The World Bank

DocumeIt aI TheWorld Bank

FOROMCIUL USEONLY Cp. 1/?S3 -. 2,4 Public Disclosure Authorized

Report No. 6310-ZA Public Disclosure Authorized STAFF APPRAISAL REPORT

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

November17, 1986 Public Disclosure Authorized Public Disclosure Authorized

Industrialand DevelopmentFinance Division Easternand SouthernAfrica Region

This documentha a mtetncteddisttibution and may be used by recipientsonly in the performance of ofllcial dutiea Its contentsmay not othenrse be discloW withoutWodd Bank authorization. CURAENCYEQUIVALENTS

CurrencyUnit - Kwacha (K) JS$1 - K 6.87 US$0.1456 - K 1.00

The US Dollar/ZambianKwacha exchangerate is determinedby weekly auction. The exchangerate shown above is the resultof the auctionheld on August 30, 1986.

WEIGHTSAND MEASURES

1 meter (m) = 3.28 feet (ft) 1 kilometer(km) 0.62 miles 1 sq kilometer(km 2) 0e3860 sq miles 1 metric ton (tonne) - 1,000kg - 2,204.6pounds 1 liter - 1.057US quarts = 0.22 Imp. Gallon

ACRONYMSAND ABBREVIATIONS

ADB - African Development Bank AFC = Agriculture Finance Company BOZ = Bank of Zambia DBZ U DevelopmentBank of Zambia ,EG DeutscheGesellschaft fur WirtschaftlicheZusammenarbeit Entwicklungsgesellschaft(German Finance Company for Economic Cooperation)

DRA 5 Debt Recovery Action Plan EAS EquatorAdvisory Services EIB = EuropeanInvestment Bank FMO NederlandseFinancierings Maatschappij Voor Ontwikkelingsladen N.V. (NetherlandsFinance Company for DevelopingCountries) GDP Gross DomesticProduct INDECO = IndustrialDevelopment Corporation MBA - Master of BusinessAdministration MIS = ManagementInformation System NORAD - NorwegianAgency for InternationalDevelopment NSCB = NationalSavings and CreditBank PTA = PreferentialTrade Area SEP = Small Scale EnterprisePromotion Ltd. SSE = Small Scale Enterprises T-Bill = Treasury Bill ZADB - ZambianAgriculture Development Bank ZCCM = ZambianConsolidated Copper Mines Limited ZIMCO - ZambiaIndustrial and MiningCorporation ZNBS - Zambia National Building Society ZNCB = ZamblaNational Commercial Bank ZNPF a ZambiaNational Provident Fund ZSIC = ZambiaState InsuranceCorporation

FISCALYEAR

April 1 - March 31 FOXOMCIAL USEONLY STAFF APPRAISALREPORT

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

Table of Contents

Page No.

Creditand Project Summary ...... i - iii

Basic Data ...... iv -vi

I. INTRODUCTION

A. The Industrial Sector ...... 1 Sector Background ...... ,.,,, , .. 1I...... Structureof Industry...... ,.,...... 2 Employment, Labor Productivity and Wages ...... 3 The PolicyFramework ...... ee....e.e..c 3 Background ... oeee.. 33...... The New Industrial Policy Regime ...... 4 ForeignExchange Regime ...... e...... 4 Import Regime ...... 5 Export Promotion ...... te.eeeeeeeeeC5 InvestmentAct ...... PublicSector Investment in Industry ...... 5 RecentIndustrial Performance ...... 6 Resource Allocation 66...... * Effect of Policy Changes ...... 6 Capacity Utilization ...... e. 6

B, The Financial Sector .. a eec ...... c cc... 7 FinancialInstitutions ...... eec 7 The Bank of Zambia (BOZ) ...... 7 The Commercial Banks ...... e 77ee...... Specialized Parastatal Financial Institutions ...... 7 Agricultural Development Banks ...... 8 Structure of Banking System Lending ...... 8 Monetary Policy Developments ...... 9 Money, Credit, Inflation and Devaluation .....t.. 9 Interest Rates ...... ee 99.eee.e Effectof the ForeignExchange Auction on Interest Rates ...... 9

This reportis based on the findingsof an appraisalmission to Zambia in March-April1986, composed of Neil C. Hughes,Godfrey Tumusiime and JosephOwen of RAPID.

Thisdocument has a retricteddistrbution andmay be used by reipients onlyin the perfowmance of theirofki duties.Itscontents may not otherwisbe disclosedwithout World Bank authoriation. Page No.

II. DEVELOPMENT BANK OF ZAMBIA ...... 10

Origin, Objectives and Role ...... ,., 10 Ownership ...... 10 Board of Directors 00*e*00*S ...... 11 Organizationand Management ...... 11 Staff Development and Training ...... 12 Operating Policies and Procedures ...... 12 Policy Statement ...... 12 Promotion ...... ,.,...... 13 Appraisal ...... , , , , ,.,...... 13 Supervision00000., 13 Accounting,Financial Management and Information Systems *...... 13 Procurement 0000000000000000000000000000000000000000000. 14 Interest Rate Structure *...... 15 Operations .... 0...... 0 15 Quality of DBZ's Portfolio ...... 15 Resources ...... , 17 Financial Results and Condition ...... 18 Projected Operations and Financing ...... 19 New Capital Increase ... ,...... ,...... 20 ProjectedFinancial Performance ... o ...... 21

III_ THE PROJECT*2***1*.....,...... ,...... 21

Bank Group Experience with DBZ ...... 21 Project Justification and Objectives ...... 22 ProjectDescription **0000@000000 0050000000 0000000o...... 23 CreditComponent .... 0...... 00 ...... 23 Technical Assistance Component ...... 24 ProjectImplementation 000...... 00000000000000000.00.0. 24 ReportingRequirements .... 24 Procurement and Disbursement ...... 25 Special Account ...... 25 Project Benefits and Risks ...... 25

IVe AGREEMENTSREACHED AT NEGOTIATIONS ... , ...... 26

ANNEXES

1. ZAMBIA: Structure of Interest Rates .,...... ,.,.... 28 2. DBZ: List of Shareholders ...... 29 3. DBZ: OrganizationalChart ...... 30 4. DBZ: Statement of Operating Policies ...... 31-33 Page No.

5. DBZ: Debt RecoveryAction Plan Methodology...... 34 6. DBZ: Summaryof Operations,December 31, 1985...... 35 7. DBZ: Analysisof Loan Approvals,December 31, 1985 36-37 8. DBZ: BalanceSheets, 1982-86 ...... 38 9. DBZ: IncomeStatements, 1982-86 39 10, DBZ: AssumptionsUnderlying Financial Projections 40-43 11. DBZ: ProjectedOperations, 1987-91 44 12. DBZ: ProjectedSources and Uses of Funds,1987-91 ...... 45 13. DBZ: ProjectedNet Cash Generation*,,,,,,,**,**,**,,,. 46 14. DBZ: ProjectedBalance Sheets, 1987-91 ...... 47 15. DBZ: ProjectedIncome Statements, 1987-91 ...... 48 16. DBZ: ProjectedFinancial Ratios, 1987-91...... 49 17. DBZ: ProposedCapital Structure, 1987-91 o.o.o..o...... 50 18. DBZ: Scheduleof Disbursements., 51 ZAMBIA

THIRD DEVELOPMWENBANK OF ZAMBIAPROJECT

Credit and Project Summary

Borrower: Republic of Zambia

Beneficiary% DevelopmentBank of Zambia (DBZ)

Amount: SDR 8.3 million (US$10.0million equivalent)

Terms: StandardIDA terms

Terms of Relending: The borrowerwould onlendthe about US$8.9million investmentcomponent of the creditto DBZ at an interestrate equal to the Bank rate at the time of negotiations(i.e. 8.23%),for subloansdenominated in foreigncurrency, and at a variablerate equal to the treasurybill (T-bill)rate plus 22 for subloans denominated in Kwacha. DBZ would repay the Credit to the borrowerin accordancewith the aggregateof the repaymentschedules for subloans. Subloanswould not exceed 15 years with appropriategrace periodsnot to exceed 4 years. DBZ would providesub-borrowers with the optionof denominatingthe subloanrepayments (i) in US dollarsat a fixed rate equal to the Bank rate plus a 4% spread;(ii) in kwacha at a variablerate equal to the sum of the 1-bill rate plus a 2% foreign exchangerisk premium,plus a spreadof not less than 4%. The borrowerwould pass on the US$1.1million technicalassistance portion of the creditto DBZ as a long-termsubordinated loan, which would be consideredas quasi-equityfor the purposeof calculatingDBZ's debt-to-equityratio. Retroactive financingup to an amountof SDR 250,000would be made availablefor expendituresmade beforethe date of loan signingbut after October31, 198f,under the technicalassistance component.

ProjectDescription: The creditwould financethe long-termforeign exchange portion of the capitalinvestment requirementsof productive sector subprojects approved by DBZ, for modernization, expansion or restructuring of existingenterprises, and to a lesserdegree for new investmentsubprojects. The creditwould also financethe establishmentof a computerizedfinancial and managementinformation system at DBZ, technical assistanceto Implementthe new systemand train staff in its use, as well as staff trainingin projectevaluation and supervision,both in Zambia and abroad. - il -

ProjectBenefits and Risks: The propcsedproject would provideterm resourcesto the productivesectors in Zambia to rehabilitate industrialand agro-industrialenterprises, develop manufacturedand other non-traditionalexports, and increaseproduction in all productivesectors. It would thus help accelerategrowth and increase employmentin Zambiaand would complementthe positiveimpact of the policyreforms already taken by the Governmentand supportedby IDA. The investmentcomponent of US$8.9 millionIs expectedto supportproductive investments totalling about US$20 million. The projectwould also enableIDA to help DBZ, the main term-lendinginstitution in Zambia,to increaseits effectivenessas a term-lending institutionby mobilizingadditional resources, upgradingthe qualityof its portfolio,and increasingthe effectivenessof financialand msnagementdecision-making. Continued IDA support would enhanceDBZ's capabilityto mobilizeadditional foreigncapital and other resourcesfrom bilateral institutionsand would enableit to play a more significantrole in assistingthe recoveryof Zambia'sproductive sectors.

There are two major risks to this project. One is the possibledeterioration of Zambia'seconomic situation. Such a risk is, however,limited, so long as Zambia continuesto followthe stabilization programsupported by the IMF and the policyreforms and actionsenvisaged by IDA and other donorsto increasethe resourcetransfer and accelerate economicgrowth in Zambia. A secondrisk is a continueddeterioration of DBZ'a arrearsposition. This risk is being reducedas DBZ takes the actions supportedby the proposedcredit to improveloan collectionsand to resolveits portfolioproblems. These shouldinsure that DBZ will remainan effective term-lendinginstitution that promoteseconomically sound investmentprojects. - iii -

FinancingPlan PY86/91

(US$ million) Amount % Commercial:.iks $ 16.0 15.4 Non-BankF: .Anci8lInstitutions 18.0 17.3 DBZ-ShareCapital 7.3 7.0 DBZ-RetainedEarnings 4.7 4.5 IFC 6.0 5.8 FMO 5.0 4.8 IDA (DBZ III) 10.0 9.6 BIB 8.0 7.7

Total DBZ Financing $ 75.0 72.1 BeneficiariesOwn Funds 29.0 Z7.9

Total ProJectCost $104.0 100.0

EstimatedDisbursements

IDA FiscalYear 1987 1988 1989 1990 1991 1992

- … ------(US$million)-----

Annual 0.5 2.5 3.0 2.0 1.5 0.5 Cumulative 0.5 3.0 6.0 8.0 9.5 10.0 - iv -

DEVELOPMENTBANK OF ZAMBIA

Basic Data Sheet

1. Year of Establishment:1972

2. Ownership(as of October31, 1986):

AuthorizedCapital K 30 million Paid-upCapital K 21,030million (US$2.77million)

A. Domestic: 75% of which: Public E % Private -

B. Foreign: 25% of which: Public v Z Private 8%

3. PortfolioArrears (March 31, 1986)

Total Affected Principal Interest Total Portfolio Portfolio Arrears Arrears Arrears

Amount (K million) 177.2 90.1 13.3 6.3 19.6 Percentage 100.0% 50.8% 7.5% 3.6% 11.1%

4. Main OperationalResults (K'OOO)

Actual Projected

1983 1984 1985 1986 1987

TotalAssets 101,989 125,200 172,825 222,693 275,226 Total Portfolio(Gross) 87,053 102,714 141,946 177,150 234,669 Total Number of Loans 231 223 202 288 317 Total Equity (Share 15,937 16,849 18,017 25,509 40,936 Capital/Reserves)

LT Debt-EquityRatio 2.6 3.4 4.8 4.9 4.1 Total Debt-EquityRatio 2.8 3,7 5.2 5.3 5.7 Debt ServiceCoverage Ratio 1.6 1.9 1.4 1.1 1.1

Number of Total Staff 134 179 182 182 182 (of which professional) 46 65 69 64 64 - v-

5. InterestRates and Other Charges

InterestRates: Local Currency ForeignCurrency Loans Loans

IndustrialProjects 28.0% floating 15.0%fixed AgriculturalProjects 26.0% floating 15.0%fixed SSI 18.0% fixed Discretionary

CommitmentCharges: (Chargesare due on signingof the contractand on the undisbursed amount on each anniversaryof contractsigning.) 2.0% 3.0%

6. OperationsSummary (K'000)

Actual EstimatedProjected 1983 1984 1985 1986 1987 Approvals AmountApproved 11,669 29,495 46,396 58,000 113,942

Commitments Equity 12 638 1,001 500 500 Local CurrencyLoans 8,181 11,608 15,291 43,578 81,190 ForeignCurrency Loans 8,858 12,946 25,968 10,896 18,266

TOTAL 17,051 25,192 42,260 54,974 99,957

Disbursements Equity n.a. 170 27 500 500 Local CurrencyLoans n.a. 6,167 14,554 37,920 73,668 ForeignCurrency Loans n.a. 10,310 18,640 16,925 15,318

TOTAL 27,300 16,647 33,221 55,345 89,486 - vi -

7. FinancialPerformance Indicators

A. IncomeStatement Items as % of AverageTotal Assets

Actual Proi. 1983 1984 1985 1986 1-97 1. Loan Income T=T IT17 IT T2.8 TK79 2. Other Income 1.2 0.9 1.6 0.7 0.6 3. Total Income 12.3 12.2 14.6 13.5 15.5 4. FinancialExpense 5.9 7.3 7.5 7.5 9.6 5. Groas FinancialSpread a/ 6.4 4.9 7.1 6.0 5.9 6, AdministrativeExpense 1.8 1.8 1.8 2.2 2.2 7. of whichPersonnel 1.0 1.1 1.1 1.0 1.2 8. Provision 0.7 0.4 2.7 1.7 0.8 9. Depreciation 0.3 0.3 0.3 0.3 0.3 10. ProfitBefore Tax 3.6 2.4 2.3 1.7 2.6 11. ProfitAfter Tax 1.9 1.2 1.1 0.9 1.3 B. ProfitabilityIndicators

12. Net ProfitAfter Tax as 2 of AverageEquity 10.2 8.6 9.6 6.7 9.0 13. Loan Incomeas % of AverageLoan Portfolio 13.1 13.7 16.2 15.7 17.6 14. FinancialExpense as % of AverageLiabilities 8.1 9.1 9.C 8.4 12.1 15. AverageSpread b/ 5.0 4.6 7.2 7.3 5.4 C. PortfolioIndicators

16. Arrearsas % of Total Portfolio - 7.8 13.1 10.8 10.0 17. Loan Collectionsas % of TotalBil'lings - - 66.0 86.5 105.0

8. ResourcePosition (as of December31, 1985) K'000 Local Foreign Total

ResourcesAvailable for Disbursement 3,395 38,476 41,871 Less: UndisbursedCommitments 13,673 34,100 47,773

ResourcesAvailable for Commitments (10,278) 4,376 (5,902) Less: UncommittedApprovals 15,620 2,715 18,335

ResourcesAvailable for Approvals (25,898) 1,661 (24,237) a/ Line 3 - Line 4 tr/ Line 13 - Line 14 STAFFAPPR.AISAL REPORT

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

I. THE INDUSTRIALAND FINANCIALSECTORS

A. The IndustrialSector

SectorBackground 1/

1.01 Zambia'smanufacturing sector is relativelylarge compared to other sub-SaharanAfrican countries, contributing over US$600million to GDP in 1983, and employingnearly 60,000workers (16% of employmentin the modernsector). The 20% shareof manufacturingin Zambia'sGDP is second only to Zimbabwe,and only Zimbabweand the Ivory Coast in sub-Saharar. Africahave higher levelsof manufacturingGDP per capita.

