For more information, see Zambia and the IMF

The following item is a Letter of Intent of the government of Zambia, which describes the policies that Zambia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Zambia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Lusaka, March 29, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C.

Dear Mr. Köhler:

1.  In this letter, we discuss progress in implementing the 2000 program supported by the PRGF arrangement, and describe the government's key economic and financial policies for 2001. The letter also requests completion of the second review of the PRGF arrangement and the disbursement thereunder. As some performance criteria were not observed, the government is requesting waivers for their nonobservance. The attached Tables 1-4 report on developments with regard to quantitative performance criteria and benchmarks through end-December 2000, and on the performance criteria and benchmarks for 2001.

I.  Recent Economic Developments

2.  During 2000, Zambia's economic performance continued to improve, with real GDP growth estimated at about 3.6 percent, well above the slow pace recorded in the past several years. However, the twelve-month rate of inflation accelerated to about 30 percent, compared to 19 percent in the program, as a result of a sharp depreciation of the kwacha, a steep rise in the cost of fuel, transport and other services, and higher than programmed money growth.

3.  The fiscal stance was weaker than programmed. Although overall expenditures were broadly in line with the program projection, revenue and grants fell short of the program target (largely because of 2.2 percent of GDP shortfall in grants) and as a result, the overall fiscal deficit was higher than anticipated. The domestic fiscal deficit, at 3.4 percent of GDP, was also higher than the program estimate.

4.  Broad money expanded by 68 percent during 2000, compared with the program target of 25 percent. This increase was primarily due to the sharp depreciation of the kwacha, a rise in foreign currency deposits (FCD) as the newly privatized copper companies placed their foreign exchange earnings in the domestic banking system, and from increased dollarization of the economy. During the year, the kwacha depreciated vis-à-vis the U.S. dollar by some 37 percent in foreign currency terms, with most of the depreciation taking place in the fourth quarter--this represents a significant real depreciation. The main factors contributing to this depreciation included: (i) a weaker than expected overall external position; (ii) an increase in demand for dollars stemming from a loss in market confidence in the kwacha, as inflation accelerated; (iii) monetary expansion beyond program estimates; and (iv) possibly, political instability in the region.

5.  To address the mounting pressures on the exchange rate and prices, in December 2000 the Central Bank undertook to tighten monetary policy by: (i) increasing the statutory cash reserve requirement on domestic and foreign currency deposits from 8 percent to 11 percent--and, subsequently, to 15 percent in mid-January 2001; (ii) reducing monthly limits on the rediscount of government paper from 15 percent to 10 percent; and (iii) raising the penalty rate for non-compliance with reserve and rediscount requirements. In addition, the BoZ began to pursue more aggressive open market operations. In view of the severe pressures in the foreign exchange market, in mid-January 2001 the government introduced measures on foreign exchange transactions in order to discourage foreign currency outflows and speculation. During January, the BoZ rate appreciated by 15 percent in foreign currency terms.

II.  Program Implementation

6.  All the quantitative and structural performance criteria for end-September 2000 were met. In addition, all the benchmarks for end-September were met, including issuance by BoZ of a supervisory directive to the Zambia National Commercial Bank (ZNCB). Notwithstanding some improvement in certain areas, ZNCB's performance continues to be of concern and government has taken further measures to pre-empt any serious threat to the financial sector and government finances (paragraphs 28-29).

7.  The following quantitative performance criteria for end-December 2000 were met (Table 1): (i) the ceiling on domestic arrears; (ii) net international reserves of the BoZ;1 (iii) the ceiling on external payments arrears; (iv) new medium- and long-term nonconcessional debt; (v) ceiling on the stock of short-term debt; (vi) new loans collateralized or guaranteed by the central government or the BoZ for ZESCO and ZNOC; and (vii) net bank claims on government. However, the performance criteria were missed for the following: (i) the domestic budget balance; (ii) net domestic assets (NDA) of the BoZ; and (iii) the ceiling on the accumulation of new tax arrears from ZESCO and ZNOC to the central government.2

8.  All the program's structural performance criteria for end-December 2000 were observed including: (i) the prohibition against new tax rebates, reductions, exemptions or preferential treatment; (ii) the consolidation of each controlling officer's commercial bank accounts into a single account; and (iii) submission to Cabinet by ZPA of studies on the modalities for privatizing the electricity utility, ZESCO, and the ZNCB. Also, the structural benchmark on the publication of monthly data on budgetary cash allocations was met and data through end-December 2000 were published in February 2001. Owing to the complexity of the petroleum sector, the structural benchmark on effectively privatizing the petroleum sector was not observed.

