Morocco - Agricultural Sector Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7868-MOR PROGRAM PERFORMANCE AUDIT REPORT MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2590-MOR) JUNE 26, 1989 Operations Evaluation Department 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 (DH) DH 1.0 = US$ WEIGHTS AND MEASURES The Metric System ABBREVIATIONS AFDB African Development Bank AI Artificial Insemination ASAL Agricultural Sector Adjustment Loan CNCA National Agricultural Credit Bank (Caisse nationale de credit agricole) DPAE Division of Planning and Economic Analysis (Division de la planification et des affaires economiques) ESW Economic Sector Word FERTIMA National Fertilizer Marketing Company (Fertilisants marocains) GDP Gross Domestic Product IMF International Monetary Fund ICB International Competitive Bidding INRA National Agricultural Research Institute (Institut national de la recherche agronomique) ITPA Industrial Trade and Policy Loans MARA Ministry of Agriculture and Agrarian Reforms (Ministere de 1'agriculture et de la reforme agraire MOF Ministry of Finance MTASAP Medium-Term Agriculture Sector Adjustment Program OCP National Phosphate Company (Office Cherifien des phosphates) ONICL Office for Ct-reals and Legume Crops (Office national interprofessionnel des cereales et des legumineuses) ORMVA Regional Office for Agricultural Development (Office regional de mise en valeur agricole) PCR Project Completion Report PPAM Project Performance Audit Memorandum PPAR Project Performance Audit Report SAL Sectoral Adjustment Loan SAP Special Action Program SONACOS National Seed Company (Societe nationale de commercialisation des semences) TA Technical Assistance TOR Terms of Reference USAID United States Agency for International Development C3VERNMENT OF KINGDOM OF MOROCCO FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.SA ofice of Director-Ceeral Operatons EValuat"an June 26, 1989 MEr"'"'WDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Morocco Agricultural Sector Adlustment Loan (Loan 2590-MOR) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Morocco Agricultural Sector Adjustment Loan (Loan 2590-MOR)" prepared by the Operations Evaluation Department. Attachment 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. ALL PROGRAM PERFORMANCE AUDIT REPORT MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) Table of Contents Page No Preface . ...... o ..................... ..i Basic Data Sheet ........................ii Evaluation Summary ................................ iv PROGRAM PERFORMANCE AUDIT MEMORANDUM I. PROGRAM BACKGROUND ..* ....* ........... ......................... 1 II. PROGRAM DESIGN ........ ................. .* ... * ..... .. 4 III. IMPLEMENTATION .......................................... 8 IV. IMPACT OF SECTORAL ADJUSTMENT PROGRAM ............ ... 11 V. FINDINGS AND ISSUES ....................................... 15 Annexes I. Timing of Withdrawals .................. * .............. 21 II. Calculating Cost of Funds and Spread over LIBOR ........ 23 PROJECT COMPLETION REPORT I. INTRODUCTION ....... .................... # .... ......... . 39 II. ECONOMIC BACKGROUND .................................................... 40 III. THE GOVERNMENT'S ADJUSTMENT PROGRAM .................... 42 IV. THE AGRICULTURAL SECTOR ADJUSTMENT LOAN ................ 48 V. THE IMPACT OF ASAL-I ................... 68 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, cont. Paae No. Annexes: I. List of Legal Conditions/Covenants ..............95 II. MTASAP Measures Monitored Under ASAL-I .......... 96 III. Impact Assessment ....... . ............o..... 103....... Table 1 - Public Investment Program 1985-87 .............104 Table 2 - Protection Coefficients for Cereals ......... 105 Table 3 - Farm Profiles .....106 Table 4 - Fertilizer Value-Cost Ratios.... . . . 107 - i - PROGRAM PERFORMANCE AUDIT REPORT MOROCCO AGRICULTURA. SECTOR ADJUSTMENT PROGRAM (LOAN 2590-MOR) PREFACE 1. This is a Program Performance Audit Report (PPAR) on Morocco Agri- cultural Sector Adjustment, involving an IBRD loan in the amount of US$100 million to the Government of Morocco, with the objective oi helping Morocco adjust to a fiscal crisis by reducing public subsidies to agriculture while improving the efficiency of Government services to farmers. The loan was approved on July 29, 1985 and became effective on Oct. 28, 1985. The loan closed in June 1987, six months ahead of schedule. Final disbursement was made in June 1987. 2. The PPAR consists of the Program Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Pro- ject Completion Report (PCR) prepared by the EMENA Region. The PPAM is based on the attached PCR, the President's Report, the loan documents, the transcript of the Executive Director's meeting at which the project was considered, on a study of project files, and on discussions with Bank staff. An OED mission visited Morocco in November 1988, and discussed the effectiveness of the Bank's assistance with the Ministries of Agriculture, Finance, and Economic Affairs, as well as the Central Bank (Banque al Magrib) and the national phosphate company (Office cherifien des phos- phates). Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. 3. The PCR provides a good account and assessment of the program experience, and discusses the performance of the Bank and the program exe- cuting agencies. The PPAR elaborates on particular aspects st-h as: the risks of proceeding with a sectoral adjustment loan in the absence of com- prehensive knowle-'ge of the sector; problems in balancing the desire for fiscal savings against the desire to help the farm sector; oversights in supervision and procurement; and virtues and weaknesses of agricultural sectoral adjustment loans vis-a-vis other lending instruments. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government. No comments were, however, received. - iii -I Mission Data Month No. of No. of Date of Year Weeks Persons Manweeks Report Preparation 07/2-12/84 1.5 2 3.0 BTO 07/19/84 10/8 - 11/2/84 2.0 a/ 7 14.0 BTO 11/19/84 12/10 - 15/84 0.5 1 0.5 BTO 01/04/85 Appraiail 01/07 - 21/85 2.0 7 14.0 ) Issues Paper: 01/14-18/85 0.5 1 0.5 ) 01/25/85 Pre-Effectiveness Review 05/19-25/85 110 1 1.0 BTO j6/05/85 Supervision Supervision I 10/14-18/85 0.5 5 2.5 Report: 11/21/85 Supervision Supervision II 01/1n-28/86 2.0 5 10.0 Report: 03/19/86 Completion 01/13-21/87 1.0 2 2.0 BTO 01/29/87 04/04-11/88 1.0 1 1.0 PCR 06/22/88 a/ on average. Follow-On ASAL Operations MOROCCO Agriculture Sector Adjustment Loan II, Loan No. 2885-MOR, approved on November 24, 1987, in the amount of US$225.0 million. (3729E) - iv - PROGRAM PERFORMANCE AUDIT REPORT MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (LOAN 2590-MOR) EVALUATION SUMMARY Introduction 1. In the 1970s and 80s, Morocco suffered not only from oil price shocks, but also from a drastic fall in price of its biggest export, phosphates, and from the cost of activities in the western Sahara. Structural adjustment efforts began in the late '70s in collaboration with the IMF. Morocco declined a Bank SAL in 1980. By 1983, international private borrowing had become difficult; Morocco borrowed from the Bank for industrial sectoral adjustment. In the same year, preparation of Loan 2590 began, leading to appraisal and effectiveness in 1985. Oblectives 2. The program's primary objective, as per the President's Report, was to generate substantial fiscal savings as a result of subsidy reduction. It was expected that resulting increases in production costs would be off-set by other effects of liberalization so that agricultural production would be maintained or even enhanced. Intra-sectoral equity was to be improved by reducing protecti:n for irrigated farmers while increas- ing it for the generally-more-impoverished rainfed farmers. 3. Loan conditions were seen as a limited, first attempt to ratio- nalize incentives to the sector and government intervention in it. Simul- taneously, an internationally-supported Prices & Incentives Study (not financed from the loan) would provide comprehensive sector knowledge, permitting subsequent sectoral adjustment programs' conditions to address sectoral bottlenecks and distortions mcre critically and efficiently. Implementation Experience 4. The loan disbursed fully, six months ahead of schedule. All covenants have been complied with (or are so far being complied with in the case of covenants dated end 1989), mostly on time. The letter of the pro- curement rules was respected. Results 5. Public budgetary outlays for agriculture were reduced by 25% over two years. If reforms already initiated are carried through, fiscal sa- vings will grow. The cost of these savings has been borne by farmers to some extent. Models suggest that, as a result of ASAL I reforms, ceteris paribus, farm incomes declined 2%, which may have resulted, still ceteris paribus, in a small decline in production. This modest effect, however, is dwarfed !y the effects of other, macro-economic policy changes, and by the effects of drought. - v - 6. The loan strengthened the agricultural reform process and bought for the Bank an opportunity for extended di-logue with those carrying it out. The Prices and Incentives Study, carried out simultaneously with the program, is generating comprehensive sector understanding that is improving the quality of sectoral reform and has already improved the quality of con- ditions in ASAL II. The existence of ASAL II testifies to the endurance of the sectoral reform process and to the Bank's role in it. 7. The conditions in ASAL I regarding fiscal savings were more spe- cific than those involving fiscal cost or demonopolization. The latter include conditions that would have improved incentive output prices to farmers, would have strengthened and improved the focus of the Agriculture Ministry's investment budget, and would have redressed inequities, chiefly between irrigated and rainfed farmers. The less-specific conditions pro- duced studies and recommendations but few other results during ASAL I. Consequently, a number of the prcgram's objectives have not been achieved. Moreover, Agriculture Ministry support for the reform program has waned, placing in jeopardy the sectoral reform process. Sustainability 8. Fiscal savings are likely to be sustained. They have been achieved at moderate cost to the sector. 9. The sectoral reform process, currently jeopardized by clashes between the Agriculture and Finance Ministries over the cost to the sector of fiscal savings, may continue if those clashes can be resolved and if the sector can reap positive consequences from some of the initiatives studied under ASAL I, but which have not yet produced tangible results. There are currently encouraging signs that this resolution may be happening. Findings and Lessons 10. Agricultural sectoral adjustment lending can support reforms for fiscal savings. 11. Inter-ministerial cooperation in sectoral reform is difficult, even when explicitly addressed in the program. 12. When sectoral-adjustment programs proceed beiore there is compre- hensive understanding of the sector (and without firm support outside the ministry most directly concerned), the effects of SECAL conditionalities may be unexpected. However, an initial SECAL can be used to improve see- toral knowledge and to strengthen planning, resulting in more intelligent- ly selected and effective conditions in subsequent SECALs. 13. Experience with ASAL I suggests that SECALs are a difficult deve- lopment tool, even when certain conditions usually critical to success are present. In Morocco, staff on both sides were well qualified and there was continuity of staff. Country conditions produced a strong will for reform. However, Ministries of Agriculture and Finance had divergent interests. Knowledge of the sector, good compared to most Bank/IDA borrowers, was nevertheless not good enough to permit sectoral problems to be addressed systematically, and with confidence, resulting in a modest list of specific loan conditions. Major dividends, other than fiscal savings, are hoped for from subsequent operations. PROGRAM PERFORMANCE AUDIT MEMORANDUM MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) I. PROGRAM BACKGROUND 1. The Kingdom of Morocco is a moderate-sized country with an economy that spans the range from quite developed to quite backward. As the 1980s began, it was coming off a period of moderately positive growth in GNP/ head, yet was at the lower end of middle-income countries. Agriculture accounted for over half of employment and about one-fifth of GDP. Social indicators, such as life expectancy and literacy, reflected the fact that Morocco was really quite a poor country, though one with some very modern sectors. 2. Like the rest of the economy, agriculture also spans a consi- derable range, from farms growing vegetables and citrus for export with the benefit of sophisticated irrigation and other technology to farms in the hills and on the desert shore dependent on sparse and highly erratic rainfall for meagre crops of barley, chickpeas and fava beans. The country had long since lost its self-sufficiency in food and become a major importer of wheat, vegetable oil, and other foodstuffs. The agricultural trade balance was positive until 1974, but the negative balance has been expanding ever since. Still, agricultural exports, principally citrus and vegetables are enough to pay for 60-90% of imports of agricultural goods and inputs. 3. The considerable, in fact, heavy, public agricultural infras- tructure in research, extension, veterinary services, irrigation, forestry, was frequently not cost effective. Government, and foreign development entities as well were concerned about the low standard of living of farmers in the "disfavored rainfed" areas. However, even more salient was the weight of agricultural subsidies in the budget. The biggest of those were for fertilizer and irrigation. 4. In 1980, Morocco was suffering a severe economic crisis, the result of triple shocks: the oil-price shock which similarly affected many oil-importing, lower-middle-income countries; the swingeing fall in the world price of Morocco's largest foreign-exchange earner, phosphates; and the cost of the war in the phosphate-rich western Sahara. 5. In response to the unusually severe shocks it was being subjected to, the Government of Morocco was trying to adjust. Based on Bank and other projections of world phosphate prices, informed opinion, including the Bank and Moroccan financial authorities, expected the crisis to be temporary. Based on that opinion, Morocco was still able to borrow on international capital markets. Nevertheless, it was an obvious candidate for the new kind of "structural adjustment" loan which the World Bank had said in 1980 it would make to borrowers in Morocco's situation. Conver- sations started in 1978 ard proceeded through the appraisal stage in 1980 but ultimately faltered because Government saw no need to accept the kinds morocco/2590 ppa/WJone:tm/13-AJN-89 -2- of conditions the Bank was seeking in return for the loan. One significant part of the disagreement was over what Govarnment would do to reduce the fiscal cost of fertilizer and irrigation subsidies. 6. Morocco worked closely with the IMF dt ring the early 1980s, but the triple stresses on the cconomy continued and the adjustment process was far from complete. The fiscal gap, in particular, continued to be large. After falling from 16% of GDP in 1977 to 11% in 1980, it started rising again to 14.5% in 1981 with the start of the 1981-5 Development Plan which was, in retrospect, too ambitious. In the agricultural sector, the fiscal impact of the fertilizer subsidy continued to attract attention within the Bank. There were plenty of agricultural loans being disbursed or being processed, but, through them, it was not easy for the Bank to address the fiscal concern -- the cost of agricultural programs and subsidies. In May 1983, staff proposed a two-stage approach that led to the Bank's first true agricultural sector adjustment loan anywhz-e reviewed by OED.1/ 7. The two-stage approach argued, firstly, that Bank and Moroccan understanding of the agricultural sector was limited, so that conditio- nalities should "focus on issues for which the Bank thinks its present knowledge is comprehensive enough to trigger precise and quickly imple- mentable recommendations" (internal memo of 24 May 1983), specifically the issues covered in the Bank's Fertilizer Sector Memorandum and the agricultural part of the 1980 SAL action program, "not used but still mostly valid". Secondly, the first-stage would be quick-disbursing to respond to Morocco's balance-of-payment problems. The initial idea was for a US$30 million loan to be disbursed through CNCA (Caisse Nationale de Credit Agricole/National Agricultural Credit Bank) for fertilizer, high- yielding variety seed and livestock feed imports. A second stage would be more comprehensive and linked to the better sectoral understanding that would be gained from planned sector work, notably the planned FY 1984/5 Agricultural Prices & Incentives Study to be carried out with USAID financing under terms of reference prepared by Bank staff. 1/ The two Sudan Agricultural Rehabilitation Programs (Cr. 100010057 appraised in July 1979 and reviewed by OED In PPAR #6170 of 6 May 1986, and Cr. 1389, appraised in January-February 1983 and reviewed by OED in PPAR # 7342 of 30 June 1988) were much narrower in scope and ambition- -essentially cotton-input import financing exercises. A much closer precedent Ls the Tanzania Export Rehabilitation Program (Cr. 1133, appraised in November 1980 and reviewed by OED in PPAR # 7347 of 30 June 1988). As in the case of Morocco, in Tanzania, "Initially, discussions... centered on IDA support for a... Structural Adjustment program, but the policy changes which government was prepared to undertake were deemed insufficient and a limited first operation... was agreed upon." That program generated significant sectoral reform as effectiveness conditions were met. Nevertheless, both PCR and PPAM found it an "essentially failed program" that failed in its objectives, was a disappointment to both sides, was characterized by "lack of dialogue between government and the Bank" so that, in the absence of a follow-on project, "the (already) waning government commitment [to agricultural reform] fell away altogether." I -3- 8. With this start, Bank staff pursued discussions with the Moroccan Agriculture Ministry (MARA) in 1983 and 1984 leading to preparation missions in July and October-November 1984 and appraisal in JantE.-y 1985. One should bear in mind that there was no exact precedent to guide these discussions towards an agricultural sectoral adjustment loan (ASAL). For that reason, and because the process of reaching agreement for this loan proved to be critical both for its content and for the future of the agenda for Moroccan agriculture which it espoused, it is important to analyze that process.2/ 9. What the Bank wanted in fertilizer conditions had been hashed out in the elaboration of the Fertilizer Sector Memorandum and in the prepa- ration of the Fertilizer Distribution Project (which was abandoned when the Borrower refused what the Bank wanted). Similarly, there was a Bank position on irrigation subsidies which grew out of earlier irrigation lending and of the preparation of the Large-scale Irrigation Improvement Project, then going on. But Moroccan authorities were not willing in 1984 to accept the conditions they had refused to accept in 1980 SAL negotia- tions just because they attached to an agricultural adjustment loan (even though Morocco could not borrow abroad as freely in 1984 as it could in 1980). Besides, the July 1984 preparation mission rejected "simply" financing a tranche of Morocco's agricultural investment because of the complications of procurement and of skirting the substantial portions of the investment budget already financed by external donors. So two major features of ASAL I were decided by the first, July 1984 preparation missions firstly, it would disburse against agricultural imports rather than an agricultural-investment tranche; and, secondly, its conditions would not be limited to those "falling out" of earlier SAL negotiations but would be more comprehensive, more based on discussions with the Moroccan agricultural department directors and their staffs in the agricultural sub- sectors, more detailed and attuned to the special conditions of each sub- sector and the Government's and the Bank's agendas therein. 10. What followed was a process of consultation, sub-sector by sub- sector, between Moroccan directorates and Bank sub-sector experts (or, in the case of research, the International Service for National Agricultural Research) expanding on the Minister of Agriculture's 3 December 1983 letter of intent to the Bank, outlining his plans for agricultural reform. As discussion continued, the conditions, initially very simple in the Bank's conception, became more complicated. They came to include more sub-sectors (e.g. forestry, livestock), and to become micro in every respect, down to including highly specific measures. (See Project Design, Paras. 20-25, and PCR, Annex I). 11. What were the pre-occupations of Bank staff and their Moroccan interlocutors during these conversations as they sought to come up with a 2/ For a discussion of the process of project preparation, informed by the public-administration tradition, see Leila Zlaoui, "Institutional Aspects of Agricultural Sector Adjustment Loans; a Case Study of Morocco", September 3988, 21 pp. plus annexes, an unpublished paper prepared for the Public Sector Management & Private Sector Development division of the Bank's Country Economic Department as background for a study on institutional reforms in sectoral adjustment operations. small number of conditions to attach to the loan--the conditions that would do the most to develop Moroccan agriculture? Both were impressed by the sense of urgency created by the large and apparently unsustainable fiscal deficit. For most agricultural directors on the Moroccan side, fiscal pressures meant that they had to accept change. For the reform-minded Minister of Agriculture, it created an opportunity to get reforms accepted. 12. The primary concern of both sides was certainly fiscal. However, there was also a strong perception on the Bank side that the agriculture sector was riddled with contradictory rules ati administered prices such that government intervention was expensive and not effective. A major objective, therefore, was to achieve economy and efficiency in government regulation, including the regulation of prices. It was not to exclude government from price regulation, as some Bank staff who reviewed project processing would have preferred. Bank staff had an additional objective: to redress the balance in the intra-sectoral terms of trade, which favored the modern, typically irrigated & fertilizer-using farms with lots of subsidies and subsidized government services, while providing little for "disfavored rainfed" farms. 13. Those involved in the process were aware that they were groping in the shadows--trying to find "pressure points" where conditions could do the most to change Moroccan agriculture for the better. Recognizing their lack of a comprehensive understanding of the sector, they initiated MARA's USAID-financed Prices & Incentives Study early in 1984, before the first preparation mission. This study was to lay the basis for a comprehensive knowledge and approach in time for ASAL II. This willingness to take risks ,s in dramatic contrast to the background of ITPA (Industrial & Trade Policy Adjustment), another series of Bank sectoral adjustment loans (SECALs) to Morocco, the first of which somewhat preceded ASAL I. ITPA I was processed in 1983, after five years of studies to get the comprehensive sector knowledge that ASAL I meant to get during implementation. From 1978 to 1983, at which point Morocco's difficulty in borrowing abroad disposed it to look at SECALs, a Bank consultant, resident in Morocco, worked with Ministry of Industry to better understand the industrial economy, the obstacles to growth, and the "pressure points" that could be used as conditions to move the sector forward.3/ Comparable agricultural sector understanding was not achieved until the e-A of ASAL I at the earliest, so ASAL I had to be designed without it. II. PROGRAM DESIGN 14. The program designed, in the broadest sense, is the Borrower9s Medium-term Agricultural Sector Adjustment Program (MTASAP), enunciated by the Minister of Agriculture in his 3 December 1983 letter of intent, with its 61 measures to be monitored (see PCR, Annex II). In stricter, legal terms, the program designed is what the Bank did to support MTASAP: the US$100 million loan, against what it was to be disbursed, how goods 3/ OED's audit of the first two ITPAs, "Morocco - Industrial and Trade Policy Loans I and II - Program Performance Audit Memorandum", is currently in preparation. - 5 - financed were to be procured, and the 24 conditions the Borrower agreed to meet (see PCR, Annex I). 15. Disbursements & procurement. Bank appraisal mission staff argued for a "positive" list of agricultural goods against which disbursements would be made. Morocco's agricultural import patterns were studied and projections made to show the size of loan that would be possible under this conception. Pure consumption agricultural imports, e.g. wheat and vege- table oil, were not considered, but intermediate consumption goods, e.g. maize feed, fertilizer, pesticides and veterinary medicines. were. Initially, two years' normal imports of these categories was far in excess of the amounts the Bank was discussing lending--$30 million; the mooted loan amount grew, however, during project processing to $100 million--an amount that approximated the two-year import projection for the chosen categories. 