Morocco - Country assistance strategy public information notice (CPIN)

Report No. PIN65 Morocco CAS: Public Information Notice World Bank Board Discusses Morocco Country Assistance Strategy On May 31, 2001, the World Bank's Board of Executive Directors discussed the Bank Group's Country Assistance Strategy (CAS) for the Kingdom of Morocco covering the period 2001-2004. Country Context Over the last four years, Morocco has undergone a major transition, which has modified the way the Bank Group and development partners work in the country. The country has experienced an important political transition, with the main opposition parties forming a government in 1998, for the first time since Morocco's independence. This was accompanied by a major opening of the civil society. Since the death of King Hassan II in 1999, Mohamed VI has moved even further and stressed the rule of law and social progress as his main development objectives. This transition is still unfolding, with new elections scheduled in about 12 months -- i.e. during the CAS period. This profound transition has involved difficult trade-offs. Although economic and social reforms continued, consensus building within the seven party Government slowed down decision-making on economic policy, preventing Morocco from lifting itself from its slow growth path. In the meanwhile, two years of drought further contributed to weaken economic growth. As a result, Morocco's growth trend rate continued to slacken, entailing a stagnation in per capita incomes over the last decade, as well as increased poverty and urban unemployment, in sharp contrast with the performance of most other middle income countries over the same period. Poverty, at around 20 percent of the population, and urban unemployment, around 22 percent, now constitute the key challenges facing the country. If left unattended, they could also undermine the on-going political transition. Yet, the country has enormous opportunities as well. It has established a solid track record in economic stabilization over the last decade and is facing the prospects of a windfall of privatization revenues, especially following its successful deregulation and privatization of its telecommunications sector. This provides a unique platform to accelerate the reform agenda to boost growth while at the same time strengthening human resources and accelerating rural and social programs - all key ingredients to improve general living standards while reducing the large social gaps between urban and rural areas. Indeed, the Government recently signaled its continued focus on economic issues, through a realignment of its exchange rate, which will in turn require strong fiscal discipline in the future. These recent evolutions entail new constraints and new opportunities. Morocco's increasingly pluralistic society requires more consensus building, in particular with regard to the difficult second generation institutional reforms on the agenda (such as that of the civil service) that involve strong vested interests. Civil society has also emerged as a new important actor, both vocal on the political scene and active on the ground, but it is still relatively fragmented. The gap between rural and urban areas remains huge, despite clear progress on access to basic social services over the last few years, and income poverty has increased due to declining growth and repeated droughts affecting agriculture. On the macroeconomic front, the country continues to enjoy financial stability, but trends are not encouraging, with stagnating growth and a progressive deterioration in government savings, which may jeopardize financial stability in the medium term if corrective actions are not introduced in the coming years.  Recent actions, such as the adjustment of the exchange rate peg, will need to be accompanied by a more flexible management of this instrument, as well as strong fiscal discipline and structural measures, to lead to a new sustained growth path. Finally, the country does not need major external financing flows due to the availability of both concessional funding (especially from the EU) and the one time privatization proceeds, which may amount to US$ 5 billion over the next three years. Bank Group country strategy. The Bank Group's assistance is thus at a juncture. It needs to adapt itself to the country's new environment and capitalize on recent advances in decentralization and participation to deepen its poverty impact on the ground. Finally, since it is clear that without growth only a limited impact can be achieved on poverty reduction in the short to medium term, the Bank Group needs to balance appropriately reform support and actions on the ground to maximize the overall impact of the Government program on the living standards of the population. Therefore, the CAS strategic directions are: * focusing on the poverty challenge, especially in rural Morocco, and working on key emerging areas of progress, such as decentralization; * remaining present as a lead external partner on the structural front, by supporting advances on reforms, while continuing to build up the policy dialogue and consensus on macroeconomic and sectoral issues; * strengthening partnerships with other external agencies, especially the EU and AfDB, under improved coordination mechanisms within the Government. In this environment, the CAS proposes to focus Bank activities on a base case program composed of: (i) a core program with tangible impact on the ground, and (ii) support for sectoral reforms contingent on government actions. The core program focuses squarely on social development issues, on community-based approaches, and on governance and decentralization, while also seeking new partnerships with the emerging civil society. This is a key priority of the King and the Government, with great potential for progress. At the same time, however, the Bank also plans to remain fully engaged on macro and structural reform issues through analytical work, and be ready to support the Government reform efforts, depending on progress on fiscal and structural issues. In terms of lending amount, the base case program would remain at about the same level as during the last five years, or about $250 million, compared to $300 million in the previous CAS. However, it would include significant shifts. First, the program would be divided into two components: a core poverty focused program and a sectoral reform support component. The core program would amount to $150 million, composed of about three operations per year (excluding smaller institution building projects). This program would seek to deepen the shift towards catalytic projects, institutional support, and analytical work, and be clearly focused on the poverty and social agenda facing the country. Second, the sector reform program, of about $100 million per year, would seek to support priority reforms by the Government, currently under preparation, but not yet fully developed. This second component, thus, would depend on progress in two areas: (i) fiscal triggers to ensure that the budget remains sustainable in the long term; and (ii) sectoral triggers demonstrating the up-front commitment of the Government so as to support the actual implementation of the reforms. In this respect, the next Budget law (i.e., for 2002) will reveal Government intentions both with regard to the depth of the fiscal consolidation contemplated and on the direction of structural reforms. The recent adjustment in the management of the exchange rate clearly - 2 -  demonstrates the Government's continued focus on economic reforms. The next Budget law is also expected to achieve greater fiscal discipline and tax reform, and to include further advances on structural issues, inter alia the launching of a broader public sector reform program, with increased emphasis on decentralization; a new framework for simplifying the business environment; and continued rationalization of the food subsidy scheme. These are all avenues the Bank would be ready to support when the details of such policies are worked out. Should reforms be delayed, the Bank would focus on the core program of the country, and reallocate resources towards analytical work to build consensus on the reform agenda. The Bank would, however, also be ready to support strongly the Government should it implement a more aggressive growth-oriented reform program. A high case scenario is therefore proposed amounting to up to US$ 450 million in total per year to also support programmatic or broad based adjustment lending and/or specific interventions designed to protect the most vulnerable groups affected by the reforms. Such a scenario would be triggered by a more aggressive reform program, including measures to further improve the external competitiveness of the economy, within a framework of fiscal sustainability. Partnerships In this process, the Bank Group intends to continue to focus on the development of the private sector. The Bank will focus on the business environment, issues relating to employment and growth, and support for new services sector, such as information technology. Collaboration will also be further strengthened with the EU on issues related to competitiveness and EU integration. The IFC will support this thrust through efforts aimed at mobilizing financing for complex projects, providing innovative financial instruments, especially for SMEs, and supporting institution building in the financial sector. i -3-