9.  In the light of monetary measures already undertaken and the agreed strong macroeconomic policies for the 2001 PRGF-supported program, the government is requesting waivers for the nonobservance of the performance criteria indicated in paragraph 7.

III.  The Medium-Term Strategy

10.  The government's medium-term strategy is outlined in the Interim-PRSP.3 For the period 2001-03, the government aims to achieve sustained economic growth with low inflation, a substantial strengthening of the external sector, and a reduction of poverty. To achieve these objectives, the main macroeconomic targets for the period 2001-03 are to realize: (i) real GDP growth of around 5 percent a year; (ii) a substantial reduction of inflation to single digits by 2003; and (iii) a build-up of gross international reserves to the equivalent of about three-months of imports of goods and non-factor services by end-2003. This will be achieved by strengthening macroeconomic stability, and deepening structural reforms. This should help to mobilize both domestic and external resources, and provide an enabling environment for direct investment and for rapid and sustained economic growth, and poverty reduction.

11.  The medium-term fiscal objectives aim to enhance domestic resource mobilization for the social and poverty programs and for investment in infrastructure, and are consistent with lowering inflation to the single digit level and to moving toward a sustainable external current account deficit. Total revenues (excluding the clearance of ZESCO arrears) are projected to rise from 17.7 percent of GDP in 2000 to about 18 percent of GDP by 2003. Over the same period, total expenditures (after adjusting for relief on external interest obligations under the HIPC Initiative) are estimated to decline by around 4.5 percent of GDP. However, spending on social sectors is expected to increase from 4.5 percent of GDP in 2000 to 6.7 percent by 2003, as a result of HIPC resources.4

12.  Notwithstanding a substantial growth in exports, the external current account deficit (excluding grants) is expected to widen slightly from about 18.5 percent of GDP in 2000 to 19.9 percent in 2001 owing to strong growth in imports. Nonetheless, external financing, including debt relief under the Enhanced HIPC Initiative, should permit a build-up of gross reserves to a comfortable level by 2003. The financing gaps in 2002-03 are expected to be filled by new commitments of grants and highly concessional loans from bilateral and multilateral sources.

13.  The government is cognizant of the importance of continuing to deepen the on-going program of structural reforms to ensure that resources are deployed efficiently. In this context, the government is committed to the divestiture of key state enterprises, in line with the PRGF and HIPC Decision Point documents. Moreover, to improve the monitoring, control and auditing of expenditure, and in order to prevent the accumulation of domestic arrears, the government has agreed to a timetable for the implementation of the IFMIS and development of a medium-term expenditure framework (MTEF).

14.  Some progress has been achieved in preparing the full PRSP, especially on reviewing existing policies and future policy development. The PRSP will: analyze the nature and causes of poverty in Zambia, taking account of the new dimensions of poverty (including HIV/AIDS); specify policies designed to accelerate growth and poverty reduction; establish a poverty monitoring system; and include costings for the priority sectors and programs. Eight working groups have been formed to work on these issues, and a synthesis document is expected to be completed by March 2001 and sent to the provinces for consultations with civil society groups and provincial officials during April 2001. The technical secretariat has been expanded to include representatives from key line ministries, and a steering committee comprising ministers and high level officials has been set up to guide and endorse this process.

IV.  The Program For 2001

A.  Macroeconomic Policies

15.  Consistent with the medium-term framework, the main objectives of the program for 2001 are to: (i) increase real GDP growth to 5 percent largely on the basis of a strong recovery in mining; (ii) create conditions fostering exchange rate stability; (iii) reduce the 12-month rate of inflation to 17.5 percent by year-end; (iv) increase gross international reserves to the equivalent of 2 months of imports; and (v) start laying the basis for poverty reduction by increasing spending on key priorities in the social and economic sectors. These objectives will involve appropriate financial policies, a strengthening of structural reforms, and improvements in expenditure monitoring and control to ensure that the freed-up HIPC resources are used for poverty reduction.

The budget for 2001

16.  Fiscal policy will be geared toward promoting sustainable growth, and to supporting poverty-reducing expenditures. Total revenue and grants are projected to increase slightly by 1.5 percentage points of GDP, while total expenditures (including the statistical discrepancy) are projected to decline by 0.5 percentage points of GDP.

