Document or The World Bank FOR OFFICIAL USE ONLY Report No.;?-4032-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DI RECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$100.0 MILLION TO THE KINGDOM OF MOROCCO FOR AN AGRICULTURAL SECTOR ADJUSTMENT LOAN May 28, 1985 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 authorizakion. .~~~~~~ I CURRENCY EQUIVALENCY Calendar 1984 January 1, 1985 Currency Unit - Dirhams (DH) US$1.00 = DH 8.90 9.5 DH 1.00 = US$o.1l2 0.105 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS CKV - Field Offices in Irrigated Areas Centres de Mise en Valeur CNCA - National Agricultural Credit Bank (Caisse Nationale de Credit Agricole) CP - Programme Contract CT - Centres de Travaux (Field Offices in Rainfed Areas) DER - Rural Investment Division Division de l'Equipement Rural DPA - Provincial Department of Agriculture - (Direction provirciale de l'agriculture) DPAE - Division of Planning and Economic Analysis - (Division de la planification et des affaires economiques) DPV - Crop Production Division Division de la Production Vegetale EFF - Extended Fund Facility FERTIMA - National Fertilizer Marketing Company (Soci6t6 Marocaine des Fertilisants) INRA - National Agricultural Research Institute - (Institut national de la recherche agronomique) ITPA - Industrial & Trade Policy Adjustment ICB - International Competitive Bidding - (Appel d'offres international) MARA - Ministry of Agriculture and Agrarian Reforms (Ministere de l'Agriculture et de la Reforme Agraire) OCE - National Export Company - (Office de commercialisation des exportations) OCP - National Phosphate Company - (Office Cherifien des phosphates) ONICL - Office for Cereals and Legume Crops - (Office national interprofessionnel des cereales et des l6gumineuses) ORMVAs - Regional Office for Agricultural Development - (Office regional de mise en valeur agricole) SCAM/CMA - Regional Marketing Cooperatives - (Soci6te Cooperative agricole marocaine/coop6rative marocaine d'approvisionnement) SONACOS - National Seed Company (Soci6t6 Nationale de Commercialisation des Semences) GOVERNMENT OF KINGDOM OF MOROCCO FISCAL YEAR January 1 - December 31 FOR OMCIAL USE ONLY KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN Table of Contents Page No. LOAN SUMMARY PART I : THE ECONOMY I PART II : OTHER BANK GROUP OPERATIONS 7 PART III :THE AGRICULTURE SECTOR 9 PART IV :THE AGRICULTURAL SECTOR ADJUSTMENT PROGRAM 14 A. Origin and Objectives 14 B. Restructuring Public Investments and Expenditures 14 C. Re-orienting Prices and Incentives Framework 18 D. Strengthening Supporting Services and Rationalizing the Role of the Public Sector 22 E. Building Institutional Capacity and Resolving Structural Problems 34 PART V THE LOAN 38 A. Origin and Objectives 38 B. The Action Program Under the Loan 38 C. Loan Administration 45 D. Management and Co-ordination 48 E. Justification and Risk 49 PART VI : LEGAL INSTRUMENT AND AUTHORITY 50 PART VII : RECOMMENDATIONS 51 ANNEXES I. Country data II. Status of Bank Operations III. Supplemental Loan Data Sheet IV. Government Statement cf Sector Development Policy V. Action Timetable for Medium-term Sector Adjustments VI. Outline of Technical Support Volume TABLES 1. Agricultural Production 2. Agricultural Imports/Exports 3. Projected Annual Input Program 4. 5 Year Water Charge Recovery Program 5. Core Investment Program 6. Budget Impact of Alternative Cereal Procurement Programs This document has a rstricted distnrbution and may be used by .epints oldy in the performance of their ofridal duties Its contents may not otherwis be disclosed without World Bank authorization. MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan Summary Borrower: The Kingdom of Morocco Amount: US$100 million equivalent Terms: 20 years, including 5 years of grace, at the standard variable interest rate Loan Description: The proposed Loan would support the first phase of the implementation of the Government's program of adjustments in the agricultural sector. The principal objectives of the sector adjustment program are to improve the growth rate in agriculture within the overall constraints in public resources. To achieve this objective, actions have been taken and others will be implemented in the following 18 months, to (i) complete a restructuring of the investment program; (ii) re-orient the prices and incentives framework; (iii) strengthen agricultural support services including rationalizing the role of the private sector; and (iv) build institutional capacity for agricultural planning and policy analysis. The adjustment program is described in the Government's letter to the Bank of Sector Development Policies. The foreign exchange provided by the Loan would be used to finance an agreed program of imports of inputs needed for stimulating agricultural production, including fertilizers, pesticides, seeds, animal feed, fuel, agricultural machinery and spare parts and veterinary medecines. The risks of the program relate to assessing the length and difficulty of the adjustments, the uncertainties of response of the private sector and farmers to the changes in the incentive patterns and uncertainties in the external environment including the prospects for Morocco's agricultural exports. Estimated Disbursements. The Loan would be disbursed in two tranches. The first tranche of US$50 M would be available at the time of Loan Effectiveness. The second tranche of US$50M would be released after implementation of specific actions, including an overall satisfactory review of the implementation of the sector adjustment program. Appraisal Report: This is a combined President and Staff Appraisal Report. A detailed Technical Support Volume is available on request. 1361E INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR AN AGRICULTURAL SECTOR ADJUSTMENT LOAN 1. I submit the following report and recommendation on a proposed Loan to the Kingdom of Morocco, for the equivalent of US$100.0 million, in support of its program for agricultural sector policy adjustments. This program is described in a Letter of Sector Development Policy, received from the Government (Annex IV). The Loan would have a term of 20 years, including 5 years of grace, at the Bank standard variable interest rate. The African Develapment Bank is also considering a loan in support of this program. PART I - THE ECONOMY1' 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 "Morocco: Industrial Incentives and Export Promotion" (No. 4893-MOR) was distributed to the Board on January 11, 1984. An economic mission on financial intermediation was in Morocco in September 1983 and its report, entitled "Morocco - Financial Sector Study" (No. 4957-MOR), was issued on December 12, 1984. The following section reflects the findings of an economic updating mission that went to Morocco in July 1984 to prepare a paper, entitled "Morocco: Medium-term Adjustment Policies and Prospects", for presentation to a Consultative Group meeting held in Paris in January 9-11, 1985. 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. Agriculture remains an important sector in the Moroccan economy: about half of the population depend on it for their livelihood, but it lags behind in productivity - it contributes only 17% of GDP (1979-82). Agricultural exports accounted for about 17% of total exports in 1980-83, down from 38.5X in 1969-71. Agricultural and food imports have been increasing at 1/ Part I is substantially the same as Part I of President's Report No. P-4079 of May 15, 1985 for a Health Development Project. - 2 - a rate of about 12% in the last decade, reaching 16% of total imports in 1980-83. Nonetheless, Morocco has a relatively good agricultural potential which remains untapped. 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 favorable external environment and 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. Morocco thus entered the 1970s with no major financial imbalances, but a relatively limited growth capacity. 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 7.5% per year between 1973 and 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 in 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 the Western Sahara, soon created strong pressures on both the balance of payments and the Government budget. The Treasury deficit reached 15.8% 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 the end of 1980, the external debt had risen to $7 billion (not including military and short-term debt) and the debt service ratio was 27% of exports of goods and services in 1980, and continuing to rise. Recent Economic Developments 8. GDP growth has slowed down since 1978 to 2.8% a year on average, just enough to keep per capita income from falling. Agricultural val'ie 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 with 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 exogenous 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, followed by a succession of poor harvests, which led to substantial imports of cereals in recent years; c) the rise . international interest rates which contributed to a steep increase in debt service; and d) the international economic recession which contributed to a 30% 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 6.5X p.a., led to a substantial increase in public investment expenditures and the Treasury deficit rose from 10.7Z of GDP in 1980 to 14.5Z in 1981 and 12.3% in 1982. 11. The combined impact on the balance of payments of external shocks and expansionary fiscal policies was an caerall increase in the current account deficit from $1.4 billion in 1980 to $1.9 billion in 1982 (or from 8Z to 13Z 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. 12. 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 IMF obligations, reached an estimated $12 billion. As a result of growing debt and the rise in international interest rates, Morocco's debt service averaged $1.2 to 1.3 billion in 1980-82 (medium and long-term debt only, noc including military debt and IMF debt). The debt service ratio in 1982 rose to 34.7X of exports of goods and services. Loan commitments in 1980-82 averaged $2 billion a year of which $0.9 billion from official multilateral and bilateral sources. The 1983 Adiustment 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 - 4 - 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. 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 deficit of the balance of payments 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 172 to 602 and increases were made in the prices of fertilizers, electricity, water and petroleum products. Budgetary investment appropriations were also revised dowrnward, substantially in line with tIe recommendations of the Bank report on Priorities for Public Sector Investment, so as to limit actual Treasury investment expenditures to DH 8 billion in 1983 (compared with DH 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. The real effective exchange rate index calculated on a trade weighted basis declined by 9Z between July 1983 and May 1984. 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, a rescheduling of its external public debt maturing in September 1983 - December 1984. 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 the 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 IMF Stand-by, coupled with a reduction of the special import tax; reductions in import tariffs and an easing of quantitative import restrictions; broader access to 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 measures under this program have now been implemented. The first tranche of 1/ Report No. 4156-MOR Priorities for Public Sector Investment (15 June '84). - 5 - the Bank loan ($75 million) was drawn in June 1984, and the second tranche in October 1984. A recently negotiated $200 million follow-up Loan would support the second phase of the adjustment program, which would continue the industrial and trade policj- reforms initiated in 1984 and would extend the reform program to the financial sector. Future phases of the adjustment process will address further fiscal reform and initiate reforms in public enterprises, education and in agricultural policy. Those included in the agricultural restructuring program are supported by the present loan. 17. The information available for 1983 and the first half of 1984 confirms that the results of the Government's adjustment program thus far have been largely positive. Exports increased by about 10% in real terms in 1983 and an estimated 8% in 1984. Tourism receipts and workers' remittances also increased sharpLy. On the import side, a significant contraction was achieved in 1983 as a result of the stabilization policies. In 1984, imports rebounded to some extent, partly as a result of the trade liberalization policies adopted under ITPA. There was also a considerable increase in food and petroleum imports as a result of the continuing drought. The current account deficit of the balance of payments was sharply reduced, from $1.9 billion and 13.2% of GDP in 1982 to $1.1 billion and 8.0% in 1983 (before debt relief). In 1984, despite the growth of imports, the current account deficit before debt relief is estimated to have remained at about $1.1 billion, rising to 10.8% of GDP (as against IMF initial program targets of 7.5% of GDP, the latter being based on expectations of substantially higher rates of GDP growth and inflation). Significant improvement was also recorded in the government budget deficit, which declined from 12.5% of GDP in 1982 to 9.1% in 1983 and 7.8% in 1984 (before debt relief), as planned under the IMF program. Simultaneously, 1984 marked the fourth consecutive year of drought with its serious consequences not only for the balance of payments but also on employment, since the agricultural sector accounts for approximately 50% of total employment. The combined impact of stabilization policies and poor harvests kept GDP growth low (2.2% in 1983 and 2.4% in 1984). Medium-Term Policies and Prospects 18. A Consultative Group meeting was held in Paris on January 9-11, 1985. The Consultative Group focused 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 for this meeting. Both the Bank's and the Government's presentation to the Consultative Group reflected the view that a fundamental stabilization effort needs to be sustained over several years and combined with a strong program of structural adjustment in order to restore a viable external payments position and resume a satisfactory rate of growth, in view of the high external debt burden. Such a program would have as its basic aims: (a) 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; (b) 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); - 6 - (c) to increase the level of public sector savings through reductions in the Treasury deficit and improvements in the efficiency of public enterprises; (d) 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 (e) 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. These objectives are being pursued with different relative intensity under the reform programs in the agricultural, industrial and educational sectors prepared with the assistance of the Bank and supported by related lending (ITPA I and II loans in support of reforms in financial, industrial and trade policies and the proposed loan in support of policy reforms in the agricultural sector). 19. The medium-term projections for Morocco, based on the policies outlined above, depict a scenario of transition from inward-looking import substitution to outward-oriented export expansion. Due to the large external imbalance, the restructuring policies designed to achieved this transition must be accompanied by continued efforts to reduce domestic absorption. Policies 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, given the constrained net anount of external financing available to Morocco, with a resulting deflationary impact on domestic demand. However, implementation of the adjustment measures, including improved export incentives, would induce an expansion of exports and a gradual acceleration of output growth toward the end of the period. 20. Export growth plays a crucial role in the projected adjustment scenario. As a result of improved export incentives and the revival of foreign markets, exports of manufactured products (including phosphate derivatives) would grow at 13% p.a on average in 1985-90. Exports of rock phosphates and phosphate derivatives would grow at about 9% p.a.. The overall growth rate of Morocco's exports of goods and nonfactor services in this scenario would accelerate to about 8% 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 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 about 2% 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 about 22.9% of GDP in 1984 to 18.5% towards the end of the decade. It is assumed that the Government would start 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 orievted, less capital intensive and which use a greater proportion of domestic resources. In addition, particular attention - 7- 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 12% in 1984 to about 17% by 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 result in a steady improvement in Morocco's external payments position. Assuming that the growth of workers' remittances can be sustained, the current account would be approximately in equilibrium by 1989. Until then, however, Morocco would continue to require substantial amounts of medium and long-term capital to cover the continuing current account deficits and meet the heavy schedule of debt repayments coming due in the next few years. Total gross capital requirements would average close to $3 billion annually in 1985-87. A substantial portion of these requirements could come from debt relief along the lines of the debt rescheduling obtained by Morocco from its creditors in 1983-84. The remainder could be obtained through normal mediumi and long-term inflows of new capital, if new commitments from Morocco's official lenders can be maintained at their current rate. PART I[ - OTHER BANK GROUP OPERATIONS IN MOROCCO-' 24. Bank lending to Morocco has supported 60 projects, financing a total of $2,415 million (net of cancellations), of which $25 million from a Third window loan. IDA credits, totalling $52.6 million, have been made available for five projects. IFC investments have amounted to $99.1 million ($54.1 million after cancellations, terminations, repayments and sales). Annex II contains a summary statement of Bank loans and IDA credits, and of IFC investments, as of March 31, 1984. 25. Until recently, performance in project execution has been satisfactory overall, although in some cases management problems have caused delays in project implementation, and in others insufficient tariff adjustments have affected project entities' financial performance. However, during 1983, as budgetary constraints became more severe, projects relying on the Government budget for a substantial part of financing have been seriously delayed because of inadequate budgetary allocations. The appreciation of the dollar vis-a-vis the dirham in recent years has reduced considerably reimbursable expenses in dollar terms, thus lowering disbursements vis-a-vis appraisal estimates. The ratio of disbursements to appraisal estimates averaged 49% as of September 30, 1984, low in comparison to other countries in the region. 1/ Part II is essentially the same as Part II of the President's Report No. P-4079 of May 15, 1985 for a Health Development Project. - 8 - 26. The objectives of Bank Group activities in Morocco are to support (a) investments and policy reforms aimed at structural adjustment and strengthening the balance-of-payments; (b) measures to reduce the Treasury deficit; and (c) efforts to redress poverty and improve income distribution, particularly through lowering the unit costs for the delivery of basic services, in order to increase access by lower-income groups. Important structural reforms must be undertaken in the coming years, in order to return to a path of reasonable economic growth compatible with a sustainable external payments position. A major objective of Bank economic and sector work is to provide the analytical basis for the development of specific proposals for structural reform, which in several cases is being supported by Bank lending. The Government has requested that, in addition to ongoing work on the public investment program, the Bank assist in developing reform proposals relating to the financial sector (for which a mission visited Morocco in September 1983), public enterprises (for which a first economic mission was undertaken in spring 1984), and the education and agricultural sectors, which is the origin of the proposed loan. Because severe budgetary constraints are likely to persist over the medium-term, projects now under preparation are being timed and designed to be consistent with the revised investment strategy which aims to minimize their reliance on incremental budgetary funds. 