1. Persistent news reports in the Zambian press have raised the issue of budget limits on the size of the government wage bill (as a percentage of GDP) and the role played by the Bretton Woods institutions, particularly the IMF in the determination of that limit.

2. At the outset it must be made absolutely clear that decisions relating to wage policy, as for all other policies, are, and must be, the responsibility of the government. The IMF's role has been, and continues to be, to advise government on the consequences of various policy options.

3. The government's objective of restoring macroeconomic stability has been the dominant issue in Fund staff's recent discussions with the authorities. The government, the IMF and Zambia's development partners agree that the reestablishment of fiscal discipline and an improvement in the quality of public expenditures are critical steps to not only improving macroeconomic performance but also to promoting poverty reduction. Given the resource constraints, the Government decided in the budget for 2004 to limit the wage bill as a ratio to GDP to 8 percent (from 8.6 percent in 2003). Fund staff considers that this level of the wage bill is consistent with the government's expenditure priorities. Even with this limit on the wage bill, there are sufficient resources to fund only a modest increase in poverty- reducing expenditures to about 2 percent of GDP in 2004, from 1.5 percent in 2003.

4. The limit on expenditures to be allocated to the wage bill is not an IMF imposition, but a manifestation of the fiscal reality in Zambia today. As the Minister of Finance and National Planning indicated in his budget speech, the wage bill takes up 43 percent of total domestic government revenue. This percentage is even higher, when account is taken of allowances paid to public servants reflected in other recurrent charges. There are about 120,000 civil servants (plus their dependants) taking nearly half of government domestic revenue. At the same time, the government has to provide for the rest of the population, the majority of whom have no wages or other regular income. That is one of the more fundamental distributional issues the government has to face in making budget decisions. There seems to be a consensus in Zambia that this latter group requires a significantly higher share of government resources than they have taken lately getting. This needs to be part of the policy agenda and of the national debate about government expenditures.

5. Fund staff believes that the average pay of civil servants would need to be substantially improved over the medium term to attract skilled and more productive personnel. For this to be done without creating fiscal difficulties for the government, the civil service reform program must be vigorously pursued. A start has been made, but a lot remains to be done before this reform can provide a basis for sustained real growth in civil service pay.