FILE C0PY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PRESIDENT. May 5, 1971 REPORT AND RECOMMENDATION OF THE TO THE EXECUTIVE DIRECTORS

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE C0PY RESTRICTED Report No.P-9Z8 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE OR MOROCCO WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO May 5, 1971

2 ITERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 'REPORT AND RECOFBENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BMAOUE NATIONALE POUR LE DEVELOPPENPTh ECONOMIMUE TO BE GUARANTEED BY THE KINGDOM OF MOROCCO 1. I submit the following report and recommendation on a proposed loan in an amount of various currencies equivalent to $35 million to the Banque Nationale pour le Developpement Economique (BNDE) in Morocco. PART I - HISTORICAL 2. The Bank has been associated with BNDE since 1962, and has so far provided it with four loans totalling $62.5 million. In addition, IFC holds about $1 million or 25 percent of BNDE's share capital. In recent years BNDE's general performance has consistently improved, and it has continued to expand its business activities, especially in The fourth Bank Loan to ENDE, made in an amount of $15 million in March 1970, is now fully committed. An appraisal mission visited BNDE in September Negotiations for a fifth loan took place in Washington from February 17 to February 22 with Mr. Mohamed Bargach, President of BNDE, and Mr. Mohamed Lahlou, Director of the Treasury in the Ministry of Finance, who represented the Guarantor. Subsequent discussions took place with Bank missions in Morocco and agreement on the legal documents was reached on April The proposed loan would be the eleventh operation in Morocco by the Bank and IDA. The following is a summary statement of Bank loans and IDA credits in Morocco as of March 31, 1971.

3 -2- Loan or Credit Amount (U.S.$ millicn)) Number Year Borrower Purpose Bank IDA Undisbursed BIDE DFC Kingdom of M4orocco Agriculture Kingdom of Morocco Education Caisse Mationale de Credit agricole Agriculture B1IDE DFC IEDE DFC Kingdom of liorocco Roads Kingdom of Morocco Roads Kingdom of Morocco Agriculture 46.0 o BNDE DFC CIH DFC(Tourism) 10.0 _10.0 Total (less cancellations) of which has been repaid to Bank and others 16.1 Total now outstanding Amount sold 1.3 of which has been repaid.9.4 Total now held by Bank and IDA Total undisbursed Several of the projects under execution present currently some problems. Execution of Eoan 389-MOR, an agricultural development project in the Sidi Slimane area, was delayed and even after extending the closing date one year to October 31, 1970, the loan was not completely disbursed. The work is now complete, however, and the unutilized balance of about $2.4 million will be cancelled. The main reasons for this excess of funds are the Governments's use of other

4 - 3 - resources to finance some parts of the project and a reduction in the program of farm improvement. Disbursement on the $11 million IDA credit (79-IMDR) made in 1965 for an education project amounted to only $4.5 million as of March 31, The Bank has asked the Government to take several specific steps to remedy administrative difficulties hampering impiementation of the project. The action now taken by the Government is being reviewed before deciding on the Government's request, for postponing the closing date which at present is June 30, After a slow start in the execution of the Roads Project (167-NIOR and 642-YiOR) most contracts have now or will soon be let and the initial delay should be progressively overcome. Construction of the dam included in the Rharb-Sebou Irrigation Project (643-NOR) is progressing satisfactorily, but delays are occurring in the implementation of some other parts of the project, particularly in the land consolidation, reorganization and redistribution throughout the project area, the Government being slow in putting into effect the Agricultural Investment Code. The Bank is urging prompt action and is awaiting a government report on the situation. 5. As mentioned above, IFC holds 25 percent of the share capital of B1DE. The Corporation made in 1966 an investment and a loan totaling about $1.4 million in Compagnie Industrielle del Lukus (CIL), a company mainly concerned with processing and canning vegetables. EYDE made a similar investment in CIL, and IFC and INDE each hold 23 percent of CIL's share capital. 6. Projects under preparation for consideration by the Bank Group include a second education project, a second agricultural credit project. a second loan to the Credit Immobilier et H8telier (CIH) - the development finance company specializing in tourism projects - a first project for water supply and a first project for power development. PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Banque Nationale pour le D6veloppement Economique (BMDE) Guarantor: Amount: Purpose: Kingdom of IViorocco The equivalent of $35 million in various currencies To provide ENDE with funds to finance projects carried out by industrial or other productive enterprises.