27. Agriculture continues to represent an important sector in Bank lending for Morocco. Past Bank lending has primarily supported rural development and irrigation projects focusing on particular geographical regions, in parallel with successful series of agricultural credit projects. There are no major covenants in default. Bank's operations in those fields will continue at a pace consistent with the country's investment capacity while paying special attention to maximizing non-budgetary financing and improving cost recovery. Experience has shown that while the impact of these projects on the production in the specific area of operation has been satisfactory, there remain significant weaknesses yet to be adequately addressed in the Government intervention and support for the agricultural sector as a whole. At present increased attention is being given to agricultural support services at the national level, which are essential for backstopping regional development projects. In parallel, the Bank has helped the Moroccan authorities to review the sector policy framework and to formulate its medium-term adjustment program covering investment strategy, pricing and incentive policy and role of the public sector. The proposed loan is in support of a first phase of the sector adjustment program to support the medium term sector adjustment program (para. 18) and is expected to be followed by similar operations, as further specific measures to adjust the prices and incentives framework are developed. 28. Energy and mining. The Government has given high priority to reducing the oil import bill, a major factor in the current account deficit, through development of domestic energy supplies. The Bank has supported this effort through loans for the exploration and appraisal of petroleum (primarily natural gas) and oil shale resources as well as for power generation and transmission and coal mining w-dernization and expansion. Future projects would assist in the development of domestic energy supplies, including gas, and hydropower. Through these projects as well as in our sectoral policy dialogue, efficiency in energy development and use would be promoted through attention to pricing, cost recovery and management issues. 29. Bank lending for infrastructure and utilities has helped to build a number of technically competent agencies in the fields of road transportation, electricity, water supply, housing finance, and community infrastructure finance, as well as to expand the provision of essential services. Future projects will place greater emphasis on improving the productivity and efficiency of existing infrastructure through improved financial and management performance. Mobilization of private and non-budgetary financing as well as improved cost recovery in these sibsectors through tariffs should help reduce tihe Treasury deficit. In additiot to continuing support for the abo'r--.-:;tioned subsectors, projects are unde. preparation for ports, sewerage and telecommunications. 30. Industrial development in Morocco has been supported primarily through strengthening the financial and institutional resources of the Banque Nationale de Developpement Economique (BNDE), the major source of industrial medium-term credit. In addition, policy changes were introduced to widen access to credit by small-scale labor-intensive industries. Other projects focused on phosphate processing and cement production. The Bank's efforts are now focused on the development and implementation of meditum-term policy reforms aimed at encouraging exports and improving incentives to domestic production. The first phase of such reforms is supported by the first Industrial and Trade Policy Adjustment (ITPA) loan, and further sectoral adjustment lending in industry to support subsequent phases of the medium-term ITPA program adopted by the Government has been negotiated recently. 31. Education, health and urban development projects will increasingly concentrate on lowering unit costs in order to widen the access by low-incnme groups. Policy dialogue in these sectors continues to encourage the shift away from capital-intensive investments benefitting limited clientele and the development of more cost-effective delivery systems for basic services. While previous Bank-financed projects have supported technical education, rural primary education and improved teacher training, these should be complemented by efforts to expand basic education and skill training, as well as restructuring of the formal education system, which has represented a major drain on the recurrent budget. A first health development project which would test new health care delivery systems in order to improve basic health services in rural areas has been negotiated recently. Finally, the experience of projects in urban upgrading will be continued and expanded, with increased efforts to mobilize private financing in order to reduce budgetary costs. PART m - THE AGRICULTURAL SECTOR Past Performance 32. Similar to many middle income countries, Morocco has experienced a decline in the relative importance of agriculture i.: its economy during the last 20 years with reductions in proportionate value added, employment and exports. Nevertheless, the agriculture sector still accounts for 17% of the GDP, provides abouc 40% of all employment and accounts for about a third of Morocco's merchanlise exports and 15% of total exports. The performance of the sector has been uneven: following a period of rapid growth in the 1960s, when agriculture grew at more than 3% p.a. and accounted for 25% of the total growth in GDP, Moroccan agriculture has since developed slowly. During the seventies and early eighties the sector's growth rate, held back by successive - 10 - droughts, was only 1.2%, among the slowest-growing relative to other middle income countries. 33. Since the mid-seventies, Moroco has seen a continued widening of the "food gap", with its adverse consequences on the trade balance. Food production has failed to keep pace with increased domestic demand generated by a combination of rapid population growth (3.2X), a high rate of urbanization (4.81) and declining real prices for food. Food imports have increased by about 102 p.a. and the rate of self-sufficiency for key items has declined over the last decaide (cereals from 86% to 75 X, edible oils from 32% to 19%). Even for sugar and dairy products, for which domestic production has increased by about 41 per annum since 1970, the level of imports has hardly declined. Despite considerable forest resources, the net wood trade balance deficit has also become significant ($50 M annually). Altogether, agricultural imports now account for about 25% of the merchandise imports (approximately the same level as petroleum imports). If present trends continue, food imports of cereal- alone could reach 3.5 M tons by the year 2000 compared to an average of 1.5 M tons in 1980-84; increasing incomes could generate additional animal feed imports of the the same magnitude1' and imports of vegetable oil could double to 400,000 tons. 34. Agricultural exports have decreased in importance. They consist mainly of citrus fruits, vegetables, canned fish and wine. The total value of agricultural exports has been stagnant during the last fifteen years, and the agricultural trade balance has become one of deficits of about US$200 M each year from being one of surplus up to 1974. Prospects for increasing agricultural exports depend critically on Moroccan efforts to diversify to new markets and maintain realistic exchange rates that pro-ide adequate export incentives as opportunity for expansicn in the traditional markets is limited. 35. This divergence between domestic production and consumption, between agricultural imports and exports, has aggravated the balance of payments situation. Continued stagnation in agricultural production would be a major hurdle to Morocco's adjustment program. It would also have serious social consequences: the rural population represents 60% of the total and for whom agriculture represents 75-80X of the income. Any further acceleration of the urbanization process would create employment pressures and involve increased budgetary support for food subsidies. Thus, exploiting the full economic potential of the agricultural resource base of Morocco has become a crucial objective of the Government's overall adjustment program. Resource Base and Structure 36. Of Morocco's 60 M ha. of land only 7.7 M ha. have soils and moisture suitable for cropping, with another 20 M ha. in semi arid or mountain regions suitable only for grazing and forests. Of the cultivable land, about 50% receives an erratic rainfall of under 400 mm, which can only be put under a relatively high risk, low value barley/fallow cropping system. Only about 1.5 M ha are estimated to be irrigable economically. Fruits, vegetables, 1/ Some recent estimates made by the International Food Policy Research Institute indicate potential cereals imports of up to 7 M tons by year 2000. - 11 - forage crops and industrial crops are grown under the more favorable irrigated conditions; but cereals and pulses which dominate the cropping pattern on 80% of the land are mostly grown under rainfed conditions where cultivation practices remain traditional. Although modern technology is increasingly evident in the higher rainfall areas, overall inadequate use is made of fertilizers and pesticides, high yielding seeds and farm machinery compared with the advantages of their use as has been demonstrated by research. The following table provides basic statistics on the resource base and the comparative use of modern inputs: Resource Base and Comparative Use of Inputs: Key indices Morocco AveraRe for the Mediterranean Basin Fertilizer: Kg/ha cultivated 33.5 115 Certified seeds Kg/ha cultivated 13.0 n.a. % area with more than 400 mm rainfall 50% n.a. % irrigated area 10% 16 Area cultivated/tractor (ha) 324 212 37. The recent poor performance of Moroccan agriculture conceals highly contrasting trends between the modern irrigated sector, which now covers 10% of the cultivated land, and the traditional rainfed sector. Government has in the past concentrated 60-75% of its investment resources (para. 44), most of its producer subsidies (para. 55) and the best talent to manage the modern irrigation perimeters. As a result, over the period 1971-1985, irrigated output has grown at a respectable rate of 5.5% p.a. though it represents a subsidized capital intensive type of development. The progress in use of improved farming techniques and production inputs for commodities grown under irrigated conditions has been important and an increasing proportion of the value added is generated by the production in these perimeters from which Morocco obtains about 45% of the total agricultural value added and 60% of its agricultural exports. 38. Rainfed cultivation, on the other hand, which involves 75% of the rural population, and provides the bulk of the country's basic internal food supply (cereals, pulses, nil seeds and red meat) remains largely traditional. Output fluctuates widely with rainfall and there does not appear to be a trend for improvement. Most farms are small (80% below 5 ha), fragmentation is a serious problem (typically plots are of 0.6 ha) and farming is mainly subsistence in nature. Productivity in general is constrained by a combination of uneconomic land holdings and insecure tenures, poor farming practices, lack of incentives for on-farm investments, inadequate use of modern inputs and poor support services, except possibly in small pockets represented by special development projects. With the influence of the subsidized urban food progxam rapidly reaching rural areas, the need for adequate producer incentives for cereal production is critical to obtain higher productivity. The higher growth rate of irrigated crops compared with rainfed crops is evident in the following table: - 12 - Growth Rate and Irrigated Production % Grown in Average Commodity Irrigated areas Growth Rates (1971-83) Sugar cane/beet 90 3.8 Vegetables 65 7.1 Citrus Fruits 50 1.2 Milk 65 3.8 Cereals 20 -2.4 Meat 20 0.8 Forestry products - 0.5 Pulses -6.0 External Factors 39. Proximity of Morocco to the EEC and the traditional trading links developed with the Community have a strong influence on the sector's export performance. A large percentage (80t) of Moroccan agricultural exports are presently to the EEC, and EEC import policies, for example the cessation in 1982 of fruits and vegetables imports during certain months of the year, have far reaching effect not only on agricultural trade, but also on farm level cropping patters. An enlarged EEC, which could become more self-sufficient in crops of vital interest to Morocco, would have important consequences for Moroccan agriculture. 40. Imports of agricultural commodities which are surplus in some producing countries including the EEC and benefit from incentive pricing to encourage exports, have an equally profound influence on the sector. Operating under severe budgetary constraints, and given the slow pace of changes in the subsidized urban food program, the Government has adopted short term policies based on this availability of cheap imports. These policies often conflict with policies to develop the domestic agricultural production potential. Implications of this conflict are seen in the imports of cereals (para. 56), milk products (para. 85), livestock and some animal feeds (para. 58), particularly during periods when exchange rates are overvalued (para. 15). The pace at which the full economic potential of Morocco's agricultural resources can be developed depends as much on these external factors and macro-economic policies as on policies within the sector. Potential for Increased Production 41. Morocco's agricultural potential is far from being fully realized. The technical and economic ceilings of input use to increase yields could be substantially increased in the rainfed areas as well as the irrigated areas. In the former, despite natural constraints, major productivity improvement would result from widespread introduction of improved farming techniques including mechanization of land preparation, use of modern inputs, and a more intensive and rational land use through an integration of crop/animal production. Most of these increases in productivity can be expected to occur - 13 - in the medium to high rainfall areas-". In the irrigated areas, there is also considerable room for increase in yieldsA', for production growth through greater intensification in the existing schemes and shifts in cropping patterns. About 20Z of the already developed irrigation potential lies unutilized due to lack of complementary infrastructure. Similarly, cropping intensity in the areas already equipped for irrigation averages 90X while it could be in excess of 130% offering a scope for low cost increases in productivity. Potential for economically developing additional irrigation capacity is estimated to be about 300,000 ha, and another 100,000 ha of presently rainfed areas could be developed through small and medium scale irrigation. Benefits from better maintenance and rehabilitation of existing irrigation schemes would also be considerable. Together these could represent over the next decade, an impact equivalent to a doubling of the currently irrigated area. Potential for doubling forage production and output per livestock has also been demonstrated.2- 42. The pace of achievement of this potential is linked to the pace with which existing constraints are removed to facilitate growth. A new agricultural policy and a corresponding adjustment program, based on the analysis of past performance and identification of constraints, has been designed by the Government in consultation with the Bank. The new policy recognizes the need for restructuring of the investment and expenditure programs to favor viable, quick maturing investments, along with an emphasis on ensuring adequate financing of key operating and maintenance functions. Greater selectivity and better targeting of financial incentives and greater private sector participation are to be sought. Efforts are needed at increasing the efficiency of agricultural support services, and transfer to the private sector or farmer cooperatives of those services that are commercially viable. In the rainfed sector, improved performance requires a package of policies designed to overcome constraints to efficient land use, but also the means to improve production incentives. Finally, improved institutional capability to analyze policy options and to strengthen the management of the agricultural programs and projects, is called for. 1/ Potential for increasing yields in rainfed areas of Morocco is evident from results already being obtained: Demonstration Average Best Farmers Farms Hard Wheat 1.0 1.8 2.1 Soft Wheat 0.9 2.0 2.4 Barley 1.0 1.4 1.2 Maize 0.7 1.5 1.7 2/ In the irrigated areas, average yields obtained compare with the best areas as follows: ORMVA Average Yields in Better ORMVAs Cereals 1.5 t/ha 3.4 t/ha Sugar beet 35 62 Alfalfa 45 66 Potato 15 25 Cotton 1.5 3.4 31 Yield per animal is 117 kg of meat and 782 litres of milk compa.ved to a mediterranean basin average of 142 and 1585 respectively. - 14 - PART IV. THE AGRICULTURAL SECTOR ADJUSTMENT PROGRAM A. Origin and Objectives 43. The outline of the Government's medium-term sector adjustment program was developed during the late 1983 and early 1984 in response to the worsening macro economic situation, (para. 13). For this, Bank assistance was available to the Government in the form of sector strategy discussions, and assessments of policy constraints facing the sector. The medium-term program for adjustments covers a 5-year period and the Loan would support the first phase of reforms over a period of 18 months. The specific action plan to implement the adjustment program described in this Chapter, are discussed in Chapter V. Prime objectives of the sector adjustment program, which re-inforce the overall structural adjustment program being undertaken by Morocco (para. 18), are as follows: (a) to achieve a restructuring of public investment and expenditure program towards quick maturing and high return investments while assuring adequate funding for maintaining the already established productive infrastructure; (b) to introduce corrections in the prices and incentives framework to encourage optimal shifts in agricultural activities, while maintaining adequate farmer incentives in those areas likely to be the primary sources of future agricultural growth; (c) to strengthen the agricultural support services offered by the Government while rationalizing the role of the public sector in provision of commercially viable services, and improving cost recovery in others; and (d) to build-up institutional capacity for agricultural policy planning and analysis, strengthen the organization and structure of the agricultural sector and to take steps aimed at resolving basic issues of improving productivity of land use and protecting the natural resource base. Details of supporting programs and policies are in a separate Technical Support Volume available on request; the outline of this document appear in Annex VI. A suimmary is given below. B. Restructuring Public Investments and Expenditures 44. During the 1970s, the level of public investment in agriculture (including dams, most of which multipurpose) has been quite high, representing roughly 20% of agricultural GDP, and over 20% of total public investmeat. However, priority was given to the development of capital-intensive large scale irrigation schemes, which received over 65% of total allocations. The 1978-80 Development Plan, while it recognized the need for the development of rainfed agriculture, failed to achieve a shift in investment patterns, because of the momentum gained in the execution of the irrigation program and the lack of a clear development strategy for the rainfed sector. The 1981-85 Development Plan involves a significant reallocation of public investment in favor of rainfed agriculture, livestock and forestry, while emphasizing, for the irrigated sector, an expanded program of low cost, quick maturing small - 15 - and medium-scale irrigation and the completion of large scale projects where water resources had already been deve'loped. The share allocated to large-scale-irrigation development was down to about 40S, while propos6d investments in rainfed areas were almost doubled, more closely reflecting their relative importance and potential. 