Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 34357 - M A

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF EURO 166.3 MILLION

(US$200 MILLION EQUIVALENT)

TO

THE KINGDOM OF MOROCCO

FOR A

FINANCIAL SECTOR DEVELOPMENT POLICY LOAN

November 17,2005

Finance, Private Sector and Infrastructure Department Middle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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MOROCCO - GOVERNMENT FISCAL YEAR January 1" -December 31''

AML BCP B M A O BNDE C A M CAS CDG C D V M CFAA CFT C IH CNCA CPM EIB FSAP GDP IBRD IDA IFC IMF LDP NPLS ROSC

CURRENCY EQUIVALENTS (Exchange Rate Effective as of September 30th, 2005)

Currency Unit Moroccan Dirham US$1 .oo 9.3 DH

ABBREVIATION AND ACRONYMS

Anti-Money Laundering Banque Centrale Populaire (People's Central Bank) Banque Marocaine pour I'Afrique et I'Orient (Moroccan Bank for Africa and the East) Banque Nationale pour le Dtveloppement Economique (National Bank for Economic Development) Crtdit Agricole du Maroc (Moroccan Agricultural Bank) Country Assistance Strategy Caisse de DtpGt et Gestion (Deposit and Management Fund) Conseil Dtontologique des Valeurs MobiliPres (Securities Ethics Council) Country Financial Accountability Assessment Counter-Financing o f Terrorism Cre'dit lmmobilier et HGtelier (Housing and Real Estate Bank) Caisse Nationale de Cre'dit Agricole (National Agricultural Credit Bank) Cre'dit Populaire du Maroc (People's Bank of Morocco) European Investment Bank Financial Sector Assessment Program Gross Domestic Product International Bank for Reconstruction and Development International Development Association International Finance Corporation International Monetary Fund Letter o f Development Policy Non Performing Loans Report on the Observance o f Standards and Codes

Vice President: Christiaan J. Poortman Country Director: Theodore 0. Ahlers Sector Director Hossein Razavi Sector Manager: Zoubida Allaoua Team Leader: Samir El Daher

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

FOR OFFICIAL USE ONLY

Kingdom of Morocco FINANCIAL SECTOR DEVELOPMENT PoLicY LOAN

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ......................................................................................................... i

I. INTRODUCTION ................................................................................................................................ 1

11. MACROECONOMIC FRAMEWORK ............................................................................................. 2

111. MOROCCO’S FINANCIAL SECTOR REFORM AGENDA ......................................................... 4

MAIN FINANCIAL SECTOR ISSUES ............................................................................... 4 GOVERNMENT PROGRAM ............................................................................................. 6

BANK SUPPORT TO THE GOVERNMENT STRATEGY ............................................................ 8 IV. OBJECTIVE AND RATIONALE .................... LINK TO CAS ............................................. COLLAB ORATIO ITH THE IMF AND OTHE RELATIONSHIP TO OTHER BANK OPERATIONS ........... LESSONS LEARNED .......................... ........................................................................ 11 ANALYTICAL UNDERPINNINGS .... ........................................................................ 11

THE PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY LOAN ........................... 12

OPERATION DESCRIPTION ............................................................................................ 12 LOAN AMOUNT AND TRANCHING ............................................................................... 19 POLICY AREAS .............................................................. .............................. 19

VI. OPERATION IMPLEMENTATION ................................................................................................. 19

.....

V.

POVERTY AND SOCIAL IMPACTS ......... SUPERVISION ................................................. FIDUCIARY A ...................................................................... DISBURSEMENT AND AUDITING ................................................................................. 20 ENVIRONMENTAL ASPECTS ........................................................................................ .2 1 RISKS AND RISK MITIGATION ...................................................................................... 21

..........

ANNEXES

ANNEX 1 : LETTER OF DEVELOPMENT POLICY (ENGLISH & FRENCH) ............................................ 24 ANNEX 2: OPERATION POLICY MATRIX ................................................................................................. 32 ANNEX 3: FUND RELATIONS NOTE .......................................................................................................... 35 ANNEX 4: COUNTRY AT A GLANCE (INCLUDES COUNTRY MAP) .................................................... 40

The loan was prepared by an IBRD team composed o f Samir El Daher, Regional Financial Sector Advisor; Jean Pesme, Sr. Financial Sector Specialist; Dimitri Vittas, Senior Advisor; Didier Debals, Sr. Financial Sector Specialist; Alain Laurin, consultant (Banque de France); Charlie Garrigues, consultant (Payments system); Steve Wan, Sr. Program Assistant. Peer Reviewers are Deane Jordan, Lead Operations Officer and Wafik Grais, Sr. Advisor. The Sector Director i s Hossein Razavi, the Sector Manager Zoubida Allaoua, and the Country Director Theodore Ahlers.

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LOAN AND PROGRAM SUMMARY

Borrower

Implementing Agencies

Amount Terms

Tranching

Description

Benefits

Risks

3peration ID Number

Kingdom of Morocco FINANCIAL SECTOR DEVELOPMENT POLICY LOAN

Government o f Morocco

Ministry o f Finance and the Central Bank

EURO 166.3 mil l ion (US$200 mil l ion equivalent)

Commitment-linked, Fixed-Spread Loan (FSL) o f EURO 166.3 million (US$200 million equivalent). A capitalized front-end fee o f EURO 417,750 (US$500,085 equivalent). The lending rate applicable i s six month LIBOR plus a fixed spread for FSLs denominated in EURO. The loan repayment period wil l be 20 years, including an eight-year grace period. Interest and other charges wi l l be payable semi-annually on May 15 and November 15 o f each year. The final reimbursement date i s November 15,2025. Two tranches o f EURO 108.5 million (US$130 mil l ion equivalent) for the f i rst one and EURO 57.8 mil l ion (US$70 million equivalent) for the second; the first one to be disbursed after effectiveness and the second one at the latest 12 to 18 months after effectiveness, which i s the period over which agreed measures are expected to be finalized, following the Bank’s review o f policy actions implemented as per the loan agreement.

The main development objective o f the government financial sector reform program, and o f the proposed loan, i s to strengthen the enabling legal and institutional environment for financial intermediation and risk management, and to increase private sector role and participation in the provision o f financial services. The operation would support this objective under three components aimed at: (i) implementing an effective and modern legal, regulatory and supervisory framework, in line with international standards, across the banking, insurance, and securities markets so as to improve financial intermediation and risk-taking behaviors, and foster a more efficient mobilization o f savings; (ii) restructuring weak public financial institutions particularly in addressing their stock o f non-performing assets, and streamlining their role and activities in the financial sector; and (iii) developing as needed the financial sector infrastructure in modernizing the payments system, improving the integrity o f the financial sector through better anti-money laundering policies, and enhancing the quality o f financial information in upgrading accounting and auditing standards.

Benefits would result from alleviating impediments to a more efficient functioning o f the financial system, from a stronger legal and regulatory environment, from addressing the weaknesses o f the public financial institutions and by strengthening their financial intermediation capacity. This should contribute to enhancing the flow o f credit to the corporate sector, and improving risk management in the context o f the progressive liberalization o f Morocco’s economy, including its external transactions.

The main risks could be a slowdown o f the reform momentum to a path that would not allow for a genuine move towards market-based, risk-taking business patterns in the specialized public banking institutions (moral hazard issue). This relates particularly to the restructuring o f the Cre‘dit Agricule du Maruc, the pace o f this restructuring, and the burden-sharing o f costs.

PO88243

INTERNATIONAL BANK FOR RECONSTRUCTION AN DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED

FINANCIAL SECTOR DEVELOPMENT POLICY LOAN TO THE KINGDOM OF MOROCCO

I. INTRODUCTION

1. As a result o f reforms initiated since the early 1990s, supported inter-alia by a Wor ld Bank adjustment operation in 1996, Morocco has significantly modernized i t s financial sector. I t has established the main components o f a modem financial system bestowing increased autonomy and power to the monetary and regulatory authorities; i t has a number o f wel l established, sound and profitable private banks, and good primary and secondary markets for government securities. Credit to the private sector accounts for a relatively good share (55 percent) o f GDP, and has a potential for further growth. Despite these positive steps, the financial sector continues to face important challenges related to improving the competitiveness o f banking institutions, developing the insurance and capital markets, modernizing the payments system, and pursuing the strengthening o f the supervisory framework. Furthering the coverage o f the retail banlung system, and access to financial services for l o w income groups remain key challenges.

2. The banking sector plays a central role in the financial system. The State s t i l l plays an important role in the sector through direct or indirect control o f a significant share of domestic financial assets, in five banks including four. former specialized financial institutions (the former OFSs’), and the Caisse de Dkppdt et Gestion (CDG), a non-bank financial institution which plays an important role in the economy.

3. L i f e insurance and other forms o f long-term saving schemes have higher penetration levels than in other neighboring countries, although they have not yet gained broad appeal in the general public. Contributors to pension funds represent less than 15 percent o f the labor force. The weakness in institutional savings i s one o f the impediments to capital market development.

4. The 2002 Morocco Financial Sector Assessment Program (FSAP) highlighted some key priorities for financial sector reform. These were broadly endorsed by the authorities and included, in particular, the: (i) restructuring o f state-owned banks formerly specialized, and streamlining o f their role in the financial system; (ii) strengthening o f the legal, regulatory and supervisory framework for the banking sector, including procedures for troubled-bank resolution; (iii) reform o f the pension system, ensuring public pension programs long-term sustainability and containment o f government contingent liabilities; and (iv) reduction o f distortions in financial sector intermediation. The authorities have already taken action in several o f these priority areas,

1 The former Organismes Financiers SpCcialisCs (OFS) include Banque Nationale pour le DCveloppement Economique (BNDE), le Fonds d’Equipement Communal (FEC), le CrCdit Immobilier et HBtelier (CIH), and la Caisse Nationale du Credit Agricole (CNCA), recently transformed into a limited company and renamed CrCdit Agricole du Maroc (CAM).

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sometimes with technical assistance from the IMF, and financial support from the European Union and the African Development Bank.

5. Against this background, the authorities have requested World Bank support for their financial sector reform program through a Development Policy Loan. This Program Document lays out the framework for the implementation o f a successful program by: (i) outlining how the proposed reforms would address key impediments to further financial sector development in Morocco through measures consistent with the overarching objectives o f financial sector efficiency and increased private participation in the financial sector; (ii) assessing the measures and processes used to restructure the troubled public banks; and (iii) assessing the key r i sks associated with the operation. The proposed structure o f the operation, in two tranches, reflects the World Bank’s and the authorities’ assessment that the proposed reform program represents a consistent and self-reinforcing package to be implemented over a 12 to 18 month timeframe. In this context, the first tranche aims at loclung in as soon as possible a set o f irreversible policy measures and at supporting the reform momentum. The second tranche conditions encompass measures which require more time for preparation and w i l l deepen the structural changes in the economy.

11. MACROECONOMIC FRAMEWORK

6. Over the past decade, Morocco has implemented successful stabilization programs and pursued prudent economic, fiscal, monetary and debt management policies, and financial sector reforms which have been conducive to maintaining price stability. I t initiated an ambitious program o f structural reforms in many areas including trade facilitation, customs reform, financial ,sector liberalization, telecom privatization, agriculture and public sector modernization. The successful privatization o f several state enterprises attracted foreign direct investments, which coupled with strong and steady flows o f remittances f rom Moroccans abroad and tourism receipts, led to an increase in international reserves (which more than doubled from 4.6 months o f imports in 2000 to 10 months o f imports in 2004), successive current account surpluses (since 2001) and banlung liquidity. These reforms would help increase investor confidence and lead to spurring the growth necessary to address Morocco’s poverty and social pressures.

7. An active debt management strategy has helped reduce current debt payments and the related interest and exchange rate risks, and increase foreign direct investments. The strategy resulted in total external public debt steadily decreasing from 34 percent o f GDP in 2000 to an estimated 16 percent in 2004, while domestic debt increased from 42 to 51 percent o f GDP over the same period. The increase o f the domestic debt took place in a favorable environment, without pressure building up on the liquidity in the economy (crowding-out effect), as evidenced for instance by the steady decrease in interest rates on Moroccan Treasury bonds. The significant privatization receipts have financed a sizeable share o f budget spending, thereby reducing the financing gap o f the central government, and leading to a continuous decrease of the debt to GDP ratio over the last ten years.

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8. The principal issues o f concern over the medium term relate to the economic rate o f growth, employment, and fiscal sustainability. Accelerating growth w i l l require sustained macroeconomic stability and completion o f an agenda o f structural reforms that w i l l increase the competitiveness o f Moroccan businesses.

9. Economic growth has been volatile and below i t s long-term potential. The economy has achieved a growth rate o f less than 3.5 percent on average over the last decade, wi th a promising 4.5 percent in 2001-04, that must be increased to address existing constraints, in particular on the social front. Growth remains somewhat vulnerable to agriculture, although it represents only 15 percent o f GDP. Non-agricultural output has continued to grow, slowly but steadily, at a rate o f 3.2 percent, wi th dynamic contributions from the manufacturing and service sectors such as tourism and information technology. Lending rates have been declining. The negative impact o f the Multi-Fiber Agreement (MFA) expiration on industrial output, and poor rainfall are projected to reduce the growth rate to 1.5 percent in 2005.

