Kingdom of Morocco - First and Second structural Adjustment Loans

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14221 PROGRAM COMPLETION REPORT KINGDOM OF MOROCCO STRUCTURAL ADJUSTMENT LOANS I AND II (LOANS 3001-MOR AND 3463-MOR) FILE COPY MARCH 31, 1995 Country Operations Division Country Department I Middle East & North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CULRRENCY' EQUIVA LENTS Official Exchange rate: Dirham (DH) per US$ Period End of Period Period Average 1990 8.043 8.242 1991 8.150 8.707 1992 9.049 8.538 1993 9.651 9.299 June 1994 9.096 9.222 LIST OF ABBREVIATIONS ASAL Agriculture Sector Adjustment Loan EFF Extended Fund Facility ESAL Education Sector Adjustment Loan EU European Union FSDL Financial Sector Development Loan GDP Gross Domestic Product ICB International Competitive Bidding ITPAL Industrial and Trade Policy Adjustment Loan LSMS Living Standards Measurement Survey MENA Middle East and North Africa MLT Medium-Long Term PERL Public Enterprise Restructuring Loan RER Real Effective Exchange Rate SAL Structural Adjustment Loan SBA Stand-by Arrangement SECAL Sectoral Adjustment Loan STEP Social Target Expenditures Program TIP Target Investment Program FISCAL YEAR OF BORROWER January I - December 31  FOR OFFICLkL USE ONLY lIHE WORLD BANK Washington, D.C. 20433 U.SA Office of Director-General Openrtions Evaluation March 31, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Completion Report on the Kingdom of Morocco Structural Adjustment Loans I & n (Loans 3001-MOR and 3463-MOR) Attached is the Program Completion Report for the Kingdom of Morocco Structural Adjustment Loans I & I (Loans 3001-MOR and 3463-MOR) prepared by the Middle East and North Africa Regional Office. Part II was prepared by the Borrower. The PCR gives an adequate account of Morocco's adjustment experience. The two SAL. were an integral part of the country's comprehensive economic reform program, which was supported by several IMF standbys and by nine adjustment operations from the Bank, for a total of US$1.8 billion between 1984 and 1992. SAL I was the seventh operation of the nine; SAL U was the last one and was approved more than two years after SAL I had been closed. By the time the SAL I program was launched in 1988, reforms were well underway in several sector and major macroeconomic disequilibria had already been corrected. Thus, the two SALs could be focussed on a handful of remaining weaknesses in the reform process with reatively few and simple conditions attached. The goals of the SALs were to increase growth, to strengthen creditworthiness and, more especially in SAL U, to achieve a more equitable distribution of welfare. The focus of the action programs was on fisal reform, public investment efficiency and private sector development, trade liberalization, external debt management and the articulation of a poverty reduction strategy. Solid ownership of the overall reform program and a circumscribed set of conditions contributed to the smooth implementation of the SALs. In terms of outcomes, the SALA contributed significantly to fiscal reform and to further trade liberalization, and they helped restore Morocoo's creditworthiness. Also, progross was made towards laying the basis for addressing social issues in earnest. On the other hand, targeted increases in public investment spending in priority sectors were not achieved and the overall GDP growth rate fell much below expectations. On balance, the outcome of the SAL. is ratod as satisfactory and the sustainability of the reform process as likely. The institutional impact of the SAI was modest. Morocco's decade-long adjustment process has resulted in remarkable improvements in macroeconomic indicators, combining successful stabilization with modest growth. Yet, the growth rate has been too low to remedy the unemployment problem and has been lower in the post-1988 SAL period than in earlier years. Industrial growth has been especially disappointing. The SAL. will be audited by OED with special attention to these issues. 1 / Francciso Acting Director- Atachment Tn domant ba a rmtricted distribution and may be utd by fcipiefts only in the peformaeo of their official dutiLs I amtents may not otherwibe be disloed without World Bank autborization.   