Morocco - Fourth Banque Nationale Pour Le Developpement Economique (BNDE) Project

R ESTR ICTED FILE C DY Report No. P-768 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 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE OF MOROCCO WITH THE GRARANTEE OF THE KINGDOM OF MOROCCO December 24, 1969 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE OF MOROCCO WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US $15 million to the Banque Nationale pour le D6veloppement Economique (BNDE) in Morocco. PART I - HISTORICAL 2. BNDE was established under Government sponsorship in 1959 with the participation of local and foreign private investors. The Bank's association with it dates from December 1962 when the company was reorganized to include a majority of private sharehol- ders and the Bank's first loan in Morocco amounting to $15 million was made to it. At that time, BNDE increased its share capital, in which IFC took a $1.5 million participation. In 1968, the share capital was reduced by one third, through the refunding of shares or their conversion into bonds, in order to increase its profitability, bringing IFC's participation to about $1.0 million but without altering IFC's share in the company (25 percent). At present the remainder of theequity is held by Government (3 percent), Moroccan investors (16 percent) and foreign investors (16 percent). A second Bank loan of $17.5 million was made in May 1966 and a third one of $15.0 million in November 1968; there are only negligible balances left uncommitted. In the spring of 1969, BNDE requested a fourth Bank loan and an appraisal mission visited BNDE in May 1969; negotiations took place in Washington from December 8 to December 12 with Mr. Benkirane, Director General of BNDE, and Mr. Benchekroun, Director of the Treasury in the Ministry of Finance, who represented the Government - as Guarantor. - 2 - 3. The proposed loan would be the ninth operation in Morocco by the Bank or IDA. The following is a summary statement of Bank loans and IDA credits in 11orocco as of November 30, 1969: Loan or Credit (Amount in US $ million) Number Year Borrower Purpose Bank IDA Undisbursed 329 1962 BNDE DFC 15.0 389 196b Kingdom of Morocco Agriculture 17.5 h.8 79 1965 Kingdom of Morocco Education 11.0 9.9 h33 1965 Caisse Nationale de Cr6dit Agricole Agriculture 9.8 7 1966 BNDE DFC 17.5 3.2 571 1968 BNDE DFC 15.0 11.0 *167 1969 Kingdom of Morocco Highway 7.3 7.3 62 1969 Kingdom of 1orocco Highway 7.3 7.3 *63 1969 Kingdom of 1orocco Agriculture h6.0 h6.0 Total (less cancellations) 128.1 of which has been repaid to Bank 8.6 Total now outstanding 119.5 Amount sold 1.1 Total now held by Bank and IDA 11 -T 7.3 Total undisbursed 72.3 17.2 89.5 * Not yet effective )4. Progress of the projects which are under implementation is now satisfactory except for disbursements under IDA Credit No. 79 for education, which are considerably behind schedule. This project had a slow start but, since 1967, construction of schools in the first phase has proceeded satisfactorily and this phase was completed in 1968; there have been delays, though, in payments to contractors and in applying to the Association for reimbursement. A recent supervision mission has also reported delays in the implementation of the second phase of school construction and corrective measures have been suggested to accelerate the work. A supervision mission - 3 - will be sent to Morocco in about three months to ascertain the progress achieved. Disbursements have also been slow under IBRD Loan No. 389 -- although work is almost completed -- and the original closing date has been postponed by one year to October 31, 1970. 5. Apart from the above mentioned investment of IFC in BNDE, the Corporation made in 1966 an investment and a loan totalling about $1.b million in Compania Industrial del :ukus (CIL), a company mainly concerned with processing and canning of vegetables. IFC and BNDE shared equally in the financing of this project and each holds 23 percent of the share capital of CIL. PART II - DESCRIPTION OF THE PROPOSED TOAN 6. Borrower: Banque Nationale pour le D6velop- pement Economique (BNDE). Guarantor: Kingdom of 'orocco Amount: The equivalent of $15 million in various currencies. Purpose: To provide BNDE with funds to finance projects carried out by productive enterprises. Amortization: The initial amortization schedule provides for repayment over 15 years through semi-annual installments starting March 15, 1972 and ending September 15, 1986; it is subject to change to conform substantially with the aggregate of the amortization schedules for the sub-projects for which loan funds are disbursed. Interest rate: Seven percent Commitment charge: 3/b of 1 percent per annum on the un- withdtaTn amount of the loan PART III - THE PROJECT 7. A report entitled "Appraisal of Banque Nationale pour le Q6veloppement Economique" (No. DB-57a) is attached. 8. Morocco's exceptionally good harvest in 1968 resulted in a GDP increase of 12 percent cver 1967. As a result of this increase in purchasing power, demand for consumer goods increased and industry operated closer to capacity than in 1967. Industrial output rose by b.2 percent in relation to the previous year, and sales probably increased at a faster rate, allowing many industries to reduce stocks. Nevertheless, industrial growth since indepen- dence has fallen short of expectations, mostly as a result of the departure of the important foreign entrepreneurs who played a leading role in this sector and of the quasi-stagnation of the economy as a whole from the time of independence through 1966. By 1968, industry and handicrafts accounted for 12 percent of GDP, with employment in manufacturing representing 160,000 jobs (i.e. only L.3 percent of the labor force). These results are disappoint- ing considering the high rate of increase of the active population, which by far exceeds that of job creation, and the consequent pressure on the land and unemployment. Nhile there appears to have been an increasing rate of industrial growth during the first 9 months of 1969, the insufficient development of industry in the last few years has led the Government to ask the Bank to carry out an industrial survey in early 1970. A Bank mission will undertake this task and will explore the prospects for industry (in particular in the light of the recent association with the European Economic Community) and review present policies affecting industrial growth. 