## _cr04214 ## Source details **Canonical URL:** [_cr04214](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04214.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04214.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04214.pdf.json) --- ### Executive Summary — Key Findings - Real GDP increased by about 4 percent in 2003; Real GDP growth estimated at 4.2 percent in 2003 (fourth consecutive year of growth). - 12-month inflation rate: 17.2 percent in December 2003 (lowest since 1982). - Fiscal slippage in 2003 driven by large wage increases and new housing allowance; if paid in full, total remuneration would have exceeded budgeted 8 percent of GDP by 2½ percent of GDP. - SMP targets for July–December 2003 were missed by a wide margin; overall fiscal deficit (after grants) and domestic financing in 2003 estimated to have exceeded SMP targets by 1½ percent of GDP and 2 percent of GDP, respectively. - Government medium-term PRSP targets: real GDP growth of at least 4½ percent; inflation in single digits; strengthening of international reserves. - Agreed 2004 program macro assumptions: real GDP growth of 3.5 percent; inflation (end of period) of 20 percent. - Fiscal adjustment to focus on expenditure restraint; wage bill to be held to 8 percent of GDP. - Domestic deficit projected to narrow by 2.2 percent of GDP in 2004; domestic financing expected to decline by 3 percent of GDP. - Structural reform priorities: financial sector reforms (including dealing with insolvent NBFIs); complete privatization of ZNCB (49 percent sale underway); commercialization of ZESCO; improve public expenditure management and governance; policies to improve private sector environment. - Satisfactory performance under the SMP is crucial for moving to a PRGF arrangement and reaching the HIPC completion point. ### Recent Developments and Performance Under the SMP - Growth and inflation: - Real GDP growth: 4.2 percent in 2003. - 12-month inflation rate: 17.2 percent in December 2003. - 2002 context: - Real GDP growth in 2002: 3 percent. - Inflation (12 months to December 2002): 26.7 percent. - Central government overall deficit narrowed to 6.3 percent of GDP in 2002 from 8.1 percent in 2001. - Current account deficit after grants narrowed to 6.5 percent of GDP in 2002 from 10.8 percent in 2001. - Gross international reserves at BoZ: 2.2 months of imports in 2002 (0.9 month at end-2001). - 2003 fiscal slippage and specifics: - Overall cash deficit for 2003 estimated at -6.6 percent of GDP, exceeding programmed target by about 1.4 percent of GDP. - Net domestic financing exceeded the adjusted program ceiling by about 1.7 percent of GDP in December 2003 (K 354 billion). - Unbudgeted payments to Luanshya mine workers (RAMCOZ) of K 167 billion (0.8 percent of GDP). - Retrenchment: 2,498 employees retrenched Apr–Nov 2003; expected 3,500 by end-2003. - Expenditures on PRSP priority projects fell short of budgeted levels; domestic arrears accumulated (stock of domestic arrears end period reported as 711 in table entries). - Monetary and financial sector developments: - Reserve money growth: 49 percent in 2002; limited to 17 percent in first nine months of 2003. - Broad money growth: 23.4 percent for 2003 (SMP target 17 percent). - Treasury bill interest rates: in range 30-35 percent for most of 2003; declined sharply in final months after reserve requirement reduced from 17.5 percent to 14 percent (effective October 31). - BoZ introduced an interbank foreign exchange market (July 2003). - External sector: - Total exports grew by an estimated 22 percent in 2003; total imports grew by 15 percent. - Current account deficit (after grants) estimated at -5.9 percent of GDP in 2003. - Overall balance of payments deficit estimated at -7.6 percent of GDP in 2003. - Gross international reserves: US$196 million at end-2003 (1.3 months of imports); BoZ met adjusted end-December 2003 reserve target under the SMP by US$46 million margin. ### Medium-Term Outlook and Key Policy Issues - PRSP medium-term goals: - Poverty headcount target: reduce from 73 percent in 1998 to 65 percent by 2004. - Real GDP growth targets: at least 4 percent per annum during 2004-05 and at least 5 percent thereafter. - Inflation targets: around 10 percent in 2006 and single digits thereafter. - Reserves: increase gross international reserves significantly by end-2006; reduce external current account deficit to sustainable level. - Zambia: Medium-Term Indicators (selected figures, percent of GDP unless otherwise indicated) - Real GDP (annual % change): 2003 Prel. 4.2; 2004 Proj. 3.5; 2005 Proj. 4.5; 2006 Proj. 5.0 - Consumer prices (end of period % change): 2003 Prel. 17.2; 2004 Proj. 20.0; 2005 Proj. 15.1; 2006 Proj. 10.1 - Revenue (excluding grants): 2003 Prel. 18.1; 2004 Proj. 19.0; 2005 Proj. 19.0; 2006 Proj. 19.0 - Expenditures (excluding interest): 2003 Prel. 27.3; 2004 Proj. 24.5; 2005 Proj. 24.9; 2006 Proj. 24.7 - Overall balance, cash basis: 2003 Prel. -6.6; 2004 Proj. -4.0; 2005 Proj. -2.5; 2006 Proj. -1.4 - Domestic financing: 2003 Prel. 5.1; 2004 Proj. 2.0; 2005 Proj. 1.5; 2006 Proj. 1.0 - External current account balance, incl. grants and debt relief: 2003 Prel. -5.9; 2004 Proj. -6.1; 2005 Proj. -4.8; 2006 Proj. -4.0 - Gross official reserves (months of imports): 2003 Prel. 1.3; 2004 Proj. 1.5; 2005 Proj. 1.7; 2006 Proj. 2.2 ### The Macroeconomic Program for 2004 — Policy Recommendations and Implementation Priorities - Program macro assumptions: - Real GDP growth: 3.5 percent in 2004. - Inflation (end of period): 20 percent in 2004. - Fiscal policy and public expenditure management: - Emphasis on expenditure restraint; avoid unbudgeted spending. - Hold the wage bill to 8 percent of GDP in 2004 (wage bill expected to decline from 8.5 percent in 2003 to 8.0 percent in 2004). - Improve PEM and governance; strengthen commitment control; expedite IFMIS procurement and implementation (award contract by April 2004; pilot IFMIS in three ministries thereafter). - Protect priority poverty-reducing spending; increase priority poverty-reducing spending financed with HIPC debt relief from 1 percent of GDP in 2003 to 2.1 percent of GDP in 2004. - Domestic debt and financing: - Domestic primary balance projected to move from deficit of 0.7 percent of GDP in 2003 to surplus of 2.4 percent in 2004. - Overall deficit after grants projected to narrow to -4.0 percent of GDP in 2004. - Net external financing (including carryovers and IDA tranche) projected at 2.0 percent of GDP; domestic financing limited to 2.0 percent of GDP in 2004 (down from 5.1 percent in 2003). - Passive projection with domestic financing reduced to 2 percent of GDP leaves a financing gap of about US$182 million for 2004. - Tax and revenue measures (2004 budget specifics): - Restore original VAT structure effective Feb 7, 2004; expected yield K 95 billion (0.4 percent of GDP). - Double VAT turnover threshold to K 200 million; expected savings K 26.3 billion from VAT refunds. - Introduce 3 percent turnover tax by Apr 1, 2004 for firms below VAT threshold; expected yield K 7.3 billion. - Personal income tax reform effective Apr 1, 2004: exempt threshold K 3.1 million; add two brackets at 35 and 40 percent; expected yield K 23.8 billion. - 10 percent excise duty on cell phone airtime from Feb 7, 2004; expected yield K 15.6 billion. - Removal of preferential corporate tax rate for listed companies; expected yield K 17.4 billion. - Combined tax policy measures expected to raise revenues by 0.7 percent of GDP; nontax and exceptional measures expected to add 0.4 percent of GDP; total revenue expected to reach 19 percent of GDP in 2004. - Monetary and financial policies: - Limit broad money expansion to about 18 percent in 2004. - BoZ stands ready to tighten monetary policy, including reversing reserve requirement reduction, if necessary. - Continue financial sector reforms, implementation of FSDP, and resolve insolvent NBFIs (deadlines: BoZ set end-March 2004 for restructuring agreements with Zambia National Building Society and National Savings and Credit Bank). - Structural reforms and program sequencing: - Complete privatization of ZNCB (sale of 49 percent to strategic investor hoped in first half of 2004); commercialization of ZESCO to proceed to interim phase by June 2004. - No public funds to recapitalize two NBFIs before FSDP completion; allowance in 2004 budget for expected minimum costs of resolving these institutions. - New concessional borrowing by ZESCO guaranteed by Government subject to cumulative limits: US$20 million to end-2004 and US$40 million to June 2005. - Satisfactory performance under SMP is prerequisite for moving to a PRGF arrangement and for HIPC completion. ### External Debt Sustainability — Baseline and Scenarios (Box 4) - Baseline scenario (Est./Proj. 2003–2012) key series (selected): - Financing gap (surplus +): 2003: 0.0; 2004: -4.1; 2005: -2.5; 2006: -2.3; 2007: -2.1; 2008: -1.6; 2009: -1.2; 2010: -1.2; 2011: -1.2; 2012: -1.2. - Gross official assistance (percent of GDP): 2003: 9.5; 2004: 9.6; 2005: 10.3; 2006: 9.8; 2007: 9.9; 2008: 10.0; 2009: 10.1; 2010: 10.1; 2011: 9.7; 2012: 9.9. - Copper price ($/lb): 2003: 0.79; 2004: 0.86; 2005: 0.88; 2006: 0.89; 2007: 0.89; 2008: 0.90; 2009: 0.90; 2010: 0.90; 2011: 0.90; 2012: 0.90. - Exports (3-yr average) US$m (selected): 2003: 1,150; 2004: 1,291; 2005: 1,509; 2006: 1,917; 2007: 1,918; 2008: 2,028; 2009: 2,282; 2010: 2,236; 2011: 2,368; 2012: [value truncated in source]. - Debt service (percent of exports): 2003: 14.2; 2004: 16.3; 2005: 11.3; 2006: 4.5; 2007: 5.4; 2008: 6.3; 2009: 5.3; 2010: 6.5; 2011: 7.0; 2012: 6.7. - NPV of debt (percent of exports, incl. additional financing): 2003: 182; 2004: 160; 2005: 133; 2006: 120; 2007: 110; 2008: 103; 2009: 100; 2010: 97; 2011: 95; 2012: 94. - Higher debt composition scenario (half of assistance as loans) — NPV of debt (percent of exports): 2003: 182; 2004: 162; 2005: 138; 2006: 127; 2007: 119; 2008: 114; 2009: 114; 2010: 114; 2011: 115; 2012: 117. - Lower copper price scenario (10 percent reduction from 2004 baseline) — key outcomes: - Financing gap (2004–2012) more negative (2004: -5.9; 2005: -4.8; 2006: -4.8; ...; 2012: -2.7). - Copper price ($/lb) path: 2004: 0.78; 2005: 0.80; 2006: 0.80; ...; 2012: 0.81. - NPV of debt (percent of exports) declines more slowly: 2003: 182; 2004: 166; 2005: 143; 2006: 134; 2007: 125; 2008: 119; 2009: 116; 2010: 113; 2011: 112; 2012: 111. - Key point: a 10 percent reduction in copper price from 2004 relative to the baseline would increase NPV of debt at end-projection to about 110 percent of exports. - Higher donor support scenario (gross assistance raised by about 3 percentage points of GDP from 2007) — NPV of debt (percent of exports): 2003: 182; 2004: 160; 2005: 133; 2006: 120; 2007: 111; 2008: 107; 2009: 104; 2010: 102; 2011: 101; 2012: 102. - HIPC DP scenario (higher copper prices and export paths): NPV of debt (percent of exports): 2003: 161; 2004: 148; 2005: 140; 2006: 136; 2007: 131; 2008: 125; 2009: 121; 2010: 117; 2011: 113; 2012: 111. - Baseline narrative findings: - Baseline assumes HIPC completion point by end-2004 and strong fiscal adjustment. - NPV of debt at end-2003 tentatively estimated at 182 percent of exports (above 150 percent threshold). - NPV projected to trend down to about 94 percent of exports by 2012 under baseline due to shift toward grants in external assistance. ### Public Expenditure Management, Governance, and Structural Reforms - Public sector reform needs: - Contain the wage bill to below 8 percent of GDP projected in MTEF; current 2003 wage bill at 8.5 percent of GDP. - New round of public sector reforms 2004–08 to "right size" government and complete pay reform strategy. - Strengthen commitment control and enforce sanctions against accounting officers for overspending and virements. - Finalize IFMIS procurement and pilot in three ministries (contract expected by end-April 2004; procurement delayed from end-2003). - Finalize multi-year plan for clearing domestic arrears by March 2004; OAG to have exclusive responsibility to settle discounted amounts within quarterly ceilings. - Governance and transparency: - Strengthen independence of Office of the Auditor General; draft legislation to be submitted to Parliament by end-June 2004. - Publish comprehensive quarterly budget execution reports within 45 days of quarter end starting Q1 2004, including full coverage of poverty-reducing spending. - Strengthen Anti-Corruption Commission and maintain regular auditing and publication of accounts. - Privatization and public enterprises: - Continue privatization program: ZNCB sale negotiations ongoing; commercialization of ZESCO progressed to "entry point" with interim phase measures to be completed by June 2004. - No new government guarantees or recapitalization of certain NBFIs before FSDP completion. - ZESCO concessional borrowing guaranteed by Government capped at US$20 million to end-2004 and US$40 million to June 2005. - Private sector development issues: - Land tenure: over 90 percent of land under customary ownership cannot be used as collateral; consultative process begun on conversion of traditional lands to state lands. - Labor and investment law reforms: revise Industrial and Labor Relations Act; avoid provisions imposing housing obligations on employers; consult private sector on Investment Act revisions. ### Technical Assistance, Statistics, and Fund Relations - Statistical capacity and TA needs: - Core economic database largely adequate for program monitoring but quality and timeliness of key monetary, fiscal, and external trade data require improvement. - Authorities requested a data ROSC mission in April 2004; TA urgently needed to improve national accounts data quality and timeliness. - Monetary statistics: BoZ switched to new computing system Apr 2003; recommendations from July 2003 STA mission to be implemented. - GFS: resumed compilation; migration to GFSM2001 advised. - Fund relations: - Zambia had two ESAF/PRGF arrangements; ex post assessment concluded further PRGF arrangement necessary. - SMP July–Dec 2003 (extended into 2004) designed as bridge to PRGF; satisfactory SMP performance critical to reach HIPC completion point and catalyze donor support. - IMF credit indicators and timetable (selected figures preserved): - Outstanding Fund credit, end of period (SDRs): 2000: 873; 2001: 782; 2002: 747; 2003: 578; 2004: 408; 2005: 238; 2006: 227; 2007: 200; 2008: 153; 2009: 106; 2010: 61; 2011: 22; 2012: 0. - Fund credit outstanding (percent of quota): 2000: 179; 2001: 160; 2002: 153; 2003: 118; 2004: 83; 2005: 49; 2006: 46; 2007: 41; 2008: 31; 2009: 22; 2010: 12; 2011: 4; 2012: 0. - Zambia's quota in the Fund: 489 (years 2000–2012). ### Risks, Staff Appraisal, and Recommended Actions - Risks to program implementation: - Unanticipated spending decisions and weak program ownership; holding the wage bill to 8 percent of GDP is a key challenge. - Vulnerability to climate and terms of trade shocks, including copper price declines and HIV/AIDS impacts. - Precarious BoZ reserves and large debt-service payments (SDR 85 million due to Fund in June) underscore need for strong SMP performance. - Staff appraisal and recommendations: - Fiscal policy should bear the greater burden of adjustment to reduce real interest rates and support private investment. - Implement public sector reforms to control wage bill and improve PEM; strict enforcement of budgetary procedures and sanctions against overspending. - Prioritize financial sector challenges, resolve insolvent NBFIs in 2004, and complete ZNCB sale. - Improve investment climate via land, labor, and Investment Act reforms with private sector consultation. - Strengthen monitoring and coordination within government; strong SMP performance would facilitate transition to PRGF and reaching HIPC completion point. *IMF staff report summarized from the provided content.* ### 2003. The staff team met with Mr. Magande, Minister of Finance and National Planning (MoFNP), ### 2003. The staff team met with Mr. Magande, Minister of Finance and National Planning (MoFNP), ### Executive Summary — Key Findings - In 2003, Zambia’s economic performance continued to improve: Real GDP is estimated to have increased by about 4 percent, making 2003 the fourth consecutive year of uninterrupted growth in over three decades. Inflation, at about 17 percent, declined to its lowest level in two decades. - The improved outcomes reflected favorable exogenous developments that masked serious shortcomings in policy implementation, notably a sharp deterioration in fiscal performance owing to overruns in the wage bill and ad hoc policy decisions which raised expenditures markedly. Targets under the SMP for July-December 2003 were missed by a wide margin. Progress on structural reforms was mixed. - The government’s medium-term strategy (PRSP) targets: real GDP growth of at least 4½ percent; an inflation rate in single digits; and a strengthening of the international reserves position. - A macroeconomic program for 2004 was agreed that could establish a track record for moving to a new PRGF arrangement. The program is based on real GDP growth of 3.5 percent and inflation of 20 percent. - Fiscal adjustment will focus mainly on expenditure restraint. The authorities were urged to refrain from unbudgeted spending, improve public expenditure management and hold the wage bill to 8 percent of GDP. - The domestic deficit is projected to narrow by 2.2 percent of GDP, permitting domestic financing to decline by 3 percent of GDP and thereby reducing pressures on prices and domestic interest rates. - Structural reform priorities include: financial sector reforms (including measures to deal with insolvent NBFIs); completing the privatization of ZNCB; completing the commercialization of ZESCO; improving public expenditure management and governance; and implementing policies to improve the environment for private sector development. - Satisfactory performance under the SMP is crucial for moving to a PRGF arrangement and reaching the HIPC completion point. ### Recent Developments and Performance Under the SMP - Growth and inflation: - Real GDP growth: estimated increase of 4.2 percent in 2003 (4th consecutive year of growth). - 12-month inflation rate: 17.2 percent in December 2003 (lowest since 1982). - 2002 context: - Real GDP growth in 2002: 3 percent. - Inflation (12 months to December 2002): 26.7 percent. - Central government overall deficit narrowed to 6.3 percent of GDP from 8.1 percent in 2001. - Current account deficit after grants narrowed to 6.5 percent of GDP from 10.8 percent in 2001. - Gross international reserves at the BoZ rose to 2.2 months of imports in 2002 from 0.9 month at end-2001. - Fiscal slippage in 2003: - Large wage increases and a new housing allowance granted in April 2003; if paid in full, total remuneration would have exceeded the budgeted figure of 8 percent of GDP by 2½ percent of GDP. - SMP (July-December 2003) modified to accommodate part of higher payments to government employees while minimizing inflationary pressures and protecting priority expenditures. - Overall fiscal deficit (after grants) and domestic financing in 2003 are estimated to have exceeded the SMP target by 1½ percent of GDP and 2 percent of GDP, respectively. - From September 2003 onward there were large unbudgeted outlays, including security-related spending and payment of retrenchment benefits and wage arrears of 0.8 percent of GDP to facilitate the sale in December of the Luanshya mine, Roan Antelope Mining Company of Zambia (RAMCOZ). - Expenditures on PRSP priority projects fell short of budgeted levels. Domestic arrears continued to accumulate, mostly from penalties and an increase in the kwacha value of foreign currency-denominated arrears. - Monetary and financial sector developments: - Reserve money growth: 49 percent in 2002; limited to 17 percent in first nine months of 2003. - Broad money growth: 12 percent through first nine months of 2003; 23.4 percent for 2003 (exceeded SMP target of 17 percent). - Treasury bill interest rates: in the range of 30-35 percent for most of 2003; declined sharply in final months after cash reserve requirement reduced from 17.5 percent to 14 percent (effective October 31). - BoZ observed ceiling on net domestic assets (NDA) and floor on gross reserves during first nine months of 2003. - BoZ introduced an interbank foreign exchange market. - External sector: - Total exports grew by an estimated 22 percent in 2003; total imports grew by 15 percent. - Current account deficit (after grants) estimated at 5.9 percent of GDP in 2003; overall balance of payments deficit estimated at 7.6 percent of GDP in 2003 (better than SMP projections of 7.5 percent and 8.8 percent, respectively). - BoZ met the adjusted end-December 2003 reserve target under the SMP. - Structural reform progress: - Positive: MTEF discussed in preparation of 2004 budget; draft Financial Sector Development Plan (FSDP) posted for comments in February 2004; plans to deal with three insolvent nonbank financial institutions; negotiations ongoing with preferred bidder for sale of 49 percent shares and management rights of Zambia National Commercial Bank (ZNCB). - Negative/delayed: effectiveness of strengthened commitment control undermined by cash releases for unbudgeted expenditures and weak enforcement of sanctions on accounting officers; procurement of hardware and software for IFMIS delayed; preparation of a multiyear plan for clearing domestic arrears delayed. - HIPC-related progress: - Measures implemented in health and education; privatization of the ZNCB progressed; commercialization agreement on ZESCO; preparation and implementation of MTEF; PRSP progress report draft being finalized. - Key outstanding requirement: maintenance of a stable macroeconomic environment evidenced by satisfactory performance under a PRGF arrangement. - Satisfactory progress under an extended SMP could serve as a bridge to a new PRGF arrangement. - Data and statistical capacity: - Core economic database largely adequate for program monitoring, but quality and timeliness of key monetary, fiscal, and external trade data need improvement. ### Medium-Term Outlook and Key Policy Issues - PRSP medium-term goals and macroeconomic objectives: - Poverty reduction target: reduce poverty headcount from 73 percent in 1998 to 65 percent by 2004. - Real GDP growth targets: at least 4 percent per annum during 2004-05 and at least 5 percent thereafter. - Inflation targets: reduce to around 10 percent in 2006 and to single digits thereafter. - Reserves and external position: increase gross international reserves significantly by end-2006 and reduce external current account deficit (including grants and debt relief on interest payments) to a sustainable level. - Zambia: Medium-Term Indicators, 2003-06 (In percent of GDP, unless otherwise indicated) - Real GDP (annual percentage change): 2003 Prel. 4.2; 2004 Proj. 3.5; 2005 Proj. 4.5; 2006 Proj. 5.0 - Consumer prices (percentage change, end of period): 2003 Prel. 17.2; 2004 Proj. 20.0; 2005 Proj. 15.1; 2006 Proj. 10.1 - Revenue (excluding grants): 2003 Prel. 18.1; 2004 Proj. 19.0; 2005 Proj. 19.0; 2006 Proj. 19.0 - Expenditures (excluding interest): 2003 Prel. 27.3; 2004 Proj. 24.5; 2005 Proj. 24.9; 2006 Proj. 24.7 - Overall balance, cash basis: 2003 Prel. -6.6; 2004 Proj. -4.0; 2005 Proj. -2.5; 2006 Proj. -1.4 - Domestic financing: 2003 Prel. 5.1; 2004 Proj. 2.0; 2005 Proj. 1.5; 2006 Proj. 1.0 - External current account balance, incl. grants and debt relief: 2003 Prel. -5.9; 2004 Proj. -6.1; 2005 Proj. -4.8; 2006 Proj. -4.0 - Gross official reserves (in months of imports): 2003 Prel. 1.3; 2004 Proj. 1.5; 2005 Proj. 1.7; 2006 Proj. 2.2 ### The Macroeconomic Program for 2004 — Policy Recommendations and Implementation Priorities - Program macro assumptions: - Real GDP growth: 3.5 percent (2004). - Inflation (end of period): 20 percent (2004). - Fiscal policy and public expenditure management: - Fiscal adjustment emphasis on expenditure restraint; crucial to avoid unbudgeted spending. - Hold the wage bill to 8 percent of GDP. - Improve public expenditure management and governance, strengthen commitment control, and expedite IFMIS procurement and implementation. - Protect priority poverty-reducing spending; address shortfalls in PRSP priority project execution. - Domestic debt and financing: - Implementation of the proposed 2004 budget, broadly in line with the SMP, should help Zambia avoid an unsustainable spiral of higher domestic debt and interest payments. - Domestic deficit projected to narrow by 2.2 percent of GDP; domestic financing expected to decline by 3 percent of GDP. - Monetary and financial policies: - Prudent financial policies are critical to achieving macro objectives; monetary restraint to limit inflationary pressures and stabilize interest rates. - Continue measures on financial sector reforms, including dealing with insolvent NBFIs and implementation of the FSDP. - Structural reforms to support growth and private sector development: - Complete privatization of ZNCB. - Complete commercialization of ZESCO. - Implement policies to improve the environment for private sector development. - Program conditionality and sequencing: - Satisfactory performance under the SMP is a prerequisite for moving to a PRGF arrangement and for progress toward the HIPC completion point. ### Technical Assistance, Statistics, and Fund Relations - Technical assistance and statistical issues: - Core economic database adequate for monitoring but requires improvements in quality and timeliness of key monetary, fiscal, and external trade data. - Statistical issues described in Appendix IV; social and demographic indicators in Appendix V. - Relations with the Fund and World Bank: - Zambia has had two ESAF/PRGF arrangements; an ex post assessment issued as a background paper to the report. - The mission worked closely with World Bank staff; relations summarized in Appendices II and III. *IMF staff report summarized from the provided content.