17.  The government intends to adopt several revenue measures to address poverty and improve the efficiency of the tax system. To counter the accumulated effect of inflation since 1996, the lowest PAYE band has been widened and the basic tax credit increased, and allowable deductions for pension contributions have also been raised. Other measures intended to help the poor and the vulnerable include exempting from income tax severance packages for employees who are retired on medical grounds, and removing the duty on mosquito nets. The government aims to boost lagging nontax revenue, including, in particular, efforts to ensure that lottery proceeds are collected and go to the government. Proceeds from any training or tourism levies that may be under consideration will also be channeled through the budget. To improve efficiency and revenue from the VAT, a set of measures to reduce the administrative costs of refunds will be put in place. In addition, the insurance industry will be moved to VAT-exempt status to reduce the exceptionally high level of VAT refunds to the industry. To preserve the excise revenue base, ZNOC will be registered as a licensed manufacturer under Section 93 of the Customs and Excise Act and its storage tanks will be designated as a licensed bonded warehouse. This will ensure that valuation of locally produced petroleum products is maintained at the wholesale price for the product ex-Indeni refinery. To maintain the integrity of the tax system, the government will refrain from introducing any new tax reductions, exemptions, rebates, or any other preferential tax treatment during 2001, except that hotel accommodation in the Livingstone area will be zero rated for VAT until end-2002. In addition, there will be no new accumulation of tax arrears by ZESCO and ZNOC to the central government.

18.  Total expenditures for 2001 are estimated at about 32 percent of GDP (including HIPC-related expenditures). Part of the expenditure reflect one-off allocations for: the presidential and parliamentary elections amounting to 0.7 percent of GDP; another 0.5 percent of GDP for the OAU summit; and 0.4 percent of GDP related to the elimination by line ministries of domestic arrears. Furthermore, the budget also includes allocations of 0.8 percent of GDP for repayment of a guarantee to ZNCB on behalf of ZNOC, a contingency reserve of 0.4 percent of GDP, and continued net lending to ZCCM of about 1.4 percent of GDP. The contingency will be used strictly for unanticipated outlays that were not foreseen at the time of budget preparation and for events such as natural disasters, and is significantly smaller than in 2000. Regarding the payments to ZNCB, government intends to make these payments slowly, cautiously and progressively. As for public sector wages, the government will limit the wage bill to 5.7 percent of GDP in 2001 and will reduce the share of the wage bill in domestic noninterest expenditures over the medium term. Budgeted allocations for spending on the social sectors (excluding HIPC resources), along with improvements in the funding mechanism, will ensure that at least 36 percent of domestically financed discretionary expenditures go to these sectors.5 Government has decided to recapitalize the Development Bank of Zambia. However, in light of resource constraints disbursements for this initiative will be made when external funding for this purpose has been obtained.

19.  As noted above, given the additional resources released under the HIPC initiative, the government intends to boost substantially outlays on social sectors and other poverty-related programs. Accordingly, the government has identified a priority list of programs equivalent to 2.7 percent of GDP.6 About 68 percent of these outlays would be used to scale-up existing programs and the rest would be for new programs. In addition to maintaining expenditures in the social sectors, the government intends to ensure rapid growth that would benefit the poor, through income-generating activities especially in rural areas. Thus, of the additional expenditure financed by the HIPC initiative, some 35 percent will go to rural development, and the rest will go to education (19 percent); health (14 percent); water and sanitation (10 percent); HIV/AIDS (9 percent); social safety nets (9 percent); low cost housing (2 percent); and human rights and governance (3 percent).

20.  The government realizes the crucial importance of effective tracking of HIPC-related expenditures, and of monitoring and controlling expenditures generally. An interim tracking system will be set up that involves: (i) establishing a separate HIPC budget code to be used in all disbursement, expenditure, reporting and auditing procedures; (ii) improving the timeliness and quality of monthly fiscal expenditure reports from the line ministries; (iii) publishing consolidated quarterly expenditure reports on HIPC-related activities; (iv) organizing independent semi-annual monitoring of HIPC expenditures and holding public meetings to promote public scrutiny of the use of HIPC resources; and (v) mobilizing external assistance to conduct independent public expenditure tracking surveys.

