Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 14221

PROGRAM COMPLETION REPORT

KINGDOM OF MOROCCO

STRUCTURAL ADJUSTMENT LOANS I AND II(LOANS 3001-MOR AND 3463-MOR)

FILE COPY

MARCH 31, 1995

Country Operations DivisionCountry Department IMiddle East & North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CULRRENCY' EQUIVA LENTS

Official Exchange rate: Dirham (DH) per US$

Period End of Period Period Average

1990 8.043 8.242

1991 8.150 8.707

1992 9.049 8.538

1993 9.651 9.299

June 1994 9.096 9.222

LIST OF ABBREVIATIONS

ASAL Agriculture Sector Adjustment LoanEFF Extended Fund FacilityESAL Education Sector Adjustment LoanEU European UnionFSDL Financial Sector Development LoanGDP Gross Domestic ProductICB International Competitive BiddingITPAL Industrial and Trade Policy Adjustment LoanLSMS Living Standards Measurement SurveyMENA Middle East and North AfricaMLT Medium-Long TermPERL Public Enterprise Restructuring LoanRER Real Effective Exchange RateSAL Structural Adjustment LoanSBA Stand-by ArrangementSECAL Sectoral Adjustment LoanSTEP Social Target Expenditures ProgramTIP Target Investment Program

FISCAL YEAR OF BORROWER

January I - December 31

FOR OFFICLkL USE ONLYlIHE WORLD BANK

Washington, D.C. 20433U.SA

Office of Director-GeneralOpenrtions Evaluation

March 31, 1995

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Program Completion Report on the Kingdom of Morocco StructuralAdjustment Loans I & n (Loans 3001-MOR and 3463-MOR)

Attached is the Program Completion Report for the Kingdom of Morocco Structural AdjustmentLoans I & I (Loans 3001-MOR and 3463-MOR) prepared by the Middle East and North Africa RegionalOffice. Part II was prepared by the Borrower.

The PCR gives an adequate account of Morocco's adjustment experience. The two SAL. were anintegral part of the country's comprehensive economic reform program, which was supported by several IMFstandbys and by nine adjustment operations from the Bank, for a total of US$1.8 billion between 1984 and1992. SAL I was the seventh operation of the nine; SAL U was the last one and was approved more than twoyears after SAL I had been closed.

By the time the SAL I program was launched in 1988, reforms were well underway in several sectorand major macroeconomic disequilibria had already been corrected. Thus, the two SALs could be focussedon a handful of remaining weaknesses in the reform process with reatively few and simple conditionsattached. The goals of the SALs were to increase growth, to strengthen creditworthiness and, more especiallyin SAL U, to achieve a more equitable distribution of welfare. The focus of the action programs was on fisalreform, public investment efficiency and private sector development, trade liberalization, external debtmanagement and the articulation of a poverty reduction strategy.

Solid ownership of the overall reform program and a circumscribed set of conditions contributed tothe smooth implementation of the SALs. In terms of outcomes, the SALA contributed significantly to fiscalreform and to further trade liberalization, and they helped restore Morocoo's creditworthiness. Also, progrosswas made towards laying the basis for addressing social issues in earnest. On the other hand, targetedincreases in public investment spending in priority sectors were not achieved and the overall GDP growth ratefell much below expectations. On balance, the outcome of the SAL. is ratod as satisfactory and thesustainability of the reform process as likely. The institutional impact of the SAI was modest.

Morocco's decade-long adjustment process has resulted in remarkable improvements inmacroeconomic indicators, combining successful stabilization with modest growth. Yet, the growth rate hasbeen too low to remedy the unemployment problem and has been lower in the post-1988 SAL period than inearlier years. Industrial growth has been especially disappointing. The SAL. will be audited by OED withspecial attention to these issues. 1 /

FranccisoActing Director-

Atachment

Tn domant ba a rmtricted distribution and may be utd by fcipiefts only in the peformaeo of their official dutiLs Iamtents may not otherwibe be disloed without World Bank autborization.

FOR OFFICIAL USE ONLY

PROGRAM COMPLETION REPORT

THE KINGI)OM OF MOROCCO

STRUCTURAL AD.JUST1%1ENT LOANS I AND II(LOANS 3001-MOR and 3463-MOR)

TABLE OF CONTENTS

PREFACE ....................................................EVALUATION SUMMARY ..........................................

PART I: THE BANK'S ASSESSMENT OF SAL I AND SAL II ................. 1

A. BACKGROUND .......................................... 1

B(I) THE PROGRAM SUPPORTED BY SAL 1 ........................ 4

C(I) EVALUAnON OF SAL I .................................. 6(i) Implementaion ..................................(ii) Achieving the Objives ............................. S(iii) Performance Target Used ........................... 11(iv) Exteral Environment .............................. 14Lesns Leaned ...................................... 14

D(1) PROCUREMENT AND MONITORING OF SAL I ................... 15

B(II) THE PROGRAM SUPPORTED BY SAL II ....................... 16

C(II) EVALUATION OF SAL II... 17(i) Implementation .................................. 18(ii) Achieving the Objxfives ............................ is(iii) Performance Indicators Targeted ......................... 22(iv) Extenal Environment .............................. 24Lesons Leaned ...................................... 25

D(1) PROCUREMENT AND MONITORING ......................... 26

CONCLUSION ............................................ 26

PART II: THE BORROWER'S ASSESSMENT OF THE STRUCTURALADJUSTMENT PROGRAM .................................. 27

PART III: STATISTICAL ANNEX .................................... 49

STRUCTURAL ADJUSTMENT LOAN I (3001-MOR) .............. 49STRUCTURAL ADJUSTMENT LOAN II (3463-MOR) ............. 51

This document has a restricted distinbution and may be used by recipients only in the performance of theirI official duties. Its contents may not othermise be disclosed without World Bank authorization. l

i

PROGRAM COMPLETION REPORT

THE KINGDOM OF MOROCCO

STRUCTURAL ADJUSTMENT LOANS I AND II(LOANS 3001-MOR and 3463-MOR)

PREFACE

The first Structural Adjustment Loan (SAL I) to Morocco was approved by theBoard on December 1, 1988 for an amount of US$ 200 million. The loan was closed onschedule after the whole amount of the loan was disbursed by the closing date, December 31,1989.

The second Structural Adjustment Loan (SAL II) to Morocco was approved bythe Board on April 30, 1992. The loan was closed on schedule after the whole amount wasdisbursed by the closing date, December 31, 1993.

This Program Completion Report (PCR) was prepared by the Country OperationsDivision of the Middle East and North Africa Region (MNICO) (Parts I and III) and theBorrower (Part II).

Preparation of this PCR was started during March 1994. The basic informationis drawn from the President's Reports (P-4867-MOR) and (P-5637-MOR), the loan agreements,supervision reports, internal Bank papers and documents provided by the Moroccan authorities.The report has also benefitted from numerous discussions with IMF and Bank staff memberswho have been involved in the Moroccan adjustment program.

iii

PROGRAM COMPLETION REPORT

THE KINGDOM OF MOROCCO

STRUCTURAL ADJUSTMENT LOANS I AND II(LOANS 3001-MOR and 3463-MOR)

EVALUATION SUMMARY

1. Morocco's adjustment program began in earnest in 1983 with the onset of thefinancial crisis. After nearly two decades of conservative economic management sinceindependence in 1956, the boom in phosphate prices during 1975-1977 increased export revenuessubstantially and led to an unprecedented expansion of government expenditures. This signalledthe beginning of a new era and an end to the conservative fiscal policies of the past. However,the boom in phosphate prices was short-lived. The ensuing terms of trade reversal, the secondoil shock, and the increase in international interest rates led to the fiscal crisis of the eighties.

2. During the period leading up to the need for reform, Morocco's external debtgrew dramatically from US$ 1.8 billion in 1975 to US$ 13.4 billion in 1983 with an increasingproportion being owed to commercial banks. By 1982 Morocco's external and budget deficitshad both reached around 12% of GDP. With the increase in international interest rates,combined with a prolonged drought during the early eighties and a decline in the productivityof public investment, Morocco could not shoulder its debt service burden. The debt to GDPratio had reached 96% and the debt service ratio had reached almost 40% in 1983. It was nowapparent that a comprehensive program of economic reform was needed.

3. Morocco's reform program consisted of stabilization measures on the fiscal andmonetary front combined with structural adjustment measures in trade, industry, agriculture, thepublic enterprise sector and education to promote a supply response in the economy.Macroeconomic imbalances were addressed by reducing government expenditures includingpublic investment. Improvements in the terms of trade, appropriate exchange rate policies andtrade liberalization, as well as improvements in weather conditions led to better performance inGDP growth and in the current account. Structural reform facilitated trade and helped boostnon-traditional exports. In addition, a series of debt rescheduling agreements with both officialand private creditors reduced its outflow of resources. Thus, by the time the SAL I programwas launched, Morocco had already undergone a period of extensive reform. During thisperiod, it was aided in its efforts by several stand-by arrangements with the Fund as well as bya number of sectoral adjustment loans from the Bank. These loans prepared the ground forSAL I.

'V

4. The SAL I program was initially seen as the first of two or three macro-economicadjustment operations which would be needed in Morocco in addition to various sectoraladjustment programs. It was launched to help Morocco continue its long-term adjustment effortswith the goals of improving Morocco's creditworthiness and of increasing growth through higherand more efficient investment. A number of measures were taken on the fiscal/ budgetary frontto improve revenue collection and to increase government investnment in key areas. Thesemeasures along with trade liberalization and measures taken to improve debt management werealso to improve Morocco's creditworthiness. The elements of the SAL I program complementedthe government's own vision and efforts, the requirements for second tranche release were fewand simple, and thus the program itself was implemented successfully. Continued reschedulingsand external support also helped the authorities in reaching their macroeconomic goals. Thewhole amount of the loan was disbursed and it was closed on schedule.

5. However, Morocco's average growth rate in the post SAL I years did not increasebut rather, declined from an average of over 5% during 1985-1988 to under 2% during 1989-1993. While a great deal of the variability in GDP growth stems from the variability inagricultural value added, the average growth rate for non-agriculture GDP also fell from 4 % to3% in the same time period. It is difficult to isolate the SAL I program's direct effect ongrowth given the importance of past policy actions and exogenous factors. While Morocco'screditworthiness depends on a variety of factors not directly related to the SAL I program,budgetary reform, trade liberalization, and the measures undertaken to improve informationmanagement on foreign debt helped to improve Morocco's attractiveness to external creditorsand debt management. The most important contributions of the SAL I program however, havebeen the impetus provided for further trade liberalization and the emphasis on fiscal reformwhich led to a revamping of the tax structure in Morocco. The Bank played an important rolein these two areas without which reform would probably have been slower.

6. An innovative feature of the SAL I program was the adoption of a set ofmacroeconomic targets that were to be monitored during the program. Deviations from thesetargets were supposed to trigger policy discussion with the Bank and possible corrective action.While many of these macroeconomic targets were met in practice, their usefulness isquestionable in the context of Bank SALs whose duration is generally very short. First, theindicators were mostly a set of endogenous variables, not within the government's direct control.Divergence from these indicators in the short run may not even be a reflection of governmentpolicy, but of other factors. In addition, these variables were subject to a great deal ofmeasurement error and they are betters indicators of the direction of government policy over thelong run rather than as tools to be used for fine tuning the economy. Second, even whendivergences are due to government policy it is hard to separate out the effect of previous versuscurrent policies as well as the effect of exogenous factors. Also, these indicators did not fonnpart of Bank conditionality in Schedule 4 of the loan agreement and thus were not binding onthe government.

7. Though SAL II was approved over two years after the first SAL closed,discussions with the government continued on various reform issues. In parallel, a SECAL forthe financial sector was approved in the intervening period. The SAL II program had asomewhat different focus from that of SAL 1. While the goal of increasing growth remained,the Bank put more emphasis on private sector development and poverty alleviation than it hadin the SAL I program. Morocco's debt problem and the issue of international creditworthinesshad been resolved by continued debt reschedulings in 1990 and 1992 at the London and ParisClubs, and by continued macroeconomic stabilization and trade liberalization. Like itspredecessor, the SAL II program was implemented successfully. The whole amount of the loanwas disbursed and the loan was closed on schedule.

8. Along with trade liberalization and continued macroeconomic stabilization, SALII also aimed to protect core investments in the economy and to provide public investmentcomplementary to private investment to achieve its growth objective. It is too soon to estimatethe beneficial effects on growth of the SAL II investment program, which targeted infrastructureand social programs. As long as investments in key sectors are maintained the growth effectscould be positive. The SAL II program also played an important role in pushing for greaterprivate sector involvement in areas traditionally reserved for the government in Morocco.Another major contribution of the program was in focussing the Moroccan government'sattention on the issue of poverty alleviation. The Bank worked with the authorities to establisha database on the poverty situation in Morocco through the Living Standards MeasurementSurvey (LSMS) and various studies, and on the preparation of a strategy for poverty alleviation.

9. The SAL II program contained a set of targets that were to be monitored duringthe program that included not only the macroeconomic ones used in SAL I but also a set ofindicators for the social sectors. The relevance of the indicators used for the social sectors arealso debatable since they were not all monitorable on a timely basis and their selection did notachieve the desired objective of targeting the poor. Given that a detailed analysis of the socialissues was undertaken, and that a strategy for poverty alleviation has been developed inconsequence, these targets for the social sectors did not add much to the SAL II program.

10. In conclusion, the two structural adjustment loans of the Bank, SAL I and SAL II,were implemented successfully though they did not meet all their objectives. SAL I played animportant role in promoting further trade liberalization in Morocco, and in reform of thebudgetary/fiscal system. The program also helped, along with Bank technical assistance, toimprove debt management in Morocco. However, average growth in the post SAL I years wasactually lower than in the pre-SAL I years. The SAL II program reflected the Bank's changingpriorities in Morocco as it emerged from its financial crisis yet continued with low growth: itplayed a crucial role in focussing government attention on poverty alleviation, continued tradereform, private sector development, and investment in the social sectors to enhance long termgrowth. The fact that Morocco's reform program had started five years before the first SALwas approved, and that several Bank SECALs had been approved in the interim, meant thatreforms were well under way when SAL I was negotiated. It also meant that SAL conditionality

vi

could be more simple and thus easier to meet. The Moroccans already had a coherent vision oftheir goals and the Bank complemented their reform program by highlighting crucial areas foradjustment and by providing it with various instruments. Thus, borrower ownership, a wellestablished reform program, economic and political stability, relatively simple loan design, anda productive relationship with the Bank made implementation of the SAL programs relativelyeasy.