* ### Box 1. Key Points From the Ex Post Assessment ### Box 1. Key Points From the Ex Post Assessment ### Past performance - Program implementation under the ESAF arrangement approved in 1995 was poor, but generally improved under the PRGF arrangement approved in 1999. - Growth resumed, but fell short of targets. - Fiscal outcomes were not strong enough and inflation remained above 20 percent. - Delays in privatization of the copper company, ZCCM, generated large fiscal costs. - Fiscal slippages, including excessive wage increases, put pressure on interest rates and prevented increases in priority social spending. - Progress in monetary management was more encouraging. - Zambia’s relatively open and liberal exchange regime and a flexible exchange rate have supported private sector activity including growth of nonmining exports. - Progress in structural reforms was mixed: - Improvements in public expenditure management were slower than expected and undermined by poor expenditure policy. - Repeated delays in the privatization of the insolvent commercial bank ZNCB. - Nontransparent processes have adversely affected mining sector privatizations. - After the elections in 2001, the new government launched a policy of “zero tolerance” of corruption, but fundamental weaknesses in budgetary processes remain an obstacle to good governance. - Implementation shortcomings indicate incomplete program ownership; implementation also suffered from limited capacity and lapses in coordination. - The growth target in the ESAF-supported program may have been too optimistic. - Initial program targets to reduce inflation to 4 percent over three years appear overambitious given the record of fiscal slippages. - Assumptions for external assistance may also have been too optimistic; policy slippages often led to shortfalls in donor support and higher recourse to domestic borrowing. ### Looking ahead — key recommendations and policy directions - A further PRGF arrangement is needed to assist Zambia in addressing challenges in the Fund’s core areas of responsibility. A strong track record of implementation would allow Zambia to reach the HIPC completion point and catalyze higher aid flows for progress towards the MDGs. - Fiscal policy must bear a greater burden of adjustment to facilitate a sustainable reduction in real interest rates and support private domestic investment. - Development and implementation of public sector reforms to support tight control of the wage bill and improvements in PEM will be crucial to fiscal consolidation and a reorientation of spending to poverty reduction. - It is essential to strengthen budgetary processes to improve governance. - A consistent policy for the granting of tax exemptions is needed to avoid ad hoc treatment and to preserve the relatively strong revenue base. - Completion of the privatization program is essential to improve economic efficiency and protect the budget. - Accelerating growth will require removal of obstacles to private sector development. - Financial sector reform should follow through on the conclusions of the FSAP, including resolving government-owned nonbank financial institutions and improving rural banking services. - Avoidance of ad hoc spending decisions and strict enforcement of budgetary procedures will be key tests of ownership. - Public advocacy of the chosen policy path will also be important in demonstrating ownership at the highest levels of government. - Monitoring of implementation needs to be strengthened through improved coordination within government. - The authorities agreed with many points in the assessment, but argued that more needed to be done to support private sector growth, particularly through improvements in infrastructure. ### Sources of growth and medium-term macroeconomic outlook - In the medium term, agriculture, mining, manufacturing, and tourism are expected to be the main sources of growth. - Authorities expect agricultural growth to moderate in 2004 after the strong recovery from drought in 2003, but to pick up steadily to 4 percent by 2006; this growth will be bolstered by support to small-scale farmers and privately managed outgrower schemes for export crops. - The mining sector is expected to play a key role, as a result of higher private investments and the positive outlook for copper prices. - The government expects manufacturing to benefit from higher demand from mining and agricultural sectors, and sees good prospects in tourism, particularly in the Livingstone area. - Zambia would continue to benefit from regional trade agreements and from the U.S. African Growth and Opportunity Act. - Staff analysis indicates the increase in GDP growth since 2000 reflects a turnaround in total factor productivity (TFP) growth, attributable to improved macroeconomic management and greater private sector participation, especially in mining after privatization of ZCCM. - The medium-term growth target of 5 percent in the PRSP could be attained with further moderate growth in TFP. - Risks to the long-term growth outlook include drought, a downturn in copper prices, and a worsening of the HIV/AIDS situation. ### Sectoral and growth contribution statistics (preserved figures from staff analysis) - Contributions to Real GDP Growth, 1995-2009 (In percentage points): - Annual real GDP growth: 1.8 (1995-2000); 4.0 (2001-03); 4.6 (2004-09) - Labor: 1.9 (1995-2000); 1.6 (2001-03); 1.5 (2004-09) - Capital: 1.3 (1995-2000); 1.9 (2001-03); 1.9 (2004-09) - Total factor productivity: -1.3 (1995-2000); 0.6 (2001-03); 1.2 (2004-09) ### Mining sector developments and prospects (Box 2) - Zambia’s mining sector, which includes cobalt as a by-product of copper extraction, suffered three decades of decline; by 2000 copper production had fallen to 234,000 tons, or less than a third of the 1969 peak. - Following privatization of ZCCM in 2000, copper production rose sharply in 2001 and 2002, to 330,000 tons at the end of 2002. - Outlook improved due to new investments and higher prices. - Developments at Konkola Copper Mines (KCM) will still play an important role; partial exploitation of the Konkola Deep Mining Project is assumed only to offset declining output from KCM’s other mines. - KCM’s share of total production would decline from two-thirds to about 40 percent over the medium term, as a result of expansion from other existing mines and opening of new lower-cost mines such as at Kanshansi and Lumwana. - Total copper production is now expected to reach almost 600,000 metric tons by 2008, a level last attained in the 1980s. - Recovery will also be supported by higher cobalt production; projections include exploitation of substantial cobalt “tailings” at Chambeshi over the near term. - Projections do not account for potential significant expansion of cobalt production at Chambeshi and Lumwana or in gemstone mining. - Despite recovery, the mining sector is unlikely to regain its former predominance; its share of total merchandise exports is expected to remain around two-thirds because of continued expansion of nonmining exports. ### Private sector development issues - Over 90 percent of land is under customary ownership; lands under the customary system cannot be used as collateral for loans. - Limited availability of state lands could constrain commercial agriculture. - Government priority: improve governance and administration of state-controlled lands and provide infrastructure for development of farming blocks. - A consultative process has begun on conversion of more traditional lands to state lands; the World Bank is undertaking a PSIA of land ownership reform. - Government plans to revise the Industrial and Labor Relations Act to streamline bargaining and reduce illegal strikes and lockouts. - Government is considering modifications to reduce retrenchment costs; staff urged avoidance of provisions requiring employers to provide housing or housing allowances and avoidance of undue restrictions on hiring skilled foreign workers. - Staff urged government to seek private sector views in revising the Investment Act and cautioned against public statements seen as inimical to foreign investment. ### Governance and fiscal sustainability - Authorities reiterated determination to continue “zero tolerance” of corruption and to strengthen the Anti-Corruption Commission and the Office of the Auditor General. - To improve transparency, government will continue regular auditing and publication of accounts and public enterprise operations. - Staff stressed addressing fundamental weaknesses in budgetary processes as crucial to strengthening governance. - Urgent need for fiscal adjustment to break unsustainable cycle of rising domestic debt and interest payments. - Under an adjustment scenario consistent with higher external support and a move in 2004 to a PRGF arrangement with the HIPC completion point reached soon after: - Domestic financing would be phased out and eliminated in 2008. - Domestic debt would decline from 21.9 percent of GDP in 2003 to below 14 percent of GDP in 2008. - Real interest rates would decline. - Domestic interest payments would fall from a peak of 3.7 percent of GDP in 2004 to 1.8 percent of GDP in 2008. - Poverty-reducing spending would increase from 2.4 percent of GDP in 2003 to 5.4 percent of GDP in 2008. - In a scenario without fiscal adjustment: - Domestic financing would double from 4.9 percent of GDP in 2004 to 10 percent of GDP in 2008. - This would entail an unsustainable rise of domestic debt and interest payments and a sharp reduction in all components of primary spending. - Staff stressed firm fiscal policy in 2004 to establish a sustainable path for domestic debt and noted risks of costly delay in adjustment with national elections in 2006. - Authorities agreed on need for a 2004 budget geared to restraining domestic borrowing, limiting the wage bill to no more than 8 percent of GDP, and protecting priority social spending. - Authorities agreed to phase out domestic financing over the medium term and reorient spending toward poverty-reducing programs. - Staff emphasized maintaining good tax revenue performance; cautioned that exemptions could undermine revenue; authorities to assess budgetary effects of tax incentive initiatives and seek a consistent policy. - Raising budgetary revenues as a share of GDP by expanding the tax base and improving tax system efficiency should remain a pillar of fiscal adjustment. ### Public sector reform and expenditure management - Further public sector reforms were needed to contain the wage bill while improving efficiency. - Despite a reform plan supported by the World Bank since 2001, progress was disappointing, especially in implementing the pay reform strategy. - Weaknesses remain in procedures for wage negotiations and in managing the establishment register and the payroll. - Staff stressed importance of a new round of public sector reforms (discussions underway with the World Bank and other donors) over 2004-08 to “right size” government operations and complete the pay reform strategy. - Reforms should aim to reduce the wage bill to below the level of 8 percent of GDP projected in the MTEF to provide more room for priority spending. - Progress in strengthening public expenditure management had been undermined by unbudgeted expenditures. - The HIPC Initiative expenditure-tracking Assessment and Action Plan (AAP) (December 2003) concluded only limited progress had been made in strengthening PEM. ### Medium-term external outlook and policy issues - With domestic fiscal adjustment and attainment of the HIPC completion point, medium-term external prospects were generally positive. - Based on discussions with government and key mining companies, copper exports are projected to rise by 20 percent a year over 2004-06 due to higher prices and expansion of production, including new mines in Kansanshi and Lumwana. - In 2006, production is expected to be about half a million metric tons. - Outlook vulnerable to weaker copper prices and continued uncertainty concerning sale of a majority share of KCM. *Source: _cr04214 - Box 1. Key Points From the Ex Post Assessment* ### Box 4. External Debt Sustainability ### Box 4. External Debt Sustainability ### Baseline scenario (Est./Proj. 2003–2012) - Financing gap (surplus +), 2003–2012: - 2003: 0.0 - 2004: -4.1 - 2005: -2.5 - 2006: -2.3 - 2007: -2.1 - 2008: -1.6 - 2009: -1.2 - 2010: -1.2 - 2011: -1.2 - 2012: -1.2 - Gross official assistance, 2003–2012: - 2003: 9.5 - 2004: 9.6 - 2005: 10.3 - 2006: 9.8 - 2007: 9.9 - 2008: 10.0 - 2009: 10.1 - 2010: 10.1 - 2011: 9.7 - 2012: 9.9 - Copper price ($/lb), 2003–2012: - 2003: 0.79 - 2004: 0.86 - 2005: 0.88 - 2006: 0.89 - 2007: 0.89 - 2008: 0.90 - 2009: 0.90 - 2010: 0.90 - 2011: 0.90 - 2012: 0.90 - Exports (3-yr average) US$m, 2003–2012: - 2003: 1,150 - 2004: 1,291 - 2005: 1,509 - 2006: 1,917 - 2007: 1,918 - 2008: 2,028 - 2009: 2,282 - 2010: 2,236 - 2011: 2,368 - 2012: [value appears truncated in source; preserve available sequence] - Debt service, percent of exports, 2003–2012: - 2003: 14.2 - 2004: 16.3 - 2005: 11.3 - 2006: 4.5 - 2007: 5.4 - 2008: 6.3 - 2009: 5.3 - 2010: 6.5 - 2011: 7.0 - 2012: 6.7 - NPV of debt, percent of exports (including additional financing to close the financing gap), 2003–2012: - 2003: 182 - 2004: 160 - 2005: 133 - 2006: 120 - 2007: 110 - 2008: 103 - 2009: 100 - 2010: 97 - 2011: 95 - 2012: 94 - Key baseline narrative findings: - Baseline assumes Zambia reaches the HIPC completion point by end-2004 and implements strong fiscal adjustment through the medium term. - External debt service expected to decline substantially in 2006 as large repayments due to the Fund, related to the 1995 arrears clearance, come to an end. - Debt-service payments are then projected to trend upwards because of repayments on new PRGF disbursements since 1999, but will remain below 7 percent of exports. - Payments to other creditors will remain relatively low due to the longer maturities on their lending. - The NPV of debt at end-2003, using decision point discount rates, is tentatively estimated to be 182 percent of exports—above the 150 percent sustainability threshold. - The NPV of debt is projected to trend down to about 94 percent of exports by the end of the projection period, reflecting a stronger than expected shift in the composition of external assistance towards grants (share of loans in gross external financing fell from about half in 2000 to about 30 percent in 2003 and projected to trend further down to about 20 percent). ### Higher debt composition scenario - Debt service, percent of exports, 2003–2012: - 2003: 14.2 - 2004: 16.3 - 2005: 11.4 - 2006: 4.6 - 2007: 5.5 - 2008: 6.5 - 2009: 5.5 - 2010: 5.6 - 2011: 8.6 - 2012: 7.3 - 2012 (final listed): 7.1 - NPV of debt, percent of exports (including additional financing), 2003–2012: - 2003: 182 - 2004: 162 - 2005: 138 - 2006: 127 - 2007: 119 - 2008: 114 - 2009: 114 - 2010: 114 - 2011: 115 - 2012: 117 - Key point: - Under the alternative assuming half of assistance is in the form of loans, the debt burden by the end of the projection period is higher than under the baseline. ### Lower copper price scenario - Financing gap (surplus +), 2003–2012: - 2003: 0.0 - 2004: -5.9 - 2005: -4.8 - 2006: -4.8 - 2007: -4.4 - 2008: -3.9 - 2009: -3.2 - 2010: -3.0 - 2011: -2.8 - 2012: -2.7 - Copper price ($/lb), 2003–2012: - 2003: 0.79 - 2004: 0.78 - 2005: 0.80 - 2006: 0.80 - 2007: 0.80 - 2008: 0.81 - 2009: 0.81 - 2010: 0.81 - 2011: 0.81 - 2012: 0.81 - Exports (3-yr average) US$m, 2003–2012: - 2003: 1,150 - 2004: 1,264 - 2005: 1,448 - 2006: 1,620 - 2007: 1,785 - 2008: 1,910 - 2009: 1,994 - 2010: 2,082 - 2011: 2,161 - 2012: 2,247 - Debt service, percent of exports, 2003–2012: - 2003: 14.2 - 2004: 17.2 - 2005: 12.0 - 2006: 4.8 - 2007: 5.7 - 2008: 6.7 - 2009: 5.6 - 2010: 6.9 - 2011: 7.4 - 2012: 7.1 - NPV of debt, percent of exports (including additional financing), 2003–2012: - 2003: 182 - 2004: 166 - 2005: 143 - 2006: 134 - 2007: 125 - 2008: 119 - 2009: 116 - 2010: 113 - 2011: 112 - 2012: 111 - Key point: - A 10 percent reduction in the copper price from 2004 relative to the baseline would increase the NPV of debt at the end of the projection period to about 110 percent of exports. ### Higher donor support scenario - Gross official assistance, 2003–2012: - 2003: 10.0 - 2004: 13.7 - 2005: 12.8 - 2006: 12.2 - 2007: 15.0 - 2008: 14.7 - 2009: 14.3 - 2010: 14.3 - 2011: 14.0 - 2012: 14.2 - Debt service, percent of exports, 2003–2012: - 2003: 14.2 - 2004: 16.3 - 2005: 11.4 - 2006: 4.6 - 2007: 5.6 - 2008: 6.5 - 2009: 5.6 - 2010: 6.8 - 2011: 7.3 - 2012: 7.0 - NPV of debt, percent of exports (including additional financing), 2003–2012: - 2003: 182 - 2004: 160 - 2005: 133 - 2006: 120 - 2007: 111 - 2008: 107 - 2009: 104 - 2010: 102 - 2011: 101 - 2012: 102 - Scenario assumptions and result: - Scenario assumes gross assistance about 3 percentage points of GDP higher than baseline starting from 2007—after allowing for additional financing to close the financing gap—so gross financing rises to over 14 percent of GDP over 2007–12. - Assuming additional assistance is more heavily tilted toward loans than under the baseline, but overall share of loans declines to about 25 percent, the NPV of debt at the end of the projection period would remain over 100 percent of exports. ### HIPC DP (Decision Point) document scenario - Copper price ($/lb), 2003–2012: - 2003: 0.94 - 2004: 0.97 - 2005: 1.00 - 2006: 1.01 - 2007: 1.01 - 2008: 1.02 - 2009: 1.02 - 2010: 1.03 - 2011: 1.03 - 2012: 1.03 - Exports (3-yr average) US$m, 2003–2012: - 2003: 1,386 - 2004: 1,508 - 2005: 1,606 - 2006: 1,712 - 2007: 1,812 - 2008: 1,842 - 2009: 1,943 - 2010: 2,072 - 2011: 2,351 - 2012: 2,505 - Debt service, percent of exports, 2003–2012: - 2003: 10.0 - 2004: 13.2 - 2005: 11.8 - 2006: 5.3 - 2007: 6.2 - 2008: 6.3 - 2009: 6.2 - 2010: 5.7 - 2011: 5.7 - 2012: 5.7 - NPV of debt, percent of exports, 2003–2012: - 2003: 161 - 2004: 148 - 2005: 140 - 2006: 136 - 2007: 131 - 2008: 125 - 2009: 121 - 2010: 117 - 2011: 113 - 2012: 111 ### Additional analytical and policy points from the box and surrounding text - Excluding new PRGF disbursements in baseline projections. - The NPV of debt at end-2003 (182 percent of exports) is higher than projected at the end-2000 decision point mainly because of weaker copper prices. - A shift in external assistance composition toward grants materially reduces projected NPV of debt; share of loans in gross external financing fell from about half in 2000 to about 30 percent in 2003 and is projected to trend further down to about 20 percent under the baseline. - Reaching the HIPC completion point is critical to achieving medium-term debt sustainability and meeting PRSP objectives; reaching the completion point would also allow Zambia to meet large debt-service obligations due to the Fund through end-2005. - External debt-service obligations are projected to drop sharply in 2006 once repayments to the Fund related to the 1995 arrears clearance under the RAP have been completed. - Significant levels of external donor support, preferably in the form of grants, are needed for Zambia to meet its poverty reduction targets; policy slippages jeopardize near-term donor support. - On the basis of existing data (to be revised for a new debt sustainability analysis prior to the HIPC completion point), debt-service payments would remain below 7 percent of exports and the NPV of debt would continue to trend downward to below 100 percent of exports. *Box 4. External Debt Sustainability, from the IMF staff report content provided.