## 1. Good Practices to Support Formalization ## Source details **Canonical URL:** [1. Good Practices to Support Formalization](https://www.imf.org/-/media/files/publications/cr/2025/english/1zmbea2025002-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1zmbea2025002-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1zmbea2025002-source-pdf.pdf.json) --- ### Introduction and key messages - Firm growth in Zambia has been slow, limiting job creation and productivity gains. - Enterprise Survey data show stagnant median sales growth during 2007–13, followed by widespread declines in 2013–19. - Sluggish firm expansion has constrained structural transformation; much of the labor force remains in low-productivity informal work while the economy remains heavily reliant on mining. - The paper focuses on three consistently cited, binding constraints to firm growth: limited access to finance, unreliable electricity, and competition from informal firms. Empirical analysis links these constraints to weaker firm performance and low new business formation. - Major summary statistics and indicators: - 76 percent of the workforce is employed in the informal economy (Zambia Labor Force Survey 2023). - Informal sector accounts for about 40 percent of GDP (Elgin et al., 2021). - Zambia registers about 1.6 new formal businesses per 1,000 working-age adults annually. ### Firm landscape - Dual structure: a small number of large firms (mining, finance, telecommunications) coexist with a vast number of micro and informal enterprises; formal SMEs are relatively scarce. - Informality is both a consequence and a cause of limited formal sector development: regulatory barriers, high compliance costs, and prevalence of informal competitors discourage formal expansion. ### Constraints to firm growth (survey evidence and cross-country comparisons) - Top constraints reported by firms (World Bank Enterprise Surveys 2007, 2013, 2019): - Access to finance: 28.5 percent of firms cited finance as the biggest obstacle in 2019 (up from 18.1 percent in 2007). - Electricity constraints: 25.8 percent of firms cited electricity in 2019. - Informal competition: 12.8 percent cited informal competition in 2019 (down from 22.6 percent in 2013). - Zambia vs peers (2019): - Share citing finance as top constraint: Zambia 28.5 percent; Sub-Saharan Africa 23.2 percent; lower-middle-income countries 15.6 percent. - Share citing electricity as top constraint: Zambia 25.8 percent; Sub-Saharan Africa 12.7 percent. - Share citing informal competition as top constraint: Zambia 12.8 percent; Sub-Saharan Africa 10.4 percent. - Access to finance details: - Nearly all formal firms have a bank account, but only about 10 percent have a bank loan or line of credit (World Bank, 2020). - Sub-Saharan Africa average for firms with a loan/line of credit: around 20 percent; lower-middle-income average: 26 percent. - 69.3 percent of Zambian business owners relied on personal funds to start their businesses (2022 MSME Finance Survey). - 3.3 percent accessed formal external sources such as commercial banks, microfinance institutions, or government programs (2022 MSME Finance Survey). - Average retail lending rate of about 28 percent in 2024. - Persistent barriers: high interest rates, strict collateral requirements, underdeveloped credit information systems, weak creditor rights. - Electricity supply details: - 87 percent of firms reported experiencing power outages (2019 Enterprise Survey). - Firms reported averaging 13 outages per month (Zambia) versus regional average of 8.6 outages per month (Sub-Saharan Africa). - Frequent outages force reliance on expensive generators or cause productivity losses; inadequate infrastructure deters expansion, particularly in energy-intensive sectors. - Informality details: - High prevalence distorts competition; formal firms face disadvantages versus informal firms that avoid taxes and regulations. - Senior managers in Zambia report spending more time on regulatory compliance than counterparts in peer countries (World Bank, 2024). - Reforms undertaken include the national e-Registry of licenses and risk-based regulation frameworks, but further streamlining and predictable enforcement are needed. ### Empirical findings (firm-level fixed-effects panel estimates on real sales growth) - Regression framework: firm-level panel fixed-effects estimates controlling for time, firm, sector, and location effects. Results indicate statistically significant and economically meaningful effects for finance access, electricity reliability, and informality. - Access to credit: - Firms with access to an overdraft facility grew on average 4.4447 percentage points faster in annual real sales compared to those without. - Coefficient: 4.4447; standard error: 1.6986; significance: ** (p<0.05). - Finance constraint: - Firms reporting finance as a major constraint experienced -8.1283 percentage points lower growth per year. - Coefficient: -8.1283; standard error: 0.9757; significance: *** (p<0.01). - Electricity (power outages): - Each additional outage per month is associated with a -0.1837 percentage point decline in annual real sales growth. - Coefficient: -0.1837; standard error: 0.0635; significance: *** (p<0.01). - In specifications with other constraints, coefficient on outages: -0.1335; standard error: 0.0618; significance: ** (p<0.05). - Informal competition: - Firms identifying informal competitors as a major constraint grew on average -3.6575 percentage points slower. - Coefficient: -3.6575; standard error: 1.2518; significance: *** (p<0.01). - In full model specifications informality coefficient: -2.3703; standard error: 1.1900; significance: * (p<0.1). - Model statistics (selected): - Observations: 8686. - R-squared values reported: 0.4899; 0.4643; 0.3235; 0.6190 across reported columns. - Fixed effects included (FE Yes). ### Formal business density and new firm entry - Total business density in Zambia: about 18 registered firms per 1,000 working-age adults. - Comparators: - Lower-middle-income group: roughly 12 registered firms per 1,000 working-age adults. - Upper-middle-income countries: 60 registered firms per 1,000 working-age adults. - High-income countries: 74 registered firms per 1,000 working-age adults. - Implication: Zambia’s formal private sector is small and slow to renew; new firm entry is particularly weak relative to higher-income comparators. ### Role of new firms for jobs and dynamism - Evidence: young firms—not necessarily small ones—are responsible for most net job creation (Haltiwanger, Jarmin, & Miranda, 2013). - Policy emphasis: expanding the flow of new, growth-oriented firms is vital for diversification and inclusive employment in Zambia. ### Barriers to entrepreneurship and