45. Stringent budgetary constraints emerged in 1982 and required a significant scaling down of overall public investments. Following a Review of the Plan by the Bank in late 1981,-L' the Government started to restructure its investment program. A review during appraisal of actual expenditures for 1982 and 19E3, indicates that considerable progress was made in adjusting the ongoing public investment program in agriculture. Specifically, two large irrigation projects, two sugar mills and some modern high cost irrigation schemes were postponed.-' The review also revealed that the restructuring process was likely to extend beyond the Plan period. Among the issues which were identified were: (a) a lack of methodology and clear criteria to guide project selection and revision, and to evaluate activities of a program nature; (b) variable implementation capacity among agencies and units of the Ministry of Agriculture leading to significant discrepancies in implementation rates; (c) a chronic imbalance between available budget resources and approved project requirements translating into an overall slowdown in the implementation of the investment program; and (d) the large proportion of ongoing operations for which funds had been committed, thus maki.Lg it difficult to rapidly re-adjust the direction of the program. 46. A significant proportion of the investment program (about 60Z) consists of general activities which do not fall into a project format, and those that do, but for externally funded projects, are not routinely subject to critical evaluations of their economic impact. Regarding implementation capacity, the regional agencies in charge of implementing most development programs suffer from limitations of poor organizational, structure, inadequately trained staff and lack of autonomy, while the agencies in charge of large-scale irrigation development are better endowed with funds and skilled staff. As a result, despite attempts to shift the investment program towards rainfed development, the review showed a shift of actual expenditures back towards large irrigation (during the 1981-84 perizd, against an initial allocation of only about 40t of the total funds, share of actual expenditures for irrigation was about 53%; the same figures for rainfed programs were 50% and 37%, respectively). 47. Under its agriculture sector adjustment program, the Government's objective is to maximize the contribution to agricultural growth of the reduced level of available funds for public expenditures. This will involve: (a) a strengthening of the investment planning process including the application of specific methodologies for itivestment programming in 1/ MOROCCO: Priorities for Public Sector Investment (1981-85), Report No. 4156-MOR. 2/ Projects which were postponed were: Plaines et Basses Collines in Loukkos (except the flood protection works), Sectors N2/Na in Gharb STI for Large irrigation; Grou and Oued Hachef in modern medium scale irrigation; SURAC II and Loukkos for sugarmills. - 16 - agriculture; (b) the strengthening of implementation capacities fcr rainfed development programs; (c) a redirection of government resources towards support for private investment and technological change in agriculture; and (d) the setting up of institutional mechanisms to ensure adequate funding in the investment budget for maintenance of productive infrastructure. Under its overall adjustment process, the Government is undertaking studies to make reforms in the present budgeting system. 48. Utmost priority has been given to weed out low priority operations to ensure adequate funding and timely completion of essential projects and a significant restructuring has taken place in the following areas: (a) priority funding has been granted to a core group of ongoing priority projects and activities which serve the essential sectoral development objectives (Table 5). This core group, which represents about 55% of the total agricultural investment budget, accounted for over 70% of actual expenditures in 1984; (b) no new projects have been started in 1984, and all budgetary appropriations for new projects (representing about 20% of the total 1984 budget) have been frozen; (c) most low-priority activities and programs,'- accounting for about 20% of the budget but involving heavy recurrent costs, have been slowed down or stopped (general administrative infrastructure, subsidy programs to livestock importers and agro-industries, public farm mechanization services, etc.); and (d) the 1985 Investment Budget has been designed to continue these restructuring efforts: the shares allocated to the key subsectors are consistent with the recommendations for near term allocation by the 1984 Joint Investment Review. While the total allocations to the sector have been maintained in real terms at the 1984 level, for the group of core projects the allocations in 1985 have been increased by 37% by reducing the allocations to the remaining investment budget by 21% (Table 5). 49. The principles established for the future investment programs confirm these policy directions: (a) in the large irrigation program, priority would be given to equipping for irrigation those areas already commanded by existing dams or where the primary distribution infrastructure is already in operation so as to eliminate the backlog of about 60,000 ha of land waiting to be put under irrigation; to place emphasis on low-energy consuming technology; and to limit any new investments to developing irrigation potential in low rainfall zones; (an estimated 200,000 ha or 50% of total remaining potential is in these zones); 1/ Because of their advanced stage of implementation and the availability of a significant proportion of external concessional finance for the remaining expenditures, two irrigation projects in Northern Morocco outside the list of core projects have continued to receive budgetary allocations. - 17 - (b) in the small and medium scale irrigation subsector, priority would be given to the rehabilitation of traditional schemes (30,000 ha) which typically have high economic rate of return, (15-25Z compared to 8-14X for the typical large irrigation projects) rapid production build-up and greater cost sharing by beneficiaries; new 'modern' medium scale projects which have development cost per ha (US$4-7,000/ha) comparable to the large irrigation sector, would be postponed; (c) in the livestock program, components of low priority (public sector fattening units, large breeding farms and slaughter houses) would be postponed, in favour of completing rapidly the investments in vaccine production; construction of new milk collection centers would be postponed in favour of making operational the 38 centers still inoperative, and until the low capacity utlization (55X) of 230 existing ones is improved; programs for diversification of animal feed resources and range land improvement would be expanded; (d) in agricultural extension, investments in building new CTs/CMVs and purchasing additional tractors for the public sector farm mechanization service, would be postponed/abandoned, in favour of investments in greater mobility, upgrading and training of existing extension staff; Ce) in research, investments would be concentrated in a reduced network of 22 stations of INRA, and on selected priority research topics; Cf) in the forestry sector, a reforestation target of 30,000 ha/yr would receive priority funding, and sylvopastorai improvement programs would be accelerated to 10,000 ha/yr; and Cg) operating budgets for rehabilitation and maintance of productive infrastructure would be monitored for their adequacy, particularly for the maintenance of irrigation infrastructure and expenditures of extension activities in rainfed areas. 50. While completing the restructuring of the ongoing investment and expenditure program, the Government intends to initiate a series of actions to improve public investment programming and implementation over the medium term. To strengthen the planning and budgeting process, the Government has requested further assistance from the Bank and discussions are under way regarding improvements in the planning and budgeting systems. With respect to a methodology and criteria for investment programming in agriculture, a major study on options and investment priorities in irrigation development, cofinanced by the Bank, UNDP and the French Government, is nearing completion. This study provides a comprehensive analytical framework for investment programming and priority ranking of projects according to key economic criteria for large and small-scale irrigation. Its initial findings concur with the principles above. For other subsectors, the Government aims to develop similar approaches: major studies are underway in cold storage, dairy production, agro-industry, research and extension, and forest resource management. These improvements in investment decision-making will require a strengthening of the planning and policy analysis capabilities of the Ministry of Agriculture (details of actions are in para. 94). - 18 - 51. The Government has commissioned a study to review its Agricultural Investment Code which establishes its policy of incentives for private investment, and is designing a major reform to improve the selectivity, targetting, institutional channels and cost recovery for existing financial incentives to promote greater private investment in agriculture, such as in on-farm storage, mechanization, and land improvement (details of actions are in para. 88). It is also establishing a stronger analytical base to review the justification for temporary financial incentives for specific agricultural investments, taking into account the existing pricing distortions and programs for their elimination. These efforts are expected to be accomplished by mid-1986. Finally, organizational reforms are proposed (details of actions are in para. 96) to improve implementation capacity in rainfed areas. C. Re-orienting Prices and Incentives Framework 52. Government intervention in agriculture through regulation of foreign and domestic trade, taxes, subsidies, and price fixing has had an important impact on the incentives regime in the sector particularly on resource allocation within the sector, among products and farming systems. The Government is now undertaking detailed studies L' for assessing the impact of various Covernment interventions in the sector. Preliminary analysis by the Bank shows that: (a) overall, the sector has not suffered from excessive negative protection as compared to industry, and the domestic terms of trade for agriculture have not evolved particularly unfavorably relative to the other sectors of the economy; (b) however, within the agricultural sector, relative protection varies significantly, with, on the one hand, a net negative protection to cereals and rainfed farming for which the country enjoys a significant comparative advantage, and, on the other hand, a large net positive protection to irrigated farming, particularly to certain agro-industrial crops, the production of which does not make an efficient use of domestic resources; (c) these distortions, besides affecting optimal resource allocation, have worsened income distribution; and (d) currency overvaluation and trade controls have been major disincentives to agricultural exports and major incentives to imports. Price & Subsidy Interventions 53. Government's price and subsidy interventions in agriculture attempt to satisfy multiple and often conflicting objectives, which are to: (a) provide adequate incentives to producers in order to raise productivity and rural incomes; (b) supply the urban work force with basic food products at low prices; (c) insulate producers and consumers from short-term international price fluctuations; and, (d) raise revenues for Government. These objectives are pursued through fixed producer prices for buying all or part of agricultural output, consumer price controls, input subsidies, charges on public sector services and regulation of foreign trade. 1/ The study financed by USAID under TORs prepared by the Bank is being monitored by a Steering Committee headed by the Minister of Agriculture. The draft report is expected in September '85 (para. 106). - 19 - 54. Producer prices are fixed or supported at minimum fixed levels by selective purchasing by the Government for a number of basic products (cereals, oilseeds, cotton, milk, sugar beet and cane) and have generally been maintained at or above world market levels at the official exchange rate. However, official floor prices for cereals are rarely, if ever, available to farmers (para. 81). Fruit, vegetables and meat prices are not regulated. 55. Input subsidies to agriculture, amounted to about DH 1,150 M (US$118 M) in 1984, of which 30% were for fertilizers, 37% for irrigation water, 18% for animal feed (wheat bran and sugar beet pulp),1' 5% for agricultural machinery and 6% for certified seeds. In addition, subsidies on other conmercial services to farmers in the irrigated areas amounted to about DH 180 million (US$19 million), and subsidies for on-farm investments to about DH 200 million (US$21 million). It is estimated that about 70% of total input subsidies have benefitted irrigated farming systems, which represent less than 10% of the agricultural land and contribute for about 45% of the value-added in agriculture. Output subsidies through price support programs during the same year amounted to about DH 900 M (US$ 95 M), of which more than 80% went to sugar producers and the remainder to cereals (mostly soft wheat) and milk producers. Overall, producer subsidies over the last few years have represented 8 to 12% of the agricultural GDP and roughly 80% have benefitted farmers in the irrigated areas but despite these significant public outlays, the production response has not been satisfactory. Terms of Trade & Relative Protection Patterns 56. Over the last two decades, agriculture as a whole has not experienced extensive negative effective protection when compared with industry and terms of trade have not been turned against the agricultural sector as a whole. Within the agricultural sector, relative protection levels are markedly different among crops and farming systems. The net taxation of cereals production and rainfed fanning result from conflicting macro-economic, food and agricultural policies. The low level of consumer prices for flour has triggered an increase in imports which, given the ineffectiveness of the producer price support program, have tended to displace domestic production. Access to cheap imports, made possible by the fierce competition among major food exporters, has led to actual CIF prices being 20 to 30X below world market prices, and complemented by a overvalued currency, has in the recent past enabled the Government to keep urban food prices down while containing the budgetary impact of a rapidly expanding food distribution program.2/ Therefore, although the level of official producer prices is close to world market equivalents at official exchange rates, actual producer prices are 30-40% below official prices in good production years (para. 81c). Since at the same time the bulk of input subsidies is captured by irrigated farming (para. 55), rainfed cereals production has been consistently penalized during 1/ In the form of price controls and government-managed distribution. 2/ Consumer subsidies amounted to about DH 1,500 M (US$170 M) in 1984, compared to only DH 850 M in 1982/83. This went for the most part to flour and edible oils. This amount is almost equal to total estimated producer subsidies (see para. 55). - 20 - the 1970s;.L/ preliminary estimates of effective protection rates have ranged from -20 to -101 for different cereals, production region and farming technologies, which in view of the average protection in the agricultural sector of about 251, implies a net negative protection in the range of -30% to -451. Similar pattern and conclusions could apply to edible oils, for which Morocco also has a comparative cost advantage. 57. On the other hand, irrigated farming in general and a few agro-industrial crops in particular, benefit from a high level of protection. This result from the high concentration of input and investment subsidies for all irrigated production and of price support programs for sugar crops. Farmers in the irrigated areas have been receiving implicit and explicit subsidies at a rate of about DH 1,600 million per year (US$180M) over the past few years, and sugar producers have captured around 60% of that amount. Initial estimate of effective protection rates for irrigated crops appear well above the average for the agricultural sector, with particularly high levels for sugar beet. In addition, preliminary analysis shows that the country appears to have a comparative advantage in producing irrigated citrus, olives, tomatoes and cotton, though there are serious export marketing problems developing in these crops . 58. Government's market intervention in the livestock subsector through price and distribution controls on certain animal feeds (agro-industrial by-products) also tend to reinforce the relatively high protection of irrigated farming systems, since over two thirds of dairy production comes from the irrigated areas. In addition, the consequences of price and distribution controls of high value animal feed (mostly sugar beet pulp, wheat and imported barley, and sale of imported animal feed often below domestic prices, are: (a) these high value products are wasted when fed to low potential animals; they should rather be incorporated into balanced rations by the domestic concentrate feed industry which now operates at 40Z capacity, basing 75S of its production on imported materials and targeting 95X of this to poultry feed; (b) this is a major disincentive to forage production, since bran and dehydrated pulp are sold at prices per forage unit (DH 1.05) lower than straw (DH 1.20); (c) it reduces the profitability of sugar and flour mills representing a transfer of about DH 220ML' mostly to irrigated area livestock producers; and (d) adverse income distribution effects, since the users who have access to the controlled distribution system are the intensive modern cnits. Conscious of this, the Government has been implementing a policy of correcting the relative prices for feeds, and last increased the price of bran and pulp by 60-80% in January 1984, accompanied by a major rise in consumer milk prices. 59. Trade controls and currency overvaluation throughout the last decade have adversely affected agricultural exports and been a reflection of the general bias towards import substitution. Over the last 15 years, a real term 1/ Estimates for 1984 show that farmers in rainfed sector have been losing a producer surplus of about DH830 M, mostly from subsidization of cereals & edible oil imports. 