Morocco - Industrial Export Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6537-MOR STAFF APPRAISAL REPORT MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT March 4, 1987 Regional Projects Department Europe. Middle East and North Africa Regional Office 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 EQUIVALENT Currency Unit = Dirham (DR) DH per US$ 1982 1983 1984 1985 1986 Year Average 6.02 7.11 8.81 10.06 9.07 Year End 6.27 8.06 9.55 9.62 8.71 FISCAL YEAR January 1. - December 31 LIST OF ABBREVIATIONS ASMEX Association Marocaine des Exportateurs BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BdM Banque du Maroc BMCE Banque Marocaine du Commerce Exterieur BMCI Banque Marocaine pour le Commerce et l'Industrie BNDE Banque Nationale pour le Developpement Economique CCG Caisse Ce.atrale de Garantie CDM Credit du Maroc CGEM Conf6deration Gen6rale des Entreprises Marocaines CIH Cr6dit Immobilier et Hotelier CMPE Centre Marocain de Promotion des Exportations CNCA Caisse Nationale de Credit Agricole CNS National Commission for Simplification of International Trade Procedures DCE Directorate of International Trade, in MCI DI Directorate of Industry, in MCI EEC European Economic Communities EMIs Electrical and Mechanical Industries ERR Economic Rate of Return FRR Financial Rate of Return ISCAE Institut Sup6rieur de Commerce et d'Administration des Entreprises ITC International Trade Center ITPA Industrial and Trade Policy Adjustment MCI Ministry of Commerce and Industry OCE Office de Commercialisation et d'Exportation OCP Office Cherifien des Phosphates OdC Office des Changes ODI Office pour le Developpement Industriel PBs Participating Banks SAL Structural Adjustment Loan SGMB Soci6te G6nerale Marocaine de Banques SIT Special Import Tax SSIs Small-Scale Industries VAT Value Added Tax  FOR O CAL USE ONLY KINGDOM OF MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT Loans and Project Summarp Borrowers: Eight Moroccan banks: Banque Nationale pour le Developpement Economique (BNDE, coordinating bank) and seven Moroccan commercial banks: Banque Commerciale du Maroc (BCM), Banque Centrale Populaire (BCP), Banque Marocaine du Commerce Exterieur (CMCE), Banque Morcairne pour le Commerce et l'Industrie (BMCI), Credit du Maroc (CDM), Societe Generale Marocaine de Banques (SGMB) and Wafabank. Guarantor: The Kingdom of Morocco. Amount: US$70.0 million equivalent in aggregate. Terms: 15 years, including 4 years of grace, at the standard variable interest rate. The foreign exchange risk on the Bank loans will be borne by final borrowers, or will be covered by the Foreign Exchange Risk Fund if the final borrowers take sub-loans in local currency. On-lending $69.7 million will be on-lent by the financial intermediaries Terms: to private exporting enterprises. Each financial intermediary has been allocated, for a period of commitment of 3 years, a line of credit on the basis of its pipeline of sub-projects. The interest rate on investment sub-loans to exporters will be the variable Bank rate plus 3Z, if sub-loans are in foreign currency. If sub-loans are in local currency, the interest rate will be between 13 and 162, which is consistent with Local market rates on medium- and long-term loans (which are reviewed twice a year by the Permanent Committee for Interest Rates - created under the second Bank Industrial aad Trade Policy Adjustment (ITPA) Loan -- and adjusted if need be) and would remain significantly positive in real terms. The terms of investment sub-loans will reflect the economic life of sub-projects, with a maximum maturity of twelve years, including a maximum grace period of three years. $20 million, in aggregate, of the credit lines would be used initially for working capital financing for exporters. The interest rate on working capital sub-loans will be the Bank rate plus 22; maturities for these sub-loans would not exceed one year. ($0.3 million would be borrowed by BNDE to finance expert services needed for executing subsector studies and for staff training and technical support). 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.  Table of Contents (continued) Chapter VI. AGREEMENTS ............................... .. ....... 50 Agreements Reached during Negotiations ................... 50 Condition of Loan Effectiveness .......................... 52 TABLES Table 2.1: Sectorial Distribution and Performance of the Manufacturing; 1980 and 1985 ............................. 4 Table 2.2: Investment Approvals in Manufacturing; 1982-86 ........... 