* ### 38. The fiscal adjustment would enable the expansion of broad money to be limited to ### _cr04214 - 38. The fiscal adjustment would enable the expansion of broad money to be limited to ### Monetary policy, broad money, and interest rates - The fiscal adjustment would enable the expansion of broad money to be limited to 18 percent in 2004. - This objective takes into account the monetary overhang at the end of 2003 resulting from the reduction in reserve requirements, while accommodating a substantial increase in credit to the private sector in real terms. - The staff cautioned that the sharp decline in interest rates—which brought real yields on treasury bills close to zero in December 2003—was unlikely to be sustainable, given the government’s continued financing needs, and urged the authorities to keep the stance of monetary policy under careful review. - The BoZ indicated that it stood ready to tighten monetary policy, including reversing the recent reduction in reserve requirements, if necessary. - The flexible exchange rate regime will remain in place, with interventions by the BoZ aimed primarily at smoothing out short-term fluctuations in the market, and in meeting the program’s gross international reserve target. ### External sector and reserves - Copper exports are projected to grow strongly in 2004. - As a result of large imports for investment in the sector, the external current account deficit is projected to widen slightly to 6.1 percent of GDP. - Program loans and grants are expected to remain low, at 1.6 percent of GDP. - The gross international reserves of the BoZ are expected to rise slightly to 1.5 months of import cover by end-2004 (up from an estimated 1.3 months of imports in 2003), provided a PRGF arrangement is in place and the projected donor financing materializes. - Reserves of US$196 million at end-2003 were equal to 1.3 months of import cover, but are low in relation to forthcoming debt-service payments, including large obligations (SDR 85 million) due to the Fund in June. ### Structural measures, privatization, and public enterprise reform - Under the program, structural measures are aimed at strengthening budget execution, and expenditures controls, and restructuring the insolvent public NBFIs (see para. 31 above and Table 4 of the MEFP). - The government is proceeding with the commercialization of the electricity utility company, ZESCO, in line with agreements reached with the World Bank. - The commercialization has progressed satisfactorily, with the agreed “entry point” conditions for the commercialization strategy met by end-December 2003. - The authorities intend to request a revision of the HIPC Initiative completion point trigger relating to the privatization of ZESCO, to be replaced by the completion of measures specified as benchmarks to reach the interim phase of the commercialization (MEFP, para. 38). ### Program monitoring, governance, and implementation - The implementation of the SMP will be monitored under monthly targets and benchmarks (Tables 3 and 4 of the MEFP). - The staff considers that this close monitoring is required in view of the slippages during 2003. - Good performance against monthly targets may enable more rapid progress to a successor arrangement. - The government has revived the Interministerial Economic Monitoring Committee, which will now be chaired by the President. - The Fund’s Resident Representative will also be invited to attend the meetings of the technical group that will advise the interministerial committee. ### Risks to program implementation and fiscal discipline - Developments during the last year have highlighted the risks posed by unanticipated spending decisions; greater program ownership and rigorous spending controls are essential. - Holding the line on wages poses a key challenge; the authorities intend to bring the wage bill down to 8 percent of GDP in 2004. - The authorities’ strong advocacy of the need for wage restraint, and for changes in the income tax code that benefit the majority of government employees, is supportive of progress, but the government’s strong stance has resulted in strikes by civil servants. - The economy remains vulnerable to climate and terms of trade shocks; the crop early warning system does not point to losses of macroeconomic significance in 2004, despite below-average initial rains in parts of the country. - Copper prices have remained above the average levels assumed in the program. - The reserve position of the BoZ may come under pressure as a result of large financing needs in 2004; the proximity of payments such as SDR 85 million due to the Fund in June underscores the importance of strong performance under the SMP to allow an early transition to a new PRGF arrangement. ### Technical assistance and statistical issues - Zambia has received significant Fund technical assistance in areas such as tax policy and administration, PEM reforms, and banking and financial sector reforms, as well as in strengthening the capacity of the BoZ. - Implementation of PEM reforms has not had the desired results, owing to continued extrabudgetary expenditures and the circumvention of budget procedures (paras. 29 and 31 of MEFP). - In 2002-03, TA in the foreign exchange market resulted in the introduction of an interbank foreign exchange market in July 2003. - The joint Bank-Fund Financial System Stability Assessment (FSSA) of 2002 identified key financial sector challenges, being addressed through tailored MFD TA including the preparation of the FSDP, the restructuring of the NBFIs, payments system reforms, and anti-money-laundering legislation. - The authorities reaffirmed their interest in a data Report on Observance of Standards and Codes (ROSC) mission in April 2004 to provide a diagnosis for further TA to improve statistical systems in the Ministry of Finance, the Central Statistics Office, and the BoZ. - The authorities agreed that TA was urgently needed to improve the quality and timeliness of national accounts data. ### Staff appraisal, policy priorities, and recommended actions - The staff concurs with the conclusions of the ex post assessment of Zambia’s performance and considers a further PRGF arrangement necessary. - Fiscal policy should bear a greater burden of adjustment to facilitate a sustainable reduction in real interest rates and support private domestic investment. - Development and implementation of public sector reforms to support tight control of the wage bill and improvements in PEM are crucial to fiscal consolidation and a reorientation of spending to poverty reduction. - Strengthening budgetary processes is essential to improve governance; completion of the privatization program is essential to improve economic efficiency and protect the budget. - Financial sector reforms should follow through on the FSAP conclusions, including resolving government-owned nonbank financial institutions and improving rural banking services. - Avoidance of ad hoc spending decisions and strict enforcement of budgetary procedures will be key tests of ownership; public advocacy of the chosen policy path is important. - Monitoring of implementation needs to be strengthened through improved coordination within government. - A strong track record of implementation would allow Zambia to reach the HIPC completion point and catalyze higher aid flows for progress towards the MDGs. - The 2004 budget proposal is welcomed for seeking a sharp reduction in domestic borrowing and focusing adjustment on expenditure restraint; measures included should help broaden the tax base and improve the efficiency of the VAT system while simplifying its administration. - The recent strengthening of the commitment control system must be supported by tight enforcement of procedures, including sanctions against accounting officers responsible for any overspending and the diversion of funds between budget subheads. - The development of a medium-term expenditure framework and the intention to contain the government wage bill over the medium term are important steps; a medium-term strategy to “right size” government operations and complete the pay reform is essential. - The authorities are urged to prioritize financial sector challenges so that urgent issues, such as the insolvency of the NBFIs, are addressed in 2004. - The authorities should continue to improve the environment for private sector development and foreign investment, including consideration of private sector views on reforms to the Investment Act, labor legislation, and land legislation, and strengthen the land administration system to make more traditional land available for commercial agriculture. - Policies under the SMP, if implemented, are sufficient to help Zambia avoid an unsustainable spiral of higher domestic debt and interest payments. - Satisfactory performance under the SMP in 2004 is crucial for transition to a PRGF arrangement and reaching the HIPC Initiative completion point; given precarious BoZ reserves, there is little room for further lapses in policy implementation. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 57. Regarding the exchange restriction evidenced by the existence of external arrears, the ### _cr04214 - 57. Regarding the exchange restriction evidenced by the existence of external arrears, the ### Exchange restriction and consultation cycle - Staff encourages the authorities to continue with their efforts to resolve the remaining arrears. - It is proposed that the next Article IV consultation be held on the 12-month consultation cycle, subject to the provisions of the decision on consultation cycles approved on July 15, 2002. ### Indicators of Fund credit (Table 1) - Outstanding Fund credit, end of period (in millions of SDRs): 2000: 873; 2001: 782; 2002: 747; 2003: 578; 2004: 408; 2005: 238; 2006: 227; 2007: 200; 2008: 153; 2009: 106; 2010: 61; 2011: 22; 2012: 0. - Of which: SAF/ESAF/PRGF 1/: same series as outstanding Fund credit above. - Fund credit outstanding (percent of quota): 2000: 179; 2001: 160; 2002: 153; 2003: 118; 2004: 83; 2005: 49; 2006: 46; 2007: 41; 2008: 31; 2009: 22; 2010: 12; 2011: 4; 2012: 0. - PRGF loan disbursements: 2075133 0000000000 (as presented). - Total debt service to the Fund: 2000: 7; 2001: 173; 2002: 173; 2003: 174; 2004: 173; 2005: 173; 2006: 12; 2007: 29; 2008: 49; 2009: 48; 2010: 47; 2011: 40; 2012: 22. - Repayments: 2000: 0; 2001: 167; 2002: 168; 2003: 169; 2004: 170; 2005: 171; 2006: 10; 2007: 27; 2008: 48; 2009: 47; 2010: 46; 2011: 39; 2012: 22. - Interest charges on Fund credit and use of SDRs: 7655332221111 (as presented). - HIPC Initiative assistance: 011712112183860000000 (as presented). - After HIPC Initiative assistance: 75652 53908712294948474022 (as presented). - Net use of Fund resources: 2000: 13; 2001: 19; 2002: 81; 2003: -53; 2004: -90; 2005: -87; 2006: -12; 2007: -29; 2008: -49; 2009: -48; 2010: -47; 2011: -40; 2012: -22. - Change in Fund credit outstanding: 2000: 20; 2001: -92; 2002: -35; 2003: -169; 2004: -170; 2005: -171; 2006: -10; 2007: -27; 2008: -48; 2009: -47; 2010: -46; 2011: -39; 2012: -22. - Zambia's quota in the Fund: 489 for years 2000–2012. ### Selected economic and financial indicators (Table 2) - Real GDP (annual percentage change): 2000: 3.6; 2001: 4.9; 2002: 3.3; 2003: 4.5; 2004: 4.2; 2005: 3.5; 2006: 4.5; 2007: 5.0. - GDP deflator: 2000: 27.9; 2001: 24.3; 2002: 19.9; 2003: 19.9; 2004: 20.1; 2005: 19.5; 2006: 14.4; 2007: 10.1. - Consumer prices (annual average): 2000: 26.1; 2001: 21.7; 2002: 2.2; 2003: 20.5; 2004: 21.5; 2005: 18.5; 2006: 7.5; 2007: 12.6. - Consumer prices (end of period): 2000: 30.1; 2001: 18.7; 2002: 26.6; 2003: 13.0; 2004: 17.2; 2005: 20.0; 2006: 15.1; 2007: 10.1. - U.S. dollar value of exports of goods and services (annual percentage change): 2000: 2.1; 2001: 19.4; 2002: 2.4; 2003: 15.8; 2004: 22.1; 2005: 12.8; 2006: 17.5; 2007: 12.1. - U.S. dollar value of imports of goods and services: 2000: 12.8; 2001: 23.3; 2002: -2.5; 2003: 13.0; 2004: 13.0; 2005: 8.8; 2006: 12.4; 2007: 9.1. - Export volume (percentage change): 2000: -5.0; 2001: 26.2; 2002: 11.2; 2003: 5.2; 2004: 8.6; 2005: 6.8; 2006: 17.0; 2007: 12.2. - Import volume (percentage change): 2000: 2.4; 2001: 33.8; 2002: -4.3; 2003: 7.2; 2004: 9.9; 2005: 9.2; 2006: 13.1; 2007: 8.2. - Copper export volume (percentage change): 2000: -2.5; 2001: 26.9; 2002: 11.3; 2003: 7.6; 2004: 5.8; 2005: 9.3; 2006: 22.9; 2007: 14.8. - Copper export prices (average, U.S. dollars per pound): 2000: 0.82; 2001: 0.77; 2002: 0.70; 2003: 0.75; 2004: 0.78; 2005: 0.85; 2006: 0.88; 2007: 0.88. - Money and credit (change in percent of beginning-of-year M2): Net foreign assets: 63.9 (2000); -6.0 (2001); 56.0 (2002); -13.3 (2003); -9.0 (2004); 12.0 (2005); ... - Broad money (change in percent of beginning-of-year M2): 2000: 74.1; 2001: 10.7; 2002: 31.5; 2003: 1.6; 2004: 9.5; 2005: 12.3; 2006: 11.9; 2007: 12.4. - Treasury bill rate (end of period): 2000: 34.1; 2001: 52.0; 2002: 32.5; 2004: 18.2. - Central government budget (percent of GDP): Revenue (excluding grants): 2000: 4.7; 2001: 28.4; 2002: 16.0; 2003: 28.2; 2004: 26.5; 2005: 30.0; 2006: 19.4; 2007: 15.5. (As presented.) - Investment and savings (percent of GDP): Gross national savings 3/: 2000: 5.7; 2001: 9.2; 2002: 16.5; 2003: 12.5; 2004: 17.3; 2005: 17.9; 2006: 20.1; 2007: 18.4. - External sector: Current account balance, excl. grants (percent of GDP): 2000: -19.2; 2001: -20.8; 2002: -17.3; 2003: -16.7; 2004: -14.8; 2005: -13.9; 2006: -14.2; 2007: -13.4. - Current account balance, incl. grants and debt relief (percent of GDP): 2000: -11.4; 2001: -10.8; 2002: -6.5; 2003: -7.5; 2004: -5.9; 2005: -6.1; 2006: -4.8; 2007: -4.0. - External official debt service (percent of exports of goods and services): 2000: 15.9; 2001: 13.5; 2002: 11.4; 2003: 15.9; 2004: 14.2; 2005: 16.3; 2006: 11.3; 2007: 4.5. - Current account balance, incl. grants and debt relief (in millions of U.S. dollars): 2000: -369; 2001: -394; 2002: -246; 2003: -304; 2004: -251; 2005: -271; 2006: -215; 2007: -185. - Overall balance of payments (in millions of U.S. dollars): 2000: -416; 2001: -399; 2002: -383; 2003: -358; 2004: -321; 2005: -292; 2006: -211; 2007: -215. - Gross official reserves (end of period, in millions of U.S. dollars): 2000: 114; 2001: 114; 2002: 283; 2003: 155; 2004: 197; 2005: 239; 2006: 312; 2007: 440. - In months of imports of goods and services: 2000: 1.0; 2001: 0.9; 2002: 2.2; 2003: 1.1; 2004: 1.3; 2005: 1.5; 2006: 1.7; 2007: 2.2. ### Central government overall operations (Tables 3 and 4) - Revenue and grants (in billions of kwacha, Table 3): 2000: 3,262; 2001: 4,259; 2002: 5,256; 2003: 5,173; 2004: 5,104; 2005: 6,287; 2006: 8,086; 2007: 9,423. - Revenue (in billions of kwacha): 2000: 2,509; 2001: 2,909; 2002: 3,677; 2003: 3,729; 2004: 3,680; 2005: 4,783; 2006: 5,710; 2007: 6,594. - Tax revenue (in billions of kwacha): 2000: 2,449; 2001: 2,849; 2002: 3,446; 2003: 3,498; 2004: 3,548; 2005: 4,533; 2006: 5,412; 2007: 6,251. - Income taxes: 977; 1,244; 1,470; 1,558; 1,622; 2,048; 2,445; 2,824. - VAT (total): 821; 812; 1,010; 1,014; 1,034; 1,344; 1,605; 1,853. - Domestic VAT: 278; 342; 423; 428; 393; 632; 755; 871. - Import VAT: 544; 471; 587; 586; 642; 712; 850; 982. - Grants (in billions of kwacha): 754; 1,350; 1,579; 1,444; 1,424; 1,505; 2,376; 2,829. - Expenditures (in billions of kwacha): 4,212; 5,172; 6,226; 6,223; 6,338; 7,301; 8,839; 9,895. - Current expenditures: 2,578; 3,161; 3,580; 3,927; 4,003; 4,714; 5,646; 6,322. - Wages and salaries: 888; 1,301; 1,520; 1,758; 1,728; 2,018; 2,345; 2,638. - Domestic interest: 207; 450; 532; 658; 563; 927; 1,080; 1,052. - External interest 2/: 124; 210; 287; 299; 229; 216; 265; 268. - Capital expenditure (in billions of kwacha): 1,557; 1,925; 2,646; 2,295; 2,335; 2,588; 3,193; 3,573. - Domestically financed: 494; 417; 696; 458; 507; 601; 812; 989. - Foreign financed: 1,063; 1,508; 1,951; 1,837; 1,828; 1,986; 2,381; 2,585. - Overall balance (in billions of kwacha): -1,056; -1,031; -971; -1,050; -1,349; -1,014; -753; -472. - Domestic balance: -607; -662; -260; -345; -716; -316; -483; -448. - Domestic primary balance: -400; -212; 272; 313; -152; 611; 597; 605. - Financing (in billions of kwacha): 1,056; 1,031; 971; 1,050; 1,349; 1,014; 753; 472. - Domestic 4/: 589; 337; 298; 618; 1,041; 504; 451; 347. - External: 467; 693; 673; 432; 308; 510; 302; 125. - Stock of domestic arrears (end period): 346; 602; 276; 711 (as presented). - Stock of domestic debt (end period, in billions of kwacha): 2,891; 3,408; 3,647; 3,903; 4,263; 4,974; 5,425; 5,769. - Central government operations (percent of GDP, Table 4): Revenue and grants: 24.9; 26.2; 27.2; 25.5; 25.1; 25.0; 26.9; 27.1. Revenue (percent of GDP): 19.2; 17.9; 19.0; 18.4; 18.1; 19.0; 19.0; 19.0. - Overall balance (percent of GDP): -8.1; -6.3; -5.0; -5.2; -6.6; -4.0; -2.5; -1.4. - Domestic balance (percent of GDP): -4.6; -4.1; -1.3; -1.7; -3.5; -1.3; -1.6; -1.3. ### Monetary survey and Bank of Zambia (Tables 5 and 6) - Monetary Survey (billion kwacha, Table 5): - Net foreign assets (billion kwacha): 2000: -1,512; 2001: -2,843; 2002: -957; 2003 (various months) range including -1,127; -1,329; -1,458; -1,432; -1,559; -1,486; -1,586; -1,558; -1,631; -1,647; -1,691; -1,609; -1,529; -1,454; -1,608; -1,778; -1,240. - Net domestic assets (billion kwacha): 2000: 3,998; 2001: 5,596; 2002: 4,577; 2003 (various months) range including 4,747; 5,005; 5,357; 5,280; 5,443; 5,426; 5,549; 5,625; 5,682; 5,716; 5,747; 5,729; 5,757; 5,922; 5,839; 6,246; 6,519. - Broad money (billion kwacha): 2000: 2,486; 2001: 2,754; 2002: 3,620; 2003 series: 3,676; 3,899; 3,848; 3,885; 3,939; 3,964; 4,066; 4,051; 4,068; 4,056; 4,121; 4,228; 4,468; 4,230; 4,468; 5,279. - Narrow money and quasi money series provided (see table entries). - Change in percent of beginning-of-year broad money: - Net foreign assets: 2000: 63.8; 2001: -53.5; 2002: 68.5; 2003 onward include -5.6; -9.1; -8.4; -11.9; -9.9; -12.7; -11.9; -13.9; -14.4; -15.6; -13.3; -11.1; -9.0; -13.3; ...; 12.0. - Broad money: 2000: 74.1; 2001: 10.8; 2002: 31.5; 2003 onwards include 1.6; 7.7; 6.3; 7.3; 8.8; 9.5; 12.3; 11.9; 12.4; 12.0; 13.8; 16.8; 23.4; 16.9; ...; 18.2. - Program exchange rates (Kwacha per dollar): 2000: 2,632; 2001: 4,158; 2002: 3,830; 2003: 4,334; 2004 (SMP entries): 4,334 (multiple entries) and later 5,018 for some 2004 entries. - Kwacha per SDR: 2000: 3,612; 2001: 5,405; 2002: 4,826; 2003: 5,634; later 6,975 for some 2004 entries. - Bank of Zambia assets and liabilities (Table 6, in billions of kwacha): - Net foreign assets (BoZ): 2000: -2,440; 2001: -3,705; 2002: -1,954; 2003 series include -2,255; -2,392; -2,306; -2,272; -2,417; -2,278; -2,455; -2,350; -2,511; -2,449; -2,582; -2,474; -2,431; -2,377; -2,521; -2,766; -2,275. - Of which: IMF (net): -3,155; -4,229; -3,603; -4,206; -4,206; -3,721; -3,721; -3,721; -3,721; -3,721; -3,715; -3,721; -3,721; -3,721; -3,715; -3,721; -3,242; -3,251; -3,715; -3,438. - Net domestic assets (BoZ): 2000: 2,996; 2001: 4,513; 2002: 3,158; 2003 series range 3,459; 3,499; 3,432; 3,606; 3,503; 3,668; 3,758; 3,748; 3,730; 3,821; 3,756; 3,722; 3,796; 3,813; 4,185; 3,951. - Reserve money (BoZ): 2000: 556; 2001: 808; 2002: 1,205; 2003 onwards series include 1,107; 1,193; 1,160; 1,189; 1,224; 1,213; 1,408; 1,237; 1,280; 1,239; 1,282; 1,291; 1,419; 1,292; 1,419; 1,677. - Multiplier (broad money/reserve money): 2000: 3.8; 2001: 3.4; 2002: 3.0; 2003: 3.0; later series include 3.3; 3.3; 3.3; 3.3; 3.2; 3.3; 2.9; 3.3; 3.3; 3.3; 3.2; 3.3; 3.1; 3.3; ...; 3.1. ### Balance of payments (Table 7 summary) - Current account balance (in millions of U.S. dollars): 2000: -622; 2001: -758; 2002: -652; 2003: -681; 2004: -627; 2005: -618; 2006: -629; 2007: -626. - Trade balance on goods and nonfactor services (millions of U.S. dollars): 2000: -446; 2001: -570; 2002: -504; 2003: -543; 2004: -477; 2005: -468; 2006: -456; 2007: -415. - Exports, f.o.b. (millions of U.S. dollars): 2000: 746; 2001: 884; 2002: 916; 2003: 1,051; 2004: 1,117; 2005: 1,273; 2006: 1,509; 2007: 1,700. - Metal sector: 497; 590; 560; 636; 710; 818; 1,012; 1,156. - Nonmetal: 249; 295; 357; 415; 407; 455; 497; 544. - Imports, f.o.b. (millions of U.S. dollars): -978; -1,253; -1,204; -1,387; -1,388; -1,520; -1,719; -1,876. - Services, nonfactor (net): -225; -228; -245; -236; -235; -252; -277; -305. - Receipts: 115; 144; 136; 167; 168; 176; 194; 210. - Payments: -340; -372; -381; -403; -403; -429; -471; -515. - Income (net): -158; -168; -155; -148; -148; -125; -143; -176. - Of which: official interest payments: -155; -144; -137; -131; -131; -120; -109; -102. - Current transfers (net): -18; -20; 7; 10; -2; -24; -31; -36. - Capital and financial accounts (millions of U.S. dollars): 202; 466; 255; 361; 330; 326; 418; 411. - Project grants: 153; 222; 236; 240; 240; 246; 316; 338. - Official loan disbursement (net): -140; -96; -122; -97; -133; -114; -128; -98. - Disbursement: 93; 136; 111; 139; 109; 110; 50; 40. - Amortization (-): -233; -233; -234; -236; -242; -224; -178; -138. - Overall balance (millions of U.S. dollars): -416; -399; -383; -358; -321; -292; -211; -215. - Change in net international reserves of BoZ (-increase): -49; -124; -225; -117; -164; -291; -324; -143. - Gross official reserves of BoZ (millions of U.S. dollars): -680; -169; 129; 87; -43; -73; -128 (as presented across series). - Debt relief (millions of U.S. dollars): 217; 436; 437; 384; 391; 395; 335; 167. - Non-HIPC: 217; 170; 171; 154; 154; 120; 67; 19. - HIPC, including IMF 3/: ...; 266; 266; 230; 237; 275; 237; 118. - Of which: IMF: ...; 150; 153; 164; 171; 119; 123; 0. - Net change in arrears (+ increase): -103; 112; 354; 9; -6; 100 (as presented). - Memorandum: Net present value of debt (percent of exports): 2000: 214; 2001: 210; 2002: 209; 2003: 194; 2004: 185; 2005: 162; 2006: 134; 2007: 121. ### Status of reform objectives for HIPC floating completion point (Table 8) - Poverty reduction: - The PRSP was prepared, and implementation is ongoing. - The adoption of a PRSP to be prepared through a participatory process, and satisfactory progress with implementing and monitoring the PRSP for at least one year based on annual report. Preparation of the annual report is underway and completion is expected in the first half of 2004. - Social sectors: - Progress in combating HIV/AIDS: - Full staffing of secretariat to National HIV/AIDS/STD/TB Council. Implemented. - Integrate HIV/AIDS awareness and prevention programs in the pre-service and in-service programs of at least ten key ministries. Implemented. - Progress in education sector reform as indicated by the following: - The ratio was met in 2001, but it fell to 18 percent in 2002. Gov't plans to meet this (table entry continues in source). *Sources: IMF Finance Department; Bank of Zambia; Zambian authorities; and Fund staff estimates and projections.