FOR OFFICIAL USE ONLY PROGRAM COMPLETION REPORT THE KINGI)OM OF MOROCCO STRUCTURAL AD.JUST1%1ENT LOANS I AND II (LOANS 3001-MOR and 3463-MOR) TABLE OF CONTENTS PREFACE .................................................... EVALUATION SUMMARY .......................................... PART I: THE BANK'S ASSESSMENT OF SAL I AND SAL II .................1 A. BACKGROUND .......................................... 1 B(I) THE PROGRAM SUPPORTED BY SAL 1 ........................ 4 C(I) EVALUAnON OF SAL I .................................. 6 (i) Implementaion .................................. (ii) Achieving the Objives .............................S (iii) Performance Target Used ........................... 11 (iv) Exteral Environment .............................. 14 Lesns Leaned ...................................... 14 D(1) PROCUREMENT AND MONITORING OF SAL I ................... 15 B(II) THE PROGRAM SUPPORTED BY SAL II ....................... 16 C(II) EVALUATION OF SAL II... 17 (i) Implementation .................................. 18 (ii) Achieving the Objxfives ............................ is (iii) Performance Indicators Targeted ......................... 22 (iv) Extenal Environment .............................. 24 Lesons Leaned ...................................... 25 D(1) PROCUREMENT AND MONITORING ......................... 26 CONCLUSION ............................................ 26 PART II: THE BORROWER'S ASSESSMENT OF THE STRUCTURAL ADJUSTMENT PROGRAM .................................. 27 PART III: STATISTICAL ANNEX .................................... 49 STRUCTURAL ADJUSTMENT LOAN I (3001-MOR) .............. 49 STRUCTURAL ADJUSTMENT LOAN II (3463-MOR) ............. 51 This document has a restricted distinbution and may be used by recipients only in the performance of their I official duties. Its contents may not othermise be disclosed without World Bank authorization. l   i PROGRAM COMPLETION REPORT THE KINGDOM OF MOROCCO STRUCTURAL ADJUSTMENT LOANS I AND II (LOANS 3001-MOR and 3463-MOR) PREFACE The first Structural Adjustment Loan (SAL I) to Morocco was approved by the Board on December 1, 1988 for an amount of US$ 200 million. The loan was closed on schedule after the whole amount of the loan was disbursed by the closing date, December 31, 1989. The second Structural Adjustment Loan (SAL II) to Morocco was approved by the Board on April 30, 1992. The loan was closed on schedule after the whole amount was disbursed by the closing date, December 31, 1993. This Program Completion Report (PCR) was prepared by the Country Operations Division of the Middle East and North Africa Region (MNICO) (Parts I and III) and the Borrower (Part II). Preparation of this PCR was started during March 1994. The basic information is drawn from the President's Reports (P-4867-MOR) and (P-5637-MOR), the loan agreements, supervision reports, internal Bank papers and documents provided by the Moroccan authorities. The report has also benefitted from numerous discussions with IMF and Bank staff members who have been involved in the Moroccan adjustment program.   iii PROGRAM COMPLETION REPORT THE KINGDOM OF MOROCCO STRUCTURAL ADJUSTMENT LOANS I AND II (LOANS 3001-MOR and 3463-MOR) EVALUATION SUMMARY 1. Morocco's adjustment program began in earnest in 1983 with the onset of the financial crisis. After nearly two decades of conservative economic management since independence in 1956, the boom in phosphate prices during 1975-1977 increased export revenues substantially and led to an unprecedented expansion of government expenditures. This signalled the beginning of a new era and an end to the conservative fiscal policies of the past. However, the boom in phosphate prices was short-lived. The ensuing terms of trade reversal, the second oil shock, and the increase in international interest rates led to the fiscal crisis of the eighties. 2. During the period leading up to the need for reform, Morocco's external debt grew dramatically from US$ 1.8 billion in 1975 to US$ 13.4 billion in 1983 with an increasing proportion being owed to commercial banks. By 1982 Morocco's external and budget deficits had both reached around 12% of GDP. With the increase in international interest rates, combined with a prolonged drought during the early eighties and a decline in the productivity of public investment, Morocco could not shoulder its debt service burden. The debt to GDP ratio had reached 96% and the debt service ratio had reached almost 40% in 1983. It was now apparent that a comprehensive program of economic reform was needed. 