World Bank Document€¦ · John Todd will introduce the proposal. John, please. MR. TODD: Thank...

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INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

Thursday, August 1, 1996

Washington, D.C.

The meeting of the Executive Directors was

convened at 10:05 a.m. in the Board Room, 700 Eighteenth

Street, N.W., Washington, D.C., Mr. Sven Sandstrom,

Chairman, presiding, followed by Mr. Wolfensohn, followed

again by Mr. Sandstrom.

MILLER REPORTING COMPANY, INC. 507 C Street, N.E.

Washington, D.C. 20002 (202) 546-6666

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ITEM

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I

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C 0 N T E N T s

Proposed Credit - Zambia (Second Economic and Social Adjustment Credit)

Mr. Mr. Mr. Mr. Mr. Mr. Mr.

_Mrs. Mr.

·-Ms. Mr. Mr. Mr. Mr. Mr. Mr.

-Mr. Mr. Mr. Mr.

Evans Li Loevbraek Good Crowe Rahman Schaffer

Herfkens Gerber Cordeiro Tamaki de Paiva Chneiweiss Alyahya Clark Al-Saad Galindez Rill Lodhi Mseka

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12 14 17 20 22 25 26 36 37 41 43 45 46 47 48 49 50 50 55


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MR. SANDSTROM: All right. I think we should get

started. We have a couple of interesting items on the

agenda for today.

The first one is a proposed credit of 62.4 million

SDRs to Zambia for a Second Economic and Social Adjustment

Project.

You also received an updating note after the CAS

discussion which we had on July 18th.

We are very happy to welcome again Mr. Basu and

also Mr. van Til of the IMF, who are sitting there in the

back.

John Todd will introduce the proposal.

John, please.

MR. TODD: Thank you, Mr. Chairman.

Mr. Chairman, Members of the Board: The Board

discussion two weeks ago on the Zambia country assistance

strategy highlighted two central challenges.

First, Zambia faces a particularly long and

difficult task, especially in light of its large external

debt, in transforming its economy from one of controls,

parastatals, and dependence on copper to one of diversified,

private sector led growth.


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As a result, the strategy will have to be

carefully designed and consistently implemented. We believe

the strategy Zambia has chosen - rapid liberalization and

extensive privatization in order to unleash a process of

private sector led growth coupled with increased attention

to social services and other direct efforts at poverty

reduction -- is a sound one.

The credit before you today is part of the Bank's

continuing support for that program and includes a special

emphasis on policies that promote the development of more

efficient private markets and the provision of vital social

services.

The more immediate challenge highlighted by the

CAS discussion is the uncertain macroeconomic environment.

In light of this, effectiveness and disbursement of the

first tranche will take place when we have additional

evidence of strong macroeconomic policy implementation.

We will determine that by sending staff to Lusaka,

in liaison with the August IMF mission, to look at end-June

performance against the Fund targets, recent progress in the

areas of structural reform, including the privatization of

ZCCM, and the outlook for continued strong performance on

the macro and structural fronts.

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As explained in the updating note distributed last

week to the Board, a determination on the effectiveness

condition will be based on the findings of that mission. As

suggested by many of you, we will also be redoubling our

efforts to rekindle a constructive dialogue between the

government and its bilateral partners. Thus, going forward

with this credit at this time is intended to provide a

bridge -- or breathing space -- to enable this dialogue on

governance issues to resume and thus to make it possible for

bilateral financing to resume at an early point.

Let me turn to the credit itself. The basic

approach behind this credit is to focus on some of the

specific areas that had been supported by the first Economic

and Social Adjustment Credit approved in 1994. Several new

areas have also been added, including procurement reform,

informal urban settlements and a follow-up on ZCCM

privatization.

In all areas, substantial actions have already

been taken by government. Let me give a few examples which

illustrate the range of issues covered and the strong

commitment of the government in these areas.

In the area of continuing reforms, the historical

Land Act passed last year is being implemented. Statutory


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instruments acceptable to the Bank have been issued, and the

Ministry of Lands has begun a program of improving the

administrative efficiency of processing the sale and

transfer of leaseholds.

In social sector spending, the government has

managed to meet the strict requirements of the IMF program

on the fiscal deficit while protecting the agreements on

social sector spending agreed to under this credit, both for

aggregate shares and for priority subsectors.

In addition, the 1996 budget included a major

reduction in tariff rates, particularly for capital goods

and inputs and an elimination of most tariff exemptions,

including for the government itself, that has made the trade

regime more conducive to exporters without lowering tariff

receipts.

The government is also moving on public

procurement reform. By itself, this program will not end

all of the problems in this area, but the enhanced

visibility of this process and the quicker movement towards

decentralization should open the process to greater

transparency and accountability.

We are also especially pleased about the

government's increased emphasis on the legal regularization


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of Lusaka's many informal urban settlements.

The enhanced security of tenure should bring an

immediate improvement in the well being of hundreds of

thousands of inhabitants, as well as a needed boost in

construction and the launching of new small businesses.

The last five years of Zambian economic reform

program have witnessed considerable accomplishments. Much

more remains to be done, however, because as we have seen,

Zambia's legacy of structural and financial problems is a

daunting one. A sound longer-term agenda is set, but to get

there Zambia will need to meet its current challenges of

steadying the macro picture, moving ahead with ZCCM

privatization, and of special importance reestablishing a

cooperative relationship with all of its external partners.

If these challenges are met, Zambia's prospects

for sustainable growth are reasonable.

I would like to acknowledge the thoughtful

statement we have received from Mr. Chneiweiss. As he

requests, we will be happy to circulate more widely an EM we

prepared and sent to several of your offices on the specific

actions we will be reviewing with respect to the progress on

ZCCM privatization.

I also want to reemphasize that over the next


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several weeks, taking advantage of the bridge afforded by

the proposed credit, we will be increasing our efforts to

encourage the government and its bilateral partners to come

to a common understanding on economic management and

governance actions which will allow a sustainable economic

reform program to remain in place.

Thank you.

MR. SANDSTROM: Thank you very much.

Are there any comments?

Huw Evans.

MR. EVANS: Thank you, Mr. Chairman.

