Morocco - Current economic position and prospects (Vol. 1 of 2) : Main report

RESTRICTED FILE COPY Report No. AF-55b This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT. ASSOCIATION THE CURRENT ECONOMIC POSITION AND PROSPECTS OF. MOROCCO (in two volumes) VOLUME I MAIN REPORT March 28, 1967 Africa Department  The Current Economic Position and Prospects of Morocco Corrigendum - Volume I Page v, para. 4. Delete last sentence and substitute: "However, private capital outflow apparently declined significantly during the year, and foreign exchange reserves remained at nearly the level reached at the end of 1965." Page viii, para 15. fifth line. "$46 million" should read: "$41 million". Page 12, para. 29. fifth line. "1966" should read: "11963". Paae 31, para. 8h. Delete last two lines and substitute: "possibilities of irrigation in both the Sebou and the Oum Er Rbia regions. For the latter, it would appear to be desirable to prepare a full river basin study like that for the Sebou recently completed by the UNDP." Page LO, para. 101. Delete existing lines 12 and 13 and substitute the following: "projected to rise by around 1.5 percent annually over the next five years. In contrast, the growth rate in". Page 41, para. 106. line h. Change "paras."1 to read: "para. 112".  -2 - Page 41. Para, 107. Delete existing paragraph and substitute: "107. All in all, we might expect real growth in groes domestic product between 1965 and 1970 to average about 4.5 percent a year, as compared to a 2 percent average rate in 1964 and 1965. Taking as base the 1962-1966 average (which includes one bad crop year, as by hypothesis do the prospective agricultural growth rates discussed above), the level of output projected for 1970 would imply an annual rate of increase of just over 4 percent." Page 2. Table 11. Delete existing table and substitute the following: Table 11: PROJECTION OF GDP AT 1960 PRICES (billions of dirhams) 1960 1963 1965 1970 Agriculture 2.65 3.o6 3.15 3.53 Modern (0.56) (0.62) (0.80) (1.01) Traditional (2.09) (2.44) (2.35) (2.52) Energy 0.18 0.23 0.26 0.37 ivtning 0.54 0.53 0.59 0.69 Manufacturing 1.10 1.29 1.32 1.79 Construction, public works 0.32 0.46 8.h8 0.75 Services to tourists and foreign governments 0.19 0.23 0.27 0.53 Public administration 0.89 1.09 1.12 1.38 Other services 3.22 3.61 3.64 4.46 Total 9.09 10.50 10.83 13.50 Page 52. para. 128. Amend last line by adding "119X' after the word "paragraph". Africa Department April 17, 1967  F O R E W O R D This report was prepared by a Mission which visited Morocco in May-June 1966 and again in early 1967. The Mission consisted of the following members: John A. Edelman Paul E. Booz Bernard Decaux Miss Aida Eid (FAO) Philip Golden Klaas Haasjes Frank Higginbottom Gustave Maryssael (Consultant) Epiphane Mawussi Odd M. Myhrer Geradus H. Ronday (Consultant) Cornelis P. van Dijk All Mission members assisted in the preparation of the report. The Mission was also assisted by Miss Barbara Eschenbach and Messrs. de Fontenay and Hussein. Messrs. Edelman and Golden are the chief authors of this volume.  TAELE OF CONTENTS Page lko. BASIC DATA i - iii GUIDE TO ABBEEVIATIONS USED IN MOROCCAN REPORT SUMMARY AND CONCLUSIONS iv - ix I. RECENT ECONOMIC PERFORMANCE ................................ o.. 1 Recent Trends in Productiono............. 0 .. . 0.. ... . ..... 2 Investment. . . . . . 4 . a a & . * * * * * * . . . . . . . . . . . . a . . a . . . . . . . * . . 14 Savings and Consumption... 7 The Private Se.tor 9 The Balance between Investment, Savings and Private Transfers...... ........... 10 Government Finance.......................................... 12 The Growth of Specialized Financial Institutions.......o.. 15 Consolidated Finances of Public Enterprises.....es........ 16 Overall Monetary Movements.1 ................................... 17 Foreign Trade and Payments 18 II. DEVELOPMENT PROBLENS AND PROSPECTS... 23 Population and Labor Force Gro w t h 23 The Growth Potential... 24 Investment Prospects: An Overall View.......i 25 Investment Projects in the Main Set o r s 27 Agriculture ... 7 Mining ~~~~~~~~~~~~~28 Manufacturing... 29 Tourism 29 Electric Power ...... ........ oo*e**oeoeo*ooo*&**ooo. 30 Transport and Communications....................... .. , 31 Educationi.. ... ... . .. .......... ........ ....... *....... .... 32 All Othr... toheoreoe.oo*oooooooooto 33 Summary~~~~~~.0000.006. 34 III. PROSPECTS FOR PRCDUCTION, EXPENDITURE & FINANCE...A...........E 39 The Outlook for Output and Exports.................p.......t s 39 National Expenditure and S asi n g s 42 Public Fina n c e 44 Private Finance and the Monetary B ana n c e 50 The Balance on External A cco u n t 51 The Need for Local Currency Financing 52 ANNEX I A. Agriculture B. Mining C. Manufacturing D. Tourism E. Education  MOROCCO Basic Data Area: 172,000 sq. miles Population (Moslem only, mid-1966 estimate): 13.4 million Rate of growth (1960-65): 3.1% Population density (per sq. mile): 78 Political status: Independent since 1956 Gross domestic product (1965): DH 13.2 billion Rate of growth, real terms (1960-65): 3.6% (1956-60): 1.3% Per capita (1965): $200 Gross domestic product at market prices (1965): DH 13.2 billion of which, in percent, Agriculture: 29 Mining 5 Industry and handicraft 12 Percent of GDP at market prices 1965 1966 (est) 1960-65 Gross investment 11.0 10.5 11.1 Gross domestic savings 13.0 9.9 10.3 Balance of payments on goods and services 2.0 _o.6 -0.8 Net factor income payments 0.1 -0.1 0.6 Government current revenue 15.6 16.5 14.5 Resource gap as % of investment No gap 5.7 7.3 Money and credit Conversion: 1DH = $0.1974 1 $ = 5.o6 DH Relationship to large monetary or customs area: Preferential tariff and marketing arrangements with France. Association with Common Market under discussion.  Nov. 1966 Change l960-5 (DbH -millions) sp. a.r Total money supply 3,678 7.9 Time deposits 248 .5 Commercial bank claims on private sector 1,540 8.1 Central Bank claims on public enterprises 356 22.6 Annual rate of change in prices _ 4.3 Public sector operations (cash basis) 1965 1966 j (et. hage96C-66 (DH millions) (DH m-il3iioins) 7 p.,a Government current receipts 2,050 2,130 9.6 Government current expenditures 1,970 2,000 5.9 Deficit (surplus) (80) (130) _ Government capital expenditures 635 500 -1.1 Public investment expenditures 860 760 5.6 External public debt (in US$) 196 Total debt outstanding 519 million Total annual debt service 46.o tl (est.) Debt service ratio 8% (est.) Balance of payments (in US$) 1965 Change 1960-65 Total exports h36 million 2.6 Total imports 395 " 0.5 Tourist receipts 66 " 19.9 Other invisibles (net) -38 tl Transfers, including errors and omissions 123 " Average 1960-64 1965 Commodity concentration of exports (phosphate, citrus fruit) 37% 40% Gross foreign exchange reserves 229 125 ( or 7 months' imports) DMYF position Average 1960-65 1966 Quota $55 million $76 million Drawings 3.3 It 7 t  Exter-nal _Pnancial Assistance to Central Government onliy (in U.S. $) Total disbursements (1962-66) 300 million MSajor donors: United States 130 rnillion France 129 It Kuwait 28 " Germany 7 IERD 6  Guide to Abbreviations Used in Moroccan I?ero:'t BEPI - Bureau d'Etudes et des Participations Industrielles. BRPM - Bureau de Recherches et des Participations Minieres. CDG - Caisse de D6pft et de Gestion. CGEa - Centrale de Gestion des Exploitations Agricoles. CNSS - Caisse Nationale de S6curit6 Sociale. COMANAV - Compagnie Marocaine de Navigation. OCIC - Office Ch6rifien Interprofessionnel des Cer6ales. OCP - Office Ch6rifien des Phosphates. ONVA - Office National de Mise en Valeur Agricole. ONCF - Office National des Chemins de Fer. ONE - Office National de l'Electricit6. ONI - Office National d'Irrigation. RAM - Royal Air Maroc. RTM - Radiodiffusion Tel6vision Marocaine. SCP - Soci6te Cherifienne des P6troles. SUNAB - Sucrerie Nationale du Beht. SUTA - Sucrerie du Tadla.  SOT4ARY AND CONCLUSIONS 1. Despite moderate increases in investment and economic activity since the late 1950's, Morocco's economy still suffers from low rates of investment and output growth, and from a high level of unemployment. Domestic savings, which are comparatively high, have been offset to a significant degree by a continuing outflow of private capital. Efforts are now underway to stimulate the growth of inveszment and output, but important problems of economic management still confronting the country make it difficult to judge what measure of success these efforts are likely to have. 2. The economy has passed through three fairly distinct phases since its independence in 1956. The first, which lasted until 1960, was characterized by the departure of large numbers of foreign settlers, a declining level of private investment, comparative stagnation in output and employment and by rising foreign exchange reserves, chiefly as the result of large receipts from foreign military payments. The second phase covered the period 1961-6h, when there was significant revival of investment from 9 percent of GNP in 1959-60 to around 12 percent by 1963, mainly because of an expanded public sector development program. Out- put growth also picked up in this period, rising by over h percent annually. There was also a sharp increase in current government expenditures in this period, mainly for military purposes. Together with the growth of public investment, this led to substantial government budget deficits, which were financed in large part by borrowings from the banking system. The increase in domestic credit contributed to pressures on the balance of payments, leading to a fall in foreign exchange reserves from $200 million at the end of 1960 to an end 1964 level of $80 million, or less than two months imports. 3. The third phase comprising the years 1965 and 1966 has been one of greatly improved financial stability, but also one of renewed stagnation in investment and economic growth. Actually the slowdown in output growth started in 1964; in the two years 1964 and 1965, output went up by no more than 2 percent annually. In 1966, output fell by 2 percent mainly because of a serious drought. In this period, investment declined as a ratio of GNP to around 11 percent. However in 1966, total fixed investment apparently rose moderately, with private investment going up sharply, particularly in tourism and manufacturing, while public sector investment declined significantly. There was also a large decline in stocks, due mainly to the drought. 4. Stability in investment was accompanied by a sharp improvement in the current finances of the government during 1965 and 1966. Total current expenditures were cut by 5 percent below the 1964 level, mainly through a reduction in military expenditures. At the same time, current revenues were increased by around 20 percent through improved collections of direct taxes and by a tax on sugar which retains for the government the differential between the high internal price set in 1964 when world prices were up and the present much lower import price. This helped to reduce pressures on imports, which had already been subjected to quanti- tative restrictions in late 1964. In 1965, gross medium and long-term capital inflow went up to a temprrary peak of around $140 ruillion, Cr  nearly 6 percent of GNP and exchange reserves rose to a level of $120 million at the end of the year. During 1966, exports receipts rose by 10 percent, but imports went up even more as the result of the removal of quantitative restrictions at the end of 1965 and heavy wheat imports. More- over, foreign aid declined in the year. However, private capital outflow reserves remained at nearly the level reached at the end of 1965. 5. Thus, on the whole, the Moroccan Government has done an impressive job of maintaining financial stability in the past two years. It has also begun to tackle the problem of the rapid growth of the population, which has led not only to growing urban unemployment, and rapidly rising demand for primary education, but also to serious pressures on the arable land. A birth control campaign was started on a pilot basis during the last two years, and has now moved onto a national level. But even assuming considerable success in this program, the population of working age will continue to grow at a rapid rate during the next fifteen years, which will make it increasingly difficult to prevent the absolute level of unemployment from rising. 6. However, in the area of expanding investment, output and employ- ment, recent Government policies have not been notably successful. Cert- ainly, it should be possible to improve substantially on this record. Morocco has a number of important economic assets. Adequately developed, these could lead within a few years to a substantial acceleration in the growth rates of output and employment. The main obstacles to taking fuller advantage of these opportunities in the past have been: a) hesi- tancy in the private sector, resulting both from the slow growth of domestic demand, and from uncertainties regarding Government policy toward private investment, b) lack of effective management in key public sector investments programs, particularly in agriculture; and 3) a lack of depend- able sources of public sector finance for investment purposes. 7. The besitancy of the private sector in Morocco has been re- flected in the maintenance of private investment at a fairly low level, corresponding to about 5 percent of GNP through 1965, and by compara- tively large and persistent transfers of capital abroad. These transfers abroad are made mainly by foreign technicians and by private investors who still play quite an important role in Morocco, but capital outflow from Moroccan sources may also be significant, especially on a short term speculative basis. Such speculative movements were apparently quite important in the large increases in the "errors and omissions" item in the balance of payments during 1964 and 1965 when they reached DH 500 million, or over 4 percent of GNP. The Governmelnt has been making efforts to give private capital a greater sense of security in the country by various assurances regarding fiscal policies and transfer rights, as well as by generally conservative monetary and fiscal policies of the past two years. There are signs that these policies resulted in a significant improvement during 1966, when total private investment evidently increased substantially, and when private capital outflow appears to have dropped. Nevertheless, some uncertainties are likely to remain. One continued source of uncertainty is the government policy toward the remaining foreign-ownied land in Morocco, which the Governm.ent has stated it plans  - vi - to nationalize sometime in the future, without, however, setting any tLmetable. 8. 1Management of the public sector development cffort has long been a problem in Morocco.. Many factors are involved, including lack of consistent leadership, due to frequent cnanges in Ministerial assignments and in top civil service appointments, and to a lack of clear cut responsibility for making decisions about priorities and for follow- ing up on implementation. Another factor has been an important lag on the part of the technical ministries in making the adjustment from the period when external funds for development were comparatively easy to come by - through large direct budget support aid, to the present situ- ation where external development assistant depends heavily on the prepar- ation of cletailed projects and sector programs. 9. However, progress has been made on these points in the past year or two, particularly in project preparation for a number of sectors. But, much more remains to be done, particularly in the management and staffing of the Government's efforts in agriculture, tourism and education, which rightly have been assigned top priority in the Government's current Three Year Plan. In agriculture, technical assistance is presently being provided by the World Bank to help Morocco improve the management basis for expanding its efforts, and to identify priorities among a variety of projects which could be started in the near future. In this sector how- ever, clarification of land tenure arrangements will be necessary in a number of areas in order to permit efficient project implementation. In tourism, progress is also being made in mobilizing financial resources to assist private sector investment which is the key to effective expan- sion in this sector, but some institutional problems remain. In education, the situation is still quite difficult as a result of the absence of a clear cut plan to guide future development, and of a shortage of qualified teachers at both the primary and secondary levels. 10. If the key weaknesses in administration and staffing of the public sector programs are energetically dealt wjith during the next year or two, it should be possible to achieve a substantial expansion of pub- lic sector investment on a reasonably efficient basis during the period 1968-70. Indeed, even in 1967, some recovery over the comparatively depressed level of 1966 should be feasible. In the latter year, fixed investment in the public sector (Central Government plus the main Govern- ment enterprises) fell to around DH 770 million, as compared with DH 870 million reached in 1965, while Central Government capital outlays (in- cluding financial transfers to enterprises) were only about DH 500 million, as against DH 635 million in 1965. The 1967 capital budget calls for an increase to DH 886 million in Central Government expenditures. However in practice, it seems likely that spending of around DH 700 million is the most that can be reached this year. Together with other outlays of public enterprises, this might permit total public sector expenditures to reach DH 920 million in 1967. 