Morocco - Industrial Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Al $t36v- A - o t- 7 - Repot No. P-4907-MOR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED PACKAGE OF EIGHT LOANS TO MOROCCAN BANKS AMOUNTING TO US$170 MILLION EQUIVALENT FOR AN INDUSTRIAL FINANCE PROJECT NOVEMBER 7, 1989 This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CUURENCY EQUIVALENTS Currency Unit = Dirbam (DH) 1982 1983 1984 19G5 1986 1987 1988 DH Per US$ Year Average 6.02 7.11 8.81 10.06 9.10 8.36 8.21 Year End 6.27 8.06 9.55 9.62 8.71 7.80 8.21 DA per SDR Year Average 6.65 7.60 9.03 10.22 10.68 10.81 11.03 Year End 6.91 8.44 9.36 10.57 10.66 11.07 11.05 FISCAL YEAR January 1 - December 31 ABBREVIATIONS BNDE Banque Nationale pour le Developpement Econoaique CMPE Centre Marocain de Promotion des Exportations GDP Gross Domestic Product ITPA Industrial and Trade Policy Adjustment MCI Ministere du Commerce et de l'Industrie PB Participating Bank SAL Structural Adjustment Loan SOE Statement of Expenditures UNDP United Nations Development Program  FOR omcIAL USE ONLY MOROCCO INDUSTRIAL FINANCE PROJECT Loans and Projeet Summary Borrowers: Banque Centrale Populaire (US$ 12 M) Banque Commerciale du Maroc (US$ 25 M) Banque Marocaine du Commerce Exterieur (US$ 40 M) Banque Marocaine pour le Commerce et l'Industrie (US$ 12 M) Banque Nationale pour le Developpement Economique (US$ 50 M) Credit du Maroc (US$ 5 M) Societe G6n6rale Marocaine de Banque (US$ 9 M) Wafabank (US$ 17 M) Guarantor: The Kingdom of Morocco Amount: US$ 170 million equivalent in aggregate. Terms: Twenty years, including a five-year grace period, at the Bank's standard variable interest rate. On-lending Arrangements: The funds will be on-lent by the participating banks (PBs) for eligible industrial, industry-related, and tourism sub-projects. The sub-loans would be made in local currency, at the prevailing fixed rates for medium- or long-term industrial credit or for tourism financing. These rates are currently substantially positive in real terms, and are expected to remain so. Sub-loan maturities will not exceed twelve years (including a grace period of up to five years). Financing Plan: Not applicable. Economic Rate of Return: Minimum of 12% for each sub-project. Staff Appraisal Report: Report No. 7458-MOR, dated October 26, 1989. This document has a restricted distibution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDEINT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED PACKAGE OF EIGHT LOANS TO MOROCCAN BANKS FOR AN INDUSTRIAL FINANCE PROJECT 1. The following memorandum and recommendation on a proposed package of eight loans to Moroccan bar.ks for an aggregate amount of US$ 170 million equivalent is submitted for your approval. The proposed loans would be made on standard Bank terms, with a 20-year maturity, including a five-tear grace period. The funds would be used to establish lines of credit for medium- and long-term investment projects, primarily by private, export-oriented, industrial firms. They would thus help to generate a supply response from the industrial sector to ongoing Government efforts to liberalize the economy and to strengthen competition in the domestic economic environment. These overall policy initiatives have been closely supported by the Bank and the IMF since 1983, and further deepened through the recent Structural Adjustment Loan (Ln. 3001-MOR) "'. 2. k After a period of economic stagnation culminating in a payments crisis in 1983, the Government of Morocco embarked upon a comprehensive program of structural and incentive reform in an attempt to reorient the economy towards a more dynamic and export-led growth pattern. The program focussed on: (i) the progressive elimination of tariff ..id other barriers to international trade, combined with a series of measures to promote non-traditional exports; (ii) the liberalization of prices and other measures to promote competition and efficiency in the domestic industrial and financial sectors; (iii) rationalization of the financial and management controls of the public enterprise sector, and the more systematic application of economic criteria in the approval of public sector investments; and (iv) fiscal reform and budgetary stringency so as to improve the Government's own financial position. 