Morocco - Industrial Export Finance Project

Doamm d The World Bank FOR OMCIAL USE ONLY Report No. P-4520-MOR MEM4ORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$ 70.0 MILLION TO THE KINGDOM OF MOROCCO FOR AN INDUSTRIAL EXPORT FINANCE PROJECT April 16, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Currency Unit = Dirham (DH) DH per US$ 1982 1983 1984 1985 1986 Year Average 6.02 7.11 8.81 10.06 9.07 Year End 6.27 8.06 9.55 9.62 8.71 FISCAL YEAR January 1 - December 31 LIST OF ABBREVIATIONS ASMEX Association Marocaine des Exportateurs BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BdM Banque du Maroc BMCE Banque Marocaine du Comerce Exterieur BMCI Banque Marocaine pour le Commerce et l'Industrie BNDE Banque Nationale pour le Developpement Economique CCG Caisse Centrale de Garantie CDM Cr6dit du Maroc CGEM Confederation Generale des Entreprises Marocaines CiH Cr6ait Immobilier et H8telier CMPE Centre Marocain de Promotion des Exportations CNCA Caisse Nationale de Credit Agricole CNS National Commission for Simplification of International Trade Procedures DCE Directorate of International Trade, in MCI DI Directorate of Industry, in MCI EEC European Economic Communities EMIs Electrical and Mechanical Industries ERR Economic Rate of Return FRR Financial Rate of Return ISCAE Institut Superieur de Commerce et d'Administration des Entreprises ITC International Trade Center ITPA Industrial and Trade Policy Adjustment MCI Ministry of Commerce and Industry OCE Office de Commercialisation et d'Exportation OCP Office Cherifien des Phosphates OdC Office des Changes ODI Office pour le D6veloppement Industriel PBs Participating Banks SAL Structural Adjustment Loan SGMB Societe Gen6rale Marocaine de Banques SIT Special Import Tax SSIs Small-Scale Industries VAT Value Added Tax  FOR OFFICUAL USE ONLY KINGDOM OF MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT Loan and Project Summary Borrowers: Eight Moroccan banks: Banque Nationale pour le D6veloppement Economique (BNDE), Banque Commerciale du Maroc (BCM), Banque Vi Centrale Populaire (BCP), Banque Marocaine du Commerce Exterieur (CMCE), Banque Marocaine pour le Commerce et l'Industrie (BMCI), Credit du Maroc (CDM), Soci6t6 Generale Marocaine de Banques (SGMB) and Wafabank. Guarantor: The Kingdom of Morocco. Amount: US$70.0 million equivalent in aggregate. Terms: 15 years, including 4 years of grace, at the standard variable interest rate. On-lending $69.7 million would be on-lent by the Borrowers to private Terms: export-oriented firms, with maturities of up to 12 years, including up to 3 years of grace. The interest rate would be the variable Bank rate plus 3S if sub-loans are in foreign currency; if sub-loans are in local currency, the interest rates would be the local market rates for medium and long-term loans. $20 million of the credit lines would be used initially for working capital financing in foreign exchange for exporters. The interest rate on these sub-loans would be the Bank rate plus 2% and their maturities would not exceed 1 year. ($0.3 million would be borrowed by BNDE to finance staff training and expert services needed to carry out sub-sector studies). Financing Plan: Not applicable. Economic Rate of Return: Not applicable. Staff Appraisal Report: No. 6537-MOR. This document has a restricted distribution and may be used by recipients only in the porformance of their official duties. Its contents may not otherwise be disclosed without World Bank authoiation.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON PROPOSED LOANS TO EIGHT MOROCCAN BANKS FOR AN INDUSTRIAL EXPORT FINANCE PROJECT 1. The following report on a proposed package of loans to eight Moroccan banks for a total of US$70 million is submitted for approval. The proposed loans would be for 15 years, including 4 years of grace, and would help finance an industrial export finance project. 2. Background. Since the foreign exchange crisis of 1983, Morocco has embarked simultaneously on a program of macroeconomic stabilization and a program of adjustments in key productive sectors (industry, finance, agriculture and public enterprises) as well as social sectors (education and public health). These programs have been supported during 1983-86 by both the IMF and the Bank. Under the two Industrial and Trade Policy Adjustment (ITPA) Bank loans, the Government initiated a progressive reduction of the anti-export bias resulting from tariff and non-tariff protection, the simplification of administrative procedures for exports and export-related imports, and the improvement of export financing and special customs regimes for exporters. The implementation of the ITPA program is already having its first positive effects in the export sector, despite the decline of exportn of phosphate rock, the main Moroccan export. Exports from manufacturing, excluding phosphate derivatives, increased at an average annual rate of 8.8X in constant prices during 1980-85, and their share in total Moroccan exports increased from 22.8% in 1980 to 29.42 in 1985. Moroccan imports growth has been contained by the devaluation of the Dirham, the fall in the price of oil and lower imports of cereals due to a return to normal rainfalls. As a consequence, the current account deficit has been estimated at less than 22 of CDP in 1986, down from 13.31 in 1982. However, Morocco's medium and long-term foreign debt is still substantial -- $12.9 billion, or 88% of GDP - and debt service obligations remain very high. Under these conditions, continued export growth is indispensable to enable Morocco to achieve economic recovery and service its debt. Attaining this growth would require a continuation of the industrial and trade policy adjustment process -- via import liberalization, tariff reform and appropriate exchange rate policy -, and the Government is designing further de-protection policies. Furthermore, export-oriented productive capacity should be increased and further improvements should be made to the administrative systems under which exporters operate; the proposed project aims at contributing to achieve the latter objectives. 