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Document of The World Bank

Report No: ICR00001107

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-44430 TF-56855)

ON A

CREDIT

IN THE AMOUNT OF SDR 6.3 (US$ 10 MILLION EQUIVALENT)

TO

THE REPUBLIC OF ZAMBIA

FOR A

SECOND ECONOMIC MANAGEMENT AND GROWTH CREDIT

June 25 , 2009

PREM AFTP1 Zambia AFCS2 Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 2, 2009)

Currency Unit = Kwacha ZMK 1.00 = US$ 0.000201

US$ 1.00 = ZMK 4,964

FISCAL YEAR (July 1- June 30)

ABBREVIATIONS AND ACRONYMS

AMA Agriculture Marketing Act BOZ Bank of Zambia CAS Country Assistance Strategy CEM Country Economic Memorandum CPs Cooperating Partners CRBAL Credit Reference Bureau Africa Limited DPO Development Policy Lending Operation EBZ Export Board of Zambia EMGC Economic Management & Growth Credit FDI Foreign Direct Investment FNDP Fifth National Development Plan FSAP Financial Sector Assessment Program GDP Gross Domestic Product GRZ Government of the Republic of Zambia GNI Gross National Income HIPC Highly Indebted Poor Country ICA Investment Climate Assessment ICR Implementation Completion Report IEG Independent Evaluation Group IFMIS Integrated Financial Management Information System IMF International Monetary Fund JAR Joint Annual Review JASZ Joint Assistance Strategy for Zambia JEC Joint Executive Committee JSC Joint Steering Committee MACO Ministry of Agriculture & Cooperatives MDRI Multilateral Debt Relief Initiative MOU Memorandum of Understanding MOFNP Ministry of Finance & National Planning MPSA Ministries, Provinces & Spending Agencies MTEF Medium Term Expenditure Framework NRFA National Road Fund Agency ODA Overseas Development Assistance

PAF Performance Assessment Framework PDO Project Development Objective PEFA Public Expenditure Financial Accountability Assessment PER Public Expenditure Review PEMFA Public Expenditure and Financial Accountability PEMFAR Public Expenditure Management and Financial Accountability Report PMEC Payroll Management & Establishment Control PRGF Poverty Reduction and Growth Facility PRS Poverty Reduction Strategy PRBS Poverty Reduction Budget Support PRSC Poverty Reduction Support Credit PSMD Public Sector Management Division PSPF Public Service Pension Fund PVA Poverty and Vulnerability Assessment RDA Road Development Agency ROC Regional Operations Committee RTSA Road Transport and Safety Agency TNDP Transitional National Development Plan SAGs Sectoral Advisory Groups SEDB Small Enterprise Development Board ZDA Zambia Development Agency ZEPZA Zambia Export Processing Zone Authority ZIC Zambia Investment Centre

Vice President:Obiageli K. Ezekwesili

Acting Country Director: Peter Nicholas

Sector Manager: John Panzer

Task Team Leader:Susan Ngoza Mpande

ICR Team Leader:Susan Ngoza Mpande

ZAMBIA Second Economic Management and Growth Credit

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

1. Program Context, Development Objectives and Design............................................. 1 2. Key Factors Affecting Implementation and Outcomes............................................... 4 3. Assessment of Outcomes ............................................................................................ 9 4. Assessment of Risk to Development Outcome......................................................... 18 5. Assessment of Bank and Borrower Performance...................................................... 19 6. Lessons Learned........................................................................................................ 21 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 22 Annex 1 Bank Lending and Implementation Support/Supervision Processes.............. 24 Annex 3. Stakeholder Workshop Report and Results................................................... 27 Annex 4. Summary of Borrower’s ICR and/or Comments on Draft ICR ..................... 28 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 33 Annex 6. List of Supporting Documents....................................................................... 36

MAP

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A. Basic Information

Country: Zambia Program Name: Second Economic Management and Growth

Program ID: P074445 L/C/TF Number(s): IDA-44430,TF-56855

ICR Date: 06/26/2009 ICR Type: Core ICR

Lending Instrument: DPL Borrower: GOVT OF ZAMBIA

Original Total Commitment:

XDR 6.3M Disbursed Amount: XDR 6.3M

Implementing Agencies: Ministry of Finance and National Planning

Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 02/06/2007 Effectiveness: 12/24/2008

Appraisal: 05/15/2007 Restructuring(s):

Approval: 05/20/2008 Mid-term Review:

Closing: 12/31/2008 12/31/2008 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Moderately Satisfactory

Risk to Development Outcome: Substantial

Bank Performance: Moderately Satisfactory

Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Moderately Satisfactory

Overall Bank Performance:

Moderately SatisfactoryOverall Borrower Performance:

Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance

Indicators QAG Assessments

(if any) Rating:

Potential Problem Program at any time

Yes Quality at Entry (QEA):

None

ii

(Yes/No):

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Agricultural marketing and trade 12 12

Banking 13 13

Central government administration 50 50

General industry and trade sector 13 13

Roads and highways 12 12

Theme Code (as % of total Bank financing)

Administrative and civil service reform 17 17

Debt management and fiscal sustainability 33 33

Other financial and private sector development 17 17

Public expenditure, financial management and procurement

16 16

Standards and financial reporting 17 17 E. Bank Staff

Positions At ICR At Approval

Vice President: Obiageli Katryn Ezekwesili Obiageli Katryn Ezekwesili

Country Director: Peter Nicholas Michael Baxter

Sector Manager: John Panzer John Panzer

Program Team Leader: Susan Ngoza Mpande Jos Verbeek

ICR Team Leader: Susan Ngoza Mpande

ICR Primary Author: Susan Ngoza Mpande F. Results Framework Analysis

Program Development Objectives (from Project Appraisal Document) EMGC II is the second Development Policy Lending Operation (DPO) to support policy and institutional reforms as outlined in the Country Assistance Strategy (CAS) for FY04-07. This credit's reform program and objectives aim to facilitate Zambia:

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-To maintain and deepen Zambia's macroeconomic framework conducive to robust growth; -To strengthen the credibility and institutional capacity of the public sector; -To enhance Zambia's growth opportunities while improving its poverty impact. In addition, the expected results of the Credit are embedded in the CAS for FY08-11 and contribute to its goals and objectives. IDA and the Government of the Republic of Zambia agree that achieving these objectives in part depend on the implementation of specific reforms in the areas of: (i) public sector management; (ii) macroeconomic management including the reduction of arrears and the establishment of a credit rating bureau; (iii) agriculture; (iv)infrastructure; and (v) business environment. The actions and outcomes under the development policy operation will help deepen and consolidate the macroeconomic gains that Zambia has registered over the last three years , will contribute to the sustainability of the reform process in the area of public sector management, financial sector development and private sector development. In addition, it will also contribute towards the bridging of a financing gap that exists in the implementation of Zambia's Fifth National Development Plan and it will contribute towards improving aid effectiveness by being part of a harmonized approach to budget support. More specifically the operation aims to contribute to (i) improved management of public resources and credibility of Government vis-à-vis domestic suppliers by reducing arrears; (ii) timely payment of pensions by Zambia's Public Pension Fund (PSPF); (iii) availability of creditworthiness information of borrowers to Commercial Banks; (iv)improved ability to execute in year programs and reduced disconnect between plans and budget execution; (v) improved quality of data maintained in Zambia's civil service Payroll Management and Establishment Control (PMEC) system; (vi) a simplified institutional framework to reduce bureaucratic procedures for businesses; (vii) the reaching of consensus on the roles and mandates of each actor, public and private, in the agricultural marketing sectors; and to (viii) the ability of the road agencies to operate their statutory tasks. Revised Program Development Objectives (if any, as approved by original approving authority) (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Improved management of public resources and credibility of government vis a vis domestic suppliers.

Value K 532.8 billion i) Stocks Arrears were

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(quantitative or Qualitative)

diminishing from K532.8 billion at the end of 2005 to equal or less than K491.8 billion at the end of 2006 (ii) K147 billion released to further pay down the arrears in 2007; and (ii) a commitment in 2008 to reduce arrears to negligible by 2009.

reduced to K193.3 billion by end 2008, with government committing to clear all arrears by end 2009.

Date achieved 12/30/2005 06/18/2008 12/31/2008

Comments (incl. % achievement)

Government has shown commitment to clear outstanding domestic arrears and has provided the required financial resources in this respect. Arrears that do exist are on account of the verification process being undertaken by government agencies.

Indicator 2 : Pensions are paid on a timely basis by Zambia's Public Service Pension Fund.

Value (quantitative or Qualitative)

Arrears of K464 billion.