3. Vigorous implementation of this program, combined with a more favorable international environment and the agreed rescheduling of Moroccan debt, has enabled the country to make substantial economic progress over the past five years. In particular, manufactured exports have grown rapidly -- 92 p.a. between 1984 and 1988 -- in response to the new policy environment, and have been instrumental in bringing about the higher rate of overall economic growth (5.6% p.a.) that has characterized this period. In parallel, ~-' The Bank has supported Morocco's adjustment efforts through a series of investment and adjustment operations; the latter include two Industrial and Trade Policy Adjustment (ITPA) Loans in 1984 and 1985, respectively, two Agriculture Sector Loans (1986 and 1988), and Education Sector Loan (1986), a Public Enterprise Rationalization Loan (1987) and, most recently, a SAL in 1988.  "a - a substantial reduction In the budget deficit and tight control of monetary poliey has enabled this accelerated growth to be achieved while keeping annual inflation in the very low 3-6% range. Moreover, the structural changes In the eonomy have made it more responsive and should make it more capable of adapting to future changes in the international economic environment and in its major export markets. Finally, Morocco's medium-term economic prospects would be further enhanced if It is able to obtain agreement with its principal creditors on a package of debt and debt-serviee reductions. Morocco's external debt accounts for 901 of its GDP and about 3002 of Its total foreign exchange earnings, and Its servicing cost is an Important item in the country's external payments. Negotiations on allievating the burden of Morocco's external debt are currently underway and are being followed closely by the Bank and the IMF. 4. Notwithstanding these factors, the challenge for Moroccan policymakers and entrepreneurs remains a difficult one for the 1990's. Even the simple maintenance of current per capita living standards requires GDP growth of about 3.5S per year, and this, in turn, would imply a econtinued expansion in manufactured exports of about 6S per year. This level of export growth is feasible, but it will require action, in particular, on two fronts. First, Moroccan exporters must diversify their markets no as to reduce their heavy dependence on the EEC, which currently absorbs over half of Morocco's total exports and an even greater share of the non-traditional export products. While the EEC will and should remain a major target for Moroccan exports, excessive reliance on this market makes the country's exports very vulnerable to economic and administrative developments in that market. Indeed, adverse developments in the EEC are cited by Morocca. exporters as a principal factor underlying the slowdown in manufactured exports during the first half of 1989. Even in the absence of such vulnerability, however, the very low level of penetration in other significant markets, such as North America, Asia or Africa, provides a compelling reason for increased efforts to tap the potential for Moroccan exports in these markets. A second important point is that future export growth is more dependent upon the availability of medium- and long-term investment financing because, unlike the mid-1980s, capacity utilization rates in export industries are already quite high, and additional output now generally requires additional investment. This strong demand for investment financing has been reflected in the rapid commitment of the last Bank-supported Industrial Export Finance Project (Ln. 2806-0/7-MOR) which was approved in May 1987. Over 901 of that $70 million package of loans was committed in the first eight months of the project. This demand has continued throughout 1988 and in 1989, and the proposed project will help to meet part of it. 5. The proposed project would also support the progressive liberalization of Morocco's financial system, which is a necessary adjunct to the continued program of macroeconomic and industrial sector reforms. During the 1980's, the Government's financial sector policies rightly emphasized the control of credit expansion in a potentially inflationary environment, the maintenance of significantly positive real interest rates at a time when the opportunity cost of capital was high, and the preservation of the financial strength of the banking institutions when many of their clients were undergoing a period of restructuring. While these objectives have generally been achieved, their pursuit has limited the scope for greater competition and liberalization in the financial sector. In particular, ceilings on credit to the economy, imposed by the Government to ensure the financing of its own borrowing requirements, have  - 3- limited the amount of investment lending that the banks could offer to tAe private sector and led them instead to focus their efforts on low-risk, short-term loans. Direct controls on different types of credit and administratively set interest rates have also limited the growth of competitive and profit-based resource allocation by the banks, and fostered the defacto monopoly of specialized credit institutions in certain areas. 