Public Disclosure Authorized TABLE OF CONTENTS. Page No. Chairman's Report... 1

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized TABLE OF CONTENTS Page No. Chairman's Report... 1 Annex I Annex II Annex III Annex IV Annex V Annex VI Background... 1 Opening Statement by the Chairman... 1 Progress Towards Economic Adjustment... 2 Statement by the Zambian Delegation...... 2 Statement by the World Bank Delegation...... 4 Statement by the IMF Delegation... 5 Discussion of Zambia's Adjustment Program...... 6 Program Implementation........ 10 Statement by the Government of Zambia on Technical Assistance... 10 Statement by the Government of Zambia on the Social Action Program... 11 Statement by the Bank on the Government's Social Action Program... 11 Discussion of the Social Action Program...... 12 Debt, Arrears, and Financing Requirements... 13 Statement by the Government of Zambia...... 13 Statement by the Bank... 13 Discussion on Debt, Arrears and Financing Requirements... 14 Other Business......... 15 Closing Remarks by the Zambian Delegation... 15 Closing Statement by the Chairman........ 16 Agenda Final List of Participants Chairman's Opening Statement - Mr. Sven Sandstrom, World Bank Delegation Message of Goodwill from H. E. The President of Zambia Opening Statement by the Minister of Finance and National Commission for Development Planning, Hon. G. G. Chigaga, Head of Delegation of Zambia Statement by the World Bank on Zambia's Adjustment Program and Economic Prospects - Mr. George Gebhart, World Bank Delegation Annex VII Statement by the IMF Delegation - Ms. Burke Dillon

CONSULTATIVE GROUP FOR ZAMBIA, PARIS, APRIL 9-11, 1990 Chairman's Report of the Proceedings Background 1. A meeting of the Consultative Group for Zambia was convened at the World Bank's European Office in Paris, from April 9-11, 1990, under the Chairmanship of Mr. Sven Sandstrom, Director, Southern Africa Department, the World Bank. 2. The meeting was attended by delegations from: Canada, Denmark, Finland, France, the Federal Republic of Germany, Ireland, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, the United States, the African Development Bank, the Commission of the European Communities, the European Investment Bank, the International Monetary Fund, the OPEC Fund for International Development, the United Nations Children's Fund, and the United Nations Development Program. Observers from the Arab Bank for Economic Development in Africa, the Food and Agricultural Organization, and the Organization for Economic Cooperation and Development also attended the meeting. 3. The following documents were distributed for the meeting: Government of Zambia (i) Progress Report on the Implementation of Economic Measures. (ii) The Public Investment Program for 1990-1993. (iii) The Social Action Program. The World Bank (i) Report to the Consultative Group for Zambia on Progress Towards Economic Adjustment. (ii) Zambia Transport Sector Issues: Summary and Recommendations. Opening Statement by the Chairman 4. In welcoming the representatives of the Government of Zambia and the donor community, Mr. Sandstrom noted that the meeting was taking place at a particularly critical juncture in Zambia's adjustment process. After a prolonged period of economic decline marked by several unsustained attempts at economic reform, Zambia had now embarked on the path of economic reform. But this effort was made particularly difficult by two factors. On the one hand, the capacity of the Government to carry out the reforms had been reduced by the cumulative deterioration of physical infrastructure and the shrinking domestic resource base, while on the external front Zambia's access to external financial resources had been seriously constrained by the huge debt overhang and inappropriate economic

policies. How to relieve these constraints in the short and medium term, while responding to Zambia's long-term growth needs, the Chairman stressed, was the key question before the meeting. He noted that a sound basis for adjustment had been laid in the Policy Framework Paper (PFP), as well as the Fund-monitored annual program for 1990, on which the Government had recently embarked. Although these initial efforts were beginning to bear fruit in restoring macro balance, it was important for the adjustment effort to go beyond the stabilization stage, in order to bring about the required longer-term restructuring and growth of the economy. Prospects for this structural transformation depended crucially on adequate external financing. 5. Efforts to mobilize the necessary external resources in support of Zambia's adjustment program were, however, complicated by the difficult question of how to resolve Zambia's huge debt and arrears, particularly to the two Bretton Woods institutions. Various suggestions on how to deal with this problem such as the "accumulation of rights" within the Fund, were under consideration, the Chairman continued. However, the adoption of any such proposals would require Bank and Fund shareholders to reconcile application of such solutions to the case of Zambia with the existing rules and procedures on access to and use of resources from these institutions by other borrowers. In this context, it was particularly important, the Chairman stressed, to resolve the question of the simultaneous versus sequential clearance of arrears to the Bank and the Fund. The Chairman informed the meeting that these difficult questions had not yet been resolved, and would most likely be taken up at the forthcoming meeting of the Interim Committee in early May. 6. But while financing issues were of immediate and central concern to the meeting, the Chairman hoped that participants would give serious attention to the substance and process of reform in Zambia. The content, pace, and institutional capacity for implementing the reform program, were critical elements to ensuring the success of Zambia's adjustment program. Equally important was the need to consider the Government's Social Action Program in order to ensure that the vulnerable groups in society participated in and benefitted from the adjustment program. Only then could sustainability of reform be assured. Progress Towards Economic Adiustment Statement by the Zambian Delegation 7. Before making his opening remarks, the head of the Zambian delegation, Hon. Gibson G. Chigaga, the Minister of Finance and National Commission for Development Planning, read out a message of goodwill to the meeting from H.E. the President of the Republic of Zambia in which the President reiterated the commitment of the Zambian Government to the reform program. In his opening statement, the Minister pointed out that in contrast to previous attempts at economic reform, the present program of adjustment in Zambia took as its starting point the need to integrate and protect the vulnerable groups from the adverse effects of adjustment. In this way, he noted, the risk of reversing the program of reform on account of adverse reactions from the public would be considerably reduced.

