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

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1537-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (BNDE) WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO December 4, 1974 This report was prepared for official use only by the Bank Group. It may not be pubtished, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the . accuracy or completeness of the report.  Currency Unit Moroccan Dirham (Dfi) DH 1 = U$$0L24 U$ 1 DH L4.23 Exchange rate fluctuates with weighted average of major currencies; rate used in Appraisal Report is U-$1 = DH L- 30 Fiscal Year: January 1 to December 31  INTLRi'ATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SEVENTH LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (BNDE) WITII TIE G.UARANTEE OF TIlE KINGDOM OF MOROCCO 1. I submit the following report and recommendation on a proposed loan to Banque Nationale pour le Developpement Economique (BNDE) to be guaranteed by the Kingdom of Morocco, for the equivalent of US$30 million, to help finance lending for industry. Amortization would conform substantially to the aggre- gate of the amortization schedules applicable to the specific investment proj- ects financed out of the proceeds of the loan, with a maximum period of 15 yt!ars for individual investment projects. The interest rate would be 8 per- cent per annum. PART I - TiE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of ilorocco" (R329 MOR, dated February 7, 1974) was distributed to the Execu- tive Directors on March 6, 1974. The report is based on the findings of an economic mission which visited Morocco in September 1973. The next economic mission is scheduled to visit Morocco in March 1975. Country data are attached as Annex I. Past Developments 3. The overall performance of the Moroccan economy improved during the Second Five-Year Plan (1968-72), despite difficult political circumstances in 1971 and 1972. Aided by favorable weather conditions and good crops in 1968, 1971 and 1972, real GDP growth accelerated from an average annual rate of about 3 percent in 1960-67 (barely above the rate of population growth) to 5.6 percent in 1968-72, thus exceeding the modest Plan target of 4.3 percent, and permitting real gains in private consumption per capita of about 2 percent a year. At the same time, the implementation of prudent fiscal and monetary policies contributed to a significant improvement in Morocco's domestic and external financial situation, despite shortfalls on planned capital inflows from official external sources. Government saving and investment exceeded slightly the modest Plan targets, while price stability was maintained. Following a decade of recurring deficits, the balance of payments registered a surplus in 1969-72, mainly because of sharply rising receipts from merchan- dise exports, tourism and Moroccan workers in Europe. At the end of 1972, Morocco had accumulated net foreign assets equivalent to 3.5 months' imports of goods and non-factor service; these rose further to the equivalent of more than 5 months by the end of 1973. 4. Although the acceleration of GDP growth in 1968-72 was in part due to generally favorable weather conditions, it appears that the economy has moved onto a path of more rapid long-term growth. Agriculture, export in- dustries, tourism and sectors with derived demand (energy, transportation,  comraunications anid mocdern services) secri to have acquired a capacity for sus- tmined growth. In agriculture, expavsioj) of irrigation, increased use of key inputs in raiiifedi areas (improved6 seeds, fertilizers and timely ploughing) and a large number of trained extension personnel hlave caused faster output growth. Tn the export sector, the phosp'hate company (OC() has regained leadership in the world market as a result of internal reorganization and investment carried out during tile Second Plan and the export company (OCE), which has a monopoly over M1orocco's exports of freshi and processed foodstuffs, has acquired consid- erable dynamlism in management and m,arketing. Further, a relatively broad rainge cf industries, including some sub-contracting companies, have emerged with a good competitive position and sizeable sales on external markets. 5. These achievements should not detract attention, however, from the serious difficulties wliich Morocco still had to overcome at the end of the Second Plan period. There was a need to revive private investment, which hacl stagnated in 1971 and 1972 mainly because investors took a wait-and-see attitude in the light of political developments and the expectation of new incentives and new regulations regarding the association of Moroccan and for- eign capital in business ventures ('Mi4arocanisation" laws). There was also a need to raise private savings, which remained at an insufficient level, in part because of the relatively low returns on domestic financial assets. Finally, the Government would have to increase investment capacity in the public sec- tor by appropriate changes in staffing and organization. 