Morocco - Financial Markets Development Loan Project

Document of The World Bank FOR OFICIAL USE ONLY Report No. P-6633-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SINGLE CURRENCY LOAN WITH A US DOLLAR TRANCHE IN AN AMOUNT EQUAL TO US$125 MILLION AND A FRENCH FRANC TRANCHE IN AN AMOUNT EQUAL TO FRF600 MILLION TO THE KINGDOM OF MOROCCO FOR A FINANCIAL MARKETS DEVELOPMENT LOAN JUNE 29, 1995 This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS Currency Unit: Dirham (DH) April 1989 1990 1991 1992 1993 1994 1995 DH per US$ 8.12 8.04 8.15 9.05 9.65 8.96 8.40 End of Period DH per US$ 8.49 8.24 8.71 8.54 9.30 9.20 8.38 Period Average I___I_I_ i FISCAL YEAR January I - December 31 WEIGHTS AND MEASURES Metric System ACRONOYMS AND ABBREVIATIONS BAM Bank Al-Maghrib BCP Banque Centrale Populaire BMCE Banque Marocaine du Commerce Exterieur BNDE Banque Nationale pour le Developpement Economique BOT Build-operate-transfer CCG Caisse Centrale de Garantie CDG Caisse de Depots et Gestion CG Central Government CIIH Credit Immobilier et H6telier CDVM Comite Deontologique des Valeurs Mobilibres CNCA Caisse Nationale de Cr6dit Agricole CNSS Caisse Nationale de Securit6 Sociale CSE Casablanca Stock Exchange EU European Union FMDL Financial Markets Development Loan FRF French francs IPO Initial Public Offering ICB International Competitive Bidding LCB Local Competitive Bidding PE Public Enterprise PEP Plancher d'Effets Publics PSA Private Sector Assessment PSD Private Sector Development SFI Specialized Financial Institution SNI Societe Nationale d'lnvestissement SOEs Statement of Expenditures USD US dollars VLR Variable Lending Rate Bank staff contributing to the project include: Messrs./Mmes. Forestier (Task Manager), Batchoun (Foreign Exchange Market). Brun (Monetary Policy), De Wulf and Soman (Macroeconomic Framework), Dupuy,(Legal Aspects), Gress (Procurement), Savorelli (Capital Markets), Yourougou (Bank Lending Products). Mr. Al-Khafaji and Mr. Daniel Ritchie are, respectively, the managing Division Chief and Department Director for the operation. Ms. Liliane Vert provided excellent support services.  FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF TBE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIIVE DIRECTORS ON A PROPOSED FINANCIAL MARKETS DEVELOPMENT LOAN TO THE KINGDOM OF MOROCCO TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY ..................................... i I. INTRODUCTION .1 II. RECENT ECONOMIC DEVELOPMENT AND PROSPECTS . . A. Stabilization and Structural Adjustment Policies .1 B. Recent Economic Performance. 2 C. Prospects .............................................. 4 III. PRIVATE SECTOR DEVELOPMENT ................................. 5 A. Public Enterprises and Privatization ............................. 5 B. The Financial Sector ....................................... 8 C. Government Strategy ...................................... 11 IV. PROGRAM OF FINANCIAL SECTOR REFORMS ........... ............. 12 A. Reform of Treasury Financing ................................ 14 B. Indirect Monetary Control .................................. 14 C. Development of Capital Market ............................... 15 D. Banking System ......................................... 15 E. Capacity Building ........................................ 17 F. Fiscal Impact of Reforms ................................... 17 V. PROPOSED LOAN ..................... ....................... 18 A. Loan Amount and Borrower ................................. 18 B. Rationale for Bank Involvement ............................... 18 C. Project Description ........................................ 19 D. . Implementation Arrangements ................................ 19 VI. RISKS ..................................................... 21 VII. OTHER BANK GROUP OPERATIONS .22 VIII. AGREEMENTS REACHED .22 IX. RECOMMENDATION .22 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ANNEXES Annex 1: Letter of Development Policy Attachment 1: Macroeconomic Framework - Selected Indicators Attachment 2: Matrix of Policy Measures Annex 2: Macroeconomic Indicators Annex 3: Cost of Reforms Annex 4: Privatization Indicators Annex 5: Securities Market Annex 6: Situation and Role of Institutional Investors Annex 7: Capacity Building Program Annex 8: Distribution of Financial Assets Annex 9: Consolidated Balance Sheet of Deposit Banks and Monetary Survey Annex 10: Social Indicators Annex 11: Status of Bank and IFC operations Annex 12: Key Processing Events MAP: IBRD No. 24657  i LOAN AND PROGRAM SUMIARY Borrower: Kingdom of Morocco Amount: US$250 million equivalent comprising: (a) a US$125 million US dollar Tranche, and (b) a FRF 600 million French franc Tranche Terms: Fixed rate single currency loan for up to 15 years. For each loan currency Tranche, each semester's aggregate disbursements (Disbursed Amount) will have a grace period of 3 years and a final maturity of 12 years; both beginning from the rate fixing date for such Disbursed Amount. Interest Payment dates November 15 and May 15 and Rate Fixng Dates: Loan Description: The Financial Markets Development Loan (FMDL) is the first of a US$600-700 million equivalent multi-year private sector development (PSD) lending program currently under preparation and scheduled for FY96-98. The FMDL would support a program of reforms in the financial sector and finance the temporary cost to the Moroccan Treasury of implementing this program. Beyond a transitional period of three years, the budgetary impact will remain limited to about 0.17 percent of GDP per year and, therefore, consistent with macro- stabilization objectives. The specific policy measures concern: (a) the reform of Treasury financing including the removal of mandatory placement ratios for banks in Treasury bonds at below market rates; (b) indirect monetary control including the liberalization of lending rates; (c) the development of capital markets; and (d) the banking system, in particular the privatization of the remaining state-owned banks and the establishment of an interbank foreign exchange market together with related prudential measures. A policy matrix details the specific actions to be supported by the FMDL and shows how they complement those already implemented. Benefits: The main benefits of the loan will be: (a) establishment of a market-based financial system, essentially free of any significant distortion in the allocation of credit and the pricing of financial assets; and (b) the deepening of domestic financial markets which will increase the supply of long-term capital for private investment and contribute to achieving a sustained improvement in domestic savings.  