Zambia and the IMF

Country's Policy Intentions Documents

See also:
Poverty Reduction Strategy Papers (PRSPs)



Zambia
Enhanced Structural Adjustment Facility
Policy Framework Paper, 1999-2001

Prepared by the Zambian authorities in collaboration
with the staffs of the Fund and the World Bank
March 10, 1999

Contents

  1. Introduction

  2. Recent Economic and Financial Developments

  3. Overall Objectives and Macroeconomic Framework
    1. Sources of Economic Growth
    2. Fiscal Policy
    3. Monetary Policy
    4. Trade Liberalization and Exchange Policy

  4. Institutional Reforms
    1. Privatization and Parastatal Reforms
    2. Public Sector Management
    3. Financial Sector Reform

  5. Sector Policies
    1. Agriculture
    2. Mining
    3. Tourism
    4. Transport
    5. Water
    6. Energy

  6. Poverty Reduction, Human Resource Development, and the Environment
    1. Health
    2. Education
    3. Environment

  7. External Financing Requirements
    1. Sustainability of External Debt

Tables

  1. Zambia: Selected Economic and Financial Indicators, 1996-2001
  2. Zambia: External Financing Requirement, 1996-2001
  3. Zambia: Structural Policy Matrix, 1999-2001

 

I. Introduction

1.  Since Zambia embarked on its structural adjustment program in late 1991, much has been accomplished. The economy has been liberalized, and the macroeconomic situation has improved considerably. Nonetheless, much remains to be done. In the coming three years, government economic policies will focus on further reducing inflation, promoting economic growth, and moving toward a sustainable balance of payments position. The ultimate goal of these policies is to reduce the incidence of poverty in Zambia and to improve the well-being of the Zambian people.

2.  This policy framework paper (PFP) gives an overview of the government's adjustment program for the period 1999–2001. It updates and extends the PFP that was prepared in 1995. The next section briefly reviews recent economic and financial developments and policy implementation. Section III discusses the overall macroeconomic program for 1999–2001, and Sections IV–VI deal with institutional reforms and sectoral policies. External financing requirements are discussed in Section VII, and the sustainability of Zambia's external debt is assessed in Section VIII.

Contents

II. Recent Economic and Financial Developments

3.  Since 1991, far-reaching structural reforms have been implemented, including (i) the decontrol of agricultural prices and the liberalization of maize marketing; (ii)  substantial progress on a comprehensive parastatal reform and privatization program; (iii)  the decontrol of interest rates, (iv)  the removal of exchange controls and the floating of the kwacha; (v) the liberalization of the banking sector; and (vi) the removal of quantitative restrictions on imports and exports, as well as the reduction of the level and dispersion of customs tariffs. These reforms, coupled with efforts to pursue stable financial policies, have improved Zambia's economic outlook considerably. Nonetheless, economic performance was uneven, as several droughts and falling copper production caused negative economic growth during 1991–95, and real per capita GDP declined by more than 20  percent during this period. Economic activity recovered significantly after the mid-1990s, with real GDP expanding by 6  percent in 1996 and 3  percent in 1997. The turnaround in economic activity was helped by the near doubling of the maize harvest in 1996 and strong growth in nontraditional exports. The tightening of monetary policy contributed to a steady decline in the rate of inflation from 35  percent in 1996 to 18  percent in 1997.

4.  As a result of adverse weather conditions, the sharp decline in copper exports, and the weakening of the financial position of the copper parastatal (ZCCM), real GDP contracted by an estimated 2  percent in 1998 (Table 1). Inflation increased since the beginning of 1998 to 31  percent by end-January 1999, reflecting mainly the pressures on domestic food prices and the pass-through effects of the depreciation of the kwacha since late 1997. Owing to revenue shortfalls and spending overruns, mainly on public service retrenchment and domestic arrears, the overall fiscal balance (excluding grants) widened in 1998 to 10  percent of GDP from 7  percent in 1997.

