Morocco - National Rural Finance Project

Documt of The World Bank FOR OMCLL USE O%LY Report No. P-6114-MOR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$100 MILLION TO THE NATIONAL AGRICULTURAL CREDIT BANK (CNCA) WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A NATIONAL RURAL FINANCE PROJECT OCTOBER 29, 1993 MICROGRAPHICS Report No: P- 6114 MOR Type: MOP 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 autborization. CURREC EQUALE Currency Unit = Ditham (D3H) US$1.00 = DH 9.00 DR 1.00 = US$0.111 (as of September, 1993) FISCAL YEAR January 1 to December 31 LOSARY Of ABBEVIATIO ADB African Development Bank ASAL Agricultural Sector Adjustment Loan ASIL Agricultural Sector Investment Loan BAM Bank Al-Maghrib (Central Bank of Morocco) CAS Country Assistance Strategy CFD Caisse Franaise de D6veloppement CPPR Country Portfolio Performance Review CLCA Caisse Locale de Cr6dit Agricole CNCA Caisse Nationale de Crddit Agricole (National Agricultural Credit Bank) CRCA Caisse Rfgionale de CrEdit Agricole DFI Direct Foreign Investment EEC European Economic Community EIB European Investment Bank FAA Fonds d'Assurance Agricole contre les Calamitds Naturelles (Agricultural Insurance Fund for Natural Calamities) FADES Arab Fund for Economic and Social Development FIAS Foreign Investment Advisory Service FSDP Financial Sector Development Project IDF Institutional Development Fund KfW Kreditanstalt fir Wiederautba of Germany LSMS Living Standards Measurement Survey MARA Ministry of Agriculture and Agrarian Reform METAP Mediterranean Environmental Technical Assistance Program MF Ministry of Finance MTASAP Medium-Term Agricultural Sector Adjustment Program OECF Overseas Economic Cooperation Fund of Japan OPS Other Public Se-tor PPAR Project Performance Audit Report PSA private Sector Assessment UMA Arab Maghreb Union UNDP United Nations Development Program UNIDO United Nations Industrial Development Organization USAID United States Agency for International Development POR OFFICIAL USE ONLY KLGW O KRQ NATIONAL RURAL FIANCE rJECTa Loan ad.ProtectSmmr Borrower: National Agricultural Credit Bank (CNCA) Guarantor: Kingdom of Morocco Amount: US$ 100 million equivalent [rm: 20 years, including five years of grace, at the Bank's standard variable interest rate Financing Pl US$ Million IBRD 100 CFD 30 EIB 60 FADES 60 KfW 34 OECF 95 CNCA 431 Sub-Borrowers TOTAL Environmental Ratimr: B Poverty Ca : Important elements of targeted interventions to respond to the credit demand for investment at market conditions of rural women, artisans, and small farmers StaffAppraisal Report: No. 12197 Date: October 29, 1993 This document has a restActed distribution and may be used by recipients only in the performance of their official duties. Its contents way not otherwise be disclosed without World Bank authorization. NATIONAL RURAL FINANCE PROJECT Table of Centents PE No. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY ..... 1 A. Introduction ............................................ 1 B. PastPerformance ........................................ 2 Recent Economic and Social Developments ... ............... . 2 World Bank Group Operations ............................. 4 IMF Involvement ...................................... 5 C. Morocco's External Environment .............................. 5 D. Morocco's Development Objectives, Policies, and Medium-Term Outlook ..... 6 Consolidating Adjustment and Reform ........................ 6 Alleviating Poverty and Improving Social Conditions ............... 7 Alleviating Remaining Constraints to Private Sector Development ....... 8 Enhancing Public Sector Management ......................... 8 Improving Environmental and Water Resource Management ........... 9 Developing Closer Links with External Markets ................... 10 Medium-Term Macroeconomic Context for Bank Group Assistance ...... 10 E. The Bank's Country Assistance Strategy .......................... 12 Overall Objectives ..................................... 12 Instruments to Support the Strategy .......................... 12 IBRD LendingLevel ................................... 16 Downside R1isks and Contingency Plans ........................ 18 F. Key Policy Issues for Board Consideration ......................... 18 II. TIIEPROPOSEDPROJECT .................................. 19 A. Linkage to the Country Assistance Strategy ........................ 19 Lessons From Previous Bank Involvement ...................... 20 Rationale for theProject.................................. 20 B. TheProject ... 21 Proj ectt Obectives...................................... 21 Project Description ..................................... 21 Benefits ............................................ 23 Risks .............................................. 23 Environmental Aspects .................................. 23 Country Portfolio Management ............................. 24 Recommendation ...................................... 24 NATIONAL RURAL FIANC PROJECT Table of Contents (continued) lst of Tables and FIgures Table 1: Projected Macroeconomic Performance and Medium-Term External Resource Requirements .................................. 11 Table 2: World Bank Financial Flows and Exposure: Base Case Outlook ............. 17 Table 3: Changing Composition of Bank Lending, FY88-FY98 ................... 17 Figure 1: Current Account/DP ...................................... 2 Figure2: DirectForeignInvestment.................................... 3 List of Schedules Schedule A: Estimated Costs and Financing Plan Schedule B: Summary and Procurement Arrangements Schedule C: Timetable of Key Project Processing Events Schedule D: Status of Bank Group Operations in Morocco List of Annexes Annex A: Bank Group Fact Sheet, FY91-98 Annex B: Economic and Social Indicators Annex C: Selected Indicators of Portfolio Performance and Management Attachment: SAR Responsibility for preparation: Bernad Dussert, Task Manager (MNIAG); Odin Knudson, Division Chief (MNIAG); Mahmood Ayub, Acting Dire-tor (MNI); Ali Khadr, CAS (MNICO); Caio Koch-Wesor, Vice President (MNA); and Millard Long, Per Reviewer (FSD). MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DAVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PRIOPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$100 MILLION TO THE NATIONAL AGRICULTURAL CREDIT BANK (CNCA) WITI THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A NATIONAL RURAL FINANCE PROJECT 1. I submit for your approval the following memorandum and recommendation on a propoed financial intermediary loan to Morocco for US$100 million equivalent. The loan would have a term of 20 years, including five years of grace, at the standard variable XBRD rate. It would help finance a rural credit project at market terms and conditions. Consistent with the Government's adjustment program and priorities, the objective of the project is to assist Morocco and the National Agricultural Credit Bank (CNCA) for 1993-97 in developing a competitive and financially sound rural finance system, well integrated into an increasingly liberalized financial system. The project includes a crop Insurance and drought management scheme, and important elements of targeted interventions to the rural poor. CNCA, a bank specializing in rural finance but with an increasingly diversified portfolio, would be the Borrower, and the Kingdom of Morocco the Guarantor. The project would be cofinanced by CFD of France, E13, FADES, KtW of Germany (a KfW loan to the Government will be passed on to CNCA as a capital increase), and OECF of Japan for a total additional US$279 million equivalent. I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Introfducin 2. Since the discussion of the last Country Assistance Strategy (CAS) statement for Morocco (Report No. P-5823-MOR) by the Executive Directors in February 1993, the country has continued its eftrts to Improve economic performance. Despite the adverse effects of a second consecutive year of drought on growth and certain other macroeconomic indicators, Morocco has firmly stayed the course of reform and adjustment. Key reforms, notably privatization, have gathered pace. Post-rescheduling external debt service obligations have been punctually honored and, despite higher-than-expected food import requirements and a slowdown in exports, foreign reserves remain strong. In parallel, foreign investors' perceptions of Morocco continue to improve, as evidenced by a rapid increase in foreign investment and, most recently, secondary market trading of the country's paper at a discount of only about 20 percent, compared with some 65 percent in early 1991. 3. Morocco is now at a phase in its development where it has redressed the key macroeconomic balances and liberalized its economy, thereby setting the stage for rapid improvements in living standards and poverty reduction. *Take off" toward rapid and sustained private sector-led growth and welfare gains now requires accelerated Implementation of remaining incentive, institutional, and regulatory reforms to remove lingering distortions, increase efficiency, and assure more judicious use of natural resources, particularly water. Most important, however, is the need for emphasis on poverty reduction and human resource development, where Morocco's achievements have lagged behind those of comparable countries. The agenda is all the more challenging, and fraught with risks, in that it is being addressed against a oackground of gradual political liberalization and decentralization. -2- 4. Since the last CAS discussion, Important political changes have taken place; on balance, these are not expected to entail major changes in policy direction or the pace of reform implementation. After an Initial delay, legislative elections for two-thirds of the country's 333 parliamentary seats were held in June 1993, resulting In gains tor the opposition coalition. However, following a further round of elections (by electoral college) for the remaining one-third of seats, the coalition of parties which had dominated the previous parliament-dissolved in October 1992 to prepare for elections in the wake of a revision in the Constitution-retained a small plurality. At the time of writing, appointment of a new Government was imminent, although indications as to the identity of the new cabinet, or its political affiliation(s), were as yet unclear. While the new Government would be expected, at least in broad terms, to reconfirm the previously-discussed policy agenda (para. 17) and Its agreement with the planned Bank Group assistance program, some degree of uncertainty is inevitable, as with any political change. Contingency plans for this and other downside risks are discussed later (para. 43). B. PsErM ance Recent Econgic and Social Develooments 5. Unfavorable exogenous influences notwithstanding, Morocco has continued to consolidate the program of macroeconomic stabilization and structural adjustment begun a decade ago. After steady progress in redressiAg macroeconomic balances while maintaining average GDP growth at ov;r 5 percent through the period 1988-91 (see Annex B), macroeconomic results for 1992 and the preliminary outlook for 1993 continue, on balance, to be favorable. Recent growth performance has been tainted by drought: after a drought-induced 3 percent real decline in GDP in 1992, sparse rainfall during the winter and spring of 1992-93 prevented the hoped-for agricultural rebound in 1993, limiting expected G-P growth to some 3 percent. However, other aspects of macroeconomic performance and management have been more positive. Growth in non-agricultural GDP averaged 3.8 pircent in 1992, with a similar trend over the first half of 1993. Despite the impact of the drought, the budget deficit declined to 1.7 percent of GDP in 1992, although indications for 1993 are that the deficit may widen-possibly to slightly more than 2 percent of GDP-owing fater alla to larger public investment and relief expenditures necessitated by the drought, an arrears clearance program, and sluggish trade tax revenues. Money and credit growth has continued to slow down following the surge when credit controls were removed in 1991. This is reflected in moderate inflation (4.9 percent in 1992, with a continuing downward trend in recent months) and high rel lending rates Mgre 1: Current AccountlGDP (about 10 percent in real terms), although rates have eased slightly over the past few months. 