6. Difficult social problems also hsad to be tackled. Unemployment remained at a high level, averaging 9 percent of labor force nationwide and ranging between 12 and 16 percent in large urban centers. The urban popula- tion in substandard housing was large and rising. Wealth and income differ- ences between cities and villages, amiong regions, and between rich and poor were widening, while about one third of the rural population in the less fertile agricultural areas were experiencing a slow decline in real consump- tion. Long-Term Development Prospects 7. Recognizing these difficulties and problems, the Government began in 1971 to revise its development policies, paying increasing attention to social objectives. Reflecting tIe changed orientations, the Third Five-Year Plan (1973-77) air-s at: - sustaining real GUP growth of 7.5 percent a year from 1973 to 1977, mainly through a 10 percent a year rise in exports and a doubling of investmenit over the Plan period; and - improving distribution of growth benefits, mainly through further land distribution to poor farmers and more emphasis on rainfed farming in agriculture, the association of Moroccan nationals with foreigners in services and several industrial sub-sectors, large increases in Government spending on social services and low-cost housingl, a more progressive tax system, and appropriate changes in wages and in the prices of basic agricultural commodities.  -3- Departing from the previously strict financial orthodoxy, the Plan calls for an expansionary fiscal policy and a liberal credit policy, accepting the risk of less price stability. It recognizes that, in spite of faster economic growth, increased public works and continued enmigration, unemployment may rise in absolute, and perhaps also in relative, terms because the growth of the working-age population is accelerating (from 2 percent a year in the 1960's to 4 percent a year in the 1970's). 8. In accordance with its export-oriented strategy, the Plan gives priority to sectors contributing to exports; these include phosphate mining and processing by thle state-owned phosphate company (OCP), as well as other mining, agriculture, fishing, food processing, subcontracting industries, tourism and transportation. This priority is reflected in the allocation of Government resources to investmient in these sectors, and in the measures introduced in August 1973 to provide better incentives to industrial exports and private investment. Achievement of the Plan's export targets will depend on further expansion in some export sectors, which is being carried out, and on the strength of external demand. External demand for Moroccan phosphate rock hias risen continuously in 1974, and driven the average price per ton received by Mlorocco from about $13 in 1973, to around $40 in the first half of 1974 and to more than $60 in the second half; however, due to the supply response of other producers, the price will probably decline substantially in 1975-8U. Demand for other Moroccan goods and services may weaken over the next few years as a result of the economic slowdown in developed countries. On balance, real export growth, which exceeded Plan expectations in 1973, will probably be somewhat below Plan targets during most of 1974-77, while in cur- rent prices export receipts will exceed substantially the level envisaged in the Plan. 9. The Plan proposes significant changes in the investment strategy to increase labor intensity, and improve the situation of less favored groups of society and less developed areas of the country. Education, health and housing, together receive a significantly higher share of planned Government investment (23 percent) than during the Second Plan (11 percent). Among sectors, the main change concerns agriculture, for which the Plan de-empha- sizes dam construction, and favors equipment of existing irrigation areas, intensification of rainfed cropping, improvement of animal husbandry and implementation of land reform. New incentives for private investment are less biased in favor of imported equipment than the previous system and encourage efficient operations and location in less developed areas. (See below Part III, para. 25). In view of the hiiglher-than-planned level of export receipts (and domestic saving), the Government is carrying out an upward revision of investment targets, the details of which are not yet available. 10. In changing its investment strategy, Morocco is breaking new ground, and significant shortfalls on planned investment could well be experienced in new priority sectors as a result of staffing and organizational con- straints, w1hich can only be relieved progressively. Shortfalls will probably affect mainly rainfed cropping, livestock production, low-cost housing and  - 4 - tourisr-m iinfrastructure. In addLition, most of 1973 was lost for the revival of private investi.ent, since the new incentives were introcukced only in AugUst, anld. tihc start of new public investmlent prograrm,s was delayed, since tiue Plan was issued only in July. However, in(licationis are that investment hias beeii picking7 up at a fast pace in 1974. 