10. Morocco has the possibility to accelerate growth, increase employment and reduce poverty. To this end, i t needs to build upon the existing foundations of macroeconomic stability (including low inflation and a solid external position), and continue wi th a multi-pronged structural reform agenda focused on reducing fiscal imbalances, continuing trade liberalization and opening-up o f the economy, expanding the role o f the private sector and enhancing i t s efficiency, addressing weaknesses in the financial sector and the pension regime, and freeing the labor market. The exchange rate regime may also need to be adapted to the changing context, mainly in view o f further trade liberalization and in the prospect o f eventual capital account opening in parallel wi th continued trade liberalization.

11. The fiscal position has remained stable overall and the authorities have announced their intention to reduce the budget deficit to 3 percent o f GDP in the medium term. However, excluding privatization receipts and including expenditures o f the Hassan II Fund for Economic and Social Development, the budget deficits2 amounted to 5.2 percent o f GDP over the 2001-04 period, and were financed by proceeds from privatization and domestic borrowings3. The deficits were due mainly to a rising wage bill (representing about 13 percent o f GDP in 2004), and weaker revenue performance on account o f selected import tariff reductions. In 2004, over one fourth o f the fiscal deficit was financed from privatization proceeds that are projected to decline rapidly as o f 2006, which makes fiscal adjustment a priority. T o preserve stability over the medium term, rapid and decisive action i s needed to address budget rigidities, reverse expansionary payroll spending, and address actual and contingent fiscal liabilities. This would also create enough fiscal space to cover investments in development priorities. Measures have already been adopted to this end, mainly through the early retirement program (programme de dkparts volontaires h la retraite), which i s supported by the Wor ld Bank. Some 38,500 civ i l servants have retired early, and the program i s expected to lead to a significant reduction in the wage bill over time, while improving the quality and management o f c iv i l service.

_ _ _ _ _ ~ ~

* A l l future references to the “budget deficit” w i l l follow this definition. Given privatization receipts, the “debt creating” deficit averaged roughly 3 percent during 2001-04.

- 4 -

12. The Base Case scenario foreseen under the 2005-08 CAS assumes a stable macroeconomic framework under modest growth and partial adjustment. This i s supported by a strengthening of medium-term fiscal sustainability, slightly higher national savings ratios, and sustained export performance resulting from constant real exchange rates and terms o f trade. Despite declining current account surpluses, tourism receipts and remittances f rom Moroccans abroad would help maintain a sound external position. As privatization proceeds decline, multilateral financing and foreign direct investment would play an increased role in filling a rapidly declining external financing gap. Under this base case, the cumulated financing gap would be about US$15 bi l l ion over 2005-08, about the same amount considered for the previous CAS period. Selected economic indicators for Morocco are provided in Table 1.

Table 1 : Selected Macroeconomic Indicators (%ages) Actual Est. Projected

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Growth rates (in %)

Real GDP

CAS 01 -04 forecast

Real consumption

Real Gross Domestic Investment

Export Volume, GNFS

CAS 01 -04 forecast

Import Volume, GNFS

CAS 01 -04 forecast

GDP deflator

Ratios to GDP Gross Investment

CAS 01-04 forecast

Gross National Savings

Budget deficit (-)*

CAS 01 -04 forecast

Direct Public Debt

External Current Balance

1.0 6.3 3.2

0.8 8.0 3.4

3.0 7.1 0.5

7.0 8.0 4.4

6.4 13.0 8.8 -0.8 4.0 6.9

-0.5 5.7 12.2

-2.8 5.5 4.9

1.5 1.8 0.6

23.6 22.9 22.1

24.5 24.7 25.2

22.2 21.6 26.8

-5.8 -6.3 -4.6

-6.4 -7.7 -5.5

75.6 74.1 11.3

-1.4 4.1 4.1

5.5

3.6 3.6

7.6

-3.6

5.7

15.6

5.6

-0.1

24.1

25.4

21.1

-5.3

-4.3

69.2

3.6

4.2

3.8

5.5

2.8

12.6

5.8

-2.3

5.9

1.5

25.0

25.6

27.3

-5.0

-3.5

66.8

2.2

1.5 5.0

2.1 5.2

3.9 7.1

3.4 4.6

6.0 6.5

2.0 2.5

25.6 26.1

25.1 26.3

-6.8** -4.4

71.4 69.5

0.1 0.2

4.0 4.0

4.2 3.6

5.6 5.7

5.4 6.2

6.5 6.2

2.0 2.0

26.4 26.8

26.3 26.1

-4.1 -3.8

68.1 66.5

-0.1 -0.1

CAS 01 -04 forecast -1.6 -1.5 -1.1 -1.0 -1.0 *) Excl. Privatization receipts and including FH I1 for Economic and Social Development expenditures **) including one-offnet spending related to the Voluntary Retirement Program and equivalent to 1.7percent of GDP.

111. MOROCCO’S FINANCIAL SECTOR REFORM AGENDA

MAIN FINANCIAL SECTOR ISSUES

13. The Financial Sector Assessment Program, completed in 2002, suggests that, despite significant measures and reforms implemented in Morocco to strengthen and modernize the financial sector, important challenges s t i l l l ie ahead. These challenges include improving the competitiveness of public banking institutions, developing the insurance and capital markets,

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strengthening the long-term balance o f the pension system, modernizing the payments system, and pursuing the strengthening o f the supervisory framework. Geographic coverage in banking services remains low, with only 18 percent o f households holding bank accounts, while access to financial services for low income groups i s limited. Government s t i l l plays an important role in the sector through direct and indirect control o f a significant share o f domestic financial assets, as the state controls: (i) five banks, among which the former specialized financial institutions (former OFS), which accounted for 30.4 percent o f total banking sector assets at end 2004; and (ii) the Caisse de De‘ppBt et Gestion (CDG), a non-bank financial institution which plays an important role through i t s management o f pension fund assets, ownership interests in state- owned banks, investments in national development projects, and substantial holdings o f government securities. As the main shareholder and creditor o f the “Banque Nutionule de De‘veloppement Economique” and “Cre‘dit Immobilier et HpBtelier”, the C D G i s playing a major role in the restructuring o f these financial institutions. The restructuring of these institutions w i l l be undertaken in a transparent way in accordance with market-based policies and mechanisms that seek to enforce financial discipline.

14. Moroccan banks need to adopt a more dynamic strategy to withstand better the country’s increasingly competitive and liberalized environment. The importance and urgency of reforms are compounded by on-going changes - such as the landmark merger o f WafaBank and Bunque Commerciale du Maroc into a combined institution o f almost equal size to the “Cre‘dit Populaire du Muroc” (CPM), the Kingdom’s largest banking group. In June 2004, the government listed Banque Centrule Populuire (BCP), fol lowing i t s transformation into a l imi ted company, and publicly tendered 20 percent o f i t s capital on the Casablanca stock exchange. The operation, substantially oversubscribed, was a success for the State, the BCP and the Stock Exchange. As a result, the government’s direct share in BCP’s capital i s below 50 percent, and a further tender o f at least 15 percent i s foreseen during the 2006 fiscal year.

15. Morocco needs to pursue i t s drive aimed at strengthening the legal, regulatory and supervisory framework for the financial sector. I t faces challenges in terms o f quality o f financial sector infrastructure, and in this regard, needs to improve the efficiency o f i ts payments system, the transparency of corporate accounting and auditing standards - a critical element for reliable credit assessment by lending institutions - and i t s policies on anti-money laundering and counter- terrorism financing.

16. Morocco’s banlung system i s characterized by a marked dichotomy between relatively sound and profitable commercial banks, and some o f the government-owned financial institutions which are, to various degrees, in dire condition. These institutions are the “Banque Nationale pour le Dkveloppement Economique ’’ (BNDE), the “Cre‘dit Immobilier et Hdtelier” (CIH), and the “Cre‘dit Agricole du Muroc” (CAM) - successor to the “Caisse Nationale de Cre‘dit Agricole ” (CNCA). Addressing the outstanding problems o f asset quality, and covering fully the cost o f past losses, would necessitate large outlays o f public funds, over and above substantial amounts already transferred to the institutions under various restructuring and rescue plans. Indeed, between 1998 and 2004, those three financial institutions, as outlined in the following table, had received about: (i) DH 6.6 bi l l ion in direct or indirect transfers f rom government and public institutions; and (ii) DH 9 bi l l ion in preferential financing consisting of DH 1 bi l l ion in

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direct Treasury loans, DH 4 bi l l ion in Treasury-guaranteed loans, and DH 4 bi l l ion in “directed” credit facilities from other domestic financial institutions.

Government-owned Financial Institutions Public Transfers & L

Funds Transfers

Public Shareholders Public borrowers (ERAC)

Govt. guarantee on call

Liquidity Support

Treasury Loans Govt. guaranteed Loans Compulsory Bonds

Source : Moroccan Treasury

GOVERNMENT PROGRAM

uidity Su

CZH

2765

1565 1200

1700

- 2444

1000 1444

-

-

lort - 1998.

CAM

- 2381

238 1

6576 - 2520 4056

DO4 (DH mi

BNDE

- 1462

1462

Ion)

Total

6608

5408 1200

1700

9020

1000 3964 4056

-

- -

17. The authorities have stated their intention to disengage gradually f rom the financial sector and foster an enabling environment for the emergence o f an efficient, private sector led financial industry that serves more effectively the country’s development and growth objectives. The government and the Central Bank are moving to improve the legal, regulatory, and supervisory framework of, and strengthen enforcement capacity in the financial sector. The ongoing restructuring o f the public financial institutions i s a prerequisite to improving, overall, the sustainability and efficiency o f the Moroccan financial sector. In this context, the government program builds on the following three pillars.

(a) - Strengthening the legal, regulatory and supervisory framework of the financial industry

18. In the banking sector, the program i s anchored in the amendment o f the Central Bank and banlung laws, these two laws have recently been approved by Parliament. The implementation of this new legal framework w i l l provide for the: autonomy o f the banking regulator; strengthening o f central bank authority to intervene in troubled banks; and broadening o f banking supervision to institutions, such as CDG, hitherto subject to no regulatory oversight. Extending banking supervision to the C D G represents a significant step forward that consolidates the various measures adopted by the authorities over the last years vis-B-vis the CDG. In the insurance sector and capital markets, relevant regulations to strengthen the operating framework have been prepared or approved. The authorities are also pursuing the liquidation o f f ive ailing insurance companies. The last component o f this liquidation, both essential and difficult, namely the realization o f the real estate collateral, appears to entail important delays.

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(b) - Restructuring the public financial institutions

19. Whi le the resolution plan for the “Banque Nationale pour le De‘veloppement Economique” i s well on the path o f implementation, the remaining challenge for the authorities relates to both the “Cre‘dit Immobilier et Hdtelier” and the “Cre‘dit Agricole du Maroc”.

20. (i) - “Banque Nationale pour le Dkveloppement Economique”. BNDE has been largely liquidated and its performing assets transferred to CDG or CAM, along a plan based inter-alia on sustainability analyses commissioned by the European Union (EU).

21. (ii) - “CrCdit Immobilier et HBtelier”. C M i s faced with the challenge o f redefining i t s strategy and role in the financial sector, addressing the burden o f Non Performing Loans (NPLs) and rebuilding i t s capital base. For C I H to operate on a sound and sustained footing, the shareholders are preparing a detailed action plan for the restructuring o f C M and the streamlining of i t s core activities. C M ’ s dire financial position i s further compounded by: (i) the institution’s s t i l l l imited competitiveness, despite efforts to reduce administrative and funding costs, compared to other banks which have successfully developed mortgage and housing products; and (ii) the loss o f market share, evidenced by a significant decrease in 2004 in new loans (resumption o f credit activity was evidenced during the f i rst semester of , 2005). The design and success o f the ongoing restructuring o f C M depend to a large extent on how the losses incurred since the early 90s wi l l be shared among shareholders. The government, although not a shareholder, has to bear part o f the resolution cost as guarantor o f a large non-performing tourism sector loan portfolio. Given the magnitude of CM’s restructuring needs, the main stakeholders had rightly concluded that a strategic investment by a private bank was worth contemplating in the context o f this restructuring. Discussions to this effect are yet to be finalized.

22. (iii) - “Crkdit Anricole du Maroc”. The long lasting rehabilitation o f C A M w i l l require an action plan that addresses the issue o f capital adequacy and re-assesses the strategy o f the bank, as the agricultural sector i s to become one among other activities. As a “Socie‘te‘ Anonyme” (limited company), i t i s now possible for C A M to elicit support f rom new private shareholders. The restructuring plan under implementation aims at restoring C A M financial situation so i t be in regulatory compliance in 2007. As CAM’s capital could not be replenished as needed at the plan outset, i t was granted an exemption (through a ministerial decree in 2002 with a five year-tern) to give i t room to take corrective actions. The plan thus expected the new leadership to instill more discipline in the management of the bank, improve loan collection, redirect business to higher-yield activities, and generate operating profit margins eventually allowing the build-up o f capital to the required levels in 2007.

c) - Enhancing the financial sector’s infrastructure, transparency and integrity

23. strengthening AML-CFT policies, and improving accounting and auditing standards.

