Morocco - Sixth Agricultural Credit Project

Dowm.at of The World Bank FOR OMCUL USE ONLY Report No. 6094-M0R STAFF APPRAISAL REPORT KINGDOM OF MOROCCO SIXTH AGRICULTURAL CREDIT PROJECT May 28, 1986 Europe, Middle East and North Africa Region Projects Department Agriculture II Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Dirham (DH) US$ 1.00 = DH 10.00 DH 1.00 = US$ 0.10 GLOSSARY OF ABBREVIATION.. ADB : African Development Bank ASAL : Agricultural Sector Adjustment Loan BNDE : Banque Nationale de Diveloppement Economique CIH : Credit Immobilier et Hotelier (Housing and Tourism Development Bank) CLCA : Caisse Locale de Credit Agricole CNCA : Caisse Nationale de Credit Agricole CRCA : Caisse R6gionale de Cr6dit Agricole DPA : Direction Provinciale de 1'Agriculture (Provincial Directorate for Agriculture) EDP : Electronic Data Processing Fl : Fiscal Income ISNAR : International Service for National Agricultural Research INRA : Institut National pour la Recherche Agricole ITPA : Industrial and Trade Policy Adjustment KfW : Kreditanstalt fUr Wiederaufbau MIS : Management Information System OPEC FUND : Organization of Petroleum Exporting Countries Fund ORW4As : Offices R6gionales de Mise en Valeur Agricole (Regional Development Offices) SCAMS/CMAS : Regional Marketing Cooperatives ONICL : Grain and Pulses Marketing Agency GOVERNMENT OF KINGDOM OF MOROCCO FISCAL YEAR: January 1 to December 31 CNCA FISCAL YEAR: September 1 to August 31  FOR OFFICLIL USE ONLY KINGDOM OF MOROCCO SIXTH AGRICULTURAL CREDIT PROJECT (CNCA V LOAN AND PROJECT SUMMARY Borrower: Caisse Nationale de Credit Agricole Loan Amount: US$120.0 million Equivalent Lending Terms: 20 years, including a 5 year grace period at the Bank Standard variable interest rate. Project Description: The proposed project would pursue the Government's sectoral objectives being supported by the Bank through the recent Agricultural Sector Adjustment Loan (ASAL) (Loan 2590-MOR). The project would: (i) increase institutional credit penetration in rainfed areas to help ircrease agricultural production and to assist Morocco towards reaching self sufficiency in food stuffs; (ii) augment non budgetary financing of agriculture through increased credit extension to small farmers; this is aimed at increasing production and farmers' income and at enhancing the role of the private sector in the economy; (iii) upgrade the technology being used by small farmers in rainfed areas and increase land productivity by financing more intensive use of chemical fertilizers, high yielding seeds and small scale mechanization; (iv) generate value added by financing individual and cooperative on-farm storage to safeguard the prices of cereals obtained by farmer, small- and medium-size agroindustry, construction and equipment of greenhouses for the production of vegetables, and flowers mainly for export; and (v) provide for institutional development already started during CNCA V by: strengthening CNCA's management structure; improving its lending appraisal procedures; completing the installation of the management information system in CNCA; and increasing domestic resources mobilization activity. T his document ha a mtesdcted distribution and may be use by recipients only in the performance of theit offcial duties. Its contents may not otherwise be disckosod without Woftd Bankc authoriztion.  ii Local Foreign Total --- US$ million------ Estimated Project Costs: On-farm investment 411.6 171.0 582.6 Agroindustry 7.2 17.1 24.3 Rural housing 12.8 6.0 18.8 Total Base Costs 431.6 194.1 625.7 Price Contingencies 62.7 22.5 85.2 Total Cost 494.2 216.6 710.8 Institutional Development Physical Infrastructure 3.3 2.7 6.0 Institutional Development 0.3 1.1 1.4 .Total Base Costs 3.6 3.8 7.4 Physical Contingencies 0.5 0.5 1.0 Price Contingencies 0.5 0.5 1.0 Total Project Costs 498.8 221.4 720.3 (USS Million) Financina Plan: CNCA Total Total Equity Own Funds Bank ADB KFW Lending Project Cost Small Farmers 96.3 134.8 35.0 35.0 20.0 224.8 321.1 Med. & Large Farnmers 100.5 136.3 58.9 31.0 15.0 241.2 341.7 Agroindustry 8.2 4.4 14.6 19.0 27.2 Rural Housing 6.3 7.8 7.0 14.8 21.1 Physical Infrastructure 4.5 3.0 7.5 7.5 Institution Development 0.2 1.5 - - 1.7 1.7 Total 211.3 288.0 120.0 66.0 35.0 509.0 720.3 Estimated Disbursements: Fiscal Year 1987 1988 1989 1990 ---US$ million - Annual 15.0 35.0 45.0 25.0 Cumulative 15.0 50.0 95.0 120.0  STAFF APPRAISAL REPORT KiNGDOM OF MOROCCO SIXTH AGRICULTURAL CREDIT PROJECT Table of Contents Page No. I. INTRODUCTION .................................... ....... .o. I II. THE AGRICULTURAL SECTOR ........ .. * ..... ....*.......... 2 A. Economic Background ................ ................. 2 B. Place of Agriculture in the Economy ...... .............. 3 C. Agricultural Performance and the Government Strategy ............................... 3 D. Sectoral Issues Relevant to Agricultural Credit ..... 4 E. Bank Agricultural Sector Strategy and Performance under Previous Projects ................ 9 III. THE FINANCIAL SECTOR ................. ....#*- 10 IV. THE CAISSE NATIONALE DE CREDIT AGRICOLE ................. 12 A. Background, Organization and Staffing 12 B. Lending Policies and Procedures .................... 13 C. Lending Operations ...... * ...* 15 D. Financial Situation and Performance . 18 E. CNCA Objectives and Development Strategy 21 F. CNCA Projected Lending Program and Financing Requirements (1985/86-1987/88) ..... .. 21 V. THE PROJECT ...................... E. ......J 22 A. Rationale for Bank Involvement and Project Objectives 22 B. Summary Project Description....... 23 C. Detailed Features . .. . . ....... . 4* ................. 23 D. Project Cost Estimates ............................ 24 E. Project Financing .... ............. ... 25 F. Procurement ....... . ..... . . .... .. ...... . 26 G. Disbursement .. .............. . .. ...... .. . . 28 VI. PROJECT IMPLEMENTATION . . ... . , . ..... 30 A. LNCA Institution Building Activities .30 B. Accounts and Audit . ...... a ....39 C. Investment Code Study .... ... ... .. 39  -2- Page No. VII. PRODUCTION, MARKETING, AND PRICES ..... ........ ........... 39 A. Incremental Project Production . . 39 B. Markets ............ ................. 4............... 41 C. Prices . ................... ................... .. 41 VIII. FINANCIAL ANALYSIS ....... .............................. 42 a. Farmers' Benefits ... . 42 B. Financial Impact on CNCA. 44 C. Financial Implications for Governhlent .45 IX. PROJECT BENEFITS AND JUSTIFICATION ..46 A. Economic Analysis ..46 B. Project Risks. 47 X. AGREEMENTS REACHED . . .48 ANNEXES 1. CNCA's Lending Program .................................. 2. Financing of On-farm Investments ........................ 3. Project Cost: CNCA Component ............................ 4. Schedule of Disbursements of Bank Loan .................. 5. Structure of Intereet Rates ............................. 6. CNCA's Financial Statements ............................ 