Zambia
Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
15 Dec 1997
eISBN:
9781451841183
Language:
English
Keywords:
ISCR; CR; economic activity; capital expenditure; private sector; broad money; U.S. dollar; supply and demand; import parity price; parity price; foreign trade
Download PDF (2.7 MB)

This Selected Issues paper and Statistical Appendix examines the economic developments in Zambia during the 1990s. Economic activity recovered significantly in 1996. Real GDP expanded by almost 6½ percent, compared with a cumulative decline of 12½ percent in 1994–95. Good rains stimulated agricultural production, while the other nontraditional and mining sectors also contributed to the turnaround in economic activity. However, owing to a sharp deterioration in the terms of trade, largely on account of falling copper prices, real national income increased by only 2 percent.

Abstract

This Selected Issues paper and Statistical Appendix examines the economic developments in Zambia during the 1990s. Economic activity recovered significantly in 1996. Real GDP expanded by almost 6½ percent, compared with a cumulative decline of 12½ percent in 1994–95. Good rains stimulated agricultural production, while the other nontraditional and mining sectors also contributed to the turnaround in economic activity. However, owing to a sharp deterioration in the terms of trade, largely on account of falling copper prices, real national income increased by only 2 percent.

I. Recent Economic Developments2

A. Overview

1. Economic activity recovered significantly in 1996. Real GDP expanded by almost 6½ percent, compared with a cumulative decline of 12½ percent in 1994-95. Good rains stimulated agricultural production, while the other nontraditional and mining sectors also contributed to the turnaround in economic activity. However, owing to a sharp deterioration in the terms of trade, largely on account of falling copper prices, real national income increased by only 2 percent. Aided by the abundant food supply and the tightening of financial policies since mid-1996, consumer price inflation decelerated to 35 percent for the year ended December 1996 and further to 20 percent in August 1997. Notwithstanding wide swings in budget performance during 1996, the fiscal position improved, with a domestic fiscal surplus3 (on a cash basis) of more than 1 percent of GDP for the year as a whole, compared with virtual balance in 1995. Fiscal performance during the first half of 1997 continued its erratic pattern, with revenue shortfalls and expenditure overruns in the first quarter of the year and a significant recovery in tax collection during the second quarter. The balance of payments strengthened markedly in 1996, and the overall external deficit is estimated to have narrowed further during the first half of 1997. Following a sharp depreciation of the kwacha during the first four months of 1996, the improvement in the external position has resulted in relative stability of the exchange rate since then. During the last few years, Zambia has embarked upon a broad agenda of structural reforms, including privatization of state enterprises, trade liberalization, civil service reform, and financial sector restructuring. Particularly noteworthy has been the recent progress in trade liberalization and privatization.

B. Growth and Inflation

2. The favorable weather conditions during the 1995/96 (May/April) crop season resulted in a near-doubling of the marketed production of maize, Zambia’s main staple food; production of some other agricultural crops recorded growth rates of more than 100 percent, in particular sunflower seeds, seed cotton, and soybeans. The mining sector recorded 12 percent real growth, with production of copper and cobalt increasing by 2 percent and 70 percent, respectively. Wholesale and retail trade (13 percent) and restaurants and hotels (18 percent) were other strong growth sectors. The recovery in the manufacturing sector was modest, however, with total output rising by only 2½ percent after three consecutive years of decline, led principally by expansion in textiles, basic metals, chemicals, and plastics production.

Figure 1.
Figure 1.

Zambia: Selected Monetary Indicators, August 1995–June 1997

Citation: IMF Staff Country Reports 1997, 118; 10.5089/9781451841183.002.A001

Sources: Bank of Zambia; and Ministry of Finance.1/ As a share of total broad money.
Figure 2.
Figure 2.

Zambia: Selected Exchange Rate Indicators, January 1994–June 1997

Citation: IMF Staff Country Reports 1997, 118; 10.5089/9781451841183.002.A001

Source: IMF, Information Notice System; and Fund staff estimates.1/ Weighted by total trade. A rise in the index indicates a real appreciation of the kwacha.
Figure 3.
Figure 3.

Zambia: Selected Fiscal Indicators, 1990–96

Citation: IMF Staff Country Reports 1997, 118; 10.5089/9781451841183.002.A001

Sources: Zambia authorities; and Fund staff estimates.

3. Reflecting the increase in production, domestic demand grew by 1½ percent in real terms during 1996. The government’s efforts to regain control over the budget after serious fiscal slippages early in the year and in October 1996 resulted in a severe compression of real public consumption and domestically financed capital expenditure, which declined by 13 percent and 50 percent, respectively. The drop in domestically financed public investment was offset by a strong increase in foreign-financed capital expenditure, and private investment increased from 8 percent of GDP to 10 percent, mainly reflecting increased activity emanating from the privatization process (Table 1). The strengthening of the fiscal position resulted in a rise of 1½ percentage points in domestic savings, to the equivalent of 9 percent of GDP. With private consumption increasing by ½ percent of GDP, the contribution of the private sector to the mobilization of savings remained subdued.

Table 1.

Economic Activity and Inflation, 1994–96

article image
Sources: Data provided by the Zambian authorities; and staff estimates.

4. Reflecting expansionary financial policies and a 30 percent depreciation of the kwacha vis-à-vis the U.S. dollar during the first four months of 1996, inflation, as measured by the consumer price index (CPI), accelerated to 50 percent in June 1996 (12-month basis), up from 46 percent at end-1995, but declined steadily thereafter, to 20 percent for the year ended August 1997. The abundant food supply and the tightening of financial policy since mid-1996 has contributed importantly to the slowing of inflation. Nonfood prices exhibited the same downward trend as food prices, despite several increases in administered energy prices.4

C. Public Finances

Developments in 1996

5. The centerpiece of the stabilization effort in 1996 was the tightening of the fiscal stance, with the targeting of a domestic fiscal surplus (on a cash basis) of K 40 billion (1 percent of GDP), compared with a surplus of 0.3 percent of GDP in 1995. The fiscal position deteriorated significantly in the early part of the year, however, with sizable budget deficits in January and February, largely on account of increased domestic interest payments and serious problems of expenditure control. Budgetary control was regained in March through sharp reductions in purchases of goods and services (“recurrent departmental charges”) and capital expenditure, which limited the domestic fiscal deficit in the first quarter to K 7 billion.

Table 2.

Revenues and Expenditures, 1996/97

(In billions of kwacha)

article image
Source: Data provided by the Zambian authorities.

6. Additional measures were adopted in the second quarter, as it became apparent that the targeted fiscal surplus for the year as a whole was in jeopardy. New actions on revenue included the improved collection and remittance of fees and charges; the strengthening of customs duty collections through the use of cross-checking procedures with South African and Zimbabwean customs; the auditing of bonded warehouses; the improvement of the administration of the import declaration fee; and the inclusion in the value-added tax base of most food items. At the same time, the government identified a number of measures to limit the growth in expenditure. Most of the expenditure cuts came from a severe compression of domestically financed public investment, which was reduced by 30 percent from budgeted levels. Other expenditure measures included reduced travel allowances for foreign travel; the imposition of across-the-board expenditure cuts in recurrent departmental charges of 8 percent from budgeted levels; and reduced funding for civil service retrenchment, which was proceeding more slowly than envisaged. With the implementation of these measures in the second quarter, the fiscal position for the first half of 1996 improved to an overall fiscal surplus of K 35 billion (equivalent to 1.7 percent of GDP on an annualized basis), significantly higher than the budget target of K 20 billion.