11. D)espite the acceleratioln of investmient trnt' related import growth, financial resources are not expccted to be a constraint in the m,.edium term, provided increased inflows of official assistanlce are achiieved. Tihe strength- eninr, of the balance of pavl.:ents since 1969 has continuliedi in 1973, and the steep rise in tihe price of phosphate in 1974 has enabled the country to offset the incre,ase in tie imuport bill due to higlher prices, in particular Per petroleull. This favorable situation, ihowever, nay be erodled in later years, sinice tie price of phosphate is likely to decline, while prices of il.!ports andl import requirements will keep rising;. :qonetheless, until the eeIC of the Plan period, phosphate and other exports, and worker's remit- tances, together with the expected increase in capital inflows, should pro- vidie enouglh foreign exchange to meet import re!uirenents and maintain reserves at a sufficient level. (in the cldomrestic side, tihe -Phosphate company (DCP) will be able to m:ake large, adclitional rei-littances to the Government, whzich shiould ilelp finance public investmenit in a non-inflationary manner. IHowever, the Covernmnent will hlave to proceed with plaanned tax: measures in order to make the tax system,n ore responsive to eccnomic growth and ol- re equitable, andl with planned imrprovements of the capital niarket to facilitate thie mobilization of private savin: and the financing of private investment. 12. The financial situation m:iay become wore difficult i)eyond 1977, if tile predicted trends in exports (wit'hi no furtiher g.ains from, 'lhosphate prices) and im,Lport requirctments continiue. To prepare for this eventuality, ilorocco neecds to increase, as planned, tihe level of external borrowing on favorable termis Irorn official sources, and this will require improved project prepara- tion. At tiLe end of 1973, M1orocco's external debt amounited to an estiriatecd 077 million excluding undisbursed amounts. Service payments represented only 6 percent of goods and non-factor services exports. Although long-term prospects are for aore pressure cn thie balance of payments than at present anci a considerable rise in thie debt service ratio, .orocco cani service sub- stantial additional debt. PART II - BAiNKiT GROUP OPERATIONS IN: LOPOROCCO 13. Bank and IDA lending to MIorocco has supported projects witht financ- ing, totalling S 423.2 million (net of canicellations), of which $242 million was lent over the last two vears. Four projects lhave been financed under IDA credits totalling $36.8 million. IFC investments amount to $1.3 million. I;l.plenentation of projects is often slow- due to cumbersome Governrment dis- burserrment procedures, but withl time performance usuallv improves. Annex II contains a sumnary statemient of Bank loans, ID)A credits and IFC investments as of October 31, 1974, and notes on the execution of on-going projects.  - 5 - 14. The Bank Group strategy is to suipport selected objectives of the third Five-Year Plan through projects which contribute to increased production, inlpjrovement in the balance of payments, institution building, and the strength- ening of sector organization and policies, and througlh programs attacking the problems of poverty in HIorocco. Particularly in agriculture and urbanization and to a lesser extent in inyustry, projects should yield substantial benefits in economic terms and at the same tirne improve income distribution. The lend- ing program includes several projects, mostly in agriculture, wilich might serve as pilot schemes. Because the pace at which Bank Group lending can be carried out will continue to depen(i to a large extent oni the speed at which the Gov- ernment prepares projects and takes related policy decisions, special efforts will have to be made to help prepare projects and programs. 15. In financing agricultural projects the Bank has helped develop large-scale irrigation schemes and agricultuiral credit. A project for a large multipurpose dam in the Oum-er-R'bia valley is under preparation. Objectives include efficient organization of the sector, land reform and development of small farms in order to alleviaite rural poverty. The Government hias recen- tly accelerated land distribution to smallholders and landless laborers, and is. presently preparing projects for small farrers both in rainfed and irrigated areas for which it has sought 3ank financing. 16. Education is a critical bottleneck in Moroccots development. Two IDA credits have been miade to improve technical and vocational training. Fol- lowinwg a UNESCO project identification mission, in the framework of the Bank UJl.SCO Cooperative Program, which visited the country in September 1973, prepa- ration of a third project is underway. 