Morocco - Second Banque Nationale Pour Le Developpement Economique (BNDE) Project

LJ. .4Y7- MOR RESTRICTED FILE COPY Report No. P-481 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE IN MOROCCO April 27, 1966   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONONIQUE IN MOROCCO 1. I submit the following report and recommendation on a proposed loan, in an amount in various currencies equivalent to US$17.5 million, to the Banque Nationale pour le D6veloppement Economique (BNDE) in Morocco. PART I - HISTORICAL 2. The Bank made a loan of $15 million to BNDE on December 21, 1962, and IFC made a $1.5 million investment (25%) in BNDE's capital stock on January 16, 1963 when the reorganization of BNDE into a private development finance company was completed. BNDE has now approved loans and other investments that will utilize the full amount of the 1962 loan, and has applied for a second loan. A mission to Morocco in November/ December 1965 concluded that BNDE would be a suitable recipient for further Bank lending. Negotiations for the proposed loan took place in Washington from February 21 to March 3, 1966, with Mr. Mohamed Benkirane, Managing Director of BNDE. 3. The proposed loan, if approved, would be the fourth operation of the Bank in Morocco. The first was the 1962 loan to BNDE mentioned above. In August 1964 a loan equivalent to $17.5 million was made to help carry out the Sidi Slimane agricultural development and irrigation program. In November 1965 the Bank made a loan equivalent to $10 million to the Caisse Nationale de Credit Agricole to help finance an agricultural credit project. IDA made one credit to Morocco in October 1965 in the amount of $11 million for a secondary education project. 4. As of March 31, 1966 the status of the three Bank loans and of the IDA credit was as follows:  -2- (Amount US$ millions) Year Borrower Purpose Bank IDA Undisbursed Balance 1962 Banque Nationale pour le Developpement Economique Industry 15.0 4.7 1964 Kingdom of Morocco Agriculture 17.5 13.8 1965 Caisse Nationale de Credit Agricole Agriculture 10.0 8.9 1965 Kingdom of Morocco Education 11.0 11.0 Total (less cancellations) 42.5 11.0 38.4 of which has been repaid 0.7 Total now outstanding 41.8 Amount sold 0.3 of which has been repaid - 0.3 Total now held by Bank and IDA 41.5 11.0 Total undisbursed 27.4 11.0 38.4 5. The loan for agriculture of July 1964 became effective only in April 1965. The slow rate of disbursement since then has reflected administrative delays rather than slow progress on the project. The borrower has been urged to speed up the submission of withdrawal requests in respect of works performed to date and it is planned to send a project supervision mission to Morocco in May. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. The proposed loan would have the following characteristics: Borrower: Banque Nationale pour le D6veloppement Economique (BNDE) Guarantor: The Kingdom of Morocco  Amount: The equivalent in various currencies of $17.5 million. Purpose: To be used by BNDE for making loans to, and other investments in, private industrial and other productive enterprises in Nlorocco to cover the foreign exchange costs of specific projects. Amortization: The initial amortization schedule provides for amortization over 15 years in 30 semi- annual payments beginning January 1, 1969 and ending July 1, 1983, subject to change to conform substantially with the aggre- gate of the amortization schedules for the projects for which loan funds are disbursed Interest Rate: The Bank's standard lending rate current at the time each portion of the loan is credited to the Loan Account Commitment Charge: 3/8 of 1% per annum PART III - THE PROJECT 7. A report entitled "Reappraisal of the Banque Nationale pour le Developpement Economique (BNDE)" (DB-27b dated April 26, 1966) is attached. 8. BNDEts resources, excluding rediscounting facilities at the Banque du Naroc, totaled approximately DH 166* million at December 31, 1965. Of this total, DH 56 million was equity and quasi equity in the form of a long-term subordinated government loan, DH 96 million conven- tional long-term borrowing and DH 14 million short-term debt. Since then the Government has granted BNDE a long-term loan of DH 10 million, subordinated to other debt, bringing the total of equity and quasi equity to DH 66 million. The proposed Bank loan would raise conven- tional debt to about DH 170 million by the end of 1969, giving a ratio of such debt to the total of equity and subordinated loans of 2.3:1, well within the 3:1 limit laid down in both the first and the proposed second Bank Loan Agreement with BNDE. 9. BNDEts financial position and prospects in general are satis- factory, although earnings have been low and will increase only modera- tely for some years. Earnings will be improved by the Governmentts reduction from 4% to 2% of the interest it charges on its loans to BNDE. * (DH 1 = US$0.198) (DH 5.06 = $1)  - 4 - The quality of its portfolio is considered, on average, to be good, and reserves and other provisions adequate to meet potential losses. Short- term as well as long-term liquidity is satisfactory, and BNDE should have no difficulty in servicing the proposed loan as well as its other borrowings. 