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         Zambia: Country Assistance Review
  

Introduction

1. Bank assistance to Zambia during the eighties and nineties was characterized by the predominance of adjustment lending, which accounted for over 60 percent of commitments and nearly 80 percent of disbursements-substantially higher than it did in Kenya, Malawi, Tanzania, Uganda and Zimbabwe. Yet Zambia has not been an outstanding case among adjusting countries. The Bank's assistance was marked by frequent interruptions. disbursements were suspended, because of the accumulation of arrears, in 1983, in 1987 for an extended period of nearly three years, and in 199 1. Zambia has gone from being an IBRD borrower to a blend country, to an IDA only borrower. It received its first IDA credit in 1978 and has been an IDA only country since 1984.

2. The general conclusion of this evaluation is that, given the nature of Zambia's problems and the governments wavering commitment to reform in the 1980s, there was too much emphasis on policy-based operations, and too much emphasis within policy-based operations on stabilization rather than on long term structural adjustment. A more balanced approach, with a higher share (of a smaller total) going to physical and social infrastructure would have been desirable. Since the election in 1991 of a new govenunent more committed to reform, structural adjustment lending has helped bring inflation under control, while permitting the restoration of discipline in debt management. But privatization, diversification of production, rehabilitation of economic infrastructure and improvement in social services, are taking longer to achieve. Sustainability of the reforms is also an issue, particularly in a pre-election period.

3. Despite improving economic policies in the 1990s, Zambia's economic performance remains poor. The 1994 Consultative Group report noted that "deepening poverty in Zambia is reflected in the deterioration in nearly every major social indicator. " Per capita income has fallen almost continually since 1973; poverty has increased to the point where in 1994 some 70 percent of the population lived in households where basic needs are not being met; and life expectancy decreased from 53 years in 1987 to 48 years in 1992.

4. The prolonged suspension of lending between 1987 and 199 1, required by Zambia's arrears to the Bank, had a negative impact on many projects, ongoing at the time. Moreover, a rich program of ESW was considerably reduced, adversely affecting the ESW basis of Bank operations after the suspension was lifted. The conclusion drawn from this episode is that some of the negative consequences from prolonged suspensions can be avoided with appropriate actions during the suspension, and that this can increase the efficacy of the Bank's assistance.

Bank Assistance Strategy

5 The Bank strategy evolved through the following stages:

- Before 1980: the Bank shared Zambia's optimism regarding copper and was uncritical of the Zambian industrial development strategy; - 1980-82:the Bank started to base its strategy on its own diagnosis of the Zambian development problem, a diagnosis which saw the need to reduce dependence on copper, liberalize controls over trade and markets, and reduce public sector dominance in manufacturing, and in financial and other services;

- 1983-86 : Bank support for Zambia's intermittent reform efforts was mainly in the form of structural adjustment and sector adjustment credits focused on stabilizing the economy;

- 1987-90 :in response to Zambia's accumulation of arrears (and abandonment of the adjustment program) the Bank suspended disbursements to Zambia but continued its dialogue with the government to try to get the program back on track;

- 1991 : the Bank helped clear arrears through an innovative strategy and resumed lending to Zambia despite the risk that with impending elections the government would not meet conditions;

- 1991-94 :Bank strategy emphasized adjustment lending in support of Zambian stabilization efforts and debt servicing; and

- 1994 and after: Bank strategy increased its to focus on growth and poverty alleviation, with increasing emphasis on privatization and sectoral investment programs.

6. Early in 1994, the emphasis of Bank assistance strategy shifted toward assisting Zambia in achieving sustainable economic growth and reducing poverty. The strategy also emphasized the new concern in the Region to undertake participatory assessments of Bank projects through systematic client consultation. This is to foster greater local design of sectoral strategies and investment programs, and maximum government and beneficiary involvement and ownership to ensure the sustainability of development impact. While accepting the need to continue support for structural adjustment and to help close the massive financing gap, greater priority was given to improving the enabling environment for private sector growth through investments in infrastructure and human resources and to targeting the poor and vulnerable groups with specific programs in agriculture and social services.

