Document of

The World Bank

FOR OFFICIL USE ONLY

CA). /$-u=k

Repwt No. 5050-sZA

STAFF APPRAISAL REPORT

ZAMBIA

AGRICULTURAL REHABILITATION PROJECT

December 12, 1984

This iscumeut ha a 'esld dlsibuti ad may be used by recipets only In the pefoeue oftheir oU.Acil dltie Its emiem may not odhewise be dlsued withot Wol Bnk athsdzo".

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CURRENCY EQUIVAIENTS

Currency Unit Z&mbian Kwacha (K)

US$1.00 - K 2.00US$0.50 K 1.00

(The US Dollar/Zambian Kwacha exchange rateshown above is the rate that prevailed atthe beginning of November 1984.)

ABBREVIATIONS

BOZ = Bank of ZambiaCFB = Commercial Farmers BureauPIC - Project-Implementation CommitteePIU = Project Implementation UnitGRZ = Government of the Republic of ZambiaKFC = Kwacha Fund CommitteeMAWD) Ministry of Agriculture and Water

DevelopmentMOF = Ministry of FinanceNamboard = National Agricultural Marketing BoardNCDP = National Commission for Development PlanningPCUs ' Provincial Cooperative Unions

FISCAL YEAR

GRZ: January 1 to December 31

FOR OmCL USE ONLYZAMBIA

AGRICULTURAL REHABILITATION PROJECT

Table of Contents

Page No.

Su MARY (i)-(iii)

I. BACKGROUND .. **,,,,,,.., 1

A. Salient Economic Features ......................... 1

B. National Economic and Social Goals, and Performance 2

C. Current Economic and Financial Crisis (1980-83) ... 4

D. Short-Term Outlook and Medium-Term Prospects ...... 7

II. THE AGRICULTURAL SECTOR ........ . ............. 9

A. National Agricultural Goals and Achievements ...... 9

B. Major Constraints........................ .o......... .10

C. Foreign Exchange Requirements for Agriculture .....

and Agro-industries (1985-1987) ................. 21

D. Bank Group Assistance to Zambian Agriculture ....... 22

III. THE PROJECT .. ....... .. .. g. . ... 23

A. Origin and Design * .............................. 23

B. Main Objectives ... e ...................... e...... 24

C. Project Description .. c....... .................. 26

D. Estimated Costs and Financing Arrangements ..... oo 28

E. Procurement and Disbursement ..... ................ 30

F. Accounts, Audit and Reporting..................... 31

G. Relations with the IMF *.. ..... ......... e.. .... 31

IV. IMPLEMENTATION AND MANAGEMENT ......................... 32

A. Overall Responsibility ............ ............... 32

B. Project Implementation Unit ........ o.............. 33

C. Trading Houses ...... ge.eeg..g.....eggge.....eg... 34

D. Kwacha Fund .. o .............. 35

This report was prepared by Mr. F.I.H. Mcreithi. It is mainly based on thefindings of a preparation mission consisting of Messrs. F.I.H. Horeithi(Bank), R. Hoover, T. Cobald, and R.J. Lacroix (consultants) which visitedZambia in August 1983, and appraisal mission consisting of Messrs. F.I..Moreithi and D. R. van der Sluijs (Bank) which visited Zambia in November1983.

Thb document has a nrticted disbution and may be wed by reipients only in the Peirfomunce ofthei ofria dutes Its contents may not otherwisebe dbcoed without World Dank autboriatim

Table of Contents (continued) Page No.

V. BENEFITS, JUSTIFICATION AND RISKS 36

A. Main Benefits ........ ............................ 36

B. Main Direct Beneficiarieso.......................... 39

C. Maize Producer Incentive and Fertilizer Subsidies 39

D. Risks .00... ........................... 40

E. Justification for IDA Assistance .................. 40

VI. AGREEMENTS REACHED AND RECOMMENDATIONS ................ 41

A. Agreements Reached ......................... 41

B. Recommendations *6@eO*Se ........................ 43

VII. CONDITIONS OF EFFECTIVENESS ,,,*********.............. 43

ANNEXES

Annex 1 - Zambia's Economic Recovery Program

Annex 2 - Table 1: Principal Agricultural Imports

Table 2: Official Producer Prices for Major Crops

Table 3: Marketed Agricultural Produce Intake

by Official Channels

Annex 3 - Implementation Schedule for Policy Reforms and

Other Measures

Annex 4 - Table 1: Financial Costs and Benefits (Hybrid Maize)

Table 2: Economic Costs and Benefits (Hybrid Maize)

Table 3: Sensitivity Analysis (Hybrid Maize)

Annex 5 - Disbursement Schedule

MAP: IBRD 11631R of 6/83

Project File Papers:

Paper No. 1 : Agricultural Mechanization: Current Status and

Requirements.

Paper No. 2 : Namboard and Provincial Cooperative Unions.

Paper No. 3 : Foreign Exchange Requirements for Agro-Processing

Sub-sector.

Paper No. 4 : Study on PCU's Costs (Terms of Reference, Actl3n Program,

and Manpower Requirements).

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ZAMBTA

AGRICULTURAL REHABILITATION PROJECT

PROJECT SUMMARY

Borrower: Republic of Zambia.

Executing Agency: Bank of Zambia (BOZ)

Amount: SDR 24.7 million (US$25.0 million equivalent).

Terms: Standard IDA terms.

Project Description: The proposed Project would encourage theGovernment to continue the on-going and tocarry out further policy and institutionalreforms on issues that have hitherto cons-trained agricultural development in Zambia; itwould also help to finance critical productioninputs with a view to arresting the decliningtrend in agricultural production. The mainreforms would be: adopting a pricing policyconsistent with regional comparative advantagesand the principle of full cost recovery; andimproving efficiency of produce marketing andinput distribution system by making the systemmore competitive through allowing privatesector participation. The Project wouldfinance imports of farm machinery, spare parts,agro-chemicals, seeds and other miscellaneousinputs which are in short supply and constrainproduction.

Main Benefits: The envisaged policy and institutional reformswould have widespread benefits, thoughdifficult to quantify. In particular, theywould reinforce Government efforts to diversifythe economy from the extreme dependency onmining, especially through: (a) adopting apricing policy consistent with regionalcomparative advantages, thereby promoting amore efficient use of resources and thusenhancing the general capacity of theagricultural sector to generate alternativesources of incomes and employment; (b) adoptinga price structure that allows full-costrecovery, thereby helping to eliminatemarketing subsidies and thus releasing fiscalresources to support diversification efforts;

(ii )

and (c) adjusting wheat product prices andencouraging implementation of measures toreduce uneconomic fertilizer consumption, thusreducing imports and releasing foreign exchangeresources for diversification investments. Inaddition, the physical inputs would enablefarmers to respond to the improved policyenvironment and increase agriculturalproduction in general and maize output inparticular. It is estimated that, during theProject's economic life of 12 years, theincremental maize production would average190,000 tons annually with a gross value ofabout K 59.8 million, and a net present valueof about K 34.3 million (US$17.2 million). Theeconomic rate of return has been roughlyestimated at 59%.

Main Direct Beneficiaries: The proposed policy and institutional reformswould benefit a wide spectrum of farmers,including subsistence farmers on the verge ofentering the market economy. The major part ofof the tractor units and agro-chemicals wouldbenefit the medium- and large-scale farmers;however, it is estimated that about 20% ofthese inputs would go to the market-orientedsmallholders (emergent farmers). In addition,about 7,000 smallholders would benefit fromox-drawn implements financed by the Project.

Main Risks: The Project's main risks are: delays or failureto carry out the envisaged policy and institu-tional reforms; inadequate availability ofcomplementary inputs, especially fertilizers,which are not financed by the Project butwithout which the Project's inputs wouldachieve very little; and recurrence ofdroughts. The Government has recentlydemonstrated the political will to implementunpopular measures and this now makes itrealistic to expect that, in view of the grimfinancial and economic prospects confrontingZambia, the Government would take resolutesteps to implement the reforms envisaged underthe proposed Project. The likelihood ofserious shortages of fertilizers is expected tobe significantly reduced by the on-going andplanned efforts to increase local production of

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fertilizers, and bilateral assistance which hasbeen readily forthcoming in the past; at nego-tiations, the Government confirmed availabilityof such assistance. Little can be done aboutdroughts in the short-run; however, for thelong-run, research is proceeding to developmore drought resistant crop varieties andfarming techniques.

Estimated Costs: Local Foreion Total %usi million --

Farm Machinery 3.9 36.0 39.9 55.2Spare Parts 1.2 10.2 11.4 15.8Agro-chemicals 2.0 17.4 19.4 26.8Miscellaneous 0.2 1.2 1.4 1.9Consultancy - 0.2 0.2 0.3

Total 73. W5.0 7 -3 100.0

Financing Plan: Local Foreign Total Z-- u-S$ million -

IDA - 25.0 25.0 34.5Co-financing 1/ - 40.0 40.0 55.3Trading Houses 2/ 7.3 - 7.3 10.2

Total -9.0 65.0 72.3 100.0

t/ US$4.8 million from the Swiss Govt.,andUS$5.0 million from USAID, US$23.4 millionfrom the African Development Bank, and US$6.8 million from CIDA (Canada).

-2 Farm machinery and agro-chemical importers.

Estimated Disbursement: IDA Credit would be disbursed in two tranches,in keeping with implementation of the policyand institutional reforms as scheduled in Annex2; disbursement is estimated as follows:

Bank/IDA FY '85 '86 '87 '88US$ million -

Annual 4.2 10.6 7.7 2.5Cumulative 4.2 14.8 22.5 25.0

Rates of Return: Financial: 27%; Economic: 59Z.

Map: IBRD No. 11631/R

ZAMBIA

AGRICULTURAL REHABILITATION PROJECT

I. BACKGROUND

A. Salient Economic Features

1.01 Zambia is a land-locked country with a surface area of 763,000sq. km, a population of about 6.3 million of which 43% is urban, and aper capita GDP of US$526. The service sector, accounting for about 48% ofGDP in 1980-83 and consisting mainly of governmental services, is thesingle largest sector; however, the mining sector, accounting for about 15%of GDP and 95% of total export revenues is the most important productivesector, because of its overwhelming impact on the rest of the economythrough its effects on the available development resources in general andforeign exchange earnings in particular. Manufacturing and agriculture arethe other major productive sectors, respectively accounting for 22% And 14%of GDP and jointly contributing about 5X to export earnings. Copper is byfar the most important export mineral, representing about 90% of miningexport values, while cobalt ranks next and represents about 6X of exportearnings,with the remainder coming from zinc and lead.

1.02 The manufacturing sector is dominated by agri-related activities(food, beverages, tobacco, textiles, wood and wood products) which accountfor about 65% of value added in manufacturing; the rest of the sectorcomprises mostly rubber, chemicals, petroleum, and plastic products whichcontribute about 17%; and metal products which contribute about 11%. Thesector is characterized by generally high production costs relative to theborder price equivalents, excess capacity, and high capital and importintensities. It is estimated that most of the manufacturing enterprises inthe country are operating at less than 50% of the installed capacityprimarily due to the shortage of foreign exchange. While it accounted forabout 22% of GDP, the sector absorbed about 42% of the country's totalimports during 1979-81. The heavy dependence on imports renders the sectorfragile especially with regard to capacity utilization. Although Zambia hasa wide range of natural resources, numerous obstacles limit their use as asource of industrial raw materials. The known iron ore dep(usits are of apoor quality for economic exploitation on a large scale. Forestryresources are abundantly available but the bulk of the indigenous wood isunusable for industrial purposes. On the other hand, several agriculturalraw materials, which are now imported (oil seeds, natural fibres, livestockby-products, etc.) can be technically produced locally, but theirproduction has been constrained by the various factors which have generallyhampered the growth of the agricultural sector (paras 2.05 to 2.28).

1.03 The development of Zambia's agriculture has remained far belowthe potential. Of the estimated 60 million ha of arable land, only about12 million or 20% is currently cultivated. Although much of the land isinfertile and is suited mainly to extensive farming, there still remainslarge areas of idle land consisting of pockets of medium to high potentialsoils. The rains tend to be erratic, but the climate is generallyfavorable for the cultivation of a wide range of crops. Maize is by farthe most important crop and accounts for over 70% of the value cf themarketed agricultural products. The other significant crops are cassava,

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millet, sorghum, groundnuts, sunflower, cotton, tobacco, sugar cane, rice,soyabeans, and a variety of legumes and vegetables. The country also has asizeable number of the various types of livestock, and cattle are a majorsource of cash income and offer a considerable potential for animal draftpower.

1.04 The sector is acutely dualistic. On the one extreme is thetraditional farming system entailing about 460,000 or about 76% of theestimated 600,000 farm households, who cultivate an average of slightlyless than 2 ha, using family labor and simple hand tools, and producing forsubsistence purposes with only occasionally marketable surpluses. On theother extreme is a small category of medium- and large-scale commercialfarmers,comprising about 4% of the farm households and producing about 40Xof the value of maize and 55% of the other marketed agricultural products,using a full range of inputs, and characterized by high yields. Theextreme dualism has been slightly moderated by the development ofsmallholder (emergent) market-oriented farmers, numbering about 125,000 or20% of the farm households, cultivating an average of 3 ha, using mainlyhand tools and labor but also oxen and hired tractors, and modest amountsof purchased seasonal inputs especially fertilizers; these farmers producedeliberately for the market, and generally obtain much higher yields thanthe traditional farmers. Together with the occasional surpluses fromtraditional farmers, the smallholder market-oriented farmers account for60% of the value of maize and 45% of the other marketed agriculturalproducts.

B. National Economic and Social Goals, and Performance

1.05 Since Independence 20 years ago, Zambia's economic and socialgoals have been aimed at attaining a level of income sufficient to meet atleast the basic needs of the population, with special reference to ruralareas, and at achieving an enduring socio-political stability as anindispensable foundation for economic development. The country has soughtto achieve these goals through various policies directed at acceleratingoverall economic growth, narrowing the urban-rural income gap, diversifyingthe economy from the extreme dependence on copper, and disengaging it fromthe historical dependence on southern Africa, Zamblanizing the ownership ofthe major economic enterprises, expanding access to education, health andother essential public services, and developing basic infrastructure.

1.06 Some notable achievements have been made especially in education,in re-routing transport outlets from the south to the north through Dar esSalaam, in developing basic infrastructure, in Zambianizing the economymostly through parastatal ownerships, and in maintaining socio-politicalstability. However, the achievements have on balance fallen far short ofexpectations as is manifested by the fact that the economy has been on asharply declining trend for the past nine years. In real terms during1975-83 compared to 1970-74, total income fell by about 22%, per capitaincome by about 36%, capacity to import by about 61%, net fixed capitalformation by about 67%, gross domestic savings by about 72%, and fiscalrevenues by about 33%; in addition, overall food self-sufficiency declinedby about 21%, while the balance of payments on current account deterioratedfrom a surplus position to a deficit of K 369 million, or 14% of GDP (Table1.1). Furthermore, the urban-rural income gap has remained wide, with

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Table 1.1 - Selected Socio-Economic Indicators 1/

Percentage1970-74 1975-83 Change- - Averages

Gross Domestic Income 2/Total K (Million) 1,318 1,027 -22.1Per Capita (K) 290 184 -35.6

Real Average Wages (K) 1,390 1,140 -18.0Capacity to Import (K Million) 3/ 645 254 -60.6Net Fixed Capital Formation

(K Million) 219 72 -67.1Gross Domestic Savings (K Million) 592 166 -72.0Current Account BalanceK Million 53 -369 -% of GDP 3 -14 -

Government Revenues (K Million) 487 326 -33.1School Enrollment (%) 4/Primary 91.0 95.0 +4.4Secondary 13.0 17.0 +30.8

Food Self-sufficiency Index 5/ 89 71 -20.8

1/ All monetary values are at 1970 constant prices, except balance ofpayments figures.2/ GDP adjusted for changes in terms of trade.3/ Export at current prices divided by import price index.7! 1970-74 values refer to available annual data for the period 1968-70,

while 1975-83 values refer to available annual data for the period5/ Cereal production as a proportion of total consumption requirement.

average rural income at about one-third of the urban level. Efforts todiversify the economy have met with little success and the economycontinues to be heavily dependent on mining and, therefore, highlysensitive and vulnerable to external factors; the modest structural changesthat have taken place in this respect during the last decade have been morea result of an absolute decline in mining production than of a positivedifferential growth among the major productive sectors.