1.02 Manufacturingwas the fastestgrowing sector of the economyin the first decadeafter independence.From 1965 to 1974,manufacturing value added grew at 10% per annum in real terms while total GDP was growing at about 3.3% p.a. The rapid growth of manufacturingduring the 1960s and early 1970swas due to: (i) growingdemand for consumergoods becauseof growingincomes; (ii) increaseddemand for equipmentand metal fabrication linkedto the miningsector; and (iii)the Government'spolicy of accelerated industrializationthrough import substitution and publicsector investmentsin manufacturing.The sector'sgrowth continued at high rates until 1975 when, in responseto the sharp fall in copperearnings and the resultingeconomic recession, industrial output fell dramaticallyby 15% in real terms between1975 and 1980. Despitesome recoveryin 1981, the generalpicture remained one of declinein industrialoutput, with manufac-

/ A detailedanalysis of the performanceand main policyissues facing Zambia'sindustrial sector was presentedin the report: Zambia: IndustrialPolicy and PerformanceIDA. ReportNo. 4436-ZA,from which this section is taken. - 2 -

turing value added in 1985 about three quartersthe 1976 level. Depressed demandas well as increasingdifficulties in obtainingimported inputs due to foreignexchange scarcity were mainlyresponsible for this situation.

Structureof Industry

1.03 Industrialproduction in Zambiahas becomeincreasingly diver- sifiedover the years,moving from a predominanceof consumergoods to a greatershare of output in intermediateand capitalgoods (chemicals,metal products,machinery etc.). Between1965 and 1975, the share of food, beverages,tobacco, textiles, clothing and leatherin gross manufacturing outputdropped from 59% to 40% whereasthe share of intermediateproducts and equipmentincreased from 32% to 49%. The spatialdistribution of Zambia'sindustry is unusualin Africabecause it is not concentratedin the administrative/commercialcapital. Rather,about half the establish- ments and employmentare locatedin citiesalong the line of rail to the north in the CopperbeltProvince, and in the SouthernProvince, with only arounda third in the Centraland LusakaProvinces. The remainingfive of the country'snine provinceshave less than 3% of the firms and less than 1% of industrialemployment.

1.04 The degreeof governmentintervention in the industrialsector has been substantial.Between 1970 and 1980, the public sector,repre- sentedprimarily by the IndustrialDevelopment Corporation (INDECO), grew at rates exceedingthose for the economyas a whole and those for private manufacturing.By 1980, publicenterprises accounted for more than half of gross manufacturingoutput and more than 40% of manufacturingemploy- ment. Governmentpolicies with respectto licensing,tariffs and investment incentivescreated an environmentin which competitionwas limitedand industrygrew as an import-substitutingactivity behind high protective barriers. In addition,the choiceof publicsector investments coupled with distortionsin factorprices combined to createa highlycapital and import-intensivestructure.

1.05 The shortageof foreignexchange to purchaseimported inputs and spare parts,on which Zambianmanufacturers are heavilydependent, led to low levelsof capacityutilization resulting in decreasingefficiency and increasingaverage costs. Resultsof a 1981 survey 2/ of 24 firms revealedthat, on average,firms importedabout 50% of their inputs. Only food, textilesand footwearindustries import less than half their inputs, while metal productsare the most import-intensive,with importsaccounting for 81% of all inputs. Chemicals,wood and paper productsalso have high import sharesin total inputs.

1.06 Despitea relativelylarge and more advancedindustrial sector comparedto other sub-SaharanAfrican countries, Zambia's manufactured exportsare exceptionallysmall. The highestamount of manufactured exportsachieved was US$3.3million in 1974,which was greaterthan only eight out of 34 Africancountries for which data was available. Manufac- tured goods made up only 1.3% of Zambia'sexports in 1977 and 0.7% in 1980. The depreciationof the kwacha,beginning in 1983, foliowedby the

2/ Ibid. drasticdrop in the kwachafollowing the introductionof the foreign exchangeauction in 1985,have helped to bring abouta small but significant increasein manufacturedexports. A survey31 of about twenty privatefirms in early 1986 indicatesthat exportsfor these firmsare expectedto increaseten-fold this year (i.e. to about US$2 million). Manufacturingexports are largelylimited to cement,molasses, copper cable,clothing, crushed stone and lime,and explosives. As the product base is enlarged,through the implementationof appropriatepolicies, manufacturedexports can becomesignificant contributors to the balanceof paymentsin the 1990s.

Employment,Labor Productivityand Wages

1.07 Zambia'smanufacturing sector employs nearly 60,000 workers, which amountsto 16% of formalsector employment. Manufacturing employment grew at more than 11% per annum in the 1960sand 5.6% per annum during 1970-74. Thereafter,employment continued to grow, albeitat only 1% annually,despite the sharpdrop in the value of manufacturingoutput. This was due to the parastatalsector, in which employmentwas growingat an annual rate of 5% during 1975-80,more than twicethe rate of growthof parastatalproduction. In the privatesector, both employmentand value added fell at about 3% annuallyduring this period. As a resultof these trends,labor productivityin manufacturingdeclined, at an averageof about 4% annually,between 1973-80. Real wages in manufacturing,which rose substantiallyduring the post-independenceboom period,also followed a decliningtrend since 1973,falling at an averageannual rate of 2% between1975 and 1980. Wages in the formalmanufacturing sector are now below the averagewages in mining,transport, communications and services.

The PolicyFramework

1.08 Background. The Zambianeconomy has been in a continuingstate of contractionsince 1975. Relyingon a singleprimary commodity (copper) for the bulk of its exportearnings and with both productionand consumptionheavily dependent on imports,Zambia was vulnerableto the combinationof deterioratingexport prices, increasing costs for imported goods and raw materials,and regionalunrest which occurredover the past decade. The country'sexternal terms of trade fell by 70% duringthis periodcausing a severecompression of importsand a sharpdecline in GDP, All sectorsof the economywere affectedby the contractionon imports which resultedin widespreadunderutilization of capacity. In addition, spare parts for maintenancebecame increasingly scarce leading to large unmet rehabilitationand replacementrequirements. The Government'sfiscal and balanceof paymentsperformance, which had reliedheavily on the mining industry,deteriorated dramatically.

1.09 Zambia'sdifficulties were exacerbatedby inappropriateeconomic policiesand weaknessin economicmanagement. Continuedeconomic deterio- ration,however, led the Governmentto recognizethe permanentnature of the imbalancein its externalaccounts and the correspondingneed for deep-seatedstructural changes in the economy. In the past three years,

31 IDA Supervisionmission for IndustrialReorientation Credit. - 4 -

the Government,with Bank and IMF assistanceand support,has undertakena recoveryprogram to stabilizeZambia's external accounts, restore growth, and lay the basis for restructuringthe economy. The Government'slong- term objectivesare to diversifythe economythrough greater emphasis on increasingagricultural output, restructuring industrial operations along the lines of comparativeadvantage, rationalizing the miningindustry, rehabilitatingexisting infrastructure, and encouragingnon-traditional exports. In support of the Government's recoveryprogram, recent Bank assistance to Zambia includea US$75 millionExport Rehabilitation and Diversificationloan for the mining sectorin 1984, an AgriculturalRehabi- litationcredit of US$25 millionand an IndustrialReorientation credit of US$62 millionin 1985, and a Recoverycredit of US$50 millionin 1986. In addition,stand-by arrangements were agreedwith the IMP in 1983, 1984 and 1986.

1.10 The New IndustrialPolicy Reglme. An immediateobjective of the Government's new industrial strategy is to raise the level of capacity utilizationin the sectorby providingadditional foreign exchange to efficientimport-substitution and export-orientedindustries. Increased industrialproduction will reduce the economicand socialpressures associatedwith the economicstabilization and adjustmentprocess, and growthin industrialexports will help to regainexternal equilibrium. In the longerterm, the Government'sobjective is to increasethe efficiency and exportorientation of the industrialsector, by institutingan incentivestructure and a set of policiesthat encouragethe flow of investnentresources to the more productiveindustrial subsectors and enterprises. In order to attainthese objectivesthe Governmentis committedto pursuea less protective,more outward-lookingindustrial strategy,to rely increasinglyon market forcesto allocateresources, and to reduce the share and increase the efficiency of the public sector in manufacturing.

1.11 The Government is aware that in addition to the provision of foreignexchange, controls and restrictionsmust be removed and the policy frameworkchanged. Consequently,it has adopteda numberof institutional and policyreform measures that are being implementedwith IDA assistance in the contextof the IndustrialReorientation Project, and are designedto improvethe foreignexchange regime, reform the importregime, remove disincentivesto exports,streamline and improveinvestment incentives, increasethe efficiencyof publicenterprises and improvethe public sector'sinvestment program in manufacturing.

1.12 ForeignExc!an gime. A market determinedexchange rate is the cornerstoneof the Government'snew developmentstrategy and of its industrialpolicy reform. The foreignexchange auction system, which has been functioningeffectively since October 1985,is basedon a weekly auctionof foreignexchange at which the exchangerate which appliesto all foreignexchange transactions is determinedby the marginalbid which exhauststhe foreignexchange available for auction. At present,about US$6-9million is being auctionedevery week. Althoughadministrative allocation,at the auctionrate, continues for the fore.'gnexchange requirementsof the Government,the coppermining conglomerate (ZCCM), public debt service,and for importsof pharmaceuticals,books and, when necessary,maize and fertilizer,the use of this mechanismis decliningand will be reducedto a minimumin the future. -5 -

1.13 IMrtRegmime. The Governmenthas adoptedseveral policy reforms,beginning in October 1984, to shift the full weight of trade restrictionsfrom an importlicensing system to a tariffsystem. The measuresadopted to date, which constitutea major step in the reformof the importregime, are: (a) eliminationof import licensingand its replacementby a simplesystem of registration;(b) eliminationof all import prohibitionsfor protectivepurposes; (c) establishmentof a 10% minimumtariff on all imports;(d) reductionof maximumtariff rates from 150% to 100%; and (e) establishmentof a 15% sales tax on all final domesticgoods producedin significantquantities. The secondphase of the tariff reformincludes the establishmentof a Tariff Commissionto prepare and carry out furtherreforms of the tariff structureand indirecttaxes in order to decreasethe level and increasethe uniformityof effective protectionbetween sectors. The recommendationsof the Tariff Commission are expectedto be implementedby the Governmentno later than June 30, 1987.

1.14 Epr romotion. Given the limitedprospects for copper exports,particularly beyond the year 2000, Zambia'sfuture foreign exchangeavailability will dependon the developmentand growthof non- traditionalexports. To provideincentives for non-traditionalexports, the governmenthas establisheda set of new incentivesthat include: (a) replacementof exportlicensing by a simple systemof registration; (b) replacementof the complexsystem of individualduty drawbacksby a simpler system of average drawbacks for major groups of exports; (c) establishmentof an autonomousexport promotion board, with private sector participation;(d) initiationof feasibilitystudies for establishingexport credit insurance and guaranteeschemes.

1.15 InvestmentAct. In April 1986,the Governmentenacted a new InvestmentAct to replacethe IndustrialDevelopment Act of 1977. The old Act failedin its objectiveto attractnew privateinvestment to manufacturing becauseit was highlyregulatory; did not provideany new incentives that were not alreadyavailable to all manufacturers;access to incentives was arbitraryand finallyit did not abandonthe overallindustrial strategyof grantinga dominantrole to the publicsector at the expenseof the privatesector. The new Act providesa uniformpolicy environment for publicand privateenterprises and improvedincentives in the form of income tax deductionsand grants for trainingand R&D, for enterprisesthat eitherexport, produce with high local input content,are locatedin a rural areas,or are classifiedas small-scaleenterprises (SSEs),

1.16 PublicSector Investment in Industry. Most publicinvestment in manufacturingis carriedout by INDECO. In the past, the limitedcapabi- lity of INDECOto appraiseprojects and to assessthe performanceof esta- blishedenterprises resulted in many uneconomic,capital-intensive and import-dependentinvestments. The Governmenthas committeditself to increasethe efficiencyof the publicsector and has commenced with a plan of actionto achievethis objective. In this context,INDECO's management has: (i) establishedan EconomicEvaluation Unit to appraisenew investment projectsand monitorthe performanceof existingenterprises using sound economiccriteria; (ii) initiateda review,with the assistanceof IDA, of the economicviability and operationalefficiency of existing enterprisesthat will subsequentlylead to the implementationof an action - 6 -

plan to restructure some enterprises that are viable, and to phase out firms or activitiesthat are not viable;and (iii) prepared a three-year investmentprogram, which has been reviewedand approvedby IDA.

Recent IndustrialPerformance

1.17 ResourceAllocation. A study of the impactof the foreign exchangeauction on the allocationof foreignexchange to the productive sectors,carried out in April 1986, revealsthat the manufacturingsector is receivinga similaramount and proportionof the foreignexchange availableto what it was receivingimmediately prior to the auction. However,major changesare takingplace in the allocationof foreign exchangewithin the industrialsector. The share of importsgoing to the privatesector has increasedsignificantly, from less than 50% immediately before the auctionto over 61% now, at the expenseof parastatals.Within parastatals,preliminary evidence suggests that the least efficientfirms are purchasingsmaller amounts of foreignexchange, whereas others are gettinga highershare. 1.18 Effectof PolicyChanges. The auctionsystem, with its market- clearingexchange rate level,and the major trade policyand financial reforms (eliminationof all non-tariffimport restrictions, freeing of Interestrates), has led to a significantchange in the actualamounts of foreignaxchange purchased by differentsectors and subsectorsand is also havinga positiveimpact on the efficiencyof use of foreignexchange and other resources. In industry,increases are alreadytaking place in capacityutilization, productivity of capitaland labor,efficiency of foreignexchange use and exports. The differencesin attitudeon the part of parastataland privatesector management are strikingwhen comparedto earlierexperiences. Since the changesin the economicand regulatory environmentof October1985, managers interviewed during a supervision missionof the IndustrialReorientation Project emphasized efficiency, labor productivity,competition and the profitabilityof exports,in contrastto the "cost-plus"complacency of the past.

1.19 Capacityutilization in industryis estimatedto have increased from 42% in early 1985 to 47% in 1986, the directresult of the significant rise in privatesector capacity utilization from 38% to 54%. Capacity utilizationdeclined in the parastatalsector from 45% to 41% mainly as a resultof the poor performanceof five economicallyineffiAient enterprises.The productivityof capitalin industryhas increasedby approximately12% as a resultof higher capacityutilization. Overall, labor productivityhas increasedsignificantly (by at least 15%) becauseof the higher productionlevels and reductionsin the industriallabor force. Industrialparastatals, with few exceptions,have shed labor through naturalattrition as a means of reducingcosts.