7. Guidelines for Rural Housing Loans ...................... 8. Performance under Previous Agricultural Credit Projects.. SELECTED DOCUMENTS AVAILABLE 114 PROJECT FILE ............ 9. Financial and Economic Analysis ......................... 10. Draft Terms of Reference for On-Farm Subsidy Study ...... 11. Recommendations on the Strategy for CNCA's Future Development ........................................... 12. Suggested Agenda for CNCA Management Committee .......... 13. Suggested Elements for Branch Network Cost/Benefit Analysis ................................... MAPS IBRD 17220 .  STAFF APPRAISAL REPORT KINGDOM OF MOROCCO SIXTH AGRICULTURAL CREDIT PROJECT 1. INTRODUCTION 1.01 The Caisse Nationale de Credit Agricole (CNCA) has requested Bank assistance to finance, with other cofinanciers, the Sixth Agricultural Credit Project. The Project would follow five successful Bank-financed agricultural credit projects implemented by CNCA. It would support Government's development objectives through: (a) improving agricultural production by financing on-farm investments; (b) shifting an increased share of investment in agricu'Lture to the private sector; (c) increasing access by small farmers to institutional credit; (d) increasing CNCA's financial autonomy and promoting the mobilization of domestic savings; and (e) strengthening CNCA's management efficiency and financial situation. 1.02 The Project would be implemented by CNCA and finance on-farm investments undertaken by individual farmers and farmers' cooperatives, investments for the establishment or extension of small- and medium-scale agroindustries, and rural housing investments as well as the extension and rehabilitaLl on of CNCA's branch offices network construction of a headquarters building and technical assistance to CNCA for the introduction of medium- and long-term planning and for the improvement of its Management Information System (MIS). The Project would be implemented over a three-year period (September 1986 to August 1989). 1.03 The total cost of the Project is estimated at US$720.3 million, of which US$221.4 million (30.0%) is foreign exchange. A Bank loan of US$120.0 million to CNCA would finance part of CNCA's medium- and long-term lending, agroindustry, rural housing, and institutional development during the Project period. The remaining investment resources would be mainly provided by CNCA's own resources, sub-borrowers' contributions and by loans from the Kreditanstalt fUr Wiederaufbau (KfW) of the Federal Republic of Germany, and the African Development Bank (ADB). 1.04 The Project was identified and prepared by CNCA with the assistance of Bank missions supervising the Fifth Agricultural Credit Project (Loan 2367-MOR). The Project was appraised in November 1985 by a mission composed of Messrs. Lucca, Hovnanian, Ms. Effron (Bank), and Messrs. Diamond and Barraclough (consultants), together with representations of the German Government bilateral agency (KfW) and of the African Development Bank (ADB).  -2- H. THE AGRICULTURAL SECTOR A. Economic Background 2.01 Since 1978, the Government of Morocco has tried various stabilization measures sulpported by the IMF to prevent a financially deteriorating economy. These efforts included some attempt to contain the growth of domestic expenditures, reform of tariff and interest rate increases, reduction or elimination of subsidies, and improvements in management and financing of public enterprises. These efforts were hampered by a number of exogenous shocks: (a) the 1979 increase in oil prices, whici added to an already sizeable petroleum import bill; (b) a severe drought in 1980/81, followed by several poor harvests, which led to large imports of cereals; (c) increases in international interest rates which led to a steep increase in debt service; and (d) a decline in the world market price of phosphate, a major source of Morocco's foreign exchange earnings. These factors, combined with expansionary public spending policies to carry out the ambitious 1981-85 Development Plan, led to a further deterioration in the situation. By end 1982, the Treasury deficit had increased to 12.3% of GDP and the debt service ratio was 34.7b of exports (up from }1% and 27%, respectively, in 1980). 2.02 By 1983, the financial situation required a renewed effort at stabilization, structural adjustment and debt rescheduling. The Government limited monetary expansion, revised investments downward, decreased subsidies on food prices, and increased prices of fertilizer, electricity, water and petroleum products. The flexible exchange rate policy, begun in 1980, was continued and the external public debt maturing in September 1983-December 1984 was rescheduled. These stabilization measures were supported by an SDR 300 million stand-by arrangement with the IMF. In addition, Morocco has been encouraging the growth of the export sector and removing the bias towards import substitution and inefficient use of resources. Industrial and trade policy reforms, including reduction of import taxes', tariffs and restrictioiis, elimination of export licensing and improvement of administrative procedures, export credit and export credit insurance systems, have been supported by two Bank Industrial and Trade Policy Adjustment (ITPA) Loans, the first in 1984 for US$150 million and the second in 1985 for US$200 million. Agricultural sector reforms have been supported by the Bank with a US$100 million loan for an Agricultural Sector Adjustment Loan (ASAL) in mid-1985 and include: (a) reorientation of investments towards on-going priority projects and activities for completion or rehabilitation; (b) restructuring the pricing and incentives framework to encourage growth in rainfed areas and shift production in irrigated areas to more marketable crops; (c) improvements in cost recovery for agricultural support services; (d) action programs to make the support services more effective; these services include irrigation management, livestock services, agricultural extension, research, fertilizer and cereals marketing; and (e) replacing public sector investment by gradually increasing private sector financing through increased lending of CNCA. 2.03 While these adjustments and stabilization efforts need to be sustained over several years, information for 1983 and 1984 indicate that the early results of the Government's adjustment program have been generally positive. The current accounts deficit of the balance of payments decreased from US$1.9 billion in 1982 to US$1.1 billion in l9831' and is estimated to have remained at US$1.1 billion in 1984.' GDP growth was low, however, at 1/ Before debt relief.  - 3 - 2.2% in 1983 and 2.4% in 1984 (in real terms) due to a combination of poor harvests and the impact of the stabilization policies. Over the next five years, Morocco should continue to address the objectives of improved balance of payments by encouragirg investment in export oriented or import substituting activities and of curtailed public expenditures by encouraging domestic resource mobilization and private sector investment. The present Project would help to meet these objectives. B. Place of Agriculture in the Economy 2.04 Morocco's population is estimatei at 23.0 million (mid-1983) of whom about 58% live in rural areas. During the last ten years, population growth has averaged ..5% p.a. (4.2% in urban areas and 1.4% in rural areas). About 40% of the total labor force is employed in agriculture. While the proportion of total Moroccan population estimated to live below the absolute poverty level went down from 43% in 1970 to 35% in 1984, the improvement occurred mainly in urban areas. The proportion of rural familles. living at or below the absolute poverty level (US$239 per capita in 1979) remained constant at 45%, and the number increased to 5.3 million by 1980. 2.05 The value of agricultural output grew at 1.5% (in constant prices) during 1970-80 period, lower than other sectors of the economy. Since 1980, the value of agricultural output has decreased because of a severe drought followed by several bad crop years, and for the 1980-85 period, it is estimated that output decreased by an average of 0.7% p.a. Because agricultural output has not kept pace with the country's demand, imports of agricultural products have increased rapidly and now account for about 25% of merchandise imports. However, because of the return of normal climatic conditions, the 1985/86 harvest is expected to be excellent. The relative contribution of agriculture to GDP has fallen from about 29% in 1960 to about 17% in 1979-82 (in current terms), and is estimated to have decreased further to 14% in 1985. In 1982-85, cereals and pulses contributed to 36% to total agricultural GDP, with livestock contributing 33%, citrus and vegetables 11% each, and industrial crops and forestry about 6%. 2.06 Agricultural exports have decreased in importance, accounting fer about 15% of total exports in 1985 compared to 38% in 1970 (current prices); their value has stagnated in the last fifteen years and the agricultural trade balance has been in deficit by about US$200 million, where it had been in surplus up to 1974. 2.07 Since the mid-seventies, Morocco has had a widening of the "food-gap". The rate of self-sufficiency for key items has declined over the last decade (cereals from 86% to 60%, edible oils from 31% to 13%). Even for sugar and dairy products where self-sufficiency ratios have increased (60% to 64% for dairy products and 46% to 53% for sugar), the level of imports has hardly declined. C. Ag&icultural 0erformance and the Government Strategy 2.08 The recent poor performance of Moroccan agriculture can be divided into two contrasting trends between the modern irrigated sector, which now covers 10% of the cultivated land, and the traditional rainfed sector. Government has concentrated 60-75% of its investment and most of the producer  -4- subsidies in the irrigated sector. As a result, considerable progress was made in farming techniques and yields, output from this sector grew at 5.5% during 1971-85, and production of sugar beet, sugar cane, end dairy cattle showed rapid progress. Morocco now obtains 45% of the total agricultural value added and 60% of its agricultural exports from the irrigated areas. 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, oil seeds and red meat), remains largely traditional. Low yields are the result of a combination of factors: climatic constraints, in which 7 out of the past 14 years have been drought years, fragmentation of holdings (typical plot size is 0.6 ha), insecure land tenure, poor farming practices, inadequate use of modern inputs and poor support services, except in small areas of special development projects. Potential does exist, however, in both the irrigated and rainfed sectors to increase yields: in the rainfed areas, mechanized land preparation, use of modern inputs and selected improved seeds and a more intensive and rational land use would improve productivity; in irrigated areas, improved farming techniques, greater cropping intensity, development of complementary infrastructure and better maintenance could expand production by as much as 100% over the next decade. 2.09 Within the general objectives of improving self-sufficiency of food through increased production, iucreasing agricultural exports, and reducing social and regional income disparities, the Government has committed itself to a structural adjustment strategy for agriculture, aiming at accelerating growth as noted above in para. 2.02, which has as primary objectives: (a) restructuring public investment and expenditure towards quick maturing and big return investments, while maintaining existing infrastruicture; (b) correcting prices and incentives framework; (c) strengthening agricultural support services and improving cost recovery for some of the services; and (d) improving institutional capacity of agricultural policy planning and analysis, to resolve basic issues of improving land use and protecting the natural resource base. D. Sectoral Lssues Relevant to Agricultural Credit Institutional Credit and Low Debt Service Capacity 2.10 A key element in Government strategy for structural adjustment is to rely more on private investment channelled through institutional credit, as opposed to public sector investment. In agriculture, private investment now accounts for about 50% of total investment, of which 50% is financed by CNCA. CNCA handles about 60% of total agricultural lending."' Since public investment has been concentrated in the irrigated areas, the development of 1/ The rest is mainly lending by commercial banks, which is primarily short-term. The commercial banks play a minor role in financing on-farm investments (less than 5% of total medium- and long-term credit to agriculture).  - 5 - rainfed areas has relied heavily on institutional credit and roughly 65% of CNCA lending is targeted in these areas. In order to carry out its strategy of gradual privatization of the economy, Governmenv plans to phase out its own investments and make additional credit available chiefly through CNCA for private investments in on-farm and market level storage, farm mechanization, field irrigation facilities and agroindustry. The Project would be the major provider of funds for the implementation of this strategy. 