11. Further increases to around DH 1300 million annually in public fixed investment might be feasible by the year 1970. In addition, public  - vii - credit to the private sector, for agriculture, manufacturing, tourism and housirig miglt usefully total as much as DH 200 million by 1970 as compared with around DH 100 million annually estimated for 1966-67. Total public outlays on this scale would mean an aggregate for the period 1965-70 in the neighborhood of DH 6.8 billion, as compared with a total of DH 7.1 billion recoamended for this period by the Bank's 1965 Survey Mission Report. Given adequate support by public policies, a further significant increase in private investment should also be feasible in the next several years. If this does take place, total investment might well reach about 1 percent GNP by 1970, as compared with about 11 percent in the last two years. 12. With such an increase of investment, an acceleration in the growth rate of output to around 1.5 percent annually should be possible in the next several years. The main possibilities for expanded growth of output and income are in the export sectors, particularly tourism and in agriculture exports. Exports of phosphate rock and phosphate fertili- zer should also rise at a fairly healthy rate, although some reduction in the North Africa price is likely to be necessaryr to cope with the sales resistance-which has been met this year. In terms of constant prices, total exports of goods and services could well rise by over 6 percent annually between 1965 and 1970, while at current prices the growth rate will probably be around 5.5 percent. Some expansion in agricultural output for domestic use should also be possible, on the assumption that expanded use of fertilizer and improved cultivation can get started on a reasonably wide scale in this period. Construction activity certainly should provide a major stimulus to expansion in the next several years if investment expands at the rate which seems feasible, while a significant increase irt value added by manufacturing is likely as the result of in- vestments in textiles and sugar refining made recently or nowi underway. 13. In 1962-66, national savings averaged about 11 percent of GNP - only slightly less than the domestic investment rate. By 1970, an increase in national savings to around 13.5 percent might plausibly be projected. However, this would, in all probability require increasing the public savings effort. There should be scope for this. The recent increase in Central Government revenues brought them up to an average ratio of 16 percent of Gle in 1965 and 1966. It should be possible to effect an in- crease in this ratio to around 17 percent over the next four years, with- out unduly hampering economic development. This would permit an increase of around 5 percent annually in current Governlment expenditures between 1967 and 1970, as compared with only 2 percent growth in the last two years, and still permit the current surplus to rise from DH 100 million at present to around DH 300 million by the latter year. In addition, expanding surpluses should be obtained from the main Government enter- prises, including the new ones recently established to run the Government owned sugar mills and the Safi fertilizer plant. 14. With investment at 15 percent of GNP and national savings at 13.550, there would be a small current balance of payments deficit in 1970, as compared with a surplus of about 2 percent of GNP recorded in 1965 and a deficit of 0.6 percent for the period 1962-66 as a whole.  - viii - This shift to a deficit position reflects the probability that im,poy'ts would have to rise somewhat faster than exports between 1965 and 1970 in order to malce possible the increase of investment goods imports foreseen and to meet a need for rising imports of cereals. There is reason to believe that net private transfers out of Morocco will tend to decline in the next several years, particularly if the government intensifies its policies of encouragement to private investment. However, on balance there very probably will be a need for rising net capital inflows during this period. The mission estimates such requirements in 1970 at around DH 600 million which would correspond to one quarter of total investment level projected for that year. Some increase in private foreign investment seems likely in the next few years. On a net basis, such investment has been quite small in recent years. However, an increase to around DH 40 million (net) by 1970 should be possible, given the growing investment opportunities in tourism and manufacturing. This would leave a need for net public capital inflow of around DH 560 million as compared with actual net receipts of about the same amount in 1965, but only DH 355 million in 1966. However, amortization payments are rising fairly sharply, so that gross requirements of public capital inflows are likely to go up faster than this, reaching an estimated DH 740 million in 1970. 15. At the end of 1966, Moroccols external medium and long term public debt repayable in foreign currency amounted to about $520 million, of which about $108 million was still undisbursed. Of the total, about $350 million consisted of debt of the Central Government and the remainder debt of government enterprises. Service on this debt amounted to about $46 million in 1966 or an estimated 8 percent of estimated export earnings. The service burden is expected to increase sharply in the next three years as the result of payments due on suppliers' credits contracted by government enter- prises and on several eighteen months credits for wheat, including about $46 million contracted in early 1967. Because of heavy burden arising from these, the years 1968 and 1969 are likely to be rather difficult. Even assuming only a moderate addition to debt service in these years from new loans contracted in 1967 and 1968, total service will probably exceed $80 million in 1969, when $20 million will fall due on the wheat credits. However, a temporary draw-down of foreign exchange reserves (or use of IMF facilities) could serve to ease this short term problem. If restraint is used in contracting new medium term credits in the next few years, the service burden will drop by 1970 to about $70 million, which would correspond to around 10 percent of the export earnings projected for that year. 16. However, net capital inflow requirements will probably increase in the 1970's if further increases in the rate of domestic investment takes place as seems desirable. If most of Moroccols public capital requirements were to be provided on conventional terms during the next five or six years, total debt service could rise to over $120 million by 1975, even assuming only a moderate reliance on suppliers' credits in that period. If the export growth in that period were to be significantly less than the 5.5 per- cent per year now considered likely for 1965-70, the debt service problem could become quite serious, and might then warrant provision of a significant amount of foreign assistance on concessionary terms. However, in view of the relatively low average debt service burden at present and of the good  - ix - medium run outlook for export earnings, it would seem reasonable for Morocco to seek the greater part of its public capital assistance on a long term conventional repayment basis at least during the next few years.  CHAPTER I RECENT ECONOMIC PERFORMANCE 1. In the early 1950's Morocco benefited from an investment boom supported by large inflows of private and public capital which brought the investment rate up to nearly 20 percent of GNP in 1952-53. This contributed to the achievement of real growth averaging nearly 5 per- cent annually up to 1955. However, as Independence approached private investment declined sharply, private capital began to leave the country, and economic growth slowed down markedly. 2. The departure of European settlers from Morocco has been slower than from the rest of North Africa but nonetheless was substantial up until 1965. The number of Europeans in the country declined from a peak of about 500,000 at the time of Independence to 300,000 in 1960 and around 100,000 in 1965. In 1966, however, indications are that the number remained constant. Of the 750,000 hectares of farm land purchased or taken by foreign settlers, 250,000 were taken back by the Government in 1965. The Government has announced its intention to take over the remainder but no timetable has been set. The prospect of nationalization has contributed to the persistent tendency of the private foreign community to send capital out of the country. Until 1958 large foreign military installations constructed during the early 1950's provided an important source of employ- ment and foreign exchange earnings, but those were largely phased out be- tween 1958 and 1961, adding to the depressing effect on private investment and on demand for Moroccan goods and services already resulting from the departure of foreign settlers. In large part because of these factors, real GNP growth averaged only 1 percent annually in the 1956-60 period. 3. At the same time, the natural rate of increase in the Moroccan population had risen to around 3 percent annually, so that despite the emigration of Europeans,average per capita incomes were declining slowly. Moreover, labor force growth was approaching 3 percent. With over 70 percent of the labor force engaged in agriculture and the limits of arable land already reached, this led to growing underemployment in the rural areas and to growing unemployment in the towns. According to the 1960 census, urban unemployment among males was then in the neighborhood of 20 percent of the working age population. 4. Morocco was thus confronted with a difficult economic and social situation when it entered the decade of the 1960's. In some respects the situation is probably even more difficult today. The population and labor force growth rates have continued to rise, with the result that pressure on the land and urban unemployment have grown worse. The exodus of foreigners has left shortages of managerial and technical skills in a number of sectors. And the loss of important sources of foreign exchange income has contributed to a much tighter financial situation. 5. Nevertheless, in some respects there has been significant improve- ment in Morocco's economic performance during the past five years. Some elements of this improvement are already measurable, as in the case of  - 2 - moderate increases in the rate of olltput and investment. Others involve changes which will have a quantitative impact only in the medium or longer run, as in. the case of the initiation of a comprehensive birth control campaign and the thorough review of the goverrnrent's agricultural effort now under way. Recent Trends in Production 6. The growth rate of GDP in the first half of the 1960's accelerated to an average of around 3.5 percent annually. Although only slightly over population growth, this represents a significant advance over the r.early stagnant years 1956-1960. Year to year variations in the rate, which have been significant, reflect largely the influence of weather on crops and the direct impact of investment activity. After a very bad crop in 1961, farm- ing enjoyed four good years, with modern agriculture showing steady growth and output by traditional methods fluctuating about a nearly level trend. However, in 1966 there was another very poor crop. A recovery of total investment by nearly 50 percent between 1960 and 1963 played a major role in stimulating economic growth. in that period. However, since then invest- ment growth has slowed down considerably under the impact of austerity measures adopted by the government to reverse a deteriorating financial situation. As a result of these factors, the growth rate of real output in 1964 and 1965 averaged less than 2 percent annually, and in 1966 output fell by around 2 percent. 7. The growth trend in total agricultural output can be estimated at around 1.5 percent annually in recent years, with a fairly rapid growth rate in the modern sector and practically stagnant production in the traditional sector. Morocco's modern agricultural sector consists mainly of citrus, wine, vegetables, cotton and sugar beet. Output of those crops, which is primarily for export, has been growing at about 9 percent a year since the early 1950's and now accounts directly for around 7 percent of GDP. European farmers still play an important role in this sector, but Moroccan farmers have become predominant. Government irrigation programs now under way are designed mainly to expand production of high value crops by Moroccan farmers on a smallholder basis, within a cooperative framework. Given adequate administrative and technical support, prospects are favor- able for achieving good economic returns from such investments. 8. On the other hand, traditional agricultural output - consisting of grain and livestock production - has risen by no more than 1 percent annually over the past decade, if that. These activities account for 22 percent of GDP and over 70 percent of employment. Serious efforts to in- crease productivity have been started recently but are still on a compara- tively small scale. Since grain consumption keeps rising in pace with the population, Morocco has shifted from net exporter to net importer, with requirements now at around 250,000 tons annually in normal good years and as much as one million in a bad year such as 1966. 9. Mining output (5 percent of GDP) has expanded fairly slowly in the past 5 years. The major mineral resource - phosphates - has been developed  - 3 - in an efficient fashion by a government corporation- /, and exports rose from 7.5 million tons in 1960 to 10.0 million in 1964, when they constituted 25 percent of the total value of exports. Since then they have levelled off under pressure of international competition. An investment program now under way will increase ca.pacity to 14 million tons or more by 1970. Output of other itinerals declined moderately in the period. However, new finds have Iecently.been made and&sorme investment has occurred, so that output may quicken somewhat in the years ahead. 10. Matufacturing development was comparatively rapid in the early 1950's but since the late 1950's ha.s slowed down as the result of stagnat- ion of demand and some uncertainties about government attitudes toward private investmen.t. As a. result the contribution of manufacturing to GDP has remained constant at around 12 percent for the past five years. Some increase is likely in the immediate future as a. result of the completion of the large government fertilizer project at Safi, a third sugar mill, and an expansion of private investment in textiles which has been stimulated primarily by higher tariffs introduced in 1965. Direct government policies in support of private investment have been improved in the last few years, but lack of domestic demand still constitutes an important obstacle to expansion in most sectors. 11. Tourism is proving to be the most dynamic single activity in Morocco at present. The number of tourists has risen from 166,000 in 1961 to an estimated 450,000 in 1966. Declines in foreign govemment expendi- tures on military bases offset the impact of a good part of this increase on exchange earnings and economic activity during 1960-62, but in the past several years the net impact ha.s become quite significant. Gross earnings from this source are now equivalent to 4 percent of GDP and 15 percent of current external earnings. At present demand for accommodation has out- stripped supply in the peak season, and substantial increases of investment are planned for the next several years. 12. Construction activity fell sharply after independence a.s a result of the drop in private investment which occurred at that time. Between 1960 and 1963, it recovered significantly under the impact of expanded public investment expenditures. However, between 1963 and 1966 the annual rate of increase wa.s less than 3 percent annually, reflecting the slow growth of total investment in this period. Commerce, transport and other private services remained a.pproximately stagnant in the late 1950's reflecting the general levelling off of economic activity. They too picked up temporarily in 1960-63 but have slowed down a-gain since. Government services were the most single dynamic element of growth just after independence, averaging an expansion of 9 percent annually up to 1963. However, since then growth has been slowed down substantially under the impact of the governmentts stabilization efforts. 13. The following table sumfimarizes trends in output over the past fif@rn years: lJ The Office Cherifien de Phosphates (OCP)  - h - Table 1: TRENDS IN OUTPUT: GDP AT 1960 PRICES (billions of dirhams) 5 Year Averages Totals, Selected Years 1951-55 1956-60 1962-66 1960 1961 1963 1965 1966 est. Agriculture 2.56 2.62 2.96 2.65 2.26 3.o6 3.15 2.70 Grain & Livestoca/ (2.31)b-/ (2.17) (2.26) (2.09) (1.73) (2.44) (2.35) (1.95) Othera/ (0.25) (0.45) (3.70) (0.56) (0.53) (0.62) (0.80) (0.75) Mining, Manufacturing and Energy 1.38 1.69 2.12 1.82 1.90 2.05 2.17 2.24 Construction o.64 0.35 o.46 0.32 0.37 0.46 0.48 0.50 Government 0.53 0.83 1.10 0.89 0.94 1.09 1.12 1.15 Other Services 3.14 3.23 3.86 3.41 3.41 3.84 3.91 3.99 Of which: Tourism & Foreign Government a/ (0.24) (0.32) (0-.25) (0.19) (0.17) (0.23) (0.27) (0.30) Total 8.25 8.72 10.50 9.09 8.88 10.50 10.83 1050, a/ These are rough estimates by the mission, designed to indicate approximate orders of magnitude. See Appendix Table A7 for basis of estimation for agriculture. b/ There were no particularly bad crop years in this five year period, unlike the two later periods which had one bad year each. If one bad year were notionally imputed to 1951-55, the average would be about DH 2.20 million. Investment 14. Shortly after independence, total investment activity dropped off sharply - falling from a peak of around 20 percent of GDP in the early 1950's to a low of 9 percent in 1957-59, mainly as a result of a drop in private investment. In an effort to stimulate the economy, the government's development plan for 1960-64 called for a tripling in the level of total in- vestment between 1959 and 1964. In practice, investment outlays roughly doubled between 1959 and 1963, reaching 12 percent of GDP in the latter year. Since then, fixed investment has gone up very slowly in absolute terms, and  - 5 - has declined slightly relative to GDP. Up until 1966, the major part of the increase was in the public sector, which more than doubled between 1959-60 and 1964-65. However, preliminary indications are that public investment fell significantly in 1966, while private investment apparently rose substantially. 