(i) Stocks diminishing from K464 billion at the end of 2005 to equal or less than K 388 billion at the end of 2006; (ii) K 112 billion released to further pay down arrears in 2007; and (iii) a commitment expressed to reduce arrears to negligible end 2008

The government allocated funds to clear the arrears in 2008. However substantial arrears still exist on account of accrual of interest due to late submission of employers contributions. End year arrears were K 93billion.

Date achieved 12/30/2005 06/18/2008 12/31/2008 Comments (incl. % achievement)

While MOFNP has made a commitment to clear all arrears by 2009, the late submission of employers contribution especially by Defence forces has caused the accrual of substantial interest payments.

Indicator 3 : Creditworthiness information of borrowers is made available to commercial banks.


Currently, Zambia has no CRB, but it is a point for action under the Private Sector Development Programme (PSDP). In

The Bank of Zambia has issued a license for the creation of a credit reference bureau.

A license for the creation of a Credit Reference Bureau was issued in June 2006 and the institution launched

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the interim, guidelines have been developed and a license application has been submitted to BOZ for consideration.

in January 2007. The CRBAL began functioning in January 2008.

Date achieved 12/30/2005 06/18/2008 12/31/2008

Comments (incl. % achievement)

While Credit Reference Bureau African Limited (CRBAL) has been functional since January 2008, its database on customer's creditworthiness information is not well populated. Regulations prevent banks disclosure of customer information without prior consent

Indicator 4 : Ability to execute in year programs has improved and disconnect between plans and budget execution has been reduced.


27 out of 49 heads as at December 2005.

MOFNP has ensured more predictability of budget execution by providing to 34 out of 49 budget heads with annual calculated expenditure of between 95% and 105% of the total funding for fiscal year 2006.

The end year target was met for 2006 and 2007. By end 2008 this had improved to 41 out of 49 heads had calculated expenditure of between 95 and 105% of total funding for 2008.


Budget execution has improved since 2005 with an increase in the percentage of heads whose calculated expenditure is between 95% and 105% of total funding, increasing from 55% in 2005 to 84% in 2008.

Indicator 5 : Improved quality of data maintained in payroll management establishment control (PMEC) system.


The PMEC system functions in a central system but has not been rolled out to any MPSA yet

PSMD in Cabinet office has implemented a payroll management and establishment control system in six additional central spending agencies, enabling direct access to the system.

PMEC was rolled out to six additional agencies; Police, PSMD, Ministries of Finance, Works and Supply, Home Affairs and Agriculture by end 2007.


Since 2007, the PMEC roll out has stalled at the central agency level due to technical difficulties. Government needs to intensify its efforts to resolve these technical problems.

Indicator 6 : A simplified framework with a well-defined strategic approach is in place to

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reduce bureaucratic procedures for businesses.


The ZDA bill has been initiatied. The average length of time it takes to establish business is 35 days.

The authorities have (i) established the Zambia Development Agency taking on the responsibilities of 5 former agencies (ZIC, EBZ, SEDB,ZEPZA and ZPA) and (ii) developed implementation plan for ZDA in areas of removal of barriers to export and business.

ZDA established through Act No. 11 of 2006. Interim board was appointed and the roadmap to implement the work plan for removal of barriers to export and business in place.


Under PSDP significant progress has been made in reducing the time to start business from 35 days in 2005 to 8 days by end 2007.

Indicator 7 : Clarification of and consensus reached on the roles and mandates of each actor, public and private, in the agricultural marketing sectors.


Finalising consultation on draft Agricultural Marketing Act (AMA) by end 2006.

The Ministry of Agriculture and Cooperatives has drafted and finalised consultations with stakeholders on agricultural marketing legislation by end 2006.

Consultation phase was completed end 2006. After extensive discussions, the AMA concept note and cabinet memo were presented to Cabinet end 2008.


Enactment of the AMA through parliamentary approval will be an important milestone for the sector. Government needs to speed up the process which has moved slowly since 2006.

Indicator 8 : Road agencies have the minimum capacity to operate their statutory tasks.


Less than 10% of posts in the road agencies have been filled.

The authorities have strengthened capacity to address bottlenecks to development in the management of the road infrastructure by filling 80

By end 2006, 90% of the positions in RDA and 100% of the positions in NRFA were filled. 99% of the positions in RTSA were filled by end

vii

percent of the staffing vacancies of the road agencies.

2007.


The road agencies have the requisite staffing levels. Going forward the capacity of the RDA especially in supervision of works and procurement need to be improved.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : EMGC II was a one year and single disbursement operation, therefore it had no intermediate outcome indicators.


Date achieved Comments (incl. % achievement)

G. Ratings of Program Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 12/31/2008 Moderately Satisfactory Moderately Satisfactory 0.00 H. Restructuring (if any) Not Applicable

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1. Program Context, Development Objectives and Design

1.1 Context at Appraisal 1. In 2007 Zambia was in the midst of the most robust period of economic growth and macroeconomic stability the country had enjoyed in decades. Helped partly by a benign external environment average annual GDP growth since 2003 had exceeded 5.5% and growth was actually accelerating further in 2006 and 2007 to roughly 6% per year. Prudent fiscal and monetary policies were also helping abate inflation significantly, with Zambia achieving in 2006 single digit inflation of 8.2 percent, the lowest level in three decades.

2. The attainment of the Heavily Indebted Poor Country (HIPC) completion point in April 2005 together with the additional debt relief through the Multilateral Debt Relief Initiative (MDRI) in January 2006 also had led to a much improved external position leading to a current account surplus in 2006 and a much needed build up of reserves. Fiscal space was also enhanced by the reduction in the interest bill resulting from the debt relief. The domestic borrowing requirements were reduced from 5.1 percent of GDP in 2003 to 2.9 percent in 2006 while the overall fiscal deficit was down to 2.9 percent of GDP in 2006 from 6.6 percent in 2003.

3. With continued strength in the copper sector, a small rebound in agriculture growth, plus the continued dynamism from the services sector, the overall economic outlook was very positive. Expectations were that annual GDP growth would continue at a pace of 6 percent for 2008-2010, inflation would remain at single digit levels, and there would be continued improvement in the external sector due to expected export growth, particularly in the mining sector.

4. This period of macroeconomic stability with low inflation and low fiscal deficits was a significant departure from the long history of struggle with large macroeconomic imbalances and lack of consistency in the implementation of reforms. In the past, the government had typically dealt with fiscal imbalances by constraining investment spending and increasing arrears, which generated large quasi-fiscal obligations in the 1990s and also threatened overall development. Commitment to structural reforms was also weak, resulting in the government’s failure to create an environment within which the private sector was encouraged to diversify away from copper by pursuing alternatives both in the domestic and export markets.

5. The good economic performance, however, had not translated into a significant decline in poverty. While the depth and severity of poverty had declined rapidly in the 1990’s the downward trend had tapered off suggesting that the benefits from economic growth were not reaching parts of the population. The overall poverty headcount had declined from 73 percent in 1998 to 64 percent at the end of 2006. One explanation of the weak growth-poverty relationship was that the growth was concentrated in urban areas anchored on capital intensive sectors such as construction, mining, retail and whole sale trade, which are less pro-poor than the agriculture sector.

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6. In this context, in 2006, the Government of the Republic of Zambia (GRZ) launched the Fifth National Development Plan (FNDP), its Poverty Reduction Strategy (PRS), covering the period 2006-2010. The FNDP was seen as the key strategy document that would help reach the goal set by the National Vision 2030“to become a prosperous and middle income country by the year 2030”. The vision called for economic and expenditure policies plus institutional reforms that would accelerate growth and lead to sustained poverty reduction. The FNDP recognized that policies that enabled the sharing of growth needed to be undertaken by the government.

7. The Bank’s Country Assistance Strategy (CAS) for FY2004-07 was structured along the predecessor to the FNDP – the Transitional National Development Plan (TNDP) and was aligned with three strategic priorities: (a) sustained economic growth anchored on a diversified and export-oriented economy; (b) improved lives and protection of the vulnerable; and (c) efficiently and effectively managed public sector. The FY2008-10 CAS which was presented to the Board together with the Economic Management and Growth Credit (EMGC II) was aligned with the FNDP, which in turn continued the strategic trend of the TNDP –thus providing continuity to the government’s program as well as to the Bank’s engagement.