1.07 While Zambia has made considerable progress with regard toeducation, it continues to face an acute shortage of skilled manpower and,to a considerable extent, is still dependent on expatriates, particularlyin the professional and technical areas. The country is also handicappedby demographic features which include a high rate of population growth atabout 3.1% per annum, a high economic dependency ratio of 1.4, and a highurbanization growth rate of about 6.7% annually. These factors necessitatediversion of a large part of the available resources from immediately

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productive activities to education, health and other social services, andthus constitute a severe strain on an economy beset by economic andfinancial crisis of such a magnitude as is now facing Zambia.

C. Current Economic and Financial Crisis (1980-83)

1.08. Precipitated by a 40% drop in copper prices during 1975, aneconomic and financial crisis of major proportions has continued to plagueZambia and to worsen steadily to the present day. In 1983 compared to the1980-82, average real per capita income is estimated to have fallen furtherby about 6.6%, capacity to import by about 191, net fixed capital formationby about 52Z, while the balance of payments deficit on current accountdeteriorated by about 13.1Z; in addition , after slowing down towards theend of the 1970s, inflation has assumed a sharp upward trend, rising fromabout 12.4% during 1980-82 to about 25% during 1983, to a large extentreflecting recent devaluation and price decontrol (Table 1.2). Severalfactors have contributed to this situation but the most important are: achronic decline in Zambia's external terms of trade; a secular decline incopper production and, consequently, export volume; recurrent droughts; anincreasingly heavy external debt service burden; and an adverse policy andinstitutional environment.

Table 1.2 Recent Economic Indicators 1/

1980-82 1983 2/ PercentageChange

Gross Domestic Income 2/Total (K Million) 1,038 1,052 +1.3Per Capita (K) 178 168 -6.6

Capacity to Import 3/ 190 154 -19.0Current Account Balance (K Million) -633 -716 -13.1

% of GDP 19 17 -Net Fixed Capital Formation(K Million) 50 24 -52.0

Government Revenues (K Million) 243 264 +8.2Rate of Inflation (X) 4/ 12.4 25.0

1/ All monetary values are at 1970 constant prices, except balance ofpayments deficit.

2/ Estimate.31 As in Table 1.1, footnote (3).4/ Weighted average of urban low and high income consumer prices.

1.09 Mainly as a result of depressed economic conditions in theindustrialized countries, the world copper prices and demand have remainedweak over the past nine years. Although some recovery has taken place andcopper prices rose by about 18% during 1980-82 compared to 1970-74, theprices have continued to be well below the pre-1974 levels in real terms,

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averaging about 50X of the 1970-74 level during 1980-83. In addition, theprices of cobalt, the next important mineral export, dramatically plummetedfrom USS25 per lb in 1981 to US$6 per lb in 1982 and further to aboutUS$5.70 per lb toward the end of 1983. The situation has been aggravatedby a continuous fall in copper production and export volume, reflecting asecular declining trend arising from the facts that copper deposits arebecoming increasingly less accessible and ore grades less rich. Partly as aresult, copper production declined from 750,000 tons in 1976 to an averageof 620,000 tons in 1980-82, and down to 580,000 tons in 1983; it istherefore estimated that, at the prevailing rate of exploitation, theeconomically exploitable copper reserves are likely to be exhausted inabout 15-20 years. In addition, Zambia has been plagued by severedroughts during most of the past four years, necessitating large imports ofmaize, estimated to have cost the country about K 11 million in 1982/83.

1.10 A further factor underlying the current crisis facing the countryis related to external debts. Zambia's debt service amounted to about 27%of export earnings in 1980-81 and is estimated to have risen to about 34%in 1983. Despite large accumulation of payment arrears, debt servicingoutlays siphoned off over 45% of total disbursements of medium andlong-term capital inflow during 1980-83. The external debt burden,declining copper prices and export volume have exerted a severe strainparticularly on the balance of payments. The balance of payments has beencharacterized by a chronic disequilibrium since 1975, and despite majorcutbacks on imports in real terms (para 1.16), the deficit on currentaccount rose from an average of K 212 million, or 10.3% of GDP, during1975-79 to K 561 million, or 15.9% of GDP, during 1980-83. The persistentdeterioration in the balance of payments position has led to a severeshortage of foreign exchange which, in turn, has resulted in acuteshortages of imported machinery, components, spare parts and industrial rawmaterials, thereby causing considerable under-utilization of productioncapacity throughout the country, and a deterioration of basic infra-structure.

1.11 The on-going crisis has also caused serious difficulties withregard to public revenues. The persistently low copper prices, coupledwith steadily rising mining costs, have eroded the profitability of themining industry as a result of which the sector has virtually disappearedas a major source of fiscal revenues. Whereas the mining industryprovided an average of K 172 million or 41% of total Government revenueduring 1970-74, it provided only an average of K 19 million or 3% of totalGovernment revenue during 1975-82. Although measures to generate morerevenues from non-mining sources have succeeded in raising fiscal revenuesby about 60% during 1980-82 compared to 1975-79, recurrent expenditureshave been rising more sharply to the effect that budgetary deficits rose byabout 74% from K 301 million during 1975-79 to K 524 million, or 14.7% ofGDP, during 1980-83. These deficits have been financed mostly by borrowingfrom the banking system, with the Government accounting for about 69% ofthe total domestic credit during 1980-83, thereby crowding out theavailability of resources to the private sector in addition to exerting aninflationary pressure on the economy.

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1.12 The economy's capacity to withstand external shocks has beenimpaired by unfavorable domestic policies and practices, notably inappro-priate commodity and factor pricing policies, poor allocation of publicresources, an over-valued currency, a deficient tariff structure, and anover-extended and generally inefficient parastatal sector. Until recently,all commodity prices were controlled by the Government and were generallyskewed in favor of and entailed heavy budgetary subsidies to the urbanconsuers '.vhile providing inadequate incentives to agricultural andindustrial producers. Interest rates are also controlled by the Governmentand have been set at levels far below inflation rates, whereas wages havebeen rising sharply. This situation has tended not only to discouragesavings but also, coupled with duty-free import of and accelerateddepreciation allowance for capital goods and an over-valued currency, toencourage a capital-intensive mode of production throughout the economy.Moreover, the over-valued currency has been acting against exports whilemaking imports artificially cheaper and, together with low tariffs on rawmaterials, has thus encouraged importation of raw materials at the expenseof local production.

1.13 Inappropriate allocation of public resources has been a furthermajor factor accounting for the poor performance of the Zambian economy,considering that the Government commands a substantial proportion of theavailable resources. The bulk of the public expenditures has continued togo mainly to social services, with the share of the directly productivesectors falling from 12% of the total expenditures during 1970-74 to about62 during 1980-83. In addition, the brunt of the measures to restrainpublic expenditures has been borne mostly by capital outlays and non-wageoperating costs. As a proportion of total public expenditures between1970-74 and 1980-83, wage costs rose from 19% to 23% and consumer subsidiesfrom 6Z(K 34 million) to 10% (K 138 million); on the other hand, capitaloutlays fell from 33% to 15% and non-wage operating costs from 14% to 12Z.The decline in the ratio of non-wage operating costs to wages has meantincreasing under-utilization of the public manpower resources.

1.14 The parastatals, originally expected to generate incrementaldevelopment resources, have been a heavy drain on the economy. Sinceindependence in 1964, Zambia has assigned the parastatals an increasingrole in the production and distribution of goods and services in allsectors of the economy. Many of them have been operating at substantiallosses which have had to be covered by credit from the banking system andbudgetary subsidies. The poor performance has been due to several factors,notably: adverse pricing policy; weak managerial, administrativP andsupervisory capabilities; ill-defined objectives; limited authorityrelative to responsibility; lax accountability; and inadequate attention toeconomic considerations.

1.15 The Government has increasingly come to recognize the need tocarry out policy and institutional changes with a view to reversing thedownward trend which has characterized tle Zambian economy during the pastnine years, and to diversify the economy from the dependence on the miningindustry. To this end, the Government has initiated or committed itself toinitiating policy and institutional reforms which include:

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(a) improving price and non-price producer incentives;

(b) mobilizing resources partly by reducing subsidies, and improvingtheir allocation through systematic planning to shift resourcesto productive investments;

(c) adjusting wage and interest rate policies to reverse the pasttrend which has tended to encourage consumption at the expense ofinvestments;

(d) adopting a flexible exchange rate system; and

(e) improving the efficiency of parastatal enterprises bystrengthening their technical and management capacity, andcreating an environment as would enable them to becomefinancially self-sufficient.

1.16 Several of the above measures have already been implemented(Annex 1). In December 1982, all consumer prices were decontrolled exceptfor candles, maize and wheat products; agricultural producer prices havebeen raised to levels close to or above the border price equivalents; anda number of non-price incentives, notably foreign exchange retentionallowances and concessional tax rates, nave been introduced with a view tostimulating production and encouraging new non-mineral exports.Furthermore, the Government has undertaken institutional changes aimed atimproving operational and financial performance of the parastatalenterprises, attaining a better match between budgetary recurrent andcapital costs, improving foreign exchange allocation procedures, andstrengthening agricultural planning capability. The Government has alsodevalued the Kwacha by about 42%, adopted a system of flexible exchangerates, increased interest rates across the boards reduced budgetarydeficits from K 765 million in 1982 to an estimated K 308 million in 1983,and subsidies from K 154 million in 1982 to an estimated K 83 million in1983. In addition, measures have been adopted to restrain increases inGovernment employment and in wages throughout the economy. In real terms,total imports have been reduced from K 332 million in 1975-79 to K 241million in 1980-82 and to K 157 million in 1983.

D. Short-term Outlook and Medium-term Prospects

1.17 In the short to medium term, the performance of the Zambianeconomy critically depends on the behavior of the world copper prices anddemand; it will also depend significantly on the success and impact of theon-going policy and institutional reforms, and on Government's ability toencourage increased domestic savings while directing a greater amount ofinvestment resources into the main productive sectors in general, and intothe quick-pay-off activities in particular. The economy will cintinue tobe heavily dependent on foreign exchange resources not only to financeimportation of essential capital and intermediate goods but also to meetthe mounting external debt payment obligations. In view of the seculardecline in copper production and export volume, coupled with a limitedscope for a rapid growth of non-mineral exports, the requisite foreignexchange resources during the remainder of the 1980s will need to comemostly from improvement in copper prices.

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1.18 Current copper prices are below average world production costsand the Bank commodity price projections therefore envisage copper pricesto rise by about 12% in real terms between 1985 and 1990. In addition, thepolicy and institutional reforus already in place should have a positiveimpact on the economy. The devaluation of the Kwacha should make themining industry more profitable and, in combination with the foreignexchange retention allowances and concessional tax rates, may stimulatenon-traditional exports. Similarly, the decontrol of consumer prices andthe high increases in producer prices should encourage increased industrialand agricultural production, while the reduction in subsidies releasespublic funds to productive investments. Nonetheless, as recent Bankprojections indicate, Zambia will continue to face severe economic diffi-culties in general, and balance of payments problems in particular duringthe remainder of the current decade, with GDP growing by about 2.32, percapita GDP and consumption falling by 0.3% and 1.7% respectively, while thebalance of payments will experience a substantial financing gap (Table1.3). Given the fact that imports have already been cut severely in realterms, the grim prospects necessitate a large inflow of external assistanceto permit even a modest rate of growth and prevent a possible collapse ofthe Zambian economy.

Table 1.3 Balance of Payments Projections(US$ Million)

1984 1985 1986 1987 1990

Exports, Goods & NFS 1,108 1,242 1,487 1,674 2,178Imports, Goods & NFS 1,099 1,177 1,297 1,418 1,766

Balance of Trade 9 65 190 256 412

Net Factor ServiceIncome & Transfers -389 -384 -383 -374 -322

Current Account Balance -379 -319 -193 -118 90

Net Capital Inflows 108 32 -152 -137 -330

Financing Gap -271 -287 -345 -255 -240

Source: Summary from Zambia; Country Economic Memorandum;Issues and Options for Economic Diversification";April 16, 1984.

1.19 The situation described above underlines the urgency ofaccelerating the development of the non-mining sectors to providealternative sources of income, export earnings, savings, and employment.Achieving this objective is made more difficult now than ever before by thefact that the mining sector itself will continue to be a substantialconsumer of the available domestic and 'oreign resources at a time when

such resources are critically needed to support diversification into othersectors, and by the fact that the external debt servicing will absorb alarge proportion of the foreign exchange earnings. The agricultural sectoroffers the most promising prospects of achieving the diversification goalin the short to medium term, particular through ensuring adequate foodsupply so as to obviate the need for higher imports, and through increasingthe supply of locally produced industrial raw materials in order tofacilitate greater utilization of the existing manufacturing capacity andconsequently reducing the high import-intensity which has hithertocharacterized the majority of the maw;facturing enterprises in Zambia.

II. THE AGRICULTURAL SECTOR

A. National Agricultural Goals and Achievements

2.01 Agricultural development efforts in Zambia have historicallyaimed at several goals, some of which are mutually incompatible. Inaddition to diversifying the economy away from mining, the main goals ofthe agricultural sector have been directed at attaining self-sufficiency instaple food crops, especially maize; spreading growth and development toall parts of the country thereby helping to narrow the rural-urban incomegap and to redress regional disparities; and at ensuring low-cost food forthe mining and industrial workers by keeping agricultural prices low.Despite various development programs and projects since Independence twodecades ago, little progress has been made towards achieving these goals.The country continues to import agricultural commodities which could beproduced locally,notably vegetable oils (Annex 2, Table 1). Moreover,after attaining self-sufficiency in maize in 1971 and becoming a netexporter fior the subsequent six years, Zambia has reverted to being a

Table 2.1 - Average Annual Growth Rates(Percentage)

1970-74 1975-82

Marketed Volume of Main CropsMaize 26.1 -2.7Virginia Tobacco 0.9 -16.6Sugar Cane 22.7 0.0Seed Cotton -2.0 43.7Sunflower Seeds 1.0 15.8Groundnuts (Shelled) -13.1 -11.6

2.03 The sector's contribution to diversification efforts has beenminimal. Furthermore, its impact on the urban-rural income gap, and theregional disparities has been equally disappointing. Though they havebeen improving during the 1980s following sharp increases in agriculturalproducer prices, the rural-urban barter terms of trade were about 28Xagainst rural areas in 1980-81 compared to 1970, partly reflecting a

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continuous rise in wages in all the non-agricultural sectors while farmprices were kept low through Government control. As a result, the urban-rural income gap remained wide and rural incomes are estimated at aboutone-third of the urban level. Little has been achieved towards redressingregional disparities as the three ecologically better endowed and histori-cally more developed provinces have continued to account for over 90% ofthe marketed maize and other farm products, more or less as they did priorto Independence.

2.04 Although throughout the last decade Zambia continued to carry outa wide range of programs and projects to stimulate agricultural developmentand growth, it is evident that the past efforts have failed to generaterates of growth sufficient to ensure satisfactory rural incomes, andadequate food and agro-raw materials for the rapidly growing population.The reasons behind the poor results are many and include external factors,notably the shortage of foreign exchange and severe droughts which have hitthe country in three successive years during the recent past. However, theadverse impact of such external shocks and natural calamities has beengreatly exacerbated by a number of internal constraints which have weakenedthe Zambian economy in general and the agricultural sector in particular.

B. The Major ConstraintsPricing Policies

2.05 Inappropriate pricing policies have been one of the major factorsconstraining the growth of Zambia's agriculture. Producer prices of themajor crops, notably maize, have been subject to Government control mainlyin the interest of maintaining a cheap food regime for the benefit of theindustrial workers and urban population. Accordingly, producer priceswere, until three years ago, kept substantially below the border-priceequivalents, while retail prices were set below production and marketingcosts, resulting in mounting subsidies mainly to consumers. For crops suchas maize, tobacco, cotton and wheat, which the farmers cannot market out-side the parastatal channels, the official low producer prices are at oncethe effective prices, and have had the effect of imposing an implicit taxon producers and creating a disincentive to increased production. Thepolicy was drastically modified towards the end of 1982, when all consumerprices were decontrolled except, as far as agriculture is concerned, formaize and wheat products; following negotiations for this Project, theGvernment decontrolled wheat product prices effective from Nov'ember 1,1984. Although the Government continues to set all producer prices, andto control maize producer as well as fertilizer selling prices, they hav-.been increased substantially in real terms, and, until the later half of1984, to levels close to or above the border-price equivalents.1/ TheGovernment has thus taken notable steps towards improving the pricingpolicy. However, the policy continues to entail a number of features thatadversely affect agricultural development, namely: a price structure formaize and fertilizers that does not permit full cost recovery and whichinvolves uniform producer throughout the country, while allowing inadequateregional differentials for consumer prices of maize; and a defective pricesetting methodology for the controlled prices.

1/ The gap between the domestic and import-parity prices of maize haswidened since mid-1984 mainly as a result of devaluation of the Kwacha.

