zambia - third poverty reduction budget support (prbs iii ......6.1.1 government of zambia; of the...
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AFRICAN DEVELOPMENT FUND ADF/BD/WP/2010/54/Rev.1
24 June 2010
Prepared by: OSGE
Original: English
Probable Date of Board Presentation:
30 June 2010
FOR CONSIDERATION
MEMORANDUM
TO : THE BOARD OF DIRECTORS
FROM : Cecilia AKINTOMIDE
Secretary-General
SUBJECT : ZAMBIA : PROPOSAL FOR AN ADF LOAN OF UA 31.9 MILLION TO
FINANCE THE THIRD POVERTY REDUCTION BUDGET SUPPORT
(PRBS III)
REVISED VERSION*
Please find attached hereto a Revised version of the above-mentioned Appraisal
Report, incorporating the IMF Assessment Letter.
A summary of the changes made to the initial report is also attached, for ease
of reference.
Attach.
cc. : The President
* Questions on this document should be referred to:
Mr. G. NEGATU Director OSGE Extension 2077 Mr. F. BLACK Regional Director ORSB Extension 2042
Mrs. M. KANGA Division Manager OSGE.2 Extension 2251 Mr.M.P.S. MATILA Senior Economist OSGE.2 Extension 3266
Mr. J. CHOI Economist OSGE.2 Extension 3688 SCCD:C.H.
Changes submitted with IMF Relation Note
ADF Financing Information
Original Text New Text
Loan Information
Interest type (fixed)
Log frame: Progress anticipated ; Annual GDP growth
rate higher than 7% in the 2010-2015 period
Loan Information
Principal Repayment schedule.
Log frame: Progress anticipated: Annual GDP growth
rate is higher than 6% in the 2010-2015 period.
Paragraph 2.2.1: GDP growth rate of 5.5%: Inflation
falling from 16.6% to 12% end of 2009.
Paragraph 2.2.2: Revenue and grants estimated at
18.8% of GDP;
Paragraph 2.2.3: Current account deficit (excluding
grants) narrowed to 1.8% of GDP.
2010 current account deficit projected to reach 2.5%;
2009 import cover was 4.5 months and 2010 import
cover estimated at 4.1 months
Public debt to slightly increase to 27.6% (see table 1
Old).
Paragraph 4.3.2 , revenue collection projected to
increase to about 156.9% of GDP and expenditure to
reach 21.2% of GDP.
Para 2.2.1 GDP growth rate of 5.8%. Inflation falling
from 16.6% to 9.9% end of 2009.
Para 2.2.2 Revenue and grants estimated at 16.3% of
GDP
Para: 2.2.3; Current account deficit (excluding grants)
narrowed to 1.1% of GDP.
2010 current account deficit projected to reach 2.1%;
2009 import cover was 3.9 months and 2010 import
cover estimated at 3.5 months;
Public debt to increase to 26.4% (see table 1 New)
Paragraph 4.3.2, revenue collection projected to
increase to 16.3% of GDP and expenditure to reach
22.3% of GDP.
Section 6 Legal Documentation.
6.1.1 Government of Zambia; of the Fund, dated 23
November 1989, as amended.
The Government will use its procurements system
subject to the list of non eligible items
6.2.2 section 5.01
6.2.3 The loan shall disburse conditional upon (i)
evidence of foreign currency account with the Bank of
Zambia to receive budget support resources, including
proceeds of this loan
Section 6. Legal Documentation
6.1.1 Republic of Zambia. (as amended from time to
time).
6.2.2 section 12.01
6.2.3 The obligation of the Fund to make the
disbursement of the loan shall be conditional upon the
entry into force of the loan agreement in accordance
with section 12.01 of the General conditions and the
fulfilment by the Borrower of the following condition:
The Borrower shall have to the satisfaction of the Fund,
provided evidence of having opened a foreign currency
account with the Bank of Zambia dedicated to receive
the proceeds of this loan.
Table V Prior Actions: Component A.
Reform area II: Procurement regulations adopted by
Cabinet by May 2010.
Reform area: IV: Implementation Plan for the
Anticorruption Policy is developed and submitted to
Cabinet
Table V Prior Actions: Component A:
Reform area II: Procurement regulations are submitted
to Ministry of Justice by May 2010 (also reflected in the
logframe)
Reform area IV: Implementation plan for the Anti
Corruption Policy is developed and launched by
Government by May 2010 (also reflected in the log
frame)
Table I Macroeconomic Indicators in page 3 section 2.2 paragraph 2.2.1 replaced by a new table I. The two
tables (old and new hereafter)
Table I: Macroeconomic Indicators (NEW) using IMF Relation Note Table
Macroeconomic status
2008
2009 est.
2010
proj.
Real GDP Growth 5.7 6.3 5.8
Consumer prices (end of period) 16 9.9 8
Overall Balance (including grants) -2.2 -2.6 -2.4
Total Revenue 18.6 15.7 16.3
Total Expenditure 23.8 22.9 22.3
Current account balance -5.6 -1.8 -2.5
International reserves
(month of import) 2.8 3.9 3.5
Total debt 26.7 26.4 26.4
Source: AfDB Statistics Department, as percentage of GDP
Table I: Macroeconomic Indicators (Old)
Macroeconomic status
2008
2009
est
2010
proj
Real GDP Growth 5.7 6.3 5.5
Consumer prices (end of period) 16 12 8
Overall Balance (including grants) -2.2 -2.6 -2.4
Total Revenue 18.6 15.7 15.9
Total Expenditure 23.8 22.8 21.2
Current account balance -5.6 -1.8 -2.5
International reserves
(month of import) 2.1 4.5 4.1
Total debt 26.7 26.4 27.6
Source: AfDB Statistics Department, as percentage of GDP
Language: English
Original : English
AFRICAN DEVELOPMENT FUND
PROGRAMME : THIRD POVERTY REDUCTION BUDGET
SUPPORT (PRBS III)
COUNTRY : ZAMBIA
_________________________________________________________________________________
APPRAISAL REPORT APRIL 2010Appraisal Team
Appraisal Team
Team Leader:
Team Members:
Sector Manager:
Sector Director
Regional Director:
Mothobi P. S. MATILA, Senior Economist,
OSGE.2 (Task Manager)
Jieun CHOI, Economist, OSGE.2
Marlène KANGA, OSGE.2
Gabriel NEGATU, OSGE
Frank BLACK, ORSB
Peer Reviewers
1.T. Bhebhe, Country Programme Officer, ZMFO
2. S. Darbo, Senior Country Economist, ORSA
3. A. Issahaku, Principal Governance Expert, OSGE.1
4. C. Mollinedo, Macroeconomist, OSGE.2
5. T. Temesgen, Principal Private Sector Specialist, OSGE.2
6. N. Jere, Procurement Specialist, ZMFO
7. H. Ojo, Consultant, ORPF.2
8. A. Toto Same, Principal Public Finance Management Expert, OSGE.1
TABLE OF CONTENTS
CURRENCY EQUIVALENTS i
WEIGHTS AND MEASURES i
FISCAL YEAR i
LOAN INFORMATION ii
ADF FINANCING INFORMATION ii
PROGRAMME TIMEFRAME ii
ACRONYMS iii
RESULT BASED LOGICAL FRAMEWERK iv-v
PROGRAMME EXECUTIVE SUMMARY vi
I –THE PROPOSAL 1
II – COUNTRY AND PROGRAM CONTEXT 1
2.1. Government overall development strategy and medium-term reforms priorities 1
2.2. Recent social economic development, perspectives, constraints and challenges 2
2.3. Bank Group portfolio status 5
III – RATIONALE, KEY DESIGN ELEMENTS AND SUSTAINABILITY 6
3.1 Link with the CSP, country readiness assessment and analytical works
underpinnings 6
3.2. Collaboration and coordination with other donors 8
3.3. Outcomes of past and ongoing similar operations and lessons 8
3.4. Relationship to ongoing Bank’s operations 9
3.5. Bank’s Comparative advantages 10
3.6. Application of good principles on conditionality 10
IV – THE PROPOSED PROGRAMME AND EXPECTED RESULTS 10
4.1. Programme’s goal and purpose 10
4.2. Programme pillars, specific operational policy objectives and expected results 11
4.3. Financial needs and arrangements 15
4.4. Programme’s beneficiaries 16
4.5. Impacts on gender 16
4.6. Environmental Impacts 17
V – IMPLEMENTATION, MONITORING AND EVALUATION 17
5.1. Implementation arrangements 17
5.2. Monitoring and evaluation arrangements 18
VI – LEGAL DOCUMENTATION AND AUTHORITY 18
6.1. Legal documentation 18
6.2. Conditions associated with Bank Group intervention 18
6.3. Compliance with Bank Group policies 19
VII – RISKS MANAGEMENT 19
VIII – RECOMMENDATION 19
TABLES
I Macroeconomic Indicators 2
II Links between the CSP and FNDP 6
III Summary of Lessons Learnt 9
IV Zambia’s Ranking in Doing Business 13
V Prior Actions for the PRBS III 15
VI Fiscal Financing gap in billions of Kwacha (US$ billions) 16
BOXES
I Purpose of PRBS 10
Figures
I Governance Indicators 3
II Competitive Index of SADC countries 4
III Ease of Doing Business among SSA Countries 4
ANNEXES
I. Letter of development policy
II. Operation policy matrix
III. A summary assessment of the prerequisite conditions for PRBS III
IV. IMF/Country relations note
V. Zambia: Selected Economic Indicators
VI. Information on Licenses and Trade Across Borders
VII. List of Ongoing Projects VIII Application of Good Practices Principles of Conditionality TECHNICAL ANNEXES
I. 2009-2011 Performance Assessment Framework of the PRBS 2009-2011
II. PRBS Roadmap – Assessment of Progress
III. PEMFA Components and Progress
CURRENCY EQUIVALENTS
As of March 2010
Currency Unit Zambia = Kwacha
1 UA = 7127.42 Kwacha (ZMK)
1 UA = 1.53258 US$
1 UA = 1.12939 EURO
1US$ = 4650.60
WEIGHTS & MEASUREMENTS
1 metric tonne = 2204 pounds (lbs)
1 kilogramme (kg) = 2.200 lbs
1 metre (m) = 3.28 feet (ft)
1 millimetre (mm) = 0.03937 (inch)
1 kilometre (km) = 0.62 mile
1 hectare (ha) = 2.471 acres
FISCAL YEAR
January 1 - December 31
ii
LOAN INFORMATION
Client’s information
BORROWER: Republic of Zambia
EXECUTING AGENCY: Ministry of Finance and National Planning
Financing plan for 2010
Source Amount (USD million) Instrument
ADF (UA31.9 M) 48.89 Loan
DFID 52.0 Grant
EC 45.94 Grant
Finland 7.00 Grant
Germany 14.00 Grant
Netherlands 14.00 Grant
Norway 28.35 Grant
Sweden 22.16 Grant
World Bank 20.02 Loan
ADF FINANCING INFORMATION
Loan Amount 31.9 million Units of Account
Principal Repayment Schedule 1% from 11th to 20th year and 3% thereafter
Commitment fee 0.5% on undisbursed amount
Other fees (service charge) 0.75% on disbursed and Outstanding amount
Tenor 50 years
Grace Period 120 months (10 years)
TIMEFRAME - MAIN STEPPING STONES (EXPECTED)
Programme Concept Note March 2010
Programme Appraisal March-April 2010
Loan Negotiation May 24, 2010
Programme Presentation to the Board July 21, 2010
Loan Signature August 2010
Effectiveness September 2010
Disbursement September 2010
Programme Completion June 2011
iii
ACRONYMS AND ABBREVIATIONS
ACC Anti-Corruption Commission
ADF African Development Fund
BSL Budget Support Loan
CEM Country Economic Memorandum
CFAA Country Financial Accountability Assessment
CPAR Country Procurement Assessment Review
CPs Cooperating Partners
CSP Country Strategy Paper
DFID Department for International Development
DIP Decentralisation Implementation Plan
DSA Debt Sustainability Assessment
FMS Financial Management System
FNDP Fifth National Development Plan
FRA Food Reserve Agency
FSDP Financial Sector Development Plan
FSP Fertiliser Support Programme
FY Financial Year
GDP Gross National Product
GRZ Government of the Republic of Zambia
HIPC Heavily Indebted Poor Countries
IFMIS Integrated Financial Management Information System
IMF International Monetary Fund
MDG Millennium Development Goals
MDRI Multilateral Debt Relief Initiative
MFNP Ministry of Finance and National Planning
MPSAs Ministries, Provinces, Spending Agencies
MTEF Medium Term Expenditure Framework
MTR Mid -Term Review
NACP National Anti-Corruption Policy
OAG Office of the Auditor General
PAC Public Accounts Committee
PAF Performance Assessment Framework
PEFA Public Expenditure and Financial Accountability
PEMFA Public Expenditure Management and Financial Accountability
PFM Public Finance Management
PRGF Poverty Reduction and Growth Facility
PRBS Poverty Reduction Budget Support
PSDP Private Sector Development Programme
RDA Road Development Agency
SFTA Support for Fiscal Transparency and Accountability
SMEs Small and Medium Enterprises
UA Unit of Account
US$ United States Dollars
WB World Bank
ZNTB Zambia National Tender Board
ZPPA Zambia Public Procurement Authority
ZRA Zambia Revenue Authority
iv
RESULT-BASED LOGICAL FRAMEWORK
HIERARCHY OF
OBJECTIVES EXPECTED RESULTS REACH
PERFORMANCE
INDICATORS
INDICATIVE TARGETS
TIMEFRAME
ASSUMPTIONS /
RISKS
1. Goal
Contribute to economic
growth and poverty
reduction
Impact
Improved living standards
Beneficiaries
Zambians
population
Impact Indicator
(1) GDP growth rate
Source : MoFNP
(2) Percentage share
of population below
poverty line
Source : Living
Conditions
Monitoring; CSO
Progress anticipated in the long term:
2010-2015
(1) Annual GDP growth is higher than
6% in the 2010-2015 period
(2) Proportion of people living below
poverty line reduced to 37.5% by 2015
from 64% in 2008 (70% in 1990, 75% in
1999).
