## IMF staff assessment of Zambia’s Fifth National Development Plan (FNDP) for 2006–10

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---

### Overview and objectives
- FNDP guided by the National Vision 2030 (NV2030) with the goal to transform Zambia into “a prosperous middle-income country by the year 2030.”
- Theme: “broad-based wealth and job creation through citizenry participation and technological advancement.”
- Focus areas: “economic infrastructure and human resources development.”
- Overarching objective: accelerate growth to an average of at least 7 percent per year.
- Related goals:
  - broaden sources of growth to enhance poverty-reducing impact;
  - maintain fiscal and financial stability;
  - deepen structural reforms;
  - implement Private Sector Development (PSD) program, Financial Sector Development Plan (FSDP), and National Agriculture Policy;
  - accelerate infrastructure investments.

### Participatory process
- Preparation was highly participatory, involving civil society, cooperating partners, the private sector, permanent secretaries, members of parliament and the cabinet.
- Consultations integrated the views of 21 Sector Advisory Working Groups (SAGs).
- Preparation included 72 district development plans approved by respective Provincial and District Development Coordinating Committees.
- Result: FNDP has a high degree of ownership compared to the previous PRSP.

### Poverty analysis — key statistics and observations
- Key statistics:
  - National incidence of poverty fell from 73 percent to 68 percent between 1998 and 2004.
  - Extreme poverty (population living below US$1 per day) fell from 58 percent to 53 percent between 1998 and 2004.
  - Gini coefficient was 0.57 in 2004, down from 0.66 in 1998.
- Observations:
  - Poverty is more pronounced in rural areas.
  - Significant gender gap persists.
  - Non-income aspects of poverty discussed less comprehensively.
  - Need for better quality and timely poverty data; latest available poverty data are for 2004.

### Macroeconomic policy framework and financing scenarios
- Recent improvements: stronger macroeconomic performance and progress in public expenditure management.
- Constraints noted:
  - Fiscal and monetary policy at times fell short of objectives.
  - Inadequate instruments to mop up excess liquidity.
  - Bank of Zambia limited operational autonomy.
  - Lack of coordination of fiscal and monetary policies hampered liquidity management.
- Debt and borrowing:
  - HIPC Initiative and MDRI external debt relief reduced debt service payments, providing scope for additional poverty-reducing spending.
  - FNDP supports containment of domestic debt and public resources spent on debt service.
  - External borrowing to continue on highly concessional terms consistent with repayment capacity.
  - Staffs support formulation of a comprehensive debt management strategy.
- Monetary policy objective:
  - achieve and maintain single-digit inflation during the period of the plan.
- Fiscal policy priorities:
  - Improve budget execution.
  - Strengthen financial accountability and expenditure monitoring.
  - Enhance revenue base; broaden tax base and rationalize tax rates as guiding principles.
  - Concern: 2007 budget’s wide-ranging tax incentives for investment appear inconsistent with tax-broadening principles and could jeopardize FNDP medium-term resource envelope targets.
- Risk assessment:
  - FNDP identifies failure of scaling up aid as a particular risk.
  - Staffs note insufficient specificity on other risks such as a sharp fall in copper prices and drought.
  - Emphasis on diversifying production base considered appropriate to address key risks.
- Financing gap and scenarios:
  - Baseline scenario (continuation of existing tax policies and donor financing according to existing commitments) shows a financing gap of about 5 percent of the FNDP’s total cost or 1.4 percent of GDP per year.
  - Resource gap under a growth scenario aligned with MDG attainment would be substantially higher.
  - Government has taken steps to increase domestic tax revenues by reforming the fiscal regime of the mining sector, but revenue impact over the FNDP period remains uncertain.
  - Staffs recommend seeking assurances from cooperating partners on their ability to scale up aid and proceed expeditiously with proposed mining fiscal regime changes.
  - Note: More ambitious projections and alternative scenarios are presented elsewhere in the FNDP (an alternative scenario contains more ambitious growth and medium-term resource envelope projections).

