Morocco - Country assistance review

Report No. 16326-MOR Kingdom of Morocco Country Assistance Review January 29, 1997 Operations Evaluation Department Document of the World Bank Abbreviations and Acronyms ASAL Agricultural Sector Adjustment Loan ASIL Agricultural Sector Investment Loan BNDE National Development Bank CAR Country Assistance Review CAS Country Assistance Strategy CEM Country Economic Memorandum CNCA National Bank of Agricultural Credit CPP Country Program Paper CSP Country Strategy Paper EMI Electrical and Mechanical Industries ESW Economic and Sector Work EU European Union FDI Foreign Direct Investment FERTIMA National Fertilizer Distribution Agency FlAS Foreign Investment Advisory Service FIL Financial Intermediary Loan FTA Free Trade Agreement ITPAs Industrial Trade and Policy Adjustment Loans O&M Operation and Maintenance OCP National Phosphate Company ODEP Port Agency OED Operations Evaluation Department ONICL National Interprofessional Cereals and Pulses Office ORMVA Regional Authority for Agricultural Development PAR Performance Audit Report PCR Project Completion Report PE Public Enterprise PERL Public Enterprise Rationalization Loan PR President's Report R&D Research and Development SAL Structural Adjustment Loan SAR Staff Appraisal Report SIT Special Import Tax SMSE Small and Medium Scale Enterprise SMSI Small and Medium Scale Industry SONACOS National Seed Company TIP Target Investment Program UIT Uniform Import Tax VTC Vocational Training Center Director-General, Operations Evaluation Mr. Robert Picciotto Director, Operations Evaluation Department Mr. Francisco Aguirre-Sacasa Division Chief : Mr. Manuel Pefialver Task Manager : Mr. Rend Vandendries The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation January 29, 1997 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT Kingdom of Morocco: Country Assistance Review Attached is the report Kingdom ofMorocco: Country Assistance Review prepared by the Operations Evaluation Department. This Country Assistance Review (CAR) is the fourth of the new type of country-focused studies that, for each country concerned, evaluate (i) the relevance of the Bank's overall country assistance strategy and (ii) the efficacy of various lending and non-lending instruments of Bank assistance. The objectives are to establish accountability, derive lessons of experience and provide recommendations for action. The Morocco CAR evaluates Bank assistance from 1983 until today. The year 1983 was chosen because it was a turning point in Bank-Morocco relations. After several years of incomplete stabilization, the financial situation had become untenable. In response, the Government initiated a comprehensive reform program which received strong Bank support. Since then, Morocco's economic record has been superior to that of most other countries in the Middle East and North Africa Region. The contribution of the Bank to this record has been significant. Individual Bank operations (both adjustment and investment) show a very large share of satisfactory outcomes (89 percent average for the whole period). The study finds that the Bank strategy got off to a good start during the mid-1980s, as it helped stabilize the economy through budget deficit reduction, promote integration of Morocco into the world economy by opening up the trade regime, and thus promote growth and job creation. However, as Morocco's economic situation improved during the late 1980s, partly because of the reform program and partly because of exogenous developments, overoptimism set in and the Bank's strategy began to lose relevance and efficacy. The deficit reduction objective continued to be pursued successfully but structural fiscal issues and other structural reforms needed to remove obstacles to increased growth and employment were neglected. In addition, important objectives in social sector development, especially in education, continued to be elusive. By the early 1990s, when exogenous factors, especially several severe drought years, turned against Morocco, the gaps in the reform process became apparent. Sustained progress towards budget deficit reduction, opening the economy to world markets, stimulating domestic and foreign private investment, and privatization continued, but many of the structural problems identified in 1983 remained to be resolved. Most important of all, economic growth and employment creation have been disappointing, and Morocco continues to lag in social sector development. The study recommends that the Bank help Morocco to broaden the structural reform process. Most urgent are policies to address the structural elements of the budget deficit, improvements in public sector management and the enabling environment for private sector growth, and a more aggressive program of social sector development. Contents Preface 3 Executive Summary 5 1. Background and Brief History 19 2. Bank Assistance Strategy: Contents and Results 23 Strategy Prior to the Reform Program: The 1983 CPP 23 Assistance Strategy in the Mid-1980s: Supporting Structural Reform 24 Strategy in the Late 1980s: Emerging Conflict Between Stabilization and Trade Reform 26 The Strategy in 1990: An Overoptimistic Assessment of Achievements 26 The Strategy in 1993: Continued and Unwarranted Overoptimism 28 Country Assistance Strategy Today 29 3. Instruments of Bank Assistance 31 Economic and Sector Work (ESW) 31 Overview 31 Assessment of Selected Areas 32 Lending 34 Amount and Allocation 34 Implementation 37 The Efficiency of the Bank Assistance Program 40 Supervision and Portfolio Ratings 41 4. Bank Assistance to Agriculture 43 Introduction 43 Economic and Sector Work: Issues and Objectives 44 An Issues-Oriented Lending Program 45 Conclusion and Lessons: Moroccan Agriculture Today and Challenges for the Future 50 5. Bank Assistance to Industry and Finance 53 Objectives and Issues 53 Bank Instruments 53 Economic and Sector Work (ESW) 53 Lending 54 Outcome 59 6. Poverty Alleviation, Social Sector Development and Gender Issues 63 Introduction 63 Health 64 Education and Training 66 Background 66 Economic and Sector Work 67 Lending for General Education 68 Vocational Training 73 Education and Unemployment 74 Lessons and Outlook 76 The Task Manager and principal author of this study was Ren6 Vandendries. Background papers were prepared: Messrs. Bernard Decaux (consultant, industry and finance) William Jones (OEDD1, agriculture), and Hans Thias (consultant, human resources). Geri Wise provided administrative assistance. Contents (cont'd.) 7. Outcome, Conclusions and Recommendations 77 Achievements and Shortcomings on the Fiscal Side 78 Insufficient Economic Growth 81 Overall Assessment 83 Recommendations 85 Appendix Tables: 1: Morocco - Net Receipts of External Financial Resources, 1983-93 89 2: IBRD Commitments Per Capita Per Annum 90 3: Disbursement Ratios for Morocco Compared with Bank-wide Averages 91 4: Morocco - Disbursement Ratios by Project for Investment Loans (excluding FILs), by Fiscal Year and Sector 92 5. Summary of Project Information: Morocco - Bank-wide 93 Annex: Report from CODE 95 List ofBoxes in the Text: 5.1: IFC Country Strategy, Results and Impact 58 5.2: Morocco and the European Union 60 5.3: Foreign Investment Advisory Service (FIAS) 61 7.1: Privatization 81 7.2: Relevance 84 List ofFigures in the Text: 1.1: Morocco - Debt Outstanding to Private Creditors, IMF and IBRD, 1973-94 20 7.1: Export of Manufactures/GDP and the REER 83 List of Tables in the Text: 1.1: Morocco - Net Receipts of External Financial Resources, 1983-93 21 3.1: Intensity of ESW 32 3.2: Commitments (by Sector), 1983-95 36 3.3: Disbursement Ratios for Morocco Compared with Bank-wide Averages 38 3.4: Comparative Data on the Efficiency of Bank Assistance Programs 40 3.5: Average Elapsed Time in Months for FY90-FY96 Approvals 41 3.6: Portfolio Ratings and Supervision Effort 42 5.1: Lending for Industry and Finance 55 6.1: Comparative Social Indicators 64 6.2: Education Indicators 72 6.3: Recurrent Budget Allocations (in DH million), 1975-95, by Subsector, and Macroeconomic Reference Points 73 6.4: Urban Unemployment Levels (in '000) and Rates (Percentages), by Age Group and Education Level, 1993 75 6.5: Unemployment Rates in 1990/91 and 1995 75 7.1: Selected Indicators (1982/83, 1987/88 and 1993/94) 77 7.2: Central Government Budget Data, 1982-94 80 3 Preface This Country Assistance Review (CAR) examines World Bank assistance to Morocco during the 1983-1995 period. The CAR is a countrywide evaluation that concentrates on the relevance, efficacy and efficiency of the Bank's program of assistance to Morocco. It is similar to project evaluations which review the relevance of the project objectives, the degree to which they were achieved (efficacy) and the cost effectiveness of the resources used (efficiency), but it takes the country as the unit of account. The CAR on Morocco is the fourth in the series, which was initiated in 1994.1 The CAR is issues-oriented, is geared toward current decision-making, and selective as to time span, instruments and issues covered: the focus is on the issues which remain relevant today. The starting point is 1983 because it was a turning point in Bank-Morocco relations and in Morocco's policy stance. The review covers all instruments of the Bank's assistance strategy from 1983 to date, including lending and non-lending services. Sources and Acknowledgments The study is based on Bank reports, including Country Program Papers, Country Strategy Papers, Country Assistance Strategy Papers, Divisional Country Briefs, Country Economic Memoranda, Project/Implementation Completion Reports, Performance Audit Reports, and project and general country files. It is also based on interviews with Moroccan officials and private sector spokesmen interviewed during a mission to Morocco in October 1995, and on interviews with Bank, IFC, FIAS, and IMF staff. Their kind cooperation and valuable assistance is gratefully acknowledged. The first three CARs published in the series: Ghana (Report No. 14547, June 1, 1995); Zambia (Report No. 15675, June 3, 1996) and Argentina (Report No. 15844, June 28, 1996). Next in the series of CARs are Poland, Bangladesh and the Philippines. 5 Executive Summary Introduction 1. The objective of this Country Assistance Review (CAR) is to examine how relevant, effective and efficient the Bank's assistance strategy and its instruments have been. The topics covered are selective: the focus is on those issues which remain relevant today. 2. The year 1983 is chosen as the starting point of the review because it was a turning point in Bank-Morocco relations. A financial and external debt crisis had been in the making for some time, following a period of excessive public investment and foreign borrowing, aggravated by the 1979 increase in oil prices. By 1983, the financial situation had become untenable as the country found itself unable to meet its debt service obligations. Growth prospects were bleak. Something had to be done. During the second half of that year, the Government initiated a comprehensive reform program, to be phased over a number of years. Together with the IMF, the Bank's response to Morocco's predicament was comprehensive, both through support of the reform program and continued assistance in a variety of sectors. 3. The Bank's country assistance strategy for Morocco has been documented in a variety of ways. A Country Program Paper (CPP) was prepared in April 1983, before the Government launched its reform program. Until 1990, when a Country Strategy Paper (CSP) was prepared, there were only fragmentary discussions of strategy in the President's Reports (PRs) for adjustment loans. This was followed by another CSP in 1993, and a chapter on Country Assistance Strategy (CAS) in the President's Reports for two projects in 1993. A new CAS is to be completed in FY97. 4. Morocco's economic management during the period covered by this CAR has been sound, and Morocco-Bank relations have been fruitful. The Government's consistent and cautious approach to economic policy reform, and the fact that economic change was steady, all contributed to the continuity observed in Bank programs. By the mid- to late 1980s substantial progress towards stabilization and growth objectives had been made. The fiscal and balance of payments deficits had been lowered, budgetary subsidies and transfers had been reduced, import protection had declined and there had been a turnaround in attitude from earlier autarkic policies to a quest for integration into the world economy. But the initial progress, which was helped by favorable exogenous developments, led to excess confidence within the Bank. Moreover, progress in other needed structural reforms, e.g., public enterprises, agriculture, and poverty alleviation was slow, and the initial recovery in economic growth was not sustained in the 1990s, partly because of the droughts and less favorable external environment. In the education sector, among others, substantial progress is needed, The Bank's 1994 Poverty Assessment shows that total illiteracy in Morocco is estimated at 55 percent, compared with 47 percent in the Middle East and North Africa region and 25 percent in lower middle income countries. Female illiteracy is estimated at 68 percent for Morocco, versus 60 percent in the Middle East and North Africa region and 32 percent in lower middle income countries. Rural illiteracy rates are typically more than double those in urban areas. 5. Overall, Morocco approaches the 21st Century in a stronger position than most countries in the MENA region, but very important challenges remain. In terms of macroeconomic 6 management, and the stability of the economy, Morocco remains a leader among middle income countries. The stability of the currency, the socio-political and legal environment, and the internal peace that has never been significantly disturbed, make Morocco particularly attractive to investors interested in Africa and the Middle East. With Tunisia, Morocco was also the first MENA country to firmly anchor itself to Europe and to enter a far reaching commitment to become fully integrated in the world economy. Stability is not sufficient, however, to greater prosperity. Morocco has the potential to double per capita income growth and to consolidate its achievements, if the key structural problems discussed below can be resolved. Main Development Issues Background 6. Gradualism has characterized Morocco's approach to the 1983 crisis and to structural reform. This is consistent with Morocco's consensus-building style of governance. During the 1970s, broad support had developed from all sides of the political spectrum in Morocco for an increase in the Government's involvement in production and for providing food subsidies to reduce the cost of living and counteract the impact of agricultural protection. This policy was facilitated at first by the 1974 phosphate price boom. Concurrently, defense expenditures rose in connection with the military conflict in the Western Sahara. As phosphate prices dropped, financial imbalances became excessive by 1977-78, but attempts at stabilization during the ensuing years were half-hearted and public spending continued unabated. A proposed Bank Structural Adjustment Loan (SAL) in 1980 was abandoned primarily because the Government found it hard to adopt a number of difficult reforms when alternative finance was readily 2 available. Finally, in 1981 a stabilization program, including major food price increases, was interrupted in the wake of a nationwide strike and resulting civil unrest. The net result was that adjustment was postponed and significant cuts in public spending were delayed. The Economic and Financial Impasse in 1983 7. By 1982/83, the Moroccan economy was in a state of high financial stress. The budget deficit exceeded 12 percent of GDP, the current account deficit in the balance of payments was close to 10 percent of GDP, and the country was unable to service its external debt. Foreign reserves were depleted. The inward-orientation of the economy intensified further as the balance of payments constraint led to increased protectionism. 8. GDP growth had barely kept up with population growth during 1978-83, and prospects were poor, because of the closed economy. Government spending was excessive and Morocco's stabilization and adjustment experience has also been evaluated elsewhere: this includes a very positive evaluation by the IMF, in a 1995 report "Resilience and Growth Through Sustained Adjustment: The Moroccan Experience," Occasional Paper 117, International Monetary Fund, January 1995, as well as internal evaluations in Morocco. Among others, a wide-ranging International Colloquium on Morocco's structural adjustment program during the past decade was held in Rabat on October 1-3, 1993, organized by the Association of Moroccan Economists. The findings were published in a special 1994 edition of the Association's Review. The focus of the colloquium was analysis and debate by a cross-section of Moroccan stakeholders and international experts. Among the many topics covered, major questions were raised about the social consequences of the adjustment process. 2 Moroccan authorities dispute this interpretation. They ascribe the delay to the need for systematic preparation of the reform program in close consultation with the Bank and the Fund. 7 unbalanced. Current spending was equivalent to close to 24 percent of GDP, more than 2 percentage points above current revenues. The wage and salary bill alone was equivalent to 11.5 percent of GDP, far above international averages; with transfers and subsidies equivalent to some 4 percent of GDP, and interest payments, this left inadequate funds for other recurrent expenditure. A huge public investment program had proven ineffective and yielded limited returns. The agricultural sector was distorted through high protection of products in which Morocco has no comparative advantage, such as bread wheat, sugar, beef and dairy products. The sector also drained the treasury because of inadequate cost recovery for public goods and services. The industrial sector, likewise, was heavily protected and the large public enterprise sector was a burden on the budget. 9. In terms of social development indicators the country ranked well below other countries at similar income levels. The education system was inefficient and public spending for higher education excessive. Urban areas were favored and rural areas neglected in the provision of education and health services. Box 1: Morocco at a Glance 1D01 199.0 199 GNP per capita (US$)a 990 690 1,040 1,150 Population (million) 19.4 20.8 24.3 26.5 Gross domestic investment/GDP (%) 24.2 24.0 25.2 21.0 Gross domestic savings/GDP (%) 13.7 15.2 19.2 15.9 Budget deficit/GDP (%) -10.1 -12.1 -3.6 -3.1 Tradeb /GDP (%) 45.3 51.7 59.0 56.2 External debt/GNP (%) 53 101 95 76 Illiteracy rate total (%)C n.a. 58.3d 50.5 n.a. Illiteracy rate female (%)' n.a. 70.5d 62.0 69.0 Life Expectancy (years) n.a. 59.5e 64.5 65.1 n.a. not available. a. Atlas Method. b. Exports plus imports of goods and non-factor services. c. Source: World Bank: Social Indicators of Development d. 1985 e. 1982. f. 1992. 10. The primary objectives of the Government's 1983 reform program, in response to the crisis, were (i) to stabilize the economy by reducing aggregate demand and the size of the budget deficit; (ii) to transform the economy into an efficient export-oriented producer by reforming the structure of incentives; and (iii) to increase private sector savings and improve the allocation of investment through financial sector reform. In order to avoid a major recession, the program was to be gradual and phased over several years, starting with a focus on stabilization and industrial incentives' reform. The program did constitute a major departure from past attempts in that 8 stabilization was to be accompanied by structural reforms so as to maintain acceptable rates of economic growth. An Overview of Bank Assistance Strategy 11. The Bank has been the most important external partner in Morocco's reform efforts since 1983, both in terms of financial support and of its economic and sector work (ESW) and an active and substantive policy dialogue. During the first few years of the adjustment period (1983-87), the Bank accounted for 20 percent of all net external financial flows to Morocco, including grants and private flows, much larger than the share of any other donor. Subsequently, during 1988-93, the Bank's share in net flows declined somewhat, but remained high at 14 percent of the total. As a result, by 1994 debt to IBRD was 17 percent of Morocco's total external debt, the equivalent of 12 percent of GDP. This is a record among IBRD borrowers, equaled only by Tunisia where the percentages were respectively 19 percent of the debt and 12 percent of GDP. In contrast, for the group of all middle-income countries, IBRD debt constituted 6 percent of their total debt in 1994, or 2 percent of GDP. IMF financial assistance was also important in the early years. However, while there continued to be Fund programs, net financial assistance from the IMF peaked in 1985. Thereafter, it became negative in sharp contrast to the increase in Bank exposure. In future, the role of other donors is likely to intensify compared to that of the Bank. In particular, the European Union (EU), is expected to have a much stronger presence not only through its regular programs of assistance but as a result of an association agreement with Morocco, signed in February 1996, whereby trade barriers are to be phased out slowly over a period of 12 years. As part of the agreement, the EU is expected to provide large amounts of grants and concessional aid to Morocco, possibly doubling the level of its previous assistance. 12. The fundamental aims of the Bank's assistance strategy since 1983 have been threefold: to help stabilize the economy; to raise the rate of economic growth; and to reduce income inequality and extend social services to the poor. The first of these three objectives has been achieved to a much larger extent than the other two. The Bank's strategy was supported by a wealth of solid ESW and lending. Over the 1983-95 period there were 51 economic and sector reports of high quality, covering virtually every aspect of the Moroccan economy. By the time the adjustment program started in 1983, the Bank was well prepared. Path-breaking studies had been under preparation and were published on the education sector (1983), industry (1984) and agriculture (1986). The high volume and quality of economic analysis has continued in more recent years, with the publication, among others, of private sector assessments (1993/94), a thorough public expenditure review (1994) and a poverty assessment (1994). 13. The Bank's financial support to Morocco during 1983-95 totaled $5.53 billion, or $425 million per year, in commitments. On a per capita basis this amounts to about $17.5 p.a., which is high by Bank standards. While the start of the reform program in 1983 led to a substantial increase in lending, Morocco had already become a major Bank borrower in the mid-i 970s. Bank commitments totaled $1.4 billion during the five-year period 1979-83, rose to $2.0 billion during 1984-88, and to $2.6 billion during 1989-93. With large repayments coming due, however, the Bank's future financial role is evolving: during the past two fiscal years annual net disbursements from the Bank were barely $20 million and annual net transfers (i.e., including interest payments) were minus $250 million. 9 14. More important than the increase in the level of lending after 1983 was the shift in its composition, linked to the reform program. With the focus on stabilization and reform, close to 40 percent of all commitments during 1983-95 were for adjustment loans. And, unlike in many other countries, the first six adjustment loans, out of a total of ten during the period, were sector adjustment loans. A sectoral approach was expected to be more effective, because it responded to the Government's preference for phasing of the reform. Apart from stabilization, the Bank sought to promote growth in agriculture and industry, as well as social sector reform, especially in education. The two SALs plus lending to these three sectors accounted for 70 percent of all lending. 15. Morocco's project portfolio performance has been strong. Twenty-four of the 57 loans approved during 1983-95 (close to half of the amount lent) have been rated by OED. Some 89 percent of the operations (by loan amount) were judged to have had satisfactory outcomes: this is well above the Bankwide average of 70 percent for the same period. The main exception was the education sector, where outcomes were generally unsatisfactory. The Bank's institutional development impact in Morocco was likewise highly significant: it was rated as substantial for 56 percent of the amount lent, compared with a Bankwide average of 39 percent. 16. On the other hand, project sustainability was rated as likely for only 49 percent of the amount lent, below the Bank average of 56 percent, largely as a result of policy slippages and poor design. Sustainability was rated as uncertain in 50 percent of the amount, compared with 27 percent Bankwide. This lower than average sustainability record at the project level may be interpreted as a warning signal of the deep-seated development constraints affecting the overall economy. Disbursement performance for investment loans was also among the weakest of all Bank borrowers. The explanation may be found in the continuous budgetary constraint and consequent shortage of counterpart funds. Relevance, Efficacy and Efficiency of the Bank's Assistance Strategy 17. The Bank's assistance strategy for Morocco was more relevant in the early years of the period than in later ones, when it failed to detect the early warning signs of economic slowdown and policy slippages. It was also more effective in the area of stabilization, where the Government achieved impressive progress, than in the structural reforms in several sectors. The instruments used to carry out the strategy have had mixed results. For example, ESW was almost universally of high quality and was relevant throughout the period. Recent examples include a 1994 Poverty Assessment that was rated by OED as among the best in the Bank, and a very thorough 1994 Public Expenditure Review. Technical analyses were sound and conclusions action-oriented. In a number of instances, however, the ESW has had limited influence, despite good dissemination efforts. In the areas of social development and public sector management, the Bank has found it difficult to help develop Moroccan ownership for reform proposals. 18. During the first few years of the adjustment period, 1983-88, the Bank's lending strategy was highly relevant. It was implemented with efficacy and efficiency, with some important exceptions, especially in the education sector, and to a lesser extent in agriculture, where resistance to reform could not be overcome. Some important structural problems were addressed. The prime objectives were to break with past inward-oriented policies and to reduce the budget deficit. The Bank was aware that, because of the urgency to reduce the deficit, important structural fiscal problems would have to be addressed later. 10 19. The early and rapid success with stabilization, and the renewed growth, helped by favorable exogenous developments during the mid-1980s, detracted attention from fundamental structural issues, particularly public sector management (e.g., public enterprises) and human resource development. Moreover, by the late 1980s, continuing need for fiscal deficit reduction (in the absence of some needed structural reforms) led to a major slowdown in the import liberalization process. At that time, the Bank's assessment and strategy were overoptimistic. By not addressing the structural fiscal problems, including the excessive wage bill, and other needed structural reforms, the Bank's strategy had lost much of its relevancy. While the efficacy of individual loans remained high (specific loan objectives were being achieved in most cases), the central issue, i.e., the removal of structural obstacles to increased economic growth and social development, was not addressed effectively. 20. Morocco did achieve a solid record in economic performance compared to many other countries during the period under review. But today, with many fundamental issues still not resolved and low economic growth, Bank and country performance cannot be considered a full success, particularly for the second half of the decade covered. Morocco's industrial sector growth, in particular, illustrates the limited impact of the Bank's assistance. While Morocco's industrial sector absorbed one quarter of total Bank lending for Morocco during 1983-94, it grew at only 3.0 percent per annum in real terms, below the 3.8 percent growth rate for the economy as a whole, and only 1.2 percent per annum in the most recent years (1990-94). 21. For other sectors, the picture is more favorable. In the transport sector, e.g., the Bank's assistance program has been well designed and focused. Important policy changes were achieved as the Bank held firm and deferred projects until Government approval of key reforms could be obtained. In health, where Bank involvement began only in 1985, the main objective of strengthening basic health care delivery in poorer rural areas has met with success. A Successful Start of the Adjustment Process, but Insufficient Focus on Structural Fiscal Issues (1983-88) 22. During the early years of adjustment the Bank's focus was on sectoral reforms, while the Fund took the lead on stabilization issues. The main concern in fiscal matters was a rapid reduction in the fiscal deficit. There was little initial attention to some structural fiscal issues: the problems were known, including the excessive wage bill, poor allocation of public resources, and inefficient public enterprises, but the appetite to deal with these difficult issues was limited. References to wage restraint were vague and public investment was being cut across the board. Public enterprise reform was initiated towards the end of this period (see para. 24 below). Most structural fiscal issues were to be dealt with later, as they appeared secondary, at that time, to reducing the deficit. 23. The efficacy of the Bank's assistance strategy was good at the sectoral level: it got off to a very good start in several cases, particularly in trade policy reform. A Bank-supported research project on industrial incentives had been initiated in 1979. The three-year research program gradually succeeded in building a strong consensus among a select group of Government policymakers and industrialists on the measures needed to turn the stagnating industrial sector around: a thorough reform of the structure of incentives, import liberalization and the removal of the bias against exporting. It became the basis for the Bank's first adjustment loan, the Industrial Trade Policy Adjustment loan (ITPA) approved in January 1984, and it helped to create a small but influential lobby for reform within Morocco. 11 24. At about the same time, Bank ESW had also laid the basis for a first Agricultural Sector Adjustment loan, approved in 1985, and for an Education Sector Adjustment loan, approved in 1986. A first Public Enterprise Rationalization Loan (PERL) in 1987 had likewise benefited from intense preparation on the part of the Bank, and initiated a much-needed reform of the large public enterprise sector. 25. These first structural adjustment loans were well designed and thorough, although they only covered the early stages of needed reforms in each sector. Their implementation was, with few exceptions, satisfactory. In the industrial policy reform area, the only shortfall was a delay in lowering import duty protection. In the agricultural sector, much was achieved towards improved cost recovery and reducing government subsidies; planned benefits for poor farmers, however, in the form of increased government support for rainfed farming or small-scale irrigation, were never realized. The program to rationalize public enterprises had a successful beginning and led to the initiation of a privatization program. The one stark area of failure was education sector reform, where the Bank's assistance failed to reorient educational spending from higher to lower levels of education: political resistance to such a change was underestimated at appraisal time, even though it had been well documented in the ESW. 26. The response of the economy to the liberalization process, which went hand in hand with a gradually depreciating exchange rate, was highly positive. Exports of manufactures expanded rapidly and the manufacturing industry grew by 4.0 percent per annum during 1983-90; overall GDP grew at close to 5 percent per annum. By 1987-88, the Government deficit had been cut in half as a share of GDP and the balance of payments current account was in surplus. Demand restraint and tax reform, promoted jointly by the Bank and the Fund, were important factors in this improvement, as were exogenous factors-i.e., good weather and the dramatic decline in international petroleum prices in 1986. In a 1988 report the Bank isolated the relative effects of stabilization and structural adjustment policies on economic performance. The analysis showed that most of the improvement in the current account in the mid-1980s could be traced to stabilization: reduction in domestic absorption accounted for 57 percent of the improvement and exogenous factors for 28 percent. Only 15 percent was attributable to the supply-side response to the improved incentives system. The latter was nevertheless considered a significant effect given the small starting base of manufactured exports and lags in supply effects. 27. Other structural problems with fiscal and public sector management aspects, however, were not being addressed even though the adjustment process had run for almost five years. For example, a wage freeze during 1981-85 had helped contain the public sector wage bill, but the real problem was the excessive number of public sector employees. Also, capital spending had been reduced, but its structure was not reshaped to meet social development priorities. Conflicting Signals and Overoptimism (1988-93) 28. In spite of the budgetary improvement noted above, the fiscal situation remained difficult. This led to a conflict between continuing trade liberalization at a fast pace (with potential declines in import duty revenues) and budgetary objectives. An across-the-board import tax, the Special Import Tax (SIT) had not been reduced as planned as part of a second ITPA in 1985. A waiver had been granted with what seemed to be a firm promise of further reductions in the future. This promise became part of the 1988 first structural adjustment loan (SAL I) in its early stages of preparation. However, it was eventually dropped, as the Bank gave ground to the arguments of the IMF (which at that time played a lead role in the context of 12 ongoing debt reschedulings) in the interest of stabilization and immediate deficit reduction. In January 1988, the SIT was combined with another duty and replaced by a new Uniform Import Tax (UIT) at 12.5 percent, which, in essence, entailed a 2 percentage point increase in total import taxes, although it was across-the-board and therefore did not distort relative prices within the import competing sectors. The UIT was increased to 15 percent in 1994 for most products and reduced to 10 percent for capital goods, thus further increasing effective protection. 