8. The EMGC II also took place in the context of a changing approach to budget support. In 2005, on the basis of a good track record of economic performance and the existence of a well articulated government strategy the government and the donor community agreed on establishing a harmonized framework for joint budget support – the Poverty Reduction Budget Support (PRBS). The PRBS process was and still is a collective effort to provide predictable and performance based budget support. The PRBS is anchored on a Performance Assessment Framework (PAF) which outlines a rolling multi-year reform program. The PAF contains policy and institutional reforms as well as outcome indicators which are part of government strategy contained in the TNDP and later the FNDP. Government’s performance under the PAF is assessed annually, each June, and the rolling plan of reforms for the subsequent years agreed to each October.

9. Program performance is assessed by a simple and direct method: assessing the number of PAF indicators met, partly met, or not met, with each indicator being weighted equally. One point is given for indicators met, while half a point is given for indicators partially met.

10. The EMGC II was the second Development Policy Operation as identified in the Country Assistance Strategy (CAS), FY04-07. EMGC II aimed to support the policy and institutional reforms outlined in the CAS and the government’s overall reform program stemming from the TNDP and the FNDP.

11. Although a self-standing operation (not a part of a programmatic series), the EMGC II was indeed supporting a slice of what was then already a multi-year reform program. EMGCII supported a subset of the PAF actions in the areas of public sector reform, macroeconomic management, and wealth creation. These actions were linked to specific government reforms in public pay policy, public finance management, pensions, financial sector development, infrastructure, agriculture, and the business environment. It

3

was expected that in conjunction with the new CAS and provided continued government commitment to reforms, the Bank would follow the EMGC II with a clearly defined programmatic approach to budget support through a PRSC series.

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) 12. EMGC II (US$10 million) was the second (of two) Development Policy Operation (DPO) to support policy and institutional reforms as outlined in the Country Assistance Strategy (CAS) for FY04-07.This credit’s reform program and objectives aimed to facilitate Zambia:

• To maintain and deepen Zambia’s macroeconomic framework conducive to robust growth

• To strengthen the credibility and institutional capacity of the public sector • To enhance Zambia’s growth opportunities while improving its poverty impact

In addition, the expected results of the Credit are embedded in the CAS for FY08-11 and contribute to its goals and objectives.

13. The actions and outcomes under the development policy operation would help deepen and consolidate the macroeconomic gains that Zambia had attained over the last three years, and would contribute to the sustainability of the reform. In addition, it would also contribute to help bridge the anticipated financing gap for implementation of Zambia’s Fifth National Development Plan and contribute towards aid effectiveness by being part of a harmonized approach to budget support.

14. More specifically the operation aimed to contribute to (i) improved ability to execute the budget reducing the gaps between planned and budget execution; (ii) improved management of public resources, enhanced cost effectiveness and credibility of Government vis-à-vis domestic suppliers by reducing arrears; (iii) timely payment of pensions by Zambia’s Public Service Pension Fund (PSPF); (iv) improved management and control of Zambia’s civil service payroll through the establishment of the Payroll Management and Establishment Control system (PMEC); (v) financial sector development by enhancing availability of creditworthiness information of borrowers to Commercial Banks; (vi) a simplified institutional framework to reduce bureaucratic procedures for businesses; (vii) agriculture sector development by setting a process for reaching a consensus for legislating on the roles of the public and private actors agricultural markets; and to (viii) improve infrastructure by enhancing the ability of the road agencies to carry out their statutory tasks.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification 15. The original PDO and key indicators remain unchanged.

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1.4 Original Policy Areas Supported by the Program (as approved) 16. The program supported the government’s overall program outlined in the PAF for 2006-2008. Within a set of 30 policy reforms or outcome indicators in the PAF, eight specific reforms were selected as EMGC II prior actions. The prior actions were chosen based on their importance in advancing the government’s reform agenda. The eight prior actions belonged to three broad pillars in the PAF:

(a) Macroeconomic management; with a focus on financial sector development and reforms in the public sector pension fund. (b) Public sector reform; with a focus on budget implementation, payroll management; and reduction of arrears to suppliers. (c) Wealth creation; with a focus on key measures in agriculture, business environment; and enhanced provision of infrastructure.

1.5 Revised Policy Areas (if applicable)

17. The original policy areas remained unchanged.

1.6 Other significant changes 18. The policy reforms were expected to be implemented during calendar year 2006 and within the CAS period FY04-07. However, delays in implementation of some of the prior actions led to postponements in completion of appraisal as well as negotiations. All reforms were carried out by early 2008 (as opposed to June 2007) and the credit was approved in May 2008, almost a year later than originally planned.

2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance 19. The credit selected eight of the thirty indicators as prior actions from the PAF expected to be implemented in CY2006. The assessment of the overall performance of this program was undertaken during the joint harmonized framework, the PRBS process, in June 2007. The assessment, noted that overall performance against the indicators and targets included in the PAF for CY2006 had shown a downward trend, compared with achievements for CY2005. The targets for 19 of the 30 indicators were fully achieved, and substantial progress was observed on another four, while seven indicators had not been achieved even partially. Utilizing the rough measure of program performance (see paragraph 9), this was equivalent to 70 percent achievement, compared to an 85 percent achievement rate in CY2005. It must be noted, however, that such comparisons are not necessarily very illuminating considering the differences in program targets and ambition of the indicators across years can vary quite significantly.

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20. In terms of the broad areas of the PAF, in 2006 most progress was achieved under in the actions under the umbrella of wealth creation (which focuses on reforms in the areas of agriculture, infrastructure, and private sector development), followed by social equity. This was followed by the area of macroeconomic management and finally by public sector reforms.

21. The report noted that in view of the budgetary challenges government had faced in 2006, because of an unanticipated decline in revenues, the achievements against the PAF targets were in line or slightly ahead of what could have been expected for the year. It was also noted that the expansion of the PAF to include additional areas had resulted in some targets being overambitious and not in line with agreed definitions under the Poverty Reduction Growth Facility (PRGF) or sector initiatives.

22. With regard to the specific eight indicators (prior actions) supported of the credit, government had not met three of the prior actions by the time of the June 2007 assessment. However, government did follow up and by the time of negotiations in March 2008 all prior actions had been met.

Table 1: EMGC II Prior Actions

EMGC II List conditions from Legal Agreement/ Program Document Status A. Public Sector Reform i) Public Service Management: PSMD in Cabinet office has implemented a

payroll management and establishment control system (PMEC) in six additional central spending agencies enabling the human resource officers to directly access the system.

ii) Public Finance Management: MOFNP has ensured predictability of budget execution by providing 34 out of 49 budget heads with annual calculated expenditures of between 95% and 105% of the total funding for fiscal year 2006.

iii) Public Finance Management: MOFNP has reduced domestic arrears to suppliers with (i) stocks diminishing from ZMK532.8billion at end 2005 to equal or less than ZMK491.8 billion at the end of 2006 (ii) ZMK147billion released to further pay down the arrears in 2007, and (iii) a commitment expressed in the 2008-2010 MTEF/Green paper and the 2008 budget to reduce these arrears to negligible levels by 2009.

B. Macro Economic Management iv) Financial Sector Development: BOZ has issued a license for the creation of

a credit reference bureau. v) Public Service Pension Fund: The Ministry of Finance and National

Planning has implemented a phased reduction of arrears of contributions owed by the Government to the Public Service Pension Fund with: (i) stocks diminishing from ZMK464 billion at the end of 2005 to equal or less than ZMK388 billion at the end of 2006; (ii) ZMK112 billion released to further pay down arrears in 2007; and (iii) a commitment expressed in the 2008-2010 MTEF/Green paper and the 2008 budget to reduce these arrears to negligible levels by the end of 2008.

Met

Met

Met

Met

Met

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C. Wealth Creation vi) Agriculture: The Ministry of Agriculture and Cooperatives (MACO) has

drafted and finalized consultations with stakeholders on an agricultural marketing legislation.

vii) Infrastructure: The authorities have strengthened its capacity to address identified bottlenecks to development in the management of the road infrastructure by filling 80 per cent of the staffing vacancies of the National Road Fund Agency, the Road Development Agency, and the Road Transport and Safety Agency.

viii) Private Sector Development: The authorities have: (i) established the Zambia Development Agency taking on the responsibilities of the former Zambia Investment Centre, Zambia Privatization Agency, Zambia Export and Processing Zone Agency, Small Enterprise Development Board, and Export Board of Zambia; and (ii) developed an implementation plan for the ZDA to accomplish further progress in the areas of removal of barriers to export and setting up of businesses.

Met Met

Met

23. At the moment, it is also possible to assess the performance of the program in CY2007, based on the assessment of the program carried out in June 2008. The overall performance against the indicators and targets included in the PAF for CY2007 was broadly consistent with that of CY2006, measured by a rate of achievement of 66.7 percent slightly below the rate of 70 percent for CY2006.