3. Project Obiecttves. The proposed project is designed to help the development of efficient export-oriented industries in Morocco, as a complement to the array of reforms of the country's industrial and trade  -2- policies that the Government has been implementing since 1983. The project is expected to assist in the development of the country's industrial base, the improvement of the overall export framework, the creation of jobs in efficient exporting industries, and in improving both the country's export performance and balance of payments situation. 4. Project DescriDtion. The project consists of eight lines of credit to BNDE (the national development bank) and seven Moroccan commercial banks, and technical assistance to strengthen BNDE. In parallel, the Government would adopt a package of measures to improve the export environment, and to ensure the strengthening of institutions concerned with export promotion and development. The lines of credit, amounting to a total of $69.7 million in aggregate, would finance export-oriented private sector industrial investments. Each of the eight participating banks (PBs) would be fully responsible for the use of its loan and liable for its repayment. Each PB would appraise sub-projects and submit them directly to the Bank for approval and subsequent financing. The lines of credit would represent about one-fourth of the total cost of all export-oriented investments in Morocco over a 3-year period, and about 50% of their foreign exchange component. BNDE would be the coordinating bank and, as such, would be responsible for the administration of the loans, and the maintenance of the project Special Accounts on behalf of all PBs. Sub-projects would be eligible if at least 402 of the production attributable to the investment is expected to be exported and if their FRR and ERR are at least 12X. Loans to exporting enterprises would have maturities of 5 to 12 years. The interest rate on investment sub-loans would be the Bank variable rate plus 3% if sub-loans are in foreign currency; if they are in local currency, the interest rates would be between 13 and 16% which are substantially positive in real terms, inflation in Morocco being expected to reach 8X in 1987 and to decrease thereafter. For the first two years of the project implementation, parts of the eight loans amounting to $20 million in aggregate - would be used for working capital financing in foreign exchange for exporters. The interest rate on these sub-loans would be the Bank rate plus 2% and their maturities would not exceed 1 year. The foreign exchange risk on investment sub-loans in local currency would be covered by the Foreign Exchange Risk Fund -- established under the ITPA-2 loan - the operation of which is monitored as part of the supervision of ITPA. The Fund's objective over time is to pass the full exchange risk to the ultimate borrowers. The Government monitors the financial standing of the Fund and can adjust coverage charges to financial intermediaries to ensure the Fund's financial viability. Procurement under the investment sub-projects would be made on the basis of a comparison of at least three quotations from suppliers or contractors. The Bank loan will finance up to 602 of investment costs. Disbursement of Bank loan proceeds will be done on the basis of staidard documentation except for expenditures below $100,000 where SOEs would be used. To expedite disbursements, Special Accounts in foreign exchange -- with an aggregate provision of $8 million, equal to 4 months of disbursements - would be established by the PBs under the project. Financing of technical assistance to BNDE under the project would amount to $0.3 million for training its staff, further developing the services that they extend to exporters and carrying out sub-sector studies. 5. The measures introduced by the Government under the project to improve the fiscal, financial and administrative environment in which  -3- exporters operate include the simplification of the procedures of the duty-free replacement regime, the exemption of VAT for exporters, and the system of release of bank guarantees. These measures would also help achieve the Government's objective of establishing parity between direct and indirect exporters in facilities and incentives, the only remaining exception being that indirect exporters do not benefit from the same fiscal advantages as direct exporters, an issue that the Government intends to address as part of wider fiscal reform. The Government would also ensure the provision of technical a3sistance to (i) the National Commission for Simplification of International Trade Procedures, for improvements to trade documentation and procedures; (ii) the Directorate of Industry, for carrying out sub-sector studies leading to action plans for tapping more effectively Morocco's export potential in particular industrial branches; and (iii) the Moroccan Center for Export Promotion, to undergo a significant reform (under which, with revised statutes, it would start before end-1987 operating with greater financial autonomy and increased exporter representation) and to carry out a study to identify the most feasible modes of representation abroad of Moroccan exporters, country by country and sector by sector. The estimated project costs and financing plan are given in Schedule A. Amounts and methods of procurement and disbursements, as well as the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Morocco are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, Number 6537-MOR, dated March 4, 1987, is being distributed separately. 