PROGRAM COMPLETION REPORT

THE KINGDOM OF MOROCCO

STRUCTURAL ADJUSTMENT LOANS I AND II(LOANS 3001-MOR and 3463-MOR)

PART I: THE BANK'S ASSESSMENT OF SAL I AND SAL I

Program Identity:

Name : Structural Adjustment Loans I and IILoan Numbers 3001-MOR and 3463-MORRVP Unit Middle East and North Africa RegionCountry MoroccoSector Non-Project Lending

A. BACKGROUND

11. From independence in 1956 until the mid-1970s, Morocco pursued relativelyconservative economic policies with investment growing slowly over the years and an annualGDP growth rate of 4%. During this period, primary products, and particularly phosphates,with which Morocco is substantially endowed, accounted for about 90% of merchandise exports.A boom in phosphate prices during 1975-1977 which increased public sector revenues, led toa substantial expansion of the public investment program. From 1973 to 1977 investmentexpenditures rose from about 17% of GDP to about 34%. Defense expenditures related to theWestern Sahara conflict, also escalated.

12. After the terms of trade reversal in the late 1970s, with phosphate prices fallingand oil prices rising, the increase in public sector expenditure was sustained by recourse toexternal borrowing as was true of many developing countries during this period. This strategywas encouraged by the availability of foreign financing at exemely attractive terms. Duringthis period, the budget deficit grew to reach about 13% of GDP in 1981 and 1982 and thecurrent account deficit reached 12%. Morocco's foreign debt grew from US$1.8 billion in 1975to USS 13.4 billion in 1983. Total external debt was at 96% of GDP while the debt serviceratio was almost 40% in 1983. More than 60% of the debt was at non-concessional rates, withover 40% owed to commercial banks (negligible a decade earlier).

13. In view of the dramatic deterioration of the macroeconomic situation, astabilization program was launched in 1978 but was interrupted due to a severe drought andsocial pressures. Another adjustment program was launched in the context of the Extended FundFacility (EFF) of the IMF in 1980 but this program was also interrupted after food riots in

2

Casablanca. Government expenditures had now reached 37% of GDP. During 1980-81 theBank attempted to negotiate a SAL program; however this effort failed. The high debt stock andthe interest rate increase in the early 1980s, both combined with a severe drought in 1980-84,brought about a debt crisis in early 1983 with interest payments alone accounting for 20% ofexports and with no access to commercial borrowing.

14. In response to the financial crisis, the Moroccan authorities began a program ofcomprehensive economic reform strongly supported by its international partners, and a seriesof reschedulings at the Paris and London Clubs, a process that was to last several years. During1983 - 1992, this program was supported by seven Stand-by Arrangements (SBAs) with theFund, seven Sectoral Adjustment Loans (SECALs) and two SALs with the Bank (see Table 1).The SECALS consisted of two loans for trade and industry (ITPALs I and II), two foragriculture (ASAL I and II), one for public enterprises (PERL I), one for education (ESAL) andone for the financial sector (FSDL). World Bank adjustment loans alone amounted to US$1.065 billion. In addition to macroeconomic stabilization, the Moroccan reform programconsisted of a series of measures to liberalize and increase efficiency in trade and industry,agriculture, education, and the public enterprise sector. In addition, restrictive monetary andfiscal policies were employed to contain aggregate demand.

Table 1: IMF Loans and World Bank Adjustnent Loans1982-93

Starutng Ending In Millions ofSDR US$

SBA, CFF 4/82 4/83 517SBA 9/83 3/85 300IPTA 1 5/84 6/85 150ASAL I 8/85 100SBA, CFF 9/85 12/85 125ITPA 11 10/85 11/86 200ESAL 3/86 12/89 150SBA 12/86 4/87 240ASAL 11 12/87 12/91 225SBA 9/88 12/89 210PAL 9/88 23SAL 1 1288 12/89 200SBA 7/90 3/91 48EFSAL 6/91 235SBA 1/92 3/93 18SAL [1 3/92 12/93 275

3

15. Stabilization of public finances was achieved by cutting govemment expendituresand particularly public investrnent. In addition, as oil prices fell, the governnent imposed anoil levy which generated revenues of about 2.7% of GDP. As a result of these measures thefiscal deficit fell from 12% of GDP in 1983 to under 5% in 1987 and 2% in 1993 despite largeinterest payments on government debt. The decline in international petroleum prices, and therebound in agricultural production combined with demand management policies served toimprove the current account of the balance of payments substantially from a deficit of 12% in1983 to under 5% in 1988 and 2% in 1993 (before debt rescheduling). In addition, GDP growthduring the period 1983-1988 averaged around 4.5% while inflation remained under 5%. Thestriking improvement in macroeconomic indicators between 1981-82 and 1987-88 is shown inTable 2 and Figures 1-4 (from pages 4 to 6).

16. Structural reforms during 1983-1988 led to a more efficient productive sector.The substantial reforms of the trade and industrial regime gave rise to productivity gains incapital and labor and a shift in trade flows. ' By substituting quantitative restrictions with tariffs,by eliminating anti-export biases, and by simplifying administrative procedures, total trade, and

particularly exports ofmanufactured goods,

Plgw 1: udal 11 d CVnn A@oUM 3/ 0~ was given a boost. Byon Pao"of GDM 1988 non-traditional

1980 *I 02 93 ad 85 86 l7 IS 09 90 91 92 1993 manufactured goods2" accounted for 30% of- total merchandise

-2

-' Ext. ACct. Deficit exports compared with20% in 1988, resultingin a reduced dependency

-12! t d ricit on natura resource--2. Dudget deficitbased manufactures.

11 D d dt d Vw Cm"u Gavemmwt budge an a p erba Thus exports hadxdudgoIn ptd GP. alrady recovered and

21 Ddidt c gg dmiuatamnt duehg cMiI Sab ni fete current account hadcOIIP. turned into a small

surplus in 1988.

17. As mentioned before, during the pre-SAL adjustment period, the Bank was heavilyinvolved in the Moroccan reform program. A number of studies conducted by the authoritieswith Bank assistance enabled them to gain a good understanding of the economic issues. Anexample of this is the three year study on indusial incentives and export promotion which wasinitiated in 1979 and which served as the basis for the Industrial and Trade Policy Adjustment

[/ A detailed analysis of dte impact of liberalization on trade and industrl adjustmen is provided in report6714-MOR.

4

Loans (ITPAs). Fund and Bank programs complemented each other providing a good mixbetween stabilization at the macro level supported by the IMF and structural, supply-responseenhancing, sector level reform supported by Bank SECALs. For example, trade and priceliberalization were harmonized with fiscal and monetary measures (so that a reduction in importduties was associated with a reduction of the real effective exchange rate.) The negative impactof lower trade taxes was compensated for by a gain in domestic taxes through the establishmentof a value added tax.

B(I THE PROGRAM SUPPORTED BY SAL 1

18. The Bank SALs came in at the second stage of Morocco's adjustment process; theSAL I program was designed to address weaknesses in the Moroccan reform program. Whilemacroeconomic stabilization had been largely achieved, the growth rate was still low. During1983-88 macroeconomic stabilization had been achieved primarily by cutting govermnentexpenditures and particularly investment. The remaining adjustment came from a reduction inexpenditures on wages,goods and services. Frwo 2*: Dobt,wvW Rao 1I, d Gross. vrv2 1USD43Government revenues hadremained virtually | .oftDP Debt ervie.

unchanged at around 22.5 % o.0 Rtioof GDP (see Figure 5 on eo

page 7). The share of 10.0

central government 40.0 CY Xo

investment in GDP had o..fallen dramatically to 4% in 10.0

1987 and 1988. Thus per 0 so .,64 *5 *6 *7 as Is 30 81 92 93

capita consumption hadstagnated and with essential lI/ Daeft buel0IreeSwe*1Q t peS of IPOSNFS &d plS

han" cm *owe).investments in key a" o ddM ao").

economic and social sectorscancelled, the outlook forgrowth was not positive.

5

19. Budgetary problems remained given the weak fiscal system leading to a substantialbuild-up of domestic payments arrears. Structural weaknesses in the area of public finance had

at times slowed the pace ofreform (for example, the

FP1g 3:ODPQrowthl/ andlnflal*lo2117343 inability to reducean wop"w ) budgetary reliance on trade

taxation and the lack of________________________________________ local counterpart funding

0 Gpe dfa for public investment30.00 CDP deflator

programs in agriculture,15.00 GDP cont prices health and education). In10.00 addition, low foreigns.o0 exchange reserves led to

0.00 periodic external arrearsY0 mand delays in obtaining

73 74 75 74 77 71 79 00 i 0i 33 S4 £5 SO *7 S0 0 * 12 *3 financing. Debt indicatorsI/Ga P continued to be highw aI* dehhk. proving to be an

impediment to obtainingexternal financing. Total

external debt remained at 94% of GDP, and the debt service to exports ratio at 26% in 1988.The lack of foreign and public savings and the rise in domestic interest rates signalled the dangerof crowding out private sector investment. These weaknesses were an impediment to highergrowth in Morocco.

20. Thus the two broad goals of the SAL I program were to increase the growth rateand to improve creditworthiness. Since the deteriorating quality of the public capital stockrepresented a constraint to attaining higher growth, raising the level and efficiency of public

investment expendituresRPpm & aEfw Examg PA" mw T omloan was a major component of

mn IM to the adjustment program. Itaimed to do this bytargeting increases in acore investment programwhich would protectinvestment in areas crucial

e0.e .for growth. By increasing.0.0 >s the buoyancy of the tax76.0 -=h _ . R system while minimiziDgg0.0 . distortionary effects on

I 0 *1 20 l} 36 97 S990 91 93 93 resource allocation, the

program was to rationalizethe incentive structure.

6

Measures to be supported under the program served to lower marginal tax rates, improve theallocative efficiency of the tax system, and to improve tax incentives for productive investment.It also aimed to enhance the equity of the tax svstem and to raise collection rates. Tradeliberalization had already led to significant improvements in the incentive regime, though thepace of liberalization had slowed somewhat in 1986 for fiscal reasons. The SAL programcontinued this reform to provide clear pricing signals for investment and production decisionsand also to enhance government credibility in the area of trade reform.

21. As the external debt burden continued to be formidable, the elaboration of arobust debt management system was warranted to monitor the complexities of the reschedulingarrangements of the past, inform policy-makers as to the relative merits of different restructuringoptions, and enable the formulation of a strategy governing external debt policy in the future.The SAL provided the institutional reforms and technical assistance necessary for theimplementation of such a system.

C() EVALUATION OF SAL I

22. Overall the SAL I program in Morocco was completed satisfactorily. The successof the program is evaluated by considering the objectives of the Bank's program, the areas ofintervention chosen by the Bank and the specific policy tools targeted. In this context, thefollowing issues are examined:

(i) Were the SAL-related requirements including the conditionality implemented asenvisaged?;

(ii) Was the conditionality appropriate in terms of the stated objectives of the SALand in the context of the overall reform program of the government which the SAL was intendedto support? Did the conditionality achieve the intended goals?;

(iii) Were the economic indicators chosen to monitor overall compliance with theprogram the most suitable? What was the trade-off between simplicity and accuracy?;

(iv) What was the effect of the external environment-- did it facilitate/ make it moredifficult to meet the goals outlined in the SAL program?

Each of these issues will be discussed in turn in the context of the overall macroeconomicsituation of the economy. This section will conclude with a summary of the strengths andweaknesses of the program and the lessons to be learned from it.

23. As mentioned previously, the two stated objectives of the policy reformscomprising SAL I2 were to (a) increase growth through higher levels of more efficientinvestment and (b) tostrengthen Morocco screditworthiness while Figure 5: Govemment Revenu, and Expenditure

t i i i t h p~~~~~~~~~(n pecnt of GDP)continuing with n.cnoGP

macroeconomic stabili- Expend:-ture

zation. To this end, the 4 .oISAL I program intervened 35.0.

in the following four areas: Budget DecLt25.0

increasing the efficiency of 20.0

public investment, fiscal 15.0 Revenue

reform, trade liberalization, 1o.oand improved external :.1 liability management. The so el 82 83 84 85 86 87 SB 89 90 91 92 93

specific policy tools in eacharea used to meet the stated 1/DefioeCt0 Govwmmbubudeto naommitmentbsis bore grmnt.

objectives were dividedbetween the conditions ofBoard presentation (release of first tranche) and the conditions of second tranche release in thefollowing manner:

(a) Conditions of Board presentation: (i) public investment: simplification ofbudgetary management policies and systems, rationalization of public investment programmingincluding agreement on the contents and level of the target investment program for 1988-89; (ii)fiscal system: revision of corporate tax rates,adjustment of the VAT on selected commodities,presentation of a more equitable personal income tax to Parliament, and the promulgation ofinvestment codes; (iii) trade liberalization: the elimination of import licensing requirements onover 500 products, the repeal of exchange restrictions on foreign investments, and thestrengthening of the export insurance scheme; (iv) external debt management: elaboration of anaction plan establishing an external debt management system in collaboration with the Bank.

(b) Conditions of Second Tranche Release: (i) public investment: implementation ofthe Target Investment Program (TIP) by ministry for 1988 and beginning 1989, and preparationof an action plan (including implementation timetable) satisfactory to the Bank for the interfacebetween budgetary management information systems of all relevant ministerial departments; (ii)fiscal system: approval by the Council of Government of the draft law instituting a national chartof accounts, as well as a regulatory framework pertaining to the accounting profession; (iii) tradeliberalization: repeal of import licensing requirements on products corresponding to at least 120

2/See para. 89, pg. 26, President's Report, SAL 1.

8

tariff positions, and preparation of a circular satisfactory to the Bank for the simplification ofthe customs nomenclature and tariff structure; (iv) external debt management: publication of acircular satisfactory to the Bank mandating the registration of all external financing agreementson public and publicly guaranteed debt.

(c) In addition, continued macroeconomic stabilization was considered essential to thegrowth objective and to the resolution of the debt problem.

(i) Implementation

24. In terms of actual implementation of the loan, SAL I was a success. Thegovernment met the conditions for Board presentation of the loan as well as those for secondtranche release, largely within the expected time frame. The loan was fully disbursed and closedon December 31 1989. Cofinancing of 13 billion Japanese Yen was provided by the OverseasEconomic Cooperation Fund of Japan, and of approximately US$ 140 million by the AfricanDevelopment Bank.

(ii) Achieving the Objectives

25. Macroeconomic Stabilization: The macroeconomic situation was good in 1988with GDP growth at over 10%. The budget deficit was reduced and the current account attaineda surplus. However, the situation in 1989 (the year the second tranche of SAL I was disbursed)was worse than projected with GDP growth at 2.5%, an increase in the budget deficit and alarge increase in the current account deficit. In 1990 all three indicators improved though theimprovement in GDP growth was not sustained. Inflation was very low in both years atunder 3%.