entry - Regulatory/administrative barriers: - Entry barriers suppress formal entrepreneurship through increased cost and uncertainty. - Progress noted in digitizing registration (GSMA, 2024), but further simplification is needed. - Access to finance: - Many entrepreneurs lack collateral, credit histories, or tailored financial products, constraining startup capital. - Bank of Zambia MSME Finance Survey 2022: most new firms rely on own funds; only a small fraction access formal credit. - Recommended actions: expand SME finance initiatives, improve credit infrastructure, promote fintech and leasing solutions. - Informality: - High levels of informality lead firms to avoid taxes/regulation, remain small and unproductive, and be excluded from support. - Consequences: reduced firm quality, eroded tax base, distorted competition. - Suggested measures: simplify registration and tax procedures, provide targeted support services, digital tools, and balanced enforcement. ### Good practices to support formalization (Box 1 highlights) - Simplifying registration and compliance (examples cited: Benin “entreprenant”; Cambodia CamDX portal). - Implementing simplified tax regimes (examples cited: Brazil’s Simples Nacional and IME; Mexico’s Régimen de Incorporación Fiscal). - Leveraging digital tools (examples cited: Nigeria digital tax systems; Indonesia JMP app; Argentina real-time worker registration). - Providing targeted support (examples cited: Montenegro grants; Indonesia’s APINDO; Mexico’s business chambers). - Combining enforcement with support (examples cited: Colombia inspections; Nigeria penalties + reduced initial social security contributions). ### Nature of entrepreneurship in Zambia (Box 2 highlights) - Early-stage entrepreneurial activity: 39 percent of the adult population was engaged in starting or running a new business in 2013 (Global Entrepreneurship Monitor, 2013). - Characterization: - Much activity is necessity-driven rather than opportunity-driven. - Entrepreneurial landscape dominated by informal, low-growth microenterprises serving local, subsistence markets. - Limited access to finance, business development services, and scale opportunities. - Firm survival: - Established business ownership (firms older than 3.5 years) is less than one-tenth of the early-stage rate. - Zambia ranks among the highest globally in business exit rates, indicating weak firm survival and limited transition to maturity. - Policy implication: Complement entry reforms with targeted support—training, mentorship, and incubators—focused on high-potential sectors such as agribusiness, light manufacturing, and digital services. ### Strengthening firm survival and scale-up - Many new firms fail early due to weak managerial capacity, limited market access, and vulnerability to shocks. - Global evidence highlights value of a robust entrepreneurship ecosystem: advisory services, incubators, buyer linkages. - Recommendation: Strengthen support systems to raise productivity and employment impact of new firms. ### Conclusion and policy implications (firm growth section) - Core constraints to firm growth: limited access to finance, unreliable electricity supply, and an uneven playing field for formal enterprises. - Targeted reforms recommended: - Deepen credit markets and strengthen financial infrastructure. - Invest in power infrastructure. - Simplify regulatory processes. - Improve access to startup capital and provide tailored support for entrepreneurs. - Expected outcomes: accelerated structural transformation, higher productivity, more inclusive and resilient economic growth. --- ### Climate vulnerability, emissions, and mitigation commitments (Zambia: Building Resilience to Climate Shocks) ### Climate shocks, fiscal constraints, and emissions profile - Climate shocks: - Growing frequency and severity of floods and droughts; 2023–2024 El Niño triggered prolonged drought, crop failures, energy shortages, and economic disruptions. - Vulnerabilities: large agricultural sector (predominantly rain-fed, subsistence), reliance on hydroelectric power. - Fiscal and implementation constraints: - Limited coordination across government levels and absence of robust systems to track climate-related expenditures within the national budget. - Mobilizing domestic revenue and external financing is key for adaptation implementation. - Emissions profile: - Zambia’s contribution to global GHG emissions: 0.08 percent (ranked 111th worldwide in 2023). - Emissions growth: compound average growth rate of 1.2 percent per year since 1991. - Absolute level: GHG emissions doubled since the 1970s, reaching 30 million tons of CO2 equivalent in 2023. - Sectoral composition of emissions (2023): - Agriculture: approximately 38 percent. - Industry: approximately 20 percent. - Waste management: approximately 17 percent. - Power sector: historically minimal due to hydro; commissioning of first MW300 thermal power plant in 2016 added roughly 9 percent to installed generation capacity. - Government announced plans to double thermal generation capacity as part of energy security strategy after severe electricity shortages of 2024. - Mitigation commitments: - Updated NDC (submitted 2021): commit to reducing GHG emissions by 25 percent unconditionally, and up to 47 percent with international support by 2030 compared to 2010 level. - Mitigation scope broadened to include transport, coal (production, transportation and consumption), and liquid waste alongside sustainable forest management, agriculture, and renewable energy. ### NDC, NAP, and financing needs - Implementing the NDC is estimated to cost approximately US$17.2 billion —about 65 percent of GDP— across 11 priority sectors. - The National Adaptation Plan (NAP) provides a long-term roadmap but requires additional resources and enhanced coordination across sectors and government levels to be operational. - The NDC Implementation Framework (2023–2030) estimates a financing need of $17.2 billion across 11 priority sectors—and targets a 25 percent reduction in greenhouse gas emissions by 2030, conditional on external support. - The implementation cost of approximately $17.2 billion between 2023 and 2030 represents estimated funding needs of above 8 percent of 2024 GDP, compared with current budgetary environmental spending of less 0.2 percent of GDP. - International assistance in finance, technology, and capacity-building is identified as crucial to meeting these targets. ### Changes in temperature and rainfall patterns (observed and projected) - Over the past two decades, average temperatures have risen by 1.3°C. - Zambia receives between 700 mm and 1,400 mm of annual rainfall, with the ITCZ and ENSO driving increasing unpredictability. - The ITCZ typically brings 150–300 