Morocco - Country assistance strategy (CAS)

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 22115-MOR MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE KINGDOM OF MOROCCO May 7, 2001 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Unit of Currency = Moroccan Dirhams (DM) Period Average Exchange Rates (DM per US dollar) 1996 1997 1998 1999 2000 2001* 8.72 9.52 9.60 9.80 10.63 10.73 * Rate for 2001 is average January 1- April 20 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS AAA = Analytic?,l and Advisory Activities AfDB = African Development Bank CAS = Country Assistance Strategy CAE = Country Assistance Evaluation CBD = Community Based Development CDF = Comprehensive Development Framework CDR = Comprehensive Development Review CPPR = Country Portfolio Performance Review EA = Environmental Assessment EIA = Environmental Impact Assessment EIB = European Investment Bank EU = European Union FIAS = Foreign Investment Advisory Service FM = Financial Management FSAP = Financial Sector Assessment Program GDLN = Global Distance Learning Network GDP = Gross Domestic Product GEF = Global Environmental Fund GOM = Government of Morocco ICR = Implementation Completion Report IDF = Institutional Development Fund IFC = International Finance Corporation IGF = Inspection G6ndrale des Finances IMF = International Monetary Fund IT = Information Technology LIL = Learning and Innovation Loan LMI = Lower Middle Income Countries METAP = Mediterranean Environmental Technical Assistance Program MIGA = Multilateral Investment Guarantee Agency MNA = Middle East and North Africa Region MOU = Memorandum Of Understanding NER = Net Enrollment Rate NGO = Non-Governmental Organizations OED = Operations Evaluation Department PER = Public Expenditure Review PHRD = Policy and Human Resources Development Fund PPI = Private Participation in Infrastructure SME = Small and Medium Enterprise SSR = Social and Structural Review UN = United Nations UNDP = United Nations Development Program WBI = World Bank Institute Vice President: Jean-Louis Sarbib Vice President: Assaad Jabre Director: Christian Delvoie Director: Sami Haddad Task Team Leaders: Olivier Godron/Pedro Alba Task Team Leaders: Margaret Henderson/ Joamana Cobein  FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO COUNTRY ASSISTANCE STRATEGY TABLE OF CONTENTS PAGE EXECUTIVE SUMMARY .........................................................I 1. BACKGROUND AND RECENT DEVELOPMENTS ........................................................ 1 A. Poverty Trends .......................................................2 B. Economic Developments ........................................................4 II. KEY DEVELOPMENT CHALLENGES ........................................................7 A. The Growth Challenge .......................................................8 B. Improving the Poverty Focus of Public Policies and Expenditures ..........................................8 C. The Reform of the State ........................................................9 D. Reducing Agricultural Vulnerability and Environrmental Threats ......................... ................ 10 III. MOROCCO'S DEVELOPMENT PROGRAM ........................................................ 10 A. The Growth Agenda ........................................................ 11 B. Improving the Poverty Focus of Public Policies and Expenditures ........................................ 11 C. The Reform of the State ........................................................ 11 D. Reducing Agricultural Vulnerability and Environmental Threats .........................1................ 11 E. Bank Assessment ........................................................ 12 IV. MEDIUM-TERM PROSPECTS ....................................................... 13 A. Base Case Scenario (Partial Adjustment) ........................................................ 13 B. High Case Scenario (Full Adjustment) ........................................................ 16 C. Exogenous Risks and Vulnerabilities ........................................................ 18 V. BANK GROUP STRATEGY ....................................................... 19 A. New Challenges and Opportunities for the Bank Group ........................................................ 19 B. CAS Approach and Key Objectives ........................................................ 21 C. Assistance Levels and Triggers ....................... 25 D. The Bank Group's Base Case Program: The Core Component ............................................. 27 E. The Bank Group's Base Case Program: The Sector Reform Component ............... ............... 32 VI. PORTFOLIO MANAGEMENT ....................................................... 33 A. Portfolio Management ....................................................... 33 B. Fiduciary Provisions and Safeguards ....................................................... 35 VII. COUNTRY RISK MANAGEMENT ............... ........................................ 36 A. Country Creditworthiness ....................................................... 36 B. Performance Indicators and Monitoring ....................................................... 38 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  PAGE TABLES Table 1. Morocco: Selected Poverty Indicators ....................................................... 2 Table 2. Partial Adjustment Scenario - Selected Macroeconomic Indicators ................................ 14 Table 3. Morocco - Financing Plan (US$ million) ...................... ................................ 17 Table 4. Bank Assistance Levels and Triggers ...................................................... 26 Table 5. The Bank's Program ....................................................... 31 Table 6. Portfolio Summary ...................................................... 34 Table 7: Time and Resource Costs of Bank Operations ...................................................... 35 Table 8. Morocco -World Bank Lending Flows and Exposure(Base Case) .................. ................ 37 Table 9: Morocco Core Performance Indicators ....................................................... 38 Table 10. CAS Monitoring Indicators ....................................................... 39 FIGURES AND BOXES Figure 1 Average GDP Growth of Selected Regional Comparator Countries, 1991-1998 Figure 2 Average Annual Growth of Manufacturing Exports, 1986-1991 and 1991-1998 Figure 3 Privatization Revenues, Government Savings, 1999-2004 Box 1 Rising Poverty in Morocco Box 2 The Country Assistance Assessment by OED Box 3 The CDF Box 4 Participatory Process ANNEXES Annex A2 Country at a Glance Annex B2 Selected Indicators of Bank Portfolio Performance and Management Annex B3 Bank Group Program Summary Annex B4 Summary of Non-Lending Services Annex B5 Poverty and Social Development Indicators Annex B6 Key Economic Indicators Annex B7 Key Exposure Indicators Annex B8 Operations Portfolio Annex B9 CAS Program Matrix Annex B10 CAS Summary of Development Priorities Annex B Il World Bank and Civil Society  MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE KINGDOM OF MOROCCO EXECUTIVE SUMMARY The Bank Group is confronting a vastly changed environment compared to the one it faced at the onset of the last CAS... i. Over the last four years, Morocco has undergone a major transition, which has fundamentally altered the way the Bank Group and development partners work in the country. The country has witnessed a fundamental opening of the political process, with the main opposition parties forming a govemment 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, Mohamed VI has moved even further allowing the return of long time dissidents and stressing 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. ii. While this profound transition has so far been peaceful and orderly, it involved difficult trade-offs. Although economic and social reforms continued, consensus building within the seven party Govemment slowed down decision-making on economic policy, preventing Morocco from lifting itself out of its low 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. iii. 