### Policies for growth and investment
- Growth-poverty linkage:
  - Past growth concentrated in urban-based, capital-intensive sectors (mining, wholesale and retail trade, construction) with limited pro-poor impact.
  - FNDP major focus: sectors with direct pro-poor impact — rural development, agriculture, tourism, manufacturing.
- Environment and natural resources:
  - FNDP recognizes causes of environmental and natural resource degradation but analysis of solutions could be strengthened.
  - Recommendation: mainstream sustainable development across line ministries and collect information on natural resource management and environmental degradation.
- Agriculture and MTEF budgeting:
  - FNDP aims to increase agriculture budget share from 5 percent in 2006 to 9 percent in 2010.
  - Concern: planned spending increase may not sufficiently target programs that improve productivity (agricultural research, technological and irrigation development, diversification of staple and cash crops).
  - Subsidized fertilizer support program absorbs significant resources, reaches less than 10 percent of intended beneficiaries (small-scale farmers), and crowds out more sustainable productivity-enhancing programs.
- Infrastructure and utilities:
  - Poor physical infrastructure (roads, electricity, irrigation, water and sanitation) is a major bottleneck to private sector development.
  - Advice: upgrade and expand rail, energy infrastructure, and telecommunications to reduce business costs.
  - Public private partnerships identified as important; tariffs in many utility sectors do not cover full costs or distort competitiveness.
  - Arrears between government agencies and utilities continue to cause difficulties.
  - Staffs urge Government to pay bills on time and rebalance utility tariffs to reflect full cost, attract investors, increase access to electricity and water and sanitation, and improve competitiveness.
- PSD and FSDP implementation challenges:
  - PSD and FSDP articulate key measures but implementation has been slow.
  - Specific issues:
    - Ease of trading across borders ranks in bottom deciles of “Doing Business” indicators.
    - License fee for an international telecommunications gateway remains prohibitively high.
    - Resolution of insolvent nonbank financial institutions has faced repeated delays.
    - Access to financing system is low, with fewer that 15 percent of Zambians holding a bank account.
  - Staffs concur that improved implementation of PSD and FSDP is essential.
- Mining sector:
  - Mining has driven development for over 70 years.
  - FNDP discusses constraints to large and small-scale mining and need to improve domestic backward and forward linkages.
  - Government steps to reform mining fiscal regime commended, but staffs advocate inclusion of an additional revenue-sharing mechanism to capture a higher share of mineral rents during periods of abnormally high international prices; such a device is not part of proposed reforms.
  - With expected fiscal gains from the copper export boom, authorities urged to ensure transparent management of resources.
  - Zambia’s intention to join the Extractive Industry Transparency Initiative is welcomed as a step toward verification and publication of company payments and government revenues.

### Human development and service delivery
- Rationale:
  - Spending on health and education is important for sustainable growth given high incidence of Malaria, high prevalence rates of HIV/AIDS, and a shortage of skilled manpower.
- Education:
  - Achievements: increased enrolment and better gender balance in basic education.
  - Challenges:
    - Quality of education needs further improvement.
    - Secondary and tertiary education have not been priorities; little investment in last 30 years.
    - Low transition rates between educational levels.
    - FNDP places a premium on skills development, but implementation may be difficult due to resource constraints.
    - Recommendation: formulate sub-sector specific objectives, strategies and targets for better alignment of resources.
- Health:
  - Progress in health indicators stagnant under previous PRSP.
  - FNDP highlights a human resources crisis in health sector but strategy focuses heavily on numbers and training.
  - Staffs note public expenditure tracking survey shows gains possible by improving productivity of health workers and addressing tardiness and absenteeism.
  - Availability of essential drugs and medical supplies hampered by poor timing of funds for procurement, lack of consumption data, and fragmented supply chain management leading to poor forecasting and stock outs.
  - Recommendation: stronger collaboration between Ministry of Health and Ministry of Finance and National Planning on budget planning and procurement; implement logistic management information system and capacity building at district level.
  - Capital asset deficiencies urgent: less than half of Regional Hospital Centers (RHCs) have an electric connection; nonfunctional utilities and transport equipment erode access; many hospitals lack appropriate medical equipment.
- Disease control:
  - Zambia is among the countries worst affected by malaria and HIV/AIDS.
  - Programs strongly focused on increasing access to drug treatment; staffs recommend continued and expanded prevention efforts and direct community involvement in prevention, treatment, and care.
- Gender mainstreaming:
  - Implementation of national gender policy (adopted 2000) has been limited.
  - Illiteracy: women 75 percent vs. men 65 percent.
  - Strategic action plan (2005) developed; cabinet office coordinating, monitoring and evaluating activities; institutional structures added in line ministries and at district and provincial levels.
  - Staffs recommend stronger accountability mechanisms for gender equality promotion and measures to strengthen collection of gender-specific economic data.