29. Towards the end of the 1980s, the Bank was excessively bullish in its assessments of Morocco's economic future. To be sure, the economy had performed well but it had been aided by exogenous factors, which were subsequently downplayed. The 1990 CSP noted that "Morocco is entering the 1990s with a real chance of becoming a success story" and predicted that after 1993, there would no longer be a need for adjustment lending. In line with this approach, a proposed second PERL was dropped from the lending program in 1991, reportedly because it was felt that the public enterprise reform process was well on its way. This assessment turned out to be premature. Moreover, a good part of the funds intended for PERL II were redeployed to increase the amount of SAL II. In the same year, it was decided that directing credit to exporters was no longer necessary: the Government's program of financial sector reform was assumed to be sufficiently advanced so that there remained no significant barriers to an efficient, market-determined allocation of resources. This conclusion again proved premature. 30. Consistent with the prevailing optimism, the two SALs in 1988 and 1992 carried only minor conditionality because their focus was on continuing what was seen as a smoothly progressing reform program. While complacency with progress may have been understandable in 1988, it was not in April 1992, when SAL II was approved: the real exchange rate had been appreciating since 1990 and industrial and manufacturing export growth had slowed considerably. 31. The Bank's optimism continued with the 1993 CSP, even though it was no longer warranted: there had been hardly any economic growth between 1990 and 1993. But the Bank attributed an excessive share of the slowdown to adverse exogenous factors (the drought, and recession in Europe) while the policy factors were essentially ignored. Not only was the real exchange rate appreciating, but the import liberalization program had slowed down considerably. While the original program had called for a maximum import duty of 25 percent by 1989, the 1992 SAL had to call for a reduction in the maximum import duty from 52.5 percent in 1992 to 47.5 percent in 1993, with major exceptions for agricultural products. Economic growth was not even featured as a primary objective in the 1993 CSP, rendering the strategy much less relevant than the one initiated in 1983. 32. Overall, Bank strategy during the late 1980s and early 1990s had run into three major problems. First, complacency with past achievements led the Bank to underestimate the structural (and sectoral) reforms needed, as exemplified by the soft conditionality in the two SALs. Second, some structural reforms were undermined by the Government's willingness to sacrifice trade reform to achieve an "easy" solution to the fiscal problem (and by the Bank's willingness to support this approach). Third, the remaining structural issues, such as the wage bill and the social gap, still need to be addressed, but in a much more difficult environment (reduced external flows because of Morocco's graduation from Fund programs and rescheduling, and reduced Bank flows). To be certain, progress continued on some key structural reforms (financial sector, privatization program, new investment code). But, increasingly, signals became blurred as the earlier discipline and long term view brought about by the Fund 13 stabilization and Bank adjustment programs was not replaced by a clear medium term economic strategy of the Government. Indeed, the end of the review period was also marked by frequent changes in policy makers, reducing continuity in decision making and preventing the development of a long term vision. 33. Since 1994 Bank documents have shown a new awareness of the limited extent of Morocco's progress in several structural areas, and of the remaining reform agenda. In 1995, adjustment lending was resumed. The FY97 CAS notes that structural reforms to date fall short of providing a basis for sustainable and equitable growth. In particular the Bank strategy notes that economic growth during the early 1990s has barely kept up with population growth, the fiscal situation remains fragile, and import protection remains excessive, and emphasizes the need to address these issues. Similarly, the needs in the social sectors are great although there are promising beginnings of a participatory approach to project development. Above all, the Bank now recognizes that in spite of the substantial progress in stabilization, several development issues facing Morocco remain much as they were in 1983. Key Current Issues (a) Public Sector Management 34. Morocco's fiscal management has been rigorous and skillful, and has been praised by the IMF (see footnote 1). The stabilization efforts succeeded in reducing the budget deficit from 10.9 percent of GDP in 1983-85 to 2.6 percent in 1992-94. This is a major achievement, not matched by many other countries. But the deficit reduction was not accompanied by an improvement in the structure of revenues and expenditures or in the provision of public services. The decline in the deficit was made possible by a 5 percentage point increase in revenues, a 2.3 percentage point decline in recurrent spending and a l percentage point decline in capital spending. Increased tax revenues across the board, with rate reductions for major income taxes and benefiting from improved tax administration, was the major adjustment. The decrease in current spending was indeed an improvement as it was mostly a decline in transfers and subsidies. But the main constant in this picture was the public wage and salary bill, which remained at 10.6 percent of GDP between the two periods. 35. Three issues stand out: (a) The substantial progress on stabilization (deficit reduction) was achieved partly at the expense of structural reform. The slowdown in trade liberalization discussed above is one example.3 The achievement record in agriculture is another: substantial progress was made in improving cost recovery for goods (fertilizer, seeds) and services (irrigation), but efforts to promote rainfed agriculture, the fundamental source of income of most poor farmers, and small- scale irrigation largely failed and were eventually abandoned. Thus, the successful reforms in agriculture were primarily of a fiscal savings nature, while measures to promote the sector and "compensatory conditions", such as higher The Moroccan Government considers that the successful outcome of GATT negotiations and the positive stance of Morocco's major trading partners regarding Morocco's liberalization efforts confirm the soundness of Morocco's trade policies. 14 farm prices for barley or durum or increased public investment, were not implemented. (b) The Bank began to address the issue of public investment allocation in the framework of the two SALs. The objectives were twofold: to raise overall public investment, which had been cut substantially, and to shift its composition towards priority sectors: agriculture, infrastructure and human resources-the Target Investment Program or TIP. But the concept of priority sectors has been slow in taking root, and in 1990, when budget cuts were called for, the Government decided to cut its investment by 15 percent across the board, including the TIP. (c) The public sector has traditionally served as a source of employment for the fast growing labor force. This is the main reason behind the excessive wage bill. This issue has yet to be tackled. 36. There remain important questions about the role, efficiency and financial health of Morocco's public enterprise sector, which still makes up a large share of the economy and remains a drain on the Central Government's budget. The Bank's 1987 PERL was to be the first step in a program of rationalization of the sector, but the efforts were interrupted. The continuing challenge of the Bank's assistance strategy in Morocco is to help the Government seek improvements in the operational efficiency of public enterprises and in pricing policies, and to accelerate privatization (see para. 38 below). It should be added that the roles in the public finance picture of the State's large phosphate company (OCP) and of defense spending need further exploration. In spite of its important role in the economy, OCP's relations with the Treasury are insignificant: its transfers to the budget and tax payments are minor, and it appears to have built up substantial debt service arrears. A detailed assessment of OCP's financial condition is warranted. Defense spending, likewise, remains a reason for concern given the competing demands of the social sectors. While defense spending has declined over time, it is still about 4 percent of GDP, above the average for comparable countries. (b) Private Sector Development 37. Vigorous private sector development has yet to be achieved. While the economy grew at an average of 3.8 percent per annum in real terms since 1983, growth decelerated from close to 5 percent during the second half of the 1980s to 2.0 percent during the early 1990s. Agriculture (and droughts) played an important role in this deceleration, but another key explanatory factor was slow growth in manufacturing. Since 1983, Morocco's industrial sector has grown at only 3.0 percent per annum in real terms, even though it absorbed one quarter of the Bank's lending during 1983-94: in addition, while the sector grew at 3.4 percent per year during 1983-90, its growth rate dropped to 1.2 percent during 1990-94. Private investment peaked in 1989-91 at 13.7 percent of GDP but then declined to about 11.7 percent in 1994, the same level as in 1983. The reasons for this weak performance are many, including the slowdown in trade liberalization, appreciation of the real exchange rate since 1990, deficient infrastructure-transport, electricity-deficiencies in the human resource base and various bureaucratic impediments. The new unified Investment Code introduced in early 1996 as well as sharp reductions in corporate taxation are major efforts to stimulate investment. Yet important impediments still prevail. The Bank should help the Government address these issues. The most urgent requirements are intensified efforts to reduce protectionism, improved exchange rate management, an increased 15 allocation of public funds for basic human resource and infrastructure development, and improved public sector management. The signing of the free trade agreement with the European Union in 1996 was a strong reaffirmation of the Government's commitment to full liberalization of the economy. 38. Given internal socio-political constraints and the after-effects of the Gulf War, the privatization process was very slow in starting. While it now appears well underway, it is important that privatization revenues be seen for what they are-transitory sources of income- and treated as such. In view of Morocco's substantial internal and external indebtedness and given the need to come to grips with resolving the structural fiscal deficit, privatization should be seen as a means to improve the efficiency of the public sector, while reducing its scope, and its proceeds should be used to reduce the public sector's access to debt generating deficit financing. Not all public enterprises are likely to be privatized soon and further rationalization of the public enterprise sector remains urgent. Financial sector reform also has yet to be fully implemented. Among others, the continued absence of a free foreign exchange market dampens private investment, including activity by the International Finance Corporation. (c) Poverty Alleviation, Social Sector Development and Gender Issues 39. While there has been progress over the past several years in reducing poverty and improving social indicators, such progress has been insufficient. In particular, the underprivileged position of rural areas and of women remains. The Bank's 1994 Poverty Assessment reports that, in 1991, 13 percent of the population was below the poverty line, compared with 21 percent in 1985. However, an additional 8 percent of the population remained close to the poverty line and thus vulnerable to even small deteriorations in economic conditions (e.g., a poor crop). Also, while only 7.6 percent of the urban population was below the poverty line, the percentage in rural areas was 18. The unemployment rate is estimated at more than 20 percent in urban areas, making job creation one of the most urgent needs. Morocco still compares unfavorably with countries in a similar economic position, in terms of primary and secondary enrollments, especially for females, and in literacy rates. Health indicators are also poor, namely infant mortality and access to health care in rural areas. Morocco's lagging social indicators remain a major impediment to economic growth. 40. Total public spending on education in Morocco compares favorably with other similar countries. Over time, enrollments are up, including in rural areas, and internal efficiency has increased. But the main issue remains: excessive public spending on higher education at the expense of basic schooling. The Bank's attempt to help redress this situation under the Education Sector Reform Program failed because it proved to be politically unfeasible. In the health sector, the Bank's involvement, which dates from 1985, has been more successful and helped strengthen basic health care delivery, increasingly in poorer, rural areas. Yet the parallel issues of excessive spending in urban areas and of poor cost recovery for expensive urban-based curative services remain. 41. Bank strategy has recently strengthened its efforts to zero in more effectively on poverty and social issues. Starting in FY94, the Bank has played a catalytic role in bringing together the Government, other donors, NGOs and stakeholders in a participatory, consensus-based research process focused on the role of women in Morocco's development. The results, reported in an FY95 Bank report, suggest that the effectiveness of social sector projects can be enhanced greatly by a stronger focus on the basic needs of recipients. These findings have been 16 incorporated in the recently approved Bank loans in support of the Government's Social Priorities Program. Nevertheless, it remains to be seen whether generic issues, such as rural- urban disparities in budget allocations for social development purposes and the implementation of effective rural development, will be addressed. (d) The Environment 42. On the environmental front, the recent droughts have concentrated minds and highlighted the dependence and vulnerability of Morocco on water. Issues of air pollution and soil erosion are also becoming more severe. Government environmental action is in its early stages and overall awareness of the problems is still lacking. Progress towards defining a National Environmental Action Plan has slowly gotten underway. A new Ministry of the Environment has been created, but overall institutional coordination is weak. A 1993 Bank project, designed to help strengthen the institutional and regulatory framework for managing environmental protection has made unsatisfactory progress, primarily because of difficulties in improving inter-institutional cooperation: three years after project approval only 10 percent of the loan had been disbursed compared with an appraisal estimate of more than 60 percent. 43. Probably the most urgent environmental problem is water. Morocco is now defined as a "water-stressed" country. Irrigation presently accounts for 85 percent of water use, but future industrial growth and economic development in general will generate much increased demand for other uses. To avoid further "stress" and the possibility that water becomes the binding constraint to development, a comprehensive approach to water management needs to be developed. A 1995 Bank Water Sector Review contains the ingredients for the development of a water sector strategy. The review was the basis for a seminar on water held in Morocco in late 1995, and a Water Code was adopted in 1996. Currently, per capita supplies are declining as is water quality; rural areas are poorly served with potable water, and there are substantial losses in both the irrigation subsector and in the provision of potable water in urban areas. Cost recovery in urban areas is quite good, for which Bank project interventions can take some credit, but it is still far from adequate in irrigation, even though better than in many other countries. Improved cost recovery and a more efficient use of water in irrigated areas would go a long way towards lessening this constraint. Conclusions and Recommendations 44. The Bank's primary contribution to Morocco's development process has been to help the country achieve a major improvement in its fiscal balance and break from past autarkic policies. In particular, there has been substantial trade liberalization, including import duty reductions, the elimination of all import quotas and export taxation, as well as the reduced use of reference prices. In addition, the Bank has helped initiate a reform process across the board. The outcome has been renewed economic growth, without a major interruption in spite of the stabilization efforts, since the mid-1980s. This in itself is commendable. But the Bank's perseverance as well as the overall pace of reform weakened towards the end of the 1980s, even while a large reform agenda remained. In the end, the results have been mixed, and there has been overoptimism on the part of the Bank. As a result, the full potential of Bank assistance has not been tapped. 17 Based on this review's findings, the following main recommendations are offered to enhance the development effectiveness of the Bank's assistance strategy in Morocco: In Public Sector Management the Bank should focus on * The structural aspects of the fiscal problem. If major structural fiscal problems remain unresolved, they are likely to derail any adjustment program. In Morocco, these problems include the huge public sector wage bill, the public enterprise sector, the inefficient allocation of public spending, and the need for greater and more equitable cost recovery. * The process ofpublic enterprise rationalization. Not all public enterprises are likely to be privatized soon, and there is an urgent need to improve operational efficiency and pricing policies of public enterprises. The privatization process should be accelerated. Private participation in infrastructure development should also be pursued vigorously. In Private Sector Development the Bank should help the Government * Restore momentum to the trade (and incentives) reform process. Adherence to the commitments to the World Trade Organization and European Union Association Agreement will be of great benefit. Trade liberalization could be expanded in a non-discriminatory fashion. Interruptions or policy reversals could be especially damaging in a socio-political context where change is gradual. * Intensify efforts to fully liberalize the financial system. In particular, full convertibility of the dirham and a market-determined foreign exchange rate would further enhance private investment. * Focus on human and physical infrastructure. It is important that a number of structural and institutional constraints to industrial growth be addressed as a matter of urgency. These constraints include the quality of human and natural resources, infrastructure (including industrial land, reliable electricity and telephone services, an efficient transportation system) and the ability to generate, adopt and diffuse technological innovation. In Social Sector Development, Bank assistance should help * Redirect public spending towards the social sectors. Within the social sector budget, an increasing share must be allocated towards basic services, rural areas and women. * Increase the focus on poor farmers. There is a need to learn more about the types of assistance that would promote farming improvements in rainfed areas. There is also a case for stronger Bank efforts to persuade the Government to give higher priority than in the past to small and medium, as opposed to large scale, irrigation. 18 In the Environment the Bank should * Focus on Morocco's scarce water resources. Full cost pricing of irrigation water would lead to important efficiency gains. It would encourage shifts into less water-using crops, which are more in line with the comparative advantage of Morocco. Water pollution practices should be stemmed. With regard to the types of Bank assistance, the main recommendations are: On Instruments * Lending. The Bank's future task is likely to be more challenging than in the past because of high exposure. During the past four fiscal years, the net flow of Bank resources to Morocco has been only $29 million per year and net transfers (i.e., including interest payments) have been highly negative. While the temptation to lend may be strong, it is becoming increasingly important to ensure that projects contribute measurably to increasing the productive capacity of the economy. Structural adjustment lending in particular should be more selective. The program needs to show concretely how it will improve the growth capacity of the economy and help reduce poverty. Measurable performance indicators should be included in every operation. Lending that does not lead to accelerated growth would be counterproductive. * Improve the utilization of ESW A careful review of past trends is an indispensable element of diagnosis and prescription. The Bank has tended to blame exogenous factors excessively for poor performance and to discount their role at times of improved economic results. A good portion of the excellent ESW has not been put to use. Relatively more resources need to be spent on dissemination and constituency building. On Process * Realism of CAS. The 1993 CSP and CAS, in particular, did not provide a realistic assessment of economic and social conditions and failed in designing an appropriate and relevant Bank assistance strategy. * Strengthen project design. The high proportion of satisfactory project outcomes in combination with limited long-term returns raises questions about the relevance and appropriateness of project and program design, even though the basis for correct design has usually been laid out well in the ESW. In the past, this was especially important in financial intermediation operations, which seem to have had very limited impact on industrial growth. * Resident Mission. Establishment of a Resident Mission would help strengthen the process of creating contact with local stakeholders, which is proving to be an important tool for improving project design, as exemplified by the 1994/95 study of the role of women in development. 19 1. Background 1.1 With a per capita GNP of $1,150 in 1994, Morocco is in the lower end of the group of lower middle-income countries. The birthrate has been falling steadily but slowly during the past three decades. The most recent estimates suggest that the population of 26.5 million is growing at about 2.0 percent per annum, with slightly less than half of it urbanized. The growth of population of working age is considerably more rapid at more than 3 percent per annum. 1.2 Morocco's development potential is considerable. The country is relatively well endowed with natural resources, including large areas of arable land, a long coastline well suited to tourism and three-quarters of the world's easily accessible phosphate reserves. Yet much of this wealth remains underexploited. Water scarcity is a growing bottleneck which will require improved management practices. Phosphate rock, traditionally the leading export commodity, and its derivatives (phosphoric acid and fertilizers), still made up about 25 percent of merchandise export earnings in 1994. This is down from more than 40 percent during the early 1980s, largely on account of the expansion of manufactured exports, which now constitute about 40 percent of the total; agricultural products and fish account for about 30 percent of exports. 1.3 For nearly two decades after independence in 1956, Morocco followed conservative economic policies, with GDP increasing at about 4 percent per year. A relatively weak savings effort and conservative foreign borrowing policies permitted only a slow rise in investment. The country thus entered the 1970s with no major financial imbalances but a limited growth capacity. 1.4 By the mid-1970s economic policy became more ambitious. With the sudden large jump in phosphate prices in 1974, the Government launched a massive public investment program which brought about a sharp acceleration in growth: GDP grew at 7.5 percent per year in 1973-77. Concurrently, defense expenditures rose in connection with the military conflict in the Western Sahara. 1.5 The phosphate boom was short-lived with prices declining rapidly during the second half of the 1970s. In spite of this decline and of the second oil shock, the higher rate of public spending was maintained, made possible by increased reliance on external borrowing which was abundantly available on attractive terms. A proposed Bank structural adjustment loan (SAL) in 1980 was abandoned: the Government found it difficult to adopt a number of difficult reforms when other external finance was still readily available.4 Morocco's total external debt outstanding and disbursed grew from $1.7 billion at the end of 1975 to $12.4 billion by the end of 1983, or from the equivalent of about 20 percent to 100 percent of GDP. Meanwhile, the share of the public debt on concessional terms had decreased from about 50 percent to 40 percent. 1.6 The growing budgetary and balance of payments difficulties during the period from 1976 to 1983 prompted a number of stabilization programs which received IMF support. The Government's stabilization efforts, however, proved inadequate. They derailed frequently and did not generate the hoped-for financial improvements. Thus, the IMF was forced to cancel an Moroccan authorities dispute this interpretation. They ascribe the delay to the need for systematic preparation of the reform program in close consultation with the Bank and the Fund. 20 Extended Fund Facility in March 1981 and another one in April 1982 and replace it by a Stand- by arrangement: even so, by the end of 1982, IMF exposure had reached $1 billion (see Figure 1.1). Figure 1.1: Morocco - Debt Outstanding to Private Creditors, IMF and IBRD, 1973-94 ($ million) 5,000 4,500- -w-Private 4,000 + BRD 3,500 - 3,000-- 2,500 2,000 1,500 1,000 500- 0 MO LO 1- 0) M- C U) 1~- 0) ~- co fl- t- t- 1,- 00 co co 00 0) 0) 0o 0) 0) 0) 0) 0 0) 0) 0) 0) 0) Source: World Bank data. 1.7 The high level of government expenditure during 1975-83 did not yield the expected benefits, and after the short-lived 1973-77 boom, GDP growth barely kept up with population growth. Public investment programs often emphasized costly infrastructure projects and capital- intensive import substitution, with limited returns. A key element of Morocco's policy response to the balance of payments constraint was increased trade protection (quantitative restrictions, licensing, high tariffs) which hampered the efficient use of resources by the private sector and discouraged exports. Investment was large, but the productivity of capital was low and employment creation limited. The most positive policy component in this period was the prudence displayed by Morocco in the monetary field, which set Morocco apart from many developing countries that undertook a similar unsuccessful dash for growth: a price explosion was avoided. But this was achieved in part through excessive foreign borrowing. 1.8 By mid-1983 the financial situation had become untenable. The rise in international interest rates in the early 1980s, compounded by a prolonged drought during 1980-84, contributed to the virtual depletion of foreign exchange reserves, thereby forcing the country to debt reschedulings, emergency import restrictions, and a massive curtailment of public spending. 21 1.9 The severity of the 1983 crisis prompted the Government to launch a comprehensive economic program, combining stabilization, debt rescheduling and structural adjustment. The object of the latter was to transform the economy into an efficient producer by reforming the structure of incentives through policy changes, primarily in agriculture and industry, so as to revitalize growth in the economy. 1.10 The Government's program, initiated during the second half of 1983, has received strong Bank support through Bank economic and sector work (ESW), an intensive policy dialogue, substantial structural adjustment lending and continued project support. This support continues today. Throughout the period since 1983 Bank-Fund collaboration has been close. However, while there continued to be Fund programs, net financial assistance from the IMF peaked in 1985. Thereafter, it dropped precipitously in sharp contrast to the increase in Bank exposure (Figure 1.1). 1.11 During the first few years of the adjustment period (1983-87), the Bank accounted for 20 percent of all net financial flows (including grants and private flows) to Morocco (Table 1.1). Subsequently, during 1988-93, as repayments to the Bank became more significant, the Bank's share in net flows declined to a still high 14 percent, while the shares of the African Development Bank and France rose to respectively 13 percent and 16 percent. One result of this high level of activity was that by 1994, 17 percent of Morocco's total external debt was owed to the Bank, the equivalent of 12 percent of GDP. Apart from the heavy financial involvement by the Bank, the Bank's ESW and advice also far outweighed that of any other donor, with the Government actively seeking the assistance of the Bank on the direction of structural policies. As a result, in the case of Morocco, other donors have often followed the Bank's lead in policy matters. Table 1.1: Morocco - Net Receipts of External Financial Resources, 1983-93' Yearly Averages 1983-87 1988-93 Total in million of US$ 1,057 1,277 In percent 100.0 100.0 of which: *IBRD 19.5 13.8 *AfDB 2.5 13.2 *ODA Loans & Grants 45.1 64.0 of which: France 12.8 15.6 Arab Countries 13.8 12.6 a. Total includes both official and private flows, from all sources. Source: Appendix Table 1. 1.12 In future, the role of other donors is likely to intensify compared to that of the Bank. In particular, the European Union (EU), is expected to have a much stronger presence not only through traditional development assistance but through its association agreement with Morocco signed in February 1996, whereby trade barriers are to be phased out slowly over a period of 12 years. As part of the agreement, the EU is expected to provide large amounts of grants and The rate of decrease in Fund exposure in Morocco is similar to that in Chile between 1982 and 1992; among major countries with prolonged Fund programs it is exceeded only by that in Korea. 22 concessional aid to Morocco, possibly doubling the level of its previous assistance. Good coordination on policy action will be required, which the Bank and the EU have initiated. 1.13 Relative to most other Middle East and North Africa borrowers, Morocco's economic record stands out in terms of growth outcomes, financial sector development, direct foreign investment flows and poverty reduction. The contribution of the Bank to this record has been significant both in terms of resource transfers and policy advice. Yet, in terms of Morocco's resource endowment and, particularly in recent years, in comparison to many similarly situated countries in East Asia and Latin America, performance has fallen well short of potential and, again, the Bank must share some of the responsibility for this disappointing outcome. The purpose of this CAR is to pinpoint the areas requiring attention in light of experience. 1.14 The CAR focuses on the Bank's role and assistance strategy in Morocco during the past fifteen years. Morocco's overall stabilization and adjustment experience has been evaluated elsewhere including by the IMF6 and internally in Morocco. Among others, a wide-ranging International Colloquium on Morocco's structural adjustment program during the past decade was held in Rabat on October 1-3, 1993, organized by the Association of Moroccan Economists. The findings were published in a special 1994 edition of the Association's Review.7 The focus of the colloquium was analysis and debate by a cross-section of Moroccan stakeholders and international experts. Among the many topics covered, questions were raised about the social consequences of the adjustment process. Avery positive evaluation is contained in "Resilience and Growth Through Sustained Adjustment: The Moroccan Experience, " Occasional Paper 117, International Monetary Fund, January 1995. "Bilan Dicennal du Programme d'Ajustement Structurel et Perspectives de I'Aconomie Marocaine": Actes du Colloque international de l'A.E.M. des 1", 2 et 3 octobre 1993, Annales Marocaines d'Economie: Revue de l'Association des Economistes Marocains, Janvier 1994. 23 2. Bank Assistance Strategy: Contents and Results 2.1 Formal reviews of Bank strategy in Morocco in the 13-year period between 1983 and 1995 took place on only three occasions: a Country Program Paper (CPP) prepared in 1983, and two Country Strategy Papers (CSPs) produced during the 1990s (1990 and 1993). The substance of the 1993 CSP, which was discussed with Senior Management on June 2, 1993, was included in summary form as a Country Assistance Strategy (CAS) chapter in the President's Reports for projects on two occasions during 1993: on February 2, 1993, when a Telecommunications Sector Restructuring Project was approved by the Board, and on November 23, 1993, when a National Rural Finance Project was approved (together with a Fifth Water Supply Project). The differences between the three 1993 documents-the CSP and the two CAS statements-were marginal, except that the first CAS statement was less comprehensive. A new CAS is scheduled for FY97. Between 1983 and 1990, fragmentary discussions of strategy can be found as part of the economic analysis in the President's Reports (PRs) of the different loans. 