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 Govemment recently signaled its continued focus on economic issues, through a realignment of its exchange rate, which will in tum require strong fiscal discipline in the future. ...entailing new constraints and new opportunities... * Morocco has evolved into a more pluralistic society. This requires much 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. * Despite clear progress on access to basic social services over the last few years, the gap between rural and urban areas remains huge, 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. and requiring a fundamental rethinking of the Bank Group country strategy. iv. 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 Govemment. v. 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. vi. 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 ii  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 $100 million per year, would seek to support priority reforms by the Government, currently under preparation, but not yet fully developed. This second component, thus, would depend on progress in two areas: (i) fiscal triggers to ensure that the budget remains sustainable in the long term; and (ii) sectoral triggers demonstrating the up- front commitment of the Government so as to support the actual implementation of the reforms. In this respect, -the next Budget law (i.e., for 2002) will reveal Government intentions both with regard to the depth of the fiscal consolidation contemplated and on the direction of structural reforms. vii. The recent adjustment in the management of the exchange rate clearly demonstrates the Government's continued focus on economic reforms. The next Budget law is also expected to achieve greater fiscal discipline and tax reform, and to include further advances on structural issues, inter alia the launching of a broader public sector reform program, with increased emphasis on decentralization; a new framework for simplifying the business environment; and continued rationalization of the food subsidy scheme. These are all avenues the Bank would be ready to support when the details of such policies are worked out. Should reforms be delayed, the Bank would focus on the core program of the country, and reallocate resources towards analytical work to build consensus on the reform agenda. viii. The Bank would, however, also be ready to support strongly the Government should it implement a more aggressive growth-oriented reform program. A high case scenario is therefore proposed amounting to up to US$ 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. ix. 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. Linking the CAS with the CDF x. Overall, in terms of approach, Morocco fully fits with the concept of the CDF. Progress has been broad-based, encompassing political opening, the rule of law and social development. Morocco followed a unique process with the Government embarking on the CDF at the time of preparation of its five-year plan. At that time, the Government requested Bank assistance in assessing sectoral performance in some 16 sectors to provide a broad policy and institutional context to their program and to review priorities for action. These sectoral matrices were then discussed with key counterparts. A series of seminars was conducted on key sectoral issues, such as health insurance reform, education reform, and issues of governance and corruption, to name a few. Following the approval of the Plan, the Ministry of Finance has now prepared a broad financing plan to improve coordination of external financing sources. The CAS program fits within this framework and proposes various avenues to streamline the CDF concept in the future. iii  xi. In summary, the CAS proposes a refocused but flexible approach over the next three years, as this will encompass a decisive period for Morocco, with elections scheduled for around the middle of 2002. The proposed base case embodies this flexibility fully by focusing on a core program, complemented by contingent support for reforms depending on progress and emerging priorities. xii. In this environment, the Executive Directors may wish to focus on the following issues: * Is the base case program, with its twin approach on a core poverty oriented program and support for reforms, appropriate to reach the CAS poverty objectives? * Is the composition of the program, and the balance between lending, analytical work and institution building adequate? * Are the level of assistance and the proposed triggers of the base case and the high case programs in line with Morocco's development challenges and current policies? iv  I. BACKGROUND AND RECENT DEVELOPMENTS 1. During the last years, Morocco has embarked on one of the most successful processes of rapid political opening in the Middle East and North Africa. In addition, civil society has experienced a tremendous expansion. Particularly important is the increasing assertiveness of the media, notably the press, which has created new channels for civil society to voice concerns and demonstrate its achievements. The key political events in this still unfolding process were: * In September 1997, the House of Representatives were elected by universal suffrage for the first time, as called for under the new Constitution of 1996. A new electoral legal framework is currently being prepared. * In March 1998, Abderrahmane Youssoufi, the leading opposition figure and a one-time exile, formed a Government backed by a seven-party center-left coalition. Following a limited reshuffle in September 2000, Mr. Youssoufi's Government is expected to remain in office until the next legislative elections, in 2002. * Political democratization and modernization have been gaining further momentum since Mohammed VI's accession to the throne in July 1999, including progress on human rights and the return of well-known dissidents. The new King's agenda stresses social, poverty, governance and gender issues, as well as the need for 'a new concept of authority' based on the rule of law, and on a public administration supporting development rather than control of the society. He has backed his ideas with decisions that were both symbolic and had strong implications for governance, including a major reshuffle among the senior staff of the Ministry of Interior and local governors. A new legislative framework for decentralization is also currently under preparation. 