5 Table 2.3: Exports (current DH million); 1980 and 1985 ............... 6 Table 2.4: Manufactured Exports (DH million); 1980 and 1985-86 ...... 7 Table 2.5: Principal Characteristics of Industrial Firms, Classified by Market Destination of their Production; 1985.......... 9 Table 2.6: Characteristics of Selected Export Industries; 1985 ...... 9 Table 2.7: Destination of Exports; 1985 ............................. 11 Table 3.1: Distribution of Credit to the Economy; 1982-85 ........... 16 Table 3.2: Outstanding Export Credits Rediscounted by Banque du Maroc as of December 31, 1985 ............................ 18 Table 4.1: BNDE's Operations; 1982-86 ......................... ...... 21 Table 4.2: BNDE's Financial Situation and Performance; 1982-85 ...... 23 Table 4.3: BNDE's Loan Portfolio and Arrears; 1982-85............ ... 24 Table 4.4: BNDE's Projected Operations and Resource Mobilization; 1986-90 ................. .................*................. ................... 25 Table 4.5: BNDE's Projected Financial Situation and Performance; 1986-90 ........................................................... 26 Table 4.6: Summary Indicators of the Participating 'Commercial Banks. 28 Table 5.1: Anticipated Credits by Participating Banks for Export- Orieated Projects for the April 1987-March 1989 Period... 34 ANNEXES 1. The Manufacturing Sector, 1980 and 1985 ............... ...........0.. 53 2. Investment Approvals under the Industrial Code, 1982-85 ... ..... .. 54 3. Export Performance, 1981-85, ............. . ...... . ..... ........ 55 4. Structure of Key Interest Rates, 1983-85 ... ............ ...... 57 5. BNDE: - Industrial MT and LT Loan Approvals, 1983-86 ...........0 58 - income Statements, 1982-85. ....................................... . 59 - Balance Sheets, 1982-85.............. ............ ...... .... 60 - Sources and Applications of Funds, 1982-85 ................. 61 - Projected Balance Sheets and Income Statements 1986-90 ..... 62 - Projected Sources and Applications of Funds 1986-90 ........ 63 6. The Participating Commercial Banks ............. ....... .. 64 7. Facilitation: Technical Assistance, Draft Terms of Reference ..... 68 8. Checklist of Items in Appraisal Reports and Export Development Plans ................................................................ 69 9. CMPE: Technical Assistance, Draft Terms of Reference ............. 72 10. Estimated Disbursement Schedule ......... ....... 73 11. Documents in the Project File ....... ............................ 74 MAP  INDUSTRIAL EXPORT FINANCE PROJECT 1. INTRODUCTION 1.01 This report appraises a project designed to provide financial assistance to Morocco's export industries. In parallel, institutional strenghtening would be undertaken of the National Commission for Simplification of International Trade Procedures (CNS), the Directorate of Industry (DI), Banque Nationale pour le Developpement Economique (BNDE), Centre Marocain de Promotion des Exportations (CMPE) and participating commercial banks. The project also aims at bringing about improvements in the policy and administrative framework. for exports. Under the Bank-supported Industrial and Trade Policy Adjustment (ITPA) program undertaken since 1984, the Covernment has adopted a flexible exchange rate policy, liberalized imports and exports, reduced tariff and non-tariff protection, and begun to simplify the administrative procedures for exports and export-related imports. The ITPA program has succeeded in reducing the anti-export bias, and provides the framework to the proposed project which addresses directly the country's need for significant growth of its exports to gradually achieve an improvement in its balance-of-payments situation. The project was prepared by Bank missions in 1985 and 1986 in response to the Government's desire to promote the development of exports of manufactures. 1.02 The proposed package of eight Bank loans, amounting to a total of US$70.0 million, would be made to BNDE and seven commercial banks. The lines of credit would be on-lent by the eight participating banks to industrial enterprises for eligible expvrt-oriented sub-projects. BNDE would use up to US$300,000 of its line of credit to finance consultant and advisory services for training its staff and providing them with technical support for undertaking sub-sectoral studies. IL THE INDUSTRIAL SECTOR A. Macroeconomic Background 2.01 Morocco's overall economic performance (1973-1986). Following the 1973 oil crisis, the price of phosphate - Morocco's main natural resource quadrupled. In the expectation of large export earnings, the Government then embarked on an ambitious development program based on an import substitution industrial strategy and heavy public investment. When phosphate-generated earnings tapered off in 1975-1976, the Government did not reconsider its program; instead, it maintained it and resorted to increased foreign borrowing. 