26. Growth: Elements of the SAL I program that were expected to affect the growthobjective were the TIP, fiscal reform and trade liberalization. The TIP, which increasedinvestment in the social sectors and in infrastructure and other measures related to publicinvestment were designed to improve the efficiency of public investment by reallocatinginvestment between sectors. Only six ministries were included to facilitate monitoring.Increased investment in infrastructure, by being complementary to private investment was toraise overall growth. Investment in the social sectors was to improve the productivity of laborand thus the economy's growth potential. As a result of the SAL I program investment in keysectors did increase as there was a reorientation of government priorities; thus, we can say thatthe intersectoral efficiency of government investment probably increased.3

27. The TIP, which accounted for 2.4% of GDP in 1987 was to rise to 3% in 1990.Government fixed investment accounted for 4% of GDP in 1987 and 4.5% in 1990. Thus the

3/However, the TIP did not address the issue of the efficiency of government investment within sectors. Theoveall efficiency of investment depends on both.

9

TIP accounted for about half of central government investment. The data show that totalinvestment in the economy was higher in 1989 and 1990, during the SAL years. Centralgovernment fixed investment only rose by less than half a percentage point-- most of the increasein investment was due to an increase in private sector (including public enterprise) investmentThus the TIP which was to have increased central government investment by almost 1 % of GDPdid less in affecting its magnitude. In addition, the data show that average governmentinvestment was in fact higher before the program years (5.4% of GDP in 1985 and 4.8% in1986) than after (4.4% in 1990, and 4.5% in 1991). Private sector investment however, rosein 1989 (18.4% of GDP) and 1990 (19.5% of GDP) in comparison with 1985-1988 (when itaveraged 16.7% of GDP).4 This seems to suggest that the TIP was not a particularly ambitiousprogram in that it did not increase investment a great deal.'

28. The effect of the public investment program on growth since the program yearsis difficult to assess. Apart from the fact that the effects of investment are often not obviouslydiscernible in the short run, other policies and exogenous factors play a role in determining GDPgrowth. The latter effects may outweigh or obscure the effects related to increased investmentby the public sector. In fact, the average growth rate of real GDP in Morocco during the years1985-1988 was 5.6% while the average for 1989-1992 was 2%. This variability was due to theagriculture sector since the early nineties were very bad years while 1988 was a very good yearfor agriculture. In addition, some of the (productivity increasing) effects of investment,particularly in sectors such as education and health will take longer to show.

29. In sum, though the targeted public investment program increased governmentinvestment in some sectors of the economy, overall central government investment increased lessthan envisaged. It is not possible to discern the long-run growth enhancing effects of theprogram; in addition, the efficiency of investment within sectors has not been evaluated thoughthe efficiency of public investment in terms of choice of sectors was directly affected by thetarget investment program. It is interesting to note that the (post SAL I) 1990 investment budgetwas cut by 16% across the board, with no distinction being made between core and non-coreinvestments. This raises the question of how committed the government was in achieving SALI objectives vis a vis the TIP: if reforms are not sustained they will not have the long-term effectdesired. The SAL I program also excluded some ministries to facilitate monitoring. Thisimplies that the TIP (and the associated conditionality) was an important first step in improvingpublic sector investment but a more extensive program including public enterprise investnentis probably necessary. Given the lack of separate published accounts for private and public

4/Though private investment rose it is not clear that this was the result of an increase in complementary publicinvestment so the increase cannot be attributed to more efficient public investment.

5/Note that only a fraction of what appeared in the public investment program (PIP) was executed,whichcomplicated the monitoring of the PIP. Thus by choosing a TIP, monitoring was made possible and theessential investment needs of six ministries were protected.

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enterprise investment the establishment of a consolidated, readily available database for publicenterprise and private investment should probably have been part of the SAL I program.

30. The reform of the fiscal system undertaken in the context of the SAL I programwas essential to efficient public sector revenue management. Improvements on the revenue sideof budget management are crucial if the government is to undertake essential investment withoutcrowding out the private sector or resorting to inflationary financing. In this sense, fiscal reformwas complementary to the goal of increasing public investment in the context of macro-economicstabilization. The reforms on the fiscal side to improve revenue collection and to lower thecorporate profits tax rate in the context of the SAL I program probably had a positive effect onprivate sector investment. In the context of a sound macro- policy, the indirect effects ofimproved revenue collection would be to reduce the crowding out effects associated withrecourse to domestic debt financing, while the effects of a lower profits tax are obvious. Themodification of the existing investment codes was meant to rationalize investment incentives andreduce intersectoral disparities in the investment code both for revenue enhancing reasons, andfor increased efficiency in investment.

31. The Bank played an important role in pushing for further trade liberalization inthe context of the SAL I program. Trade reform had resulted in an increase in export earnings(including workers remittances) from 23% of GDP in 1980 to 32% in 1985 but since 1985earnings have stabilized between 28% and 32% (see Figure 6). Further, trade liberalization wasexpected to enhance export growth and by promoting private sector development, increaseinvestment and growth in the long run. Though it is not possible to quantify the impact of tradeliberalization on growth at this stage, this program was complementary with the other aspectsof the reform program.

32. I m p r o v i n gCreditworthiness: The other nhd asaOP)major objective related to theSAL program was improvingMorocco's creditworthiness inthe international market. Oneaspect of this was improvedexternal debt management. so ; FSTo this end, the Governmentof Morocco committed itself oain the context of the SAL tothe establishment of a debt omanagement system which *0 81 82 13 96 65 86 97 88 89 90 91 92 93

would allow for a morerigorous and reliable analysisof the country's debt profile.Under a plan of action formulated with Bank support, the Government undertook to establish

I1

a system of data collection, compilation and recording of all foreign public and publiclyguaranteed MLT debt public short term debt and private non guaranteed debt. As part of theSAL, the Government published a circular instituting the obligation to register all public andpublicly-guaranteed debt contracts with the Treasury, as well as communicate all pertinent data(commitments, disbursements, cancellations, amortizations and interest payments). It alsoestablished a formal coordination committee among all agencies involved in the foreignborrowing process.

33. Better information management is a first step to improved debt management; thusestablishing a database was a priority. Discussions with government officials indicate that inpractice all external debt (public and publicly guaranteed) is currently registered. The processof rescheduling through the Paris Club in 1990 in fact, not only aided Morocco by reducing debtpayments but also helped organize a great deal of the information available on debt. Thus otherexogenous developments plus Bank provided technical assistance in conjunction with the SALI initiatives helped improve the database on debt.

34. However, what is equally important for debt management are the incentives forborrowing from abroad and the ability of the economy to repay its foreign debt obligations. Inthis respect, the overall structural reform program of the government has played an importantrole since these two factors will be affected by the macroeconomic policies undertaken by thegovernment. For example, greater emphasis on investment and growth will increase thecountry's ability to repay debt. Continued trade liberalization will, by increasing the opennessof the economy and by encouraging exports in the long run, have a positive effect on thecountry's ability to service and obtain foreign financing. Rationalization of the investment code,and the tax system should also help attract foreign direct investment and improve Morocco'screditworthiness. Thus, better information management in the context of the government's andthe SAL program's overall policies (particularly the emphasis on growth of manufacturedexports) had a positive effect on debt management and the ability to repay foreign debt.

(iii) Performance Targets Used

35. A number of indicators were chosen to monitor progress during the SAL Iprogram. These were specifically: (a) the ratio of total gross fixed capital formation to GDP;(b) the ratio of gross public and publicly guaranteed debt outstanding to total foreign earnings;(c) the rate of real growth of manufactured exports; (d) the level of net foreign assets of theCentral Bank. The targeted figures were to represent minimum levels of performance;significant divergence from the minimum targets were to be countered with remedial policyaction. These targets however, were not written into the loan agreement and were thus notbinding on the government. Macroeconomic performance was to be reviewed semiannually andthe indicators were to be used to assess the effects of policy reforms being introduced in thecontext of the SAL. The values of the indicators for 1988 were reviewed before second trancherelease and those for 1989 were supposed to be reviewed before Board presentation of a secondSAL.

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36. The annual targets set in SAL I for 1988-92 were met in about two-thirds of thecases as shown in Table 3. The target for the ratio of gross fixed capital formation over GDPwas exceeded in each year, the minimum value of the net foreign assets of the Central Bank wasexceeded in four out of the five years. The growth rate of manufactured exports was higher inthree out of the five years with the growth rate falling in 1991 and 1992. Public and publiclyguaranteed debt was almost on target.

37. While macroeconomic progress and compliance with the SAL program must beevaluated, it is difficult to choose a set of indicators that would accurately reflect the policystance taken by the government in the short run. The indicators chosen by the SAL I programwere mostly variables that were endogenous (not in direct government control like base moneyfor example), which are subject to fluctuations from exogenous factors, and the evolution ofwhich do not have much meaning in terms of signalling policy changes in the short run.Therefore using these indicators to fine tune the economy (take corrective action) may not beuseful or feasible in the context of a SAL. In addition, when endogenous variables are targeted(such as the real exchange rate), the control variables (such as aggregate demand managementand the nominal exchange rate) which must be managed appropriately to achieve the target, needto be identified.

38. In sum, the use of the performance targets as a signalling device before secondtranche release is questionable. For example, the growth rate of manufactured exports can beaffected by a number of things like aggregate demand management and the real exchange rate,international economic conditions, and structural inefficiencies at the micro level. Real exchangerate policy however, was not explicitly discussed in the context of the SAL. However,estimations show that during 1980-93, 55% of the variance in the export to GDP ratio isexplained by variations in the level of the real effective exchange rate (REER).

1

Table 3: SAL I Macroeconomic Indicators 1988-92

__ _ _ ___ _ 1988 1989 1990 1991 1992

Total Gross Fixed CaDitalFormationlGDP

Targets 19.0 19.5 20.0 20.5 21.0Actual 20.4 22.8 23.9 22.3 23.0

Gross Public and Publicly GuaranteedExternal Debt / Total ForeignExchange Earnin2s

Targets 2.8 2.6 2.4 2.2 2.2Actual 2.9 3.2 2.6 2.4 2.3

Real Growth Rate of ManufacturedExDorts

12.0 10.0 10.0 10.0 10.0Targets 14.0 13.1 22.1 4.5 2.8Actual

Net Foreign Assets of Bank Al Maghrib(US million)

350.0 850.0 1050.0 1200.0 1400.0Targets 500.0 463.0 2040.0 2990.0 3481.0Actual

39. The ratio of total gross fixed capital formation to GDP is a good indicator ofinvestment trends in the economy. However, the SAL program focussed on the TIP directly andon total investment only indirectly. While it is reasonable to monitor the growth rate of the TIP(which is a government decision variable), the TIP formed only a small part of the overallinvestment in the economy (11.4% of overall investment in 1987). Total public sectorinvestment could have been monitored. However, the SAL I program was designed to monitorreadily available data; since public enterprise data is presented jointly with private investmentdata in Morocco, total public investment could not be easily monitored.

40. As mentioned previously, an important element of the SAL I program could havebeen to establish a database separating private and public sector investment. Readily availableseparate statistics on private and public investment are essential in the formulation of the mostbasic macroeconomic policy, particularly since they may respond to different incentives or havedifferential access to resources. In addition, since the effects of government policy take placeover the longer run (there are lagged effects) any growth in the overall gross capital formationfigures probably reflected the effects of policies undertaken previously in the context of theauthorities' overall reform program. The investment indicator that the Bank used for monitoringprogress does show that overall investment, which was low compared to that in other comparablecountries, increased.

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41. A good indicator to use as a measure of a country's liquidity and ability to serviceforeign debt is debt service over exports. The stock of public and publicly guaranteed debt waschosen to signal any sudden jumps in the debt stock which would hamper Morocco's futureability to pay. Given that future ability to pay also depends on interest rates and export earningsamong other things, perhaps these should have been taken into consideration too by monitoringthe debt service to export ratio. Even with no sudden jumps in the debt stock the debt serviceratio may rise signalling the onset of problems. In 1989 export earnings fell, mainly due to therecession in Europe and the stock of debt increased-- both effects tending to increase the ratio,whereas in 1990 the opposite occurred.

(Iv) External Environment

42. In the second half of the eighties phosphate prices rose so that Morocco's(merchandise) terms of trade regained their 1980 level and were even 8% higher by 1989. Atthe same time, oil prices continued to fall. These were both positive developments forMorocco's budget and current account deficits. Also, rescheduling of external debt continuedduring this period and official foreign creditors were willing to extend the necessary foreignfinancing. These actions helped Morocco move closer to regaining its creditworthiness.Agriculture performed very well in 1988, and moderately well in 1989 due to adequate rainfall.This reduced the food import bill and had a positive effect on the trade balance.

43. In conclusion, Bank conditionality was in general appropriate in the context of thegovernment's reform program. The target investment program represented a first step towardsincreasing the efficiency of public investment, but represented a small proportion of total publicsector investment. However, a more comprehensive improvement in the allocation of publicsector investment would have been harder to implement and would probably have required moretime than was available in the context of the SAL. It would also have been harder to monitor.Trade liberalization was an important element of the reform program and SAL I successfullycontinued the work begun in the ITPAs. Tax reform was another area in which the Bank playeda pivotal role.

Lessons Learned

44. SAL I was successfully implemented. The success of the program was probablydue to the following factors:

(i) Timing: The Bank's first SAL came at a time when government reforms werewell under way and the authorities' overall reform program was obviously 'owned' andsustainable (politically and economically). It also came after a series of sectoral adjustmentprograms by the Bank. One of the reasons for this was that the Moroccan government wasorganized around strong sectoral ministries which meant that it had been more efficient to builda dialogue with the government through SECALS. In addition, several Fund programs weresimultaneously working on macroeconomic stabilization. This had helped establish the basis for

15

the implementation of an overall SAL which required significant inter-sectoral cooperationamong the ministries.6 The Bank often provides adjustment loans to countries that are at a lessmature stage in their reform program (sometimes with a less defined vision of their own ends)which makes it harder to achieve success.

(ii) Content: The conditionality of SAL I itself was politically feasible andcomplemented the government's own vision.

(iii) Content: There were few actions the government was supposed to take beforesecond tranche release, and these actions were simple. This is different from other loans wherethe conditionality is sometimes overwhelming in its complexity, the sheer number of things thatthe government is required to do before tranche release, and where the changes required aremore substantive. While this is an argument in favor of simplicity when designing loans, (i.e.have few conditions), it must also be remembered that this was possible partly due to (i) aboveand also that in some countries, conditionality that is not more extensive may have no impact.For example, one of the conditions of second tranche release was the publishing of a circularrequiring the registration of public and publicly guaranteed debt. This condition was easy forthe Moroccans to satisfy whereas it did not assure implementation of the condition ex ante. Inmany countries this may not be sufficient to ensure compliance.

D(D PROCUREMENT. DISBURSEMENT AND MONITORING OF SAL I

45. The conditions for withdrawing the proceeds of SAL I were similar to thoseapplied to other policy-based loans. The loan was administered by the Central Bank and theMinistry of Finance. Proceeds of the loan were used to finance the full foreign exchange costs(c.i.f.) of eligible imports procured after ICB. Ineligible items were those financed from othersources, goods intended for military or paramilitary use and luxury items. Both public andprivate sector imports were eligible for financing. Private sector contracts under US$ 5 millioneach, including petroleum products, would be awarded on the basis of the nornal purchasingprocedures of the buyer, which are based on price quotations in international markets.Procurement of petroleum products and foodstuffs were limited to an aggregate of US$ 50million. Public sector imports under contracts below US$ 5 million up to an aggregate of US$20 million were awarded in accordance with local competitive bidding procedures acceptable tothe Bank. Contracts for all other goods were procured through ICB in accordance with Bankguidelines.