7. The sharp drop in copper prices in May/June 1996 and the shortfall in bilateral donor assistance necessitated a further tightening of financial policies to close the financing gap. However, the budget position worsened in October, as the government spent about K 18 billion on unbudgeted court-ordered payments to the former owners of nationalized companies5 and K 13 billion on previously unrecorded domestic arrears. As a result, domestic fiscal deficits of K 30 billion and K 3 billion were recorded in October 1996 and November 1996, respectively. The government implemented strong corrective measures in December, which resulted in an increase in revenue of K 43 billion compared with the November outcome. Of this increase, K 27 billion was brought in through special revenue measures, including vehicle registration fees, collection of tax arrears, privatization receipts, and parastatal profit transfers. In addition, cuts in nonwage current and capital outlays resulted in a K 19 billion reduction in expenditure in December compared with the outcome in November. As a result of these measures, a domestic fiscal surplus on a cash basis of K 49 billion (1.2 percent of GDP) was achieved for the year as a whole.6

Developments in the first half of 1997

8. The main objectives of the 1997 budget, which was submitted to parliament on January 31, 1997, were to reduce inflation by generating a domestic fiscal surplus of K 62 billion (1.2 percent of GDP), and to reconfigure the expenditure profile toward high-priority sectors, including social expenditure and public investment in the road system. To achieve these objectives the government aimed to limit the increase in the government wage bill to 17 percent over the outcome for 1996.

9. During the first quarter of 1997, fiscal developments deteriorated sharply, with the domestic fiscal balance moving to a deficit of K 30 billion (equivalent to 2.2 percent of GDP on an annualized basis). Domestic revenue was K 29 billion lower than budgeted, reflecting the poor performance of income tax, a shortfall in international trade taxes, and the lower-than-expected nontax revenue, as the receipts from increased vehicle registration/driver’s license fees and state property rents were negligible. Domestic expenditure exceeded the budgeted amount by K 28 billion, primarily reflecting higher expenditures on interest payments and other current expenditures. Owing to a strong increase in revenues, coupled with a compression of capital expenditure and recurrent departmental charges, the overall fiscal position improved considerably in the second quarter, with the domestic fiscal balance moving to a surplus of K 41 billion. Total current domestic expenditure, however, exceeded the budget target by K 33 billion during the second quarter, owing mainly to an unbudgeted K 30,000 across-the-board increase in monthly civil service wages, which was made retroactive to January 1997 and came on top of the K 10,000 wage award granted earlier in the year. The wage increase would bring the wage bill to K 292 billion for 1997, representing a rise of 32 percent over the 1996 outcome. As a result, the share of wages in total domestic expenditure would increase to 33 percent (Figure 3). In addition to the deviations from the budget plan during the first half of the year, a number of new fiscal liabilities emerged, including previously unidentified domestic arrears (K 57 billion outstanding as of end-December 1996), obligations to the civil service pension fund, and unbudgeted awards and compensation payments.

D. Monetary Developments

10. Monetary developments in 1996 were characterized by strong credit growth to the nongovernment sector (40 percent), most of which occurred during the first half of the year. In response to the rapid monetary expansion, the Bank of Zambia (BoZ) raised the minimum cash reserve requirement,7 from 3 percent in July to 8 percent in December 1996, and the minimum core liquid assets ratio8 was raised in three steps, from 30 percent in July to 43.5 percent in December. As a result, private sector credit expansion slowed considerably and broad money virtually remained unchanged in the second half of the year. For the year as a whole, broad money rose by 34 percent, compared with 55 percent in 1995, broadly in line with the growth of nominal GDP. Owing to the uncertainties following the loose fiscal stance in early 1996 and the tightening of monetary policies in the second part of the year, the market-determined interest rate on 28-day treasury bills rose from 41 percent at end-1995 to 57 percent at end-1996 (annualized).

11. The Bank of Zambia broadly maintained its tight monetary policy stance during the first half of 1997. The higher minimum core liquid assets ratio9 provided limited room for credit expansion by commercial banks. Moreover, high lending rates and a cautious lending policy by banks resulted in subdued credit growth to the private sector during the first half of 1997. In contrast, the considerable government borrowing requirement prompted a strong expansion of net bank claims on the government, and total domestic credit grew by 14 percent, compared with 28 percent during the same period in 1996. The growth of net domestic assets during the first half of 1997 was partly offset by a deterioration in the net foreign assets position of the banking system, which limited broad money growth to 17 percent, compared with 29 percent in the first half of 1996.

Table 3.

Sources of Money Growth, 1996/97

article image
Source: Data provided by the Zambian authorities.

12. A more restrained issue policy of the BoZ in the treasury bill market, coupled with the need for commercial banks to increase their holdings of treasury bills to meet the core liquid assets requirement, led to a rapid decline of interest rates on treasury bills in 1997.10 Reflecting, inter alia, persistently high inflationary expectations, the downward trend in commercial bank rates was less pronounced than for treasury bills: the margin between the 28-day treasury bill rate and commercial banks’ rates on 30-day deposits swung from plus 10 percent in December 1996 to minus 16 percent in July 1997. As treasury bills constitute the bulk of assets held by banks to meet the minimum core liquid assets requirement, this de facto captive market may not properly reflect the underlying trend in market interest rates. In addition, the widening gap between commercial banks’ deposit rates and the treasury bill rate had a negative impact on the profitability of the banks and contributed to the high lending margins on private sector credits.

E. External Sector Developments

Balance of payments

13. Despite the growth in copper and cobalt production recorded in 1996, the value of metal exports (in U.S. dollars) was 23 percent lower than in the previous year, mainly because of the sharp drop in copper prices in the wake of the Sumitomo trading scandal.11 The copper parastatal’s (ZCCM) copper export price fell by 29 percent, compared with 1995, and export volumes declined by 4 percent to 327,473 tons in 1996. In contrast, cobalt export volumes expanded significantly in 1996, by more than 65 percent, which more than offset the 16 percent drop in the average export price. In contrast to the disappointing performance in the metals sector, nontraditional exports—including flowers, cotton, and gemstones—continued to show rapid growth in 1996. While imports by ZCCM were depressed by the company’s financial difficulties, and maize imports dropped as a result of the return of favorable agroclimatic conditions after the 1995 drought, the volume of other imports grew by about 20 percent; this, along with the deterioration in the terms of trade, pushed the trade balance into deficit for the first time since 1993.

14. The deficit in the services account is estimated to have narrowed significantly in 1996, largely reflecting rapid growth in tourism receipts. However, there was a sharp fall in official transfers to Zambia related to bilateral donors’ concerns over governance issues, which, coupled with the slump in metal exports, contributed to the widening of the current account deficit to an estimated US$221 million (6½ percent of GDP) in 1996, from US$148 million (4½ percent of GDP) in 1995. Excluding official transfers, the current account deficit narrowed marginally, to the equivalent of 13½ percent of GDP.

