Document of

The World Bank

FOR OFFICIAL USE ONLY

AA/ 3oc'd- ,szoZReport No. P-4867-MOR

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED STRUCTURAL ADJUSTMENT LOAN

IN AN AMOUNT EQUIVALENT TO US$200 MILLION

TO

THE KINGDOM OF MOROCCO

November 8, 1988

This document bas a resticted ditibution and may be used by recipients only in the perfonnance oftheir offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

AverageCalendar 1987 July 1988

Currency Unit = Dirham (DH)1 Dirham (DH) - US$0.1196 0.11861 US Dollar (US$) = DH 8.359 8.432

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AfDB: African Development BankASAL: Agricultural Sector LoanBank al-Maghrib: The Central BankCMPE: Centre Marocain pour la Promotion des Exportations

(Center for the Promotion of Moroccan Exports)GFCF: Gross Fixed Capital FormationICB: International Competitive BiddingIGR: Personal Income TaxIHS: International Harmonized SystemITPA: Industrial and Trade Policy Adjustment LoanMLT: Medium and Long TermOCP: Office Cherifien des PhosphatesOECF: Overseas Cooperation Fund (Governmenc of Japan)PAL: Public Administration LoanPGI: General Import ProgramPSN: National Solidarity TaxQR: Quantitative RestrictionSMAEX: Societe Marocaine d'Assurance a 1'Exportation

(Export Insurance Agency)SOE: Statement of ExpensesTIP: Target Investment ProgramTPS: Domestic Sales TaxVAT: Value Added Tax

FOR oFCAL US ONL!

MOROCCO

SrRUCITURAL ADJUSTMENT LOAN

Loan and Pro Sam

Borrower: The Kingdom of Morocco.

Amount: US$2C0 million equivalent.

Terms: 20 years, including 5 years of grace at the standardvariable interest rate.

Description: Morocco's Structural Adjustment Program aims to achieve asustainable increase in the rate of economic growth inorder to ensure employment opportunities and acceptableliving standards for its growing population, while --

enhancing external creditworthiness. The proposed SALwould support the first phase of a program of actioncovering: an increase in the level of public revenues andsavings to finance essential infrastructure and socialinvestment, while reducing the need for public sectorborrowing; further rationalization of trade and industrialpolicy; and the elaboration of an external liabilitymanagement action plan. Specific policy measures wouldhelp raise the overall efficiency of the economy in linewith program. goals.

Bentfits The principal benefits of the adjustment program resultingand Risks: from the acceleration of economic growth through increased

factor productivity would be: a rise in employmentopportunities and living standards for the growingpopulation; the development of an outward-oriented privatesector; and continued improvement in externalcreditworthiness with a view to restoring voluntary accessto commercial borrowing. Program risks concern the timelyimplementation of a comprehensive set of structuralreforms, which will require a cohesive and concertedapproach from those governmental institutions involved inpolicy implementation. Underscoring the Government'scommitment to the adjustment program are strong policydialogue as reflected in a jointly-evolved, medium-termmacroeconomic framework, the implementation of severalbroad reforms in the fiscal area, and the buoyant responseof the economy to the structural measures in place. These,bolstered by a multifaceted program of training andtechnical assistance, all serve to mitigate the risks.

This document has a stricd distrbution and may ' t:u<d by ecipients only in the peformaneof their official duties. Its contents may not otherwi -e be dis m-ed without World Bank authorition.

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Estimated The proceeds of the proposed loan would be disbursed in twoDisbursements: tranches: US$100 million upon loan effectiveness, bhich is

expected to take place by December 1988, and the remainingUS$100 million after the completion of a number of keyactions upon which success of the program depends. Releaseof the second tranche iP planned for mid-1989.

Appraisal Report: None

Map: IBRD No. 20864

KINGDOM OF MOROCCO

STRUCTURAL ADJUSTlM LOAN

Table of Contents

Page

INTRODUCTION I

PART I: THE ECONOMY 1

Background 1Macroeconomic Developmentssince the Firancial Crisis of 1983 2

Outstanding Development Issues 5Rationale for Continuing Bank Adjustment Lending 6

PART II: THE STRUCTURAL ADJUSTMENT PROGRAM 7

Program Objectives and Policy Tools 7The Policy Framework ofthe First Structural Adjustment Loan 9

Tax Policy and Administration 9The Public Investment Budget 12Trade and Industrial Policy 16External Liability Management 20

Program Benefits, External Financing Requirementsand Social Impact 23fsacroeconomic Outcome of the SAL 23Assessment of Macroeconomic Perfozmance 26Medium-Term External Financing Requirements 27Social Impact of Adjustment 29

PART III: LOAN ADMINISTRATION 30

Procurement and Disbursement 30Accounts and Audits 31Coordination with Other Agencies 31

The OECF 31The AMDB 31

Implementation Risks and Justification 31

PART IV: OTHER BANK OPERATIONS 33

Experience with Past Adjustment Lending 33Project Lending 34

PART V: RECOMMENDATION 35

ANNEXES: I Key Economic Indicators 38II Letter of Development Policy

and Associated Policy Matrices 44III Supplementary Program Data Sheet 62IV Status of Bank Operations in Morocco 65V Institutional Support, Technical Assistance & Training 68VI Progress under Existing Adjustment Operations 70

MAP: IBRD No. 20864

REPORT AND REON OF THE PROF THE ITERNAIONAL BANK FOR RECONSTRUCTON AND DEVELOPMENT

TO THE EXECUTIVE DRECTORSON A PROPOSED STRUCTURAL ADJSIENT LOWAN

IN AN AMOUNT EQUIVALENT TO US$200 MILLONTO THE KINGDOM OF MOROCCO

INTRODUCTION

1. I submit the following report and recommendation on a proposed loanfor the equivalent of US$200 million to the Kingdom of Morocco. The loanwould support the first phase of a structural adjustment program aimed at anacceleration of growth and a strengthening of social services. The programwould be implemented in the context of a macroeconomic framework which ensuresinternal and external equilibria. The loan would have a term of 20 years,including 5 years of grace, at the standard variable interest rate.Cofinancing arrangements with other bilateral and multilateral agencies arebeing actively pursued.

PART I - THE ECONOMY

2. Morocco has a relative abundance of natural resources, including theworld's largest and most easily accessible phosphate reserves, vast areas ofarable land, and an extensive coastline. Its geographical proximity to majorindustrialized markets favors the development of international trade. Thispotential has been exploited in terms of strong manufactured export growth, abooming tourism sector, and the substantial outflow of workers abroad whoseremittances figure prominently in Morocco's balance of payments.

3. Social indicators have improved over time, although differentiallyaccording to income level. The urban-based growth of the 1960s and 1970s, forexample, increased the share of income accruing to the upper 20% of thepopulation, while the poorest levels vitnessed a reduction in their share from181 to 12X. Overall growth was nonetheless sufficiently rapid to diminish theincidence of absolute poverty from almost 50% in 1960 to 372 in 1979. Otheraspects of socioeconomic development have improved since the mid-1960s withlife expectancy at birth rising from 49 to 59 years, infant mortalitydeclining from 145 to 90 per thousand, caloric intake per capita increasingfrom 952 to 119S of the minimum daily standard requirement, and primary schoolenrollment rates growing from 572 to 81S, principally the result of higherfemale participation rates. Although the urban growth rate is twice that ofthe rural sector at present, a significant share of the population continuesto reside in the countryside and is employed in agriculture. In 1986, thepopulation, which is increasing at about 2.61 per annum, reached 22 millionwith a GNP per capita of US$580.

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4. For nearly two decades after Independence in 1956, Morocco followeda re-atively conservative approach to economic management. A slow rise ininvestment was financed by periodic recourse to external borrowings, whichsupplemented the limited pool of domestic savings. During this period, theeconomy grew at a rate of 4S per anmum. Primary products, principallyphosphates, accounted for 90S of merchandise exports.

5. A boom in phosphate prices during the years 1975-77 injected renewedvigor into the economy and coincided with rising defense expenditures and anunprecedented expansion of the public investment program, signaling the end ofthe circumspect fiscal policies of the past. The sudden reversal in the termsof trade in the late 1970s, as a result of the plunge in phosphate prices andthe second oil shock, prompted Morocco to resort increasingly to externalcapital markets in order to maintain the higher rate of public investment.The viability and expediency of this development strategy were conditioned bythe abundance of foreign financing opportunities on highly attractive terms(interest rates were negative in real terms).

6. During this period, Morocco's external debt grew exponentially fromUS$1.8 billion in 1975 to US$13.9 billion in 1983, at which point itrepresented nearly 1201 of GDP and 3551 of foreign exchange earnings. Thestructure of Moroccan debt changed over this period with 401 of outstandingliabilities owed to conmercial banks compared to nil a decade earlier; morethan 601 of the debt was at non-concessional rates. The unanticipated rise ininternational interest rates in the early 1980s, compounded by the decliningproductivity of public investment and a severe and prolonged drought in1980-84, proved more than Morocco's balance of payments could endure. Bereftof foreign exchange reserves and access to external funds, Morocco was unableto shoulder its debt service burden-the debt service ratio reached 531 in1983, with interest payments alone accounting for 201 of exports.

7. By that time, it ha'd become clear that the solution to Morocco'sfinancial distress lay in a comprehensive program of economic reform. A setof extensive stalb'lisation and adjustment policies was evolved by theGovernment and supported by a series of IMF standby arrangements and WorldBank sectoral adjustment loans. Restrictive fiscal and monetary policies wereemployed tu contain aggregate domestic demand, while structural reforms intrade and industry, agriculture, education, and the public enterprise sectorwere initiated to augment the supply response of the economy. Debt servicepayments to official and comnercial creditors were rescheduled, initiating aprocess that has already spanned five years and is expected to continue wellinto the future.

M b Deveow_ents since the Financial Crss of 1983

8. The challenge of adjustment facing Moroccan policy makers was indeedformidable given the forbidding debt burden, the large financial imbalanceswhich beset the economy, and the relatively limited base of non-traditionalmanufactures. Despite difficult circumstances, Morocco has made much progressin alleviating both internal and external disequilibria since 1983.Stabilization of public finances was achieved through a package ofexpenditure-reducing measures to decrease government absorption. As a result,the overall fiscal deficit as a share of GDP fell from 11.71 in 1983 to 6.11

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in 1987 on a commitment basis. This performa.'ce was all the more remarkablein view of the budgetary claims of national priorItios in the Western Saharaand the sizable interest payments on the public debt, the latter representingnearly one-quarter of total budgetary expenditures. The improvement it thebalance of payments has been even more impressive, as evidenced by the declinein the current account deficit from 12.71 of GDP in 1982 to about 1S (beforedebt rescheduling) in 1987.

9. The substantial reduction in macroeconomic imbalances can beattributed to a combination of favorable external dtvelopments and the pursuitof rigorous policy reforms. The decline in international petroleum pricesserved to strengthen not only the trade balance but the fiscal situation aswell, with the introduction of an oil levy equivalent to 2.7S of GDP(para. 32). Following a period of protracted drought, agricultural productienresponded decidedly to the more auspicious weather conditions, leading to adecline in food prices ana imports. These factors contributed to animprovement in the overall terms of trade when the decrease in import pricesmore than offset the fall in export-prices (para. 10) in 1986, restoring muchof the deterioration that occurred since 1980.

10. Structural policy measures intended to augment the productivecapacity of the economy, however. underlie much of the adjustment that hastaken place sinc6 1983. The sweeping reform of the trade and industrialregime has given rise to productivity gains in labor and capital, averagingover 51 per year, as well as a shift in the structure of external tradeflows-V. Measures introduced to eliminate export barriers, reduce existingdisparitiks between exporting and import-substituting activities, and simplifyadministrative procedures in the area of external trade have led to buoyantexport growth of manufactured goods (para. 60). Increasing at an averageannual rate of 15.5S since 1983, nonphosphate-based manufactures havecompensated both the decline in the price of phosphoric acid and thestagnati=n of world phosphate demand. Nont-aditional manufactured goods nowaccount for over 301 of total merchandise exports, compared to approximately201 in 1983, ~esulting in a more diversified export base and a reduceddependency on natural resource-based manufactures.

11. Appropriate exchange rate management, an important factor underlyingthis impressive performance, served to boost tourism proceeds and workerremittances as well, while containing import demand at sustainable levelsfollowing the reduction of external trade barriers. Despite a 251 nominaldepreciation of the Dirbam since 1983, judicious monetary policies helpedstaunch inflationary pressures, resulting in a 231 decline in the realexchange rate. In line with the objectives of a Bank-supported financialsector reform, the structure of deficit financing changed significantly duringthis period, as the Treasury resorted increasingly to the nonbank privatesector to compensate for reduced borrowing opportunities abroad and limitedaccess to Central Bank funds. This enabled the monetary authorities to eschewinflationary financing and lower the rate of change in prices from 12.5% in1983 to 2.41 in 1987.

1/ The impact of liberalization on trade and industrial adjustment has beenthoroughly documented in report 6714-MOR.

4-

12. The extent of Morocco's adjustment efforts is apparent in theevolution of the non-interest current account balance, which represents themagnitude of the resource transfer between the home country and the rest ofthe world. Before the adjustment program was launched in 1983, Morocco wasreceiving a not resource transfer in excess oL 52 of its GDP. This trend wasreversed after 1985 with Morocco transferring nearly 3% of its GDP abroad in1987, net of debt rescheduling, in line with the narrowing of the currentaccount deficit (para. 8). During this period, the stock of external debtnonetheless continued to rise owing to continuing, albeit decreasing, currentaccount deficits, and increases in the valuation of external liabilitieslinked to real exchange rate movements between the Dirham and internationalcurrencies and amongst the international currencies themselves. By 1987,total debt outstanding and disbursed still represented about 115 of GDP and353X of all foreign exchange earnings.

13. The Bank has given its support to Morocco's adjustment program interms of policy advice, technical assistance, and financing (paras. 109-110).In certain areas, however, progress was not as rapid as expected. Forexample, objectives aiming at the complete repeal of quantitative restrictionson imports by 1989 and the elimination of a stable source of fiscal receiptsin the form of the special import tax (para. 61), as reflected in the ITPAprogram, were not achievable within the given timeframe in light of thelooming threat of world protectionism. the growing opposition of certaindomestic interest groups to further trade liberalization, and the pressingneed to narrow the budget deficit in the face of structural revenueconstraints. In the context of the overall implementation of trade policyreform (paras. 57-61), however, Morocco has arguably become one of the moreliberal trade regimes within the developing world.

14. On balance, the extensive reforms implemented since 1983 haveinitiated a significant transformation of Morocco's underlying economicstructure without unmanageable stress to the social fabric. Themoderately-paced implementation of stabilization measures, the exploitation ofavailable financial capital and restructuring techniques in the form of debtrescheduling, and the adoption of supply-oriented policy reforms have allserved to mitigate the contractionary impact of adjustment. The fall inpurchasing power of salaried employees tollowing the devaluation of the Dirbamwas to some extent limited by the fact that consumer prices increased at aslower rate than producer prices. The social costs of lower real wages,however, were partly compensated by a postive employment effect in themanufacturing sector (7.5% growth per annum since 1983), as the bias towardcapital use was reduced and production shifted to more labor-intensiveexporting activities. In general, the rationalization of the structure ofincentives led to a growing outward-orientation and an increasedcompetitiveness of Moroccan industry which, in turn, enabled firms to exploitexisting productive capacity and avert recessionary pressures. Prescientpolicy-making was evident in the design of a detailed plan, developed inconjunction with the Bank, to target subsidized foodstuffs to the poor topermit a substantial narrowing of generalized consumption subsidies.

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15. The progress achieved in remedying macroeconomic imbalances since theonset of the adjustment program nevertheless belies certain structuralweaknesses. Although the impact of stabilization policies on economic growthwas relatively restrained, with GDP increasing at an average annual rate of3.3S, per capita consumption stagnated. Moreover, the narrowing of the fiscaldeficit has been achieved, in large part, at the expense of publicinvestment. To this effect, the share of central government gross fixedcapital formation in GDP has fallen by more than half since the early 1980s,representing a modest 2.81 in 1987. While a good deal of budgetary resourceshad previously been channeled to finance premature investments or projects ofquestioneble economic priority, the recent curtailment of developmentexpenditures has been so severe that it has led to the suspension orcancellation of many essential investments in key economic and social sectors,with potentially deleterious effects on future growth and the development ofhuman capital, as well as on income distribution.

16. A less than buoyant fiscal system and the inability to effect therequisite cuts in current expenditures are manifest in the weak public savingseffort, reflected in a 4.51 current budget deficit on average since 1983.kUe discrepancies between budgetary commitments and cash payments have led toa s,ubstantial buildup of domestic payment arrears, which represented 7.31 ofGDp at end-1987. In addition, the virtual depletion of foreign exchangereserves, amounting at times to only several days worth of imports, has givenrise per4!-dically to external payment arrears and protracted delays inobtaining foreign exchange. This has resulted in foregone opportunities orhigher financial charges for those economic agents operating in the foreigntrade sector.

17. T..re are indications that the tendency of the Government to consumebeyond its means may adversely affect private investment demand. For example,real interest rates have risen by approximately 19.5 percentage points sincethe mid-1970. in order to mobilize the private resources necessary tocompensate for the comparative lack of foreign and public savings. Thesignificant rise in the cost of capital and the liquidity problem faced bysome firms as a result of the proliferation of domestic payment arrears, pointto the continuing danger of crowding-out.

18. Finally, Morocco's balance-of-payments' position remains precariousdespite the dramatic improvement in the current account previously noted(pars. 8). At present, debt indicators remain high (para. 74) and constitutea major impediment to mobilizing adequate levels of external financing.Furthermore, the future performance of the current account is predicated, inpart, on the favorable evolution of the external environment. Unlessconstraints on the capital account are eased, Morocco would have to transfereven higher levels of net resources abroad, thereby compromising futureeconomic growth, adjustment efforts, and, ultimately, prospects for improvedcreditworthiness.

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FRdl#2fti for g9§*tbig Bo& AdHzsbDFr¢ tMAWn

19. Structural weaknesses in the area of public finance have at timesslowed the pace of reform in sectoral adjustment programs supported by theBank, viz. the inability to reduce budgetary reliance on trade taxation, therecurrence of government arrears, particularly to the public enterprisesector, and the lack of local counterpart funding for public investmentprograms in agriculture, health, and education. As evidenced by thesedevelopments, Morocco's adjustment program is at a critical juncture.Although the vigorous pursuit of policy reforms at the sectoral level has ledto marked increases in output and employment, particularly in export-orientedsectors (para. 14), initial optimism about the timeframe needed to yield thefull benefits of each program is being tempered, as continuing budgetarydifficulties introduce tensions into program execution. Moreover, thefavorable exogenous factors which abetted adjustment efforts cannot be reliedupon to nourish higher rates of economic growth. Finally, Morocco's heavydebt service obligations, which continue to absorb a substantial share ofnational savings, militate in favor of additional structural reforms designedto raise the growth rate above that achieved is the recent past. Indeed, thisorientation is explicitly recognized in the Government's medium-termmacroeconomic framework, which targets a 4.52-51 GDP growth rate. Theviability of a growth-oriented medium-term scenario is conditioned on theextension of structural policy reform to the government budget, required toconsolidate and strengthen the sectoral gains achieved thus far.