2.2 In 1983, Morocco's difficult economic situation-financial distress, economic stagnation, social underdevelopment-was well understood by the Bank, and the Bank's strategic response at the time was appropriate. Over time, the Bank strategy contributed to Morocco's substantial progress towards its reform goals. Three main points stand out. First, major (and early) progress was made towards resolving the budgetary imbalance, although it still remains an issue, at a much smaller scale, today. Second, a productive dialogue on industrial and trade issues led to significant trade liberalization during the mid-i 980s; in the late 1980s and thereafter, however, the dialogue lost its effectiveness. And, third, the difficulties and political resistance to other sectoral structural reforms, especially in the education sector, but also in agriculture, were underestimated from the start. As a result of the above, the fundamental aims of Bank strategy in Morocco have remained roughly the same throughout the years since 1983. They were threefold: to help stabilize the economy's financial situation; to raise the rate of economic growth; and to reduce income inequality and extend education and health services to the poor. Strategy Prior to the Reform Program: The 1983 CPP 2.3 The April 1983 CPP was prepared before the Government launched its comprehensive reform program. Short-term stabilization and longer-term structural change were clearly and urgently needed when the CPP was prepared. However, the Government reluctance to adopt structural reforms, aggravated by public dissatisfaction and unrest resulting from the Government's attempt to reduce food subsidies, led the Bank to endorse a cautious approach. The Bank decided to support the IMF's programs to encourage stabilization, and to address longer-term structural change through project lending, through Economic and Sector Work (ESW) and through an active country dialogue. Adjustment lending, in the form of two industrial program loans, was held in reserve pending a turnaround in Government policy and adoption of an industrial incentives' reform program (which happened later during the year). 2.4 The Bank's diagnosis focused on three main issues and the lending and ESW program were correspondingly designed to contribute to three economic objectives. First, an improvement in the balance of payments was sought through financing high-yielding, export- oriented or import substitution activities as well as supporting infrastructure and services. 24 Second, an increase in domestic resource mobilization, essentially through an improvement in the current budget balance and in particular through limits on current public spending; at the same time, public capital spending was to be severely constrained. Third, an improvement in income distribution through job creation and increased services to the poor, especially in rural areas. The ultimate objective was to renew growth in the economy which would also be sustainable in the longer term. 2.5 At the sectoral level, the objectives of Bank lending in agriculture would focus first, on substituting for food imports; second, on seeking to reduce unnecessary budget outlays through, among others, improved cost recovery and reduced subsidies; and third, on helping the poor through increased resource allocation to rainfed areas (see also Chapter 4 below). In industry the objective was to deepen the industrial structure, specifically through the promotion of efficient import substitution in the electromechanical sector. In addition, if the Government were to embark upon an outward-oriented strategy through implementation of the Bank- proposed reforms of industrial incentives, the 1983 CPP proposed to provide additional financial support. Proposed lending for infrastructure and utilities was largely designed to sustain agricultural and industrial development (see also Chapter 5 below). In the human resources area, the Bank's focus was on cost-effective delivery of basic services for all, including the poor. The budgetary implication was a shift away from excessive spending on items such as capital- intensive health investments and higher level education (see also Chapter 6 below). 2.6 Major pieces of ongoing and planned ESW, geared to support the lending objectives and to underpin the policy dialogue included: periodic Country Economic Memoranda (CEM) with focus on Morocco's external debt and creditworthiness; follow-up on an Industrial Incentives Report issued in January 1984 which contained an exhaustive series of reform proposals: exchange rate policy, fiscal, tariff, financial and administrative policies; an Agricultural Incentives Study; and studies on financial intermediation and public enterprise performance. Economic work to better understand issues of poverty and population policy was also planned. 2.7 The main objectives of the Bank's assistance strategy embodied in the 1983 CPP were highly relevant. Some of the subsidiary objectives, however, such as food import substitution, and the absence of an all-out effort to open up the economy were less appropriate: they supported traditional government policy. But the latter was about to change during the second half of 1983, when the Government adopted its comprehensive reform program, under the combined weight of an untenable economic and financial situation and a persuasive Bank dialogue on the benefits of an outward-oriented strategy. Assistance Strategy in the Mid-1980s: Supporting Structural Reform 2.8 The diagnosis of Morocco's structural problems in the PR for the Bank's first adjustment loan, the January 1984 Industrial and Trade Policy loan (ITPA I) echoed, to a large extent, the analysis in the 1983 CPP-low and declining domestic savings mainly because of uncontrolled government current spending, low economic growth and high unemployment. The report's primary focus, however, was the structural weaknesses in Morocco's external trade regime, i.e., excessive, ever-increasing protection and an overvalued exchange rate. 25 2.9 The first steps in the adjustment program were government spending cuts, aimed at a variety of subsidies as well as at capital outlays, fiscal reform and initial rationalization of industrial incentives. Subsequent steps, beyond IPTA I and eventually supported by Bank adjustment lending, would include further reform of industrial incentives and reforms in the domestic capital market, agriculture and the public enterprises sector. 2.10 With regard to industrial protection, a prime objective was to reduce the maximum customs duty, which reached as high as 400 percent before the reform, to 60 percent by June 30, 1984, and then gradually to 25 percent by about 1989. An additional import levy, the Special Import Tax (SIT) applicable to most commodities and which stood at 15 percent before the reforms, would be reduced to 10 percent in January 1984, to 5 percent by January 1985 and be eliminated by January 1986. Also, a flexible exchange rate policy would be introduced. 2.11 Economic growth was projected to remain at a relatively low 1.5 percent per year during 1983-85, the combined result of an improved incentives' system and the dampening effect of the stabilization program. Thereafter, growth was expected to increase to 3.8 percent per year during 1985-90. The current account deficit in the balance of payments was projected to decrease to the equivalent of 5.7 percent of GDP in 1985 and 3.0 percent of GDP by 1990. 2.12 Morocco's structural reform program got off to a very good start. It had been well prepared and designed and was fully relevant in the economic circumstances. Eventually, ITPA I was followed by five more sectoral adjustment operations during 1985-87 in the industrial (ITPA II), agricultural (ASAL I and II), public enterprises (PERL) and education sectors, for a total of $1,065 million, or 63 percent of all lending during 1984-87. All of these loans, with the exception of the education loan, contributed significantly to initiating reform across a wide spectrum of the Moroccan economy, and led to a successful stabilization with increased growth in the second half of the 1980s. 2.13 In the case of the industrial sector in particular, there was a noticeable response of manufactured goods exports to the improved incentives' framework. Overall, GDP grew at more than 5 percent per year during 1983-88, i.e., well above the projections in the 1983 CPP. By 1987-88, the Government deficit as a share of GDP had been cut in half, and the current account in the balance of payments was in surplus. Exogenous factors played an important role in these developments, and reinforced the positive impact of the reform measures. Good weather helped in reducing the food import bill; and, the dramatic decline in international petroleum prices in 1986 served to strengthen both the trade balance as well as the fiscal situation with the introduction of a substantial oil levy, representing 13 percent of budgetary revenues in 1986. 2.14 The ESW accompanying the preparation of the ITPAs (para. 3.5 below) had led to a very fruitful dialogue and had helped convince a group of Government officials and industrialists of the advantages for Morocco of trade liberalization. A very significant change in perception and attitudes about industrial protectionism and its negative consequences had been accomplished in a fairly short period of time. The response of the economy (exports, growth) during the mid- 1980s to the reduced protectionism had been positive and the advocates of reform 8 Consumer subsidies were to be cut in half in 1983-84, compared with 1982, and nearly eliminated subsequently. Government investment was expected to be cut by about one-third between 1982 and 1983; most new projects were to be cancelled or deferred and ongoing projects stretched out over longer implementation periods. 26 and liberalization were enthusiastic about further progress towards a fully free-market economy, and about continued Bank support towards that goal. Strategy in the Late 1980s: Emerging Conflict Between Stabilization and Trade Reform 2.15 Although not a formal country strategy document, the PR for the December 1988 first structural adjustment loan (SAL I) reviewed the progress achieved, and recognized the important role played by exogenous factors in the stabilization and reform achievements during the mid- 1980s. Even so the report was very upbeat, stating that "Structural policy measures.. .underlie much of the adjustment that has taken place since 1983" and referring to "The sweeping reform..." (para. 10). The analysis failed to notice, however, that the substantial progress in stabilization had not been matched by similar progress in structural reforms and that problems had started to appear in the reform program. Even in the area where most progress had been made, the industrial and trade policy regime, important slippage had already started.9 The schedule for the planned reduction and then elimination of the SIT-a key element of the reforms-was at first revised and then abandoned. The SIT was reduced in half in January 1985, but in January 1988 it was combined with the stamp duty and replaced by a 12.5 percent "uniform import tax", prompted by fiscal considerations. This move entailed a 2 percentage points increase in the total of all import taxes at a time when these still remained far too high. Even with favorable external developments, the budget continued to be under considerable stress. Budgetary revenues, though much improved, remained critically short of what was needed to meet necessary expenditures. The country and the Bank were confronted with the inherent conflict between liberalization, which would be reflected in revenue declines, and budgetary improvement. Faced with this dilemma, the Bank, in the context of the 1988 first SAL, and following a long debate with the IMF, which at that time had taken a lead role in the context of ongoing debt reschedulings, accepted that import duties would be increased. 2.16 The overriding objective of the Bank's strategy at the time of SAL I was to "consolidate the structural achievements registered to date, without disrupting macroeconomic stability". The focus was in four areas. Tax reform designed to rationalize the tax system and to raise revenues, an increase in public investment which had taken the brunt of the fiscal adjustment in the past, further trade liberalization and improved debt management. But the trade liberalization was compromised by the decision to increase import duties, and there was little discussion about further necessary reform measures in the agricultural, education or public enterprises sectors. The PR is also silent on social issues, except to say that benefits will flow to the poor from the workings of the adjustment policies. The Strategy in 1990: An Overoptimistic Assessment of Achievements 2.17 Some seven years after the 1983 CPP, and less than two years after SAL I, a new CSP was produced in August 1990. The Bank's optimism about Morocco's achievements and 9 A Bank report reviewing Morocco's achievements around 1987 (in import liberalization particularly) had warned: "The temptation to reverse the reforms achieved thus far in the interest of short-term stabilization should be resisted as a facile expedient. Such a solution will provide only momentary relief from underlying macro-economic disequilibria while mortgaging the economic future of the country from a structural point of view." World Bank, "Morocco: The Impact ofLiberalization on Trade and Industrial Adjustment", Report No. 6714-MOR, (Executive Summary, para. 25), March 15, 1988. 27 outlook, already evident in 1988, was restated in the very first paragraph. "Morocco is entering the 1990s with a real chance of becoming a success story" and "Major economic reforms have been implemented..." The main issues still to be addressed were identified as the uneven distribution of income, and the debt overhang and fiscal strain caused by it. Missing from the analysis was a detailed review of past achievements and failures in the different sectors, including agriculture, industry and education. As will become clear later, the structural reforms in agriculture and education in particular had been fairly limited. 2.18 The focus of the Bank's strategy was thus somewhat more narrow in the 1990 CSP than it had been in 1983: fiscal reform and a resolution of the debt issue, and social sector progress through a restructuring of public spending. Economic growth (and an improvement in export performance) remained a fundamental objective, of course, but, based on the experience of earlier years, it was felt that this was being achieved. Pivotal parts of the lending program for 1990-93 were a second SAL (approved in April 1992), to finalize the trade reform and achieve the restructuring of public spending towards social goals, and a second Public Enterprise Rationalization Loan (PERL II) to consolidate public enterprise reform and promote privatization. After 1993, the CSP no longer saw a need for adjustment lending, and the Bank program was expected to revert to investment lending only. Proposed ESW focused on longer- term key issues, i.e., social expenditure priorities, the role of women in Morocco's development, and environmental assessments. 2.19 A target growth rate of 4.5 percent per annum was set for the first half of the 1990s. The budget deficit was expected to be reduced from 4-6 percent in recent years to 2-3.5 percent. Manufactured exports were expected to grow at 6 percent per annum during the 1990s, while the ever-increasing openness of the economy would be reflected in an increase in the ratio of the sum of exports and imports over GDP from around 50 percent to 61 percent over the decade of the nineties. 2.20 All things considered, the Bank's satisfaction about Morocco's achievements and prospects at the time of the 1990 CSP was understandable. The economy had been performing well in most respects, with growth exceeding the Bank projections, and a process of reform had been initiated, successfully, in many areas. Still, no attempt was made (in the CSP) to separate the impact of exogenous factors from structural reforms per se on the favorable economic performance.'0 In retrospect, it would appear that exogenous factors played a more important role than judged by the Bank. And, as noted above, there had been some important slippage in trade policy reform. 2.21 Subsequently, in 1991, a previously good Bank-country dialogue on public enterprise rationalization, which had produced profound changes in attitudes in Morocco towards public enterprises and led to the successful PERL I project in 1987, was interrupted. PERL II, a pivotal part of the 1990 CSP and almost fully prepared, was cancelled by mutual agreement between the Bank and the Government, reportedly, because it was felt that the public enterprise reform process was well on its way. This assessment was premature. Moreover, dropping PERL II from the lending program was made easy when it was agreed that a good part of the funds intended for it would be redeployed to increase the size of SAL II. lOn the other hand, a 1988 economic paper (The Impact on Trade and Industrial Adjustment, Report No. 6714) had estimated for the period of the mid-1980s the relative effects of stabilization, structural reform and exogenous factors. 28 2.22 The decision to drop PERL II was a disappointment in Morocco and also to Bank staff who had worked hard for the reforms. While the dialogue deteriorated, the Bank's formal attitude remained unchanged. The 1992 PR for SAL II refers to "sweeping reforms of incentives" that have been implemented and states that "the loan would support the last phase of a structural adjustment program.." after which there would be no more need for adjustment lending. In summary, during the late 1980s, the Bank's strategy started to become less relevant and effective. The Strategy in 1993: Continued and Unwarranted Overoptimism 2.23 By the time of the 1993 CSP, optimism about Morocco's achievements was no longer warranted, yet it prevailed. To be sure, there were more encouraging developments. Important achievements included convertibility for current account transactions (as well as for capital transactions in connection with foreign investment), a significant increase in foreign direct investment signaling credibility of the reform program, and after much delay, the initiation of the privatization program. Also, following a successful rationalization of the tax system in the context of SAL I, the budget deficit was on target in 1993. On the other hand, there was hardly any economic growth between 1990 and 1993, yet this was too easily dismissed as being the result of exogenous factors, i.e., inadequate rainfall and recession in Morocco's major European markets. The stagnation in exports of manufactures (in contrast to an earlier projected growth rate of 6 percent per annum in real terms), which had been a leading growth sector during the second half of the 1980s, was acknowledged but no mention was made of the probable effect of the appreciation of the real exchange rate, which began in 1991, nor of that of important delays or slippage in reforms. To illustrate the latter, the 1993 CSP called for a reduction in the maximum import duty from 52.5 percent in 1992 to 47.5 percent by 1993. However, import duties were in fact increased in 1988 and the original objective in the mid-1980s was to have the maximum import duty at 25 percent by 1989. In essence, protection and the bias against exporting remained excessive. 2.24 The upbeat attitude towards Morocco predominated, however. The 1993 CSP referred to "the healthy average growth rates" and to prospects for 1993 which are not as favorable as "the economy's underlying strength would suggest." Proposed Bank assistance was tailored "to respond to a post-adjustment development agenda" and "there is no proposal for new adjustment lending". 2.25 The essence of the strategy in the 1993 CSP was the same as in 1990, i.e., resolution of the fiscal problem and social sector progress. Six areas of intervention were emphasized: (1) consolidation of macroeconomic adjustment; (2) the social sectors; (3) private sector development; (4) public sector management; (5) environmental and water resource management; and (6) outward orientation of the economy. Flagship loans in the lending program were social priorities loans, private sector development loans and public sector management loans. Planned ESW focused on in-depth sector issues, including a poverty assessment, a private sector assessment and a public expenditure review. 2.26 There were problems with most aspects of this strategy. The "consolidation" of the macroeconomic adjustment was not easy. The liberalization of the industrial and agricultural sectors was, in fact, far from complete, and would require more than "consolidation". Economic growth, instead of accelerating, was decelerating for reasons beyond exogenous factors. Private sector development was limited. Job creation for the large numbers of unemployed had become 29 a major challenge. To the extent that the Bank had lost sight of the urgency of the growth objective, and the difficult challenge which it implied, the 1993 assistance strategy was much less relevant than the well-focused strategy of 1983. The above, together with continuing structural fiscal problems and slow social sector change, and the economic developments since 1993, suggest that, in spite of significant progress made, the primary issues to be addressed in Morocco today are not very different from what they were more than a decade ago. 2.27 In retrospect, over the period from 1983 through the 1993 CSP, the stabilization objective has received the most attention, probably because of the immediate urgency of resolving the financial impasse, and is the area where most progress has been made. In line with the Bank's objectives, 37 percent of the lending amount during 1983-95 were structural adjustment loans with stabilization as one main goal. On a sectoral basis, the focus of the Bank's lending activity was on agriculture, industry and the social sectors. The objectives in agriculture and industry were to promote growth, mainly through an opening up of the economy to international competition; the primary objectives in education were to improve internal efficiency and permit additional services to rural areas and girls, as well as to curb public spending on higher education; in health, a reallocation of spending from urban to rural areas was being sought. But at the sectoral level, the Bank's dialogue, while relevant, has not been very effective. Often, the Bank appears to have underestimated the resistance to reform. 2.28 In agriculture, an apparently constructive dialogue led the Bank to support agricultural reform through two adjustment loans (1985 and 1987). Good progress was made particularly in reducing transfers and subsidies to the sector-an important achievement towards the stabilization objective-but strong resistance was encountered in the area of price liberalization. The sector clearly paid a price for the reforms (reduced subsidies) but received few benefits, e.g., in the form of such things as public support for rainfed development. As a result, resistance to reform, if anything, appears to have increased. 2.29 In the industrial sector, the Bank's ESW and dialogue may have contributed to some confusion about strategy. For a while, it was unclear whether full liberalization or selective import substitution (through targeted lending for the electrical and mechanical industries) was being promoted (see paras. 2.5 and 5.14-5.15). 2.30 In education, and in spite of warnings to the contrary in the 1983 Education Sector Survey, the Bank believed that curbing higher education growth (a most unpopular measure) would be feasible. It included this objective in its 1986 Education Sector Loan, but in the end it was not achieved. Country Assistance Strategy Today 2.31 Since about 1994 there has been a new awareness in the Bank about the scale of the remaining reform agenda. Adjustment lending was resumed in 1995 with the approval of a $250 million Financial Markets Development loan. The FY97 Country Assistance Strategy (CAS) acknowledges that the recent growth performance was neither sufficient nor sustainable: the list of development constraints is long. Unemployment is high, and the country remains heavily indebted; protection is still excessive, external competitiveness has eroded and the degree of openness of the economy remains limited; the role of the state is still too large and public enterprises still lack managerial autonomy while their financial situation remains weak; finally, 30 Morocco's social indicators continue to lag behind other similar countries, especially in rural areas where they are comparable to those in Sub-Saharan Africa.11 2.32 The CAS proposes reduced traditional investment lending, renewed support for policy- based lending and an increased focus on non-lending activities, partly because of the Bank's already high exposure, a participatory approach towards project development and more emphasis on dissemination. Major elements of the assistance strategy, however, remain the same as they were in 1983: invest in people, as a necessary ingredient for growth and to help reduce inequalities; increase competitiveness through liberalization and policy reforms so as to promote growth; and modernize the public sector through improvement in public expenditure management, fiscal and civil service reform, and public enterprise restructuring. Strengthened environmental management has become an additional priority. Because of exposure, the financial impact of the Bank's program will be constrained. Repayments to the Bank exceeded $300 million while interest payments were about $275 million during each of FY95 and FY96. Inevitably, for a mature lending program, net transfers from the Bank to Morocco have been highly negative during the past four years. Comparative Basic Social Indicators can be found in the Banks 1994 Poverty Assessment (Report # 11918). As one example, total illiteracy in Morocco is estimated at 55 percent, compared with 47 percent in the Middle East and North Africa region and 25 percent in lower middle income countries. Female illiteracy is estimated at 68 percent for Morocco, versus 60 percent in the Middle East and North Africa region and 32 percent in lower middle income countries. Rural illiteracy rates are typically more than double those in urban areas. 31 3. Instruments of Bank Assistance Economic and Sector Work (ESW) Overview 3.1 Even a cursory review of the Bank's ESW on Morocco confirms the sheer volume and high average quality of the output. Over the past 13 years (1983-95) the Bank produced 51 economic and sector reports, covering virtually every aspect of the Moroccan economy. Five of these reports were country economic reports; 5 were public expenditure reviews or analyses; and 12 were social sector studies, including reports on education, on poverty, on the role of women in development, and on nutrition. There were also 10 studies on industrial development issues, exports and the private sector, and 7 on agricultural issues. The remaining 12 reports dealt with a variety of infrastructure sectors, including energy, power, transport, housing and water. 3.2 The above is a listing of formal ESW products. But the actual volume of economic and sector work is in fact larger. It is also difficult to measure. Much "ESW" is not even recorded as such, but rather is part of the appraisal process of adjustment and investment operations. In the case of Morocco, e.g., a Public Enterprise Rationalization Loan (PERL) in 1987 involved an unusually large and excellent Bank staff input in preparation and appraisal (in addition to numerous government studies), all of it geared to (and largely successful in) changing attitudes towards the role of public enterprises in society: this was clearly good, solid "ESW", though not recorded as such. 3.3 Over the past 11 years, the Moroccan assistance program spent, on average, 6.3 staffyears per year on ESW, which is fairly high given the country population size. On the other hand, the share of ESW in the total of staffyears spent on the country assistance program was 19.9 percent, considerably below the Bank average. 3.4 It is difficult also to generalize about the quality of ESW. The Bank's ESW on Morocco has been, on the whole, of high quality and highly relevant, but its impact has varied considerably. During the early 1980s, in preparation for the start of the adjustment process, several excellent reports were produced. Some of this work (industry and trade) was also highly effective because of exemplary focus on dissemination and constituency building. The work on agriculture and education, on the other hand, to a large extent failed to create a strong constituency. Later on, much of the work produced during the early 1990s was also of high quality, but there was duplication among the reports (e.g., on the need to lower protection, or the urgency to reorient public spending towards basic human capital formation and rural areas) as well as much repetition of issues reviewed a decade earlier. Furthermore, with few notable exceptions such as in the area of developing a legislative agenda for private sector development, the reports appeared to have had little immediate impact. In fact, the Bank's policy dialogue with Morocco was at a low ebb during 1994 and 1995, and no loans were approved between July 1994 and May 1995.). 32 Table 3.1: Intensity of ESW ESW ESWas % of Country SYs Total SYs Bolivia 3.6 18.3 Tunisia 4.2 18.7 C8te d'Ivoire 4.3 18.8 Chile 3.0 23.7 Malaysia 2.7 22.9 Morocco 6.3 19.9 Colombia 5.7 22.1 Poland 6.9 28.8 Philippines 8.3 23.5 Nigeria 11.2 21.1 Bangladesh 12.7 21.8 Pakistan 10.4 17.9 All countries 476.7 22.0 Notes: 1. Countries are ranked according to population size. 2. ESW SYs (Economic and Sector Work staffyears) are yearly averages, based on data for FY86-96. SY data include borrower country-identified staffyears only. Source: PBD. Assessment of Selected Areas 3.5 The Bank's preparatory work for the first adjustment loans (the Industrial and Trade Policy loans in 1984 and 1985) was truly exemplary of good ESW. As noted earlier, prior to 1980 Morocco was a very protected, inward-oriented economy. Policymakers and businessmen alike focused almost exclusively on the domestic market. Around 1979, one lone Bank-financed consultant started to make a difference. He spent some three years in Morocco measuring, but also and most importantly explaining, the intricacies of the "effective protection" concept. In the process he managed to convince a considerable number of businessmen and policymakers of the virtues of a more open economy, the resulting likely supply response and consequent growth. In other words, his work built a constituency for reform and trade liberalization. The end result was not only an excellent report on Industrial Incentives and Export Promotion but also two successful adjustment loans that supported large initial steps in trade reform. The earlier mentioned preparatory work (appraisal) towards the 1987 PERL was also highly effective. 3.6 Also around the time that Morocco's adjustment process was launched in 1983, the Bank produced high-quality, path-breaking studies on the agricultural and education sectors. An Agricultural Prices and Incentives Study mapped out, for the first time, the effects and high costs of prevailing agricultural policies and suggested remedial action. Likewise, a comprehensive Education and Training Sector Survey, published in 1983, was a watershed for the Bank's approach to education investments in Morocco. For the first time, the Bank made an assessment of the entire education sector and developed a set of priorities for future programs which derived from a uniform approach rather than from ad hoc priorities. In both cases, agriculture and education, the ESW was excellent. However, a strong constituency to promote some of the more 33 far-reaching of the proposed reforms had not developed, even though, especially in the case of agriculture, collaboration with the Moroccans in the preparation of the reports had been close. Eventual reforms fell considerably short of what had been expected, as will be seen below. 3.7 In more recent years, during the first half of the 1990s, the Bank continued to produce high quality economic reports, as planned in the Country Strategy Papers. Private sector assessments were contained in three reports: "Developing Private Industry in Morocco " (Report No. 11 557-MOR, July 1993); "Preparing for the 21st Century. Strengthening the Private Sector in Morocco" (Report No. 11894-MOR June 1994); and "Kingdom of Morocco- Republic of Tunisia. Export Growth: Determinants and Prospects" (Report No. 12947-MNA, October 1994). All three of these reports provide a good diagnosis of the factors constraining private sector development in Morocco, and contain a large number of valid recommendations for the future. At the same time, there is considerable overlap, especially between the first two of the above reports, on major issues and recommendations, ranging from the financial incentives system (tariffs), to legal and regulatory reforms, and to the issue of pre-emptive Treasury financing (mandatory holding of Treasury bonds by the banks). Many of these issues had also been dealt with in earlier reports. 3.8 The June 1994 report summarizes the findings of all three studies best, by suggesting that Morocco's private sector has not yet reached the critical mass of policies and incentives for sustained development. Import protection remains excessive; moreover, overall effective protection is found to be inversely related to comparative advantage. Also, the continuing high protection level discourages and restrains the use of imported technology. The re2orts recommend that import duties be lowered further, as originally intended in 1983. This, however, needs to be done in combination with a simultaneous broadening of the tax base in order to avoid renewed increases in the budget deficit, which in the past have tended to undermine the tariff reform process. Other recommendations include real exchange rate competitiveness, which has tended to erode since 1990, more spending on technology, more transparency in the administrative environment affecting business, and stronger support for human resource development. 3.9 To an extent, the repetition among reports on major issues and recommendations was by choice. The June 1994 report drew heavily on several other reports (not only the private industry report but also reports on agro-industry and on poverty) with the objective of focussing on selected issues for easier and more effective dissemination. The report became an input for a private sector seminar in Morocco in December 1993 (and subsequent follow-up seminars). This became the point of departure for the formulation of a private sector development policy, including the creation of a private sector committee, a joint public-private advisory group reporting to the Prime Minister. 3.10 A poverty assessment entitled "Poverty, Adjustment, and Growth" (Report No. 11918- MOR) was published in January 1994. It has been rated by OED as among the best poverty assessments in the Bank. The report reviewed the dimensions of poverty in Morocco as well as current Government policies, and on that basis made policy recommendations for the future. The findings were to be incorporated in the Government's strategy for poverty alleviation which was under preparation. A primary conclusion of the report is that economic growth is 12 In the context of the 1996 Investment Code, import duties on investment goods were reduced to 2.5 percent. 34 fundamental to achieve improvements in poverty indicators. Specifically the report calls for labor-intensive growth, and for rural growth which implies that the policy of self-sufficiency in food production should be abandoned and farmers should be encouraged to grow whatever crop is best suited to their land. In addition, a convincing argument is made for control of the public sector wage bill and for a reorientation of public spending towards rural areas. 