2.02 Starting in 1975, the Government began increasing its mobilization of domestic resources by across-the-board raises in trade taxes (special import  2- tax (SIT) and stamp duty, in particular). Between 1978 and 1980, it attempted to stabilize the economy through expenditure cuts, import controls and further increases in trade taxes. These efforts did not prove successful, but public investment continued to expand, financed by further foreign borrowings and grants. Also, from 1980 onwards, the agricultural sector was severely affected by a series of droughts, which led to increased imports of cereals and other foodstuffs, with an attendant drain on foreign exchange reserves. The Government kept subsidizing the consumer prices of foodstuffs, which resulted in additional budgetary expenditures. 2.03 Li spite of the deteriorating economic situation, the Government did not adjust its foreign exchange rate as necessary. From 1973 !.o 1979, the exchange rate appreciated by 10-15% in real terms; in 1979-80, it declined by 4-51 only. A1l these factors led to an increase in the current account deficit which reached t2 billion in 1982 (or 13.3% of GDP). Foreign exchange reserves kept decreasing and, in March 1983, they were completely depleted. The Government then suspended all payments in foreign exchange, subjected all imports to prior administrative authorization and undertook to reschedule its foreign debt with international commercial banks. 2.04 The stabilization and adjustment process. Since 1983, Morocco has embarked simultaneously on a program of macroeconomic stabilization and a program of adjustments in the industrial and agricultural sectors. 1/ The objectives of the stabilization program were to reduce the current account deficit to 7.11 of GDP by 1985. The Treasury deficit was also to decrease to 6.12 of GDP, from 12.31 in 1982. These objectives were expected to be achieved by limiting monetary expansion, increasing turnover taxes, reducing subsidies to basic commodities and increasing public utility prices, as well as reducing Treasury recurrent and capital expenditures. The Government also undertook to reform the tax system (inter alia, by replacing the turnover tax by a value added tax (VAT)) and to improve tax collection. 2.05 The Government also decided to undertake, aleng with this stabilization program, the structural reforms needed to restore a viable balance of payments position in the medium-term. For that purpose, it adopted a strategy that encompassed: (i) adopting a realistic exchange rate policy; (ii) reducing progressively the anti-export bias resulting from tariff and non-tariff protection; (iii) simplifying the administrative procedures for exports and export-related imports; (iv) improving the system of export finance; (v) providing indirect exporters with the same access as direct exporters to special customs regimes; and (vi) establishing institutions to encourage and develop exports. 1/ These have been supported by the IMF ($200 million for the period June 1983-June 1985) and the Bank (0450 million since 1984 under ITPA-1, ITPA-2 and ASAL-1; para 2.06), with additional financing being provided in the form of commercial debt rescheduling ($1.7 billion for the 1983-84 period).  -3- 2.06 This strategy has been the foundation of the Government's Industrial and Trade Policy Adjustment (ITPA) program, which the Bank has supported through its 198I and 1985 ITPA-1 and ITPA-2 loans. 1/ Under the ITPA program, the Government has taken significant steps to implement this strategy. 2/ The program is well advanced and expected to be completed in 1988. 2.07 The implementation of the ITPA program is already having its first positive effects, as developments in the export sector in 1985 have been quite favorable. Manufactured exports increased by 142, and tourism receipts by 172. Nonetheless, total exports of goods and non-factor services only increased by 2.5S in constant prices, due to the poor performance of phosphate rock and derivatives. Despite the liberalization of imports and the reduction of tariff barriers, imports for the domestic market did not increase signficantly. 