FILE GP. Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3707-MOR. Public Disclosure Authorized

Transcription

1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY FILE GP Report No. P-3707-MOR Public Disclosure Authorized Public Disclosure Authorized REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO US$150.4 MILLION TO THE KINGDOM OF MOROCCO Public Disclosure Authorized January 6, 1984 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 KINGDOM OF MOROCCO CURRENCY EQUIVALENT Currency Unit - Dirtam (DH) US$1 = DH 7.5 Dirham (DH) 1 = US$o0.126 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric system GLOSSARY OF ABBREVIATIONS BdM BMCE BNDE CMPE CNCA ITPA MCIT OCE SIT TPS Banque du Maroc (Bank of Morocco) Banque Marocaine du Commerce Exterieur (Morocco's External Trade Bank) Banque Nationale Pour le Developpement Economique (Morocco's Development Bank) Centre Marocain de Promotion des Exportations (Export Promotion Center) Caisse Nationale de Cr6dit Agricole (Agricultural Credit Bank) Industry and Trade Policy Adjustment Ministry of Commerce, Indiustry and Tourism Office de Commercialisation et d'exportation (Office for Exports and Marketing) Special Import Tax Sales Tax

3 FOR OFFICIAL USE ONLY MOROCCO INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN Table of Contents Page LOAN SUMMARY i PART I: THE ECONOMY 1 A. Morocco's Economic Performance in the 1970s. 2 B. Recent Economic Developments. 3 C. The 1983 Stabilization Program. 4 PART II: THE GOVERNMENT'S ADJUSTMENT PROGRAM 5 A. Structural Problems and the Need for Structural Change. 5 B. The Short and Medium Term Adjustment Program. 7 C. Macroeconomic Projections. 10 PART III: THE INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN 14 A. Loan History. 14 B. The Adjustment Program under the Loan. 14 C. Expected Effects of the Adjustment Program. 26 D. IMF Activities in Morocco and Government/IMF/Bank cooperation. 28 E. Benefits and Risks. 30 F. Disbursement and Procurement. 31 G. Monitoring. 32 PART IV: OTHER BANK GROUP OPERATIONS IN MOROCCO 32 PART V: LEGAL INSTRUMENTS AND AUTHORITY 34 PART VI: RECOMMENDATIONS 34 ANNEXES: I. Country Data. 35 II. Status of Bank Operations. 41 III. Supplementary Loan Data Sheet. 42 IV. Government's Statement of Development Policy. 43 V. Use of IMF Resources. 57 VI. Summary of Measures and the Implementation Schedule of the ITPA Program. 58 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.

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5 - i - MOROCCO INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN Loan Summary Borrower: Amount: Terms: Loan Description: The Kingdom of Morocco US$150.4 million equivalent, including the capitalized front end fee. 17 years, including 4 years of grace, at the standard variable interest rate. The proposed loan would support the first phase of implementation of the Government's industrial and trade policy adjustment program. The principal aim of the program is to introduce structural changes in the system of incentives in order to eliminate bias against export production, lower manufacturing costs and hence lay the basis for a restoration of dynamism to the pattern of industrial growth. To achieve those objectives within the context of a medium-term adjustment program, specific actions have been taken and others would be implemented over the next twelve months to reform the system of (i) export incentives; (ii) import protection (tariffs and quantitative restrictions); (iii) fiscal incentives; (iv) financial policy (interest rate policy and export credits); and (v) price controls (liberalization of prices). The program is described in the Government's Statement of Development Policy to the Bank. The foreign exchange provided by the loan would be used to finance imports. The main benefit of the program would be an improvement in the balance of payments by increasing exports and reducing the current account deficit; it would also improve the allocation and efficiency of industrial investment and increase national production. The risks of the program relate to assessing the length and difficulty of the adjustment process, internal resistance to a timely and continued implementation of the program, uncertainties in the external environment and export prospects, and the possibility of further deterioration of Morocco's financial situation which could affect the commitment to import liberalization.

6 - ii - Estimated Disbursements: The loan. would be disbursed in two tranches. The first tranche of US$75.4 million would be available for disbursement at the time of loan effectiveness. The second tranche of US$75.0 million would be released after implementation of specified actions and a progress review approximately six months later. Disbursements for the entire loan are expected to be comp:leted within 12 months of loan effectiveness. Appraisal Report: This is a combined President's and Staff Appraisal Report.

7 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$150.4 MILLION TO THE KINGDOM OF MOROCCO FOR AN INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN 1. I submit the following report and recommendation on a proposed Loan to the Kingdom of Morocco, for the equivalent of US$150.4 million, including the capitalized front-end fee, in support of its program of industrial and trade policy adjustment. The Loan would have a term of 17 years, including 4 years of grace, at the standard variable interest rate. PART I - THE ECONOMY 2. An economic report, entitled "Morocco: Priorities for Public Sector Investment ( )" (No MOR), was issued on June 15, An economic report entitled "Morocco: Industrial Incentives and Export Promotion" is expected to be distributed to the Board shortly. An economic mission on financial intermediation was in Morocco in September 1983 and its report should be ready in Country data are given in Annex I. Introduction 3. Compared with many developing countries, Morocco is well endowed with natural resources. Morocco has the world's largest and most easily recoverable phosphate reserves, which makes the phosphate sector a key export sector. Other minerals such as iron ore, manganese, lead and zinc are also exported, but in much smaller amounts. Coal and hydropower plants satisfy only a small part of the country's energy requirements, but Morocco has some uranium and oil shale resources which could become significant energy sources in the long term. There are moreover preliminary indications of natural gas reserves. Morocco has also a relatively good agricultural potential. In addition, Morocco's proximity to Europe has favored trade, tourism and labor migration to the EEC countries. 4. During the first 15 years after Independence in 1956, a conservative approach to economic policy predominated in Morocco, and GDP increased at an average rate of 4% a year in the 1960s. A relatively weak savings effort and conservative external borrowing policies permitted only a slow rise in the share of resources allocated to investment. Morocco thus entered the 1970s with no major financial imbalances, but a relatively limited growth capacity. Although some industrialization had taken place, over half of the labor force was employed in the relatively inefficient traditional agricultural sector, and primary products accounted for close to 90% of merchandise exports, with phosphates representing about a quarter of the total.

8 -2- A. Morocco's Economic Performance in the 1970s 5. During the mid-1970s, economic policy became more ambitious. In 1974, with the sudden jump in phosphate prices, phosphate export earnings more than quadrupled, and although the petroleum import bill also quadrupled in 1974, the current account of the balance of payments remained in surplus. The Government launched a massive public investment program which brought about a sharp acceleration in the rate of growth of the economy, and GDP grew at the rate of 6.7% per year in The phosphate boom, however, was shortlived and phosphate exports started falling in both volume and value as early as mid Markets for other exports as well as for tourism and labor migration were also negatively affected by the world recession. Agricultural production and exports entered a period of prolonged stagnation and Morocco turned from being a net exporter into a net importer of foodstuffs. As a result: of all these factors, the growth of exports of goods and nonfactor services, which in constant prices had exceeded 8% a year in , averaged only 0.6% a year in Accelerated investment, growing public: expenditures, and particularly increased defense spending in response to growing tensions in the Western Sahara, created strong pressures on both the balance of payments and the Government budget, with the result that the overall Treasury deficit reached 17.6% of GDP, and the current account deficit 16.5% of GDP in To help finance the gap, Morocco borrowed heavily from the international capital market, which led to rapid increases in external debt and the debt service burden. The debt service ratio rose from 5.6% of exports of goods and services in 1975 to 10.7% in Stabilization Program In order to redress the rapidly deteriorating financial situation, the Moroccan Government in 1978 adopted a three-year stabilization program, with the aim of reducing internal and external deficits to sustainable levels. The demand management policies of that period centered on reductions in investment outlays and stricter import controls and included an exchange rate devaluation in 1980, but did not address adequately the fundamental structural weaknesses of the economy, with the result that the short-term downward adjustment of the economy was only moderately successful. By 1980, both fiscal and external imbalances were still substantial: the overall Treasury deficit remained at about 12% of GDP and the current account deficit at 8% of GDP. Social Development 9. Social expenditures have been at a high level in recent years, accounting for more than half of current budgetary outlays. However, social indicators still appear to be at a relatively low level in Morocco. The limited effectiveness of past social policies in reaching the lower income groups, especially in rural areas, is increasingly recognized as a major

9 -3- issue, and the strategy of the Development Plan emphasizes the importance of rural development in rainfed areas, where most of the poorest households in Morocco currently live, and the need to improve mechanisms for delivering services to meet basic needs at an affordable cost. An effort is also being made to increase the involvement of local communities in meeting basic needs, particularly for low cost housing, water supply, sewerage and electrification. Although rapid results cannot be expected in any of these areas, implementation of these policies would help meet the needs of low-income groups, while holding down the budgetary cost of social programs. B. Recent Economic Developments 10. Pattern of Growth. The agricultural sector, which grew by nearly 4% in the sixties, failed to grow in the seventies partly as a result of poor climatic conditions. This trend continued in recent years with a sharp fall in output in 1981, partly reversed in At the same time, and despite large public investment in manufacturing since the mid-seventies, value-added in manufacturing declined in As a consequence, Government services have been the main source of growth (12% p.a. in real terms), reflecting the rapid rise in Treasury expenditures. Overall, real GDP increased by only 2.1% p.a. in real terms in compared with 3.6% p.a. in , so that Morocco's real income per capita declined for the first time in many years. 11. In the last three years, the Government's effort to stabilize the Moroccan economy has been severely 'hampered by a series of external shocks: (a) the 1979 increase in oil prices which aggravated an already substantial oil import bill ($1.2 billion in 1982); (b) a severe drought in 1981, which reduced agricultural output by about 20% and led to substantial imports of cereals; (c) the rise in international interest rates which contributed to a steep increase in debt service; and (d) the international economic recession which contributed to a 31% decline in in the dollar price of rock phosphates, as well as to a fall in workers' remittances, Morocco's principal sources of foreign exchange. 12. In addition to the external shocks, growing internal pressure to provide social services and consumer subsidies to a rapidly growing population, as well as defense expenditures for the Sahara war, led to a rapid growth in Government current expenditures. At the same time, the Development Plan, which aimed at an ambitious 6.5% p.a. GDP growth rate, induced a sharp increase in Treasury investment expenditures (46% rise from 1980 to 1982). Thus, despite tax increases and improved tax collection that brought the fiscal pressure up to 23.1% of GDP in 1982, the overall Treasury deficit- 1 rose from 12.2% of GDP in 1980 to 14.1% of GDP in 1982, thus constituting the major source of financial imbalance. 1/ Excluding special accounts and annex budgets.

10 - 4- Balance of Payments and External Debt 13. The combined effect on the balance of payments of the previously mentioned external shocks and of a highly expansionary fiscal deficit was an overall increase in the current account deficlt from $1.4 billion in 1980 to $1.9 billion in 1982 (or from 8% to 13% of GD3?). While there were some positive factors on the export side, such as 'the continued growth of manufactured exports, the emergence of new non-traditional exports and renewed growth in the tourism sector after the 1980 exchange rate devaluation, these were more than offset by the fall in phosphate earnings, agricultural exports and workers' remittances. On the import side, imports continued to increase due to petroleum and capital goods imports, although at a slower rate than previously because of the economic slowdown, thus contributing to a larger current account deficit. 14. To finance its current account deficit and meet its debt amortization payments, Morocco increased its external borrowings considerably. By December 1982, its external mediulm- and long-term debt (disbursed only) rose to $9 billion or 61% of GDP (excluding military debt) and in 1983, its total external debt including military and short-term commercial debt reached an estimated $13 billion. As a result of growing debt and the increase in international interest rates, Morocco's debt service (excluding IMF) amounted to $1.2 billion in 1980 and $1.4 billion in 1982 of which $0.6 billion in interest. This was equivalent to 27.0% and 36.3%"' respectively of total exports of goods and services. Loan commitments in averaged $2 billion a year of which $0.9 billion from multilateral andl bilateral sources (excluding special grants). As in previous years, major sources of official aid were Saudi Arabia, France, the United Arab Emirates, the United States, Germany, and the Bank Group. At the end of 1982, the Bank Group's share in Morocco's outstanding and disbursed external public debt was 7.7%, and its share in debt service was 6.4%. C. The 1983 Stabilization Program 15. In 1983, the financial situation deteriorated rapidly and net foreign assets declined sharply, prompting the Government to reverse the earlier trend toward trade liberalization by tightening import restrictions in March With freely usable reserves virtually depleted, and the high level of external debt entailing an unsustainable debt service burden for the next few years, the need for a stabilization program was evident. A Government program prepared in mid-1983 was supported by an IMF Stand-by arrangement covering the second half of 1983 and calendar 1984 in an amount equivalent to SDR 300 million. Its principal objective is to reduce the balance of payment deficit from 12.9% of GDP in 1982 to 8.9% in 1983 and 6.6% in This objective would be pursued through limits on monetary expansion, reduction in the Treasury deficit and continued use of a flexible exchange rate policy. 16. To reinforce the adjustment process, the flexible exchange rate policy initiated in 1980 was continued in 1983 with the dirham being depreciated by about 10% in September In addition, a process of debt 1/ 38.7% including repurchases from IMF.

11 rescheduling was started in order to improve the debt profile and restructure it in the light of the estimated resources available for debt servicing. Although the overall impact of the stabilization program would result in a sizeable decrease in the current account deficit, projected debt service payments of about $2 billion per year in on external medium- and long-term debt outstanding as of December 1982 (excluding military debt) would create severe difficulties for debt management over the next few years. Given these factors, the Government has asked for a rescheduling of its external public debt due in with the Paris Club and commercial creditors. Negotiations with the Paris Club were held successfully in October, and rescheduling with commercial banks is expected to be completed by early At a meeting of donors in Paris in November, which was chaired by the IMF, indications of new official aid to Morocco of about $500 million in were given, and it was agreed that a Consultative Group would meet in late Preliminary indications are that rescheduling of Morocco's debt would yield about $1.7 billion in Furthermore, in order to improve Morocco's debt profile, appropriate ceilings will be set under the IMF Stand-by on short-term debt (up to one year's maturity) and non-concessional borrowings (up to 15 years' maturity). Under the present Stand-by, net IMF financing is expected to amount to $293 million. These various forms of financing, in conjunction with the implementation of a continued adjustment program, would make it possible for Morocco to cover its projected financing gap ($2.4 billion in ) and increase its external reserves. PART II: THE GOVERNMENT'S ADJUSTMENT PROGRAM A. Structural Problems and the Need for Structural Change 17. The underlying structural problems faced by the Moroccan economy were already evident in the 1960s, but their impact on the balance of payments was mitigated by the fact that Morocco followed a cautious fiscal and monetary policy. In the mid-seventies as the Moroccan Government adopted a much more ambitious growth-oriented policy than had been followed earlier, imports of goods and non-factor services increased rapidly (17% p.a. in real terms in ) while exports lost their previous dynamism and grew very slowly (0.6% p.a. in real terms in ). A a consequence, the external trade situation became increasingly unbalanced during that period. Although this trend was checked and slightly reversed with the implementation of the stabilization plan, the trade deficit became gradually worse in with merchandise exports declining from 64% of imports in 1980 to 54% in This structural weakness in external trade is in part due to the slow growth of phosphate earnings but the large trade deficits generated by other economic sectors such as agriculture and industry point to other more fundamental causes, including stagnation in agricultural production and structural weaknesses in the sectors themselves. First of all, over the last ten years, there has been a sharp increase in the level of protection and the number of quotas, with the result that the bias against exports, resulting from the structure of incentives, was increased. At the same time, there was also a substantial appreciation of the real effective exchange rate during the period, which was only partly offset by depreciation in

12 -6- Besides the sectoral problems, these last two factors explain to a large extent the decline in agricultural and food exports, the stagnation of tourism receipts in real terms as well as the lack of diversification of manufactured exports during the seventies. 19. The second main macroeconomic structural problem faced by Morocco concerns the low (and declining) level of domestic savings. After increases in the late sixties and early seventies, domestic savings fell from 15% of GDP in 1972 to 8% in This decline was mainly due to a rapid increase in Treasury current expenditures in excess of current revenues so that net savings generated by the Government became negative in In addition, financial private savings have remained low, partly due to inadequate financial and banking policies and negative real creditor interest rates in the 1970s (whereas they were positive in the 1960s). In contrast with the evolution of domestic savings, gross; fixed investment rose sharply in the mid-seventies, and despite a sharp decline in , remained at a relatively high share of GDP in recent years (22% in 1982 vs 14% in 1972). As a consequence, high foreign borrowings, contracted almost entirely by the public sector, have been necessary during the second half of the decade to help finance high investment levels, and external debt (disbursed only) increased from $0.9 billion at the end of 1973 to $9 billion at the end of 1982 (61% of current GDP). 20. As Treasury expenditures have persistently increased in recent years at a rate in excess of normal revenue growth, they have been a major factor in fiscal disequilibrium. Their financing has required successive raises in tax rates and the imposition of additional taxes, with the result that the fiscal pressure in Morocco has become quite high (23% of GDP) and extremely unequal across sectors or firms, thus accentuating distortions in the allocation of resources. At the same time, the increase in the domestic borrowing requirements of the Treasury in conjunction with quantitative ceilings on domestic credit has narrowed access to credit by private firms, The large and growing deficits of the Treasury have also been the key source of the growth of Morocco's foreign indebtedness. 21. Thirdly, despite the sharp increase in the investment ratio achieved in the seventies, the growth rate of the econoiy has now fallen to a level (3.2% p.a. in real terms in ) below the one achieved in the sixties, and barely in excess of the population growth rate. Morocco's gross incremental capital-output ratio thus rose froml a level of 3 in the sixties to 4 in the period , reflecting a significant decline in the efficiency of investment and a poor selection of projects. In industry, this was due to a poorly conceived import-substitution strategy, involving high cost capital-intensive projects which simply shifted. dependence fromn consumer goods imports to imports of intermediate and capital goods. This strategy encompassed heavy reliance on a continuing increase in tariff levels and quotas, a system of generous investment incentives and an artificially low price of capital. In the public sector, the low efficiency of investment was due to poor project selection in a number of sectors and the continued preference for large-scale, capital-intensive projects. In some cases, capacity was extended prematurely and design standards other than least-cost options were adopted. Also, Government financial institutions performed poorly in the selection of projects and achieved low recovery rates.