5.  Progress has been made on a broad range of structural issues. The privatization of nonmining public enterprises has continued at a rapid pace, with 224 companies/units privatized by end-December 1998 out of a total portfolio of 282. Zambia's privatization efforts suffered a setback when an international consortium withdrew from the negotiations on the sale of the largest asset package of the ZCCM in May 1998, but the process of privatizing the ZCCM gained renewed momentum in December 1998. Financial sector reform has also advanced, as the Bank of Zambia (BoZ) has strengthened supervision of commercial banks and gazetted regulations on large loan exposure, insider lending, and provisioning. The central bank also made progress in strengthening the commercial banking system. By early-1998, one distressed bank was taken over by a larger bank, while four others were put under receivership. Also, on September 1, 1997, the government adopted a medium-term public service reform program aimed at reducing the size of the nonmilitary public service from 136,775 to 80,000 persons by end-1999. In the context of this program, about 7,600 public servants were separated in December 1997, and another 7,900 employees were retrenched in 1998.

Contents

III. Overall Objectives and Macroeconomic Framework

6.  The government's macroeconomic objectives for the period 1999–2001 are to achieve sustained economic growth of about 5  percent a year, reduce inflation to 4  percent, and strengthen Zambia's gross official reserves from the equivalent of two weeks of imports at end-1998 to about three months in 2001.

A. Sources of Economic Growth

7.  The medium-term growth projections assume an increase in copper production of about 10  percent a year, agricultural output growth of some 7 to 8  percent a year, and an expansion in nontraditional exports of about 13  percent a year. The growth prospects over the medium term are underpinned by a projected rise in the investment-GDP ratio from 14  percent in 1998 to 20  percent in 2001. The investment growth is expected to come mainly from the mining and manufacturing sectors. While most of the higher investment will need to be financed by increased public savings and foreign capital inflows, private domestic savings would increase by more than 3  percentage points of GDP during the program period.


B. Fiscal Policy

8.  Key fiscal targets for 1999–2001 are to reduce the overall fiscal deficit (including grants) while generating domestic budget surpluses (excluding exceptional lending to the ZCCM) of some 1  percent of GDP, which would create the necessary room for an expansion of private sector activity. The fiscal stance will also allow Zambia to reduce over the medium term its dependence on external assistance as a source of budget financing. Strengthening tax administration and public expenditure management is key to achieving the fiscal objectives. Tax administration will need to be improved to increase effective tax yields, particularly with respect to income and corporate taxes. The public expenditure management system will need to be strengthened to avoid domestic arrears and ensure the proper execution of the budget.

9.  The revenue-GDP ratio is programmed to increase by 1  percentage points of GDP over the medium term. Building on the progress already made in restructuring the tax system, a further shift is envisaged of the incidence of taxation toward domestic sources and away from international trade. Given the limited scope for raising tax rates, the bulk of domestic revenue improvements will need to be found in the strengthening of tax administration. The efficiency and performance of the value-added tax (VAT) will be improved by further reducing fraud, while the current one-rate structure will be maintained. In addition, the company income tax rate structure will be reviewed with a view to its unification. Efforts to combat smuggling and customs fraud will be intensified by strengthening the customs administration and intensifying cooperation with customs officials in neighboring countries.

10.  The government recognizes that public expenditure needs to be restructured to safeguard priority spending in the social sectors and infrastructure investments. The reduction in the size of the public service will allow the government to lower wage payments in  percent of total domestic noninterest expenditures from 37  percent in 1996–98 to 25  percent in 2001, while bringing the wage bill relative to GDP down to below 5  percent as of 2000. The reduction in the stock of domestic debt and the declining interest rates will lead to a drop in domestic interest payments of about of 1  percentage point of GDP between 1998 and 2001. Lower wage and interest payments in relation to GDP will, in turn, create room for the needed increases in domestically financed public investment and social expenditures. Between 1998 and 2001, domestically financed public investment is projected to increase by about 1  percentage points to 3  percent of GDP, in line with the medium-term growth objectives of the program. This increase will be realized in the context of a medium-term public investment program that identifies priority infrastructure projects in tourism, agriculture, and social services. To improve fiscal performance, the government will give high priority to the strengthening of commitment controls and the elimination of domestic payments arrears.