3. Morocco's reform program consisted of stabilization measures on the fiscal and monetary front combined with structural adjustment measures in trade, industry, agriculture, the public enterprise sector and education to promote a supply response in the economy. Macroeconomic imbalances were addressed by reducing government expenditures including public investment. Improvements in the terms of trade, appropriate exchange rate policies and trade liberalization, as well as improvements in weather conditions led to better performance in GDP growth and in the current account. Structural reform facilitated trade and helped boost non-traditional exports. In addition, a series of debt rescheduling agreements with both official and private creditors reduced its outflow of resources. Thus, by the time the SAL I program was launched, Morocco had already undergone a period of extensive reform. During this period, it was aided in its efforts by several stand-by arrangements with the Fund as well as by a number of sectoral adjustment loans from the Bank. These loans prepared the ground for SAL I.  'V 4. The SAL I program was initially seen as the first of two or three macro-economic adjustment operations which would be needed in Morocco in addition to various sectoral adjustment programs. It was launched to help Morocco continue its long-term adjustment efforts with the goals of improving Morocco's creditworthiness and of increasing growth through higher and more efficient investment. A number of measures were taken on the fiscal/ budgetary front to improve revenue collection and to increase government investnment in key areas. These measures along with trade liberalization and measures taken to improve debt management were also to improve Morocco's creditworthiness. The elements of the SAL I program complemented the government's own vision and efforts, the requirements for second tranche release were few and simple, and thus the program itself was implemented successfully. Continued reschedulings and external support also helped the authorities in reaching their macroeconomic goals. The whole amount of the loan was disbursed and it was closed on schedule. 5. However, Morocco's average growth rate in the post SAL I years did not increase but rather, declined from an average of over 5% during 1985-1988 to under 2% during 1989- 1993. While a great deal of the variability in GDP growth stems from the variability in agricultural value added, the average growth rate for non-agriculture GDP also fell from 4 % to 3% in the same time period. It is difficult to isolate the SAL I program's direct effect on growth given the importance of past policy actions and exogenous factors. While Morocco's creditworthiness depends on a variety of factors not directly related to the SAL I program, budgetary reform, trade liberalization, and the measures undertaken to improve information management on foreign debt helped to improve Morocco's attractiveness to external creditors and debt management. The most important contributions of the SAL I program however, have been the impetus provided for further trade liberalization and the emphasis on fiscal reform which led to a revamping of the tax structure in Morocco. The Bank played an important role in these two areas without which reform would probably have been slower. 6. An innovative feature of the SAL I program was the adoption of a set of macroeconomic targets that were to be monitored during the program. Deviations from these targets were supposed to trigger policy discussion with the Bank and possible corrective action. While many of these macroeconomic targets were met in practice, their usefulness is questionable in the context of Bank SALs whose duration is generally very short. First, the indicators were mostly a set of endogenous variables, not within the government's direct control. Divergence from these indicators in the short run may not even be a reflection of government policy, but of other factors. In addition, these variables were subject to a great deal of measurement error and they are betters indicators of the direction of government policy over the long run rather than as tools to be used for fine tuning the economy. Second, even when divergences are due to government policy it is hard to separate out the effect of previous versus current policies as well as the effect of exogenous factors. Also, these indicators did not fonn part of Bank conditionality in Schedule 4 of the loan agreement and thus were not binding on the government.  