Morocco - Second Agricultural Credit Project

CIRCULATtNG COpy RESTRICTED TO BE RETURNED TO REPORTS DESK Report No. P-1107 FILE COP This report is for of ficial use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibQlity for the accuracy or oompleteness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF MOROCCO AND A PROPOSED LOAN TO THE CAISSE NATIONALE DE CREDIT AGRICOLE (CNCA) WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A SECOND AGRICULTURAL PROJECT June 15, 1972  CURRENCY EQUIVALENT US$ 1.00 = DH 4.66098 DH 1 .00 = US$ 0. 21 4547  REPORT AND RECOMbENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS 01N A PROPOSED CREDIT TO THE KINGDOM OF MOROCCO AND A PROPOSED LOAN TO THE CAISSE NATIONALE DE CREDIT AGRICOLE WITH THE GUARANTEE OF THE KINGDOM-OF MOROCCO FOR A SECOND AGRICULTURAL CREDIT PROJECT 1. I submit the following Report and Recommendation on a proposed development credit for the equivalent of $10 million to the Kingdom of Morocco, and on a proposed loan to the Caisse Nationale de Credit Agricole (CNCA) for the equivalent of $24 million with the guarantee of the Kingdom of Morocco. The Credit and Loan would help finance a three-year program for agricultural development through medium and long-term credits provided by Caisse Nationale de Credit Agricole (CNCA). The development credit would be on standard IDA terms. The Government would make its proceeds available to CNCA for use under the agricultural credit program and would leave the funds permanently with CNCA as a Government capital contribution. The loan would have a term of 15 years, including four years of grace, with interest at 7.25 percent per year. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Pro- spects of Morocco" (Sec. R 71-222) was distributed on September 20, 1971. An economic mission visited Morocco in April. Its findings are reflected in the present Report. The Government has asked the Bank to review the next five-year Development Plan (1973-77) presently in preparation. The Bank intends to organize a basic economic mission for this purpose as soon as the preparation of the new Plan is sufficiently advanced, possibly in the spring of 1973. Characteristics 3. Forming for centuries a well defined geographical unit between the Mediterranean, the Atlantic, the Atlas mountains and the Sahara, Morocco has developed a distinctive civilization with a traditional monarchy. Inde- pendence was achieved in 1956, after 44 years as a French protectorate. The Government is highly centralized with supreme power held by King Hassan II, who acceded to the throne in 1961. Arab-Berber cultures are predominant, and conservative Islamic tradition, in which the King is the religious as well as the political leader, remains an important unifying force. France left a deep imprint on culture, business and administration, and French is the pre- vailing langtuage in government circles, and in education above the primary level.  -2- 4. In the period since independence the traditional social and polit- ical order has been essentially maintained while the economic structure began to change gradually. Traditional subsistence rainfed agriculture still ab- sorbs more than half of the active population. A small but growing modern type agriculture provides a substantial part of the commercialized agricul- tural production. Phosphate mining has remained the major industrial activity. The relative importance of manufacturing industry is growing only slowly and is oriented toward import substitution. The traditional crafts and trades provide substantial employment and supply the Moroccan population as well as a growing number of tourists. Construction of hotels and the fast growing tourism traffic have made tourism the most dynamic sec- tor of the economy. In 1971 foreign exchange earnings from tourism amounted to $151 million; from phosphate, $117 million; from workers remittances, $95 million; and from citrus exports, $77 million. Major constraints to balanced economic growth continue to be the vulnerability of agriculture to drought, low savings, and insufficient dynamism of the private sector, especially in industry. Unemployment in cities and on the countryside is high and large differences in cultural and economic level between regions and population groups exist. Rapid growth of the population aggravates the problems. Policies 5. The objectives pursued by successive governments since independence include: (i) acceleration of economic growth; (ii) preservation of social and political stability; and (iii) promotion of "Moroccanization", i.e. a larger share for Moroccan ownership and management in foreign-owned land, commer- cial and financial companies, and selected industries. 6. The moroccanization policy has been consistent but moderate. For- eign businesses have not been nationalized with the exception of the take-over in 1963 of land held under concession by foreign owners. The number of for- eigners declined from 400,000 in 1960 to 100,000 in 1971. "Moroccanization" of the services sector implies the gradual increase of the share of Moroccan capital and labor in foreign-owned commercial, financial and transport con- cerns, often associated with an expansion of capital. At the same time new foreign investment in industry, tourism and mining continues to be encouraged by the Government. Other recent economic measures include: tariff cuts and trade liberalization on the occasion of Morocco's association with the Common Market, slight increases in long term interest rates applied by certain fi- nancial institutions to reflect better the opportunity cost of capital, and increase in tariffs for water supply helping to increase public savings in that sector. 