Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized f1le COPY Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQIJIE' WITH THE GUARANTEE OF THE KINGDOM ofr MOR( CO May 6, 1977 Report No. P-2032-MOR 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.

2 CURRENCY EQUIVALENTS (Dirhams per U.S. Dollars) End of Period Period Period Average (DH) Source: IMF, International Financial Statistics - February ABBREVIATIONS BAII BCM BCP BNDE BRP CCG CDG CIH CNCA DFC LIBOR OCP ODI SSI Banque Arabe Internationale d'investissement Banque Commerciale du Maroc Banque Centrale Populaire Banque Nationale pour le Developpement Economique Banque Regionale Populaire Caisse Centrale de Garantie Caisse de Depot et de Gestion Credit Immobilier et H^telier Caisse Nationale de Credit Agricole Development Finance Company London Inter-Bank Offered Rate Office Cherifien des Phosphates Office pour le Developpement Industriel Small-Scale Industries FISCAL YEAR January 1 - December 31

3 FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED EIGHTH LOAN TO BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO 1. I submit the following report and recommendation on a proposed loan to Banque Nationale pour le Developpement Economique (BNDE) to be guaranteed by the Kingdom of Morocco, for the equivalent-of US$45 million, to help finance lending for industry. Amortization would conform substantially to the aggregate of amortization schedules applicable to the specific investment projects financed out of the proceeds of the loan, with a maximum period of 15 years for individual investment projects, including up -to three?ears of grace. Up to $3.0 million equivalent of the loan proceeds would be relent by BNDE to Banque Centrale Populaire to help finance lending for small-scale industrial enterprises (SSI). PART I - THE ECONOMY 1/ 2. A report entitled "Current Economic Position and Prospects of Morocco" (1021-MOR, dated January 26, 1976) was distributed to the Executive Directors on February 13, An updating economic mission visited Morocco in June 1976 (its report is planned for distribution to the Executive Directors by June 1977), and the following is based on this mission's findings. 3. During the Plan, Morocco succeeded in accelerating the growth of its economy and in improving the situation of its external payments. Aided substantially by good crops following favorable weather in three years out of five, real GDP growth averaged 5.6 percent per annum during the fiveyear period. Reflecting the sustained rise in exports during the Plan period and a slower growth of imports in 1971 and 1972, the balance of payments showed a surplus from 1969 onward. These results represented a definite improvement over those of the preceding decade, during which the rate of real GDP growth had barely exceeded that of population growth, and the balance of payments had been a source of constant concern. These achievements were accompanied by an increase in private consumption averaging about 2 percent per capita in real terms during the five-year period. 4. From 1967 to 1970, the main growth determinants had been exports, tourism and investment, all of which rose substantially; in addition sizeable stocks were accumulated following the exceptionally good harvest in By contrast, in , exports and tourism together with current government spending were the major factors to sustain economic growth. During 1/ This part has been slightly revised from President's Report No MOR on the Doukkala II Irrigation Project, dated April 21, This document ha raetricted distribution and may be used by recipients only In the perfonnme of their officw dutis. Its contents may not otherwis be disclosed without Wori Dnk auth_dmion.

4 - 2 - these last two years of the Plan, the investment of public and semi-public enterprises declined, largely because the state-owned phosphate company (OCP) had completed its expansion program. Government investment stagnated after Private investors adopted a wait-and-see attitude in the face of political developments in 1971 and 1972 and in the expectation of new measures to encourage investment and exports. At the end of the Plan period, there was therefore an urgent need to revive public and private investment. Particularly in the public sector, absorptive capacity needed to be increased by appropriate changes in staffing and organization. 5. Following a long period of very slow growth in private consumption, social problems had to be tackled. Over the period, there had been a slow but perceptible decline in real per capita consumption for about onethird of the rural population. Wealth and income differences between cities and villages, among regions, and between rich and poor tended to widen. Unemployment remained high, in 1971 averaging 9 percent of the country's labor force, and ranging between 12 and 16 percent in large urban centers. 6. Recognizing these difficulties and problems, the Government began in 1971 to revise its development policies, paying increasing attention to social objectives. The changed orientations were reflected in the Plan which aimed at (1) GDP growth of 7.5 percent per annum in real terms from 1973 to 1977, mainly through a sharp increase in public and private investment and a strategy geared strongly toward increasing exports, and (2) an improvement in the distribution of growth benefits among the different social groups and the various regions, in order to achieve greater equity and at the same time increase domestic demand. This improvement was to be brought about through a modest program of distributing colon lands to poor farmers, more emphasis on the development of rainfed agriculture, "Moroccanization" of some industrial and commercial enterprises, a price and wage policy designed to enable the poorest segments of the population to satisfy their essential needs, an ambitious program of low-cost housing, various measures to improve the lot of the rural poor, and increased emphasis on the development of the poorest regions. 7. In 1974 and 1975, Morocco benefitted from a large increase in the average export price of phosphate, its main export product, which provided substantial additional resources compared to the Plan's expectation. The Government decided in 1975 to step up investment spending for the years , and the allocations for investment by the public and semi-public sectors were increased substantially in the annual Budget Laws. Part of the additional allocations were to cover investment cost increases, and a larger part to launch expanded or new investment programs. Recent Economic Performance 8. During the first three years of the Plan period, Morocco's overall economic performance improved substantially as compared to the past. Gross fixed investment rose sharply and reached 24 percent of GDP in 1975 and almost 30 percent in Investments in the public and semi-public sectors contributed strongly to this increase and there was also a good response on

5 - 3 - the part of private investors to the new incentives introduced in Industrial growth accelerated to an average annual rate of about 11.5 percent for the first three years of the Plan compared to 6 percent in , in large part because of the vigorous expansion of construction in response to rising investment demand. At the same time, increased emphasis was put on achieving the social objectives of the Plan with the implementation of an accelerated low-cost housing program, expanded investments in social sectors in small cities, and a program of small-scale investments in disfavored regions. In the face of import price rises, especially for wheat, sugar and edible oil, the Government also raised significantly price subsidies for these essential foodstuffs and adjusted upward legal minimum wages in agriculture and industry with a view to protecting the purchasing power of low-income groups. 9. Some weaknesses appeared, however, during this period. After the five-fold increase in phosphate exports receipts between 1973 and 1974, expected further increases in financial resources did not materialize in Due to weakening external demand, phosphate exports decreased to 13.1 million tons, from 18.7'million tons in 1974, and phosphate prices began to drop sharply in the second half of 1975, restraining the country's real capacity to save-'and to import. Unfavorable weather resulted in poor crops in 1973 and in 1975 and to meet domestic demand, food imports were increased substantially. In constant prices, value added by the mining and agricultural sectors returned in 1975 to levels slightly below those of Despite the fast growth of industry (excl. mining) and services, real GDP growth averaged only about 4 percent per year in As a result largely of the disappointing performance of phosphate exports in 1975, Morocco's internal and external finances came under pressure. The Treasury's accounts showed in 1975 an overall deficit twice the 1974 level due mainly to sharply rising capital spending and insufficient growth in budgetary savings. This contributed to inflationary pressure domestically; the cost of living index rose by nearly 8 percent in The current account of the balance of payments, which had shown a surplus of $105 million in 1973 and $237 million in 1974, registered a deficit of $546 million in In 1976, GDP growth accelerated to 10 percent, thanks mainly to a good cereal harvest (48 percent larger than the previous years) and the continued growth momentum in manufacturing, construction and services. The expansionary investment policies of have continued, and the 1976 Budget Law raised further the allocations for investments in the public and semi-public sectors. Several measures were, however, taken to curb the growth of consumption demand, including some restraint in current budgetary spending, the successful placement last summer of a DH 1 billion ($230 million) bond issue among the Moroccan public, and the introduction of credit restraints. Nevertheless, for the full year, imports registered another sizeable increase, not matched by recovery of'export receipts, and the balance of payments current account-'reached an estimated $1.1 billion deficit (it was $0.5 billion in 1975). There was however an increase in the country's net foreign assets,