ii Risks: Two main risks are associated with the proposed loan. The first relates to the fiscal sustainability of the reform program. The recent resurgence of macroeconomic imbalances, in particular on the fiscal front, could put pressure on interest rates, increase the cost of public sector borrowing and prompt the authorities to revert to administrative controls of interest rates and credit allocation. Corrective measures aimed at increasing public savings, notably through tightening of recurrent expenditures and acceleration of the privatization program, are being prepared by the Government. The impact of these measures is reflected in the macroeconomic indicators, attached to the Letter of Development Policy, which will be used to monitor continued satisfactory macroeconomic performance which is essential for the successful implementation of the financial reform program. The second risk is a deterioration of banks' loan portfolios following the implementation of liberalization measures and increased competitive pressure as financial markets develop. Moroccan banks are generally healthy and have demonstrated their capacity to sustain an adequate profitability following the first liberalization measures in the early nineties. Furthermore, a sound prudential and regulatory framework is already in place. This risk will be reduced by further strengthening of bank supervision. Financial Benefits and The Borrower has selected a fixed rate single currency loan with currency Risks: Tranches in US dollars and French francs in order to improve the management of its external liabilities. The choice of currencies reflects the weight of French francs and US dollars in Morocco's foreign exchange receipts, of which about 35 percent is denominated in each of those two currencies. The choice of a fixed interest rate reflects the Borrower's preference to reduce the risk of interest rate volatility in view of its current exposure in floating rate loans which account for about 45 percent of its total external debt. In addition, the Borrower considers that the budgeting and management of its external debt service obligations would be simpler for single currency loans than for currency pool loans. Estimated The loan would be disbursed in two aggregate tranches of US$150 Disbursements: equivalent and US$100 million equivalent against import documentation. The release of the second tranche will be conditioned on satisfactory macroeconomic performance and satisfactory progress in the implementation of the reform program in the financial sector, including the achievement of a limited number of specific measures. FY96 FY97 (US$ million equivalent) IBRD 150 100 Parallel Financing: Parallel financing may be provided by the African Development Bank and the European Union Project Identification No. MA-PA-5522  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED FINANCIAL MARKETS DEVELOPMENT LOAN TO THE KINGDOM OF MOROCCO I. INTRODUCTION 1. I submit for your approval the following report and a recommendation on a proposed Financial Markets Development Loan (FMDL) to the Kingdom of Morocco in an amount equivalent to US$250 million in support of a program of financial sector reforms. The fixed rate single currency loan package would comprise a US$125 million US dollar Tranche and a FRF 600 million French franc Tranche, for up to 15 years. For each loan currency Tranche, each semester's aggregate disbursements (Disbursed Amount) will have a grace period of 3 years and a final maturity of 12 years, both beginning from the rate fixing date for such Disbursed Amount. Parallel financing may be forthcoming from the African Development Bank and the European Union (EU). 2. The FMDL is the first loan of a FY96-98 US$600 - 700 million equivalent multi-year PSD lending program. In line with the CAS discussed by the Board on November 23, 1993, and the 1994 Private Sector Assessment (PSA)', the core objective of the Bank PSD program is to achieve higher private investment and private sector growth which are necessary to accelerate the rate of overall economic growth, above the average 3 percent real rate of the 1990-94 period. Some five other projects, currently under preparation, are scheduled for FY96-98. They will focus on: (a) private provision of infrastructure; (b) vocational training; and (c) enterprise competitiveness. 3. The main objectives of the FMDL are to deepen Morocco's financial markets and to establish a market-based financial system. The financial sector remains a bank-based system where domestic capital markets play a very modest role in supplying long-term capital to the private sector. The Government channels a large share of banks' deposits and medium- and long-term institutional savings to secure the Treasury borrowing requirements at administered, below-market interest rates. Morocco's domestic savings rate of about 16 percent remains significantly below countries that have achieved high rates of investment and growth. To sustain the necessary increase in the overall rate of domestic savings and private investment, further reforms are necessary to develop domestic financial markets along with other macroeconomic measures aimed at raising public savings, in particular, fiscal stabilization and an acceleration of the privatization program. The policy measures supported by the FMDL represent a continuation of the financial sector reform that Morocco launched in the late eighties, and that the Bank has supported through the 1991 Financial Sector Development Project2. II. RECENT ECONOMIC DEVELOPMENT AND PROSPECTS A. Stabilization and Structural Adjustment Policies 4. The internal and external imbalances that characterized the Moroccan economy in the early 1980's led to the adoption of vigorous stabilization-cum-adjustment policies. These efforts were supported by bilateral and multilateral sources and debt relief under the auspices of the Paris and London Clubs. In the first phase, up to 1986, the emphasis was on economic stabilization. Supported by lower budget deficits, prudent monetary policies favored greater price stability, while an active exchange rate 1/ Preparing for the 21st Century - Strengthening the Private Sector in Morocco - Report No. 1 1894-MOR; June 30, 1994 2/ Report No. P-5553-MOR; June 3. 1991  2 policy restored external competitiveness. In the second phase, policies focused on structural reforms, while maintaining internal and external balances. The adjustment process moved generally in the right direction and brought tangible progress. 5. Main elements of the structural adjustment measures implemented since the mid-1980's are: (a) liberalization of foreign trade; (b) progress towards balance of payments sustainability; (c) partial reform of the financial sector; and (d) reform of the public enterprises and privatization. 6. Trade liberalization, begun in 1984, was pursued, and from a situation of wide scale import and export restrictions, Morocco became a country where only ten products remain subject to quantitative trade restrictions. Tariff protection has also been lowered (maximum rates fell from 45 percent in 1988 to 35 percent in 1994, but a fiscal duty of 12.5 percent still applies), with the exception that the 45 percent tariff still applies to selected agricultural commodities. The 1995 Finance Law reduced tariffs to 5 percent on a large number of imports that do not compete with domestic products, and abolished the fiscal duty on imports of a wide range of investment goods. The scope of reference prices was also narrowed considerably, and by 1994 applied to only 10 percent of industrial imports. Within the context of an eventual association agreement with the European Community (EU), discussions are ongoing to phase out duties on imports from the EU. 7. Current account convertibility has been achieved with Morocco accepting obligations under Article VIII of the Articles of Agreement of the IMF in January 1993. Virtual full capital account convertibility is achieved for foreign investors. The relaxation of surrender requirements and restrictions on foreign borrowing, as well as authorization of outbound investment by certain export firms and banks, represent the first moves towards capital mobility for residents. 