20. In view of its ongoing involvement in Morocco's sectoral adjustmentprograms1', the Bank is well placed to assist the Government in deepeningits adjustment efforts through a structural adjustment loan (SAL). Thecompouents of the SAL have been tailored to address the principal difficultiesfacing existing sectoral programs, as well as formulate medium-term approachesto issues addressed hitherto in a short-term perspective. The IMF support tothe Government in furthering the Tmprovement in external and domestic balanceswill continue to be both necessary and desirable. In this context, theestablishment of annual budget and balance-of-payments targets is warranted.Insofar as structural weaknesses in fiscal and investment policy persist, itis apposite that the SAL program pursue the objective of supportinga medium-term framework for roroccan public finances in parallel with the IMFprogram to reduce the budget deficit.

21. Two broad interrelated strategic goals will be pursued throughcontinued adjustment lending. The SAL program would both coalesce with theachievements of past adjustment efforts and address remaining constraints tofurther policy reform, thus effectively helping Morocco to move from aninitial phase of stabilization-cum-liberalization to one of comprehensivestructural adjustment. As the first in a program of two or three similaroperations, the SAL would serve to support Morocco during the transition to apath of higher growth through increased investment, greater productivity,

1/ A description of Bank-supported sectoral adjustment operations and theprogress achieved in meeting specific conditions are addressed inpar"s. 109-111 and Annex VI.

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and improved creditworthiness. Concomitantly, a shift in Bank assistancetowards investment lending will be facilitated through continuedliberalixation at the sectoral level, together with the reconstitution of thecountry's development programs for key social sectors and infrastructure. TheBank's continued association with the adj-ustment process through the provisionof quick-disbursing resources is warranted in light of Morocco's limitedaccess to international capital markets, while its catalytic role could betapped to mobilize sources of additional financing (paras. 101-102) in orderto ensure more equitable burden-sharing and limits on exposure.

PART I - THE STRUCTURAFL ADJUSTMENT PROGRAM

PrWIuan Obet vesand PRocn Tools

22. During the past few years, the Moroccan economy has grown at anaverage rate of 3.32 on an annual basis, slightly more than the rate ofincrease in the population. The proposed medium-term adjustment program seeksto reinvigorate the economy through a rise in the growth rate of per capitaincome and to consolidate the structural achievements registered to date,without disrupting macroeconomic atability. Spanning the initial two years ofthe Government's medium-term adjustment program, the SAL is viewed as thefirst in a series of two or three similar operations designed to fully restoreMorocco's access to international financial markets by the mid-1990s, whileenabling the ec-nomy to grow by 4.5S-52 per annum. The adjustment programcontains four sets of policy tools to be used in achieving these goals.

23. Fiscal reform measuree are intended to increase the buoyancy of thetax system, while minimizing distortionary effects on resource allocationdecisions. Measures to be supported under the SAL (paras. 37-42) serve tonarrow fiscal incentives and lower marginal tax rates, leaving exportpromotion to the realm of trade and exchange rate policy. Additional actionin the area of tax administration would improve collection efforts(paras. 43-44).

24. Public investment has taken much of the brunt of the fiscaladjustment in the past. The deteriorating quality of the publ£c capital stockrepresents at present a significant constraint to attaining higher rates ofGDP growth. The increase in the level and efficiency of public investmentexpenditures constitutes a major component of the adju&tment program. To thiseffect, particular attention is being devoted to the identification of atarget public investment program, which would respond to the twin objectivesof complementing private investment and providing for the most urgent socialneeds. The timely execution of the target investment program would besupported by an improvement in budgetary procedures.

25. Trade liberalization efforts have given rise to significantimprovements in the incentive regime governing economic behavior in thetradables sector since 1983, although the pace of structural reform slowedsomewhat in 1986 for fiscal reasons (para. 61). In order to provide economicageats with clear pricing signals for investment and production decisions, aswell as reinforce perceived government credibility in the area of tradereform, the SAL would support continued import liberalization and exportpromotion.

26. External liability management represents a significant challenge inview of the impact of the formidable external debt burden on the Moroccaneconomy. The elaboration of a robust debt management system is clearlywarranted to monitor the complexities of the rescheduling arrangements of thepast, inform policy-makers as to the relative merits of differentrestructuring options, and enable the formulation of a strategy governingexternal debt policy in the future. In this vein, the SAL provides for theinstitutional reforms and technical assistance necessary for theimplementation of such a system.

27. Macro Links to Proaram Components. The interrelationship between thepolicy measures comprising each component of the adjustment progrem and themacroeconomic objectives is an important aspect of the SAL. Growth targetsare predicated on increases in efficiency and investment: the sectoralallocation of incremental capital formation is determinant, however, ifdistorted patterns of growth are to be avoided. To this effect, further tradeliberalization is necessary to provide the private sector with unAmbiguousindications as to the relative profitability of exports, particularly sincecapacity is likely to become an increasing constraint to buoyant export growthin the near future. Tax policy should be designed so as to minimizedistortions regarding the intersectoral allocation of investment. Publicinvestment plays a significant role in the adjustment program in view of itsstrong complementarity to private investment1L7.

28. Finally, policy measures should be internally consistent so as toensure that the processes of fiscal reform, trade liberalization, and raisingpublic investment do not work at cross purposes, with negative repercussionson macroeconomic equilibria. The increase in investment and the process ofimport liberalization could lead to a worsening of the current accountbalance, requiring compensatory action on the exchange rate. Regardingbut' etary balance, both the substitution of quantitative restrictionsby tariffs and the reduction in existing tax incentives will boost Treasuryrevenues. The increase in public investment, however, could exacerbate thebudget deficit, while the mobilization of the required additional financingwill confront the authorities with difficult choices. Whereas excessivereliance on monetary financing would be incompatible with the objective ofprice stability, unbridled recourse to fledgling capital markets could lead toa crowding-out of private investment, either through the cost or theavailability of credit. Furthermore, increasing reliance on non-inflationarysources of domestic finance could jeopardize budgetary equilibria in thefuture by an unsustainable increase in the burden of interest payments. Forexample, a rcenario whereby higher public debt leads to rises in interestrates which, in turn, result in larger interest payments and even higherlevels of public debt, would eventually culminate in an explosion of thebudget deficit.

29. Macroeconomic Consistency Analysis. In order to ensure internalconsistency between the structural measures to be supported under the SAL(Annex II) and the medium-term macroeconomic framework, a macroeconometric

1/ Analysis shows that private investment in Morocco, for example, may besubject to sharp declines in marginal productivity or even not materializeat all in the absence of matching infrastructure-related public investment.

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model of the Mo,-occan economy was constructed. In view of its importance tothe policy dialogue, the model underpinning the macroeconomic analysis wastransferred to Morocco and technical staff trained in its use. These jointefforts served to ensure realism and inject an added degree of rigor in theelaboration of the Government's medium-term macroeconomic framework.Specific, desired outcomes of the SAL program, which have been developed inconsultation with the Bank. are discussed below in paragraphs 82 through 88.

30. The analysis, which has been designed to reflect the mnain objectivesof the adjustment program and aid in the assessment of the ex ting trade-offsand complementarities between policy instruments and targets, las three maincomponents. In the area of external trade, behavioral relationshipscharacterizing the export supply and demand of manufactured goods, as well asdisaggregate import demand decisions, were estimated. Import demand wasanalyxed in the context of a rationed consumer/producer model and, as such,can be used to simulate the impact of trade liberalization policy scenarios.In the area of private expenditure, the relative importance of factorsunderlying consumption and investment decisions was assessed. The privatecapital accumulation decision was found to depend on output, the cost ofcapital, credit availability, and the stock of public capital. While publiccapital is shown to have a strong complementarity effect on privateinvestment, the availability of credit affects only the dynamic adjustment ofinvestment. In the area of Public finance, Treasury revenues were shown to bea function of both income and import levels, with expenditures being set torespect fiscal objectives.

31. Particular emphasis was given to the macroeconomic impact offinancial choices. The amount of monetary financing compatible with a giveninflation target was assessed on the basis of an estimated money demandfunction. Domestic bond financing was determined residually. While recourseto monetary financing is shown to have a decided impact on inflation,exoessive reliance on domestic bond financing could lead to a significantcrowding-out of private investment. The path traced for the fiscal deficit(para. 86) takes these effects into account and is consistent with continuedlow rates of inflation, as well as the targeted levels of private investmentexpenditures.

The Pblicy Framework of the First Structural Adiustment Loan

Tax Policy and Administration

32. Progress to Date. The structural weaknesses in the Moroccan taxsystem have given rise to a steady reduction in tax pressure from 19.01 of GDPin 1983 to 16.8% in 1986. This trend has been mitigated to some extent byincreases in nonfiscal revenues, attributable by and large to the introductionin 1986 of a windfall tax on petroleum. The considerable proceeds from thislevy, which represented 13X of total Treasury revenues in 1986 and 2.72 ofGDP, more than offset the virtual dissipation of dividend payments and profittaxes from OCP (the state-owned phosphate company) to the Government,following the plunge in world phosphate demand.

33. The evolution of overall fiscal receipts nonetheless beliessignificant changes in the structure of revenues since 1983. Direct taxes on

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personal income and corporate profits remained relatively stable in relationto GDP during the period 1983-86. The extension of various exemptions grantedunder the* investment and export codes forestalled any rise in the buoyancy ofprofit taxes, particularly since fiscal privileges were directed to the moredynamic sectors of the economy of late, namely agriculture, real estate,tourism, and certain export industries. Revenue from taxes on salaries andwages rose slightly as a proportion of GDP, owing to the progressivity of therate structure and the lack of adjustment of nominal rates in keeping withinflation, resulting in the phenomenon of so-called bracket creep.

34. Indirect taxes have been subject to significant structural reformsleading to wide fluctuations in revenue shares. For example, the reduction inthe special import tax rate (para. 58), as part of the overall efforts toattenuate the bias against exports, led to a decline in overall trade taxrevenues. However, this trend was cushioned to some extent by an increase inthe average effective customs duty rate, coincident with the elimination ofquantitative restrictions on goods at the upper range of the tariff schedule.The aggregate loss of trade tax revenues corresponds tc approximately onepercentage point of GDP.

35. Despite several increases in rates, domestic indirect taxes alsoexperienced a reduction in their share of GDP. On two occasions, the generalrate on the former domestic sales tax (TPS) was raised, from 152 to 17% in1982 and to 192 in 1984. After increasing from 5S in 1980-81 to 62 in1984-85, the ratio of sales tax revenues to GDP subsequently fell to 5.52 in1986. These results can be attributed to: (i) a decline in the tax base,owing to the fact that agriculture and exports, the two fastest growingsectors in the economy, where the incidence of exemption from indirecttaxation is relatively high; and (ii) transitional difficulties regarding thereplacement of the TPS by the value-added tax (VAT) in 1986. Reasons for theshortfall in revenues linked to the introduction of the VAT include: First,the generalization of tax credits were not fully offset by reductions inexemptions or increases in tax rates for certain products. Second, credits onexisting inventories were granted as a condition of the VAT being extended tothe wholesale level. Third, the time period during which tax credits could beclaimed was shortened, engendering a once-and-for-all loss in revenues.Initial revenue losses notwithstanding, the VAT led to a significantrationalization of the rate structure of indirect taxes, as the number ofrates was compressed from eleven to five.

36. Consumption tax proceeds also exhibited a downward trend resultingfrom the failure to adjust upwards most specific tax rates. The only item onwhich revenues increased was tobacco, insofar as government revenues are basedon a percentage of the total sales of the state-owned tobacco monopoly,corresponding in essence to an ad valorem rate. Revenues from all otherexcise taxes and registration fees decreased from 1.4% to 1.0% of GDP duringthe 1983-86 period.

37. Fiscal Reform. The program to be supported under the SAL iscomprised of a series of actions which seeks to: (i) increase the buoyancy ofthe fiscal system by broadening the tax base and reducing marginal rates;(ii) improve the allocative efficiency of the fiscal system, as well as taxincentives for productive investment; (iii) enhance the equity of the tax

- 11 -

structure; and (iv) raise collection rates by strengthening existinginstitutions and rationalizing tax administration efforts.

38. Considerable progress in the fiscal area will be achieved with thepromulgation of the 1988 budgetary law, which contains numerous measures toreform the current tax structure based on the recommendations of jointBank-IMF technical assistance missions. As part of the SAL, the modificationof the existing investment codes (para. 33) will rationalize the incentivesfor productive investment by limiting the duration and rate of existing fiscalexemptions and reducing intersectoral disparities in the tax code. Profit taxexonerations have decreased from ten to five years and the exemption rate from1001 to 50S for all sectors other than export-oriented industries. In thecase of the latter, the ten-year exemption has been curtailed, with the resultthat exporters will now be subject to taxes on half the profits earned fromthe sixth year on. As a result of these reforms, investors in less-developedregions and/or privileged sectors will witness a reduction in tax advantages,both in absolute terms and in relation to other sectors, which have benefitedfrom the reduction in the corporate tax rate (para. 39). Finally, fiscalexemptions on various state-owned banks, including the Central Bank, have beenrepealed.

39. The corporate tax rate on profits earned in 1987 was lowered from 48Sto 451, followed by a further decrease to 40S on all profits earned beginningin 1988 in the context of the SAL program. These reductions in rates havebeen matched by additional measures to broaden the tax base and ensure a moreequitable distribution of the fiscal burden. The minimum corporate taxliability rate, deductible from the actual tax liability of the firm, has beenraised from 4.51 to 81, whereas the national solidarity tax (PSN) rate hasincreased from 101 to 25% for those firms exempted from the corporate tax inaccordance with the privileges previously granted under the investment codes.Finally, the zero-bracket threshold applied to the personal income tax hasbeen raised from DR 6,000 to DH 8,400 in response to the fiscally regressiveimpact of inflation on low-income groups. This measure will result in animprovement in income distribution and an administrative simplification of thepersonal income tax regime in view of the elimination from the tax base of thelarge number of low-income taxpayers.

40. Important measures have also been taken as part of the SAL withrespect to indirect taxation. For example, exemptions from the VAT have beeneliminated on a number of products, leading to a widening of the indirect taxbase. In order to reduce dispersion, rates have been increased on certainitems such as coffee, rice, cattle feed. and transportation services. Excisetaxes, stamp duties, and registration fees have also been adjusted upward witha 7.51 increase in the average price of tobacco products.

41. In order to complete the final phase in the modernization of thefiscal system, the Government has presented the personal income tax reformbill to Parliament for ratification in October 1988 in accordance with theSAL. This reform replaces the current schedular system with a unified incometax schedule, which aggregates all sources of personal income and reduces thehighest marginal tax rates. Multiple taxation of dividends is to becircumscribed, the five existing tax rates on different sources of income areto be consolidated, and the rate structure is to be simplified. As a result

- 12 -

of these modifications, the number of taxpayers will be reduced, therebyfacilitating tax administration. The multiplicity of tax rates according toincome source, which characterized the previous system, was potentiallyregressive in nature and offered numerous possibilities for tax evasion to allbut salaried employees and wage earners. In contrast, the personal income taxreform should lead to a more equitable treatment of the individual taxpayer.

42. On the basis of a disaggregate analysis of these fiscal reform,government revenues are projected to increase significantly. VAT collectionsfrom January to August 1988 are already 232 higher than over the same periodIn the previous year. Wage and corporate tax proceeds should also exhibitgreater buoyancy, as witnessed by the projected increase with respect to GDPof nearly half a percentage point. Globally, fiscal revenues are expected togrow by over 132 in 1988 with the share of total government revenues in GDPrising from 21.91 in 1987 to 22.5S in 1988.

43. Institutional Reform of Tax Administration-'. Important measuresto improve domestic tax administration are being undertaken in parallel to thestructural reform of the fiscal system, so as to realise the expected yieldsof the latter. In order to standardize and strengthen corporate accountingvractices in Morocco, the Government would approve for presentation toParliament a draft law instituting a national chart of accounts to replace theone in effect since 1957, as well as a draft law regulating the accountingprofession. A functional reorganization of the tax department is beingundertaken and a training component formulated to enhance the quality of taxreturn audits, by fully exploiting the potential for cross-checkingdeclarations of VAT and corporate income tax liabilities. The hiring of aminimum of fifty new examiners per year over the period of the SAL programwill lead to an increase in the frequency of audits.

44. A series of actions is presently underway to reduce the potential fortax evasion. The structure of penalties applicable to late payments and taxfraud would be reinforced. Penalty interest will accrue from the time the taxliability originates, rather than at the time the violation is detected as inthe past. A unified taxpayer identification file would be established on thebasis of a national fiscal census, which should aid in tax enforcement. Inorder to simplify administration and reduce lags in tax collection, a study isbeing undertaken to examine the feasibility of advancing the due date for thesecond payment of the corporate income tax and amending the fiscal code, so asto mandAte that commercially-oriented transactions exceeding a certain amountbe settled by check. This will serve to limit the potential for evading VATpayments at the wholesale level.

The Public Investment Budget

45. Proaress to Date. Morocco entered the decade with an ambitious1981-85 Development Plan which targeted an annual GDP growth rate of 6.5%, tobe achieved primarily through a doubling of public investment. In response to

1/ Institutional support, technical assistance, and training programsunderpinning SAL reforms are proposed to be financed under a PublicAdministration Loan (PAL), described in Annex V.

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the adverse economic conditions which characterized the early 1980s,government investment was curtailed to the point that real expendituresdeclined by over 501 between 1981 and 1986. While the adjustment andliberalization efforts undertaken by the Government since the 1983 crisissought and obtained a higher share of private investment in total gross fixedcapital formation (GFCF), rising from 12.9% in 1982 to 16.61 in 1986, thelevel of public investment has fallen below the minimum necessary to meet thedevelopment needs of the private sector and the social needs of thepopulation, particularly the economically disadvantaged.

46. The volume of the 1981-85 Plan, together with inappropriate projectselection criteria and the inadequate coordination of planning and budgetingprocesses, resulted in the programming of more public investment than existinginstitutional capacity and resource availability could support. In addition,the Government was unable to contain the growth of annual commitments on theinvestment budget. This led to delays in project execution, a deteriorationof the existing public capital stock, and a substantial buildup of paymentarrears to local contractors.

47. In response to these problems, the Government took a series ofactions beginning in I '5 with a view to realigning expenditures withavailable resources, and thereby improving the budgetary process. Specificmeasures undertaken include: (i) detailed annual reviews of the investmentprogram in consultation with the Bank, resulting in the postponement orelimination of most nonpriority or inadequately prepared projects;(ii) development of the capabilities to undertake sound economic and financialanalysis of investmnt projects, prior to their inclusion in either theDevelopment Plan or the annual budgetary law; and (iii) introduction of anannually modifiable investment plan.

48. The impact of these reforms is evident both in terms of projectselection and efficiency gains achieved in the area of investment budgetingand financial execution. One example of this is the improvement in the ratioof payment orders to authorizations from 301 in 1986 to 501 in 1987.Furthermore, the majority of projects contained in the 1988-92 DevelopmentPlan are of high priority and economically justified.

49. Despite the actions taken during the past few years to rationalizepublic investment expenditures and related budgetary procedures, there remainsome outstanding issues which, unless addressed, could compromise medium-termgrowth objectives. The relative scarcity of fiscal resources and thepersistence of government payment arrears have seriously slowed the completionof ongoing projects and virtually preclude undertaking new investment.Disbursements under externally-financed projects have been hampered for wantof local counterpart funds.

