30 million was approved by the board on January 5, 2006 and was declared effective on May 10 2006. The operation contributes to a pooled funding arrangement and is for a part a follow up on the Public Sector Capacity Building project (PSCAP) which closed in 2005. 26 accountability, including the installation of an Integrated Financial Management Information System (IFMIS). The reforms in the area of wealth creation are complementary to ongoing investment operation in infrastructure,15 agriculture,16 and private sector development with a focus on economic diversification.17 One of the main challenges for infrastructure development to contribute to economic growth and increase access is resources for maintenance and investment, which is hampered by tariff levels that do not guarantee revenue adequacy. In the area of social equity, IDA is currently implementing a HIV/AIDS project,18 and after the closure of its Basic Education project in June 2006, IDA has taken on the roll of providing knowledge transfers to GRZ and cooperating partners for the remainder of the CAS. As such, IDA has prepared a Public Expenditure Review for the education sector. In the health sector, IDA currently also provides knowledge based services and is in the process of finalizing a PER for the health sector. 71. Lessons learned. It will be necessary to take on board lessons learned from the recently completed EMGC, which have been articulated in its Implementation Completion Report (ICR) and IEG's evaluation of the EMGC operation,19 and from the Country Assistance Evaluation by the World Bank's Independent Evaluation Department (IED)20 as it will improve effectiveness of this and future IDA programs. In developing the program supported by the proposed operation, lessons learned from the two reports, have led to recognizing that (a) institutional reforms require a longer time horizon than one year quick disbursing credit by anchoring the reforms in a three your rolling Performance Assessment Framework; (b) the need for experienced staff in the continuity of policy dialogue by teaming up with other cooperating partners who bring specialized skills to the team; (c) the need for continuity in the policy dialogue by signing up jointly with other cooperating partners and GRZ to an institutionalized implementation arrangement, which stipulates regular meetings between GRZ and PRBS donors to review progress and identify potential bottleneck with regard to GRZ's ability to reach the identified targets in the PAF. The latter has resulted in an agreement to have a high- level discussion on important policy issues at least once a year. 72. Analytical underpinnings. The proposed operation draws from a variety of economic sector work that includes the Public Expenditure Management and Accountability Report (PEMFAR), Country Economic Memorandum (CEM), Investment Climate Assessment (ICA), Foreign Investment Advisory Services' (FIAS) 15The Roads Rehabilitation and Maintenance Project of USD50 million was approved by the board on March 9, 2004 and declared effective on June 15, 2004. Additional financing in the amount of USD25 million was approved in 2007. A Water Sector Performance Improvement Project was approved by the board on October 5, 2006 in the amount of USD23 million. 16The Agriculture Development Support Program in the amount of USD37.2 million was approved by the board on May 16, 2006 and declared effective on September 12 2006. 17The SEED project in the amount of USD28.2 million was approved by the board on July 29 2004 and declared effective on November, 10 2004. 18The HIV/AIDS project, Zanara, in the amount of US42 million, was approved by the board on December 30, 2002 and declared effective on July 8 2003. 19See ICR of the EMGC operation, report No. 36495 ZA and IEG's evaluation dated March 26, 2007 20See the program document of the EMGC, report no. 29294 ZA, page 3, for an overview of its main recommendations for adjustment lending to GRZ. 27 Administrative Barriers to Investment report, Poverty and Vulnerability Assessment (PVA) as well as the diagnostic work on pro-poor growth undertaken by the Poverty group in PREM. In addition, the credit draws from reports and evaluations carried out by GRZ such as "Zambia: Public Financial Management Performance Report and Performance Indicators (PEFA)." In the social sectors the PAF has drawn on the recently completed PER on the education sector and on the preliminary findings of the Health PER. 73. The CEM combined with the Pro-Poor Growth publication by the Bank's PREM poverty group analyzes the potential of enhancing pro-poor growth in Zambia. One of its main conclusions is that the impact of growth on the poor can be enhanced by ensuring that rural dwellers can better participate in the economic process. The challenge identified is to improve the functioning of the agricultural sector while improving access to markets through a better road network and access to (micro) finance. This has influenced the FNDP and its focus on agriculture and physical infrastructure i.e. roads. The PVA confirms that to have a significant impact on poverty, particular attention needs to be paid to integrate more of the rural population into the economy. 