7. The political and social structures have been resistant to change, but the Government recognizes that their stability is increasingly in question unless growth and change are achieved at a more rapid pace, and are accom- panied by a more equal income distribution. In recent speeches, the King has stressed several social-economic objectives, in particular redistribution of income, creation of jobs, land distribution, extension of education and reform of administration and justice. A new constitution has been enacted and a Gov- ernment formed to prepare elections which would provide a wider basis for the  -3- next administration. The Government has increased civil servants basic salaries and workers minimum wages by 15 percent, extended family allowances, introduced a modest progressive income tax and reduced the price of sugar, an important consumption item of the low income classes. It intends to accel- erate the distribution of ex-colon land, to extend pension and health insurance schemes, to embark on a wide-scale replacement of slum areas, and to help set up small farms. Development Plan 8. The 1968-72 Development Plan is nearing completion and a new five- year Plan (1973-1977) is under preparation. During the present Plan period the production growth in most sectors has surpassed the Plan targets substan- tially: (percent average annual growth) Actual Plan 1968-71 Targets Agriculture 6.4 2.1 Energy 7.2 5.4 Mining 2.1 7.9 Industry and Handicraft 5.7 4.3 Building and public works 5.9 8.5 Non-government services 5.4 4.6 Total (government services excluded) 5.6 4.3 9. Results in agriculture appear better than they really were because of a mediocre crop in the base year. But even taking more normal periods as a base, the average growth of agricultural output has been about 3.5 percent, well above expectations. Only mining fell below the Plan target, largely because competition on the world phosphate market depressed production, and 1971 output was only three quarters of the volume planned. Prospects have recently improved and the Government phosphate company expects to reach the plan target in 1973. Most other mining declined due to depletion of re- sources. The political events of tnid-summer 1971 had lindted immediate ef- fect on the overall growth rate. The acceleration in manufacturing output and construction activity was interrupted, but good weather helped to in- crease agricultural output. Total production increased by 5 percent in real terms, only slightly lower than that of the preceding three years. 10. The volume of total fixed investment increased by 6 percent annual- ly during the 1968-71 period, slightly lower than was assumed in the Plan. Central Government investments accounted for about half of the total and was close to the targets wlicth were revised upward in 1969. About 70 percent of the Government investment program in agriculture was allocated to large scale irrigation schemes. While dam construction proceeded on schedule, Land preparation lagged behind and progress with regard to rairfed agriculture and  -4 - livestock was slow. Construction of power stations is in line with Plan tar- gets. Other government investments did not differ by more 'than 10 percent from Plan targets except for delays in investments for urban development, health, education and communications. 11. Since 'the abortive coup of July 1971, many private investors seem to be awaiting the outcome of the political reorganization which is under way, and public investments have also been stagnant largely due to some re- consideration of policies and changes in cabinet and civil service. Total fixed capital formation in 1971 dropped by about 2 percent in real terms and represented 14.1 percent of GDP. Consumer demand was sustained by good crops and *the social measures taken by the Government since mid-1971. 'The impact of these measures on government savings was offset by better performance of public enterpirses, while the good crops and remittances from emigrant workers stimulated private savings.. However, total gross national savings remain around 12 percent of GDP, which is low for a 'country at Morocco's stage of development. The current account deficit was reduced from $144 million to $78 million, and thanks to larger public capital inflow and SDR allocation, the reserve position improved and reached a level tbf $235 million in March 1972, equivalent to about two and a half months of imports of goods. Development Prospects 12. Appropriate fiscal, monetary and trade policies could ensure that GDP will continue to grow at about 5 percent per year until 19i7. However, to achieve this modest target, per capita annual consumption'would have to be limited to 1.5 percent. This would not be easy in view of the increased attention given by the Government to social progress, but would be necessary because a growth rate of 5 percent would require savings and investments to be raised from about 12 percent and 14 percent of GDP respectively to 14 per- cent and 17 percent of GDP in 1977. The other growth assumptions could prob- ably be achieved without major difficulty. On the basis of present trends, foreign aid disbursements in 1977 might be projected as follows, although the actual flows will depend on future commitments still to be made by the respec- tive donors:  -5- (million of dollars) Annual Average Actual Projection 1966/68 1969/71 1971 1977 Bilateral 112 125 144 156 USA (48) (56) (56) (36) France (39) (27) (30) (54) Germany (19) (17) (28) (17) Othier Countries (6) (25) (30) (49) Bank Group 11 18 25 59 Total Gross Official Flow 123 143 169 215 Repayments 45 50 64 95 Net Official Flow 78 93 105 120 13. While the above projections appear feasible, the Government's tar- gets are likely to be more ambitious. It is considering an annual growth target of 6.5 percent for the next Five-Year Plan, and is working out its implications. These would clearly include stronger growth of gross national savings and additional foreign aid. If more aid could be obtained, it would be desirable for it to be on concessionary terms, since the terms of -aid which is already in prospect are likely to deteriorate as a result of the decline in grants, especially from the United States, and of the increase in mediun-term credits wihich would be the normal form of part of the projected larger French aid. External Debt 14. Disbursed foreign debt is at present $804 million and may grow to about $1 ,500 million in 1977. The debt service ratio may rise from 8.9 per- cent in 1971 to 12 percent in 1977 and further thereafter. While Morocco remains creditworthy for substantial additional loans on conventional terms, a substantial proportion of new external assistance should be made available on concessional terms if the growth of the debt service burden is to be re- strained in the long run. The share of the Bank Group in Morocco's total outstanding external debt is increasing. From about 7 percent at the end of 1968 it had reaclhed 10 percent at the end of 1971 and may rise to 20 percent by the end of 1975. Projects already approved and those under consideration would lead to disbursements equivalent to about one-fifth of Morocco's pro- jected foreign capital needs in the mid-seventies.  -6- PART II - BANK GROUP OPERATIONS IN MOROCCO 15. Bank and IDA lending since the first Bank group project in 1962 amounts to $211.4 million, net of cancellations, for 12 projects, three of which were financed under IDA credits totalling $28.4 million. These loans have helped finance industry ($85 million), agriculture ($71.1 million), transportation ($14.6 million), education ($10.5 million), and tourism ($17 million). IFC has made investments totalling $2.4 million in the Banque Nationale pour le Developpement Economique (BNDE) and a canning factory. Annex I contains a summary statement of Bank loans, IDA credits and IFC in- vestments as of,: May 31, 1972 and notes on the execution of on-going proj- ects with particular reference to those which are encountering problems. 16. The Bank group strategy is to respond to the requirements of Morocco's economic and social objectives, which appear in line with most previous Bank recommendations. Specifically the Bank group program aims at assisting Morocco in maintaining a growth of GDP at roughly 5 percent per year, the rate achieved in the recent past, financing key projects in prior- ity sectors, and devising and implementing policies to limit unempiloyment, develop agriculture and improve urban and rural living conditions. It con- templates primarily lending from the Bank, but with some blending of IDA funds, as in the present case, in order to moderate the build up of external debt service requirements. In the last three years Bank and IDA lending ranged between $45 and $75 million. Projects now in course of preparation could lead to a higher level of lending over the next two or three years, but this much depends upon Morocco's capacity to prepare projects, upon solving the difficulties encountered in creating new institutions or in improving ex- isting ones and upon finding competent management. Sectors and Projects 17. The, key sectors on which the Bank concentrates its action are agri- culture, touzism, urban infrastructure, industry for export and transport. Amongst these key sectors, agriculture and urban infrastructure provide spe- cial opportunities to help devise and implement policies responding to the Government's new emphasis on social development. 18. In agriculture the proposed $34 million second financing for agri- cultural credit would help develop modern farming. The problems of tradi- tional agriculture would be dealt with through a project for the integrated development of rainfed agriculture now being prepared with the help of the FAO/IBRD Cooperative Program; this project would combine consolidation, basic infrastructure, soil preparation and credit, and could have a substan- tial effect on rural underemployment. It may be ready for consideration by FY 1974. A study of the Oum er Rbia basin development was recently com- pleted in cooperation with the Bank, and an irrigation scheme is now under preparation. Originally planned for financing in FY 1972, it has been post- poned to FY 1974 because of delays in initiating the feasibility studies. The Bank is also helping the Government define and prepare a project to de- velop the production of off-season fruits and vegetables for export.  19. Tourism has become the largest source of foreign exchange for Morocco and its further expansion should help finance the substantial imports necessary for future development. The Bank finances the Moroccan development bank for hotels (CIR) for which a second loan of $15 million will shortly be presented to the Executive Directors. The Bank might also well be Executing Agency for a proposed UNDP study which could lead to a tourism infrastructure project for FY 1974. Finally the Bank is helping the Government to coordinate a number of other studies and reviews of the sector. 20. Urban infrastructure projects include one for bulk water supply in the Casablanca-Rabat region for which a $48 million loan will be presented shortly to the Executive Directors, to be followed by a second project in FY 1974. A Bank sector mission has recently reviewed the Government's pro- posed urbanization policies and identified a site and service project which may be ready for financing in FY 1974. Finally, a power project planned for FY 1973 is designed to meet urban needs. 21. The Government is now placing more emphasis on exports. The Bank has assisted this orientation through an industrial review completed 18 months ago and is now helping define the required policies and the measures to implement them, particularly in manufacturing and mining. In this line, the Bank is considering two proposed loans for FY 1973, i.e. a sixth loan to the industrial development bank (BNDE) and a loan for a phosphoric acid plant whose production would be entirely exported. 22. Morocco's transport network requires some expansion to meet grow- ing needs. After a first loan to finance the road between Marrakesh and Agadir and a transport survey, a transport sector mission visited the country in late 1971. A second road project is now under preparation for presentation in FY 1973. A port expansion project may also be ready for FY 1974. 23. Education represents a major bottleneck in Morocco's development: students represent a low proportion of the school age population, the pro- portion of drop-outs is high, curricula are not well adapted to economic de- velopment, graduates are too frequently unable to use the skills acquired and, as a result, unrest in the student population is high, leading to strikes and a further lowering of the standard of education. If this dete- rioration is allowed to continue social stability could be affected while the qualified personnel needed to insure economic expansion would be lacking. Projects for education in Morocco undoubtedly have a high priority; two cred- its already have been made and another is planned for BY 1974. However, its presentation will depend on a substantial improvement in the execution of the first two projects and on the completion of the study of higher education whose financing is included in the second credit (Annex I C. para. 1). Other Assistance 24. A Consultative Group for Morocco was formed in April 1967. The Group is chaired by the Bank and includes Belgium, Canada, France, Germany, Italy, Kuwait, The Netherlands, Spain, Switzerland, United kingdom, United  - 8 - States, IMF, UNDP, OECD/DAC, African Development Bank and European Invest- ment Bank. At its last meeting, in October 1971, the Group welcomed Gov- ernment's new policies and affirmed continued support. PART III - THE AGRICULTURAL SECTOR 25. Agriculture in Morocco contributes about one fourth of GDP, while the rural population amounts to about 10 million, or about 65 percent of the total population. Major farm areas are between the Atlantic Coast and the Atlas mountains where annual rainfall averages 400 to 600 mm. Only about 3/4 of the cultivable area is used in any one year, because traditional methods of cultivation and climatic conditions require extensive fallows. Major crops are cereals and citrus; livestock and fruits and vegetables have good prospects. 