13 Fourthly, unemployment (about 10%) and underemployment (estimated between 30% and 40%) remain high. 'While unemployment was alleviated in the mid-seventies due to the rapid growth of that period, employment creation was less than could have been expected due to the inefficient allocation of capital. Since then, it is likely that unemployment has worsened due to the economic recession. In addition, a growing percentage of the unemployed are relatively well educated young people, but their skills do not match demand, creating a potential source of increasing political and social tension. The Need for Structural Change 23. Current account deficits of 8 to 13% of GDP which Morocco has experienced during the last five years cannot be sustained in the future. In view of the liquidity problem and the debt management problems experienced by Morocco in 1983, a fundamental stabilization effort needs to be made in the next few years and combined with a program of structural adjustment if the current account deficit is to be reduced from 13% of GDP in 1982 to a more sustainable long-term level of 3% by Macroeconomic projections of the likely outcome of the implementation of a stabilization program without fundamental structural changes being made suggest that Morocco would, in such circumstances, experience a sharp decline in GDP with severe social and economic consequences. In the event, however, that Morocco implements a program of structural reforms, the required external and internal adjustment would be achieved at a lower economic and social cost. The macroeconomic projections clearly indicate (see Part C below) that the Moroccan economy cannot return to a financially sustainable internal and external situation within a reasonably short period of time unless a series of extensive structural adjustment measures are implemented over the next few years. B. The Short- and Medium-Term Adjustment Program 24. The Government's program of adjustment and stabilization was started in The basic objectives of this program are as follows: (i) (ii) (iii) (iv) to reduce the deficit of the balance of payments over the short and medium term through policy changes in agriculture and industry that would promote exports and efficient import substitution while raising output in these sectors; to improve the allocation of capital and the efficiency of investment, both in the public sector (through appropriate revisions of the investment program) and in the private sector (through reform of the protection system and of interest rate policies); to increase the level of public sector savings through reductions in the Treasury deficit and improvements in the efficiency of public enterprises; to improve the mobilization of private savings through a reform of the financial sector involving interest rate increases, diversification of financial instruments and greater competition in the banking sector; and

14 (v) to accelerate the rate of employment creation through better manpower planning and a revision of the protection and incentives system so as to encourage investment in labor-intensive activities. 25. In view of the external financial constraint faced by Morocco, the Government's adjustment program focusses on those policy areas which have the greatest need for fundamental reform and the greatest potential for improving the balance of payments. As the preparation and implementation of far-reaching policy reforms require considerable time and staff resources, the program is phased over time and concentrated cn a limited number of sectors in each phase. The first phase of adjustment would thus be focussed on (i) stabilizing the economy and (ii) reforming the system of industrial incentives and export promotion. Reforms in these two areas are essential as they condition the successful implementation cf the second phase of adjustment, which includes further trade liberalization and reform of the domestic capital market. The third phase of adjustment, which could overlap with the second phase, could address issues of domestic resource allocation in the agricultural sector and public enterprises. 26. Within the overall adjustment program, the proposed Loan would support the implementation of policy reforms in the industrial and trade sectors during the first phase of the adjustment program; the program of measures supported by the Loan would not, however, constitute a structural adjustment of the economy as a whole. Details of the measures to be taken under this Loan are presented in Part III-B. First Phase of Adjustment 27. The first phase of the adjustment prcgram started in mid-1983 and it focusses on (i) stabilizing the economy through restrictive budgetary policies; (ii) implementing a comprehensive program of adjustment of the system of protection (tariffs and quantitative restrictions), export promotion and incentives, and (iii) initiating a reform of the fiscal and financial system. The program of adjustment under this first phase is detailed below. 28. Treasury Deficit. To achieve the objective of stabilizing the economy, the Government has adopted a stabilization program focussed on reducing the Treasury deficit through cuts in current and investment expenditures and implementation of a fiscal reform. In the 1983 revised Finance Law, particular emphasis was placed on a sharp reduction of consumer food subsidies"" (and their elimination in the case of sugar cubes, luxury flour, edible oil and butter). This policy wculd be pursued in 1984 with the result that food subsidies would be cut in half in and nearly eliminated by Additional restraint of Treasury current expenditures would also be achieved in A new education policy reflecting the recommendations of a World Bank study would be' implemented, and the Government 1/ Subsidized food prices were increased by 17% to 60% (with the exception of granulated sugar and non-luxury flour) in July 1983.

15 - 9 - would limit recruitment, wage increases and subsidies to public enterprises. As a consequence of these changes, the earlier trend of excessive increases in Treasury current expenditures would be reversed and current expenditures would decrease in real terms. 29. Apart from the short-term fiscal and financial mianagement issues which are being addressed by the IMF Stand-by, there is a need for long-term fiscal reform. This would serve the objective of development as it will correct the large distortions currently in existence and minimize present disincentive effects. To address these issues, the Government has prepared a comprehensive tax reformn which will be implemented in phases, with technical assistance from the IMF. In 1984, legislation concerning the general income tax and the corporate income tax will be submitted to Parliament for approval and effective implementation of the new tax laws is expected to begin in In 1984, the Government will also initiate a reform of the system of indirect taxation with the objective of establishing a general value added tax over the medium-term. 30. Government Investment. In view of the present shortage of resources, the investment program formulated in the 1983 revised Finance Law calls for a significant decline in expenditures. Appropriation levels were reduced from DH 18.7 billion to DH 13.6 billion for 1983, and actual Treasury investment expenditures are expected to decline from DH 12.5 billion in 1982 to DH 8 billion in To achieve these objectives, most new projects have been cancelled or deferred and ongoing projects have been stretched out over longer implementation periods or scaled down to reduce costs. The sectors most affected by the budget cuts are dam construction (nearly all new dam projects have been cancelled or deferred), energy (oil shale and most hydro projects), ports and railways. Some large road investments are also being delayed. In the social sectors, there are large reductions in education and hospital construction. In the agricultural sector, few projects have been cancelled, but all are being stretched out over time. Overall, the decision to cancel or postpone a number of new projects appears justified and it corresponds quite well to the present priorities faced by Morocco and to the recommendations of the Bank report on Public Sector Investment (Report No MOR). However, the reduction is also likely to affect the completion date of ongoing projects. This should be minimized through allocation of additional resources that may become available to the completion of advanced priority projects. 31. Industrial and Trade Policy Adjustment. In addition to improving resource use and establishing industry as a leading growth sector, reforms in these areas would have a directly beneficial impact on the balance of payments by promoting exports, encouraging efficient import substitution and limiting dependence on external borrowings by reducing the resource gap. The most important elements of this program - which would be supported by the proposed ITPA Loan - include measures to promote exports, the first phase of a major tariff reform and import liberalization, policy changes and institutional development in agriculture and industry that would raise productivity and output in these sectors. The complete program is discussed in more detail in Part III-B.

16 Second Phase of Adjustment 32. The second phase of the adjustment program expected tc be implemented in 1985 would continue the industrial and trade policy reforms initiated in 1984 and it would extend the reform program in the financial sector. In the area of trade policy, this program could include further across-the-board reductions in the level of tariff rates and the second phase of reduction of quantitative restrictions. The objective would be to reduce the excessive levels of effective protection granted to some sectors and to reduce the variation of protecton rates within sectors so that rates of protection would not exceed 25% by Financial Sector Reform. The objectives of this reform would be to address issues of private savings mobilization, sectoral allocation of funds by commercial banks and specialized financial institutions, increased availability of medium and long-term financing and the efficiency of financial intermediation. 34. In all these areas, the Govrernment has initiated or is planning to initiate studies which will provide the basis for a detailed formulation of the second phase of the adjustment program. In the case of the financial sector reform, a Bank mission on financial sector intermediation was in Morocco in September 1983, and the conclusions of its report, if approved by the Government, could serve as a basis for adjustment measures. Future Adjustment Programs 35. Future phases of the Government's adjustment program will continue the trade policy reforms, address further issues of fiscal reforms and initiate reforms in public enterprises and in agricultural policy. A comprehensive review of public enterprises has been carried out by the Government in This study, which covers, among other subjects, pricing policies, financing and the legal status of enterprises, provides a basis for preparing proposals for rationalization of this sector. The program in this area would be reviewed with the Governm.ent in 1984 during a Bank mission on public enterprises. Concerning agriculture, the adjustment program would aim at increased farmer incentives and improved resource allocation. A study on the incentives system in agriculture is now being initiated by the Government in collaboration with the Bank. C. Macroeconomic Projections 36. Preliminary projections based on the above policies bring out the dampening effect on growth in the short-term and the importance of improving the efficiency of investment, domestic savings and export incentives for higher long-term growth. As efforts to promote exports and increase domestic savings can be expected to bear fruit only graclually in Morocco's circumstances, this would severely limit the level of investment that could be

17 financed in under the conditions of a projected decline in the net amount of external financing available to Morocco. In the short-term, the external constraint will also require a reduction in Treasury current and investment expenditures, with a resulting deflationary impact on domestic demand. Implementation of the adjustment measures aimed at improving export incentives would, however, induce an expansion of exports and a gradual increase in output. Overall, the projections indicate that Morocco's GDP may increase by 1.5% in (Table 1). 37. In the medium-term, structural improvements in the efficiency of resource use should induce a resumption of economic growth, and GDP is projected to increase at 3.8% p.a. in without unsupportable strains on the balance of payments. This result would reflect a change in the sources of growth with the manufacturing and phosphate sectors playing an important role in improving the balance of payments. As the anti-export bias of the present system of incentives would gradually decrease in the short- and medium-term, exports of goods and non-factor services would grow at 5.6% p.a. and those of manufactured products at 9.8% p.a. in At the same time, under the assumption that the present international economic recession ends soon, exports of rock phosphate and phosphate derivatives would increase at 5.4% p.a. in As a result of both factors, the overall growth rate of Morocco's exports of goods and nonfactor services would reach 5.6% p.a. in constant prices in With respect to imports, the change in the structure of incentives in conjunction with the 1983 depreciation of the dirham would improve the efficiency of import substitution and reduce the reliance on imported inputs. As a consequence of recent increases in the domestic price of energy and petroleum products, the oil import elasticity can also be expected to fall from 1.04 in to 0.8 in Overall, import growth of goods and nonfactor services would be limited to 3.7% p.a. during Given the strong constraints on the resources available, investment is projected to decline in the short-term from 21% of GDP in 1982 to 14% in 1985 and to rise gradually thereafter to 16% of GDP by It is assumed that, in conformity with the Plan objectives, the Government would start fewer large capital-intensive projects and restrict the allocation of investment to priority subsectors so as to improve the sectoral allocation and the efficiency of investment. Priority is to be given to projects that are export-oriented, less capital intensive and which use a greater proportion of domestic resources. In addition, particular attention would have to be paid by the Government to manpower planning and to the employment effect of investment in order to prevent unemployment from rising to excessive levels. 39. An essential aim of the adjustment process would also be to increase domestic savings. As a consequence of the reduction in the Treasury deficit and improvement in public enterprise efficiency, public savings are projected to increase by about 3% of GDP. In addition, improvements in the mobilization of private savings through interest rate increases and reform of the financial sector could generate an increase of about 2% of GDP, so that the overall savings rate would rise from about 8% in 1984 to 13% in The acceleration of export growth relative to import growth in conjunction with an

18 Table 1: Morocco - Projection of Selected Economic Indicators (with adjustment-') Estimate _ Projected Growth Rates (1980 prices) GDP Consumption Investment Exports of goods and NFS Imports of goods and NFS Other Indicators (% GDP) Investment 22.52" ' 15.84' Domestic savings 8.42' / 13.04' Current Account Deficit 12.92/ ' 3.04/ Notes: 1/ This includes the effects of the ITPA program as well as of other adjustment programs to be implemented in / 1982 data. 3/ 1985 data. 4/ 1990 data.

19 Table 2: Morocco - Balance of Payments (Millions of current dollars) (with adjustment'') Actual Projected Exports of Goods and NFS 2,991 2,936 3,976 7,515 Imports of Goods and NFS 5,176 4,570 4,920 8,310 Net Factor Services Current Account Deficit -1,982-1, Net transfers Net Foreign Investment Public M & LT Debt (gross) 2,180 1,503 2,108 2,886 Amortization on M & LT Debt ,364 1,996 Net M & LT public Debt 2 ' 1, Net IMF-!' Others Selected Financial Indicators Debt Service Ratio (% of goods and services)/' 3/ Notes: 1/ This includes the effects of the ITPA program as well as of other adjustment programs to be implemented in / Including the projected effect of the debt rescheduling. 3/ Including IMF debt service.

20 increase in the savings ratio relative to the investment ratio would be compatible with a stabilization of the current account deficit at a sustainable level of $0.8 billion by 1985 (Table 2). It would also be consistent, under the above conditions, with a GDP growth accelerating from 2.1% p.a. in 1985 to 4.2% in However, external borrowings are projected to increase from $2 billion in 1985 to $3.0 billion in 1990 as repayment of debts contracted in the early 1980's and rescheduled in 1983 fall due. The debt service ratio would remain in the range of 37% in the second half of the eighties and would gradually decline thereafter. PART III - THE INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN A. Loan History 40. The role of the Bank in industrial development in Morocco has been to support structural change through a dialogue on policy issues, and through the development of individual sub-sectors and of key institutions. In recent years the policy dialogue has focussed on the structure of protection and incentives, the expansion of manufactured exports, employment generation, and deepening of the industrial structure. A detailed study, supported by the Bank, was undertaken in 1979, to assess protection, pricing, and incentives, and to recommend changes with a view to rationalizing and improving the system. The preliminary conclusions of the Ba.nk report following this study (Morocco: Industrial Incentives and Export Promotion, paragraph 2 above) were discussed with the Government in March The Government expressed keen interest in the study's findings. Since the proposed measures for structural change in industry and external trade would form part of the country's global immediate and medium-term efforts 'to restore stability to its balance of payments position, and to improve economic growth performance, the Government requested the Bank's support of these efforts through an Industrial and Trade Policy Adjustment Loan, the first in an eventual series of sectoral adjustment loans to Morocco. The loan was appraised in two stages, in July/August and in September Negotiations were held in Washington in December The Moroccan delegation was led by Mr. Ben Mansour, Director of the External Finance Department, Ministry of Finance. Supplementary loan data are provided in Annex III. B. The Adjustment Program under the Loan 41. The program of industrial and trade policy adjustment which would be supported by the loan is described in the Government's Statement of Development Policy (Annex IV). The measures constituting this program and their implementation schedule are outlined below and summarized in Annex VI. 42. The adjustment program under the proposed Industrial and Trade Policy Adjustment loan is focussed on measures aimed at (i) improving the system of industrial incentives so as to address the fundamental issue of inefficient resource utilization in the industrial sector; (ii) improving the balance of payments by encouraging exports and a more efficient import-substitution policy; and (iii) promoting greater domestic resource mobilization and

