Morocco - Vocational Training Project

Document of The World Bank FOR OMCIAL USE ONLY *eUM N. P-3893-MR REPORT AMD RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$27._ -ILLION TO THE KINGDOM OF MOROCCO FOR A VOCATIONAL TRAINING PROJECT November 2, 1984 lrbk daemmtd bw a mftgcZj 4Ijs&gntk gj NW be ued by hepj.b mly in &e pezf,m ofd Xdr O.ehI duke Its e_m. am mO etdmie be ikemd wto Wedi ain_ mhihmV.  KINGDOWK OF MOROCCO CURPENCY EQUIVALENT Currency Unit - Dirham (DH) US$1.0O DR 9.06 DR 1.00 USO.llO FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS ITA - Institute of Applied Technology (Institut de Technologie Appliqude) LCB - Local comperit1ve bidding MOA - Ministry :f Agriculture MOE - Ministry o.,f National Education *MOF - Ministry of Finance MOP - Ministry of Planning *YPW - Ministry of Public Works, Vocational ',raining and Staff Trainin& ODI - Office for Industrial Development (Office pour le Developpement Industriel) Office - Office of Vocational Training and Employment Promotion (Office de la Formation Professionnelle et de la Promotion du Travail) TA - Technical assistance UNDP - United Nations Development Prograume VTC - Vocational Training Center (Centre de Qaalification Professionqelle)  FOR OMCIAL USE ONLY KINGDOM OF MOROCCO VOCArIONAL TRAINING PROJECT Loan and Project Suumasy Borrower: The Kingdom of Morocco Beneficiary: The Office de la Formation Professionnelle et de la Promotion du Travail (the Office). Amount: US$27.1 million equivalent, including the capitalized front-end fee. Terms; 17 years including 4 years of grace, at the standard variable interest rate. $26.7 million of the Bank loan would be made available to the Office on a grant basis. The Government would bear the foreign exchange and interest rate risks on the Bank loan. Project Description: The project's objectives are to address key sector issues by contributing to expanding vocational training capacity consistent with future needs for skilled manpower, improving coordination of vocational training, assessing policy options to assure the financial viability of such training, and helping to develop appropriate future training strategies and programs. The project would also help improve project selection and preparation in the public sector. To achieve these objectives, the project would comprise: a) construction, furnishing, and equipping of 22 new industrial vocational training centers throughout the country; b) equipping, furnishing and providing technical assistance for a new vocational Instructor Training Center; c) providing five new mobile training units; d) studies on sector policy issues and to develop new training programs; and e) technical assistance for development of a national training program in project - selection and preparation. The main benefits of the project would be the expansion of lower and middle level skill training for the private sector, until now very limited in relation to ; national demand, and development of strategies for sound and planned expansion in the future. The project would address the training needs of secondary school leavers and support expansion of industrial sector output. Important benefits would accrue both to employers, in the form of improved worker productivity, and trainees. The project is also expected to lead to widespread benefits through improved pro,ect preparation, selection, and appraisal in the public sector, and to more timely project implementation in all sectors. This document hs 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.  - ii - Project Cost Estimates: (us$ million) Local Foreign Tota' Vocational Training Centers (22) 11.68 17.47 29.15 Instructor Training Center equipment .02 .07 .09 Mobile training units .14 1.30 1.44 Technical assistance; Studies for development oi future training activities .11 .47 .59 Support for Instructor Training Center .04 .15 .19 Program in project preparation .26 .39 .65 TOTAL BASE COST 12.26 19.85 32.11 Physical contingencies 1.22 1.99 3.21 Price contingencies 3.46 5.23 8.69 TOTAL PROJECT COSTS 16.941/ 27.07 44.01 Il Front-End Fee .07 .07 TOTAL FINANCING REQUIRED 16.94 27.14 44.08 Financing Plan; Local Foreign Total (iJSs million) Bank - 27.1 27.1 UNDP 0.2 - 0.2 Government 16.7 - 16.7 Total 16.9 27.1 44.1 1/ Including US$ 3.31 million of indirect taxes. Details may not add due to rounding.  - iii - US $ Million Estimated Disbursements; FY85 FY86 FY87 FY88 FY89 FY90 FY91 Annual 1.3 3.0 6.8 9.2 3.6 2.2 1.0 Cumulative 1.3 4.3 11.1 20.3 23.9 26.1 27.1 Staff Appraisal Report: Report No. 5141-MOR, dated October 29, 1984.  INIERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECUMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO UST27.1 UMION TO THE KINGDOM OF MOROCCO FOR A VOCATIONAL TRAINING PROJECT 1. I submit the following report and recommendation on a proposed Loan to the Kingdom of Morocco, for the equivalent of US$27.1 million, including the capitalized front-end fee, to help finance a Vocational Training Project. Tne Loan would have a term of 17 years, including 4 years of grace, at the standard variable interest rate. UNDP would provide $170,000 in cofinancing. PART I - THE ECONOKY 2. An economic report, entitled "Morocco; Priorities for Public Sector Investment (1981-85)" (No. 4156-MOR), was issued on June 15, 1983. Another economic report entitled tMorocco; Industrial Incentives and Export Promotion" was distributed to the Board on January 11, 1984. An economic mission on financial intermediation was in Morocco in September 1983 and its report is expected to be issued shortly. The following section reflects the findings of an economic updating mission that was in Morocco in July 1984. Country data are given in Annex I. Introduction 3. Compared with many developing countries, Morocco is well endowed with natural resources. Morocco has the world's largest and most easily recoverable phosphate reserves, which makes the phosphate sector a key export sector. Other minerals such as iron ore, manganese, lead and zinc are also exported, but in much smaller amounts. Coal and hydropower plants satisfy only a small part of the country's energy requirements, but Morocco has some uranium and oil shale resources which could become significant energy sources in the long term. There are moreover preliminary indications of natural gas reserves. Morocco also has a relatively good agricultural potential. In addition, Morocco's proximity to Europe has favored trade, tourism and labor migration with the EEC countries. 4. During the first 15 years after independence (1956), a conservative approach to economic policy predominated in Morocco, and GDP increased at an average rate of 4% a year in the 1960s. A relatively weak savings effort and conservative external borrowing policies permitted only a slow rise in the share of resources allocated to investment. Mokocco thus entered the 1970s with no major financial imbalances, but a relatively limited growth capacity.  - 2- Economic Performance in the 1970s 5. During the mid-1970s, economic policy became more ambitious. In 1974, with the sudden jump in phosphate prices, phosphate export earnings more than quadrupled, and although the petroleum import bill also quadrupled, the current account of the balance-of-payments remained in surplus. The Government launched a massive public investment program which brought about a significant acceleration in the rate of growth to 6.7% per year between 1973-1977. There was also a major expansion of expenditure on social services, which have however until now been relatively inefficient in reaching the lower income groups, particularly in the rural areas. 6. The phosphate boom, however, was shortlived and phosphate exports started falling ia both volume and value as early as mid-1975. Markets for other exports as well as for tourism and labor migration were also negatively affected by the world recession. Accelerated investment, rising social expenditures and increased defense spending in response to growing tensions in che Western Sahara, soon created strong pressures on both the balance-of- payments and the Government budget. The Treasury deficit reached 17.6% of GDP, and the current account deficit of the balance-of-payments, 16.5% of GDP in 1977. To help finance the gap, Morocco borrowed heavily from the international capital market, which led to rapid increases in external debt and the debt service burden. 7. In order to redress the rapidly deteriorating financial situation, the Moroccan Government in 1978 adopted a stabilization program, with the aim of reducing internal and external deficits to sustainable levels. The program centered on reductions in investment outlays and stricter import controls but was not sustained long enough and did not address the fundamental structural weaknesses of the economy. By 1980, both fiscal and external imbalances were again substantial: the Treasury deficit remained at about 11% of GDP and the current account deficit of the balance-of-payments at 8% of GDP. By then, the external debt had risen to $7 billion and the debt service ratio was 27Z of exports of goods and services. Recent Economic Developments 8. GDP growth has slowed down since 1978 to 2.8% a year on average, barely enough to keep per capita income from falling. Agricultural value added, which rose rapidly in the sixties, has stagnated since the seventies. Despite substantial public investment, value added in manufacturing also stagnated in recent years. Construction, which had experienced intense activity during the mid-seventies, started declining steadily with the slow down in public investment after 1977. Government services have been the main source of growth since 1978. 