1.20 Foreignexchange is also being utilizedmore efficiently. Based on actualdata from all INDECOfirms and a sample4/ of private enterprises,it was found that each unit of foreignexchange is generating about 10% more value added than beforethe auction,because: (i) foreign

4/ Ibid. - 7 -

exchangeis beingpurchased by more efficientproducers in the sector;and (ii) firmshave implementedproductivity improvement measures as a response to the higher cost of foreignexchange.

B. The FinancialSector FinancialInstitutions

1.21 Zambiahas a well developedfinancial system which includes,in additionto the CentralBank, nine commercialbanks and six specialized parastatalfinancial institutions. The latterare under the controlof the ZambiaIndustrial and Mining Corporation(ZIMCO)--the Apex holdingcompany for all state-controlledenterprises.

1.22 The Bank of Zambia (BOZ). The CentralBank was establishedin 1965 to issuecurrency, regulate commercial banks, and establishand administernational monetary and creditpolicies through the use of the discountrate and reserverequirements. BOZ also managesZambia's interna- tionalreserves and is in chargeof the country'sforeign exchange control system,which it administersin cooperationwith the commercialbanks.

1.23 The CommercialBanks. The first commercialbank was established in Zambia in the early part of this century. However,of the nine existing commercialbanks, five have been establishedduring the last five years. The state-ownedZambia National Commercial Bank (ZNCB)handles the bulk of commercialbanking business of parastatalorganizations and other Governmentagencies. Its assetsamounted to K 1,305million (US$186 millionequivalent) at December31, 1985. Subsidiariesof two British banks,Barclays Bank and StandardChartered Bank, are next in size,with total assetsof K 1,035million and K 1,090million, respectively. One foreign-ownedmiddle-sized bank, the Bank of Creditand Commerce(total assets of K 532 million),is followedby five smallerforeign bankb. with assets rangingfrom K 64 millionto K 241 million. Zambianinvestors recentlyestablished a secondlocal bank,the AfricanCommercial Bank (no data available).The commercialbanking system is the major sourceof mobilizationof savingsfrom the generalpublic. At year-end1985, total depositsamounted to K 1,964million, equal to a real increaseof 100% in five years. Three fourths(K 1,484million) of thesedeposits were held by the three largestbarks. The five banks establishedsince 1980,control just one fifthof total deposits. Over one half of the totaldeposits (K 1,027million) are demanddeposits. Rates for time depositshave not providedmuch incentivefor saversto place their fundsat term (AnnexI). For small savers,bank depositsare the only means of savingfor the future and earning a reasonable return.

Specialized Parastatal Financial Institutions

1.24 ZambiaNational Provident Fund (ZNPF)was establishedin 1966 as a Government-ownedentity to administera mandatoryretirement savings schemefor non-civilservice Zambian employees. The funds are channelled into productiveinvestments mainly through credit to the public sector. As of March 31, 1984,the Fund'stotal assetswere K 550.5million. Zambia - 8 -

State InsuranceCorporation (ZSIC) was formedin 1967 after the merger and nationalizationof all existinginsurance companies. As of December31, 1985, the Corporation'sresources totalled K 415.0 million,of which about 80% were investedin Governmentbonds, loans and in industrialand commercialinvestments. Zambia National Building Society (ZNBS) was formed after the nationalizationof three privatesocieties in 1971, It obtains funds throughsavings shares and depositsfrom the generalpublic and institutions.As of December31, 1984, its assetstotalled K 163.4 million,of which four fifthswere investedin mortgageloans mainly for residentialproperties. National Savings and CreditBank(NSCB) is the financialinstitution in Zambia with the largestnetwork of branches (150). The bank catersto small savers,especially in the rural areas where no other bankingfacilities exist. At the end of 1984, its total assets amountedto K 125 million,one half of which were loans to the Governmentand parastatals,and one half were depositswith ZNBS and ZNCB.

AgriculturalDevelopment Banks

1,25 AgricultureFinance Company (AFC) was establishedin 1970 as a parastatalholding company under the Ministryof Rural Development.Most of AFC's lendingis for seasonalloans to agriculture.The remainder consistsof medium-termagriculture financing and mortgageloans for the purchaseof farms. As of March 31, 1985, AFC had accumulatedlosses of K 95.7 millionon a share capitalof K 43.5 million. AFC has had a very high rate of defaulton its loans,is presentlyinsolvent, and is still operatingonly becauseit is receivingGovernment financial support. It is expectedto be mergedwith the ZambianAgriculture Development Bank (ZADB) which was establishedin 1979 but only commencedoperating in 1983. This institutionis expectedto graduallytake over the activitiesof AFC and to becomethe main sourceof creditto the agriculture,fishing and agro- industrialsectors. ZADB had a net unimpairedshare capitalof K 3.8 millionand total assets of K 7.9 millionas of December31, 1984,

Structureof BankingSystem Lending

1.26 The commercialbanks provideshort- and medium-term(up to three years) credit,leaving long-term credit to specializedinstitutions. Althoughmost banks are limitedby their own internalcontrols to allocate only 10-15%of their portfoliofor medium-termlending, it was only after the establishmentof the foreignexchange auction that they made any real effortin this area. In effect,the banks respondedto the needs of their clientswho wanted medium-termkwacha loans to purchaseforeign exchange in the auctionto financecapital imports. They also made loans to DBZ, which did not have the local resourcesto attend to the similarneeds of its own clients. The compositionof the banks portfoliois as follows: about 35% of commercialbank lendinggoes to agriculture;20% to manufacturing;15% to miningand 8% to commerce. The balance(22%) is lent to transport, construction,financial institutions, and individuals.At December31, 1985, 50% of total commercialbank loans and advanceswere grantedto the privatesector, 38% to parastatalentities and the balanceof 12% to meet statutoryrequirements. Since 1980, total outstandingloan portfoliohas increasedfrom K 431.6 millionto K 1,146.6million (an increaseof about 66% in real terms). About two thirdsof lendingby the privatecommercial banks goes to the privatesector, while four fifths of ZNCB lendingis directedto the publicsector and parastatalorganizations. -9-

MonetaryPolicy Developments

1.27 Money, Credit,Inflation and Devaluation.During the 1980s, monetarypolicy has largelymet the requirementsof the Government'sfiscal policy. Between1980-82, monetary and creditpolicy accommodated the growingneeds of an expansionarybudget policy and an attemptedrecovery in the productivesectors. Over the two-yearperiod, when the consumerprice index was increasingat a rate of 12% p.a., the money supplyincreased by 22% annually,the net domesticassets of the bankingsystem increased30% p.a. and bankingsystem credit to the governmentincreased by 25% each year. Credit to the privatesector grew even faster,averaging 40% p.a. Budgetaryrestraint in 1983 led to a sharp declinein the rate of growthof net bankingsystem assets, the money supply,and bankingsystem creditto the Government,all of which grew by less than 10%. Privatesector credit still managedto grow by 14%, while the inflationrate increasedto 18% and the kwacha was devaluedby 27%. All monetaryindicators indicated growth rates of 18% or less in 1984, but meanwhileinflation had reacheda rate of 21% and the kwacha suffereda further32% depreciation.With the opening up of the economyin 1985,a substantialmonetary expansion occurred (42%), while bankingsystem assets increased29%. At the same time, the rate of inflationrose 35%, fueledby major price increasesin a whole range of goods and servicesfollowing the 200% devaluationof the kwacha in October-Novemberof that year. The monetaryexpansion continued in 1986, with the money supply increasing24% betweenJanuary and May (an annual rate of 58%).

1.28 InterestRates. Between 1982-85,BOZ raisedinterest rates in a seriesof graduallylarger steps (Annex1), until in 1985, rates were completelyfreed and limitswere set by market forces. In 1983,most rates were raisedbetween 1.5-3.5%. In 1984,most activeand passiverates were substantiallyincreased again, i.e., by 3-10.5%. However,these increases did not catch up with increasinginflation, and in real terms,rates remainednegative. The removalof all ceilingson interestrates in September1985 radicallychanged this situation,and resultedin almosta furtherdoubling of rates withina two-monthperiod. An auctionof treasurybills was also introduced,which more than doubledthe T-bill rate over the same period (i.e.,from 13% to 23%). Under the new system,the Banks in practiceestablish a prime rate which is close to the T-bill rate. The basicmarket optionfor the banks is to (i) invest depositsin T-bills,or (ii) make loans at rates reflectingthe returnon T-billsplus their own loan administrationcosts of about 1% plus an additionalprofit margin. In practice,the prime rate chargedis about 2% above the T-bill rate, which providesthe banks with a 6% spreadover the averagecost of deposits. In effect,the T-billauction established a market-orientedcost structurenot only for governmentborrowing, but also for settinglending rates throughoutthe bankingsystem.

1.29 Effect of the ForeignExchange Auction on InterestRates. When the T-bill remainedat about 24%, the bank'sprime rate was set at 1% to 2% above the T-billrate. Some borrowershad to pay as high as 33%, and the averagelending rate was about 30%. Becauseinflation in the past has been much lower,low inflationaryexpectations have led to resistanceto these interestrates. This is also reflectedin an increasein the - 10 -

liquidityratio (liquidassets as a percentageof depositliabilities) of the commercialbanking system, which was 70.6%at December31, 1985,up from 63.1 at the end of 1984. As a result,even thoughreal interestrates became negativefollowing the 1985 devaluationand subsequentprice inflation,they have recentlybecome marginally positive as the rate of inflationslowed during the courseof 1986. Nevertheless,pressures are buildingto limit furtherincreases in interestrates. If low or even negativerates persist,deposits are likelyto go down, hamperingresource mobilizationand leadingto new upward pressuresin the interestrate. The prospectsfor future trendsin interestrates and inflationdepend largely on the Government'ssuccess in controllingthe latter. Assumingthat the Government'seconomic program including market-oriented interest rate policywill be maintained,the outlookis for a returnto an equilibrium situation,resulting from a continueddecline in the rate of inflation. Consequently,the market-determinedinterest rates are expectedto becomemore positiveover the medium-term.

II, DEVELOPMENTBANK OF ZAMBIA

Origin, Objectives and Role

2.01 The Developmet Bank of Zambia, established as a statutory corporationby an Act o' Parliament in 1972, startedoperations in 1974. Its main objectivesare providemedium- and long-termloans and equity financingfor projectsin idustry,agro-industry, construction, transport, power,tourism, mining and .arge-scaleagriculture. DBZ is also authorized to providetechnical assistance and advisoryservices and to administer SpecialFunds on behalfof the Government. The World Bank Group assisted the Governmentin establishingDBZ by participatingin the feasibility study that led to its creation,through an IFC equityinvestment of US$545,000and by grantinga US$15 millionloan to DBZ in 1975 and an additionalUS$15 million loan in 1980. Since inception,DBZ has maintained its autonomyin making investmentdecisions, has becomethe major sourceof term financingfor productiveinvestments in Zambia and, despitethe country'seconomic difficulties, has remaineda basicallysound financial institution.

Ownership

2.02 DBZ was establishedwith an authorizedshare capitalof K 10 millionconsisting of 600 "ClassA" sharesand 400 'ClassB" sharesof K 10,000each. IFC subscribed35 sharesof the latter. In April 1979, Parliamentauthorized DBZ to increaseits share capitalby issuinga new class of non-votingpreferred interest-bearing shares designated "Class C" shares. However,none has as yet been issued. The "ClassA" sharesare reservedfor the Governmentand its agenciesand the "ClassB" sharesare reservedfor local privateshareholders and internationalbanks or institutions,while there are no limitationson 'ClassC" shares. DBZ's authorizedshare capitalhas been increasedto K 30 million,and as of March 31, 1986,DBZ's totalpaid-in capital amounted to K 18,950,000, includingK 14,150,000held by 6 "ClassA" shareholdersand K 4,800,000 - 11 -

held by 23 "ClassB" shareholders.Total capitaland reserves(including subordinateddebt) amountedto K 35.5 millionat March 31, 1986. The list of DBZ's shareholdersis presentedin Annex 2. A capitalizationplan to raise an additionalK 51 millionin share capitalto supportthe expected increasein DBZ's operationswas acceptedby DBZ's shareholdersduring its July 1986 Board Meeting (para.2.29). Board of Directors

2.03 DBZ's Board of Directorsconsists of ten members,six of whom, includingthe chairman,are appointedby the Governmentto represent 'ClassA" shareholderswhile four membersare appointedby "ClassB" shareholders. The Directorsappointed by the Governmentinclude the Permanent Secretaryof the Ministryof Finance,who is the chairman,the Governorof the Bank of Zambia,the SpecialAssistant to the Presidentof Zambiaon EconomicAffairs, the Directorof the Zambia NationalProvident Fund, DBZ's ManagingDirector and a local businessman.The Directorsappointed by "ClassB" shareholdersinclude an officialof DEG, the ResidentDirector of BeogradskaBank, ADB's RegionalRepresentative 5/ and the CreditManager of GrindlaysBank (Zambia)Limited. The Directors,who are appointedfor a term of four years,do not have alternates. The Board meets quarterly, takes an active interestin DBZ'sactivities, and has been instrumentalin helpingDBZ maintainits autonomyand to developinto a sound,profitable institution.The contemplatedshare capitalincrease will resultin a re-distributionof "ClassB" Board seats,to conformwith new shareholding relationships.A new shareholder,FM0, which has agreedto subscribeat least 10% of the total amountof share capital,w3uld receiveone of the seats presentlyheld by groupsof shareholderswho individuallyhold less than 10%.

Organizationand Management

2.04 Except for a one-manoffice in the NorthwesternProvince (which is responsiblefor implementinga small-scaleenterprise program financed by the InternationalFund for AgriculturalDevelopment (IFAD)), all DBZ's staff are locatedin one buildingin Lusakawhich DBZ owns. The appraisal, implementationand supervisionof projectsfinanced by DBZ entailextensive travelby DBZ staff. The distancesinvolved make it difficultfor DBZ to promote,implement or superviseeffectively some of these projects. Copperbelt, Northwestern,Northern and LuapulaProvinces account for 31% of the numberand 40% of the amountof DBZ's loans. DBZ has carriedout a detailedfeasibility study which assessthe justification,costs and benefitsof establishingthe proposedregional office, and recommendsits establishment.DBZ managementhas decided, therefore,to establisha regionaloffice in Ndola to handlethe appraisal,implementation and supervisionof projectsin this area.

2.05 Overall,DBZ's management is dedicatedand effective. DBZ is headed by a ManagingDirector who joined the institutionin 1977.