5 - 4 - Amortization: Interest Rate: Commitment charge: The initial amortization schedule provides for repayment over 14 years including a two year period of grace through semi-annual installments beginning July 1, 1973 and ending January 1, 1985; it is subject to change to conform substantially with the aggregate of the amortization schedules for the sub-projects for which loan funds are disbursed. 7 and 1/4 percent per annum 3/4 of 1 percent per annum on the unwithdrawn amount of the loan. PART III - THE PROJECT 8. A report entitled "Appraisal of Banque WJationale pour le Developpenient Economique" (Mo. DB-74) is attached. 9. Industrial production in 1Idorocco grew slowzly but steadily during the 1960's until 1969, when growth increased sharply to 9 percent as compared to 5 percent per year in the preceding years. In 1970 private investument in industry appears to have increased significantly as evidenced in the sharply increased volume of approvals of private industrial projects by the IMioroccan Investment Cormission. Although the recent spurt in investors' interest is encouraging, the low growth in industrial output over the past decade has been a matter of concern to the Government. At the Government's request, a Bank mission has reviewed the industrial sector and submitted a draft report. Subsequently, a 1iinisterial Commission, appointed by the Prime KIinister, has been studying this draft and other documents prepared by the Nhoroccan administration to prepare policy recommendations for industrial development and related incentives. These recommendations will be submitted to the Government and reviewed with the Bank. 10. HIDE plays an important role in the industrial development of Morocco. Its major activity is to provide long term finance for privat^industrial projects, mostly for imported equipment. EN\DE's lending during 1970 accounted for over 30 percent of total private investment in industry, and 25 percent of aggregate investment approved by the Investment Commission for the same year. UNDE expects its annual volume of loan operations to continue approximately at the 1970 level, wihich was more than double the level attained in previous years. Although the sectoral pattern of ENDE's industrial investments has been stable in the past twro years, with about 40 percent in textiles and food processing, its investments are now rapidly becoming more diversified. Projects under 1IDE's consideration currently include, for example, the expansion of two oil refineries and an

6 - 5 - automobile assembly plant. ERJDE's projects are becoming larger, thus accentuating the importance for BlDE of finding financing partners. An increasing share of ENDE's industrial projects is oriented toward exports, which should be developed as fast as possible to enlarge the base of hi'oroccan development as well as to provide the countrr Twith additional foreign exchange earnings. 11. BliDE's net profit for 1970 was almost 20 percent higher than 1969 profits, which were in turn higher than in preceding years. The rate of return on share capital in 1970 was 20 percent. ELTDE's loan portfolio is adequately protected and it has no serious risk or exposure problems. ENDE has also made further progress in improving the quality of project preparation and its appraisals have reached a good standard, thus increasing R.TDE's ability to cope with the recent rise in loan applications. This ability will be further enhanced by the measures agreed upon between the Bank, ENDE and the Government during negotiations for the present loan, particularly the increasing emphasis 31DE is to give to better assessment of the economic aspects of its operations. 12. The Bank has been concerned for several years about BIDEfs low lending rate of 7 percent. This was made possible by a government subsidy eqaivalent to HNDE's borrowing costs above 5 percent up to 7 percent. This arrangement was part of the long standing government policy to maintain a low interest rate structure. However, over time, this policy enhanced the risk of misallocation of capital resources and inhibited BJNDE from mobilizing resources on the capital markets. As a result, BIDE's dependence on the Bank was becoming excessive. 13. The Government has now decided to let SIDE raise its lending rate from 7 to 9 percent and to abolish government subsidies to RIDE after it has raised its rate. The increase will be made in twio steps: to 8 percent on July 1, 1971, with an interim subsidy of H\JDE borrowing costs between 6 and 7 percent, and to 9 percent on January 1, 1972, with a complete abandonment of the subsidy of B!VDEPs borrowings obtained after that date. 14. This 2 percent increase in its interest rate is not expected to turn business away from MNDE. To soften the impact, the Treasury will, for the time being, subsidize BNDE's borrowers directly, thus maintaining their net borrowing costs at their present level of 7 percent. Later, in the course of the review of industrial development and related incentives mentioned above, the Government will consider how the subsidy could be made available selectively.

7 The increase in its rate of interest should enable ENDE to seek new capital on market terms, and BNDE has recently succeeded in obtaining a FF 50 million loan from a French bank. imoreover, government policies that have limited ENDE's activities in the past will be revised. The Government has agreed that BNDE will have access to the domestic capital and money market, and enjoy freedom, within the limits of financial prudence, to make share capital investments in enterprises eligible for BNDE financing. 16. In recognition of the improved quality of ENDE's operation, the "free limit" for use of the proceeds of the loan without prior Bank approval would be raised to $500,000 not to exceed an aggregate of $7 million. While amounts in excess of $500,000 could be financed under the loan after they had been approved by the Bank, SIDE indicated during negotiations that, save in exceptional cases, it would not submit projects to the Bank which would call individually for more than $3.5 million of Bank financing. 17. In view of BIDE's good portfolio and prospects that BNDE will maintain an ample debt service coverage, BNDE's debt equity limit would be raised from 4.5 to 5.5. To strengthen its equity base, BNDE intends to increase its share capital from $4 to $6 million by the end of Finally, as in the past two loans, financing of public sector projects would be permitted under the limitations set by ENDE's policy statement, but not more than t6 million from the proposed loan would be so used. PART IV - LEGAL DJSTRUMENTS AND AUTHORITY 18. The draft Loan Agreement between the Bank and the Banque Nationale pour le D6veloppement Economique, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, the report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a Resolution approving the proposed Loan are being distributed to the Executive Directors separately. The provision of the draft Loan and Guarantee Agreements conform; generally to the pattern of Agreements utilized for loans to development finance companies. PART V - THE ECONONCY 19. An economic Report entitled "Economic Development and Prospects in liorocco" (aia 27a) dated September 30, 1970 was distributed to the Executive Directors on October 16, An economic mission is presently in the field and its report should be available by the end of the summer. A basic data sheet is attached.