7. Bank strategy in the late nineties is planned around the integrated sector investment operation. The Bank is fully aware of the importance of the bilateral donor community and of the IMP need to continue improving coordination of aid activities to more effectively serve the country. The Agricultural Sector Investment Program and Health Sector Support Project were born of this approach. With the support of the donor community and the diligence of the government these pilot programs hold good promise but they will need close monitoring and attention to aid coordination.

Evaluation of the Bank's Assistance Strategy in Zambia

Overview

8. The evaluation of the Bank's assistance strategy in Zambia during 1983-95 may be summed up in the following statements:

- Bank assistance strategy has been less relevant to the country's long term development than it could have been if it had followed more closely the Bank's excellent diagnosis of Zambia's development problems and prospects. Instead, the strategy overestimated the government's willingness to reform and focused too narrowly on immediate output expansion and price stability, rather than on privatization, policy adjustments for private producers and rehabilitation of economic and social infrastructure. Particularly during the 1980s, long-ten-n relevance was compromised by the nearly exclusive pursuit of short-term stabilization objectives, which remained elusive.

- The efficacy of Bank assistance was poor in the 1980s and higher after 1991 when a government more committed to the reforms has been in office. Bank assistance has not helped Zambia to establish a trend of positive GDP growth, much less positive per capita income growth; poverty has increased and social indicators have deteriorated. During the 1980s, the efficacy of the Bank's assistance suffered from the vacillation in application of reforms by the Kaunda government. Under the Chiluba government, reforms supported by IDA lending helped to drastically reduce inflation and to return interest rates to more normal levels, thereby rewarding the government's steadfast commitment to the reform program. But sustainability of the reforms remains an important issue.

- Judging from the staffyear resources devoted to client services, the Bank's assistance to Zambia has been conducted with greater efficiency since 1991 than the average for the Africa region. This has been due partly to the predominance of policy-based lending with its shorter gestation time, and partly to the commitment of the government in Zambia to implement agreed reforms. The Bank strategy during the eighties must also be judged as inefficient because of the limited permanent improvements in the policy environment which were achieved.

9. Greater relevance and efficacy of Bank assistance in the future require that the Bank be more realistic in its outlook for Zambian recovery; acknowledge that the political situation may not always be favorable to development; pay more attention to human and infrastructure constraints, consider that international aid may well decline now that Zambia is no longer a "front-line state," and recognize that the deterioration in Zambia's infrastructure after years of neglected maintenance and under-investment, skill deficiencies, and the slow pace of institutional change will all militate against quick recovery.

10. In retrospect, the focus of Bank assistance on structural adjustment lending in the mid eighties, though relevant to Zambia's need, was over-optimistic concerning the commitment of the government to stay the course. Moreover, the need for coordination among individual operations within the adjustment support group did not receive enough attention at design stage.

11. The suspension of disbursements as a result of Zambia's arrears also had a negative impact of the ongoing portfolio that could have been reduced with appropriate complementary measures. Thus, a lesson of experience is that suspensions of disbursement should be factored in within the Bank's assistance strategy, and the CAS should include provisions to mitigate the effects on the efficacy of Bank operations when suspensions take place (see para. 22 below).

12. The following paragraphs discuss in more detail the assessment of the Bank's assistance strategy.

Liberalization Overshadowed by Stabilization Concerns

13. During the 1980s the stabilization concern was primarily that of recovery in the level of industrial output. In 198 1, the Bank saw the risk of continued dependence on copper and counseled structural adjustment to reduce dependence on this single export and to develop other non-traditional exports and efficient import substitution in the agricultural and industrial sectors. The essence of the required structural adjustment was the liberalization of the economy from the plethora of controls on production and internal and external trade. The Bank assumed that the measures taken by Zambia at the beginning of 1983 implied an irrevocable commitment to full liberalization, and wished to enhance the credibility of reforms by ensuring that foreign exchange was available to allow output to respond.

14. Since 1991, adjustment lending has been more successful in helping reduce inflation and restore fiscal balances. But more attention needs to be focused on longer-term development issues, as noted by donors at the December 1994 consultative group meeting. Thus, land laws and human resource improvement now seem to be crucial concerns to the next stage of development.

