AFRICAN DEVELOPMENT BANK KINGDOM OF MOROCCO

Transcription

1 AFRICAN DEVELOPMENT BANK Public Disclosure Authorized Public Disclosure Authorized KINGDOM OF MOROCCO INDUSTRIALIZATION ACCELERATION SUPPORT PROGRAMME IN MOROCCO PHASE I (PAAIM I) APPRAISAL REPORT ECGF/RDGN/PIFD DEPARTMENTS July 2017 Translated Document i

2 TABLE OF CONTENTS I. INTRODUCTION: THE PROPOSAL... 1 II. COUNTRY CONTEXT Political Situation and Governance Context Recent Economic Developments, Macroeconomic and Fiscal Analysis Economic Competitiveness Public Finance Management Inclusive Growth, Poverty Situation and Social Context... 6 III. GOVERNMENT S DEVELOPMENT AGENDA Government's Overall Development Strategy and Medium-Term Reform Priorities Weaknesses and Challenges in Implementing the National Development Programme Consultation and Participation Process... 8 IV. BANK SUPPORT FOR GOVERNMENT S STRATEGY Linkages with the Bank's Strategy Compliance with Budget Support Eligibility Criteria Cooperation and coordination with other partners Linkages with other Bank operations Analytical Underpinnings of this Operation V. THE ENVISAGED PROGRAMME Programme Goal and Objective Programme Components Policy Dialogue Loan Conditions Application of Good Practice Principles in Terms of Conditionality Financing Requirements and Terms VI. IMPLEMENTATION, MONITORING AND EVALUATION Programme Beneficiaries Impact on Gender, the Poor and Vulnerable Groups Impact on the Environment and Climate Change Implementation, Monitoring and Evaluation Financial Management, Disbursement and Procurement VII. LEGAL DOCUMENT AND AUTHORITY Legal Documents Conditions Related to Bank Intervention Compliance with Bank Group Policies VIII. RISK MANAGEMENT IX. RECOMMENDATION ANNEX I. AfDB/WB COMMON MEASURES MATRIX ANNEX II. DEVELOPENT POLICY LETTER ANNEX III. NOTE ON RELATIONS WITH IMF ii

3 CURRENCY EQUIVALENTS May 2017 Currency = Moroccan Dirham [MAD] UA 1 = MAD EURO 1 = MAD USD 1 = MAD 9.72 FISCAL YEAR 1 January - 31 December WEIGHTS AND MEASURES 1 tonne = 2204 pounds (lbs) 1 kilogramme (kg) = lbs 1 meter (m) = 3.28 feet (ft) 1 millimeter (mm) = inch ( ) 1 kilometer (km) = 0.62 mile 1 hectare (ha) = acres i

4 TABLE OF ABBREVIATIONS AfDB AMMC BADR BAM CCI CCG CFRA CGEM CIC CMC CNEA CPI CST CW DTFE EU-D FDI FTZ GDP GPBM GPP HCP HDI IC ICE IGF IIAG IMF INDH IRES ISRR LF LOF MCC MEF MIICEN OCP PAAIM PACEM PAPMV PCS PEFA PJD PPP SEGMA SME SNDD SNIF TFP UNDP VSME WB WEF WTO African Development Bank Moroccan Capital Market Authority Automated Customs Network Base (Moroccan system) El-Maghrib Bank French Chamber of Commerce and Industry Central Guarantee Fund Country Fiduciary Risk Assessment General Confederation of Moroccan Enterprises Collective Investment Companies Moroccan Centre for Economic Prospects (Centre Marocain de Conjoncture) National Business Environment Comity Corruption Perception Index Special Treasury Accounts Civil Works (Engineering and Public Works) Directorate of Treasury and External Finance European Union Delegation Foreign Direct Investments Free Trade Zone Gross Domestic Product Professional Grouping of Banks of Morocco Principal Partners Group High Commission for Planning Human Development Index Industrial Company Common Business Identifier Finance General Inspectorate Mo Ibrahim Index of African Governance International Monetary Fund National Human Development Initiative Royal Institute of Strategic Studies Implementation Status and Results Report Budget Law Organic Law Relating to Budget Laws Millennium Challenge Corporation Ministry of Economy and Finance Ministry of Industry, Investment, Trade and Digital Economy Office Chérifien des Phosphates Industrialization Acceleration Support Programme in Morocco Morocco s Competitiveness Support Programme Maroc Vert (Green Morocco) Plan Support Project Public Call for Savings Public Expenditure and Financial Accountability Assessment Justice and Development Party Public-Private Partnership Autonomously-managed State Services Small and Medium Enterprises National Sustainable Development Strategy National Financial Inclusion Strategy Technical and Financial Partners United Nations Development Programme Very Small and Medium Enterprises World Bank World Economic Forum World Trade Organization ii