17. Industry and tourism development has been financed through two DFC's (Banque Nationale pour le Developpement Economique, and Credit Immobilier et hiotelier), and through a loan for the construction of a phosphoric acid plant at Safi. In addition, as Executing Agency for a UNDP-financed study, the Bank is helping to prepare a tourism infrastructure project which would alleviate the scarcity of improved land for hotel development in the Agadir region. Projects in these sectors as well as the project presently proposed help Morocco to raise its foreign exchange earnings and help improve sectoral policies. 18. The first transportation loan, a $14.6 million Bank/IDA blend, was for a highway project and included financing of a sector review which served as a basis for a second loan of $29 million approved in 1973, as well as recommendations on transport policy. A proposed third loan would help to implement a revised policy and to improve maintenance and administration of the highway system. 19. Public utilities in urban areas were supported through a $48 million Water Supply loan in July 1972 and a $25 million loan for a power project in October 1973. Bothi projects aimed at improving the organization of public utilities. A second water supplv project is being prepared by the Government  - 6 - to meet the needs of several urban and rural centers. To help tackle some of thie social problems of rapid urbanization, a site and services project in Casablanca is being considered. 20. A consultative group for Morocco was formed in April 1967 under the cliairmanshiip of the Bank. It includes Belgium, Canada, France, Germany, Italy, Japan, Kuwait, Spain, the U.K., the U.S., IMF, UNDP, OECD/DAC, the African Development Bank and the European Investment Bank. The last meeting of the Group, on ,larch 28 and 29, 1974, expressed satisfaction with the improvement in Morocco's economic performance in recent years, and the emphasis in the Third Five-Year Plan (1973-77) on improving the distribution of growth bene- fits. Tile gross inflow of official loans and grants to Morocco rose from $129 nillion in 1966 to $159 million (of wlhich $18 million in grants) in 1971, but temporarily fell to $138 million in 1972 and $115 million in 1973. The major sources of aid were France, the U.S., Germany and the Bank Group. 21. At the end of 1973, the Bank Group's share in Morocco's external public debt was estimated at 13.4 percent on a disbursement basis. The share of the Bankc Group in debt service was 11.2 percent in 1973. By the end of thie 1970's the Bank Group's share in public debt and debt service is expected Lo rise to about 20 percent. PART III - TllE INDUSTRIAL SECTOR 22. During the Second Plan (1968-72), investment in manufacturing to- talled nearly DH 1.9 billion (about US$380 million). Of this total, DH 425 million was in five public and semi-public companies; the remaining investment, more than three-fourths of the total, was carried out by'private companies, with BNDE providing about DH 630 million. In terms of value added, manufac- turing grew by 5.6 percent a year, a rate of growth equal to that of GDP, and in 1972, the share of industry was 12.4 percent of GDP. The leading subsectors were food-processing (6.8 percent annual growth rate), truck and car assembly (6.8 percent), textiles and leather goods (6.0 percent), and construction ma- terials (5.4 percent). By the end of the Second Plan, the structure of manu- facturing was heavily weighted in favor of consumer goods production, which represented 63 percent of the sectoral total. Exports by the manufacturing sector rose by 13.6 percent a year, from 17 percent of Morocco's total mer- chandise exports in 1967 to 24 percent in 1972. Exports of processed food- stuffs rose more slowly (7.6 percent a year) than those of other manufactures (19.0 percent a year). The broad range of products exported by the manufac- turing sector was based predominantly on domestic raw materials produced by agriculture and mining. Imoort substitution was promoted in basic and other consumer goods; nonetheless, in 1972, most of Morocco's imports were semi- finished and finished industrial products (62 percent) and some processed foodstuffs (about 10 percent).  