C. Monetary Policy

11.  Monetary and credit policies will play a crucial role in reducing the rate of inflation. A strong anti-inflationary policy will require improvements in the effectiveness of monetary policy, including through a broadening of instruments. In this context, the BoZ will intensify the use of open market operations and reduce reliance on cash and liquidity reserve requirements as instruments of credit control. An enhancement of confidence in the internal and external value of the kwacha will also help the BoZ develop a market for medium- and long-term government bonds, which will widen the available options for open market operations and reduce the sensitivity of the government budget to short-term fluctuations in interest rates.

D. Trade Liberalization and Exchange Policy

12.  The 1996 tariff reform and the elimination of the import declaration fee in 1998 have stimulated Zambia's external competitiveness by reducing duties on imported inputs. The government is committed to maintaining a liberal trade and exchange regime, and to continuing trade liberalization as part of the Cross-Border Initiative (CBI). Average import tariffs have been reduced to below 15  percent, and the tariff schedule consists of only three nonzero rates, with a maximum of 25  percent, which is consistent with Zambia's commitments under the CBI. Over the medium term, the government aims to reduce the weighted-average import tariff to close to 10  percent. To this effect, the maximum rate will be reduced to 20  percent in 2001. Also, the mechanism for consultation between the private sector and the government on export promotion will be  streamlined.

13.  The exchange rate of the kwacha is market determined, and the BoZ intends to continue its policy of refraining from interventions in the exchange market that go against underlying market trends. The authorities will closely monitor conditions in the exchange market and developments in other major countries in the region, with a view to adapting policies if exchange rate developments jeopardize the inflation objective or the profitability of Zambia's tradable goods sector.

Contents

IV. Institutional Reforms
A. Privatization and Parastatal Reforms

14.  Privatization of state enterprises is key to the government's efforts to raise efficiency, promote private sector development, and bolster economic growth. As part of the program, the government enacted a sound legal framework and established the Zambia Privatization Agency (ZPA). Significant progress has been made in implementing the privatization program, which started in 1993 with a list of about 138 companies to be privatized. This portfolio was increased to 282 entities in December 1998, of which 224 have been privatized. In the mining sector, six small copper and cobalt mines and ZCCM's Power Division were sold in 1997–98, while preliminary agreements were reached on the privatization of the remaining large assets—the Konkola, Nchanga, Nkana and Mufulira Divisions—as well as the Ndola Lime Company.

15.  The government also intends to pursue a far-reaching privatization program in other sectors. It aims to complete the divestiture of the remaining 50 commercial entities in the ZPA's current portfolio, and offer for sale a minority shareholding and management rights in (ZAMTEL) by September 1999. In the power subsector, the government will add the electricity company (ZESCO) to ZPA's portfolio in 1999 with a view towards its eventual privatization. In the petroleum sector, the government plans to establish a liberalized pricing and retail distribution system for petroleum products. Based on the conclusions of a fuel options study and the review of the institutional framework for the petroleum sector, to be completed by December 1999, the government will adopt an action plan by 2000. On the TAZAMA pipeline, discussions will begin with the Tanzanian authorities to examine the options for private sector participation in its operations.

16.  With regard to financial institutions, the government intends to privatize the state- owned institutions in accordance with the provisions of the Privatization Act, including the Zambia National Commercial Bank and Zambia State Insurance Company. Similarly, it intends to complete the privatization of the Zambia National Building Society and the National Savings and Credit Bank by 2000. In the transport sector, Zambia Railways has begun the implementation of a two-year management contract with a Swedish International Development Cooperation Agency (SIDA)-financed management team, while ZPA has initiated the examination of the railways' privatization options (see below). Concerning government departments, the government will decide on their divestiture in 1999.

B. Public Sector Management

17.  The cost-effectiveness of the public service has declined significantly over the past ten years. Wage costs account for about 29  percent of domestic fiscal resources and crowd out expenditure on essential supplies and capital spending. As wage levels and pay differentials in the public sector have been compressed, it has become difficult to attract and retain skilled personnel. Moreover, even the available manpower is not used efficiently because of inappropriate management and organizational structures. Consequently, the public service has become generally unresponsive to the country's needs.