1/ 15. Inventory changes have been of some importance in this period, with the major impact falling in the poor crop years of 1961 and 1966, when grain stocks were drawn down sharply. The following table shows the trends in fixed investment and stock movements since 1959. Table 2: PUBLIC AND PRIVATE INVESTMENT, 1959-66 (millions of Dirhams in current prices) 1959 1960 1961 1962 1963 1964 1965 1966 est. Fixed Investment 760 920 1050 1150 1h10 1390 lh5O 1510 Public a/ 3h0 390 510 610 790 780 870 760 Private a420 530 540 ShO 620 610 580 750 Stocks -100 40 -150 100 60 -20 - -150 Total 660 960 900 1250 1470 1370 1450 1360 Percent of GDP Fixed investment 9.2 10.1 11.6 10.8 11.9 11.1 11.0 11.8 Total investment 8.0 10.6 10.0 11.8 12.4 11.0 11.0 10.6 a/ Breakdown estimated by Mission. 16. Only incomplete data are available on investment by industrial sector. However, a crude picture can be put together of investment trends in the main productive sectors: agriculture (public only), mining, manu- facturing and tourism. This indicates that investment has expanded more rapidly in these categories than in others, with their share rising from 39 percent of the total in 1959-61 to 45 percent in 1965-66. Relatively, the most striking increase has been in tourism which has risen from negli- gible proportions in 1959 to 6 percent of the total in 1966. Investment in manufacturing has more than doubled (to 14 percent of the total in 1965-66) with the main increase accounted for by public investment 1/ However, total investment estimates for 1966 are very preliminary, and since private investment is derived as a residual, the 1966 estimates should be regarded with considerable caution.  - 6 - in the fertilizer and sugar factories. Public investment in agriculture and mining has nearly doubled, while private mining investment has declined moderately. No comprehensive data are available on private in- vestment in agriculture. It is known that some private investment has taken place, particularly in citrus plantings,which have expanded substan- tially. However, in total it is not likely that this has been a very dynamic part of private investment given the uncertainties facing the foreign land owners who still control an important part of the modern agricultural sector. The available information on sectoral investment trends is summarized below. Table 3: FIXED INVESTMENT BY SECTOR (millions of dirhams) 1959 1961 1963 1964 1965 19662e/ est. Agriculture - public2/ 79 116 221 161 180 178 Mining - publicb/ 47 84 74 125 121 148 Mining - privatec/ 78 90 53 47 54 66 Manufacturing - public 2 15 91 77 188 69 Manufacturing - privateL/ (60) 84 91 121 76 116 Tourism - public (incl. infrastructure) - 3 - 15 16 37 Tourism - private c/ (5) (10) 14 25 41 48 Sub-total 271 402 544 571 676 662 Transport, power and communications - publica/ 75 147 209 182 193 195 Education and health - public 38 35 65 65 65 48 All other publica/ 98 109 131 149 110 90 Residential building-private 166 183 202 184 165 ( All other private d/ 112 174 259 239 241 (15 Total 760 1050 1410 1390 1450 1510 a/ For years 1963 and after, includes United States aid-in-kind (Title II") with DH 15 mill. to agriculture, 5 to transportation, 5 to all other public. b/ Mainly OCP. c/ Includes some participation by government. d/ Derived as residual e/ To compensate for understatement attributable to preliminary nature of results from "budget d'equipement",10 percent has been added to direct government investment estimates included here (see Table A16).  - 7 - 17. The levelling off of investment during the past three years is duie in part to financial limitations, which resulted from an austerity progam started during 1964. This probably had its main impact on private invest- ment in housing and commercial development, through the operation of credit restrictions. Private manufacturing was probably also affected somewhat in spite of availability of long term credit for new investment, but the main difficulties in this sector have related to uncertainties about market prospects. Private investment generally was probably also adversely affected in 1965 by the government's nationalization of the export trade in fruits and vegetables which took place in that year. In the public sector, the main problems have been lack of decisive direction and shortages of managerial and technical staff. These problems have been particularly evident in the agricultural program, which was budgeted to average DH 310 million in 1965 and 1966, but which actually reached an average of only about DH 175 million. The education program too, has suffered from lack of clear cut policies and from a shortage of qualified teachers, at both the primary and secondary levels. In most other parts of the public sector, technical and managerial skills are in greater abundance. However, throughout the public sector, there is lack of experience in preparing thorough economic analyses of project possibilities which has contributed to delays in securing long term external finance for some projects. 18. The Government has begun to take steps to remedy a number of these problems. With the improvement in the financial situation in 1966, credit restrictions have been eased somewhat. As already noted, policies with respect to encouraging private investment (particularly relevant to manufacturing and tourism) have been improved recently. In agriculture the government has made intensive recruiting efforts in the past year to augment its expatriate staff. Moreover, important administrative changes are being considered in an effort to ensure better use of staff in this sector. The IERD has agreed to help provide consultants to assist in this task. The government also is seeking technical assistance to help improve project preparation and generally to help strengthen the economic planning effort. Savings and Consumption 19. In 1959-60 the domestic savings rate averaged 9 percent or about the same as the investment rate. It declined to around 8 percent in 1961-63 but then recovered to 13 percent by 1965 - or significantly more than the investment rate. In 1966, the rate is likely to drop again to around 10 percent due to the decline in income resulting from the poor harvest. National savings were significantly higher than domestic savings in 1959-60, mainly as a consequence of factor income earned from the foreign bases in the country. However, net factor income receipts have shown a declining trend since then, and the national and domestic savings rates have been approximately the same in recent years. 20. Total public sector savings fell steadily from around EH230 mil- lion or 2.7 percent of GNP in 1959-60 to a low of DH40 million in 196h, but then recovered sharply by 1966 to DH 490 million or 3.5 percent of GNP.  - 8 - 21. The largest single cormlponent of public savings throughout most of the period has consisted of the operating surplus of the OCP, much of which has been transferred to the Central Government budget. However, despite the increase in OCP gross revenues since 1959, its current surplus declined between 1959 and 1962 as the result of increased operating costs. In 1964 and 1965, with an increase in export prices, profits recovered somewhat, but were still below the DH 153 million level of 1959. The Office Nationale d'Electricite and Royale Air Maroc have also showed consistent current surpluses since 1959, rising in total from DH 24 million in 1959 to DH 40 million in 1965. The railway organization (ONCF) had a current deficit position of around DH 30 million in 1963-64 (earlier data are not available), but as the result of an increase in rates in 1965, achieved a balanced posit- ion in that year. 1/ 22. In recent years, the most volatile component of government savings has been the Central Government's current balance. 2/ This balance deter- iorated from a surplus of around DH 50 million in 1959-61 (before transfer payments) to a deficit of DH 110 million in 1964. Between 1964 and 1966, however, current consumption was cut by around 5 percent while revenues increased by 22 percent, resulting in the achievement of surplus of DH 300 million in 1966. The most important single source of new revenue in this period is the surplus of the government's sugar fund which results from a decision to maintain the high domestic market price set in 1964 when world prices went up, in spite of the subsequent drop in import prices paid by the government.3/ There have also been important increases since 1964 in direct tax receipts, mainly as the result of improved collections. In 1965 and 1966 total Central Government revenues including the sugar fund surplus averaged about 16.0 percent of GNP, against a ratio of 14 porcent maintained in most of the period 1960-6h4 1/ Other government enterprises of an operating nature are included in the Central Government's budget accounts. These main ones are ports and the radio and television entities. 2/ Defined here to exclude transfer receipts from the OCP and current transfers to the private sector. See text Table 4 for a measure of these transfers. 3/ In the Moroccan accounts, this surplus is included in La Caisse de Compensation, most of whose resources are attributed to one of the Special Treasury Accounts (Fond de developpement regional). Up until 1967, none of these resources appear as part of current revenue receipts. However, for purposes of the mission's presentation, they have been included in current receipts in all years.  -9- 23. The miain reason for the deterioration in the governmentl j posit- ion between 1959 and 1964 was a sharp increase in current expenditures. On a budget realization basis, this increase amounted to about 60 percent in the five years, while on a cash basis it was around 70 percent j/. The main elements of this increase were - a) a steady expansion of outlays on economic services averaging 15 percent annually between 1959 and 1963, b) an expansion in social services, averaging about 12 percent annually between 1959 and 196h, c) a 35 percent increase between 1961 and 1963 in military expenditure. 24. Between 1963 and 1966, total expenditures, en a budget realization basis, have risen by only 2 percent. (See Table A 15). Military, police and general administrative outlays have been cut by nearly 10 percent from their 1963 peak, and economic services have been reduced by 5 percent. Social outlays have continued to rise although at a slower rate - around 5 percent annually between 1963 and 1966. As noted, on a cash basis, there has been a cut of around 5 percent from the l964 peak in total outlays. While details of cash outlays are not available on a functional basis, it is likely that the main overrun in 1964 (relative to the budget) was in military outlays. In any event, military and police expenditures in 1966 were down to 28 percent of the budget (and 4 percent GDP) as against a peak of around 32 percent in 1963. Education took 25 percent of the 1966 budget as against 20 percent in 1959. The absolute cut in economic services (mainly agricultural extension and public works maintenance) reduced them as a ratio of the budget from 15 percent in 1963 to under 14 percent in 1966, but at the expense of adding to the difficulty of implementation of the government's development program, particularly in agriculture. The Private Sector 25. Between 1959-60 and 1964-65, private disposable income at current prices rose by 45 percent. In the same period private national savings, as implied in the national accounts, rose from around 11 percent of disposable income to 12 percent. (In the poor crop years r.f 1961 and 1966 the private savings rate was about 5 percent and 7 percent, respectively). Thus private consumption has gone up somewhat more slowly than income, averaging about 7 percent annually at current prices, and around 3 percent at constant prices - or slightly less than the growth of population. No data are 1/ The difference is apparently mainly due to tho shift in the 1964 budget accounting away from a 15 month year (including a 3 month complemen- tary period from the previous year) which meant that a part of 1963 expenditures paid in 1964 (on a cash basis) are excluded from the 1964 budget "realizations".  - 10 - available on trends in the components of private consimption. However, given t'Le decline in the number of Europeans with their relatively high level of consumption, the average per capita consumption of the Moroccan population probably increased moderately in this period. 26. It is evident that there has been a large outflow of private capital from Morocco in recent years. Total recorded transfers have averaged over DH 280 million in recent years, while unrecorded transfers (as reflected in the errors and omissions of the balance of payments) have averaged nearly DH 300 million. These transfers have shown substan- tial variation from one year to another, but generally have tended to move in line with variations in private savings. Taking the extreme assumption that most of these transfers are in fact made out of current income, the private savings rate would then have been only around 7 per- cent in 1959-60, and 6 percent in 1964-65. While these percentages probably understate the real savings rate on a properly defined basis, they do indicate roughly the private national resources available in the country for financing investment in the period. The Balance between Investment, Savings and Private Transfers 27. Before allowing for private transfers, there has been in all years since 1959 a surplus in the private sector balance between savings and investment which has been quite large, except in the poor crop years of 1961 and 1966. On the other hand, the public sector deficit which was quite moderate in 1959-60, increased to a peak of DH 750 million in 1964, but then went down to DH 290 million in 1966. Before allowance is made for private transfers, the total external balance of payments shows a surplus on current account in four years out of the last eight. How- ever, when private transfers are taken into account, there was a deficit in every year, averaging DH 500 million since 1961. A summary of the main flows in the public and private sectors is given in Table 4 on the following page:  - 11 - Table 4: THE SECTORAL BALANCE BETWEEN INC@IE AIMU EYXPENDITURE (millions of dirlhams) 1959 1960 1961 1962 1963 1964 1965 1966 (est.) Public Sector Central Government Revenue 1110 1270 1360 1h80 1690 1750 2050 2130 Consumption 1060 1220 1310 1460 1710 1860 1800 1830 Expenditure (1240) (1350) (1510) (1590) (1940) (2120) (1970) (2000) Less: transfersL/ (-180) (-130) (-200) (-1n0) (-230) (-270) (-220) (-170) Government saving 50 50 50 20 -20 -110 250 300 Public enterprise saving 170 180 130 130 110 1h0 170 190 Pub'lic saving 220 230 180 150 90 30 420 h93 Public investment 340 390 510 610 790 780 870 760 Sector Balance -120 -160 -330 -46o -700 -750 -450 -270 Private Sector Di-sposable income 7250 7810 7620 90h0 10150 10690 10960 10540 Ccnsumption 6430 6950 7200 8310 9010 9250 9660 q780 Frivate national savings 820 860 420 730 11o 1hho 1300 760 Private investmentb/ 320 570 390 640 680 590 580 600 Sector Balance (before transfers) 500 290 30 190 h6o 8ho 710 160 Current account2/ 380 130 -300 -370 -240 100 270 -110 External transfers (mainly private) d/ -360 -190 -190 -60 -290 -770 -620 n.a. Current Balance after transfers 20 -60 -490 -430 -530 -670 -350 n.a. a/ Derived as the residual between current government expenditure (cash basis) and government consumption as given in the national accounts. The uneven trend in recent years probably reflects some differences in the coverage of the two series, but the general order of magnitude of this item seems correct. b/ All inventory movements have been attributed to the private sector. c/ Differs moderately from balance of payments data in several years but in principle this covers the balance on goods, services and factor income payments. d/ Net transfers (except for official grants) and errors and omissions (See Text Table 8 for detail); recent information indicates that these transfers may have been even greater than shown here, especially for the period 1963-66, because errors and omissions now seem understated for those years. (See para 55).  - 12 - Government Finance 28. The large public sector deficits of 1962-64 were financed primarily from domestic resources. One important source was the current and accumulated surpluses of the OCP, of which DH 250 million were transferred to the budget in this period. In addition, OCP borrowed DH 180 million from the Central BAnk for transfer to the budget. Other government enterprises and local authorities also contributed to the financing of the deficits in these years by transferring funds from the banking system to the Treasury, particularly during 1964 when their deposits in the Treasury rose by DH 166 million 1/. The Government also drew on the deposits of the postal checking system and private deposits with the Treasury at an average rate of DH 30 million in this period.2/. Government sales of bonds to non-bank financial institutions averaged about DH 60 million. These bonds, yielding about 4.6 percent on average were sold rorincipally to the domestic insurance companies, and to a lesser extent to the government ownet Caisse de Depot et de Gestion. However, the most important single source of government finance during 1962-64 was borrowing from the banking system. Net bank claims on the government in this three year period rose by DH 1.0 billionl, an amount equivalent to 40 percent of the end 1961 money supply. 29. Foreign aid channelled directly to the Central Government's budget averaged around DH 250 million from 1959 through 1963, then rose to DH 350 million in 1964 and to over DH 500 million in 1965, but dropped again to around DH 250 million in 1966. The United States has been the main source of aid in most years, although from 1966 through 1965 French aid equalled it in importance. In 1965 and 1966, there were also disbursements against loans from the IBRD, Kuwait and Germany. 