40316 THE INTERNATIONALMONETARY FUNDAND THE INTERNATIONALDEVELOPMENTASSOCIATION THE REPUBLICOF ZAMBIA EnhancedInitiativefor Heavily IndebtedPoor Countries CompletionPoint Document Preparedby the Staffs of the International MonetaryFundand the International DevelopmentAssociation Approvedby Saul Lizondoand G.RussellKincaid(IMF) and GobindNankani andDannyM. Leipziger (IDA) March23. 2005 Contents Page Executive Summary................................................................................................................... 3 I.Introduction ............................................................................................................................ 5 I1. Assessment of Requirementsfor Reachingthe CompletionPoint ....................................... 5 A. Implementationof the PovertyReductionStrategy.................................................. 6 B. MacroeconomicStability.......................... ;............................................................... 7 C. Social Sector Policies.............................................................................................. 11 D.Key Structural Reforms.......................................................................................... E.Public ExpenditureManagementReforms.............................................................. 15 16 F.Use of HIPC InitiativeInterimAssistance.............................................................. 19 I11 DebtReliefandDebt SustainabilityAnalysis Update . ....................................................... 19 19 B. Status of Creditor Participation............................................................................... A.UpdatedData Reconciliationfor the Decision Point.............................................. 20 C.Multilateral Creditors.............................................................................................. 21 D. UpdatedDebt SustainabilityAnalysis .................................................................... 22 IV.PublicDebt Management.................................................................................................. 30 V. Conclusions ......................................................................................................................... 32 VI. Issues for Discussion ......................................................................................................... 33 DMSDRlS-2396572-~8-Zambia--HIPCCP Doc.DOCMarch 23. 2005 (4:39PM) - 2 - Boxes 1. Key Reforms and Objectives for Reaching a Floating Completion Point......................... 8 2. Commercialization o f ZambiaEnergy Supply Company (ZESCO)................................ 17 3. Macroeconomic Assumptions Underlying the Debt SustainabilityAnalysis Over the 26Period 2004-2023 ........................................................................................................ 26 4. Main Challenges inPublic Debt Management ................................................................ 31 Figures 1. Average Annual Real GDP Growth 1981-2004 ................................................................ 7 2. Inflation. 1981-2004 ........................................................................................................ 10 3. External Debt and Debt-Service Indicators for Medium- and Long-Term Public Sector Debt. 2004-2023 ................................................................................... 27 4. Sensitivity Analysis 2004-2023 ...................................................................................... 28 Tables 1. Selected Economic and Financial Indicators. 2000-04 ................................................... 35 2. HIPC Initiative IntermDebt Relief and Selected Poverty-reducing Spending................36 3. EnhancedHIPC Initiative Assistance Levels Under a Proportional Burden Sharing Approach............................................................................................ 37 4. Status o f Creditor ParticpationUnder the Enhanced HIPC Initiative.............................. 38 5. Delivery o f IDA Assistance Under the Enhanced HIPC Initiative, 2001-20 ..................39 6. Deliverty o f IMF Assistance Under the Enhanced HIPC Initiative, 2000-09 .................40 7. Paris Club Creditors' Delivery of Debt ReliefUnder Bilateral Initiatives Beyondthe HIPC Initiative ............................................................................................. 41 8. Comparison o f Discount Rate and Exchange Rate Assumptions at end-1999 and end 2003 ............................................................................................. 42 9. Nominal andNet Present Value o f External Debt at Completion Point, End-2003 ........43 10. Comparison o f Net Present Value o f External Debt BetweenDecisionPoint and Completion Point ................................................................................................... 44 11. Comparison o fMacroeconomic Assumption at Decision Point and Outturns, 1999-2004 ..................................................................................................................... 45 12. Macroeconomic Assumptions, 2003-2023 ...................................................................... 46 13. Net Present Value o f External Debt, 2003-2023 ............................................................. 47 14. ExternalDebt Service After Full Implementationo f Debt-ReliefMechanisms, 2004-2023 ..................................................................................................................... 48 15. External Debt Indicators, 2003-2023 .............................................................................. 49 16. Sensitivity Analysis, 2003-202 3 ..................................................................................... 50 17. HIPC Initiative Status o f Country Cases Considered Underthe Initiative, February 11, 2005 ......................................................................................................... 51 EXECUTIVE SUMMARY aInthe opinion o fthe staffs ofthe International Monetary Fund(IMF) and International Development Association (IDA), Zambia has satisfactorily fulfilled the requirements for reaching the completion point under the enhanced Initiative for Heavily IndebtedPoor Countries (HIPC Initiative). The staffs recommend that Executive Directors agree with this assessment and commit resources for the enhanced HIPC Initiative to Zambia, as approved at the decision point, on an irrevocable basis. a At the decision point inDecember 2000, ExecutiveDirectors agreed that Zambia's external public debt shouldbe reducedby 62.6 percent (or US$2.5 billion) in 1999 net present value (NPV) terms, after the full use o f traditional debt-relief mechanisms. Fulldelivery o fthis assistance would lower the ratio o f Zambia's NPV of external public debt to exports to the enhanced HIPC Initiative's threshold o f 150 percent, based on end-1999 parameters and debt stocks. The IMF and IDA commitments to this debt relief were US$602 million andUS$488 million, respectively, inNPVterms o f which US$452 million and US$98 million, respectively, were delivered as interim assistance as o f March 2005. 0 Zambia has met all but three o f the completion point conditions, as specified inthe decision point document.Zambia made satisfactory progress inimplementing and monitoring its Poverty ReductionStrategy Paper (PRSP) for at least one year, and maintaineda stable macroecondmic environment as evidencedby satisfactory performanceunder a program supported by the Poverty Reduction and Growth Facility (PRGF). Zambia has met the completion point targets inthe social sectors, has undertaken important structural reforms and strengthened public expenditure management. Conditions regarding restructuring and privatization o f the electricity utility (ZESCO) andthe review o f the implementation o f an integratedfinancial management and information system (IFMIS),however, have not been met.In addition, the condition regarding privatization o f the Zambia National Commercial Bank (ZNCB) has not fully been met, as the authorities recently terminated negotiations with the current bidders in order to restart the privatization process to allow the participation o f new bidders. Based on progress achieved inthe areas o f restructuring ZESCO, public expenditure management, and privatization o f ZNCB, it i s recommended that the IMF Board grant waivers for the nonobservance o f the completion point conditions regarding ZESCO, the IFMIS, and ZNCB. a Financing assurances on the provision o f assistance under the enhanced HIPC Initiative have been obtained from creditors representing97 percent o f Zambia's total debt inN P V terms. Government has requested enhanced HIPC Initiative debt relief from non-Paris Club bilateral and commercial creditors. Some non-Paris Club bilateral creditors have providedpartial relief. - 4 - 0 An updated debt sustainability analysis basedon end-2003 debt data andparameters indicates that, after full delivery o f enhanced HIPC Initiative assistance and additional bilateral debt relief, the N P V o f debt-to-exports ratio was 174 percent, 13 percentage points above the decision point projection. The NPV o f debt-to exports ratio i s estimatedto have fallen to 140 percent in2004 and i s projected to decline steadily thereafter. On this basis, the staffs do not recommend a topping-up o f debt relief at the completion point. 0 A sensitivity analysis suggests that Zambia's debt sustainabilityposition after the completion point shouldbe able to withstand some severe shocks, such as a sizeable permanent fall inthe price o f copper, Zambia's principal export commodity, substantially slower economic growth, or a significant shortfall in donors' grants. 0 Government's capacity for public sector debt managementi s relatively low. Zambia participates inthe joint IMF/World Bank Debt Reform and Capacity Building Program. An assessment o f the main challenges was undertaken inM a y 2004. With technical assistance from IDA and other cooperatingpartners, government has prepared a public debt management reform program, which i s to be implementedover the next few years to remedy this situation. - 5 - I.INTRODUCTION 1. This paper discusses Zambia's progress under the enhanced Initiativefor Heavily IndebtedPoor Countries(HIPC) and seeks approvalfrom the ExecutiveBoardsof the InternationalMonetaryFund (IMF) and the InternationalDevelopmentAssociation (IDA) of Zambia's attainment of the completionpointunder the Initiative.InDecember 2000, the Executive Boards o f the IMF and IDA agreed that Zambia hadmet the conditions to reach its decision point under the enhanced HIPC Initiative and defined a set o f conditions for Zambiato reach the completion point, at which time the debt relief committed at the decision point would become irrevocable. 2. At the decision point, Zambia became eligiblefor debt reliefin the amount of US$2.5 billionin net present value (NPV) terms. Based on a debt sustainability analysis (DSA) using end-1999 data, the full delivery o f this assistance would reduce the ratio o f the NPV of Zambia's external public sector debt to exports to 150 percent-the threshold for sustainability under the enhanced HIPC Initiative. Employingthe principle o f equal burden sharing, all creditors would reduce the NPV o f their claims on Zambia by a commonreduction factor o f 62.6 percent, after the full use o f traditional debt-relief mechanisms. For the IMF and IDA,the resultingcommitments amountedto US$602 million andUS$488 millioninNPV terms, respectively. Duringthe interimperiodbetween the decision and completion points, the IMFprovided debt relief of US$452 million inN P V terms, while IDAprovided relief o f US$98 million. Zambia has also benefited from interim assistance granted by the African Development Bank (AfDB), the OPEC Fundfor International Development, the European Union (EU), and Paris Club creditors. Total HIPC Initiative assistance to Zambia was inexcess of US$830 million inN P V terms duringthe interimperiod.2 3. The document i s organized as follows: Section I1assesses Zambia's performance in meeting the requirements for reaching the completion point under the enhanced HIPC Initiative, as set out inthe decision point document. Section I11reviews the status o f creditor participation andthe delivery o f debt reliefto Zambiaunder the enhanced HIPC Initiative andpresents the results o f the D S A based on end-2003 debt data and parameters, including the sensitivity o f debt indicators to changes inkey economic variables. Section IV outlines the present state o f public sector debt management and summarizes the main challenges to be addressed in the ongoing efforts to build capacity inthis area. Sections V andVI present the conclusions and issues for discussion by the Boards, respectively. 11. ASSESSMENT OF REQUIREMENTSFOR REACHING THE COMPLETIONPOINT 4. The conditions for reachingthe completionpoint, as set out inthe decisionpoint document, comprised:(i) adoption of a Poverty Reduction Strategy Paper (PRSP) to be prepared through a participatory process and satisfactory progress with implementing and *See EBS/00/233 (11/20/2000) and IDA Report No. P7410-ZA (11/20/2000). Paris Club creditors have provided additional interim reliefbeyondHIPC Initiative assistance. - 6 - monitoring the PRSP for at least one year; (ii) maintenance o f a stable macroeconomic environment as evidenced by satisfactory performance under a program supported by an arrangement under the IMF's Poverty Reduction and Growth Facility (PRGF) (iii) specific targets inthe areas of education, health, and the fight against HIV/AIDS; (iv) implementation o f key structural refoms inthe electricity and financial sectors; and (v) strengthening o f public expenditure management. 