8. In discussing the progress achieved in policy reforms since the last informal meeting of donors on Zambia in July last year, the Minister outlined some of the measures the Government had taken within the framework of agreed policies. These included the decontrol of all prices except on maize meal; significant reductions in subsidies; progressive adjustments to the exchange rate and monetary and fiscal measures to reduce inflation. Although it was too early for many of these measures to have had an impact on the performance of the economy, there were indications, he noted, that the measures were beginning to have the desired stabilization effects. After a rapid rise in inflation following price decontrol in June 1989 (the rate of inflation rose to 122.5 percent by December 1989, compared to 62.1 percent at the end of 1988); there were indications that inflation was now slowing down. Similarly, the rate of growth in money supply had decelerated from 75 percent in June 1989 to 49 percent in February 1990, and it was expected that the rate would fall further to 30 percent for 1990 as a whole. 9. In spite of these encouraging trends, economic performance remained weak during 1989. GDP was estimated to have grown by only 0.1 percent compared to 6.3 percent in the previous year. This poor economic performance was largely attributable to extensive damage at the Kafue Gorge Power Plant which seriously affected the performance of the manufacturing sector; while agricultural output was adversely affected by the heavy rains and floods. The mainstay of the Zambian economy, the mining sector, performed satisfactorily, registering a rate of growth of 9.5 percent in 1989, compared to a decline of 12.9 percent in 1988. Transport bottlenecks, however, continued to affect adversely the performance of this sector; and overall, the prospects for improved economic performance in 1990 were not promising, the Minister observed. 10. In the light of these circumstances, the Government of Zambia recognized the need for additional policy measures to restructure and diversify the economy, the Minister continued. In particular, there was need to take further actions to stimulate agricultural performance and nontraditional exports. Such actions would include the creation of an Export Revolving Fund, streamlining of export licensing procedures; improvements in marketing and distribution of agricultural commodities and inputs, as well as enhanced incentives to encourage domestic and foreign investment. Tariff reform, reduction of industrial protection, revision of the investment code, and review of the operations of major parastatals, would be key actions in this regard. 11. On the important question of Zambia's needs for balance of payments and investment support, the Minister appealed to the Group for immediate support. The Government of Zambia had prepared a detailed Public Investment Program (PIP), for the period 1990-1993, in which the priorities of various projects had been indicated. Of special importance to the success of the reform program was the adequate funding of the Social Action Program, designed to cushion the impact of the adjustment process on the vulnerable groups. Actions to strengthen the Government's implementation and management capacity were also critical to the success of the program. In concluding his remarks, the Minister noted that it was beyond the capacity of Zambia to service its debt, even on the most optimistic