2. The focus of the Bank's poverty reduction strategy and assistance shifted during the mid- 1990s towards social development and access to services, away from a narrower focus on economic adjustment. This shift in emphasis is due to both the consolidation of Morocco's stabilization efforts of the early 1990s, as well as an increasing awareness both in Morocco and in the Bank of the burden that poor and unequal social progress represents for Morocco's long-term development. The 1997 CAS was the first Bank strategic document that focused on the difference between the "two Moroccos": a relatively prosperous urban one, and a rural, backward Morocco with social indicators closer to those of Sub-Saharan Africa than of MNA countries. In support of this approach, the Bank's strategy emphasized social sector reforms, particularly in education and health, and the provision of basic infrastructure and social services in rural areas. The Bank's strategy, however, also considered income growth as an essential element of poverty reduction, and stressed continued fiscal and structural reform. Given successful stabilization, conditions were ripe to improve Morocco's rather weak growth performance of the early 1990s. Where does Morocco stand after four years?  Table 1. Morocco: Selected Poverty Indicators Past Latest available year Urban Rural Urban Rural Period 1990-1991 1998-1999 Population (millions) 12.3 12.7 15.4 12.9 Poverty incidence (percentage of total) 8% 18% 12% 27% Number of poor (millions) 0.9 2.3 1.8 3.5 Number of econoniically vulnerable (millions) 1/ 2.3 6.6 5.0 7.1 Poverty depth (percentage) 2/ 0.4% 1.2% 0.8% 2.5% Period 1990-1991 1998-1999 GINIcoefficient 37.7 31.2 37.7 31.6 Period 1992 2000 Percentage of households with access to safe water 3/ 98% 14% 100% 42% Percentage of villages with access to electricity 15% 45% Period 1990-1991 1999 Percentage of households with access to electricity 89% 13% 89% 22% Period 1990-1991 1998-1999 Women who last gave birth at home 43% 84% 28% 79% Percentage of pregnant women who visited prenatal care 65% 24% 76% 37% facilities Period 1980-1992 1992-1997 Matemal mortality rate (per 100,000 births) 284 362 125 307 Period 1990-1991 1998-1999 Female primary net enrollment rate (% school-age female 79% 28% 83% 47% population) Female youth hteracy rate (aged 15-24) 76% 21% 77% 25% Sources: Living Standards Measurement Surveys of 1990/91 and 1998/99, Labor Market Survey 1999, Statistical Yearbooks, Statstical Office of Morocco; Provincial Department of Ministry of Equipment; National Electricity Office. 1. People between the poverty line and 1.5 times the poverty line. 2. Indicates inequality/income distribution among the poor. An increase in the index implies a deterioration in income distribution. 3. Percentage of the population with access to a pernanent source of drinking water with acceptable sanitary conditions, generally stand pipes provided by the local authorities. Does not include catch basins or other unprotected sources of wai er (even if uncontaminated). A. Poverty Trends 3. Social and human development policies have gained momentum since the mid- 1990s... * Access to health and education in rural areas has improved (Table 1) especially since the mid-1990s, reflecting the new focus in Government policies on the poorest provinces through instruments such as the flagship social programs (the 'BAJ')5. Girls' net enrollment in rural primary schools increased sharply from 28 percent to 47 percent during 1991-98. These strong improvements follow many years of slow progress. * Over the past two years, the authorities have successfully mobilized financial resources 10 accelerate rural infrastructure programs (electricity, potable water and roads). As a result, the timeframe for providing the rural population with universal access was reduced from 30 to about 10 years, a remarkable achievement. * In education, perhaps Morocco's most important long-term development challenge, the authorities and other stakeholders reached a consensus in 1999 on the main elements of The Social Priorities Program for the poorest provinces. 2  reform. This breakthrough is set out in the "Charter for Education" prepared by a Royal Commission composed of all key stakeholders. * In an effort to become more responsive and effective, the Government has also initiated several partnerships with civil society. For example, Government endorsed an ambitious Gender Action Plan entirely prepared by a group of NGOs and women's representatives, an unprecedented initiative in the MNA region. It is also supporting NGO-sponsored schools and literacy programs. Finally, the authorities are establishing a Social Fund, which by supporting community-based development, has strong potential to efficiently reduce poverty. 4. but inefficiencies and gaps in the social sectors remain substantial,... * Despite significant public spending on education (6 percent of GDP), both quality and coverage remain weak. Although illiteracy is slowly receding, it remains one of the highest (52 percent) in NNA and lower rniddle-income countries (LMI). Similarly, although school enrollment is increasing, 2.5 rnillion children, a majority of them rural girls, still do not attend school. Quality is also an issue as evidenced by poor retention rates in school: 25 percent of schoolchildren drop out before the fifth grade, and only 10 percent make it to 1 1h grade. University students take on average 8 years to complete a 4-year program, to find all too often their skills unsuited to the labor market. * The health system also lags behind most LMI and regional comparators. While life expectancy has increased to 67 years and vaccination is widespread, many outcome indicators remain disturbingly low: e.g., maternal and infant mortality are considerably higher than the regional average2, with continued significant urban-rural disparities. Low, inequitable and inefficient spending on health, particularly in the public sector3, has created serious problems in terms of access and quality, and is compounded by one of the lowest health insurance coverage rates in the region (15 percent of population). * Despite efforts to enhance the status and condition of women4, gender indicators, especially in literacy and health and in rural areas, remain among the worst in the region. For example, 83 percent of women are illiterate in rural areas. One of the few bright spots is the high labor force participation for women. * Access to basic infrastructure by the rural population, in spite of the recent progress, remains limited and constitutes a severe constraint to economic and social development. 5. .... and most disturbingly, as a result of slow growth, income poverty and unemployment substantially increased during the 1990s. * Poverty, which had declined from 21 to 13 percent of the population during 1984-91, bounced back to 19 percent in 1998 (Box 1), and now affects 5.3 million people.5 The vulnerable population also increased dramatically, from 9 to 12 million, or about 45 percent of the population.6 Slow and volatile growth in a period characterized by repeated droughts, rather than distributive factors, is mainly to blame. 2Matemal: 230 per 100,000, vs. 134 in the region. Infant: 48 per 1,000 vs. 45. 3Total spending: Around 4 percent of GDP, vs. 5.4 percent in the region. Public spending is only 1.4 percent of GDP (1999 figures). 4The Government adopted the Beijing action program, ratified the Convention for the Elimination of All Forms of Discrimination Against Women (CEDAW) and endorsed the Gender Action Plan. 5 The poverty line is based on per-capita consumption. See Morocco - Poverty Assessment Update, May 2001. 