2/ DH60 M from consumers (sugar) and DHl60 M from rainfed producers (flour). - 21 - decline of 22% the agricultural value-added by exports was associated with a comparable fall in Dihram denominated export prices as compared to domestic producer prices. More realistic exchange rate policies expected to be adopted in the future should help correct this adverse situation. 60. The Government's agricultural adjustment program recognizes that its macro-economic interventions need to be more consistent with the objective to fully develop the potential of the agricultural sector. Since agricultural growth potential in Morocco lies on the one hand in the integration of cereals and livestock production in the medium to high rainfall areas and on the other hand in a more rational use of irrigated land, the primary objective is to steadily restructure the pricing and incentives framework in the sector so as to maintain the overall incentives for agriculture, while making the framework more conducive to faster growth in rainfed areas and to desirable shifts in irrigated cropping patterns, particularly reduced emphasis on sugar production in marginal areas. This objective is grounded both on economic grounds of long-term comparative advantage considerations and growth potential and on equity grounds since incomes in rainfed agriculture are substantially lower than in the irrigated sector. 61. Reduction of excessive protection to irrigated farming systems and encouragement to better use of domestic resources in the dairy sector, would be essentially achieved through gradual adjustments in costs of inputs and services which are preferentially consumed in irrigated farming, so as to bring them closer to their real economic value. These changes would also induce desirable changes in cropping patterns. The changes established in the Letter of Sector Development Policy would involve: (a) the gradual elimination of fertilizer subsidies; (b) fuller recovery of water charges; (c) charging at real cost of the various commercial services provided by the ORMVAs; and (d) the phasing out of price and distribution controls on animal feed (sugarbeet pulp and bran). Government's objective is to eliminate the fertilizer subsidy entirely by the 1989/90 crop year and recent actions have already been taken to increase prices by 35% in 1983 (details of actions to be supported under ASAL are in para. 106). In view of the input-output price relationships prevailing in Morocco of fertilizer use patterns in the country by crop and production system, the elimination of the subsidy is not expected to adversely affect production. First, for productions which deserve to be encouraged (soft wheat), the fertilizer subsidy does not cost less than the output price support needed to achieve a specific expansion of output l'; second, crop-fertilizer price ratios in Morocco are high, and value-cost ratios, which incorporate the factor of crop-responsiveness, are also higher than the threshold levels considered necessary to induce fertilizer use -/ 1/ There could be a case for a limited subsidy restricted to producers of traditional cereals (such as barley) which have a low price elasticity of supply; however, such a targeted subsidization scheme would be difficult to operate. 2/ These ratios fall to more iarginal levels (around 2) for farmers facing high production and marketing risks such as in the lower rainfall areas. It does not seem, however, that the price factor is a primary constraint to fertilizer use in these areas. - 22 - and third, the income distribution effect of the present subsidy is highly regressive, with over 60X benefitting farmers in the large irrigated areas where average incomes are higher than in rainfed areas. As regards recovery of water charges, substantial improvements in their level and automatic increase have been introduced in the recent past and a five-year action program to increase actual collections to reach at least 90S of amounts due and payable, has been developed (details of actions are in para. 108). As for the commercial services provided by the public sector in the large irrigated schemes, government's objectives are to progressively transfer to the private and cooperative sectors all the commercial activities they can manage and gradually reach full costing of the commercial services still to be provided by the ORNMAs (para. 92d). Regarding distortions in the dairy sector, Government's medium-'term objective is to eliminate the intervention on controlling the prices of selected livestock feed by December 1987. This would encourage the development of forage production and storage as well as a better utilization of underutilized low value feeds by phasing out its intervention on the wheat bran and beet pulp market and allowing prices to reflect the real value of these feeds (details of the actions are in para. 107). 62. Parallel with the reduction in fertilizer subsidies, the Government intends to use the resources thus saved to operate a more effective program of price support to rural producers to effectively make available to them at least the prevailing world prices. Provision of adequate incentives to cereals production in the rainfed sector would be achieved by: (a) gradually reducing the magnitude of consumer subsidies on flour and assuring that imported animal feed is sold at or above the floor prices; (b) maintaining official floor prices at levels high enough to induce production and marketable surpluses; and (c) improving the effectiveness of the producer price support program for grains. The consumer subsidy on flour represents the single most important disincentive to cereals production, and although its phasing out is likely to extend over several years, initial steps are being taken. Steps to ensure that imported livestock feeds are resold in the domestic markets above support prices are also being taken. As regards the producer floor price policy, the Government intends to set and revise annually the official producer prices, taking into account two set of criteria: (a) the evolution of world market prices and real exchange rate movements, and (b) the evolution of input-output price ratios at various levels of technology, particularly during the period of phasing out of the fertilizer subsidy. The objective would be to move these prices steadily towards at least the world market equivalents. Actions have already been taken to increase official producer prices by about 20% in 1985. Finally, an effective operation of the price support program is a necessary complement to the above, and Government's medium-term objective is to redesign the present system by expanding the role of private sector in domestic procurement of the marketable surplus of cereals to ensure the availability of the minimum support prices at the farm lev..l and to improve the coordination of imports and domestic procurement (details of actions are in para. 80). D. Strengthening Supporting Services and Rationaizing the Role of Public Sector 63. The agriculture sector is marked by an excessive dependence of farmers on support and marketing services provided by the Government directly or by its agencies. These services operate under inherent constraints - - 23 - financial and managerial - which impair their effectiveness while at the same time, due to inadequate cost recovery policy, discourage the development of alternative sources of supply. Under the assessments made for designing the adjustment program of the Government, restructuration of the role of the public sector is planned to increase efficiency of services, reduce avoidable cost and improve cost recovery in major support service functions. Action programs have been prepared to improve extension and research, livestock services, input and crop marketing, institutional credit and management of irrigation. 64. Agricultural Extension. At present, agricultural extension services do not provide for an adequate transfer of available technology to farmers and need strengthening. Two parallel systems exist, one for irrigated areas as part of the 9 Irrigation Offices (ORMVAs) operating out of 140 field offices (CMVs) and another for the rainfed areas as part of the 28 Provincial Agricultural Directorates (DPAs), operating out of 117 field Offices (CTs). The effectiveness of the general extension services, except for some crop specific efforts, for example in sugarbeet or vegetables, is constrained by: (a) an unfocused organization structure at Rabat under which land reform, cooperative development and crop extension activities are grouped together, and poor management of extension at the DPA where financial resources, technical direction and administrative supervision come from different directorates at Rabat; (b) lack of focus on extension activities, with field level staff devoting nearly all their attention to input supply, mechanical cultivation, production and harvest scheduling and statistical work; (c) lack of technical specialists with the role and expertise to develop simple, effective extension messages"' for extension staff whose number is, in any case, inadequate: Extension Staffing Irrigated Rainfed Number of Offices/DPAs 9 28 Number of Technical Specialists 42 77 Number of "Extension" staff 1,010 910 Ratio Technical: Extension staff 1:25 1:14 Ratio Extension staff: farmers 550 1,960 (d) lack of appropriate training since little on-the-job or pre-service training is available: average in service training period is only 6 days per year in the CMVs and only 3 in the CTs; 1/ Simple low-cost initial extension messages would include improved land preparation to conserve moisture, more appropriate fertilizer for specific zones applications, use of weedicides and better seeds, improved water management in irrigated areas, which together could yield impressive results. - 24 - (e) lack of infrastructure particularly field housing, and mobility: only 351 of the extension staff in the rainfed areas have motorcycles; (f) inadequate operating funds in rainfed areas, funds available for extension activities-L including travel have dwindled to about DR6000/yr per technical staff; and (g) a breakdown of the traditional linkages between extension and research due to major organizational changes in MARA. 65. Given budget constraints, the Govemnment's adjustment program is to strengthen extension activities in three phases. Under phase I to be launched immediately in 28 selected zones, low cost changes would be undertaken in the field organization structure, work programs, mobility and training of available staff. Provision of farm mechanization service by extension staff is to be completely phased out before 1987. Action is underway to appoint head of extension of field of offices and create a team of technical specialists at DPA/ORMVA level, and introduce practical extension training curriculum in the agricultural colleges. Integration of livestock extension and forage production with crop extension is also programmed. Under Phase II, the same approach would be extended to cover all zones by 1987. Under the final phase, new trained extension staff would be recruited to reach an extension worker: farmer ratio of 1:320, housing infrastructure built, and necessary reorganization done at headquarters. Adequate financing for Phase I has been confirmed by the Government (further details of actions are in para. 114), while detailed implementation plans for the last two phases are to be developed by early 1986. Once the essential restructuring of the system has been completed by 1987, linkage with research would be strengthened by training of extension staff at selected research stations and involving extension services in developing research objectives. 66. ARricultural Research. Stagnation of Moroccan agriculture has been paralleled by stagnation in research; the last major research achievement is considered to have been in the mid-seventies, when a few improved wheat varieties were introduced. Agricultural research is dispersed over different institutes, departments, universities, ORMVAs and DPAs. While research in fruits, vegetables, sugar and citrus has been active and successful, little success has been achieved from dispersed efforts in oilseeds, fodder crops, and winter and spring cereals. The national research effort is poorly focused, inadequately funded and coordinated and the few results obtained are insufficiently disseminated. To overcome this situation the Government had established in 1981, an autonomous national research institute, (INRA) and, following a diagnostic study completed by ISNAR in 1984, the Government has prepared a stategy to overcome the constraints which have prevented INRA from fulfilling its important role. 67. Among the major constraints affecting INRA functioning had been the erratic flow of budgetary allocations and high turnover of its staff due to low salaries. Although INRA had been established as a public enterprise in 1981, only since January 1, 1985, has the Government authorized it to be 1/ Including tractor services, input marketing and other functions. - 25 - funded directly from the Ministry of Finance; at the same time, the recent upgrading of its staff to reflect its status as a public enterprise, should help resolve the issue of staff turn-over. 68. The development of national research priorities and the definition of the role of each participating institution in these, is the major task ahead. Under the research master plan, now under preparation, the Government has made arrangements under terms of reference approved by the Bank, for an expert team to develop national research priorities over the next 5 years, ensuring greater focus and selectivity of research activities. The Government's adjustment program also aims to strengthen the system of coordination among institutestagencies undertaking research to reduce waste and duplication and encourage better sharing of research results and setting of research objectives. For this, research agreements would be signed between INRA and individual agencies executing research funded by the Government. Increased funding would be provided for high priority research projects to be executed by various agencies, once INRA's internal reorganization and definition of national research priorities has been completed. 69. To strengthen the system for management of scientific research, the Government intends to complete by 1986 INRA restructuring as recommended by the expert team from ISNAR. The new structure emphasizes scientific freedom and research by objectives, it relies on a system of technical program sub-committees to manage and monitor research programs and aims to reduce multiple administrative control over scientific units. 70. INRA's scientific staff which number 230 are mostly (52%) located at Rabat, while its 65 field stations lack adequate scientific talent to execute research programs; apart from rigid centralized research programming, this results in a poor supervision of research effort due to inadequate operating budgets for headquarter staff. The Government aims to reduce the research station network of INRA to about half to ensure that each station has the critical mass (3-4) of scientific staff and to increase the operating budget available per station. The land in these surplus research stations has so far been devoted to commercial seed production, which absorbs about 30Z of INRA operating budget and staff time. To ensure a sharper focus on research, the Government's strategy is to limit INRA's role to mother seed production only, transferring its other seed activity to farmers or cooperatives already active in seed production (details of the actions are in para. 115). 71. Livestock Services. Government provides a host of livestock services, ranging from essentials like preventive animal health care to commercial activities such as feed distribution. While the good growth in the livestock production of recent years is partly attributable to this expanded service network, the budgetary burden has reached such levels that financial uncertainties have begun to affect the quality of service: use of AI services has dwindled from 43,000 to 34,500 and natural service from 32,400 to 26,700 between 1977 to 1983. Recognizing the impressive growth achieved in the poultry sub-sector after the liberalization of the industry, including support services, the sector adjustment program emphasizes the transfer to the private sector and cooperatives of those Government services which they could provide effectively; specifically, health services, breeding services and feed prices (the last is discussed under Prices in para. 58). - 26 - 72. Animal health services, which take up 20% of the Livestock Department's operating budget are thinly spread: each agent covers 25,000 heads of sheep and 6,000 cattle for both preventive and diagnostic treatment. No parallel private service is permitted. Although the unit costs per animal theoretically covered are reasonable (DH4.30 head/yr) considerable improvements can be achieved in current high mortality of the young (12%) and the adult (6%), in low fertility (55%) and other technical parameters (average production per lactation of 530 liters). The Government' adjustment strategy is to establish a system under which private veterinarians are able to work under contract with the Government to provide the essential preventive services while undertaking, on a full cost recovery and competitive basis, individualized animal health care for livestock raisers. Availability of necessary medicines in the open market is assured. The Government has already established the legal framework for the system, fixed fee levels for contractual services and assisted veterinarians, particularly the 40 new graduates produced each year, to sign up. Based on the initial response, it is expected that a country wide system could be establishled by 1989. 73. Government breeding services are offered free of charge. Artificial Insemination (AI) services which are provided from 24 sub-centers by 62 inseminators have, after an initial growth, faced a decline and now represent barely 20% of the annual matings even for the 115,000 pure bred cows. Budget difficulties have reduced the operational flexibility to provide timely, on-the-spot services and the average cost of each AI has reached DH340 while commercial services, in irrigated areas, have been demonstrated to be viable at half this cost. The Government's sector adjustment program aims to transfer all artificial insemination services to livestock groups or cooperatives, and to develop by then a pilot program to also transfer some of the natural service centers, primarily located in remote rainfed areas. Meanwhile, the program to import catttle for production purposes has been terminated in 1985 (details of actions are in para. 112). 74. Fertilizer Marketing. Since 1974, after upheavals in the international fertilizer markets following oil price increases, the Government has regulated the import and domestic trade, has participated directly in domestic marketing through FERTIMA, a state-owned company and has subsidized fertilizer use (para. 55). FERTIMA has played a useful role in developing the domestic market from 160,000 nutrient tons in 1974 to 287,000 nutrient tons in 1984, a growth rate of 6%, just below the average for the mediterranean basin countries. However, the consumption at 33.5 kg/ha of arable land is still below the average of 122 kg/ha for the mediterranean basin countries. Because irrigated areas benefit from well developed arrangements for adequate and timely supply of inputs through the ORMVAs (para. 90), roughly 50% of the fertilizer consumption is on 700,000 ha of irrigated lands, concentrated on sugarbeet, fruits and vegetables. For the rainfed areas and basic cereal crops, the present retail distribution system is not as effective. 75. FERTIMA's import monopoly, its monopoly over the domestic sale of locally produced phosphate fertilizer, its simultaneous involvement in wholesale and retail trade, and the system of fixed distribution allowances: these factors have led to an increase in FERTIMA's proportion of total sales to 55% in 1983 from 42% in 1980. These factors have also discouraged private sector from developing a wide distribution network, led to a shortage of - 27 - storage downstream, closer to the user-' and left many farmers without assured and timely access to fertilizer. In addition, a review of the operation of FERTIMA's 250 remaining retail outlets, shows that costs of providing the infrastructure and staffing required for the operation has become much higher (12Z of final price) compared to a 52 margin normal in the trade, and are no longer justified in areas where fertilizer use has become well established. 