5 PROGRAMME INFORMATION BENEFICIARY : Kingdom of Morocco SECTOR : Multi-sector: Industrialization, Business Climate, Finance Sector PSO DESIGN MODEL : Two-Phase Programme Support Operation (2017/ /2020) EXECUTING AGENCY : Ministry of the Economy and Finance (MEF) Department of Treasury and External Finance (DTFE) Financing Plan as budget support (USD million) Source Phase 1 Amount ( ) Phase 2 (Indicative) Amount ( ) AfDB Loan Currency Loan Type Maturity Grace Period Weighted Average Maturity Refunds Interest Rate Base Rate Financing Cost Margin ADB Key Financing Information U.S. dollars Total Flexibility Loan To be determined (up to 25 years maximum) To be determined (up to 8 years maximum) To be determined (based on amortization schedule) Semi-annual payments after the grace period Base rate + Financing margin cost + Loan margin + Maturity premium (This interest rate must be greater than or equal to zero) Floating (USD LIBOR 6 Months revised on 1 February and August or any other acceptable rate) A free option is offered to set the base rate Financing Cost Margin of the Bank revised on 1 January and 1 July and applied on 1 February and 1 August with the base rate Loan Margin 80 basis points (0.8%) Maturity Premium To be determined : - 0% if weighted average maturity <= years % if < weighted average maturity <= % if weighted average maturity> 15 years Opening Fee Commitment Fee Base Rate Conversion Option* Rate Cap or Collar Option * Currency Conversion Option* 0.25% of the amount of the loan payable on or before the loan agreement signature date 0.25% per annum of the undisbursed amount. It begins to run 60 days after the loan agreement signature date and is payable at payment dates Besides the free option to set the base rate, the Borrower is offered the option to revert to floating rate or reset the rate on all or part of the disbursed amount of its loan. Transaction fees are payable The Borrower is offered the possibility of putting a base rate cap or collar for all or part of the disbursed amount of its loan. Transaction fees are payable The Borrower is offered the possibility of changing the currency of all or part of its loan, whether disbursed or not, into another loan currency of the Bank. Transaction fees are payable *: The related conversion options and transaction costs are governed by the Bank s Directives on conversion available on the website **: A weighted average maturity calculator is available on the website iii

6 Timeframe Main Milestones (expected) Phase I ( ) Phase 2 ( ) (tentative) Activities Dates Activities Dates Appraisal May 2017 Appraisal December 2018 Approval July 2017 Approval March 2019 Effectiveness August 2017 Effectiveness April 2019 Disbursement August 2017 Disbursement April 2019 First Supervision November 2017 First Supervision September 2019 Second supervision February 2018 Second supervision February 2020 Third supervision September 2018 Third supervision September 2020 Closing Date December 2018 Completion December 2020 Programme Overview Programme Outcomes Alignment with Bank Priorities PROGRAMME SUMMARY Programme Name: Industrialization Acceleration Support Programme in Morocco Phase I (PAAIM I). Geographic Scope and Sector: National Territory/Multi-sector. General Calendar: May 2017 December Operational Instrument /Financing: Sector Budget Support/USD 200 million. PAAIM I is an intervention to enhance the competitiveness of Morocco s industrial fabric and finance industrial economic activities. It aims to contribute towards achieving the following outcomes by 2020: (i) Establishment of a coherent and clear investment attraction scheme in line with the territorial and sectoral policies of the State; (ii) provide investors with leased land at competitive prices (400 ha); (iii) Establish an official portal dedicated to the main administrative procedures related to companies; (iv) increase to at least60% in the integration of industrial automotive ecosystems; (v) Development of 5 integrated ecosystems; (vi) moving to the 40 th rank in the world as concerns the sub-index operating environment of the Enabling Trade Index (46th among 136 countries in 2016); (vii) increase to 400 of the number of recommended exporting companies (211 in 2014); (viii) increase of number of SMES benefited from guarantee from 7290 in 2016 to in 2020; (ix) increase in number to women's SMEs benefitting from the guarantee products from 374 in 201- to 1100 in 2020; (x) increase in market capitalization relative to GDP to 57% (52% in 2015); (xi) increase of invested funds through private equity from 2.7 billion Dhs between 2013 and 2016 to 2.92 billion Dhs between 2017 and 2020; (xii) mobilization of 200 million Dhs for investment in innovative start-ups; (xiii) support to at least 150 companies at pre-seed stage; (xiv) increase in the number of entrepreneurs financed; and (xv) design of new products to foster green financing in Morocco. PAAIM I was designed from a gender perspective, with the aim of boosting women's empowerment and curbing gender disparities. This budget support programme forms part of the first pillar of Morocco's CSP: "Support to Green Industrialization by SMEs and the Export Sector". It directly contributes to two of the Bank's "High 5" priorities, namely "Industrialize Africa" and "Improve the Quality of Life for the People of Africa", and pursues the green and inclusive-growth objectives of the AfDB s Ten-year Strategy for the period PAAIM I is also part of the Governance Strategic Framework and Action Plan (GAP II) under Pillar I "Public Sector Management and Economic Management" and Pillar II "Sector Governance". It is aligned with the thrusts of the Bank Group's Strategy for the Industrialization of Africa. In particular, it supports the implementation of flagship programmes related to the development of incentive industrial policies and improved access to finance for industries. PAAIM I is also aligned with the pillars of the Bank's Financial Sector Development Strategy, through support to broadening access to financing for economic players. iv