6 Defined as living between the poverty line and 1.5 times the poverty line. 3  * Urban unemployment has risen to an all-time high of 22 percent of the labor force n 1999, up from 15 percent in 1991, and is 27 percent among young graduates. Employment pressures will only intensify in the near future since the growth of the labor force is expected to increase as a result of demographic trends. Box i: Rising Pos erti) in Morocco The latest Po%erty Update for Nlorocco is based on a Li'ing Standards Nleasurement Survev conducted in 1998-99. It points to a significant deterioration in povert3 indicators: W While po'.crl\ declined substaniallh in the 1980s. its inLidence increased in almost all rectons cf Morocco during the 1990s. abo,ut 5.3 million people. i e 19 percent of che population. ;re now considered px.r. compaTed to 13 percent in 1991. The number L4 Nloroccans *ulnerable to po%erty during episode.s ot instabilirN. such as droughis. a3bo increased dramaticall. frtum around 9 million in 1991 to I million in 199S. or about 45 percent of tht pi apulaticn * The lack of economic growth hab been a kee factor behind these developmenu.. explaining 84 percent tl the po\erty increase. Rising incsuality accounted for the balance. and affected essentiall\ rural areas. Public and private transtfers tremittances lrom abroad) constitute the backbone of the satetN net in the country. * While income po'envy *crsencd. access to b3sic %er%ices. however. impr"'ed o%er the period The Go ernmenL also rcentily introduced a drought emergency program foused un labor intensi e w\ork. to.' cushion the impact of droughts on the poor * Poverny continues to be mostly a rural phenomenon. in 199S-99 more than one fourth ot the population li% ing in ruril aress arc pKor. a, compared to tine-tenth in urban areas The depth and severity of pKo'ertN are also much higher in rural areas. and ha%e significanil'. increased since 1991. However. due to weak performance in the manufactunng sector and continuing rural migration. the number of urban poor doubled to 1.800.000 during the penod; about one third of the poor now li e in urban areas * The profile ot Ilte pooxr has nut changed dunng the 1990s poverly in both urban and rura. areas is largely associated with (i) larger household size. higher childiadult ratios and a high dependency ralto: :nd tiih lack of human capital tin 1998-99. about 64 percent of the poor had no edu,arlon and Jbout 1- percent had unk pi-mary education). Urban poor household heads arc must likel) to bt eLithcr \a:ge earners or self-employed in the sersices or Vt.nstructLtin, rural ptr hou.sehold heads are mrinls self-employed and work in agriculture B. Economic Developments 6. Indeed, while Morocco has been relatively successful with stabilization... * Consolidating its stabilization efforts, Morocco has over recent years maintained inflation below 3 percent p.a. and the current account deficit at around 1 percent of GDP. To reduce external vulnerability, the authorities have relied more on domestic financing sources to meet fiscal needs and gradually reduced external debt to about 55 percent of 4  GDP in 19997. These results are based on prudent monetary and fiscal policies that have supported until very recently a fixed exchange rate that in turn anchored expectations.' * The fiscal deficit has been kept around 3 percent of GDP until very recently, although fiscal management was Figure 1. Average GDP Growth of Selected Reglorna more constrained than Conaator CouritrIes, 1991-1996 suggested by this 65 5.6 performnance. The 1998- 1999 and 1999-2000 budgets relied heavily on 4 one-time measures;9 without 3 these measures, the deficit 1.9 would have been around 5 2 percent of GDP. Additional 1 challenges include: ol (i) expected revenue losses .. of 2 percent of GDP from Egypt Jordan Tunsia Lebanon Turkey Moroco the implementation of the EU trade agreement over the medium-term; (ii) continuing pressures on the wage bill, already high at 12 percent of GDP; and (iii) contingent liabilities in the banking system, or in the pension funds of the public sector. * The financial sector has been liberalized by the gradual elimination of almost all forms of direct state intervention, and the regulatory framework has been modernized. The Bank's recent Financial Sector Review assessed Morocco's financial system as generally sound and with limited exposure to risks, although characterized by weak competition. Some specialized public banks, however, need to be restructured and revitalized. 7. ... it has experienced a volatile and below-potential growth performance. * Growth dropped from an annual average of 4.4 percent during 1986-91 to 1.9 percent during 1991-98, turning Morocco from one of the best to one of the worst performers within the MENA Region (Figure 1). With population increasing at 1.7 percent p.a., this has implied virtual stagnation of per capita income, and a reduction of per capita private consumption that was crowded out by public consumption. * The contribution of agriculture to Figure 2. Average annual growth of overall growth turned negative manufacturing exports, 86-91 during 1991-99: minus 0.3 percent 200% and 91-98. p.a., a sharp drop from a positive _ . contribution of 0.8 percent p.a. 15% - - during 1986-91. Droughts became " more frequent and output 100- 991- fluctuations more pronounced .> 1998 leading to an increase in overall GDP 5'%o j ~ .frt . volatility during the 1990s. This, _ combined with weaknesses in the 0% _ safety net system, is a key Exports current US$ 7 Due to exchange rate movements, total debt increased temporarily in 2000, to 59 percent of GDP. s The authorities modified the currency basket underlying the exchange rate in late April, implying a de facto devaluation of 5 percent. 9 Such as exceptional 'dividends' imposed on public enterprises; lump sums paid by private enterprises as part of a tax amnesty scheme; and the sale of State assets. 5  contributing factor behind the increase of rural poverty. * The manufacturing sector's lack of dynamism has been an important factor behind the increase in urban unemployment and poverty. Its average growth rate dropped from 4.5 percent p.a. in the late 1980s to 2.6 percent in the 1990s, less than half of that of other emerging economies. The sector also lost competitiveness as evidenced by slower export growth and the loss of market share (Figure 2). Service sectors are, however, emerging, such as tourism and information technology. 8. Slow growth reflects both increasingly rigid macro policies as well as slow, albeit steady, progress in implementing structural reforms: * Successful as they have been, stabilization policies have started to take a toll on competitiveness. First, the exchange rate peg contributed to a real appreciation of the dirham, by over 20 percent during 1990-2000 leading the authorities, in April 2001, to effectively devalue the domestic currency by 5 percent in nominal terms. Second, the only mixed success achieved in reducing the fiscal deficit and total public debt has implied some crowding out in financial markets and upward pressure on interest rates. Finally, the fiscal deficit was mostly contained through cuts in public investment, while recurrent expenditures, particularly the wage bill, have remained high. It is not yet clear whether the recent readjustment of the exchange rate is a first step towards a more flexible management of this instrument, and what other measures the authorities are considering in the fiscal area. * Accelerating and completing the process of structural reforms is a key condition to unleash the growth potential in a sustainable way. Many reforms have been achieved in the 90s: the financial sector was largely liberalized, a privatization program has been under way since 1993, including private sector participation in many infrastructure sectors, and the investment climate was