3.11 A public expenditure review entitled "Public Expenditure: Issues and Outlook" (Report No. 13413) was prepared in August 1994. One of the key conclusions of that report is that future growth will depend on increased public spending on basic human capital formation (primary education, basic health care) and water supply, especially in rural areas. It is suggested that the size of the public sector can be reduced through privatization and greater cost effectiveness and cost recovery. The main messages of the report are, in fact, similar to those in several earlier Bank reports. The relative neglect of basic education and health in public spending priorities, especially in rural areas, has been a major topic in Bank reports at least since 1983. 3.12 As said earlier, however, a high volume and quality of ESW is not sufficient for effectiveness, even if the ESW is prepared in close contact with local researchers; rather it is dissemination and the building of a constituency which is powerful enough to be an effective advocate for the recommendations made. An extreme example of an important report which was not acted upon is: "Towards the Increased Participation of Women in Society: Morocco" (World Bank, Report No. 8536-MOR, September 1990). There was a lack of interest on the part of the Government combined with little effort at constituency building. A new report on the subject was prepared in 1995. It is still too early to judge its effectiveness. 3.13 In sum, while the ESW on Morocco has been generally of high quality, a good part of it has not been very effective. To this must be added that, on occasion, the Bank went ahead with reform proposals without having laid the groundwork for these proposals or having developed a full understanding of the issues through preparatory ESW. This happened, e.g., in the case of the social component of SAL II in 1992, where much-heralded social performance indicators (cited as examples of best practice in the Wapenhans report) turned out to have been poorly designed: in the end, two out of four selected indicators were not monitorable and, in any event, the indicators were never given much attention. The judgment of the new Bank staff in charge of the health and education sectors after SAL II became effective, was that even the two indicators which were monitorable were not relevant because they did not address the true problem, i.e., rural-urban disparities in budget allocations. Lending Amount and Allocation 3.14 Bank commitments to Morocco during 1983-95 totalled $5.53 billion or $425 million per year. On a per capita per annum basis this amounts to roughly $17.5, which is fairly high by Bank standards. Comparisons with other Bank borrowers for selected subperiods are given in Appendix Table 2. Close to 40 percent of the total has been structural adjustment lending. 3.15 As noted in Chapter 2 above, structural adjustment issues were discussed in the April 1983 Country Program Paper, but adjustment loans were not part of the lending program at that 35 time. Instead, it was suggested that a large part of the dialogue on structural issues could be pursued through project lending, intensive ESW, and support of IMF policies in Morocco. However, once the Government had put a stabilization-cum-adjustment program together during the second half of 1983, the Bank showed flexibility and reacted quickly. Adjustment loans became a major part of the program and a number of investment project proposals were correspondingly dropped.13 It was also decided at that time that many structural adjustment objectives would be more effectively addressed through a sectoral rather than a global approach. Thus, unlike in many other countries, the first six adjustment loans, out of a total of ten for the 1983-95 period, were sectoral loans: in industry, agriculture, and education. The sector-by- sector approach to adjustment responded to the Government's inclination for phasing. It was not expected to detract from attention to macroeconomic reforms. It allowed for the operations to be designed and timed in accordance with the absorptive capacity for change of the different ministries and constituencies. Furthermore, the macroeconomic framework was the primary responsibility of the Fund.14 As mentioned earlier, there was a continuation of Fund programs and advice during the adjustment period. Between August 1983 and January 1992, six Stand-bys were approved. However, the Fund's net financial contribution to Morocco declined rapidly after 1985 in contrast to the Bank's financial assistance. 3.16 On a sectoral basis, those same three sectors would account for 70 percent of the Bank's lending over the next decade (see Table 3.2). This was clearly the core of the Bank's program. The remaining 30 percent was spread over a variety of infrastructure sectors, including "new areas" such as the environment, but the focus of the program was on adjustment, agriculture, industry, and education and health. In retrospect, this choice of intervention was appropriate and relevant, even if effectiveness was uneven. The Bank's activity in the core sectors of its assistance program is discussed in detail in Chapters 4-6. 3.17 While the 30 percent of Bank commitments for infrastructure projects was distributed fairly thinly over several sectors-highways, ports, energy, power, telecommunications, urban development, water supply and sanitation, drought relief, coal mining and the environment-the individual outcomes were generally satisfactory. Important sectoral findings are as follows. 3.18 The Bank's assistance in the transport sector (highways and ports) has been, on the whole, well-designed and focussed. In several instances important policy changes were achieved because the Bank held firm and deferred projects until Government approval of key reforms could be obtained. A railway restructuring project, pre-appraised in 1991 and to be appraised in 1996 was left on hold for almost five years until the Government finally approved needed tariff adjustments and other key managerial measures. And the Secondary, Tertiary and Rural Roads project, approved in 1995, was kept on hold for about two years until the Government finally accepted to change the transport law and do away with the crippling road freight forwarding monopoly. In the highways sector, Bank projects contributed to greater prioritization of maintenance, more regular financing under a road fund system and institutional development in 13 Several project proposals, especially in agriculture and agroindustry, were dropped altogether. A few (urban development, e.g.) were reinstated some years later. 14 Moroccan authorities stress that sectoral adjustment provided an appropriate role for the Bank given the active macroeconomic dialogue conducted by the Fund and the good coordination arrangements between the Bank and the Fund. 36 the Roads Department of the Ministry; in ports, the focus was on rehabilitation as well as institutional development of ODEP, the port agency. Table 3.2: Commitments (by Sector), 1983-95 In millions of US$ In Percent of Total All o/w All o/w Sector loans Adjustment loans Adjustment Agriculture 1,449.4 325.0 26.2 5.9 Education/Health 559.8 150.0 10.1 2.7 Industry/Finance' 1,815.5 1,550.4 32.8 28.0 Transport 375.6 - 6.8 - Water Supply & Sanitation 380.0 - 6.9 - Urban Development 374.5 - 6.8 - Power/Energy/Telecoms 504.2 - 9.1 - Other 72.0 - 1.3 - TOTAL 5,531.0 2,025.4 100.0 36.6 a. The two SALs, for a total of $475 million, have been arbitrarily classified under the sector Industry/Finance. Though SAL measures cover a variety of sectors, an important focus of these two was continuation of the program initiated under the earlier Industrial and Trade Policy loans. Source: Financial Database. 3.19 About 7 percent of all lending during 1983-95 was allocated to the transport sector, which is only about half of the Bankwide average. To an extent, this was a byproduct of the need to devote an inordinate amount of Bank resources to stabilization and adjustment. Yet, Morocco's transport sector has a substantial modernization backlog to better serve the needs of a growing economy. Preparatory sector work towards future Bank involvement in transport, especially the Private Provision of Infrastructure Study, issued in green cover in December 1995 and widely disseminated in Morocco, led to a number of most relevant recommendations: as the Government embarks upon a major rural roads expansion program, it will be important to be selective; in ports, the existing system of cross-subsidization and remaining inefficiencies suggest the need for greater transparency in policies, a more commercial orientation for ODEP and selective privatization. 3.20 Bank lending in the urban sector during the past decade focussed on housing finance; in addition, a municipal finance project was approved in 1993. The housing loans disbursed fairly smoothly. However, a primary objective, viz. to increase the share of investment going to low and moderate cost housing was not achieved. An important constraint in the sector is high land prices, resulting from various distortions in the urban land development system. Thus far, the Bank has been unsuccessful in promoting housing policy reform. A "Housing Sector Strategy" report was prepared during 1995 (Report No. 13930-MOR) which reviews existing constraints and suggests remedial action. 3.21 Bank lending in telecommunications succeeded in helping the expansion and modernization of the sector and in promoting institutional development. At the identification stage of the second project, in 1989-90, commitment towards sector restructuring appeared strong. Yet, subsequently commitment waned and by the time of Board presentation in 1993 it had become very weak. The Government's hesitation towards restructuring may reflect the high 37 profitability of the sector. For the most part, this second project is a repeat of the first and finances a slice of the Government's investment program. It is now under implementation. Still, the project was accompanied by a policy letter with intentions of sector restructuring, in which there appears to be renewed interest in recent months, including in privatization. In the power sector, the Bank is playing a catalytic role, through its ESW and dialogue, in promoting privatization. Implementation 3.22 Two common measures of the implementation performance of Bank lending are the examination of OED's overall ratings' results of completed projects and the review of disbursement performance. The two approaches present a contrasting picture in the case of Morocco. 3.23 Out of a total of 57 loans approved during the 1983-95 period, 24 have been reviewed or audited by OED to date (44 percent of the total by loan amounts). Three findings stand out. First, 89 percent of the operations (by loan amounts) were judged to have had satisfactory outcomes, which is significantly above the Bank average. Second, sustainability is rated as likely for only 49 percent, which is below the Bank average. Third, the Bank's institutional development impact in Morocco is consistently rated as much stronger than that for Bank projects as a whole. 3.24 Outcome ratings are high for practically all sectors except for education. Thus, they are 98 percent satisfactory for industry and finance (including SALs) and 93 percent for agriculture, but only 22 percent for education. 3.25 The other global measure of project implementation, disbursement performance, presents a mixed picture. The measure of disbursement performance most commonly used in the Bank, i.e. the ratio of annual disbursements to the undisbursed balance outstanding at the end of the preceding year, averaged 17.6 percent in 1985-94 and showed a decidedly downward trend throughout the period. This ratio is difficult to interpret, however, and does not yield insights in the disbursement performance of individual projects. 3.26 Another approach to comparing Bank disbursements for a given country, or sector, with Bank averages, has been developed by the Bank's Risk Management and Financial Policy Department (FRS) in an August 1995 draft paper: "Factors Affecting World Bank Disbursements". The disbursement measures used in that paper (disbursement ratios) are built up from individual loan data. The basic measure is the ratio of cumulative disbursements, after a given number of semesters from the date of loan approval, to the original loan amount. For analytical purposes, these ratios can then be grouped by sectors, time periods or countries.I 3.27 In order to allow for comparison with the Bank averages presented in the FRS paper, and in view of the inherent difference in disbursement profiles for SALs, FILs, and other investment loans, estimates of disbursement profiles for Morocco, are reviewed separately for these three 15 The longer the disbursement period allowed for, the more reliable the measure as an indicator of the full disbursement profile. On the other hand, the shorter the disbursement period allowed for, the more up-to-date and timely the information obtained. In the FRS paper it was concluded that a disbursement period of eight semesters from the time of loan approval (with loan approval falling in semester 1) was most appropriate. 38 categories of loans. As could be expected SALs disbursed quickly with 90 percent disbursed after eight semesters; the disbursement ratio for FILs was also fairly high at 77 percent, in sharp contrast to other investment loans where less than 23 percent was disbursed after eight semesters. 3.28 A comparison with Bank-wide averages, which can be done for the FY82-90 period shows that the disbursement ratio for Morocco's SALs is similar to the Bank-wide average (Table 3.3), and the ratio for FILs is considerably above the Bank-wide average, 79 percent versus 65 percent, and among the highest of all countries. On the other hand, "investment loans" disbursed extremely slowly, with Morocco falling far below Bank averages, and among the weakest performers of all Bank borrowers. This is especially the case in the agricultural, urban and water sectors. There appears to have been no improvement over time in this disbursement performance (see Appendix Table 4). 3.29 Morocco's tight fiscal situation and the consequent scarcity of counterpart funds throughout the past decade is, of course, one explanation for the slow disbursement of investment projects. At the same time, the concentration of the decision-making process in the Ministry of Finance together with sectoral investment programming that insufficiently accounts for budget constraints hindered the project implementation process and the efficiency of investment spending. It has tended to slow down decision-taking and thwarted the Bank's intentions to influence the allocation of resources. There has been inadequate budgeting of counterpart funds for Bank projects. Cumbersome financial procedures translate into slow processing of payments by the Treasury. 3.30 A review of individual OED audits, supplemented by the analysis presented in Chapters 4-6 of this report, also suggests that the overall message conveyed by the high proportion of satisfactory outcomes in OED ratings does not convey fully the complexity of the results in different sectors. This variety of results is summarized in the next few paragraphs and explored in more detail in the following chapters. Table 3.3: Disbursement Ratios for Morocco Compared with Bank-wide Averages Approval Year Morocco Bank-wide Adjustment Loans FY82-86 95.5 94.4 FY87-88 88.7 87.2 FY82-90 91.9 91.0 Financial Intermediary Loans FY82-86 63.5 61.5 FY87-88 84.9 76.5 FY9-90 24A 59 FY82-90 79.3 64.6 Investment Loans FY82-86 27.1 39.9 FY87-88 11.9 40.0 EY89-90 33.a 1Ji FY82-90 24.4 39.3 Source: Appendix Table 3. 39 3.31 With regard to industrial development, Morocco's adjustment program got off to a very good start with tangible results. The two Industrial and Trade Policy Loans (1984, 1985) and the Public Enterprises Rationalization Loan (PERL, 1987) were successful operations. Subsequently, for a number of reasons, as explained earlier, efforts at continuing reform slowed down. The focus of the two SALs (1988, 1992) was on continuation of a seemingly smoothly progressing reform program: their scope was too limited, particularly for SAL II. In the end, their contribution was also limited, including that to a further reduction in industrial protectionism. By April 1992, when SAL II was approved, the Bank clearly paid inadequate attention to evolving negative economic trends: exchange rate appreciation, a slowdown in industrial and manufactured exports growth. The OED PAR rated the outcome of SAL II as only "marginally" satisfactory. In addition, the promising moves towards rationalization of the public enterprise sector under the PERL project came to an abrupt halt in 1991 when the Bank and the Government decided that further Bank support for these reforms was no longer necessary. Subsequently, progress stalled and public enterprises continue to be a serious drain on public finances. 3.32 In the agricultural sector, successive Bank loans have made a major contribution to improved cost recovery for goods (fertilizer, seeds) as well as for services (irrigation). These achievements have been claimed as benefits by several Bank projects, and suggested that the reform process was moving forward and nearing completion: the bulk of the operations were rated as having had satisfactory outcomes. In the process of evaluating individual projects (the trees), however, it is easy to lose sight of the overall reform process (the forest). As steady and irreversible progress was made towards reducing the burden of the agricultural sector on the budget, much less was happening towards the achievement of other objectives, such as shifting resources from irrigation to rainfed agriculture and from large to small-scale irrigation, or in the pursuit of price liberalization. 3.33 The overriding goals in the education sector were to curb higher education growth and spending, in order to free resources for basic education, as well as improve the internal efficiency of the sector. Socio-political obstacles together with overoptimism on the part of the Bank have led to few achievements. 3.34 In retrospect, it is clear that both the Government and the Bank were more concerned, during the past decade, with stabilization and deficit reduction than with structural adjustment. It is also clear (see Chapter 7) that much more has been achieved in the former area. Both some of the achievements and some of the failures of the Bank's programs in different sectors illustrate this concern with fiscal issues. Thus, e.g., the decision to raise import duties in 1988 (in the context of SAL I) meant a slowdown in trade reform but achieved an improvement in the budget; the successful reforms in agriculture were primarily of a fiscal savings nature, while additional public spending or policy action to promote the sector was absent. Similarly, one of the important objectives of SAL II that was not achieved was to ensure that public investment in priority sectors-agriculture, infrastructure, the social sectors-would increase as a share of GDP. The one exception to this preoccupation with fiscal issues is in the sector where Bank assistance was less successful: education (and where there was no inherent conflict between structural reform and budgetary objectives). In the education sector, fiscal savings could easily be achieved by curbing excessive spending on higher education, but this proved to be politically difficult. 40 The Efficiency of the Bank Assistance Program 3.35 The overall efficiency of the Bank's assistance program for Morocco is expressed in Table 3.4 primarily in terms of staffyears (SYs) spent per approved project. Dollar cost data have not been used because they have tended to be less reliable. As can be read from the table, Morocco compares favorably with the outcome for the Bank as a whole-7.6 total SYs per project versus 9.3 SYs Bankwide-although the programs for some of the comparator countries (Chile, Malaysia, Bolivia) were clearly more efficient. Table 3.4: Comparative Data on the Efficiency of Bank Assistance Programs (1) (2) (3) (4) (5) (6) (7) Total Lending No. of Country SYs SYs projects Commitments (1)1(3) (2)1(3) (1)/(4)a All countries 23,801.7 8,611.3 2,550 229,359 9.3 3.4 10.4 Bolivia 216.9 81.1 37 1,067 5.9 2.2 20.3 Tunisia 243.9 103.9 33 2,278 7.4 3.1 10.7 COte d'Ivoire 249.7 106.1 32 2,697 7.8 3.3 9.3 Chile 139.3 56.7 27 2,533 5.2 2.1 5.5 Malaysia 131.5 53.9 22 1,677 6.0 2.5 7.8 Morocco 350.0 155.0 46 4,969 7.6 3.4 7.0 Colombia 283.7 108.4 34 3,738 8.3 3.2 7.6 Poland 262.5 111.1 23 4,054 11.4 4.8 6.5 Philippines 388.9 162.8 45 5,382 8.6 3.6 7.2 Nigeria 584.6 190.2 41 4,423 14.3 4.6 13.2 Bangladesh 638.2 226.3 46 3,947 13.9 4.9 16.2 Pakistan 638.6 236.9 63 6,821 10.1 3.8 9.4 a. Column (7) percentages are expressed in Total SYs per $100 million of commitment. Notes: 1. Countries are ranked according to population size. 2. All data are totals for the FY86-96 period. Total SYs (staffyears) includes borrower country-identified staffyears only. Commitments are in US$ million. 3. Lending SYs is project development from identification to Board presentation; the other two main categories in the Total SYs are supervision and economic and sector work. 4. Column (5) is Total SYs per project; column (6) is Lending SYs per project. Sources: PBD, Financial Database. 3.36 On the other hand, the 3.4 lending SYs per approved project in Morocco equals the Bankwide level, and is above that for 6 of the 11 comparator countries. Lending completion staffweeks for a few of the Moroccan projects have been very high: 7.2 SYs for the PERL (although as mentioned in para. 3.2 some of this could equally well have been labeled ESW), 5.7 SYs for an FY88 power distribution project, 4.6 SYs for SAL I and 4.9 SYs for SAL II. At the same time, in terms of average elapsed time from Initial Executive Project Summary to Board presentation, Morocco compares well with the group of comparator countries (Table 3.6). The difference between total SYs and lending SYs is primarily supervision and ESW. The 41 Moroccan assistance program spent relatively less on both of the latter than was the case Bankwide. Table 3.5: Average Elapsed Time in Months for FY90-FY96 Approvals (IEPS to Board Presentation) No. of Average Average Average Country approvals IEPS-Appraisal Appraisal-Board IEPS-Board Bolivia 25 16.5 9.6 26.1 Tunisia 19 22.0 6.5 28.5 C8te d'Ivoire 23 28.1 12.5 40.5 Chile 15 16.6 7.9 24.5 Malaysia 8 14.9 12.0 26.9 Morocco 27 15.5 10.5 26.0 Colombia 21 19.7 14.3 33.9 Poland 23 14.9 12.8 27.7 Philippines 31 14.7 9.6 24.3 Nigeria 22 19.8 14.0 33.8 Bangladesh 26 29.8 13.8 43.6 Pakistan 36 18.1 13.5 31.6 Total 276 19.3 11.6 30.9 Note: IEPS = Initial Executive Project Summary. Source: PBD. Supervision and Portfolio Ratings 3.37 Over the period FY86-96, on average, 32 projects were under supervision in Morocco of which, on average, 10.4 percent (about 3 projects) were rated as less than satisfactory. Comparative data for the Bank as a whole and for selected comparator countries are shown in Table 3.6. Although Morocco compares favorably with the Bank-wide average, over the past three years (FY94-96) the number of less than satisfactory projects under implementation doubled, to 6 projects on average, or 20.7 percent of the portfolio. 3.38 Bankwide also, there has been a deterioration in portfolio ratings with 17.6 percent of projects rated less than satisfactory during FY94-96 compared with 14.1 percent during FY86-88. In parallel, the supervision effort has increased over time as can be seen in Table 3.6 both in Morocco and Bankwide. Nevertheless, the supervision effort in Morocco remains substantially below the Bankwide average. 42 Table 3.6: Portfolio Ratings and Supervision Effort Portfolio Ratings Supervision Effort (average FY86-FY96) (staffweeks/project) Avg. # ofprojects % ofprojects rated under supervision less than satisfactory FY86-89 FY90-92 FY93-96 Bankwide 1,706 16.2 15.8 17.2 21.4 Tunisia 29 6.5 10.3 11.1 15.8 C6te d'Ivoire 17 13.4 14.2 16.1 26.2 Chile 14 5.2 11.3 11.8 13.5 Malaysia 18 2.0 8.4 25.1 9.0 Morocco 32 10.4 12.2 14.5 15.8 Colombia 28 21.0 15.9 17.3 42.8 Poland 15 18.7 -- 18.6 22.9 Source: PBD. 43 4. Bank Assistance to Agriculture Introduction 4.1 The conventional assessment of the Bank's assistance to Morocco's agricultural sector, expressed in the Bank's November 1994 agricultural strategy paper, is that agricultural policy in Morocco had long been inward-oriented, interventionist and based on food self-sufficiency, and that the Bank's main contribution, since the early 1980s, was to help the Government liberalize prices, eliminate quotas and reduce the Government's role.16 By now, according to this assessment, the focus can shift to consolidating the gains and to looking after the rural poor, especially the female rural poor, and the environment. 4.2 This view is, to some extent, correct. Reality, however, is a great deal more complex and nuanced. To understand what the reforms of the 1980s and 1990s did and did not accomplish, it is necessary to refer to earlier Moroccan agricultural policy. 4.3 In pre-Protectorate Morocco, agricultural policy was quite liberal, with the Sultan intervening principally to define water rights, making sure that they belonged to those who used the water, not to absentee officials. During the 1912-1956 Protectorate period, agricultural policy was liberal for Moroccan farmers too; it was the colons whom France settled on the best one-tenth of Morocco's farmland who got major subsidies and assistance. The public irrigation system installed on the Oued Beht in the Gharb, for instance, provided free water in raised canals to colon farmers, but not to their Moroccan neighbors whose land will be served only now, when the current rehabilitation under the Large-scale Irrigation I (Loan 3587 approved 1992) is completed. The farm land tax (tertib) fell mainly on Moroccan subsistence farmers. French colons were the main beneficiaries of subsidized farm credit and price supports.19 16 World Bank, "The Kingdom ofMorocco: Agricultural Sector Strategy Paper," Report No. 13421 MOR, November 18, 1994. "For a long time, the driving concern of agricultural policy [was] high levels of food self- sufficiency.... The continuing legacy of this inward-oriented, interventionist policy is a low productivity, dualistic and distorted agriculture." (p. i). "Since ... 1985, [the agricultural ministry] and the Bank have developed an increasingly close relationship, ... addressing key policy issues with respect to progressive liberalization and institutional reforms, net protection on inputs and outputs, refocussed public private sector roles in the delivery of basic services and investment, and targeted poverty alleviation programs. Since the dialogue was initiated, much has been accomplished, though much remains to be done." (p. 2, para. 5). 17 On this subject, see A. Tazi, "Gestion de l'eau a travers les documents de l'Etat Marocain" and M. Chaouni, "Gestion de l'eau par les arabes au Moyen Age," unpublished papers presented at Colloque sur l'Eau: Gestion de la rarete," Rabat, 19-20 October 1995. If public control of agriculture was liberal in the "bled el makhzan," literally the treasury country, it was even more so in the "bled es siba" where the sultan exercised suzerainty over Berber tribes through caids and pashas. 18 In 1953, colons owned over one million hectares in "useful" zones: the Chaouia, Doukkala, Gharb, Souss and around Oujda. Typical colon farms were 110 to 170 ha and colons made up one to two percent of the farming population. The average Moroccan farm was then 17 ha of marginal land. 19 See Hasan Tuluy and B. Lynn Salinger, "Trade, Exchange Rate, and Agricultural Pricing Policies in Morocco; The Political Economy ofAgricultural Pricing Policy," (World Bank Comparative Studies). Washington: World Bank, 1989, pp. 36-41. 44 4.4 When Morocco regained independence, like most countries in the mid-195 Os, it pushed industrialization through protection. This hurt agriculture in general but especially subsistence farmers because they did not benefit from much of the public support, originally put in place to help the French colons, as commercial farmers did. In fact, the colons' lands were expropriated only in 1966 and 1973. 4.5 The King recognized the importance of water early. The throne speech of 1967 enunciated the goal of one million hectares of irrigated land by 2000. The Erfoud speech of 1972 called for doubling the rate of dam construction. In the 1968-72 Development Plan, two- thirds of the agricultural investment was for dams and irrigation. These directives still guide Moroccan water policy. 4.6 In the early 1970s, Moroccans increasingly poured into the coastal cities from the disadvantaged subsistence farm sector- the rainfed "bour" that makes up nine-tenths of Moroccan agriculture in terms of land (three-fourths in terms of production) and produces mainly wheat (especially durum wheat), barley, chickpeas, and sheep. Rising inflation led to urban unrest and intervention to subsidize urban food consumers. The Government was able to sustain this costly policy after the 1973 oil shock because phosphate prices were high too. In line with the autarkic thinking then common, it moved to stimulate production that would replace imports, principally of wheat, sugar, vegetable oils, and dairy products-the "strategic" goods in which self-sufficiency was the goal. Due to the structure of Moroccan agriculture, these measures were income-regressive: farmers who benefitted were those in irrigated areas, especially sugar producers, who have income levels far above the rainfed producers. Pan- territorial prices were fixed for inputs and outputs at the farm, factory and consumption levels. 4.7 When world phosphate prices fell in the late-1970s, Morocco was in financial crisis. The costs of agricultural policy and food subsidies were clearly insupportable. Moreover, it was obvious that Morocco was far from self-sufficiency in grains, sugar, etc., and how costly it would be to get there. From 1980 on, the Government started to address the financial crisis and to introduce policy reforms in several sectors, including agriculture. 4.8 In the agricultural sector, the main instruments of Bank support to the reforms were the Agricultural Sector Adjustment Loans for $100 and $225 million (approved in 1985 and 1987), the Small and Medium-scale Irrigation II ($23 million approved 1988), Large-scale Irrigation Improvement I & II ($46 and 215 million, approved in 1986 and 1992), and an Agricultural Sector Investment Project ($50 million approved FY1992). All of these operations were largely "policy-based" operations, though the last four were formally investment projects and their disbursements were tied to actual investments. Economic and Sector Work: Issues and Objectives 4.9 The agricultural reforms recommended by the Bank have sought to increase the role of the private sector; liberalize prices and restrictions; recover more of the public costs of services, irrigation in particular, from users; pay more attention to rainfed agriculture and, within irrigated agriculture, to smaller systems, and to operational up-grading in preference to new starts; and improve the Government's ability to plan in the sector. All of these objectives were endorsed by the Bank already before 1980, but the agricultural prices and incentives study, started in 1983, mapped out the effects and costs of agricultural policies and revealed some inter-relationships that had not been evident. This study, generally considered to be part of ASAL I, was financed 45 by USAID and carried out by a team of Moroccans and Americans, and inspired by the Bank as part of the preparation of ASAL I. Thanks to this study,20 it became possible to quantify the effects of policies, thereby greatly strengthening the hand of agricultural reformers in Morocco. 4.10 At the risk of over-simplification, the prices and incentives study confirmed what most Moroccan and foreign observers of the sector had long believed: there was an almost inverse relationship between Morocco's comparative advantage and the amount of public assistance a crop got. For instance, Morocco has a high comparative advantage in producing rainfed barley, durum wheat, chickpeas, and sheep. There are few alternative uses for the bour that produces these commodities. But these crops (and farmers) got few public benefits: no price support, no irrigation, virtually no extension, rural roads and other infrastructure or agricultural research, and, because of drought risk, bour farmers use little fertilizer and hence did not benefit from fertilizer subsidies. By contrast, growers of sugar, in which Morocco has no comparative advantage, get all of the above-mentioned public benefits. Not only was public intervention perverse in terms of Morocco's resource endowment but also, given the structure of Morocco's agriculture sector, it was income regressive. 4.11 In the context of Morocco's fiscal austerity (starting with the Three-Year Austerity Plan of 1978-80), the Bank's proposals for Moroccan agriculture were not to increase public resources flowing to it but to reallocate those resources to make them more growth-efficient-to alter their allocation away from activities in which Morocco has comparative disadvantages and toward those in which it has advantages. In this respect, the prices and incentives study confirmed the Bank's position of wanting to shift public resources from irrigated to rainfed agriculture and, within irrigated agriculture, from large-scale to small-scale projects, both objectives built into Morocco's 1981-85 Development Plan. New efforts had to be achieved without net fiscal cost,21 which strengthened Bank advice on cost recovery for services (irrigation) and inputs (ending fertilizer subsidies), and on devolving government functions to the private sector (e.g., veterinary services), and phasing out consumers' subsidies (e.g., for bread and sugar). An Issues-Oriented Lending Program 4.12 Bank assistance to Moroccan agriculture over the past decade, both lending and non- lending, is reviewed below in the context of its progress in achieving each of four goals: (a) shifting resources to rainfed agriculture; (b) shifting resources from large-scale to small-scale irrigation; (c) improved cost recovery for goods and services; and (d) price liberalization. 4.13 Shifting resources to rainfed agriculture. Most of the efforts to achieve this objective took place prior to the period under review, and particularly during the 1978-82 period (although project implementation continued until 1992). Three of the four rural development projects were 20World Bank, "Kingdom ofMorocco. Agricultural Prices and Incentives Study," Report No. 6045-MOR, May 15, 1986 (5 volumes). 21 Morocco's 1981-1985 Development Plan, however, sought to increase the agricultural share of the public investment program. 46 rated satisfactory,22 but the results were clearly below expectations and no further projects specifically aimed at the bour have been approved since. 