15. Foreign direct investment, partly related to the privatization of state-owned enterprises, is estimated to have increased by 45 percent to US$132 million, and short-term capital swung from a net outflow of US$70 million to a net inflow of a similar magnitude. Part of the net inflow of short-term capital in 1996 reflected the accumulation of external payments arrears by ZCCM, which increased to US$45 million at end-1996. The strong capital account allowed the BoZ to accumulate foreign exchange to offset the reserve loss suffered in early 1996 as a result of the central bank’s selling of foreign exchange in support of the kwacha. The level of international reserves at end-1996 amounted to US$211 million, equivalent to 1.7 months of imports.

External debt

16. Box 1 describes Zambia’s external debt situation. In February 1996, Zambia’s Paris Club creditors agreed to reschedule on concessional (“Naples”) terms Zambia’s outstanding arrears on pre-cutoff-date debt and debt service falling due on pre-cutoff-date debt during the period 1996-98, with the agreement entering into force in March 1997 after the completion of the midterm review under Zambia’s first annual ESAF arrangement. As of end-July 1997, Zambia had signed bilateral agreements with two of the nine participating creditors. Virtually no payments were made in 1996 by Zambia to its non-Paris Club official bilateral creditors.

Zambia’s External Debt Situation

Even by the standards of sub-Saharan Africa, Zambia’s external debt burden is exceptionally heavy. At the end of 1996 the stock of medium- and long-term public sector debt amounted to about US$7 billion, equivalent to 204 percent of GDP and 530 percent of exports of goods and services, respectively. The debt burden has been broadly stable over the past five years, with the public sector debt/GDP ratio remaining in the region of 200 percent and the debt exports ratio fluctuating around 500 percent. Reflecting the concessional nature of much of the debt, especially that owed to the multilateral institutions, the end-1996 net present value of Zambia’s external debt is estimated at about US$4.4 billion, or 131 percent of GDP.

At end-1996 just under half of public sector external debt was owed to multilateral institutions, principally the World Bank and the Fund. Most of the remainder (36 percent of the total) was accounted for by loans from Paris Club creditors, with claims of non-Paris Club official bilateral creditors (notably Russia) making up a further 12½ percent. In 1996 the only disbursements of medium- and long-term credit came from the World Bank; there has been virtually no new lending by official bilateral creditors in recent years, with bilateral assistance instead taking the form of grants and debt relief.

The bulk of Zambia’s commercial debt was eliminated in a 1994 IDA-supported buy-back, although a number of creditors (mostly holding very small claims) did not participate in that operation. The Zambian authorities estimate that the nominal value of these “dormant” claims, some of which were subsequently settled, is about US$85 million, or just over 1 percent of total external debt outstanding.

Scheduled debt service on Zambia’s public and publicly guaranteed external debt fell from an estimated US$590 million in 1995 to US$453 million in 1996, largely because 1995 was the final year of an amortization schedule for an earlier Paris Club rescheduling. Cash debt service fell by nearly US$100 million to an estimated US$279 million, with one major factor in the decline being the US$45 million reduction in payments to the Fund, as charges on the Fund’s general resources were replaced with interest due on Zambia’s concessional ESAF loan. As a result, Zambia’s debt service paid as a proportion of exports of goods and services fell from 27.3 percent in 1995 to 21.5 percent in 1996.

17. The past 18 months have also seen a number of developments with regard to disputed claims on Zambia. In May 1997, an agreement was reached between Zambia and Camdex International Limited, a company that had acquired a US$134 million claim on the Bank of Zambia originally owned by the central bank of Kuwait. The agreement provided for a two-thirds reduction in the net present value of Camdex’s claim, with repayment over eight years. During 1996, two smaller claims that had also been successfully litigated by creditors in the U.K. courts were likewise settled by agreements on partial payment of the nominal amounts due. As of end-August 1997, the most significant claim remaining in dispute was that being pursued in the U.K. courts by Ex-Printer International Bank NV, the holder of a US$19 million commercial bank claim acquired from a creditor that had not participated in the 1994 commercial debt buy-back.

Exchange system

18. There was one significant change in the exchange system in 1996, which was triggered by the Bank of Zambia’s dispute with Camdex. In April 1996 the requirement that ZCCM surrender a portion of its foreign exchange proceeds to the Bank of Zambia was ended, in order to prevent these amounts (which were transferred from ZCCM to the Bank of Zambia’s accounts in the United Kingdom) from being seized by Camdex.

F. Structural Reforms

19. Structural adjustment measures have focused on four principal areas: civil service reform, the privatization of state enterprises, bank restructuring, and the liberalization of the external trade regime.

Civil service reform

20. The Public Sector Reform Program (PSRP) was adopted in 1993 with a view to improving the quality of public services through, inter alia, the restructuring of ministries, civil service retrenchment, and the introduction of a performance-based management system with decompressed pay scales. In the context of the PSRP, new ministerial structures have been proposed for 20 ministries, of which 14 have been approved by the cabinet. Also, a partial hiring freeze has been implemented since July 1995, which has led to a reduction in non-military employment from a high of 125,000 at end-July 1995 to 121,006 at end-April 1997. The limited progress in the implementation of the PSRP has been caused, inter alia, by the prohibitive costs of civil service retrenchment under the current pension law. More recently, the authorities have been preparing a revised PSRP in cooperation with the World Bank.

Privatization

21. Since the restructuring of the Zambia Privatization Agency (ZPA) in 1995, the privatization process has accelerated rapidly. By the end of April 1997, of the 326 companies in various stages of privatization or liquidation, 204 companies were privatized or liquidated while negotiations on an additional 7 companies were completed or under way (Table 4). The government also took decisive action on the privatization of ZCCM in 1996. On the basis of a report issued in May 1996 by Rothschild, the U.K. investment bank, it was decided to break up the ZCCM conglomerate into 11 packages. Nine of these packages were offered by international tender, while two others, the Konkola Deep and Konkola North mining projects, were offered separately. The international bidding process for the publicly offered packages was closed on February 28, 1997. The status of negotiations on these packages at end-June 1997 is summarized in Table 5 below.

Table 4.

Status of Zambia’s Privatization Program as at end-April 1997

article image
Source: Zambia Privatization Agency progress reports.
Table 5.

Status of ZCCM Privatization as at end-June 1997

article image
Source: ZCCM, Privatization—Progress report as of June 30, 1997.

22. A consortium led by Anglo-American of South Africa, the 27.3 percent minority shareholder in ZCCM is conducting a feasibility study with regard to the development of the Konkola Deep Mining Project. Following the signing of the Memorandum of Understanding on February 11, 1997, negotiations on the development of Konkola North with Avmin Ltd., a subsidiary of Anglovaal of South Africa, were completed. The sale of ZCCM’s other assets, including nonmining subsidiaries such as the bulk transport fleet, began in September 1996.