46. Disbursements for contracts procured after ICB were made against appropriatelydocumented withdrawal applications. Disbursements against other items were made on the basis

6/See minutes of Board discussion for SAL 11.

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of Statements of Expenditures from the Central Bank- detailing individual transactions in a rivenperiod, together with a certification of payment of the amounts involved and of their eligibilityunder the loan.

47. The total amount of the loan was withdrawn over a one year period. The secondtranche of the loan was disbursed as expected; second tranche release was approve(i on 18thSeptember 1989 and by October 10, 1989 the loan was fully disbursed. An initial audit reportfor the loan was supposed to be prepared simultaneously with the one for SAL II. However,this was not done. The program supported by SAL I was monitored by the Country OperationsDivision of the Middle East and North Africa Department I of the MENA region.

B(II) THE PROGRAM SUPPORTED BY SAL II

48. During the interval between SAL I and SAL II the Bank and the Moroccanauthorities continued a fruitful dialogue which included the approval of a sectoral adjustmentloan for the financial sector. Though total expenditures of the central government increased byabout 1 % of GDP from 1988 to 1992, government revenues increased more, as a result of aseries of measures undertaken to rationalize the tax system. In consequence, the budget deficitcontinued to fall in the post SAL I period reaching around 2% of GDP in 1992. The currentaccount deficit fell from its level of 3.5% in 1989 to under 1% of GDP in 1990 but rose againin 1991 and 1992 to around 1.5%. The real exchange rate remained stable during this periodwhile exports fell on average in 1991 and 1992.

49. The outbreak of the Gulf war largely explains the slowdown of export growth and thehigher current account deficit in 1991. This came about as a result of an increase in Morocco'soil import bill, a decline in its earnings from tourism, and a curtailment of its export market.However, these negative consequences were outweighed by the generous compensation Moroccoreceived from the Arab states for its participation in the conflict. In 1991 Saudi Arabia forgaveMorocco's entire debt obligation of around US$ 2.7 billion. This was equivalent to almost 25%of its Paris Club debt. In addition, Paris Club deals in September 1990 and February 1992,saved Morocco approximately US$ 1 billion in 1990, US$ 900 million in 1991 and US$ 600million in 1992. Gross foreign exchange reserves had reached five months of imports. Thesedevelopments on the external debt front prompted the government to target ambitiousmacroeconomic objectives: convertibility and a balanced budget by 1993.

50. Despite progress on the macroeconomic front and the substantial stabilizationachieved, Morocco still faced major challenges. There was concern that Morocco be aided toachieve a viable balance of payments by 1993 and that the fiscal effort be consolidated andstrengthened in the second half of the 1990s when the commercial banks' rescheduled debt fallsdue. Increased government savings and a sustainable budget deficit were crucial to ensure astable economy and to promote private sector development. In view of the growing rate ofunemployment in Morocco, higher private sector investment has become even more importantin that it was expected to help relieve the unemployment problem. GDP growth however,

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continued to be low, declining from an average of 4.4% during 1983-88 to 2% during 1989-92.Non-agriculture GDP growth remained constant during the two periods at around 3.6 %.Achieving high growth was (and remains) particularly important given the high unemploymentrate reaching around 15% in urban areas. Though expenditure allocations for health andeducation increased from 5.3 % of GDP in 1987-88 to 6.2 % in 1991-92 and the poverty situationhas improved considerably, Morocco's welfare indicators including child and maternal mortality,nutritional status, access to safe water, and illiteracy remain much lower than those for countrieswith similar per capita incomes.'

C(I) EVALUATION OF SAL 11

51. The stated objectives of the SAL II program were to support the govermnent'sobjectives of achieving higher growth, strengthening private sector development with higherprivate investment, increasing external creditworthiness, and achieving a more equitabledistribution of welfare in the context of continued macroeconomic stabilization. To this end, theinterventions of the SAL II program were in the following areas: budgetary reform and privatesector development, trade liberalization, and the articulation of a poverty reduction strategy.The specific policy tools in each area to meet the stated objectives were divided between theconditions of Board presentation (release of first tranche) and the conditions of second trancherelease in the following manner:

(a) Conditions of Board presentation: (i) private sector development and budgetaryreform: a real increase in the 1992 Finance Law for the six ministries targeted, discussion withthe Bank of reform proposal for investment incentives, submission to the Bank of TORs for astudy analyzing the areas where the private sector could intervene for the provision of publicservices; (ii) trade liberalization: elimination of quantitative restrictions on 460 tariff positions,implementation of a number of actions concerned with simplification of trade procedures,reduction of the maximum customs duty to 40%, reduction in the number of tariff rates,undertaking the first phase in the elimination of industrial reference prices, elaboration ofmethodology to impose variable levies on agricultural products; and (iii) erv reduction:increase in investment by central and local governments in social sectors, monitoring of priorityindicators, preparation of TORs for a study on the impact of agricultural policy changes on therevenue of low-income households, TORs for a study on the influence of public social spendingon low income households, and on the sources of vulnerability (including costs of safety netprograms) for low income households.

(b) Conditions of Second Tranche Release: (i) Rrivate sector development andbudgetary reform: adoption of the 1993 Finance Law increasing investment credits at least 5%in real terms for 1993 for the six ministries targeted, realization of the related investmentobjectives for 1992, and submission to the Council of Government of the draft texts dealing with

71World Bank, "Kingdom of Morocco, Poverty Adjustment and Growth, ' Report No. 11918-MOR, January1994.

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reforn of the investment incentives system (rationalization of incentives to eliminate distortionscaused by different sectoral codes), completion of the study regarding private provision of publicservices, increase in investment credits; (ii) trade liberalization: reduction of the maximumcustoms duty to 35 %, eliminate all quantitative restrictions (except some products), eliminationof all industrial reference price, introduction of variable levies or other stabilization measuresfor some agricultural products, implementation of mutually agreed measures aimed at improvingtrade efficiency and logistics and implementation of other trade simplifying measures; and (iii)poverty reduction: completion of a profile of the target population for the social strategy onLSMS and other date sources, refinement of the monitoring system for social indicators,development of a strategy for low-income households, increase in investment credits for health,education and rainfed agriculture, based on study of low-income households done before Boardpresentation, definition of policy and investment strategies, elaboration of a strategy for theexpansion of social services, examination of system of transfers to low-income households.

(i) Implementation

52. In terms of actual implementation of the conditions, SAL II can be regarded assuccessful. The govermnent met the conditions for Board presentation of the loan as well as forsecond tranche release mostly within the expected time frame. Cofinancing of approx. US$ 140million was provided by the AfDB, and of 100 million ECU by the European Commission.

(i) Achieving the Objectives:

53. Macroeconomic Stabilization and External Creditworthiness: In terms of themacroeconomic framework, which was consistent with the IMF's program, Morocco's prioritiesremained to increase growth, improve its fiscal stance and attain balance of payments viability.The Treasury's deficit was reduced to 1.7% of GDP in 1992 and to 2% in 1993. Monetarygrowth slowed and inflation declined to 4.9%. Balance of payments viability was expected toincrease foreign direct investment and to help Morocco return to voluntary lending. In fact therewas a sharp increase in foreign direct investment and this coupled with the February 1992 ParisClub rescheduling increased net inflows so that by 1993 Morocco's gross official foreignexchange reserves which had been as low as the equivalent of one week of imports in 1985 hadreached half a year of imports. In early 1993 Morocco took the last steps in liberalizing theexchange system for current account transactions.

54. Growth and Private Sector Development: One of the main tools to enhancegrowth was the Social Target Expenditures Program (STEP) (See Table 4). The SAL II policymatrix defines the targeted increase in expenditures in the chosen sectors as the average yearlygrowth rate in the three year period ending in 1993 and this was how these indicators were

19

monitored. Table 4 shows that these targets were not met in 1993.8 The public investmentprogram undertaken in the context of the second SAL targeted the same ministries as underSAL I; a measure which allowed for continuity and ease in monitoring. In addition, greaterattention was paid to the allocation of current expenditures and to local communities. Bytargeting a real increase in investment in the social sectors and in infrastructure, the SAL IIprogram like its predecessor was attempting to realign government priorities and thus increaseefficiency in public investment as well as improve the growth prospects for the economy byinvesting in improvements in human capital and infrastructure. These objectives were sound andthe redirection of investment served a purpose. However, the Bank program could not ensurethat the use of funds within sectors was efficient; a factor that should be considered if the aimis encourage growth in more efficient investment whether intersectorally or intrasectorally.Also, the targets were defined as credit allocations in the Finance Law which made monitoringeasy; these may differ from the investments actually made.

Table 4: Investment 1/ Growth for core ministries(In percentage per year)

1991 1992 1993<- Actual > | Target

Six ministries 6.4 4.5 -0.4 5.0

Health 20.3 21.5 5.3 15.0

Primary and Secondary Education 23.7 17.5 8.7 10.0

Rain fed Agriculture 5.0 0.0 5.0

i/ Credit allocation in the Finance Law, assuming a 6 % yearly inflation rate.2/ Net percentages yearly increases rI in 1991, r2 in 1992 and r3 in 1993. Cumulative growth c3 in year

1993 is given by: (I +.Ol*rl)(1+.Ol*r2)(1+.Ol*r3) = (I +.OI*c3)3 .

55. Budgetary measures undertaken under the SAL II program were also aimed topromote private sector development and hence growth. Fiscal discipline was necessary formacroeconomic stability and, by reducing crowding out of the private sector was expected toencourage private investment.While the public investment program was to providecomplementary infrastructure to private investment, the SAL program included a study toidentify areas in which the government could disengage from the provision of services that couldbe provided by the private sector. However, it was agreed that the study which had to becompleted before second tranche release would not cover the problem of cost recovery.

8/When yearly changes in investment rather than the 3-year averages are taken the decline in 1993 is moredramatic.

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56. The study undertaken in the context of SAL II, by doing a sector by sectoranalysis, has been very helpful in practice since it suggest definite areas in which the governmentcan begin taking action in rationalizing public expenditures and it also promotes positivegovernment action in favor of the private sector. However, it does not address the issue ofwhether or not the private sector should/could enter activities the government is involved in thatare not identified by the study. A complementary approach would be to emphasize that thepolicy and regulatory environment in all sectors is suitable for the development of private sectorprovision. In this case, the assumption is that regardless of whether or not the government isinvolved in certain economic activities, once the policy and regulatory system is "right" (theright price incentives are there, there are no barriers to entry, contracts are enforceable, thereis enabling legislation, etc.), the private sector will automatically invest in profitable (orpotentially profitable) areas, and where the public sector is inefficient, replace it. In otherwords, the "market" can identify areas where investments should be made.

57. The investment codes in effect prior to the SAL II program provided for sevendistinct sectoral investment codes. This resulted in significant distortions in the incentive regimeand therefore in resource allocation. SAL II supported reforn of investment incentives topromote efficiency in private sector investment by requiring that a draft text of a revised systemwithout distortions be submitted to the Council of Govermnent before second tranche release.While this was done, the code was not required to be, and has not yet been, adopted by thegovernment.

58. Continued trade liberalization and facilitation under the SAL II program consistedof the elimination of all quantitative restrictions, reduction of the maximum tariff to 35% anda simplification of the tariff structure, a simplification of trade related procedures, and reductionof industrial reference prices to 10% of 1992 domestic industrial production. When the secondtranche of SAL II was released the average level of effective protection had been substantiallyreduced. In addition, trade was greatly facilitated due to the simplification of customs and tradeprocedures. These policy reforms were intended to reinforce past liberalization and to increasegrowth by promoting exports. Since trade liberalization began in Morocco, exports have in fact,increased. The fastest growth has been for manufactured goods and services -- the increase inthe growth of manufactured exports however, has been compensated by a decline in that ofphosphates and fertilizers. Though trade liberalization has brought about a diversification ofexports, sustained and high growth in exports has not been attained (See para. 69).9

59. Povertv Alleviation: Another goal of SAL II was to aid the government in thereduction of poverty in Morocco. To this end, three expenditure categories in the STEP withlong-term effects on poverty were identified and government spending (investment and non-salary recurrent credits) was reallocated by targeting real increases for selected categories. Bothinvestment credits and real non-salary recurrent credits increased for the social sectors on the

9/Figure 6 showed the evolution of exports of goods and services in Morocco.

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whole, but less than targeted. As mentioned before, Table 4 shows the investment targets andactual expenditures. Real non-salary recurrent credits for health increased less than targeted in1993. However, the share in basic education and health in recurrent credits increased by almostI % to 4% of the non-interest recurrent budget during 1990-93.

60. The shortfalls in social expenditures are compensated for if relevant parts of abroad ranging DH 6 billion drought relief program launched by Royal Order in March 1993, aswell as the expansion of the public works employment program in non-irrigated areas are takeninto account. In addition, increases in expenditures were slow because the ministry of healthand education did not have the capacity to absorb the large increases of the previous years. In1994, investment allocation for primary and secondary education remained frozen in nominalterms, investment for health rose 25% and investment for defense 66%. It is interesting to notethat a World Bank financed study on capital expenditures by the Ministry of Education held theview that the investment allocations had not been used efficiently.'" While the results of theseinvestments are not yet visible, a comparison of Morocco with other developing countries(including five fast growing East Asian economies) shows that government expenditure oneducation (5 % of GDP) is higher than the average for developing countries. This suggests thatit may not be the level of government expenditure in this sector that has constrainedimprovements in educational attainment but rather the nature of expenditure/investment includingthe distribution among different categories of education in at least this sector.'1

61. As part of the poverty alleviation strategy of the authorities, the SAL program alsofocussed on establishing a database on the poverty situation in Morocco. As part of thepreparatory work for SAL II the authorities implemented an ambitious LSMS. In addition, SALII supported the preparation of three studies which examined the relation between public policyand three fundamental aspects of poverty: income, social conditions, and vulnerability to shocks.These studies analyzed (a) the effect of public policy agricultural services (including ruralinfrastructure) and pricing on the poor; (b) the effect of public expenditure in social services onlow income groups; (c) the effect of public transfer programs (including feeding programs andpublic works) designed to provide a safety net for the poor on their income. To improve thedatabase, regular surveys with an expenditure or income component as a core module were tobe undertaken at intervals of about three years. A set of quickly available indicators providingindirect information on both income and living conditions were collected and publishedregularly. As a result of these studies a poverty alleviation strategy has also been developed bythe authorities with Bank assistance. Though the eventual goal is to implement such the strategyto date no action program has been adopted.

10/Kingdom of Morocco, 'Costs, Financing and Efficiency of the Education System", January 1994. GreenCover.