8. Recent public enterprise (PEs) and financial sector reforms are detailed in Chapter III. They are consistent with the growing conviction that the private sector is to become the engine of future growth in Morocco, that the public sector should withdraw from direct production activities, and that a market-driven financial sector should gradually replace a system largely based on administrative controls of the price and allocation of financial resources. B. Recent Economic Performance 9. The growth performance of the Moroccan economy varies greatly from year to year, largely because of its structural vulnerability to climatic conditions (Table 1). During 1987-92, annual GDP growth averaged 3.6 percent. In 1993, a drought caused the growth rate to decline. With good rainfall in 1994, the economy picked up strongly and GDP rose by 11.8 percent. For 1995, negative growth is projected as a result of another severe drought. Inflation has been successfully contained at around 5 percent a year, as a result of prudent fiscal and monetary policies. The budget deficit fell to 3-4 percent in recent years as compared to 11 percent in 1980-86. 10. External balances were also substantially strengthened. The deficit of the current account, on average 8 percent of GDP during the first half of the 1980's, has been successfully contained below 3 percent of GDP since 1990. External reserves rose steadily due to increasing flows of direct foreign investment and improving current account deficits, including continued inflows of worker remittances. They amounted to the equivalent of six months' worth of imports at the end of 1994, compared to about one month in the mid-1980s. At one-third of exports, the burden of servicing the external debt remained heavy in 1994. However, the stock of external debt stood at 67 percent of GDP in 1994, down from an average 90 percent in 1987-92, and the debt service ratio is declining (Table 1).  3 Table 1: Selected Macroeconomic Indicators 1980-86 1987-92 1993 1994 1995 1996 1998 2000 Actual Prelim Estim. Proiected ( in Percent) Real GDP Growth 4.2 3.6 -1.1 11.8 -3.7 9.0 3.9 5.3 - Agriculture 5.4 0.7 -6.2 65.0 -30.0 44.0 3.0 4.0 - Non-agriculture 4.0 4.2 -0.2 3.7 2.7 3.2 4.1 5.6 (In percent of GDP) Gross Investment 25.4 22.7 21.2 21.2 21.4 22.4 23.5 25.0 - Central Govt. 6.6 4.4 6.2 4.5 4.4 5.1 5.3 5.3 - Private Sector " 18.8 18.4 15.0 16.8 17.0 17.2 18.2 19.7 Domestic Savings 14.8 18.0 15.7 16.1 14.8 16.0 17.7 20.5 - Government -1.9 2.5 4.6 2.7 2.8 3.2 4.3 6.5 - Private 16.7 15.5 11.1 13.3 12.0 12.8 13.4 14.0 Budget Deficit -11.2 -4.2 -3.3 -3.8 -4.7 -4.3 -3.2 -1.1 Privatization receipts 0.0 0.0 0.9 0.7 1.2 1.3 1.2 0.0 Current Account Deficit -7.7 -0.8 -2.0 -2.2 -3.5 -2.9 -2.5 -1.2 Exports 21.2 23.1 23.3 21.2 22.3 22.2 25.3 27.8 Manufact. Exports/GDP 5.6 8.0 8.0 7.1 7.3 7.3 8.5 9.4 Foreign Debt Outstanding 91.6 89.6 80.5 66.8 66.0 60.2 56.3 48.6 (In Percent of Exports) Foreign Debt Service 35.1 26.4 30.4 32.4 27.4 23.9 21.3 23.0 (In Month of Imports) Foreign Reserves 1.2 3.2 6.2 6.3 5.4 5.2 5.6 5.6 1/ Includes Public Enterprises Source: Annex 2 11. Since 1992, however, macroeconomic developments, especially in the area of public finance, indicate an emergence of modest but growing imbalances. Over the 1992-94 period, the fiscal deficit increased from 2.2 percent to 3.8 percent of GDP. There are also signs of potential tension on the external situation despite a relatively comfortable level of foreign reserves at the end of 1994. Total exports have stagnated as a percentage of GDP and manufactured exports have declined in line with an appreciation of the real effective exchange rate of 6 percent since 1991. The end of external debt relief since 1992 has translated into an increase in the debt service ratio over the period. Finally, both investment and savings have stagnated as a share of GDP and remain significantly below the rates achieved by other fast-growing middle-income economies. For 1995, the budget deficit is expected to widen further to 4.7 percent of GDP. This deterioration is explained in part by excessively optimistic projections of budgetary revenues which led to high expenditure authorizations. During the first quarter of 1995, the trade deficit widened by 3 percent compared to the corresponding period of 1994, while foreign exchange receipts from tourism shrank by 21 percent. In addition, the drought will cause the GDP to decline which will undermine Government revenue performance and necessitate exceptional drought-relief expenditures. Hence, macroeconomic stability needs to be reasserted more firmly than in recent years.  4 C. Prospects 12. Assuming basic internal and external stability are maintained and the structural reforms continue at the modest pace of recent years, Morocco can expect to continue to grow at the 1990-94 average level of about 3 percent p.a. However, this rate would lead to a further increase in the unemployment rate. Only higher economic growth built on labor intensive investment will permit an increase in the number of jobs that exceeds the number of people coming into the urban labor market. 13. Maintaining a sustainable macroeconomic framework is a pre-requisite for achieving higher savings and growth and also for liberalizing the financial sector, a major objective of the proposed loan. A package of policy measures, mainly on the fiscal front, is being prepared by the Government in close cooperation with the IMF and the Bank to bring the recent deterioration under control. They include: (a) reforming the tax system, in particular through the adoption of a unified investment code and the redefinition of the personal income tax to simplify its administration and achieve a more equitable pattern; (b) increasing the cost recovery of services delivered by the State, in particular by raising water charges; and (c) rationalizing public expenditures through a limitation in the increase in recurrent expenditures, an acceleration of the privatization program (Chapter III), an increase in resources allocated to human capital formation (basic education and health) and the preparation of three-year rolling public investment plans. Prudent monetary policy will complement these fiscal measures and aim at providing the private sector with adequate credit to support economic growth while ensuring that monetary expansion is consistent with maintaining a low level of inflation and international reserves at about 5 months of imports. Macroeconomic variables consistent with these measures and with the gradual achievement of a higher growth scenario are provided in Table 1 and detailed in Annex 2. 14. By the year 2000, the accumulated impact of structural changes is expected to result in sustainable growth of around 5 percent p.a. and the budget deficit is projected to approach balance. Fiscal revenues, currently at 24 percent of GDP and relatively high compared with those of fast growing economies, are to drop slightly, while recurrent expenditure growth is contained. Based on the existing stock of debt and a modest net foreign borrowing, the ratio of foreign debt to GDP would fall from about 70 percent of GDP in 1994 to 56 percent in 1998 and 49 percent in the year 2000. The debt service to exports ratio would fall from 32 percent in 1994 to a more sustainable level of 23 percent. Investment, as a share of GDP, would increase by 4 percentage points between 1994 and the year 2000, and would be financed by a substantial increase in domestic savings. The increase is expected to result from the deepening of domestic financial markets and higher public sector savings. The reduction in the overall budget deficit will reduce the pressure on domestic financial resources. Reforms, restoring and then maintaining external competitiveness through flexible exchange rate management, would further improve the medium-term macroeconomic outlook, especially the growth and balance of payments indicators. 