Bank restructuring

23. The demise of Meridien Bank, African Commercial Bank, and Commerce Bank in 1995 prompted a considerable strengthening of prudential supervision of the banking system in 1996. Stricter foreign exchange regulations were gazetted in March 1996, followed by regulations on large loan exposure and insider lending in June 1996, and loss provisioning rules in August 1996. Minimum capital requirements of the BoZ were raised in June and September, and small banks are now subject to a minimum capital requirement of K 2 billion. Larger banks are required to have primary capital equivalent to 5 percent of risk-weighted assets and total capital equivalent to 10 percent of risk-weighted assets. The capacity of the central bank to conduct on-site inspections was strengthened through intensified training and an expansion of supervisory staff. The BoZ also made progress in modernizing its accounting and interbank payments systems, and introduced a book entry system for securities transactions.

24. Notwithstanding improved regulations and supervision, the situation of the commercial banking system has remained fragile. The drought in 1995, and unexpected losses on maize stocks in 1996, in conjunction with bad loan management, have left a large number of banks with a sizable portfolio of nonperforming loans, mainly to the agricultural sector. Moreover, several banks have not met the minimum capital requirements. Financial restructuring plans for some of these banks have been under preparation: they provide for the sale of nonperforming loans of two commercial banks; the write-off of government deposits; the cancellation of debt owed to the BoZ; and the sale of the remaining assets and liabilities to larger domestic banks.

II. Trade Liberalization13

A. Introduction

25. After gaining independence in 1964, Zambia embarked upon an interventionist, state-led development policy aimed at industrial import-substitution and agricultural self-sufficiency, supported by a highly protective exchange and trade regime. This policy was associated with the establishment of a large number of state-owned manufacturing industries and close involvement of the government in the marketing of agricultural products, subsidized rural credit, and the supply of fertilizer.

26. Since the early 1990s, the Zambian government has pursued an economic reform program aimed at reducing the role of the state in the economy and enhancing private sector growth through liberalization, deregulation, and privatization of state enterprises. This policy change reflected a recognition that reliance on administrative controls had driven much economic activity outside formal channels, depressed exports, and contributed to an inefficient structure of domestic production. A more open exchange and trade system was expected to help promote the growth of nontraditional exports, particularly in the agricultural sector, which was given special priority in view of the uncertain long-term prospects for the copper sector. The reforms—including liberalization in the agricultural sector, the elimination of exchange controls, and trade liberalization—have laid the basis for profound changes in the structure of the Zambian economy. While many older industries experienced slow growth and falling profitability as a result of increased pressures of international competition, new sectors benefited from the liberalization, as reflected in the strong growth of nontraditional exports since 1993.

27. As a result of the government’s trade liberalization program, Zambia now has one of the most liberal trade regimes in Africa, thereby setting a positive example for other countries in the region. This chapter gives an overview of the reforms of the exchange and trade regime in 1990—96, their effects on the domestic economy, and the agenda for further rationalization of the trade regime in the period ahead.

B. Overview of Recent Reforms

Trade reforms in 1990–95

28. At the end of the 1980s, Zambia’s trade and exchange system was characterized by a dual exchange rate system, import and export licensing requirements, and a surrender requirement for export proceeds. Goods could be imported under an open general license (OGL) system or an export retention scheme. Initially, eligibility under the OGL system was restricted to specific industrial inputs and spare parts. Import licenses were granted only after approval of a foreign exchange allocation by the Foreign Exchange Management Committee, and were subject to a licensing fee equivalent to 5 percent of the c.i.f. value of the imported products. Import tariffs ranged from zero to 100 percent, and most imports were also subject to a 15 percent sales tax after the application of a 25 percent uplift factor. A duty drawback system for nontraditional exports was in place, but because of its complexity it remained virtually unused. In addition, exports of 48 groups of products were subject to controls or prohibitions.

29. A major first step toward a more open trade system was made in 1990 with a considerable reduction in the average level and dispersion of tariffs. A minimum tariff rate of 15 percent was established for most products that had previously been subject to a zero rate, and the maximum tariff rate was reduced from 100 percent to 50 percent. In addition, the scope for discretionary import duty exemptions was limited. The dual exchange system was unified in 1991 through the elimination of the official exchange rate, which had been applicable to external transactions by ZCCM and imports of oil and fertilizer. Also, the coverage of the OGL system was expanded considerably to include import categories equivalent to about 90 percent of merchandise imports, while the list of controlled or prohibited exports was reduced from 48 to 4 groups of products.14 The import regime was further liberalized in 1992 with the inclusion of fertilizer in the list of products that could be imported under the OGL system and the reduction of the number of groups of products subject to import restrictions to 13.15 Also, effective taxation of imports was lowered through a reduction of the uplift factor applied to the sales tax on imports, from 25 percent to 20 percent. The licensing requirement for OGL imports was eliminated in 1993, and the dispersion of tariffs was further reduced by raising the minimum rate to 20 percent while lowering the maximum rate from 50 percent to 40 percent. Most of the remaining restrictions on current international transactions were eliminated in 1994, and restrictions on imports were limited to a few products for health or security reasons. The following year witnessed some reversal of trade liberalization with the introduction, for fiscal reasons, of an across-the-board 5 percent Import Declaration Fee (IDF) on imports. The effects of the IDF were, however, mitigated by the elimination of the 20 percent uplift factor applied to the sales tax in the same year.16

Trade reforms in 1996

30. Despite progress made in exchange and trade reforms during the first half of the 1990s, the trade regime continued to suffer from a number of anomalies and inefficiencies which urgently needed to be addressed. In particular, the competitiveness of exporters of nontraditional products and import-competing producers was undermined by relatively high tariffs (20 or 30 percent) on intermediate products and investment goods (machinery and equipment). Domestic producers were often faced with negative effective protection as many finished products, which were in general subject to the maximum rate of 40 percent, effectively entered the country at zero rates under an exemption or through smuggling. Also, the large number of exemptions reduced the transparency of the system, undermined the tax base, and created ample opportunities for fraud. For these reasons, the government decided to abolish, as of January 1996, exemptions for government imports, while exemptions on the basis of the Investment Code were limited to those granted in the context of existing covenants. At the same time, the average level of tariffs was brought down considerably through a 15 percentage point cut in tariffs on most products, while the tax base was further broadened through the elimination of the remaining import restrictions and prohibitions, with the exception of some restrictions for environmental, health, and security reasons.

31. The effects of the latest tariff reform on average most-favored nation (MFN) tariffs and tariff escalation are shown in Table 6. The simple average of MFN import tariffs, including the IDF, was brought down from 27 percent in 1994 to 19 percent in 1996; the trade-weighted average was equivalent to 16 percent in 1996.17 Also, the dispersion of tariffs was narrowed considerably, with the difference between the statutory average tariff on raw materials and final goods reduced from 16 percentage points in 1994 to 12 percentage points in 1996. In the process, the high levels of trade taxes on imports of investment goods and intermediary products were reduced to some 15 percent in 1996.

Table 6.

Zambia: Most-Favored Nation (MFN) Trade Taxes, 1994 and 1996

article image
Source: Zambian authorities; and staff calculations.

In 1994, there was also a 20 percent import sales tax uplift which increased the effective import tax by 4 percentage points for products subject to the sales tax. The uplift was eliminated in 1995.

Temporary Import Declaration Fee.

Simple average MFN tariff, including the sales tax uplift (1994) and Import Declaration Fee (1996).

Including the revenue effects of the sales tax uplift (1994).