11 /In other words, the efficiency of investment within sectors should be considered.

I 'I

62. SAL II took the appropriate measures regarding poverty alleviation under thecircumstances existing in Morocco. At the time of preparation of the SAL II program, therewere no statistics on the poor allowing detailed analysis of the extent and the severity of poverty.Neither had the beneficiaries of public expenditure in the social sectors been identified. Thusgovernment policies had not addressed the issue of poverty alleviation. SAL II aimed to reducepoverty by (a) encouraging higher growth, and (b) first identifying and then using directmeasures to improve the condition of the poor (for example by improving access to health careand education). The SAL II program thus played an important role in focussing governmentattention on poverty alleviation though more attention should probably have been paid to thebeneficiaries of the increase in public expenditures for the social sectors. It also helped toincrease the efficiency of government expenditures in the social sectors through the studies (a)-(c), and by creating a database which would allow targeting of social expenditures.

(iii) Performance Indicators Targeted

63. The SAL II program included two sets of indicators that were to be monitoredduring the program and deviations from which were to be used as signals for possible remedialaction. The first set of indicators included the four macroeconomic targets monitored underSAL I plus a new one: foreign direct investment. The second set contained some socialindicators, namely, (i) non-salary public recurrent expenditures per primary pupil, (ii) non-salarypublic recurrent expenditures on health services, and (iii) the proportion of births attended byhealth personnel in rural and urban areas. Most of the targets in the first set were met duringthe SAL II program.'2

64. Any shortfalls in the targets for 1993 were due more to exogenous factors ratherthan to policy related causes. Table 5 shows the macroeconomic targets and realized values.The recession in Europe was cited as the main cause of the shortfall in export growth in theearly 90s. Though the economic situation in Europe certainly had an effect on exports, perhapsmore attention should have been paid to the REER relative to Morocco's competitors. Duringthe SAL period both the REER and the export to GDP ratio remained fairly stable. Also, thereare indications that labor productivity in Morocco's competitor countries (Asia) has increasedmore rapidly.'3 During the same period, the REERs of Malaysia and Indonesia depreciatedsubstantially in relation to the Moroccan rate and these two countries increased their shares inthe imports of the European Union (EU).

12/The same caveats for the macroeconomic indicators apply as in SAL 1.

13/From Kingdom of Morocco - Republic of Tunisia, Export Growth: Determinants and Prospects, YellowCover, April 1994."

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Table 5: SAL II Macroeconomic Indicators 1991-94

J991 1992 1993 1994

Total Gross Fixed CapitalFormation/GDP

Targets 23.5 23.9 24.2 24.4Actual 22.3 23.0 25.8

Gross Public and PubliclyGuaranteed External Debt/Total Foreign Exchange Earnings

Targets 2.5 2.3 2.1 1.9Actual 2.4 2.3 2.5

Real Growth Rate of ManufacturedExDorts

Targets 9.0 9.5 9.0 9.0Actual 4.5 2.8 -1.2

Net Foreign Assets of Bank Al-Maahrib (USS million)

Targets 2900.0 3200.0 3400.0 3600.0Actual 2990.0 3481.0 2040.0

Direct Foreian Investmentin USS million

Targets 180.0 300.0 400.0Actual 376.0 503.0 577.0

65. The usefulness of the set of social indicators is even more debatable than that ofthe first set. Firstly, it is difficult to choose the "correct" three social indicators, i.e., thosethat can accurately describe social conditions. Secondly, social change occurs over the longerrun; thus targeting three broad indicators has little meaning in the context of a SAL.1 4 Third,setting a minimum level of non-salary recurrent expenditures for health and education may notbe the proper way to achieve the desired objective of reaching the poor. For example, in thecase of publicly provided health care, the main problem was the disparity in the proportion of

14/Note also that the indicators are based on credit allocations as defined in the Finance Law which may differfrom investments actually made.

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public expenditure going to urban versus rural areas. About one third of total public healthexpenditures was absorbed by the two university hospitals located in Rabat and Casablanca thatserve the higher income groups. Proposing an increase in health expenditures may have had noeffect no effect on poverty at all since it does little to ensure that rural access to health servicesis improved. A recent study shows that the top quintile benefitted from 40% of the expendituresof the ministry of health, while the 40% of the population at the bottom the income scale werereceiving less than 20%.'5 Elimination of poverty requires that the distribution of socialservices provided by the government be skewed in favor of the poor.

66. The indicators monitored were to correspond to existing budget categories to alloweasy monitoring. In the education sector SAL II aimed at the redirection of spending towardsprimary education, and targeted an increase in budgetary allocations to this effect. However, itis interesting to note that in Morocco the expenditure on primary education is not separated inthe budget from the expenditure on the first stage of secondary education.

67. The third indicator relating to the proportion of births attended by health personnelwas not monitorable as required and implied by the SAL II program. Neither was it made clearhow this target was going to be met. Also, accurate data on births are only collected every fiveyears. According to the 1992 survey, 31% of births were assisted by health personnel, and 25%by a nurse or midwife. From 1987-92 the proportion of assisted births had increased from26%to 31% -- an average of 1.2% p.a., compared with a targeted 3.5% p.a. However, it mustbe noted that during the SAL II period little attention was given to the social indicators becauseof the LSMS and various studies that were being conducted. Staff felt that given the nature ofthe detailed work that was being undertaken on the poverty situation in Morocco, little value wasadded through the monitoring of the indicators chosen for the SAL II program.

68. In addition to these indicators deemed to be under direct government control, fourindicators were to be monitored for tracking changes in welfare: (1) male/ female gross primaryeducation enrollment rates and primary completion rates; (2) number and percentage of children,aged between 0 and 5 years seen in health facilities who suffer from moderate to severemalnutrition; (iii) contraceptive prevalence rate; (iv) urban and rural unskilled wages; (v)producer and wholesale prices for principal rainfed crops. Since most of these indicators evolveonly very slowly tracking them in the context of the SAL program did not seem to add value tothe program.

(iv) External Enviromnent

69. During the SAL II program there were some unfavorable developments. During1992 a severe drought led to a 29% contraction in agricultural value added and a 3% real declinein overall GDP. In addition, the recession in Europe continued to hurt export growth.

II/"Etude de l'Impact des Depenses Publiques Sociales sur les Menages a Revenu Modeste: Sante." Ministeredes Finances, Delegation de la Commission des Communaut6s Europeennes, 14 avril 1993.

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However, tourism receipts recovered following the slump during the Gulf war improving thecurrent account deficit. The gains from the 1992 Paris Club rescheduling allowed furtherreserve accumulation to five months of imports. The European recession and the droughtcontinued in 1993 so that GDP growth was almost nil and the growth rate of total exports wasslightly negative. However, the growth of direct foreign investment to over US $ 500 millionin 1992 and to almost US $ 600 million in 1993, was promising.

70. In conclusion, SAL II continued with the emphasis on budgetary measures andalso helped the government to focus on social sector issues and to develop a poverty alleviationstrategy. Incentive structure reform continued with trade liberalization. However, the lowgrowth performance and low efficiency of government investrnent within the social sectorssignals the need for continued work in these areas.

Lessons Learned

71. A number of lessons can be drawn from the SAL II experience in Morocco:

(i) As was the case for SAL I, implementation was successful because the ground hadbeen well prepared for SAL II. The objectives related to the SAL II program were consistentwith the Moroccan government's goals.

(ii) SAL II conditionality was simple and feasible in the given time frame.

(iii) The use of social indicators did not add much to the SAL II program. The targetsused were either not monitorable in the given time frame, or were not targeted to the poor. Theindicators for tracking welfare did not have much meaning in the one-year context of the SAL.

(iv) To affect change in social conditions, it is important to preserve continuity ingovernment policy. In this respect, the potential value added by SAL II which carried over theemphasis on public investment in the social sectors from SAL I, could be high once the problemof inefficiencies in investment in the social sectors is addressed. It remains to be seen whetherthe government is truly convinced of the need to raise both the efficiency and the magnitudeof investment in these sectors.

(v) The Bank can play a crucial role in the improvement of social conditions bypushing for the establishment of the necessary database and by engaging in intensive dialogueon social sector issues. In Morocco, the Bank's emphasis on these issues helped bring povertyalleviation to the forefront of the Government's agenda.

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D(I) PROCUREMENT AND MONITORING

72. SAL II was carried out through three categories of procurement based on thevalue or nature of the contract. For contracts exceeding US$ 5 million simplified ICBprocedures were followed. Public sector procurement valued below the 1CB threshold werecarried out following the standard procedures of the purchasing institutions acceptable to theBank. Private sector purchases below the ICB threshold followed established commercialpractice; quotations from eligible suppliers from at least two countries were required. Specialprocedures applicable to the respective commodity market were followed for procurement ofcommodities traded in international commodity markets. These, however, did not preclude theuse of other channels of competitive procurement that offered better delivered prices. TheBorrower was also allowed to seek disbursements for imports under pre-existing contracts(except sole source purchases) awarded through the above procedures.

73. A total amount of US$ 275 million was withdrawn over a one and a half yearperiod. There were no problems with the timely submission of eligible documentation inaccordance with procurement procedures and disbursements were made smoothly. An initialaudit report for the project was carried out by the Inspection Generale des Finances in July1993 and the auditor's report was unqualified. The audit report for the second tranche of SALwas completed in June 1994 and has been received by the Bank. Implementation of the programsupported by SAL II was monitored by the Country Operations Division of the Middle East andNorth Africa Department I of the MENA region.

CONCLUSION

74. The Bank played an important role in Morocco's reform program which startedin 1983. It intervened first with a number of SECALs to prepare the ground for the two SALsapproved in December 1988 and April 1992. The SAL programs addressed key outstandingissues in Morocco. Their main contributions were the emphasis on trade liberalization, reformof the fiscal system and on focussing the government's attention and efforts on povertyalleviation. Due to the Bank's and other donors' efforts in Morocco's adjustment process,Morocco's external debt problem has also been resolved. The dramatic improvement in themacroeconomic indicators on average is shown in Figures 1-4. However, growth continues toremain susceptible to exogenous shocks (such as the weather, recession in trading partners andregional tensions). Since 1989-94 GDP growth as well as export growth has been very lowaveraging just under 3 %. As mentioned before, this has exacerbated the growing unemploymentproblem in Morocco.

75. The major challenges facing Morocco are (i) to increase long-run growth rateswith an export-based, outward oriented growth strategy, (ii) to achieve balance of payments andfiscal sustainability in an era when net inflows to Morocco have diminished, (iii) to mobilizedomestic savings and private sector investment by focussing on financial sector development,and (iv) to achieve improvements on the poverty and social fronts.

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PART II: THE BORROWER'S ASSESSMENT OF THE STRUCTURALADJUSTMENT PROGRAM

I. PROGRAM IDENTITY

Country: Kingdom of Morocco

Program name: Structural Adjustment LoansSAL I and SAL II

Program nos.: SAL I - Loan 3001 MORSAL II - Loan 3463 MOR

Amount of IBRD loans: SAL I - US $200,000,000SAL II - US $275,000,000

Effectiveness date: SAL I - December 20, 1988SAL i - June 1, 1992

Program closing date: SAL I - December 31, 1989SAL II - December 31, 1993

II. OBJECTIVES AND DESCRIPTION OF SAL I AND SAL Il

SAL I and II were part of medium-term macroeconomic adjustment operations based onsustained and durable growth. The loans sought to continue the adjustment efforts that hadbegun in 1983, through a program of structural reforms affecting the budget, foreign trade andindustry, management of the external debt and formulation of a social development strategy toimprove the living conditions of low-income households.

The main medium-term macroeconomic objectives of SAL I and SAL I were as follows:

- faster growth of GDP;

- sustained reduction in the budget deficit compatible with the objectives of price stabilityand investment fmancing at a reasonable cost;

- continued liberalization of foreign trade, supported by a flexible exchange rate policy;

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- formulation of a forward-looking external debt management strategy;

- recovery of balance of payments viability in 1993 with a view to convertibility ofthe dirham.

For the purposes of evaluating the performance of Morocco's economy during theadjustment program, the following key macroeconomic indicators were identified and agreedwith the World Bank:

- total gross fixed capital formation (GFCF) in relation to GDP;

- gross public external debt in relation to foreign exchange earnings;

- real growth rate of manufactured exports;

- net foreign assets of the issuing institute; and

- direct foreign investment.

In addition, in the social arena, social indicators to assess the key determinants of livingconditions, such as wages and salaries, enrollment rates in primary education and the proportionof births attended by public health personnel, were agreed with the Bank. Changes in theseindicators were to be tracked under SAL II.

II. SAL CONDITIONALITIES

The main components for SAL I and SAL II were as follows:

SAL I: - budget policy reforms- trade and industrial policy reforms- policy reforms regarding management of the external debt.

SAL II: - continuation of foreign trade reforms- public finances- social component.

A. SAL I Conditionalities

1. Rgarding budget policy

The reforms of taxation and investment included the following measures:

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1.1 The fiscal measures aimed at improving the taxation system by broadening the tax base,lowering rates and increasing equity.

The main measures that were to be taken in this connection involved in particular:

- a reduction in corporate taxes (imp6t sur les societes - IS), with the introductionof a minimum payment and earlier tax payment deadlines;

- regulation of commercial transactions effected in cash;

- increase in the national solidarity tax;

- elimination of VAT exemptions for selected commodities and higher rates forothers;

- submission of texts on the general income tax (IGR) to the Parliament;

- [establishment of] a single taxpayer identification file (identifiantfiscal);

- preparation of the general accounting standardization code and its submission tothe Parliament;

- regulation of the accounting professions.

1.2 Investment: The measures relating to investment include:

- inmproved budgeting procedures through a reform of the credit carryoverprocedure and introduction of the new nomenclature, so that the work programscould be streamlined;

- preparation of an action plan for the implementation of an integrated budgetinformation management system by the offices of the Ministry of Finance;

- continued application of the principles established under the PERL with regardto budget transfers to public enterprises;

- revision of the current exchange risk system to limit the related costs to theTreasury;

- the establishment in 1988 and 1989 of the Target Investment Program forinvestments to be made by the Ministries of Agriculture, Public Works,

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Transport, Housing, Education, and Public Health. The TIP monitoring systemused 1987 as the base year. The main indicators were as follows:

* total credits for 1988-90 (net of transfers to public enterprises, with the exceptionof those to the Regional Agricultural Development Offices (Offices RWgionaux deMise en Valeur Agricole - ORMVAs) and the Casa Airport Office (Office desAeroports de Casa - OAC) were estimated at DH 19.3 billion in constant values;

* total payments were expected to fall from DH 1.3 billion at the end of 1987 toDH 0.9 billion at the end of 1990;

* from 1988-1990, gross fixed capital formation under the TIP was to reach DH14.4 billion;

* the share of the TIP in GDP was to rise from 2.00% in 1987 to 2.80% in 1990(DH 5.4 billion);

* the share of investments by the Ministries of Health and Housing was to increasefrom 6.4% in 1987 to 8.1% of the total TIP in 1990.