5/ ADB and IPC have a rotationarrangement for representationon DBZ's Board,under which IPC Bits for two years followedby ADB for one year. - 12 -

Previously,he had been ManagingDirector of ZNCB and had also occupieda senior positionat BOZ. He is assistedby a GeneralManager who also previouslyoccupied senior positions at ZNCB and BOZ. DBZ's organization structurecomprises six divisionsresponsible for projectpromotion, appraisal,supervision, personnel and administration,finance and internal audit. Except for internalaudit, each of the divisionscomprises two departments. DBZ's organizationstructure is appropriatefor its objectives and operations.Two expatriateadvisors funded by the Norwegian Agency for InternationalDevelopment (NORAD) provide assistance in SSI developmentand projectsupervision. An organizationchart is presentedin Annex 3. All managersin DBZ are Zambiannationals, All the divisionsare adequatelymanaged, but the Financedivision needs to be strengthenedby recruitingan experiencedFinancial Advisor (para.2.13). Staff Developmentand Training

2.06 DBZ has a total staffof 182 consistingof 64 professionalstaff and 118 secretarialand generalsupport staff. All managementand almost all professionalstaff are universitygraduates with degreesmostly in economics,agriculture and businessadministration, and one quarteralso hold graduatedegrees. More than one half of the professionalstaff have been with DBZ for more than five years. Overall,the professionalstaff is of good qualityand is productive. Since 1982,staff increasedby 67, from 115 to 182 (a growth rate of 58%). Most of the increase(44) was in non-professionalstaff, while professionalstaff increasedby 23. As operationswere growingat a fasterrate, staff costsas well as total administrativecosts, remained low (para.2.24). DBZ has been activein trainingits staff throughon-the-job training, and by sendingselected professionalstaff on trainingprograms abroad. Due to lack of foreign exchange,however, DBZ has not attainedits staff trainingtargets for the past two years (only two of the five staff originallyexpected to receive externaltraining were sent on short-termtraining programs). In the technicalassistance component of the proposedcredit, funds would be includedto help DBZ carry out its staff trainingactivities and prior to June 30, 1987,DBZ would preparea detailedstaff tisiningprogram satisfactoryto IDA (para.3.08). OperatingPolicies and Procedures

2.07 PolicyStatement. The operatingpolicies that governDBZ's activitiesare set forth in a Statementof OperatingPolicies (Annex 4), which were establishedunder the firstBank loan. This statementesta- blishes,inter alia, the financingof economicallyand financiallyviable projectsas DBZ's main objective,limits the DBZ's re-lendingmaturities to the maturitiesof the borrowedfunds utilizedin making such loans, establishesa maximumexposure limit per client (20% of DBZ's equityand quasi-equity),and guidelinesfor equityinvestments (10% of DBVs equity) in viable enterprises.The policy statementalso requiresthat DBZ be managedon sound and businesslikeprinciples. In January1986, DBZ adopted a specificpolicy for makingadequate provisions for possiblelosses (para.2.22). DBZ's policystatement, as previouslyreviewed and including the above amendment,provides a sound basis for operationsunder the proposedcredit. - 13 -

2.08 Promotion. Promotionalactivities in DBZ are carriedout by the ProjectsPromotion Division which, at present,has a staff of five professionals. The division'srole is to developproject ideas using outside consultantsfinanced out of a SpecialFund for TechnicalAssistance funded by the governmentsof Norway,Germany and Swedenand, where justified,to preparepre-feasibility studies. After the studiesare reviewedby DBZ's Loan Committee,a detailedappraisal is carriedout of projectswith potential, and in consultationwith DBZ seniormanagement, suitable uponsors are identifiee. Over the past five years, this divisionhas carriedout 23 feasibilitystudies of which 13 have been implementedby interestedprivate investors.

2.09 Appraisal. During implementationof the secondBank loan, the qualityof DBZ's projectappraisals has continuedto improvewith the building-upof staff experienceand technicalcapabilities, and the adoptionof an improvedcredit manual. The appraisaldivision at present has a staff of 12 professionals.Detailed appraisal is undertakenonly after an initiatingproject brief has been clearedby management. Appraisalreports are, in general,compreheasive, and cover the project's featuresin detail. However,except when requiredby the Bank,DBZ has not calculatedeconomic rates of returnon all the projectsit finances. Agreementwas reachedat negotiationsthat by December31, 1986, economic rates of retirnwould be calculatedfor all subprojectsrequiring DBZ financingof US$250,000equivalent or more, not just for Bank-financed subprojects.

2.10 Supervision.The SupervisionDivision has a staffof 19 profes- sionalswho visit most projectsat leastonce a year (thosefacing problems,more frequently).In the past, supervisionhas been hamperedby unexperiencedstaff and a tendencyto visit enterprisesonly after problems had developed. DBZ has made effortsto train and obtainnew personnel,and to establishprocedures and guidelines,which were set out in a Project SupervisionManual adoptedin 1980. However,although the manuallays out generalprinciples and sets guidelines,it lacks specificity.Partly as a resultof this, projectsupervision has not been systematic,sometimes failingto determinethe root cause of problemsor to arriveat adequate solutionsfor dealingwith them. During preparationand appraisalof the proposedcredit, DBZ agreedto establisha more systematicapproach to supervision,and to gear its supervisionactivities to achievingspecific and realizablegoals. For this purpose,it has establisheda Debt Recovery Action (DRA)Plan to reducearrears (Annex 5), and has developed appropriatecollection targets (paras. 2.19 and 2.21).

Accounting,Financial Management and InformationSystems

2.11 The qualityof financialinformation prepared by DBZ and reflectedin annualaudits prepared by its auditorsremains satisfactory. The growth of DBZ's volumeof operationsand size of portfolio,however, has outstrippedthe institution'smanual capabilityto prepareand maintain accurate,detailed, and up-to-dateaccounting, financial and portfoliodata and these processesare now very time consuming. Except for payroll,staff loans and a generalledger, which are processedon a smallmicro-computer with littledata processingcapability, all other accounting,financial and - 14 -

portfoliodata are preparedmanually. As a result,data preparation managementand retrievalare cumbersome;there are frequentdelays in preparationof key managementreports, the flow of informationis slow and inadequate,and there is lack of coordinationbetween the FinanceDivision and the operatingdivisions, especially the SupervisionDivision, which is responsiblefor portfoliomanagement and thereforerelies extensively on informationgenerated by the FinanceDivision.

2.12 In an effortto alleviatethe existingweaknesses, DBZ has carriedout, with the help of its auditors,a detailedreview of the presentaccounting and managementinformation practices, which included designingan appropriatesystem to replacethem. The first and second stagesof the review(assessment of the adequacyof existingpractices and designspecification and tenderingof the new system)have been completed. A contract,satisfactory to IDA, is presentlybeing negotiatedbetween DBZ and its auditorsfor the third stage (implementationof the system).

2.13 The weaknesssesin DBZ's accountingand managementinformation systemsare also partlydue to manpowerconstraints. The head of the FinanceDivision, a qunlifiedaccountant, has limitedexperience to design new systemsand to manageDBZ's accountingand financialmanagement functions. DBZ has agreedto recruita suitablyqualified Financial Advisor for a three-yearterm. In view of the shortageof Zambian nationalswith the necessaryexperience, DBZ would recruitan expatriateto occupythis position. In addition,the Directorof Financewould complete a one-yearintensive executive MBA (finance)program. In his absence,the FinancialAdvisor would be Acting Directorof Finance. Also, DBZ does not have the qualifiedstaff neededto developand implementa management informationsystem (MIS). Trainingof DBZ staff in the operationof the MIS will be providedunder the project. To help DBZ achievethese objectives,the requiredfinancing would be includedunder the technical assistancecomponent of the proposedcredit (para.3.08). The hiringof the FinancialAdvisor would be completedprior to March 31, 1987 (para. 3.08). The initialsalary and the part of the equipmentcost associated with this componentwould be financedretroactively (para. 3.05).

Procurement 2.14 Procurement for DBZ-financedprojects is made followingregular commercial practices in Zambia. DBZ policies requirethat clientsobtain at least three quotations from three different suppliers or contractors. To be comparable,each quotationmust includea completeitemization of the total price or cost,including suppliers' standard term of sale. Selection of the winningquote is based on adherenceto the followingcriteria, which are closelymonitored by DBZ: (i) price/costcompetitiveness; (ii) track recordof the suppliers/contractors;(iii) availabilityof maintenance servicesin Zambia;(iv) availabilityof technicalassistance services (i.e.,training and installation);and (v) provisionof warrantiesand performanceguarantees. In general,this procedurehas workedwell in the past. Under the proposedproject, DBZ will, in addition,require each sub-borrowerto submita detailedwritten comparisonof the quotations received. - 15 -

InterestRate Structure

2.15 DBZ's present loan portfolio is almostevenly dividedbetween foreignand localcurrency denominated loans. On foreigncurrency loans, DBZ has been charginga fixedannual interestrate of 15% and a commitment fee of 3% due on the date of signingthe contractand on the un'isbursed amountson each subsequentanniversary of contractsigning. Local currency loans bear a semi-annualfloating interest rate that carriesa predeterminedspread above the market-determinedT-bill rate (priorto March 1984, loans in local currencyhad fixed interestrates). As of March 31, 1986,the interestrate for loans for industrialprojects was 28% p.a. and for agriculturalprojects 26%. Loans to SSEs bear a fixed interestrate of 18%. A commitmentfee of 2% is chargedon local currency loans. Follovingthe adoptionof the foreignexchange auction in October 1985 and the recentdecline in world interestrates, DBZ will establisha lower interestrate for new foreigncurrency loans based on the Bank's rate plus an adequatespread (para. 3.06).

Operations

2.16 An analysisof DBZ's loan approvalssince 1974 and a summaryof DBZ's operationsover the last five years are presentedin Annexes6 and 7. As of December31, 1985,DBZ had approved402 loans for a total of K 233.9million and 23 equity investmentsamounting to K 5.1 million. Loan approvalsin the last five years grew from K 24.9 millionin 1982 to K 57.2 millionin 1986-a nominalaverage rate of growthof 24.0%p.a., or about 2% p.a. in real terms. Both loan comsmitmentsand disbursementshave kept pace with DBZ's approvals. In each of the past five years, loan commitments exceeded 80% of amountsapproved and a disbursementrate of more than 65% of the amountcommitted was achievedin each of the last five years. Most (86%)of the loans approvedby DBZ sinceits establishment,were for less than K 1 million (US$142,887at the currentexchange rate). In terms of value,however, loans for less than K 1 millionwere just 38% of the total amountapproved. The sectoraldistribution of loan approvalsshows a concentrationin manufacturing,with 51% of the numberand 68% of the amountof loansapproved. Agricultureaccounts for 17% of the total amount. Other sectors--mining,tourism, transport, trade and construction-accountfor the remaining15%.

2.17 A substantialmajority (84%) of the projectsfinanced by DBZ are concentratedalong the line of rail, notablyin the Copperbelt,ientral, Lusakaand SouthernProvinces. About 55% of both the numberard amountof loans approvedsince inception were for new projects. In recentyears, however,DBZ has respondedto a growingdemand for expansionand rehabilitation of existingenterprises. Although DBZ has no policythat gives preferenceto privatelyownee projects,90% of the numberof loans it has approvedto-date and 71% of the amountsapproved were to the private sector.

Qualityof DBZ's Portfolio

2.18 DBZ's loan portfoliohas increasedfrom K 65.7 millionat year end 1982,to K 177.2million (net of provisions),distributed among 288 borrowersas of March 31, 1986. DBZ also had a total equityportfolio of - 16 -

K 5.1 millionin23 firms. DBZ's portfoliohas been traditionallyof high quality,with arrearsof over three months considerablybelow 5% of the total portfoliountil 1983, The portfoliostarted to deteriorate,however, when the Zambianeconomic crisis accelerated in the early 1980s, Many of DBZ's clients,operating in an adverseeconomic environment and suffering from reducedsales and profits,had to cut back production.Those which had receiveddollar-denominated subloans, began to suffer from the increasedfinancial burden resulting from the devaluationof the kwacha. Other firms,operating below their capacitylevels, have not been able to generatesufficient income to service air debt. Still othershad to delay projectimplementation, often becauseforeign exchange was not availableon time to make key investmentpurchases. This situationwas compounded by DBZ's initialinability to prepareand implementa systematic approachto portfoliomanagement and arrearscollection. As a result,loan principaland interestin arrearsover three monthsincreased from 2.8% of total loan portfolioin 1982, to 4.4% in 1983, 7.8% in 1984 and 13.1% a year later. Portfolioaffected by arrearsincreased accordingly from 18.3% in 1982 to 46.9% in 1985. Meanwhile,collection ratios ranged from 60-75% of total billings, By December31, 1985, arrearshad reached15.8% of loan portfolio,and affectedportfolio amounted to 50% of the total. The collectionratio for the f1irt six monthsof FY86 was 61%. Duringproject preparation,DBZ intensifiedits collectionefforts, and the ratio rose to 80% for the quarterended December31, 1985, and increasedsharply to 144% for the quarterended March 31, 1986. The recentlycompleted annual audit for the year endingMarch 31, 1986, indicatesthe successof these efforts, as arrearsfe:l to 11,1% of portfolio,substantially ahead of the arrears reductiontargets agreed at negotiations(para. 2.21).

2.19 Improvedcollectioni were the resultof additionalefforts made by DBZ, particularlyin systematizing its approachto debt recovery. With IDA's assistance,DBZ prepareda Debt RecoveryAction (DRA)Plan to deal with its more persistentarrears problems, based on the individualclient's capacityto repay (Annex5). This plan consistsof two phases. Phase one focusedon reducingarrears from the 40 clientswith the largestarrears exposureas of December31, 1985. By concentratinginitially on this group,DBZ has applieda systematicrecovery strategy with the objectiveof recovering732 of its portfolioin arrears. By the end of September1986, seven firms had repaidin full and 23 firms were in the processof repaying (throughinstallment payments, sale of assetsor liquidation).In addition,three firms which had demonstratedtheir capacityto repay over the longerterm have had their arrearsrescheduled, and legal actionis being taken againstseven other firms with whom agreementwas not reached. Duringnegotiations, agreement was reachedon the timingof phase two, which will commence not later than December 31, 1986, will follow the same methodology as phase one, and vill concentrate on a second group of 40 clients, comprising an additional18% of total portfolio. Both phases would includeabout 90% of the arrears outstanding at the end of December 1985. The existingstaff in DBZ's ProjectSupervision Department is sufficientto carry out this program.

2.20 The Governmenthas also taken measuresto reducethe impactof the devaluationon DBZ's portfolio. In particular,in October1985, the Bank of Zambia fixed the liabilityof the disbursedand outstanding portionsof DBZ's dollar-denominatedsubloans at the exchangerate in effect on the day beforethe initialauction (October 4, 1985). Thus, - 17 -

repayments under subloans drawn down before the above date can be made at the equivalentof K 2.2 to the US dollar. This step greatly eased the local currencycost of payingoff dollar obligations for many of DBZ's clients,and has paved the way for a much more vigorouscollection effort on the part of DBZ. In addition,the implementationof the foreign exchangeauction is enablingmany firms to obtainthe importedinputs and spare parts they need to increasecapacity utilization and to generatethe incomethey need to servicetheir debts,or to coap.etethe implementation of projectswhich have been held up.

2.21 As a means of establishinga monitorablebasis for assessing DBZ's collectionperformance, DBZ agreedat negotiationsto set preliminary semestraltargets for collectionsand arrearsreduction over the next 18 months,to includea collectionratio (totalcollections as a % of total billings)of not less than 100%at December30, 1986, and June 30, 1987, and then decliningto 90% at the end of December1987. This collection targetwould resultin the arrearsratio (as a % of total loan portfolio) declininggradually to 12% in December31, 1986, 101 by June 30, 1987 and 9% by December31, 1987.

2.22 Althoughprovisions for doubtfulloans were made after the end of FY84 and FY85 (para.2.25), DBZ had not adoptedan explicitpolicy for establishingsuch provisions.As its arrearssituation worsened, DBZ's Board,in its January1986 meeting,adopted a provisionspolicy that enablesit to anticipateprudently its potentiallosses on loan and equity investments.The main criteriaof DBZ's provisionspolicy are: (i) a 100% provisionon principaland interestin arrearsover one year; (ii) a 50% provisionagainst principal and interestin arrears6 to 12 months;and (iii) a 100% provisionagainst bad debts (i.e.,non-recoverable principal and interest)after deductingthe value of securityas determinedby DBZ's auditors.