4.14 The Bank's search for rainfed-subsector investments was pursued through a reconnaissance mission in 1974, when integrated rural development was in fashion. From the beginning, the Government was uninterested, but the Bank began preparing the Loukkos Rural Development project in 1975. An FAO mission in 1976 advised postponement of the program due to Government reluctance and insufficiency of technical information. The Government finally agreed to two projects on Loukkos and Fes-Karia-Tissa when they were re-designed to extend the life of irrigation dams by including more catchment protection and to include more rural roads, health and drinking water. 4.15 Two other projects were subsequently approved and the four projects included Bank financing of US$158 million between June 1978 and December 1982. The Government's lukewarm support was manifested in slow provision of counterpart funds and minimal efforts to force reluctant line ministries to cooperate. The projects' implementation dragged, and by loan closing (December 1988 to December 1992), 54 percent of Bank loans had been canceled. Total project outlays, (not known in two projects), were clearly well below half of projections. 4.16 When these early projects were prepared there was, as there is today, insufficient technical knowledge, in the Bank or elsewhere, of how to help improve rainfed durum and barley farming, livestock raising or, for that matter, forestry by Morocco's poor farmers. When Loukkos was being processed, an internal Bank memo noted that the cost per family was "estimated at US$12,000, for marginal agricultural increases." The Prices and Incentives Study found that Morocco has a comparative advantage in these activities, but not enough was known of how to improve on what rainfed farmers are doing now. The Bank projects had hoped to discover attractive investment packages through research and extension, but the results are meager. From this viewpoint, Morocco's initial and continuing reticence appears justified. 4.17 Proponents of support for the rainfed sector argue that enough is known to warrant support for increased and improved extension efforts. Certainly, on a world scale, Morocco's public agricultural extension efforts are modest enough. But the only Bank effort in this area, a national research and extension project originally scheduled for FY85 was not approved until FY89 and did not achieve its objectives. The research component was disbursed, but the extension component was not, and, in 1995, the extension component was canceled. Finally, forestry projects have financed successful tree planting on public lands, but there is no evidence of substantial progress on solving the problem of deforestation of unprotected lands due to grazing of over-abundant livestock, nor in developing a forage cover crop that will survive drought and overgrazing and prevent erosion and soil-degradation. In short, despite widespread agreement that more investment funds should be directed towards rainfed agriculture, there is insufficient technical knowledge on how to do it. The causes of low productivity in the sector further include poor access to input and output markets, including fertilizer, plowing, credit, market-access roads, timely market information and the like. Also, the Government's priority 22World Bank, "Performance Audit Report. Kingdom of Morocco: Fes-Karia-Tissa Agriculture Project (Loan 1602- MOR), Loukkos Rural Development Project (Loan 1848-MOR), Middle Atlas Agriculture Development Project (Loan 2082-MOR), Oulmes-Rommani Agricultural Development Project (Loan 2217-MOR) ", Report No. 12701, January 25, 1994. 47 support for irrigation at the expense of extension and research, has resulted in poorly motivated, poorly trained and poorly equipped staff. 4.18 The Bank's push to shift resources from large-scale to small-scale irrigation first materialized in the Small and Medium-scale Irrigation project (SMSI-I) (Loan 2253 for US$42 million, approved March 1983) which was to upgrade three traditional schemes irrigating 12 thousand ha, build two new schemes, and prepare a sequel project. The Bank maintained its support through a second, smaller loan (Loan 2954 for US$23 million, approved June 1988) which basically financed a share of Government's existing program of rehabilitating very small traditional irrigation schemes in the arid, poverty-stricken south. 4.19 The Project Completion Report of SMSI-I emphasizes the advantages of small-scale irrigation. Compared with large-scale irrigation, it has "lower costs per hectare and more rapid build-up of benefits, increased recovery of operation/maintenance and investment costs from farmers, and reduction of social and regional income disparities through investment and employment creation in depressed areas."23 While such investments appear attractive in terms of growth and equity, the first SMSI project was only partially implemented, and the second one was smaller. Due to fiscal difficulties, the Government was slow in providing its share of SMSI-I financing. In the end, project expenditures were only 53 percent of projections and 27 percent of the Bank loan was canceled. Costs were higher than projected and water available less. The estimates of sub-project returns, ranging from 4 to 21 percent-low for upgrading projects with their large sunk costs-are based on poor estimates because, twelve years after project effectiveness, baseline surveys are not yet complete. While there is agreement that upgrading small, traditional schemes ought to have high priority and payout, it has been hard to find these high-return investments in practice. And there is little evidence that the Bank has persuaded Morocco to change its irrigation investment priorities. 4.20 Cost recovery for goods. This is the area where progress has been highest. When the adjustment process started, government subsidies for fertilizer and seeds were substantial. Those for fertilizer were by far the largest. They were reduced substantially in the period of ASAL I (1985-87) and eliminated in the period of ASAL 11 (1988-92). Although "Fertilizer marketing and pricing were freed and subsidies eliminated,"24 some government involvement continued. Morocco has three-fourths of the world's reserves of phosphate and the Office Cherifien des 25 Phosphates (OCP) is one of the biggest phosphate producers and exporters. It would be unreasonable to expect a country where the public sector involvement in fertilizer production is so strong not to have a large presence in its own domestic fertilizer marketing and distribution. However, this involvement was substantially reduced when FERTIMA, the state fertilizer company, closed all of its sales points where competition existed, allowing the private sector to 23 World Bank, "Project Completion Report. Kingdom ofMorocco. Small and Medium-scale Irrigation Project (Loan 2253-MOR) " June 10, 1994, Report No. 14676 (p. 4, para. 4.1). 24 World Bank, "Performance Audit Report. Morocco. Second Agricultural Sector Adjustment Loan (Loan 2885- MOR), " Report No. 14588, June 12, 1995, Memorandum to the Executive Directors and the President, para. 4. This CAR relies on this audit and on the OED audit of ASAL I (Report No. 7868-MOR of June 26, 1989). 25 The audit of ASAL I (see above) investigated Bank complaints that Morocco was losing out by refusing to procure imported nitrogen fertilizer under international competitive bidding. The audit found that OCP was able to beat ICB prices by bartering phosphates with urea producers that subsidized their exports and were not members of the World Bank. 48 expand and confined itself to supplying areas not interesting to the private sector. Not surprisingly, however, there continues to be a major government role in the sub-sector. 4.21 The marketing of seeds has also been liberalized. The private sector is, in fact, free and unsubsidized in some areas, e.g. vegetables, where private companies procure most of their seed from the Netherlands. SONACOS, the Government company, continues to handle seed in "strategic" commodities: cereals and sugar principally, procuring, multiplying, maintaining stocks, and operating 350 sales points that maintain pan-territorial prices. SONACOS already competes with the private sector and, though subsidized, has been preparing itself for privatization. SONACOS has been asking Government whether it is expected to maintain sales points in locations unattractive to private operators, or stocks in excess of what a private entrepreneur would maintain, or pan-territorial prices, and, if so, how much it would be paid for such non-commercial actions judged to be in the public interest. 4.22 In short, the Government now recovers most of the cost of inputs that were once heavily subsidized. Much of this reform was accomplished during the ASAL I period. Indeed, the major complaint of agricultural interests about ASAL I was that all conditions that saved the Government money by cutting expensive services to the agricultural sector were implemented, whereas "compensatory conditions" meant to reward agriculture for taking these cuts, e.g. higher farm prices for barley and durum, were never implemented.26 4.23 Cost recovery for services. Another area in which substantial progress has been made is irrigation, which is the most costly service. There are other services, however, where there is no intention of recovering costs or privatizing, such as agricultural research or extension.27 Among other reforms in provision of services, the Government privatized the Veterinary Service, first banning new hiring, and then forcing veterinarians from the public service into private practice. No figures are available on how much fiscal saving this change entailed or on how much veterinary service improved. Most likely, however, the savings and improvements were small. As in pre-reform times, beef and dairy cattle owners in irrigated and favorable rainfed areas get pretty good service; sheep and goat owners in the less-favorable rainfed areas get little. On the other hand, the Government substantially reduced its role in marketing a number of agricultural goods, notably fruits and vegetables, with the private sector and cooperatives taking up the slack quite well. 4.24 Irrigation is by far the most costly service which the Moroccan Government provides to farmers. Morocco has long been regarded as a leader in irrigation cost recovery. The SAR for the Second Large-scale Irrigation Improvement project says, "Morocco is a leader among 26 This was a major conclusion of the ASAL I audit (q.v.). At the time, grains were, in net terms, taxed, not subsidized. One of the (questionable) objectives of ASAL I was to introduce grain protection by raising the domestic price to the "undistorted world market equivalent," not the actual world price facing Morocco but what that price would have been if Part I exporting countries did not subsidize their exports! See discussion in David Wilcock & Lynn Salinger. Moroccan Cereals Policy Reform at the Crossroads: Final Report of the CMR Project (CMR Report No. 20) Bethesda: Development Alternatives International, September 1994, p. 12. 27 De facto, there is little extension outside the ORMVAs (Office R6gional de la Mise en Valeur Agricole-Regional Agricultural Development Office) which provide extension and a variety of other services to farmers on the large-scale irrigation projects and adjacent rainfed areas which they cover. The ORMVAs' average annual net expenditure on such services in 1988-90 was US$29 million. [World Bank, Staff Appraisal Report, "Morocco: Second Large-scale Irrigation Improvement Project, "Report No. 10732, March 1, 1993, p. 39, Annex 2.3] 49 developing countries in having a legal and institutional framework in place for significant recovery of both operating and investment costs in irrigation." Not only is the framework in place but "... water charges as calculated cover about 85 percent of actual O&M costs."28 In practice, however, actual recovery is lower because not all of calculated water charges are actually collected,29 and two of the 9 ORMVAs (Regional Agricultural Development Offices) serve farmers with very small plots who have traditional rights and pay no water charges. Moreover, actual O&M is not enough to maintain the systems. When these factors are taken into account, actual water and pumping charges collected probably cover just under half of what it would cost to operate and maintain the 7 ORMVAs' irrigation systems.30 4.25 Even with the above qualifications, Morocco's collection of nearly half of irrigation O&M needs is one of the developing world's most successful cases of irrigation cost recovery. The Bank deserves a fair amount of credit for this record, as it campaigned hard for higher water charges and has supported those reformers who shared this point of view. Nevertheless, irrigation remains the most costly service furnished to farmers, and the water and pumping charges, however onerous for farmers,31 are not high enough to generate the water-saving behavior that would be appropriate for a water-scarce country like Morocco. 4.26 The above facts are well understood by Government and by the Bank. This understanding also stands behind Morocco's recent passage of a new Water Code which prescribes greater collection of fees from those who use public water facilities for irrigation and for other purposes, and behind the Bank's recent, well-received Water Sector Review. 4.27 Price regulation and import protection. Substantial progress has also been achieved in price liberalization. However, price regulation in Morocco was and is so pervasive that the unfinished agenda remains substantial. Progress has been uneven. For instance, liberalization has affected certain farm inputs as well as the dynamic and export-oriented fruit and vegetable sector but little else. Regarding protection, for products originating in the European Union, nominal protection is 144 percent for bread wheat, 215 percent for vegetable oil products, 28 Ibid., paras. 2.17 and 2.18. These statements are based on 1988, 1989 and 1990 figures for the 7 ORMVAs that recover costs. While cost recovery is substantial, these figures overstate actual recovery. The "revenue" from water charges includes uncollected amounts which have been added to arrears, while the O&M base does not include the O&M expenses of the Tafilalet and Ouatzazate ORMVAs, which command about 78,000 ha of very small farms where farmers have traditional rights and pay no water charges. Neither do the figures include an average estimated US$13 million of deferred maintenance (see pp. 38 & 39 and p. 7, para. 2.22). 29 Collections as a percent of assessments were 53 percent in 1984, 61 percent in 1985, 64 percent in 1986, 62 percent in 1987, 64 percent in 1988, 68 percent in 1989. Ibid,. p. 36. 30 An annual average for 1988-90 of $34.7 million water charges assessed by the 7 ORMVAs that collect them, times a generous estimate of 80 percent actually collected, divided by the sum of the annual averages for 1988-90 of O&M expenditures for the 7 ORMVAs ($46.5 million) and of estimated deferred maintenance ($13.3 million) = 45 percent. This adjusted national figure would be lower if it included Government O&M expenditures on Tafilalet and Ouarzazate ORMVAs (apparently excluded here) and on non-ORMVA irrigation or the full cost of electric power for irrigation pumping. Moroccan irrigation is relatively advanced in water-saving. Roughly one-fourth of the area served by the 9 ORMVAs is irrigated by sprinkler. 31 In 1990, assessed charges ranged from US$0.14 and 0.091M3 in Souss-Massa and Loukkos respectively where virtually all irrigation is by pump and sprinkler to $0.008/M3 in Tadla, which is served by surface irrigation. 32Report No. 14750-MOR, June 1995. 50 45 percent for red meat and 168 percent for sugar. Products in which Morocco has a documented comparative disadvantage-the above, plus rice and bananas for instance-remain protected while products in which is has a comparative advantage generally get no protection (fruits and vegetables, groundnuts) or face net taxes (durum wheat, barley, maize, cotton, artichokes, fodder legumes). 4.28 Writing in 1994 of the cereals' sector, one of the authors of the 1983-86 Prices and Incentives Study sums up more than a decade of liberalization: "reform has brought numerous changes to Morocco's cereals subsector. Some of these move Morocco toward the goal of economic efficiency; others profess to do so but either remain unimplemented or actually further entangle the sector."34 International trade in maize, durum wheat and barley was supposed to have been liberalized as part of ASIL II. The Government has informally disengaged from setting producer prices and regulating markets for these important commodities, but traders require permission from the agriculture ministry and from ONICL (National Interprofessional Cereals and Pulses Office). Bank attempts to liberalize the sugar and the grain-milling sectors through adjustment lending also failed. Conclusion and Lessons: Moroccan Agriculture Today and Challenges for the Future 4.29 After more than a decade of adjustment lending and policy advice, what does Moroccan agriculture look like? There have been structural adjustments, substantive in some areas but modest in others. Most of the successes have resulted in fiscal savings. Despite these successes, many of the problems of the agricultural sector remain, in essence, the same as in 1983, when the Prices and Incentives Study was undertaken--distortions that benefit production in which Morocco has no comparative advantage, while other production lines which have clear comparative advantage get little public support. The degree of severity of these problems has been reduced. But high protection for bread wheat, sugar, vegetable oils, beef, and dairy products is certainly not bringing Morocco self-sufficiency and not much "security" either. Agriculture has developed best over the past decade in fruits and vegetables which, if not protected, are not taxed either. And with all the changes, there is still low and uneven growth and little help for the poor farmers in the rainfed areas. 4.30 The question then is what can the Bank do to help Morocco to promote an efficient agriculture which pays its way, while increasingly releasing manpower and water to industrial and tertiary sectors. The main levers for removing distortions are price protection (both foreign-trade and domestic), government investments, and water policy. The Bank has tried to influence all three over the past decade with varying but overall modest success, principally regarding subsidies and water policy, much less regarding prices and investments. When it comes to liberalizing reforms, ASAL II's implementation experience shows that the easy, fiscally-rewarding reforms are over and that the remaining ones face strong resistance from vested interests. It has also proved harder than expected to change public investment policy, mainly for want of appropriate public investments that would help those lines of production in which Morocco has a comparative advantage. Internal Bank memo, December 9, 1995. Wilcock and Salinger. Op.cit., p. 16. 51 4.31 If the Bank is to help increase the living standards of the vast majority of poor farmers in Morocco, there is a clear need to learn more about the nature of assistance which would promote farming in rainfed areas. Subsequently, renewed efforts would have to be made to strengthen extension services to get the knowledge to the farmers. In addition, there is a case for stronger Bank efforts to persuade the Government to give higher priority than in the past to small and medium, as opposed to large scale irrigation. 4.32 In water policy, Morocco has long been more enlightened than most countries; nevertheless, Bank efforts to help Morocco recover the full cost of water storage and water services have had limited results. Still, there is reason for optimism. Severe droughts have concentrated minds. The King, who has pursued a far-sighted and steadfast policy in developing water supply for over three decades, has recognized the need to act on water demand-publicly calling for those who benefit from water investments to pay for what they get in the name of national solidarity. A national Water Code has been passed and its application texts are now being elaborated. The stage is finally set, then, for having the users of these investments fully pay. 4.33 Price-based water allocation would go a long way towards removing the distortions in Moroccan agriculture. Once farmers are paying the full cost of their irrigation water for sugar, bananas and rice, those crops, even with protection, will lose a great deal of their attractiveness. This would lead to shifts, at the margin, into less water using crops which are more appropriate for Morocco. Price-based water allocation would make more orderly the inevitable, but painful, process of taking water from the agricultural sector and giving it to others. It would speed investments in waste water purification and recovery and focus attention on water quality and sustainability. Rationalization of the national water market would leave major distortions which only price and trade reform will remove, but it appears to be the most promising next step in attacking today's agricultural distortions. 4.34 Water is probably the most urgent environmental problem in Morocco. Others are growing air pollution and soil erosion. While the Bank has been much involved in water issues, it entered the more general environmental area only recently. Government environmental action is in its early stages and overall awareness of the problems is still lacking. Progress towards defining a National Environmental Action Plan has slowly gotten underway. A new Ministry of the Environment has been created, but overall institutional coordination is weak. A 1993 Bank project, designed to help strengthen the institutional and regulatory framework for managing environmental protection has made unsatisfactory progress, primarily because of difficulties in improving inter-institutional cooperation: three years after project approval only 10 percent of the loan had been disbursed compared with an appraisal estimate of more than 60 percent. , 53 5. Bank Assistance to Industry and Finance Objectives and Issues 5.1 The overriding objective of the Bank's assistance strategy for Morocco's industry has been the promotion of growth and of employment. The Bank and the Government have long known that with limited employment opportunities in agriculture and a fast-growing labor force, the industrial sector would be called upon to provide the bulk of new jobs. In addition, following the 1983 financial crisis, improving fiscal performance of public enterprises (PEs) became a supplementary objective. During the 1960s and 1970s, the PE sector had grown rapidly to become a significant segment of the economy. The expansion, however, had been characterized by a lack of financial discipline and the PE sector had become a serious drain on public finances and a major element in the 1983 crisis. 5.2 Thus, the issues to be addressed by the early 1980s were clear. First, the prevailing industrial protectionism was an impediment to growth acceleration, and had to be reversed. Second, the heavy government involvement in the PE sector not only slowed efficiency improvements and growth but also contributed to the public finance impasse. Finally, providing adequate finance for an anticipated industrial expansion would require reforms of the financial sector, including changes in interest rate policy, increased competition in the banking system and a reduction in the crowding-out effect of compulsory Treasury financing on credit availability for the private sector. Bank Instruments Economic and Sector Work (ESW) 5.3 During the late 1970s and early 1980s the Bank prepared three major studies designed to guide its efforts to promote industrial growth in Morocco. First, the Government initiated, during the late 1970s, a series of studies to guide the industrial sector towards a much more selective approach to import substitution. In particular, the Government chose to pursue efficient import substitution in the engineering industries in order to reduce the pressure of electromechanical industry imports on the balance of payments. This approach received the endorsement of the Bank and was discussed in a 1981 report entitled "Morocco - Review of Engineering Industries " (Report No. 3233-MOR). The recommendations of this report became part of the industrial strategy in the 1981-85 Development Plan. The report recommended that the engineering sector be provided with additional incentives in the form of technical assistance and institutional support. The latter included, among others, the establishment of Institutes for Industrial Standards and Quality Control and the urgent completion of Vocational Schools and Institutes of Applied Technology. An Electrical and Mechanical Industries project (Loan 2487), providing financing for the subsector, was approved by the Bank in January 1985, as is discussed below. 5.4 At the same time, however, and also during the late 1970s, a debate had started among some senior officials in Morocco about the need to increase the economy's efficiency and the desirability of giving greater emphasis to exports. This led to a request for assistance from the 54 Bank. The Bank responded with a three-year research program on industrial incentives. The research was carried out in the Moroccan Ministry of Commerce and Industry jointly by Government staff and one World Bank consultant at a minimal cost to the Bank. The research involved daily contacts among the research team, government policymakers and industrialists: as a result, by the 1983 crisis year, there was a consensus among all parties on the measures that were needed to turn the industrial sector around: a thorough reform of the structure of incentives, import liberalization and the removal of the bias against exporting. The results were eventually published in a January 1984 report, "Morocco - Industrial Incentives and Export Promotion " (Report No. 4893-MOR), which was the basis for the Bank's first structural adjustment loan to Morocco, the Industrial Trade and Policy Adjustment Loan (ITPA I), approved in January 1984. This second approach which reflected the evolution in thinking both in Morocco and in the Bank, was not consistent with that of the earlier report (on Engineering Industries) and its subsequent project. 5.5 Third, by the early 1980s, Morocco was a typical example of a financially repressed economy. There was no stock market to speak of. A good part of bank deposits were harnessed for the Government's purposes, thereby almost entirely cancelling the banking system's function of channeling savings to efficient investors. What was left for private lending was lent at negative real rates of interest, subject to rigid rationing. The many issues of financial intermediation and allocation of resources were brought together in a 1984 Bank report "Financial Sector Study " (Report No. 4957-MOR). At the time, it was unthinkable to deregulate the banking system all at once, but a beginning was made with the introduction of some policy changes (see para. 5.19) in the context of the ITPAs. Further changes were introduced as part of subsequent Bank operations as discussed below. 5.6 In sum, by the time Morocco initiated its stabilization cum adjustment program, the Bank had accumulated a large amount of good quality ESW to guide its lending in the industrial and finance area. But the two parallel approaches (subsectoral support with directed credit and support for sector-wide policy reforms through adjustment lending) and the inconsistency between the selective import substitution strategy-leading to support for the engineering industries-and the liberalization strategy-leading to the ITPA I and subsequent adjustment operations-would create problems as will be seen below. In addition to the above, a number of Government studies, in time supplemented by Bank economic analyses, had laid a solid basis for public enterprise reform (see para. 5.16 below). Lending 5.7 The specific strategic objectives which emerged from the Bank's ESW and the accompanying intensive policy dialogue were fourfold: (a) the promotion of an open trade regime and more particularly of exports; (b) selective import substitution in the electrical and mechanical engineering industries; (c) assistance to the Government's stabilization objective through public enterprise reform; and (d) improved access to medium- and long-term resources through financial sector reform. These efforts would be supplemented by vocational training projects. 5.8 Starting in 1984 Bank lending support for this strategy was in the form of 10 loans (including the two SALs) for a total of $1.8 billion, as follows: 55 Table 5.1: Lending for Industry and Finance Year Loan Amount ($ million) 1984 ITPA I 150.4 1985 Electrical and Mechanical Industries 25.1 1985 ITPA II 200.0 1987 Public Enterprise Rationalization (PERL) 240.0 1987 Industrial Export Finance 70.0 1988 SAL I 200.0 1989 Industrial Finance 170.0 1991 Financial Sector 235.0 1992 SAL II 275.0 1995 Financial Markets 250.0 Source: Financial Database. 5.9 Progress towards the first objective-opening up the trade regime and promoting exports-was impressive in the early years of the reform process, especially in the context of the two ITPAs. The proposed export promotion and import liberalization measures were implemented as scheduled and supplemented by fiscal and financial reform. As a result, there was a significant rationalization of the structure of industrial incentives and, during the second half of the 1980s, a strong supply response in manufacturing subsectors producing exports. Following the conclusion of the ITPAs, however, there was a slowdown in the pace of reform. To illustrate, while the maximum tariff protection was reduced from 400 percent to 45 percent between 1983 and 1986, it still stood at a relatively high 35 percent following the conclusion of SAL II in 1994 (exclusive of an additional 12.5 percent uniform import tax; the latter was furthermore increased to 15 percent in 1994 for most products, but reduced to 10 percent for capital goods, thus further increasing effective protection). 5.10 In fact, despite the substantial progress made in the early years, the manufacturing sector continues to benefit from high rates of effective protection against imports. As reported in a recent Bank report, the weighted average for over 200 manufacturing firms (except phosphate derivatives) was 26 percent in 1991. The preference given to import substitutes also remains high-the incentive rate for imports is some 30-35 percentage points higher than for exports; exports are effectively taxed in the sectors where export performance has been strongest (canned and processed foodstuffs, garments and leather goods, chemicals). As was the case for the agricultural sector, overall, effective protection is inversely related to comparative advantage.3s Thus, it appears that the ITPAs started the process in earnest, but the SALs did not go far enough in pursuing import liberalization. 5.11 As a complement to the adjustment loans, financial intermediation loans were also to varying degrees designed with export promotion in mind. Given the undeveloped state of the financial sector, resources provided by the Bank through financial intermediaries met an otherwise unsatisfied demand. Even before the adjustment period, in 1981, a small part of the World Bank, "Kingdom of Morocco: Preparing for the 21st Century: Strengthening the Private Sector in Morocco, " Report No. 11 894-MOR, June 30, 1994. 56 proceeds (20 percent) of the ninth World Bank loan to the National Development Bank (BNDE) was directed towards export-oriented projects. The object was to test the potential for such investments. The component proved very successful. Beyond the 20 percent, other sub-projects financed under the general category also met the export-oriented component eligibility criteria. 5.12 This outcome was helped considerably by the trade adjustment policies promoted by the ITPAs, and underlined the potential of adjustment loans in supporting policy reforms. Previous Bank attempts at policy reforms through financial intermediation loans, which had been tried through earlier BNDE loans up until the late 1970s, had never been successful. 5.13 The practice of earmarking funds, provided in the context of financial intermediation loans, for export development evolved quickly over time. In the 1987 Industrial Export Finance project, all of the money was earmarked for export industries. Implementation was smooth. The 1989 Industrial Finance Project allocated about 40 percent of the funds to export-oriented industries and 20 percent to tourism. Again, project implementation was fully satisfactory, although supervision reports suggested that participating Banks and industrialists stressed that the availability of funds was crucial but not sufficient to ensure good subprojects' outcomes: inadequate infrastructure and cumbersome customs procedures were singled out as bottlenecks. The 1991 Financial Sector Development project no longer earmarked funds for exporters. It was felt that past emphasis on directing credit towards specific industrial subsectors (exports, capital goods, small-scale industries) was no longer necessary: the Government's program of financial sector reforms was moving forward, and it was judged that there remained few significant barriers to an efficient, market-determined allocation of resources. 5.14 Another objective of the Bank's strategy-selective import substitution in the electrical and mechanical engineering industries-was partly at odds with the previous objective, and Bank lending for this purpose turned into a failure. The 1985 Electrical and Mechanical Industries (EMI) project was an outgrowth of past import-substitution policies. The objective was to make import-substitution efficient by promoting technologically advanced engineering industries. The concept was to provide these industries with credit, exceptional incentives, technical assistance and institutional support in order to introduce new technologies and promote marketing. The basic idea was that of a government-sponsored selective industrial strategy, with the Government selecting specific subsectors to support. 5.15 By the time the Bank-financed EMI project was approved (1985), however, the policy approach had changed to one relying on liberalization and deregulation, public enterprise reform, and financial sector reform. The EMI became a subsector-specific credit line with little institutional, capacity building and technological development aspects. But subprojects under the EMI generally fell into the category of assembly, low technology and low value added fabricalfons. The only medium-technology enterprise (manufacturing machine tools) was shut down because it could not withstand competition from imports. The main objective of the loan, i.e., developing technologically advanced engineering industries, was totally missed. The project, however, did help improve the efficiency of financial sector intermediation through the increased involvement of commercial banks in the area of industrial term financing. 