26. There are no recent figures on farm ownership; it has been esti- mated, that 90 percent of farm families hold less than 1/3 of the arable land of which 2/3 are in farms of less than 10 hectares. Small farms in the tra- ditional sector suffer from inadequate agricultural practices, and their pro- duction is particularly subject to the vagaries of the weather. Considerable rural underemployment contributes to migration to urban centers and foreign countries. The modern sector comprises about 1/5 of the cultivated area, produces most of the cash and export crops and consist mainly of medium and large farms, often using mechanized techniques. From 1963 to 1970, agrictulture as a whole grew at a rate of 2.8 percent per year, as compared with 3.6 percent for the overall economy and 9 percent for modern agriculture. The principal reason of these disparities is the low productivity of the subsistence-oriented traditional sector. Land Reform 27. In line with its growing emphasis onE social-economic objectives, the Government has paid increasing attention to the problems of land tenure and of attaining viable farm sizes. About 250,000 hectares formerly farmed by foreign settlers are to be redistributed to small farmers and landless laborers. Land reform in the irrigated zones is the main objective of the agricultural investment code published in 1969. From 1966 to 1968, about 24,000 ha were distributed. An additional 75,000 ha were to be distributed from 1969 to 1972, and the Government has announced its intention to accel- erate the distribution of formerly foreign-held land. Another measure in- volving about 34,000 hectares aims at the consolidation of small holdings into economic units. Major Products 28. Cereals are the most important crop but there is a chronic deficit in soft wheat. Import requirements vary from year to year depending on the weather. Over the past five years, despite better than average harvests,  -9- the deficit averaged about 500,000 t per year, or about a $50 million worth of imports. By the end of the decade, Morocco could be self sufficient in cereals if the appropriate technology, based on seeds, fertilizers and mech- anization were applied. This would require considerable effort and invest- ment. 29. Morocco is one of the leading Mediterranean suppliers of citrus and citrus exports represent nearly one third of agricultural exports. Citrus growers have attained high standards in production techniques and plantation management. Output and exports have grown at about 10 percent per year over the last decade and present exports are about 600,000 t per year worth about $100 million. More than one half of Morocco's citrus ex- ports goes to EEC countries, and since the Association Agreement of Septem- ber 1, 1969, Morocco has slightly increased its citrus exports to EEC coun- tries other than France which always has taken, a large share. According to a 1969 FAO study on citrus fruit, Morocco's potential for exports would make it possible to increase the country's share of the world market to about 15 percent by 1980. This would imply a growth rate in output of 5.2 percent which would require substantial investments in plantations. 30. Market gardening in Morocco provides export revenues of about US$44 million, of which about half is represented by tomatoes. Given its favorable climate and its experience in marketing vegetable, Morocco should find outlets for the additional 50,no0 t that will be generated under the project. 31. Because only a small share of milk produced is marketed through com- mercial channels, an assessment of the supply-demand situation is difficult. There are indications, however, of a rising demand in urban centers, while production suffers from strong seasonal fluctuations sometimes compounded by excessive import of dairy products. Policies 32. Under the current 1968-72 Development Plan, government investment in agriculture accounted for about $94 million annually, of vhich $65 million for irrigation, and $17 million for progressive improvement of traditional rainfed agriculture and livestock development. Bank Group contribution to the agri- cultural investment program consisted of the Sebou irrigation project and the first agricultural credit project which is described below (para. 35). 33. The Government seems now prepared to give more emphasis to rainfed agriculture, small scale irrigation and livestock, which is in accordance with economic priorities. A proposed UNDP study for a Water Master Plan with the Bank as Executing Agency should eventually provide the basis for a more rational resource allocation to irrigation. The Government is also acceler- ating land distribution in the Sebou project area. A Bank agricultural sec- tor review planned for the spring of 1973 should also help in defining agri- cultural development strategy.  - 10 - Agricultural Credit 34. In 1962, the Government established a new agricultural credit system under which CNCA provides short-term advances as well as medium- and long-term credit to commercial farmers. It also operates the Caisses Locales de Credit Agricoles (CLCA) which provide seasonal and longer term credit to smaller farmers under simplified procedures. Limited advances to subsistence farmers are made through Societes Agricoles de Prevoyance (SOCAP), separate institu- tions which do not operate on a commercial basis. In 1971, these credit in- stitutions together with commercial banks made about 230,000 farm loans. 