18.  In September 1997, the government adopted a public sector reform program (PSRP) aimed at, inter alia, reducing nonmilitary public employment, decompressing public sector salaries, strengthening the systems for controlling the public payroll, and improving performance management systems. Since then, some progress has been made toward realizing these goals. A World Bank-supported action and implementation plan for the program was prepared and approved by the cabinet in April 1998. A full-time Director General was appointed in early 1998 to oversee the implementation of the program. To ensure enforcement of tighter establishment controls, a limited hiring freeze was instituted in August 1997. Staffing reviews have been initiated for the ministries that account for the bulk of civil service employment.

19.  However, the original phasing of the program, as spelled out in the action plan finalized in April 1998, has been modified, reflecting the inadequate coordination among the key agencies responsible for the program. Specifically, the pace of retrenchment of pensionable civil servants will now be slower than was originally envisioned; meanwhile, improvements in payroll management controls, establishment controls, and performance management, as well as the ministerial staffing reviews and restructuring, will be completed later than was anticipated in the action plan.

20.  To ensure further progress on the PSRP, a revised action and implementation plan will be prepared with the support of the World Bank, and its implementation started during the first half of 1999. This plan will include time-bound actions in areas such as retrenchments, pay and pension policies, establishment and payroll controls, ministerial restructuring, performance monitoring, and the mitigation of the social impact of retrenchments. Of particular importance is the evaluation of various options for retrenching pensionable civil servants in an affordable manner. The possibility of altering the computation of pension benefits to retrenched civil servants and the feasibility of sending retrenchees, once identified, on forced leave so that they cannot benefit from future wage increases or changed pay scales will be examined in this context.

21.  The government intends to improve local government finances, with a view to ensuring that basic services are delivered effectively. The government also intends to decentralize part of the public service functions over the next ten years. A policy paper on decentralization was presented to the cabinet in 1998; it contains a fiscal framework that promotes efficient behavior on the part of municipalities and enables municipalities to increase their capacity for self-financing.

C. Financial Sector Reform

22.  The main priority in the financial sector will be strengthening prudential oversight of the banking system, which entails, inter alia, dealing effectively with banks that do not meet the capital adequacy requirements. On November 1, 1997, the new national payments system went into effect through the transfer of the operation of the clearinghouse to commercial banks. In this regard, the BoZ will continue to refrain from providing unsecured credit facilities to commercial banks. Also, no direct lending or deposit taking will take place through public agencies or institutions that are not licensed by the BoZ. In particular, the Development Bank of Zambia will not resume direct lending and will limit its activities to loan recovery. A newly established apex financing organization (Zambia Enterprise Financing), which will start its operations in early 1999, will channel external loans in support of private investment and exports through properly supervised financial institutions.

Governance issues

23.  The government will give high priority to further improving political and economic governance. It will continue to implement its action plan to strengthen procurement at the national, provincial, and district levels, with a view to making the system more transparent and accountable. Donor-supported activities to build capacity of financial institutions and the judiciary will also continue, including improving accounting and auditing standards and drafting laws. In addition, the government will ensure adequate budgetary provisions for the  recently established Election Commission, Anticorruption Commission, Drug Enforcement Commission, and Human Rights Commission. The government is preparing a comprehensive Governance Program for discussion with its external partners.

Contents

V. Sector Policies
A. Agriculture

24.  The primary objective of agricultural policies during 1999–2001 is to promote more efficient smallholder agricultural production, with a view to increasing agricultural output and nontraditional exports. The government's strategy emphasizes the diversification of output and the reduction of susceptibility to drought by (i) improving smallholder access to inputs and financial markets through the promotion of private sector activity in input distribution and agricultural marketing; (ii) providing effective technical and advisory services through the decentralization of adaptive research and extension services; and (iii) improving infrastructure. An important vehicle for the coordination of agricultural policies is the Agricultural Sector Investment Program (ASIP), which combines donor support into one program.