6 - 4 - as the current deficit was more than covered by increased net external capital inflows. Morocco drew on IMF facilities for a total amount of SDR 115 million in early 1976, and it considerably stepped up borrowings from Arab and commercial sources (see Annex 1, page 4). Since early 1976, when Spain relinquished its control over the Spanish Sahara, Morocco and Mauritania have extended their administration to this territory, the northern part being administered by Morocco. Detailed information is lacking to trace the impact of spending for former Spanish Sahara on government expenditures, imports and external capital inflows, but it appears that the substantial increments in government spending and imports for the Sahara were nearly offset by grant inflows from external sources. 11. For 1977, the trends in consumption demand, particularly for imported consumer goods, will have to be curbed further, and investment growth in the public and semi-public sectors may have to be significantly slowed, in order to keep developments in the internal and external financial situation under firm control. The Government has been introducing measures to restrain domestic demand. While 1977 would, with such measures, be a year of retrenchment by comparison with policies during the first four years of the Plan, tentative Bank estimates (Annex 1, page 3) indicate that overall performance of the economy would be satisfactory for the Plan period as a whole. They show that a rapid growth of investment (between 16 and 17 percent a year) would have been achieved, exceeding the original Plan targets for They also show relatively good gains in GDP (about 6 percent a year) and consumption (close to 3 percent a year per capita), despite the rather disappointing developments in real terms for the phosphate and agricultural sectors. Finally, national savings would have financed a larger share of investments than anticipated originally. A detailed review of the economy's performance during will be undertaken by the Bank next fiscal year, in conjunction with an assessment of Morocco's next five-year Plan ( ). Development Prospects 12. The Plan revisions that were introduced since 1975 have maintained or strengthened the investment programs designed to achieve the original economic and social objectives of the Plan. They have, in addition, greatly increased allocations for regional development, for low-cost housing, and especially for three industrial investment programs to be implemented over the next decade. These programs are a one-million ton steel mill and related infrastructure at Nador, a series of sugar mills and related irrigation development and several chemical units based partly on phosphate. Thus, the Plan revisions will have an important spill-over effect on the next Plan. 13. The general thrust of the Plan revisions seems justified. Indeed, the achievement of initial (especially social) Plan objectives is eminently desirable. Similarly, Morocco's economy has developed to a stage where some basic industries may find a justified place. The Country in particular possesses an obvious comparative advantage in the processing of phosphates,

7 - 5 - which would tend to stabilize export earnings. Similarly, it can produce at competitive cost steel and sugar which it would otherwise import, although cost competitiveness in both cases is difficult to assess because of volatility in international prices. The Plan revisions nonetheless raise several issues of importance for Morocco's long-term development strategy and prospects. 14. The present investment level is very close to the country's absorptive capacity. Although training efforts have been stepped up, it is likely that shortages of skilled and experienced manpower will continue to be a problem for some years to come. While for large industrial and infrastructure projects, Morocco can use foreign services extensively, this is costly and would not be a suitable solution to meeting the needs of smaller investments in large numbers. Further investments in steel and chemical industries will generate comparatively little direct employment opportunities for unskilled workers. 15. In addition, financial constraints may in future again restrain Morocco's overall development efforts. While there is scope for increasing phosphate exports, the prospects in the medium term are that the real price of phosphate will remain stable. Hence, Morocco's real capacity to save and import would be expected to increase only moderately. The pursuit of the objectives and policies to improve consumption levels of low income groups would also restrain national savings. Thus, in spite of likely efforts to increase budgetary savings and import substitution (particularly food), foreign exchange and national savings are likely to be constraints on investment during the next Plan period. 16. Bank staff projections which are preliminary since the Government has not yet fixed the Plan's objectives and strategy indicate that gross fixed investment could only grow slowly in view of limited resources available. Given the planned move into heavy industries, investment possibilities in other sectors would by necessity be limited. Assuming a real investment growth of about 3 percent per year and export growth of about 8 percent, which seems feasibile in view of market prospects and export capacity, GDP growth could probably average about 6 percent yearly during the period. Despite implementation of policies to restrain consumer goods imports and likely import substitution, Morocco would experience a sizeable resource gap, and need relatively large inflows of external capital to cover it and to service accumulated debt. External borrowing requirements on a commitment basis are tentatively projected to average $900 million per year in , about two-thirds of which would be met by official multilateral and bilateral sources and the rest by commercial sources. Morocco has successfully increased external borrowings in ; loan commitments have risen to $550 million in 1974, $860 million in 1975 and $1.8 billion in Morocco should, therefore, be able to mobilize the amounts projected for External debt and debt service would increase as a result of projected borrowings. Debt outstanding and disbursed, which was $1.1 billion at the end of 1974 and an estimated $1.5 billion (19 percent of GDP) at the end of 1975 would rise to a projected $5.0 billion (or 24 percent of GDP) by the

8 - 6 - end of Similarly, debt service payments would rise from the low 8.3 percent of exports in 1975 to about 18 percent in Adding workers' remittances to exports, the debt service ratio was less than 7 percent in 1975 and would rise to 15 percent in These projected levels for debt and debt service would be high, but still within Morocco's debt carrying capacity, especially when considering the country's improved economic and social policies and its long-term export prospects, not only in phosphate rock and related products, but also in agricultural and industrial commodities for the European market. Beyond 1982, the relative burden of debt would probably tend to decline gradually as Morocco benefits from anticipated supplier's market for phosphates and its resource gap consequently tends to diminish. Morocco is therefore considered creditworthy for further Bank lending. PART II - BANK GROUP OPERATIONS IN MOROCCO 18. Bank and IDA lending to Morocco has supported 32 projects, financing a total of $748.4 million (net of cancellations), of which $534.5 million has been lent since the beginning of FY73. IDA credits, totalling $50.0 million, have been made available for five projects. A Third Window loan for $25 million for the third education project was approved in March IFC investments have amounted to $4.2 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1977, and notes on the execution of ongoing IBRD/IDA projects. In some cases, delays have been caused by management or procurement difficulties, and in 1974 cost overruns increased due to accelerating inflation, which was in part caused by the upsurge of investment activity in Morocco. However, performance in project execution has considerably improved during the last two years. 19. Past Bank Group lending has been concentrated in the industrial and agricultural sectors, which together have accounted for 65 percent of total net commitments; the balance is accounted for by utilities (15 percent), tourism (9 percent), roads (6 percent) and education (5 percent). Apart from the transfer of resources to Morocco (Bank Group gross disbursements amounted to 5.5 percent of total fixed investment in ), the main objectives of lending were to foster and strengthen development institutions, provide technical assistance, particularly for project preparation, and increase productive capacity, particularly in order to improve the balance of payments. 20. While these objectives remain, emphasis is also being given to supporting the Government's effort to improve income distribution. An increasing share of Bank Group lending will be devoted to projects directly or indirectly developing the productive capacity of the lowest urban and rural income groups. 21. Past lending for agriculture has supported irrigation development, credit and, through a first operation in FY75, the improvement of the productivity of rainfed farming. While continued lending for irrigation is envisaged, greater emphasis will be given to supporting the improvement of rainfed farming, and lending will in general be focussed on support to small farmers. A

9 third agricultural project was recently approved. Projects for livestock/ rural development in the rainfed zones in northern Morocco, for developing production of fruits and vegetables on small holdings and for promoting integrated rural development in selected regions of Morocco are being prepared. 22. Projects in industry and tourism have as key objectives increased foreign exchange earnings or savings and the improvement of sectoral policies. Continued lending for industry and tourism through two DFC's (Banque Nationale pour le Developpement Economique-BNDE and Credit Immobilier et Hotelier-CIH) will be proposed. In order to increase employment generation, projects supporting exclusively small-scale industry (SSI) are envisaged after sufficient experience in SSI lending is gained through the pilot project included as a component of the proposed loan to BNDE. Bank involvement in development of large-scale industries include a recently approved project for a construction of a cement plant in the less developed Northeast. In addition, the Government has requested Bank financing for a steel mill in the northeast Morocco. 23. An urban project is being prepared, which should contribute to devising means to solving the problem of the rapid growth of slum areas. 24. Education is a critical bottleneck in Morocco's development. Two IDA credits have been made to develop secondary education and teacher training and to improve technical and vocational training. A third project, with emphasis on improving facilities in rural areas, was recently approved by the Executive Directors. A fourth project with emphasis on technical and vocational training is under preparation. 25. Loan commitments from multilateral and bilateral official sources to Morocco rose from $92 million in 1973 to $425 million in 1974 and $538 million in In addition Morocco received grants totalling $40 million in 1973 and $42 million in The major sources of aid were France, Saudi Arabia, the UAE, the U.S., Germany and the Bank Group. 26. At the end of 1976, the Bank Group's share in Morocco's outstanding and disbursed external public debt was estimated at 13 percent. The share of the Bank Group in debt service was 20 percent in 1975 and an estimated 13 percent in By 1982 the Bank Group's shares in debt outstanding and in debt service are expected to be about 17 percent and 11 percent respectively, on the basis of the assumptions made for total external borrowings for the period (see paragraph 17). 27. IFC investments in Morocco to date amount to $4.2 million, of which $1.5 million was used for purchasing BNDE shares in IFC is now considering a request by Temara Cement Company to assist in the financing of a new cement plant with a capacity of 600,000 tons p.a.