16. Another reason for choosing specific categories was undoubtedly the hope of improving the efficiency of Morocco's agricultural imports through liberalization. Bank staff were well aware of the reluctance of Morocco's monopolies for import of fertilizer and fertilizer raw materials (OCPIFERTIMA) and of grains and pulses (ONICL) to procure through inter- national competitive bidding. It would have been easier to agree to disburse the loan against other goods. Nevertheless, Bank staff believed that Morocco stood to gain in economy and efficiency by importing these goods through .B. Therefore, efforts were made to keep them on the list. 17. At negotiations, it was agreed to disburse 25% of the loan for imports of a not-srecifically-agricultural good -- petroleum. This change in program design occurred when it became apparent that Government of Morocco did not wish to compel FERTIMA to practice ICB (see below, Paras. 30-31 for more details). The amount in the fertilizer disbursement cate- gory was reduced from $25 million to $4 million and the difference was made up by introducing petroleum. However, it was stipulated that disbursements for petroleum were not to exceed $25 million, thus keeping at least 75% of the loan tied to agricultural goods. 18. Procurement for fertilizer, fertilizer raw materials, seed, feed, pesticides and veterinary products was treated in a standard manner, with ICB prescribed for contracts exceeding US$ 0.5 million or 1.0 million. (See Paras. 30, 31 & 33 below for results of this initiative during imple- mentation.) 19. As regards what was slated to be (and was) the largest disbur- sement category -- agricultural machinery and spare parts--it was agreed thnt Morocco's market was already competitive; given this finding, and given that there was neither a significant parallel market in Moroccan currency nor major exchange restrictions, it was agreed that ICB offered no - 6 - significant advantages to prevailing practice in economy and efficiency of importing farm machinery.4/ For petroleum imports too, the Borrower's standard importing practices were accepted. 20. Conditions. It is in tha design of the conditions that program design was most original, and controversial. The debate within the Bank and between the Bank and the Borrower was quite involved. Precedents were being set, for there were none to use. Such an assertion may seem curious, given that the Bank had done great quantities of sector work for many years. Nevertheless, the focus and discipline of having to choose a small number of legal conditions to bring about maximum development in the sector is more demanding than writing recommendations in a sector report. Moreover, existing Bank agricultural sector work on Morocco in 1984 provided surprisingly little guidance in identifying the conditions likely to do most for sector development. While the Bank had a great deal of sector knowledge, there appears to have been more description than analysis. Relationships between and within sub-sectors had been little explored; there had been few attempts to trace the repercussions of possible changes through the sectoral, let alone national, economy. In short, neither the Bank nor Government of Morocco were close to being able to build a satis- factory model of the Moroccin agricultural economy. Therefore, there was, perforce, no method for arriving at optimal conditions. That had to be an art, not a science, benefitting from some minimal guidance from some very, very partial analytical tools. 21. The Bank staff's first attempt at designing conditions aroused "unease" at the juxtaposition of "requirements of great consequence" alongside "inconsequential" release conditions (internal memo of 29 February 1984), leading to the novel suggestion that conditions be given weights and points. At the end of the day, the 24 conditions that survived negotiations and appear in the legal documents (see PCR, Annex I for summary) manifest the same juxtaposition of consequential and not-very consequential, and of tightly-drawn conditions having very specific consequences with loosely-drawn covenants which, legally, have little or nQ practical consequence other than, often, a study. 22. The animal feed sub-sector provides an example of juxtaposition of the vague and the specific. The Borrower agreeds " (a) to carry out a study on animal feed prices, designed to identify, evaluate and recommend measures required to liberalize such prices; (b) not later than December 31, 1986: (i) cause such study to be completed; and (ii) furnish to the Bank a report on the results of such study, together with the recommen- dations based thereon; and (c) after an exchange of views with the Bank, 4/ This finding was not shared by all Bank staff. The audit mission, without the benefit of an exhaustive market study but on the basis of numerous interviews, supports the judgement implicit in program design. There are numerous suppliers of the Moroccan tractor market. They contest vigorously for market share. There is no evidence of over- invoicing to conceal capital flight (nor any reason why there should be) or of other common anti-competitive practices. Moreover, since ASAL I is not a project, there is no reason to try to impose standardization on Moroccan farm-machinery buyers fulfilling their normal import demand under Bank loan financing. - 7 - carry out such recommendations as shall have been agreed with the Bank." (Loan Agreement, Schedule 4, Para. 5) This covenant could be complied with by a very summary study and report, followed by failure to agree with the Bank on any recommendations to be carried out, provided the study was completed by end 1986.5/ In contrast, in the same sub-sector, as a disbursement condition for the second tranche, the B_rrower agreed to "increase of both the ex-mill price of dehydrated sugar beet pulp and the ex-mill price of wheat bran to at least 115% of such price in effect as at May 1, 1985." (Legal Agreement, Schedule 5, Para. 2) This covenant is specific, legally tightly drawn, and would seem to presume an understanding of at least part of the animal-feed sub-sector of the sort that the study, if undertaken seriously, would be expected to provide. What repercussions such specific price increases would have throughout the Moroccan economy, whether they would be momentous enough to be considered sectoral adjust- ment, whether that sectoral adjustment would bring things closer to the optimum, and whether this measure is one of the, say, 24 most important conditions for sectoral reform that lender and Borrower could come up with -- those are more difficult questions. 23. The conditions cover a variety of agricultural topicst fertilizer price & distribution; irrigation water charges & the degree of autonomy of irrigation authorities (ORMVAs); grain storage; grain price supporti; extension; livestock services; livestock feed; research; and C ctor planning. This is a long list, but a very selective one compared to the 61 topics covered in the MTASAP. Some sub-sectors have specific conditions; some don't. Some involve significant changes; others seem quite modest. 24. The variety demonstrates tLat, though the Bank staff preparing the program did not know Moroccan agriculture comprehensively, they knew much of it intimately. These are not boiler-plate "get-the-prices-right" conditions that could be applied in any country. Staff and the Moroccan reformers mandated that agents who stored Moroccan-grown grain for ONICL should get paid DH 26/ton/month, seemingly confident that this fee would produce near-optimal results once the linkages played themselves out. But there were few areas of the sector where they displayed analogous confi- dence. Moreover, dialogue participants from both parties report conditions the Bank wanted but where agreement was not reached; noteworthy examples are demonopolization of fertilizer imports and grain milling. 25. Under the circumstances of imperfect sector knowledge, less than total agreement, and paucity of tools for identifying the best conditions to produce desired developmental results, the 24 conditions in ASAL I show a great deal of sophistication. What their upshot was in practice and whether or not that adds up to genuine sectoral reform are no longer questions of design but of implementation, and of impact. S/ One-third of the covenants were of this form, which strongly indicates the areas where lender and borrower were not in agreement, or where neither knew what they wanted, at the time of negotiations. - 8 - III. IMPLEMENTATION 26. Disbursements occurred quickly. Half of the first tranche financed Morocco's petroleum imports for November and December 1985. Then the other half was spent by May 1986 on imports of farm machinery. pesti- cides, veterinary products and feed maize. Disbursement of the second tranche in 1986 was spread out over nine months. The entire petroleum category having been disbursed first (it had been agreed that the US$ 25 million provided for this category would not be exceeded), it took somewhat longer for eligible imports on the other categories to accumulate. 27. The pattern of disbursements can be seen from the graph (Annex I). Agricultural machinery and animal feed proved more popular than estimated at appraisal; disbursements in these categories were 145% of appraisal estimates, while disbursements for pesticides and veterinary medicine were 41% of estimates and there were no disbursements for fertilizer imports (see Paras. 30-31 below). The loan was fully disbursed six months before the closing date. 28. A few points about disbursements warrant comment. Firstly, procurement and disbursements were handled by the central bank, the Banque al Magrib. That bank informed commercial banks of categories of imports eligible for World Bank financing. In disbursement categories where importers were few, Banque al Magrib informed the importers directly. This was the case with veterinary products, pesticides, and with maize feed. In this latter case, ONICL (Office National pour l'Importation des Cereales et Legumineuses) enjoys a legal monopoly. The commercial banks (or importers) gathered documentation on normal imports eligible for World Bank financing and submitted invoices and bills of lading to the Banque al Magrib (keeping customs and other shipping documents). 29. The procedure and the timing of disbursements shown in the graph (Annex I) indicate that the loan financed normal imports. Of course, US$100 million was available to the Moroccan central bank that would not otherwise have been available. Therefore, that amount of incremental imports must have occurred (or other incremental foreign borrowing must not have occurred, or some mixture of the two). But, since assets are fungible, p&rticularly in central banks, in the economic sense, there is no way of knowing what additional imports ASAL I financed (or what foreign borrowing it enabled the Kingdom of Morocco to forego). 30. Secondly, none of the amount in disbursement category 1 6/ (finished fertilizer and raw materials required for fertilizer production) -- US$ 4 million -- was disbursed. The Borrower's decision not to use category 1 marks the end of lengthy discussions resulting from the World Bank's efforts to persuade Morocco to use ICB for fertilizer imports and to liberalize them. These conversations took place throughout preparation between Bank staff, ultimately the Procurement Adviser (Goods), and FERTIMA, the commercial arm of OCP (Office Cheriffien des Phosphates), Morocco's biggest foreign exchange earner, which mines, manufactures and exports phosphates, has the monopoly of foreign fertilizer trade, and other commercial operations. Staff bel_eves that it had convinced FERTIMA of the 6/ See PCR, Para. 45 for disbursement categories. - 9 - value of ICB, delinking inputs from its bilateral export deals. FERTIMA officials maintain that they presented Bank staff with conclv.sive data showing that they were already getting better import prices than they would get under ICB (principally by importing urea from non-Bank members in eastern Europe). They say that they agreed to a small amount of ICB "a titre d'essai" (as a trial). 31. The record shows that the amount in category 1 was cut from $25 million to $4 million at negotiations (see Para. 17). FERTIMA continued to use its normal procurement methods (it had experience with ICB, having used ICB before 1974 when it was a private firm, before its acquisition by OCP). There is no record of an exchange of letters to re-allocate the funds from category 1, but they were in fact disbursed against other categories. 32. Thirdly, all disbursements were according to the normal procu- rement procedures of the Borrower's purchases of such goods, justified by statements of expenditures. No procurement was by ICB, which is typical enough of structural and sectoral adjustment loans, but not what one would expect from reading the President's Report and the legal documents. It had been agreed that farm machinery (category 2), and petroleum (category 5) be procured through normal procurement procedures regardless of the amount, and these accounted for 52% of disbursements (cf. the 40% anticipated at appraisal). However, the thresholds over which other procurement (categories 1, 3 & 4) would go ICB had been carefully discussed and agreed at negotiations: $1 million for animal feed (category 3) and $0.5 million for seeds (category 3), pesticides and veterinary medicines (category 4). All procurement under category 1 (fertilizer) was expected to be by ICB. 33. In fact, purchasers of category 1, 3 & 4 goods financed by the loan always procured in amounts less than the thresholds. (Category 1 was not used; see Paras. 30-31 above.) This it was their right to do and they did so with the approval of the Bank. However, the splitting of contracts to get under the ICB limit is a bit flagrant in the case of ONICL, where multiple contracts were signed on the same day with the same firm to deliver the same product on the same date, with payment on the same date. These multiple contracts aggregated to more than the ICB threshold but were below it individually. This is particularly noteworthy in that ONICL was in correspondence with staff over ICB procedures and had prepared ICB bidding documents. Only further investigation would show whether economy and efficiency were served by this procedure, but with an import monopoly involved, there might have been reasons for using ICB. Be that as it may, Bank staff did not object, and provisions of the legal agreement have been complied with. 34. Conditions of the loan are the 24 mentioned in the legal agree- ment. But, in looking at implementation, it is important to remember that these legal covenants constitute only part of the sectoral adjustment which is embodied in the 61 planks of the Borrower's MTASAP. By making the loan conditional on 24 of them, the parties judged these aspects of the MTASAP to be salient. Therefore, we will concentrate on the conditions. 35. All of the program's legal covenants have been complied with, and in a reasonably timely manner. This includes not just the more general covenants requiring the Borrower to set up task forces, study, report, evaluate, and carry out such conclusions as may be agreed with the Bank, - 10 - but the specific ones: pay ONICL grain storage agents at least DH 26/T/month; raise fertilizer price 15% by effectiveness and another 20% by release of tranche two; raise ex-mill price of dehydrated sugarbeet pulp and wheat bran 15% by release of tranche two; close 20 INRA (National Agronomic Research Institute) stations; close 802 of FERTIMA's retail shops meeting certain criteria by release of tranche two; and select 20 zones for privatization of artificial insemination services. 36. It is worth noting that all of the specific, quantified conditions mentioned above removed what had been a subsidized or free government service to farmers and all resulted in fiscal savings (except the grain storage provision which is supposed to induce middlemen to store farmersO grain).7/ In some instances, government over-fulfilled covenants. All FERTIMA sales points meeting the agreed conditions were closed, not just 80% of them. Regarding animal breeding services, government didn't just select 20 zones and "take all action required to develop and facilitate the implementation" of a pilot program." It closed the veterinary posts in 20 zones, turned the work (and not just AI) over to private veterinarians, and virtually stopped recruiting veterinarians into government service. Wheat bran and sugarbeet pulp prices were raised 17%, not the required 15%. The first tranche fertilizer price increase was 17%, not the agreed 15%. Twenty-four research stations were closed, not 20. 37. One particular instance of this over-fulfillment of conditions (see Para. 42 of the PCR) says a great deal about the Moroccan environment in which ASAL I was implemented. A covenanted goal of ASAL I was to align Moroccan fertilizer prices to world market by end 1989. Covenanted proxi- mate steps were raising fertilizer prices 15% by effectiveness and by another 20% by release of tranche two. As the projected date for tranche two release approached, the international fertilizer price had fallen. MARA argued that a 20% increase was not necessary to stay on schedule for full alignment with world market by end 1989. The Bank's analysis showed that a 15% increase would keep the liberalization plan on schedule. The Bank was willing to accept a 15% increase instead of 20%. "However, budgetary considerations prompted Government to implement the 20% increase as initially planned." (PCR, Para. 42) 38. The more-general covenants were fulfilled too. A task force was created to improve price supports; it developed a plan and submitted it to the Bank; a "methodology" was developed to determine prices at which ONICL purchases grains from farmers. A progress report on improved delivery of extension services under the pilot program was prepared and evaluated. An animal feed study was carried out and furnished to the Bank. Government proposed a program-contract with the Doukkala ORMVA (irrigation authority) on the basis of which that ORMVA has become financially autonomous.8/ All / Some "specific" covenants are not due to be fulfilled until end 1989. Th,;y are: 1) end all fertilizer subsidies, and 2) collect at least 90% of irrigation water charges due and payable. Government is on schedule towards fulfilling this latter covenant; collections rose from 47% of charges due and payable in 1984 to 67% in 1986. 8/ The text of that program-contract is still the subject of negotiations between the Borrower and the Bank. It has not been signed yet. - 11 - of these task force-study covenants ended, in one way or another, with discussions between Borrower and Bank and implementation by the Borrower of what was agreed in those discussions. Their impact, thus, could not be specified beforehand. Nevertheless, both MARA and the Bank had specific expectations from these task force-study covenants. 39. If all the specific covenants turned the terms of trade against the farmers and decreased the role of MARA and its ability to deliver services to farmers, MARA hoped to recoup something for the farmers in the price studies. The Loan Agreement says that several covenants are "to facilitate the achievement of the objective ... of improving the Borrower's existing program to support the prices at which cereal producers actually sell cereals." (Section 3.03) The Ministry (and Bank staff) expected that farmers would recoup through "the right" prices what they lost through other mandated sectoral adjustments. The Ministry expected that the mandated inter-ministerial committee and the coordinating and monitoring committee would get MARA the better-prioritized (and bigger?) investment budget promised in the MTASAP. Bank staff expected that the task forces and studies would lead to considerable liberalization. They also expected that "the right" prices, in addition to maintaining the agricultural sector's terms of trade vis-a-vis other sectors, would redress the intra- sectoral balance, giving more government support to poor, rainfed farmers and less to better-off irrigated ones. Impact did not always follow expectations. IV. IMPACT OF SECTC,AL ADJUSTMENT PROGRAM 40. There is no question of comparing ASAL I's impact with the impact expected at appraisal. Given imperfect sector knowledge as well as the indeterminate character of most of the loan conditions, the appraisal team would have been reckless to give more than vague, qualitative indications of the program's impact. The President's report shows that they were not reckless. 41. Comparisons aside, when assessing the program's actual impact, it is useful to keep in mind how very marginal ASAL I was for the sector as a whole. The PCR (Para. 52) correctly reports that ASAL I effects were "dwarfed" by effects of variations in rainfall, exchange rates, world prices, and other government policies. Even Ln the case of the 38% increase in fertilizer prices over two years where one might have expected a detectable impact on quantity demanded, no such effect is dissociable from effects of droughts and other policy changes. 42. Moreover, one cannot a sure to vhat extent Morocco would have implemented the modest reforms which were ASAL I conditions in the absence of the loan; the will to reform seems to have been strong, as was the fiscal compulsion. Finally, as the PCR points out (Para. 51), it is still too early to draw definitive conclusions regarding impact on agricultural performance; "adjustment is a slow process" (at least when the reforms are so modest and the reformers are groping in the shadows for want of compre- hensive sector knowledge because the Prices & Incentives Study is just beginning). It is too early for definitive assessment not just for the usual reasons, but because the outcome of a number of ASAL I's conditions is still indeterminate. What will be the result of studies leading to a - 12 - new way of government price setting? And of attempts to "prioritize" government's agricultural investment budget? Only time will tell. 43. Given all the above reasons for circumspection about impact, six points are worthy of comment: a) apparent fiscal impact; b) apparent impact on farm income and implied impact on production; c) apparent intra-sectoral redistribution; d) impact of the loan qua loan; e) impact on availability of imported agricultural investment goods and the efficiency & economy of their procurement; and f) impact on government institutions and reform process. 44. a) Fiscal impact. From 1985 to 1987, budgetary outlays on agriculture fell by 25% (PCR, Para 77). Some fall would probably have occurred in the absence of ASAL I, given budgetary difficulties. However, there is general agreement that MTASAP and ASAL I accentuated the agricul- tural cuts. For instance, agriculture's share of Government invest-int budget averaged 12% over the 1975-84 decade and was 15% in 1984; in 1985 and 1986, it was 9% and 72.91 In 1987, irrigation operation subsidies were down 26% vis-a-vis 1984, a fiscal saving of Dh 83.5 million that year. In 1986/7, fertilizer subsidies were down 19% vis-a-vis 1984/5, a fiscal saving of DH 63.5 million that year (PCR, Paras. 77-81). In short, the "substantial public savings" mentioned as the Program's first objective in the President's Report (Para. 134) are being realized. Moreover, they will continue to grow substantially, provided that the reforms underway-- removal of fertilizer and irrigation operating subsidies, phasing out of subsidized livestock and tillage services, etc.--are carried through. 45. b) Farm-income and production impact. Fiscal savings were not pure productivity gains. Therefore, fiscal gains involve some corres- ponding losses, preponderantly borne by farmers. Measures of this loss, which is bound to grow as reforms are carried through, are hazardous. 46. The only serious attempt at measurement is based on eight representative farm models, five rainfed, three irrigated, used by MARA's DPAE (Planning & Economic Affairs Directorate). Comparing 1984 to 1987 in constant Dirhams, for 6 of the 8 model farms, the impact of ASAL I/MTASAP changes on income is negative. Impact ranges from +8% to -11%, averaging -2% (PCR, Paras. 67-72). For most situations, higher costs, principally 9/ See World Bank, Morocco; CEM: Issues for a Medium-Term Structural Adiustment Program (Report # 6608-MOR), 30 January 1987, Table 5.5. Investment budget figures for 1986, not yet published, are DH 582 million for agriculture, DH 8600 million total (furnished by Direction de la planification et des affaires economiques/Ministere de l'agriculture et de la reforme agraire). - 13 - for animal feed and fertilizer, more than off-set higher revenues from soft wheat. These models may understate reality, not completely capturing higher farmer costs due to phase-out of subsidized government tractor- plowing and veterinary services and not completely recognizing that small- farm producers of barley and wheat usually get less than the official support price.101 47. Granted that, ceteris paribus, ASAL I lowered farmers' income, economic theory predicts that, as a result of ASAL I conditions, sector output must have fallen. 