25.  The key elements of the government's agricultural reform policy have been liberalization and decentralization. The agricultural sector has been largely liberalized, as input supply and crop marketing have been privatized, prices are set in free and open markets, and restrictions on domestic and international trade have been removed. The strategic grain reserve will be procured and released through the market and will rely on the private sector. Distribution of fertilizer through government-appointed agents will be discontinued beginning with the next crop season (1999/2000) and will henceforth be handled through the private sector. The government also intends to sell on a competitive basis the agricultural inputs it receives in the form of external aid, to the extent that this is allowed by the donor.

26.  As part of its agricultural policies, the government will encourage the expansion of rural finance, with a view to developing effective and demand-driven financial intermediation and sustainable financial institutions. In remote parts of the country, the government will provide support through its regular extension programs, rural infrastructure development programs, and other arrangements, such as the Rural Investment Fund (RIF) under ASIP. To help improve the efficiency of smallholder agriculture, the government intends to raise the quality of publicly funded research and extension services, as well as improve land administration. Specific measures include making available affordable, yield-enhancing technologies and testing conservation tillage techniques. To improve rural roads, over 360 kilometers of feeder roads will be constructed over the next two years, and about 400 kilometers of roads will be rehabilitated. With respect to small irrigation projects, about 200 earth dams built over the last 20–30 years will be repaired, and 15 new earth dams will be constructed over the 1999–2001 period. The RIF will provide matching grants to smallholder farmers for small-scale capital investments and will accelerate disbursement of the US$27 million allocated under ASIP.

B. Mining

27.  Zambia adopted a new Mining Act in 1995 and a revised fiscal regime in 1997 to encourage exploration and mining development. Over 30 exploration licenses have been issued in the past few years, and over US$20 million was spent on exploration in 1997. As much as US$800 million could be invested in the sector over the coming three years. Zambia also has considerable potential for the mining of gemstone and industrial minerals, which have typically been extracted on a smaller scale. The government encourages the formalization of these activities through the provision of licenses for small-scale mining and gemstone trading; in addition, the Ministry of Mines will be establishing four regional mining licensing bureaus, and it is preparing specific initiatives to improve the efficiency of government services, including the establishment of libraries and the presentation of seminars and workshops on technology.

C. Tourism

28.  The slow development of Zambia's tourism industry has been due largely to limited infrastructure and unsatisfactory management of the parastatal lodges. Several developments in the past few years have boosted the tourism sector, including the establishment of eight private airlines. In mid-1997, the government adopted a Medium-Term Tourism Development Strategy, under which it will stimulate private sector development in tourism by fostering an economically and environmentally sustainable sector and by encouraging foreign and domestic investment. To this end, the government will also undertake infrastructure investment. A National Parks Act was adopted in early 1998, which is expected to contribute to a reduction in wildlife poaching. In addition, a Tourism and Hospitality Bill is being prepared for presentation to parliament in 1999.

D. Transport

29.  In order to develop an efficient transport network, the government aims to adopt a national transport policy by mid-1999. An important component of the policy is a World Bank-supported ten-year road sector investment program (ROADSIP), launched in 1997 to improve and rehabilitate the road network and to eliminate the maintenance backlog. The key targets of the first five years (1998–2003) of the program, estimated at US$450 million, are (i) to bring over 50  percent of the network (15,700 kilometers) under regular maintenance; (ii) to place 6,600 kilometers under periodic maintenance; and (iii) to rehabilitate 1,500 kilometers of roads. The program aims to increase the proportion of main roads and feeder roads in good condition to 45  percent and 15  percent, respectively.

30.  In addition to the ROADSIP, the government intends to strengthen the institutional capacity to manage and maintain the road network, promote greater private sector participation in the roads sector, improve the control and prioritization of roads-sector expenditures, and mobilize revenue through the Road Fund. Among measures to strengthen the institutional framework are the restructuring of the Roads Department and a revision of the Roads and Road Traffic Act. Measures to improve revenue mobilization include the full transfer of fuel levy proceeds to the Road Fund within 30 days and the adjustment of road user fees in line with inflation.