2.11 Several constraints exist to expanding the role of CNCA, however. One is the limited savings and debt service capacity of many rural families, shown in the Table 2.1 below. Table 2.: 1IMATED POTENTIALANLD AC5INOWUA.S CLIENTS /A Total No. of CNCA Farmers Eligible Fiscal Family Total Financial Clients CNCA Clients Farm Size for Credit Income Consumption Surplus No. As % of Total ha k'000) DH ON OH million ('000) Eligible Farmers 1 254.5 782 782 1-5 834.5 1,2S1 1.251 - 292.0 35 5-10 219.9 3,873 3,246 137.9 67.4 31 10-iS 101.6 6.000 4,194 183.5 29.2 29 I5-20 13.0 6,970 4,870 27.3 5.0 38 20-50 44.0 12.580 6.490 268.0 20.4 46 50-100 7.7 28.525 12,985 119.7 3.S 45 over 100 2.6 11S735 19.475 259-1 0.9 35 TOTAL/AVG. 1477.8 2.466 986.7 423.8 29 /a December 1984 estima-e. 2082E/pl5 5/29/86 In addition, because most farmers do not hold documented title to their land, CNCA's established lending criteria have been based on a notion of fiscal income (i.e., income estimated to be derived from existing land holdings plus livestock) and have resulted in credit extension to a limited proportion of small farmers and for smaller than requested amounts. Recent 1985 data indicate that CNCA is lending to only about 26% of potential CLCA borrowers,"' (para. 4.12). To increase accessibility of farmers to credit, particularly in rainfed areas, CNCA has begun to expand its physical network, to open temporary credit outlets, and to develop a new credit policy on eligibility, based on the direct assessment of farmers credit needs which should increase the ceilings on the loan amounts as well as the number of eligible borrowers. The Project would support this effort (para. 6.11). Deposits and Savings Mobilization 2.12 A second constraint to expanding CNCA's role is its ability to mobilize deposits and savings in ordcr to provide an increasing share of domestic resources to finance a rapidly expanding lending program. Domestic savings mobilization in Morocco has been poor and only recently begun to increase,-Z with a pa-ticular effort by Governmeat to reduce budgetary 1/ Cais.e Locale de Credit Agricole (CLCA) serves smaller scale farmers, with fiscal income DH 50 - 6,000 (see para. 4.08). 2/ In the mid 1970's, gross domestic savings was 15^16% cf CDP, by 1981-82 it had fallan to 9-10% of GDP and in 1984 and 1985 it had increased to 12% of GDP.  - 6- deficits and contain the external debt. Mobilization of private savings to finance investments has priority. CNCA with its large network of branch offices is particularly well positioned to mobilize deposits and savings in the rural sector of the econonmy. 2.13 Since 1975, CNCA's deposits hiave increased by about 20% p.a., from DH 136 milllon to DH 821.6 million in 1985. A large part of these deposits are institutional, from state-owned companies, however, and rural savings are still not adequately attracted. CNCA has recently raised the interest rates on deposits. by 1-2% in April 1985 and it has undertaken a more intensive campaign to mobilize savings, including use of a "carnet-vert" (savings passbook) system, rehabilitation of existing branches and expansion of banking activities. Nevertheless, many farmers still prefer to store their wealth in real assets such as livestock, or to invest, for the larger farmers, in urban based investments, so that in 1984/85 only 14% of CNCA's resources were raised through deposits and savings. A medium- and long-term strategy to increase savings mobilization is therefore required, and would be developed under the Project (paras. 6.05 and 6.08). Agroindustrial D_velopment 2.14 Development of small-scale, relatively labor intensive agroindustrial activity complementary to primary production has been constrained by a combination of lack of entrapreneurs' experience in dealing with financial institutions, a lack of technical and finan-ial competence to manage firms and a lack of access to finance.1I Under the ongoing Fifth Agricultural Credit Project (Loan 2367-MOR), efforts have been made to strengthen CNCA's capacity to assess rural industry potential, and to provide funds for financing selected activities in fruit and vegetable processing and packing, milk, meat and olive oil processing, flour milling and cold storage. Lending levels for agroindustry increased from DH 25.0 million in 1983 to DH 48.9 million in 1985 or about 10% of total agroindustrial lending. Increase and regionalization of agroindutrial lending was in part due to the establisht,ent of a special office in Meknes, which actively promoted lending for agroindustrial activity. In addition, CNCA is providing technical assistance to entrepreneurs on legal, financial and technical matters and marketing assistance is being provided through technical assistance financed by USAID. There is still a need, however, to expand assistance and access to credit to small-scale agroindustries to other areas of the country. Under the proposed Project, CNCA would increase its efforts in developing a sectoral s :rategy to provide credit, technical assistance and internal and export marketing services to small-scale agroindustries in other high-potential areas of the country (paras. 6.14). 2.15 Land Tenure. Land owned individually (5.4 million ha) represents about 74% of all cultivable land in Morocco, land collectively owned about 14%; the balance belongs to the state or other groups such as religious foundations. The land tenure situation represents a constraint to I/ Medium- or large-scale agroindustries, defined by an investment in equipment alone of DH 5.0 million or more, are promoted by the Office de Developpement Industriel and have access to several forms of institutional credit.  -7- agricultural growth. This is because land distribution is unequal, with 74% of the farmr having 5 ha or less, owning less than 25% of the cultivable land and 0.5% having more than 50 ha on average and owning about 17% of the cultivable land (see Table 2.2). In addition, the land is highly fragmented, with an average plot size of 0.6 ha, too small for efficient rainfed farming. A third problem is that most private farmers do not have a documented land title which limits their access to long-term credit for land improvements and other investments. In addition, absentee land ownership may represent as much as 30-35% of the land, resulting in under-use of resources and unwillingness to invest in improvements, and farmers of collectively owned lands are also generally unwilling to make such investments. Table 2.2: DISTRIBUTION OF FARMS BY FARM SIZE Average Average No. No. of % of Cultivable % of Size of of Plots Farm Size Farms Total Area Total Farms per Farm (ha) ('000) (%) ('000 ha) (Z) (ha) (unit) Without Cultivable Land /a 450.3 23.4 - - - 0-5 1,089.5 56.5 1,776.2 24.5 1.6 5.5 5-10 219.9 11.4 1,508.0 20.8 6.9 6.8 10-20 114.1 5.9 1,529.7 21.1 13.3 7.7 20-50 44.0 2.3 1,218.0 16.8 27.7 8.8 50-100 7.7 0.4 514.8 7.1 66.4 8.8 More than 100 2.6 0.1 703.3 9.7 278.0 9.7 TOTAL/AVERAGE 1,928.1 100.0 7,250.0 100.0 4.9 6.0 /a Includes livestock farmers using communal grazing lands. Source: Agricultural Census, 1974 2.16 The Government's efforts to improve the land tenure situation have, so far been concentrated on the redistribution of land regained from foreign settlers and the development of a legal framework for land transfers in the irrigation schemes. In the latter, land consolidation and titling programs have been completed on about 460,000 ha and are underway on another 275,000 ha. The Government sees the importance of improving the structure of land tenure in the rainfed areas and under the adjustment program referred to above (para. 2.02) is taking the following actions: (a) acceleration of collection of the statistical data base on land tenure and potential for 750,000 ha, partly funded under three on-going Bank projects'' and one project financed by the Government of Canada; (b) land consolidation schemes to restructure farms into economically viable units; and (c) introduction of new legislation to modify the relationships between lessors and lessees in agriculture, to be developed for review and finalization before December 1986 and to provide credit to farmers to finance land registration operations. 