Lack of political Consensus Over Adjustment Impeded Ownership

15. In the 1980s, the Bank missed or ignored the early signs that the national political and social context of the structural adjustment program was inconsistent with its sustainability. There were sharp divisions within the government over development strategy and economic management. At the outset the Ministry of Finance and the Bank of Zambia were the main influences 'in favor of adjustment; and convinced the President of its merits. He in turn convinced or pushed the cabinet and the party to go along. But there were advisors and powerfull political groups who favored the public sector dominated control economy to which they had become accustomed over the previous twenty years. The Bank did not fully appreciate the delicate balance among these opposing forces, and did not pay enough attention to the limited ownership of the reform process outside a narrow group of politicians and senior officials; and was particularly oblivious to the sensitivities of the party and the unions. Thus, the government's commitment to reform should have been doubted when, faced with industrial unrest over public sector pay in early 1985, it slackened its stabilization program; and when it replaced the liberal economic team with economic planners not long after it had announced a revitalized liberalization program.

Importance of Other Donors Limited Bank's Influence

16. The influence of other sources of long term finance besides the Bank was also important. The Bank's share in resource flow was relatively small, as seen by the fact that indebtedness to the Bank group accounted for less that one-fifth of total long-term debt. During the period 1986-93 per capita ODA disbursements averaged $33 per annum while disbursements by Bank/IDA averaged $1 1, and before 1984 the Bank /IDA share was even smaller. (Bank/IDA resources have become increasingly important to Zambia only since 199 1.) In the mid-eighties bilateral donors were very influential in Zambian policy making, and, at the same time, they were not particularly supportive of the merits of structural adjustment programs; at times they formed a countervailing influence to that of the Bank in relation to Zambia's development strategy. At the time the need for coordination of donors efforts was still a new idea in the Bank.

Sustainable Reform Requires Attention to the Disadvantaged

17. The failure to recognize the risk of reversal of the reform process may have been associated in part with lack of attention to issues of poverty alleviation, and equitable distribution of the burden of adjustment. Thus it was not sufficiently recognized how important the public sector was in providing employment in urban areas and the immense social cost associated with the need to curtail the fiscal deficit. While the deficit had to be reduced, there was also need to protect vulnerable groups. The idea of protecting the very poor from the impact of maize pricing reform could have made pricing policy palatable to the poor and acceptable to the politicians. Unfortunately, the idea of a safety net came much later, and effective pricing policy reform was postponed until a new government was elected in 1991.

Adjustment Lending Underestimated The Risks of reversal

18. In light of the policy reversals in the early 1980s and again in 1987, and although some reforms were continued to good effect, it may be argued that support should have been related to the prolongation of the crucial elements of reform. Adjustment lending to Zambia did not pay enough attention to the risks of policy reversals, and to the fact that the political and public acceptance risks were high.

The Reform Program of the 1980s May Have Been Underfinanced

19. Some have argued that had external support been more responsive to the deterioration in export earnings in early 1986, the reform process would not have been reversed. The argument is that the new team may not have had to resort to management of the auction to prevent a drastic deterioration in exchange rate and flight from the Kwacha, and that with more adequate supply of imported inputs the economy would have performed better, thereby relieving the government of the worry that it was losing control of the economy. While it is impossible to know what level of financing will induce the optimal rate of reform, it is clear that the reforming government must be assured of sufficient support if they are undertaking politically risky policy initiatives. But while the incentive to undertake reforms and to avoid resort to controls have been much greater since 1991 when Zambia has been assured of more adequate resource inflows, it also appears that resources have been more adequate because the new government has been perceived as being more committed to reforms. Thus, it is impossible to conclude from this that the Bank should have provided more support in the 1980s.

SALs of the Nineties Avoided Defects of Those of the Eighties

20. Recent structural adjustment operations have gone far to avoid the criticisms made of those of the mid-eighties. There is now more overt concern for the social costs of adjustment and the plight of vulnerable groups. Also there is a more gradual approach to the "demandingness" of conditionality in relation to reforms involving greater political difficulty. Greater attention is now being given to getting wider agreement and understanding of measures leading to greater national and beneficiary ownership of the programs.

21. Bank assistance strategy is continuing to change. Recently it has signaled a gradual shift away from lending for structural adjustment toward support for sector investment programs. The difference from the traditional sector program or project is that the operation covers all projects by all donors in the sector, is prepared by a Zambian task force drawn from the public and private sector, provides for annual reviews and adjustments based on beneficiary consultation and feedback. This approach is expected to enhance the relevance not only of the Bank's program but those of all donors and of the country as well. It does require, however, considerable technical work and aid coordination efforts, most of them in the field.