50. The inability to pay contractors in a timely manner for works carriedout has led, moreover, to an increase in project costs. Companies inflatetheir margins on government contracts in order to compensate for anticipatedpayment delays. At times, the situation has deteriorated to such an extentthat certain firms are no longer willing to bid on government contracts.Although the outstanding stock of arrears on the investment budget has beenreduced by over DR 1 billion in 1986-87, principally as a result of the issueof Treasury bonds to public enterprises, payment delays concerning capitalexpenditures now stand at four months.

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51. The budgetary practice of cancelling and recommitting those budgetaryallocations which have not given rise to payment orders constitutes asignificant impediment to project execution. While justified in the past whena standardized budgetary nomenclature and computerized management informationsystem were lacking, this procedure has been found to complicate unnecessarilyinvestment planning in the technical ministries. At present, much of the worksundertaken in the previous year must await up to six months of interministerialbudgetary arbitrage before they are recommitted and authorized to continue.Between 50Q and 75% of all payment orders approved in 1987 in health (74.11),housing (65.7X), and education (55.3%) went towards the settlement of arrears;similarly, the share of recommitments in total commitments for these sectorsexhibited comparable rates. In contrast, these same ratios for totalproductive investment across sectors averaged 24.4% and 35.5% respectively.Thus, while the sectoral distribution of budgetary allocations may adequatelyreflect development priorities, budgetary execution has been otherwise.

52. There is presently an urgent need to ensure a level of publicinvestment in priority socioeconomic sectors consistent with overall growthand developmental objectives. In addition, the efficiency of publicinvestment programming and budgeting must be raised to support the timelyexecution of individual projects. In accordance with the growth-oriented,medium-term macroeconomic framework, the Government intends to: (i) maintaina minimum level of central government investment consistent with the targetedincrease in the share of public gross fixed capital formation in GDP from 3.51to 4.21 by 1991-92 (par"s. 27, 84); and (ii) strengthen the processes andprocedures of investment planning and budgeting in order to improve themanagement and efficiency of public investment expenditures. These measuresare expected to ensure both the availability of sufficient resources and thetimely execution of targeted high priority projects in key socioeconomicsectors.

53. The Target Investment Program (TIP). A targeted program of publicinvestment has been formulated by the Government in consultation with Bankstaff, on the basis of growth objectives, sectoral priorities, and identifiedprojects in the Plan. The SAL will focus primarily on projects carried out inthe context of the central budget, insofar as investments of the main publicenterprises and municipalities will be followed under other Bank operations.The annual evolution of the TIP in terms of project execution and financing,as well as changes in the relative share of the TIP with respect to relevantmacroeconomic aggregates, are presented in Table 1. The specific projects orsubsectoral programs contained in the TIP for 1988-89 have been identified andare acceptable to the Bank. Formulation of the annual TIP for the followingyears will take place in October, prior to the presentation of the draftbudgetary law to Parliament. The annual execution of the TIP in terms ofbudgetary commitments and expenditures will be monitored on a quarterly basisunder the SAL.

54. Reform of Budgetary Procedures. A sweeping reform of investmentbudgetary procedures has been initiated based on the recommendations of ajoint Bank-Fund technical assistance mission. Actions already underwayinclude the preparation of a new, harmonized budget nomenclature torationalize the classification of capital expenditures, the simplification ofbudgetary procedures to facilitate investment programming, the strengthening

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of project evaluation capabilities in the Department of the Budget, and thecomputerization of budget management a"id control. Overall support for theimprovement of government expenditure policies is expected to be provided forunder the PAL. In contrast, the SAL focuses on those aspects of theinvestment budget and its management which underlie implementation andmonitoring arrangements for the TIP.

Table 1: PROJECTED EVOLUTION OF INVESTMENT(in percentages)

1987 1988 1989 1990 1991

Total Investment/GDP 19.1 19.9 20.5 20.7 21.6

Consolidated GovernmentIuvestment/GDP La 3.5 3.5 4.0 4.1 4.2

Target InvestmentProgram (TIP)/GDP 2.4 2.7 3.1 3.3 3.7

TIP/ConsolidatedGovernment Investment 69.6 77.1 77.5 80.5 88.1

Percentage Share in Cumulative IncreaseTotal TIP 1987-1990

Sectoral Distribution of TIP- Agriculture 32 31 30 30 46S- Public Works 38 39 37 34 41S- Transport 2 2 2 2 24S- Social Sectors /b 28 28 31 34 86%

/a Includes central government, municipalities, and social security./b Includes education, health, and housing.

55. In the context of the 1989 budget law, investment procedures would befurther modified to accelerate the currently protracted arbitrage of budgetaryresources which takes place early in the year between the Ministry of Financeand the spending ministries, so as to expedite project commitments. Inaddition, commitments of the previous year, which have not given rise topayment orders, would no longer require a formal reauthorization prior to thecontinuation of the corresponding works in the following year. To ensure thetimely flow of information between the Ministry of Finance and the spendingministries required for investment planning, the integration of budgetarymanagement systems through computer links to all relevant users would bedesigned in consultation with the Bank. Finally, the present arrangementregarding foreign exchange risk would be reviewed in consultation with the

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Bank to mitigate future costs to the Treasury and facilitate financialplanning by beneficiaries and financial intermediaries utilizing foreign loans.

56. These improvements in procedures should give rise to considerableefficiency gains in the budgetary execution of public investments. A set ofperformance ratios in terms of budgetary authorizations, commitments, paymentorders, and disbursements has been established in the context of the SAL. Theadequate execution and financing of the target public investment programshould result in a gradual improvement in these performance ratios and aconcomitant reduction in payment delays from four months in 1987 to one andone-half months in 1989. In order to provide the Bank with the informationrequired for the timely monitoring of the investment budget, aninterministerial working group has been established for all SAL-relateddiscussions of public investment.

Trade and Industrial Policy

57. Progress to Date. A broad reform of the structure of incentives waslaunched in 1983 to correct the deep structural distortions which had hinderedthe performance of the Moroccan eConOmy. This program, supported by twoBank-financed Industrial and Trade Policy Adjustment (ITPA) loans, includedthe liberalization of the trade and industrial regime, the promotion ofexport-oriented activities, the adoption of a more flexible exchange ratepolicy, and the rationalization of domestic capital markets. Specificmeasures were taken in three major areas.

58. First, import restrictions were significantly reduced and theprohibited list of imports abolished, with the result that 89% of total importvalue and 66% of total tariff positions are no longer subject to licensing,compared to 381 and 50S respectively at end-1983. The maximum customs dutyrate was reduced from 4002 in 1983 to 451 in 1987 and the special import tax,an across-the-board, uniform surtax, declined from 151 to 51 over the sameperiod, although the latter was subsequently raised in the interest of fiscalexigencies (para. 61). These measures lowered the unweighted averagecumulative rate of trade taxes (inclusive of the stamp duty) to 35.91, downfrom 58.41, and the maxirum protective rate to 621, down from 466%. Thedispersion of rates was also reduced with the standard deviation decreasingfrom 40.5 to 15.4. Second, the export regime was considerably enhanced. Thetemporary admission scheme, the centerpiece of Morocco's export promotionefforts, was strengthened and extended to include indirect as well as directexporters. Virtually ell export licensing requirements were abolished and allexport taxes repealed. -the export credit scheme was improved by raisingceilings on pre-shipment financing and increasing maturities on post-shipmentfinancing. Fiscal and financial incentives embodied in the industrialinvestment and export codes were rationalized. Third, the simplification ofadministrative procedures has improved the flow of information and relaxedinstitutional constraints with respect to international trade transactions.This has led to a reduction in customs processing time by 501.

59. Analysis of the change in the structure of incentives reveals thatexternal trade flows have increased their share in GDP as a result of thereplacement of quantitative restrictions by tariffs; the decline in nominalprotection following the successive reductions in the tariff ceiling; and thefall in effective protection owing to the high concentration of finished

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products in the upper echelons of the tariff range. Liberalization-inducedpolicy reforms have also resulted in a growing proportion of local industrybeing subject to increased competition from abroad. According to aproduction-weighted index of protection, for example, the share of domesticmanufacturing subject to QRs during the period 1983 to 1986 declined from 602to 401 and from 452 to 15S, as a function of tariff line and import valuerespectively. Various export promotion measures served to curtail thefinancial profitability premium of import-substituting activities relative toexports by a factor of nearly three, the premium declining from 501 to 201.The administrative co8sC of external trade also decreased, as illustrated bythe steady increase in the proportion of license requests approved (842 in1986) and the substantial reduction in processing time for applications.

60. The change in incentives has induced a number of significant shiftsin economic benavior since 1983. Buoyant export growth has sustained arelatively higher level of imports, leading to a more open economy asreflected in an increase in the ratio of external trade flows to GDP from 53Sin 1983 to 561 in 1986. The growth in exports could not be attributed to asurge in traditional exports insofar as the decline in the value of phosphaterock was only partially compensated by an increase in the export of phosphoricacid and fertilizer. Rather, robust growth of Moroccan manufactured exportsled to greater market penetration abroad. After stagnating at 1.51 during theperiod 1982-84, Moroccan manufactured exports as a percentage of EEC importsrose to 1.91 in 1986, a strong iadication of improved competitiveness. Therealignment of the wage-rental ratio in keeping with the relative abundance oflabor in the Moroccan economy underlay productivity gains in labor and capitalwhich have taken place in the manufacturing sector. The attenuation ofdistortions in factor prices also contributed to the rapid gains in the exportof labor-intensive goods, particularly once subcontracting activities weretaken into account.

61. Following the closing of ITPA II, the Government continued with thereform of the trade and industrial regime. Licensing requirements wereremoved on 335 tariff positions in August 1987, corresponding to approximately61 of domestic industrial production. Prompted by fiscal considerations, theGovernment replaced the SIT and the relatively distortionary stamp duty by a12.51 uniform import tax in January 1988 to mobilize additional revenues. Theoverall impact of these measures was a rise in the average trade tax rate ofabout two percentage pointa.V, accompanied by a significant compression inthe dispersion of nominal and, by extension, effective rates of protection.

62. Import Liberalization. Although considerable progress has beenachieved in reducing both the level and dispersion of effective prote4%tion,the present structure exhibits certain characteristics which indicate the needfor further reform. An analysis of QR and tariff coverage by end-use showsthat final goods continue to be more highly protected by both instruments thanare inputs, resulting in a cascading structure which reinforces rates of

1/ The average trade tax rate in 1988 (35.7X) is nonetheless significantlylower than that prevailing in 1983 (58.4X) at the onset of theliberalization program.

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effective protection. For example, 67.52 of all consumer goods are subject toQRs, compared to 9.52 of intermediates and 17.5% of capital goods. Similarly,intermediates, capital goods, and consumer items had mean tax rates of 27.92,31.72, and 50.12 respectively on an unweighted basis in 1986, and 20.42,21.2%, and 26.52 when weighted by import value.

63. The growth objectives of the medium-term macroeconomic framework arebased, in part, on an increase in the level and marginal efficiency of privatesector capital formation. Whereas existing capacity has been adequate tosustain the manufactured export drive until now, utilization rates arepresently high and new investment is required if export potential is to befully realized in the future. To this effect, further reductions in theremaining quantitative restrictions are necessary to ensure that investmentdecisions, whether in import-substituting or export-oriented sectors, areconditioned by undistorted price signals. Only in this way will resources bechanneled into those productive sectors where Morocco enjoys a comparativeadvantage. A significant share of the latter, however, corresponds toindustries (e.g. textiles) where international trade is regulated on the basisof multilateral agreements.

64. As part of the ITPA program, quantitative restrictions have beeneliminated on product categories corresponding to 602 of domestic industrialproduction, indicating the extent of trade liberalization which has takenplace to date. While the share of domestic production subject to quantitativerestrictions is perhaps the most economically meaningful index of the extentof trade liberalization, Morocco's trade regime appears even more liberalizedin terms of the more traditional measure based on import weights. Subsequentto the ITPA reforms, only 102 of total import value is subject to quantitativecontrols. As part of the SAL, the Government abolished import licensingrequirements on preducts corresponding to 102 of industrial production, inorder to promote efficiency in the industrial sector and reduce the existinganti-export bias. The promulgation of the 1989 and 1990 liberalizationprograms should leave no more than about 152 of domestic production subject toimport licensing requirements, corresponding for the most part to productswhose trade is regulated by international agreement.

65. Safeguard Procedure. Since the onset of the liberalization programin 1983, the shift from quantitative controls to price restrictions has causedconcern among domestic producers and government officials that increasedimport flows could exert excessive pressures on certain industries,particularly in areas exposed to unfair trading practices from abroad. Thishas led to the introduction of reference prices on a limited number of itemswhen the amount of potential protection in the tariff structure was deemedinadequate. Reference prices are set in nominal dirhams and have yet to besubsequently raised on any item. Existing reference prices are limited toapproximately 300 tariff positions (out of 8,057) with concentration ratios of302 in ceramics, 102 in textiles, and less than 52 in paper, chemicals,electrical products, and metal works. The import coverage of reference pricesimposed since 1985 varies from about 952 in ceramics, 202 in textiles, and 52to 72 in paper and metal works. The transitory protection afforded byreference prices has eased adjustment pressures for politically sensitiveindustries and, as such, has served to retain political support for tradeliberalization in general.

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66. The Government has recognized the need for a more formal procedurewhich is transparent, nondiscretionary, and reflects the national interestrather than the concerns of onc particular special interest group. Inconsultation with the Bank, the Moroccan authorities are preparing such aprocedure which allows for a limited amount of transitory protection,consistent with the overall national interest, without reintroducing thelevels of protection prevailing in the past. Specific features of thisprocedure are as follows: (i) representation of all concerned parties,including both users of the imported good, be they producers who import theitem as an intermediate input, or final consumers of the good, and producersof the import-competing good. Whereas the producer benefits from theintroduction of transitory protection, users are penalized by the artificialincrease in price; (ii) protection would be granted temporarily, in accordancewith Morocco's international commitments and the national interest; (iii) theinstitution(s) governing this procedure would prepare an annual report on thestate of protection and related costs and benefits to the national economy, inline with continued efforts to rationalize incentives.

67. As part of the SAL, the safeguard procedure will figure prominentlyin the law outlining the general principles of foreign trade activities whichthe Government intends to present to Parliament in 1989. This procedureshould enable trade liberalixation to proceed without jeopardizing theefficient development of the domestic economy. In addition, the adoption ofthe safeguard procedure will supplant the existing practice of referencepricing.

68. Tariff Simplification. An international comparison of Morocco'strade tax structure with those of immediate competitors and comparableeconomies underscores the need for further simplification. Most of the tariffreforms implemented to date have focused on the reduction of rates; however,the Moroccan tariff nomenclature is unduly driven by firm-specificconsiderations. This is particularly evident in the case of such consumergoods as foosd, beverages, tobacco, and textiles. The intricacy of theMoroccan tariff structure seems hardly justified in view of the fact thatother countries manage more complex foreign trade structures with fewer codes.

69. In order to correct these irregularities and induce greaterefficiency in the allocation of productive resources, the Government, in thecontext of the SAL, intends to simplify the existing tariff nomenclature withthe adoption of the International Harmonized System (IHS) on January 1, 1989.Those tariff positions which have not been used during the past five yearswould not automatically be integrated in the new tariff nomenclature. Thenumber of tariff positions would be consolidated at the eight-digit level withthe same rate being applied to like products. An action plan and timetablewill be established in early 1989 to reduce the number of tariff rates and toaggregate product categories from the eight to the six-digit level.

70. Export Promotion and Industrial Developrent. In tandem with the SALprogram, the Government intends to strengthen its efforts in the area ofexport promotion to sustain the impressive performance of exports ofmanufactured goods and services exhibited during the past few years. Theexport insurance agency, S AEX, would be provided with adequate budgetary

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resources to cover normal commercial risk and empowered to act on behalf ofthe State in the case of political risk. Budgetary funding for the Center forthe Promotion of Moroccan Exports (CMPE) would be increased with the objectiveof identifying new markets abroad. A study would be carried out to identifyspecific policies and actions in support of industrial expansion and sustainedexport growth. Potential obstacles to external trade flows, identified in thereport of the Committee for the Simplification of Trade Procedures, would beaddressed with the objective of reducing customs processing time by one-half.In order to increase proceeds from tourism, price controls on four- andthree-star hotels were abolislaed in September 1988 and credit ceilings onmedium- and long-term loans to the hotel sector are to be removed beforeend-1988.

71. As part of the SAL, the Government has taken a series of significantmeasures to liberalize the exchange regime to attract both foreign directinvestment and worker remittances from abroad. Virtually all controls havebeen abrogated for resident and nonresident foreign investors ou foreignexchange and stock tranEactions. As such, foreign investors are empowered torepatriate up to the full amount of their initial investment, irrespective ofwhether a guarantee to this effect was granted at the outset. In addition,the purchaser of foreign-owned assets may now settle all foreign-exchangeobligations directly abroad. Prior authorization to repatriate theforeign-exchange equivalent of paid-in capital and profits has been abolishedand commercial banks can now be used to transfer funds directly to nonresidentaliens without going through the Exchange Bureau. Finally, the deregulationof exchange controls has been extended to include Moroccan nationals residingabroad, the latter being authorized to open convertible dirham accounts.

External Liability Management

72. Progress to Date. The rapid rise in Morocco's external indebtednesshas its roots in the late 1970s and largely reflects various adverse externaldevelopments and serious structural problems in the economy. Sharp increasesin oil prices, depressed conditions in the world phosphate market, and risinginternational interest rates undermined Morocco's ability to service itsexternal debt. In addition, an ambitious public investment program and aheavy buildup of defense expenditures were sustained through extensiverecourse to borrowing abroad. As a result, Morocco's total external debtreached about 86t of GDP by 1982, compared to only 371 in 1977. In 1983,Morocco found itself unable to meet its heavy debt service obligations. Inresponse, it sought the assistance of the IMF and the World Bank in puttingtogether a program of macroeconomic stabilization and structural adjustment.This allowed for a series of official and commercial bank debt reschedulings.The amount of payments rescheduled from end-1983 to end-1987 totaledUS$6.5 billion.

73. The profile of Morocco's external debt has improved since 1983,reflecting a slowdown in the contracting of new debt commitments. Inaddition, the compositional structure of new borrowings shifted fromcommercial to official sources which served to soften the average terms ofexternal liabilities. As such, the average interest rate on new commitmentsdeclined from 101 in 1982 to less than 61 in 1987, while the average maturity

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increased from 11 years to approximately 20 years. This resulted in anincrease in the grant element from 5% to 282&'.

74. Despite the relief from its creditors, Morocco's total external debtposition remains precarious. At the end of 1987, the total external debtoutstanding and disbursed (DOD) was approximately US$20.6 billion or 11% ofGDP, while debt service payments absorbed 31.6S of exports of goods andservices, inclutiing workers remittances (Table 2). Before debt rescheduling,the debt-service ratio was 60.8%, of which 20.9% of exports accounted forinterest payments alone. In the absence of additional debt relief or anyother form of refinancing, the debt-service ratio would average an estimated47.3S a year during 1988-1990, equivalent to annual debt service payments ofUS$3.8 billion.