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2.06 The resale prices charged by the marketing agencies, Namboard and

Cooperatives, for maize and fertilizer were recently raised to a level

which covers the procurement costs (producer prices for maize, and

fertilizer landed cost) incurred by these agencies, but they still do not

allow any margins for transport, handling, storage, and other relevant

marketing overheads. These marketing agencies are therefore compelled to

remain dependent on budgetary subsidies to cover these costs, and this has

several adverse effects because: (i) it fosters inefficiencies since there

is no compelling reason to control costs as the Government stands ready to

cover lossses; (ii) it hinders the development of essential marketing

facilities, such as storage, because the responsible agencies are unable to

generate the required financial resources; (iii) it results in mounting

financial charges to the marketing agencies as delays in receivingsubsidies are becoming longer and longer, thus forcing these agencies to

increasingly resort to costly overdraft facilities from the banking system;

and (iv) it inhibits the growth of private enterprise which can survive

only if allowed to recoup full costs, including a reasonable return on

capital and management. It is therefore important that Namboard and the

Cooperatives are enabled to be financially wholly self-dependent, not onlyto reduce the burden on fiscal resources, but also to minimize these otheradverse effects and particularly to foster financial discipline and astronger awareness of the cost-and-return imperatives, both of which are

critically needed if these agencies are to become financially viable and,

thus, valuable assets to the economy. Under the proposed Project, the

Government would take appropriate measures to this end (para 3.07 (a) ).

2.07 The rationale for controlling maize and wheat product prices is

that these commodities are regarded as an essential part of the Zambian

diet. As a result of a dialogue initiated under this Project, the Govern-ment has agreed to decontrol wheat product prices mainly because, unlike

maize which constitutes the predominant proportion of food consumption forthe majority of the Zambians both in the rural and urban areas, the

consumption of wheat products is overwhelmingly confined to the urbandwellers (Table 2.2). Furthermore, wheat product prices have remained

unchanged during the

Table 2.2 - Estimated Annual Per Capita Consumption(Percentage of Total Cereal and Cassava Intake)

Maize Wheat

Rural Areas 65.5 2.8Urban Areas 71.7 25.6Zambia 68.0 11.9

past three years as a result of which these products have become increas-

ingly cheaper relative to such commodities as maize meal and cassava,

thereby tending to encourage greater consumption of wheat, which is mostly

imported, at the expense of locally produced commodities. There is,

therefore, little economic justification in continuing the control over

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wheat product prices, especially since a price increase is unlikely to havea major impact on the cost of living since wheat products are estimated toaccount for less than 2% of the urban population expenditures on food.

2.08 Since 1974/75, the Government has set producer and, untilmid-1984 (para 3.07), consumer prices of agricultural products at a uniformlevel throughout the country, partly with a view to lessening the transportconstraint by wholly subsidizing transport costs. Partly as a result ofthe vast size of the country combined with a widely scattered population,internal transport costs are considerably high; for example, in the case ofmaize, transport costs during 1980 averaged about 52.7% of the producerprice and 41.5% of the retail price. This restricts supply responses amongthe farmers off the line-of-rail, who make up the majority of the Zambianfarmers, as the high transport costs have an effect equivalent to reducingproducer prices and thus represent a major disincentive to such farmers.The high transport costs dictated that, from an economic efficiency pointof view, most of the marketable food surpluses have to be produced close tothe urban centres where the non-agricdltural workers are concentrated.Consequently, the preponderant majority of the Zambian farmers, located asthey are in remote areas and producing relatively bulky crops, have verylimited opportunities to benefit from the available markets in the majorurban centres along the line-of rail.

2.09 The major part of the subsidies associated with this policy hasbeen reflected chiefly in lower consumer prices. The resultant lowconsumer prices have tended to encourage the consumption of maize at theexpense of the traditional crops, such as cassava and sorghum, most ofwhich are marketed outside Namboard and cooperative channels and thereforereceive no subsidies; the policy has therefore acted against the interestof the estimated 60% of traditional farmers for whom, due to unfavorableclimate and soil conditions, the cultivation of maize is generally marginalcompared to such traditional crops. Rather than spreading development tothese farmers, the uniform price system has constrained increased produc-tion of the crops in which they enjoy comparative advantages. Furthermore,in addition to giving distorted price signals to producers and consumers,thereby leading to inefficient allocation of resources, the policy hascontrained overall agricultural development because it ignores the inter-and intra-regional comparative advantages in a country characterized bysuch widely varying climatic and soil conditions as Zambia is.

2.10 The policy also has other built-in features which militateagainst the equity objectives it was originally intended to achieve. Thesize of the benefit to an individual farmer depends not only on how far heis located from the market but also on the bulkiness of his crop relativeto value, and the amount he produces for the market. This means, forexample, that rice and wheat farmers benefit proportionally less than maizefarmers, and large-scale farmers benefit more than smallholders. Withregard to fertilizers, the subsidy benefits particularly the few whoalready have sufficient production resources to cultivate large acreage andwho find the available technological packages suited to their farmingsystem. The available technological packages are largely unsuitable forthe preponderant majority of the farmers; until this constraint is subs-tantially resolved, the majority of the farmers stand to gain little from

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from fertilizer subsidies and would probably have been better off if thesubsidies had been used to provide them with better research and extensionsupport. Apart from the fact that there is no practical way to removing thesubsidies without introducing a regionally differentiated price structure,the uniform price policy needs to be changed so as to take full recognitionof inter-regional comparative advantages. Under the proposed Project, theGovernment would begin to take appropriate measures accordingly (para 3.07(a) ).

2.11 The methodology currently used to determine produce pricesremains unsatisfactory. The prices are derived from estimated averageproduction costs for the year immediately preceding the cropping season,based on a single model farm budget for the whole country, and including areturn to fixed capital which varies widely from crop to crop and year toyear for no apparently justifiable financial or economic reasons. Apartfrom the fact that the data used have little empirical basis, the resultantprices have no bearing on the prevailing or anticipated supply-demandimbalances, or on the likely changes in incremental production costs as thedesired increase in production necessitates expanding cultivation intorelatively marginal areas, and does not take into account the tradingopportunities open to the country as reflected by border prices. A betterprice setting methodology needs to be evolved, especially for maize butalso for fertilizers, to reflect border price equivalents (para 3.07 (f) ).

Non-price Producer Incentives

2.12 The Government has introduced a number of non-price producerincentives, notably concessional tax rates for agricultural incomes;accelerated depreciation and customs duty exemptions for farm machinery;and foreign exchange retention allowances to those marketing over, forexample, 5,000 bags of maize, and 50% of foreign exchange value to thoseexporting non-traditional commodities. Tax rates on farming incomes werereduced from 80% to 25% in 1981 and to 15% in 1982, and farmers are nowallowed to write off 100% of capital cost of farm machinery and implementswithin two years. Although these incentives mostly benefit the medium andlarge scale farmers, the Government is well advised to retain them in orderto encourage increased supply of marketed production to arrest thedeclining trend.

Produce Marketing and Input Distribution

2.13 Produce marketing and input distribution in Zambia plays acritical role in the development of agriculture in view of the fact thatonly when a reliable marketing system is assured can the traditionalfarmers be realistically expected to deliberately aim at producing asurplus over and above their consumption needs. Maize is the mostimportant among the marketed agricultural products in the country as it isthe main staple food crop cultivated by the majority of the farmers andconsumed heavily both in the urban and rural areas. Varying quantities ofseveral other food and industrial crops are also marketed but they all rankfar below maIlze in terms of volume, value and strategic importance.Fertilizerr dominate agricultural input distribution trade. Consequently,the level of efficiency in the marketing of maize and distribution of

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fertilizers is crucial to the welfare of both the Zambian farmers andconsumers. The marketing of maize and distribution of fertilizers areexclusively undertaken by the National Agricultural Marketing Board(Namboard) and the cooperatives.

2.14 National Agricultural Marketing Board (Namboard). Namboard wasestablished in 1969, as an amalgamation of two crop marketing boards whoseorigin goes back to the 1930s. Its main responsibility is to ensuremarketing outlets for the maize surplus regions, adequate and equitablesupply in the deficit regions, and availability of fertilizers in all partsof the country. Following its establishment, Namboard rapidly expanded itsfunctions and geographical coverage by taking on the marketing of severalcrops (sunflowers, soyabeans, groundnuts, rice, wheat, seeds, andvegetables), and distribution of other inputs (pesticides and farmimplements). The rapid expansion made Namboard an unwieldy organizationand took a heavy toll on its efficiency as it became increasingly difficultto attract and retain competent staff in view of the acute shortage oftrained manpower in the country. Until recently, its operations were verydiverse and complex.

2.15 The most critical problems that Namboard has had to face havebeen beyond its control. In many respects, it has been treated like agovernmental department subject to ministerial directives on matters whichare normally entrusted fully to the chief executive of a corporate body.Both the buying and the selling prices for the various commodities itdeals with are determined by the Government, with inadequate regard to theneed to cover costs. Thus, it has been forced to buy at higher prices thanit is allowed to sell, and to expand its operations -all over the country,irrespective of financial implications arising therefrom. Being heavilydependent on subsidies, its ability to meet its financial obligations tothird parties, to adopt efficient staffing and other normal businesspolicies and practices, and to procure and distribute goods in a timelymanner is conditioned by the timing and the ability of the Government tomake budgetary funds available. Namboard has been running at mountingdeficits, rising from an annual average of K 19.2 million during 1970-74 toK 87.5 million during 1980-82 (equivalent to about 11% of the total budgetdeficit in 1982), with the sharpest increase occurring in 1975, followingthe change from regionally varying to uniform prices (Table 2.3).

Table 2.3 - Annual Average Subsidies to Namboard (1970-82)

1970-74 1975-79 1980-82K'million % K'million % K'million Z

MaizePrice Differential 6.7 35 7.1 15 10.0 12Marketing Costs 6.3 33 15.3 31 30.7 35

Sub-total 13.0 68 22.4 46 40.7 47

FertilizersPrice Differential - - 15.8 33 26.4 30Marketing Costs 3.3 17 6.8 14 17.0 19

Sub-total 3.3 17 22.6 47 43.4 49

Other Activities 2.9 15 3.4 7 3.7 4

Total Subsidies 19.2 100 48.4 100 87.8 100

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2.16 Recently, the Government initiated several measures, especiallysince 1982, which have helped to significantly reverse the past risingtrend of subsidies to Namboard. These measures have included: increasingNamboard's resale prices for maize to equal the prices it pays toproducers; hiving-off its intra-provincial operations and handing them overto the Provincial Cooperative Unions (PCUs); and reducing Namboard'sstaff. The transfer of intra-provincial functions to PCUs was virtuallycompleted by mid-1983. Henceforth, Namboard's main functions are topurchase maize from PCUs in the maize surplus provinces, or to import it,and to sell it to PCUs in the deficit province; to import fertilizers anddistribute them to PCUs; and to maintain maize security reserves. Namboardhas consequently become a more manageable body and has been able to reduceits staff from a total of about 6,000 in 1979 to about 2,000 in 1983. As aresult, Namboard's losses and, in turn, subsidies fell from K 109.7 millionin 1980 to K 84.3 million in 1982, with a further estimated reduction to K35.8 million in 1983 (Table 2.4). The remaining subsidies are now due tothe fact that the Government controlled price structure for maize andfertilizers does not allow any margins to cover transport and othermarketing costs. As noted above, under the proposed Project, theGovernment would take appropriate measures to rectify the situation (para3.07 (a) ).

Table 2.4 - Namboard Financial Performance 1980-83 1/

1980 1981 1982 1983Estimates

====== - - K ' million

Total Sales 122.0 157.8 175.8 251.3

Cost of Goods Sold 179.9 177.7 211.3 242.6

Trading Surplus (Deficit) (57.9) (19.9) (35.5) 8.7

ExpensesTransport, Handling and Storage 26.2 24.8 24.3 23.0Staff and Administration Costs 22.8 21.7 19.2 11.6Financial Charges 1.7 1.8 4.0 1.0Depreciation 1.1 1.3 1.3 0.2

Total Expenses 51.8 49.6 48.8 35.8

Total Surplus (Deficit) (109.7) (69.5) (84.3) (27.1)

Marketing Expenses as Percentageof Total Sales 42.5 31.4 27.8 -

1/ The increase in subsidies by about 21% in 1982 compared to 1981 was dueto maize imports at prices higher than the domestic prices.

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2.17 Provincial Cooperative Unions (PCUs): While potentially capableof playing a significant role with regard to agricultural marketing, inputdistribution, as well as credit delivery and recovery, the cooperatives inZambia have remained basically weak. Their organizational structure startswith primary societies at the village level; the societies group themselvesat the provincial level to form nine Provincial Cooperative Unions (PCUs)which, in turn, constitute the apex organization, the Zambia CooperativeFederation (ZCF), at the country level. The Ministry of Cooperatives(MOC), established in 1983, is responsible for promoting cooperativedevelopment, and for ensuring compliance with cooperative laws andprinciples. The major functions now carried out by PCUs are: purchasing,collecting, transporting, storing and selling farm produce, anddistributing farm inputs, notably fertilizers. All the PCUs have beenoperating at substantial losses and depend heavily on subsidies from theGovernment. Mainly as a result of taking over Namboard's intra-provincialfunctions but also because of the higher cost of imported maize, subsidiesto PCUs virtually doubled within two years from K 30.6 mlllion in 1981 to K57.8 million in 1982, and while the amount budgeted for 1983 isconsiderably lower than in 1982, it is still about 20% above the 1981 level(Table 2.5). Although the hiving-off of Namboard's intra-provincialfunctions to PCUs is a move in the right direction in principle, it has ledto a very rapid expansion of PCUs operations without a correspondingimprovement in their managerial and operational capabilities, therebyrunning the high risks that, like Namboard, many of the PCUs, especiallythe new ones, will find their operations ballooned to enormous proportionstoo complex and unwieldy to manage efficiently. Except in the Southern,Eastern and Northern provinces, PCUs are relatively new, and have littleexperience in handling large volumes of business as they now must do. AllPCUs suffer from inability to attract and retain competent staff, weakoperational and financial management and inadequate capital.

Table 2.5 Subsidies Given to Cooperatives(K)

Province 1981 1982 1983

Southern 15,000,000 19,000,000 11,000,000Eastern 7,449,600 14,000,000 5,500,000Northern 2,038,000 10,230,000 5,800,000Western 610,000 813,370 750,000Laupula 268,000 1,768,000 800,000Copperbelt 258,000 830,790 500,000North Western 490,000 864,720 730,000Central 4,000,000 9,000,000 11,000,000Lusaka 500,000 1,335,600 800,000

Total 30,613,600 57,842,480 36,880,000

2.18 However, it is encouraging to note that PCUs are taking measuresto avoid falling into the same problems that plague Namboard. Uneconomicdepots previously operated by Namboard are being closed down while othersare being converted to "marketing centres open only during the peak

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seasons, and manned on part-time basis; also, the PCUs have refrained fromabsorbing the entire number of personnel laid off by Namboard, in mostcases absorbing only about 35-40% of such personnel. Furthermore, in viewof the acute shortage of qualified and experienced manpower in Zambia,steps were recently initiated to provide centralized services to the PCUs,under the auspices of the National Federation of Cooperatives, in allaspects of cooperatives' operations, and some bilateral assistance hasalready been secured for the purpose. Several measures are required toimprove PCU's operational and financial efficiency; they include: improvedmanagement and financial control through training of cooperative officialsand intensified supervision; institution of sound accounting and timelymanagement information; and, above all, provisions of adequate tradingmargins, based on a thorough analysis of the cost structure facing thevarious PCUs, to cover all marketing costs and allow for a reasonablereturn on capital and management so that PCUs can become financiallyindependent. The proposed Project would assist the Government to reviewthe operations of PCUs for the purpose of identifying and implementingvarious measures to improve their operational and financial efficiency aswell as making them financially self-dependent (para 3.07(a) and paras 3.11and 3.12).

2.19 Private Sector and Competition. Unlike several other Africancountries, Zambia las not gone so far as to discourage or wholly excludeprivate traders in the marketing of agricultural commodities anddistribution of farm inputs. Private traders are not allowed in themarketing of maize and distribution of fertilizers; they, however, play themajor role in the marketing of cassava, millet, sorghum, rice, sunflowerseeds, soyabeans, various livestock products, and fruits and vegetables.Similarly, private enterprise predominates the distribution of agro-chemicals, and farm machinery and implements. Now that the Governmenthas to reduce subsidies, and given the need to improve efficiency in theagricultural marketing system,the opportunity has come to permit theprivate sector to play a greater role in the marketing of maize anddistribution of fertilizers, in order to tap additional developmentresources from private sources and to foster competition with a view tospurring Cooperatives and Namboard to higher levels of efficiency. Underthe proposed Project, the Government would take appropriate measures tothis end (para 3.07 td) and para 3.11).