15. At about 30 percent of GDP, total Government expenditures are high compared to other rapidly growing economies. The brunt of the budgetary adjustment will need to come from lower recurrent expenditures which currently amount to about 70 percent of total expenditures. They are projected to come down by 4-5 percentage points of GDP by the end of the decade. The share of civil service wages in GDP, in particular, would drop from its current level of 10 percent of GDP to 8 percent in the year 2000, by limiting the increase in the wage bill to the rate of inflation. 16. Morocco's balance of payments remains vulnerable to the external environment, as well as to the climatic conditions (three droughts over the past four years). The current account deficit is projected to deteriorate to 3.5 percent in 1995 due to increased import demand for foodstuffs and investment goods. The high concentration of over 60 percent of the country's merchandise trade with the European Union makes Morocco's exports sensitive to economic growth trends in the EU. As a result of the Uruguay Round of the GATT and the impending Free Trade Agreement with the EU, Morocco will face increased competition for its main exports: textiles and clothing, and agricultural  5 products. All these developments could put a strain on the economy's ability to generate additional foreign exchange and sustain the current level of external reserves. A decline in external reserves would adversely affect the internal and external credibility of the Government's program. Consolidating the level of reserves at its current level of about 5 months of imports is, therefore., part of the medium-term economic framework agreed between the Moroccan authorities, the Bank and the IMF. III. PRIVATE SECTOR DEVELOPMENT 17. The private sector accounts for an increasingly significant share of economic activity in Morocco, about 70 percent of value added, 90 percent of employment, and 75 percent of investment. It contributes virtually all of the value added in agriculture, commercial construction and trade, 75 percent of industry, and 70 percent of banking and financial institutions. However, the public enterprise (PE) sector remains economically important. It accounts for about 20 percent of GDP, with more than half of value added in mining, energy, water supply, and roughly half of transport and communications. Since 1990, most restrictions on foreign ownership have been lifted and direct foreign investment rose from about 0.9 percent of GDP to an annual average of 1.7 percent in 1992-94. 18. Recent Bank economic and sector work, in particular the 1994 PSA, has shown that achieving a higher rate of private investment and private sector growth will be predicated upon further progress primarily in three areas. First, deepened macroeconomic adjustment, in particular lower fiscal deficits, is necessary to raise public savings and overall domestic savings to finance investment (Chapter II). Second, the PE sector needs downsizing primarily through faster and bolder privatization. This will raise the level of efficiency of private investment and open key infrastructure services such as water, electricity and communications to private financing. Investment needs in these sectors are estimated to grow at an annual average rate of 7 to 12 percent depending on the sector, and their public financing is no longer compatible with macroeconomic stability objectives. Privatization will, in addition, raise revenues for the Government and contribute to the development of capital markets. Third, further reforms in the financial sector are essential to alleviate the shortage of term resources to finance private investment. This shortage is largely due to the low development of domestic financial markets, the Government's preferential access to bank credit at non-market terms which taxes and crowds-out private investment, and Morocco's limited access to international capital markets. A. Public Enterprises and Privatization 19. The Public Enterprise Sector. As detailed in Table 2, Morocco has a large PE sector. There are about 330 firms in which the State has a majority holding. The fourteen largest PEs, mainly operating in power, water, transport, and mining and phosphate processing, account for the bulk of the sector. Table 2: The Public Enterprise Sector GDP Gross Domestic Wages and Domestic Credit Investment Salaries (1994) In Percent of 20 21 27 7 Total PE PE PE transfers from Stock of Arrears Investment Losses CG (1994) Gross Net From From In Percent of GDP PE to CG CG to PE 5.8 1.7 0.9 0.3 3.2 1.3 Source: Ministry of Finance and Bank estimates. CG = Central Government; annual average of various years, mainly 1988-94.  6 20. Performance. Despite the divestiture program initiated in the late eighties, the efficiency and the financial health of the large PE sector remains a concern. In the period 1988-92, the fourteen largest PEs had an annual average deficit of 1.7 percent of GDP. Despite recent improvements, Government-PE cross arrears remain substantial. Central Government (CG) arrears to PEs totalled 1.3 percent of GDP at end-1994 and were mainly related to lack of payment to utilities caused by a lack of budgetary discipline. Arrears from PEs to CG of 3.2 percent of GDP at end-1994 are mostly related to tax payments and service of guaranteed external debt. The PE sector, as a whole, is a slight drain on the government budget: net CG transfers to the PEs averaged 0.3 percent of GDP p.a. during 1990-93. 21. Investment and Financing. The bulk of the investment by the PE sector is accounted for by the fourteen largest PEs and averaged DH 13.5 billion p.a. (5.8 percent of GDP) during 1988-94. About 40 percent is self-financed, 20 percent is financed through CG capital transfers and 40 percent through domestic (10 percent) and external borrowing (30 percent). The importance of foreign borrowing explains why the largest PEs only account for less than 10 percent of domestic credit to the economy and, therefore, does not represent a significant risk for the financial system. During the eighties, the PE sector enjoyed special privileges to finance its borrowing requirements, such as various government guarantee schemes and mandatory placements of a fixed portion of banks' deposits in bonds issued by state-owned specialized financial institutions'. PEs' preferential access to credit combined with their poor financial performance led to an increase in non-performing loans, mainly in state-owned banks, and in the case of some PEs, forced the CG to service their guaranteed external debt. In 1992, the Government started to reduce these privileges: (a) directed credit policies benefitting SFIs were eliminated; (b) the Ministry of Finance discontinued granting credit risk guarantees on domestic and external loans and is phasing out its policy of covering the foreign exchange risk'; and (c) prudential ratios were introduced in the banking system to prevent excessive risk concentration5. Combined with the forthcoming reforms which will eliminate Government guarantees of PEs bond issues, these measures will essentially create a level playing field between PEs and the private sector in raising funds. Subsidies resulting from PEs' preferential access to domestic and foreign resources will be eliminated and the risk of contamination of banks' portfolios by PEs' losses will be reduced. In parallel, the Government plans to complete the first phase of its privatization program and subsequently expand it to a second phase. 