Regional trade liberalization

32. Zambia also participates in ongoing efforts to promote regional trade liberalization, including the liberalization programs of the Common Market for Eastern and Southern Africa (COMES A),18 which was established in December 1994, and the Cross Border Initiative (CBI) for southern and eastern African countries, a regional integration initiative supported by the Fund, the World Bank, the European Union, and the African Development Bank. The member states of COMES A have agreed on the phased introduction of an intraregional free trade area by the year 2000, and a customs union by 2004. In line with its commitments to COMES A, Zambia currently applies a preferential rate of 60 percent of the MFN rate on imports from other member states. The countries participating in the CBI19 are aiming, inter alia, for the establishment by October 1998 of a free trade area, a harmonized external tariff with no more than three nonzero rates, a maximum rate of 20-25 percent (including all import taxes), a difference between the lowest and the highest rate of no more than 20 percentage points, and a weighted average rate of 15 percent.

Effects on tax revenue

33. As a result of the tariff reductions and the successful introduction of a value-added tax (VAT) in 1995, Zambia’s dependence on trade taxes as a source of revenue has fallen significantly. The share of trade taxes (including the 3 percent extraction royalty on exports of copper and cobalt) in total government revenue declined from 19.1 percent in 1994 to 16.4 percent in 1996. During the same period, the collection rate (the share of import tax revenue in total imports) declined only slightly, from 11.3 percent in 1994 to 9.6 percent in 1996, reflecting an increased efficiency of the customs administration and the effect of the reduction of exemptions. The tax reforms of the past few years have contributed to the integration of the Zambian economy in the world economy without substantially undermining the revenue effort.

C. The Effects of Trade Liberalization on Agriculture and Industry

34. The liberalization policy in recent years has pushed the Zambian economy into a transformation process that has contributed to a fall in capacity utilization and increasing uncertainties in some sectors, while opening the road to strong growth in others. As a result of increased pressures from foreign competition and generally weak domestic demand conditions, many manufacturing industries—especially those that were slow to adjust—have been experiencing sluggish demand and falling profitability. A recent survey20 of the industrial sector indicates that in early 1997, some 70 percent of reviewed enterprises in the manufacturing industry utilized less than 60 percent of their productive capacity, with the weakest firms in the metal sector, plastics and rubber, chemical and pharmaceutical products, paper and printing, textiles, and electrical goods. The picture of generally sluggish performance in the manufacturing industry is confirmed by the available production statistics, which show an average real decline in output of about 3 percent a year since 1990. At the same time, however, deregulation and trade liberalization have created favorable growth opportunities for a large number of enterprises in the last four years. Growth of production was particularly strong in the floricultural and horticultural sector, the sugar industry, and grain milling (including feed stock production). Most of the enterprises in these sectors, which are often foreign owned, were established after 1993 or successfully restructured after privatization.

35. The economic transformation has become most visible in the commodity structure of exports, which has changed considerably since 1993 (Table 7). In 1992, metal exports—mainly copper and cobalt—constituted some 90 percent of total exports. However, reflecting generally weak copper prices and falling productivity of the state-owned mining company ZCCM, the total value of metal exports steadily declined in the following years, from some US$1 billion in 1992 to only US$755 million in 1996. During the same period, the U.S. dollar value of nontraditional exports more than doubled, reducing Zambia’s dependence on copper and cobalt as sources of foreign exchange. The strongest growth, albeit from a low base, was recorded in floricultural and horticultural products, primary agricultural products (tobacco, coffee, cotton lint, soybeans, and maize), processed foods (mainly sugar), engineering products (copper rods and cables, copper alloys, brass ingots, and bicycles), and textiles (mainly cotton yarn). There are indications that the official statistics, which are based on customs data, underestimate the actual value of nontraditional exports (most notably gemstones) by a wide margin.

Table 7.

Zambia: Composition of Recorded Exports, 1992-1996 1/

article image
Source: Bank of Zambia.

Non-metal exports reported in Appendix Tables 20-21 include estimates of unrecorded exports.

D. Further Reforms in 1998

36. Zambia’s commitments under the CBI will require a further reduction of the maximum import taxation from 30 percent (including the IDF) to 20 percent or 25 percent by October 1998, with the difference between the lowest and the highest rate not exceeding 20 percentage points. In addition, import taxes on raw materials and investment goods, currently some 12–15 percent, need to be reduced substantially to improve the competitive position of exporters and import-competing domestic industries. These objectives can be achieved by unifying the import tax regime into one tariff schedule by eliminating the 5 percent IDF by January 1, 1998, as planned,21 and transforming the existing tariff schedule into a system with a tariff of 5 percent on raw materials and investment goods, 15 percent on intermediate products, and 25 percent on consumer goods. Such a measure would be sufficient to bring the trade-weighted average rate of import taxation below 15 percent, in line with the objectives of the CBI.

37. A further strengthening of customs administration and fraud prevention, including intensified cooperation with customs officials of neighboring countries, will minimize the potential fiscal revenue loss of tariff reductions. Although exemptions were reduced substantially in early 1996, the value of exempted imports still constitutes some 25 percent of total imports. This number could be brought down considerably by a further reduction in exemptions; a close review of the implementation of exemptions based on international treaties; a reduction of the number of bonded warehouses in the country; and firm resistance against pressures for new duty exemptions.

III. Liberalization of Agricultural Policies22

A. Introduction

38. An important element of Zambia’s structural adjustment efforts since the beginning of the 1990s has been the reduction of the role of the state in agriculture. Before the implementation of agricultural reforms, the state had direct control over rural credit and procurement, pricing, and marketing of major commodities, which was supported by restrictions on exports and imports of agricultural products. In addition, state-owned firms played an important role in farming and food processing. As a result of these policies, relative prices of agricultural commodities and food products were highly distorted, productivity remained low, and one of the key objectives of state intervention—lasting food self-sufficiency—was not achieved. The liberalization of agricultural policies since 1990, coupled with trade liberalization and privatization, has contributed importantly to the transformation of the Zambian economy since the early 1990s, as reflected in strong growth of private sector activity.

39. This chapter gives an overview of the objectives and main elements of agricultural policies in Zambia before 1990 and the implementation of the liberalization program since the early 1990s. Because of the detrimental effects of severe droughts in 1992, 1994, and 1995, it is still too early to give a full assessment of the effects of the liberalization program on productivity and the production structure. Nevertheless, it is possible to draw some preliminary conclusions with regard to private sector activity in the agricultural sector. Finally, this chapter discusses further steps needed to improve the growth prospects in the agricultural sector.

B. The Role of Agriculture in the Zambian Economy

40. Zambia is endowed with abundant arable land resources (Table 8). In 1995, available arable land per capita amounted to some 4 hectares, which is high in comparison with other African countries. However, less than one fourth of all land available for cultivation was actually cultivated, and the share of agricultural production in GDP has hovered around 20 percent in recent years. Only one half of total production of food crops—mainly maize, millet, wheat, and rice—is marketed, with the remainder being used for subsistence purposes and seed stocks. Although the share of the Zambian population living in the rural areas steadily declined from some 80 percent in the early 1960s to less than 60 percent in the mid–1990s, its dependence on agricultural activity as a source of income and daily nutrition remained high: the share of the agricultural labor force in the total labor force declined by only about 5 percentage points during this period, to an estimated 75 percent. The sector is still the largest source of formal employment, after public administration.