I think my colleagues and management will be aware

that a number of my colleagues, including many of the major

donors, would have preferred to delay this discussion for a

further ESAC to Zambia until after the forthcoming Bank/Fund

staff mission has reported.

We very much support the objectives of this ESAC.

But I have to say that the timing of this approval is wrong.

We are sympathetic to Zambia's situation.

The staff's updating note makes clear that in

Zambia's huge progress in recent years in carrying through

its economic reform program, there have been indeed

occasional and serious setbacks, including missing several


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of the Fund program benchmarks at the end of last year.

But again there have been renewed and successful

efforts to get back towards the original track.

As we know, Zambia is now facing extremely

difficult circumstances with a big fall in copper prices and

the drop in assistance from bilateral donors.

I very much welcome the improvement we have seen

in performance this year, although, as we have noted earlier

in CAS and other discussions, Zambia could and certainly

should have acted earlier particularly on ZCCM where

privatization is still somewhere off and where I think the

company is still being run badly.

Continued donor assistance will certainly be

necessary to support successful reform and higher growth in

Zambia, which is what we all wish to see. Further donor

meetings will certainly be needed, but I cannot see any real

prospects for success in a meeting as early as September.

Now staff tell us that this credit is intended as

the bridge to give the Zambians time to secure renewed

bilateral balance of payments assistance and, although the

Bank papers are strangely silent on this to react to the

steep fall in the price of copper.

We are also waiting for Zambia to get back on


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track on its macro program so that the ESAF program can

resume. As everyone knows, Zambia is currently on a staff

monitored program.

I think hence the importance in next month's

mission by Fund and Bank staff essentially to do two things:

first of all, to assess policy performance in recent months;

and secondly, to assess whether the authorities can mobilize

sufficient financing.

Those two conditions are being brought out clearly

in the note from Mr. Ouattara of the Fund but not specified

in that way in the Bank's updating note.

I very much hope that both conditions will be met

so that the ESAF program and all that goes with it can be

resumed.

Now, as I said, Zambia's efforts certainly require

substantial donor support, including from the Bank, but the

Bank's efforts have to be part of a viable economic and

balance of payments picture. There seem to be real dangers

in the Bank contributing the bridge to nowhere or

participating in a seriously under-financed program.

I wonder whether the staff can today give us any

assurances that would help us on this issue of finance for

the program.


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That is why I and some of my colleagues would have

much preferred this discussion to take place in September

after the report back of the Bank and Fund mission. And

while I would like Bank management to give and undertake now

to report to and consult this Board before this loan becomes

effective, but failing that undertaking, Mr. Chairman, I

cannot support the timing of this loan approval and wish to

be recorded as abstaining in what I regard as a mistaken

recommendation by management.

Thank you.

MR. SANDSTROM: Thank you very much, Huw.

We will get back to your questions.

Mr. Li, please.

MR. LI: Thank you, Mr. Chairman.

At the outset, I would like to state that this

Chair strongly supports the Second Economic and Social

Adjustment Credit to Zambia.

The reasons are as follows. The first, I fully

understand the Zambian Government is facing serious

macroeconomic challenges, including pressure on balance of

payments, especially current account difficulties resulting

from declining copper prices and others.

However, the government has already taken measures


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to counter these challenges. It is our view that the

country's economic reform is basically on track.

Secondly, Zambia's far-reaching efforts require

substantial financial resources; support from the

international community is urgently needed. The World Bank

being one of the most important multilateral development

institutions should not step aside at this critical time of

Zambia's economic reform.

It needs to be stressed that this is exactly the

right time for the Bank to step in to demonstrate what a

development institution can really do and to offer our

timely support to prevent the previous efforts from being

washed away or the whole Zambian economy from falling apart.

Thirdly, Mr. Chairman, as clearly stated by the

IMF staff during the last Board meeting, implementation of

the IMF staff monitored program in Zambia to date has been

satisfactory, and indications are there that the quantity of

performance targets for end of June were met.

The scheduled Fund staff mission in August is to

confirm, inter alia, satisfactory economic performance which

carries no presumption that the government failed to meet

its commitment. Therefore, there is no justification or

excuse for the Bank to hold up its proposed credit.


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Finally, I would like to emphasize that the Bank's

credit is a timely financial support to Zambia's ongoing

effort, which addresses serious levels of poverty in the

country and to achieve significant improvements in living

standards of all Zambians who deserve our continued support.

Thank you, Mr. Chairman.

MR. SANDSTROM: Thank you very much, Mr. Li.

Asbjoern Loevbraek.

MR. LOEVBRAEK: Thank you, Mr. Chairman.

This is a rather difficult discussion. I think

the difficulty is that there are different perceptions about

the situation in Zambia, both in terms of the sort of real

economy and both in terms of the economic reform program

that the government is undertaking, and also very different

perceptions as to the assessment which bilateral donor

agencies are undertaking.

We would have preferred postponement of this

discussion and approval of this adjustment credit until

after the IMF/Bank mission in August.

We took that view on the basis of assessing the

project documentation, The updating note that we have got

from staff had not changed our view at all on that point.

So, I am also entering into the discussion with basically


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the same position as Huw Evans has taken, that we would

abstain if we don't have assurances of sort of a second

discussion or the possibility of the second discussion on

releasing the funds under this adjustment credit.

A little bit more detail on what are the

differences in perception, fortunately it doesn't happen

very often that we these days get an assessment from our

bilateral agencies which is very contradictory to the

assessment that the Bank is doing.

But frankly, with the Nordic countries ten years

ago, it happened much more frequently than it does today.

But in this particular case in Zambia, I am a bit worried

that the assessment that we get from our bilateral aid

agency representatives in our embassies in Lusaka contradict

what the Bank is saying.

Now, of course, for a Board member that leaves the

question who you should trust, and my personal view is that

I would not automatically side with my bilateral people.

But in this particular case I do.

So, basically just to give you the flavor of some

of the arguments that they have been putting forward, they

do have a more critical assessment both of the fundamentals

of the economy in Zambia. They do think that the Bank and


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Fund estimation of the situation is too optimistic. They do

point to problems with the implementation of budget

decisions that have been taken for this year. For instance,

that it seems that consumption expenditures and capital

investment expenditures are down compared with the budget

estimates.