2.08 In 1986, Morocco's export performance has continued to be satisfactory. Imports have fallen further as a result of currency adjustments, the fall in the price of crude oil and lesser imports of cereals - the latter, due to a return to normal rainfalls. The current account deficit is projected to be less than 2% of GDP in 1986. However, the foreign debt of Morocco is still substantial; medium and long-term foreign debt currently stands at $12.9 billion, or 88% of GDP. Furthermore, due to the magnitude of the debt service, external arrears have significantly increased, to about $450 million at end-1986. 2.09 The need to export. Continued export growth remains indispensable to enable Morocco to service its debt and achieve economic recovery. Estimates are that total export growth over the next decade should rise to over 7S p.a. in real terms in order to overcome the debt problem and to enable the economy to achieve positive growth. Given the fluctuations in the export performance of the agricultural and phosphate sectors, the above target would require growth rates of manufactured exports (para 2.14) higher than 151 p.a.. Manufactured export growth is, therefore, of central importance in Morroco's medium-term strategy. 2.10 Attaining growth rates of this magnitude, however, would require the continuation of a comprehensive economic program. First, the industrial and trade policy adjustment process should be continued, including further reduction of the anti-export bias (via appropriate exchange rate policy and continued import liberalization and tariff reform), as well as further I/ Reports P-3707-M0R and P-4075-MOR. ITPA-2 also contained a component relating to financial sector reform. 2/ These steps include: (a) the depreciation of the Dirham; (b) the liberalization of exports and imports; (c) the elimination of the statistical export tax; (d)'an across-the-board reduction of the SIT (from 152 to 7.5%, to be further reduced to 52 by January 1, 1987); (e) the reduction of the maximum rate of import duties from 2001 to 45%; (f) a substantial improvement in customs regimes for exporters; (g) the creation of the National Commission for the Simplification of International Trade Procedures; and (h) the reform of the export insurance system.  -4- improvements in the fiscal and administrative framework. J/ The Bank is discussing assistance to the Government to support this objective, possibly through a Structural Adjustment Loan (SAL) (para 2.33). And second, export-oriented productive capacity should be increased since capacity utilization in the export industries is already quite high (para 2.23). The proposed project aims at contributing to achieve the latter objective. B. Industria Exports: Structure, Performance and Constraints (i) The Manufacturing Sector 2.11 Performance. Prior to the shift in Government policy in 1983, the development of the manufacturing sector was based on import substitution behind high tariff protection and on large public investments in capital intensive projects (para 2.01). This policy did not succeed, as the growth of manufactucing production declined from an annuw. average of 6.0% in real terms in 1974-78 to an average of t.4% in 1979-83. During 1984-85, manufaccuring production dropped 'by 0.9% in real terms. The share of manufacturing in GDP, which had remained at around 17.5% in 1974-78, declined to 15.4% in 1985. The manufacturing sector currently accounts for about 11.5% of total employment in the country. 2.12 The performance of manufacturing, by sub-sectors, during the last five years is presented in Annex 1 and summarized in the table below. Table 2.1: SECTORAL DISTRIBUTION AND PERFORMANCE OF THE MANUFACTURING SECTOR: 1980 AND 1985 (percentages) Value Added Exports Exports/Output 1980 1985 1980 1985 1980 1985 Food Industries 26.1 33.3 24.6 17.3 9.2 9.2 Textiles & Leather 17.6 16.7 20.7 31.1 19.0 36.0 Engineering 18.1 19.0 3.2 6.1 2.7 6.3 Chemicals & Others 38.2 31.0 51.5 45.5 20.1 24.1 TOTAL 100.0 100.0 100.0 100.0 13.3 17.9 Source: Ministry of Commerce and Industry 1/ In particular, further improvements are needed in the following areas: simplification of international trade procedures and documents, access to foreign exchange and export financing in Dirhams, international trade legislation, special customs and VAT regimes for exporters, and export promotion and marketing. There is also a need to ensure equal access to export incentives for direct and indirect exporters.  