48. c) Intra-sectoral distribution. Hoped-for reductions in income disparities between irrigated and rainfed farmers did not occur (PCR, Para. 72). Gains for rainfed farmers had been expected to stem from instituting support prices for barley and soft wheat that would give protection equi- valent to that accorded to the reut of the sector and economy ("price coherence" in Moroccan parlance). Instituting such prices was not, however, a condition of ASAL 1. It did not occur during ASAL I. 49. d) Impact of the $100 million. The Banque al Margib had an additional $100 million of foreign exchange available as a result of the loan at a time when foreign borrowing was extremely difficult. Because of the fungibility of central-bank assets, there is no way of tracing the specific economic impact of the $100 million, except to say that Morocco was able to import additional goods and services (or avoid other foreign borrowing, or some mix of the two) in that amount (see Para 29 above). 50. ej Impact on agricultural Imports. Availability of the loan was expected to reduce delays in importing items in the disbursement cate- gories, but no such effect was observed (PCR, Para. 46). The Bank had hoped for impact on the efficiency and economy of procurement for imports in those categories where the Borrower's normal practice was challenged by the conditions (fertilizer, seed, animal feed, pesticides, and veterinary medicine), especially so for fertilizer (FERTIMA) and feed grain (ONICL) (see Paras. 16 & 18 above). This did not occur (see Paras. 30-33 above) because ASAL I did not lead to changes in the Borrower's import procurement practice. 51. f) Impact on government institutions & sectoral reform. We have seen that, when ASAL I was still in the ideas' stage in 1983, Bank staff recognized that it was likely to be the first, perhaps halting step in a sectoral reform process that would involve strengthening Moroccan public institutions, studying the sector to achieve a comprehensive knowledge of its working, and broadening and deepening cooperation between the Bank and the Borrower. Since this process was still in its initial stages, even at 10/ It is important to bear in mind, as the PCR notes fpara.72), that farm incomes over the period were more affected by general government economic policy, notably devaluation and food subsidies, than by ASAL I measures. - 14 - appraisal in 1985, risk of disappointment on points b), c) and e) above should have been apparent.11/ 52. Without question, ASAL I did greatly improve the quality and quantity of the Moroccan-Bank agricultural-sector dialogue. The feelings of mutual respect are striking. Only this respect enabled the Bank to maintain some relationship with MARA in the face of MARA's increasing consternation over what Moroccans call the assymetry of MTASAP--assiduous implementation of budget-cutting measures that cost farmers and MARA, but not of provisions that would have benefitted them. MARA feels that assymetry was supported by World Bank leverage in ASAP I & II. (PCR, Paras. 87-8) The proof of the strength of the dialogue is the existence of ASAL II, and the continued existence of a dialogue despite tensions over, inter alia, tranche release under ASAL II. 53. ASAL I strengthened the agricultural reform process, and the institutions that underpin it: MARA's DPAE and the para-public agricultural consulting firm, Agro Concept. The level of discussion of all aspects of agricultural policy is much more sophisticated now than it was in 1983, thanks indirectly to ASAL I. This institutional strengthening was greatly helped by the on-going Prices & Incentives Study and the technical assistance to DPAE and Agro Concept that have accompanied it. That study was and is financed by USAID, though terms of reference were originally drawn up by Bank staff. 54. What has truncated Moroccan agricultural sector adjustment and the improvement of the MTASAP process is the lack of inter-ministerial insti- tutional strengthening, planning, and sectoral dialogue. As part of ASAP I, an interministerial commission was created to promote these objec- tives. As the PCR reports, this aspect was "less satisfactory." The commission was set up, but "meetings ... were few and far between," and "attendance at meetings was often marked by a lack of continuity and inadequate representation from a decision-making standpoint" (PCR, Para. 89).121 We do n-t know how sanguine staff were that this commission would resolve the protlem. To their credit, they sought to address the problem. ll/ The discussion of risk in the President's Report, however (Paras. 138-139), ignores this point. 12/ Bank studies of institutional aspects of agricultural SECALS world-wide have shown that interministerial coordination is a common problem. Often it is not addressed. Even where it is addressed, as in the Morocco ASAL I case, SECALs have not proved successful in solving the problem. See Thelma A. Triche, "Institutional Aspects of Agricultural SECALs", unpublished Bank paper, November 1988, 49 pp. plus annexes, and Samuel Paul (assisted by Ashok Subramanian) & Thelma Triche, "Institutional Reforms in Sector Adjustment Operations", unpublished Bank paper, 9 January, 1989, 53 pp. plus annexes. - 15 - V. FINDINGS AND ISSUES 55. The above indicates that a singularly well-qualified and cons- cientious Bank team, working with an interested borrower, brought about quite marginal changes in the agricultural sector. In a divergence of interests both within Government and in the Bank, fiscal concerns won out over agricultural development concerns where the two clashed. As a result, ASAL I bought fiscal relief at some cost to incentives for agricultural growth and redistribution. For this reason, the excellent sector dialogue and very promising sectoral planning and reform process initiated under ASAL I have been compromised and continue to face difficulties under ASAL II. While there are recent signs that the reform process may now be back on track, thanks not to the functioning of the inter-ministerial committee but to intervention from the highest level, the travails of agricultural sectoral reform in the last two years testify to the vulnerability of the process. Therefore, the most important issue is: under the circumstances that obtained in Morocco in 1983-5, was a SECAL the best available tool for bringing about agricultural development? In so asking, we are only repeating the question left un-answered by staff in the first memorandum in the project file dated 24 May 1983. Before addressing this question though, the audit reviews other issues: the Bank's role; program sustaina- bility; and the fiscal bias of loan conditionality which antagonized MARA and more than a few farmers.13/ 56. Role of the Bank. During the audit, some of those interviewed criticized Bank staff's elaboration of conditions in the absence of a macro-economic or even of a sectoral framework. This absence was recog- nized by staff from the very beginning (see reference. Para. 7); ASAL I was designed to improve obvious weak points in Government intervention in the sector while the USAID-sponsored Prices & Incentives Study improved sectoral knowledge, so that future sectoral interventions would not suffer the same handicap. Having to work before that handicap could be removed, staff did a commendable job of practicing the art of the possible--of finding interventions that were acceptable to the Borrower and would improve the efficiency of Government intervention in agriculture. 131/ The burden of ASAL I reforms has fallen most heavily on some more "modern" farmers who use the most fertilizer, irrigation water, livestock services, etc. Those farmers are the best organized and the most articulate. The farmers of Doukkala ORMVA are an example. ASAL I's model "program contract" with that irrigation district has made it entirely self-financing, and more. (See OED, Impact Evaluation Report, Mexico and Morocco, Rio Sinaloa and Panuco Irrigation Projects (Loans 970- and 969-ME) and Doukkala I and II Irrigation Projects (Loans 1201- and 1416-1OR), November 17, 1988, Para. 45, pp. 25-6). Actual water charges collected in 1986--$232/ha--were double O&M expenditures and about 10% of the gross value of production. Water charges are deducted from payments for sugarbeet, a crop which the farmers are obliged to grow, by the ORMVA. High water charge payments have not resulted in good operation and maintenance. Farmers, who pay for pumping co&s.s at the equivalent of $30/barrel of oil, were on strike in November 1988, blocking roads and threatening not to plant sugarbeet. - 16 - 57. Without exceptional foresight, staff could not have been expected to know that the Borrower would, while adhering to the letter of the agreement, implement those conditions generating fiscal savings more vigo- rously than those requiring fiscal cost or demonopolization. However, Borrower resistance to specificity regarding public agricultural invest- ments might have been a warning of things to come. (So might the Bor- rower's reluctance to agree to ICB and other demonopolization measures for fertilizer and grains.) In that sense, MARA's contention that the assymetrical treatment of agriculture was supported by the assymetry of the agreed conditions--specific for cost saving, general for cost expanding-- has some merit. No doubt, it stems from the same variety of interests in the Bank as in Morocco, with some staff interested in agricultural deve- lopment & fiscal efficiency, others primarily in fiscal savings. 58. The strategic question for the Bank is the optimal degree of preparation for SECALs. Bank OMS 2.28 requires considerable preparation before projects are submitted to the Board. SECALs are not investment projects. However, Morocco's ASAL I clearly stretches the spirit of OMS 2.28, in sharp contrast to ITPA I with its five years of in-country, resident preparation between 1978 and 1983 (see above, Para. 13). Since Morocco was not prepared to undertake "policy-based" loans until 1983, there was no real alternative for the industrial sector. In agriculture, however, the parties could have waited for the results of the Prices & Incentives Study. The improved sector knowledge would have given the program the sophistication of ASAL II from the beginning. Conditions would not have had to be so vague or indeterminate but could have focussed better on the sectoral "pressure points." But everything else would have been delayed by several years. While more preparation would have improved the design of ASAL I, delay might have been costly. 59. Apparently, supervision was light. There were two supervision missions. The mission of October 1985 comprised 5 persons but devoted only one-half week per person to the task of supervising ASAL I. On the January 1986 mission, 5 persons devoted two weeks each to supervision, but much of this work may be seen as preparation for ASAL II. However, appearances in this regard are probably misleading in view of the Bank's many involvements in Morocco's agricultural sector at the time. Because of the broad nature of the ASAL, all sector work and work on preparation and supervision of other agricultural projects contributed, in effect, to ASAL I supervision. 60. One oversight in supervision, though one that is extremely common in the Bank at large, was the apparent failure to check SOEs. Another was failure to re-allocate the proceedings of the loan in disbursement category 1 (fertiliser) when it became apparent that the Borrower had no intention of using the loan for this purpose. A third oversight was failure to challenge ONICL's splitting of contracts from the same supplier for the same good on the same date in order to avoid ICB as per agreement. 61. Sustainability. Not being a project, ASAL I is not sustainable in the normal sense. In the event, it did not bring about changes in agricul- tural import procurement, nor, in what agricultural goods are imported. Therefore, its legacy to the future lies tn its other conditionalities. 62. The impact of the specific conditions--almost uniformly fiscal cost-saving ones--is significant and likely to be maintained, parti- - 17 - cularly if Government carries through its plan to end fertilizer and irrigation subsidies altogether. But the entire process of structural adjustment and agricultural planning is currently being threatened precisely because the task force-study conditions of ASAL I--which generally implied fiscal costs--were not implemented with equal vigor. Therefore, it is too early to be sure about the sustainability of the ASAL I reforms; their sustainability will probably still be in question after the travails over release of ASAL II tranche two are over. Ironically, one of the most sustainable facets of ASAL I may prove to be the Prices & Incentiver Study, done in parallel and not even financed by ASAL I but, nevertheless, resulting in a significant impact on Moroccan understanding of its agricultural sector and ability to plan public intervention in that sector. 63. Fiscal Bias. The conjuncture of economic and political forces in Morocco in 1983-5 was really quite promising for bringing about agricul- turr.1 development through the tool of a Bank SECAL. Severe and worsening fiscal and foreign-payments deficits were impelling the Borrower towards reform; they were making it more difficult to borrow externally. The Minister of Agriculture was reform-minded and his directors saw the need to reform. A number of the Bank technical staff working on Morocco had depth of experience in dealing with Moroccan agriculture. 64. A considerable stock of Bank sector work on Moroccan agriculture was available in 1983 when ASAL I preparation started. Nevertheless, that stock had been generated for purposes other than sectoral adjustment; it was very sub-sector specific, and it did not specify technical relation- ships between sub-sectors or, in most cases, likely outcomes of possible policy changes; it was not very helpful in drawing up sectoral-adjustment plans or in specifying conditions to the loan. Bank staff preparing the program and the Moroccan policy-makers they were working with were aware of these short-comings and proposed to go ahead with ASAL I despite the imperfections in sectoral knowledge. They proposed to: a) use existing sector knowledge to elaborate the sectoral-adjustment plan and specify conditions, while b) improving sectoral knowledge through the Prices & Incentives Study (independently financed). This is what they did. In fact, the plan and conditions drew heavily on the 1980 Bank-Moroccan SAL negotiations and on the Bank's fertilizer marketing study. To Bank staff's credit, they resisted suggestions for quick agreement on conditions "falling out" of the Bank's earlier dealings with Morocco in agriculture and insisted on deepening and broadening discussions with the Borrower during 1984 to achieve some degree of consensus on the MTASAP and the ASAL I conditions. 65. The resultant sectoral-reform process proceeded as planned, except where fiscal ambitions clashed with agricultural-development objectives. There were signs of these clashes during ASAL I's disbursement period, notably when the Bank and MARA agreed to a fertilizer price increase of 15% for tranche two release and Ministry of Finance proceeded with the 20Z agreed earlier. Less obvious but more critical was Government's unwil- lingness to move ahead with the costly parts of reform: improved farm output price supports and improved support for MARA's (more efficient) investment budget. Only during ASAL II Implementation have the clashes in objectives clearly come to the fore, with negative consequences for sectoral reform and Bank sector dialogue. - 18 - 66. In short, the Borrower has shown enthusiasm for agricultural- sector reforms that save Government money, but not for those that cost Government money. Reforms designed to break up monopolies in foreign trade, processing and marketing were resisted during ASAL I (ASAL II has taken more precise aim at them).14/ Government resistance to going beyond public-cost-saving reforms has stymied the sectoral-adjustment process. At the same time, it has alienated MARA and harmed Government's sector dialogue with the Bank. 67. Now, it is too early to tell whether the dilemma will be resolved 15/ and Moroccan agricultural sectoral reform will get back on track. However, the travails of Moroccan agricultural-sector reform to date do provide some indication of the practical limits to pushing agricultural sector reforms by means of Bank sector loans. 68. Realistically, even with the wisdom of hindsight, it is difficult to see what staff or Borrower might have done to preclude these clashes. The PCR suggests (Para. 89) that Bank supervision focussed too much on MARA and might have made matters better by supervising inter-ministerial aspects more, e.g. trying to get the Borrower's inter-ministerial committee working effectively. That puts a heavy burden on Bank supervision. It is probably unrealistic to expect Bank pressure to accomplish what MARA and other Moroccans interested in agricultural sector reform could not. 69. The result, then, of this truncated sectoral reform was a considerable fiscal savings, which will become greater in future if Government carries through, putting its interventions in irrigation on a self-financing basis and finishing the phase-out of fertilizer subsidies. The scattering of evidence available (mainly frc. Price/Incentive Study models) suggests that the cost of these savings .j the agricultural sector is significant, but not devastating. It is beyond the scope of this audit to determine whether the agricultural cost is worth the fiscal savings. The point is that the amount of sectoral reform that $100 million of agricultural SECAL would buy was modest. For the most part, it was limited to public-cost-saving measures which Government, under heavy fiscal pressure, was strongly motivated to take, and which Government might have taken anyhow in the absence of the loan. The Bank-Borrower sector dialogue and the sectoral-adjustment process, both excellent to begin with, have tended to falter as non-cost-cutting measures come into play, as agricul- tural interests increasingly realize that they are bearing the costs of reform, and as Government9s fiscal and foreign-borrowing crises become less severe. 70. Was ASAL I Justified? On the hypothesis that MTASAP, ASAL I, and ASAL II had not encountered resistance, another question presents itself: 14/ The Government monopoly of price setting was not tackled. ASAL I aimed at getting Government to "set the prices right" ("coherence des prix" in Moroccan parlance), not at getting Government to stop setting prices. 15/ While the current sticking point is certain conditions for ASAL II tranche two release, this in only symptomatic of deeper problems which will not necessarily be solved if tranche release occurs. - 19 - were the reforms proposed in MTASAP which were agreed in ASAL I worthwhile, or close to optimal vithin the given constraints, for the sector and/or for the Moroccan economy as a whole? Such a hypothetical realm is beyond the scope of OED audits. Suffice it to say, however, that neither Bank staff nor others possess tools for identifying loan conditions to optimize sectoral (or macro-economic?) growth, with or without equity. This would be less true if it were possible to construct a model that would accurately track the agricultural sector and its inter-actions with other sectors. Needless to say, model-building with such confidence is far from possible, even in Morocco, where understanding of the sector is better than in the average Bank/IDA borrower. The efore, constructing a sec.oral-adjustment plan and selecting loan conditions should be recognized for what they are: an art, informed, where possible, by descriptive sector work and a few feeble quantitative techniques. And the art is an art-of-the-possible, not what the artists think might be best for the sector (or the macro-economy?) in the abstract, but some blend of that with what they think the borrower, and Bank management, will accept. 71. In view of the "clashes" and the limits to reform described above, was it, in retrospect, unwise for Morocco to have taken this loan? No. Firstly, in purely commercial terms, the loan provided $100 million of hard foreign borrowing at a time when that was difficult for Morocco to get. The Kingdom had ta assume exchange-r&te risk. However, in retrospect, it seems to have borrowed at a wise time. Assuming that today's exchange rates prevail over the remainder of the repayment period, the cost of funds under the loan will have worked out to 11.5%, equivalent to about 4.2% over LIBOR, a not unreasonable premium for a country in Morocco's financial situation to pay at that time.16/ The loan's conditions wire not, in fact, onerous. Procurement and disbursement conditions were such that they effectively resulted in an addition of fully-fungible funds to the central bank. Secondly, in development terms, most of the conditions fulfilled were things Government might have done anyhow; however modest their additionality, they were certainly all steps in the right direction. And, thanks to ASAL I, Government of Morocco started an effort to understand and to plan its agricultural sector that should, in ways we cannot now foresee, improve future government intervention in agriculture, with or without the involvement of the Bank. 72. From the Bank's perspective, was it wise to lend for this program, and with the wisdom of retrospect, would there have been a better way? And is there anything to suggest that the SECAL reform process might have been easier or more difficult in countries with characterist&cs other than those of Morocco in 1983-7? Once again, some of these are hypothetical questions on which the empirical findings of the audit can shed, at best, very dim and partial light. Many of the aspects of sectoral adjustment tackled in ASAL I could have been tackled under project loans. Many of them have been followed up in this way, through sub-sector loans for irrigation, research & extension, forestry, .... But the broader sectoral concerns: improving agricultural planning, prioritizing the agricultural investment budget, injecting competition into fertilizer and grain imports, rationalizing government price-setting,..., are not naturals for tackling through 16/ See Annex II for explanation of how cost of funds and spread over LIBOR were calculated. - 20 - project loans. Thus, there may be a place for sectoral-adjustment (or structural-adjustment) lending, provided Bank and borrower can agree on reasonable steps to address these broader sectoral concerns. In the case of ASAL I, in the audit's judgement, the program has been worthwhile. 73. The Moroccan ASAL I experience shows, however, that this process can be difficult, even where there has been high-quality dialogue and apparent agreement, and where other pre-conditions for SECAL cooperation seemed to be near-optimal. It is in addressing the broader sectoral concerns that ASAL I most often fell short of its anticipated results. Tn countries where sector knowledge is less complete, where the country's circumstances make it less enthusiastic about sectoral reform, and/or where Bank and borrower interlocutors are less able or their dialogue less fruitful, there is likely to be less scope than in Morocco for addressing broader sectoral concerns through a SECAL. The reverse is true as well, though Morocco in 1983-5 certainly offered better-than-average conditions for success of an agricultural SECAL. Therefore, Morocco's experience under ASAL I suggests that Bank and borrowers reflect carefully and realistically on the relative merits of sectoral adjustment loans vis-a-vis other lending instruments in addressing a country's agricultural levelop- ment problems. MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (Loan 2590-MOR) Timing of Withdrawals 19 - 18 - Legend: 17 - Petroleum 16 - Pesticides & Veterinary 15 [ Feed Grain & Seed 14 - [77] Farm Machinery 13 - 12 - 11 10 9-k409 7- 6- 5 4 3-F 2 NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN -23 - ANNEX II Page 1 of 4 PROGRAM PERFORMANCE AUDIT MEMORANDUM MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) CALCULATING COST OF FUNDS AND SPREAD OVER LIBOR 1. Loan 2590-MOR was disbursed in twelve different currencies. Table 1 shows the actual currency composition of the loan along with the respective exchange rates that each currency commanded during the period. Table 2 traces the historical disbursement of the loan. The columns in both tables are self-explanatory. 2. The basic data on foreign exchange risk is given in Table 3. The individual columns ares (a) Borrower Obligation: the amount in current dollars which Morocco would have to pay to repurchase the foreign exchange in which its loan was denominated. This is discussed in greater detail below. (b) Due Banks the amount due to the Bank, ex- pressed in "historic dollars". This column checks with the third column of Table 2, after deducting any repayments made in the later time periods. (c) Interest Rate: the pooled interest rate for the quarter. It changes semi-annually. (d) Loan Index: the borrower obligation for this loan expressed as a percent of the amount due to the Bank (i.e. 100 * Column (3]/Column [1]). (e) Average Cost of Fund Index: the same concept as the loan index, except that it is the total borrower obligation (over all borrowers and loans in the pool) expressed as a ratio of the total amount due to the Bank. (f) Loan Index/Fund Index: the ratio of the Loan Index to the Fund Index. It shows that they move proportionately. 3. Since the Bank's interest ratio is applied to Borrower Obligation, not the amount due to the Bank, the Loan Index affects not only the cost of loan repayments, but also the effective rate of interest on funds lent by the Bank. Thus, in November 1988, the amount due the Bank was $100.00 million, and the pooled interest rate was 7.59%. Applying this to the Borrower Obligation of $125.84 million yields an interest payment of $9.55 million, which, expressed as a rate on the amount due to the Bank ($100 - 24 - ANNEX II Page 2 of 4 million) is 9.55%. Foreign exchange risk affects both Borrower repayments and interest commitments. 