Statement by Jannes Hutagalung at the Board meeting of January 30, 1997

CONFIDENTIAL InternationalBank for Reconstructionand Development InternationalDevelopmentAssociation 86318 InternationalFinance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY EDS97-20 January 29, 1997 Board Meeting of January 30, 1997 Statement by Jannes Hutagalung Morocco: Country Assistance Strategy We would like to commend management for preparing this well written CAS which presents development challenges, prospects and reform agenda of Morocco. After three years of negative GDP growth in the first half of 1990's, Morocco now is recovering from the adverse effects of the external shocks (severe droughts and sluggishness in European market). We praise the GOM for its commitment to maintain prudent monetary policies during this difficult period resulting in relatively low inflation rates. Together with the govemment's commitment to hold down the budget deficit, the adherence to prudent monetary policies would certainly strengthen the macroeconomic stability and the ongoing recovery. This recovery, however, remains vulnerable. To establish a firm basis for sustained improvement in economic and social performance, Morocco has to deal with a number of economic problems which constrain her development. These problems range from budget deficit to the erosion in external competitiveness. Besides these, Morocco also faces other challenges, such as the existence of dual society and dependence on agriculture. We are glad to note that GOM has come up with a set of reform priorities to address these problems. We endorse the general thrust of CAS to reduce poverty through broad-based reform effort to promote growth, reduce unemployment pressures and speed up world integration. We also welcome the Bank's effort to strengthen human resources development and to reduce the social gap between urban and rural areas. These CAS objectives are in line with and very supportive of the GOM reform agenda to achieve sustainable development. In particular, we welcome the priority given to increase in the access to, and, improvement in the quality of education by putting more money for primary education, especially in rural areas. Allocation of one-third of the Bank's proposed lending for the social sectors, especially in health, education, rural employment and women development deserves support. Opening up of all infrastructure sectors to private investment is also an encouraging step, provided that the rural infrastructures are well taken care of by the state. 1. It has been acknowledged that the over dependence of Morocco's economy on agriculture makes it susceptible to external shocks, such as drought (which comes with an accelerating cycle), therefore diversification of the economy is warranted. However, other than Thisdocument hasa restricted distributionandmaybe usedby recipients onlyin the performance of their officialduties. It should not be distributedwithout the consent of the ExecutiveDirector concerned.  2 the proposed reform measures, which supposedly would encourage broad-based growth, very little is mentioned about the diversification effort. While we are aware of the current trend of the lessening of government's role in the economy, we still feel there may be some merit for the government to support the development of certain industries based on Morocco's comparative advantage that can outweigh the cost of intervention. However, I would also like to emphasize the importance of promoting rainfed farming and irrigation programs suitable for Morocco's condition, as raised in the Country Assistance Review paper of the Operations Evaluation Department. 2. We understand that in order to reduce the budget deficit it is necessary to reduce the current expenditures by cutting back the wage bill of the public sector and rationalizing the public expenditures. In this connection, I would like to have staff's elaboration on whether downsizing of the civil servants is also being considered, since the proportion of public employees in the population is 27 per thousand and drains over 36 percent of total budget expenditure, which is higher than the average of other comparable countries. We would like to caution, however, that these measures are politically sensitive and need strong political will to implement without endangering social cohesion and reform effort. We also note the budget deficit reduction measure gives strong focus on the expenditure side but pays little attention on the revenue side. We wonder whether the current revenue collection is already optimal that the Bank deems it no longer necessary to help the GOM improve the domestic revenue mobilization. 3. We are happy that the GOM has come to the realization of the importance of reducing the disparities between the urban and rural areas. We are also very supportive of the CAS's agenda in social and urban development. However, besides providing infrastructure and an educated work-force, we feel more concrete measures need to be taken in this area, such as providing incentives to investors to invest in rural areas. This would spread growth centers from the Western coastal corridor to rural areas and increase job opportunities for the rural population. Finally, this CAS also provides very significant avenues of non-lending services, guarantees, and promoting partnership with others in addition to the Bank Group's lending program. The Bank as a "connector" will also help improve Morocco's external relationships with other investors and donors. Thank you.