Table 2: EXTERNAL DEBT KEY INDICATORS

160t 1981 1982 1C63 194 19o5 194 1967.........................................................................................................

Totol It.nmIt DO (billIon) 1/ 9689.1 10.4 12410.0 139.4 139.0 16696.1 188.6 203.of tiich: PiAlic Odt 6739.1 9615.4 11119.0 12567.4 12707.3 1432.1 1746.6 19466.6

Privte Led" (iltion) 3649. 3694.3 4w23.6 36. 38)6.6 4059.1 48)0.1 4904.4Offietat ewns (bilion) 43.4 M591.1 69A.4 63.0 O6. 1131n.0 1204.4 1452.2

" IXt GofP 59.92 74.31 06.32 118.6S 127.02 134.7S 12212 115.02

Debt tevIce efore Oft (Iitten) 21 1314.7 1423 1S14.2 2063.8 19.3 2361.6 36. 3550.?As I of iSO's net workee rn 30.1$ 34.52 39.42 2.6 S0.6 56.72 7R.7X 60.81

det Service After OC (bmillion) 2V 314.7 143.3 1S14.2 1321.3 653.3 1224.6 1669.4 1166.?A6s X of SINs lnet wrkes r_ 30.12 34.52 39.42 33.71 21.72 29.42 3.43i 31.62

tnt Pewce Sefore St (llitten) 21 68.9 706.6 666.5 7755 79.3 774.1 1063.2 1220.5S X Of GUP 3.63 4.62 4.S2 5.68 6.71 652 7.21 7.32

A S d ofU Mel workers ro 14.9S 17.121 17.32 19.62 20.32 18.62 21.1X 20.92

Int Pwmft Aftor 0t (btlelo) 21 64.9 706.6 6.50 627.5 606.3 576.1 851.2 839.5eof cw 3.62 4.2 4.5 4.71 5.12 4.92 5.1S 5.02

t 2X f We inet Wkes ro 14.92 17.11 1V.32 16.02 15.51 13.62 16.91 14.41

Sacst INIIF. INf aff etimot

1V Inctufts NUL Sahrt-tenu Debt.21 Incltui ILt Debt except military debt.

19B0 1981 196 1910 1984 1985 1966 197T

AMtt ReshWeded a 0 0 742 1134 1135 1769 1704hAMti.tlO 0 0 0 594 945 937 1557 1323Intet0 0 0 148 189 198 212 381

1! During the period 1983-87, Bank lending played a major role in torocco'sadjustment efforts, accounting for about one-fourth of net externalfinancial flows (including int-irest reechedulings).

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75. With the steady improvement in the external current account balanceachieved since 1983, Morocco transferred about 3% of its GDP abroad on a netbasis in 1986-87. Net transfers from Morocco are projected to reach between42 and 5% in 1988-89. Notwithstanding these substantial capital outflows andthe underlying repercussions for growth prospects, Morocco still requiressignificant amounts of financing to meet its debt service obligations and toensure an adequate expansion of public investment in key economic and socialsectorsL. Gross capital requirements in 1989-95 would average aboutUS$3 billion per year. More than one-third of this could be covered byrescheduling, although potential amounts forthcoming from conventionalrescheduling do not offer Morocco the relief it needs from its heavy debtburden-it would merely postpone the problem. The rest could be obtainedthrough fresh borrowing, preferably at softer terms, or through exceptionalfinancing in the form of grants. Assuming the necessary financing does notmaterialize from these sources, Morocco could explore other means, includingdebt conversion schemes, exit bonds, or exchange offers, as have beenundertaken by other heavily-indebted countries such as Mexico, Chile, and thePhilippines.

76. Debt Mana8ement System. The debt-servicing problems that continue toloom ahead despite multi-year reschedulings underscore the urgent need for theadoption of a solid debt mAnagement system. The most urgent aspect of debtmanagement consists of an effective system of approving, registering, andmonitoring all external borrowing. This would require institutionalarrangements covering: (i) the legal modalities for authorizing andregulating new borrowings; and (ii) the organization of the flow ofinformation on the contracting and disbursement of loans, and on payments ofprincipal and interest. These structural changes are required before any typeof data computerization is implemented.

77. Recognizing the need to improve the management of its externalindebtedness, the Government of Morocco has committed itself in the context ofthe SAL to the establishment of a debt management system which would allow fora more rigorous and reliable analysis of the country's debt profile. Under aplan of action formulated with Bank support, the Government, through theDepartment of the Treasury, would establish a system of data collection,compilation, and recording of all foreign debt1'. This would serve as thebasis for the Debt Data Computerization Project, which is being undertakenover an 18-month period that began in September 1988 with the support of thePAL.

78. The Department of the Treasury has been effective in monitoringdirect government debt. For public enterprise and publicly-guaranteed debt,however, gaps still exist due to weak control procedures. Privatenonguaranteed debt, though negligible, needs to be added to the system whileit is still within manageable proportions. Most of the necessary informationexists in the Exchange Bureau, but there is no mechanism in place to keeptrack of the evolution and status of private nonguaranteed borrowing.

1/ Detailed projections of external capital requirements in the context ofthe medium-term adjustment program are presented along with a feasiblefinancing plan in paras. 92-93.

2/ Includes public and publicly-guaranteed MLT debt, private nonguaranteedMLT debt, and public short-term debt.

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Short-term debt is also a source of concern since the Government has no dataon the actual level of total short-term borrowing. Bank estimates show aboutUS$2.2 billion at the end of 1986, which appears overstated from the Moroccanperspective.

79. Clearly, an essential ingredient for an effective debt managementsystem is a stroP3 statistical base. In order to achieve this, theresponsibility for monitoring and regulating foreign debt must be centralized,and the procedure for carrying this out strengthened. The Department of theTreasury is the logical choice as the central monitoring unit. Nevertheless,it would be critical to have an established system of coordination among allagencies involved ii the borrowing process to facilitate reconciliation andsharing of relevant data.

80. As part of the SAL, the Government would: (i) publish a circularinstituting the obligation to register all public and publicly-guaranteed debtcontracts with the Department of the Treasury, as well as communicate allpertinent data (commitments, disbursements, cancellations, amortization, andinterest payments); (ii) establish a formal coordination committee among allagencies involved in the foreign borrowing process, i.e. Department of theTreasury, Central Bank, Exchange Bureau, and relevant ministries; and(iii) submit annual tables indicating the status of both private nonguaranteedand short-term debt.

81. The success of these endeavors would greatly assist Morocco in theimplementation of debt policy, especially by providing the means to analyzethe impact of various financing alternatives and different debt restructuringoptions. In order to improve the structure of external debt, the Governmentintends to limit nonconcessional public and publicly-guaranteed borrowings tounder US$500 million on maturities of 12 years or less, and to US$70 millionon maturities between one and three years. Short-term borrowing (i.e.maturities of less than one year) by the Treasury and public enterpriseswill be limited to US$300 million. Improvements in the debt profile andcreditworthiness are essential requirements if Morocco is to be in a positionto secure sufficient external financing at the most advantageous termspossible.

Proeam Benefits. Externl Financint R*uuirements, and Soca Impaet

Macroeconomic Outcome of the SAL

82. The medium-term macroeconomic scenario underlying the structuraladjustment program identifies a set of economic policies which results in:(i) an increase in the rate of GDP growth induced by a rise in the level ofproductive investment; and (ii) an improvement in external creditworthiaess.The impact of the structural reforms (paras. 83-84) on macroeconomic aggregatessuch as the government budget, current account, and, by extension, the stockof external debt was assessed in comparison to a scenario where no policyreforms are present. A set of complementary macropolicies was then identifiedto preserve budgetary and balance-of-payments stability, thereby ensuring thesustainability of the structural reforms over the medium term. To thiseffect, the macroeconomic framework to be supported under the 1988-92structual adjustment program (paras. 86-88) is based on the implementation ofa series of structural and accompanying macro measures which coalesce into acomprehensive and consistent policy package.

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83. Trade liberalization measures, represented by the repeal of mostremaining quantitative restrictions, will affect the current account throughan increase in import demand. Specifically, imports of consumption andinvestment goods (e.g. categories affected by the removal of nontariffbarriers) should increase by 8.42 with respect to the base case by 1990, andby 15.6S by 1992. Higher trade tax revenues, corresponding to 0.2 percentagepoint of GDP in 1990 (and rising, thereafter, to 0.4 in 1992) will serve toimprove the fiscal balance. The rise in customs receipts derives from theliberalization-induced widening of the overall tax base in keeping with thegeneral orientation of the fiscal reform. The increase in foreign and publicsavings leads to lower interest rates and/or less constrained credit policywith a positive impact on investment. A priori, the effect on consumption isambiguous. Higher customs duty collections (not rebated to the privatesector) will reduce disposable income and hence consumption, whereas the fallin interest rates will positively affect the propensity to consume.Empirically, the income effect was found to prevail with the result thatprivate consumption declines. The change in the composition of expenditures,with investment increasing its share, would lead to a weakening of the currentaccount on the order of 0.8% and 1.6S of GDP in 1990 and 1992 respectively,compared to the scenario without policy reform, thereby warrantingcomplementary macropolicy action (para. 85).

84. The effects of increased public investment are as follows.Investment of the consolidated government sector (i.e. central government,municipalities, social security) is targeted to increase its share in GDP from3.52 in 1988 to 4.0% in 1989, rising to 4.2S by 1991-92. In order tofcrestall the upward pressure on interest rates and the potential crowding-outof private investment that would ensue from the increased demand on existingresources, the budget deficit is targeted to fall to about 3.5% of GDP(paras. 86-87). In fact, the crowding-out effect on private capitalaccumulation is more than compensated in the medium term by the complementarityeffect which relates private and public investment. As a result, totalinvestment will increase by I percentage point of GDP in 1991-92. Higherinvestment will lead to higher import demand for capital goods with anassociated impact on the current account, corresponding to 0.1 and0.5 percentage point of GDP in 1990 and 1992 respectively. Fueled by higherinvestment spending, Treasury borrowing requirements would increase by0.6 percentage point with respect to GDP over the period of the program in theabsence of compensatory macropolicy action. Higher tax revenues frominvestment imports, however, will slightly mitigate the impact of the rise incapital expenditures.

85. Action on key macropolicy instruments has been envisaged to take intoaccount the overall effects of supply-oriented structural measures on thebalance of payments and government budget. The medium-term macroeconomicoutcome is thus based on the use of a flexible exchange rate policy to improvethe current account balance and to strengthen external creditworthiness,whereas tax policy is geared to rationalizing investment incentives andnarrowing the budget deficit. The projected rise in the average effectiverate of tax collection reflects improvements in the area of tax administrationand structural measures to increase the buoyancy of the fiscal system.Increases in national savings are required to allow the desired increases ininvestment, reserve accumulation, and growth; moreover, they reflectbehavioral responses to fiscal, interest rate, and exchange rate policies, as

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well as to the liberalization of the financial sector which is presently understudy and could be supported by a future Bank-financed operation. Othercombinations of policy instruments (i.e. import tariffs/export subsidies,public expenditures) can be envisaged; however, they are not likely to changesignificantly the path of the required adjustment.

86. The macroeconomic scenario on which the SAL is based (Table 3)integrates both the aforementioned structural policies, as well as theobjectives of further reducing the budget deficit and achieving virtualcurrent account equilibrium. The borrowing requirements of the Treasury areassumed to fall to 3.5% of GDP by 1989. The current account should continueto register at most a slight deficit over the period, whereas the non-interestcurrent account would exhibit significant surpluses, on the order of 5-6% withrespect to GDP. The evolution of the current account is predicated on theactive management of the exchange rate needed to contain import demand andsustain the strong export growth of finished manufactures, projected toaverage approximately 122 on an annual basis.

Table 3: MEDIUM-TERM MACROECONOMIC SCENARIO

1987-88 1989-90 1991-92

GDP Growth Rate 3.0 4.6 4.8Total Consumption/GDP 83.9 81.7 81.2Total Investment/GDP /a 19.5 20.6 21.7

- Private GFCF/GDP 16.1 15.9 16.7- Public GFCF/GDP /b 3.5 4.1 4.2

Gross National Savings/GDP 18.7 20.1 20.7- Private Savings/GDP 20.4 19.5 20.0- Public Savings/GDP /b -1.7 0.6 0.7

Fiscal Revenues/GDP 22.2 23.4 23.6- Trade Taxes/GDP 3.6 4.3 4.5- Other Revenues/GDP 18.6 19.1 19.1

Public Expenditures/GDP 27.5 26.9 27.1- Interest Payments/GDP 6.7 6.5 6.1- Transfers/GDP 7.1 6.9 6.9- Other Current Expenses/GDP 10.2 9.4 9.9

Budget Surplus/GDP -5.3 -3.5 -3.5Exports of GNFS/GDP 26.7 31.1 32.0Exports of Manufactures/GDP 8.4 10.8 11.7

Imports of GNFS/GDP 30.1 33.6 35.1Imports of Capital Goods/GDP 5.6 7.1 7.9Imports of Consumption Goods/GDP 3.1 3.5 3.6

Index of Competitiveness 1.00 1.07 1.07Non-interest Current AccountSurplus/GDP 6.4 6.2 5.0

Current Account Surplus/GDP -0.8 -0.6 -1.0

/a Including variations in stocks.lb Consolidated government sector, including central government,

municipalities, and social security.

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87. The sedulous implementation of fiscal reforms is expected to lead toan improvement in the efficiency of tax administration and an abatement in thedistortionary and revenue-reducing effects of various fiscal exemptions. Theresultant increase in government savings will ensure that the posited rise inpublic investment is not incompatible with the objective of providing privatefirms with the necessary incentives to invest. Indeed, the real interest rateis projected to decline from its 1987 level, enabling the share of privateinvestment in GDP to reach 16.71 by 1991. Total investment would thereforeincrease its share in GDP and reach 20.62 in 1989-90 and 21.71 in 1991-92.

88. Finally, the impact of declining current account deficits on the onehand, and the dynamic growth of export proceeds on the other, should have abeneficial effect on external perceptions of creditworthiness. The impact ofreal exchange rate movements on foreign exchange earnings and GDP growth willmore than compensate the ensuing capital losses on the valuation of the stockof outstanding external debt. As a result, debt indicators will improve withthe ratios of net debt to GDP and to exports of goods and services (includingworker remittances) decreasing respectively, from 1.13 and 3.48 in 1987 to0.81 and 1.95 in 1992.

Assessment of Macroeconomic Performance

89. The intended economic outcome of the policy reforms comprising theSAL can be summarized as: (i) an increase in growth fueled by higher levelsof efficient investment; and (ii) a strengthening of Morocco's creditworthinesswith a view to restoring voluntary access to international capital markets.To this end, the overall evolution of the economy will be monitored to ensurethat the structural reforms introduced in the context of the SAL are havingtheir intended effect, as reflected in the adjustment path set out in themedium-term macroeconomic framework (paras. 86-88). Monitcring arrangementswill be conducted in close cooperation and consultation witi the IMF.

90. From the vast array of suitable aggregates, a set of four indicatorshas been identified in consultation with the Bank as the basis formacroeconomic monitoring under the SAL program. Reflecting the supplyresponse emphasis of the SAL on outward-oriented growth and improvedcreditworthiness, these indicators will be at the center of the macroeconomicdiscussions with the Government (para. 91) and will allow for a quantitativeevaluation of the progress made in achieving program objectives. The fourindicators, whose targeted evolution is portrayed in Table 4, are as follows:

(a) the ratio of total gross fixed capital formation to GDP;

(b) the ratio of gross public and publicly-guaranteed debt outstanding tototal foreign exchange earnings;

(c) the rate of real growth of manufactured exports;

(d) the level of net foreign assets of the Central Bank.

91. Macroeconomic progress will be reviewed semiannually. The effects ofthe policy reforms being introduced in the context of the SAL will be assessedprincipally through reliance on the evolution of these indicators. Although

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related to the macroeconomic outcome adduced in the medium-term framework(paras. 86-88), the actual figures presented in Table 4 are intended torepresent minimum levels of performance. Should there be any significantdivergence from the targets, explanatory factors would be identified andremedial policy action taken. In the event that actual performance exceedsthe targeted outcome, a strengthening of objectives would be considered. Theevolution of the indicators for 1988 would be reviewed prior to second trancherelease, and those for 1989 before Board presentation of a second SAL or anyfuture policy-based operation. Were the Moroccan economy to achieve thetargeted levels of performance through 1992, it would essentially haveestablished a secure basis for self-sustaining growth, which would permitaccess to voluntary financing from international capital markets.

Table 4: MACROECONOMIC INDICATORS TO BE MONITORED UNDER THE SAL

1988 1989 1990 1991 1992

Total Gross FixedCapital Formation/GDP 19.01 19.52 20.0% 20.5% 21.0%

Gross Public & Publiely-Guaranteed External Debt/Total Foreign ExchangeEarnings 2.8 2.6 2.4 2.2 2.1

Real Growth Rate ofManufactured Exports 122 10% 10 102 102

Net Foreign Assets ofthe Bank al-Maghrib(US$ million) 450 850 1,050 1,200 1,400

Medium-Term External Financing Requirements

92. Sustained equilibrium on the current account implied by themedium-term macroeconomic framework would limit net external capital flows toa minimum. This policy stance is conditioned by creditworthinessconsiderations in terms of the need to keep the evolution of the external debtstock in check and thereby contain future debt service payments. In the earlyyears, net inflows from abroad would go towards reconstituting internationalreserves, and would therefore not lead to any significant increase in net debtoutstanding. At present, reserves are at an unacceptably low level for aneconomy in which external trade flows play such a critical role. Theirbuildup is important to sustain further trade liberalization, to protect thehitherto vulnerable public investment program, and to cushion the economyagainst the vicissitudes of the external environment.

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93. The strong current balance notwithstanding, structural weaknesses onthe capital account, manifest in the limited levels of autonomous lending,will mst likely require continued reliance on exceptional financing throughthe early 1990.. Given the current account projections of the medium-termmacroeconomic scenario and in the absence of debt rescheduling, Morocco'sgros capital requirements will average approximately US$3 billion per yearover the period 1989-95. An analysis of the sources and uses of foreignfunding, based on a number of reasonable assumptions, has given rise to afeasible external financing plan which is consistent with the macroeconomicframework (Table 5). During the period 1989-91, continued rescheduling ofdebt service payments to the Paris and London Clubs, on terms at least asfavorable as those obtained in the past, would be required. As the fullimpact of the SAL program begins to materialize in the early 1990s, theimprovement of the debt indicators would permit a relative shift in financingfrom rescheduling to increased access to international capital markets on avoluntary basis. A more equitable distribution of Morocco's capitalrequirements vis-&-vis external creditors is one objective of the financingplan. As a result of the targeted buildup of reserves (para. 92) and theincrease in public investment (para. 52), debt outstanding of all creditorsother than the Bank and Fund should increase by about US$150 million in 1989.

Table 5: MEDIUM-TERM EXTERNAL CAPITAL FLOWS(Millions of US Dollars)

1985 196* 196? 1965 1989 1990 199 1992 1993 19* * ..... .*v.+............. v**v. ......... * ..... . . ... h.*.**................ ...... * ............................