10 - 8 - PART III - THE INDUSTRIAL SECTOR 28. Manufacturing and processing industry account for about 13 percent of GDP in Morocco. During the first twelve years after Independence (1956) manufacturing output grew at 4.0 percent per annum and increased to 5.6 percent per annum during the Second Plan ( ). By the end of the Second Plan, the structure of the sector was heavily weighted in favor of consumer goods production, which represented 63 percent of total sectoral output, whereas industries producing intermediate and capital goods were less important (24 percent and 13 percent respectively). Exports by the manufacturing sector were based predominantly on domestic raw materials produced by agriculture and mining, and rose by 14 percent a year in The Third Plan ( ) aimed at a growth rate for the industrial sector of about 10 percent through an acceleration of industrial exports, and also through continued import substitution in food processing, textile, metal working and chemical industries. The Government sought to attain these objectives by providing generous stimuli for the private industry (such as the Industrial Investment Code promulgated in 1973, which includes a 2 point interest rebate on industrial loans obtained from BNDE, and income tax and custom duty exemptions, etc.) and by investing substantial amounts in the development of public and semi-public enterprises. The actual growth of the industrial sector as a whole in period is estimated at about 10 percent p.a. - in line with the Plan targets. 29. Investment in manufacturing and processing industry during the Second Plan period reached about DH 1.9 billion of which about 75 percent was accounted for by the private sector. Based on data for the first four years of the current Plan, it is estimated that the total industrial investment for the Third Plan could reach about DH 8.0 billion, 70 percent of which in the private and 30 percent in the public sector. Private investment in manufacturing and processing industries (excluding construction and transport) increased from DH 754 million in 1973 to over DH 1,300 million in Public investment increased even more dramatically from DH 77 million in 1973 to at least DH 712 million in To stimulate capacity utilization, the Government successfully promoted exports of finished products (DH 795 million in 1975 compared to DH 426 million in 1972). A further increase of 10 percent in these exports is estimated for Efforts were also made to stimulate regional development, not only by directing public investment into regions other than Casablanca-Mohammedia where most of Morocco's industry is clustered, but also by substantially improving infrastructure which would in the medium and long term facilitate investments in less developed regions. The most notable examples of the regional diversification of industry are the building of sugar refineries, expansion of phosphate production and processing and of the cement industry, and the large-scale steel project which will be started 'n ate ,. Recorded employment in manufacturing and processing grew from 225,000 in 1960 to 366,000 in 1971, an average growth of 3.3 percent, slightly slower than the growth of output. An important step in encouraging employment in manufacturing and processing was made through the 1973 Industrial Investment

11 - 9 - Code. Its incentives favor less-developed regions (for example, the tax holiday does not apply to Casablanca). Based on investments approved under the Industrial Investment Code, the average investment for job created in manufacturing in is estimated in the order of $20-25, Small scale industrial enterprises (SSI) form an essential part of Morocco's economy. According to the 1969 industrial census, SSI enterprises (for definition, see para. 53) accounted for 75 percent of total industrial employment and over 40 percent of industrial value added. A Bank-sponsored survey (1975) of industrial activities which focussed on Casablanca and some other cities, indicated that the majority of SSI operate in textile and leather products, and metal working and fabrication. Other principal sectors were food processing, wood working, construction materials, electrical equipment, chemicals and rubber products. On the basis of the sample it is estimated that about half of the total enterprises surveyed employ less than 10 workers and are in fact handicraft enterprises. While handicrafts receive substantial Government support through a special investment code, training centers and export and marketing promotion, similar assistance is not available to the SSI, and neither is long term credit and equity financing since banks are not yet adequately equipped to cater to them. The proposed project will in part attempt to provide or identify corrective actions. 32. The Government establishes the policy framework for the development of industry through its Ministry of Industry, acting in coordination with the Ministries of Finance and Plan, and with the Prime Minister's Office. It also participates directly in manufacturing activity. The Office Cherifien des Phosphates (OCP) is responsible for mining, processing and export of phosphates and derivatives, which has been reserved to the public sector because of its importance to the economy. The Industrial Development Office (ODI) is responsible for direct industrial promotion activities. ODI undertakes pre-investment studies, acquires equity shares in new industrial enterprises, and aims at contributing to regional development. Few of the projects promoted by ODI since its establishment in 1973 have yet come into production, and many are still under construction, including the cement project, for which a Bank loan has been recently approved. So far ODI has been fully dependent on the Treasury for its financial resources. It is expected that ODI will also play an active role in promotion of future SSI programs. PART IV - THE PROJECT 33. The Banque Nationale pour le Developpement Economique (BNDE), established in 1959, has received seven loans from the Bank totalling $141 million (net of cancellations). In 1962, IFC became a shareholder; it currently holds 7.5 percent of BNDE's equity. The most recent loan from the Bank, $30 million, was signed on December 20, 1974, and was fully committed by October Substantial resources have been mobilized from diverse sources (see para. 50) but BNDE still needs additional funds to meet growing demand for industrial

12 credit. In addition, Bank financial and technical assistance is needed to carry out the SSI pilot project (see paras ). 34. A detailed description of the proposed project is given in the report entitled "Appraisal of the Banque Nationale Pour le Developpement Economique including a Small Scale Industry Component" (1505a-MOR) dated April 25, 1977, which is being distributed separately. A loan and project summary is attached in Annex III. The proposed eighth loan to BNDE was appraised in December 1976 and negotiations were held in Washington, D.C. in April BNDE was represented by Mr. Mustapha Farns, its President and General Manager, and the Guarantor by Mohamed Aissaoui of the Ministry of Finance. BNDE's Past Performance 35. Since its inception in 1959, BNDE has developed into a mature institution making its investments on sound financial and economic criteria. It holds a key position in the term financing of industry in Morocco: in 1976 an estimated two thirds of all industrial term credit granted by the banking system and specialized financial institutions were provided by BNDE. 36. Management and Organization. BNDE's Board, on which several wellknown international banks and institutions are represented, participates actively in the formulation of BNDE's lending policies. IFC is represented on both the Board and the Executive Committee. Mr. Mustapha Faris, former Finance Minister, was appointed President and General Manager in December Under his leadership, BNDE aggressively sought and obtained additional resources, and enhanced its developmental role in the Moroccan economy. 37. BNDE's professional staff is well qualified, adequately experienced and works effectively as a team. In line with the growth in its operations since the last appraisal in 1974, BNDE's staff has expanded from 48 to 60 professionals by end 1976, including four additional engineers recently recruited. Additional financial analysts, economists and engineers are presently being hired in order to further improve BNDE's technical appraisal work and carry out more frequent supervision of projects. BNDE's performance in project evaluation has been satisfactory. BNDE will calculate the economic rate of return for all Bank financed projects (except SSI) as well as for other projects involving direct loans in excess of DH 5.0 million. 38. Resources. Since the previous Bank appraisal in mid-1974, BNDE's total outstanding resources have increased by 124 percent -- from DH 786 million to DH 1,763 million by the end of In 1975 BNDE mobilized resources amounting to DH million (DH 34.4 million in new share capital, DH 474 million in foreign borrowings, and the remaining DH 170 million in local borrowings). In 1976, largely for reasons beyond its control (such as a Government domestic bond issue of DH 1000 million made necessary by increased budgetary expenditures, and a large Eurodollar borrowing by the Office Cherifien des Phosphates) BNDE managed to contract only DH 313 million in new resources (of which DH 273 in foreign exchange) which left it with a resource gap (on a commitment basis) of DH 168 million at end 1976.

13 The Bank has been successfully pressing BNDE to continue to diversify its resources and to rely less on Bank funds. The share of Bank funds in its total resources outstanding amounted to 61 percent by end-1972, 42 percent by mid-1974, 20 percent by end-1976 and is expected to decline further to about 13 percent by the end of At the same time, BNDE has been successful in borrowing from institutions in Arab countries; the share of such borrowings in BNDE's total resources outstanding increased from 1.4 percent by mid-1974 to 18 percent by end Diversification of its resources will remain one of the main objectives of BNDE's future resource mobilization policy. In order to meet its resource needs, BNDE has had to resort to floating rate Eurodollar borrowings, which in 1976 represented about 10 percent of its total resources outstanding. Balancing such borrowings with other types of resources is one of the key aspects of BNDE's resource mobilization strategy (see paragraph 50). 40. Interest Rate. BNDE's nominal lending rate (applicable to mediumand long-term loans) increased from 7 percent in 1971 to 10 percent at present: to this, various charges amounting to a further 1 percent of the outstanding loan amount are added by BNDE. The effective rate paid by the industrial sector, however, is 9 percent because of the 2 percent rebate provided by the Government under the Industrial Investment Code. In addition, BNDE plays a major role in the distribution of medium-term industrial loans by commercial banks, which do not have the benefit of the 2 percent rebate, but are rediscountable with the Central Bank (currently at 4.5 percent) if appraised and approved by BNDE. These loans have terms up to five years and come to the borrower at an effective cost of 8 percent (regulated by the Government), to which about 1 percent is added for various charges (of which 0.75 percent is BNDE's commission). The primary risk of default is borne by the commercial bank. 41. With the future average cost of its resources (excluding Bank and local funds) conservatively estimated at 9 percent (6.5 percent in 1976), BNDE agreed to increase by September 1977 its nominal rate for loans with maturity of 7 or more years from 10 percent to 11 percent p.a. (see Supplemental Letter circulated with the legal documents). The effective rate paid for such loans by the industrial sector would thus increase to 10 percent (after allowing for the 2 percent rebate and adding 1 percent for various charges). This increase would enhance BNDE's profitability while allowing it comfortable levels of reserves and thus help attract foreign capital. It would also result in a significantly positive interest rate paid by BNDE's borrowers. For reasons of competitiveness, the rate increase would not apply to direct medthtex=m4nans with maturities up to 7 years. 42. BNDE's Operations. From the start of BNDE operations in 1959 to end- 1973, BNDE approved 1,116 operations for a total of DH 1.7 billion, of which about 40 percent consisted of direct long-term loans; another 40 percent comprised rediscountable medium-term loans extended by commercial banks, which BNDE appraised and approved. The remainder consisted of direct medium-term loans, equity participations and guarantees. Operations increased substantially during the period: a total of DH 2.75 billion was approved for 920 projects with long-term loans absorbing DH 1.6 billion (58 percent of the total), medium-term loans DH 264 million (10 percent), medium-term rediscountable loans DH 850 million (31 percent) and equity investments DH 33 million