21.  In order to strengthen public expenditure management in the medium term, the government is developing an Integrated Financial Management Information System (IFMIS).7 An IFMIS project manager is already in place, and the government will establish a well-staffed project management team by April 2001. To develop user specifications for the design of the IFMIS, the project management team will review the current budgeting and accounting processes and institutional framework and make specific recommendations for improvements by September 2001. The IFMIS Steering Committee will approve the user requirements and timetable for implementation recommended by the project management team by October 2001. The government will appoint an external consultant to develop specifications for the procurement of hardware and software for the IFMIS by December 2001.

22.  As full implementation of the IFMIS will take a number of years, the government will continue its current efforts to improve public expenditure management (PEM). In particular, improvements in cash management, expenditure reporting and commitment control will take high priority. A study of government cash management has been completed, and follow-up actions will be taken. The government will issue rules governing the terms and conditions for commercial bank accounts of all government agencies and will consider tendering procedures for banking services, as well as adopting a zero-balance basis for commercial banking. MOFED and BoZ staff will review, with Fund staff, the reclassification of government accounts effected during 2000. Moreover, it is intended that the system of government accounts with the BoZ will be simplified during 2001, in consultation with Fund staff. MOFED intends to constitute a task force to study ways of accelerating the production of expenditure reports. The government will also continue its efforts to improve commitment control. The recent placement of an IMF resident budget advisor will contribute to the PEM improvements discussed above.

Monetary and exchange rate policies

23.  Monetary policy will aim to (i) attain the target for inflation of 17.5 percent; (ii) attain relative stability of the kwacha exchange rate; (iii) build-up gross international reserves of the BoZ; and (iv) facilitate a substantial increase in credit to the private sector in support of productive activities. In light of the rapid expansion in broad money in 2000, and in order to guard against re-igniting inflationary pressures from a monetary over-hang and possibly the lagged effects of the depreciation on inflation, broad money is projected to increase by about 17 percent. Achieving this monetary target will be facilitated by a decline in credit to public enterprises (especially to ZESCO and ZNOC) as outstanding loans are repaid and the strict limits on lending by ZNCB are maintained, and by the net repayments by government to the banking system.

24.  The exchange rate will continue to be market-determined. Central bank intervention in the foreign exchange market will be limited to efforts aimed at meeting the international reserves target and to smooth short-term fluctuations without attempting to influence the underlying market trends. To achieve the monetary policy objectives, the BoZ will undertake indirect monetary policy measures, as necessary, and will refrain from entering into foreign exchange transactions that could expose it to undue risk. Accordingly, we intend to undertake specific measures (see paragraph 25) to improve the operations of the treasury bill market to strengthen implementation of the monetary program. Reaching the reserve target will be facilitated by substantial inflows of IMF disbursements under the PRGF (about US$130 million) and interim assistance from the Fund under the HIPC initiative (US$150 million).

25.  The government is committed to improving the operation of Zambia's treasury bill market. While recognizing that some steps in this direction will take time to implement, the BoZ intends to take the following actions in the near term: (i) in order to reduce government interest payments and strengthen the auction process, the modifications to the book entry system (provided with World Bank and IMF assistance) have been made that will enable the BoZ to effect a multiple-price format in which successful bidders pay their own bid price. The issuance of revised auction guidelines and the change to multiple pricing will be implemented by June 2001; (ii) strengthen communications with banks and other market participants. In this regard BoZ staff will poll market participants on likely demand to better match volumes offered by maturity. This will help to ensure that auctions are fully subscribed. The poll will also enable the BoZ to determine the desired treasury bill maturities to offer each week; (iii) introduce repurchase agreements, initially between the BoZ and the commercial banks, as the main vehicle for open market operations by April 2001; (iv) prorate the marginal auction bid so that announced auction amounts will not be exceeded; and (v) the BoZ will strictly adhere to auction guidelines.

External sector policies

26.  Zambia's external current account deficit (excluding grants) is projected to widen to around 20 percent of GDP in 2001, as a robust growth in exports is offset by a sharp increase in imports. Total exports are projected to increase by 17 percent mainly on account of a 22 percent increase in metal exports. The latter reflects an improvement in the outlook for copper and cobalt prices and export volume, and is based on the full-year operation of the privatized ZCCM and the newly established mining companies. Nonmetal exports are programmed to grow by 8 percent reflecting, in part, the real depreciation of the kwacha exchange rate during 2000. Total imports are envisaged to increase by 15 percent as a result of increased financing (grant and loans) for projects, and higher foreign direct investments. The projected net capital inflows, together with balance of payments support and debt relief under the HIPC initiative, would allow an accumulation of gross reserves of some US$135 million.