* ### 20.5 percent.ratio by end 2004. ### _cr04214 - 20.5 percent.ratio by end 2004. ### Education and Social Sector Actions and Implementation Status - Raising the starting compensation of teachers in rural areas above the poverty line for a household, as defined by the Central Statistical Office. Implemented - An action plan for increasing student retention in northern, eastern, northwestern, and western Provinces, and Luapula Province. Observed ### Health Sector Reform Progress and Implementation Status - Implementation and scaling up of an action plan for malaria. Implemented - Procedures and mechanisms for the procurement of drugs reorganized to be fully transparent and efficient. Implemented - Timely release of complete, detailed, annual health expenditure data. Implemented - Actual cash releases to District Health Management Boards shall be at least 80 percent of amount budgeted. Implemented ### Macroeconomic and Structural Reforms; Privatization - Maintenance of a stable macroeconomic environment, as evidenced by satisfactory performance under a program supported by PRGF arrangement. Observed for 2002. PRGF arrangement has been delayed. - Procurement of hardware and software for IFMIS is expected in the first half of 2004. - Implementation of an Integrated Financial Management Information System (IFMIS) on a pilot basis for at least three ministries and a midterm review of the pilot program. Piloting in three line ministries is expected thereafter. - Implementation of a Medium-Term Expenditure Framework (MTEF) prepared by MoFED and approved by the Cabinet. A MTEF for 2004-06 was prepared; Cabinet approved the MTEF along with the 2004 budget parameters. - Restructuring and issue of international bidding documents for the sale of a majority (controlling) interest in the power company, ZESCO. Given the new commercialization strategy for ZESCO, a revision of this trigger will be sought before the completion point. - Issuance of international bidding documents for the sale of a majority (controlling) interest in the Zambian National Commercial Bank. Implemented. Negotiations for sale to the preferred bidder are continuing. ### Performance Under the SMP (July–December 2003) - Net domestic financing exceeded the cumulative adjusted program ceiling by about 1.7 percent of GDP in December. - Programmed payment of domestic arrears was not observed; continuous prohibition against the accumulation of external arrears was breached. - Target on cumulative deposits into the HIPC Initiative account was not met. - Targets met: net domestic assets (NDA) of the Bank of Zambia (BoZ); gross international reserves (GIR); ceilings on external debt (including for ZESCO); cumulative wage bill. - Arrears accumulated on the housing allowance whose cancellation was challenged in court by civil service unions. - Strengthened commitment control system implemented in most ministries; accumulation of arrears limited to 0.1 percent of GDP in the second quarter. - Cash releases did not conform to quarterly expenditure ceilings because of execution of unbudgeted expenditures. - Comprehensive database of domestic arrears completed in June; only the Office of the Accountant General (OAG) has initiated settlement; multiyear plan for clearing domestic arrears delayed to 2004. - Retrenchment: 2,498 employees retrenched between April and November 2003; expected to reach 3,500 by end-2003. - Circular issued in September 2003 to reduce rates of housing allowances payable in 2003. ### Recent Economic Developments (end-2003) - Real GDP growth estimated at 4.2 percent in 2003 (not 4.5 percent envisaged earlier), due to lower mining growth. - 12-month inflation rate of 17.2 percent at end-December (above SMP target of 13 percent). - Overall cash deficit for 2003 estimated at 6.6 percent of GDP, exceeding the programmed deficit target by about 1.4 percent of GDP. - Net domestic financing exceeded the program target (adjusted for shortfall in external debt service) by K 354 billion (1.7 percent of GDP). - Overrun in nonwage current and capital spending, including recurrent departmental charges (RDCs). - Unbudgeted payments of K 167 billion (0.8 percent of GDP) to Luanshya mine workers (Roan Antelope Mining Company of Zambia—RAMCOZ) to meet accumulated wage arrears and retrenchment benefits; expected to yield K 20 billion in income tax withholding (K 10 billion in 2003, balance in 2004). - Broad money increased by 23.4 percent during 2003 (target 17 percent). - BoZ lowered cash legal reserve requirements from 17.5 percent to 14 percent in late October 2003. - Bank credit to the private sector rose by 31 percent in 2003. - Kwacha: depreciated about 12 percent in Q1 2003, strengthened thereafter giving a net depreciation of 7 percent for the year against the U.S. dollar; depreciated 29 percent against the South African rand and 19 percent against the euro through end-December. - Interest rate on the 91-day treasury bill remained in a narrow band of 32-35 percent most of the year, declined to below 20 percent in mid-December. - Exports: total exports grew by 17 percent for the first nine months compared with same period in 2002; imports grew by about 11 percent. - BoZ met the adjusted end-December reserve target under the SMP by a margin of US$46 million through foreign exchange purchases from the market. ### Revised Macroeconomic Framework for 2004 - Objectives envisaged for 2004: - Real GDP growth of 3.5 percent (compared with 4.5 percent previously). - A 12-month inflation rate of not more than 20 percent (instead of 13 percent). - Build-up in GIR to about 1.5 months of import cover (compared with 1.7 months previously). - Domestic debt service expected to be about 1½ percent of GDP higher than projected in the Green Paper, at 3.7 percent of GDP. - Passive projection with domestic financing reduced to 2 percent of GDP (from 5.1 percent of GDP in 2003) leaves a financing gap in the 2004 budget of over 2 percent of GDP (about K 500 billion). - Government commits to far-reaching expenditure and revenue measures to meet macroeconomic targets and to avoid destabilizing further domestic financing. ### Fiscal Policy Measures and Public Expenditure Management for 2004 - Wage bill to be reduced by 0.5 percent of GDP from expected 2003 outturn; wage bill expected to decline to 8.0 percent of GDP. - Only allowed nominal increases: K 40 billion for police, immigration and prison service personnel; K 38 billion to cover promotion increases or wage creep; K 7.2 billion per month for housing allowance. - No nominal increase in wages otherwise; total headcount not to exceed end-October 2003 level for core civil service. - Public Service Management Division (PSMD) to create single team to negotiate with all unions; no wage agreements concluded until costed by MoFNP and implications reported to Cabinet. - Campaign to remove ghost workers to be expanded to noncore civil service areas, including teachers and health workers. - Ordinary RDCs allocations reduced by 0.5 percent of GDP from the 2003 outturn of 2.8 percent of GDP. - Savings via re-organization of operations and aggressive cutting of discretionary spending, strict enforcement of expenditure control, reductions in official travel and other discretionary spending. - Cabinet Office preparing plan for rationalizing government structures; installation of internal telephone system to reduce telephone service costs with Zambia Telecommunication. - Commitment to increase priority poverty-reducing expenditures financed with HIPC debt relief from 1 percent of GDP in 2003 to 2.1 percent of GDP in 2004. - Monthly payments into account 49 at the BoZ to cover these expenditures; line ministries’ commercial bank balances to be monitored and disbursed from account 49 only when existing balances expected to be exhausted during the month. - Execution of some nonpriority domestic capital projects will be rephased to remain within budget envelope without incurring arrears. - Public expenditure management: enforcement of regulations on breaches of expenditure control; improved timeliness of Monthly Expenditure Reports (MERs); sanctions enforcement against over-commitment and virements remains inadequate. ### Tax and Revenue Measures for 2004 Budget - Restoration of original VAT structure, coverage and efficiency by exempting most nonexport goods currently zero-rated; measure effective February 7, 2004; expected yield K 95 billion (0.4 percent of GDP). - Doubling the turnover threshold for VAT to K 200 million; cancellation of voluntary registration below this threshold expected to result in savings of K 26.3 billion from VAT refunds. - Introduction of a 3 percent turnover tax by April 1, 2004, to replace income tax and VAT for companies below the VAT threshold; expected to yield K 7.3 billion. - Personal income tax reform effective April 1, 2004: - Increases threshold for exempting annual income to K 3.1 million (from less than K 2 million). - Adds two income brackets at tax rates of 35 and 40 percent above the current top rate of 30 percent. - Expected yield K 23.8 billion. - 10 percent excise duty on cell phone airtime introduced on February 7, 2004; expected to provide K 15.6 billion. - Removal of preferential corporate tax rate for companies listed on the Lusaka Stock Exchange; expected to yield K 17.4 billion. - Combined tax policy measures expected to raise revenues by 0.7 percent of GDP. - Measures on nontax revenues (increase of fees and penalties) and exceptional revenues (reduction of subsidy on sales of fertilizer) expected to generate additional resources of 0.4 percent of GDP. - Consequently, total revenue collection expected to reach 19 percent of GDP in 2004. *Source: Zambian authorities and staff assessment.* ### 6.0 percent of GDP and include program grants carried over from 2003 and the first ### _cr04214 - 6.0 percent of GDP and include program grants carried over from 2003 and the first ### Fiscal framework and financing - The domestic primary balance is projected to move from a deficit of 0.7 percent of GDP in 2003 to a surplus of 2.4 percent in 2004. - The overall deficit after grants is projected to narrow to 4.0 percent of GDP in 2004. - Net external financing, including small amounts carried over from 2003 and the first tranche of US$20 million under a new IDA structural adjustment operation, would amount to 2.0 percent of GDP. - Recourse to domestic financing is therefore limited to 2 percent of GDP in 2004, down from 5.1 percent of GDP in 2003. - External program assistance in 2004 is projected at US$70 million and is expected to come from the World Bank, the EU, and the AfDB, and mostly in the second half of the year, once a new PRGF arrangement is in place. - The financing gap in 2004 is projected to be about US$182 million; this could be filled by additional donor program support as well as by support under a PRGF arrangement. ### Revenue policy, tax incentives, and reviews - The Government will, in 2004, complete a review of the potential adverse impact of the Export Processing Zone Act on the revenue base and particularly in the area of direct taxation; the review will be completed in time for its conclusions to be addressed, if necessary, in the 2005 budget. - The Government is developing a consistent and general policy for the granting of tax incentives to avoid ad hoc interventions; the exercise will be completed in conjunction with the review of the EPZ Act and put in place in time for the preparation of the budget for 2005. - In the interim, the Government will consider only limited exceptions to the current policy of not granting any new tax reduction, exemptions, rebates or preferential treatment. Such tax incentives would be granted only in the case of new “green field” investments, or for the operation of the Luanshya mine or KCM following their sales to new investors. - The revenue implications of any such incentives would be assessed and offsetting measures taken to protect revenues. ### Monetary and exchange rate policies - Monetary policy in 2004 will aim to achieve the program’s inflation target while safeguarding the international reserve position. - The expansion of broad money will be limited to about 18 percent through BoZ’s use of indirect monetary instruments. - The proposed monetary framework provides sufficient room for a significant real increase in credit to the private sector and is consistent with the fiscal framework. - The BoZ will monitor monetary developments closely and stands ready to take appropriate action, including, if necessary, raising the legal reserve requirement. - The BoZ will continue to explore market-based avenues for increasing access to domestic credit by farmers and other small-scale enterprises. - The BoZ intends to continue to adhere to the treasury bill auction guidelines to ensure that interest rates reflect market conditions and is reviewing measures, including current volume and price penalties for rediscounting treasury bills, to facilitate banks’ liquidity management and reduce banks’ intermediation costs. - The exchange rate will continue to be market determined with BoZ intervention aimed at smoothing short-term fluctuations and meeting the program’s gross international reserves target. - The Government considers the current level of the real exchange rate broadly appropriate for promoting diversification and protecting Zambia’s external competitiveness. ### External sector outlook - Copper receipts are projected to rise about 20 percent in 2004 because of stronger prices and increased production. - Nonmining exports are projected to increase by over 12 percent in 2004. - The current account deficit (including grants and debt relief on interest payments) is projected to increase to 6.4 percent of GDP from 5.9 percent in 2003. - International gross reserves are projected to increase from US$196 million at end-2003 to US$239 million (1.5 months of imports) by end-2004. - Prospects in the copper sector could be bolstered by the sale of a majority stake in Konkola Copper Mines to a strategic equity partner. - Stronger imports are expected, mostly because of large capital expenditures in the mining sector, including expenditures on the new Kansanshi copper mine due to start operations in 2005. ### Structural reforms and financial sector measures - Negotiations for the sale of 49 percent of the shares of the Zambia National Commercial Bank (ZNCB) to a strategic investor are at an advanced stage; the Government hopes to conclude the sale and effect the handover during the first half of 2004. The costs of retrenchment will be paid out of the gross sales proceeds. No interest on the bond to recapitalize ZNCB will be paid before the sale is concluded. - A draft of the FSDP was completed in December 2003; further work is needed to draw up operational plans, with developing strategies to address insolvent NBFIs a priority. - The BoZ has set a deadline of end-March 2004 for the Zambia National Building Society and the National Savings and Credit Bank to reach agreements with the BoZ on time-bound and credible restructuring programs to be monitored against quarterly targets. - No public monies will be used to recapitalize or restructure these two entities before an appropriate FSDP is completed and agreements have been reached; if restructurings are not feasible, appropriate supervisory action will be taken. - The Government has made an allowance in the 2004 budget for the expected minimum costs of resolving these institutions. - Restrictions have been placed on the Development Bank of Zambia, pending private sector contribution of 60 percent of its capital base; no public money will be used to recapitalize the bank. - As part of the FSDP, the BoZ has drafted regulations for the microfinance sector; smaller microfinance institutions would be subject to nonprudential supervision, emphasizing transparency. These regulations will take effect in 2004. ### Public expenditure management and governance actions - The Government will avoid policy decisions that would entail expenditures in addition to budget allocations; unforeseen expenditure requirements will be funded only to the limits of contingency resources indicated in the budget or after cabinet approval with adjustments elsewhere. - To strengthen cash management, the Budget Office will issue quarterly and monthly expenditure ceilings, revised monthly on the basis of updated projections of revenue, expenditure, and financing constraints; monthly ceilings will be backed by corresponding cash releases. - The MoFNP will strictly enforce sanctions for noncompliance with established spending procedures; on the basis of monthly reports prepared by the OAG, the Budget Department will reduce disbursements to line ministries, departments, and provinces responsible for over-commitment, virement of funds, and expenditures lacking ex-ante written authorization by the MoFNP, as well as failure to report expenditures, as specified in circulars issued in September 2002. - Activity-based budgeting (ABB) is introduced for the preparation, implementation, and reporting starting with the 2004 budget; the 2004 budget includes an annex identifying all poverty-reducing spending allocations. Line ministries, departments, and provinces will report on execution of spending identified in this annex through a form attached to MERs; the OAG will transfer these forms monthly to the Department of Planning. - Comprehensive quarterly budget execution reports, including full coverage of poverty reducing spending, will be published within 45 days of the end of the quarter, beginning with the report for the first quarter of 2004. - The MoFNP will finalize by March 2004 a multi-year plan for clearing the stock of domestic arrears as at end-December 2002; the plan will prioritize arrears payments by the penalty accruing, the interest rate applied, and exchange rate affecting overdue payments. An inter-ministerial committee chaired by a MoFNP senior officer will negotiate discounts with contractors; the OAG will have exclusive responsibility to settle the discounted amounts due within the quarterly expenditure ceilings. - The Government remains fully committed to implementing an IFMIS; procurement of hardware and software, expected to be completed by end-December 2003, is now expected in the second quarter of 2004 due to World Bank procurement delays. The MoFNP expects to sign a contract for procurement of hardware and software by end-April 2004 and start piloting the IFMIS in three line ministries shortly thereafter. - The Government will strengthen the independence of the Office of the Auditor General; by end-June 2004, the Government intends to submit to Parliament draft legislation to grant autonomy to the Office of the Auditor General. - The Government is committed to bringing forward the budget cycle so that Parliament can approve the budget before the beginning of the fiscal year; since this requires a constitutional amendment, the Government will present a proposal to the Constitutional Review Commission (CRC). ### ZESCO commercialization and borrowing limits - Commercialization of ZESCO has reached the “entry point”; the Government intends to expedite measures to reach the interim point June 2004 and then embark on commercialization according to the agreed detailed framework. - Following a preliminary agreement to settle government’s and ZESCO’s cross-debts, the Controller of Internal Audit will verify the extent of government indebtedness to ZESCO; ZESCO’s tax liability as assessed by ZRA, subject to revision by the Revenue Appeals Tribunal, will be used to estimate cross-debts. This process will be finalized before settlement of any cross-debts. - The Government envisages requesting a revision to the trigger for the HIPC initiative completion point on ZESCO’s privatization to incorporate completion of measures at the end of the interim phase of commercialization, potentially including passage of the proposal to amend the Electricity Act and Cabinet approval of proposals for separate legal acts for private and public partnership. - New concessional borrowing by ZESCO guaranteed by the Government will be permitted, subject to cumulative limits of US$20 million to the end of 2004 and US$40 million to June 2005; this limit would be subject to review, in consultation with Bank and Fund staff, if additional concessional resources are required. ### PRSP progress, HIPC triggers, and MTEF - Zambia has implemented measures in health and education; privatization of ZNCB; agreement on commercialization of ZESCO; preparation and implementation of the MTEF; preparation of the PRSP progress report; and implementation of the IFMIS on a pilot basis. - The key outstanding area is the maintenance of a stable macroeconomic environment as evidenced by a satisfactory performance under a PRGF arrangement; the Government is committed to implementing the revised SMP to serve as a bridge to a new PRGF toward the HIPC completion point. - Preparation of the Government’s first annual report on PRSP implementation has been completed and will be formally handed over to co-operating partners in March 2004. The PRSP progress report was prepared in tandem with the MTEF for 2004-2006 and has influenced reprioritization of Poverty Reduction Programs in the 2004 Budget. ### Program monitoring and institutional arrangements - Progress in implementing the SMP will be monitored monthly under the program, based on the quantitative and structural measures indicated in Tables 3 and 4 and the attached Technical Memorandum of Understanding. - To allow accurate monitoring of spending on the wage bill, the Government will implement all the actions indicated in Annex I to the letter. - The Government has revived the economic monitoring committee for Economic Ministries, chaired by President Mwanawasa, meeting once every two weeks. - The Government has strengthened the Economic Management Monitoring Committee at the MoFNP to ensure it meets at least once a week; the Fund’s Resident Representative will be invited to attend meetings as required. ### Annex I: Actions to control the wage bill and related payments (excerpt) - The PSMD will withdraw the circulars PSMD/53/11/1 n. B.9 (June 26, 2002), TS/7/2/20 SEC n. 2, n. 3, and n. 4 (April 16, 2003), and any other related circulars introducing housing allowance. *IMF staff report excerpt: _cr04214 - 6.0 percent of GDP and include program grants carried over from 2003 and the first* ### 2. As soon as negotiations with unions are concluded, the PSMD will revise the circulars ### _cr04214 - 2. As soon as negotiations with unions are concluded, the PSMD will revise the circulars ### Agreed administrative actions and timelines - Revise circulars PSMD/7/2/20 SEC. n. B.8 (April 16, 2003) and TS/7/2/20 SEC. n. B. 4 and n. B. 13 (April 16, 2003) in order to eliminate the voluntary Medical Scheme. - Tracking of housing assistance: - In November 2003 the MoFNP issued an instruction introducing the tracking of all payments related to housing assistance (housing allowance and housing rental) for civil service employees. - The tracking mechanism will allow reporting on all the payments related to housing assistance executed in 2002 and from January to November 2003. - From November 2003 onwards, the same instruction will allow tracking and classifying under PEs all the payments related to housing assistance. - Monitoring unit and reporting: - By end-December 2003, the MoFNP will set up a unit dedicated to monitoring and reporting on a monthly basis all payments to civil service employees as specified in the attached TMU (paragraph 23). - Budget cost analysis requirement: - By end-December 2003, the Government will approve a requirement that the Minister of Finance and National Planning should submit to the Cabinet an analysis of the short and medium-term budget costs of any agreement with government employees before it is finalized. ### Indicative targets and program performance (select highlights from Table 1) - Ceilings, floors, and program observations were tracked monthly for 2003 (June–Dec) across indicators including: - Ceiling on the cumulative increase in net domestic assets (NDA) of the Bank of Zambia — example monthly entries include: 0; 107; -12; 169; 50; 254; 87; 327; 183; 228; 212; 319; 169. - Adjusted (NDA) examples: 45; 105; 198; 306; 47; 249. - Ceiling on the cumulative increase in net domestic financing (NDF) — example monthly entries include: 0; 59; 11; 125; 119; 199; 348; 202; 503; 164; 568; 201; 624. - Adjusted (NDF) examples: -4; 60; 142; 181; 233; 270. - Floor on gross international reserves (GIR) of the Bank of Zambia (In millions of U.S. dollars) — example monthly