7 Needs Assessment and Programme Rationale Harmonization Bank s Value Added Furthermore, it supports the country in the implementation of the business and investment climate reform programme, which is defined and supported by the G20 Compact with Africa Initiative (mobilizing in particular AfDB, IMF and WB). Lastly, PAAIM I is in line with the Bank's Gender Strategy ( ), "Investing in Gender Equality for Africa's Transformation", more particularly Pillar II on "Economic Empowerment". Thanks to strong and sustained economic and financial reforms over the last two decades, Morocco has achieved satisfactory results in terms of economic growth and stabilization of its macroeconomic framework. In its bid to get out of the trap of middle-income countries, it has prioritized the manufacturing sector, placing industrialization at the core of its structural transformation drive. It adopted the Industrialization Acceleration Plan, a dynamic and ambitious strategy seeking to create sustainable jobs, encourage private investment, targeted at the most dynamic and most promising export sectors. For instance, industrial sector exports increased by 10% in value between 2013 and 2016, to reach DH 137 billion in 2016, and the industrial sector became the leading job provider with 425,000 jobs between 2015 and Hence the diversification of manufactured products is a priority project requiring a targeted and strategic intervention to enhance the competitiveness of the industrial fabric which forms the bedrock of any overall diversification project. Furthermore, the levers identified in the Bank Group's strategy for the industrialization of Africa provide a response to the challenges and constraints identified under PAAIM I, and which should be addressed in order to achieve accelerated industrialization. The said levers are: (i) an incentive policy, legislative and institutional framework; (ii) an enabling economic environment and infrastructure; (iii) access to capital; (iv) market access; and (v) competitiveness of skills, capacity and entrepreneurship. Hence, an improved investment climate, the promotion of industrial exports and the financing of industrial economic activities are the key points of intervention for accelerated industrialization. In the long term, these objectives should also open up better prospects for national and foreign operators to develop large-scale projects, both local and regional, to enable Moroccan private operators to add value. This should also usher in new projects that the Bank could support through its private window and the various available financing instruments. During the preparation mission of this budget support, the Bank team met with the main TFPs to develop the synergies required for this operation. The programme is thus designed in coordination with other donors, notably the European Union Delegation (EU-D) in Morocco, which has launched a budget support programme for the years 2017, 2018 and 2019, totalling 95 million, with the following main objectives: (i) enhance the competitiveness of Morocco s economy; (ii) develop the potential of Moroccan exporters; and (iii) trigger Morocco s transition and that of its industry to a green economy. More generally, overall coordination among the donors in Morocco is highly satisfactory and is carried out through formal discussion and dialogue frameworks to which the Bank belongs as a member. At the initiative of the Bank's Office in Morocco (COMA), and in collaboration with the World Bank and UNDP, a Senior Partners Group (SPG) has been formed, and holds regular meetings to share information on the outcomes and operational approaches to be adopted during the interventions. Additionally, thematic groups led either by partners or the administration meet regularly to coordinate activities related to sector operations. Lastly, the Bank is partnering with the EU-D in Morocco to conduct Morocco's PEFA for the year 2016, and a TFP working group on competitiveness in Morocco is being set up under the aegis of the EU-D. Spanning the periods 2017/2018 and 2019/2020, PAAIM adopts a programmatic approach, organized in two successive phases PAAIM I and PAAIM II, and supported by a number of impactful activities that have been implemented or are being implemented as part of the Bank's operations in Morocco. This will facilitate taking and tracking the preliminary programme measures and triggers, to ensure solid and impactful reforms. Through such reforms, PAAIM I should contribute towards increasing the industrial sector's share of GDP by up to 23% and creating 500,000 committed jobs in the industrial sector by To that end, emphasis in this operation is on reforms to support the economic diversification process, which will significantly impact improved economic activity for Moroccan women. Under the project, special emphasis is also placed on green financing intended for industrial activities, notably through the measure relating to the launch by the AMMC of a guide to green bonds for enterprise financing. v

8 Contribution to Gender Equality and Women s Empowerment Dialogue on Policies and Associated Technical Assistance Accelerated industrialization in Morocco will create sustainable employment in a sector that boasts extremely high added-value. By granting pride of place to industrialization, PAAIM I will help raise workforce qualification levels among the youth and women in particular, and this will positively impact their living standards. Furthermore, the programme will reduce inequalities in access to finance to the benefit of women, notably in the industrial sector which employs an increasing number of Moroccan women. The programme actually includes a number of measures directly or indirectly linked to enhancing women's economic activities, such as easing the guarantee product for womenrun enterprises, known as Daman Ilayki. The design of this programme is the outcome of extensive consultations, making for quality dialogue with all stakeholders, notably the Moroccan authorities, the private sector and civil society. Besides the numerous regular meetings with the Moroccan authorities, two workshops were held in preparation for this operation, and the first of these workshops involves the Bank and civil society, and the second the Bank and the private sector. PAAIM I adopts a programmatic approach based on a number of activities falling within the framework of the Bank's institutional support to Morocco (Maroc Export Support Project, Moroccan Growth and Employment Study Project, etc.). vi

9 RESULTS CHAIN RESULTS-BASED LOGICAL FRAMEWORK Country and Project Name : Morocco Support Programme for Accelerated Industrialization in Morocco Phase I (PAAIM I) Project Purpose: Contribute towards creating conditions conducive to accelerated industrialization for sustainable economic growth INDICATOR (including CSI) PERFORMANCE INDICATORS BASELINE TARGET MEANS OF VERIFICA TION RISKS / MITIGATION MEASURES GDP growth rate 2.8 % (Average ) 4.5 % (Average ) MEF IMPACT Sustained growth driven by a jobgenerating industrial sector Share of industrial sector in GDP 17.9% (2016) 23% (2020) MEF Number of jobs created (commitment) in the industrial sector 425,000 ( ) 500,000 ( ) MIICEN - Risk 1: Delays in implementing reforms. OUTCOMES Outcome 1 : Industrial investment environment strengthened and exports facilitated Outcome 2 : Financing of industrial activities strengthened Ease of Doing Business Index Enabling Trade Index (Pillar 3 - Efficiency of administrative procedures) Number of SMEs benefiting from financing guarantee Nnmber of Women led projects benefiting from financing 75 th (2016) 60 th (2019) WB 4.9 points (54 th ) (2016) 4.6 points (2019) HCP FEM 7290 (2016) (2020) MEF 374 (2016) 1100 (2020) MEF - Mitigation:. Continued commitment by successive governments, including the new government, formed on April 5, 2017, to continue the implementation of economic reforms. Risk 2: The economy s high vulnerability to climatic hazards and climate change (agricultural sector) - Mitigation: To mitigate this risk, the Government is committed to pursuing the implementation of reforms as part of economic diversification through accelerated industrialization. The PAAIM is supporting this drive. vii