Government efforts in this area are devoted to upgrading Morocco’s payments system,

24. ( i ) - Payments system. On-going reforms, led by the Central Bank, represent important steps towards a more efficient payments system in addressing three main issues: upgrading the

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institutional and legal framework governing electronic payment instruments, and clearing and settlement systems ; improving the functioning o f payment clearing systems and card operations regarding low value payments; widening access o f payment services to banks and financial institutions’ clients; and mitigating systemic r i sks regarding settlement o f large-value financial transactions. These measures now need to be supported by improvements in the institutional framework, progress in services to clients and the roll-over o f a real-time gross settlement system (RTGS). The authorities have decided to implement such a system and have chosen a provider, with a view to having the system operational in 2006.

25. (ii) - Auditing and accounting in the corporate sector. The ROSC recently conducted outlined that investors (for listed companies) have a mixed opinion o f the quality o f information published in financial statements. The supervisory authorities in the financial sector have been at the forefront o f promoting improvements in financial information. The informal set-up o f the Implementation Committee o f the Accounting and Auditing Action Plan stemming from the ROSC i s a step in the right direction. Regarding accounting standards, the main challenge i s to mandate the preparation o f consolidated financial statements for companies making public offerings. Several regulations related to the securities market already call for the publication o f consolidated financial statements, but are sometimes difficult to implement and enforce in the absence o f clear accounting norms.

26. (iii) - Anti-monev laundering (AML) and counter-financing: o f terrorism (CFT). Provisions on CFT have been incorporated in the anti-terrorism law and the banlung regulator has issued customer due diligence regulations. Morocco, however, s t i l l lacks a specific AML legal framework. A draft law on the fight against money laundering has been prepared and i s currently being finalized by the authorities.

IV. BANK SUPPORT TO THE GOVERNMENT STRATEGY

OBJECTIVE AND RATIONALE

27. (i) - Objective. The main development objective o f the government financial sector reform program, and o f the proposed loan, i s to strengthen the enabling environment for financial intermediation and risk management, and to increase private sector role and participation in the provision o f financial services. Work focuses on the stability, sustainability and efficiency o f the financial sector, with a view to enhancing i t s intermediation capacity and i t s ability to finance growth. The Bank strongly supports these reform proposals, which are congruent wi th the recommendations o f the Financial Sector Assessment Program, and fully consistent wi th the World Bank assistance strategy for Morocco to achieve economic growth. The Wor ld Bank loan w i l l support this objective under the operation’s three components aimed at: implementing an effective and modem legal, regulatory and supervisory framework, in l ine wi th international standards, across the banking, insurance, and securities markets so as to improve financial intermediation and risk-taking behaviors, and foster a more efficient mobilization o f savings; restructuring the public financial institutions particularly in addressing their stock o f non- performing assets, and refocusing their role and activities in the financial sector; and developing

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as needed the financial sector infrastructure, modernizing the payments system, improving the integrity o f the financial sector through better anti-money laundering policies, and enhancing the quality o f financial information in upgrading accounting and auditing standards.

28. (ii) - Rationale. A main focus o f the proposed operation w i l l be the restructuring o f C I H and CAM, which have benefited from periods o f regulatory exemption from prudential requirements. In this regard, compliance would strongly signal the credibility o f the regulatory authority in the context o f the new central bank and banlung laws. Moreover, i t would be a critical signal as to these institutions’ ability to operate in a competitive, market-based environment. The Wor ld Bank would thus support the authorities’ on-going efforts to strengthen the legal, regulatory and supervisory framework and develop a modem financial sector infrastructure. Wor ld Bank support would be needed at this juncture to help the government move forward with the program o f financial sector reform especially in what relates to the institutional and financial restructuring of C I H and C A M . The operation would build upon the policy dialogue conducted with the authorities in the financial sector most recently in the context of, and as a follow-up to, the Financial Sector Assessment Program. O f particular relevance i s the World Bank’s long-term involvement in, and comprehensive approach to, financial sector reform and development in Morocco. The proposed operation would represent a significant step forward in that respect, in particular given the importance o f the signaling effect o f a successful restructuring o f C I H and CAM, that would add to the on-going restructuring o f the BNDE. The proposed operation does not intend to, nor can it, address all the challenges facing the Moroccan financial sector, but seeks to lock in a significant set o f reforms on the most pressing issues and therefore to pave the way, if the authorities so wish, for World Bank support to subsequent reforms.

LINK TO CAS

29. The proposed operation i s consistent with the objectives o f the 2005-08 CAS to support growth-oriented policies and strengthen the capacity o f the financial system in funding corporate sector activities. By addressing the high level o f non-performing loans in public financial institutions - a weak link within the banking system as a whole - and, in parallel, strengthening the legal and regulatory environment, the operation w i l l help alleviate a main impediment to a more efficient functioning o f the financial system and i t s ability to improve financial intermediation in support of private sector growth. The operation w i l l therefore represent a clear contribution to the objectives stated in the CAS, and in particular to the achievement under the first strategic objective to “Improve competitiveness and the investment climate” and more precisely under the CAS outcome to “Strengthen growth-oriented financial sector”. In addition, the operation w i l l contribute to achieving several governance-related objectives of the CAS, such as: increased autonomy o f the banking sector supervisor while ending existing conflict o f interest between i t s supervisory and shareholding roles; extension o f banking supervision to CDG, among others; improvements in the quality o f financial information; and adoption o f an Anti- Money Laundering (AML) law.

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COLLABORATION WITH THE IMF AND OTHER DONORS

30. There has been close collaboration between the World Bank and the IMF in Morocco, particularly in the financial sector. In the context o f the FSAP and the IMF Article IV process, the IMF has advocated, together with the Bank, a strengthening o f the financial sector legal and regulatory framework, and a restructuring of ailing public financial institutions. The preparation o f the proposed operation has entailed, in particular, close dialogue and coordination with the IMF which provides technical assistance to the banking supervision department o f the Central Bank.

3 1. O f the other donors, the European Union (EU) has been actively involved in the financial sector over the past few years, and has in particular supported analytical work to identify the main options for banlung sector restructuring. The EU, which in the context o f i t s “New Neighborhood Policy” has shifted support to other sectors beyond finance, welcomes the World Bank assisting the authorities in achieving their financial sector reforms and does not intend to get involved in that sector in the coming years. The African Development Bank (AfDB) has also been involved in the Moroccan financial sector, in close coordination wi th the EU. The AfDB has expressed interest in further supporting the authorities’ reform program in the financial sector. The LFC, and potentially the European Investment Bank (EIB), are interested in further involvement in the Moroccan financial sector - as opportunities may arise in the context o f commercial operations. IFC has provided support to the Central Bank in preparing a feasibility study on the set up o f a credit registry.

RELATIONSHIP TO OTHER BANK OPERATIONS

32. In parallel to this proposed development policy loan, the World Bank i s supporting the government housing sector policy reforms. A Housing Sector Development Policy Loan was approved on June 30, 2005. This loan’s objectives are to: (i) strengthen the institutional, regulatory and fiscal environment for a well-functioning housing market and for the emergence o f market-based solutions to the country’s housing sector constraints and needs; and (ii) increase the access o f low-income [and severely disadvantaged] households to more affordable and higher quality housing. The loan supports these objectives through policy reform and measures to: (i) modernize urban planning standards and regulations; (ii) restructure and refocus public sector housing agencies and enterprises; (iii) rationalize and simplify real estate taxes and subsidies; (iv) promote urban slum upgrading and social housing programs through market-friendly approaches; (v) improve the efficiency o f the residential rental market; and (vi) expand the access o f informal sector and low-income households to market-based housing finance. Several o f the measures to be supported would reinforce the objectives of the proposed financial sector operation, given the role of C I H in housing finance. The on-going work related to Morocco’s pension system, in particular given the links with CDG’s activities, was also taken into account in the preparation o f the proposed operation.

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LESSONS LEARNED

33. World Bank past involvement in the financial sector in Morocco, such as the FY96 Financial Sector Adjustment Loan or the FY97 Contractual Savings Development Loan, has not yielded all o f i t s expected results. In particular, the first loan did not achieve the objective of restructuring of, and state divesture from, C I H and BNDE, while the second did not go as far as expected in clarifying CDG’ s role in the collection, administration and allocation o f financial resources o f the pension system and savings banks. Past World Bank involvement has in particular been less successful with reforms focusing on leveling the playing-field between the public and the private financial institutions and on promoting reduced state ownership. One key lesson stemming from the Financial Sector Adjustment operation i s the importance of: (i) dealing with the issue o f non-performing loans and recognizing up-front the full economic costs o f restructuring; and (ii) promoting radical changes in credit allocation policies by the restructured banks. Extended periods o f regulatory forbearance are not a rigorous and sustainable way to restructuring.

34. Against this background, and regarding the CDG, the authorities’ present emphasis focuses on the extension of supervisory oversight to this entity’s banking related activities. With regard to CM, assessing the true financial position, settling non-performing loans o f public entities, honoring the State guarantee o f loans extended by C M in the tourism sector, and rebuilding the capital base are pre-requisites to a definitive restructuring o f the bank that should lead to opening the capital to a strategic partner. In the same vein, the need for the government to recognize that CAM’s problems ought to be tackled as soon as possible i s a l l the more crucial as this bank may face further stress as a result o f a l ikely deterioration o f many small farmers’ creditworthiness due to recent unfavorable weather conditions. One key element o f the World Bank dialogue with the authorities has therefore been the insistence on clear actions on these pre- requisites, and in particular the central objective o f restoring compliance o f both C M and C A M with prudential requirements as soon as possible. The design o f the proposed operation in two tranches (para.63) aims at ensuring that the medium-term components o f the reform package are implemented.

35. Beyond financial sector issues, the CAS completion report for FY 01/04 points to several recommendations which were taken into account in the preparation o f the proposed operation. The institutional capacity of the banking and insurance supervisors to implement the component o f the reform program related to the legal, regulatory and supervisory framework w i l l be key to success. Both have already prepared detailed action plans and have launched the drafting o f the bulk o f the regulations reflected in the policy matrix. One key issue for success i s related to the strengthening o f the capacity o f these institutions to implement the new legal, regulatory and supervisory framework, and w i l l be closely monitored during project supervision. The preparation o f these regulations has progressed significantly.

ANALYTICAL UNDERPINNINGS

36. The Financial Sector Assessment Program has provided a strong underpinning to the design of the proposed operation. In addition, the accounting and auditing ROSC and prior

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studies (such as insurance market development, and EU bank restructuring analyses) were used to help design sub-components o f the proposed reform program.

V. THE PROPOSED FINANCIAL SECTOR DEVELOPMENT POLICY LOAN

OPERATION DESCRIPTION

37. The proposed development policy loan would support the authorities’ actions in moving forward under the program o f financial sector reforms namely in: (i) improving the legal, regulatory and supervisory framework for the financial industry; (ii) restructuring the public financial institutions; and (iii) strengthening financial sector infrastructure. Successful implementation of the operation would yield a substantially improved financial sector framework and infrastructure, and more resilient public financial institutions. The three proposed components, consistent with the operation’s development objective, are reviewed in the following sections.

A - Enactment of new banking legislation, and implementation o f an enhanced regulatory and supervisory framework in the banking, insurance and securities sector

38. This component would include the drafting and issuance o f executive regulations pursuant to the new banlung legislation - Statutes o f the Central Bank, and new Banlung Law. Strengthening o f the financial sector regulatory and supervisory bodies would entail the following:

39. (i) - Banlung regulation and supervision. Supervisory capacity would be strengthened, and the main existing prudential regulations w i l l be revised to be in conformity with the new legislation. Consolidated supervision o f related entities w i l l be introduced, and steps taken towards the adoption o f Basle II capital standards (the IMF has been providing technical support to the Central Bank on this issue). Extension o f supervisory oversight to CDG’s banking activities w i l l be a specific condition for the second tranche. The Central Bank has begun the drafting o f related regulations and w i l l soon be ready to proceed accordingly. I t has also prepared an Action Plan to strengthen i t s own capacity to implement the new regulatory framework.

40. (ii) - Insurance regulation and supervision. The quality and autonomy of insurance sector regulation, which remains within the Ministry o f Finance, w i l l be enhanced. Insurance supervision would be brought into compliance with I A I S standards. In this regard, several implementing regulations for the recently approved new Insurance Code have already been enacted. One key implementing regulation, which includes the new requirements on the diversification and valorization of assets, solvency requirements, calculation o f technical provisions and recourse to reinsurance, has been finalized and w i l l be a condition for the f i rst tranche. Revised accounting standards for the insurance sector, anticipated in the above mentioned implementing regulation, have also been finalized and are ready for endorsement by the National Accounting Council - and are a condition for the first tranche. In the context o f their on-going efforts to modernize the insurance sector, the authorities have also launched the

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preparation o f a new regulatory framework for the insurance o f labor accidents, natural disaster and political r isks.