76. Regarding the management of fertilizer import and wholesale distribution, the Governmenit objective is to adequately meet the evolving demand for fertilizer and adjust quickly to any changes in international markets. The Government intends to gradually put the public and private sector on an equal fouting as regards import procurement, distribution as well as the responsibility holding of national security stocks in view of wide variations in demand from one year to another. To avoid a disruption of supply while maintaining a steady transition to a more competitive market structure, two essential measures have recently been taken. First is the establishment of a formal coordination mechanism with private sector blenders and distributors for scheduling and delivery of imports; second is the creation of a special allowance (1% of the reference price) to encourage the maintenance of security stocks. The latter accompanied by medium term credit would also encourage downstream storage construction. The Goverment is also evaluating the advantages of permitting direct imports by private sector over the present system of coordinated contracting for imports and exports through FERTIMA, and its parent company OCP, once fertilizer subsidies are eliminated (para. 61). 77. Government strategy is to strengthen the retail level distribution system, particularly in the rainfed areas, by withdrawing FERTIMA and encouraging greater private sector participation. To this end, FERTIMA's retailing would be limited to areas where the market requires further development before commercial operations can start. Outlets located in zones, where private sector retailing has become established (2 retailers in a commune) and where, as a result, FERTIMA's volume has reduced to less than an average of 3OT/yr, would be closed down (details of actions under ASAL are in para. 116). To ensure adequate profitability for the private sector, Government's aim is to eliminate the system of uniform margins, and deregulate domestic marketing once subsidies are eliminated. Meanwhile, to ensure appropriate incentives to private traders to expand their operations, distribution margins have been raised by 40% since September 1983 and an indexation formula for their regular revision has also been developed and was used in De-ember 1984. Analysis of the investment and operating costs of a typical retail operation show that the new margins (which work out to about 13% for the typical private operator) are adequate. 78. Seed Production & Marketing: Production or import of seeds znd planting material for most industrial crops is already in the private sector which operates reasonably efficiently. For cereal and some forage crops the production and marketing of certified seeds is carried out, as in many developing countries, by a public sector seed company (SONACOS). Its output 1/ 80% of total storage capacity is located at points upstream of the provincial headquarters. - 28 - meets only about half of the effective demand, particularly for hard wheat and barley. SONACOS contracts for multiplication of basic seed produced at the National Agricultural Research Institute (INRA) (para. 66) with private farmers and cooperatives, and distributes the certified seed through a network of 12 regional centers and 300 retail points. SONACOS's inability to meet full domestic demand is largely due to the shortage of farmers able to meet the strict regulations-! which govern contractual seed multiplication. In addition, given the budgetary contraints, the present subsidy policy (under which seed producer prices are fixed 25% above official cereal prices, and the price at the seed user level is subsidized on average by about 17%), does not permit an expansion of seed production. The rigid administration of the subsidy policy also leads to situations in many years, when seed is priced lower than grain so that certified seed gets consumed as grain. 79. The objective of the adjustment program is to focus the research effort towards the selection for introduction in Morocco of improved seed varieties developed elaewhere for similar conditions, to increase the vclume of cereal seed marketed to meet demand and to encourage the marketing of seed jointly with other inputs. Actions have already been taken to transfer multiplication of foundation seed from INRA to other agencies (para. 70) and to reduce the subsidies to cereal seed users for 1984/85 by about 20%; the latter is a part of a program to gradually phase out the remaining subsidies, by holding the budget allocations in current terms at the levels of 1984, except for some specific varieties adapted to high risk regions. The adjustment program also envisages a more flexible management of the remaining subsidies according to conditions in the grain market, and actions to facilitate an increased volume of contractual seed multiplication. The Government also intends to encourage greater retail level marketing of seeds with other production inputs using the private sector as appropriate. 80. Cereals marketing. The cereals marketing system is characterized by a heavy Government intervention for cereals subsidized at the consumer level: the public sector handles 36% of the total availability of cereals. Imports play an important part, accounting for 30% of the total availability. A public enterprise (ONICL) has the monopoly of organizing imports through 12 licensed traders. To protect domestic producers from the effects of depressed market prices due to subsidized consumer prices, the Government operates a system for domestic price support, also through ONICL which on average buys about 350,000 tons of cereals (about 10% of the crop) from the domestic markets at fixed prices. The proportion of the domestic production purchased by ONICL has increased from 5% in 1976/77 to about 14% in 1982/83. Most operations are concentrated on soft wheat of which ONICL buys on average 37% of the domestic production, while only 5% of other cereals are purchased. Purchases are made through 100 buying points handled by largely Government-run cooperatives (SCAM-CMAs) and through about 60 licensed private traders. Soft wheat is milled on Government account by private millers, who sell the flour at a fixed retail price, involving a consumer subsidy of about US$130 M ox 52% of cost (para. 56). For other cereals, imports are undertaken for livestock feed, but are often sold to users and few mills at prices which heve in the recent past been below domestic market prices (para. 58). 1/ Farmers must be land owners or hold longterm leases, must grow cereals on at least 20 ha in rainfed areas and 10 ha in irrigated schemes and have equipment for initial seed treatment. - 29 - 81. Although the level of floor prices set by Government for producers has generally been satisfactory (para. 54), the present marketing system does not assure the availability to producers of established floor prices, particularly during good production years. In 1982, which was a normal crop year, in three regions of the country out of four, the prices of soft wheat on the rural markets were known to have been consistently 30 to 401 below the official floor prices for up to nine months of the year. For barley ln 1983, when production was 351 below the 10 year average, the nationwide year-around average price at the local market was 12.5% below official prices and for maize it was 151 below. In regions with the best potential for growth, average year-round producer prices were below established floor prices. A' Major reasons for this are: (a) the effect of the subsidized food distribution program on the free market priccs for cereals (this aspect is discussed fully in para. 56); (b) a lack of coherence between the price support objective and the actual programming of imported and domestic procurement, given the overriding priority for maintaining urban supplies of flour. Import programming has become quasi-automatic because of constraints in pcrt storage capacity and increasing dependence on concessional imports over the scheduling of which the Government has little control. Given limited storage capacity (651 of average annual handling of grain), domestic procurement is treated as a residual. In addition, since ONICL is allocated a limited budget to carry out the Government's subsidized food policy, this bias against domestic procurement has long been reinforced by currency over-valuation and access to cheap imports (para. 56). (c) administrative rigidities in the domestic trade regulations which prevent millers' from buying soft wheat directly from farmers and traders as well as the system of fixed margins for the domestic price support purchasing and processing services. These margins have not been revised since 1980 and are now 151-50% below cost for different cereals while handling margins cover only half of estimated costs. As a result, less private traders are willing to participate in ONICL's program, the domestic collection network has contracted, and their share of soft wheat domestic procurement has decreased from 501 to 33% between 1975 and 1983. In addition, more than two-thirds of the private storage capacity has been gradually transferred for handling imports in the urban coastal corridor. Even for the Governmenit operated SCAM-CMAs, the proportion of purchases they make at the local markets has declined to 10% in 1983, thus limiting the impact of the program to large farmers who can bring their produce to the main collection center to benefit from the official floor price; 1/ In 1982, nine zones out of 11 reported average year-round prices 10-30% below in case of soft wheat and barley. Since peak market arrivals are in 3-4 months, the price available to medium and small farmers immediately after harvest in the producing regions would be even less attractive. - 30 - (d) for other cereals, which do not involve large imports for urban consumers, too small a proportion of the crop is purchased by ONICL to affect market prices, and there is a critical absence of a system of coordinated management of imports, national buffer stocks, and incentives for on-farm storage to reduce peak season arrivals. 82. Under its adjustment program, the Government intends to develop before June 1986 an operational plan to improve the effectiveness of the price support program for all cereals. Analysis of the impact an the budget of a more active domestic procurement program (Table 6) has demonstrated that the budgetary impact is quite minimal. Increasing the proportion of domestically purchased soft wheat to 20% of the target availability of 2 M/ton, in a year good harvest from 5% in a year of bad harvest would increase the cost to the Treasury about DH 160 M. This level of additic'.dl expenditure wculd be comparable to the likely savings expected from the reduction in fertilizer subsidies (para. 61). The operational plan is expected to have the following features: (a) establishing a system for fixing producer support prices which takes into account not only production costs, but also cost of imports and overall price movements (para. 62); (b) introducing an integrated system of food planning under which import, domestic procurement and storage operations are treated as essential components of a food production system; improved monitoring of production and stock trends, and regional and seasonal producer prices would be needed; and imports would be l ..ked Lo domestic production and procurement, not only in the overall programming but also by developing a system of import entitlements for millers linked to domestic purchase; (c) reducing the administrative restrictions which reduce the participation of private traders in the domestic buying program (specifically giving mills the freedom to buy soft wheat from any intermediary thereby eliminating the need to establish margins and reducing licencing requirements to expand participation); (d) encouraging actions and policies which would permit farmers to hold grain off the market during the period of peak arrivals immediately after the harvest (these would include extending medium-term credit for storage, permitting longer roll-over period for short-term farm credit, expanding the financing of stocks and introducing seasonal price differentials in official prices); (e) examining the feasibility of exporting or establishing buffer stocks for cereals like barley and maize in good harvests; for these cereals, it would also be necessary to ensure that imports are not sold at below the official floor prices, adjusted for marketing and storage costs; (f) bringing the procurement system closer to the farm by encouraging the formation of farmer cooperatives to operate collection, storage and milling facilities to help farmers take advantage of the floor price support program. To this end a reorganization of SCAM/CMAs would be needed, including the transferring of their secondary centers to local cooperatives. - 31 - 83. Technical assistance needed for the development of this operational plan and for stret.gthening the planning, programning and market monitoring capacity of ONICL is being organized (details of actions are in para. 119). In the short-term, the Government aim is to avoid further deterioration of the present system by restoring the viability of the domestic price support purchasing activities of existing private sector traders and cooperatives. 84. Milk Marketing. After a period of sustained growth in the production and consumption of milk in the country, the dairy sector is now confronted with major adjustment problems. This is a result of the elimination in 1981/82 of consumer subsidies when prices were increased by 60%, of improved producer prices, and of an expanding network of cooperative milk collection centers. The industry now processes a record 402 of total domestic production and with the supply in the peak season being almost double that during the lean season, an estimated 20,000 tons of milk (or 8% of total milk processed) were refused for processing during 1983/84. However, structural problems led to imports by the industry that year of 500,000 tone equivalent of fresh milk despite reduced per capita consumption of 53 liters iL; 1083 compared to 71 in 1979-'' 85. Government controls over the dairy sector take the form of fixing producer prices, specifying milk products which can be marketed, fixing tariff levels against imports and licensing processing capacity. Government's past policy, given large consumer subsidies, had been to encourage imports of cheap milk powder and butter by the industry to make milk products to complement inadequate domestic supplies. Therefore, besides producing pasteurized fresh milk for immediate consumption, the industry specialized in making profitable milk derivatives, while sale of reconstituted milk was banned. The domestic processing industry is thus unbalanced, with a capacity to make long duration products from the seasonal excess of the winter limited to 15% of its total capacity compared to an international norm of 65X. The present tariff structures cannot assure the financial viability of domestic production of long conservation commodities by the small-scale plants which exist now, given the prevaiiing and often subsidized import prices. With structural surpluses building up during the peak season, the Government's Sector adjustment program envisages measures to encourage a better inter-seasonal distribution of production, to minimize the need to produce long conservation commodities, nnd to achieve the minimum necessary balancing in the most efficient manner. 86. As a first step, the Government has increased in January 1985 the seasonal producer price differential from 10 to 177 and a further increase to 25% would be implemented depending on the effect of the increase on the inter-seasonal supply patterns. Other measures to help reduce seasonal supply variations are the gradual elimination of price controls on high value animal feed (para. 58) and extension programs for forage production (para. 65). In addition, restrictions on making low fat milk are to be eliminated to improve domestic butter supplies. The Government also plans to ensure that the remaining structural excesses can be absorbed by the industry to reduce imports and processed into derivatives, at the lowest possible economic cost. 1/ Per capita consumption is 26X below the average for North African countries. - 32 - This would include the setting up of units of the appropriate size to benefit from the significant economies of scale which 'icist in the industry and the use of technological alternatives to powder making such as UHT milk. In the near term, revenues available from the sale of milk powder donated by the World Food Program would continue to be used to encourage cooperatives to operate their existing small-scale balancing capacity and accept aLl of farmers' milk. Close monitoring of the export policies of major dairy surplus countries would be undertaken, since increases in international prices of butter or milk powder would, in the medium term, make domestic balancing more profitable without the use of the existing anti-dumping legislation in Morocco. 87. Marketing of Agricultural Exports. Until recently, public sector involvement in marketing of agricultural exports through the State Marketing Board (OCE) has been significant, with private firms allowed to initiate market surveys and contacts with buyers, but contract negotiation and implementation including transport, marketing and quality control were carried out by OCE. In addition to currency overvaluation, non-price factors such as trade controls, have been in the past major disincentives to agricultural and food exports. As part of the industrial and trade policy adjustment program developed with the assistance of the Bank, the Government has abolished in 1984 the export monopoly of OCE for processed food exports, with OCE remaining responsible for quality control. Export licensing has been abolished for most agricultural products (except subsidized commodities) and a study of the future marketing arrangements for exports of fresh vegetables and fruit is scheduled for completion in 1985. 88. Institutional Credit. Greater reliance on private investment through institutional credit as opposed to direct public sector investments, continues to be a key element in the Government strategy. Private investment now accounts for about 40% of the total investment in agriculture, 50% of which is associated with lending by CNCA, the national agricultural credit bank, which now handles more than 60% of the total agricultural lending. With direct public investment concentrated in the irrigated perimeters (para. 44), the development of rainfed areas has relied heavily on institutional credit and roughly 65% of CNCA lending is targetted in these zones. 