Gross oilbW*sita 1314.5 1W.9 1434.9 148.2 1695.2 1563.8 1578.3 1647.6 1661.9 20.2Ofticlot =swe 059.9 10t.9 11.8 153.6I t1.3 IM&2 18.2 131.6 124A. 1517.2

of thigh 1330 307.0 362.6 40.5 470.0 586.9 530.6 530.5 489.9 4n2 5s52.Privae sttm 154A 317.1 331.6 250.6 313.6 315.5 315.1 416.0 43.1 515.0

Si ct invsat 20.2 11.6 56.7 62.4 64.6 75.5 83.0 91.3 100.4 149.6

Int1et losbeholwti 196 212 361 1r 138 19* 14 78 59 14

Total; rtlatlen 1/ "60.5 108.3 996.2 1087.5 1518.3 1401.7 1302.8 1402.5 1497.9 1967.6

Totat Ibt capital otes 692.3 583.3 876.4 630.2 363.5 448.5 49. 414.4 343.5 336.2Officift t6 72.7 515.? 614.5 543.2 331.2 469.2 369.0 273.5 28.5 59.S

of hi 116 220.2 254.3 241.0 260.0 3Q2.5 305.3 292.2 165.4 86.1 115.4Privat tIwcm 129.6 67.6 61.9 87.0 52.4 -40.? 105.4 140.9 315.0 278.6

36 not flow/Total met Capitad Ftows 24.71 43.6X 27.51 41.31 94.51 68.1X 59.1 39.91 2S.6 34.12Touta Clm/U 2/ 134.71 122.1t 115.01 117.3X 109.01 101.9X 95.31 88.7X 82.21 70.21Toeta tCSfmsr eof 4 2/ 3/ 400.71 374.5 35.51 307.3X 266.3 246.21 229.7X 21t.61 196.91 171.42Debt Svc eprts ofG 3/ 4/ 29.41 37.6X 31.6X 33.1X 34.6 30.S 27.31 26.2X 24.61 24.41

1/ Represnt. rtlaatian an NLT ptAic debt inctuding the INF.2/ 00 Ifclues NLT (pitic ad private) ard S Oebt.3/ Expr et of a inctue wrkas iittwnee.4 After debt reltio; Ilatude tLT pubtic debt onty.

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Moreover, concerted efforts have been made in the context of the SAL toattract additional sources of financing at highly favorable terms(par"s. 101-102) in the interest of burden sharing and portfoliodiversification. The medium-term financing plan has Bank exposure rising from13.8f in 1988 to 17.7S in 1995, in keeping with the limits of prudentfinancial management.

Social Impact of Adjustment

94. The social impact of the SAL program is expected to be positive.After five years of sustained stabilization, the acceleration of economicgrowth will improve prospects for national income and employment over themedium term. Fiscal policy reforms will raise public savings, enabling vitalincreases in public investment to take place. The share of social expendituresin overall public investment will rise with a view to improving human capitaland relieving the plight of the poor. Measures to increase the progressivityof the tax structure will engender a more equitable distribution of income.Judicious financing of the budget will ensure adequate access of the privatesector to domestic credit, while averting an erosion of purchasing power inthe rural and socially disadvantaged sectors through excessive reliance oninflation tax revenues. Continued trade liberalization should lead to theexpansion of private investment in labor-intensive, export-oriented activities.Average growth in indastrial employment is expected to register at least 5Sper annum in keeping with past trends. Although real wages are likely toremain stable in the short term, returns to labor are expected to increase inthe medium term as a result of the continued gains in worker productivity andthe relative expansion of labor-intensive sectors. Consumer welfare willbenefit from the effect of trade liberalization on both import prices anddomestic prices linked to gains in factor productivity. Diversification ofthe production base and the increased openness of the economy should put thecountry in a better position to withstand external shccks.

95. In addition to the measures proposed under the SAL, the Bank isattempting, through other operations in the lending program, to protect thepoorcr segments of Moroccan society from any adverse effects induced by thecompression of government spending. The Agriculture Sector Loans have beendesigned to stimulate agricultural growth in general, with investment policyfocusing on capital formation and structural reforms being extended to thearea of rainfed agriculture. Income distribution patterns in the agriculturalsector will thus be improved. At the same time, protection will be affordedto low-income urban and rural landless groups through a targeted program ofconsumer subsidies. Bank-supported investments in the agricultural sectorhave focused to date on area development, small and medium irrigation systems,and agricultural credit. In the future, emphasis will also be placed onnatural resource management and the development of research and extensionpackages, which would benefit smaller farmers in both rainfed and irrigatedperimeters. The Education Sector Loan will ensure greater equity of access toeducational services by focusing on basic education, particularly in ruralareas, where measures to increase female participation rates have receivedspecial emphasis, and on lower secondary levels relative to higher stratawithin the sector. Within the Public Health sector, expenditure patterns arebeing restructured away from the traditional urban-based, curative health caresystem to emphasize preventive health care, particularly in rural areas.

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PART m - LOAN ADMINISTRATION

Proia-ement and Disbursement

96. Import eligibility criteria would be similar to those applied toother recent policy-based operations, which have proved to be both efficientand satisfactory. The Ministry of Finance and the Bank al-Maghrib (theCentral Bank) will be responsible for loan administration. Proceeds of theloan would be used to finance the full foreign exchange costs (c.i.f) ofeligible imports, procured after ICB. Ineligible items would be thosefinanced from other sources, goods intended for military or paramilitary use,and luxury items. Both private and public sector imports would be eligiblefor financing. Private sector contracts under US$5 million each, includin¶petroleum products, would be awarded on the basis of the normal purchasingprocedures of the buyer, which are based on price quotations in internationalmarkets. Procurement of petroleum products and foodstuffs would be limited toan aggregate of US$50 million. Public sector imports under contracts belowUS$5 million up to an aggregate of US$20 million will be awarded in accordancewith local competitive bidding procedures acceptable to the Bank. Contractsfor all other goods, public and private, will be procured throughinternational competitive bidding in accordance with Bank guidelines.

97. The Central Bank will be responsible for the maintenance of the loanaccounts, and for the preparation and submission of withdrawal requests.Disbursements would be in two tranches of US$100 million each, one upon loaneffectiveness scheduled for December 1988, the other upon fulfillment ofconditions precedent to release of the second tranche (conditions of first andsecond tranche release are presented in Annex III), estimated to beaccomplished by mid-1989. The Closing Date of the proposed loan would beDecember 1989.

98. Disbursements for contracts procured after ICB would be made againstfully documented withdrawal applications, following standard proceduresemployed in adjustment lending. Disbursement against other items would bemade on the basis of Statements of Expenditures (SOEs) from the Central Bankdetailing individual transactions in a given period, together with acertification of payment of the amounts involved and of their eligibilityunder the proposed loan. Supporting documentation for SOEs would be retainedby the Central Bank and withdrawal applications would be consolidated andsubmitted in amounts of not less than US$1 million. In light of the fact thatthe Government has taken upfront action on many elements of the adjustmentprogram, including fiscal and budgetary reforms1', it is recommended thatthe Bank retroactively fi,.&ace eligible items procured within four monthsprior to expected loan signing, up to a maximum of US$40 million. Under thefinancing plan for the overall adjustment program on which the SAL has beenbased, no other financing is available in 1988 for the needed imports.Contracts costing less than US$25,000 would not be eligible for financing.

1/ The extensive advanced actions undertaken by the Government are enumeratedin Attachment I of Annex II to this report.

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Acunoots and Audits

99. The Central Bank would maintain records of all transactions under theloan in accordance with sound accounting practices. All accounts would beaudited within nine months of the end of each fiscal year of the Borrower byindependent auditors acceptable to the Bank. Audit reports would containexplicit certification that claims submitted under SOEs were made inaccordance with the Loan Agreement.

Coodination with OtherlA2encies

100. Morocco successfully concluded its fourth Standby Arrangement withthe IMF on August 30, 1988, authorizing purchases of SDR 210 million. Theprogram covers the period September 1, 1988, to December 31, 1989. Theformulation of the SAL has been evolved in close collaboration with the IMF.The reform of investment budgetary procedures and fiscal policy derived fromthe work of joint missions with the IMF which visited Morocco in September1986 and December 1986 respectively. The SAL appraisal mission benefited fromthe participation of an IMF staff member, and continuous consultations withthe DMF have been conducted on all aspects of Morocco's adjustment program.

The OECF

101. The Overseas Co-operation Fund (OECF) of the Government of Japan hasexpressed its intention to cofinance the proposed SAL. A representative ofthe OECF participated in the SAL appraisal and negotiations and will recommendthat the OECF support the same policies as those contained in the programdescribed in this document, in an amount equivalent to US$100 million.Commitment authority is expected to be available to the Government by December1, 1988.

The AfDB

102. Lending to Morocco by the African Development Bank (AfDB) isincreasing, although it has chiefly financed investment overations. However,close collaboration was maintained between the SAL appraisal mission and staffof the AfDB, with the latter participating in key mission meetings with theGovernment and in negotiations in Washington. The AfDB expects to decidelater in 1988 as to whether they will cofinance the SAL.

ImDlementation Risks and Justifcation

103. Program risks are essentially economic and institutional in nature.Failure to persevere on the path of structural adjustment is likely to lead toa distorted pattern of growth with severe repercussions on the overallperformance of the economy. Moreover, the lack of a firm commitment tostructural reforms may undermine the confidence of foreign investors andabruptly force the Moroccan economy onto a path of economic contraction,necessitating an immediate and significant transfer of resources abroad. Theinability to renew rescheduling agreements, implied by such a scenario, wouldrequire a surplus of US$442 million and US$974 million in 1989 and 1990respectively, to avoid defaulting on contractual obligations via-a-vis foreign

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creditors. This pattern stands in sharp contrast to the gradual adjustment ofthe current account envisaged under the SAL, and would necessarily lead to acurtailment of growth objectives. The macroeconomic consistency analysis(paras. 29-31) suggests that to achieve this highly ambitious externalpayments objective, output would register a once-and-for-all loss of nearly 9%over the 1989-90 period with respect to the levels achieved under the SALscenario, despite a relatively more expansionary fiscal stance.

104. Although a reform program of the kind being proposed may present apolitical challenge to the Government, none of the specific measures to besupported by the SAL is deemed to be excessively difficult to introduce. Thefiscal reforms were begun in 1986, and many of the measures described in thisdocument have already been initiated. Trade reforms of the kind beingintroduced are always potentially contentious. However, they are essentiallythe continuation of a program previously supported by the Bank under the ITPAoperations, and are thus expected to encounter few difficulties that have notalready been experienced and resolved under the ITPAs. The ability of theGovernment to implement an enhanced public investment program will essentiallydepend on the availability of additional revenues, for which prospects arereasonable (para. 42).

105. The capacity of existing governmental institutions to coordinate andimplement a broad-ranging and complex set of reforms will be considerablytested, In order to ensure appropriate interdepartmental coordination of theSAL program, the Government has established a high-level committee which hasserved as a counterpart to Bank teams throughout the appraisal process. Theimplementation risk was addressed from the outset by the formulation ofcomprehensive technical assistance and training programs for all departmentsof the Government which will be charged with the implementation of the program.As previously mentioned (para. 43), these programs are proposed to be financedby the Bank under a Public Administration Loan which was appraised in parallelwith the proposed SAL, and which is expected to be presented to the ExecutiveDirectors in January 1989. A brief description of these programs is attr.chedas Annex V.

106. In sum, three factors serve to limit implementation risks. First,the SAL program has been cast in a medium-term macroeconomic framework whoseunderlying analysis explicitly ensures internal consistency among fiscal,external, and monetary accounts over the period 1988-92. Second, Government"ownership" of the program is evident in the many upfront actions taken thusfar. Moreover, the macro framework has been developed jointly both at thepolicy and technical levels, with Government counterparts using the model thatunderpins the analysis. It is also noteworthly that the program, as reflectedin the Letter of Development Policy, has been presented to the Council ofGovernment and endorsed by the King in its overall thrust. While certainaspects of the implementation phase may indeed test the limits ofinstitutional coordination, the myriad interministerial counterpart groupsestablished in the context of the SAL, together with the broad politicalbacking of the program within the country, will serve to overcome potentialobstacles. Third, the program is both realistic and feasible, particularly,in view of its strong social bent which seeks to restore an adequate level ofdevelopment expenditures in social sectors having succumbed to the exigenciesof past stabilization efforts.

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PART lt - OTHER BANK OPERAIIONS

107. As of September 30, 1988, cumulative commitments to Morocco (lesscancellations) amounted to US$3,821.8 million, of 4.ich US$804.9 million havebeen repaid, US$2,722.8 million have been disbursed, and US$1,099.0 millionare undisbursed. During FY87, gross disbursements were US$390.6 million,while repayments totaled US$134.1 million. Total IFC investments as ofAugust 31, 1988, amounted to US$157.1 million, comprising 12 operations(equivalent to US$110.4 million after cancellations, terminations, repayments,and sal,ta).

108. Over the past several years, resource constraints on governmentspending limited public investment essentially to the completion of ongoingprojects. This led to the postponement of the new Orientation Plan and anincreased focus on policy reforms that would profoundly change the nature andextent of government intervention in the economy. Against the background of aseries of IMF-sponsored stabilization programs, the cycle of reforms wasconceived so as to maximize supply responses in key sectors of the economy.The reforms have aimed to spur productive efficiency, inter alia, throughgreater reliance on the private sector, and to enhance participation byMorocco in international trade.

Exueoenee with Pat Adustment

109. As previously mentioned (para. 13), the Bank has actively supportedMorocco's adjustment program through a series of policy-based lendingoperations. Two Industrial and Trade Policy Loans (ITPAs I & II - Ln. 2377,dated March 19, 1984, and Ln. 2604, dated July 29, 1985) reduced protection ina wide range of industrial subsectors and reoriented incentives away fromdomestic markets. The second of these loans also contained reforms of thefinancial system aimed at mobilizing domestic savings and increasing theefficiency of financial intermediation. Action programs under each loan weresuccessfully implemented, although a delay of about nine months wasexperienced under che second ITPA on a measure which would have lowered theincidence of trade taxation. Two Agricultural Sector Adjustment Loans (Ln.2590, dated July 29, 1985, and Ln. 2885, dated December 4, 1987) rationalizedpublic investment programs within the sector and fostered efficient growththrough the liberalization of pricing and marketing. Adverse socialconsequences attendant on the reduction of consumption subsidies wereminimized through the implementation of a detailed targeted program of foodsubsidies. The first loan was executed with only minimal delays. Delays ofabout eight months have been experienced in meeting those conditions ofeffectiveness of the second loan related to the implementation of the targetedfood subsidies program. Public finance shortfalls have hindered the executionof the agreed minimum sectoral investment program, an issue to be addressedunder the SAL. An Education Sector Loan (Loan 2664, dated May 9, 1986)restructured sector expenditures so as to reduce the budgetary burden ofeducation at all levels, while at the same time, rendering access to educationmore equitable to all segments of society. Physical execution of the loan wassatisfactory, with completion scheduled for Dectmber 1988, about six monthsbehind the appraisal estimate. However, progress towards evolving asatisfactory structure of sector expenditures, including their financing, is

-34 -

taking longer than originally anticipated in that additional sector analysisand discussion are required. The Public Enterprise Rationalization Loan(Lu. 2820, dated July 27, 1987) introduced measures to promote financial andadministrative autonomy of a lIrge number of enterprises through policyreforms designed to change government-enterprise relationships, as well 8athrough enterprise restructuring. Initial execution proceeded essentially onschedule. However, subsequent, though hitherto moderate, delays have emerged,principally on account of public finance difficulties, in settling thepervasive government arrears to public enterprises and in executing some ofthe sector surveys which are to lay the basis for further restructuringefforts.

110. On balance, experience with sectoral adjustment lending has beenpositive. To the extent that delays have beset program execution, they haveoften been the result of government revenue shortfalls, an issue beingaddressed under the proposed SAL. A feature of the sectoral approach toadjustment has been to enable the design and phasing of operations in a mannerthat has geared relevant constituencies to the scope and pace of change, whiletaking into account the absorptive capacity of individual client ministries.They have also provided suitable fora for the conduct of the dialogue onsector issues, leading to the establishment of viable policy frameworks forproject investments. Institutional autonomy promoted under the sector loansis intended to enhance the efficiency of enterprises (particularly thoseoperating in the public sector) benefiting from Bank-financed projectassistance.

ill. Building on the sectoral reforms achieved through past adjustmentlending, the proposed SAL program supports the transition from a period ofstabilization to the resumption of per capita income growth and productiveinvestment, while ensuring macroeconomic balance. To this end, the SALspi-ifically provides for overall macroezonomic wonsistency, particularlyamong fiscal, monetary, and external accounts, as well as a minimum level ofdevelopmental expenditures necessary to achieve economic and social objectives.One important consequence of the program would be a shift in Bank assistancetoward a relatively higher proportion of investment lending.

Pro Le

112. Agriculture represents the largest sector receiving Bank support.Past lending has been ta rural development or irrigation projects focused ongeographical regions, as well as a highly successful credit program. In thefuture, increasing attention will be accorded to agricultural support servicesat the national level, as essential backstopping of the regional developmenteffort. Projects are under preparation in research and extension, watermanagement, and forestry.

113. The development of domestic energy supplies will be essential if theoil import bill is to be reduced. The Bank is supporting this effort throughinvestments in power generation and distribution, in the development ofdomestic coal resources, and the appraisal and development of petroleum(principally gas) and oil shale resources. A pilot, small sce'e miningventure for export is also under execution.

- 35 -

114. Bank lending for infrastructure and utilities has helped to build anumber of technically proficient agencies in the fields of road transportation,water supply, housing finance, and municipal infrastructure finance, as wellas to expand the provision of essential services. Future emphasis will be onenhancing the efficiency of existing infrastructure through improved financialand managerial performance. Mobilization of private and non-budgetaryfinancing, as well as improved cost-recovery, will receive special emphasis.

115. Industrial development in Morocco, taking advantage of changes in theoverall incentive framework introduced under the ITPAs, is being supportedthrough commercial and development bank intermediary lending to domesticelectrical and mechanical enterprises, as well as firms engaged in productionfor export. Future lending will aim to improve the efficiency of bankintermediation and help expand the availability of credit to small-scale andexport-oriented industries.

116. Education, health, and-urban development projects are being designedto lower unit costs in order to widen the access of low-income groups to theseservices. Bank-financed operations are promoting a shift away fromcapital-intensive investments benefiting a limited clientele towards thedevelopment of more cost-effective delivery systems for basic services.

PART V - RECOMMENDATION

117. I am satisfied that the proposed loan would comply with -he Articlesof Agreement of the Bank and I recommend that the Executive Directors approvethe proposed loan.

Barber ConablePresident

AttachmentsNovember 8, 1988Washington, D.C.