74. The investment climate assessment ranks cost of finance and macroeconomic stability as the two main constraints to business. Obviously, the cost of finance is related to macro economic performance and to the functioning of the financial sector. In addition, the FSAP points directly to the need to improve the credit culture in Zambia as a means of reducing the cost of doing business in the financial sector. Both these reports have influenced the focus of the FSDP, which has guided the FNDP and the PAF for the financial sector. The Doing Business indicators, the Administrative barriers study as well as the DTIS have helped identify the need to reduce administrative barriers in particular in the areas of trade and licenses. These are the two main categories in which Zambia scores poorly. The milestones and indicators in the area of PSD are based on these findings. 75. The PEMFA report has guided the comprehensive reforms the Government is implementing in the area of public sector management. These reforms are supported under the PEMFA project, which receives funding from a large group of CPs including IDA. In addition, GRZ's PEFA reports have all identified the main areas of public sector management in which Zambia should make improvements. This to ensure the sustainability of the macro economic framework, the ability to direct resources to those expenditure programs that are a priority of Zambia's PRSP, and to improve the credibility and accountability of the Government with the business sector as well as civil society. V. THE PROPOSED SECOND ECONOMIC MANAGEMENT AND GROWTH CREDIT 76. Operation description and Policy areas. Partly at the request of Government and partly because of the need to increase the impact of growth on the poor, this operation focuses on those components of the FNDP, i.e., wealth creation, macroeconomic management and public sector reform that enhance the positive impact of growth on the poor, add to the sustainability of the current growth momentum, and contribute indirectly 28 to the sustainability of (social) service delivery and contribute to the results specified in the CASs (see Annex 3: results framework and alignment with the strategic priorities of the CAS and FNDP). Accordingly, the proposed operation has selected eight credit release milestones in the areas mentioned. See Table 4: EMGC II ­ Credit Milestones. Table 3: EMGC II - CREDIT MILESTONES By Board presentation (Prior Actions) A. Public Sector Reform A.1. Public Service Management PSMD in cabinet office has implemented a payroll management and establishment control system in six additional central spending agencies enabling the human resource officers to directly access the system. A.2. Public Finance Management The Ministry of Finance and National Planning has ensured more predictability of budget execution by providing to 34 out of 49 budget heads with annual calculated expenditures of between 95% and 105% of the total funding for fiscal year 2006. The Ministry of Finance and National Planning has reduced domestic arrears to suppliers with: (i) stocks diminishing from ZK532.8 billion at the end of 2005 to equal or less than ZK491.8 billion at the end of 2006 (ii) ZK 147 billion released to further pay down the arrears in 2007; and (iii) a commitment expressed in the 2008-2010 MTEF/Green paper and the 2008 budget to reduce these arrears to negligible levels by 2009. . B. Macro Economic Management B.1. Financial Sector Development The Bank of Zambia has issued a license for the creation of a credit reference bureau. B.2. Public Service Pension Fund The Ministry of Finance and National Planning has implemented a phased reduction of arrears of contributions owed by the Government to the Public Service Pension Fund with: (i) stocks diminishing from ZK 464 billion at the end of 2005 to equal or less than ZK 388 billion at the end of 2006; (ii) ZK 112 billion released to further pay down arrears in 2007; and (iii) a commitment expressed in the 2008-2010 MTEF/Green paper and the 2008 budget to reduce these arrears to negligible levels by the end of 2008. C. Wealth Creation C.1. Agriculture The Ministry of Agriculture and Cooperatives has drafted and finalized consultations with stakeholders on an agricultural marketing legislation. C.2. Infrastructure The authorities have strengthened its capacity to address identified bottlenecks to development in the management of the road infrastructure by filling 80 percent of the staffing vacancies of the National Road Fund Agency, the Road Development Agency, and the Road Transport and Safety Agency. C.3 Private Sector Development The authorities have: (i) established the Zambia Development Agency taking on the responsibilities of the former Zambia Investment Center, Zambia Privatization Agency, Zambia Export and Processing Zone Agency, Small Enterprise Development Board, and Export Board of Zambia; and (ii) developed an implementation plan for the ZDA to accomplish further progress in the areas of removal of barriers to export and setting up of businesses VI. OPERATION IMPLEMENTATION 29 77. Poverty