Suspensions, Inadequate Coordination, Absorptive Capacity Constraints Impede Efficacy

22. The repeated build up of arrears to the Bank in 1983, between May 1987 and March 1991 and from September 1991 until January 1992, which lead to three suspensions of disbursements, further reduced the Bank's ability to achieve results. The long suspension beginning 'in 1987 increased the cost to completion of many projects, including interest cost during construction, and the cost of demobilization and re-mobilization of contractors, and delayed the flow of benefits. In some cases projects were abandoned and investment to that point was essentially lost. In addition, some investors postponed the implementation of their plans. While suspensions of disbursement are inevitable in cases like Zambia's, the Bank could have developed some complementary measures to mitigate negative impacts on the ongoing portfolio. Such measures could include coordination with other donors to ensure that the implementation of high priority projects continues, and continued economic and sector work and supervision.

23. The efficacy of the assistance also suffered as a result of inadequate coordination between the different components of Bank assistance. Thus the importance of price adjustments for maize, to keep its production profitable even though the auction was devaluing the Kwacha and raising the cost of imported inputs, was not given adequate attention. As a result, the resources under the Agricultural Rehabilitation Credit to buy replacement equipment were not used and the quick output increase in agriculture was not realized.

24. Constraints on absorptive capacity also impeded the efficacy of Bank operations throughout the 1980s. Among these constraints are deficiencies in human resources, especially management and the civil service, and physical infrastructure. In recent years, the Bank has sought to compensate for some of these by providing technical assistance, both directly and through coordination of aid from other donors. Also, by assisting in debt management the Bank has been able to reduce the debt service burden on the budget, relaxing the constraint inherent in the shortage of counterpart funds.

Bank Assistance Not Uniformly Effective-Non-lending Services Effective, Investment Projects Not

25. Bank assistance to Zambia has not been uniformly effective 'in all its components. Bank assistance was helpful in relaxing the constraint on the capacity to ' ort and to utilize productive IMP capacity. Investment lending was less effective since a substantial portion of the loans made in the early eighties was canceled. The efficacy of Bank non-lending assistance has been most evident in (non-lending) technical assistance, especially in aid mobilization/coordination and debt management, where, by providing documentation and chairing consultative group meetings, the Bank helped to bring about the significant rise in the ratio of aid from 10 percent of GDP in the 1980s to 30 percent in the 1990s. The Bank has assisted Zambia in rescheduling US$1.5 billion of debt between 1990-1993, resulting in a substantial reduction in debt service; and in obtaining substantial debt relief

Evaluation of the Instruments:

Economic & Sector Work

26. An overview of Bank ESW on Zambia in the 1980s and 1990s must highlight the following:

- Bank ESW identified the three major policy requirements for Zambian development during last fifteen years as liberalization, privatization, and diversification;

- Bank ESW has given priority attention to liberalization. Liberalization has been successfully implemented, partly due to the more informed policy dialogue that Bank ESW has made possible; privatization has lagged behind and diversification has remained elusive;

- The Bank should study Zambian privatization experience. Land policy and cultural factors also remain to be studied in detail;

- The Bank has not done enough ESW on the requirements for diversification of the Zambian economy; although its recent work on "Prospects for Sustainable Growth in Zambia- 1 995 -2005 is a step in the right direction;

- Several public expenditure reviews have helped in proposing ways for bringing the public sector deficit under control;

- The Bank has done an outstanding assessment of poverty in Zambia in 1994; it is now being used in the design of public policy to mitigate the problem;

- Sector work done in context of project identification had significant impact in mining and agriculture.

27. Overall, Bank ESW has been relevant and adequate in the sectors it has covered and the issues it has analyzed. The selection of topics has been appropriate to the Zambian situation, particularly the problems facing the economy. However, the absence of significant Bank ESW to underpin investment promotion and infrastructure planning will limit the feasibility of Bank support in these areas in the near future. Generally, relevance has been reinforced by timeliness in that ESW responded to a need and the output was ready when the government was inclined to consider adjustments in policy.