14 (1 percent). Almost half of these resources (DR 1.3 billion) was absorbed by 37 loans, each exceeding DH 10 million. Over 60 percent of all loan amounts approved had a term of 9 or more years. New projects and extensions of existing operations have absorbed approximately equal amounts of resources. (During the period, the number of extensions exceeded substantially the number of new projects. It can be thus assumed that during the period the Government's investment incentives have helped to start a substantial number of new industries.) Public enterprises absorbed about 55 percent of the total DH 2.75 billion in loans approved from , as compared to 25 percent in the period. 43. Changes in BNDE's lending activity, such as increased lending for large-scale enterprises, for fishing and transport, and the need to improve the economic analysis of such projects were reviewed during the appraisal. In regard to large-scale projects, BNDE can contribute its financial, economic, and technical expertise provided that it is involved at an early stage of project preparation, which in the past was not always the case. To rectify this, BNDE agreed not to consider financing large-scale projects brought to its attention after the engineering contract has been completed or the construction contract signed. 44. Economic Impact of BNDE's Operations. BNDE's loans approved from 1974 to 1976, totalling DH 2.75 billion (para. 42) are estimated to have assisted total investment in the order of DH 6.4 billion which could provide 50-55,000 new jobs. Of all sectors, the food and beverages industry received the largest number of loans (180 loans, amounting to DH 304 billion or 11 percent of all amounts approved by BNDE in that period). About 67 percent of total BNDE loans was absorbed by chemical, mechanical, textile and miscellaneous manufacturing industries; 29 percent of loan amounts was absorbed by transportation and 4 percent by fishing. 45. Financial Situation. BNDE's income statements and balance sheets (detailed in Annexes of the Appraisal Report) indicate that it has increased its total assets from DH 489 million at the end of 1973 to about DH 1,521 million by end A major increase in term borrowings brought BNDE's total debt equity ratio to 9:1 by end-1975 and to 10.5:1 by end However, its debt/equity ratio calculated on the basis agreed with the Bank, where equity includes quasi-equity (i.e. long-term Treasury loans), remained below the maximum limit of 7:1. In line with the seventh project Loan Agreement 1061-MOR, the term debt/equity ratio, excluding any reference to quasiequity, will be limited to 10:1 from January 1978 onwards. 46. Operating results reflect a satisfactory profitability. Profits before tax (including allocations to reserves and provisions) as a percentage r` average net worth increased from 16.6 percent in 1973 to 23.3 percent in '315 and to 27.2 percent in Net profits have increased from 6.8 percent to 8.9 percent in 1975 (as a share of average net worth). BNDE's shareholders received an 8 percent dividend in The book value of shares amounted to 157 percent of the par value at end-1976.

15 As of end-1975, BNDE's portfolio comprised 243 term loans, amounting to DH 909 million, of which 52 percent was guaranteed by the Government through Caisse Centrale de Garantie. These guarantees, as well as other banking consortium guarantees (i.e. for leasing companies) are additional to normal securities taken by BNDE, such as mortgages. As of December 31, 1975, total arrears of principal and interest in excess of three months amounted to DH 44.6 million. Total portfolio affected amounted to DH million, i.e percent of total portfolio outstanding at end In the opinion of its auditors, BNDE's provisions for losses of DH 12 million are adequate and the quality of BNDE's loan portfolio is reasonably good. 48. BNDE's Performance under Loan 1061-MOR. BNDE's overall performance under the seventh loan (1061-MOR approved in 1974) has been very satisfactory. To maintain a strong equity base, BNDE doubled its share capital, while also increasing its interest rate by 1 percent to better approximate the real cost of funds. Commitments and disbursment of the loan proceeds were generally in line with the appraisal estimates. Forty-three sub-projects were financed (total capital cost DH million) and about 2,300 jobs were created at an average cost of about $41,000 per job. The high cost per job is explained by the fact that a large number of Bank-financed subprojects comprise expansion and/or modernization of existing enterprises, in which case the job-creation effect is relatively limited. Appraisal and supervision procedures in project implementation were satisfactory. BNDE's Prospects 49. Operations. Industrial growth is expected to remain as one of the prime objectives of the next ( ) Development Plan. Based on a pipeline of 60 projects requiring at least DH 1.4 billion in direct term loans, BNDE expects its business to grow at about 8 percent per annum (in current terms) in the next few years. Total loan approvals are presently estimated to reach DH 3.4 billion in (DH 2.0 billion in ). Equity participations are estimated at DH 55 million (DH 42 million in ). 50. Resources. BNDE's resource requirements for are estimated at DH 2,158 million ($480 million equivalent), which would be provided from different sources: DH 450 million from the Eurodollar (floating rate) market, DH 370 million in loans and credits from Spain, DH 300 million from the domestic bond market, DH 250 million (tentatively) from the Kuwait Fund and Arab Fund for Social and Economic Development, DH 145 million in internally generated cash, DH 70 million in increased share capital (special condition of effectiveness) and DH 203 million from the proposed Bank loan. An additional DH 370 million will be required, mostly in the second half of It would be premature at this time to expect BNDE to identify firm sources of lending for this amount. However, no difficulties are expected by BNDE in securing the necessary resources on time. In preparation of the above plan, the BNDE management has sought to keep a balance between fixed and floating interest loans, with the later amounting to about 21 percent of the total resources to be contracted in , which is considered reasonable. On the basis of the projected Eurodollar holdings, BNDE could support an interest

16 rate on Eurodollar borrowing of 12 percent for more than a year without seriously affecting its financial position. (While the present Eurodollar rate is 7-1/2 percent per annum, a rate of 9 percent per annum has been used for the financial projections). BNDE will consult with the Bank on any substantial change that may be necessary in the resource mobilization plan described above. 51. Financial Situation. BNDE's projected financial position during would be generally satisfactory. Its assets are expected to increase from DH 1.5 billion by end 1976 to DH 2.5 billion by end 1979 and DH 3.1 billion by end 1981 mainly on account of the expected increase in net equity and loan portfolio. The 10:1 term debt-equity ratio will again be a condition of the loan agreement (Section 4.06 of draft Loan Agreement). BNDE also agreed tu WafilLtall at all times a debt service coverage ratio of at least 1:1. The projected debt service coverage ratio for is substantially in excess of 1:1 for all years except 1977, when the short-term borrowings contracted in 1976 must be repaid. Profit before taxes and allocations to reserves and provisions are expected to grow from 19.4 percent of average BNDE equity in 1978 to 28 percent in 1981, after'experiencing a dip in 1977 and 1978 following a doubling of share capital. Net profits amounting to 6.9 percent of average equity in 1976, will decline to about 5.5 percent in 1978 (in part due to doubling the share capital) but would recover to about 10.3 percent of average equity in No problem is anticipated in BNDE's maintaining an 8 percent dividend- as projected, -th-roughout the period. Terms of the Proposed Loan 52. There would be a ceiling of $4 million on the use of the loan for any single project. BNDE's total exposure in any single enterprise financed with Bank funds should not exceed $6 million. Not more than 40 percent of the loan proceeds would be used for public sector projects (Section 3.01(b) of draft Loan Agreement). The free limit would be raised to $2 million ($900,000 under the previous Agreement). As in the past, the foreign exchange risk would be assumed by the Central Bank. BNDE is to submit its audited accounts to the Bank within six months of the close of each financial year (Section 4.01(a) of draft Loan Agreement). Small-Scale Industry (SSI) 53. $5.0 million of the proposed loan would finance an SSI pilot project (Section 2.02 (b) of draft Loan Agreement). For this purpose, SSI is defined as an enterprise employing persons, with annual turnover not exceeding DH 7.5 million and total gross assets not above DH 5.0 million (Schedule 3 of draft Loan Agreement). The investment cost per job created in SSI should not exceed the equivalent of $5,500, which the Bank analysis indicates as a suitable maximum cost per job in programs to benefit the urban poor in Morocco. The $5.0 million would be tentatively allocated as follows: (i) $0.3 million for BNDE's participations in equity of SSI; (ii) $1.7 million to finance estimated foreign exchange costs (i.e. up to 65 percent of the total investment cost) of direct BNDE loans to SSI; and (iii) $3.0 million to be relent by BNDE to Banque Centrale Populaire (BCP) to finance the import component of the