and social impacts. The proposed EMGC II will have an important, though indirect, effect on poverty reduction, since it will support the Government's effort with regard to FNDP implementation. It will facilitate poverty reduction mainly through three channels. The first channel is by assisting the Government to maintain a growth conducive macroeconomic environment, which will aid the robustness of the current growth momentum. The second channel is through the continued support to improve public sector management processes that will enhance the Government's ability to direct its scarce resources to those expenditure programs that will reduce poverty more efficiently and more effectively. The third channel is by contributing to a reduction in the cost of doing business in Zambia, by putting in place or making operational institutional arrangements that can directly or indirectly contribute to increased productivity of the private sector. 78. Environmental impacts. An effort was made to assess and address the likelihood of significant effects of policies supported by the DPO on the environment, natural resources, or forests including assessment of the government's systems for reducing adverse effects and enhancing positive effects. There are two areas of the proposed EMGC II that require further attention with respect to environmental issues. These are: (i) the development of an Agricultural Marketing Act, and (ii) increased staffing of three new road agencies. 79. Development of Agricultural Marketing Act. EMGC II supports the effort to develop a competitive, efficient, and transparent public and private sector driven marketing system for agricultural commodities. As the draft Agricultural Marketing Act (AGM) act is still under preparation, any environmental impacts are difficult to predict. In the past, discretionary policies by the government negatively affected the ability of the private sector to invest in the market. If the new AGM Act will include clear rules for the private and public sector, the predictability of market outcomes for all participants will increase. As a result, the private sector will face reduced costs related to risk and uncertainty, such that the profitability of commercial agriculture is likely to increase, leading to production enhancing investments. In principle, increased agricultural activity may lead to encroachment of previously forested lands for agriculture production and increased intensification. Environmental impacts associated with the development of a more transparent marketing system are therefore likely. 80. In the short to medium term, the majority of agricultural investments induced by an improved Agricultural Marketing Act will be carried out by large scale commercial farms and corporations (ca 700 in total) and by emergent, commercial farmers (totaling 50,000). For two reasons, significant negative effects of these investments are less likely. First, the Environmental Protection and Pollution Control Act (EPPCA) from 1990 requires that an EIA be prepared for all investments that have a major impact on the environment. EIA procedures are defined by the Environmental Impact Assessment Regulations (1997) and include the identification and implementation of adequate environmental mitigation measures. As EIAs are the main source of income for the Environmental Council of Zambia (ECZ), it has a strong incentive to follow up on these regulations. Second, due to the strong presence of the Bank as a lead donor in 30 agriculture, actively supporting the development of commercial agriculture, an additional mechanism to monitor these investments is in place. 81. The FNDP identifies the agricultural sector as one of the main sources of growth and broad-based poverty reduction in Zambia. In the medium to long term, the pressure on natural resources, arable and rangelands is therefore likely to increase. The FNDP recognizes that sustainable management of the natural resource base will be key to maintaining current and sustaining future growth and poverty reduction in Zambia. While as yet unapproved, the National Policy on Environment (NPE) is designed for a 15 year period from effectiveness, to create "a comprehensive framework for effective natural resource utilization and environmental conservation", while being "sensitive to the demands of sustainable development". The main impact of agricultural growth on the environment will therefore depend on the implementation of the NPE. Currently, the implementation of environmental policies is limited by a lack of information management systems to establish trends in the status of Zambia's natural resources. It is therefore recommended that the Bank support the development of appropriate Information and Monitoring Systems for natural resource management. 