9. In 1980-82, renewed efforts were made to stabilize the Moroccan economy witn the help of the IMF. In October 1980, the IMF approved a three-year Extended Fund Facility (EFF) in the amount of SDR 810 million. The EFF was suspended in 1981, however, and replaced in April 1982 by a one-year  Stand-by, which was implemented as planned, but had relatively little impact on Morocco's financial performance. Throughout this period, Morocco"s attempts at stabilization were severely hampered by a series of external shocks: a) the 1979 increase in oil prices which aggravated an already substantial petroleum import bill ($1.2 billion in 1982); b) a severe drought, which reduced agricultural output by about 20% in 1981 and led to substantial imports of cereals; c) the rise in international interest rates which contributed to a steep increase in debt service; and d) the international economic recession which contributed to a 30Z decline in 1982-83 in the dollar price of rock phosphates, as well as to a fall in workers' remittances, Morocco's two principal sources of foreign exchange in the early 1980s. 10. At the same time, however expansionary public spending policies continued to be a major source of both fiscal and external imbalance. Adoption of the 1981-85 Development Plan, which aimed at an ambitious GDP growth rate of 6.5% p.a., led to a sharp increase.' in public investment expenditures and the Treasury deficit rose from 10.7% of GDP in 1980 to 12.3% in 1982. .1/ 11. The combined impact on the balance-of-payments of external shocks and expansionary fiscal policies was an overall increase in the current account deficit from t1.4 billion in 1980 to $l.9 billion in 1982 (or from 8% to 13% of GDP). While there were some positive factors on the export side, such as the continued growth of manufactured exports, the emergence of some non-traditional exports and renewed growth in the tourism sector after the adoption of a flexible exchange rate policy in late 1980, these were more than offset by the fall in phosphate earnings and workers' remittances and the continued growth of petroleum and capital goods imports. i2. To finance its current account deficit and meet its debt amortization payments, Morocco continued to rely heavily on external borrowing. By December 1983, total external debt, including military and short-term commercial debt but excluding LF obligations, reached an estimated $12 billion. As a result of growing debt and the rise in international interest rates, Morocco's debt service (excluding ID4F debt service) averaged 31.2 to 1.3 billion in 1980-82. The debt service ratio in 1982 rose to 35% of exports of goods and services. Loan commitments in 1980-82 averaged $2 billion a year of which $0.9 billion from multilateral and bilateral sources (not including grants). The 1983 Adjustment Program 13. In early 1983, the financial situation deteriorated rapidly and net foreign assets declined sharply, prompting the Government to tighten import restrictions in March. With freely usable reserves virtually depleted, and the high level of external debt entailing an unsustainable debt service burden for the next few years, the Government became aware of the need to put together a package of policies, including stabilization and structural adjustment measures, which could warrant support from both the IMF and the Bank, and form the basis for a debt rescheduling operation. 1/ Excluding changes in floating debt to suppliers ("Fonds rdserves").  - 4 - 14. A program prepared in mid-1983 was supported by an IMF stand-by arrangement covering the second half of 1983 and calendar 1984 in an amount equivalent to SDR 300 million. Its principal objective was to reduce the current account balance-of-payments deficit from *1.9 billion in 1982 to *1.3 billion in 1983 and $1 billion in 1984 through limits on monetary expansion, reduction in the Treasury deficit and continued use of a flexible exchange rate policy. Subsidized food prices were increased by 17% to 60Z and increases were made in the prices of fertilizers, electricity, water and petroleum products, with the result that budgetary outlays on subsidies would be cut in half in 1983-84. Budgetary investment appropriations were also revised downward, substantially in line with the recommendations of the Bank report on Priorities for Public Sector Investment, so as to limit actual Treasury investmeat expenditures to DR 8 billion in 1983 (compared with DR 12.5 billion in 1982). The objective of the 1983 adjustment program was to reduce the overall Treasury deficit from DH 11.1 billion in 1982 to about DH 8.8 billion in 1983. 1/ 15. To reinforce the adjustment process, the flexible exchange rate policy initiated in 1980 was continued in 1983 with the dirham depreciated by 17% in the 12 months since August 1983. In addition, a process of debt rescheduling was started in order to improve the debt profile and restructure it in the light of the estimated resources available for debt servicing. The Government asked for, and was granted by the Paris Club and the banks, a rescheduling of its external public debt maturing in September 1983 - December 1984. In addition, at a meeting of donors in Paris in November 1983 additional balance-of-payments assistance of about $500 million was pledged for 1983-84 and it was agreed that a Consultative Group for aid coordination would be convened a year hence. 