Assumption
Statement
The current
economic and
political management
as well external
environment
continues.
2. Programme Purpose
1. Improve financial
governance through
efficient public financial
management and the
fight against corruption
2. Enhancing business
environment by
simplifying business
licenses and shortening
time for trade across
borders
Outcomes
1.1 Enhanced public
financial management
through credible budget
management.
1.2 Reduced perceived
corruption as a result of
GRZ’s comprehensive and
coordinated actions against
corruption
2.1. Reduced cost related to
business licensing
2.2. Reduced time required
to import and export across
borders.
Beneficiaries
Zambian
Population
Zambian
enterprises
including SMEs
Outcome Indicators
1.1.1. Percentage of
Expenditure variance
Source: PEFA
reports and GRZ
documents
1.2. Corruption
Perception Index
Source. Transparency
International
Governance Indicator
Source: Bank CPIA
2.1. Cost of
compliance with
business licenses
Source : Ministry of
Commerce Trade and
Industry
Progress anticipated in the medium
term
1.1.1. Less than 15% expenditure
variance between budget and total
expenditure outturn in 2009 from 25% in
2008.
1.2 Zambia’s Corruption Perception
Index (CPI) ranking by Transparency
International (TI) moved to 90 in 2011
from 99 in 2009 out of 180 countries.
CPIA governance indicator to increase to
3.7 in May 2011 from 3.6 in 2008.
2.1. Cost of compliance with licenses
reduced to 1.5 trillion by Dec. 2011 from
2.2 trillion Kwacha in 2008 baseline
2.2. Time required to pass Chirundu
Border Posts reduced from 3 days in
2009 to 1 day by June 2011
Assumption
statement:
Risks: Capacity
constraints could
undermine project
implementation.
Mitigation: The
ongoing reforms
including capacity
building through the
multi donor PEMFA
programme and the
PRBS dialogue
mechanism will
mitigate risk.
v
2.2. Number of days
required to import and
export across borders
Source: Zambia
Revenue Authority
Inputs (USD Million)
ADF Loan $48.89
DFID $52.0
EC $45..94
Finland $7.0
Norway $28.35
Germany $14.0
Netherlands $14.0
Sweden $22.16
World Bank $20.02
2. Staff cost on
identification,
preparation and appraisal
3. Mission costs for
donor coordination and
supervision
Outputs (Policy Actions)
1.1.1. Aligned expenditure
to approved budget
1.1.2. Approved legislation
on procurement
implemented
1.1.3. National
Anticorruption Plan
developed and implemented
1.2.1. Action taken on
Auditor General’s
recommendations
2.1.1. Report on licensing
reform submitted to Cabinet
2.1.2. Implemented the
recommendation of the
Business Licensing Report
2.1.3. Business license E-
registry piloted
2.2.1. Modernized Chirundu
border post
2.2.2. Integrate the
operations of
borderagencies into one
premise
Beneficiaries
Ministry of
Finance and
National
Planning
and Ministries,
Provinces, and
Spending
Agencies
Zambian
population
Zambia Public
Procurement
Authority
(ZPPA)
Anti-corruption
Commission
(ACC)
Auditor General
and Parliament
Enterprises in
Zambia,
especially for
SMEs
Importers and
exporters
Output Indicator
1.1.1. Enhanced
budget execution
1.1.2. Gazetting of
procurement
regulations
1.1.3. Anticorruption
Plan
1.2.1. Actions on
Auditor General’s
recommendations
2.1.1. Report on
licensing reform
2.1.2. Number of
licenses eliminated
2.1.3. E-registry
piloted
2.2.1. Delivery of ICT
delivery
2.2.2. Chirundu border
post committee
Progress anticipated in the short term
1.1.1 Implementation of IFMIS and single
treasury account by May 2010 to enhance
budget controls.
1.1.2. Procurement regulations published
in the Government gazett by end May,
2010
1.1.3. Implementation Plan developed and
launched by Government by May 2010
1.2.1. 85% of 2006 Auditor Generals
recommendations acted upon in 2010
2.1.1. Submit a list of license to eliminate
and streamline to Cabinet by May, 2010
2.1.2. 150 licenses from 15 sectors
eliminated by Dec. 2010 (517 licenses
existing in 2008)
2.1.3. E- Registry for business licensing
piloted by June 2011.
2.2.1. ICT facility delivered to modernize
Chirundu Border by Dec. 2010
2.2.2. Established a committee to
integrate existing 11 agencies in
Chidundu border post by June 2011
Assumption
Statements: Risks.
Mitigation:
Increasing budget
deficit without a
corresponding
increase in revenue
base could impede
service delivery.
Mitigation.
Government intends
to reduce
unsustainable
expenditures and
increase spending on
revenue generating
activities. IMF is
also assisting GRZ to
broaden the tax base
and increase revenue
collection.
vi
PROGRAMME EXECUTIVE SUMMARY
Programme
Overview
Program Name/Number : Third Poverty Reduction Budget Support (PRBS III)/ P-ZM-KA0-004
Geographic Scope : Zambia national territory
Overall Timeframe : One year, July 2010 to June 2011
Overall Loan Amount : UA 31.90 million
Programme Output : Key outputs include: Aligned expenditure to approved budget; Approved
legislation on procurement implemented; National Anticorruption Plan developed and implemented;
Action taken on Auditor General’s recommendations; Report on licensing reform submitted to Cabinet;
Business license E-registry piloted; and Modernized Chirundu border post.
Programme
Description
The overall goal of this operation is to improve financial governance through efficient public financial
management and fight corruption and enhancing business environment by simplifying business licenses
and shortening time for trade across borders. The programme has two components, namely (i) Improving
financial governance and (ii) Enhancing business environment.
Programme
Outcomes
and
Beneficiaries
Expected programme outcomes are: Enhanced public financial management through credible budget
management; Reduced perceived corruption as a result of GRZ’s comprehensive and coordinated actions
against corruption; Reduced cost related to business licensing; and Reduced time required to import and
export across borders. Programme beneficiaries include: Ministry of Finance and National Planning
(MFNP) and Ministries, Provinces, and Spending Agencies (MPSAs); Zambia Public Procurement
Authority (ZPPA); Anti-corruption Commission (ACC); Auditor General and Parliament; Enterprises in
Zambia, especially MSMEs.
Needs
Assessment
Zambia’s economy grew by 6.3% in 2009 and is projected to grow by 5.5% in 2010. According to the
IMF Article IV Consultation staff report of December 2009, the overall fiscal balance (including grants)
widened to 2.5% of GDP in 2009 from 2.2% in 2008. Domestic revenues as a share of GDP declined
from 18.6 % of GDP in 2008 to 15.7 % of GDP in 2009. A reduction of 26.4 percent in trade related
taxes due to the global economic crisis resulted in the fall in revenues. The expenditure out-turns for
2009 is 8.3% lower than the budget mainly because of decline in projected revenue by 13.2% from the
original budget. In 2010, the overall balance (excluding grants) is projected at 5.9% of GDP, of which
0.6% will be external financing. The Bank’s UA31.90 million, therefore, will contribute to reducing this
financing gap in 2010.
Risks and
Risk
Mitigation
Capacity constraints could adversely affect reform implementation. Lack of coordination among service
ministries to private sector needs could impede private sector development. Increasing the budget deficit
without a corresponding revenue base increase could undermine service delivery. Also, the fifth multi-
party general elections in 2011 could lead to budget overruns. Government is strengthening the
mechanisms of ensuring adherence to financial regulations through introduction of a treasury single
account and IFMIS. The ongoing reforms including capacity building through the multi donor PEMFA
programme and the PRBS dialogue mechanism will mitigate risk. IMF is assisting GRZ to broaden the
tax base and increase revenue collection.
Bank’s
Added Value
The Bank has built knowledge and gained the trust of authorities on public sector and business
environment reforms, which allows the Bank to bring the best practices to Zambia. Through analytical
work such as the Africa Competitiveness Report and the ongoing study to identify constraints on
competitiveness in selected industries, the Bank could strengthen support for private sector growth.
Institutional
development
and
Knowledge
building
To enhance knowledge of Zambia’s developmental challenges and priorities, the Bank will intensify
policy dialogue at the country level through the PRBS group. Lessons learned from past operations have
informed the Bank Group’s advisory services to Zambia as well as lead to a better design of the Bank
programme. The Bank will document the lessons learnt and disseminate the results Bank-wide through a
variety of channels including seminars and newsletters, to share learning on development best practices.
1
I THE PROPOSAL
1.1 Management submits the following Report and Recommendation on a proposed loan to the
Republic of Zambia for UA31.90 million to finance the Third Poverty Reduction Budget Support
(PRBS III) programme over one year from July 2010 to June 2011. The programme was appraised in
March 2010. It results from a request by the Government of the Republic of Zambia (GRZ) dated
15th January 2010. The PRBS III deepens reforms that were supported by the Bank, through the last
two budget support operations. The PRBS III is aligned to Zambia’s development objectives as set
forth in the Fifth National Development Plan (FNDP), the Bank’s CSP and Governance Strategic
Directions for 2008-2012. The design of the programme took into account good practice principles
on conditionality and Bank Group provisions on non-concessional debt accumulation policy.
1.2 The overall goal of the programme is to reduce poverty through improved economic
governance. Its operational objectives are improving public financial management by efficiently
managing budget and tackling corruption, and enhancing business environment by simplifying
business licenses and facilitating trade across borders. Expected programme outcomes include
enhanced budget management, reduced the perceived level of corruption and reduced cost related to
business licensing, and reduced time require to trade across borders.
II COUNTRY AND PROGRAMME CONTEXT
2.1 Government Overall Development Strategy and Medium-term Reforms
Priorities 2.1.1 The Government of Zambia launched a long-term national development plan entitled Vision
2030, in consultation with line ministries, provinces, districts, the donor community and civil society.
It sets out the Government’s vision, and aspirations and determination of the Zambian people to be a
‘prosperous middle-income country by the year 2030’. The overarching goals are to: (i) reach
middle-income status; (ii) significantly reduce hunger and poverty; and (iii) foster a competitive and
outward-oriented economy. These goals call for policies that will accelerate and sustain economic
growth, enable the poor to participate in, and benefit from the growth. The Government’s
development agenda is further articulated in the Fifth National Development Plan (FNDP for 2006 –
2010) and the rolling Medium Term Expenditure Framework for 2009 -2011.
2.1.2 The FNDP represents the first building block for achieving the Vision 2030’s objectives. The
FNDP’s main objective is to achieve a broad based wealth and job creation through citizenry
participation and technological advancement. Its structural reform agenda focuses on (i)
improving the business and investment climate(Private Sector Development Programme); (ii)
providing for the delivery of basic services (Public Service Reform Programme); (iii) strengthening
expenditure and financial accountability systems (Public Expenditure Management and Financial
Accountability Programme); and (iv) developing the financial system (Financial Sector Development
Programme). Implementation of some of these reforms began before and continued during FNDP
period 2006-2010. The strategic focus of the FNDP is strengthening economic infrastructure, human
resources development through investment in health and education, agriculture and rural
development for job and wealth creation for the poor. In addition, the mining, construction and
energy sectors will continue to contribute to the overall economic growth.
2
2.1.3 The Medium Term Expenditure Framework (MTEF) articulates the macroeconomic
objectives for the 2009-2011 period which includes: (i) sustain macroeconomic stability; (ii)
maintain Government borrowing within sustainable levels; (iii) promote economic diversification;
(iv) increase investment in human capital; and (v) enhance the competitiveness of Zambia. The
Government’s fiscal policy objectives are: enhancing fiscal prudence, focusing public expenditure on
FNDP expenditures priorities; and ensuring that public sector borrowing is sustainable. On monetary
policy a key priority for GRZ is to bring down inflation back to single digit of 8% levels, improve
international reserves to cover at least three months of import and to buffer Zambia economy from
external shocks in the medium term. With regard to economic growth, Government’s goal in the
medium term is to accelerate diversification of the economy from mining to key areas with great
potential to grow namely, agriculture, tourism and manufacturing.
2.1.4 The second Private Sector Development Reform Programme (PSDRP II) was launched in
2009 to build on the achievements of PSDRP I and enhance further business enabling environment
and human capacity for enterprise development in Zambia. Its specific objectives are: (i) to reduce
business licensing procedures and requirements resulting in a reduction of the cost of doing business;
(ii) to stimulate the growth of Medium Small Micro Enterprise (MSME) in Zambia; (iii) to increase
private sector labour productivity and employment; (v) to develop public private partnership for
investment on infrastructure and services; and (v) to address barriers to trade expansion and enhance
the capability of Zambia to efficiently and effectively take advantage of trade opportunities in the
regional and other international markets.
2.1.5 The Second Financial Sector Development Programme (FSDP II) complemented the PSDRP
II by improving access to finance. The three strategic pillars of the FSDP II are: (i) to improve
banking infrastructure and the capital markets; (ii) to increase access to financial services with
emphasis to the MSMEs and the rural and agricultural sectors; and (iii) to reduce cost of finance in
terms of interest rates, intermediation spreads as well as costs of financial transactions.