6. The balance of payments has 2 not suffered any significant deterioration, * despite the transitory difficulties. The -* agricultural downturn has, through its impact -an on food exports and import requirements, 4A% 9 1993 1993 worsened the trade balance In 1992, and A en s especially that projected for 1993. This has been aggravated by a recent slowdown in the growth of manufactured exports, mainly to Europe. Owing to more favorable trends in other current account items, notably tourism receipts, the current account deficit is likely to remain around 2 percent of GDP in 1993 (Figure 1). Gains from rescheduling have now ended; the February 1992 Paris Club Agreement, expected to be Morocco's last, covered the period -3- through end-1992. Mobilizing needed foreign inflows, an estimated US$2.5 billion per year (gross) in 1993-94 (15-20 percent more than in 1992), has therefore become more of a challenge. However, capital inflows during recent months, bolstered by disbursements from multilaterals and, in particular, sharply increasir- direct foreign investment (DFI) flows, are keeping pace with financing requirements. In particular, DFI in 1993 is expected to top US$600 million, almost 2 percent of GDP, up from slightly under 1 percent of GDP (about average for developing countries) in 1990 (Figure 2). While access to foreign exchange has been liberalized (pan. 7), no apparent disequilibrium has mgure 2: Direct Foreign Investment emerged in the foreign exchange market (the 40ss dirham rate, which is pegged to a basket of currencies, has remained constant in real see__terms). The end-1993 level of reserves is a_ _expected to increase modestly over the end- Jo 1992 level, stabilizing at almost 5 months of 200 imports (over US$3.5 billion). , 7. Even more importantly, the a 1 0 1 99 1m 1 momentum of reform has been maintained. Under the country's privatization program, launched in October 1992, more than one-fifth of the 111 concerns slated for divestiture have already been put up for sale, generating significant interest among foreign investors. Treasury receipts from the program are expected to top US$200 million in 1993. In the financial sector, reforms in 1993 include the enactment of a new banking law defining a more rigorous framework for bank regulation and supervision, the introduction of stricter prudential regulations, the enactment of laws to invigorate the stock exchange and capital markets, and a reduction in mandatory placements m low-interest Treasury bonds from 32 to 25 percent of banks' sight deposits. These measures have been supported by a Financial Sector Development Project Other reforms in 1992- 93 include cuts in the corporate tax rate and the top personal income tax rate, the removal of remaining restrictions on access to foreign exchange for current transactions and capital transactions in connection with foreign investment, as well as on private foreign borrowing (this was followed by an announcement that Morocco would abide by the IMF's Article VIII), a reduction in the maximum import duty, suppression of remaining import licensing restrictions (except for those on cereals, sugar, and edible oils, which are due to be removed in 1994), and the preparation of legal texts to unify the existing web of sectoral investment codes. 8. While the gradual but determined pace of adjustment and reform over the past decade has helped ensure sustainability, changing attitudes have paved the way for accelerated liberalization in the future. The pronounced macroeconomic imbalances of the early 1980's-budget and current account deficits exceeding 10 percent of GDP, for example-were reduced gradually over a decade without sudden and dramatic cuts in expenditures or imports. Trade reforms, removal of controls on the financial sector, exchange liberalization, and tax reforms have likewise been implemented gradually. As a result, adjustment costs have been largely contained-indeed, average growth performance has improved since the early 1980's-and institutions as well as mentalities have had time to evolve. The continuing drive toward a market economy now enjoys widespread support among the country's policy-makers and population. International markets also appear to view the sustainability of Morocco's adjustment and reform program favorably, as indicated by recent increases in the secondary market price of Moroccan debt and growing willingness of the foreign private sector to lend to, and directly invest in, the country. -4- 9. Concerning social policy, government recognition of-and a sense of urgency in addressing-shortcomlags in past performance has continued to grow. As discussed below (para. 19), poverty and other basic social indicators (including child nutrition, basic health care, and literacy) continue to lag behind averages for comparable countries. Disparities among different sections of the population are stark. In addition, unemployment-now close to 20 percent In urban areas, compared with about 12 percent a decade ago, and largely concentrated among new labor force entrants-has also proved a persistent, and potentially explosive, problem. However, recent growth performance-at least before the recent drought struck-has clearly helped to reduce the percentage of absolute poverty, now estimated at some 13 percent, compared to some 21 percent in 1985. Though greater efforts are needed, budgetary priorities in recent years have evolved in favor of social expenditures likely to benefit low-income groups. Social and poverty-related issues have become increasingly prominent in the Government's agenda, and are the subject of open pubiV: debate. They are also central to the Bank's country dialogue and assistance program. Word Bank grou Operations 10. IBRD's Morocco portfolio-its largest in the Middle East and North Africa Region-is diverse. New IBRD commitments have a% eraged some US$470 million per year over the past six years, and cumulative commitments net of repayments amount to some US$4.6 billion, of which US$1.4 billion remain undisbursed (for details, see Annex A and Schedule D). Outstanding IDA credits, for which Morocco 1 no longer eligible-its per capita income level was US$1030 in 1991-amount to US$36 million. Investment loans, which account for 73 percent of commitments to date, have covered a wide variety of sectors (see also para. 42 and Table 3). Nine adjustment loans, which account for the remaining 27 percem of commitments to date, have been approved, including two Agricultural Sector Adjustment Loans, a Public Enterprise Rationalization Loan, an Education Sector Loan, a Structural Adjustment Loan, and two Industrial and Trade Policy Adjustment Loans. The last two adjustment loans, a Second Structural Adjustment Loan and the adjustment component of a Financial Sector Development Project, are expected to close shortly, following satisfactory implementation of agreed policy measures and release of the second tranche of both loans in summer 1993. By agreement with the authorities, no new adjustment lending is foreseen under normal circumstances. 11. Implementation of the Bank's portfolio in Morocco is very satisfactory, particularly when recent improvements in portfolio management are taken into account (for the recent evolution of portfolio indicators, see Annex C). Disbursements on the current portfolio are running at more than 80 percent of projections at loan appraisal. The number of *problemn projects has gradually diminished, and all projects are currently rated 2 or above. Supervision efforts over the past two years have also resulted in i1gnificant improvements in average project performance, reflected in a change in the overall portfolio rating from 1.88 in PY91 to 1.66 in FY93. A country portfolio performance review (CPPR) in May 1993 addressed two major sets of issues. The first concerned mechanisms to solve generic problems, which include inadequate budgeting of counterpart funds for Bank projects, administrative bottlenecks in the management of special accounts, failure to follow required procurement procedures, slow processing of payment orders by the Treasury. The second set of issues concerned project-specific problems, which include delays in implementing programmed policy measures, such as tariff increases for public utilities, and institutional weakness of some executing agencies. The CPPR mission reached agreement with the authorities on an action plan to deal with several impediments to portfolio implementation, fcluding matters related to procurement, audits, and government arrears. As the Morocco portfolo has clear potential for even further improvement, further efforts in this area, including a follow-up CPPR mission, will feature prominently in the Bank's assistance program (see para. 32). -5 - 12. Other members of the World Bank Group, particularly IFC, are directly supporting private sector development, a pillar of the Bank Group's country assistance strategy. Over the past eight years, IFC activities- -abetted by favorable policy changes and rapid growth of private activity in Morocco-have broadened from a previously narrow base of investments in development finance, cement, and mining to a range of other sectors such as agribusiness, textiles, maritime transport, construction, and tourism (see Annex A and Schedule D). By the end of FY93, IFC investments were held in a total of 15 companies, compared with 4 in 1985, with outstanding commitments of US$237 million, compared with US$82 million in 1985. Most recently, projects have been approved for investments in leasing companies and a privatization fund. In addition to its direct investments, IFC has also facilitated access to international financial markets for Moroccan entities-another key component of the Bank Group's country assistance strategy-by arranging ten syndicated loans totalling more than US$200 million for 13 leading financial institutions and corporations in the country, and has provW' technical assistance on capital market reforms and privatization. Morocco joined MIGA in SeptemL r 1992, but-despite strong initial interest by one investor in particular-no guarantees have as yet been purchased from the Agency. The Bank Group's Foreign Investment Advisory Service (FIAS), under a UNDP-funded project, is expected to begin technical assistance on foreign investment promotion. IMEInolvement 13. Morocco's long-standing relationship with the IMP, during which Bank-Fund collaboration has been very close, has included seven Stand-by arrangements starting in the early 1980's. Outstanding purchases amount to SDR 244 million (about US$340 million), some 75 percent of quota. The last Stand-by facility, approved in January 1992, was largely not drawn upon, and the program lapsed at the end of March 1993. In parallel with Morocco's "graduation" from rescheduling, no further recourse to Fund resources is planned. Article IV consultations were last held in November 1992, and the next consultations are currently planned for early 1994. IMF technical assistance, particularly in the area of tax reform, has been extensive in the past, and is expected to continue. C. Moracce's Eame.al FA.XIMIR 14. Morocco's balance of payments remains vulnerable to the external environment. Recent experience suggests that the main risks are those of lower foreign exchange earnings due to adverse external shocks or, less directly, those of drought-induced agricultural downturns. Adverse shocks, including export commodity price dips (or import commodity price increases), as well as declines In other sources of foreign exchange earnings, are a clear possibility, although the growing diversity of exports has reduced their impact. At 1992 volumes, a fall in the prices of phosphate rock and phosphoric acid (which together account for close to a fifth of merchandise exports) to the lower bound of the probable range identified by the Bank's Planning Assumptions Committee (PAC) would result in an export revenue loss of about US$100 million over one year. Similarly, an increase In ide petroleum price to the upper bound of the PAC's probable range for this price would result In a rise in the import bill of about US$200 million. Other sources of foreign exchange, notably tourism (from which Morocco currently earns US$1.5 billion per year) are sensitive to even distant regional tensions. This was exemplified by the sharp drop in tourist arrivals during the 1990-91 Gulf crisis, which resulted in a US$300 million loss over the year relative to the expected trend earnings. Recurrence of similar events could similarly affect DFI flows. In addition, there is a risk of continued recession in Europe, which would impede growth in Morocco's merchandise exports (some two-thirds of merchandise exports are sold to Europe), mainly of manufactured goods. It is estimated, for example, that at least half of the slowdown in manufactured export growth over the past two years, which translates into a loss of some US$150 million per year, can -6- be accounted for by slower (mainly European) market growth. The remainder represents a loss of export market shares to competitors, which also represents a non-negligible future risk; avoiding It hinges on faster implementation of policies to increase competitiveness. 