35. The Bank's first Agricultural Credit Loan in Morocco (Loan 433-MOR), in an amount of $10 million, was.signed in 1966. It was for a three-year agricultural development project, with a total cost of about $26 million, covering medium and long-term loans to farmers and institutions for machinery, equipment, processing and storage facilities, to help improve agricultural productivity. Part A of the project consisted of on-farm development and Part B of equipment loans for Centrale de Gestion des Exploitations Agricoles (GCEA), the agency responsible for managing land taken over from foreign set- tlers. Initial progress on the project was disappointing. On-farm invest- ment loans lagged behind schedule, mainly because of CNCA's shortage of quali- fied personnel; moreover, the credit policies followed by CLCA, 'seriously af- fected CNCA's financial soundness. Part B was used satisfactorily until CGEA was dissolved and its assets transferred to provincial authorities. Because of these developments, withdrawals under Part A were suspended and the bal- ance of Part B amounting to $0.2 million equivalent cancelled in February 1968, indicated at that time to the Executive Directors (R68-38). Eventually, CNCA's and CLCA's accounts were separated, lending programs revised, staff was strengthened and disbursements under Part A resumed in September 1968 (R68-167), and were completed in September 1969. PART IV - THE PROJECT 36. The proposed Second Agricultural Credit Project was prepared by CNCA and the IBRD/FAO Cooperative Program; it was first appraised by a Bank mission in November-December 1970. Negotiations were delayed until April 1972 because of the discussions between the Bank and the Government of Morocco on the question of appropriate interest rates for CNCA's lending. The initial appraisal of the project was updated and negotiations took place in Washington on April 10-14, 1972. CNCA was represented by Mr. Lahlou, General Manager and Mr. El Mesmoudi, General Inspector; the Government was represented by Messrs. M. Tazi and Ben Mansour of the Ministry of Finance and MIr. Belkoura of the Prime Minister's Office. Description 37. The project would be a three-year program for the developmrent of farms selected for their development potential and priority. It would help  finance medium and long-term investments for mechanization of grain farms in rainfed areas, citrus development through groundwater and plantation de- velopment, winter vegetable production, livestock development and packers' marketing facilities mainly for export produce. Total expected investment amount to about $69 million of which more than 50 percent would be for tractors and other farm machinery, about 22 percent for citrus plantation development and about 13 percent for winter vegetable production. The project would involve about 8,000 loans to individual farmers, groups of farms and operators of packing facilities. Farms receiving loans would range in size from 5 to 50 ha on irrigated land, or from 15 to 200 ha on dry land. A description of the project is given in Annex III to this Re- port. The Appraisal Report (No. PA-95, dated May 15, 1972), is being circulated to the Executive Directors separately. Execution 38. The proceeds of the loan and credit are expected to be committed over three years starting September 1, 1972, coinciding with the start of the planting season. The project will be administered by CNCA, a public credit institution responsible to the Minister of Agriculture who heads its Board of Administration. The Chief Executive is the General Manager who is appointed by a joint decree of the Ministers of Agriculture and Finance. CNCA is well organized, with 17 regional offices in the major agricultural provinces. Staff has more than doubled over the past five years and is generally well qualified. There is an active internal training program at all levels and, as a result, the last expatriate left this year. Lending procedures provide that responsibility for loans below DR 40,000 (equiva- lent to US$8,700) Is delegated to the regional offices, while loans above that level have to be approved by the head office; these procedures oper- ate efficiently. Cost Estimates and Financing Plan 39. Total project cost is estimated at DH 320 million (equivalent to US$69 million), with a foreign exchange component of US$34 million (49 per- cent) which would be met by the proposed Loan/Credit. These estimates are based on prices to. farmers of the goods to be financed and therefore include duties and taxes amounting to about $5.7 million. The Bank loan would be made to CNCA, to be repaid in 15 years including four years of grace. The proceeds of the IDA credit would be made available by the Government to CNCA as part of the Government contribution to CNCA's equity. CNCA would contrib- ute 21 percent of project cost from its own resources. Thus subloans to farmers made by CNCA from Bank/IDA and own resources would amount to 70 per- cent of project cost. Farmers and other borrowers would contribute the bal- ance of 30 percent. The Government would carry the foreign exchange risk on the Loan and Credit.  - 12- Financial Position 40. At the close of its last fiscal year, August 31, 1971, CNCA's total resources were about DII 365 million (equivalent to $72 million at the exchange rate then prevailing) of which 36 percent came from capital grants from Government and reserves; 13 percent, from a special liquida- tion account for government operations carried out by CMCA; 13 percent from the first Bank loan and 38 percent from short-term resources, mainly rediscounts and deposits. CNCA has been raising funds from individual de- posits in rural areas since 1970. Financial results including government operations carried out by CNCA in 1967-71 show a satisfactory operating position. Administrative costs averaged less than 3 percent of the capital employed. Over the period 1967-71, total income on the combined CNCA and government operations averaged 6.3 percent of total capital employed, and return on equity, quasi-equity, and general reserve averaged 1.8 percent. In 1971, these ratios were respectively 6.2 percent and 2.8 percent. The debt/equity ratio was 1:3.9 at the end of 1971. The repayment record was good, and provisions adequate in respect of CNCA's own operations. 41. Recoveries on CNCA's loans made under the direction of Government remained unsatisfactory, and the Government has now agreed to separate these operations from those made by CNCA proper so that all costs accruing to CNCA in connection with Government operations be chargeable to Government. An- other immediate requirement is to strengthen CNCA's capital structure. To this end, the Government would authorize CNCA to transfer DI-I 44 million from the special liquidation account, referred to above, to equity capital, and would contribute the proceeds of the IDA Credit (DII 46 million) to CNCA as equity. This additional equity capital together with increased medium and long-term debt, and deposits would enable CNCA to expand its medium and long- term lending with limited reliance on short-term resources. 