21 increased availability of long-term finance for industry. The proposed Bank loan would thus support the implementation of a program of reforms concerning export incentives and trade policy, and measures to improve the fiscal system, price controls and the financial sector. Export Incentives 43. The main objective of this set of measures would be to improve the international competitiveness of the Moroccan economy and increase the efficiency of resource utilization. To achieve these objectives, special attention is being focussed on reducing the bias of the system of incentives against exports. It is estimated that in 1978 this bias resulted in the rate of effective protection in the manufacturing sector being 50% higher in import-competing sectors than in export-oriented activities. This reflected the imposition by Morocco of import restrictions as well as high customs duty rates. Although various schemes to ensure duty free access to imported inputs by exporters as well as some specific export incentives were introduced, their overall effect on export profitability was insufficient to overcome the large incentives given to import-substitution by tariffs and import restrictions. To offset the present bias against exports, a major reform of trade incentives would be implemented under the ITPA loan; it would aim at (i) improving the system of export incentives, and (ii) reducing the overall level of import protection. 44. During the first year of the adjustment program supported under the ITPA loan, the Government will implement a reform of the system of export incentives in the following areas: (i) exchange rate; (ii) exports of agricultural and food products; (iii) special customs regimes; and (iv) administrative procedures. In addition, measures have been taken to improve the system of export credits and exports by construction firms (paras ) and further measures will be studied. 45. Exchange Rate. During the period, the real effective exchange rate (trade weighted) appreciated by about 19%. To offset the resulting disincentive effects on exports, Morocco devalued its real effective exchange rate by about 6% in In view, however, of the need to further reduce the bizs against exports of the system of incentives, Morocco devalued its exchange rate by 10% in August 1983 under the Stand-by arrangement with the IMF. Additional adjustments in the exchange rate will be made in conjunction with future trade liberalization and reductions of import duty rates, if considered necessary from the point of view of the balance of payments and trade policy. 46. Agricultural and Food Products. In the present system, exports of fruits, vegetables and processed food products are under the exclusive control of OCE (Office of Marketing and Exports). Although firms are allowed to initiate market surveys and prospection of new buyers, they are not entitled to negotiate directly with their customers. Contract negotiation and implementation are carried out by OCE including the transport, marketing and quality control of processed food exports. In exchange for its role, OCE

22 receives a commission of 1 to 3% of the value of the contract, amounting to about 6 to 14% of value-added depending on the product, which constitutes a strong deterrent to exports. In order to improve export incentives in the food sector, the Government intends to eliminate the export monopoly of OCE for processed food exports by September 30, 1984, so that firms will be left free to choose their own commercial and shipping agent and sign their own contracts, and their exports would no longer be submitted to price controls or commissions charged by OCE. OCE, however, will continue to be responsible for quality control. 47. In addition to processed food, OCE has a monopoly for exports of agricultural products. It appears likely that modification of the present structure of export marketing for agricultural products could have a significant impact on the growth of exports of such products. However, such changes raise complex issues related to OCE's future role, markets in the EEC and marketing strategy. Accordingly, the Government will carry out a study of the arrangements for export marketing of fresh vegetables by September 30, On the basis of this study, appropriate changes in the arrangements for export marketing of fresh vegetables could be implemented in During the last few years, administrative procedures for exports have been significantly improved. However, exports of agricultural products remain under strict Government control. First, exports are explicitly prohibited in the case of a few products (seven items), so as to protect rare species (fowl and game) or commodities (undressed walnut wocd and charcoal)., Secondly, an export licence is required for practically all agricultural products. In general, denials of export licences have been infrequent and have affected only a few raw materials used in local processing industries (for example, hides and leather). On the other hand, the requirement of an export licence has not only resulted in a lengthening of the administrative process for exporting, but it has also introduced an additional element of uncertainty as to the probability that future exports would be allowed. In some cases, this has led to a loss of foreign markets, as in the case of aromatic plants. 49. In order to increase exports of agricultural products, the Government intends to review its present system of export. licencing and to significantly reduce the number of products subject to it. By June 30, 1984, export licencing will be abolished for all agricultural products currently subject to licensing requirements (about 100 positions in the customs nomenclature), except for subsidized basic food products. 50. Special Customs Regimes. The objectives of this reform are to ensure duty free access to imported inputs by exporters. Although a number of special customs regimes were created in Morocco, exoneration from customs duties and indirect taxes was not granted to all imported inputs for exports. This situation was particularly important for chemical products and other inputs, which are physically altered during the production process. Since these inputs were typically subject to high customs duties, at rates often higher than those on output, the structure of protection was reversed. This

23 is the case, for example, for leather products in Morocco. In other cases, imported inputs were exonerated from customs duties and indirect taxes, but only on an ex post basis through refunds (drawbacks) and after lengthy delays, reaching several years in some cases. As a result, the cost of production for exporters was effectively raised. ]n 1978, limited access to duty-free imported inputs resulted in an estimated 7% average increase in the cost of inputs for exporting firms in Morocco. 51. In order to improve existing customs regimes and assist exporters, the Government introduced several important reforms in late First, the procedure of temporary admission, permitting exporters to import automatically, free of duties and taxes, was extended to cover all inputs imported by direct and indirect exporters except a few specified by the Customs Office. Secondly, the wastage allowance procedure was revised, the principle being that firms would indicate wastages and wastage allowance rates to the Customs Office, and that these rates would be accepted as final, unless otherwise decided by the Customs Office within a period ot six months. Thirdly, the regime of drawbacks was reformed, so as to replace drawbacks by the system of temporary admission'/, for firms primarily engaged in exports. Fourthly, in cases where manufacturers opt to export goods already produced and initially destined for the local market, they are now permitted to import "non-consumable" 1 / inputs under the temporary admission system, to replace such inputs used for the manufacture of the exported items. Fifthly, the Customs authorities have instituted a new system which allows exporters to obtain customs clearance for both imported inputs and exported products at the production site, rather that at the port of entry or exit. To complement these measures, capital goods belonging to foreign firms, and imported for use in export production, will, with effect from June 1984, be exonerated from import duties. Consideration is also being given to the extension of new forms of guarantees, for customs duties potentially payable by exporters, in replacement of traditional bank guarantees. 52. Administrative Measures. To complement these reforms, several important administrative reforms would be implemented. First of all, direct control by the Government on exports would be significantly reduced. In addition to the measures outlined in paragraph 49, export licensing will be eliminated on cement and tires by December 31, 1983, and on the few other industrial products subject to it (construction materials, scrap metals, molasses, cattle-cake) by June In the case of mining products, export licensing and taxation will be the subject of a Government study in Secondly, measures would be taken to provide specific assistance to exporters and promote exports in ; they include revision of the customs manual, creation of customs offices for exporters, technical assistance to new exporters by the Customs Office, study of the problems encountered by small 1/ This procedure provides for exoneration from import duties at the time of import rather than ex post as under the drawback system. 2/ Not physically altered during the production process.

24 exporters in the case of marine transport, revision of per diem rates for foreign travel by exporters and an information campaign to inform entrepreneurs of new policy changes (see para. 66). The System of Import Protection 53. As the reforms of export incentives would affect mainly exported goods, a reform of tariff and nontariff protection would have to be undertaken in order to modify the level and struicture of incentives grantecl to import substitution activities relative to exports, so as to further decrease the bias against exports. Such a reform would also improve the efficiency of import substitution. 54. Morocco's system of tariff and nontariff protection has been built up progressively since Independence in response to several objectives. Immediately after Independence, and in an attempt to reduce the trade gap, the existing uniform customs tariff (10%) was replaced by a range of higher tariffs differentiated on a product basis. In 1967, the previous cumbersome system of import restrictions and bilateral clearing arrangements was abolished and replaced by the creation of three categories of imports. List A comprised goods which could be freely imported, list B consisted of imports requiring authorization and list C of prohibited imports. In the seventies, as the role of the public sector expanded considerably and industrialization was emphasized, import substitution became the principal instrument of Morocco's industrial policy. Tariff protection was granted automatically to any new enterprise and the number of products subject to import licensing or interdiction was increased in order to reserve t:he domestic market for local industry. 55. The allocation effect of the system of protection in Morocco was analyzed in a joint research project undertaken by the Bank and the Ministry of Commerce, Industry and Tourism during The general conclusions were that the system of tariffs and import restrictions (i) has been a major cause of inefficient use of capital and low labor absorption, as it has frequently favored industrial activities where Morocco does not have any comparative advantage, and (ii) has resulted in a strong bias against exports and activities which corresponded to the country's comparative advantage. Overall, relatively high effective protection rates were granted to import-substitution activities and low rates to export-oriented activities. Within the import-substitution sector, the variation in effective protection rates was quite large across sub-sectors, with no clear relationship to the economic profitability of the production process. 56. Tariff Protection. Tariff protection in Morocco takes the form not only of customs duties, but also of the special import tax (SIT). Unlike customs duties, the SIT is levied at a uniform rate on the vast majority of imports (the exceptions are imported inputs for exports, some basic food products and a few other commodities). From an initial rate of 2.5% in 1973, the SIT was raised to its present 'Level of 15%, with a resulting substantial increase in the level of import duties (which besides the SIT and customs duties include a stamp duty). As this represents an asymmetrical devaluation for imports without any counterpart for exports, the bias of the protection

25 system against exports was worsened. At present, import duty rates range from a minimum of 18% to more than 180% and exceed 40% for some 41% of the items in the customs nomenclature. When sold on the local market, imports are also subject to sale taxes (TPS) (usually at a rate of 19% in 1983). 57. The combination of high import duties and indirect taxes resulted in turn in a significant increase in production costs, both for exporters (para. 50) and for firms producing for the local market. Since the SIT was considered an import duty and not an indirect tax (although it was created for budgetary reasons), fiscal deduction of the SIT was not allowed for the manufacturing sector unlike in the case of the tax on products and services. As a result, the indirect tax system in Morocco moved farther away from a value-added tax, and the cascading nature of the indirect tax system became more widespread. 58. To offset in part the disincentive effect of higher taxes on economic activity, the Government introduced several investment codes, whereby finns were allowed to import capital goods equipment duty free. As a consequence of the gradual increase in import duties, the pressure to exonerate other imports from tariffs intensified and exemptions from customs duties were granted to fisheries (boats), the agricultural sector for its inputs (tractors, fertilizers, seeds, cattlefeed and insecticides) and to basic consumer products (cereals, frozen meat, books and newspapers). As a consequence, the overall impact of the tariff structure has become extremely unequal and distortions have worsened. 59. To address these various issues, the Government has initiated a program of reforms of its tariff policy, which will be implemented in successive phases over a five-year period starting in The medium-term objectives of the tariff reform are to reduce the overall level of protection, decrease the maximum customs duty rates to 25% and even out the spread in tariff rates within and between sectors. The aim of these measures would be to increase economic efficiency in Morocco, and this would be achieved if the current range of effective protection rates was narrowed and made more uniform. 60. Towards these goals and in order to promote exports while cushioning the effect of the loss of fiscal revenues, the Government has decided to reduce the special import tax from 15 to 10%, with effect from January Subsequently, the Government will reduce this tax to 5% in January 1985, and eliminate it on January 1, The elimination of the special import tax would significantly reduce the anti-export bias of the present system of incentives, but there would still remain an important bias due to high tariff rates, which have been an important cause of the unsatisfactory performance of the Moroccan manufacturing sector as well as of the high cost of the import-substitution policy. In order to reduce this bias, a reform of customs duties rates would be implemented over a period of five years. First,

26 the maximum customs duty rate would be reduced to 60% by June 30, 1984 (so as to decrease tariff redundancy, import smuggling and the high cost of protection). This measure would affect 320 tariff positions in the customs nomenclature (out of a total of 3100 positions,. Secondly, the Government will prepare a new customs nomenclature (international harmonized system) which would include an initial rationalization of customs duties (to ensure that tariffs are not higher on inputs than on output). In parallel, a major tariff reform would be implemented in phases during the period , involving further progressive reductions in tariff rates. This policy change is expected to improve efficiency in industrial investments by promoting the establishment of competitive industries. 61. Protection Policy for New Investment. In the past, tne protective trade regime together with the overall incentives system has been a major cause of inefficient use of capital and labor. As outlined above, the Government intends to promote the creation of an internationally competitive industry. To achieve this objective, the following principles will be applied in considering requests for additional protectlon for new investments: (a) protection will generally be given only through tariffs and not through quantitative restrictions; in the exceptional cases where quantitative restrictions are considered necessary, these will be limited to a period of three years. (b) while a level of tariff protection corresponding to protection in excess of 25% may be accorded during the first three years after project completion, tariffs would be set at a level providing protection not in excess of 25% thereafter. (c) protection along the lines of (a) and (b) above will only be accorded to new products whose profitability is demonstrated after rigorous economic and financial analysis. It is also understood that the anti-dumping provision, as defined by GATT, could be applied for these new products. 62. In view of the multiple demands on the country's limited capital resources, initiation of public sector investment projects would be phased carefully. During 1983, the public investment program has been substantially reduced, on the basis of a detailed analysis of investment priorities. In view of the continued scarcity of resources, new public investments will only be initiated after careful analysis of their economic benefits and budgetary impact. In the case of public investment in manufacturing, the criteria for granting of tariff protection outlined in the preceding paragraph will be applied. In addition, economic evaluation criteria including net foreign exchange savings (as explained to the Bank during negotiations), will be applied to new public and private investment in manufacturing when these investments are subject to a convention!/ with the Government under the Industrial Investment Code. 1/ Projects are subject to a convention with the Government under the Investment Code when the size of the investment exceeds DR 50 million or the investment is in a specified sector.

27 Import Liberalization. An essential element of the Government's strategy to improve industrial efficiency is to expose Moroccan industries to greater competition from abroad. In 1982, 42% of imports (in value) were free of import licensing (List A). Although this percentage declined to below 10% in March 1983, when additional restrictions were introduced, the Government's objective is to renew the policy of import liberalizatiorn initiated in As a first step, the Government introduced an easing of import restrictions in May and August 1983, so that all raw materials and spare parts previously in List B (import licensing) were transferred to List A (no restrictions). Following this liberalization, imports in List A represented about 30% of total imports (by value, on the basis of data for imports in 1982). However, goods imported for use in production for exports have not been subject to restrictions. The Government will maintain this principle. 65. In 1984, further import liberalization will be i-'iplemented. Some 12% of total imports (in value, on the basis of 1982 figures) will be transferred to list A (no import licensing) by June 30, 1984, and another 6% by December This transfer will exclude wheat, green tea, sugar, crude oil imports, and oil from petroleum and bituminous materials, since they are imported by Government agencies or public enterprises. During this process of liberalization, the Government will give priority to capital goods (including imports under the investment codes) and to intermediate products not manufactured in Morocco. 66. In subsequent years, the Government's objective is to open the economy further to competition from abroad, and progressively eliminate the import restrictions prevalent in 1983 (with the exclusion of items injurious to public morality and possibly certain luxury articles) by As regards the prohibited imports in 1983 (List C), the prohibitions will be progressively eliminated by 1988, beginning with products manufactured by industries long-established in Morocco. The specific content of the action plan for 1985 in this area will be defined in The Government has initiated an information program. It aims at explaining to industrialists concerned, in particular through meetings to be held before March 1984, with relevant professional associations, the Government's medium-term (1988) objectives in tariff and non-tariff protection. As the effort to restructure protection and increase external competition might have an adverse impact on certain industrial subsectors over the medium-term, specific restructuring programs will be implemented by the Government in coordination with the implementation of the reform of tariffs and import restrictions. To define the restructuring measures which may be necessary, preliminary studies will be carried out by the Ministry of Commerce, Industry and Tourism in Fiscal Reform 67. In the fiscal area, apart from the short-term fiscal management issues, there is a need for a longer-term fiscal reform which will serve the objectives of development. Successive tax increases for budgetary revenues have resulted in very high tax rates on profits from capital and a strong disincentive effect on private enterprises. In part to offset these

28 consequences, the investment codes that have been introduced for nearly every sector provide for partial or total exoneration from profit taxes during a period of ten years. As a consequence, the actual taxation of capital varies widely across firms from very low rates to rates reaching 80% of profits, which distort the sectoral allocation of resources and capital intensity. In addition, there is a clear need to harmonize all, the various taxes on capital, some of which are still in existence purely for historical reasons. 68. In the case of indirect taxation, the pressure to increase fiscal revenues in conjunction with the social objective of preserving the purchasing power of low income groups has led to wide variations in the fiscal burden across products and within the same category of products. The diegree of fiscal neutrality of the indirect tax system has also worsened over the years. This trend has been reinforced with the revenue-raising role attributed to the special tax on imports (SIT), which, as mentidned earlier, has accentuated the degree of cascading of the indirect tax system. 69. During the last two years, the Government has made considerable progress in formulating a compreher,sive fiscal reform (Loi Cadre), which was approved by Parliament in The Government's intention is now to prepare detailed proposals for the reform of direct taxation which would be presented to Parliament in 1984 with a view to implementation in January This reform would be part of a wider tax reform program pursued by the IMF which includes the introduction of a unified personal income tax (presentation to Parliament in 1984) and of a value--added tax (in the medium-term). 70. Within this context, the ITPA project would support specific measures which have been identified in the Bank report on Industrial Incentives and Export Promotion (para. 2) as being particularly important for economic development and export promotion. These measures would be aimed at: (i) harmonizing the fiscal pressure on enterprises while minimizing losses of revenues; (ii) modifying aspects of indirect taxation which are particularly disadvantageous for exporters; and (iii) restoring fiscal neutrality between local and imported products. 71. In the case of direct taxation, measures of particular importance for improving industrial incentives would include the establishment of a uniform profit tax rate, simplifying accounting rules for taxation of small firms, and providing for the revaluation of balance sheets. These reforms would be presented to Parliament before mid-1984 and implemented by January In the medium-term, the Government's objective is to bring about greater harmonization of the incidence of profit taxation through a revision of the various fiscal subsidies provided for by investment codes. 72. In the case of indirect taxation, the immediate objective of the Government as concerns industrial incentives and export promotion is to reduce the rate of the special import tax (SIT) from 15% to 10% in January 1984 and to eliminate it completely by January Elimination of the SIT will generate a loss of fiscal revenues of about 1% of GDP in 1984 and 5% of GDP by Part of this loss will be offset by the increase in fiscal revenues (about 1% of GDP by 1986) due to the additional output generated by the