15. Drought-Induced agricultural downturs, aside from temporarily depressing income and consumpdon, have a negative impact .n the trade balance. Given agriculture's weight in the economy, every 5 percentage-point decline in agricukure contracts GDP by about 1 percent. Drought also reduces agricultural and agro-industrial exports, which account for almost one-third of total merchandise exports, and Increase food (particularly cereal) import needs, which typically account for about one-tenth of merchandise imports. For example, comparing food imports in drought-ridden 1992 with those in 1990 (an "average* agricultural year) shows a 55 percent higher food import volume. At 1992 prces, this translated into an extra food import bill of about US$260 million. 16. While shocks would probably not derail Morocco's reform and adjustment efforts or warrant substantial revision of planned Bank Group assistance, efforts to increase the economy's resilience to shocks must continue. Foreign reserves are currently sufficient to cover even major shocks without compressing imports (and thereby choking Zrowth potential) for one or two years. For example, aven if (other things equal) all of the shocks enumerated in paras. 14 and 15 were to materialize in one year, about one-third of fbreign reserves would be sufficient to cover the incremental balance of payments deficit. However, recurrent shocks would clearly create major difficulties. Drought-linked contractions aside, the impact on growth would depend on the nature of the shock but, in the case of a major reduction in tourism or DPI, it could be substantial. In extreme circumstances, the Bank would re-consider the decision to discontinue adjustment lending (see para. 43). Meanwhile, on-going efforts to further reduce the economy's vulnerability to its external environment include reforms to increase Morocco's international competitiveness, seeking closer links with Europe (see para. 27) to secure market shares, developing links with non-traditional markets, and improving the agricultural sector's potential for recovering faster from drought-thereby containing any sustained impact on the trade balance-by developing a drought insurance scheme for farmers under the proposed Rural Finance Project. The Moroccan authorities are also conscioas of the growing importance of a sound policy framework, given that balance of payments stability hinges increasingly on the confidence of domestic residents and foreign investors as exchange and trade restrictions are progressively lifted. D. Morocco's Development Objectives. Policies, and Medium-Term Outlook 17. Morocco's medium-term development agenda derives from a vision of sustainable, more equitably distributed, private sector-led income growth. The agenda thus rests upon six objectives or "pillars*: (a) consolidating adjustment and reform; (b) alleviating poverty and improving basic social indicators; (c) creating a more conducive incentive, regulatory, and institutional framework for private business; (d) enhancing public sector management, particularly in the local government sector; (e) improving environmental and water resource management; and (f) developing closer links with external markets. A broad consensus on this agenda is developing among government authorities and other groups, as underscored in public debates and statements as well as concrete policy actions. Consolidating Adjustment and Reform 18. Despite the commendable achievements of the past decade, there is a need to consolidate macroeconomic balances and-in order to bring Morocco on par with its most dynamic international competitors-accelerate implementation of further incentive and structural reforms. Regarding macroeconomic balances, the main challenge Is to continue moving toward a balancel Treasury budget and, in particular, to monitor and control the consolidated public sector deficit (see para. 23). On incentive and structural Issues, corporate and personal Ir mme taxes (at marginal rates of about 42 and 48 ercent, respectively) would need to be reduced by 8-10 percentage points to match conditions in competitor countries. Import tariffs (at a top rate of 35 percent plus a 12.5 percent uniform surcharge) would similarly need to be lovered, as effective protection in many sectors remains high. In the financial sector, key issues include remaining controls, such as the fixed margin between deposit rates-which are freely determined-and lending rates, as well as mandatory placements by banks in Treasury bonds. Such controls, which distort financial intermediation and impede financial deepening, would need to be removed. Other issues that need to be addressed include labor regulations that impede labor mobility and absorption, and continuing public sector involvement in certain production and value-added services that could more efficiently be provided by the private sector. Alleviating Poverty and Improving Social Indicators 19. While the incidence of poverty as measured by income and expenditure has declined sharply in recent years, many of Morocco's social indicators continue to lag (see Annex B). The percentage of absolute poverty is estimated at 13 percent (down from more than 21 percent in 1985) and, promisingly, households living in absolute poverty have an average expenditure level that is only 3 percent below the poverty line. Much of the recent decline in poverty can be explained by rapid growth coupled with incentive reforms which removed long-standing distortions (notably reducing biases against the agricultural and labor-intensive export sectors) and thereby fostered income-generating opportunities for the poor. However, progress remains fragile and uneven. The expenditure of almost one-tenth of the population is only US$60 per year or less abeve the poverty threshold, making it vulnerable to a deterioration in economic conditions (as may have occurred during the recent drought). Poverty, in addition to being an essentially rural phenomenon (two-thirds of the poor live in rural areas), remains disproportionately high in some regions of the country, as well as am ang certain socio-economic groups, such as rural wage earners and the rural and urban self-employed. In addition, many other welfare indicators lag, and display significant gender disparities, especially in relation to comparable countries. Net primary enrollment rates are about 68 percent for males and 48 percent for females nationwide (and as low as 22 percent for girls in rural areas), compared to an average of about 87 percent for lower middle-income countries. There are also large disparities in social conditions between rural and urban areas. Only some 23 percent of the rural population is literate, compared to 62 percent in urban areas, and no more than a meager fraction has access to safe drinking water. 20. Rapid and lasting improvements in social indicators require public expenditure reallocations, notably in favor of rural areas, as well as measures to improve their efficiency. In recent years, central and local government expenditure in the social sectors has been increased in absolute terms -and as a proportion of the total. For example, basic education and health increased their share in the investment budget by about three percentage points to over 14 percent over the period 1990-93, and their share in real non-wage expenditures by almost one percentage point to about 4 percent of the non-im st recurrent budget. These trends need to be built upon over the next several years. Even so, .e disappointing rates of improvement of social indicators over the recent past, when juxtaposed against expenditure levels that in some cases exceed those of countries with similar per capita incomes, calls for greater efficiency and equity in the delivery of services. To help formulate more effective poverty- reducing measures, a substantial analytical base has already been developed. In addition to the -completion of a Poverty Assessment by the Bank, a comprehensive poverty profile, based on the 1990-91 Living Standards Measurement Survey (LSMS), has been prepared with Bank assistance. Several recent donor-funded studies have addressed the efficiency, targeting and potential recovery of public expenditures, as well as the appropriateness of direct transfer mechanisms and other policy instruments (notably in agriculture) to reduce poverty. Government authorities have already used the results of this work to prepare a strategy of priority Interventions to improve living conditions for the poor, which is now being translated into concrete recommendations for action (notably as concerns public expenditure allocations). An upcoming public expenditure review (para. 33) will assist in formulating recommendations. Alleviating RemaininS Constraints to Private Sector Develoment 21. Morocco's private sector-the subject of a recent assessment by the Bank Group-Is vigorous and diverse, and has responded strongly to liberalization. The privat( --ctor now accounts for about 70 percent of value added, almost 90 percent of employment, and over 60 percent of investment. It contributes virtually all of value added in agriculture, commercial construction, and trade, three-fourths of manufacturing, roughly half of transport and communications, and a third of banking and financial intermediation. In response to liberalization, the private sector's share in production and investment has increased steadily since the early 1980's, climbing by more than 10 percentage points in the case of investment. Foreign private holdings-now spread among such diverse areas as financial services, real estate, tourism, pharmaceuticals, food processing, electronics, and textiles-have also grown rapidly, in response to an increasingly conducive policy environment and the removal of most restrictions op foreign ownership. 22. While private business activity has grown rapidly over the past decade, realizing the private sector's full potential for growth requires action-involving both the Government and the business community-along three broad lines. The first is to further liberalize and open the economy, aligning key economic, financial, and institutional policies with those of the EC and other major trading partners and competitors. Increased openness requires, inter alla, lower import duties, lower income tax rates harmonized across sectors and income sources, deregulation to increase domestic competition, elimination of remaining distortions in the financial system (e.g., mandatory placements in low-interest government bonds), and a more open foreign exchange market. The second is accelerated disengagement of the State from a range of commercial activities and the provision of many services, including infrastructure and training. This includes accelerating and broadening the privatization program and, more generally, paving the way for private investment and provision of services in areas currently reserved for the public sector. The third is increased government emphasis on improving the enabling environment for private business. Required actions here range from introducing more flexible labor regulations, developing equity and debt markets, and strengthening the judiciary (especially to speed up rulings on commercial matters and make them more transparent and predictable), to alleviating-increasingly with private participation-infrastructure constraints to private sector development, notably poor and high-cost telecommunications services, electricity shortages, and less-than-satisfactory transport links. Creating a better enabling environment will also depend critically on the success of government actions to alleviate poverty and develop human resources. Enhancing Public Sector Management 23. Given the trend toward increasingly decentralized public sector management, the development agenda calls for special focus on the local government sector and other public sector (OPS) entities, which include state-owned enterprises and utilities, in addition to consolidating adjustment at the central Government level. In the local government sector, the basic challenge is to develop institutional -9- capacity, particularly for sound fiscal management. Decentralization has recently doubled the number of local collectives to over 1500, significantly increasing their combined employment and expenditure levels, as well as their access to resources through the transfer from the central Government of a share of VAT receipts according to objective, pre-determined criteria. The greater responsibility of local governments for resource management creates an urgent need to strengthen their administrative and regulatory capacities, including those pertaining to expenditure control and project selection and management, as well as their coordination with the central Government. The Bank is already supporting development of local capacity through its latest infrastructure and agriculture projects, and the recently approved Municipal Finance Project has a substantial institution-building component. 