10 - Risk 3: Lack of coordination between the various government departments involved in implementing the reforms under the programme. Invested funds through private equity 2.7 bn Dhs ( ) 2.92 bn Dhs ( ) MEF - Mitigation: The DTFE which coordinates implementation of the reforms and is responsible for monitoring programme implementation has in previous programmes demonstrated its ability to mobilize the various stakeholders. To facilitate coordination, the Bank will additionally maintain dialogue with all the structures taking the relevant measures. OUTPUTS Output Establishment of a legal modernized framework on private investment Output Establishment of a legal framework on industrial land Output Improving tax incentives for industrial companies Output Facilitating administrative procedures for investors Adoption of a new framework law forming an investment charter Passing of a framework law on industrial land Exemption of newly created industrial companies (ICs) from corporate tax (CT) Launching of eregulations Casablanca Sub-component 1.2. Support to the Promotion of Industrial Exports Output Dematerialization of the one-stop shop/port of Agadir Deployment of Portnet for the port of Agadir COMPONENT I : SUPPORT TO COMPETITIVENESS OF THE INDUSTRIAL FABRIC Sub-component 1.1. Support to the Promotion of Industrial Investments Framework Law of n of 1995 forming charter of the investment (2016) There is no framework law on industrial land (2016) Only (i) the exporting companies are totally exempt from CT for their export turnover for 5 years and benefit from a 50% reduction beyond that period; (II) Enterprises located in prefectures or province that economic conditions require preferential tax treatment, benefits from a 50% reduction of the CT for 5 years eregulations Casablanca 1.2. Port of Agadir does not have Portnet (2016) The new framework law forming a charter for investment is adopted by the Council of the Government (2019/2020) Submission to the SGG of the industrial estates bill (2019/2020) All newly created ICs and carrying out activities fixed by regulation are exempt for 5 years from the CT (2017/2018) eregulations Casablanca is functional (2017/2018) Portnet is deployed for the port of Agadir (2017/2018) MIICEN MIICEN MIICEN CNEA MIICEN Output Improving incentives for industrial subcontractors Granting of indirect exporter status to subcontractors Subcontractors do not enjoy the benefits of direct exporters Subcontractors are considered indirect exporters (2017/2018) MIICEN COMPONENT 2 : SUPPORT TO FINANCING OF INDUSTRIAL ECONOMIC ACTIVITIES viii

11 KEY ACTIVITI Sub-component 2.1. Support to the Development of SMEs Output Guarantee product for women-run enterprises: "Daman Ilayki" Output Support to nonbanking finance for SMEs Output Easing access to financing for innovative start-ups Output Creation of labeled incubators for pre-seed business support Output Establishment of new private corporate bond issues COMPONENTS Relaxation of the guarantee product for women-run enterprises: "Daman Ilayki" Issue by the MEF of the Order governing borrowing, pre-divestiture and ancillary activities pursuant to Law No on CISOs Decision to pre-select the private management funds for the Innov Invest Fund to benefit to innovative startups launch of the ecosystem labeling process for structures that will accompany projects holders in early stage Publishing a new guide for green bonds Component 1 : Support to the competitiveness of the industrial fabric Component 2 : Support to the financing of industrial economic activities Product limited to SMEs wholly owned by women (2016) CISO activities facing several constraints Product available to SMEs majority-owned by women (2017/2018) Comprehensive framework for private equity activity ( ) MEF Casablanca Stock Exchange Sub-component 2.2. Facilitation of Pre-seed Funding for Enterprises and Green Financing No Fund in place in No coherent pre-seed programme for enterprises No green bonds Two funds of 100 million Dhs each available for innovative start-ups(2017/2018) At least 150 projects holders financed (2017/2018) 2.2. At least 5 private corporate bond issues (2017/2018) MEF CCG MEF INPUTS: UA 140 million ix

12 I. INTRODUCTION: THE PROPOSAL 1.1. Management submits this proposal to finance for the benefit of the Kingdom of Morocco, Phase I of the Industrialization Acceleration Support Programme in Morocco (PAAIM I) through a loan of USD 200 million from the resources of the African Development Bank (AfDB). PAAIM I is a sector budget support. It supports efforts by the Moroccan authorities to diversify and scale up economy through industrialization, thus creating wealth and new jobs. This drive falls within the framework of the Industrialization Acceleration Plan, which, since its launch, has mobilized all the public players in the country and the bulk of the private sector. The strategy addresses the challenges identified during the implementation of the two previous industrial strategies. It adopts a new approach based on establishing industrial ecosystems ( 231.2) so as to reduce sector fragmentation by promoting the establishment of targeted and mutually beneficial strategic partnerships between industrial leaders an VSMEs. The strategy covers all industrial sectors for which integrated development will be ensured. To date, 48 industrial ecosystems have been created covering 13 sectors, including offshoring automotive industry, aeronautics, electronics, textiles and leather, chemical/para-chemical industry, pharmaceuticals, agro-industry, renewable energies, electrical, mechanical and metallurgical industries. The targets set for the 2020 horizon are: creation of half a million jobs (half of which will be generated by FDI and the other half by the renovated national industrial fabric), a 9 percentage points increase in the industrial share of GDP (from 14% in 2014 to 23% in 2020) and the rebalancing of external accounts through export promotion and import substitution. 1.2 The PAAIM encourages the government to accelerate the structural reforms required to diversify the economy through industrialization and thus improve the quality of life of the Moroccan populace It addresses the constraints on the competitiveness of Morocco s economy and its industrial sophistication, notably in terms of the business climate and access to finance, as highlighted in the 2015 growth diagnostic 1. By including environmental protection and gender-related issues, this programme opens up prospects for accelerated green industrialization, with due regard for nature and ensuring gender equality. PAAIM I also enables the government to partially meet the country's financing needs for fiscal year The PAAIM adopts a programmatic approach over the periods 2017/2018 and 2019/2020, with a view to improving aid predictability and facilitating alignment with the country s development policies in order to create inclusive and sustainable growth conditions. This multi-year framework also facilitates the medium-term creation of a platform for dialogue on key reforms for industrialization-acceleration in Morocco. Furthermore, the programme adopts an integrated inter-sector approach whereby synergy will be developed among the different sectors of economic activity resulting in greater complementarity between the Bank s financial and technical instruments (reform support, investment support and technical support). The submission of this report for approval is conditional upon effective implementation of the preliminary measures taken from a matrix of reforms prepared in 1 Growth Diagnosis, 2015, prepared by the Bank, MCC and the Moroccan Government 1