4. To trace exactly how disbursements of $100 million became trans- formed into obligations of $125.84 million In November 1988, it would be necessary to know the exact currency composition of pool at the two time periods and their respective dollar exchange rates, but the principle of the transactions shoild be clear. 5. (Lest it appear that crrency risk always works against the bor- rower, it should be noted that $128.58 borrowed in March 1988 could have been repaid with $116.95 in September 1988. Similarly, by November 1988 the Loan Index had fallen to 125.84 from its peak of 133.64 in December 1987. A strengthening of the dollar would continue this downward trend; but a weaker dollar wculd increase the Borrower's Obligation.) Reconciliation of Repayments 6. Data given in Tables 2 and 3 are quarterly. Actual disbursements and repayments occur on particular days. Hence actual interest and com- mitment fees differ somewhat from those calculated from quarterly data. Table 4 provides an approximate reconciliation of calculated and actual service payments to the Bank. The individual columns report: (a) The Interest Rate, as in column 6 of Table 3. (b) Borrower Obligation, as in column 4 of Table 3. This is the dollar value of the loan's share of the currency pool, on which interest is charged. (c) Estimated Interest: the rate of interest multiplied by the amount outstanding, and divided by four to reflect that it is a quarterly, rather than an annual, charge. (d) Undisbursed, as in column 1 of Table 2. (e) Commitment Fee: 0.75% p.a. on the undisbursed balance of the loan. Because this loan was disbursed quickly, this is a small part of total costs, amounting to about $0.6 million in all. (f) Estimated Commitment Charge: the undisbursed amount, multiplied by the commitment fee, and divided by four to find the quarterly, rather than annual, charge. (g) Estimated Service Payment: the sum of esti- mated interest and commitment payments (column 3 + column 7). (h) Actual Interest Payments are taken from Bank records. The first impression is of a com- - 25 - ANNEX II Page 3 of 4 plete lack of fit between estimated and actual service payments. In part this is because the actual data do not include commitment fees, but the commitment fee is a trivial amount in this loan. The next columns make needed ad- justments. (i) Cumulative Estimate Lagged Six Months. This lag reflects that (i) the interest due is billed semi-annually after the interest has been incurred, and (ii) there is some delay in Borrower response even after the account has been received. (j) Cumulative Actual: this is calculated from the actual payments column. 7. While columns 12 and 13 of Table 4 differ substantially in the early years, there is good agreement in the later periods as to the total payments which have been estimated and total actual payments. There is no reason to expect exact agreement, since the actual payments are calculated on the basis of daily balances and may involve miscellaneous lags in inter- national payment procedures, whereas the estimates are theoretically derived from an end of quarter figure. The important point is that the comparison shows that there are no major discrepancies in this case between theory and practice. Cost of Funds 8. To provide an estimate of possible cost of funds for this project it is necessary to make assumptions about future foreign exchange and interest rate movements. Quarterly actual payments through October 1988 are given in Table 5. This series is continued in Table 6, on the assump- tion that there is no further change in either the interest rate or the value of the currency pool relative to the US dollar. 9. The cash flows in Table 5 (column 5) and Table 6 (column 4) have been consolidated over the life of the loan in column 1 of Table 7. Since future payments depend on assumed lack of movement in exchange and interest rates, column 2 of Table 7 also gives the cash flow if Morocco paid off the outstanding balance of its loan in the fourth quarter of FY89. This "balloon payment" schedule ignores any pre-payment penalty, since the objective is simply to obtain an estimate of the effective cost of funds. 10. Repayment schedules over the life of the loan are then presented in Tables 8 through 11. Tables 8 and 9 reflect repayment according to the projected agreed schedule (column 1 of Table 7); Table 8 uses a constant interest rate, which turns out to be 11.4626% p.a.; while Table 9 uses LIBOR plus a premium which turns out to be LIBOR + 4.2605%. Tables 10 and 11 present the same calculations for the balloon payment options resulting in interest rates of 18.7585% or LIBOR + 11.545%. 11. Since "LIBOR + 11.545%" is so high so as to be a counter-intuitive interest rate, Table 11 gives detailed columns for LIBOR, LIBOR + 11.545% - 26 - ANNEX II Page 4 of 4 p.a., and the semi-annual equivalent of LIBOR + 11.545%, and the resulting discount factor. 12. Table 12 demonstrates that the present value of the payments needed to amortize the loan, evaluated at LIBOR + 1%, yields a net present value of $21.94 million in excess of the amortization requirements. -27 - TABLES 1 - 2 Table 1: Paid Withdrawals, By Currency, Loan 259-ltA husIeghted Weighted Average Minian Maxima I Cange in S Change In Value Exchange Rate USD Percent Exchange Rate Exchange Rate Exhans Exchange Currency Dates Amount (1 USO = I Equivalent of Total (1 USD = ] [1 USO - ] Rate Rate Swedish Kroner 8601-8703 664,905.85 6.95 95.605.72 0.101 6.44 7.60 17.9491 0.017% Japanese Yen 8601-8703 27,478.507.00 187.39 148,637.27 0.151 153.88 202.65 31.6941 0.046% Swiss Francs 8512-8701 859,052.50 1.73 495,554.28 0.50% 1.59 2.11 32.433% 0.161% Spanish Peseta 8512-8705 145,535,054.00 143.55 1,020,822.95 1.021 124.48 155.37 24.8231 0.2531 Danish Kroner 8512-8703 8,761,850.79 7.61 1,151.595.67 1.151 6.90 9.07 31.4675 0.3621 Italian Lire 8512-8706 2,320,493,330.00 1387.86 1,671,993.90 1.67% 1264.05 1717.94 35.9071 0.600% Belgium Francs 8512-8706 88,433,699.00 44.56 1,984,537.83 1.981 36.63 51.28 39.9961 0.7941 Gulider 8512-8705 8,781,150.96 2.50 3,516,840.00 3.525 1.99 2.83 42.1805 1.484% Pound Sterling 8512-8706 9,246,955.78 0.84 14,421,239.30 14.42% 0.60 0.70 17.3831 2.504% French Francs 8512-8706 137,103,354.42 6.64 20,650,293.44 20,65% 5.93 7.69 29.6431 6.121% Deutsch Mark 8512-8703 50,469,338.57 1.98 25,429,549.04 25,431 1.76 2.52 42.884% 10.905% US Dollar 8511-8705 29,426,592.49 1.00 29,415,330.48 29.421 0.98 1.02 4.3071 1.2G7% Table 2: Disbursement by IBRD for Loan 2590-MOR (Current US$) CUMULATIVE FISCAL UNDISBURSED DISBURSED DISBURSED QUARTER (US$) (US$) (US$) ---------------- ------------- -------------- ------------ 1986 1 100,000,000 0 0 1986 2 72,139,376 27,860,624 27,860,624 1986 3 60,029,733 12,109,643 39,970,267 1986 4 50,000,000 10,029,733 50,000,000 1987 1 50,000,000 0 50,000 000 1987 2 37,874 970 12,125,030 62 125,030 1987 3 9,753,467 28 121,503 90,246,533 198714 0 9,753,467 100,000,000 ----------- ----------------------------------- TABLE 3: BASIC DATA ON FOREIGN EXCHANGE RISK, LOAN 2590-MOR CUMULATIVE BORROWER INTEREST AVERAGE COST FISCAL DISBURSED DISBURSED UNDISBURSED OBLIGATION DUE BANK RATE LOAN INDEX OF FUND INDEX LOAN INDEX/ QUARTER DATE (US$ M) (US$ M) (USS M) (USS M) (USS M) () () (x) FUND INDEX 1988(2) December 85 27.88 27.88 72.14 28.58 27.88 8.82 102.58 93.70 1.09 1986(3) March 88 12.11 39.97 8.93 43.08 39.97 8.82 197.78 190.45 1.67 1988(4) June 88 19.83 50.0 59.00 56.02 50.00 8.50 112.04 196.75 1.05 1987(1) September 86 9 59.66 5 60.28 59.00 8.50 120.52 114.48 1.05 1987(2) December 88 12.13 62.18 37.87 72.66 62.18 8.23 116.95 115.81 1.01 1987 () March 87 28.12 99.25 9.75 196.81 90.25 8.23 118.35 123.71 0.96 1987(4) June 87 9.75 199.99 0.00 115.32 100.00 7.92 115.32 122.63 0.94 1988(1) Septeaber 87 9.90 0.00 0.09 115.21 100.00 7.92 116.21 122.97 0.94 1988(2) December 87 0.00 0.99 9.99 13.84 100.90 7.76 133.64 142.12 0.94 1988(3) March 88 9.90 0.00 0.00 128.58 190.00 7.78 128.58 187.07 0.94 1988(4) June 88 0.00 9.99 B.90 120.02 199.90 7.72 129.92 127.63 0.94 1989(1) September 88 0.00 9.00 9.0 118.95 190.90 7.72 118.95 124.37 0.94 1989(2) (Oct. 8) 9.00 0.00 9.90 123.22 100.90 7.59 123.22 124.87 G.99 -------------------------------------------------------------------------------------------------------------------------------------- loble 4: CalculateO ored Actual Pavmetts to 03nk. OLtOber 1985- Noveaber 1989. Loan 2590-M0P CUMULATIVE ACTUAL ESTIMATED ESTIMATED ACTUAL ACTUAL ACTUAL CUMULATIVE PAYMENTS INTEPEST 8OPROER ESTIATED COMMITWENT COMMITMENT SERVICE INTEREST COMMITNENT TOTAL SERVICE LASSED SIX PATIO RATE OBLIGATION INTEREST DISBURSED UNDISBURSED FEE CHARGE PAYMENTS CHARGE CHARGE CHARGES ESTIMATE MONTHS ESTIMATED' DATE ( US$ tu i 1US$ l 1(US$ Il 1UHS$ ") ) (1US$ M (US$ M) IUSI M) (US$ II (US$ MI (US$ 1 WS M ACTUAL Oct. 85 9.82 0.00 0.0000 0.00 100.00 0.75 0.0625 0.0625 - - - 0.0Q625 1.1104 0.0563 Nov. 95 8.92 10.31 0.0758 10.05 99.95 0.75 0.0562 0.1320 - - - 0.1945 1.1104 0.1752 Dec. 85 9.82 29.58 0.2101 17.81 72.14 0.75 0.0451 0.2552 - - - 0.4497 1.4279 0.3149 Jan. 96 9.50 34.07 0.2413 4.54 67.60 0.75 0.0423 0,2836 - - - 0.7333 1.5137 0.A944 Feb. 86 8.51( 41.06 0.2909 4.60 63.00 0.75 0.0394 0.3302 - - - 1.0635 1.5137 0.7026 Mar. 86 8.50 43.09 0.3052 2.9? 60.03 0.75 0.0375 0.3427 - - - 1.4061 1.5137 9.9289 Apr. 86 8.50 49.19 0.3485 3.51 56.52 0.75 0.0353 0.3389 1.1104 - 1.1104 1.7899 1.5137 1.1e25 Hov 86 9.50 53.48 0.3788 6.52 50.00 0.75 0.0312 0.4101 - - - 2.2000 1.5137 1.45!4 Jun. 96 9.50 56.02 0.3968 0.00 50.00 0.75 0.0312 0.42e1 - (1.3175 0.3175 2.62W 4.2063 0.6248 July 96. 9.23 59.08 0.4052 q.00 50.00 0.75 0.0312 0.4364 0.0958 - 0.0859 3.9645 4.2063 0.7295 Aug. 86 8.23 59.53 0.4083 0.00 50.00 0.75 0.0312 0.4396 - - - 3.5040 4.2747 0.1lV Sept. 96 9.23 60.26 0.4133 0.00 50.00 0.75 0.0312 0.4445 - - - 3.9495 4.2747 fl.9237 Oct. 96 8.23 69.84 0.4790 12.13 37.87 0.75 0.0237 0.5027 - - - 4.4512 4.2747 1.0413 November 96 8.23 71.65 0.4914 0.00 37.87 0.75 0.0237 0.5151 - 4.9663 4.2747 1.1618 Deceber 96 8.23 72.66 0.4903 '.0o 37.87 0.75 0.0237 0.5220 2.5028 0.1898 2.6926 5.4883 7.7074 0.7121 Janarv 97 ?.92 96.39 0.5702 9.33 28.55 0.75 0.0179 0.5810 - 6.0763 7.70.4 0.7884 February 87 7.92 85.70 0.5661 0.01 28.55 0.75 0.0178 0.5940 0.0694 - 0.0684 6.6603 7.9381 9.817 March 9? 7.92 106.1 0.7649 18.79 9.75 0.75 0.0061 0.7110 - - - 7.3713 7.9381 0.?286 April 97 7.92 111.03 0.7328 1.70 8.05 0.75 0.0050 0.7370 - - - 8.1092 7.9381 1.0216 May 87 7.92 113.98 0.7522 5.69 2.37 0.15 0.0015 0.7537 - - 8.9629 12.9116 0.6864 June 87 7.92 115.32 0.7611 2.37 0.00 0.75 0.0000 0.7611 3.3193 0.1!33 3.4327 9.6240 12.9172 0.7451 July 87 7.76 113.97 0.7370 0.00 0.00 0.75 0.0000 0.7370 - - - 10.3610 12.9172 0.842! August 97 7.76 117.22 0.7580 0.00. 0.00 0.75 0.0000 0.7580 0.2307 - 0.2307 11.1190 12.9172 0.B609 September 87 7.76 115.21 0.7450 0.00 0.00 0.75 0.0000 0.7450 - - - 11.8641 12.9172 0.9185 October 97 7.76 121.12 0.7832 0.00 0.00 0.75 0.0000 0.7932 - - 12.6473 17.8878 0.7070 November 87 7.76 127.64 0.8254 0.00 0.00 0.75 0.0000 0.9254 4.9735 4.9735 13.4727 17.8879 0.7572 December 87 7.76 133.64 0.9642 0.00 0.00 0.75 0.0000 0.9642 - 0.0056 0.0056 14.3369 17.8878 0.8015 January 88 7.72 127.63 0.8211 9.00 0.00 0.75 0.0000 0.8211 - - - 15.1590 17.9110 0.8463 February 89 7.72 126.51 0.139 9.00 0.00 0.75 0.0000 0.0139 - - - 15.9719 17.9110 0.8917 March Be 7.72 120.58 0.8272 0.00 0.00 0.75 0.0000 0.0272 - - - 16.7991 17.9110 0.9379 April 89 7.72 129.16 0.9245 0.00 0.00 0.75 0.0000 0.8245 4.9706 - 4.9706 17.6236 22.5889 0.7802 May 96 7.72 125.57 0.8078 0.00 0.00 0.75i 0.0000 0.8078 - - - 18.4314 22.5889 0.8160 JuNe 98 7.72 119.23 0.7606 0.00 0.00 0.75 0.0000 0.7606 - - - 19.1920 22.589 0.8496 July 8 7.59 117.00 0.7400 0.00 0.00 0.75 0.0000 0.7400 0.0232 - 0.0232 19.9320 22.5889 0.8e4 August BB 7.59 116.95 0.7397 0.00 0.00 0.75 0.0000 0.7397 - - - 20.6717 22.5899 0.9151 Seotember N9 7.59 116.95 0.7397 0.00 0.00 0.75 0.0000 0.7397 - - - 21.4114 22.5889 0.9479 (Oct. 9) 7.59 123.22 0.7794 0.00 0.00 0.75 0.0000 0.7794 4.6779 - 4.6779 22.1908 22.5889 0.9824 (Nov. so) 7.59 125.84 0.7959 0.00 0.00 0.75 0.0000 0.7959 - 22.9967 22.5899 1.0176 -30 - TABLE 5 TABLE 5: ACTUAL CASH FLOW (FROM BORROWER), DECEMBER 1985 THROUGH OCTOBER 1988, LOAN 2590-MOR ACTUAL ACTUAL ACTUAL COMMITMENT INTEREST ACTUAL FISCAL DISBURSEMENT CHARGE CHARGES REPAYMENT CASH FLOW QUARTER DATE (US$ M) (US$ M) (US$ M) (US$ M) (US$ M) 1986(2) December 85 27.86 - - - (27.86) 1986(3) March 86 12.11 - - - (12.11) 1986(4) June 86 10.03 0.317 1.110 - (8.60) 1987(1) September 86 0.00 0.086 - 0.09 1987(2) December 86 12.13 0.190 2.503 - (9.44) 1987(3) March 87 28.12 0.068 - (28.05) 1987(4) June 87 9.75 0.113 3.319 - (6.32) 1988(1) September 87 0.00 0.231 - 0.23 1988(2) December 87 0.00 0.006 4.974 - 4.98 1988(3) March 88 0.00 - - - 0.00 1988(4) June 88 0.00 - 4.971 - 4.97 1989(1) September 88 0.00 - 0.023 - 0.02 1989(2) (Oct. 88) 0.00 - 4.678 - 4.68 -31 - TABLE 6 TABLE 6: PROJECTED SERVICE AND REPAYMENT SCHEDULE, LOAN 2590-MOR. (Current Exchange & Interest Rates) BORROWER CAPITAL INTEREST FISCAL OBLIGATION REPAYMENT CHARGE TOTAL QUARTER (US$ M) (US$ M) (US$ M) (US$ M) 1989(4) 125.84 0.00 4.78 4.78 1990(2) 125.84 0.00 4.78 4.78 1990(4) 125.84 0.00 4.78 4.78 1991(2) 125.84 4.19 4.78 8.97 1991(4) 121.64 4.19 4.62 8.81 1992(2) 117.45 4.19 4.46 8.65 1992(4) 113.25 4.19 4.30 8.49 1993(2) 109.06 4.19 4.14 8.33 1993(4) 104.86 4.19 3.98 8.17 1994(2) 100.67 4.19 3.82 8.02 1994(4) 96.47 4.19 3.66 7.86 1995(2) 92.28 4.19 3.50 7.70 1995(4) 88.08 4.19 3.34 7.54 1996(2) 83.89 4.19 3.18 7.38 19-6(4) 79.70 4.19 3.02 7.22 1997(2) 75.50 4.19 2.87 7.06 1997(4) 71.31 4.19 2.71 6.90 1998(2) 67.11 4.19 2.55 1.74 1998(4) 62.92 4.19 2.39 6.58 1999(2) 58.72 4.19 2.23 6.42 1999(4) 54.53 4.19 2.07 6.26 2000(2) 50.33 4.19 1.91 6.10 2000(4) 46.14 4.19 1.75 5.95 2001(2) 41.94 4.19 1.59 5.79 2001(4) 37.75 4.19 1.43 5.63 2002(2) 33.55 4.19 1.27 5.47 2002(4) 29.36 4.19 1.11 5.31 2003(2) 25.16 4.19 0.96 5.15 2003(4) 20.97 4.19 0.80 4.99 2004(2) 16.78 4.19 0.64 4.83 2004(4) 12.58 4.19 0.48 4.67 2005(2) 8.39 4.19 0.32 4.51 2005(4) 4.19 4.19 0.16 4.35 -- - - - - - - - - - - - - - -- - - - - - - - --I- - - - -32 - TABLE 7 TABLE 7: PROJECT CASH FLOW WITH CURRENT REPAYMENT SCHEDULE OR BALLOON PAYMENT, LOAN 2590-MOR PROJECTED AGREED FISCAL REPAYMENT BALLOON QUARTER SCHEDULE PAYMENT 1986(2) (27.86) (27.86) 1986(4) (20.71) (23.71) 1987(2) (9.35) (9.35) 1987(4) (34.37) (31. 7) 1988(2) 5.21 5.21 1988(4) 4.97 4.97 1989(2) 4.70 4.70 1989(4) 4.78 130.61 1990(2) 4.78 0.00 1990(4) 4.78 0.00 1991(2) 8.97 0.00 1991(4) 8.81 0.00 1992(2) 8.65 0.00 1992(4) 8.49 0.00 1993(2) 8.33 0.00 1993(4) 8.17 0.00 1994(2) 8.02 0.00 1994(4) 7.86 0.00 1995(2) 7.70 0.00 1995(4) 7.54 0.00 1996(2) 7.38 0.00 1996(4, 7.22 0.00 1997(2) 7.06 0.00 1997(4) 6.90 0.00 1998(2) 6.74 0.00 1998(4) 6.58 0.00 1999(2) 6.42 0.00 1999(4) 6.26 0.00 2000(2) 6.10 0.00 2000(4) 5.95 0.00 2001(2) 5.79 0.00 2001(4) 5.63 0.00 2002(2) 5.47 0.00 2002(4) 5.31 0.00 2003(2) 5.15 0.00 2003(4) 4.99 0.00 2004(2) 4.83 0.00 2004(4) 4.67 0.00 2005(2) 4.51 0.00 2005(4) 4.35 0.00 -33 - TABLE 8 TABLE 8: LOAN AMORTIZATION WITH FIXED INTEREST RATE OF 11.4628X PER ANNUM, PAID SEMI-ANNUALLY, (LOAN 2590-MOR) PROJECTED PRESENT AGREED DISCOUNTED REPAYMENT VALUE OF FISCAL DISCOUNT SCHEDULE REPAYMENT CUMULATIVT QUARTER FACTOR (US$ M) (US$ M) (USS M) 1986(2) 1.000 (27.880) (27.860) (27.860) 1986(4) 0.947 (20.712) (19.618) (47.478) 1987(2) 0.897 (9.852) (8.89) (65.888) 1987(4) 0.850 (84.869) (29.206) (85.074) 1988(2) 0.806 5.210 4.193 (80.881) 1988(4) 0.762 4.971 3.790 (77.091) 1989(2) 0.722 4.701 3.895 (78.696) 1989(4) 0.684 4.776 3.266 (70.480) 1990(2) 0.648 4.776 8.094 (67.886) 1990(4) 0.614 4.776 2.980 (64.406) 1991(2) 0.581 8.970 5.214 (59.192) 1991(4) 0.551 8.811 4.851 (64.841) 1992(2) 0.521 8.652 4.512 (49.829) 1992(4) 0.494 8.493 4.195 (45.685) .993(2) 0.468-- 8.838 8.899 (41.736) 1993(4) 0.448 8.174 3.622 (88.114) 1994(2) 0.420 8.015 8.864 (84.756) 1994(4) 0.898 7.856 8.123 (31.627) 1995(2) 0.877 7.897 2.898 (28.728) 1995(4) 0.857 7.537 2.688 (26.040) 1996(2) 0 838 7.378 2.493 (23.547) 1996(4) 0.320 7.219 2.810 (21.287) 1997(2) 0.803 7.060 2.140 (19.097) 1997(4) 0.287 6.901 1.981 (17.118) 1998(2) 0.272 6.742 1.68 (18.283) 1998(4) 0.268 6.582 1.695 (13.5688) 1999(2) 0.244 6.428 1.587 (12.021) 1999(4) 0.281 6.264 1.447 (10.573) 2000(2) 0.219 6.105 1.336 (9.237) 206O(Al 0.207 5.946 1.238 (8.004) 2001(2) 0.196 5.786 1.186 (6.868) 2001(4) 0.188 5.627 1.047 (5.822) 2002(2) 0.176 5.468 0.968 (4.858) 2002(4) 0.167 6.809 0.886 (8.972) 2008(2) 0.158 5.160 0.814 (8.158) 2008(4) 0.150 4.990 0.747 (2.411) 2004(2) 0.142 4.881 0.685 (1.726) 2004(4) 0.184 A.672 0.628 (1.099) 2006(2) 0.127 4.613 0.674 (0.526) 205(4) 0.120 4.854 0.625 .oee -34 - TABLE 9 TABLE 9: LOAN AMORTIZATION USING INTEREST AT 4.2865 OVER LIBOR, PAID SEMI-ANNUALLY. (LOAN 2590-MOR) PROJECTED PRESENT AGREED DISCOUNTED REPAYMENT VALUE OF FISCAL LIBOR + 13mi-Annual DISCOUNT SCHEDULE REPAYMENT CUMULATIVE QUARTER LIBOR 4.26053 Interest FACTOR (US$ M) (US$ M) (US$ M) 1986(2) 6.94 11.20 1.0545 1.0000 (27.8600) (27.8600) (27.8800) 1986(4) 8.94 11.20 1.0545 0.9483 (20.7122) (19.8414) (47.5014) 1987(2) 6.96 11.22 1.0546 0.8993 (9.3516) (8.4096) (55.9110) 1987(4) 7.59 11.85 1.0576 0.8527 (84.3889) (29.3067) (85.2177) 1988(2) 7.32 11.58 1.0568 0.8068 5.2098 4.20065 (81.0172) 1988(4) 7.19 11.45 1.0567 8.7688 4.97068 8.7940 (77.2232) 1989(2) 7.19 11.45 1.667 0.7286 4.7011 8.8989 (78.8242) 1989(4) 7.19 11.45 1.6557 0.6849 4.7755 8.2705 (70.5587) 1990(2) 7.19 11.45 1.0557 0.6487 4.7756 8.0979 (67.4658) 1990(4) 7.19 11.45 1.8557 0.6145 4.7755 2.9844 (64.5214) 1991(2) 7.19 11.45 1.0567 0.5820 8.9702 5.2211 (59.3008) 1991(4) 7.19 11.45 1.6557 0.5518 8.8110 4.8578 (54.4425) 1992(2) 7.19 11.45 1.0557 0.5222 8.6518 4.6188 (49.9248) 1992(4) 7.19 11.46 1.0557 0.4947 8.4926 4.2011 (45.7232) 1998(2) 7.19 11.45 1.0567 0.4886 8.8384 8.9048 (41.8184) 1998(4) 7.19 11.46 1.0557 0.4488 8.1742 8.6281 (38.1963) 1994(2) 7.19 11.45 1.0557 0.4204 8.0151 3.8697 (84.8206) 1994(4) 7.19 11.45 1.0557 6.8982 7.8559 8.1285 (81.6922) 1995(2) 7.19 11.45 1.6557 0.8772 7.6967 2.9633 (28.7888) 1995(4) 7.19 11.45 1.0557 0.8578 7.5375 2.6932 (28.6956) 1996(2) 7.19 11.46 1.6557 0.8386 7.8783 2.4972 (23.5984) 1996(4) 7.19 11.45 1.0567 0.8206 7.2191 2.3144 (21.2840) 1997(2) 7.19 11.45 1.6557 0.8087 7.6599 2.1439 (19.1461) 1997(4) 7.19 11.45 1.67 0.2876 6.9067 1.9856 (17.1551) 1998(2) 7.19 11.45 1.0557 8.2725 6.7416 1.8869 (15.3182) 1998(4) 7.19 11.46 1.0557 0.2581 6.5824 1.6988 (18.6194) 1999(2) 7.19 11.45 1.6557 0.2445 6.4282 1.5708 (12.6491) 1999(4) 7.19 11.45 1.657 0.2818 6.2840 1.4565 (10.5988) 2000(2) 7.19 11.45 1.0557 0.2193 6.1048 1.3891 (9.2596) 2000(4) 7.19 11.45 1.0557 0.2078 5.9456 1.2858 (8.6242) 2001(2) 7.19 11.45 1.f567 0.1968 5.7864 1.1888 (6.8864) 2001(4) 7.19 11.45 1.9557 0.1864 5.6272 1.6490 (5.8864) 2002(2) 7.19 11.46 1.8567 0.1766 6.4686 0.9856 (4.8768) 2002(4) 7.19 11.45 1.6567 0.1673 5.3689 0.8880 (8.9828) 208(2) 7.19 11.45 1.0557 0.1684 5.1497 0.8169 (3.1669) 2008(4) 7.19 11.45 1.0567 0.1601 4.9905 0.7490 (2.4180) 2004(2) 7.19 11.45 1.0557 0.1422 4.8818 0.688 (1.7812) 2004(4) 7.19 11.45 1.6557 6.1247 4.6721 0.6291 (1.1626) 2005(2) 7.19 11.45 1.0557 0.1275 4.5129 0.6756 (0.5264) 2005(4) 7.19 11.45 1.0557 0.1208 4.8587 0.5280 (0.04) - 35 - TABLES 10 -1 TABLE 10: LOAN AMORTIZATION WITH FIXED INTEREST RATE AT 18.7585% PER ANNUM, PAID SEMI-ANNUALLY, AND BALLOON PAYMENT. (LOAN 2590-MOR) PROJECTED PRESENT AGREED DISCOUNTED BALLOON VALUE OF FISCAL DISCOUNT PAYMENT PAYMENT CUMAULATIVE QUARTER FACTOR (US$ M) (US$ M) (US$ M) 1988(2) 1.000 (27.88) (27.860) (27.860) 1986(4) 0.918 (20.71) (19.006) (46.866) 1987(2) 0.842 (9.35) (7.874) (54.741) 1987(4) 0.773 (34.37) (26.558) (81.297) 1988(2) 0.709 5.21 3.694 (77.603) 1988(4) 0.651 4.97 3.234 (74.369) 1989(2) 0.597 4.70 2.807 (71.562) 1989(4) 0.548 130.62 71.562 0.000 TABLE 11: LOAN AMORTIZATION WITH INTEREST AT LIBOR + 11.545% PAID SEMI-ANNUALLY, AND BALLOON PAYMENT. (LOAN 2590-MOR) PRESENT DISCOUNTED BALLOON VALUE OF FISCAL LIBOR + 1+SEMI-ANNUAL DISCOUNT PAYMENT REPAYMENT CUMULATIVE QUARTER LIBOR 11.545% INTEREST FACTOR (US$ M) (US$ M) (US$ M) 1986(2) 6.94 18.485 1.0885 1.0000 (27.86) (27.860) (27.860) 1986(4) 6.94 18.485 1.0885 0.9187 (20.71) (19.026) (46.886) . 1987(2) 6.96 18.505 1.C886 0.8440 (9.35) (7.891) (54.777) 1987(4) 7.59 19.135 1.0915 0.7753 (34.37) (28.647) (81.424) 1988(2) 7.32 18.885 1.0903 0.7103 5.21 3.701 (77.724) 1988(4) 7.19 18.738 1.0897 0.6515 4.97 3.238 (74.485) 1989(2) 7.19 18.738 1.0897 0.5979 4.70 2.810 (71.675) 1989(4) 7.19 18.738 1.0897 0.5487 130.61 71.667 (0.008) - 36 - TABLE 12 TABLE 12: LOAN AMORTIZATION USING INTEREST AT 1% OVER LIBOR, .PAID SEMI-ANNUALLY. (LOAN 2590-MOR) PROJECTED PRESENT AGREED DISCOUNTED REPAYMENT VALUE OF FISCAL DISCOUNT SCHEDULE REPAYMENT CUMULATIVE QUARTER FACTOR (US$ M) (US$ M) (US$ M) 1986(2) 1.0000 (27.8600) (27.8600) (27.8600) 1986(4) 0.9625 (20.7122) (19.9358) (47.7958) 1987(2) 0.9264 (9.3515) (8.6636) (56.4595) 1987(4) 0.8916 (34.3689) (30.6445) (87.1039) 1988(2) 0.8556 5.2098 4.4577 (82.6462) 1988(4) 0.8221 4.9706 4.0864 (78.5598) 1989(2) 0.7904 4.7011 3.7157 (74.8441) 1989(4) 0.7599 4.7755 3.6288 (71.2153) 1990(2) 0.7305 4.7755 3.4887 (67.7266) 1990(4) 0.7023 4.7755 3.3540 (64.3726) 1991(2) 0.6752 8.9702 6.0568 (58.3158) 1991(4) 0.6492 9.8110 5.71E" (52.5962) 1992(2) 0.6241 8.6518 5.3995 (47.1967) 1992(4) 0.6000 8.4926 5.0955 (42.1011) 1993(2) 0.5768 8.3334 4.8070 (37.2941) 1993(4) 0.5546 8.1742 4.5331 (32.7610) 1994(2) 0.5332 8.0151 4.2733 (28.4877) 1994(4) 0.5126 7.8559 4.0267 (24.4611) 1995(2) 0.4928 7.6967 3.7928 (20.6683) 1995(4) 0.4738 7.5375 3.5709 (17.0973) 1996(2) 0.4555 7.3783 3.3606 (13.7367) 1996(4) 0.4379 7.2191 3.1611 (10.5756) 1997(2) 0.4210 7.0599 2.9721 (7.6035) 1997(4) 0.4047 6.9007 2.7929 (4.8106) 1998(2) 0.3891 6.7416 2.6232 (2.1874) 1998(4) 0.3741 6.5824 2.4623 0.2749 1999(2) 0.3596 6.4232 2.3100 2.5849 1999(4) 0.3458 6.2640 2.1658 4.7507 2000(2) 0.3324 6.1048 2.0293 6.7800 2000(4) 0.3196 5.9456 1.9001 8.6801 2001(2) 0.3072 5.7864 1.7778 10.4578 2001(4) 0.2954 5.6272 1.6621 12.1200 2002(2) 0.2840 5.4680 1.5528 13.6728 2002(4) 0.2730 5.3089 1.4494 15.1221 2003(2) 0.2625 5.1497 1.3516 16.4738 2003(4) 0.2523 4.9905 1.2593 17.7330 2004(2) 0.2426 4.8313 1.1720 18.9051 2004(4) 0.2332 4.6721 1.0897 19.9948 2005(2) 0.2242 4.5129 1.0119 21.0067 2005(4) 0.2156 4.3537 0.9385 21.9452 - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - -- - 37 - KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) PROJECT COMPLETION REPORT June 22, 1988 - 39 - L INTRODUCTION 1. In response to changing economic circumstances as summarized in Section 2 of this report,.' the emphasis of Bank support to Morocco shifted away from 'traditional' investment projects to policy-based lending in support of the Government's structural adjustment programs. In conjunction with the efforts to stabilize the economy, the Government began to implement a proram of policy adjustments in 1984 based on reforms in major economic sectors. 2. This report presents the economic situation faced by Morocco since the 1970s and summarizes the Government's adjustment program designed as a result. The Bank's assistance strategy in support of this adjustment ih then presented (Section III). Implementation and monitoring of the loan are examined in Section IV. Performance of ASAL-1 is analyzed with respect to stated loan objectives in Section V. The report concludes with a brief evaluation of Government and Bank performance, and outlines certain lessons learned under ASAL-1. The implementation section is based on the final progress report 1/ Dealt in full detail in project documents and in the following reports: Medium-Term Adjustment Policies and Prosepcts (Report 5785-MOR), August 1985; and Issues for a Medium-Term Structural Adjustment Program (Report 6608-MOR), January 1987. C3729Z) - 40 - prepared by MARA and provided to the Bank in draft form. The performance section draws on the impact analysis prepared by MARA in conjunction with this progress report. The concluding chapter is based on discussions with MARA officials and experience of Bank staff involved in the design and sxupervision of ASAL-1 and the follow-up operation, ASAL-2. H. ECONOMIC BACKGROUND 3. Early Stabilization and Adjustment. Ambitious investment programs were implemented in the 1970s, financed initially through gains in the terms of trade due to the sharp rise in phosphate prices that followef the 1973 oil price shock. When these prices fell in 1975-76, Morocco resorted to external borrowing and public sector deficits. The 1975 repossession of the Spanish Sahara entailed heavy economic and military expenditures. The second oil price rise in 1979-80, a further fall in phosphate prices and rising interest rates on foreign debt all militated in favuur of intensifying stabilization efforts to absorb the combined impact of these external shocks on the economy. 4. The stabilization policies of the early 1980s sought to restrain high levels of public expenditures; however, in the face of economic recession, the Government continued to pursue expansionary public spending policies. The 1981-85 Development Plan aimed at an ambitious 6.5% p.a. GDP growth rate, to (3729E) - 41 - be obtained through increasing public investment- . The treasury deficit rose as a result to 14.5% of GDP in 1981 and to 12.3% of GDP in 1982; however, GDP growth in the 1980-82 period averaged only 2.7% p.a.. Further external and internal shocks (notably, severe drought in 1981 followed by years of poor harvests and social unrest in 1981 resulting from efforts to increase the prices of subsidized commodities) exacerbated the mounting economic disequilibria. 