41. (iii) - Securities market regulation and supervision. The legal framework in this area i s broadly in line with international standards, especially following the recent adoption o f six new laws. The objective w i l l therefore be to finalize and implement the revamping o f the legal framework on such outstanding issues as the draft law on collective management schemes, and the measures needed to incorporate all IOSCO principles. The supervisory powers o f the regulator have been expanded to include control o f the Securities Exchange, the central depository (Maroclear), in particular with compliance to their norms and operational rules. The oversight has been expanded also to promoters o f mutual funds (OPCVM), securitization companies and private equity companies. The surveillance and investigative powers have been reinforced. In particular, the Conseil De‘ontologique des Vuleurs Mobilibres (CDVM) i s able to investigate in any location and obtain subpoenas for individuals whose activities are questionable wi th respect to financial regulations. Guidelines about how to deal with insider information have been issued. The system o f sanctions for violations o f regulations has been modified to provide for a greater range and gradualism o f penalties. Licensing o f OPCVMs i s now given by the CDVM and not the Minister o f Finance. The mechanism o f licensing however i s s t i l l focused on the mutual fund product and not the company and the individuals which promote and manage such a product. Nevertheless, new rules have been set up regarding the oversight o f the mutual funds companies with an array o f disciplinary and pecuniary sanctions. The protection o f minority shareholders has been strengthened through a new law about public offerings. Statements are clear about take-over bids, initial public offerings, and withdrawal public offerings ensuring transparency, integrity and fairness. The CDVM has oversight powers for public offerings and i t was given pecuniary sanctions in case o f breach. In addition, there are judicial sanctions. The supervision body was also given adequate powers to define detailed norms for the application o f regulations through circulars that have legal force. These circulars should be in compliance with international standards and issued after a broad consultation. With a broader scope of supervision, the resources o f CDVM in terms o f staff and information technology need to be increased, and steps have already been taken in that regard. However, the current institutional status of CDVM implies that i t has not yet been granted full autonomy insofar as budget execution i s concerned. Giving CDVM a real autonomy in that respect i s therefore crucial, especially to ensure that CDVM i s properly equipped to undertake the needed on-site inspections, on financial integrity (insider trading, false information, mishandling o f quotation) and on brokerage f i r m s .

B - Restructuring of state-owned specialized financial institutions

42. The Restructuring o f the state-owned specialized financial institutions i s a focus and a main challenge o f the proposed operation. As regards BNDE, the institutional restructuring plan i s fairly advanced, with mechanisms set up to absorb the losses. CM’s restructuring i s now proceeding as part of a scheme which would involve an investment by a private strategic partner - although conditions related to such a partner’s entry are yet to be finalized. CAM’s restructuring now calls for decisive and refocused shareholder and management actions to address the challenges recently identified. While this operation would not entail detailed

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conditions attached to CAM’s restructuring plan, i t would focus on the objective o f restoring compliance with prudential requirements in 2007. The World Bank loan w i l l also entail no conditions related to the on-going restructuring (liquidation) o f BNDE which i s wel l underway. The following sections review in more detail the restructuring programs o f the three institutions.

(a) - Cr6dit Immobilier et H8telier

43. A t the end o f 2003, the C I H had a negative net worth o f DH 1.1 billion. The general assembly of the shareholders has decided to maintain the activity o f the CIH, discarding the optional liquidation- an option the World Bank had recommended that i t be carefully assessed. In light o f this decision, the C I H has committed itself to restoring a positive net worth by December 31St, 2005. In addition, C I H has a stock o f non-performing loans, estimated at DH 1.7 billion, which are guaranteed by the State. This stock o f NPL’s i s included in the net NPL’s portfolio estimed at DH 5.3 bi l l ion at the end o f 2004. Several important actions over the recent past provide evidence o f government commitment to the restructuring process, including the government assumption o f the arrears of the public urban development entities (ERACs) and i t s support to the definitive settlement o f the claims on the national power company (Office National d’Electricit6) and other public entities in arrears towards the CIH. The restructuring process i s moving forward along the following four-step approach:

44. (i) - Future role o f C M . The World Bank has agreed with the authorities that a restructured, market-based, C M would mainly redirect i t s activities to the financing of low-cost housing. The entry o f a strategic shareholder w i l l be a critical market-test to provide comfort as to the sustainability o f the C I H business strategy, in a context where other leading financial institutions have recently stepped up their role in the housing sector.

45. (ii) - Resolution o f non-performing loans, a critical step o f the restructuring plan. Claim recovery efforts should be brought to bear in prompting a first phase o f negotiations between C I H and large delinquent borrowers. This phase should take place within a specified timeframe to ensure momentum. Where negotiations are not conclusive, there would be a need to launch the required legal proceedings to allow C I H to take effective ownership of loan underlying collaterals, improve asset recovery and realize guarantees. Although the authorities acknowledge the need to relieve C M from the burden o f non-performing assets, so as to focus management attention on future activities, the specific scheme that would be used to address the stock o f NPLs i s yet to be defined. One solution could be for the NPLs to be carved out o f CIH’s balance sheet and transferred into an ad hoc company. Given the need to build on C M expertise in the hotel and real estate sectors, so that this expertise can be used in resolving problem loans, the preferred option in this context would be to set up a dedicated Asset Management Corporation (AMC) as a subsidiary of CIH. To this effect a clear separation would have to be made between performing and non-performing assets. Alternatively, the new investor may accept keeping these impaired assets in C M ’ s accounts provided that adequate safeguards are set up. In conclusion, this technical issue w i l l be sorted out in the context o f the restructuring o f the C I H and in particular the rebuilding o f i t s capital base.

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46. (iii) - Ownership and governance structure. The operation should help promote measures and decisions supportive o f the broader policy approach o f reducing government ownership in the financial sector. Public participation in C I H currently stands at almost 70 percent. The on- going restructuring should lead to a financial strengthening o f the C M and a refocusing of i t s activity allowing over time to reduce public ownership through the opening o f i t s capital. In the short run, the Central Bank (which holds 12.96 percent o f the capital o f CIH) i s required, per i t s new Statutes, to relinquish i t s shareholding, while the BCP, which owns more than 20.23 percent o f the capital, has sold i t s participation to CDG. The CDG, as the largest shareholder (57.55 percent o f the capital with i t s recent acquisition o f BCP and Central Reinsurance Company shares (2.01 percent)) in C M , plays a lead role in the restructuring process. Given the magnitude of CM’s restructuring needs, the main shareholders have agreed to strengthen the governance structure in order to set up genuine risk and market-based decision-malung processes in CM, in particular as far as lending and investment decisions are concerned. One leading foreign bank has expressed interest in acquiring an equity position in C M and playing a central role in the revival of the bank including shoring up i t s financial position and building up i t s risk management capacity. This would be a promising step, giving a clear signal that the increase in private sector participation in the financial sector i s on track, even if the resulting ownership structure i s l ikely to translate in C D G holding a larger stake at least during a few years.

47. (iv) - Burden-sharing arrangements regarding the economic costs o f C I H restructuring. Agreement to this effect i s being finalized between shareholders and government. During the August 2005 shareholders’ Extraordinary General Assembly, the following decisions were adopted: (i) affect the reserves (more than DH 400 mil l ion) to cover the remaining losses; (ii) absorb the losses by reducing the bank’s capital base f rom DH 3.3 bi l l ion to DH 332 mi l l ion by a reduction of 90 percent o f the number o f shares (one new share for 10 former ones); and (iii) increase capital by DH 1.850 billion, through a subscription o f new shares open to the current shareholders, wi th a view to restoring a positive net worth.

As far as the government guarantees associated with C I H tourism sector loans are concerned, the C I H submits that the ensuing government’s liability amounts to DH 1.7 billion. As the guarantee provided i s o f last resort, the Treasury considers that calling i t would suppose that all related pledges should first be realized. In addition, the guarantees should be called on a case by case basis. A transaction agreement i s currently under finalization, which would imply that the Treasury would take over an amount o f DH 1 bi l l ion in final settlement. The C I H shareholders have accepted this solution. Regardless o f the conditions under which the burden-sharing w i l l take place, the State w i l l de facto bear the bulk o f the overall cost directly or indirectly since the largest two shareholders (CDG and BAM) all belong to the public sector. Government contribution also entails close DH 1.2 bi l l ion transferred to the state-owned housing companies (ERACs) through a capital increase in the context o f their restructuring and preparation to become subsidiaries o f the A1 Omrane Planning Holding, which allowed them to repay their outstanding debt to C M for an amount close to DH 0.66 billion. In the same vein, discussions with other public sector entities have led to agreed memoranda o f understanding for a definitive settlement o f their arrears towards CIH, in an amount o f DH 1.450 billion. All these steps w i l l allow for a better value for the C I H in the context o f the opening o f i t s capital, and would

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generate a goodwil l that could be paid by the new investor, which could somehow alleviate the cost to be borne by each current shareholder.

(b) - CrQdit Agricole du Maroc

48. Crkdit Agricole du Maroc (CAM) i s a 100 percent state-owned bank originally established to provide financing to the agricultural sector in support of government’s sectoral policies. Due to Morocco’s unstable hygrometry, the bank i s periodically faced wi th arrears on farmers loans, as their activities are negatively affected by weather conditions (mainly small farmers in non-irrigated zones), often leading to the rescheduling o f the related portfolio. Given the magnitude o f losses over the years and the socio-economic importance o f the sector, the government has provided support in the form o f guarantee or relief to farmers. Thus between 1998 and 2004, the government’s support amounted to DH 2.5 bi l l ion in guarantees o f CAM’s borrowings. Despite government efforts, CAM’s financial position has been weakened as not al l o f these losses could be passed on to the government.

49. C A M has been proceeding with a restructuring plan to address structural weaknesses and enhance i t s operations and finances. Under the plan initiated in 2002, the government changed CAM’s legal status into a “Socie‘te‘ Anonyme” (limited company) malung it possible to open up capital to private investors. In addition, several measures that w i l l strengthen CAM’s financial position have been recently approved. They mainly consist o f the acquisition o f B M A O and o f the transfer o f the bulk o f the BNDE network to CAM, a move expected to increase CAM’s capacity to collect savings and t o . reduce the cost o f i t s resources. The newly appointed management devised a strategy to shift part o f CAM’s traditional activities towards more profitable customers within the agricultural sector (e.g. corporate) but also in other sectors. The medium to long-term objective o f C A M i s to reduce the share o f agriculture in the bank loan portfolio to around 30 percent from the current 60 percent level.

50. The 2002 plan foresaw that C A M would be in a position, by June 2007, to comply with prudential rules related inter-alia to provisioning levels and regulatory capital. C A M however recently recognized that a share o f the healthy portfolio would need to be classified as non- performing, and has yet to enforce ful ly Central Bank regulations on loan classification and provisioning (as a result o f which DH 2.5 bi l l ion in additional provisions may be needed). Furthermore, a balance sheet category in an amount o f DH 1.5 billion, listed as “other assets”, may need to be assessed more thoroughly to ensure that i t i s free from potential losses. T o address the evolving situation, management has outlined a revised action plan to put back C A M on a sound and sustainable path, and which, contrary to init ial expectations: (i) would have to rely on support from i t s shareholder and other partners; and (ii) could involve the issuance of subordinated debt to strengthen regulatory capital. A provisional road map outlined at a recent meeting (April 11, 2005) o f C A M Board - headed by the Prime Minister - put forth the following option to shore up CAM’s financial standing:

51. (i) - Capital replenishment by the government, sole existing shareholder. The Treasury seems to be leaning towards a recapitalization o f C A M up to DH 1 billion, that would be disbursed over a three-year period, in the context o f a “program agreement” specifying the

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restructuring measures to be implemented by C A M capital, mainly to ensure sustainability.

C A M - including the entry o f new investors in

52. (ii) - Opening UP capital to private investors. The legal status enacted in 2003 allows C A M to offer up to 49.9 percent o f i t s capital to new shareholders, wi th no single shareholder holding more than 10 percent o f the overall capital - a provision which may be viewed as a constraint to a shareholder’s ability to influence key institutional and operational decisions. Based on current management estimates, CAM’s capital base would reach only DH 0.5 bi l l ion in 2007, which would fal l short o f the level required for compliance with capital adequacy regulation by approximately DH 1.5 billion.

53. (iii) - Subordinated debt scheme. C A M has requested that the current compulsory revolving funding facility (DH4 billion) that all banks had to extend to C A M (the so-called “bons CNCA” - C N C A bonds) be converted into a subordinated debt, which can then be counted as part o f Tier-2 capital so as to buttress CAM’s capital base. Indeed, per ministerial decree, all banks had to provide liquidity support to C A M through the purchase o f CAM’s, government- guaranteed, bond issues. Banks would be asked to subscribe voluntarily to the proposed debt subordination scheme.