27.  The projected balance of payments support in 2001 amounts to US$208 million. Of this total, the IDA is expected to provide US$95 million, and US$79 million would be provided by the EU. The BOP support, including Fund disbursements, is estimated at US$338 million, compared to the projected cash debt service payments of US$160 million. Since Zambia reached the decision point under the HIPC initiative in early December 2000, Zambia will benefit from interim assistance from the Fund of US$150 million and from the IDA of US$18.9 million during 2001. In addition, the Paris Club is expected to grant a flow rescheduling agreement on Cologne-terms during the interim period before reaching the floating completion point. Such an agreement would supercede the current flow-rescheduling agreement on Naples terms.8 On the basis of the above inflows, the program for 2001 to be supported by the PRGF arrangement would be fully financed.

B.  Structural Reforms and Governance

28.  Clearly, resolving the situation of the ZNCB is a high priority. The recent full-scope examination of the Bank revealed that a substantial part of its loan portfolio is nonperforming and the bank does not fully meet the minimum regulatory requirements. The government recognizes that addressing its ownership and control of ZNCB will be the key to the necessary reforms. In order to guard against further deterioration in the bank's financial condition that would increase the shareholders (government) financial liability, the Bank of Zambia has instituted additional supervisory measures, including daily monitoring, aimed at ensuring prudential operations and management of the bank. Consistent with this, exemptions from provisioning requirements on nonperforming loans to ZNOC and RAMCOZ will not be extended, unless significant payments (other than from government) have been received. Furthermore, ZNCB will be required to comply with all loan/other asset-provisioning instructions, and will publish by end-April its March 31, 2001 financial statement subject to specific instructions from the central bank.

29.  A proposal regarding the divestiture of government's interest in ZNCB, consistent with our commitments under the PRGF and HIPC documents, has been submitted to Cabinet. Approval and hence authority for the ZPA to act will be granted by end of March 2001. Subsequently, ZPA will implement the decision of Cabinet by end-2001. Progress towards the divestiture of ZNCB will be reviewed during the mid-term review of the program.

30.  In further efforts to strengthen the banking system, the BoZ has imposed a deadline of end-June 2001 for the provision of new capital for the Investrust Merchant Bank. Also, Union Bank Zambia, Ltd. has been taken over by the Bank of Zambia and its operations suspended pending possible recapitalization and a takeover by another bank. In addition, Commerce Bank is under liquidation. The BoZ is also considering recommendations to improve, bank supervision, regulatory enforcement, and actions to bring Zambia into compliance with the Basel Core Principles.

31.  Under the petroleum sub-sector, government will implement actions as agreed with the World Bank under the Fiscal Sustainability Credit. By end-April 2001 the following actions will have been undertaken: (i) government will have issued a written notification that the private sector is free to import crude oil as well as petroleum products. Import licenses will be given by the ERB according to a set of transparent criteria; (ii) The Energy Regulation Board (ERB) will amend license conditions to abolish requirement for undertakings to inform ERB before price adjustment; monitor pump prices ex-post; require display of pump prices, maintain a minimum stock of products; (iii) ZNOC will have ceased to be involved in importation (except for maintaining strategic reserves), marketing and distribution of petroleum products but ZNOC will continue to manage Ndola terminal facility; (iv) A committee composed of representatives of oil marketing companies (OMCs) and other relevant market participants, with ERB as observer, will have been established to coordinate the procurement of oil through the TAZAMA pipeline. By end-October 2001, government will have: (i) offered for sale its shares in Indeni in order to reduce its equity stake to below 50 percent; (ii) TAZAMA pipeline will have been offered for sale and/or long-term concession to a private sector operator through competitive bidding;9 (iii) Ndola storage tank will have been offered for sale and/or long-term concession to a private sector operator through a competitive bidding process; (iv) TAZAMA and Ndola tank concession could be packaged as one and given to a single operator; (v) ZNOC will be assigned the legal role of maintenance of strategic stock, which role it could perform by contracting with the private operator of the storage tank.

32.  The ZPA submitted to Cabinet a proposal for the divestiture of ZESCO, in line with the government's commitment in the PRGF and HIPC Initiative documents, and a directive to ZPA to proceed is expected shortly. As action on ZESCO is a key condition for reaching the HIPC Initiative floating completion point, ZPA will act promptly to initiate the required actions.