16. Finally, along with its stabilization effort, Morocco is making a significant start on the structural reforms needed to restore a viable balance-of-payments position in tFe medium term, with a package of measures to restructure incentives in order to eliminate the bias in favor of import substitution which has in recent years handicapped the growth of the export sector and hampered efficient use of resources. In January 1984, the Bank approved a *150 million Industrial and Trade Policy Adjustment Loan (ITPA) to support the first phase of this program, which included actions to reduce import protection and promote exports, in particular: a continuation of the exchange rate adjustment initiated under the LMF Stand-by, coupled with a reduction of the special import tax; reductions in import tariffs and an easing of quantitative import restrictions; broader access t6 duty-free inputs for exports and the rationalization of border-tax adjustments on external trade under the domestic sales tax; improved administrative procedures; the elimination of export licensing in agriculture and manufacturing; improvement of the export credit and export credit insurance systems; and a significant reduction in the scope of price controls on manufactured goods. Most of the 1/ Excluding changes in floating debt to suppliers ("Fonds reserves").  -5- measures under this program have now been impLemented. The first tranche of the Bank loan (g75 million) was drawn in June 1984, and the second tranche in October 1984. A follow-up loan is under preparation. The second phase of the adjustment program, expected to be implemented in 1985, would coatinue the industrial and trade policy -reforms initiated in 1984 and would extend the reform program to the financial sector. Future phases of the adjustment process could address further fiscal reform and initiate reforms in public enterprises, education and in agricultural policy. 17. The information available for 1983 and early 1984 confirms that the Government's adjustment program has led to a considerable improvement in both the external and fiscal accounts. The current account deficit of the balance- of-payments was halved in 1983 to $872 million and the Treasury deficit was reduced by about one third, from DH 11 billion to DH 8 billion or 8.5% of GDPY. While the initial tightening of import restrictions and public investment cutbacks were the main factors behind the improvement in financial performance in 1983, the depreciation of the exchange rate and measures to encourage exports also appear to have had a positive impact on exports of both goods and services, and import restrictions have subsequently been substantially relaxed. Current estimates for 1984 anticipate strong growth of earnings from manufactured exports, tourism and workers' remittances, along with a good performance of agricultural exports and a recovery of phosphate exports. In the fiscal area, further progress is expected in reducing the deficit, to about 7% of GDP, mainly as a result of economy measures in the recurrent budget. Imports are also rebounding, as a result of the recent trade liberalization measures and the need to replenish stocks. However, their growth is expected to slow down in the latter part of the year, and the current account deficit for 1984 is expected to remain below t800 million, after allowing for the impact of the debt rescheduling on interest payments. As was to be expected, GDi growth slowed down to an estimated 2.2% in 1983, as a new drought hurt agriculture and the growth of the Government sector was constrained by lack of budgetary resources. Medium-Term Policies and Prospects 18. A Consultative Group meeting has been scheduled in Paris in January 1985. The Consultative Group will focus on Morocco's medium-term adjustment policies and prospects. A joint Bank-IMF economic updating mission visited Morocco in July to prepare a background paper which will present to the Group a unified assessment of Morocco's current adjustment program and medium-term outlook by the two institutions. The mission's preliminary conclusions are that taedium-term prospects remain precarious. Both the current account deficit of the balance-of-payments and the fiscal deficit, at 6-7% of GDP, are still too large to be sustainable. A fundamental stabilization effort needs to be sustained over several years and combined with a strong program of structural adjustment. Such a program would have as its basic aims: 1/ Relief on interest payments on external debt is estimated a. $230 million m 1983. The current account deficit of the balance of payments would have been $1,100 million without debt rescheduling and the Treasury deficit DR 8.6 billion or 9.1% of GDP.  -6- (i) to reduce the deficit of the balance-of-payments over the short- and medium-term through continued trade policy reforms and appropriate development strategies in the productive sectors, particularly agriculture and industry, that would increase production and promote exports and efficient import substitution; (ii) to improve the allocation of capital and the efficiency of investment, both in the public sector (through appropriate changes in investment policies) and in the private sector (through reform of the & protection system and of interest rate policies); (iii) to increase the level of public sector savings through reductions in the Treasury deficit and improvements in the efficiency of public enterprises; (iv) to improve the mobilization of private savings through a reform of the financial sector involving interest rate increases, diversifi- cation of financial instruments and greater competition in the banking sector; and (v) to accelerate the rate of employment creation through better manpower planning and a revision of the protection and incentives system so as to encourage investment in labor intensive activities. 19. Medium-term projections for Morocco are currently being revised. Preliminary projections based on the policies outlined above bring out the dampening effect of stabilization on growth in the short-term and the importance of improving the efficiency of investment, domestic savings and export incentives for higher long-term growth. As efforts to promote exports and increase domestic savings can be expected to bear fruit only gradually in Morocco's circumstances, this will severely limit the level of investment that can be financed for the next several years, under the conditions of a constrained net amount of external financing available to Morocco, with a resulting deflationary impact on domestic demand. Implementation of the adjustment measures, including improved export incentives would, however, induce an expansion of exports and a gradual increase in output. 20. In the medium-term, structural improvements in the efficiency of resource use should induce an acceleration of economic growth, and GDP is projected to increase at 3.6% p.a. in 1985-90. This result would reflect a change in the sources of growth, with the manufacturing and phosphate sectors playing ad important role in improving the balance-of-payments. As a result of improved export incentives and the revival of foreign markets, exports of manufactured products (including phosphate derivatives) would grow at 12% p.a. Exports of rock phosphates and phosphate derivatives would recover from their present low level and grow at about 9% p.a. in 1985-90. The overall growth rate of Morocco's exports of goods and nonfactor services in this scenario would accelerate to about 7% p.a. in constant prices in 1985-90. With respect to imports, the change in the structure of incentives in conjunction with the depreciation of the dirham would improve the efficiency  -7- of import substitution and reduce the reliance on imported inputs. Overall, import growth of goods and nonfactor services in this scenario would be limited to 5% p.a. during 1985-90. 21. Given the strong constraints on the resources available, gross investment is projected to decline in the short-term from 23% of GDP in 1980 to about 16% of GDP in 1986-90. It is assumed that the Government would srart fewer large capital-intensive projects and restrict the allocation of investments to priority subsectors so as to improve the sectoral allocation and the efficiency of investment. Priority is to be given to projects that are export oriented, less capital intensive and which use a greater proportion of domestic resources. In addition, particular attention would have to be paid by the Government to manpower planning and to the employment effect of investments in order to prevent unemployment from rising to excessive levels. 22. An essential aim of the adjustment process would also be an increase in domestic savings. As a consequence of policies aiming at a reduction in the Treasury deficit and at an improvement in public enterprises efficiency, public savings are projected to increase significantly. In addition, improvements in the mobilization of private savings would also take place through interest rate increases and reform of the financial sector, so that the overall domestic savings rate in this scenario would rise from about 8% in 1981-82 to about 13% in 1990. 23. The acceleration of export growth relative to import growth in conjunction with an increase in the savings ratio relative to the investment ratio would be compatible with a stabilization of the current account deficit at a level of $700 to 800 million a year in 1985-90. In relation to GDP, the current account deficit in this scenario drops to about 3% by 1990. This would be consistent, under the above assumptions, with a GDP growth accelerating from 2.6% in 1985 to 3.9% in 1990. However, gross external borrowings in this scenario are projected to increase from 92.2 billion in 1985 to g2.8 billion in 1990 as repayments of debts rescheduled in 1983 or contracted in the early 1980's fall due. The debt service ratio in these projections would remain high (40-45%) in the next few years, starting to decline below 35% in 1990. PART II - OTHER BANK GROUP OPERATIONS IN MOROCCO_/ 24. Bank and IDA lending to Morocco has supported 65 projects, financing a total of