54. CAM’s road map, notwithstanding i t s anticipated positive impact, needs to reflect the following: (i) CAM’s projections are based on aggressive assumptions that CAM would generate DH1.5 bi l l ion in earnings (before amortization and provisions) over the next three years, which represents almost twice the earnings generated between 2002 and 2004; (ii) CAM should better account for uncertainties which could lead to an upward revision o f the capital gap; for that purpose the Wor ld Bank suggested that C A M should run sensitivity analyses with a view to increasing government’s awareness about various scenarios; (iii) C A M should take due account of the fact that converting the liquidity support to C A M into Tier-2 capital i s contingent upon the replenishment o f capital by the government andor new shareholders, as the regulatory computation o f capital in Morocco does not allow Tier-2 to exceed half o f the Tier-1 capital; (iv) some Moroccan banks may not subscribe to CAM’s subordinated debt, since subscription o f Tier-2 capital issued by a bank translates in an equivalent deduction f rom the subscriber’s own capital (double-counting o f capital); and (v) the ongoing growth of CAM’s balance sheet, which entails the build-up o f r isks, should not continue if the restoration o f the capital base were again postponed. Indeed CAM’s growing activity i s largely funded by additional interest bearing sight deposits, which could eventually lead to further difficulties for the bank. CAM would also have to re-assess the quality and reliability o f i t s IT system architecture and modus operandi.

55. In this context, the World Bank has recommended the conclusion of a “program agreement” between the government and C A M . In addition, the World Bank has advised that the mission of public interest (“mission de service public”) vis-&vis the agricultural sector incumbent upon the C A M be the subject o f a Memorandum o f Understanding between C A M and the government.

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(c) - Banque Nationale de DCveloppement Economique

56. The restructuring plan o f BNDE has been proceeding along a two-track approach which involved the government, CDG and C A M . Under the plan, CDG took over BNDE, and launched an in-depth review o f the portfolio; i t recognized the accumulated losses and wrote down capital accordingly. Part o f BNDE’s branch network and the performing share o f the loan portfolio were sold to C A M . The government and CDG, as shareholders, agreed at the outset on a burden- sharing formula whereby the government would cover 70 percent o f the restructuring costs against 30 percent for CDG.

57. BNDE has a negative net worth o f DH 1.3 billion. Non-performing loans are in the range of DH 4.7 bi l l ion against which DH 3.1 bi l l ion in provisions have been set. There i s s t i l l DH1.2 bi l l ion in BNDE’s accounts, which are being transferred to CAM, leaving de facto BNDE as a recovery entity for non-performing assets. BNDE’s management has publicly announced i t s willingness to engage in negotiations with creditworthy debtors to conclude restructuring plans “in the shadow of the law”. Thus far the cost o f BNDE’s liquidation, including losses not yet realized, i s estimated at DH 2.8 billion, out o f which DH 2 bi l l ion have been financed so far.

58. In parallel, BMAO, a subsidiary o f BNDE, was taken over by C A M . The transfer to B M A O o f the domestic branch network bought from the BNDE i s completed. C A M intends to recapitalize B M A O in the coming months with a view to merging i t wi th C A M as required by the prudential authorities.

C - Enhancement of the financial sector’s infrastructure, transparency and integrity

59. (i) - Modernization o f the payments system. The main objectives are to: improve the regulatory framework, the national coverage and the efficiency o f processing for all payment instruments; reduce the time lag for the settlement o f payment operations and in particular “out of station” checks by introducing check imaging and electronic transfers technology; process new electronic payment instruments such as credit orders and standing debit orders, in the national Interbank Telecompensation System ( “SystBme Znterbancaire de T616compensation ”) replacing paper-based methods; and install a Real Time Settlement System (RTGS) to settle large value financial operations in a secure environment (systemic risk free).

60. (ii) - Improvement in the transparencv and integrity o f the financial system. The proposed operation would support progress in this area through improvements in the quality o f financial information and the development o f tools to fight against money laundering and terrorism financing. Regarding AML, the authorities have made strides over the last months in preparing a draft AML law (cf. par. 26) and are aware o f the importance for Morocco to quickly adopt a legal framework in l ine with international standards. In addition, they have the intention to take steps in defining the role and administrative status o f the financial intelligence unit set forth in this draft law.

61. (iii) - Upgrading o f accounting and auditing standards. The operation w i l l support improvements in the Moroccan accounting and auditing framework and the development o f a

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financial information registry, thereby fostering market discipline and monitoring. This component w i l l build on the ROSC on accounting and auditing, with a view to foster Morocco’s compliance with international norms and standards (IFRS standards), focusing on companies making public offerings and consolidation of financial statements. A draft law aimed at requiring public companies and institutions to prepare and disclose consolidated financial statements has been submitted to Parliament. The authorities have confirmed their commitment to adopt the IFRS standards and set up consolidation o f financial statements, in particular for companies making public offerings.

LOAN AMOUNT AND TRANCHING

62. The proposed loan would be in an amount o f US$200 mi l l ion equivalent, wi th two tranches. The f i rs t tranche in the amount o f US$130 mi l l ion equivalent would be disbursed following Board approval, which w i l l be conditional on the realization o f specific reforms. The disbursement o f the second tranche in the amount o f US$70 mi l l ion equivalent w i l l depend upon the fulfillment o f a detailed set o f measures. The attached draft policy matrix lays out the proposed conditions for each tranche.

63. The proposed structure o f the operation, in two tranches, reflects the Wor ld Bank’s and the authorities’ assessment that the proposed reform program represents a consistent and self- reinforcing package to be implemented over a 12 to 18-month timeframe. In this context, the f i r s t tranche aims at locking in as soon as possible a set o f irreversible policy measures and at supporting the reform momentum. The second tranche conditions encompass measures which require more time for preparation and w i l l deepen the structural changes. The project team’s and the authorities’ preference for a two-tranches operation instead o f two successive one-tranche ones also stems from the attention being paid in the operation to embed the banks’ restructuring agenda into a coherent move by the authorities towards increasing private participation into the C M .

POLICY AREAS

64. The main policy area of the proposed operation i s financial sector development.

VI. OPERATION IMPLEMENTATION

POVERTY AND SOCIAL IMPACTS

65. not apply to this operation.

The Social Safeguard policy pertaining to Involuntary Resettlement (OP/BP 4.12) does

66. The operation’s objective to improve efficiency o f the financial sector w i l l have a direct and positive impact on growth. In addition, the operation i s expected to improve access to finance, including in rural areas. The operation has been prepared following extensive discussions with market participants from all pillars o f the financial sector and professional

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associations, as wel l as with the Steering Committee for the Accounting and Auditing Action Plan resulting from the Accounting and Auditing ROSC.

SUPERVISION

67. The Ministry o f Finance and the Central Bank w i l l be the two entities responsible for overall implementation o f the proposed operation and for reporting progress and coordinating actions among other concerned agencies, including the capital market authority. As regards the outcomes of the policy reforms, the World Bank w i l l monitor actions and review progress o f the implementation o f the proposed operation. At the same time, the overall status o f the government’s program w i l l be monitored during supervision to determine whether the specific conditions o f the proposed operation have changed. Supervision missions w i l l allow the World Bank to continue the policy dialogue with the institutions involved in the implementation o f the program o f reform. I t w i l l also ensure the deployment o f staff and consultants able to advise the government in al l o f the policy and technical areas involved in the reforms.

FIDUCIARY ASPECTS

68. A Country Financial Accountability Assessment (CFAA) was conducted in 2003. The main conclusion o f the C F A A i s that the Moroccan public financial management system i s characterized by a good level o f transparency and accuracy and backed by a strong ministry o f finance which has an extensive treasury network in the country. The C F A A also assessed the overall PFM risk as low, yet pointed out areas o f higher risk stemming f rom excessively long payment delays, especially in the area o f transfers to local governments which are inadequately deconcentrated, making i t difficult to see how these funds are allocated and used. This particular project financial management risk does not affect the operation since the resources would be disbursed in two tranches against fulfillment o f a set o f measures and managed at the central level.

69. The Moroccan Public Financial Management system i s characterized by long implementation delays. The system o f control i s comprehensive (internal, external, ex-ante, and ex-post) but requires further co-ordination and modernization in order to provide performance- based audit and add value. The integrated computerization o f the system i s on-going and expected to be effective in 2006. A number o f reforms are underway in the areas o f public sector integrated accounting information system, performance based-budgeting, decentralization and de-concentration, internal control and civ i l service reform. These are expected to modernize and improve substantially the public sector management and i t s performance.

DISBURSEMENT AND AUDITING

70. The proposed loan w i l l follow the Bank’s simplified disbursement procedures for policy development operations. The approved tranches w i l l be disbursed against satisfactory implementation of the development policy program and wil l not be linked to any specific purchases, and no procuremerlt requirements w i l l be needed.

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71. As Morocco has not been under IMF program for several years, no safeguard assessment of the Central Bank has been undertaken by the IMF. The World Bank knowledge o f the Central Bank fiduciary capacity was compiled during the 2003 CFAA discussions with the Treasury o f the Kingdom on the treasury single account management and the debt accounting and reporting systems by the Central Bank. Treasury appeared satisfied wi th the Central Bank performance and did not raise any serious concerns to call for a specific assessment. Against this background, once the loan i s approved by the Board and becomes effective, the proceeds o f the first tranche in the amount o f US$130 mi l l ion equivalent w i l l be deposited by IBRD in an account designated by the Borrower and acceptable to the World Bank at the Central Bank o f Morocco at the request o f the Borrower. The proceeds o f the second tranche in the amount of US$70 mi l l ion equivalent w i l l be deposited after all the conditions of the second tranche release are met.

72. If the proceeds o f the loan are used for ineligible purposes as defined in the Development Loan Agreement, IBRD w i l l require the Borrower to promptly upon notice refund an amount equal to the amount o f said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The administration of this loan w i l l be the responsibility o f the Central Bank.

ENVIRONMENTAL ASPECTS

73. Since this proposed operation i s a Development Policy Lending (or DPL) it falls under the recently approved OP/BP 8.6. As the operation i s not expected to have significant environmental effect, according to OP/BP 8.6, safeguard policies (such as OP4.01 Environmental Impact Assessment) do not apply to development policy lending, and an Integrated Safeguard Data Sheet (ISDS) i s not needed. The policies supported b y the proposed adjustment loan are not likely to have any significant direct effects on the environment and natural resources. In addition, the indirect impacts that the DPL i s likely to have on the environment are difficult to predict but are expected to be marginal.

MONITORING AND EVALUATION

74. In addition to the monitoring o f the macroeconomic framework o f the program agreed between the two parties, the impact o f this program w i l l also be monitored through the following focused set o f indicators:

(i) Level o f bank provisioning o f non-performing loans (ii) Share o f State ownership in the banlung sector (iii) Number o f companies preparing consolidated audited financial statements (iv) Number and amount o f new l i fe insurance contracts (v) Other

RISKS AND RISK MITIGATION

75. At the global level, one risk could be that social and political opposition would weaken government resolve to pursue the macroeconomic reform program. T o mitigate such a risk, the macroeconomic program w i l l be monitored closely and the government and the Wor ld Bank w i l l

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consult on further actions, i f required, to maintain the economy on a sustainable path. Moreover, many measures under the financial sector reform program are centered on changes in the legal, regulatory and supervisory framework, which require no large public outlays, or on technological improvements, such as those pertaining to the payments system, where large private sector operators would be sharing in the investment costs. The other r isks associated with this component relate to the authorities’ ability to finalize the legal texts within the operation’s timeframe and more importantly to enforce the strengthened legal framework. These r isks w i l l be mitigated through the preparation of all regulations over the operation’s timeframe (as reflected in the policy matrix) and by supporting inter-alia through ongoing technical assistance from other donors, the banlung and insurance supervisors’ on-going efforts to implement their action plans. Finally, the other development partners, in particular the European Union, have indicated their support to the objectives o f the proposed operation (the preparation o f which did draw on analyses commissioned by the European Union) despite their decision to redirect support to other sectors beyond finance. The restructuring o f the public financial institutions does however entail large fiscal outlays; the associated r isks are discussed below.

76. (i) - Government commitment to CIH restructuring. The political decision to address forcefully the issue o f non-performing loans i s a necessary step central to the success o f the reform program. The issues at stake have now been under debate for a long time. The main r isks going forward could be a path o f reform that would not allow for a genuine change towards market-based, risk-taking business patterns in the state-owned banking institutions (moral hazard issue). The r i sks are in part mitigated by the authorities’ willingness to submit the C M business plan to a “market test”, as one important foreign bank i s interested in taking a strategic 35 percent stake in CM, and i s conducting intensive discussions with C M to this effect. A positive outcome in this regard w i l l provide an important policy signal. The World Bank has engaged in detailed discussions with the authorities on the key policy orientations pertaining to C M restructuring and ownership and governance structure, in particular through a detailed letter to the Prime minister outlining the options available and the related decisions that, in the World Bank’s view, would need to be made. Regarding vested interests, the Wor ld Bank stressed the importance that the burden sharing o f the restructuring costs be agreed ex-ante, thereby providing incentives to the government - given the potential fiscal implications (see below) - to press connected delinquent borrowers into clearing their arrears towards the CM.