- 4 - assumptions on performance of the economy, and in this regard, he looked forward to the suggestions of the Group on how best to deal with this difficult problem. Statement by the World Bank Delegation 12. Mr. George Gebhart, on behalf of the Bank, reviewed the background to Zambia's present reform program. While the 1980s had been characterized by economic decline, it was important that the present reform effort establish the basis for economic recovery as Zambia enters the 1990s. Although the present adjustment program marked a significant departure from past policies, it was nonetheless doable, he noted. The content of reform had been considerably strengthened since the conclusion of the PFP in September last year; while arrangements to strengthen the implementation capacity of the Government were underway. All in all, the pace and direction of reform appeared appropriate. 13. However, in order to consolidate progress achieved on the macroeconomic front, it was important to address the policy and structural bottlenecks to production and diversification of the economy. In this regard, further sectoral policies were essential. In agriculture, it was important to reinforce the impact of pricing policies by further liberalization of marketing and distribution of agricultural commodities, particularly maize and fertilizers. Involvement of private sector truckers in these activities would result in significant cost savings, and hence contribute to reduction of subsidies in this sector. In addition, it would be desirable if agricultural support services such as credit, research and extension were to be more directly targeted to the small-scale holders in order to raise the productivity and hence incomes of this group. Lastly, the development of the country's agricultural exports would require removal of the remaining restrictions on them. The Bank would address these and other outstanding issues in the agricultural sector such as land tenure in a forthcoming agricultural sector review. 14. As regards industry, the adjustment measures already taken by Zambian authorities should considerably improve allocation of resources in the sector while reducing the import dependence and intensity of production. However, the key to improved industrial performance was increased competition through private participation and investment in the sector, he stressed. This required the creation of an enabling environment in which private entrepreneurs would be able to go about their business with minimal controls and regulations from the Government. Identifying and pursuing such actions should be at the top of the policy agenda in this sector. 15. Mr. Gebhart further noted that at the core of the issue of improved industrial performance in Zambia was the whole question of the role and performance of the parastatal sector. In recognition of this role, the Government of Zambia had initiated a review of the parastatal sector which would simultaneously focus on the relationship between ZIMCO and its subsidiaries as well as in-depth reviews of financial and economic viability of selected poorly performing subsidiaries. The Bank would assist the Government of Zambia in this exercise. In the mining sector,

- 5 - the uncertain prospects both with regard to copper prices and mineral reserves, demanded that measures for cost controls and the orderly phase down of the sector, which were currently being implemented by the ZCCM and the Government, be sustained. He noted that Zambia's deteriorated transport sector was exacting a heavy cost on the economy. Neglect of maintenance and lack of spare parts had led to inefficient and costly transport services, and it was important to restore balance in the transport systems in order to permit more efficient economic activities. In this regard, priorities for investment and expenditure in the sector within the Public Investment Program (PIP) would be directed at rehabilitation and maintenance activities, provision of spare parts, acquisition of a limited number of locomotives as well as other transport vehicles. Improvements in planning and financial controls, as well as training of technical personnel, would also be required in order to remove the inefficiencies in the sector. 16. With regard to public expenditures, the Government had initiated reforms under the 1990 budget. Of particular importance was the decision by the Government to increase significantly the allocations for recurrent departmental charges for the social sectors, particularly education and health. It was the intention of the Government, Mr. Gebhart noted, to maintain these increases in subsequent budgetary allocations. The PIP for 1990-1993, which was a first "cut" at expenditure restructuring along the lines of the criteria set out in the 1987 Public Expenditure Review, constituted the first step in the Government's ongoing exercise in expenditure restructuring. While this exercise would be broadened and deepened in the following years, it was the expectation of the Government that investment activities would reflect the priorities outlined in the PIP. Statement of the IMF Delegation 17. In her statement, the IMF representative, Ms. Burke Dillon, noted that Zambia had made significant progress in its adjustment program since the last informal meeting of donors on Zambia almost nine months ago. Not only had the Government persevered with the adjustment strategy set out in the PFP, but in many ways the Government had taken stronger actions up front and set itself more ambitious targets for the 1990 program. In particular, the authorities had moved more rapidly on reduction of subsidies, adjustment of the exchange rate, and trade liberalization. They had also set more ambitious targets for inflation, the budget deficit, and interest rates, while work on designing the parastatal and tariff reforms had commenced. As a result of an active monetary policy, she noted, the rate of growth of money supply had been reduced from 75 percent through June 1989, to 60 percent through December 1989 and down to 49 percent by February 1990. Because of this progress, the Government had now set itself the goal of 40 percent for the rate of inflation in 1990 compared to the PFP target of 55 percent. But although the budget deficit was reduced significantly in 1989 compared to 1988, fiscal performance remained somewhat weak and would require careful management. Two recent developments in the real economy gave cause for concern. Firstly, as a result of continuing problems in the transport sector, the volume of copper