31.  The railway network in Zambia is at the center of the international routes linking Zambia and the Democratic Republic of Congo to their neighboring countries, as well as to the seaports in Mozambique, Tanzania, Angola, and South Africa. However, because of the poor state of the rail track, operating inefficiencies, and the increasing frequency of accidents, Zambia Railways' freight traffic declined from 4 million tons to about 1 million tons between 1990 and 1996. The shift from trains to road traffic is estimated to cost the Zambian economy US$100–150 million per year in increased road deterioration and fuel costs. A SIDA-financed management team has been installed to immediately improve the railways' performance, while a more permanent solution is being sought by tendering concessions with regard to the railway system, which will take place before end-1999.

E. Water

32.  Increasing access to safe water is vital to the health of the population. Currently, about 70  percent of the urban population has access to piped water, but there are serious deficiencies in peri-urban areas and informal settlements. Only 10–30  percent of the rural population (varying across provinces) has access to safe water. The government has developed a national water strategy that will encompass rural and urban water supplies, river basin management, irrigation, and the control of pollution. In October 1997, parliament passed the Water Supply and Sanitation Act, which authorizes the establishment of commercial utilities and creates a regulatory body for these sectors. To enable these utilities to be established and ensure their viability, the government will clear its arrears to existing water supply agencies by end-1999. In addition, efforts are under way to deal urgently with deteriorating urban water systems by, inter alia, strengthening urban water management, rehabilitating water supply and sewage treatment facilities, and increasing fees and improving fee collection so as to generate the funds necessary to operate the water systems on a more commercial basis. The government's objective is to ensure that 50  percent of the rural population and 100  percent of the urban population will have access to clean water and sanitation by the year 2004.

F. Energy

33.  In the power sector, the government's main priorities are to attain financial viability for ZESCO, restructure it for privatization, facilitate private sector investment, and improve management of the Rural Electrification Fund, which, because of the tight budgetary situation in recent years, has received only a small part of the central government's revenues from the 10  percent levy on electricity tariffs. A 40  percent tariff increase for non-ZCCM customers, effective from January 1, 1998, and the finalization of a 15-year bulk sales agreement between ZESCO and the successor companies to ZCCM's power division will help strengthen the financial position of ZESCO. The accounts of ZESCO's generation, transmission, and distribution functions were separated in early 1998 in the context of a World Bank-supported reform program. A plan to contract out ZESCO's distribution system will be finalized and implemented by 2000. To facilitate private sector involvement in new generation and transmission projects, a hydropower and transmission policy was approved by the government in October 1998 that will make it possible to develop projects such as Kafue Lower Gorge and other power line interconnectors. In addition, the government has issued guidelines for improved management of the Rural Electrification Fund to speed up the collection and release of funds.

34.  The government has begun to establish regulatory arrangements for public utilities. Public utility prices need to be set at levels that provide adequate returns on capital and facilitate efficiency and investment, while ensuring that enterprises do not exploit their monopoly positions. The Energy Regulation Board, which was established in 1997, has the independent power to regulate electricity prices.

35.  As regards the oil sector, the government is committed to limiting its role to providing a policy environment conducive to energy development and conservation. To that end, the government will review the economic viability of the INDENI Refinery and the Zambia National Oil Company (ZNOC), continue to maintain a liberalized system of retail distribution and pricing, and remove all restrictions on oil imports by December 1999. In addition, the government will commission a study on fuel supply options, which is expected to be completed by December 1999. An action plan based on the findings of this study will be implemented in 2000.

Contents

VI. Poverty Reduction, Human Resource Development, and the Environment

36.  Poverty is widespread in Zambia, and its incidence has declined only marginally in recent years, with 70  percent of the population still classified as poor in 1996. Poverty is higher in rural areas and in female-headed households. The government has prepared a National Poverty Reduction Plan that aims at reducing the overall incidence of poverty to 50  percent of the population by the year 2004. This goal is to be achieved through rural development, increased infrastructure investment, human resource development, and targeted poverty reduction programs. In this regard, the government has agreed with the World Bank to allocate at least 36  percent of domestic expenditure (excluding debt service) to the social sectors in 1999–2001. The government also intends to promote the construction of dwellings and home ownership through the President's housing initiative, which is expected to gain momentum in 1999.