82. Increased staffing of three new road agencies. The EMGC II supports the appropriate staffing levels of the newly created road agencies, National Road Fund Agency (NRFA), Road Development Agency (RDA), and Road Transport and Safety Agency (RTSA). The main objective of the creation of these new road agencies is to increase the predictability of financing and to strengthen implementation capacity. Part of the new structure is an Environmental Management Unit within the Planning Department of the Road Development Agency. As a result, environmental concerns are an integral part of the planning and design process. This is an improvement to the past, where environmental aspects were only considered at a very late stage of the planning process. The EMGC II support to the new road agencies is therefore expected to have a positive impact on the environment 83. Implementation and monitoring and evaluation. The agreement reached between cooperating partners and GRZ and made explicit in the MoU for budget support, defines reporting requirements, bi-annual meetings to discuss progress and possible revision of the PAF, as well as institutional arrangements and platforms for evaluation. In addition the cooperating partners under the MoU have agreed to provide budget support in a way that: (i) is aligned with GRZ cycles for planning, implementation, monitoring, reporting and funding; (ii) improves harmonization by eliminating bilateral administrative and reporting requirements as well as bilateral reviews; (iii) ensures transparency in Zambia of conditions and funding; and (iv) enhances the capacity of GRZ to meet its commitments by providing appropriate technical assistance and capacity building. 84. Disbursement. After Credit effectiveness and upon receipt of a withdrawal application signed by an authorized signatory, the single tranche withdrawal from the Credit Account will be deposited by IDA into an account designated by the Borrower at the Central Bank of Zambia which forms part of the country's foreign exchange reserves. The Borrower will ensure that upon deposit of the Credit proceeds into said account, an equivalent amount is credited in the borrower's accounting system to an account, 31 acceptable to the Bank, which finances budget obligations. The Government will confirm these transactions in writing within 30 days after receipt of the deposit from IDA. The proceeds of the Credit may not be used to finance expenditures excluded under the Credit Agreement. If the proceeds of the credit are used for ineligible purposes (for example, to finance goods or services on IDA's standard negative list), IDA will require the borrower to refund the amount directly to IDA. 85. Auditing, and Closing Date. The use of the equivalent amount of the Credit proceeds as described above for budgetary expenditure is subject to audit by the Auditor- general. IDA reserves the right to require an audit of the foreign exchange account at the Central Bank of Zambia (deposit account). MoFNP will arrange for the audit of the deposit account upon request by IDA in accordance with auditing standards and terms of reference acceptable to IDA and by auditors acceptable to IDA. The MoFNP will make the report on the audit of such account available to IDA not later than four months after the date of the Association's request. However, IDA will coordinate with other PRBS donors in the case it request an Audit as the memorandum of Understanding for PRBS donors includes the provision of an annual audit. The closing date of the Credit will be December 31, 2008. 86. Risks and risk mitigation. It is useful to make a distinction between the risks related to the proposed DPO and the implementation of the overall medium term program as articulated in the PAF of which the first year is supported by the proposed DPO. The risk related to this DPO is one of sustainability and maintenance of the implemented reforms. This is actually mitigated through the fact that the operation is embedded in a medium term performance assessment framework (PAF) that is aligned with the country's own development strategy, i.e., FNDP, and is undertaken in conjunction with all donors, which are providing budget support. Nevertheless, successful implementation of the PAF could face risks of the following nature: (i) political; (ii) macro economic; (iii) external developments; (iv) failure to contain the further spread of the HIV/AIDS pandemic; and (v) implementation capacity. 87. Political Risk. The outcome of the elections has shown that the current regime is susceptible and vulnerable to populous ideas. This can affect the attention needed to stay the course with the ongoing economic reform efforts to further strengthen the effectiveness of the public sector and the commitment to work towards a more private sector friendly economic environment. To mitigate these challenges IDA, through the activities identified under the FY08-11 CAS, will assist the authorities to strengthen the institutional capacity of key oversight agencies and support bottom-up initiatives that emphasize good governance. 