Resources 2.23 As of March 31, 1986, DBZ had mobilizedlong-term local currency resourcesamounting to K 107.9million consisting of paid-inshare capital of K 14.2 million,reserves and retainedearnings of K 8.98 millionand medium-and long-termborrowings totalling K 79.97 million. DBZ has also been successfulin mobilizingresources from foreigninstitutions. As of March 31, 1986, it had obtainedforeign currency resources amounting to K 150.0million. These includedpaid-in share capitalof K 4.7 million, IBRD loans amountingto US$30 millionand K 26.8 millionfrom an OPEC Fund line of creditcommitted but not disbursed. Other lendersinclude ADB, EIB, BADEA,DEG and FMO. Local currencyresources have been raisedat interestrates rangingfrom 6.25% to 24% with maturitiesbetween 3 to 24 years. Foreigncurrency resources carry interestrates rangingfrom 1% (OPEC Fund) to 9.2% (IBRD)with maturitiesof 6 to 15 years. The weighted averagecost of funds is 10,96%,with 8.75% on foreigncurrency resources and 13.7% on local currencyresources. DBZ's resourceposition as of December31, 1985,showed a resourcegap for commitmentsin local currency of K 10.3million and K 4.4 millionin resourcesavailable for foreign currencyloan commitments.Its plans for mobilizingadditional resources to cover this gap and financeits futureoperations are outlinedin paras. 2.27-2.28. - 18 -

FinancialResults and Condition

2.24 DBZ's incomestatements, balance sheets and main financialratios for FY82-86are summarizedin Annexes8 and 9. In spite of the increasinglyadverse economic circumstances of the last five years and the portfoliodeterioration during 1985, DBZ has continuedto be profitableand remainsa sound developmentbank. Net profitbefore tax as a percentageof averageequity for the five-yearperiod FY82-86 was 17%, and fairlystable during the same period. Since 1982, DBZ's borrowingcosts have been going up steadilyfrom 5.8% of averagetotal assets to 8.4% in 1986, and DBZ has had difficultyin maintainingits financialspread as it relentthese funds at fixed rates. Despitethis increasein financialcosts, the effecton profitabilitywas not significantbecause DBZ kept a tight lid on administrativeexpenses which, at an averageof 2% of averagetotal assets, remainone of the lowestrates for DFC's in the ESA region. In March 1984, DBZ adopteda variable(during the life of the loan) lendingrate policy for local currencyloans and its spreadbegun to improveagain. DBZ's total assetshave grown from K 68 millionin 1982 to K 223 millionin 1986, an annualgrowth rate of 33%. This growth is attributedto an increasein DBZ's lendingactivities as well as the upward revaluationof the foreign exchangecomponent of its loan portfolioas a resultof the depreciationof the kwacha beginningin 1983.

2.25 In 1985, DBZ substantiallyincreased its provisionsagainst bad loans, in responseto a deterioratingarrears situation, to K 4 million from K 0.4 millionin FY84. Total accumulatedprovisions at the end of FY85 amountedto 3% of total portfolioor 6% of loans affectedby arrears. The implementationof the new provisionspolicy (para.2.22) in FY86 has resultedin total provisionsof K 7.1 million (4% of total loan portfolioand 8% of loans affectedby arrears). Such a level of provisions reflectsadequately DBZ's portfoliorisk at this time. During negotiations,DBZ agreednot to distributedividends unless provisionsfor bad or doubtfulloans constituteat least 4% of total loan portfolio.

2.26 DBZ's financialstructure remains sound. DBZ's liquidity positionis satisfactoryand its currentratio has remainedabove 1.8 in recentyears (with a peak of 2.6 in 1985). DBZ's debt obligationshave overalla longerduration than its portfolioloans. As a result,the ratio of its currentmaturities of portfolioloans to currentmaturities of term debts averaged2.0 for the periodFY82-85. However,DBZ has recentlyhad to rely increasinglyon local currercyresources to financeits investment activities,and its currentmaturities ratio fell to 1.4 in 1986. Much of this new fundinghas been obtainedfrom commercialbanks at three-year maturities,and DBZ has in turn relentthese funds for up to five years to meet the longer-terminvestment needs of its clients. This term transformationwas neededto fill a temporaryfinancing gap, and DBZ has now agreedthat it will cease this practicein the future (para. 2.07). While DBZ's debt servicecoverage ratio is expectedto declineslightly in the next few years (Annex16), the projectedcapital increase will provide DBZ with an adequateliquidity margin. DBZ's financialstructure remains sound. The term debt-to-equityratio for the periodFY82-84 remained below the recommended4:1. By early 198',however, the debt-to-equityratio jumped to 4.9:1 becauseof a subs'^atialrevaluation of the foreign exchangecomponent of its loan portfolio,and becauseshare capital - 19 -

subscriptionsdid not keep pace with DBZ's borrowingto meet the need of its clients. However,the ratio has subsequentlydeclined as additional capitalwas paid-in,to 4.4 as of October31, 1986. Furthercapital paymentsare expectedto reducethe ratio even further,to 4.1 at the end of FY87.

ProjectedOperations and Financing

2.27 DBZ's operationalforecast is based on a firm pipelineand a cautiousoptimism that the recenteconomic policy measures undertaken by the Government,with strong supportfrom the IMF and the World Bank, will providea timelystimulus to the economyand generatea growthin demand for investmentfinancing. Total loan approvalsexpressed in currentUS dollarsare expectedto grow in nominalterms by 4% in FY87 increasingto 10% in FY91. This impliesnegative real growth for FY87 followedby increasingpositive real growthrates throughFY91. Commitmentsand disbursementswould followthe pace of approvals. To meet this expected growth in operations,DBZ will requirenew resourcesin an amountof US$75 million equivalentfor the five-yearperiod FY86-91. The directand indirectforeign exchange component of this amountis estimatedto be US$45 million,of which about US$30 millionwould be requiredduring the three-yearcommitment period of the proposedcredit. Roughlyone half of the US$30 million representsfinancing of currentrequirements for spares and medium-termfixed asset investmentfinancing. The remainingUS$15 millionrepresents long-term financing needs of investmentprojects, includingfixed assets,associated working capitaland relatedcivil works.

2.28 Over one fifth of the US$75 millionequivalent required to meet DBZ's five-yearoperational targets are expectedto be suppliedby local commercialbanks, with a maximumterm of three years. About one fourthis expectedto be obtainedin loans from parastatalnon-bank financial institutions.In addition,DBZ plans to obtainone-sixth of its needs from new equityand retainedearnings. Loans grantedby FMO, EIB and possibly IFC (whichis presentlyappraising DBZ for a possiblejoint equity investmentand loan),would providean additionalfifth. The proposedIDA creditwould fill the remaininggap during the middlethree years of the period,and would play an importantcatalytic role in the new capital increase,since IDA's supportto DBZ is criticalin order to obtainthe equity financingit needs. IDA, PMO and BIB (and possiblyIFC) funds would be DBZ's main sourcesof long-termfinancing, and would meet the foreign exchangelong-term investment needs mentionedin para. 2.31. DBZ's pipelineof subprojects,which has been carefullyreviewed on an individual basis, supportsthis estimate. It reflectsa potentialthree-year demand for foreignexchange investment financing of US$20-30million (including 6-9 parastatalsubprojects and 20-25 privately-ownedenterprises), dependingon whethera moderateor high probabilityof project implementationis projected, The expectedcontribution from each of the above sourcesto DBZ's financingplan is the following: - 20 -

FinancingPlan FY86/91 (US$ million) Amount % Commercial banks $ 16.0 15.4 Parastatalnon-banks 18.0 17.3 DBZ-sharecapital 7.3 7.0 DBZ-retained earnings 4.7 4.5 IFC 6.0 5.8 FMO 5.0 4.8 IDA (DBZ II) 10.0 9.6 EIB 8.0 7.7 Total DBZ financing $73W T.8 Beneficiariesown funds 29.0 8.2 Total ProjectCost $104.0 100.0

New Capital Increase

2.29 As of March 31, 1986, DBZ's share capitaltotalled K 19 million. In order to meet its operationalgrowth targets (paras. 2.27-2.28), DBZ will need to increaseits share capitalto about K 70 millionby FY91. DuringFY86, DBZ increasedits share capitalfrom K 10 million to K 19 million,of which "ClassA" (domestic)shareholders hold 75%, while "Class B" (foreign) shareholders presently hold 25%. Traditionally, the relationshipsbetween "Class A" and "B" shares has been 60:40, and the presentimbalance results from the fact that "ClassA" shareholders respondedmore quicklyto the requestedincrease than did the "ClassB" shareholders.In order to at least returnto the 60:40 relationship, the foreignshareholders would have to subscribea largershare of the K 70 million target, and an additionalK 51 millionwould have to be subscribed, of which K 23.1 millionwould have to be subscribedby "ClassB" shareholders,and K 27.9 millionby 'ClassA shareholders. 2.30 DEG of Germany,FMO of the Netherlands,and EIB have indicated their intentionsto subscribea substantialportion of the amountrequired from 'ClassB" shareholders.They are expectedto take a formaldecision shortly,following the clarificationof DBZ's capitalneeds withinthe contextof an accurateoperational forecast of DBZ's potentialfor growth, which was preparedby DBZ with IDA assistanceduring appraisal. DEG, FMO, EIB and IFC have undertakena joint appraisalof DBZ, followingwhich they will presentproposals to their respective Boards.

2.31 The Government is having difficulties in providing additional capital because of fiscal constraints, bait it has agreed to channel a K 9 millionportion of a grant from the Dutch Government,to DBZ as part of the Government's"Class A" share contribution.IFC is also presentlyexploring with the Governmentthe possibilityof restructuringDBZ's ownershipto give more scope to non-Governmentshareholders, in connectionwith a possibleincrease in IFC's investmentin DBZ. Based on tentative agreementsreached with its existingand potentialnew shareholders,DBZ presenteda preliminarycapitalisation plan totallingK 51 millionto its - 21 -

Board at the July 11, 1986, Boardmeeting. A final capitalizationplan would be presentedto DBZ's Board not laterthan September30, 1987. While commitment to subscribe will be firmed up as soon as possible,paying-in of the amountssubscribed would be phased accordingto a timetablerelated to DBZ's growthneeds (Annex14).

2.32 With the forecastoperations and financingplan, DBZ will need to increaseits total debt-to-equityratio from its present4:1 limit to 5:1. The higher ratio is justifiedgiven DBZ's improvedportfolio quality and financialperformance, and its commitmentto match the maturitiesof its loans to those of its borrowings.

ProjectedFinancial Performance

2.33 DBZ's financialprojections for FY86-91(Annexes 10-16) assume that it will maintainan averagespread of 4.5% on its foreigncurrency borrowingsand that its spreadon local currencyborrowings will increase from a projected5.0% in FY87 to 7% in FY91 as new loansenter the variable lendingrate pool. Also, DBZ's profitabilityis expectedto increaseas a result of the implementationof the DRA Plan and improvedcollections record (paras.2.18-2.19). Net incomeafter tax is projectedto grow from about US$0.2million in FY86 to US$1.9million in FY91 when it is expected to representabout 20% of averageequity, as comparedto 8.0% for the periodFY82-85. Total assetsare projectedto increasefrom US$32 million in FY86 to US$68million in FY91. DBZ's financialstructure is expectedto continueto remainsound, with the debt-to-equityratio decliningas the capitalincrease is subscribedand paid-in.

III, THE PROJECT

Bank Group Experience with DBZ

3.01 The Bank Group'srelationship with DBZ began in 1971 when the Bank, on request of the Government, reviewed the need for a development bank in Zambia and recommendedthe establishmentof DBZ to fulfilthe main functionsof mobilizingresources and promotingand financingof viable projectsin the productivesectors. In addition,the Bank providedadvice on DBZ's organizationalstructure, operational policies and proceduresand staffingrequirements. DBZ was subsequentlyestablished in December1972 and beganoperations in January 1974. To enableDBZ to fulfilits role, the Bank Grouphas helpedDBZ to mobilizeforeign exchange resources throughan IFC equityinvestment and providinglines of creditto finance its operations.DBZ receiveda Bank loan (No. 1210-ZA)of US$15.0million and an IFC equity investment of K 550,000in FY76, and a secondBank loan (No. 1923.-ZA)of US$15.0million in FY80. Loan 1210-ZAwas fully disbursedin 1981,and Loan 1923-ZAwas 100% committedand 99.9% disbursed as of October31, 1986.

3.02 The objectivesof the first Bank loan and the IFC investmentwere to (a) pirovideappropriate mediumr- and long-termfinancing to medium-and large-sealeprojects which met sound economic,financial and technical criteria,rMnd (b) to buildDBZ into an effectivedevelopment financial - i2 -

institutionby developingand strengtheningits projectpromotion and appraisalcapabilities. A projectcompletion report (PCR),prepared in 1982, found that these objectiveswere substantiallymet. Proceedsof the first Bank loan financed47 small-and medium-sizeprojects mainly in the manufacturing,agricultural and transportsectors. The projectsfinanced under the loan generated1,500 new Jobs at an averageinvestment cost per job of K 20,400(US$16,000 in 1981). DBZ establishedsound operating policiesand steadilyimproved its project&ppraisal, implementation and supervisionprocedures. Initially,DBZ achieveda rapid growth in operations,while maintaininga healthy financialcondition and an increasingprofitability. Implementation of the secondBank loan, whose main objectivewas to assistin the efficientdevelopment of the industrial,agro-industrial and agriculturalactivities in Zambia, progressedat a fasterpace than that anticipatedat appraisal. The loan was effectivelyfully disbursedby June 30, 1986, about one year ahead of schedule. Nevertheless,an increasinglydifficult macroeconomic environmentbegan to affect the performanceof a substantialnumber of DBZ's clients,and this situation,in turn, was affectingDBZ's own performance.As noted earlier(para. 2.18), the reviewof DBZ's performancecarried out duringsupervision of Loan 1923-ZAindicated that while DBZ remaineda sound institution,the difficulteconomic situation of the past severalyears led to a deteriorationin the qualityof DBZgs portfolio,an increasein the level of arrearsand a declinein profitability.The proposedproject would aim inter alia at helpingDBZ improvethe qualityof its portfolioand financialcondition and performance.

ProjectJustification and Objectives

3.03 The Governmentof Zambiais presentlyinvolved, with IDA's assistance,in a major effortto reformits macro and industrialpolicy framework. A criticalelement in this processis the establishmentof policiesthat rely increasinglyon marketforces in an effortto increase the efficiencyof productivefacilities in industry. The core elementsof the new approach,the foreignexchange auction system, and the trade and financialliberalization, are alreadyhaving a positiveeffect on the industrialsector, which is evidentin increasedlevels of capacity utilization,capital and laborproductivity and more efficientforeign exchange uses The Government also views the financing of productive investment as a vital complement to the policy-based initiatives. Without investmentfinancing, the supplyresponse from the sectorwould fall short of desiredlevels. With it, the sectorcan be renderedmore effective;it can begin to contributemore effectivelyto economicgrowth by helping productiveenterprises to increasecapacity utilization, to createor preservegainful employment and to developnon-traditional exports. The main objectiveof the projectwould be to complementthe impactof the policy reformsby helpingproductive enterprises to expand,modernize or rehabilitatetheir existingcapacity, and in some cases,to establishnew productivefacilities.

3.04 The projectwould supportthe supplyresponse in the productive sectorsby helpingDBZ, the main sourceof term financingin Zambia,to improveits performanceand its abilityto mobilizeresources. In particular,the major improvementsin DBZ, to be supportedby the proposed - 23 -

projectwould be: (i) a major capitalincrease, which would enableDBZ to mobilizeadditional borrowed resources; (ii) the upgradingof the quality of DBZ's portfolio,and (iii)increasing the efficiencyof financialand managementdecision-making by establishingan MIS and trainingDBZ staff in its use, In spite of the increasinglyadverse economic circumstances of the last five years, DBZ has continuedto be profitableand remainsa sound devolopmentbank. Nevertheless,DBZ's performancedeteriorated in recent years, and it now requiresassistance to regain its strengthand confront the task of financingthe rehabilitationof Zambianindustry. The proposed projectwould help DBZ in its effortsto resolvea worrisomeportfolio problem,substantially strengthen its equitybase, improveits institutionalcapability to promote,evaluate and monitorinvestments projects,and completelymodernize its existingaccounting and financial informationsystems. The projectwould also attractsubstantial cofinancingfor DBZ.

