Morocco - Policy Reform Support Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-7287-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ONA PROPOSED POLICY REFORM SUPPORT LOAN IN THE AMOUNT OF US$250 MILLION EQUIVALENT TO THE KINGDOM OF MOROCCO May 5, 1999 Middle East and 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.  CURRENCY AND EXCHANGE RATE (March 1998) Currency Unit = Dirham (DH) US51.00 = DH 9.712 FISCAL YEAR July 1 -June 30 ABBREVIATIONS AND ACRONYMS ADB African Development Bank ADS Agence de Developpement Social AFSED Arab Fund for Social and Economnic Development ANRT Agence Nationale de Reglementation du Secteur des Telecommunications BAJ Barnamaj al Aoulaouiyat al Ijtimaiya (Social Priorities Program) BCP Banque Centrale Populaire BNDE Banque Nationale pour le Developpement Economique CAS Country Assistance Strategy CCAC Casablanca Commercial Arbitration Center CCG Caisse Centrale de Garantie CDM Charbonnages du Maroc CNCA Caisse Nationale de Credit Agricole CPI Consumer Price Index DH Dirham EN Entraide Nationale EU European Union FDI Foreign Direct Investment FEC Fonds d Equipement Communal GDP Gross Domestic Product IAM Itissalat al-Maghreb (Public Telephone Company) IBRD International Bank for Reconstruction and Development ICSID International Center for Settlement of Investment Disputes IDF Institutional Development Fund IFC Intemational Finance Corporation IMF Intemational Monetary Fund INEJ Institut National des Etudes Judiciaires IPP Independent Power Producer NGO Non-Govemmental Organization ODEP Office d 'Exploitation des Ports ODI Office de Developpement Industriel OFPPT Office de la Formation Professionnelle et de la Promotion du Travail ONCF Office National des Chemins de Fer ONDA Office National des A4roports ONE Office National del 'Electricite ONEP Office National del 'Eau Potable ONT Office National du Transport PAGER Programme d 'Approvisionnement Groupd en Eau Potable des Populations Rurales PBG Pacte de Bonne Gestion PERG Programmed 'Electrification Rurale Global PHRD Policy and Human Resources Development PN Promotion Nationale PNCRR Programme National de Construction des Routes Rurales PPI Private Participation in Infrastructure PRSL Policy Reform Support Loan PSA Private Sector Assessment RAM Royal Air Maroc SAL Structural Adjustment Loan SEFERIF Socitdt d 'Exploitation des Mines du Ri TPI-SAL Telecommunications, Post and Information Technology Sector Adjustment Loan WTO World Trade Organization Vice President: Kemal Dervis& Country Director: Christian Delvoie Sector Director: John Page (*) Sector Manager: Ali Khadr Task Team Leaders: Ali Khadr/Axel Peuker (*) This operation is managed by MNSED in close cooperation with MNISHD and MNSPF  FOR OFFICUIL USE ONLY KINGDOM OF MOROCCO POLICY REFORM SUPPORT LOAN TABLE OF CONTENTS LOAN SUMMARY ............................................................i PART I. POLITICAL AND ECONOMIC CONTEXT ............................................................l..1 A. Political Context .........................................................,,.1 B. Economic Performance .........................................................2 C. Economic Outlook, Risks, and Financing Requirements .......................................................4 PART II. THE GOVERNMENT'S ECONOMIC AND SOCIAL REFORM PROGRAM ......................................8 A. Overview and Key Government Objectives .......................................... , . 8 B. Macroeconomic Framework .9 C. Public Sector Reform ..........................................; 10 D. Private Sector Development ......................................... 14 E. Poverty Reduction and Social Welfare ......................................... 19 PART I. THE PROPOSED LOAN ........................ 23 A. Loan Objectives and Rationale for Bank Involvement .23 B. The PRSL and the Country Assistance Strategy .24 C. Actions Taken Prior to Board Presentation .26 D. Expected Areas for Follow-up Policy Reform Lending .26 E. Disbursement and Auditing ................................. 26 F. Cofinancing.27 G. Technical Assistance .27 H. Environmental Aspects ................................. 27 I. Program Objective and Poverty Categories .27 J. Benefits and Risks ................................. ,, 27 PART IV. RECOMMENDATION ...................... 28 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.  KINGDOM OF MOROCCO POLICY REFORM SUPPORT LOAN TABLE OF CONTENTS ANNEXES ANNEX 1: ECONOMIC INDICATOR TABLES ANNEX 2: MATRIX OF POLICY OBJECTIVES AND ACTIONS ANNEX 3: LETTER OF DEVELOPMENT POLICY ANNEX 4: LIST OF MONITORING INDICATORS ANNEX 5: TIMETABLE OF KEY PROCESSING EVENTS ANNEX 6: STATUS OF BANK GROUP OPERATIONS ANNEX 7: MOROCCO AT A GLANCE MAP OF MOROCCO IBRD 25545 TEXT FIGURES AND TABLES TABLE I.1: KEY MACROECONOMIC INDICATORS, 1980-96 ......................................... , .2 TABLE 1.2: KEY MACROECONOMIC INDICATORS, 1990-97 .3 TABLE 1.3: KEY MACROECONOMIC INDICATORS, 1998-2002 .4 TABLE I.4: STATUS OF CAS MACROECONOMIC BENCHMARKS .6 TABLE 1.5: BUDGET FINANCING, 1997/98 - 98/99 .8 TABLE 1.6: BALANCE OF PAYMENTS FINANCING, 1997-99 .8 TABLE m.1: WORLD BANK LENDING AND EXPOSURE INDICATORS .26 This report is based on the work of missions to Morocco during May to November 1998, comprising: Ferid Belhaj (LEGMN), Denis Chaput (MNSPF), Joumana Cobein (MNSPF), Mourad Ezzine (MNSHD), Olivier Fremond (PSDEN), Pierre Guislain (Coordinator, Programme on Private Participation in Mediterranean Infrastructure, World Bank/EU), James Hanna (LCSFP), Timothy Irwin (PSDPP), Ali Khadr (Co-Task Team Leader, MNSED), Amine Khene (MNSED), Fran,ois Lacasse (MNSED), Linda Likar (MNSHD), Michel Loir (MNSID), Axel Peuker (Co- Task Team Leader, MNSPF), Maryse Pierre-Louis (MNSHD), Setareh Razmara (MNSHD), Vera Songwe (MNCMG), Clemencia Torres (MNSPF), Rene Vaurs (MNCMG) and Paolo Zacchia (MNICMG). Further essential contributions were made by Peter Bocock (MNSED), the Morocco Resident Mission under Olivier Godron, andthe Morocco Country Team. Mary Lou Gomez (MNSED) and Liliane Vert (MNSPF) contributed to the production of the document. PHRD funding is gratefully acknowledged.  KINGDoM OF MOROCCO POLICY REFORM SUPPORT LOAN LOAN SUMMARY Borrower: Kingdom of Morocco Amount: US$250 million equivalent (including 1% front-end fee), to be made available in one tranche upon loan effectiveness. Terms: Single currency, libor-based variable interest, 20 years' maturity, including 5 years of grace. Objectives: The objective of the PRSL is to advance the alternance Government's broad-based economic and social reform program, which aims to accelerate GDP and employment growth, and to increase access to basic services and reduce poverty. Under this program, the Government is giving a public commitment to pursue sound macroeconomic management, initiate public sector reform, encourage private sector development, and address the country's social development agenda. It has already taken key actions to bolster the program's credibility and initiate its implementation. The program, together with Bank support through the PRSL, will send an important signal to the investor community, and demonstrate that political opening and economic reform are going hand-in-hand in Morocco. Description: The PRSL supports a wide range of actions outlined in the main text of this report and in Annex 2 (Matrix of Policy Objectives and Actions) and Annex 3 (Letter of Development Policy). Benefits: The benefits of the reform program supported by the PRSL would be considerable. The program addresses a broad range of measures needed to enhance Morocco's competitiveness and achieve strong, sustainable growth, while advancing the country's important social development agenda. In addition, the preparation of the PRSL has served to promote a dialogue and develop a partnership with the alternance Government, and to act as a catalyst in setting out a medium-term framework for reform in Morocco. Risks: The program supported by the PRSL faces four main types of risk. First, the authorities' medium-term growth forecast hinges sensitively on ambitious budgetary adjustment and a significant increase in private investment; a shortfall in either would reduce GDP growth prospects. Second, political opposition to reforms could stem from three sources: coalition partners in the Government with an etatiste tradition; the recently elected Parliament, which may not support a program which restricts the sphere of influence of the state; and unions and other stakeholders adversely affected by certain aspects of the reform program. Third, technical implementation difficulties could arise from weaknesses in intra- governmental coordination as well as from scarcity of expertise. Fourth, social problems may result, in particular, from expenditure constraints, from employment consequences of the privatization program, and/or from poor implementation of social reform measures envisioned under the program. These risks would be mitigated through: the Government's efforts to pursue budgetary adjustment and improve the business environment as well as the climate  - 11 - for private investment, supported by regular monitoring of key economic indicators; a close policy dialogue with the Government and affected stakeholders; a technical dialogue with all government agencies concerned and provision of resources for technical assistance; and financing provided under the operation, together with social measures which constitute an integral part of the Government's reform program. Poverty Category: The PRSL supports a comprehensive reform program to accelerate economic growth and improve social equity to the benefit of the poor. As part of its reform effort, the Government intends to pursue social programs focusing on improved education, health and infrastructure services, with emphasis on traditionally underserved rural areas.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED POLICY REFORM SUPPORT LOAN To THE KINGDOM OF MOROCCO 1. I submit for your approval the following Report and Recommendation on a proposed quick- disbursing Policy Reform Support Loan (PRSL) to the Kingdom of Morocco in the amount of US$250 million equivalent. This Loan would support implementation of a broad-based nmedium-term economic and social reform program. The Loan would be a single currency loan with a variable libor-based interest rate and a maturity of 20 years, including 5 years of grace. It would be made available in a single tranche based on measures taken prior to Board presentation. Parallel financing of approximnately US$200 million equivalent has been approved by the Board of Directors of the African Developmernt Bank (ADB). PART I. POLITICAL AND ECONOMIC CONTEXT A. Political Context 2. Morocco has recently achieved substantial political liberalization. Following elections in November 1997, King Hassan II appointed Abderrahmane Youssoufi, the leading opposition figure and a one-time exile, as Prime Minister in February 1998. Mr. Youssoufi heads a Government backed by a seven-party center-left coalition, the Koutla, which holds 102 of the lower chamber of parliament's 325 seats. The alternance Government marks the first time in independent Morocco's 42-year history that the opposition has had the opportunity to govern. It also marks a break from the recent succession of technocratic, "transitional" Governments, although the alternance Government reappointed the Ministers for Foreign Affairs, Interior, Islamic Affairs and Justice. 3. The alternance Government exemplifies the overhaul of Morocco's political institutions, spurred on in large measure by the King. An amended Constitution, adopted in September 1996, responded to long-standing calls for a return to direct election by universal suffrage of memibers of the House of Representatives, as well as for making Government more accountable to Parliament. Under the new Constitution, Parliament is composed of a directly-elected 325-seat House of Representatives and a 270- member upper House of Counselors (representatives of chambers of commerce, labor unions, and local communities). The State's unity and sovereignty continue to be embodied in the Monarchy. The new Constitution paved the way for adoption prior to the November 1997 elections of a "joint declaration of the administration and the political parties", whereby the previous transitional Government undertook to ensure fair and transparent elections while the political parties undertook to abide by the rules of the electoral process and its results. 4. The alternance Government's economic and social reform program has four broad pillars: (i) prudent macroeconomic and fiscal management to lay the foundations for higher economic growth in the medium term; (ii) measures to improve public sector performance; (iii) reforms to encourage private investment and business activity; and (iv) measures to foster broad-based human and social development, particularly in the country's least developed areas. The Government has already sent significant policy signals underscoring a commitment to fiscal discipline. Shortly after assuming office, it took steps to contain an otherwise widening deficit for the 1997/98 fiscal year to 3.5 percent of GDP. Its 1998/99 budget, approved by Parliament in July 1998, provided for a similar deficit level (3.6 percent of GDP), despite initial pressures that might otherwise have raised it to nearly 5 percent of GDP. As discussed further in Section I.C below, execution of the 1998/99 budget has remained on 1rack. The most recent budget-for the upcoming 1999/00 fiscal year, presented to Parliament in April 1 999-again provides-for a deficit level of around 3.6 percent of GDP. While this demonstrates Governmenit resolve in continuing to resist widespread pressures for higher spending, it also highlights the difficulties of making significant inroads in the Government's aim to further reduce the deficit and, in particular, change the structure of  -2 - revenues and expenditures to bring about a substantial increase in budgetary savings over the next few years. Finally, the alternance Government has consistently sought to reassure the domestic and international financial and business communities of its commitment to economic liberalism, and has shown continuity in taking forward the legislative agenda initiated by its predecessor, with good initial results. B. Economic Performance 5. Following rapid growth in the latter half of the 1980s, the Moroccan economy's performance has slowed since the early 1990s (Table L.1). In the late 1980s, growth was supported by a forceful adjustment program that devalued the Dirham, substantially reduced trade protection, and cut the fiscal deficit. GDP grew at an annual average rate of 4.4 percent, with non-agricultural GDP growth reaching over 6 percent in 1988 and 1990. These rates were achieved with relatively modest investment levels (around 23 percent of GDP), but with substantial increases in the efficiency of investment. Growth was also driven by exports, which grew at an impressive 9 percent over the period, with a strong surge in manufacturing exports. Meanwhile, foreign direct investment (FDI) also grew exponentially, from only US$1 million in 1986 to US$317 million in 1991. 6. The reduction in average annual growth to well below 3 percent in the 1990s partly reflects greater frequency of drought as well as slower growth in Morocco's principal trading partners. But it also reflects enduring structural problems. In the absence of deep-rooted sectoral and public management reforms, the fiscal deficit has remained around 34 percent of GDP. Meanwhile, public expenditure patterns have become increasingly rigid (with the government wage bill, together with interest payments, absorbing around 65-70 percent of revenues), to the detriment of public spending on infrastructure and the social sectors. Further, since the adoption of a nominal exchange rate peg in 1991 (whereby the Dirham's value was held fixed relative to that of a basket of trading-partner currencies), Morocco's currency has appreciated by some 15 percent in real terms, despite a substantial decline in inflation. Together with real depreciation in competitor economies, this appreciation has adversely affected export growth. Table 1.1: Key Macroeconomic Indicators, 1980-96 1980-85 1986-90 1991-96 Average Annual Growth (%/6) GDP 2.7 4.4 2.6 Non-Agricultural GDP 3.1 4.0 2.6 Domestic Inflation 6.8 5.8 4.3 Exports of GNFS 3.7 8.8 5.9 Share of GDP (%) Current Account Balance -8.6 -0.4 -2.4 Foreign Debt 85.5 98.7 72.6 Budgetary Revenue 21.3 21.8 24.8 Budgetary Expenditures 32.9 27.5 28.5 o/w Investment Expenditures 6.6 4.5 4.1 Fiscal Deficit 11.6 5.7 3.7 Gross Domestic Savings 15.1 18.5 16.0 Gross Domestic Investment 25.9 22.9 21.9 7. Structural and institutional reforms have continued to be implemented in the 1990s, but arguably with less momentum than in the late 1980s. Tax administration has been improved, the financial sector has been deregulated and modernized, and a limited but successful privatization program has been implemented. Trade liberalization has also continued, most recently with the conclusion of an Association Agreement with the European Union (EU), which calls for the elimination of tariffs for all European industrial products over the next 12 years. The business environment for the private sector has also been  -3 - improved, although structural constraints still inhibit firms' competitiveness, underscoring the need for profound institutional reforms. 