Table 8.

Zambia: Changes in the Pattern of Land Use, 1961-94

article image
Sources: Food and Agriculture Organization, World Bank.

C. Agricultural Policy Before 1990

41. In line with a general policy aimed at strengthening government control over the economy, direct interventions of the state in the agricultural sector were dramatically expanded in the early 1970s. The main objectives of increased government involvement were threefold: (i) to achieve lasting self-sufficiency in food crops, to be able to feed a rapidly growing population and reduce or eliminate dependence on imports; (ii) to keep food prices low and stable for urban consumers; and (iii) to support equitable regional development. At the end of the 1980s, the government had the following instruments in place to achieve these objectives.

Fixed producer prices

The government and parastatal institutions purchased the major agricultural commodities, including maize, groundnuts, sunflower seeds, soybeans, cotton, wheat, rice, and tobacco, at fixed producer prices. The prices were set at the beginning of the crop season, in general at levels well below world market prices (for maize prices, see Figure 4). With a view to promoting equitable regional development, producers in various parts of the country received the same price for their output, despite large differences in transportation costs and availability of agricultural support facilities.

Figure 4.
Figure 4.

Domestic Producer Prices and Import Parity Prices of Maize in Zambia, 1971-1997 1/

Citation: IMF Staff Country Reports 1997, 118; 10.5089/9781451841183.002.A001

1/ The import parity price is the c.i.f. price at the nearest port plus transportation and other costs, and a profit margin. Both the import parity price and the domestic producer price are computed for Lusaka.

Transportation and storage subsidies

Regional procurement centers and storage facilities were owned by the state. Transportation costs from the farm gate to the procurement centers were borne by the producers. All the remaining costs of transportation, processing, handling, and storage were borne by the government.

Consumer price subsidization

Processed agricultural products were sold to consumers at retail prices well below world market prices.

Subsidies on agricultural inputs and credits

Government agencies supplied inputs (fertilizer, maize seed) at subsidized prices to producers all over the country. In addition, the government provided loans to farmers at subsidized interest rates; the bulk of these loans became nonperforming and were eventually written off.

42. As some of the key objectives of agricultural policies—in particular, food self-sufficiency and low food prices—were hard to reconcile, and the instruments ill-conceived, the overall net effect of the agricultural policies on agricultural production has been negative. For most products, the production incentives emanating from the subsidization of inputs (fertilizer), transportation, and other support facilities were insufficient to compensate for the negative effects of artificially low domestic producer prices. For a number of products, these policies have resulted over the years in sizable declines in the total surface of land under cultivation (Table 9). Also, despite improvements in yields, reflecting, inter alia, the provision of fertilizer at low cost, the objective of self-sufficiency was not achieved. On the contrary, Zambia’s dependence on imports steadily increased between 1970 and 1985, and the food availability diminished (Table 10).

Table 9.

Zambia: Cultivated Area under Major Crops, 1966-95

article image
Source: Food and Agriculture Organization.
Table 10.

Zambia: Food Availability, 1971-94

article image
Sources: Food and Agriculture Organization, World Bank.

The total availability of calories is computed by adding up the calories from all foods available in the economy using the appropriate calorie conversion factor for each food item. The conversion factors are applied to the available quantity of each food item (i.e., the sum of production (less seed, cattle feed and waste), net imports and changes in stocks).

The calorie balance is the percentage deviation of the actual calorie availability from the recommended average daily calorie intake for adults (2200 kilo calories).

43. The subsidization policies were also very costly to the government. During 1975-85, consumer subsidization of maize, as measured by the difference between world prices (including processing and transportation cost) and domestic retail prices, averaged about 60 percent of the price consumers actually paid for processed maize. This resulted in a large and eventually unsustainable burden on government finances. In 1991, agricultural expenditure constituted 12 percent of total domestic expenditure of the central government.

D. Liberalization of Agricultural Policies After 1990

44. In light of the disappointing outcome of direct state intervention and the resulting unsustainable fiscal burden, the government acknowledged at the beginning of the 1990s that the liberalization of agricultural policies should constitute a key element of its structural adjustment efforts. A first, modest step toward agricultural liberalization had been taken in 1989 when administrative price controls were removed, except for those on maize, maize meal, and fertilizer. However, given the importance of maize, the effect of this price liberalization was small. More substantial progress was made in 1990 with the liberalization of trade in maize and fertilizer, which hitherto had been subject to a government monopoly. The price controls on maize and maize meal were removed in late 1991, resulting in a doubling of retail prices during the first months of 1992. In the following year, the government decided to cease the provision of subsidized rural credit and inputs; direct involvement in the area of procurement, transportation, and processing of maize was terminated as well. In the same year, the Agricultural Market Information System was created to facilitate the flow of local and international information on prices and supply and demand conditions to producers and traders across the country. Finally, official producer prices for maize were abolished in 1994.

45. Although the liberalization effort during the first half of the 1990s has led to a dramatic expansion of the role of market forces in the agricultural sector, the state has continued its involvement in certain key areas, with unfavorable, distortive effects on prices, trade, and government finances. With a view to reducing the risk of domestic food shortages, the government found it necessary to maintain the prohibition on maize exports during the severe droughts of 1992, 1994, and 1995. The export prohibition was suspended in early 1996, but the authorities have continued to manipulate foreign trade through restrictive licensing requirements for maize exports. As a result of the export restrictions, domestic maize prices have remained at levels well below import parity prices during 1994-96, despite the abolishment of official prices in 1994 (Figure 4).23 Also, the state still has a substantial direct impact on domestic price developments and trade through the maize purchases of the Food Reserve Agency for the strategic maize reserve;24 the central government budget for 1997 includes an allocation for maize purchases in an amount of K 19 billion. In addition, despite the formal termination of the subsidization of fertilizer in 1993, the state remained active as a supplier of fertilizer in recent years, which has undermined the growth of private sector activity in this area.

46. Given the detrimental effects of the droughts in recent years, it is still too early to assess the full impact of the liberalization program on productivity and the production structure in the agricultural sector. Moreover, the analysis is complicated by the fact that it is hard to draw a clear distinction between the impact of agricultural liberalization and the trade reforms, which were implemented during roughly the same period. The available data do allow some preliminary conclusions nevertheless. First, the elimination of input subsidization coupled with depressed producer prices for maize has caused farmers to move away from maize cultivation toward other crops. As Table 9 shows, the share of maize in the total area under cultivation has declined steadily since the late 1980s, while the area under millet, wheat, and rice increased. Other crops—such as roots/tuber, pulses, fruits, fiber, sugar cane, tobacco, and coffee—also gained in total area under cultivation. Second, the liberalization process has given a strong impetus to private sector activity in the agricultural sector. In 1994, the National Farmers Union established the Agricultural Commodity Exchange for trade in spot and future contracts for maize, wheat, oilseeds, fertilizer, and other products. This was accompanied by the creation of local markets for various products, particularly maize, which have effectively replaced the state-owned procurement centers as a market outlet for producers. The abolishment of the procurement centers and the centralized pricing policy has opened the way to the emergence of price differentials among regions, reflecting local supply and demand conditions, the condition of the local infrastructure, and the relative costs of transportation. Also, the private sector has taken over part of the role of the state in the management of storage facilities and crop financing. The elimination of subsidized financing has caused a strong expansion of contract farming, which gives small- and medium-scale farmers better access to commercial financing, inputs, and domestic and foreign markets. For instance, the increasing importance of contract farming in the cotton sector explains the strong growth of exports of cotton and textiles since 1993-94.