13 coordination with the authorities and the other donors. This matrix has been coordinated between the Bank and other donors. II. COUNTRY CONTEXT 2.1. Political Situation and Governance Context Showing remarkable stability, Morocco hasadopted in 2011 a new Constitution to strengthen pluralism and individual freedoms. The Constitution was revised by referendum in July 2011, with the aim of strengthening political pluralism and individual freedoms. The legislative elections of November 2011 led to the victory of the Justice and Development Party (PJD), following which its secretary-general was appointed head of government. A first coalition government was formed in January 2012 and a second in October The regional and communal elections of September 2015 marked a milestone in the implementation of the decentralization process, as enshrined in the new Constitution. The October 2016 parliamentary elections resulted in the victory of PJD. On 17 March 2017, El Othmani (PJD) was appointed Head of Government by King Mohammed VI, and a new government was formed on 5 April Since the early 2000s, Morocco has achieved highly satisfactory results in the areas of public financial management and control, the fight against corruption and improvement of the business climate, by implementing a number of impactful reforms. The enactment of Organic Law No on Budget Laws (LOF) in 2015 entailed the adoption of a new results-based approach and a culture of performance in public financial management. Regarding the fight against corruption, Morocco on 28 December 2015 adopted the National Anti-Corruption Strategy which covers various aspects, notably upgrading of the institutional and legal aspects, activation of the prevention and repression dimension and strengthening of the education and awareness-raising aspects. In 2015, Morocco was ranked 14th out of 54 African countries on the basis of the Mo Ibrahim Index of Governance in Africa (IIAG), with a score of 58.3 points, up +5.7 points compared to As concerns Morocco s level in Transparency International s Corruption Perception Index (CPI), the country recorded a four-point improvement between 2014 and 2017 (37 points out of 100), to rank 90th out of 176 countries Recent Economic Developments, Macroeconomic and Fiscal Analysis Growth in the Moroccan economy was 1.2% in 2016, down 3.3 percentage points from It is expected to reach 5% in 2017, in line with the average annual growth rate over the period (3.7%). The decline in growth in 2016 is largely attributable to underperformance of the agricultural sector, which was affected by unfavourable climatic conditions, causing cereal production to drop by almost 70%. However, like the industrial sector, the phosphates sector witnessed a good year both in terms of rock production (+1.1% in September 2016) and in its processing (+9.6% with a 20.7% rise in exports, including an increase in fertilizer exports of 47.2%). Domestic demand is still driven by low inflation (1.6% in 2016, 0.9% in 2017), thus preserving the purchasing power of consumers. Furthermore, consumption benefited from the increase in remittances from Moroccans living abroad (+4.5% to DH 48.3 billion in September 2016) and the increase in consumer loans (5.2% increase overall). In terms of employment, the economy saw the creation of 126,000 paid positions in 2016 (of which 101,000 in rural areas), causing unemployment to drop by 0.3 point (to 9.4%), which benefited particularly graduates (-0.4% to 16,9%). Despite a decline in 2016 compared 2