Research and Extension Services

2.20 The bulk of the available technological packages remains largelyunsuited to the needs of the smallholders in general and of subsistencefarmers in particular. Insufficient attention has been given to cropsgrown mainly by subsistence farmers such as cassava, sorghum and millet,which account for about 40X of the total cropped area in the country; tothe inter-cropping and shifting cultivation systems prevailing among thesefarmers; and to practical ways of increasing productivity within theconstraints imposed by the labor, managerial skills, and capital resourcesat the disposal of these farmers. Partly as a result of the technologicalconstraints, the preponderant proportion of Zambia's agriculture ischaracterized by low productivity, both per unit of labor and land; forexample, the average maize yields among traditional farmers, who account

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for 85X of the total maize acreage, is estimated at 0.9 tons/ha compared toan average of 2.4 tons/ha among the emergent farmers and 5 tons/ha amongthe large-scale commercial farmers. For the majority of the smallholders,there is hardly any technical message which, at present, the extensionstaff can convey with confidence. There is therefore an urgent need todevelop proven technical messages which are location-specific, and whichtake into account the regional comparative advantages, labor availability,management capability, financial and other production resources at thedisposal of the majority of the Zambian farmers. Like research, extensionservices in Zambia have been geared mainly to the commercial farmers alongthe line-of-rail. In addition, extension efforts have been seriouslyhampered by inadequate funding, shortage of qualified and experiencedstaff, and inadequate logistic support. The Government is now in theprocess of preparing a long-term program to improve research and extensionservices, and to re-orient these services to the needs of the smallholders.

2.21 Partly due to poor technical guidance and weak extensionservices, Zambia uses an extraordinarily high amount of fertilizers for acountry of its agricultural size. For example, during 1980/81, itestimated to have consumed about 74,000 tons of nitrogenous and phosphatefertilizers which is only slightly below Kenya's consumption estimated at79,000 tons despite the fact that Zambia's grain production was onlyone-third of Kenya's production. The Government is most concerned aboutthis situation but little has been done to identify the underlying factorsand possible solutions; a study recently carried out by USAID appears tohave been inadequate to lead to any significantly effective solutions. Theproposed Project would require a thorough analysis of the problem and wouldprovide for consultation with IDA regarding implementation of the findings(para 3.07(f) ). On the other hand, and because of the shortage of foreignexchange, import of the various types of agro-chemicals, such as pesti-cides, and of miscellaneous requisite items, notably produce and inputpackaging materials, has fallen below the mirimum levels. For example, in1982, only K 3.2 million of agro-chemicals was imported out of the requiredK 5.0 million as estimated by the agro-chemical dealers 2/; locallymanufactured fertilizer has frequently remained undistriluted to thefarmers because of lack of packaging material, and farmers are reported tobe facing a similar problem regarding packaging of farm produce. Theproposed Project would accordingly help to finance agro-chemicals and suchother miscellaneous inputs (Table 3.1).

Agricultural Credit

2.22 Credit, in the strict sense, is not a major constraint inZambia. The preponderant majority of the Zambian farmers, consisting ofsubsistence farmers, has had virtually no effective demand for creditbecause of the absence of attractive technological packages. However,bridging funds to finance the purchasing of produce and inputs by Namboardand PCUs is already an important problem, stemming primarily from theGovernment's pricing policy which has weakened Namboard's and PCUs' finan-cial conditions to an extent that has made them uncreditworthy in the eyesof the commercial banks, and consequently heavily dependent on the

2/ Foreign Exchange allocation to agro-chemicals for crop production during1981-82 is estimated as follows (K 'million): 1981 1982

4.3 3.2

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Government to provide such funds or to guarantee loans from commercialbanks. The budgetary crisis facing the Government has made it increasinglydifficult to obtain the needed funds or guarantee in a timely manner.Consequently, delays in paying the farmers have become increasinglyfrequent and longer, often extending to six months. This has caused cashflow problems down the marketing chain, as Namboard is unable to pay PCUsand PCUs in turn unable to pay the farmers, thereby artificially increasingthe demand for credit at the farm level among the emergent and commercialfarmers. It has also resulted in a disincentive to producers in terms ofthe increased opportunity cost of the delayed receipts.

2.23 For the market-oriented farmers, the required amount of credithas been generally available from commercial banks and governmental lendinginstitutions. A recent study of the agricultural credit situation inZambia indicated that the credit is not a major constraint to these farmersand estimated that the existing financial institutions readily extend aboutK 99 million, about 47% of which consisted of medium- and long-term loans,or about 70% of the estimated financial resources needed for the on-farmdevelopment requirements during 1980-81. Reports of the Commercial FarmersBureau also confirm that most of their members have no difficultiesobtaining loans from commercial banks, provided they have viable investmentproposals.

Tillage Power

2.24 Given the ample land resources, an appropriate policy and institu-tional environment, suitable technological packages, and adequate supportservices, tillage power (in terms of labor, animal draft and machine power)is residually the most binding constraint on agricultural development inZambia, for it alone determines the area that a farmer can cultivate andconsequently the amount of surplus he can produce over and above subsis-tence requirements. The predominant reliance on the hand hoe is one of themajor causes of the under-utilization of the most abundant and cheapestresource in the country: land. The tillage power constraint is exacerbatedby the fact that, in the agriculturally more important parts of Zambia,rains are erratic and confined to a period of four to five months, followedby a long, hot and dry period, thus necessitating hurried land preparationto avoid late planting because delay in planting for even one week mayresult in as much as 50% decline in yields.

2.25 Despite the high rate of unemployment in the country, laborshortages are a major problem, though the problem takes on different formswithin the three main farming systems. Among the traditional farmers, whodepend entirely, and the emergent farmers, who depend substantially onfamily labor, labor shortages are pronounced during the planting andharvest seasons; the shortage has been steadily aggravated by the unabatedexodus of the young and able males from the rural to the urban areas to theextent that, in some rural areas such as Northern Province, the economic-ally productive population has dropped to about 40%. Although most of theemergent farmers use oxen or hired tractors for land preparation, laborconstraints on planting, weeding and harvesting significantly inhibit therealization of the full potential offered by the use of animal draftpower. The labor constraint manifests itself more pronouncedly in

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influencing the type and range of crops these farmers choose to produce,leading the farmer to allocate more of the available production resourcesto the cultivation of crops such as maize which have the double advantageof being a less labor-intensive and sta.le food crop compared to crops suchas tobacco and groundnuts. Among the medium and large scale commercialfarmers, the labor constraint manifests itself primarily in terms of laborcosts which rose sharply during the 1970s due to the introduction ofstatutory minimum wage and high housing standards. The result has been astrong tendency to shift away from the labor-intensive crops such astobacco, and to resort to labor-substituting production techniques.

2.26 Efforts to lessen the labor constraint have focussed on promotingthe use of animal and tractor power. Although the country has a sizeableherd of cattle from which a considerable number of oxen could potentiallybe drawn, the use of draft animals is limited by tsetse infestation in someparts of the country, by the fact that about two-thirds of the potentialoxen remain untrained, and by the fact that a large number of farmers doesnot own cattle. Moreover, since the mid-1970's, it has become increasinglydifficult to acquire ox-drawn implements because of the acute shortage offoreign exchange to finance either imports of the finished implements orraw materials for local manufacturing. The use of oxen is also renderedless attractive by the fact that, unlike tractors, the farmer has to awaitthe onset of the rains to soften the ground before ploughing is possibleand, therefore, the area that can be prepared within the short timeavailable for the optimal planting is limited.

2.27 Since the early 1950s, tractor power has played a crucial role inZambia in expanding the cultivated acreage in general and in ensuringadequate supply of marketed surpluses to feed the rapidly growing urbanpopulation in particular. Although mainly concentrated among the mediumand large-scale commercial farmers, the use of tractor power has beenspreading steadily among che market-oriented smallholders (emergentfarmers), mainly through the process whereby medium and large-scale farmerssell used tractors to the more advanced smal-holders. Virtually all of themedium and large-scale farmers as well as many of the emergent farmers inZambia have sufficient farming skills, and fairly suitable technologicalpackage to respond quickly to favorable changes in pricing policies andother incentives that have taken place recently. Given the ampleavailability of land, cultivation power alone prescribes the area thesefarmers can plough, plant and weed during the critically short croppingseason. Adequate tractor power is, therefore, crucial to ensuring thatthese farmers have the capacity to at least sustain the current level ofproduction.

2.28. On the other hand, the acute shortage of foreign exchange has ledto inadequate allocation of resources to farm mechanization 3/; this hascompelled farmers to increasingly defer essential repairs anT replacementof the existing tractor fleet and associated implements. In physicalterms, tractor imports declined from an annual average of 840 units during

3/ Foreign exchange during 1981-82 is estimted as follows (K 'million):1981 1982

Tractors 7.8 4.6Implements 1.4 1.5

9.2 6.1

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1970-74 to 490 units during 1975-80, and to 230 units during 1981-82.Import of essential spare parts has similarly been curtailed as a result ofwhich it is estimated that about 40Z of the 2,500 operable tractor units inthe country are mostly out of action and, because of frequent breakdowns,the units cannot cope with an average of more than 40 ha/year. This hadled to a serious impairment of the existing production capacity (in termsof already developed land, on-farm fixed assets, and managerial skills)among the market-oriented farmers, thereby contributing to the decliningoutput of the marketed production. The proposed Project would help tofinance replacement and rehabilitation of the current stock of tractors andassociated implements, as well as procurement of animal drawn implements(Table 3.1).

2.29 In an effort to lessen the tillage power constraint among themajority of the smallholders who, because of their limited financialresources and the small size of the cultivated area, are unable toindividually own tractors, the Government has been offering tractor hireservices since the late 1960s. However, the Government has refrained frominterfering with the private sector in this respect and farmers and otherindividuals who own tractors are free to offer services at whatever pricethe market can bear. The Government tractor fleet now consists of about350 units but most of the equipment is in poor working condition because ofinadequate maintenance and lack of spare parts; only about 280 units areoperational. The Government services have been running at a loss becausethe charges are fixed below full cost, estimated at about K 30/hr comparedto the current charges at K 22.0/hr, and have therefore had to be supportedby budgetary subsidies estimated at about K 200,000 during 1983, while thecapital costs has been covered by both bilateral grants and budgetarysubventions. The uneconomic charges have inhibited proper maintenancethereby widening the cost-recovery gap and making operational efficiencymore difficult to achieve. The Government is in the process of reassessingand will henceforth periodically review the charges to ensure that they areadequate to cover all operating plus replacement costs. Under the proposedProject, the Government would take appropriate measures to this end (para3.07 (c) }.

C. Foreign Exchange Requirements for Agriculture and Agro-Industries(1985-87)

2.30 Except those relating to policy and institutional issues, theabovre constraints involve imported inputs and their solution thereforecalls for foreign exchange resources. Indeed, to play its expected roleeffectively, the agricultural sector will require a large injection offoreign exchange resources. It is estimated that agricultural production,agro-processing and other agro-related industries in Zambia will requireabout US$540 million of foreign exchange during 1985-87 (Table 2.6). Thisfigure does not include fuel, transport and factor service income andassumes an increasing supply of locally manufactured fertilizers.

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Table 2.6 - Estimated Foreign Exchange Requirements (USS Million)At 1983 Constant Prices

1985 1986 1987 Total

Agricultural ProductionFarm Machinery and implementsReplacements 16.9 12.0 12.0 40.9Spare Parts 4.2 3.7 3.7 11.6Miscellaneous 0.6 0.4 0.4 1.4

21.7 16.1 16.1 53.9

Fertilizers 53.0 48.8 39.9 141.7Agro-chemicals 1/ 8.0 9.0 10.3 27.3

61.0 57.8 50.2 169.0

Agro- and Agri-related IndustriesFood Processing and Auxiliary IndustriesRaw Materials 2/ 89.9 94.3 98.9 283.1Spare Parts and Compc-._nts 8.3 4.2 2.3 14.8

98.2 98.5 101.2 297.9

Rehabilitation of NCZ Fertilizer PlantMachinery and Spare Parts 2.0 5.5 1.5 9.0Technical Assistance 1.0 2.5 2.5 6.0

35.O 8. 4.0 T1

Total 183.9 180.4 171.5 535.8

1/ Including veterinary drugs.2/ Mostly agro-raw materials required to enable optimum utilization of

the installed capacity.

D. Bank Group Assistance to Zambian Agriculture

2.31 Bank group assistance to agriculture has involved ten projects(three for industrial forestry, two for livestock/dairy development, twofor tobacco production, one for coffee production and two area-basedprojects for overall agricultural development. The first livestock loanwas cancelled in 1973 at GRZ's request because of pricing problems and poormanagement. The dairy project which aims at improving milk production bysmallholder producer was approved in 1982 and has been having initialimplementation problems, especially inadequate funding, and has had to bescaled down and restructured into a more realistic pilot design. The firstand second industrial forestry projects were relatively well executed; thethird one has just become effective and no serious problems are anticipatedregarding its implementation. The two commercial tobacco farming projectswere completed, but were unsuccessful in meeting their respective objec-tives of training and establishing Zambian commercial tobacco farmersand hence raising tobacco production. The projects encountered major

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managerial problems and pricing policy issues. The coffee project has beenhampered by cost overruns, and by shortages of foreign exchange andGovernment funds. The two area-based agricultural development projectsbecame effective recently and faced some initial problems relating toinadequate Government funds and inappropriate pricing policy; theseproblems are gradually being resolved. Assistance to agriculture has alsobeen provided through projects in other sectors. The Fourth EducationProject, for example, had a major component to strengthen the training ofextension staff and farmers; lines of credit to the Development Bank ofZambia have financed the provision of medium and long-term finance tocommercial farmers. In general inadequate local counterpart funds havebeen one of the main problems facing all Bank/IDA-supported projects inZambia.

III. THE PROJECT

A. Origin and Design

Origin

3.01 The proposed Project originated fren discussions between Zambianofficials and a Bank mission which visited Zambia in March 1983 inconnection with agricultural sector work. It was prepared jointly by Bankstaff and the Ministry of Agriculture and Water Development (HAWD).

Project Design

3.02 The proposed Project would extend over a period of three years soas to allow sufficient time for implementation of the envisaged policy andinstitutional reforms. The Project's policy and institutional reforms aswell as the thrust of its physical inputs are consistent with therecommendations of the recent agricultural sector report (Zambia: PolicyOptions and Strategies for Agricultural Growth; No. 4764-ZA), carried outjointly by the Government and the Bank, and which provided the analyticalunderpinnings to the Project's proposals. The physical input componentswere based on estimates made primarily by the major local suppliers of suchinputs, taking into account the likely effective demand, as opposed to mereneeds, among the various categories of farmers in the country. The totalcost of these inputs is the same as shown in Table 2.6 for agriculturalproduction, excluding fertilizers and veterinary drugs. Fertilizers wereexcluded chiefly because of: (i) easy availability of bilateral assistance;(ii) the already extraordinarily high consumption of fertilizers; and (iii)the belief that the most urgent needs are a thorough study to identify thecauses behind the high fertilizer consumption and a program to rehabilitatethe existing facilities for domestic production of fertilizers. Veterinarydrugs were excluded because of the relatively low degree of urgency placedon livestock compared to crop production. The design sought to balanceshort-term measures, consisting of the physical inputs, with policy andinstitutional measures aimed principally at improving the performance ofZambia's agriculture over the medium to the long-term period. To avertfurther declines in agricultural production in the immediate future, it isnecessary to not only improve the policy environment but also to ensure

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adequate availability of various key inputs to activate utilization of theexisting production capacity so as to enable the farmers to respond to theimproved policy framework.

3.03 Although the long-term growth of Zambia's agriculture dependson the development of the subsistence and emergent farmers, and despite thefact that a recent analysis suggests that the medium- and large-scalefarmers are less efficient than the subsistence and emergent farmers withregard to the use of both the domestic and foreign resources, in theimmediate future Zambia must look to the medium- and large-scale farmersfor a more rapid increase of agricultural productions. The reason is that,over the short-run, the supply response among subsistence and emergentfarmers will remain low; on the other hand, the medium- and large-scalefarmers are well placed to increase production quickly in response toimproved policy environment because they already possess the requisitecapacity and farming skills, and are already engaged in a farming systemfor which fairly suitable technological packages are available. Therelatively low level of efficiency among these farmers is largely attri-butable to the high rate of protection accorded to them mainly through thehighly subsidized fertilizer prices. tience, by encouraging measures toeliminate these subsidies, the proposed Project would help to raise thelevel of efficiency among these farmers. However, to ensure sustainableimprovement, such measures need to be reinforced by research to increasecrop yields; it is expected that the research and extension project nowunder preparation would cater to this need as well as to the needs ofsubsistence and emergent farmers (para 2.20).