9. Total investment in industry and tourism authorized by the Government's Investment Commission since 1967 has been of the order of $80 million per year. BNDE's role in this process has been a major one. Total BNDE approvals of financial assistance, including rediscounting commitments and guarantees, increased threefold from 1968 to 1968 to a level of about $21 million in the latter year. In recent years, BNDE has been providing finance for a major share of new investments and there are few new indus- trial or tourist enterprises which have not received some form of financial assistance from BNDE. 10. Close to one third of BNDE's volume of business in 1968 and most of 1969 has been concentrated on tourism, mostly through its participation in loans made for hotel construction by the Cr6dit Immobilier et HStelier (CIH), a credit institution specialized in housing and hotel financing. BNDE's lending through CIH for hotels - and the use of Bank loans for that purpose - was agreed upon in 1966 pending direct lending by the Bank to CIH. The Bank is now considering such a direct loan to CIH and it is planned to negotiate it in early 1970. It is therefore expected that, in the future, practically all of BNDE's lending will be for in- dustrial projects, although the company will continue to play a promotional role and to take equity participations in tourism projects, a field in which it has made profitable investments in recent years. Judging from the number of projects now under study by BNDE, the reduction in its hotel financing is expected to be more than offset in the next few years by increased lending for industry. 11. Parallel to the expansion of BNDE's activities, return on its equity has sharply increased in 1968 as a result of the one third reduction in share capital effected in that year and its replacement by a low interest (2 percent) Government loan. The improved return allowed an increase in dividends from b percent to 6 percent in respect of 1968, but this is still hardly sufficient to induce Moroccan investors to buy BNDE's shares. The Bank has urged the Government and the BNDE to consider an increase in BNDE's present interest rate of 7 percent, not only in order to increase BNDE's profitability but more importantly to achieve a rate more appropriate in determining the allocation of scarce resources. In this regard , the whole range of subsidies, incentives, protections and tax exemptions given to industry need to be re-examined at the same time as BNDE's rate. It has therefore been agreed with the Government that the next Bank economic mission, scheduled for April 1970, will carry out, as part of its review of the economy, a survey of the interest rate structure and of the incentives given to industry. In this field, the economic mission will be closely coordinated with that of the DIF and with the industrial survey mission scheduled for about the same time. - 6 - 12. In the past year, BNDE improved its methods and standards of project appraisal, particularly concerning financial and technical aspects, as well as its performance on project supervision. There is, however, still room for improvement in marketing and economic analysis and a need for better coordination among BNDE departments. The situation is aggravated because in the absence of a Deputy, the Director General is heavily over-burdened. This is an important problem and the Director General has indicated during negotiations that a Deputy will be appointed by August 1970. 13. BNDE seems to have weathered the troublesome period which arose as a result of the economic recession of 1966/67 and its lingering effects in such sectors as textiles; its portfolio does not contain any unusually risky items and is protected by adequate reserves. In view of this, and the procedural and organizational improvements effected by BNDE, it is proposed to raise the limit under which BNDE can use the Bank loan proceeds without the Bank's prior approval of the projects from the present $150,000 to $300,0003 however, it is stipulated that no more than $L.0 million of the loan should be used for such projects. 1b. BNDE is a suitable borrower for a new Bank loan of $15 million which together with a $3.0 million loan fron AID would cover its foreign exchange needs until about April 1971. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Loan Agreement between the Bank and the Banque Nationale pour le D6veloppement Economique, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, the report of the Committee provided for in Article III, Section L (iii) of the Articles of Agreement and the text of a Resolution approving the proposed Loan are being distributed to the Executive Directors separately. The provisions of the draft Loan and Guarantee Agree- ments conform generally to the pattern of Agreements currently utilized for loans to development finance companies. - 7 - PART V - THE DCONOMY 16. An economic report entitled "Recent Economic Develop- ments in Morocco" (No. EMA-1b, dated August 29, 1969) was distri- buted to the Executive Directors on September 22, 1969. 17. Morocco's economic performance in the late 1960's improved considerably as compared with the early and mid-1960's when there had been little change in per capita incomes. In 1967, despite poor rainfall, total output rose by 7 percent while in 1968 a record cereals crop accounted for two-thirds of the 12 percent gain in the gross domestic proouct. Investment expenditures, which had been averaging some 11-12 percent of GDP earlier in the decade, rose to a rate of 13-1 percent in the last years, all of the rise being attributable to public sector outlays. Thus, the 1968-72 Plan has had a good start, with expenditures close to targets. Various administrative and organizational improvements have recently been made, including in the planning process itself, and in mid-1969 an important step towards institutional reform was taken with the en- actment of an agricultural investment code. Other auspicious recent developments have included the maintenance of internal price stabil- ity, a decline in private capital outflows, the conclusion of an Association Agreement with the Eiropean Economic Community and sig- nificant gains in tax revenues. 18. Problems of major concern include the very rapid rate of population growth, mounting unemployment in the cities and under- employment on the land, serious shortages of skilled manpower and continuing hesitancy in the private sector. The debt-service burden is still fairly low relative to foreign exchange earnings and to Government revenues. The debt-service ratio is expected to be below 10 percent in 1969, but it will rise steadily if Morocco is able to borrow abroad the considerable amounts it needs to help finance its growing investment program, even if exports rise substantially. However, recent perfprmance and current outlook indicate that Morocco is creditworthy for additional borrowing on conventional terms. - 8 - 19. A Consultative Group for Morocco was organized in 1967 and met in April of that year. A second meeting took place in Paris in October 1969. A subsequent meeting is planned for late 1970. PART VI - COMPLIANCE WITH ARTICLES OF AGREEWENT 20. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMIMENDATION 21. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments December 21, 1969