8. Following 1995's historic drought, GDP growth rebounded to 12 percent in 1996 but fell again to negative 2.2 percent in 1997, once more reflecting poor rainfall; agricultural value-added declined by 26 percent while non-agricultural growth held at around 3 percent. Tight monetary policy and low increases in import prices helped to reduce inflation from 3 percent in 1996 to 1 percent in 1997. In the balance of payments, the current account deficit improved to 0.3 percent of GDP (from 1.7 percent in 1996), reflecting faster growth in phosphate and jobbing trade exports, and slower growth in imports. Even more significantly, foreign investment more than doubled to an all-time high of almost US$1.2 billion as a result of large direct investment by multinationals and the sale of a major state-owned enterprise. Table 1.2: Key Macroeconomic Indicators, 1990-97 1991-96 1996 1997 Growth rates (%) GDP 2.6 12.0 -2.2 Non-Agricultural GDP 2.6 3.2 3.2 Domestic Inflation 4.3 3.0 1.0 Exports of GNFS 5.9 6.2 7.7 Share of GDP (%) Current Account Balance -2.4 -1.7 -0.3 Foreign Debt 72.6 60.0 62.7 Budgetary Revenue 24.8 24.2 25.2 Budgetary Expenditures 28.5 27.7 28.7 o/w Investment Expenditures 4.1 4.2 4.5 Fiscal Deficit 3.7 3.5 3.5 Gross Domestic Savings 16.0 15.8 17.3 Gross Domestic Investment 21.9 20.3 20.7 9. The fiscal stance has remained broadly unchanged since 1996. The overall budget deficit stabilized at 3.5 percent of GDP in 1997/98, the same level as in the preceding fiscal year.' Both revenues and expenditures increased by around one percentage point of GDP in 1997/98, owing in part to higher tax revenues, the proceeds of a major electricity concession, and larger expenditure on the wage bill (from 10.8 percent of GDP in 1996/97 to 11.3 percent in 1997/98). Domestic financing of the deficit increased from 4.9 percent of GDP in 1996/97 to 5.4 percent in 1997/98. This reflected a continuation of the Treasury's policy of tapping the domestic market in order to reduce its exposure to foreign debt, which has gradually declined as a share of GDP over the past few years. The Treasury also be,gan an initiative in mid- 1996 to manage external debt more actively through private and public debt-equity conversion, refinancing, and pre-payment which has amounted to some US$900 million of external debt. Non-government investment remained stagnant at 16 percent of GDP in 1997. Coupled with roughly stable government investment, this placed limits on growth potential. Morocco's fiscal year cycle (July 1-June 30), which until 1996 coincided with the calendar year, was changed to increase the capacity for gearing the annual budget to the agricultural output cycle (knowledge of winter rainfall allows more refined harvest projections by the time budget preparation is finalized). The budget data presented in Table I.2 are fiscal year data, but calendar year data do not present a significantly different picture.  - 4 - C. Economic Outlook, Risks, and Financing Requirements Estimates for 1998 and Medium-Term Outlook 10. The economy is estimated to have grown by 6.3 percent in 1998, reflecting a rebound of agricultural output and steady non-agricultural growth, driven by buoyant tourist and phosphate sectors. This solid growth has had a positive impact on private investment, resulting in an increase in the overall investment ratio of close to one percent of GDP. The current account deficit remains very low at an estimated 0.4 percent of GDP, and exports (including net jobbing trade exports) are estimated to have grown at 5.6 percent in dollar terms (3.9 percent in real terms), despite the difficult world economic situation. Inflation, estimated at 2.8 percent during 1998, has also remained very low. 11. The 1998/99 Finance Law had provided for a deficit of 3.6 percent of GDP, roughly unchanged relative to the preceding two years. Budgetary revenues were prudently forecast, increasing by over 7 percent relative to the 1997/98 fiscal year, owing largely to an expected 1.5 percent of GDP in one-time revenue, including an increase in dividend payments by some public enterprises and proceeds from a business tax amnesty. The authorized increase in budgetary expenditures (8 percent relative to 1997/98) was driven largely by a 7.7 percent increase in the wage bill, one-time expenditures in support of the liquidation of Charbonnages du Maroc (CdM), and the financial restructuring program of Caisse Nationale de Credit Agricole (CNCA). This entailed a borrowing requirement of a little over 3 percent of GDP, slightly lower than that for 1997/98, with the mix between domestic and external financing programmed to shift towards the latter. Table 1.3: Key Macroeconomic Indicators (Projected), 1998-2002 1998 1999 2000 2001 2002 Growth Rate (%) GDP 6.3 3.0 5.0 5.0 5.5 Non-Agricultural GDP 3.5 3.7 4.2 5.2 5.7 Domestic Inflation 2.8 2.5 2.5 2.5 2.5 Exports of GNFS 3.9 6.0 7.5 8.2 8.6 Share of GDP (%) Current Account Balance -0.4 -0.5 -0.4 -0.5 -0.5 Foreign Debt 52.7 49.2 46.2 43.1 41.0 Budgetary Revenue 25.7 24.7 24.7 25.1 25.1 Budgetary Expenditures 29.2 28.3 27.5 27.2 27.0 olw Investment Expenditures 4.3 4.3 4.5 4.7 5.2 Fiscal Deficit -3.5 -3.6 -2.8 -2.1 -1.9 Gross Domestic Savings 18.3 19.1 19.6 20.2 21.4 Gross Domestic Investment 21.6 22.3 22.7 23.5 24.5 12. Preliminary estimates indicate that the execution of the 1998/99 budget will be broadly in line with the provisions of the Finance Law. The deficit is now forecast to be slightly lower than the authorized amount. Revenues from the fiscal amnesty have exceeded expectations, making it likely that the overall revenue target will be amply met, while recurrent expenditures may come in at slightly under the budgeted figure, owing to savings on domestic debt interest payments. On the financing side, privatization receipts are likely to fall short of the targeted amount, while arrears have been repaid on a large scale, requiring somewhat higher-than-programmed domestic (non-monetary) borrowing. 13. Near-term economic performance is expected to remain solid, although overall growth is likely to be limited to around 3 percent in 1999, owing largely to lower-than-average agricultural performance as a  - 5 - result of capricious winter rainfall. (By the same token, overall growth would be expected to rebound somewhat in the year 2000 on the assumption that agricultural performance returns to average.) Barring unforeseen shocks, the current account in the balance of payments is expected to remain stable at around 0.5 percent of GDP in 1999. The evolution of monetary aggregates is expected to keep inflation low (around 2.5 percent over the year) while allowing for sufficient growth in credit to underpin a continued modest increase in private investment. 14. No significant changes are expected in the fiscal stance during the upcoTring fiscal year (which begins on July 1, 1999). At the time of writing, the Finance Law for the 1999/2000 fiscal year had recently been presented to, though not yet approved by, Parliament. With a prograrnmed deficit of around 3.6 percent of GDP, roughly unchanged vis-a-vis the past two years, the draft budget holds the line on fiscal stability-a significant accomplishment in the face of still-mounting pressures by several government departments and groups in society to expand spending. Promnising elements in the draft budget include increased expenditure allocations for key social programs (e.g., rural water supply). Nevertheless, the draft budget raises two key issues of concern. The first is its increased reliance on "one- time" revenues (e.g., concession revenues for the second GSM license), which suggests some deterioration in the underlying deficit trend. The second, related issue is the absence of decisive measures to strengthen recurring, especially tax, revenue sources (notably in the face of eroding trade tax revenues as the Association Agreement with the EU unfolds), as well as to rationalize the structure of recurrent expenditures. 15. Beyond the near term, deep-rooted structural changes in the composition of expenditures as well as increased budgetary savings will be critical for higher economic growth. The Government is targeting a sustained increase in (average) annual GDP growth to reach roughly double the present level of 3 percent per year over the next 4-5 years. Higher growth would be underpinned by a gradual rise in investment to almost one-quarter of GDP (from an estimated 21.6 percent in 1998) as well as by greater efficiency of investment, reflected in a declining incremental capital-output :ratio (ICOR).2 Of the projected three-percentage-point increase in the overall investment ratio, increased domestic private investmnent is expected to contribute about 1.7 percentage points of GDP, public investment about 0.8 percentage points, and foreign direct investment (FDI) about 0.5 percentage points. Consistent with this scenario, the budgetary stance would need to generate additional public savings of nearly 3 percent of GDP by fiscal year 2002/03. Rising budgetary savings would enable a progressive reduction in the budget deficit, from 3.6 percent of GDP in fiscal year 1999/2000 to below 2 percent by fiscal year 2002/03, releasing resources for investment. In parallel, declining deficit financing requirements would gradually reduce the public debt-to-GDP ratio and put public finances on a more solid path. 16. The higher growth rates and investment ratios targeted over the medium term are supported by export growth that is projected to rise to over 8 percent a year. Together with planned structural reforms to enhance Morocco's external competitiveness, the stimulus for exports is expected to come from a resurgence of growth in Europe, Morocco's principal market. Also projected over the medium term is continuing low inflation, underpinned by tight monetary policy (which does however allow for adequate growth in credit to the private sector). Low inflation would be expected to prevent any further real appreciation of the Dirham. In addition to limiting growth in the stock of broad money to the pace of nominal GDP growth in order to maintain price stability, monetary policy will allow continued expansion of credit to the private sector in line with nominal GDP growth as credit to the Treasury is reduced and foreign assets are stabilized. Additional resources to fund private investment will come from non-banking sources, such as the stock market and non-bank financial institutions, which now constitute one of the more sophisticated capital markets in the region. In parallel, FDI is projected to increase from 1.3 percent of GDP in 1998 to about 1.9 percent by 2002. 2 The (non-agricultural) ICOR values of around 4.5 in the outer projection years, while smaller than those realized in the recent past, are not unprecedented. Sirnilar figures prevailed in the late 1 980s.  -6 - 17. As discussed in Part III below, the proposed PRSL will keep Bank lending well within the base case lending volume envisaged under the Bank Group's 1997 Country Assistance Strategy (CAS) for FY97-99 (Table 1.4). Beyond the CAS benchmarks for the base case (which on balance have been met), recent performnance and the Government's short- and medium-term policy objectives also meet some, though not all, of the high-case macroeconomic performance benchmarks of the CAS. In the external accounts, the current account deficit has been reduced significantly below the high case scenario target of 2 percent. Debt service has also been declining, and is likely to out-perform the CAS target of 25 percent of export receipts. By contrast, developments in the fiscal accounts fall somewhat short of the high case benchmarks. The high-case scenario envisaged a reduction of the fiscal deficit of one percentage point of GDP per year with a target of 2 percent by 2000. While the deficit has come down by about two percentage points of GDP (from 5.5 percent of GDP in 1995), there has been little change in the overall fiscal stance since 1996/97. In addition, the present outlook is for a postponement by at least one year of the 2-percent deficit target compared with the CAS high-case scenario. Instrumental to this setback has been the increase in wages for Government employees agreed with the unions in the context of the 1996 dialogue social. This led to an increase in the wage bill from 10.8 percent of GDP in 1996/97 to 11.3 percent in 1997/98, running against the CAS benchmark of a reduction of the wage bill by 2 percentage points of GDP. The wage bill as a ratio of GDP has been roughly maintained during the 1998/99 fiscal year, and is expected to decline somewhat to slightly below 11 percent of GDP under the 1999/2000 budget. Table 1.4: Status of CAS Macroeconomic Benchmarks (High-Case Scenario) Target CAS High-Case Scenario Status Current Account Deficit Below 2% of GDP Below I% of GDP in 1997 and 1998. Debt-Service-to-Export Ratio Below 25 % by 2000 25.8% in 1998; projected to decline to 20% by 2000. Budget Deficit 2 % of GDP by 2000 Target of around 2% of GDP by 2001. Government Wage Bill Reduction by 2% of GDP over 3 years Increased by 0.5 % of GDP between 1996/97 and 1997/98; maintained in 1998/99; slight reduction expected in 1999/2000. Riskfactors 18. The medium-term economic outlook is subject to four main risk factors: drought, external shocks, sluggishness in private investment, and slippage in the fiscal stance vis-a-vis the Government's intentions. The frequency of drought appears to have increased in the 1990s, causing large year-on-year swings in agricultural value added and overall GDP growth. Beyond 1999 (and an expected rebound in 2000, on the assumption that agricultural output returns to trend levels), drought has not been factored in the medium- term outlook. Its timing and intensity are inherently difficult to forecast, and its overall impact appears to be transitory in nature and limited to the share of agriculture in GDP. Analysis of past performance indicates that on average the impact of a single-year drought is limited to between 0.1 and 0.3 percentage points of non-agricultural GDP (but two or more consecutive years of drought would undoubtedly have much more lasting and damaging effects). Analysis of the budgetary impact of past droughts points to a limited effect on absolute budget figures, although it can affect ratios expressed in terms of shares of GDP because of fluctuations in the latter. 19. Potentially damaging external shocks would include higher international interest rates, an economic slowdown in Europe, and a worsening of the terms of trade. A hypothetical two-percentage- point rise in intemational interest rates would increase service payments on external debt by around US$200 million, equivalent to roughly 0.5 percent of GDP-thus putting additional strain on the budget, inhibiting private investment through higher domestic interest rates induced by Govermment borrowing, and worsening the balance of payments. Similarly, higher medium-term growth in Moroccan exports hinges on stronger growth in Europe than in the last few years; a downtum in Europe is likely to depress Morocco's growth prospects. However, European growth is now generally projected to be somewhat  - 7 - stronger over the next three years following a limited recovery in France and Germany, and EU import growth is expected to average over 6 percent a year over the medium term, well above its 1991-1997 average. Finally, Morocco's exports are still heavily dependent on phosphate rock and derivatives, which represent more than one-third of total merchandise exports. At current volumes, for example, a 10 percent drop in phosphate prices would reduce export earnings by some US$140 million over one year (equivalent to roughly doubling the 1998 current account deficit). On the import side, oil and energy products account for more than 15 percent of merchandise imports. Morocco's terms of trade are therefore sensitive to changes in international prices for phosphates and oil, and a reversal of the favorable (for Morocco) recent international trends for these prices could worsen balance of payments prospects and reduce GDP growth. 20. The Governnent's medium-term growth target also hinges sensitively on a significant increase in private investment. Despite lower domestic interest rates over the past 18 months, private investment and the associated demand for credit has only recently picked up. Domestic political uncertainty-one possible explanation for the sluggishness of private investment until recently-has now subsided with the alternance Government's establishment of a good dialogue with the business cornmunity. Nevertheless, at least over the near term, there is some uncertainty about whether the increase in investment will be sustained. Private entrepreneurs may exercise caution in the face, for example, of the international financial situation, or of the gradual unfolding of trade liberalization with Europe under the Association Agreement. 21. Finally, medium-term growth prospects hinge critically on the Government's ability to restructure the composition of the budget in order to allow for a sustainable increase in budgetary savings and reduction in the fiscal deficit. Failure to implement concrete measures to bolster revenue, as well as to reduce the wage bill and transfers to public enterprises, will limit the prospects for fiscal adjustment and thereby for "crowding in" private investment. Risks of major fiscal slippage, capable of compromising overall macroeconomic stability, appear limited, in view of Morocco's track record over the past decade and the commitment of key policy-makers to maintain macroeconomic balances. Financing Requirements and Bank Support 22. Near-term financing requirements for the budget and the balance of payments are shown in Tables 1.5 and I.6, respectively. Reflecting reduced Treasury borrowing from the domestic monetary system, the financing plan for the 1998/99 budget (Table 1.5) provides for net external financing flows of negative DH 3.6 billion, compared with negative DH 6.2 billion in 1997/98. In keeping with the Treasury's strategy of reducing the burden of external debt service over time, the amnortization figure (DH 12 billion) for the fiscal year is estimated to include around DH 2 billion of debt-equity conversion and pre-payment of high-cost debt. Bank support through the proposed PRSL and the first tranche of the US$100 million Telecommunications, Post and Information Technology Sector Adjustment Loan (TPI- SAL) should yield combined disbursements of US$300 million (DH 2.9 billion), plus ADB co-financing for both operations of US$100 million (DH 970 million). Project financing is expected to amount to about DH 3.3 billion over the 1998/99 fiscal year.  -8 - Table 1.5: Budget Financing, 1997/98 - 98/99 (DH million) FY97/98 FY98/99 Total Financing Requirement 11719 12669 Domestic Sources 17901 16294 Privatization Proceeds 1155 500 From Monetary System 3258 5000 Non-bank Financing 14895 13794 Changes in Domestic Arrears -1407 -3000 External Financing -6182 -3625 Disbursements 7150 8365 Fast Disbursing Loans 2450 5100 o/w IBRD 950 2910 Project loans 4700 3265 o/w IBRD 1500 1200 Amortization due -13332 -11990 23. Balance of payments financing in 1998 is estimated to have included total disbursement of some US$1.6 billion in new long-term assistance flows. The substantial increase in long-term disbursements relative to 1997 mirrored a reduction in foreign investment flows, which were exceptionally high in 1997, owing in part to the privatization sale of a large oil refinery. External financing also supported a slight rise in international reserves to some 4.6 months of imports. Given overall external financing requirements, heavy reliance on long-term assistance from multilateral sources reflects the limits on the Moroccan Treasury's scope for raising funds on international capital markets on favorable terms. The present outlook for 1999, both in terms of overall balance of payments financing requirements and reliance on long-term loan sources, is broadly similar to the estimate for 1998. Table I.6: Balance of Payments Financing, 1997-99 (US$ million) 1997 1998 1999 (estimated) (projected) Financing Requirements 2,447.0 2,280.2 2322.6 Current account deficit 112.8 128.1 204.9 Long-term amortization 1784.0 1834.0 1888.0 Reserves Changes of Monetary Authorities 550.2 318.1 229.8 Financing sources 2,447.0 2,280.2 2322.6 Private investment (net) 1165.2 520.0 728.9 Long-term Disbursements 1151.0 1553.0 1593.7 Other capital flows 130.8 207.2 0.0 PART II. THE GOVERNMENT'S ECONOMIC AND SOCIAL REFORM PROGRAM A. Overview and Key Government Objectives 24. The alternance Government faces a combination of challenging initial conditions and high public expectations about improving them. In recent years, growth has been both volatile and insufficient on average to reduce Morocco's substantial levels of unemployment (now running at 18 percent in urban areas and up to 25 percent among educated youth). Meanwhile, social inequality-substantially driven by large urban-rural disparities in incomes, opportunity, and basic social and infrastructure services-poses  -9 - potentially serious socioeconomic problems. Redressing disparities in access to basic services is complicated by budgetary rigidity, reflecting in particular the size of the civil service wage bill. And finally, there is an urgent need to address institutional, governance and transparency issues with respect to government and judiciary operations. 