B. Main Objectives

3.04 The Project's main objectives are to encourage and support theGovernment to continue the on-going, and initiate further policy reforms onissues that have hitherto adversely affected the development of Zambianagriculture in general and crop production in particular; and to reinforceGovernment's efforts to diversify the economy and to reverse the decline inthe marketed agricultural output. The Project would also help to sharpenthe focus of, and to develop a specific program of action for the policymeasures spelt out broadly in the "Memorandum of Development Objectives andPolicies" submitted to the Bank by the Government of Zambia in January 1983and which, as far as the agricultural sector is concerned, affirms theGovernment's commitment to:

(a) provide a system of incentives to producers of agriculturalproducts, based on a sound price setting methodology, with a viewto facilitating establishment of economic prices and a rationalallocation of resources according to the principle of comparativeadvantage among the various regions;

(b) adopt a policy of economic pricing for parastatal enterprises,and streamline their operations;

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(c) increase the efficiency of the marketing system, by allowing adegree of competition among the official marketing organizations,cooperatives, and private traders, eventually leading to a systemin which official producer prices would become floor prices andNamboard would become the buyer and seller of last resort insupport of producer prices at a level that provides adequateincentives;

(d) strengthen the Agricultural Planning capacity of MAWD to enablepolicies to be formulated on the basis of a well definedagricultural development strategy; and

(e) review the whole range of services available to the smallholder,particularly extension, research, input supply and marketingservices, for the purpose of identifying existing deficiencies,and drawing up an action program to rectify such deficiencies.

3.05 The Government has already taken important steps towardsimplementation of some of these measures, particularly with regard topricing policies, non-price producer incentives, and streamlining theoperations of Namboard. Measures are also underway, following a review andrecommendations by the Bank, to strengthen the Planning Division of MAWD.A thorough review of the research and extension services is also proceedingwith a view to prepare a possible Bank-supported project to improve theseservices. The proposed Project would help the Government to undertakefurther policy and institutional reforms (para 3.07) in keeping with thebroad commitments outlined above.

3.06 The Project also aims at enhancing farmers' capacity to increaseaggregate production in response to the on-going and proposed policy andinstitutional reforms by ensuring availability of essential inputs. Inaddition, it would reinforce revernlent's efforts to diversify the economyby:

(a) accelerating agricultural growth through a pricing policyconsistent with the varying regional comparative advantages,leading to a more efficient use of resources; and

(b) helping to release domestic and foreign exchange resources foruse in support of diversification efforts by: reducing fiscalexpenditures through allowing the cooperatives and Namboardsufficient margins to ensure full cost recovery, therebyeliminating budgetary subsidies; and reducing expenditures onimports through increasing production of maize, throughencouraging implementation of measures to reduce theextraordinarily high consumption of fertilizers, and throughrestraining increased consumption of imported wheat products.

3.07 As Annex 1 shows, the Government has already taken several boldand far reaching measures towards stimulating economic recovery in generaland agricultural growth in particular. Some of these measures are theresult of the conditions attached to the IMF Stand-by arrangements, whileothers are the result of the continuing dialogue between the Government and

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the Bank. In addition to those shown in Annex 1, since negotiations forthis Project last July, the Government has: (i) decontrolled the price ofwheat products; (ii) increased charges for Government tractor hireservices; (iii) initiated, with Bank support, formulation of a pricesetting methodology which would relate controlled prices to the border-price equivalents; and (iv) commenced a study on Provincial CooperativeUnion costs with a view to providing a firm basis for determining tradingmargins that should be allowed to these Cooperatives so as to attainfull-cost recovery. Furthermore, since last May, the Government instituteda modestly regionally differentiate price structure for maize and wheatproducts. The proposed Project would seek to encourage the Government totake further specific measures in accordance with the details andimplementation schedule set forth in Annex 3, summarized as follows:

(a) allow Namboard and Cooperatives trading margins sufficient toattain full-cost recovery with regard to maize marketing andfertilizer distribution, within a regionally differentiated pricestructure and related to border price equivalents (para 6.02fb) );

(b) undertake an action-oriented study regarding ways and means toimprove efficiency of Namboard and PCUs in the marketing of maizeand distribution of fertilizers, (paras 6.03 (b), 6.04 (b), 6.05(a), and 6.06 (a) );

(c) adjust and maintain the charges for the Government tractor hireservices at a level sufficient to ensure full cost recovery (para6.02 (a) );

(d) allow a broader-based participation by private traders in themarketing of maize and the distribution of fertilizer (para 6.06(a) );

Ce) undertake a thorough assessment of the factors underlying theextraordinarily high consumption of fertilizers, and discuss thefindings with IDA with a view to agreeing on recommendations tobe implemented and an implementation schedule for suchrecommendations (paras 6.03 (e) and 6.04 (a) ); and

(f) adopt a pricing setting methodology for producer and fertilizerprices, which relates such prices to the border-price equivalents{para 6.03 (a) ).

3.08 At negotiations, assurance was obtained from the Government thatthese measures would be carried out in accordance with the details andimplementation schedule set out in Annex 3 (paras 6.02 to 6.07).

C. Project Description

Physical Production Inputs

3.09 The physical inputs that would be eligible for IDA financingwould be as follows:

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(a) Farm Machinery and Implements: new tractors; mechanically poweredand animal drawn machinery and implements for land preparation,sowing, weeding, fertilizer and agro-chemical spreading orspraying, and for crop harvesting; ox-carts; and spare parts;

(b) Agro-chemicals: various crop protection chemicals andherbicides;

(c) Miscellaneous: agricultural hand tools, bags for packagingfertilizer and grain; improved seeds; small-scale irrigationpumps and fittings; and farm trucks and trailers; and

(d) Consultancy: about 27.5 man-months of internationally recruitedspecialists to carry out an agricultural marketing study.

Agro-chemicals known to damage the environment would not be eligible forIDA financing.

Studies

3.10 Some of the Project's policy and institutional measures, namelythose aimed at improving fertilizer usage, allowing margins to cooperativesand Namboards, and promoting a broad-base participation by private tradersin maize marketing and fertilizer distribution, require further anddetailed analysis before implementation. Work is already well underwaytowards the formulation of a price setting methodology that would relateproducer prices to the border-price equivalents for implementation withinsix months after project effectiveness (para 6,03 (a) ). With regard toimproving fertilizer usage, a study carried out in 1983 through bilateralassistance (USAID) did not come up with effective solutions to the problemand a further study, again with bilateral assistance, would be carried outduring the first half of 1985 (para 6.03 (c). The Government has alreadyinitiated a study of the magnitudes and structure of costs of the ninePCUs, in accordance with terms of reference acceptable to IDA (Project FilePaper No. 4), for the purpose of establishing an empirical base fordetermining the appropriate margins 4/. This study would constitute thefirst phase of the study explained iF para 3.11 below, and would entailabout 10.5 man-months of consultancy services; it is expected to becompleted by the second week of March, 1985, and thus on time for therequired action to allow trading margins to PCU and Namboard not later thanMay 1985 (para 6.02 (b) ).

3.11 Having identified the nature and magnitudes of PCU's cost, theabove study would be followed by a more comprehensive sttvdy on how toreduce these costs and create a system that would susr-air. improved level ofefficiency with special reference to the marketing of Ibaize and distri-bution of fertilizers 4/. While detailed terms of reference for this phaseof the study would be drawn at the completion of the first phase, so as totake full advantage of the findings therefrom, broadly they would cover:

4/ The Bank's mission on Pricing and Parastatal Efficiency, which visitedZambia last october, is carrying out a similar exercise with regard toNamboard. The mission is also assisting in formulation of a pricesetting methodology that would relate producer prices to the border-price equivalents.

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(i) ways and means of improving marketing efficiency, especiallythrough cost reduction, among the Cooperatives and Namboard, withparticipation by the private sector acting as an essential spurto that end;

(ii) legal changes that are needed to facilitate private sectorparticipation;

(iii) a workable mechanism to guard against wide spread commodityhoarding and/or smuggling by private traders, and against thebulk of the trade falling into non-Zambia hands;

(iv) ways and means to improve financial and operational managementamong the Cooperatives;

(v) measures needed to enable Namboard to establish and manage foodgrain reserves, and to carry out the role of a buyer and sellerof last resort within a system of guaranteed floor and ceilingprices;

(vi) policy and operational guidelines for the management of foodgrain reserves; and

(vii) required investments and financial resources for the operationsof such reserves.

It is estimated that this study would take about six months to complete andthat it would require about 17 man-months of internationally recruitedconsultants, comprising specialists in agricultural marketing and inputdistribution (six man-months), grain and input storage (three man-months),cooperative organization and management (three man-months), financialmanagement (two man-months), and transport (three man-months).

3.12 At negotiations, assurance was obtained from the Government thatthe above study would be carried out accordingly and its findings imple-mented (paras 6.03 (e) and (b); 6.04 (b); 6.05 (a); and 6.06 (a) ).

D. Estimated Costs and Financing Arrangements

Estimated Costs

3.13 The quantities of physical inputs to be financed by the Projectare based on estimates provided by the local major supplies of agriculturalmachinery and agro-chemicals; the costs are based on the US dollar pricesprevailing in November 1983, adjusted to reflect the exchange rate at thebeginning of November 1984. The Project total cost is estimated at K 144.6million, consisting of K 79.8 million for tractors and associated imple-ments, K 22.8 million for spare parts, K 38.8 million for agro-chemicals,K 2.8 million for miscellaneous inputs, and K 0.4 million for consultancyservices (Table 3.1). The foreign exchange costs are estimated at K 130.0million (US$65.0 million) and local costs at K 14.6 million (US$7.3million). Specific categories have been used for the purpose of estimating

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costs; it is expected that Project implementation would permit a largemeasure of flexibility to switch funds among the various categories, theonly condition being that the inputs to be financed by IDA are as indicatedabove (para 3.09).

Table 3.1 Estimated Costs

Local Foreign Total Local Foreign Total Z---- K million -- --- US$ million---

Farm MachineryReplacementsTractors 5.7 52.8 58.5 2.8 26.4 29.2 40.3Tractor Implements 1.9 16.4 18.3 1.0 8.2 9.2 12.7Ox-drawn Implements 0.2 2.8 3.0 0.1 1.4 1.5 2.2

7.8 72.0 79.8 3.9 36.0 39.9 55.2Spare Parts

Tires 0.4 3.6 4.0 0.2 1.8 2.0 2.8General Spare Parts 2.0 16.8 18.8 1.0 8.4 9.4 13.0

2.4 20.4 22.8 1.2 10.2 11.4 15.8

Total Farm Machinery 10.2 92.4 102.6 5.i 46.2 51.3 71.0

Agro-chemicals 4.0 34.8 38.8 2.0 17.4 19.4 26.8Miscellaneous 1, 0.4 2.4 2.8 0.2 1.2 1.4 1.9Consultancy _ 4 0.4 - 0.2 0.2 0.3

Total 14.6 130.0 144.6 7.3 65.0 72.3 100.0

1/ See para 3.09, (c).

Financing Arrangements

3.14 The Project's foreign exchange costs would be financed asfollows: US$25 million, or 38% of the foreign exchange costs, from IDA;a further US$40.0 million or 62% of foreign exchange costs from co-financing sources: US$4.8 million from the Swiss Government, US$23.4million from the African Development Bank; US$5.0 million from USAID, andUS$6.8 million from CIDA (Table 3.2). The local costs, estimated at US$7.3million, would be financed directly by the farm machinery and agro-chemicaldealers (Trading Houses). The Bank of Zambia (BOZ) would sell to theTrading Houses foreign exchange made available by the Project and eachTrading House would pay to BOZ the Kwacha equivalent of the full amount ofthe foreign exchange cost of the items for which a Trading House isallocated foreign exchange; the Trading Houses would therefore finance 100%of the Project costs, though in local currency. The Government intends touse the local funds generated by the IDA Credit, estimated at K 50 million,to create a Kwacha Fund to support agricultural development activities(para 4.09). The IDA Credit would be to the Government of Zambia and wouldbe subject to the standard IDA terms. To facilitate and early start and,therefore, a timely completion of the proposed study (para 3.10) provisionwould be made for retrospective financing of up to US$80,000 of consultancycosts incurred after September 1, 1984.

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Table 3.2 - Financing PlanPercentage

Total ForeignLocal Foreign Total Cost Exchange- US$ million --

IDA - 25.0 25.0 34.5 38.5Co-financing 1/ - 40.0 40.0 55.3 61.5Trading Houses 2/ 7.4 - 7.4 10.2 -

Total - 7.4 65.0 72.4 100.0 100.0

1/ US$4.8 million from the Swiss Govt., US$23.4 millionfrom AfDB, US$5.0 million from USAID; and US$6.8 million

2 from CIDA (Canada).2, Farm machinery and agro-chemical importers.

E. Procurement and Disbursement

Procurement

3.15 Procurement of the goods to be financed by the Project would beundertaken by Trading Houses already established in Zambia and dealing infarm machinery and implement, spare parts, and agro-chemicals, and would beprocured through normal commercial channels. All the major internationalmanufacturers of farm machinery and agro-chemicals are well represented inZambia, through the Trading Houses, and are already engaged in a fairlyintense competition for the available market (para 4.06). The Project'sgoods would be resold, by the Trading Houses, to farmers who would havefull freedom to choose from which Trading House they purchase theirrequirements, taking into account comparative prices, technical suitabilityand availability of after-sale services in convenient locations. Theselection and terms of appointment of consultants would be in accordancewith Bank/IDA guidelines.

Disbursement

3.16 Annex 5 shows the estimated disbursement schedule; it differsfrom the Bank-wide disbursement profile mainly because the proposed Projectis essentially in the nature of a structural adjustment assistance. Theproceeds of the IDA Credit would finance 100% of the foreign exchangeexpenditures for imported farm machinery, spare parts, agro-chemicals, andmiscellaneous items; and 100% of the consultancy service costs.Disbursements would be fully documented. The Credit would be madeavailable in two tranches as follows:

(a) a first tranche of US$10 million upon Project effectiveness;and

(b) a second tranche of US$15 million within 15 months followingProject effectiveness, and upon IDA's satisfaction that theGovernment has:

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(i) adjusted and maintained the structure of maize and fertilizerprices to allow sufficient margins to cover at leasttwo-thirds of the amount needed to attain full-cost recoverywithin a regionally differentiated price structure andrelated to border price equivalents;

(ii) adjusted and maintained charges for Government tractor hireservices at a level sufficient to ensure full cost recovery;

(iii) adopt a pricing methodology for producer prices, whichrelates such prices to border price equivalents as relevant;and

(iv) completed interim report of the proposed study on themarketing of maize and distribution of fertilizers (para3.11);

3.17 To facilitate disbursement for the eligible goods and servicesother than the consultancy services, the Government would open and maintaina Special Account, in the Bank of Zambia, under terms and conditionssatisfactory to IDA, into which IDA would, upon Project effectiveness andreceipt of withdrawal application, deposit a sum of US$3 million(equivalent to about 3 months of imports of the eligible goods); thereafterIDA would periodically replenish the Special Account upon receipt andapproval of borrower's application, subject to: (i) the maximums-set by theabove tranching arrangement and a minimum of US$20,000 equivalent per eachreplenishment application ; and (ii) evidence satisfactorily showing thatthe expenditures paid out of the Special Account were eligible forfinancing by the Project. The establishment of the Special Account wouldbe a condition of Project effectiveness (para 6.07 (a) (i) ).

F. Accounts, Audit and Reporting

3.18 The Bank of Zambia (for activities other than those related tothe proposed study) and the Government through MAWD (for the proposedstudy) would maintain separate records and accounts which would be auditedby independent auditors acceptable to IDA and submitted to IDA not laterthan four months following the end of the financial year. The auditor'sreport would include specific comments as to whether the proceeds of theIDA Credit have been used in accordance with the agreed purposes andmanner, and whether allocation of foreign exchange among the variousTrading Houses reflects the nature and the volume of business normallycarried out by the concerned. Trading Houses. BOZ and MAWD would alsomaintain adequate records, in a manner and detail to be agreed with IDA, tofacilitate a close monitoring of the implementation of the Project, andwould prepare and submit to IDA a quarterly progress report and a finalProject Completion Report.