ProjectDescription

3.05 The proposedIDA credit of US$10.0million would consistof two components. The creditcomponent (US$8.9 million) would provideresources to DBZ to financethe long-termforeign exchange requirements of its plannedinvestment financing activities over a three-yearperiod. The technicalassistance component (US$1.1 million) would provideDBZ with resourcesto train its staff,computerize its accountingand financial managementprocedures and establishan MIS. The creditwould be made to the Governmenton standardIDA terms. A US$1.5million advance, equal to four monthsanticipated disbursements, would be made from IDA's credit accountto establisha specialaccount operated by DBZ. In order to preventdelays in the implementationof the MIS sub-component(para. 3.08), an amountnot exceedingSDR 250,000would be made availableretroactively for financingrelated expenditures made beforethe date of creditsigning, but after October31, 1986. This Creditis expectedto be fully committed by March 31, 1990, and the closingdate for disbursementsis expectedto be June 30, 1992.

CreditComponent

3.06 The Governmentwould onlendthe fundsfor the creditcomponent (US$8.9million equivalent) to DBZ at a fixed interestrate of 8.23 percent p.a., which is equal to the Bank rate in effectat the time of negotiations,for subloansdenominated in US dollars,and at a variable interestrate equal to the auction-determinedTreasury Bill rate plus two percentagepoints for subloansdenominated in Kwachas. Becauseboth foreignexchange and local currencycan be freelyobtained at interest rates establishedby the market and at an exchangerate also determinedby the market,sub-borrowers would have the optionof selectingsubloans denominatedeither in dollarsor kwacha. The price differentialbetween the two currencieswould reflectthe relativerisks and costs involved,and the rates proposed are expected to approximate an equilibrium situation duringthe commitmentperiod of the credit. The proposedlending rate structurefrom DBZ to the individualborrowers would be as follows:

(i) subloans denominated in dollars: fixed interest rate equal to the Bank rate at the time of negotiations, plus a 4% spread (i.e.,8.23 + 4.0 - 12.23%); - 24 -

(ii) subloansdenominated in kwacha: BOZ's T-bill rate (variable every six months),plus a 2% premiumfor the foreignexchange risk, plus a 4% spread (i.e.,pr_sently 23 + 2 + 4 - 29%). The proposedonlending arrangements are based on the market determined interestand exchangerate systemscurrently in place. Shouldthese systems,whicb rely on market forces,be changed,further disbursements would be subjectto the establishmentof new systemsacceptable to the Governmentand the Association, Agreementbetween IDA and Governmenton this arrangementwas reachedduring negotiations.

3.07 DBZ would relend the funds for maturitiesof up to 15 years includingappropriate grace periodsnot to exceed4 years. DBZ would repay the Governmentin accordancewith an amortizationschedule conforming to the aggregateamortization schedules of subloans. DBZ would keep its presentfree limit of US$400,000for individualsubprojects and aggregate free limit of US$5 million. The maximumamount which could be financedfor individualsubprojects would be US$2 million. BeginningDecember 31, 1986, DBZ would calculateeconomic rates of return for all projectsrequiring DBZ financingof more than US$250,000. Proceedsof the credit componentwould financecapital investment and permanentworking capital requirements of viablesubprojects which meet the criteriaset out in DBZ's Policy Statementand have been satisfactorilyappraised by DBZ. DBZ's exposureto any singleborrower would be limitedto 20% of its own equity,and DBZ's financingwould not normallyexceed 75% of the total cost of any individual subproject. TechnicalAssistance Component

3.08 The Governmentwould provideUS$1.1 million to DBZ, from the proceedsof the technicalassistance component of the proposedproject, as a subordinatedloan to DBZ, which would representa quasi-equity contribution,and would strengthenDBZ's financialcondition. The terms and conditionsof such financingwould be spelledout in a Financing Agreementapproved by IDA. These funds would be used to financethe total cost of the following: (i) trainingDBZ professionalstaff especiallyin the areas of financialmanagement and projectappraisal and supervision (US$200,000);(ii) employingan MIS advisoryservice to installand implementa computerizedaccounting, financial and managementinformation systemand to train DBZ staff in its use (US$300,000);(iii) obtainingthe necessarycomputer hardware and software(US$400,000); (iv) employ for a term of three years, a FinancialAdvisor to help DBZ improveits accounting and financialmanageixent functions and train staff in the FinanceDivision (US$200,000).DBZ is presentlynegotiating a contractfor the hiring of MIS advisoryservices. The FinancialAdvisor would be hired prior to March 31, 1987. DBZ would, not later than June 30, 1987, submita detailedstaff trainingprogram to IDA for its reviewand comment. A detaileddescription of the individualelements of this componentis availablein the project file.

Project Implementation

3.09 Reporting Requirements. DBZ would submit quarterly reports to IDA which would include interim balance sheet and profit and loss statements, a resourceposition statement, a listingof arrears,the amountsof - 25 -

loan repaymentsbilled and collectionsreceived, and the statusof subprojectprocessing. On an annualbasis, DBZ would submit,not later than six monthsafter the end of FY87 and four monthsfollowing succeeding fiscalyears, a full annualaudit report,prepared by accountants acceptableto IDA, in accordancewith the Bank Group's "IllustrativeForm of Audit Reportsfor DevelopmentFinance Companies."

3.10 Procurementand Disbursement.Procurement practices for subprojectsfinanced under the creditwould followDBZ's procurement procedures,which are satisfactoryto IDA (para.2.14). Consultantswould be selectedin accordancewith "Guidelinesfor the Use of Consultantsby World Bank Borrowersand by the World Bank as ExecutingAgency", published by the Bank in August 1981. Disbursementsare expectedto conformto regionaland IDA-wideprofiles for IDF lending. The proceedsof the credit would be disbursedaccording to the following:

Credit Component

(a) 100% of the c.i.f.cost of importedgoods or servicesinto Zambia; (b) 75% of the local cost of goods (i) previouslyimported into Zambiathrough normal trade channelsor (ii) producedin Zambia utilizingpreviously imported components or raw materials; (c) 40% of the cost in local currencyof constructionworks included In subprojects.

TechnicalAssistance Component

(a) 100% of the cost of consultantservices and training; (b) 100% of the foreignexchange cost of equipmentpurchased by DBZ.

3.11 SpecialAccount. In order to expeditedisbursement, a special accountwould be set up in DBZ, into which IDA would make an initial depositof US$1.5million equivalent from the proposedcredit immediately followingcredit effectiveness. This amount representsan estimated averagedisbursement of funds over a four-monthperiod. Replenishmentof the SpecialAccount for all subprojectcomponent expenditures against contractsor ordersof less than $25,000would be made on the basis of Statementsof Expenditures(SOE), and the documentationfor withdrawals made would be retainedby DBZ and would be reviewedby IDA supervision missions. Expendituresagainst contracts or ordersin excessof $25,000 would be fully documented.Applications for replenishmentwould be submittedto IDA on a monthlybasis or wheneverfunds fell below US$1 million. An audit of the SpecialAccount would be includedin the audit of DBZ's accountsby DBZ's independentauditors, whose reportwould be submittedto IDA not more than four monthsafter the end of the fiscal year. The auditor'sopinion would includea separateparagraph with respectto amountswithdrawn on the basis of SOEs.

ProjectBenefits and Risks

3.12 The proposedproject would provideterm resourcesto the productive sectorsin Zambiato rehabilitateindustrial and agro-industrial enterprises,develop manufactured exports, and increaseagricultural - 26 -

production. It would thus help accelerategrowth and increaseemployment in Zambia and would complementthe positiveimpact of the policyreforms alreadytaken by the Governmentand supportedby IDA. The investment componentof $US8.9million is expectedto supportproductive investments totallingabout US$20 million. The projectwould also enableIDA to help DBZ, the main term-lendinginstitution in Zambia,to increaseits effectivenessas a term-lendinginstitution by mobilizingadditional resources,upgrading the qualityof its portfolio,and increasingthe effectivenessof financialand managementdecision-making. Continued IDA supporthas enhancedDBZ's capabilityto mobilizeadditional foreign capitaland other resourcesfrom bilateralinstitutions and would enableit to play a more significantrole in assistingthe recoveryof Zambia's productivesectors.

3.13 There are two major risks to this project. One is the possible deteriorationof Zambia'seconomic situation. Such a risk is, however, limited,so long as Zambiacontinues to complywith the IMF stabilization programand the policyreforms and actionsenvisaged by IDA and other donors to increasethe resourcetransfer and accelerateeconomic growth in Zambia. A secondrisk is a continueddeterioration of DBZ's arrearsposition. This risk is being reducedas DBZ takes strongaction to improve loan collectionsand to resolveits portfolioproblems, in the contextof the DRA plan, which will be closelymonitored by IDA. These shouldinsure that DBZ will remainan effectiveterm-lending institution that promotes economicallysound investmentprojects.

IV. AGREEMENTSREACHED AT NEGOTIATIONS

4.01 This report recommendsan IDA credit of US$10.0 million equivalent to the Republicof Zambia. DBZ would relendUS$8.9 million for investmentsubprojects and would receiveUS$1.1 million as a quasi-equity contributionfrom Governmentfor technicalassistance and training. During negotiationsof the proposedcredit, agreement was reachedon the following matters:

(a) From Government that it will:

(i) onlend to DBZ US$8.9 million equivalent for the credit component, on the conditions specified in paras. 3.06-3.07;

(ii) onlend to DBZ US$1.1 million for technical assistance and trainingas a subordinatedloan (para.3.08); and

(iii) submitno applicationsfor disbursementunder the proposed credit,if the currentmarket-based interest and exchangerate systemsare changed,until a new structureof onlendinginterest rates,satisfactory to IDA has been established(para. 3.06).

(b) From DBZ that it will:

(i) complete implementation of a Debt Recovery Action Plan satisfactory to IDA (paras. 2.19); - 27 -

(ii) distributedividends only when provisionsfor doubtfulloans constituteat least 4% of its total loan portfolio(para. 2.25);

(iii) implementa five-yearcapitalization plan satisfactoryto IDA (paraso2.29-2.31);

(iv) maintainis total term debt-to-equity(including quasi-equity) ratio below 5:1 (para.2.32);

(v) calculateeconomic rates of returnfor all subprojectsrequiring DBZ financingof US$250,000or more (para.3.07);

(vi) hire a FinancialAdvisor satisfactoryto IDA prior to March 31, 1987 (para.3.08);

(vii) amend its procurementprocedures to includedetailed written comparisonsof the bids received(para. 2.14);

(viii) establisha specificplan for utilizationof the trainingsub- componentprior to June 30, 1987 (para.3.08); and

(ix) establishappropriate collection and arrearsreduction targets (para.2.21). - 28 -

ANE 1

ZAMBIA

MM DMa MirK OF ZAMBIPRJECI

Mmdan Interest Rates, 19886

(in percent; end of period)

1980 1981 1982 1983 1984 1985 1986 5/

Centra bark rate 6.50 7,50 7.50 10.00 14.50 24.00 23.50

Crcial baiks Lan rates Overdrafts 9.50 9.50 9.50 13.00 17.50 1/ 30.00 3/ 29.50 Maxtm rate on loans 12.00 12.00 12.00 13.00 17.50 30.00 29.50 To agr;alture 9.50 12.00 12,00 13.00 17.50 30.00 29.50 To Aanifiatrltng 10.25 12.00 12.00 13.00 17.50 30.00 29.50 Bi1ls diswonted (up to 120 days) Minimum 9.50 9.50 9.50 13.00 13.00 n.ao n.a.

Deposit rates Pixed deposits 3-6 mnntbs 7.00 7.00 7.00 7.00 15.00 2/ 20.00 4/ 20.00 6-12 iu,ths 7.50 7.50 7.50 7.50 15.00 24.00 - 24.00 Over 12 ncrtbs 8.25 8.25 8.25 8.25 15.00 15.50 15.50 Sort-term deposits 4.75 4.75 4.75 4.75 15.00 18.00 18.00 Savings accounts 7.00 7.00 7.00 8.00 11.00 16.00 16.00

Buildlrg societies *rtSga rates Residbntial 8.00 8.00 8.00 12.00 12.00 n.a. n.a. Comrmcial and Industrial 10.25 10.25 10.25 14.00 14.00 n.a. n.a.

Tremay bills 4.50 6.00 6.00 7.50 9.50 24.00 23.50

Souroe: Data provided by DYFand BEZ.

1/ eldaum lening rate. r/ Mmdnuudeposit rate. t/ lvrage of adum lendingrate of individual losm rangirg from24.50-33.0Cc. e/ Average of um,dmn deposit rate. Rate range of 12.50-17.50 forindivideal barks. _/ Ymiret-determ d rates. Eativmtes as cf March31, 1986. - 29 -

ANNEX 2

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

List of Shareholdersas of March 31, 1986

Percentageof Class 'A' OrdinaryShareholders OrdinaryShares Kwacha 1. Ministryof Finance 24 45,500, 2. Bank of Zambia 37 7,000,0oo 3. ZambiaNational Provident Fund 8 1,500,000 4. ZambiaNational Commercial Bank Ltd. 2 400,000 5. ZambiaNational Building Society 1 150,000 6. ZambiaState InsuranceCorporation Ltd. 3 600,000 SUB-TOTAL 75% 14,150,000 Class 'B' OrdinaryShareholders 1. GermanDevelopment Company (DEG) 8 1,500,000 2. EuropeanInvestment Bank (BIB) 3 550,000 3. BarclaysBank of ZambiaLtd. 4 800,000 4, InternationalFinance Corporation (IFC) 2 350,000 5. StandardBank Zambia Limited 3 500,000 6. AfricanDevelopment Bank (ADB) 1 150,000 7. Bank of Tokyo 0.5 100,000 8. GrindlaysBank Inter.stional (Zambia) Ltd. 3 200,000 9. BankaNazionale del Lavoro 0.5 100,000 10. Bank of America 0.5 100,000 11. BeogradskaBanka 0.3 60,000 12. Jugobanka 0.3 60,000 13. Den NorskeCreditbank 0.3 50,000 14. ZagrebackaBanka 0.2 40,000 15. PrevrednaBanka 0.2 40,000 16. LjubljanskaBanka 0e2 40,000 17. RijeckaBanka o.2 40,000 18. Dai-ichiKangyo Bank Limited 0.1 20,000 19. MitsubishiTrust and BankingCorporation 0.1 20,000 20. Fuji Bank Limited 0.1 20,000 21. Mitsui Bank Limited 0.1 20,000 22. MitsubishiBank Limited 0.1 20,000 23. InvesticionaBanka 0.1 20,000

SUB-TOTAL 25% 4,800,000

ORDINARYSHARES 100% 18,950,000

SubordinatedLoan Stockholders % 1. ZambiaNational Provident Fund 45.75 4,575,000 2. Bank of Zambia 44.25 4,425,000 3. Zambia State Insurance Corporation Ltd. 10 1,000,000

SUBORDINATEDLOAN STOCK 100% 10,000O,OO DEVELOPMENt BANK OF ZAMBIA

ORGANIZATIONAL CHAIT

Bor d cor.I

g Dlirca

Dire~o I us 0df DWrector Dlnctr inetor FiI [rue. _roj~ta ftojects Persomie a 6 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~tn tn l Od|d -i .~e i| . ~b. . fl_r ¢heu_i Lea _hqeiaMe H~aae -Ihajr r Caal lasral irc IFlIus I cassut Peujci laimrilasnI rc elttwws Sscrtotay Aeesrsaet sa ftrtiwu ItojecrM Penjects )taneg2s ecttrI

pratsa & binhl1± W~Ice ~ . | | lO~~~(flaur| Secret,dary, |

Senior IISenir tolI I Seni19Polr PrlIISedor I Sendior IIS ISenIr

I I I ~ ~ ~~~~&d. ICIIvaI I LoI OI OI OfIcIIeIr O 1erto 1 It 1 IPrA E ; StILI ro I c fI~ Po3eict1Ier OfIcr Io ersb CI r OorI, I~~~ P r teOfficers Ief OirIIfficer ILlbraIaI OffIceI OffaicI Officer

i I I I I | tXfir| | g P ruom u Man Ubare &slstt i II F 1I

I ~ . - 31 -

ANNEX 4 Page 1 of 3

ZAMBIA

THIRDDEVELOPMENT BANK OF ZAMBIA(DBZ) PROJECT

Statementof OperatingPolicies

I. General

1. DBZ is a nationaldevelopment institution, and shall contribute to the developmentof economicallyviable enterprises in Zambiain all the sectorsof the economymentioned in the DBZ Act, mainly:

(a) manufacturingand agro-industries; (b) agriculture;and (c) tourism.