1/ Fes-Karia-Tissa (Loan 1602-MOR), Loukkos (Loan 1848-MOR), and Oulmes Rommani (Loan 2217-MOR) Projects.  -8- Detailed information on land holdings is essential for the distribution of agricultural credit and improved land ten'Ue will expand the potential for credit use and investment in improved operations. In aC tion, CNCA is helping to accelerate the registration process (para. 6..Z). 2.17 Agricultural Extension. Agricultural extension services are not providing for an adequate transfer of available technology to farmers and need strengthening if maximum benefit is to be achieved by the rural community. Except for some crops, specific efforts, such as in sugar beet and vegetables, the extension service has been constrained by a number of factors: (a) an unfocused organizational structure at Rabat; (b) field level staff devoting most of their attention to administrative and commercial tasks such as input supply, mechanical cultivation, production and harvest scheduling and statistical work; (c) a lack of technical specialists with ability to develop simple, effective extension messages for extension staff; (d) an inadequate number of field staff; (e) inadequate training; (f) inadequate infrastructure, particularly field housing, and mobility; (g) inadequate operating funds in rainfed areas; and (h) absence of organized linkage between extension and research. Under the on-going ASAL (Loan 2590-MOR) reforms of agricultural research and extension services are being undertaken, affecting both rainfed and irrigated areas. These reforms are focused on low cost improvements in the field organizational structure, development of work programs, training and increased mobility within existing total staff resources, and strengthened linkages with research. Price and Subsidy Intervention 2.18 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. These official floor prices are, however, ineffective as only a small proportion of total production (10-15%) is marketed through official channels. This is due to a combination of factors which includes limited official marketing capacity for domestic production and limited budget, both of which give priority to imports. On the free market, cereal prices show sharp seasonal fluctuations, with prices below official floor prices, except for hard wheat, by 30% to 40% for up to nine months of the year. Fruit, vegetable and meat prices are not regulated. 2.19 Input subsidies to agriculture amounted to DR 961 million (US$118 M) in 1984, of which 35% was for fertilizers, 35% for animal feed and 13% for irrigation water. In addition, other subsidies cover commercial services to farmers in the irrigated areas and part of the costs of on-farm investments. It is estimated that about 70% of total input subsidies benefit irrigated farming systems, which represent less than 10% of the agricultural land and contribute about 45% of the value added in agriculture. In order to reduce excessive protection to irrigated farming systems and to encourage better use of domestic resources in the dairy sector (over two thirds of dairy production comes from irrigated areas), under the adjustment program the Government plans to eliminate gradually the fertilizer subsidy, move to fuller recovery ot water charges and of commercial services to farmers in the irrigated area, and to phase out price and distribution control on animal feed. In addition, Government also plans to operate a more effective price support program and to  9- ensure producer prices at least equal to the prevailing world prices. These measures are particularly aimed at encouraging production of cereals in the rainfed areas. E. Bank Agi:cultwral SectorStrategy and Performance under Previous Projects 2.20 The Bank's strategy in the agricultural sector has supported the Government objectives of increasing agricultural production wherever economically justified while placing, for economic and social reasons, an increased emphasis on developing rainfed areas, where a large untapped potential exists and most of the poorest members of the rural population live. In the near term, emphasis is being given to (a) highly productive projects which will increase foreign exchange earnings or savings; (b) strengthening agricultural services at the national level in order to provide an efficient support for regional projects and to address certain sector-wide policy issues; and (c) adjustments in the prices and incentives framework to promote more economic production, particularly in rainfed areas. 2.21 Bank Group lending to Morocco began in 1965, and to date, 64 loans have been made and supported by US$2,608.5 million Bank/IDA funds (US$45.2 million of IDA credits). In agriculture, 10 projects have been completed and 11 are underway. These include seven irrigation projects: Sidi Slimane (FY65), Sebou I (FY70), Souss Groundwater (FY75), Doukkala I (FY76), all completed, and Doukkala II (FY77), a Small- and Medium-Scale Irrigation (FY83) and a Large Scale Irrigation Improvement Project (FY86); five rainfed agricultural development projects in the Meknes (FY75), Fes-Karia-Tissa (FY78), Loukkos (FY80), Middle-Atlas (FY82) and Oulmes Rommani (FY83) areas; an agroindustrial and flood control project (Sebou II, FY74); a Vegetable and Marketing Project (FY80); a Forestry Project (FY82); five Agricultural Credit Projects (FY66, FY73, FY77, FY79 and FY83), four of which have been completed; and an Agricultural Sector Adjustment Loan (2590-MOR) for which a first tranche was already released because of good project performance. A second ASAL is under preparation. Performance of the Agricultural Credit Projects has been good. OED reports are available for all four of them.-I These reports stress the contribution made by the projects to agricultural development, their success in introducing institution building measures (CNCA) and the successful expansion of credit to small farmers. Following is a brief summary of their achievements. 