5. In the view of the staffs of the IMFand IDA, all but three of the completionpoint triggershavenow been satisfied(Box 1).The completion point triggers regardingthe implementation and review o f the piloting o f an integrated financial management and information system (IFMIS) and restructuring and issuance o f intemational biddingdocuments for Zambia Electricity Supply Company (ZESCO), however, have not been met. Inaddition, the condition regarding privatization o f the Zambia National Commercial Bank (ZNCB) has not been fully met. The authorities recently terminated unsuccessful negotiations with the current bidders in order to restart the privatization process to allow the participation o f new bidders. Based on substantial progress in implementinga broader strategy to strengthenpublic expenditure management and govemment's commitment to implement IFMIS at the earliest possible date, satisfactory progress inimplementing a comprehensive commercialization strategy for ZESCO, and the authorities' commitments to advance the privatization process for ZNCB, as discussed below, it i s recommendedthat the Boardof the IMF grant waivers for the nonobservanceof the three completionpoint conditions regardingIFMIS,ZESCO, and ZNCB. The staffs of the IMF and IDA recommendthat ExecutiveDirectorsagree that Zambia has made sufficient progressto reachthe completionpointunder the enhanced HIPC Initiative. A. Implementationof the PovertyReductionStrategy 6. Inearly 2002, Zambia adopteda full PRSPcoveringthe period2002-04, whichwas preparedthrougha participatoryprocess.The PRSP was endorsed bythe IMF andIDA Boards inM a y 2002 as a credible framework for the provision o f concessional assistance. Zambia's PRSP aims to promote growth and diversification inproduction and exports, to improve delivery o f social services, and to foster appropriate policies for fighting HIVIAIDS, addressing gender inequality, and protecting the environment. In consultation with stakeholders, the period coveredby the original PRSP was extended by a ear to 2005 to overlap with Zambia's Transitional National Development Plan (TNDP). A new PRSP will be developed Y during2005 alongside a new National Development Plan for the period2006-2010. Policies for reducing poverty during 2005 will be guidedby the existing PRSP and TNDP. 7. Implementationof the PRSPwas not fully satisfactoryinthe first year, but has improved.The first Annual Progress Reporton the implementation o f the PRSP, covering the periodJanuary 2002-June 2003, was prepared by the Government o f the Republic o f Zambia The TNDP for the period 2002-2005, preparedwhen the current government took office in 2002, encompasses all the areas discussed inthe PRSP, but also includes other areas such as the Judiciary, Law and Order, and Defense and Security. - 7 - and submittedto the IMF andIDA inMarch2004. The Progress Report andthe accompanying Joint StaffAssessment (JSA) were discussedbythe Boards ofthe IMF and IDA inJune 2004.4 The JSA concludedthat Zambia'sstrategyto reducepoverty continuedto articulate a soundset o f policies andprograms.However, despite satisfactoryeconomic growth and someprogress on reformsrelatedto public expendituremanagement, satisfactoryimplementationofthe PRSP still neededto be established.Inparticular,monitoringandexecutionof the budgetfor poverty- reducingprogramswas poor andimplementationof the PRSPwas impairedbyweaknesses in macroeconomicmanagement.The secondAnnual ProgressReportand its Addendum, covering the periodJuly 2003-December2004 andincludinga supplement onpoliciesandobjectives for 2005, was releasedinFebruary2005. This report, whichwas also preparedthrough a participatoryprocess, andthe accompanyingJoint StaffAdvisory Notepoint out that macroeconomicpolicyhadbeenstrengthenedandprioritypoverty-reducingprogramswere fully fundedinline with the budgetin2004. Moreover,an activities-basedbudget (ABB) classification was introducedand the financial managementsystem(FMS)was improvedand computerizedto allow for substantiallybetter monitoringof expenditure.The improved predictabilityof funding has ledto better outcomes of PRSPprograms, suchas inthe areas of education,HIV/AIDS, and infra~tructure.~ Basedon this performance,IMF and IDA staffs conclude that satisfactoryprogresswith implementingand monitoringof the PRSPwas achievedfor a full year in 2004. B. MacroeconomicStability 8. Since the decision pointinDecember 2000, the Zambian economy has performed Figure 1. Average Annual Real GDP Growth, 1981-2004 (In percent) relativelywell, althoughpolicy implementation 5.0 4 has beenuneven and inflationhas yet to be aran Africa (excludingNigeria 4.0 broughtfully under control(Table 1).RealGDP 3 0 growthaveraged4.6 percenta year during2001- 2004, just under the 5 percentannual growth 2 0 projectedat decisionpoint, but this, nevertheless, 1 0 markeda turnaroundfrom the decline inper capita 0 0 incomethat hadprevailedover the previoustwo -1.0 I decades (Figure 1).Moreover, growthhas been 1981-90 1991-2000 2001-04 fairly broad-based,extendingbeyondthe recovery - - inthe miningsector andhas withstoodadverse shocks andpoorpolicyimplementation,suchas the severedrought in2002 anda sharp rise ininterestrates causedby excessive government EBD/04/49(5/25/04),EBD/04/50(5/25/04),andIDA ReportNo. 29048-ZA. EBD/05/21and Supplements 1and2, EBD/05/22, 3/11/05; and IDA ReportNo. 31572-ZA. - 8 - BOX 1: KEY REFOtLllS AND 0 HIPC Program P DUC The adoption o f a PRSP to be Implemented. A full PRSP was received in April 2002 and endorsed by the xepared through a participatory IDA and IMFBoards inMay 2002. The first progress report for the period ?recess and satisfactory progress with January 2002-June 2003, was prepared. However, despite satisfactory economic implementing and monitoring the growth and some progress on reforms related to public expenditure PRSP for at least one year based on an management, the Joint Staff Assessment (JSA) concluded that satisfactory innual report. implementation o f the PRSP still needed to be established. A second PRSP Progress Report and its Addendum, covering the period July 2003-December 2004, provides the foundation for satisfactory progress with implementation and Implemented. A new three-year PRGF arrangement was put in place on June macroeconomic environment as 16,2004. The first review o f the PRGF-supported program was concluded in zvidenced by satisfactory December. The second review i s to be discussed by the IMF Board in early performance under a program 2005, concurrently with the consideration o f the HIPC completion point document. Progress in CombatingAIDS Full staffing o f secretariat for Implemented. The original program agreement was that the National Aids National HIVIAIDSISTDITB Council (NAC) would improve its staffing by employing 4 managers to be able Council. to launch the MultiCountry HIVIAIDS Program. In line with this requirement, the NAC employed these managers as follows: Manager, Program (August 2001); Manager, Administration (August 2001); Manager, Management Information Systems (August 2001); and Manager, Finance (August 2001). Integration o f HIViAIDS awareness Implemented. HIVIAIDS awareness and prevention programs have been and prevention programs in the pre- integrated in the pre-service and in-service programs o f Ministries o f Health, service and in-service programs for at Education, Agriculture, Science4and Technology, Community Development, least 10 key ministries. Tourism, Commerce, Home Affairs, Finance and National Planning and Youth, Sport and Child Development. In addition to these ten line ministries, all other line ministries have awareness programs integrated into their own programs. Progress in Education Reforms Y Increasing the share o f education in Implemented. The discretionary budget for Education in 2004 was the domestic discretionary budget K795 billion. The discretionarybudget for GRZ as a whole for 2004 was from 18.5 percent in 1999 to at least K3866 billion. Therefore, ratio for the 2004 budget turns out to be 20.6%. The 20.5 percent. budget for 2005 puts this ratio at 24.1%. Raising the starting compensation o f Implemented. According to the Ministryo f Education's report, the minimum teachers in rural areas above the monthly salary as at September 2004 for trained teachers was K 787,996. The poverty line for a household, as Poverty Line was estimated at K 825,988 for August 2004. With the 20% rural defined by the Central Statistical hardship allowance, a trained teacher in a rural area would be above the poverty Office. line. An action plan for increasing student II Implemented. The data in the Ministry o f Education's Strategic Plan 2003-07 retention in Northem, Luapula, relate mainly to national totals and averages. Nevertheless, the Ministry has Eastem, Northwestem, and Westem taken actions that have had an impact on student retention in the five lagging Provinces. provinces e.g. (i) the Ministry's deployment policy that 100% o f newly qualified teachers should be posted to rural areas; and (ii)the elimination o f P T A fees as user fees in Grades 1-7 following the Free Education policy introduced in 2002. As a result, enrollment nationwide increased by 15% between 2001and 2003. Retention rates among the five relatively lagging provinces increased from about 95% in 2001 to about 97% in 2003. Cumulative retentions over a seven-year period increased from 73% to 83% in these provinces. - 9 - BOX 1: KEY REFORMS ASD OBJECTIVES FOR REACHIR'GA FLOATINGCOMPLETION POINT HIPC Program Comments Progress iii Healih Secior Reforills - Implementation and scaling-up o f an Implemented.The deployment o f Co-artem was scaled up in28 districts in action plan for malaria. 2003. In 2004, the Ministry o f Health carried out a countrywide inventory o f functional laboratories to establish the staffing situation (April-July, 2004), conducted an evaluation exercise o f RDTs (Sept, 2004), conducted training o f frontline health workers in the use o f Co-artem in all provinces and districts (Sept-Nov, 2004). Furthermore, the Ministry has developed a plan to increase the number o f functional laboratories in vears 2005 and 2006. Procedures and mechanisms for the Implemented.The procurementplan for the entire health sector has been procurement o f drugs reorganized to finalized and distributed to all stakeholders including Cooperating Partners. In be fully transparent and efficient. line with the agreement with the Cooperating Partners, all procurements continue to be done by the Central Board o f Health. Timely release o f complete, detailed, Implemented.The Income and Expenditure Reports for 2001 and 2002 have been released. The 2003 report was released in early 2005. Implemented.For 2004, actual cash releases to District Health Management Management Boards to be at least 80 Boards stood at an average o f 88.2% o f the amount budgeted. ercent o f the amount bud eted. Restructuring and issuance o f Not Implemented.An understanding was reached inApril 2003 between the internationalbiddingdocuments for Government o f the Republic o f Zambia, IDA, and the IMF that the sale o f a majority (controlling) commercialization o f ZESCO would be pursued in lieu o f restructuring and interest in the power company, privatization as originally envisaged. Satisfactory progress has been made in ZESCO. implementing this alternative strategy Issuance o f international bidding Not Fully Implemented.Intemational bidding documents were issued in May documents for the sale o f a majority 2002 for the sale o f a 5 1 percent share o f ZNCB; Revised bidding documents (controlling) interest in the Zambia were issued in March 2003 to reflect the fact that GRZ decided to alter the National Commercial Bank (ZNCB). structure o f the proposed privatization transaction to divest a 49 percent share with management control. Government selected a preferred bidder and a reserve bidder in M a y 2003. Negotiations with the preferred bidder were substantially concluded in August 2004, however, the preferred bidder's negotiating team was unable to secure approval o f the agreement from its board. No agreement was reached with the reserve bidder. Given preliminary interest expressed by other parties to participate in the divestiture o f ZNCB, ZPA terminated Implementation by MoFED o f an Integrated Financial Management Information System (IFMIS) on a example, IFMIS management and technical committees have been constituted, pilot basis for at least three ministries the IFMIS design has been completed, preparation o f sites has almost been and a mid-term review o f the pilot completed as well, and the Local Area Network (LAN) infrastructure at the program MoFNP has been revamped for the IFMIS pilot. Partly for reasons beyond Government's control, the contract for the installation o f IFMIS hardware and Implementation o f a Medium-Term Expenditure Framework (MTEF) prepared by MoFED and approved by Cabinet - 10- borrowing in2003. Investmenthas been strong inrecent years, particularly inthe mining, agricultural, and tourism sectors, suggesting a LOO favorable outlook for continued economic - i I ! growth. Inflation, which stood at 17.5 percent 150 J i Zambia:,,. in2004, however, remains well above the low 1 '; 100- *i ,! j Sub-Saharan Africa single-digirange that was targeted at the (excludingNigeria decision point, mainly reflecting an initial lack 50- o f fiscal support for the programmedlowering o f inflation (Figure 2). Program slippages in 0 2002-03 and shortfalls in donor budget support resulted in excessive domestic borrowing by government, which to some extent was monetized with central bank financing. Of particular importance inthis regard i s that government did not adequately control its wage bill during 2000-03, which rose by 3 percentage points o f GDP, to 8.4 percent6 9. Macroeconomicpolicyimplementationimprovedsubstantiallyin 2004, as evidenced by satisfactoryperformancesunder an IMFstaff monitoredprogramduringthe first half of 2004 and under a new PRGF-supportedprogramduringthe second half of the year. The first review7o f the program supported by the PRGF arrangement approved on June 16,2004, was completedon December 15,2004, and it is expected that the second review' will be completed concurrently with the IMF Board's consideration o f Zambia's attainment o f the enhanced HIPC Initiative completion point. The principal achievement o f the authorities' 2004 program was the large fiscal adjustment, which narrowed domestic borrowingby more than 4 percentage points o f GDP from the previous year. Government exercised restraint on its wage bill, which was heldto 7.8 percent o f GDP, while revenues were strengthened(by 0.5 percent o f GDP) andother expenditures were trimmed. 10. The largereductionin governmentborrowingin 2004 allowed a substantial reductionininterestrates and expansion in credit to the privatesector. Much o fthis credit expansion was directed to the productive sectors, notably agriculture and manufacturing. Broad money and reserve money growth exceeded program targets in 2004, partly because of large end-year transfers to commercial bank accounts by govemment from its accounts inthe Bank o f Zambia (BoZ) and by private corporations from abroad.' See Zambia-Ex Post Assessment o f Performance Under Fund-Supported Programs (SM/04/97, 3/22/2004). EBS/04/166, 12/01/04. 