5. Thel983Crisis. In early 1983, the financial situation deteriorated rapidly and net foreign assets declined sharply, prompting the Government to impose emergency import restrictions and massively curtail public expenditures. Morocco could no longer finance its external deficits and the Government became aware of the need to undertake a serious stabilization and adjustment program that could warrant support from both the IMF and the Bank and form the basis of a debt rescheduling operation. 1/ Traditionally, the Moroccan economy's main source of growth has come from expanding Government expenditures. Government direct and indirect participation in the economy is widespread, with public enterprises accounting for some 20% of value-added. See Morocco Public Enterprise Sector Review, August 1986 for more details. ( 3729E) - 42 - M. THE GOVERNMENT'S ADJUSTMENT PROGRAM 6. The objectives of the Government's adjustment program in response to the 1983 crisis were to (i) stabilize the economy in the short-term by reducing aggregate demand and the sizes of the budget and the balance of payments deficits and (ii) reform the underlying structure of key economic and social sectors in order to increase their productivity. A. Stabilization 7. Key elements of the stabilization program are: (i) revenue enhancement measures culminating in a fiscal reform which introduced a value-added tax and aimed at improving collection of existing taxes; (ii) limits on the growth of the civil service and public sector salaries; (iii) major cuts in the public investment program and reduction of consumer subsidies; (iv) increases in public sector tariffs, limits on credit to the economy and annual limits on external borrowing; and (v) a flexible exchange rate policy. IMF Programs in support of stabilization 8. A series of three IMF Stand-bys covering the period 1983-88 supported the Government's stabilization program. The main elements of the stabilization effort continue to be severe restraint in Government investment and consumption, price increases to reduce consumer subsidies, limits on civil service growth and salaries, reductions in Government arrears and ceilings on credit to the economy and on non-concessional borrowing. Each of these - 43 - Stand-bys was prepared in close cooperation with the Bank to ensure complementarity of their stabilization measures with structural adjustment measures being formulated with Bank assistance (para. 10). Morocco obtained debt reschedulings from the Paris Club of US$ 1,350 million and from the London Club of US$ 630 million on the basis of the first Stand-by. B. Adjustment 9. The objectives of the Government's structural adjustment program are to increase the productive efficiency and competitiveness of the economy through trade liberalization, export promotion and reforms in the financial, agriculture, education and public enterprises sectors. 10. In addition to depreciating the Dirham by about 18% in real terms since 1983, a series of measures designed to encourage exports, improve industrial incentives and reduce price distortions has been instituted. Sector policy reforms have been undertaken in agriculture (para. 18) with an aim to better orient the incentives framework. An education reform spreading primary education in rural areas and increasing female participation while reducing the overemphasis on upper secondary and higher education is also underway. Substantial changes have been made to loosen or remove constraints to mobilize private sector savings and allocate resources to the most profitable uses (interest rates have been raised to positive levels and inter-bank mediation has increased). The Government has also initiated a program of reforms relating to public enterprises to lessen their budgetary burden and promote their financial and administrative autonomy. (3729E) -44- Role of the Bank 11. Prior to 1983, Bank lending to Morocco consisted of investment projects and DFC-type operations. Since 1983, however, Bank lending has increasingly shifted to policy-based operations in support of the Government's structural adjustment program. Adjustment loans currently represent some 56% of the Bank's portfolio in Morocco. 12. Sectoral Policy perations: In support of the Government's objective to transform the Moroccan economy into an efficient producer of goods and services through reform of the key social and economic sectors, several lending operations have been approved by the Bank since 1984. The Industrial Trade and Policy Loans (ITPA I, Loan No. 2377-MOR, signed March 19, 1984; ITPA II, Loan No. 2604-MOR, signed July 29, 1986) have promoted manufactured and agricultural exports and improved efficiency in import substituting activities. The Agriculture Sector Adjustment loans aim to foster efficient growth in the sector by inter alia restructuring the investment program, re-orienting the prices and incentives framework, and rationalizing the role of the public sector. An Education Sector Reform Loan (Loan No. 2664-MOR, signed July 9, 1986) is aimed at increasing the efficiency and equity of the educational system and expanding primary and lower secondary education. The Public Enterprise Rationalizatation Loan (Loan No. 2820-MOR, signed July 27, 1987) addresses the arrears problem of the public sector, and initiates action on privatising/restructuring of public enterprises and improving pricing of public goods. (3729E) - 45 - 13. Investment Operations: Leans in infrastructure (telecommunications, water supply, irrigation, and port improvement), vocational training, and DFC-type operations in agriculture, housing and industry continue to provide investment support to help the economy take full advantage of the policy reforms implemented by the Government. 14. Other: Lending operations are supplemented by regular reviews of the public investment program aimed at allocating scarce public resources to their most efficient uses. Bank-financed training programs are provided to increase Government's capacity in appraising public investment proposals. The Bank has taken several initiatives to help Morocco muster external resources for development on favourable terms. Specifically, the Bank has chaired two Consultati7e Groups for Morocco in support of the Government's adjustment program, and has participated in an observer capacity in Paris and London Club debt rescheduling exercises. 15. Overall, sectoral policy operations have provided the Government with quick-disbursing balance-of-payments support at a time of severe resource constraints. In addition, higher disbursement rates introduced for 15 traditional project loans since 1983 in the context of the Bank's Special Action Program (SAP) have contributed to improve disbursement performance and to alleviate project implementation delays arising from the unavailability of counterpart funds. In the agriculture sector, five operations are currently benefitting from SAPs; these projects have been restructured in light of domestic resource availability and investment priorities, and cancellations due to both the restructuring and the devaluation of the dirham vis-i-vis the (3729E) - 46 - dollar have taken place . As of March 31, 1988, cumulative commitments to Morocco (less cancellations) across all sectors were US$3,814.3 million, of which US$735.3 million have been repaid, US$1,789 million are disbursed and outstanding, and US$1,290 million are undisbursed. Total cumulative repayments in FY87 were US$ 635.2 million against gross disbursements of US$ 2238.2 million. 16. Economic and Sector Work(ESW): Strong ESW has formed the basis of the Bank's policy operations in Morocco. The ITPA programs were based on the "Industrial Incentives and Export Promotion Report" (Report No. 4893-MOR), undertaken jointly by the Bank and the Ministry of Commerce and Industry, and also drew heavily on "Morocco: Financial Sector Review" (Report No. 4957-MOR). In the agriculture sector, a USAID-financed Prices and Subsidies Study formed the basis of the Bank's "Agricultural Prices and Incentives Study" (Report 6045-MOR). This sector study, together with its companion study "Compensatory Programs for Reducing Food Subsidies" (Report No. 6172-MOR) provided the analytical framework for ASAL-II. Similar ESW studies were undertaken rrior to the prepara:ion of the Education Sector Reform Program ("Education and Training Sector Survey", dated June 10, 1983) and the Public Enterprise Rationalization Loan ("Morocco: Public Enterprise Sector Study", dated August 20, 1986). Other sector studies have covered Energy, Transport and Municipal Finance. In addition to these, more sector-specific topics have been covered 1/ Out of a total original loan amount of US$328.5 million for the seven ongoing operations in agriculture as of May 1988, US$72 million have been cancelled. The projects involved are all traditional investment operations (integrated rural development, forestry and small- and medium-scale irrigation. (37 A.9 E) - 47 - through Bank-financed projects in Morocco or through collaboration with other multi- and bi-lateral agenciesL'. Finally, the Bank has undertaken annual reviews of the public investment program. The annual ESW program includes about 12 tasks, and consumes on average 6.9 staff-years-!'. The results of the Bank's Public Investment Reviews and of its general macro-economic work have provided background for the Consultative Group for Morocco. 1/ In the agriculture sector, e.g., a study on options and investment priorities in irrigation development was cofinanced by the Bank, UNDP and the French Government. In addition, studies in which the Bank had an input by way of preparation of TORs include the Sugar Industry Study, Phase II, undertaken by the Ministry of Commerce and Industry. 2/ Including sector memos and extensive strategy papers; average over 1982-87. (3729E) - 48 - IV. THE AGRICULTURAL SECTOR ADJUSTMENT LOAN 17. This section discusses the origin and objectives of ASAL-I and implementation performance of the Government's adjustment program experienced under the loan. Specific loan conditionality is then discussed. Procurement and disbursement related issues are presented in paragraphs 44-45. Cofinancing is discussed briefly in paragraph 47. Finally, monitoring mechanisms instituted under the loan are presented. A. Origin and Objectives 18. The Government's medium-term agriculture sector adjustment program (MTASAP) was developed in response to the worsening macro-economic situation (para. 5) and as part of the Governmerit's structural adjustment strategy. In late 1983, the Ministry of Agriculture (MARA) in a letter sent 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. ASAL-I (Loan 2590-MOR, signed July 29, 1985 and closed June 24, 1987) was made in support of the MTASAP, whose objectives may be succintly resumed as follows: (3729E) - 49 - - to achieve a restructuring of public investment and expenditure program toward quick maturing and high return investments and toward the rainfed sector while assuring adequate funding for maintaining the already established productive infrastructure; - to introduce corrections in the prices and incentives framework to encourage optimal shifts in agricultural activities, while maintaining adequate farmer iticentives in those areas likely to be the primary sources of future agricultural growth; - 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 - 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. 19. A series of detailed adjustment measures in support of the above objectives constitutes the action program implemented under the loan. These are presented in matrix form at Annex 2 to this report together with the expected and actual timetable of their execution. (37288) - 50 - B. Implementation 20. Overall, implementation of the ASAL-I adjustment program has been good. The Government's commitment to the broad-based reforms envisaged in the MTASAP remained strong throughout the loan period. In addition to the actions formally covenanted in the Loan Agreement, implementation of the general program as contained in the matrices attached to the Policy Letter has been satisfactory, and in certain cases, has exceeded Loan Agreemenc requirements. However, some implementation delays were experienced (Annex 2), often due to circumstances beyond the control of MARA. These delays have not had a negative impact on the overall program. The paragraphs below discuss implementation performance by major reform area. Restructuring of Publie Expenditures 21. The MTASAP emphasized (i) a strengthening of the investment planning process; (ii) a strengthening of implementation capacities for rainfed development programs; (iii) a redirection of government resources towards support for private investment in agriculture; and (iv) the setting up of institutional mechanisms to ensure adequate funding in the investment budget for maintenance of productive infrastructure. 22. The restructuring of public investment is being carried out by giving priority to operations that are key contributors to essential sectoral development objectives and that meet certain eligibility criteria. The freeze in the introduction of new projects started in 1984-85 was pursued in 1986 to facilitate completion of ongoing priority operations. A core program of - 51 - investment operations (Annex 3, Table 1, and paras. 53-55) has been defined: it represented 75% of total budgetary allocations in 1987, compared to 69% and 72% in 1985 and 1986 respectively. Private sector investment in agriculture is being encouraged through institutional credit (private investment in agriculture is estimated at over 50% of total investment in agriculture),' and through direct assistance from the state according to criteria defined in the Agriculture Investment Code- . This assistance is now channelled through the Agriculture Development Fund, created in 1986, which pools all available subsidy funds tG provide beneficiaries with timely and more efficient access to investment incentives. 23. ASAL-I measures in this area comprised (i) a review of actual expenditure patterns in agriculture in order to identify constraints and restructure the public investment program accordingly; (ii) joint reviews of the public investment program with the Government and (iii) setting up of a mechanism to monitor overall sector and subsectoral allocations as well as budgetary appropriations and expenditures for the core investment program. While points (i) and (ii) above were implemented as planned, the monitoring system envisaged has not yet become fully operational. MARA's budget is now computerized at DPAE; however, timely information on actual budgetary 1/ Although it is difficult to estimate with precision actual private sector investment in agriculture, institutional credit provided by the CNCA (agriculture credit) can serve as a proxy. Medium- and long-term credit provided for on-farm investment amounted to approximately DH 1.5 billion in 1985-86 and DR 1.3 billing in 1986-87. In comparison, public investment through the investment budget amounted to DR 1.5 billion in 1986 and DH 1.8 billion in 1987 (commitments). Actual payments were considerably below these amounts. 2/ The Agriculture Investment Code provides a package of incentives for on-farm investment. This Code, which dates from 1969, is being progressively revised under the MTASAP. (3729E) - 52 - commitments and payments is not yet available. It is difficult for MARA to centralize this information on a project-by-project basis from the various regional agencies charged with implementation of the investment program. At the regional level, a start has been made in instituting such information systems for Bank-financed projects. At the central level, however, efforts to obtain this information from MOF, which is the final clearing house for all budget-related paperwork, have not generally met with success. Re-orienting the Prices and Incentives Framework 24. The MTASAP aimed to correct the adverse consequences of the Government's intervention in agricultural pricing. The primary objective was to steadily restructure the pricing and incentives framework in the sector in order to achieve better resource allocation and more equitable income distribution. The MTASAP planned to (i) reduce excessive protection to irrigated farming systems; (ii) provide adequate incentives to rainfed agriculture; and (iii) encourage better domestic resource use in the dairy I sector. The Government's Letter of Sector Development Policy therefore stressed adjustment in costs of inputs and services essentially consumed in irrigated farming, notably the gradual elimination of fertilizer subsidies, fuller recovery of water charges, charging at real cost of the various commercial services provided by the irrigation agencies (ORMVAs) and the phasing out of price and distribution controls on animal feed. Incentives to rainfed agriculture were to be provided through inter alia maintaining official floor prices for cereals (essentially produced in rainfed areas) at levels high enough to induce production and marketable surpluses. These actions were also expected to achieve better income distribution, since incomes in rainfed areas are substantially lower than those in irrigated - 53 - areas. The MTASAP reforms were based on preliminary analyses undertaken by the Bank and MARA; detailed studies1' for assessing the impact of Government intervention on the sector were ongoing at the time of ASAL-I preparation and appraisal. 25. A first set of measures designed to redress the imbalance in protection patterns in Moroccan agriculture was implemented during ASAL-I timeframe. Fertilizer prices were increased by 17% in 1985 (compared to the minimum of 15% stipulated in the Loan Agreement) and by 20% in 1986. Wheat bran and sugarbeet pulp prices were increased by 40% and 17% respectively (compared to 15% indicated in the Loan Agreement) in an effort to eliminate price distortions between different types of animal feed. In line with the irrigation water charge recovery program, recovery rates improved substantially, going from 47% in 1984 to 63% in 1985 and 67% in 1986. These recovery rates were higher than those anticipated in the five-year program (57% and 66% respectively). An inter-ministerial order authorizing the ORMVAs to apply a 9% distribution margin for input supply and to charge other commercial services at full cost in the short-term was issued, pending full disengagement from the provision of such services over a five-year pariod. As a result of these measures, three ORMVAs (out of a total of nine in the country) have already become financially autonomous in 1987 (para. 80-81). 1/ MARA's Prices and Incentives Study, financed by USAID under TORs prepared by the Bank. - 54 - 26. In terms of output pricing, ASAL-I measures were restricted to the development of a methodology for determining domestic procurement prices for cereals (para. 34). Official producer prices were increased by an average of 11% for the 1985-86 campaign. No producer price increases have taken place since this time, however, despite the stated Government intention of regular reviews of official prices and more effective price support for cereals- 27. ASAL-I also required that MARA's ongoing Prices and Incentives Study be completed and submitted for review to an Inter-ministerial Commission. This study provided the basis for Bank sector work in the same area-' and led to the expansion and refinement of the NTASAP, supported by ASAL-II. Strengthening Agriculture Support Services and Rationalizing the Role of the Public Sector 28. Under the MTASAP, action programs were devised to restructure the role of the public sector to increase the efficiency of services provided and to improve cost recovery in major support service functions. Specific measures contained in the MTASAP and included under ASAL-I are discussed below by subsector. 29. Extension: The MTASAP called for strengthening of extension services in three phases. In the first phase, low cost changes in field 1/ Letter of Sector Development Policy, June 4, 1985. 2/ Morocco: Agricultural Prices and Incentives Study, Report 6045-MOR, May 1986. (3729E) - 55 - organization structure, work programs, mobility and training of available staff were foreseen. Under the second phase, this approach was to be applied to all zones by 1987. Farm mechanization services provided by field offices was also to be phased out by 1987. In the final phase, reorganization at headquarters and recruitment of new, trained extension staff in order to increase the worker:farmer ratio to 1:320 were to be implemented. Under ASAL-I, a new T&V based system integrating crop and livestock activities was implemented in 28 pilot zones as planned. Non-extension related activities are being phased out, including a freeze in public sector tractor purchases and the elimination of operating subsidies for farm mechanization services. Adequate financing of the first phase was assured by the Government and staff were recruited for these field offices to improve the extension agent:farmer ratio. A start has also been made in upgrading key field extension staff positions. In general, staff morale and commitment have improved in the field extension centres. A National Extension Master Plan was completed, and contains proposals regarding the new implementation schedule of phases 2 and 3 of the MTASAP"'. 30. Research: A major objective of the MTASAP in this area was to define research priorities so as to better focus research activity. Another aim was to strengthen coordination among the different institutes/agencies undertaking research. For this, research agreements were to be signed between INRA and individual agencies executing research funded by the Government. The National Research Institute (INRA) was to be reorganized to strengthen the 1/ The reforms initiated under ASAL-I are being followed up under ASAL-II and more specifically, a proposed Research and Extension Project, appraised in June/July 1987. - 56 - system for management of scientific research and atleast 20 field research stations were to be closed down and staff redeployed to ensure both a critical mass of scientists in the remaining stations and a higher operating budget per station. In addition, INRA's involvement in commercial seed production was to be limited to mother seed production, and other seed activity transferred to the private sector. During ASAL-I timeframe, 24 research stations were closed down; research priorities were prepared for major crops; the reorganization plan for INRA was adopted by the Government; INRA's seed production activities were scaled down; and coordination mechanisms for applied research were 4istituted between INRA and other executing agencies. Staff turnover has declined in INRA as a result of these measures. These initiatives are being followed up under ASAL-II and the proposed Research and Extension Project. 31. Livestock Services: The MTASAP in livestock services was prompted by both the growing budgetary burden of their provision and the impressive growth experienced as a result of liberalization of the poultry sub-sector, which the Government wished to extend to other livestock sub-sectors. The objectives of the MTASAP were to progressively transfer livestock support services to the private sector and to liberalize animal feed prices (para. 25). Accordingly, the adjustment strategy called for the provision of essential preventive services by private veterinarians on contract to the Government. General animal health services were to be provided by these veterinarians on a full cost recovery and competitive basis. In the area of animal breeding, the Government aimed to progressively transfer artificial insemination (AI) services to producers' groups or cooperatives; natural breeding centers, located primarily in remote rainfed areas, were also to be transferred in a subsequent phase. Under ASAL-I, animal health services were - 57 - to be privatized in 20 zones; the favourable results of this initial privatization prompted the Government to identify an additional 40 zones where the new system is to be applied. Regarding AI services, specific steps under ASAL-I were to finalize the terms and conditions under which the restructured breeding services would be operated by the private sector. A legal framework governing such a transfer was therefore designed, and AI services were transferred to producers' groups in 20 zones. Overall, this program has been successful, and there is now a waiting list of veterinarians for the next round of privatization. 32. Fertffizer Market!2g: Government strategy in this area was to gradually put the public and private sector on an equal footing regarding procurement (hitherto, a public sector monopoly), distribution as well as the holding of national security stocks. The retail level distribution system was to be strengthened, particularly in rainfed areas, by withdrawing FERTIMA, the state-owned company, in favour of private traders. Pending deregulation of domestic marketing once fertilizer subsidies were removed, steps to increase distribution margins available to the private sector were taken. ASAL-I measures involved the closing down of certain state-owned fertilizer outlets, to be chosen according to agreed criteria. Although required by the Loan Agreement to close down 80% of the outlets meeting these criteria, the Government actually closed down all the outlets on the list. FERTIMA's share of the market declined by 6 percentage points as a result. To ensure the continued participation of the private sector, an indexation formula for fertilizer distribution margins has been set up, and private companies have been associated with the planning of fertilizer imports. - 58 - 33. SeedProduction andMarketing: Adjustment in seed production and marketing involved a better focus of research towards improved varieties developed elsewhere for similar agro-climatic conditions while phasing out seed subsidies and transferring certain seed production from INRA to other operators. Under ASAL-I, the Government implemented a freeze on cereal seed subsidies (these have been maintained at their 1984 nominal levels). The conditions governing the granting of royalties to INRA for mother seed development have been defined and the transfer of foundation seed production has taken place. 