### Governance priorities, reforms, and decentralization
- FNDP governance priority: improve and institutionalize political, administrative, financial, and budgetary transparency and accountability in all priority sectors and programs.
- Governance goals include:
  - improving access to justice;
  - upholding human rights;
  - improving the management of free and fair elections;
  - strengthening collaboration and cooperation among governance institutions;
  - improving the National Assembly’s oversight role over the Government;
  - enhancing constitutionalism and rule of law;
  - institutionalizing anti-corruption programs in all public institutions by 2010.
- Staffs commend recent successes in the fight against corruption, as witnessed by the positive conclusions of the Zamtrop and Bulaya cases.
- Staffs encourage adoption of the National Anti-Corruption Policy and Strategy and resolution of the future of the Task Force on Corruption.

### Constitutional reform, implementation, monitoring, and evaluation
- Constitutional reform:
  - Republican Constitution currently undergoing review and expected to be finalized during the plan period.
  - Certain proposed amendments appear uncontroversial, including putting the public sector pension fund on sound financial footing and changing the budget cycle to allow for parliamentary approval of the budget before the start of its fiscal year.
  - Staffs recommend finding ways, if possible, to de-link these important revisions from the wider constitutional reform process.
- Governance-related reform initiatives under implementation:
  - Public Expenditure and Financial Management Reform Program (PEMFA);
  - Public Service Management (PSM);
  - Local Government Development Program (LGDP).
- Decentralization:
  - Government has finalized its decentralization policy and efforts are underway to design an inter-governmental fiscal architecture (IFA) to effect fiscal decentralization.
  - Staffs encourage accelerated implementation of ongoing reforms to strengthen institutional capacity.
- Monitoring and evaluation:
  - FNDP is a results-based strategy but its KPI tables are not clearly linked to its poverty-impact indicators.
  - Creation of the Monitoring and Evaluation Unit under PEMD seeks to institutionalize a system to monitor inputs, outputs, outcomes, and impacts.
  - Monitoring system will include process indicators at macro and sectoral levels and link to the performance assessment framework (PAF) used in direct budget support.
  - Staffs urge the Government to finalize the monitoring and evaluation system as soon as possible.
- Planning Division role:
  - Newly created Planning Division (PEMD) of the Ministry of Finance will be focal point for institutional linkages and to institutionalize five year development planning as the means to guide the budget preparation process.
  - Staffs recommend review of existing regulatory and legislative systems for planning and budgeting, including the role of parliament and coordination between Cabinet Office and the Ministry of Finance and National Planning.

### Conclusions, priority actions, and risks
- Staffs consider the FNDP broadly provides a comprehensive framework for growth and poverty reduction in Zambia.
- Resource constraint caveat:
  - Without a scaling up of donor assistance, and/or inability to raise domestic revenues, there will be a significant shortfall of resources to implement the plan.
  - The Government should continue to base its MTEF and subsequently its annual budget on realistic financing assumptions.
- Areas for Government focus to improve implementation capacity:
  (i) putting in place a more efficient, productive, and equitable tax system covering all sectors;
  (ii) consistently using the FNDP to guide expenditure allocations;
  (iii) improving its capacity to evaluate the effectiveness and efficiency of expenditure programs to rank programs by impact on growth and poverty reduction;
  (iv) improving incentives to service delivery at all levels of government;
  (v) speeding up implementation of reforms in the Private Sector Development initiative to improve Zambia’s competitiveness;
  (vi) rebalancing utility tariffs such that they cover all costs in conjunction with putting in place a framework for Public Private Partnership to assist with resource mobilization.
- Risks and financing:
  - Main risks: lower-than-expected economic growth and shortfalls of external financing.
  - Macroeconomic stability and growth could come under pressure from volatility in the world market price for copper.
  - Lack of tangible progress in improving Zambia’s investment climate could endanger diversification and reduce investments in productivity enhancing activities.
  - FNDP’s baseline financing scenario contains a significant financing gap expected to be filled by a combination of higher domestic tax revenues and larger external inflows.
  - Maintenance of sound macroeconomic policies and continued implementation of economic reforms are key to attracting larger donor inflows.
  - Government and cooperating partners have embarked on a harmonization agenda; continued commitment to the Joint Assistance Strategy for Zambia (JASZ) will be important to improve aid coordination and effectiveness.