88. Macroeconomic stability. Even though fiscal discipline has taken root in Zambia, relatively ineffective public expenditure management processes and populist tendencies can generate risks for macroeconomic performance in particular given the expected additional tax revenues coming from the mining sector under the revised fiscal regime for mining. The recent progress in regaining control over the fiscal situation and the decline in inflation together with the fact that Zambia has reached HIPC Completion and subsequently benefits from MDRI, could reduce the Government's willingness to 32 maintain a growth conducive macro economic framework. In addition, pressure by civil service unions for increases in wages and allowances and other non-priority sectors such as defense could potentially risk the successful execution of the fiscal program. A new three PRGF arrangement, membership of EITI++, and monitoring of budget execution through the PRBS related biannual reviews assist addressing these potential risks. 89. External Developments. The country is vulnerable to terms of trade shocks and droughts. The upsurge in copper prices and expended production of copper might re- ignite the hope that Zambia once more can count on the copper sector for economic success. This could potentially reduce the efforts to diversify the economy and as such reduce the pro-poor nature of Zambia's growth. IDA in collaboration with other cooperating partners supports GRZ's efforts to manage its mineral wealth such that it contributes to increased diversification. This includes assistance to increase institutional capacity to harness the mining boom and improvements in the business environment that improve productivity and thus Zambia's competitiveness. A reoccurrence of a drought would harm the recent gains in food security and could see a surge in the need for food imports. Several activities are supported to reduce the dependency on rain-fed agriculture. IDA is proposing under the FY08-11 CAS to support GRZ with an irrigation project as well as a water resource assistance strategy that can help the authorities to improve the management of its water resources partly with an aim to reduce the impact of droughts. 90. HIV/AIDS pandemic. HIV/AIDS remains the most significant health threat to Zambia's population and hence to its prosperity. The impact of the disease is increasingly visible in all spheres of Zambia's society and economy. With prevalence rates remaining in double-digit figures, the potential damage is enormous. Besides that the PAF, and thus EMGC II, monitors GRZ's efforts to fight the pandemic, the Bank's FY08-11 CAS requires that issues of HIV/AIDS are part of each IDA operations. 91. Implementation capacity. In addition to the risks identified in the CAS in this area, GRZ's weak policy implementation record, limited Government administrative capacity, and coordination among relevant agencies could lead to delays in the implementation of key measures. Several programs in particular through PEMFA are in place to assist the authorities to improve its capacity to manage the economy. 33 ANNEXES 34 35 36 37 38 39 40 41 42 43 Annexes Annex 2: Performance Assessment Framework 2006-08 44 Annexes Annex 2: Performance Assessment Framework 2006-08 45 Annexes Annex 2: Performance Assessment Framework 2006-08 46 Annexes Annex 2: Performance Assessment Framework 2006-08 47 Annexes Annex 2: Performance Assessment Framework 2006-08 48 Annexes Annex 2: Performance Assessment Framework 2006-08 49 Annexes Annex 2: Performance Assessment Framework 2006-08 50 Annexes Annex 2: Performance Assessment Framework 2006-08 51 Annexes Annex 2: Performance Assessment Framework 2006-08 52 Annexes Annex 2: Performance Assessment Framework 2006-08 53 Annexes Annex 2: Performance Assessment Framework 2006-08 54 Annexes Annex 2: Performance Assessment Framework 2006-08 55 Annexes Annex 2: Performance Assessment Framework 2006-08 56 Annexes Annex 2: Performance Assessment Framework 2006-08 57 Annexes Annex 2: Performance Assessment Framework 2006-08 58 Annexes Annex 2: Performance Assessment Framework 2006-08 59 Annexes Annex 2: Performance Assessment Framework 2006-08 60 Annexes Annex 2: Performance Assessment Framework 2006-08 61 Annexes Annex 2: Performance Assessment Framework 2006-08 62 Annexes Annex 2: Performance Assessment Framework 2006-08 63 Annexes Annex 2: Performance Assessment Framework 2006-08 64 Annexes Annex 2: Performance Assessment Framework 2006-08 65 Annexes Annex 2: Performance Assessment Framework 2006-08 66 Annexes Annex 2: Performance Assessment Framework 2006-08 67 Annexes Annex 2: Performance Assessment Framework 2006-08 68 Annexes Annex 2: Performance Assessment Framework 2006-08 69 Annexes Annex 2: Performance Assessment Framework 2006-08 70 Annexes Annex 2: Performance Assessment Framework 2006-08 71 Annexes Annex 2: Performance Assessment Framework 2006-08 72 Annexes Annex 2: Performance Assessment Framework 2006-08 73 Annexes Annex 2: Performance Assessment Framework 2006-08 74 Annexes Annex 2: Performance Assessment Framework 2006-08 75 Annexes Annex 2: Performance Assessment Framework 2006-08 76 Annexes Annex 2: Performance Assessment Framework 2006-08 77 Annexes Annex 2: Performance Assessment Framework 2006-08 78 Annexes Annex 2: Performance Assessment Framework 2006-08 79 Annexes Annex 2: Performance Assessment Framework 2006-08 80 Annexes Annex 2: Performance Assessment Framework 2006-08 81 Annexes Annex 2: Performance Assessment Framework 2006-08 82 Annexes Annex 2: Performance Assessment Framework 2006-08 83 