2. DBZ will supportnational priorities for economicand social developmentas laid down in the Government'sDevelopment Plans. Within this framework,DBZ will give equalpriority to parastataland private projects.

3. DBZ will only financeprojects which are technicallyfeasible and financially and economically viable. When these requirements are satisfied, DBZ will give priority to projects contributing towards:

- foreign exchange savings and earnings - use of local raw materials - development of related industries - transfer of appropriate technology, creation of permanent employment and developmentskills - development of Zambian entrepreneurship and management.

4. DBZ will not subsidize enterprises or the projects it finances.

5. DBZ will, to its best endeavour,identify investment opportunitiesand presentthem to potentialZambian and foreigninvestors.

6. DBZ will, where appropriateand possible,offer technical assistanceand adviceto its clients In matters of project planning, organization and financing.

II. InvestmentPolicy

1. DBZ will grant medium- and long-term loans whose terms and conditions such as repayment periods, interests rates, commitment and other charges will vary with the requirements of each project. - 32 -

ANNEX 4 Page 2 of 3

Statementof OperatingPolicies

DBZ may also investin the share capitalof enterprises, underwritesecurities and guaranteedebts.

DBZ will not extend loanswhose maturitiesare greaterthan the maturitiesof borrowedfunds used in makingsuch loans.

2. DBZ's financialassistance shall not amountto less than K 75,000 in any one project.

3. DBZ's total outstandingcommitments in favourof one single enterprisewill neitherexceed 20% of DBZ'snet worth nor 75% of the total cost of the projectfinanced. Exceptionsto this rule must be justifiedby the particularnature and meritsof a project.

4. DBZ's aggregateinvestments in the form of equity participcion shall not exceedthe Bank'snet worth. In one singleenterprise, DBZ's maximumequity investmer.t shall not exceed 10% of the Bank'snet worth nor, in normal circumstances,25% of the share capitalof the enterprise.

S. DBZ's funds shallnot normallybe committedspecifically for the financingof workingcapital, except when they form part of the permanent workingcapital of an investmentsubproject.

6. Where appropriate,DBZ may join with other institutions/ organizations,local or foreign,in financingprojects.

7. DBZ shallendeavour to distributeits investmentsamong the various sectorsof the economymentioned in the DBZ Act, and to all the provincesof Zambia.

III. Relationshipwith Clients

1. DBZ shall not seek to obtaincontrolling interest in a projector enterprise. It will also generallyavoid assumingmanagement responsibi- lities in such projectsor enterprises.

2. In accordancewith normalbanking practice, DBZ will requireits clientsto privideand to maintainadequate security, to keep recordsand accountsin accordancewith soundaccounting practices and to furnish whateverinformation on their operationsand accountsDBZ deemsdesirable. DBZ will have the right to inspectthe enterprisesand projectsit finances.

3. Businesssecrets and otherinformation furnished by applicantsor clientswill be treatedas confidentialby DBZ. - 33 -

ANNEX 4 Page 3 of 3

Statementof OperatingPolicies

IV. FinancialPolicy

1. As an independentinstitution, DBZ shall at all times manageits funds in such a way that it can honour its obligations.The Bank'sprofit margin must at all times be sufficientto cover the operatingcosts, to build up provisionsand reserves,and to renumerateits shareholders.The minimuminterest rate chargedby DBZ shall thus substantiallyreflect its cost of capital.

2. To this end, DBZ shall:

- requireadequate security for its loan;

- maintaina satisfactorybalance between the maturitiesof its own obligationsand those of the loans it grants;

- ensure that eitherthe borrowersor the Governmentincur the foreignexchange risks in respectof funds borrowedin foreign currencyby the Bank;

- make adequateprovision against potential losses and build up reservesto a level consistentwith sound financialpractices, takinginto accountthe size and qualityof its portfolioof loans and investmentsas well as the need to pay dividendsto shareholders.

V. SpecialFunds

From time to time,Special Funds may be placedunder the Bank's administration,ear-marked for specificpurposes or categoriesof borrowers. Althoughmodifications in the Bank'snormal Operational Policieswill have to be worked out for each SpecialFund, a SpecialFunds establishedand administeredby DBZ shall not conflictwith the basic functionsof DBZ as definedin its Act and this PolicyStatement. - 34 -

ANNEX5

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIA(DBZ) PROJECT

Debt RecoveryAction Plan Methodology

The methodologyutilized by DBZ in carrying out the Debt Recovery Action Plan is the following:

(i) obtain an accurate and up-to-date cashflow statementindicating each firm'scapacity (or lack of it) to serviceits debt with DBZ; (ii) if debt servicecapability is positive,establish a systemof aonthly payments (not to include current maturities) for recoveringarrears in the shortestpossible time, consistentwith the firm'scash generationcapability. If subsequentlyany monthlypayment becomes more than 30 days overdue,legal action shouldbe taken forthwithwith notice to the borrower;

(iii) if debt servicecapability is negative,determine whether grounds exist for reschedulingthe whole loan (i.e.,because the operationis basicallysound but is not yet successfuldue to problemsbeyond the controlof the firm, and that prospectsfor resolvingthese problemsare good),for reducingin scope or redesigningthe project,or for requestingthat a sale of part or all of the firm'sassets be made to pay off the loan;

(iv) if agreementcannot be reachedwith the borrowerto any of the steps listedin (iii) above within 60 days after the date that discussionsare initiated,then legal actionshould be instituted to recoverthe assets pledgedas securityunder the loan;

(v) furnishIDA with a detailedreport coveringeach of the 40 enterprises,indicating actions taken by DBZ and the result,in accordancewith the steps outlinedabove. - 35 -

iNNEX 6

ZAMBIA

THIRD DEVELOPNENTBANK OF ZAMBIAPROJECT

SUMMARYOF OPERATIONSAS OF DZCEMBER31, 1985

(K'000)

Actual Estimated FiscalYear 1982 1983 1984 1985 1986 Approvals 1/

EquityInvestments 190 67 638 1 001 506 Local CurrencyLoans 17,682 5,620 10,738 16,810 52,200 Fore:cLoans 7 288 6,123 18 119 28,525 5,000 Total 25 ,1646,396 57,706

Commitments

Equity Investments 190 12 638 1,001 506 Local CurrencyLoans 18,660 8,181 11,608 15,291 43,352 Forex Loans 12,092 8,858 12,946 25,968 10 896 Total Commitments 30,942 17,501 25,192 42,260

Disbursements

EquityInvestments 453 500 170 27 506 Local CurrencyLoans 12,374 12,075 6,167 14,554 37,740 Forex Loans 11,340 12,805 10 310 18,640 15,827 Total Disbursements 24,167 7 33,221 54,073

Loan Collections2/

Local CurrenyLoans 2,916 3,651 4,221 41,774 9,460 Forex Loans 2,418 42876 6,847 9,077 18,424 TotalCollections 5,334 8,527 11,068 50,851 27,884

1/ Net of Cancellations / PrincipalAmounts Only - 36 -

ANNEX 7 Page 1 of 2

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

Analysis of Loans Approvedup to December31st, 1985

(Amountsin K'OOO)

Number % Amount % A. SIZE 1 - 50,000 29 7.2 1,060 0,4 50,001- 250,000 183 45.5 23,689 10.1 250,001- 500,000 86 21.4 28,932 12.4 500,001- 1,000,000 47 11.7 34,504 14.8 Over K1 million 57 14.2 145 768 62.3 402 100.0 233,953 100.0 B. SECTOR igricultureI/ 155 38.6 39,604 16.9 Manufacturing2/ 205 51.0 159,529 68.2 Mining & Quarrying 8 2.0 7,702 3.3 Tourism 16 4.0 16,034 6.9 Transport 15 3.7 6,434 2.8 Distribution 2 0.5 2,400 1.0 Construction 1 0.2 2,250 0.9 Trade - - MU100.- 23,95 IUr-J100.0

C. TYPE OF PROJECT New 235 58.5 129,211 55.2 Expansion 138 34.3 66,998 28.7 Rehabilitation 29 7.2 37,744 16.1 100.0 100.0

D. OWNERSHIP Private 362 90.0 165,087 70.6 Public 40 10.0 68,866 29.4 T 65575 233,95 lOOeO - 37 -

ANNEX 7 Page 2 of 2

Analysisof Loans Approvedup to December31st, 1985 (amountsin K'000)

Number % Amount X E. LOCATION(Province) Lusaka 165 41.0 85,770 36.7 Luapula 6 1.5 2,632 1.1 Central 40 10,1 17,686 7.6 Copperbelt 93 23.1 78,870 33.7 Eastern 16 4.1 6,373 2.7 Northern 24 6.0 11,679 5.0 North-Western 8 2.0 1,565 0.7 Southern 41 10.2 28,272 12.1 Western 9 2.2 1,106 0.4 Wu 106.0 n233,953 100.0 F. TERM Up to 5 years 68 16.9 23,859 10.2 S - 10 years 312 77.6 196,041 83.8 10 - 15 years 21 5.2 13,053 5.6 Over 15 years 1 0.3 1 000 0.4 402 1000 233953 1000 G. INTERESTRATE UP to 9% p.a. 35 8.7 12,687 5.4 9 - 12% p.a. 170 42.3 58,644 25.0 12 - 15% p.a. 176 43.8 133,278 57.0 Over 15% p.a. 21 5.2 29,344 12.6 1666 2103,953 100.0

1/ Including Forestry and Fishing 7/ Including Agro-Industries - 38 -

ANNEX 8

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

DBZ Balance Sheets, 1982-86

(K'000)

1982 1983 1984 1985 1986 ASSETS

Cash and Bank Deposits 3,005 6,386 10,184 11,954 12,883 Other Current Assets 2,898 4 898 7 021 14,097 17,227 Total Current Assets 5.903 1 1 26,051 30,110

Portfolio Loans 57,776 84,452 99,510 136,062 177,150

Staff Housing Loans 198 839 2,216 3,813 5,384 Equity Investments 913 1,413 1,583 1,842 4,218 Net Fixed Assets 3,308 3,961 4,602 4,921 5,406 Other Investments __ 40 84 136 425 TOTAL ASSETS 68,098 101,989 125,200 172,825 222,693 !- _ __-,

LIABILITIES AND EQUITY

Current Liabilities 2,710 4,388 6,195 9,411 13,964 Medium & Long Term Debt: IBRD 14,685 19,297 24,696 31,542 35,327 Other Long-Term Debt 25,426 48,765 67,127 103,829 139,463 SubordinatedLoans 7 425 10 000 10 000 10 000 10 000 Total MLT Debt T7536 78 06Z 14371

Special Funds 2,033 3,602 333 26 (803)

Equity: Share Capital 11,000 10,000 10,000 10,000 18,950 Accumulated Reserves I4,819 5,937 6,849 8 017 6 559 Total Equity 15,819 15,937 16,849 18,017 25,509

Unrealized Exchange Loss ------(767)

TOTAL LIABILITIES AND EQUITY 68,098 101,989 125,200 172,825 222,693 __mu _cnom= -- - _= - 39 -

ANNEX 9

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

DBZ IncomeStatements, 1982-86

(K'000)

1982 1983 1984 1985 1986 INCOME

Loan Income 6,672 9,452 12,658 19,352 25,347 Short-term Investment Interest 26 51 107 66 105 Other Income 491 1,003 937 2,364 1,190

TOTAL INCOME 7,189 10,506 13,702 21,782 26,642

EXPENSES

FinancialCharges 3,322 5,061 8,168 11,125 14,804 AdministrativeExpenses 1,280 1,574 2,093 2,724 4,352 Depreciation 111 218 295 387 547 Provisions 271 635 434 4,001 3,277 Loss on Exchange i - - (383)

TOTAL EXPENSES 4,984 7,488 10,990 18,237 23,363

NET PROFITBEFORE TAX 2,205 3,018 2,712 3,545 3,279

Taxes 1,030 1,400 1,300 1,877 1,640

NET PROFITAFTER TAX 1,175 1,618 1,412 1,668 1,639 - 40 -

ANNEX 10 Page 1 of 4

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIA (DBZ) PROJECT

AssumptionsUnderlying Financial Projections

(1986-1991)

A. Approvals

1. During 1985/86,the demandfor foreigncurrency loans has been depressedas a resultof:

(a) lack of foreigncurrency lines of credit availableto DBZ;

(b) clientsperceptions of foreignexchange risk as a result of the drasticdrop in the value of the Kwacha followingthe introductionof the foreignexchange auction;

(c) attemptsby firms to increasethe utilizationof existing capacityas opposedto expansionor establishmentof new productivefacilities. 2. Projectionsfor totalapprovals are firstlycomputed in current US terms,using 1985/86as the base year, and then projectedfor 1986-1991 using the nominal $ growth rates in pera. 4 for three scenarios: optimistic,neutral and pessimistic.The currentUS$ value of total approvalsfor the base year 1985/86has been calculatedby convertingthe forecastedKwacha value of total approvals(K 58 m.) at a rate of dS$1 - K 2 for the first six monthsof FY86 (pre-auction)and at a rate of US$l - K 7 for the last six monthsof FY86 (post-auction).These approvals are assumedto be evenlyspread throughout the year.

3. It is expected that recent policy measures taken by the Government to liberalize the economy together with strong support from multilateral agencies like the IMF and the World Bank will start having positive effects on the economy; hence, the realistic scenario for growth in total approvals has been selected in making DBZ's financial projections.

4. Nominal Growth rate (in US$) of total approvals:

1987 1988 1989 1990 1991

Optimistic 7% 9% 10 10% 12% Realistic 4% 7% 81 9% 10% Pessimistic 2% 3% 4% 5% 5% - 41 -

ANNEX 10 Page 2 of 4

AssumptionsUnderlying Financial Projections

(1986-1991)

5. Ratio of foreigncurrency loans to local curencyloans approved:

Actual Estimated Projected 1984 1985 1986 1987 1988 1989 1990 1991

FC 61 62 8 20 25 30 35 40 LC 39 38 92 80 75 ?0 65 60

The percentageof foreign currecrty loans approved droppped dramatically in 1985/86 for reasons statedin para 1. However, given historical evidence and the availability of new foreign currencylines of credit,we believethat ratio of foreign currency loans approved will grow, as shown in the table above,from 8% in 1986 to 40% in 1991.

