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SUBJECT : ZAMBIA : PROPOSAL FOR AN ADF LOAN OF UA 31.9 MILLION TO FINANCE THE THIRD POVERTY REDUCTION BUDGET SUPPORT (PRBS III) REVISED VERSION*

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Page 1: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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.

Page 2: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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)

Page 3: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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

Page 4: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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

Page 5: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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

Page 6: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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

Page 7: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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

Page 8: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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

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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

Page 10: Zambia - Third Poverty Reduction Budget Support (PRBS III ......6.1.1 Government of Zambia; of the Fund, dated 23 November 1989, as amended. The Government will use its procurements

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.

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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.

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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.

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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.

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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

.

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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

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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

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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.

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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.

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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.

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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

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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.

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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.

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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

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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

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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

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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

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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

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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

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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

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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.

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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".

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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.

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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.

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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.

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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.