24. Regarding OPS entities, close monitoring and further rationalization, in parallel with divestiture, is required to improve performance. Administrative agencies aside, OPS entities comprise some 680 distinct enterprises, hotels, utilities, and other entities that are partly or wholly state-owned. Many of these are subject to private sector peiformance standards, as the State has a controlling interest (33 percent or more of total equity) in only about half. Of entities in the latter category, over 100 have been slated for full privatization (these in turn have stakes in some 200 other firms, in which state ownership would be automatically relinquished). The remainder of the sector is almost wholly accounted for by a "core" of lart utilities and other companies (covering, Inter alia, production and distribution of water and electricity, telecommunications, rail, air, and maritime transportation, tobacco processing, and phosphate mining and processing). Some of these core entities are plagued with poor financial performance, and require measures to improve and sustain performance, including tariff increases and clearance of government arrears. Over the medium term, parts of the public sector core entities could be privatized. In the near term, the potential for private provision of certain value-added services currently provided by the public sector core entities (the subject of a recent USAID-financed study) is being examined notably in the electricity sector, with potential for IFC participation (para. 35). Improvin? Environmental and Water Resource Management 25. Environmental and water resources have been increasingly under strain in recent years. Contributing factors include rapid population growth (about 2.6 percent over the past two decades), agricultural intensification and extension of the irrigated perimeter, industrialization, and urbanization (almost one-half of the population now lives in cities, compared to about one-third two decades ago). Worrisome aspects of environmental degradation include deforestation, soil erosion, and the ill effects of industrial effluents and air pollution. In many industrial areas, sulphur dioxide air quality standards are regularly violated. However, most important among environmental resource issues are an impending water shortage and water pollution. Projected water demand and supply patterns suggest the emergence of a critical country-wide deficit within the next two decades, and regional deficits well before that. Groundwater is being consumed in excess of recharge rates in many areas. Several prime sources of water, notably the Sebou basin, are polluted by sewage and agricultural and industrial by-products. 26. Improvements in environmental and water resource management call for a program with four complementary sets of measures: (i) building up the nascent institutional framework for environmental and water resource management; (ii) strengthening the legal and regulatory framework for environmental protection and standards; (iii) addressing incentive framework distortions (e.g., low tariffs for irrigation) that impact environmental sustainability; and (iv) undertaking priority investments under both sector (irrigation) and cross-sectoral (water supply, watershed management) operations. Government concern, and commitment to improve environmental management, has grown in recent years. Evidence for this includes an increasingly active dialogue on the environment with international organizations, the -10- first-time appointment of a cabiet-rank Under-Secretary of State for the Environment, and active Moroccan participation in the GEF, METAP and other environmental bodies (Morocco hosted the META n1 Confermnce in May 1993). The Government has already begun implementing a program to improve environmental and water resource management, for which increased Bank support is planned (see para. 37). Dffefoing CloWU Lbnb with External Markeo 27. To increase competitiveness and access to foreign resources, it is important that Morocco continue its recent efforts to develop closer links with external markets. After technical discussions during 1992, formal negotiations toward a Partnership Agreement between Morocco and the European Community (EC) are due to begin shortly. A major part of the Agreement, which is unlikely to be concluded before mid-1994 and would be implemented over several years, will concentrate on establishing a free or near-free trade zone. However, several sensitive issues, notably concerning the treatment of agriculture and the "end state" relationship that Morocco could realistically (and beneficially) seek to have with the EC, are likely to be resolved only in the longer term. Despite these uncertainties, and the potential transitional costs, an agreement-and, in the longer term, the fuller integration that it would facilitate-promses significant medium-term benefits for Morocco, particularly in the form of greater DF1 and financial flows and more secue access to European markets. Other on-going initiatives to build closer links with external markets, which merit greater emphasis in the future, include: (a) efforts to diversify the country's export markets and sources of direct foreign investment by developing closer commercial relations with potential buyers of Moroccan exports and foreign investors who have not traditionally had important roles in Morocco, such as Japan and the United States; and (b) re-establishing active contact with a brosd range of international creditors, who have recently shown strong interest in resuming lending to Morocco, to increase post-rescheduling access to foreign private capital. The country is also a member of the Arab Maghreb Union (UMA), which was created in 1989 and whose other members are Algeria, Tunisia, Libya, and Mauritania, although the organization has made only slow progress toward integration (trade flows among UMA members remain negligible). Medium-Term Macroeconomic Conte= for Bank JroM Assisac 28. Even under relatively conservative assumptions, Morocco's medium-term prospects are favorable. An outlook that extrapolates from. performance in the recent past-and, significantly, does not hinge on major efficiency Improvements or full realization of the private sector's potential for rapid growth-suggests satisfactory medium-termn growth prospects with low inflation, gradual post-rescheduling improvement in the country's debt indicators, and consolidation of internal and external macroeconomic balance. This outlook is summarized in Table 1. Under this scenario, a one-time boost to real GDP, driven by an expected rebound in agricultural production (assuming only that production levels return to the ten-year average, after two consecutive years of drought), would occur in 1994. Thereafter, growth and inflation would settle at levels attained in recent years, with the manufatrn and service sectors leading overall GDP growth. Debt service, after rising initially in 1993 (following the end of debt rescheduling), would be expected to decline gradually thereafter. Gross fixed investment would be expected to increase slightly as a share of GDP over the remainder of the decade, continuing the recovery observed in recent years. Direct foreign investment would also be expected to continue growing, fueling export capability; under conservative projections, DF1 levels would increase to some US$900 m3ilion per year by the end of the decade, staying roughly constant in terms of GDP (at slightly under 2 percent). Central government investment is expected to be concentrated increasingly in the social sectors and infrastructure complementary to private activity. The budget, as well as the current account, are expected - 11 - to tend toward balance within a few years, allowing the domestic private sector greater access to resources while consolidating sovereign creditworthiness. Finally, given the expected labor force growth (over 3 percent per year), historical labor absorption trends suggest that even without significant increases TANLI 1: PmisldMamm mIn Perth m dMedmaTerEteraR e Rements Average Pqlecte Avera 198091 1992 1993 1994 1995 1996-2000 (in pare"t) GDP Growth Rate 43 -2.9 3.2 7.2 4.5 4.9 ConsuUption/Caplita Growth Rate 4.1 -4.2 0.0 4.2 1.9 2.4 Inflation 7.2 4.9 4.0 4.2 4.2 4.4 DOD/XGS 2/ 31 315.1 241.5 231.1 214.2 195.9 152.2 DOD/ODP 31 92.1 73.6 69.6 64.1 60.6 50.5 Debt Service/XGS 1/ 2/ 3/ 32.0 28.7 31.0 30.8 28.2 22.7 Gross FCFIGDP 23.1 23.4 24.2 24.2 24.4 24.9 ICOR 5.8 6.1 9.6 6.9 6.6 5.2 Govt Deficit/GDP (commit. basia) 41 -7.4 -1.7 -2.3 -1.6 -0.9 -0.1 Exports (GNFS) Growth Rate 5.3 1.2 6.1 5.5 5.9 6.6 o/w Manufactures 12.4 4.8 9.0 6.0 6.5 7.4 Imports (GNFS) Growth Rat. 3.1 7.5 5.3 4.5 5.3 5.4 Current Account/ODP 4/ -4.7 -2.1 -2.1 -1.4 -0.9 -0.4 (in USS million) Current Account Balance 3/ -745 -478 -649 -483 -336 -179 Net Resewo Accumulation (- - Increase) and Capital Flows NEI -218 -560 -406 -368 -426 -578 MLT Amortization 31 -635 -1213 -1520 -1748 -1836 -2091 Direct Foreign Investment 147 503 600 650 700 840 Gross MLT Disborsements 1450 1748 1975 1899 1898 2117 Official Creditors 915 1316 1460 1323 1361 1448 of which: Wodd Bank 282 430 380 371 437 484 Private Creditors 535 433 515 576 537 670 melo Im: Reserves as mo. of Imports 1.6 4.8 4.8 4.7 4.8 5.3 N.B.: Inflation is measured by CPI through 1992, GDP deflator thereafter. PCF denotes Fixed Capital Formation. ICOR denotes Incremental Capital-Output Ratio (measured over preceding five years up to 1992; yearly from 1993 onwards). Average growth rae over a given period includes growth in the first year of the period (e.g., 1996 during 1996-2000). GNFS denotes Goods and Non-factor Services. I/ Includes MLT, IMP, and short-term debt. 21 XGS includes workers' reminances. 3/ After debt rellef. 4 1980-91 averages are measured after debt relief. -12 - in labor intensity, a GDP growth rate of 4.5-5.0 percent would at least be consistent with no medium- term rise in unemployment. 29. If more significant efficiency gains-fueled by deepening reforms, closer integration with the EC, and larger DFI flows-were to materialize, growth prospects would, for the same overall level of domestic Investment, improve perceptibly relative to the scenario in Table 1. The social welfare Impact of such higher growth would be significant. By way of example, a GDP growth rate of 7 percent by the end of the decade would significantly increase labor absorption, reducing unemployment by over one percentage point per year even without major increases in labor intensity. Such growth would also support rapid increases in per capita consumption-some 5 percent per year in real terms, even at current population growth rates-which, If accompanied by further reductions in population growth and expanded social safety net coverage, could allow poverty in Morocco to be virtually eradicated within one generation. E. 'Th Bank's Country Assistance Strategy Overall Obectives 30. The Bank's country assistance strategy responds to the six pillars of the post-adjustment development agenda outlined in the preceding section. An important feature of the strategy is the planned shift in the composition of lending relative to the past (see Table 3 below), with no further role foreseen for adjustment lending, barring exceptional circumstances (see para. 43). Consistent with the strategic vision that future growth should increasingly be led by the private sector, an increasing share of Bank resources--together with continuing support from the IFC-is expected to benefit private operators directly. Even where, as in the human resource sectors, the public sector is expected to serve as the sole conduit for Bank resources over the next few years, the design of Bank lending instruments will ensure a growing role for the private sector (e.g., by seeking to increase private provision of services currently provided by the public sector). Instruments to Sumort the Strate 31. The major instruments of planned Bank assistance have been tailored to the priorities detailed in Section D above. Thus, planned lending is concentrated in favor of operations with a substantial policy content that are either "flagship" investment loans in support of key development objectives (e.g., poverty reduction or private sector development), or agricultural, infrastructure, and human resource projects (which, as argued in para. 36, are efficient instruments to address poverty reduction, public sector management, and private sector development objectives). With regard to environmental and water resource management, specific projects will address this objective directly. Economic and sector work (ESW), designed to lay the groundwork for future lending, will increasingly address in-depth sector policy issues, rather than broad-based diagnostic assessments of the country's reform and adjustment program. Lending and ESW will be complemented by efforts to mobilize private and official capital, as well as by technical assistance. The proposed assistance strategy is elaborated on in the following paragraphs and presented schematically in the matrix on the following page. 32. Improvements in Portfolio Implementation. Several initiatives are planned to build on the recent improvements in portfolio performance. First, a follow-up CPPR mission is planned in early 1994 to address remaining impediments to the implementation of existing operations and lessons for the future. Second, particularly where projects with a substantial policy content are concerned, broader in-country · !3 · 므 -14- participation in pwJect design will be sought at an early sage of preparation to maximize borrower "ownership", and facilitate later . - 0. For example, the Bank is planning in-country seminars (with a broad attendance from representatives of government, NGO's, the private sector, and external partners to discuss the results of recent Bank work and follow-up action) as precursors to the design of "flagship" investment projects to support poverty reduction and private sector development (see para. 33). 