42. A third basic requirement is the increase of interest rates applied to CNCA's loans. Public credit in Morocco is traditionally made at preferen- tial rates, in particular for agriculture. CNCA's lending rate was already raised to 6.5 percent in connection with the first Bank loan (February 1966), and a further increase is now both possible and desirable. Higher rates should foster a better allocation of resources and are well below commercial farmers' financial rates of return which range between 20 percent and 43 per- cent. Continuation of existing rates would have implied substantial subsi- dization of investments in mechanization by medium and larger farmers. Fur- thermore, CNCA's overall financial stability also requires an increase in its interest receipts; the cost of resources to CNCA and its administrative costs are bound to increase substantially over the next few years, and pre- sent earnings would not be sufficient to cover such increases. The Govern- ment has therefore agreed to adopt a two-stage interest rate structure based on the assessment of farmers' taxable income. Farmers whose annual taxable income exceeds DH 6,000 and all borrowers for mechanization loans (other than groups or cooperatives having an average taxable income of less than ER 4,000) would be charged 8 percent. For farmers with a taxable income below DH 6,000, the present rate of 6.5 percent would be continued. These smaller farmers  - 13 - will absorb less than 20 percent of the total amount of the Loan!Credit (i.e., $6.8 million). CNCA's income on its own operations only is expected to rise from i6.0 percent of average capital employed in 1971 to 7.5 percent In 1976. Return on equity, quasi-equity, and general reserves, derived from CNCA's own operations, is expected to rise from 2.2 in 1971 to 3.8 percent by 1976. Procurement 43. The range of items to be financed is wide, and the quantities to be procured by Individual farmers are small and would not be suitable for bulk procurement under international competitive bidding. The main types of equipment are tractors and attachments, combines, and pump sets which would be purchased through commercial channels. Major farm machinery manu- facturers from at least six Bank member countries are represented in Morocco, their prices are competitive and they have adequate after-sale services through well established dealer networks. As a result of the 1906 Act of Algeciras, Morocco has no preferential tariffs, despite its associa- tion with the European Economic Community. Farm buildings are constructed by local artisans or contractors. Dairy development would require about 1,800 in-calf heifers, which would be partly supplied from Government and private dairy farms; however, not all Project requirements would be readily available locally. Provision has therefore been made for importing about 900 heifers through existing livestock procurement channels which are satis- factory. Disbursement 44. Bank/IDA would reimburse 70 percent of CNCA sub-loans. Disburse- ment amounts by categories are detailed in Annex III to this report. Wfhile CNCA's commitments under the lending program would be made over three years, disbursements to borrowers would require about 3-1/2 years. Assuming a tim.e lag of six months between CNCA diabursement to borrowers and IERD/IDA dis- bursements to CNCA, Bank/IDA disbursement is expected to take about four years. Economic Rate of Return 45. The Project would expand financial support for both commercial farmers in the modern sector, and agrarian reform cooperatives, thus assist- ing small farmers in making the transition from the traditional to the modern sector. By encouraging investment and modernization it would help accelerate growth in agriculture which, for the last decade, has grown more slowly than the overall economy. 46. The Project's overall rate of return to the economy, based on an average life of 20 years of project investments (30 years for citrus) is es- timated at about 18 percent if based on present prices, or 16 percent if cereal prices were reduced by 10 percent in line with pTojected 1975 world prices, adjusted for transportation and distribution in Morocco. Financial rates of return for illustrative farm models range from 20 to 43 percent.  - 14 - 47. Incremental production generated by the Project would: (a) re- duce grain imports and result in annual import savings of about DII 63 mil- lion (US$14 million); (b) generate additional export earnings of about DH 74 million (US$16 million) annually by 1980, and larger amounts thereafter, through increased fresh citrus and vegetable exports; and (c) benefit Mforocco's urban consumers and tourist industry through increased availa- bility of meat and milk throughout the year. The overall impact on the balance of payments would be substantial. Import substitution of cereals and exports of citrus and vegetable, less foreign exchange required for the replacement of equipment, operating cost and debt service, would be equivalent to net foreign exchange savings of about US$15 million in 1980, rising to DH 98 million (US$21 million) in 1985. Employment 48. The employment effect of the Project has been carefully reviewed. While some of the increased labor requirements will take the form of increased working hours by labor that is already employed, some will generate opportuni- ties for employing additional people. The investments under the project, other than mechanization, are expected to create employment for about 18,000 persons through citrus, vegetable and livestock development on about 4,000 farms. Additional employment would also be generated through marketing ac- tivities, especially for exports. 