'EBS/O5/[-], 3/[-]/05. By end-January 2005, the BoZ hadmoppedup mucho fthe excess inreserve money, mainly through open-market operations. - 11- 11. Exportperformanceduring2000-03 was weaker than projectedat the decision point but Zambia's externalpositionimprovedmarkedlyin 2004, with the recovery in copper prices and healthy growthof nontraditionalexports. Owing mainlyto lower-than- projected copper prices during2001-03, export earnings fell short o f the decision point projections (by about 20 percent). This situation was reversedin2004, as copper prices rose in excess o f 50 percent. As a result, the external current account deficit (excluding grants) narrowed from 16.2 percent o f GDP in2003, to 11.9 percent o f GDP in2004. However, this level was still higherthan the decisionpoint projection o f 10.6 percent o f GDP, because imports also exceeded projections. At end-2004, the import cover o f gross international reserves stood at 1.2 months, only slightly higher than at end-2000, and well below the decision point target o f a buildup in gross international reserves to 3.0 months o f imports by end 2004. 12. IMFandIDAstaffs conclude that Zambia metthe trigger onthe maintenanceof a stable macroeconomic environmentas evidenced by satisfactoryperformanceunder a programsupportedby a PRGF arrangement.Growthperformancehas improved significantly.Policy slippages, which were also reflectedin a significant rise inthe wage bill and domestic financing o f the budget, have prevented a sharper decline ininflation. However, policy implementation improved substantially in 2004 under both a staff monitored program and the new PRGF arrangement approved inJune 2004. Completion o f the second review will establish the minimumof six months o f satisfactory performanceunder a PRGF arrangement required immediately before reachingthe completion point under the enhanced HIPC Initiative for countries with extended interruptions intheir PRGF-supported programs. C. Social Sector Policies Progress in CombatingHIV/AIDS 13. Zambia's population has been severely affected by the HIV/AIDS epidemic. With an adult HIV prevalence rate o f 20 percent based on sentinel surveillance, it was recognized at the time of the decision point that several priority actions needed to be supportedunder the HIPC program. The first trigger gave prominence to the need to have afully staffed secretariatfor the NationalHIV/AIDS/STD/TB Council (NAC) to be able to effectively launch Zambia's national HIV/AIDS program. Inline with this requirement, the NAC employed four managers in 2001. In 2004, a new organizational structure for the NAC was developed to enable it to better coordinate andmonitor the national HIVIAIDS program. Currently, the NAC is inthe process o f recruiting according to this new organizational structure. While full staffing under the new structure is yet to be achieved, significant progress has been made and the office i s currently fully operational." This trigger was therefore met. loThe Council i s now being served by an Acting Director General, three Directors (Programs, Administration and MIS), an Acting ProgramManager, an Internal Auditor, an Informationand Communication Specialist, a Management Information System Specialist, and several support staff. Inaddition, the Council has conducted recruitment interviews for the following positions: Donor Coordinator and Public Relations Manager, Administrative Officer, ProcurementOfficer, (continued) - 1 2 - 14. The secondmilestone focuses on integrating HIWAIDS awareness andprevention prograins in thepre-service and in-service programs of at least ten key ministries. These programs have been integratedinthe pre-service and in-service programs o f the Ministries o f Health, Education, Agriculture, Science and Technology, Community Development, Tourism, Commerce, Home Affairs, Finance and National Planning, andYouth, Sport and Child Development: Inaddition to these ten ministries, all other line ministrieshave awareness programs integrated into their own programs. This trigger was therefore met. 15. Given the magnitude o f the HIV/AIDS epidemic, the fight against HIV/AIDS i s one o f the important crosscuttingthemes o fZambia's PRSP. Several programs supported under the PRSP umbrella have demonstrated progress inthe multi-sector response to HIV/AIDS.There have been improvements in outreach, knowledge sharing and communication, and access to services such as voluntary counseling and testing and therapy with anti-retroviral drugs (ARVs). There i s now evidence that suggests positive behavioral changes are occurring among sub- populations, even though there is scope for further improvement. For example, young males are delaying the start o f sexual intercourse. Condom use has increased significantly among males from 28 percent in 1998 to 43 percent in2003 and among females from24 percent to 34 percent. Inaddition, the number o fpeoplereceivingARVs is currentlyreportedto be increasing by approximately 2000 a month. Although it i s still relatively early to say, these behavioral changes that have taken place over the last few years are promisingand have the potential to halt the spread o f the pandemic andmitigate some o f its impact. Progress inEducationSector Reform 16. Given that government was devoting a lower share of its budget to the education sector thanother African countries, andwould needto increase the share of its budget allocated to the education sector in order to achieve its stated objective o f universal completion o f primary education, the milestone o f increasing the share of education in the discretionary budgetfrom 18.5percent in 1999, to at least 20.5percent" was included inthe HIPC program as a trigger. Based on data from the Ministryof Finance and National Planning (MoFNP), this share was 21.4percent (actual outturn) in2003. The share o f discretionary budget that went to the education sector in 2004 was equal to 20.6 percent and the share o f the Ministryo f Education in the domestic discretionarybudget is to be 24.1 percent in2005. This trigger was therefore met. 17. The second HIPC program trigger inthe area o f education, raising the starting compensation of teachers in rural areas above thepoverty linefor a household, as defined by the Central Statistical Office, was derivedfrom the observations that in 1998, teachers' starting compensation was below the poverty line, which contributed to shortages o f teachers inrural areas. At the same time, there were surpluses o f teachers inurban areas such as Lusaka and the towns inthe Copperbelt. Therefore, it was necessary to improve teachers' compensationinthe Monitoring, Evaluation and Research Specialist, Care and Support Specialist, IEC/BCC Specialist, Provincial and Multi-sectoral Response Specialist, accountants and secretaries, l 1The trigger is intended to refer to the "domestically financed discretionary budget". - 13 - rural areas. According to Zambia's central statistical office (CSO), the poverty line stood at K825,988 inAugust 2004. The minimummonthly salary at September 2004 for trained teachers stood at K787,996, which together with the 20 percent rural hardship allowance puts the starting compensation for a trained teacher above the poverty line for a household. This trigger was therefore met. 18. L o w retentionrates-or, equivalently, highdropout rates-in five predominantly rural provinces inthe eastem and western "wings" o f the country ledto primary completion rates substantially below the national average inthese provinces. It was therefore agreed to include a HIPC program trigger that would call for an actionplan for increasing student retention in Northern, Luapula, Eastern, Northwestern, and Western Provinces. Since 2000, the Ministry o f Education has taken numerous actions, which have had a positive impacton student retention inthese five laggingprovinces. These measures includethe Ministry's deploymentpolicythat mandates that 100 percent o f the newly qualified teachers shouldbe postedto rural areas and the elimination o f user fees in Grades 1-7 following the Free Educationpolicy introduced in 2002. As a result, enrollment nationwide surgedby 15 percent between2001 and 2003, and retention rates among the five relativelylagging provinces increased from about 95 percent in2001 to about 97 percent in 2003. The cumulative full-cycle retention rate,12 correspondingto the observed annual rates, increased from 73 percent to 83 percent inthese provinces. This trigger was therefore met. 19. The education sector has seen increased enrollment at all levels o f education since 2000. This resultedinan increase inpupil/teacher ratios, partly because the hiringo fnew teachers (to replace those retiring) was constrained as the Ministryof Education had not removed many retired teachers from its payroll during the last few years. However, this issue has been addressed inthe 2005 budget13creating fiscal space to incorporate7000 additionalteachers inZambia's schools, effectively dealing with the shortfall registered since 2003 and improving Zambia's pupil/teacher ratios. Progress in Health Sector Reform 20. The health service has suffered from weaknesses inpublic expenditure management at the sector level, which has seriously hamperedservice delivery. To address budget execution, procurement and transparency inthe health sector three HIPC program triggers were agreed uponwith government. First, to strengthen budget execution andto ensure that resources would indeed flow io the districts, it was agreed that actual cash releases to District Health Management Boards shall be at least Sopercent of the amount budgeted. This measure has been implemented and continues to be observed. For 2004, actual cash releases to District Health ~ l2Accumulation assumes that the observed annual retention rate prevails for the next six years (to Grade 7 o f the seven-year cycle). l3The Dutchgovernment has made available a grant inthe amount o f Euro 9.2 million to settle the backlog o fretirement and associated repatriation allowances andto provide for part o f the settling inallowances o f the new teachers. The budget for 2005 also includes an additional allocation for substantial teacher hiring. - 14- Management Boards as o f December 2004 stood at an average of 84.4 percent o f the budgeted amount for the year, which i s well above the requiredpercentage. This trigger was therefore met. 2 1. Second, to improve accountability for resource use it was agreed with government that procedures and mechanismsfor theprocurement of drugs should be reorganized to befully transparent and efficient. The procurement plan for the entire health sector has been reevaluated anda revisedset o fprocurementprocedures finalized and distributedto all stakeholders. Inline with the agreement with the CooperatingPartners, all procurement is being done by the Central Board o f Health.l4 tender for the Medical Stores Limited has been completed and the The contract has been awarded to Crown Agents, whose procedures would assure transparent and more efficient procurement procedures for the procurement o f drugs. This process was concluded on October 1, 2004. A Business Plan was presentedto the Health Sector on September 30,2004, and CooperatingPartners agreed inprinciple to fundthe plan on condition that Medical Stores Limiteddivides the plan into quarters, indicating quarterly activities and budgets.This trigger was therefore met. 22. Third, to improve transparency and access to information on expenditureallocation, government agreed to the timely release of complete, detailed, annual health expenditure data. The Income and Expenditure Reports for 2001 and 2002 were finalized in2004; this was the first time that such detailed data on public health sector activities havebeenreleasedto the public. The 2003 report was releasedinearly 2005. This trigger was therefore met. 23. Inaddition to the HIPC program triggers relatedto a more transparent and accountable public expenditure management system for the sector, it was important to improve service delivery inthe fight against malaria, which has remained a major cause of morbidity and mortality inZambia. Therefore, it was agreed at the time o f the decision point that government would implement and scale up an action plan for malaria. The deployment o f Co-artem@, an effective anti-malarial medicine, has been scaled up in selected 28 pilot district^.'^ In2004, the Ministrycarried out a nationwide inventory o f functional laboratories to establish the staffing situation, and conducted an evaluation exercise of its RapidDiagnostic Tests (RDTS).'~ Currently, 34 percent o f malaria cases are diagnosedthrough such laboratory tests. 24. Additionally, the Ministry increased the distribution o f Insecticide Treated Nets in all districts throughout the country, and introduced an Indoor Residual Spraying System in 5 districts (Livingstone, Ndola, Kitwe, Kabwe and Lusaka) during the 2003/2004 transmission season. Looking forward, the Ministry has developeda pian to increase the number of functional laboratories in2005 and 2006 by training staff for RDTs in28 districts by the end o f 2004/2005 transmission season, and by scaling up o f the Indoor Residual Spraying project during the l4 The public health sector i s currently beingrestructured and the Ministry o f Healthwill absorb the Central Boardof Health. This i s not to affect the procurement procedures. l5 In2003, the Ministry o f Healthconducted training ofHealthWorker inCo-artem@ use (January), introduced Co-artem@ in 7 sentinel districts (February), trained front line health workers inthe use o f Co-artem@ in28 districts (July), and deployed Co-artem@ in 28 districts (November). l6 use The o f RDTs i s to be introduced to supplement microscopy. - 15- 2004/2005 transmission season to cover 8 districts from the initial 5 districts (Kitwe, Ndola, Kabwe, Lusaka and Livingstone). This trigger was therefore met. 25. Inorder to improve the prospects ofmeetingthe healthtargets under the MDGs, government i s restructuring the healthministry.A revised and, most likely, increased establishment (payroll) for the Ministryi s to be agreedupon during2005 and implemented ina phased manner over the next few years taking into account the humancapacity and budgetary constraints that Zambia faces. D. Key StructuralReforms 26. Two structural reform triggers inthe area o f divestiture were identified for the HIPC program, aimed at reducing the fiscal burden o f public enterprises and extendingthe provision and quality o f essential services inthe electricity and financial sectors. Privatization o f the state- owned energy utility, ZESCO, and the remaining state-owned commercial bank, Zambia National Commercial Bank (ZNCB), were seen as particularly important. With regard to ZESCO, an understandingwas reached in 2003 between the Government of the Republic o f Zambia, the staffs o f IDA and the IMF that the objectives of restructuring and privatization as originally envisaged could be pursued by the commercialization o f ZESCO, whereby govemment would retain ownership while ZESCO would operate on an independent and commercial basis. An understandingwas also reached on the modalities for monitoring implementation o f this strategy, which would be reviewed at three distinct points intime (Box 2)-entry point (December 2003), interimpoint (June 2004), and evaluation point (June 2005). IfZESCO has not met the understood performance targets at the evaluation point, govemment would be committed to implementing a strategy that i s consistent with the original objectives o f restructuring and privatization. 