6. ExchangeRate and InflationRate

1986 1987 1988 1989 1990 1991

AverageAnnual ExchangeRate 7.5 8.5 9.5 10.0 10.5 11.0 Local Inflation 50% 25% 15% 10% 10% 10% InternationalInflation 7% 7% 7% 6% 6% 6%

7. Projectionof Approvals(1987-1991)

RealisticScenario

1986 1987 1988 1989 1990 1991

Total Loans (US) 12,889 13,405 14,343 15,490 16,884 18,573 Total Loans (K) 58,000 113,942 136,258 154,900 177,282 204,303 LC Loans (K) 91,254 102,319 108,580 115,408 122,782 FC Loans (K) 22,688 33,940 46,320 61,874 81,521 FC Loans (US$) 2,669 3,573 4,632 5,893 7,411 Cum. PC Loans (US$) 2,669 6,242 10,874 16,767 24,178

B. Commitments

75% of loans approvedwill be committedin the year of approval and 25% in the followingyear. - 42 -

ANNEX10 Page 3 of 4

AssumptionsUnderlying Financial Projections

(1986-1991)

C. Disbursements

1. ForeignCurrency Loans - 60% of the committedamount in the year of commitmentand 40% in the followingyear.

2. Local CurrencyLoans - 80% of the committedamount in the year of commitmentand 20% in the followingyear.

D. Loan Collections(Principal Amounts)

1. Collectionson loans alreadyapproved have been calculatedat the followingpercentages of amountsas per the amortizationschedule:

1987 1988 1989 1990 1991

80% 90% 100% 100% 100%

2. Collections of loans expected to be approved in the future are assumed to be over a six year period, beginning after a two year grace period. E. Equity Investments

All equityinvestments will be in local ct,rrency only and will amount to R 500,000per year for the period 1986-1991.

F. CommitmentFee Receivable

1. On the date of commitment, a fee amounting to 3% of committed amount is charged on foreign currency loans and 2% of committed amount is charged on local currency loans.

2. On each subsequentanniversary, a furtherfee is charged,calculated at the same rates as above.

G. CommitmentFee Payable

Assumedat 50% of commitmentfee receivable(an extrapolation from historicaldata). - 43 -

ANNEX10 Page 4 of 4

AssumptionsUnderlying Financial Projections

(1986-1991)

H. InterestRate Structure

1986/87 87/88 88/89 89/9(0 90/91

1. BorrowingsFC 9.0 9.25 9.5 9.75 10.0 LC 15.0 16.0 17.0 18.0 19.0 2. Loans FC 13.5 13.75 14.0 14425 14.5 LC 19.5 21.0 22.5, 24.0 25.0

3. Intereston shortterm investments- 23.0 per cent. I. Tax Rate

Profitsare taxed at 50%.

J. Provisions

1. Provisionsfor the currentyear 1985/86have been roughlyestimated at K 6.45 millionusing the DEG formulaadopted by the DBZ Board. Since an amountof K 4 millionwas providedin 1984/85,the additional provisionrequired in 1985/86is K 2.45 million.

2. The totalprovision for 1985/86of K 6.45 is approximately4% of total portfolioinvestments. For the purposeof the projections,total provisionsare assumedat 4% of totalportfolio investments. The additionalprovision required each year is calculatedby subtracting the cumulativeprovisions made up to that date from the total provisionsrequired for that year.

K. Borrowings

1. It has been assumedthat foreigncurrency borrowings will match projected foreign currency loan disbursements and that repayment of foreign exchange borrowings will be synchronized with the collection on foreign currency loans (so that DBZ does not carry the foreign exchange risk).

2. Local currency borrowings have been calculated as the amount needed to match totalassets with total liabilitiesplus equity.

L. Dividends

Calculatedat 5% of paid-inshare capital. - 44 -

ANNw11

IHIRDEM B,*C ZWA PR1r

ProjectedOpsLi, 198791

196 1 1988 1989 1990 1991 stimated @(Forecast)foecast) (Foreast) (orecast) (Forecas) APP1OVATS we ty s500 500 500 500 500 500 IC tam 52,500 90,754 101,819 108,080 114,908 1282 PC 1cn 5 000X 22,688 33 46 320 61874 81,521 -TO-nL *1 W[2,907,2D2a49,303

E ty Iwestments 500 500 50 500 500 500 IC loaws 43,578 81,190 99,052 106,515 113,201 120,438 FC Tor 10 896 18,266 31,127 43225 57 985 76 609 TCJYAL 54,974 99,957 130,679 150W , 171687 17 5

w ty Investmarts 500 500 500 500 500 500 IC brng 37,920 73,668 95,480 105,022 111,864 118,991 FC lans 16 925 15 318 25 983 38 386 52 081 69,160 3OrL 89 4 6 1345188,651

IN a 2 pnial Cy) IC tom 7,568 8,394 8,844 14,967 28,423 42,845 FC loon 17 001 16 923 15 633 14320 12 329 13,271 TOOAL 29,287 56,117 . ---. - 45 -

ARMI 12

ZAA

TMR NrM BW F ZLA PRM

iPme and Use of F, 19r-91

Proected Sorces 1967 1988 1989 1990 1991

Not Profit BeSoreTaxes 6,246 11,156 19,s3 30,821 42,804 Dpreiatln 751 864 950 1,045 1,150 provialone 1,859 3,254 4,265 4,79 5,152 - -- Toa Funds from Operatloin 8,856 15,274 24,608 36,658 49,107

Increase in Borro.drgs (net of loan rqayusts) 56,267 85,801 97,290 101,032 104,476 ShareCapital Subsribed 11,050 10,000 10,000 10,0s0 10,000

MALS9URCES 76*173 111,076 131,898 147,690 163,583

-~~~

Taxs 3,123 5,578 9,696 15,411 21,402 3Ividens 1,500 2,000 2,500 3,000 3,500 Fixed Absets 2,131 1,899 1,744 1,917 2,111 Increase In Poytfolio (net of lon crtlethio) 64,669 98,035 115,225 124,359 133,266 Irtrease/(decreaee) In WbrkingCapital 4,750 3,563 2,732 3,004 3,304 SpecialFunds 0 0 0 0 0 Othbr 1nvestments 0 0 0 0 0

TOMALtSa 76,173 111,076 131,898 147,690 163,583 - 46 -

ANNEX 13

ZAMBIA

THIRDDEVELOPMENT BANK OF ZAMBIAPROJECT

Projected Net Cash Generation

Projected

1987 1988 1989 1990 1991

Total Funds from Operations 8,856 15,274 24,608 36,658 49,107

Loan Collections(LC) 8,394 8,844 14,967 28,423 42,845

Share CapitalSubscribed 11,050 10,000 10,000 10,000 10,000 Total SourcesExcluding New Borrowings 28,300 34,118 49,575 75,081 101,952 less:

Loan Repayments(LC) 9,932 18,265 27,557 35,964 42,831

Taxes + Dividends 4,623 7,578 12,196 18,411 24,902

ExcessCash Generated 13,745 8,275 9,821 20,706 34,219 - 47 -

AMU 14

Thm) ixvii r ZAMKIF ZA

Balance %*et,98g6-l

1986 1987 1988 1989 1990 1991 ASSW Cash on Hbndat Bs* 12,883 12,500 14,375 15,813 17,394 19,133 hrt-Term Investulfts 3,750 4,313 4,744 5,218 5,740 Receivables and COterCbrrent Assets 17,227 2500 28,750 31A 34,788 38,266 7OtALCQRRT AS 30,110 41,250 47,438 52,182 57,400 63,139

C loano ) 183,384 78,396 88,745 112,810 152,356 201,451 bc loens ) - 145,273 231,909 321,964 405,406 481,551 Staff Housirg laomz 5,384 5,500 6,050 6,655 7,320 8,052 Equity Investuuits 4,218 5,500 6,oo 6,50D _ 7,000 7,5M CFM11LIODWbESDf9RS 192,986 234,669 332,704 447,930 572,288 70Sk555 Less: Provisions 6,234 8,093 11,347 15,613 2D,404 2S5,557 NET PBRiOLIOINVESDMBNIS 186,752 226,576 321,357 432,317 551,884 679,998

Fimd Assets at NBV 5,406 6,900 7,935 8,729 9,601 10,562 OtberInvestments 425 500 5C0 50 500 500 TtWALASSETS 222,693 275,226 377,230 493,728 619,385 7541199 ---- * -w _ -t

UIABILTflw Payables awdOtber Qwrreit tlPablitie 13,964 17,500 2,25 22 24351 26,786 TOMALCiNW LIABILITIES 13,964 17,500 20,125 22,137 24,351 26,786

PC Borr sn 117,933 98,396 108,745 132,810 172,563 228,451 IC BDorToigs 662857 118,394 193,846 267,070 328, 3J6938 TOIALBMIM Gs 184,790 216,790 302,591 39981 500,913 605,390

Unmalized Liabilities (1,570) -- - - -

TOtL UABILlTtES 197,184 234,290 322,716 422,018 525,264 632,176

Equity Capital 18,950 30,000 40,000 50,00 60,000 7000D, Acamlaited Reserves 6,559 10,936 14,514 219710 34,121 52.023 TOMALNEr WRIB 25,509 40,936 54,514 71,710 94,121 122,023

TOtALLIABIlFllES AND NEU WII1i 222,693 275,226 377,230 493,728 619,35 754,199

1PIBR/EQ RATIO 4,92 4.06 4.54 4.77 4.71 4.51 - 48 -

ANNEK15

ZAMTA

¶RD aMm K&CF zA1B PJE

In Sttamnt, 1986 91 (K'000)

1986 1987 1988 1989 1990 1991

_NO---

Interest fromFCloans ) 23,758 10,692 11,491 14,109 18,908 26,174 Interest frauIC loans ) 21,964 39,604 62,311 87,284 110,870 ConmntmentFees Reeeivable on PC lorsn) 1,589 844 1,385 1,893 2,513 3,295 ComnitmuntFees Receivable on IC loans) 2,011 2,440 2,619 2,779 2,953 TOtALLN INDME 25,347 -35,511 54,919 8,931 111,484 143,291 Interest on S/tInvestemt 105 776 927 1,042 1,146 1,260 OtherIncome 1,190 708 850 1,020 11,223 1468

TOtALINME 26,642 36,996 56,6% 82,992 113,853 146,019

EXPE

Interest on IC BorrwiNrgE 8,928 9,580 11,474 14,887 20,051 Interest JnIC Borrowdrgs 13,419 24,979 39,178 53,588 67,002 ConmttientFees Payable 422 692 946 1,256 1,647 Other Chargeson BorroEdx 132 145 159 175 193 EXPENSESCNEaRf SC 14,8D4 291 -S 91,757P 8 8 , Staff Eiqpenr 2,401 2,863 3,292 3,621 3,983 4,382 A&fdzuistrativeEpeses 1,951 2,376 2,733 3,006 3,306 3,637 StFpreciat1o 547 751 864 950 1,045 1,150 Provisions and Tosses 3,277 1,859 3,254 4,265 4,792 5,152

TOuM.EXPSEW S 22,980 30,75D 45,540 63,599 83,032 103,215

PRCFTTSBEFCRE TAZES 3,279 6,246 11,156 19,393 30,821 42,8)4 TAXES 1640 3,123 5,578 9,696 15,411 21 402 IRUFT[AF13 TAX 1,639 3,123 5,578 9,696 15,411

DIVIEND 5m0 1,500 2,000 2,900 3p0(X 3,500

1E'AI1NEDEARNINGS 1,139 1,623 3,578 7,196 12,411 17,902 ZWMMIW .omnmo --. lomum -wonmm _IMU - 49 -

AN!X 16

ZAHEA

nfD VEiLt BAKOF ZM48IA PwDnc

Poected- f.aia Rat, 19891

1momeStatemnlt Items as % Actual Projected of ema TOt Assets 1986 1987 1988 1989 1990 1991

1. lownIu 12.8 14.9 16.8 18.6 20.0 20.9 2. Qlhr Inccm 0.7 0.6 0.5 0.5 0.4 0.4 3. Total b1 13.5 15.5 17.4 19.1 20.5 21.3 4. Fnal Expen 7.5 9.2 10.9 11.9 12.6 12.9 S. Gross PlrdalSpead 6.0 6.3 6.5 7.2 7.9 8.3 6. isr e rses 2.2 2.2 1.8 1.5 1.3 1.2 I* of whichPersomel 1.2 1.2 1.0 0.8 0.7 0.6 8. Provis 1.7 0.8 1.0 1.0 0.9 0.8 9. Deprecation o.3 0.3 0.3 0.2 0.2 0.2 10. Profit Before Tax 1.7 2.6 3.4 4.5 5.5 6.2 11. Profit After Tax 0.9 1.3 1.7 2.2 2.8 3.1

PtofitabAUty indicatoms

12. Proit before Tax as X of Av. quity 13.3 18.1 23.4 30.7 37.2 39.6 13. I ia as % of Avre tamPortfolio 15.7 17.6 19.4 20.7 21.9 22.4 14. Piracia Expenseas % of Av. labiUtles 8.4 12.1 13.6 14.7 15.5 16.1 15. Aver pread 7.3 5.4 5.7 6.0 6.3 6.4

F1zmdal Structure Tndiastors

16. Urm Debt/%al d Euity 4adsi-fqdty 4.9 4.1 4.5 4.8 4.7 4.5 17. IDbt Servie Cwge Ratio 1.1 1.1 1.0 1.0 1.1 1.2 - 50 -

AMUEX17

ZAMBT

IH ERVELM BANK(P ZAMBIAPR

ros 1E2'sCapital Structure, 1987-91

UP to 1985 1985/86 1986/87 1987/88 1986/89 lB/90 1990/91

Cla8s A Share 6,000 14,150 18,000 24,000 30,000 36,000 42,000

Class B Shares 4000 4,800 12,000 16,000 20,000 24,000 28,000

Total Share CapLtal 10,000 18,950 30,000 40,000 50,000 60,000 70,000

SubI~inat laoam 10,000 10,000 10,000 10,000 10,000 10,000 10,000

Total Equity & Quasi-Equity Capital 20,000 28,950 40,000 50,000 60,000 70,000 80,000

Patio A:B Shares 60:40 75:25 60:40 60:40 60:40 60:40 60:40

Dbbt/Equtty 4.83 3.93 4.06 4.54 4.77 4.71 4.51

AddtUm Shalwe tal Tura

Class A - 8,150 3,850 6,000 6,000 6,000 6,000 27,850

Class B - 800 7,200 4,000 4,000 4,000 4,000 23,200

TOtAL - 8,950 11,050 10,000 10,000 10,000 10,000 51,050

Addltlomd fiboned Tour ------51 -

ANNEX18

ZAMBIA

THIRD DEVELOPMENTBANK OF ZAMBIAPROJECT

Scheduleof Disbursements1/

Disbursement (US$million)

IDA FY/Quarter By Quarter Cumulative

FY 1987 March 31 - - June 30 0.5 0.5

FY 1988 September30 0.5 1.0 December31 0.6 1.6 March 31 0,7 2.3 June 30 0.7 3.0

FY 1989 September30 0.7 3.7 December31 0.8 4.5 March 31 1.0 5.5 June 30 0.5 6.0

FFY1990 September30 1).5 6.5 December31 0.5 7.0 March 31 2/ 0.5 7.5 June 30 ~ 0.5 8.0

FY 1991 September30 0,5 8.5 December31 0.4 8.9 March 31 0.3 9.2 June 30 3/ 0.3 9.5

FY 1992 September30 0.2 9.7 December31 0.1 9.8 March 31 0.1 9.9 June 30 0.1 10.0

/ Conformsto regionaland IDA-wideprofiles for IDE lending. 2 Terminaldate for submissionof subprojects. 3/ Closingdate fot disbursements.