30. In addition to direct receipts of foreign aid (which include trans- fers from counterpart funds), the budget has received considerable support in recent years from a net increase in the counterpart balances of foreign aid, most of which are deposited with the Treasury. According to preliminary estimates, the increment in these balances went up from DH 40 million in 1964 to DH 103 million in 1966, and is projected at DH 187 million in 1967. The principle source of this increase has been grain imports financed by U.S. PL 460 and by eighteen months credits from France. (In total, such credits 1/ Since 1963, all local government and government enterprises have been required in principle to hold their surplus funds with the Treasury. In 1964, deposits of non-financial public entities with the Treasury went up by DH 116 million, which apparently was mainly a reflection of a one-time transfer of deposits from commercial banks, resulting from the 1963 directive. In addition the deposits of the CDG with the Treasury rose by DH 50 million in 1964, but these declined by nearly the same amount in 1965). See Appendix Table A 18 for detail of Treasury deposit accounts. 2/ Data published in the IFS on total private demand deposits with the Treas;rv and with the postal checking system (which are treated as part of the money supply by the IFS) show significant differences from Moroccan Treasn:-- data. Part of the explanation lies in recording lags (e.g. for the four year period 1962-1965 as a whole, these differences largely cancel out).  - 13 - from France have amounted to DH 270 million in the 1964-67 period, of whici DTI 45 million had been repaid at the end of 1966; another DH 45 million repayment is due in 1967). 31. In addition to the increase in direct foreign aid and counterpart balances in 1965-66) there was an increase in bond sales to non-bank finan- cial institutions to an average of DH 85 million in this period. But the main cause of the improved public financial situation in these years was,. as already noted, a sharp improvement in the current balance of the Government, combined with stability in govermnent capital expenditures. The overall result was a reduction in the government reliance on bank credit to DH 100 million in 1965 and less than DH 50 million in 1966. For the year 1967, the Government currently estimates there will be a slightly lower current surplus than for 1966. Total revenue (including the surplus of the Caisse de Compensation arising from the sugar price differential) is estimated at only 1 percent above 1966, mainly because of the stagnation of incomes in 1966 resulting from the poor crop years experienced in 1966 and expected for 1967. Current expenditures on the other hand are likely to grow by around 3 percent. Capital expenditures, which fell sharply in 1966 to around DH 500 million, are projected in the official Budget for 1967 to grow to DH 886 million, but judging from the difficulties of implementation encountered in 1966, a recovery to even DH 700 million seems fairly opti- mistic. Using the latter figure, the overall deficit after projected amortization payments and net treasury operations is estimated by the Mission at DH 730 million as against DH 490 million in 1966. 33. On the basis of foreign aid commitments presently made and likely in the next few months, disbursements in support of the Central Government budget are likely to rise to around DH 490 million in 1967 including the counterpart funds originating in wheat deliveries under PL 480 and medium term credits from France (net of repayment). Other elements consist of DH 39 million in estimated disbursements of long term French aid against commitments made before 1966; DH 30 million of IBRD and IDA loans for education and agriculture; DH 77 million against three loans from Germany for infrastructure at Safi, tourist infrastructure, and general imports; and DH 45 million against two loans from Kuwait for irrigation projects. 34. This would leave DH 240 million to be covered by domestic finance. Of this, DH 60 million is expected to be provided by a transfer of OCP profits, while bond sales to non-bank financial institutions might well reach DH 90 million. On these assumptions there would remain a need for borrowing from the banking system of less than DH 100 million, an amount well within the limits required for financial stability under present conditions. 35. The main elements in the financing of the Central Government's budget deficit since 1962 are summarized below:  - 14 - Table 5: CENRAL GOVERNMENT FLIANCE, CASHI BASIS (millions of dirhams) 1962 1963 196)4 1965 1966 1967 -962 -963 -964 19 5 (est.) (IBRD est.) Operations Current expenditure 1593 1937 2115 1968 2004 2060 Current receipts (1476) 1686 (1741) (1897) (1962) (1960) Surplus of Caisse de Compensation - - (8) (155) (169) (195) Current revenue 1476 1686 1749 2052 2131 2155 Current Balance -117 -251 -366 83 127 95 Capital expenditure-/ -521 -652 -650 -635 -500 -700 Net Treasury operations outside budget -107 -16 -52 -51 13 -45 Anortization b/ -56 -91 -42 -53 -132 -80 Total financing required -801 -1010 -1110 -656 -492 -730 Financing Current dividends from OCP - c/ 150 100-/ - - 60 Change in Treasury deposits: 123- 63 214 4 109 200 Changes in counterpart balances e/ (n.a.) (n.a.) (40) (72) (103) (187) Other (n.a.) (n.a.) (176) (-68) (6) (13) Bond sales to non-bank institutions 57 58 65 103 68 90 Use of bank credit and d/ cash balances 3152/ 338 339-' 101 36 80 Subtotal of above 495 609 718 208 213 430 Foreign grants - - - 14 - - Foreign loans 2h1 200 345 527 245 300 Errors and omissions 65 201 47 -93 34 - Total financing 801 1010 1110 656 492 730 a/Includes financial transfers to government enterprises. b/ Includes amortization of external loans repayable in local currency. c/ DH 6Zamillion "Special deposit of the Bank of Morocco" in this year here included with use of Bank credit. d/ DH 180 million borrowed by CCP from the Central Bank and transferred to the government in this year is included under use of bank credit. e/ Net of repayments to France under the wheat credits.  - 15 - The Growth of Specialized Financial Institutions 36. In recent years, the Moroccan Government has been actively pro- moting a number of specialized credit institutions iwhich have been serving an increasingly useful role in lending to key sectors of the economy. The most important of these are: the Caisse de D6pot et Gestion, the Bank Nationale de Developpement Economique and the Caisse Nationale de Credit Agricole. In addition, long established financial institutions such as the insurance companies continue to play an important role in mobilizing domestic savings. 37. The CDG, which was established in 1959, administers the major part of the public sector's social security(CNSS) and pension funds, all the funds of the Caisse de'Epargne Nationale and deposits of a variety of other public institutions. In total the resources of the CDG have grown from DH 78 million at the end of l959 to DH 4h7 million at the end of 1966. The most dynamic source of CDG funds in recent years has been the Caisse Nationale de Securite Sociale whose deposits with the CDG rose from DH 23 million in 1961 (the year the CNSS was established) to DH 171 million at the end of 1966. The resources of Caisse d'Epargne have also shown a steady increase - from DH 5 million in 1959 to DH 82 million in 1966. Of the annual average increase in total resources of DH 55 million since 1959, the CDG has invested around DH 20 million annually in government securities.l,' The remainder has been used mainly for the finance of residential construc- tion and tourist facilities, either directly or through the Caisse de Pret TImoblier du 4aroc (in which CDG holds a 65 percent participation). CDG also invests in transport services related to tourism (e.g. the new ferry company "Limadet" from Tangiers to Ialaga), in two insurance companies and a consu- mer credit institution. Finally, CDG trades on the small Casablanca stock exchange from time to time mainly with a view to dampening fluctuations. 38. Another public institution of growing importance is the Caisse Nationale de Credit Agricole (CNCA), whose funds are supplied mainly by borrowing from the Central Bank and to a smaller extent by part of a recent IBRD loan. Gross lending by the CINCA averaged DH 60 million in 1962/63 and 1963/64 but rose to DH 146 million in 1964/65. The latter increase was entirely due to the working capital needs of the CGEA (Centrale de Gestion des Exploitation Agricole), the agency created in 1965 to run the 250,000 hectares of farm land taken over from foreign settlers in that year. 1/ The domestic insurance companies have invested around DH 50 million annually in government securities. Although comprehensive data are not available on the sources and uses of insurance company funds, it is believed that this has constituted the bulk of their investments in recent years partly as the result of government regulations oblig- ing them to invest domestically, and because of vwhat they regard as a lack of safe alternative investment opportunities.  -_16 - 39. The BNDE, a development finance company reorganized with the help of IFC in 1962 is the main source of long term finance for industry. Its equity funds have been provided by private Moroccan and foreign in- vestors, the Government and IFC. Its loan funds come from the government and the IBRD. The volume of BNDE direct lending rose from an average of around DH 20 million annually in 1962-64 to DH 37 million in 1965, mainly because of an exceptionally heavy investment (using IBRD funds) in a new government-owned sugar refinery in the latter year. Consolidated Finances of Public Enterprises and Financial Institutions 40. Complete data are not yet available on the sources and uses of funds of these credit institutions, or for those of the Government's main operating enterprises. However, a rough picture can be put together, which shows the comparatively large magnitude of domestic and external funds channeled through these entities in recent years, both for fixed public enterprise investment, and for credit to the private sector. Table 6: CONSOLIDATED ESTIMATES OF OPERATIONS OF MAIN PUBLIC FINANCIAL INSTITUTIONS AND ENTERPRISES (millions of dirhams) 1964 1965 1966 1967L/ est. Sources: Operating surplus of enterprises 140 170 190 185 Increase in resources of CDG and CNSS 90 43 76 60 Transfers from Gov't budget 1/ 138 169 47 160 Credit from Central Bank 2/ - 27 24 - Foreign official loans 3F 14 20 98 94 Suppliers' credits L/ 58 140 50 70 OCP's use of cash balances 32 33 _ Total Sources and Uses 471 602 485 569 Uses: Fixed investment 272 399 312 338 Credit to private sector 4/ 57 90 95 110 CDG purchases of Gov't bonds 21 28 5 10 OCP transfers to Gov't 100 - - 60 Repayment of external debt 4/ 40 35 65 65 All other 5/ -18 50 8 -14 1/ Included in Central Government capital expenditures in Table 4. 2/ Excludes DH 180 million loan to OCP in 1964, which is included in Table 5. 3/ Disbursements of loans to BNDE, CNCA and OCP. 17/ Rough estimates by Mission. &/ Residual; includ6s changes in deposits with Treasury and other deposits net of advances to and from Treasury, as well as errors and omissions.  - 17 - Overall Monetary Movements 41. Commercial bank credit to the private sector expanded rather sharply from 1960 through 1962 reflecting the moderate recovery of private sector activity in that period. Since 1962, commercial bank credit to the private sector has been generally stable, although there have been some important temporary swings. 42. The combined impact of the large credit expansion to the private sector in 1961-62 and to the public sector in 1962-64 was a doubling of total domestic credit outstanding in the four year period 1960-64. At the same time, private time and savings deposits with the commercial banks dropped moderately, and foreign exchange reserves fell substantially - from DH 1.3 billion at the end of 1960 to less than DH 400 million in 196h. The money supply rose by over 7 percent a year on the average and prices by about 4 percent. In order to stem the loss of reserves, the Government imposed a temporary ban on a number of imports during 196h, increased some taxes and ordered cuts in current government expenditures. It also negot- iated a standby agreement with the IIMF in mid-1965 for a drawing of up to DH 165 million. 43. During the year 1965, these measures were sufficiently effective to limit total bank credit expansion to DH 110 million (3 percent), and to permit a build up in exchange reserves to DH 611 million without recourse to the IMF standby. As a result of this improvement, the restrictions on imports were largely removed in the fall of 1965, after tariffs on a number of them had been raised substantially. However, this was followed by a temporary speculative increase in demand for credit for imports. At the same time there was a substantial increase in commercial bank credit to the Office de Commercialisation d'Exportation, the agency created in 1965 to handle the nationalized export trade. The monetary authorities acted vigorously in February 1966 to curb these trends. They imposed a 100 percent reserve requirement on any increase in commercial bank deposits, required the banks to maintain until the end of 1966 their holdings of treasury securities, and established new quotas for discounting at the Central banks much tighter than the previous limits. In addition, the commercial banks were urged to reduce net lending by about 8 percent. These measures proved highly effective (probably too effective), and during 1966, commercial bank credit to the private sector fell by nearly DH 100 million. Together with the continued improvement in the public sector's position, the net result was a reduction in total credit to the economy between the end of 1965 and the end of November 1966 of over DH 50 million. Net foreign exchange reserves were down slightly from their December 1965 level, and the money supply at the end of November 1966 was 2 percent below the level of the previous November. For the year 1966, as a whole, prices were also about 2 percent lower than 1965.  - 18 - Table 7: MONETARY SURVEY 1960-1966 (million DH) Nov. 1960 1961 1962 1963 1964 1965 1966 Total credit to Govt. (net)!V 402 572 945 1307 1514 1572 1602 Central Bank credit to enter- prises 2/ 120 125 97 145 305 332 356 Commercial Bank credit to private sector 111117 1L37 1600 1664 1626 1648 1540 Total domestic credit 1639 2070 2642 3116 3445 3552 3498 Time and savings deposits -227 -221 -249 -223 -190 -232 -248 Other liabilities (net) - 68 -124 - 64 - 84 - 51 - 72 -165 Foreign assets (net) 1298 1076 911 694 381 611 593 Money supply 2642 2801 3241 3503 3585 3859 j678 J Including private sector deposits with the Treasury and postal checking deposits, as reported to the IMF. 2/ Mainly public enterprises, including OCP and CNCA. 44. By the end of 1966 it was felt by the Moroccan monetary authorities that some easing of credit restrictions was called for, in order to stimulate activity in manufacturing and trade which had been adversely affected both by these restrictions and by the fall in incomes resulting from the poor 1965/66 grain crop. As a result, in November, the 100 percent marginal reserves requirement was replaced by a 25 percent reserve requirement and the freezing of Treasury bills was replaced by the former regulation requiring the Commercial Banks to hold government securities equivalent to 25 percent of their deposits liabilities. Foreign Trade and Payments 45. In the second half of the 1950's Morocco's current surplus on its external accounts averaged DH 400 million annually, mainly as the result of large foreign government expenditures on the military installations in the country. In addition, public capital assistance averaged around DH 200 million annually. Thus in spite of an outflow of private capital estimated at an average of DH 300 million a year, Morocco accumulated sizeable foreign exchange reserves during 1957-60.  - 19 - 46. After 1960, private capital apparently continued to flow out at about the same rate. Public capital inflow increased to an average of DH 350 million in 1960-6hs, but foreign government expenditures in Morocco fell sharply, from an average of DH 700 million in 1956-60 to DH 280 million in 1964. Thus, in spite of the fact that imports rose more slowily than other current earnings in that period, there was a draw-down of foreign exchange reserves totalling DH 900 million in 1961-64. The main factors responsible for the reversal of this trend in 1965 were increased foreign aid and a cut in import payments. 47. Morocco's total current earnings rose by around 4 percent annually between 1960-61 and 1964-65 but declined as a percent of GDP at current prices in that period from 27 percent to 23 percent. Current receipts from foreign governments dropped from DH 380 million to DH 250 million, while all other earnings went up by around 5 percent annually. As estimated for balance of payments purposes, merchandise exports rose by 4 percent a year - from DH 1.88 billion in 1960-61 to DH 2.21 billion in 1964-65. Invisibles earnings, other than government receipts, rose by nearly 8 percent from DH 270 million to DH 420 million, as a result of the strong expansion of tcurist earnings. 48. Moroccols merchandise exports are well diversified with the largest single item, phosphate rock, accounting for 25 percent of the total, and citrus, the next largest for 14 percent. Phosphate exports rose from DH 42C million in 1960 to a peak of DH 580 million in 1964, but fell off moderately in 1965, because of a temporary marketing difficulty. Other mineral exports also rose at a healthy rate between 1960 and 1965 - from DH 230 million to DH 300 million, mainly reflecting a large increase in lead exports owing to the sharp rise in world prices. Citrus exports rose by 50 percent in this four year period and exports of other fruits and vegetables in all forms (fresh, dried and canned) by 80 percent to a total of DH 420 million in 1965. Wine exports also went up substantially in this period, but exports to France, the main purchaser, have now reached the quota limit, and in 1965 when there was an exceptionally good harvest, a large part of the crop went into stocks. Most other exports have been stagnant or declined in the past five years, particularly those of the traditional agricultural sector: grain, vegetables, horsehair, canned fish, cork and livestock products. Together, these amounted to DH 390 million in 1960-61 but fell to DH 330 million in 1964-65. In the same period, exports of manufactured products declined from DH 160 million to around DH lhO million. 