27. Inthe context ofthe commercialization strategy, apossible alternative for the completion point trigger on ZESCO was identified as: completion of all interim point actions specified in the commercializationstrategy andpreparation, approval, and adoption by ZESCO's Board of Directors of a satisfactory annual businessplan. Despite government's strong ownership o f the commercialization strategy, there have beendelays to its implementation, most notably inthe preparation o f a business plan that properly addressed risks, pricing strategy, and ZESCO's planned tariff requests. Inconsultation with IDA and IMF staffs, ZESCO's management revised its original business plan to address these issues. The revisedbusiness plan for the financial year ~LdlllllgAplll -L--L:-- A--:I 1 ___- I,LWWJ, warY CllClI appuvcu qnnc +L-- ----,.,-A L.?LLL3L.V D-,..A uy712cr7n7-rY u u a l u 111 lalc UCL.CIIIUCI LWW-k. :-in+-n qnnn T- 111 addition, all actions for the interimpoint hadbeen met by December 2004-including the contracting o f an expert to strengthen the capacity o f the Energy Regulatory Board (ERB), which had delayed the interimpoint somewhat with respect to the strategy's timetable-and actions taken under the entry point have been sustained. The staffs therefore consider that satisfactory progress has been made inimplementing the altemative strategy o f commercialization o f ZESCO. The delay inthe preparation o f the business plan, however, will delay the evaluation point, so that the it can encompass an assessment o f a full year's performance under the plan. Based on the progress achieved to date inthe restructuring o f ZESCO, it i s recommendedthat the IMF Boardgrants a waiver for the nonobservance of the HIPC completionpoint conditions regardingthe restructuringand privatizationof ZESCO. - 16- 28. Parallel to the commercializationo f ZESCO, government has embarked on the development o f a new national energy policy. The new policy will better clarify the roles o f government as policy maker, the ERB, and the private sector and introduce measures to promote competition and efficiency, inparticular through private sector participation. The new policy i s expected to be submitted to cabinet for review and adoption by end-June 2005. 29. In2000 government implementedmuchneededmeasures that improvedZNCB's financial position. To ensure that ZNCB's operations would not become a costly contingent liability once again, government agreed to the issuance of international bidding documentsfor the sale of a majority (controlling) interest in theZambia National Commercial Bank as a HIPC completion point trigger. Internationalbiddingdocuments were issued inMarch 2003. However, the prolonged negotiations with the selected preferredand reserve bidders could not be successfully concluded and the board o f Zambia's PrivatizationAgency (ZPA) terminated the negotiations on March 15, 2005, for the purpose o f issuinga new invitation to bid for the sale o f 49 percent equity inZNCB with management control as soon as possible (by late March or early April 2005). Inaddition, government plans to offer a 26 percent share o f ZNBC on the Lusaka Stock Exchange, following an agreement with a strategic investor, which would reduce government's ownership to 25 percent, the maximum share allowed by a single entity under the Banking and Financial Services Act. This trigger was therefore not fully met. Based on the authorities' commitment to restart the privatization process expeditiously, it i s recommended that the IMFBoard grants a waiver for the nonobservance of the HIPC completionpoint conditionregardingthe issuingof biddingdocuments for the sale of the ZNCB. 30. T o further strengthen the role of the financial sector inZambia, the authorities prepared a comprehensive financial sector development plan (FSDP) in 2004 drawing on the recommendations of the IMFiIDA Financial Sector Assessment Program mission that was undertaken in 2003. The implementation of the FSDP i s supported by the cooperating partners and should provide significant benefits to the economy through more efficient financial intermediation and a deepening o f the sector. The FSDP includes initiatives that should facilitate increased access to financial services by the rural andurbanpoor. E. PublicExpenditureManagementReforms 31, Zambia's public expenditure management system contained serious weaknesses at the prioriiy time of the decision point. Government recognized that to be able to direct resources towards pover~y--re~-uc~iig a serio-us effoit calledfoi-* As,a two triggers were included inthe HIPC program. First, implementation of a Medium-Term Expenditure Framework prepared by M o F E D and approved by the Cabinet. And second, implementation by MoFED of an Integrated Financial Management Information System (IFMIS) on apilot basisfor at least three ministries and a mid-term review of thepilot program. 32. Government, with support from the donor community, has made substantial progress with its broad strategyto strengthenpublic expendituremanagementand financial accountability (PEMFA), in line with the recommendations of IDA's PEMFA - 17- ReviewI7andthe December2003 joint IMF/IDA HIPC assessment and action planto track poverty-reducingspending. Governmenthas agreedwith the donor communityon a reform programthat will improveZambia's PEMFA systems significantly.Meanwhile, governmenthas (i) inplaceaCommitmentControlSystem(CCS);(ii)introducedanactivity-basedbudgeting put Box 2. Commercializationof Zambia Energy Supply Company (ZESC0)- Understandings and Status of Implementation InApril 2003, the Zambian authorities adopted a strategy of commercialization of ZESCO's operations, which is intended to achieve the same objectives as privatization. Understandings were reached with IDA and IMF staffs in September 2003 on the strategy and on the modalities for monitoring its implementation. Among these understandings, the strategy i s to be reviewed by June 2005 and, if by that time, ZESCO does not meet the agreed performance targets, the govemment is fully committed to implementing a strategy that i s consistent with the original objectives o f privatization (Le., extending the provision and quality of service without risk o f a fiscal burden). The commercialization strategy encompasses four broad areas: The revisionof legal provisionsrelatingto ZESCO, including: (i)an amendment to ZESCO's Articles o f Association and the composition o f its Board to ensure independence from political interference and to provide a mandate to operate on commercial principles; (ii) revisions to the Electricity Act and to the Energy Regulatory Board (ERB) Act to revise ZESCO's regulatory environment, including to give greater independence to the ERB; (iii) a separate act to permit ZESCO to enter into private as well as public partnerships. Commercialoperations:ZESCO is required to operate on a commercial basis and to provide evidence o f its capacity to do so-including the formulation and implementation o f a business plan and the collection o f amounts owed by government; the absence o f financial support from govemment; and tight constraints on govemment concessional debt guarantees. Outstandingobligations:Outstanding obligations are to be settled (including those owed by the miningcompany, RAMCOZ, and central and local govemment arrears) and ZESCO's outstanding tax liabilities are to be clarified. Concessionalborrowing:Inorder to provide ZESCO some breathing space to build a track record o f credit worthiness, new borrowing on concessional terms (mainly from the World Bank) guaranteed by the government i s permitted up to US40 million until the end o f 2005. The strategy for commercialization envisages its implementation inthree stages: Entry point-December 2003.Before approval o f the new strategy by IDA and IMF staff, govemment was to implement ten measures. These included (i)reduction o f technical and non-technical losses; (ii-v) 4 specific measures dealing with outstanding obligations; (vi) ZESCO board approval for amending the Articles o f Association; (vii) the constitution o f a new ZESCO Board with 9 members, o f whom only 2 are from the public sector; (viii) preparation o f amendments to the ERE3 and Electricity Acts; (ix) ERB resolution with respect to electricity tariff adjustment for 2003; and (x) strengthening o f ERB's capacity. All actions were implementedby December 2003 and have been sustained. i Interimpeint-June 2004. The strategy envisiged the implemer.tation o f four measures: (i-ii) zmendment o f the the ERB and the Electricity Acts; (iii) contracting o f an internationalregulatory expert to assist the ERB; and (iv) the government approval o f a proposal by the Ministry o f Energy and Water Development for separate legal acts for private and public partnership. All actions were implementedby December 2004. Evaluation point-June 2005. The framework envisages the implementation o f three further measures prior to a final assessment of the viability o f the strategy. These are: (i-ii) completed implementation o f settlement plans for arrears owed by government agencies and by RAMCOZ; and (iii)ex-post evaluation o f the ZESCO business plan preparation process, implementation results, and management performance. Forthcoming measure. l7 IDA ReportNo. 26162-ZA. - 18- (ABB), which allowedfor improved analysis of linksbetweenbudgets andprograms, and facilitates more detailed and comprehensive prioritization and monitoring of expenditures, particularly poverty-related spending, and (iii) upgradedandmodifiedthe main accounting and reporting system-the Financial ManagementSystem (FMS)-to enable it to produce timely quarterly reports usingthe ABB classification. The FMS was also computerized. Medium-TermExpenditureFramework 33. The first Medium-TermExpenditureFramework (MTEF) covered 2004-06 andwas prepared as background for the 2004 budgetproposal. The aim was to enhance transparency and planninginthe budgetprocess and to achieve greater efficiency inbudget allocations. InOctober 2003, government issued its first consultative "Green Paper" on the 2004-06 MTEF, which outlined boththe macroeconomic framework-including projections on economic growth, inflation, the exchange rate, balance o f payments, and domestic and foreign debt-service payments-and the fiscal framework which outlined the expected resources available to govemment and their allocation by type o f expenditure. 34. The Green Paper was also subject to a broad consultative process, which included the president, the cabinet, members o f parliament, and stakeholders at the provincial level. These consultations promoted transparency, enhanced the realism of budget preparation and increased understandingand ownership of the budget by all stakeholders. As such, the Green Paper was an important step in the effort to link budgets to the national priorities as espoused inZambia's PRSP/TNDP. 35. The 2005-07 MTEF presented inthe GreenPaper issued in October 2004 was much improved over the previous year's and was distributed to parliamentand stakeholders for discussion. This Green Paper, unlike the first one, contained sectoral budget ceilings, which allowed for greater scrutiny o f budget priorities and inter-sectoral allocations and was the outcome o f intensive cabinet deliberations. Based on the ceilings, line ministries, provinces, and spendingagencies preparedan activity-based and bottom-up budgetfor 2005-07. The MTEF was submitted to cabinet for approval and formed the basis for the 2005 budgetproposal submitted to parliament in January 2005. Based on these developments, the trigger with respect to the MTEF was met and has been sustained. 36. The objective o f the IFMIS project i s to implement a computerized financial management information system for the Zambian Government, which will aid strategic management o f public financial resources for enhanced accountability, transparency, and cost-effective public service delivery. The main expected outputs o f IFMIS include timely and accurate financial reports, improved monitoring o f public expenditure, and strengthened financial management and controls, This trigger has notbeen met due to weak implementationcapacity of government andprotractedprocurementdifficultiespartly outside of the authorities' control,Key steps have been taken to prepare for the initiation o f the IFMIS pilot. Inparticular (i) IFMIS management and technical committees have been constituted; (ii) the IFMIS designhas been completed; (iii) the preparation of sites has almost been completed; (iv) an ABB software that - 19- can accommodate a 3-year planning horizon has been deployed; (v) the F M S has been upgraded so that it can report usingthe ABB classification; and (vi) the Local Area Network (LAN) at the MoFNP has been revampedto accommodate the new ABB andFMS data, andindue course, the IFMIS pilot. While the trigger on the IFMIS has not been met, IMF and IDA staffs are o f the view that substantive progresshas beenachieved inthe broader reform of public expenditure management and that the authorities remain committed to initiating the IFMIS pilot as soon as possible. Based on this commitment and the progress achieved in public expenditure management more broadly, it i s recommendedthat the IMFBoard grants a waiver for the nonobservance o f the HIPC completion point conditions regarding the initiation and review o f the I F M I S pilot. F. Use of HIPC Initiative InterimAssistance 37. Budgetary savings f r o m interimHIPC debt relief have been used broadly in line with the criteria set forth at the decision point (Table 2). Giventhat the Bank o f Zambia faced large debt service obligations, whose nonpayment could have resulted in a curtailment o f non- HIPC donor assistance, HIPC interim debt relief accruing to the Bank o f Zambia was designated for debt service payments. The remainder has mostlybeen allocated to priority poverty-reducing programs, which focused on investments ininfrastructure, support for small-scale farmers and food security, and increased expenditures inthe social sectors, inparticular, education. 