mm of rain per month from October to April. - ENSO impacts: - El Niño events bring severe drought to southern regions; La Niña episodes can cause excessive rainfall and flooding in northern and central areas. - The 2023–2024 El Niño drought affected over 1 million hectares of cropland, depleted water reservoirs, and triggered emergency food assistance for nearly 2.3 million households. - Projections: depending on global emissions trajectories, Zambia will continue to experience warming of 1.5°C to 3°C by 2050. - Rainfall variability is expected to intensify, with shorter, more intense rainy seasons and longer dry spells. - Frequency and intensity of extreme weather events increased: in the decades after 2000, the number of such events exceeded 10, while in the two prior decades there were fewer than 5. ### Impact of natural disasters and disaster risk - Floods and droughts are the most common and impactful climate-related disasters; localized flooding recurs during the rainy season, while rare large-scale disasters (e.g., the 2024 drought) can disrupt national food security and overwhelm response capacities. - Policy emphasis: strengthen community-level preparedness, enhance meteorological forecasting capacity, and mainstream climate risk into development planning. ### Agriculture: exposure, productivity trends, and adaptation options - Agriculture share of GDP: on average 3 percent of GDP in the last decade, but it employes ¼ of the work force. - Maize dominates production and remains predominantly rainfed; most maize is produced by smallholder farmers using traditional techniques and minimal inputs. - El Niño events can cause a 30–40% drop in crop yields for staple crops like maize. - Observed maize productivity trends: - Between 2002 and 2020, yields increased from 1.3 metric tons per hectare to 2.1 metric tons per hectare. - Area under maize cultivation expanded from 750,000 hectares to 1.7 million hectares. - Average yields remain low—currently around 2 metric tons per hectare—well below the global average of 5.5 metric tons. - Irrigation infrastructure covers less than 6 percent of cultivated land. - Recommended climate-smart agricultural interventions: - Investment in adaptive farming techniques and improved irrigation systems. - Adoption and scaling of drought- and flood-resistant seed varieties. - Enhanced agricultural extension services, targeted subsidies, coordinated public investment, and improved access to markets and financial services for smallholders. - Practices cited: conservation agriculture, agroforestry, crop rotation and diversification, integrated soil fertility management. ### Energy sector impacts and resilience needs - Zambia generates approximately 80% of its electricity from hydropower (major plants at Lake Kariba and Kafue Gorge). - Declining water levels during droughts severely curtail generation; at its lowest point, Lake Kariba’s output dropped by 80 percent during the 2023–2024 drought. - Load-shedding reached up to 20 hours per day in urban centers like Lusaka during that crisis. - Installed capacity: Zambia currently has over 3,650 MW of installed capacity. - Government copper production target: 3 million metric tons annually by 2030 — triple current levels. - Electricity access: only about half of the population has access to electricity. - Power shortages: - In 2015 drought, small businesses experienced a 7.3% drop in turnover due to electricity shortages; many firms used diesel generators, raising operational costs. - In the 2024 crisis, ZESCO prioritized power to the mining sector and large manufacturers, leaving small and medium enterprises more exposed. - Policy priorities to build resilience: - Diversify the energy mix (solar, wind, biomass). - Expand off-grid solutions in rural and semi-urban areas. - Institutional reforms to strengthen energy governance, return ZESCO to financial viability via cost-recovery tariffs, and attract private investment. ### Natural resources, forests, and the charcoal value chain - Zambia has lost approximately 6 percent of its forest area due to wood fuel use and expansion of cultivated land. - Wood fuel (charcoal and firewood) is the primary source of energy for over 90 percent of Zambian households. - Rural households rely more on firewood; urban populations depend more on charcoal. - Forest and carbon assets: - Zambia has 49 million hectares of forest. - Zambia contributes 6 percent of Africa’s and 0.7 percent of global carbon credits. ### Institutional progress, carbon market, and implementation challenges - Institutional and legal milestones: - Ministry of Green Economy and Environment (MoGEE) created in 2021. - Green Economy and Climate Change Act passed in 2024 (Act No. 18 of 2024); full implementation depends on the issuance of a Statutory Instrument. - Frameworks include the National Adaptation Plan (2023), National Policy on Climate Change (2016), National Green Growth Strategy (2024–2030), and other sector policies and strategies. - Carbon market readiness: - Zambia advanced a Carbon Market Framework with guidelines for project development, trading rules, institutional roles, fee structures, and a national carbon registry. - In 2024, bilateral agreements were signed with Sweden and Norway to support carbon market infrastructure and mobilize private investment. - Implementation constraints: - Limited technical capacity, overlapping institutional mandates, weak rural outreach, and heavy reliance on donor financing. ### C-PIMA findings, gaps, and recommendations - C-PIMA (2024) findings: - Performed relatively well in climate-aware planning, inter-governmental coordination, and disaster risk management. - Weaknesses: project appraisal and selection; tracking and reporting climate-related investments in the budget. - Of five C-PIMA pillars, three—climate-aware planning, coordination, and risk management—rated medium; project appraisal and budgeting rated low. - C-PIMA recommendations: - Integrate climate analysis into project appraisals to improve infrastructure resilience. - Implement climate budget tagging to enable tracking and prioritization of climate-related investments. - Expand climate risk analysis within fiscal risk statements to better anticipate vulnerabilities. - Strengthen institutional coordination to align all public sector entities, including SOEs, with national climate goals. ### Infrastructure, PPPs, fiscal risk management, and policy priorities - Climate risks embedded in long-term infrastructure investments are not systematically addressed. - Recommendations: - Incorporate climate risks into PPP contracts and systems to monitor and report climate-related public spending. - Expand coverage of climate risks in the Fiscal Risk Statement and promote insurance