89. The Government's medium term strategy, developed jointly with the Bank in the context of ongoing project activities, particularly the Vth Agricultural Credit Project (Ln. 2367-MOR), aims to assure that CNCA lending continues to encourage greater private sector participation in agricultural development, specific attention being directed at five areas. First, wherever feasible, investments presently financed by the Government budget are to be progressively shifted, through use of institutional credit, to private ownership. Prime candidates would be investments in on-farm and market level storage, commercially viable agricultural support services, farm mechanization, investments in field irrigation facilities and agro-industry. Key instruments to achieve this shift would be the termination of public investment programs in these areas, extension of CNCA credit program to replace them and restructuring of the current system of managing investment incentives.t- Secondly, a review of the present system of establishing 1/ A study to revise the Agricultural Investment Code is set for completion in December '85. - 33 - farmer credit ceiling is underway to ensure that loans are made on the basis of the production potential and viability of the investments rather than be decided based on low and unreliable declared fiscal incomes. Under the present system, average lending per borrower in 1983 was 2,500 DH, representing an investment of only DH 400/ha. Thirdly, access to institutional credit in rainfed areas is to be improved: presently it is limited to about 280,000 borrowers, roughly 25Z of potential borrowers, compared to nearly 60% of potential borrowers who are reached in irrigated areas. To correct the imbalance, emphasis is to limit the expansion of CNCA's physical network to the rainfed or newly irrigated areas and to open temporary seasonal credit outlets, sixty of which operated in 1983/84. Access to credit is also constrained by a lack of documented title to land. fragmentation of holdings and insecurity of tenure, initial action on which is included in the sector adjustment program (para. 97). Fourthly, action is to be taken to reduce CNCA's dependence on Government resources. In 1983/84, only 17% of its resources were raised through its deposits even though they have increased by 22% each year during the last decade. Specific actions contemplated involve autonomy to CNCA to plough back its profits, greater diversity in financial services offered to clients, motivating staff for more intensive deposit mobilization activities and raising interest rates on deposits.-I Finally, the objective is to increase the diversification in CNCA lending to fill the gap in financing of labor intensive, low cost rural industry which is not presently catered to by existing institutions under the Ministry of Industry. Action has started to strengthen CNCA's capability to undertake assessments of rural industry potential, particularly in the productive Meknes area. In addition, there are plans to assist potential enterpreneurs in linking up with potential markets with prime attention to storage and marketing infrastructure, small scale flour milling, decentralized sugar production, slaughterhouses, oil extraction, and food processing for exports. Technical assistance for this effort is being organized (para. 120). 90. irrigation Management. The nine existing ORMVAs have played a key role in promoting the development of irrigation. They provide a wide range of services: supervision of land consolidation, design and construction, operation & maintenance, applied research, extension, input distribution, credit supervision, production planning & marketing. As their coverage and operations have expanded, internal management deficiencies have begun to show. In addition, the increasing supervision and control exercised by the Government as their dependence on the Government budget has increased, has adversely affected their ability and operational flexibility to provide efficiently these wide range of services. The total financial support provided to the ORMVAs by the Government has increased steadily from DH140M in 1977 to DH250M in 1983 (a 45Z increase in real terms), and on the basis of area irrigated, it is now 875DH/ha compared to 420DH/ha in 1977 (a 20% increase in real terms). 91. With recent increases, the level of water charges is now adequate to recover 1007 of O&M costs in gravity systems and about 65% of O&M costs in sprinkler systems, the latter covers 20% of the irrigated area. Land betterment levies now cover 307 of the investment costs in newly developed 1/ Recently increased by 2% in April 1985; overall interest rates for lending are positive. - 34 - systems. However, recovery of water charges due for collection has fallen behind to only 43% of total amounts due in 1984, though in some perimeters it is close to 100Z. The actual collections represent only a third of the ORMVA recurrent budget increasing the need for financial support from the Government. Given budget constraints, virtually 85S of the available budget is now accounted for by staff salaries, leaving little to purchase spare parts and undertake maintenance. In recent years, operation and maintenance expenditures have been only 652 of those estimated as needed for adequate operation and maintenance of the network. Lack of spending authority at the field level to undertake urgent maintenance work is also a constraint. Overall water use is about 80% of potential but in some perimeters it is as low as 40X. Cropping intensity has steadily increased to 982, but remains below the average potential of 130%. Crop yields have increased steadily, particularly in the older perimeters, but they are still 70-100% below levels achieved in the best perimeters (pg 13, footnote 2). 92. The Government's sector adjustment program aims to improve the operation ai.d management of large irrigation and involves adjustments regarding the role of the ORMVAs, the system of supervision by the Government over them, and actions to improve their financial viability and autonomy (details of key actions are in para. 110). These adjustments would be implemented for all ORMVAs at a pace appropriate for each; an action program for each ORMVA to implement these adjustments is being developed. The main actions would be as follows: (a) reduction in the administrative and financial control of the Government over the ORMVAs to expedite contracting by revising upwards the limits for review of contracts at Rabat; regularizing the flow of financial resources, establish revolving funds to undertake urgently needed maintenance to introduce a system of contractual maintenance; (b) establishment of a system of medium-term 'contracts' with the ORMVAs', under which overall objectives, resources available and performance indicators would be fixed. This system would permit greater autonomy for effective execution and maintenance. The system would be introduced in the first ORMVA by June 1986 for further expansion if justified after an evalution in 1989; and (c) actions to improve the financial autonomy of the ORMVAs, involving the introduction of user charges to gradually recover the full cost of those commercial services provided by them, while transferring to others those for which private sector or cooperatives are ready; and (d) action over 5-years with the objective of improvement in overall recovery levels to 902 by 1989 (Table 4); the Government's objective is by 1990 to reduce to half the total budgetary support to the ORMVAs (to about DH125 M in constant prices), and to assure that by then at least 3 ORMVAs are financially self-managing for their activities in the irrigated areas. E. Building Institutional Capacity aDd Resolving Structural Problems 93. Management of the adjustment process over the next five years would not only affect the role of the state enterprises and the departments of MARA, but also would necessitate a review of the structure itself. Major weakness - 35 - that have emerged during recently completed assessments, relate to policy planning and analysis capacity, extension organization and field implementation in rainfed areas. In addition, a start would need to be made to deal with structural problems relating to increased land productivity and protection of the natural resource base. 94. Policy Planning and Analysis Capability. A primary reason for the stagnation of the seventies and early eighties - in addition to the effect of droughts - has been the inadequate adjustment of policy instruments and expenditure decisions in response to changing economic environments. In recognition of this weakness, the Government created in 1981 within MARA a separate Directorate of Planning and Economic Affairs (DPAE). To meet the challenge of the adjustment process, DPAE needs to be strengthened in areas of policy analysis, investment analysis and project monitoring and evaluation - all three of which fall under its ;arisdiction. In addition, the various technical Directorates of MARA are all also in need of improvements in this area. 95. So far, Government has used a task force approach, with a major involvement of the Bank, to design the medium term adjustment program in agriculture. To maintain the momentum of the adjustments, increased capacity of MARA is needed to monitor, analyse and make effective interventions to ensure that there is greater policy consistency of MARA decisions regarding investment priorities and incentives. The Government strategy in this regard consists of four components. First, is to build up the capacity of DPAE, by making use of available technical assistance from USAID, focussing this effort on improving the statistical data base; secondly, to use the new FADES/FAO assistance to selectively strengthen DPAE's own role in investment programing, expenditures monitoring and project evaluation; thirdly, to appoint economists in key Directorates, by reclassification of existing technical positions, and start suitable training programs for existing staff; finally, to create a team of qualified staff for major policy work starting with the policy analysis emerging from the prices and incentives study, (para. 52). For the last, Government has decided to establish a new company owned by the various para-statals associated with MARA, to work under contract for special studies and assignments. Some of the key policy analysis it is expected to focus on would be: (a) Evolution of input-output price ratios for the major commodities and production systems and setting up of a computerized monitoring system in the Ministry; (b) Evolution of relative prices for cereals/livestock products; (c) Comparative financial and economic viability of irrigated productions; (d) Development of national accounts ..or agriculture; - (e) Measures of supply elasticity for the principal commodities produced; (f) Comparative viability of the investments in irrigation (large scale, modern and traditional small and medium scale); and (g) Cost benefit analysis of the provision of principal services by MARA (animal health, genetic improvement, mechanization, etc.). - 36 - 96. Field Organization of MARA. The recognition of the need to review the overall structure of MARA in the field is not recent. Important changes are needed to improve the field implementation capacity in rainfed areas because, despite the declared priority for these areas and initial allocation of funds reflecting those priorities, actual performance of the DPAs in executing the allocated tasks has been poor, in particular for agricultural extension and small and medium scale irrigation. Difficulties relate to the vast number of DPA's, their internal organization structures which are amorphous, parts of which are controlled by different directors at Rabat, and which have little financial and operational autonomy. The Government's medium term adjustment program aims to build around the ORMVAs to augment the overall field implementation capacity. The Government has decided to expand the ORMVA's formal developmental responsibility to the surrounding rainfed areas, thus benefitting from their better operational flexibility, improved staff capability and better staff motivation. Virtually 80% of Morocco would be covered this way and for the remaining areas, the Government plans to establish three new Offices in 1988, once the expansion of the area of operation of the existing 9 ORMVAs is fully implemented. With these changes, DPAs would be linked to the ORMVAs as field offices and the CTs would take on a role comparable to the CMVs. Funding of the development activities in rainfed areas through these ORMVAs, integration of DPA staff and establishment of medium term development programs for the newly associated areas remain the major tasks to be accomplished in the medium term. The enabling legal framweork has been established by a Decree issued in March 1985 and a MARA task force, headed by the Secretary-General, is now monitoring the implementation, during 1985, of this major reform of field crg.rnization. Structural Constraints 97. Agrarian Structures. The land tenure situation in Morocco represents a structural constraint to agricultural growth. This resullts from (a) skewed land distribution patterns with 802 of the farms having 5 da or less and 12 more than 50 ha, representing 25% and 20% of the cultivable land respectively; (b) an extreme fragmentation of the holdings which affects their viability (average plot size is 0.6 ha); (c) a lack of documented land titles with adverse consequences for access to credit and incentives tr invest on the farm; (d) a lack of security of tenure for tenant farmers; (e) a high incidence of absentee land ownership and a consequent unde--use of resources, and (f) poor management and over-exploitation of collectivity owned lands. These problems are most acutely felt in the rainfed sector, where little effort has been made except as part of a national cadaster program. Government's efforts have so far been concentrated on the redistribution of land regained from foreign settlers and the development of a legal framework for land transfers for the irrigation schemes. In the latter, extensive land consolidation and titling programs have been completed (about 460,000 ha) or underway (275,000 ha). While a regulation of land leases and a more comprehensive legal framework for land transfers would benefit the entire rainfed sector, it is estimated that economically justified consolidation programs could be envisaged on up to 0.5 million ha in the high rainfall areas. 98. The Government's medium term adjustment program recognizes that the potential for improvement of land structures and more rational land use in rainfed agriculture is substantial. As a result, extension of the comprehensive land policy alresdy developed for irrigated areas into the rainfed sector at a pace consistent with the social realities of the rural areas has become a priority for the agricultural sector. - 37 - 99. The first element of the Government strategy is to continue the national cadastre, linking its activities more closely to the future land consolidation operations, to prepare a complete statistical data base on farm fragmentation, parcelling, distribution of ownership, and land tenure status including the collective lands, and start work on value mapping based on the potential of the land. Actions are already underway regarding the national cadastre and on the establishing the statistical data base, funded partly through ongoing Bank-financed projects. The second element is the constitution of economically viable production units through land consolidation schemes and establishing guidelines for farm restructuring and transfers based on viability thresholds. The third element concerns improved security of tenure for which legislation which would codify the relationsnips between lessors and lessees in agriculture, has been developed for review and finalization before 1986. The Goverment has prepared draft legislation based on the experience gained in the irrigated areas specifically related to these broad objective and aims to complete its review and finalization before 1986. These new policy instruments would lead to the setting up of a land agency, a general zoning of agricultural land and execution of land consolidation programs in promising rainfed areas. 100. Conservatiun and Renewal of Natural Resources. Morocco is confronted with a situation of rapid deforestation, decreasing productivity of forest rangeland and growing erosion damages. The country's forest resources of 8.6 M ha are declining at a rate of about 20,000 ha per year, while erosion damages result in the permanent loss of arable land and dam siltation, the latter through loss of storage capacity is estimated to cost the equivalent of the production of about 6,000 ha of irrigated land per year ($7M). The net wood trade balance deficit has reached significant levels (about $50 million p.a. or 10% of agricultural imports) with domestic production only providing 30% of demand. A rational management of forest resources is constrained by a number of factors. First is a lack of planning for forest resources leading to sub-optimal use of existing resources. As of 1984, only about 25% of the forest areas had been subjected to detailed inventory and mapping and only about 15% of Morocco's forests currently have a management plan. Second is a general over-exploitation and over-grazing resulting from increasing pressure of rural population and cattle on forest areas for fuel wood and fodder. Third, is a poorly funded reforestation program partly resulting from inappropriate financing mechanisms. Although the National Reforestation Plan of 1979 concluded that a program of 40,000 bs/yr was technically and economically feasible, due to budgetary constraints, the annual reforestation has been about 15,000 ha for the 1980-83 period. As part of its medium term adjustment program, the Government is taking several actions to address these major constraints. 101. A Landsat-based inventory is scheduled for completion by 1985 and will complement ongoing studies of resource management. Under ongoing projects, special pilot projects are being developed to improve management of rangeland. This is based on the recognition that problems of over- exploitation can only be solved gradually through a community-based approach, using pilot approaches to integrate operation of different Government agencies. Finally, the financing mechanisms for reforestation are being reviewed for their adequacy, as well as for the timeliness of the availability of fund to match the seasonality of reforestation activities. To raise additional resources, the Government is considering to bring about a parity between the local wood and imports by placing a parallel 5S tax on the - 38 - imports; this would comipare with a present tax of 10% on local wood auctions. Combined with closer monitoring of the use of reforestation by the communes of the 20X of their forest revenues they are obliged to do, the Government aims to assure adequate funding and management, within the overall sector investment priorities, of a reforestation program of about 30,000 ha/yr. The improved timeliness of Government funding would be achieved through greater use of the National Forestry Fund, which is replenished by the local tax revenues. V. THE LOAN A. Origin and Objectives 102. The purpose of this Loan is to provide the financial and technical support to the Government's sector adjustment program described in Part IV. In late 1983, the Ministry of Agriculture (MARA) in a letter to the Bank, spelt out the outlines of a program for policy reassessments and development of adjustment measures to overcome the stagnation in the agricultural sector. A request was also made for consideration of an Agricultural Sector Adjustment Loan. In March 1984, MARA completed a review of the implementation status of its action program which demonstrated its commitment to design and implement a meaningful program of sector adjustments. Three Bank missions visited Morocco during the period July 1984 to January 1985, and assisted in the preparation of, and finally appraised, the adjustment program. Negotiations took place in Washington between April 29 and May 10, 1985; the Moroccan delegation was led by Mr. M. Sahel, Head of the Investment Budget Division of the Ministry of Finance. A delegation of the African Development Bank attended the negotiations as observers. 