- 36 -

1987 SOCIAL INDICATOR DATA SHEET

imaccoReference Groups (MRE)

MostRecent Lower mid Upper mid

1965 1973 Estimate incomo InCome

AREATotal lend area (thou sq km) 446.6 446.6 446.6Agricultural (% of total) 54.7 59.2 65.5

GNP PER CAPITA (current USS) 220 340 580 820 1,830

POPULATION aID VITAL STATISTICSTotal population (thou) 13,323 16,478 22.474Urban pop. l of total) 32 36 44 36 65Population growth rate(%):

Total 2.7 2.4 2.5 2.1Urban 4.4 4.0 4.2 3.6

Life expect. at birth (yrs) 49 53 59 58 66Population projections:

Pop. in 2000 (thou) 31,267Stationary pop. (thou) 65,846

Population density per eq kmof agricultural land 68 82 73 284 238-Pop. age structure ():

0-14 yrs 46 48 45 39 3615-64 yres 0 48 52 55 5965 and above 3 4 3 6 5

Crude birth rate (per thou) 49 44 36 36 28Crude death rate (per thou) la 15 II 1i 8Total fertility rate 7.1 6.7 4.9 3.6 3.7Infant mort. rate (per thou) 145 120 90 82 52Child death rate (per thou) 32 26 10 II 4Family planning:

Acceptors annual (thou) 6 37Users (% of married women) 5 27

FOOD, HEALTH AND NTRITIONIndex of food production percapita (1979-81 a 100) t13 105 108 106Per capita supply of:

Calories (per day) 2,162 2.548 2,729 2.514 2.987Proteins (grams per day) 58 67 73 56 75

Pop. per physician (thou) 13.1 17.2 6.9 2.4Pop. per nurse (thou) 4. 0.9 1.4 0.7Pop. per hospital bed (thou) 0.7 0.8 0.8 0.4Access to saft water

(% of population): Total tof5 57Urban 100 100Rural .

Population Growth Infant Mortality Primary School Enrollment

4.Z

3 - ISO.' I

ms,sooCeIns-$ Be to 510Ilo0b 650oM Noltocco 9 zooccoMRNmS Kr rour * QWWS°Q

- 37 -

1987 SOCIAL INDICATOR DATA SHEET

MOROCCOReference Groups (MRE)

mostRecent Lower mid Upper mid

196! 1973 Estimate income income

LABOR FORCETotal Labor Force (thou) 3.694 4,413 6.906

Female (%) 11 15 20 29 34Agriculture (%) 61 54 46 55 29Industry (%) 1S 10 25 16 31

Participation rate (%)Total 28 27 30 35 38Male 49 45 49 49 50Fiemale 6 9 12 20 26

Age dependency ratio 1.0 1.1 0.9 0.8 0.7

HOUSINGAverage size of household:

Total 6Urban 5Rural 6

Percentage of dwellings withelectricity:

TotalUrban 66Rural

EDUCATIONEnrollment rates:

Primary: Total 57 82 0o 103 1O5Male 70 78 97 110 108Female 35 48 62 97 101

Secondary: Total i1 16 31 40 63Male 16 21 37 48 64F_male 5 12 25 39 61

Pupil-Teacher ratio:Primary 39 36 36 32 28Secondary 26 21 21 20 19

Pupils reaching grade 6 (7) 21 S5

tCOME . CONStMWTION. AND POVERTYEnergy consumption per cap.(kg of oil equivalent) 124 204 237 345 1.960Percentage of private incomereceived by:Highest 10% of householdsHighest 20% 436 49Lowest 20% 7 a 4Lowest 40% 18 a 12

Est. absolute poverty incomelevel (USS per capita):Urban 157 389 bRural 101 238 b

Est. pop. below absolutepoverty income level (X)

Urban Si a 38 28 bRural 49 a 48 45 b

Passenger cars/thou pop. 12.2 17.1 4.0 50.4Newspaper circulation(per thousand population) 16.5 14.2 11.9 14.0 68.0

IECSE August 1987Net aaae.. Netw mest ist eati_etf 4ffuehre a" oU w ect 1as 6 salemm etbe.ws noted.

Gernp suag. ato gUltO wegted. Cbmte ae adeses on data avatbult sd Is et Maem. Unlethe,dee notedt8 sles to en ye b I= and It_ 1802 betwen 80 i a_d ee et eW elwoe betwee90 esd 188..180. b. 17.

- 38 -

AMEX I

KEY ECONOMIC ICATORS

KEY NACOKDNIC INDICAT

* Actual~..P.....el......Prj .iea............................ .................................................................................................................................

--....... - -- --- t al -- ........... Prol . ........ ----. P r o i * e t I a n 8 ...........

1961 1982 1983 198 1965 1986 1967 1968 1989 1990 1991 1992 193 195S.............................................................................................. ................................................................................................................................ ..............................

0P Growth Rate -1.3X 6.8X 2.38 2.1S 4.4% SX 1.0 S..0 4.6 4X8 4.6 4.68% 4.91 5.0X

GD? Growth Rate -2.38 6.18 2.3X 2.08 4.6 T.4. 1.28 4.9S 4.4X 4.S 4.68 4.9S 4.§X S.O

GDI/capita Growth Rate -4.9S 3.X -0.3X -0.7X 24. 4.9X 1.38 2.4X 1.6. 2.08 2.4S 2.4X 2.58 2.4X

Constptioucapita Gromth Rate -2.8 2.1X -3.48 -0.68 0.4" 7.2n 1.3X -1.78 0.3X 2.7X 1.08 2.18 1.9X 2.3X

Debt Service (USS 1/ 4/ 1427.3 1S14.2 1321.6 653.3 1226.6 1869.4 1646.7 2306.8 2633.7 2M.3 273.4 2890.4 292.1 3S57.6

Debt Service/XCS t/ 4/ 34.S 39.48 33.78 21.78 29.48 37.6 31.68 33.18 34.6 30.SX 27.38 26.28 24.48 24.4

Oebt Service/U0P 4/ 9.4 10.1t 9.98 7.28 10.38 12.6X 11.0 12.18 13.S 12.08 10.68 10.4X 9.7X 9.S8

Gross Investmnt/GDP 22.4X 23.3S 20.9X 21.6X 22.9S 20.3S 19.18 19.9X 20.58 20.7X 21.4 21.78 22.0S 22.28

Dometic Savings/GUP 7.48 6.4" I1." 10.48 13.28 13.08 14.11 18.08 16.78 1T.68 16.S 18.78 16.7X 20.98

National Savings/P 9.88 10.6X 13.28 11.68 14.08 1T.48 1T.6 19.58 20.68 19.58 20.38 21.08 21.48 21.78

Noaginat lational Sawings Nte -S2.48 16.28 S8.98 -1.38 31.38 34.08 24.38 44.28 32.38 7.78 28.98 27.28 26.48 19.08

P,htic lewIetwmntGP 2/ 3/ 7.98 10.S8 S.28 S.98 4.28 3.18 3.58 3.S8 4.08 4.18 4.28 4.28 4.3n 4.48

Pbtic Saing/P 3/ -S.4" 1.S -6.S -S.SS -5.78 -2.78 -2.68 -1.08 0.58 0.4 0.78 0.78 1.0 1.8

Private Investment/U0P 2/ 14.18 12.9X 16.48 1S.4 17.48X 6.4 16.8 15.l1 15.68 1S.98 16.4 16.6 17.O8 17.1

Private Savings/P 1S.41 9.18 19.78 17.38 19.n1 20.18 20.48 205 20.18 18.9 1t.4 20.38 20.48 20.58

Ratio of P/riv Inrvetment S6.08 81.48 31.8 37.68 24.28 8.7 21.2X 22.38 25.8 2S.8X 25.38 2S.O 2S.38 2S.7

Goverumnt sevenues/P 3/ 23.2 22.78 22.38 21.28 21.28 20.S 21.98 22.S 23.41 23.511 23. 23.4 23.78 23.68

overument Experditures/GOP 3/ 36.78 31.78 34.08 32.6 31.18 26.38 28.08 27.08 26.98 27.68 27.1X 27.1 27.0 27.08

Def t-) or Swplus (*) /GDP 3/ *13.SM *s9.0 -11.78 -11.48 *9.98 -S.8 -6.11 -4.SX -S.SX -3.58 .3.SX -$.58 3.38 -3.28

Exports 6rowth *ate 0.28 4.98 8.28 2.6 4.28 2.28 9.68 11.18 9.68 6.18 S.68 S.1X S.A6 s.n

Exports/GUP 20.68 19.88 22.58 2S.S 26.98 24.58 25.38 28.08 3O.68 31.51 31.98 32.22 32.48 32.s5

lkrt Grith Rate 1.98 3.18 -11.38 4.38 0.1 7.48 4.18 -1.1n S.68 7.2 S.31 S.2S S.4" S.58

luports/DP 35.a8 34.a8 .31.7n 36.9s 36.68 31.6 30.2S 30.08 32.6 34.68 34.98 3S.3X 3s.3n 3S.4x

Currnt Account (in USS) -1861.6 -189.6 -1021.0 -1166.6 -1056.7 -427.s -216.9 -6.2 26.5 -275. -320.S -161.4 -123.5 168.3

Current Account/GOP -12.5X -12.7X -7.7X -10.08 -8.98 *2.9s -1.38 -0.48 O.1X -1.28 -1.38 -0.78 -0.48 -0.58

.............................................................. ................................... , ... ,,,,,.......................... ... ,, 0

1/ Debt Service on KLI debt only: XGS includes workers remittances.

2/ Includes onty gross fixed investment.

3/ Consolidated public sector (Central Goernment. wsnicipalities, Social Security).

4/ After debt relief.

MOROCCO - BALaNCE OF PAYOEUTS

(US1 Nillions at Current Prices)

-- -- - -- Actual ---.--.-----.--------- Prelim -------------- Projections --------------

1980 1981 1982 1963 1984 1985 1986 1987 1968 1969 1990 19 192 1999.... .... . .... .... . .... .... . .... .... . .... .... . .... .... . .... ........ ..... ..... ..... ..... ..... .....

A. Exports of Goods & NFS 3273 3082 2969 2994 3038 316S 3616 4234 5341 640 7240 6068 8979 1210S

1. Merchandise (FOB) 241S 2283 2043 2086 2161 2145 2411 2782 3S87 4410 4962 S550 6198 8374

2. Non-Factor Services 6S0 7I9 926 906 677 1040 1205 1453 1754 2041 2278 256 278 3731

B. lsports of Goods & NFS S247 S310 S199 4223 4390 4341 4692 5063 5696 6837 7956 8650 9626 13187

1. Merchandise (FOB) 1/ 3770 3840 3615 3301 3S69 3S13 3477 3650 4931 SS3 6740 7516 0319 11042

2. Non-Factor Services 1477 1471 1364 923 821 628 1215 1212 767 983 1216 1332 1507 2145

C. Resource Balance -1974 -2226 -2230 -1229 -1352 ll1S6 -1076 -828 -3S8 386 -716 -782 -847 -1062

0. Net Factor Income -562 -702 -650 -768 -764 -964 -900 -1148 -1476 -1478 -1SSS -1633 -1S34 -1698

1. Factor Receipts 38 36 2S 11 16 15 1S 16 23 34 63 iS 67 127

2. factor Payments 600 738 675 779 781 979 916 1163 1499 1512 1618 1706 1621 1825

(interest payments) 638 690 647 766 796 764 1048 1208 1370 1434 1563 1576 1566 1714

E. Net Current Tronsfers 1116 1069 981 977 930 1064 1S49 1759 1767 1693 199S 2095 2200 2592

1. Current Receipts 12S2 1195 1068 1068 1006 1125 1602 1824 1T82 1907 2009 2109 221S 2610

a. Workers Remittances 1054 1014 849 916 8n 967 1396 158? 1591 1703 1789 1878 197n 2329

b. Other current trans. 198 181 239 151 135 157 204 237 191 204 220 231 243 281

2. Current Payments 135 126 107 91 n 61 S3 65 1S 1S 14 15 1S is

F. Current Account Balance -1420 -1862 -1899 -1021 -1187 -1057 -428 -217 -67 29 -276 -320 -181 -128

G. Long-term Capital Inflow 1318 1541 1S66 736 1229 1119 886 985 712 4S8 676 666 S79 343

1. Direct Investment 110 74 102 47 S1 20 12 57 62 69 75 83 91 150

2. Official Capital Grants 96 314 124 142 16 300 17 0 0 0 0 0 0 0

3. Net LT Loans (DOS Date) 1111 1154 1340 399 973 601 646 S47 478 2S1 407 439 409 49 ,

a. Disbursements 1665 1774 2099 1044 1167 1096 1353 1228 1332 1501 1584 1570 1648 2032 (g z

b. Sepayments 553 620 759 644 194 495 706 6B1 854 1250 1177 1131 1238 1963 "4. Other Lt Inflows (Met) 0 0 0 148 189 196 212 361 171 136 194 144 78 144 r

H. Total Other Items (Net) -207 120 -32 9 -166 -79 -100 -503 -402 0 0 0 0 0 n

1. Met Short-Term Capital -124 178 331 16 3 168 134 -218 0 0 0 0 0 0

2. Capital Flows WEI -83 58 -363 -7 -169 -247 -234 -285 -402 0 0 0 0 0

3. Errors and omissions 0 0 0 0 0 0 O 0 0 0 0 0 0 0

NOROCCO - BaLANCE OF PAYMENTS

(US$ Mitlions at Current Prices)

--.....-.......-- -.- Actual. ----------.----------- Prielia ............. Projections ---------------

1980 1961 1962 1983 1984 1985 1966 1987 1968 1989 1990 1991 199 1995.... .... . .... .... . .. .... .... .... . .... .... . .... .... . .... .... . .... .. ..... ..... ..... ..... ..... ..

1. ChgWe in Net Reserves 308 200 366 277 123 17 -359 -26S -243 *486 -401 -345 .397 -1551. Met Credit from the INF 152 164 442 119 136 73 -287 -109 -82 -74 *228 -171 -164 -S2. Other Reserve ChangesC- indicates Increase) 1S6 36 -77 158 -13 -56 -73 -157 -161 -412 -173 -174 -233 -150

Shares of GDP (current USS):............................

1. Resource Balance -11.11 -1S.0O -14.9X -9.2X -11.4" -9.8X -7.3X -4.9X -1.9X -1.81 -3.1X -3.1X -3.01 -2.9X

2. Total Interest Paynts 3.61 4.7X 4.31 S.86 6.71 6.41 7.1K 7.2X 7.2X 6.81 6.6S 6.2X 5.6" 4.6X "3. Current Account Salance -8.01 -12.5 -12.71 *7.71 *10.0 -8.91 -2.91 -1.31 -0.41 0.11 -1.21 -1.31 -0.71 -0.5S4. LT Capital Inflow (line G) 7.41 10.41 10.51 S.51 10.31 9.4X 6.01 5.9X 3.71 2.21 2.91 2.6X 2.11 0.91S. Net Credit from the INF 0.91 1.11 3.01 0.91 1.1S o." -1.91 -0.6" -0.41 -0.41 -1.01 -0.71 -o." 0.01

Foreign Exchange Reserves:..........................

1. Int'l Reserves (IFS lid) 180 144 202 44 50 82 155 327 48S 900 1073 1247 1480 1970

2. Gold (end yr wLoro price) 415 280 322 269 217 230 275 341 341 341 341 341 341 341

3. Gross Reserves incl Gold 595 424 524 313 267 312 430 668 829 1241 1414 1S88 1821 2311

4. Gross Res in months imports 0.37 0.28 0.41 0.10 0.12 0.18 0.33 0.63 0.81 1.29 1.34 1.42 1.SS 1.5?

Exchae Rates (ON/1SO):........................

1. Nam. Off. X-Rate (IFS rf) 3.9367 5.1723 6.023 7.1113 8.8105 10.0625 9.1044 8.35922. Real Eff. X-Rate Base 1980 100.0 92.3 90.3 84.3 79.5 74.2 70.9 68.53. X-Rate for GNP Conversion 3.9361 5.1723 6.0230 ?.1113 8.8105 10.0625 9.1044 8.3592

OQX00

Nemomandu Item: w

CDP (millions of current USS) 17822.3 14836.1 14957.3 13307.7 11899.4 11856.9 14754.8 16748.0 19094.6 20964.3 23019.3 25322.6 278J1.6 37278.6 0

1/ FOB for historical years and CIF for projected years.

MlOROCC: NLT EXTENAL PU8KIC FINANtAfLOLSP 1/(Willisam of US Dotlars)

.............................................................................................................................................. .................................................................................... __

1980 1961 1962 1983 1964 1985 1986 1987 1988 1909 1990 1991 1992 1995............................................................................................................................................... .................................................................................. _

Gross Dlsbursements 1904.7 2001.8 2577.8 1187.9 13S2.0 1314U. 1387.9 1434.9 1484.2 1695.2 1583.8 1S70.3 1647.6 2032.2

Offfeist Sources 1099.5 1442.6 1339.4 672n. 7.6 1059.9 1070.9 1103.0 1233.6 1381.3 1268.2 12S5.2 1231.6 1S17.2

Multilateral 146.9 254.2 244.2 304.1 312.3 447.5 608.0 506.1 664.8 808.9 758.4 770.7 78.s 792.8

of which: IBRD 63.7 49.3 134.1 174.5 274.7 307.0 362.6 404.5 470.0 #5.9 S30.6 S30.5 489.9 5Si.8

Bilateral 712.5 961.1 616.8 224.3 223.8 394.1 427.7 390.1 416.7 376.2 509.8 484.5 S03.1 724.4

INF Purchasos 240.1 227.3 478.4 144.1 184.5 218.4 35.2 206.9 1S2.1 194.2 0.0 0.0 0.0 0.0

Private Sources 805.2 SS9.2 1238.3 S1S.4 631.3 254.6 317.1 331.8 250.6 313.8 31S.5 31S.1 416.0 S15.0

Total Aamrti2ation 2/ 640.8 683.2 79S.2 669.3 243.0 640.5 1028.3 906.2 1087.5 1S18.3 1404.7 1302.8 1402.5 1987.6

Not Financial Ftows 1263.9 1318.7 1762.4 S18.6 1109.1 674.1 359.7 438.7 396.8 176.9 179.1 267.5 245.1 44.7

Official Sources 897.2 1258.8 1176.1 531.3 S01.S 564.7 303.7 433.5 372.2 193.1 295.2 245.0 195.5 -84.S

Multilateral 107.9 207.9 192.5 231.9 206.5 291.1 406.1 262.5 199.9 450.2 436.3 431.4 294.0 226.1

of which: IBRO 35.0 62.2 96.5 123.5 202.7 220.2 254.3 241.0 260.0 362.5 305.3 292.2 16S.4 115.4

Bltateral 636.9 886.S 541.2 180.2 159.1 200.6 184.2 279.5 254.0 -183.1 86.7 -1S.1 65.7 -306.0

Not IMF 152.4 164.4 442.4 119.2 135.9 73.0 -256.7 -108.5 -81.7 -74.0 -227.8 -171.3 -164.2 -4.6

Private Sources 366.6 59.9 606.3 -12.6 607.6 109.4 56.0 5.2 24.6 -16.2 -116.2 22.4 49.6 129.2

1/ Excludes military debt.

2/ Includes amortization on NLr public debt including IMF.

OEDT SERVICE ASWTWUS..................... ......................................................