6. Rationale for Bank Involvement. Continued export growth is indispensable to enable Morocco to service its debt and achieve economic recovery. This will require a continuation of the policy adjustment process undertaken in 1983 with the support of the Bank ITPA-1 and ITPA-2 loans. This process, however, needs to be accompanied by the increase of the country's productive capacity, especially in the export sector. Given the uncertainties and fluctuations of international markets for agricultural products, phosphates and phosphate derivatives, growth of manufactured exports is of central importance in Morocco's medium-term economic program. The Government is convinced of this importance and has recently joined GATT. Foreign commercial credit to Morocco has substantially decreased in the last few years and hampered the expansion of the country's productive capacity, including that oriented towards exports. Bank assistance to the financing of export-oriented firms and the development of marketing capabilities, and to the further improvement of the fiscal, financial and administrative environment facing exporters would thus be important at this stage. 7. Agreed actions. The Government has agreed on the following actions: (1) the undertaking of sub-sector studies and action programs to develop new industrial branches for export; (2) the coverage of the foreign exchange risk by the Foreign Exchange Risk Fund; (3) the establishment of project Special Accounts in foreign exchange; (4) consultation with the Bank on progress made by the Commission for Simplification; and (5) the undertaking by CMPE of a reorganization of its operations. Financial intermediaries have agreed to the lending arrangements for the Bank loan, on the criteria and procedures to be met for sub-projects appraisal and on the terms and conditions of sub-loans, and to consult the Bank on their staff training program. Finally, the  -4- Government has agreed to adopt measures to improve the rules and procedures for export financing, the operation of special customs and VAT regimes, and the rules and procedures for the release of bank guarantees related to duty-exemption of imports under the temporary admission custom regime. 8. Benefits and Risks. The project would contribute significantly to the improvement of the fiscal, financial and administrative framework of the country's export sector. The main risks relate to the effective exchange rate and to market assessments by exporters. As regards the managentent of the exchange rate, the continued monitoring by the IMF should ensure that the effective exchange rate does not undergo significant appreciation. As for market assessments, the PBs have shown under the Bank financed EMI project (FY 1985) that they already have a capacity to appraise their clients' market assessments. They have also agreed to pay particular attention to this aspect of sub-projects appraisal and to strengthen their capability in this respect and their monitoring of the exporters' performance. Their plans to do so are sound, and their commitment genuine to participate significantly in the expansion of the country's exports. Thus, overall, the project risks appear reasonable and worth taking in relation with expected benefits. 9. Recommendation. I am satisfied that the proposed loans would comply with the Articles of Agreement of che Bank and recommend that the Executive Directors approve the proposed loans. Barber B. Conable President Attachments Washington, D.C. April 14, 1987  -5- Schedule A Estimated Costs and Financing Plan Estimated Costs: The prc'posed loans consist of lines of credit to eight Moroccan banks for them to finance eligible exporting sub-projects. The conventional project cost concept is therefore not applicable. Financing Plan: The lines of credit would finance up to 60% of investment costs of eligible sub-projects (including permanent working capital, but excluding cost of land) which corresponds to the estimated foreign exchange component af industrial export-oriented investments in Morocco. Investors would contribute a minimum of 30S to the total cost of the investment in the form of equity, and the rest would be contributed by participating banks.  -6- Schedule B Procurement and Disbursements Procurement Procurement under the investment sub-projects would follow the procedures used under previous Bank lines of credit to the industrial sector in Morocco, which have been satisfactory. Purchases would be made on the basis of a comparison of at least three quotations from suppliers or contractors. In the past, this has led to international bidding or rhopping. Procurement for the technical assistance component would be done on the basis of Bank Guidelines on the use of consultants. Estimated Disbursement Schedule IBRD Fiscal Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 (Us $ million) Annual 25.90 15.25 8.60 6.00 5.00 4.00 2.90 1.90 0.45 Cumulative 25.90 41.15 49.75 55.75 60.75 64.75 67.65 69.55 70.00  -7- Schedule C MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT Timetable of KeY Project Processing Events (a) Time taken to prepare One year and one quarter (b) Prepared by Government with ,,RD assistance (c) First IBRD mission June 1985 (d) Appraisal mission departure September 1986 (e) Negotiations February 1987 (f) Planned Date of Effectiveness September 1987 (g) List of relevant PCRs or PPARs none relevant  - .P V~*s B?fiU i S guSto, itS UIt of 1wt %Is -I 11101 ta "fy SIStWSOE 1106. 14 *gl [ro0t5 fully dlshwgo *a,1 *too 11 lottm of "rWge grtglturo 3.0 3 . 1 10 197 KIa,om f *r956 Agtgultvr 50.6 39.05 l* 191