23. A major objective of the Third Plan (1973-77) is to achieve an 11 percent annual growth rate of the manufacturing sector. Exports of manufac- tures are expected to rise from 24 percent of merchandise exports in 1972 to 32 percent in 1977. However, the Plan also projects further import substitu- tion in food processing, textiles, motor-vehicle components, ship building and chemicals. Corresponding investment requirements are estimated at about DlH 3.6 million (around $900 million); of this, Dil 2.6 billion would be carried out by public and semi-public enterprises, and DH 1.0 billion by the private sector. Most of long-term finance for industrial investment is expected in the Plan to come from BNDE, which is assigned a lending program of DH 950 million for 1973-77. At the same time, the Plan foresees that capacity util- ization would rise to 85 percent by 1977. The export-oriented strategy and accelerated growth of manufacturing are expected to increase employment and to add an estimated 90,000 new jobs during the five-year period. Finally, the Plan calls for special measures, including differentiated investment incen- tives, to spread manufacturing investment more evenly among the country's various regions. Generally, the Plan's objectives appear well chosen, and Morocco possesses the basic potential to attain them. 24. N4ew meastures to encourage in(uistrial exports, whlicih were issued in August 1973, include income tax exemptions on the exported portion of output, allocations of foreign exchange to exporters for promoting sales abroad, and guarantees to foreign investors regardin-g (dividtendl and capital repatriation. In addition, the P'lan calls for streanliniug; cx-clhange and othier controls ap- plving to industrial exports. 25. The Government also introduced measures to encourage private invest- ment in manufacturing in August 1973. For investments up to DH 30.0 million (excluding taxes), benefits under the new measures are granted nearly auto- matically. The benefits comprise exemptions from import duties and indirect taxes on all equipment purchases, exemptions from income tax for 10 years, guarantees to foreign investors regarding dividend and capital repatriation, and a 2 percent subsidy on interest payments on BNDE long-term loans. Invest- ments in regulated sectors such as mctor-vehicle assembly and investments exceeding DH 30 million are still subject to case-by-case approval by the Government. The new investment incentive measures are a significant improve- ment by comparison with the previous system and provide a suitable framework for further investment in manufacturing. In addition to being granted almost automatically, they are less biased in favor of capital-intensive methods of production. Furthermore, regional differentiation has been introduced (e.g. income tax holidays are not available for investments in Casablanca). 26. Industrial investment is also encouraged by the creation in 1973 of an office for industrial development (ODI) replacing the former office (BEPI) in the promotion of industrial investments through Government-sponsored studies and Government participations, Under the Five-Year Plan, ODI is to spend DR 15 million on pre-investment studies, and the Ministry of Industry DH 5 million on general studies. Further, the Plan allocates DH 423 million (about $105 million) for Government participations in industrial ventures.  - 8 - 27. It is still too early to gauge the results of the above measures. Investment proposals in the public and seNi-public sector may be insufficient to reach the Plan's targets for industrial investment and output. For export, much '.Jill depend on demand frorm developed countries. however, for the first si-. montihs of 1974, industrial investment has been increasing rapidly and the packa;e of incentives seems to hiave ha(l important stimulating effects. In the future, greater efforts are neededi to induce the manufacturing sector to con- tribute more to the objectives of erployment and regional development. 2;. \According to leiislation passed in March 1973 promoting "narocanisa- tion" in industry, foreigln investors have to associate with M-1oroccan nationals in services antd several industrial sub-sectors. The aim of the Government in taking these measures is to build a class of Mloroccan entrepreneurs, and to facilitate industrial ownerslhip. Because a large part of the manufacturing sector remains outside its scope, "Marocanisation" seems to have had only a temporary adverse effect on foreign private investment activity. PART IV - TlE PROJECT 29. The Banque Nationale pour le Developpement Economique (INDE) esta- blished in 1959, has received six loans from the Bank totalling >113.0 million (net of cancellations). In 1962, IFC becam,le a shareholder. The most recent loan from the Bank, >24 million, was signed on Htay 14, 1973 and was fully committed in M'ay 1974. Additional but insufficient resources have been mobi- lized from diverse sources and BNDE needs further assistance to meet its grow- ing requirements. 