103. The agricultural adjustment program of Morocco, in the Letter of Sector Development Policy (Annex IV), covers a period of five years of which the proposed Loan covers actions to be taken during an initial 18 month period. The proposed adjustments cover the entire range of agricultural activities, but, given the need for further analysis to develop the specific adjustment measures in certain areas, the pace of progress in all sub-sectors is not uniform. It is the intention of Government to give priority to complete the necessary studies and analysis to accelerate the progress in those areas where further actions are needed to complete the adjustment program. B. The Action Program under the Loan 104. The agricultural sector adjustment program involves a series of actions over the next five years which are summarized in Annex V, and are based on detailed action plans in each major area/sub-sector (see the Technical Support Volume). The detailed action plans will form the basis for monitoring the implementation of the overall program as well as of the specific measures to be taken in the context of the Loan itself. A review of the implementation of the entire adjustment program would be undertaken at the time of release of the second tranche of the Loan. Under the Loan, selected measures which would be crucial to the overall process of adjustment would be closely monitored, being linked to the release of two tranches of the Loan. - 39 - These specific adjustments are discussed below and include actions on review of public expenditures, initial adjustment in the prices and incentives framework, improvements in agricultural support services and marketing and improved operation of the floor price support program. 105. Restructuring of Public Expenditures. The emphasis would be on the monitoring of the overall sector and subsector allocations as well as of budgetary appropriation and expenditures for key priority projects and activities within the major subsectors (Table 5). DPAE would play a crucial role in this monitoring, using the new computer based system linking the data base of MARA with that of Ministry of Finance. In order to maintain and deepen the ongoing dialogue, it is Government's intention, confirmed in the Letter of Sector Development Policy to undertake joint reviews of the public sector investment and expenditure program with the Bank. The next such review is planned for September 1985. 106. Prices and Incentives Framework. Under the Loan, a first set of adjustments in the pricing and incentives framework to reduce existing distorsions within the agricultural sector would be implemented. In addition, the on-going agricultural prices and incentives study (para. 52) would be completed and submitted to an Interministerial Commission for review of its major conclusions and policy implications by June 1986. Assurances were obtained at negotiations that the final report, with the views of the inter-ministerial commission, would be provided to the Bank before June 1986 (Part 1, Schedule 4 of Loan Agreement). 107. Specific actions for adjusting the prices and incentives framework to be taken within the timeframe of the Loan would serve the purpose of redressing the imbalanced protection pattern within the sector and would include fertilizer and livestock feed price increases, adoption of a phased program for improved collection of water charges, and development of a methodology for setting and maintaining target producer prices for cereals at adequate levels. The Government has resolved to eliminate the fertilizer subsidy by the start of the 1989/90 crop year. Assurances were obtained at negotiations that in order to complete its program to eliminate fertilizer subsidies by 1989/90, the Government would undertake two fertilizer price adjustments before June 1986. First, as a condition of Loan effectiveness, the Government would increase the weighted average fertilizer unit reference prices by at least 15% according to a methodology agreed with the Bank-' (Part A.1 of Schedule 5). A second increase of at least 20% would be a condition for the release of the second tranche (Part B.l of Schedule 5). The Government would also take further steps to eliminate the adverse effects of the present controls on the distribution of selected livestock feed materials. As a condition for the release of the second tranche, the ex-mill prices charged for the livestock feed materials distributed under Government 1/ The weighted average reference price is determined by weighing the reference price (established by Government at the level of blenders of fertilizers) of each one of nine selected fertilizers, by the volume of its sales in the previous 12 months as a proportion of the total sales of these nine types of fertilizers. The subsidy is defined as the difference in the CIF (or ex-factory price in case of locally made products) and the reference price. - 40 - control (sugarbeet pulp and wheat bran) would be raised by at least 15% (Part B.2 of Schedule 5), in order to maintain those at levels comparable to alternative feeds, based on nutritive values (para. 58). This would also help ensure that the private sector concentrate feed industry would have access to these high value materials, that the use of alternative low value feed materials would not be discouraged, and that the feed industry would be encouraged to develop a balanced feed for cattle. Assurances were also obtained that a study to identify, evaluate and recommend measures required to liberalize the animal feed prices, would be completed by December 31, 1986 (Para. 5 of Sctadule 4 of Loan Agreement). 108. With respect to irrigation water charges, the Government bas developed a 5-year program for improving the overall recovery of water charges to reach 90% of amounts due and payable by 1989 (Table 4). Specific actions for each ORMVA to achieve the required increments have been developed and involve the establishment of separate water charge collection units, and developing appropriate measures, such as, cutting off water to delinquent users or even collecting charges in advance, to be applied in the event of non-payment. Assurances were obtained at negotiations (Section 3.02 of Loan Agreement) that the Government would carry out a program of actions, acceptable to the Bank, to help achieve this objective. The Government is now implementing these specific changes; it is expected that by June 1986 the overall recovery levels for the 1984/85 irrigation season would have improved to 57% in line with the five-year program. Achievement of this would be reflected in a statement of recovery and arrears situation for each ORMVA in 1985, to be made available to the Bank before June 1986. As regards cereals producer prices, assurances were obtained (Section 3.03 (c) of Loan Agreement) that the Government would develop, before June 1986, a methodology, acceptable to the Bank, for determining the price at which ONICL purchases locally produced cereals. This methodology would take into account the evolution of world market prices and exchange rate movements, as well as the evolution of input-output price ratios at various levels of technology, with the objective of maintaining target prices above world market equivalents by at least the average protection rate in the economy and providing adequate financial returns to producers. The objective would be met initially by making effectively available to producers at least the world price, and to steadily move towards providing the cereal producers the same level of protection as available to the rest of the economy. 109. Irrigation Management: Under the Loan, the primary focus would be on improvements in the management, automony and financial viability of the ORMVAs. Specific measures would be to improve the system of financial and administrative control exercised over ORMVAs; to introduce a new contractual approach to their supervision by the Government; to improve their collection of water charges (the last action is discussed in para. 108). 110. Four specific actions are envisaged regarding the increased operational flexibility of the ORMVAs. First, to expedite implementation the review of contracts at Rabat would be reduced by raising the minimum level for such review from the current level of DH 200,000 to about DH 1-1.5M for civil works and DH 300,000 for others. These limits have not been revised since 1972, and have resulted in 80X of the number of contracts representing 95Z of the total value, being sent to Rabat. Secondly, the budgetary support from the Government would be provided in four quarterly releases, rather than in unprogrammed and ad hoc tranches of the past. Thirdly, the ORMVAs would be - 41 - granted the option to obtain timely audits by private auditors to improve internal management; and finally, ORMVAs would be granted an imprest account to permit rapid execution of urgent maintenance works without awaiting prior approvals. These four actions have been implemented in April 1985 prior to negotiations, in the form of inter-ministerial approval of the necessary circulars/orders. Under the Loan, the Government vould also introduce, on a pilot basis, a system of program contracts (CP) between the Government and each ORMVA (para. 92b). For its success, the CP system would need to be supported by a good management information system, cost accounting and a performance audit system The first CP would be finalized for at least one ORMVA, expected to be Doukkala, one of the oldest, before June 30, 1986 (Para. 2 of Schedule 4 of the Loan Agreement). 111. Livestock Services. Under the Loan, specific actions to be implemented in the livestock sub-sector would relate to the launching of new approaches to provision of animal health and breeding services to improve their effectiveness and to reduce the financial burden on the Government. 112. Following the approval of a law permitting the establishment of private veterinary service (para. 72), which could also enter into specified health control contracts with the Government, the Government, prior to negotiations, has delimitated 20 viable zones for the introduction of such a system, each zone covering about 2,000 cattle and 30,000 sheep. Based on the initial good response to the first announcement of the proposed contractual conditions, it is expected that by June 1986 contracts with private veterinarians would have been signed with the state for compulsory health care in these zones. Regarding provision of breeding services (para. 73), specific steps under the Loan would be to complete the finalization of the terms and conditions under which the restructured breeding services would be operated by cooperatives or livestock groups. The new breeding services would start from irrigated areas where the density of coverage is high and where there is no longer a need to promote artificial insemination. Under the new system, the Government would continue to operate the 2 main centers and the 24 sub-centers to supply the private inseminators with essential supplies, at full cost. Users would start paying a fee for Al services, which would initially represent the cost of the supplies. Assurances were obtained at negotiations that by December 31, 1985, the Government would identify at least 20 co-operatives/zones where the new breeding services program would be developed (Para. 4 of Schedule 4 of the Loan Agreement). It is expected that by June 1986 the Government would have trained about 20 cooperatives/groups ready for taking over the management of the breeding services and appropriate contracts between these cooperatives and private inseminators would have been executed. 113. Agricultural Extension. Under the Loan, the first phase of reforms in agricultural extension (para. 65) would start affecting both rainfed and irrigated areas. The first phase would focus on low cost improvements in field organization structures, work programs, training, and increased mobility within existing total staff resources. 114. All major principles for organization and structure of a T&V based field extension system would be applied first to 28 selected zones, one in each DPA. The number of extension agents in these zones would be increased by transfer to reach a farmer to extension agent ratio of 1:320. To ensure that the extension staff effectiveness is not hampered by a lack of mobility, - 42 - travel allowances and necessary extension materials, the Government has, prior to negotiations, ensured that adequate funding (about $20,000 per zone for investments and $7000 per year for operating costs) has been made available. This has been confirmed through the Ministry of Finance approval of appropriate budget documents. Technical assistance would be obtained (para. 119) to assist in the establishment of in-service training and preparation of technical messages, based on agro-economic surveys already completed. In parallel, similar changes would also be introduced in the irrigated areas. In addition, suitable circulars have been issued by MARA to introduce a final year of practical cxtension training in the curriculum of the agricultural schools from where extension workers are recruited. Assurances were obtained at negotiations that an interim progress report on the performance and experience of this pilot extension system would be made available to the Bank in June 1986 and a final evaluation report by December 1987 to facilitate the expansion into other areas (Para. 3 of Schedule 4 of Loan Agreement). 115. Agricultural Research. With the recent completion of an expert team review of the role, organization and structure of INRA, the stage is set for to start under the Loan the establishment of a sound national research system in Morocco (para. 66). Such a system would be centered around a restructured INRA capable of fulfilling its mandate and involve three actions. First as a follow-up to recent actions to grant INRA financial autonomy and to improve the salary levels of its scientific staff, INRA would start internal reorganization, following the recent approval of the Government of its new organization structure. The new structure aims to establish a system of decentralized management, combined with a multidisciplinary research team approach concentrating on specific priority research objectives defined by program technical committees. Secondly, the selection of INRA field stations to be transferred or closed--based on their relevance to the future research program- would be finalized and ratified by the INRA Board. Thirdly, the INRA would begin to close down its involvement in foundation seed production activities for G-4 stage of multiplication for cereal crops, and transfer these to private seed producers, who already produce 40% of the foundation seed for SONACOS. The formal approval of these proposed actions by INRA's Board has been completed prior to negotiations. As a condition for the release of the second tranche, INRA would have completed the definition of a priority program for agricultural research, including its breakdown by stations which would remain in INRAs' network, and INRA would have ceased its research activities on at least 20 of the 44 field stations considered superfluous (Part B.3 of Schedule 5 of Loan Agreement). It is also expected that by that time INRA %ould have reduced its G-4 cereal foundation seed program to only 500 ha, half the level in 1.33/84. 116. Fertilizer Marketing. Under the Loan, further steps will be taken to continue the changes initiated by the Government during the last 12 months, (para. 76), changes which aim to bring about an improved private sector participation in the retail distribution in rainfed areas, provide greater incentives for downstream storage, and ensure improved coordination between FERTIMA, and private sector blenders and wholesalers. While many FERTIMA retail points are located in remote and marginal rainfed areas where demand levels and its wide variability do not attract private retailers, it is estimated there are about 70-90 others where sales have declined significantly as the private network has expanded. To encourage further enlargement of the private retail network, the Government has developed criteria to continually - 43 - review the need to operate FERTIMA outlets (para.77). Prior to negotiations, the Government has completed an analysis of the 1984/85 sales season, to identify the various points which meet the criteria and as a condition for the release of the second tranche, at least 80% of the outlets which meet these criteria would have been closed down (Part B.4 of Schedule 5 of Loan Agreement). The staff at these outlets who are seconded from MARA, would revert to MARA, to be retrained and absorbed, as suitable, into the reorganized extension services (para. 65). 117. Cereal MarketinR. Following an analysis which shows that the potential impact on the budget of a more active floor price support program in good crop years, would be minimal (Table 6), the Government has decided to accelerate actions in this area as part of the sector adjustment program. For this purpose, the Government proposes to use savings from the reduction in fertilizer subsidies to operate a larger program of domestic cereal procurement particularly in years of good harvests. The primary objective would be to define an operational plan to strengthen the price support program by actions in line with Government strategy (para. 82). Assurances were obtained at negotiations (Section 3.03 (b) of the Loan Agreement) that an inter-agency task-force would be set up before September 1985 with terms of reference acceptable to the Bank, to dcvelop such a plan with a timetable for the specific actions needed to implement the policy, and that this plan would be 'urnished to the Bank before June 30, 1986. Technical assistance would be provided to both ONICL and DPAE (para. 120). 118. In the meanwhile, the Government would take action to prevent further deterioration in the existing system of price support for key cereals, particularly in view of the crop forecasts for a good harvest in 1985. As a condition for Loan effectiveness (Section 3.02 (a) and Part A.2 of Schedule 5 of Loan Agreement), the storage margins allowed the SCAMs or private traders to purchase domestic cereals in the local market on account of ONICL, would be revised upwards to reach at least DH 26/ton/month for wheat and barley so as to fully compensate for the cost of domestic purchases in the souks. This would represent an average increase of about 30%. Technical Assistance 119. MARA would need technical assistance (TA) in order to manage the sector adjustment program, complete the remaining analysis. define follow-up measures, and to monitor the implementation and the i,mpact of the specific adjustment measures to make corrections as needed. To this end, assurances were obtained (Section 3.04 b of the Loan Agreement) that the Borrower would employ consultants whose qualifications and experience and terms of reference are satisfactory to the Bank for assistance in implementing the adjustment program, particularly those referred to below in para. 119 (a), 120 (b) and 120 (a). Ongoing technical assistance which has also been reviewed and would, once reshaped, help in the implementation of the adjustment program, includes: (a) a proposed grain storage study which would be replaced by a new TA focusing on the development of an operational plan for the domestic floor price support program (para. 82). The TA (48 MM) is likely to be operational by December 1985; - 44 - (b) the extension master plan, for which the focus would be on developing a feasible implementation and financing plan for Phase It and Phase III of the adjustment program (para. 65); individual experts are now being recruited with TORs focussing on specific TA needs such as extension methodology and communication training; the TA (6mm) expected to be operational by June 1985; (c) study to strengthen INRA, for which TORs I. ive been finalized for assistance from CIRADV' to implement the new policy adopted by INRA's Board; this TA (L2nm) is expected to be operational by June 1985 possibly under financing from the French Government; (d) the TA (55mm) being provided by FAO (under FADES financing) to strengthen the DPAE is now begin revised to make the work program consistent with MT strategy (para. 95). 120. Additional technical assistance is foreseen in the following areas: (a) defining new credit supported agro-industry and storage investments by CNCA; the technical assistance (24mm) for this is likely to be financed by USAID using TORs developed with the Bank, managed by CNCA and is likely to start by Sepcember 1985; (b) assistance to implement the first "Contrat de Programme"; the TA (12mm) would be supervised by Directorate of Rural Investment (DER); discussions are underway to finalize this and it is likely to be operational by December 1986; (c) the ongoing Prices and Incentives study (para.52) upon completion would be followed by an analysis of specific policy options and setting of analytical tools in the Ministry: this TA could be implemented through the new policy analysis agency (para. 96) and discussions are underway to finalize this; and (d) a study to identify, evaluate and recommend the measures required to liberalize the animal feed prices; the TA (6 mm) is likely to be finalized by June 1986 (para. 107). 