25. The Government has responded to these challenges with a broad-based program that balances economic and social objectives. Its goal is to maintain macroeconomic stability while both accelerating economic growth and reducing poverty, within a framework of institutional reformr that promotes better governance and greater transparency, which in turn will help the prospects for sustainability. The program comprises four linked and mutually reinforcing components designed to: * raise the GDP growth rate, roughly doubling average annual growth over the next 5 years, notably by generating larger budgetary savings in order to support increased investment; * initiate public sector reform, designed to enhance budgetary perfonnance and flexibility, promote civil service and administrative reform, and upgrade the quality and effectiveness of the judicial system; * accelerate private sector growth and investment, by further promoting privatization and private participation in infrastructure services, and by improving the business climate and access to finance; * implement a social program, focusing on improved education, health and infrastructure services in traditionally underserved rural areas, so as to enhance welfare and reduce poverty among the rural population, and hence address wider national social equity goals. 26. Specific elements of the program are detailed below, in the Matrix of P'olicy Objectives and Actions (Annex 2), and in the Government's Letter of Development Policy (Annex 3) which the Government intends to publicize widely in Morocco as a signal of its commitment to reform and transparency. B. Macroeconomic Framework 27. Key Issues and Medium Term Objectives. Morocco needs substantially higher growth so as to reduce unemployment and poverty, and increase access to basic services. Accelerating growth to the Government's medium-term objective of around 6 percent per year will require an increase in gross domestic investment of some three percentage points of GDP. To avoid undue reliance on foreign savings, domestic, mainly public sector, savings would need to be increased so as to make room for higher levels of both private and public investment. The Government will also need to accelerate and deepen efficiency-enhancing structural reforms (see sections C and D below, which deal with public sector reform and private sector development, respectively). And it will need to take steps to enhance Morocco's international competitiveness and attractiveness to FDI. Competitiveness-supporting policies include (i) preventing real appreciation of the Dirham, principally through a tighl: monetary policy that will keep inflation low; (ii) pursuing trade liberalization with European and third-party trading partners to further reduce the implicit tax on exports stemming from import tariffs; and (iii) adopting labor market policies that help to ensure that domestic production costs remain competitive. With respect to FDI, the Government plans to help foster an increase over the medium term from the current 1.4 percent of GDP to 1.9 percent, through measures such as the establishment of a one-stop agency for foreign investors and the implementation of a new, consistent framework for infrastructure concessions. 28. The cornerstone of macroeconomic policy is achievement of additional budgetary savings of between 2.5 and 3 percentage points of GDP over the next 4-5 years, involving a modest increase in revenues and a significant reduction in recurrent expenditures. Revenue measures, intended in part- to compensate for the erosion of trade tax revenue as import tariffs are reduced under the EU Association Agreement, will be based on IMF tax reform recommendations. Expenditure measures will include: (i) limiting new public sector hirings pending civil service reform (section II.C.) so as to maintain the public  - 10- sector wage bill at its present level in real terms and progressively reduce it by about two percentage points of GDP by 2003/04; (ii) actions to improve public enterprise (PE) governance and financial performance, in order to further reduce transfers to PEs (section II.D.); and (iii) a rationalization of consumer subsidies to enable reduced budgetary outlays (section II.E.). In parallel, the Treasury plans to continue its active management of both internal and external debt, including the use of debt conversion, pre-payment, and refinancing to reduce the burden of its more expensive fixed-rate debt. 29. PRSL-Related Actions Taken. Shortly after assuming office, in the face of indications at the start of the fourth quarter of the 1997/98 fiscal year of a widening deficit, the Government adopted expenditure-curbing measures to limit the 1997/98 deficit to an estimated 3.5 percent of GDP. The budget for 1998/99, adopted soon after, was also consistent with the medium-term deficit reduction strategy, containing the deficit for the current fiscal year at about the same level-3.6 percent of GDP. Latest indications are that budget execution is broadly on track, with a slightly lower-than-projected deficit likely. C. Public Sector Reform 30. Public sector reform needs to be at the heart of the Government's overall reform program. No overarching strategy for economic and social development, however well-conceived in principle, can deliver its expected benefits in practice in the absence of a well-functioning, cost-effective public administration. Measures to enhance the quality, dependability and transparency of public sector institutions and operations, and to scale back "non-core" public sector functions, are thus inextricably linked to each of the other three components of the Government's program-macroeconomic stability and growth, dynamic private sector development, and enhanced social provision for those most in need. This section outlines key issues, objectives and actions already taken by the Government in three areas critical for successful public sector reform: (i) budgetary institutions, (ii) the civil service, and (iii) the judiciary. Budgetary Institutions 31. Key Issues and Medium-Term Objectives. Arrangements for budget preparation and execution have not served Morocco well in recent years. Aggregate fiscal discipline and strategic prioritization of expenditures have not been adequately safeguarded, and efficiency and effectiveness in the use of resources at the individual ministry and agency level has often been impeded. Specifically: (i) the annual budget has permitted substantial earmarking of public funds through a complex array of special accounts and annex budgets; (ii) the budget has been prepared without the benefit of a full-fledged medium-term public expenditure and associated macroeconomic policy framework, or explicit costing and impact analysis of proposed policies; and (iii) the expenditure management process (ranging from ex ante authorization requirements to effective payment of suppliers) has been rigid, often creating substantial delays. In particular, public procurement has relied on less-than-adequate competition and transparency standards. 32. The alternance Government has already begun to address these and other issues. To begin clarifying the links among outcomes, outputs, inputs, and public expenditure requirements, an April 1998 directive made analysis of costs and impacts a pre-condition for presentation of new policy proposals to the Cabinet. The Government also plans to improve financial management of public enterprises, including provision of a clear and predictable dividend policy. The 1998/99 Finance Law provided for substantial "special" contributions by key public enterprises, thus effectively incorporating into the budget funds which would previously have been spent off-budget by enterprises on Govement-mandated initiatives. 33. The Government has also taken steps to improve the expenditure management process and the rules for public procurement (see below). Further improvements under consideration relate to standardization of expenditures (already being implemented on a pilot basis in certain ministries-eg., Education and Public Works-based on setting unit cost standards for items such as a new school, a stretch of rural road, or a basic community health care service package) and administrative decentralization of budget execution. The Ministry of Finance has commissioned a study to formulate a  - 11 - broader range of unit cost standards and a plan for flexible implementation; the study is expected to be completed within a few months. 34. PRSL-Related Actions Taken. With respect to budget preparation: a new organic budget law has been approved by Parliament. The new law (which governs the preparation and approval of annual budget laws beginning in fiscal year 1999/2000) inter alia reduces the incidence of extra-budgetary accounts with earmarked revenues, and increases flexibility with respect to managing appropriations. Further, following a provision in the 1996 Constitution, the Government has proceeded to restore a medium-term planning framework (the "Plan", which had been discontinued in 199:2) on a more flexible basis than in the past. Such a framework will articulate the links between, or the one hand, key development objectives and strategies and, on the other, public expenditure needs and likely tradeoffs among them-thereby institutionalizing a connection between annual budget appropriations and medium- term strategic priorities. The Conseil du Gouvernement has already discussed and approved a policy paper that provides directives for preparation of the plan. Work on the plan began under the auspices of the Ministries of Planning and Finance in late 1998, and is expected to be completed over the summer of 1999. 35. With respect to budget execution, the Government has prepared a comprehensive action plan, based inter alia on a major diagnostic study completed under the Bank-financed social priorities (BAJ) projects, designed to introduce more streamlined and transparent expenditure management and procurement arrangements. While its introduction is expected to be phased over the next two years, elements of the action plan already being implemented to reduce bottlenecks in budget execution include: (i) streamlining supporting documentation requirements for appropriation transfer requests; (ii) fostering administrative decentralization by empowering additional managers to approve expenditure proposals; and (iii) improving expenditure management by issuing a circular reminding budget administrators of the (streamlined) procedures for payments from working capital funds in individual departments. Other steps already taken include issuance of tender invitations to short-listed bidders for the establishment of a computerized integrated expenditure management system on a pilot basis. It is expected that when implemented, the new system will significantly speed up authorization and payment procedures. 36. Regarding procurement, the Conseil du Gouvernement has approved a decree overhauling the public procurement system, so as to enhance transparency, accountability and competitiveness in procurement. In particular, the decree mandates public bid-opening sessions, substantially narrows the scope for restricted bidding or sole-sourcing, extends the period for bid submissions, and provides for mandatory special controls and audits for contracts valued at over DH 5 mnillion. Implementing regulations covering, for example, transparency and uniformity in pre-qualification listings of contractors and suppliers, are also being prepared. The Bank is advising the authorities on addlitional aspects of the implementing regulations and related matters in the context of a country procurement review. 37. Finally, revenue administration has been strengthened by the approval by the Conseil du Gouvernement of a new code (Code de Recouvrement) that will facilitate the collection of receivables from taxpayers. Civil Service and Administrative Reform 38. Key Issues and Medium-Term Objectives. Central Government employment represents a heavy burden on the budget. The Government wage bill (for some 760,000 budgeted positions as of end- 1997) has grown rapidly in recent years. It presently accounts for over 11 percent of GDP, exclusive of employer contributions for health and social security. This is a large percentage by international standards-and does not take into account the costs of an additional 135,000 (as of end-1997) public sector employees in municipalities. Given the need to safeguard macroeconomic balances and avoid crowding out private investment, the resources for any significant increases in expenditure on basic services for the rural poor and growth- and equity-enhancing public investment will need to be found from reallocation rather than from higher overall spending. But the sheer weight of wage costs, accentuated by net new hirings and an embedded wage drift of over 3 percent a year (reflecting automatic  - 12 - increases as a result of within-grade progression, promotion, and job reclassifications) severely restricts the scope for such reallocation. 39. The weight of budgetary costs is not the only problem leading to calls for civil service reform. Rigidities in personnel management and related incentive deficiencies have made for a combination of inadequate and cost-ineffective service delivery. Remuneration often hinges sensitively on post-specific allowances and bonuses; coupled with regulations constraining mobility, this inhibits the redeployment of staff across agencies, departments, or regions, leading to larger recruitment needs than would otherwise be necessary. Restrictions on staff mobility also impede administrative decentralization and consequential improvements in service delivery (see below). And finally, incentives for on-the-job performance (and hence increasing service quality) are largely absent. Employees are effectively guaranteed life-time jobs, and seniority weighs heavily in remuneration and promotions. It is estimated that within a given grade, the fastest possible advancement takes an employee to the top of the scale after 32 years of service, only 11 years earlier than progression at the statutory minimum rate of advancement. 40. While reform initiatives in individual ministries have been in place for some time (for example, under the UNDP-supported National Capacity Modernization and Improvement Program, which has been operational since 1996), the present Government has emphasized to an unprecedented degree the priority need for a comprehensive, system-wide civil service reform program. Specific proposals are expected to emerge from the results of a major AFSED-funded study, completion of which is expected by the summer of 1999. The study will inter alia present detailed proposals to: (i) rationalize remuneration structures in order to reduce obstacles to mobility stemming from the job-specificity of bonuses and allowances; (ii) revamp incentives, notably by increasing the weight assigned to performance relative to seniority in remuneration and promotions; and (iii) reorganize governmental structures to make more efficient use of available human resources. Detailed implementation is expected to begin later in 1999, although a number of initiatives have already been taken by the Government (see subsection below on PRSL-related actions taken). 41. A further issue concerns the high degree of administrative centralization in Government. Policy- makers have long acknowledged the need to bring the delivery of priority services (such as those to the rural poor) closer to users and, in parallel, to strengthen the political channels through which the "voice" of actual and prospective users can be heard. Currently, over-centralization inhibits cost-effective service delivery and delays implementation of public investment projects, especially in education and health care. Meanwhile, Morocco's development over the past three decades has been skewed in favor of a few urban areas, requiring new mechanisms for less developed communities to express their needs in the national political arena. 42. The Government plans to address these issues through a combination of: (i) administrative decentralization of central Government structures; and (ii) greater participation of sub-national levels of government (especially the new Regional Councils elected in 1998) in the administrative decentralization process. Some ministries (Public Works and Transport, for example) have already begun to implement limited administrative decentralization initiatives. The Government's draft charter on administrative decentralization (Charte de D&oncentration) is intended to set out key objectives, principles, and guidelines, as a basis for individual ministries and agencies to develop budget-neutral action plans for spatial redeployment of staff and resources, along with effective delegation of decision-making powers and accountability for service delivery. Implementation, based on the Charte and follow-up measures drawn up by individual ministries and agencies, is expected to begin later in 1999. 