They look at the budget balance situation. They

do look at the accumulation of domestic debt burden, and

they are also making comments relating to the currency

situation and the over-valuation of the kwacha, and there

are a number of other issues that I don't need to go into

detail on all of them.

But I do make a fairly fundamental point, namely

that the likelihood of bilaterals deciding to release

balance of payments support for Zambia over the next few

months is -- let me put it this way -- somewhat limited.

Now the Bank's argumentation for approving the

loan now seems to be based fairly fundamentally on an

assumption that the bilaterals will come forward with new

balance of payments support before the election. That seems

to be the basis for arguing for the release of this credit,

for arguing for a donor meeting where one would persuade the

bilaterals to release balance of payments support.


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The assessment, at least the Nordic

representatives in Lusaka, are making is that this is not

realistic. So, I think that is a fairly fundamental point

in getting to a conclusion at least until we have heard more

specifically from staff whether a second round discussion

would be possible after the return of the mission, and that

we are not convinced by the arguments.

We still maintain that there should not be a

decision taken today. If a decision is taken without an

assurance, that we will have the opportunity of management

making a recommendation to the Board on the release of the

funds and then the Board having an opportunity to discuss,

to approve or reject, such a recommendation, then we would

have to abstain.

Thank you.

MR. SANDSTROM: Thank you very much, Asbjoern.

Len Good, please.

MR. GOOD: Thank you.

I will not take too long because what I had to say

has been basically said by Mr. Evans and Mr. Loevbraek. I

would like to say that I fully endorse everything they are

saying.

Briefly simply to emphasize a couple of points.


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One is that our preference would have been to see a much

more coordinated World Bank bilateral donor approach to this

problem than to one which at this point can be seen as the

World Bank in some sense working at odds with bilateral

donors, the latter having withdrawn balance of payments

support and the former at a point where we are about to

provide balance of payments support.

The issue is clearly one of ultimately -- because

we are all interested in the long-term success of Zambia --

of getting a fully funded program, and at this point we are

not at that situation. It seems to us that that is the

primary objective towards which we should be working.

We really do appreciate the response of staff

since our last meeting, where, in fact, they have made a

couple of suggestions, including this reference to trying to

work with donors in September. I think that is very helpful

and that is very much appreciated.

But in some sense, it seems to us that that is

much more what the orientation of the strategy should be and

one in which we take an action like this, in a situation,

where as everyone has said we don't have information and

where as a Board -- and this is a question of process which

is important to us -- we are being asked to approve a


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decision in the absence of information.

Despite what Mr. Loevbraek has asked for and would

like, which I would also like too, I am led to believe that,

in fact, we will not have the opportunity to discuss the

results of the mission before disbursements.

So, as much as we would like that, as I read the

documentation that came from some decision back in 1990, it

is simply not the case, and that is very unfortunate. So, I

think it puts the Board in a very difficult situation.

The second point which I understand is the

argument which is the basis of the Bank's strategy which has

to do with bridging, I don't find in any of the

documentation the rationale that says over the next six

weeks, between now and mid-September, that the world is

going to fall apart.

I still have not fully grasped -- and if you could

comment on that, I would appreciate it -- what is going to

happen over the August and the first half of September that

requires the Board to be put in this position of approving

the loan without the requisite information or the ability to

look at it in the future before disbursement.

I simply don't find that convincing. As I like to

use the expression, you know, it is the bridge to nowhere.


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We should be working on the other end of the bridge before

we start doing what we are doing today.

Having said all of that, I recognize that there

are different approaches to this problem, and we had some

good discussions with staff a while ago. Clearly, I

recognize that there is some chance -- it is not one that I

would bet on -- that the argument is right and that this

loan is essential, and you have come to that judgment and I

understand that, and there is some chance that that is

right.

Secondly, we appreciate the changes that have been

proposed since our last meeting. From our point of view,

they don't go far enough, but we do appreciate that. And it

is on that basis that we choose to abstain on this

particular issue.

Thank you.

MR. SANDSTROM: Thank you very much, Len.

Brian Crowe, please.

MR. CROWE: Thank you, Mr. Chairman.

I don't think anyone here questions the very

difficult circumstances of the Zambian economy. We are

particularly worried by the depth and the tenacity of

poverty in that country.


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I think we would all agree also on the importance

of a viable economic program. In fact, such a program

really is essential if Bank resources are going to be used

effectively.

As staff has commented, as have a number of other

speakers, we are a considerable distance from that point.

The IMF has not been able to conclude its mid-year cycle

review of the ESAF program, and has moved Zambia to a less

stringent staff monitored program.

The balance of payments gap has widened

significantly given the withdrawal of bilateral support and

the declining copper prices. Our reports from Lusaka

indicate the Bank unfortunately is probably overly

optimistic as to when the situation regarding bilateral

donors will be normalized.

Moreover, fiscal discipline in the pre-election

environment has been very uneven with significant foreign

exchange being spent on maintaining an artificially high

exchange rate, and inflation running two-and-one-half times

of the original targets.

I think the phrase that we are lending into a

bridge nowhere keeps coming across our minds. For that

reason, we believe it is far too premature for the Board to


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be asked to approve this credit. We just do not have all

the information we need. That is the reason we join with a

number of our colleagues in asking management to submit a

recommendation to the Board prior to loan effectiveness.

If that does not prove possible, regretfully we

would like to be recorded as opposing.

Thank you.

MR. SANDSTROM: Thank you very much, Brian.

Mr. Rahman, please.

MR. RAHMAN: Thank you, Mr. Chairman.

I would like to support the Second Economic and

Social Adjustment Credit for Zambia. The recent note

circulated by staff confirms many of the macroeconomic

trends that emerged during the CAS discussion.

In the main, Zambia has made considerable progress

in implementing its economic reform program in the past few

years and the corrections made to counter mid-course

slippage confirm that the policy orientation of the

authorities is correct. This is further confirmed by recent

initiatives on the structural front, particularly on trade

policy and privatization.

The certification provided by the IMF Fund was not

really necessary. We believe that the Bank report on the


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proposed credit are an adequate assessment of the challenges

and risks and of the urgent necessity of this credit.