2.2 Recent Economic and Social Development, Perspectives, Constraints
and Challenges 2.2.1 GDP growth developments: Zambia
experienced an impressive economic growth
between 2002 and mid 2008. The average real
GDP growth between 1999 and 2008 was
4.8%. In 2009, the Zambian economy showed
resilience to the global economic crisis, and
grew by 6.3%, boosted by a significant
increase in copper production and a bumper
harvest. The real GDP growth is expected to
reach 5.8% in 2010. Inflation has been falling
gradually from 16.6% as end of 2008 to 9.9%
at end of 2009; and it is expected to decline
to 8% by the end of 2010.
2.2.2 Fiscal Developments: the budget deficit (overall balance including grants) widened from
2.2% in 2008 to 2.5% in 2009. Similarly, the deficit (excluding grants) increased from 6.0% of GDP
in 2008 to 6.7% of GDP in 2009. According to the revised programme with the IMF, the overall
Table I: Macroeconomic Indicators
Macroeconomic status
2008
2009
est.
2010
proj.
Real GDP Growth 5.7 6.3
5
.
8
Consumer prices (end of period) 16
9
.
9 8
Overall Balance (including grants) -2.2 -2.6 -2.4
Total Revenue 18.6 15.7
1
6
.
3
Total Expenditure 23.8 22.9
2
2
.
3
Current account balance -5.6 -1.8 -2.5
International reserves
(month of import)
2
.
8
3
.
9
3
.
5
2
6
.
3
budget deficit (including grants) for 2010 is projected to decline to 2.4% of GDP. Government
intends to finance part of it, about 2% by domestic borrowing and the remainder by foreign loans.
Total revenues and grants are estimated at 16.3% of GDP while expenditures are projected at 22.3%
of GDP in 2010. The tax revenue declined by 0.6 percentage points of GDP in 2009, due mainly to
imports related taxes and will slightly decline to 14.9% of GDP in 2010 (see Annex V). There is
concern among donors and civil society organization of a smaller tax base hence low (inadequate)
revenue collection which could impact negatively on budget execution. To enhance tax performance,
the IMF is supporting the ongoing tax policy and administration reform program.
2.2.3 Developments in the External Sector: The external sector (including grants) experienced
deficits averaging 2.5% of GDP between 2005 and 2009. The current account deficit (excluding
grants) narrowed to 1.1% of GDP in 2009, from 5.6% in 2008 due to a fall in copper prices and
reduced mining activities as a result of the global financial crisis. In 2010, the current account deficit
is projected to reach 2.1% of GDP (Annex V). The decline in export values is expected to be more
than offset by a marked contraction in imports and by lower copper sector profit. The international
reserves have increased significantly, from 2.1 months of import cover in 2007 to 3.9 months in
2009, boosted by the SDR 401millions allocation. It is estimated to slightly decline to 3.5 months of
import cover in 2010, as more resources will be required to finance public expenditure. Total public
debt is expected to remain the same (26.6% in 2008 and 26.4% in 2009) and remain the same in
2010 at 26.4%. The updated debt sustainability analysis (DSA) for Zambia by the IMF and World
Bank shows that the country is still at low risk of debt distress and that there is some scope for
external borrowing on commercial terms to finance high-priority infrastructure projects.
2.2.4 Impact of the Global Financial Crisis: The Zambian economy was affected by the world
economic downturn mainly through lower commodity prices, a drop in foreign portfolio investments,
and increased volatility of the Kwacha against major trading currencies. The falling demand for
copper resulted in a reduction in copper prices from a high of US $8,684.93/ton in April 2008 to
US$3,955.00/ton in March 2009. This development adversely affected export earnings and tax
revenues. Considering Zambia’s high dependency on the mining sector, economic diversification
through private sector development is an appropriate strategy in order to reduce the economic
vulnerability against external shocks.
2.2.5 Governance: Recent reforms have been on legal
and regulatory frameworks focusing on creating a
productive private sector environment and ensuring
transparency and accountability in the use of public
resources. Figure 1 shows the progress Zambia is
making on governance. According to the Transparency
International’s Corruption Perception Index (2009),
Zambia ranked 99 out of 180 countries. The 2008 Public
Financial Management-Performance Report (PFM-PR)
indicated improvement in a number of areas which have
increased transparency, comprehensiveness and
accountability of public financial management system.
However, Cooperating Partners raised concern with
regard to slow progress in (i) implementing the
Integrated Financial Management Information System
(IFMIS), (ii) creating a treasury management department within Ministry of Finance and National
Planning, and (iii)addressing the 2008 financial irregularities in health and over commitments in the
Figure I: Governance Indicators
Source: AfDB Statistics data from WEF 2009
-1,0
-0,5
0,0
Government
Effectiveness
Voice and
Accountability
Corruption
Perception
Rule of Law
ZambiaSub Sahara
4
roads sector. Government has taken some measures to accelerate the PFM reform implementation,
for example: procurement regulations had been enacted in late 2009, IFMIS pilot implementation
launched in January 2010, anti-corruption action plan developed and special audits were being
undertaken in health and roads. The CPs were satisfied with the response provided by GRZ on the
roadmap as satisfactory. See Technical Annex II for more information on the PRBS Roadmap.
2.2.6 Investment Climate: Zambia’s competitiveness and general business environment is
favourable relative to neighbouring countries. Zambia ranked 4th of nine SADC countries in the
World Economic Forum’s overall competitiveness index, 12th of 26 countries in Sub-Saharan Africa.
In Doing Business Report 2010, Zambia ranked 90 out of 183 economies in the world, and 6th out
of 46 countries in Sub Saharan Africa (from 9th in 2008). The recent reforms have steadily improved
the Business and Investment Climate in Zambia. The Bank’s PRSP II contributed to the
improvement of investment climate by supporting private sector development (PSD) component, on
reducing number of days to register a business. However, there are a lot of cumbersome regulations
and licenses related to business and trading across borders. The proposed operation addresses some
of these challenges, and further aims to improve investment climate.
Figure II: Competitiveness Index of SADC Countries
Source : Competitiveness Index, 2009, World Economic Forum
Figure III: Ease of Doing Business among
Sub-Saharan African Countries
Source : WB Doing Business Report
2007 Ranking 2010 Ranking
1 Mauritius 1 Mauritius
2 Namibia 2 South Africa
3 South Africa 3 Botswana
4 Botswana 4 Namibia
5 Kenya 5 Rwanda
6 Seychelles 6 Zambia
7 Swaziland 7 Ghana
8 Ethiopia 8 Kenya
9 Zambia 9 Ethiopia
10 Nigeria 10 Seychelles
2.2.7 Poverty Trends during FNDP Implementation: Zambia is making progress towards
achieving the Millennium Development Goals (MDGs) though rural poverty and weak service
delivery remain a challenge (see Technical Annexe IV). Zambia is among the low human
development countries ranking 164 out of 182 countries in the human development index of 2009.
Zambia’s GNI per capita (Atlas method) is US$ 950 and with an infant mortality rate of 92 per 1000
live births. The Mid Term Review of the FNDP concluded that overall poverty levels in the country
had reduced marginally (from 73% in 1998 to 68% in 2004 and to 64% percent in 2008). However,
this was mainly due to a reduction on urban poverty levels from 53% in 2004 to 34% in 2006.
Because of low poverty elasticity in mining-intensive economies, Zambia’s growth over the past
decade has not provided sufficient economic opportunities to rural poverty. Rural poverty levels
showed an upward trend from 78 percent in 2004 to 80 percent in 2006. The rural poor mainly
depend on agriculture and service industries. Increase of the rural poverty could also be due to
inadequate service delivery in rural areas. The lack of progress on poverty reduction in rural areas
5
called into question the credibility of GRZ's commitment to use public resources for fighting poverty
where it is needed most.
2.2.8 Constraints and Challenges: The development of the private sector remains a major
challenge in Zambia. Despite the improved investment climate, credit to the private sector fell
sharply from 50.2% annual growth in December 2008 to 14% at end of 2009. Also, the investment
on private sector is mainly focused on mining sector, which create relatively low employment
opportunity and poverty reduction because of low poverty elasticity in mining-intensive economies.
Even though Zambia’s investment climate is favourable relative to neighbouring countries, the non
mining sector has not attracted many international investors, even though there are increased
investments on mining sector, especially from China and India. Export is concentrated on raw
material, mainly copper and export sophistication has not improved since the 1980s.Private sector
development in Zambia requires policies focusing on wider competitiveness issue in addition to
investment climate. Lack of innovation or entrepreneurship is a concern in Zambia as well as
affordable credit access to private sector, particularly for MSMEs. Therefore, economic
diversification through private sector development is increasingly critical to ensure sustainable and
broad-based growth in Zambia. GRZ is committed to solving these constraints through reforms on
private sector and financial sector development.
2.2.9 Despite past and ongoing reforms, weaknesses in public finance management persist,
including credible budget, procurement, external audit and fight against corruption. The
improvement has been slow, especially implementation of IFMIS, introduction of treasury single
account, and budget controls to align expenditure to budget. Additionally, there are major
developmental constraints and challenges such as wide spread rural poverty, implementation
capacity, inadequate domestic resources and financial management including delays in enacting the
new procurement regulations. However, GRZ is committed to improving financial management and
record keeping through the introduction of IFMIS in Ministry of Finance and National Planning in
January 2010 and the planned roll out to another seven sites during 2010.
2.3 Bank Group Portfolio Status
2.3.1 There are currently 15 ongoing operations in Zambia with the Bank’s commitment
totalling UA173.9 million. The overall performance of the ongoing projects is satisfactory.
Ongoing projects consist of 6 public sector projects, 3 emergency public operations, 1 feasibility
study, 2 private sector projects and 3 regional operations (see Annexe VII). The number of problem
and potentially problematic projects reduced from 2 at the end of 2008 to 1 at the end of 2009.
However, 4 public sector projects are eligible for cancelation, whose closing dates have expired.
Additionally, two private sector projects were also eligible for cancelation on account of having been
signed and undisbursed for 2 years. However, all conditions precedent to disbursement was fulfilled
by end of 2009 and recruitment of staff for the National Coordinating Unit was ongoing and first
disbursement on the Special Account was prepared. Performance of the past two budget support
operations was satisfactory according to the joint annual assessment review.
6
III RATIONAL, KEY DESIGN ELEMENTS AND SUSTAINABILITY
3.1 Link with the CSP, Country Readiness Assessment and Analytical Works
Underpinnings
3.1.1 Link with the CSP: The proposed budget support operation is in line with the Bank’s
strategic goals, and the CSP (2007 – 2010). The CSP has two main pillars (i) Support to
Infrastructure Development; and (ii) Support to good governance by intensifying policy dialogue
through policy based and project investment lending.. GRZ recognized the strategic role that ‘good
governance’ plays in service delivery and poverty reduction. The strategic emphasis is on
accountability and transparency in management of public resources.
3.1.2 Private Sector Development was identified as a priority in the FNDP, and the recommended
major reforms are Improving the Business and Investment Climate, Policy Environment &
Institutions, Regulations and Laws, Infrastructure Development, Business Facilitation and Economic
Diversification, Trade Expansion and Citizens Empowerment, all of which are linked to the proposed
operation. During the implementation of the FNDP Government targeted these reforms by focusing
on two strategies whose focus is relevant to the proposed programme namely: (a) enhancement of
efficient public service delivery system and (b) private sector development by improving the business
and investment climate.
3.1.3 The proposed programme will support good governance activities and private sector
development, consistent with the Bank’s Strategy for Zambia, and FNDP objectives. Table II below
shows linkages between the CSP pillars and the FNDP priorities.
Table II : Links between the CSP and FNDP
Country Strategy Paper (CSP) Pillars Fifth National Development Plan Priorities
Support to Infrastructure Development. Strengthening the relevant economic and social infrastructure,
especially roads, schools and hospitals
Enhancing agriculture and rural development
Support to Good Governance through
provision of budget support.
Strengthening expenditure and financial accountability systems
3.1.4 Analytical Works Underpinnings: The Government undertook a midterm review of the
FNDP in 2009 and made the following conclusions: (i) There were bottlenecks and difficulties in the
implementation of certain key structural reforms like the introduction of the Integrated Financial
Management Information System (IFMIS); (ii) Despite the improvement recorded in variance and
deviation on budget, there is lack of assigning activities and programmes including basic output
targets in the activity based budgeting system which lead to non-alignment of expenditure to budget;
(iii) Enactment of the procurement regulations, requiring establishment of a regulatory and capacity
building authority; and (iv) the development of a comprehensive and coordinated anti-corruption
action plan. Areas that needed improvement included among others: budget preparation and
execution, procurement system, anticorruption systems well as the audit system. The Bank is
participating in an economic and sector work (ESW) together with the World Bank and DFID under
the theme: Jobs, Prosperity and Competitiveness in Zambia. In this regard, the Bank is financing a
study aimed at identifying social, political and institutional constraints on competitiveness and
proposing solutions in selected industries, tourism, mining and livestock industries. The findings of
this study will complement the support of the PRBS III and help achieve its objectives.
7
3.1.5 Private Sector Development: An evaluation of the PSDRP I 2005-08 undertaken in
December 2008 – February 2009 acknowledges that although much work had been done, further
outcomes for improving the competitiveness for the Zambian private sector were still expected. On
the basis of the PSDRP I evaluation, PSDRP II developed a monitoring and evaluation system and
communication strategies among different stakeholders through institutional arrangement. Also, the
number of policy target was reduced from 72 to 6. The priority reform areas are: Business licensing
and regulatory framework: MSME development; Labour reform and labour productivity; PPP
development; and Trade expansion.