43. PRSL-Related Actions Taken. The Prime Minister has issued a circular establishing a ministerial level Strategic Committee for Civil Service and Administrative Reform, to oversee the design and implementation of a comprehensive reform program. The program's elements are to include: (i) containing the wage bill; (ii) promoting administrative decentralization and easing restrictions on mobility of personnel; (iii) fostering better client relations and improving services to citizens; and (iv) overhauling incentives for Government employees. The Government has already taken steps towards realizing these goals. It has committed itself in its Letter of Development Policy to reduce the public sector wage bill by  - 13 - at least two percentage points of GDP over the next five years. With respect to administrative decentralization, the Strategic Committee has already reviewed the draft Charte de Deconcentration decree, in preparation for approval by the Conseil du Gouvernement. With respect to client orientation, the Conseil du Gouvernement has already approved a Good Management Compact (Pacte de Bonne Gestion, or PBG), as a first step in defining and implementing a government-wide program covering conduct and ethics, efficient resource management, and client relations, and the Strategic Committee has conducted a first review of mechanisms to implement key PBG provisions. Finally, a high-level independent Commission has been appointed to develop recommendations for refornms in the areas of personnel redeployment and remuneration and retirement systems. Although these initial steps represent a significant start, the most difficult steps in implementing the Government's medium-term civil service reform agenda clearly lie ahead, and the Bank will seek to maintain a close dialogue with the authorities to ensure that the agenda moves forward. Judicial Reform 44. Key Issues and Medium-Term Objectives. Following substantial progress with legal and regulatory reform, attention has also turned to enhancing the effectiveness of reform by improving the functioning of the judicial system. Over the past two years, the King has askedi the Government to undertake judicial reform. The judicial system has long been criticized domestically, particularly with regard to business-related litigation, and was identified as a key constraint to private business development in the Bank's 1994 Morocco Private Sector Assessment (PSA) as well as in the 1998 PSA Update. Major shortcomings include a lack of: (i) efficiency and timeliness in the judicial process, resulting in a huge backlog of cases; (ii) transparency and predictability in judicial decisions; (iii) competence in commercial law, broadly defined; and (iv) capacity to enforce judgments. 45. PRSL-Related Actions Taken. The Government has made judicial reform a top priority within its overall program. To strengthen the ability of the judicial system to handle business-related cases, six new commercial courts and three commercial courts of appeal have been established. In order to ensure the effective operation of the new commercial court network, the Government has also (i) begun work on a legal guide for commercial court judges and agreed on a timetable for its dissemination; (ii) harmonized statutes governing the organization of the judiciary and magistrates with the law establishing the commercial court network; and (iii) agreed on a timetable for completing the computerization of commercial court operations, which is already underway. As a first step towards the possible extension of the commercial court network, the Government has conducted an assessment of experience with the network to date. In addition to these actions, the Government (i) plans to assess the feasibility of enhancing the timely enforcement of business-related judicial decisions by establishing an office of judge for the implementation of commercial decisions analogous to the existing office of judge for the implementation of decisions in penal cases (juge d'application des peines); and (ii) is studying ways to reduce ex post stakeholder criticism of new laws related to commercial issues by allowing the Secretaire General du Gouvernement to create, on an ad hoc basis, legal drafting teams consisting of relevant government officials, private sector representatives and academnics. 46. The Government believes that alternative modes of dispute settlement, such as arbitration, can also reduce congestion, notably in matters of commercial litigation. A Casablanca Commercial Arbitration Center (CCAC) has been established as a pilot vehicle for this purpose. Although the CCAC is a non-governmental body, the Government wishes to support its activities and the broad concept of recourse to commercial arbitration; it has therefore completed an action plan and timetable for the preparation and adoption of a consolidated Commercial Arbitration Code that would bring together the numerous provisions relating to arbitration that are currently scattered in Moroccan laws. 47. More generally, in order to improve service delivery throughout the judicial system as a whole, the Government has published a decree establishing a new organizational chart and administrative structure for the Ministry of Justice. The new structure establishes clearer lines of responsibility and accountability, more streamlined procedures and decision-making processes, better interaction between  - 14 - judicial services and users, greater capacity for monitoring and evaluating judges' performance and inspecting courts, and performance incentives for the Ministry's civil servants. As implementation proceeds, the Ministry plans to conduct a formal impact assessment, which will be used to further improve the system. As a first step towards ensuring the comprehensiveness and broad acceptability of this reform process, the Government has signed an agreement with the Moroccan Bar Association providing for a participatory approach to judicial reform. 48. A professional and authoritative judiciary in which the public has confidence needs adequate career development and related arrangements. The Ministry of Justice has recently initiated work (and prepared a timetable for adoption of the relevant legislation) to create a legal framework providing for, inter alia, the career development of notaries, professional experts in judicial matters, and court personnel (including bailiffs, transcribers and legal translators). 49. The quality and timeliness of the judicial process also depends critically on well-trained personnel, including judges. Accordingly, the Government has initiated a study which will (i) critically review current training systems for judicial staff, including training of judges by the National Judicial Studies Institute (INEJ), and (ii) reconmmend reforms in training mechanisms, with special reference to restructuring INEJ and fostering greater interaction with the private sector. Joint financing and organization of targeted seminars for judges and others in the legal profession has already been initiated with the banking community, and the Casablanca stock miarket has expressed interest in joining similar efforts. In addition, the Government has launched a wider study on training and career development in the justice sector as a whole. D. Private Sector Development 50. The Government sees dynamic private sector development as central to achieving the country's growth objectives. While the public sector reforms outlined in the previous section should contribute to improving the enabling environment for the private sector, the reform program supported by the PRSL also includes a range of actions specifically focused on encouraging the private sector. This section describes four strategic priorities for private sector development: (i) to continue the privatization effort effectively initiated in 1993; (ii) to promote private participation in infrastructure; (iii) to improve the business environment for private enterprises; and (iv) to improve access to finance. Public Enterprise Reform and Privatization 51. Key Issues and Medium Term Objectives. Since 1993, Morocco has substantially improved the management of public enterprises (PEs), as exemplified by the increase in PE self-financing from 36 percent in 1993 to 87 percent in 1996. It has also moved forward with privatization; of the 113 PEs designated for privatization, 52 have been transferred to the private sector, including 125 subsidiaries. Nevertheless, the rules governing PE management remain cumbersome and incompatible with managerial autonomy and transparent financial management and operations. Meanwhile, the PE sector still accounts for about 14 percent of GDP. Accordingly, the Government's medium-term objective is to undertake, within its tenure of office, a comprehensive PE reform and privatization program. 52. PRSL-Related Actions Taken. To this end, the Conseil du Gouvernement has approved an action plan, detailed in its Letter of Development Policy (Annex 3), to: (i) strengthen governance and performance of enterprises remaining in the public sector; (ii) transfer in a transparent manner the majority of the remaining portfolio of public enterprises to the private sector; and (iii) liquidate non- viable enterprises. 53. PE Reform. The Government sees reforming PE governance and performance as critical, even in the context of its commitment to the privatization program. Priority reform areas include: (i) redefining the relations between the state and PEs, based on new "strategic" program contracts with key performanice indicators, inspired by the performance improvements yielded in the case of the National Railways Company; (ii) improving PE financial management, through legislation that defines reciprocal PE/Govemment financial obligations, together with upgrading of PE financial management systems; and  - 15 - (iii) corporatizing selected PEs by making them subject to the recently revised law governing limited liability companies, thus helping to resolve the problems of excessive (ex ante) control by government agencies. 54. Liquidation. The Government has gradually changed the approach to liquidation as a potentially necessary instrument of public enterprise reform. Until recently, even for PEs whose activities had become obsolete, efforts were made to restructure their balance sheets and sell themn as going concerns. These efforts were partially successful at best, and some companies had to be closed down-involving processes that were costly (because employees had to be retrenched in compliance with domestic labor law), and lengthy (due to an antiquated legal framework for liquidation). In 1998, the legal framework was modernized with the introduction of commercial tribunals; the Government believes that this measure, together with the reform of the law governing limited liability companies., should facilitate the liquidation of non-viable PEs. It has asked the Office de Developpement Industriel (ODI) to proceed with the liquidation of 13 companies in the remaining portfolio under the privatization list. 55. PRSL-Related Actions Taken. The Government has begun to implement a DH 3.7 billion package for the phased shut-down by 2001 of a non-viable coal-mining operation, CdM, which had reported losses of DH 400 million in 1996 alone. The closure plan has been agreed by all parties including labor unions. Initial provision of DH 667 million has been made in the 1998/99 budget to implement the first phase of the liquidation, including the layoff and compensation of almost one third of the 4647 employees. With respect to a second non-viable PE, SEFERIF, DH 24 million has been allocated in the 1998/99 budget for the first phase of liquidation, affecting some 230 employees, 166 of whom have already been laid off. However, ensuring rapid progress in other liquidations, including those entrusted to ODI, calls for further strengthening of implementation capacity. 56. Sale of Public Enterprises. The Government is cornmitted to divesting the remaining portfolio of companies selected for privatization within the shortest possible timeframe. The original privatization law was adopted by Parliament in December 1989 with strong endorsement from the King, but implementation began only in 1993. The law mandated the initial transfer to the private sector of 112 PEs by December 31, 1995, and was then amended to provide for the transfer of 113 enterprises by December 31, 1998. The list of privatizable enterprises focused on firms operating in the tradable sector; it excluded public utilities as well as phosphate companies and other firms classified as "strategic". The law emphasized transparency and accountability, albeit at the cost of slow procedures. 57. PRSL-Related Actions Taken. Parliament has approved new legislation that modifies and complements the current Privatization Law (No. 39-89). The new legislation: (i) removes any deadline constraining the implementation of the privatization program; (ii) streamlines and simplifies procedures in order to accelerate transfers to the private sector; and (iii) allows new companies to be privatized. The Government has also abandoned the notion of "strategic" enterprises, and considers all enterprises operating in a competitive environment eligible for privatization. In parallel, while the existing privatization list has been maintained (excluding a number of PEs that are candidates for liquidation), the principle of a global "positive" list is to be abolished and replaced with an annual identification in the budget of firms to be privatized within a given fiscal year. 58. It is anticipated that at least two large privatization transactions, involving a. strategic investor and the participation of the general public, will take place every year. In addition, there will be a pipeline of divestitures of small and medium enterprises, including those where the state holds a minority share. In total, it is expected that privatization revenues in 1999/2000 will increase from DH 500 million to DH 3.5 billion. However, no new firms outside the existing list have as yet been slated for privatization.  - 16 - Private Participation in Infrastructure 59. Key Issues and Medium Term Objectives. In Morocco, as in developed and developing economies worldwide, the concept of private participation in infrastructure (PPI) has recently come to the fore as a means of: (i) expanding infrastructure provision against a background of budgetary constraints on potentially massive new public investment needs; and (ii) improving the quality of services to customers relative to public sector provision, based on the better management often offered by private sector providers and/or enhanced competition. Moroccan experience with PPI has included a 30-year concession for water and power distribution and sanitation in Casablanca, a large project (supported by a Bank guarantee) for electric power generation at Jorf Lasfar, and the transfer to private consortia of industrial parks in Casablanca and El Jadida under a concession scheme. In May 1998, Rabat awarded a concession similar to that in Casablanca. Other PPI initiatives at various stages of preparation include a new port near Tangier, new water, power distribution and solid waste collection and disposal schemes in various cities, and new private power stations. Following enabling legislation passed in 1997, the telecommunications sector is being opened up to private participation and competition (to be supported by the planned Bank TPI-SAL; see section I.C.3). 60. Despite these initiatives, PPI in Morocco continues to face significant obstacles. Much remains to be done to increase competition in service provision. Moreover, PPI has thus far been piecemeal and, in the absence of an overall policy framework, has been subject to poor coordination and procedural weaknesses. Thus, while some private operators have been selected on the basis of a competitive process (Jorf Lasfar power generation), others have been selected on the basis of direct negotiations (Casablanca and Rabat water and power distribution). In some cases, the institutional, financial and technical engineering was done with assistance from experienced international advisers, in other cases without expert assistance. Projects have been plagued by long delays due to lack of consensus, lack of high-level government commitment, opposition from entrenched interests, and poorly designed processes lacking in transparency. Thus, the Jorf Lasfar project took over 3 years from the launch of the tender process to financial closing, as did the Casablanca water and power concession. Though some of these delays are inherent in early operations and should be reduced in follow-up projects, developing a coherent pipeline of well-designed PPI initiatives will require a new and carefully designed strategy and institutional, legal and regulatory framework-involving competition in the market for infrastructure services by introducing new providers, or where this is not feasible,for the market by way of competitive award of concessions- so as to avoid replacing public monopolies by private ones. 61. PRSL-Related Actions Taken. The Govemment has taken some first steps in the area of PPI, even though important implementation challenges to reach its objectives in this area still lie ahead. To improve the foundations for PPI, it has initiated a comprehensive reform of the legal and institutional framework for concessions and related PPI contracts. Specifically, it has created an inter-ministerial working group and launched a study to develop new common cross-sectoral policies with respect to concessions, and provide draft guidelines, regulations and/or model contractual clauses to operationalize cross-sectorally consistent new policies for PPI. 62. In addition, the Government has initiated work in three areas of special concern. First, the Conseil du Gouvernement has approved a long-awaited draft law abolishing the monopoly of the Office National du Transport (ONT) on road freight forwarding-although the abolition is deferred for two years and ONT's regulatory functions have not been clearly separated from its commercial activities. Second, it has initiated a study of options for increasing competition in the electricity sector, including the creation of a wholesale market. Third, it has initiated work on a strategy for increasing competition and private provision in rail, air, road and maritime transport services, and has set up an inter-ministerial committee to oversee strategy preparation and to develop concrete recommendations for reform.  - 17 - Business Environment 63. Key Issues and Medium Term Objectives. The private sector supply response to recent improvements in the business environment has been disappointing. Over the past few years, private investment has lacked dynamism, productivity has stagnated, and export growth has fallen behind the growth in trade of Morocco's partners. Recent World Bank analysis suggests that these factors reflect the need for specific improvements in Morocco's business environment that extend beyond ensuring good macroeconomic management. An industrial competitiveness (mise i niveau) program, launched in 1997 and designed to upgrade firm-level technical capacity and managerial skills as well as business development services, is still in its early stages. Meanwhile, high trade barriers inhibit competitiveness (about one-third of non-agricultural imports remain subject to protection exceeding 31) percent, based on a complex array of instruments-some 17 tariff bands, three import levy rates and iFive value-added tax rates). There is no legal base for modem competition policies. In addition, burdens on private investment and business operations were ranked top constraints on private sector development in a recent survey of enterprises. 