49. Tractors financed under the project would probably have a net positive effect on employment. While tractors reduce labor requirements for the operations of land preparation and seeding when measured on a per unit basis (per hectare planted or per quintal of output). They permit a substan- tially larger area to be planted and result in higher yields because of much better seed-bed preparation and because of the short period between the first rains and the latest optimal planting time. When these changes in production methods are combined with the higher levels of other inputs made possible by improved land preparation, the resulting increase in activity and output tends to increase direct, on-farm labor requirements over the cropping period. In addition, it seems probable that the net effect on indirect employment oppor- tunities will be positive in vie.w of the need for tractor maintenance and supply services, and the increased marketing activities directly required by increased output, as well as the multiplier effects on overall employmentof the higher level output. 50. The effect of mechanical grain harvesting on employment would de- pend on whether the combines would be used to replace existing ones or to mechanize grain harvesting in new areas. No displacement would result through replacement of existing combines, which is estimated at 80 to 90 percent of combines provided for under the Project. The alternative of re- verting to hand-harvesting on these farms must be ruled out because the seasonal labor required for relatively short periods could not be mobilized. On the other hand, combines financed under the Project which could replace traditional harvesting (10 to 20 percent), would displace approximately 900 temporary 2-month jobs annually.  - 15 - Ecological Risks 51. To insure proper use of limited groundwater resoures, current legislation requires ministerial approval for use of such water in excess of 200 m3 per day. This approval will be required prior to CNCA granting any loan for investments involving use of groundwater. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. A draft Loan Agreement between the Bank and CNCA, a draft Guarantee Agreement between the Kingdom of Morocco and the Bank, a draft Development Credit Agreement between the Kingdom of Morocco and the Associa- tion, a draft Project Agreement between the Association and CNCA, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association, and the texts of draft resolutions approving the proposed loan and credit are being distributed to the Executive Directors separately. The provisions of the draft loan and credit documents conform generally to those included in agreements for agricultural credit projects. 53. I am satisfied that the proposed loan and credit would comply with the Articles of Agreement of the Bank and the Association. PART VI - RECOMMENDATION 54. I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President  ANNEX I Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN MOROCCO A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at May 31, 1972) Loan or US$ million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed 329 1962 BNDE DFC 15.0 389 1964 Kingdom of Morocco Agriculture 15.4 79 1965 Kingdom of Morocco Education 11.0 3.0 433 1965 Caisse Nationale de Crgdit Agricole Agriculture 9.7 - 447 1966 BNDE DFC 16.2 _ 571 1968 BNDE DFC 15.0 4 3 167 1969 Kingdom of Morocco Highways 7.3 4.6 642 1969 Kingdom of Morocco Highways 7.3 7.3 643 1969 Kingdom of Morocco Agriculture 46.o 660 1970 BNDE DFC 15.0 5.0 704 1970 CIH DFC(tourism) 10.0 8.7 736 1971 BNDE . DFC 35.0 20.8 266 1971 Kingdom of Morocco Education 8.5 Total 184.6 26.8 102.7 of which has been repaid 21 .2 Total now outstanding 163.4 Amount sold 1 .3 of which has been repaid 1.0 .3 Total now held by Bank and IDA 163.1 26.8 Total undisbursed 86.6 16.1 102.7 _m - B. STATEMENT OF IFC INVESTMENTS (as at May 31, 1972) Amount in US$ million Year ObligOir Type of Business Loan Equity Total 1962 BNDE Development Bank - 1.0 1.0 1966 CIL Canning Factory 0.9 0.5 1.4 Total gross commitments 0.9 1.5 2.4 less cancellations, terminations repayments and sales o.4 - 0.4 Total commitments now held by IFC 0.5 1.5 2.0 Total undisbursed - 0.1 0.1 L The original investment was $1.5 million; ' BNDE has redeemed $0.5 million in October 1968.  ANNEX I Page 2 of 2 C. Projects in Execution 1. Delays in disbursements of several loans and credits have been caused mainly by cumbersome budgetary and accounting procedures, and administrative inefficiency in submitting disbursement applications, rather than by delays in the execution of the project. A Bank disburse- ment officer visited Morocco last November to investigate the problems and propose solutions. During the recent negotiations further improve- ments and streamlining of procedure were agreed upon. 2. Considerable delays have been, and still are, affecting the execution of the education credits (79 and 266-MOR). Disbursements under the first credit have been extremely slow and the Closing date had to be extended twice, from the original date of June 30, 1971 to March 31, 1973; disbursements under the second credit have not yet started, ten months after signing. Project implementation has been affected by inadequate management of the project unit, insufficient control of construction works, departures from agreed procedures for procurement, and lack of coordination. The higher education study needed to prepare a proposed third loan is not yet started. Despite numerous supervision missions, little progress has so far been achieved. This situation is under constant review and a new schedule for project implementation has just been sent to the Government. 3. The Sebou irrigation loan (643-MoR) is progressing satisfactorily. Redistribution of expropriated properties to small landowners started more slowly than expected because of delays in enacting the necessary legis- lation. Substantial cost increases on a number of important items are becoming apparent and as soon as they are reviewed, the Bank will discuss with the Government their consequence for the financing of the project. 4. The first highway financing (167 and 642-MOR), mainly for the Agadir-Marrakesh road, is progressing satisfactorily from a technical standpoint. However, only $2.7 million has yet been withdrawn out of a combined loan/credit amounting to $14.6 million. The Effective date was March 16, 1970, and the Closing date is February 28, 197h. The situation is being reviewed with the Government.  