29 expansion of exports. To compensate for the remaining impact on the Government's financial position, additional measures to increase revenue and reduce expenditure will need to be carried out in parallel with the progressive elimination of the SIT. In mid-1983, the first adjustment was implemented with an increase of two percentage points in the rate of the sales tax (TPS) on manufactured products, which would compensate about half of the fiscal loss due to the five percentage point reduction in the SIT tax in In 1984, the Government will also modify three aspects of the indirect tax system which are particularly disadvantageous for exporters, pending the full implementation of a value-added tax. First of all, the number of products for which the sales tax (TPS) paid on purchases may be deducted from the tax on sales will be increased. Secondly, wholesale trading companies will be entitled to the TPS deduction. This last measure is particularly important from the point of view of export promotion, since trading companies could not previously deduct the TPS paid on purchases, even in the case of exports. Thirdly, TPS rates will be revised and harmonized (including the abolition of differential rates for local products and imports so as to restore fiscal neutrality between local and imported products). In the medium-term, with implementation of the value-added tax, the "cut-off rule" which limits fiscal deductions from the sales tax (TPS) would be substantially abolished. In addition, as concerns the wastage allowance rates to be applied for fiscal purposes (when a product imported by an exporter is sold locally), a study of the rates will be completed in 1984 by the fiscal authorities and the Ministry of Commerce, Industry and Tourism. Financial Sector Reform 74. The Government is in the process of formulating a comprehensive reform of the financial sector to make it more flexible and responsive to the country's development needs in order to promote growth of domestic savings and a better financial intermediation. To complement the reform of industrial incentives, the ITPA project would support the implementation of a first phase adjustment. These measures would aim at (i) mobilizing financial savings through interest rate adjustments; and (ii) reforming the system of export credits, and insurance for export credits. 75. Interest Rate Adjustment. Over the past several years, the Government's policy has been to increase the level of interest rates and to make them more flexible, so that they would play an increasing role in the allocation and mobilization of financial resources. Since 1979, interest rates on savings accounts, time deposits, bonds and Treasury bills have been raised by 2 to 4 percentage points, while the inflation rate has remained nearly constant at about 10% per year. As a result, interest rates have become positive in real terms for term deposits (over one year). Sight deposits yield no interest, and the rate of interest on other accounts varies from 4.5% for one-month time deposits to 10% for one-year time deposits and 10.5% for 18-month deposits. Savings accounts yield 7%.

30 In the case of lending rates, similar increases were enacted in Interest rates on medium- and long-term loans to the industrial sector by BNDE (National Bank of Economic Develcpment) reached 1L4% (12%, net of subsidies) in 1982'", and have remained positlive in real termns. Maximum rates charged by commercial banks on rediscountable loans are now 10% for short-term loans and 11% for medium-term loans. Interest rates on CNCA (Agricultural Credit Bank) loans to agriculture range from 7% to 11% on short-term loans and from 10% to 13% on medium- and long-term loans. 77. The position of the Government is that interest rates should be more flexible than in the past, and fixed at levels permitting the necessary equilibrium between national savings and investment. In 1983, in view of the current economic recession and the excess liquicdity of the banking sector, it was felt that no general increase in interest rates was necessary. However, several important adjustments to the overall inl:erest rate structure were implemented. First of all, in August 1983 the rates on non-rediscountable credit were increased by 1% under the Stand-by arrangement with the IMF. Secondly, the Government has set the rate of inl:erest on incremental deposits in the accounts held by Moroccan workers abroad at 8% at the end of 1983 (so as to stimulate workers' remittances, Morocco's largest source of foreign exchange earnings; formerly no interest was paid on these accounts). Thirdly, the Government increased CNCA lending rates by two percentage points on average, so that they would be positive in real terms. For the future, and in normal economic conditions, the Government intends to maintain interest rates at levels that are positive in real terms, with the exclusion of certain concessional rates, notably for export credits. 78. Adjustment of interest rates will improve the mobilization and allocation of financial resources in Morocco. To complement this reform, there is also a need to increase the financial intermediation function of commercial banks, which have typically shown a preference for collecting short-term deposits and making short-term loans. Specific measures to achieve this objective are being formulated in the context of the financial sector reform that would be implemented in the second phase adjustment (paras ). 79. Export Credits. The system of pre-shipment credits was established in 1978 by the Bank of Morocco (BdM). It is designed to finance the acquisition of both imported and local inputs on a short-term basis of up to one year, and the credits are denominated and repayable in local currency and rediscounted by the BdM. These credits are officially excluded from the rediscounting and credit ceilings authorized by the BdM for the commercial banks, as export finance is considered a priority sector; for the same reason, borrowers are charged an interest rate of between 5.5 and 7% per annum. In general, the scheme of pre-shipment credits appears to function satisfactorily. The two major constraints in the past have been: (i) conservative credit ceilings for exporters, averaging about 1.5 months of export sales; and (ii) limited access of smaller firms to credit. The first 1/ These rates are net of taxes which amount to about 2 percentage points.

31 constraint is being addressed through a greater readiness of the BdM to be flexible in establishing ceilings for pre-shipment export credits and in extending the maturities of post-shipment export credits (Annex VI). The second constraint has been due to the general difficulties of access to credit by smaller firms as a result of conservative collateral requirements of commercial banks. The Government is exploring various approaches to addressing this issue and reducing the risk-aversive tendencies of commercial banks, in the context of credit to small- and medium-scale enterprises, as for instance, through a guarantee fund. In the medium- to loag-term, it is expected that various reforms being considered in the financial sector to improve the degree of competition and increase the capability of commercial banks to conduct project appraisals, would reduce their insistence on extensive collateral requirements. 80. To complement further the reform of export incentives, the system of medium-term credit is also being revised. A medium-term -redit facility was recently created for the financing of equipment goods in i4orocco, and in 1983 a similar facility was established for exports of capital goods. In 1984, its effective use by commercial banks will be developed; a study of the feasibility of extending its term from five to seven years and coverage to exports by construction and engineering service firms will be carried out. Until now, and unlike other countries in the Middle-East, Moroccan firms have not participated in any construction projects outside Morocco. To further promote such exports, the Government will initiate a study of the feasibility of providing the required bank guarantees for export contractors through a consortium of Moroccan banks. 81. The export credit insurance system was also revised in The globality rule was eliminated so that exporters may insure only part of their exports; minimum limits on premiums and maximum limits on repayments were removed and budgetary credits were allocated to the insuring agency (BMCE). Extension of the insurance coverage to include manufacturing risk insurance will be studied by the Government in 1984, with a view to implementation before mid Price Liberalization 82. The Government's position is that competition is a vital element to increase dynamism and productivity, and it intends to make the Moroccan economy more responsive to market forces. In 1983, price controls on manufactured goods were significantly reduced, as the prices of about 19 products were liberalized (out of a total of 40 manufactured products subject to price control). The intention of the Government is to liberalize the prices of about 10 more manufactured products in Remaining price controls on about 12 manufactured products would be gradually removed in later years in line with the elimination of import interdictions (or restrictions) on those industries and greater exposure to international competition. Price controls would be retained only for subsidized basic commodities, public utilities, and commodities for which there is limited competition.

32 C. Expected Effects of the Adjustment Program 83. The set of measures under Morocco's Industrial and Trade Policy Adjustment (ITPA) program is designed to: (i) help improve the country's balance of payments in the medium-term with minimum short-term adverse effects; (ii) increase national savings so as to reduce external borrowings; and (iii) improve industrial incentives. As mentioned in Part II, the policy reforms that have been or would be implemented under the ITPA project are part of a series of adjustment programs that extend over the medium-term and which are complementary. The overall impact of this series of sectoral adjustment programs on the Moroccan economy was analyzed in Part II. In order to evaluate the economic and financial effects specific to the ITPA program-', the effects of the proposed measures were assessed on the basis of the 1978 input-output matrix for Morocco ancd econometric regressions for exports and imports. 84. Balance of payments effects. The progressive elimination of the special tax on imports would constitute an important step towards reducing the bias against exports in the present system of incentives. This policy change, which would be further supported by the proposed reform of other export incentives, would ensure a sustained growth of exports. However, reduction in the level of customs duties would by itself lead to a rise in imports. To offset the increase in imports and strengthen export incentives, Morocco would therefore implement a flexible exchange rate policy. 85. In 1983, in line with the Stand-by arrangement with the IMF, Morocco devalued its exchange rate by 10% and by a larger percentage than the reduction in customs duties (the special import tax would be reduced by 5 percentage points in January 1984). As a result of this partially compensated devaluation, there would be an increase in exports and a reduction in imports in 1984, which would make it possible for Morocco to pursue future tariff reductions and trade liberalization under conditions compatible with a financially sustainable balance of payments deficit. At the same time, the reduction in tariff rates will also reduce the increase in import prices due to the devaluation. Overall, the cost of living index is not expected to increase by more than 9-10% p.a. in z/. 86. Besides their impact on exports of food and agricultural products (a 6% increase in dollar terms in ), and of manufactured products3' (a 26% increase in dollar terms in ), the changes in export incentives would also stimulate tourism (a 20% increase over three years) and workers' 1/ Including the policy measures agreed under the IMF Stand-by concerning the exchange rate, and workers' remittances. 2/ As of December 1983, the increase in the ccist of living was 9-10% on an annual basis. 3/ Excluding mineral products and phosphate derivatives, which were considered as not being affected by the change in export incentives.

33 remittances (due to the rise in the interest rate on the checking accounts of Moroccan workers abroad). Overall, the effects of the complete elimination of the special import tax in conjunction with adjustment of the exchange rate would be to reduce the current account deficit by about $350 million in 1984 and $500 million in 1986 (or 3% of GDP) (Table 3). However, these estimates do not take into account the effects of the other reforms of export incentives that Morocco would implement in , ' so that the final improvement in the balance of payments is likely to be larger. Table 3: Effects of ITPA and Stabilization Measures on the Balance of Paymentsa/ (Million of current dollars) Balance of Trade Exports Imports Non factor Services Tourism Goods and Nonfactor Services Interest on M & LT debtb Workers remittances Current Account Improvement Notes: a/ A plus sign indicates an increase in receipts; a minus sign a decrease in payments. These measures include the elimination of the special import tax, adjustment of the exchange rate, and increases of the interest rate on the incremental deposits of expatriate Moroccan workers, but exclude other reductions in customs duties and import liberalizations that would be implemented in b/ Due to the reduction in external borrowings. 1/ Their impact on the balance of payments could not be easily quantified.

34 Growth and employment effects. The increase in exports will induce a rise in the total demand for Moroccan products, which will stimulate output. Although such an increase cannot be expected to completely offset the deflationary impact of the required stabilization program, implementation of the proposed measures under the ITPA program would considerably ease the economic and social cost of the adjustment of the Moroccan economy. First of all, the expansion of exports would lead to a direct expansion of production in agriculture, manufacturing and the tourism sector. As the industrial sector is currently using only a small part of its capacity (output has stagnated since 1978), the direct gain in output need not put any pressure on domestic prices, so that it will, in turn, have a multiplier effect on income and demand (estimated for the whole Moroccan economy at albout 2). Implementation of the proposed reform of export incentives would thus lead to a cumulative gain in output of about 2% of GDP in 1984 and 5% byr 1986/'. However, due to the deflationary impact of the required stabilization policies, the overall GDP growth rate is projected to increase by only 1.5% p.a. in Secondly, the expansion of output would also create new job opportunities. As exporting industries are generally labor intensive in Morocco, the increase in exports would generate a sharp rise in employment directly in the exporting sectors, but also indirectly in other industries. Overall, the rise in employment2- would amount to about 110,000 in 1984 and 210,000 by Since the average wage levels irn the exporting industries are well below sectoral averages, the increase in employment would benefit primarily the poorest part of the labor force in Morocco and it would contribute significantly to poverty alleviation. D. IMF Activities in Morocco and Government/IMF/Bank CooperatLon 89. In 1980, the IMF and the Moroccan Government negotiated a three-year stabilization program to be supported by financing of $1.2 billion (SDR 956 million) under the Extended Fund Facility. The program was aimed at (i) containing the growth of domestic expenditures through a gradual reduction of consumer subsidies as well as restraint concerning wage, fiscal, monetary, and external debt policies, and (ii) restructuring supply-side policies as a basis for sustained long-term growth. Appropriate measures were adopted concerning the liberalization of trade and payments, interest rates, petroleum price increases, energy policy and utility tariffs. However, Morocco was 1/ These estimates do not take into account the effect of the stabilization program. The overall impact on the economy of adjustment and stabilization policies was indicated in Part II-C. 2/ Estimated on the basis of labor coefficients derived from the 1978 input-output matrix. These estimates do not take into account the impact of the stabilization policies to be implemented in , so that the actual increase in employment would be lower than indicated.

35 unable to meet the EFF fiscal targets and the ceilings on domestic credit were exceeded in The EFF was declared inoperative in late 1981, and replaced in April 1982 by a one-year Stand-by arrangement, augmented by drawings under the Compensatory Financing Facility (to offset the balance of payments impact of the 1981 drought) for a total of about $570 million (SDR 518 million). The emphasis of the 1982 program was on a reduction in the overall budget deficit by over one-third, complemented by other elements, including a small depreciation of the dirham, increases in interest rates, restraint on overall credit and monetary expansion, and further trade liberalization. Results under the Stand-by arrangement were reviewed in early 1983 by the IMF, and it was found that the Government had met all the performance criteria for 1982, although progress towards meeting the internal and external goals of the Stand-by was slower than expected. Intended structural measures, especially in the areas of education policy, reform of public enterprises and tax reform were not implemented. Moreover, beginning in the last quarter of 1982, partly because of optimistic assumptions regarding concessional external assistance, the Government increased capital expenditures well beyond the program targets, with a resulting accumulation of unpaid bills. Thus, although the performance criteria under the Stand-by agreement were met, the financial outcome was disappointing, and the objective of reducing the deficit in the balance of paynents was not achieved. The developments leading to the latest Stand-by agreement were negotiated in July 1983; the main features of this new agreement are discussed in Part I. 90. There has been full coordination of Fund and Bank positions and assistance to Morocco, with extensive consultation and exchange of information at the staff level between the two institutions. With a view to ensuring that the program under the proposed Bank loan and that under the Stand-by agreement are consistent, two Bank staff members participated in the mid-june preparatory IMF mission. Their participation was aimed in particular at ensuring consistency in economic and financial projections, and reviewing the revised Government investment budget. In addition, the recent Bank report on the education sector in Morocco (No MOR of June 10, 1983) provided the basis for the Fund's discussions with the Government on education policy. 91. In the context of the program of measures under the proposed loan, there have been detailed discussions with Fund staff, leading to full agreement on the overall objectives of the program, on the specific measures, and on their timing. In the area of fiscal policy in particular, the division of work has followed the comparative advantages of the two institutions, with the Fund handling short-term macro management and budgetary issues, as well as the proposed fiscal reform, while the Bank has addressed specific features of the fiscal system of relevance to industrial growth and exports. 92. The Bank has also participated in discussions organized by the IMF to coordinate balance of payments assistance over the short-term (para. 16). At these meetings, the Bank presented its view of Morocco's medium-term prospects.

36 E. Benefits and Risks 93. Benefits. The main benefits of the locn consist of the effects of the policy adjustments which they support. These effects are expected to be in the form of an improved balance of payments, growth of output, and generation of employment. Estimates of the quantitative impact of these benefits were provided in Part IV-C. An improved growth and balance of payments performance (as against what might occur in the absence of policy reforms) will help restore Morocco's access to funds from foreign donors and lenders. Finally, the loan will provide quick-disbursing foreign exchange at favorable maturities which will help the country meet its substantial foreign financing needs in Risks. The risks of the adjustment program relate to assessing the length and difficulty of the adjustment process, internal resistance to a timely and continued implementatior, uncertainties in the external environment: and export prospects, and the possibility of further deterioration of Morocco's financial situation, which could affect the commitment to import liberalization. Since the magnitude of the expected benefits of the program cannot be predicted with certainty, if the projected increase in exports does not materialize, the rate of growth may be reduced, and trade liberalization may proceed more slowly. The need to reduce the Treasury deficit, and the elimination of the special import tax mean that the Government will have to take difficult decisions to raise other tax revenues and cut Treasury expenditures. Unexpected adverse developments in the trade environment and international economic conditions may cause the Moroccan economy's performance to be lower than projected; resulting lower output and increased unemployment may lead to pressure on the Government to abandon stabilization efforts, and reverse its policy of import liberalization. 95. There are, however, a number of features that reduce the above risks. First, measures are being implemented to offset some of the adverse effects of the trade liberalization program. For example, during the first year of the program, a flexible exchange rate policy will be maintained so that reductions in tariff rates will not induce an increase in imports. Also, industrial restructuring programs would be implemented by the Government to help firms adjust to a more competitive environment. Second, the adjustment program would be implemented in phases so as to allow exports to grow and provide the foreign exchange required to finance the increase in imports that the import liberalization program rnight entail. Also, the phased implementation will allow firms to adjust gradually. Third, the budgetary cost of the tariff reduction was taken into account in the formulation of the program; estimates of the fiscal cost of the program were reviewed in detail with the Government, and proposals were made so as not to increase the Treasury deficit. Finally, the Government has so far shown a strong commitment to the program both by preparing the reforms through a three-year research program in collaboration with the Bank, and by implementing the first phase of the industrial and trade policy adjustment in an extremely adverse international environment.