64. To address these shortcomings, the Government is committed to advance the mise a niveau program, and to create a business enviromnent conducive to private sector development, based on policies to increase competitive pressures in the economy and promote new businesses. It is further supporting the trade liberalization process in the context of agreements with the WTO and the EU. It also has already taken specific PRSL-related actions in three important areas: customs administration and procedures; competition policy; and administrative and legal requirements with respect to business establishment and investment (see below). 65. Trade Liberalization. Honoring WTO commitments, the Government has eliminated reference prices and adopted the harmonized code in its 1998/99 budget. It has also begun to reduce tariffs on agricultural products where current protection levels exceed WTO limits. With respect to the Association Agreement with the EU, free trade in virtually all industrial products is to be phased in over 12 years following ratification by all EU states. Overall, the Agreement covers about 50 percent of all Morocco's dutiable imports. Pending ratification, the Government has already implemented some of the tariff reductions in its 1998/99 and 1999/2000 budgets. Negotiations on liberalization of agricultural trade are expected to begin in the year 2000. 66. Customs administration. The stimulus to a competitive business environment provided by a liberalized trade regime can be offset by cumbersome customs administration and procedures that impose undue costs and delays on firms currently involved in international trade and deter others potentially interested in entering the trade arena. The Government has therefore adopted a reform program to modernize customs administration. Work is under way to increase the use of computerization and other technology to manage critical information, such as the movement of goods, processing of declarations, assessment of tariffs in an integrated fashion, and payment of obligations. In parallel, it is streamlining the regime for temporary admissions, which allows exporters to import inputs free of duty. The reform program also calls for upgrading staff skills through on-the-job training and short-term courses. 67. PRSL-Related Actions Taken. The Conseil du Gouvernement has approved a new Customs Code that strearnlines procedures in line with international practices. The Moroccan authorities have also (as of January 1999) reduced the elapsed time for customs clearance to fifteen hours on average, compared to two days in July 1998. 68. Competition and Price Policies. The effects of promoting a competitive business environment via tariff and customs reform need to be buttressed by a legal framework that fosters competitive domestic business practices and that begins to reduce the scope of remaining price controls. The Government is committed to moving decisively in this direction, as outlined below. 69. PRSL-Related Actions Taken. The Conseil du Gouvernement has approved a new draft competition law which is generally consistent with international best practices. It provides for consumer protection information, along with guidelines for identifying anti-competitive behavior and market  - 18 - concentration, and for prior notification of proposed mergers and acquisitions. It will create a Competition Council to administer the law in a transparent manner. Council members will be appointed for substantial terrns, investigative and adjudication functions will be separated, and dissenting views will be published but confidentiality of sensitive business information will be protected. The Council will have an enforcement capacity, along with mechanisms for appeal of decisions, and will be accessible to producers and consumers. However, the Council is dominated by government representatives-which might weaken the its credibility in the eyes of the business community. Finally, the draft competition law envisions a five-year transition period for the elimination of the remaining price controls on 29 products and services, and the Government has expressed its commnitment to reduce price controls to 18 products/services in the short term. 70. Legal and Administrative Framework. Much has recently been done to improve the legal environment for business establishment and operation, including introduction of a simplified investment charter, legislation governing joint stock companies, and a modern commercial code. The alternance Government is committed to continuing this process. Together with recently approved property rights legislation, it intends to activate the provisions of the investment charter for a "one-stop shop" for investors and the granting of permits by default if official responses to requests are not received within sixty days. It is also reviewing the system of permits and authorizations, and has agreed to establish centers in local chambers of commerce to support and certify accounting and tax declarations by small and medium-sized enterprises. 71. PRSL-Related Actions Taken. The Conseil du Gouvernement has approved a draft law and enabling decree creating a single agency for registry of intellectual property rights (e.g., patents and trademarks) in the industrial and commercial sectors. Access to Finance 72. Key Issues and Medium Term Objectives. Major reforms have been undertaken since the late 1980s with respect to liberalization of banking activities, modernization of the banking regulatory framework, development of capital markets, and promotion of institutional savings intermediaries such as insurance companies and pension funds. The result has been expanded market-based bank financial intermediation and the emergence of capital market financing and other non-bank financing alternatives. Bank credit has grown as a percentage of GDP with no significant overall increase in the banking system's credit risk exposure. There are now 20 private commercial banks, and some 70 finance companies offering mainly leasing and consumer credit facilities. Government ownership of bank assets has decreased significantly while foreign participation in bank capital has grown rapidly. Finally, stock market activity has been energized, mainly by a series of privatizations facilitated by a more modern market infrastructure. 73. Nonetheless, access to finance is still a major impediment to private sector growth. It is constrained by a number of factors, including: limited savings mobilization by the banking system; limited term lending by banks resulting from the very short maturity of bank deposits; non-performing loans (a manageable problem for banks but a major issue for specialized credit institutions-which are also hampered by inefficiencies created by their dual organizational goals as public service institutions and commercial banks); and the high proportion of government domestic borrowing from the banking system. 74. Meanwhile, the supply of bank finance for small businesses remains very limited. This partly reflects high risk aversion in the absence of an adequate judicial system and technical support for secured lending to private firms. It also reflects low risk premiums for bank lending to large enterprises, which have reduced incentives for such borrowers to obtain alternative financing from capital market instruments-which could otherwise have helped both to meet demand for high-grade corporate securities and to free up bank credit for smaller enterprises. At the same time, stringent listing requirements inhibit the access of small firms to the stock market. Hence, while stock market capitalization has increased more than seven-fold in the last five years, there has been no initial public  - 19 - offering of new equity securities by private non-financial enterprises during this period, in spite of highly favorable stock market conditions. 75. The Government recognizes the importance of improving access to finance for private sector development, and intends to focus on three priority areas of reform. First, to increase the efficiency of the banking system as a whole, it will pursue financial restructuring and improved governance of public sector banks. Second, it will promote greater access to finance by small enterprises by introducing a legislative framework for the orderly development of micro-credit activities. Third, it will seek ways to promote more effective savings mobilization. 76. PRSL-Related Actions Taken. The Government has already taken action in the first two areas. With respect to restructuring public sector financial institutions, it has focused on three institutions in particular. First, the Conseil du Gouvernement has approved draft legislation that transforms CNCA, the rural credit institution, into a joint stock company. DH 450 million had also been allocated in the 1998/99 budget to recapitalize CNCA and write off its large portfolio of non-performing agricultural loans. There remains, however, a tension between its public service and commercial functions. Clearly, the viability of CNCA will need to be judged in light of the framework agreements which set out the contractual obligations of this institution and the Government, and which are still under preparation. Second, the Conseil du Gouvernement has approved a draft law changing the statutes of the Banque Centrale Populaire (BCP), to allow divestiture of state-owned shares to its regional network of banks (Banques Populaires). It is also envisioned that a minority offering will be sold to the private sector through the stock market. However, the Government retains significant influence on BCP's corporate governance through a Commissaire du Gouvernement that directly reports to the Ministry of Finance, which introduces uncertainty as to whether this reform will indeed change the incentives and competitive behavior of this important financial institution. Third, the 1998/99 budget includes DH 150 million for rescheduling non-performing fishery sector loans in the portfolio of the Caisse Centrale de Garantie (CCG) as the first step in a 10-year, DH 1.5 billion rescheduling program. 77. With respect to micro-credit and savings, Parliament has approved a lavv facilitating micro- lending activities and conditions, based on a regulatory framework that will both encourage financial institutions to expand their lending to small and micro enterprises and promote savings mobilization from small entrepreneurs. E. Poverty Reduction and Social Welfare 78. The scope for poverty reduction in Morocco is intimately linked to the other core elements of the Government's program discussed above. Specifically, adoption of a medium-term macroeconomic framework conducive to more rapid GDP growth (Part II.B), complemented by public sector reform (Part II.C) and private sector development (Part II.D), will help to provide opportunities for increasing the scale and improving the delivery of services to the poor, and for new private sector jcobs that will help to alleviate poverty. But a range of specifically targeted interventions, as specified in the Government's reform program, is also needed to accelerate the hitherto gradual pace of improvements in Morocco's social indicators (including access to basic social and infrastructure services), which continue to lag substantially behind those of comparator countries. The Government's program supported by the PRSL emphasizes four areas of intervention designed to alleviate poverty, which is heavily concentrated in rural areas: (i) social assistance and community development; (ii) rural water supply, electricity and roads; (iii) education (especially in rural areas) and adult literacy; and (iv) health care. Social Assistance and Community Development 79. Key Issues and Medium Term Objectives. The challenge for the Governmnent with respect to social assistance and community development is to overhaul existing mechanisms and institutions supporting the poor, especially in rural areas, and to establish new ones to respond to currently unmet needs.  -20 - 80. One such existing mechanism is that of food subsidies, which currently absorb close to two percent of GDP and six percent of Government expenditures. Moreover, subsidy expenditures substantially serve to counteract import tariffs and thus represent effective transfers to producers rather than consumers while distorting agricultural production patterns. Finally (with the exception of self- targeting of coarse wheat flour), subsidies are not targeted, and only an estimated one-fifth of subsidy expenditures reach the poor. The Government has begun assessing options for reform-albeit cautiously, in light of the subject's potential sensitivity-including: (i) parallel reduction of tariff protection and subsidies on food products; (ii) introduction of targeted assistance to low-income groups negatively affected by (i) above; (iii) reallocation of budgetary funds freed up by reduced subsidy expenditures to programs benefiting the poor (e.g., basic education and health care services in rural areas, basic infrastructure, and public works programs). 81. A second mechanism for poverty alleviation is the Promotion Nationale (PN), a public works program that finances temporary jobs for unemployed unskilled workers at below-market wages to provide low-income communities with basic infrastructure. PN exhibits serious weaknesses, however. A large share of resources is spent on local government administrators' wage payments rather than directly helping low-income communities. Overall, less than one-fifth of PN's budget is genuinely spent on labor- intensive programs benefiting localities where the poor are concentrated. Options being studied by the Government for restructuring PN include: (i) concentrating programs in low-income areas and strengthening self-targeting mechanisms; (ii) allocating a significant share of PN financing to labor- intensive activities and increasing the share of labor costs to over 60 percent of total costs; and (iii) involving the private sector in PN programs. 82. Apart from food subsidies and public works programs, most publicly-funded direct assistance to the poor is administered by the Entraide Nationale (EN), under the auspices of the Ministry of Social Development, often working in partnership with local charities.3 However, EN's programs are not cost effective, and fail to reach many of the poor (of an estimated 5 million poor and vulnerable people, EN programs reach only some 60,000). The budget for EN activities is modest (about 0.1 percent of GDP in 1996), and much of it is allocated to recurrent costs, mainly the salaries of about 6,300 persons. Nevertheless, a restructured EN has the potential to provide more effective assistance to the poor, by expanding its outreach and delivering fewer, better-focused programs in a more cost-effective way. 83. Finally, no overarching mechanism exists for supporting participatory, community-based development initiatives, particularly among the rural poor. Pilot programs for the development of basic social and infrastructure services at the community level have been initiated in several regions, in many cases administered by local NGOs, with promising results. This suggests the need for a new broad-based national program to promote participatory development mechanisms. 84. PRSL-Related Actions Taken. To focus attention on poverty reduction, the Government has appointed an inter-ministerial comnmittee, chaired by the Prime Minister, to coordinate preparation and monitor implementation of a strategy designed to increase the access of the poor to basic infrastructure and social services, to job opportunities, and to social protection mechanisms. 85. To enhance the effectiveness of the Entraide Nationale, the Government has prepared a report detailing EN's long-term development strategy, and has agreed on a restructuring program for EN, designed to better identify target groups and their needs; better focus its activities, make them more cost- effective, and increase their beneficiary coverage; and strengthen its institutional capacity to monitor the impact of its activities. Implementation has begun through: (i) a detailed review of necessary changes in EN's legal status in accordance with the restructuring program; (ii) the selection of provinces in which to 3 Existing EN programs include: (i) basic literacy training and nutritional advice for mothers in Centres Socio-Educatifs; (ii) training centers for illiterate and/or drop-out girls in Centres d 'Education et de Travail; (iii) support for shelters for (mainly male) school-age children and orphans provided by Associations Musulmanes de Bienfaisance (AMB); (iv) pre-school centers (garderies); (v) technical training for needy children, basic education drop-outs, and AMB orphans in Centres de Formation Professionnelle; and (vi) food aid and training for the handicapped.  - 21 - begin implementing the restructuring program on a pilot basis; and (iii) an assessment of EN's vocational training activities with a view to transferring beneficiaries to programs run by the National Establishment for Vocational Training (OFPPT). 