### Questions for Directors
- Do Directors concur with the areas identified by staffs as key for sustaining growth and reducing poverty, particularly the need to implement PSD and agriculture related reforms, improve infrastructure, and address the human resource crisis in the social sectors?
- Do Directors concur with the areas identified by staffs as key for strengthening implementation of the FNDP, particularly by increasing domestic tax revenue, and improving the efficient use of public resources, while strengthening the incentives for public service delivery, and managing the difficulties posed by capacity weaknesses, governance, and natural resource dependency?

*IMF staff assessment of Zambia’s Fifth National Development Plan (FNDP) for 2006–10, as presented in the supplied chapter.*

### 1.      The Government of the Republic of Zambia has officially launched its second

### The Government of the Republic of Zambia has officially launched its second Poverty Reduction Strategy Paper, known as the Fifth National Development Plan (FNDP) for the period 2006–10

### Overview and objectives
- The FNDP is guided by the National Vision 2030 (NV2030) with the goal to transform Zambia into “a prosperous middle-income country by the year 2030.”
- Theme: “broad-based wealth and job creation through citizenry participation and technological advancement.”
- Focus areas: “economic infrastructure and human resources development.”
- Overarching objective: accelerate growth to an average of at least 7 percent per year.
- Related goals: broaden sources of growth to enhance poverty-reducing impact; maintain fiscal and financial stability; deepen structural reforms; implement Private Sector Development (PSD) program, Financial Sector Development Plan (FSDP), and National Agriculture Policy; accelerate infrastructure investments.

### Participatory process
- Preparation was highly participatory, involving civil society, cooperating partners, the private sector, permanent secretaries, members of parliament and the cabinet.
- Consultations integrated the views of 21 Sector Advisory Working Groups (SAGs).
- Preparation included 72 district development plans approved by respective Provincial and District Development Coordinating Committees.
- Result: FNDP has a high degree of ownership compared to the previous PRSP.

### Poverty analysis
- FNDP acknowledges high poverty despite PRSP and positive growth since 1999.
- Key statistics (preserve exact figures):
  - National incidence of poverty fell from 73 percent to 68 percent between 1998 and 2004.
  - Extreme poverty (population living below US$1 per day) fell from 58 percent to 53 percent between 1998 and 2004.
  - Gini coefficient was 0.57 in 2004, down from 0.66 in 1998.
- Observations:
  - Poverty is more pronounced in rural areas.
  - Significant gender gap persists.
  - Non-income aspects of poverty discussed less comprehensively.
  - Need for better quality and timely poverty data; latest available poverty data are for 2004.