- 6 - shipments was running significantly below program level; and secondly, owing to the erratic rains in the 1990 crop season, the maize output was likely to be sharply down compared to 1989. 18. The most important development in policy reform in Zambia since the informal meeting of donors in July last year was, she noted, the introduction by the Zambian authorities of a dual exchange rate system, with a second window exchange rate designed to provide a strong incentive to non-traditional exporters and to encourage more efficient use of foreign exchange for imports, including donor funds. In opening the second window, the Bank of Zambia had been rightly cautious in establishing a limited initial list of items under the Open General License (OGL) scheme; however, the intent was to move fairly rapidly to a more general OGL system and in this regard, the authorities had recently added more goods to the OGL list. Fund and Bank staff attached importance to the mobilization of donor support for second window operations; but this would require streamlining of donor procurement and disbursement procedures. Regarding the official exchange rate in window one, the authorities were moving that rate in a manner consistent with convergence of the two rates in advance of the mid- 1992 target date envisaged in the PFP. Taking all these into account, the Board of the Fund considered that except for the absence of adequate financing on appropriate terms, Zambia's policies and objectives under the 1990 annual program met the standards of upper tranche arrangements and Fund-monitored programs. The Zambian adjustment effort was now entering a new and challenging phase, calling for determined and closely monitored implementation. 19. On the question of arrears to the Fund, Ms. Dillon noted that the "accumulation of rights" approach had been generally endorsed by the Fund's board, but the modalities remained to be determined, she stressed. Although there was broad agreement on the need for a Support Group, it was expected that the Consultative Group would serve as the main vehicle for mobilizing external assistance for Zambia. Pending the formation of a Support Group, a Working Party of Fund Directors had met on several occasions to discuss Zambia's financing requirements which were estimated at about $700 million for 1990. In conclusion, she noted that Zambia's ambitious adjustment program deserved the timely and adequate support of the international community. Discussion of Zambia's Adjustment Program 20. In discussing Zambia's ongoing economic reform program, all delegations commended the Government of Zambia on the difficult decisions it had taken so far to restore macroeconomic balance. The participants noted that while it was important to sustain the stabilization gains, it was necessary to take a longer-term perspective and begin to lay the basis for the more difficult task of restructuring and diversifying the economy. The participants stressed that the present reform program needed to be sustained over a long period for the reforms to bear the necessary fruits in the form of restored economic growth. While broadly welcoming the content and direction of the Government's reform program, the participants were unanimous in their view that the present adjustment program, if fully implemented, and appropriately backed with sufficient financial resources,

constituted a fair chance, perhaps the last chance, for Zambia to embark on long-term self-sustaining growth. For it to succeed, however, it required a fundamental policy reorientation on the part of the Zambian authorities. 21. In particular, all delegates were concerned about four aspects of the program, namely: (a) the role of parastatals and, as a corollary, the need for a more effective role by the private sector in the economic life of the country; (b) diversification and restructuring the economy; (c) the size and structure of the public investment program, and (d) measures to strengthen the Government's program implementation capacity. (a) Role of Parastatal and the Private Sector 22. Participants expressed the view that in order to bring about the required structural transformation of the Zambian economy, it was essential to curtail and reduce the role and size of the present parastatal sector in Zambia. The parastatal sector continued to be a drain on the country's scarce resources, both financial and human. A smaller and more efficient public sector would be cheaper to sustain, and could contribute more effectively through higher productivity and domestic resource mobilization. There was a need, therefore, to take a critical look at the economic and financial viability of public enterprises with a view to closing down poorly performing entities. Such a review of the parastatal sector should also provide scope for privatization initiatives in Zambia. Moreover, it was essential to follow up price decontrol measures with actions to liberalize marketing and distribution systems in order to enhance efficiency and competition in the productive sectors. It was clear, most participants observed, that if the Government's diversification efforts were to succeed, the private sector, both domestic and foreign, would have to play a greater role in the Zambian economy. To effect this change, the Government needed to change its attitudes towards the private sector, particularly the small scale and the informal sectors. Actions to create an enabling environment and to enhance incentives for investment would be required, they stressed. 23. Several delegations also expressed the view that the role of the Zambia Consolidated Copper Mines (ZCCM), the largest parastatal and economic entity in the country, needed to be reviewed in the light of Zambia's short and medium-term growth prospects. In particular, ZCCM's use of foreign exchange, and its contribution to the budget needed to be reviewed. Similarly, there was need for a critical review of its operation of non-copper and non-mining subsidiaries and activities. But above all, ZCCM would have to share in the burden of adjustment by intensifying its cost-cutting and phasing down plans, in order to prepare itself for the leaner years ahead when the economics of copper production would be radically altered by the prospective decline in ores and structural decay of the industry. 24. In reacting to these concerns, Hon. Chigaga assured the participants that the Government of Zambia had already taken decisions to resume the review of parastatals which had been initiated under a World Bank project in 1986. It was the intention of the Government to extend this review to the portfolio of Zambia Industrial and Mining Corporation