3.1.6 Capacity Building: Government with support from eleven donors has developed the Public
Expenditure Management and Financial Accountability (PEMFA) programme in December 2004 and
started operation in 2005 for a period of five years. It was funded through a Trust Fund for a total
amount of USD72.0 million for five years, and due to end in December 2010. The objective of
PEMFA is to contribute to the efforts of Government in improving its capacity to effectively and
efficiently mobilize and utilize public resources and to strengthen overall financial accountability and
public service delivery. A successor programme is under preparation. The 2007 review of the
programme points to some components and reforms having made little progress such as the legal and
regulatory framework, external finance and co-ordination, parliamentary oversight and budget
preparation and execution. It further singled out the following areas as needing additional attention
and further planning in PEMFA: (i) budget preparation and formulation, as the MTEF
implementation and structure of budget documents need improvement; (ii) budget execution and
cash management, especially to secure timely, balanced and predictable releases to service delivery
units; and (iii) decentralization to cater for the need to build capacity and systems that will serve the
District level government institutions, an area where little is planned under the current PEMFA
programme.
3.1.7 The proposed programme is informed by various studies and analytical work recently carried
out by government and budget support donors. The Public Financial Management Performance
Report (PFM-PR) of 2008 concluded that while reforms show good progress in achieving results, the
public finance management systems had weaknesses. The PRBS and High Level Policy Dialogue
meetings in 2009, PRBS annual reviews of 2007 & 2008 have also indicated to evidence of
weaknesses in public finance management.
3.1.8 Country Readiness Assessment: Zambia has a stable democratic government based on a
constitutional multi-party democracy. Government has three planning instruments, namely Vision
2030 (long term), FNDP 2006-2010 (medium term) and the MTEF 2009-2011(short term) which
prioritized maintenance of macroeconomic stability among others. The FNDP and MTEF underpin
the strategic framework for the medium and short term policy actions and expenditure framework
respectively. Performance under the IMF Poverty Reduction and Growth Facility (PRGF) review of
December 2009 has been satisfactory and the programme is on track. An effective donor
coordination framework exists under the Joint Assistance Support for Zambia (JASZ), the Poverty
Reduction Budget Support frameworks as well as the PEMFA programme. All the groups have been
formalized by signing of individual memoranda of understanding for each. The 2008 PFM-PR,
assessment found that Zambia’s PFM system has good fiduciary safeguards, although there is need
for improvement which is currently being undertaken through the PEMFA Programme. Zambia
meets the general and technical prerequisites for General Budget Support as set out in the Bank’s
policies on Development Budget Support Lending (DBSL). The summary assessment of the
programme is presented in Annex III.
8
3.2 Collaboration and Coordination with Other Development Partners
3.2.1 Through the Zambia Country Office, the Bank is actively engaged in donor coordination and
policy dialogue with the Government and donors. The CPs in Zambia signed a GRZ/Donor Co-
ordination and Harmonization Memorandum of Understanding on 1st April 2004. The objective is to
enhance aid effectiveness through Aid Harmonisation and Co-ordination, for poverty reduction and
achieving the Millennium Development Goals (MDGs). In 2007, the Bank signed the GRZ/Donor
Co-ordination and Harmonization MOU as well as the JASZ MOU together with sixteen Cooperating
Partners (CPs). The agreement helps (i) to better align development assistance with the Fifth National
Development Plan; (ii) to strengthen local ownership of the development process; and enhance
official development assistance (ODA) effectiveness (iii) to improve aid delivery through effective
Division of Labour, deepen the results focus of development assistance and improve aid
predictability.
3.2.2 The general budget support programme in Zambia is supported by nine donors who are
committed to support the national development agenda through a common framework. The MOU
identifies underlying principles which are pre-requisites for provision of budget support (see section
V). The PEMFA programme aimed at building capacity is also supported by a group of donors (see
paragraph 3.1.6). On private sector, GRZ and 8 Cooperating Partners signed the MoU on the
coordination of the implementation and support of the PSD Reform Programme in 2006.
3.2.3 An evaluation of the implementation of the Paris Declaration was launched in January
2010 and the conclusions report are: (i) the harmonisation and alignment (H&A) agenda has
been advancing relatively well in Zambia, despite some procedural and operational challenges;
(ii) Government ownership of the development process and leadership of the H&A agenda is still
weak; (iii) GRZ has not been forceful in stating its preferences for the CP division of labour in
the 20 priority sectors identified in the FNDP; and (iv) although the Paris Declaration is widely
seen as an important international normative framework guiding relations between donors and
the Zambian government, the level of clarity on the PD principles varies and is low among GRZ
officials. The Bank through this operation will continue to work with other CPs and promote
dialogue with GRZ to improve ownership and implementation.
3.3 Outcomes and Lessons from Past Similar Operations
3.3.1 The PRBS I & II operations were anchored on the second pillar of the Bank’s support to
good governance which was an integral part of the JASZ and FNDP. The operations covered four
broad areas of the PRBS’s performance assessment framework (PAF), namely: macroeconomic
management, public sector reforms, wealth creation and social equity. The PRBS I focused on
procurement and debt management reforms. PRBS II focused on private sector development and
public financial management reforms. Performance of PRBS I was rated 70% by the group while that
of the PRBS II was assessed at 65.5%. All the targets for the two operations were met, MTEF was
introduced, Debt Policy was prepared, Procurement system was reviewed, number of days to register
a business were reduced from 8 to 3 days; and anti-corruption policy have been adopted by
Government.
3.3.2 The Program Completion Reports for both the PRBS I & II operations provide the lessons
that much more need to be done to make Zambia attractive to investors, increase private sector
investment and improve good financial governance. Progress was noted to be slow in implementation
9
of reforms in private sector development and public financial management including procurement,
anticorruption and external audit. However, Government is committed to implement PFM reform
including IFMIS rollout. It also adopted the anti-corruption and procurement legislation
implementation plan, as well simplifying business licenses and cross border documentation. Table III
below shows a summary of lessons learnt in the last two operations.
Table III Summary of Lessons Learnt PRBSI to II Lessons Actions Taken
Conditions should fall within the limits of government
The design of the PRBS III carefully selected targets
from the PAF (see Annex II) that was developed by
GRZ and donors and are achievable by Government
The need for the Bank to continue to align to the PRBS
framework and to enhance its participation in the Joint
Donors meetings through increased capacity in the field
office.
Joint reviews complement capacities of donors and
reduce transaction cost to Government. Donor
Coordination strengthens dialogue with Government.
Other donors have been consulted during the design of
this operation.
Flexibility in the aid delivery mechanism can be helpful
in achieving and sustaining development outcomes
during crisis such as the global financial crisis.
The PAF is reviewed every year to take into account
emerging issues, this operation selected areas on the
current PAF. The Bank will ensure during the annual
reviews that future PAFs are forward looking.
The need for strong and efficient public governance
systems/institutions is critical for timely and successful
implementation of budget support programmes; this
could reduce risks associated with weak country system.
This operation selected areas deemed important by both
GRZ, donors and the Bank to improve governance
which is critical for budget support. Introduction of
IFMIS and STA will improve financial governance.
The use of national systems simplified the design,
implementation, supervision and monitoring of the
operation.
National systems need to be improved and the operation
supports enactment and implementation of laws using
existing structures like MFNP, ZPPA, ACC, OAG, etc.
PRBS III uses national procurement and audit systems.
Source. PRBS III Team
3.4 Relationship to Ongoing Bank’s Operations
3.4.1 The proposed operation has strong links with other ongoing and future Bank activities in
Zambia. The PRBSIII will complement other operations which are aimed at improving public service
delivery and enhancing business environment for private sector growth. Improvement of the public
financial management will have a positive effect on project management capacity of other Bank
financed projects in agriculture, water supply and sanitation sectors, as well as newly prepared
projects in road and energy. This operation has a direct link with the Bank financed procurement
reforms in the Common Market for Eastern and Southern Africa (COMESA).
3.4.2 In private sector, the Bank is supporting operations in mining, manufacturing and finance
sectors valued at US$ 65 million. Particularly, the operations in the Finance involve two lines of
credit to ZANACO and Invest trust banks. These are aimed at providing long-term financing and
partial credit guarantee facilities to enhance SMEs access to finance on more favourable and
accessible terms, and thus contribute to deepening the reach of financial services of the sector in
Zambia. Also, the Bank’s grant of an amount of UA 1.3M provides technical assistance to SMEs in
Zambia. These additional supports of the Bank will help to improve the business environment in
Zambia complimentary to the proposed program.
10
3.5 Bank Comparative Advantages and Added Value
3.5.1 The cumulative experience and achievement from budget support operations in several
countries in Africa has provided the Bank with invaluable experience in supporting public sector
reforms. This has led to a strong partnership between the Bank, other CPs and governments in public
sector reform and business enabling environment development. The Bank also built knowledge and
gained the trust of authorities on business environment reforms both in the previous operations and
through analytical work such as the Africa Competitiveness Report (with the World Bank and World
Economic Forum) and the ongoing study (with World Bank and DFID) that will identify constraints
on competitiveness in selected industries, tourism, mining and livestock industries. This allows the
Bank to bring the best practices of budget support operations in Africa to Zambia. The experience
gained from implementing the SFTA rand PRBS reform programmes will put the Bank in a better
position to manage the operation efficiently and add value to the reform process. The proposed
operation will make synergy with other ongoing Bank operations in public service delivery and
business environment for private sector development.
3.5.2 Through the Country Office, the Bank is now better placed to play active roles in the aid
architecture of Zambia as well as in the dialogue with other partners. A closer supervision will be
provided for this operation through the Zambia Country Office.
3.6 Application of good principles on conditionality
3.6.1 Good practice principles on conditionality, particularly those relating to reinforcement of
ownership by Government, coordinated accountability framework by Government and financial
partners, and the adaptation of this framework to the Bank support, choice of disbursement
conditions necessary for achieving results, and the transparent progress reviews for predictable and
performance-based financial support were taken into account in the formulation of the PRBS III. The
details of application of good principles on conditionality are given in Annex VIII.
IV THE PROPOSED PROGRAMME
4.1 Programme’s goal and purpose
4.1.1 The purpose of this operation is to improve financial governance through efficient public
financial management and fight corruption and enhancing business environment by simplifying
business licenses and shortening time for trade across borders, as outlined in Box I.
Box I: Purpose of PRBS III
To improve financial governance through efficient public financial management and fight corruption by
Reducing expenditure variance between budget and total expenditure outturn to less than 15% in 2009
from 25% in 2008
Increasing Zambia’s Corruption Perception Index (CPI) ranking by Transparency International (TI) to 90
in 2011 from 99 in 2009 out of 180 countries.
To enhance business environment by simplifying business licenses and shortening time for external trade by
Reducing cost of compliance with licenses to K1.5 trillion by December 2011 from 2.2 trillion Kwacha in
2008
Shortening time required to cross Chirundu Border Posts from 3 days in 2009 to 1 day by June 2011.
11
4.2 Programme Components, Operational Objectives and Expected Results
4.2.1 The programme is consistent with the reform programmes of GRZ, CSP pillars and lessons
learnt from the past operations. The programme has two components, namely: (i) improving financial
governance; and (ii) enhancing business environment. The financial governance component will
focus on the following interventions: enhancing credibility of the budget process, establishing and
implementing effective procurement systems, coordination and streamlining anticorruption
regulations, and ensuring actions are taken on the recommendations of the Auditor General. The
second component will reduce the cost of doing business in Zambia, through streamlining business
licenses and administrative cost of compliance with licenses and shortening time required for cross
border trade.
4.2.2 These components have been carefully selected based on reforms needs of the GRZ and
implementation capacity of both the Bank and GRZ. Further, this operation deepens reforms
supported by the past budget operations and complements reforms supported by other development
partners. The PAF matrix comprising all sectors supported by the Bank and other cooperating
partners is shown in Technical Annex I.
Component A: Improving financial governance The intervention aims to improve financial
governance through credible budget, procurement, external audit and fight corruption.
4.2.3 Current Status: On the basis of the PFM-PR of 2008, aggregate expenditure outturn
compared to approved original budget using the PEFA indicators improved from C in 2005 to B in
2008, while composition of expenditure out turn and aggregate revenue out turn compared to original
budget remained stagnant during the same period. The stock and monitoring of expenditure payment
arrears moved from D+ in 2005 to B+ in 2008. A new Public Procurement Act was approved in
2009, aimed at improving efficiency of the system and Government is preparing new procurement
guidelines and rules as well as bids documents based on the new Act. The Zambia Public
Procurement Authority (ZPPA), whose function is regulatory and capacity building of the
procurement of goods, works and services and to ensure transparency and accountability in public
procurement has been established. The new policy provides for an appeal mechanism for aggrieved
parties (bidder or supplier) to contact the Authority (ZPPA) and if not satisfied with its decision to
submit its appeal for arbitration. The capacity of the Auditor General has improved due to support
from CPs. The Auditor General’s Office has decentralised to about 36 districts and all the provinces
and audit coverage is about 79%, nationally. The recommendations of the Auditor General and the
Public Accounts Committee are reviewed and acted upon by a committee chaired by the Secretary to
Treasury. The National Anti-corruption Policy which is the first comprehensive policy on the fight
against corruption in a comprehensive, coordinated, and inclusive manner was adopted in 2009. The
policy provides for participation and involvement of all stakeholders to deal with corruption which
requires a multi facetted approach. The fight against corruption requires intervention at three levels,
namely, institutional, legal and social aspects. Eight integrity committees to fight and prevent
corruption at the work place have been established and they report through the Anti-Corruption
Commission (ACC) to the National Steering Committee chaired by the Secretary to Cabinet which
oversees implementation of the anti-corruption plan.
