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

RESTRICTED FILEf COPY IReport No. P-646 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DElVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE IN MOROCCO October 16, 1968   REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$ 15 million to the Banque Nationale pour le Developpement Econom- ique (BNDE) in Morocco. PART I - HISTORICAL 2. BNDE was established under Government sponsorship in 1959 with the participation of local and foreign private investors. The Bank's association with it dates from December 1962 when the Bank's first loan in Morocco amounting to $15 million was made to BNDE. Concurrently, BNDE increased its share capital in which IFC took a $1.5 million participation (25%). At present the remainder of the equity is held by the Government (43%), Moroccan investors (15%) and foreign investors (17%). A second Bank loan of $17.5 million was made in May 1966. BNDE has now utilized the full amount of the 1966 loan. In July 1967, BNDE requested a third Bank loan in an amount to be determined, and an appraisal mission visited BNDE in October 1967. Preliminary discussions on the proposed loan were held in Rabat in February 1968 and negotiations took place in Washington in May 1968 with Mr. Mohamed Benkirane, Director General of BNDE. Full agreement on all aspects of the loan, however, was reached only in September 1968. 3. The proposed loan would be the fifth loan in Morocco, - where the Bank so far has lent $60 million. Apart from the two previous loans to BNDE, the Bank financed, in 1964, the Sidi Slimane agricultural development project ($17.5 million) and, in 1965, the agricultural credit program of the Caisse Nationale de Credit Agricole (CNCA) in the amount of $10 million. IDA made a credit of $31 million in 1965 for the construction and equipment of secondary schools. 4. As of September 30, 1968, the status of the four Bank loans and of the IDA credit was as follows:  -2- Loan or Credit Number Year Borrower Purpose Bank IDA Undisbursed 329 1962 BNDE Development 15.0 _ Finance Company 389 1964 Kingdom of Morocco Agriculture 17.5 - 8.4 433 1965 CNCA Agricultural 9.8 - 5.2 Credit 79 1965 Kingdom of Morocco Education - 11.0 10.2 447 1966 BNDE Development 17.5 - 8.0 Finance Company Total (less cancellations) 59.8 11.0 of which has been repaid to Bank 3.7 Total now outstanding 56.1 Amount sold 1.1 of which has been repaid 0.0 1.1 Total now held by Bank and IDA 55.0 11.0 Total undisbursed 21.6 10.2 31.8 5. Because of departures from the Loan and Guarantee Agree- ments, the Bank on February 19, 1968 suspended disbursements under one part of Loan 433-MOR for the agricultural credit project and cancelled the undisbursed balance for the second part, the Closing Date of which had passed; cQrrective measures were recently agreed upon by the Government and CNCA and the suspension was lifted on September 30, 1968. Shortcomings in the implementation of the Sidi Slimane project (financed under Loan 389-MOR) also developed; the measures needed to improve implementation have now been undertaken. Finally, disbursements under the IDA credit for education have been slower than expected because of delays in construction and procure- ment and slowness in submitting withdrawal applications; steps to remedy this situatiQn are under discussion with the Government.  6. The Bank has informed the Government that in the light of the progress made in the implementation of the Sidi Slimane project and in the reorganization of agricultural services (a basic issue confronting agricultural development in Morocco, which was the sub- ject of a Bank-sponsored survey in 1967), it would be prepared to consider financing new agricultural projects. In addition, a Bank mission visited Morocco in September 1968, to identify projects suit- able for further Bank/IDA lending in other sectors as well. 7. IFC has made two investments in Morocco. In January 1963, IFC acquired 25% of BNDE's share capital amounting to about $1.5 million. In 1966, IFC made an investment and a loan totalling $1.3 million in Compania Industrial del Lukus (CIL), a company mainly con- cerned with processing and canning of tomatoes and paprika. IFC and BNDE shared equally in the financing of this project and each holds 23% of the share capital of CIL. 8. A Consultative Group for Morocco was organized in 1967 and met during that year. A second meeting, originally scheduled for late spring 1968, was postponed at the Government's request; a new date for the meeting is expected to be fixed soon. PART II - DESCRIPTION OF THE PROPOSED LOAN 9. BORROWER: Banque Nationale pour le Developpement Economique (BNDE). WUARANTOR: The Kingdom of Morocco. AMOUNT: The equivalent in various currencies of $15 million. PURPOSE: To be used by BNDE for making loans to, and other investments in, private industrial and other productive enterprises in Morocco to cover the foreign exchange costs of specific projects. AMORTIZATION In 17 years including a two- year period of grace, through semi-annual installments begin- ning January 15, 1971 and end- ing July 15, 1985, subject to change to conform substantially with the aggregate of the amortization schedules for the prQjects for which loan funds are disbursed.  