entries include: 233; 206; 238; 197; 234; 183; 220; 166; 200; 201; 189; 149; 179. - Adjusted GIR examples: 220; 211; 196; 171; 185; 133. - Ceiling on new external payments arrears (In millions of U.S. dollars) — example monthly entries include: 13.0; 0.0; 4.6; 0.0; 2.9; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; ... - Floor on cumulative payment of domestic arrears of the Government — example monthly targets/observations include: 23; 34; 24; 44; 29; 62; 49; 74; 55; 87; 58; 100; 62. - Cumulative ceiling for the central government wage bill — example monthly entries include: 814; 967; 973; 1,121; 1,126; 1,281; 1,281; 1,441; 1,431; 1,600; 1,581; 1,758; 1,728. - Monthly wage bill examples: 153; 159; 153; 153; 160; 155; 160; 150; 158; 150; 158; 148. - Floor on cumulative deposits into the HIPC Account 49 at the BoZ — example monthly entries: 0; 42; 0; 83; 42; 125; 84; 167; 126; 208; 126; 250; 167. - Memorandum item — Cumulative net balance of payments support (In US dollars) examples: -22.0; -7.6; -26.9; -12.1; -35.3; -22.3; -47.9; -43.1; -9.1; -46.1; -24.4; -18.6. - Balance of payments assistance examples: 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 45.8; 0.0; 45.8; 45.3. - Central government debt service obligations (excl. IMF) examples: -22.0; -7.6; -26.9; -12.1; -35.3; -22.3; -47.9; -43.1; -54.9; -46.1; -70.2; -63.9. - Shortfall (-)/Excess (+) net BOP support example: 14.4; 14.8; 13.0; 4.8; -37.0. - Monthly and quarterly indicative targets for 2004 (Table 3 highlights — January to June example values): - NDA (cumulative increase): January 119; February 81; March 113; April 178; May 185; June 225. - Adjusted (NDA): (not listed month-by-month in excerpt). - NDF (cumulative increase): January 133; February 131; March 207; April 272; May 308; June 391. - GIR (In millions of U.S. dollars): January 173; February 187; March 187; April 175; May 178; June 46. - Ceiling on cumulative concessional loans collateralized/guaranteed for ZESCO: 20 each month (January–June). - Floor on cumulative payment of domestic arrears of the Government: January 4; February 8; March 13; April 19; May 25; June 32. - Cumulative ceiling for the central government wage bill: January 169; February 338; March 506; April 675; May 844; June 1,012. - Floor on cumulative deposits into the HIPC Account 49 at the BoZ: January 58; February 87; March 117; April 165; May 205; June 244. - Memorandum item — Cumulative net balance of payments support (In millions of U.S. dollars): January -19.0; February -4.0; March -3.0; April -18.0; May -18.0; June -32.0. - Balance of payments assistance examples for Jan–Jun: 0.0; 17.0; 22.0; 25.0; 29.0; 29.0. - Central government debt service obligations (excl. IMF) Jan–Jun: -19.0; -21.0; -25.0; -43.0; -47.0; -61.0. ### Structural reforms and performance (select highlights from Tables 2 and 4) - Privatization: - Conclude evaluation of bids for the sale of the majority (controlling) interest in the ZNCB, and approve negotiations with the preferred bidders. Timing: End-June 2003. Status: Observed. - Public expenditure management improvements: - Payments of audited domestic arrears pertaining up to December 2002 to be made only by the Accountant General's Office; line ministries will not clear any arrears. Timing: Continuous. Status: Observed. - Complete a computerized database of all outstanding arrears as of end-December 2002 as verified by the Controller of Internal Audit. Timing: End-June 2003. Status: Observed. - No payment will be made for clearance of arrears other than the items included in the audited list of arrears. Timing: Continuous. Status: Not Observed (then Observed). - Government will refrain from paying any amounts for which it is not legally liable, including ZNOC's liabilities on liquidation. Timing: Continuous. Status: Observed (then Not Observed). - Issue quarterly expenditure ceilings before the beginning of each quarter and make monthly cash releases accordingly. Timing: Continuous. Status: Observed (then Not Observed). - Fully implement the commitment control system (CCS) to all ministries in line with the Treasury Circular of September 2002. Timing: End-July 2003. Status: Observed. - Award a contract for the procurement of hardware and software for IFMIS. Timing: End-December 2003 / End-April 2004 (Table 4). Status: On-going / planned. - Financial sector and public enterprises: - Prepare a comprehensive financial sector development plan addressing weaknesses of nonbank financial institutions, including institutional structures for rural financial services. Timing: End-November 2003. Status: On-going. - Provide no further budgetary support to nonbank financial institutions until the financial sector development plan is finalized. Timing: Continuous. Status: Observed. - Complete the review of entry conditions for the strategy to commercialize ZESCO. Timing: End-September 2003. Status: On-going / Observed with a delay. - Final decisions and action plans for resolution of Zambia National Building Society, National Savings and Credit Bank, and Development Bank of Zambia. Timing: End-March 2004. - Governance and transparency: - Accountant General to submit to the Office of the Auditor General accounts for 2002 to facilitate timely preparation of final audited accounts as required by law. Timing: End-September 2003. Status: Partially Observed. - Submission to Parliament of legislation to grant full autonomy to the Office of the Auditor General. Timing: End-June 2004. - Publication of quarterly budgetary execution reports, including full coverage of poverty-reducing spending. Timing: 45 days after the end of each quarter. - Creation of a program-monitoring group comprised of key officials from MoFNP, BoZ, and the Cabinet office. Timing: End-December 2003. ### Technical Memorandum of Understanding (TMU): key definitions and adjustors - Net Domestic Assets (NDA) of the Bank of Zambia: - NDA defined as the monthly-average (based on daily data) of reserve money less net foreign assets calculated at end-December 2003 BoZ mid-exchange rates (program exchange rate). - Program exchange rate: K 4,645 per U.S. dollar for 2004 conversions (unless otherwise defined). - Reserve money includes: currency in circulation; required reserves on kwacha deposits; required reserves on foreign currency deposits (at the program exchange rate); positive current account balances of banks with the BoZ; deposits of non-central government institutions. - Net foreign assets include gross international reserves plus any other foreign asset, including the US$25 million blocked reserves at the former Meridien Bank, minus foreign liabilities. - Foreign liabilities defined as short-term (one year or less in original maturity) foreign currency-denominated liabilities of the BoZ to nonresidents and outstanding use of Fund credit. - The ceiling on NDA will be adjusted upward by the amount of the shortfall of balance of payments support net of debt service as indicated in Table 3 of the MEFP, up to a maximum of US$16 million for the period end-December 2003 to end-June 2004. - Disbursements during the month of the test date are treated as if disbursed on the first day of the month for monitoring NDA. - The ceiling on NDA will be adjusted downward/upward to reflect decreases/increases in legal reserve requirements; adjustor calculated as percent change in reserve requirement multiplied by actual amount of reserves at end of previous calendar month. - The ceiling on NDA will be adjusted upwards by the full extent of payments made in 2004 to settle wage arrears and retrenchment costs relating to Luanshya mine workers for which the Government assumed responsibility in 2003. - Net Domestic Financing (NDF): - NDF is Central Government’s net borrowing from banking and nonbanking sectors; includes government securities recorded at cost. - Components include: government position with commercial banks (treasury bills, government bonds, loans and advances less support to Meridien Bank; less Central Government deposits); BoZ holdings (treasury bills, government bonds, Kwacha bridge loan less Government’s position at BoZ and donor suspense account; plus long-term non-transferable security issued against Government’s total indebtedness to BoZ as at end-2002); nonbank holdings (treasury bills and government bonds). - In event of ZNCB’s privatization, measurement of NDF will exclude the government bond issued to ZNCB in 2002 in the amount of K 249 billion. - The NDF ceiling will be adjusted upward by the shortfall in balance of payments support net of debt service as indicated in Table 3 of the MEFP, up to a maximum of US$16 million for the period end-December 2003 to end-June 2004; in event of excess support, ceiling adjusted downward by 100 percent of additional excess support. - The ceiling on NDF will also be adjusted upwards by the full extent of payments made in 2004 to settle wage arrears and retrenchment costs relating to Luanshya mine workers. - Data source: “Net Domestic Financing” Table produced by the BoZ Economics Department, submitted weekly and reconciled with the monthly monetary survey. - Gross International Reserves (GIR) of the BoZ: - GIR defined as reserve assets of the Bank of Zambia per IMF BOP manual (5th edition) and SDDS reserve template; exclude foreign assets not readily available or controlled by monetary authorities and foreign currency claims on Zambian residents. - Components: (i) monetary gold; (ii) foreign currency in cash; (iii) unencumbered foreign currency deposits at non-resident banks; (iv) foreign securities and deposits; (v) SDR holdings and Zambia’s reserve position with the Fund; and (vi) balances in the BIS account related to debt service to Paris Club creditors. - Exclusions: non-convertible currencies; pledged, swapped, or encumbered reserve assets; reserve assets used as collateral or guarantees; commercial banks reserve requirements in foreign currency; the US$25 million deposit in Meridien Bank under liquidation. - The floor on GIR will be adjusted: (i) downward by shortfall in balance of payments support net of debt service up to US$16 million for period end-December 2003 to end-June 2004; (ii) upward by 100 percent of cumulative excess BOP support net of debt service; (iii) downward/upward for any shortfall/excess in U.S. dollar value of disbursements from the IMF under the PRGF arrangement; and (iv) downward for any increase in BoZ short-term foreign currency denominated debt. *Italic: Source — excerpt from the IMF document _cr04214 - 2. As soon as negotiations with unions are concluded, the PSMD will revise the circulars_* ### 13. For the purpose of this target, as well as those for external debt and arrears, valuation ### _cr04214 - 13. For the purpose of this target, as well as those for external debt and arrears, valuation ### Valuation and Reporting of Reserves and Debt - Valuation for this target, and for external debt and arrears, will be in U.S. dollars using the program exchange rate. - Data on gross international reserves including its components will be reported by the BoZ on a weekly and end-month basis. - The program target for gross international reserves will be adjusted as described in the TMU. - Reporting frequency: - Gross international reserves: weekly and end-month (BoZ). - Detailed data on new concessional and non-concessional debt: monthly (MoFNP). - Official external short-term debt data: monthly (MoFNP and BoZ). - Domestic arrears audits and data submission: quarterly (Accountant General within 6 weeks of quarter end). - Central Government wage bill data: monthly (MoFNP within three weeks of month end). ### Official Medium- and Long-Term Concessional External Debt - Definition: - All forms of official debt with original maturity of more than one year contracted or guaranteed by the central Government and BoZ having a grant element of more than 40 percent. - Excludes debts subject to rescheduling. - Adjustment lending from the IMF will be excluded. - Grant element calculation: - Use currency-specific commercial interest reference rates (CIRRs) reported by the OECD. - For maturities of less than 15 years: calculated based on six-month averages of CIRRs. - For maturities longer than 15 years: calculated based on 10-year averages of CIRRs. - Coverage: - Applies to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000) and to commitments contracted or guaranteed for which value has not been received. - Reporting: - Detailed data on all new concessional and non-concessional debt contracted or guaranteed will be provided by MoFNP on a monthly basis. ### Official External Short-Term Nonconcessional External Debt - Definition: - Outstanding stock of external debt with original maturity of less than one year owed or guaranteed by the central Government or the BoZ. - Includes forward commodity sales. - Excludes normal trade credit for imports. - Policy: - There will be no new official external short-term debt during the program period. - “Debt” follows the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000). - Reporting: - Data reported monthly by MoFNP and BoZ. ### Collateralizing/Guaranteeing of Loans to ZESCO - Policy prohibitions: - The Government and the Bank of Zambia shall not extend or guarantee any new commercial debts to ZESCO, including loans, suppliers credits and leases. - Concessional borrowing to ZESCO: - New concessional borrowing, as defined above, will be subject to a cumulative limit of US$20 million in 2004. - The limit on new concessional borrowing will be subject to review, in consultation with Fund and World Bank staff, if additional concessional resources are required. ### Domestic Arrears of Government - Definition of domestic arrears: - (i) Any bill received by a spending Ministry from a supplier for goods and services delivered (and verified) and not paid within 30 days after the due date. - (ii) Wage, salary and any payment to government employees, including any direct or indirect scheme of housing assistance, due in a given month but unpaid on the 15th of the following month. - (iii) Interest or principal obligations unpaid 30 days after the due date. - Excludes changes in the stock on account of interest, penalties and valuation changes. - Compilation and audit: - Compiled through audits of spending Ministries and agencies by the Internal Audit division of the MoFNP. - Audits completed and data submitted to Fund staff by the Accountant General within 6 weeks of the end of each quarter. - Adjustment: - Upon completion of the computerized domestic arrears database and establishment of an arrears settlement plan, this adjustor will also apply to reduction of domestic arrears. ### Central Government’s Wage Bill - Coverage: - Central Government definition includes all heads covered in the 2004 Yellow Book. - Total wage bill includes wages, salaries, allowances, and all personal emoluments specified in the Yellow Book, and any direct or indirect housing assistance to employees. - Monthly data to be provided by budget head: - (i) Number of all employees in the Central Government for each budget head. - (ii) Basic salary, allowances and any other personal emoluments released during the month. - (iii) Arrears incurred during the month on basic salary, allowances, and other personal emoluments. - (iv) Number of employees retrenched and corresponding retrenchment costs. - (v) Number of ghost workers removed from the payroll and corresponding monthly savings on the wage bill. - Submission timetable: - All data submitted to Fund staff by the MoFNP within three weeks of the end of each month. ### Structural Reforms — 2004 Budget and Public Expenditure Management - Submission and content of 2004 budget: - Submit to Parliament the 2004 central government budget by end-February, 2004, consistent with the SMP, including the wage bill ceiling and all the tax measures described in paragraph 17 of the MEFP. - 2004 budget to contain an annex identifying allocations on all poverty-reducing spending programs, in case Activity Based Budgeting (ABB) is not in place. - Multi-year plan for clearing stock of domestic arrears: - Office of the Accountant General, with Budget Office and Department of Debt Management, to finalize by March 2004 a multi-year plan for clearing the stock of domestic arrears as at end-December 2002. - Plan will prioritize arrears payments by penalty accruing, interest rate applied, and exchange rate affecting overdue payments. - An inter-ministerial committee, chaired by a MoFNP senior officer, will negotiate contractors’ discounts; Accountant General will have exclusive responsibility to settle discounted amounts within quarterly expenditure ceilings. - Line ministries, Departments, and Provinces will not settle any arrears. - Government liabilities: - Government will refrain from making payments for which it is not legally liable, including ZNOC liabilities on liquidation. - Guide liquidation of public enterprises to minimize Government’s liabilities consistent with the law. - Publication: - Within 45 days from the end of each quarter, the Office of the Accountant General will publish quarterly reports on budget execution in at least two leading newspapers, detailing expenditure execution under RDCs and on identified poverty-reducing programs. - Auditor General independence: - Submit to Parliament draft legislation by end-June 2004 to grant full autonomy to the Office of the Auditor General. - IFMIS procurement: - Government will award a contract for procurement of software and hardware of IFMIS by April 2004. ### Strengthening the Financial Sector and Public Enterprises - Action on NBFIs: - Government and BoZ to take final decision and adopt an action plan addressing weaknesses of state-owned nonbank financial institutions (DBZ, NSCB, ZNBS, ZSIC) and design institutional structures to support rural financial services. - Government will collaborate with IMF and World Bank in preparing the strategic plan and seek technical assistance. - Budgetary support: - Government will not provide any budgetary support to state-owned financial institutions until the comprehensive strategic plan is finalized. - Government will refrain from taking over liabilities and/or providing guarantees on loans secured by NBFIs. ### Program Monitoring - Program Monitoring Group (PMG): - Benchmark met when MoFNP sends written confirmation to Fund Staff of the creation of the PMG, indicating composition and scheduled meeting frequency. ### Annex — Guidelines on Performance Criteria with Respect to Foreign Debt (Excerpt) - Definition of “debt” (point 9): - Debt means a current (not contingent) liability created under a contractual arrangement through provision of value in assets (including currency) or services, requiring future payments of assets or services to discharge principal and/or interest. - Primary forms: - (i) Loans: advances of money including deposits, bonds, debentures, commercial loans and buyers’ credits; temporary exchanges equivalent to fully collateralized loans (repurchase agreements, official swap arrangements). - (ii) Suppliers’ credits: supplier permits deferral of payments after delivery. - (iii) Leases: debt is present value (at inception) of all lease payments expected during the agreement, excluding payments covering operation, repair or maintenance. - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. ### Key Numeric and Timing Items Extracted - Cumulative limit on new concessional borrowing to ZESCO in 2004: US$20 million. - Deadlines and dates: - Submit 2004 budget to Parliament by end-February, 2004. - Finalize multi-year arrears-clearing plan by March 2004. - Draft legislation for OAG autonomy by end-June 2004. - Award IFMIS software and hardware contract by April 2004. - Accountant General audits/data to Fund staff within 6 weeks of quarter end. - Central Government wage bill data submitted within three weeks of month end. - Quarterly budget execution reports published within 45 days of quarter end. - Reporting frequencies: - Gross international reserves: weekly and end-month. - Debt data (new concessional and non-concessional): monthly. - Short-term external debt: monthly. *Source: Excerpt from IMF document _cr04214 - 13. (Attachment II and III excerpts).* ### 1. The World Bank and IMF Boards endorsed the Government’s Poverty Reduction ### 1. The World Bank and IMF Boards endorsed the Government’s Poverty Reduction ### PRSP endorsement and context - The Government’s Poverty Reduction Strategy covering the period 2002-2004 was embodied in its first full PRSP in May of 2002. - An Interim Poverty Reduction Strategy Paper (I-PRSP) had been presented to the Board in July 2000. - The PRSP was substantially complete when the new Government took office in January 2002; the new Government endorsed the PRSP and expanded it in the Transitional National Development Plan (TNDP) published in October 2002. ### Strategic focus of the PRSP - Identified barriers to poverty reduction: - lack of economic growth - high inequality - excessive dependence on foreign aid - poor prioritization of public resources - inadequate safety nets - HIV/AIDS - PRSP objectives to achieve poverty reduction: - (i) economic growth and diversification of production and exports; - (ii) improved access and quality in the provision of social services; - (iii) mainstreaming of governance, HIV/AIDS, gender, and the environment. - Targets and indicators are provided for each sector and sub-sector. - Specific target: by 2004 the poverty headcount is to be reduced to the 1996 level of 65 percent. - MDGs are not explicitly mentioned in the PRSP, but some social indicator targets parallel the MDGs. ### Joint Staff Assessment (Bank and IMF) - Bank and IMF staff agreement with major PRSP objectives. - Strengths of the PRSP: - participatory process involving civil society, private sector, and donors; - poverty analysis using quantitative and qualitative data, multiple dimensions, and breakdowns by socio-economic group, gender, and region; - appropriate macroeconomic framework and financing plan; - identification of priority sectors likely to contribute most to pro-poor growth; - emphasis on improving governance and reducing corruption. ### IMF support and macro-fiscal program - Since 1995, the Fund supported Zambia’s economic reform program by ESAF and PRGF arrangements. - Government implementing a staff-monitored program (SMP) covering January-June 2004, expected to bridge to a new Fund-supported PRGF. - Extended SMP focuses on: - (i) fiscal consolidation; - (ii) reducing inflation; - (iii) maintaining an adequate level of foreign reserves. - Successful performance under the extended SMP and the proposed PRGF would remove a key constraint to reaching HIPC Completion. ### World Bank Group strategy and CAS (2004-2006) - Bank’s Executive Board discussed the Country Assistance Strategy (CAS) on March 9, 2004. - CAS is explicitly rooted in a results framework linking PRSP/TNDP goals to strategic objectives measured by long-term outcomes. - Bank focus: improve enabling environment by removing obstacles to longer-term development outcomes; specify quantitative targets where appropriate; track CAS outcomes and intermediate indicators directly affected by Bank interventions. ### Bank strategic priorities and planned activities - Strategic Priority 1: Sustained Economic Growth Anchored in a Diversified and Export-Oriented Economy; - Strategic Priority 2: Improved Lives and Protection of the Vulnerable; - Strategic Priority 3: Efficiently and Effectively Managed Public Sector. - Planned activities include adjustment lending and support for diversification, continuing project support for public sector reforms, infrastructure, sanitation, health, education, and reengagement in the agricultural sector. ### Diagnostics, analytic work, and planned ESW/AAA - Completed combined PER, CPAR, and CFAA in 2003. - Major economic sector work in preparation: - Country Economic Memorandum (CEM); - Investment Climate Assessment (ICA); - Administrative Barriers study (AB); - Strategic Country Gender Assessment (SCGA). - Collaborative Poverty and Vulnerability Assessment (PVA) underway. - Planned for FY06: review of labor market regulations, rural development strategy, post privatization copper strategy, integrated framework study for trade; social sector: public expenditure review of education in FY06. ### IDA resource scenarios (CAS FY04-07) - Low case scenario: - departure platform given previous low case outcome; - proposed resource envelope US$180-240 million for the period FY04-07. - Base case scenario: - US$70-80 million p.a., or between US$280-320 million in total; - would exhaust the current IDA allocation of SDR230 million for FY04-07. - High case scenario (if performance is sustained/accelerated): - US$90-105 million p.a., or US$360-420 million in total; - would be a 30 percent increase over the current IDA envelope. ### World Bank active portfolio (as of March 2004) - The Bank’s active portfolio as of March 2004 contains 15 IDA credits, total commitment US$610 million. - Recent approvals during FY03–FY04 included: - Copperbelt Environment (March 2003); - Emergency Drought Recovery Project (November 2003); - HIV/AIDS project (ZANARA) (December 2002); - Southern African Power Pool (Subregional Project) (December 2003); - Road Rehabilitation and Maintenance Project (RRMP) (March 2004). - Table summarizing World Bank operations (As Of 02/01/04) — figures preserved exactly: - Basic Educ Sec Inv Prg (1999) — IDA 40.0 — Undisb. 