E. The Agricultural Sector Investment Program

47. In early 1996, the government launched the donor-supported Agricultural Sector Investment Program (ASIP), the main objective of which was to reorient and strengthen public institutions and agencies as providers of services to the agricultural sector, including agricultural research, animal health field services and disease control, the development of fish farming, the promotion of rural transport, small-scale processing and village storage technologies, irrigation development, training of small holders, and the rehabilitation of agricultural training institutions. The program also provides for several initiatives in the area of rural financing, such as the establishment of a revolving credit fund of about US$25 million to support product and input marketing through commercial banks. In addition, smallholder farms and other rural groups are eligible for grants to help finance small-scale capital investment in a wide variety of facilities and equipment.

48. The total budgetary cost of the program is projected at US$350 million over a four-year period, of which half will be financed by foreign donors. Its implementation had a slow start: in 1996, total expenditure on the ASIP did not exceed US$38 million, of which some US$11 million was domestically financed.

F. Further Reforms

49. Notwithstanding considerable progress made since 1990, the agricultural sector continues to face serious bottlenecks that urgently need to be addressed in the coming years. First, the reintroduction of an export ban on maize in 1995 and the implementation of restrictive licensing requirements after the lifting of the ban in early 1996 has created major uncertainties for the private sector, depressed domestic maize prices, and undermined farmers’ incomes. The argument that export restrictions increase food security for the Zambian population is debatable at best: given the declines in areas under maize cultivation in recent years, the opposite appears to be closer to reality. Second, the recurrent interventions of the government in the supply of fertilizer, despite the decision in 1993 to terminate the state’s involvement in the supply of inputs, have undermined the development of private sector activity in this area. As long as the government continues to act as a supplier of fertilizer, private traders have little incentive to invest in a distribution network that reaches small- and medium-scale farmers and remote areas. It also adds to the uncertainties for small- and medium-scale farmers, who do not have access to fertilizer on a commercial basis and remain largely dependent on infrequent, unpredictable deliveries by the state. Third, deregulation of markets is in itself not sufficient to create the appropriate conditions for sustained productivity growth. This needs to be complemented by an ambitious investment program, aimed at improving the rural infrastructure, including roads, irrigation systems, storage facilities, and rural financing. This requires considerable increases in budgetary outlays on public investment in the years to come, and an expeditious implementation of the ASIP.

IV. Developments in Social Expenditures25

A. Introduction

50. Zambia has one of the highest poverty rates in sub-Saharan Africa. In 1993, 85 percent of the population lived on less than US$1 a day and poverty is especially high in rural areas.26 Although the reduction in inflation and higher growth in 1996 have reduced the national poverty rate somewhat, real expenditures on education and health have declined in recent years, and social indicators such as infant mortality and net enrollment rates in education have deteriorated. This chapter gives an overview of developments in social expenditures and government policies in these areas.

B. Education

Expenditures

51. Between 1986 and 1996, real public expenditure27 on education declined at an annual average rate of almost 5 percent (Table 11).28 The secondary education level recorded the largest decline (7.7 percent), followed by teacher training (6.1 percent), tertiary education (5.4 percent), and primary education (4 percent). During the same period, primary education’s share in total domestic education expenditure increased from 39 percent in 1986 to 45 percent in 1996. The budget for 1997 provides for a further increase, to 52 percent, well above the average in 1996 for other sub-Saharan African countries (43 percent) and OECD countries (31 percent) (Box 2). The results of comparative international studies summarized in Box 2 indicate that the increased emphasis on primary education is warranted, in view of the generally higher rate of return to primary education. Sub-Saharan African countries tend to overemphasize tertiary education relative to other regions of the world, and for many years, Zambia was among the countries with the highest share of expenditure on tertiary education. During 1986-96, the share of expenditure on tertiary education in total education expenditure was 24 percent, well above the average for sub-Saharan Africa (20 percent) and other geographical regions. Since the benefits of tertiary education accrue mostly to the relatively well off, the emphasis on tertiary education and relative neglect of primary and secondary education may have contributed to the increase in poverty rates in the past decade.

Table 11.

Zambia: Domestic Public Expenditure on Education by Education Level, 1986-96

article image
Source: Ministry of Education.

Authorised expenditures including supplementary allocation.

Nominal expenditure deflated by the consumer price index.

Table 11.

Zambia: Domestic Public Expenditure on Education by Education Level, 1986-96 (concluded)

article image
Source: Ministry of Education.

Authorised expenditures including supplementary allocation.

Rates of Return on Education and the Composition of Education Expenditure

The effect of education on the economy and on productivity is usually measured by comparing the difference in earnings over time of individuals with and without a particular level of education and the cost to the economy of producing that education. This measure is known as the rate of return on education. Irrespective of differences in country circumstances, in economies with less than universal primary education, rates of return are generally greatest for primary education, followed by secondary and higher education.

Rates of Return on Education by Level

(in percent)

article image
Source: Psacharopoulos (1994), “Returns to Investment in Education: A Global Update”, World Development, pp. 1325-43.

Generally, at the margin, investment in higher education is less efficient for the society as a whole, especially in countries that have yet to achieve universal primary and secondary education. International differences in the composition of expenditure at various levels of education are shown below.

Composition of Education Expenditure by Level

(in percent) 1/

article image
Source: World Bank (1995), Priorities and Strategies for Education.

Unweighted averages; figures in parentheses refer to the number of countries in the regional sample.

52. Expenditures on wages and salaries in the education sector are much higher than expenditures on textbooks, supplies, and capital goods. On average, wages and salaries constituted 49 percent of education expenditure during the 1986-96 period and recurrent expenditure some 23 percent, while the share of capital expenditure averaged only 6½ percent (Table 12). This is consistent with the experience of many other sub-Saharan African countries, in which schools have no textbooks and are poorly maintained. The excessive share of wages has been exacerbated by recent wage increases which, along with a significant compression of the wage structure, has contributed to the departure of qualified teachers and the deterioration in the quality of education. In addition, inadequate expenditures on operations and maintenance often imply higher future expenditures, which could otherwise have been avoided.

Table 12.

Zambia: Domestic Public Expenditure on Education by Economic Classification, 1986-96

article image
Source: Ministry of Education.

Recurrent Departmental Charges.

Authorised expenditures including supplementary allocation.

Enrollment and illiteracy

53. Primary gross enrollment rates in Zambia are quite high relative to the rest of sub-Saharan Africa and close to the stated government objective of 100 percent (Table 13). As expected, secondary gross enrollment rates are much lower than primary gross enrollment rates. However, at either level of education, the government’s objective of gender equality is not borne out by the data; females have a much lower enrollment rate than males, particularly at the secondary level.