34. Cereals Marketng: Measures leading to major reform in the area of cereals marketing were foreseen in the MTASAP. These included inter alia the establishment of a domestic procurement price that took into account international price trends; the reduction of administrative restrictions to private sector participation in domestic procurement and storage; the encouragement of on-farm storage by farmers; and liberalizing external trade in cereals. Under ASAL-I timeframe, an operational plan to strengthen the price support program was defined. An Inter-ministerial Task Force was set ap to mastermind the exercise. The completion of the Prices and Incentives Study and the work of the Task Force have led to substantial expansion of the MTASAP in the area of output pricing, marketing and trade. In parallel, fixed grain storage margins were revised upwards to prevent further deterioration of the domestic marketing system. - 59 - 35. Irrigation Management: The MTASAP included measures to improve the operation and management of large irrigation and involved the adjustment of the role of the ORMVAs, the system of supervision by the Government and actions to improve their financial viability and autonomy. Several actions regarding the increased operational flexibility of the ORMVAs were implemented prior to negotiations. In addition, ASAL-I provided for the establishment of a program-contract between the ORMVAs and the Government, to be finalized for atleast one ORMVA during ASAL-I timeframe. As a pre-requisite, improvements in management information, cost accounting and performance audit systems were to be implemented. This pilot program-contract is awaiting approval at MOF. Measures to improve the financial viability of the ORMVAs were also implemented under ASAL-I (para. 25). The ORMVAs were expected to receive their annual budgets in quarterly tranches to regularize the flow of financial resources, facilitate operations programming and prevent the build-up of arrears to private contractors. However, this measure has not yet been applied by the Government pending a decision at MOF. The new policy directions developed under ASAL-I have paved the way for a set of wide-ranging reforms being implemented under the Large Irrigation Improvement Project (Loan No. 2656-MOR, signed April 11, 1986)L' and followed up under ASAL-II. 1/ The project is intended to implement and complement the ASAL-I reform package. Its overall objective is to provide for greater efficiency in the use of existing physical infrasture and improve management and financial performance of the ORMVAs. (3729E) - 60 - Building Institutional Capacity and Resolving Structural Problems 36. The Government recognized that the management of the adjustment process would require an improved policy planning and analysis capacity and attention to structural problems relating to land use and natural resource management. Accordingly, the MTASAI included measures designed to address these issues. 37. Policy Analysis and Sector Monitorng: The MTASAP emphasized the strengthening of the Directorate of Planning and Economic Affairs (DPAE) in MARA with respect to its policy analysis and sector monitoring capabilities. Using technical assistance from multi- and bi-lateral sources, staff training programs were implemented in planning, statistics, project preparation and monitoring and evaluation. Economist positions have been added at DPAE; in addition, a specialized, partly government-owned unit has been created to carry out policy advisory and economic work under contract to MARA and other agenciesL'. Most importantly, the Prices and Incentives Study undertaken by the Government was completed during ASAL-I timeframe. All TA specific needs identified in ASAL-I have been executed-. 1/ This unit (AgroConcept) provides consulting services to a variety of institutions, including the Bank; the bulk of the impact assessment of ASAL-I (Section V) was undertaken by it under contract to MARA. 2/ Bilateral sources provided the bulk of financing for the execution of this TA. Bilaterally financed TA was often undertaken on TORs produced by the BANK and was monitored by Bank staff to ensure productive results in a timely fashion. (3729E) - 61 - 38. Lad PoAey: The MTASAP aimed at the extension of the comprehensive land policy developed for irrigated areas into the rainfed sector at a pace consistent with the social realities of rural areas. In the context of ASAL-I, a comprehensive legal package on land consolidation, prevention of land fragmentation, transfers, leases and distribution of collective lands has been approved by the Council of Government and is awaiting Parliamentary action. The MTASAP also included measures to accelerate the national cadastre and land registration; however, while efforts have been made in land registration, the cadastre has not been significantly affected, primarily due to financial constraints (para. 57). 39. Natural Resource Management: Concerning the conservation and renewal of natural resources, specifically in forestry, the MTASAP aimed at continuing detailed inventory work and defining viable forest management plans for the country's forests. A review of financing mechanisms for reforestation was planned with regard to their adequacy and timeliness of the availability of funds. To raise additional resources for reforestation and to bring about parity between local and imported wood-", a 6% tax on wood imports was instituted. Receipts of this tax feed the National Forestry Fund, which is used to finance reforestation activity. In addition, the Government has assured adequate financing to reforest the target 30,000 ha per year agreed to under ASAL-I. As a result of improved financing mechanisms, the Forest Service has been able to start reforestation programs on time and average unit costs (on a per-hectare basis) have declined by about 15% in 1986. A priority program for national forest inventory and management has also been prepared; however, actual inventory work has not taken place due to financial constraints. l/ A tax of 10% is applied to local wood auctions. ( 3729E) - 62 - C. Loan Conditionality and Covenants 40. The MTASAP comprised some sixty specific actions in different sub-sectors and policy areas (Annex 2). Of these, 3 were designated as effectiveness conditions and 5 as second tranche release conditions. 5 specific and 6 additional measures were to be monitored as dated covenants according to the Loan Agreement. These actions are presented at Annex 1 and discussed below. 41. ConditionsofEffectiveness: A 15% increase in fertilizer prices, a 30% increase in cereals storage margins and the establishment of a Monitoring Committee headed by the Secretary General of MARA were the conditions required for effectiveness or first tranche release. All three were implemented according to schedule. Fertilizer prices were increased by 17% instead of the 15% initially foreseen. The loan was declared effective on October 28, 1985 (compared to an August 1985 estimate), and the first tranche was fully disbursed by May 1986, as expected. 42. Conditions of SecondTranche Release: These were: (i) satisfactory progress in the overall sector adjustment program with specific attention to the implementation of pilot programs in animal health care and breeding services and of improved water charge recovery; (ii) a 20% increase in fertilizer prices; (iii) a 15% increase in bran and sugarbeet pulp prices; (iv) the closing down of 20 INRA research stations and the definition of research priorities for the other stations; and (v) the closing down of 80% of state-owned fertilizer retail outlets meeting the selected criteria. All (3729E) - 63 - these conditions were met, and some were complied with at levels beyond the requirements set in the Loan Agreement. At the request of MARA, the Bank agreed to reduce the fertilizer price increase required given the fall in international prices of fertilizer; new Bank calculations put the increase required in 1986 at 15% in order to completely eliminate the fertilizer subsidy by 1989. However, budgetary consideratiins prompted the Government to implement the 20% increase as initially planned. Animal feed prices were increased by 40% and 17% respectively for bran and sugarbeet pulp. 24 research stations were closed down and all fertilizer outlets meeting the defined criteria were closed. In addition, animal health services were privatised according to plan, and water charge recovery reached 63% in 1985 compared to the 57% stipulated. The second tranche was released in September 1986 compared to a June 1986 forecast, mainly on account of difficulty in advancing the announcement of new increased fertilizer prices normally done in August or September. 43. Covenants: Two of the eleven dated covenants had time horizons that extended beyond ASAL-I timeframe. These concerned the elimination of fertilizer subsidies and the improvement in water charge recovery to 90%, both to be implemented by December 31, 1989. The corresponding annual targets were monitored under ASAL-I-L. Seven of the remaining nine covenants were complied with according to schedule (Annex 1). Two of the covenants were complied with after the actual date set out in the Loan Agreement. These concerned (i) the development of a program-contract for one ORMVA, which was finalized by the authorities concerned during the first 1/ The corresponding annual targets for subsequent years will be monitored through ASAL-II. (3729E) - 64 - semester of 1987, and has been submitted to MOF for their approval; and (ii) the study on animal feed liberalization, which was completed a year later than scheduled. However, animal feed liberalization has been under active review since early 1986, and specific proposals to effectively liberalize feed prices have already been formulated. These have been included in ASAL-II. Although this was, strictly speaking, non-compliance with the Loan Agreement, no remedial action was taken on the part of the Bank given the general satisfactory progress in other areas. D. Procurement and Disbursement 44. The proceeds of the loan were used to finance imports of eligible agricultural inputs and fuel (maximum of US$ 25 million). As stipulated in the Loan Agreement, procurement was to follow general Bank Guidelines with certain modifications. International Competitive Bidding (ICB) was to be used for the procurement of fertilizer, pesticides, animal feed and seeds; however, contracts for seeds, pesticides and veterinary medicine costing below US$ 500,000 equivalent each, contracts for animal feed costing below US$ 1 million equivalent each, and contracts for machinery, spare parts and petroleum, regardless of cost, could be awarded on the basis of the normal procurement procedures of the country. In practice, this translated to all procurement being carried out according to the normal procurement procedures of the procuring agency. The only item for which this was not possible was fertilizer; since the importing agency was unwilling to use ICB for procurement, no disbursements were made against this category. 45. Disbursements were made on the basis of statements of expenditure for items imported by the private sector and for petroleum. Disbursements for - 65 - items procured by the public sector were made against fully documented withdrawal applications. The loan was disbursed in two tranches of US$ 50 million equivalent each, and was fully disbursed some six months earlier than the closing date'. Retroactive financing up to US$ 10 million was permitted and a limit of US$ 25 million was placed on imports of petroleum eligible for financing. Inter-category reallocations were permitted, and actual disbursements were somewhat different from the indicative amounts determined at appraisal as shown below: DISBURSEMENTS (US$ millions) Item Allocated Actual Fertilizer 4.0 0.0 Agricultural Machinery & Spare Parts 36.0 52.2 Seeds and Animal Feed 8.0 11.5 Pesticides and Veterinary Medicine 27.0 11.2 Petroleum Products (maximum) 25.0 25.0 Total 100.0 100.0 46. Loan administration was the responsibility of the Central Bank. A joint audit report of the loan account for the years 1985 ind 1986 was provided (with delay) and was acceptable. An audit report for the year 1987 has not yet been received by the Bank; it is expected six months after the end of the Moroccan fiscal year (June 1988). The availability of loan funds, given 'hat they were tied to the imports of certain items, was expected to reduce the delays experienced by importers in obtaining foreign exchange for imports of those items. However, commercial banks were often not aware of the fact that ASAL-I existed. Importers themselves heard about ASAL-I as a result of meetings organised by MARA with the profession, but the general consensus 1/ ASAL-I documents indicated fill disbursement within 18 months of effectiveness. The loan was fully disbursed 20 months after effectiveness. - 66 - amongst them was that no appreciable change had taken place in timeliness of availability of foreign exchange for eligible imports as a result of ASAL-I. E. Cofinancing 47. The African Development Bank (AFDB) made a loan in support of the MTASAP ir. the amount of approximately US$ 50 million. An AFDB delegation had participated in ASAL-I negotiations in an observer capacity, and Bank documents in support of ASAL-I were made available to the AFDB. Loan administration was completely autonomous, and Bank-AFDB contact beyond negotiations was limited to sporadic liaising on the general progress of the MTASAP. The AFDB had expressed a desire to participate in Bank supervision mission for ASAL-I; however, no joint missions took place during ASAL-I timeframe. F. Monitoring 48. The management and coordination of the MTASAP is the prime responsibility of the Secretary General of MARA, who heads a Monitoring Committee set up by the Minister of Agriculture and composed of MARA directors. Secretariat support for this committee is provided by DPAE; progress reports on MTASAP and ASAL-I implementation are prepared by it. In addition to the MARA Monitoring Committee, an Inter-ministerial Review Committee headed by the Minister of Agriculture was set up to monitor the adjustment program and review semi-annual progress reports. These reports were also to be provided to the Bank; in addition, a status report prior to second tranche release was to be made available. (3729E) - 67 - 49. A system for general sector monitoring was set up at the DPAE with Bank collaboration, and comprised: (i) the status of the adjustment program, using the Government's Letter of Sector Development Policy as a base. Under this segment, the status of formal actions under ASAL-I (conditionality and covenants) is tracked, as well as the other measures contained in the MTASAP as described in the series of policy matrices attached to the Letter; (ii) policy performance indicators, devised to monitor in a quantitative manner the changes in key policy variables over time. A set of tables, one for each policy area or subsector, monitors variables such as input use, relative prices and water charge collection; and (iii) production results, used to monitor responses not necessarily attributable to the implementation of the adjustment program. This segment includes tables on production, imports and exports. 50. During the course of ASAL-I, two reports were submitted to the Bank-. The first was prepared in March 1986, some six months after effectiveness. The second was prepared in January 1987, four months after second trarche release. The monitoring system was maintained at DPAE and updated in conjunction with report preparation. A final progress report was submitted in draft form to the Bank and served as input to the present I/ Requirements on reporting as spelled out in the President's Report were: semi-annual progress reports (a total of three were expected given that the loan was expected to be fully disbursed within 18 months of effectiveness); a status report prior to second tranche release; and a completion report. In fact, however, the first semi-annual progress report serv-d as the status report required for tranche release; the final progress report served as part of the completion report. 29E) - 68 - report1'. Although meetings of the Monitoring Committee and the Inter-ministerial Committee were less frequent than had been expected at appraisal, MARA directorates were all well-apprised of the adjustment program. In general, Bank supervision missions acted as catalysts to the monitoring process. This raises several questions about the sustainability of monitoring (para. 100). V. THE IMPACT OF ASAL-! I 51. This section presents a preliminary assessment of the impact of ASAL-I. It must be borne in mind that it is still too early to draw definitive conclusions regarding ASAL-I's impact on agricultural performance: adjustment is a slow process, and sector performance is influenced by changes in many variables which cannot be attributed solely to ASAL-I. Clearly, progress has been made as a result of macro-economic adjustment: the devaluation of the exchange rate has started to reduce the penalization of agricultural exports and trade liberalization measures in industry have initiated a welcome move towards reducing inter-sectoral disparity in incentive regimes. A variable that is completely outside the control of policy-makers but which has a major impact on agricultural performance is rainfall: good rainfall helped agriculture grow at 17% p.a. in 1986. 1/ These reports are available in Regional Files. (3729E) - 69 - 52. The assessment of impact presented here is confined to those variables that were directly affected by ASAL-I measures: sector investment profile after restructuring; relative protection rates between irrigated and rainfed areas for major crops; effect on farm revenues of input and output price changes; fertilizer demand; budgetary impact of input subsidy elimination; and a qualitative discussion of institutional impact. A. Publie Investment 53. InvestmentlBudget: The restructuring of the investment program led to a clearer definition of priority areas for public investment on which budgetary resources were focussed. Annex 3, Table 1 shows the 'core' investment program for the years 1985-1987, together with budgetary allocations, commitments and emissions (payment orders) received by the sector. 54. The core program represented 69% of MARA's investment budget in 1985 and increased from DR 1097 million to around DH 1765 million in both 1986 and 1987 (72% and 75% of the total investment budget respectively). Sub-sectoral allocations showed a small shift from large-scale irrigation towards small- and medium-scale irrigation. Rainfed projects and reforestation also increased in importance in their representation in the core program. 55. Up to and including 1985, carry-over appropriations were differentiated at the level of allocations. However, the data available on the level of zommitments and emissions does not differentiate between 1984 carry-over items and 1985 items. Beginning in 1986, commited carry-over appropriations were merged into the budget. The table below shows certain indicators pertaining to budget performance (million Dirhams): - 70 - BUDGET PERFORMANCE ---1985a/--- --- 1986--- - 1987---- Total Core Total Core Total Core Allocations 3643 2441 1763 2350 1765 o/w new (1597) (1097) Commitments 2730 n.a. 2176 1533 1885 1247 commit./alloc. 75% 89% 87% 80% 71% Emissions 1355 n.a. 1311 856 1116 701 emiss./alloc. 38% 54% 49% 48% 40% a/ includes carry-over appropriations from 1984 56. The budget situation has worsened appreciably over the period as can be seen above. Government investment in the sector measured through emissions is 18% lower in nominal terms in 1987 compared to 1985; actual payments in any given year are lower-'. Inspite of the better focus of investment expenditures at the budgetary allocation stage, the ratios of actual commitments and emissions to allocations are lower for the core program than for MARA as a whole. The utility of having a well-defined core program is questionable under these circumstances: priority investment areas have been penalized rather than favoured in overall sector investment. 1/ Data on the actual amounts disbursed are not available in MARA. (3729E) - 71 - 57. ASAL-I Measures: As a result of the squeeze in the budget, certain investment-related MTASAP measures were not implemented during ASAL-I timeframe due to inadequate funding: for example, no cadastral surveys have been undertaken and forest inventory work is at a standstill. Although it could be argued that these are not priority operations, the lack of them has long-term consequences on the successful implementation of other MTASAP measures. It is difficult to foresee major productivity gains in Moroccan agriculture in the absence of structural changes in land policy; while the legal package governing these new policy orientations has been prepared, its application is likely to be hindered by the lack of basic cadastral data. Similarly, the absence of detailed forest inventory makes it virtually impossible to devise rational management plans for a major portion of the country's natural resource base. 58. PublicSectorSupportServices: The long-term impact of a strengthened and rationalized public sector cannot be evaluated as yet. However, the implementation of ASAL-I measures has started to generate positive results in terms of staff morale and turnover. Some internal shifts in manpower allocation (resulting from the upgrading of certain positions in research and extension) and in total public sector employment (due to the divestiture from the provision of certain commercial services) have taken place. B. Protection Patterns 59. The estimation of protection patterns in agriculture 'before' and 'after' ASAL-I is based on an analysis of crop budgets using representative - 72 - technical itinerariesL". The estimates presented here, which should be considered preliminary pending further analysis, have relied on publicly available secondary data and sometimes suffer as a consequence from a lack of precision. 60. In order to compare protection patterns in Moroccan agriculture pre- and post-ASAL-I, 1984 crop budgets-' for the chosen crops and technical itineraries were updated using 1987 prices for inputs and outputs. The changes in absolute protection levels between 1987 and 1984 cannot be wholly attributed to ASAL-I since exchange rate movements and international price movements are both exogenous to the analysis. A second approach utilized to guage the impact of ASAL-I on these coefficients attempted to answer the question 'what would the coefficients be if all variables exogenous to ASAL-I remained at their 1984 levels?'. This approach abstracts from relative price changes occurring in the economy as a result of inflation; it also assumes that international prices remained at thei: 1984 levels. Producer prices, on the other hand, are assumed to have been affected by ASAL-I measures and are 1987 prices expressed in 1984 Dirhams. Exchange rate changes on 1/ This section is a summary of various analyses undertaken to estimate protection patterns pre- and post-ASAL-I. Details of this work, which draws on the Prices and Incentives Study (Re.;rt No. 6045-MOR), are available in Regional Files. 2/ The choice of 1984 as the base year was dictated by the availability of data in the Prices and Incentives Study (Report No. 6045-MOR). - 73 - endogenous variables have been incorporated: the model does not, therefore, abstract from relative price changes in international markets. 61. Cereals: Effective protection to soft wheat, hard wheat and maize was higher in absolute terms in 1987 than it was in 1984 due to either higher output prices or lower international prices; effective protection to barley was lower in 1987 than in 1984, due to both a stagnation in domestic producer prices received and slightly higher international prices. Under the second approach (termed 'what if'), effective protection is higher in 1987 than it was in 1984 only for soft wheat. This demonstrates that the official price support program is more effective for soft wheat than for other cereals, and that it is particularly ineffective for barley. The table below summarizes the results of the anlysis (details are in Annex 3, Table 2): EFFECTIVE PROTECTION RATES (Weighted Average) CROP 1984 1987 'What If' Soft Wheat 0.86 1.05 0.94 Hard Wheat 1.00 1.27 0.98 Barley 1.04 0.97 0.87 Maize 0.83 1.35 0.82 62. OilSeeds: Protection to all oilseeds shows a marked increase. The coefficient increased from a weighted average of 0.86 in 1984 to 2.27 in 1987, with the largest increase registered for soyseed (4.65). This is the combined effect of a sharp drop in international prices and the sharp rise in domestic - 74 - producer prices which more than compensated for the reduction in input subsidies resulting from the application of ASAL-I measures. Under the 'what if' scenario, effective protection is considerably lower (1.03). 