schemes in vulnerable sectors. - Mobilize international support—climate finance, technology transfer—and enhance domestic revenue mobilization (including environmental taxes). - Integrate climate considerations into public investment management and track budgetary spending on climate adaptation. - In agriculture: promote drought- and flood-resistant seeds, crop diversification, and expand irrigation. - In energy: diversify electricity generation toward renewable sources and promote alternative household fuels to reduce dependence on charcoal and firewood. - Improve disaster risk management and early warning systems, enhance institutional and community response capacity, and increase public awareness. - Create fiscal buffers, enhance revenue mobilization, and attract a balanced mix of private and public funding for climate adaptation priorities. - Key compact statistics and observed impacts (selected): - US$17.2 billion — estimated NDC implementation cost; also cited as financing need for NDC Implementation Framework (2023–2030). - about 65 percent of GDP — share represented by the US$17.2 billion estimate. - 1.3°C — temperature rise over past two decades. - 700 mm and 1,400 mm — range of annual rainfall. - 150–300 mm per month — typical ITCZ monthly rainfall from October to April. - over 1 million hectares — cropland affected by the 2023–2024 El Niño drought. - nearly 2.3 million households — required emergency food assistance during the 2023–2024 drought. - 1.5°C to 3°C by 2050 — projected warming range depending on emissions trajectories. - more than 10 vs fewer than 5 — count of extreme weather events in decades after 2000 compared with two prior decades. - 3 percent — agriculture’s average share of GDP in the last decade. - ¼ — share of the workforce employed in agriculture. - 30–40% — typical El Niño-induced drop in crop yields for staples. - yields: 1.3 metric tons per hectare (2002) to 2.1 metric tons per hectare (2020). - area under maize: 750,000 hectares to 1.7 million hectares. - currently around 2 metric tons per hectare — average maize yield cited. - 5.5 metric tons — global average maize yield cited. - less than 6 percent — irrigation coverage of cultivated land. - approximately 80% — share of electricity from hydropower. - 80 percent — Lake Kariba output drop at lowest point during 2023–2024 drought. - up to 20 hours per day — load-shedding experienced in Lusaka during 2023–2024 drought. - over 3,650 MW — Zambia’s installed capacity. - 3 million metric tons annually by 2030 — government copper production target. - about half — share of the population with electricity access. - over 90 percent — households using wood fuel. - approximately 6 percent — forest area loss cited. - $17.2 billion between 2023 and 2030 — NAP/NDC implementation projection. - above 8 percent of 2024 GDP — estimated funding needs share. - less 0.2 percent of GDP — current budgetary environmental spending. - 49 million hectares — Zambia’s forest area. - 6 percent of Africa’s and 0.7 percent of global carbon credits — Zambia’s contribution. *Source: IMF staff compilation from the provided Zambia country chapter.* ### 1. Good Practices to Support Formalization ______________________________________________ 6 ### 1. Good Practices to Support Formalization ### Introduction and key messages - Firm growth in Zambia has been slow, limiting job creation and productivity gains. - Enterprise Survey data show stagnant median sales growth during 2007–13, followed by widespread declines in 2013–19. - Sluggish firm expansion has constrained structural transformation; much of the labor force remains in low-productivity informal work while the economy remains heavily reliant on mining. - The paper focuses on three consistently cited, binding constraints to firm growth: limited access to finance, unreliable electricity, and competition from informal firms. Empirical analysis links these constraints to weaker firm performance and low new business formation. *Major summary statistics and indicators* - 76 percent of the workforce is employed in the informal economy (Zambia Labor Force Survey 2023). - Informal sector accounts for about 40 percent of GDP (Elgin et al., 2021). - Zambia registers about 1.6 new formal businesses per 1,000 working-age adults annually. ### Firm landscape - Dual structure: a small number of large firms (mining, finance, telecommunications) coexist with a vast number of micro and informal enterprises; formal SMEs are relatively scarce. - Informality is both a consequence and a cause of limited formal sector development: regulatory barriers, high compliance costs, and prevalence of informal competitors discourage formal expansion. ### Constraints to firm growth (survey evidence and cross-country comparisons) - Top constraints reported by firms (World Bank Enterprise Surveys 2007, 2013, 2019): - Access to finance: 28.5 percent of firms cited finance as the biggest obstacle in 2019 (up from 18.1 percent in 2007). - Electricity constraints: 25.8 percent of firms cited electricity in 2019. - Informal competition: 12.8 percent cited informal competition in 2019 (down from 22.6 percent in 2013). - Zambia vs peers (2019): - Share citing finance as top constraint: Zambia 28.5 percent; Sub-Saharan Africa 23.2 percent; lower-middle-income countries 15.6 percent. - Share citing electricity as top constraint: Zambia 25.8 percent; Sub-Saharan Africa 12.7 percent. - Share citing informal competition as top constraint: Zambia 12.8 percent; Sub-Saharan Africa 10.4 percent. - Access to finance details: - Nearly all formal firms have a bank account, but only about 10 percent have a bank loan or line of credit (World Bank, 2020). - Sub-Saharan Africa average for firms with a loan/line of credit: around 20 percent; lower-middle-income average: 26 percent. - 69.3 percent of Zambian business owners relied on personal funds to start their businesses (2022 MSME Finance Survey). - 3.3 percent accessed formal external sources such as commercial banks, microfinance institutions, or government programs (2022 MSME Finance Survey). - Average retail lending rate of about 28 percent in 2024. - Persistent barriers: high interest rates, strict collateral requirements, underdeveloped credit information systems, weak creditor rights. - Electricity supply details: - 87 percent of firms reported experiencing power outages (2019 Enterprise Survey). - Firms reported averaging 13 outages per month (Zambia) versus regional average of 8.6 outages per month (Sub-Saharan Africa). - Frequent outages force reliance on expensive generators or cause productivity losses; inadequate infrastructure deters expansion, particularly in energy-intensive sectors. - Informality details: - High prevalence distorts competition; formal