71ird, simplicity and flexibility of design will, whenever possible, be an explicit feature of new projects. And fourth, the share of resources allocated to portfolio management will be increased. 33. Economic and Sector Work W.M . As a diagnostic and design tool for policy and instiltution-building measures, in most cam directly supporting subsequent Bank lending, ESW holds a pivotal role in the overall assistance strategy. Two key pieces of ESW, the Poverty Assessment: and the Private Sector Assessment, have already been substantially completed. On-going and planned ESW addresses five of the priority objectives directly. Concerning pgysM reauction the Poverty Assessment will be followed by a human resources strategy document (which will also draw on recent and on-going work in education and health), and a Maghreb-wide study on the role of women in rural economic development, beginning with Motocco in FY94. Planned strategy documents for agriculture and housing will also have a strong poverty focus. In support of Vrivate sector develgpment, the Private Sector Assessment, which was undertaken Jointly with IFC, will be followed by a study addressing the development of domestic debt instruments and markets, a key remaining issue. Concerning NWic sector mmamiem a Public Expenditure Review, planned for FY94, will analyze the current structure of expenditures and propose reallocations to increase beneficial effects on low-income groups and the environment for private business. A review of issues related to decentralization, notably the potential fbr private provision of public savices at the local level, would be undertaken in a planned study on public sector management issues. Enviromnental manament and, in particular, the scarcity of water resources will be addressed in studies funded under projects (para. 37). as well as a Water Resource Management Study and an Environmental Update. To support develgMent of clgsgX links With external markets, a study on the implications for Morocco of the expected Partnership Agreement with the EC has been substantially completed. An Export Performance study will build on an analysis of the reasons for the slowdown in manufactured export growth over the past two years to develop a strategy for export promotion and diversification. Other pieces of ESW are planned to address pressing policy questions- even if these do not give rise directly to specific loan operations-and give periodic updates of the staW of economic management and performance. Finally, an integral part of the ESW program is to follow preparation of major studies with in-country semmars to dissemmate study results and discuss links to future project design. In the case of the Poverty Assessment and the Private Sector Assessment, seminars, scheduled for November/December 1993, will allow broad-ranging reviews involving the Government, the private sector, and other interested parties (e.g., external donors). Subsequently, action plans would be prepared and implemented with, inter alla, Bank Group assistance. 34. Lending lnavvwnts. The binding constraint on future Bank lending is exposure, not the potential pipeline of high-quality projects (see pun. 39-42). To manage exposure while responding to key development needs over the medium term, a lending program of some US$450 million per year, to be delivered through 4-5 operations, is planned for FY94-98- Ibree types of operations make up the bulk of the proposed leading program: (a) objective-geared "flagship" Investmient loam; (b) specific projects in the agricultural, infrastructure, and human resource sectors; and (c) projects in support of environmental and water resource management. irrespective of their coverage, the design of projects will, whenever possible, emphasize sector policy issues, institution-building measures, and simplicity of project design to facilitate implementation. - 15 -. 35. Planned "flagship" investment loans are tailored directly to key development objectives, although their precise timing and content remains under revision in light of emerging ESW results. Concerning ,mM reUcion and im m in bUic social indiors completion of the Bank's Poverty Assessment and related work has allowed the start of preparation of the fkst of three planned Social Priorities Investment Loans, which would support measures to increase low-income groups' access to social services (cutting across health, education, employment, and direct assistance programs) while improving cost-effectiveness in delivery. These flagship operations, which would support an agreed medium-term policy framework for poverty reduction and which account for about one-fifth of the planned FY94-98 lending program, would be complemented by other operations focusing inter alia on rural poverty, water supply, social housing, and health. Regarding private sector development. completion of the Private Sector Assessment has enabled preparation of a Private Sector Development project to begin. As a first step, project preparation work is assisting the Government in drawing up a medium-term "umbrella" framework for private sector development that addresses all relevant policy (e.g., tax, external trade, and foreign exchange) institutional, (e.g., extension and information services for business), and structural (e.g., privatization) issues. "Time-slices" of the umbrella framework would then be supported by this project and at least two successors; together, the three projects would account for 16 percent of the planned five-year lending program. Since, concurrently, other Bank projects would support specific parts of the framework, the flagship projects understate true Bank support for the private sector development objective. In parallel, IFC's future operations would support private sector development directly, notably in the financial sector (e.g., by supporting needed specialized financial institutions, such as discount houses, and leasing finance), in power generation, and through loan syndication. 36. About half of the Bank's proposed five-year lending program takes the form of projects in agriculture and rural development, infrastructure (including roads, housing, water supply, and energy distribution), and the human resource sectors. The emphasis on human resources is easily explained; the predominance of agriculture and infrastructure in proposed project lending is explained by the links that these sectors have to the country's key development objectives. Agricultural and rural development projects are an efficient way of addressing poverty (two-thirds of the absolute poor live in rural areas), fostering private sector development (virtually all of agricultural production is private), and public sector management (the Ministry of Agriculture's budget accounts for some 15 percent of central Government investment; irrigation agencies need institutional strengthening). The proposed Rural Finance project, for example, cuts across several priority objectives. Similarly, infrastructure projects directly support private sector development (by alleviating infrastructure constraints to doing business), public sector management (many proposed projects deal with local government and OPS entities and have substantial policy and institution-building content), and assistance to the poor (extending running water to low-income neighborhoods and promoting construction of low-income housing). 37. Some 15 percent of the planned five-year lending program Is earmarked for environmental and water resource management operations. The Environment Technical Assistance project, approved by the Board in September 1993, is designed to assist Morocco in developing a comprehensive environmental strategy. Measures formulated under this project, as well as under the planned Water Resource Management study, will be implemented in subsequent projects addressing cross-sectoral issues in Environmental Management, Watershed Management, Water Resource Management, and Sewerage and Pilot Wastewater projects. A PHRD Grant has been obtained to assist the development of an integrated water resource management strategy and subsequent project preparation. A planned Rural Poverty project will also have a significant environmental protection component. - 16.- 38. Technical Asistance. Aside from substantial technical assistance and institution-building components in several projects, Bank Group strategy also covers free-standing technical assistance- financed to the extent possible by grant ftunds--to address key areas in Morocco's development agenda. Examples of ongoing technical assistance arrangements are: (a) analytical work to identify and design measures need*d to facilitate the transition engendered by a Partnership Agreement with the EC, financed by an IDP grant; and (b) development of enhanced monitoring and evaluation of public enterprise performance as well as restructuring plans for public enterprises that are candidates for privatization, financed by a PIRD Grant. Free-standing Bank technical assistanc- will continue to address key issues on the country's development agenda. Areas under discussion with the authorities include the management of Morocco's renewed access to international capital markets and secondary market development for domestic Treasury paper, both in coordination with IFC and the IMP. FIAS is planning to assist in reinforcing Morocco's ability to attract foreign Investors through a UNDP-funded project. IBRD Lending Level 39. While Morocco's achievements are commendable, and while notable economic and social progress has taken place, a sizeable unfinished agenda remains. The country's good project implementation capabilities and absorptive capacity argue for a high level of Bank involvement. However, the Bank's long involvement in Morocco and particularly the high levels of adjustment lending over the past decade (para. 10) have resulted in relatively high Bank exposure. 40. The planned Base Case lending program of about US$450 million for 4-5 projects per year during the period FY94-98 aims to reduce Bank exposure while responding to Morocco's external financing needs for high-quality development projects. Given the exposure-driven limits on Bank lending, assistance to Morocco in mobilizing non-Bank external resources will be critical. Consequently, as a rule, co-financing will be sought for all Bank projects (as under the proposed Rural Finance Project), and one explicit selection criterion for projects will be the amount of potential co-financing that can be mobilized. Close coordination will continue to be ensured with bilateral donors' and creditors' development finance institutions, as well as other multilaterals, notably the EC, EIB, and the African Development Bank. In addition to increased efforts to mobilize other potential official donors and creditors as well as to encourage increased recourse to international capital markets, the Bank, together with IFC, is actively exploring the use of concession-agreement formulae and other financing instruments to attract privatr capital. 41. Under the planned level of Bank lending, and with the expectation of a gradually increasing weight for co-financing and private capital, Bank exposure will decline and, by the end of the decade, the objective of returning within the indicative ceilings will have been substantially achieved. Under the planned lending program, Bank disbursements, averaging roughly the same level as proposed commitments, would account for an average of about a fifth of Morocco's gross new MLT inflows each year over the period 1993-2000 (see Table 2). Under the relatively conservative macroeconomic outlook summarized in Table 1, Bank exposure ratios would remain above the indicative ceilings for a few more years. However, as shown in Table 2, in the medium term, all but one of the indicators (debt service due to the Bank as a share of the total) would come down below the ceiling. By the end of the decade, even this latter indicator would be on a declining trend. 