5.16 The objective of public enterprise reform was first addressed in the 1987 Public Enterprise Rationalization Loan (PERL). The main purpose of PERL was to reduce the fiscal burden of the PE sector, but the long-term objective was to introduce competitive pressure in the sector in order to promote efficiency. A large number of Government studies and 57 thorough preparation and appraisal by the Bank resulted in an excellent project conceived as the first of a series of operations. Reforms were sought in the PE sector at large as well as in six selected enterprises, to begin with. Even before the loan became effective, a second PERL was being contemplated by all parties concerned. 5.17 PERL made good progress towards controlling arrears, improving tariff policy and reducing the need for Government transfers. Performance contracts (contrats-plan) were signed with five of the six enterprises and a legislative framework to permit implementation of a privatization strategy was completed. An institutional framework was developed to implement PE reforms and, possibly most important of all, there was a change in attitude and perception among policymakers and enterprise managers alike about the role and responsibilities of PEs. 5.18 After the PERL was implemented, the momentum for reform appeared to stall. In December 1991, the Government and the Bank decided not to proceed with a follow-up PERL. This was unfortunate because the still fragile overall public finance situation warranted further improvements in the capacity of PEs to generate savings, and rationalization of the PE sector had only just begun. However, the government and the Bank concluded that the country no longer needed Bank help in this area. It was agreed that a good part of the funds originally intended for a second PERL would be redeployed to increase the amount of SAL II. Thus, short-term budget support would be forthcoming, but the Bank interrupted its support for (and close involvement in) the long-term objective of increasing the efficiency of PEs. PERL I, however, was successful in paving the way for the current privatization drive because of the progress already made in areas such as reduction in government transfers, granting of greater financial autonomy, clearing up of arrears and establishment of program contracts.36 5.19 Steady progress has been made towards the realization of the Bank's fourth objective for the promotion of industrial activity in Morocco-financial sector reform. But progress has been slow. The process began with the first ITPA loan and continued with several financial intermediation loans. In the context of the IPTAs several measures were taken to increase financial savings, including the beginnings of Government bond issues, a relaxation of credit ceilings and of prudential regulations and a reduction in the scope of Treasury financing at subsidized rates. Through subsequent loans, a gradual increase in competition among banks was promoted, there was progressive interest rate liberalization and substantial institutional strengthening of the banks. 5.20 Still, in spite of five consecutive loans since 1984 to help promote a more efficient and effective financial sector, the PR for a sixth loan in 1995 states in its introduction: "The financial sector remains a bank-based system where domestic capital markets play a very modest role in supplying long-term capital to the private sector." Private enterprises essentially rely on bank credit or self-financing. Financial instruments such as bonds or stocks are used sparsely by the private sector, even though, spurred by the privatization program there has been some growth in the stock market during the past couple of years. In addition, some domestic credit continues to go to the Treasury through forced placements. 5.21 The 1995 Financial Markets development loan supported a new round of reforms which, once implemented, should further improve financial intermediation as well as the full range of 36 World Bank, PAR, "Morocco: Public Enterprise Rationalization Loan, " Report No. 11892, May 19, 1993. 58 financial institutions in the country. These reforms would remove mandatory Treasury financing, eliminate all interest rate ceilings and fully liberalize interest rates. They also include measures to further develop the capital market, privatize the remaining state-owned Banks (with the exception of the agricultural bank-CNCA), establish an interbank foreign exchange market so as to stimulate foreign direct investment (as well as move towards a fully market-determined exchange rate and capital account convertibility), and further strengthen bank supervision. Although progress over time has been slow (see also Box 5.1 on IFC activities), the net result of the 1995 loan is expected to be a market-based financial system, essentially free of any significant distortion in the allocation of credit and the pricing of financial assets, a sustained improvement in domestic savings and an increased supply of long-term capital for private investment. Box 5.1: IFC Country Strategy, Results and Impact During the period 1983-93, Morocco's high level of foreign indebtedness and repeated debt reschedulings made it difficult to mobilize market-based foreign funding. This funding was badly needed to compensate for the insufficient level of domestic savings and to finance new productive investments. IFC stepped in to fill this gap by focusing on the mobilization of large amounts of long-term funding for the Moroccan banking system in favor of Small and Medium Scale Enterprises (SMSEs). This effort took the form of five syndicated loans to six Moroccan banks for a total amount of US$343 million, of which US$154 million for IFC's account. Hundreds of SMSEs benefitted from IFC's funding. Many of them were export-oriented and contributed to a substantial increase in Morocco's non-traditional exports over the past 10 years. IFC's investment program also targeted import substitution and export-oriented projects to further address the shortage of foreign exchange. For example, IFC made major investments in the Moroccan cement industry playing an important role in improving environmental standards and contributing to the complete deregulation of cement prices. IFC's projects included two cement companies (CINOUCA and CIMAR), a copper mine (SOMIFER), an orange processing company (FRUMAT), a shipping company (COMARIT), a deep-sea fishing project (ENNASR), and a spinning mill (SETAFIL). As a result of these efforts, Morocco became IFC's tenth largest client in FY92. Over the past three years, the pace of reforms slowed down. To a large extent this was due to indecision resulting from frequent Government changes. A limited interbank foreign exchange market was established in June 1996. Moroccan companies have to repatriate all foreign exchange receipts and sell at least 80 percent to domestic commercial banks, while they are allowed to keep 20 percent in foreign exchange accounts. Under these circumstances companies have only limited means of covering their foreign exchange exposure. In this context, six clients decided in FY95 and FY96 to prepay outstanding loans from IFC totaling about US$ 113 million to limit their foreign exchange exposure. This makes it difficult for IFC to lend to Moroccan entities and is a major impediment to IFC's operations in Morocco. In fact, over the last three years, IFC's only investments were limited to equity contributions in Capital Markets projects. IFC, along with the IMF and the IBRD, has been encouraging the Government to allow the creation of a free foreign exchange market, which would enable Moroccan companies to cover themselves against such risk through correctly priced, market-based instruments. Until the pace of reforms picks up, IFC will focus on (1) the development of the domestic capital market and (2) opening up the infrastructure sector to private investments. In capital markets, IFC's strategy aims at broadening and deepening the financial sector through a combination of institution building, technical assistance and resource mobilization both locally and on the international markets. In Infrastructure, the decision by the Government to open up the power, water and, more recently, the telecommunications and transportation sectors to private investors should create new opportunities for IFC's involvement in this area. 59 Outcome 5.22 Morocco's slow and gradual approach to financial sector reform is typical of the generally cautious approach to policy change in the country. In the end, however, a sound financial system should be in place. Furthermore, the gradualism helped prevent financial instability or a major banking crisis along the way. On the other hand, the efficiency of the Bank's assistance is clearly in question. While the large volume of lending facilitated the thorough, but slow, process of financial reform, the ultimate objective of private industrial sector growth remains elusive. 5.23 Overall, the impact of the Bank's assistance to Morocco's industrial sector has been disappointing. In spite of the very high level of such assistance ($1,340 million over the 1983-95 period excluding the two SALs) which accounted for one quarter of the total Bank's program, between 1983 and 1994 industry grew at only 3.0 percent per annum in real terms. Growth was faster during the early stages of the adjustment program (at 3.4 percent per year in 1983-90), but then declined to 1.2 percent during 1990-94. 5.24 The acceleration in growth in the late 1980s was largely a result of the strong performance of manufactured exports during those years: their share in total merchandise exports increased from 16 percent in 1980 to almost 40 percent by 1990. This performance was essentially a result of the process of rapid import liberalization and a depreciating exchange rate. 5.25 To some extent, the slowdown in exports of manufactures since 1990 (in fact, a decline in real terms) resulted from the recession/stagnation in the markets of the European Union (EU). But this is only part of the explanation, because Morocco's share in total manufactured imports of the EU increased from 0.17 percent in 1980 to 0.32 percent in 1990 and then stabilized, while other competing exporters (Malaysia, Thailand, Eastern European countries), continued to increase their market share in the EU considerably, in spite of the fall in demand.3 5.26 The slowdown in exports also appears to be due partly to policy factors, mainly the relaxation in reform efforts in trade liberalization (as the reduction in import protection slowed down considerably since 1988) and since 1990, to the appreciation of the real exchange rate. These two factors were "missed" by the Bank in the overoptimistic assessments of the late 1980s and early 1990s (see Chapter 2 above) and were only to be picked up again in the reformulation of the strategy during FY95 and FY96. 5.27 In addition, there are other important structural and institutional constraints to industrial growth. The range of such factors includes: quality of human and natural resources; infrastructure, including industrial land, reliable electricity and telephone services and an efficient transportation system; the ability to generate, adopt and diffuse technological innovation; and flexibility to adjust to changing domestic and external circumstances. These constraints have only recently been highlighted in the Bank's ESW (Private Sector Assessment, e.g.) and are now a crucial element in the private sector development strategy. World Bank, "Kingdom ofMorocco-Republic of Tunisia: Export Growth: Determinants and Prospects, " Report No. 12947, October 1994. 60 Box 5.2: Morocco and the European Union The European Union (EU) is by far Morocco's largest trading partner, particularly France. Close to two-thirds of Moroccan exports are sold to the EU, while more than 50 percent of its imports originate there. In the past, Morocco already enjoyed privileged access to the European market through association agreements with the EU, including duty-free access for industrial products. This, however, did not prevent that Morocco's share in total imports of manufactures of the EU has stagnated since 1990, while that of other competing countries such as China, Indonesia or Malaysia, increased. Apart from phosphate derivatives, Morocco's main manufactures exports are textiles and clothing. In February 1996 Morocco signed an Association Agreement with the EU, encompassing not only trade but also technical and financial assistance. The benefits could be substantial, but the agreement will increase competition for domestic producers in Morocco, because the Moroccan market will gradually have to open up to EU imports. An acceleration in overall trade liberalization is therefore urgent to strengthen the competitiveness of Moroccan industry. Possibly the most important potential benefit will be increased investor (including foreign investor) confidence as the association agreement signals Morocco's continued commitment to reform and opening up of the country. 5.28 Compared with other industrializing countries, Morocco ranks poorly on all factors of competitiveness: macro-dynamism, financial dynamism, market dynamism, trade orientation, 38 human resources, technology, infrastructure, firm management and product quality. As an example, research and development (R&D) becomes especially important when countries graduate from exporting mainly unskilled-labor intensive products (as Morocco does now) to skilled-labor/technology intensive products (e.g. electrical and mechanical industries products). Morocco spends a low 0.1 percent of GDP on R&D; it also ranks very low in terms of number of engineers. 5.29 In addition to the above, there are few policy but many other barriers to foreign capital. Foreign direct investment has grown in recent years but remains small in comparison to East Asia or Latin America (Box 5.3). Morocco is unlikely to attract much foreign capital without a systematic effort to target likely investors, geographically and sectorally. Many businesses sense that rules, regulations, and administrative procedures in Morocco are opaque, in contrast to the legal framework itself, which is clear. The costs of coping may be high. By sidestepping rules, businesses get on with business, but it leaves them vulnerable to discretionary or unpredictable 38 World Bank, "Developing Private Industry in Morocco, " Report No. 11557, July 1993, Volume II, Annex 6. 61 enforcement, which exacerbates uncertainty. Most of these problems have been correctly identified by the Bank in recent economic and sector work, particularly the two studies on private industry and private sector development mentioned in footnotes 38 and 39 but the implications for the Bank assistance strategy have not yet been fully internalized. Box 5.3: Foreign Investment Advisory Service (FIAS) Private foreign direct investment (FDI) in Morocco has grown steadily over the past several years, particularly since 1987, when Morocco became a member of GATT. However, since 1994, the level of new FDI has begun to decline, a disappointing development given the opportunities offered by the Moroccan economy, its locational advantage vis-a-vis the European market and the growing flows of FDI into developing countries. In 1990 the Foreign Investment Advisory Service (FIAS) of the World Bank Group reviewed the investment climate in Morocco and in 1994 advised the Government on investment promotion institutions and strategy. FIAS recommended three main areas of action for the Government to improve the country's attractiveness for FDI: (a) Simplify administrative procedures and reduce bureaucratic red tape faced by investors. (b) Develop a promotion strategy involving identification of appropriate investor targets and promote Morocco as a location for FDI. (c) Review and streamline the institutional structure for investment promotion by establishing one national promotion agency On the whole, progress to date towards the above objectives has been limited, especially when compared with developments in other countries. A new Investment Code was introduced with the 1996 budget, but Morocco has yet to simplify its administrative procedures and create an investment promotion agency. Moreover, a constructive dialogue towards that end has yet to materialize. The major obstacle towards progress appears to be administrative inaction during the past two to three years. 39 See World Bank, "Kingdom ofMorocco: Preparingfor the 21st Century: Strengthening the Private Sector in Morocco, " Report No. I1894-MOR, June 30, 1994. This study was prepared at the request of the Moroccan Government to help better understand and remedy prevailing obstacles to private sector development. The information in the report was largely collected during a Bank mission in February 1993. The Moroccan authorities point out that since that time numerous measures have been implemented to improve the business environment. Foremost among these is a new investment code introduced with the 1996 budget, as well as commercial and company codes recently approved by Parliament. In addition, a consultative committee for private sector development has been set up, with powers to propose to Government measures designed to further improve the environment for private enterprises and investment. Similarly, a National council for Social Dialogue was set up to bring together representatives of Government, employers, unions and of the society at large. Also, the Government and employers recently concluded a gentlemen's agreement to promote improvements in the environment for enterprises. 63 6. Poverty Alleviation, Social Sector Development and Gender Issues Introduction 6.1 Information on poverty in Morocco is available only at infrequent intervals. Existing surveys, conducted in 1984/85 and 1990/91 strongly suggest that poverty did fall during the second part of the 1980s, although there are comparison problems between the two surveys. Reportedly, 13 percent of the population fell below the poverty line in 1991, compared with 21 percent in 1985. However, an additional 8 percent of the population in 1991 remained close to the poverty line and thus vulnerable to even small deteriorations in economic conditions. The primary factors in the decline in poverty over the second half of the 1980s were strong GDP growth and the especially rapid growth in labor-intensive export activities. At the same time, poverty in 1991 remained disproportionately high in rural areas, both among wage earners and the self-employed. 6.2 The poverty problem is exacerbated by inadequate access to basic social services by disadvantaged segments of the population. The result has been that average social welfare indicators in Morocco remain disappointing in spite of significant progress in some areas. Thus, e.g., Morocco's total fertility rate has fallen from 5.8 in 1980 to 3.5 today and the annual population growth rate has slowed from 2.8 percent in about 1960 to 2.0 percent today. The Bank was not involved in population policy, but external assistance was provided by other donors, especially USAID. Since the 1960s, life expectancy at birth has likewise increased from 45 to 65, and infant mortality declined from 119 per 1,000 to 57 per 1,000. The gross primary enrollment ratio increased from 57 percent in 1965 to 73 percent today. 6.3 In spite of this progress, Morocco's social indicators still compare poorly with those of other countries in the region or countries with similar income levels, even though public resource allocation to the social sectors, especially education, has been substantial in the past (see Table 6.1). While the issues are many, the overriding concern is the underprivileged position of the rural areas and of women. This concern remains as strong today as it was a decade ago. For example: * in 1991, poverty was considerably higher in rural than in urban areas (18 percent vs 7.6 percent); * literacy rates in rural areas are half those in urban areas; and * the percentage of women who last gave birth at home was 84 percent in rural areas compared with 43 percent in urban areas. 6.4 Furthermore, women remain disadvantaged. The gross primary enrollment rate (73 percent overall) is 85 percent for men but only 60 percent for women. Illiteracy, which is still 51 percent overall, is 69 percent for women. In an important effort to focus on the role of women in development, the Bank, starting in 1993, played a catalytic role in bringing together the Government, other donors, NGOs and stakeholders in a participatory consensus-based 64 research process. The results, reported in an FY95 Bank report,40 suggest that the effectiveness of social sector projects can be enhanced greatly by a stronger focus on the basic needs of recipients, which are likely to differ depending on economic circumstances. Thus, e.g., it was found that improved access to potable water and fuel or electricity were of higher priority than more expenditure on education, because it would free women to attend school in the first place. These findings have been incorporated in the recently approved Bank loans in support of the Government's Social Priorities Program. Table 6.1: Comparative Social Indicators (most recent estimates) Mid-East & Lower middle- Morocco Tunisia North Africa income Gross primary enrollment ratio 73 118 97 104 Life expectancy 65 68 66 67 Infant mortality 56 40 48 36 Population per hospital bed 785 566 623 592 Total fertility rate 3.5 3.0 4.5 2.7 Population growth rate 2.0 1.8 2.6 1.3 GNP per capita 1,150 1,800 1,970 1,670 Source: Social Indicators ofDevelopment, World Bank, 1996. 6.5 The Poverty Assessment Report found a strong link between poverty in economic terms and social problems such as low literacy, education and health levels, and high fertility rates. Bank assistance to health sector development during 1983-95 has been relatively minor: two projects for a total of $132.4 million, of which the largest ($104 million) is only half disbursed; and there has been no formal ESW on health. The Bank has been much more involved in the education sector both through ESW and a total of five projects for $427.4 million during 1983-95, of which two are still under implementation. Recently, in June 1996, a Basic Education project ($54 million) and a Health project ($68 million) were approved by the Bank as part of a package of three loans for a Social Priorities Program, targeted on rural areas. Health 6.6 Morocco's health system, like that of many other developing countries, has traditionally been tilted towards treatment rather than prevention, and is based mostly on a network of urban hospitals to the detriment of rural populations. This urban bias put serious obstacles in the way of activities, such as maternal and child health care, family planning, immunization and nutrition campaigns that are broad-based and require for their success a modicum of supporting infrastructure. Other major issues in the health sector are insufficient financing41 and ineffective centralized management. 40World Bank, "Morocco - Economic and Sector Work Enhancing the Participation of Women in Development", Report No. 14153, June 29, 1995, draft. 41 Data for 1990 for a group of 27 countries extending from Morocco in the West to Pakistan in the East confirmed the comparative disadvantage of Morocco: for total health expenditure as a percentage of GDP, the country was in 25th place, for total expenditure per capita in 26th, and for the share of public in total health expenditure, in 25th position. (Source: WHO, Global Comparative Assessments in the Health Sectors, Geneva, 1994, Annex.) 65 6.7 The Bank's involvement in the sector initially focused on specific logistical and institutional activities to prepare the field for subsequent broader interventions and to improve the knowledge base for the sector. The first major Bank project in the health sector in Morocco, the Health Development Project of 1985, sought to make advances in four specific areas: (i) to improve and expand care to rural areas by piloting a new health care delivery system in three provinces, through upgrading and extending the physical infrastructure, providing equipment, support for training, and improvement in logistics; (ii) to support institutional development in the Ministry of Public Health, with a view to improve planning, training, research and administration at both central and provincial levels; (iii) to carry out a program of training and public information; and (iv) to set up a comprehensive system of drug supply. 6.8 This initial-pilot-operation was of comparatively small size. The total project cost was estimated, at the time of PAR preparation, at US$53.3 million. About half was financed from Loan 2572-MOR (in an original amount of US$28.4 million), which was closed at the end of 1993, two years behind schedule. 6.9 While project outcomes were somewhat uneven, overall project performance was satisfactory. The major component of the project, to improve and expand basic health care to rural areas, was a success. Over 134 rural health facilities were constructed and equipped, representing a doubling of the number of existing facilities in the three provinces. The ratio of population to health facility improved from one basic center per 75,000 people in 1985 to one for 44,000 people in 1994, and the number of general practitioners in the project area more than doubled. Upon project completion, approximately 20 percent of new health facilities remained closed because of staffing shortages. However, all facilities were operational at the time of the audit in December 1995, though provincial authorities pointed out that some facilities were not operating at full capacity because a lack of staff, e.g., a rural hospital was operating as a health center due to lack of radiology and laboratory technicians. The staffing shortages were said to be a general problem in the sector, not specific to the project. 6.10 In addition to the improved infrastructure, the other major achievement of the primary health services component was the organization and mobilization of the central and provincial teams, and decentralized planning in support of primary health care. The project established sound standards and flexible institutional arrangements for the delivery of primary health care services. These standards and arrangements were replicated in other provinces beginning in July 1988 and have since been expanded nationwide. This new service delivery system has become an integral part of Morocco's system of decentralized administration of health services. 6.11 The results of the component to strengthen the Ministry of Public Health were less clear given the multiple reorganizations that took place within the Ministry during the eight years of the project. The component to support training, and information, education and communication programs was dropped due to the availability of other donor (grant) funding. The drug supply component was not completed under the project. Because of delays in the construction of the drug supply unit, its storage and distribution function did not become operational until two years after closing. There still remain questions regarding the management and operation of the drug formulation unit which was constructed under the project as it is not yet operational. 6.12 The initial project was followed in 1990 by a more ambitious operation, the Health Sector Investment Project (Loan 3171-MOR in the amount of US$104 million). This project built upon the pilot-scale efforts of the first project and aimed at establishing a nationwide 66 sustainable public health program. It continues the first project's focus on primary health care and on diagnostic/referral services. At the project's core was the restoration of the country's basic health services, to be complemented by improvements of emergency diagnostic and referral services, and continued institutional development. Specific investments comprised civil works, including rehabilitation/extension/transformation of 17 rural hospitals, 50 urban and 35 rural dispensaries; provision of equipment, furniture and vehicles and a stock of essential drug supplies. The project was to address also medium- and long-term issues related to the structure and financing of health services as a follow-up to the recommendations arising from two studies undertaken in the context of the first project, health sector financing and hospital management. 6.13 The original closing date was at the end of 1995, but project implementation has been slow, reportedly due to the complexity of project design and cumbersome governmental administrative procedures. The new closing date is December 31, 1997. The project is rated as satisfactory for both development objectives and implementation progress in recent supervision reports. 6.14 The recently approved Basic Health project (Loan 4025-MOR in the amount of US$68 million of FY96) in support of the Government's Social Priorities Program further reinforces the Bank's ongoing strategy for the health sector. This project is one of three that focus on basic education and literacy, health and family planning, and employment promotion, constituting an integrated program to implement the Government's new social development strategy. All three projects are demand-driven and activities are targeted to the 13 poorest provinces and would benefit predominantly women and girls in mostly rural areas. The Basic Health Project aims to increase access to essential curative and preventive health care, including access to essential drugs in the 13 provinces; to increase coverage of prenatal visits, assisted deliveries, and family planning, thus strengthening the Safe Motherhood Program in the 13 provinces; and to maintain the performance of priority public health programs at the national level. 6.15 In sum, Bank support for Morocco's health sector development has been highly relevant. It has been and remains focused on strengthening basic health care delivery, increasingly in poorer, rural areas. In addition, assistance has been provided for the managing and administrating of health services, and policy reform including health financing and hospital management. The one project completed to date was also implemented with substantial efficacy, although because of a two-year delay, with only moderate efficiency. Education and Training Background 6.16 During the 1970s, Morocco's education system had undergone substantial growth and diversification. Between 1973 and 1980 primary enrollments (which then comprised grades 1 through 5) had grown by 6.4 percent annually, and secondary enrollments (grades 6 through 12) by 10.6 percent. These growth rates were even surpassed by the expansion of higher education which averaged 17.9 percent per year. This development was facilitated by an entitlement for all secondary school graduates (baccalaureate holders) to continue their education and by a generous subsidy policy for university students. In addition to a tripling of enrollments in Morocco, Government scholarships for foreign university studies surged: between 1977 and 1979 alone, they rose by 174 percent. 67 6.17 Towards the end of the 1970s, the worsening fiscal situation brought to light the budgetary burden that the previous expansion had created: the share of recurrent education expenditures had risen from a moderate 3.1 percent of GDP in 1970 to 5.1 percent by the end of the decade (see also Table 6.3 below).42 6.18 The changed macroeconomic and budget situation caused the Government to take a closer look at educational outcomes. The available indicators were not encouraging: repeater rates in primary education were high throughout the cycle, ranging from a low of 23 percent in grade 2 to over 50 percent in the last grade (5). One out of five students dropped out of school before reaching the last grade, and most repeated three grades or more before completing. As a result, less than one quarter of students finished primary schooling in the prescribed five years (the average was 8.6 years). 6.19 At the other end of the educational ladder, the rapid expansion of higher education enrollments and the prospect of only slightly slower growth in the years ahead43 was a cause of grave concern. The oversupply of graduates was most obvious in liberal arts and law (which accounted for three out of four students), but even in sciences and mathematics market saturation seemed near. In addition, the subsector was plagued by problems of internal inefficiency similar to those experienced at lower education levels; for example, in science, 70 percent of first-year students dropped out or had to repeat. 6.20 Prior to the early 1980s, the Bank's education projects in Morocco (the first project was approved as early as in 1965, three years after the Bank started lending to the sector) had focused on specialized education, guided primarily by perceived deficiencies in manpower requirements at various educational levels. The fifth education project, approved in 1982, was a harbinger of the Bank's changing approach to education projects in Morocco: for the first time, the Bank's concern was exclusively with general, rather than specialized, education. Economic and Sector Work 6.21 The comprehensive Education and Training Sector Survey undertaken by the Bank in late 1981 and published (in six volumes) in June of 1983 can be seen as a watershed in the Bank's approach to education investments in Morocco.44 For the first time, the Bank made an assessment of the entire sector and developed from it, through the Education/Training Sector 45 Memorandum of June, 1983, a set of priorities for future programs which derived from a uniform approach rather than from a list of selective government priorities (which were normally unconnected to one another). 6.22 The Bank's analyses focused on major areas of concern: inefficiencies in primary education, excessive spending on higher education, and inadequate vocational training. The Sector Memorandum stated, with only little exaggeration, that "the current primary school 42 The highest point-5.4 percent-was reached in 1983. For the period 1981-85, an average annual growth rate of 14 percent was expected. 44World Bank, "Kingdom ofMorocco: Education and Training Sector Study," Report No. 4105-MOR, 1983. World Bank, "Kingdom ofMorocco: EducationTraining Sector Memorandum," Report No. 4480-MOR, 1983. 68 enrollment ratio of 75% could, in principle, be increased to 100% with no increase in facilities or teaching staff by eliminating repetition of primary school classes." Furthermore, "The rapid growth of higher education is clearly excessive, both in terms of labor market demands, and of equity considerations."47 The Memorandum emphasized vocational training as the major instrument for easing the transition from schooling to employment for all students whose education had stopped short of the baccalaureate. An expansion and strengthening of the system was considered an urgent priority. 