17 medium-term credits that the latter bank would grant to SSI. (The relending mechanism is outlined in para. 55). BCP is the largest Moroccan bank predominantly serving SSI. Since it lacks experience in term investments, as well as in Bank procedures, BNDE would act as an intermediary for this loan component, refinancing BCP subloans from the proceeds of the Bank loan. An agreement to that effect between BNDE and BCP would be a condition of disbursement of the SSI component of the project (Section 2.04 of draft Loan Agreement). It is estimated that up to about SSI subloans will be financed under the pilot project and that the resources provided would be additional to those normally available to SSI. 54. The main objective of the pilot project is to gain experience that would permit larger projects to be prepared aimed at developing SSI in Morocco. The pilot project would be limited to the urban centers with the largest concentration of SSI (Casablanca, Fes, Marakesh) and the strongest SSI subsectors (mechanical and electrical manufacturing, textile, leather, and food products); these areas would also be the subject of a sector study (to be financed by BNDE, with participation of the Bank -- Section 3.07 of draft Loan Agreement) which should primarily assess SSI needs and potential, and propose an action plan for technical assistance to SSI. BNDE, BCP and the Ministry of Commerce and Industry are expected to provide technical assistance to SSI in the appraisal and supervision of the pilot project. 55. During the pilot phase the interest rate for SSI subloans would remain at 8 percent per annum, in line with the interest rate currently charged on medium-term loans to SSI. The Government has so far maintained, and the Bank agreed, that it would not consider an increase in interest rates to SSI before the pilot project and the SSI sector study have been completed and evaluated. In order to permit BNDE and BCP to cover their expenses and secure a modest margin, the Treasury wil provide funds to reduce to 5 percent the cost of Bank funds to BNDE for the $3.0 million BNDE/BCP portion of the SSI pilot project, which BNDE would then relend to BCP at 6 percent p.a. (Section 3.03 of draft Guarantee Agreement). This would leave BNDE with a 1 percent and BCP a 2 percent gross margin. The subsidy from the Treasury for direct BNDE loans to SSI ($1.7 million of Bank loan proceeds) would be 2 percent p.a. No subsidy is envisaged for equity participations. PART V - LEGAL INSTRUMENTS AND AUTHORITY 56. The draft Loan Agreement between the Banque Nationale pour le Developpement Economique, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, a draft Supplemental Letter, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of 'the resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern for development finance companies.

18 Features of the Agreements of special interest are described in Annex IV of this report. As a specific condition of effectiveness of the proposed Loan Agreement, BNDE should increase its share capital to at least DR 140 million and have the increase fully subscribed by the effectiveness date (Section 6.01 of draft Loan Agreement). Specific conditions of disbursement for part of the project to be implemented jointly by BNDE and BCP ($3.0 million for SSI) is the signing of a convention between BNDE and BCP (Section 2.04 of draft Loan Agreement). 58. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECONMENDATION 59. I recommend that the Executive Directors approve the proposed loan. May 6, 1977 Robert S. McNamara President

19 TABLE 3A l4" I of 4 pages MOROCCO - SOCIAL I NDICATORS DATA SHCET LAND AREA ItHOU KL MOROCCO RfFERENCE CoJNTRIES TOTAL MOST RECENt AGRIC. 199.b ESTIhATE PHILIPPINES TURKEY GFBRC*. GNP PEP CAPITA (US$) POPULATION AND VITAL STATISTICS POPULATION (MID-YR, MILLIONI ? 8.8 POPULATICA DENSITY PER SCUARE XK PER so. KM. AGRICULTURAL LAND /a VITAL STATISTICS AVERAGE BIRTH RATE I/THOUI LO AVERAGE oeath RATE 1/THUIU i INFANt MORTALITY RATE I/THOU) 149.0, LIFE EXPECTANCY AT birth IYRSI GROSS RFPRODuCTION RATE 3.4Lt &/b 1.0 POPULATION GROwTH RATE (I) TOTAL L / URBAN I4.0 URBAN POPULATION 11 OF TOTAL) AGE STRUCTURE (PERCENT) 0 TO 14 YEARS aj TO 64 YEARS k YEARS AND OVER AGE DEPENDENCY RATIO ECONOMIC OEPENDENCY RATIO 2.0b L I.S FAMILY PLANNING ACCEPTORS (CUmULATIVE. T FJ) USERS IS OF MARRIED WOMEN) EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) k b c d. LABOR FORCE IN AGRICULTURE (1) 56.0j5.. 50s UNEMPLOYED IS OF LA8OR FORCE) 9.0o a.0 INCOME DISTRIBUTION 2 OF PRlArTE INCOME RECD BY HIGHEST ss OF HOUSEHOLDS /f HIGHEST 205 OF HOUSEHOLOS LOWEST 202 OF HOuSEHOLDS T LOWEST 402 OF HOJSEHOLDS DISTRIBUTION OF LAND OWNERSHIP X OWNEn BY TOP 102 OF OWNERS OWNED By SMALLEST IO OWNERS HEALTH AND KUTRITION POPULArIoN PER PHYSICIAN /A lOa * POPULATION PER NURSING PERSON 7350.OZ.*- -* 18oD.Oa 1140.D POPULATION PER HOSPITAL BED al (± PER CAPITA SUPPLY OF - CALORIES I: OF REQUIREMENTS) d PROTEIN (GRAMS PER OAY) d CF WHICH ANIMAL AND PULSE O 52.0& DEATH RATE I/THOU) AGES & EDUCATION ADJUSTED ErJCLLMENT RATIO PRIMARY SCHOOL Ld S5.O k I SECCNDAPY SCHOOL 5.0 : YEARS OF SCHOOLING PROVIDEO (FIRST AND SECOND LEVFLI VOCAT IONAL fnrollment It Cf SECONDARY) '* ADOELT LITERACY RATE (U) 17.0L a 82.0 IOUS ING PERSONS PfE ROOM (AVERAGEI OCCUPIED DIWELLINGS WITHOUT PIPED water (X i.. 5.0/a..0Lda ACCtSS TO ELECTRICITY (t OF ALL DWELt It!GS) RURAL DWELL I.GS CONNLCT(U TO ELECfPICITY (It e 18.0 CONSUMPTI ON PRAID AlCLIVERS (PLk InOu Ta'P) 146.o * PASFRNGrR CAPS (rer I REtl PfOPI IT. 0E FLFCTRIClIY liwh/yk PlR CAPI e7,o 128.D Nf ISpkdNT (KG/YtT rer (Ali t SEE l;difs AlDU L(EFINITIUNS ON EtiVERSE