17.2 - Copperbelt Environment (2003) — IDA 40.0 — Undisb. 38.4 - ERIPTA (1996) — IDA 40.5 — Undisb. 12.4 - Emergency Drought Recovery Project (2003) — IDA 50.0 — Undisb. 23.3 - HIV/AIDS (ZANARA) (2003) — IDA 42.0 — Undisb. 40.0 - Mine Township Services Project (2000) — IDA 37.7 — Undisb. 20.3 - Pub Svc Cap (PSCAP) (2000) — IDA 28.0 — Undisb. 9.2 - Regional Trade Fac. Proj. – Zambia (2001) — IDA 15.0 — Undisb. 11.0 - Social Investment Fund (ZAMSIF) (2000) — IDA 64.7 — Undisb. 35.6 - TEVET (2001) — IDA 25.0 — Undisb. 21.3 - ZM Railways Restructuring Project (2001) — IDA 27.0 — Undisb. 3.9 - ZM National Road (1998) — IDA 70.0 — Undisb. 11.6 - Zambia Power Rehab (1998) — IDA 75.0 — Undisb. 25.6 - RRMP* (2004) — IDA 50.0 — Undisb. 50.0 - South African Power Pool Project* (2004) — IDA 3.0 — Undisb. 3.0 - Overall Result — IDA 607.9 — Undisb. 322.8 - Note: * Recent approvals which are not yet effective ### IFC and MIGA involvement - IFC: - small portfolio of 12 projects totaling US$15 million outstanding; - mix: financial sector, agribusiness, telecommunications (mobile telephone), and tourism projects; - most prominent recent project: US$30 million in equity of Konkola Copper Mines (KCM) with Anglo-American in 2000; IFC exited in 2002. - Zambia is a group 3 country for IFC — assessed as a relatively poor investment climate with limited prospects for stimulating new private investment. - IFC seeks to be responsive to individual projects with strong development impact and is exploring joint support with the Bank to improve the investment climate. - MIGA: - outstanding portfolio consists of four contracts of guarantee in agribusiness and manufacturing services sector with US$36.1 million gross exposure and US$35.7 million net exposure as of December 2003; - projects include privatization, modernization, and expansion of a foundry, and for cobalt and copper facilities; - estimated total amount of foreign direct investment facilitated to date is US$155.5 million; - MIGA underwriting a project in the infrastructure sector with anticipated coverage of US$20 million expected to be signed in FY04. ### IMF–World Bank collaboration and division of lead roles - Joint responsibilities and coordination: - Fund and Bank shared joint responsibility in supporting Government preparation of PRSP and forthcoming first progress report. - Joint assistance to evaluate progress to reach HIPC Completion Point. - Joint evaluation planned of Zambia’s debt and cash management practices. - Areas where the Bank leads (no direct IMF involvement): - social sectors (health, education, social protection, water and sanitation); - agriculture and rural development; - economic diversification; - infrastructure and the environment. - Areas of shared responsibility and close coordination: - trade policy; - financial sector; - public expenditure management, including debt management; - improving economic governance. - The Fund leads on macroeconomic stability analysis and its policy advice serves as input into Bank policy formulation, including fiscal, monetary, and exchange rate policies. ### Specific Bank-led interventions and planned support - Social Protection Strategy: - Bank assisting Government to develop a cross-sectoral Social Protection Strategy extending beyond ex post safety nets to include ex ante risk-prevention and risk-mitigation measures; strategy to be integrated within Zambia’s next PRSP; Poverty and Vulnerability Assessment to support this. - Health and HIV/AIDS: - Bank assisting Ministry of Health with a US$12 million subcomponent under ZANARA multi-sectoral AIDS program; - ESW on human resources in health (FY04); - planning health sector PER in FY06; - support for Health Sector Support Program (SWAp) beginning in FY07. - Education: - support via Adaptable Program Lending (APL); - APL1 Credit used for basic education and, after amendment, construction of two high schools in Eastern Province; - APL2 expected to be committed in FY06 to support education sector more broadly; sector-focused PER planned to support expenditure effectiveness and management. - Technical education (TEVET): - Government reforms supported by IDA credit committed in FY01 and other partners to improve quality, labor market responsiveness, financial sustainability, and participation of female and disadvantaged trainees. - Agriculture and rural development: - Bank reengaging in agriculture given PRSP/TNDP priority; - focus: improve productivity and food security, define improved sector policy, infrastructure support, investments in land development, irrigation, and infrastructure; - planned AAA to support agricultural policy formulation and an Agricultural Support Project planned as follow-up. - Disaster relief and mitigation: - Bank assisting development of an Integrated Framework for Disaster Relief and Mitigation under Emergency Drought Recovery Project (EDRP); - aim: increase food security and protect poorest/vulnerable in target districts; pilot programs include dams/local irrigation, labor-intensive public works, agriculture input distribution, and primary school feeding programs. - Economic diversification and SEED project: - SEED project supports diversification strategy in tourism, agribusiness, and gemstone sectors; initial phase focuses on policy/legal frameworks and tourism-related infrastructure; tourism component aims to make Livingstone flagship destination and strengthen national parks management; gemstones and agribusiness components to strengthen supply chains linking rural/small-scale producers to markets. - Private sector development: - Bank and IFC to assist with Investment Climate Assessment and FIAS-led Administrative Barriers to Investment study to facilitate a new business-friendly investment act and regular government-business consultations. - Infrastructure and energy: - HIPC-related economic program to assist in turning ZESCO into a financially viable, commercially operated company; - analytical work to identify bottlenecks to competition and effective service delivery; policy/institutional recommendations supported through adjustment operations; investment projects (RRMP and Water Sector Reform Project) to provide financial resources; Zambia benefits from Southern African Power Pool Project. - Environment: - environmental concerns addressed per Bank safeguard policies and through Copperbelt environmental project to assist cleanup of hazardous sites in Copperbelt and Kabwe; SEED to assist sustainability of tourism in protected areas. ### Bank-led institutional work feeding IMF program - Bank leads dialogue on institutional dimensions of public expenditure management and financial accountability, and on public sector reform, restructuring, and privatization. - Objectives include: - more transparent and accountable public sector through improved budget management, procurement systems, and accountability of public funds; - public sector reform aimed at a more productive and efficient public service through: creating a more qualified and motivated civil service; developing strategic management orientation in line ministries; improving policy coordination and implementation; strengthening local government capacity. *IMF/World Bank staff report content as presented in the source document.* ### 29. While the Bank has taken the lead in privatization, the IMF has also a strong ### _cr04214 - 29. While the Bank has taken the lead in privatization, the IMF has also a strong ### IMF–World Bank coordination and division of labor - High degree of consultation and coordination between the IMF and the World Bank on privatization and related reforms because they are critical to macroeconomic stabilization and enhancing Zambia’s growth prospects. - Five jointly worked areas: - (i) trade policy; - (ii) financial sector reform; - (iii) debt management and domestic debt market development; - (iv) PRSP monitoring and evaluation; and - (v) progress towards HIPC completion. - Joint initiatives and interactions: - The Bank will undertake the integrated framework exercise for trade policy with collaboration from other partners. - Follow up to the recently completed FSAP will guide the Bank’s policy dialogue and interventions in the financial sector in close collaboration with the IMF. - The Fund and the Bank recently jointly reviewed the proposed Financial Sector Development Plan for the financial sector in Zambia. - The Bank and the IMF jointly prepared the JSA for the full PRSP published in May 2002 and prepared for the JSA of the first progress report of the PRSP to be issued by the end of March 2004. - The Fund and the Bank jointly prepared the HIPC-AAP document and jointly monitor progress towards HIPC completion; Zambia reached its decision point in December 2000. ### Areas of shared responsibility — emphasis and inputs - Debt management and domestic debt market development: - Assistance will focus on improving the functioning of debt management and domestic debt markets to reduce vulnerability and the cost of and the need for domestic financing. - This work will draw from the Guidelines for Public Debt Management (published in March 2001) and the Handbook on Developing Government Bond Markets (published in July 2001). - The Bank and the IMF have recently prepared an accompanying document to the guidelines containing case studies from a range of countries at different stages of economic and financial development, which will feed into this work as well. ### Areas where the Fund leads (and Bank integrates Fund analysis) - The Fund leads the dialogue on the macroeconomic framework, specifically: - Fiscal policy (overall envelope for public expenditures, tax policy), - Monetary and exchange rate policy, - Debt management. - The World Bank takes into account the policy recommendations of the Fund and ensures its own policy advice, embedded in its adjustment lending, is consistent with Fund recommendations. ### IMF–World Bank collaboration in Zambia (selected program/goal highlights) - Goal: A growth conducive macro economic environment - IMF specialized advice: Monetary policy; Financial sector consolidation, exchange rate, fiscal policy and wage bill, debt management, balance of payments, economic statistics. - World Bank specialized advice: Debt management; Wage bill management; Financial sector consolidation. - Key instruments: IMF: SMP and PRGF performance criteria and benchmarks on key monetary and fiscal targets, and structural reforms; benchmark on arrears. Jointly: JSA of PRSP progress report. - Goal: A diversified and export oriented economy - IMF instruments: SMP and PRGF performance criteria and benchmarks on key monetary and fiscal targets, and structural reforms. - Joint instruments: FSAP (FY02) and follow up, JSA of PRSP progress report. - Goal: Good governance and public sector management - IMF instruments: SMP and PRGF; measures to strengthen the Office of the Auditor General; measures to put in place the IFMIS; multiyear plan for clearing the stock of arrears; measures to ensure timely reporting of government accounts to Parliament as required by law. - Jointly: HIPC AAP expenditure tracking assessment. ### Statistical issues — institutional arrangements and GDDS participation - Zambia is a participant in the GDDS project for Anglophone African countries. - Zambia’s GDDS metadata on the Dissemination Standards Bulletin Board was last updated in February 20042003. - Present compilation arrangements involve duplication of effort and insufficient coordination among the Bank of Zambia (BoZ), the Ministry of Finance, and the Central Statistical Office (CSO). - CSO weaknesses: resource constraints and organizational weakness have affected timely production of economic statistics. ### Real sector (national accounts) — missions, findings, and data gaps - IMF/DFID GDDS mission visited Lusaka June 24 to July 5, 2002 to provide technical assistance to the CSO on national accounts focusing on: - Improving source data (surveys); - Introducing phased implementation of the 1993 System of National Accounts (1993 SNA); - Developing quarterly GDP estimates. - Current national accounts situation (as reported): - National accounts compiled using both production and expenditure approaches. - Estimates compiled according to 1968 SNA conceptual guidelines, with phased introduction of 1993 SNA planned. - Production side: cover 11 industry groups and 23 subgroups. - Expenditure side: cover 6 main components, at both constant and current prices. - For the production approach, 1994 is the latest benchmark year for value-added ratios. - For many industries (wholesale and retail trade, construction, business services and many service industries of small-scale private providers), no appropriate indicators exist. - Current data are mostly quarterly volume or quantity indicators used to construct quarterly indicators of GDP by activity/industry at constant prices. - No appropriate data on total production and intermediate consumption of establishments for comprehensive real sector indicators. - On the expenditure side, no current indicators of household consumption; private final consumption expenditure is derived residually. - Source data to estimate gross fixed capital formation and changes in stocks are incomplete. - Current price estimates derived from constant price indicators using WPIs and CPIs as deflators; for the most recent period the WPI was no longer available and CPI components were used throughout the system. - The range of basic source data for national accounts estimates has rapidly eroded in recent years amid major structural changes. - The CSO has not adopted methodological improvements such as the commodity flow approach nor used the input-output table for 1994–1999. - Authorities plan to implement the economic census project for 2002 as a major breakthrough in source data development. - Follow-up mission visited Lusaka March 3-19, 2003; noted short-term recommendations from the first mission were not carried out due to lack of staff resources. ### Government finance statistics (GFS) - Zambia resumed compilation of GFS data; quality of reported data has improved. - GFS data updated to 1998 for final data and to 1999 for forecast data; coverage for 1989-99 limited to budgetary central government. - Authorities report monthly budget data for the Fund’s operational use in a timely manner, but data are often subject to substantial revisions later in the year. - No monthly or quarterly fiscal data are reported for publication in International Financial Statistics (IFS). - Local government fiscal data are not available. - No data reported for the GFS Yearbook since 1999. - IMF/DFID GDDS mission visited Lusaka March 13-26, 2003 to provide technical assistance to the Ministry of Finance and National Planning on fiscal issues and advised on initial steps toward migration to GFSM2001 methodology. ### Monetary accounts - Progress in compilation of monetary statistics; monetary survey is published monthly. - BoZ eliminated discrepancies between its own records of IMF accounts and data from the Finance Department of the IMF. - In April 2003, the Bank of Zambia fully switched to a new computing system for generating its monthly trial balance, expected to enable timely production of monetary accounts. - A July 2003 STA monetary and financial statistics mission recommended: - Recording of deposits on a gross, rather than net, basis; - Reporting of central government securities at cost, rather than at face value; - Reclassification of some accounts. - Data reported by commercial banks are adequate; other depository corporations survey should be expanded to cover four nonbank deposit-taking institutions. - BoZ should include accounts of all banks in liquidation in the survey, classifying their deposits as restricted deposits and excluding them from broad money. ### Balance of payments - May 2000 STA mission found compilation of imports, exports, and FDI data inadequate and made recommendations. - Authorities prepared a work plan and some improvements were made in customs data coverage and methodology for some BOP components. - Quality of balance of payments data continues to be problematic: data sources are poor and unreliable, methodology is inadequate. - Insufficient data sources on private sector foreign assets and liabilities required to compile an international investment position statement. ### Core Statistical Indicators (As of April 30, 2003) — selected dated observations and frequencies - Exchange Rates: Date of latest observation 1/30/04; Date received 2/04; Frequency of data 1/: D; Frequency of reporting 1/: D; Source of data 2/: N; Mode of reporting 3/: E; Confidentiality 4/: C; Frequency of publication 1/: D. - International Reserves: Date of latest observation 11/30/03; Date received 1/13/04; Frequency of data 1/: W; Frequency of reporting 1/: W; Source of data 2/: A; Mode of reporting 3/: M; Confidentiality 4/: B; Frequency of publication 1/: M. - Central Bank Balance Sheet: Date of latest observation 11/30/03; Date received 1/13/04; Frequency of data 1/: M; Frequency of reporting 1/: M; Source of data 2/: A; Mode of reporting 3/: M; Confidentiality 4/: B; Frequency of publication 1/: M. - Reserve/Base Money: Date of latest observation 11/30/03; Date received 1/13/04; Frequency of data 1/: W; Frequency of reporting 1/: W; Source of data 2/: A; Mode of reporting 3/: M; Confidentiality 4/: B; Frequency of publication 1/: F. - Broad Money: Date of latest observation 11/30/03; Date received 1/13/04; Frequency of data 1/: M; Frequency of reporting 1/: M; Source of data 2/: A; Mode of reporting 3/: M; Confidentiality 4/: B; Frequency of publication 1/: M. - Interest Rates: Date of latest observation 12/31/04; Date received 1/13/04; Frequency of data 1/: W; Frequency of reporting 1/: W; Source of data 2/: A; Mode of reporting 3/: E/M; Confidentiality 4/: C; Frequency of publication 1/: F. - Consumer Price Index: Date of latest observation 3/03; Date received 4/14/03; Frequency of data 1/: M; Frequency of reporting 1/: M; Source of data 2/: A; Mode of reporting 3/: E/M; Confidentiality 4/: C; Frequency of publication 1/: M. - Exports/Imports: Date of latest observation 2/03; Date received 4/28/03; Frequency of data 1/: Q; Frequency of reporting 1/: Q; Source of data 2/: A; Mode of reporting 3/: M/V; Confidentiality 4/: B; Frequency of publication 1/: A. - Current Account Balance: Date of latest observation 12/02; Date received 2/23/03; Frequency of data 1/: A; Frequency of reporting 1/: A; Source of data 2/: A; Mode of reporting 3/: M/V; Confidentiality 4/: B; Frequency of publication 1/: A. - Overall Government Balance: Date of latest observation 03/03; Date received 4/14/03; Frequency of data 1/: M; Frequency of reporting 1/: M; Source of data 2/: A; Mode of reporting 3/: M/V; Confidentiality 4/: C; Frequency of publication 1/: A. - GDP/GNP: Date of latest observation 2001; Date received 7/02; Frequency of data 1/: A; Frequency of reporting 1/: A; Source of data 2/: A; Mode of reporting 3/: M/V; Confidentiality 4/: B; Frequency of publication 1/: A. - External Debt/Debt service: Date of latest observation 02/03; Date received 4/14/03; Frequency of data 1/: W; Frequency of reporting 1/: W; Source of data 2/: A; Mode of reporting 3/: M/V; Confidentiality 4/: B; Frequency of publication 1/: A. - (Notes on table legends preserved in source: 1/ D= daily; W=weekly; F=fortnightly; M=monthly; Q=quarterly; Y=Yearly; V=irregularly. 2/ A = direct reporting by the Central Bank or the Ministry of Finance; N=official publication or press release. 3/ C= cable or facsimile; E=electronic data transfer; M=mail; V=staff visits. 4/ B=for use by the staff and the Executive Board; C= unrestricted use; D=embargoed for specified period.) ### Social and demographic indicators (selected figures from the source) - Area (thousand sq. km.): 753 - Total population (in millions) (1998): 10.2 - Annual rate of growth (percent) 1980-98: 2.9 - Population density (per sq. km.): 13 - Percent of national income — Highest 20 percent: 55 - Percent of national income — Lowest 20 percent: 4 - Urban population (percent of total): 39 - Proportion in capital city (percent of urban population): 37 - Gini coefficient: 0.50 - Population below the poverty line (percent) (1998): 69 - Rural poverty (percent of rural population): 82 - Life expectancy at birth (years) (1998): 43 - Infant mortality (per 1,000 live births): 114 - Mortality under 5 years (per 1,000): 192 - Maternal mortality (per 1,000 live births): 650 - Total participation rate (labor force) (percent) (1998): 62 - Percent employed in agriculture (1998): 70 - Percent in manufacturing (1998): 4 - Percent in mining (1998): 2 - Child immunization rate (under 12 months; percent): 70 - Child malnutrition (under 5 years) — Percent underweight (1997): 24 - Child malnutrition (under 5 years) — Percent stunted (1997): 42 - Gross enrollment rates (percent) — Primary (1997): 89; Secondary (1997): 27; Tertiary (1997): 3 - HIV/AIDS prevalence rate (percent): 19 - Access to safe water (1998) — Percent of total population: 43; Urban population: 64; Rural population: 27 - Illiteracy (percent of adult population) — Total: 38; Men: 16; Women: 31 *Prepared by IMF staff as presented in the source content.