33.  Regarding steps to strengthen economic and financial governance, the government intends to promptly move forward to follow-up on actions initiated during 2000. The consultants conducting the audit of cobalt sales have submitted a draft report. This report will be finalized by end-June 2001, including completing all information outstanding and requesting the major ZCCM players to submit their views on the issues raised. The government will then determine what follow-up action may be required, including possible referral to the Director of Public Prosecution for consideration of whether a criminal investigation is warranted, or the Attorney General for possible civil action.

34.  In order to promote transparency, the annual audited government accounts will be prepared within the 12-month period mandated by the Constitution and submitted to parliament. To this end, funding will be sought to increase the resources for the offices of the Accountant General and the Auditor General (OAG), which will facilitate among other things, interim audits, speedy auditing of the final accounts, and performance audits.

35.  The government continues to place high priority on the improvement of the statistical system. Efforts will be intensified to implement the recommendations of previous technical assistance missions. These will include, as in the case of compilation of the balance of payments, to better utilize existing data sources, as well as develop additional ones. Zambia will continue to require technical assistance from the Fund and other development partners in the areas of public expenditure management (including IFMIS), tax policy, monetary operations, bank supervision, and treasury operations.

V.  Program Monitoring

36.  For the 2001 program, the number of quantitative and structural performance criteria has been streamlined to the following (Table 3): (i) net domestic assets of the BoZ; (ii) gross unencumbered international reserves; (iii) banking system's net claims on government; (iv) domestic payments arrears of the government; (v) no new external payment arrears; (vi) no new loans collateralized or guaranteed by the government or BoZ for ZESCO and ZNOC; and (vii) no new nonconcessional external debt.10 Regarding the latter, given Zambia's high level of indebtness, the government will only seek to contract loans which have a grant element of at least 40 percent. The non-accumulation of new tax arrears by ZESCO and ZNOC will be monitored as a benchmark. The structural performance criteria and benchmarks aim to advance the privatization process, improve the efficiency of public sector management, maintain the integrity of the tax system and improve governance (Table 4). The program includes an adjustor for shortfalls in external BOP support net of debt service payments, with a flat maximum adjustment of $45 million. The definitions of the performance criteria and benchmarks are contained in a Technical Memorandum of Understanding (TMU) agreed with Fund staff. Quantitative performance criteria will be monitored on a quarterly basis with associated disbursements taking place quarterly. Program reviews will be semi-annual. The third review of the PRGF-supported program will be conducted based on performance through end-June 2001, and will include an assessment of progress in implementing the agreed budget, the monetary framework, remaining foreign exchange measures, the operation of the foreign exchange market and governance issues.

Yours faithfully,

Dr. Katele Kalumba, MP
Minister of Finance and Economic Development


Table 1. Zambia: Quantitative Performance Criteria and Benchmarks During the Second Year of the Three-Year Arrangement Under the Poverty Reduction and Growth Facility, January 1, 2000–December 31, 2000

  Ind. Tar.
  Performance criteria
End-Sept. Prog. End-Sep. Actual End-Dec. Prog. End-

Ceiling on the increase in net domestic
     assets (NDA) of the Bank of
3,233   76   127   148   28 68 -50 161
   Adjusted (NDA)             144   112   68  
Ceiling on the increase in net bank
       claims on government (NCG)2,3
693   189   201   227   126 200 36 139
   Adjusted (NCG)             223   210   154  
Floor on the domestic budget balance
    of the government
. . .   -89   -184   -189   -217 -189 -227 -335
Ceiling on the outstanding stock of
    domestic arrears of the government
147   152   142   114   100 94 55 53
Floor on net international reserves
       (NIR) of the Bank of Zambia
       (In US dollars)4
-1,155   -1,190   -1,159   -1,172   -1,114 -1,132 -1,074 -1,107
   Adjusted NIR             -1,167   -1,146 14 -1,119  
Ceiling on new external payments
   arrears (In US dollars) 5/
. . .   15   0   0   0 0 0 0
Ceiling on new medium- and long-term
   nonconcessional debt (In US dollars) 6/
. . .   0   0   0   0 0 0 0
Ceiling on the stock of external short-
   term debt (in US dollars) 7/
. . .   23   0   0   0 0 0 0
Ceiling on new loans collateralized or
   guaranteed by the central
   government or the Bank of Zambia
   for ZESCO and ZNOC
. . .   . . .   0   0   0 0 0 0
Ceiling on the accumulation of new tax
   arrears from ZESCO and ZNOC to
   the central government
. . .   . . .   0   0   0 0 0 15
Memorandum item:    
Balance of payments assistance
   (in US dollars)
. . .   1.5   74.7   72.9   149.2 117.5 241.7 185.2