49. Preliminary customs returns for the first half of 1966 show a substantial drop in total exports, particularly of citrus, as compared with the first half of 1965. However, receipts from exports are recorded by the Office du Change for that period show an increase of 10 percent, and for the third quarter of the year an excess of 10 percent over 1965 is also shown. The difference is probably due in part to prompter and fuller payment on exports being handled by the OCE, but under-counting by the customs on first half exports is also thought to account for an important part of the difference. 50. Total imports of goods and services rose by only 2 percent annually between 1960-61 and 1964-65, and as a result fell in relation to GDP by even  - 20 - more than exports - from a ratio of 28 percent to one of 22 percent. Merchandise imports were almost completely stagnant in this period, while invisible payments rose by around 6 percent annually. The latter increase was due mainly to an expansion in tourist spending abroad, in Moroccan government diplomatic expenditures and in pensions to retired expatriates. In 1965, invisible payments dropped because of a sharp cut in travel allow- ances for Moroccans. 51. There have been some significant changes in the composition of imports in recent years. Food and beverage imports rose considerably in 196L-65, because of the sharp increase in world sugar prices, which brought total sugar imports to DH 300 million in the latter period, or 1 percent of the total. Food grain imports have varied with harvest conditions, from around DH 120 million in 1961 to DH 60 million in 1963. In 1966, they are expected to be more than double the 1961 level. Imports of finished consumer goods declined substantially, from 27 percent of the total in 1960 to 21 percent in 1964, reflecting both a decline in consumption by Europeans, and an expansion of domestic output of consumer goods. The import restric- tions of 1965 produced a further reduction in this category, and as noted, gave a new impetus to import substitution, particularly in textiles. 52. The total value of petroleum imports has declined because of a shift from refined products to crude oil resulting from the completion of a large refinery in 1963, and also from a comparatively slow growth in demand for finished products. Other industrial raw material imports have, however,risen substantially in support of the increases in activity of the modern agricultural sector, manufacturing and mining. Imports of metal products, machinery and industrial transport equipment have gone up by 20 percent since 1960-61, or less than the increase in fixed investment (the ratio falling from 42 percent to 35 percent in 196b-65). This apparently reflects an increase in the domestic component of investment. 53. Imports in the first half of 1965 are reported in Moroccan customs data to be up about 1 percent over the first half of 1965, mainly because of increased imports of petroleum, semi-finished products and investment goods. For the year as a whole, it is estimated they may be as much as 20 percent higher as the result of higher wheat imports which arrived in the second half. 5b. Morocco's private transfer receipts have expanded substantially in recent years, mainly because of an increased number of Moroccarnworking abroad. Their estimated remittances doubled between 1960 and 1965 to a total of DH 120 million in the latter year. However, outward transfers of both a current and capital nature have gone up much more sharply. The main recorded transfer payments consist of recurrent transfers of expatriates working in Morocco, and capital transfers of emigrants leaving Morocco. In addition, miscellaneous government transfer payments to abroad (for pur- poses which could not be determined by the mission) have become important in recent years. The "errors and omissions" item in the balance of payments, which is believed to be primarily a reflection of unrecorded private transfers,  - 21 - has been negative in most years, reaching peaks of nearly DH 500 million in both 1959 and 1964. Temporary speculative factors were undoubtedly important in both those years. FIowever, taking one year with another, it may be estimated that capital transfers reflected in this item averaged DH 250 million in the 1960-65 period 1/. There are some indications that the level may be significantly lower in 1966. The nationalization of exports in fruits and vegetables in mid-1965 was aimed primarily at reducing illegal capital outflow believed to be taking place through under declar- ation of these exports. In addition, the government had two bond issues totalling DH 20 million in 1965-66 designed to make foreign owned capital more comfortable in the country by offering repatriation of interest (4 percent) and principle over a 10-year period. 55. Net private capital inflow into Morocco has been quite small, averaging around DH 10 million annually. The major equity investments have been by private oil companies for exploration purposes. Gross public capital inflow on the other hand, went sharply up, from around DH 300 million in 1960 to a peak DH 670 million in 1965. Within this total, grants have remained steady at around DH 70 million, mainly for food relief programs. Most of the loans have gone to the Central Government, but some have gone to the government enterprises, and a moderate amount to the private sector through such channels as the BNDE and CNGA. Use of suppliers' credits by government enterprises has apparently averaged around DH 80 million in recent years. The official balance of payment estimates make no allowance for use of these credits, although it is believed the imports financed by them are included in the customs records. If this is true, then the errors and omissions item would be higher by the amount of the suppliers' credits. 56. By mid-1966, Morocco's external debt amounted to around $520 million, an amount equal to about 80 percent of annual export earnings. Of the total of $520 million external debt, about $350 million represents debts of the government, the remainder being debt of public enterprises. Out of the government debt, around $55 million was undisbursed as of mid- 1966, while $53 million in enterprises debt was undisbursed. Reliable data on service schedules are available for only $480 million of this debt. On this amount service payments are estimated to rise from an estimated $37 million in 1966 to a peak of $L4 million in 1968, (including an estim- ated $11 million against French wheat credits contracted through 1966) and then drop to $36 million by 1970. However, most of the $40 million in debt on which service data are not available consists of supplierst credits with fairly short average repayment terms; these might well add another $9 million annually to the service burden in the next several years. In addition, two suppliers' credits totalling $16 million were contracted for sugar mills early in 1967, while another $25 million in wheat credits from France are expected to be used in 1967. Including estimated service on these, total service might be estimated at around $46 million in 1966 equivalent to 8 percent of estimated current external earnings, and in 1969 at around $70 million, including $20 million that will fall due on the wheat credits. By 1970, service on the existing debts will fall to around $47 million. 1/ This may be higher by around DH 80 million in recent years. See para 55.  - 22 - Table 8: SUMMARY BALANCE OF PAYMENTS (mill. DH at current prices) 1959 / 1960 1961 1962 1963 1964 1965 Current Receipts Merchandise exports 146o 1934 1836 1788 1935 2219 2207 Receipts from Governments 550 437 328 287 319 277 258 Tourist earnings ) 220 134 126 161 218 306 332 Other invisibles ) 132 134 139 154 161 138 Total current earnings 2230 2637 2424 2375 2626 2963 2935 Current expenditures Imports 1322 1952 2125 2086 2186 2165 2000 Investment income payments )39 136 189 194 151 115 169 Other invisibles ) 359 408 462 525 584 496 Total current payments 1717 2447 2722 2742 2862 2864 2665 Current account balance 513 190 -298 -367 -236 99 270 Private transfer receipts n.a. 86 83 99 140 127 151 Recorded transfer payments n.a. -175 -213 -255. -354 -415 -466 Private capital outflow ) - 66 - 63 - 28 - 14 - 34 - 41 ) 17 Gross private capital inflow ) 56 56 23 25 46 52 Official grants 37 86 69 62 85 60 76 Official loans b/ 156 216 209 272 227 377 598 Less: recorded amortization - 16 - 11 - 7 - 8 - 10 - 87 -101 Use of reserves -208 -343 262 101 217 312 -231 Errors and omissions b -h95 - 39 - 60 101 - 80 -485 -308 a/ Exchange rate until October 16, 1959 was DH 4.20 to $1.00 subsequently it became DH 5.06 to $1.00. b/ Use of suppliers' credits by enterprises is omitted from these official balance of payments estimates. Rough estimates by the mission indicate that these may have amounted to the following: (million DH for 1960-65 respectively), 13, 44, 35, 100, 58, 147. If included in the balance of payments, errors and omissions would rise by equivalent amounts. c/ Apparently includes amortization on suppliers' credits at least in 1964 and 1965.  - 23 - CHAPTER II DEVELOPMENT PROBLEMS & PROSPECTS 57. Considering the difficult transition period through which Morocco has been passing, the Government must be credited with a fair measure of success in dealing with its problems of economic growth and finance during recent years. However, a substantially greater effort is called for in the near future if the economy is to achieve any sustained increases in per capita living standards and if it is to avoid a very serious further increase in unemployment. Major campaigns are needed to reduce the population growth rate and to create more jobs; domestic investment must be expanded sub- stantially, and steps must be taken to ensure greater efficiency in the use of investment resources. Population and Labor Force Growth 58. The 1965 World Bank Survey Mission Report drew attention to Morocco's serious population problem and proposed a large scale campaign to reduce the birth rate. The Moroccan Government which even before then had been cognizant of the issue has since begun to take action. In 1966 it set up pilot centers for distributing birth control devices in the cities, and it also established provincial and national commissions to promote popular acceptance of the program. There will undoubtedly be some popular resistance, particularly in rural areas. If it proves necessary to provide a moderate financial in- ducement to gain rapid acceptance, such expenditure might yield a high economic return to M4orocco in terms of savings on consumption and investment that would otherwise be required to provide for the increased population. In any event, the urgency of the problem permits no delay in pressing ahead with preparations for a large scale campaign and in getting it underway as soon as the most effective and acceptable techniques for the Moroccan situation have been carried out. 59. However, there are no measures of birth prevention which can affect the population of active age before 1982 at the earliest. Thus, the Govern- ment's demographers, assuming a large scale control program will not get under- way before 1970, forecast that the numbers of persons eligible to join the labor force by 1985 under a reduced birth rate projection will be the same as under their projection based on a constant birth rate - about 12.9 million. Assuming changes in the participation rates of various groups notably a rise from 10 percent to 30 percent among urban females, the total participating should be about 8.4 million. This may be compared with an estimated active population of 4.6 million in 1965. 60. We have no direct information on current unemployment. The census of 1960 showed that 21 percent of urban males of active age were unemployed then, with rates ranging to about 25 percent for many age sub-groups in such cities as Casablanca, Kenitra and Tangier. It is reasonable to believe that the general rate for urban males rose to something like 25 percent by 1965. Rates among rural men are much lower, as under-employed are not considered unemployed. Likewise, rates among women, urban and rural, are nearly zero.  - 214 - All rates are in terms of total population in the age group. If put in the more usual way on the base of the participating population only they would of course be higher. 61. A crude estimate of total unemployment in 1965 would then be about 400,000 of which about 250,000 would be made up of men in cities. Such very large numbers pose one of the gravest problems facing the Moroccan Government. However, the problem is likely to grow even more serious as the result of additions to the labor force expected in the next twenty years. The Develop- ment Ministry's demographers estimate that to employ all new entrants to the labor force, including women at a gradually ascending ratio to all women of active age, would require creating jobs at annual rates rising from an average of 150,000 a year between 1965and 1970, 160,000 between 1970and 1975, 200,000 by 1980 and 290,000 by 1985. These figures rest on somewhat speculative assumptions concerning the distribution of population growth between city and country, but they indicate the order of magnitude involved. They compare with our rough estimates of new jobs created in recent years at an annual rate of less than 100,000 annually. 62. Clearly the creation of employment must be a major concern of economic policy in the years ahead. There are no easy solutions to offer. As a general rule it can be recommended that investment proposals be ex- amined closely for their employment effect. Equally important, measures should be taken to prevent undue rigidities in the labor market from develop- ing and to hold down actual wage costs so that Moroccan production can benefit financially from the low opportunity cost of labor. Programs of employment such as the Promotion Nationale should be maintained until in- vestments yielding higher economic returns (and as many jobs) can be de- veloped on an adequate scale. But the main objective should be the quickest possible implementation of those investments which promise to yield good returns to the economy. The Growth Potential 63. Morocco has a number of important economic assets. Adequately developed, these could lead within a few years to a substantial acceleration in the growth rates of output and employment. Much of Morocco's comparative advantage derives from its proximity to Europe and from its climate. In agriculture, these factors have already been combined with Morocco's con- siderable resources of good soils and water to create a healthy expansion in exports of fruits, vegetables, wine and cotton to Europe. The technical possibilities for further expansion are excellent. There is also a good potential for expanding output of grain and livestock, possibly on an even more economic basis than expansion of the main export crops - up to a point. In tourism, the basic factors combine with impressive cultural and scenic assets to offer a major growth potential which has just started to be developed. In minerals, Morocco has not yet had the luck to discover important petroleum deposits, but it does have the world's largest deposits of phosphate rock, and also smaller commercial deposits of other minerals currently in good demand. The only constraint on expansion of revenue from phosphates in the medium-term lies in effective demand; available reserves are virtually unlimited. Manufacturing offers a considerable potential for  - 25 - expansion in further selected import substitution, and for export, both in the context of an eventual Maghrebian common market and for export to Europe in labor-intensive lines of production. 6L4, Morocco already has considerably more well-trained manpower than most African countries and there are major longer term possibilities for Moroccans to replace higher paid Europeans now working in large numbers in the country. For the short term and even the medium run, however, if Morocco is to accelerate its growth rate, it will probably have to import additional technical and managerial skills, while concentrating on further development of its own "cadres" of higher level skills. But in the medium run, even Moroccots growing surplus of unskilled manpower offers good opportunities for earning additional income abroad. It is believed that about 70,000 Moroccans are now working abroad. Remittances were DH 117 million in 1965. If the European countries continue to experience labor shortages, as they did in the early 1960's, and if Moroccan workers are allowed into the labor-short countries, these magnitudes could be expanded substantially in the next five to ten years. 