24. With regard to progress in continuing and deepening reforms in the specific areas supported by EMGC II, government’s performance during CY2007 was strong in public finance management, public sector management, agriculture, and private sector development where all targets for 2007 were met. The only area where targets were not met was meeting the goals of reducing arrears in payments of the public pension system. Government failed to meet the end year target of reducing pension arrears from the end 2006 figure of K305 billion to K270 billion by end 2007, despite it releasing most of the money committed to clearing arrears in 2007. The problem arose due to the contracting of new arrears (specifically from the defence forces and the late remittance of central government’s contribution from December 2007 – valued at K8.3 billion) and the non estimation of interest payments on accrued arrears. As recommended at that review, the indicator was revised in the PAF 2008-2010 to take into account this earlier weakness where the indicator was a stock of total arrears whose value would be difficult to attain. The new indicator measures a value of not more than two months of employer’s contribution, considered to be more realistic. Follow up actions in the areas of financial sector development and infrastructure, which had been supported by EMGC II were not included in the PAF for 2007-2009.

25. Furthermore, a preliminary assessment of government’s performance for CY2008 (the full review will be carried on June 24, 2009) indicates that follow up in progress in the areas supported by EMGC II has continued. There has been good progress in improvements in the business environment, and government has also remained committed to meeting the targets in public finance management to improve budget execution and provided resources for the clearance of domestic arrears. In agriculture,

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progress continues to be made towards having a new Agricultural Marketing Act (AMA) with a draft bill currently being developed by the Ministry of Justice, with an intention to submit it to Parliament in the next parliamentary sitting in the third quarter of 2009.

26. In the areas of pension reforms and macroeconomic management the reduction of arrears to the public pension system was provided for in the 2008 budget, however the contracting of new arrears by defence forces has continued to be a problem which government needs to address going forward. Overall, government continues to be committed to undertake the reforms under the PAF.

2.2 Major Factors Affecting Implementation: 27. There were delays in implementation of reforms supported by the EMCG II that were expected to be carried out in CY2006, but were not implemented until early 2008. This can be largely traced to the tightening of the fiscal situation in 2006 with lower than expected revenues, which had a particular impact in delaying two prior actions related to the reduction in arrears.

28. This was exacerbated by competing demands on the budget since 2006 was also an election year. On the other hand, policy reforms that did not require significant budgetary resources, such as the reforms in the wealth creation pillar, were implemented in a timely manner.

29. It must be noted, however, that in CY2007, with the elections behind and a very strong revenue performance, much progress was achieved in the areas of strengthening macroeconomic and public sector reforms. The recent relatively stronger performance in macroeconomic management and public sector reform are in part explained by alignment of these reforms with the Poverty Reduction and Growth Facility (PRGF) arrangement with the International Monetary Fund (IMF) as well as the ongoing program in the public sector, the Public Expenditure Management and Financial Accountability program (PEMFA) and corresponding policy dialogue.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: 30. The memorandum of understanding (MOU) that governs the PRBS process defines reporting requirements such as the bi-annual meetings to discuss progress and review the PAF, institutional arrangements such as the Joint Executive Committee (JEC) and Joint Steering Committee (JSC) and other platforms for evaluation, mainly the Sectoral Advisory Groups (SAGs).

31. Cooperating partners (CPs) also review government’s reform efforts under the FNDP and PAF through various sector groups. Different CPs are leads in sectors where they have a comparative advantage and are key players, in line with the Joint Assistance Framework for Zambia (JASZ) which was developed in 2007 to increase aid coordination and reduce transaction costs to GRZ.

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32. While the current PAF results framework has improved since 2005 when the interim PAF was prepared under a harmonized donor agenda, it is a difficult assessment framework to utilize due to its substantial reliance on higher- level outcome indicators whose progress is difficult to meaningfully assess on an annual basis, than on policy actions or outputs. For example in the area of pension reform, the PAF has been measuring the stock of arrears attained at end year. This tends to reduce the focus from assessment of the overarching FNDP macroeconomic objectives in this area which are to secure fiscal and financial stability in the sector. The current situation in pension points to a substantial attainment of this objective. The remaining challenges still to be resolved in this area require a constitutional amendment of the Pension Act which needs a relatively longer timeline to be achieved. An improvement of the PAF to begin to address these weaknesses was made in January 2009 to monitor progress under the PAF 2008-2010 with the inclusion of annually measurable output indicators in the energy sector.

33. In addition, some indicators in the PAF do not have a reliable data system due to lack of annual data for some sectors, such as the water sector. This has made assessment of all indicators in the PAF difficult. Going forward, sectors have agreed to revise previously poorly defined indicators that have not been measurable.

2.4 Expected Next Phase/Follow-up Operation (if any):

34. EMGC II is expected to be followed up by a set of programmatic PRSC’s that support the PRBS process and government program laid out in the multi-year PAF 2008-2010. The PRSC’s will support the objectives of the CAS FY08-11 which highlights the need to support improved macroeconomic management and public sector reforms.

35. The PRSC’s which will provide the predictability of financing, which is desired by government and will support the core objective of the Bank’s macroeconomic program to help Zambia better manage its financial resources in order for fiscal policy to foster more inclusive growth. The PRSC’s will continue to support some of the reforms areas supported by EMGC II in public finance management and macroeconomic management that still require a few actions to attain the policy outputs. They will also focus on support of reforms actions in the wealth creation pillar of the PAF in agriculture and energy. Reform in these sectors supports the theme of the FNDP which is broad based wealth and job creation where the strategic focus is economic infrastructure and human resource development focusing primarily on agriculture, infrastructure and private sector development. At present, PRSC1 has undergone a regional operations committee (ROC) review which has authorized appraisal. Appraisal is likely to be completed in the second half of CY2009.

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3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Overall rating: Moderately Satisfactory

36. The objectives of EMGC II were and are still relevant to the country situation and priorities as articulated in the government programs, the TNDP and FNDP and the PAF. Based on critical inputs such as the Public Service Management Program (PSMP) and analytical work which included a Public Expenditure Management and Financial Accountability Report (PEMFAR), a Country Economic Memorandum (CEM), an Investment Climate Assessment (ICA), a Poverty and Vulnerability Assessment (PVA) including diagnostic work on pro-poor growth, the credit rightly identified the need to focus on improving public sector performance, maintaining a conducive framework for macroeconomic growth, and enhancing the opportunities for reducing poverty through reforms that provide a better business environment.

37. EMGC II aligned with the joint donor framework, the PRBS process and utilized the PAF 2006-2008 in identifying prior actions to support. The PRBS process had only began substantively in 2006 and as a result the PAF had weak policy content in some areas such as private sector development and pension reform. The framework was therefore not able to adequately support the attainment of the program objectives.

38. In view of the tradeoffs that the use of the PAF entailed, the overall assessment of the relevance of the objectives as well as the design and implementation is moderately satisfactory.

3.2 Achievement of Program Development Objectives PDO 1: Maintain and deepen Zambia’s macroeconomic framework conducive to robust growth. Rating: Satisfactory

39. The government’s macroeconomic program continued to sustain macro stability providing a good basis for implementing the structural reform agenda outlined in the FNDP. The government maintained a satisfactory macroeconomic framework supported by the IMF through the PRGF arrangement.

40. The recent economic developments show that growth remained strong throughout the period 2005-08 and Zambia’s macroeconomic framework remained robust (Table 2). The positive growth developments were helped by a very favorable external environment. More recently Zambia has been impacted by the global crisis, especially on account of much lower copper prices. However, this impact has been mitigated by an increase in copper production –a result of new large foreign investments that preceded the crisis.

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Table 2: Zambia Key Economic Indicators

2005 2006 2007 2008 2009f

GDP Growth (constant prices) 5.3 6.2 6.2 6.0 4.0

Inflation rate (end of year) 15.9 8.2 8.9 16.6 10.0

Current Account Balance, inc. grants (% GDP) -4.4 1.2 -6.6 -7.4 -9.5

International Reserves (months of imports) 1.5 2.2 2.5 2.1 3.1

Central Government Accounts (% GDP)Total Revenue 17.4 16.9 18.7 19.0 17.7 Grants 5.6 26.0 4.6 3.9 5.0 Total Expenditure 25.6 24.3 23.5 24.6 25.3 Overall Balance after Grants (cash basis) -2.6 18.6 -0.2 -1.7 -2.6

Sources: Bank of Zambia, Central Statistical Office and IMF. f = 2009 IMF forecast. 41. In addition to the strong growth performance experienced, government’s commitment to macroeconomic stability resulted in declining inflation underpinned by adequate fiscal policy agreed under the PRGF arrangement with the IMF. The PRGF arrangement which supported a structural agenda in the areas of public expenditure management, tax reform, debt management and financial sector development was successfully completed at the end of 2007. A new IMF PRGF arrangement was subsequently agreed to in June 2008.