G. Relations with the IMF

3.19 Annex 1 shows the relationship between the proposed Project andthe stipulations of the IMF stand-by arrangements. The Project wouldcomplement the IMF's conditions by: (i) requiring the Government to allow

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Namboard and the Cooperatives sufficient margins to eliminating subsidies,thus helping to reduce budgetary expenditures and deficits; (ii) stimula-ting increased production of the major staple food crops and domesticsupply of industrial raw materials, thus helping to mitigate decline inliving standards likely to result from the recent devaluation of the Kwachaand the measures to restrain wage increases. In addition, it wouldcontribute towards improving the balance of payments by helping to staveoff the need to import staple food commodities, and by encouraging theGovernment to implement measures to reduce the extraordinarily highconsumption of fertilizers.

IV. IMPLEMENTATION AND MANAGEMENT

A. Overall Responsibility

4.01 The Bank of Zambia (BOZ) would be responsible for implementingand managing the Project's aspects other than those relating to theproposed study, while the Government through MAWD would be similarlyresponsible for the proposed study. For the non-study aspects of theProject, and before Project effectiveness, the Government would establish aProject Implementation Committee (PIC) consisting of representatives of theMinistry of Finance (MOF), Agriculture and Water Development (MAWD),Commerce and Industry (MCI), National Commission for Development Planning(NCDP), small-scale and commercial farmers, and the Project ExecutiveOfficer (para 4.04). PIC's main functions would be:

(a) laying down overall procedures of managing the activitiesfinanced by the proposed Project, and ensuring that suchprocedures are consistent with the Credit Agreement between IDAand the Government of Zambia;

(b) Approving applications from various Trading Houses afterreviewing them to ensure that: (i) the applications are inconformity with the objectives of the Credit Agreement;(ii) allocations of Project funds are in accordance with agri-cultural priorities as set by the Government of Zambia and inaccordance with eligibility for IDA financing; (iii) allocationsof Project funds to individual applicants are consistent with thetype and the volume of business normally carried out by theapplicant during the past six years prior to Projecteffectiveness; (iv) specifications of goods to be imported aresufficiently clear and reflect the prevailing scarcity in thecountry; and (v) prices quoted for similar items by the variousTrading Houses are competitive;

{c) ensuring that all qualifying applicants comply fully with theterms and conditions stipulated in the agreement between BOZ andTrading Houses (para 4.06) and that appropriate action is takenagainst non-complying Trading Houses;

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(d) ensuring that foreign exchange allocated to the various TradingHouses and the type of imports are immediately publicized throughthe local press (para 4.04(a) ).

(e) ensuring coordination between its activities and those of thegeneral foreign exchange allocation committee.

4.02 At negotiations, assurance was secured from the Government that aProject Implementation Committee (PIC) would be established in a manner andfor the functions as specified above (para 6.07 (a) (ii) ).

4.03 BOZ has already worked out a set of criteria, taking into accountthe type and volume of business that the Trading Houses have been regularlycarrying out during the past six years, for allocating foreign exchangeamong interested Trading Houses; has designed a proforma agreement betweenBOZ and Trading Houses; and has submitted the criteria and proforma agree-ment to IDA and both are acceptable to IDA (para 6.07 (b) (i) ).

B. Project Implementation Unit

4.04 BOZ would also establish, before the Project becomes effective, afull-time Project Implementation Unit (PIU), which would be headed by aProject Executive Officer (PEO) with qualifications and experience accep-table to IDA, staffed adequately, and provided with adequate facilities andlogistic support. The costs relating to PIU would be financed by the localfunds generated by the Project. PIU would be responsible for the day-to-day operations, specifically:

(a) evaluating and processing applications from Trading Houses forthe allocation of foreign exchange in a manner that would enablePIC to readily arrive at sound decisions;

(b) liaising with the officials of the Ministry of Commerce andIndustry to ensure that import licenses are issued promptly tothe eligible Trading Houses;

(c) closely monitoring the activities and transactions of the. Projectto ensure that Trading Houses are complying fully withstipulations of the agreement between them and BOZ (para &.05);

(d) maintaining records adequate to show the uses of the proceeds ofthe Credit, project's costs and, where appropriate, benefits;

(e) publishing in the local press, within seven working daysfollowing the decision by PIC, the foreign exchange and types ofimports allocated to the various Trading Houses; and

(f) preparing and submitting quarterly and other reports to IDA.

4.05 At negotiations, assurance was obtained from the Government thatBOZ would establish a Project Implementation Unit (PIU) in the manner andfor the functions as specified above (para 6.07 (b), (iii) ).

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C. Trading Houses

4.06 Importation of the goods financed by the proposed Project wouldbe undertaken by Trading Houses consisting of frrm machinery and agro-chemicals dealers located In Zambia. There X nine large Trading Housesand four small ones dealing in farm machinery and spare parts, and fivemajor ones dealing in agro-chemicals. Each Trading House representsseveral manufacturers, on an agent basis, and most of them have branches orsub-agents in the main urban centres. Under the proposed Project, eachTrading House wishing to participate in Project activities would enter intoa formal agreement with BOZ, stipulating, inter-alia, that:

(a) all goods financed by the Project would be sold to bona-fidefarmers or buyers who would use these goods to serve the needs ofsuch farmers in Zambia;

(b) applications for allocation of foreign exchange would beaccompanied by proforma invoices sufficiently showing specifi-cations, quantities and unit prices (c.i.f. Lusaka) of the goodsto be imported;

(c) in all cases where the concerned goods are of the sametechnical specification and delivery dates are comparable,foreign exchange allocation would be made in preference of theTrading House quoting the lowest price as shown in proformaiuvoices;

Cd) Trading Houses or their agencies would: (i)not require repairs tobe done in their workshop as a condition of selling spare parts;(ii) stock sufficient spare parts up-country; (iii) publicize inlocal press, farmers' and cooperatives' newsletters, retailprices of aUl imported items financed by the Project andretailing for K 500 and above per standard unit, at least once ayear and any time the retail prices change by a percentage to beagreed between BOZ and Trading Houses; (iv) maintain and submitto PIC on quarterly basis a summary of sales of goods financedunder the Project, classified according to the type of goods; (v)as may be relevant, periodically orgAnize short courses and fielddemonstration days, in such places as may be agreed with MAWD, totrain farmers and operators in farm machinery operation andmaintenance; (vi) submit to PIC, immediately upon receipt fromthe suppliers, shipping and other relevant documents in respectof all goods financed by the Project; and (vii) allow on-the-spotinspection, by BOZ or its representatives, of the goods procuredunder the Project;

(e) Trading Houses would be responsible for directly paying the localcosts and would, before obtaining an import license, deposit withBOZ the Kwacha equivalent of the c.i.f. cost of goods to beimported;

- 35 -

(f) Any balance of foreign exchange allocations which remins unusedafter a period of one month would automatically revert to a poolfor re-allocation to those Trading Houses that have fullyutilized their allocation;

(g) each Trading House would prepare and submit to PIC: (i) beforeapproval of the first application for foreign exchangeallocation: projections of total agricultural imported inputs itexpects to import during the following three years, detailed asmay be required by PIC; (ii) by the end of October each year:revised estimates of such imports for the immediately succeedingcalendar year, broken down into quarterly projections; (iii) bythe end of February, May, August, and November of each yearduring the life of the Project: actual sales of goods financed bythe Project during the preceding quarter;

(h) foreign exchange and types of imports allocated to each TradingHouse would be published in the local press within seven daysfollowing the decision on the matter by PIC and any TradingHouse may lodge objections if it considers that the allocationto it is unfair; and

(i) upon request, PIC would make available to any participatingTrading House copies of documents relating to any application forwhich foreign exchange has been allocated under the Project.

4.07 At negotiations, assurance was obtained from the Government thatBOZ would ensure that a legally binding agreement substantially reflectingall the above points would be drawn up, and that BOZ would submit a copy ofthe proforma agreement to IDA for comments prior to project effectiveness(para 6.07 (b), (iii) ). -

D. Kwacha Fund

4.09 MAWD considers it most important that arrangements are made,without involving IDA, to create a Kwacha Fund from the local currency(amounting to about K 50 million in three years) generated by the IDACredit. To this end, it is envisaged that BOZ would, upon Projecteffectiveness, open and maintain a separate Kwacha Fund Account in favor ofthe Ministry of Finance (MOF), which would o. reflected by a SpecialAccount in the national budget in a manner and details sufficient toidentify its use. The Fund would be used, wholly or partly depending onthe need, to support agricultural projects and programs, including, ifnecessary, credit to farmers who may need loans to purchase farm machineryand implerents under the proposed Project. A modest amount from the Fundwould be used to defray the costs incurred by PIU in connection with themanagement of the Project activities. MAWD and MOF would draw up a set ofcriteria for determining which projects and programs to support from theKwacha Fund. Such criteria would give primary consideration to economicand financial justification and pay special attention to: addressing the

- 36 -

needs of subsistence and emergent farmers; promoting non-traditionalagricultural exports; enhancing the capacity of MAWD to utilize theavailable manpower and physical resources more effectively; andfacilitating implementation of various projects or programs for which alack of local funds prevents the use of available foreign exchangeresources.

4.10 It is further envisaged that the Fund would be administered by aKwacha Fund Committee (KFC), to be established within three monthsfollowing Project effectiveness, under the chairmanship of the PermanentSecretary, MAWD, with a membership consisting of representatives of MOF,BOZ, and NCDP. KFC's main functions would be to determine which projectsand programs to be financed, and how much to be allocated to each case outof the Kwacha Fund, and to ensure a timely release of funds to thebeneficiary projects and programs.

4.11 To ensure additionality to the sector, KFC would in each caserestrict the use of the Fund to the financing of local expenditures overand above the amounts actually covered by local funds in the financial yearimmediately preceding the year in which the project or program is toreceive support from the Fund. To this end and before making allocationsfrom the Fund, KFC would, through the Budget Section of MAWD, determine theactual local funds contributed accordingly, estimate local expenditures forthe next three years or so, and revise such estimates annually in time forinclusion in the national budget for the immediately succeeding financialyear. Authorization to release funds from the Kwacha Fund would besignified by vouchers or checks countersigned by the Permanent Secretariesof MAWD and MOF.

V. Benefits, Justifications and Risks

A. Main Benefits

5.01 Data is not readily available to allow a meaningful, detailedassessment of the benefits likely to result from the various policy andinstitutional reforms under the proposed Project. However, it is realisticto expect that these reforms would have a considerable and positive impacton agricultural development by facilitating the achievement of theobjectives set out above (para 3.06), and by strengthening the Government'scapacity to sustain the on-going policy changes. In conjunction withmeasures being promoted by the IMF, the reforms constitute a criticalcomponent of the strategies to place Zambia's economy on the road torecovery, diversification, and growth (para 3.18).

5.02 Lack of reliable data also partly makes it difficult to quantifyaccurately the benefits anticipated from the physical inputs to be financedby the proposed Project. While the farm machinery and implements financedby the Project would certainly help to increase output by enabling thecultivation of an acreage larger than is now the case, and would probablylead to higher yields as a result of better and timely seedbed preparation,and while the various agro-chemicals would help to increase production by

- 37 -

reducing crop losses, it is very difficult to separate these benefits fromthose attributable to the other key inputs, such as fertilizers, farmmanagement skills, better seeds, which would not be financed by theproposed Project but without -hich the Project's inputs would achievelittle. In addition, it is problematical to define the "without case"primarily because a number of options are available to the majority of thefarmers who are expected to benefit from the Project. These optionsinclude: shifting out of crop farming, wholly or partially, to lessinput-intensive and less mechanized farming operations and activities suchas ranching or tree farming; continue farming but on a reduced crop areaproportional to the available farm machinery; or going out of businessaltogether and selling out to those ("emergent") farmers who might be ableto operate without the use of tractors. In reality, the "without case- islikely to involve a combination of all these options in proportions thatare not possible to determine objectively. However, all these options haveone feature in common: they would result in reduced cropped area and cropproduction. Several difficulties also preclude an accurate and objectivedetermination of the benefits to be expected from the "with case", largelybecause it is not known accurately how the Project's proceeds would bedistributed among the various types of crops, other agriculturalactivities, and categories of farmers; or how the Government would use theKwacha funds generated by the Project.

5.03 Nonetheless, to gain some notion of the magnitude of the possibleimpact on production arising from the Project, an indicative assessment ofthe financial and economic costs and benefits has been carried out on thecultivation of hybrid maize. The following are the main assumptions:

(a) for both without and with project cases:

(i) tractors are used by the medium-, large-scale and the moreadvanced emergent farmers;

(ii) in keeping with the estimated percentage of the cultivatedarea allocated to maize growing by the medium- andlarge-scale farmers, 75Z of the tractor time is devoted tomaize production;

(iii) seasonal inputs, including agro-chemicals, are applied inaccordance with recommended dosages; and

(iv) average maize yields remain at the current level of 4.7tons/ha, currently attained by improved farmers.

(b) for the without project case:

(i) the existing fleet of 2,500 operational tractor units wouldbe scrapped after ten ye.:^rs of use from the year Lhey wereimported; and

(ii) because of frequent breakdowns at the critical landpreparation, planting and weeding period, each tractor unitwould handle an average of 40 ha annually;

- 38 -

(c) for the with project case:

(1) all tractors ten years and older, estimated at 1,000 out ofthe 2,500, would be replaced, while the remainder would berehabilitated;

(ii) the new tractor units would handle 50 ha annually up to theseventh year and 40 ha thereafter, while the rehabilitatedones would handle 50 ha annually up to the fifth year and 40ha thereafter;

(iii) incremental tractor units would necessitate expandingcultivation into already destumped fallow land; and

(iv) the total Project's cost is charged to maize cultivation.

5.04 Under these assumptions, the Project would increase maize produc-tion by an amount rising from about 30,000 tons in Year 1 to a peak ofabout 320,000 tons in Year 10. Over the Project's economic life of twelveyears, the incremental production would average about 190,000 tons annuallywhich, at the current prices, is equivalent to K 59.8 million gross. Thepresent value of the net benefits discounted at 13.5% would be K 34.3million (US$17.2 million). The financial rate of return is estimated at27% and the economic rate of return at 59% (Annex 4, Tables 1 and 2). Inreality, the return would be much higher than indicated by these figures(para 5.05). The financial rate of return is particularly sensitive tochanges in costs and benefits (Table 5.1), reflecting the fact, mainly as aresult of the subsequent devaluation of the Kwacha, the latest increase inproducer price of maize offers a relatively modest profit margin while ithas led to a substantial widening of the gap between domestic and borderprices. The latter problem is expected to be rectified by the adoption ofa better price setting methodology starting with the next cropping season(Para 6.03 (a) ). Farmers' respresentatives and the Government havealready initiated a review of maize producer price with a view to effectingan increase during the current cropping season.

Table 5.1 - Sensitivity Analysis (Total Costs and Benefits)

Financial EconomicRate of Return Rate of Return

(X) (Z)

Base Case 27 59Benefit Up by: 10% 37 73

20% 47 88Costs Down by: 10% 38 74

20% 52 96Benefits Down by: 10% 15 46

20% 1 34Costs Up by: 10% 17 48

20% 6 38Switching Values at 13.5% Disc. Rate

Benefits -12 -34Cost 13 52

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5.05 The other reason why the financial rate of return are sosensitive is that the analysis includes the total capital costs relating tothe tractor units, while the benefits are predicated on 75% of the tractorunits" time. In addition, the analysis does not take into accountincreased yields likely to result from timely land preparation, plantingand weeding facilitated by the new and rehabilitated tractor units, andfrom the improved availability of agro-chemicals. Annex 4, Table 3(2)shows the results when the costs are adjusted to exclude 25Z of the tractorunits' capital costs. This adjustment leads to a significant improvementof the financial rate of return (Table 5.2).

Table 5.2 - Summary of Sensitivity Analysis (Excluding 25Z ofTractor Units' Capital Costs)

Financial EconomicRate of Return Rate of Return

(M) (Z)

Base Case 42 90Benefits Down by: 10% 27 70

20% 10 51Costs Up by: 10% 29 71

20% 16 57Switching Values at 13.5% Disc. Rate

Benefits -18 -39Costs 22 65

B. Main Direct Beneficiaries

5.06 The envisaged policy and institutional reforms would benefit awide spectrmm of the Zambian farmers, including subsistence farmers on theverge of entering the market economy. The major part of the tractor unitsand agro-chemicals would go to the medium- and large-scale farmers;however, assuming that farmers would buy these inputs in proportions thatreflect the current ownerhsip of tractors, about 20% of these inputs wouldbenefit the emergent farmers. In addition, about 7,000 emergent farmerswould benefit from ox-drawn implements financed by the Project.