42. In terms of the composition of the planned five-year lending program, significant shifts are expected vis-a-vis the recent past (Table 3). The major change is that, compared with a 29 percent share for adjustment lending in the recent past, future lending is expected to consist wholly of investment - 17- TABLE 2: World Bank Financial Mo and EUre As Cae Outk -Projection- Average 1991 1992 1993 1994 1995 199C-2000 2001 World Bank (in US$ million) DiAbursements 357 430 380 371 437 484 472 Amortization 230 269 291 301 342 399 422 Interest 242 264 273 283 235 304 329 Net Transfers -11S -102 -184 -213 -189 -218 -280 Exposure Indicatorse (In percent) WB Debt Service/Exports (5%) 5.7 6.1 6.0 5.8 S.7 4.9 3.9 WB DS/Total DS (20%) 20.9 21.4 19.8 19.2 20.5 22.0 21.0 Prof. Cred. DS/Total DS (35%) 40.3 38.5 36.0 34.2 34.4 33.6 32.4 ' Figures in parentheses show the indicative ceulings. loans. Concerning sectoral composition, there is clearly an element of arbitrariness in classifying certain loans-for example, infrastructure projects with significant institution-building components for national and local OPS entities could have been classified under public sector management, rather than TABLE 3: CMIMh l Cmgosi of Bank Leaffdin YE (Percentages) FYs-FY93 FY94-FY98 Ajustment Lending 29 - - Investment Leanding 71 100 Agriculture 20 16 Industry, Finance, PSD 13 16 Energy and Power 7 3 Infrastructure 16 24 Environment - 15 Human Resources 11 23 Public Sector Management 4 3 TOTAL 100 100 - 18 - infrastructure. Consequently, the link between the priorities on the development agenda and lending instruments is not always readily apparent. Nevertheless, the increase in the share of new Bank commitments devoted to private sector development, poverty reduction and human resource development, and environmental and water resource management emerges very clearly. Downside Risks and Contingency Plans 43. The Bank's assistance strategy allows for both exogenous and endogenous contingencies. Exogenous risks, which include those of drought-induced agricultural downturns and external shocks (see paras. 14 and 15), would probably entail only transitory damage. Nevertheless, in the remote event that (due, for example, to serious foreign reserve depletion) sound economic performance appeared threatened, the Bank would, in close consultation with the IMF, re-consider the option for new adjustment lending. Endogenous risks, which include the risk of serious policy slippage under a new economic management team, while unlikely, cannot be ruled out. In the event of less-than-satisfactory Government efforts to improve conditions for the poor, or of a deficient macroeconomic framework, the Bank would consider reducing lending to US$300-US$350 million per year. The proposal to curtail lending in response to insufficient efforts to improve the living conditions of the most vulnerable groups is important in order to underscore the importance that the Bank attaches to the alleviation of poverty and other social ills. Continued processing of the Base Case program would be contingent on a periodic confirmation of satisfactory progress, based on reviews of policy measures and outcomes affecting low income groups as well as (in consultation with the IMF) of the macroeconomic and policy framework. In particular, reviews of policy measures and outcomes affecting the poor would be based on a set of quantitative indicators consisting o.: (a) variables under direct Government control (such as expenditure allocations for primary education and health); (b) "intermediate" indicators pertaining to the availability and quality of basic social services; and (c) "output" indicators (such as infant mortality and malnutrition). Insufficient improvement in the quantitative indicators would not serve as mechanistic triggers for curtailing lending, but rather as "early warning" signals leading to fhuther discussion and possible reassessment of lending volumes. Should scaling back to a lower lending level be warranted, the affected projects would be those in areas where it is judged that preparation and implementation would be most difficult for either policy or institutional reasons. F. Key Polley Issues for Board Consideration 44. Country Performance and Potenial. Morocco has continued to build up a track record of good macroeconomic management and-allowing for the effects of recent exogenous shocks- performance. There has been steady progress in the implementation of structural and incentive reforms, against a background of gradual political liberalization and decentralization. The country now faces the challenge of accelerating policy reforms to unleash the potential for rapid, private sector-led growth while reducing poverty and developing its human resources. 45. Development Agenda. The agenda, on which a broad consensus is dev 3loping among government authorities and other groups, can be characterized largely as a post-adjustment one, although continued vigilance is required to consolidate stabilization and deepen adjustment. The agenda calls for particular focus on the following piorities: (a) consolidating adjustment and reform; (b) reducing poverty and improving basic social indicators; (c) removing lingering obstacles to private sector development; (d) enhancing public sector management, especially at the increasingly important local level; (e) improving environmental and water resource management; and (t) building closer links with external markets. - 19- 46. Bank Strategy. The strategy, already under execution, Is to tailor the assistance program to this development agenda. Major elements of the planned assistance program Include new lending of about US$450 million per year for 4-5 projects (which would reduce Bank exposure while responding to Morocco's key development needs), foreshadowed by focused ESW, maintaining and further improving portfolio performance to maximize the development impact of existing and future Bank projects, continuing technical assistance on central issues, and coordinating external financing to maximize additionality to Bank funds. To gauge progress in meeting Morocco's key development objectives, the Bank will regularly review economic and social policy and performance in the country, measuring progress against a range of specific indicators covering the macroeconomy, policy reforms (e.g., in taxes and import tariffs), private sector activity, and social conditions. In parallel, other members of the Bank Group, notably IFC, would directly support private sector activities and help increase the country's access to foreign resources. 47. Risks and Contingencies. Exogenous risks, which include those of drought and external shocks, will continue to cast a shadow on economic performance, but events are unlikely to seriously slow down or reverse reform implementation. However, under extreme circumstances, the decision to discontinue Bank adjustment lending would need to be revisited. While the new economic management team (not yet in place at the time of writing) would be expected to reconfirm the broad thrust of the development agenda, and the Bank's role in it, some degree of uncertainty does exist. In the event that- as determined by a broad-based judgement with reference to the relevant indicators--there should be significant shortfalls in addressing key social or economic policy issues, Bank lending would be scaled back to some US$300-350 million per year. Affected projects would be those auguring complex preparation and implementation or lesser government commitment. H. THE PROPOSED PROJECT A. Linkage to the Country Assistance Strategy 48. Bank involvement would :onsolidate and deepen the institutional reform process (initiated under Loan 3088-MOR) to develop a financially sound rural finance system well-interated into an increasingly competitive financial sector. The project would fulfill fundamental social and economic needs in the country for progress in rural development, greater efficiency in rural financial intermediation, and private sector growth. In this context, the project will be integral to the Country Assistance Strategy (CAS) articulated in Section I of this Memorandum, by supporting Government efforts to alleviate rural poverty and to further develop the rural private sector. Agriculture is a key sector in Morocco, accounting for some 18 percent of GDP, 30 percent of export earnings, and 40 percent of employment. Its continued development to reduce poverty and slow rural-to-urban migration is a key Government priority. Provision of credit has been one of the main factors in promoting private investment and in developing the agricultural and rural sectors in Morocco. Supported by a gradually liberalized sectoral policy and well-chosen public investments in infrastructure, private investment in agriculture has expanded by about 7 percent per year in current terms since 1985. 49. In this context, the National Agricultural Credit Bank (CNCA) has been instrumental in providing rural finance and will continue to play a lead role in financing private investment in agriculture, notably in the poorer regions of the country, through its nationwide branch network. Since 1987, CNCA's lending to rural activities has expanded by 15 percent per year. While diversifying its portfolio and resources, CNCA has maintained its focus on small- and medium-scale farmers. Commercial banks -20- have concentrated on financing commercial and industrial activities, Including short-term financing of agro-industry and of imports of cereals, and prefinancing of exports. By contrast, about 85 percent of CNCA's farmer clients have less than 15 ha. O these, many farm in the poorest rafed regions of the country. 50. Morocco's substantial progress in adjustment and reform (paras. 5-7) has encompassed financial sector reforms that have been supported by the Bank since 1985, and the country now has a relatively well-developed financial sector. In 1990-91, the monetary authorities moved to a second phase of reforms and deposit interest rates were liberalized. Most lending rates are now freely determined within a ceiling of 2.5 percentage points above the 6- and 12-month bank deposit rate (which stood at some 11.5 percent in mid-1993), and this system currently applies to all banks. In addition, Treasury recourse to the monetary market (rediscountable bills) has been reduced and the Government enacted a new banking law in July 1993. The Bank's Financial Sector Development Project, approved in June 1991, has supported the Government's program to continue financial liberalization and to ensure its sustainability (Report No. P5553-MOR of June 3, 1991). The proposed project is fully consistent with these financial sector reforms. CNCA's effective on-lending rates (which average 14 percent for medium- term farm loans and for agro-industry, compared with inflation of about 5 percent in 1992 and an expected 4 percent in 1993) are highly positive in real terms. CNCA rates are comparable to rates for other banks' loans for productive activities. Lessons from Previous Bank Involvement 51. Through a series of Bank projects, CNCA has gradually been strengthened. CNCA is generally regarded as one of the premier rural financial institutions in developing countries. Portfolio performance is good except in years of drought. The high risks of lending to rainfed agriculture in particular and the two consecutive years of drought have strained CNCA's recovery performance. Although profitable, CNCA still needs financial strengthening and portfolio diversification and to continue its development as a viable competitive bank at a crucial time when banking restrictions are being lifted. In parallel, agricultural insurance and climatic risk management mechanisms available to all banks must be developed to separate normal credit risk from climatic risk. A critical element of this strategy is to make these mechanisms operational so that banks can have a better control on their financial margins in a co-petitive environment Bank loans to CNCA, with cofinancing by KfW, EEC/EIB, ADB, IFAD, FADES and USAID have been successful in building an efficient rural credit institution. OED has commented favorably on past performance. The National Agricultural Credit Project (Loan 3088-MOR to CNCA) has progressed well and was implemented on schedule (the loan was fully disbursed in four years as originally planned). In a PPAR released recently, OED rated the most recent CNCA operations as "satisfactory, with probable sustainability, and substantial institutional development impact". It also noted that since 1987, "the Bank provided valuable assistance in its supervision missions by encouraging appropriate reforms at CNCA". OED also suggested that *continued support for CNCA should be assured". Rationale for the Proiect 52. The proposed project comes at a critical moment in the consolidation of reforms in the rural finance