Annexes Annex 2: Performance Assessment Framework 2006-08 84 Annexes Annex 2: Performance Assessment Framework 2006-08 85 Annexes Annex 2: Performance Assessment Framework 2006-08 86 Annexes Annex 2: Performance Assessment Framework 2006-08 87 Annexes Annex 2: Performance Assessment Framework 2006-08 88 Annexes Annex 2: Performance Assessment Framework 2006-08 89 Annexes Annex 2: Performance Assessment Framework 2006-08 90 Annexes Annex 2: Performance Assessment Framework 2006-08 91 Annexes Annex 2: Performance Assessment Framework 2006-08 92 Annexes Annex 2: Performance Assessment Framework 2006-08 93 Annexes Annex 2: Performance Assessment Framework 2006-08 101 Annexes Annex 2: Performance Assessment Framework 2006-08 102 Annexes Annex 2: Performance Assessment Framework 2006-08 103 Annexes Annex 2: Performance Assessment Framework 2006-08 101 Annexes Annex 2: Performance Assessment Framework 2006-08 102 Annexes Annex 2: Performance Assessment Framework 2006-08 103 Annexes Annex 2: Performance Assessment Framework 2006-08 104 Annexes Annex 3: Results Framework ANNEX 3: RESULTS FRAMEWORK AND ALIGNMENT WITH THE STRATEGIC PRIORITIES OF THE CASs AND FNDP Reform program supported by EMGC II and alignment with the strategic priorities of the CAS and FNDP Reform Priorities Expected DPO CAS outcome indicators to which Link to FNDP areas Outcomes the DPO will contribute CAS 2004-2007 CAS 2008-2011 Objective: to maintain and deepen Zambia's macroeconomic framework conducive to robust growth Fiscal policy Improved Improved 1.1. Macro economic management of management of Macroeconomic management public resources public resources framework and that supports and credibility as measured by expenditure pro-poor of Gov't vis-à- reduced arrears management economic growth vis domestic of Government maintain stability and a fiscal suppliers (including and support the policy that parastatals) from growth and maintains an estimated 2% diversification of macroeconomic of GDP in 2003 the economy. stability to, negligible percent in 2007 Pensions Reducing Pensions are arrears to paid on a timely Zambia's basis by public service Zambia's Public pension fund Pension Fund (PSPF) and (PSPF) general contractors Financial Improving Creditworthines Improving the 2.3 Improved Sector Zambia's s information of functioning of Access to business credit culture borrowers is the financial affordable environment, made available systems such finance especially for to Commercial that it can play micro-, small- Banks its role as and medium-size intermediary enterprises between (MSMEs). providers and Proportion of consumers of · adult population financial with access to resources affordable financial services (according to 105 Annexes Annex 3: Results Framework Reform program supported by EMGC II and alignment with the strategic priorities of the CAS and FNDP Reform Priorities Expected DPO CAS outcome indicators to which Link to FNDP areas Outcomes the DPO will contribute CAS 2004-2007 CAS 2008-2011 FinScope definition) increases from 37.7% in 2007 to 45% by 2011. Objective: to strengthen the credibility and institutional capacity of the public sector Public Improving Ability to Government 1.1. Public sector and expenditure budget execute in year executes an Macroeconomic fiscal policies management execution & programs has open/transparent framework and that improve financial improved and , timely and expenditure budget execution accountabilit disconnect realistic management y between plans budgeting maintain stability and budget process with and support the execution has lower levels of growth and been reduced financial waste diversification of the economy. · Budget presentation includes reporting on donor funding and revenues and expenditures of quasi-fiscal institutions (Bank of Zambia, the Public Service Pension Fund and state owned enterprises (SOEs), especially ZESCO). Civil service Improved Environment in 2.1 Strengthened Ensure that Expanding quality of data place for public financial personal the coverage maintained in improved management, emoluments and to additional PMEC performance by procurement and establishments spending the civil service oversight for the Public agencies of capacity. Sector are the PMEC CAS milestone: effectively system managed and · IFMIS fully maintained at implemented approved levels. and integrated with PMEC in at least 5 key ministries & 106 Annexes Annex 3: Results Framework Reform program supported by EMGC II and alignment with the strategic priorities of the CAS and FNDP Reform Priorities Expected DPO CAS outcome indicators to which Link to FNDP areas Outcomes the DPO will contribute CAS 2004-2007 CAS 2008-2011 piloted in at least 2 provinces (North Western, Eastern) by 2010. Objective: To enhance Zambia's growth opportunities while improving its poverty impact Private Assisting A simplified Administrative 2.3 Improved Wealth creation Sector GRZ to institutional barriers for business and Development reduce framework with exports, environment, enhancement of bureaucratic a well-defined investment and especially for efficient public procedures strategic production are micro-, small- service