65. The policies of Morocco's main trading partners with respect to imports of both goods and services from Morocco will clearly be an important factor in how fast and how efficiently that country can exploit its potential. The main questions at the moment concern the terms under which Moroccan exports, particularly of fruits and vegetables, will be able to enter the European Common Market, but there are also important potentials for expansion in Northern and Eastern Europe. Availability of foreign aid and foreign technical assistance also constitutes an important element over which Morocco obviously does not have complete control. However, the main decisions affecting Morocco's economic growth rate rest with Morocco. Investment Prospects: An Overall View 66. The Government is aware of its main economic potentials and of the need to increase its investment rate to exploit them in an efficient fashion. In order to help it work out a detailed public sector program for this purpose, it sought advice from a World Bank Survey Mission in 1964/65. That Mission prepared recommendations for a six year public investment program covering 1965-70. The Government then made final a Three Year Plan for 1965-67 which is in accordance with the lines indicated by the Survey Mission in most respects. The Mission's report proposed fixed investment at an average rate of DH 1,050 million for 1965-70 and public credit to the private sector at an average of DH 150 million, as compared with actual averages during 1963 and 1964 of DH 805 and 50 million respectively for these spending categories. The Three Year Plan projected fixed public investment at an average of DH 980 million and public credit at an average of DH 170 million.l/Thus, in its overall magnitudes, the Plan appeared only moderately ambitious in relation both with the recent past and to the longer term projections of the Bank Mission. Moreover, the Plan's statement of priorities fitted well with the country's potential, emphasizing the development of agriculture, tourism and skilled manpower as its primary objectives. 1/ After adjustments for comparability with the Survey Mission. Includes allowance for primary education, the foreign-aid component of Promotion Nationale, and public credit to the private sector through BNDE, all of which were omitted from the Three Year Plan. See Table 10 at the end of Chapter for full details.  - 26 - 67. However, actual expenditure results in 1965 and current estimates for 1966 show a considerable shortfall below the total Plan targets, with the greatest lags being precisely in the three sectors given the highest priority by the Plan. Total public investment in 1965 and 1966 is estimated at DH 860 million and DH 750 million respectively, as compared with Plan targets of around DH 950 million for both years. As already noted in Chapter I, spending on agriculture was only two-thirds of the targets in both years, while in tourism and education (other than primary), the shortfalls were relatively even greater. In the case of agriculture and education the short- falls were due mainly to shortages of trained manpower and to organizational difficulties; in the case of tourism, the original estimates were probably unrealistically high. In several sectors, outlays were close to or over the Plan's estimates in 1965/66, especially in manufacturing and community de- velopment. Public credit to the private sector averaged only DH 95 million in 1965-66, because of financial stringency and of delays in making effective arrangements for providing adequate external finance for this purpose. 68. As mentioned in paragraph 18, serious efforts are now being made to overcome the difficulties responsible for the shortfalls in the Three Year Plan. However, even with a substantially improved effort, there is no real possibility now of making up the entire shortfall of 1965-66 during 1967. This would entail an increase in public outlays to DH 1,330 million in fixed investment from the average of DH 805 million (excluding military) realized in 1965-66, and an increase in public sector credit to over DH 200 million. Tihdeed, in agriculture, it will take the government's best efforts to achieve even a moderate expansion in 1967 (on an efficient basis) over the record of the previous two years, given the major reorganization which has just taken place and the need to "brealc in" a large number of foreign experts who have been recruited to replace those departed during 1965-66. In tourism, the prospects for a sizeable expansion seems more promising as the result of efforts made during 1966 to sort out the administrative and manpower bottle- necks. A continued high level of public investment in mining and manufacturing also seems assured on the basis of commitments already made. In transport and electric power, too, important new projects should be ready for construction in 1967. In total, it seems possible that an increase in public investment to around DH 910 million might be achieved in 1967, and that credit to the private sector might be expanded effectively to as much as DH 110 million. 69. Assuming that improvement can be achieved during 1967-68 in the administration of key development programs, a substantial further expansion in public outlays should be targeted for 1968-70 in order to ensure reasonable progress toward increased per capita output and employment. As a tentative goal, fixed investment might plausibly be set at around DH 1,300 million for 1970 and credit to the private sector at DH 200 million. On a reasonably phased schedule, this would result in total public development spending for 1965-70 of around DH 6,800 million or only slightly less than the total recommended by the Survey Mission.  70. For the most part., the composition of development spending suggested by the Survey Mission seems appropriate to the authors of this report. There- fore, the specific sector programs described at length in the Survey Mission Report are not discussed here in any detail. However, several modifications to the Survey Mission proposals do seem desirable on the basis of more recent information. These are indicated in the summary discussion of the main sector prospects below. 71. The Survey Mission Report dealt almost exclusiVely with public sector investment for the sound reason that virtually no information on pri- vate investment was then available. Since 1964 there has been an improvement in data on private investment for several sectors, particularly manufacturing, mining and tourism. On the basis of these indications, and on the assumption of a continued improvement in the climate for private investment in Morocco, it might be estimated, very tentatively, that privzte fixed investment can be expanded from the DH 650 million average of 1964-66 to around DH 1,000 million by 1970. The most promising sector by far for private investment is tourism, but there should also be significant possibilities for expanded private investment in agriculture, manufacturing, the construction trades, road trans- port services and housing. Investment Projects in the Main Sectors 72. The annexes to the present report provide a description of the problems and possibilities in several important sectors. The expenditure implications are summarized briefly here, and sketches of investment pros- pects in other sectors are also given. Azriculture 73. The success of the Government's efforts in agriculture will depend on its expressing in empirically valid priorities the broad policies which it has adopted and on embodying those policies and priorities in programs capable of execution with the resources at hand. To date, the record judged in such terms is not encouraging. However, the Government has recognized the deficiencies of its recent performance and has requested help from the IBRD in efforts designed to provide the basis for overcoming them. As a result, two related studies are now under way. One is a study of manpower and organization. It is hoped that its conclusions will form the basis for devising an organization capable of planning and executing in a coordin- ated way sound programs of investment. The other study is intended to help develop an inventory of projects and programs analyzed in identical or com- parable fashion so that they can be assessed on their economic merits and a judgment made among them. 7h. Once these essential studies are completed the Government can pro- ceed to the establishment of priorities on a more valid foundation than in the past. Meanwhile, the field of agriculture retains a position of first importance in investment plans. The 1967 capital budget allows nearly DH 400 million for agriculture, as compared to about DH 160 million estimated as expenditure in 1966 (net of the value of United States aid in kind used in Promotion Nationale programs). Well over three-quarters of the increase would be in outlays for irrigated agriculture, including work on dams for the Tessaout Amont scheme and on the Ziz River though, in agreement with the recomnendation  - 28 - of the Survey Mission that investment in major infrastructure be deferred et least until 1968, the Three-Year Plan gave priority status to neither. 75. However, the mission is inclined to believe that the budget fore- cast overestimates the ability of the government agencies to carry out effective- ly investments of this magnitude in 1967. A level of around DH 250 million would seem more realistic. Even that figure represents a rise of 40 percent over the estimate for 1966 (both inclusive of U.S. aid for Promotion Nationale). However, assuming that efforts to improve planning and program execution pro- cedures are reasonably successful, the level of DH 400 million might well be an appropriate target for 1969. 76. All main programs should be expanded. There is a prima facie case, resting on the desirability of investment that will produce returns quickly, for special emphasis on raising yields in rainfed agriculture through appli- cation of fertilizer and improved seed. However, achieving practicable programs on a substantial scale along those lines and arousing motivation among farmers to adopt the innovations, particularly if poor rainfall when they are first tried actually leads tothe fertilizer reducing yields rather than raising them, may take a considerable amount of time. In any case, such an emphasis would not necessarily mean larger expenditures on dryland agri- culture than recommended by the Survey Mission, though it might involve some shift away from tractor plowing in favor of fertilizer and seed distribution. In the case of irrigation, the total proposal for specific projects by the Survey Mission might usefully be expanded, if present impressions of the com- paratively attractive returns on several new project possibilities are confirmed A somewhat larger program than proposed specifically by the 1Mission for soil conservation and reforestation (including Promotion Nationale) would also seem warranted. However, assuming use of the large contingency item (DH 200 million) in the Mission's agricultural program, their total allowance for spending on fixed investment in agriculture does not fall much short of our present impression of the desirable level. 77. Private investment in agriculture would be facilitated by a fuirther expansion of public credit, for which the Survey Mission proposed DH 286 million in the six year period. This now seems like an over-optimistic target since it would involve more than a doubling of net credit expansion in 1968-70 as compared with 1964-66. However, an increase to DH 60 million by 1970 (or double the 1966 figure) might prove feasible. Mining 78. By far the most important investments in extractive industry will be those of OCP. The severe international competition it has recently encountered has kept production level in the last three years and has led it to reconsider the investment plans formed following the encouraging market experience of 1964, when exports advanced 18 percent over the year before. It is believed that the goal set at that time of capacity by 1970 of 15 million  - 29 - tons or thereabouts will be cut by up to a mil-lion tons. Capital spending in 1965-1967 is estimated at around DH 350 million. It is understood that the revisions in the investment perspective might have an especially sharp renercussion on the level of outlays in 1968-1970, pulling them down to DH 200 million for the period. 79. On the basis of what is known about prospects at present, other public investment in mining is not likely to exceed the annual rate of around DH 30 million estimated for 1967, while private investment is also likely to remain comparatively stable at around DH 65-70 million. These investments are likely to achieve no more than a moderate increase in output most of which is likely to go for domestic use (e.g. sulphur for use by Safi, and coal for use by ONEts thermal plants). Manufacturing 80. Public sector investment in manufacturing could reach DH 110 million in 1967 (as compared with DH 69 million in 1966) because work on the third and fourth sugar mills is now under way. There will also probably be some smaller expenditure in connection with the Safi plant and some extension of work on the Tangier industrial zone. The other important public investment in manu- facturing now under consideration is a sizeable minority participation (pro- bably 40 percent) in a second phosphate fertilizer plant under study by a foreign firm with a total estimated cost of DH 250 million. If this is found to be justified and can be completed by 1970, total direct public investment in manufacturing for 1965-70 would approximate the total allowed for by the Survey Mission (DH 537 million) since investment in 1965-67 is estimated at DH 367 million. In addition, the Government has under study a steel mill project to be located at Nador which might cost in the order of DH 400 million. No decision has been made on it, and no allowance is made here for expenditure on the project up to 1970. 81. Private investment in manufacturing has been averaging around DH 100 million in recent years, with textiles accounting for about half the total. Textile investment undoubtedly will fall off by 1968 as problems of excess capacity appear to be looming. However, there are reasonably good prospects for expansion in food processing and, if total investment picks up, for expansion of facilities in construction materials and transport equipment. Moreover, in addition to the second fertilizer project there is a prospect for two important chemical plants with a total cost estimated at around DH 100 million. All in all, given continued improvement in govern- ment policies with respect to private manufacturing, private investment might well rise to a level of between DH 150 and DH 200 million by 1970. Under such conditions, there might usefully be scope for net annual new lending through BNDE of DH 40 million annually by then, as against an average of DH 20 million in 1964-66. Tourism 82. Official estimates of arrivals of tourists, except cruise ship arrivals, show increases averaging 30 percent a year from 1961 through 1964  - 3o - and dropping to a 15 percent average thereafter. It is believed that the estimates do not distinguish properly between foreigners visiting Moroccan residents and those who intend to stay mainly in public accommodations. However, there are indications that a shortage of rooms has tended, particularly in peak seasons, to discourage travel to and in Morocco. In any case, the 20 percent growth rate projected by the Survey Mission for 1966-1970 still appears plausible, if not on the Moroccan record then on the record of other countries, similarly circumstanced, which have preceded it in the tourist industry, and on general forecasts of demand. 83. The Survey Mission, predicating its analysis of investment require- ments on that growth projection, arrived at an aggregate of DH 540 million over the period. With somewhat altered estimates of hotel occupancy rates and unit costs, the present mission finds that at least DH 575 million will be needed. During 1965-1966 estimated investments came to DH 115 million (as against DH 50 million in 1963-1964). Thus for 1967-1970 DH 460 million or more of the total that might be needed is left to be put in place. About DH 50 million of that might come (most of it in the early years of the period) in the form of direct public investment, and public credit would have to finance around 55 percent or more of private investment, meaning DH 230 million for the four years, compared to only an estimated DH 35 million in the two years 1965 and 1906. In addition, public investment in specific infrastructure for tourist purposes, such as beach developments or transportation equipment, might run around DH 15 million a year. Electric Power 84. Basing its program for l'Office National de lElectricite (ONE) an assumed growth in demand of 7 percent per annum, the Survey Mission foresaw spending for needed generation and transmission facilities totalling DH 650 million in the years 1965-1970. The Three-Year Plan was in general agreement on growth assumptions and on the projects called for. It allowed DH 240 million for electric power. In the first two years of the Plan period demand actually grew by only 5.5 percent a year, while the ONE investment program has lagged far behind the projected schedule, in part because of flooding at construction sites. Thus value put in place amounted to only about DH 100 million at the end of last year. The mission foresees a moderate increase in the rate of construction for 1967 but believes that the end of the Plan period will find about three-quarters of the Survey Mission program still to be acccmplished. On the assumption that power demand will quicken in step with accelerating general economic activity, there will be justification for proceeding with the program though it cannot be expected to be finished until sometime after 1970. The present projection calls for a rate of capital spending by ONE of DH 125 million annually by 1970. Expenditures mounting tc that rate will mean completing hydro projects now under way on the Moulouya River, the installation of thermal stations at Casablanca and Djerada to better the system balance between hydro and thermal sources, the achievement of substantial progress on the nation's transmission net, and work on minor installations designed to provide capacity for meeting peaks in demand. It is understood also that ONE has in mind the possibility of breaking ground either before 1970 or not too long thereafter on one or more of the large plants on the Oum Er Rbia River or on the Sebou. The mission urges that  - 31 - the government take final decisions on those investments only after they have been subjected to thorough study in coordination with economic studies of the possibilities of irrigation in both the Sebou and Oum Er Rbiabasin, on the basis of studies. 