1987 1968 199 1990 1tt 1992 199 1994 1995

PrincipAl Repoyu_nts (NLT)INultilateral 243.6 464.9 358.7 322.1 339.3 434.5 494.3 S27.3 566.7

Of Wchs IIIRD 164.2 210.6 227.0 225.9 239.1 325.5 385.6 408.2 438.6

Bllaterol 110.S 162.7 561.3 423.1 499.S 437.4 605.5 943.6 108.7IIF (Repurd.es) 315.4 233.8 268.3 227.8 171.3 164.2 177.S 97.7 4.7Privat* 326.7 226.1 330.0 431.7 292.6 366.4 220.6 33S.7 332.S

TOTAL 996.2 1087.5 1518.3 1404.7 1302.8 1402.5 1497.9 1904.3 197.6

Interest Repe)luflts (NLT)Nultiltteral 235 314 349 388 423 456 477 490 503

Of which: I3RO 182 246 276 306 331 356 369 374 380

Iilateral 217 537 577 672 728 758 719 763 691

INF 69 72 66 56 42 29 17 6 1Private 307 277 304 253 239 24 271 306 376

TOTAL 827 1199 1296 1369 1432 1488 1484 1564 1S70

Key Ratios (CLT)Interest ;S 14.28 17.2X 15.88 15.08 14.38 13.S 12.3X 11.8X 10.88

00A/XoS 333.58 284.2x 245.3X 22S.OX 208.3X 192.08 177.18 162.9X 149.68Net Oisbursaaents/lnterest 53.0X 33.18 13.6X 13.1X 18.7X 16.S8 12.48 7.2X 2.88

Net Tromfers/GDP -2.38 -4.2X -538 -5.2 -4.6 -4.S -4.28 -4.3X -4.18

IBRO Debt Service/Totsl DSAfter Debt Relief 18.78 19.88 17.88 19.28 20.9X 23.68 25.38 22.68 23.0X

Before Oebt Relief 9.78 13.2X 13.38 12.68 13.2X 16.68 19.18 18.SX 18.38

I0 n

- 44 -

ANNEX E

LETTER OF DEVELOPMENT POLICY

AND ASSOCIATED POLICY MATRICES

- 45 -ANNEX IIPage 1 of 8

November 1, 1988

KINGDOM OF MOROCCO

STRUCTURAL ADJUSTMENT LOANLETTER OF DEVELOPMENT POLICY

(nofficial Tasion of FrEnc Version)

Dear Mr. President:

1. The current outlook for the Moroccan economy is more promising thanit has been at any other time since Morocco began its stabilization andadjustment programs in 1983. The country's external and domestic deficitshave been greatly reduced in comparison with the levels reached in the early1980s. Ongoing restructuring programs aimed at improving the performance ofthe major economic sectors, chiefly agriculture and industry, are beginning toyield results.

2. Key reforms in other sectors such as education, public health andpublic enterprises, now permit an improved allocation of capital expendituresin line with development priorities, together with the restructuring andrehabilitation of enterprises. All these efforts have contributedsimultaneously to increasing the production of goods and services, improvingthe efficiency of resource utilization, and widening access to social services.

3. The progress realized since 1983-oftentimes in difficultcircumstances-in restructuring the economy and reducing financialdisequilibria, is undeniable.

4. However, this progress has not been as pronounced as the Moroccanauthorities had initially hoped owing to the constraints imposed by publicfinance, the debt service burden, and the country's limited foreign exchangereserves.

5. Thus, notwithstanding the fruitful efforts made to reduce arrearsowed by the Treasury to public and private enterprises, the continuingweaknesses in the realm of public finance have not yet made it possible toachieve the level of liquidity necessary for the sound execution of publicexpenditure programs and support for economic activity. Moreover, thecompression of the investment budget has inevitably disrupted the execution ofcertain essential programs designed to boost the productive capacity of theeconomy, in particular in the areas of infrastructure and irrigation, and tofurther improve access of the growing population to public services,especially as regards education in rural areas and in public health. Inaddition, service of the country's external debt represents an excessive drainon per capita income, while limiting Morocco's normal access to international

- 46 -ANNEX IIPage 2 of 8

capital markets, despite the efforts made by His Majesty's Government toensure that the country remain in good standing with its creditors. Finally,the low level of Morocco's foreign exchange reserves wakes it difficult toabsorb the external shocks re-sulting from the vicissitudes of external factorsand intensify the efforts to restructure the national economy.

6. To ease these constraints and consolidate the foundation forsustained and lasting growth, the Government proposes to pursue itsrestructuring and adjustment efforts within a medium-term macroeconomicframework that reflects the objectives and priorities set forth in theOrientation Plan for 1988-92. A program of structural reforms in the areas offiscal policy, public investment, foreign trade, and external liabilitymanagement has been developed to achieve the macroeconomic objectives for the1988-90 period, as concretized by a selected number of indicators. Toimplement this program, the main components of which are detailed below, theGovernment requests the support of the World Bank in the form of a firstStructural Adjustment Loan (SAL). Insofar as the proper implementation andmonitoring of the SAL are closely linked to a set of institutional reformsdesigned to reinforce existing capabilities within the Administration, theGovernment also seeks the Bank's assistance in the form of a PublicAdministration Loan (PAL).

7. The Government commits itself to implementing the policies andactions described below and in the associated Attachments, in order to achievethe objectives of the program contained in this letter. In this context, itplans to conduct semiannual consultations with the Bank and the othercofinancing partners of the SAL to review the progress of the economy underthe reform program.

MEDIUM-TERM MACROECONOMIC FRAMEWORK

8. The principal medium-term macroeconomic objectives, in keeping withthe 1988-92 Orientation Plan, are:

- acceleration of GDP growth rates, renulting from improvements in thelevel and productivity of investment;

- application of fiscal and monetary policies consistent with theob-jectives of price stability and the financing of private investmentat a reasonable cost, with a view to ensuring a balanced contributionto savings and investment from the public and private sectors;

- further liberalization of foreign trade, supported by a flexibleexchange rate policy;

- elaboration of a forward-looking debt management strategy, includinga policy of indebtedness compatible with the targeted evolution ofthe economy, and permitting the adequate mobilization anddiversification of financial resources.

- 47 -

ANNEX IIPage 3 of 8

9. This macroeconomic framework, which has been the subject of detailedexchanges of views among the Government authorities, the World Bank and theother parties cofinancing the SAL, will serve as a performance milestone forthe semiannual consultations in the context of the proposed loan, the purposeof which will be to analyze setual results obtained as compared to agreedobjectives. In the event that divergences between the target and actualfigures were to jeopardize global macroeconomic equilibria, the Governmentwill take the necessary remedial actions.

10. In order to facilitate assessment of the economy's performance duringthe adjustment process, four key indicators have been selected that reflectthe overall strategy of the program, the figures for which are presented inthe Attachment. These indicators are:

(i) total gross fixed capital formation (GFCF) to GDP;

(ii) the ratio of total gross public and publicly-guaranteed external debtoutstanding to exports of goods and services;

(iii) the real growth rate of exports of manufactured products;

(iv) the level of net foreign assets of the Central Bank.

PROGRAM OF ECONOMIC POLICY REFORM

11. The accomplishment of the macroeconomic objectives expressed by thesefour indicators will depend on the implementation of a set of economic policymeasures in the areas of public finance, foreign trade and industry, externaldebt, and the promotion of private investment, all of which comprise theaction program supported by this first Structural Adjustment Loan.

Budgetary Policy

Fiscal Policy

12. Morocco is currently implementing a far-reaching tax reform that willprovide the country with substantial additional revenues and furtherrationalize the structure of incentives for private investment. The reform ofthe corporate tax has allowed increased flexibility and better control of thetax base as compared to the past. In addition, new procedures for settlementand collection will serve to accelerate the payment of corporation taxliabilities to the Treasury. These changes are already having an effect,insofar as 762 of the estimated proceeds of this tax had been received as ofMay 31, 1988, compared with 41X as of May 31, 1987.

13. With regard to the reform of the Investment Codes, the duration andrate of exemptions granted to enterprises have been reduced, although the fullimpact of these measures on the Government budget will not be apparent forabout five years. At present, revenues which benefit from either partial orfull fiscal exemptions, however, have been made subject to the NationalSolidarity Levy (PSN) at a rate of 25% (formerly 10), which should result inan appreciable increase in receipts from this tax.

- 48 -

ANNEX IIPage 4 of 8

14. Furthermore, with a view to broadening the tax base and enhancing theequity of the tax system, the Budgetary Law for 1988 has repealed certainexemptions allowed hitherto for some financial institutions.

15. The lowering of corporate income tax rates should lead to higherproductivity of private investment and an expansion of its overall volume,while harmonization of tax incentives will have the effect of reducing theaverage cost of capital and will help to attenuate the existing distortionsamong the various types of investments.

16. The introduction of the VAT on April 1, 1986, as an integral part ofthe Moroccan fiscal structure, also represents an important milistone towardsthe modernization of the existing tax system, particularly considering thatthe previous eleven rates of the ad valorem tax on products and services (TPS)have been replaced by only five rates. As of January 1, 1988, the low ratesapplied to certain products and services have been raised, while some productsformerly exempted are now subject to the tax. These measures have served tomitigate even further the existing distortions in the VAT rate structure. Theproceeds of this tax are rising rapidly, its yield as of end-August 1988 being23f higher than that for the same period in 1987. In order to achieve greatereconomic neutrality, one of the major advantages of the VAT, the Governmentintends to examine the possibility of further simplifying the rate structure.

17. To support these reforms, the Government has undertaken a large-scaletraining program with the aim of producing a highly-skilled and multifacetedcorps of tax inspectors. In this vein, the Government has launched adecentralization policy to facilitate the identification of taxable income andassets, and to speed up tax administration.

18. The Government will impleient the following measures in order toincrease the yield and productivity of the tax system:

(i) the draft legislation instituting the Personal Income Tax (IGR) whichreplaces the direct schedular tax system will be submitted to theHouse of Representatives during its October 1988 session.Introduction of the IGR will, in a relatively short period of time,yield additional budgetary revenues compared to the present system,as well as lead to the simplification of the direct tax system andgreater fiscal equity. The IGR will apply a single progressive scalethat will take the place of the diverse schedules of the past,thereby eliminating the distortions between taxpayers with only onesource of income and those with more than one. The system ofdeclaration on which the tax will be based, together with theconsolidation of the various tax schedules, will enable bettermanagement of the tax base. Application of these measures is an areawhere the technical assistance envisaged under the PAL will beutilized;

- 49 -

ANNEX IIPage 5 of 8

(ii) the General Code for Standardized Accountint, the draft version ofwhich is now ready, will be submitted to the Rouse of Representativesas soon as possible in order to consolidate the standardization ofaccounting operations. The draft law regulating the accountingprofession will also be submitted to the House of RepresentatiLves asearly as possible;

(iii) in order to further rationalize the functioning of the tax system, astudy will be undertaken, the purpose of which is to:

- prepare, with due regard to the specific features of the Moroccaneconomy, recommendations regarding regulations to govern comnercialtransactions conducted on a cash basis, in order to enhance thetransparency of business operations and reduce the likelihood ofevasion;

- accelerate payment of corporate taxes, insofar as the present systemdoes not require payment of the first installment until three monthsafter the close of the fiscal year.

Public Investment

19. The Government is aware that the macroeconomic objectives require theshare in GDP of gross fixed capital formation of the consolidated publicsector to increase significantly, from 3.5S to around 4.22. Within thecontext of the 1988-92 Orientation Plan, the SAL envisages monitoring theexecution of the capital expenditures of certain ministries related to thoseinvestments that will help speed the country's economic and social development.

20. To this end, and with regard to the capital budget, the Governmentintends to adopt the following measures:

(i) during the preparation of the Budgetary Law, the Government willdiscuss with the Bank the annual investment Program to be carried outin the context of the SAL. This discussion will focus, inparticular, on the contents and implementation of the TargetInvestment Program (TIP) for 1988-89 (see attachment).

Performance indicators will be used to reflect the improvement expected interms of commitments, payment orders, and payments. A working group, underthe auspices of the Budget Directorate and comprised of representatives of theMinistries of Finance and Plan, will be created to monitor the TIP. Thisgroup will provide the World Bank with the information, on a quarterly basis,necessary to monitor these investments.

(ii) budgetary procedures will be improved to permit expeditious approvalof work programs, pending the introduction of the new nomenclaturethat will make possible the elimination of most of these programs.Technical ministries will be given greater flexibility to manage

- 50 -

ANNEX IIPage 6 of 8

appropriations. In particular, expenditures committed in the courseof the year, which do not receive the General Treasury (TG) approvalfor payment during that year, will be automatically carried forward

s to the next year. This will enable the technical ministries to startor continue works for which comuitments have already been made.

(iii) a detailed plan will be drawn up for implementing an integratedbudget management information system, which will include definitionsand specifications permitting the interface between the differentinformation systems in existence or under preparation.

(iv) as regards gulic enterprises, other than the ORMVAs, budgetarytransfers for their investments will continue to be governed by theprinciples established under the public enterprise rationalizationprogram.

(v) the current foreign exchange risk system, under which major losseshave resulted in the buildup of payment arrears to financialintermediaries, will be modified in consultation with the Bank, so asto limit the drain on the Treasury in the future. Existing arrearswill be cleared by direct payment or through the issuance ofinterest-bearing Treasury Bonds.

Trade and Industrial Policy

21. The pronounced expansion of exports of manufactured goods included inthe macroeconomic framework presumes intensified participation by the privatesector, especially in the form of increased industrial investment in thesectors possessing a comparative advantage. In this vein, the Governmentintends to improve the environment of the industrial sector and to continue toliberalize foreign trade.

22. To this end, the Government intends to take the following measures:

(i) to progressively eliminate recourse to protection based onquantitative restrictions, the Government has transferred 544 tariffpositions, 512 of which relate to strictly industrial products, fromList B co List A with the publication of the General Import Programs(PGI) for 1987/88. As a result, only 252 of domestic indtstrialproduction is currently still protected by quantitativerestrictions. Upon publication of the 1989 PGI, additionalindustrial products will be transferred to List A, after adoption ofthe customary ancillary measures;

(ii) the industrial sector is presently confronted with economic orinstitutional obstacles that constrain its development. To improvethe environment in which Moroccan industrialists operate andfacilitate the pursuit of liberalization, the Government willundertake a study to identify ways of easing the constraints whichhamper the development of the Moroccan industrial base and the

- 51 -

ANNEX IIPage 7 of 8

expansion of manufactured exports; moreover, the study will examinethe role that the Ministry of Trade and Industry could play in thisregard, in the context of a more liberal economy. Therecommendations of this study will be discussed with the Bank andimplemented as part of a wider program which could eventually benefitfrom Bank support;

(iii) when the International Harmonized System is adopted onJanuary 1, 1989, the Moroccan customs nomenclature will be amended soas to limit tariff positions to eight digits;

(iv) with a view to reducing dispersion in nominal protection and toreduce the present distortions in resource allocation, an actionprogram to rationalize the tariff structure will be drawn up, basedon the following principles:

- a reduction in the number of customs duty rates;

- application of the same duty to similar products, so that the newnomenclature can be reduced progressively from eight to six digits,according to a schedule set by the Ministries of Trade and Industryand of Finance.

In addition, the principle of using the customs duty as an instrument ofsectoral rather than of fiscal policy will be instituted.

(v) in the context of the draft framework law on Foreign Trade that willbe submitted to the House of Representatives in the course of 1989, asafeguard system based on the following principles will be proposed:a transparent procedure, with all parties represented, based on thecosts and benefits to all Moroccan economic agents, providing for theestablishment of a temporary protection mechanism, in accordance withMorocco's international commitments and the national interest. Anannual report on the status of protection, setting out the costs andbenefits of existing or envisaged protection measures during theyear, will be issued. Existing mechanisms, which will continue to beused in accordance with the principles presently in effect, will berevised when the safeguard system is adopted.

External Liability Policies and Management

23. The Government seeks to achieve progressive improvement in theexternal debt indicators through the sustained growth of the economy and ofexports. It also proposes to diversify its sources of external financing,improve the debt profile, and give preference to non debt-creating financing(direct investment). In the immediate future, the Government's priority is toimprove external debt management so as to fully anticipate changes in thestructure of the debt and the evolution of debt service obligations. This

- 52 -ANNEX IIPage 8 of 8

will facilitate the Government's analysis of financing alternatives forbalance-of-payments requirements by taking into account different hypotheseswith respect to interest and exchange rate variations, and contribute to thesustained improvement of the country's liquidity indicators, which willstrengthen the Government's position in its relations with Morocco's externalcreditors.

24. In the context of the action program implemented by the Governmentwith technical assistance from the World Bank, the Government intends toimprove the procedures for data gathering and processing on a consolidatedbasis with regular updating covering all short, medium and long-termcommitments contracted or guaranteed by the State. The Government alsointends to set up a system for inventorying private nonguaranteed debt withmaturities of one year or more.

25. In the context of the SAL, the Government intends to take thefollowing measures:

'i) institute, by circular, the obligation to promptly register with theTreasury Directorate all external financing contracts on behalf ofthe State or guaranteed by the State or by the Central GuaranteeFund, and to regularly report all data relating to externalindebtedness;

(ii) establish a coordinating committee under the auspices of the TreasuryDirectorat* and consisting of representatives of the Ministries ofPlan and of Economic Affairs, the Bank al-Maghrib and the ExchangeOffice, with a view to improving the inventorying and collation ofexternal debt. In addition, the Treasury Directorate will send theBank an annual summary table setting out all indebtedness, includingrecourse to nonguaranteed private debt with maturities of more thanone year, and the available data on short-term debt.

26. The Government considers that the policies and measures described inthis letter will enable the country's economic and social objectives to beattained. To facilitate the smooth implementation of the program, theGovernment hereby renews its request for an initial Structural Adjustment Loan.