1Net domestic assets are equivalent to reserve money minus net foreign assets, calculated at the end-December 1999 U.S. dollar-kwacha exchange rate (US$ 1=K 2,632).                      
2In case of a shortfall in balance of payments assistance, the ceilings on the increase in net domestic assets and net bank claims on the government will be adjusted upward by the amount of the shortfall with a maximum of US$45 million. The kwacha value of the cumulative shortfall will be calculated at the end-December 1999 U.S. dollar-kwacha exchange rate (US$ 1=K 2,632).
3Net bank claims include the U.S. dollar-denominated foreign exchange bridge loan of the Bank of Zambia to the government.    
4Foreign assets of the Bank of Zambia include the balance in the special Bank for International Settlements account established in accordance with the April 1999 Paris Club accord. In case of a shortfall in balance of payments assistance, the floor on net international reserves will be adjusted downward by the amount of the shortfall with a maximum of US$45 million. Net international reserves exclude a US$ 25 million deposit in Meridien Bank, which is under liquidation. Until end-March it also excludes a US$ 30 million deposit held as collateral in KBC, Belgium. Net international reserves are defined otherwise, consistent with the definition of the special data dissemination standard (SDDS) template, as external assets readily available to, or controlled by, the Bank of Zambia net of external liabilities of the Bank of Zambia. Pledged or otherwise encumbered reserve assets including but mot limited to reserve assets used as collateral or guarantee for third party exteral liability are to be excluded.
5The injunction against new external payments arrears is continuous.
6Loans contracted or guaranteed by the central government or the Bank of Zambia with grant elements of less than 35 percent. Excludes debts contracted in the context of rescheduling agreements; includes financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms.
7Includes debt contracted or guaranteed by the central government and Bank of Zambia or public enterprises with an original maturity of not more than one year, but excludes normal trade credits for imports.

Table 2. Zambia: Structural Performance Criteria and Benchmarks
During the Second Year Of the Three-Year Arrangement under the PRGF,
January 1, 2000-December 31, 2000
  Timing Status
Publication of monthly cash allocations to each of the line ministries in Ministry of Finance's Monthly Macroeconomic Indicators.2 Continuous Observed
The abstention from new tax reductions, exemptions, rebates or any other preferential tax treatment.1 Continuous Observed
Appointment of a project manager to implement the Integrated Financial Management Information System (IFMIS).2 September 30, 2000 Observed
Issuance of a supervisory directive from BoZ to ZNCB.1 September 30, 2000 Observed
Implement a program of action that effectively privatizes the petroleum sector, with the government retaining responsibility for maintaining a strategic petroleum reserve.2 December 31, 2000 Not Observed
Each controlling officer to consolidate their commercial bank accounts into a single account at one bank only.1 December 31, 2000 Observed
Submission to Cabinet by the Zambia Privatization Agency (ZPA) on modalities for the privatization of the electricity company ZESCO, and the Zambia National Commercial Bank (ZNCB).1 December 31, 2000 Observed
1Performance Criterion

Table 3. Zambia: Quantitative Performance Criteria During the Third Year of the Three-Year Arrangement Under the Poverty Reduction and Growth Facility1
(In billions of Kwacha unless otherwise indicated)
          Performance criteria
End-Mar. End-June End-Sept.


Ceiling on the cumulative increase in net
   domestic assets (NDA) of the Bank of

3,182   3,392   174 127 183   -100

Adjusted (NDA)


Ceiling on the cumulative increase in net
   bank claims
on government (NCG)3

729   832   194 204 257   -100

Adjusted (NCG)


Ceiling on the outstanding stock of
   domestic arrears of the government

55   53   40 27 13   0

Floor on gross international reserves
   (GIR) of the Bank of Zambia
   (In millions of US dollars)3

    114   83 142 137   249

Adjusted GIR

. . .                