4.2.4 Challenges: The ability of government to implement budgeted expenditure is an important
factor to assess delivery of public services and ensure credibility of the budget. The past trends for
the last three years show an expenditure variance of 20%. Efficient procurement system is necessary
for budget management and credibility, therefore, establishment of procurement units in MPSAs and
12
capacity development to ensure effective and efficient use of procurement regulations as well as
monitoring compliance without trained procurement staff, will be hard to achieve. Auditor General’s
budget and employment is controlled by Government. Enforcement of the audit recommendations is
not effectively undertaken at times due to delays in service delivery and inadequate information for
follow up. Coordinating the fight against corruption, enhancing transparency and accountability in
the exercise of public authority, streamlining bureaucratic and complex procedures in public service
delivery, building capacity and motivating public service employees, and mainstreaming anti-
corruption interventions, are challenges that require concerted efforts by all stakeholders. GRZ is
committed to fight corruption at all levels and good financial governance in public service.
4.2.5 Needed reforms to improve financial governance: Introduction of the single treasury
account and quarterly reviews will enhance budget execution. The introduction of IFMIS through the
PEMFA programme will also improve record keeping and budget preparation and execution, and
preparation of accounts for auditing. The government intends to introduce a planning and budgeting
act in 2010 to reinforce budget planning and execution, and accountability among MPSAs. The
Government is also committed to decentralise the procurement system to MPSAs and will train
personnel to manage procurement units and ensure that ZPPA plays its regulatory and capacity
building roles. The completion of the procurement guidelines will set another stage for training and
establishment of procurement units in all procuring entities. On external audit, the Secretary to
Treasury is to ensure that treasury minutes on recommendations of the Auditor General and Public
Accounts Committee are produced in time and follow ups are made. To enhance the fight against
corruption through the integrity committees, the National Steering Committee is mandated to ensure
that anti-corruption activities are comprehensively coordinated and incidence of corruption is
reduced. The effectiveness of the structures will be a test to the fight against corruption. Governance
issues that cropped up last year points to the need for a cohesive fight against corruption.
4.2.6 Policy Actions and targets for improving financial governance: GRZ intends to
implement measures that will improve public financial management and the fight against corruption
through alignment of expenditure to approved budget, implementing approved legislation on
procurement, developing and implementing a National Anticorruption Plan, and effectively acting on
the Auditor General’s recommendations. In an effort to align expenditure to original budget, GRZ
will provide evidence that percentage of spending agencies (heads) whose expenditure is between
95% and 105% of the total funding (including grants) is 85. (see table V and Annex II for prior
actions and policy matrix). In an ideal situation all spending agencies should spend 100% of their
budget allocation. Alignment to budget will also be influenced by efficient implementation of
procurement regulations and in this regard GRZ will ensure that procurement regulations are
adopted by Cabinet by May, 2010 and also implemented. Implementation of budget controls through
IFMIS and single treasury account will ensure that agencies spend according to their budget.
Ministry of Finance will execute controls to ensure that percentage of expenditure variance between
original budget and total expenditure is less than 15% in 2009 (see table V and Annex II for prior
actions policy matrix).
4.2.7 External audit is an important factor to ensure financial transparency and accountability to
achieve financial governance. Government will ensure that the proportion of recommendations in the
Auditor General’s report acted on is 85% in May 2010 (see table V and Annex II for prior actions
and policy matrix). The Government is required to provide Treasury Minutes to PAC with clear
actions on subject undertaken and reported. If proper and timely action is taken on the
recommendations of the Auditor General’s report and Public Accounts Committee, the outcome will
be an effective and efficient public resources management. Reduction of the incidence of corruption
13
contributes to improved financial governance. The GRZ will ensure that Implementation Plan of the
anti-corruption policy is developed and submitted to Cabinet by May, 2010 (see table V and Annex II
for prior actions and policy matrix). Implementation of these reforms will result in improved
financial governance.
Component B: Enhancing business environment The intervention aims to reduce the cost of
compliance with business licenses and shortening time for cross border trade
4.2.8 Current Status: The past reforms have
steadily improved the Business and Investment
Climate in Zambia. In Doing Business Report
2010, Zambia is ranked 90 out of 183 economies,
improved from 99 and 116 out of 178 economies
in 2009 and 2008, respectively. Table IV shows
Zambia’s ranking with respect to several items
considered for the ranking. Through PRBS II, the
Bank has contributed to this improvement of
investment climate, by supporting the PSD
component on shortening time for starting a
business. This improvement made Zambia’s
competitiveness and general business environment
favourable relative to neighbouring countries.
However, there are a lot of cumbersome
regulations and licenses related to business,
particularly in dealing with construction permits, employing workers and starting a business. Trading
across borders ranked lowest for the last two years (see table IV). To further improve the business
environment, the proposed operation aims to support reforms in two areas: (i) reducing the
administrative cost of compliance with business licenses and ii) shortening time for trade across
Chirundu border post.
4.2.9 Business operation in Zambia requires numerous licenses which cause a heavy financial
and administrative burden on businesses. The aim is to reduce administrative costs of compliance
to licenses. As of 2008, there were 517 licenses related to business from 15 different sectors,
including regulations on construction permits, employing workers and starting a business. The GRZ
appointed a Business Licensing Reform Committee (BLRC) in May 2008 to eliminate the
unnecessary licenses in Zambia. The GRZ is now in the process of implementing the
recommendations of the Business Licensing Report. A drafting Committee under the Ministry of
Justice was appointed by Cabinet to implement the report’s recommendations. This reform is not
only critical to attract new business activities, but also to ease the way for the informal sector to
transform to the formal sector.
4.2.10 High cost of trade is the binding constrain of private sector development in Zambia. As
a landlocked economy, transportation in and out of the country is expensive. But the current
complicated process of trade across borders worsens this situation. For the medium size firm located
in the urban area, it takes 53 days to export and 64 days to import products. The GRZ together with
its three neighbours (Democratic Republic of Congo, Tanzania and Zimbabwe), made decisions to
improve cross border trade by introducing One Stop Border Posts at three places, Chirundu,
Kasumbalesa and Nakonde. Another One Stop Border Posts at Kazungula between Botswana and
Zambia, is still at design stage, financed by the Bank is expected to facilitate trade. Chirundu border
Table IV : Zambia’s ranking in Doing Business
Items 2009 2010
Starting a Business 72 94
Dealing with Construction Permits 146 151
Employing Workers 129 116
Registering Property 94 94
Getting Credit 68 30
Protecting Investors 70 73
Paying Taxes 39 36
Trading Across Borders 157 157
Enforcing Contracts 88 87
Closing a Business 83 83
Ease of Doing Business(Overall) 99 90
Source : Doing Business Report, 2010. WB
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post that lies between Zambia and Zimbabwe provides the shortest route to South Africa. Currently,
85% of imports/exports of Zambia go through Chirundu Border Post. Therefore, the number of days
required to import and export could be significantly reduced when Chirundu border is in full
operation. Also, current lessons learned from Chirundu border could help implementation of other
border posts.
4.2.11 Challenges: Lack of communication among the implementing bodies in Ministries and
local government is a strong bottleneck to licensing reforms. Among the list of licenses to be
eliminated or amalgamated, 67 licenses are issued by local Government. In sector level, more than 25
licenses are to be eliminated or amalgamated in agriculture, commerce, information broadcasting and
communication and health sector. This means that licensing reform needs to be implemented by all
ministries and regulatory authorities. However, currently there is no regular communication channel
related to licensing reform among ministries. Initiating a dialogue among implementation bodies as
well as legal institution is highly required. Strong commitment of government to progress this reform
and capacity building in implementation bodies is necessary. Despite successfully launching the One
Stop Border Post in December 2009, Chirundu Border has not yet been fully operational. The
infrastructure has been modernized and the inspection time has been reduced by reducing the number
of trucks physically checked by Zambia Revenue Authority (ZRA) to three, out of 110. However, the
average time to across Chirundu border takes three days, far below its target of one day due to the
delay of ICT system installation and not integrated border agencies.
4.2.12 Policy Actions and targets for improving business environment: The BLRC built a
comprehensive inventory of all business licenses that exist in Zambia and established baseline on
number of licenses to (a) eliminate and (b) streamline (see Annex VI for list of license reviewed).
The BLRC made a recommendation of specific reform actions to eliminate or streamline the licenses
and this report was submitted to Cabinet in 2009 (see table V and Annex II for prior actions and
policy matrix). The GRZ is now implementing the recommendations of the Business Licensing
Report which culminated in the repeal, amendment and revision of a number of Acts, the elimination
of licenses, streamlining of processes and procedures. Up to now, 40 Acts and eight regulations
related to reducing licenses have been drafted for presentation to Parliament. An additional 49 Acts
are yet to be drafted and this will result in 186 licenses either being eliminated, amalgamated or
reclassified. The expected result would be more than 150 licenses are removed from 15 sectors by
December 2010. Further, the GRZ is preparing the creation of the Electronic Registry and Regulation
Unit for further simplification of the licensing process. E-registry needs to be piloted by June 2011.
This reform is not only critical to attract new business activities, but also to ease the way for the
informal sector to incorporate them into the formal sector. This will reduce regulatory transaction
costs and risks, improve transparency and accountability and provide a platform for further
regulatory reform.
4.2.13 To shorten the trade time across borders, the ZRA is now working on mainstreaming
Information Communication Technology access by Zambia and Zimbabwe to automate customs
operations. The legislative and bilateral agreements have been completed by both sides. The ICT
facility needs to be installed by December 2010. There are 11 border agencies at Chirundu border
post and each of them requires different process to import and export products, which prevents
shortening time across borders. It is required to establish a committee to integrate these agencies by
June 2011 and simplify the process for trade across the border. Additionally, there are concerns about
the weak capacity in Chirundu one stop border and lack of an independent assessment for time
release study in this border post. The GRZ and cooperating partners are providing staff training. ZRA
15
is conducting time release study at border post together with CPs and COMESA. To monitor the
implementation result, this study needs to be publicized.
4.2.14 During the programme appraisal mission, the Government demonstrated that substantial
progress had been made in implementing key policy actions that are aimed at reforming the
environment for private sector growth, and improving financial governance. The prior actions that
are shown in Table V have been carefully selected, and they build the momentum for reforms in key
areas supported by PRBS III. What is remaining now is for the GRZ to provide evidence of their
fulfilment, prior to Board approval of the PRBS III. These measures have been extracted from the
PAF that was developed by the Government, with wide consultations with key stakeholders,
including the Bank and other cooperating partners.
Table V: Prior Actions for the PRBS III
COMPONENT A: Improve financial governance through public financial management and fight corruption
Reform area I: Credibility of the budget
Percentage of spending agencies (heads) whose expenditure is between 95% and 105% of the total funding
is 85. Implementation of budget controls through IFMIS and single treasury account in May 2010.
Percentage of expenditure variance between original budget and total expenditure is less than 15% in2009
Reform area II: Procurement regulations
Procurement regulations are submitted to Ministry of Justice by May 2010
Reform area III: Auditor General’s Recommendations
85% of 2007 Auditor Generals recommendations acted upon in 2010
Reform area IV: Anticorruption Implementation Plan
Implementation plan for the Anti Corruption Policy is developed and launched by Government by May 2010
COMPONENT B: Improve business environment by simplifying business licenses
Reform area I : Reduced cost related to business license
Establishment of baseline on number of licenses to (a) eliminate and (b) streamline by Business Licensing
Reform Committee
A recommendation report on licensing reform submitted to Cabinet.
4.3 Financial needs and Arrangements
4.3.1 The financing needs and justification of the operation is based on the fiscal gap that exists in
the country. This will also determine how the resources should be disbursed. According to the IMF
Article IV Consultation of 2009 staff report, the overall (including grants) fiscal balance widened to
2.5 percent of GDP in 2009 from 2.2% in 2008. Domestic revenues as a share of GDP declined from
18.6 % of GDP in 2008 to 15.7 % of GDP in 2009, leading to lower than expected expenditure at the
time of the 2009 budget approval. A reduction of 26.4% in trade related taxes due to the global
economic crisis resulted in the fall in revenues. The expenditure out-turns for 2009 is 8.3% lower
than the budget mainly because of decline in projected revenue by 13.2% from the original budget.
The lower revenue performance was attributable to underperformance of trade taxes which were
affected by low export and imports. This shortfall was financed by domestic borrowing which
increased by 3.0% of GDP.
4.3.2 In 2010 the revenue collections are projected to increase to about 16.3% of GDP and
expenditure will reach 22.3% of GDP. In 2010, the fiscal balance (excluding grants) is projected at
5.9%, of which 0.6% will be external financing out of which 0.4% of GDP will be in the form of
budget support. The Bank’s UA31.90 million and other PRBS CPs commitments for 2010 amounting
to US$246.36 million have already been factored into the grants and contributed to reducing the
projected financing gap of 5.3% which leaves an unfinanced gap of 2.4% of GDP (overall balance
16
including grants) in 2010. GRZ intends to finance the 2.4% from domestic borrowing. A delay or
withholding of resources by donors will increase the unfunded deficit which may affect the
macroeconomic variables. Table VI below shows a financing gap (excluding foreign financing) of
US$875 million, grants and loans of US$481 million, leaving an unfunded balance of US$394
million. GRZ intends to increase domestic funding to finance the gap.