However, we welcome Mr. Ouattara's assessment to the effect

that end-June ESAF targets appear to have been met and that

the Zambian authorities should not be faulted for the

setbacks of the early 1996 period, the blame for which can

be laid at the door of the problems of the ZCCM, complicated

further by the reduction in bilateral support.

This, in fact, is a self-fulfilling prophesy we

often encounter. Balance of payments assistance gets

chopped off, reflecting concerns about economic performance

and governance issues. This in itself causes a further

decline in economic performance.

To the extent that the Fund supervision will help

the authorities directly address issues relating to the

management and performance of the ZCCM, fiscal adjustments

aimed at reducing debt one percentage point of GDP,

rebuilding international reserves and moving ahead with the

Bank supervision, the World Bank is then free to focus on

other aspects.

To the extent that both prudent advice and

development assistance are eventually fungible across

sectors, we see the proposed credit as not merely


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cofinancing the Fund program for macroeconomic management.

Of course, we accept that the benchmarks should be linked to

continued progress in satisfactory implementation of the

macroeconomic program.

But this is an opportunity for the authorities to

address the social services through the social safety net

programs and the public procurement process.

The lot of the poor particularly can come under

severe pressure with the liberalization of trade and prices

and we, therefore, endorse the proposed growth strategy that

would seek to improve terms of trade in agriculture, while

facilitating enhanced productivity and improving beneficiary

participation.

I will not attempt to list at this juncture the

various initiatives that can be covered under the project

but can agree with the report on some of the main priorities

the authorities need to address: first, initiating the

process of land transfer to enable a stepped-up investment

in agriculturei second, moving further on the national

housing policy document, including addressing the problems

of the informal urban settlementsi third, reform of labor

regulationsi fourth, maintaining the budget allocation on

the social sectors with further focus on the national drugs


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policy and nutrition policy.

Finally, we can endorse the report's focus on

capacity building and ownership of the program by the

Zambian authorities, both measures vital for the eventual

success of their efforts. Zambia is one of the most

indebted low-income countries and we feel it would benefit

from a strong endorsement of the credit by this Board.


MR. SANDSTROM: Thank you very much, Mr. Rahman.

Helmut Schaffer, please.

MR. SCHAFFER: Thank you, Mr. Chairman.

We worry about the same questions that were raised

in the circulated statement by Arnaud Chneiweiss. The

reasons given for proceeding now have not been able to

address these preoccupations sufficiently and, therefore, we

remain rather unconvinced.

It is not satisfactory and risky for IDA to submit

to the Board a bridge financing arrangement in a situation

where we face a high degree of insecurity with an overall

under-financed program.

Like others, we would have preferred to discuss

this credit upon the return of the joint mission of the IMF

and the Bank and with a clear outlook for a viable program


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that we then can support.

As I pointed out in the CAS discussion, we were

not convinced that Zambia is meeting the criteria for the

high-case scenario.

On the other hand, we see the difficult situation

of this country. The bilaterals are an important element

for closing Zambia's financing gap and we very much hope

that the Zambian Government will secure this support because

it is in their hands and within the reach of their decision-

making to achieve this needed financial support in order to

continue the path of substantial economic growth.

Please record me as abstaining for this credit.

Thank you.


Eveline Herfkens.

MRS. HERFKENS: Sven, I am not sure if this is

useful if I reiterate my position at this stage, but, as Huw

Evans started by saying that he reflected the view of many

major donors and representing at least one major donor, I

would like to reiterate and let me just cite The Hague to

prevent any questioning on whose behalf I speak -- "if based

on economic performance criteria only, the second ESAC

should be approved by the Executive Directors".


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Clearly, there is a huge difference of opinion

among donors about the reasons why they withdrew balance of

payments assistance. I clearly represent one that does

that, not for reasons of economic performance. I find it

very disturbing that the Bank should follow, given the

background of these reasons.

So, I do support the credit very much because it

is not the Bank business to be involved in these issues of

non-economic governance, and I also would like to say that I

find it disturbing that we would set a precedent in which

the Board would be involved in judging if effectiveness

conditions are met. I would find that very disturbing, but

maybe I am in a minority.

MR. SANDSTROM: Thank you very much, Eveline.

Maybe this is a good time actually to respond to

two or three points that have come up.

I would first ask Daoud to describe the procedure

agreed by the Board for deciding on effectiveness conditions

and tranche releases and then Callisto to comment on the

differing perceptions within bilaterals and staff and on the

funding prospects.

I think it would be good to get these comments in

now before we continue.


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I have four or five speakers more, but let's take

a break right now.

Daoud.

MR. KHAIRALLAH: Well, the established practice of

the Bank and IDA based on the provisions of the Articles of

Agreement as consistently applied to all loans and credits

has been that the Executive Directors approve the conditions

of Bank loans and IDA credits and that management determine

whether these conditions have been met.

If these conditions have not been met, management

does not disburse and may seek Board approval of amending

these conditions.

Now this policy has been approved by the Board

back in June 1990 and basically states the following:

Management will be responsible for determining whether

conditions have been fulfilled. If it is satisfied that

they have been fulfilled on all material grounds, then it

releases the tranche in question and immediately inform the

Board so the Board can exercise oversight over management.

If management determines that the fulfillment has

not taken place in a satisfactory manner, then it would

decide either to suspend or cancel or, if it finds reason

either to amend the conditions or to waive them, it brings


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the matter to the attention of the Board who will decide

then.

This has been the practice and I don't see reason

for departing from it.

MR. SANDSTROM: Thank you very much, Daoud. It is

very clear in the minutes of the Board meeting on this that

if the conditions have been fulfilled, the Bank is

contractually obligated to release the tranche.

But if there are doubts, that is when the

management comes back to the Board and that decision is left

up to the management.

So, this is very clear and this is the way we have

consistently applied this.

Huw Evans.

MR. EVANS: I don't think, Mr. Chairman, this is a

legal problem. The fact is nobody, and certainly not I, is

suggesting that we change our basic policy. There will· be

the difficult decision to make when management sees the

results of the mission in August.

As I made clear in my statement, I thought that

the conditions for disbursement set out in the updating note

were not sufficient in that they did not include any

reference to a fully financed program. Therefore, that is


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one of the reasons why I say I don't think this appeal to

this 1990 decision is important for our decision today.

Thank you.

MR. SANDSTROM: Thank you very much, Huw.