86. Finally, to respond to the need to support participatory, community-based development initiatives, the Government has approved a draft law for the creation of a social development fund (Agence de Developpement Social, ADS). The Board of Directors will include representatives from the business and NGO communities, although half its members will be government representatives. The law also provides for: ex post (rather than ex ante) government financial control through independent technical and financial audits; specific emphasis on partnerships with the private sector, NGOs, and Government in identifying target groups, assessing priority needs, designing and implementing activities, and monitoring their impact; and decentralized project selection with community-level participation to ensure that ADS-supported activities are demand-driven and sustainable. The Government is currently drawing up the detailed institutional arrangements to initiate ADS operations as soon as the draft law is approved by Parliament. These arrangements will determine the degree of operational and financial autonomy from government, including flexibility in day-to-day management, remuneration of personnel, and procurement regulations. The Government is fully aware that the nature of these arrangement will be critical determinants of the effectiveness and efficiency of ADS operations. The Elank is pursuing the dialogue on ADS arrangements and is ready to assist further as needed. Basic Rural Infrastructure 87. Key Issues and Medium Term Objectives. The Government has identified rapid increases in access to basic rural infrastructure services-safe water, electricity, and roads-as a priority in its attack on poverty. Almost two-thirds of the rural population still lacks access to safe water, compared with less than 20 percent in urban areas. Access is disproportionately low among the rural poor, with negative effects on health, productivity, and incentives for the schooling of children, particularly girls. Lack of access to safe water also contributes to rural-urban migration. Rural access to electricity and roads is also disproportionately low. Only about one-third of the rural population currently has access to electricity (compared with well over 90 percent in urban areas), and only around 40 percent has access to an all- weather road. While access to safe water is arguably the most critical need, bringing electricity supply to poor rural areas can enhance labor productivity, arrest environmental degradation, facilitate the provision of basic services, and stem rural-urban migration. Similarly, increased road access, by enhancing market opportunities and facilitating wider access to basic social and infrastructure services for rural communities, can play a crucial role in reducing poverty and enhancing welfare. 88. PRSL-Related Actions Taken. The Government has committed itself to largets for access to safe water and an associated financial plan based on its Program for Rural Potable Water Supply (PAGER). Targets under the program call for ensuring access to safe water for 53 percent of the rural population by 2002. Previous difficulties with financing the PAGER program have now been substantially addressed through a recent Government decree instituting a water surcharge on urban consumers (Taxe de Solidarite'). Proceeds of the surcharge, estimated at about DII 70 million for the 1998/99 budget year, will help fund the program. The Government has finalized the financing plan for the PAGER Program, involving an increase in the central budget's contribution from DH 100 million in the 1998/99 Finance Law to DH 250 million in the 1999/2000 Finance Law. The Government has also agreed to access targets and a fnancing plan for the Rural Electrification Program (Programme d 'Electrification Rurale; PERG), which aims to provide access to electricity connections for 80 percent of the rural population by 2010 by increasing connections at a rate of some 100,000 households (about 600,000 individuals) each year. Finally, the Government has agreed on targets and a financing plan to accelerate the on-going rural roads rehabilitation and reconstruction program (Programme National de Construction des Routes Rurales; PNCRR), designed to ensure road access to some 58 percent of the rural population by the year 2003. The agreed program involves a gradual increase of the annual rehabilitation and construction target (from the current level of about 1300 kilometers per year). It has been agreed that all three programs (PAGER, PERG, and PNCRR) will be monitored jointly with the Bank on a regular basis.  -22 - Education and Adult Literacy 89. Key Issues and Medium term Objectives. Effective delivery of high-quality education services is critical for building the strong human capital base that Morocco needs in order to achieve rapid economic growth and job creation, and address domestic income disparities. Despite substantial public spending on education (about one-fifth of budgetary resources, equivalent to 5 percent of GDP), outcomes have been disappointing. In quantitative terms, enrollment rates for lower basic education (6 to 11 year olds) have grown rapidly in the past five years, but are still below regional and international averages for comparator countries. Meanwhile, serious inequities persist between urban and rural enrollment rates, and rural girls' enrollments have traditionally been particularly low, although improvements in the past two years have been noteworthy. Finally, the quality of general education has also eroded as a result of inefficient teaching methods and the absence of programs for systematically adapting and upgrading teacher skills. 90. In addition, more than half the adult population is currently illiterate. The problem is especially acute in rural areas (72 percent illiteracy compared with 37 percent in urban areas), and among rural females (with estimated illiteracy rates of 89 percent compared to 60 percent for rural males). 91. The Government is determined to improve the performance of the education sector. Its goal is to achieve within the next five years: (i) universal lower basic education (where enrollments are currently 86 percent), a 75 percent enrollment rate in upper basic education (currently about 50 percent) and a 50 percent rate in secondary education (currently less than 25 percent); (ii) a reduction in the gender gap and rural-urban disparities (lower basic enrollments lag at around 72 percent in rural areas); and (iii) improvements in the quality and efficiency of education services. 92. PRSL-Related Actions Taken. The Government and the Bank have agreed on an action plan to: (i) extend rural schooling facilities, initially through a three-year program to construct 1500 rural classrooms annually; (ii) introduce decentralization of administrative responsibilities for school mapping and project implementation to regional authorities; and (iii) initiate measures aimed at increasing staff mobility and facilitating redeployment of personnel. 93. With respect to illiteracy, the Government plans to reduce adult illiteracy to around 20 percent by 2012. To implement its program, it has: (i) allocated DH 30 million in 1998/99 to support agreed literacy programs; and (ii) launched a new approach to reducing illiteracy by concluding several agreements on the implementation of specific, targeted literacy programs, including eight with NGOs in December 1998 and one framework agreement with the private sector. Health Care 94. Key Issues and Medium Term Objectives. Morocco's health budget amounts to only 1.3 percent of GDP, about half the level of spending in comparable countries. The current system also suffers from inefficient use of resources and maldistribution between urban and rural areas. Meanwhile, less than 15 percent of the population has formal health insurance. Limited resources combined with poorly targeted public health programs and inefficiently run hospitals have resulted in poor health indicators, particularly for women and children in rural areas. Infant mortality accounts for 22 percent of all deaths in the country, and is 30 percent higher in rural areas than in urban localities. 31 percent of the rural population still lives over 10 kilometers from the nearest primary health care clinic, and only 25 percent of pregnancies in rural areas are assisted by trained medical personnel (compared with 50 percent in urban areas). 95. The Government's medium-term program for upgrading health service coverage, access, and quality emphasizes reallocation of resources towards the disadvantaged, particularly in rural areas, general improvements in allocative efficiency, and structural reforms necessary to ensure sector-wide efficiency and long-term financial sustainability. Specific medium-term objectives include reducing infant and maternal mortality rates in rural areas, increasing the access of rural inhabitants to primary health care clinics, and introducing new service financing mechanisms. Priority areas for action include: (i) reducing rural-urban and inter-regional inequities in access to preventative and curative services; (ii) improving  - 23 - sector efficiency, by making hospitals autonomous with respect to financial management and administration; (iii) strengthening institutional capacity, by implementing a careflilly coordinated and monitored decentralization strategy; (iv) ensuring long-term sector financial sustainability, by improving the cost-effectiveness of provision of services and pharmaceuticals; and (v) reformin,g and expanding the coverage of health insurance schemes and putting in place a national health assistance mechanism for low-income groups. 96. PRSL-Related Actions Taken. The Government has already taken important actions to support its medium-term reform agenda. It has agreed on a detailed, time-bound action plan to extend health insurance coverage and ensure the affordability of adequate health care for low-income households. It has also approved: (i) a decree introducing user charges in hospitals and other Ministry of Health establishments; and (ii) standardized bulk purchase procedures for pharmaceuticals. In addition, it has taken steps to initiate a pilot redeployment program for healthcare personnel in Morocco's poorest provinces, and prepared terms of reference for a system of health sector accounts. Meanwhile, as in other sectors, the Ministry of Health is preparing a medium-term expenditure frameworlk to help ensure that objectives and targets can be accurately translated into output, input, and resource requirements. PART III. THE PROPOSED LOAN A. Loan Objectives and Rationale for Bank Involvement 97. The overall objective of the PRSL is to support the Government's broad-based economic and social reform program described in previous sections. The Government is showring a strong public commitment to this reform program. It has agreed to widely publicize its Letter of Development Policy (Annex 3), which elaborates on the reform agenda outlined in the Prime Minister's inaugural speech of April 1998. The Government has also demonstrated its commitment in concrete fonn, by taking a range of prior measures to initiate implementation of its program (Part II and Annex 2). 98. The rationale for Bank involvement is predicated on the following factors: * the program's emphasis on an enabling environment for dynamic private sector growth while also paying attention to enhancing social welfare and equity, along with Bank support through the PRSL, will send an important signal to the investor community, and will underscore the fact that political opening in Morocco is being accompanied by broad socioeconomic reform with potentially substantial payoffs in terms of economic growth and social cohesion; * the breadth of the program, together with PRSL support for it, provides a catalyst for addressing a wide range of cross-sectoral and multi-agency issues at an early stage in the Government's term of office, improving prospects for implementation and sustainability of comprehensive reform over the medium term; and * the process of PRSL preparation, including the Government's willingness to draw on Bank expertise, has helped to identify priority reforms and the means to implement them, and has strengthened Govemment-Bank policy dialogue and partnership. Bank involvement and concrete support may also help the Government to continue to manage domestic political and economic pressures as it implements its program. 99. More generally, the proposed Loan would support an expansion of private investment and help finance the associated increase in import requirements, while helping to buttress external reserves in order to guard against Morocco's continuing vulnerability to balance of payments shocks. Access to the Loan in support of the initial phase of the reform program would help the Treasury reduce its call on domestic savings. The additional external financing for the budget that would be provided under the PRSL, coupled with containment of the overall budget deficit, would reduce the risk of putting upward pressure  -24 - on domestic interest rates and crowding out private investment, on which the potential for higher growth in the medium term depends. 100. The additional medium-term financing contributed by the Loan would support a modest expansion in imports needed to support higher domestic private investment and would also help offset Morocco's vulnerability to exogenous shocks (Section I.C (Risk Factors)) that may be created by drought, fluctuations in prices of phosphates (which still constitute over one-third of Morocco's merchandise exports), and/or downturns in foreign exchange receipts from tourism and FDI, which have historically shown considerable vulnerability to regional events outside Morocco's control. In this context, the modest build-up in external reserves envisioned under the Government's program constitutes a prudent policy measure. Finally, given current international financial market conditions, external financing alternatives to the proposed Loan would be on substantially less favorable terms, reducing the potential for fiscal consolidation and expansion of private investment. 101. As already noted, the PSRL is proposed as a single-tranche operation. This approach is based on the following factors: * it acknowledges not only Morocco's track record of solid economic management and the Government's commitment to future reform, but also the measures already undertaken by the Government (described in earlier sections and detailed in Annexes 2 and 3), which signal its determination to adhere to the program; and e it represents a considered and positive response to the Government's request for a new approach to Bank assistance, based on credible prior action rather than forward-looking conditionality. It also recognizes the importance of up-front Bank support in helping to shape the Government's medium-term reform program. B. The PRSL and the Country Assistance Strategy 102. Consistency with CAS objectives. The objectives of the PRSL reflect the priorities identified by the CAS and the accompanying 1997-99 Business Compact. The PRSL addresses three priority areas highlighted in the CAS: (i) encouraging more rapid growth and competitiveness; (ii) supporting accelerated social and rural development; and (iii) reforming the public sector. These areas constitute the core of the Government's economic and social reform program supported by the PRSL. Specific CAS objectives addressed in the reform program include: * deficit reduction and reallocation of public expenditures, continued integration into the global economy, deepening of financial markets, and private participation in infrastructure; * resumption of public enterprise reform and privatization; initiation of dialogue on public administration reform; and support for decentralization; and * shift of education expenditures towards basic schooling, improving access to basic infrastructure services, targeting social safety net mechanisms to those most in need, and increased public financing for basic health services. 103. Response to CAS challenges. The main challenge identified by the CAS was that of combining implementation of an economic and social reform program adhering to these objectives with an ongoing process of political opening. Morocco has risen to this challenge. On the political front, the country has witnessed a transition that goes well beyond the constitutional changes already anticipated in the CAS. An alternance Government, for the first time constituted by a group of center-left parties which had been in opposition for decades, and led by a Prime Minister with strong credentials at home and abroad, has been elected and has taken office. This development is of great importance from the perspective of governance, a key parameter for sustainable development. At the same time, Morocco has experienced continued sound economnic management and, as noted, the alternance Government's economic and social reform program meets major CAS objectives.  - 25 - 104. Lending volume in relation to CAS scenarios. The proposed US$250 million PRSL and the US$100 million TPI-SAL remain within the base case lending commitments envisioned under the FY1997-99 Business Compact. The base case foresaw commitments of US$1 billion; the PSRL and the TPI-SAL would bring total commitments for the period in question to around US$940 million, on target for the base case scenario. Without the PRSL, commitments would have fallen short even of the US$780 million limit set under the low case scenario. The triggers for the base case scenario are: * continued improvement in macroeconomic indicators and competitiveness monitored in close coordination with the IMF; * consistent progress on the implementation of priority social projects, in particular the BAJ; and * progress on public enterprise reform, including a significant opening of infrastructure to private investment. 105. Morocco's prior performance and the current Government's short-term measures and medium- term reform program justify lending at the level envisioned under this scenario. Wilh respect to specific CAS benchmarks, Morocco has, on balance, clearly met those for the base case. 106. Lending modalities in relation to CAS projections. As noted above, however, the PRSL does reflect a shift in lending approach, from traditional investment projects towards quick-disbursing policy- based loans: including the FY98 Contractual Savings Development Loan, policy-based lending to Morocco over the CAS period would amount to US$400 million instead of the projected US$80 million. 107. In addition to the specific rationale for Bank involvement in the proposed PRSL, the broader evolution of lending towards policy-based operations is based on the following main considerations: * the new approach reflects and responds to Morocco's clear movement towards a more open political system, and strong commitment to institutional and governance reform and greater operational transparency-all factors that provide a basis for greater consensus-building for, and improved prospects for the sustainability of, programs supported by policy-based lending; * the comprehensiveness of, and political commitment underlying, the Government's overall reform effort warrants a commensurate commitment from the Bank, which may be most effectively and publicly demonstrated by large-scale policy-based operati.ons explicitly linked to broad segments of the Government's program; * as is the case with all external financing, Bank lending to Morocco is fiilly integrated in the country's budget and expenditure management strategy, and Bank projects do not change the budget envelope for a particular sector. In such an environment, the strong dichotomy between investment and adjustment lending no longer applies from the country's point of view. This suggests a need to reach agreement on multi-sector or sector-specific performance indicators, and then designing the most appropriate mix of lending instruments, be it investment projects, guarantees or policy-based loans. 