C. Maize Producer Incentive and Fertilizer Subsidies

5.07 The issue arises whether the proposed elimination of subsidies onfertilizers would seriously reduce producer incentives, particularly formaize. A full answer to the question calls for a comparative analysis ofreturns from the various farming and non-farming investment opportunitiesavailable to the Zambian maize farmers; such an analysis is beyond thescope of this report. During the past two years, the Government has beenreducing fertilizer subsidies gradually and the remaining subsidies are atpresent estimated at about 5% of the fertilizer total costs (procurementand distribution costs and overheads). Annex 4, Table 3(3) presents asensitivity analysis of the financial rate of return for maize with respect

- 40 -

to the cost of fertilizers. An increase of fertilizer prices by, forexample, 10% would still leave an attractive rate of return of about 24%;furthermore, for the rate of return to fall below the estimated opportunitycost of capital (13.5%), fertilizer prices would have to increase by about45%. Since the remaining fertilizer subsidies are less than 10% of fullcosts, the analysis suggests that the subsidies can be eliminated withoutresulting in a serious disincentive to maize producers.

D. Risks

5.08 The Project's main risks relate to delays or failure to carry outthe proposed policy reforms; lack of foreign exchange to finance inpurs,especially fertilizers, complementary to those financed by the proposedProject; and recurrence of droughts. Several of the policy reformmeasures, especially those concerning pricing policies and private sectorparticipation in the marketing system, call for bold and resolute actionsin the face of probably strong and widespread resistance from those whostand to be adversely affected, particularly the urban population and thedoctrinaire politicians. It is, however, encouraging that the Governmenthas already demonstrated its resolve to take unpopular measures. Partlybecause of the grim economic and financial prospects confronting thecountry in the absence of the required policy changes, the political willnow exist to make it realistic to expect that the Government would makedetermined efforts to implement the reforms proposed under the Project.The risk that lack of foreign exchange may lead to inadequate availabilityof fertilizers is expected to be minimized by the on-going efforts toincrease local production of fertilizers, and by the fact that fertilizersare one of the inputs for which Zambia has found relatively easy to obtainaid from bilateral sources in the past; at negotiations, the Governmentconfirmed availability of such assistance. In the short- to medium-term,little can be done about droughts. For the long-run period, research isproceeding with a view to developing more drought resistant crop varietiesand farming techniques.

E. Justification of IDA Assistance

5.09 Zambia will continue to face severe' foreign exchange constraintsduring the remainder of the decade (Table 1.3). The country will thereforecontinue to be in great need of support from the international community toensure reasonable prospects that the on-going economic . covery measureswill succeed. Apart from the expected benefits from the proposed Project,IDA support is justified by the facts that:

(a) the physical inputs to be financed by the Project call for asubstantial multilateral as opposed to just bilateral assistancein order to facilitate unencumbered procurement from theleast-cost suppliers, free of ties to any one specific country.One of the problems facing farm mechanization in Zambia is theincreasingly large number of different makes of machinery andequipment, as a result of tied bilateral assistance, whichrenders maintenance and repairs more costly;

- 41 -

(b) the objectives of the proposed Project bear significantly on thesuccess of the on-going and future Bank/IDA supportedagricultural projects in Zambia; and

(c) there are reasonable prospects of IDA successfully encouragingthe Government to carrying out further policy and institutionalreforms as envisaged under the Project.

VI. AGREEMENTS REACHED AND RECOMMENDATIONS

A. Agreements Reached

6.01 The main issues that call for formal agreement between theGovernment and IDA have been discussed with and essentially accepted by theGovernment in the course of preparing and appraising the project. Atnegotiations, agreements were reached as shown below:

6.02 Periodically after Project effectiveness, the Government would:

(a) further adjust, gradually or otherwise, hire charges for theGovernment tractor services, to achieve full cost recovery notlater than end of August 1986, and thus maintain such chargesthereafter;

(b) allow PCUs and Namboard, with regard to the marketing of maizeand distribution of fertilizers, and within regionallydifferentiated price structure, sufficient margins to cover:

(i) not later than May 1985: at least one-third of the amountsneeded to attain full cost recovery;

(ii) not later than May 1986: at least two-thirds of the amountsimilarly needed, and;

(iii) not later than May 1987: the total amount similarly needed.

6.03 Within six months following Project effectiveness the Governmentwould:

(a) adopt a pricing methodology for producer prices which relatessuch prices to the border-price equivalents as relevant;

(b) initiate a study with terms of reference as broadly set out inpara 3.11 above; and

(c) complete a further study of the factors underlying the extraor-dinarily high consumption of fertilizers, and possible solutions;and present a specific action plan satisfactory to IDA for imple-menting the recommendation of the study (para 2.21).

- 42 -

6.04 Within twelve months following Project effectiveness theGovernment would:

(a) initiate implementing the recommendations of the fertilizerconsumption study (para 6.03 (c) above), as may be agreedfollowing discussions with IDA; and

(b) submit to IDA for review and comments an interim report of thestudy proposed under para 6.03 (b) above.

6.05 Within eighteen months following Project effectiveness theGovernment would:

(a) submit to IDA for review and comments the final report of thestudy proposed under para 6.03 (b) above.

6.06 Within twenty-four months following Project effectiveness theGovernment would;

(a) implement the recommendations of the study proposed under para6.03 (b) above, with special reference to improving the effi-ciency of Namboard and PCUs, and allowing a broad-based parti-cipation by the private sector in the marketing of maize anddistribution of fertilizers, with Namboard playing the role ofthe buyer and seller of last resort.

6.07 Prior to Project effectiveness:

(a) The Government would:

Ci) establish a Special Account in the Bank of Zambia (paxra3.17);

(ii) establish a Project Implementation Committee (PIC) in themanner and for the functions set out in paras 4.01;

(b) The Bank of Zambia would:

(i) draw up a set of criteria, taking into account the type andvolume of business that a Trading House has been regularlycarrying out during the past six years, for allocatiigforeign exchange to the various Trading Houses, and submit itto IDA for review and comments (para 4.03);

(ii) establish a Project Implementation Unit (PIU) in the mannerand for the functions set out in para 4.04, and appoint anExecutive Officer for PIC with qualitifaction and experienceacceptable to IDA (para 4.04); and

(iii) submit to IDA for review and comments a proforma agreement,entailing the stipulations set out in para 4.06 above,between BOZ and Trading Houses, and implement the agreement.

- 43 -

B. Recommendations

6.08 Subject to the above agreements, the proposed Project is suitablefor financing by IDA.

VII. CONDITIONS OF EFFECTIVENESS

7.01 The conditions set out in paras 6.06 would constitute conditionsof Project's ei;e;tiveness.

_ 44 -

tcnx 1Page 1

ZA~I

Zantda Ecoocc Recovery Program

RelevantActim to beTaken Actimtobe TakenUnder IM Stand-by axber nroposed

icIsuAtio Already Taken Arraneuts MA Credit

Price ard Income

1. Uolesale aid Retail i) A meneral decitrol of i) Increed flezdbibtty 1) Adjusting the struc-Prices 'ixaesale and retail to lead settirng prices at tu of mbeat f]mr and

prices ; made recently, ecoond.c levels with a bread prices to a levelexcept for maiie meal, view to reducing aibsi- sffient to ena.r fiwheat flour and bead, dies. cost recoery.and candLes. The pricesfor the cotrolled ii) Adjusting the stnruc-

xmrmdities are uniform te of maize and aizethroughout the country meal prices to permitand crpping year; g sufficient tofurthernmre, in the case cover Namboard's ardof maize, the resultant co ves' tort,price structue es rx t d storg aidallow stfficient magis other operating costs,to cover the marketing within a regionallycosts. differentiated price

structure.

2. Producer Prices i) Produzer prices for i) Adopting a betterall the mjor agricul- price setting metbdologytulral camidities have for controlled producerbeen increed to levels prices, to reflectc,lose or above the 1, border-price equivalents.border-price equivalents.However, price setting ii) Initiating stepsmetbodongy rains towards a system wherebyinla e, arxd data gua producerbase poor. Me pricesare prices for maize andalso uniform thra.ougcx other mjor crop6 wouldthe coutry. becme floor prices, with

Nanbogld becaing a buyerof last resort, withdn aregially differentiatedprice structue.

45-

Page 2

3. Farm 1x*it P.lces i) Fertilizer ellinag i) Increase In price of i) Increasing fertilizerprices were incrermed fertilIzers to reduce selling prices to a levelrecetly but not suffi- subsidies. a RfiCien to coverciently to cover promi- Nai,oad's and Coopera-rerit and distributim tives' procureet,costs. tawpoxt, hUlIM,

storage ad otleroperattng costs, witblI aregLonaly differenlatedprice structure.

ii) I kg dargesfor Gov:erment's tractorbire servins itffi-ciently to ensure fullcost reco%ry.

ttial Reforms

4. Produce Marketing and i) Major danges were i) Allwig inceasedInput ritica coupleted recently ampetiticn in the

~*erby Nari,ard hsded mgaetig of maize andover to Provincial distribxtim of ferti-Cooperative 1ILOiS (ECU) zers dwuh pzLtt1gall its intna-provincLaL participatiaa by tiefunctils in tie market- priaste sector.ing of maize and distri-biticn of fertiLzers.

External Sector

5. Foreig Exchange i) A 42X devalUa waS i) DeValuatim aldRates da during 1983, and a adoptiom of fleidble

fledble exwharg rate exchange rate.policy bas been adopted.

Fblil Finance

6. Ribc Fxpenditures i) Total adbdies to i) Re-zctiai cf hbdgetary i) Making Nmboad aidNauiard we reduced subsidies. Cnperta fi Ualyfrm K 109 udLlicn in self-d fedent by adopt-198D to about X 84 ing maurer set out inmlIlnic in 1982; tIe 1ili) and 3(i) abote.estirted subsidies for1983 axunt to K 36

- 46 -

Annex 2Table 1

ZAMBIA

AGRICULTURAL REHABILITATION PROJECT

Principal A:ricultural Imports(K Million)

Percentage1972-74 1975-80 Change

Meat and Meat Preparations 6.8 1.5 -78.0

Dairy Products 6.0 4.8 -20.0

Fish and Fish Preparations 2.4 1.2 -50.0

Cereal and Cereal Preparations 1/ 9.6 17.3 +80.0

Fruits and Vegetables 2.3 1.2 -47.8

Sugar and Sugar Preparations 0.5 - -

Beverages and Spices 2.4 2.5 +4.2

Natural Textile Fibre 0.7 0.4 -42.9

Vegetable Oils and Fats 5.0 8.9 +78.0

Animal Feed Stuff 2.1 3.2 +52.4

37.8 41.0 +5.9

1/ Mostly wheat.

47 _

Annex 2Table 2

Official Producer Priceo For Major Crqos

Md%a)

Harvest Year Unit 1970 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Ceres

Nulie 90 kg 3.50 4.30 5.00 6.30 6.30 6.80 9.00 11.70 13.50 16.00 18.30 24.50

Whene 90 kg - - 16.00 16.00 16.00 20.00 2D.O0 2.00 26.00 32.00 35.75 42.50

Paddy Rice 80 kg - 12.00 12.0D 14.40 14.40 14.40 16.00 18.0D 18.60 28.oD 40.OD 40.00

Saco=xn W90 kg 4.70 5.00 6.00 6.00 6.00 6.00 6.00 6.00 9.00 9.00 16.00 18.00

millet 90 kg 29.00 29.60

B-rley 90 kg 35.75 42.50

cassava 1 kg 0.15 0.20

011 r1 Seds

Soya BEan 90 kg 3.20 13.20 13.20 17.0O 17.00 21.50 25.00 32.00 36.30 42.31 45.30 52.50

Sxfloer 50 kg 2.45 8.95 9.40 10.00 10.00 12.50 13.70 16.40 17.60 20.75 21.50 21.50OMGra(Sheljled) 80 kg 10.20 17.00 17.00 25.00 25.00 28.60 32.00 35.00 42.70 48.00 52.00 65.00

Seed Cotton I/ 1 kg 0.08 0.25 0.30 0.40 0.40 0.46 0.46 0.46 0.46 0.47Vi'd&aTobaeo 2/ 1 kg 0.63 0.99 0.81 L.0O 0.98 1.29 1.51 1.57 1.65 2.40 2.70 2.80

Sbgasrcne Mr 6.60 8.40 8.90 10.90 10.90 10.90 12.30 13.47 18.00 n.a. nua. n.a.

Fresh MLlk 2 / 1 lltre 0.08 0.10 0.11 0.15 0.15 0.21 0.24 0.23 0.28 0.43 0.47 0.52

Beef Cattle 3/ heed 83.97 NWA N/A NIA N/A N/A N/A N/A 251.00 273.00 N/A N/A

1/ bm*a QJzry HaM-PJdwd Prie.2/ Average Prlce.3/ Anerage Cant. Prime for LMve Cattle.

-48 -

-zhmc 2Miie 3

Naketed Agdtetnra1 Pbodtm TAcPe by OffiCIAl (ils

Qktdcr TOM)

Hariwt Year 1970 1974 1975 1976 1977 1978 1979 1980 1981 1982

Careas

132,000 588,000 559,000 750,000 696,000 582,000 336,00 382,000 693,000 508,000- - 934 3,948 5,324 5,251 6,528 9,584 11,478 n.a.

PEddy Rim 93 357 1,009 2,093 1,860 2,925 1,852 2,213 2,673 n.a.

01 E irg Seeds

Soya Beet - 37 367 604 1,274 1,187 1,295 3,531 3,673 z.a6Suflcuer - 4,000 8,242 15,964 13,320 7,551 11,919 17,238 19,223 20,3500ronxmts (&elled) 3,601 3,626 6,499 9,467 7,462 2,234 2,737 2,028 1,320 704

S1 Cottix 5,446 2,173 2,602 3,884 8,928 8,430 14,916 22,913 16,752 12,784

S-gr Cane 321,000 570,000 768,000 780,000 691,000 775,000 888,000 920,000 893,000 1,010,C00

Vlxgirda Tobacc 4,795 6,301 6,466 6,2L2 5,588 3,7014 4,591 4,127 2,319 1,869Erle Tbacci 388 501 502 212 311 264 381 554 665 704

Roested Coffee 6 11 24 33 44 77 24 2B 40 nea.

Tea Iea - - - 10 81 144 249 314 na. n.ea

Fresh- MUk 45,000 49,500 50,070 50,000 48,000 48,000 50,180 53,670 55,300 n.a.

Beef Cattle (HEad, 000's)

Total Slaazgn*r1n 68.4 80.1 71.7 77.6 71.5 67.7 88.6 92.4 100.1 n.a.

Cold Storage Board 35.9 28.0 18.2 18.7 23.9 18.9 19.7 15.9 13.8 nua.

Plg S3azletW 31.9 44.3 55.5 50.2 35.8 42.4 48.4 47.9 37.7 n.a.

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Annex 3Page 1

ZAMBIAAGRICULTURAL REHABILITATION PROJECT

Implementation Schedule for Policy Reforms and Other Measures

1. Pricing Policy

A. Before Board presentation:

(a) increase the price of wheat product by at least 22%, ordecontrol such prices;

(b) increase the charges for Government tractor hire servicesto cover at least 50% of the amount needed to attain fullcost recovery; and

(c) formulate a price setting methodology for producer pricesso as to relate such prices to the board-price equivalents;

B. After Project Effectiteness:

Ca) within six (6) months following Project effectiveness:adopt a pricing methodology for producer prices which relatessuch prices to the border-price equivalents as relevant;

(b) further adjust, gradually or otherwise, the price of wheatproducts, if not yet decontrolled, and charges 'or Governmenttractor hire services to achieve full cost recovery not laterthan end of August 1986, and thus maintain them thereafter.

Cc) allow PCUs and Namboard, with regard to the marketing ofmaize and distribution of fertilizers, and within regionallydifferentiated price structure, sufficient margins to cover:

(i) not later than May 1985, at least one-third of theamounts needed to attain full cost recovery;

(ii) not later than May 1986, at least two-thirds of theamount similarly needed, and;

MiU¶i) not later than May 1987, the total amount needed toattain full cost recovery, and thereafter maintain suchamounts;

(d) periodically review and maintain charges for Governmenttractor hire services at levels sufficient to attain fullcost recovery.