42. A recent assessment of the performance under the new arrangement has noted that a few exogenous factors have affected economic conditions. These are mainly the surge in global food and fuel prices in the first half of 2008 which led to a significant increase in inflation and the global financial crisis which led to a drop in commodity prices. The drop in copper prices significantly affected the balance of payments as the sector provides 60-70 percent of the country’s export revenue. As a consequence, the IMF has increased substantially its balance of payments support for 2009.

43. Government’s commitment to the maintenance of sound macroeconomic policies is one of the underlying principles of the Memorandum of understanding (MOU) between GRZ and budget support donors, mainly assessed by a positive implementation of the PRGF arrangement with the IMF program. Throughout the PRBS process, the macroeconomic framework has been maintained by an active participation of the IMF. The prior actions that supported this development objective were thus complementary to the government’s performance under the IMF program.

44. EMGCII specifically aimed to assist government reforms that focused on reducing arrears to the public service pension fund (PSPF) and to improve Zambia’s credit culture. This would consolidate the macroeconomic gains achieved by the country

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particularly in promoting fiscal sustainability and contribute to sustainability of reforms in the financial sector. Attainment of these objectives would lead to the timely payment of pensions by PSPF and the availability of credit worthiness information of borrowers to commercial banks.

45. Public Service Pension Fund

In the area of pensions, expected outcomes have not been fully achieved. The government’s target in 2008 was to reduce the amounts owed from K305 billion at the end of 2007 to not more than two months by end year, approximately K23billion. While the required budgetary allocations were made, the end year value was K93billion. The target was not met mainly as a result of continued late payment of employers’ contribution, by the defense forces. While the government arrears reduction plan has significantly reduced government liabilities to the pension fund and potentially freed up resources that could be channeled to other priorities areas, without addressing the current problem of late payment of employers’ contributions by some institutions, this will continue to pose a challenge for PSPF in meeting its current liabilities in the short to medium term. The recent MTEF 2009-2011 reiterates government’s commitment to clear all pension arrears by end 2009. 46. A deeper problem in the area of pension reform though, is the fact that PSPF is a defined benefits scheme, which has unfunded liabilities that make it financially insolvent. An amendment of the constitutional clause regarding Pensions has been proposed. However the constitutional amendment process is yet to be finalized, the process is expected to be completed by 2011. Additionally, for this to reform to be undertaken a broad and potentially difficult consultative process with all stakeholders is required. At the moment, these discussions have not yet begun.

47. Financial Sector Development

With the establishment of a credit reference bureau in 2008, there was an expectation of improvement in availability of creditworthiness information on borrowers. While the established Credit Reference Bureau African Limited (CRBAL) is functional, it is not populated enough to provide useful information. As of end year 2008, commercial banks had not been actively submitting creditor information to the bureau, as privacy agreements dictate the need for borrower consent to allow banks to share information, hence inhibiting the bureau’s effectiveness. This may improve marginally in the coming years following the directive from the Central Bank in late 2008 for commercial banks to observe this requirement. The positive attainment of this objective which would reduce the cost of and enable quicker access to finances for the private sector is yet to be achieved. 48. The policy reforms in these two areas supported by the credit have enabled some improvements in terms of the current Pension fund financial standing compared to its position a few years ago and have also enabled some access to creditworthiness information on borrowers. The country has also achieved relatively strong macroeconomic performance since 2005. Although a few actions are still required under

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these reform areas in order to achieve outcomes expected by the operation, the rating of the attainment of this PDO is satisfactory.

PDO 2: Strengthen the credibility and institutional capacity of the public sector. Rating: Moderately Satisfactory

49. The attainment of this PDO was dependant on reforms in public sector management that would result in improved access to and quality of data in the PMEC system, as well as improved ability by government agencies to execute in year programs thus reducing the disconnect between plans and budget execution. The program also supported government reforms that focused on reducing arrears to general contractors that would lead to improved management of public resources and improve the credibility of GRZ vis-á-vis domestic suppliers. Attainment of these outcomes was to contribute towards sustainability of reforms in these areas.

50. Public Finance Management- Domestic Arrears

The Public Expenditure Financial Accountability assessment (PEFA) report 2008, showed a significant improvement in reduction of the stock and monitoring of expenditure arrears mainly as a result of government’s strategy in the MTEF’s and the regular reporting by the responsible departments. By end 2008, domestic arrears had been substantially reduced to K193 billion from K376.4 billion in December 2007. This was however, above the government end year target for 2008 of K120billion. In the medium term expenditure framework (MTEF) for the period 2009-2011, government has committed to clear all arrears by the end of 2009 and has allocated K176 billion in the 2009 budget to this effect. As at end March 2009, arrears owed to domestic suppliers had been furthered reduced down to K144 billion. 51. The progress made thus far has shown that government has made a committed effort in tackling this area of concern and has allocated resources towards this. Current arrears being owed have not been paid only due to the verification process that is being undertaken by government agencies prior to payment, some of these institutions have not until recently been adequately staffed. As a result of the clearance of significant amounts of the arrears owed, governments’ credibility vis-á-vis domestic suppliers' has improved.

52. Public Finance Management- Budget Execution

Budget execution has continued to improve over the last four years. By December 2007, 91.8 percent of heads (45 out of 49) had annual expenditures between 95 % and 105% of total funding, as government had committed. This was a marked improvement from 55 percent in 2005. As at end 2008, approximately 41 out of 49 heads (84 percent) had annual expenditures between 95 % and 105% of total funding. This reflects a continued commitment by government towards meeting its targets under the PAF and the broader FNDP goals.

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53. The PEFA 2008 report, noted that whilst budget performance on aggregate has improved, variances across individual budget heads continue to be significant, although progress since the 2005 assessment is evident. Total expenditure variance averaged just below 15 percent for the three years, from 2005 to 2007. Some of the specific reasons for the deviations for institutional heads include: relatively low resource absorption capacity by some MPSAs and thus differing discretionary releases of funds to different institutions, and weaknesses in planning (e.g. the ex ante planning of pay awards).

54. Overall, the slightly improved performance (reflected in the lower average variance from the high variance levels found in 2005) indicates greater consistency in policy focus and adherence to sustained financing of policy priority programs, i.e. in health, education and agriculture, infrastructure sectors, as envisaged in the FNDP. The result of these improvements is that the credibility of the budget has improved significantly as it is to a large extent implemented in accordance with estimates as approved by Parliament.

55. Public Service Management

The roll out of a payment establishment and management control (PMEC) system to additional central agencies as government had planned, was not undertaken in 2008. While the government planned to increase the number of central agencies linked to the system from five at end 2007 to thirteen at end 2008, there has been no implementation of this action. Government has been relying on the installation of fiber-optic lines by Zambia Telecommunications Limited (ZAMTEL) particularly in Lusaka where all ministry headquarters are, which has been delayed. The PMEC program had not initially been designed to use the ZAMTEL fiber-optic network. To counter this delay, a web-based roll out was attempted by government but security inadequacies have not enabled this to be achieved. 56. However, the PEFA report of 2008, states that as a result of an update in the central site communication equipment in 2007, an automated Payroll Management and Establishment Control (PMEC) system is fully operational, which directly links personnel data and payroll data to ensure consistency and monthly reconciliation for civil service. The payroll system processes wages and salaries for about 132,000 central government employees. However, 2000 employees are still on the old legacy system due to fact that they cannot be fused into the current organization structure.

57. In spite of the automated PMEC system in most agencies, there are still delays in processing changes to personnel and payroll which lead to retroactive adjustments. There is recent evidence of very long delays which have resulted in undue payments and financial losses to the Government. The overall assessment is that while internal controls of the operations of the payroll system are functioning, the evidence of lapses in the updating of personnel data by end users poses a risk to the accuracy of the system. On account of the challenges with regard to timeliness of changes to payroll and personnel records, the overall performance of government in ensuring effectiveness of payroll controls was noted to be same as it was in 2005.

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58. Government has undertaken significant strides since 2005 in improving public finance management in the areas of budget execution and clearance of domestic arrears which have improved credibility of the budget and credibility of government as viewed by domestic suppliers. While challenges still exist with regard to the timeliness of changes to payroll records, other areas such as integration and reconciliation of records and internal controls have improved. However in view of the delays in the roll out of the PMEC system to central agencies which would substantially improve challenges faced in timeliness of updating records and payroll thus saving government undue payments, the programs achievement of this PDO is moderately satisfactory.