ANIRf II Fomi No. 81.02 WORLD BANK GROUP (5-72) COUNTRY DATA COUNTRYE: IVROGODX AREA: 505,940 km 2 POPULATION: 15.379 sillion (1971) DRISITYs per.km 2 %l_e7_=Qowth 2.6 % (fromi 1960 to 1971 ) Ir1T 10 per 62 of arable land POPULATION CHARACTERISTICS: q HB.LTH: Crude Birth Rate (per 1,003) (1966- 70) 4~9. '' 'Pjopuation per physician (1965) 12,930 Crude Death Rate (per 1,000) (1966- '70) 16.5 L'Population per hoapital bed (1965) 660 Infant Mortality (per 1,000 live births) n.a. INCOKE DISTRIBUTION: DISTRIBUTrION OP LAND OWNERSHIP- (early 19601a) 7. of national income. loweat quintile n.a 707. of land awmed by top 10% ow,ners higheat quintile n.a ACCESS TO POTABLE WATER (7. of population) n.a. ACCESS TO ELECTRICITY. (% of population) n.a. Urban n.a. Urban n.a. Rural n.a. Rural n.e. NUTRITION: 7/ GNP PER1 CAPITA: $ 242 ('971) EDUCATMON: C-aTorie intake an % of requirements (1964-'66) 92- -A-dut literacy rate n.e. Per capita protein intake (graimen) ( 1964-'66) 58 Primary school enrolment 54% (1968) GRtOSS NATIONAL PRODUCT (1971 ): ANNUAL RATE OF ROT *constant prceel: GNP at market prices 3728 10070 3.0 5.1 5.8 Groan Investnent 535 14.4 5.4 8.3 -2.0 Grons National Savings 457 12.3 Current Account Balante -78 -2.1 lbcports of Goods, NIES 742 19.9 0.7 5.3 6.7 Imports of Goodn, NFS 863 23.1 -1.0 9.6 -2.3 OUTPUT LAO PORCE AND Value Addedi L.abor Force- Value 4dded Per Worker (US 3Million) A Tr_nT_T(US $) % of national average Agriculture 1,021 28 3.67 71 (278) C 39) Industry 907 25 0.60 12 (1,512) (213) Servicen 5 47 0.91 18(193-0) (2711 Total/Average 3.64 10 71-8 ~ 100 (71T) (1001 PUBLIC FINANCER IN 1971 All Governuaents Central Governmsnt i of GP avrage % of GDP average (US$ inSa) % of rDP '196P -1971'. Psg $ale) % of GDP 1969-1971 Current Receipts n.a. n.a. n.a. 672 18.0 18.7 Current Extrendituren (incl, transfers) n.e. n.e. n.e. 581 15.6 16.0 Current Surplus/Deficit ()211 5.7 5.5 91 2.4 2.7 Capital Excpenditures 312 8.4 9.0 258 6.9 6.3 External Assistance (net) 105 2.8 2.7 63 1.7 1.5 PRICES AND CREDIT, 4/ end of year: Coat of living in Casablanca Senk Credit to Public Sector Bank Credit to Private Sector index (1963.100) 7. change (US $ aml) % change (US $ mln) % change 1968 105.5 0.5 448 17.4 521 21.7 1969 108.6 2.9 552 23.2 510 -2.2 1970 110.0 1.3 589 6.6 511 0.3 1971 114.5 4.1 602 2.2 583 14.2 Feb.) 1971 114.3 - Feb.)1972 120.6 5.5 BALANCE OF PAYMENITS IN 1969, 1970 and 1971 : ECADSE EXPORTS (Average of 1969. 1970 and 1971): (millions US 9) (mln.) % hcports of Goode, NFS .667 698 742 Phosphate 113 23 ImportB of Goode, NFS 709 854 863 Citrus fruit 75 15 Resource Gap (deficit -)-2 -3 11Tomatoes 32 7 ____________ - ~~~~~~~~~~~~~~~~~~~~Canned fish 26 Interest Paymenta (net) -18 -16 -22 All other commodities 248 50 Workers' Remittances (grose) 60 63 95 Total 494 100 Other Factor Paymenta (net) -4 -44 -43 INVISIBLE EXPORTS (Avarage of 1969. 1970 and 1971)1 Net Transfers 10 9 13 Balance on Current Account -39 -144 -78 Touriemn3 Workers' remsittences 3 Direct Foreign Investment 4T97other 72O Medium and Long-term Loans (net) 31 99 75 Ttl14 Disbursements ( 70 )(136 )(126 )EXTERNAL DEBT ON DOCEMBRE 31. 19711 Official Grants 26 20 18 Medium and Long-term Credits, Public 804 Other Capital (net) -1 28 28-urnte rvaeMTn.a. Increase in Niat Total Reserves 21 37 726/NnGaatedPiae(. Total Outstanding end Diabursed n.a. All other itema - 15 12 Nret TOtfcal Reserves (end year) 824 1418 174 DEBT SERVICE RATIO (1971): 8.9 Not Total Reserves (end year) 82 118 1900/ IBRD/IDA LENDING, DIEE4BE 31. 1971 mina.a IBRD IDA Outstanding and Disbursed 70.6 8.5 Undisbureed 95.3 18.3 Outstanding incl. Undiebarsed 165.9 26.8 Rate of Exchange8'/ US $1.00 * DH 4.66098 Date: May 21, 1972 DH 1.00 * US *0.214547 Departmntti ENE 1/ shares in 1960 prices applied to COP in current prices. 5/ including long teca loans to the private sector. 2/ estimate (results census 1971 not yet available). 6, at US 91.00 - DH 5.03 conversion rate. 3/ excluding 0.8 aillion unenmployed 114UDepartmentn of Agriculture 4/ only price index available 8/exchange rato before 3)aoesiber 1971 was US $1.00 * DR5 5.06 ~/UN data, which may overestimate natural population growth  ANNEX III Page 1 of 3 M O R O C C O AGRICULTURAL CREDIT PROJECT Loan/Credit and Project Summary Borrower: Loan Caisse Nationale de Credit Agricole (CNCA) Credit Kingdom of Morocco Guarantor: Loan Kingdom of Morocco Amount: Loan $24 million Credit $10 million Terms: Loan Payable in 15 years with 4 years of grace at 7-1/4 percent interest per annum Credit Standard Re-lending Terms: Government will make the proceeds of the credit available 'to CNCA as part of the government contribution to CNCA's equity. CNCA will lend the proceeds of the loan/credit at an interest rate of 8 percent for farmers having a taxable revenue of DH 6,000 and above, and for all ,mechanization loans, and of '6-1/2 percent..for, farmers earning less than DH 6,000. Loans over $110,000 for marketing facilities would require prior Bank/IDA approval. Project Decription: To provide funds for loans to sub-borrowers to help finance medium and long term investments over a 3-year period.  Annex III Page 2 of 3 Estimated Cost: Typical Size of Individual Investment Category Sub-project Sub-loans Average Total Rainfed Irrigated Total Average Invest- Invest- -ha- -ha- number Amount ment rnent of loans per farm per farm (DH (DHIOOO) (DHtOOO) million) Grain farm equipment Tractors and attachments 100 3,500 27 39 136.5 Grain harvesters and balers 200 460 49 70 32.2 Citrus plantation development 20 360 137 196 70.6 Winter vegetable production 48 12 750 38 54 40.5 Dairy farm development 65 13 150 49 71 10.6 Beef and sheep fattening 40 2,920 5.6 8 23.4 Marketing facilities 6.0 TOTAL 319.8 Financing Plan: Total Category Sub-borrowers CNCA Bank/IDA Project Cost - --------------- DH million ---------_- % of total Grain farm equipment Tractors and attachments 40.9 28.7 66.9 136.5 43 Grain harvesters and balers 9.7 6.7 15.8 32.2 10 Citrus plantation development 21.2 14.8 34.6 70.6 22 Winter vegetable production 12.J 8.5 19.9 40.5 13 Dairy farm development 3.2 2.2 5.2 10.6 3 Beef and sheep fattening 7.0 4.9 11.5 23.4 7 Marketing facilities 1.8 1.3 2.9 6.0 2 TOTAL 95.9 67.1 156.8 319.8 100 Total in US$ millions (20.8) (14.6) (34-0) (69-4) Percent of total 30 2i 49 100  ANNEX III Page' 3of 3 Estimated Disbursements: IBRD/IDA DISBURSEKENTS CUMULATIVE FY DURING FY DISBURSIMIENTS ($ million) 1973 6.- 6.- 1974 10.1 16.1 1975 11.3 27.4 1976 6.6 34.0 Procurement: Through normal commercial channels Consultants: None Rate of Return: The economic rate of return from the several types of investments to be financed ranges from 17 percent to 40 percent. Appraisal Report: Report PA-95a (June 2, 1972) Agricultural Projects Department  I`i- 8-. SPAIN I3 MOROCCO Mediterrcneon Seo AGRICULTURAL CREDIT PROJECT touan CNCA ORGANIZATION * Head office AL Reg,onal offices Ko