- 8 - (ZIMCO) including ZCCM, and in this regard, terms of reference for such a study had already been agreed with the Bank. In addition, the actions which the Government had taken on price decontrol and other macroeconomic measures -- the adjustment of the exchange rate, interest rates and the removal of subsidies, and the proposed tariff review, should considerably enhance competitiveness in the sector. Moreover, he added, the Government had abolished duty exemptions for parastatals and had taken actions to limit their financial dependence on the budget. 25. With regard to the particular issue of the role of the private sector, the Minister reiterated the Government's policy of attracting foreign investors through joint ventures. Indeed, the Government was in the process of reviewing the Investment Code to make it more attractive to investors, both local and foreign. The Government intended to establish a one-stop window to facilitate more rapid approvals of investment proposals and was considering establishing a Tax Free Manufacturing Zone. The actions to adjust the exchange rate, raise interest rates, as well as more rapid approval of investments should also enhance the incentives to the private sector. The Government was also concerned, he added, to enhance the incentives to local small-scale enterprises, and to this end, it had established a Credit Guarantee Scheme at the Bank of Zambia. However, more still remained to be done to create an enabling environment for the informal sector and, in this regard, the Government was seeking assistance from donors to finance a project targeted at this particular sector. Finally, a representative of the Government of Zambia stressed that ZCCM was carrying out its own review of its subsidiary activities, and would, in the meantime, embark on the recommended cost-cutting and phase-down plan to assure the long-term viability of the company. (b) Diversification of the Economy 26. The economic prospects of Zambia are overshadowed by the prospective medium and long term decline of the copper industry. It was imperative, therefore, that actions to diversify and restructure the economy were taken on a timely basis. However, while welcoming the Government's diversification strategy, several participants thought that its present strategy relied excessively, and perhaps unrealistically, on the growth of non-traditional exports. The restructuring of an economy was a slow process, and the supply response was likely to be slow in Zambia where there were still many impediments to agricultural productivity. Efforts at restructuring the economy should, therefore, focus on reducing the import dependence and intensity in production in Zambia by encouraging import substitution activities as well. Moreover, such a strategy would reinforce the Government's efforts at promoting private sector investments and the development of the informal sector. It was essential, therefore, to remove the remaining constraints to informal activities in addition to streamlining and liberalizing export activities. 27. In response to these concerns, Hon. Chigaga concurred with the sentiments of the participants and assured the delegates that export licensing activities will be further liberalized, while regulations governing establishment of local enterprises will also be reviewed and simplified.

- 9 - (c) The Public Investment Program (PIP) 28. Participants generally welcomed the Government's PIP, but expressed concern on the following aspects: (a) its size relative to available resources; (b) the balance between capital and recurrent expenditures; (c the balance between public and private sector activities; (d) priorities within the sectoral programs, particularly the emphasis on rehabilitation of ongoing activities versus new projects; and (e) the capacity of the Government of Zambia to implement the program effectively. Several participants felt that at K 49,442.5 million the program was perhaps too large compared to the resources that were likely to be available to Zambia. Moreover, with a total foreign exchange requirement of $1,309.9 million (65 percent of the total cost of the program), the program had an excessively high foreign exchange content. In addition, the PIP did not indicate the recurrent expenditure requirements for the investment program. It was important, participants felt, to indicate the corresponding recurrent resource requirements necessary to sustain the various projects in the PIP. In addition, the balance between public and private sector investment activities showed that the parastatals would remain the dominant investment vehicle in Zambia, in contrast to the perceived need of restructuring the economy by promoting more private sector activity. A better balance between private and public investment shares in the PIP was necessary in order to reduce the crowding out effect of the PIP on economic activity in the country. While many participants welcomed the special emphasis on the social action program contained in the PIP, several donors noted that the share of investment allocated to the social sectors (i.e. education and health), remained inadequate. The focus of the PIP on rehabilitation of existing projects was also likely to perpetuate unviable or inappropriate activities and outmoded investment patterns. The need to restructure the economy called for new investments to reflect present needs and growth prospects. Moreover, there was need to move away from large to small-scale investments in order to reduce the import content of the PIP, while encouraging the informal sector. The comprehensiveness and ambitious scope of the PIP would also, in the view of the participants, sorely test the implementation capacity of the Government of Zambia. 29. With regard to the questions raised on the PIP, Mr. Gebhart of the World Bank said that the PIP had been based on a careful review of the resources likely to be available to Zambia and the estimated cost of the program up to 1993 was consistent with the financing assumptions presented to the group. Moreover, the balance between the public and private sector would be progressively enhanced. The PIP was also flexible enough to accommodate changes in priorities to enable the Government and donors to respond to new investment demands. In preparing the PIP, the Government had also sought to eliminate or down-play several ongoing projects such as Area Development Programs in the Ministry of Agriculture, which had been identified as of lower priority or as no longer viable. However, in carrying out this exercise, it would be necessary to proceed carefully and review the implications of abandoning various projects on the viability of other related and ongoing government activities, as such decisions to cancel projects would in many cases also involve changes in financing arrangements which would have to be renegotiated with donors. However,