63. Sugarcrops: The estimation of protection rates for sugar crops presents particular difficulties, since an international reference price for sugarbeet and sugarcane has to be derived from the international price of sugar. The 1984-87 period was marked by both increasing costs of domestic transformation and falling prices of sugar in international markets. In the Moroccan context, negative reference prices are obtained given domestic inefficiencies in transformation; the negative coefficients do not lend themselves to meaningful interpretation. A preliminary estimate of the economic cost of domestic sugar production integrating both the cost of raw materials and transformation was made on a unit-by-unit basis to enable comparison with the 1983 situationL". The table below shows the principal conclusions of this analysis: 1/ Data for 1984 are not available. The Prices and Incentives Study (Report No. 6045-MOR) analysed the 1983 situation, which was slightly above average for the sector (agricultural yields and capacity utilization rates in industry). (3729E) - 75 - ECONOMIC COST OF SUGAR (in DH/ton sugar equivalent) -----1983------ -----1987----- Sugar Plant Total Raw Total Raw Material Material Raw Sugar Doukkala (irr.beet) 2113 1088 2631 1043 Sunacas (irr. cane) 2481 1277 2925 1076 Sunag (irr.beet) 3349 1826 3949 1677 Sunat (irr. beet) 2645 1080 3634 1236 Subm (irr. beet) 2539 1096 3120 1193 Refined Sugar Zemamra (irr. beet) 2212 1131 2529 1041 Surac (irr. cane) 2421 1277 2470 1076 Sunab (rfd/irr.beet) 3391 1385 3864 2006 Sunabel (rfd. beet) 3248 981 4513 1240 Sucrafor (irr.cane/beet) 5209 2561 7054 2411 64. The results above permit only general observations and raise several questions that cannot be answered by this initial analysis. Domestic raw material costs would appear to show less inter-regional variation in 1987 than they did in 1983. One reason for this change could be productivity gains in those regions that were less performing in 1983. Yet the raw material portion of total cost of production increased in some regions, notably in Tadla (Sunat and Subm) and in rainfed areas (Sunab and Sunabel). The latter can be explained by the poor rainfall conditions in 1986/87 which would affect yields of sugarbeet. Transformation costs (net of by-products) would appear to have increased across all units, despite the fact that capacity utilization rates increased slightly overall. (3729E) - 76 - 65. The 1983 analysis indicated that Morocco's producing regions could be competitive at a world price equivalent of about 19 cents/lb, and that approximately 75% of Moroccan production was competitive at a price of 13 cents/lb. In 1987, this threshold price is 22 cents based on the above analysis. Exchange rate variations account for around 25% of the difference-/; nonetheless, the competitivity of Moroccan sugar in 1987 worsened as a result of higher output prices for sugar crops combined with higher transformation costs. Imported sugar cost the equivalent of 6 cents/lb in 1987. It should be borne in mind that this price is not generally considered to be a true indicator of the costs of production in producing 2/ countries- 1/ The exchange rate used for the 1983 analysis is US$1 = DH10; in 1987, it is US$1 = DH8. 2/ Volume II of Price Prospects for Major Primary Commodities (Report No. 814/86) indicates that the world price for raw sugar reflects "residual" sugar supply to the world market, and contrasts the average 1985 world price of 4 cents/lb with the estimated 1985 average export price of raw and white sugars of 13 cents/lb. The US market stabilization price is estimated by the report to be around 18 cents/lb and that of the EEC/Lom6 at around 16 cents/lb in 1987. (3729E) - 77 - C. Farm Revenues 66. Insufficient data on the country-wide distribution of farming systems prevent the estimation of a meaningful aggregate impact of the MTASAP on net farm income for the whole country. However, the impact of ASAL-I measures on typical irrigated and rainfed farming systems"' is assessed. The analysis compares farm revenues in 1984 for certain farming systems to those prevailing in 1987, after the first phase of adjustment. Details of the farm profiles are at Annex 3, Table 3. 67. hrigated fariag systLems: All three models analysed include soft wheat,forage and vegetables in their cropping patterns. Two of them grow sugar crops and one has a citrus plantation. The table below shows the 'pure' income effect-' of the price policy changes introduced under ASAL-I (expressed in 1985 prices): 1/ Indicative farm models developed for the impact analysis of ASAL-II were used in the analysis. 2/ No supply response or cropping pattern changes are assumed. This is clearly a transitional phase since relative profitabilities would induce farmers to adjust cropping patterns or animal feed rations. (3729E) - 78 - IMPACT ON FARM REVENUES ---1984------ -- 1987--- Model Area Income/ Income/ Income/ Income/ ha head farm head farm ('000) ('000) Tadla 3 3071 18.4 332/ 19.6 Moulouya 6 4923 29.5 4362 26.2 Gharb 6 3996 24.0 4318 25.9 68. All three farmers experience an increase in revenues due to the increase in soft wheat prices which more than compensates for the increased cost of inputs. In addition, the farmers in Tadla and in the Gharb gain from higher sugar crop prices which offset higher fertilizer costs. However, the farmer in the Moulouya suffers a net loss of income: the rise in revenues from soft wheat does not compensate for the declines in citrus and forage (primarily due to fertilizer cost increases) and in dairy (higher feed costs). In reality, however, the devaluation of the Dirham has probably had a favourable impact on citrus exports and thus on the incomes of citrus growers. In all three systems, water charges do not change appreciably in real terms, due to the indexation formula applied by the Government. I 69. RainfedFarmingSystems: The farm profiles chosen all include cereals with varying degrees of importance in the cropping patterns. The table below summarizes the 'pure' income impact of ASAL-I measures on these farmers (expressed in 1985 Dirham-): IMPACT ON FARM REVENUES --1984------ ----1987---- Model Area Income/ Income/ Income/ Income/ ha head farm head farm ('000) ('000) Taza 1 3 1487 8.9 1477 8.9 Sidi Kacem 50 21023 126.1 20089 120.5 Taza 2 50 26642 133.2 26055 130.3 Settat 5 1577 11.0 1507 10.6 Marrakech 3 559 3.4 507 3.0 - 79 - 70. Revenues in these systems are highly dependent on rainfall patterns. The farmer in Taza 1 does not experience an appreciable change in real revenues since he is not a big user of subsidized inputs. The farmer in Sidi Kacem is adversely affected since he uses a higher level of inputs (fertilizer, seed and animal feed). The Taza 2 farmer is not adversely affected by animal feed price increases since his livestock activities are concentrated on sheep. The small farmer in Settat is similar to the one in Taza 1, except that hie is located in a less favourable rainfall area and needs a larger area to generate approximately the same level of income. Revenues for the farmer in Marrakech, and to a lesser extent, the farmer in Settat, are dependant upon effective barley prices received. Consequently, this farmer experiences the greatest variablity in income'. 71. The assumption of constant yields is much more limiting for rainfed systems than it is for irrigated systems-'. In order to test the sensitivity of farm revenues t3 changes in yields, the effect of a 10% 1/ Official support price mechanisms are least effective for barley. There is an inverse relationship between barley yields and prices in a given period. 21' Stability of yields for irrigated systems is a valid assumption given the short timeframe of the analysis: yields in such systems are dependent on technology utilized and on the availability of water as opposed to rainfall. (3729E) - 80 - increase in cereals yields was analysed. In such a case, revenues of all farms except the one in Marrakech are higher in real terms in 1987 than they were in 1984. The progressive farmer in Sidi Kacem obtains the largest per capita increase due to the importance of cereals in his cropping pattern. The farmer in Marrakech remains worse off in 1987 than in 1984, due essentially to the fall in barley prices in the market. 72. IMpact on Farm Revenues: Farm revenues over the period were probably more affected by the general economic policy of the Government (devaluation of the Dirham in the case of citrus and food subsidies in the case of cereals) than they were by ASAL-I measures. However, the reduction of price distortions does seem to have benefitted producers of soft wheat as expected. Nonetheless, the reduction in income disparities between the rainfed and irrigated sectors resulting from the MTASAP price policy measures (notably for soft wheat) ' was more than offset by the fall in barley prices, the increase in sugar crops prices and the relative stability of water charges. Refinements to the MTASAP pursue the reduction in disparities between the rainfed and irrigated sectors and include specific measures to effectively support barley prices and reduce excessive protection to sugar crops. D. Fertilizer 73. The reduction in fertilizer subsidies was justified on the grounds I 1/ The bulk of cereals production takes place in rainfed areas. (3729E) - 81 - that generalized subsidies were no longer needed in Morocco to encourage fertilizer use. In addition to the budgetary cost of providing these subsidies (para. 78), the income distribution effect of the subsidy was judged to be highly regressive with over 60% benefitting larger farmers in irrigated areas. ASAL-I supported the first two years of fertilizer price increases. 74. Prices: Analysed on an ex-post basis, average effective fertilizer price increases (Casablanca) were of the order of 14% in 1985/86 and 18.5% in 1986/87 (nominal). In real terms./, the cumulative increase was 15.3% over the two years. This increase was relatively uniformly distributed across the nine fertilizers concerned. Fertilizer reference prices were effectively increased by 17.3% and 21% on the basis of the price formula agreed to under ASAL-I-'. World prices, however, fell in real terms over the period: 1/ Deflated by the wholesale price index. 2/ The weighted average reference price is determined by weighting the reference price (established by the Government at the level of blenders of fertilizer) of each ore of nine selected fertilizers, by the volume of its sales in the preceeding 12 months as a proportion of total sales of these nine fertilizers. Thus the increase in individual fertilizel reference prices does not necessarily yield the actual ex-post weighted average increase. Under ASAL-I, the weighted average reference price increase was 17% in 1985/86 and 20% in 1986/87 at the beginning of the campaign in question. (37292) - 82 - for the types of fertilizer consumed in Morocco, international prices were lower by 34% in 1987 than in 1984. 75. Demand: The evolution of fertilizer sales over the 1984-87 period shows an increase for the first two years (17.5% and 6% respectively) and a decrease (3.3%) in 1986/87 in the quantities of nutrient elements consumed. Econometric estimates of the price elasticity of demand" indicate that fertilizer demand is not very price-sensitive. The availability of water (irrigation or rainfall) seems to be the major determinant of fertilizer use1'. In an uncertain environment such as that faced by the majority of Moroccan farmers, fertilizer use decisions would seem to be a function of the amount of rain that has fallen at the time of fertilizer application. Seasonal variations in fertilizer sales support this hypothesis, as does the increase in fertilizer demand in the 1984/85 and 1985/86 campaigns (marked by above average rainfall) and the decrease in demand in 1986/87 (below avetage rainfall) 1/ Prices and Incentives Study, Report No. 6045-MOR. 2/ Impact Analysis undertaken for ASAL-II, Repc t No. P-4437-MOR, March 1987. - 83 - 76. Fertilizer Value-Cost Ratios: The fertilizer value-cost ratio shows the relationship between the value of incremental output attributed to fertilizer and the cost of the required fertilizer. A ratio of 3 or more is considered to be necessary to motivate traditional farmers to adopt fertilizer for the first time; a ratio of 2 is considered to provide sufficient incentive for sustained use. These ratios were estimated in 1984/85 as being in excess of 3 for major crops; although they are lower in 1986/87, they remain above 3 for all crops analysed except barley in certain farming systems-. This result suggests that fertilizer demand would not be adversely effected by the increase in fertilizer prices. Details of the value-cost ratio calculations are at Annex 3, Table 4. E. Budgetary Impact 77. ASAL-I measures in the area of input subsidy reductions and in irrigation water charge recovery had a positive impact on the budget. The freeze on certified seed subsidies has contained budgetary outlays at their 1984 nominal levels of DH 38 million. MeaEures that represented an outflow from the budget (increase in official support prices), though not explicitly stated in ASAL-I legal documents, were also included for cereals. In reality, the Government implemented only one price increase for cereals in 1985/86. 1/ It should be noted that the 1984/85 estimates use official producer prices in the calculation. Estimates of actual producer prices received by farmers were used in the 1986/87 calculations. 29E) - 84 - 78. FertilizerSudaidy: Factors exogenous to ASAL-I have had an impact on the fertilizer subsidy, viz. the fall in international prices and the increase in fertilizer consumption. The compound effect of these factors together with the increase in fertilizer prices is shown below in current Dirhams: FERTILIZER SUBSIDY 1984/85 1985/86 1986/87 Total Fertilizer Subsidy (DH millions) 334.0 408.3 270.5 79. The increase in the total subsidy in 1985/86 was partly due to the increase in demand and to the effect of devaluation of the Dirham, which compensated for both the fall in international prices and the increase in domestic prices. In 1986/87, however, further falls in international prices and decreases in the quantities consumed contributed to the 34% decrease in the total fertilizer subsidy bill. The average subsidy rate in nominal termsL/ has decreased from 66% in 1984/85 to 39% in 1986/87. 80. hIgation Water Charge Recovery: The budgetary impact of the total package of improvements in the irrigation sub-sector is estimated through an examination of the total operating subsidy provided to ORMVAs through the I 1/ Defined as the ratio of average fertilizer subsidy per ton and the weighted average selling price of fertilizer per ton; elements of the domestic fertilizer cost calculations are not available to permit comparisons between actual fertilizer cost and selling price. (3729E) - 85 - Government budget. Clearly, the reduction in the operating subsidy required by the ORMVAs over the period 1984-87 cannot be attributed solely to the ASAL-I measure of improved water charge recovery. Improvements in the general operation and management of the ORMVAs and other actions implemented by the Government to improve the financial viability of the ORMVAs (e.g., indexation of water charges) have contributed to net budgetary savings in this sub-sector. The table below shows the evolution of this subsidy over the period: OPERATING SUBSIDIES (DH millions) ORMVA 1984 1985 1986 1987 Gharb 51.1 48.5 37.6 30.3 Haouz 31.1 32.4 34.6 30.9 Moulouya 24.0 26.9 28.5 24.0 Tafilalet 25.6 28.0 27.8 29.4 Ouarzazat 19.9 20.0 20.3 22.0 Souss Massa 18.0 17.6 12.7 9.0 Tadla 31.3 28.3 28.6 0.0 Loukkos 16.8 16.9 5.4 0.0 Doukkala 11.3 4.2 0.0 0.0 TOTAL a/ 229.2 222.9 195.6 145.7 % Change over -2.7 -12.2 -25.5 previous year a/ totals may not add up due to rounding 81. The total subsidy bill for the ORMVAs has declined considerably since 1984. Three of the nine ORMVAs no longer require subsidies from the Government budget for their operations. 82. Cereals Price Support: The official price support program of the Government primarily benefits.certain soft wheat farmers. The other cereals do not, for the most part, enter the official marketing circuit, and market prices are not necessarily aligned to official prices. The budgetary impact J (372SE) - 86 - arising from official price increases concerns essentially soft wheat purchased by the Government. The 11% increase in cereals prices in 1985/86 is the only price increase that was implemented during ASAL-I timeframe. Data limitations permit only a rough estimate of the additional cost to the budget of this price increase. Official purchases of soft wheat are around 6 million quintals in an average year. However, 1986 was a good year for cereals production, and even assuming 8 million quintals of official procurement, the incremental cost to the Treasury is DH 160 million. In 1987, a year of below average rainfall, official procurement would have been around 5.5 million quintals, generating an additional cost of DH 110 million. F. Institutional Impact 83. Perhaps the most significant short-tprm impact of policy-based lending is the institutional strengthening that takes place as a result of such operations. Technical assistance based on needs identified in ASAL-I, though not financed under the loan, has contributed to improving the policy planning and analysis capabilities of MARA. The creation of a Monitoring Committee has provided a mechanism for regular coordination between MARA directorates on general sector activities and the progress of adjustment. The monitoring system devised for ASAL-I provides basic information on sector performance. The parastatal consulting firm established in ASAL-I timeframe carries out policy advisory and economic work and is now routinely prevailed upon to provide ad hoc analytical support to the DPAE. In addition, regular liasing between MARA and the Bank on policy issues and on the implementation of reform is beneficial to both: it broadens each party's frame of reference and develops a more realistic approach to problem-solving. (3729E) - 87 - VL CONCLUSIONS A. Government/Bank Performance 84. WEASAP Origin and Objectives: Both the Bank and MARA recognized that the incentives framework in Moroccan agriculture was no longer achieving its stated objectives and needed therefore to be reassessed and recalibrated. From MARA's perspective, the objective of this exercise was to redefine state intervention in agriculture by eliminating the distortions in the incentives framework and by better orienting public expenditures. Preparatory work to this end, undertaken jointly by the Bank and MARA, culminated in the MTASAP. As defined on paper, the MTASAP was a coherent package of adjustment measures that would contribute to more efficient growth in the sector. 85. ASAL-I Content: In terms of project preparation, the approach utilized within MARA was cited as one of the strong points of the program. Several inter-departmental meetings were held by Bank missions to discuss the MTASAP and all directorates in MARA were fully aware of the adjustment program across all subsectors. 86. A somewhat isolated or narrow view of policy reform within a subsector was cited as a shortcoming in certain areas. In the case of fertilizer, for example, MTASAP measures called for an elimination of fertilizer subsidies, defined as the difference between the procurement price (c.i.f. price for imported fertilizer and OCP/FERTIMA quoted price for domestic t,rtilizer) and wholesale price, over a five-year period. However, (3729Z) - 88 - the elements of procurement price calculation were not necessarily transparent, especially in the case of domestic fertilizer. This, in combination with trade restrictions on the import of fertilizer, meant that the adjustment undertaken was partial and operated under several constraints outside the control of MARA. 87. Conditionaity: In retrospect, MARA feels that the major shortcoming was the legal interpretation of the adjustment program, referring to the nature of the conditionality. Measures that implied a cost to the sector (eg., removal of subsidies) were given more weight in the legal documents thau measures that implied a gain in terms of benefits to the sector (such as adequate investment or higher output prices). Thus, leverage on the part of the Bank and within the Government tended to operate in favour of direct cost reduction measures. MARA feels that the coherence of the MTASAP was not adequately maintained: adjustment was one-sided. The redressment of incentives brought about through ASAL-I was only partially successful in reducing disparities between the rainfed and irrigated sectors'. In addition, public investment necessary for growth in the sector was not adequately maintained (para. 55). 1/ Input subsidies that benefit irrigated farmers over rainfed farmers were reduced; however, output prices for cereals, grown primarily in rainfed areas, have not been increased since 1985. - 89 - 88. The problem of conflicting objectives within the Government was cited as the direct cause of this imbalance. The two ministries involved (MARA and MOF) clearly viewed ASAL-I from very different angles. MOF would appear to have been guided by strong fiscal and balance of payments constraints which ASAL-I addressed satisfactorily. Measures that represented an inflow to the Treasury were implemented immediately, while those that represented an outflow were delayed. Given the relative power structure between the two ministries, MARA found itself over-ridden in its demands for more equitable treatment. Ironically, ASAL-I legal documents reinforced this imbalance; covenants and conditions did not set explicit targets for output prices (para. 25) or public investment expenditures (para. 23). 89. It is also worth noting that ASAL-I conditionality consisted of both conditions of tranche release and dated covenants. While it is not obvious why this distinction was made, it is clear that the latter provided less operational leverage in assuring implementation. Although two of the eleven dated covenants were not complied with according to schedule, no remedial action was taken on the part of the Bank, primarily because the justification for the delay was judged acceptable. In addition, non-compliance in these two instances did not jeopardize the success of the entire program. 90. Sprvio Supervision effort on the part of the Bank tended to focus on MARA, given that it was the implementing Ministry and that the ad.;tment measures being monitored were, for the most part, under its direct authority. The monitoring committee instituted in MARA under the leadership of the Secretary-General assured the necessary coordination. Monitoring at an inter-ministerial level was less satisfactory. Although an inter-ministerial -90- commission was instituted to monitor ASAL-I and MTASAP progress, meetings held were few and far between. In addition, attendance at these meetings was often marked by a lack of continuity and inadequate representation from a decision-making standpoint. 91. It is somewhat ironical that Bank supervision missions were prevailed upon to provide data that they had gathered across ministeries and sometimes within MARA itself to other MARA directorates. Supervision missions tended to act as information disseminators in other respects as well: time was expended in explaining the rationale behind certain actions contained in the MTASAP to MARA counterparts, inspite of the lengthy discussions held with all relevant parties at preparation and appraisal. 92. Regarding sub-sectoral coherence, an example concerning MOF was cited. Bank intervention was confined to the Budget to ensure that adequate budgetary allocations had been made according to defined priority areas. However, interventions with MOF, which approves commitments and emissions, and with the Treasury, which is responsible for actual payments, were felt to be outside the scope of Bank supervision missions. 93. In retrospect, ASAL-I was relatively straight-forward and well-designed. Technically, MTASAP measures were sound and implementation experience within MARA was fully satisfactory. However, MARA 'elt that certain measures were emphasized over ard beyond their strict economic importance. The closing down of certain state-controlled fertilizer outlets was cited as an example. These outlets represented barely 6% of total fertilizer sales and it was felt that the political cost (at the gubernatorial level) of closing them down did not justify the ends sought. - 91 - B. Lessons Learned 94. B-nk/Government dialogue concerning adjustment in the agricultural sector is one based on learning from experience, characterized by frequent feed-back. Given that th! dialogue is constantly evolving as is the MTASAP, it is somewhat difficult to abstract from current experience in presenting this section. Much of the experience of ASAL-I has already been taken into account in the preparation of ASAL-II. AQ%L-I set the stage and provided the analytical basis for the expansion and refinement of the MTASAP. Bank sector work, which provided the underpinnings of ASAL-II, built upon the Prices and Incentives Study undertaken by MARA and monitored under ASAL-I. The complicated and far-reaching reforms envisaged under ASAL-II are in themselves a testimony to the success of ASAL-I and the willingness of both sides to incorporate lessons learned under ASAL-I in the design of future programs. 95. ProramnDsige: The concern for coherence, cited in paragraph 86, led to the integrated treatment of policy adjustment measures both within and across subsectors. ASAL-II therefore contains measures that go well beyond the agricultural sector, and includes adjustment at all levels of the production-consumption chain. Similarly, harmonization of trade practices and protection levels between agriculture and other sectors is foreseen. 