108. Subject to satisfactory implementation of the Government's medium-term program, the PRSL, and other operations, the shift in focus towards programmatic, policy-based operations is likely to continue in the future. A new CAS, to be presented to the Board by January 2000, will elaborate on the implications of this approach for the Bank's future assistance program. The CAS will be based on recently-initiated work on a Comprehensive Development Framework for the country. 109. Exposure considerations. Quick-disbursing operations entail greater exposure risk. In Morocco's case, following portfolio restructuring and partial cancellation of loans, Morocco's share in IBRD's portfolio and debt outstanding has been reduced compared to the CAS projection, although other exposure indicators are expected to exceed Bank thresholds for the coming years (see Table III.1).  - 26 - Nonetheless, even assuming an increase in Bank base lending during FYOO-02 to US$1.2 billion compared to US$1 billion during FY97-99, Bank exposure should remain manageable. Table M.A: World Bank Lending and Exposure Indicators Indicator 1997 1998 1999 2000 2001 2002 IBRD Debt outstanding and disbursed (USSBn)a 3.3 3.2 3.3 3.3 3.4 3.4 CAS projections 3.8 3.8 3.8 3.8 IBRD exposure indicators (%) IBRD Debt Service (DS)/public DS 17.9 18.8 19.9 20.4 19.8 19.6 CAS projections 21.2 22.5 19.2 18.9 Preferred creditor Debt Service(DS)/public DSb 30.1 33.4 31.0 33.0 32.2 35.3 CAS projections 35.4 38.5 33.3 33.3 IBRD Debt Service/Exports of Goods & Services 5.4 4.7 4.5 3.9 3.6 3.2 CAS projections 5.2 4.9 4.6 4.2 Share of IBRD portfolio 3.2 3.1 3.0 3.0 2.9 2.9 a. Includes present value of guarantees. b. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for Intemational Settlements. C. Actions Taken Prior to Board Presentation 110. Prior to Board presentation, the Government has (i) taken steps to establish and maintain a satisfactory macroeconomic framework; (ii) agreed to implement an overall medium-term economic reform program as outlined in the Letter of Development Policy (Annex 3); and (iii) carried out a series of actions outlined in Part II and listed in Annex 2. D. Expected Areas for Follow-up Policy Reform Lending 111. As noted above (sections IH.A and H.B), the PRSL represents a first step towards establishing a new, more programmatic relationship between Morocco and the Bank. This relationship and its specific consequences for the lending program will be detailed in the upcoming Morocco CAS, but at its core is a flexible, performance-based multi-year programming framework whose specifics will be determined on the basis of effective implementation of existing operations, including the PRSL. Within this framework, programmatic lending is expected to assume increasing prominence, and such lending during FY2000-02 is expected to help the Government to deepen the reform program outlined in the PRSL Letter of Development Policy (Annex 3). In particular, in the area of public sector reform, follow-up support is expected to focus on public expenditure management and implementation of civil service reform. In the area of private sector development, follow-up will likely cover continued implementation of the Government's privatization program; promotion of private participation in infrastructure; and improving the country's business environment. In the area of social sector reform, follow-up would be directed towards strengthening social assistance mechanisms and improved delivery of basic education and health care services, particularly in rural areas. E. Disbursement and Auditing 112. Disbursement arrangements will follow the simplified procedures approved by the Board on February 1, 1996. The Borrower will open a deposit account in USD in the Central Bank of Morocco. Upon effectiveness, proceeds will be deposited by the Bank in this account at the request of the Borrower. If after deposit in this account, the proceeds of the Loan are used for ineligible purposes (i.e., to finance items imported from non-member countries, or goods or services in the standard negative list), the Bank will require the Borrower either: (i) to return that amount to the account for use of eligible purposes; or (ii) to refund the amount directly to the Bank, in which case the Bank will cancel an equivalent undisbursed amount of the Loan. Although a routine audit of the account will not be required, the Bank reserves the right to require it. The closing date for the PRSL is December 31, 1999.  -27 - F. Cofinancing 113. The ADB has approved a parallel two-tranche policy-based lending operation in the amount of about US$200 million. As a matter of policy (as was the case with the parallel financing of the World Bank's one-tranche Contractual Savings Loan), the ADB only supports two-tranche operations. The first tranche conditions of the ADB loan match those for Board presentation of the PRSL. G. Technical Assistance 114. The Government has received technical assistance under a PHRD Grant for the preparation of the PRSL. The Ministry of Privatization is also benefiting from an IDF grant in support of telecommunications liberalization and privatization. Further, the Bank is planning to support a workshop on governance and corruption in late June 1999, to be followed by seminars on small-medium enterprise development and on the preparation and use of medium-term expenditure frameworks in the course of the year. Other Bank technical assistance related to private sector participation in infrastructure has been available through various Bank investment projects. Complementary technical assistance by the EU is under discussion. H. Environmental Aspects 115. The PRSL has been placed in environmental category U, which does not require an environmental assessment. While environmental policies are not a focus of this operation, they are an integral part of the ongoing CAS discussions and will be fully addressed in that context. I. Program Objective and Poverty Categories 116. Since the Loan supports a comprehensive medium-term economic and social reform program in the context of macroeconomic stability and satisfactory public expenditure policies, it falls principally within the category of Economic Management. However, the Loan also contributes to other key program objective categories. It supports Public Sector Management by initiating a substantial public sector reform effort. It supports Private Sector Development through a range of measures designed to enhance the prospects for dynamic, competitive private sector growth. And finally, it contributes to Poverty Reduction through specific short-term actions as well as through the establishment of key principles for the Government's poverty alleviation and social sector reform policies. J. Benefits and Risks 117. Benefits. The benefits of the reform program supported by the PRSL would be considerable. As described above, the reform program addresses a broad range of issues needed to enhance Morocco's competitiveness and achieve strong sustainable growth, while also advancing the country's still- significant social development agenda. In addition, the preparation of the PRSL has served to promote a dialogue and develop a partnership with the alternance Govemrnment, and to act as a catalyst in drawing up the medium-term framework for reform in Morocco. 118. Risks. The PRSL faces four main categories of risk. The first relates to medium-term growth prospects; the second concerns political support for the program; the third relates to technical aspects of program implementation; and the fourth centers around the social costs of the program supported by the PRSL. With respect to growth prospects, the attainability of the authorities' medium-term target hinges sensitively on significant budgetary adjustment and growth in private investment, and a shortfall in either would reduce GDP growth prospects. Political opposition to reforms could stem froim three sources. The new coalition Government includes parties with an etatiste tradition; these parties may be skeptical of the benefits of a reform program grounded in fiscal discipline and re-orienting the role of the state, and seek to promote a traditional "1960's Keynesian" model in which higher deficit spending would pave the way for growth, and in which the public sector would not only promote access to goods and services, but  - 28 - would also take charge of delivering them. Similarly, a recently elected Parliament vested with more power may not fully support a program which restricts the sphere of influence of the state. Finally, unions and other stakeholders affected by the reforms may lobby strongly against the program, leading the Government to scale back or delay implementation of measures such as re-deploying teachers. To address concerns from any of these sources, the Government may opt to engage in a time-consuming process of identifying compromises which it judges palatable to all interests. This would increase the political viability of the reform program, but at the expense of speed and depth of reforms-as exemplified in the reform of ONT (see Section I.D. on Private Participation in Infrastructure). Technical implementation difficulties could arise from weaknesses in intra-governmental coordination of design and application of the reforms, as well as from scarcity of expertise in the implementation of a policy reform program combined with slow processing of available assistance, including technical assistance. Social problems may result, in particular, from expenditure constraints and employment consequences of the privatization program, and/or from poor implementation of social reform measures envisioned under the program. 119. Risk Mitigation. Risks of shortfalls in economic growth would be mitigated by the government's efforts to improve the business environment and the climate for private investment, together with regular monitoring of key economnic indicators, including investment. Political acceptance risks would be mitigated through close policy dialogue with the alternance Government, and, if appropriate, with members of Parliament and affected stakeholders. Meanwhile, the Government itself is making a strong effort to reach out to its constituencies, notably through public dissemination of the program described in the Letter of Development Policy. Technical implementation risks resulting from intra-governmental coordination problems would be mitigated by an active and open dialogue with all government agencies concerned. With respect to technical expertise, the Government has established its openness to and interest in hiring outside advice as needed, and the Bank will continue to provide financial and human resources for technical assistance. As noted earlier, further technical assistance has also been offered by the EU. Social risks associated with certain economic reform measures (e.g., liquidation of non-viable public enterprises) would be mitigated through financing provided under the proposed operation and through an array of social measures which constitute an integral part of the Government's reform program. Moreover, as endorsed in the CAS, social development is already at the center of the Bank's policy dialogue and assistance effort. PART IV. RECOMMENDATION 120. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it. James D. Wolfensohn President by Shengman Zhang Managing Director Attachments Washington, D.C. May 5, 1999  Annex L.A Page 1 of 3 Morocco - Key Economic Indicators National accounts (as % GDP at current market prices) Gross domestic product 100 100 100 100 100 100 100 100 100 Agriculturea 18.5 14.6 19.3 13.9 15.8 14.9 15.1 14.6 14.1 Industrwy 30.8 33.0 31.0 33.5 30.0 30.0 29.7 29.5 29.5 Servicesa 50.6 52.4 49.7 52.6 40.9 41.8 41.8 42.0 42.5 Total Consumption 84.1 86.7 84.5 82.8 81.7 80.9 80.4 79.8 78.6 Gross domestic fixed 20.6 21.4 19.4 20.7 21.1 21.8 22.2 23.0 24.0 investment Government investment 5.5 5.1 4.2 4.7 4.4 4.3 4.4 4.6 5.0 Private investment 15.9 15.6 15.6 15.9 17.2 18.0 18.3 18.9 19.5 (includes increase in stocks) Exports (GNFS)b 25.3 27.0 25.7 28.3 27.9 28.8 29.9 31.2 32.3 Imports (GNFS) 30.9 34.4 30.0 31.7 31.1 32.0 33.0 34.5 35.4 Gross domestic savings 15.9 13.3 15.5 17.2 18.3 19.1 19.6 20.2 21.4 Gross national savingsC 19.5 16.2 18.6 20.3 21.2 21.8 22.3 23.0 24.0 Memorandum items Gross domestic product 30351 32986 36672 33514 35928 37931 40419 43070 46266 (US$ million at current prices) Gross national product per 1160 1110 1290 1240 1240 1270 1309 1388 1466 capita (US$, Atlas method) Real annual growth rates (%, calculated from 1980 prices) Gross domestic product at 10.4% -6.6% 12.0% -2.2% 6.3% 3.0% 5.0% 5.0% 5.5% market prices Gross Domestic Income 9.9% -6.2% 11.2% -2.2% 7.9% 3.7% 5.5% 5.5% 6.0% Real annual per capita growth rates (%, calculated from 1980 prices) Gross domestic product at 8.4% -8.2% 10.2% -3.7% 4.6% 1.3% 3.2% 3.2% 3.7% market prices Total consumption 8.9% -5.5% 6.5% -7.6% 5.3% 1.2% 3.4% 3.3% 2.9% Privateconsumption 12.3% -5.1% 8.3% -5.5% 5.5% 0.5% 4.4% 4.1% 3.4% (Continued)  Annex L.A Page 2 of 3 Morocco - Key Economic Indicators (Continued) Balance of Payments (US$m) Exports (GNFS)b 7688 8892 9433 9483 10013 10931 12090 13426 14961 Inports (GNFS)b 9368 11339 10991 10623 11185 12129 13344 14848 16386 Resource balance -1680 -2447 -1559 -1139 -1172 -1198 -1254 -1422 -1426 Net current transfers 2124 2261 2352 3202 3269 3082 3159 3061 2908 (including official current transfers) Current account balance -672 -1442 -346 -113 -128 -205 -147 -207 -218 (after official capital grants) Net private foreign direct 555 237 258 1294 520 729 780 981 995 investment Long-term loans (net) -230 -199 -340 -630 -281 -294 -118 -425 -374 Other capital (net, including 860 657 476 -2 207 0 0 0 0 errors and omissions) Change in reservesd -513 747 -47 -550 -318 -230 -515 -349 -403 Memorandum items Resource balance (% of -5.5% -7.4% -4.3% -3.4% -3.3% -3.2% -3.1% -3.3% -3.1% GDP at current market prices) Real annual growth rates (1980 prices) Merchandise exports (FOB) 4.4% 12.0% 5.3% 5.8% 1.0% 4.5% 6.6% 7.4% 6.0% Primary -1.4% 8.0% 9.8% 0.6% 3.9% 3.4% 5.5% 6.3% 5.6% Manufactures -4.1% -0.5% 1.0% 1.1% 4.4% 13.6% 14.6% 14.3% 13.4% Merchandise imports (CIF) 3.5% 13.5% -4.6% 4.7% 11.9% 7.4% 6.0% 9.5% -5.6% Public finance (as % of GDP at current market prices)' Current revenues 24.3 23.9 24.1 25.2 25.7 24.6 24.7 25.1 25.1 Curentexpenditures 21.4 22.5 21.1 22.8 22.8 22.0 21.0 20.5 19.9 (Continued)  Annex L.A Page 3 of 3 Morocco - Key Economic Indicators (Continued) Cutrent account surplus (+) 2.9 1.4 3.0 2.4 2.8 2.6 3.7 4.6 5.2 or deficit (-) Capital expenditure 6.7 7.0 6.4 5.9 6.4 6.2 6.4 6.6 7.1 Foreign financing -1.6 -0.7 -1.4 -1.9 -1.0 -0.7 -0.4 -0.5 -0.2 Monetary indicators M2/GDP(atcurrentmarket 70 73 62 72 71 71 72 72 72 prices) Growth of M2(%) 7.3 6.2 -3.6 9.2 7.6 6.0 7.7 7.7 8.1 Private sectorcredit growth! 8.7 77.1 107.0 88.0 45.8 72.5 78.1 82.9 85.5 total credit growth (%) Price indices( 1980 =100) Merchandise terms of trade index 94.5 98.4 94.0 88.8 82.9 83.9 82.1 81.4 81.8 Real effective exchange rate 108.7 112.2 113.2 114.2 116.0 116.5 116.5 116.5 116.5 (FCU/LCU)J Consumerprice index 5.2% 6.1% 3.0% 1.0% 2.8% 2.5% 2.5% 2.5% 2.5% (% growth rate) GDP deflator 1.6% 8.0% 1.2% 2.0% 2.8% 2.5% 2.5% 2.5% 2.5% (% growth rate) a. From 1998 onwards, sector shares are estimated at factor cost and do not therefore sum to 100% of GDP at market prices. b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Data refer to the Central Govemrnment Budget. f. "LCU" denotes "local currency units". FCU denotes "foreign curency units". An increase in FCU/LCU denotes appreciation.  Annex 1.B Page 1 of 3 MOROCCO: RMSM-X PROJECTIONS, 1998-2002 STANDARD NATIONAL ACCOUNTS INDICATORS 1998 1999 2000 2001 2002 Growth Rate of GDP 6.3% 3.0% 5.0% 5.0% 5.5% Import (GNFS) growth 8.6% 7.4% 8.5% 9.8% 8.8% Export (GNFS) growth 3.9% 6.0% 7.5% 8.2% 8.6% As a share of GDP in local currency: Resource Balance -3.3% -3.2% -3.1% -3.3% -3.1% Exports 27.9% 28.8% 29.9% 31.2% 32.3% Imports 31.1% 32.0% 33.0% 34.5% 35.4% Consunption 81.7% 80.9% 80.4% 79.8% 78.6% Private 66.0% 64.9% 65.1% 65.1% 64.3% Public 15.7% 16.0% 15.3% 14.7% 14.3% Investment 21.6% 22.3% 22.7% 23.5% 24.5% Private 17.2% 18.0% 18.3% 18.9% 19.5% Of which FDI / IDE 1.4% 1.6% 1.6% 1.9% 1.9% Public 4.4% 4.3% 4.4% 4.6% 5.0% ICOR (non-agric) 6.9 6.9 6.3 5.2 4.8 Gross Domestic Savings 18.3% 19.1% 19.6% 20.2% 21.4% Total Savings 21.6% 22.3% 22.7% 23.5% 24.5% Foreign Savings 0.4% 0.5% 0.4% 0.5% 0.5% Gross National Savings 21.2% 21.8% 22.3% 23.0% 24.0% Monetary System Savings 0.0% 0.0% 0.0% 0.0% 0.0% Government Savings 2.5% 2.6% 3.4% 4.0% 4.9% Private Savings 18.8% 19.2% 18.9% 19.0% 19.1% Value Added (Factor Cost) Growth Rates Agriculture 24.3% -0.6% 9.3% 4.0% 4.3% Industry 3.4% 3.7% 4.2% 5.0% 5.8% Manufacturing 3.0% 4.5% 5.5% 6.5% 6.7% Services 3.7% 4.0% 3.5% 4.1% 5.7%  Annex 1.B Page 2 of 3 MOROCCO: RMSM-X PROJECTIONS, 1998-2002 CENTRAL GOVERNMENT BUDGET (IN PERCENT OF GDP) Actual Estimated Projection Projection Projection Projection FY97/98 FY98/99 FY99/00 FY0O!01 FY01/02 FY02/03 Revenues Total Current Revenues 25.1% 25.7% 24.6% 24.7% 25.1% 25.1% Tax Revenues 21.8% 21.9% 20.7% 22.0% 22.4% 22.5% Direct Taxes 6.5% 6.3% 6.2% 6.8% 7.1% 7.2% Total Indirect Taxes 15.3% 15.6% 14.5% 15.2% 15.4% 15.3% Taxes-International Trade 3.8% 3.6% 3.5% 3.3% 2.9% 2.3% Others Indirect Taxes 11.5% 12.0% 10.9% 11.9% 12.4% 13.0% Total Non Tax Revenue 3.4% 3.9% 4.0% 2.7% 2.7% 2.6% Expenditures Current Expenditures 22.8% 22.8% 22.0% 21.0% 20.5% 19.9% Wages & Salaries 11.3% 11.2% 11.0% 10.5% 10.0% 9.5% Other Consumption (incl. Transfers 6.3% 6.4% 6.1% 5.9% 5.9% 6.0% & Subsidies) Interest Payments 5.2% 5.2% 4.9% 4.7% 4.6% 4.4% Domestic Debt 3.0% 3.1% 3.2% 3.2% 3.1% 3.1% Foreign Debt 2.2% 2.1% 1.7% 1.5% 1.5% 1.3% Total Capital Expenditures 5.9% 6.4% 6.2% 6.4% 6.6% 7.1% Capital Transfers 2.1% 2.2% 2.0% 1.9% 1.9% 1.9% Budgetary Investment 4.5% 4.3% 4.3% 4.5% 4.7% 5.2% Deficit -3.5% -3.5% -3.6% -2.8% -2.1% -1.9% Financing Financing (including all grants): 3.5% 3.5% 3.6% 2.8% 2.1% 1.9% Foreign: -1.9% -1.0% -0.7% -0.4% -0.5% -0.2% Domestic: 5.4% 4.5% 4.3% 3.2% 2.6% 2.1% Monetary Sector Credit 1.0% 1.4% 0.9% 1.1% 1.1% 1.0% Domestic Borrowing from Priv. Sector 4.5% 3.1% 3.4% 2.1% 1.5% 1.0%  Annex 1.B Page 3 of 3 MOROCCO: RMSM-X PROJECTIONS, 1998-2002 BALANCE OF PAYMENTS AND MONETARY INDICATORS 1998 1999 2000 2001 2002 Balance Of Payments Current Account Balance (% of GDP) -0.4% -0.5% -0.4% -0.5% -0.5% Financing Requirements (US$ millions) Financing Requirements 2280.3 2322.6 2370.8 2393.0 2524.5 Current account deficit 128.1 204.9 146.8 207.2 218.0 Long term amortizations 1834.0 1888.0 1709.0 1837.0 1903.0 Reserves Changes of Monetary Authorities 318.2 229.8 515.0 348.8 403.5 Financing sources 2280.3 2322.6 2370.8 2393.0 2524.5 Private investment (net) 520.1 728.9 779.8 980.7 995.3 Long term Disbursements 1553.0 1593.7 1591.0 1412.3 1529.2 Other capital flows 207.2 0.0 0.0 0.0 0.0 Asset Markets Money: Money Growth 7.6% 6.0% 7.7% 7.7% 8.1% Inflation (p.a.) 2.8% 2.5% 2.5% 2.5% 2.5% M2/GDP 71.2% 71.5% 71.5% 71.6% 71.6% Currency/M2 50.9% 50.9% 50.9% 50.9% 50.9% Income-Velocity 1.4 1.4 1.4 1.4 1.4 Nominal GDP growth 9.3% 5.6% 7.6% 7.6% 8.1% Credit Stocks: Total Credit/GDP 76.0% 75.4% 73.9% 72.8% 72.0% Private Credit/GDP 50.4% 50.0% 49.3% 48.9% 48.8% Government Credit/GDP 25.6% 25.4% 24.6% 24.0% 23.3% Total Credit/M2 106.7% 105.5% 103.3% 101.8% 100.7% Real credit growth (stocks)/GDP growth 50.5% 74.4% 57.8% 70.1% 78.8% Credit Flows: Total Credit/GDP 4.3% 3.4% 3.8% 4.2% 4.7% Private Credit/GDP 3.4% 2.3% 2.8% 3.1% 3.6% Government Credit/GDP 0.9% 1.2% 1.0% 1.1% 1.1% Foreign Debt: Total Debt/GDP 52.7% 49.2% 46.2% 43.0% 41.0% Treasury Debt/GDP 37.3% 34.2% 32.4% 30.4% 29.5% Monetary Sector/GDP 3.7% 3.5% 3.3% 3.2% 3.2% Other Debt/GDP 11.7% 11.4% 10.5% 9.4% 8.3%  Annex 1.C Page 1 of 1 MOROCCO: EXPOSURE INDICATORS, 1994-2002 Total debt outstanding and 22441 23002 21999 21001 18939 18645 18678 18515 18953 disbursed (TDO) (US$m)a Net disbursements (JS$m)a -382 -299 -85 -607 -381 -295 319 118 587 Total debt service (TDS) 3637 3792 3160 3537 3055 2973 2743 2828 2872 (US$m)a Debt and debt service indicators (%) TDO/XGSb 230.4 208.2 189.2 181.3 156.7 143.2 131.6 119.1 110.8 TDO/GDP 73.9 69.7 60.0 62.7 52.7 49.2 46.2 43.0 41.0 TDS/XGS 37.3 34.3 27.2 30.5 25.3 22.8 19.3 18.2 16.8 ConcessionalYTDO 27.1 28.5 30.1 32.7 33.0 35.3 38.7 43.5 49.5 IBRD Exposure Indicators (%) IBRD DS/public DS 15.8 16.7 19.1 17.9 18.8 19.9 20.4 19.8 19.6 Preferred creditor DS/public DS 29.4 31.9 34.9 30.1 33.4 31.0 33.0 32.2 35.3 IBRD DS/XGS 5.9 5.7 5.2 5.4 4.7 4.5 3.9 3.6 3.2 TBRD TDO (US$m)d 3746 3966 3732 3271 3212 3281 3313 3355 3370 Share of IBRD portfolio (%) 3.2 3.6 3.4 3.2 3.1 3.0 3.0 2.9 2.9 IDA TDO (US$m)d 35 33 32 31 29 28 27 26 24 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IM;F, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.  