38. Government, in consultation with staff of the IMFand IDA, developed a n expenditure tracking system that allows for explicit identification o f savings f r o m interim HIPC debt relief. Under this arrangement savings o f debt service accruing to the government were allocated to priority poverty-reducing programs. To facilitate monitoring, funding for these programs was channeled through a special account at the BoZ. Government ministries and agencies executing these priority programs usingHIPC debt relief were required to submit their request for resources to the MoFNP, which would then authorize the BoZ to release these resources. 39. Looking ahead, government i s committed under the MTEF to increasing spending on priority poverty-reducing programs (PRPs) by at least 1.6 percentage points o f GDP between 2004 and 2006. As a result o f improvements inbudgeting, including the introduction o f ABB, the 2005 budgetnow includes a wider definition o fpoverty-reducing expenditures that ---.---c-. will also be usedinquarterlybudget execution reports. With this comprehensive reporting on puvc11y ,,l,c,A lClLlLCU GhpGllulLUlb, W111b.11 lllblUUb3 bhpbllulLUlbJ IlllUllbbU I l W l l l Ull J W U l b b J , L l l b p l b v I W U J .T,h:nh:,nl.,Abn bv-anA;hlrnn GmnnnnA Crnm rillon,,rnnn +Lo,-,+-nT,:n,,o procedures operating with a special account inthe BOZ have been discontinued. 111. DEBTRELIEFANDDEBTSUSTAINABILITY ANALYSISUPDATE A. Updated Data Reconciliation for the Decision Point 40. An updated reconciliationof debt data conductedby the staffs of IDA and the IMF, together with the Zambian authorities, indicates that a revision to the amount o f HIPC Initiative assistance calculated at decision point i s n o t necessary. N e w creditor information and revisions to the terms o f loans for some multilateral creditors result in an upwardrevision o f less than 1percent of the overall NPV o f debt as o f end-1999, after traditional debt relief. In - 20 - accordance with enhanced HIPC Initiative guidelines," staffs have, therefore, not changed their assessment o f the required debt relief at decision point or the corresponding common reduction factor. The main revisions are as follows: e Multilateral Creditors.A revisionto the terms o f the loans o f the AfDB Group, the OPEC Fund, and the IFAD leads to a US$14.9 million increase inthe NPV o f debt owed to these creditors. The N P V o f debt to the EEC was reviseddownwardby US$0.93 million due to a revised debt service profile provided by the creditor, while the N P V o f debt to the EIB was revisedupward by US$0.33 million for the same reason. The reclassificationo f EuropeanEconomic Community-IDA administeredloans from multilateral credits to Paris Club bilateral credits results in a downward revision o f US$1.9 million. The net addition to the debt owed to multilateral creditors i s US$12.4 million inNPV terms. e BilateralCreditors.The N P V o fbilateral debt has been increasedby US$11.7 million because o f the addition o f loans from the UnitedStates, Brazil, and France that were not captured duringthe reconciliation exercise at decision point, as well as the reclassificationo f IDA-administered EEC loans (describedabove). However, loans amounting to US$6.1 million inN P V terms were subtracted for Italy, as these loans arose out o f a prior Paris Club rescheduling agreement, but were subsequently not made effective. The net addition to bilateral debt is, therefore, US$5.6 millioninN P V terms. 41. The revisedend-1999NPV of debt, after full implementationof traditional debt reliefmechanisms, amounts to US$4,002.6millioncomparedto US$3,990.5 million estimatedat the decision point." Since the upward adjustment i s less than 1percent o f the NPV of debt outstanding after HIPC Initiative relief, staffs have maintainedthe estimate o f required HIPC Initiative relief o f US$2,499 million inN P V terms and the corresponding common reduction factor o f 62.6 percent calculated at decision point (Table 3). B. Status of Creditor Participation 42. Creditors representing97 percent(US$2,416millionin end-1999NPV terms) of HIPC Initiativedebt relief estimatedto be requiredat the decision pointhavegiven satisfactoryfinancing assurances (Table4). Basedon these financing assurances, multilateral creditors account for 53 percent o f total committed HIPC Initiative assistance, while bilateral creditors account for 44 percent. Paris Club and most multilateral creditors have providedinterim assistance. The Zambian authorities are making an effort to obtain HIPC Initiative debt relief from creditors that have yet to participate inthe Initiative. l8EBS/02/36. l9The total net increase in the NPV o f debt i s US$18.8 million, but falls to US$12.1 million after traditional debt relief. - 2 1 - C. MultilateralCreditors 43. Debt relief from multilateralcreditorsunder the enhanced HIPC Initiativeamounts to US$1,331 millionin 1999 NPV terms.IDA,the IMF,the AfDB, the EU, andthe OPECFund have granted interim assistance. The IFAD and the Arab Bank for African Economic Development (BADEA) have committed to provide the assistance required under the enhanced HIPC Initiative once Zambia reaches the completion point. 44. Assistance from IDA (Table 5). Debtrelief from IDA, approved at the decisionpoint, amounts to $488 million in 1999 N P V terms. This assistance i s being delivered through a reduction o f 84 percent o f the debt service falling due to IDA until 2003 and an average o f 64 percent thereafter on debt service on disbursed and outstanding credits to IDA as of end- December 1999. Over 2001-20, this mechanismi s projected to provide cumulative nominal assistance o f US$885 million. Of this amount, US$98 million i s delivered as interimassistance. 45. Assistance from the IMF(Table 6). Debtrelief from the IMF amounts to SDR 469 million (US$602 million) in 1999 N P V terms. IMF assistance i s being delivered through grants from the PRGF-HIPCTrust to Zambia's UmbrellaAccount. At the decision point, the Executive Board o f the IMF decided that, on an exceptional basis, IMF interim assistance should amount to 75 percent o f total IMF HIPC Initiative assistance to Zambia. As a result, a total of SDR351 millionwas providedas interim assistance through end-2003. Interim assistance covered approximately 69 percent o f Zambia's principal repayments falling due to the IMF during2001-03. Remainingassistance would nearly cover the large principal repayments to the IMF in2005, with smaller amounts available for 2006-07 when repayment obligations decline sharply. 46. Assistance from the AfDB Group.Debtrelieffrom the AfDB Group amounts to US$146 million in 1999 NPV terms. AfDB group assistance provided to Zambia since January 2001 amounted to US$61 million innominal terms. Interimassistance was halted in October 2003 when the cumulative limit for interimassistance o f 40 percent o f the total NPV o f debt relief committed was reached. AfDB's interimassistance was provided through a reduction o f 76.8 percent in debt service payments to the AfDB Group over the period January 2001 to October 2003 and will resume after the completion point i s reached through an 80 percent reduction in debt-service payments due until2014. Bilateraland commercialcreditors 47. Paris Club creditorshave agreedinprinciple to provide assistance to Zambia under the enhanced HIPC Initiative on Cologne terms, amounting to almost U S $ l,1billion in 1999 NPV terms. Inorder to provide interim assistance under the enhanced HIPC Initiative, the Paris Club provided flow reliefunder Cologne terms (a debt reduction o f 90 percent inNPV terms). Provided Zambia has maintainedsatisfactory relations with participating creditor countries, the Paris Club has agreed to a goodwill clause stating that participating countries will, at the completion point, make the necessary effort to enable Zambia to reach the HIPC Initiative threshold inthe context o f equitable burden sharing among creditors. The remaining amount o f assistance required from the Paris Club at the completion point (that i s after factoring inthe interimassistance provided)would be delivered through a stock-of-debt operationon Cologne terms to ensure that the NPV assistance pledged at decision point i s deliveredin full. Most Paris - 22 - Club creditors have indicatedtheir intention to provide debt reliefbeyondthat requiredunder the enhanced HIPC Initiative, estimated at US$87 million inN P V terms as o f end-2003. The willingness o f Paris Club creditors to deliver debt reliefbeyond that requiredunder the HIPC Initiative, and the modalities o f such delivery, are summarized inTable 7. 48. Non-ParisClub bilateraland commercialcreditorsare expected to provide treatment comparableto that of the Paris Club. Under the enhanced HIPC Initiative, this assistance amounts to US$79 million in 1999 N P V terms. Of these creditors, India has provided fullreliefon official debt, as well as a 50 percent write-off ofcommercial debt; China wrote off selected loans (without bilateral reconciliation) at the decision point. The Czech Republic has received a settlement o f its claims through a buyback priced at 11U.S.cents to the U.S. dollar. Romanian debt, now heldby a commercial entity, has been reduced by 67 percent. Other non- Paris Club countries and commercial creditors have yet to signal their willingness to provide debt relief to Zambia. The Zambianauthorities are continuing their efforts to obtain comparable treatment from official bilateral and commercial creditors. D. UpdatedDebt SustainabilityAnalysis ExternalDebt at End-2003 49. The DSA includedin the decision point document has been updatedjointly by the Zambian authoritiesand the staffs of IDA and the IMF.The stock o f debt disbursed and outstanding was updatedon the basis o f end-2003 loan-by-loan information provided by the authorities. This information has beenreconciled with creditor statements from all multilateral and Paris Club creditors, as well as with statements from several non-Paris Club creditors. The reconciliation rate i s in excess of 94 percent o f the total debt outstanding and disbursed as o f end-2003. The exchange rates and discount rates used for calculating Zambia's nominal and NPV debt as of end-2003 are presented inTable 8. 50. Based on the reconcileddebt data, Zambia's nominalstock of disbursedand outstandingexternaldebt reachedUS$7,000 millionat end-2003, comparedwith US$6,459 millionat end-1999.Of the end-2003 total, 56 percent was owed to multilateral creditors, 43 percent to bilateral creditors, and less than 1percent to commercial creditors. Zambia's largest official creditor at end-2003 was IDA, accounting for 34 percent o f total debt in nominal terms (Table 9). 51, The NPV of Zambia's debt at end-2003, after full applicationof traditionaldebt reliefmechanisms, is estimated at US$4,872 million, equivalentto 432 percent of exports of goods and non-factorservices (three-year average). After full delivery o f HIPC Initiative debt relief, the NPV o f extemal debt would be reduced to US$2,078 million, equivalent to 184 percent o f exports, 34 percentage points higher than the 150 percent debt sustainability threshold and 23 percentage points higher than the decision point projection for end-2003. Takinginto account additional bilateral debt relief, the NPV of external debt would bereducedto US$1,958 million, equivalent to 174 percent o f exports (Table 10). - 23 - Factorsexplainingthe increase in the NPV of debt-to-exportsratiobetweenend-1999 and end-2003 52. Zambia's NPV of debt-to-exportsratio, assuming the full delivery of HIPC assistance, increasedby 34 percentagepoints between end-1999 and end-2003,to 184 percent.Ofthis increase, 23 percentage points represent the change inthe ratio that was not anticipated at decision point. Changes inthe exchange rates and discount rates that are used in the calculation o f the U.S.dollar value o f the N P V o f external debt andnew borrowing are the key factors behind the overall increase inthe ratio. Although the growtho f exports over the 1999-2003 period lowered the ratio significantly, export growth was considerably slower than projected at the time of the decision point. On the other hand, new borrowing during 1999-2003 was lower than projected. The relative contributions o f each factor to the increase inthe NPV o f debt-to- exports ratio i s presented in the text table, below. 53. At the time of the decisionpoint, new borrowingwas projectedto increase significantlyfrom 1999 due inpart to the approval o f a new PRGF arrangement with the IMF in 1999. Because export growth was not expected to keep pace with the projected increase innew borrowing, staffs projected a rise inthe NPV of debt-to-exports ratio to 161percent at end-2003. However, actual new borrowingwas less than expected, due inpart to the PRGF arrangement going off-track in2003 andthe country falling into the low case lendingscenario under IDA'S 1999-2003 CountryAssistance Strategy. Consequently, the unanticipated shortfall o f new borrowingacted to reduce the actual debt-to-exports ratio at end-2003. 54. Export growth during 2000-03 fellwell short of the decision pointprojection.The weaker export outtum (by about 20 percent on average) than anticipated at decision point was in large measure due to a substantial shortfall inmetals export receipts. Although copper export volumes expanded at a strong pace, after an initial dip in 2000, copper prices remained relatively soft through 2003. Other metals exports experienced an even weaker performance. The shortfall inexport earnings added35 percentage points to the end-2003 NPV of debt-to-exports ratio relative to the decision point projection (Table 11). 