85. Though the Plan made no allowance for them, the Survey Mission estimated requirements for local distribution facilities at DH 162 million in the six years ending 1970. The present mission does not dispose of information on actual outlays for such purposes in the Plan period to date, but in the belief that the Survey Mission proposals were well-founded a notional allowance of DH 40 million has been set forth for 1970. Transport and Communications 86. In transport and communications, the Three Year Plan projected public investments at an average of DH 125 million annually, or moderately less than those of 196h-65. The Survey Mission's recommendation for 1965-70 involved approximately the same annual average, but with considerably less for tertiary roads, and more for ports and telecommunications. We believe that the total Survey Mission allowance is about right, but that somewhat more should be allowed for tertiary roads, railroads and civil air transport, and less for ports. The adjustment for roads would mean only a specific allocation to this sector of part of the Survey Mission's unallocated general allowance of DH 250 million for Promotion Nationale, which is currently spending annually about DH 10 million on roads and which is largely excluded from the Survey Mission proposals. In accordance with the findings of a recent IBRD pre- appraisal mission it might also mean more work than originally envisaged on improvement of the country's primary road net. The mission recommended that the Bank proceed to the appraisal of a project which might cost upwards of DH 75 million and would involve purchase of maintenance equipment as well as highway construction. In the case of the port program, more recent estimates indicate that the cost of expanding Casablanca (an urgent project) might be lower by DH 15 million than the DH 118 estimated by the Survey Mission. Revi- sions naw being made in the forecasts of phosphate shipment might entail fur- ther reductions. Moreover, the DHh4O million allowance for new oil handling facilities at Mohammedia does not seem warranted, since the necessary facili- ties could be probably included at very little extra cost in the Casablanca extension. The cost Of an oil pipeline from Casablanca to Mohammedia, which would be borne by the oil companies, would be no more than DH 5 million. 87. On railroads, available data suggest that actual outlays in 1965- 1967 will exceed the DH 55 million set forth in the Plan and will approach the total allowance to 1970 of the Survey Mission. Outlays projected here would take the six-year result over the Survey Mission level by perhaps one- fourth. As to civil air transport, expenditures for ground installations both to date and as projected are in line as well with the Plan allowance of DH 31 million as with the Survey Mission allocation of DH 77 million for the longer period. With respect to transportation equipment the Survey Mis- sion's DH 32 million was predicated on purchase of one Caravelle and of smaller planes for domestic flights. The Plan's figure of DH 32 million appears to assume purchase of two Caravelles. In fact, 1965 saw the acquisition of one Caravelle, and by the end of 1967 another large aircraft may be ordered and  - 32 - delivered. It is probable that it will be a Boeing 727, which costs twice as much as a Caravelle. By 1970 another Boeing may well be put into service. The possibility is foreseen that it may be a 707, which is a model even rnore expensive than the 727. Education 88. Since Independence,Moroccan public education has had to expand very rapidly.. In absolute numbers it has been primary education which has seen the greatest growth. Though over half of school-age children still do not attend school, estimated enrolment in primary schools has much more than doubled since 1957-58. Public secondary education of lIoroccans, which was rare before Independence, now enrols more than seven times as many students as in 1957-58. In the past several years, construc- tion of facilities has failed to keep pace with student population, resulting in widespread overcrowding. MIoreover, the proportion of un- qualified teachers at work in the primary schools is high while the short- age of Moroccans qualified to teach at secondary level has compelled employr-ent of large numbers of foreign teachers. 89. Changes in language policy are also now complicating secondary school education. A shift to Arabic to replace French as the language of instruction in the primary schools has recently been completed. A decision now appears to have been taken to introduce Arabic as the language of instruction for the first year of secondary, in spite of a grave shortage of qualified teachers. Unless qualified teachers from other Arab countries can be found, and that seems unlikely at present, there is a real risk that the quality of secondary education will decline markedly for sometime, i.e. until enough Moroccan secondary teachers can be trained. 90. Last year the Ministry of Education prepared a ten-year plan for education involving emphasis on secondary education and on teacher training. It also called for deferring arabization in the secondary schools with a transition year between primary and secondary for purposes of teach- ing French. This plan was not accepted by the government, and it is understood that in effect the education system is now operating without benefit of a planning framework and on ad hoc basis. It seems apparent that this situation cannot continue for long without serious consequences to the efficiency of the educational system. Operations, including capital construction, must without too much delay be placed in a perspec- tive that takes cognizance of the mounting difficulties and of the means available to deal with them. 91. Though secondary education will deserve the greater emphasis in any such perspective, some capital spending for primary education is un- avoidable. Fortunately, the rate of increase of primary enrolments has dropped markedly in recent years. It is estimated at about 6 percent a year in the last three years, and it is believed that with a gradual reduction in repeaters, who now number about 30 percent of the primary school population, an annual rate of increase henmeforth of 3 percent or h percent would permit a gradual rise in the proportion of children of  - 33 - school age attending school. Capital spending for primary schools in the central government budget averaged about DH 25 million a year in 1964-1965 and then dropped off sharphly, to the point where the 1967 budget allows nothing for it. However, some funds may be made available later on an emergency basis. Partly to make up for the backlog implied by this recent slowdown, it is suggested here that primary education could in the three year period 1968-1970 absorb some DH 100 million in capital spending. This would still not provide enough facilities to avoid the need for two shifts at the primary level. 92. Secondary education requires much more elaborate and costly over- head per pupil. Overcrowding is aleeady commrion, facilities are needed in locations which now lack them, and provision must be made for prospective additions to enrolment. The 1967 budget calls for DH 26 million in invest- ment for education above primary level. If the annual increase in secondary enrolment is kept down to 10 percent to provide the facilities needed the 1967 figure should probably be doubled for 1968 and doubled again by 1970; making a total for 1967-1970 of DH 50 million for higher education. Even mith such rises in rates of spending for 1968 and after, totnl investment in education would fall short by DE 50 million of the Survey Mission recormendation of DH 486 million. 93. It is essential to untangling the difficulties now hampering public education that the education of teachers be stepped up dramatically. In fact the balance and volume of higher education should be sharply adjusted to meet future needs not only for teachers but generally for persons trained in science and technology (many of whom must be routed into secondary teaching, as it is precisely in qualified science teachers that are found the greatest shortages) and in methods of planning and administration. This and the other tasks of education should be regarded as matters of highest priority, since fulfilling them is essential to Morocco's economic and social progress. All available means should be brought to bear, and particularly a'roviewJ made of the curricula and the examination system and the methods of certification which are so important a part of the present arrangement. Achievement of individuals who fall short of the high baccalaureate standards cal'led for under the current system of examninntions should be recognized so that it can be utilized in appropriate ways. Special courses, on-the-job training, night schools, and so on, should be made common and incentives provided for participation. The facilities of the school system should be used to the utmost and other governmental facilities called on as needed. All this will depend on the government manifesting an urgent will to adapt resources ard structures to real needs and conditions. All other 94. For public health the Survey Mission proposed average outlays of about DH 18 million or roughly the 1964-65 rate. However, so far as can be determined, no specific allowance was made by the Mission for a greatly expanded birth control campaign. To be effective, we assume that such a campaign mzight require additional clinics around the country as  - 34 - well perhaps as other items of capital expenditure such as automative equipment. Mainly for that reason we estimate that capital outlays on public health might rise to an average of DH 25 million by 1968-170. 95. Direct public outlays on water supplies, housing and rural development have been averaging DH 40 million in recent years. The Survey Mission allowed for an average of DH 35 million, but that does not appear to include any allowance for urban water supplies. No allowance was made, likew-iise, by the Three Year Plan. Presumably most urban water supplies are financed by local governnments. However, on the assumption that they will need some additional central government finance in 1968-70, we assume outlays for that purpose and for other community facilities will rise to an average of DH 60 million in 1968-70. 96. No direct data are available on private investment in residential construction, besides the national accounts estimates of total building. However, by making some very rough estimates of building in other sectors we arrive at an estimate of total private residential and commercial building of around DH 185 million in recent years. That is quite a low level, coming to only 1.5 percent of GNP, which compares with between 2 percent and 3 percent in other less-developed countries for which housing data are available. If the level is, indeed, that low it is probably because the departure of foreigners, leaving accommodations vacant, has made it possible. For the future, it seems likely that the net rate of departures will decline. Therefore we assume that the demand for new private housing is likely to increase. As a very rough guess, a level of DH 270 million for 1970 would appear to be conservative. Public credit for housing would also probably have to rise in such an event, so we have allowed for an increase from an estimated DH 20 rmillion annually in 1964-66 (excluding loans from the Agadir fund) to DH 30 million in 1970. 97. The Furvey Mission made no specific allowance for outlays on civil administration, which recently have been running at around DH 25 million annually. We assume this will rise moderately in the next few years to around DH 40 million by 1970. On the other hand, outlays for the reconstruction of Agadir which averaged DH 30 or 35 million in 1964-65 are now tapering off and should stop altogether by 1968. Outlays for military installations are included in the government's capital budget but were not covered by the Survey Mission. They will probably approach the DH 43 million allowed for 1965-67 by the Plan. The present projections make no allocation for such expenditures. Summary 98. The results of the analysis of probable investment requirements in the public sector are summarized in Table 10, which compares actual results in 1964-65 with estimates by the mission for 1966, 1967 and 1970, with the Three Year Plan, and with the Survey Mission recommendations for 1965-70. The mission's impressions about prospects in the private sector are summarized in Table 9. Together they suggest the possibility  - 35 - of an increase in fixed investment from around DH 1420 million in 1964-65 to nearly DH 2300 million by 1970, implying an overall rate of increase of around 10 percent. While such an increase seems rapid in relation to the past, it is modest in relation to Morocco's needs. Table 9: ILLUSTRATIVE PROJECTIONS OF PRIVATE INVESTMENT (in millions of dirhams) 1963-65 1966 Average (Est.) 1970 Mining 51 66 65 Manufacturing 96 116 170 Tourism 27 48 150 Residential building 184 ) 250 ) 1455 All other 250 ) 375 a/ Total 608 685 1010 a/ Half of this increase over 1963-65 reflects an assumed increase in private investment in agriculture.  - 36 - Table10: COMPARISON OF GOVERNMENT THREE YEAR PLAN AND BANK SURVEY MISSION RECOMMENDATrIONS WITH RECENT AND PROBABLE RESULTS A. Fixed Investment 1964 1965 1966 1967 1965-67 1965-67 1965-70 1970 -~~~~ ) ( es-t) (es-t -7s) Plan S.M. ( p-roj Agriculture 161 180 178 250 608 927 1581 415 Irrigation 8 109 76 147 332 792 639 210 Dry farming and animal raising 36 1-4 24 35 73 213 298 90 Conservation and forestry /a 38 41 75 66 182 206 357 105 Other 2 16 3 2 21 16 287/1 10 Mining 125 121 148 142 411 422 810 95 0CP 111 107 130 110 7 352 700 Other/b 14 14 18 32 64 70 110 30 Manufacturing 77 188 69 110 367 369/h 537 110 Sugar mills 10 92 26 -1 9' 173 2)4 0 Safi and others/b 67 96 43 30 169 196 297 75 Tourism 15 16 37 48 101 134 143 20 Hotels 15 2 2 33 37 67 105 5 Specific infrastructure/c - 14 35 15 64 67 38 15 Transport-budget 77 71 78 71 220 201 517 130 Ports 13 T 21 11 4 48- 202 5 Roads/a 50 46 46 46 138 122 238 55 Air 14 11 11 14 36 31 77 20 Other Transport 32 45 30 57 132 87 122 30 ONCF (rail) 32 27 30 20 77 r 90 1 Royal Air Maroc/d - 18 - 37 55 32 32 15 Communications 23 35 32 36 103 73 210 45 Posts, telegraph and telephone 18 28 21 36 85 57 152 - Radio and television 5 7 11 - 18 16 58 _ Electric Power 50 42 55 65 162 240 811 165 ONE 2 72 7 I40 79 1 Other - - - - - - 162 40 Education 45 47 34 26 107 131 486 140 Priary 22 28 - 17 13 117 4 Other 23 19 30 26 90 118 369 100  - 37 - 1964 96 166 1967 67 6-67 6567 1965-70 1970 est) est) Plan S.M. (proj) All other 144 114 89 107 310 260 505 1140 Health 20 -17 18 -7 70- -47 107 30 Housing and Community ( ) ( facilities/a (52 41 31 43 115) 54 134 (70 Rural development ( ) 37 64 ( Civil administration 35 27 22 40 89 81 200/m 40 Reconstruction of Agadir 37 28 22 16 66 40 - - Contingency and Additional Promotion Nationale - - - - - - 570 _ Total Investment/a 749 859 750 912 2521 2844/i 6292 1290 (29L4T Military 25 14 15 10 39 43 - - Total 774 873 765 922 2560 2887 6292 1290 (2957) B. PUBLIC INVESTMENT (CREDIT & EQUITY) IN PRIVATE SECTOR Increases Agriculture (CNCA) 15 25 30 30 80 202/ 286 60 Industry (BNDE)/e 17 20 20 25 65 - 155 40 Tourism (CDG & CPDM)/f 5 15 20 30 65 170 268 80 Housing and Agadir/g 20 30 25 25 80 77 - 30 Total 7 90 - 9 Efl 290 7-9 709 210 (400)/k (889)/n Total Public Sector r31 96 7- -77 2l08 70 7001 - 1500 Expenditures/a (3357) (7181) /a Includes United States aid in kind ("Title II") for Promotion Nationale of DH 25 million (30 in 1967) a year allocated as follows: conservation and forestry. 5 (20 in 1967); roads, 5; and community facilities, 5. /b Includes some minority participation by BRPM (mining) and BEPI (industry) in the private sector. /c Includes transport, specifically, car ferry "Limadet." /d Plan figure represents two Caravelles. 1965 actual corresponds to a Caravelle, but 1967 estimate represents a Boeing. Figure for 1970 is annual rate based on forecast of purchases for period. /e Includes small amounts of credit to private sector outside industry but ex- cludes credit to sugar mill included in Part A and credit to CPIM. Source of these funds is a government advance and IBRD loan.  - 38 - If Includes funds for tourism originating in IBRD loan to BNDE. Sources of CDG's own funds are mainly social security and savings accounts. These are notional estimates even for 1964-1966. /g Banque Populaire, Agadir reconstruction fund and CPIM. Source of these funds is Treasury and CDG. These are notional estimates even for 1964-1966. /h Includes DH 27 million for Safi infrastructure and DH 17 million for Tangier industrial zone, but only the DH 325 million given in detailed statement of plan for industry rather than the DH 485 million listed in plan summary. /i Includes DH 70 million additional for primary education which was not covered in plan. Gross credit extension; repayments not taken into account. Latter might notionally be estimated at DH 100 million. Source of CNCA funds is a Treasury advance and IBRD loan. /k Adjusted to allow for repayment of agricultural loan and for credit from BNDE. /1 Includes DH 200 million contingency. /m The allowance in the Survey Mission Report for civil administration, military lnvestment and contingencies was DH 700 million (in addition to the DH 200 million contingency for agriculture). Of that DH 200 million is notionally allocated here to administration. A further DH 180 million is assigned notionally to housing credit (see note/n). To the balance of DH 320 million is added the DH 250 million general allowance for Promotion Nationale. /n Adjusted to allow a notional DH 180 million for housing credit which was not covered by the Survey Mission.  - 39 - CHAPTER III PROSPECTS FOR PRODUCTION, EXPENDITURE AND FINANCE The Outlook for Output and Exports 99. An investment effort along the line indicated in Chapter III would bring the Moroccan economy out of the state of semi-stagnation with which it has been contending for most of the past decade. A good deal of momentum has already been generated in tourism, phosphates, the modern agricultural sector and some parts of manufacturing. Given the expanded effort in these areas and in others which should be possible, Morocco could probably increase its growth rate to an average of 4.5 percent annually for the five years 1966-1970. 