77. (ii) - Government commitment to C A M restructuring. As C A M i s a state-owned entity, the government, as sole shareholder, w i l l have a key role to play in i t s restructuring and in ensuring that the objective o f restoring compliance wi th prudential requirements in 2007 i s achieved. Late recognition by the authorities o f the extent o f the remaining problems in CAM, coupled with significant demands on the authorities’ budget (including the fiscal costs o f C M and BNDE restructuring), represent a noticeable risk going forward. A strong commitment from the only shareholder o f C A M i s essential to the success o f the revised restructuring plan. The operation aims therefore at locking in from the outset the main features o f CAM’s restructuring plan, along the lines described in paras. 48-55, and the commitment by the shareholder to shoulder i t s responsibilities - as laid out in the letter o f development policy.

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78. (iii) - Fiscal Costs. The rehabilitation o f C M w i l l have definite and relatively large fiscal costs (even though the government holds no direct ownership in C M ) since the state had provided guarantees to C M covering i t s loans in the tourism sector. As far as CAM i s concerned, the restoration o f the capital base in line with prudential requirements i s most l ikely to entail the need for funding from the government, unique shareholder, even in the scenario o f an entry of new shareholders. The likely budget impact also calls for careful attention to the transparency of the restructuring mechanism.

79. (iv) - Role o f the iudiciaw. The role o f the judicial system in the recovery o f loans and realization o f collateral values and guarantees w i l l be crucial (this should fo l low the period of extra-judiciary negotiations between banks and borrowers). Experience so far has been mixed. The on-going ROSC on insolvency and creditor rights i s likely to confirm that i f Morocco’s legal framework i s broadly in line with international best practices, i t s implementation s t i l l presents important pitfalls. T o mitigate as much as possible the associated r isks, the Project team has raised the issue with the authorities and emphasized the need for a strong political signal from the outset, in which the mobilization and association o f the Justice Ministry would be essential.

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ANNEX 1: LETTER OF DEVELOPMENT POLICY

Unofficial Translation

KINGDOM OF MOROCCO Ministry o f Finance and Privatization

The President o f the World Bank 1818 H Street, NW Washington, D C 20433

Financial Sector Development Policy Loan

Letter of Development Policy

Mr. President,

Since the early 1990s, the Kingdom o f Morocco has been engaged in a process o f thorough modernization o f i t s financial sector. As a result o f the government's resolve and the dynamism of the private sector, significant progress has been made. In addition, the government has implemented one of the main conditions for a modem financial system by according greater autonomy and authority to the Central Bank, particularly in setting monetary policy and banking supervision, as well as expanded authority and additional resources to the other regulatory and supervisory entities.

1. Characteristics o f the financial sector

The banking sector plays an important role in the financial sector as a whole. Although the banking sector in the Kingdom o f Morocco is, in general, well-established, sound, and profitable, a number o f public financial institutions, namely, the Banque Nationale pour le De'veloppement Economique (BNDE), the Cre'dit Zmmoblier et Hdtelier (CM), and the Cre'dit Agricole du Maroc (CAM) are s t i l l experiencing financial difficulties, although to varying degrees. In this regard, the government i s determined to complete the restructuring process of these institutions by finding structural solutions to remedy this situation.

The government i s also seeking to encourage competition and innovation within the banking sector, in order to ensure that Moroccan banks are equipped to face the country's increasingly competitive and liberalized environment.

Although noteworthy strides have been made with respect to the development o f capital markets, the financial sector authorities are aware o f the fact that institutional savings remain weak. L i f e insurance and other forms of long-term savings, although higher than in other countries o f the region, have not yet gained broad public appeal. In addition, only a small percentage o f the working population participates in retirement plans.

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2. Government’s strategy

The government intends to pursue fully i t s efforts aimed at disengaging gradually from the financial sector, strengthening the role o f the private sector, and fostering an enabling environment for the emergence o f an efficient financial system that i s better suited to Morocco’s growth and development objectives.

Morocco i s committed, in particular, to strengthening the legal, regulatory, and supervisory framework o f the financial sector as a whole.

In this regard, the Government of Morocco paid close attention to the analyses and recommendations o f the 2002 Financial Sector Assessment Program, which pinpointed the weaknesses and deficiencies o f the financial sector. As a result, the government took steps which led, among other things, to greater competition, to the modernization o f the legal and regulatory framework o f the financial sector, to efforts to reestablish balance within the pension system, and to the launching o f a process aimed at modernizing the payments system. In addition, i t made a commitment to the transparent restructuring o f troubled public financial institutions and to placing them within market mechanisms, in order to ensure a more efficient allocation of public resources.

The main priorities for the Kingdom o f Morocco with respect to financial sector reform are therefore: (i) enhancing the efficiency o f financial sector intermediation; (ii) strengthening the financial sector’s legal, regulatory, and supervisory framework; (iii) restructuring public financial institutions and streamlining their role in the financial system; and (iv) reforming the retirement system, with a view to ensuring i t s sustainability .

The Kingdom o f Morocco w i l l also continue i t s efforts to improve the infrastructure o f the financial sector in order to enhance the efficiency o f the payments system, improve the quality of corporate accounting and financial information, and improve auditing standards - critical elements for reliable credit assessment by banks and capital markets - and step up efforts to fight against money laundering.

3. Government’s Program o f Action

Important measures have been adopted by the government to improve the financial sector’s legal, regulatory, and supervisory framework. In addition, the Moroccan Government i s making the public financial institution restructuring exercise, currently under way, the centerpiece o f i t s efforts to enhance the sustainability and efficiency o f the Moroccan financial sector. Against that backdrop, the government’s program o f action i s supported by the following three pillars:

(a) Strengthening the legal, regulatory, and supervisory framework of the financial sector

To that end, the government has already:

- Amended the bylaws o f the Central Bank and the Banking Law - the two legal texts were recently approved by Parliament. The application o f this new legal framework provides in particular for autonomy in setting monetary policy and in banking supervision; strengthening o f Central Bank authority to intervene in troubled banks; and broadening o f banking supervision to such institutions as the CDG, the financial services o f Burid Al-Mughrib - the Moroccan postal service - and micro- credit associations.

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- Undertaken the drafting o f the implementing regulations to these two laws. The Central Bank has also drafted an action plan intended to bolster i t s own capacity to implement the new regulatory framework.

- Adopted a series of legislative and regulatory texts applicable to the insurance and capital markets sectors. The implementing regulations to this amended regulatory framework are being finalized.

In addition, the government plans to improve the quality o f regulation and supervision o f the insurance sector in particular, in order to bring these activities in line with international standards (MIS). Also, the government i s committed to completing and implementing the new legal framework applicable to capital markets and to taking the steps necessary to comply with the international best practices stipulated by IOSCO.

(b) Restructuring public financial institutions

The restructuring plan for the Banque Nationale pour le De'veloppement Economique i s proceeding smoothly, and the government remains fully mobilized for the restructuring process o f the Cre'dit Immobilier et Hdtelier and the Cre'dit Agricole du Maroc. To that end:

The Banque Nationale pour le De'veloppement Economique has, to a large extent, been liquidated and i t s performing assets transferred to the CDG or the Cre'dit Agricole du Maroc.

The Cre'dit Zmmobilier et Hdtelier i s facing the challenge o f redefining i t s strategy and role in the financial sector, addressing the burden of i t s non-performing portfolio, upgrading i t s management and IT systems, and rebuilding its capital base. A number o f important steps taken recently demonstrate the government's commitment to restructuring the C M , in particular the settlement o f outstanding debt o f several public entities to C M . Current C M shareholders have already taken action to ensure the accuracy o f C M accounts, thereby assuming their financial responsibility. In addition, they have decided to increase i t s capital and have entered into negotiations, currently at an advanced phase, to enlist the services o f a strategic private partner to help get the C M on a sound footing and operate on a profitable and sustainable basis, while respecting the prudential rules o f ordinary law.

The financial situation o f the Cre'dit Agricole du Maroc remains difficult. An overall restructuring program i s needed, focusing on institutional, operational, and financial aspects. The government w i l l ensure, within the framework o f the program agreement currently being prepared, that any new public capital contributions needed to restore (by December 3 1, 2007 at the latest) conformity with prudential ratios i s included in this overall restructuring program, including, in particular, possible support from new shareholders and strict adherence to the bank's financing and credit policy.

(c) Enhancing the financial sector's infrastructure, transparency, and integrity

The government i s forging ahead with efforts to improve the payments system, to improve accounting and auditing standards, and to strengthen policies related to money laundering.

- Payments system: Emphasis w i l l be placed on upgrading the institutional framework (including providing the Central Bank with more human resources), improving client services, and the implementing a real-time gross settlement system (RTGS), which should be come on stream in 2006. AuditinP and accounting in the corporate sector: In keeping with the recommendations set forth in the Report on the Observance o f Standards and Codes (ROSC), the government w i l l take steps to

-

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improve the quality o f its financial information, with a view to fostering market discipline and monitoring risk. The objective i s to adopt IFRS standards and to establish consolidated financial statements, particularly in the case of companies making public offerings.

- Money laundering. and the financing. o f terrorism: a draft law on fighting money laundering, intended to bring Morocco in line with FATF and United Nations standards, w i l l be submitted to the government as soon as possible.

Mr. President, we would like to express our appreciation to you for your invaluable assistance with the implementation o f this ambitious program.

Very truly yours,

1

PrGt ir I'appui des politfques de ddvetappement du secteur financier

Lettre de politique de dhwdoppement

Monsieur le F&sident,

Depuis le d&uf de5 annCes 90, le Royaums du Maroc s'est eqgsgk dans une modernisatloh en profondeur de son fec+eur financier. Grdclp h la d4ferminatiarr des. autoritds et clu dynamiPjme du sectwr privk, des progrks importants ont k.th sccomplis. ba plus, le Gouvernement a mis en Oeuvre une des principales conditions d'un systkme: financier moderna en uccordant une wtonomie et un pouvarr accrw 21 lu Banque centrale en matiare notamment de conduite de 16 politique monitaire et de la supervision bancaire e t en renfor5aW les porrvcirs et les mayens des autres autori tb de rdgulaticn e l de supervision.

1. Caract&istisua du secteur financier

Le setterrr bancaire jaue un r51e important dans I'ensemble du systdme financier. Si le Royaurne du Maroc dispose d'un secteur bancaire globalemeni bien &tab!!, solide e t rentable, it n'en demeure pa5 moins que certaines institutions financikrcs publiques - tu Benque Nationale pour le Dhveloppotl.cent b n o m i q u e (BNDE), le Crddit Immobilier e l Hstelier (CIH), et le Cridir Agricote du Maroc (CAN) - se trouvent, ?I des degrhs divers, daw me sitciafion financihre encore difficile. Le touvwnernent est 21 cet igard ddtermihg 6 rnener b son terme la restructuration do CES

institutions Gn czppattant des solutions structurelles 4 cefte situotion.

Le Gouvernernent souhaite kgalement favoriser Io. concurrence et l'innovatian CIU seiq du stxteur bancaire pour que los banques marocaines puissent faire face h I'envirannment de plus en plus concurrentiet et libkralise dlr pays. Bicn que des prcgres notables dent i t 6 accomplis sur la voie du diwloppement du rnarchd der; capitaux, les autoriths du secteur financier sont conscientes que I'kpargne institutionnelle reste Ctlcore faibls. L'asurance vie et le5 autres formes d'hpargne 4 long terme n'ont pas encore gag& le grand plrblic, mzme si leur niveau de pdnhtration est plus klevd que d w S d'autres pays de la r&yon. De mGme, les cotisants auX fonds d e retrai je ne reprdsentent encore qu'un faible poiircentoqe de la population active.

1

-I 2. Strathsie. du.qouvernernent

~e Gouvernwnent entend pleinemenT poursuiure s a efforts de d4SengagemsnP prvtgressrf du secteur f imncier, cfcr renf orcsrnent du r6te du secteur prive et de promotien d'un environnement favorisant l'hmcrgence d'un s y s t h e financrer efficace servant mkux les objectifs de dS,voloppement e? de croissaee du pap. Le MO~QC est notarnment d&terminb h rmforcer le cadre juridique, rtglementdre e t de supervision pour le secteur finwcier dans son ensemble. an^ CR confate, le ljouvernernant du Marac u pris (argemmt en canr;idiraSion les malyses et recommandations du Prugrarnme d'thaluation du secteur financier. rkulisL en 2002 et qui avait Ident'ifi6 cfa faiblesses et des imuffisonces 011 Seih du secfeur financier. Le touvernernen? a ainsi deploy6 des efforts qui ont perrnis wtamment de rmforcer la concurrence et do, moderniser le cadre iiiggal et riglemcntaira du secleur firisrider. d'entmer le ri&pilibrage du systkme de retraite e t dengager un processus de modernisation des sysSkme5 de paiemen'ts. I! r'wt par ail leurs engagd it redtructurer de, mhnikre transparente les instiMians finat~iires publicpres en difficult6 et Ir les inscrire dans des mkanismes de marchd aftn de mieux dlouer les rssuurces publiqufs.

fiinsi, les principales prioritds du Rayaume du Maroc pour k rdfonne du secreur financier son? (i) le rehforcement de l'efficacitd de I'intermidiation du secteur financier ; (ti) le renforcement du codre. juridique, rkg1emenTaire et de nrpervisim du secteur financier : (iii) la r&tructuro-tion des institutions finnncGra publique et la Wionalisotion de leur &e dans le systkrne finunder : et (iv) la rikforma dq sysShe de ratmite, assurant la viabilitk & iong tarme des r&gimes.