22. First Phase of Privatization. Recognizing the unsatisfactory performance of the PEs, a Privatization Law was passed in 1989 mandating the sale of 112 companies and hotels. As of end-April 1995, after a relatively slow start, some thirty companies have been sold generating revenues of 7.2 billion DH (US$785 million). Individual share-holding is expanding rapidly and testifies to the existence of savings available for long-term investment: nearly 150,000 individuals had subscribed to privatization offers on the Casablanca Stock Exchange, while less than 10,000 individuals participated in the stock market before the onset of the privatization program. The Stock Exchange itself is due to be privatized in 1995. About 35 percent of the proceeds generated have come from foreign investors. In early 1995, the Government extended the sales deadline for the first phase by one year to December 1996 and added the two oil refineries to the list of privatizables. However, with the notable exception of the financial sector, the privatization program has not yet seriously reduced the economic weight of the public enterprise sector, in particular in transport and utilities. This conclusion is consistent with the 3/ Banks were required to place 5.5 percent and 6 percent of their deposits in BNDE and CIH notes, respectively. 4/ Several large borrowers, such as ONE, the electricity utility, already bear the foreign exchange risk on new borrowings. 5S Loans to a single beneficiary and to a single corporate group are limited to 7% and 15% of the bank's net equity, respectively.  7 regional pattern: privatization in Middle East and North African countries is lagging behind other regions, in particular Latin America, both in terms of number of transactions and receipts (Annex 4). 23. Privatization in the Financial Sector. Ten financial institutions (banks, insurance companies and a large financial holding) which contribute about 30 percent of total value added of the sector, are to be privatized before end 1996. The first two large and complex privatizations were successfully completed in 1994 and 1995. The State's shares in Societe Nationale d'Investissement (SNI), a financial holding with shares in 41 varied concerns, were sold in two phases for a total of DH 2.0 billion (US$225 million) at the end of 1994. An initial public offering (IPO) of 18 percent of SNI's share was oversubscribed six times on the Casablanca Stock Exchange (CSE), while 51 percent were sold through tender to a consortium of Moroccan private financial institutions. SNI management was restructured shortly after privatization. In 1995, Banque Marocaine du Commerce Ext6rieur (BMCE), Morocco's second largest commercial bank with assets representing 18 percent of total assets of the banking system was privatized in three tranches for a total of DH 1.8 billion (US$214 million): (a) an IPO of 14 percent of BMCE's shares sold on the stock exchange; (b) 3 percent sold directly to BMCE's employees; and (c) 26 percent of BMCE's shares sold through tender to a group of foreign and Moroccan financial institutions. Finally, a consumer credit institution was also privatized in 1994, through a combination of tender, IPO and direct sales to workers. The State's shares were sold for a total of DH 130 million (US$14 million). 24. Lessons of First Phase. Morocco has so far privatized a few PEs. What has been privatized, has been privatized very well. One should not discount the substantial benefits of having at first proceeded slowly and cautiously, with much discussion along the way, and with considerable attention to transparency mechanisms. In privatization programs, building a public consensus is as important as the technical quality of transactions. The first set of privatizations has demonstrated that sales of PEs can be conducted that are fair, open and mutually beneficial to seller and buyer, and that do not impose undue pain on workers and consumers. Thus, Morocco now can and should go farther and faster along the path of increasing private participation in, and ownership of, the remaining public enterprise sector to reduce the size and the losses of the sector, and to raise the overall efficiency of investment. 25. Second Phase. In October 1994, the Minister of Privatization launched the second phase of the privatization program by requesting all Ministries to submit to him: (a) a list of PEs in their portfolios that they consider suitable for privatization; and (b) data on the performance of every enterprise under their control to compile a data base for the Ministry's supervision activities and examine whether likely divestiture candidates were being held back. The second phase will be extended to previously untouched areas, primarily transport and the largest utilities'. In April 1995, the Government confirmed this orientation and stated that it "cannot continue to apply conventional public financing methods in order to raise the whole of the financing needed to satisfy the real basic infrastructure needs generated by Morocco's economic expansion and population growth"'. The Government's strategy consists of: (a) withdrawing from industrial and commercial activities and promoting new formulas of partnership between the public and private sectors, such as concessions and limited recourse project financing; and (b) diversifying sources of infrastructure financing notably through reforms of the domestic financial market. Several ground-breaking activities are already underway. The electricity enterprise ONE 6/ The first list of privatizable companies excluded: (i) firms fulfilling a public service role, and (ii) firms not operating in competitive markets. 7/ "Infrastructure Financing in a Post-Adjustment Economy" paper by the Government of Morocco, presented to the April 1995 meeting of the Development Committee.  8 awarded in early 1995 a leaseback and a build-operate-transfer (BOT) contract for a total of US$1.7 billion to a private group for the operation of two existing units and for the construction and operation of two additional thermal generating units. Discussions are advanced for concession arrangements in electricity, water distribution and sanitation services, in a number of municipalities. A concession has also been awarded to build and operate a toll road system, the Rabat-Laracha 150 km highway. Finally, a new telecommunications law has been drafted which calls for the creation of an independent telecommunications company operating on commercial principles, which paves the way for competition and, ultimately, privatization in the sector. B. The Financial Sector 26. Institutions and markets. The public institutions currently operating in the financial system include: the Central Bank, Bank Al-Maghrib (BAM); the Treasury; the postal checking system and the National Savings Bank which collects small savings from the public; and the Caisse Centrale de Garantie (CCG) - providing guarantees on loans to private and public firms. There are also five state-owned specializedfinancial institutions (SFIs)5. Finally, the Casablanca Stock Exchange (CSE) was created in 1929, and became a formally organized market in 1967. 