2. Measures to Improve Marketing Efficiency

A. Before Board Presentation:

(a) finalize the terms of reference of the study on PCU andNamboard costs, with special reference to maize marketing andfertilizer distribution, and select consultants to carry outthe study;

- 50 -

.- .Annex 3Page 2

B. After Project Effectiveness

(a) within six (6) months following the date of Projecteffectiveness: initiate a study with special reference to:ways and means of improving efficiency of the maizemarketing and fertilizer distribution system throughreducing Cooperatives' and Namboard's costs, withparticipation by the private sector acting as an essentialspur to that end; legal changes needed to facilitateprivate sector participation in the marketing of maize andfertilizer distribution; a workable mechanism to guardagainst widespread commodity hoarding and/or smuggling byprivate traders, and against the bulk of the trade fallinginto non-Zambian hands; measures needed to enable Namboardto establish and manage food grain reserves, and to carryout the role of a buyer and seller of last resort, policyand operational guidelines for the management of food grainreserves, and required investments and financial resourcesfor the operations of such reserves;

(b) within twelve (12) months following the date of Projecteffectiveness: submit to IDA for review and comments aninterim report of the above study;

Cc) within eighteen (18) months following the date of Projecteffectiveness: submit for IDA rev-iew the final report ofthe marketing study proposed above, and agree with IDAregarding a firm schedule to implement the recommendationsthereof, with special reference to improving the efficiencyof Namboard and PCU, and allowing a broad-based participationby private traders in the marketing of maize and distributionof fertilizers, with Namboard playing the role of the buyerand seller of last resort; and

(d) within twenty-four (24) months following the date ofProject effectiveness: implement the recommendations of thestudy referred to above, in consultation with IDA.

3. Measures to Improve Fertilizer Use Efficiency

(a) within six (6) months following the date of Projecteffectiveness: complete a further study of the factorsunderlying the extraordinarily high consumption offertilizers, and possible solutions; and present a specificaction plan satisfactory to IDA for implementing thereconmendation of the study, and

(b) within twelve (12) months following the date of Projecteffectiveness: implement the recommendations of the abovestudy in accordance with plan of action as may be agreed withIDA.

-51- x

pF1al Cast ad lauiaO(1d Kdaze)

Yew1I Yew 2 Yew 3 Year 4 Yenr 5 Yer 6 Yew 7 Yew 8 Ynr 9 Year 10 Yew 1 Yw 12

cr4dA xAzO'0W) 1 / 73.8 71.7 66.9 57.0 44.7 44.7 44.7 25.5 13.5 6.0 -Crq Psrala (Te 'OO( D) 2/ 3t6.9 337.0 314.0 257.9 210.0 210.0 210.0 119.8 63.4 2L2 - -Cse sevmi n(Kc m ) 109.2 106.0 98.8 843 66.1 66.1 66.1 37.7 19.9 8.9 - -

X Wtu (X Mfllion)Gqa axt - - - - - - - - _ _ _ _

S / 2.2 2.2 2.0 1.7 1.3 1.3 1.3 0.8 0.4 0.2 - -FeJlze 5/ 27.9 27.2 25.4 21.6 17.0 17.0 17.0 9.6 5.1 23 - -

, 1 s 61 7.8 7.6 7.2 6.1 4.8 4.8 4.8 2.7 1.4 0.6 - -thddrnqr ccAri 7/ 29.0 233 26.4 22.4 17.6 17.6 17.6 10.0 53 2.3 - -lar 8 y 5.1 4.9 4.6 3.9 3.1 3.1 3.1 1.8 0.9 0.4 - -maceYwas 9 / 7.2 7.0 6.6 5.6 4.4 4.4 4.4 2.5 13 0.6 - -

Ttl Cost -79i 772 7.2 613 48.2 48.2 48.2 27.4 14.4 6.4 - -

11th Projet Ce

Cxped ArM (0a'000) 80.2 90.0 93.7 93.7 93.7 90.7 81.7 8D3 76.5 75.0 54.0 15.0p Prodo (aons 'COO) 2/ 376.9 43.0 440.4 440.4 440,6 4263 396.1 377.4 359.6 352Z.5 258 70.5

Ra. Uevena UlMliUM) T3 118.6 1A3.1 138.6 138.6 138.6 34.2 1253 118.8 113.2 110.9 79.9 22.2

FaedtE C-VLUm

;sscur Wits IOy 23.0 38h4 15.4FaflwI1W n os 1 2.6 4.8 1.8. acellawa. 12 / 1.7 2.9 1.2

Sub-total 273 46.1 UL4

qeratbg c-mses 4 / 2.4 2.7 2.8 2.8 2.8 2.7 2.5 2.4 2.3 2.2 1.6 0.4FeC13l7zar 5/ 30.5 34.2 35.6 35.6 35.6 34.4 32.2 30.5 29.1 2L5 20.5 5.7A d,ai- 6a L6 9.6 10.0 10.0 10.0 9.7 9.0 86 8.2 8.0 5.7 1.6Matidnety ontaA-3 I 29.6 29.9 29.9 29.9 29.9 29.8 29.7 29.6 29.6 29.5 21.2 5.9L.bor 8

/ 5.5 6.2 6.5 6.5 6.5 6.2 5.8 5.5 5.3 5.2 3.7 1.0;: oef w 9 / 7.7 8.3 8.5 85 8.5 83 7.9 7.7 7.4 73 5.3 1.5

Suab-total 84.3 90.9 93.3 93I 93.3 91.1 87.1 81.3 8L.9 W..7 58.0 16.1

Total Cos 111.6 137.0 111.7 93.3 933 9L1 87.1 81.3 81.9 8D.7 5L0 16.1

In qra1 Gosts 32.4 59.8 39.5 32.0 45.1 42.9 38.9 56.9 67.5 74.3 53.0 16.1Iital Fw 9.4 27.1 39.8 51.3 72.5 68.1 59.2 81.1 93.3 102.0 79.9 22.2Net Incre.1 Revemo (23.0) (32.7) 03 2L3 27.4 25.2 2v3 2.2 25.8 27. 21.9 6.1

FTnadal Rate of Return: 27A

I/ At 40 1./yea par tractor urit.2J At 4.7 tamlA.31 At K 28.32 per bg cif 90 kg, or K 314.7/tan.4/ At 25 rgAh o rg K la2/kg cr K 3D/lw.5/ At 350 kg/t af D nImuu costixg K 0.56/kg; 30D kg/ of ure amtLg K 0.56hgt ad

D20 kg/ls cE Un Aong K 0.58/a..61 At K 106.74/ba cmnslating of Prbugcln at K 77.65/lu and Tacduz at K 29.09/ha.7/ At K 393.8/ha azslsdzig of K 1234/hm for ful and h -2iares; K 182.4/l for umddnexy

watntetmre ad napalm; ad K 83/1a for tImmee 11incaam d sndries.8S At 25 wrn-ayi at X 2.76/on-day gLv1g a toal aig K WA.9/ t llC of eratig aosmt

u10 At K 76.8W/tractor umt, c1Izrg assode lplma. Ams aliU tor uitseatinaed Ot abwat 1O00D cUt cE tbe oerable 2,500, ag. 10 y ad above am replace.shie the bhao irnid be rhabilitated.

11/ At K 490.8/hl for lnrmtal over aid aboe tie arm adtivatt by 2,50trow urnts (75,000 ba) before the project.

IV CWlstlzg Of Ot-p1Av, aDd ulMU e13M (aem Table 3.1).13 At K 319Ah for nE trtor mitts up to Yer 7 ad for rb biitste1 tractor uats

q> to Year 5 (aa.ssting oE K 142.4/i for fel ad lubtict, K 107.6/lu for xepLm ad_mlaeanoe; ad K 83u for inzmne, li1eAm ad a)ule); ad at K 393.8/kg for am

tuits after Yewr 7 ad for rdAUltec ugtrn after Ye 5, ad for v-rdubiteteddwits dudg les 1 ad 2.

lb_r 8, 1981

Annex 4Table 2

Economic Costs and Benefits I/(Hybrid Matze)

Year I Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 1C Year 11 Year 12

Without Project Case

Gross Revenues (K' Million) 2/ 136.1 132.2 123.2 105.1 82.4 82.4 82.4 47.0 24.9 11.1 - -

Expenditures (K' Million)Operating CostsSeeds 2.1 2,1 1.9 1.6 1.2 1.2 1.2 0.7 0.4 0.2 - -Fertilizers 3 '29.4 28.6 26.7 22.7 17.9 17.9 17.9 10.1 5.4 2.4 - -Agro-chemicaIs 4/ 7.4 7.2 6.8 5.8 4.6 4.6 4.b 2.6 1.3 0.6 - -Machinery Costs-4/ 23.2 22.6 21.1 17.9 14.1 14.1 14.1 8.0 4.2 1.8 - -Labor 4/ 3.4 3.3 3.1 2.6 2.1 2.1 2.1 1.2 0.6 0.3 - -MiscelTaneous 4/ 5.8 5.6 5.3 4.5 3,5 3.5 3.5 2.0 1.0 0.5 - -

Sub-total 7TE3 69.4 6.Z9 55.1 43.4 43. 43.4 24.6 12.9 S.8 - -

With project Case

Cross Revenues (K'%illion) 2/ 147.9 165.9 172.8 172.8 172.8 167.2 156.2 148.0 141.1 138.3 99.6 27.7

Expenditures (K' Million)Capital CostsTractor Units 41 21.8 36.5 14.6 N

Fallow Reclamation 4/ 2.3 4.6 1.7Miscellaneous 4/ 1.6 2.8 1.1

Sub-total 25.7 43,9 17.4

Operating CoatsSeeda e/ 2.3 2.6 2,7 2.7 2.7 2.6 2.4 2.3 2.2 2.1 1.5 0.4FertilTzers 3/ 32.1 36.0 37.5 37.5 37.5 36.2 33.9 32.1 30.6 30.0 21.6 6.0Agro-chemicals 4/ 8.2 9.1 9.5 9.5 9.5 9.2 8.5 8.1 7.8 7.6 5.4 1.5Machinery Coats 4/ 23.7 23.9 23.9 23.9 23.9 23.8 23.8 23,7 23.7 23,6 17.0 4,7Labor4/ - 3.7 4.2 4.4 4.4 4.4 4.2 3.9 3.7 3.6 3.5 2.5 0.7Miscellaneous 4/ 6.2 6.6 6.8 6.8 6.8 6.6 6.3 6.2 5.9 5.8 4.2 1.2

Sub-total 76.2 82.4 84.8 84.8". XR "i 82T6 7, MIA 52,2 14,3

Total Costs 101.9 126.3 102.2 84.8 84.8 82.6 78.8 76.1 73.8 72.6 52.2 14.5

Incremental Coats 30.6 56.9 37.3 29.7 41,4 39.2 35.4 51.5 60.9 66.8 52.2 14.5Incremental Benefits 21,8 33.7 49.6 67.7 90,4 84.8 73.8 101.0 116.2 127,1 99.6 27.7Net Incremental Benefits (18.8) (23.2) 12.3 38.4 49,0 45.6 38,4 49.5 55.3 60.5 45.4 13.2

Economic Rate of Return: 592

1/ Derived from Annex 4, Table 1.2/ At current import parity price of K 35.31 per 90 kg or K 392.3 per ton.3/ Excluding subBidies estimated at 5X of landed cost.4/ Caletilated using conversion factors as estimated by the Program Division.

November 8, 1984

-53 -Annex 4Table 3

Sensitivity Analysis(Hvhrid Kaize)

Financial EconomicRate of Rate ofRetnrn Return

X 2

I. .Total Costs and Benefits

Base Case 26.6 59.3Costs lip by 102 16.5 47.5

2nz 6.5 37.9Benefits down by: 102 15.4 46.4

202 1.0 33.6Costs down bv: 10Z 37.9 74.5

20Z 51.6 95.7Renefits tip by: 10 36.8 72.9

2nX 46.6 87.7Switching Valutes 1/

Rene fits -11.6 -34.4Costs 13.1 52.4

2. Excluding Nominal Costs 2/

Base Came 41.9 90.2costs up by : IZ 28.7 71.3

20Z 16.4 56.9Benefits down by: 102 27.3 69.6

-20 10.0 50.8Costs down by: 102 57.7 117.1

202 76.6 159.9Benefits up hy: 10Z 56.1 114.2

202 70.8 143.0Switching Values 1/

Benefits -18.2 -39.4Costs 22.3 65.1

3. Fertilizer Cost and Total Benefits 3/

Base Case 26.6 n.a. 4/Cost tip by: 107 23.9 n.a.

2n% 21.1 n.a.Benefits down hy: 102 23.6 n.a.

20Z 19.6 n.a.Cost dewn by: 102 29.3 n.a.

2nx 32.0 n.a.Beneftts up by: 10Z 29.1 n.a.

20z 31.1 n.a.SwitchSng Values 1/

Benefits -31.n n.a.Costs 44.9 n.a.

1/ At 13.5X Discount Rate asstmed to reflect the npportunity cost ofcapilal.

2/ Nominal cost refer to 252 of capital costs which arise from the factthat the Total Cost and fenefits case assumes that only 75% of thetraictor tunits' time is devoted to maize cultivation while 25Z is devotedto other on-farm activities, inclding production of livestock and cropsother than maize; they also include the costs of ox-drawn implements andmiscellaneous [tems as shown in Table 3.1.

3/ This is intended to Cest the probable impact on producer incentive towati:.e Farmers as a result of increases in Fertilizer prices with a viewto eliminating subsidies.

4/ n.a. not applicahbl.

November 8, 1984

- 54 -

Annex 5

Estimated Disbursement Schedule (USS million)

Annual Cumulative

FY '85

First Semester 4.2 4.2

FY '86

First Semester 4.8 9.0

Second Semester 5.8 14.8

FY '87

First Semester 5.2 20.0

Second Semester 2.5 22.5

FY '88

First Semester 2.5 25.0

212 24 216

REPUBLIC OF ZAMBIA

ECOLOGICAL ZONES ANDTRADITIONAL AGRICULTURAL SYSTEMS

ECOLOGICAL ZONES: Roads , Stte land

ZONE 1 Northern High Rainfall Railways

ZONE 2 Western Serni-Arid Pbins -: = RlversSwampsZONE A Central and Southern + Airfields

______---Provincial boundariesZONE 35 F-iwrn Plateau International boundaries

ZONE 4 Luangwa-Zombezi 0 50 1cc 150Rift Valley MILES

o so icc IF 200 250

KILOMETERIS

* _ _ -~ ZAIRE

12 2 y e SD x :.

< ~N Qi R T H/ ZONE, 51 -l Sr E R N

1 _ _ _t *_ _ 4 _ ,,t~~~~~~~c COP,-iKa r { MO Ksempa -

t IC~~~Kmba<

I w~~~~kl 2e { ,-

1i iE 2

01~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I

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2e t8thdl t\

j W E\ S \T E R N KataoN It 2oo 3| _ rSenonga f5) Kaw( :

A. ,J < 2d /,' >_----1, .. MUkL

_._-- N A M I B I A I w

2--229 2

IBRD 11631RI JUNE

//> j X K) ~ T A. N Z A N I A2W ~.O- Lke 3

II heo / S j, *-_ \ bIukguO .'

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0 Ch n-caHl f

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(~~~~~~~~~~ibLIkoR. ( soiy a 3b *s I

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ZONE hi

Chtnp Ills Him ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~Muw

I 4n, f -uf { - M O Z A M B I Q U E4 4

o---- , Mdula~~~~~~i "Im Z6NtE

ic 'jCOPPERBLT + '. I -M UtuweM I Q/

-n~~~~~~~~Msl *-lqb -AICLUb SYSErenje?

i U Tb r H P Rce Bme lb

9RM' unbw -emi e NotenIoooi1t w s\ /s

/ ZE _OZ MB QnU E ;>/

hZAMBEZI RIVER '~~~~~~. Caw.~~~. ? ~ .... L,U-

~- f;' ungaVwalae e E-hrn bu \At^"O

amwaig ~~~~~~~~~~~~~~~~~~~~~~~~NIGERIA VE.1ANP UD ETHIOPIA

( ~~~AGRICULTURAL VSYSE_MS:\GUN 0_ U11NDA)~ OAIBUSH-FALLOW ASH- CULrURES (Chitemene) K]ENVfA

-. -. # - - Large-Circle Chitemen b Small-Circle Chiteene

) U T ir R NC Northern Plateau Block Chitemnene

Chore BA2. TRANSITIONAL ASH- CULTURESANOAZBI MlAW

C Southern Plateau d Southern Kalahari

0 i anque 6 Norterw Kaloahari 3r 3' ~~~~~~~~~~~~~~~3. HOE 8 PLOUGH CULTURES Ad.ieci

- ~~~~~~~~~0 Luapula Basin b Bangweulu Basin Oeo.uSOHC Luangwa Valley d Easten Plateau AFIALSWNO h.e. Oc..

lone e~ ~~~~~~~~~ Eastern Valley F Central VblleySane U~~~~~~~~~~~~ Zambezi Valley h upper vailey

218/ Barotse Plain 3? 3d 1