7. Though SAL II was approved over two years after the first SAL closed, discussions with the government continued on various reform issues. In parallel, a SECAL for the financial sector was approved in the intervening period. The SAL II program had a somewhat different focus from that of SAL 1. While the goal of increasing growth remained, the Bank put more emphasis on private sector development and poverty alleviation than it had in the SAL I program. Morocco's debt problem and the issue of international creditworthiness had been resolved by continued debt reschedulings in 1990 and 1992 at the London and Paris Clubs, and by continued macroeconomic stabilization and trade liberalization. Like its predecessor, the SAL II program was implemented successfully. The whole amount of the loan was disbursed and the loan was closed on schedule. 8. Along with trade liberalization and continued macroeconomic stabilization, SAL II also aimed to protect core investments in the economy and to provide public investment complementary to private investment to achieve its growth objective. It is too soon to estimate the beneficial effects on growth of the SAL II investment program, which targeted infrastructure and social programs. As long as investments in key sectors are maintained the growth effects could be positive. The SAL II program also played an important role in pushing for greater private sector involvement in areas traditionally reserved for the government in Morocco. Another major contribution of the program was in focussing the Moroccan government's attention on the issue of poverty alleviation. The Bank worked with the authorities to establish a database on the poverty situation in Morocco through the Living Standards Measurement Survey (LSMS) and various studies, and on the preparation of a strategy for poverty alleviation. 9. The SAL II program contained a set of targets that were to be monitored during the program that included not only the macroeconomic ones used in SAL I but also a set of indicators for the social sectors. The relevance of the indicators used for the social sectors are also debatable since they were not all monitorable on a timely basis and their selection did not achieve the desired objective of targeting the poor. Given that a detailed analysis of the social issues was undertaken, and that a strategy for poverty alleviation has been developed in consequence, these targets for the social sectors did not add much to the SAL II program. 10. In conclusion, the two structural adjustment loans of the Bank, SAL I and SAL II, were implemented successfully though they did not meet all their objectives. SAL I played an important role in promoting further trade liberalization in Morocco, and in reform of the budgetary/fiscal system. The program also helped, along with Bank technical assistance, to improve debt management in Morocco. However, average growth in the post SAL I years was actually lower than in the pre-SAL I years. The SAL II program reflected the Bank's changing priorities in Morocco as it emerged from its financial crisis yet continued with low growth: it played a crucial role in focussing government attention on poverty alleviation, continued trade reform, private sector development, and investment in the social sectors to enhance long term growth. The fact that Morocco's reform program had started five years before the first SAL was approved, and that several Bank SECALs had been approved in the interim, meant that reforms were well under way when SAL I was negotiated. It also meant that SAL conditionality  vi could be more simple and thus easier to meet. The Moroccans already had a coherent vision of their goals and the Bank complemented their reform program by highlighting crucial areas for adjustment and by providing it with various instruments. Thus, borrower ownership, a well established reform program, economic and political stability, relatively simple loan design, and a productive relationship with the Bank made implementation of the SAL programs relatively easy.  