6. While stability in the financial sector remains a key Government objective, greater emphasis is now being placed on measures to improve efficiency and competition in the sector. First, the scope and volume of directed credit is being reduced. The ceiling on tourism projects has already been lifted to encourage commercial banks to participate in their financing; other credit ceilings are expected to be eliminatd by the end of 1990. Second, in the control of aggregate credit to the economy, the Government is expected to shift progressively from direct to indirect instruments such as reserve requirements, open market operations and interest rate policy. In 1988, an auction-tased system for placing Treasury bonds on the money market was introduced. Third, in light of the increased involvement of commercial banks in externally financed investment lending, the Government has also moved to further streamline the system for foreign exchange risk coverage. The characteristics of this system in the past resulted in substantial losses for the Treasury. The new system is expected to be self-financing. More importantly, it will eliminate any bias towards foreign borrowing by equating the cost of comparable funds from domestic and external sources. It will also permit the financial intermediaries to set their intermediation margins on the basis of their individual credit risk assessment. The modalities of the new system are being worked out and, after initial testing, it should become operational in 1990. The pace of further financial sector reforms, in particular interest rate liberalization, will largely depend on the Government's ability to further reduce the fiscal deficits. 7. Project Objectives. The major objective of the proposed Project is to promote the expansion and modernization of Morocco's industry, with particular emphasis on export-oriented, private sector firms. It will further contribute towards the alleviation of pressure on the balance of payments by financing a limited number of efficient import-substitution and tourism investments. By directly involving both BNDE and the main Moroccan commercial banks as intermediaries for investment lending, the Project will encourage competition in the area of investment lending and support the commercial banks in the early phase of their involvement in lending for tourism projects. It will also strengthen the effectiveness of export promotion activities. 8. Project Description. The Project would provide lines of credit for an aggregate amount of US$ 170 million equivalent to seven commercial banks and the Banque Nationale pour le Developpement Economique (BNDE). The participating commercial banks are: Banque Centrale Populaire, Banque Commerciale du Maroc, Banque Marocaine du Commerce Exterieur, Banque Marocaine pour le Commerce et l'Industrie, Credit du Maroc, Societe Generale Marocaine de Banque and Wafabank. The Bank loans would have a 20-year maturity, including a five-year grace period, at the standard variable interest rate. The lines of credit would help finance up to 70% of the costs of eligible investment sub-projects (including permanent working capital but excluding the cost of land) of financially sound firms. Most sub-projects are expected to be manufacturing, export-oriented investments developed by private firms. The  - 4 Project allocates & line of credit to each participating bank (PB) on the basis of its estimated sub-project demand and its past performance in investment lending. The PBs would allocate a minimum of 602 of the Bank funds to export-oriented sub-projects (i.e. those expected to export, directly or indirectly, at least 40S of the additional production attributable to the investment) of which no more than 20a of Bank funds could be allocated to tourism sub-projects. Financing of leasing companies would be limited to 101 of each of the credit lines to assist in priority direct industrial investment. To support the development of private investment, sub-projects of public enterprises would be limited to 15% of each of the credit lines. These limits represent a progressive liberalization in the allocation of credit by the Moroccan financial system. They are also in line with the Bank's own efforts to support this move towards commercially determined credit allocation criteria through the design of successive financial intermediation operations in the country. 