delivery that approach is in reduced and medium-size system negatively place to reduce enterprises affect the bureaucratic (MSMEs). investment procedures for and business businesses practices of the private sector Agriculture Roles of each Clarification of Poverty levels in 2.4 Improved Agricultural actor in the and consensus rural areas agricultural Marketing, agricultural reached on the indicate a need productivity and Trade & sector are roles and to orient growth marketing Agribusiness well defined mandates of towards sectors schemes. Development: each actor, that would · Value of Promotion of a public and benefit the rural agricultural competitive, private, in the areas and exports for target efficient and agricultural agricultural value chains transparent public marketing potential is not (cotton lint) from and private sector sectors. fully exploited USD43.4 mill in driven marketing (CAS Obstacle) 2006 to USD 65 system for mill by 2011. agricultural and CAS outcome commodities and 1.1: inputs. Road Road Road agencies Financial 3.1 Improved Public Infrastructur agencies are have the management and transport Infrastructure e appropriately minimum sustainability of infrastructure. Management: staffed, and capacity to infrastructure · % of rural Effectively operate their services is population with manage public statutory tasks improved with access to an (re- infrastructure to an increase in instated) all ensure private weather river accountability, investment for crossing in serviceability and service provision target provinces prolonged life (Luapula, span. Northern, Copperbelt Road provinces) from infrastructure development 107 Annexes Annex 3: Results Framework Reform program supported by EMGC II and alignment with the strategic priorities of the CAS and FNDP Reform Priorities Expected DPO CAS outcome indicators to which Link to FNDP areas Outcomes the DPO will contribute CAS 2004-2007 CAS 2008-2011 40% in 2007 to 80% in 2010. · Indicator on improved links between producers and agricultural markets in targeted project areas to be defined. 108 Annexes Annex 4: Fund Relations note ANNEX 4: FUND RELATIONS NOTE 109 Annexes Annex 4: Fund Relations note 110 Annexes Annex 5: Country at a Glance ANNEX 5: COUNTRY AT A GLANCE Zambia at a glance 10/5/07 Sub- Key Development Indicators Saharan Low Age distribution, 2006 Zambia Africa income (2006) Male Female Population, mid-year (millions) 11.9 770 2,403 70-74 Surface area (thousand sq. km) 753 24,265 29,215 60-64 Population growth (%) 1.7 2.3 1.8 50-54 Urban population (% of total population) 35 36 30 40-44 30-34 GNI (Atlas method, US$ billions) 8.1 648 1,562 20-24 GNI per capita (Atlas method, US$) 690 842 650 GNI per capita (PPP, international $) 1,000 2,032 2,698 10-14 0-4 GDP growth (%) 6.2 5.6 8.0 20 10 0 10 20 GDP per capita growth (%) 4.5 3.2 6.1 percent (most recent estimate, 2000­2006) Poverty headcount ratio at $1 a day (PPP, %) 53 41 .. Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2 a day (PPP, %) 87 72 .. Life expectancy at birth (years) 38 47 59 200 Infant mortality (per 1,000 live births) 102 96 75 180 Child malnutrition (% of children under 5) 23 29 .. 160 140 Adult literacy, male (% of ages 15 and older) .. 69 72 120 Adult literacy, female (% of ages 15 and older) .. 50 50 100 80 Gross primary enrollment, male (% of age group) 114 98 108 60 Gross primary enrollment, female (% of age group) 108 86 96 40 20 Access to an improved water source (% of population) 58 56 75 0 1990 1995 2000 2005 Access to improved sanitation facilities (% of population) .. 37 38 Zambia Sub-Saharan Africa Net Aid Flows 1980 1990 2000 2006 a (US$ millions) Net ODA and official aid 317 475 795 945 Growth of GDP and GDP per capita (%) Top 3 donors (in 2005): United Kingdom 43 43 111 166 10 Japan 13 40 32 132 5 United States 41 12 46 124 0 Aid (% of GNI) 8.8 15.8 25.7 13.3 -5 Aid per capita (US$) 52 57 74 81 -10 Long-Term Economic Trends -15 90 95 00 05 Consumer prices (annual % change) .. 117.5 26.0 8.2 GDP implicit deflator (annual % change) 11.8 106.4 30.0 12.2 GDP GDP per capita Exchange rate (annual average, local per US$) 0.8 34.5 3,110.8 3,601.0 Terms of trade index (2000 = 100) .. 147 100 222 1980­90 1990­2000 2000­06 (average annual growth %) Population, mid-year (millions) 6.1 8.4 10.7 11.9 3.2 2.4 1.7 GDP (US$ millions) 3,884 3,288 3,238 10,740 1.0 0.5 5.0 (% of GDP) Agriculture 14.0 18.2 19.9 20.4 3.6 4.2 2.1 Industry 39.1 45.3 22.5 30.7 1.0 -4.2 9.2 Manufacturing 16.9 31.9 10.2 10.4 4.1 0.8 5.4 Services 39.7 24.8 46.7 42.3 -0.2 2.5 5.9 Household final consumption expenditure 55.2 64.4 87.4 59.0 3.6 6.7 0.0 General gov't final consumption expenditure 25.5 19.0 9.5 10.2 -3.4 -8.1 24.5 Gross capital formation 23.3 17.3 17.4 24.0 -4.3 5.3 6.4 Exports of goods and services 41.4 35.9 27.1 38.2 -3.3 6.7 22.0 Imports of goods and services 45.4 36.6 41.5 29.6 -2.0 15.5 15.6 Gross savings 7.3 6.9 -1.2 34.0 Note: Figures in italics are for years other than those specified. 2006 data are preliminary. .. indicates data are not available. a. Aid data are for 2005. Development Economics, Development Data Group (DECDG). 