and banking sectors in Morocco and the launching of new initiatives in risk management. To meet the challenge of a more competitive banking system, CNCA is being diversified into a more universal bank, still geared to rural finance, but with a broader portfolio and resource base. This requires CNCA to make many organizational and financial changes to better serve its diverse clientele (including -21 - women, for whom CNCA has been a pioneering Institution). As part of its strategy to meet this challenge, CNCA is implementing an in-depth five-year training plan for its staff, seeking ways to improve its efficiency and office and accounting technology, and mobilizing savings and deposits nationwide. In parallel, the Government is working on improving drought management through the launclinU of an Agricultural Insurance Fund for Natural Calamities (FAA) to make agricultural lending more attractive to all banks and to provide more financial stability to rainfed farming. Bank involvement through the proposed project would assist the Government In implementing two difficult but important policy actions. To increase competition in rural credit, the Government needs to establish the necessary conditions for other banks to lend for agriculture by: (i) separating normal credit risk from climatic risk; and (Hl) promoting greater efficiency in rural financial iatermediation through competitive financial margins and market-determined Interest rates. In particular, in dealing with risk, the Bank would assist the Government in bringing forth worldwide experience and expertise in insurance schemes for agriculture. Bank support would also assist CNCA's efforts to raise about US$279 million of additional cofinancing for private investments and technical assistance in the sector. B. The Prfc MroWc ObJectilves 53. Consistent with the Government's adjustment program and priorities, the objectives of the project are to promote private Investment in rural areas, further develop high-quality, competitive and more diversified rural banking for small and medium-size agricultural and rural enterprises, and establish the enabling policy and institutional environment for more efficient financial intermediation and competition in rural credit. In addition, the project would initiate the process of diversifying risk in rainfed agriculture. In this regard, the project would: (a) finance private sector investments in rural areas and in agro-industries; (b) increase domestic resource mobilization through rural savings schemes; (c) consolidate (in a prudent manner) the institutional transformation of CNCA into a decentralized, competitive, universal bank, through clientele and resource diversification; (d) provide greater ability to farmers and the rural banking system to share risk through the development of a sustainable drought relief fund/crop insurance system; and (e) develop viable credit/savings schemes to reach the rural poor. Prtect Descipin 54. The project would support the following activities over a four-year implementation period (1994-97): (a) CNCA redit Progran. First, the project would continue financing CNCA's core activities, notably: (i) on-farm and forestry investments by private farmers and agrarian reform cooperatives including water conservation measures; and (ii) investments in rural housing. Second, the project would support diversification of CNCA financing into: (I) private coastal fisheries; (1i) private artisans, with a special effort to support women's activities; (iii) land consolidation (part of the project but not for Bank financing); (1y) rural non-farm enterprises; and (v) private and environmentally sound agro- processing industries including joint ventures and technical assistance with UNIDO support. (b) Strengthening of CNCA and Institutional Dewelopment. Consistent with CNCA's policy statement and change in strategic direction as approved by the Government in 1989, and -22 - endorsed by the Bank, the project would provide for further strengthening of CNCA's organizational and regional structure, its financial viability, strategic and operational planning and management control, accounting and office technology systems, new banking services, and prudent diversification program. Specifically, the project would fund (1) the training program and equipment needed to better manage CNCA as a universal bank, assist CNCA's clientele, and promote export-related operations and leading to women; (1i) training of specialists; (i) overseas training for CNCA local trainers and managers; and (iv) consulting services for CNCA management. In addition the project would provide KfW-finded technical assistance to support development, testing and Implementation of an agricultural insurance scheme and climatic risk Insurance Fund for drought management (FAA). Total project cost is estimated at US$1.15 billion equivalent, with a foreign exchange component of US$439 million, or abov* 39 percent of total cost. The proposed Bank loan of US$100 million would finance about 9 percent of total project costs and 23 percent of the estimated foreign exchange costs of the project. A breakdown of costs and the financing plan are shown in Schedule A. Retroactive financing of up to 10 percent of the loan amount (US$10 million) would be made available to the Borrower to help bridge part of the financing gap between the recently closed and successfully implemented loan (Loan 3088-MOR) and this operation. Amounts and methods of procurement and disbursements, as well as the disbursement schedule, are presented in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Morocco are given in Schedules C and D, respectively. The Staff Appraisal Report (No. 12197-MOR, dated October 29, 1993) is being distributed separately. 55. Actions and Implementaton. The Guarantor has provided two letters, satisfactory to the Bank, on: (a) foreign exchange risk coverage; and (b) financial measures as of beginning 1994 in favor of drought stricken farmers and to maintain CNCA's financial viability as a consequence of the two-year drought. The Guara has also committed itself to establishing an agricultural Insurance scheme and climatic risk Insurance Fund (open to all banks) by end-1996, after two years of pilot implementation in 1995 and 1996. CKA has provided a letter defining its procedures, satisfactory to the 'sank, for loan classification and loan loss provisioning, and a financial performance development letter with monitorable indicators aiming at maintaining minimum standards of capital adequacy, liquidity, profitability and financial margins. In addition, CNCA and the Government have agreed on the following actions: (a) CNCA would obtain Bank approval for Individual subloans to agro-processing and fishery investors of more than DH 20 million (US$2.2 million equivalent); (b) CNCA would adopt the banking accounting plan as of January 1, 1995 and upgrade its procedures in agreement with the recommendations of Bank AI-Maghrib (the central bank); (c) CNCA would maintain a maximum level of debt to equity of 10 to 1, and, at a minimum, positive real interest rates, as measured before June 30 in each year; (d) CNCA would continue to send to the Bank annual audit reports to international standards; (e) CNCA would prepare by October 31 each year, as part of its 5-year strategic plan for training, an annual training program for the following year acceptable to the Bank; (f) CNCA would take satisfactory actions during project implementation to implement its banking diversification and regionalization plan; (g) CNCA would further develop and implement its new strategic and management control tool (by June 30, 1994) introduced under Loan 3088-MOR; and (h) CNCA and the Government would carry out a comprehensive mid-term review (according to agreed terms of reference) with the Bank in June 1996 to assess progress on implementation (including that of the Insurance Fund), CNCA's institutional and financial performance, the level of interest rates, prudential regulations, subsidization, development impact, project sustainability, and related institutional, financial and policy measures. On-lending terms and conditions -23 - would be in accordance with CNCA's existing policies and practices, which are acceptable to the Bank. Fulfillment of the conditions of effectiveness of all cofinanciers' loan agreements would be aimed at before June 30, 1994. enefit 56. The project would provide part of the financing and institutional framework necessary for the private sector (in particular small- and medium-scale farmers) to respond to the improving policy environment, including the opening of external markets. It would help achieve a vital transition in CNCA's institutional development and on-going conversion into a full-service bank while promoting entry of other banks into rural finance. This would improve Morocco's institutional capacity to promote private sector investment in rural areas, and increase domestic savings nationwide. Through provision of investment credit to private farmers, agro-industries and other operators, the project would also contribute to increased production and productivity, exports, and rural employment, while increasing competition among banks and reducing pressure for public investment. By developing crop insurance and building the foundations for an agricultural insurance fund, it would assist farmers in managing risk and reduce the hardship and budgetary costs associated with periodic droughts. This, in turn, would impact favorably on the economic and social goals of Morocco. 57. The risks are mainly associated with the impact of droughts on farm credit recoveries and rural savings mobilization, and the difficulty of implementing an institutional reform process. Droughts create problems in credit recoveries and have led to writing off arrears or rescheduling farmers' debts. On the basis of past experience, this risk has not adversely affected CNCA's long-term performance and sustainability, owing mainly to CNCA's prudent policies and the occasional injection of additional equity. It is crucial, however, that the Government remain committed to taking systematic actions to reduce fArmors' and CNCA's,vulnerability to drought. For the future, the creation of a pilot drought relief fund/crop insurance system, drawing from best practices worldwide on risk pricing and sharing, as well as improved methods of provisioning, would provide farmers additional security against catastrophic risk and give additional safeguards to CNCA's long-term financial viability. Regarding the implementation of the institutional reforms, the Government has emphasized at the highest levels its commitment to the development of the rural sector and the transformation of CNCA into a viable, universal bank geared to rural finance. This commitment, supported by the institutional component of this project, reduces the risks of a slower-than-expected pace in the institutional reform of CNCA and other policy adjustments. Environmental Aspects 58. Environmental issues are of limited scope for this project. As in the previous line of credit for agriculture in Morocco, the focus concerning the environment is on: (a) sound appraisal procedures for subloans; and (b) training in environmental assessment methods. CNCA staff have participated in the workshop on Bank guidelines for environment protection organized by the Bank in 1990. The issues of poor land management in rural areas and the depletion and degradation of water resources are important environmental aspects which will be addressed in other projects (see para. 37). -24- Countr Portfoio MNaN=n 59. As part of the Bank's recent portfolio management initiative, a Country Portfolio Performance Review (CPPR) took place in May 1993, and the country portfolio is currently sound (see para. 11). 60. I am satisfied that the proposed Loan to CNCA would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the Loan. Lewis T. Preston President Washington, D.C. October 29, 1993 -25- sheutA Pago 1o 2 NATIONAL RUA IANE OJE EstimAted Cost and F1lncngf la Estimate CosMs lk Local Foreig ToWa - USSMillon - 1. CREDIT COMPONENT 21. 437.1 1,147. FARMERS Construction 42.4 7.5 49.9 Equipment 164.1 188.3 352.4 Livestock 227.2 26.5 253.7 Land Consolidation 48.0 7.2 55.2 Plantations 57.0 38.1 95.1 AGRO-INDUSTRIES 40 74.5 114.5 RURAL HOUSING 59.3 39.6 98.9 COASTAL FISHERIES 22.4 22.3 44.7 ARTISANS AND RURAL th WOMEN ACTIVITIES/ 39.0 34.1 73.1 ENTERPRISES 2. INSTITUTIONAL DEVELOPMENT It .1 0- Li Training/Consultants 0.1 0.4 0.5 Data Processing 0.4 1.4 1.8 Physical Contingencies 0.0 0.2 0.2 Price Contingencies 0.0 0.0 0.0 3. TOTAL PROJECT COST (1+2) 211. 