8 20. Morocco's annual rate of growth of output during the period averaged 6.5 percent. This was partly due to above-average harvests, but it reflected also substantially increased public investment. Domestic savings have remained at only about P1-12 percent of GDP in recent years, but fixed investment rose from 11 percent in 1965 to about 14 percent of GDP in The rise in investment occurred mainly in the public sector, and the public investment targets of the Five-Year Plan -were largely attained. As a consequence, the targets for the years were raised by about 25 percent, with most of the increases allocated to irrigation, other agricultural projects and transportation. Public savings have also risen steadily in recent years, helped by higher tax rates and by collection of arrears. Prices have been stable. 21. A fundarental problem in Knorocco is the worsening unerployment situation, with its serious social and economic implicat-ions being felt most severely in the cities, to which migration from the countryside is continued at a rapid pace. The net additions to the labor force are partly being reduced by emigration, but the current pace of new investment is failing to absorb the excess labor. Agrarian reform should also help in absorbing excess labor, but implementation of the Agrarian Reform Law passed in 1969 has been slow. In the long term, a family planning program. much more vigorous than tihe present one will be necessary. 22. Tourism has continued to expand rapidly in recent years and receipts from tourism and from emigrant workers remittances have become important sources of foreign exchange. The improvement in the balance of payments in 1969 was due mainly to increases in these receipts together ;4th reduced wheat imports and a high olive oil export. Howsever, comnodity exports in general have risen slowly and although net foreign exchange reserves rose in 1969, they remained at the equivalent of only one and one-half month's imports. 23. Norocco t s publicly guaranteed external debt increased at an average rate of 15 percent between to reach a value of $570 million in January The ratio of public debt service payments rose from about 3 percent in 1964 to about 8 percent in 1969, and may reach 12 percent by 1976, and close to 20 percent in the early 1980's. The continuation of concessionary aid in the next few years is needed to prevent the debt burden from rising to an excessively high level. Neverthelessn, Morocco remains able to undertake substantial additional borrowing on conventional terms. 24. A Consultative Group for IKorocco met in October 1969 and i1ovember The next meeting is planned for October 1971.

9 - 8 - PART VI - M14PLIANCE WITH ARTICLES OF AGRERENT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - REODI2ENDATION 26. I recommend that the Executive Directors approve the proposed loan. Robert S. bnc-amara * President Attachments lwashington, D.C. May 5, 1971

10 KIITGDOT.1 BASIC DATA OF NIOROCCO Area: : 172,000 sq. niles Population. : 15.5 mllion Rate of growth ( ), total : 29% per annum current : 3.2 per annum Political Status : Independent Kingdom since 1956 Gross Domestic Product at market prices (1969). DH 15;8 billion or $3.1 billion Rate of growth, in real terms (pnr annum) :2.6% : 6.4% Per Capita (1969) : DH 1,05o or $207 Structure of GDP ( %of total) Agriculture Electricity 2 3 Mining 5 5 Industry and handicrafts Construction and public works It 5 Coamerce Transport and other services Gover rnent Total Investment and Savings CZ of MDP) Average 1969 Gross investment 12rw 12;9 of which: fixed investment (12;3) (13;F) stock changes (0o5) (-0;C) Gross domestic savings 11;B 11; Resource gap 1.0 1;L4 Resource gap as % of total investment Central Goverrnment Transactions (Cash basis) (in millions of DH) Current Surplus T2t Governmnent development expend Debt repayment Other accounts Total deficit financed from: Foreign loans Internal borrowing, net Treasury deposits C0 Central Bank

11 Money and Credit (end of period, mill. DH) Money supply (including quasi-money) 4,108 4,468 5,223 5,691 Credit to the Government 1,541 1,868 2,257 2,777 Credit to the private sector 1,976 2,118 2,621 2,564 Prices Cost of living index (1958/59 = 100) Balance of Payments Conversion Relationship to large customs areas : $1 = 5.o6 DH : Association with EEC effective as of September 1, (DH million) Exports 2,768 2,146 2,278 2,450 Imports 2,241 2,431 2,587 2,641 Trade Balance (goods) Tourism (net) Other services Interest, dividends and transfers Current Account Balance Export Earnings Concentration (% of total exports of goods and non-factor services) Phosphates Citrus Tourism receipts External Public Debt (in US$ million end of 1969) Total IERD/IDA Total debt outstanding, including undisbursed /18 Total debt outstanding, disbursed only /1 Debt service in /- Ratio of debt service to exports of goods and services in % 1.0%/- ; Foreign Exchange Reserves and IEF.Position (in millions of US$T Gross reserves(public and private) Net reserves (including IECT) l'F quota IMF drawings outstanding hiay 5, 1971