The TIP monitoring system also included other sectoral indicators, in particular the ratioof CED [controleur d'engagements de depensel - approved commitments to total credits, thecommitment/payment ratio, etc.

2. Trade and industrial policy reform

The planned reforms sought to rationalize the incentives structure, simplify the tariffsystem and trade procedures, and promote exports and industrial investments. They involvedin particular:

- the elimination of quantitative restrictions;- tariff reform;- the launching of studies to improve the export environment;- a study on the measures necessary for industrial expansion;- preparation of a foreign trade law;- simplification of international trade procedures.

3. Extemal debt management police reforn

These reforms sought to improve external debt management and were to result in theestablishment of a formal coordination system to ensure the smooth running and tracking of theexternal debt, along with the dissemination of a circular mandating the registration of all external

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financing agreements on public and publicly guaranteed debt as well as private loans with termsof more than one year.

B. SAL II Conditionalities

1. Continued foreign trade reforms: Beyond the adoption of the foreign trade law thatprovides a legal framework to ensure even, moderate and equal protection, these reforms wereto include the following measures:

- tariff reform: This includes a gradual reduction in tariff items (quotites), reduction inthe maximum ad-valorem customs duty from 45% to 40% and ultimately 35%, and theestablishment of a protection mechanism;

- non-tariff restrictions: These consist of the elimination of all quantitative restrictionson exports, with the exception of a negative list agreed with the Bank, elimination of allindustrial reference prices, except for 10% of the value of industrial production, and theestablishment of variable levies (prelevements) and other stabilization measures for agriculturalproducts and their derivatives: meat, milk, grains, sugar and vegetable oils;

- foreign trade promotion measures: These include essentially a study on the logistics andefficacy of foreign trade, effectiveness of the single merchandise declaration (declaration uniquede marchandises - DUM), and finalization of documents other than the DUM, with a view tothe simplification and standardization of foreign trade procedures. Foreign trade promotion alsoincludes the effective implementation of the selective inspection of containers with a view toreducing port transit time as well as the acceptance by Morocco of the GATT system fordetermining the customs value.

2. Public finance: The actions to be undertaken were as follows:

- Investment expenditures by the State and local communities were to satisfy needs ineconomic and social infrastructure necessary for development of the private sector. In thisregard, the 1992 and 1993 finance laws were to include an annual increase of 5% in real termsof investment credit for the six ministries: Agriculture, Transport, Public Works, Education,Public Health and Housing. These growth rates were average minima for 1990-93, calculatedretrospectively.

- The draft texts on the investment incentive system reform were to have been submittedto the Council of Government before the disbursement of the second tranche of the loan;

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- A study on the possibilities of reducing budgetary charges for selected public servicesthat could be provided by the private sector'.

3. Social Component: The actions decided on included:

- joint determination with the Bank of the profile of the target population for the socialstrategy based on the National Household Living Standards Survey (Enquete Nationale sur leNiveau de Vie des Menages - ENNVM) and other sources of data;

- improvement in the system for monitoring social indicators;

- development of a social development strategy for low-income households;- evaluation of the functioning and rates charged by SEGMA hospitals and the possibility

of expanding and improving the system;

- public expenditures for health care should improve the efficiency of the existinginfrastructure through an increase, in real terms, of at least 15% for 1992 and 1993 in budgetallocations for "equipment and miscellaneous" and "investment" by the Ministry of PublicHealth;

- an increase of at least 10% in real terms of investment outlays and at least 15% in realterms of non-wage operating expenditures per student for 1992 and 1993;

- increase of at least 5% in real terms in 1992 and 1993 of investment outlays for rainfedagriculture;

- the carrying out of the following three studies:

study of the impact of public social spending on low-income households and thepossibilities of cost recovery in the social sectors;

* study of the effect of agricultural policies on the income of low-income households;

* study of the sources of vulnerability of low-income households and the adequacy and costof the various social protection programs.

T.N. sentence fragment in original.

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IV. EVALUATION OF ACTIONS CARRIED OUT UNDER SAL I AND SAL n

A. Macroeconomic evaluation

With a view to remedying a difficult situation from the financial standpoint, since 1983the Moroccan authorities have been following an adjustment and economic restructuring policycharacterized in particular by financial rigor.

The economic policy adopted in this context meant measures to reduce total demand, witha view to shrinking the deficits in the budget and the current account of the balance of payments,along with measures to increase total supply, the efficiency of public and private enterprises andexport capacity.

The actions undertaken as part of the adjustment policy helped reduce the total Treasurydeficit, which fell from 12% of GDP in 1992 to some 5% in 1988. Likewise, the balance inthe current account of the balance of payments went from a deficit of 12% to virtual equilibriumin 1988.

Although financial constraints made a significant recovery in the volume of publicinvestment impossible, the vitality of private investment nevertheless markedly increased totalGFCF beginning in 1989. The ratio of GFCF to GDP rose from 20.5% in 1988 to nearly 23%on average in the following years.

Another of the constraints recognized just before the implementation of the SAL was thesharp increase in external debt charges. Accordingly, the authorities, in conjunction with theWorld Bank, targeted better management of the public debt. As a result, the outstanding balanceof the external debt was brought down from 2.9 times current receipts in the balance ofpayments in 1988 to 2.5 times in 1993.

The period covered by SAL I and SAL n (1988-1993) was marked by unfavorabledomestic and external circumstances due in particular to the negative impact of the Gulf war andthe recession in the world economy, together with a slowdown in international trade and aresurgence in protectionism, as well as by two successive years of drought (1992-1993), whichtook a heavy toll on Morocco's economy.

Despite these adverse occurrences, thanks to the continuation and consolidation of theadjustment and restructuring process, the balance of payments moved in a favorable direction,despite the fact that rescheduling was ended and the dirham became convertible for currentinternational transactions as of January 1993.

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Efforts to enhance balance of payments viability met with particular success with regardto the promotion of manufactured exports, foreign private investment and the volume of externalassets. Thus:

1. The annual growth in real terms in exports of manufactured products was some 13 % onaverage between 1988 and 1993. Growth was admittedly higher during the period from 1988-91(more than 19%) than from 1991 to 1993 (6%). This is due essentially to the sluggishness inexternal demand during the second period in the wake in particular of the recession that wasmore severe in the economies of partner countries. Nevertheless, the average rate of 13% islargely higher than the average rate of 10% for commitments made under SAL I and SAL II.

2. The deficit in the current account in the balance of payments was reduced substantially,from an equivalent of 4.4% of GDP in 1989 to some 2% of GDP in 1993. Concurrently witha reduction in the deficit of the current account, foreign investment increased on average indollars 35.2% on an annual basis between 1988 and 1993, rising from US$129 million in 1988to US$584 million in 1993. Importantly, average growth for the period covered by SAL II was39%, thus largely exceeding program objectives.

Given this favorable turn of events, the share of the current deficit in the balance ofpayments financed by foreign investment flows rose from 22% in 1989 to 62% in 1991 and114% in 1993.

3. Lastly, the substantial increase in external assets represents a major qualitativeimprovement in the balance of payments, since from US$523 million or the equivalent of onemonth of imports of goods and services, the volume of foreign exchange reserves rose toUS$3.824 million in 1993, i.e. the equivalent of some six months of imports of goods andservices. These levels clearly exceed the objectives of SAL I and SAL II.

The total volume of foreign trade during the SAL program increased markedly, from38% of GDP in 1988 to 40% in 1992.

Morocco's new trade policy, which makes the country's economy highly outward-oriented, had a modest impact on foreign trade indicators . Thus, the ratio of exports to GDPfell from 16% in 1988 to 14% in 1992. The average annual change in the total value of exportsdid not exceed 4%. For the period in question, this unfavorable picture was due largely to thepoor sales of phosphoric acid, which was a main factor in the decline of exports by 5% over1988 and the climatic conditions that prevailed throughout almost the entire period from 1989to 1992.

With regard to the rate of economic growth, although the recovery of financial equilibriaand the bringing of inflation under control demonstrate that the objective of stabilization wasachieved, economic growth was nevertheless quite satisfactory until 1991, i.e. more than 5%

35

on average per year. However, this trend was cut short by the drought of 1992 and 1993 andby the 1992 recession in Europe.

MACROECONOMIC INDICATORS 1988-1993

1988 1989 1990 1991 1992 1993

Real growth in manufactured exports- SAL 12.0 10.0 10.0 9.0% 9.5% 9.0%- Actual % % % 5.7% 5.9% 6.5%

11.6 19.4 28.4Net foreign assets of Bank Al % % %Maghrib (US$ million)

- SAL 2900 3200 3400- Actual 2998 3482 3824

450 850 1050Direct foreign investment (US$ 523 486 2064million) 250 300 400

- SAL 375 504 584- Actual

Source: Ministry of Finance (Department of Treasury and External rinance)

B. Tax reform measures

1. Corporate tax (IS)

1.1 Reduction in the tax rate

Corporate taxes were lowered as follows:

1988: from 45 to 40%;1993: from 40 to 38%;1994: from 38 to 36%.

1.2 Introduction of a minimum payment

The minimum payment for the corporate tax changed as follows:

1987: progressive schedule based on turnover, miscellaneous and financial eaniings aswell as grants and subsidies received:

36

0.30% for the tranche between DH 1 and DH 1,000,0000.50% for the tranche between DH 1,000,001 and DH 10,000,0000.75% for the remainder.

The minimum payment may not be less than DH 1,500 or greater than DH 100,000.

1990: retention of the same schedule with a raising of the ceiling to DH 150,000.

1992: introduction of a single 0.5% tax and elimination of the ceiling on the amountdue.

1994: the minimum payment in a deficit fiscal year is imputable to the tax surplus inrelation to the payment for the following fiscal year.

This credit can be made up to the third fiscal year following the deficit fiscal year.

1.3 Shortening of the tax payment deadlines

As of January 1, 1990, the tax is paid in the form of estimated payments based on thetax liability for the previous fiscal year.

In addition, as of 1992, the deadline for the payment of assessments stipulated on the taxrolls (droits emis par voie de role) was shortened from three to two months.

1.4 Regulation of commercial transactions carried out in cash

With a view to reducing tax fraud and evasion, the 1990 finance law stipulated thatexpenditures relative to selected charges for which the amount is equal to or greater than DH10,000 and for which payment cannot be evidenced by an unendorsable crossed check (chkquebare [sic] non endossable), commercial paper or bank draft are deductible up to only 75% oftheir amount.

1.5 Elimination of tax exemptions for certain financial agencies

The policy to expand the tax base has meant the elimination of tax exemptions as of 1988for the Bank Al Maghrib, the banques populaires regionales, as well as the Caisse Nationale deCredit Agricole.

,7

2. National Solidaritv Tax

As of 1989. income and earnings totall) and temporarily exempt from the corporate tax,IBP (imp6t sur les benAfices professionelles) and TPI (tare sur les profits immobiliers) becamesubject to a national solidarity tax cparticipation a la solidariie nationale) at the rate of 25 %.

3. General income tax (IGR): Revisions to the nontaxable threshold for wages and salaries

Prior to 1979, the nontaxable threshold for purposes of the income tax (then known asthe prelevement sure les traitements et salaires - PTS) was set at DH 3,000. At that time, it wasraised to DH 6,000 and then DH 8,400 in 1988.

With the introduction of the general income tax (imp6t general sur le revenu - IGR) in1990, the exemption threshold was raised to DH 12,000, and then DH 15,000 by the 1993finance law and DH 18,000 by the 1994 finance law.

For the record, the nontaxable threshold made effective in 1994 exempted 240,000people.

4. VAT: Elimination of exemptions and increase in rates for certain commodities

4.1 Elimination of exemptions

1988: The following became taxable as of January 1, 1988:

- milled rice, rice flour and semolina and starches (farines de fculents);- mineral substances;- straight and composed feedingstuffs and their components to be used for cattle feed;- credit operations of the banques populaires.

1992: As -of January 1, 1992, credit operations carried out by the CIH (CreditImmobilier et Hotelier) became taxable at the rate of 14%, with the exception of credit for low-income housing construction.

4.2 Increase in VAT rates

1988: As of January 1, 1988, the rates for the following commodities were increased:

- coffee went from 7% to 14%;- transport went from the reduced rate of 7% to 14%;

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- sales operations for foodstuffs or drriks to be consumed in situ and the provision oflodging by hotels classified as h6tels a voyageurs and restaurants operating in such hotels weresubjected to a tax of 14% instead of 12%.

1990:

- matches became taxable at 19% instead of 7%.

1992:

- credit, bank and exchange agents were taxed at 14% instead of 12%;- operations carried out by insurance brokers became taxable at the rate of 14% instead

of 7%.

5. Revision of IBP. IGR and IS exemptions under the investment codes, effective May 4.1988

The 1988 investment code reform sought to maintain incentives for the investment phase(regarding customs duties, VAT and the registration fee) and reduce incentives for the operatingphase (IGR, IBP and IS).

The reform consequently decreased tax exemptions on earnings through a change fromtotal exemption to a partial exemption of 50% of the amount of the tax. It also reduced theduration of the exemption - to five years from the previous 10 to 15 years. The followinginvestment codes were affected: the export code, the artisanal investments code, the industrialinvestment code, the tourism investment code, the maritime investment code, the fixed assetinvestment code, the mining investment code, the code governing vocational training graduatesand the private education investment code.

6. Accounting reform

The following three texts were finalized, adopted and published in the Official Bulletin.

6.1 Chart of Accounts

Law No. 9.88 regarding the accounting obligations of merchants, which extends the newchart of accounts to businesses, was promulgated by Dahir No. 1.92.138 of December 25, 1992and published in the Official Bulletin of December 30, 1992.

39

6.2 Association of Chartered Accountants

Law No. 15.89 regulating the auditing profession and establishing an Association ofChartered Accountants was promulgated by Dahir No. 1.92.139 of January 8, 1993 andpublished in the Official Bulletin of February 3, 1993.

6.3 Auditing Degree

Decree No. 2.89.519 of July 16, 1990 establishing a national auditing degree waspublished in the Official Bulletin of September 19, 1990.

C. Budget measures

1. Achievements under SAL I

SAL I had the following main objectives:

- improvement in management bodies and budget procedures;- increase in public investment, in particular with regard to economic and social

infrastructure.

For the first aspect, the following actions were undertaken:

* reorganization as of December 28, 1988 of the Budget Departnent, improving theorganization of the budget function, in particular through the consolidation of the operating andinvestment budgets, along with better monitoring of external financing;

* establishment of the new budget nomenclature as of January 1989 and the streamliningof work programs, resulting in more flexible budget procedures, modernization and greatertransparence of the State budget;

* formulation of an action plan for the establishment of an integrated budget informationsystem. The system is now being implemented;

* establishment of a procedure for carrying over credits that enables the ministries tocontinue to make expenditure allocations without the need for prior formalities.