strengthened. More recently, the Government also initiated a strong drive to enhance transparency and public sector governance. Sonme of the more important initiatives are the customs administration reform, a new law on public procurement, transparent procedures for privatization, initiating the reform of the judiciary and the establishment of a competition council, together with price liberalization. * Despite those improvements, the private sector response has been lagging, due to the uneven progress on the reform program and slow decision making. For example, while the Government has established commercial courts and passed new laws on competition policy and on the liberalization of the road freight transport, implementation of these laws has been slow. Other remaining constraints identified in the recent Private Sector Assessment include: the weight and inefficiency of the administration, access to land, investment procedures, skills of the labor force, rigidity of labor markets, access to financial services for the SMEs, and agriculture incentives and policies. * A success story, however, is Morocco's policy of liberalization and privatization of the Telecom sector, which is yielding unprecedented economic and financial benefits and which illustrates well the potential benefits of structural reforms. In the late 90s, the Government of Morocco, with support from the Bank, embarked on a radical reform of the regulatory framework. In 1999, the award of a second GSM mobile phone license by international bidding fetched more than US$ 1 billion. IFC supported this reform through investment in Medi Telecom, the winning cellular operator for this license, and was instrumental in mobilizing other sources of financing. This reform triggered a major 6  reduction of communication prices and the creation of thousands of jobs. Further benefits are expected from the privatization of the state-owned telecom operator, the first phase of which was completed recently. Together with the attribution of a third mobile phone license, the partial privatization of the national airline carrier, and continued divestiture of other large public enterprises, the govemment could reap up to US$ 5 billion, equivalent to around 17 percent of current GDP, over the next 3 to 5 years. II. KEY DEVELOPMENT CHALLENGES 9. The positive political, economic and financial developments that are taking place present Morocco with the best opportunity in more than a decade to tackle successfully its difficult development challenges. Progress in policy reform and institution building made during the 1990s provide a strong foundation upon which to jumpstart the economy. Morocco's most positive initial conditions are: * The process of political opening has placed Morocco ahead of most countries of the Region. Although it may have reduced the continuity in government and affected its focus on economic issues, political opening is bringing far-reaching developments. New partners in development are emerging. The contribution of a vibrant civil society to development is tangible and increasingly encouraged. The public sector is expected to become more effective as local Government and local representatives of the central Government take on increasing responsibility in the coming years. * The progress achieved during the 1990s on economic management is a strong basis from which to implement more aggressive growth oriented policies and programs. Strong stabilization was needed to re-establish credibility following the rescheduling agreements of the late 1980s. Later on, it provided the basis to support structural reform, notably in the financial sector and in opening the economy to private investments. Without stabilization, the authorities would not have been able to correct the fiscal excesses of the 1980s, and macro instability would have reduced both the quality and quantity of private investment. Without the liberalized markets and the stronger regulatory institutions, Morocco would be less able to reap benefits from the EU Association agreement, and generally integrate successfully into the world economy. While growth and poverty reduction have been weaker than hoped for during the 1990s, this is not because of too much reform, but because of too little progress on some critical structural reforms and because of the rigid macro framework which emerged. The recent decision to rebalance the currency peg basket and the resulting de facto 5 percent devaluation is a step in the right direction to allow the economy to maximize its return from reform. * Potentially large privatization revenues provide a unique opportunity to reduce social gaps and to create the conditions for long-term growth. In view of their one time effect, Morocco should manage these resources carefully and use them to finance key social priorities such as education reform or the extension of health insurance, as well as stronger structural reforms in support of growth-oriented policies. 10. Morocco's main development challenges can be summarized into four inter-related objectives that cut across sector issues: achieving higher growth to reduce poverty, improving the access of poor households to social services, enhancing public sector efficiency, and reducing vulnerability, in particular to droughts and, in the medium-term, to environmental degradation. 7  A. The Growth Challenge 11. Higher growth and competitiveness hinge on the implementation of the outstanding structural reform agenda, including in social sectors. However, because many of these reforns are of a 'second generation' nature and require a significant measure of institution and consensuis- building, their effects will build gradually over time. While pursuing them aggressively, Morocco therefore needs to also put in place an economic framework that allows the economy to exploit fully its current growth potential, so that it can address the critical poverty and unemployment challenges it is facing today. 12. In order to achieve higher growth in the short-term, Morocco is essentially presented wth two broad options: boost domestic demand through expansionary fiscal policies, or rely to a larger extent on the dynamics of international trade. * Allowing for a higher budget deficit would not be a viable option. Total public debt has been receding but still stands at a high 80 percent of GDP and, as already noted, fiscal management remains constrained. * The option of a non debt-creating fiscal expansion is available to Morocco, thanks to tle large expected privatization revenues. However, allocating these revenues only to pub' ic investment would likely have only a transitory impact on growth, given the estimatled modest supply-side effects in the long run. Allocating them to current expenditures would endanger the sustainability of the already fragile overall fiscal position. * Fiscal and supply-side rigidities suggest that the best option to realize the full growth potential in the short-term might be a shift in economic policy based on the stronig dynamics of international trade. To this effect, two complementary measures should be implemented: (i) increased flexibility in the exchange rate regime, building on the recent devaluation to restore competitiveness of the tradable sector, and to allow enterprises to diversify; and (ii) an acceleration and broadening of the trade liberalization agenda with the EU to alleviate inflationary risks and maintain the pressure on import substitution industries to improve productivity. Such an agenda should be complemented