So, let's move on then to the issue of the

bilaterals and funding.

Callisto.

MR. MADAVO: Thank you, Mr. Chairman.

Let me make three points. The first one is

obviously that it is fundamental that the bilaterals come

back to the table if we are going to have a program that is

fully funded. There is absolutely no question about that.

Now in looking at the prospects for this coming

about, we have to look at two things that drive, in fact,

the position of the bilaterals. On the one hand are the

economic factors: the strength of the program, the

performance to date and so on.

On the other hand, it is very important that we

all be honest and be very clear that it is their governance

preoccupations that also drive the position of the

bilaterals.

What we, the staff, are saying is that on the

economic side, we working together with the Fund have seen


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progress by the authorities in addressing the shortfalls

that occurred in the Fund program in December, at the end of

December last year.

We are, however, very conscious of the fact that

the position that was put to you in the documents is based

in some cases on preliminary information that we need to

confirm, and that this would be done through the mission in

August where we would have Bank staff in liaison with the

IMF mission working together and confirming whether or not

(a) the targets that have been agreed in the revised IMF

program have been met, whether the prospects continue to be

good that progress would be made in the economic program

and, therefore, in a certain sense, whether the prospects

are there that we will have an effective program.

On this front, we believe that there may be

different perception between us and the bilaterals, in a

certain sense, but we think that, on the basis of the

information that we have, on the basis of the analysis that

the two institutions have, we think progress has been made

in recent months and that the prospects remain good, if

financing is available, to maintain this progress in the

program.

The funds would not be released unless, in fact,


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management is satisfied that these prospects remain viable.

The second driver which is the governance issues,

Mr. Chairman, what we are, in effect, saying is that some of

the elements that are in that basket are beyond the reach of

Bank staff to assess, are beyond the reach of the mandate

that we have to take into account. That is why we have not

introduced that particular element in the condition of

effectiveness.

At the same time, we are very aware that these

issues need to be dealt with, which is why we took Mr.

Good's suggestion from the discussion during the CAS that we

see whether there are ways in which we might encourage the

government and the bilaterals to get together to discuss the

specifics surrounding these governance issues.

We have been careful to limit ourselves and our

involvement to the economic governance dimension of that

discussion and not the political.

So, to summarize then, Mr. Chairman, I would say

that there may well be different perceptions by the

bilaterals on the recent economic progress made from that of

the Bank staff and the Fund staff. But we think on the

basis of the information that we have, that the position we

have taken is in fact a sound position.


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On the issue of governance, as I said, we can

facilitate a discussion but I don't think we could

realistically link it as an element of the condition of

effectiveness.


Let's move on and hear five or six more views

here.

Huw again.

MR. EVANS: Sorry, Mr. Chairman.

I thought when you introduced the speakers, you

said we were going to hear something more about the finance

of this program. We have heard something about the attitude

of the Bank towards governance issues, but I have not heard

any more statements about the financeability of this

program. It would be helpful to hear a bit more about that

either from the Bank staff or perhaps from the Fund at this

stage.

MR. MADAVO: Mr. Chairman, I think we can make two

points on that and I will call on my colleague, John Todd,

to perhaps provide some numbers about the financing

requirements particularly over the next period ahead, in the

third quarter.

But I want to preface that by saying again that we


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don't think this program can be financed in the medium term

for Zambia if all the players do not come around the table.

That is why it is so very important that there be

a dialogue between the government and the bilaterals leading

at an early point to their coming back to the table. That

will give us the basis on which we can say in the medium-

term the program can be, in fact, financed.

Now there is the issue of whether the requirements

over the next few months, which would enable the government

to continue to make their progress, that we and the Fund

would expect to see if they keep their commitments, and

perhaps my colleague would lay out the requirements in terms

of the numbers.

MR. TODD: Let me just start by saying that I

agree with Mr. Good that there is risk on both sides, and

none of the estimates that we have or the assessments that

we make are certain, but this is our best judgment at the

time.

On the annual side, I think the numbers that were

conveyed to the Fund Board remain a reasonably good estimate

for total need, which was the $263 million. I think to that

one might need to add in the neighborhood of $20 million as

the net change for the year due to all of the copper and


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cobalt machinations. It could be 30; it is in that range.

Available assistance in the absence of any

additional assistance from bilaterals would be in the range

of $215 million, and that is the same number that had been

conveyed before.

So, that represents the challenge and that

challenge would best be met by additional assistance. It

would undoubtedly be met to some extent by compression of

the Zambia program as needed and appropriate and determined

through the August mission.

The point I wanted to emphasize relates more to

the third quarter. The number that we had given you before

is still the primary number, which is that there is $62 debt

service owed in the third quarter alone. There is the added

liquidity problem that the fire in the smelter, of which

most of you are probably are aware, is probably going to

have a short-term impact of $10 million to $12 million.

This will probably be made up over the course of the year as

the backlogged copper is finally processed through the

smelter once it is back in operation, and I believe it is,

in fact, already beginning to be back in operation. But

there is that short-term liquidity problem.

Then the uncertainty of copper prices, which is in


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nm 36

the neighborhood of $5.00 per month per dyne (Phonetic), and

we are running about 10 cents to 12 cents below the previous

projections we had made for the year on copper prices, only

somewhat offset by the good news on cobalt.

So, we cannot prove that everything comes unstuck,

but clearly if all of the assistance, including the

multilateral assistance, lies behind the bilateral

assistance, there is a very substantial risk that the

program would come unstuck over even the course of the next

months.

Thank you.


Jean-Daniel Gerber.

MR. GERBER: Thank you, Mr. Chairman.

Mr. Chairman, I think Asbjoern Loevbraek has

fairly well resumed the position this constituency is

taking. I may add one or two more points.

The first is the historic perspective. Those who

have participated in the discussion a month or two months

ago in the country assistance strategy review on Zambia will

certainly confirm that the Bank and particularly the Board

in the last fifteen years has always, without exception,

been over optimistic about the program and the performance.


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If we always are speaking about taking the lessons

from the past, I think we should bear that in mind.