Table VI: Fiscal financing gap in billion of Zambian Kwacha (US$ billions)
2009 2010 2011
GDP at market prices 65,196 ($14.02) 76,191 ($16.38 ) 87,446 ($18.80)
Total Revenue (Domestic) 10,226 ($2.2 ) 12,107 ($2.6 ) 13,876 ($2.98 )
Grants & Loans 2,948 ($0. 634) 2,236 ($0.481) 2,216 ($0. 477)
Total revenue including grants & loans 13,174 ($2.833) 14,343 ($3.084) 16,092 ($3.460)
Total Expenditure 14,841 ($3.191) 16,178 ($3.479) 17,476 ($3.758)
Balance including grants & loans -1,667 (-$0.358) -1,835 (-$0.395) -1,384 (-$0.298)
Balance excluding grants & loans -4,615 (-$0.992) -4,071 (-$0. 875) -3,600 (-$0.740)
Budget Support Funds (loans & grants) AFDB ($0.015) ($0.049)
EC ($0.039) ($0.046)
WB 0 ($0.020)
Bilateral Donors:
DFID ($0.047) ($0.052)
Others ($0. 076) ($0.086)
Total Loans and grants (budget
support)
($0.178) ($0.253)
Project loan and grants ($0.456) ($0.228)
Total Foreign Financing ($0.634) (0.481)
Source: IMF draft Article IV Consultation Report of 2009 and GRZ MFNP
4.4 Programme’s Beneficiaries
4.4.1 Beneficiaries will include the entire population of Zambia, due to the broad reform agenda
and its impact on the entire development programme. Users of public services will benefit from
efficient budget execution, procurement system, audit service and private entrepreneurs who will
experience less cost of managing a business. Some of the beneficiaries institutions are: the Ministry
of Finance and National Planning, Zambia Public Procurement Authority (ZPPA), Anti-corruption
Commission (ACC), Auditor General and Parliament, Enterprises in Zambia, especially for SMEs
and importers and exporters. Also, the programme resources will allow for increased spending on
social programs to make further progress towards achieving the Millennium Development Goals.
Improved business environment will enhance private investment and employment opportunities that
will benefit workers.
4.5 Impacts on gender
4.5.1 While the proposed operation does not have specific prior action on gender, the PRBS
programme supports social sectors (health and education) among others and some activities are
expected to have an impact on gender. The ongoing and intended reforms aimed at improving public
finance management and public services delivery will strengthen the numerous programs directly
supporting women, especially health assistance, for example increased institutional deliveries. The
PRBS programme also covers key strategic goals such as gender equality in education, specifically to
reduce the number of districts whose transition rate for girls fall below the threshold of 50 percent for
17
grades 7 & 8 from 26 in 2008 to 25 in 2009. HIV/AIDS is also covered by PRBS within the cross
cutting issues and activities include prevention of mother to child, provision of a complete course of
ARV to pregnant women. The Bank will have a limited impact on gender through its participation in
annual assessment review meetings of the PRBS programme and other meetings where PRBS issues
are discussed.
4.6 Environmental Impacts
4.6.1 PRBS III is classified in Category 3 according to the procedures for the environmental and
social impact assessment. Given that PRBS III is a budget support operation, the policy changes it
supports are not likely to have direct effects on the environment and natural resources.
V IMPLEMENTATION, MONITORING AND EVALUATION
5.1 Implementation arrangements
5.1.1 Institutional Arrangements: The Ministry of Finance and National Planning is the focal
point for budget support. It houses the PRBS Secretariat and the GRZ Monitoring and Evaluation
Department as well as chairing the annual consultation for Performance Assessment Framework
(PAF). The Zambia Country Office represents the Bank in the PRBS review and follows up on
monitoring progress in the Bank’s areas of focus. The programme will be jointly supervised twice a
year by the cooperating partners and Government as provided for in the common framework for
budget support. The PRBS donor group hold meetings to consult each other on PAF progress and any
other issue of their interest. Chairmanship of the PRBS group rotates among volunteers and acts as
the focal point between the PRBS donors and government.
5.1.2 The general budget support programme in Zambia is supported by nine PRBS members who
support the national development agenda through a common framework formalized by a
Memorandum of Understanding (MOU) signed in April 2004. The PRBS policy dialogue is based on
the MOU and the underlying principles defined therein which includes governance and human rights
and stable economic management. The monitoring and review is based on a common PAF which
includes benchmarks and indicators monitored and assessed annually by the members. For the 2009-
2011, the areas of focus include: reform processes; economic sectors; social sectors; and cross cutting
sectors. The upcoming PAF review will take place in May 2010. During the assessment, Government
and DPs discuss policy coverage, formulation of targets and means of verification. DPs confirm their
commitments for the following year during the second review scheduled for August 2010.
5.1.3 The PRBS MOU provides for one foreign currency account into which the PRBS resources
will be disbursed before an equivalent Kwacha amount is deposited into the general Government
treasury account by the Central Bank within two days after receiving the funds. The resources of this
operation will be disbursed in a single tranche after an overall satisfactory assessment of the PAF on
the specific prior actions of the operation assessed by the Fund and evidenced by the report of the
PRBS PAF review of May 2010. However, the Bank will continue to engage in Zambia since this
operation is part of an ongoing programme covering 2009-2011.
5.1.4 Procurement & Audit: Zambia has improved its procurement regulatory framework to
bring it in line with the Bank Group rules, through the assistance of the Bank in previous projects and
other CPs. While capacity is being developed, the PRBS agreed to use the procurement system of
Zambia for the purposes of budget support. The office of the Auditor General has also received
18
support from the Bank and other CPs and has developed capacity and improved coverage to have
presence in provinces and districts. The PRBS MOU signed by all CPs provides that the budget
support donors will use the Auditor General’s report for audit of the operation. However, it also
provides for engagement of an external audit, in cases where the donors are not satisfied with the
Auditor General’s report. The Government will use its procurements system subject to the list of non
eligible items
5.1.5 Disbursement: The ADF loan amounting to UA31.9 million for a one year period starting
July 2010 to June 2011 will be disbursed in a single tranche in 2010. The disbursement will finance
the 2010 budget of the Government to reduce the projected deficit. However, the Bank will continue
to engage in Zambia to monitor progress on some of the reforms that will be assessed in 2011.
5.2 Monitoring and evaluation arrangements 5.2.1 The programme will utilise the Monitoring and Evaluation mechanism based on the country
system built around the PAF annual progress report. It receives reports from sector working groups
and compiles a report that is submitted to donors for review and verification before the annual review
meetings. Sector working groups chaired by Permanent Secretary of respective sectors which include
CPs sector leads/representatives meet regularly to assess and report progress to M&E Department of
MoFNP. At the review meetings, Government presents its own assessment on the PAF performance
and donors also presents theirs and a consensus is reached on the status of each indicator and the
overall performance. Donors including the Bank, then use their internal processes to disburse based
on individual agreements signed with Government. At the annual review meetings Parliamentarians
and Civil Society organizations are invited.
VI LEGAL DOCUMENTATION AND AUTHORITY
6.1 Legal Documentation
6.1.1 The Fund will enter into a Loan Agreement with the Republic of Zambia for the purposes of
the proposed budget support. Both the Government of Zambia and the Fund will accept all the
provisions of the General Conditions Applicable to ADF Loan and Guarantee Agreements (as
amended from time to time).. The total amount of the loan will be UA31.9 million to be disbursed in
one tranche. The charges and payments arrangements will be according to the policy and financing
guidelines provided in the ADF XI report..
6.2 Conditions associated with Bank Group intervention 6.2.1 Prior Actions: The joint annual assessment review of the performance assessment
framework including prior actions for this operation will be undertaken in May 2010 by all PRBS
members including GRZ. Before this proposed programme is presented to the Board for approval,
the GRZ shall provide evidence to the Bank that the prior actions outlined in Table V have been
implemented.
6.2.2 Entry into force of the loan: The loan shall enter into force subject to fulfilment by the
borrower of the provisions of section 12.01 of the General Conditions.
6.2.3 Conditions precedent to disbursement: The obligation of the Fund to make the
disbursement of the loan shall be conditional upon the entry into force of the loan agreement in
19
accordance with section 12.01 of the General conditions and the fulfilment by the Borrower of the
following condition:
The Borrower shall have to the satisfaction of the Fund, provided evidence of having opened a
foreign currency account with the Bank of Zambia dedicated to receive the proceeds of this loan.
6.3 Compliance with Bank Group policies
6.3.1 This programme complies with all applicable Bank Group policies and guidelines, including:
(i) the 2004 Guidelines for Development Budget Support Lending; (ii) the Bank’s Governance
Strategic Directions and Action Plan, 2008-12; (iii) the Environmental and Social Assessment
Procedures (ESAP); and (iv) requirements on cross-cutting issues.
VII RISKS MANAGEMENT 7.1 Capacity Constraint: Capacity constraints could adversely affect reform implementation
and service delivery. Lack of coordination among service ministries to private sector needs could
impede private sector development. The ongoing reforms including a multi-donor capacity building
initiative under the PEMFA programme and close monitoring by Cooperation Partners will mitigate
the risk. (See technical Annex III)
7.2 Increased Financing Gap: There is a risk of increasing the budget deficit if Government
expenditure continues to increase without a corresponding revenue base increase. To mitigate this,
GRZ intends to reduce unsustainable expenditures and increase spending on revenue generating
activities. IMF is monitoring fiscal discipline and assisting the revenue modernisation program to
broaden tax base and increase domestic revenue collection capacity.
7.3 Weaknesses in Public Finance Management: Alleged financial irregularities in the health
sector and perceived over procurement in the roads sector posed a challenge to the credibility of the
country’s public financial management system. Government has taken a series of actions including
the appointment on 20 April 2010 of a new Permanent Secretary to the Ministry of Works and
Supply and the dissolution of the Boards of Road Development Agency (RDA) and the National
Road Fund Agency to confirm its firm commitment to address the problems in the road sector.
Moving forward, Government is strengthening the mechanisms of ensuring adherence to financial
regulations. In addition, structural measures such as establishment of a treasury single account and
implementation of IFMIS will strengthen financial controls and mitigate the risk.
7.4 Upcoming General Elections in 2011: While Zambia enjoyed political stability since
independent in 1964, political situation may not always favourable to development. Zambia will hold
its fifth multi-party general elections in 2011. The risk is possible slippages on expenditure due to
unforeseen spending on election. The PRBS mechanism will ensure continued dialogue on issues
affecting budget implementation, and will continue to monitor and mitigate political risks through the
ongoing dialogue with Government of Zambia.
VIII RECOMMENDATION
8.1 Management recommends that the Board of Directors approve the proposed Loan of UA31.9
million from the ADF resources of Bank to the Government of Zambia in the form of general budget
support for the purposes and subject to the conditions stipulated in this report.
1
ANNEX I Letter of development policy
MINISTRY OF FINANCE AND NATIONAL PLANNING OFFICE OF THE MINISTER
P.D Box 50062, Chimanga Road, Lusaka, Phone: +260 211 254263,250481, Fax: +260 211 253494, website:
www.mofnp.gov.zm, email: [email protected]
REF: MFAL/1I 02/1/59
May 17th 2010
Mr. Donald Kaberuka
President
African Development Bank Group
BP323, 1002 Tunis Belvedere
TUNISIA
Your Excellency,
RE: LETTER OF DEVELOPMENT POLICY - THIRD POVERTY REDUCTION BUDGET
SUPPORT CREDIT
1. I am writing to request on behalf of the Government of the Republic of Zambia, a credit of VA
31.9 million equivalent from the African Development Fund (ADF) in support of our ongoing reform
efforts. This Credit, the First Poverty Reduction Support Credit (PRSC I), aims to help Zambia
sustain the economic gains it has achieved over the last few years and further enhance our
capabilities to sustain growth and reduce poverty, while providing us with financial resources that
will be used for to implement the final year of the Fifth National Development Plan (FNDP).
Fifth National Development Plan
2. In January 2007, our Government launched the Fifth National Development Plan (FNDP), which
is Zambia's second Poverty Reduction Strategy Paper (PRSP) for the period 2006-2010. Our FNDP
is guided by the National Vision 2030 (NV2030), which has as its goal to transform Zambia in to "a
prosperous middle income country by the year 2030." The FNDP is organised around the theme of
"broad-based wealth and job creation through citizenry participation and technological advancement"
and it focuses on "economic infrastructure and human resources development".
2
3. The FNDP builds upon the achievements of the first PRSP, for example, strong improvements in
macroeconomic performance and progress in public expenditure management. The FNDP has a
strengthened focus on key issues relevant for Zambia's development, emphasizes achieving tangible
results, and includes monitoring and evaluation arrangements. On policies, it continues to place
emphasis on the importance of a stable macroeconomic framework, improved domestic revenue
collection, good governance, increased production and productivity in agriculture, and strengthened
human resource development.
4. The preparation of the FNDP was highly participatory. All the major stakeholders – civil Society,
cooperating partners, the private sector, permanent secretaries, members of parliament and the
Cabinet-were involved in the preparation of the strategy. The priorities were arrived at through a
series of consultative meetings with Sector Advisory Working Groups (SAGs) and other key
stakeholders. This consultative process integrated the views of 21 SAGs and included the preparation
of 72 district development plans that were approved by the respective provincial and district
Development Coordinating Committees. Consequently the FNDP has a high degree of ownership.
5. The importance of institutional frameworks for implementation, monitoring and evaluation are
acknowledged and prioritized by the FNDP. The Planning and Economic Management Division
(PEMD) of the Ministry of Finance and National Planning has served as the focal point for
institutional linkages. It has institutionalised five-year development planning as the means to guide
the budget preparation process. With the formal creation of the Monitoring and Evaluation Unit
under PEMD during the implementation of the first PRSP, the Plan seeks to institutionalise a system
to monitor inputs, outputs, outcomes and impacts so that resources are strategically managed and
progress tracked. In particular, monitoring and evaluation processes will provide essential data and
insights for drawing lessons, priority setting and for an informed review of the FNDP
implementation.