30. A detailed description of the proposed project is given in the re- port entitled "Appraisal of Banque Nationale pour le Developpement Economique, Morocco" (585-HOR) dated November 27, 1974, which is being distributed sepa- rately. A loan and Project Summary is attached as Annex III. The proposed seventh loan to BNDL was appraised in July, 1974, and negotiations were held in Washington, D).C. in October. BNDE was represented by Mr. Mustapha Faris, its President and General Manager, and the Guarantor by Mr. Tazi, of the .iinistry of Finance. iNDL's Objectives and Role in the Economy 31. Since its inception in 1959, and especially since 1972, under the leadership of .r. Faris, IiiDE h 1as developed into a well-managed institution making its investment decisions on sound financial and economic criteria. BND)h holds a Key position in tihe term financinig of industry in ,iorocco. Management and Organization 32. BNDE's Board meets four times a year. It has delegated authority to approve loans up to DH 4 million to the Executive Committee which also examines loan proposals above this amount prior to their presentation to the  - 9 - board. Loan proposals are thorou,hly examined and changes are often pro- pose(d prior to approval or presentationi to the boar(l. This represents an iriproveTmient over the situation at the time of the last appraisal. Represen- tation of IFC, both on the Board and the Executive Committee, gives an oppor- tuiiitv to thLe Bank Group to examine all projects financed by lNDE. Er. 'lustapha Faris, former Finance Minister, was appointed President and General Mlanan;er in l)ccemlher 1972. lie enjoys high standing- among his staff, the busi- ness community and the Government. 33. s professional staff is well-qualified, adequately experienced and tlorks effectivelv as a team particularly at the Department head level. ,iDW) hias anl effective training program for new recruits and encourages train- int; for c.;istilig staff. 34. As there is a shortage of qualified engineers in Morocco BNDE has found it difficult to compete with the private enterprises which have been of- fering more attractive compensation. With an increased volume of operation, BNDE needs additional senior engineers and junior technical assistants to study new projects thoroughly, and ensure adequate suipervisioii of projects unlder coustruction. A salary premium for technical staff has recently been intro- duced, and during negotiations, B.;DE confirmed its intention to appoint at least twio senior and two junior enineers by Decemiber 1974 and an additional two senior and two junior engineers by Marchi 1975. Resources 35. In December 1972, BNDE increased its share capital from DH 20.0 million to DH 32.4 million. For tlhe first timie, a rmajor proportioni (hi1 per- cent) was subscribed by private sharelholders. The sihare of Government ourner- ship dronped from 43.6 to 38.2 percent between June 1972 and June 1974, while thie share of private individuals increased from (.4 percent to 17.3 percent. IFC, whiichs held 24.7 percent in 1972, reduced its share to 14.83 percent by June 1974. 36. As of July 31, 1974, B'i)D]'s total resources amounted to Dh 736.4 nilliorn, 47 percent iore than at Decermber 31, 1972. 37. The 'sank has been pressing BMIDL to diversify resources and to rely less on Bankl fundtis. hNDI hias meanwhile reduced thle share of I]RD funds in total resources outstanding froni 61.0 to 41.8 percent between December 1972 andl July 1974. 14ith additional resouirces contracted and those expected over the next two years, including the proposed loan, IBlRD's share in 13NDE's total resources slhould drop to about .30 percent by end 1976. 31.. Interest Rate. BINDE's lending rate was increased from 7 percent to 3 percent in July 1971 and to its present level of 9 percent in January 1972. B.'D!'W's borrowing cost averaged about 5 percent over 1970-73. With more expensive debt expected to be contracted, the average cost of long-term debt should increase to about 6.8 percent by 1977. Taking into account thie increase in tiie level of operations anc higher debt leverage, the current lendin:t rate of 9 percent is still sufficienit to maintain and possibly irmprove ov Irall profitlabili:v.  :31. lThe Government regulates interest rates of the Central 1dank, BNDE antd tihe comnmercial banks. It also reb,ates 2 percent of thfe 9 percent interest whicl l,.t. narg>es its borrowers, resulting in ani effective rate of 7 percent. Tihis reloate is part of the incenitive package described in paragraph 25 above. 40. Thc Government is carrying out an overall review of tie interest rate systeim and of its relation to incentives. Onl the basis of this review, tiue Governi-tent intends to increase tile ,eneral level of interest rates; this increase is particularly justified in the light of a moderate acceleration of price iniflatioln (whiich now amounts to about 10 percent per year) from the low rates experienced between 1968 and 1972 (aboult 4 percenit per year). An in- crease in 6iDE's rate is cxpected to follow fromi tihis reviewi. Operations 41. Promi its inception iii 1959 to December 1973, BiDE approved 1,116 operationis for a total of Dii 1.7 billion (US$406 m;illion equivalent). An im- portaiit part of these operationls, am,ounting to approxinatelv 40 percent of the total, were in appraising anti approving medium.-tern loans, extended by commercial baniiks, whicih nay subsenuentle lie rediscounted by the Central Bank. -.itci sorte tirve Lag, 13;o's levc-.l of business tends to reflect the level of investment in :oroecco. 1ts total direct loan approvals decliried froml Dhi 165 miillion in 197() to 01! 