2.22 The first and second projects (Loan 433-MOR, and Loan 961-MOR, Credit 338-MOR) financed mechanization and modernization of medium- and large-farms resulting in a maximum short-term production impact in an effort to meet urgent domestic food requirements. Part of the Third Agricultural Credit Project (Loan 1361-MOR) was directed to meet rural smallholder needs by financing improved subsistence production. The Folurth Agricultural Credic Project enlarged the project scope to include small- and medium-scale, rurally based agroindustries to promote processing and exports. The Fifth Agricultural Credit Project is pursuing the objectives of CNCA IV and 1/ First Agricultural Credit Project reviewed in Background Paper No. 4 of OED's Report on Agricultural Credit Programs; Second in Report 2543, June 25, 1979; Third in Report 3248, December 23, 1980 and the Fourth in Report 3812 of January 21, 1985.  - 10 - particularly strengthening the management structure of CNCA. All five projects had a strong institutional impact by strengthening CNCA's capital -structure and its lending appraisal and procedures, improving loan collection performance and transforming it in an efficient credit institution. A more detailed description of the projects' performance and sectoral impact is in Annex 8. Ul. "HE FINANCIAL SECTOR 3.01 Morocco has a well developed financial sector. It consists of (a) fifteen commercial banks having a combined network of about 630 branches; (b) five specialized credit institutions including CNCA; and (c) twn savings banks. Morocco has a Central Bank (Banque du Maroc) and a capital market (Casablanca stock exchange) where stocks and bonds of private companies are listed and traded. Medium- and long-term credit is provided to investors mostly by three specialized institutions: the Housing and Tourism Bank (CIH), the Industrial Development Bank (BNDE) and the Agricultural Bank (CNCA). Each of these institutions caters to its respective economic sector and has received Bank loans. In 1985, the banking system provided about DH 36.4 billion to the economy, about two thirds of which (DH 23.4 billion) were short-term. Commercial and Saving Banks 3.02 At the end of 1985, the fifteen commercial Banks had total assets of DH 48 billion (US$4.8 billion). The eight largest banks account for some 92% of total assets. Their branch network is unevenly distributed geographically, 251 of all branches being located in Casablanca where about 40% of deposits are collected and another 50% of the branches in cities along the Atlantic coast. In 1985, commercial banks extended DH 24 billion in credits to the economy (or 651 of total credits), of which 902 were short-term. In spite of Government encouragements, banks have been cautious in extending investment credit, partly because of the possibility of making higher profits at lower risk on short-term lending. ,At the end of 1985, their medium- and long-term lending (DH 2,646 million) represented 20X of total medium- and long-term credits to the economy. It represented 8% of their sight deposits (DH 34,055 million) and 24% of their term deposits (DH 11,151 million). About 25% of all commercial banks deposits originated from Moroccan immigrant workers. Commercial banks participate, under the strict control of the Ministry of Finance, in the syndicated financing of production and marketing operations of state-owned agricultural enterprises. In principle, they also offer seasonal and investment credit to individual farmers. However, (a) their branches are mostly located in urban centers along the coast; (b) they are profit-maximizers and avoid making small loans with relatively high processing costs; (c) they lack adequately trained agricultural staff; and (d) their lending is usually restricted to borrowers who also keep sizeable deposit balances and offer sufficient guarantees. As a result, their agricultural lending to individual farmers is minimal. Specialized Credit Institutions 3.03 Specialized credit institutions are responsible for the bulk of medium- and long-term lending. In 1985, they provided DH 11 billion or 80b  of all medium- and long-term credit to the economy, CNCA's share was about DH 1.5 billion or 12% of the total. Since 1981, credit extended by these institutions has grown at an average annual rate of 13% p. a. (in current terms), at the same rate as total credit to the economy. Interest Rates 3.04 The Government sets interest rate ceilings on both deposits received and loans granted by Morocco's financial institutions. Interest rates on deposits have been increased recently in April 1985, to attract savings: sight deposits yield no interest, except current accounts with CNICA (up to 3% p.a.); term deposits yield from 8.5% p.a. for 3-months deposits, to 12% p.a. for 12-month deposits. The cost of rediscounting facilities with the Bank of Morocco ranges from 4% for agricultural loans to 8% (basic rate). The yield of Treasury bills varies between 10.5% p.a. for 6-month bilis, to 12% for one year bills. Local currency bonds carry interest rates up to 11.5% and are mostly issued by specialized financial institutions (CIH, BNDE, CNCA) or public enterprises. 3.05 Lending rates were raised across the board in April 1985. Maximum rates charged by commercial banks on rediscountable loans (including agricultural loans) are now 13% for short-term loans and 15% for medium-term loans. CNCA's interest rates on loans are positive in real terms and competitive with those of other financial institutions (para. 4.09 and Annex 5). CNCA is providing an estimated 90% of investment credit to agriculture and about 50% of production credit. Recent Financial Sector Reforms and ITPA Loans 3.06 As part of the structural adjustment process (paras. 2.02 - 2.03), efforts are being made to remove distortions in the factor markets, particularly the capital market, while promoting competition in the sector and reducing Government's intervention in the economy. This has involved a reduction in the bias favoring capital by increasing the cost of capital and reducing the subsidies to capital, which includes removing interest rate rebates and shifting the foreign exchange risk to the specialized financial institutions and their clients. The April 1985 interest rates increase referred to above also made rates more flexible by setting minima for deposits and maxima for lending, to replace fixed rates and/or narrow ranges of rates. A Permanent Committee for Interest Rates has been established to review the rates on a regular basis. In addition, to begin to shift the foreign exchange risk on term-borrowings by the specialized financial institutions, the Government has set up a Foreign Exchange Risk Fund to which these institutions would contribute. The Government plans to shift gradually the full foreign exchange risk to the specialized institutions and the ultimate borrowers. This arrangement is part of the ITPA II program and directly affects CNCA (see para. 6.21 and Table 6.1 for further details).'/ 1/ Other changes have also been introduced: in reserve requirements and obligatory placements of term-deposits and certificates of deposit, in credit ceilings, and in the setting of bank commissions; all of which are designed to promote competition and domestic resource mobilization by banks.  