37 F. Disbursement and Procurement 96. The proposed loan would be disbursed in two tranches, and is expected to be fully disbursed within a year of loan effectiveness. The first tranche of $75.4 million would be available upon effectiveness, and the second tranche of $75 million would become available about six months later. Disbursement of the second tranche would be conditional on i) satisfactory progress with respect to continued implementation of the program of industrial and trade policy adjustment set forth in the Government's Statement of Development Policy (Annex IV), and ii) on the Government's having taken the following actions: (a) reduction of the maximum rate of customs duty on each import to 60% (paragraph 13 of the Attachment to the Government's Statement of Development Policy); (b) liberalization of imports, through the transfer of 12% of total imports (in value, on the basis of 1982 data) to List A (imports free of licensing), so that the percentage of imports in List A will reach at least 42, this transfer to exclude wheat, green tea, sugar, crude oil and oil obtained from petroleum and bitumincus materials (paragraph 21 of the Attachment); and (c) elimination of export licensing requirements for all products except minerals and subsidized food products (paragraph 7 of the Attachment)/(Loan Agreement, Paragraph 2 of Schedule 1 and Schedule 4). 97. The loan would reimburse 100% of the foreign exchange cost of eligible imports. Excluded categories involve goods financed from other sources, goods intended for military or paramilitary use, and goods for luxury consumption. A list of ineligible imports is included in the Annex to Schedule I of the Loan Agreement. Expenditures for goods procured under contracts of $25,000 or less would not be eligible for financing. Disbursements against petroleum products and foodstuffs will be limited to a maximum of $50 million. 98. The Banque du Maroc (BdM) will be responsible for maintaining loan accounts, and for the preparation and submission of withdrawal applications. Disbursements from the proposed loan would be made on the basis of a summary from the BdM detailing individual transactions in a given period, in respect of eligible imports, together with a certification from the BdM of payment of the amounts involved, and of their eligibility under the loan. Documentation would be retained by the concerned commercial banks, and made available for review by Bank supervision missions. Applications for withdrawal will be consolidated and submitted in amounts not less than $1 million (Loan Agreement, Section 2.02(b)). 99. Both private and public sector imports would be eligible for financing. Certain commonly traded commodities may be purchased through price quotations available from organized international commodity markets. Petroleum would be procured under bilateral agreements with oil-exporting countries; these agreements are based on prevailing market prices, and are generally for a maximum period of 12 months. All other purchases, public and private, under contracts of $5 million or more each, will be procured through international competitive bidding in accordance with Bank Guidelines. Contracts for the procurement of goods by the private sector estimated to cost

38 less than $5 million each will be awarded on the basis of normal procurement procedures of the purchaser. Public sector imports under contracts below $5 million will be procured in accordance with standard government practices, which are acceptable to the Bank (Loan Agreement:, Schedule 3). G. Monitoring 100. To monitor the implementation of the adjustment program, the Government has established an inter-ministerial committee under the chairmanship of the Prime Minister's office. This committee would meet regularly to review progress, and to decide on appropriate acti:ns necessary to ensure timely implementation The Bank will also monitor the progress of the program in two ways: (a) through regular supervision and exchange of views with the Sovernment; as part of this process, the Government will prepare and send the Bank two status reports, summarizing the status of implementation of the program, the first by early July 1984, and the second in early January 1985; and (b) through extensive discussions with the Government which will be required for the preparation of future sectoral adjustment loans to Morocco, assuming successful implementation of the program specified under the proposed loan. The first status report would also serve as a basis for a mid-term review (Loan Agreement, Section 3.03(a)) which in turn would form the basis for the release of the second tranche of the loan (see para. 97 and Loan Agreement, Schedule 1, paragraph 3). PART IV - OTHER BANK GROUP OPERATIONS IN MOROCCO 102. Bank and IDA lending to Morocco has supported 64 projects, financing a total of $2,406 million (net of cancellations), of which $1,480 million has been lent since the beginning of FY1978. IDA credits, totalling $51 million, have been made available for five projects and a Third Window loan for $25 million has been made for an education project. IFC investments have amounted to $99.3 million ($59.1 million after cancellations, terminations, repayments and sales). Annex II contains a sunmary statement IFC investments as of September 30, 1983, and of Bank loans and IDA credits as of October 31, Until recently, performance in project execution has been satisfactory overall, although in some cases management problems have caused delays in project implementation, and in others insufficient tariff adjustments have affected project entities' financial performance. However, during 1983, as budgetary constraints became more severe, projects relying on the Government budget for a substantial part of financing have been seriously delayed because of inadequate budgetary allocations The objectives of Bank Group activities in Morocco are to support (a) investments and policy reforms aimed at strengthening the balance of payments; (b) measures to reduce the Treasury deficit; and (c) efforts to redress poverty and improve income distribution, particularly through lowering the

39 unit costs for the delivery of basic services, in order to increase access by lower-income groups. As mentioned earlier (para. 25) important structural reforms must be undertaken in the coming years, in order to return to a path of reasonable economic growth compatible with a sustainable external payments positon. A major objective of Bank economic and sector work is to provide the analytical basis for the development of specific proposals for structural reform, which in several cases may later be supported by Bank lending. The Government has requested that, in addition to ongoing work on the public investment program, the Bank assist in developing reform proposals relating to the financial sector (for which a mission visited Morocco in September 1983), public enterprises (for which a first economic mission is envisaged for Spring 1984), and the education and agricultural sectors. Because severe budgetary constraints are likely to persist over the medium-term, projects now under preparation are being designed to minimize their reliance on budgetary funds Agriculture continues to represent the most impirtant sector in Bank lending for Morocco. Past Bank lending has primarily supported rural development or irrigation projects focusing on particular geographical regions, as well as a highly successful agricultural credit program. In the future, increased attention will be given to agricultural support services at the national level, which are essential for backstopping regional development projects and would be more appropriate vehicles for addressing sectoral policy issues. Projects are under preparation in agricultural inputs distribution, research and extension services, cereals storage and marketing and irrigation management. In view of limited budgetary resources, special attention would be paid to maximizing non-budgetary financing and improving cost recovery. Sector work on agricultural incentives - fiscal, financial, pricing and institutional policies - is expected to provide recommendations on structural reforms which could lay the basis for an agriculture sectoral adjustment loan Energy and mining. The Government has given high priority to reducing the oil import bill, a major factor in the current account deficit, through development of domestic energy supplies. The Bank has supported this effort through loans for the exploration and appraisal of petroleum (primarily natural gas) and oil shale resources as well as for power generation and transmission. Future projects would assist in the development of domestic energy supplies, including gas, coal and hydropower. Through these projects as well as in our sectoral policy dialogue, efficiency in energy development and use would be promoted through attention to pricing, cost recovery and management issues. A pilot project to support small-scale, export-oriented mining activities in a remote, low-income region will be monitored with a view to its possible extension Bank lending for infrastructure and utilities has helped to build a number of technically competent agencies in the fields of road transportation, electricity, water supply, housing finance, and community infrastructure finance, as well as to expand the provision of essential services. Future projects will place greater emphasis on improving the productivity and efficiency of existing infrastructure through improved financial and management performance. Mobilization of private and non-budgetary financing

40 as well as improved cost recovery in these subsectors through tariffs should help redluce the Treasury deficit. In addition to continuing support for the above-mentioned subsectors, projects are under preparation for ports, sewerage and telecommunications Industrial development in Morocco has been supported primarily through strengthening the financial and institutional resources of the Banque Nationale de Developpement Economique (BNDE), the major source of industrial medium-term credit. In addition, policy changes were introduced to widen access to credit by small-scale labor-intensive industries. Other projects focussed on phosphate processing and cement produ,ction. The Bank's efforts are now focussed on the development and implementation of medium-term policy reforms aimed at encouraging exports and improvirng incentives to domestic production. A first phase of such reforms would be supported by the proposed loan, and further sectoral adjustment lending is likely in industry to support subsequent phases of the medium-term ITPA program adopted by the Government Education, health and urban development projects will increasingly concentrate on lowering unit costs in order to widen the access by low-income groups. Policy dialogue in these sectors will continue to encourage the shift away from capital-intensive investments benefitting limited clientele and to the development of more cost-effective delivery systems for basic services. Previous Bank-financed projects supporting technical education, rural primary education and improved teacher training would be complemented by efforts to expand basic education and skill training and, more importantly, by a sector loan aiming at restructuring the education systern, which has represented a major drain on the recurrent budget. The experience of projects in urban upgrading will be continued and expanded, with increased efforts to mobilize private financing in order to reduce budgetary costs. PART V: LEGAL INSTRUMENTS AND AUTHORITY 110. The draft Loan Agreement between the Kingdom of Morocco and the Bank, and the Report of the Committee provrided for in Article III, Section IV (iii) of the Articles of Agreement of the Bank are being distributed separately. Proposed special conditions for disbursements are described in Annex III. PART VI -- RECOMMENDATIONS 111. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank I recommend that the Executives Directors approve the proposed loan. Attachments January 6, 1984 Washington, D.C. A. W. Clausen Presideni:

41 AR (THOUSAND SQ. KR) TOTAL /c /c /c AGRICULTURAL W 200.i7W ANNEX :I T A B L E 3A ANNEX I Page 1 of 6 MOROCCO - SOCIAL INDICATORS DATA SHEET MOROCCO REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) /b lb RECENT MIDDLE INCOME MIDDLE INCQIE 1 960/1-b 1970/ ESTimAT8 N. AFRICA & MID EAST LAT. AMERICA & CARIB GNP PER CAPITA (USS) ENERGY CONSUMPrION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) POPULATION AR VITAL STATISTICS POPULATION,MID-YEAR (THOUSANDS) URBAN POPULATION (% OF TOTAL) POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILL) 40.0 STATIONARY POPULATION (MILL) YEAR STATIONARY POP. REACHED 2120 POPULATION DENSITY PER SQ. YM PER SQ. KM. AGRI. LAND POPU'LATION ACE STRUCTURE (5) 0-14 YRS YRS AND ABOVE POPULATION GROWTH RATE (Z) TOTAL URBAN CRUDE BIRTH RATE (PER THOUS) CRUDE DEATH RATE (PER TROUS) GROSS REPRODUCTION RATE FAMILY PLAkNNING ACCEPTORS, ANNUAL (THOUS) O/d USERS (Z OF MARRIED WOMEN) W* FOOD AHD NUTRITION INDEX OF FOOD PROD. PER CAPITA (! ) PER CAPITA SUvPPLY OF CALORIES (% OF REQUIREMENTS) PROTEINS (CGRAMS PER DAY) OF WHICH ANTIMAL AND PULSE /e CHILD (AGES 1-4) DEATH RATE HEAL T LIFE EXPECT. AT BIRTH (YEARS) INFANT MORT. RATE (PER THOUS) ACCeSS TO SAFE WATER (%POP) TOTAL /d 'JRBAN l00.o7w RURAL W ACCESS TO EXCRETA DISPOSAL (C OF POPULATION) TOTAL URBAN RURAL POPULATION PER PHYSICIAN POP. PER NURSING PERSON /e POP. PER HOSPITAL BED TOTAL /e URBAN RURAL ADMISSIONS PER HOSPITAL BED /e HOUSING AVERAGE SIZE OF HOLCSEHOLD TOTAL URBAN RURAL AVERAGE NO. OF PERSONS/ROOM TOTAL URBAN RURAL ACCESS TO ELECT. (Z OF DWELLINGS) TOTAL URBAN /e 77.6 RURAL

42 -36- ANNEX I T A B L E 3A Page 2 of 6 MOROCCO - SOCIAL INDICATORS DATA SHEET MOROCCO REFERENCE GROUPS (WEIGHTED AVERAGES) /a MOST (MOST RECENT ESTIMATE) lb RECENT MIDDLE INCOME MIDDLE INCOME b ESTIMATELŽb.. AFRICA & MID EAST LAM:. AMERICA & CARIB EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL MALE FEMALE SECONDARY: TOTAL MALE FEMALE VOCATIONAL (% OF SECONDARY) PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITERACY RATE (Z) CONSUllT ION PASSENGER CARS/THOUSAND POP /f RADIO RECEIVERS/THOUSAND POP TV RECEIVERS/THOUSAND POP NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION CINEMA ANNUAL ATTENDANCE/CAPITA /e LABOR FORCE TOTAL LABOR FORCE (THOUS) FEMALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEMALF ECONOMIC DEPENDENCY RATIO INCtEE DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 OF HOUSEHOLDS 18.O/g 2 0.O/g HIlGHEST 20% OF HOUSEHOLDS 43.37j LOWEST 20% OF HOUSEHOLDS 7.o7j 4.0/.. LOWEST 40% OF HOUSEHOLDS 18.07j 12.0Li POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOM E LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED POP. BELOW ABSOLUTE POVERTY INCOME LEVEL (%) URBAN RURAL NOT AVAILABLE NOT APPLICABLE N O T E S /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. lb Unless otherwise noted, "Data for 1960" refer to any year between 1959 and 1961; "Data for 1970" between 1969 and 1971; and data for "Most Recent Estimate" between 1979 and /c Excludes the ex-spanish Sahara; /d 1976; 'e 1977; If 1978; /g Consumption expenditure of households. May 1983