- 10 - such review would not preclude new investment projects, and there was still scope in the PIP for the inclusion of new projects consistent with the broad recovery strategy. Finally, it should be noted that the PIP was not a full blown public expenditure review exercise. Rather, the PIP was a first attempt at review of government expenditures, based largely on the recommendations of the last World Bank Public Expenditure Review of 1987. The process of preparing and updating the PIP was, moreover, an iterative one, and the present PIP constituted the first phase of identifying the critical elements of public investments in pursuit of the adjustment strategy. It was expected that the Government would systematically review the recurrent expenditure implications of the PIP in the process of preparing the annual expenditure and investment program of the Government budget. These views were endorsed by the representative of the Government of Zambia, who assured the participants that the PIP would be reviewed annually in order to reflect performance and experience in program implementation. Program Implementation (a) Statement by the Government of Zambia on Technical Assistance 30. The implementation capacity of the Government had been a source of concern to both the Government itself and the donors. It was important that actions were taken to strengthen the capacity of the Government to implement the reform measures and to manage the adjustment process effectively. This was all the more important in view of the complexity and comprehensiveness of the current reform effort. The Government of Zambia outlined the measures that it had taken or intended to take to strengthen program implementation capacity. So far, a National Economic Monitoring and Implementation Committee to monitor the implementation of the adjustment program had been established. However, this committee required the back-up of additional experts in the core areas of economic management. These were: (a) two experts on statistics and national accounts; (b) Macroeconomic Management Advisor; (c) Planning and Budgeting Advisor; (d) External Aid Coordination Advisor; and (e) Debt Management Specialist. The specific terms of reference for each of these experts were outlined in Chapter 9 of the PIP. The estimated cost of technical assistance for a period of three years would range from $1.8 million to $2.7 million. The experts would work closely and provide advice to selected Zambian key personnel as well as undertake training activities, and he hoped that donors would respond favorably to the Government's plea for assistance in financing and providing the required experts. 31. With regard to the particular problem of ensuring the effective implementation of the PIP, participants stressed the need for effective donor coordination. It was especially important that donors reviewed their own ongoing activities to ensure that these were consistent with the Government's priorities as reflected in the PIP. Besides the provision of technical assistance for program implementation, there was need to undertake special programs for human resource development, in order to internalize the reform process and thus ensure sustainability of the program. Actions to counter the increasing brain drain from Zambia were

- 11 - also important in this regard. Actions along these lines would also positively contribute to the capacity of the Government to implement the Social Action Program. (b) Statement by the Government of Zambia on the Social Action ProRram 32. As stressed in the Minister's opening remarks, Zambia placed a great deal of importance on ensuring that the socially vulnerable groups participated in and benefited from the adjustment process. The capacity of the Government to maintain adequate levels of expenditures on social services had been reduced as a result of economic decline in the last 15 years. Consequently, social indicators for health, education and nutrition had deteriorated; and it was imperative that these trends were reversed in order to alleviate the burden of adjustment on the already marginalized social groups such as the unemployed youth, women and children. The Government had therefore prepared a Social Action Program as an integral part of its adjustment strategy whose main focus would be the reduction of poverty through employment creation and income generating activities. The elements of the program were outlined more comprehensively in the Government's document on the Social Action Program which had been distributed to the meeting. A series of projects in health, nutrition, education, water and sanitation, women in development, small-scale enterprise development, etc., amounting to a total cost of $314.5 million for the period 1990-1993 had been identified; and the Government hoped that donors would express their support to this program by funding various elements of this program. (c) Statement by the Bank on the Government's Social Action Program 33. Mr. David de Ferranti of the World Bank noted that the Social Action Program was a timely and important initiative, essential for helping to protect the vulnerable groups during the transition to economic recovery. The program, which was both action oriented and multisectoral in its scope, had been fully incorporated and well integrated into the recovery strategy. The proposed projects in health, education, water, sanitation, agriculture, roads, market places, etc were all contained in the PIP. There was a strong focus on helping people to help themselves through meaningful public work programs. By improving the infrastructure and economic environment of the poor, the program would respond to the needs of the growing numbers of unemployed youths and women. The strategy of the Social Action Program of working through and strengthening existing institutions would further strengthen planning and project implementation capacity. The crucial issue now, he observed, was the need to assure effective implementation of the program. This would require creating an effective partnership between the Government and donors, and among the donors themselves. Five considerations would be especially important in this regard. First, it would be important to initiate quick administrative action to start the process of implementation. Second, the necessary institutional arrangements should be spelt out carefully and in detail. Third, the necessary legal and regulatory policy changes required to support the program should be enacted at once in order to create an appropriate enabling environment. Fourth, there should be sufficient flexibility to allow reallocation of resources or changes in investment