14 to an exceptional year in 2015, FDI inflow to Morocco remains relatively high compared to the rest of the region, reaching USD 3.2 billion The industrial sector for its part continued to grow (+ 1. 5%), reaching 17.9% of GDP in 2016, thanks to the impetus from the Industrialization Acceleration Strategy. Mechanical, metallurgical and electrical industries (+ 2.7%) and the mining industry (+ 2.2%) posted the best growth, followed by the Textile and Leather Industries (+ 1.8%). Nevertheless, some sub-sectors have not performed so well. The chemical and para-chemical industry contracted by 0.4%, and the agri-food sector rose from 2.6% in 2015 to just 0.1% in Table 1. Industrial Sector Exports (MDH) /2016 Textile & Leather ,8% Aéronautics ,2% Automobile ,1% Électronics ,5% Agri-food ,9% Public debt is estimated at 64,7% of GDP in The government has set itself the target of bringing debt down to 60% of GDP by 2020, thanks to the gradual reduction of the budget deficit that has been under way since After a rising trend since 2010 (with a debt of 49% of GDP), the trajectory of public debt is expected to start reversing from 2017, falling to 63,8% and then to 62% in According to the latest IMF mission in July 2016, public debt will remain sustainable in the medium term. An analysis of the sustainability of the public debt shows that it is resilient to various shocks and vulnerabilities linked to the debt level and profile, despite the high gross financing requirements due mainly to refinancing of the existing debt. Furthermore, the debt structure remains favourable as three-quarters of the stock is domestic debt. As for the external public debt (stood at Dh 312 billion in June 2016, up 4%), it is contracted to the tune of 46% from institutional creditors on concessional terms. The efforts undertaken over the last decade in the areas of fiscal consolidation and active debt management have yielded concrete results: the government has continued financing itself at relatively low rates and extending the debt maturity. The rates applied on the primary market continued their downward trend during the month of June Compared to the end of December 2015, the 52-week and five-year yields fell by 74 bps and 83 bps, respectively, to 1.85% and 2.29%. The same trend was noted with long maturities, reflected by a significant decrease of 80,2 bps in the 10-year rates from 3.62% at the end of December 2015 to 3.54% at the end of June (Technical Annex 6) Morocco has been pursuing a prudent monetary policy since Inflation remained low in the period , averaging 1.4%, despite the gradual removal of subsidies on energy products in January The Central Bank sought to support demand, the main engine of economic growth. In a context characterized by low inflationary pressures, it decided to lower its key interest rate three times to 2.25% (its lowest historical level) between 2014 and

15 Table 2. Key Macroeconomic Indicators Rev. Rev (Annual variation as percentage) Real GDP Agriculture Real GDP Non-Agriculture Real GDP Consumer Prices (end of period) (As percentage of GDP) Gross Capital Formation Budget Balance 2/ Primary Balance (excluding grants) Total Public Debt Broad Money Current Transactions Balance, including Official Transfers Gross Reserves in Months of Goods and Service Imports of the Following Year Sources: Moroccan Authorities, estimates and projections of IMF services With regard to economic growth prospects, growth is expected to reach 5% in 2017 as a result of resumption of agricultural activity, which will benefit in particular from the impact of the Green Morocco Plan and the provision by the authorities to producers, of almost 900, 000 tonnes of certified seed and tonnes of fertilizer. The development of irrigation should be accelerated by equipping 50,000 hectares and upgrading 120,000 hectares in order to strengthen crop resilience in the face of climatic hazards. For example, cereal production was estimated at 102 million quintals for the 2016/2017 crop year, an increase of 203% compared with the previous season. In the medium term, GDP is expected to reach around 4.5%, supported by the outcome of the implementation of a number of key reforms concerning business climate improvement, agricultural sector modernization and industrial product diversification. Low inflation is forecast in 2017 (1.2%), with a two-point increase in the medium term. It is also forecast that the public deficit will narrow to 3.5% of GDP in Economic Competitiveness In 2016, Morocco ranked first in the Maghreb and 4th in Africa according to the Global Competitiveness Report of the World Economic Forum (70th out of 138 countries). It is also ranked 68th out of 190 countries according to the Doing Business 2017 report and first in North Africa, third in Africa and fourth in MENA (Middle East and North Africa). According to the same report, in 2017, Morocco is among the countries that have made the greatest efforts to: (i) introduce or improve on-line procedures; (ii) improve administrative efficiency; (iii) introduce credit ratings from a credit bureau or register as a value-added service; (iv) expand the role of shareholders in company management; and (v) introduce or improve the electronic submission and processing of import documents. These performances result from the implementation of a number of structural reforms undertaken through operational structures dedicated to improving Morocco's economic competitiveness, such as the National Committee for Business Environment (CNEA), the Moroccan Observatory of VSMEs, Maroc PME, Portnet, Central Guarantee Fund (CCG), etc. Through their activities, these structures 2 contribute to industrial acceleration. 2 And others, including private sector entities, such as the Moroccan Professional Bankers Group (GPGM) 4

16 In its bid to escape from the middle-income trap, Morocco has made the manufacturing sector a priority sector, and has placed industrialization at the core of its structural transformation. It has adopted the Industrial Acceleration Plan , a dynamic and ambitious strategy which aims to create sustainable jobs, encourage private investment targeted towards the most dynamic and most promising export sectors. To boost this strategy, industrial ecosystems have been turned into leading areas of accelerated industrialization. The industrial ecosystems approach consists in rallying groups of companies around "engines" driving ecosystem projects. Such engines may be national captains of industry, professional groups or foreign investors. In this way, they enable more effective sector integration, stronger increase in investment, a higher rise in the value of the industrial sector by spurring the establishment of targeted and mutually beneficial strategic partnerships between industry leaders and VSMEs. To encourage the creation of ecosystems, the State signs "performance contracts" with the private sector to achieve a number of development objectives, including the creation of new jobs, in return for a number of benefits, some of which are land and tax-related. To date, 48 industrial ecosystems have been created in Morocco in various sectors, such as textiles and leather, automotive, aeronautics, agro-industry, etc. (Technical Annex 4) Industrial sector exports 3 thus increased by 10% between 2013 and 2016, reaching MAD 137 billion, making the industrial sector the leading job provider with jobs committed 4 between 2015 and Despite these results, the competitiveness of Morocco s industrial fabric remains limited compared to its potential as is the added value of its poorly diversified export products compared with other emerging countries. Overall, the obstacles identified are related to an investment climate requiring improvement and export promotion that needs boosting. Manufactured product diversification is thus a priority project requiring targeted intervention to improve the industrial fabric s competitiveness which is the bedrock of any overall diversification project. Moreover, to accelerate industrialization ( 3.2), the levers identified in the Bank Group's strategy to industrialize Africa provide a possible response to the challenges and constraints identified under PAAIM I, namely (i) an incentive policy, legislative and institutional framework; (ii) an enabling economic environment and infrastructure; (iii) access to capital; (iv) market access; and (v) competitiveness of skills, capacity and entrepreneurship. Thus, improving the investment climate, promoting industrial exports and financing industrial activities constitute the key points of intervention for industrial acceleration. In the long term, these objectives should also help create better prospects for local and foreign operators to develop large-scale projects at the local and regional level and enable Moroccan private operators to add value. This should also pave the way for new projects that the Bank could support through its private window and the various available financing instruments In terms of financing economic activities, Morocco has achieved significant progress in modernizing its financial sector. It climbed 21 places in financial market development in 10 years and was ranked 70th in 2016 (WEF, 2015a). The legal and institutional framework governing the financial environment has been further liberalized due, inter alia, to the AfDB s reform support. The Moroccan banking sector is one of Africa s most efficient and is seeking to become the continent s leader with three of its largest banks in over 20 African countries. At the end of 2016, the banking sector had a balance sheet of MAD 1,150 billion, i.e. 120% of GDP, and represented 2/3 of the financial system. Following the slowdown in 3 Europe is Morocco s leading client. In 2015, the European Union represented 63.7% of Morocco s export market. Also in 2015, the share of trade with Africa rose by 0.2 point to reach 6.8%. 4 At April 2016, job creation commitments by industrial sector were as follows: Textile (90 000), Automobile (74 000), Leather (35 000), Building materials (28 000), Aeronautics (23 000), Heavy Vehicles (21 000), Chemical (12 000), Pharmaceuticals (500). 5