20 Page 2 of I. pages ttlao thrala not.d, dot. fos 1960 refer to anv Yor teatoc 959 and 1961, for 1910 hoteao Q6 antt 1970, and for Boat faoant etxtnai baetaea 1973 and s AlLhb h rb he-.1. lo) par "ipt.to -a.het higk.ar tha toot of Mooc,O--nc h., born slce no 1,1-letire oouotty.!ne both countries auv anio tt. dlt.rct-a, th-sr ecctjsrly an the v*.ke rt..oa, s theyl ore eic2.l. In productive activity, aesop lefly ho aga-icult...s BotOsccO ~ '; /b Lo1uda ooreportod fmnle faa.i2 h.lpara I. aghr-oat-srw / Ioeltsl.dng aistlare.8 -dassistant racsea; dc."nvnlunstt h-epita. eei,sb5ilseosnta; La 6-10 and pooce n: eg atep..tlonlj; t Peroano ovar 5 years of.v t.o coan mo and wodt.a Du aa o esigoaution, pojoalti-a gtsth rte Ic 1os thn itte rate os cota-- i-rsaoet & atvernia-t htospital ast,abilso)snta only; I I1S'- Ld 7.11 and 12-ii$ y.a.a of "s. -. p,.tivep.?wt flcftjt L'1'I XAl!a 972; /b Erciod.a unraparted fo,sal. aat ssi7 h,lper, Lot arictlt.s-e /, ~d assrage and I-18 years a age; 'f Urban t-ey; & Dcc to essglaion, grnsth Mat. a. hoar than rate af natural. locrea.. PIUI.PIpNU 1970 /a As percentags of seplognentt A 7-12 and Yoaro of agse raepetively; Ic Not Including psi-tv-t vocational scolsols or -tloiinal short-to-m ur'os-e,; L 1967 heuueohldes (1 Iou1ov csj, /f Iooerta only. TUMY ~~1970 /a~ ltcludee 17 Eaetars prosnna.; /b t A, Ratio of population under 15 and 65 and over to labor foam. age 15 year an00 o,rer; d 15 years and ovwr, axciud.sa soemslyed; -Pegietet.-d onl.y; If Ditpoeils Inc,an I nclss= g aeciatant noures and midsasa;l,15l-61 ~ 7-IT ya- of LI;~.ravwel..a yeasc and over hok tall the. cana taker. that. tin can coo. and wint.. OMCF, ~1970 Doe to eadgrmtion, glotth rate is icuer then rat. of natural. iner-asoe j 196f. otdefntions OF SOCIAL 0lID17ATORS Land Ar- (thsou 1.2) Popol.tt.n peo -- rnin or-- - Popol.tien divided by rteohr of poeotiriog Total1 Totl o1 t area -apriing land ara and inland -1tea.ul and fr-clo Sr.dUaLa nuse, tr-ine or octfd'nae, cad Agolo. -Mont -.. st.timnsta of aghriut-ral arac ocd tgmpo..rtly or... oi1i.cy peraon-i with trointon oreorice poroaneetly tor -opt, p.sture -navbt 6 kitohe,n Zardnasna t Lie PgEaLalotioo- hupi tol ha - 1Populatio divided by -ob-r of hosptta1 foliee. bed. -11ablabn Plaslslil cod private cod a-iolal-ed ho.pit.1 sod -I -rhbtii,.tiunoer--e -1cldes nursing h-ooc and -etblioh ot.eo for LISP apita per (0$) GNP Per capita estastec a. t current narbk rie, ntodil end pveo-rti-ec-.. -caloolted by convrcian method.o 00r1d Uank Atlas ( Pecpiasul f,soia(. of r* bireon L. Canptedra inncday; basin); 1960, 1970 and 1975 data. J 9ocablan fe food'- noypriec d-tiabi prod cotct ip-0 capit sportday ;:eolctli1o ond vital s.toictioc and ht,agma io -tok; oat applica eoold. aniosi foed, ao,quontioplton nid-_r oillion) - A. of Joi1y float: If net avilable, tie, uaad in food prtocain and Ioses, L. distribution; raqoiranete average of otto eud-yocr e.iatlo.o; 1960, 1970 cod 1975 data. We reatimated by FAO beced oat phyoiolgicl1 mood, for mooedi activity.and healith e -iete ai-aanta1 tnper-tu-, hody, weightn, age and ace diatotbutiono CoooIDodooiy-or of population, co.i and ol11sing - 10% Kid-Ysar far -eat. populatian at hb..cboid ar Sqoar Iti- levei-. meter (5 btoe)oftota _ ora.pt. aerita supply of f -Prtein cooteot of Par Pouatogoo ciry -oerngae Inf -onic. Iaod - CoePsted aa abov for capita net supply of -od' per day, net copply of food L. defined a agriototolw la ny obos V.qoironota inn oil countries ectabliohed by USDA E.ooaiu Re earch Serviten proide foe a ninisonco aieo - of Vital no0 mo-t slatletics of ente1 - - r -aqaootoia pr d.y,.ad Oi osm Efcooa ad pol.c p-.l.i, fh. Credo rote birc per housand avrno, -sannual line birtt). pari,oud 10 gran hbtld ba coiol protein. tbese otoodard. are I-r than ihoem of nid-you. popolotion osyu ctsoic overage ending in t960 and of 75 g000 of toto1 protain sod 23 aren of animl pr-too en an 1970, and fivn-poa -- ;re -tdi- 9 I., 1975 for moat regoot ncttimotc. -crag. for te norld, pr-po-d sv- PA0 L. the Third World food ev. Crude dleath ta- or r heosc.. _A-1e ono dentha P. thouandl ofat- 21 "P"'coensypofo nplno oo rtinspl ffo petpoplto;i yes, ontasaic r ocgoaedin in 1960 mod 1970 and derived fros animal, td. five-year oveosfo- -din puleo iv17 in oaoorcretae.dahrt orn P.tdy th-s coca 1.l - Autul death. pee t.oasad In oga grdip "Ifo. roecllity ont U0titni) Arno- deaho of idi.ot. under oca yac of i-4 y--r, to children in Ohio age ajtc group,..sogget.d ot ih...nd Live a, co btrcho. indioct.r af molnutriciu- Life eovotc a birth (v-v) - A-nroga rober of years of lifo re noinog at boh.l ously _fve r -vrftediui In 1960, 1970 and 1975 for 4fo dovelopiof voo.trt-'. _~ldvolovrtio - Poi-ot, -choo - Entnt1oent of oil a iroooroprodtsvrto rate-doorago oso.cr of live4douhcr.r a wo-uo wil p-.c.t.ag of primay.ryshool-ap ~populamor; i-oodoboo ohildrn tohotcca.da rrprodooc'inepoldlf ho nper-ienc pre..ent ag.- 6-1l yvre hot adjuced for difforet leogtho of primary edu.. tin, spooific feetiliry rece.....oclly fiv-y-arv--goa Coding Ln 1960, foe -otrios uibh oor-a ed...otioo, -- 11lcsct moo...en.d ed1975 for dovlpag nnrc. ic1ce uiaoe cotorbv ie fillscolae Poooio _.ultvt cla '1 - C" -obo.1sa growth rotna of nid. Adjusted enoolloent ra.tin.' I...dar ah.ol - Coupoted aa above; pee.pofvlatiu lo , and atoond.ry edu..ctio rquirec at Ie... tofr ye-r of eppr-vd prinary PnooIcoiun xr-thcboc t r - Computed lika groeth rate of totn1 inet-ation; providen genral, v-ctlocl 00 tea..her training PpOp).tioo, diff.r-ct dofl,tsstcovs f.urban areassay affect canpara- ioatruti-n fur pupila of 12 to 17 years of ege; crapne bilityr of date a_oof oo_c Urb!n L.. p.pol.ti-t (7, of.t.s ) -.. corse ore Rati of uban to otlpopulation, g--raly Y.ers e-otded. of *huioprevidod.(float cod aevo-d leva ) - Tuta1 years of difforrt d.floiti.n. oc urb.. -coa may affoct cnpercbility of data acolet a rosny Ire,vcroo ototon may be pa- _osog cooostrlea. tiaily orcosplocoy exclded. Ag00 ctrssctssrg forv-.. s Children (0-14 years). wnrkiog-age (15-6li year,), Voceticc -srulloe-t l of necondery) - Vooctioa1 iootitutioran 1olo (65 Y..sovnd rvr)e.e.roentar. ifdedye popoletlan. i-niudo eni. i.dus-ria1 tr other profr-a hbi h opn-- hoe dcsvusl-cy rotn - kutu of poplosiun uoder 15 aod 65 and over to tdepondrctlyoe drpurne,nta of..ronday icarituti-o thee. u c;1 thsr-pil 65. Adu1'lt itce..v CE't - Litteote adult (chic to red a-d aito) 0 tcer n(vuvtsi- y a - Ouo ci pvspuiaciou ondor IS and 65 cod ovr per-tond o1 tutl1 adult popsslotio agod 15 y-ara andovr to us. ltu f-,es iis 040, i9 -p of i5-61s,ora.r rofli2 ',ItZ.h,,,.l ceorpoun bis 1,roes i ol dvienunde usp iooc. Ifniy sj5o.a,acoob- -tvusoroc vf p--ne rsvti pisenief. Pro,r-els 11n-oprlvo.. ois Iuuidvrnticldoo urban oroe..d. scs id felmlr slsivo~_!!.o._rtl.z f esrsc ss - P-ruutocg- of nervied oo-aoson tructsss -o=osootpid p-et.- t.sos oi esd-vs is (i15-.4 v -so ho ote birth-control device Occ-pied sisslf. v 'ihtt u,jvr ar '. Or-splcd ovvoi,c to alltsatvisl wot,s Ineant oe go-p. doltnfu' s.ol re co Iua orec- Ithsst intid. or outside piped ~Ri.0L0'.U!.n Aoc_r_occl-vtSt ty (7, ofal (rvr.(.~s>.;ssd)~p,,o.rlval)vco-i- Iosn1,10, onrttuasttlog -orcs, including I lctr", '0 Ity i~las 1010 q,ursers., p-r-le of cocci1 stt.s0ill0 in -aodssvc sd -sop1s,s.ss 0c ss-.ts huu-r k-, students, etc.; urban and ruvol1area. efir,ltio- 1st vei- tvuri- r rs. n-t re-parabr- v n '~ldc5 vovertd L2_L,j!_vot!,y (l - Computed e above for hos is r- tc 7 -i Asrl"its H.1tl o-n1 l.thu fore (t. tarrs,,g, rural do- i sofa -tsy. f--rs.y, v -de u.)s-..t n- p--n,r.;e of tucol labor, forse ivsv(o.ltev)l't i-plytpd ev -- tssuly dot i-td acper-n -- suvlss sot t,tu ~~~~;~- rr-,it,,d ssi of o I,,!, d,! tor n-vfd fli",. rvn ata s g-te-1 Iblic pro tlset-d 0t p.pul.ti.u. r,tsd 00,u edls mvs,, ste.00 I sn..n.l brsoecnsrt.a u o-leosdrestsivvttood dtfe,scdt ss),stof,suvt.e It Ot yan Cstsf aa,eg.e~ssiss adosesoc aegt1.tvotit o u fes. eo n- ea: ycrtcynt 000 us ureye. opsi 5cs5o tepucoy osp.eol nnyo sscspoyon Iouooe. 15 antetsit ao Ct tale, fitoalo d.f d 'g'' pr (,v i) 5t,o0t at otsrc olrtr b~~~~~~~~ass.o~c mea, iots is-pre.tt spiaeteoo(ohi ohodbtt oaiolo lu,el.t o-no icon noo,e ere n revosor,d Isp tiss-1 5. ritituot 2057,, p-rveoe 2(1%7. atd puoreot i0, of n5isstvctsl_ e bouvolsolde.ft. t bytt-1oep-ip. ttieito)lt s/ytfrr "! cof Os-ss-d n,fsoctci r I(t'a, -d p-u.s-o IV1. ol l,-ts go rid. h.,ol.uts to,-spnuos.iepor- 551 ers'tt, ResL fand ssstrst1_!is.,etnsm Pus~s.~oosjv,tyisinn - fpspsslat los dtntld Op toobs- of pate ft.llj2 sl.' W010 )J4I.rT. 5 (r Ca,,,I, "nit'll oplv oolurn vv',e s..s,tln I plop,0 npos0 nspi toy