The second, also as a matter of fact, lesson we

have drawn time and again in CODE is what has been said by

the predecessors here around the table. When a program is

not fully financed, whatever the reason is, be it now

politically, be it now economically, be it internal,

external economic factors, the program, which is financed

partially by the Bank will in no likelihood fail and, at the

same time, our President time and again here in your chair,

Sven, tells us the Bank has to increase its performance.

We all agree with that. But we, the Executive

Directors, are the first responsible that the Bank does not

perform well. It is not management, but it is the Board

which gives it agreement to such kind of credits where we

know in advance that the likelihood that it will fail is

fairly substantive.

That is the reason I would also like to be

recorded as abstaining.

Thank you.


Helena Cordeiro.

MS. CORDEIRO: Thank you, Mr. Chairman.


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This is, in fact, a difficult situation and it is

not the first time that this Board has confronted difficult

options in the Zambia case. I think our deliberations

today, as we already said during the CAS discussion, have

been made more difficult for the lack of a clear and

transparent dialogue between management and the Board and

the bilaterals.

We know that the options are limited if one can

even put it in the plural, but a cooperative approach would

have been preferable than the approach chosen by management

in this case.

The donor community has supported strongly Zambia

and the economic program. That support is failing for

reasons of doubts on the economic performance and on the

political commitment towards the core objectives of the

program.

As it has been said by several speakers, both

staff and my colleagues, donor support is crucial. We are

not sure when and if it is going to be available.

We are also concerned with the approach taken in

using IDA money as a breathing space or as others said

bridging nowhere. We are seriously concerned with that.

Although not benefiting from the assessment of our


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bilateral agencies, we share the concerns expressed by

previous speakers of the current situation. We would have

preferred to consider this credit after being able to

benefit from the outcome of the mission.

We also attach considerable importance to the main

objectives of the mission, as Huw Evans reminded us, based

on Mr. Ouattara's memo.

We recognize the late movement done by introducing

an additional condition of effectiveness, which, as many

others said, goes in the right direction, but we wish it had

gone further in spelling out all the elements that make

possible to fill that IDA money is going in support of a

sustainable and viable program.

We fully support the thorough statement circulated

by Arnaud Chneiweiss on the issues that remain for us. We

are also very reluctant to see IDA money being disbursed for

this adjustment credit if the prospects for resuming funding

under the ESAF are not confirmed.

Our constituency is not involved in bilateral

support to Zambia. So, we cannot add any words if it is

coming from our side; no. We are interested to see how our

donors will, in fact, assess their own views of the

political and economic situation.


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So, somehow I share most of what has been said by

previous speakers, but I take a different view regarding the

issue of who is responsible for assessing the fulfillment of

effectiveness conditions. I agree with Eveline of creating

a precedent for which we are not in favor.

We consider that management has the responsibility

of assessing progress as it has been stated today by this

Board, taking into account the concerns, as they have been

expressed, as the guidance for management's judgment of

conditions of effectiveness.

We entrust management with such responsibility,

and we think that this Board has been clear during our CAS

discussion and today of what our concerns are. Our

concerns, and in particular my constituency's concerns, are

on economic performance and commitment to pursue the

economic program.

We expect in view of this debate and this

divergence of views or different perceptions, as some others

have called it, that in this case management will take an

in-depth and detailed approach in reporting to the Board

when and what its assessment is of the conditions of

effectiveness.

So basically, what I would like to state 1s that,


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although we share all the concerns, we feel that for reasons

that we may not fully understand, management decides that it

is in a bad situation, it is better to bring this credit to

the Board now in order not to make the situation worse that

we are willing to support this credit and the conditions

that I have expressed which put on management a stronger and

heavier responsibility in assessing performance after the

August mission and share with us a very detailed report on

meeting those conditions.



These were very helpful suggestions and the rest

of you may want to comment on those too.

Mr. Tamaki, please.

MR. TAMAKI: Thank you, Mr. Chairman.

It is of great concern for us if we should support

Zambia at this time. As the alternative plan suggested by

the management could be seen as a progress to me, my

reasoning is quite similar to Helena and Arnaud.

The crucial point in undertaking this plan is

obviously the condition of effectiveness, namely the content

of the condition and the method of evaluating its success.

The conditions should not be too rigid so as not


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to encourage the Zambian Government to proceed with the

reform process. However, I agree with the French statement

on its macroeconomic framework that IDA money should not be

disbursed if no prospects are foreseen for the Fund to

resume its ESAF program disbursement.

The conditions should also be concrete so that it

will be obvious for all of us if Zambia has met the

conditions or not. As long the conditions are concrete, I

believe that another formal procedure by the Board would be

unnecessary.

Besides, considering the importance of the timing

of this assistance, it would be better to give the

responsibility to the management for making assessment of

compliance with the condition of effectiveness. In doing

that, the management should take the concerns expressed at

the Board into full consideration.

So, my conclusion is that I could accept the

alternative with a strong request for the management to keep

a very close eye on the reform process in Zambia, to

evaluate its success carefully and to report it back to the

Board appropriately.

Thank you.



Washington, D.C. 20002 (2 02) 546-6666


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That was also very helpful. Thank you.

Marcos de Paiva, please.

MR. DE PAIVA: Thank you, Mr. Chairman.

Mr. Chairman, none of the countries that I

represent runs a bilateral agency. So, I have to rely on

the information provided by the Bank.

I am certain that the Bank tends to have

information of very good quality. I know the involvement of

the Bank in countries' realities based on the experience I

have with the countries I represent, and I tend to believe

that the political judgment that the Bank makes on realities

usually works well.

No doubt about the fact that this is a very

ambitious loan that one disbursement upfront, based on

general conditionality, and additional conditionalities very

strong, touching macro performance, budget priorities, land

reform, a new Labor Act, a number of things.

I tend to believe that the Bank has in its

relations, regular relations with a country like Zambia, the

obligation to be responsive at a critical moment. I tend to

believe that, given the commitments accepted by the

Government of Zambia in the context of the whole loan I

am not talking only about the macro performance -- there is


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a gain in going ahead with the loan and getting the

government engaged with the measures that are foreseen here.

We tend to judge the Bank operation based on the

quality of the project on the country commitments and on not

on elements that are not included in the project or do not

belong to the economic reality of the country.

So, if one looks at this project, it is very

difficult to object to it, given the very strong commitments

that are accepted by the Government of Zambia.