43 ~~~~ANNEX I DEFINITIONS OF SOCIAL IyIICAOTRS a e 3 o route: Alnboagh the data are dcant- - ora geneall 1,jadged the art.... er....eom relabl,ittol.o alo anoeto then oar not ho Intra na coparable becus of tin lack of stoda-dieed detto.n ocpsae by differet caore I h.lnto dat._ Th datc ac, noneheless,... efalto disc-tbe -rder of eagollode, ltet rends sod chaeter Ise --ee to.mjor difte-nte ho rec co-tra- The rtferencr groups ar (1) the eas cautry gos o. f roe object ceecty and 10) a co...rc g-ipo alth tonehat hlghar araaincome- thac the -- ony droop of the aohjethoo_n_y flcynto "ifug Iocean' Oil Enp-- el " gr_p etere 'Siddle Ioo North'l ofrlca and.mi~ddl tart r cio.en bica... of r.icogerncocloa aft. leiler) n the etreno g..ay dat the anraeear pepolatlot neghte d seibert- mentfc ah IndIcator at._sor non fo aj I t ftecutisi eneein elaing -erges a oc- ltd icto.rto nar The acrae ate onyo Ia in cnparodofb cb ofnr latra _rtm anoog the cooney and T Tc)tr -- o area cenptlelng land area and Inladase; 1960, phaoasqaiidfo eia nola ortyi 0.enel 1970 and 1983 detboouinto unifro-cuoulniodd arnhoe of pract~icg Agolatu1ral alot I f ag1icu-t-ro sein used tepo-raily or peraaeo1y saec1tnl edoenre,enmattre,p-occlca Inoren and fo eoa asoe, nate end kitchen ga_ders or te lte fa1les; 1960, no-ale _oilierie.- 19)0 and 180 data. Pepa.a.i.. ret lelalbd - total, omb, und rural -.poylocln toal -ean, and -aro) dhooded by thei Iccsperot or nne of one pial1 bade 2Ny yie CAFITA 1051) - GNPye cay -ple enna-ra- corectmatatpetem a-alblubt i pahlio and prinate genero.. ai ipeli-dee haytil. red cnlooi-td by ennatoion artlod.r goold tank ilu (11919-Sibas;rhbltnl'cnen _hrmeenet--ip optlmurohblfttt atafftd 1960, 1970, and 1981 dai,. by at -ece one yhylcia. E.rnbehlt eti PIo Ilog, pincipally ocatdilo ENE10Y CCNSl9MyTION PER CAPITA - nai apparn yet (oal narymeetgy sri igeire, etrolea oossre of.a.e..c.. narara gs and hydr-, codein medica-1 -(p--stu"ffed tenntytnon a-i--a, nuae, rtdrlfe, ti.) chic by a physician (hoc by aedios1 offee lo l-yten a--rmda-tn ard rod leoneiciny) gmottrrerl ir nilogeame ot col eqolalrnn ye capita; oc,ord, a lie Ined cogif ce-cltolli- ta for eta. tiajual yacp..en 1960, 197i, end 19f0 dists. rban boeytl _colol WHOa yrto-iyl/g-nr-o -opital, and tu..a) hosyltola, loca or corhl bopiti and ordinal -od -at-rltycnes POPULATCION ANT VITAL. STATISTICt Teral Poelaitoo, ad-tear )nrooonds) aof July 1; 1960, 1970, and 1981 Spenliceel; bespyltls r e nlldocycdrct oa nb _llroapefopia Ero lotio t riatr data. Iron~~~~~~~~~~~~~~~~~f. hospitals diuided If tho no.h. oo I bed_..r.an.o..letln I peroe of total) - Offanlo offarhe-nite total poyolailon difeert dfiotloe f obacare my f Iron -ope-billey af dat cibn -cig caere;1960, 1970, and 19f dat. OnrgPIno ioeodipro ekper inontll)-ttl rhn o oo foaainprlennlei -.. houehid cnnc of a grooc ot. ndll-a_ oh ha lta oanr Ptyrlauln In yer OOOC C.e... y...alo ye)cr tame `se on 931 -ni thite main o-a. A hbselc oe Iodgo nay on ray ant he Included In totalppulaie y ae ad Vttan their motality acd fertility the h_hnetod foestaistcal porotr J_eaatalgOf epcaoy_ it -oeenigie noa I,ry- e A fyemn e cone In all rhin an ua cuid on,iootlonal platne cefe "c. tat b..o.ey Isi then a-ssind oe o-c-m intcnno Elonalbel Iniat eetiit niulgoateea er tg nombloaniote f nernailty ed fetlyseni t orpojcto-pptt.o unto.orha-, an rurl eeloft epd nuey Siitoeyoeoano -I a eat-nab.opaen-d hee.i.n.grai since bnrh he rateis eqol to he d-oh rate sd al1oceag tipicifiy mathgenrrnou f emeeerp_ ca SmltencIf. Teselnr noloo falagna tbc p'llry GIaro as 1-1nrnae oldf eurilo 15dm te popalaton of On th yer0000,an th Irt ofdei_o ofyan a djne feh tct legts f rur edct o;fa pou-toti ir l)i eo e.scodoym ol-toa,ml_o fcn-ala Cnae d- at1d of e, 6o; ac ina ae; ,In 08 ln. ol 5 dsna-l of1 deo f-7 l-ora o a gr ore,oder f ace r onl; 162,190 an 190 dra-n-aninsienrllmnt ceoicuh-codor...oul onoi_ to_ Peylno aesrctr -oei, reet Clfa (-4par),eebu-gk(S nluretir) a --Ia,d oce fcc i y Cog p-s _hc oproe _ dy P_o outno o , 960-1,Ia. i..-f..rerpodfog,',,yo f'oplaol OrahRf1 eoet sot eo7 rahrnso -I--bIon- abr- PMolt 1 -ne lcyut 12ena II - ieat1d7i I het rdadalii)e papalenleem1 fo I O ,. aovi90-1-oprrntg o otladltppoa Inopl 7yea aloue oplio;lh,1970, and 1911 laaiansa o enta lciprsn;eroianlor er n Se omiepeoo pcid 96n If t sprent oae-adseei t970taltecedorer-y _ yen tho_ raid poyclt.on -d Il pcyo rerlnee fo-ai aue;usaipfleyer neseeenbg'i-16h 1970 ngnclpff e tnuolo rcono;aou n fetiit ao-ra-at -eogear. TOOIcinra pehnh-dndiofoenon)- b' or Iner fo.bndrsn yamid. Pia 196ng- 1970s -dern of8 darete coel-pretaeo aer tnrlph per oon-e- 'oycltirn Yn-aoe -oload TI cceor GElo offodprdoto per Cals11-l1t 1 )-..no etcyt p...lena>ut 00cII hprtaidl f p_oelo Ignralno.IIInlae feed aoi-s oo cale fea da hat.hmolte oe errgoa(.g laaaco tednrprlct a Tra_-Ouned nb -on oun o tr base on"yinleccg pfc-o- -pric o digbt; , 1970, coed 1911PI h. d, dma. ertll~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ cr uyis oylyofcrunes(ooronofteaucnetr -Copaelicn otl ahe net ihornn)- connruiyurbu ynnnt iridig_noe eoergyeqonalenn ofon ford oepp leasealle - -1 In -u b-pecaiaprfeesadaeyoe L_i an... e. Ifoteanrt,Itooi-, etc.,d coe-r Yi_o tooenscsoer da. oslsleroplesceprnedoesicprlotio,topotelae oplato o all ogre TUfon o enyiot, ao chager I amok retiop1et.t- tclad snml feed, reds nmorbl; 90,190 n 181laa Per lapely rarln f proirn Iran te_a) - eti cnete7pecpt 1970 aol 1981 j dots ci pulse potein,of allh 10 gsna sioo6d b7anima peni.thr OO , aoi1d1laa Tboaat aedo 00'tpatiipoin ae nial en m n f a eeao or hen_all pryned y--p n he emeridair reiro pniocld-rea deee rti nacaadpollee It ean per la; , 1970i and 1977' l li i, ' data. lecoec oloinispfipig at birth; 1560, I cod dp _198 daa h9l einepeidrc cmdich atin peat.o age. pe hoen ln leh; d Ni 1- b191 at.phslable p19e6o Incom lnid I hnbcm enhloaii iia N iartf tpt(tli nhn e ta esl)- ai reasona,ille-adet no.suit afiucdohlr esterspl itid tratd- renacraoranteaelba Enlae e tuf atm oeiyicn aai(s e sptl-abr o os ococrlsefete ah mebtfompodceibrholt.srng,ad ua-rlniapoetiioe I oo-.icdob ocgeprcpt lecl eretae rir o taresetorpouaroe.i esoa moe enlislrre tu etite c a fth rucy.iha tna oa nra ae apblcfoonasorldeps loctelnetcae han20 nrei eo- id sloietfechge-ot-fioo n rzocet cora - ohto yoi it,ubn n roo) sine byeaceetoe p and sfle 6lie Intia 1 Psior. Id20 lay 1983 i- - ~iyv_b

44 Population 21.6 million (mid-1982) ANNEX I GNP Per Capita. USE 820 (1982) Page 4 of 6 MOROCCO - ECONOMIC INDICATORS Amount f/ (million US$ at Anaual Growth Rates (X) current prices) Actual Projected Indicator e/ 1982 e/ NATIONAL ACCOUNTS Gross domestic product a/ Agriculture Industry Services Consumption Gross investment Exports of GNFS Imports of GNFS Gross national savings PRICES GDP deflator ( ) Exchange rate (US$ per DH) Share of GDP at Market Prices (X) Average Annual Increase (X) (at current prices)d/ (at constant 1969 prices) (at constant 1980 prices) Gross domestic product Agriculture / Industry b/ Services _/ Consumption Gross investment Exports GNFS Imports GNFS Gross national savings AE X_of GDP PUBLIC FINANCE Current revenues Current expenditures Surplus (+) or deficit (-) Capital expenditure Foreign financing OTHER INDICATORS GNP growth rate (X) GNP per capita growth rate (2) Energy consumption growth rate (2) ICOR Marginal savings rate Import elasticityc/ a/ At market prices. b/ Share of GDP at factor cost beginning in 1985 and sectoral growth rates at factor cost beginning in c/ Goods only. d/ Projected years at constant 1980 prices. e/ Partially estimated. f/ at 1969 prices, at 1980 prices. November 4, 1983 EMENA CP II-B ID 0180B p. 1

45 'opulation : 21.6 million (mid-1982) ANNEX I.NP Per Capita: US$ 820 (1982) Page 5 of 6 MOROCCO - EXTERNAL TRADE Amount Indicator (million USI at Annual Growth Rates ( I) 1/ current prices) Actual Projected EXTERNAL TRADE Merchandise exports (FOB) Primary products Phosphate rock Others Intermediate & manufactures Merchandise imports (CIF) Food Petroleum Machinery and equipment Others PRICES (1980 = 100) Export price index Import price index Terms of trade index Composition of Merchandise Trade (%) Average Annual Increase (Z) (at current prices) (Constant 1969 prices) (Constant 1980 prices) Exports Primary products Intermediates & manu factures Imports Food Petroleum Machinery and equipment Otners Share of Trade with Share of Trade with Share of Trade with Industrial Countries (Z) Developing Countries (%) Capital Surplus Oil Exporters (Z) DIRECTION OF TRADE Exports Imports I/ at 1969 prices, at 1980 prices November 4, 1982 EMENA CP II-B ID 0180B p.2

46 Population 21.6 million (mid-1982) ANNEX I GNP Per Capita: US$ 820 (1982) Page 6 of 6 MOROCCO - BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT (million US$ at current prices) Indicator Actual Pro'ected / BALANCE OF PAYMENTS Exports of goods and services Of wnich% Merchandise f.o.b Imports of goods and services Of whicn: Merchandise f.o.b.!/ Net current transfers Current account balance Special grants Current account balance after grants Private capital MLT loans (net) Official Private Other capital Monetary movementsb/ International reserves Of which: Gold Reserves as months imports EXTERNAL CAPITAL AND DEBT Gross disbursements Concessional loans DAC OPEC IDA Other Non-concessional loans Official export credits IBRD Other multilateral Private Suppliers credits Financial credits and bonds External Debt Debt outstanding and disbursed Official Private Undisbursed debt Deot service Total service payments Interest Payments as Z exports of G+S c/ Average interest rate on new loans (Z) Average maturity of new loans (years) As Z of Debt Outstanding at End of Most Recent Year (1982) Maturity structure of debt outstanding Maturities due within 5 years 56.2 Maturities due within 10 years 80.8 Interest structure of debt outstanding Interest due within first year 5.9 a/ c.i.f. for projected years. b/ Includes IMF credits. c/ Excluding debt service on IMF loans. d/ Partially estimated. November 10, 1983 EMENA CP IX-B ID 0180B p.3

47 ANNEX II STATUS OF BANK OPERATIONS A. STATEMENT OF BANK LOANS AND IDA CREDITS a/ (As of October 31, 1983) Loan or us$ Million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed Twenty-nine Loans fully disbursed Four Credits fully disbursed Kingdom of Morocco Agriculture T 1976 Kingdom of Morocco Education Kingdom of Morocco Agriculture S Kingdom of Morocco Engineering Kingdom of Morocco Urban Development Kingdom of Morocco Agriculture Kingdom of Morocco Education Kingdom of Morocco DFC (SSI) Kingdom of Morocco Power i Kingdom of Morocco Water Supply Kingdom of Morocco Agriculture S ONAREP Oil Exploration Kingdom of Morocco Highways Kingdom of Morocco Agriculture CIH Tourism Kingdom of Morocco Urban Development Kingdom of Morocco Water Supply BNDE DFC Kingdom of Morocco DFC (SSI) Kingdom of Morocco Agriculture Kingdom of Morocco Mining Kingdom of Morocco Forestry i UNAREP Oil Shale Kingdom of Morocco Education b/ 1983 Kingdom of Morocco Agriculture CIHI Housing Devt b/ 1983 Kingdom of Morocco Agriculture h/ 1983 Kingdom of Morocco Highways ONAREP Oil Exploration b/ 1983 Kingdom of Morocco Village Infrastr NOTE Total c/ 50.8 of which has been repaid Total now outstanding ,2 Amount Sold 20.1 of which has been repaid Total now held by Bank and IDA Total undisbursed a/ The status of the projects listed in Part A is described in a separate report on all Bank/IDA financial projects in operation, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. _/ Not yet effective. c/ Excludes loan of $115.4 million to CNCA, approved by the Board on 13 December 1983, not yet signed. 3. STATEMENT OF IFC INVESTMENTS (As of September 30, 1983) US5 Million Fiscal Year Loan Equity Total 1963/1978/1984 BNDE Development Bank CIL Canning Factory Marrakech Cement Cement Factory /1980 Temara Cement Cement Factory Agadir Cement * Cement Factory SOMIFER Copper Mining /1983 Casablanca Cement Cement Factory Total Gross Commitments Less cancellation, terminations, repayments and sales Total commitments now held by IFC Total Undisbursed * Agadir Cement has been cancelled. ID Bp9 U1/05/84

48 ANNEX III Page 1 of 1 KINGDOM OF MOROCCO INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN Supplementary Project Data Sheet Section I - Timetable of Key Events (a) Time taken to prepare program 9 months (from March 1983 to November 1983) (b) Appraisal Mission: July/August and September (c) Completion of Negotiations: December 28, 1983 (d) Planned Date of Effectiveness: April 14, 1984 Section II - Special Bank Implementation Actions By July 15, 1984, or other agreed date, the Bank will rev-iew the Government's progress in implementing its adjustment program (para. 101). Section III - Special Conditions Release of the second tranche of $75 million of the loan would be contingent upon (para. 96): i) satisfactory progress with respect to continued impliementation of the program of industrial and trade policy adjustment; and ii) the Government's having taken the fol.lowing measures: a) reduce the maximum rate of customs duty on each imported good to 60%; b) liberalize imports, through the transfer of 12% of total imports (in value, on the basis of 1982 data) to list A (imports free of licensing), so that the percentage of total imports in List A will reach at least 42; and c) eliminate export licensing requirements for all products except mining and basic food products subsidized by the Stabilization Fund.

49 TRANSLATION OF THE ORIGINAL. IN FRENCH ANNEX IV page 1 of 14 Dear Mr. Clausen, Statement of Development Policy Since Independence, Morocco has followed a pattern of growth that has emphasized development of national capabilities, and increased self-sufficiency through reduced dependence on imports. There has been major progress in creating the base of a modern and progressive economy. However, an unintended consequence of import substitution policies, of the structure of protection that has evolved in support of these policies, and of exchange rate management, has been a disincentive effect on exports in agriculture, manufacturing, and tourism receipts. A second major structural question that concerns the Government is that of the level of domestic savings. After increases in the late sixties and early seventies, domestic savings fell from 15 percent of GDP in 1972 to 11.5 percent in Meanwhile, the Government has faced the need to meet mounting demands on its financial position: it was considered essential to increase military expenditures in defence of the national territory, and the highest priority was attached to increasing the access to social services, and to meeting the basic needs of the poorest sections of the population. Gross fixed investments rose sharply in the mid-seventies, reflecting the strategy of accelerating growth through higher Government expenditure and public investment. This strategy was successful in raising the growth rate in real terms from 4 percent p.a. in the 1960's to 6.7 percent in However, imports of goods and non-factor services increased by over 17 percent p.a. in real terms in , while exports lost their dynamism and grew by only 0.6 percent p.a. Because of the important commitments by the Government, there was a rapid increase in Treasury current expenditures in excess of current revenues. The financing of current budgetary expenditures led to increasing fiscal pressure, and consequently some adverse effects on the allocation of resources and the growth of private financial savings. Because of the effort to mobilize resources in the face of constraints on domestic savings, there was an increase in foreign indebtedness (much of it on commercial terms). In the Government, realizing the gravity of overall imbalances in the economy (particularly in the balance of payments and budgetary position), undertook sericus stabilization efforts, in collaboration with the IMF. The policies of this period centered on demand-management, and included reductions in investment outlays, stricter import controls and a devaluation of the exchange rate (in 1980). These measures brought about a decline of the current account deficit from 16.5 percent of GDP in 1978 to 8 percent Since then, the Government's efforts to stabilize the economy have been severely hampered by external shocks.