96. A better balance between measures perceived as 'negative' and 'positive' to the sector has been sought. ASAL-II conditionality is more explicit than its predecessor in its emphasis on budgetary allocations and output price support. However, the perception remains that, at the sectoral (3729E) - 92 - level, it is more acceptable within the Bank to insist on specific cost reduction measures, justified on the basis of economic efficiency, unan it is to insist upon explicit investment targets, rejected on the basis of interference with the sovereignty of the Borrower. 97. Unlike its predecessor, ASAL-II conditionality consists almost entirely of specific conditions of tranche release, and no dated covenants per se are included. Covenants were judged to provide less flexibility (from an operational standpoint) in accomodating implementation delays and less leverage, since the remedies available are either ineffectual or too drastic- 98. A point worth mentioning is the somewhat apprehensive attitude MARA and other Government officials have concerning ASAL-II, which is felt to be complex and politically difficult to implement. Similar feelings were expressed by many concerning ASAL-I in its initial stages; the perception now within MARA is that ASAL-I was straight-forward and uncomplicated. 99. Inter-ministerial Coordination: Building upon the perceived need for more awareness-building (para. 90) across Ministries, ASAL-II preparation involved several meetings with an inter-ministerial working group. However, this group was by and large characterized by the same lack of continuity and decision-making power that had plagued ASAL-I. This point merits further attention and action on the part of the Government. Inter-ministerial 1/ A waiver of the covenant in question, an amendment to the legal documients or outright suspension of the loan. < 3729E) - 93 - coordination is indispensable to the successful implementation of adjustment that calls for action on the part of several interlocutors. Building awareness is a slow and time-consuming process that would seem to require both a bottom-up and top-down approach (as undertaken in MARA for ASAL-I). This would require much higher manpower allocation on the part of the Bank at various stages of the project cycle. 100. Role of the Bank as Catalyt: Experience in the preparation, implementation and monitoring of ASAL-I suggests that the Bank acts as a catalyst in drawing together different interlocutors and in achieving consensus amongst their different and perhaps conflicting policy objectives. Often, desired policy reforms can be implemented using the Bank as a scapegoat to diffuse internal political tension. However, this apprMach does not address the fundamental problem of internal communication and coordination, and raises the question of sustainability. How best to assure this coordination is a question to which there are no easy answers and one that merits further reflection on the part of both the Bank and the Government. It is clear that more effort is required to institutionalize this process in order to achieve some degree of sustainability. 101. PoUcy Dialogue: The factor that seems to have been paramount in the success of ASAL-I is the concordance of Government and Bank objectives in the subsector. It is difficult, and perhaps immaterial, to judge whether this was the cause of or the effect of strong policy dialogue between the two. The lesson to be learnt is that successful adjustment depends on the commitment of the Government to undertake reform. Locating high-level support to the adjustment program is crucial, since implementing politically sensitive (3729E) - 94 - reforms requires someone to champion the cause within the Government. In the case of ASAL-I, the full commitment of MARA at the highest level was primarily responsible for successful implementation. 102. It is also important to stress the need for continuity in interlocutors on both sides. Complex adjustment measures build upon past experience. Policy dialogue is more fruitful if both sides are fully aware of prior work undertaken in the sector. In addition, building trust and mutual understanding between Bank staff and Government representatives, indispensable to strong policy dialogue, take both time and repeated contact. Experience with Bank involvement in the agricultural sector in Morocco bears this out: a core Bank team undertook sector work both pre- and post-ASAL-I and continued the policy dialogue that resulted in the refinement and expansion of the MTASAP and the policy package supported by ASAL-II. This continuity meant that each successive contact picked up where the preceeding one left off. 3 I < 3729E) KINGDOM OF MOROCCO ANNEX I AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) List of Legal Conditions/Covenants COVENAN S/CONDIT IONS : DATE REMARKS 1. CONDITIONS OF NEGOTIATIONS 1. Interministerial approval of circutars/orders :Before Neg. All negotiation to inprove financial control over ORMVAs COnditions fulfilled 2. Delineation of 20 zones for privatization of :efore Ne. prior to start of : animal health services :neo : p tiatio s 3. Approval of budget document to finance increm. (April 29, 1985). investment and op. costs of Phase I of new :Before 2eg. : extension program :B Ne 4. Approval by INRA Board of new org. structure, List of research stations to be tr-nsferred and:eefore Neg. reduction of G-4 seed production 5. Identification of retail fertilizer outlets :Before Meg. meeting criteria for close-down I. CONDITIONS OF EFFECTIVENESS 1. Increase in fertilizer prices (15%) :1st Tranche :ministerial decision, 7/85 2. Increase in cereals storage margins (30%) :1st Tranche :ONICL circular, 5/85 3. Establishment of monitoring conittee :1st Tranche :ministerial order, 5/85 Ill. CONDITIONS OF SECOND TRANCHE RELEASE 1. Satisfactory progress in overall implementation:2nd Tranche :Bank supervision mission. 3/86: esp. animal health serv.,water charge recov. 2. Increase in fertilizer prices (20%) :2nd Tranche :ministerial decision, 8/86 3. Increase in beet pulp, bran prices (15%) :2nd Tranche :ministerial decision, 7/86 4. Close down of 20 research stations; research :2nd Tranche :during 1st saester 86 priorities for other stations 5. Close down of 80% of fertilizer outlets meeting:2nd Tranche :interdepartmental memo, 6/86 : pre-defined criteria : IV. DATED COVENANTS: SPECIFIC ADJUSTMENT MEASURES 1. Elimination of fertilizer stbsidies :Dec 31, 1989: ongoing 2. Iyprove irrigation water charge recovery to 90%:Dec 31, 1989: ongoing 3. Develop methodology for cereals price setting :Jun 30, 1986: corptied with 4. Establish cereaLs canmission to prepare operational plan for strengthening domestic :Sep 30, 1985: cmptied with price support program 5. Furnish above plan to Bank for review :Jun 30, 1986: coaplied with V. DATED COVENANTS:ADDITIONAL MEASURES 1. Complete interministerial review of Prices & :Jun 30, 1986: complied with Incentives study 2. Complete animal feed price Liberalization study:Dec 31, 1986: delayed to 2nd semester 87 3. Develop program-contract for one ORMVA :Jun 30, 1986: delayed to 1st semester 87 4. Identify 20 zones to implement At pilot program:Dec 31, 1985: complied with 5. Progress report on pilot extension program :Jun 30, 1986: comptied with 6. Establish coordinating/monitoring comnittee :1st Tranche : complied with NOTE: In addition to the above, several other dated covenants/conditions are included in the Loan Agreement. These refer to follow-up actions stenwing from initial measures or studies foreseen under the Loan. Many of these have been incorporated into ASAL-2. -96- ANNEX II Page 1 of 7 KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) MTASAP Measures Monitored Under ASAL-I TIME FRA E MEASURES :---------------- ----------: RESPON : REMARKS :SEM 2 :SEN 1 :SEM 2 :SEN 1 :UNDEF.: SIBILITY : : 1985 : 1986 : 1986 : 1987 : M-T : --------------------------------- ----------------------------------....-------------------- 1. PUBLIC INVESTMENT : 1)Review of actual expendiiure petterns : : : :subsector priorities: in 1985 to identify constraints and * * * : : :DPAE/Bank :defined during : restructure accordingly : : = : : : :ASAL-1 preparation 2)Joint reoiew of public invest. program: * * * * * * :DPAE/Bank :during supervision :budget monitoring 3)Mechanism for monitoring investment : * * * * : :DPAE, MOF :remains inadequate II. POLICY ANALYSIS & PLANNING : 4)Submit Prices & Incentives Study to : * : : : Interministerial Commission for review: : : : : :MARA/AIRD ---------------------------------------------------------------------------------------------- :Bank followed up 5)Complete Interminist. Review of P&I * * * * * : :Interminist.:with 2nd phase and present findings to Bank : : : : : :Comnission :(Report 6045-MOR) ---------------------------------------------------------------------------------------------- :financed by USAID; 6)Launch staff training programs in key : : * * * : : DPAE :M&E financed under areas(policy,econ. anaLysis,M&E,etc) : : = : : :ongoing Bank project: ---------------------------------------------------------------------------------------------- :ongoing; parastatal 7)Contracts to new parastatal for * * * * :routinely used by priority studies DPAE :DPAE for supporting: :analyses ---------------------------------------------------------------------------------------------- 8)Continuation of TA to MARA in economic: :USAID financed AIRD and policy analysis : * * * : = : DPAE :support to AGRO- :. : : bilateral : CONCEPT *:foreseen implementation (President's Report, refined during supervision) =:actual implementation - 97 - ANNEX II Page 2 of 7 KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) MTASAP Measures Monitored Under ASAL-I : TIMEFRAME MEASURES :----- -------------------------------: RESPON : REMARKS : :SEN 2 :SEM 1 :SEM 2 :SEM 1 :UNDEF.: SIBILITY : 1985 : 1986 : 1986 : 1987 : M-T : III. IRRIGATION 9) Revised structure, staff training * * *: DER progrim, accounting/MIS for each : * ORMVAs Office 10) Transfer of certain coummercial : : DER :lnterministerial activities to private sector : = : MARA :decision issued 11) Draft program-contract for 1 Office : DER :submitted to MOF 12) iproved water charge recovery * * DER :targets exceeded according to established targets = : : : ORMVAS 13) Introduce minimun 6% distribution : * * DER :9 margin instituted: margin for input supply : : = : : MARA :via interministerial: : :decision IV. RESEARCH & EXIENSION 14) Plan of research priorities : : * : INRA :followed up through : :Res.& Ext. Project : 15) Develop research convencions between: * : INRA :research conventions: INRA and other agencies : : : = : : agencies :signed with DPAs, : : . . :OCP, etc. 16) Iplement new statutes for INRA staf: : * : : = : INRA :under study by MOF :authorities 17) Achieve INRA reorganization : : : * : : : INRA :implementation : : : MOF :underway *:foreseen inplementation =:actual inplementation ANNEX II - 98 - Page 3 of 7 KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) MTASAP Measures Monitored Under ASAL-I T IME FRAME MEASURES . : S - ----------------------------------- RESPON : REMARKS :SEM 2 :SEM 1 :SEM 2 :SEM 1 :UNDEF.: SIBILITY : 1985 : 1986 : 1986 : 1987 : M-T : 18) Close down selected research station: * : INRA :24 stations closed and part of commercial seed prod. : : MARA 19) Shift in research efforts towards :N: priority topics INRA :underway 20) Preparation of a research project : : * : : INRA :project appraised S : : Bank :June/July 87 21) Start up activities in 28 pilot CTs * : * *:DVRA 22) Establish MARA task force to monitor: * : = : DVRA :task force pilot CT activities : : : : :cL-dI 'ed 23) Integrate livestock extension in * : : : DVRA pilot CTs : = : : DE : 24) Evaluate pilot CT program : * = : DVRA :first report sent S : ::to Bank 25) Close down tractor services in : * * * : : DVRA :gradual disengage- pilot CTs : . = : MARA : ment 26) Complete Extension Master Plan : : * : : DVRA :finalised : : : =::December 87 27) Develop programs for better linkage : : * : : DVRA :followed up via between INRA and extension : : : : : INRA :Res.- Ext. Project *:foreseen implementation =:actuaL implementation ANNEX II - 99 - Page 4 of 7 KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) MTASAP Measures Monitored Under ASAL-I : TIME FRAME : MEASURES .:---------------------------- RESPON : REMARKS :SEM 2 :SEM 1 :SEM 2 :SEM 1 :UNDEF.: SIBILITY : 1985 : 1986 : 1986 : 1987 : M-T : 28) Continue to upgrade CT managers to : : : * : : : DVRA :underway engineer level : : N : : : MOF 29) Establish in-service training prog. : * : DVRA :underway 30) Add 3rd year training in extension : * DVRA at agricultural coleges : : colleges V. LIVESTOCK 31) Select 20 zones for transfer of A * * : : : DE 32) Privatize vet. services in 20 zones : * * * * : : DE 33) Transfer At services to private : : * : : = : : DE :L:ai framework sector in 20 zones : : : : : :issued;AI transfer :in 20 zones in 87 34) 15% increase in bran and beet pulp : : * : : : E prices : : 35) Review price policy for milk to : : : * : : : DE :foLLowed up through ^nsure better seasonal baLancing : : : = : : : :ASAL-1I 36) Study on animal feed price LiberaL. : * * * * : = : DE :completed Dec 87 *:foreseen implementation =:actuaL implementation ANNEX II - 100 - Page 5 of 7 KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) MTASAP Measures Monitored Under ASAL-I I TIME FRAME MEASURES . RESPON : REMARKS :SE4 2 :SEM 1 :SEM 2 :SEM 1 :UNDEF.: SIBILITY : : 1985 : 1986 : 1986 : 1987 : M-T : VI. LAND POLICY : : : 37) Complete Interministerial review of : : : : draft rainfed legislation and action: : * : : : DVRA :draft submitted to plan for follow-up steps : : = : :Sec. Gen. of Govt. ------------------------------------ --------------------------- ------ ------------ -------------------- 38) Submit draft legislation to parliam.: : : * Parliament :awaiting parliament.: : : :action ---------------------------------------- ---------------------------------- ------------ --------------- 39) Enactment of legislation and : : * DVRA :awaiting enactment follow-up steps 40) Complete cadastrat survey and Land : * * * * : : DCFTT :land registration registration on additional 1.2 m he.:. :satisfact.;cadastre : . .. :not undertaken VII. INPUT DISTRIBUTION 41) 15% increase in fertilizer prices : * : : MARA :17% increase -------------------------------------------- --------------------------------- 42) Definition of list of outlets to be : * * * : : MARA closed based on defined criteria : : = ---------------------------------------------------- ---------------------------------- ------------ -------------------- 43) Actual closing of fertilizer outlets: * MARA -------------------------------- ---------------------------------- ------------ ------------- ------- 44)20% increase in fertilizer prices : : : MARA ::foreseen implementation =:actual implementation ANNEX II -101 - Page 6 of 7 KINGDOM OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) MTASAP Measures Monitored Under ASAL-I : TIME FRAME : MEASURES . : S - ----------------------------------RESPON : REMARKS :SEN 2 :SEM 1 :SEM 2 :SEM 1 :UNDEF.: SIBILITY : 1985 : 1986 : 1986 : 1987 : M-T : -------------------------- ---------------------------------- ------------ -------------------- 4Ill. FORESTRY : 45) Special tax (5%) on wood imports : * DEFCS :6% tax instituted 46) Mobitize FNF funds for reforestation: * : DEFCS 47) MobiLize 20% commune contribution : * : DEFCS :ongoing: applied in for reforestation = : = Communes :certain conmes 48) Draft proposal for reforestation of : * * * * DEFCS :reforestation of 30000 he per year over next Plan : : : = : :44000 ha in 86/87 49) Define research priorities * :* = : : DEFCS :some activity : :initiated 50) Complete national inventory and : * : = DEFCS :nk inventory taken define forest management plans for : :place;existing plans: main productive forests : :being updated IX. CEREAL MARKETING : 51) Set up special commission to draw up: * : : MARA operational plan for proposed reform: = : : and preparation of TORs : : : 52) Improve programing of domestic * * * = : MARA :part of cereaLs purchases/imports by region/crop : : : ONICL :reform being :implemented *:foresen implnentation =:actual implementation ANNEX II -102 - Page 7 of 7 KINGDOLi OF MOROCCO AGRICULTURAL SECTOR ADJUSTMENT LOAN (2590-MOR) MTASAP Measures Monitored Under ASAL-I TIME FRAME MEASURES .-: RESPON : REMARKS :SEM 2 :SEM 1 :SEM 2 :SEM 1 :UNDEF.: SIBILITY : : 1985 : 1986 : 1986 : 1987 : M-T : 53) improvements in present marketing * : : : MARA :storage margins system = : ONICL :revised 54) Design of operational plan including: : * : MARA :followed up through new methodology for price-setting : : Cereals :ASAL-II Camission : 55) Interministerial review of above : : : * MARA : ::Ministeries 56) Revision of official floor prices : : * : DPV :no increase in price: for cereals for 1986/87 campaign : : : :Ministeries :since 1985 X. SEED PRODUCTION 57) Phasing out of subsidies on * * * * : DPV :subsidies frozen at : certified cereal seed : : : = : MARA :1984 nominal Levels : 58) Define conditions and amount of : * : : : : INRA INRA royaLties for mother seed prod.: 59) Foundation seed transfer from INRA : * : * * * * : INRA to SOGETA/SONACOS : = : = : 60) Payment of royalties to INRA for : * * : = : INRA :not yet applied mother seed production : :: SONACOS -------------------------------------- ---------------------------------- ------------ --------------------. 61) Determine incentives to develop : : : * : = : DPV :ongoing associations of seed producers : : *:foreseen implementation =:actual implementation -103- ANN MPACT ASSESSMENT Table 1 : Core Investment Program Table 2 : Protection Coefficients for Cereals Table 3 : Farm Profiles Table 4 : Fertilizer Value-Cost Ratios Annex III Table 1 KINGDOM OF MOROCCO AGRICULTURE SECTOR ADJUSTHENT LOAN Public Investment Program 1985-87 A/ (O Millions) 1985 h/ 1986 1987 Program Allocations Z Comitments Emissions Allocations % Comitments Emissions Allocations Z Comitments Emissions Total Total Total Core Program: - Small & Medium Scale Irrigation 171 10.7 375 15.4 336 306 308 13.1 245 225 - Integrated Rural Development Projects 133 8.3 282 11.6 188 83 243 10.3 164 Sis - Large-Scale Irrigation 631 39.6 791 32.4 767 334 868 36.9 601 278 -; Extension & Research 65 4.1 150 6.2 82 35 123 5.2 61 33 Rangeland Improvement Program. 10 0.6 10 0.4 ) 16 0.7 - Soil Conservation & Sylvo Pastoral Programs 12 0.8 20 0.8 ) 160 98 32 1.4 ) 176 110 - Reforestation 75 4.7 135 5.5 ) 175 7.5 ) Subtotal Core Program . 1,097 68.9 1.763 72.2 1,533 856 1,765 75.1 1.247 701 Total Investment Program 1.592 100.0 2.441 100.0 2.176 1.311 2.350 100.0 1.885 1.i16 Total Appropriations h/ 3.643 2,730 1,355 (3729E) a/ Lot de Finances for allocations. MARA estimates for commitments and emissions. h/ Up to 1985. the budget differentiated between new allocations and carried-over appropriations. The figures shown here concern the new allocations. Disaggregated comitments and emissions figures are not available. >C 105 - Annex III Table 2 KINGDOM OF MOROCCO AGRICULTURE SECTOR ADJUSTHENT LOAN Protection Coefficients for Cereals Effective Protection Producer Prices Border Prices a/ Coefficients Technical Itineraries A/ 1984 b/ 1987 r/ 1987/84 d/ 1984 1987 1984 1987 1987/1984 f/ SgttWhat El Kalas I 1.50 1.94 1.66 1.S9 1.66 0.92 1.13 1.03 El Kalaa 3 1.50 1.94 1.66 1.59 1.66 0.96 1.24 1.08 Tanger 1 1.35 1.80 1.54 1.S9 1.66 0.83 1.08 0.96 Tanger 2 1.35 1.80 1.S4 1.59 1.66 0.80 1.04 0.89 Tanger 3 1.35 1.80 1.54 1.S9 1.66 0.79 1.00 0.97 Fes Karia Tissa 1 1.75 1.94 1.66 1.59 1.66 1.11 1.16 1.04 Fes Karia Tissa 2 1.75 1.94 1.66 1.59 1.66 1.23 1.21 1.12 Fes Karia Tissa 3 1.75 1.94 1.66 1.59 1.66 1.12 1.19 1.06 Tadla 3 (irrigated) 1.55 1.90 1.62 1.59 1.66 1.03 1.22 1.12 Loukkos 3 (irrigated) 1.26 1.82 1.56 1.59 1.66 -0.70 2.77 -1.19 Oulmes Roanni 1 1.55 1.84 1.57 1.59 1.66 0.96 1.10 0.98 oulmes Roamani 2 1.55 1.84 1.57 1.S9 1.66 0.99 1.14 1.00 Oulmes Rommani 3 1.55 1.84 1.57 1.59 1.66 0.97 1.23 0.98 Settat 1 1.37 1.89 1.62 1.S9 1.66 0.86 1.13 1.03 Settat 2 1.37 1.89 1.62 1.59 1.66 0.85 1.16 1.03 Settat 3 1.37 1.89 1.62 1.S9 1.66 0.84 1.12 1.04 Hard Wheat El Kalaa 1 2.10 2.27 1.94 2.11 1.46 0.99 1.19 0.91 El Kalaa 2 2.10 2.27 1.94 2.11 1.46 1.01 1.17 0.90 El Kalas 3 2.10 2.27 1.94 2.11 1.46 1.01 1.26 0.93 El Kalaa 4 2.10 2.27 1.94 2.11 1.46 6.99 1.22 0.90 Tanger 1 1.61 2.09 1.79 2.11 1.46 0.75 1.10 0.83 Tanger 2 1.61 2.09 1.79 2.11 1.46 0.75 1.11 0.84 Tanger 3 1.61 2.09 1.79 2.11 1.46 0.69 1.06 0.80 Tadla 3 (irrigated) 2.10 2.27 1.94 2.11 1.46 1.07 1.47 0.96 Loukkos 3 (irrigated) 1.75 2.21 1.89 2.11 1.46 2.07 1.S7 2.40 Oulmes Romnani 1 2.04 2.34 2.00 2.11 1.46 0.96 1.24 0.99 Oulmes Rommani 2 2.04 2.34 2.00 2.11 1.46 0.97 1.28 0.95 Oulmes Romani 3 2.04 2.34 2.00 2.11 1.46 0.97 1.27 0.94 Settat 1 1.89 2.28 1.95 2.11 1.46 0.91 1.22 0.91 Settat 2 1.89 2.28 1.95 2.11 1.46 0.95 1.27 0.95 Settat 3 1.89 2.28 1.95 2.11 1.46 0.90 1.25 0.92 Barlax El Kalaa 1 1.33 1.41 1.21 1.23 1.27 1.14 1.07 0.96 El Kalaa 2 1.33 1.41 1.21 1.23 1.27 1.08 1.08 0.97 El Kalaa 3 1.33 1.41 1.21 1.23 1.27 1.09 1.06 0.95 El Kalaa 4 1.33 1.41 1.21 1.23 1.27 1.07 1.12 0.92 Tanger 1 1.17 1.48 1.26 1.23 1.27 0.94 1.15 1.02 Tanger 2 1.17 1.48 1.26 1.23 1.27 0.94 1.07 1.04 Tanger 3 1.17 1.48 1.26 1.23 1.27 0.91 1.00 1.05 Oulmes Romnani 1 1.31 1.23 1.05 1.23 1.27 1.07 0.96 0.85 Oulmes Romnani 2 1.31 1.23 1.05 1.23 1.27 1.08 0.94 0.82 Oulmes Rannani 3 1.31 1.23 1.05 1.23 1.27 1.11 0.87 0.80 Settat 1 1.22 1.24 1.06 1.23 1.27 1.02 1.00 0.87 Settat 2 1.22 1.24 1.06 1,23 1.27 1.02 0.96 0.85 Settat 3 1.22 1.24 1.06 1.23 1.27 1.01 0.87 0.82 Settat 1 1.49 1.74 1.49 1.75 1.37 0.78 1.38 0.76 Settat 2 1.49 1.74 1.49 1.75 1.37 0.85 1.36 0.85 Settat 3 1.49 1.74 1.49 1.75 1.37 0.85 1.29 0.84 A/ Based on Prices and Incentive Study (Report No. 6045-MOR). (3729E) h/ 1984 nominal prices effectively received at farmgate. r/ 1987 nominal prices effectively received at farmgate. A/ 1987 prices deflated by the wholesale price index and expressed in 1984 Dirhams. g/ International reference price, converted to Dirhams at the prevailing exchange rate, expressed at farm-gate. f"/ What if* scenario: all variables endogenous to ASAL I are assumed to remain at their 1984 levels. Size Rented Agro-Ecological Model/Area (h%I . Zone Main Aaricultural Enterprises A/_Camnts Irricated - f rarahlp - Soft wheat (1.7); Sugarbeet (0.5); Cotton (0.2); Typical for 84% of farmers and 432 berseem (0.9); fallow (0.3); tomatoes (0.2); of area cropped. greenpeas (0.1) - 4 milking cows and 7 mature ewes. Gharb 6 0 Favorable - Soft wheat (2.5); sugarcane (1.0); broad beans (0.7) Typical for 44% of farmers and 46% berseen (0.6); sugarbeet (0.5); green peas (0.3) of area cropped. tomatoes (0.3); fallow (0.1) - 4 milking cows and 7 mature ewes. Rainfed Taza 1 3 33% B-Favorable - Hard wheat (1.2): fallow (0.6); barley (0.3); Typical for 62% of farmers and 30% soft wheat (0.3); olives (0.3); broad beans (0.2; of area cropped. Also appliet to chick peas (0.1) Sidi Kacem and Kenitra. - 30 milking cows and 15 mature ewes. Sidi Kacem 50 30% 8-Favorable - Hard wheat (15); fallow (10); soft wheat (5); Large dairy-mixed cropping farmer (4% sugarbeet (5); olives (5); broad beans (3.5); farms and 28% area cropped). Also chick peas (1.5) applies to Kenitra. - 30 milking cows and 15 mature ewes. Taza 3 50 20% B- avorable - Hard wheat (14); fallow (8); olives (7); Large mixed cropping -- sheep broad beans (4); barley (10); soft wheat (4); fattener (2% farms and 242 area lentils (3); cropped. - 4 milking cows and 80 mature ewes. Settat 5 40% B-Intermediate - Barley (2.1); hard wheat (1.3); fallow (0.8); Typical for 41% farmers and 32% of soft wheat (0.4); lentils (0.3); green peas (0.1); area cropped. - 2 milking cows and 10 mature ewes. . Marrakech 3.5 43% B-Poor - Barley (2); hard wheat (0.5); olives (0.5): Typical for 75% of farmers and 30% fallow (0.5); of area :ropped. Representative of - 7 mature ewes. Moroccan poor farmer. A/ Cropping pattern area is given in parenthesis (ha). (3729E) 6-1 XZ Srn (D >< Annex.II1 Table 4 KINGDOM OF MOROCCO AGRICULTURE SECTOR ADJUSTMENT LOAN Fertilizer Value-Cost Ratios Fertilizer Rate Yield Value of Cost of Value- Value of Value of Cost of Value- Value- Irrig./ Other kg/ha Increase b/ Add. Product C/ Fertilizer d/ Cost Add. Product Add. Product Fertilizer g/ Cost Cost Cr= Rainfad 102ut3-A/ Nutrient Element a/ha_ DH/ha - DHJha " IIIftyati fl l a 1Z_fLDH/bA DH/ha Ratio-1 Ratio- --------------1984---------------- -------------------------1987---------------------------- Wheat Irrig. Improved 100 - 80 - 40 12 2,160 517.8 4.17 2.268 2,400 695.8 3.26 3.45 Irrig. Tradition. 60 - 60 - 0 6 1.080 271.0 3.99 1,134 1,200 357.4 3.17 3.36 Rainf.)* Improved 80 - 60 - 30 9 1.620 403.7 4.01 1,701 1,800 541.7 3.14 3.32 Rainf.)* Tradition. 40 - 40 - 0 6 1,080 180.6 5.98 1,134 1,200 238.2 4.76 5.04 Rainf.)* Tradition. 40 - 40 - 0 5 900 180.6 4.98 945 1,000 238.2 3.97 4.20 Barley Rainf.)* Improved 60 - 60 - 30 8 1,200 34".8 3.45 992 1,320 468.8 2.12 2.82 Rainf.)* Tradition. 40 - 40 - 0 6 900 180.6 4.98 744 990 238.2 3.12 4.16 Rainf.)* Tradition. 40 - 40 - 0 5 750 180.6 4.15 620 825 238.2 2.60 3.46 Maize Irrig. Improved 100 - 80 - 40 15 2,400 512.2 4.69 2,610 2.775 689.2 3.79 4.03 Rainf.)* Tradition. 60 - 40 - 20 8 1.280 289.6 4.42 1.512 1.600 387.6 3.90 4.13 Sugar- beet Irrig. Improved 150 - 130 - 65 120 22,800 789.1 28.9 25.800 25,800 1064.6 24.23 24.23 Rainf.)* Improved 100 - 100 - 50 60 11.400 509.6 22.4 12,900 12,900 509.6 25.31 25.31 Cotton Irrig. Improved 89 - 80 - 40 5 2,025 445.2 4.6 3,000 3,000 603.2 4.97 4.97 (3729E) .. *400mm A/ Improved: sqlected varieties and mechanical soil preparation Traditional: traditional varieties and animal traction. k/ Based on results reported in final report on FA0 ferilizer Program, 1971. G/ Based on 1984 official prices d/ Based on 1984 retail prices in Meknis. including transport to farms Q/ Based on 1987 producer prices effectively received f/ Based on 1987 official prices g/ Based on 1987 retail prices in Meknes, including transport to farms. -4 r* (D C