* ### 1. Transactions with the Fund, 1970-2005.........................................................................3 ### _cr04214 - 1. Transactions with the Fund, 1970-2005.........................................................................3 ### I. INTRODUCTION - Purpose: - Assess Zambia’s progress in implementing economic reforms supported by Enhanced Structural Adjustment Facility (ESAF) and Poverty Reduction and Growth Facility (PRGF) arrangements since 1995. - Draw lessons for a possible successor arrangement. - Structure: - Section II: economic developments prior to these arrangements, including early-1990s deregulation and reform. - Section III: review of performance and progress under the two arrangements, 1996–2002. - Section IV: lessons and main challenges facing Zambia. - Section V: role the Fund could play to help authorities meet those challenges. ### II. BACKGROUND - Long-term decline and structural context: - From the mid-1970s, Zambia’s mining-based economy suffered more than two decades of decline. - Copper provided almost all export earnings and about half of GDP in the first decade after independence in 1964. - After the 1970s oil price shocks and a long-term decline in real copper prices, Zambia took on large external debts and used exchange and trade controls rather than restructuring. - By 1990, nominal per capita GDP had fallen to US$450. - Early-1990s reform (rights accumulation program, RAP, 1992–95): - Market-oriented reforms implemented: prices liberalized, interest rates decontrolled, kwacha floated. - By 1994, virtually all exchange controls on current and capital transactions removed. - Quantitative controls on imports and exports removed in 1992; customs duties levels and dispersion reduced. - Privatization Act passed in 1992; Zambia Privatization Agency (ZPA) established. - Inflation reached 180 percent at end-1992; inflation above 40 percent in both 1994 and 1995. - ZCCM inefficiencies contributed to mining sector output decline >10 percent per year in four years to 1995. - Real GDP contracted by an average of 2.3 percent per year over the same period. ### III. DEVELOPMENTS UNDER ESAF- AND PRGF-SUPPORTED PROGRAMS, 1996-2002 H3: A. Goals of the Programs - ESAF arrangement (approved December 1995): - Three-year arrangement in the amount of SDR 701.7 million (193 percent of quota). - SDR 661.7 million made available immediately after Zambia cleared overdue obligations to the Fund. - PRGF arrangement (approved March 1999): - Three-year arrangement with access at 52 percent of quota (lower than the norm for second-time users) in recognition of Zambia’s high level of outstanding obligations to the Fund. - Program objectives: - ESAF (1995 program): reverse economic decline via market-oriented reforms, efficient public sector resource use, cessation of inflationary financing, and restoration of relations with the international financial community. - Structural reforms targeted: strengthen banking system, continue privatization (particularly ZCCM), civil service reform, and government withdrawal from agricultural finance and marketing. - PRGF (1999 program): bolster economic growth, reduce inflation to single digits, support poverty reduction goals (interim-strategy paper endorsed July 2000; PRSP endorsed May 2002). - Monetary policy supported by fiscal tightening, broader use of indirect instruments (including open market operations), strengthened liquidity management. - Privatization aims: ZCCM (debt obligations had reached 16 percent of GDP), telecommunications, electricity utilities, financial institutions, and petroleum sector. - Improve governance. H3: B. Compliance with Program Conditionality - Overall implementation: - ESAF: program implementation poor; key performance criteria (PCs) for end-December 1995 were missed. A staff-monitored program (SMP) allowed delayed completion of a midyear review in March 1997; no further reviews completed; ESAF expired December 1998. - PRGF: initially faltered; key PCs in 1999 missed due to shortfalls in donor support, delays in ZCCM privatization, and inadequate civil service reform progress. Performance improved markedly thereafter; arrangement extended by 12 months and expired in March 2003 with five of six reviews completed. Sixth review not completed because of delays in privatizing Zambia National Commercial Bank (ZNCB). - Monitoring framework: - Quarterly quantitative and structural PCs and benchmarks; semiannual reviews. - ESAF: six out of ten PCs for end-December 1995 were not observed. - PRGF 1999: few quantitative PCs met (two out of nine for March and June 1999; only one in September and December 1999); none of the structural PCs observed. - 2000: all quantitative and structural criteria for September 2000 observed; seven out of ten for December observed. - 2001: all structural PCs observed; only three of seven quantitative PCs met for March and September. - 2002: virtually all quantitative and structural PCs observed for March, June, September, and December. - Composition and focus of conditions: - Conditions broadly within Fund’s core areas of responsibility. - ESAF: structural PCs/benchmarks largely restricted to issues with direct bearing on macroeconomic stability; average number of structural conditions per year low because few set while program off track. - PRGF: number of structural conditions in line with other PRGF arrangements, except lack of prior actions. - Distribution comparable to average for all ESAF/PRGF programs, with heavy emphasis on fiscal and financial areas. - Zambia had greater weight on privatization and governance measures given importance for budgetary performance. H3: C. Attainment of Program Objectives - Macroeconomic outcomes 1996–2002: - Growth: - 1996–98: growth averaged 2.7 percent (vs. average -2.3 percent in 1992–95 and original program target of 6 percent per year). - 1999–2002 (PRGF period): growth averaged 3.5 percent (targeted increase of 4-5 percent per annum), despite a severe drought in 2002. - Inflation: - Program targets called for decline to 4 percent per annum over both three-year periods. - Inflation slowed from almost 100 percent per year (1992–95) to average 28 percent in 1995–98 and 24 percent in 1999–2002 — still well above original program targets. - Fiscal and monetary factors: - Revenue performance relatively strong by regional standards and generally in line with program expectations. - Delays in privatization of ZCCM adversely affected implementation, especially when copper prices fell and operating losses rose, prompting revision of annual program targets. - Under ESAF-supported program, central government fiscal deficit broadly in line with program until 1998. - Financing of ZCCM losses through quasi-fiscal operations contributed to excessive monetary expansion in this period. - Original fiscal targets of PRGF substantially relaxed, particularly in 2000, to account for ZCCM operating losses. - Privatization of ZCCM later allowed pursuit of a more coherent macroeconomic framework. - Weaknesses in expenditure policy and management continued to hamper fiscal implementation; domestic financing typically exceeded program targets, complicating monetary policy, slowing decline in inflation, and contributing to upward pressure on real interest rates. - Public wage bill and public employment: - Public service reform program (launched 1998) separated over 15,000 contractual workers and reduced public service from 139,000 to 104,000. - By 2002, total had risen again to around 120,000. - Including security forces, employees of grant-aided institutions, and other bodies, total government employment stands at about 160,000. - Pay reform initiatives since 2001 focused on decompression of wage structure and rationalizing allowances; progress incomplete and fragmented. - As a result of larger payroll and average wage increases, the wage bill rose from 5.6 percent of GDP in 1996 to 8.5 percent of GDP in 2003. - At 8.5 percent of GDP, the wage bill accounts for 47 percent of domestic revenues. - Expansion in wage bill, together with increased domestic interest payments, crowded out domestic capital expenditures, including poverty-reducing spending. - Public expenditure management: - Overall reform slow despite technical assistance. - Commitment control system strengthened only in early 2003; this slowed accumulation of arrears, but enforcement of sanctions and prevention of veering funds inadequate. - Comprehensive database of outstanding bills completed in June 2003; plan for settling domestic arrears delayed. - HIPC Initiative AAP benchmarks: in 2001, Zambia met three out of sixteen benchmarks; by 2003, four benchmarks met. - Monetary and financial sector reforms: - Improvements in BoZ monetary operations: greater use of indirect instruments, improvements in treasury bill market, introduction of repurchase agreements, steps to improve liquidity management. - Financial sector reforms included strengthening regulatory framework. - Persistent delays in privatizing ZNCB. - 2002 FSAP (joint with World Bank) identified weaknesses: low level of financial intermediation; weaknesses in central bank independence; absence of small and medium-sized enterprise financing; immediate threats from insolvent public nonbank financial institutions; high interest rates fueled by domestic government borrowing. - Trade, exchange regime, and diversification: - Open liberal trade and flexible exchange rate supported diversification. - Simple average import duty reduced from 27 percent in 1994 to 19 percent in 1996. - Trade-weighted average tariff rate declined from 16 percent in 1996 to 11.5 percent in 2003 (removal of 5 percent import declaration fee; reduction in maximum tariff to 20 percent; reclassification of some goods into lower tariff brackets). - Interbank foreign exchange market introduced in July 2003; central bank foreign exchange auctions ceased. - Real effective exchange rate fluctuated around trend of moderate appreciation despite weakening terms of trade from lower copper prices; real effective exchange rate moderated significantly after 2001. - Nonmining exports expanded under PRGF; sustained nonmining GDP growth, especially agriculture, contributed importantly to overall gains in economic growth. - External viability and HIPC: - PRGF implementation allowed Zambia to reach decision point under enhanced HIPC Initiative in December 2000. - Expiry of PRGF arrangement in March 2003 and subsequent large projected wage overrun precluded Board consideration of a new PRGF arrangement. - SMP covering July–December 2003 went off track due mainly to large unbudgeted expenditures. - Delays in new PRGF arrangement postponed attainment of HIPC completion point — key to restoring external sustainability. - Exceptional front-loading of HIPC relief from the Fund provided in interim to reduce cash debt service payments to the Fund. - Gross reserves recovered to more than two months of imports at end-2002, but declined to about half this level at end-December 2003. - Privatization program: - Accelerated between 1995–97 after ZPA restructuring in 1995; subsequently lost momentum. - By end-2002, 254 out of 280 parastatals under ZPA were privatized through relatively transparent and competitive tendering. - Mining sector privatizations handled largely outside ZPA with less transparency; lack of transparency in valuation and bidding contributed to costly delays in ZCCM privatization. - Sale of Konkola Copper Mines (KCM) to Anglo American (AA) in 2000 was followed by AA’s withdrawal; privatization yielded productivity gains and an end to budgetary support. - Sale of Roan Antelope Mining Company of Zambia (RAMCOZ) in 1997 was nontransparent and proved unsuccessful; buyers lacked mining experience and faced difficulties servicing obligations to employees and suppliers including ZESCO; RAMCOZ ultimately placed into receivership. ### Key statistics and exact figures cited in the chapter - SDR 701.7 million (ESAF amount; 193 percent of quota). - SDR 661.7 million (made available immediately after clearing overdue obligations). - PRGF access at 52 percent of quota. - ZCCM debt obligations had reached 16 percent of GDP. - Growth averages: - 1992–95: -2.3 percent (real GDP average annual contraction). - 1996–98: 2.7 percent (growth averaged). - 1999–2002: 3.5 percent (growth averaged). - Original program growth target: 6 percent per year (ESAF period). - PRGF targeted growth: 4-5 percent per annum. - Inflation: - 1992 end: 180 percent. - 1992–95 average: almost 100 percent per year. - 1995–98 average: 28 percent. - 1999–2002 average: 24 percent. - Original program inflation target: decline to 4 percent per annum. - Public employment: - Public service reduced from 139,000 to 104,000 after reform; by 2002 rose to around 120,000. - Total government employment (including security forces, grant-aided institutions, other bodies): about 160,000. - Wage bill: - 5.6 percent of GDP in 1996. - 8.5 percent of GDP in 2003. - Wage bill accounts for 47 percent of domestic revenues (at 8.5 percent of GDP). - Trade and tariff levels: - Simple average import duty: 27 percent in 1994; 19 percent in 1996. - Trade-weighted average tariff rate: 16 percent in 1996; 11.5 percent in 2003. - Privatization coverage under ZPA: 254 out of 280 parastatals privatized by end-2002. - HIPC milestones: - Decision point under enhanced HIPC Initiative reached December 2000. - Reserves: - Gross reserves: more than two months of imports at end-2002; about half this level at end-December 2003. - HIPC AAP benchmarks met: - 2001: three out of sixteen benchmarks met. - 2003: four benchmarks met. *Source: IMF staff report chapter titled "Transactions with the Fund, 1970-2005" (sections I–III as provided).* ### 2000. Further costs to the budget arose when the resale of the RAMCOZ to private investors ### _cr04214 - 2000. Further costs to the budget arose when the resale of the RAMCOZ to private investors ### Privatization, mining sector outcomes, and fiscal costs - Government assumed responsibility for wage arrears and retrenchment costs totaling about 0.7 percent of GDP related to the resale of the RAMCOZ at the end of 2003. - Terms of privatizations in the mining sector included generous, ad hoc tax treatments; these set a precedent for mining investors and left the sector providing only very modest revenues to the budget. - The withdrawal of Anglo-America from KCM in 2002 did not require renewed budget support; the negotiated exit package made provisions for operating losses through to 2004 and copper prices were sufficient to cover KCM’s operating costs. - Privatization difficulties in KCM and RAMCOZ contributed to public and political disquiet, delaying privatization/commercialization steps for ZNCB and ZESCO and calling into question long-standing policy commitments tied to the HIPC Initiative completion point. ### Role of the private sector and investment trends - Resumption in growth of mining and nonmining activity was driven by the private sector despite setbacks in privatization. - Foreign direct investment: negative in the early 1990s, rose to an average of 5 percent of GDP under the ESAF-supported program, and reached an average of more than 6 percent of GDP per year under the PRGF arrangement. - Copper production: stagnated in 1997, fell by a fifth in 1998, then, following privatization, rose by an average of more than 20 percent in 2001 and 2002. - Sectoral weight: mining accounted for only 12 percent of GDP in the mid-1990s. ### Governance, oversight, and accountability improvements - Political-level progress: after December 2001 elections the government adopted a zero-tolerance policy on corruption and launched a national movement against corruption with broad-based representation. - Anti-Corruption Commission (ACC) funding increased; ACC complaints received: 836 in 2002 compared with 315 in 2001. - Office of the Auditor General (OAG) strengthened; audited public accounts for 2001 were completed and submitted to parliament in 2002 as required by law. - Despite these gains, continued fundamental weaknesses in budgetary processes remain an obstacle to good governance. ### Program design and implementation lessons — macro and fiscal - Growth targets and outcomes: - The growth target of 6 percent in the ESAF-supported program may have been too optimistic. - Under the PRGF-supported program, nonmining activity growth slightly exceeded the implied target of 4 percent per annum through 2001. - Overall growth slowed to 3 percent in 2002 due to a severe drought. - Fiscal and monetary implications: - Delays in ZCCM privatization and shortcomings in budget policy/execution resulted in higher recourse to domestic financing and higher domestic borrowing. - Broad money typically exceeded program targets and inflation objectives were revised upwards; original program target to reduce inflation to 4 percent over three years appears over optimistic. - Domestic debt and interest costs: - Stock of domestic debt around 20 percent of GDP. - Sharp increase in domestic debt raised real interest rates; domestic interest payments now exceed external debt service. - Risk: continuing the 2004 borrowing pace of 2003 would risk a destabilizing widening cycle of higher domestic debt and interest rates. - External assistance assumptions: - Program assumptions for external assistance were too optimistic; adjuster for shortfalls in external financing was initially capped at US$45 million or more than one percent of GDP. - Shortfalls in aid and failure to meet donor-set policy objectives contributed to dependence on domestic financing and called on monetary policy for adjustment. - Contingency planning and conditionality: - Programs lacked ex ante contingencies for exogenous shocks other than aid shortfalls; shortfalls in copper exports prompted target modifications during reviews. - Civil service reform: hiring freeze under ESAF but limited structural conditionality under PRGF; controlling the wage bill proved unsuccessful and closer monitoring (possibly supported by conditionality) was recommended. - Front-loading key reforms and monitoring as prior actions could have reduced derailments; alternatively, strengthening ZCCM’s financial position before privatization was suggested. - Institutional capacity and coordination: - Implementation hampered by limited capacity and lapses in coordination; high staff turnover in MoFNP exacerbated difficulties. - SMP aims to reinvigorate interministerial program monitoring with the President as chair and to ensure wage/allowance decisions are agreed with MoFNP and the cabinet. ### Public expenditure management, technical assistance, and ownership - Fund TA focus: improving PEM, tax policy and administration, and strengthening BoZ capacity. - PEM outcomes: - Some progress (e.g., improvements in the commitment control system reduced arrears accumulation in the first half of 2003) but gains undermined by extrabudgetary expenditures and circumvention of budget procedures. - Revenue and financial sector reforms: - FAD TA led to reforms including reform of Zambia Revenue Authority (ZRA), widening of the tax base, and introduction of VAT; revenue-to-GDP ratio stable at 18-19 percent. - MFD TA supported bank supervision, monetary and exchange operations, payments systems, IT, resolution of insolvent nonbanks, and preparation of a Financial Sector Development Plan; outcomes include generally adequate supervisory/regulatory framework (based on 2002 FSAP), introduction of the interbank foreign exchange market and indirect monetary policy instruments. - Ownership: - Mixed record of policy implementation and limited follow-up on TA recommendations, especially in expenditure, point to incomplete ownership. - BoZ successfully introduced an interbank foreign exchange market in July 2003 with MFD support, indicating strong ownership in some areas. - Public perceptions of reforms remain skeptical due to prolonged decline and high indebtedness to the Fund. ### Collaboration with the World Bank - Close collaboration: World Bank led support for public enterprise reform and privatization (except ZNCB), petroleum sector price liberalization and liquidation of Zambia National Oil Corporation, support to ZPA and commercialization of ZESCO. - World Bank roles: assisted in bringing strategic investor into KCM after AA withdrawal and supported public sector management strengthening and civil service reform, including attempts to reform the pay structure. ### Medium-term policy challenges and recommendations - Growth and poverty reduction targets: - PRSP initial growth target: 5 percent. - To attain poverty reduction consistent with the corresponding MDG for 2015, Zambia will need to grow by 6–8 percent per year. - Main growth sources: agriculture, mining, manufacturing, and tourism with private sector- and export-led policies. - Key strategy elements: - Consolidation of macroeconomic stability. - Strengthening budgetary processes to improve fiscal outcomes, governance, and facilitate higher donor support of priority social spending. - Civil service reform to bring the wage bill to a more affordable level; wage increases must be tightly controlled. - Completion of the privatization program and removal of obstacles to private sector growth in business licensing and regulation, land tenure and labor legislation. - Financial sector development to support improved financial intermediation including in rural areas. - Progress toward HIPC Initiative completion point to reduce debt to sustainable levels. - Public expenditure management reforms: - Government priorities in PRSP include PEM reform and financial accountability. - Major initiatives (supported by World Bank and other donors): introduction in the 2004 budget of an activity-based classification of operations, a medium-term expenditure framework (MTEF), and development of an Integrated Financial Management System (IFMIS). - A joint donors’ group has been established to oversee public sector reform progress; a technical team is developing a specific action plan largely based on the World Bank’s PEMFAR. - Clearing the stock of domestic arrears requires a developed and implemented strategy. *Source: IMF staff report content provided in the supplied document.