### Achieving the goals of the FNDP — Macroeconomic policy framework and financing scenarios
- Recent improvements: stronger macroeconomic performance and progress in public expenditure management.
- Constraints noted:
  - Fiscal and monetary policy at times fell short of objectives.
  - Inadequate instruments to mop up excess liquidity.
  - Bank of Zambia limited operational autonomy.
  - Lack of coordination of fiscal and monetary policies hampered liquidity management.
- Debt and borrowing:
  - HIPC Initiative and MDRI external debt relief reduced debt service payments, providing scope for additional poverty-reducing spending.
  - FNDP supports containment of domestic debt and public resources spent on debt service.
  - External borrowing to continue on highly concessional terms consistent with repayment capacity.
  - Staffs support formulation of a comprehensive debt management strategy.
- Monetary policy objective: achieve and maintain single-digit inflation during the period of the plan.
- Fiscal policy priorities:
  - Improve budget execution.
  - Strengthen financial accountability and expenditure monitoring.
  - Enhance revenue base; broaden tax base and rationalize tax rates as guiding principles.
  - Concern: 2007 budget’s wide-ranging tax incentives for investment appear inconsistent with tax-broadening principles and could jeopardize FNDP medium-term resource envelope targets.
- Risk assessment:
  - FNDP identifies failure of scaling up aid as a particular risk.
  - Staffs note insufficient specificity on other risks such as a sharp fall in copper prices and drought.
  - Emphasis on diversifying production base considered appropriate to address key risks.
- Financing gap:
  - Baseline scenario (continuation of existing tax policies and donor financing according to existing commitments) shows a financing gap of about 5 percent of the FNDP’s total cost or 1.4 percent of GDP per year.
  - Resource gap under a growth scenario aligned with MDG attainment would be substantially higher.
  - Government has taken steps to increase domestic tax revenues by reforming the fiscal regime of the mining sector, but revenue impact over the FNDP period remains uncertain.
  - Staffs recommend seeking assurances from cooperating partners on their ability to scale up aid and proceed expeditiously with proposed mining fiscal regime changes.
- Note: More ambitious projections and alternative scenarios are presented elsewhere in the FNDP (an alternative scenario contains more ambitious growth and medium-term resource envelope projections).

### Policies for growth and investment
- Growth-poverty linkage:
  - Past growth concentrated in urban-based, capital-intensive sectors (mining, wholesale and retail trade, construction) with limited pro-poor impact.
  - FNDP major focus: sectors with direct pro-poor impact — rural development, agriculture, tourism, manufacturing.
- Environment and natural resources:
  - FNDP recognizes causes of environmental and natural resource degradation but analysis of solutions could be strengthened.
  - Recommendation: mainstream sustainable development across line ministries and collect information on natural resource management and environmental degradation.
- Agriculture and MTEF budgeting:
  - FNDP aims to increase agriculture budget share from 5 percent in 2006 to 9 percent in 2010.
  - Concern: planned spending increase may not sufficiently target programs that improve productivity (agricultural research, technological and irrigation development, diversification of staple and cash crops).
  - Subsidized fertilizer support program absorbs significant resources, reaches less than 10 percent of intended beneficiaries (small-scale farmers), and crowds out more sustainable productivity-enhancing programs.
- Infrastructure and utilities:
  - Poor physical infrastructure (roads, electricity, irrigation, water and sanitation) is a major bottleneck to private sector development.
  - Advice: upgrade and expand rail, energy infrastructure, and telecommunications to reduce business costs.
  - Public private partnerships identified as important; tariffs in many utility sectors do not cover full costs or distort competitiveness.
  - Arrears between government agencies and utilities continue to cause difficulties.
  - Staffs urge Government to pay bills on time and rebalance utility tariffs to reflect full cost, attract investors, increase access to electricity and water and sanitation, and improve competitiveness.
- PSD and FSDP implementation challenges:
  - PSD and FSDP articulate key measures but implementation has been slow.
  - Specific issues:
    - Ease of trading across borders ranks in bottom deciles of “Doing Business” indicators.
    - License fee for an international telecommunications gateway remains prohibitively high.
    - Resolution of insolvent nonbank financial institutions has faced repeated delays.
    - Access to financing system is low, with fewer that 15 percent of Zambians holding a bank account.
  - Staffs concur that improved implementation of PSD and FSDP is essential.
- Mining sector:
  - Mining has driven development for over 70 years.
  - FNDP discusses constraints to large and small-scale mining and need to improve domestic backward and forward linkages.
  - Government steps to reform mining fiscal regime commended, but staffs advocate inclusion of an additional revenue-sharing mechanism to capture a higher share of mineral rents during periods of abnormally high international prices; such a device is not part of proposed reforms.
  - With expected fiscal gains from the copper export boom, authorities urged to ensure transparent management of resources.
  - Zambia’s intention to join the Extractive Industry Transparency Initiative is welcomed as a step toward verification and publication of company payments and government revenues.