Annex 2 Page 1 of 9 ANNEX 2: MATRIX OF POLICY OBJECTIVES AND ACTIONS Budgetary and macroeconomic . Maintain a consistent macroeconomic policy framework to * Adoption of measures to limit the budget deficit in policy framework consolidate macroeconornic balances and increase medium- FY 1997/98 to 3.5% of GDP in the face of initial term GDP growth to 6% in order to reduce unemployment, indications of a substantially higher deficit trend at including a budgetary policy stance that ensures a gradual the start of the fourth quarter of the fiscal year. reduction in the deficit from 3.5% of GDP in FY 1997/98 to around 2% of GDP by FY 2001/02. * Prepare measures during the transitional fiscal year 1998/99, * Adoption and on-track execution of the 1998/99 to be implemented in subsequent budgets, in order to ensure a budget, which provides for containing the deficit at sustainable increase in budgetary savings. These measures a similar level (3.6% of GDP) to that achieved in include, in addition to the debt management initiatives already 1997/98, within a consistent supporting under way: (i) tax measures (per IMF recommendations); (ii) macroeconornic framework. measures to reduce the government wage bill by at least two percentage points of GDP by FY 2003/04; and (iii) reductions in transfers to public enterprises and in consumer subsidy expenditures. Budgetary Institutionsl * Budget preparation and approval * Put in place institutional arrangements for annual budget * Approval by Parliament of a new Organic Budget preparation and approval in order to ensure better medium- Law which, inter alia, reduces the incidence of term strategic prioritization of public expenditures against a extra-budgetary accounts with earmarked revenues backdrop of aggregate fiscal discipline. and increases flexibility in mnanaging appropriations. * Prepare annual budgets on the basis of a medium-term * Discussion and approval by Council of framework, to be detailed in the forthcoming 1999-2003 plan. Government of a policy paper to provide directives for the preparation of the plan.  Annex 2 Page 2 of 9 . w1N R '., ''.' . , , , ,,, ,,,,,,,,,,,,,,; ,,.,,, < 1 ...................................................... ' . ' . ...........- Budget execution * Provide for more transparent and streamlined expenditure * Implementation of a first set of BAJ action plan management and procurement arrangements to foster more measures to reduce bottlenecks in budget efficient and effective use of resources at the ministry/agency execution, including: level. In particular, extend and ensure full imnplementation of * streamlining supporting documentation the action plan designed to streamline budget execution requirements for appropriation transfer (prepared under the BAJ project on the basis of prior requests; diagnostic studies). * empowering additional managers to approve expenditure proposals in order to foster administrative decentralization; and . enhancing project expenditure management through the issuance of .a circular reminding budget administrators of the (streamlined) procedures for payments from working capital funds in individual departments. * Issuance of tender invitations to short-listed bidders for the establishment of a computerized, integrated public expenditure management system on a pilot basis. * Approval by the Council of Government of a decree overhauling the public procurement system to provide for greater transparency, accountability, and competitiveness. * Approval by the Council of Govermnent of a new code (Code de Recouvrement) to facilitate the li _________________________________________________________ j[ collection of receivables from taxpayers. Civil Service and Administrative Reform * Employment levels and service . Define and implement a broad-ranging civil service reform * Issuance of circular from the Prime Minister delivery. program to ensure a progressive reduction of the central establishing a ministerial-level Strategic government wage bill (as a share of expenditure and of GDP) Committee for Civil Service and Administrative while maintaining service delivery levels and improving their Reform, to take charge of designing and l_____________________________ j[ quality. Based on a comprehensive study nearing completion, overseeing the implementation of a comprehensive  Annex 2 Page 3 of 9 the program will inter alia address impediments to staff civil service reform program. mobility across and within departments, excessive centralization of decision-making authority, poor enforcement * Review and discussion by the Strategic Committee of conduct and ethical standards, inadequate or non-existent of a proposed "Decentralization Charter" decree, service standards, complexity and non-uniformity of which lays out principles of administrative remuneration structures, and poor links between performance decentralization, in preparation for Council of and advancement. Government approval. Approval by the Council of Government of a "Good Management Compact" (Pacte de Bonne Gestion) as a first step in defining and implementing a government-wide program covering conduct and ethics, efficient resource management, and client relations. * Review and discussion by the Strategic Commnittee of mechanisms to implement key provisions of the "Good Management Compact" (Pacte de Bonne Gestion). * Appointment of an independent Commission of VIPs to develop recommendations for reforms concerning personnel redeployment, as well as the remuneration and retirement systems. Judicial Reform Commercial dispute resolution * Enhance capacity to handle commercial litigation through the * Establishment and operation of six commercial development of a network of specialized commercial courts courts and three commercial courts of appeal. and promote arbitration as an altemative mechanism for commercial dispute resolution. * Initiation of work on a legal guide for judges in commercial courts and agreement on timetable for its dissemination. * Harmonization of statutes relating to the ...........  Annex 2 Page 4 of 9 ARJk OF INTERVENTION 1 MED1UM4Evm OBwTTeSn ACTIONS TAK1EN VgWOR TO BOARD organization of the judiciary and magistrates with the law creating the commnercial courts. * Pursuit of computerization of the commercial courts in line with agreed timnetable. * Assessment of commnercial court experience to date, including quantified data on imipact on, e.g., caseload backlog and on cases brought, resolved, and appealed. * Comipletion of an action plan and timnetable for preparation and adoption of a consolidated commnercial arbitration code. * Administration of the judiciary * Restructure Ministry of Justice to provide for more * Publication of a decree establishing a new and service standards streamlined decision-making and imiproved service delivery, organizational chart and administrative structure including the establishment of a new unit for user feedback, for the Ministry of Justice. * Incentives for administrative * Improve incentives and conditions (including issues relating to * Initiation of a study and preparation of a timetable staff of tribunals remuneration, career development, training, and professional for relevant legislation to create a legal framework status and eth-ics) in order to promote better performance and providing for, inter alia, career development of: service delivery among administrative staff of tribunals. (i) notaries, (ii) professional experts in judicial matters; and (iii) court personnel, including bailiffs, transcribers and legal translators. * Training and professional * Improve professional standards and training for judges, * Initiation of a study to: (i) critically review the standards notably through a comprehensive restructuring of the National present training system for judicial staff, including Judicial Studies Institute (INEJ) to ensure greater mianagerial INEJ's training ofjudges; and (ii) reconmmend arid fInanCail autonomiiy, cturAriculu ovrau,And -eatr reformei to overhauil troininui mec,hanisms, withi interaction with the business environment, particular focus on a restructuring of INEJ and greater interaction with the private sector in training. * Initiation of a broader study on training! employment in the justice sector as a whole. * Comprehensiveness of the * Develop and sustain a participatory approach to legal and * Signature of agreement between the Ministry of  Annex 2 Page 5 of 9 judicial reform judicial reform through partnership with all the legal Justice and the Moroccan Bar Association to professions. promote a participatory approach to judicial _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _re fo rm . Public Enterprise Reform and Privatization * Public Enterprise Reform and * Implementation of a comprehensive public enterprise reform | Approval by the Council of Government of an Privatization and privatization program within the tenure of this action plan, as detailed in the LDP, to: (i) Government. strengthen governance and performance of enterprises remaining in the public sector; (ii) transfer in a transparent manner the mnajority of the remaining portfolio of public enterprises to the private sector; and (iii) liquidate non-viable enterprises. * Liquidation * Liquidate non-viable state-owned commercial ventures . Implementation of a DH 3.7 billion package for (beginning with two mining enterprises which constitute a phased shutdown by 2001 of CdM (Jerrada coal significant part of the portfolio of non-viable enterprises) with mine) which has been ratified by all relevant adequate provision for safety net measures and settling parties, including labor unions. Allocation of DH fnancial liabilities. 667 million in the 1998/99 finance law for implementation of the first phase, including layoff and compensation of almost one-third of the 4647 employees. * Implementation of a plan to liquidate SEFERIF. Allocation of DH 24 million in the 1998/99 Finance Law for the implementation of the first phase (affecting some 230 employees of which 166 have already been laid off). * Sale of state-owned enterprises * Revise the legal framework for transfer of state-owned * Approval by the Council of Government of commercial ventures to the private sector; accelerate sale of legislation that modifies and complements the residual portfolio of state-owned enterprises previously current Privatization Law (No. 39-89), in order to targeted for privatization; and initiate sale of other enterprises extend the privatization program and streanline not previously earmarked. privatization procedures.  Annex 2 Page 6 of 9 AREA OW INTERMUnTON . 1IUM-ThRM OBJCR A T .: TO Demonopolization and Private Participation in Infrastructure Legal and institutional | Ensure that the legal, regulatory, and institutional framework * Initiation of a comprehensive revision of the framework for PPI encourages competition and efficient private participation in concession framework. Creation of an inter- infrastructure. ministerial working group and agreement on terms of reference and selection of consultants for a study on the institutional framework for concession contracts. * Competition in energy services * Define and implement specific policy measures to encourage * Initiation of a study to examine range of options, greater competition in the provision of energy services. including the creation of a wholesale market, for introducing competition in the electricity industry. * Competition in transport services a Define and implement specific policy measures to encourage * Approval by the Council of Government of a draft greater competition in the provision of transport services and law (i) abolishing, within two years after the improved intermodal transport. promulgation of the Law, ONT's monopoly on road freight forwarding; (ii) separating ONT's regulatory functions from its commercial activities; and (iii) guaranteeing free and unrestricted access to the road freight market. * Initiation of work on a strategy for increasing competition and private provision in rail, air, road, and maritime transportation services; creation of an inter-ministerial committee to oversee preparation of the strategy and develop concrete recommendations for reform measures. Business Environment * Customs procedures . Put in place a legal framework providing for greater * Approval by the Council of Government of a new transparency of customs valuation procedures; further customs code. streamline customs clearance procedures and reduce delays. * Reduction of the average time required for customs clearance to one day (compared to two days in July 1998).  Annex 2 Page 7 of 9 * Competition policy . Put in place a legal framework to foster competitive business . Approval by the Council of Government of a new practices, including a progressive substantial reduction in the draft cornpetition law. scope of remaining price controls. | Business establishment and asset * Streamline procedures for the establishment and registration * Approval by the Council of Government of a draft registration of private businesses and their assets. law and enabling decree creating a single agency for the registry of intellectual property rights (e.g., patents and trademarks) in the industrial and |______________________________________________________________ conmmercial sectors. Access to Finance ._.___.__._I * Restructuring of state-owned * Ensure the future financial viability and efficiency of state- | Approval by the Council of Government of draft financial institutions owned financial institutions to improve allocation of legislation that transforms CNCA into a joint stock resources and financing to the economy. company and allocation of DH 450 million in the 1998/99 budget to recapitalize CNCA and write off non-performing agricultural loans. . Approval by the Council of Government of a draft law changing BCP's statutes to allow divestiture of state-owned shares to the regional mutual Banques Populaires and to the private sector through the stock exchange. * Allocation of DH 150 million in the 1998/99 Finance Law for the CCG in order to reschedule non-performing fisheries sector loans (DH 1.5 billion rescheduling program over a 1 0-year period). * Improve mobilization of long- * Provide legal basis for efficient functioning of the micro- * Presentation to Parliament of a draft law term resources credit market to increase access to finance of small and facilitating micro-lending activities.. _______ ______ _______ ______ m edium sized enterprises._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Poverty Reduction and Social Assistance * Poverty reduction strategy . Prepare and implement a detailed action plan to increase * Appointment of an inter-ministerial committee to access of the poor, particularly in rural areas, to basic social coordinate the preparation and implementation of a l__________________________________ l and infrastructure services. I strategy to increase access of the poor to basic  Annex 2 Page 8 of 9 AREA, OF INTERVEN NION MID1JMA-_ERM: OBJECTIVES ACT... .....RI TO'BOARD social and infrastructure services, as well as to job opportunities and social protection mechanisms. *Social assistance mechanisms *implement a comprehensive organizational and operational * Preparation of a document detailing the EN's long- restructuring of the Entraide Nationale (EN) to ensure more termn development strategy. effective and efficient delivery of services. Underlying * Agreement on a restructuring programn for EN and principles include restricting the EN's role to the identification start of its imiplementation through: (i) a detailed of needy groups, coordinating assistance (e.g., by defining review of necessary changes in EN's legal status in programs and sub-contracting their imnplementation to NGOs), accordance with the restructuring program; (ii) the and ensuring monitoring and evaluation, selection of provinces in which to begin Strngthn exitingsafey netmechnism and efor theimiplementing the restructuring program on a pilot Strenthenexising afet net echausmsand efor thebasis; and (iii) an assessmeflt of EN's vocational present consumer subsidy system. training activities and transfer of trainees to OFPPT programs. Community Development *Social Development Fund (ADS) * Put in place a publicly funded mechanism to support low- * Approval by the Council of Government of a draft income commnunity development initiatives, using law creating the ADS. Initiation of work on: (i) participatory methods of project identification and detailed institutional ar-rangements to ensure implementation and drawing on the capacity of NGOs. operational autonomy; and (ii) an action plan to begin ADS operations with a pilot programn. Basic Infrastructure in Rural Areas * Water supply * Increase access to potable water in rural areas from about 37% * Agreement with the Government on access targets of the population presently to 53% by 2002. and financing plan (based in part on the recent approval of urban water surcharges) for the PAGER program.