Lending

28. IBRD/IDA commitments to Zambia during FY83-95 amounted to US$ 1,466.4 million. Disbursements during the same period amounted to US$1,266.9 million. During FY83-91 average annual commitment in constant 1990 prices were US$74.8 million (US$112.2 million if the periods of suspension are excluded). After FY91 the average increased to US$203 million.

29. Adjustment accounted for 67 percent of commitments during FY83-95. Sectoral distribution of lending commitments reflected the importance of structural and other adjustment lending. The distribution among sectors was as follows: multisector, 32 percent; industrial/IDF, 18 percent; agriculture, just under 16 percent; financial, 14 percent; social sectors (education and population/health), 9 percent; mining, just under 7 percent; and infrastructure (transportation and water supply), 3 percent.

30. Zambia has gone from being a Bank client to a blend country to an IDA only borrower. The first IDA credit was approved in 1978, and Zambia has been an IDA only client since 1984. Disbursements by IDA rose rapidly during the eighties (except for the period of suspension) to an average of about US$160 million per year since 1991. Net disbursements of IDA have been positive throughout the period into the nineties; averaging US$ 1 85 million in the three year period 1991-1993.

31. Bank/IDA lending to Zambia has not been excessive from the point of view of Bank/IDA exposure. At June 30, 1994 Zambia accounted for 1.52 percent of credits outstanding to IDA; and 0.21 percent of total loans outstanding to the Bank. Bank/IDA held 22.6 percent of Zambian longterm debt at the end of 1993; a portion requiring between 7 and 10 percent of exports of goods and services to service it during the nineties. Hence, though not excessive Bank/IDA exposure has been associated with some portfolio risk. Because four-fifths of commitments have been for adjustment operations to provide balance of payment support to assist in debt service, Bank/IDA lending has not been excessive in relation to Zambia's capacity to implement projects.

32. Based on project completion (PCR) and audit reports (PAR), the performance ratings available for 18 of the 45 operations approved since 1980 show:

- only 44 percent of Zambian operations were judged satisfactory; compared with

- percent Bankwide and

- percent in the Africa Region.

Performance varied across sectors, with all four projects in the energy sector rated satisfactory compared with only one out of six rated satisfactory in agriculture. The successfull projects tended to be:

- small and not management intensive,

- with appropriate technology,

- used foreign contractor/consultants, and involved some training of nationals.

The unsuccessful projects, mainly in agriculture, were:

- dependent on weak administration and management,

- required counterpart funds,

- suffered from unperfect delegation of authority, and

- Presented Coordination Problems among agencies with unclear responsibilities.

33. Tht adjustment operations of the eighties were all rated unsuccessful, although Some benefits were achieved; the production objectives were not achieved and the policy objectives were not diligently pursued and were mostly abandoned in 1987. The adjustment operations after 1991 appear to have been successful, both on the policy front, by bringing fiscal and monetary magnitudes under control, and in serving as the basis for the coordinated mobilization of balance of 1 payments support from the larger donor community. Only one project has been evaluated so far; the audit of the Second Economic Recovery Credit (FY91) rated the project outcome as satisfactory,

34. The ongoing portfolio has been evaluated by looking at the supervision ratings where available, by assess' the "demandingness" of each operation on the main determinants of absorptive capacity, and in terms of specified desiderata of a good program. Supervision information is available for 14 operations, and of these I has been rated as highly satisfactory in its implementation, 12 as satisfactory and I as unsatisfactory.

35, The Agricultural Sector Investment Program,(ASIP) represents a major departure from the traditional project approach, and seeks to improve development impact through better coordination among donors, and greater participation by client/beneficiaries in identification as well as implementation of the sector program. The ASIP is to be the first in a series of four-year programs of coordinated multilateral, bilateral, and govenunent initiatives supporting the medium-and longterm development of strategic sectors. The project includes components to improve consultation of donors and beneficiaries concerning the policy environment and institutions, to make monitoring and public investment more efficient, to promote private sector participation, and to include pilot schemes. The preliminary assessment of ASIP preparation and implementation has been mixed. The preparation process has allowed wide participation and a greater sense of beneficiary ownership of the projects. However, this has slowed the process, and some organizations complain about inadequate representation of some interested groups, while some donors are still uneasy about the dominant role of the Bank.