416 12& of which: Total Base Cost 711.9 438.9 1,149.8 Contingencies 0.0 0.2 0.3 .1 Includes taxes and duties estimated at DH 1,120 million (US$125 million equivalent). hl Includes financing of young professionals/graduates. / Does not include headquarters and branch network construction financed by CNCA. -26- Page 2 of 2 IMNGDM QM NATIONAL RIRAL FINAN(E PROJECT Estmate Cost and MiNnig Plan if Plan (US$ Million) Total Total Sub- Sub- Project Borrowers CNCA IBRD CFD KfW EIB FADES OECF Lending Costs A. Small Frrmers 101 /1 154 25 14 7 - 13 - 213 314 B. Medium & Large Fanners 148 150 35 - 7 45 34 75 346 494 C. Agroindustries 34 35 15 - 10 10 - 10 80 114 D. Rural Housing 30 51 10 - - - 8 - 69 99 B. Coastal Fisheries 13 2.5 10 10 - 5 - 5 32.5 45.5 F. Artisans and Rural Women Actities/Enterprises 12 33 4 5 10 - 5 5 62 74 G. Land Consolidation 2 5 - - - - - - 5 7 H. Institutional Development - 0.5 1 1 - - - - - 2.5 TOTAL 340 431 100 30 34 60 60 95 807.5 1,150 % 30 37 9 3 3 5 5 8 (70) 100 I/ Of which 10% from the Agricultural Development ind created January 1, 1986 and supported by the ASIL I to promote investments aiming at the intensification of production and improved technology on farms in accordance with the Agricultural Investment Code. Cofinancing by Subtendins Cateory CNCA's Sublending Share Grace interest by Category and Source i Amount Maturity Period Rate A B C D E F G (US$M) (Years) (Years) (% p.a.) % IBRD 99 20 5 7.4 1k 12 10 19 14 30 7 - CFD 29 15 5 4.0 7 - - - 30 8 - KfW 34 30 10 -. 3 2 12 - - 16 - EIB fi 60 18 5 8.0 Ik - 13 12 - 15 - - FADES 60 15 5 4.0 6 10 - 12 - 8 - OECF 95 30 10 3.0 I - 22 12 - 15 8 - TOTAL 377 /f 28 57 55 26 90 47 0 I/ For derinition of category see Table above. h/ Variable rate. g/ As CNCA equity. L1 ECU 50 million. et Indicative. t Total CNCA lending USsoT.5 million. -27- (US$ m~lio equivalent) /g romm~ Method- ICe LCIR 0tr /s NBF/f Total Cost S. Farm uam, farm and P1,140.5 7.0 / 1,147.5 non-farm equipment and (99.0) (99.0) implements, livestock, fishing par, civil worbE and working capital under subloans 2. ConultantsI/ - - 0.5 - 0.5 (0.5) (0.5) 3. Software, computer - - 0.5 - 0.5 mntenan U training programs (0.5) (0.5) 4. Data processing/ - - 1.5 1.5 TOTAL - - 1,141.5 8.5 1,150.0 (100.0) (100.0) 1/ Figures in parentheses represent Bank loan flnancing. bl This represent normal commercial practices for goods and civil works for on-farm and non-farm investmtents; for consultants, Bank guidehines for employment of consultants would be fol~owed; for sofware, naintenane and training, international or local shopping would apply. 2/ Land consolidation credit program. L ncudes training specialists. el Paid out of CNCA's and CFD's funds. f/ NBF : Non Bmnk-financed. -28- lDem=ursMQ= (USSMHU94n alsbursm~ hm ~edre Category Amount of the Loan % of Expenditures to Anlented be inaned (US$ men) 1. Subloans to snuil, m~. a5 of am^ma adbyCC en0erprise~ and cooperativ~s (a) Green~ 10.0 75% of amounts paid by CNCA (b) 0&r invesbn 45.0 40% of amounth paid by CNCA 2. Subloans to agrprocssn and wood-r~sn ~t~as (a) Agronuastr 15.0 50% of amounta paid by CNCA (b) O r ivesb~ 10.0 50% of a~ paid by CNCA 3. Suon ftr b~ain g 10.0 35% of aml paid by CNCA 4. . SubMoaw to Sabdn~e 5.0 30% of amont pai by CKCA 5. &Mboaps to arisn and ~ua women actiites 4.0 50% of am~ut pai by CMCA anurri~ and youg profeioal 6. Compu~ mainenanc and 0.5 100% Of totaw pniue softwar (80% for goods procured locally) 7. Training and consultants 0.5 100% of total expenditures TOTAL 100.0 Estim~e ibursn~ Bank flscul Year 1994 1995 1996 1997 US$ affunn Annual 15.0 30.0 30.0 25.0 Cunntative 15.0 45.0 75.0 100.0 -29- Ik~ of of h (a) Time Taka to Prep~: 9 ~ntths (b) Preparation Rport by: Ca=i. Ntionat de Cffdit Aricole (CNCA) with Bank's mads~nn (May 199) (c) International Co-Fnancir Coordinatin Meeting with Moroccan Authorities /g: July 2-3, 1992 (d) Strategy Report on CNCA Reforms and Bank Pre-appraisal Mission: November 1992 (e) Time Taken to Process: 7 monts (i) Appraisal Mission Departure: March 28, 1993 (g) Technical Study and Actuauial Analysis on Agriultural Risk Management and Insumne Fund for Drought Mangem May 1993 (h) Ngotiahons: September 20-25,1993 (i) Plaed Dt of ffective January 31, 1994 (j) List of Relevant PCRs and PPARs: First Agricultural Credit Project roviewed in Rackground Paper No. 4 of OBD's Report on Agricultural Crndit Plogra~s; Seond in Report 2543, Jne 12, 1979; Third in Report 3248, Daemb~r 23, 1980; Fourth in Repout 5392 ofDecember 28,1984; and combined Report 11492 of Dlcember 30, 1992 on die Fifth aud Sixth Pr~jects coverng credit operations from 1985 to 1989 with PPAR No. 11491 of sam dat% a/ Participated: CNCA of MMrocco, Ministry of PMa of Moroo, ADB, CPD, E^B, KfW, OECP and the Wadd Bank. А � O�D � • ���� ���������������������о������� � �������� Q � �.� �j ~ � � ��� � � � � О ...........r......�....... .................. r............ �...л......�r �r � � � ��������жжж�����������х��х��� ����W��� � т �� � '� $ '� 3 2S �О �jАА ФО А s � �� �� �� � �о о��� $ � а���� �г5�г�а�а �S�aagaa � 5 � �����������������'������������ �������� � � � g� s�sasssa я,аsв�s, saasя,�� s��� sa�ss��sв$ $ ,� � � � � � �� � � � � � � � � � � � � � � � � � � � � � � � � � � � � � о � � � о � 8� � А ^ ро � _ � � Ф� � � о �i �� � � р�а��� � ����� �8'+�g^� � � � � � � � � � � � � � � � S � � � � � � о � ° � � •• � с � с �"� � �� _ ��3� � �� � � � � � � � рΡ _ ��� "I� �/ � 1'уΡ�f о iii � у�, '� II�V j� � � ?Ф �� ��� ,�� � $r��G�. � ���� , � � а� ��т � _ _ � � � - � .� � �. �� � - � � � �� _ � � �� � . �. а � � �� � � А "� � r i'Q �� � ,P►I�aB� $iŭ�aSai�,c"�$'BiS�$i„i�$B���mi3 � 8 w�i'�S,$�8,°о� �S $ �����8�8$8�8$5����$8Ж$������$ � 8�$�Ж��S . � � � а �р � � � о � + � ФА�� J�O1�, V W А� V±ОЧО+�оФ.�рвУ1(O�AQO�i1.+♦♦ � � (�5���&�$�У.'$iŭ�S&�BBi;v°5���'3°iSi�'il3л&а�е'л8о �i �' . р � � р -31- $~uf@ D of IFC InV=M= In M«^ iAs 01 ý11nQUil-Iffi FIOW Y~ 0b110~ TWDOIBU~ TQw 1= Nag~ p= DwAdopmønt Fim~ 42.61 2.48 46.19 im le Døv. Eoon. (SNM 1M ~ te Mintere du Bou- mine* 12.99 2.38 16x Q~(SOMIFER) 1962 Cimøntør19 NOUVØIIG Cement ProdUCtion 29.30 Llo 31.40 I9U dø Cawbk~ (CINOUCA) 1w2 lem Frufflere M~ nø Aardndustry 4.97 4J7 de Trand~on ~MAI) 1987 Crodit Immobiller at Tourlem Hotoller(CIH) 1987 8~ Rature Te"le Fa~ &28 IAI 4» (SETAML) le» compagnio Madfdmø Fæq 8~ 4M 4M Mamcc>~Ienne P0~17) logi Cø~ Atdque ceraffike S-47 1.70 6.17 Industdøs(CAJ) len CIMASR ~ nt loce 1= Banquo Comm«cWe de Sanking 12-W - I2A0 mø= (SCM) Igu ~Ug Mar~ Ban" 12.00 - 12.00 du Commorce Extøftur (BMCq IM Cradit du ~ (CDM) B~no 6.00 8.00 i= Wa~ k Banldne 8.00 *.00 lem Inw~ de capiw m~ - Rnencementetde Pafficipatlon (INTERFINA) 2U.64 14.87 23721 ToW grow oommilmente t~ canc~ one, torminatione. ropsymo". 48W 4.06 83.0$ ~ and ø~9 8dIustmøntg TOW ~=ftments hold by IFC 17&87 jool 184-18 of ~ undlebu~ &14 1.98 7.10 WC net Dm. nat inelude ~O~ta km omm~ banke -32- -33- Ann.x Pag of i Morftmo: mnl Fact Sheet Bank ke~in Prfgrm,% FM9-98 By Se~O and Lm~in Insr~ ent (% of TOta Co~nimenmD ursemen~ pamt Canent Panned 9 F F Fn94 FM Fy% Fm FM C--n--a (Usah) 626 325 sa 383 450 440 495 480 Setor(%) Agriculane 15 39 58 15 20 Indu~ry & Hnac. 38 En~rgyIe 18 15 Publi seotor M an a 19 15 Inframtm m & ~UDrbanDev. 21 42 40 25 25 40 Huma R~~nios 23 35 30 30 Evronrm~ a Watr Roo~ 2 35 15 20 Mini4 & Odmar Extratve Muld~setor 85 25 25 30 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Linding Instraient (%) A4ju~muntm a/ 20 85 0 0 0 0 0 0 specific bv. Loan & oth~ 80 15 100 100 100 100 100 100 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (UWaa 358 506 347 406 403 446 472 460 Approvals (Uas> 5.16 67.7 46.2 35 Sector (%) Agrl-busines cap. Markt 59 85 chem-Fadiä~r nfrastroun 14 Manufactur~a 100 41 1 100 Oi-mining Total 100.0 100.0 100.0 100.0 hed~nmaIn eut (%) Loans 67 100 86 71 Equity 33 0 14 29 Quaai tyb Total 100.0 100.0 100.0 100.0 / Progam and sn~el A4~ * Loa, sector Adju~bment ans, and Dob AdjuenW Loma. / Iaoluds bo quas.quity oan aOa -quiy equity types. ! " о «. ы w л и � �� ���� �� �°.��� ���� � � � R 1 � а � �. , -� � � �� � � ��' ��' � �� � � � � � � � � 8 � � � � �� � � �� � � � � � � � � � � � xN � r g о 1S а � � S �� в.� в� ..�� �, . s. s : в� f1.R1:�� -� � �� � � g � � � � � �� � g � � � � � пit $ � � . д S � � � .. � п � � � к �� � � к'ь�.�� к к к к�i► й►в'а:� : к п: к%�в к к: 8 п п: п п � :�л�iYw ткк sй i�'ло��i т пттка�''в гкк а::кк � � ` �� о � � � � А о ~ У r �i . 4 к�iйEi й�й г�� Mw� к к к ws ii к к к �.��tŭ3d �� � � � � ~ � - к ii�$�► : ë�.i +�i� ��w� к t п к п: s к к $: п к п � � �+ � ~bОΡ� ,,t+t АΡ �OO � �� s iwbbV s РСь i1i0 OOi�g с к т к к к к к п О к: к: � п�� к � r 1� к п 2 р� к к: п п i i:. 2 к к � к к к т �� �а (� w �� � °м к сА рл ，…’&{‘……………‘……………‘……’ 协目 .36- Am« a Paa 3 då Moroceo: Key Econook Indkators im im 1991 im NATIONAL AMOUM (tt d GDP *t Cw~ M~ P&M1 Gr» Do~ pr~ 100.0 100.0 100.0 100.0 10(4.0 172 17.2 16.8 18.9 14.4 333 333 32.8 31.3 32.7 86~ 49.3 494 50.4 49.8 53.0 CMSM~ 193 et4 80.9 OLS 82.6 Gr~ hmed~ 21.0 23.7 25.0 22.9 23.9 of ~ OOVWM~ 4.0 4.4 4.4 43 43 p~ 16.4 18.4 191 171 19.1 b~ GOS 24.7 22.1 24.3 211 223 b~ GNFS 25.1 173 30.2 Vi 28.6 GOM Naf~ S~ 23.1 20.2 242 21.4 22.1 G~ Do~ 5~ 20-s 18.1 19.1 112 17.4 hfonora~ U= 0~ et e m - : d ~ .. 0~ Donostk Pr~ 22198.3 22MI.I 2=.4 V651.0 28762.2 0~ Do~ Pm~ P« Capha 948.4 953.9 1060.2 1105.1 1123.7 PUBUC d GDr at Cw~ C~ Pz~ 22J 21.4 23.8 22.9 253 Cm~ Expum~ 19.1 20.1 19.0 19.5 194 3~ (+) or Doffit (-) -4.9 -6.0 -33 -3.0 -1-? C~ zwpý 6.4 7.4 7.2 6.3 7.0 ~ Fd~ 0.9 1.3 0.4 -02 03 ~ ^L ~Wlm RATZ (4) 0~ Do~ Pr~ 10.4 2.5 3.7 5.1 -2.9 0~ Do~ b~ 11.9 1.7 2.8 5.8 -2.0 RM ffimAL PER CmIrA GROWTH RATES M: ~ Do~ h~ 8.1 0.1 1.5 3.0 -53 TOWC~ <m 6.4 2.1 -0.9 6.3 -43 P~ CM~ si 2.1 -0.3 5.4 -4.3 m~Aff OMWATOU 0* N2~ 503 533 $7.4 9.7 64J 09~ of ha 13.4 12.1 18.9 17.0 10.1 T~ effl& 0~ 80.7 84.4 2053 143.2 -113.1 -37- Ann l B Page 4 of 5 Morocco: Key Economic Indicators (cont.) 1988 1989 1990 1991 1993 BA~ANCE OF PAYMENTS Oa US$ m~ilos): Eqorts (Geods and Må) 5474.2 5038.2 6306.2 6116.9 6403.1 Of which: ooda (FOD) 3608.9 3312.9 4210.4 4277.7 3976.7 Import (Ga~ds and af) 5575.6 6287.4 7850.0 7689.8 8228.5 Ofwhich: Goods (C) 479.5 5488.6 6908.4 6872.2 7355.9 Reswu. Bal-~ -101.4 -1249.2 -1543.9 -1572.9 -1825.4 Net F,etor Payments 1036.8 1159.4 985.3 1115.4 1055.8 Ofwbich: Intere t Payments 960.1 1182.1 962.5 1169.3 1170.3 Net Cun~ Transf~r . 1595.8 1602.7 2320.4 2270.2 2402.7 CuTuu~t ACCnt Re an 457.5 -805.9 -208.8 -418.0 -478.4 Prvfi Diet Investment 128.6 226.3 227.2 375.5 503.3 MLT Loas (nat) 637.6 460.9 472.1 163.7 416.9 Offcial 509.7 478.9 605.8 508.5 478.6 Prvate 232.7 64.7 28.7 -173.2 54.4 Net U"F -104.8 -82.7 -162.4 -171.6 -116.1 Other Capital (n]. erorm & malons) .1047.9 109.8 1144.1 660.4 1.7 Change ia Reservu -175.8 8.9 -1634.6 -781.6 4433 Ineïnatioma Rasves (milion US$) 547.0 488.0 2066.0 3100.0 3543 Mefmtwmna km. G esras mms of pt 1.5 1.2 3.1 4.5 4.8 pot as % of GDP 24.7 22.1 24.3 22.1 22.3 u %portas % of GDP 25.1 27.5 30.2 27.8 28.6 Rpaou atala au of ODP -0.5 -5.5 -5.9 -5.7 -6.3 REAL ANNUAL GROWTH RATES (a %, 1980 PRICES): Mw ~ Exp 18.7 -12.6 21.4 1.3 .6.6 P r 24.1 -22.1 20.0 0.9 -.5 Manufatu~s 4.2 17.8 24.4 2.0 -8.8 9.2 7.7 12.7 3.2 8.0 PRICE INDICES (190-100): Export Price Index 190.7 207.0 210.3 222.8 217.6 Import Pdce Index 173.6 190.8 206.9 210.7 204.8 Trms Of Trade Index 109.8 108.5 101.7 105.8 106.2 ReaB~change Rate 67. 67.7 64.4 64.4 65.0 Cannme Price Index (* Growdh Rate) 2.3% 3.1% 6.7% 8.2% 4.9% Real Ineret Rat~ (%) 10.9 9.9 6.6 6.6 10.2 GDP Deflatr (% GrowhRate) 53% 3.9% 6.4% 7.0% 5.1% ．岡面繪•”司唱闖甲戶•勿孕喲d馴江戶編洶叩戶繪••開參．闖飼鳥叫騙叩州磚，•馴盧丸叩中d戶•叩中d劇甲悶網嘆戶 JO 0&0 0&0 0&0 0&0勾鄴田國口OV馴視 仲導騷摔誠口〕神緬退中口吋 r乞ttr審常寥rt•戲騰嘎悶開閱么日闖闈口 !.9必．9 I.f0&,L&g織州灘越觀叨q劉叮 「魷『仲r佛『計rlg SQ細中閑『P”〕7•U r萬不e侃0’憐r魷常露Sd物中曦指症詼切口卻顱 ：劇馴口袖呵“•州袖）口閱閣口 嗡州織•騙必 『轉r轉，’粤，’弱寧與OC開織沁戶閑馴O 右此馴U L&l蓄．’群r寫留馴劉激騙 9&U0’弘r弱r舛r舛dq顫閱（區 「I舛0’電仰r以藝L’舛CC以緝g卹馴X略 鄒娜闖中叮馴神幼略神唱，口抑唱 C此舛「個飲瀉r粤粤『婦鰓．&！弘寥戶個楓幼•司“唱抑唱寧網區 C,I中L’必Ir以中C劍冷F必你神卸••略酌寧細神闖 必寫認910諱01寧卹O邵寥神劇寫戶總以山物響•甲開O補唱開颼． 個磚開網．“織）寫綴准．初口啗 •••••••■．•••••．口 寥閱，寥弱萬織陽讓憫話寥馴婦寥 口自■■口口開口■口開由．口口■ 劇嗡祈開甲呵韶•喊驪自嚨榭．”用矓 gpg織毬 屆萬”.V·SC· 。39•A．馴織C 納審1 Orl S血賺卹h曲誡•悶or酌”纖山o劉吋向屹細近開四d觔吻”即叫驢 •闕口•開••口•■■••••• 蘭牌且F奮雜F奮發F聖闕 妒．U》 •閑－•••．•． 黝州細細劉開化“•卸團冶 馴陋．Of訕刈婉細個j細〞h呼細•開“么織一一 點個細•勵卹廟闖由面。h也卹心“州a．一游亂卹 倡h刈“細萬頃細d唱”or.4& )“勿朧．個水州啊d么，J邊0 C陶劉•江籐細細f二亂70 A開職，勵d叩• ）硎勿辦磁O細曉由”l悲！涌5魚」磚 O開•觀，勿細•1．觀1．馴l，弱 DU比••闔‘勵面偶丫訪」n酒潤．0認J yi馴”j扯•黝州， 倡偽卹織目計閱細細h鰓dU.d山此叮－··…認 h州細細開陣物•耐 屆叩州個閱訕•劇附“你自遺織鳥細d．馴讓癩螂才徊4 4215他 A”騰，昌叩州個贓攔咋州陣膠」14·0幼e21觔 齣馴州嗡閱訕“馴幼開•勿L闖•細。伽勾 馬臉目啊也“逞卹Ico 1001卹 舊雙州織贓h啊州卹 齣馴州由滷勵”團國“勿訕d細偽州即叮物”中中細必 訕吋闢細奮目開’l.or吃，絡j幼J總J h唱婉細點鰓d唱”or,4& 12.6悲JO ••••目••．■•■••••－-．個•一－•••••■•口•■■■■■■■■•■■•．••州••－－一一一－－•．•－■目•陶一•■．•■■••．．•••一－一•－■ 江乃細細細•陶職，鯧•Orop呵麒h翻勵頭丫•幹誠由· 選勵自d勿喃誠細馴叫州州朋•．磁細由州坤瞧颼向“由“·▲州磚of&1．。開煙”細電磁由州吻辦睡娥戶由嚇騙網網嚇． 細鵝細”喊氣”約•．吋細柚細吋州”齡“.y戲b馴由hd撇•噸儲向喘咖”一•初闢闢論加•嗚喘”網神，呵麒 硎卹由啊購瀾h妙勿細闢嗡”闖卹心細胛鳥•d細。劍曲•目加d細睡翰婦細，呵州細個“j鵝•d,4.”•司留織仲由”，口 p州團心叫細細觔凶姨•d細p呵州邢甲開•祕細幼翰舉『加d也d伽•xmor0DU派以 壯A•開圈闖‘of。團磁鳥計婦聞國鰓•ot細p畸戲細•喊儲細寫d網p戶”祕細細織d•叩闢細ofp呵囉細響細•啊“曲•令各． •”閑闈•鳥州訕由細物ot物•州馴織響肱．”柄么輪卹引，閱•國州自．）•d物白州勿嚇磁魚細臨啊·k州叩of&l．•鰓開•ao 自叫么論‘p勿U閱叫喘”．馴細口細馴哺細叫嗚，叫神州臉．地叩胛叩由觔“山．一細輪細細唱物劇闖細•細•馴滷細嗎•U ,4,”個觔衍p州蛐開鳥b鷗細州細緬．•磁細細訕平豳細州撾••dor一謝園涌勿麒叩州觸細抽•，比幼”繡勿劉d畸細 閱卸詠織·乃•。陶•鰓“劉．•州攤細叫卹〝矓。細觀••出總血•細寫d糊to馴刈州由州物－州劇物馴頃闐寫DZOfo。嬌向． 選h面ot山由細•團口口細向吃唱細夢”•勿細。U馴比•d細細．論of細勵口丫•併哺闖。磁細細吵d磚d伽界颼‘