PROGRAM COMPLETION REPORT THE KINGDOM OF MOROCCO STRUCTURAL ADJUSTMENT LOANS I AND II (LOANS 3001-MOR and 3463-MOR) PART I: THE BANK'S ASSESSMENT OF SAL I AND SAL I Program Identity: Name : Structural Adjustment Loans I and II Loan Numbers 3001-MOR and 3463-MOR RVP Unit Middle East and North Africa Region Country Morocco Sector Non-Project Lending A. BACKGROUND 11. From independence in 1956 until the mid-1970s, Morocco pursued relatively conservative economic policies with investment growing slowly over the years and an annual GDP growth rate of 4%. During this period, primary products, and particularly phosphates, with which Morocco is substantially endowed, accounted for about 90% of merchandise exports. A boom in phosphate prices during 1975-1977 which increased public sector revenues, led to a substantial expansion of the public investment program. From 1973 to 1977 investment expenditures rose from about 17% of GDP to about 34%. Defense expenditures related to the Western Sahara conflict, also escalated. 12. After the terms of trade reversal in the late 1970s, with phosphate prices falling and oil prices rising, the increase in public sector expenditure was sustained by recourse to external borrowing as was true of many developing countries during this period. This strategy was encouraged by the availability of foreign financing at exemely attractive terms. During this period, the budget deficit grew to reach about 13% of GDP in 1981 and 1982 and the current account deficit reached 12%. Morocco's foreign debt grew from US$1.8 billion in 1975 to USS 13.4 billion in 1983. Total external debt was at 96% of GDP while the debt service ratio was almost 40% in 1983. More than 60% of the debt was at non-concessional rates, with over 40% owed to commercial banks (negligible a decade earlier). 13. In view of the dramatic deterioration of the macroeconomic situation, a stabilization program was launched in 1978 but was interrupted due to a severe drought and social pressures. Another adjustment program was launched in the context of the Extended Fund Facility (EFF) of the IMF in 1980 but this program was also interrupted after food riots in  2 Casablanca. Government expenditures had now reached 37% of GDP. During 1980-81 the Bank attempted to negotiate a SAL program; however this effort failed. The high debt stock and the interest rate increase in the early 1980s, both combined with a severe drought in 1980-84, brought about a debt crisis in early 1983 with interest payments alone accounting for 20% of exports and with no access to commercial borrowing. 14. In response to the financial crisis, the Moroccan authorities began a program of comprehensive economic reform strongly supported by its international partners, and a series of reschedulings at the Paris and London Clubs, a process that was to last several years. During 1983 - 1992, this program was supported by seven Stand-by Arrangements (SBAs) with the Fund, seven Sectoral Adjustment Loans (SECALs) and two SALs with the Bank (see Table 1). The SECALS consisted of two loans for trade and industry (ITPALs I and II), two for agriculture (ASAL I and II), one for public enterprises (PERL I), one for education (ESAL) and one for the financial sector (FSDL). World Bank adjustment loans alone amounted to US$ 1.065 billion. In addition to macroeconomic stabilization, the Moroccan reform program consisted of a series of measures to liberalize and increase efficiency in trade and industry, agriculture, education, and the public enterprise sector. In addition, restrictive monetary and fiscal policies were employed to contain aggregate demand. Table 1: IMF Loans and World Bank Adjustnent Loans 1982-93 Starutng Ending In Millions of SDR US$ SBA, CFF 4/82 4/83 517 SBA 9/83 3/85 300 IPTA 1 5/84 6/85 150 ASAL I 8/85 100 SBA, CFF 9/85 12/85 125 ITPA 11 10/85 11/86 200 ESAL 3/86 12/89 150 SBA 12/86 4/87 240 ASAL 11 12/87 12/91 225 SBA 9/88 12/89 210 PAL 9/88 23 SAL 1 1288 12/89 200 SBA 7/90 3/91 48 EFSAL 6/91 235 SBA 1/92 3/93 18 SAL [1 3/92 12/93 275  3 15. Stabilization of public finances was achieved by cutting govemment expenditures and particularly public investrnent. In addition, as oil prices fell, the governnent imposed an oil levy which generated revenues of about 2.7% of GDP. As a result of these measures the fiscal deficit fell from 12% of GDP in 1983 to under 5% in 1987 and 2% in 1993 despite large interest payments on government debt. The decline in international petroleum prices, and the rebound in agricultural production combined with demand management policies served to improve the current account of the balance of payments substantially from a deficit of 12% in 1983 to under 5% in 1988 and 2% in 1993 (before debt rescheduling). In addition, GDP growth during the period 1983-1988 averaged around 4.5% while inflation remained under 5%. The striking improvement in macroeconomic indicators between 1981-82 and 1987-88 is shown in Table 2 and Figures 1-4 (from pages 4 to 6). 