Bank Assistance in Aid Coordination and Debt Management

36. Since 1989, the Bank's leadership role in the consultative group has been widely praised by Zambia and the donor community. The proximate task of the Bank in the nineties has been to mobilize assistance to close a financing gap, after rescheduling, of over US$l billion each year. So far, each year the gap has been closed. The role of the Bank has been to provide the documentary and analytical bases for discussions and negotiations. It has also played an advocacy role by educating donors and convincing them of the merit of the structural adjustment efforts to which the Zambian government has been committed since 1991, and elicited their support of this effort by increasing aid and the share of balance of payment support in the aid packages. Much of the aid mobilized by the Bank has gone to service the debt owed to multilateral and other creditors. This has drawn some criticism for diverting resources from social services and infrastructure. More recently the emphasis of aid coordination has been at the sectoral level on avoiding duplication, overloading of public sector management and unrealistic demands on local counterpart funding.

37. The following lessons emerge from the Bank's experience in aid coordination: 16

- CG meetings are useful for mobilizing resources, particularly for heavily aid dependent countries undergoing adjustment, and for bringing donor coalition behind adjustment.

- A greater field presence simplifies the process of sectoral aid coordination. It can foster local ownership and allow for more timely contributions to ease project implementation problems.

- The debt crisis galvanized greater aid mobilization, but donors do not wish debt management to be the dorminant criterion in aid allocation decisions.

- In-country aid coordination and management by client countries is as important as coordination among donors; and the institutional framework to serve this end needs to be studied and rationalized. Good aid coordination and management requires clear development goals and strategies, a capacity to identify and prepare pr 'ects, effective Oi project programming and budgeting, and sound monitoring and financial management.

- Additional opportunities for Bank-donor collaboration in ESW should be explored, given the favorable recent collaboration on public expenditure reviews and poverty assessments.

38. The Bank assisted Zambia in setting up its debt management system, and in negotiating frequent rescheduling and occasional reduction in its debt. By August 1992, due to Paris Club reschedulings and debt cancellations by bilateral creditors, Zambia's debt had fallen by $1.5 billion to $6.5 billion. The nineties have seen a net fall in the interest burden because US$597 million of interest was capitalized and US$76 million forgiven by donors during 1990-93. During the same period, net interest arrears were reduced by US$118 million. The interest burden on new commitments will also be lower because the interest rate on new loans has gone down partly as a result of the shift from private toward official creditors. Meanwhile, US$853 million of principal repayments due have been rescheduled, thereby reducing the immediate burden of debt service.

39. Over time, the share of multilateral debt has increased. The Bank is holding a larger share of Zambia's debt and accounts for a larger share of debt service obligations, as a result of the rise in per capita commitments by IDA-an average of $25 a year during 1991-95, up from $12 during 1983-87. This has done much to reduce the burden of Zambian debt as maturing IBRD debt having shorter terms and higher interest rates was followed by new IDA lending on highly concessionary terms. Commercial and short-term debt has been reduced as a result of debt buyback operations that drastically lowered the exposure of the London Club creditors. In addition, Paris Club creditors have provided significant debt relief.

40. These improvements are not reflected in the usual debt indicators relating debt stock and debt service to GNP and to exports of goods and services because, in the nineties, the denominators have fallen below the levels in 1980 and in 1989. Nevertheless, Zambia's creditworthiness has been improved and arrears have been reduced. Zambia has access to Bank and IMF resources, and some bilateral donors who had withheld support have been induced to resume. Yet there is concern in some quarters that the Bank's assistance in this area has been self-serving, and has ensured the servicing of Bank debt at the expense of Zambia's growth. But this concern is based on the assumption that without debt service inflows would have remained adequate to generate an improved growth record. This appears doubtful. More fundamentally, there is also concern that Bank preoccupation with debt service has diverted resources and time-including management time-away from development issues, and that the debt situation has been improved at the expense of focusing on real sector issues.

41. The Bank's Resident Mission has recently begun to play an important part in facilitating the delivery of Bank assistance through the lending program, aid coordination and other instruments. The mission is involved in the design of the lending program by assisting ministries and agencies in identification of projects for discussion with missions from headquarters and by helping in the monitoring and supervision of projects during the implementation phase. The mission is especially active in coordination of Bank assistance with the local representatives of bilateral donors and the local UNDP office. Although long understaffed, the Resident Mission has been able to render some support in agriculture and in monitoring the macroeconomic situation. With greater degree of client consultation envisaged in the new sector programs (e.g. ASIP), the mission will need to be strengthened so that the process will not be as critically dependent on missions from Washington to maintain momentum as it has been in the past.