21 AeMeJa?eso 9 of 4 P.BsO ECO9OI(IC SEVKLOP)4R1T DATA (Amount. in milli-o. of U.S. doll1.c) ~~~~~!I~~~~ L L. 3.2e 's.7 1!aI-1l 197e-a2 195 ceo.. Droe.ric Pcodu~~t I s oo.0 C,oe _ueitl In.ou _ T d _ f Ropoeto NFl) (mci. ~~~ Epr. (i.onor -apoctyl ~14-2,57-201~ F'A, ~ ~ fl... - Gop *T Coonueptton E.Pe.dittre S GCr06 f(bed i-re.toent DIloteeIC lo-ig. 5T y e NotUanol Savng! ml !; EXTERNAL. TPADE (Curren Ptprce.) P.Tcent of total bopoct * ~~~~~~~~~~~~ IPood.t.ff Petrleu 25 s Inter-diate Colpital geod ,,.6 Conounar good ' N0.1 9, Non-focit- erulcee ~ 950 I 6 ' ' TOWa o. txp-rt. PhoOphat Agelo-lt-rl prod.ct S Other otrio K.oofaCtore, c-facto neeco ~ _.4n Total o Tot ilb~~~~~~~~~~~~~~ Tr.de indira. (197s-1.000) Eport pr1-i.etdee O0~ Itrport prier lode T Tertu of trade v T VALUE ADDED BY SECTORCa- (h of GO rn r0 Ele. 7 Agrltultoro 2~~~~~ iy9. 1~ M4ining Other ind.atry S.-IlC W PUIELIC FINANCE (Prcen..t of CDP at current price..) (CentralG. ruet im~ Current receipt. 17~~~~~~~~~~~~~~~~~~I Crrtent..pendit.res Budgetary -aving I.n trenot t.peodit.r.o CUIRP.ET IXPENDIT:11 DXTAILS B.C. D ETAI'L ON CENTRAL. (A. 6 Tutol Crrn Expend.) COVERNfI0NT Eduration 26J INVESWIENT J... 1.Z. Other Social Service '? AgriIcuture Agricult-re Tndoetry end mininog Other Ic-nootc Service Eoo ic ifra.t.rrur.r Adodicitrttlo. and Defe Education and training Other LI 3_ Other eneial... ctur Tot.1 Current Eapenditu-ea Ade,ini.tr.tiOo end scrurity R.gi... dov- lopme.t Uncl-g.ified 4.6, - SELECTED TITDICATOPS Total fl1 19a2 A-er.ge ICORl FINAIICT9G Inp-rt Eloatcitty ? Pu,blIC.,Ct.r on-ingo Avr-g, N,,,i..I s-nnlga S.te i6. 3 tere--a ho,rreio I Slarginl NotinnI Saing. Rate Ooeuctl botto i' Tocci fin-ni.g M , IABOR FORCE AND Total E,apl.ntre V.l.e Added Per Worhkr I1960 Pri"e Ec., Pi.t.) OtflUTIr PER WfORKCER Rn Th.uc...o e. ef T.tal ~Prrtn sro 907 i*19!zj G-rnur fate I I 960 1I7I Gronth cute AgricIlture 1.)47 19a, b t 3. ledtto.ry ~~~~ ~~ S,rrvler '.2I 10 U-rl.. fflnd _... 'Rotol ~ ~ 3, ~~~~ _uura=otrn nut appsle ble nli o Roligltl

22 L A3CA or nay s. umlaesisa1r AIID mp T ar I (_nta a1 lllme of U.S. dollare at wurrent price) pes 4 et g Actual 1rojected BUWASS OF Ul 0? PA1IS9? R lptts 511. an " L Imports,, t Raomorco balea0-9 PTT Se,t fctor servicoe T lat tntecet paysot, sat Ionr_ t Inoe_ % & Vorkara reitt ee du w 1441 Otbh or t) ) Current tronsfecr (not) o Ourrent occomat balaoo 47 1cs 237 <46-18i -s Private direct Inest. (eea) 24 1s 5 t Public MiT loans DiabursITe"to I SaPayowe.c.7*.79-8t s96 Net disburaimate n Short-taer Capital (eat) -r I Capital n.a.i Chng. in rs erves U Laval of re"rser * n.'.t 286 3S r2 7I6 T onthe Ipoct o ;m AIID laincgal S Offictal grat oo Total public IM+L loans 17T /Is t2o Otber intern'l inatitutlos n covrnawt *6 40 8No sss S.ppllars! credits t VInancLel intitotion 1t o T MINTlI PEST Actal Debt Cutetanding P D Actual World bank 13f 7 6 MIt AND DEBT SRVICE1 IDA Public Debt Out. + Disbursed Other N.Itilataral Covrventa Interest o Public Debt Suppliara Repwnts on Public Debt Fin ancial 1natitutions 85.1 Total o.6 Public Debt Service B othars LL. Other Debt Service (net) Tothl To.8 10 Total Debt Servica (nat) ;6 10o i Burden on lxport tar.ings (%) Other H+IT Debts Short-tcrm Debt (dieb. only) Public Debt Srvice Total Debt Service SDS + Direct Inveat. Inc Average Tarms of Public Dobt Int, as % Prior Yecr DOD A_rt. as % Prior Year DOD ISSDebt OutAdbi.bu-sad IRISD a % Public Debt OD ) SDS as % Pubic tbot S-ric ' SDA Debt Out.adDi*bur&.d IDA as % ublitc Debt GO Das % Pubitc Debt Service tt ac ollubla oil or nagilaibla

23 Annex II A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1977) PaRe 1 Loan or US$ Million Credit Amount (less cancellations) Number Borrower Purpose Bank IDAI Undisbursed Eleven Loans Fully disbursed Three Credits Fully disbursed Kingdom of Morocco Irrigation Kingdom of Morocco Education CIH DFC (Tourism) ONEP Water Supply ONE Power Kingdom of Morocco Highways Maroc-Phosphore Industry Kingdom of Morocco Agriculture BNDE DFC Kingdom of Morocco Agriculture Kingdom of Morocco Agriculture Kingdom of Morocco Agriculture Kingdom of Morocco Tourism T 1976 Kingdom of Morocco Education CIH DFC (Tourism) Kingdom of Morocco Power Kingdom of Morocco Agriculture 35.0 _35.0 Total of which has been repaid 88.7 Total now outstanding Amount sold 6.2 of which has been repaid Total now held by Bank and the IDAL Total undisbursed *This amount does not include a $45 million loan for a cement project signed on April 29, / Prior to exchange adjustment B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1977) Amount in US$ Million Year Obligor Type of Business Loan Equity Total 1962 BNDE Development Bank , CIL Canning Factory SCM Cement Factory Total gross commitments less cancellations, terminations, repayments and sales Total commitments now held by IFC Total undisbursed

