Morocco - Power Project

9< CIRCULATING COPY TO BE RETURNED TO REPORTS DESK FILE- CO DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1313-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO OFFICE NATIONAL DE L'ELECTRICITE WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A POWER PROJECT August 28, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Unit Moroccan Dirham (DH) US$1 = DH 4.19 tDH1 = US0 .24 DH1O00 = US$ 240.00 DH1,000,000 = US$ 240,000 Fiscal Year January 1 - December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO OFFICE NATIONAL DE L'ELECTRICITE WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to Office National de l'Electricite (ONE) with the guarantee of the Kingdom of Morocco for the equivalent of US$25 million to help finance a project for the expansion of the generation and transmission facilities of Office National de l'Electricite. The loan would have a term of 20 years, including 4 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Morocco" (EMA-42) was distributed to the Executive Directors in September 1971. More recent economic information is given below. The next economic mission is currently visiting Morocco. A country data sheet is attached as Annex I. 3. Morocco's traditional social and political order has been essentially maintained since independence in 1956 while the country's economic structure has been changing gradually. In agriculture, the small modern sector has ex- panded, specializing in commercial crops mainly for export, but subsistence farming remains the mainstay of more than half of Morocco's active population. In industry, the relative importance of modern manufacturing has risen slowly, but phosphate mining is still the main industrial activity. Traditional craf`ts and services have continued to provide substantial employment. International tourist traffic has been attracted to Morocco and tourism has become the econ- omy' s most dynamic sector. Despite these changes, the economy remains vul- nerable to droughts which from time to time set back agricultural output and incomes. With only moderate economic expansion and rapid population growth, unemployment and underemployment have reached high levels. The differences in cultural and economic status between regions and population groups remain substantial. Past Developments 4. The growth of the Moroccan economy at an average annual rate of 2.7 percent barely kept pace with population increases from 1956 to 1967. Invest- ment, which showed a moderate expansion, was only about 13 percent of GNP by 1967. With the implementation of the Second Development Plan (1968-72), there was a sizeable increase in public investment. Private investment which did well during the initial years became more sluggish later because the Government did not suceed in sufficiently encouraging private initiative, particularly for investment in manufacturing, and also because of political uncertainties in 1971 and 1972. Total investment ranged between 13 and 15 percent of GNP, compared to the Plan target of 17 percent. Aided by favora- ble weather and consequent good crops, economic growth nonetheless accelerated  - - to an average annual rate of 5.6 percent in 1967-72, thus exceeding the Plan target: of 4.3 percent. Agriculture grew by 6 percent a year and manufacturing by 5.3 percent during the Second Plan period. 5. At the same time, the implementation of prudent monetary and fiscal policies resulted in a signif:icant improvement in Morocco's Linancial position. Domestically, a combination c1- new tax measures, higher income from state en- terprises and expenditure restraint led to an increase in Government savings, but private savings remained relatively low. Externally, Morocco's balance of pa-yments began to move into surplus in 1969 attaining a level of $75 mil- lion in 1972. Current receipts increased in the last four years by 11 per- cent annually -nainly due to tourism, workers' remittances and phosphate ex- ports. Gross public capital flGws also increased initially but, when invest- ment stagnated in 1971, they fell to about their old level of $130 million a year. Stagnation of investments a'lso lowered the import of equipment goods. Part of the improvement in Mo-rocco's roreign accounts is for that reason of a temporary nature and explains why gross official reserves climbed in Feb- ruary 1973 to a historical record of $274 million, equivalent to 3 months of total 1972 imports. 