9. The PBs would appraise the sub-projects and ensure that they are technically sound, and financially and economically viable, with financial and economic rates of return of at least 12S each. Only firms in sound financial condition would be eligible for financing under the Project. The PBs would assess the environmental impact of sub-projects according to guidelines satisfactory to the Bank, and would ensure that sub-projects are designed and implemented in accordance with those guidelines. The free-limit above which the PBs will submit their appraisal reports to the Bank for approval would be US$ 2 million, except for sub-loans to tourism enterprises and leasing companies for which there will be no free-limit. In order to maximize the catalytic impact of the Bank loan, the size of individual sub-loans would be limited to a maximum of US$ 5 million. The PBs would on-lend Bank funds in local currency at the prevailing fixed rates for medium- and long-term lending to industry and tourism. These rates are currently in the 12-13S range Given the current inflation level of about 31 p.a., these rates are significantly positive in real terms. The foreign exchange risk under this operation will be covered by a Foreign Exchange Risk Fund maintained by the Treasury, under a transitional scheme which represents an improved version of the system supported by the Bauk ITPA II loan. Th- Foreign Exchange Risk Fund is expected to be self-financing over the medium-term. All future operations are expected to be covered by the new scheme (para. 6). The Bank would disburse 1001 of amounts paid by a PB under a sub-loan, up to the approved sub-loan amount, on the basis of statements of expenditures (SOEs). Retroactive financing would be allowed up to 10% of the Bank loans, or an aggregate of US$ 17 million, for expenditures incurred since January 1, 1989. This financing would make up for the early commitment of the Industrial Export Finance Project and would avoid delays in sub-project implementation due to the lack of alternative sources of funds. The closing date of the loans would be June 30, 1996. ~' In the unlikely event that these rates fall below the prevailing IBRD rate, the latter would set a floor for onlending rates under this project.  -5- 10. The Project would promote the institutional strengthening of the participating banks. In particular, BNDE, which has had both the burden and the beitefits of being solely entrusted with providing long-term finance to Moroccan industry, will prepare a medium-term plan to improve its competitiveness in a liberalized financial environment. The commercial banks, in turr., will have to strengthen their appraisal capabilities, in particular in tourism projects, a relatively new area of investment lending for these banks. Under the project, measures would also be taken to strengthen Morocco's institutional capabilities in relation to export promotion activities. The Project's estimated cost and financing plan are presented in Schedule A, attached. Procurement arrangements and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the Status of Bank Group Operations in Morocco are provided in Schedules C and D iespectively. The Staff Appraisal Report (No. 7458-MOR, dated October 26, 19S9) is being distributed separately. 11. Rationale for Bank Involvem.ent. Since 1983, the Bank has played a key role in assisting Morocco re-orient its economy and strengthen the industrial and financial sectors through policy and institutional reforms. The impact of the changes on the manufacturing sector to date, especially on manufactured exports, has been impressive "'. The proposed Project would complement the reforms supported by the recent SAL, and would provide the medium- and long-term financing needed for investment, especially in manufacturing. The Bank is well-placed to provide this financing given its extensive experience in institution-building and project supervision in Morocco. Furthermore, the Bank already has established a working rapport with the participating banks, which are generally in sound financial condition and have demonstrated that they are capable of evaluating and managing sub-project loans. The Project would build on this rapport and would promote greater competition and efficiency among these financial intermediaries. The Project would also enable the Bank to assist the Government to improve conditions for investment and exports. Finally, it would complement IFC's activities in Morocco. In particular, the provision of credit for tourism projects to the commercial banks under the proposed loan would complement IFC's current efforts to mount a syndication for CIH to on-lend for similar activities. 