55. The increasein the end-2003 debt-to-exportsratio due to changes inthe parameters usedto updatethe DSA is fully offset by the revisioninthe assumed delivery of HIPC Initiativeassistance. The depreciation o fthe U.S.dollar against major international currencies and the decline in discount rates from end-1999 to end-2003 increased the NPV o f debt-to- rat;o by 28 percentage points*20 Staffs revisedthedeliverymodalityof EIpc Ini~&ive debt reliefbased on updated information from creditors, which results in a more back-loaded delivery o f assistance than projected at the decision point. While the total amount of HIPC Initiative assistance in end-1999 NPV terms does not change, the effect o f the back-loading o f relief i s to proportionately increase the share o f HIPC Initiative assistance relative to additional 2oThe contribution to this increase from exchange rates i s less pronounced inthe case o f Zambia than i s typical inother HIPC countries given the large share o f Japanese Yen inthe total stock o f debt and the depreciation o f the Yen against the U.S. dollar over the 2000-03 period. - 24 - bilateral assistance beyond the HIPC Initiative. The latter i s estimated to lower the end-2003 debt-to exports ratio by 8 percentage points. Changeinthe NPV of Debt-to-ExportsRatio from Decision Point to CompletionPoint ~ ~~ Anticipated Change in Ratio Unanticipated from end-1999 Change in the Total Change to end-2003 21 end-2003 Ratio inRatio Percentagepoints End-1999 NPV of debt-to-exports ratio 150.0 150.0 21 End-2003 NPV of debt-to-exports ratio 21 Factors contributing to changes in ratios New borrowing (2000-03) 74.5 -7.4 67.1 Export growth (2000-03) -63.5 34.5 -29.1 Changesin parameters 27.5 27.5 ofwhich Due to changes in the discount rates 19.8 19.8 Due to changes in the exchange rates 7.8 7.8 Change in HIPC relief delivery assumptions 31 -28.4 -28.4 Other factors 41 -2.8 -2.8 End-2003 NPV of debt-to-exports ratio 161.0 184.4 51 184.4 51 Memorandum Item: End-2003 NPV of debt-to-exports ratio after bilateral debt relief beyond HIPC 113.1 51 Source: Staff estimates. 1/ All figures assume the full delivery o f debt relief under the HIPC Initiative. 21End-1999 data and projections at the time of the decision point. 41 Includes revisions in the end-1999 database. 51Based on actual end-2003 debt stocks, discount rates, exchangerates and the three-year backward-looking averageof exports of good and services. ExternalDebt Outlook, 2004-23 56. The long-termexternal debt outlookis set against a macroeconomic framework based uponthe PRGF- supportedprogramthat is elaborated in the authorities' medium- term expenditureframework (MTEF) preparedfor the 2005 budgetand extended along current trends (Table 12 and Box 3). Annual real GDP growth is assumed to holdsteady at 5 percent per year over the projectionperiod, 2004-23, while inflation, after being reducedto 5 percent per year by 2007, also holds steady thereafter. Investment i s assumed to be maintained at 22% percent o f GDP, which, based on recent experience, would support this rate o f economic growth, Inline with the MTEF, government domestic borrowing needs would be reducedto about % percent o f GDP by 2007, ledby continued spending discipline and donor support. Over the long term, government revenues are assumed to increase gradually (to 20 percent of GDP by - 25 - 2016). Following a strong export performance over the mediumterm, mainly reflecting recent and ongoing investments inmining, agriculture, and tourism, export volumes are expected to grow at a more moderate pace o f 4 percent a year over the long term. New external borrowing by government i s projected to remain in line with current program trends, partly reflecting a shift to greater donor assistance inthe form of grants. 57. Zambia's debt-to-export ratio i s projected to fall steadily from the end-2003 level (Tables 13-15 and Figure 3). Based on preliminary data, the N P V o f debt-to-exports ratio i s estimated to have fallen to 140percent at end-2004, after the full delivery o f HIPC Initiative and additional bilateral debt relief. The very strong increase in export receipts in 2004 i s the main factor behindthis sharp drop inthe debt-to-exports ratio,21while substantial repayments to the IMF in2004 also contribute.22Staffs' projections indicate that the ratio would fall further over the mediumterm and remain well below the HIPC Initiative threshold o f 150 percent for the entire projection period, reaching 90 percent by 2010 and 53 percent by 2023. The average level of the ratio over the 2003-13 period i s projectedto be 105 percent, considerably less than the average for non-HIPC low-income countries (143 percent). 58. External debt service after full delivery of HIPC Initiative and additional bilateral relief i s expected to remainwell below 10 percent o f exports after 2004. The debt service-to- export ratio in2004 i s estimated at 22 percent (mainly because o f large repayments to the Fund before falling sharply to 5 percent in 2005.23The estimated average debt service-to-exports ratio over the 2004-13 period i s 7 percent (6 percent during 2005-13) reflecting the impact o f debt relief andthe highconcessionality o f new debt. This average i s also well below the average for non-HIPC low-income countries (15 percent). Sensitivity Analysis 59. Based on a sensitivity analysis of three relatively severe shocks, it appears that Zambia's debt after HIPC Initiative assistancewould remain well within a manageable range. This i s primarilythe result of the favorable starting position that Zambia achieves under the baseline scenario where the amounts o f new external borrowing are quite modest and exports, which staged a strong recovery in 2004, are projected to maintain a high level, given the ongoing investments inthe export sectors (Table 16 and Figure 4). 21 The denominator inthe N P V of debt-to-exports ratio is the 3-year average o f export earnings ending inthe current year. As a result, while the growth in export earnings i s projected to moderate over the mediumterm, a strong reduction inthis ratio i s expected again in2005 and, to a lesser extent, in2006. 22 The NPV o f disbursements under the PRGFarrangement approvedinJune 2004 i s lower than that o f the repayments. 23 Large PRGF repayments account for more than half of total debt service in 2004. - 26 - Box3. Zambia: Macroeconomic AssumptionsUnderlyingthe Debt Sustainability Analysis Over the Period2004-2023 RealGDP growth, is projected to remain steady at 5 percent a year, inline with recent performance. This i s also consistent with the assumption used inthe decision point DSA. Inflation is expected to fall to 5 percent over the mediumterm (by 2007), the same level as targeted at the decision point. Realeffective exchangerate is assumed to remainlargelyunchanged over the long term. Export volume is projectedto show strong growth over the mediumterm, reflecting major investments in miningand agriculture, before slowing down to 4 percent annual growth over the long term, when miningexports are assumed to expand at about 2 percent a year, while other (nontraditional) exports grow at about 7 percent a year. Current account deficit,including official transfers, is forecast to decline gradually from nearly 5 percent o f GDP in 2004 before leveling-off at just over 2 percent by 2014-23, Fiscal policy.The 3-year PRGF-supported program i s anchored on reducing government's domestic borrowing to 0.6 percent o f GDP in2007, before falling to near zero over the long term. Government revenues are projected to rise gradually to 19 percent o f GDP by 2011and continue growing to 20 percent o f GDP by 2016, before holding steady at that level. Government spending, excluding externally financed projects, i s expected to gradually fall to about 1 percentage point o f GDP above government revenues, with the balance financed by budget support grants and loans. Externally financed projects are projectedto decline gradually to 3-4 percent o f GDP over the long term, with grants making up an increasing share o f the total. Saving and investment. Gross domestic investment is projectedto hold steady at about 22% percent o f GDP, down 2-3 percentage points from present levels, but still a few percentage points higher than historical levels. Gross national saving (after official transfers and debt relief) i s projectedto remain inthe range o f 18-19 percent o f GDP. Foreigndirect investmentis projectedto fall off from its current higho f 5-7 percent of GDP to about 5 percent o f GDP a year. New externalborrowing,excluding IMF disbursements, i s assumed to be about US$120 million a year over the mediumterm, mostly from IDA and the African Development Bank, This figure would fall to US$l05 million in2009, as a greater share o f donor assistance comes inthe form o f grants. Fromthis level, new extemal borrowing would remain constant in real terms. Gross officialreserves,expressed inmonths o f imports o f goods and services, are expected to grow gradually to nearly 6 months o f imports by the end o f the projection period. - 27 - Figure 3. ExternalDebt and Debt-Service Indicators for Medium-and Long-Term Public Sector Debt, 2004-2023 (In percent) 180 480 $40 External Stock o f Debt inNPVTermsiExports 440 100 400 -After traditional debt relief 360 --After 360 enhanced HIPC Initiative 320 \ -After bilateral debt relief beyond HIPC 320 assistance 280 280 !40 240 200 200 160 160 120 120 80 80 40 40 0 0 2003 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 30 30 ExtemalDebt ServiceiExports -After -- traditional debt relief After enhanced HIPC Initiative 25 25 20 20 15 15 10 10 5 5 0 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Sources: Zambian authorities; and staff estimates and projections. - 28 - Figure4. SensitivityAnalysis, 2004-2023 (Inpercent) 175 175 N P V o f D e b t to !3ports 150 150 125 125 100 100 75 75 -Baseline scenario 50 - Scenario 1: Fall in copper prices and export 50 volume Scenario 11: Lower GDP and nontraditional export volume growth 25 --- -- -- Scenario 111: Higher borrowing 25 0 I I I I I I I I I I I I I I I I I I I 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 26 26 24 ExtemalDebt Service / Exports 24 22 22 20 -Baseline - scenario 20 18 Scenario 1: Fall in copper prices and export volume 18 16 --- -- -- Scenario 11: Lower GDP and nontraditional export volume growth 16 14 Scenario 111:Higher borrowing 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 - 29 - Sensitivity scenario 1: Lower copper prices and lower copper export volumes 60. This scenario assumes that, beginningin2005, there is a permanent 20 percent decline in the price o f copper relative to the baseline projection, which already incorporates a 29 percent drop in copper prices by 2007. Over a three-year adjustment period, copper production falls permanently by 10 percent inresponse to the additional price decrease and, for a five-year period, govemment borrows additional funds to maintainspendinglevels inthe face o f a shortfall in revenues that arises from slightly lower GDP growth. By the end o f the projection period, exports are 16 percent lower than inthe baseline, while the stock o f debt and debt service falling due is only slightly higher.As a result, the NPV o f debt-to-exports at end-2010 is projected to be 110 percent, or about 20 percentage points above the baseline, well below the enhanced HIPC Initiative threshold o f 150 percent. For 2023, the debt-to exports ratio i s projected to be 62 percent, or 7 percentage points higher than inthe baseline. Sensitivity scenario 2: Lower real GDP growth and lower non-traditional export growth 61, This scenario assumes that, beginningin2005, real GDP growth and nontraditional export volume growth are only 3 percent a year (comparedwith 5 percent and 7 percent, respectively, inthe baseline). Govemment revenues fall in line with the lower GDP figures and for a six-year period, govemment borrows additional funds (totaling $192 million) to maintain spendinglevels inthe face o f a shortfall inrevenues that arises from the lower GDP growth. The N P V o f debt-to-exports ratio for 2010 i s projected to be 104 percent, or 14 percentage points higher than inthe baseline. By the end o f the projection period, exports are 28 percent lower than inthe baseline, giving a debt-to-exports ratio of 75 percent, or 20 percentage points higherthan inthe baseline. Sensitivity scenario 3: Increased borrowing to meet a shortfall (25 percent) in grants. 62. This scenario assumes that real GDP growth and exports remainunchangedfromthe baseline, but that, beginning in 2005, disbursements o f budget support grants fall short o f projections by 25 percent. This shortfall i s made up with additional borrowing throughout the projection period (totaling US$628 million). By 2010, this gives a projected NPV o f debt-to- exports ratio o f 96 percent, only marginally higher than the baseline (94 percent) By the end o f the projectionperiod, the projected debt-to-exports ratio is 62 percent, or 7 percentage points higher than inthe baseline. Topping-up 63. The staffs of the IMF and IDA are of the view that there is not a case for Zambia to be granted topping up assistance at the completion point. The enhanced HIPC Initiative provides for the possibility o f granting additional debt relief at the completion point if the deterioration in a country's debt sustainability i s primarily attributable to a fundamental change inthe country's economic circumstances due to exogenous factors. The NPV ofZambia's debt- to-exports ratio o f 174 percent at end-2003, after full delivery of HIPC Initiative assistance and additional bilateral debt relief i s 24 percentage points higher than HIPC Initiative debt sustainability threshold o f 150 percent and 13 percentage points higher than projected at the decision point. This deterioration inthe debt sustainability indicators i s also primarily due to - 30 - exogenous factors, namelychanges inthe discount and exchange rate parameters betweenthe decision and completionpoints and the shortfall in export receipts during 2001-03, relative to decision point projections, owing mainlyto weak world market prices for copper inthis period. However, the staffs do not consider that that these developments reflects a fundamentalchange inZambia's economic circumstances, giventhat the debt-to-exports ratio has already fallen sharply in2004 (by 35 percentage points) and is projectedto decline steadily thereafter, owing to the recovery in exports and increased share o f grants in external financing. The resilience of the debt-to-exports ratio projections to some severe shocks or sustainedpoorer export performance than assumed inthe baseline supports this view. 64. Zambia's projecteddebt service-to-exportsratio (well below 10 percentafter 2004) i s also consistentwith the view that adverse developments in exogenous factors havenot caused a fundamentalchange inthe country's economic circumstances that would unduly compromise its chances for long-termdebt sustainability.Inthe baseline, as well as inall the scenarios described inthe sensitivity analysis, the debt service-to-exports ratio i s projected to average well below 10 percent during 2004-13. Other indicators o f Zambia's debt burdenalso support this view. The debt-service-to-fiscal revenues ratio remains below 10percent for the entire projection period, while the NPV o f debt-to-fiscal revenues ratio also remains below the HIPC Initiative fiscal threshold of 250 percent for the projection period. IV. PUBLIC DEBTMANAGEMENT 65. While reachingthe completionpointwill ease the burdenof Zambia's external public debt, there will continueto be risksto government'sbudget and the economy arising from overall public debt. Inaddition to foreign currency exposure typical of a HIPC country with large external debtportfolios, significant risks from rollover and interest rate exposure have built up as a result o f the accumulationo f short-term domestic borrowing. At the same time, capacity in debt management i s relatively low, and therefore there i s an urgent need to strengthen basic debt management functions, and support the development o f domestic debt markets. 