### Human development and service delivery
- Rationale:
  - Spending on health and education is important for sustainable growth given high incidence of Malaria, high prevalence rates of HIV/AIDS, and a shortage of skilled manpower.
- Education:
  - Achievements: increased enrolment and better gender balance in basic education.
  - Challenges:
    - Quality of education needs further improvement.
    - Secondary and tertiary education have not been priorities; little investment in last 30 years.
    - Low transition rates between educational levels.
    - FNDP places a premium on skills development, but implementation may be difficult due to resource constraints.
    - Recommendation: formulate sub-sector specific objectives, strategies and targets for better alignment of resources.
- Health:
  - Progress in health indicators stagnant under previous PRSP.
  - FNDP highlights a human resources crisis in health sector but strategy focuses heavily on numbers and training.
  - Staffs note public expenditure tracking survey shows gains possible by improving productivity of health workers and addressing tardiness and absenteeism.
  - Availability of essential drugs and medical supplies hampered by poor timing of funds for procurement, lack of consumption data, and fragmented supply chain management leading to poor forecasting and stock outs.
  - Recommendation: stronger collaboration between Ministry of Health and Ministry of Finance and National Planning on budget planning and procurement; implement logistic management information system and capacity building at district level.
  - Capital asset deficiencies urgent: less than half of Regional Hospital Centers (RHCs) have an electric connection; nonfunctional utilities and transport equipment erode access; many hospitals lack appropriate medical equipment.
- Disease control:
  - Zambia is among the countries worst affected by malaria and HIV/AIDS.
  - Programs strongly focused on increasing access to drug treatment; staffs recommend continued and expanded prevention efforts and direct community involvement in prevention, treatment, and care.
- Gender mainstreaming:
  - Implementation of national gender policy (adopted 2000) has been limited.
  - Illiteracy: women 75 percent vs. men 65 percent.
  - Strategic action plan (2005) developed; cabinet office coordinating, monitoring and evaluating activities; institutional structures added in line ministries and at district and provincial levels.
  - Staffs recommend stronger accountability mechanisms for gender equality promotion and measures to strengthen collection of gender-specific economic data.

*IMF staff assessment of Zambia’s Fifth National Development Plan (FNDP) for 2006–10, as presented in the supplied chapter.*

### 24.      The FNDP’s governance priority is to improve and institutionalize political,

### 24.      The FNDP’s governance priority is to improve and institutionalize political,

### Governance priorities and progress
- FNDP governance priority: improve and institutionalize political, administrative, financial, and budgetary transparency and accountability in all priority sectors and programs.
- FNDP governance goals include:
  - improving access to justice;
  - upholding human rights;
  - improving the management of free and fair elections;
  - strengthening collaboration and cooperation among governance institutions;
  - improving the National Assembly’s oversight role over the Government;
  - enhancing constitutionalism and rule of law;
  - institutionalizing anti-corruption programs in all public institutions by 2010.
- Staffs commend the authorities for recent successes in the fight against corruption, as witnessed by the positive conclusions of the Zamtrop and Bulaya cases.
- Staffs encourage adoption of the National Anti-Corruption Policy and Strategy and resolution of the future of the Task Force on Corruption as important signals of commitment to fight corruption.

### Constitutional reform
- The Republican Constitution is currently undergoing review and is expected to be finalized during the plan period.
- Certain proposed amendments appear uncontroversial, including:
  - amendments that would put the public sector pension fund on sound financial footing; and
  - the amendment to change the budget cycle to allow for parliamentary approval of the budget before the start of its fiscal year.
- Staffs recommend finding ways, if possible, to de-link these important revisions from the wider constitutional reform process, which could take several years.