12 - V. THE CAISSE NATIONALE DE CREDIT AGRICOLE A. Background, Organization and Staffing Organization 4.01 Established in 1961, CNCA is a wholly government-owned institution. Its objectives are: (a) to promote agricultural development in Morocco by extending credit for agricultural inputs, investments and marketing to individual farmers, farmers' groups and service cooperatives and companies and (b) to mobilize savings, especially in the rural sector. To do so, CNCA prepares and implements annual lending programs which must be approved by both the Ministers of Finance and Agriculture, and it rehabilitates its branch offices network and increases its Banking activities to increase deposits and savings. 4.02 CNCA is administered by a board of directors and a managing committee. The board of directors is chaired by the Minister of Agriculture and includes representatives of the Ministries of Agriculture, Finance, Planning, Interior, of the Bank of Morocco and of local agricultural institutions. The managing committee is chaired by CNCA's Director General and includes representatives from the bodies which are represented on the board of-directors. CNCA's chief executive officer is the Director General. He is appointed by Royal Decree and is in charge of CNCA's day-to-day operations. He appoints CNCA's staff with the exception of the Financial Controller who is nominated by the Minister of Finance. The Controller is responsible for reviewing at year-end CNCA's financial transactions and ensuring that they have complied with pertinent laws and the decisions of the board.-" The Controller participates on a consultative basis at the meetings of the board of directors. Neither the Board of Directors nor the managing committee are effective bodies as their members with the exception of the President and thte General Manager of CNCA, are little informed and/or interested in CNCAs policy and operational activity. These bodies are therefore of little or no help to CNCAs management in setting the institution's policy or providing advice on operational activity. The Project will support the institution by providing a strong and competent managing committee (para. 6.03). 4.03 CNCA's credit is extended from the headquarters in Rabat, 38 Regional Branches (CRCAs) ' and 99 Local Branches (CLCAs),'3/ of which 43 offer banking services (see Map No. IBRD 19570). Since the appraisal of the Fifth Credit Project in 1983, 5 new CRCAs and 4 CLCAs have been opened. In addition, 146 seasonal credit outlets, attached to CLCAs, have been opened and six deposit branches in major urban centers have been added. There are six Inspection Directorates (IRCAs)!' in charge of banking inspection, coordination of credit activities, and undertaking special surveys and studies. However, due to the rapid expansion of the lending program, additional and more modern office space is needed. The Project will support construction 1/ Prior approval is required only where expenditures are to be made that are not included in the budget. 2/ Caisses Regionales de Credit Agricole. 3/ Caisses Locales de Credit Agricole. 4/ Inspections Regionales de Credit Agricole.  _13- and rehabilitation of CNCA's headquarters and branch offices to improve the administration of the lending program and the expansion of banking activities (para. 6.08 and 6.09). Staffing and Staff Training 4.04 As of August 31, 1985, CNCA staff numbered 2,159. Staff productivity is relatively high. The number of loans granted annually per operational staff is about 230 for CRCAs and 500 for CLCAs. The level of education of CNCA's staff is adequate. Most administrative and account officers are high school graduates or have a diploma in accounting. Middle and higher management staff (11% of total) are university graduates. Every newly appointed employee receives induction training from one to six months depending on his or her position. In addition, the training department in CNCA, established under the Fourth Agricultural Credit Project, prepares and implements training programs in various activities (agroindustries, accounting, banking activities) for continuous in-service training. The low level of salaries especially at the senior management level is an issue. In recent years, CNCA has been losing up to 10% of its more experienced managers as they find better paid positions in the private sector. Some adjustment in salary scales was made recently, and CNCA's management comittee has been assigned responsibility of establishing salaries of high level staff on the basis of market conditions. B. Lending Policies and Procedures 4.05 CNCA's objective has been to provide maximum access to credit, make the provision of credit rapid and simple and adapt credit norms to regional agroeconomic conditions. Simplification of procedures and expansion of the range of investments financed have been the main characteristics of CNCA's credit policies since 1975. Lending operations are governed by "'Credit Guidelines" which are revised every year in collaboration with MARA. These guidelines are comprehensive and cover types of credit available, appraisal criteria, financing norms, sub-borrower contributions, interest rates, loan approval authorities, security for loans and maximum credit ceilings available to borrowers. Lending procedures are different for commercial farmers, clients of headquarters or CRCAs, and for small farmers who are clients of CLCAs: Headquarters and CRCAs' loans are subject to considerably more stringent appraisal criteria than CLCAs' loans for which procedures are streamlined. Short-term loans are usually granted for periods of 3 months (harvest loan) to 12 months and finance farm inputs and produce marketing; medium- and long-term loans extend from 2 to 25 years and finance a wide range of on-farm investments. Head Office and CRCAs 4.06 The head office lends to a few large farmers whose borrowings exceed CRCAs' loan approval authority, state-owned comranies producing or marketing agricultural products, irrigation development otiices and agroindustrial enterprises. CRCAs lend to individual farmers with a fiscal income (Fl)"' 1/ Net income estimated for tax purposes. Depending upon the crops grown, real annual net tarm incomes range from 2 to more than 20 times fiscal incomes.  - 14 - above DH 6,000 (actual net farm income of at least DH 12,000 or US$1,200) and to Agrarian Reform Cooperatives. CNCA has achieved a good balance between thoroughness of appraisal and the objective of reaching a large number of farmers with limited staff resources and operating costs. Field appraisal is systematically undertaken for investments in land improvement, irrigation, pure bred livestock, plantations, poultry farming, rural housino and for all loans disbursed by installments. On-farm appraisal is also carried out for other purposes when considered necessary. Credit norms are set to cover about 70S of estimated crop production costs and 502 of investment costs. 