10. From 1959 to 1965, BNDE made 131 direct loans and equity investments totaling DH 172 million, about DH 27 million a year. Fluc- tuations from year to year were due mainly to operations undertaken by BNDE in the public sector. In recent months loan and investment activity has stepped up considerably. Thus, between late November 1965 and February 1966, loans and investments amounting to DH 29 million were approved. 11. In the summer of 1965, BNDE's management changed. The Govern- ment secured the removal of the Mlanaging Director and a new Managing Director, proposed by the Government, was appointed. This change, which took place shortly after the departure of BNDE's French Technical Adviser, made it clear that BNDE's management needed strengthening. A new Adviser and a Deputy Managing Director are now being sought. IFC is assisting BNDE in finding the former. BNDE is also making efforts to strengthen its middle-level staff. 12. BNDE has demonstrated its ability to make, in general, sound, independent investment decisions on the basis of economic and financial criteria. Its standards of appraisal and follow-up have improved in recent years, but their more consistent application is desirable. During its life of just under seven years, BNDE has assisted in one way or another new or expanding industrial enterprises which probably accounted for some three-fourths of total private industrial investment in that period. This is a significant contribution to the Moroccan economy. With additional resources from the proposed loan, BNDE will be enabled to continue in its crucial role in the further industriali- zation of Morocco. 13. The proposed loan is estimated to cover BNDE's foreign exchange requirements for the two years 1966 and 1967. BNDE has already approved loans and investments of approximately $5 million more than can be covered from the first Bank loan. Of particular interest is the prospect that BNDE will use part of the proposed loan for financing the construc- tion of hotels. The attractive opportunities inherent in Morocco's growing tourist industry are encouraging entrepreneurs to launch a considerable number of new ventures in this field. BNDE has been approached in connection with hotel projects, the total cost of which is estimated at more than DH 100 million. The foreign exchange requirements, part of which may be met by BNDE, have been estimated at more than DH 40 million ($8 million). 14. As under the first loan to BNDE, projects involving the utilization of Bank funds of more than $150,000 (the "free limit") will need prior approval by the Bank. Equity investment to be financed from Bank funds will require prior approval by the Bank in all cases.  - 5 - PARS IV - LEGAL INSTRUNENTS AND AUTHORITY 15. A draft Loan Agreement (Second BNDE Project), a draft Guarantee Agreement (Second BNDE Project) and the Report of the committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, are being distributed separately to the Executive Directors. The draft Guarantee Agreement conforms substantially to the usual form for loans to development finance companies and to the agreement guaranteeing the first loan to BNDE. 16. The draft Loan Agreement, however, reflects certain features in respect of lending to development finance companies which have been put into practice since the first loan to BNDE was made, as well as some innovations resulting from operational experience under that loan. In this respect, the following provisions of the draft Loan Agreement are to be noted: a. As in recent loans to development finance companies amor- tization of the loan would be according to a single sched- ule set forth in Schedule 1 to the Agreement, to be amended from time to time to conform with the aggregate of the schedules for repayments to the Borrower of its subsidiary loans and of the schedules agreed upon for other invest- ments (Section 2.08). Under the first loan agreement, a separate schedule was agreed upon for each subsidiary loan. b. As under the first loan, the Borrower would be required to repay to the Bank in advance of maturity any amounts received by the Borrower from sales of its subsidiary loans. The new form of Section 2.09 would require such prepayment also in case of prepayments by a subsidiary borrower. The amount prepaid to the Bank would be applied by the Bank to that portion of the amortization schedule which reflects the amount prepaid or sold of the subsid- iary loan. On sales of investments, prepayments would be applied pro rata to the appropriate portion of the amortization schedule. Past practice was for the Bank to apply any such prepayment to the appropriate schedule in inverse order of maturities. c. Section 3.02 would prohibit, unless the Bank otherwise agrees, withdrawals from the loan account to cover expend- itures