- 12 - priorities to reflect the experience of project performance. And lastly, the necessary funding for the various activities would need to be disbursed quickly in order to reach the targeted beneficiaries on a timely basis. All these activities would call for continued close collaboration and consultation between the Government and donors in the coming months. Discussion of the Social Action Program 34. A special session of the Group'z meeting was devoted to the examination of the Government's Social Action Program. As had been indicated in the plenary session on the issue, donors generally welcomed the initiative. There was also a widespread view that a lot more work by the Government was needed to specify the details, identify next steps, and assure effective implementation. Many speakers, concerned about this aspect, stressed the need for the Government to take strong and swift action. Particular areas of interest included: (a) institutional arrangements for program implementation: (b) financing mechanisms; (c) project content of the program; (d) administrative and legislative requirements for facilitating implementation; and (e) baseline studies to delineate more accurately the problem of vulnerable groups in Zambia. 35. With regard to implementation mechanisms, the Government of Zambia stated that the main vehicle for implementation would be the relevant sectoral ministries. Since the program was a major component of the PIP, the projects within the social sector reflected the same sectoral priorities as the ministries concerned. Moreover, there was a need to avoid creation of additional or new implementing agencies which would overextend the capacity of the Government to implement the program. To the extent that the Social Action Program complemented ongoing government activities, there would be a need to strengthen the institutions involved. Local communities and the Non-Governmental Organizations (NGOs) would have a critical role to play in the implementation of the program. 36. With regard to the question of financing mechanisms, there was a need to clarify and streamline disbursement procedures in order to facilitate efficient and rapid funding of the program. Although there were established government procedures for dealing with aid programs, the Social Action Program posed a special challenge in that the scale of some of the operations was too small to be covered by bidding and procurement procedures. There was a need therefore, to urgently review these procedures, particularly in view of the fact that there were donor funds currently lying idle, which could be used to finance such activities once these uncertainties had been cleared. The Government of Zambia undertook to review such regulations to take advantage of the promised financing for the program. Government procurement procedures and systems for handling counterpart funds, would, in this regard, be reviewed to facilitate optimal implementation of the program, he said. 37. It was generally observed that the program needed to be refined further to identify priorities and eliminate possible duplication of projects, given the wide-ranging nature of the program. It was particularly important to review the costs of various programs to see what was feasible within the resource and managerial constraints of Zambia. The

- 13 - integration of the activities of the NGOs into the program was, in this regard, particularly important. Furthermore, effective donor coordination was essential to achieve these goals. 38. It was the view of the participants that the regulatory, administrative and legal framework governing the establishment and operation of informal sector income generating activities needed to be urgently reviewed in order to enhance the participation of Zambians in the activities of the program. The operative environment for many of these activities remained unresponsive to the needs of the urban and rural poor. Urgent action on this front would also reinforce the Government's own efforts of diversifying the economy by encouraging non-traditional exports and enhancing the role of the private sector in the economy. 39. Lastly, the participants recommended that in undertaking the Social Action Program, the Zambian authorities should as far as possible rely on local expertise and institutions. To this end, there was a need to conduct more baseline studies in order better to delineate the extent, structure and strategy for dealing with poverty issues. Various suggestions were made for enhancing incentives to skilled Zambian manpower, but the representative of the Government of Zambia assured the meeting that actions to review salaries in the public sector were underway. 40. The Government of Zambia undertook to call an urgent meeting with donors in Lusaka in a few weeks time to follow up on the very helpful suggestions made by the Group on implementation of the program. (d) Debt, Arrears and Financing Requirements Statement by the Government of Zambia 41. In presenting the Government's position on debt and arrears, Minister Chigaga noted that the magnitudes and dimension of Zambia's debt constituted a formidable challenge to both the Government of Zambia and the international community. At $7.2 billion, Zambia's stock of debt translated into a per capita indebtedness of $950, perhaps the highest in the world. The problem of Zambia's debt had placed the country into an economic impasse from which it could not escape without the support of the international community. The Minister therefore called for urgent actions to resolve this predicament. In a further supplementary statement on the debt issue, the Minister called for actions to de-link the process of resolution of non-multilateral debt and arrears from the ongoing efforts within the Fund and the Bank to find a solution to Zambia's huge arrears to those institutions. In this regard, he hoped that the Paris Club could be convened in the next two to three months to deal with the issue of bilateral debt. In any case, the Minister stressed, measures to relieve the debt burden should be taken urgently in order to forestall the prospects of disenchantment with the reform program. Statement by the World Bank 42. In his introductory remarks to the discussion on debt, arrears and financing requirements, Mr. George Gebhart outlined the structure and