Sixth National Development Plan
6. The Fifth National Development Plan is in the final stages of implementation. Over the next few
months, the Sixth National Development Plan (SNDP), covering the period 2011-2015 will be
launched by the Government. The SNDP will continue to focus on maintaining macroeconomic
stability and promoting broad-based growth across the country.
7. The broad objectives of the SNDP will be to:
a. Enhance macroeconomic stability;
b. Expand domestic resource mobilisation;
c. Accelerate growth, economic diversification, and productive employment;
d. Accelerate rural development; and
e. Enhance the quality of human development.
8. The strategic focus areas aimed at achieving these objectives will be infrastructure and human
development, and structural policy reforms. Infrastructure development will focus on improving
the quality of energy, transportation and water supply and sanitation across the country. Human
development will build on the foundations built during the Fifth Plan, and continue to expand
education and health services to the furthest reaches of the country. In particular, focus will be placed
on improving tertiary education, and rural access to healthcare and education facilities.
3
9. Additionally, the SNDP has identified certain key sectors as having a high potential to reduce
poverty, particularly in rural areas. Agriculture, manufacturing, and tourism have will receive priority
resource allocations during this Plan, with resources targeted at projects that yield high economic and
social returns.
10. The benefits from a stable macroeconomic environment that Zambia has accrued over the last
decade continue to remain disproportionately shared. In particular rural poverty levels remain high,
while quality and availability of services remain low. The SNDP will focus on ensuring that the
benefits of growth are shared through improved rural service delivery and infrastructure provision. In
particular, focus will be placed on enhancing rural access to agricultural, health, and education
services.
II. Alongside these strategic economic and social investments, the Government will continue with its
efforts to dismantle structural barriers to doing business in Zambia, thereby ensuring that the
resources invested yield the highest possible value for money. Enhancing and maintaining National
competitiveness remains a key priority during the
SNDP.
12. The Government also recognises the important role of mining in the economy, and will
emphasise on attracting investment through a stable and attractive fiscal regime that is both open to
investors, as well as contributes in a meaningful way to national development.
Macroeconomic Environment
13. Zambia's macroeconomic environment has improved significantly over the last five years, with
end-year inflation in the single digits for three of the last five years, and fiscal deficits well within
sustainable limits. The Government is committed to maintaining and building on these achievements,
which is an important objective of the FNDP. The IMF has provided assistance to GRZ through its
ECF (formerly PRGF) arrangement to reach this positive position. The current ECF arrangement
commenced in 2008, and will conclude in 2011.
14. With regard to Public Financial Management, the Government remains committed to broad
reforms in the public sector aimed at enhancing transparency and accountability, and at the same
time improving efficiency of service. This includes continued emphasis on the Public Expenditure
Management and Financial Accountability (PEMF A) Programme, as well as enhancing the value
obtained from public expenditure through improved procurement and enhanced expenditure
management practices.
The Performance Assessment Framework
15. In line with the Government's aspirations in the Aid Policy and Paris Declaration, Zambia's
preferred mode of aid delivery is General Budget Support. In this regard, a number of Cooperating
Partners have provided funds in this manner through the development and signing of a Memorandum
of Understanding (MOU) for Poverty Reduction Budget Support (PRBS). At present nine
cooperating partners have signed up to this MOU, namely the European Commission, DFID,
Germany, Norway, Sweden, Finland, the Netherlands, the World Bank, and the African
Development Bank while a number of other partners have expressed their interest to join in the short
and medium term.
4
16. A framework has since been developed for assessing performance under the PRBS MOU,
referred to as the Performance Assessment Framework (PAF). It provides the basis for discussions
over the effectiveness of PRBS on a bi-annual basis. The PAF 2008-2010 was developed after
detailed consultations between the Ministry of Finance and National Planning (MOFNP), PRBS
cooperating partners, and representatives from the various sector ministries/institutions. The
ministries also engaged in a further series of consultations, through the Sector Advisory Groups
(SAGs) in their selection of the indicators and areas for inclusion in the PAF.
17. The Government and the PRBS donors meet twice a year to review performance in relation to the
agreed PAF for the previous year, and to agree the contents of the PAF for the next year. The joint
review meetings take place each year in June and October.
a. The June review meeting focuses on the PRBS donors and Government coming to a joint
view on performance, which serves as the basis for commitments for the next budget year.
The review is based on the National Development Plan's Annual Review, the annual Public
Expenditure Management and Financial Accountability (PEMF A) progress reports,
Quarterly Budget Execution Reports and related information, plus the national audits;
b. The October review meeting focuses on dialogue on forward planning and budgeting and
agreement on the PAF for the next budget year. This dialogue is based on the annual
Financial Reports of the previous budget year, the Annual PEFA Evaluation and the ceilings
in the annual budget for the next budget year, as specified in Zambia's MTEF Green Paper.
During this Review meeting, each member of the PRBS Group confirms the volume of its
commitment. During this review meeting, Government and PRBS donors agree on the PAF
for the next budget year, and any PRBS donor, i.e. IDA, intending to provide a floating
element will confirm against the new PAF the specific milestones, indicators and/or targets
that will trigger, when met, an immediate disbursement at the relevant review meeting in the
following year.
18. At present there are 33 indicators and milestones included in the PAF covering four areas,
namely:
a. Reform Process: Including decentralisation, public sector reform, public finance
management and macroeconomic management;
b. Wealth Creation: Including agriculture, road, energy and water infrastructure, and private
sector development;
c. Social Equity: Including health and education; and
d. Cross-cutting issues: Including HIV/AIDS and the environment.
19. Of these, 32 have been used to assess progress for 2008. The choice of these four broad areas is
in line with Fifth National Development Plan (FNDP) theme and strategic focus. Further, the
indicators in the PAF are a subset of the monitoring and evaluation framework of the FNDP and are
therefore fully consistent with the Key Performance Indicators of the FNDP.
20. The review of the PAF successfully took place in September 2009 and I attach for your
information the report outlining progress made under the Performance Assessment Framework. This
document provides for further detailed discussion of the areas covered and the performance of our
Government against each of the indicators evaluated.
5
21. The Government of the Republic of Zambia believes that the measures listed in the PAF of which
the proposed ADF credit directly supports the critical subset, will contribute to achieve robust
economic growth and poverty reduction within a sustainable macroeconomic framework. Further, the
outlined policies programmes and reforms in the PAF will create a conducive environment for the
effective and efficient utilisation of ADF assistance, and support the implementation of the final year
of the FNDP.
22. As advanced preparations are underway to launch the Sixth National Development Plan as
detailed earlier in this letter, I would like to use this opportunity to reaffirm the Government's sincere
appreciation of the efforts of the African Development Bank in assisting with the nation's
development objectives. It is also my hope that as we move forward with the Sixth Plan, that the
excellent working relationship and common purpose of ending poverty in Zambia will continue to
flourish.
Yours sincerely,
~, ~--- Situmbeko Musokotwane
MINISTER OF FINANCE AND NATIONAL PLANNING
1
ANNEX II Operation Policy Matrix (Extracted from the PAF 2009-2011)
Public Finance Management Indicators
Indicators / Issue
Required Action Baseline Target
Definition / Calculation 2008 2009 2010 2011
Indicator PFM 1:
Percent of MPSAs whose
non-PE releases are
between 95% and 105% of
the non PE budget
allocation as identified in
the Approved Budget
Numerator: Total number of MPSAs with non PE
releases of between 95 and 105% of the budget
Denominator: Total number of MPSAs. Releases are from
Budget Office to MPSA
2008 = 15% (7
out of 48 heads)
2007 = 27% (13
out of 48 heads)
40% 40% 50%
Indicator PFM 2. Calculated Expenditures (used for 2009 and 2010) are
Opening Cash Balances plus Total Funding, less
Closing Cash Balance. Total Funding includes GRZ
Releases, Donor Funding and Appropriation in Aid.
2008 = 84% (41
out of 49)
2007 = 91.8%
(45 out of 49)
85% 85% All MPSAs
where IFMIS is
operational are
in the range of
95 to 105 % for
reported
expenditure
Percent of heads whose
expenditure is between 95%
and 105% of the total
funding
Reported Expenditures (used from 2011) are the
actual expenditures reported by MPSAs and does not
include imprests, advances which are in suspense or
below the line accounts.
2006 =
69.4%
(34 out
of 49
heads)
IFMIS to go
live in 24
sites
Indicator PFM 3: This indicator measures the credibility of the budget
that is approved by parliament at the start of the
Financial Year.
2008 =
25.4%
(23.1%)
Less than 15
percent
Less
than 18
percent
Less
than 17
percent
% Expenditure Variance
between original budget
and total expenditure
(selected sectors)
Expenditure Variance (Composition) is the summed
absolute values of the difference between original
budget and actual expenditure from each budget head
(administrative classification) as a percentage of the
total originally budgeted GRZ expenditure. Original
Budget is the originally approved budget by
parliament (that is, it excludes the supplementary
budget). At present, this is based on Government
Expenditure only for all expenditure heads.
2007 =
14.4%
(9.4%)
2006 = 15.6%
(10.0%)
Indicator PFM 4a.
Domestic Arrears at end
Period
In the MTEF 2008-2010 GRZ commits itself to
clearing all old arrears by the end of the period, and
has included substantial amounts for releases in 2008
and 2009 to cover this. This indicator measures the
Total Stock of arrears expressed in ZK at the end of
the financial year, excluding statutory pension arrears.
2008 = K193.3
bn
2007 = K 376.4
bn
2006 = K 491.8
billion
Negligible
Indicator PFM 4b. Overall objective is to see that the procurement
process becomes more efficient.
Approved
procurement
legislation
Procurement
guidelines
(subsidiary
legislation
approved)
Standard bid
documents
and requests
for proposals
developed
Fully functional
independent
oversight and
regulatory body
(ZPPA) with
Ministries,
Provinces and
Spending
Agencies
Implementation of
procurement legislation
approved
By end-2010, standard solicitation documents and
procurement guidelines are to be developed,
subsidiary procurement legislation will be approved
and the Public Procurement Curriculum will be
adopted and launched. This is a pre-condition to
holding staff trainings.
Policy Action: Government will implement approved
legislation on procurement
Indicator PFM 5a.
Proportion of
Recommendations in the
Auditor General’s Report
acted on
Acted upon is defined as having a clear action on the
subject undertaken and reported on the Treasury
Minutes as received from the Secretary to the
Treasury by the PAC. Cases included refer to both
Government MPSAs and Parastatal Companies.
Production of the treasury minute within the legally
stipulated time will receive half the scoring. The rest
of the assessment will be made against targets set for
proportion of recommendations from the Public
Proporti
on of
recomm
endation
s
receivin
g
detailed
actions
Treasury Minute
submitted to PAC
on time
85% of
recommendation
2
Accounts Committee (PAC) that were
2008 = 84.3%
2007 = 83.2%
2006 = 75.4%
Indicator PFM 5b.
Proportion of audit queries
acted upon
Acted upon is defined as having a case where based
on the Secretary to the Treasury’s treasury minutes
and recommendations the Public Accounts Committee
(PAC) directs that a case be closed and action is
accordingly taken by the Treasury to close it. Cases
included refer to both Government MPSAs and
Parastatal Companies.
Baseline to be
determined
To be
determined
after
agreement on
baseline
To be
determin
ed after
agreeme
nt on
baseline
Indicator PFM 6.
National Anti Corruption
Strategy Developed and
Implemented
This indicator is developed from the discussions on
the Underlying Principles, as outlined in the roadmap
agreed between the CPs and ST. The targets are the
same, and will utilise the same agreed assessment.
Policy Actions: Anti Corruption Plan developed and
submitted to Secretary to the Cabinet by end 2009.
Draft
implementation
plan for the Anti
Corruption policy
is submitted to the
SC
National
Anti
Corrupti
on Plan
impleme
nted as
planned
Private Sector Development
Indicators / Issue
Required Action Baseline Target
Definition / Calculation 2008 2009 2010 2011
Indicator PSD 1. Definition: Using the International Standard Cost
Model, Administrative Compliance Costs = Labour
Costs+ out of pocket expenses * number of messages.) (1)517
1. Establish
baseline on
Number of
licenses to
eliminate and
streamline
1. 30%
compliance cost
reduction
e-registry
operational
Administrative cost of
compliance with business
licences
Business licenses refer to all pre-approvals including
licenses, authorisations, certification, permits, fees a
business requires in order to operate. In 2008 an
inventory of all business licenses will be undertaken
and thus provide the baseline for business licenses in
Zambia. TN14
(2) K2.2
trillion
2. 30% reduction
in businesses’
administrative
compliance costs
associated with
licensing
2. Informational
E- registry, for
all ‘approved’
business
licenses,
established
Indicator PSD 2: In terms of required actions, the MTEF identifies the
need to integrate the operations of all institutions
involved in trade facilitation at two points of entry
(Chirundu Border Post and Lusaka International
Airport). This is expected to help border agencies
exercise clear, transparent and holistic operations to
facilitate quick trade and the passage of goods and
persons transiting Zambian borders.
(a) 64
days
(Import)
(a) 48 (a 25%
reduction)
(a) 36 (a further
25% reduction)
(a) 32 (a further
10% reduction on
2010 target)
Number of days required to
complete the documentation
for (a) importing and (b)
exporting products
At present the four elements measured to assess length
of time are (a) Document Preparation (b) Inland
Transport (c) Customs Clearance (d) Ports and
Terminal Handling
(b) 53
days
(Export)
in 2007
(b) 40 (a 25%
reduction)
(b) 32 (a further
25% reduction)
(b)29 (a further
10% reduction on
2010 target)
Indicator PSD 3:
Labour Productivity
During Q1 of 2009 the labour productivity indicator defined. To be defined
Q1 of 2009
During Q1 of
2009 the labour
productivity
indicator defined.