113 million anti Dia 8b million in the tw-fo sluggish years of 1971 and 19f72. As a result of an upstulrge in inJiostrial investrmient since tiie las;t !luarltr of 1'73, total approvals of direct loans pickedl up again in 1973, and iapprovals of DiL 312 million froml January 1974 through AUgUSt 1974 alone, have e.xceetded all previous anLnual approvals. ELuitv commr-itmiients in the last tL_.re yezars increasedl to Dii 35 iillion. 42. tei sectoral distribution of ENi'ts approvals hlas clanecd little in tzie past tiree vears anti reflects approxiAi.;atelv tle sectoral lbreal:;down of pri- vate incustry in. Torocco. Textile anci food. orocessiton still account for rom"l .tv 3IL iercent of FOOl 's approvals, fol2o.eci by m!iining and -aetroleum industries, whiich account for about 15 nerctnt. About 27 percenl of LADlL's total a1provals through 1'7) were directed to public sector projects, and tlis shlare Iihas furthier decreased in t!ie last tlhree vears to about 20) per- ccnt. A s-unistantial nu2m:!ber of ne, projects apovroven 1v BONDiL in recent years (nl3 percent over 1970-1973) wo,re proeior:inantlv 'Moroccan-owned. In the past, about half of ;1J3Itm' approvals hlave been directed towards expansion and! niod- erni7atious. Thle import cormponent of projects financedl by 3ilEL, whichl has declined' sligpltly, is between 40 andi 45 percent. 43. iconomic Iropact of BOOK's Operations. Durini 1969-1973, BO.DE ap- proved operations amounting to iJL 1.0 hillion f-or projcots miainly in the in- dustrial, energv andl mining sectors, involvin,- a total investment of D1. 2.4 billion. A signlificant share of finallcinlg' wuenit to export-oriented projects, particulariv for textiles anti food processinm.. O1f the 94 projects supported throug;h tie Last two Bank loans to i,DE, 31 wjere expected to export over 10 percent of production aid( 14 were expected to export over 50 percent. Mlost of Bi5.li)L's financing, howLoxever, continues to be for imiport substituting projects. lit genieral, thlese projects have relied ommlv to a limiited extent on tariff pro- tection to ensure titcir finiancial viability. A recent study of about fortv  of BNDE's projects showed that the average investment per job created was as high as $30,000 but drops to about $17,000, if three large and capital inten- sive projects are excluded. While somewhat high, these averages do not appear unreasonable at the present stage of development of Morocco's industrial sec- tor. On a conservative basis, the projects approved by BNDE between 1969 and 1973 would generate about 20,000 new direct employment opportunities. 44. Since approval of the last Bank loan, BNDE has been making a major effort to strengthen its economic analysis of projects. The economic rate of return is now calculated for all projects involving a total investment greater than DHi 5 million or which involve an estimated rate of effective protection in excess of 50 percent. An understanding was reached during negotiations that BNDE would continue to include adequate economic analysis in the appraisal documents to be submitted to the Bank in connection with subprojects for which financing is requested under the proposed loan. In particular, BNDE will pay greater attention to the employment generation aspect of projects. Financial Situation 45. BNDE's balance sheets and income statements (summarized in Annex 10 of the Appraisal Report) reflect a doubling of total assets from DH 261 million at the end of 1970 to hA 522 million by July 1974. Total loans out- standing have slightly less than doubled and equity investments have increased two and a half times since 1970. Most of the growth was financed through addi- tional borrowing, and total borrowing outstanding also more than doubled to a level of DH 423 million. Increase in share capital, and earnings, financed approximately DH 23 million of the increase in assets (about 9 percent). 46. Operating results reflect a satisfactory profitability. Earnings before tax and net income increased respectively from 13.8 and 11.0 percent of average net worth in 1970 to 16.6 and 14.3 percent in 1973. BNDE's share- holders received a dividend of 7 percent in the years 1970 to 1972 and 8 per- cent in 1973. The book value of shares was about DH 94 million by mid-1974. BNDE's shares at the end of July 1974 were quoted at DH 60, giving a dividend yield of 6.7 percent and a price earnings ratio of approximately 5:1. 