PDO 3: Enhance Zambia’s growth opportunities while improving its poverty impact. Rating: Moderately satisfactory

59. In order to accomplish this objective the program supported reforms in the areas of agriculture, infrastructure and business environment/ private sector development. These reforms are part of the wealth creation pillar of the PAF and support the FNDP theme which is broad- based wealth and job creation through citizen participation and technological advancement, while the focus is on economic infrastructure and human resource management. Government action in these areas would result in a simplified framework to reduce bureaucratic procedures for businesses, the agreement on roles and mandates of each actor, public and private in the agricultural marketing sectors and the ability of the road agencies to operate their statutory tasks.

60. Private Sector Development

Reducing administrative barriers is a government priority in the area of private sector development. In order to reduce the cost of doing business and increase participation of Zambians in the economic process, in line with the FNDP theme, government undertook institutional and legislative changes in 2005. The establishment of the Zambia Development Agency (ZDA) in 2006 following the enactment of the ZDA Act dissolved the five agencies that had been responsible for investment, trade, small enterprise development and privatization these were the Zambia Investment Centre, Zambia Privatization Agency, Zambia Export and Processing Zone Agency, Small Enterprise Development Board, and Export Board of Zambia. This resulted in the creation of the ZDA an economic institution responsible for ensuring a holistic and strategic view on increasing trade and investment levels in the country as well as having an efficient, effective and coordinated private sector led economic development strategy. The agency would be a one stop facility for all trade and investment inquires. 61. With the establishment of the agency, a work plan for the removal of barriers to export and business was also developed for its implementation, which would result in the reduction in the number of days it takes to start up a business from 35 days in 2005 to ten days by 2007. This would significantly reduce the cost of doing business and promote private sector participation in economic development.

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62. The Doing Business report 2009 shows an improvement in Zambia’s overall ranking overall since 2008 from 101 to 100 and an improvement in the ranking for starting business from 84 to 71. The number of procedures required and duration of days for starting a business in Zambia are fewer than the regional average for other low income countries in sub-Saharan Africa, as is the cost and minimum capital required as a percentage of gross national income (GNI) per capita. These results were attained as a result of specific actions by government agencies in the areas of business registration and tax registration, as well as the simplification of banking procedures. This has led to an improvement in the business environment.

63. Going forward, government has committed in the PAF 2008-2010 towards undertaking more actions that would improve the business environment even further particularly in the area of licensing. This is specifically reducing the administrative cost of compliance with business licenses by eliminating and streamlining the current number of licenses.

64. Agriculture

The agricultural sector is a key sector in the FNDP and seen to have great potential for enhancing economic growth and accelerating poverty reduction. The FNDP notes that the poor functioning of agricultural markets is one of the challenges that compromise the ability of the sector to benefit from its full potential and hence make a significant impact on reducing the country’s poverty levels. In order to improve the sector’s ability to contribute more effectively to growth and poverty reduction, the PAF for 2006-2008 included the need to define the roles and responsibilities of the public and private sector when it comes to Zambia’s agricultural marketing system. 65. EMGC II supported the Ministry of Agriculture and Cooperatives (MACO) with the drafting and finalization of consultations with stakeholders on an agricultural marketing act. Both a concept note and cabinet memorandum on the proposed Agricultural Marketing Act were presented to Cabinet in 2007 and it was envisaged that bills proposing amendments to the current Acts would be tabled before Parliament in 2008. The proposed legislation will provide for a more efficient and transparent agricultural marketing system, attracting private sector participation, contributing to increased agricultural production and farmer’s incomes. This will be done through encouraging the participation of the private sector.

66. Although the draft act has been widely discussed within government, the concept paper defining this act is still with the Ministry of Justice and the act has not been submitted to Parliament as had been expected in 2008. This extensive consultation process is a character of the policy reform environment in Zambia. As a result of these delays, there continues to be significant influence by government, especially in the area of maize pricing. This has a negative impact on encouraging private participation in the sector.

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67. Infrastructure

EMGCII noted that the need for a well designed and maintained road network for a landlocked country like Zambia was critical to minimize the impact of transport cost on its overall competitiveness. To improve the predictability of financing and strengthen implementation capacity of the government, three road agencies each assigned with specific tasks were created. The National Road Fund Agency (NRFA) responsible for the coordination and management of the road financing functions, including collection, disbursement, management, and accounting of Zambia’s road fund; a Road Development Agency (RDA), tasked with the management responsibility of the public/proclaimed network, and which includes planning, programming, implementation, monitoring, overall supervision of all road works and axle load control in the country; and a Road Transport and Safety Agency (RTSA), responsible for implementing policy on road transport and traffic management, road safety and enforcement of laws regulating road transport and traffic safety in the country. To ensure that the newly created agencies operated effectively vacancies in the new agencies were to be filled. Under the PAF for 2006-08, it was agreed this was a priority and that by the end of 2006, 80 percent of all posts will be filled and that from 2007 onwards all posts will be occupied. The PAF also monitored kilometers of roads up graded, rehabilitated, and kilometers of unpaved roads maintained.

68. Since all three road agencies were adequately staffed in 2008, a system to attain a well maintained national core road network exists. Challenges still exist however particularly with regard to meeting the targets on the core unpaved network in the rural areas, which would have the most poverty reducing impact. The review of the annual work plan for 2008 by RDA shows that while targets for the rehabilitation of the core paved and unpaved road network were met, with targets for maintenance of paved roads also significantly met, only 62 percent of the target for maintenance of the core unpaved road network, that is, 12,436 km out of the targeted 20, 058 km was met in 2008. However, preliminary results of a current road condition survey which covers almost 35% of the unpaved core road network show a significant deterioration in the condition of unpaved roads classified as being in good and fair condition from 32% to 10% between 2006 and 2009. Most of these roads are rural roads that are essential to provision of social services such as health and education and linking the rural markets to urban centers. More resources and supervision need to be focused towards this area.

69. Available information from the RDA and the NRFA has shown that challenges are also being faced in public finance management and implementation of sound procurement practices in the sector. These are areas, in addition to strengthened supervision of road construction projects by RDA that need to be addressed going forward.

70. The enactment of the AMA has a fundamental role in unlocking the constraint to growth in the agricultural sector which has the potential to have a tremendously positive effort on growth, employment and poverty reduction. To attain these outcomes in this area, a major step is required to be completed by government, which is parliamentary submission and approval of the AMA. Additionally, increased focus by RDA on meeting

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rural road targets could have a potentially positive impact on service delivery in those areas and reducing the increasing rural-urban divide. As a result of the required actions in two of the three reform areas which have a great impact in achieving the PDO outcome, the rating of attainment of this PDO is moderately satisfactory.

3.4 Justification of Overall Outcome Rating Rating: Moderately satisfactory.

71. The program’s objectives were and continue to be relevant to the current country context. Government’s performance in undertaking reform actions in the areas supported by the program in macroeconomic management, public finance management and wealth creation has on the overall been positive and consistent with its past track record since 2005. Although there continue to be delays in key some areas such as agriculture, and public sector management. Overall, government has undertaken many of the major steps required to meet the development objective outcomes that were expected by the operation.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development

(b) Institutional Change/Strengthening 72. The program document stated that the operation was meant to extend Zambia’s track record of policy and institutional reform setting the stage for movement towards a programmatic approach under the new CAS FY08-11.

73. Although the level of reform to be achieved in each progressive year was set at a higher level than the previous in the PAF making comparisons between subsequent years difficult, it can be noted from the joint annual reviews and using recent information that government’s pace of undertaking reforms has been slightly below the performance of the previous years. Nevertheless, the progress made does provide an adequate basis on which government should be supported to assist the country meet the national goals as set in the FNDP.

74. In addition the PRBS process has enabled strengthened donor coordination at the sectoral level which has also enabled the improvement of the policy content of the PAF. The PAF review meeting which took place in January 2009 provided this opportunity in the energy sector where important output indicators were included in the PAF 2008-2011, anchored on policy actions.

75. While the participation by sectoral ministries and civil society has improved in the last eighteen months, there is still need to further strengthen the institutional arrangements for monitoring progress prescribed by the MOU provisions particularly the joint executive committee and to ensure consistent involvement of civil society in the national consultative processes such as the SAGs which feed also into the PRBS processes.

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(c) Other Unintended Outcomes and Impacts (positive or negative, if any)

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops None.