- 14 - composition of Zambia's debt. Briefly, as of the end 1989, Zambia's total debt and arrears stood at about $7.2 billion, of which $3.8 billion was principal and interest arrears. Of the total debt outstanding, $2.5 billion, including arrears, were obligations to the multilateral institutions; while $2.7 billion was owed to the bilateral institutions; and $0.7 billion in private long-term debt and a further sum of $1.3 billion in private short-term debt. Of particular concern in relation to Zambia's financing requirements was the $1.3 billion still in arrears to multilateral institutions, particularly the $987 million owed to the Fund, and $217 million due to the Bank. The difficulties in clearing these arrears to the Fund and the Bank had precluded those institutions from playing a direct role in financing Zambia's adjustment program. As had emerged from the March Pre-Consultative Group meeting on this problem, it was difficult to envisage the donors providing the amount of $1.3 billion to clear arrears to those institutions, and absorbing rescheduling of bilateral debt, while at the same time providing additional financial support for imports and investment needs under Zambia's adjustment program. During the Pre-CG meeting, donors had urged the Bank and the Fund to find innovative ways and means to solve this problem. As the representative of the IMF had earlier indicated, specific proposals were under consideration in the Fund Board and it was hoped that a decision could be taken by the time of the May 7, 1990, meeting of the Interim Committee. 43. On the important question of Zambia's external financing needs, the tables that had been circulated to donors (see Attachment 2 to the full text of Mr. Gebhart's statement in Annex XII of this report) showed a financing requirement, after rescheduling, of $702 million for 1990 and $1,835 million in 1991, under the assumption that the arrears to the multilaterals would be cleared early in calendar 1991. The financing tables also assumed rescheduling of bilateral debt under Toronto terms and full service of Bank and Fund obligations. Depending on the outcome of the simultaneous versus sequential clearance decisions, it would be possible to prepare more definite tables on financing requirements. For the moment, the tables on financing requirements showed projections of inflows of $350 million in 1990, and $1,200 million in 1991. The inflows in 1990 would comprise contributions from donors in the form of both investment and quick disbursing SPA resources. The projections for 1991 inflows assumed a resumption of IDA and IMF activity following the clearance of arrears. The pattern of financing requirements also highlighted the fact that if ways and means could be found to finance the gaps in 1990 and 1991, the financing requirements in subsequent years would appear manageable. Much still remained to be done, but above all, he stressed, successful resolution of these problems would hinge critically on the satisfactory implementation of the reform program by Zambia. Discussion on Debt, Arrears, and Financing Requirements 44. In discussing Zambia's debt, arrears, and financing requirements, participants recognized that the situation of Zambia called for extraordinary measures over and above existing arrangements for debt relief and concessional assistance. The size and structure of Zambia's debt also called for concerted action by Zambia's creditors under the Paris and London Clubs. Donors welcomed the consideration of an "accumulation of

- 15 - rights" approach within the Fund and urged an early decision on the adoption and implementation of the rights approach and its application to Zambia. Related to this was the need to arrive at an early decision on the question of sequential versus simultaneous clearance of arrears to the Fund and the Bank. Support to Zambia's adjustment program required an early resumption of IDA and Fund activities in Zambia, but this could not be initiated before the resolution of these other matters. 45. With regard to the question of "accumulation of rights," the representative of the IMF reiterated that while this approach had generally been endorsed by the Fund, a formal decision on the mechanisms of its implementation was still awaited. In her opinion, matters still stood as indicated in Mr. Bornemann's statement to the Pre-CG (Annex XIII). On the suggestion of using balances from previous IDA credits to Zambia to clear part of the arrears to the Bank, the Chair observed that IDA resources could not be used for this purpose. However, once Bank arrears had been cleared, IDA would consider the suggestion made by several delegations to front load disbursements as feasible. Participants then made various indications of financing assistance to Zambia. A total of about $450 million in additional financial assistance, in the form of $200 million for investment support and $250 million in SPA quick-disbursing resources, was indicated at the meeting. Donors urged that in order to maximize the effectiveness of this assistance to Zambia, it would be necessary to streamline and harmonize procurement and disbursement procedures in advance of the expected flows of such resources. In this connection, participants welcomed the proposed joint Bank/donor procurement mission to Zambia. The draft terms of reference for the mission were circulated to, and endorsed by the Group. Finally, all participants underscored the fact that the pledges of assistance made were contingent upon Zambia maintaining the course and direction of policy reform as outlined in the documents to the Consultative Group. Moreover, the assistance was predicated upon early formulation of a viable financing plan, and the resolution of Bank and Fund arrears issue, as well as the appropriate Paris Club arrangements. (e) Other Business 46. The Group approved the text of the Press Release (Annex XVI) which was then issued by the Bank. (f) Closing Remarks by the Zambian Delegation 47. In his closing remarks on behalf of the Zambian delegation, Minister Chigaga thanked the Chairman for the businesslike manner in which he had conducted the meeting. The Minister also thanked all the delegations for the understanding they had shown of Zambia's difficult economic situation. The Minister thanked in particular those countries that had been able to make concrete indications of financial support to Zambia, and urged those who had been unable to do so to make further efforts in the near future. The Minister further took note of the fact that disbursements and flows of much of these funds would be conditional on the successful resolution of the question of arrears to the Fund and the Bank. In addition, the Minister urged donors to come up with solutions to the debt problem which were compatible with the present economic