17 economic activity as a result of the sluggish global economy, especially in some sectors such as real estate, the debt volume continued to rise, reaching 7.7% by end However,, provisions remained adequate. The non-banking financial sector is also showing positive progress and achievements. However, despite the sound overall performance of the financial sector, efforts are required for women and other vulnerable groups to integrate into the private sector dynamics and achieve their financial inclusion. Furthermore, this calls for the promotion of equal opportunities by tackling the various sources and aspects of discrimination. Improving SME financing by mitigating collateral constraints and diversifying non-bank financial services, as well as facilitating financing for start-ups and industrial units, remain significant challenges to which the Authorities are paying close attention in order to boost private sector development and accelerate industrial transformation Public Finance Management Since 2011, the government has continued modernizing its public finance management system. Several reforms have been implemented to establish this modernization and austerity policy as enshrined in the country s new Constitution. Prepared on the basis of Article 75 of the Constitution, the Budget Law was passed by Parliament on 2 June It constitutes a response to the new constitutional provisions concerning: (i) improvement of public management performance; (ii) establishment of a set of rules to ensure the financial equilibrium of the Budget Law and improvement of public finance transparency; and (iii) enhancement of Parliament's role in the budget debate and in public finance auditing. The new Constitution focuses more specifically on regionalization and administrative de-concentration, strengthening regional level control. Additionally, the Audit Court continues to operate at the regional level to ensure tighter management control of public bodies and local and regional authorities. Pursuing a restrictive fiscal policy, Morocco has seen a sharp reduction in its budget deficit (from 7.3% of GDP in 2012 to 3.9% in 2016 and 3% expected in 2017) due to the fall in public spending, in particular current expenditure, which dropped from 29.9% to 26.4% of GDP in This is the result of: (i) a reduction in the budget allocated to subsidies (in particular energy) from 6.2% of GDP in 2012 to 1.4% of GDP in 2015; (ii) a drop in the wage bill of about 0.4% of GDP; and (iii) the cancellation of unrealized investments. As a result of these measures, additional revenue has been mobilized, government spending streamlined and investment efficiency improved. The country s efforts helped it to secure a second IMF precautionary and liquidity line in 2014 and a 3rd in These efforts have also led to a narrowing of the current account deficit from 9.3% of GDP in 2012 to 2.9% in This is due to the drop in imports (3.5%), as Morocco benefited from the oil price slump, but also to the export sector development policy. In fact, foreign exchange reserves increased from less than 4 to more than 7 months of imports between 2013 and Inclusive Growth, Poverty Situation and Social Context Poverty has reduced significantly in Morocco, from 9% in 2007 to 4.8% in 2014, mainly as a result of the implementation of a pro-active poverty reduction policy, as, for example, the National Human Development Initiative (INDH) reflecting a political commitment at the highest level to combat rural poverty but also urban exclusion and social insecurity. Morocco's HDI has steadily improved from points in 1990 to points in 2014, with an average annual growth of 1.33%. Morocco's school enrolment rate for 6-17 yearolds reached 82.2% ( ), with a school attendance rate of 98.7% among the 6-11-yearolds in rural areas and a gap of merely one point in terms of the enrolment rate of boys compared to girls. However, enrolment among year olds in rural areas is only 38.7%, with a wide 6