6. Economic expansion was not enough, however, to absorb all new addi- tions to the labor force during the Second Plan period. Emigration was an expanding outlet for the unemployed; an estimated 250,000 Moroccans were work- ing outside the country in 1972. Further, despite increases in the work re- lief program, th,ere were still mDire than 350,000 unemployed or 15 percent of the labor force outside agriculture. Development Prospects 7. The outlook for 1973 is dominated by a poor cereals crop (probably 30 percent smaller than in 1972) due to drought. This is expected to reduce farmers' incomes and the growth of domestic demand. The country may be left with a substantial shortage of cereals during the 1973/74 season requiring large imports. Private investment may be temporarily affected by recent legislation which gives the majority control of private enterprises in serv- ices and selected industrial subsectors, producing mainly for the domestic market, to Moroccan nationais. At the same time, the Government intends to establish shortly a new system cf incentives to promote private investment, including foreign investmenat _n export industries. On balance, private in- vestment may still be sluggish in 1973. Despite continued increases in tourism, workers' remittances and other sectors, these factors indicate that developments in output, investment and trade may be less favorable in 1973 than in .he recent past. 8. The Govern-nent began a thorough revision of its development policies when, on August 4, 1971, King Ilassan II set out the broad objectives in a major speech. Since then, and particularly in the last four months, increas- ing attention has been paid to a number of social objectives including the nee9 to expanc education, improve income distribution and accelerate land reform. These, together with the faster decision making apparent recently, ,he adoption of a new tax systemr and the forthcoming adoption of a new economic  3- development plan and a revised investment code give hope of accelerated development and improved performance in the longer perspective of the new plan period. 9. The main objectives of the Third Plan are (1) to accelerate output growth, particularly for export, (2) to improve the distribution of income gains among the population, and (3) to ensure balanced economic and social development among regions. It maintains existing priorities for agriculture, professional training, education and tourism, and puts increased emphasis on employment creation and export-oriented industries. It also calls for more public spending on social services, notably public health, community services and housing. Targets for annual growth in real terms are: for GDP 7.5 per- cent, exports 10 percent, investment 18 percent and domestic saving 21 percent from 1973 to 1977. These are high compared to past performance. The objec- tives, strategy and targets of the Plan generally seem to be in the right direction, and Morocco has considerable potential for growth, particularly in irrigated agriculture, manufacturing and tourism. However, the attain- ment of the Plan targets would severely tax the implementation capacity of the Government, both to carry out its own program of expenditures and re- forms, and induce the required dynamism in the private sector. There is therefore a possibility of shortfalls. A firmer assessment will have to await the results of the next economic mission, now in the field. 10. The Plan assumes that sizable increases in external financing will be obtained to supplement rising private and public savings for the financing of projected investments. Regarding the Government's investment program, the Plan calls for $860 million in net external financing compared with $360 mil- lion during the Second Plan. This large increase implies strenuous efforts on the part of the Government to improve project preparation and aid coordina- tion. At the end of 1972, Morocco's external public debt amounted to an es- timated $815 million on a disbursement basis. Service payments on this debt decreased somewhat to a level of 8 percent of goods and services exports. Morocco retains the capacity to service substantial additional debt. Imple- mentation of the new Plan will probably put the balance of payments under more pressure than before and the debt service ratio will in that case rise to higher levels. PART II - BANK GROUP OPERATIONS IN MIOROCCO 11. Bank and IDA lending to Morocco consists of 18 projects amounting to $325.6 million (net of cancellations), of which $121 million over the last two years. Four projects have been financed under IDA credits totalling $36.8 million. IFC investments amount to $2.9 million. The sectoral distribution of these operations is as follows: 32 percent in agriculture, 6 percent in edu- cation, 35 percent in industry, 4 percent in transportation, 8 percent in tour- ism, and 15 percent in urban water supply. Annex II contains a summary state- ment of Bank loans, IDA credits and IFC investments as of July 30, 1973, and notes on the execution of on-going projects. The implementation of projects is often slow to start, but with time performance usually improves. The Sebou  -4- irrigation project (Loan 643-MOR of November 13, 1969 for $46 million) on which little progress was made for a long time, is a case in point. Initially hampered by management difficulties, the slow processing of necessary land reforms and a flood of unprecederted magnitude in 1970 substantially delayed progress. At present, however, the project is proceeding well. Project im- plementation by the three autonomous financial institutions in agriculture, industry and tourism to which the Bank lends, is generally satisfactory. 12. The Bank Group program aims at a