27. Private financial intermediaries include 13 commercial banks, a financial holding company recently privatized (SNI), 6 leasing companies, 22 insurance companies, and a few recently created brokerage houses operating on the stock exchange. Institutional savings still play a modest role in the Moroccan financial system. In 1993, total assets managed by institutional investors amounted to about 20 percent of GDP compared with, for instance, about 150 percent in the US, 50 percent in Malaysia and 30 percent in Chile. Pension funds and social security collect long term savings from households and place most of them in Treasury bonds, deposits at CDG, and other public securities. The insurance industry is growing rapidly but remains financially weak and underdeveloped. Insurance premiums amounted to 2.5 percent of GDP in 1993, which situates Morocco in the low range of middle-income countries (Annex 6). Table 3: Moroccan Financial Institutions end-1993 (million DH) Deposit Banks SFIs" Institutional Savers Total Assets 135,557 54,563 Insurance companies Net Worth 12,973 7,399 Reserves 20,288 Number 15 6 Number of 2/22 public/private of which private: Social Security % of Total Assets 55.6 0 Reserves 7,624 % of Net Worth 82.2 0 Pension Funds Number 13 0 Reserves 11,749 Number of 6/2 public/private 1/ Specialized financial institutions (including SNI) Source: Bank Al-Maghrib, and Casablanca Stock Exchange. 8/ Banque Nationale pour le Developpement Economique (BNDE), which lends to industry; Caisse Nationale de Credit Agricole (CNCA), which lends to agriculture; Caisse de Dep6t et de Gestion (CDG), which mobilizes public sector savings; Crddit Immobilier et Hotelier (CIH), which lends to the housing and tourism sectors; and Caisse Marocaine des Marches (CMM), which lends to private companies involved in public works.  9 28. Credit. Morocco still has a bank-based financial system, where direct instruments of financing (bonds, stocks) are rarely used by the private sector. As detailed in Table 4, the Treasury absorbs 35 percent of domestic credit, of which 23 percent consists of forced placements of bank deposits in Treasury bills at below market rates and 12 percent of statutory advances from the Central Bank and auctioned securities placed with CDG and banks. The Treasury thus absorbs a substantial portion of investable resources in the economy, some of them through mechanisms that distort the efficient allocation of funds. SFIs continue to provide most medium and long term credit to the economy (about 66 percent of the total), but other commercial banks have become increasingly active in this respect. Public enterprises account for a relatively small portion of total domestic credit to the economy (para. 21). Table 4: Morocco - Distribution of Domestic Credit (end 1993) SUPPLY TOTAL Central Bank Deposits Banks Specialized DEMAND Institutions billion % billion % billion % billion % DH DH DH DH Treasury 59.3 35.0 8.2 4.8 44.62/ 26.3 6.5 3.8 Economy: 110.1 65.0 8.8 5.2 65.8 38.8 35.5 21.0 Short term (64.2) (37.9) (8.8) (5.2) (50.1) (29.6) (5.3) (3.1) Medium-long term (45.9) (27.1) - (15.7) (9.2) (30.2) (17.8) Total 169.4 100 17.0 10.0 110.4 65.1 42.0 24.8 Private Sector 103.3 61 Public enterprises 5.4 3.3 Public Sector = Treasury + PEs 66.1 39 1/ Credit outstanding. 2/ Of which 31 percent consists of forced placements of bank deposits in Treasury bills at below market rates (4.25 percent). Source: Bank Al-Maghrib. 29. The money and interbank markets show little transaction activity. For its advances, the central bank de facto sets the rediscount rate by fiat and this rate bears little relationship to the interbank market for short-term funds. The Treasury holds weekly auctions, but few bids take place in any one auction. The money market still plays a limited role and, as such, has not provided an efficient mechanism to price financial assets (there is no risk-free benchmark like the yield curve on US Treasury bills), and does not allow indirect monetary control. 30. Capital markets. There has been recently some important progress, especially in the legal and regulatory framework. Primary Treasury bonds issues increased by 31 percent in 1993, and provide the basis for a secondary market, which has so far remained thin. The main underwriters of these bonds are CDG banks and contractual savings institutions (Table 5). Private fixed income securities are neither issued nor traded, because of the cumbersome administrative procedures prevailing until 1993, the fiscal advantages granted to Treasury bonds, and the government guarantee attached to bonds issued by public enterprises.  10 Table 5: Primary Bond Market: Borrowers and Underwriters 1992 1993 DH million Percent DH million Percent BORROWERS/ISSUERS 5,247 100.0 6,864 100 Treasury: 1,620 30.9 3,574 52.1 Auctions (688) (13.1) (1,713) (25.0) National Issues (932) (17.8) (1,861) (27.1) SFIs and other PEs 3,627 69.1 3,290 47.9 UNDERWRITERS: CDG 2,909 55.4 3,486 50.8 Insurance C 864 16.5 1,481 21.6 Other 1,474 28.1 1,897 27.6 31. As detailed in Annex 5, and summarized in Table 6 below, the stock market has grown remarkably fast since 1992. Market capitalization as a percentage of GDP has tripled. The trading volume has increased dramatically and the liquidity ratios have improved. Privatization has been a major factor behind this surge of the stock market. The volume of trading related to privatization accounted for 27 percent of the total in 1994 and rose to more than 50 percent in early 1995. 32. The Casablanca stock exchange presents many features of a nascent capital market: (a) high concentration (94 percent of total transactions were concentrated in 10 stocks in 1993); (b) high P/E ratio and low liquidity (trading volume represents 3.5 percent of GDP as compared with 10 percent in Pakistan and more than 40 percent in Hong Kong, Japan or the UK, for instance); and (c) an excessive share of off-floor trades. Moreover, while privatization has given a boost to the market, its sustainability will depend on public offerings from private enterprises which have been scarce. Compared with other emerging markets, in 1993, market capitalization of the CSE was close to that of Egypt, exceeded Iran, Tunisia and Nigeria, but was lower than most other comparable middle income developing countries (Annex 5). Table 6: Stock Market-Key Indicators 1991 1992 1993 1994 1. Market Size -Market Capitalization/GDP % " 5.1 7.0 10.3 14.3 -Number of listed companies 68 68 65 65 -Average daily trading volume 1.8 2.5 18.6 28.8 by market session (million DH) 2. Liquidity -Turnover Ratio % 3.7 3.5 17.9 21.7 -Trading volume/GDP % 0.2 0.2 1.9 3.5 3. Concentration -Share of 10 most traded stocks in 80.0 NA 94.0 NA total transactions % 4. Asset Pricing -Official Call Market % 11.5 74.1 21.7 26.5 -Price/Earnings ratio (P/E) 7.7 8.9 22.8 22.5 5. Privatization Impact -Average daily trading related to privatization 0.0 0.0 21.0 27.4 as % of total trading 1/ Associated with the number of shares submitted for listing for each listed company's share capital. 2/ Trading volume as a percentage of market capitalization. Source: Bourse des Valeurs de Casablanca.  I1 33. In conclusion, the Moroccan financial system remains a bank-based system where a large portion of domestic credit goes to the Treasury through forced placements and where private enterprises must rely on bank credit or self-financing. Banks are generally healthy due to their limited latitude for lending, to their prudence (about half of commercial banks' assets are invested in risk-free government securities), a modern prudential and regulatory framework and to a long-time association with foreign banks. However, partly because of the administratively set ceiling on lending rates, they tend to lend only to best clients, mainly large enterprises. Capital markets still play a limited role in the intermediation of investable resources, but spurred by the privatization program, they have recently demonstrated their potential to become a major source of long-term resources for private investment. 