firms face disadvantages versus informal firms that avoid taxes and regulations. - Senior managers in Zambia report spending more time on regulatory compliance than counterparts in peer countries (World Bank, 2024). - Reforms undertaken include the national e-Registry of licenses and risk-based regulation frameworks, but further streamlining and predictable enforcement are needed. ### Empirical findings (fixed-effects panel estimates on firm sales growth) - Regression framework: firm-level panel fixed-effects estimates using real sales growth, controlling for time, firm, sector, and location effects. Results indicate statistically significant and economically meaningful effects for finance access, electricity reliability, and informality. - Access to credit: - Firms with access to an overdraft facility grew on average 4.4447 percentage points faster in annual real sales compared to those without (column 1 / table). - Coefficient reported in table: 4.4447 with standard error (1.6986); significance ** (p<0.05) in reported table formatting. - Finance constraint: - Firms reporting finance as a major constraint experienced -8.1283 percentage points lower growth per year (table column). - Coefficient reported: -8.1283 with standard error (0.9757); significance *** (p<0.01). - Electricity (power outages): - Each additional outage per month is associated with a -0.1837 percentage point decline in annual real sales growth (table column). - Coefficient reported: -0.1837 with standard error (0.0635); significance *** (p<0.01). - When considered alongside other constraints, coefficient on outages is -0.1335 (standard error 0.0618; ** p<0.05) in one specification. - Informal competition: - Firms identifying informal competitors as a major constraint grew on average -3.6575 percentage points slower (coefficient -3.6575; standard error 1.2518; *** p<0.01). - In full model specifications the informality coefficient is reported as -2.3703 (standard error 1.1900; * p<0.1). - Model statistics (selected): - Observations: 8686 (per reported table). - R-squared values reported: 0.4899; 0.4643; 0.3235; 0.6190 across columns reported in the table. - Fixed effects included (FE Yes). ### Implications and policy directions found in the text - Tackling the three binding constraints—access to finance, power reliability, and informality—could unlock significant productivity gains and support structural transformation by enabling firm expansion and new business formation. - Policy actions referenced in the source text: - Financial sector reforms to expand lending to MSMEs: address high interest rates, strict collateral requirements, and underdeveloped credit information systems. - Investments in electricity generation and grid reliability to reduce outages and lower firms’ operational costs. - Continued regulatory simplification and predictable enforcement to encourage formalization (examples in the text: national e-Registry of licenses and risk-based regulation frameworks), with further streamlining needed to reduce compliance costs and discourage informality. *Source: Extracted from the IMF chapter "Good Practices to Support Formalization" (Zambia: Firm Growth section) in the provided PDF content.* ### 0.9 to 1 for low-income and lower-middle countries, but well below the 5–7 observed in upper- ### 1zmbea2025002-source-pdf - 0.9 to 1 for low-income and lower-middle countries, but well below the 5–7 observed in upper- ### Formal business density and new firm entry - Total business density in Zambia: about 18 registered firms per 1,000 working-age adults. - Comparators: - Lower-middle-income group: roughly 12 registered firms per 1,000 working-age adults. - Upper-middle-income countries: 60 registered firms per 1,000 working-age adults. - High-income countries: 74 registered firms per 1,000 working-age adults. - Implication: Zambia’s formal private sector is small and slow to renew; new firm entry is particularly weak relative to higher-income comparators. ### Role of new firms for jobs and dynamism - Evidence: Young firms—not necessarily small ones—are responsible for most net job creation (Haltiwanger, Jarmin, & Miranda, 2013). - Policy emphasis: Expanding the flow of new, growth-oriented firms is vital for diversification and inclusive employment in Zambia. ### Barriers to entrepreneurship and entry - Regulatory/administrative barriers: - Entry barriers suppress formal entrepreneurship through increased cost and uncertainty. - Progress noted in digitizing registration (GSMA, 2024), but further simplification is needed. - Access to finance: - Many entrepreneurs lack collateral, credit histories, or tailored financial products, constraining startup capital. - Bank of Zambia MSME Finance Survey 2022: most new firms rely on own funds; only a small fraction access formal credit. - Recommended actions: expand SME finance initiatives, improve credit infrastructure, promote fintech and leasing solutions. - Informality: - High levels of informality lead firms to avoid taxes/regulation, remain small and unproductive, and be excluded from support. - Consequences: reduced firm quality, eroded tax base, distorted competition. - Suggested measures: simplify registration and tax procedures, provide targeted support services, digital tools, and balanced enforcement. ### Good practices to support formalization (Box 1) - Simplifying registration and compliance (examples cited: Benin “entreprenant”; Cambodia CamDX portal). - Implementing simplified tax regimes (examples cited: Brazil’s Simples Nacional and IME; Mexico’s Régimen de Incorporación Fiscal). - Leveraging digital tools (examples cited: Nigeria digital tax systems; Indonesia JMP app; Argentina real-time worker registration). - Providing targeted support (examples cited: Montenegro grants; Indonesia’s APINDO; Mexico’s business chambers). - Combining enforcement with support (examples cited: Colombia inspections; Nigeria penalties + reduced initial social security contributions). ### Nature of entrepreneurship in Zambia (Box 2) - Early-stage entrepreneurial activity: 39 percent of the adult population was engaged in starting or running a new business in 2013 (Global Entrepreneurship Monitor, 2013). - Characterization: - Much activity is necessity-driven rather than opportunity-driven. - Entrepreneurial landscape dominated by informal, low-growth microenterprises serving local, subsistence markets. - Limited access to finance, business development services, and scale opportunities. - Firm survival: - Established business ownership (firms older than 3.5 years) is less than one-tenth of the early-stage rate. - Zambia ranks among the highest globally in business exit rates, indicating weak firm survival and limited transition to maturity. - Policy