Redundancy
package
revised/Skills
training strategy
developed
Source: PAF 2009-2011, PRBS &Government of Zambia
1
ANNEX III: A SUMMARY ASSESSMENT OF THE PREREQUISITE
CONDITIONS FOR PRBS III
Prerequisite
conditions Focus Comments on current situation
General
prerequisites
Political stability
Economic stability and
Government’s commitment
Political stability since independence in 1964
The government’s medium-term macroeconomic framework envisages that
economic growth will gradually move to above 6 percent in 2010.
Government has agreed with development partners on a common framework
to manage and monitor budget support operations (PRBS) and a Memorandum
of Understanding was signed
Technical
prerequisites
Existence of well designed
PRSP or NDP and effective
implementation
mechanisms
Viable macro-economic and
financial medium term
framework
Strong partnership between
RMC and donors
Strong partnership among
donors
Satisfactory fiduciary
review of the public
financial management
system (use of country
system)
The Fifth National Development Plan covers period from 2006 to 2010.
The PRBS is supported by nine Poverty Reduction Budget Support (PRBS)
members who support the national development agenda through a common
framework formalized by a Memorandum of Understanding (MOU). Other
key dialogues with donors include Annual FNDP, the economic report and the
PEMFA bi-annual evaluation, PRSB joint assessment, etc.
The country currently has Financial, Procurement and Audit Systems. The
Government is committed to put in place a strong fiduciary framework. The
Public Expenditure Management and Financial Accountability (PEMFA)
programme, supported by eleven DPs has recorded significant progress.
IFMIS was introduced in December 2009 to improve record keeping and
management in MFNP.
The Zambia PFM system was reviewed in 2008 using the PEFA performance
indicators. Its conclusion was that there has been improvement in
transparency, comprehensiveness and accountability of fiscal management
since the 2005 and weaknesses of the system were in credibility, predictability
of the budget as well as accounting and auditing which impacted on budget
effectiveness. These weaknesses will be mitigated by activities of the PEMFA
programme.
GRZ prepares a Medium Term Expenditure Framework which guides the
annual budget preparation.
IMF PRGF programme was on track in 2009
ANNEX IV: IMF/Country relations note
Zambia—Assessment Letter for the African Development Bank May 24, 2010
This letter provides the IMF staff’s assessment of Zambia’s recent macroeconomic developments and
outlook, based on information received through end-April 2010. An IMF team visited Zambia in
March 2010 for the 4th review under the three-year arrangement supported by the Extended Credit
Facility (ECF). Further discussions were held during the IMF Spring Meetings in April 2010.
Growth remains strong and inflation is moderate. All but one of the performance criteria for
December 2009 were observed. Based on ad referendum understandings, staff expects to take the
review to the IMF Board in June 2010.
Recent economic developments and outlook
The Zambian economy has held up well during the recent global recession. Growth exceeded 6
percent in 2009, boosted by a significant increase in copper output, a bumper crop, and continued
strong construction activity. Inflation declined to single digits by end-2009, and has declined further
in the first four months of 2010 despite a 15 percent increase in domestic fuel prices in January 2010.
The current account deficit has narrowed, helped by a recovery of copper prices and import
compression following a sharp depreciation of the Kwacha in late 2008-early 2009. The overall
budget deficit in 2009 was broadly in line with expectations; capital spending was implemented as
envisaged in the budget, while a shortfall in tax revenues was offset by cuts in current spending.
The financial sector recovery from the global crisis has been slow. Tighter lending standards have
led to a marked slowdown in credit to the private sector and in broad money growth. Banks’ return
on assets and equity are improving, but nonperforming loans have increased: that said, banks remain
well capitalized and have ample liquidity. While bank lending rates remain high, interest rates on
government securities have dropped sharply in recent months.
The economic outlook is positive. Copper prices have strengthened significantly relative to the lows
experienced in late-2008. Zambia’s international reserves are higher than they have been in almost
four decades (at 4 months of prospective imports), thanks in part to the recent SDR allocations from
the IMF. Growth in 2010 is projected in the range of 6 percent and inflation is targeted to moderate
further to 8 percent by end-year. Credit to the private sector should gradually pick up as broad-based
economic activity gains strength. The budget for 2010 maintains an appropriately supportive stance.
The main risks in the period ahead include possible adverse developments in world copper and oil
prices, and in aid inflows.
Policies for 2010 and beyond
The main macroeconomic policy challenge is to increase growth further by creating fiscal space
for expenditures that would enhance economic diversification and reduce Zambia’s
dependence on copper exports. Consistent with this, the 2010 budget focuses on harnessing
domestically-generated resources to support investment in infrastructure and human capital.
Domestic revenues are expected to recover relative to GDP, premised on tax administration gains,
the introduction of some tax measures, and a one-off payment of tax arrears from mining companies.
To enhance tax collections, including from the mining sector, the government is undertaking a
2
comprehensive review of tax policy and administration and has commenced discussions with the
mining companies to address issues relating to tax collections from the sector.
Providing room for increased capital and social spending also requires measures to contain
current spending, including on the wage bill, and improve overall spending efficiency. The wage
bill currently takes up over 50 percent of domestically generated budgetary resources. In this regard,
the authorities have approved a performance-based pay policy and intend, during 2010, to undertake
a civil service right-sizing exercise and to extend payroll management and control to all ministries.
The authorities are also taking steps to improve overall spending efficiency, and public financial
management more broadly, with the introduction of a planning and budgeting act and the rollouts of
the Treasury single account system and the government’s Integrated Financial Management and
Information System. To avoid subsidizing fuel products, prices are being increased to cost recovery
levels.
Monetary policy appropriately targets a further reduction in inflation. Excess reserves should
drain as private sector credit picks up. The authorities remain on-track to implement the second phase
of the Financial Sector Development Plan, which focuses on improving access to credit, reducing
high interest spreads on borrowing, and strengthening the regulatory and operational environment.
Zambia’s risk of external debt distress remains low, as assessed in the latest joint IMF/World
Bank staff debt sustainability analysis (December 2009). All debt indicators remain well below the
indicative policy thresholds throughout the projection period (2009-29). Zambia’s debt to GDP ratio
has remained broadly unchanged since it received debt relief under HIPC and MDRI in early 2006,
while debt management capacity is being strengthened over time.
Zambia Selected Economic Indicators
(percent of GDP, unless otherwise indicated)
2007 2008 2009 2010 Prog
Real GDP growth (percentage) 6.2 5.7 6.3 5.8 Inflation end of period (CPI, percent_ 8.9 16.6 9.9 8.0
Central Government Overall fiscal balance (cash basis, incl. grants) -0.2 -2.2 -2.5 -2.5 Overall fiscal balance (cash basis, excl. grants) -4.8 -6.0 -6.7 -5.9
Revenue 18.4 18.6 15.7 16.3
Expenditure 24.3 23.8 22.9 22.3
Public debt (end of period) 24.3 26.7 26.4 26.4
Of which: FX-denominated 9.2 11.2 11.9 13.4
Broad money growth (M3, percent) 25.3 23.2 7.7 16.0
Real effective exchange rate (average, period) -7.2 16.2 -14.7 ---
Current account balance (incl. grants) -4.6 -5.6 -1.1 -2.1
Foreign reserves (in months of one year forward imports) 2.1 2.8 3.9 3.5
_____________________________________________________________________________________________
Source: Zambia authorities: and IMF staff estimates and projections.
1
ANNEX V : Zambia: Selected Economic Indicators (November 2009 Article IV
Consultations)
Sources: Zambian Authorities and IMF staff estimates and projections
1 Excludes Zimbabwe
2 The projected reserve money for December 2007 reflects the lowering of the statutory reserve requirements from
14 to 8 percent on October 1, 2007
3 Including the discrepancy above-the-line and below-the-line financing.
4 Imports in current year. Includes the new SDR allocation of SDR 401 millions in 2009
1
ANNEX VI: Information on Licensing and Trade Across borders
Licenses being reviewed to eliminate or streamline in 15 sectors
Sectors Number of Licenses
Agriculture 37
Tourism 17
Mining 8
Commerce 27
Local Government 67
Finance 5
Transport and Infrastructure 8
Information, Broadcasting & Communication 27
Energy and Water 9
Environment and Natural Resources 8
Education and Skills Dev. 0
Health 25
Employment, Labour and Industrial Relations 3
Services 10
Security and Public Order 0
TOTAL 251
Source : Ministry of Commerce & Trade, Industry
The comparison of cost of the trading across borders
Source : Doing Business Report, 2010. WB.
Indicator Zambia
Sub-
Saharan
Africa
OECD
Average
Documents to export (number) 6 8 4
Time to export (days) 53 34 11
Cost to export (US$ per container) 2664 1942 1090
Documents to import (number) 9 9 5
Time to import (days) 64 39 11
Cost to import (US$ per container) 3335 2365 1146
1
ANNEX VII: LIST OF ON-GOING PROJECTS
Project and Sector Amount (UA)
ADF RESOURCES
SOCIAL
1 EDUCATION III PROJECT**** 8,500,000
2 HEALTH SECTOR SUPPORT PROJECT**** 8,920,000
Total Social 17,420,000
AGRICULTURE
3 SMALLSCALE IRRIGATION PROJECT 5,290,000
SMALLSCALE IRRIGATION PROJECT - Grant 760,000
4 LAKE TANGANYIKA INTEGRATED REGIONAL MANAGEMENT PRG.** 3,260,000
5 EMERGENCY ASSISTANCE TO ZAMBIA FOR FLOOD VICTIMS** 310,000
6 AFRICA FOOD CRISIS RESPONSE FOR ZAMBIA. 2,117,727
Total Agriculture 11,737,727
WATER AND SANITATION
7 CENTRAL PROVINCE EIGHT CENTRES WATER SUPPLY 16,250,000
CENTRAL PROVINCE EIGHT CENTRES WATER SUPPLY GRANT 5,780,000
8 RURAL WATER SUPPLY & SANITATION PROGRAM 15,000,000
9 NKANA WATER SUPPLY AND SANITATION PROGRAMME 35,000,000
10
Community Water Mgt improvement Project for traditional Farmers in Mkushi,
Kapiri Mposhi, Masaiti and Chingola Districts
Total Water and Sanitation 72,030,000
MULTINATIONAL PROJECTS
11 Agricultural Marketing Promotion and Regional Integration Project 3,736,000
12 SADC North - South Corridor - Kazungula Bridge Study 1,450,000
13 Enhancing Procurement Reforms and Capacity Project 5,660,000
Total 10,846,000
TOTAL - ADF RESOURCES 127,033,727
ADB RESOURCES - PRIVATE SECTOR
14 LUMWANA COPPER MINE PROJECT 43,000,000
15 Zanaco Zambia 10,000,000
16 Investrust Zambia 3,500,000
17 SWARP SPINNING MILLS LTD (SSML 7,240,000
18 FAPA TA Grant SMEs 1,330,000
TOTAL - ADB RESOURCES 65,070,000
** Projects not yet signed
1
ANNEX VIII: APPLICATIONS OF GOOD PRACTICES PRINCIPLES
AND CONDITIONALITY
Principle 1: Reinforce Ownership The proposed operation supports implementation of Zambia’s FNDP 2006-2010 endorsed by donors in April 2007
after extensive consultations with stakeholders. Government is preparing the Sixth National Development Plan
(SNDP) a successor programme based on the lessons learnt from implementation experience of the FNDP. Donors
developed a joint assistance strategy (JASZ) based on the FNDP. Donors established a common framework to
manage the budget support which was culminated in signing of a Memorandum of Understanding (MoU). The
framework use performance assessment framework to monitor and evaluate progress of Government performance
on agreed targets. The PAF has broad areas of focus consisting of a number of relevant, monitorable, time-bound,
and realistic targets related to priority policy objectives.
Principle 2: Agree up front with the Government and other financial partners on a coordinated accountability
framework An MOU between the Government and the Poverty Reduction Budget Support Group was signed in April 2004 and
the Bank signed in April 2007. Annual reviews missions are held jointly twice a year and assess progress on agree
targets. The broad principles o f budget support is contained in the MoU signed by all members. Reviews have been
realigned to the Government’s budget cycle. Disbursements of budgetary support are based on the outcome of the
joint annual reviews. Donors of the PEMFA programme have also agreed in 2004 to fund the programme for a five
year period. There are also sector budget support operations in health and education.
Principle 3: Customise the accountability framework and modalities of Bank support to country circumstances Disbursements for the following year are confirmed during the second annual assessment review. Donors use
different disbursement methods, others have two tranche system fixed and variable tranches. Disbursement for the
proposed PRBS III will be based on targets and actions relating to its selected areas, although the decision on
progress will be made collectively during annual reviews by all PRBS members.
Principle 4: Choose only actions critical for achieving results as conditions for disbursement One of the principles of the joint budget support is that the PAF should consist of a few monitorable and realistic
targets. The targets for the proposed operation covers two main areas (public finance management and private
sector development), selected from the PAF.
Principle 5: Conduct transparent progress reviews for predictable and performance-based financial support In order to improve predictability of budgetary support from donors, the PRBS framework requires donors to
indicate levels of budgetary support that they are planning to disburse well in advance before the start of the fiscal
year, such that the amounts can be included in the Government Budget before submitted to Parliament.