4.07 Loan applications are reviewed and approved by CRCAs' credit committee, which is chaired by the CRCA director and meets weekly. However, Internal Credit Commissions (ICC) were created in 1975/76 to simplify and speed up application processing. They are composed of the CRCA director and two of his staff who can meet daily, if necessary, to approve short-term loans. The type of guarantee required from borrowers is based on CRCA staff judgment of credit risk. Short-term loans to individuals are generally secured by crop liens and sureties and medium- and long-term loans by a chattel mortgage on equipment. Loans for land improvement, irrigation and constructions are secured by a mortgage. CLCAs 4.08 CLCAs make loans to small farmers with fiscal income between D3 50 and DR 6,000, which corresponds roughly to annual net farm income of about DH 250 (US$25.0 million) to DH 12,000 (US$1,200). Comprehensive lists of farmers' FI are kept with CLCAs and consulted for every loan application. As in the'case of CRCA clients, loan amounts are determined on the basis of norms revised annually. However, there is a ceiling on maximum borrowings intended to keep borrowing within estimated debt capacity of CLCA clients. For farmers having documented title to their land, maximum short-term borrowing is limited to DR 30,000 (US$3,000) and maximum medium-term loans outstanding to DH 55,000 (US$5,500). For borrowers who cannot present evidence of ownership (which represent about 952 of CLCA clients), short-term loans are limited to 200% of their FI and annual medium-term loan installments to 160X of FI. The ceiling on borrowing capacity minimizes CLCA lending risk. This is important, because loan appraisal is based on desk review. Systematic field appraisal and supervision of small farmers' loans (average short-term loan is DH 1,700 or US$170) would not be administratively or financially feasible. The FI ceiling is necessarily arbitrary, however, and often not related to investment cost or actual farmer's repayment capacity. As a result, credit provided to CLCA clients often constitutes less than 60% of production cost and 50% of investment costs. Under this Project, new criteria would be applied for establishing eligibility and credit ceilings in two large regions where about 40% of CNCA's credit is extended (para. 6.11). Interest Rates 4.09 Current interest rates on CNCA's loans are presented below:  - 15-- Table 4.1: CNCA's INTEREST RATES ON LOANS Per Annualized HQs and CRCAs Annum % CLCAs Fee /a Rate (2) Short-term Loans Short-term Loans Crop Marketing 8.0 Cereals and Pulses 8.0 10.6 Harvest Loans 3.0 12.0 Other 8.5 11.3 Cereals & Pulses 10.0 Other 12.0 Medium- & Long-term Loans Medium- and Long-term Loans All Medium-Term Loans 13.5 All loans 11.0 13.3 All Long-Term Loans lb 14.0 Agroindustrial Loans /e 14.0 Rural Housing /d 14.0 /a For CLCA loans, a front-pod fee is charged on loan amount instead of an annual interect -ate. lb Maturity period more than 10 years. /c Maturity period 2-15 years. /d With a Government 7% rebate. In addition, an appraisal fee- of 0.5% is charged on CRCAs and HQs loans1' and a 0.75% commitment fee on loans over DH 100,000. All medium- and long-term loans are also charged a 1% front end guarantee commission to partially cover the foreign exchange risk. Interest rates on CNCA's loans are now compatible with those charged by commercial banks for agricultural loans, which range from 10% to 12% p.a. on short-term credit and from 12% to 15% p.a. for medium-term credit. CNCA's interest rate for agroindustrial loans is 14% p.a. Bank projections indicate a decline in the domestic rate of inflation from 10% in 1985 to 8% in 1987-1988. This would keep CNCA's current lending rates positive in real terms during the project period. However, if real on-lending rates were to become negative, credit rationing would result, with large, low risk borrowers obtaining most of the credit. Increase in the cost of CNCA's resources would also undermine CNCA's financial viability. A mechanism has been established under the Fifth Agricultural Credit Project to adjust CNCA's interest rates on its loans .o as to protect its financial situation. The same mechanism would be applied under this Project (para. 6.18). C. Lending Operations 4.10 In 1984/85, total CNCA lending reached DH 2,638.1 million (Table 4.2), up from DH 951.6 million in 1980/81, for an average rate of growth of 29% p.a. over the period. In real terms, lending increased at about 9% per year. 1/ On oans of more than DH 5,000. In 1984/85, the proceeds of this fee amouzted to DH 7.6 million.  -16- Table 4.2: CNCA LENDING OVER THE 1981-1985 PERIOD Average Growth Rate 1980/81 1981/82 1982/83 1983/84 1984/85 81/82-84/85 -(DR Million) -- -() Short-term Lending 579.8 817.3 869.2 881.2 1,138.6 18.4 of which: CLCAs Share 65.2 132.2 96.2 108.4 159.4 25.0 in Total Lending 61% 551 50% 51% 43% Med. & Long-term Lending 371.8 681.9 872.4 846.4 1,499.5 41.7 of which: CLCAs 190.5 303.6 396.7 365.8 678.1 37.4 Share in Total Lending 39% 451 50% 49% 451 Total Lending 951.6 1,499.2 1,741.6 1,727.6 2,638.1 29.0 of which: CLCAs 252.3 435.8 403.9 474.2 837.5 38.0 Share of CLCAs 27% 29% 232 27% 32X Total lending in real 951.6 1,338.7 1,351.4 1,081.4 1,319.0 8.5 Terms /a /a Using GDP deflator. 4.11 Over the period, the share of short-term credit in total credit decreased from 61% to about 43X. In 1984/85 short-term loans to private farmers have primarily financed crop production (421), animal production (381) and animal feed (121). Short-term credit to State agricultural companies, which represented 20% of total short-term lending, was used mainly (721) to finance, throogh the ORMVAs, industrial crop production (cotton, sugar beet and sugar cane) in irrigated perimeters. About 45% of total mediUgl- and long-term credit went to CLCA clients, 432 to individual CRCA clients and the balance to Agrarian Reform Cooperatives (2%), State companies (31), agroindustries (301, rural housing (4%). Four types of investment represented more than 82% of total lending: livestock (40%), construction (19%),/' mechanization (17%), and draft animals (161). Credit Coverage 4.12 Between 1981/82 and 1984/85 total amount of lending to individual farmers increased from DH 1,292 million to DHi 2,379 million, an average rate of growth of 16.4% p.a.. During the same period, loans to small farmers increased by about 29%. Excluded from these figures are loans to Agrarian Reform Cooperatives, whose members are, by definition, small farmers, and loans granted through ORMVAs to private farmers (many of whom are small-holders) for the production of industrial crops. The extent of CNCA's credit penetration in rural areas is illustrated in the table below: I/ Construction is usually of stables for livestock and thus is often part of a total on-farm investmen. in livestock activities.  - 17 Table 4.3: NUMBER OF POTENTIAL AND ACTUAL CNCA INDIVIDUAL CLIENTS /a No. of Actual Clients as % Individual Farmers Potential Actual CNCA Clients of Potential Clients Fiscal Income Clients 1973 1977 1985 1973 1977 1985 - .. (number)