So, for this reason, I am very much supportive of

this operation. If the dialogue were lost with other

international financial institutions, the Fund, for example,

we would have a reason to stop. But the dialogue is going

on, and, in this case, I tend to believe, based on the

information provided, that it would be a mistake for the

Bank not to be supportive.

I think that the challenge now is to help the

Government of Zambia to work with all the elements that are

included in this project and then assist them in making it

possible the release of the additional tranche.

Thank you.

MR. SANDSTROM: Thank you very much, Marcos.

Arnaud Chneiweiss, please.


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MR. CHNEIWEISS: Thank you, Sven.

It will not be a surprise if I tell you that I

agree with Helena and Rintaro. I would have preferred to

have a discussion and the approval of this credit early in

September rather than today. I think I understand the

reasons why management is proposing the approval of this

credit today. I am still a little bit unconvinced.

If you could stress one more time the rationale

for going ahead so quickly, I would appreciate it. But, to

a certain extent, I admit that it is your judgment and we

have to trust you on that.

I appreciate the fact that you have added one

condition of effectiveness, and it is your responsibility,

the responsibility of management to exert your judgment

whether or not this condition of effectiveness will be met.

But I would really urge caution and I request management to

take a very prudent conservative approach to see whether or

not conditions have been met on the macroeconomic

stabilization program.

I appreciate that Callisto reemphasized the fact

that we will look both at the targets, whether or not they

have been met in the past, and also at the prospects for the

future. If there is no prospect for the IMF to conclude a


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program, if there is no prospect for the IMF to resume its

disbursements under the ESAF program, I don't think we

should go ahead disbursing an IDA credit. It would be a

waste of IDA money.

At this time, this credit has become a very

sensitive issue. All of our capitals are aware of this

credit now, even those who don't care too much about Zambia.

I agree with Helena that you have special responsibility in

exerting your judgment in this case.

If we give the feeling over the next few months to

our capitals that in this case IDA money has been wasted, it

would have disastrous consequences for IDA support generally

speaking, more than Zambia is at stake with this credit.

So, I really urge you to exert your judgment in a

very prudent way, and to provide us a detailed progress

report after exerting your judgment.

Thank you.

MR. SANDSTROM: Thank you very much, Arnaud.

Mr. Alyahya, please.

MR. ALYAHYA: Thank you, Mr. Chairman.

At this stage of the discussion, I will be brief.

I have two comments.

First, I have noted management's arguments for


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going ahead at this time with this credit. So, I support

it, as revised, with the additional condition of

effectiveness.

There are no doubt risks to going ahead, but there

are in my view even greater risks in the kind of signal that

inaction would send.

Second and for the record, like Eveline Herfkens,

I retain a sense of unease about the way this whole issue

has been handled procedurally and otherwise. I think there

could be implications which go beyond the specifics of

Zambia, including the potential for undermining the

cooperative nature of this very Board. Perhaps we should

all reflect on this and consider how we can avoid such

situations in the future.



Mr. Clark, please.

MR. CLARK: Thank you, Mr. Chairman.

There is very little we can add to the debate at

this stage in the proceedings. However, we are disappointed

that management has chosen not to follow the directions

suggested by Mr. Evans, Mr. Good and Ms. Piercy, which we

would like emphasize should not be seen as a rejection of


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the credit.

The arguments advanced by those Chairs we saw as

compelling, and particularly for an assessment of the Board

following the Bank staff mission before any decision is made

on this ESAC. The current attitude, to highlight one thing,

of major donors whose support is vital is of great concern

to us.

Mr. Good's comment on the desirability of a

coordinated approach is particularly pertinent and really

supported by Mr. Madavo's own comment that without the other

bilaterals the financing plan will not be fulfilled.

In this light, Mr. Chairman, and to keep it short,

we would also like to be recorded as abstaining.


Mr. Al-Saad, please.

MR. AL-SAAD: Thank you, Mr. Chairman.

Our position was clearly stated in our statement

previously distributed, that we endorse the proposed credit.

We think approval of such credit should give a strong signal

of Bank continued commitment for the reform effort of

Zambia.

On the question of timing, I tend to disagree with

some of our colleagues. The timing we believe is right to


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ensure that the reform momentum is maintained.

Thank you.


Mr. Galindez, please.

MR. GALINDEZ: Thank you, Mr. Chairman.

I would like to extend our support to this

operation. I would also like to point out that in FY96

Zambia had negative net transfers with the IBRD in the

amount of $46 million. This is an IDA country transfer to

IBRD in one fiscal year, and this is something to be taken

into account, particularly in view of the $450 million which

will be needed in 1996 as balance of payments assistance.

We also endorse Mr. Tamaki's suggestion that

management keeps the responsibility to monitor future

developments in Zambia and report it to the Board in the

best possible way.

As it was said by other speakers, a dialogue is

going on and this is the right time for the Bank to go ahead

in our opinion and take what we call, and everybody calls, a

calculated risk.

Thank you.


Walter Rill.


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MR. RILL: Picking up on the calculated risk, I am

not so sure whether we really are calculating our risks

here, but I am ready to go forward, despite some uneasiness

with taking that risk.

Like Mr. Chneiweiss, Ms. Cordeiro, Mr. Tamaki and

others, I think the responsibility should remain with

management as appropriate for making the final judgments

before disbursement and effectiveness.

But picking up on Mr. Gerber's comment that we are

responsible for keeping up the quality of our work here, I

would like to strongly remind management and staff that

there may come a time when we will discuss in CODE a country

assistance review for Zambia and then you had better be

prepared to explain what went wrong afterwards if something

goes wrong.

Thank you.

MR. SANDSTROM: Thank you very much, Walter.

Mr. Lodhi, please.

MR. LODHI: Thank you, Mr. Chairman.

Countries do get into difficulties and yet, like

Zambia, they demonstrate a resolve that they can move

towards reform. This country has demonstrated that. Even

in its efforts to privatize, it has done that.


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Its shortcoming perhaps has been aggravated by the

price of its exports not being competitive. Are we going to

penalize them for that? If you are going to wait for the

Bank and Fund mission to go and to certify, what are these

six weeks going to produce really?