12. Actions. BNDE's foreign exchange losses covered by the Government through December 31, 1988 have been paid by the Treasury. During negotiations, assurances were obtained that future reimbursement by the Treasury of such losses would be made regularly to all of the PBs within three m.nths following the end of each semester. Agreements were reached with the participating banks on the eligibility criteria of sub-projects, appraisal requirements, on-lending terms, procurement and disbursement procedures, and on reporting and auditing requirements. Agreement was reached with BNDE that a medium-term plan, detailing its diversification strategy in a more competitive environment, would be prepared by June 30, 1990, and discussed Evaluations of these changes were circulated to the Board. See Report No. 6714-MOR, Morocco: The Impact of Liberalization on Trade and Industrial Adjustment, March 15, 1988, and Report No. 7938, PPAR, Morocco: Industrial Trade and Policy Adjustment Loans I & II, June 30, 1989.  - 6 - with the Bank by September 30, 1990. Finally, assurances were obtained during negotiations that the Government will strngthen itl Institutional capabilities in relation to export promotion activities. For CMPE, this would translate into maintaining an adequate budgetary allocation in 1990, at lest equal to that of 1989. 13. Bnfit. The Project would spur Morocco's economic adjustment and growth process. It would promote the expansion and modernisation of the industrial sector, the cretion of employmnt in lndustry, and the increase of manufacturing exports. It would also strengthen the institutions and initiatives underway related to the development of exports. Moreover, the increase of foreign exchange earnings which would result from the Project would improve Morocco's debt-servicing capability and creditwothiness. The Project would also strengthen the role of the commercial banks in the economy and support them in the early phase of their long-term lending efforts. By involving eight major financial intermediaries in lending for industrial invesement, the project would promote competition and efficiency in the financial sector. 14. Risks. There are two main risks associated with the Project. First, given the possibility of increased economic protection in the countries which are Morocco's major export markets, the export-oriented investment sub-projects may encounter difficulties during implementation. However, many Moroccan enterprises are already developing plans, with the support of the P5. and CMPE, to diversify their products and markets to guard against potentia: restrictions in access to traditional export markets. The second risk is that Morocco's medium-term economic prcspects may not materialize as favorably as envisaged. This may reflect a slowdown in the Government's commitment to continue policy and administrative reform. Alternatively, it could be due to an inability to reach agreement with the country's principal creditors on the moderate debt-service relief that is needed to free up the resources required for priority development investments in the infrastructure and social sectors. While neither of these possibilities can be ignored, their likelihood is small given the Government's demonstrated willingness in the past to take difficult actions, and the history of support that Morocco has received from the international financial community. 15. Recommendation. I am satisfied that the proposed package of loans complies with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loans. Barber Conable, President Attachments By: Ernest Stern Washington, D.C. November 7, 1989  Schedule A MOROCCO INDUSTRIAL FINANCE PROJECT Estimated Costs and Finaneinj Plan Estimated Costs: The proposed package of loans consists of lines of credit to eight Moroccan banks to finance eligible investment sub-projucts. Therefore, the conventional project cost concept i. not applicable to the proposed Project. Financint Plan: Each line of credit would finance up to 702 of the investment costs (including permanent working capital, but excluding the cost of land) of eligible. sub-projects . This percentage share cceresponds to the estimated average foreign exchau;e component of industrial investments in Morocco. Additional funding to cover the sub-projects' investment costs would be provided by investors, suppliers' credit, leasing financing and other bank lending.  