### Governance-related reform initiatives and decentralization
- Most governance-related reform initiatives have progressed beyond planning and are under implementation, including:
  - Public Expenditure and Financial Management Reform Program (PEMFA);
  - Public Service Management (PSM);
  - Local Government Development Program (LGDP).
- The Government has finalized its decentralization policy and efforts are underway to design an inter-governmental fiscal architecture (IFA) to effect fiscal decentralization.
- Staffs encourage accelerated implementation of ongoing reforms, particularly those that strengthen institutional capacity, as critical to successful FNDP implementation.

### Implementation, monitoring, and evaluation (institutional frameworks)
- The FNDP acknowledges and prioritizes institutional frameworks for implementation, monitoring, and evaluation.
- The newly created Planning Division (PEMD) of the Ministry of Finance will be the focal point for institutional linkages and to institutionalize five year development planning as the means to guide the budget preparation process.
- Staffs recommend that the Government review existing regulatory and legislative systems for planning and budgeting to streamline the process, including:
  - the role of parliament in the planning and budget processes; and
  - coordination between Cabinet Office and the Ministry of Finance and National Planning.

### Monitoring and evaluation system issues
- FNDP is a results-based strategy focusing on agreed targets and results, but its key performance indicators (KPI) tables are not clearly linked to its poverty-impact indicators.
- With the formal creation of the Monitoring and Evaluation Unit under PEMD during the implementation of the first PRSP, the Plan seeks to institutionalize a system to monitor inputs, outputs, outcomes, and impacts so resources are strategically managed and progress tracked.
- The monitoring system will include process indicators related to FNDP implementation at both macro and sectoral levels and will be closely linked to the performance assessment framework (PAF) currently used in the context of direct budget support.
- Staffs urge the Government to finalize the monitoring and evaluation system as soon as possible.

### Conclusions, resource constraints, and priority actions
- Staffs consider the FNDP broadly provides a comprehensive framework for growth and poverty reduction in Zambia.
- Without a scaling up of donor assistance, and/or inability to raise domestic revenues, there will be a significant shortfall of resources to implement the plan.
- The Government should continue to base its MTEF and subsequently its annual budget on realistic financing assumptions.
- Areas the Government should focus on to improve ability to implement the FNDP:
  (i) putting in place a more efficient, productive, and equitable tax system covering all sectors;
  (ii) consistently using the FNDP to guide expenditure allocations;
  (iii) improving its capacity to evaluate the effectiveness and efficiency of expenditure programs as a means to be able to rank new and ongoing expenditure programs by their impact on growth and poverty reduction;
  (iv) improving incentives to service delivery at all levels of government;
  (v) speeding up the implementation of the reforms in the Private Sector Development initiative to improve Zambia’s competitiveness;
  (vi) rebalancing utility tariffs such that they cover all costs in conjunction with putting in place a framework for Public Private Partnership that could assist with the needed resource mobilization.

### Risks and financing
- Main risks: lower-than-expected economic growth and shortfalls of external financing.
- Macroeconomic stability and growth could come under pressure from volatility in the world market price for copper.
- Lack of tangible progress in improving Zambia’s investment climate could endanger diversification and reduce investments in productivity enhancing activities.
- The FNDP’s baseline financing scenario contains a significant financing gap expected to be filled by a combination of higher domestic tax revenues and larger external inflows.
- Maintenance of sound macroeconomic policies and continued implementation of economic reforms are key to attracting larger donor inflows.
- Government and cooperating partners have embarked on a harmonization agenda; continued commitment by all partners to the agreed processes in the Joint Assistance Strategy for Zambia (JASZ) will be important to improve aid coordination and effectiveness.

### Questions for Directors (for discussion)
- Do Directors concur with the areas identified by staffs as key for sustaining growth and reducing poverty, particularly the need to implement PSD and agriculture related reforms, improve infrastructure, and address the human resource crisis in the social sectors?
- Do Directors concur with the areas identified by staffs as key for strengthening implementation of the FNDP, particularly by increasing domestic tax revenue, and improving the efficient use of public resources, while strengthening the incentives for public service delivery, and managing the difficulties posed by capacity weaknesses, governance, and natural resource dependency?

*Source: _cr07277 - 24.      The FNDP’s governance priority is to improve and institutionalize political,*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07277.pdf_