4. Assessment of Risk to Development Outcomes Rating: Significant

76. The attainment of the development outcomes could be affected by both exogenous factors, especially stemming from the global financial crisis and domestic factors based on the government’s commitment and or capacity to advance in the reform program.

77. There is a significant risk that a protracted global recession could worsen significantly the macroeconomic outlook and the fiscal sustainability, not only through lower copper prices but overall lower external demand and negative output growth. This could alter significantly the macroeconomic framework, making difficult the sustainability of the progress and reforms that have been achieved. For example, the effects of the global crisis, so far, have resulted in increased inflation, and volatility of the nominal and real exchange rates, making macroeconomic management difficult in the short term. This may potentially reduce government’s domestic revenues and the ability to meet its fiscal goals. This could have a negative effect in meeting milestones of reforms that require substantial budgetary allocations such as pension, domestic arrears, and cause a differential between the actual and authorized budget allocation making budget execution difficult.

78. A protracted global crisis could also contribute to create a political economy environment in which it would be difficult to advance in some important reforms such as reducing the role of the state in some areas of agriculture marketing. Another domestic factor that could contribute to risks to the PDOs is that the country is scheduled to have general elections in 2011. This by itself creates the risk of pressures to depart from the goals in the areas of macroeconomic management and public sector reform and could negatively affect the willingness to implement some of the most difficult reforms under the wealth creation pillar, especially with regards to reforms in agriculture and the energy sector.

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5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry

Rating: Moderately Satisfactory.

79. The Bank’s performance is rated moderately satisfactory. The reasons for this rating include: the consistency with the CAS objectives, the focus on reform measures, and the choice of prior actions which took into account experience gained from the previous EMGC I and supported the extension of Zambia’s track record in these areas. The credit was also consistent with Government’s development strategy, articulated in the FNDP and aligned with the harmonized donor PRBS process. The operation was also anchored on findings of considerable analytical work, in the areas of public finance management, public sector management, investment climate and poverty which identified the key constraints in those areas which were hindering the performance of the public sector, the deepening of progress in macroeconomic management and the creation of a conducive business environment that encourages private sector participation.

80. The project team consisted of seasoned professionals with relevant technical expertise in the areas of public sector reform, agriculture, private sector development, infrastructure and financial sector reform. The Bank team was also well managed by an experienced team leader who ensured that close consultation was also carried out with the IMF and other local PRBS donors.

81. However a few challenges were faced, as the appraisal period was extended from 2007 until 2008. The operation also overestimated the ability of government to meet the prior actions at the time anticipated and its pace a continuing with the follow up reforms needed to fully attain the PDO outcomes. In addition, the PAF which had an emphasis on rather weak measures –compared to the ambition of the government’s objectives, as well as a heavy and growing reliance on outcome indicators instead of important policy reforms has weakened the important catalytic role that an operation like this could have in terms of quality and depth of the policy dialogue. This also weakened the role the operation could have as an instrument to encourage focus on the most critically important reforms to help meet government objectives.

(b) Quality of Supervision

Rating: Satisfactory

82. In line with the harmonized PRBS process, the Bank mainly utilized the main annual PRBS June review to monitor the program. The June review assesses government performance on attainment of targets for the previous calendar year using an end year deadline. The Bank policy however allows for a longer time frame for assessment focusing mainly on attainment of prior actions. At the time of appraisal in June 2007, the government had still some of the prior actions and only met all of them in 2008.

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83. The Bank team which consisted of seasoned professionals with relevant technical in the areas supported by the credit as well as an experienced team leader showed responsiveness to government’s changed needs in the timing of negotiations and a commitment to follow through on the operation that had taken almost a year longer than initially planned. However, this extension of time had a marginally negative effect on the quality and depth of dialogue around this operation.

(c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory

84. Given that the design of the operation had to rely on a PAF that does not contribute as much as it could to support policy dialogue and reforms that can be critical to the achievement of government’s objectives, the overall rating is moderately satisfactory.

5.2 Borrower Performance (a) Government Performance

Rating: Moderately Satisfactory

85. The interim PAF developed in 2005 provided the initial framework for the harmonized provision of budget support to the Zambian government. The PAF 2006-2008 was developed in 2006 building on the interim PAF. The PAF 2006-2008 was prepared jointly by government, led by the staff of the Ministry of Finance, and the PRBS donors. Extensive consultations were held within the sectoral advisory groups (SAGs) which consist of representatives from civil society, private sector and government.

86. The PAF has improved significantly in substance and scope since 2005. The inclusion of new sector policies and refinement of previous indicators has required a more proactive coordination and leadership role by the Ministry of Finance. The Ministry of Finance has on the overall been able to provide this required leadership.

87. Government was significantly delayed in undertaking required actions to achieve the end year targets in the PAF for 2006, in reform areas of macroeconomic management, public sector management, public finance management and agriculture. As a result of these delays, the prior actions of the credit had not been met at the time of the joint review in June 2007. The performance in implementing the broad reform program for 2007 in the PAF for 2007-2009 was also somewhat weaker than previous years.

88. With regard to the EMGC II operation, the government also experienced a few setbacks in meeting the effectiveness timelines, after the credit was approved. These were mainly as a result of a change of key staff that had been involved in the operation design and negotiation and the halt of government functions after the death of the late President.

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(b) Implementing Agency or Agencies Performance

Rating: Moderately Satisfactory

89. While the Ministry of Finance does provide overall leadership in the PAF process, it has struggled to provide consistent leadership with respect to monitoring the timely implementation of reform program by other ministries and agencies. The lack of participation by key sectors in the annual review processes even until June 2008 also limited the ability to undertake timely follow up actions, hence affecting the effectiveness of the Joint Executive Committee (JEC). Government did however improve the level of participation of key sectors during the review meeting in 2009. The result of which is that implementing agencies are monitoring implementation in a more timely manner than was previously the case.

(c) Justification of Rating for Overall Borrower Performance

Rating: Moderately Satisfactory.

90. Challenges are present with respect to the timely implementation of reforms by government especially by the various ministries and agencies, which are outside the control of the Ministry of Finance. However, in light of the improved cross sectoral participation in the PAF process and improved monitoring capacities of the implementing agencies in 2009, the overall borrower performance is deemed to be moderately satisfactory

6. Lessons Learned

• The design and sequencing of reforms need to take into account the track record

of the government especially in those areas that have been chosen by the operation. This will ensure that expected outcomes can be more realistic and focused on reforms in areas where chances of success are higher.

• In order to improve accountability that will lead to better implementation of reforms, there is a need for strengthening the link between the PRBS processes and other national processes through the sectoral advisory groups (SAGs). This will enable increased involvement of other stakeholders such as civil society and parliament.

• The assessment of government performance under the PAF showed that while the Ministry of Finance substantially undertook the actions required in reform areas under its control, the performance of other government agencies in meeting their targets was not as consistent over the same period. The role of a strong Ministry of Finance that can catalyze involvement from the different sectors is a key element in cross-cutting operations such as the PAF.

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• It must be recognized that operating in a donor harmonized framework can lead to trade-offs, especially since policies governing budget support can differ between some donors and the Bank. The limits of using a single instrument to achieve multiple objectives (e.g. harmonization, predictability, contribution and encouragement to reforms) need to be acknowledged.

• In order for the PAF to be a good catalyst for the implementation of a program to meet government’s objectives, it is essential that it focuses on both the outcome indicators that would measure government performance on an annual basis and on the underlying policy and institutional reforms that would lead to these outcomes. This would avoid excessive reliance on mainly outcome indicators and lead to a more balanced approach towards supporting needed reforms.

• Consistent dialogue among donors and between donors and government can lead to improvements in the content of the PAF. A successful example of this has been the inclusion of energy sector indicators in the PAF 2008-2010.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies 91. The borrower has evaluated its performance under EMGC II in a written report (see Annex 4). The borrower noted that most of the key lessons and recommendations under EMGC II were similar to those it had made under the previous operation EMGC I. 92. One of the recommendations made, was the need to streamline the number of conditions that are attached to loan agreements in line with current reforms that are being implemented by multilateral institutions. The Bank agrees that when there is an existing IMF program, having prior actions in the areas of macroeconomic management in addition to what is in an IMF program, can be avoided. 93. The borrower also made a recommendation for the Bank to fully align with the PAF assessment framework so as to reduce transaction costs. The Bank did align the EMGC II with the PAF and PRBS process, as it only selected prior actions that were part of the PAF 2006-2008 multi-year rolling program. The Bank also undertook its appraisal of the program, during the June 2007 joint PRBS review meeting. In addition, the Bank uses only the attainment of selected PAF indicators, the prior actions, in providing its budget support. This enables the government to concentrate its efforts on attainment of only a selected number of reforms to obtain the Bank budget support allocation. As was the case in EMGC II, the Bank processes even provide for flexibility when more time is required for government to meet the prior actions of an operation. 94. The Bank acknowledges the borrower’s recommendation on the possibility of streamlining the letter of development policy when policies are already outlined in the FNDP as well as the PRBS, PAF, MTEF and other documents.