Value added in food industries recorded the highest growth during the period, but this growth was absorbed by the local market and the contribution of food industries to total manufacturing exports declined in relative terms. Textiles and enigineering maintained their level of participation in manufacturing value added. Their contribution to manufacturing exports, however, significantly increased, mainly as a result of the depressed domestic market conditions -- themselves due to the fall of agriculture production and public investment. As regards chemicals and others5 production declined in wood, paper, construction materials, -ubber and plastics. The Office Cherifien des Phosphates (OCP) Group, however, started during that period the production of fertilizers for export, which compensated for the decline in 1984-85 of exports of phosphoric acid. Phosphate derivatives still represent the most important source of manufactured exports. The share of manufacturing in total Moroccan exports has continuously increased, from 21% in 1974 to 40% in 1980 and almost 50% in 1985. Significant potential exists for further diversification of products -- as suggested in paras Z.15 and 2.18 - as well as of markets; in 1985, about 46% of Moroccan exports other than minerals and phosphate derivatives (phosphoric acid and fertilizers) went to two countries, France and Germany (para 2.24). 2.13 Investment. Industrial investment approvals by the MCI in 1982-1986 are presented in Annex 2, and are summarized in the table below. Table 2.2: INVESTMENT APPROVALS IN MANUFACTURING: 1982-86 (in DR million and percentages) As of Sept. 1982 1983 1984 1985 1986 Amount % Amount . Amount T% Amount . Amount . Food Industries 849 32 948 42 553 29 672 33 574 34 Textiles & Leather 361 13 364 16 717 ,.6 781 28 627 27 FAgineering 294 11 345 15 583 21 395 14 321 14 Chemicals & Others 1,177 44 608 27 667 24 704 25 599 25 TOTAL 2,681 100 2,266 100 2,778 100 2,832 100 2,350 100 of which: Publ:.. 921 34 90 4 215 8 105 4 86 4 Private - Moroccan 1,547 58- 1,721 76 2,042 73 2,276 80 1,610 68 - Foreign 213 8 455 20 521 19 451 16 654 28 Source: Ministry of Commerce and Industry The overall level of investment in manufacturing remained at about the same -level (DR 2.3 - 2.8 billion) between 1982 and 1985; but this represents a decline by about 207 in real terms. Whereas private ir,vestment increased by 262 in real terms during the period, public investment dropped by over 907. By sectors, the largest drop was recorded in chemicals and-others (e.g., paper and cement) and to a lesser extent in food industries (e.g., sugar), due to  the completion of some large public investment projects. Although suall, the level of investment ir engineering was maintained. Investments in tixtiles and leather increased significantly, particularly since 1984, due to the steady increase of textile exports to established markets, the successful penetration of new markets (the USA, in particular, for textiles) and improved marketing abroad of Moroccan leather goods. Foreign investment, encouraged by a new Investment Code approved in 1983, increased by 602 in real terms. Ira the past, foreign investment had been limited by administrative red tape and the "Moroccanization" policy introduced in the early 1970s. About 432 of total private investment approvals during this period were for the creation of new companies. (ii) The Exvort Sector 2.14 Table 2.3 below shows the evolu ion of exports from 1980 to 1985. I/ Table 2.3: EXPORTS (CURRENT DH MILLION): 1980 AND 1985 1980-85 Annual Growth Rate (2) 1980 1985 in current in const. Value (2) Value (2 D8 Prices Non-Manufactured Exports 6,501 (71.5) 11,020 (50.6) 11.1 -4.7 Food (non-processed) 1,924 (24.1) 3,914 (18.0) 15.3 -6.0 Petroleum products 467 (4.8) 845 (3.9) 12.6 -5.1 Agric. raw materials 399 (4.1) 574 (2.6) 7.5 -6.3 Phosphate rock 3,012 (31.2) 4,816 (22.1) 9.8 -2.2 Other.minerals 699 (7.3) 871. (4.0) 4.5 -2.1 Manufactured Exports 3,144 (28.5) 10,720 (49.4) 27.8 12.9 Phosphate derivates 946 (9.8) 4,334 (20.0) 35.6 20.9 Food (processed) 674 (7.0) 1,581 (7.3) 18.6 0.6 Manufactures, non-food 1,524 (11.7) 4,805 (22.1) 25.8 11.7 TOTAL 9.645 (100.0) 21.7kO (100.0) 17.6 1.2 Source: Office des Changes The structure of exports has changed significantly between 1980 and 1985. In that period, only manufactured exports recorded positive annual growth rates in constant prices, especially phosphate derivatives (20.92) and non-food manufactures (11.72). The share of fresh and processed food in total exports declined from 31.12 to 25.32, in part because of the severe drought between 1980 and 19v4. Phosphate rock exports declined in relative importance, from 31.22 to 22.12, reflecting the continued low demand for this commodity on the international market. This was more than offset by the growth in exports of phosphate derivatives (phosphoric acid and fertilizers) which increased from 9.82 of total exports in 1980 to 20.02 in 1985, mainly as a result of a policy to increase the local processing of phosphates. The next highest performance was by non-food manufactures which represented 11.72 in 1980 and 22.1S in 1985. In fact, by 1985, the share of non-food manufactures in exports was one of the two largest, surpassing that of non-processed foods whose share dropped to 18.02. 1/ For detail for the last five years, see Annex 3 (Table A).  -7- (iii) Structure and Recent Performance of Manufactured Exports 2.15 Structure. Between 1980 and 1985, manufactured exports evolved as follows: Table 2.4: MANUFACTURED EXPORTS (DH MILLION): 1980 AND 1985-86 1980 1985 1st 02mester Vi. lue (Z) Value (2) 1985 1986 Phosphate derivatives 946 (30.4) 4,334 (40.4) 1,686 1,384 Processed foods, of which 674 (21.6) 1,581 (14.7) 653 637 -canned fish 341 (10.8) 722 (6.7) 263 323 -canned fruits & vegetables 264 (8.5) 556 (5.2) 232 230 -beverages 69 (2.2) 303 (2.8) 158 84 Non-food manufactures, o.w. 1,524 (49.0) 4,805 (44.9) 2,274 3,019 -mineral derivatives 194 (6.2) 338 (3.2) 137 131 -yarns n.r. n.r. 251 (2.3) 119 158 -garments 295 (9.5) 1,302 (12.2) 637 798 -knitwear 113 (3.6) 469 (4.4) 222 373 -carpets 286 (9.2) 395 (3.7) 188 228 -shoes and leather 140 (4.5) 374 (3.5) 157 223 -fabrics 30 (1.0) 390 (3.6) 118 135 -miscellaneous 466 (15.0) 1,286 (12.0) _696. 973 TOTAL 3,144 (100.0) 10,720 (100.0) 4,613 5,040 Subcontracting 39 n.a. 450 n.a. 204 222 Source: Office des Changes Phosphate derivatives) produced by a public enterprise (OCP), have grown at a fast pace of 35.6% p.a., increasing their share to 40.4% of total manufactured exports. Other manufactured exports have increased at about 24% p.a. between 1980 and 1985. The average annual growth of non-food manufactured exports was about 262. Within non-food manufactures, the textile and leather sectors (garments, in particular) are dominant, accounting for about DH 3.2 billion or about 66% of the corresponding subtotal. Processed food exports increased at about 19% p.a., consisting primarily of canned fish and of fruits and vegetables; exports of beverages (mainly, orange juice) increased significantly in 1985, due to an exceptional demand from Europe. Exports under the miscellaneous category have also incrt.ased significantly (22.5% p.a.); though individually marginal in importance, they generated DR 1,286 billion of foreign exchange - i.e., about 271 of the total amount generated by the non-food manufacturing sector. 2.16 The above figures, however, only cover exports recorded in Morocco's external trade statistics and thus, omit re-exports of foreign-owned goods sent to Morocco for processing on a subcontracting basis. Exporters in this activity only bill for their services (i.e., value-added in Morocco), and this  -8- is recorded in the current accounts as a non-factor service. In 1985, total foreign earnings from these subcontracting activities amounted to DH 450 million. Since this figure corresponds to the value added in Morocco (and represents net foreign exchange earnings) and sincA the share of value-added in exports lies in the 25-40% range, the equivalent gross foreign exchange earnings would be between DH 1.1 and 1.8 billion. Thus, gross foreign exchange earnings derived from non-food manufacturing is in fact considerably greater, by 23-38%, than the DH 4.8 billion shown in Table 2.4. In the garment and knitwear sectois, in particular, subcontracting exports represented, in tonnage terms, an additional 50% over the volume shown in the above mentioned table. In the electronics sector, the majority of exports occur under subcontracting arrangements. In aggregate terms, total tonnage of subcontracting exports more than quadrupled between 1980 and 1985, and corresponding foreign earnings increased twelvefold, from DH 39 to 451 millions, during the same period. 