6.23 The Sector Survey and the Sector Memorandum proposed a number of priorities which the Bank-with some modifications and enlargements-has maintained to the present day: (a) to improve the efficiency of primary education to permit, inter alia, the enrollment of additional students, particularly of disadvantaged rural children and of girls (the latter became an objective in its own right and the equity focus was later extended to the entire nine-year basic education cycle); (b) to curb the growth of higher education, both in view of labor market constraints and of the need to free funds for the development of basic education; and (c) to expand and strengthen vocational training to facilitate the school-employment transition for all who left school before the baccalaureate. 6.24 The ESW during the early 1980s provided the Bank with a comprehensive understanding of the education sector and a solid basis for designing lending operations. During the next several years, the Bank's focus was on broad-based assessments of Morocco's overall reform and adjustment program: there was no formal further ESW on the education sector until 1993. The more recent work has been an amplification of the analyses of the early 1980s, largely because progress towards resolution of the basic issues in the sector has been exceedingly slow. Lending for General Education 6.25 The 1983 Sector Memorandum also contained a specific five-year Lending Program reflecting the priorities identified (Education/Training Sector Memorandum, paras. 4.06 to 4.08). This Program foresaw two lending operations: one for FY85 in the amount of $50 million in support of lower- and middle-level vocational training; the other, in FY87, in the amount of $80 million to assist with the development of basic schooling (primary and lower secondary education).48 6.26 The vocational training project was approved in late 1984, albeit on a smaller scale (Loan 2479 was in the amount of $27.1 million rather than $50 million) and completed in mid- 1992. It will be discussed later in this chapter. 46Ibid, para. 3.02. Of course, since repetitions and current demand for primary schooling did not always occur in the same locations, the statement should be seen as a-deliberate--dramatization. 47Ibid, para. 3.06. 48Then planned to comprise eight years; the extension to nine years was a later modification, and its implementation was not completed until 1990. 69 6.27 The other project was not appraised, in different form, until several years later. In its stead came, one year earlier than originally planned and of a much larger size and scope, the Education Sector Reform Program, supported by Loan 2664 in the amount of $150 million and approved in March, 1986. 6.28 In opting for this lending operation, sectoral staff attempted to emulate the examples of policy-based lending in other sectors in Morocco. Loan 2664 was a hybrid operation, encompassing elements of adjustment lending (Statement of Policy; Loan tranching) with those of customary investment lending (disbursement against statements of expenditure for full withdrawal documentation). 6.29 The investments to be made under the project included some 10,600 primary and lower secondary classrooms, mostly in disadvantaged rural areas; equipment, furniture and materials for the primary and lower secondary cycles; domestic and foreign university fellowships; teacher training expenditure; and other recurrent costs (mainly salaries). 6.30 The main supporting policy measures (some of which were already put into effect prior to the start of the Program) were: a ceiling on the permissible number of repetitions in primary and secondary education; restrictions on the award of university fellowships for repeaters; an increase in the faculty teaching load by some 20 percent; and an undertaking to reduce annual growth rates in higher education and admissions to 2 percent. The SAR also established target data for student flows (entrants, repeaters, dropouts, graduates) through primary and secondary education with the help of a projection model. 6.31 The design of the project had two major flaws: it misjudged the political feasibility of putting an effective brake on higher education expansion; and it was overly optimistic about the speed and extent to which the system's main features could be changed. Curbing higher education expansion was an extremely sensitive subject resisted by many vested interests. It seems that during project preparation and into the initial phase of implementation, the proposed policy of access control for higher education had only one champion in a high place: the then Minister of Education who campaigned actively for the idea. 6.32 The project design did not take sufficient notice of a finding of the 1983 Sector Survey (Volume I: Overview, para. 1.15): "The Government's strategy in education and training has undergone numerous changes since independence. These changes reflect the instability of a system which has gone through more than 20 Ministers of Education since 1956...." Thus, with a term in office that did, on average, not extend much beyond one year, the sustainability of an unpopular policy measure should have been questioned. In the event, the Minister left office before the project's midpoint and, during the second half of 1987, about one year after loan effectiveness and following the release of the second tranche, a Decree removed the 2 percent limit on annual growth of intakes into higher education. These promptly rose by about 25 percent, thus effectively removing one cornerstone of the project. 6.33 The student flow targets for primary and secondary education were similarly overoptimistic. Project experience suggests that internal efficiency gains (as reflected in changes in promotion, repetition and dropout rates) occurred more slowly and unevenly than postulated by the model. Even the intake figures did not reflect the increases in physical facilities: between 1987 and 1989, rural primary enrollments dropped by 120,000. This came about partly as a 70 result of a drop in repeater students by 48,00049 and partly due to an even larger decrease in first- time enrollments (by 72,000). The latter seems to have been a response to worsening economic conditions (as suggested by the subsequent recovery) and by rural-urban migration (as evidenced by urban first-time enrollment growth of about 10 percent over this period). 6.34 Because of the unexpected drop in rural primary enrollments, classrooms built and teachers trained under the project were temporarily underutilized. While enrollments diverged substantially-though in opposite directions-from appraisal expectations for both primary and higher education, the divergences were smaller for lower secondary education. In upper secondary education, enrollment growth was effectively controlled, leading even to a drop in overall figures, a factor which helped mitigate later enrollment growth in higher education. 6.35 On the whole this project was a disappointment, but it proved a good testing ground for subsequent operations and brought significant advances in institutional capabilities. Two examples may illustrate this: progress in school mapping was an indispensable condition for subsequent investment in rural schooling, and improvements in the statistical services have shortened the response period required for administrative and policy decisions.50 6.36 After the experience of the Education Sector Reform Program and an unsuccessful attempt to identify and prepare a lending operation in higher education, the Bank returned to the project in primary and lower secondary education originally proposed for FY87 in the five-year Lending Program. However, the investment needs were now much greater than anticipated in 1983, and so was the lending. Thus, the Bank decided to support two operations, one in FY89 for primary education in rural areas (Loan 3026 in the amount of $83 million), the other in FY91 for lower secondary education in rural areas (Loan 3295 in the amount of $145 million). 6.37 Both operations were specifically aimed at increasing the enrollment of girls in rural areas. The Rural Primary Education Project of FY89 had three main components: the first, and largest, aimed to increase access through the construction of 11,600 new classrooms and a variety of related non-teaching spaces: 1,400 school canteens, 2,900 staff houses and, as experimental components, 120 wells and 120 sanitary facilities.51 6.38 The second component intended to improve the participation of disadvantaged groups (especially of girls) in schooling, by easing the financial burden for poor families through a subsidized scheme of textbook rental and at-cost distribution of consumables such as pencils and notebooks. 6.39 Increased enrollment of girls was also to be sought through promotional campaigns to explain to the rural population the benefits of educating girls; through local initiatives such as One official maintained that the primary enrollment decreases were entirely due to the restrictions imposed on multiple repetition, which "virtually emptied entire classrooms". However, the available disaggregated figures for urban and rural areas and for repeaters and non-repeaters do not support this claim. 50 Data collected at the beginning of each school year (in October) are now available on tape by the end of the calendar year. It is only the limited printing capacities that delay the publication of the initial statistical reports by about one year. 51 The canteens (combined with stipends for meals) were hoped to attract students from poor families, and the staff houses, to hold teachers (particularly female teachers) in rural areas. 71 child-care services to relieve girls from their customary chore of watching over younger siblings; giving priority to girls for boarding in lower secondary schools; and distribution of various kinds of information materials. 6.40 Finally, quality improvements were sought through development of suitable education programs at the primary level, including multiple-grade teaching techniques; and staff development in specific areas. 6.41 Since the original closing date was December 31, 1995, and about 10 percent of loan funds were still uncommitted at the time of the CAR mission (and some 1,400 classrooms not yet built), project data normally compiled for the Implementation Completion Report were not yet available at the time of the mission (October 1995), and conclusions about project outcomes have to be drawn from general education statistics. 6.42 In 1994/95 rural primary enrollments stood at 1.224 million, about 270,000 above the initial level of some 950,000. Girls' enrollment had increased from about 270,000 to over 440,000. These increases, about 28 and 51 percent respectively, are below appraisal projections of 38 and 75 percent for 1995. But a continuous growth at the 1993-1994 rates would make up the deficit in two years at most.52 6.43 There were also some improvements in student flows through the system. Between 1990 and 1993, rural promotion rates increased in all six primary grades, and dropouts decreased, particularly in the last three grades. Except for the first grade, repetition rates also shrunk, but to a lesser extent. Thus, some improvements in internal efficiency have taken place.53 6.44 The FY91 Rural Basic Education Development Project is an extension of its predecessor into lower secondary education (grades 7-9). The array of inputs is similar to that in the earlier project: 250 new middle schools with equipment and furniture in disadvantaged rural areas permitting, at full development in 1997/98, an enrollment of 120,000 additional students, plus educational materials and supplies, canteens for all schools and boarding facilities for 30 of them (50 percent of the latter to be reserved for girls); stipends for boarding and meals; and subsidized textbooks. 6.45 Since loan closing is planned for FY97 and less than 50 percent of the Loan funds had been committed at the time of the mission, it is still too early to assess project outcomes. Some 52 Of course, these estimates should be treated with caution, as it is not known how much of the observed increases occurred in project schools, and how much was due to more intensive use of previously existing classrooms, or to new capacities financed from other sources. Incidentally, overall repetition rates, with the exception of the last three grades, were still well above the levels envisaged for 1989 under the Education Sector Reform Program-an indication of the slow speed of such improvements/processes. 54 For example, in 1994/95, all lower secondary enrollments in rural areas stood at 85,000, well under the 120,000 target for the project schools. However, the share of rural in total enrollments which stood at a very low 7.4 percent in 1989/90, had already slightly increased to 8.6 percent, despite the simultaneous growth of urban enrollments. 72 preliminary data from a sample of new schools suggest wide variations in school sizes; new intakes; percentage of girls among new students; and absorption rates.5 6.46 The preliminary results illustrate the enormous diversity of local conditions in rural areas, and of their impact on the effective demand for education (particularly of girls). The previously assumed tight linkages between education inputs and intermediate outcomes appear less direct and subject to many outside influences. The experience should caution against overconfident predictions of how a school system's key parameters will develop in response to specific interventions. 6.47 In summary, there has been some progress in Morocco's primary education system with regard to the three major objectives over the recent past: between 1987/88 (the low point of the decade) and 1994/95, the number of new entrants into grade 1 increased from about 419,000 to 536,000 or by 3.6 percent annually. However, for girls this increase was 4.9 percent per annum, and for rural girls, 7.3 percent. The total number of primary students grew from about 2.1 to 2.9 million, and the share of girls grew from 38.4 to 41.3 percent (in rural areas, from 28.7 to 33.8 percent). With the improvement in student flows, the net effect of enrollment expansion has been larger, particularly for rural areas, where enrollment figures understate relative growth 57 because of simultaneous migration from rural to urban areas. 6.48 Yet, in spite of these advances, Morocco still compares unfavorably with countries in a similar socio-economic position. In 1990 a number of indicators showed distinct deficits: Table 6.2: Education Indicators Averages for: Indicator Morocco LMTCsa LICsO GDP/capita (US$) 950 1,530 360 Adult literacy rate (%) 49 75 60 Female literacy rate (%) 38 68 48 Net primary enrollment ratio (%) 55 86 68 Female/Male Enrollment Gap (%) -35 -11 -22 a. LMIC = lower middle income country. b. LIC = lower income country. Source: World Bank, Schooling and Cognitive Achievements of Children in Morocco, Washington, 1994. New intakes as a percentage of previous year's primary graduates in the catchment area of the school. 56New entrants, however, are a more reliable indicator of expansion and equity improvements, since total enrollments are subject to two disturbances: the expansion of primary education to grade 6 during this period, and the improvement in student flows. Because of the unavailability of up-to-date rural/urban population figures for grades and age groups no enrollment ratio has been calculated. 73 6.49 The Bank has repeatedly pointed to the discrepancies between these and other education system indicators and to the high level of resource commitments to the sector, which is outlined below for selected years between 1975 and 1995. 6.50 The table indicates the recent gains in allocations to primary education, which became the largest subsector in 1994. But the increasing budget shares claimed by staff salaries could mean that the system has been deprived over a considerable period, of essential non-personnel 58 inputs. Table 6.3: Recurrent Budget Allocations (in DH million), 1975-95, by Subsector, and Macroeconomic Reference Points Recurrent Budgets for: As Percentage of Primary Secondary Higher Total Share of Staff Year Education Education Education Totals Budget GDP Salaries (%) 1975 582.4 572.2 164.0 1,318.6 13.9 3.6 84.0 1980 1,245.8 1,629.3 644.2 3,519.3 23.3 4.8 86.0 1985 2,145.8 2,891.3 1,042.0 6,079.1 28.6 4.7 86.5 1990 3,548.8 4,984.4 1,654.3 10,186.6 33.6 4.8 85.4 1995 6,414.8 5,597.4 2,272.1 14,283.6 30.3 5.2 88.2 Note: Budget figures in current prices. Source: Ministry of Education. Vocational Training 6.51 The FY86 Education Sector Reform Program (Loan 2664) was immediately preceded and followed by two projects in vocational training. The first of these operations was approved in late 1984 (Loan 2479 in the amount of $27.1 million). It was to expand the system's capacity through the establishment of 22 Vocational Training Centers (VTCs), a substantial increase over the existing 41 centers, permitting an additional annual output of 2,200 skilled workers. This investment was to be complemented by equipment for a new Instructor Training Center (then nearing completion); and by five Mobile Training Units. 6.52 The project's physical achievements generally exceeded appraisal projections: it was possible to build 30 new VTCs, thus increasing annual output to about 3,000. However, at project completion, VTC graduates faced considerable difficulties in finding employment, in part because of the poor condition of the economy, and in part due to a perceived mismatch between 58 For primary and secondary education, the rise in the salary shares, has consistently been in the range between 91 and 95 percent, without a clear trend. But in higher education the rise from 34 percent in 1975 to almost 60 percent in 1995 indicates a major shift. 74 skills tafht and skills needed. The Mobile Training Units component proved difficult to operate. The outcome of the project was rated satisfactory by OED. 6.53 The Second Vocational Training Project (Loan 2779 of FY87 in the amount of $22.3 million) was approved in FY87. The project was to continue and consolidate an investment program started under the first project. It included re-equipping and refurbishing of 33 existing VTCs and electronics equipment for 15 technician-level training institutes; the establishment of an in-plant instructor training program; and minor construction and equipping for training and repair service units in 10 VTCs and for a number of administrative units; and the in-house development of training programs and equipment. 6.54 The project succeeded in diversifying the types of training and in establishing links with enterprises. Its outcome was rated satisfactory by OED. Morocco's vocational training system has grown, partly as a result of the two Bank projects, to a substantial size: in 1994/95 a total of 178 training centers were in operation, offering 140 different courses with a training capacity of almost 44,000. Annual course graduates numbered 24,000. The annual number of applications (85,000) exceeded admissions (about 30,000) almost by a factor of three, attesting to the popularity of the training. However, absorption into employment remained a problem. Education and Unemployment 6.55 The unemployment of school (and university) graduates has been a major concern for at least ten years. However, while during the mid- 1980s the problem manifested itself mainly at the secondary schooling level, it has now engulfed the ranks of university graduates. Urban unemployment statistics show an alarming extent of graduate unemployment. 6.56 Thus, two out of three young university graduates and every other high school graduate are out of work. It is also noteworthy that at any given education level, persons who had only general schooling fare better than those who supplemented it with vocational training. This is not necessarily the fault of the training itself but rather seems to point to inherent employment difficulties of individuals which are unrelated to the education and training they received. The concept of Mobile Training Units had been pioneered by ILO and incorporated into a number of the Bank's vocational training projects (e.g. in Ecuador and Indonesia). Invariably these units posed considerable logistical difficulties and barely ever could be used to capacity. 60Because of the existence of a number of short courses, actual trainee numbers in 1994/95 were almost 50,000. 75 Table 6.4: Urban Unemployment Levels (in '000) and Rates (Percentages, in Brackets), by Age Group and Education Level, 1993 Age (Years): 15-24 25-44 45+ Totals Educational Level None' 15.3 (12.1) 39.6 (7.3) 16.3 (4.1) 71.2 (6.7) Primary 102.5 (24.1) 91.1 (12.5) 4.3 (4.1) 197.8 (15.7) Primary only 92.5 (23.0) 84.3 (12.1) 4.1 (4.1) 180.9 (15.1) Primary and VTb 10.0 '(42.3) 6.7 (22.6) 0.1 (4.3) 16.8 (29.8) Secondary 145.9 (42.0) 174.6 (19.2) 2.9 (2.4) 323.4 (23.4) Lower Secondary only 75.6 (35.7) 50.4 (15.3) 1.7 (3.1) 127.7 (21.4) Lower Secondary and VT 19.8 (52.2) 23.1 (24.0) 0.1 (0.8) 43.0 (28.2) Upper Secondary only 34.9 (49.5) 56.1 (20.8) 0.7 (2.3) 91.6 (24.8) Upper Secondary and VT 15.6 (57.3) 45.0 (21.0) 0.4 (2.3) 61.1 (23.4) Higher 16.5 (66.4) 67.1 (19.0) 0.2 (0.4) 83.8 (19.9) Other 1.0 (13.1) 2.6 (3.8) 1.0 (1.5) 4.6 (3.2) Totals 281.1 (30.2) 375.0 (14.4) 24.7 (3.4) 680.8 (15.9) a. Including incomplete primary. b. VT = Vocational Training. Source: Direction de la Statistique: Population Active Marocaine 1993, Premiers Risultats, Rabat, 1995. 6.57 Female unemployment rates are higher than those for males. About two-thirds of all male unemployed and almost three quarters of the female jobless have been looking for-work for one year or more. More recent data further illustrate the persistence of the unemployment problem, in both rural and urban areas. The data must be qualified; the year 1995 was a poor agricultural year because of drought. Table 6.5: Unemployment Rates in 1990/91 and 1995 1990/91 1995 Urban Rural Total Urban Rural Total Male 16.7 7.1 11.6 18.7 9.6 14.4 Female 31.8 3.2 13.0 32.2 6.5 19.2 Total 20.6 5.6 12.1 22.9 8.5 16.0 Source: Direction de la Statistique: Activit6 et Chomage en 1995, Premiers Resultats, July 1996. 6.58 Between 1992 and 1993 employment creation amounted to some 165,000 jobs-or about one job opening for every four job seekers. This discrepancy should dispel the notion often expressed that much of the unemployment problem is a "mismatch" of education/training and job requirements, and that more "relevant" programs are needed. The size of the demand/supply gap for labor moves the problem well beyond the reach of education and training policies. 6.59 However, policymakers cannot remain impervious to the fact that every year thousands of university graduates, who have been educated at great cost to society, join the ranks of the long-term unemployed only to take, several years down the line, employment for which they are over-qualified. The Bank has maintained consistently for over a decade that the higher education system has outgrown the absorptive capacity of the labor market, and that free access of all 76 baccalaureate holders into universities is a luxury the country can afford even less now than when the Bank first voiced these concerns more than ten years ago. Lessons and Outlook (a) The Education Sector Reform Program (Loan 2664) failed to achieve the hoped- for policy reforms. The experience confirms that education is a sector of extreme social sensibility. (b) The full integration of marginal rural groups and girls into the education processes demands sustained efforts along a broad front, given the present limited understanding of the factors that cause exclusion. The great variety of project interventions in favor of rural girls, each based on a different perception of what factors cause discrimination, attests to the shortfalls in relevant knowledge. (c) While not denying the merits of vocational training, it should not be seen as a force that creates employment (and consequently blame difficulties of former trainees to find work on real or imagined shortcomings of the training system). The absorptive capacity of the labor market moves largely independently of developments in the education and training system. (d) The alarming extent of unemployment among university graduates has undermined the principle of unlimited access of all high school graduates to free university education. While social pressures to maintain these policies are still strong, for the first time the subject has been brought into the open: the recent publication of the World Bank report dealing, among other topics, with the problem of the over-extended higher education system suggests that, as a minimum, a public discussion of the very difficult choices that are ahead for Morocco's education system is in the making. 77 7. Outcome, Conclusions and Recommendations 7.1 Major progress was made by Morocco during the past decade towards economic and financial stabilization. In 1982/83 the financial state of Morocco's economy was dismal: the budget deficit exceeded 12 percent of GDP, the deficit in the current account of the balance of payments was close to 10 percent of GDP, and the country was unable to service its external debt (Table 7.1). By 1993/94 these deficits had been reduced to, respectively, 3.5 and 2.1 percent, while Bank assistance over the intervening period had facilitated several debt reschedulings and scheduled debt service payments had resumed. The debt/GNP ratio declined substantially, though much of this decline occurred in 1991, when Saudi Arabia forgave the country's entire debt obligation of about $2.7 billion, roughly 12 percent of the total debt. There was also a strong build-up of international reserves and, throughout the period, high inflation was avoided as was a recession. These are truly major achievements, especially when compared with the experience of other highly indebted countries. Table 7.1: Selected Indicators (1982/83, 1987/88 and 1993/94) (Ratios to GDP, except for external debt) 1982 1983 1987 1988 1993 1994 National Accounts Domestic Savings 13.8 15.2 16.7 20.5 15.7 15.9 Fixed Investment 27.3 24.4 20.2 20.4 22.4 20.2 Government Accounts Current Revenues 22.0 21.3 20.9 22.5 26.7 23.4 Current Spending 22.9 23.7 20.6 20.7 22.1 20.5 Capital Spending 11.6 9.7 6.2 6.4 7.9 6.7 Deficit (-) -12.4 -12.1 -5.9 -4.6 -3.3 -3.8 Balance of Payments Exports (goods & nfs) 19.4 21.6 23.6 26.0 26.5 25.3 Imports (goods & nfs) 33.6 30.1 27.8 26.3 32.0 30.9 Current Account Balance -12.3 -6.3 0.9 2.1 -2.0 -2.3 External Debt Total Debt/GNP 84.9 100.6 115.7 99.4 81.7 72.0 IBRD Debt/GNP 4.7 6.2 14.2 12.2 13.6 12.0 Debt Service/XGS 42.7 38.2 29.9 25.7 30.4 32.6 Source: World Bank data. 7.2 The macroeconomic balances remain fragile, and can quickly deteriorate as happened during the 1995 drought year. Fiscal revenue performance has improved substantially, especially subsequent to a series of tax measures adopted in the context of SAL I, and following the recommendation of joint Bank-IMF technical assistance missions. On the other hand, the burden of the expenditure adjustment has fallen disproportionately on public capital spending; it 78 has proven difficult to curtail and control current spending, as shown in Table 7.1. In particular, the wage bill remains excessive, which together with large debt service payments limits flexibility and hence efficiency of government spending. 7.3 Growth outcomes have also been significant. GDP growth has averaged 3.8 percent per annum for 1983-94, although it has been a lower 2.0 percent per annum in the 1990-94 period. Also, export growth, after an auspicious start early on in the adjustment process, has slowed. One of the original yardsticks by which the increasing openness of the economy was to be measured was the ratio of the sum of exports and imports to GDP. As can be read from Table 7.1 this ratio has increased from 52.4 percent in 1982/83 to 57.4 percent in 1993/94, or by about 5 percentage points. However, all of this increase was the result of an increase in exports (and imports), especially since 1990, under the temporary import admissions regime. In 1994 these exports made up 28 percent of gross export earnings. Excluding these, the ratio of the sum of exports and imports to GDP has changed little over time. In addition, the external debt burden remains significant. Achievements and Shortcomings on the Fiscal Side 7.4 All throughout the period under review, central government deficit reduction has been a major preoccupation of the Bank (as well as of the Government and the Fund). During the early years of adjustment (1983-85) deficit reduction was so urgent that little attention was given to how it was achieved. Spending cuts were the most expedient way, and were also logical given that the fiscal deficits essentially had originated from excessive spending. The brunt of the adjustment fell on capital spending. Most new projects were cancelled or deferred and ongoing projects were stretched out over longer implementation periods or scaled down to reduce costs. (Severe capital spending cuts had already been the major feature of fiscal policy before the 1983 crisis year.) In addition, a public wage freeze helped reduce the wage bill. 7.5 The Bank was well aware that these were emergency measures and that a sustainable solution to the fiscal deficit would require attention to structural fiscal problems. These were well known. On the excessive number of public sector employees, e.g., a 1985 CEM reports: "The growth of wage and salary outlays, which had averaged 25% a year in 1975-77, did not slow down significantly until 1982-83, when it was still about 10% a year. The main factor behind the rapid growth of the government payroll was a steady expansion in the numbers employed in the civil service and the army, which, until recently, have provided a major source of employment growth."61 As another example, a prime objective of the Government's adjustment program in 1983 was precisely to improve the allocation of capital and the efficiency of investment in the public sector through appropriate revisions of the investment program. 7.6 The fact that important structural fiscal issues were not being addressed at the start of the adjustment program made sense. After all, not all could be done at once. Longer-term sustainable solutions to the fiscal disequilibrium were expected to be developed in due time. As it turns out, however, a decade later, several fundamental fiscal issues have remained unresolved, or, in some instances, have not yet been addressed. The Bank's 1994 Public Expenditure Review provides an excellent and exhaustive overview of current public expenditure issues in Morocco. 61 "Morocco: Country Economic Memorandum: Medium-Term Adjustment Policies and Prospects," Report No. 5785, August 5, 1985, para. 37. 79 The upshot is that structural problems are pervasive in public spending patterns. To quote: "The central message of this report is in two parts. First, public expenditure and accompanying policies do not presently address the prerequisites for accelerated growth, namely basic human capital and infrastructure development, in the best possible way... .Second, the prerequisites for accelerated growth stand little chance of materializing under a "business as usual" approach to public expenditure management; a new, more radical approach that seeks expenditure "load shedding", larger-scale privatization, and greater cost effectiveness is needed."62 7.7 The overall budget deficit was reduced from the equivalent of 10.9 percent of GDP in 1983-85 to 2.6 percent in 1992-94. The 8.3 percentage point decline was achieved as follows. Tax revenues increased by 5 percentage points; the increase was across the board, as even taxes on international trade increased by almost I percentage point. Current spending decreased by 2.3 percentage points, mostly on account of a decline in subsidies and transfers. Capital spending decreased by a further 1 percentage point. The one major constant in this picture was the public wage and salary bill which remained at the equivalent of 10.6 percent of GDP. 7.8 The progress in five main areas, as discussed in various parts of this report is summarized in Table 7.2. First, Bank-Fund programs were successful in helping to generate a substantial increase in taxation revenues, during a period of fundamental tax reform as well as rate reductions in income taxes. Second, the import liberalization drive, after a good start under the guidance of the Bank, stalled towards the end of the 1980s and is far from completed. Third, there was a substantial reduction in recurrent transfers and subsidies, for which the Bank, through its agricultural adjustment loans, e.g., can take some credit. Fourth, while Bank efforts in the context of the two SALs (1988 and 1992) were successful in reorienting public investment to priority sectors (agriculture, infrastructure, human resources), this reorientation was largely the result of further declines in total capital spending. Investment in these priority sectors did not increase as intended. Finally, the large and apparently inflexible public sector wage bill was not addressed in the Bank's strategy. At the equivalent of 10.6 percent of GDP, it compared with an average of 6 percent of GDP for a sample of 24 countries. A prime example of the structural problem-too many public sector employees-can be found in the education sector: partly to absorb the growing number of university graduates into employment, student-teacher ratios have declined steadily during the past decade, especially at the secondary level. At the end of 1996, civil service positions were frozen and an in-depth study of civil service staffing and compensation was initiated. 62 "Kingdom ofMorocco: Public Expenditure: Issues and Outlook," Report No. 13413, August 30, 1994, paras. 1.2, 1.3. 63 Op. cit. 80 Table 7.2: Central Government Budget Data, 1982-94 (in % of GDP) Current Revenues Current Expenditures o/w Taxes on Wages & Interest Transfers Capital Overall Total International Total Salaries Payments & Subsidies Other Expenditure Deficit Trade 1982 22.0 8.4 22.9 11.2 3.6 4.6 3.5 11.5 -12.4 1983 21.3 7.4 23.7 11.5 4.9 3.8 3.5 9.7 -12.1 1984 20.9 7.4 24.0 10.7 6.1 4.3 2.9 8.1 -11.2 1985 20.7 6.9 23.1 9.8 6.2 4.2 2.9 7.2 -9.6 1986 18.8 5.7 20.6 9.2 5.9 2.5 3.0 6.9 -8.7 1987 20.9 5.8 20.6 9.8 6.0 1.9 2.9 6.2 -5.9 1988 22.5 6.9 20.7 9.4 6.2 2.0 3.1 6.4 -4.6 1989 22.6 7.5 21.2 10.1 6.2 2.1 2.8 7.4 -6.0 1990 23.9 8.0 20.2 10.2 6.2 0.9 2.9 7.3 -3.6 1991 23.0 8.0 19.9 10.3 5.5 1.1 3.0 6.2 -3.1 1992 26.4 8.5 21.5 10.9 5.6 1.7 3.3 7.1 -2.2 1993 27.6 8.2 22.1 10.8 5.9 2.1 3.3 7.9 -2.4 1994 24.1 7.4 20.5 10.3 4.9 1.8 3.5 6.7 -3.1 Source: World Bank reports. 7.9 In addition to the above, there remain important questions about the role, efficiency and financial health of Morocco's public enterprises (PE) sector. PEs still make up 12 percent of Morocco's GDP and remain a drain on the Central Government budget. The issues are laid out well in the Bank's 1994 Public Expenditure Review. The Bank's 1987 PERL was to be the first step in a program of rationalization of the sector. Some progress was made, but the efforts were interrupted (paras. 