implication: Complement entry reforms with targeted support—training, mentorship, and incubators—focused on high-potential sectors such as agribusiness, light manufacturing, and digital services. ### Strengthening firm survival and scale-up - Many new firms fail early due to weak managerial capacity, limited market access, and vulnerability to shocks. - Global evidence highlights value of a robust entrepreneurship ecosystem: advisory services, incubators, buyer linkages. - Recommendation: Strengthen support systems to raise productivity and employment impact of new firms. ### Conclusion and policy implications (E) - Core constraints to firm growth: limited access to finance, unreliable electricity supply, and an uneven playing field for formal enterprises. - Targeted reforms recommended: - Deepen credit markets and strengthen financial infrastructure. - Invest in power infrastructure. - Simplify regulatory processes. - Improve access to startup capital and provide tailored support for entrepreneurs. - Expected outcomes: accelerated structural transformation, higher productivity, more inclusive and resilient economic growth. ### Climate vulnerability, emissions, and mitigation commitments (Zambia: Building Resilience to Climate Shocks) - Climate shocks: - Growing frequency and severity of floods and droughts; 2023–2024 El Niño triggered prolonged drought, crop failures, energy shortages, and economic disruptions. - Vulnerabilities: large agricultural sector (predominantly rain-fed, subsistence), reliance on hydroelectric power. - Fiscal and implementation constraints: - Limited coordination across government levels and absence of robust systems to track climate-related expenditures within the national budget. - Mobilizing domestic revenue and external financing is key for adaptation implementation. - Emissions profile: - Zambia’s contribution to global GHG emissions: 0.08 percent (ranked 111th worldwide in 2023). - Emissions growth: compound average growth rate of 1.2 percent per year since 1991. - Absolute level: GHG emissions doubled since the 1970s, reaching 30 million tons of CO2 equivalent in 2023. - Sectoral composition of emissions (2023): - Agriculture: approximately 38 percent. - Industry: approximately 20 percent. - Waste management: approximately 17 percent. - Power sector: historically minimal due to hydro; changed with commissioning of first MW300 thermal power plant in 2016, which added roughly 9 percent to installed generation capacity. - Government announced plans to double thermal generation capacity as part of energy security strategy after severe electricity shortages of 2024. - Mitigation commitments: - Updated NDC (submitted 2021): commit to reducing GHG emissions by 25 percent unconditionally, and up to 47 percent with international support by 2030 compared to 2010 level. - Mitigation scope broadened to include transport, coal (production, transportation and consumption), and liquid waste alongside sustainable forest management, agriculture, and renewable energy. *INTERNATIONAL MONETARY FUND (excerpt).* ### 7. The NDC outlines both mitigation and adaptation priorities. Adaptation focuses on ### 7. The NDC outlines both mitigation and adaptation priorities. Adaptation focuses on ### NDC, NAP, and financing needs - Implementing the NDC is estimated to cost approximately US$17.2 billion —about 65 percent of GDP— across 11 priority sectors. - The National Adaptation Plan (NAP) provides a long-term roadmap but requires additional resources and enhanced coordination across sectors and government levels to be operational. - The NDC Implementation Framework (2023–2030) estimates a financing need of $17.2 billion across 11 priority sectors—including energy, agriculture, land use, infrastructure, water, and health—and targets a 25 percent reduction in greenhouse gas emissions by 2030, conditional on external support. - The implementation cost of approximately $17.2 billion between 2023 and 2030 represents estimated funding needs of above 8 percent of 2024 GDP, compared with current budgetary environmental spending of less 0.2 percent of GDP. - International assistance in finance, technology, and capacity-building is identified as crucial to meeting these targets. ### Changes in temperature and rainfall patterns (observed and projected) - Over the past two decades, average temperatures have risen by 1.3°C. - Zambia receives between 700 mm and 1,400 mm of annual rainfall, with the ITCZ and ENSO driving increasing unpredictability. - The ITCZ typically brings 150–300 mm of rain per month from October to April, but variations significantly change interannual rainfall. - The wet season runs September to April; the cold season (May to August) is very dry with almost no rainfall. - ENSO impacts: - El Niño events bring severe drought to southern regions; La Niña episodes can cause excessive rainfall and flooding in northern and central areas. - The 2023–2024 El Niño drought affected over 1 million hectares of cropland, depleted water reservoirs, and triggered emergency food assistance for nearly 2.3 million households. - Projections: depending on global emissions trajectories, Zambia will continue to experience warming of 1.5°C to 3°C by 2050. - Rainfall variability is expected to intensify, with shorter, more intense rainy seasons and longer dry spells. - The frequency and intensity of extreme weather events—prolonged dry spells, flash floods, and heatwaves—have increased: in the decades after 2000, the number of such events exceeded 10, while in the two prior decades there were fewer than 5. ### Impact of natural disasters and disaster risk - Floods and droughts are the most common and impactful climate-related disasters; localized flooding recurs during the rainy season, while rare large-scale disasters (e.g., the 2024 drought) can disrupt national food security and overwhelm response capacities. - These severe events highlight the urgent need for improved disaster preparedness, early warning systems, and resilient infrastructure across rural and urban settings. - Policy emphasis: strengthen community-level preparedness, enhance meteorological forecasting capacity, and mainstream climate risk into development planning. ### Agriculture: exposure, productivity trends, and adaptation options - Agriculture share of GDP is small: on average 3 percent of GDP in the last decade, but it employes ¼ of the work force. - Maize dominates production and remains predominantly rainfed; most maize is produced by smallholder farmers using traditional techniques and minimal inputs. - El Niño events can cause a 30–40% drop in crop yields for staple crops like maize. - Observed maize productivity trends: - Between 2002 and 2020, yields increased from 1.3 metric tons per