Le Royaurne dco Nwoc poursuivra. &gdment, Ses efforts poor ambliorer I'ittfrlzstructure du secteur financier afirt de rendre Ins syHirnes do paicmenl plus efficuces, d'amiliorer fa quulit& de Is comptabilitb e i de I'informoticm financikre des saciktks at cetle des rrarrne5 d'audii kiements cSSt3htids d'une kvaht ion fiable du c d d i t par k s institutions LMncsires et tes marches des capitcux - et de renforcor !a lutle contre le blanchirnent des capitaux.

UI 3 Proqramme d'action Lees Autoritds

Dos me~urb5 ittIpQrta?IteS On? $ti priSeS pat- les AutOriteS p6ur amdiarer le codre juridique, r4glementairt: e t dp. s~rpervision dam le secteur ftnancier. En outre, /a ouforifis mcrocaines placent la restructuration en cours des inftitutiorls financiires publiques ou c z u r de leurs efforts en faveur du rsnfcrcement de Iu soutenabi!iti e t de l 'efficaciti du secteur financier ou Maroc. Ocns ce contexto. le. programme d'action du Gouvernement s'appuie sur ies t r o i s piiiers suivan+s :

(a) - Renforcemwrt du cadre juridique, r8glcmentaire et de si~pervision du secteur financier

Pour ct ieindte cet objectif. le Couvernement a d'ores et dkji! : r t v i s e la Statuts de la Banque Centrale e t la Ioi bancaire - ces deux textes de loi cnt k td rdcemment a d o p t i s par le Parlernent. La mise en application de cr, nouveau cadre jurrdiquc prkvoit notmmrrnt : I'autonomie dons la conduite de la politique mondtarre e.? dans lo supervision bancaire; le rsnforcerncnt de I'autorite de la Bcnque centrnie pour intervenir auprLs dc5 banqua en difficultk; et I'dlargissement de la supervision UIJX G C t l V i t e 5 baqcaires

2

d'autres institutions dont la COG, les Service5 financiers de Barid AI-Maghrib - Ia paste maracaine

erlgagi fa prkpanation des textes rigltrnentaires d'applicatioe des deux lois. La Bmquer Ccntrale C, 4.ggolement klcabord un Plan d'action destink 21 renforcer sa propre capaciti b met t re en ceuvre le noweau cadre rd~leme~taire. adopt6 une siria de textes It5gislstifs e t rt&&rnenicrires dahs le secteur des usS5urahces e t des march& des capitcu~x. Les texter d'application du codre Ikgislatif r b i s i sont en C Q U ~ S de f inaiisation,

De plus, s'agissant en particulier des a~surance~, le Gowernemeni campte rennforcer IC, qualit4 de la rigulation c t de Ja supervision du sectecrr afin de les mettre en eonformitd avet les nor me^ internationales ( IA IS ) . De mEme, e t concernant le marchi des capitaux, le Gowernement s'er~gclge d paroachever et prendre I 6 rnaures requises p a r respester tes meilleures pratiques interndimales kdictdas par t 'OTCV.

e t ies asseciations de micro- crkdit.

-

i mettre en &uwe le nouveuu cadre juridique y affirent e t

(b) - Restructuration des insWutions financikres publiques

Alorlt qua l e plan de restructuratian pour Iu Elanque natiohale de dbeloppement dconomique est en bonne vcie d'exkcutian, le Goucrernemtnl reste pleinement mrrbili56 pour maner 4 bien IE processus d'assainissernent du Crddit immobilkr et h&elier d du Cridit ngricole du Maroc. En effet :

La Bclnque ntationde pour le dbeloopement Lconnmiaue Q &.tik en granda par t ic liquid& et ses octifs prcductifs cMds h la 0 6 ou au Crkdit ogricole du Maroc.

Le Crkdit immabilier d hijtelier fait face ao dif i de la redifinition de sa stratigle e t de sa0 r6k dans le secteur financier, en trouumt une solution QU poids de s a crdmc= en souffronce. eh madernisant son systhmc de gestion et d'irrforma+ion, e+ M r&wranf son assise financikre. Pfusieurs actions importantes rdtentes ddmontrent I'twgagement du Goovernement en faveur dE fa rwtructurat ion du CIW, na.tarnmeht I'apuremeot des crQnces en souffrance de plusieurs ent i t i s publiques. De leur c&i, les lzctiomires actuels do CZH ont d'ores et dijA agi pour re f l i t e r !a vkr i tk des comptds du CfW - e t emmer en cons&quence leur responsabilitk Finonti&re. 11s ant de plus dicidd d'une augmentation de capital et mgagd des n&gociations, aujourd'hui li un stadc avancd, pour associer un partenaire strathgique pr iv i au redresserncot du CIH e t 14

poursuite de ses activit& sur des bases profitabies et pkrennes dans IC: r a p e d des rkgles pmdenticlb de droit commun.

- Le Crddit oqricole du Mcroc reste dans une situatian financikre diff ici le, qui nicessitrr un programme de restructuraticn gfobal, portont sur les aspects institutionnel, opkrationnej e t financier Le touvernemevt veillera dam le cadre d'un contrat programme en c o w s de prkporutian 6 ce que tout nouvel appor? public en fonds propres requis pour restaurer (au plus tard le 31 decembre 20071 la canformit6 avec les ratios prudcntiels s'inscrive dans le cadre d'un tcl programme de resfructuration global, incluant notsmment I'apput dventuel de rwuveoux actionnuires e t une str icte discipline dons la polttique de financement s t de crhdit de la banque.

3

(c) - Amk1ioratiotl de )'infrastructure, de la transparence et de I'in'rbgritk du secteur financier

Le Gouvernement podrsuit ses efforts d'umdiioraJ.ion du s y s t h e des paiements, d'amklieration des norwes de compktbiliti et d'audit et de rcnfowernent des palitiques de lutte contre le blenchiment de capitaux :

Systkme de wdemertts : L'accent serq mis Sur I'amdliorstkon du cadre institutiannei (y rompris le renforcement des r e ~ ~ o u r c e s hurnairles de la Banque cenimle]. des services ir la cliantkle e? lo mfse en place d'un systkme de rkglernent brut &h temp3 rkel (RTGS) - 441 devra &e opdrstionnel en 2006. Audit. et cambtobilitk dms le secieur d e s o c i i t b : En tigne avec ler; recommandations du popport stir la conformitd aU% norme.9 et c o d e (RONC), le Gouvernement poursuiura ses acTians d'am%liorstlon de I' Inforrna-tion f inandre visant h encourager Id discipline de march4 e? le wivi des risques- ('objectif ktant d'adopter les norma TFRS et d'itablir des bta$s financiers cansalidks, en parSiculier' pour le socidtds faisani uppei pubfic h I'kpargne.

&ut** contre Ir: blanchirnent de capiteux et le financement du terrorism% : Un pro jet de loi sur la lutte conyre le blrvrchiment de capitauux visan? mettre ie Maroc en confornitk avec les standards internationax du C A F I e t de5 Nations Units sera saumis du Gouvernement dsns me i I leurs d d hi 5.

:

En vous remerciunt de votre p&cieux appui pour la mise en ewris de ce? 4rnbi.tieox pragramme, je YOUS prie d'agrrier. Monsieur le PrBsident, l 'axpwsion de ma haute cansidimtion.

4

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e .I m u e m e E;I h 0 ,x .I - m

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ANNEX 3: FUND RELATIONS NOTE

Public Information Notice (PIN) No. 05/125 September 15, 2005

International Monetary Fund 700 19th Street, NW Washington, D.C. 20431 USA

IMF Executive Board Concludes 2005 Article I V Consultation with Morocco

On August 29, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article I V consultation with Morocco.'

Background

Morocco has achieved macroeconomic stability since the early 1990s. Inflation has remained low anchored by the exchange rate peg and thanks to a prudent monetary policy. The external current account has been in surplus since 2001 and external reserves increased to a comfortable level. However, fiscal deficits have remained large and the authorities have used part o f the privatization receipts to finance increased expenditures.

Growth has been volatile and insufficient to significantly reduce poverty and unemployment. Growth averaged three percent over the last decade. It has been volatile because o f the dependency o f agriculture to rainfalls, and recurrent droughts contribute to increasing poverty in rural areas. The unemployment rate remains high, particularly in urban areas. Although the growth o f the nonagricultural sector has become more resilient to agricultural output shocks, i t i s insufficient to significantly reduce unemployment.

Morocco continues to implement i t s broad based structural reform agenda. Large state-owned enterprises have been privatized and remaining public enterprises are being restructured or prepared for privatization. In the area o f trade liberalization, the implementation o f the association agreement wi th the European Union, Morocco's main trading partner, i s proceeding as scheduled. Trade agreements were signed with the United States, Turkey, Tunisia, Jordan and Egypt to complement the association agreement with the European Union. Most Favored Nation tariffs were reduced to a maximum o f 10 percent for goods freely traded with the European Union. The financial sector i s being strengthened. The imminent promulgation o f a new central bank and banking laws w i l l further enhance the autonomy of the Central Bank and i t s supervisory power. A new labor code has been approved and i s expected to improve labor relations and flexibility in the labor market. The government i s pursuing i t s efforts to fight

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poverty, improve social conditions, and enhance the rights o f the female population. The impact o f these reforms on Morocco's growth rates should be observed in the medium term.

In 2004, macroeconomic and financial conditions remained stable. Whi le the overall GDP growth slowed down to 4.2 percent on account o f a decline in growth in the primary sector, nonagricultural GDP growth picked up because o f a dynamic tertiary sector and a recovery in mining and energy. Inflation remained below 2 percent. The current account was in surplus, and external reserves increased further and covered about ten months imports o f goods and services as wel l as the public and publicly guaranteed external debt.

The fiscal deficit (including Hassan I1 Fund and excluding privatization receipts) declined b y 0.4 percentage points to 4.9 percent o f GDP, reflecting good revenue performance. However, some budgetary policies did not support fiscal consolidation. Expenditures were higher than envisaged because o f increases in: (i) investment fo l lowing acceleration in project execution; (ii) the wage bill fo l lowing new salary increases; and (iii) subsidies because the food subsidy reform was postponed and the petroleum price adjustment was not fu l ly implemented. The authorities were able to prevent further expenditure increases related to the El-Hoceima earthquake and a locust invasion b y reallocating budgetary appropriations. Public debt declined to 66 percent o f GDP because privatization receipts helped finance the deficit.

The unfavorable agricultural campaign i s expected to affect macroeconomic conditions in 2005. The overall GDP growth rate i s projected at about 1 percent. The current account i s l ikely to register a small deficit partly because o f a high level o f imports o f food products and higher o i l bill. Nonetheless, the overall balance o f payments i s expected to remain in surplus. The fiscal deficit (excluding privatization revenue but including spending by Hassan I1 Fund) i s expected to increase to about 5.5 percent o f GDP (but to decline to 4.5 percent o f GDP, excluding one-off factors) despite continued favorable revenue performance. Expenditures w i l l increase reflecting the repercussions on wage payments o f the 2004 wage negotiations, the voluntary retirement program, the new universal health insurance program, the delay o f the food subsidy reform, and the partial adjustment in M a y and August o f domestic petroleum prices. Large privatization receipts w i l l help contain the debt to GDP ratio at about 70 percent, despite the issuance o f debt to cover old pension fund arrears (2.4 percent o f GDP).

Executive Board Assessment

Executive Directors commended the Moroccan authorities for maintaining macroeconomic stability and for continuing to implement their structural reform agenda in 2004. Inflation remained low, nonagricultural output growth accelerated, and foreign exchange reserves increased further. Good revenue performance contributed to the narrowing o f the fiscal deficit and the debt-to-GDP ratio declined. Considerable progress has been made in the implementation o f structural reforms, most importantly, those related to trade liberalization, the financial sector, public enterprises, and the labor market.

Despite these achievements, Directors noted that growth continues to be volatile and insufficient to significantly reduce unemployment and poverty. T o these ends, they agreed that Morocco needs to achieve sustained high rates o f growth in non agricultural output. In the context of Morocco's increasing integration into the wor ld economy, they considered accelerated structural reforms and fiscal consolidation essential elements o f a high growth strategy. They, therefore, welcomed the authorities' resolve to move expeditiously wi th their remaining structural re form agenda in a context o f continued macroeconomic stability and fiscal consolidation.

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Although the current fiscal stance and debt level do not pose a risk to macroeconomic stability in the short term, Directors considered that current policies, if maintained, could reduce the authorities' ability to absorb unfavorable shocks, which could constrain growth. They, therefore, welcomed the authorities' targeted reduction o f the fiscal deficit to 3 percent o f GDP over the medium term. They agreed that the achievement o f this objective and i t s compatibility with a high-growth strategy would require a reform o f the tax system that would widen the tax base and allow a reduction in tax rates, a decline in the wage- bill-to-GDP ratio, an overhaul o f the food subsidy program, and the implementation o f the petroleum price adjustment mechanism.