121. As part of its responsibility to monitor the implementation of the Sector adjustment process, DPAE would be responsible for the monitoring of these TA components. Draft TORs for all these TA components, either revisions or new, were made available to the Borrower and discussed at negotiations. Training 122. While technical assistance would aim to provide immediately needed expert analytical support, training needs of Moroccan staff for the sucessful implementation of the adjustment program would also be significant. Government's approach is to start staff training programs in areas where needs 1/ CIRAD: Centre de Cooperation Internationale en Recherche Agronomique pour le D'eveloppement (France). - 45 - have already been assessed and to undertake an assessment of the trainingneeds in MARA and in each sub-sector consistent with the overall directions established in adjustment program. 123. In the area of policy analysis, the Government has developed an overseas training program with USAID financing; so far about 15 staff have received advanced degree training in economics and some of these recently returned staff are likely to form the nucleus of the new policy analysis agency (para. 95). A continuation of the overseas training program is now being discussed, along with a program to start local training for selected MARA staff in financial and economic analysis. About 8-12 staff per year are likely to participate in 3-6 month training programs. MARA is also participating in the Bank (EDI) sponsored training course in planning and monitoring; about 8 staff from MARA and associated agencies are involved. Training in monitoring and evaluation will be provided by the CIRAD for the M&E unit of DPAE and its staff in the field offices. Training would be for 6 months. C. Ioan Administration 124. Eligible Goods. The Loan would finance the foreign exchange cost of imported fertilizers, seeds, agricultural machinery and spare parts, animal feed, pesticides and veterinary medicines and fuel (maximum of $25 M). LIST OF ELIGIBLE IMPORTS Item Indicative Amounts (US $ M) 1. Fertilizer /a 4 2. Agricultural Machinery 36 & Spare Parts 3. Seeds and Animal feed 8 4. Pesticides and veterinary 27 Medicines 5. Petroleum Products (maximum) 25 Total 00 /a Including raw materials used in the local manufacture of fertilizers consumed in Morocco. 125. Disbursement. Disbursements from the Loan would be against 100% of the foreign exchange costs of eligible imports. Disbursements -for raw materials and fertilizers, animal feed and seeds which would be- imported by OCP, ONICL and SONACOS respectively, would be made against fully documented withdrawal applications. Disbursements for items imported by the private sector (pesticides, tractors, spare parts, medicines, animal feed, seeds) would be made on the basis of statements of expenditures (SOE) from the Bank of Morocco detailing individual transaction in a given period, together with a certification of payment of the amounts involved, and of their eligibility under the Loan. Disbursement for fuel would be made against SOEs, using - 46 - established prices in standard reference markets. Supporting documentation for SOEs would be retained by the Bank of Morocco and made available for review to Bank supervision missions. Applications for withdrawal would be consolidated and submitted in amounts not less than US$1 million (Section 2.01 of Schedule I of Loan Agreement). The Loan is expected to be fully disbursed within 18 months of Effectiveness. Counterpart funds generated by the proceed of the Loan would be used for financing priority investments (Table 5), and their use would be monitored through the review oE public expenditures (para. 105). In view of the many actions already taken under the adjustment program and the lead time needed to organize the imports for the 1985/1986 crop season., retroactive financing upto $10 M for payments made after January 10, 1985 would be allowed. Disbursement for petroleum products would be limited to US$25M (Section 3.02 of Schedule 1 of Loan Agreement). 126. Release of Funds and TranchinR. The proceeds of the Loan would be made eligible for withdrawal in two tranches of $50 M each, the first upon Loan effectiveness and the second, when conditions for its release have been met. The conditions for release of each tranche would relate to the actual implementation of specific measures with are crucial to the overall implementation of the sector adjustment program (Annex V). Some of these measures which have already been accomplished before negotiations are: (a) the inter-ministerial approval of circulars/orders to improve the system of financial control over the ORMVAs (para. 110); (b) delineation of at least 20 zones each where transfer of animal health services to private veterinaries (para. 112); Cc) the approval of budget document to finance the incremental investment and operating costs of Phase I of the new agricultural extension program (para. 114); Cd) the approval by INRA Board of the new organization structure, the list of research stations to be transferred and the reduction of the G-4 seed production program (para. 115); and (e) the identification of the retail sale points of FERTIMA which meet the agreed criteria for closing down (para. 116). 127. Special conditions of Loan effectiveness - or the release of the fi-st tranche - would be (Section 5.01 and Part A of Schedule 5 of Loan Agreement): (a) an increase in the weighted average unit reference price for fertilizers by 15% (para. 107); (b) an increase of 30Z in the margins for storage of domestically produced wheat and barley procured on account of ONICL (para. 118); and (c) establishment of a monitoring committee (para. 132). 128. The conditions for the release of the second tranche (Section 1 Para. 4 and Part B of Schedule 5 of Loan Agreement) would be: - 47 - (a) a satisfactory progress on the implementation of the overall sector adjustment program (Annex V); with specific attention to implementation of (1) the improved animal health care and breeding services (para. 112), and (ii) improved water charge recovery program (para. 108); (b) an increase in the weighted average unit reference prices of fertilizers by 20% (para. 107); (c) increase in the ex-mill price of selected high value animal feeds by 15Z (para. 107); (d) cessation of the operation of at least 20 of INRA's field stations, and the preparation of a plan of priority research activities for the INRA stations which would continue to operate (para. 115); and (e) actual closing down of at least 80% of the FERTIMA retail points which meet criteria agreed with the Bank (para. 116). 129. Specific measures under the adjustment program which were agreed at negotiations, and will be monitored as dated covenants are: (a) phasing out of the fertilizer subsidies by December 1990 (para. 107 and Section 3.01 of the Loan Agreement); (b) carrying out the overall water cILarge collections program designed to improve collection rates in order to reach at least 90% recovery in 1989 (para. 108 arnd Section 3.02 of the Loan Agreement); (c) development of a methodology, satisfactory to the Bank for establishing domestic cereal producer floor prices, by June 1986 (para. 108 and Section 3.03 c of Loan Agreement); (d) establishing before September 1985 an inter-ministerial expert group to prepare an operational plan for strengthening the domestic price support program, under TORs satisfactory to the Bark, and providing by June 30, 1986 the plan for review by the Bank, (para. 117 and Section 3.03 (b) of the Loan Agreement). 130. Additional actions in few selected areas which were agreed to be monitored as dated covenants (Schedule 4 of the Loan Agreement) were: (a) completing the inter-ministerial review or the prices and incentives study by June 1986 (para. 106); (b) completing the study to define measures to liberalize animal feed prices, by December 1986 (para. 107); (c) finalization of the first program contract between one selected ORMVA and the Government by June 30, 1986 (para. 110); (d) identification of 20 zones in which to implement a pilot program of improved artificial insemination services (para. 112); (e) completion of a progress report of the first phase of the new extension system by June 1986 (para. 114); and - 48 - (f) establishing of the co-ordination and monitoring committee (para. 132). 131. Procurement. Except as noted below, all contracts for the procurement of fertilizers, pesticides, animal feed and seeds, would be awarded through International Competitive Bidding (ICB) in accordance with Bank Guidelines, with the following modifications: (1) advertising would follow the simplified procedures used for structural adjustment loans; and (2) domestic preferences would not be permitted. Contracts for seeds, pesticides and veterinary medicines costing below $500,000 equivalent each, contracts for animal feed costing below $1 million equivalent each, and contracts for machinery, spare parts and petroleum,. regardless of cost, would be awarded on the basis of the normal procurement procedures of the purchaser. Tractors and other farm machinery imported by the private sector are purchased under the prevailing open market competitive system in which mary reputed importers of equipment have set up retail and service networks and there is no bar on entry of more. The latter will be indicated in a General Procurement Notice so that all intending suppliers are fully informed. Bidding documents, bid evaluation and award of contracts procured through ICB would be subject to prior approval of the Bank. For the rest, the Borromer would furnish to the Bank, prior to the submission of the related application for withdrawal of funds from the Loan account, such documentation and i.,formation as the Bank may re-.sonably request to support withdrawal application in respect of such contract (Section 3.06 and Schedule 3 of Loan Agreement). D. Manement and Coordination 132. Management and coordination of the sector adjustment program is the prime responsibility of the Secretary General of MARA, who would head a monitoring committee set up by the Minister of Agriculture composed of MARA Directors. The Secretariat support for the monitoring comuittee would come from the DPAE, which would, as part of its MARA wide planning responsibility, prepare status reports on the action programs already prepared for -ach sub-sector. A semi-annual report on the implementation of the Adjustment Program would be made available to the Inter-ministerial Review Committee responsible for monitoring the progress of the Program and is headed by the Minister of Agriculture, and to the Bank. In addition, prior to the release of the second tranche, a status report would be prepared by DPAE. Assurances on these monitoring and evaluation arrangements were obtained (Para. 6 of Schedule 4 and Loan Agreement). 133. Evaluation of the specif.c impact of the agricultural adjustment measures would, in the short disbursement span of the Loan pose special problems. Evaluation efforts are thus expected to focus on: (a) ensuring the establishment of a satisfactory data base to evaluate the response over the medium term; and (b) undertaking special studies of the initial effect of major changes to ensure adjustments as needed. Special studies, which DPAE plans to monitor and the MARA divisions most directly connected with the adjustment measure, plan to execute include: (a) Investment/Expenditure review by DPAE to identify weak performing sub-sectors and suggest solutions to improve their absorption rate; mid-year and end-year analysis; - 49 - (b) Analysis by ONCIL of regional and monthly variation in souk level prices for cereals, and the operation of the price support program, and the indicative import/domestic procurement program each year at the end of September; (c) Fertilizers and seeds regional sales analysis by DPV; (d) Analysis by DE of the supply response to the increase price differential between lean and peak season; (e) Analysis by DER of the implementation of the water charge recovery program, end of each season for each ORMVA; and (f) Analysis of the cost effectiveness of the services provided by the livestock department; (Outlines for these analyses which are included in the Technical Support Volume were discussed at negotiations.) E. JustifLeation and Risk 134. The medium-term adjustment measures considered above should have a favorable impact at the macro-economic and sectoral levels. At the macro level, the proposed resource mobilization and subsidy reduction measures would translate into substantial public savings, and a positive impact on the balance of payments can be expected from the reduction of present pricing distortions in the sector through shifts in cropping patterns towards export crops, supported by parallel steps in trade liberalization and exchange rate adjustments. At the sectoral level, adjustments in relative protection patterns between irrigated and rainfed farming should be achieved as a result of the re-orientation of price policy and strengthening of the floor price support program for cereals. Positive structural effects with a longer-term production impact can also be expected through the strengthening of essential private and public support services and the proposed land policy orientations for the rainfed sector. 135. Public savings would be achieved through: (a) the gradual phasing out of fertilizer subsidies between 1985 and 1989; (b) the increase in the water charge collection rates from 43Z in 1984 to 90% in 1991 and the indexation of water charges in the large irrigation schemes; (c) the gradual withdrawal of the public sector from the provision of commercial services below real cost (mechanized services, artificial insemination, etc.); (d) the gradual charging at real cost of services still provided by public entities; (e) the phasing out of price controls on animal feed (which would increase the revenues of public sector sugarmills and reduce the flour milling subsidy); and (f) the gradual phasing out of unit subsidies on certified-seed. 136. The positive balance of payments impact to be expected as a result of the medium-term adjustment measures would stem from the increased profitability of agricultural exports and from efficient cereals import substitution. Although the reduction of excessive protection in the irrigated areas would translate into increased production costs for the producers of export crops (about 20-25X over the 1985-1990 period if the reform are implemented according to the schedule presently considered), these should be - 50 - fully offset by the impact of realistic exchange rate adjustments on output prices and by the export promotion measures being considered in the context of the trade liberalization program (para. 87). The actual availability of revised incentive prices at farm level for cereals producers which could result from the proposed improvements in the official price setting mechanism and in the price support system, should induce a substantial production response and yield corresponding foreign exchange savings, the magnitude of which will depend on the actual conditions and timing of implementation of the proposed reforms over the next few years. Besides a likely increase in rainfed cereals production, the inter-sectoral adjustment in relative protection patterns should also lead to shifts in irrigated cropping patterns, with an expansion of export crops, an intensification of irrigated cereals production, and a decrease of agro-industrial crops such as sugarbeet and cane for which only high productivity farming systems will remain profitable. 137. The restructuring of the public investment program, should increase the proportion of directly productive and quick yielding investments, and lead to lower ICORs in the next few years. Improvements of the support services (extension, livestock, research) should in the longer term induce better yields and herd performance. The proposed land policy measures (incentives to farm restructuring, security of tenure) should induce increased land productivity and on-farm investments. Finally, efforts to conserve the natural resource base should lead to long-term benefits to protect Morocco's production potential. The cumulative effect of these adjustment measure; would be to help Moroccan agricultural move towards the growth rates of i-4% achieved in the sixties. 138. The risks of the agricultural sector adjustment program relate to assessing the length and difficulty of the process, uncertainties in the external environment and the uncertainties in the response of the private sector to the adjustments. While Morocco's record of implementing reforms agreed with the Bank is satisfactory, as evidenced by an absence of default on major covenants under Bank financed projects, the past stagnation in policy making until the worsening economic environment became a crisis, creates some risk about the adequate pace and future sustainability of the reforms. Uncertainties in the external environment also contribute to increased risk: these uncertainties partly relate to external trade and exchange rate regimes, which could reduce the positive budget impact of specific reforms or reduce the budget neutrality of others and thus reduce the willingness to pursue them. Another external factor would be weather, which might compel the Government to reintervene in livestock ieed distribution or slow down the pace of other price related reforms. The third area of risk is associated with the uncertainty of response by other participants in the sector to the adjustment. 139. There are, however a number of features of the Loan which should reduce these risks to acceptable levels. The active involvement of MARA working groups and later of other ministries as well in the design of the detailed action plans, the specificity of the targets and the initiation of actions under most headings have generated a momentum for change. The expected flexible and rational exchange rate regime would help assure that the part of the sector output depending on external markets does not face set-backs in profitability as experienced in the past. - 51 - PART VI - LEGAL INSTRUMENIS AND AUTHORrEY 140. The Loan Agreement between the Kingdom of Morocco and the Bank, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed separately to the Executive Directors. 141. Special conditions of the project are listed in Section IIr of Annex III. Special conditions of effectiveness and tranche release are described in paras 127-128. 142. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 143. I recommend that the Executive Directors approve the proposed Loan. A. W. Clausen President Attachments May 28, 1985 Washington, D.C. - 52 - ANNEX I L.A..J...-M PAGE I o1mcCo - DJEtAL ALDI-TuIALTA Num 1111MUIC1 to (WEXORTED AulApl) LI MOST (MOST IRrCIII NATEI Lk RECDNT NIDDI IOM IdS KN I %oa 1970a t UfATilk N. AFRICA A MII 1AIT LAT. APMRICA A CAt A (TNonum sq. m) TOTAL 446.0 e 4.4 1: b.0 LI ACRICUILTIRAL I92.7 200. I 2aa a,9 ap CAPITA (1) 1sa.o 300.0 370.0 1149.0 2J0o.o ECT OWIEIUYIO PEE CFITA (EiIJcNMN DF OIL RQUIVALKWT) l1).0 174.0 234.0 622.3 995.5 P JLAflON AM VITAL uUlSUflCE PIPIILATUI14N10-YEAR (THOUSAUNDS) il00n 1491.4o 20209.0 IIN1AN POIUIATION IX UV TOTAL) 2Y9. 14.0 41.9 *d.2 6bb. rnl3ULATION PROJCT IONS IPLPLATION IN TEAR 2000 (MII.) 11.2 STATIoNARY POPULATION (MILL) 70.4 POPULATIUN MIMIENTUM 1.9 POIPUIATION DENSITY PER SQ. K. 20.0 31.5 44.2 15.3 35.1 PEl S%I. 0. A;RI. LAND 00.3 71*. 94.5 41b.1 92.6 IlPUIATIIIN AVE. STtUCTUJEE 42) 0- 14 ytS 44. 1 41.6 45.4 43.0 319.. 15-04 YRS
Группа Всемирного банка · President's Report
Morocco - Agricultural Sector Adjustment Loan Project
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