A. Health

37.  The quality of health services continues to be low, owing to the deterioration of facilities and equipment, shortages of drugs, and a poorly staffed, inefficient, predominantly publicly owned health system. The government is committed to providing affordable health care services to the population. It will continue to implement the medium-term sector strategy, adopted in 1995, which focuses on providing essential and cost-effective health care services; building districts' capacity to manage health services; improving logistical and information systems; developing human resources; and increasing local involvement in the development of health  services.

38.  The major policy issues in the health sector over the medium term concern the allocation and use of public resources. The allocation of resources to nonpersonnel costs in the health sector has declined in real terms over the past few years, even though the budget allocation to health services has stayed at about 12  percent of government outlays (excluding debt service). Although committed spending has been consistent with declared policies, actual expenditures have fallen short. Efforts will be intensified to increase the share of nonpersonnel expenditures.

39.  Another major budget priority is to raise the allocations to district health boards, which provide basic health care. The goal is to provide, by 2001, a package of essential services (costing about US$7 per person) to all Zambians, compared with an allocation of about US$3.20 in 1997. This increase will be financed by the reallocation of resources from lower-priority ministry and hospital expenditures.

B. Education

40.  Enhancing the quality of, and access to, education and training will be essential to raise the productivity of human capital, reduce poverty, and achieve higher economic growth. The education sector has experienced a deterioration in all major indicators. The net enrollment ratio at the primary school level (the  percentage of children of primary school age enrolled in school) fell from 73  percent in 1993 to 69  percent in 1996; in 1996, the rate of enrollment in rural areas was only 62  percent and in urban areas 81  percent. The decline in the quality and expectations of opportunities for formal sector employment has eroded parents' perception of the importance of education.

41.  The two key targets of the Basic Education Subsector Investment Program (BESSIP) are to increase the currently stagnant enrollment in lower and middle basic education (grades 1–7, formerly known as primary), by 4  percent per year, and to improve the quality of education as measured, inter alia, by student learning. Other important elements of BESSIP include the construction and rehabilitation of schools (26  percent are substandard); improvement of accessibility; provision of instructional materials aimed at achieving a pupil-book ratio of two to one in core subjects; improvement of the health and nutrition of schoolchildren; the creation of bursaries for impoverished students; and the development of capacity building so that district education boards can be established in all districts.

42.  The government also aims at gradually increasing the Ministry of Education's share of discretionary expenditures (excluding foreign aid) to about 20  percent in 1999. Within the education budget, the share allocated to lower and middle basic education (grades 1–7) will be increased from 47  percent in 1997 to 60  percent by 2001, while the share allocated to university education, currently 18  percent, will be reduced by discontinuing the practice of making welfare payments to all university students, regardless of need.

43.  The government plans to increase the number of trained teachers and reduce the number of untrained teachers, with a view to phasing the latter out over time. The strategy relies primarily on reducing the high rate of attrition from the teaching force by raising the compensation of trained teachers above the poverty line, and by improving teaching conditions and, in rural areas, housing. Additionally, the outflow of teachers from college is being increased by reducing resident training time from two years to one, with the second year spent at an outreach school. To improve the geographical distribution of teachers, employment of excess teachers (above school staffing norms) in urban areas will be discontinued by end-1999. The government will also make government-aided training institutions more effective by granting them more autonomy in management. The National Training Authority (NTA) will be charged with setting standards and qualifications for grades, regulating national examinations, and inspecting training institutions in the public and private sectors.

C. Environment

44.  Zambia has abundant water, land, and forests, but pressure on these resources has increased in recent years. Poverty, lack of understanding of environmental problems, weak administrative and legal support structures, and a breakdown of the traditional practices that helped to ensure the sustainability of the natural habitat have contributed to environmental degradation. The effects of this degradation can be seen most directly in declining agricultural productivity, owing to improper water and soil management; dwindling wildlife because of poaching; and declining earnings of fisheries because of overfishing and water pollution. Air and water pollution has affected the health and productivity of Zambia's workforce, particularly in the urban areas surrounding the mines, and facilities to manage sanitation and solid waste are inadequate or absent in some localities.