16. Structural reforms during 1983-1988 led to a more efficient productive sector. The substantial reforms of the trade and industrial regime gave rise to productivity gains in capital and labor and a shift in trade flows. ' By substituting quantitative restrictions with tariffs, by eliminating anti-export biases, and by simplifying administrative procedures, total trade, and particularly exports of manufactured goods, Plgw 1: udal 11 d CVnn A@oUM 3/ 0~ was given a boost. By on Pao"of GDM 1988 non-traditional 1980 *I 02 93 ad 85 86 l7 IS 09 90 91 92 1993 manufactured goods 2" accounted for 30% of - total merchandise -2 -' Ext. ACct. Deficit exports compared with 20% in 1988, resulting in a reduced dependency -12! t d ricit on natura resource- -2. Dudget deficitbased manufactures. 11 D d dt d Vw Cm"u Gavemmwt budge an a p erba Thus exports had xdudgoIn ptd GP. alrady recovered and 21 Ddidt c gg dmiuatamnt duehg cMiI Sab ni fete current account had cOIIP. turned into a small surplus in 1988. 17. As mentioned before, during the pre-SAL adjustment period, the Bank was heavily involved in the Moroccan reform program. A number of studies conducted by the authorities with Bank assistance enabled them to gain a good understanding of the economic issues. An example of this is the three year study on indusial incentives and export promotion which was initiated in 1979 and which served as the basis for the Industrial and Trade Policy Adjustment [/ A detailed analysis of dte impact of liberalization on trade and industrl adjustmen is provided in report 6714-MOR.  4 Loans (ITPAs). Fund and Bank programs complemented each other providing a good mix between stabilization at the macro level supported by the IMF and structural, supply-response enhancing, sector level reform supported by Bank SECALs. For example, trade and price liberalization were harmonized with fiscal and monetary measures (so that a reduction in import duties was associated with a reduction of the real effective exchange rate.) The negative impact of lower trade taxes was compensated for by a gain in domestic taxes through the establishment of a value added tax. B(I THE PROGRAM SUPPORTED BY SAL 1 18. The Bank SALs came in at the second stage of Morocco's adjustment process; the SAL I program was designed to address weaknesses in the Moroccan reform program. While macroeconomic stabilization had been largely achieved, the growth rate was still low. During 1983-88 macroeconomic stabilization had been achieved primarily by cutting govermnent expenditures and particularly investment. The remaining adjustment came from a reduction in expenditures on wages, goods and services. Frwo 2*: Dobt,wvW Rao 1I, d Gross. vrv2 1USD43 Government revenues had remained virtually | .oftDP Debt ervie. unchanged at around 22.5 % o.0 Rtio of GDP (see Figure 5 on eo page 7). The share of 10.0 central government 40.0 CY Xo investment in GDP had o.. fallen dramatically to 4% in 10.0 1987 and 1988. Thus per 0 so .,64 *5 *6 *7 as Is 30 81 92 93 capita consumption had stagnated and with essential lI/ Daeft buel0IreeSwe*1Q t peS of IPOSNFS &d plS han" cm *owe). investments in key a" o ddM ao"). economic and social sectors cancelled, the outlook for growth was not positive.  5 19. Budgetary problems remained given the weak fiscal system leading to a substantial build-up of domestic payments arrears. Structural weaknesses in the area of public finance had at times slowed the pace of reform (for example, the FP1g 3:ODPQrowthl/ andlnflal*lo2117343 inability to reduce an wop"w ) budgetary reliance on trade taxation and the lack of ________________________________________ local counterpart funding 0 Gpe dfa for public investment 30.00 CDP deflator programs in agriculture, 15.00 GDP cont prices health and education). In 10.00 addition, low foreign s.o0 exchange reserves led to 0.00 periodic external arrears Y0 mand delays in obtaining 73 74 75 74 77 71 79 00 i 0i 33 S4