by aggressive reforms to tackle supply-side constraints. Finally, there are two additional elements of the agenda, discussed in more detail below, regarding social issues. First, the authorities should simultaneously improve the currently fragmented and limited sociail protection system in order to mitigate the possible adverse short-term effects of such a policy shift on the poor. Second, they should also take action to accelerate the integraticn of poor rural areas into the mainstream of the economy. B. Improving the Poverty Focus of Public Policies and Expenditures 13. Growth is key to poverty reduction, but, to make more rapid headway in reducing tt e large social gaps, public policies need to promote equity much more forcefully than in the past. Indeed, during most of the 1990s, expenditures on investment and social programs were restrained, and budget priorities were only reassessed during the last few years. Equity therefoie remains a serious issue in most sectors: * In the rural sector, the incidence of both the investment expenditures and subsidies s biased towards larger farmers. For example, over 70 percent of the Ministry of Agriculture's investment budget goes to large-scale irrigation, and since O&M costs aie only partially recovered from users, it benefits mostly larger and better-off farmers. A similar bias results from the high border protection for so-called strategic commodities 8  (wheat, sugar, and oil seeds) since large farmers produce the bulk of marketable surpluses. High protection may have also induced some poorer farmers into soft wheat production, increasing their vulnerability to drought. A food subsidies program, established to compensate poor consumers for the impact of protection on domestic prices, is poorly targeted. Recently, however, increased budgetary funding for rural development and drought emergency programs have targeted poorer rural areas. Also, the Government has dismantled the protection-cum-subsidy system for oil seeds in 2000, but still maintains the system for the two other commodities. * In education, unequal expenditure patterns explain many of the gaps observed at the primary level and in rural areas. As much as 20 and 17 percent of resources go to the secondary and tertiary levels, respectively, which benefit more the urban and better-off segments of the population but are provided free of charge. Among the many important breakthroughs achieved by the Royal Commission on Education, however, is a consensus for primary universal education and on regional decentralization and support for community schools to achieve this goal. * In the health sector, despite recent increases, public spending remains low by international standards, and is skewed towards the urban hospital sector, which absorbs 70 percent of the recurrent budget. As a result, 40 percent of public spending on health benefits the top quintile of income distribution, as against 20 percent of spending for the two bottom quintiles. Access to health facilities in some rural areas are 4 times lower than in urban areas, and key public programs such as reproductive health are chronically under-funded. Another emerging concern is the need to carefully monitor and control the potential spread of HIV infections. * More generally, Morocco does not spend enough on specific poverty or employment- targeted programs. Aggregate spending on social sectors is low by regional standards (12 vs. 20 percent of GDP in MNA countries), and most resources go to education, health, food subsidies, and pensions, limiting the resources available for other forms of social assistance. Promotion Nationale, the public works scheme, with 0.3 percent of GDP, provides jobs to an average of 40,000 unskilled workers per year. Spending on Entraide Nationale, which caters to the needs of disadvantaged women and children, is below 0.1 percent of GDP, and the program reaches only 80,000 individuals. Finally, with the resources allocated to adult literacy programs (US$ 3.5 million a year), it would take decades to reduce illiteracy to the LMI average rate of around 16 percent. C. The Reform of the State 14. The State in Morocco remains heavily involved in the provision of goods and services, well beyond what would be justified by objectives of regulation or redistribution, and in excess of its capacity to provide strategic leadership. Public sector management has been traditionally characterized by excessive centralization and a culture of administrative formalism, which has gradually degraded into poor accountability and pervasive petty controls. Not only does this affect efficiency, but it also creates opportunities for mismanagement and corruption, cited by private enterprises as one of the main obstacles to their development. The Government has placed the issues of transparency and corruption squarely on its agenda. The key governance issues are as follows: * Alternative delivery mechanisms involving the private sector or civil society could much improve the coverage and efficiency of public services. Incipient support to NGO-led 9  education and literacy programs needs to be expanded through additional budgetary resources, and improved capacity to regulate and monitor partnerships. * Excessive centralization has resulted in slow program implementation, lack of cross- sector coordination and insufficient participation from stakeholders. Current centralized procedures for budget preparation and execution have not led to better strategic prioritization either, nor better efficiency in the use of resources, particularly in social sectors. There are multiple examples of this: public hospital occupancy rates stancd at around 50 percent; recently-built schools sometimes remain unattended for lack of basic services such as water or access roads; in secondary education, pupil-to-teacher ratios average only 12, a very low level by international standards. Despite growing consensus in Morocco that the centralized administration model has become an obstacle to, rather than an agent of, development, reform efforts are still at their very beginning. * Finally, the heavy burden of the wage bill (12 percent of GDP) is not the only problem leading to calls for civil service reform. The skills mix, biased towards implementation rather than managerial or analytical profiles, does not serve well the needs of a modmn administration. An opaque and fragmented compensation system, coupled E ith constraining regulations, has inhibited staff redeployment, impeded administrative decentralization, and led to larger recruitment than would otherwise be necessary. D. Reducing Agricultural Vulnerability and Environmental Threats 15. With 45 percent of the population and 70 percent of the poor living in rural areas, agriculture is key to the living standards of the most deprived in Morocco. Increasing fluctuations in agricultural output and the associated expansion-contraction cycles in rural household incomes obviously influence their consumption-savings behavior. Indeed, the growing economic uncertainty observed in the 90's, decreasing real prices for main crops, weak income levels, and the absence of a genuine social protection system allowing to smooth out the effects of droughts, seem to lead to asymmetric consumption patterns, with significant consumption drcps during drought years not offset by increases during expansion phases. 