hectare to 2.1 metric tons per hectare. - Area under maize cultivation expanded from 750,000 hectares to 1.7 million hectares. - Average yields remain low—currently around 2 metric tons per hectare—well below the global average of 5.5 metric tons. - Irrigation infrastructure covers less than 6 percent of cultivated land. - Consequences of crop and livestock losses include reduced incomes, food insecurity, school dropout rates, and rural-to-urban migration. - Recommended climate-smart agricultural interventions: - Investment in adaptive farming techniques and improved irrigation systems. - Adoption and scaling of drought- and flood-resistant seed varieties. - Enhanced agricultural extension services, targeted subsidies, coordinated public investment, and improved access to markets and financial services for smallholders. - Practices cited: conservation agriculture, agroforestry, crop rotation and diversification, integrated soil fertility management. ### Energy sector impacts and resilience needs - Zambia generates approximately 80% of its electricity from hydropower (major plants at Lake Kariba and Kafue Gorge). - Declining water levels during droughts severely curtail generation; at its lowest point, Lake Kariba’s output dropped by 80 percent during the 2023–2024 drought. - Load-shedding reached up to 20 hours per day in urban centers like Lusaka during that crisis. - Installed capacity: Zambia currently has over 3,650 MW of installed capacity. - Government copper production target: 3 million metric tons annually by 2030 — triple current levels. - Electricity access: only about half of the population has access to electricity. - Power shortages: - In 2015 drought, small businesses experienced a 7.3% drop in turnover due to electricity shortages; many firms used diesel generators, raising operational costs. - In the 2024 crisis, ZESCO prioritized power to the mining sector and large manufacturers, leaving small and medium enterprises more exposed. - Policy priorities to build resilience: - Diversify the energy mix (solar, wind, biomass). - Expand off-grid solutions in rural and semi-urban areas. - Institutional reforms to strengthen energy governance, return ZESCO to financial viability via cost-recovery tariffs, and attract private investment. ### Natural resources and land use - Zambia has lost approximately 6 percent of its forest area due to wood fuel use and expansion of cultivated land. - Wood fuel (charcoal and firewood) is the primary source of energy for over 90 percent of Zambian households. - Rural households rely more on firewood; urban populations depend more on charcoal. - Forest and carbon assets: - Zambia has 49 million hectares of forest. - Zambia contributes 6 percent of Africa’s and 0.7 percent of global carbon credits. ### Institutional progress, carbon market, and implementation challenges - Institutional and legal milestones: - Ministry of Green Economy and Environment (MoGEE) created in 2021. - Green Economy and Climate Change Act passed in 2024 (Act No. 18 of 2024); full implementation depends on the issuance of a Statutory Instrument. - Frameworks include the National Adaptation Plan (2023), National Policy on Climate Change (2016), National Green Growth Strategy (2024–2030), and other sector policies and strategies. - Carbon market readiness: - Zambia has advanced a Carbon Market Framework with guidelines for project development, trading rules, institutional roles, fee structures, and a national carbon registry. - In 2024, bilateral agreements were signed with Sweden and Norway to support carbon market infrastructure and mobilize private investment. - Implementation constraints: - Limited technical capacity, overlapping institutional mandates, weak rural outreach, and heavy reliance on donor financing. - Comparative policy lessons: - Rwanda: integration of climate adaptation into national budgeting (FONERWA). - The Gambia: "Aid for Trade" mobilizing climate finance. - Kenya: climate-smart agriculture combined with crop insurance and drought-resistant seeds. - Ethiopia: Productive Safety Net linking social protection to natural resource management. - Morocco: National Climate Commission as a centralized planning and coordination model. ### Key statistics and observed impacts (compact) - US$17.2 billion — estimated NDC implementation cost; also cited as financing need for NDC Implementation Framework (2023–2030). - about 65 percent of GDP — share represented by the US$17.2 billion estimate. - 1.3°C — temperature rise over past two decades. - 700 mm and 1,400 mm — range of annual rainfall. - 150–300 mm per month — typical ITCZ monthly rainfall from October to April. - over 1 million hectares — cropland affected by the 2023–2024 El Niño drought. - nearly 2.3 million households — required emergency food assistance during the 2023–2024 drought. - 1.5°C to 3°C by 2050 — projected warming range depending on emissions trajectories. - more than 10 vs fewer than 5 — count of extreme weather events in decades after 2000 compared with two prior decades. - 3 percent — agriculture’s average share of GDP in the last decade. - ¼ — share of the workforce employed in agriculture. - 30–40% — typical El Niño-induced drop in crop yields for staples. - yields: 1.3 metric tons per hectare (2002) to 2.1 metric tons per hectare (2020). - area under maize: 750,000 hectares to 1.7 million hectares. - currently around 2 metric tons per hectare — average maize yield cited. - 5.5 metric tons — global average maize yield cited. - less than 6 percent — irrigation coverage of cultivated land. - approximately 80% — share of electricity from hydropower. - 80 percent — Lake Kariba output drop at lowest point during 2023–2024 drought. - up to 20 hours per day — load-shedding experienced in Lusaka during 2023–2024 drought. - over 3,650 MW — Zambia’s installed capacity. - 3 million metric tons annually by 2030 — government copper production target. - about half — share of the population with electricity access. - over 90 percent — households using wood fuel. - approximately 6 percent — forest area loss cited. - $17.2 billion between 2023 and 2030 — NAP/NDC implementation projection. - above 8 percent of 2024 GDP — estimated funding needs share. - less 0.2 percent of GDP — current budgetary environmental spending. - 49 million hectares — Zambia’s forest area. - 6 percent of Africa’s and 0.7 percent of global carbon credits — Zambia’s contribution. *Source: IMF staff compilation from the cited Zambia country chapter.