On the other hand, if you deny the credit at this

time, loaded as it is with the conditions of effectiveness

and the fulfillment thereof, you will generally be casting

disincentives and perhaps eroding confidence.

Yes, it is absolutely desirable that the donors

move along with the Bank. But the Bank is the senior

partner in this partnership of the donors and the Bank and

it is a more discerning partner. It is a partner that sees

that these risks are tenable.

Mr. Chairman, therefore, we very much support the

time and the content of this project.

Thank you.

MR. SANDSTROM: Thank you very much, Mr. Lodhi.

The last name on my list here is Mr. Mseka.

Leonard, please.

MR. MSEKA: Mr. Chairman, I will say something

after you have summed up or whatever.

MR. SANDSTROM: You really want to be the last


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name?

MR. MSEKA: Yes.

MR. SANDSTROM: Callisto, do you want to say a few

words and then I will try to wrap it up?

MR. MADAVO: Mr. Chairman

MR. SANDSTROM: Asbjoern, do you want to come in

first?

MR. LOEVBRAEK: Yes, I think so, just to clarify

on the procedural issues. I appreciate the explanations

that were given from staff and also the comments around this

table. In fact, I share those of you who have said that it

would, in principle, very unfortunate that the Board in a

sense had a second round and discussed conditions of

effectiveness.

I would have been willing to make an exception in

this rather exceptional case, but I just note that the road

that was suggested by Huw Evans and others is not possible.

That makes my decision more easy, which is abstention.

Thank you.

MR. SANDSTROM: Thank you.

Callisto, please.

MR. MADAVO: Let me just make a few points.

Obviously, as is obvious from the discussion


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around the table, Mr. Chairman, this is not an easy case.

It is a difficult case and we are taking some risks. We

wanted to share honestly some of these points with the

Board.

I think a second observation I would make is that

we listened very carefully and we agree that the assessment

of whether or not the condition of effectiveness has been

met should not be just a mechanical one; that we really

should exercise judgment not just about numbers but about

prospects.

So, I just wanted to be responsive to the Board on

that particular point.

My third observation, Mr. Chairman, is we had

wanted to proceed in this way so that we could remain

relevant in the question of trying to encourage a

cooperative approach. We didn't see, in fact, this way of

proceeding, as the Bank detaching from the partnership.

It was really to give us influence within the

partnership, the ability to play this role or bring in the

government to the table, bringing the bilaterals to the

table with some credibility. We could manage the risks and

proceed prudently.

So, I just wanted to make those observations, Mr.


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ONFIDENTIAL

54

Chairman.


This is clearly a very difficult case. As we now

have heard, there are very different perspectives on the

economic and political governance and, in particular, on the

links between these two, which makes it very difficult for

the Bank and its management.

We also have the difficult judgment on the funding

prospects where the IDA credit clearly is a linchpin, and

the way we go on this will affect the flow of other

resources to at least some extent. There may be different

judgments on exactly the extent on which it has an impact,

but certainly it will have an impact.

My suggestion is that we proceed, but that we

follow up on the many, I think, very constructive

suggestions that have been made here and, in particular,

that we take guidance from this discussion when we assess

the situation in August and when we assess the satisfaction

of the conditions of effectiveness, and that we then provide

a full report to you.

But in doing that, we follow the established

procedures. So, if we are fully satisfied that the

conditions have been met with the guidance we have received


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today, we will release the tranche at the same time.

However, if there are doubts, if the conditions

with your guidance today has not been fully met, we will

come back to you. So, we will follow the normal procedures

and we will try to do this to the best of our ability.

With that, Leonard, do you want to come in before

I say that it has been approved?

All right. Well, the credit is approved on the

terms proposed with Mr. Crowe opposed, or not it is Ms.

Piercy, I assume, and with the following abstaining: Mr.

Evans, Mr. Loevbraek, Mr. Good, Mr. Schaffer, Mr. Gerber and

Mr. Clark.

Did I get that right? No changes?

[No response. ]

MR. SANDSTROM: All right.

Leonard.

MR. MSEKA: Thank you, Mr. Chairman.

Although it is not customary that an Executive

Director representing the country whose operation is being

discussed takes the floor, I feel I should say a few words,

particularly in view of the controversy that has surrounded

this particular operation.

First of all, I would like on behalf of my Zambian


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authorities to thank the Board and particularly those who

have openly supported this operation for approving this

adjustment credit.

In particular, I would also like to thank Callisto

Madavo and the entire Zambian country team, led by Phyllis

Pomerantz, for working so tirelessly on this operation. We

commend them highly for their mature judgment in the case of

Zambia and their dedication to the cause of development.

Second, Mr. Chairman, I wish to register a concern

and to submit a request.

As I noted almost two weeks when we discussed the

CAS, what has happened to Zambia in the course of the last

two weeks is the fourth time it has happened in our

constituency to varying degrees during the past eighteen

months.

We find this totally inequitable. It is an open

secret that governance issues are increasingly being

camouflaged with economic arguments. In this respect, I

wish to commend Eveline Herfkens for her statement made

earlier today.

Yet, governance issues, or shall I say non-

economic issues, are not peculiar to Sub-Saharan Africa

only. Examples can be found in other regions as well.


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nm 57

It is not that we do not wish to uphold democratic

principles; we do. And evidence across Sub-Saharan Africa

clearly demonstrates our people's commitment to democracy,

the rule of law and economic reforms.

What we find intriguing and unacceptable is that,

when it comes to non-economic issues, African countries are

treated differently and are held to a different standard by

this Board from countries in other regions, even where the

record of economic reform and the implementation is clearly

not satisfactory.

If it is necessary that we should keep repeating

this observation every time it happens like a broken record,

we shall do so until we are heard.

However, we think this is not necessary if the

Board is willing to discuss this issue openly.

Therefore, I should like, Mr. Chairman, to submit

a request that CODE and/or OED examine this issue

critically. Our countries are members of these institutions

and they, like other members, deserve all the deference from

the institutions as stipulated in the Articles of Agreement;

thus, my request.

Once again, I wish to thank the Board for

approving the credit.


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Thank you .

MR. SANDSTROM: Thank you very much , Leonard.

I think we should all reflect on this discussion

and this case and the earlier cases that Leonard has

mentioned, and we will come back to this issue.

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