23

95. The borrower also made a recommendation to avoid the use of policy based conditions as requisites for tranche releases of funds as such policies are influenced by factors beyond government control. While the Bank does recognize that the political economy environment in Zambia requires an extensive consultation process, the Bank only selects reforms that the government has committed to undertaking which are already contained in the PAF. Moreover, the Bank policies with respect to development policy lending require that its operations support policy and institutional reforms that the government has committed to undertake. (b) Co financiers

(c) Other partners and stakeholders (e.g. NGOs/private sector/civil society)

24

Annex 1 Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending Jos Verbeek Lead Economist AFTP1Paavo Eliste Senior Economist AFTARPetrus Benjamin Gericke Sr Transport. Engr. EASTEPavel Lukyantsau E T Consultant AFTP1Lulu Kasamba Mwaanga Milinga

Team Assistant AFMZM

Alex Mwanakasale Agricultural Officer AFTARMushiba Nyamazana Economist AFTP1Samuel A. O’Brien-Kumi Sr Energy Econ. AFTEGPatricia Palale Public Sector Mgmt. Spec. AFTPRJonathan David Pavluk Sr Counsel LEGAFTijan M. Sallah Manager AFRCPW. Marie Sheppard Sr Private Sector Development AFTFPDotilda Sidibe Program Assistant AFTP1

Supervision Fenwick M. Chitalu Financial Management SpecialistAFTFMLulu Kasamba Mwaanga Milinga

Team Assistant AFMZ

MPatricia Palale Public Sector Mgmt. Spec. AFTPRJulio E. Revilla Senior Economist AFTP1Jos Verbeek Lead Economist AFTP1Susan Ngoza Mpande Economist AFTP1

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only)

Stage No. of staff weeks

USD Thousands (including travel and

consultant costs) Lending

FY03 13 78.72 FY04 7.82 FY05 90.94 FY06 13 200.78 FY07 33 122.05

25

FY08 19 0.00 FY09 0.00

Total: 78 500.31 Supervision/ICR

FY09 1 0.00

Total: 1 0.00

26

Annex 2. Beneficiary Survey Results (If any)

27

Annex 3. Stakeholder Workshop Report and Results (if any)

28

Annex 4. Summary of Borrower’s ICR and/or Comments on Draft ICR

35

Annex 5. Comments of Co financiers and Other Partners/Stakeholders

No comments were received from the PRBS group of donors.

36

Annex 6. List of Supporting Documents

Country Assistance Strategy for the Republic of Zambia, March 9, 2004 Country Assistance Strategy for the Republic of Zambia May 20, 2008. Poverty Reduction Budget Support (PRBS), Joint Annual Review 2007 in Zambia: Learning Assessment. Draft report, June 25, 2007. Report on Progress under the Performance Assessment Framework for the period 2007- 2009 for the Joint Assessment of Budget support at the June 2008 Joint Annual review. Republic of Zambia, Ministry of Finance and National Planning: 2009-2011 Medium Term Expenditure Framework (MTEF) and the 2009 Budget. (Green Paper) December 2008. Road Development Agency (RDA): Review of the 2008 Annual Work Plan. Zambia: Financial Sector Assessment Program (FSAP) Update. Technical note- Pensions Section (Draft). IMF & World Bank. January, 2009. Zambia: 2008 PEFA Public Expenditure Financial Accountability Assessment Report. Zambia: Fifth and sixth reviews under the Poverty Reduction and Growth Facility arrangement and request for waiver of non observance of performance criteria. International Monetary Fund (IMF) May 23, 2007. Zambia: Briefing paper- First and Second review of the Three- year arrangement under the Poverty Reduction and Growth Facility (PRGF), February, 2009. http://www.doingbusiness.org/ExploreEconomies/?economyid=207 Project files.

Mafinga Hills(2301 m)

Kaulishishi(1420 m)

Machechete(1488 m)

MulongaPlain

BusangaSwamp

LukangaSwamp

Muchinga

Mts

.

Mumbwa

Mutanda

Mwinilunga

NamwalaKafueMazabuka

Kaema

PokumaSenkobo

Kalomo

Choma

Bowwood

Pemba

Chirundu

KaribaShangombo

Kasempa

Chisasa

Chingola

Kapiri Mposhi

Rufunsa

Old Mkushi

Mkushi

Nyimba

Petauke

Mfuwe

Mpika

Chambeshi

Kope

Chembe

Samfya

Luwingu

Mpulungu

Mbala

Sumbu

MwenzoNchelenge

Kaputa

Kawambwa

Mporokoso

MufuliraMwanya

Chisomo

Katete

Serenje

Lubungu

Kawana

Mavua

LuampaKalabo

Senanga

Kabompo

Manyinga

Lukulu

Zambezi

Chavuma

Mulobezi

Kataba

Malundano

Sesheke

Sitoti S O U T H E R N

C E N T R A L

N O R T H E R N

E A S T E R N

W E S T E R N

N O R T H -W E S T E R N

C O P P E R -B E L T

LUA

P U L A

L U S A K A

Kabwe

Livingstone

Mongu

Solwezi

Ndola

Chipata

Mansa

Kasama

LUSAKA

ANGOLA

DEMOCRATIC REPUBLICOF CONGO

TANZANIA

MALAWI

ZIMBABWE

NAMIBIA

BOTSWANA

MOZAMBIQUE

MO

ZAM

BIQ

UE

To Caianda

To Lumbala

To Lutembo

To Chiume

To Ngoma

To Mpandamatenga

To Matetsi

To Harare

To Cahora Bassa

To Lubumbashi

To Mokambo

To Sumbawanga

To Mbeya

To Karonga

To Mzuzu

To Lilongwe

To Furancungo

S O U T H E R N

C E N T R A L

N O R T H E R N

E A S T E R N

W E S T E R N

N O R T H -W E S T E R N

C O P P E R -B E L T

LUA

P U L A

L U S A K A

Mumbwa

Mutanda

Mwinilunga

NamwalaKafueMazabuka

Kaema

PokumaSenkobo

Kalomo

Choma

Bowwood

Pemba

Chirundu

KaribaShangombo

Kasempa

Chisasa

Chingola

Kapiri Mposhi

Rufunsa

Old Mkushi

Mkushi

Nyimba

Petauke

Mfuwe

Mpika

Chambeshi

Kope

Chembe

Samfya

Luwingu

Mpulungu

Mbala

Sumbu

MwenzoNchelenge

Kaputa

Kawambwa

Mporokoso

MufuliraMwanya

Chisomo

Katete

Serenje

Luangwa

Lubungu

Kawana

Mavua

LuampaKalabo

Senanga

Kabompo

Manyinga

Lukulu

Zambezi

Chavuma

Mulobezi

Kataba

Malundano

Sesheke

Sitoti

Kabwe

Livingstone

Mongu

Solwezi

Ndola

Chipata

Mansa

Kasama

LUSAKA

ANGOLA

DEMOCRATIC REPUBLICOF CONGO

TANZANIA

MALAWI

ZIMBABWE

NAMIBIA

BOTSWANA

MOZAMBIQUE

MO

ZAM

BIQ

UE

Zam

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Lung

a

Luns

emfw

a

Luan

gwa

Kafue

Cuando

Lungwebungu

Kafue

LakeBangwelu

LakeMweru

Wantipa

LakeMweru

Lake Tanganyika

LakeKariba

LakeMalawiTo

Caianda

To Lumbala

To Lutembo

To Chiume

To Ngoma

To Mpandamatenga

To Matetsi

To Harare

To Cahora Bassa

To Lubumbashi

To Mokambo

To Sumbawanga

To Mbeya

To Karonga

To Mzuzu

To Lilongwe

To Furancungo

MulongaPlain

BusangaSwamp

LukangaSwamp

Muchinga

Mts

.

Mafinga Hills(2301 m)

Kaulishishi(1420 m)

Machechete(1488 m)

22°E 26°E 30°E

22°E 26°E 30°E

12°S

16°S

8°S

12°S

ZAMBIA

0 15010050

0 50 100 150 Miles

200 Kilometers IBRD 33514

OC

TOBER 2004

ZAMBIASELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endorsemen t or a c c e p t a n c e o f s u c h boundaries.