66. T o address weaknesses inpublic debt management Zambia has participated inthe Joint IMF/World Bank Debt Reform and Capacity BuildingProgram. An assessment identifying the mainchallenges inZambia's public debt management and government debt marketswas undertaken inMay 2004 (Box 4). As a result, the authorities have prepared a public debt management reformprogram which i s to be implemented over the next 3-5 years with support from IDA and cooperating partners. - 3 1 - Box 4: Main Challenges inPublicDebt Management ImprovingZambia's debt managementrequires actions on governance, strategy and risk management,and debt market development,for which capacitybuildingi s indispensable. Given current practices, efforts should focus first on establishing an institutional framework and capacity that ensure the continuous maintenance o f an updated debt database, and then on developing a strategy for overall debt management including post-HIPC debt relief. The Bank o f Zambia (BoZ) could focus on addressing some debt market shortcomings in the short run, and reforming the financial market structure in the mediumterm. The strengtheningof a back office function is the most imminentneedto ensure the accuracy and comprehensivenessof debt transaction records, and punctualpayments on outstanding debt basedon a reliabledebt recordingsystem.A critical step inthis direction includes the buildingo f a consolidated database, which has commenced. Subsequently, or even inparallel if circumstances permit, government i s advised to strengthenthe Investment and Debt Management Department's (IDM) capacity to conduct basic risk analysis so as to formulate a debt management strategy and provide input to post-HIPC credit negotiations, such that the MoFNP can play a more active role in strategy formulation. Contingent liabilities, on-lending, and sub-national debt also needserious attention as part of the country's overall debt management.Government is recommendedto set up a general policy for providing guarantees and include information on these liabilities in its consolidated database. The policy on contingent liabilities may be technically separate from the debt management strategy. However, it i s desirable to integrate it inthe overall debt management strategy as issuing a guarantee creates similar risks as borrowing and on-lending by government. Government is advisedto merge the laws governingpublicborrowinginto a comprehensive new law that would govern all borrowing by the Republic o fZambia and centralizes the ability to borrow in the name o f the Republic with the Minister o f Finance and National Planning. Furthermore, the law should specify how the Ministershould be accountable to the National Assembly and the public. The organizationalstructureof debt management functions in Zambia does not functionwell. Debtmanagement responsibilities are split between the IDMand the BoZ. The coordination and exchange o f information betweenthe ministryand the central bank are deficient. The current governance arrangements make it difficult to formulate a consolidated debt management strategy. In the area of domestic debt MoFNP has inpractice handed over the responsibility to BoZ. While this arrangement seems to have worked relatively well, the MoFNP should play a more active role when ii comes to the policy and management of the domestic debt. One important reason for this i s to make possible a clear separation of monetary policy and debt management as such a separation would be supportive o f the development o f the domestic debt markets. Zambia lacks a comprehensivestrategy for managing its debt.Over the last few years, domestic debt has increasedits share inthe total as a shortfall inexternal resource inflows has led government to fillthe gap inthe domestic market. Since room for discretion in debt management centers on the domestic debt, government needs a clear policy to manage its liability portfolio especially with regard to refinancing maturing debt and the exposure to domestic interest rate risk.The formulation o f a successful debt strategy to address the portfolio risks i s vital to maintain Zambia on a fiscally sustainable path. The strategy should be guided by clear debt management objectives and expressed - 32 - Box 4: M a i n Challenges in Public Debt Management ina law governing all borrowing inthe name of the Republic. Inaddition to fundinggovernment with due regard to cost and risk implications, it is crucial to give the MoFNP a clear mandate to promote the development o f the domestic debt market. Zambia's domestic debt market is an emergent one. The BoZhas substantially improved the market, but the market has yet to allow government to achieve debt management objectives while facilitating monetary policy operations. The market i s characterized by a concentration o f government securities ownership in the banking sector, an illiquid secondary market, and short-maturities o f government securities. These market characteristics buildup systemic risk inthe banking sector, constrain the economy's capacity for absorbing government securities, and prevent government from lowering funding costs and managing risks such as interest and refinancing risks.Conversely, the absence o f a debt management strategy and the inadequacy o f cash management hinderthe central bank's monetary operations significantly. The authorities are advised to take a series of policy measures to develop debt markets. Short- termmeasures include activatinginterbank and customer rep0markets, introducingmarket making obligations, and permitting OTC transactions. Inthe medium- and long-term, government i s recommended, among other things, to ensure competition inthe financial sector, to encourage NBFIs' intermediation, to consolidate NBFIregulators, and to reform clearing, settlement and custody systems. V. CONCLUSIONS 67. The staffs of the IMFand IDA are of the view that Zambia's performance relative to the conditions for reaching the completion point under the enhanced HIPC Initiative has beensatisfactory. The full PRSP was prepared andimplementedsatisfactorily for at least one full year, a satisfactory track recordunder a PRGF-supportedprogramhas beenre-established, andmost key structural reforms and social measures have been implemented. Giventhe overall progress in structural reforms, including a broad strategy to strengthenpublic expenditure management, the staffs consider that adequate progress has been made in implementing the completion point triggers. 68. Zambia's debt-to-export profile remains robust under a number of different sensitivity scenarios owing to debt relief provided at completion point, including the delivery of additional bilateral assistance, and the expectation that prudent macroeconomic policies and structural reforms are maintained. The authorities would also needto improve debt management andcontinue to borrow on concessional terms. The NPV o f debt-to-exports ratio under the baseline and the sensitivity scenarios presented remains below the HIPC threshold o f 150 percent for the entire projection period. Inthe staffs' view, Zambia i s not a candidate for toppingup of debt relief at completion point under the enhanced HIPC Initiative. 69. The staffs of the IMFand IDA therefore recommend that the Executive Directors determinethat Zambia has reached the completion point under the enhanced HIPC Initiative. - 33 - VI. ISSUES FORDISCUSSION 70. Executive Directors are asked to provide guidance on the following questions: D o Directors agree that Zambia has met the conditions for reaching the completion point under the enhanced HIPC Initiative framework, as established at the time o f the decision point? D o Directors agree that sufficient assurances have been givenby Zambia's other creditors to commit enhanced HIPC Initiative resources to Zambia, as approved at the decision point, on an irrevocable basis? - 34 - Proposed Decision 1. The Fund, as Trustee ("the Trustee") o f the Trust for Special PRGF Operations for the Heavily Indebted Poor Countries and InterimPRGF Subsidy Operations ("the Trust") established by Decision No. 11436-(97/10), adopted February 4, 1997, decides that Zambia has reached the completion point, notwithstanding that the conditions with respect to: a) the implementationbythe Ministryof Finance andEconomic Developmentof an IntegratedFinancial Management Information System (IFMIS) on a pilot basis for at least three ministries and a mid-termreview of the program; (b) the restructuring and issuance o f international biddingdocuments for the sale of a majority (controlling) interest inthe power company, ZESCO; and (c) the issuance o f biddingdocuments for the sale o f a majority (controlling) interest inthe ZambianNational Commercial Bank, as referenced inparagraph l(ii)(a) o f Decision No. 12348 (00/11S), adopted December 1, 2000, have not been fully met. 2. Accordingly, the Trustee confirms that, in accordance with Section 111,paragraphs 3(e) and 3(f) o f the PRGF-HIPC Trust Instrument, the balance of the grant committed at the decision point in an amount equivalent to SDR 468.80 million, less any amounts that have been disbursed as interim assistance, together with interest calculated at the average rate o f return per annum on investment o f the resources heldby or for the benefit o f the Trust, shall be made available to Zambia inthe form o f a grant to an account for the benefit o f Zambia established and administered by the Trustee in accordance with Section 111,paragraph 5(b) o f the PRGF-HIPC Trust Instrument. The proceeds shall be usedby the Trustee to meet Zambia's debt-service payments on its existing debt to the Fundas they fall due, in accordance with the schedule specified inTable 6 o f the Completion Point Document. 3. Paragraphs 1 and 2 above shall become effective on the date on which the Funddecides that the World Bank has concluded that Zambia has reached the completion point under the enhanced HIPC Initiative. - 35 - Table 1. Zambia: SelectedEconomic andFinancialIndicators,2000-04 2000 2001 2002 2003 2004 Prel (Annual percentage change, unless otherwise indicated) National income and prices Real GDP 3.6 4 9 3 3 5 1 5 0 GDP deflator 30.0 24 3 19 9 19.8 20 0 Consumer prices (annual average) 26 1 21 7 22 2 21.5 18 0 Consumer prices (end ofperiod) 30.1 18.7 26.7 I 7 2 17 5 External sector U.S.dollar value of exports ofgoods and services 2.3 19 4 2 4 15.7 49 4 U.S.dollar value of imports of goods and senices 12 8 23 3 -2 5 13 3 23 3 Export volume (goods) -5.7 26.2 11 2 1 8 5 6 Import volume (goods) 2.7 34 3 -3 9 6.9 4 3 Copper export volume -2 5 26.9 11.3 7.1 8 7 Nonmetal export rolume -9 4 22.0 20 3 -3 7 I 7 7 Copper export prices (aberage, U S. dollars per pound) 0.82 0.77 0 70 0 78 116 Nominal effective exchange rate (annual average) -16 5 -7.7 -19 3 -14.1 -2 2 Real effective exchange rate (annual average) 1.2 8.5 -5.8 -I 7 8 3 Terins of trade -4 2 -1.7 -6.7 4 2 20 3 Money and credit (change in percent of beginning-of-year M2) Net foreign assets 63 8 -53.5 68.5 -9.0 13 9 N e t domestic assets 10 3 64.3 -37 0 32 5 16 3 Net domestic credit 18.7 33 0 -29.4 36.6 I 6 4 Net claims on govemment 18.1 36.0 3.1 27.0 I O Claims on nongovernment 28 6 6 7 6 1 9 6 15 4 Broad money 74 1 10 8 31 5 23 4 30 2 Velocity 4.1 4.7 4.5 4.6 4 4 Central govemment budget Revenue (excluding grants) 47.5 28.4 16.0 26.5 28 8 Grants -3.7 31 1 79 0 5.5 0 6 Expenditures 1/ 42.2 34 9 20 7 24 6 9 2 Domestic expenditures I / 21 52 9 38 0 11.5 26.8 18 6 (In percent of GDP) Investment and savings Gross national savings 31 6.1 8.2 15.5 18.1 19 5 Gross foreign savings 41 11 4 10.8 6 5 7 5 4 8 Gross domestic investment 17.4 19 0 22.0 25.6 24 3 Of which public inveshnent 10.0 11 9 118 11.4 8 8 Central govemnent budget Revenue and grants 25.1 24 9 26.2 24 9 23 9 Revenue (excluding grants) 19.4 19 2 17.9 17.9 18 4 Expenditures (excluding interest) I/ 31.0 32.2 27.2 27.0 23 3 Interest due 3.0 2.5 4 1 3.9 3 5 Domestic expenditures I1 21 21.7 23 0 20.7 20.9 I 9 6 Overall balance, cash basis -7.0 -8.1 -6.3 -6 6 -1 7 Domestic financing 1.8 4 5 2.1 5.1 0 8 External sector Current account balance, excluding grants -19 2 -20.8 -173 -16.2 -11 9 Current account balance, including grants and debt relief 4/ -11.4 -10.8 -6.5 -7.5 -4 8 (Inpercent of exports of goods and services) External debt External official debt senice 15 9 13.5 11.4 15.4 2 0 0 51 External program assistance 21 5 7 3 1 3 1 4 5 3 6 (Inmillions o f U S. dollars, unless otherwise indicated) Current account balance, including grants and debt relief 41 -369 -394 -246 -323 -260 Overall balance of payments -309 -399 -383 -321 -285 Gross official reserves (end o f period) 1I 4 114 283 194 222 Inmonths of imports of goods and services 1 0 0.9 2 2 1 3 1 2 Sources. Zambian authorities, and I M F staff estimates. 11Includes contingency reserve and payments of domestic arrears. 21Excludes external interest payments and foreign-financed capital expenditure. 31After enhanced HlPC Initiative debt relief 41Includes program and budget grants and debt relief on interest payments. 51This figure i s based on actual debt service payments and differs by a small amount from the DSA projection for debt service in 2004 (Table 15). The difference mainly reflects lower actual payments to Paris Club creditors than proJectedin the DSA, in part because a scheduled payment to Russia i n 2004 was delayed to 2005 but also because the DSA projection uses conservative assumptions regarding flow relief during the interim period. - 36 - Table2. Zambia: HIPCInitiativeInterimDebt Reliefand SelectedPovertyReducingSpending 2000 2001 2002 2003 2004 2005 Est. Proj. (Inmillions ofU.S.dollars) HiPC Initiative interim debt relief ... 266 266 237 156 338 of which iMF ... 150 153 171 0 225 IDA ... 19 22 26 29 34 (inpercent of GDP, unless otherwise noted) HiPC Initiative interimdebt relief ... 7.3 7.1 5.5 2.9 5.9 of which On debt service under the government's budget 1/ ... 3.2 3.O 1.5 2.9 2.3 Priority poverty reducing program expenditures ... 1.4 0.9 1.o 2.1 2.2 of which HIPC-financed capital expenditures ... 0.6 0.5 1.o 1.2 1.3 (inpercent oftotal govemment capital expenditures) ... 