Notice of Entering Into a Compact With the Republic of Zambia

SUMMARY:

In accordance with the provisions of the Millennium Challenge Act of 2003, as amended, the Millennium Challenge Corporation (MCC) is publishing a summary of the Millennium Challenge Compact (Compact) between the United States of America and the Republic of Zambia. Representatives of the United States of America and the Republic of Zambia executed the Compact on October 17, 2024. The complete text of the Compact has been posted at: https://www.mcc.gov/resources/doc/agreement-zambia-farm-to-market-compact/ .

(Authority: 22 U.S.C. 7709(b)(3))

Summary of Zambia Compact

Overview of the MCC Zambia Farm to Market Compact

The Millennium Challenge Corporation (MCC), on behalf of the United States of America, has signed a five-year Compact with the Republic of Zambia (Zambia) aimed at reducing poverty through economic growth. MCC funding of $458,000,000, together with a contribution of $33,750,000 from the Government of the Republic of Zambia (GRZ), will support economic growth in Zambia through investments in the agriculture and agro-processing sectors. MCC's investment aims to address the binding constraints to economic growth of (1) poor roads and transport that reduce market access, (2) inadequate private investment in capital inputs needed to boost agricultural production, and (3) an uncertain policy environment for inputs, outputs, and exports. The Compact will address these constraints through four projects: (1) the Roads and Access Project; (2) the Asset Finance Project; (3) the Agriculture Policy Reform and Institutional Strengthening Project; and (4) the American Catalyst Facility for Development (“ACFD”) Project.

Background and Context

The Republic of Zambia, a landlocked country of twenty million people and 72 ethnic groups, stretches across southern Africa's central plateau, occupying an area slightly larger than the state of Texas. Categorized as a low-income country with gross domestic product (GDP) per capita at around US $1,300, Zambia's annual economic growth averaged 3.7 percent over the period 2011 to 2021. This growth has been inconsistent, however, primarily due to Zambia's dependence on exporting copper, a commodity known for its international price volatility. Other vulnerabilities hampering Zambia's growth include reoccurring drought shocks that harm its agriculture and energy sectors. Further, Zambia's extensive public borrowing in the recent past pushed its debt-to-GDP levels above one hundred and twenty (120) percent, overwhelming the country's ability to deliver public services and finance future investments. Meanwhile, the bulk of the country's labor force remains engaged in low-productivity agriculture and informal services, resulting in over half of the population living below the poverty line and income inequality levels among the world's worst. According to the World Bank, agriculture contributes to approximately three (3) percent of Zambia's GDP yet employs over half of its labor force.

Following the election of President Hakainde Hichilema in August 2021, the GRZ prioritized private sector-led growth, more market-friendly policies, and a decentralization of authority and budgets to local authorities. In a complementary vein, the GRZ also signaled, in its national development plan, a renewed emphasis on economic diversification led by investments in the country's underperforming agriculture and agro-processing sectors. Zambia's agricultural sector suffers from low productivity, with average maize yields hovering around two metric tons/hectare, well below the eight tons/hectare achieved by the country's leading commercial producers. Much of Zambia's low input use is a result of the lack of irrigation, outdated agricultural practices, and a highly inadequate rural road network. This also constrains the expansion of labor-intensive agro-processors, who often source inputs from local farms. Both agriculture and agro-processing are significantly constrained by a lack of access to credit to finance investment in small-scale irrigation and other inputs.

Given this sector context, the Compact program aims to address key constraints along the country's agriculture and agro-processing growth path through a combination of investments in rural road infrastructure, programs to increase access to credit, and agricultural policy reform initiatives. Investments in these areas will help the GRZ to substantially diversify and grow its economy while reducing poverty.

Project Summaries

The compact program consists of four projects:

(1) The Roads and Access Project ($315,000,000) is designed to decrease transportation costs in prioritized agriculture corridors by improving approximately 338 kilometers (210 miles) of road and transportation infrastructure, increasing rural population access to markets and services, and strengthening Zambian road asset management. The project includes upgrading road segments based on updated weather projections, reducing the number of days a road would be impassible due to flooding or the risk of washouts. The construction of trail bridges, pedestrian amenities, and other physical infrastructure paired with the application of an established social behavior change system (Gender Action Learning System) will reduce barriers to markets for rural communities, especially women and youth. In addition, this project will include technical assistance and capacity building to ensure the sustainability of these investments through better road asset management.

(2) The Asset Finance Project ($45,000,000) aims to increase access to finance for investments in electricity, irrigation, logistics and processing (EILP) equipment and infrastructure for both men and women-owned agricultural small and medium enterprises and project developers across agriculture value chains. These investments will contribute to Zambia's national development plan by increasing the adoption of irrigation, agro-processing and value addition, grain and produce storage facilities, and investments in energy sources. The project addresses the affordability of financing for EILP equipment through performance-based grants to financial service providers and equipment providers to incentivize increased lending and financing to the agriculture sector for EILP equipment and catalyzing impact investment for agri-enterprises. The project will also include capacity building and technical assistance to public and private project developers to increase the number of EILP infrastructure investments in the agriculture value chain that reach financial close.

(3) The Agriculture Policy Reform and Institutional Strengthening Project ($25,000,000) is designed to improve institutional capacity to facilitate private sector production and trade in grains. The Compact, and its associated reforms, will contribute to creating a private sector-driven agriculture and agro-processing market and support broader efforts by the GRZ and other donors to address key policy challenges constraining private sector production and trade in grain markets. To this end, the project will strengthen the Ministry of Agriculture's capacity to develop and implement reforms as well as improve the Food Reserve Agency's capacity to carry out its core functions efficiently, including managing the strategic grain reserves, encouraging private sector involvement in grain trading, making timely payments for purchases, and providing appropriate price stabilization. It will also build the Food Reserve Agency's capacity for assessing, monitoring, and analyzing the impact of its policies and practices on food security, poverty, and vulnerability, and strengthen its vulnerability response and mitigation functions. Finally, this project aims to build transparency and trust among market players by establishing an independent market observatory that collects timely and accurate data on stocks and prices and conducts relevant market analyses for the benefit of public sector policy makers and private sector economic actors, and by supporting a commodity exchange.

(4) The American Catalyst Facility for Development (ACFD) Project ($8,000,000) is designed to facilitate the U.S. Development Finance Corporation's (USDFC) investments in Zambia in the sectors identified as constraints to Zambia's growth by MCC. DFC's current transaction pipeline in Zambia, for example, includes several projects that are not viable without additional de-risking. ACFD grant funding will enable DFC-led projects like these, that would not otherwise be viable, to reach financial close.

Program Budget

The table below presents the overall budget for the program of $491,750,000, which includes MCC funding under the Compact of up to $458,000,000 and a GRZ contribution of at least $33,750,000 (required minimum of 7.5 percent, excluding ACFD).