45.  In 1994, the government adopted a National Environmental Action Plan, which sets out environmental priorities and a framework for their implementation. It highlights five major environmental issues that need to be addressed: soil degradation, water pollution and inadequate sanitation, deforestation, air pollution, and wildlife depletion.

46.  To deal with these issues, the government is undertaking an Environmental Support Program (ESP), which is the first step of a long-term effort to strengthen environmental capacities. The ESP will (i) strengthen the institutional and regulatory framework for environmental protection and natural resources management, and (ii) enable communities to address the degradation of natural resources. Specifically, during the first phase of the ESP implementation, the government will focus on reviewing and harmonizing the legal framework, strengthening its capacity for environmental management, and launching a Community Environmental Management Program, which will be supported by a pilot Environmental Fund in two districts by mid-1999, and in seven more by 2002.

Contents

VII. External Financing Requirements

47.  In the wake of the recent economic crises in Asia, copper prices have weakened considerably, and no significant recovery from current levels is expected over the medium term. Nonetheless, a resumption of metal export growth is foreseen during 1999–2001, and a robust expansion of nontraditional exports is expected, as Zambia's market share for these products is rising from a very low base. In U.S. dollar terms, exports of goods and services are projected to grow by about 13  percent a year over the next three years. Imports are projected to rise by some 10  percent a year, largely on account of a pickup in investment in the mining sector. As a result, the deficit on the current account (excluding official transfers) is expected to return to its 1998 level (15  percent of GDP) in 2001 after widening in 1999. Over the period 1999–2001, the average annual current account deficit (excluding official transfers) is projected at about US$595 million, the scheduled amortization of external public debt is projected at about US$242 million annually, and the annual buildup of net international reserves is programmed to average US$85 million a year (Table 2).

Taking into account projected net private capital inflows of about US$177 million a year, mostly related to mining investment, Zambia's gross external financing requirement for the three-year period is estimated at US$2.8 billion. Part of this amount would be met by rescheduling eligible bilateral official debt service under a new Paris Club rescheduling agreement. The mobilization of official external financing, which is expected to take the form of grants and highly concessional loans, will depend critically on the successful implementation of the program described in this PFP. External financing of this broad magnitude will be key to realizing the growth and inflation objectives of the program while attaining the levels of public development expenditures necessary for a sustained reduction of poverty and an improvement in social indicators.

48.  For 1999, the total external financing requirement will be US$907 million. Official project financing (including commodity assistance) and private capital inflows are projected at US$381 million. Balance of payments assistance is projected at US$307 million. Of this amount, US$175 million would come from IDA loans and US$20 million from the African Development Fund, with the remainder comprising grants from the European Union and bilateral donors (US$112 million). The remaining US$219 million is expected to be financed by new rescheduling from Paris Club creditors.

49.   A similar mix of financing sources is foreseen for 2000–2001. Current debt service falling due on debt to non–Paris Club bilateral official creditors is negligible, but the government will make efforts to agree on a concessional rescheduling of arrears to these creditors (estimated at about US$300 million) on terms comparable to those granted by Paris Club participants.

A. Sustainability of External Debt

50.  An updated debt sustainability analysis (DSA) for Zambia suggests that, even with strong financial policies, the avoidance of nonconcessional borrowing, and the full use of traditional debt-relief mechanisms, Zambia's external public debt burden would not be reduced to sustainable levels before the middle of the next decade. The baseline scenario indicates that the ratio of the net present value of debt to exports, which was estimated at 510  percent at end-1998, would remain above 250  percent until 2005 and would not fall below 200  percent until 2010. Debt service after rescheduling would not fall below 25  percent of exports of goods and services until 2004, and it would then still be equivalent to about 35  percent of government revenue and about 30  percent of expenditure. In addition, the degree of improvement in the debt indicators was shown to be sensitive to assumptions about export prices and growth rates, as well as to the availability of concessional external assistance. In view of this, Zambia will seek exceptional debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative. Subject to satisfactory policy performance under Fund- and World Bank–supported adjustment programs as well as to the confirmation of the excessive weight of the external debt burden on the basis of a detailed DSA prepared jointly by the Fund and the World Bank staffs, Zambia will seek assistance under the Initiative.