* ### 37. Special attention will need to be focused on ensuring that the higher levels of ### _cr04214 - 37. Special attention will need to be focused on ensuring that the higher levels of ### Governance, Budget Processes, and Accountability - Strengthen budget processes by enforcing compliance with existing systems and regulations in a comprehensive and transparent manner to promote accountability. - Enhance the independence and authority of the Office of the Auditor General (OAG) to bolster public sector accountability. - Publicly articulated support from policymakers and political leaders is required to reinforce steps toward greater accountability. ### Poverty Reduction, Social Spending, and Budgeting - Improve mechanisms for tracking poverty reduction and social spending. - Ensure a well-functioning, activity-based budgeting framework. - Conduct regular assessments of poverty programs with the participation of civil society and feed these assessments into the budget. ### Revenue Risks and Tax Policy - Develop a consistent policy for granting exemptions to avoid ad hoc exemptions and preserve the revenue base (experience in the mining sector highlights this need). - Ensure that tax concessions in the Export Processing Zone Act do not undermine corporate tax collections. ### Privatization and Public Enterprise Reform - Complete remaining privatizations to improve economic efficiency and protect the budget. - Specific pending sales: - Sale of the KCM (mining sector) to a strategic investor is expected to be completed shortly. - Sale of the ZNCB to a reputable private bank is expected to improve financial intermediation and safeguard the budget. - No consensus within the government for the privatization of the telecommunications company. ### Financial Sector Reform Agenda (from FSAP and Financial Sector Development Plan) Key issues authorities intend to address: - Strengthen capacity and independence of the Bank of Zambia (BoZ). - Improve financial sector supervision and regulation. - Resolve insolvent nonbank financial institutions (NBFIs). - Appropriately regulate and supervise the National Pension Scheme Authority (NAPSA) to address problems of unfunded liabilities. - Develop mechanisms to improve rural banking service delivery. - Implement strategies to channel finance to small and medium-sized enterprises (SMEs). - Complete sale of the ZNCB. - Improve liquidity forecasting through more effective coordination between the BoZ and the Ministry of Finance and National Planning. - Establish a comprehensive debt-management framework. - Implement the Prohibition and Prevention of Money Laundering Act of November 2001. ### External Vulnerabilities, Exchange Rate Policy, and Copper Dependence - To mitigate medium-term growth risks posed by dependence on copper, maintain open trade and flexible exchange rate regimes that supported strong growth of nontraditional exports over the past ten years. - The real effective exchange rate continues to show relative stability. - Introduction of an interbank market for foreign exchange should enhance exchange rate responsiveness to short-term market movements. ### Future Fund Relations with Zambia — Rationale for a Successor Arrangement - The Fund can support progress toward macroeconomic stability, crucial for growth and poverty reduction. - Key areas where the Fund’s expertise is relevant: - Supporting fiscal consolidation. - Reducing vulnerabilities to external shocks. - Strengthening governance in public expenditure policy and management. - Supporting financial sector reforms. - A sound track record under a successor PRGF arrangement would: - Facilitate Zambia’s attainment of the HIPC Initiative completion point. - Ease the burden of repayments facing Zambia. - Help catalyze donor budget support for meeting the MDGs, contingent on sustained implementation and progress in public expenditure management (PEM). ### Technical Assistance and Capacity Building - Continue providing adequate and timely TA in: - Public expenditure management. - Expenditure controls. - Tracking of poverty reduction expenditures. - Tax administration reforms. - Financial sector reforms. - Capacity strengthening at the BoZ and the Central Statistical Office. - Integrate TA recommendations into program monitoring due to mixed record of implementation. ### Exit Strategy, Debt Service, and Financing Needs - Zambia faces large and immediate financing needs; external debt service will fall sharply in 2006 with completion of repayments from the 1995 ESAF that cleared Zambia’s arrears, but large payments are due in 2004 and 2005. - Fund exposure and projected debt-service dynamics: - Fund's share of debt service could peak at over 60 percent of total debt service by the end of the decade. - About 70 percent with a new PRGF arrangement. - Total external debt service is expected to average no more than 7 percent of exports. - Stabilization of debt (NPV of debt in relation to GDP) after reaching the HIPC completion point would require: - Growth of about 4 percent per annum in real terms. - A stable real exchange rate. - A current account deficit, after grants, of about 5 percent of GDP. - Outlook depends on continued gains in the trade balance from stronger copper prices and provision of additional external assistance to meet MDG targets, largely in the form of grants. - Given limited progress toward macroeconomic stability and the scale/duration of reforms, Zambia is not a strong candidate for early graduation from Fund resources; further PRGF support may be required. ### Views of the Authorities - Authorities agreed with many assessment points but highlighted factors contributing to poor past growth performance: - Adjustment programs supported by the Fund and World Bank emphasized policy and institutional reform but lacked practical investment support (e.g., infrastructure) to encourage investment. - Lack of major investment in high-potential areas such as Livingstone for tourism and the “New Copperbelt” for mining. - Agricultural potential limited by inadequate investment in irrigation and power; export-based agriculture has shown strongest growth when supported. - Much financing received was adjustment credit used to service past debt rather than finance growth. - Recent growth and sectoral performance: - In the past four years the Zambian economy has shown consistent growth, though at rather low levels compared to needs. - Growth sources: mining, manufacturing, tourism, and services. - Agriculture has grown when weather permitted and with timely input support; export-based agriculture has shown the strongest growth. - Some investments in emerging growth areas occurred with little or no public support; authorities see directing public support to these areas as a key future challenge. ### Statement by IMF Staff Representative — SMP Update (as of April 7, 2004) - Preliminary data through end-February indicate: - Fiscal revenues and expenditures were in line with the program. - Limit on net domestic financing was observed. - Monetary growth of less than 2 percent for the first two months of 2004 was slower than programmed. - External debt-service payments were higher than expected, reflecting some arrears clearance; nonpayment could have jeopardized inflows of external assistance. - Delay in receipt of external budget support led to gross international reserves at end-February falling short of the adjusted target by US$8 million. - The ceiling on net domestic assets was exceeded by a small margin. - Inflation and exchange rate: - In March, the 12-month rate of inflation stood at 17.6 percent, marginally above the SMP target of 17.4 percent. - The kwacha exchange rate against the U.S. dollar remained broadly unchanged since end-2003 due to favorable external sector developments, particularly higher copper prices. - Structural reform implementation under the SMP broadly on track: - Budget passed by parliament on April 2 consistent with the SMP. - Government remains committed to containing the wage bill to 8 percent of GDP despite initial public-sector strikes. - A draft bill to grant autonomy to the Office of the Auditor General submitted to cabinet. - Work on a strategy to clear the audited stock of arrears is continuing. - Finalization of plans to resolve insolvent NBFIs with Fund TA is continuing. - Awarding of a contract for procurement of hardware and software for IFMIS appears on track. - All continuous benchmarks have been observed. ### Key Historical and Macroeconomic Data Points (from the report) - Growth averaged about 4 percent per annum since 2000. - In 2002: - Real GDP grew by 3 percent. - Inflation (12 months to December 2002) was 26.7 percent. - Central government overall deficit narrowed to 6.3 percent of GDP from 8.1 percent in 2001. - Current account deficit, after grants, narrowed to 6.5 percent of GDP from 10.8 percent in 2001. - Gross international reserves rose to 2.2 months of imports in 2002 from 0.9 month at end-2001. - In 2003: - Fiscal policy implementation deteriorated sharply due to large wage increases and new housing allowances introduced in April. - Overall fiscal deficit (after grants) and domestic financing are estimated to have exceeded SMP targets by 1½ percent of GDP and 2 percent of GDP, respectively. - Unbudgeted security-related spending and payment of retrenchment benefits and wage arrears of 0.8 percent of GDP facilitated the sale in December of the Luanshya mine. - Expenditures on poverty-reducing projects again fell short of budgeted levels. - Government agreements with some unions reduced earlier housing allowances by two-thirds to contain the wage bill. - Domestic arrears continued to accumulate. *Source: IMF staff report and related statement, April 7, 2004.* ### 4.2 percent, while the 12-month inflation rate of 17.2 percent in December 2003 was the lowest ### _cr04214 - 4.2 percent, while the 12-month inflation rate of 17.2 percent in December 2003 was the lowest ### Macroeconomic performance and outlook - Real GDP increased by 4.2 percent in 2003; this marked the fourth consecutive year of real GDP growth. - Inflation trends: - Consumer prices (end of period) were 17.2 percent in December 2003—the lowest since 1982 and the lowest level in two decades. - Consumer prices (annual average) were 21.5 percent in 2003. - GDP deflator was 20.1 in 2003. - External outcomes: - Current account deficit (after grants) narrowed to 5.9 percent of GDP in 2003. - Overall balance of payments deficit narrowed to 7.6 percent of GDP in 2003. - Nominal effective exchange rate depreciated by 15 percent in 2003. - Real effective exchange rate (annual average) was -1.8 in 2003, reflecting a relatively stable trend since the mid-1990s that supported nontraditional exports. - Gross official reserves (end of period) were 197 million U.S. dollars in 2003 (1.3 months of imports of goods and services). - Monetary and financial indicators: - Broad money increased by 23.4 percent during 2003 (target in the SMP was 17 percent). - Treasury bill rate (in percent; end of period) declined sharply to 18.2 in 2003, from 32.5 in 2002; rates had remained in the range of 30-35 percent for most of the year before falling to around 20 percent in December 2003. - Net domestic assets changed by 32.5 percent of beginning-of-year M2 in 2003. - Stock of domestic debt (end of period) was 21.0 percent of GDP in 2003. ### Drivers and risks - Positive drivers in 2003: - Sharp increase in copper prices and further growth in nontraditional exports. - Recovery in agricultural production following easing of drought conditions. - Risks and fragilities: - Fiscal deterioration driven by overruns in the wage bill and ad hoc spending; nonobservance of SMP targets by wide margins. - Sharp increase in domestic debt and strains on fiscal position. - Economic growth still below potential; macroeconomic stability not yet firmly entrenched. - Implementation weaknesses: incomplete program ownership, limited capacity, lapses in coordination. ### Fiscal performance and policy recommendations - 2003 fiscal outcomes and targets: - Revenue (excluding grants) increased to 26.5 percent (annual change); revenue (excluding grants) as percent of GDP was 18.1 in 2003. - Grants (annual change) were 5.5 percent; grants as percent of GDP contributed to revenue and grants of 25.1 percent of GDP in 2003. - Expenditures (annual change) were 22.5 percent in 2003; expenditures (excluding interest) were 27.3 percent of GDP. - Domestic expenditures (annual change) were 23.9 percent; domestic expenditures as percent of GDP were 21.0 in 2003. - Overall balance, cash basis, was -6.6 percent of GDP in 2003. - Domestic balance, cash basis, was -3.5 percent of GDP in 2003. - Executive Board recommendations and authorities’ commitments: - Expenditure restraint should be the main basis of fiscal adjustment. - Wage bill should be held to 8 percent of GDP as budgeted for 2004 to provide room for priority expenditure; authorities expected the overall wage bill to decline to 8 percent of GDP in 2004 (compared with 8.5 percent in the previous year). - Ensure tight enforcement of commitment control procedures, including sanctions against officials responsible for overspending and unauthorized re-allocation of funds. - Ministry of Finance and National Planning to receive full political backing for strict budget adherence and avoidance of ad hoc spending. - Broadening the base of the value added tax, simplifying its administration, and streamlining exemptions were welcomed measures. ### Monetary policy and financial sector measures - Central bank actions in 2003: - Bank of Zambia lowered cash legal reserve requirements from 17.5 percent to 14 percent in late October 2003 to provide additional liquidity for lending to the agricultural sector and other production sectors. - Introduction of an interbank foreign exchange market. - Completed a draft Financial Sector Development Plan (FSDP). - Progress made toward plans to deal with insolvent nonbank financial institutions. - Board guidance: - Monitor monetary developments closely, particularly in light of the reduction in interest rates, and tighten monetary policy if necessary based on a more ambitious inflation target. - Maintain a flexible exchange rate system. - Prioritize reforms in the Financial Sector Development Plan to address urgent issues such as insolvency of nonbank financial institutions. - Privatization of the Zambia National Commercial Bank considered important for financial sector stability and fiscal sustainability. ### Structural reforms, governance, and private sector - Structural progress and delays: - Medium-term expenditure framework (MTEF) discussed in preparation of the 2004 budget. - Delays in procurement of hardware and software for an integrated financial management and information system (IFMIS) and in the preparation of a multiyear plan for clearing domestic arrears. - Negotiations initiated for sale of 49 percent shares and management rights of the Zambia National Commercial Bank. - Board recommendations: - Accelerate efforts to meet the HIPC Initiative completion point triggers to ensure debt sustainability and poverty reduction. - Strengthen the environment for private sector development and foreign investment: - Consider private sector views when revising the Investment Act, labor legislation, and possibly land legislation. - Complete process of finding a strategic investor in Konkola Copper Mines. - Commercialize the electricity company to enhance efficiency and pre-empt potential strains on the budget. - Continue anti-corruption efforts and enhance transparency and accountability in government operations to improve the climate for private sector activities. - Develop a medium-term strategy to "right-size" government operations and complete pay reform to allow priority poverty-reducing expenditure to increase; work with World Bank and bilateral donors on design of these reforms. ### Assessment of program performance and IMF engagement - Ex Post Assessment conclusions: - Implementation under the ESAF arrangement (approved in 1995) was poor; implementation generally improved under the PRGF arrangement (approved in 1999). - Mixed record indicative of incomplete program ownership, limited capacity, and lapses in coordination. - Directors’ view on future IMF support: - Another PRGF arrangement would help Zambia address challenges in macroeconomic management and structural reform. - An adequate track record of policy implementation and greater ownership of the economic program and the PRSP process will be needed before moving to a PRGF arrangement. - Continued good implementation under the extended SMP for 2004 is crucial for movement to a PRGF arrangement and for reaching the HIPC Initiative completion point. ### Authorities’ statement and 2004 policy framework (Statement by Ismaila Usman, Executive Director for Zambia) - Authorities’ assessment: - Broad agreement with staff recommendations; implementation of the SMP for July–December 2003 was difficult due to unavoidable additional spending and slower-than-expected structural reforms. - Authorities requested extension of the SMP to June 2004 to return the program to the intended adjustment path. - Fiscal policy for 2004: - Major fiscal adjustment effort focused on expenditure reforms to generate domestic primary surpluses, reduce domestic borrowing and interest rates, and preserve macroeconomic stability. - Priority measures: - Contain expenditure and improve allocation of available resources. - Limit the government wage bill and nonpriority spending while increasing priority social expenditures. - No general wage increase in 2004; number of civil servants broadly kept at present level. - Overall wage bill expected to decline to 8 percent of GDP in 2004. - Current expenditures expected to decline from 19.7 percent of GDP in 2003 to 18.7 percent of GDP in 2004. - Poverty-related social outlays expected to increase by 1.1 percentage points of GDP. - Capital expenditures scaled down by 1.2 percentage points of GDP, largely due to cutbacks in foreign assistance. - Strengthen monitoring and control systems: - Finalize a multi-year plan for clearing domestic arrears. - Revise quarterly and monthly expenditure ceilings monthly and subject them to resource availability. - Enforce sanctions for noncompliance with established spending procedures. *Source: IMF staff report and Executive Board discussion as presented in the provided content.* ### 9. As a result of the introduction of several revenue enhancement measures, which are ### _cr04214 - 9. As a result of the introduction of several revenue enhancement measures, which are ### Revenue measures and fiscal consolidation - Revenue is projected to increase to 19 percent of GDP as a result of the introduction of several revenue enhancement measures (fully described in paragraph 17 of the government’s Memorandum of Economic and Financial Policies (MEFP)). - Objective: broaden the tax base and turn the tax system into a more efficient and effective tool to positively impact taxpayer compliance and revenue buoyancy. - Authorities are developing: - a new policy for the granting of tax and other incentives to investors, and - a review of the Export processing Zone Act with a view to protecting revenues from any potential adverse impact of these initiatives. - Fiscal outcome projected: - domestic primary balance shifting from a deficit of 0.7 percent of GDP in 2003 to a surplus of 2.4 percent in 2004. - Characterization: the shift reflects a significant and ambitious consolidation effort. ### Monetary policy, financial intermediation, and rural finance - Monetary policy for 2004: - will remain tight and geared towards ensuring further reduction in inflation and attainment of the international reserves target. - growth of broad money will be limited to about 18 percent through Bank of Zambia’s use of indirect instruments of monetary control. - Expected effects: - envisaged reduction in the government’s reliance on financing from the banking system will provide room for a significant increase in credit to the private sector. - Financial deepening and access to finance: - efforts to deepen financial intermediation and increase access to financing for private sector activities (including farmers and small-scale entrepreneurs) need to be pursued. - authorities are concerned with the absence of viable and sustainable financial services for the majority of the rural population effectively involved in agricultural production but lacking financial support. - authorities will welcome advice and assistance from the Fund and the World Bank to design a meaningful but sustainable method of financing this segment to boost growth prospects in agriculture, critical for preventing food shortages and increases in poverty levels. ### Interest rates, banking competition, and exchange rate policy - High commercial lending rates are a major concern due to negative impacts on economic growth and diversification. - Authorities expect that: - significant reduction in domestic borrowing requirements and increased competition in the banking system following the partial sale of the Zambia National Commercial Bank (ZNCB) to a private investor will help ease pressures on interest rates. - Exchange rate policy: - the exchange rate will continue to be determined by market forces. - the central bank’s intervention in the foreign exchange market will be limited to smoothing short-term fluctuations and meeting the international reserves target. ### Structural reform agenda - Objective: further reduce the government’s role in the economy by assigning a more prominent role to private sector activity to promote economic growth, diversification, and improve allocative efficiency. - Actions being taken include: - strengthening public expenditure management, - addressing weaknesses in the financial system to improve efficiency, soundness, and competitiveness of the banking sector, - taking necessary steps to finalize the commercialization of the electricity utility, ZESCO, - reviewing key land, labor, and investment regulations to improve the legal environment for private sector activities. ### External outlook, debt overhang, and program implementation - External situation: - expected to strengthen over the medium-term with support from tighter financial policies and stronger export performance, particularly of the copper sector but also of nonmining sectors. - authorities recognize that this outlook could be undermined by a possible decline in copper prices. - Trade regime: Zambia’s trade regime remains among the least restrictive. - Debt overhang: - Zambia’s large external debt overhang remains a serious impediment to more rapid growth and sustainable poverty reduction. - Program implementation and realism: - authorities are strongly determined to implement the ambitious financial policies and structural reforms outlined in the revised SMP, hoping it would lead to a new PRGF arrangement. - the ex-post assessment references a mixed record of implementation of policies and reforms and recognizes that too optimistic and even overambitious program targets may be reasons behind some policy slippages. - recommendation: more realistic program assumptions consistent with the country’s human and financial capacity would be a more advisable approach and increase chances of successful implementation. ### PRGF, donor support, and HIPC timing - Early consideration of the new PRGF is critical to: - help catalyze adequate external donor support to assist Zambia in meeting its poverty reduction goals, and - pave the way towards reaching the completion point under the HIPC Initiative preferably before end-2004, which will enable the authorities to meet the large debt-service obligations due to the Fund in 2005. - The success of reform efforts and fight against poverty will largely depend on the timely availability of external financial resources including effective debt relief. - Authorities have reiterated their strong resolve to stay the course of reform. *Source: IMF staff summary as provided in the supplied content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04214.pdf_