Ceiling on new external payments arrears
   (In US dollars)6

0.0   0.0   0.0 0.0 0.0   0.0

Ceiling on the stock of short-term debt
   and new medium- and long term

   nonconcessional debt (In US dollars)7

0.0   0.0   0.0 0.0 0.0   0.0

Ceiling on new loans collateralized or
   guaranteed by the central government
   or the Bank of Zambia for ZESCO and

0.0   0.0   0.0 0.0 0.0   0.0
Memorandum item:                  
Cumulative net balance of payments
      support (In US dollars)
. . .   55.2   -19.2 22.7 28.5   122.7
   Balance of payments assistance . . .   185.2   11.4 76.4 100.2   207.7
   Programmed debt service obligations
      (excluding IMF)
. . .   -130   -30.6 -53.7 -71.7   -85.0

1The definitions of the quantitative performance criteria and benchmarks are contained in the Technical Memorandum of Understanding (TMU).
2Net domestic assets are equivalent to reserve money minus net foreign assets, calculated at the end-December 2000 U.S. dollar-kwacha exchange rate (US$ 1=K 4,158).
3In case of a shortfall in balance of payments assistance net of programmed debt service, the ceilings and floors will be adjusted by the amount of the shortfall with a maximum of US$45 million. The kwacha value of the cumulative shortfall will be calculated at the end-December 2000 U.S. dollar-kwacha exchange rate (US$1=K 4,158).
4Excludes HIPC debt relief from the IMF.
5The ceiling will be adjusted for changes in the legal reserve requirements.
6The injunction against new external payments arrears is continuous.
7Nonconcessional loans are defined as having a grant element of less than 40 percent (see TMU for further details including on the definition of short-term debt).


Table 4. Zambia: Structural Performance Criteria and Benchmarks During the Third Year of the Three-Year Arrangement under the PRGF1

Implementation of the Cabinet decision regarding divestiture of government's
interest in ZNCB consistent with Zambia's commitments under the PRGF and HIPC
decision point documents.2
December 2001
The IFMIS steering committee will approve the user requirements and timetable for implementation of the IFMIS, proposed by internal management team.3 October 2001
Produce the first quarterly HIPC report as part of the interim framework to track
HIPC-related expenditures.3
September 2001
Improve the operation of the treasury bill market by issuing revised auction
guidelines announcing the reintroduction of the multiple price auction system
and the policy to prorate the size of the marginal bid. The Central Bank will adhere
strictly to all auction guidelines.3
June 2001
Accountant General to submit to the Office of the Auditor General, accounts for
2000, to facilitate timely preparation of final audited accounts as required by law.3
September 2001
The abstention from new tax reductions, exemptions, rebates or any other
preferential tax treatment.2,4
No accumulation of new tax arrears by ZESCO and ZNOC to the Central
1The definitions of the structural performance criteria and benchmarks are contained in the TMU.
2Performance criterion.
4Except that hotel accommodation in the Livingstone area will be zero-rated for VAT until end-2002.

1After applying the adjustor for a shortfall in balance of payments assistance of US$45 million. The shortfall in disbursements reflects largely the complex conditionalities that accompany each tranche of EU disbursements. We have requested the EU to consider simplifying these conditionalities. Given the experience of 2000, the program for 2001 reflects a cautious projection of balance of payments support.
2ZESCO remained current on its tax liabilities during the period under review.
3Revisions to this strategy maybe made in the context of preparing the full PRSP (paragraph 14).
4The figures for 2002-03 are tentative and may need to be revised, following the completion of the PRSP and the medium-term expenditure framework (MTEF).
5Social sector expenditure is defined as current and capital expenditure on health, education, social safety net, water and sanitation, and disaster relief. Domestically financed discretionary expenditure is defined as total expenditure, less foreign funded expenditure, domestic interest payments, the allocation for arrears clearance, the civil service wage adjustment, the contingency reserve, civil service retrenchment costs, payments to the Public Service Pension Fund, net lending to ZCCM, and court awards made against the government.
6In the event that balance of payments inflows exceed the amount indicated, the additional funds will be applied to poverty reduction in consultation with the staff of the World Bank and the IMF.
7The implementation of IFMIS on a pilot basis for at least three ministries and a mid-term review of the pilot program is one of the triggers for Zambia to reach a floating completion point under the Enhanced HIPC Initiative, and is expected in 2003.
8Efforts are on-going to conclude the only remaining bilateral agreement with Japan to implement the Paris Club rescheduling agreement of 1999.
9On TAZAMA we will consult with the Tanzanian government by end-March 2001.
10Thus, short-term debt would be prohibited except for normal trade credits for imports, and no separate criterion would be needed on such debt.