by an investment enterprise made more than 150 days prior to the date of crediting the loan account for such enterprise. Section 2.02 provides for crediting of the loan account on request of the Borrower, that is, on a date which may be later than the date of the Borrower's request for approval of the investment project in question. Since the 150-day period terminates on the date of actual crediting, the rule should encourage the Borrower to submit requests for approval of projects, where required,  - 6 - at the earliest possible date, while at the same time ensurirg that requests for crediting will be made promptly, whether approval is required or not. PART V - THE ECONOMY 17. A memorandum on "Recent Economic Developments in Morocco" (AF-36) was distributed to the Executive Directors on September 27, 1965. The report of the Bank's 1964-65 General Survey Mission, entitled "The Economic Development of Morocco", was submitted to the Executive Direc- tors in December 1965. An economic mission is about to leave for Morocco to review progress in the light of the recommendations of the Survey Mfission and to appraise future capital requirements in preparation for a Consultative Group for Morocco. 18. Industry in MIorocco did not become of real significance until after World WJar II. Foreign investors, notably French, accounted for most of the early postwar investment, but some Moroccan capital began to invest in industry from the late 1950's onwards. As Morocco moved towards independence in 1956, foreign investments slowed down considerably, and there was a substantial outflow of private capital for a number of years. Although the investment climate has not been particularly favorable for some time., as reflected in the lack of growth in BNDE's operations until recently, it now appears, again as reflected in BNDE's activities over the last few months, that private investment is taking a marked upturn. Most of industry is still in foreign hands, although private M4oroccan ownership has increased in recent years. 19. Investment in the private industrial sector in 1964 was esti- mated at approximately DH 145 million. During the period 1960-64 manu- facturing and handicraft accounted on the average for about 13% of the gross domestic product, with annual increases of about 4%. The two most important branches of industry, in terms of value added, are the beverage and food processing industries, which together account for about 40% of the total value added by industrial production. The next most important industries are metal working, textiles and leather. Major gains during the 1960-64 period were in the textile industry, construction materials and chemicals. 20. In 1964 about one half of Morocco's total merchandise imports consisted of consumer goods. Substitution for consumption goods imports appears prima facie to offer one of the inviting avenues for industrial investment. The most promising prospects appear to be those offered by investment in tourist services. The Bank's General Survey Mission was of the opinion that on the basis of a relatively conservative program of investment, involving a minimum of expenditure for new infrastructure, the number of tourist arrivals could be tripled between 1964 and 1970. They would then total one million a year, bringing a gross annual inflow equivalent to a billion dirhams and making tourism the largest single earner of foreign exchange.  - 7 - 21. At the end of 1964, debt service was less than 5% of exports, but will increase significantly in the next five to ten years. Taking into account the prospects for export earnings and assuming some IDA-type assistance is forthcoming, Morocco has scope for further borrowing on conventional terms. PART VI - COMPLIANCE W4ITH ARTICLES OF AGREEaENT 22. I am satisfied that the proposed Bank loan complies with the requirements of the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 23. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. R "Approval of Loan to Banque Nationale pour le Developpement Economique in the amount of the equivalent of US$17,500,COO to be guaranteed by the Kingdom of Morocco. RESOLVED: THAT the Bank shall grant a loan to Banque Nationale pour le Developpement Economique, to be guaranteed by the Kingdom of Morocco, in an amount in various currencies equivalent to seventeen million five hundred thousand United States dollars ($17,500,000), to mature on and prior to the date or dates to be determined as set forth in the form of Loan Agreement (Second BNDE Project) between the Bank and Banque Nationale pour le Developpement Economique which has been presented to this meeting, to bear interest at the rate or rates to be determined as set forth therein, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in said form of Loan Agreement and in the form of Guarantee Agreement (Second BNDE Project) between the Kingdom of Mlorocco and the Bank which has been presented to this meeting." Attachment George D. Woods President Washington, D.C. by J. Burke Knapp April 27, 1966