34. The First Phase of Financial Sector Reform. Morocco has been engaged in financial sector reform since the mid-eighties with the establishment of positive real interest rates, the introduction of an auction market for T-bonds, and the elimination of special advantages granted to SFIs. In 1991, the Government developed a program of financial sector reforms supported by the Financial Sector Development Project. The main objective of this program was the reform of the banking system. Key measures (detailed in Annex 1) included the liberalization of interest rates on deposits, elimination of quantitative credit rationing, obligatory lending by commercial banks to selected sectors, and strengthening of the prudential regulatory and supervisory framework of banks. This program has been implemented, and the two tranches of the Bank's loan were released as scheduled. C. Government Stratey 35. In June 1994, the Government set up an Advisory Committee comprised of policymakers and private sector leaders, with a mandate to prepare a charter for private sector development. At the Government's request, the Bank is a member of this Committee in which it actively participates. The Committee has been meeting every month since its inception. A joint private sector/government strategy for PSD has been defined and is detailed in the charter which will be discussed with the Government. The central objective of this strategy, supported by the Bank, is to create an environment to stimulate greater private investment and higher growth. The charter recommends specific actions to: (a) establish a market-based financial system and develop capital markets; (b) promote private sector participation in the development of basic infrastructure and services; (c) improve skilled labor and remove restrictions on the labor market including minimizing government interference in business-labor relations; and (d) enhance the competitiveness of the private sector in anticipation of a free trade agreement with the EU. 36. The Bank's FY96-98 PSD program aims at delivering lending and non-lending services in support of the above strategy. Six projects, including the proposed FMDL, are at various stages of preparation, for a total lending volume of US$600-700 million equivalent. Non-lending services include continued participation in the Advisory Committee, sector work on private participation in infrastructure, and technical assistance for enhancing industrial competitiveness. (a) Financial sector. The proposed FMDL comes at the forefront of the Bank's multi-year PSD program because further reforms of the financial sector are required to achieve the medium-term objective of a higher rate of economic growth and higher private investment. Forced placements tax the banking system and distort the allocation of its resources. In the absence of market-determined lending rates, there is limited competition within the banking system. The low development of domestic financial markets represents a barrier to the necessary increase of domestic savings and contributes to the shortage of long-term capital for private entrepreneurs. The Treasury relies on its tight grip on the banking system and institutional savers to finance its deficit: a loss of control on the fiscal deficit in such a rigid context would imply either hidden money creation, and thus a potential inflationary pressure, or substantial crowding out of private  12 investable resources. Freeing lending rates and eliminating forced placements of credit, thereby enabling both the Treasury and the private sector to tap deep, active domestic financial markets capable of mobilizing large amounts of resources, are therefore key items on the Government's agenda for the next phase of financial sector reforms. These measures are supported by the Bank and the IMF. (b) Infrastructure. The main objective of the Government is to ensure adequate infrastructure for private sector development, while containing the impact on the consolidated public sector deficit. The Government is therefore committed to increase private sector participation in the provision of infrastructure. Bank assistance includes an FY96 study on private participation in infrastructure and three projects currently under preparation. The study will provide guidance on the various options for demonopolization and privatization. It will cover transport and selected municipal services, such as water and electricity distribution, urban transport and solid waste management. The results of this study are expected to be incorporated in the design of several projects currently under preparation. They include: (i) a power sector reform loan which will support the private production of electricity by independent power producers, issuance of an Electricity Code, establishment of a Regulatory Agency, and unbundling of the National Power Authority; (ii) a municipal finance project which aims at fostering competition in local government financing, developing private provision of municipal services, and reforming the state-owned fund which provides term lending to local governments; and (iii) a second sewerage and water reuse project focussing on cost recovery and the viability of autonomous agencies dealing with power and water distribution in large cities in view of their privatization, which in turn will be the main objective of a FY98 project in the sector. (c) Vocational Training. An FY96 vocational training project is being developed in coordination with the EU and USAID and will increase the role of private firms in the design and financing of their vocational training programs, and enhance the role of their professional associations. (d) Enterprise Competitiveness. An ongoing Competitiveness Assessment study financed by the EU and the Moroccan private sector, and for which the Bank is executing agency, aims at identifying "clusters" of competitive industries and at strengthening their long- term viability in the context of the forthcoming free-trade agreement with the EU. In addition, the Bank is preparing an industrial infrastructure project (FY97). The objectives of this project are to alleviate the shortage of industrial sites, a major constraint to domestic and foreign investment, and strengthen support institutions for private industry. Specifically, the project will focus on: (i) developing privately operated industrial parks through private concessions; and (ii) providing financing and technical assistance to strengthen the national system of standards, certification, and technology diffusion. IV. PROGRAM OF FINANCIAL SECTOR REFORMS 37. To complement the continued macroeconomic stabilization and acceleration of the privatization program, the authorities have developed a second phase of the reform program in the financial sector. The main objectives of this program are to: (a) establish a market-based financial system, free of any major constraint in the allocation and the pricing of financial resources; and (b) develop capital markets as a main supplier of long-term capital for private investment. A central piece  13 of the Government's program is to transform the stock of government debt held by banks at below market interest rates (about DH 1.7 billion) into securities issued at market rates. Such a major substitution needs to be supported