5.16-5.17). The continuing challenge is to seek improvements in the operational efficiency of public enterprises and in pricing policies. It should be added that the roles in the public finance picture of the State's large phosphate company (OCP) and of defense spending need tarther exploration. In spite of its important role in the economy, OCP's relations with the Treasury are insignificant: its transfers to the budget and tax payments are minor, and it appears to have built up substantial debt service arrears. A detailed assessment of OCP's financial condition is warranted. Defense spending, likewise, remains a reason for concern given the competing demands of the social sectors. While Morocco's defense spending has declined over time, it is still about 4 percent of GDP, above the average for comparable countries. 7.10 The privatization process (see Box 7.1) was very slow in starting: while it now appears well underway, it is important that privatization revenues be seen for what they are-transitory sources of income-and be treated as such. In view of Morocco's substantial internal and external indebtedness and given the need to come to grips with resolving the structural fiscal deficit, privatization should be seen as a means to improve the efficiency of the public sector, while reducing its scope, and its proceeds should be used preferably to reduce the public sector's access to debt generating deficit financing. But not all public enterprises are likely to be privatized soon, which is why further rationalization of the PE sector remains urgent. 81 7.11 The upshot of the preceding paragraphs is that although the public sector management issues are well known, achievements have been limited thus far and early action is urgent. The decision in late 1995 to publish in the local press candid papers prepared by the Bank on major development issues, including public administration and education sector reform, hopefully will lead to a public debate on these issues and lessen social and political resistance to many of the necessary reforms. Box 7.1: Privatization Already during the 1970s concerns were being raised about the poor economic and financial performance of many of Morocco's public enterprises (PEs). Several studies and reports, examining PE problems, were produced during the early 1980s. By 1987, the Bank provided support to the Moroccan Government's efforts to redress the situation and initiate a PE restructuring program through a Public Enterprise Rationalization Loan (PERL). By then, the privatization option was being considered seriously: among the second tranche release conditions of the PERL were the preparation of an inventory of PEs, the development of a privatization strategy and the preparation of a draft privatization law. Enough progress was made for the Bank to be satisfied by early 1989 that the conditions had been met. Some months earlier, in April 1988, the King had personally promoted the debate on privatization by expressing the view that the Government should transfer to the private sector a good part of the commercial and industrial activities hitherto assumed by the State. The Privatization Law was passed in 1989. It required the Government to privatize 112 state- owned entities (37 hotels and 75 companies, the latter equal to about 40 percent-in number--of the State's non-utility portfolio) over a six-year period ending on December 31, 1995. The law was promulgated in April 1990 and Parliament ratified the necessary resolutions in December 1991. Implementation started seriously only in 1993, with the first sale in February of that year. Since then, rapid and solid progress has been made, with good foreign investor participation, even though the December 31, 1995, deadline had to be postponed. Some enterprises not on the original list have been privatized or are being prepared for privatization. The long delay in start-up was due, above all, to the slow process of consensus-building, typical of Morocco. Importantly, a consensus was reached, which has made the process well- organized, transparent and fair, with minimal social costs. Other reasons for the delay were a shortage of financial and human resources in the new Ministry of Privatization, charged with implementation, and the 1990-91 Gulf crisis which dampened investor confidence. Economic Growth 7.12 The most important measures of achievement are the rate of economic growth and the reduction in poverty. In this regard, the Moroccan program was successful in the mid-and late 1980s but has fallen short in the early 1990s. Furthermore, some of the gains achieved in stabilizing the economy, such as the country's strengthened creditworthiness, may not be sustained without substantial acceleration in economic growth. 7.13 Measuring Morocco's GDP growth performance over short periods of time is complicated because of the country's continued high vulnerability to recurring droughts. There have been six major drought years since 1980, and agricultural output has fluctuated widely: it declined, e.g., by some 40 percent in 1992-93 and then grew by 60 percent in 1994. Because agriculture contributes about one-fifth of GDP and still employs more than 40 percent of the 82 labor force, these fluctuations have important repercussions on the rest of the economy. All growth rates below are based on trend lines and the end-year considered is the 1994 peak agricultural year, which, if anything, would impart an upward bias to the estimates. 7.14 Over the past 25 years (1970-94) Morocco's GDP grew at 4.4 percent per annum. Growth was unusually rapid during the late 1970s, because of the public spending spree in those years. During the more recent 1983-94 period, GDP grew at 3.8 percent per annum, or roughly at 1.5 percent per capita given a 2.2 percent yearly population growth during that period. Over the same period agriculture grew at 4.2 percent per year while industry grew at 3.0 percent.6 7.15 It is commendable that the country managed to grow without a major interruption in spite of the strong stabilization efforts. This is, at least in part, due to Morocco's gradualistic approach to stabilization and adjustment. However, external financial support also played a major role. But it turns out, GDP growth was substantially stronger during the first half of the 1983-94 period than during the later years, at close to 5 percent per annum versus 2.0 percent. Agriculture (and droughts) played an important role in this, but a key explanatory factor was slow manufacturing industry growth. 7.16 Spurred by the rapid progress towards trade liberalization in the mid-1980s (the ITPAs) and by a gradually depreciating exchange rate, exports of manufactures boomed through 1990 and manufacturing industry grew at 4.0 percent per annum between 1983-90. The slowdown in liberalization which started in 1988 and a gradually appreciating exchange rate from 1990 on, combined to put a break on manufacturing exports growth (Figure 7.1). Between 1990 and 1994 manufacturing industry grew at 2 percent per year. 6The subsector, manufacturing industry, grew at 3.8 percent per year. 65 The slowdown in the growth of the European markets also played an important role but does not provide a full explanation (paras. 5.25-5.26). 83 Figure 7.1: Export of Manufactures/GDP and the REER 120-- 6 5.5 0L 100 5 0 -4.5 -w REER 1Z Exports 80 4o --3.5 60 IliIIIII 3 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Note: An increase in the real exchange rate index indicates appreciation. Exports under the temporary import admissions regime are excluded. Sources: World Bank data and IME. Overall Assessment 7.17 Bank support to policy reform has contributed to fundamental changes in the Moroccan economy following the crisis of 1983. Untenable financial imbalances have been rectified, the country's external creditworthiness has been strengthened, and there has been a fundamental turnaround from autarky to the pursuit of a more open and free-market based development strategy. But the changes have not yet gone far enough: the Bank's perseverance and pressure for reform weakened towards the end of the 1980s. This may have discouraged the reform efforts in Morocco, while Bank financial support continued unabated. In the process Morocco became highly indebted to the Bank, which will limit the Bank's future financial support, although the reform process will need to be pursued with renewed intensity. 7.18 The recent slowdown in economic growth has been also aggravated by adverse exogenous circumstances, including recurring droughts. This, by itself, could well jeopardize many of the gains Morocco achieved over the past decade. Long overdue social improvements and, above all, job opportunities for an increasingly unemployed labor force, will be hard to come by unless there is an acceleration in economic growth. 7.19 A good part of the Bank's assistance has been unquestionably relevant. The Bank's diagnosis of Morocco's ills has, for the most part, been perceptive and correct, based on solid 84 ESW. This is true at the macro-level as well as at the level of the pivotal agricultural, industrial and education sectors. In the process, the Bank managed to create ownership of one fundamental structural change needed to create the conditions for boosting the historically low growth trends: there has been a dramatic turnaround from a policy of autarky to integration into the world economy. Box 7.2: Relevance SAL II illustrates the Bank's excessive confidence in the sustainability of Morocco's achievements and the resulting complacency. The loan had several shortcomings which made it less than relevant. Not only was the conditionality attached to it fairly limited but, above all, it was mostly vague. First, while professing to promote growth, SAL II did not address this objective forcefully and counted on a continuation of past trends. The economic growth experienced during the late 1980s owed much to a remarkable export performance, aided by a depreciating real exchange rate. In the preparation of SAL II, the appreciation of the exchange rate since 1990 was ignored as a possible explanation of the slowdown in export growth, which instead was dismissed as attributable to exogenous factors. While the latter were important, they were not the sole explanation. Second, the main concrete condition in the loan towards further trade liberalization, i.e., to reduce the maximum import duty to 35 percent (a condition which was complied with) was a very modest target when compared with the import liberalization objectives set during the mid-1980s. Third, other important loan conditions were vague. They were primarily indicators to be monitored on macroeconomic results, public investment goals and social achievements. Though specific targets for the indicators were included in the President's Report, they were left to the criterion of "satisfactory to the Bank" in the Loan Agreement. Furthermore, in the social sector area in particular, preparatory sector work to design appropriate indicators had not yet been completed. The net result was that release of the second tranche was based on apparent progress towards objectives, satisfactory to the Bank, even though in important instances the targets specified in the President's Report had not been fulfilled. Thus, e.g., the targeted growth in exports fell far short of its objectives, targeted increases in public investment spending in priority sectors (social sectors and infrastructure and other investments designed to improve the incentives' environment for private investment) were not achieved, and social targets set proved to be not-monitorable or irrelevant. To illustrate the latter, one social indicator-non-salary public recurrent expenditures on health-did not address the essence of the problem. The major problem is the disparity between the shares of the health budget going to urban versus rural areas, with the urban areas currently receiving a disproportionate share. 7.20 While the Bank's prescriptions and advice have also generally been appropriate, three important qualifications have to be made. First, there are important areas where the Bank has been unclear as to how to achieve the objectives. Thus, increasing support for rainfed agriculture (the very poor) has been a long-term Bank objective and focus of Bank projects. This support has been ineffective and consequently dwindled: yet, the issue remains. 7.21 Second, in some areas the Bank clearly underestimated the constraints to reform and the time required to overcome them.. Thus, improvements in the internal efficiency of the education system have proven to take much more time than assumed; and, the Bank's judgment that education spending could be restructured, away from higher education, within a fairly short period of time, was overambitious. . 85 7.22 Third, the Bank underestimated the severity of the inherent conflict between stabilization and structural reform. Whenever the need for funds (for stabilization) was imperative and primordial (as it tended to be throughout the past decade in Morocco) necessary policy change often took a back seat during the implementation of structural adjustment loans, with counterproductive results. Thus, the import duty reduction process was slowed down for fiscal revenue reasons, but the funds were disbursed; a planned second PERL was dropped when the Government knew that the funds would be forthcoming anyway without the need for painful public enterprise reform; and agricultural reforms which generated fiscal savings were implemented, while other reforms which might require budgetary outlays were not. 7.23 Judgments about the efficacy of the Bank's lending are somewhat more complex. The satisfactory outcomes of most Bank projects in Morocco (as reviewed by OED) suggests that, as a rule, individual projects achieved their objectives. The sum total of the Bank's intervention, however, is less encouraging. On the one hand, good progress was made towards stabilizing the economy; and an irreversible change towards a more open economy has occurred. On the other hand, the predominance of fiscal concerns at times damaged the reform process. Once fiscal instability appeared to have been resolved (towards the end of the 1980s), the Bank became too complacent about the reform process. Efficacy was often high, in the sense that program or project objectives were being achieved, but the objectives often failed the test of relevancy. As it turns out, the reform agenda is far from finished. 7.24 It is difficult to measure the impact of an overall Bank country program directly, except to say that, in the Moroccan case, there has been good progress towards several of the objectives and limited progress against some others, particularly in education, rainfed agriculture and rural poverty alleviation. In addition, the large volume of assistance has produced increased indebtedness, with moderate growth. Hence, the ove'rall effectiveness of the program has been modest. At a more disaggregated level, it would appear that, on the whole, the Bank's ESW has paid off. It was of high quality and laid the basis for a better understanding of the issues and a good dialogue. But, to the extent that it has tended, at times, to become repetitive and ineffective, it should be planned more carefully. Relatively more resources should be spent on dissemination. The planned establishment of a Resident Mission would be an important step towards this objective. 7.25 Since about 1994 the Bank has begun to adopt a sober and realistic view of the limited extent of Morocco's economic reforms and progress. While the economic problems confronted in 1983 have been lessened, they are still there. In view of the increased Bank exposure, the task ahead will be more challenging. Increased emphasis is now being placed on non-lending activities, including a more participatory approach towards project development (as was the case in 1984/85 with the ITPAs) and more emphasis on dissemination. Recommendations 7.26 Based on this review's findings, the following main recommendations are offered, to enhance the development effectiveness of the Bank's assistance strategy in Morocco: 86 In Public Sector Management the Bank should focus on * The structural aspects of the fiscal problems. If major structural fiscal problems remain unresolved, they are likely to derail any adjustment program. In Morocco, these problems include the huge public sector wage bill, the public enterprise sector, the inefficient allocation of public spending, and cost recovery, where equitable. * The process ofpublic enterprise rationalization. Not all public enterprises are likely to be privatized soon, and there is an urgent need to improve operational efficiency and pricing policies. Private participation in infrastructure development should also be pursued vigorously. In Private Sector Development the Bank should help the Government * Restore momentum to the trade (and incentives) reform process. Interruptions or policy reversals are especially damaging in a socio-political context where change is deliberately slow. Commitments to the World Trade Organization and to the European Union Association Agreement must be strictly adhered to and trade liberalization expanded in a non-discriminatory fashion. * Intensify efforts to fully liberalize the financial system. In particular, full convertibility of the dirham and a market-determined foreign exchange rate would further enhance private investment. * Focus on human and physical infrastructure. It is important that a number of structural and institutional constraints to industrial growth be addressed as a matter of urgency. These constraints include the quality of human and natural resources, infrastructure (including industrial land, reliable electricity and telephone services, an efficient transportation system) and the ability to generate, adopt and diffuse technological innovation. In Social Sector Development, Bank assistance should help * Redirect public spending towards the social sectors. Within the social sector budget, an increasing share must be allocated towards basic services, rural areas and women. * Increase the focus on poor farmers. There is a need to learn more about the types of assistance that would promote farming improvements in rainfed areas. There is also a case for stronger Bank efforts to persuade the Government to give higher priority than in the past to small and medium, as opposed to large scale, irrigation. In the Environment the Bank should * Focus on Morocco's scarce water resources. Full cost pricing of irrigation water would lead to important efficiency gains. It would encourage shifts into 87 less water-using crops, which are more in line with the comparative advantage of Morocco. Water pollution practices should be stemmed. = With regard to the types of Bank assistance, the main recommendations are: On Instruments * Lending. The Bank's future task is likely to be more challenging than in the past because of high exposure. During the past four fiscal years, the net flow of Bank resources to Morocco has been only $29 million per year and net transfers (i.e., including interest payments) have been highly negative. While the temptation to lend may be strong, it is becoming increasingly important to ensure that projects contribute measurably to increasing the productive capacity of the economy. Structural adjustment lending in particular should be more selective. The program needs to show concretely how it will improve the growth capacity of the economy and help reduce poverty. Measurable performance indicators should be included in every operation. Increased indebtedness without an increase in growth is clearly counterproductive. * Improve the utilization ofESW. A careful review of past trends is an indispensable element of diagnosis and prescription. The Bank has tended to blame exogenous factors excessively for poor performance but discount their role at times of improved economic results. As a good portion of the excellent ESW has not been put to use, relatively more resources need to be spent on dissemination and constituency building. On Process * Realism of CAS. The 1993 CSP and CAS, in particular, did not provide a realistic assessment of economic and social conditions and failed in designing an appropriate and relevant Bank assistance strategy. It would appear that the main shortcomings of that strategy are being rectified in the FY97 CAS. * Strengthen project design. The high proportion of satisfactory project outcomes in combination with limited long-term returns raises questions about the relevance and appropriateness of project and program design, even though the basis for correct design has usually been laid out well in the ESW. In the past, this was especially important in financial intermediation operations, which seem to have had very limited impact on industrial growth. * Resident Mission. Establishment of a Resident Mission would help strengthen the process of creating contact with local stakeholders, which is proving to be an important tool for improving project design, as exemplified by the 1994/95 study of the role of women in development. Appendix Table 1: Morocco - Net Receipts of External Financial Resources, 1983-93* (millions of US$) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 TOTAL 783.3 1,230.1 1,456.3 1,078.4 736.4 1,032.9 1,248.7 1,561.4 1,890.6 1,212.5 716.9 of which: *IBRD 123.5 192.6 220.2 254.3 241.0 227.0 183.0 224.0 128.0 207.8 83.9 *AfDB 11.6 5.0 13.7 44.5 59.4 133.4 163.3 170.7 218.3 175.8 149.7 *ODA 396.2 352.4 785.0 402.7 447.2 456.5 449.7 1,050.5 1,232.3 962.6 751.5 ODA Loans 247.9 217.3 273.6 228.9 232.7 198.2 196.3 386.9 478.2 581.8 227.0 France 37.5 41.4 102.6 61.1 105.7 68.3 77.7 106.1 161.9 82.4 87.4 Arab Countries 120.0 73.4 53.9 69.6 49.4 9.7 -5.8 11.0 5.2 22.3 1.4 Other 90.4 102.5 117.1 98.2 77.6 120.2 124.4 269.8 311.1 477.1 138.2 ODA Grants 148.4 135.1 511.4 173.8 214.5 258.3 253.4 663.6 754.1 380.8 524.5 France 61.4 58.9 55.4 70.6 83.6 88.3 79.7 111.4 101.5 113.6 114.4 00 Arab Countries 0.0 0.0 350.0 0.0 12.1 10.6 3.4 350.1 465.1 46.9 41.6 Other 87.0 76.2 106.0 103.2 118.8 159.4 170.3 201.8 187.5 220.3 368.5 a Total includes both official and private flows, from all sources. Source: OECD, Geographical Distribution ofFinancial Flows to Aid Recipients. Appendix Table 2: IBRD Commitments Per Capita Per Annum (selected subperiods) 1993 FY85-87 1986 IBRD FY88-90 1989 IBRD FY91-95 1993 IBRD 1993 Per Country Population Commitments Population p.c.p.a. Commitments Population p.c.p.a. Commitments Population p.c.p.a. Capita GNP (million) (S million) (million) (S million) (million) ($ million) (million) Mexico 86.7 3,180.0 80.2 13.2 6,867.5 85.4 26.8 8,442.4 86.7 19.5 3,750 Philippines 65.8 747.0 57.0 4.4 1,942.4 61.2 10.6 2,317.8 65.8 7.0 830 Turkey 59.5 2,824.9 51.6 18.2 2,099.5 54.9 12.7 2,142.7 59.5 7.2 2,120 Thailand 58.8 226.5 52.6 1.4 494.0 55.2 3.0 1,060.6 58.8 3.6 2,040 Korea 44.1 1,382.0 41.5 11.1 523.0 42.4 4.1 1,445.0 44.1 6.6 7,670 Poland 38.4 0.0 37.5 0.0 781.0 38.1 6.8 3,091.0 38.4 16.1 2,270 Colombia 35.7 1,588.1 29.0 18.3 802.2 32.3 8.3 1,576.0 35.7 8.8 1,400 Argentina 33.5 1,689.5 31.0 18.2 1,513.0 31.9 15.8 5,046.0 33.5 30.1 7,290 Algeria 26.9 726.0 22.5 10.8 1,189.5 24.5 16.2 1,357.0 26.9 10.1 1,650 Romania 22.8 0.0 22.9 0.0 0.0 23.1 0.0 1,406.0 22.8 12.3 1,120 Peru 22.8 44.5 20.2 0.7 0.0 21.1 0.0 2,172.2 22.8 19.1 1,490 Venezuela 20.8 0.0 17.8 0.0 1435.0 19.2 24.9 1,314.4 20.8 12.6 2,840 Malaysia 19.0 649.9 16.1 13.5 454.7 17.3 8.8 662.0 19.0 7.0 3,160 Chile 13.8 1,109.5 12.3 30.1 954.0 13.0 28.4 741.7 13.8 10.7 3,070 Ecuador 11.3 418.5 9.6 14.5 255.0 10.3 8.3 857.0 11.3 15.2 1,170 Hungary 10.3 833.7 10.6 26.2 1,031.0 10.6 32.4 1,330.0 10.3 25.8 3,330 Czech Republic 10.3 0.0 0.0 626.0 10.3 12.2 2,730 Guatemala 10.0 148.6 8.2 6.0 90.5 8.9 3.4 149.4 10.0 3.0 1,110 Tunisia 8.6 502.9 7.3 23.0 680.5 8.0 28.4 1,137.3 8.6 26.4 1,780 Bulgaria 8.5 0.0 9.0 0.0 0.0 9.0 0.0 718.0 8.5 16.9 1,160 Dominican Republic 7.4 41.6 6.6 2.1 135.0 7.0 6.4 122.0 7.4 3.3 1,080 El Salvador 5.5 65.0 4.9 4.4 0.0 5.1 0.0 204.5 5.5 7.4 1,320 Jordan 4.1 312.6 3.6 28.9 355.0 4.0 29.6 326.6 4.1 15.9 1,190 Lebanon 3.9 0.0 0.0 342.9 3.9 17.6 Note: Excluded are IDA and blend countries, the three largest IBRD countries (Brazil, Indonesia and Russia), very recent borrowers in Eastern Europe, and countries with populations below 5 million, except for Jordan and Lebanon in the Mena Region. Source: Financial Data Base. 91 Appendix Table 3: Disbursement Ratios for Morocco Compared with Bank-wide Averages Disbursements Ratio Approvals (8 semesters) (/0) Investment Loans (SILs, SIMs, TALs) excluding FILs Morocco FY82-86 548.7 148.5 27.1 FY87-88 380.3 45.2 11.9 FY89-90 36122.= 333 FY82-90 1,295.0 315.7 24.4 Bank-wide FY82-86 51,529.0 20,538.0 39.9 FY87-88 22,673.0 9,068.0 40.0 FY89-90 26.687.0 10,009.0 3111 FY82-90 100,889.0 39,615.0 39.3 Financial Intermediary Loans (FILs) Morocco FY82-86 446.5 283.7 63.5 FY87-88 70.0 59.4 84.9 FY89-90 44Q.1 415.2 24A FY82-90 957.0 758.8 79.3 Bank-wide FY82-86 10,631.0 6,543.0 61.5 FY87-88 4,230.0 3,236.0 76.5 FY89-90 3.39Q.0 2.016.0 59U FY82-90 18,251.0 11,795.0 64.6 Adjustment Lending (SALs/SECALs) Morocco FY82-86 600.4 573.2 95.5 FY87-88 665.0 589.6 88.7 FY89-90 0 _Q.0 _U FY82-90 1,265.4 1,162.8 91.9 Bank-wide FY82-86 11,324.0 10,694.0 94.4 FY87-88 9,848.0 8,583.0 87.2 FY89-90 11,792.0 10.714.0 90.2 FY82-90 32,964.0 29,991.0 91.0 Sources: Financial Database; and "Factors Affecting World Bank Disbursements" (draft), August 1995 (FRS). 92 Appendix Table 4: Morocco - Disbursement Ratios by Project for Investment Loans (excluding FfLs), by Fiscal Year and Sector Amount Disbursed after % Loan Approvals Amount 8 semesters Disbursed By Fiscal Year FY81 123.0 17.7 14.4 FY82 136.0 25.8 19.0 FY83 262.2 78.4 29.9 FY84 0.0 0.0 0.0 FY85 82.5 24.5 29.7 FY86 68.0 19.8 29.1 FY87 267.3 40.1 15.0 FY88 113.0 5.1 4.5 FY89 134.0 40.8 30.4 FY90 232.0 81.2 35.0 FY91 391.0 76.5 19.6 By Sector Agriculture 244.5 35.4 14.5 Education & Health 459.8 108.5 23.6 Highways, Ports, Telecoms & Power 647.0 153.0 23.6 Urban & Water 303.0 39.2 12.9 Other 154.7 73.8 47.7 Source: Financial Database. 93 Appendix Table 5: Summary of Project Information: Morocco - Bank-wide OED RATINGS FOR MOROCCO (1983-1995) OED RATINGS BANK-WIDE (1983-1995) -7-:-DAW-0TCOMERA77NGS- __ -:* OEM~rcVO __ Number Percent Value Sm Percent Number Percent Value $m Percent Satisfactory Outcome Satisfactory Outcome Adjustment Loans 7 88% 1390.0 90% Adjustment Loans 129 66% 23014.7 70% Non-Adjustment Loans 12 75% 761.3 86% Non-Adjustment Loans 551 67% 34595.4 71% Total 1 19 79% 2151.3 89% Total 680 67% 57610.1 70% Unsatisfactory Outcome Unsatisfactory Outcome Adjustment Loans 1 13% 150.0 10% Adjustment Loans 66 34% 10062.0 30% Non-Adjustment Loans 4 25% 125.2 14% Non-Adjustment Loans 270 33% 14298.1 29% Total 5 21% 275.2 11% Total 336 33% 24360.1 30% TOTAL RATED 24 2426.5 TOTAL RATED 1016 81970.2 OED SUSTAINABITY RA TINGS . B. .NA f.R.T.. Number Percent Value Sm Percent Number Percent Value Sm Percent Likely Sustainability Likely Sustainability Adjustment Loans 3 38% 475.0 31% Adjustment Loans 85 47% 17953.1 59% Non-Adjustment Loans 10 63% 716.9 81% Non-Adjustment Loans 386 47% 26396.4 54% Total Likely Sustainability 13 54% 1191.9 49% Total Likely Sustainability 471 47% 44349.5 56% Uncertain Sustainability Uncertain Sustainability Adjustment Loans 5 63% 1065.0 69% Adjustment Loans 61 34% 7090.1 23% Non-Adjustment Loans 5 31% 142.6 16% Non-Adjustment Loans 274 34% 14355.5 29% Total Uncertain Sustainability 10 42% 1207.6 50% Total Uncertain Sustainability 335 34% 21445.6 27% Unlikely Sustainability i Unlikely Sustainability Adjustment Loans 0 0% 0 0% Adjustment Loans 34 19% 5394.6 18% Non-Adjustment Loans 1 6% 27.0 3% Non-Adjustment Loans 155 19% 8039.3 16% Total Unlikely Sustainability 1 4% 27.0 1% Total Unlikely Sustainability 189 19% 13433.9 17% TOTAL RATED 24 100% 2426.5 100% TOTAL RATED 995 100% 79229.0 100% Ap1NMtrUT1ONALDEVvLOPMEMFRATINGS L:.;_ :DD MFFFIVSAWH.DBI IWAif_____. Number Percent Value Sm Percent Number Percent Value Sm Percent Substantial ID Substantial ID Adjustment Loans 5 63% 965.0 63% Adjustment Loans 54 31% 12900.7 43% Non-Adjustment Loans 5 31% 394.0 44% Non-Adjustment Loans 273 34% 16678.2 36% Total Substantial ID 10 T 42% 1359.0 56% Total Substantial ID 327 34% 29578.9 39% Moderate ID Moderate ID Adjustment Loans 3 38% 575.0 37% Adjustment Loans 87 49% 11963.5 40% Non-Adjustment Loans 10 63% 465.5 53% Non-Adjustment Loans 350 44% 20757.4 44% Total Moderate ID 13 54% 1040.5 43% Total Moderate ID 437 456 32720.9 43% Negligible ID Negligible ID Adjustment Loans 0 0% 0 0% Adjustment Loans 35 20% 5181.3 17% Non-Adjustment Loans 1 6% 27.0 3% Non-Adjustment Loans 175 22% 9304.9 20% Total Negligible ID 1 4% 27.0 1% Total Negligible ID 210 22% 14486.2 19% TOTAL RATED 24 100% 2426.5 100% TOTAL RATED 974 100% 76785.9 100% Sources: OIS/MIS, OED Database, Financial Database. 95 January 29, 1997 CODE97-8 pod from CDE Committee on Development Effectiveness Kingdom of Morocco: Country Assistance Review On January 27, 1997, the Committee on Development Effectiveness considered a Country Assistance Review for Morocco (SecM97-49) prepared by the Operations Evaluation Department, together with a response from management prepared by the Middle East and North Africa Region (CODE97-4). As background material, the Committee also examined policy notes on Issues of Public Administration and Education in Morocco (CODE97-3) which were prepared at the request of the King of Morocco. The Committee welcomed the opportunity to discuss the CAR in advance of the Board's review of the country assistance strategy for Morocco which will take place on January 30, 1997. It noted the high level of cooperation and collaboration between OED and management in the preparation of the two reports on Morocco, one with a historical perspective which provides lessons from experience, and the other with a forward-looking approach. This interaction enriched the debate about the Bank's relationship with Morocco. The Committee welcomed the consensus between OED and management on the priorities to be addressed and endorsed the recommendations in the report, which management asserts have been fully integrated in the CAS. During the Committee's discussion, the following issues, which are relevant to the review of the CAS, were raised by speakers. First, the report states that a fundamental aim of the Bank's assistance strategy has been to help stabilize the economy. A key OED conclusion is that the focus of the Bank's assistance strategy on stabilization (deficit reduction) was not matched by sufficient attention to structural reform and social development. While success with stabilization was a necessary condition of sustainable development, it proved not to be sufficient given the slow progress on structural issues, particularly public sector management, rural development, and human resource development. Morocco continues to face major structural problems to enhance sustainable growth and improve social equity after ten years of adjustment. While acknowledging that stabilization and adjustment are complementary objectives, the Committee stressed that Bank lending should focus on projects which contribute measurably to accelerating growth and enhancing equity. The assistance strategy should show concretely how it will improve the growth capacity of the economy and help reduce poverty. Measurable performance indicators should be included in every operation. It welcomed the assertion in the management response that the issue of promoting sustainable growth is very relevant to future assistance to Morocco. Second, the Committee agreed that the priority areas for public investment are agriculture and human resources. It emphasized that the Bank should do more to assist the government in promoting rainfed farming, the source of income of most poor farmers, and to induce the Government to give higher priority than in the past to small- and medium scale irrigation and to rural infrastructure. In the social sectors, the Bank should build upon its ongoing efforts to increase the share of the Government budget allocated to basic health and education, to rural areas and to women. In public sector management, major structural 96 January 29, 1997 CODE97-8 fiscal problems, including a very large public sector wage bill, the public enterprise sector, and the efficient allocation of public spending, remain unresolved and should receive adequate attention. In the context of the policy dialogue, the Bank should try to convince the Government to reduce its subsidization of higher education and expensive urban health services and redirect public spending towards the areas mentioned above. In this regard, it welcomed management's response that one-third of the proposed lending program is being reserved for the social sectors. Third, the Committee emphasized that in view of Morocco's debt to the Bank and the resulting large flows of financial resources to be repaid by to the Bank in the next few years, every effort should be made to use all the Bank instruments in a cohesive fashion and to ensure that loans to Morocco do not merely increase the country's debt but are used to contribute materially to structural reform and improve resource utilization. In particular, ESW, which has been excellent, should be used more effectively. More resources need to be spent on dissemination and constituency-building through greater involvement of elements of civil society. Fourth, the Committee took note of management's observation that the country assistance review could have put more emphasis on Morocco's vulnerability to external shocks (droughts, recession in Europe, etc.) as factors affecting policy implementation. It agreed that the Bank, through country dialogue, portfolio management, and the design of new operations, should support Morocco's efforts to develop policies aimed at economic diversification, more efficient use of water resources, and improved sustainability of Bank-financed interventions. Fifth, the Committee noted that while the efficacy of individual loans was high (89% of Bank-assisted operations had satisfactory outcomes), the overall strategy, by not addressing structural fiscal problems and other necessary structural reforms, lost much of its relevance. Sixth, The Committee noted that the role of other donors is likely to intensify compared to that of the Bank. In particular, the European Union is expected to have a much stronger presence not only through traditional development assistance but through the free trade agreement signed a year ago, which symbolizes Morocco's commitment to trade liberalization. In this regard, the Committee stressed that a partnership should be forged among the Bank, the Government, and donors to maximize the effectiveness of development assistance. Close cooperation among the actors should be coordinated by the Government. Seventh, the Committee agreed that Morocco's potential gave reason for optimism for the future and acknowledged that the country had achieved a solid record in economic performance compared to many other countries during the period under review. But with many fundamental issues still not resolved and low economic growth, Bank and country performance could not be considered as a full success, particularly for the second half of the decade covered. This presents a challenge for the future.. Ruth Jacoby Chairman Distribution Executive Directors and Alternates President's Executive Committee Senior Management, Bank, IFC and MIGA IMAGING Report No.: 16326 Type: OER