50 ANNEX IV page 2 of 14 As you are aware, developments, both international and internal, have placed a great strain on the Moroccan economy over the past several years. The series of external shocks in recent years have included the 1979 rise in oil prices, the rise in international interest rates, and a decline in the world price of phosphate, Morocco's principal export. A severe drought in reduced agricultural value--added and led to substantial imports of cereals. In addition there has been renewed financial pressure to meet defence needs, social priorities, and to implemqent the increased investments of the Development Plan, which aimed at raising the GDP growth rate to 6.5 percent p.a. As a consequence, the overall Treasury deficit rose to 14 percent of GDP in 1982, and there was a corressponding weakening of the balance of payments position. By 1982 also, the debt-service ratio had risen from 18.7 percent of exports of goods and services in 1978 to 35.8 percent. The rate of growth of the Moroccan economy and the pattern of this growth are of great importance in any structural analysis. Despite the sharp increase in the investment ratio achieved in the seventies, the growth rate of the economy has fallen to a level of 3.2 percent p.a. in real terms in , barely above the rate of growth of the population. The Government is determined to reverse this trend and is committed to improving the efficiency of investments and the process of project selection. The Government is equally committed to restoring balance to the pattern of growth. In this connection, recent trends in the productive sectors are disturbing. The agricultural sector, which grew by nearly 4 percent p.a. in the 1960's experienced large fluctuations in output in the 70's in response to poor climatic conditions, and the trend rate of growth in was only 0.8 percent p.a. At the same time, value-added by the industrial sector increased by only 4.3 percent p.a. in real terms in , and in 1982, it stood below the level reached in 1979 (in part because of a severe decline in the construction sector). Following discussions with the International Monetary Fund, in mid-1983, the Government decided that a renewed stabilisation effort was essential. In September, agreement was reached with the IMF on a stabilisation programme covering the period up to the end of In the context of this programme, the Government's objectives are (a) to reduce the current account deficit of the balance of payments to 9 percent of GDP in 1983 and 6.6 percent in 1984; and (b) to reduce the Treasury deficil: to 8.7 percent of GDP in 1983 and 6 percent of GDP in It is also the Government's objective to further reduce these deficits in subsequent years. It is clear that the extent of the disequilibrium in the Moroccan economy requires that the renewed stabilisation effort adopted by the Government in mid-1983 be pursued over an extended period of several years in order to return to a financially sustainable irnternal and external situation. The Government is determined to adopt the series of policy measures necessary

51 ANNEX IV page 3 of 14 for success of the stabilisation effort over the medium term. However, pursuit of the stabilisation effort alone will severely constrain the prospects for growth of the economy, with consequent implications for employment and the pursuit of the Government's objectives for social policy. Accordingly, the Government is convinced that stabilisation policies must be accompanied by the implementation of a sustained programme of policy reforms, aimed at addressing structural constraints, in order to restore dynamism in the economy. The Government wishes to secure the support of the World Bank in this effort. The Government is aware of the importance of pursuing structural reforms in various sectors of the economy. In order to ensure that reforms are based upon a sufficient depth of analysis, and to address the most pressing issues facing the economy, we believe it is essential to develop a series of reform programmes dealing with different sectors. As a first priority, the Government has already begun to implement a programme of structural reform in the area of industrial and trade policy; the objectives of this programme are to improve the balance of payments through the development of exports, generate more efficient import substitution, and establish the basis for increased employment and growth. This programme is described in detail in the attachment to this letter. Subsequent reform programmes, in addition to pursuing the medium-term effort in industrial and trade policy reform, could address issues of public enterprises, reform of the financial sector, incentives and resource allocation in agriculture, and reform of the system of education and training. The Government wishes the World Bank to give consideration to providing financial support for the implementation of these reforms. Substantial preparation work needs to be done in all these areas before comprehensive programmes can be formulated. As you know, we are discussing with Bank staff the detailed arrangements for the execution of the necessary analytical and preparation work for these programmes. I would like to emphasize that the programme of industrial and trade policy reforms outlined in the attachment represents a significant departure from past policies, and that we propose to bring about important changes in our economy in the medium term. This letter and its attachment summarizes the essence of the Government's new economic policy objectives, designed to bring about key changes in priority areas in order that Morocco's economy could grow on a sound and viable basis. The Government declares its commitment to the objectives of the stabilizaton and industrial and trade policy programmes as described in this letter and its attachment, and will carry out the actions and policies described in this attachment. In view of the measures being taken, we would

52 ANNEX IV page 4 of 14 appreciate your favorable consideration of the Government's request for an Industrial and Trade Policy Adjustment Loan. It is our hope that the World Bank will also support our efforts through other sector lending, as appropriate, in the medium-term. We appreciate the continuing exchange of ideas with the Bank, and look forward to the opportunity to discuss from t:ime to time the progress in implementing the reforms which are planned. Yours Sincerely, Abdellatif Jouahri Minister of Finance

53 ANNEX IV page 5 of 14 Attachment THE PROGRAMME FOR INDUSTRIAL AND TRADE POLICY ADJUSTMENT 1. The basic strategy underlying the Industrial and Trade Policy Adjustment Programme (ITPA) consists of (a) shifting from an inward orientation to an outward-looking approach to industrial and trade policy; and (b) reducing administrative controls and increasing reliance on market forces. It is our belief that such a strategy will permit Morocco to improve the efficiency of the economy and to realize the substantial potential which exists for the development of exports, particularly of manufactured products. It also offers the prospect of achieving a structural change in the industrial sector, encouraging the development of new industrial activities and creating substantial additional industrial employment. The promotion of exports is of particular importance, as a contri'bution to sustaining domestic economic activity, helping to meet the foreign exchange needs of the economy and helping to service external debt. 2. The policy measures contemplated fall under the following major headings: export incentives; protection reform; fiscal reform; financial reform; and price liberalization. The implementation programme in each of these areas, including progress achieved so far, is summarized in the following paragraphs. Export Incentives 3. The Government's policy is that the maintenance of an appropriate exchange rate is crucial to stimulating exports, in addition to its role in complementing tariff policy in pro-viding reasonable protection to domestic industry. The Government's policy is also that exports should be free of taxation on imported inputs and that in principle this advantage should be extended to indirect exporters. The Government will expand its export promotion programme and expects to make rapid progress in this area. Measures already implemented or which will be implementated before the end of 1984 are the following: 4. Exchange rate: The exchange rate was devalued by 10% in August 1983 with respect to a basket of currencies. A flexible exchange rate policy will continue to be applied in 1984, in line with our agreement with the IMF, and with the objectives of maintaining Morocco's competitiveness and supporting moves towards trade liberalization. 5. Food Products: In order to promote exports of tinned and other processed food products, the Office de Commercialisation et d'exportation (OCE) has held a series of discussions with producers' associations in the relevant sectors, with the objectives of modifying current export procedures, adapting OCE's administrative systems, and particularly of resolving the issue

54 ANNEX IV page 6 of 14 Attachment of alternative utilization of staff assigned to activities in these sectors. A new marketing system based on the freedom of individual enterprises to export, will be operational at the latest, by end-september OCE will continue to be responsible for quality control. A study on the export-marketing of fresh vegetables is planned. This study will be completed by September 30, 1984, and recommendations aimeid at increasing fresh vegetable exports, which could be implemented at the beginning of 1985, will be made. 6. Special Customs Regimes: The Government introduced several important reforms in favor of exporters in late First, the procedure of temporary admission, permitting exporters to import automatically, free of duties and taxes, was extended to cover: (i) all inputs imported by direct: exporters except those explicitly specified by the Customs Office; (ii) iindirect exporters. Secondly the wastage allowance procedure has been revised, the principle being that firms would indicate wastages and wastage allowance rates to the Customs Office, and that these rates would be accepted as final, unless otherwise decided by the Customs Office within a period of six months. Thirdly, the regime of drawbacks has been reformed, so as to replace drawbacks by the system of temporary admission, for firms primarily engaged in exports. Fourthly, in cases where manufacturers opt to export goods already produced and destined for the local market, they are permitted to imporl: non-consumable inputs under the temporary admission system, to replace such inputs used for the manufacture of the exported items. Fifthly, the Customs authorities have instituted a new system which allows exporters to obtain customs clearance for both imported inputs and exported products at the production site, rather than at the port of entry or exit. To complement these measures, capital goods belonging to foreign firms, and imported for use in export pro,duction, will, with effect from June 1984, be exonerated from import duties. Consideration is also being given to the extension of new forms of guarantees, for customs duties potentially payable by exporters, in replacement of traditional bank guarantees. 7. Administrative Procedures. Administrative procedures and controls on exports have also been simplified. The number of products subject to export licensing requirements will be substantially reduced. Before the end of 1983 export licensing requirements for cement and t:ires will be abolished. By June 30, 1984, export licensing requirements will be abolished for all other products subject to export licensing at present, except for mining products and subsidized basic food products. In the case of mining products, export procedures and taxation will be the subject of a study in In order to ensure that exporters develop a full understanding of recent customs regulations, and in particular the stipulations concerning them, a customs manual will be prepared for publication by June In addition, an office specialized in the customs regulations for exporters has been created in each

55 ANNEX IV page 7 of 14 Attachment of the ports of Casablanca and Tangiers, and the airport at Casablanca. A special section for dealing with the problems of exporters will be created at Customs headquarters before end The Customs authorities have initiated a programme to give special assistance in explaining customs regulations to new exporters during an initial six-month period. 8. Market Development. In order to allow exporters to investigate markets and develop sales, the rate per diem and the ceiling per trip and per individual have been raised by 20 percent for foreign travel. These rates and ceilings will be revised at least once annually, to provide for inflation. 9. International Transport. In view of the importance for exports of international transport, the Government initiated in 1983 a study of the problems encountered by small exporters in the case of marine transport; this study is being carried out by the Ministry of Fisheries and the Merchant Marine, with support from UNCTAD and its recommendations will be reviewed and appropriate follow-up action will be decided before the end of Information Campaign. In order to inform entrepreneurs of the new direction of Government policy aimed at promoting exports, the Government will undertake an information campaign, during late 1983 and early Seminars will also be held to explain the Government's policy in this field to officials affected by the changes or concerned with the implementation of the new policies. 11. Tariff Protection. The objectives of the Government's tariff policy are to foster greater competitiveness and improve the efficiency of investment and labour use. The Government will achieve those objectives through a phased lowering and evening out of tariff rates so that the maximum rate of protection would not exceed 25% by the end of Towards this goal and in order to promote exports, the Government will reduce the special import tax from 15 to 10 percent, with effect from January Subsequently, the Government intends to reduce this tax from 10 to 5 percent on January 1, 1985, and to eliminate it on January 1, No customs duty rates will be increased with a purely fiscal objective, to compensate for the reduction in the special import tax. 13. In 1984, the Government will further reduce the level of protection. To this end, the maximum rates of customs duty on each imported good will be reduced to 60 percent by June 30, 1984.

56 ANNEX IV page 8 of 14 Attachment 14. In parallel with the phased reduction of the overall level of protection described in the preceding two paragraphs, the Government will prepare in a) a rationalization of the existing customs nomenclature, and b) a reform of customs duty rates. Preparation of the new customs nomenclature (international harmonized system) will be carried out: in 1984, and would include an initial rationalization of customs duties to ensure that similar products are subject to similar rates. The draft text is expected to be ready by December 1984, subject to the Customs Ccioperation Council completing by June 1984 the explanatory notes for application of the new customs nomenclature. Necessary measures will be taken with a VieW to application of the international harmonized system] (probably by January 1, 1987). 15. In parallel with the implementation of the new customs nomenclature, a major tariff reform will be implemented in phases during the period It would primarily involve a shift from systematic import substitution to a policy of encouraging investment in areas with comparative advantage. This policy change is expected to improve efficiency in industrial investments by promoting the establishment of a competitive industry. To that effect, the Government will implement a general tariff reform aimed at reducing and evening out customs duty rates so as to reduce rates of protection to a level not exceeding 25%. The preparation of the reform of tariff protection will be carried out according to the planning and organization detailed to the World Bank. 16. Protection Policy for new Investments. In order to promote the establishment of internationally competitive industries, the Government will carefully examine requests for protection. The following principles will be applied: (a) (b) (c) protection will generally be given only through tariffs and not through quantitative restrictions; in the exceptional cases where quantitative restrictions are considered necessary, these will be limited to period of three years. while a level of tariff protection corresponding to protection in excess of 25 percent may be accorded during the first three years after project completion, tariffs would be set at a level providing protection not in excess of 25 percent thereafter. protection along the lines of (a) and (b) above will only be accorded to projects for the manufacture of new products, whose viability is demonstrated after rigorous economic and financial analysis. It is also understook that the anti-dumping prevision, as defined by GATT, could be applied for these new products. 17. Public Investment Policy. In view of the multiple demands on the country's limited capital resources, initiation of public sector investment projects will be phased carefully. During 1983, the public investment

57 ANNEX IV page 9 of 14 Attachment programme has been substantially reduced, on the basis of a detailed analysis of investment priorities. In view of the continued scarcity of resources, new public investments will only be initiated after careful analysis of their economic benefits and budgetary impact. In the case of public investment in manufacturing, the criteria for granting of tariff protection outlined in the preceding paragraph will be applied. We also confirm that in the evaluation of applications for access to the advantages of the industrial Investment Code, of public and private sector projects in manufacturing, subject to a convention with the Government under the Code 1 ', the criteria for economic evaluation as detailed to the Bank (in particular, as concerns net foreign exchange savings) will be applied. 18. Organizational Aspects. In 1983, the Government established a planning unit in the Ministry of Commerce and Industry. This unit is responsible, in collaboration with concerned technical divisions, inter alia, for the analysis of requests for protection and of proposals for public investment in industry. In order to facilitate the work of the unit in these fields, a manual for the evaluation of protection requests has been prepared. 19. Import Restrictions. An essential element of the Government's strategy to improve industrial efficiency is to expose Moroccan industries to greater competition from abroad. In 1982, 42 percent of imports (in value) were free of import licensing (List A). Although this percentage declined to below 10 percent in March 1983 when additional restrictions were introduced, the Government will pursue the policy of import liberalization initiated in As a first step, the Government introduced an easing of import restrictions in May and August 1983, so that all raw materials and spare parts previously in List B (import licensing) were transferred to List A (no restrictions). Following this liberalisation, imports in List A represented about 30 percent of total value of imports (calculated on the basis of values for imports in effect as of December 31, 1982). However, as regards exports, goods imported for use in production for exports have not been subject to restrictions. The Government will maintain this principle. 21. The Government will take further measures in 1984, in pursuit of the policy of import liberalization. By June 30, 1984, 12 percent of total value of imports (on the basis of December 31, 1982 figures) will be transferred to List A, so that the percentage of total value of all imports in List A will reach at least 42; this transfer will exclude the following products: wheat, 1/ Explanatory note: Projects are subject to a convention with the Government under the Investment Code when the size of the investment exceeds DH 50 million, or the investment is in a specified sub-sector.

58 ANNEX IV page 10 of 14 Attachment green tea, sugar, and crude oil. Between July and December 1984, an additional 6 percent of total value of imports (on the basis of December 1982 data) will be transferred to List A (again excluding wheat, green tea, sugar and crude oil). During this process of liberalization, the Government will give priority to capital goods (including imports under the investment codes) and to intermediate products not manlufactured in Morocco. 22. In subsequent years, the Government will relax restrictions affecting imports, open the economy further to competition from abroad, and progressively eliminate the import restriction prevalent in 1983 (with the exclusion of items injurious to public morality and possibly certain luxury articles) by This reform will be implemented in parallel with the revision of customs tariffs and the implementation of programmes of industrial restructuring. As regards the goods prohibited jerom import in 1983 (List C), the prohibitions will be progressively eliminated by 1988, beginning with industries long-established in Morocco. The specific content of the action plan for 1985 in this area will be dlefined in The Government has initiated an information programme. It aims at explaining to industrialists concerned, in particular, through meetings to be held before March 1984, with relevant professional associations, the Government's medium-term (1988) objectives in tariff (see papagraph 15) and non-tariff protection. 23. We are aware that the effort to restructure protection and increase competition within Morocco's industrial sector will have an adverse impact on certain industrial subsectors over the medium-term. We have identified the subsectors of packaging, related products and screws as areas where the reform of tariff protection may need to be accompanied by specific restructuring programmes. We will carry out, within the Ministry of Commerce and Industry, preliminary studies on these sectors to define more clearly the restructuring measures which may be necessary. On this basis, specific studies will be carried out by the end of 1984 and in coordination with the preparation of the tariff reform programme in order to prepare specific subsector restructuring plans. Fiscal Reform 24. The Government has already made considerable progress in developing proposals for fiscal reform which aims, inter alia, at improving industrial incentives through (i) harmonizing the fiscal priessure on enterprises while minimizing loss of revenues and (ii) reducing the significant distortions created by the present system. In 1982, the Goviernment prepared the broad outline of a general tax reform (Loi Cadre) which was approved by Parliament in The Government will prepare detailed proposals for the reform of direct taxation before mid-1984, which will be presented to Parliament, with a view to application in January Proposals for reform of indirect taxation will be prepared in a second stage.

59 ANNEX IV page 11 of 14 Attachment 25. Within the context of the reform of direct taxation, measures of particular importance for improving industrial incentives would include the establishment of a uniform profit tax rate, simplifying accounting rules for taxation of small firms, and providing for the re-evaluation of balance sheets. In the medium-term, the Government's objective is to effect a greater degree of harmonization of the incidence of profit taxation. 26. In the case of indirect taxation, the immediate objective of the Government as concerns industrial incentives and export promotion is to modify aspects which are particularly disadvantageous for exporters, pending the full implementation of a value-added tax. In 1984, two important measures will be prepared and submitted to Parliament for approval, with the objective of implementation in January 1985: (i) the acceptance of the deduction of sales taxes (TPS) will be generalized, in particular to cover wholesale trading companies; (ii) TPS tax rates will be revised ard harmonized (including the abolition of differential rates for local products and imports). In the medium term, with implementation of the value-added tax, the "cut-off rule" which limits deductions in certain cases, will be virtually abolished. In addition, as concerns the wastage allowance rates to be applied for fiscal purposes when a product imported by an exporter is sold locally, a study of the rates to be applied will be completed in 1984 by the Tax Department of the Ministry of Finance and the Ministry of Commerce, Industry and Tourism. Financial Sector Reform 27. The Government is in the process of formulating proposals for the restructuring of the financial sector in the medium-term, to make it more flexible and responsive to the country's development needs, notably to growth of domestic savings and of exports. These proposals are being prepared in collaboration with the World Bank, and when they are finalized and approved, it is the Government's wish that the Bank give consideration to supporting the implementation of the reforms. 28. Over the past several years, the Government's policy has been to increase the level of interest rates and to make them more flexible, so that they play an increasing role in the allocation of financial resources. Interest rates on savings and term deposits, on medium and long-term credits are now positive in real terms. The Government is committed to the policy that interest rates should be more flexible than in the past, and fixed at levels permitting the necessary equilibrium between national savings and investment. Consequently, in normal economic conditions, and with the exclusion of certain concessional rates, notably for export credits, interest rates will be maintained at levels that are positive in real terms. Consideration is also being given to the elimination of subsidies on medium and long-term interest rates.