Shgbdulg i MOROCCO INDUSIRIAL FRIANCE PROJECT r.Suremeat and Dmet Procurement: Based on the experience under the Industrial Export Finance Project of 1987 and other Bank lHre of credit for industry in Morocco, the average sub-project asie is expected to be about US$ 2 million equivalent. Individual contracts for procurement of goods and services would generally be of less than US$ 500,000. Thus, procurement would bq undertaken under the iupervision of the participating banks through existing local channels according to normal commercial practices in Morocco, where the inherent self-interest of the entrepreneurs has led to efficient procurement under the Bank credit lines. Estimated Disbursement Schedule: IBRD Fiscal Year FY91 FY92 FY93 FY94 FY95 FY96 (USI million) Annual 10.2 30.6 39.1 34.0 25.5 30.6 Cumulative 10.2 40.8 79.9 113.9 139.4 170.0  -9- Schedule C MOROCCO INDUSTRIAL FINANCE PROJECT Timetable of Key Project Proceing Events (a) Time taken to prepare: 17 months (b) Prepared by: The Government and the PBs with Bank assistance (c) First IBRD mission: March, 1988 (d) Appraisal mission departure: June, 1988 (e) Post-appraisal mission: July, 1989 (f) Negotiations: October, 1989 (g) Planned Date of Effectiveness: January, 1990 (h) List of relevant PPARs: BNDE VII and VIII (PPAR No. 6058) B'.JE IX (PPAR No. 8132) Small-Scale Industry (PPAR No. 6063) ITPA I and II (PPAR No. 7938).  10 Pag0 I of 2 tha Iintum at an Grnun fenraX trn mneeorc statamnt of 4k Loans and IDA croitta (As of September 30, 1989) uns Million Amount Loan or (Less canellation;) Credit Undimmed Niumber Ylar airrabar Puarprse hank O UndlabUra Fifty two loans and five credits fully disbursed 2.060.88 45.16 1402 1978 Kingdom of Morocco Agriculture 40.00 7.46 2006 1982 Kingdom of Morocco Water Supply 78.00 16.42 2082 1982 Kingdom of Morocco Agriculture 16.00 8.39 2110 1982 Kingdom of Morocco Forestry 12.60 4.52 2149 1982 Kingdom of Morocco Education 38.00 4.50 2217 1983 Kingdom of Morocco Agriculturo 22.00 15.99 2245 1983 CIH Houstng Development 60.00 2.70 2253 1983 Kingdom of Morocco Agriculture 34.00 21.04 2254 1983 Kingdom of Morocco Highways 76.60 13.48 2272 1983 Kingdom of Morocco Village Infrastructure 16.00 .69 2479 1985 Kingdom of Morocco Vocational Training 27.10 13.82 2487 1985 Kingdom of Morocco Elec. and Mech. Industry 25.10 8.44 2508 1985 Kingdom of Morocco Jerada Coal Mining 21.00 9.90 2572 1985 Kingdom of Morocco Health 28.40 23.24 2656 1986 Kingdom of Morocco Agriculture 46.00 36.85 2657 1986 Port Authority Port of Casablanca 22.00 14.48 2664 1986 Kingdom of Morocco Education 150.00 27.23 2731 1986 CNCA Agricultural Credit 120.00 4.00 2779 1987 Kingdom of Morocco Vocational Training 22.30 15.57 2798 1987 ONPT Telecommunications 116.00 113.17 2806 1987 Etght Moroccan Banks Industrial Export Finance 70.00 27.34 2820 1987 Kingdom of Morocco Public Ent. Rationalization 240.00 4.41 2f25 1987 Kingdom of Morocco National Water Supply 60.00 58.49 2826 1987 Kingdom of Morocco Greater Casablanca Sewerage 60.00 59.37 2885 1988 Kingdom of Morocco Second Agric. Sec. Adjust. 225.00 1SO.00 2910 1988 Kingdom of Morocco Power Distribution a/ 90.00 90.00 2954 1988 Kingdom of Morocco Small & Med. Scale Irrig. It 23.00 23.00 30Z1 1989 Kingdom of Morocco Structural Adjustment Loan 200.00 100.00 3026 1989 Kingdom of Morocco Rural Primary Education h/ 83.00 83.00 3036 1989 Kingdom of Morocco Agric. Res. and Extension &l 28.00 28.00 3048 1989 Kingdom of Morocco Public Admin. Loan &/ 23.00 23.00 3038 1989 CNCA National Agric. Credit 190.00 190.00 3121 1990 CIH Housing Finance II hI 80.50 80.50 TOTAL 4404.38 45.16 1279.00 Of which has been repaid (only amortization) 932.13 4.86 Total held by Bank and IDA 3,472.2S 40.30 Amount sold 20.11 of which has been repaid 20.11 Total undisbursed 1279.00 A/ Not yet effective. h/ Not yet signed.  11 51;hedulg, Q Page 2 of 2 Kxiaim OF HoROcCO S. STATEMENT QF IFC IWKSTNENTS IN MOROCCO (as of September 30. 1089) ' Fiscal Type of USS Mtillion Year Oblar Business LQ1Dn