Progress Towards Objectives of Bank Assistance

42. Achievement of objectives is the result of many different factors, the most important of which is country performance. Nonetheless, an assessment of the degree to which each objective has been achieved (and the factors affecting the progress) is of essential importance in guiding future bank assistance strategy. The extent to which the objectives of the Bank's assistance strategy have been achieved in Zambia may be summarized as follows:

- Economic management has improved considerably, especially in monetary and fiscal discipline since 1992. The primary fiscal deficit has been reduced from 7 percent of GDP at the beginning of the nineties to I percent of GDP in 1995. But growth has not been restored, and the sustainability of the reforms still faces serious challenges, particularly in an election year.

- Achievements in liberalize the economic environment for the private sector, mg beginning with the foreign exchange market, have been significant.

- Privatization was slow initially; but gained considerable momentum in 1995.

- Diversification of production, and especially exports, has not been significant.

- During the period 1984-94, poverty increased in relative and absolute terms. There has been substantial deterioration in the major social indicators during the last fifteen years.

- Progress in agriculture has been minimal. Food grain output has declined, but some new crops and flowers for export are now being produced in small quantities. Bank projects were undermined by prolonged suspension of disbursements.

- Manufacturing, grown behind tariff protection and dependent on imported inputs, remains plagued by low productivity and low quality output. Moreover, it has been dominated by public enterprises.

- Bank support for the rehabilitation of copper mining has had positive results on output and costs.

- Bank assistance in education and health has been too recent for evaluation.

Conclusions and Recommendations

On Key Strategic Issues

Privatization and Diversification Need More Attention

43. Liberalization, privatization and diversification are the three prongs of the strategy for renewed growth. But only in the first has substantial progress been made. Recent progress (in 1995) in privatization is a good step forward but much more is needed. And diversification requires a substantial increase in private investment which has not yet taken place. A careful review of the remaining obstacles to this private sector development should be a major element of the Bank's strategy.

Growth Requires Investment in Physical and Social Infrastructure

44. Achieving positive GDP growth in Zambia and checking the worsening poverty requires The continued investment in physical and social infrastructure. These investments will rely on Bank, and other donors, support. The issue is that the mix of instruments and also the total of Bank/IDA financing, given the level of support from other donors, be consistent with the debt service requirement and the investment implications of the growth target.

Coordination and Consistency of Loan Conditions at Macro and Micro Levels Essential

45. The coordination between the macroeconomic conditions of structural adjustment operations and sectoral adjustment/investment projects should concern not only the content but also the pace and sequence of measures. This applies especially to measures affecting pricing policies of outputs and inputs and the removal of subsidies. All three affect the profitability of activities and hence the response of entrepreneurs to opportunities for diversification.

Need to Develop Entrepreneurs for a vibrant Private Sector

46. Another serious constraint to private sector development in Zambia is, increasingly, the entrepreneurship, managerial abilities, and skills of the Zambian people. Where are the entrepreneurs? Among the many factors which impede the development of entrepreneurship and skills in people are the following: declining life expectancy; the burden of work women are already bearing; the traditional barriers to women's access to credit and land ownership; the low level of personal saving due to poverty; the inability of the poor to risk their income sources (the low risk route out of the ghetto, notably the public service, does not lead to entrepreneurship); the high percentage of youth as heads of households due to early deaths of parents; and a lack of knowledge of alternative lines of production. The Bank's CAS should address this set of issues and propose specific measures.

Institutions to Serve the Private Sector Must be Developed

47. Institutional development in the public sector is a necessary complement to private sector development. There is a need to specify the role of the public sector, to identify the required complement of private sector service and support institutions, and to provide for meeting this requirement. Institutional development has had limited attention during the last fifteen years, with the result that the usual assessment in Zambia is that most ministries and agencies of government are simply not adequately staffed and supplied with the inputs to discharge their responsibilities effectively. Institutional development is a slow process and should now be given higher priority than hitherto. While privatization is proceeding the government can retain suitable officials in the public service, and re-train them for work in areas where institutional capacity is weak.