47. At the end of 1973, BNDE's outstanding direct loan portfolio amounted to DH 393 million, for 199 operations. Arrears of principal and interest in excess of three months amounted to Dh 12.2 million, relating to 31 borrowers. However, it seems likely that only eight of these loans may result in losses, for which BNDE has made adequate provision or holds adequate security. BNDE has agreed to continue the practice, established for the first time this year, to have its provisions estimated and audited annually on a case-by-case basis (Section 4.11, draft Loan Agreement). In the case of BNDE's equity portfolio, two large companies in which BNDE holds large investments are undergoing re- organization, and BNDE has made adequate risk provisions. Prospects 48. Operations. In line with the expected growth of the industrial sector, BNDE s prospects for growth in operations over the next three or four years are good. BNDE is aiming at total commitments of DR 1.7 billion and  - 12 - disbursements of DH 1.5 billion over 1974-77. Its forecast of operations for 1974 and 1975 is based on its current pipeline of projects, most of which are already under detailed study. Direct loan approvals should exceed DH 450 mil- lion for each of the next three years. 49. Resources. BNDE requires about Dii 1040 million to finance expected commitments over the period August 1974 to December 1976. So far, BNDE is fairly certain of securing about Dli 630 million, and the proposed Bank loan of $30 million would fill about one third of the remaining gap (see Annex 15, Appraisal Rleport). B3NDL; is exploring other possible sources, particularly NORAD, US EXIM Bank, and the Government of Iran, to meet the outstanding requirement. 50. Financial Situation. Principally due to increased loan operations and higher debt leverage, BNDE's profitability is expected to improve consider-- ably over the next four years. Earnings before tax and provisions for doubt- ful loanis is expected to increase from about 18.4 percent of average equitv In 1973 to between 22 and 25 percent for 1975-77. This should enable BNDE to maintain dividends of 8 percent in 1974 and 1975 and 9 percent in 1976 and 1977. With thie level of activities currently forecast, BNDE's total invest- ment portfolio is expected to increase from about Dil 490 million in mid-1974 to DH 585 million by end of 1974 and DH 1.5 billion by 1977. Total long-term debt is expected to increase to about DH 1.4 billion by 1977. By mid-1975, BNDE is likely to reach the debt/equity limit of 6:1 agreed with the Bank for the last loan, requiring an increase in its share capital and equity base, BNDE is in the process of increasing its share capital and of obtaining quasi- equity funds through new subordinated government loans (DH 50 million). In view of BNDE's sound portfolio, it was agreed during negotiation that BNDE's debt/equlity ratio could be increased to 7:1 until December 31, 1977, equity being defined to include up to DH 70 million of subordinated bonds held by the Government (Section 4.06, draft Loan Agreement). After that date BNDE'8 total debt (including subordinated debt) should not exceed ten times its equity as conventionally defined (i.e. share capital and free reserves) (Section 4.07, draft Loan Agreement). This allows BNDE enough time to plan and imple- ment the necessary capital increases after 1975. 51. rermis of the Proposed Loan. The termls for the proposed loan would be those normallv applied to Bank loans to developn.ent finance companies. Use of the proposed loan for financing public sector projects eligible for B:.)F.s financing under its policy statement would be limited to a maximum of 40 percent of the Loan amount. There would 'be a ceiling of $4 miillion on use of tihe Loan for any single project. (Section 3.01, draft Loan Agreement). The proceeds of thie loan woulld be used1 to finance direct imports, or the equivalent of 65 percent of the cost of goods procured locally off-the-shelf, representing the imrport element of these costs. Tlue free limit would be $900,000, with an aggregate free limit of S7 million (Section 2.02 (b), draft Loan Agreement). Tue foreign exchan-e risk- wouldl he assumed, as in the past, by the Central Bank. INDE is to scibrmit its audiite(d accounits to thc 3anl< within six monthis of the close of eacih financial vear. (Section 4.02, draft Loan Aireeenmt). Because thle sixth 1Bank loan to BNlDE becamre fully comrmitted in lay 1 474, it was a,greed during negotiations tlat disbursements fromi the proposed loan couldl be ma(le a7ailnst expenlritures incurreci up to 9() days before si -;natccre of the loan (Sectioni 2.02(d), draft Loan A- reerment).  PART V - LEGAL INSTRUMENTS AND AUTIIORITY 52. The draft Loan Agreement between the Bank and the Banque Nationale pour le Developpement Economique, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, the Report of the Committee provided -for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern for development finance companies. 53. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 54. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments   Page 1 of 3 pgage CRDNCRD DATA - 150001CC0 ARRA POPLULATION DENSITY vi 1.. a ha MtTio. (reid-1971 Per halo! -rbl. land SOCIAL INDICATORS Reference Countries ___ 197 f:197 MU970 GN? PER CAPITA US$ (ATLAS aASIS) /8 0 /3,X 270 4 220 /8 370A L 3,6204 ra- J' ~-fte (par tho...arcd) L5 Ad 3La.c165 Crude dec11, rate (par thousand) i q&1 I 1 f 1. Dofanot siortality ret. (per thousaod live births) '19 o