by an improved bond market infrastructure, namely, revamping Treasury bond instruments and issuance procedures. Other major reforms include the elimination of remaining controls on interest rates, the implementation of indirect monetary control, the establishment of a foreign exchange market as a preparatory step towards a market-determined exchange rate and capital account convertibility, and the privatization of banks. The main elements of the authorities' medium-term vision of the financial sector are: (a) Financial markets. The first step concerns the reform of the market for government securities to increase liquidity, provide a market-based interest rate structure, which can serve as a benchmark for the pricing of other securities, and ensure that the Treasury can meet its domestic borrowing requirements. Complementary reforms of capital markets will lead to more private equity and bond issues to be measured by an overall increase in market capitalization and new listings. (b) The Treasury will implement a modern domestic debt management system and acquire the know-how for its efficient operation. It will enable the Government to finance its borrowing requirements at market terms and discontinue its practice of intercepting savings before they can reach the private sector, thus removing a major constraint to private investment. It will also bring about greater fiscal discipline on the Government. (c) The Central Bank. The Central Bank will aim to maintain a low inflation rate, which has been achieved since the late eighties, and implement a monetary policy based on indirect instruments including open market operations. In parallel, as a first step towards a fully market-determined exchange rate, and to provide private investors with market-based instruments to hedge foreign exchange risk, the Central Bank will establish a foreign exchange interbank market. (d) The Banking System will continue to be financially sound and operate according to internationally accepted prudential norms. The remaining state-owned banks will be privatized in line with the Government program, with the exception of the agricultural bank. SFIs will compete freely with commercial banks and will either develop a competitive edge in their original market niche or disappear. Following the elimination of the tax on banks represented by the mandatory placements, a downward movement on interest rates is expected to take place. Lending to small and medium enterprises is expected to increase as banks become free to price their loans according to the risks and administrative expenses attached to this category of borrowers. As banks are given greater latitude for lending, their loan portfolios will become more vulnerable, requiring further strengthening of bank supervision. 38. The proposed operation would support the new phase of financial sector reforms. The Government program includes reforms in four main areas: (a) reform of Treasury financing including the removal of mandatory placement ratios for banks; (b) indirect monetary control including the liberalization of lending rates; (c) development of capital markets; and (d) banking system (privatization, establishment of a foreign exchange market, and bank supervision). A set of indicators will be monitored to assess the outcome of the program of financial reforms.  14 A. Reform of Treasury Financing 39. Progress to date and remaining constraints. In the eighties, the Treasury secured a large part of the financing of high public sector deficit through foreign borrowing, debt relief and preferential access to credit at administered interest rates, mainly below market. In 1988, the authorities created an auction market for T-bills. The share of this market segment progressively increased to 15 percent of the total domestic debt in 1993. The end of foreign debt rescheduling in 1992 combined with renewed pressure on the budget deficit led to a sharp increase in Government domestic borrowing requirements, to DH 8.5 billion in 1993 from DH 1.9 billion in 1991. In 1991-92, the authorities reduced the percentage of Treasury paper that is placed at below market rates with the banking sector from 35 to 25 percent of sight deposits. However, the remaining ratio of 25 percent imposed on banks, taxes the banking system and prevents a market-based allocation of its resources. Furthermore, rigid placement rules imposed on institutional savers are used to channel long-term savings to the Treasury, and constrain the development of capital markets (para. 44). 40. Program to be supported under the FMDL. The Treasury will increasingly rely on market mechanisms to finance its borrowing requirements. The development of an efficient market for government securities also represents a critical step towards the development of capital markets. Among the key measures of the Government program, detailed in Annex 1, are: (a) the elimination of banks' mandatory placements in Treasury bills; (b) reduction of the number of T-bond issues and introduction of new securities with modern features in order to enhance their marketability; and (c) the elimination of fiscal incentives on Treasury bonds. B. Indirect Monetary Control 41. Progress to date and remaining constraints. Since 1991, the authorities have established the basis for an indirect monetary policy by abolishing credit ceilings, reducing access to the rediscount window, and introducing refinancing at variable rates at the Central Bank. These measures have created the basis for a more open and competitive environment in the banking system. However, the Central Bank's refinancing mechanism at variable rates has had limited use as an instrument of indirect control of liquidity and has not played the role of benchmark for interest rates as originally envisaged by the authorities9. 42. Program to be supported under the FMDL. The Government program complements the reforms of 1991-92, and includes: (a) strengthening the Central Bank's indirect control instruments through introducing repurchase agreements auctions and open market interventions; (b) liberalizing of all lending rates; and (c) modifying in the calculation of mandatory reserves from a daily minimum ratio to an average daily reserve requirement over a monthly period. These measures will further develop the money market and facilitate the shift to indirect and market-based instruments of credit control. First, through the auction of repurchase agreements, the Central Bank will establish a market determined refinancing rate. This refinancing rate will operate as a benchmark for the banking system and the elimination of all interest rate ceilings will enable its effective transmission in the interest rate structure. Second, banks will have a wider degree of latitude in their treasury management since significant variations in their daily reserve account balances will be allowed. This liquidity can be used for market making activities in the T-bill market and promoting a more active interbank market. 9/ Originally set at 13.5 percent and now at 9 percent, the Central Bank refinancing rate does not reflect the status of liquidity of the banking system. Since the beginning of 1994, banks have refinanced themselves mainly on the interbank market at a rate which was at 5 percent by end-December 1994.  15 C. Development of Capital Market 43. Progress to date and remaining constraints. Capital market reforms undertaken so far include the implementation of a basic legal, regulatory and institutional framework including the creation of a Securities Commission'