Bilateral donors Must be Kept Engaged in Zambia's Development

48. Bilateral donors have been an important source of support to Zambia's development, and they will be indispensable to Zambia's future, especially as commercial lending sources have dried up. The issue is how to keep donors engaged now that the geopolitical reasons that justified their help in the past are no longer valid and may not be valid in the future. The answer seems to lie in fully involving donors in decisions on objectives and in the design of arrangements for the most effective use of the assistance they will provide. It may also lie partly in being mindful that the political/public relations benefits may be important to politicians in donor countries, hence the need to allow bilateral donors to play the lead donor role in as many sectors as possible.

The Political Implications of Reform Must be Anticipated

49. The political reaction to reform should be carefully studied and anticipated when planning the Bank's assistance strategy. The Bank's approach has often been to focus on the removal of distortions without much thought to the fact that behind each distortion lies a group of beneficiaries who may be expected to oppose the reform. In Zambia, a wide range of subsidies (e.g., on maizemeal, fertilizer) benefit the poor who comprise the majority of the population. The effect of a reform that affects such a large group of people has made the adjustment program politically difficult. In order to avoid a backlash some compensatory benefit with less distortionary impact should be considered. This approach will also favor the sustainability of reforms and investment programs. The reforms should also be accompanied by a suitable dialogue to foster understanding of the rationale behind them. In the absence of these and/or other means of assuaging those affected, there is increasing risk of reversal, particularly in an election year.

Careful Assessment of Options and Risks is Crucial in Formulating Strategy

50. In laying out a country and Bank strategy a "one option" approach is inadvisable. The Bank must be prepared to contemplate worse case and best case scenarios. The assumption that donors will always close the financing gap is not only dangerous, it shuts off the search for alternatives.

More Effective Instruments

ESW

51. The recommendations on ESW are the following:

- ESW should be cognizant of, and sensitive to, the political implications of its economic and social policy recommendations.

- ESW should avoid excessive optimism in its assumptions and projections. Optimistic assumptions regarding copper prices led to a delay in adjustment efforts in the eighties. There is probably too much optimism in the nineties regarding growth and aid flows.

- More attention needs to be paid to the design of strategies for reducing the public sector deficit within the context of adjustment operations, both as regards timing of actions and the monitoring of implementation.

- The Bank should continue ESW even when arrears require the suspension of lending. Many ESW tasks were dropped after the suspension in May 1987, and the ESW agenda remained sparse for the next three years. This caused long lapses between updating memoranda on strategic sectors (e.g. agriculture and delayed re-start of operations).

- ESW for privatization needs to be strengthened. The lack of prior studies very likely has contributed to the slow pace of progress. Concerns about divestiture were not anticipated.

Greater attention to sequence of actions will also help to ensure the efficacy of mg advice and assistance (e.g., liberalization and infrastructure development should go hand in hand; cost recovery solutions to the fiscal problems should be consistent with social concerns; and the public investment plan should be fitted within an agreed medium term development plan). Lending

52. The recommendations for lending are as follows:

- Adjustment lending should not be relied on to persuade an indecisive client to undertake a drawn-out reform agenda.

- In the Zambian context project success is likely to be favored by small size, appropriate and relatively unsophisticated technology, the inclusion of training assistance, the linking of implementation authority and responsibility, and attention to improvement of complementary services (e.g. extension).

- In agriculture and the social sectors pilot projects should be tried whenever there is uncertainty regarding the information/experience basis for project design.

- The cost of disbursement suspensions is very high, few projects survive long roi interruptions in implementation. The Bank should examine the feasibility of measures (such as moth-balling, increased financing from the government or other donors) that may minimize the extent to which a project is impaired by the suspension of disbursement.

- In aid coordination and debt management, the Bank should continue to provide assistance even when a suspension in lending is unavoidable.

- The new lending instrument of Sectoral Investment Project holds good promise but should be monitored carefully. Further attention should be given to full participation by donors and to avoid the impression of the Bank as a dominant player.

Resident Mission

53. The role of the Resident Mission should be further expanded, not only to reflect the general trend in the Banks greater attention to results in the field, but also in the particular context of a program that relies on expanded aid coordination and sectoral investment programs. In the past, the Resident Mission has been understaffed and decisions have had to rely to heavily on missions from headquarters,



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