111 Annexes Annex 5: Country at a Glance Zambia Balance of Payments and Trade 2000 2006 Governance indicators, 2000 and 2006 (US$ millions) Total merchandise exports (fob) 757 3,819 Total merchandise imports (cif) 978 2,636 Voice and accountability Net trade in goods and services -446 931 Political stability Current account balance -588 108 as a % of GDP -18.2 1.0 Regulatory quality Rule of law Workers' remittances and compensation of employees (receipts) .. .. Control of corruption Reserves, including gold 114 595 0 25 50 75 100 2006 Country's percentile rank (0-100) Central Government Finance 2000 higher values imply better ratings (% of GDP) Source: Kaufmann-Kraay-Mastruzzi, World Bank Current revenue (including grants) 19.4 17.2 Tax revenue 17.3 16.5 Current expenditure 16.9 19.2 Technology and Infrastructure 2000 2005 Overall surplus/deficit -11.6 -6.9 Paved roads (% of total) 22.0 .. Highest marginal tax rate (%) Fixed line and mobile phone Individual 30 30 subscribers (per 1,000 people) .. .. Corporate 35 35 High technology exports (% of manufactured exports) 0.6 1.1 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 5,722 961 Agricultural land (% of land area) 47 47 Total debt service 185 66 Forest area (% of land area) .. .. Debt relief (HIPC, MDRI) 3,096 1,522 Nationally protected areas (% of land area) .. .. Total debt (% of GDP) 176.7 8.9 Freshwater resources per capita (cu. meters) .. 6,873 Total debt service (% of exports) 21.1 1.6 Freshwater withdrawal (% of internal resources) 2.2 .. Foreign direct investment (net inflows) 122 380 CO2 emissions per capita (mt) 0.17 0.19 Portfolio equity (net inflows) -1 92 GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) 1.3 1.5 Composition of total external debt, 2006 Energy use per capita (kg of oil equivalent) 586 605 Private, 62 Short-term, 0 IBRD, 0 IDA, 260 World Bank Group portfolio 2000 2006 (US$ millions) IMF, 42 IBRD Total debt outstanding and disbursed 25 0 Bilateral, 499 Disbursements 0 0 Principal repayments 8 0 Other multi- Interest payments 14 6 lateral, 98 US$ millions IDA Total debt outstanding and disbursed 1,823 260 Disbursements 210 59 Private Sector Development 2000 2006 Total debt service 17 9 Time required to start a business (days) ­ 35 IFC (fiscal year) Cost to start a business (% of GNI per capita) ­ 29.9 Total disbursed and outstanding portfolio 22 6 Time required to register property (days) ­ 70 of which IFC own account 22 6 Disbursements for IFC own account 16 0 Ranked as a major constraint to business Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 1 2 Access to/cost of financing 84.5 .. Tax rates 57.5 .. MIGA Gross exposure 31 0 Stock market capitalization (% of GDP) 7.3 13.6 New guarantees 30 0 Bank capital to asset ratio (%) .. .. Note: Figures in italics are for years other than those specified. 2006 data are preliminary. 10/5/07 .. indicates data are not available. ­ indicates observation is not applicable. Development Economics, Development Data Group (DECDG). 112 Appendix LIC DSA 113 Appendix LIC DSA 114 Appendix LIC DSA 115 Appendix LIC DSA 116 Appendix LIC DSA 117 Appendix LIC DSA 118 Appendix LIC DSA 119 Appendix LIC DSA 120 Appendix LIC DSA 121 Appendix LIC DSA 122 Appendix LIC DSA 123 Appendix LIC DSA 124 Appendix LIC DSA 125 MAP SECTION 22°E 26°E 30°E This map was produced by the Map Design Unit of The Lake World Bank. The boundaries, 8°S Tanganyika colors, denominations and any other information shown To To TANZANIA on this map do not imply, on the part of The World Bank Sumbu Sumbawanga Kaputa Group, any judgment on the legal status of any territory, Mpulungu or any endorsement or Lake a c c e p t a n c e o f s u c h ZAMBIA Mweru Lake Mbala To To boundaries. Mweru Mbeya Wantipa Nchelenge Mporokoso Mwenzo DEMOCRATIC REPUBLIC To To OF CONGO Kawambwa Mafinga Hills Karonga LUAPULA (2301 m) Luwingu Kasama N O R T H E R N To To Lake Mzuzu Lake To To Chambeshi Malawi Caianda Mansa Bangwelu Samfya Mwinilunga Kope 12°S To To Mpika Solwezi Lubumbashi Chembe 12°S Chisasa Mts. Luangwa To To Mutanda Mwanya Lumbala N O R T H - Chingola Mufulira W E S T E R N To Mokambo Ndola Muchinga Mfuwe Chavuma Kawana C O P P E R - Serenje MALAWI ANGOLA Lungwebungu Zambezi Manyinga Kasempa B E L T To To Chisomo Chipata MOZAMBIQUE Lutembo Mkushi Kabompo Lunga Kapiri Mposhi E A S T E R N Bus a n g a To To C E N T R A L Lilongwe Petauke Lukulu S wa m p Kafue Katete To To Old Mkushi Furancungo Lubungu g a Kabwe Nyimba Kaema Machechete MOZAMBIQUE (1488 m) Kalabo Zambezi Lukan Swamp Lunsemfwa Luampa Mumbwa Rufunsa Mongu Kaulishishi LUSAKA ZAMBIA (1420 m) To To Mavua W E S T E R N Namwala Kafue LUSAKA Cahora Bassa Mazabuka Kafue Luangwa 16°S To To M u l o n g a Senanga Kataba SELECTED CITIES AND TOWNS Chiume P la i n Chirundu To To Harare Sitoti S O U T H E R N PROVINCE CAPITALS Shangombo Malundano Kariba Pemba Choma NATIONAL CAPITAL Cuando Mulobezi Lake ZIMBABWE RIVERS Bowwood Kalomo Kariba MAIN ROADS Sesheke OCTOBER To To Senkobo RAILROADS IBRD Ngoma 0 50 100 150 200 Kilometers NAMIBIA Livingstone Pokuma PROVINCE BOUNDARIES To To Mpandamatenga 33514 To To 2004 INTERNATIONAL BOUNDARIES Matetsi 0 50 100 150 Miles 22°E BOTSWANA 26°E 30°E