60 ANNEX IV page 12 of 14 Attachment 29. Recently, several measures have been taken in the field of interest rates. In August 1983, the rates oni non-resdiscountable credit were increased by 1 percent. The rate of interest on accounts held by Moroccan workers abroad has been increased to 8 percent on incremental deposits. 30. To complement the reform of export incentives, the system of export credits is in the process of being revised. The ceilings on export prefinancing are being applied more flexibly, with a maximum per exporter of the average value of 3 months of the exporter's annual exports, to ensure that a sufficient volume of such credit is available to exporting enterprises, subject of course to the usual criteria of enterprise creditworthiness. 31. In the case of short-term export credits, maturities, are currently 45 days for credits against documents, and 120 days in the case of payment periods (usually 90 days). These maturities could be extended in specific cases to allow for transport time. 32. A medium-term export credit facility was created in 1983 for capital goods. Its effective use by commercial banks will be developed in Its extension to exports by construction and engineering service firms as well as the feasibility of extending its term from five to seven years, will be studied during The possibility of providing bank guarantees for export contractors in construction through a consortium of Moroccan banks is also being studied; conclusions of the study will be available by 31 March 1984 and application would take effect befores 1 January The export credit insurance system was also revised in The globality rule was eliminated so that exporters may insure only part of their exports; minimum limits on premiums and maximum limits on repayments were removed and budgetary credits were allocated to the insuring agency (BMCE). In 1984, the Government will develo] proposals which could be implemented before mid-1985 to extend insurance coverage to include manufacturing risk insurance. Price Liberalization 34. The Government's position is that competition is a vital element to increase dynamism and productivity, and it is committed to make the Moroccan economy more responsive to market forces. In 1983, price controls on manufactured goods were significantly reduced as the prices of about 19 products were liberalized. The Sovernment will liberalize the prices of about 10 more manufactured products in 1984 (see Appendix 1 for list and detailed timing). Remaining price controls on about 12 manufactured products will be gradually removed in line with the elimination of import: interdictions

61 ANNEX IV page 13 of 14 Attachment (or restrictions) on those industries and greater exposure to international competition. Price controls will be retained only for subsidized basic commodities, for public utilities, and for commodities for which there is limited competition. Monitoring and Progress Reporting 34. In order to monitor progress in the implementation of the programme described above, an interministerial committee has been created, under the chairmanship of the Prime Minister. This committee would meet regularly to review progress and to decide on appropriate actions necessary to ensure the timely implementation of the programme. Two progress reports, summarizing the status of implementation of the programme will be prepared and furnished to the World Bank, the first one finished in early July 1984 and the second in early January 1985.

62 Price Liberalization: Products and Timing ANNEX IV page 14 of 14 Appendix 1 I. Foods Products All powdered milk (June 30, 1984) Soft drinks (December 31, 1984:1 II. Industrial Products Color television sets (Dec.31, 1984) Cars (diesel and gasoline Dec. 31, 1984) Ordinary soap (Dec. 31, 1984) Tires (self-revision, June 30, 1984) Explosives (Dec. 31, 1984) Matches (self-revision, Dec. 31, 1984) Molasses (June 30, 1984) Scrap metal (June 30, 1984). III. Services Four star hotels (June 30, 1984)

63 MOROCCO: PROPOSED SCHEDULE OF PURCHASES AND REPURCHASES FROM THE IMF DURING THE STAND-BY PERIOD, SEPTEMBER MARCH 1985 (in millions of SDRs) Tota1 Upon Board Oct.-Feb. March-May June-Aug. Sept.Nov. Nov.-Jan. Jan. aodroval March Purchases Ordinary resources (13.64) (27.27) (12.76) (-) (-) (-) (-) (53.67) Enlarged access resources (16.36) (32.73) (27.24) (40.00) (40.00) (50.00) (40.00) (246.33) Repurchases Compensatory financing facility / (-) (-) (-) (-) (-) (-) (-) (-) Stand-by and extended arrangements (-) (-) (-) (16.22) (10.76) (20.49) (10.76) (58.23) Net purchases (241.77) Total (cumulative) 1, , , , , , , U, In percent of quota 2 " Total holdings Holdings excluding IMF In percent of proposed quotaa/ Total holdings Holdings excluding IMF I/ Including cereal facility. 2/ Current quota of SDR 225 million. 3/ Proposed quota of SDR 306 million under the Eighth Quota Review. Sources: IMF, Treasurer's Department. 1638Bp41 01/05/83 tlj

64 ANNEX VI page 1 of 10 MORCCO: SlMIARY OF MEASURES AND IMPIEMENLION SCHEDULE OF THE ITPA PROGRAM I; EXPORT PFDJFION DATE OF IhPLIEWNrATION Before Board First Year Condition of Mediumn-Tern Presentation Program Second Tranche Program Release A. General Measures 1. Devaluation of the exchange rate in line with Devaluation of Carinitmsnt to a the stand-by arrangement with the IMF 10 percent effected flexible exchange in August, 1983 rate policy B. Agricultural and Food products 1. Abolish the export monopoly of OCE for L-iplerentatioD, processed food products before October Elimination of required export licensing for about ITplementation before 100 positions in the custans nomenclature July Implementation of study on export marketing Implementation Implementation of of fresh vegetables before October 1984 study's recanyrtdations C. Special Customs Regimes 1. The procedure of temporary admission would be Inplemented in 1983 extended to include all imported inputs except for those indicated on a list and to allow indirect exporters to take advantage of this procedure 2. Wastage allowance. The firm would indicate to Implemented in 1983 the customs office wastages, and rates for wastage allowance. Those rates would be accepted by the custans office as final unless the customs office would decide otherwise within a period of six nonths 3. Drawbacks to be replaced by tenporary admission Implemented in system, for firms primarily engaged in exports 1983

65 ANNEX VI page 2 of 10 I; EXPORT PRC(UIION 4. hlere goods originally produced for the local Already introduced in 1983 market are exported, manufacturers may import non-consumable inputs under the temporary admission system, to replace such inputs used in the exported goods 5. On-site customs clearance for imported inputs Already introduced and exported products in Capital goods belonging to foreign firms and imported for use in exports production to be Implmnntation exempt from import duties by June 1984 DATE OF IPIJEMENTATION Before Board First Year Condition of MediLmi-Term Presentation Program Second Tranche Program Release D. Administrative Procedures i. Reduction of the nurber of products requiring Elimination of Elimination of export Impleentation an export licence (export certificate) export certificate certificate for all before July 1984 for cement and tires products except mining already effected in 1983 products and subsidized basic food products by June 30, Study of export procedures for mining products Ccmpletion of study (specific taxes, export certificates, visas of in 1984 the Ministry of Industry and Ccaterce). 3. Clarification of procedures for imports and Publication by exports; publication of a revised manual June 30, 1984 concerning custaos regulations 4. Offices with expertise in special customs regimes Created in 1983 for exporters in ports of Casablanca and Tangiers, and Casablanca airport 5. Progran to give special assistance in explaining Program already custas regulations to new exporters during an initiated initial six month period

66 ANNX VI page 3 of 10 I: EXPORT PRO)MflON DATE OF IMPLEMENrATION Before Board First Year Condition of Medium-Term Presentation Program Second Tranche Program Release E. Market Development Increase of rate per diem and ceiling per trip and Increase of 207 per individual for foreign travel by exporters for effected; these rates market development and export promotion will be revised at least once annually to provide for inflation F. International Transport Study of problems of small exporters in marine Study initiated Implemetation of transport in 1983 with ULNGIDA recamendations of study G. Information Campaign Such a campaign, in late 1983 and early 1984 Initiated will aim at informing entrepreneurs of new Government policy direction with emphasis on promoting exports; also seminars aimed at explaining policies to officials affected by changes or responsible for implementing them. Also, information campaign to explain to entrepreneurs the Government's nediun-term objecli-ves (1988) in tariff and non-tariff protection. By March 1984

67 ANNEX VI page 4 of 10 II: TARIFF AND NONTARIFF PRO1ECTION DATE OF IMPIEWfNATION Before Board First Year Condition of Mediuar-Term Presentation Progran Second Tranche Program Release A. Tariff Protection 1. Special Import Tax on all imports of 15% Reduction by 5 Further reduction percentage points to 5% by January (to 10%) 1985 and elimination by January Reduction of maxisum customs duty rate Maxinun rate to be Maxinum rate to be Maxinma rate to be reduced to 60% by reduced to 60% by reduced to 25% June 30,1984. This June 30, 1984 by end 1988 would apply to 321 positions of the custcms ncomnclature 3. Implementation of the harmonized system (new custans nomenclature) and preparation of the reform of tariff and nontariff protection a) Rationalization of custcms duties on the Draft text to be basis of the new harmonized international ready by December customs namenclature and integration of 1984 old customs nomenclature into the new one b) Implementation of new nomenclature January 1, 1987 c) Preparation of the tariff reform with the Preparation of Implementation of new aim of harmnizing the effective protection tariff refonm tariff structure in rate Protection Policy for New Investments a. Protection will generally be given Recognition of ITplementation of only through tariffs, and not through principle principle quantitative restrictions; in the exceptional cases that quantitative restrictions are considered necessary, these will be limited to periods of 3 years

68 ANNEX VI page 5 of 10 II: TARIFF AND NONTARIFF PROECTION b. Alter the first 3 years following project Recognition of Lupleientation of Completion, tariffs would be set at a level principle principle providing protection not in excess of 25% c. Protection along the lines of (a)ana(b) will Recognition of Implerrntation of only be accorded to projects where viability principle principle is eenionstrated after rigorous econmaic and tfiancial analysis DATE OF IMPLEMENTATION Before Board First Year Condition of Mediumr-Term Presentation Program Second Tranche Program Release 5. Evaluation of new public and private investnent projects Completed EconLaic evaluation criteria including the criteria of exchange savings will be applied to new public and private investoients in manufacturing unoer tne Industrial Investment Code, when these ax investments are subject to a convention with the Govenment (investment in excess of IAH 50 million or below this asnunt in specified sectors). 6. Organizational Aspects a. Establishaent of pianning unit in the Ministry Established of Commerce and Industry to be responsible, inter alia, for the analysis of requests for protection and of proposals for public investmient in inoustry b. Preparation of manual for the evaluation of protection requests Canpleted b. Import Restrictions ObjectLives: Progressive import liberalization in order to improve industrial efficiency through greater capetition tran abroad. During this process of liberalization, the Goverrnent intends to give priority to capital goods (including imports uncer the investment codes), and to interoediate products not manufactured in Morocco 1. TranLsfer of all raw materials and spare parts Implanented in 1983 in List B (import licensing) to list A (no restrictions)

69 AhJlEK VI page 6 of 10 II: TARIFF AND NONrARIFF PROUIION 2. No restrictions on imports of goods for use Principle recognized in production for exports and in implaenetation DATE OF IMPLE7ENrATION Before Board First Year Condition of Mediuar-Term Presentation Program Second Tranche Progran Release 3. Transfer of a further 12% of total imports To be effected by Tmplementation of (in value, on the basis of 1982 figures) to July 1984 transfer before list A, so that the percentage of imports in July 1984 list A will reach at least 42; this transfer will exclude wheat, sugar, green tea, crude oil and oil obtained fron petroleum and bituminous materials. 4. Transfer of additional 6% of total imports, To be effected on the same basis, and with the same between July and exclusions as in (c) above Deceiber ' 5. Progressive elimination of import restrictions To be inplemented in prevalent in 1983 (with the exclusion of parallel with. the items injurious to public morality and revision of customs possibly certain luxury articles) tariffs and the implementation of programs of industrial restructuring. The process is to be completed by Progressive elimination of import interdictions Specific content Process to begin (List C) existing in 1983 of the action plan for with ixxnstries 1985 in this area to long-established in be defined in 1984 Mbrocco and to be cq leted by Restructuring of specific sub-sectors Studies to be carried out, in coordination with the preparation of the tariff reform progran, to prepare specific sb-sector restrucring pias

70 ANNEX VI page 7 of 10 III: FISCAL REFORM DATE OF IMPENrATION Before Board First Year Condition of Medium-Term Presentation Program Second Tranche Program Release Objectives: To reform direct and indirect taxation so as to inter alia improve industrial incentives through i) hanwnizing the fiscal pressure on enterprises while minimizing loss of revenues; and ii) reducing significant distortions. A. Direct Taxation Measures to establish uniform profit tax rate, Broad outline of Detailed proposals for lnpleamntation of simuplify accounting rules for taxation of general tax reform reform of direct reform in Jan. small firms and provide for re-evaluation of prepared by Govt. taxation to be presented Also,in Lhe a 4 balance sheets in 1982, and approved to Parliamient before mediumn-term, by Parliamnet mid-1984 greater hanmmization of incidence of profit taxation to be effected B. Indirect Taxation Modification of aspects disadvantageous to exporters through: The neasures (1) and inplerentation (2) would be prepared of (1) and (2) and approved in Jan ) Acceptance of deduction of sales taxes (TPS) will be generalized, in particular, to cover wholesale trading ccnpanies; 2) Revising and harmonizing TPS tax rates (this would include abolition of differential rates for local products and inports) 3) ADolition of "cut-off rule" according to which firms cannot claim deductions of sale tax (TPS) in excess of the sale tax on output This abolition would be effected in the nediur-term with implementation of a valueadded tax 4) Study of wastage allowance rates to be applied for Study to ccsmpleted in fiscal purporses when a product imported by an 1984 by fiscal authorities M. inist.y^f t nm.rce, exporter is sold locally Industry and Tourism

71 ANNEX VI page 8 of 10 IV: FINANCIAL SEMDR REFORM DATE OF INIIfENrATION Before Board First Year Condition of Mediuar-Tern Presentation Program Second Tranche Program Release A. Jbbiiization of Financial Savings 1. Interest rates to be flexible, and fixed at Agreelent reached levels permitting the necessary equilibrium on principle; between national savings and investuent interest rates on savings and termdeposits, medium and long-term credits are now positive in real terms. The elimination of subsidies On nediun and long-term interest rates is being considered 2. Increase in interest rate Rates on non-rediscountable credit increased by 1% in Aug. 1983; Rate on incremntal deposits of Moroccan workers abroad increased to 8%. B. Reform of Export Credits 1. Ceilings on export prefinancing Ceilings being applied nwre flexibly (up to 3 nmths of annual exports) 1/ The ratio of ccpulsory uses of banks assets to deposits

72 ANNEX VI page 9 of 10 IV. FINANCIAL SECTOR RERM 2) Extension of maturities of short-term To be done in specific export credits cases to allow for transport tine. DATE OF DMPLETLENrATION Before Board First Year Condition of?editnr-tern Presentation program Second Tranche Program Release 3) Creation of medium-term export facility Created in 1983 Effective use by cammercial for capital goods commercial banks willbe developed. Study of feasibility of extending term from 5 to 7 years and extension to exports by construction and engineering service firms 4) Provision of bank guarantees for export Study of feasibility Implementation of study's a' contractors in construction through a initiated conclusions consortium of Mbroccan banks C. Reform of Export Credit Insurance: a) Extension of insurance coverage to include To be studied by the manufacturing risk insurance Covernmnt in 1984 b) Eliinantion of globality rule, so as to permit Inplemented exporters to insure only part of their exports c) Reenoval of miniunin limits or. prniulu and maximum limits on repayments RerW_ved d) Allocation of budgetary credits to insuring Effected agency (BM1E)

73 ANNEX VI page 10 of 10 V. PRICE LIBERALIZATION DATE OF IMPLEMENTATION Before Board First Year Condition of Medium-Term Program Presentation Program Second Tranche (with import Liberalization (Already done) Release according to cases) Objective: To make the Moroccan economy more responsive to market forces, so as to increse dynamism and productivity Progressive elimination of price controls, so that Prices of 19 products Liberalization of RemvNal of reamining price such controls would only be retained for subsidized liberalized in 1983 prices of 10 more controls on about 12 basic commodities, public utilities, and camiodities manufactured manufactured products for which there is limited competition products, according to agreed schedule I. Food Products Procedure of self- All powder milk revision of prices: (June 30, 1984 concentrated milk, yeast II. Petroleum Products LIbricants (self-revision) Prices liberalized: Soft drinks Rice, imported butter Powder milk for indus- (Dec. 31, 1984 trial uses, noodles, jams coffee, local butter III. Industrial Products Electrical household Color television sets Refrigerators, appliances, black and (Dec.31, 1984), cars kitchen stoves white television sets, (diesel and gazoline (lowest category), kitchen stoves (except Dec.31, 1984), ordinary tractors, trucks of lowest category) agri- soap (Dec.31, 1984), more than 5.5 tons, cultural equipment tires (self-revision, paper pulp, diesel (except tractors), trucks June 30, 1984), explosives engines, cattle-cakes, less than 5.5 tons, (Dec. 31, 1984), natches detergents, Javelle tourism guide, paper and (self-revision, Dec.31, 1984) water, batteries. cardboard, deluxe soap, molasses (June 30, 1984), spare parts. scrap metal (June 30, 1984). IV. Services Hotels five stars Four star hotels Hotels three stars and more (June 30, 1984) and less. 15i6B-Disk 106B 11/07/83

74

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