* ### 25. Adaptation efforts are grounded in a detailed assessment of Zambia’s climate risks. ### 25. Adaptation efforts are grounded in a detailed assessment of Zambia’s climate risks. ### Climate risk assessment and overall risk profile - Based on the Climate-driven INFORM Risk Index, adapted by IMF staff from the global INFORM Risk framework, Zambia is ranked in the second-highest global quintile for climate-driven disaster risk. - The index distills climate vulnerability into three dimensions: hazard and exposure, vulnerability, and lack of coping capacity (Fig. 13). - Zambia’s high-risk score reflects frequent and severe climate hazards—particularly droughts and floods—combined with structural vulnerabilities and limited adaptive capacity. ### Agriculture and food-security adaptation measures - The agricultural sector is a cornerstone of Zambia’s adaptation strategy given its central role in livelihoods and food security. - The NAP promotes: - adoption of drought-tolerant seeds, - climate-smart farming practices, - soil conservation techniques. - Priorities also include expanding irrigation infrastructure and empowering community-based water management to stabilize productivity amid increasing climate variability. ### Disaster preparedness and risk reduction - Disaster preparedness is a critical pillar: Zambia is strengthening early warning systems and emergency response mechanisms to reduce impacts of extreme weather events. - Adaptation is being aligned with disaster risk reduction (DRR) frameworks to lower long-term exposure to climate shocks and build institutional resilience. ### Energy-sector adaptation and diversification - Zambia seeks to reduce dependence on hydropower because it is increasingly vulnerable to drought. - The adaptation agenda calls for accelerated investment in solar, wind, and other renewable energy sources, emphasizing decentralized, off-grid solutions to support rural communities. - Diversifying the energy mix is presented as essential for building a more climate-resilient power system and reducing disruptions linked to water scarcity. ### Forests, charcoal value chain, and sustainable livelihoods - Zambia’s forests are under threat from unsustainable charcoal production. - The NAP promotes: - alternative cooking fuels such as liquefied petroleum gas (LPG) and electric stoves, - reforestation efforts, - sustainable forest management practices. - A key policy priority is the formalization and regulation of the charcoal value chain to reduce illegal logging while improving rural livelihoods. - Small-scale pilot projects in Eastern Province providing solar panels, boreholes and irrigation equipment to farmers as alternatives to tree cutting have shown promise and could be scaled up. ### Financing adaptation and international mechanisms - Financing remains a major constraint to implementation. - Beyond seeking concessional funding and donor support, Zambia is exploring carbon finance opportunities, including establishing a carbon market framework to trade carbon credits for resources for adaptation investments; bilateral agreements have been reached (Sweden, Norway). - Zambia is documenting the adverse impact of climate change to access financing through the Loss and Damage Fund established at COP28 in 2023. ### Institutional capacity: C-PIMA findings and gaps - The IMF’s Climate Public Investment Management Assessment (C-PIMA), conducted in 2024, indicates Zambia performed relatively well compared to peers in integrating climate considerations into public investment management. - Strengths identified: - national and sectoral planning, - inter-governmental coordination, - disaster risk management. - Weaknesses identified: - project appraisal and selection, - tracking and reporting climate-related investments in the budget (Fig. 14). - Of the five C-PIMA pillars, three—climate-aware planning, coordination, and risk management—were assessed as medium, while project appraisal and budgeting were rated low. - Zambia lacks centralized guidance on preparing and costing climate-aware investment strategies (see Box 2). ### C-PIMA recommendations (summarized) - Integrate climate analysis into project appraisals to improve infrastructure resilience. - Implement climate budget tagging to enable tracking and prioritization of climate-related investments. - Expand climate risk analysis within fiscal risk statements to better anticipate vulnerabilities. - Strengthen institutional coordination to align all public sector entities, including SOEs, with national climate goals. ### Public sector coordination and SOE alignment - Central and local government coordination frameworks exist, but climate integration across state-owned enterprises (SOEs) remains limited. - The NAP and NDC guide sub-national coordination but do not apply to SOEs, which are not required to report GHG emissions or integrate climate objectives in their investment plans. - Given SOEs’ prominence in energy, mining, transport, and infrastructure, aligning SOEs with national climate goals is essential. ### Infrastructure, PPPs, and fiscal risk management - Climate risks embedded in long-term infrastructure investments are not systematically addressed. - The C-PIMA recommends frameworks to incorporate climate risks into PPP contracts and systems to monitor and report climate-related public spending to improve transparency and accountability. - Zambia’s annual budget includes contingency provisions for climate-related shocks, but allocations have been insufficient to meet natural disaster costs. - Recommendations include expanding coverage of climate risks in the Fiscal Risk Statement and promoting insurance schemes in vulnerable sectors to manage and share risks more effectively. ### Policy priorities and concluding recommendations - Strengthen climate adaptation through resilient agriculture, diversified energy, sustainable forestry, and institutional reforms. - Mobilize international support, especially climate finance and technology transfer, to bridge resource gaps. - Integrate climate considerations into public investment management processes and include mechanisms to track budgetary spending on climate adaptation. - Enhance risk awareness by including and costing climate risks in the Fiscal Risk Assessment (FRA) to inform sound fiscal planning and decision-making. - In agriculture: promote drought- and flood-resistant seeds, crop diversification, and expand irrigation. - In energy: diversify electricity generation toward renewable sources and promote alternative household fuels to reduce dependence on charcoal and firewood. - Improve disaster risk management and early warning systems, enhance institutional and community response capacity, and increase public awareness. - Create fiscal buffers, enhance revenue mobilization (including environmental taxes), and attract a balanced mix of private and public funding for climate adaptation priorities. *Source: IMF.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1zmbea2025002-source-pdf.pdf_