4.7 4.1 9.1 14.2 14.8 (inpercent ofdomestic discretionary budget) Education 23.0 20.2 20.8 18.1 20.6 24.1 Memorandum items External debt service due (millions o f US.dollars) 21 277 419 422 462 470 475 (inpercent of GDP) 8.6 11.5 11.2 10.7 8.8 8.3 GDP (millions o f U.S. dollars) 3,238 3,640 3,776 4,318 5,409 6,222 Sources: Zambian authorities; and staff estimates and projections. 11 Excludes debt reliefprovided by the IMF, which accrues to the Bank of Zambia. 21Before HIPC Initiative debt relief; after debt relief available under traditional mechanisms. - 37 - 4 t. G .3 m 0 a iD 2 cs 0 vi 3 h * B . 8a W h +8 .-* c v Ga a, v *2 c X Yx J % -0 cu kz 0 - 38 - Table 4. Zambia: Status of Creditor ParticipationUnder the EnhancedHIPC Initiative Debt Relief Percentageof Satisfactory Modalities To inNPV Terms Total Assistance Reply Deliver Debt Relief (US$ million) I/ 493.0 19.7 Yes IDA assistance is beingdeliveredequal to 84.2% of I D 4 debt service until2003 andon average 64% thereafter.Total debt relief is to be providedover 20 years, ending2020. The IFC has provided its full shareof HlPC relief in the interim period. AfDB Group 146.1 5.8 Yes Interimassistancewas provided equalto 76.8%debt service reductionuntil October 2003 when the 40% of total KPV o f relief limit was reached.Remainingassistance will be delivered at completionpoint equalto an 80% debt service reductionuntil2014. IMF 602.0 24.1 Yes The IMF providedinterim assistance(75% of total) until end- December2003 w,hen the interim relief limit was met.Theremainingreliefwill be provided through grantsfrom the PRGFMPC Trust to an Umbrella Account until 2007. EU 57.7 2.3 Yes Debt-senicerelief on selectedloans duringthe interimperiod, supplemented with grantsto pay off loansat completionpoint. BADEA 11.4 0.5 Yes Has agreedin principle to provide debt relief, but must agree on a specificmodality of delibery for Zambia. IFAD 17.3 0.7 Yes Assistance will be deliveredat completionpoint, througha reductionof debt servicepaymentson eligible debt by up to 100% until the target inNPV terms is reached. OPEC Fund 3.6 0.1 Yes A portionof total assistance(USS2.4 million) will be providedthrough a concessionalloanand the remainingrelief (USSl.2 million) wjill be deliveredat completionpoint. Total multilateral 1331.1 53.3 52.7 Paris Club creditors 1089.0 43.6 43.6 Cologneflow providedduring interimperiod. Stock-of-debtoperationunder Cologneterms is expectedat completionpoint. Yon-ParisClub creditors 56.0 2.24 0.4 Bulgaria K O Being contactedby Zambia. China Partial Some obligationshavebeen written off without reconciliation at decisionpoint. CzechRepublic Partial Fully repaidvia a debt buybackoperationat 11percent of face value. India Yes 100% of bilateral debt waived, alongwith 50% of commercialdebt. Iraq K O Being contactedby Zambia. Kuwait K O Obligationssold to commercialfirm (Camdex),which recoveredfull value via litigation Romania Partial Sold to commercialfirm (Debt Advisory International)at 33 percento f face value. Saudi Arabia No Fully repaid. Yugoslavia No Settlementof obligationsvia litigation at 53 percent of face value. Commercialcreditors 22.9 0.9 K O Being contactedby Zambia Total bilateral and commercial 1,167.8 46.1 44.0 Total 2,499.2 100.0 96.7 Source: Zambianauthorities;and staff estimates 1/ The amount of assistanceis estimatedusingthe exchangeratesand creditor exposureat the decisionpoint. - 39 - - 40 - m m 0 0 N m 0 8 , z N 0 r. 0 N \o 3 m o o 0 N d , e m 0 0 N U 0 0 N m 0 0N N 0 0 N - C C h C , , I CI -41 - "iV ly, I . .. .- .El I i - 42 - Table 8. ComparisonofDiscount RateandExchangeRateAssumptionsat end-1999andend-2003 DiscountRates 1121 Exchange Rates (Inpercent per annum) (Currencyper U.S.dollar) At Decision At Completion At Decision At Completion Point Point Point Point Currency Austrian Schilling 5.47 4.63 13.70 10.89 BelgianFranc 5.47 4.63 40.16 31.94 Bulgarian Leva 5.59 4.20 1.95 1.55 Canadian Dollar 6.67 5.18 1.44 1.29 Swiss Franc 4.27 3.21 1.60 1.24 ChineseYuan 5.59 4.20 8.28 8.28 Deutsche Mark 5.47 4.63 1.95 1.55 DanishKroner 5.32 4.77 7.40 5.96 SpanishPeseta 5.47 4.63 165.62 131.74 European Currency UnitEuro 5.47 4.63 1.oo 0.79 FinnishMarkaa 5.47 4.63 5.92 4.71 FrenchFranc 5.47 4.63 6.53 5.19 BritishPound 6.70 5.37 0.62 0.56 IrishPound 5.47 4.63 0.78 0.62 IndianRupee 5.59 4.20 43.49 45.61 IraqiDinar 5.59 4.20 30.00 30.00 ItalianLira 5.47 4.63 1,927.40 1,533.07 JapaneseYen 1.98 1.70 102.20 107.11 Kuwaiti Dinar 5.59 4.20 0.30 0.29 LuxemburgFranc 5.47 4.63 40.16 31.94 NetherlandGuilder 5.47 4.63 2.19 1.74 NorwegianKroner 6.64 5.30 8.04 6.68 Saudi Arabian Riyal 5.59 4.20 3.75 3.75 Special DrawingRights 5.59 4.20 0.73 0.67 SwedishKronor 5.80 5.00 8.53 7.20 RussianRouble31 7.04 4.47 0.60 0.60 UnitedStates Dollar 7.04 4.47 1.oo 1.00 Yugoslav Dinar 5.59 ... 11.61 ... Sources:OECD; and IMF, International Financial Statistics 11The discount rates usedare the average commercialinterestreferencerates (CIRRs) for the respective currencies over the six-monthperiod ending in December 2003 for the completion point and inDecember 1999 for the decisionpoint. 21For all Euro area currencies, the Euro CIRR is used.For all other currencies for which the CIRRs are not available (exceptthe Kuwaiti Dinar at completion point, for which the USD discount rate is used), the SDR discount rate is usedas a proxy. 31Former Soviet Union debt converted at 0.6 roubles per USD, as agreed betweenRussia andthe Paris Club. - 43 - Table 9. Zambia:NominalandNetPresentValue of ExternalDebt at CompletionPoint, End-2003 l/ Legal Situation 31 Net Present Value 41 Nominal Debt NPV of Dcbt After enhancedHIPC After additionalbilateral assistance Total 6,999.6 5,726.7 2,078.1 1,958.2 Multilateral 3,924.7 2,581.6 1,6 19.5 1,619.5 IDA 2,414.4 1,397.7 845.0 845.0 IBRD 3.3 3.2 3.2 3.2 AtDF 298.0 175.1 136.2 136.2 AfDB 71.8 82.1 19.7 19.7 IMF 858.7 761.4 518.1 518.1 EU 21 170.8 87.7 65.0 65.0 IFAD 73.8 46.1 21.1 21.1 BADEA 18.3 15.8 3.2 3.2 OPEC Fund 10.0 9.0 4.5 4.5 NDF 5.6 3.5 3.5 3.5 Paris Club bilatcral 2,752.3 2,8 32.3 292.6 51 172.7 Austria 6.8 4.9 ... ... Belgium 0.1 0.1 Brazil 77.7 51.8 Canada 61.2 74.2 ... ... Denmark 0.1 0.1 France 235.6 342.3 Germany 627.9 727.8 ... Ireland 0.0 0.0 Italy 115.0 103.9 Japan 692.3 780.9 ... Luxembourg 0.0 0.0 ... ... Netherlands 0.4 0.2 ... Russia 146.9 156.9 ... United Kingdom 419.2 259.3 ... United States 369.1 330.0 ... NanParis Club bilateral 247.9 239.1 123.0 123.O Bulgaria 2.7 2.7 0.9 0.9 China 212.8 206.7 92.5 92.5 India 8.0 7.5 7.5 7.5 Iraq 0.7 0.7 0.5 0.5 Kuwait 7.6 6.2 6.2 6.2 Yugoslavia 16.1 15.2 15.2 15.2 Commercial 74.7 73.7 43.0 43.0 Sources:Zambianauthorities; and staff estimates. 11Figures are based on data as o f end December 2003. 21EuropeanEconomic Commissionloans administeredby IDA classified as multilateral loans at decision point have beenreclassified as Paris Club bilateral loans at completion point. 31Reflects the externaldebt situation as ofcnd-2003, including a flow reschedulingundcr Colognc tcrms under Paris Club 8, and additional assistance from the Paris Club on avoluntary basis. 41Assumed delivered unconditionally. 51Debt relief for Paris Club countries is cxpectedto be delivered collectively under the enhancedHIPC Initiative. - 44 - I .:oao 0" 0 -c T e, E * m e + 3 e, 0 c a 3 c - 45 - Table 11: Zambia: Comparison o f Macroeconomic Assumptions at DecisionPoint and Outturns 1999-2004 l/ (In millions of U.S. dollars, unless otherwise indicated) 1999 2000 2001 2002 2003 2004 Decision Point Economic g r o w t h Real GDP (percentage change) 2 4% 4 0% 5.0% 5.0% 5.0% 5.0% GDP Deflator (in percent) 21.7% 25.9% 10.5% 9.2% 1.0% 1.O% GDP in Kwachas bn. 7,522 9,853 11,431 13,108 13,902 14,744 GDP in US$ mn. 3,150 3,389 3,445 3,652 4,059 4,305 Outturn Real GDP (percentage change) 3 6% 4 9% 3.3% 5 1% 5 0% GDP Deflator (in percent) 30 0% 24 3% 19.9% 19.8% 20 0% GDP in Kwachas bn. 10,075 13,133 16,260 20,481 25,814 GDP in USS mn. 3,239 3,640 3,776 4,318 5,409 Government Revenues Government Revenues (percent o f GDP) 17 6% 18.8% I 7 7% 18 0 % 18 2% 18 4% Outturn Government Revenues (percent of GDP) 17.7% 19 4% 19 2% 17.9% 17 9% 18.4% Prices International Inflation 0.0 0 0 0.0 0 0 1.0% 1.O% Average Exchange Rate (Kwachas per IUSS) 2,388 2,861 3,215 3,425 3,425 3,425 Terms of Trade (percentage change) (-deterioration) -5 7% 13 3% 0 4% 2 5% 0 0% 0 0% Outturn International Inflation (trading partners) 4 3% 3 3% 4.5% 3 2% 1 4% Average Exchange Rate (Kwachas per IUS$) 3,111 3,608 4,307 4,743 4,772 Tenns o f Trade (percentage change) (- deterloratlor -4 2% -1 7% -6 7% 4.2% 20 3% Balance of Payments Exports of goods and services 842 1,036 1,241 1,413 1,506 1,604 (3-year average) 994 932 1,039 1,230 1,386 1,508 Copper export receipts 371 506 587 68 1 793 912 Copper price (US$per pound) 0.70 0.82 0.86 0.91 0.94 0.97 Copper export volume (in 000's of metric tonnes) 240 280 310 340 383 427 Imports o f goods and services -1,169 -1,333 -1,554 -1,749 -1,859 -1,976 Outturn Exports of goods and services 842 86I 1,028 1,052 1,217 1,820 (3-year average) 874 910 98 1 1,099 1,363 Copper export receipts 424 506 509 606 982 Copper pnce (US$ per pound) 0.82 0 77 0 70 0 78 1.16 Copper export volume (in 000's o f metric tonnes) 234 297 330 353 384 Imports of goods and services -1,318 -1,625 -1,585 -1,796 -2,213 Disbursements Total 166 299 265 272 195 170 Outturn Total 273 274 353 Ill 375 Reinainine finance 9aD (- i s sumlus> 0 13 169 111 138 134 Additional borrowing (gap filling) 91 0 13 170 113 141 139 Total Debt Service due on gap fill loans 0 0 -1 -2 -3 -4 Outturn Remaining finance eaD (- IS sumlus) 0 0 0 0 0 Exports volume growth (percentage change) -3.9% 10.4% 16.7% 10 3% 5.5% 5 5% Imports volume growth (percentage change) -12 1% 16.7% 12.3% 11.3% 5.3% 5 3% Gross Resewes (including gold) 46 146 267 380 435 495 Gross official reserves (in months o f imports) 0 5 1 3 2.1 2 6 2.8 3 0 Outturn Exports volume growth (percentage change) -5.7% 26.2% 11 2% 1.8% 5.6% Imports volume growth (percentage change) 2 7% 34 3% -3 9% 6.9% 4.3% Gross Reserves (including gold) 1I 4 1I 4 283 197 222 Gross official reserves (inmonths of imports) 1.0 0.9 2 2 1 3 1 2 Sources: Zambian authorities; and staff estimates - 46 - x x - 47 - - 48 - ". o N :: 0 m e N n f o c m m 0 n 10 n - N 0 " c w N m N N * w N 0 e ". m ". N - m fl N - f o -x .- con 0 xl N n * N o U N - m N c 0 * 10 w * . - . N $ - -' -B t H -8E - 49 - - * o n e -- 2 3 ln 0. N - e _ a 3 3 -,e c - m e - 51 - Table 17. HIPC Initiative: Status of Country Cases Considered Under the Initiative, February 11, 2005 Target EstimatedT Z NPV of Debt-to- AssistanceLevels I1 Percentage NominalDebt Decision Completion Gov. (Inmillions 0fU.S.dollars, presentvalue) Reduction ServiceRelief Country Point Point Exports revenue Multi- World ~ inNPV of (In millionsof (in percent) Total Bilateral lateral IMF Bank Debt 2/ U.S.dollars) Completion point reachedunderenhancedframework Benin Jul. 00 Mar. 03 150 265 77 189 24 84 31 460 Bolivia 1,302 425 876 84 194 2,060 originuifrumework Sep. 97 Sep. 98 225 448 157 291 29 54 14 760 enhuncedfkmework Feb. 00 Jun. 01 150 854 268 585 55 140 30 1,300 Burkina Faso 553 83 469 57 23 1 930 originul frumework Sep,97 Jul. 00 205 229 32 196 22 91 27 400 enhuncedfrumework ~ ~on i . Apr. 02 150 195 35 161 22 79 30 300 lopping-up Apr. 02 150 129 16 112 14 61 24 230 Ethiopia 1,982 637 1,315 60 832 3,275 enhuncedfrumework A'ov. 01 Apr. 04 150 1,275 482 763 34 463 47 1.941 lopping-up Apr. 04 i5n 707 155 552 26 369 31 1,334 Ghana Feb. 02 Jul. 04 144 250 2,186 1,084 1,102 112 781 56 3,500 Guyana 591 223 367 75 68 1,354 originulfrumework Dec. 97 Muy 99 107 280 256 91 165 35 27 24 634 enhuncedfrumework Nov. 00 Dee-03 I50 250 335 132 202 40 41 40 719 Madagascar Dcc 00 Ocl-04 150 836 474 362 19 252 40 1,900 Mali 539 I69 370 59 185 895 originulfrumework Sep. 98 sep.on 200 121 37 84 14 43 9 220 enhuncedfrumework Sep. 00 Mur. 03 150 417 132 285 45 143 29 675 Mauritania Feb. 00 Jun. 02 137 250 622 261 361 47 100 50 1,100 Mozambique 2,023 1,270 753 143 443 4,300 originuifrumework Apr. 98 Jun. 99 200 1,717 1.076 641 125 381 63 3,700 enhuncedfrumework Apr. 00 Sep. 01 150 306 194 I 1 2 I S 62 27 600 Nicaragua Dec. 00 Jan. 04 150 3,308 2,175 1,134 82 191 73 4,500 Niger 663 235 428 42 240 1,190 enhuncedfromework Dec. 00 Apr. 04 150 521 211 309 28 170 53 944 topping-up Apr. 04 150 143 23 119 14 70 25 246 Senegal Jun. 00 Apr. 04 133 250 488 212 276 45 124 19 850 Tanzania Apr. 00 Nov. 0I 150 2,026 1,006 1,020 120 695 54 3,000 Uganda 1,003 183 820 160 517 1,950 originuifrumework Apr. 97 Apr. 98 202 347 73 274 69 160 20 650 enhuncedfrumework Feb. 00 Muy 00 I50 656 110 546 91 357 37 1,300 Decision point reachedunderenhanccdframework Cameroon Oct. 00 Floating 150 1,260 874 324 37 179 27 2,800 Chad May. 01 Floating 150 170 35 134 18 68 30 260 Congo, Democratic Rep.of Jul. 03 Floating 150 6,3 11 3,837 2,474 472 831 80 10,389 Gambia,Thc Dec. 00 Floating 150 67 17 49 2 22 27 90 Guinea Dec. 00 Floating 150 545 215 328 31 152 32 800 Guinea-Bissau Dcc. 00 Floating 150 416 212 204 12 93 85 790 Honduras Jul. 00 Floating 1I O 250 556 215 340 30 98 18 900 Malawi Dec.00 Floating 150 643 163 480 30 331 44 1,000 Rwanda Dec. 00 Floating I50 452 56 397 44 228 71 800 S l o Tom6 and Principe Dec. 00 Floating I50 97 29 68 24 83 200 Sierra Leone Mar. 02 Floating 150 600 205 354 123 122 80 950 Zambia Dec. 00 Floating 150 2,499 1,168 1,331 602 493 63 3,850 Decisionpoint reachedunder original framework CBte dlvoire Mar. 98 3/ 141 280 345 I63 182 23 91 6 41 800 Total assistance providedlcommltted 32,002 15,541 16,325 2,532 51 7,577 54,093 Preliminary HIPC document issued Burundi ... 150 801 120 68 1 24 414 92 1,313 Cdte d'lvoirc 61 ... 91 250 2,569 1,027 918 166 438 37 3,900 Sources: IMFand World Bank Board decisions, completion point documents, decision point documents,preliminary HIPC documents, and staff calculations. I/Assistancelevelsareatcountries'respectivedeclsionorcompletionpoints,asapplicablc. 21 Inpercentof the net presentvalue of debt at the decision or completion point (as applicable), after the full use of traditional dcbt-relief mechanisms, 31 CGte d'lvoire reachedits decisionpoint underthe original framework in March 1998. The total amount of assistancecommitted thereunder was US$345 million in NPV terms 4/ Nonreschedulabledebt to non-ParisClub official bilateral creditors and the LondonClub, which was alreadysubjectto a highly concessionalrestructuring, is excludedfrom the NPVofdebt at the completionpoint in the calculation of this ratio. 51 Equivalent to SDR 1,718 million at an SDPJUSD exchangerate of0.6635, as ofFebruary 11,2005, 61 It is suggested that enhancedHIPC relief for Cbte d'Ivoire overtake the commitmentsmade underthe original HIPC framework.