24 ANNEX II Page 2 of 6 pages C. PROJECTS IN EXECUTION 1/ Ln. No. 643 Rharb-Sebou Irrigation Project: US$46 million Loan of November : Date of Effectiveness: June 8, 1970; ClosinR Date: November 30, Progress in implementing the project is now satisfactory although considerable problems were first experienced with management and procurement, of canalettes, and some procurement difficulties continue. The major project structure, Idriss ier Dam, is completed and 27,200 ha out of a total of 35,700 ha are already equipped and will be completed for irrigation before June Additional infrastructure for the project area, including a sugar cane processing factory and flood protection works, are"being provided by Loan No MOR. Cr. No. 266 Second Education Prolect: US$8.5 million Credit of August 18, 1971; Date of Effectiveness: December 10, 1971; Closing Date: April 30, The project included the expansion and improvement of specific sections of the secondary, vocational and higher educational systems, and technical assistance for project administration and school maintenance. Subsequently, the Association agreed not to finance two Vocational Training Centers and the Department of Veterinary Medicine. Accordingly, an amount of about US$0.9 million has been transferred to the unallocated category for future reallocation and/or cancellation. Initial delays occurred in the appointment of consultant architects, in the recruitment of local personnel and technical assistance experts for the Project Unit and in procurement. However, execution is now proceeding satisfactorily. Physical execution of the project is forecast for completion by the end of / These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

25 ANNEX II Page 3 of 6 pages Ln. No. 848 Second Hotel Development Project: US$15 million of June 30, 1972; Date of Effectiveness: November 1, 1972; Closing Date: December 31, Commitments and disbursements initially lagged behind expectations, due to sluggish investment activity in 1973, but the loan is now fully committed, as against the appraisal estimate of March The loan is now expected to be fully disbursed by mid Ln. No. 850 Water Supply Project; US$48 million Loan of July 19, 1972; Date of Effectiveness: May 2, 1973; Closing Date: December The dam which was the major component of the project was inaugurated in August All project elements are being completed on schedule except for the treatment plant and the training school, which are both about six months behind schedule. The financial position of the Borrower, Office National de l'eau Potable (ONEP), is satisfactory. In early 1976 consultants have completed a tariff study which will assist in improving ONEP's long-term financial performance. Consultants have recently been engaged to undertake a management study for ONEP. Ln. No. 936 Power Project; US$25 million of October 5, 1973; Date of Effectiveness: January 23, 1974; ClosinR Date: December 31, Physical implementation of the project is practically complete. Savings amounting to about US$4.0 million are being applied to consultant services for feasibility studies, preliminary design and preparation of bid documents for 5 hydro stations required to alleviate Morocco's dependency on imported oil. Although electricity rates were sharply increased on January 1, 1976, ONE's rate of return has not yet reached the covenanted level because of even sharper increases in the price of imported inputs. Ln. No. 955 Second Highway Project; US$29 million of January 11, 1974; Date of Effectiveness: May 21, 1974; Closing Date: June 30, Construction of the Rabat-Casablanca expressway began in early 1975, 8 months behind schedule and is expected to be completed during the first half of Purchase of maintenance equipment and work on the highway improvement program are proceeding satisfactorily, close to the appraisal cost estimates. The consultants for the urban traffic and transport study in the towns of Casablanca and Rabat have submitted the draft final reports. The Government has recently awarded a contract for technical assistance for the establishment of a Transport Planning Office in the Ministry of Public Works and consultants have commenced work in August 1976.

26 ANNEX II Page 4 of 6 pages Ln. No Phosphoric Acid Project; US$50.0 million of June 27, 1974; Date of Effectiveness: February 27, 1975; Closing Date: June 30, Progress in project execution is good; the units are now undergoing commercial test runs. Full commercial production is expected by mid Personnel recruitment and training is expected to be successfully completed in early Cost overrun is expected to be less than 8 percent, mostly in local currency and will be financed locally. Ln. No Sebou II Development Project; US$32.0 million of June 27, 1974; Date of Effectiveness: February 28, 1975; Closing Date: June 30, The sugar cane processing factory was essentially completed on schedule in Construction of the project area roads is on schedule but work on the flood protection dykes is about 12 months behind schedule, mainly on account of delays in land acquisition. The studies of pollution control and the incidence of bilharzia on the Rharb plain have not yet been started. Ln. No Seventh BNDE Prolect; US$30 million of December 30, 1974; Date of Effectiveness: January 15, 1975; Closing Date: December 31, This loan is fully committed. with appraisal estimates. Disbursements are roughly in line Ln. No Souss Groundwater Project; US$18.5 million of June 11, 1975; Date of Effectiveness: September 26, 1975; Closing Date: June 30, The project unit has been created, its staff appointed, and the project co-ordinating committee has been established. The 59 wells required for new irrigated area (6,300 ha) are now completed and tested, one year ahead of appraisal schedule. Land clearing is almost complete. Land registration of private holdings is only about 50 percent completed, delaying the reorganization of land tenure. A private architect is expected to be hired to complete a design of villages within three months to help overcome this situation. Cr. No. 555 Meknes Agricultural Development Project; US$14.0 million of June 11, 1975; Date of Effectiveness: November 14, 1975; Closing Date: March 31, Following initial delay, the project is now getting underway. However, project management and the coordination of project activities between the project authority and the central offices of the Ministry of Agriculture require close monitoring for satisfactory enforcement of land distribution criteria.

27 ANNEX II Page 5 of 6 pages Ln. No Doukkala Irrigation Project; US$30.0 million of February 27, 1976; Date of Effectiveness: July 20, 1976; Closing Date: June 30, The project includes sprinkler irrigation for 15,400 ha and infrastructure and equipment. Progress of construction is satisfactory with the exception of laying and testing of large diameter concrete pipes, which continues to progress slowly because of heavy rainfalls. Only little delay is expected in completion of the primary network. Ln. No Bay of Agadir Tourism Project; US$21.0 million of February 27, 1976; Date of Effectiveness: October 29, 1976; Closing Date: December 31, The project intended to develop Agadir into a major tourism area consists of infrastructure works and public facilities for the development of a new tourism section on 260 ha on which 7,000 hotel beds and 2,600 housing units are expected to be constructed. The project includes also regional infrastructure and facilities for the development of Agadir's tourism assets. Project implementation is progressing satisfactorily. Ln. No Third Education Project; US$25.0 million of March 18, 1976; Date of Effectiveness: October 1, 1976; Closing Date: May 1, The project is designed to expand and improve primary and secondary education in rural areas and specialized training to meet urgent manpower needs in education, agriculture, health and tourism. Progress implementation is progressing satisfactorily. The ministries concerned have appointed the officials responsible for project implementation. Consultant architects have been selected. Selection and acquisition of site are well underway. Ln. No Third Hotel Development Project; US$25.0 million of July 2, 1976; Date of Effectiveness: November 18, 1976; Closing Date: December 31, Implementation of the project is proceeding well. The Loan is expected to be disbursed somewhat ahead of schedule. Commitments at end 1976 amounted to $4.2 million. CIH has been successful in mobilizing foreign exchange resources other than the Bank's and in reducing outstanding arrears in accordance with understandings reached during negotiations.

28 ANNEX II Page 6 of 6 pages Ln. No Sidi Cheho - Al Massira Hydro Project; US$49.0 million of July 2, 1976; Date of Effectiveness: November ; Closing Date: December 31, The project, comprises the construction of the Al-Massira concrete dam on the Oum er Rbia river, a 120-MW power station including a 225-KV substation, construction of about 200 Km of 225 Kv transmission lines, and preparation of preliminary designs and bid documents for the Merija compensating dam and power station. Procurement of the main project items is underway and physical progress of the project is satisfactory. Ln. No Third Agricultural Credit Project; US$35.0 million Loan to Caisse Nationale de Credit Agricole (CNCA) of February 7, 1977; Due Effective: May 10, 1977; Closing Date: June 30, The project aims at increasing Morocco's agricultural production and at expanding the capability of CNCA as a sound agricultural institution. The project will cover most of CNCA's program for medium- and long-term lending through August 1979 and will include related technical assistance. Ln. No.1383 CIOR Cement Project; US$45.0 million of April 29, 1977; Date of Effectiveness: July 18, 1977; Closing Date: June 30, The project comprises construction of a 1.2 million tons per year cement plant near Oujda in the Eastern Region of Morocco, and related distribution facilities.