54. A high gross enrollment rate is not necessarily an indicator of a good education system, though, since it does not account for student dropouts, grade repetition, or possibly low progression rates from one grade to the next. Table 14 shows selected progression rates in primary and secondary education. These rates fall at higher grades; they are lower for females and have declined over time.

Table 13.

Zambia: Gross Enrollment Rates in Primary and Secondary Education, 1985-95 1/

(In percent of total age group)

article image
Source: Ministry of Education.

Total enrollment, regardless of age, in percent of the total population of an age group. The percentage can exceed 100 to the extent that older students are enrolled at a lower age group.

Table 14.

Zambia: Progression Rates in Primary and Secundary Education, 1991-95

(In percent of total number of students)

article image
Source: Ministry of Education.

55. Another indicator of the efficiency of the education system is the adult illiteracy rate, which measures the percentage of population 15 years of age and above who are illiterate. The male adult illiteracy rate stood at 23 percent in 1985, declined to 19 percent in 1990 and declined further to 14 percent in 1995. The female illiteracy rate has been much higher, but it also declined over the years from a high of 41 percent in 1985 to 35 percent in 1990 to 29 percent in 1995. In 1995, Zambia had the fifth lowest adult female illiteracy rate (29 percent) in sub-Saharan Africa (Figure 5); the countries with the lowest and highest female adult illiteracy rates were South Africa (18 percent) and Niger (93 percent), respectively; the average for sub-Saharan Africa was 37 percent. The results of comparative international studies indicate that countries that have reoriented education expenditures toward women in primary education and reduced the gender gap in illiteracy tend to have better education outcomes and higher growth.29

Figure 5.
Figure 5.

Female Adult Illiteracy Rates in Sub-Saharan Africa, 1995 1/

(In percent of the population age 15 and above)

Citation: IMF Staff Country Reports 1997, 118; 10.5089/9781451841183.002.A001

Source: World Development Indicators, 1997.1/ Illiteracy rates for only a selection of countries are shown. The (unweighted) median and average illiteracy rates are calculated based on a sample of 40 Sub-Saharan African countries.

Education reforms in 1993–96

56. Since 1993, the Ministry of Education has been evaluating the entire formal education system with a view to determining the most appropriate framework for its future development. The Ministry has attempted to maximize participation of educational institutions and local governments through consultation and dissemination workshops. In May 1996, the government approved a new national education policy which was laid out in a document entitled Educating Our Future30 The ultimate goals of the national policy on education are to increase access to education (e.g., achievement of 100 percent Universal Basic Education enrollment rate), strengthen the capacity to provide quality education, and rationalize the use of resources. The education system will be liberalized and decentralized, with a more prominent role for local governance, which will ultimately replace the existing highly centralized system.

57. The liberalization of the provision of education will take on several forms. The new education policy recognizes the right of private and religious organizations, individuals, and local communities to control their own schools, allows those with resources to establish their own educational institutions, and run them in accordance with their own principles, subject to regulations. It also recognizes and protects parents’ rights to send their children to educational institutions of their own choice.

58. The restructuring of the Ministry of Education is an important part of the new national education policy. It involves the creation of Education Boards at district, school, and college levels. The focal point of education administration and management for primary and integrated schools will be the District Education Boards, while secondary schools and teacher colleges will each have their own Education Boards. The newly established Boards are expected to (i) relieve the Ministry of Education of much of the burden of day-to-day business; (ii) cater to a greater degree of democracy in the management and administration of the system; and (iii) allow for greater responsiveness to local needs. The Ministry of Education headquarters and the provincial education offices will be concerned mainly with policy development, training, goal-setting, monitoring of standards, and supervision. These reforms therefore form an integral part of the government’s decentralization strategy in the education sector.

59. The new system will also promote cost sharing between the state, the beneficiaries and other stakeholders. Individuals, families, communities, industry, and nongovernmental organizations will be encouraged to contribute to education and training. The state will in turn give the necessary support to these endeavors.

C. Health

Expenditure and health indicators

60. During 1986-96, domestically financed public expenditure on health care declined at an average rate of 3½ percent a year (Table 15). Despite sizable donor financing of health expenditure, which accounts for roughly 50 percent of total public health expenditure, health indicators have deteriorated in the past decade. The presence of AIDS has spread among the population. It is estimated that in 1994, between 22 percent and 25 percent of the urban population and 14 percent of the rural population carried the HIV virus. The incidence is likely to have risen since then. The high prevalence of AIDS has reduced the size of the labor force, effective labor productivity, and economic growth. Furthermore, Zambia has one of the highest fertility rates in the world. Two-thirds of Zambian women have had children or are pregnant by the age of nineteen. The high fertility rate and the low spacing between consecutive births have in part led to stunted growth, malnutrition among the newly born, and poorer health among the mothers. These factors have contributed to an increase in infant mortality from 88 deaths per 1,000 live births in 1982 to 109 in 1995. Similarly, life expectancy at birth declined from 51 years of age in 1982 to 46 years in 1995.

Table 15.

Zambia: Domestic Public Health Expenditure, 1986-96

article image
Sources: Ministry of Health, Central Statistical Office, and staff estimates.

Health reforms in 1991-96

61. In 1991, the government embarked on a comprehensive health reform program that culminated in the National Health Policy and Strategy Document of 1992. The program was intended to provide Zambians “with equity of access to cost-effective health care as close to the family as possible” and called for a significant decentralization of health care to District Health Boards (DHB). The document presented the objectives of health sector policies, but did not provide details on how to achieve them. To correct this shortcoming, the government developed the National Strategic Health Plan for 1995–99, which provided for major reforms in various areas. The most important of these include: (i) decentralization of health care provision through the DHBs along with strengthening of local planning, budgeting, and management capacity; (ii) defining of essential packages of services; (iii) introduction of user fees to share costs; (iv) opening of the sector to wider private sector participation; and (iv) improved donor coordination in support of the Zambia Health Sector Investment Program and the common “basketing” of donor funds to support a District Action Plan. To date 64 DHBs have been established and it is expected that they will facilitate the provision of health services throughout the country. Under the guidance of the Central Board of Health, the DHBs gradually take over the management of all district resources, act as purchasers of health care from other providers in the district, and buy support services (drugs, supplies, and training) from the center. The DHBs also appoint the District Health Management Team that plans the provision of health services to meet the local needs.

ANNEX I Zambia: Summary of the Tax System as of July 1, 1997

article image
article image
article image

The Minister of Finance has the power to grant exemptions under the Customs and Excise, Income Tax, and Value-Added Tax Acts. On May 31, 1996, the government published a notice that no new exemptions would be granted in 1996 apart from those referred to in the January 26, 1996 budget address.

STATISTICAL APPENDIX

Table 1.

Zambia: Gross Domestic Product by Type of Expenditure, 1990-96

article image
Source: Data provided by the Zambian authorities; and staff estimates.

Current government expenditure excluding subsidies, interest, and transfers and pensions.

Total revenue (excluding grants) minus government consumption.

Gross domestic savings plus net factor income and net current transfers from abroad.

Table 2.

Zambia: Gross Domestic Product by Sector of Origin at Current Prices, 1990-96

article image
Source: Central Statistical Office.

Includes public administration, defense, sanitary services, education, health, recreation, and personal services.