With regard to the investment program, the quantitative objectives were achieved overall.The volume of funds made available to the six ministries affected by the TIP was as a wholeconsistent with projections agreed during preparation of the program, for both 1988 and 1989,and which achieved 100% and 95%, respectively, of projections.

40

Likewise, the key budget performance indicators (credit approved by the CED'crediiavailable, payments by the Treasury on credits approved by the CED) were in accordance withthe projected levels: the commitment rate was 91 % in 1988, as against the projected figure of93%. In 1989, the actual rate was 96%, as against the 95% projected. The ratio of paymentson commitments was 66% in 1988, as against the 57% projected. In 1989, that rate was 54%,as against the 61 % projected.

Moreover, Treasury payments due (expressed in months) were reduced to the projectedlevel of three months.

Likewise, GFCF of the TIP was 96% of the original target for the two years covered bythe program.

As a share of total TIP investments, investments by the Health and Housing ministrieswere 6.44% in 1988, as against the 5.80% projected, and 5.26% in 1989, as against the 6.9%projected.

stly, TIP investments totaled DH 3,942,000,000 in 1988 (2.8% of GDP) and DH5,017,000,000 in 1989 (2.64%). The figures for 1990 were not calculated because themonitoring indicators changed under SAL II.

2. Achievements under SAL II

2.1 The average annual increase in investment budget allocations for the period from 1990to 1993 was targeted at 3.31%.

This commitment was achieved and even exceeded, as the figure was 5.4% for theperiod.

- With regard to investment credits by the Ministry of Public Health, the annual averageincrease was 10.67%, as against the 15% targeted in real terms. This shortfall was dueprimarily to the fact that the intensity of expenditures by the local communities was notmaintained in 1993 (down from DH 162,400,000 in 1992 to DH 53,000,000 in 1993).

- Budget allocations for "miscellaneous equipment and expenditures" of the Ministry ofPublic Health increased some 16.85% on average per year, as against the 10.67% targeted;

- The non-wage operating expenses of the Ministry of Education increased annually by30.26% in real terms during the same period, as against the 19.215% targeted in the matrix ofmeasures;

41

- Investment expenditures for primary and secondary education increased annually by20.74%, as against 6.56% in real terms during the period covered by the program;

- With regard to investment expenditures for rainfed agriculture, the original assumptions,which would have meant an annual average increase of 3.31 %, were largely achieved, since theincrease in such spending was 4.62%.

With the exception of the Ministry of Public Health, performance in resource allocationfor investments in economic and social infrastructure both as a whole and by ministry was betterthan expected, despite the unexpected circumstances that occurred during the years covered bythe program, namely a drought during two consecutive years, the Gulf war and an unfavorableinternational economic outlook.

2.2 Study on the participation of the private sector in the provision of privateservices(part:civation du sector prive aux Drestations de services publics - PSP-PSP)

SAL II included an overall analysis of public services currently provided by the Stateand an assessment of the possibilities of partial or total transfer of those services to the privatesector.

The study was conducted under the supervision of the Ministry of Public Works,Vocational Training and Higher-Level Training. [sic]

The Moroccan authorities are now reviewing the conclusions of the study.

2.3 Reform of the investment incentive system

The reform of the investment incentive system sought to standardize and simplify existinginvestment codes, incorporating them into a single code. The reform was to be an intermediatestage toward achieving the ultimate goal of standardizing the provisions of the codes underordinary law.

A first draft of the single code was prepared. The draft makes certain social sectorseligible, in addition to those now specified by the codes.

Moreover, all direct equity investments by the State provided for by the current codes(bonuses, investment in infrastructure) were eliminated.

The draft single code, which is now being finalized, is only one component of the reformof investment incentives.

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D. Measures undertaken with re2ard to the external debt

In accordance with the commitments made by Morocco under the Structural AdjustmentLoans concluded with the World Bank (SAL I and SAL II), the External Debt ManagementDivision carried out a number of actions to improve the system for monitoring and managingthe external debt.

A coordinating conmmittee representing several departments was established to ensure thesmooth running of the system for tracking the country's external debt.

In addition, Circular No.3/6250 of July 27, 1989 issued by the Minister of Financeestablishing the obligation to register all contracts in respect of loans and regular transactionswith the Department of Treasury and External Finances, regarding all data relative to theexternal debt of the entities in question, was disseminated on a large scale to all parties involvedin the external debt of the country.

Following that circular, a file of external loan contracts was established, making itpossible to register and centralize all loan contracts still effective. A procedure was alsoestablished for processing the data covering the country's foreign commitments as a whole afterthey are sent to the Treasury Department.

Moreover, the Division of Balance of Payments and Bilateral Relations, in conjunctionwith a systems company, designed and introduced a computerized debt management system toaddress both management needs as well as statistical requirements. A training plan for allhigher-level staff of the Division was also formulated to support the system, whoseimplementation is expected to begin in June 1994.

In tandem with these actions, the Division acquired the human and physical resources thatenabled it to further enhance its management capabilities.

As a result of these measures and actions, the objective of full control of the structureand amount of Morocco's external commitments was achieved.

Following the end of the rescheduling process, Morocco is now in a strong position tomove toward more active management of its debt based on market mechanisms, with a view toa lasting improvement in the profile of the country's external debt and a reduction in the relatedcharges.

E. Evaluation of foreign trade reforms

Liberalization of foreign trade was one of the main objectives of the structural adjustmentprogram begun in 1983. The structural reforms taken in this regard involved a recasting of the

43

trade and industrial policies through the elimination of quantitative restrictions, rationalizationof customs duties, revision of the system protecting domestic production and simplification offoreign trade procedures.

1. Elimination of quantitative restrictions

The gradual liberalization of imports that began in 1984 continued during the periodfrom 1988 to 1982 and initially saw the transfer of a number of commodities subject to importauthorization (list B) to list A of the General Import Program (duty-free products forimportation). Thus, between 1988 and 1982, some 1,400 commodities were made duty-free forimportation. As of March 1992, the General Import Program was replaced by a limited list ofcommodities subject to an import authorization representing less than 9% of the total value ofimports.

Law No.13/89 relating to foreign trade promulgated in December 1992 echoed theprinciple of duty-free imports and exports and, consequently, the elimination of quantitativerestrictions, except in order to safeguard health, security, public order or the like, or to protecta fledgling production for a limited period.

With the publication of the so-called 'negative" list (Order No.1308-94 of April 19,1994, published in the Official Bulletin of July 6, 1994), only some ten products meeting thecriteria given in Article 1 of the foreign trade law now remain subject to import or exportquotas.

As part of the implementation of the foreign trade law, the following were prepared forcommodities and their derivatives (other than meat and milk):

- a draft reference price arrete;- a methodology for calculating variable import levies.

However, because the liberalization of these commodities was postponed by a year andbecause of the need to replace the protection system based on reference prices with the customsequivalents recommended by GATT, the measures fornulated are to be reviewed as part of theeffort to adapt the foreign trade law to the provisions of the Final Uruguay Round.

Thus, the liberalization scheduled in 1994 for basic agricultural products (grains, sugar,oilseeds) and their derivatives was pushed ahead until 1995 to await the establishment of theprotection system based on customs equivalents instead of the reference price system establishedby the foreign trade law.

For energy products, liberalization was moved forward to January 1, 1995 in order toenable the offices in question to prepare the supplementary measures regarding:

44

- price indexing for petroleum products;- formulation of a text on the conditions governing trade in energy products;- standardization of taxation.

2. Tariff Reform

With regard to tariff reform, the principle of using the customs duty as a sectoral andnon-fiscal policy instrument was adapted.

The liberalization of foreign trade was accompanied by improvements in the customsschedule through a gradual reduction in the number of tariff items (from 26 to 10) and a graduallowering of the ceiling rate for import duties. Thus, the maximum customs duty was loweredfrom 45% in 1988 to 35% in 1993, with the exception of certain agricultural products that arestill taxed at 40% and 45%, plus the PFI (general import tax) of 15%.

For basic commodities (grains, sugar, oilseeds, meat and milk) and their derivatives,maximum protection will be ensured in accordance with the Moroccan proposal to GATT.

Already, in anticipation of the GATT provisions, an official order setting import dutiesfor animals and animal products (meat, milk and derivatives) was published and became effectiveon October 1, 1993.

3. Reference prices for industrial products

It had been agreed with the Bank to limit reference prices for industrial products to only10% of the value of industrial production.

This commitment was respected, as certain reference prices that had been in effect priorto 1992 were eliminated and replaced by others, in particular for textiles and apparel, with aview to supporting liberalization of that sector.

The list of products currently subject to the reference price system was agreed with theBank and represents 10% of the value of industrial production.

4. Simplification of foreign trade procedures

Simplification of foreign trade procedures took the form of:

- adoption of the standardized system for the classification and codification ofmerchandise using an eight-digit number in 1992, establishment of the single declaration ofnierchandise and reduction in port transit time for cargo;

45

- new import and export forms were prepared and will be put into use as soon as theofficial order regulating import and export modalities in application of the foreign trade law ispublished;

- the establishment of the SADOC computer system: brief declarations and DUMs arenow registered automatically at the computerized offices;

- the elimination of the systematic inspection of containers: evaluation reports in thisrespect were sent to the World Bank through the UNDP representative in Rabat;

- adoption of the International Road Transport convention and the convention onmultimodal transport linkages, as well as adoption of the GATT system for determining thecustoms value (customs value code): the Customs Authority organized training programs tofamiliarize its higher-level staff as well as those at the Ministry of Foreign Trade and theMinistry of Trade and Industry with the system.

Under SAL II it was also agreed that a study on the logistics and efficiency of foreigntrade would be carried out.

The objective of the logistics and efficiency study of foreign trade is to identify andimplement measures that reduce the cost of logistical procedures (liaisons) for operators and thatboost the efficiency of commercial transactions and improve information flows, through thesimplification of channels and elimination of additional charges that penalize domestic operatorsin relation to their foreign competitors.

The terms of reference for the study include three modules for logistical procedures: theadministrative channel, the banking channel and the multimodal transport channel.

The work of the consultants carrying out this study was supervised by committeescomposed of representatives of the public and private sectors.

Only the reports on the administrative and banking channels were submitted.

For the transport component, the expert engaged in that connection has not yet submittedhis report to the Ministry of Foreign Trade.

When all the reports have been finalized, they will be reviewed by a commission ofpublic and private stakeholders in foreign trade.

However, with regard to support for exports, the actions undertaken as part of the SALprograms are still limited and because they are not of as much interest to the Bank as areliberalization and reform of protection, proposals of possible measures for supporting the export

46

sector need to be explored with the Bank, particularly in view of the new outlook forinternational trade characterized by increasing competition on the inernational market, inparticular following the Final Uruguay Round.

These measures would include:

- a study on market diversification;- an export promotion component.

5. Establishment of a safeguard mechanism

In accordance with Article 15 of Law No. 13/89 governing foreign trade and itsimplementing decree, an import consultative commission was set up in July 1993 to report tothe Ministry of Foreign Trade. The commission gives its opinion on charges brought byenterprises regrading unfair business practices.

The commission presents its opinions to the Ministry of Foreign Trade, which can requirethe violator to pay antidumping or compensatory penalties if it finds that there is sufficientevidence of dumping or subsidy.

The commission consists of representatives from the government and the private sector(Chambers of Commerce, Industry, Agriculture, Artisanal Production, sectoral tradeassociations). It held its first meeting in early November 1993 and thus far has reviewed twoformal claims relative to antidumping measures.

F. Social component

In addition to the above-mentioned increase in budget allocations to the Ministries ofPublic Health, Education and Agriculture for rainfed agriculture, the following actions have beentaken:

1. Determination with the Bank of a profile of the target population for the socialdevelogment strategy

This work was carried out by the Statistics Department of the Ministry of EconomicIncentives in the conjunction with the Bank. The main source of data in developing the profileis the 1990-91 National Household Survey. However, changes in household living conditionswere studied in conjunction with a consumption and expenditure survey made in 1984-85.

2. The carrMin2 out of three studies planned with the Bank, namely:

47

a study of the impact of social public spending on low-income households and thepossibilities of cost recovery from other areas of the social sectors; the study was carriedout under the supervision of the Ministry of Finance. It showed that, despite theconsiderable efforts made by the government in the social sectors, major efforts are stillneeded in both the mobilization of additional resources for greater satisfaction of needsand the refocusing of social public spending toward the poorest socioeconomic groups,particularly in the rural areas;

* a study on the effect of agricultural policies on the income of low-income households;the main objective of the study was to evaluate the impact on household living standards,changes in agricultural policy following the implementation of the structural adjustmentprograms in the agriculture sector, i.e. changes in the agricultural price policy, includingprices for imports, and changes in the structure and levels of public expenditure in theagriculture and rural sector.

The study was carried out under the supervision of the Ministry of Agriculture andAgricultural Development.

* a study on the sources of vulnerability of low-income households and on the adequacyand cost of various social protection mechanisms; the study was carried out under thesupervision of the Ministry of Economic Incentives. It identified the sources ofvulnerability of low-income households, i.e. drought, sudden changes in prices and cattleepidemics. It made it possible to look at the Government's efforts with regard to safetynets. These would include National Assistance, National Promotion, the school mealprogram, distribution of weaning flour (farine de sevrage) and compensation for the threebasic food stuffs; sugar, vegetable oil and flour.

3-. Formulation of a social development strategy for low-income households

The basic document for this strategy was finalized by the Ministry of EconomicIncentives in conjunction with the Bank and was submitted to the Council of Government at itsmeeting on June 9, 1993. The document was submitted to the Bank for the release of the secondtranche of SAL II.

The strategy was based primarily on the preliminary findings of the three above-mentioned studies.

The social strategy first of all seeks to safeguard macroeconomic equilibria. It thereforegives priority to the reallocation of public resources to the underprivileged social segments. Itscentral aim is to expand access by the underprivileged to basic social services so that they canacquire the skills necessary to play a productive role in the economic development process.

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The priority areas of the strategy are as follows:

- potable water and sanitation;- basic health services and mother and child health care;- primary education and literacy, particularly in the rural areas;- low-cost housing; and- social protection.

With a view to the implementation and monitoring of the social development strategy,an interministerial committee was established by circular of the Prime Minister on April 18,1994. The secretariat function will be provided by the Minister for Economic Incentives. Thecircular specifies the priority programs of the strategy for which sectoral action plans are to beprepared.

4. Evaluation of the SEGMA hosDitals built

In the health sector, a study to evaluate the operations and charges of the new SEGMAhospitals and the possibility of expanding and improving the system was carried by the Ministryof Public Health.

V. RELATIONS WITH THE WORLD BANK

During implementation of the SAL I and SAL II structural adjustment programs, ongoingcontacts between the Bank and the Moroccan authorities involved in the project were maintainedwith a view to monitoring all actions that were to be undertaken during the period. Theserelations were fruitful and made it possible to:

- ensure compliance with the timetable of measures that were to be taken and to makethe necessary adjustments to the timetable;

- ensure compliance with procedures and commitments made in this regard;

- monitor project progress in accordance with the implementation timetable.