4-- INTEREST RATE The rate of interest payable on each part of the loan credited to the Loan Account will be the Bank's standard rate in effect at the time of crediting. COMMITMENT CHARGE: 3/4 of 1 percent per annum on the undisbursed balance of the loan. PART III - THE PROJECT 10. A report entitled "Appraisal of the Banque Nationale pour le Developpement Economique" (DB-41a, dated October 16, 1968) is attached. 11. Industry, handicrafts and mining represent 18 percent of Morocco's gross domestic product. Industrial growth has been dis- appointing in recent years for a variety of reasons, especially the stagnation of agricultural incomes and the departure of large numbers of foreigners with managerial and technical skills. The growth of tourism, on the other hand, has been much more rapid with the number of tourists doubling between 1962 and 1966, although there was a slight decline in 1967. With its many natural advan- tages, including good climate and nearness to Europe, Morocco has excellent prospects of significantly increasing tourism. 12. BNDE is the largest domestic source of medium- and long- term lending to industry and tourism in Morocco, contributing around 30 percent to all investment in these sectors. Its activities have grown sharply in the past two years. Up to 1965, the annual volume of direct loans granted averaged about $5 million equivalent. It has since doubled. Total financial assistance, including loans, equity investments and rediscounting commitments, increased from $6 million in 1964 to about $16 million in 1965 and 1966, and $25 million (of which $14 million in rediscounts) in 1967. 13. While BNDE's business expansion in recent years has been rapid, there is still room for improvement in the quality of the projects it is financing. Despite some progress achieved in the soundness of its appraisals (even in such sectors as tourism where BNDE has had to break new ground) these need to become more search- ing in their attempts to bring to light technical, commercial or financial weaknesses in individual projects and, sometimes, in entire sectors, such as textiles, where BNDE has invested heavily.  - 5 - 14. Financial performance has also lagged behind business expansion. Net profits and dividends, which in 1967 reached 8.8% and 4% of share capital respectively, remained low. This is directly ascribable to the narrow spread between the cost to BNDE of borrowed money and its lending rate. BNDE's lending rate has been 7% since its creation, in keeping with the Govern- ment's policy of price stability, and the Government reimburses BNDE for interest paid on borrowed funds above 5%. This guaranteed spread of only 2% keeps profits low. The ratio between share capital ($6 million equivalent) and total medium- and long-term borrowings outstanding ($27 million at the end of 1967 including $6 million of subordinated long-term Government loans treated as quasi-equity) because of its low leverage also limited the return on share capital. 15. The above problems of performance and profitability, together with the various means of solving them, were the chief issues in the Bank's negotiations with BNDE and the Government. Agreement was reached on a series of measures which, in due course, should enable BNDE to overcome the shortcomings mentioned above. Some of these measures are expected to entail a substantial strengthening of the role of BNDE's Board, of its management and of its investment criteria. In addition, in order to increase as quickly as possible BNDE's leverage and the dividends it can pay - a first step toward improving the marketability of its shares - it was agreed to reduce BNDE's share capital from $6 million to $4 million and to make a corresponding increase in the Government long- term loans to BNDE. Finally, taking into account the Bank's view that BNDE's financial return should be enhanced, the Government intends to undertake a survey of the interest rate structure in Morocco with a view to determining, inter alia, whether an increase in BNDE's lending rate would have any substantial impact on other rates and, eventually, on prices. 