Directors welcomed the authorities' plan to implement a medium term budget framework to enhance the efficiency o f fiscal policies. They supported the authorities' efforts to initiate a tax reform, particularly o f the Value Added Tax, and to present a tax expenditure report with the 2006 budget to raise awareness about the need to improve the efficiency of the tax system. They encouraged the authorities to move expeditiously on a broad-based tax policy and tax administration reform. Directors welcomed the authorities' decision to continue their no net new hiring policy, implement a modem human resource management and remuneration system and a voluntary retiremenddeparture program, and pointed to the importance o f controlling salary adjustments and bonuses. Directors welcomed the increased emphasis on social development, including through improved access to education, healthcare, housing and basic infrastructure and rural development, to be financed within the medium-term budget objectives. They also greeted the recent recognition of old pension fund arrears, and supported the authorities' efforts at adopting and implementing a comprehensive plan to put the pension system on a sound footing.

Directors agreed that the Moroccan authorities have made commendable progress in liberalizing the economy. The recently signed free trade agreements with the United States, Turkey and regional partners w i l l help attract foreign direct investment and boost Morocco's growth and export performances. However, to fully exploit the benefits o f trade integration, Directors urged the authorities to simplify the tariff structure, further reduce tariffs, and eliminate variable tariff rates in parallel with the reform o f the food subsidy system while providing targeted support to vulnerable groups. They noted that liberalization measures in the area o f telecommunications contributed to the current dynamism o f the sector and those related to air transportation have positively impacted tourism. They encouraged the authorities in their efforts to liberalize other sectors of the economy.

Directors urged the authorities to fully implement the new labor code, which should help clarify employer/employee relationships, and to accelerate judicial reforms, which should enhance investors' confidence. Directors encouraged the authorities to accelerate the implementation o f the remaining measures needed to improve the business environment. In particular, they noted the need to improve governance and transparency. Directors called for caution in the provision o f exemptions or special incentives in favor o f specific sectors as a measure to foster investment.

Directors welcomed the authorities' continued efforts to strengthen the financial sector and implement the recommendations of the Financial Sector Assessment Program. The promulgation o f the new central bank and banking laws w i l l further enhance the autonomy and supervisory power o f the Central Bank. Directors noted the progress made in the restructuring o f the three weak state-owned banks. They urged the authorities to accelerate the implementation o f the measures required to bring these banks to compliance with prudential regulations as soon as possible. Directors encouraged the authorities to continue addressing the remaining vulnerabilities in the financial system, including the high level o f non performing loans, and to remove the structural constraints in order to enhance the availability and reduce the cost of credit to small-and-medium-size enterprises, which represent the core o f Morocco's enterprise sector. They commended the adoption of a bill to combat the financing o f terrorism, and looked forward to action on anti-money laundering legislation.

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Directors noted that the current peg of the dirham has served the economy wel l and contributed to keeping inflation low, and that there are n o signs o f an exchange rate misalignment. Given the increasing integration o f the Moroccan economy into the rest o f the world, they noted that a gradual transition to a flexible exchange rate regime would be advisable. They welcomed the authorities' openness to consider the desirability o f alternative exchange rate regimes taking into account the characteristics of the Moroccan economy.

Directors commended the authorities' efforts to improve the statistical database. In particular, they noted the progress made toward meeting the Special Data Dissemination Standards (SDDS), and encouraged the authorities to implement the agreed action plan to enable Morocco to subscribe to the SDDS in the coming months.

Table 1. Morocco: Selected Economic and Financial Indicators, 2000-05

Quota: SDR 588.20 million

Population: 29.8 million

Per capita income: US$ 1,677 (2004)

2000 2001 2002 2003 2004 2005 Prel Proj.

(Annual percentage change; unless otherwise indicated)

Production and income

Nominal GDP

Real GDP

Real nonagricultural GDP

GDP deflator

Consumer price index (CPI), average

External sector

Exports o f goods, f.0.b. Exports o f goods, f.0.b. ( percent change)

Imports o f goods, f.0.b. Imports o f goods, f.0.b. (percent change)

Oi l imports f.0.b.

Net services and income

Net transfers

Current account (in percent o f GDP)

Overall balance (deficit -)

2.5 8.2 3.8 5.5 5.8 2.8 1.0 6.3 3.2 5.5 4.2 1 .o 3.6 3.6 2.8 3.5 4.7 4.0

1.5 1.8 0.6 -0.1 1.5 1.8 1.9 0.6 2.8 1.2 1.5 2.0

(In billions o f U.S. dollars; unless otherwise indicated)

7.4 7.1 7.8 8.8 9.7 10.2 -1.2 -3.7 9.8 11.8 11.2 4.6 10.7 10.2 10.9 13.1 16.2 18.7 7.0 -4.6 7.2 20.1 23.9 15.2 1.4 1.3 1.2 1.0 1.6 2.2

0.3 1.1 1.2 1.8 2.7 3.0 2.5 3.6 3.3 4.1 4.9 5.1

-1.4 4.8 4.1 3.6 2.2 -0.9 -0.4 3.8 0.6 1.6 1.8 0.2

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(In percent o f GDP) Central government

Revenue, excluding grants and privatization

Total expenditure (including Fonds Hassan ZZ)

Overall balance 1/ Privatization and GSM receipts

Overall balance, incl. privatization 1/

Money and credit

Broad money

Interest rate (Avg, money market rate, in percent)

Official reserves Gross official reserves (in billions o f US$, end-

In months o f imports o f goods and services

Debt (short-, medium-, and long-term)

Total external debt ( in billions o f US$)

Total external debt (in percent o f GDP) Domestic government debt ( in percent o f GDP) 2/ Total government debt ( in percent o f GDP) 2/

Memorandum items:

GDP at current prices (in billions o f DH)

GDP at current prices (in billions o f US$)

Exchange rate: dirham/US$ (average period)

Real effective exchange rate (appreciation +)

Terms o f trade (deterioration -)

Excluding o i l

Unemployment rate (in percent)

Urban

Rural

26.2 25.0 24.7 24.5 25.1 26.4 32.4 31.1 29.9 30.3 30.9 32.4 -6.4 -5.7 -4.7 -5.3 -4.9 -5.5 0.0 6.1 0.2 2.9 2.3 2.6

-6.4 0.4 -4.5 -2.5 -2.6 -2.9

(Annual percent change; unless otherwise indicated)

8.4 14.2 6.3 8.6 5.4 4.4 3.0 3.2

4.8 8.4 10.1 13.9 4.6 8.2 9.1 10.4

18.0 15.9 15.7 16.8 55.0 47.8 40.9 35.1 47.3 45.8 48.1 50.1 81.5 74.7 71.4 68.5

354.2 33.3

10.63 2.8

-7.7 -2.4 13.7 21.5 5.2

383.2 397.8 419.5 33.9 36.1 43.8

11.30 11.02 9.57 -4.1 -0.3 -1.3 7.6 -7.3 5.7 7.9 -8.6 8.5

12.8 12.5 11.4 20.3 18.0 19.3 4.2 6.2 3.4

7.5 2.4

16.3 10.0

16.6 30.8 49.9 65.8

443.7 50.0 8.87 -0.6

-10.8 -10.3 10.8 18.4 3.1

5.8 ...

16.0 8.6

16.0 30.2 55.2 69.9

456.0 ... ... ...

-3.1 -0.5

...

...

...

Sources: Data provided by the Moroccan authorities; and IMF staff projections. 1/ Commitment basis including Fonds Hassan ZZ. 2/ Gross debt including net central bank credit.

-40 - ANNEX 4: COUNTRY AT A GLANCE

Morocco at a glance 8/25/05

POVERTY and SOCIAL Morocco

2004 Population, mid-year (millims) GNI per capita (Atlas method, US$) GNI (Atlas method, US$bi/lion$)

Average annual growth, 199844

Population (%) Labor force (%)

Most recent estimate (Iatesl year available, 1990-04) Poverty (% of population below nationalpoverfy line) Urban population (% of total population) Life expectancy at birth (yean) Infant mortality (per 1,OOO live births) Child malnutrition (% of children under5) Access to an improved water sourn (% ofpopulation) Literacy (% of population age 1 5 4 Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984

GDP (US$ billions) Gross capital formationMjDP Exports of goods and servicedGDP Gross domestic savingdGDP Gross national savingdGDP

Current a w u n t balance/GDP Interest paymentdGDP Total debVGDP Total debt service/exports Present value of debtlGDP Present value of debvexports

12.8 25.3 23.8 14.7 18.2

-7.8 4.5

109.1 27.6

1984-94 199444 (average annual growth) GDP 3.6 3.2 GDP per capita 1.5 1.5 Exports of goods and setvices 7.3 4.1

30.6 1,520 46.5

1.6 2.4

19 58 69 36

80 51

110 115 to4

1994

30.4 21.3 24.9 15.3 19.0

-2.4 4.5

75.7 37.9

2003

5.2 3.6 0.6

M. East & North

Africa

294 2,000

589

1.8 -1.3

56 68 45

88 69

100 104 94

2003

43.7 23.8 32.3 19.7 27.3

3.7 3.0

43.2 23.7 40.1 96.7

2004

3.5 1.9 2.6

Lower- mlddle income

2,430 1,580 3,047

1 .o 0.7

49 70 33 11 81 90

114 115 113

2004

50.1 23.9 31.4 17.5 27.5

2.9 1.2

37.4 15.4

2004-08,

4.0 2.5 5.3

Development dlamond.

Life expectancy

Gross Per primary capita enrollment

1

Access to improved water source

-Morocco - Lower-middle-income group

Economlc ratlot'

Trade

Domestic Capital savings formation

Indebtedness

-Morocco - Lower-middleincome grwp

~~ ~~

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services Manufacturing

Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services

(average annual growth) Agriculture Industry

Services

Household final Consumption expenditure General gov't final msumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1984 1994 2003 2004

15.0 18.5 16.8 16.7 33.3 30.8 29.6 29.7 18.5 17.0 16.6 16.5 51.7 50.6 53.6 53.6

69.8 67.5 59.2 64.5 15.6 17.1 21.0 18.0 34.4 30.9 36.4 37.8

1984-94 1994-04 2003 2004

3.1 2.3 18.0 3.0 3.0 3.6 3.3 4.0 3.7 3.3 3.8 3.5 4.0 3.3 3. t 3.4

3.9 3.0 7.9 5.4 4.8 4 2 5.8 1.5 2.3 8.2 6.9 4.3 7.3 6.6 7.4 5.8

I I Growth of capltal and GDP (X)

I -GCF +GDP 1

I G r o m of exports and lrnporta (X)

Note: 2004 data are preliminary estimates.

* The diamonds show fWr key indicators in the country (in bold) compared with its incomeggroup averape. Ii data are missing. the diamond will be incomplete.

- 4 1 -

24.1 -0.8 -4.1

Morocco

9 9 m O l 0 2 m M

-GDP dellator *CPI

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices lmplicil GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overall surpluddeficil

TRADE

(US$ millions) Total exports (fob)

Agriculture Phosphorus rock Manufactures

Total imports (cin Food Fuel and energy Capital goods

Export price index (20W=lW) Import price index (ZOW=lOO) Terms of trade (20W=7001

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves including gold (US$ millions) Conversion rate (DEC, lccaVUS$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ mi//ions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resurca flow Official grants Gificial creditors Private creditors Foreign direct investment (net inflows) Portfolio equiw (net inflow)

World Bank propram Commitments Disbursemnts Principal repayments Net flows Interest payments Net transfers

1984

12.5 8.8

16.2 -7.0 8.1

1984

2,161 486 524 434

3,904 660

1,021 733

1984

3,038 4,390 -1,352

-575 930

-998

1,066 -68

8.8

1984

13,908 867 43

1,082 142

1

43 646 443 47

0

266 276 72

204 70

134

1994

5.1 1.6

24.2 1.2

-3.3

1994

5,541 1,150

273 3,010 8,271

817 1,113 2,003

1994

7,555 9,3i7 -1,822

-1,170 2,270

-723

1,084

2003

1.2 0.0

2003

2003

14,140 15,913 -1,773

-728 4,123

1,622

130 -361 -1.752

9.2

1994

22,973 3,746

35

3.636 572

2

279 -330 146 551 238

127 246 302 -56 271 -327

9.6

2003

18,910 2,719

23

4,294 431

2

230 441 103

2,279 6

54 143 307 -164 126

-290

4.1 2.5

'

1

0

2004

9,266 1,801

430 5,616

16,364 1,411 2,762 3,628

2004

15,164 18,271 -3,107

-1,001 5,560

1,473

1,801 -3,274

8.9

2004

18,710 2,524

21

2.971 572

2

-597 -573

127 129 469 -340 105

-I44

Export and Import levels ( U S mill.)

20*ooo T 15,ooo

10,wo

5.ooO

0 98 99 CU 01 02 03 M

BEXpOriS .Irrports

Current account balance to GDP (%)

6 T

Cornposttion of 2004 debt ( U S mill.)

I

I E. 5.787

A . IBRD E . Bilateral 8 . IDA D . Other mllilaleral F . Private C - IMF G . Short-term

The World Bank Group: This table was prepared by country unit staff, fgures may differ from other Wwld Bank published data. &2m

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