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PART III: STATISTICAL ANNEX

STRUCTURAL ADJUSTMENT LOAN I (3001-MOR)

Table 1: Loan Data

Amount: US$200 Million

Original Disbursed Cancelled Repaid Outstanding

200.00 200.00 0 0 200

Original Loan Date Actual or Re-estimated

| Presideot's Report 11188 11/08/88

|Letter of Dev. PoUcy 11/88 11/01/88

Negotiations _10188 10/19/88

Board Approval 11/88 12/01/88

Loan Agreement 12/88 12/02/3

Effectivenet 12/88 12/20/88

Loan Closing 12/31/89 12/31/89

Cumulative Loan Disbursement

FY89 FY90

(I) Planned 100 100

(li) Actual 100 100

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Loans Related To SAL I

1. Industrial and Trade Policy Loans - ITPAs I and II - LN 2377-MOR in the amount ofUS$150.4 million. Effective date: 05/25/84 and closing date: 06/30/85, and LN 2604-MOR in the amount of US$200 million. Effective date: 10/21/85 and closing date:05/01/87 .

2. Agriculture Sector Adjustment Loans, LN 2590-MOR in the amount of US$100 million.Effective date: 10/28/85 and closing date: 12/31/87, and LN 2885-MOR in the amountof US$225 million. Effective date: 07/26/88 and closing date: 04/01/92.

3. Public Enterprise Rationalization Loan - LN 2820-MOR in the revised amount of US$239million. Effective date: 07/27/87 and closing date: 06/30190.

4. Education Sector Loan - LN 2664-MOR in the amount of US$150 million. Board date:03/20/86. Effective date: 09/09/86. Closing date: 12/31/89.

Table 2: Mission Data

No of No of Mission Date ofMonth/Year Weeks Persons Staff Report

Weeks

Appraisal 06/14/88 - 07/01/88 2 6 12 06/12/88

Supervision I 05/15/89 - 06/06/89 1 1 1 06/28/89

Supervision 11 09/04/89 - 09/19/89 1 3 3 09/13/89

Supervision III 10/26/89-10/31/89 1 2 2 11/14/89

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STRUCTURAL ADJUSTMENT LOAN II (3463-MOR)

Table 3: Loan Data

Amount: US$275 Million

Original Disbursed Cancelled Repaid Outstanding

275.00 275.00 0 0 275.00

Original Loan Date Actual or Re-estimated

President's Report 04/08/92 04/08/92

Letter of Dev. Policy 04/08/92 04/08/92

Negotiations 03124/92 03/24/92

Board Approval 04/30/92 04/30/92

Loan Agreement 04/30/92 04/30/92

Effectiveness 05/92 06/01/92

Loan Closing 12/31/93 12/31/93

Cumulative Loan Disbursement

FY93 FY94

(i) Planned 138.0 275.0

(ii) Actual 138.0 275.0

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Loans Related To SAL II

1. SAL I (plus loans related to SAL I).

2. Financial Sector Development Loan - LN 3365-MOR in the amount of US$235 million.Board date: 06/25/91. Effective date: 11/14/91. Closing date: 12/31/97.

Table 4: Mission Data

No of No of Mission Date ofMonth/Year Weeks Persons Staff Report

Weeks

Appraisal 07/01/91 -07/14/91 2 11 22 07/31/91

Supervision 1 07/14/92 - 07/23/92 2 1 2 08/05/92

Supervision II 10/19/92 - 11/05/92 2 3 6 11/30/92

Supervision III 02/14/93 - 02/26/93 2 2 4 03/26/93

Supervision IV 05/93 1 5 5

Supervision V 12/01/93 - 12/03/93 3 1 0.5 01/11/94

Completion 03/20/94 - 03/20/94 3 2 1.5

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Table 5: Key Macroeconomic Indicators

1982 1983 1984 1985 1986 198' 1988 1989 1990 1991 1992 1993 1994

Rate of Change p.a.: Esum. ProjConsumer price index 0.105 0.062 0.125 0.078 0.087 0.028 0.023 0.031 0.067 0.080 0.057 0.052 0.050Inflation (GDP deflator) 0.072 0.073 0.086 0.084 0.103 0.039 0.053 0.039 0.065 0.064 0.0-46 0.050 0.042Inflation (import price/MUV) -0.015 -0.023 -0.021 0.008 0.179 0 098 0.073 -0.007 0.057 0.021 0.044 0.005 0.034

Real GDP 0.096 -0.006 0.043 0.063 0.083 -0.025 0.104 0.025 0.035 0.062 -0.041 0.002 0.090Per-capiLa GNP 0.078 -0.029 0.023 0.032 0.071 -0.050 0.077 -0.002 0.020 0.039 -0.060 -0.013 0.069

Real Private Consumption 0.058 -0.002 0.035 -0.004 0.123 -0.010 0.099 0.061 0.016 0.115 -0.041 -0.040 0.088Per-Capita Priv. Consumption 0.034 -0.026 0.012 -0.028 0.100 -0.033 0.076 0.038 -0.006 0.093 -0.062 -0.051 0.068

External Debt Burden: 1/

Debt Service, after DR 1641 1496 1041 1372 1810 1744 1749 2099 1776 2136 2072 2720 2945

O/w: Interest 780 749 733 688 806 759 957 1177 955 1130 995 1142 1134Debt Service/XGS 0.43 0.38 0.27 0.33 0.36 0.30 0.26 0.33 0.21 0.26 0.23 0.32 0.32Debt Service/GDP 0.11 0.11 0.08 0.11 0.11 0.09 0.08 0.09 0.07 0.08 0.07 0.10 0.10

Interest/XGS 0.20 0.19 0.19 0.17 0.16 0.13 0.14 0.18 0.11 0.14 0.11 0.13 0.12

DOD,incl IMF (USS mil.) 12518 13363 14140 16365 17731 20534 20842 21461 23263 21021 21084 21452 21521DODIXGS 21 3.26 3.41 3.60 3.93 3.53 3.52 3.07 3.35 2.77 2.53 2.37 2.52 2.35

Ratios to GDP:Gross Investment 28.22 23.99 25.28 27.12 22.80 21.09 21.00 23.69 25.08 22.82 22.95 24.63 25.07Fixed capital formation 27.32 24.44 23.10 23.11 21.32 20.19 20.43 22.78 23.87 22.30 23.01 24.12 24.25Domestic savings 13.77 15.17 14.68 18.13 16.47 16.67 20.54 18.22 19.12 17.15 16.50 18.83 19.19National savings 15.91 17.73 17.46 20.45 21.53 21.96 23.06 20.16 24.27 21.31 21.37 22.74 23.42Gov't fixed investment 7.62 5.99 4.82 5.36 4.84 4.05 4.04 4.38 4.38 4.48 4.35 4.35 4.47

Private fixed investment 19.70 18.45 18.28 17.75 16.48 16.14 16.40 18.40 19.49 17.82 18.66 19.78 19.78

Government total revenues 22.05 21.29 20.89 20.65 18.84 21.09 22.53 22.60 23.83 23.03 26.25 26.81 27.38

Gov't current revenue 22.05 21.27 20.89 20.65 18.84 20.90 22.53 22.60 23.83 22.86 26.25 25.97 26.17

Gov't capital revenue 0.00 0.01 0.00 0.00 0.00 0.19 0.00 0.00 0.00 0.17 0.00 0.84 1.21Government total expenditures 34.45 33.38 32.08 30.27 24.20 26.81 27.13 28.57 27.36 26.10 28.46 29.03 28.87

Gov'tcurrentexpendit. 22.91 23.72 24.00 23.09 20.56 20.65 20.72 21.19 20.12 19.89 21.37 21.39 20.91Gov't capital expendit. 11.54 9.66 8.09 7.18 3.63 6.17 6.41 7.39 7.25 6.21 7.09 7.65 7.96

Government Savings -0.01 -0.02 -0.03 -0.02 -0.02 0.00 0.02 0.01 0.04 0.03 0.05 0.05 0.05Gov't Deficit (comm., BDR) -12.40 -12.09 -11.19 -9.62 -5.36 -5.72 -4.61 -5.98 -3.54 -3.07 -2.21 -2.23 -1.50

Exports Growth Rate 0.05 0.08 0.03 0.04 0.02 0.10 0.19 -0.11 0.20 -0.03 0.01 -0.01 0.04

Exports/GDP 19.25 21.47 23.82 24.75 21.28 22.59 24.66 22.05 24.31 22.04 22.73 21.99 21.24Imports Growth Rate 0.03 -0.11 0.04 0.00 0.08 0.08 0.07 0.07 0.13 0.02 0.08 -0.06 0.05

Imports/GDP 33.70 30.29 34.43 33.73 27.61 27.01 25.12 27.52 30.26 27.71 29.18 27.79 27.12

Trade Balance/GDP(%) -14.86 -11.05 -13.81 -13.33 -8.30 -7.74 -5.34 -9.52 -10.40 -9.35 -12.00 -10.96 -10.54Resource balance/GDP -0.14 -0.09 -0.11 -0.09 -0.06 -0.04 0.00 -0.05 -0.06 -0.06 -0.06 -0.06 -0.06Cur. Acct. bef. grts/GDP -0.12 -0.06 -0.08 -0.07 -0.01 0.01 0.02 -0.04 -0.01 -0.02 -0.02 -0.02 -0.02Gross reserves (months imports) 1.10 0.93 0.64 0.81 1.08 1.54 1.51 1.24 3.14 4.46 4.77 5.47 5.405-Year ICOR (Average) 5.66 6.47 6.35 6.89 4.11 7.18 3.95 4.18 4.72 5.12 6.00 13.39 7.44Terms of trade index 3/ 87.35 88.35 87.57 88.06 99.06 104.19 109.83 108.47 101.66 105.78 106.32 102.62 102.66Real Exchange index 3/ 90.68 84.71 79.87 74.57 71.29 68.90 67.49 67.71 64.43 64.35 65.03 62.38 61.01

Notes:I/ Includes public & Pub. guaranteed debt, private, and IMF;2/ XGS represents exports of goods and services, including workers's remittances;3/ All price indices are based in 1980. i.e. 1980 = 100.

Sources: Official government data; Bank staff estimates and projections.

54

Table 6: BalaBce of Payments (USS million)

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 19941Estmn. Proi

ExportsofGNFS 2969 2994 3038 3185 3616 4234 5474 5038 6306 6117 6454 6032 6425Merchandise(FOB) 2043 2086 2161 2145 2410 2781 3609 3313 4210 4278 3957 3636 3932Nonfactor srvices 926 908 877 1040 1205 1453 1865 1725 2096 1839 2498 2397 2492

Imports of GNFS 5199 4223 4390 4341 4692 5063 5576 6287 7850 7690 8287 7624 8204

Merchandise (CIF) 4335 3627 3922 3861 3821 4232 4794 5489 6908 6872 7366 6642 7119(0/w: freight& insurance) 520 327 353 348 344 382 434 497 627 619 662 695 730NonfwcAorservices 863 596 468 481 871 830 782 799 942 818 921 983 1085

Resource balance -2230 -1229 -1352 -1156 -1076 -828 -30 -1249 -1544 -1573 -1833 -1592 -1780

Net factor income -650 -620 -575 -766 -689 -767 -1037 -1159 -985 -1115 -1033 -1199 -1142Factorincomereceipts 25 11 16 15 15 16 18 32 83 199 292 319 423lnvcsunentincome, receipts 25 11 16 15 15 16 18 32 83 199 292 319 423

Interest receipts - - - - - - - - - - 0 115 208

Directinvestmentincome 25 11 16 15 15 16 18 32 83 199 292 204 215Factorincomepayments 675 631 592 781 704 782 1055 1191 3068 1314 1325 1518 1565Investmentincomc.payments -105 -118 -141 93 -102 23 98 14 113 184 330 375 430

Direct investmentincome -105 -118 -141 93 -102 23 98 14 113 184 330 375 430Totalinterestpaymens 780 749 733 688 806 759 957 1177 955 1130 995 1142 1134

Net current transfers 981 977 930 1063 1549 1759 1596 1603 2320 2270 2416 2272 2422Toutl current transfers, rec. 1088 1068 1006 1125 1602 1824 1664 1669 2383 2356 2493 2386 2542

Private transfers 995 995 944 1056 1509 1718 1448 1480 2167 2181 2369 2286 2442Woirkers remiuances 849 916 372 967 1398 1587 1303 1336 2006 1990 2165 2176 2307Otherprivatetruisf. 145 79 72 89 I1I 131 144 144 161 191 204 330 135

Official transfers 94 73 63 68 92 106 216 189 216 175 124 100 100Total current trafers, pays. 107 91 77 61 53 65 68 67 63 86 77 114 119

Privazec unsfers 49 41 37 25 21 27 25 20 21 29 30 37 39Official transfers 59 50 40 36 31 38 43 47 42 57 46 77 80

Cur. Ac. bal.. excl grams -1898 -873 -998 -359 -216 164 458 -806 -209 418 -450 -518 499Official capital grants 124 142 16 300 17 0 90 0 760 573 0 90 0Cur. Ac. balance, incl. grants -1775 -731 -982 -559 -199 164 548 -806 551 155 450 429 499LT Capiial Inflows 1619 556 1044 638 832 928 859 766 891 963 1243 1018 877Direct foreign investment 139 78 74 55 39 112 129 226 227 375 503 577 660Net LT Borrowing 1480 478 970 583 743 316 730 540 664 588 740 352 217

Disburseanents(DRS) 2304 1197 1213 1103 1399 1453 1269 1200 1257 1422 1675 1778 1879Repaymentdue (DRS) 324 719 248 520 656 637 539 660 593 834 935 1426 1662

Othercapinalflows(net) -129 11 -128 *61 -266 -804 -1125 113 355 -165 -234 0 0Net shon-tam capital 331 16 3 168 134 -218 0 0 0 0 0 0 0Capital flows n.e.i. -460 -5 -132 -228 400 -586 -3125 113 355 -165 -234 0 0

Changes in net reserves 234 164 65 -19 -367 -288 -281 -74 -1797 -953 -560 -500 -378Net credit from IMF 442 94 125 54 -313 -138 -105 -83 -162 -172 -116 -152 -148Reserve changes ne.i. -157 70 -59 -73 -54 -150 -176 9 -1635 -782 -443 -348 -230

Netintlreserves 218 107 49 115 211 411 547 488 2066 3100 3584 3920 4146Gross reserves. incl. gold 540 376 266 345 486 752 836 770 2337 3349 3819 4167 4396Reserves in monthsof imports I I I I 1 2 2 1 3 4 5 5 5

Sources: Official government data; Bank staff estimates nd projecions.

FILE COPY p Lr-, wi -.

Report No: 14221Type: PCR