2.17 Recent Performance. In 1983-84, the Government adopted a more export-oriented policy (para 2.05), and preliminary effects of this policy orientation can be noticed (table 2.07). The analysis of the 1980-83 and 1984-85 periods shows that most sectors have increased their growth rates after 1984. However, there was a pronounced decline in the growth of earnings from phosphate derivatives (from 29.52 p.a. before 1984 to 2.9% after 1984), due to a fall of dem&ad in the world market. The same was true for fabrics (from 67.4% to 17.8S), due to the fall of the Middle East market and the increased integration of local fabrics in exported garments. There was also a further decline in exports of carpets (from -4.12 to -12.6X), due to the continued marketing problems affecting the sector. On 'the other hand, the annual growth for subcontracting was higher after 1984 than before. Finally, it should be noted that in 1984 and 1985, most of the export growth seems to have resulted from volume effects whereas, in 1986, price effects have been in some cases -- an important factor in the growth of export earnings. 2.18 The most recent indicators of export performance pertain to the first semester of 1986. In that period, export earnings from phosphate derivatives were less than in the same period of 1985 (-7.12), due to the continued fall in world prices. On the positive side, non-food manufactures registered a significantly higher growth, especially knitwear, leather and miscel'laneous exports. Also, there was a reversal in the downward trend for carpets (-12.6% in 1984-85), which recorded a growth of 15.5X. On the negative side, growth of subcontracting has slowed down considerably. Also, exports of processed foods declined by about 7%; this was primarily due to a major fall in exports of beverages (in particular, orange juice) and in exports of canned vegetables and fruits (-62) which could not be offset by a 17% increase in exports of canned fish. 2.19 Characteristics of exporting industrial firms. In 1985, there were about 4,000 firms in the manufacturing sector, of which about 3,240 produced exclusively for the domestic market, as shown below; the others (about 760) produced for both the domestic and the export markets. Table 2.5 summarizes the principal characteristics of the two groups.  -9- tahle 2.5- PRINCIPAL CHARACTERISTICS OF INDUSTRIAL FIRMS, CLASSIFIED BY MARKET DESTINATION OF THEIR PRODUCTION: 1985 No. of Value Employ- Aver. Ann. YA WKL Y Market$ Served Firms rxQts Erni. Asdded (VA) mnDt (oLI aco {OH YAL Pr2d {X ---- (OH billion) ...-..-- ('000) --- (ON '000) --- ------- Oomestic market only 3247 - 32.2 a.7 115.1 28 76 37.1 27.0 Foreign and domestic .2I U1a V2A _.iL2 3iI- ZI it 114 ZLa TOTAL 4009 11.4 60.0 14.9 224.1 27 66 40.7 24.8 YSurtu: Ministry of Commerce and Industry The above table shows that about 19.0% of total industrial production is exported; for firms which export, the corresponding figure is 41.5X. Compared to the companies working only for the domestic market, the export sector is smaller (19S of total number of firms), but the firms are larger (about 4 times, on average) and they take a more than proportional share of the industrial sector's output (about 461) and value added (421). Average wages do not differ significantly between the two sectors, but the share of wages in value added is higher for the export sector (45.41) than for the domestic market sector (37.11). Also, the value added to labor ratio -- A. measure of labor intensity -- is lower for exporting firms (DH 57,000) than for those serving exclusively the domestic market (DH 76,000). 2.20 The analysis of exports by size of firm (measured by the level of employment) shows that about 522 of exports (approximately DR 6.0 billion) are accounted for by 40 firms, each employing more than 500 people. An additional DH 3.3 billion of export earnings (about 291 of the'total) come from 232 firms with between 100 and 200 employees. The remaining 470 firms (of less than 100 employees each) account for DH 2.1 billion of exports (detail in Annex 3, Table B). The two most export-oriented categories among exporting firms, as measured by the share of exports in total production, are those employing, respectively, less than 100 employees (511) and more than 500 employees (482). 2.21 An analysis by sector (Annex 3 Table C and Table 2.6 below) shows that there is a large variety of situations among exporting firms. Table.2A: CHARACTERISTICS OF SELECTED EXPORT INDUSTRIES: 1985 No. of Employ- Aver. Ann. yA bXL VA 5ecton fi= Exports Erdn , E/Prodn, VA ment !L waue s 1W) L VA erodn. -(DH billion)- (X) (DH billion) ('000) ---(OH '000)