16. Environmental degradation is of concern, not only for growth sustainability, but also for equity since the poor are the most affected. The main issues include the lack of water and sanitation, with particular impact on the poor, water quality issues and urban pollution. Most generally, water availability at 700m3/person/year puts Morocco in a situation of 'water stress'. In rural areas, the lack of water and related infrastructure is affecting seriously the ability of the rural poor to cope with what seem to be growing climatic shocks. Regional disparities, with the deterioration of water quality in some water basins with high industrial and urban concentration, aggravate the problem. The country is also subject to an increasing fragility of forest and graziag land, with around 50 per cent of land affected by erosion. III. MOROCCO's DEVELOPMENT PROGRAM 17. Morocco's development program was initially formulated in the current Government's policy statement of 1998. It was further fleshed out in the five-year Plan approved by Parliament in July 2000, which takes into account recent developments such as the vision of education reform laid out by the Royal Commission, and the prospect of exceptional privatization revenues. It addresses the four key development challenges as follows: 10  A. The Growth Agenda 18. The acceleration of growth to an average of 5 percent over the five-year period is a central objective of the five-year plan, and would be supported by higher public investment levels and structural reforms. Mostly on account of privatization revenues, public investment would increase markedly over the period, to average 4.5-5 percent of GDP. The EU agreement represents a cornerstone in Morocco's integration strategy. The recent currency realignment also reflects the growing importance of Europe in Morocco's trade. 19. The Government expects private sector development to be a key source of growth. It would encourage the private sector by continued implementation of ongoing structural reforms, including: (i) privatization and PPI; (ii) the business environment, with special emphasis on SMEs, export promotion, streamlined procedures for foreign and domestic investment, and improved access to land; (iii) labor market policies, including the approval of a much delayed new labor code, increased private sector participation in the professional training system, and better market intermediation through the new National Agency for Employment; (iv) tax administration, realignment of external tariffs, and the judicial system, including further strengthening of commercial courts; and (v) continued strengthening of the financial sector. B. Improving the Poverty Focus of Public Policies and Expenditures 20. As noted above, the objectives of equity and inclusion, repeatedly stressed by King Mohammed VI, have gained importance in the Government's program. The Plan targets the generalization of education at entry levels by 2002-03. To this end, 10,000 new teacher positions were created under the current 2001 budget and the Plan envisions a large school construction program. The Government is also considering extending medical insurance, including to the poor, to be financed with budget resources. Additional pro-poor policies and programs being introduced are: (i) a further acceleration of rural infrastructure programs, with a view of reaching 60-70 percent of the rural population by 2004; (ii) a set of integrated and participatory rural development programs, targeted at the poorest rural areas; and (iii) the creation of the Social Fund, and the reform of Entraide Nationale, based on the results of a pilot reform program started in 1999. C. The Reform of the State 21. The Government plans to improve public sector efficiency by implementing the following measures: (i) enhanced autonomy for local municipalities, through a legislative reform currently under preparation, and the establishment of intermediate levels of government (regions); (ii) adrministrative decentralization, the principles of which were recently laid out in a draft charter, and successfully experimented under the recent emergency drought program; (iii) across- the-board simplification of rules and regulations including the reduction of the administration's discretionary powers; and (iv) increased accountability, through further build up of commercial and administrative courts, and the strengthening or creation of Chambers of Accounts at the central and the regional levels. D. Reducing Agricultural Vulnerability and Environmental Threats 22. The Government has launched a national drought protection program following a second drought year in 2000. The program includes measures to improve water distribution, 11  strengthening of cattle feed distribution and subsidies, debt rescheduling for farmers, and cereal distribution. The program has successfully used a decentralized and participatory approach that has had maximum and quick impact. The program will now be institutionalized to ensure rapid reaction in the event of drought. E. Bank Assessment 23. Overall, the Government's strategy does reflect Morocco's key development priorities and to a large extent identifies the budgetary resources and instruments to achieve them, as evident for instance for education reform and rural sector development. The Government strategy, however, raises four sets of issues: * Many of the reforms underlying the Plan's growth targets are of an institutional nature and might take longer than expected to materialize. Under unchanged macroeconorric policies, it is unlikely that Morocco will rapidly embark on a path of sustained and significantly higher growth. The recent readjustment of the currency peg basket, while sending a positive signal and helping prevent a further appreciation of the real effective exchange rate, might not be enough to alter significantly the growth outlook. Restoring competitiveness would require continued flexible management of the exchange rate. Similarly, these changes in exchange rate policy should be accompanied by a wider policy package that includes trade liberalization, tight fiscal policy and structural reforrs to facilitate private sector activity. Stagnation of agriculture output is also unlikely to be reversed until the issue of crop patterns, and the related questions of protection, wat-r management and price incentives, is addressed. * Fiscal management is under strain, and is a cause for concern. The 5-year Plan's objective of reducing the deficit to 1 percent of GDP by 2004 hinges on 'compensatoiy measures' of 4 percent of GDP, which have not been identified. Savings on the wage bill or food subsidies will require difficult reforms in order to materialize. On the expenditure side, strong pressures are already arising from education reform, particular y through the wage bill, and further pressure may come from health insurance or thle assumption of contingent liabilities (public pensions schemes and specialized banks). * Key structural reforms in areas such as education, extension of health insurance, health financing for the poor, or the civil service, lack a clear vision as to how they will be implemented, or financed. Education reform, in particular, requires a well-articulated plan integrating and sequencing its various aspects, including fiscal costs and efficiency gains. * While privatization revenues would present a unique opportunity to finance some of the one-time costs of important structural or social reforms or to ease future fiscal constraints, no provision to that effect has been made under the Govemment strategv. Most of the privatization revenues have hitherto gone to finance lower budgetary savings, and only a limited part has been earmarked for financing various investment projects and recapitalization operations under the Hassan II fund10. 