18 disparity between girls (29.5%) and boys (47.8%). In terms of the gender inequality index Morocco ranks 117th 5 out of 188 countries, thus maintaining the country in the average human development category of countries according to the UNDP Human Development Report Moreover, by gender, disparities in the unemployment rate are more pronounced in urban areas (but poverty is higher in rural areas) and are largely to women s disadvantage (20.6% for women compared to 11.5% for men) According to the High Commissioner for Planning (HCP), social inequalities in Morocco, as measured through the Gini index, fell between 2001 and 2014, from 40.6% in 2001 to 39.5% in This downward trend is more pronounced according to place of residence. The Gini inequality index decreased from 41.1% in 2007 to 38.8% in 2014 in urban areas, and from 33.1% to 31.7% in rural areas. However, spatial inequalities in access to quality employment constitute a weakness in Morocco despite outstanding efforts. The unemployment rate reached 9.4% in Although the rural labour force participation rate (56.7% in 2015) is higher than in urban areas (41.4%), rural employment is fragile and often poorly paid or unpaid. The latter represents 40,8% of rural employment in 2013 compared to 3.5% of urban employment. Poverty thus remains a rural phenomenon with a rate of 8.9% compared to 1.1% in urban areas, according to the HCP. Moreover, rural employment is highly dependent on weather conditions. Since the agricultural sector employs over 75% of the rural labour force, the rural unemployment rate remains directly dependent on the sector s performance. III. GOVERNMENT S DEVELOPMENT AGENDA 3.1 Government's Overall Development Strategy and Medium-Term Reform Priorities Since 2004, the sector strategies, in accordance with the general guidelines provided by the country's highest authority, have replaced the economic and social development plan. The government s programme which is part of ongoing efforts to improve the country s economic and social situation, focuses on the following five thrusts: (i) support to democratic choice and the principles of the rule of law, and strengthening of regionalization; (ii) improved administration and enhanced good governance; (iii) economic development, job creation and support to sustainable development; (iv) support to human development and social cohesion; and (v) consolidation of Morocco's influence abroad. Moreover, the priorities announced in the royal speeches are translated into development thrusts within budget laws and through sector strategies. Thus, the 2017 budget bill includes four areas of development: (i) accelerating economic transformation through industrialization and exports; (ii) strengthening competitiveness and promoting private investment; (iii) improving human resources and reducing disparities; and (iv) institutional strengthening and good governance. 3.2 Weaknesses and Challenges in Implementing the National Development Programme Moroccan growth remains dependent on the agricultural sector (whose performance is strongly correlated with rainfall) and growth in the euro zone, the country's leading economic partner. Growth volatility affects job creation and the resilience of jobs especially in rural areas 6. Moreover, the balance of payments suffers from a structural deficit estimated at 2.9% in 2016, due particularly to a weak export sector. To meet these 5 National Education Statistics, , Ministry of National Education and Vocational Training 6 23% in 2016, compared to 21% in 2015, especially young graduates (24% in 2016 against 22% in 2015) 7

19 challenges, Morocco must maintain the progress achieved in terms of diversifying sources of growth, mainly by developing the industrial sector, a sector with high potential, which is currently the leading sector in terms of providing new jobs. However, the industrial sector faces a number of constraints on its competitiveness, such as wage costs, labour productivity, but also energy costs 7. On a structural level, the growth diagnostic conducted by the Bank, the government and the MCC identifies microeconomic elements (Taxes, Land ) as a major constraint on private sector growth and the structural transformation of the economy through its industrialization. In terms of the business environment, over 40% of Moroccan companies consider access to land a major or extremely serious obstacle, according to Moroccan Centre for Economic Prospects (CMC Centre marocain de Conjoncture) [Moroccan economic think tank]. The dwindling reserves of state-owned land in urban areas is considered to be a factor reducing the supply of industrial land for investment. The tax system is also viewed as unfavourable to the development of a productive private sector according to IRES, since the tax burden (around 23%) continues to weigh on non-agricultural enterprises despite the tax incentives adopted to encourage investment While they constitute 95% of Morocco s industrial sector, SME/SMIs 8 represent merely 5 to 10% of export activities. Therefore, Morocco remains incapable of fully mobilizing its competitive potential 9 and diversifying its export basket. Thus, trade facilitation, enhanced export support and optimization of tax incentives are priorities to be addressed in order to overcome the challenge of diversifying exports and increasing their added value, particularly those resulting from the processing of agricultural products Furthermore, industrialization financing mechanisms, especially for SMEs/SMIs, remain inadequate. This situation affects the industrial sector, comprising mainly SMEs. Insufficient funding prevents SMEs from boosting the industrial sector s value-added. They account for only 10-20% of industrial production, and merely 5-10% of them export manufactured goods, as mentioned earlier. While industrialization financing mechanisms have developed, the strengthening of such instruments and the creation of new specific instruments are of paramount importance for industrialization through SMEs in order to support their investment in machinery and technology and innovation for stronger growth and moving upmarket. Among the causes of this funding challenge is the constraint on guarantees for bank financing which remains fairly high in Morocco. While the development of the national guarantee system has helped to alleviate this constraint, it is still necessary to strengthen this system and propose new guarantee products that will meet the aspirations of the growth-bearing sectors. Moreover, the diversification of non-bank financial services, such as equity investment and capital markets requires further efforts from the Moroccan authorities. 3.3 Consultation and Participation Process The Bank's intervention complements the action of other partners that focus on the economy s diversification and competitiveness and on industrialization. This programme was designed following broad-based consultations resulting in high quality dialogue with all stakeholders, including the private sector and civil society. A consultation workshop with the 7 Act No on renewable energies helped to mitigate this constraint. One of its priorities is sustainable development by promoting renewable energies to strengthen the competitiveness of the country s productive sectors. The Bank, through its energy sector operations is also contributing towards mitigating this constraint. 8 Women own around 8% of Morocco s formal sector SMEs, according to the Note by the African Development Bank (2015) entitled «Promoting women s employment in North Africa through SMEs». 9 Industrialization and global competitiveness of Morocco, Royal Institute of Strategic Studies (IRES), Value Added is the difference between revenue from raw production of an industry and all costs inherent in the industrial production, including energy, raw materials, semi-finished products and bought services. 8