100. Except for the culture of sugar-beets and tobacco, Morocco's modern agriculture is oriented mainly to external markets. In that sector some of the main output prospects for the medium-term future have already been largely determined by investments now in place, and effective demand is much more likely than production to be the factor determining export earnings. This is particularly true of citrus, other fruits and wine. In the case of citrus, output is likely to grow by around 40 percent in 1966-1970. With the uncertainties surrounding Morocco's future relations with the Common Market it would not be prudent to project annual exports to expand more than by about 30 percent over the recent average of 450,000 tons, though part of the excess can probably be sold canned or frozen. More- over, competition from other Mediterranean producers is likely to hold prices well below the exceptionally favorable ones of the 1965 season. Given the international marketing situation for wine it is not reasonable to look for any rise in export value. Indeed some decline below the level of 1963-1965 is more likely. The supply prospects for other fruits and vegetables should be limited only by sales possibilities, which will again depend on access to the Common Market. A continuation of the expansion of recent years but at a more moderate rate is forecast. Cotton has emerged as a significant export within the last few years and could well double in value between 1965 and 1970. Oil seeds (especially sunflower) might also have some export potential in this period. That completes the roster of agricultural items from which any substantial contribution to export growth can be expected in the medium-term and the roster of main crops produced largely by modern methods. 101. Traditional agricultural exports are not expected to expand much in the next several years. The main emphasis in the traditional sector will be on production for domestic consumption. As noted, it is believed that output of grain and livestock products has not expanded by more than 1 percent annually over the past decade. However, some increase in this rate should be possible in the coming five years if the present optimism about the possibilities for achieving increased grain yields with greater fertilizer use and improved seed proves justified. If the program is extended effect- ively to around 500,000 hectares by 1970, and moderate progress is made in some of the other 6.0 million hectares of grain area, it might well be possible to expand average output by 300,000 tons of cereal, or around 9  - 40 - percent of the recent production average.- However, that would still leave Morocco with a grain deficit of as much as 400,000 tons in a good normal year, or an average of 550,000 tons if allowance is made for one crop failure every five years, which has been the recent pattern. Produc- tion of livestock products, too,can be speeded up by improved grain and fodder production, both in the irrigation perimeters and in the rainfed areas as well. On balance, it would not appear too optimistic to project a growth rate of over 2 percent in the gross value of traditional agricultural output during the period 1966-1970 as compared with nearly stagnant output in the preceding decade. However, with the increased use of inputs required to achieve this increase in output, value added in this sector might be projected to rise by around 1.5 percent annually over the next five years as against about 2.0 percent in the last five. In contrast, growth rate in value added of the modern sector could well reach 6 percent in this period, as compared with one of over 7 percent in the past five or six years. 102. In mining, revised investment plans should by 1970 give OCP out- put capacity of over 14 million tons. Alterations in recent pricing policy could put exports back on the rising trend characteristic of the years before 1965. At 6 percent a year they would grow from less than 10 million tons in 1966 to some 12 million in 1970. In addition, domestic sales should rise from about 200,000 tons in 1966 to around 700,000 tons by 1970, which would bring total sales within reasonable distance of planned capacity. Other mineral output on balance is not likely to grow very fast through 1970, and export earnings may well fall off moderately from their exceptionally high 1965 level, especially because world lead prices are expected in the next few years to lose some of their recent buoyancy. 103. In manufacturing, a substantial expansion of activity in food processing (including sugar), textiles and fertilizer is promised by recent investments. If investment activity expands at anything like the rates suggested here, there should be early and sizeable demand for cement, other construction materials, and capital goods. In some lines existing excess capacity (e.g. automobile and truck assembly) could be quickly utilized if and when demand picks up. In other lines, too, especially in consumer goods, there will be significant possibilities for quickly realizable import substitution as domestic demand mounts. For all of manufacturing, however, it needs to be emphasized that both tariff and wage policies need to be applied with particular care in order to ensure both an effective and an efficient expansion. 104. Most of the increase in manufacturing output will inevitably continue to be for domestic use in the years immediately ahead. As noted, a fairly sizeable expansion of output in sugar refining and textiles is likely as the result of recent investments, while a fairly quick recovery of production of building materials and vehicle assembly is likely once investment starts to pick up. Moreover, by 1968, the Safi plant should be exporting around DH 100 million worth of phosphate, and a second fertilizer plant now under consideration would also be aimed at exports. Fish canning likewise is directed pri- marily toward foreign markets. Exports dropped sharply in 1965 but 1/ Using an average of 3.3 million tons as a base (this excludes the poor crop years). This average assumes that official graill output figures are under-estimates by around 15 percent.  - 41 - should be able to recover if measures undertaken by the Government to encourage production and improve marketing have the intended effect. Other manufactured exports consist primarily of handicrafts, and these could start to rise at a healthy rate as the result of stimulus provided by the tourist trade. Expanded output of processed fruits and vegetables for export should also be quite possible in this period. In total, a growth rate in value added by manufacturing of over 6 percent would seem feasible over the next five years, as compared with average growth rate of under )L percent in 1960-1965. 105. Tourism and construction very probably will be the most important stimulants to total activity in Morocco during the next several years. Even on moderately conservative estimates, gross earnings from tourism by 1970 should be well over DH 700 million as compared with an estimated DH 330 mil- lion in 1965. This will affect a whole range of activities in Morocco, in addition to the hotel industry. Expansion of construction activity by around 9-10 percent annually over the 1965 level would probably result from an increase of investment at the rate indicated here. This should have almost as important an indirect effect in stimulating other sectors as will the tourist trade. 106. Growth of public administration is projected at around 4.5 percent annually. Although the main economic services should be increased at a considerably faster rate than the recent past, we assume that defense and general administration services will rise only moderately (see paras below). All other services may be expected to respond moderately to the accelerating tempo of general economic activity. On the other hand, a further moderate decline of foreign government expenditures in Morocco is likely to take place, offsetting in a small degree the expansion of these other factors. 107. All in all, we might expect to see the real growth rate accelerate the 2 percent average of 1964-1965 to around 4.5 percent in the 1965-1970 period. As compared with the 1962-1966 average (which includes the effects of one bad crop year, as do the prospective agriculture rural growth rates discussed above), the total growth rate would average just over 4 percent on the basis of these assumptions.  - 42 - Table 11: PROJECTION OF GDP AT 1960 PRICES (millions of dirhams) 1960 1965 1970 Agriculture 2.65 3.15 3.53 Modern (0.56) (0.80) (1.01) Traditional (2.09) (2.35) (2.52) Energy 0.18 0.26 0.37 Mining 0.54 0.59 0.69 Manufacturing 1.10 1.32 1.79 Services to tourists and foreign governments 0.25 0.27 0.53 Public adrninistration 0.89 1.12 1.38 Other services 3.17 3.65 4.48 9.08 10.83 13.50 108. As the above discussion suggests,exports are expected to be a more dynamic source of income than output for domestic consumption. In constant prices, gross export earnings of goods and services are expected to rise by over 6 percent annually. Some price declines are foreseen for phosphates, citrus and lead, making the expected growth rate in current prices around 5.5 percent. Table 12 on the following page shows the main elements of the export projections. National Excpenditure and Savings 109. A growth of fixed investment and economic activity at these rates would, in all probability, be accompanied by moderate annual increases in inventories, as compared with no significant recorded inventory movements except in grains during recent years. Allowing for an annual rate of DH 100 million in stock increases by 1970, total investment as a ratio of GDP would then be nearly 15 percent as against 11.0 percent in 1965. As explained at the end of this chapter, it seems likely that imports of goods and services would have to rise moderately faster than exports in order to permit such a rate of investment to be realized (and to allow for an expected increase in grain requirements), so that the export surplus of 1965 would probably be replaced by an approximate balance in 1970, or by a small deficit. Net factor income payments are likely to rise, mainly because of increased service on external debt. On balance, national resources available for consumption would rise at a slower rate than the domestic product - perhaps by 4 percent annually while population will be growing by 3.3 percent a year. To keep consumption growth down to that rate would probably require a significant increase in the government's tax effort. Put another way, we would expect that the national savings rate could and should be increased in the period from an average of 10 percent in 1962-1966 to somewhat more tban 13.0 percent by 1970, but that government savings would have to provide the main increment. The private savings rate before transfers abroad is projected in 1970 at a rate only slightly higher than the average for 1962-66 (9.5 percent),but the rate of private savings after transfers is projected to rise from an estimated 6 percent in 1962-66 to usarly 8 percent in 1970.  - 43 - Table 12: PROJECTIONS OF EXPORT EARNINGS (millions of dirhams) 1962 1963 1964 1965 1970 Merchandise Phosphates 436 460 578 553 660 Other minerals 215 220 240 298 280 Citrus 200 256 311 311 370 Fresh and dried fruits and vegetables 193 245 277 357 410 Canned fruits and vegetables 42 49 63 64 90 Cotton 13 18 20 29 60 Wine 72 91 117 93 80 Fish 144 119 151 86 130 Grain 37 69 34 19 15 All other raw materials 251 278 249 235 245 Fertilizer - - - - 100 All other manufactures 160 138 146 131 170 Total 1763 1943 2186 2176 2610 Adjustment to B/P 25 - 8 +33 +31 10 Total merchandise in B/P 1788 1935 2219 2207 2620 Invisible services Tourist earnings 161 218 306 332 730 Earnings from Governments 100 109 92 49 30 All other 91 108 133 117 160 Total services 352 435 531 498 920 Total Goods and Services 2140 2370 2750 2705 3540 Factor Income receipts Pensions 140 157 142 n.a 140 All other 95 99 71 n.a 60 Total factor income 235 256 213 230 200 Total Goods, Services and factor income 2375 2626 2963 2935 3740  - h1 - Table 13: PROJECTION OF NATIONAL PRODUCT AND EXPENDITURE (millions of dirhams) l962-1966 1965 1966 1970 Av. (Est.) GDP at 1965 prices 12,800 13,170 12,890 16,420 Loss from terms of trade - - - -100 Net factor income payments 30 10 -30 -230 Gross national product adjusted for terms of trade 12,830 13,180 12,860 16,090 Deficit on current account 70 -270 110 260 National expenditure 12,900 12,910 12,970 16,350 Investment 1,400 l,150 1,360 2,400 Stock changes - - -150 100 Fixed investment- 1,h00 1,L50 1,510 2,300 Public (8LO) (870) (760) (1,290) Private (560) (580) (750) (1,010) Consumnption 11 500 11,46o 11,610 13,950 Public 1 00 1,800 1,830 2,220 Private 9,700 9,660 9,780 11,730 Public revenue 2,100 2,220 2,320 3,050 Public saving 300 L20 h90 830 Private disposable income 10,730 10,960 10,Sh0 13,040 Private saving 1,020 1,300 760 1,310 Private transfers a/ -480 -7770 -400 -300 a/ Includes addition to errors and omissions arising from adjustment for neglect of suppliers' credits in capital movements section of official balance of payments. Public Finance 110. It has been noted that largely on the strength of the government's profits from the sales of imported commodities, notably sugar, public savings suw ng very sharply from deficit to surplus between 1964 and 1965. 1966 saw some further rise in the surplus, in good part from an improve- ment in customs receipts following upon relaxation of import restrictions in effect during most of 1965. Since the drought of 1966 has continued through the 1967 growing period and since there is likely to be little further benefit to revenues from the remarkable effort made in recent years to speed up collection of direct taxes, the central government current balance this year is likely to be below that of 1966. The govern- ment intends to maintain present domestic sugar prices through 1969, but, assuming no change in the imported cost, hardly any growth in proceeds can be looked for after 1967. At the same time the yield of the rest of  the revenue system will probably lag somewhat behind GDP. The reason is that the bulk of increase in imports will be in capital goods and inter- mediate products, which come under relatively low tariffs, while the product- ivity of the direct tax structure will be affected by exemptions and favors accorded many of the new manufacturing and tourist enterprises as well as by the fact that agriculture is not subject to tax on annual income but only to an inadequately assessed impost on average productive value of land. ill. With the surge of proceeds from sugar imports and on the basis of a relatively depressed level of economic activity for the year, the ratio of central government current revenue to GNP in 1966 rose to about 16.5 percent. In the absence of other tax measures and without the benefit of commodity price operations, the ratio in 1970 can be projected at under 14.5 percent. Even if the commodity price operation were maintained as in 1969 the ratio in 1970 would be only 15.5 percent. To move the level over 17 percent, which may be taken as a reasonable target for that year, a total of close to DH 500 million in revenues will be needed beyond the DH 2,300 million projected as the yield of the present fiscal system, not including the commodity price operation. Planning for the new fiscal measures should begin at once, as they should be initiated in 1968. 112. If adequate current support is to be given to the puiblic sector development effort, the government can no longer seek to so`ve its budgetary problems by keeping its current expenditures constant or nearly so, as it did from 1963 to 1966. Apart from interest on external public debt which is bound to grow substantially if external borrowings are increased, we estiimate that all other current outlays should probably rise at an annual rate of 4 percent over 1965. Outlays on the main economic services (agricul- ture and public works maintenance) might plausibly be projected in 1970 at some 37 percent over 1965, while current outlays on education will probably have to rise by over 40 percent in the same period. Assuming an expanded birth control campaign is underway by 1970, current expenditure on public health might also have to rise by a similar rate. On the other hand, we assume all other public services, including those on defense and general administration can be held to a much more modest growth in the 1966-1970 period. Table 14 summarizes the recent course of current govern- ment expenditures and gives our illustrative projections for 1970. 113. On such assumptions concerning revenues and expenditures the government's current surplus would jump by 150 percent between 1966 and 1970 - from DH 124 million to around DH 310 million. In addition there should be a healthy rise in savings of government enterprises. The OCP current surplus is projected to rise somewhat more slowly than sales because of mounting interest on external debt. On the other hand, the surplus of the electricity company (ONE) is projected to rise by two-thirds between 1965 and 1970 partly because its interest burden will grow only moderately. 114. Comparatively the most rapid increase in public enterprise savings should come from Royal Air Maroc, which ought to benefit greatly from the tourist boom, and from the ONCF. ONCF just managed to break even in 1965 but it should benefit from expanded phosphate shipments and from the general expansion of investment activity foreseen. In addition, by 1970 the Safi fertil- izer plant and the sugar mills should be making cash surpluses at least equal to depreciation and, it is to be hoped, significantly more.  - 46 - Table 14: SUMMARY OF CURRENT GOVERNMENT EXPENDITURES (million of dirhams) 1959 1961 1963 1965 1966 1970 Economic Services 164 215 295 278 275 380 Agriculture 68 103 159 142 144 200 Public Works 83 89 103 102 104 140 Other 13 23 33 34 27 40 Social Services 357 479 609 660 696 920 Education and Youth 7T2T 323 12 I6 5072