16. The several measures that have been agreed upon to strengthen BNDE should help considerably in allowing the institution to cope with its rapidly expanding volume of business and provide a suitable basis for a new loan. Inasmuch as the proposed loan of $15 million will be used in a relatively short period, the opportunity to review the effectiveness of these measures will come before long. The early use by BNDE of such an amount is based on the assumption that BNDE will finance portions of some very large projects presently under study and that it will continue to lend for tourism until the loan is committed. For the longer term the Government's policy is to finance tourism through a specialized credit institution. The Bank has agreed in principle to consider lending to such an institu- tion in due course.  -6- 17. The provisions of the proposed loan follow closely those now applied to development finance companies. As under the first two loans to BNDE, projects involving the use of more than $150,000 of Bank funds as well as all equity investments to be financed from Bank funds will require prior approval by the Bank. In line with recent practice, a new definition has been introduced for the debt- equity ratio and it has been raised to 4.5:1, allowing a small increase in borrowing capacity. In keeping with the policy adopted by the Executive Directors in 1967 it is proposed to apply the standard provisions with respect to commitment charge to the new loan to BNDE. 18. BNDE can be considered a suitable borrower for a new Bank loan and should have no difficulty servicing such a loan and its other borrowings. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 19. The draft Loan Agreement between the Bank and BNDE, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. The Agreements are in the usual form. utilized for loans to development finance companies. PART V - THE ECONOMY 20. An economic report entitled "Recent Performance and Development in Morocco" and dated October 15, 1968, (NAU-5b) is being distributed to the Executive Directors. 21. Morocco has shown a remarkable price stability in recent years as a result of restrictive financial policies and of low domestic demand due to two poor agricultural crops. The growth of the economy has been, on the other hand, rather disappointing: between 1963 and 1967 the GDP increased by about 2 percent per annum in real terms, which is less than the annual rate of growth of the population. Investments have been too low to initiate the desired transformation of the economy; moreover, economic growth has also been held back by the shortage of qualified manpower and the slow rate of change in agriculture where under-employment is widespread. 22. At the beginning of 1968 Morocco launched a five-year development plan which calls for an increase of 50 percent in Gover- ment investment expenditure and a higher growth rate of the economy (about 4 percent). Morocco's economic problems call for sustained  - 7 - efforts over many years, and the Plan represents an improvement in the Government's effort in that direction; new taxes are going to be raised and steps to improve tax collections are being taken. However, compared to the past several years, Morocco will also require a larger inflow of capital from abroad, including from the Bank. In 1967 the service of the external public debt as a prop- ortion of current foreign exchange receipts in that year amounted to about 9 percent. Morocco can well service additional external debt, including the proposed Bank loan. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 24. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. _ Approval of Loan to Banque Nationale pour le Developpement Economique in an amount equivalent to US$ 15,000,000 to be guaranteed by the Kingdom of Morocco. RESOLVED: THAT the Bank shall grant a loan to the Banque Nationale pour le D6veloppement Econondque, to be guaranteed by the Kingdom of Miorocco, in an amount in various currencies equivalent to fifteen million United States dollars (US$15,000,000), to mature on and prior to July 15, 1985, to bear interest at the rate or rates to be determined as set forth in the form of Loan Agreement (Third BNDE Project) between the Bank and Banque Nationale pour le Developpement Economique which has been presented to this meeting, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in said form  - 8 - of Loan Agreement and in the form of Guarantee Agree- ment (Third BNDE Project) between the Kingdom of Morocco and the Bank which has been presented to this meeting. Robert S. McNamara President Attachment October 16, 1968