24. Finally, the political opening process is still unfolding. Over the last few years, the political decision-making process has sought to build consensus among the coalition members, and with civil society more generally. While transparency was enhanced, consensus building has 10 The Hassan 11 Fund was created in 1999 as an extra-budgetary account intended to earmark for investment part of the proceeds of the second GSM license. 12  often caused delays and a lack of clear vision and drive, increasing uncertainties in the private sector. With the advent of new elections next year, it is hoped that the Government will forge an early consensus on reforms to allow it to move more decisively on its agenda. IV. MEDIUM-TERM PROSPECTS 25. Morocco is at a juncture in its development agenda. In particular, choices made today in three economic policy areas will have a significant impact on economic prospects over the medium-term. First, there is broad consensus that structural reforms should continue to be an important focus of the reform program over the next four years. As noted above, the Government has made significant progress during the last few years in tackling structural issues, as well as improving human capital and reducing disparities between urban and rural Morocco. Implementing these reforms at a faster speed would help jumpstart the economy, in particular if private investors feel more reassured about the Government's commitment and capacity to manage the economy. Second, structural (second generation) reforms alone are unlikely to achieve a sharp increase in the growth rate, especially over the CAS period. The prospects for the Moroccan economy over' the next 4 years also critically hinge on sound macroeconomic policies. Finally, a decisive choice confronted by the authorities is how to use the large privatization receipts. An unwise use would represent a missed opportunity to quickly tackle key structural constraints, and might potentially undermine macroeconomic stability over the medium-term. 26. The fundamental differences between the two scenarios described below depend on choices in these three areas. The partial adjustment (base) case is defined as a continuation of the macro policies of the 1990s, characterized by sustainable fiscal management and a nominal exchange rate peg. However, given the recent deterioration of the budgetary situation financed with the large privatization receipts, this scenario is conditioned on significant fiscal adjustment over the next 3 years. In this regard, the fiscal measures of the next budget law for 2002 will be critical in keeping Morocco firmly in this scenario. Also, following the recent readjustment of the currency peg, the scenario assumes that the authorities would ensure that no real appreciation of the currency occurs in the next few years. This scenario also assumes continued progress on the structural front, along the same trends as in the 1990s. The high case, or full adjustment scenario, represents a more dynamic policy stance, more susceptible to generate the higher economic growth rates necessary for unemployment and poverty reduction. A. Base Case Scenario (Partial Adjustment) 27. The base case is predicated on the preservation of a stable macroeconomic framework in a context of medium-term fiscal sustainability, a benign external environment, and continuing structural reforms. 28. As noted above, this scenario, based on the Moroccan five-year plan, restores the economic policy framework of the 1990s, but given today's policies, it implies a sharp correction of recent fiscal trends. Indeed, the 2001 budget law foresees a fiscal deficit of 7.7 percent of GDP, although the debt-creating fiscal deficit is kept in the range of 1.2 percent of GDP, thanks to privatization receipts of about 6.5 percent of GDP. This budget marks a serious deterioration in the structure of public expenditures, essentially negative levels of government savings, which could threaten medium-term fiscal sustainability. The realization of the base case scenario will therefore hinge critically on three conditions that need to be achieved through ongoing fiscal 13  management during 2001, and through adequate measures in future Budget laws (see CAS Annex for detailed macro projections): * Maintaining current budget revenues as a percentage of GDP (24 percent) from 20(1 onwards, in the context of declining customs duties under the EU agreement. This will imply continued improvement in tax collection, and the broadening of the tax base (especially with respect to VAT). * Less than full execution of budgeted investment, at around 85 percent of the leve .s envisaged in the Plan, counting on implementation constraints and enforcement of tight selection criteria. This should result in a level of Government investment above 5 percent of GDP for the CAS period, compared to 4.5 percent in 1997-98. Table 2. Partial Adjustmnent Scenario - Selected Macroeconomic Indicators Actual Estmte Projected lndicaLor 1997 1998 1999 2000 2001 202 2003 p004 Growth rates (%) Real GDP -2.2% 6.8% -0.7% 0.8% 8.0% 3.4% 3.6% 3 8% Real non-agriculture GDP 3.2% 3.9% 3.0% 3.4% 3.9% 3.9% 4.1% 42% Real Consumption per Capita -4.3% 6.8% -3.8% -1.8% 6.6% 0.8% 1.9% 23% Import Volume, GNFS 7.3% 21.4% 4.7% -2.8% 5.5% 4.9% 5.6% 5 9% Export Volune, GNFS 8.3% 2.2% 4.8% -0.8% 4.0% 6.9% 5.7% 5 8% Ratios to GDP (%) Gross Domestic Investment 20.7% 22.5% 24.2% 24.5% 24.7% 25.2% 25.4% 25 6% Government Deficit (excl.grants) 2/ -3.3% -2.7% -3.8% -6.4% -7.7% -5.5% -4.3% -3 5% Government Current Revenues 25.5% 27.4% 27.1% 26.2% 23.8% 23.9% 23.9% 24 0% Govemment Current Expenditures 24.6% 25.2% 26.0% 26.5% 25.5% 23.6% 22.9% 22 3% Government Budgetary Investment 4.2% 4.9% 4.9% 6.1% 6.0% 5.8% 5.4% 5.2% Total External Debt 60.3% 57.5% 54.5% 59.4% 54.9% 50.1% 45.7% 42.5% Current account balance -0.3% -0.4% -0.5% -1.6% -1.5% -1.1% -1.0% -1.0% 1/ Includes changes in stocks. 2/ Fiscal years in 1997 and 1998, calendar years otherwise. Progress in reducing current expenditures. First, the 2001 budget law includes a number of one-time expenditure items, such as the drought program, a retroactive payment for the exceptional promotion of civil servants, and partial buffering of highe- oil prices. A moderately tight control of Government consumption starting in 2002 would allow to cut these expenditures by 1.3 percent of GDP by 2003. Second, further reform of the food subsidy system could be implemented, following the elimination of cooking oil subsidies in November 2000. Finally, it will be critical to enforce a strict control o. the wage bill: zero net recruitment and no discretionary wage increases from 2002 onward would allow to reduce the wage bill by around 1.5 percentage point of GDP by 2004"'. The CAS program will fully take the fiscal situation into account, not only in the determination of assistance levels but also by devoting resources to analytical work anc policy dialogue on issues such as the reform of civil service or food subsidies. " Except for the increase resulting from the process of conversion of temporary workers. 14  29. Under these assumptions, more than half of cumulated privatization revenues will still be absorbed to finance lower government Rgure 3. Privatlzation Revenues, Government Savings, 1999- savings, which will return to their 2004 1999 level only by the end of the CAS period. The debt-creating fiscal deficit 8.0