Respectfully yours,

Minister of Finance

- 53 -

AMnex IAttachment IPage 1 of 4

STRUCTURAL ADJUSTMENT LOAN

POLICY MATRIX

Reform of Budget Pollce

(Fiscal Measures)

…----Measures to be takenMeasures being taken/ Prior to release of the

Objective already implemented second tranche

Rationalization of Revision of profits tax Approval by the Council ofthe fiscal system by exemptions under the invest- Government of the draftexpanding the tax ment codes General Code on Standardizedbase, reducing tax Accounting and the draft lawrates, and enhancing Submission of the personal governing the accountingequity income tax (IGR) reform to profession

the House of Representatives

Increase in the rate of the Establishment and updatingnational solidarity levy of a single taxpayer(PSN) for tax-exempt identification file basedenterprises on an exhaustive census of

the taxpaying population

Reduction in the corporateincome tax rate from 45% to Discussions with the Sank40%. introduction of a on the findings of a studyminimum tax paywent, and on the regulation ofacceleration of payments due commarcial cash transactions

and the possibility of furtherElimination of tax exemptions accelerating payment of taxfor certain financial liabilitiesinstitutions

Increase in the zero-bracketrate below which no taxes arewithheld from wages andsalaries

Repeal of VAT exemptions forcertain categories of productsand increase in ratesapplicable to others

Increase in the TIC (domesticconsumption tax) on tobacco

79318/p0 - 10.30.88

- 54 -

Annex ItA,ttachmffent IPage 2 of 4

STRUCTURAL ADJUSTHENT LOAN

POLICY MTIX

Reform of 8udget Pol1ev

(bnvestment ExRenditures)

----- Measures to be taken -----Measures being taken/ Prior to release of the

Objective already implemented second tranche

Rationalization of Revision of budget Introduction of the newprocedures for nomencla.ure allowing invest- budgetary nomenclatureplanning, budgeting, ments to be monitored and and streamlining of workand imDlementing permitting better definition programsinvestment outlays of capital expenditures

Improved efficiency Preparation of an integratedin the management of budget management informationthe Government's systemcapital budget

Formulation of investmentprograms to be monitoredunder the SAL

Re-establishment of thecarry-over of budgetarycommitments to the next year

Preparation of an action plan Agreement on action planfor the implementation of an and implementationintegrated budget management timetableinformation system. includingdesign and specification forinterfaces with existingsystems under preparation

Establishment of a taskforce headed by the BudgetOirectorate to monitorcapital expenditures

Establishment of the Evaluation of progressobjectives of the Target in implementation of theInvestment Program (TIP) for TIP1988 and 1989 includingperformance indicators

79313/plO - 10.30.88

- 55 -AnDne, St

Page 3 of 4

STRUCTURAL ADJUSTMENT LOAh

POLICY MATSX

Trade and Industrial PolicZ

----- Measures to be takenMeasures being taken/ Prior to release of the

Objective already tmplemented second tranche

Rationalization of the Transfer of S44 tariff Transfer to List A of aboutincentives structure positions to List A. of 120 products at the time

which S12 are related to of the publication of thestrictly industrial products 1989 PGI (General Import

Program)

Agreement on the contentsof the PGI for 1990

Simplification of the Agreement in principle on Implementation of thetariff system and adoption of the International International Harmonizedtrade procedures Harmonized System System at the 8-digit level

Consolidation of the stamp Adoption of the principleduty and special import tax that customs duties areinto a single duty to be used as an instrument

of sectoral rather thanfiscal policy

Agreement on a program torationalize the tariffstructure in accordance withthe following principles:reduction in the number ofcustom duties. with samecustoms duty being appliedto similar products. andgradual consolidation ofthe nomenclature from 8to 6 digits

Promotion of exports Lifting of price controls Discussion of theand industrial on 3- and 4-star hotels reccaulendations of theinvestment study on industrial sector

and export developmentStrengthening of the currentexport insurance scheme

Liberalization of exchangerestrictions on foretgninvestments

Authorization for Moroccanworkers abroad to holdconvertible dirham accounts

Establishment of a Discussion of the report Preparation of the safeguardtransparent and submitted by the committee system within the contextdurable framork for on the simplification of of the draft frameworktrade policy international trade procedures law on foreign traderegulations

Discussion of the recom enda-tions of the study on

79315 - p.11 simplifying internattonal10.30.88 trade procedures

- 56 -

annex 11Attachment IPage 4 0f 4

STRUCTtIRAL ADJUSTMENT LOAM

POLICY MATRIX

External LiabilitZ Management Policy

----- Measures to be taken -----Measures being taken/ Prior to release of the

Objective already implemented second tranche

Strengthening external formulation of an action plan Issuance of a circularliability management establishing a computerized mandating the registration

external debt managemnt of all external financingsystem contracts and the

transmission of allexternal debt data

Restructuring andstrengthening of theinstitutions responsible forexternal debt

Establishment of a coordina-ting comuittee to ensure theexhaustive inventorying andcollation of external debt

79318/pU210.30.88

- 57 -

Annex IIAttachment 2

MACROECONOMIC INDICATORS TO BE MONITRED UNDER THE SAL

1988 1989 1990 1991 1992

Total Gross Fixed CapitalFormation/GDP 19.02 19.52 20.02 20.52 21.02

Gross Public & Publicly-Guaranteed External Debt/Total Foreign Exchange Earnings 2.8 2.6 2.4 2.2 2.1

Real Growth Rate ofManufactured Exports 122 102 10% 102 102

Net Foreign Assets of theBank al-Maghrib (US$ million) 450 850 1,050 1,200 1,400

7931B p.13

10.27.88

-58 - ANNEX II

Attachment 3

Page 1 of 4

MOROCCOSRUCTURA LOAN

TARGET NVESM14ENT PROGRAMh ClP)of 1988 constant dilams)

1988 1989 1990 1991 1992

Total Authorizations:- Arrears (beginning of year) 1,326 1,362 1,262 946 1,035- Carry-over 1a 1,769 1,719 1,998 2,092 1,627- New Authorizations 4,593 5S665 5,912 6.303 6.666

Total Authorizations 7,688 8,745 9,172 9,341 9,328

Commitments (CED) 7,165 8,307 8,714 8,874 8,862

Payment orders (visas TG):- Arrears (beginning of year) 1,326 1,362 1,262 946 1,035- New Issues 4.121 4.948 5.361 6,301 6.719

Total Payment Orders (visas TG) 5,447 6,309 6,622 7,247 7,754

Disbursements (Payments TG)

Arraars (end of year) /b 1,326 1,362 1,262 946 1,035Disbursement New Issues 2.759 3,686 4414 5266 5 611

Total disbursements 4,085 5,047 5,676 6,212 6,646

Arrears (end of year) /b 1,362 1,262 946 1,035 1,108

GFCF of the TIP 4,121 4,948 5,361 6,301 6,719

Commitments/Authorisations 931 952 952 95S 951Disbursements /Commitments 57% 611 651 702 752Growth GFCF of TIP - 20 8 18 7Payment TG (rate of growth) - 24 12 9 7Growth disbursements

Arrears (number of months) 4 3 2 2 2

/a Difference between total commitments (CED) of the preceding year and totalpayment orders (TG) approved.

/b Payment order dielays from the preceding year are carried over in the formof payment order arrears (TG) in the following year. Annual levelsrepresent a decline in monthly payment delays. In 1987, payment orderdelays (TG) amounted to DR 1.5 billion out of a total of DR 3.5 billionworth of payment orders, equivalent to about a five-month lag.

's ,"q ~;O

-0 qp~~ q

44 4~~4 .4 . 4

.a ................ -.... ---------- ------------- --- -----

-- -- - -- E--- -

a. u~~~52 a a -rI - 9 ug t e

qa ~~~a E a a a I -

a F - .- - -- - -- - - ---- -- -- - -- - ---- ---- -

z- '- -- -- -- -- ----,;-- -S£ +_

-- ------ ---------- ---------- _ _. __............. .__.........._._...._._.. .___._...................... _._...... __I I~~~~~I

--- -- ----- - -.---.--.-.-- .-- - --_ - -

--------------- ---------------- - ----------------------- ---- -----T --i c

-~~ ~~~~~~~~~~~~~~~~~~~~~ ---- C----

I g ftfi , ft W

l- -

- 61 -ANNEX IIAttachment 3Page 4 of 4

PROJET POUR L'AJUSTENENT STRUCTUREL,POBRAIIUE p'INVESTIlSEENTS CISLES IPIC)

(I9ilians do oH noostants 1986) 'a……............... -. __ _____ __._._

* * 1990 i .... . ... . ....... ... . .................. . .

CREDITS DISPONI8LES ! DECAISStMENTS TB-................. VISAS TS! !- ---------------------- ENA- ! . ....

NINISTERES !lnstanca Reports CP Total SEMENTS ------------------------------ Instance do Painnts Total! i$fint Credit' Instotnces ! Notival. -------.- aiuaut!! n-I !dt iaileant Visat Total Visas n-I n

n-I Nouveoux Eoistionsi iII) (2) t(3) (4) (4) (9) (9) (10) (13) (14) (15) (l1)

!ASRICULtURE ! !

!Invsletsie55nts PlC! 392 555 1.109 2,747 2,609 382 1,624 2,007 1,338 362 287 1,720!Transferts EPs !autres Invostis'e.

!TRAVAUI PUBLICS i

Itvstilsslosnts PlC, 452 480 2,0S5 2,907 2,838 452 1,962 2,314 !1,531 452 331 1,984!Trnsterts EPs!Mutnre lnvestisu.!!!

TotalWMt SPORTS

!Investiswunts PIC! 23 46 117 87V 178 23 117 140 97 23 20 120TTranisfrts EPs!Transfarts DCA 130)! (30)! (30)1 (30)MAutres Invrstiru.,

Total IIMEUCATIOII !!

Ilnvostisssaents PIC' 314 712 143c 2,444 2,341 ! 314 1,324 1,639 i 1,090 314 234 1,404!Ai;rNs Invnstir#.!! !!!

Totil i i ! i'SANTE

!lnvestissemnts PIC, 61 139 328 528 i 502 ! 61 291 352 i 240 61 SO 301hutrns Investisse. ! ! !

Total !!NASITAT

lnvestisloumnts PIC! 29 65 167 260 247 29 144 173 120 29 25 149!Autrs Invatinue.

Total ! ! !

!,UTRES RINISTERES

!Transferts E,P i i a a!Mutres Invntisse. ! a

Total I a a a I

!TOTAL INVESTISSEN.! i a a a,a__............. a a a !I,vnttir"Aent PIlC! 1,262 1,999 5,913 9,173 0 ,716 ! 1,262 5,362 64624 4,416 1,262 946 $5678!Transterts EP i aa Autres Invntiss. ! ! a a a

Total ! 9,173 8 9,716 i 1,262 5,362 64624 ! 4,416 1,262 946 ,6478

lTRES DEPENSES i i a a aa*._........__._ a a a a a'Equipmmnt!D ett litar i

Totala aaa

itOTAL RUIET i a_... _ . ._._.. ... . .......... . ._, ._.....… . ..

- 62 -

ANNEX m

SU PPLEMENTARY PROGRAM DATA SHEET

- 63 -

ANNEX IIIPage 1 of 2

MOROCCO

STRUCTURAL ADJUSTMENT WAN

Supplementary Program Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare program: about five months

(b) Responsibility for program preparation: Ministries of Finance, Plan,Economic Affairs, Commerceand Industry, Bank al-Maghrib

(c) Project first identified by Bank: July 1986

(d) Bank appraisal mission: June 1988

(e) Negotiations: October 1988

(f) Planned date for effectiveness: December 1988

Section II: Special Bank Implementation Actions

None

Section III: Special Conditions

(a) Conditions of Board Presentation, Release of First Tranche (US$100 million)

A number of significant policy measures were implemented in thecontext of the SAL prior to Board presentation. These include anextensive restructuring of the fiscal system with the promulgation of theinvestment codes, revision of corporate tax rates, presentation of a moreequitable personal income tax to Parliament, and adjustment of VAT rateson selected product categories; rationalization of public investmentprogramming and budgeting, including agreement on the contents and levelof the target inveatment program for 1988-89 and simplification ofbudgetary management pocicies and systems; continued trade liberalizationand export promotion with the elimination of import licensing requirementson over 500 products, the repeal of existing exchange restrictions onforeign investments, and the strengthening of the export insurance scheme;and the elaboration of an action plan establishing an external debtmanagement system in collaboration with the Bank.

- 64 -

ANNEX IIIPage 2 of 2

(b) Conditions of Release of Second Tranche (US$100 million)

Overall Performance

Satisiaction with the general progress of the program on the basis ofthe evolution of four key macroeconomic performance indicators for 1988/89.

Specific Actions

1) Fiscal Policy

- Approval by the Council of Government of the draft law instituting anational chart of accounts, as well as a regulatory frameworkpertaining to the accounting profession.

ii) Public Investment

- Implementation of the Target Investment Program (TIP) by ministry for1988 and beginning 1989.

- Preparation of an action plan (including implementation timetable)"stisfactory to the Bank for the interface between budgetary

management information systems of all relevant ministerialdepartments.

iii) Trade and Industrial Policy

- Repel of import licensing requirements on products corresponding toat least 120 tariff positions.

- Preparation of an action plan (and timetable) satisfactory to theBank for the simplification of the customs nomenclature and tariffstructure.

iv) External Debt Management

- Publication of a circular satisfactory to the Bank mandating theregistration of all external financing agreements on public andpublicly-guaranteed debt.

- 65 -

ANNEX V

STATUS OF BANK OPERATIONS IN

MOROCCO

- 66 -

AiNtX IVPage 1 of 2

STATUS OF RAUM OPEtATIS IN fMCCO

A. STATEMENT (IF BAIN LOANS ANtI IDA CREDITS (As of Santember 30 1Oaa

Credits

5 Credits() clos 4S. 16

All cosd for MOOCCO

TOTAL nuber Credits * O USS million Amount

Loan CredIt (Less CantOllational|JMNb3r liar hrroaer PunkA undgseurcod

4? Loans(s) closed 1,857.61

L16020-NYC 1978 MROCCO KARIA-TISSA RAtUFEO 40.00 13.81 12/31188(R)L1GGl0-myc 1979 OROCrCO EDUCTION IV 88.00 12.58 063/8()LC8480 YC 1980 MOROCCO RURL DEVT.Lt=OS 18.00 4.60 12/3I/88(R)L19440-MYC 198 MOROCCO UBAN .II 15.00 U.49 322/31/89

LZOOO-NlYC 1981 MOROCCO PTEP 6e e5 23/0R

tw -Y 191 NM WATER SUPPLY fit 78.00 29.62 12/3/8)L2082-NYC 192 MOOC SMALL SCALE IND It 30.00 10.10 06/3/8)L2100o-MC 198 NCEO A G * I ATLAS 16.00 8.69 06/30/9)L21w00-MYC 1il986 N UR IFORESTRY PROJECT 15.50 7S.52 0/30/9(L2149ODMYC 1962 MOROCCO EDUCATION V 38.00 7.32 03/3WtoL22I?C-MYC 198I MOROCCO AG.OEV.UTIIES 22.00 16.18 12/31/8

TOtAL2245 YC 1983 MOROCCOUR AN ilI N 60.00 14.03 12/31/89L22530-MYC 193 t MOCCO SMALULED.I1111. 34.00 25.9 12/31/89L22540-MYC 1983 MOROCCO 20 IV 3 6960L2M70-MYC 1983 CO nvl76.60 26.58 12/31/89cm)L22M2-MYC 193 IOC PET.EXPL. & APPRISA 65.20 .2? 06M/30/8(R)

L24?90-NYC 1985 MOROCCO ~~~~~~~FEC/IEMICIPALITIES 16.00 2.08 06/30189ot4790-MYC IM milmrra VW. TIN. 3 27.10 14.12 12/31/90

L21480-NYC 196 MOROCCO EL9C.MECN.tND 25.10 1.01/19L25080-MYC 1983 iMIROCCO1012319

L25720-MYC ~~~~~~~~~~~, ~JERAIA COAL 27.00 18.55 06/30/91L25720-mc 1983 MNOCCO RHEALTI DEVELOPMENT 28.40 25.25 12/31/91

L26360-MYC 1986 MORCCO LARE IRROm. IMPROVE 46.00 4.10/09L265 0~My 198 MOR CCOPO RT PROJECT 22.00 16 .06 06/30/91

L26640-MYC 1986 MOCO EDUCATION SECTOR I 150.00 38.29 12/31/88LM73O-MTC 1986 MOROCCO CUCA VI 120.00 4.00/19L2r70M-xyc 198? MOpROCCOTRIIG t2.0 5 0/19L27980-MYC 198? jMOrOCO 122 21.12 12/31/92

L2800-MC 1987 MOROCCO ~TELECW6SJNCATIONS 1 116.00 115.89 12/31/94L,28060-14TC 1987 MOROCCO IND.EXP. FINANCE 1 28.00 20.76 12/31/95L28061-YC 198 MORCC IN0D.Exp. FiINAE 1 3.00 3.00 12/31/95L28062*mC 198? -MOROCCOt- INO.EXP. FlINANCE I 7.00 4.74 12/31195L28063-NYC 198?, MOROC= IND.EXP. FINANCE 1 14.50 8.21 12/31/95L28M6-NTC 198? MOROCC IN0.EXP. FINANCE I 2.50 2.50 12/31/9SL28066-MYc ¶98? MOROCO IND.EXP. FZNANCE 1 2.00 1.64 12/31/95L2067-NYC 196? MOROCCO INO.EXP. FtNANCE 1 4.50 3.73 12/31/95L280Q7-MYC 1967 MOROCC 11ND.EEP. FINANCE I 8.50 7.05 12/31/95

L2=20-NYC 198 MOROCCO PERL 1 240.00 119.42 06/30/891.2=0-myc ige? MOROCCO NAnL. WATER StPPLY R 60.00 58.95 06/30/95

L28260*Mc 19?MIOC GRETER CASALANCA S 60.00 60.00 06/30/96L28850~NYC 988 MOROCCO AGR.SECTOR it 225.0016.0 3//9

L29100.NYC 1988 NOROCCO10-0 3319L295O-Myc 1988 NO=POWER DISTRIBUTION P 90.00 90.00 06/30/95

TOTAL oftr asns 39.S a 11*14.I1 23.00 23.00 12/31/94TOTAL taa~~~~~~~er Loans * 39 ~~~~~~~~1,964.20 1,098.96

TofA~ whd d3,821.81 45.16of ~~~diich repaid ~~~~~~804.8? .

NOTES:.....................

* not yet effectiveNot yet signed

* total Approved, Repayeants, and Outstanding balance represent both active ad inactive Loans and Credits.(R) indicates formally revi sed Closing Oate.

The Met Approved and Sank Repyents are historical value, Ott others ae market vatue.

The Signing, Effective, and Closing dates are based upon the Loan Department off ical data and are not takenfrom the Task BuEdet fite.1 n/Imlast - FM?c9

- 67 -

AI,NEX IVPage 2 of 2

fTtAENMlT OIreC tNVE MENt5 OIlUtCCO (As at Aucugt 31. 198f11

fiscal USS Millign.Year abglsor Tve of Ousinest Loan .Lt2 taatl

1962 Banque Nationale Oevelopment Financing 58.15W 1.54 S9.69-1978 oour ie Odveloppement1983 Econonique (BNOE)1985

1966 SociEte tmdustrielle Agroindustry 0.89 0.50 1.39de Lukus (Loan fullyrepaid; equity sold

1976 Marrakech Cement Cement Production - 1.28 1.28

1977 temara Cement Cement Production 4.75 3.57 8.321980

1979 Ciments dAfadir Cement Production 1S.16 15.16

1980 SO#UFER Mines 12.99 2.3S 15.34

1981 Casablanca Cement Cement Production 15.80 2.25 18.051982

196S frumat Agroindustry 8.30 8.30

1987 Crddit tmombilier et Financial InstitutionWiOteller (CtH) 2S.00- - 25.00-

1987 Setaf11 Texttle factory 3.27 1.33 4.60

1987 Cialgas-Maroc S.A. Agar Production 1.00 0.30 1.30

1988 83? (not committed) Textile 0.64 0.39 1.03

Total Gross Commitnwnts 144.31 12.82 1S7.13

Less Cancellations. terminations. repayments.sales and exchange a4djustments 41.03 -Lz. 46.71

Total Commitments held by IFC .L.LL33 JJLZU

of dwhich undisbursed 2.18 0.74 2.92

tFC net. Does not include participations from cammercial banks.

4791/p3October 12. 1988

- 68 -

ANNEX V

INSTITIONAL SUPPORT, TECHNICAL ASSTANCE

AND TRAING

-69 - ANNEX V

MOROCCO

STRUCTURAL ADJUSTMENTL

Instutional SUM Tehnic Assisa and 1

A comprehensive program of technical assistance and training hasbeen formulated in conjunction with the SAL in order to facilitate theimplementation of the various reform programs to be introduced under the SAL.Technical assistance and training will be financed under a separate loan(Morocco: Public Administration Loan) in an amount of US$25 million. Thelatter operation was prepared and appraised simultaneously with the SAL, andis scheduled for presentation to the Executive Directors in January 1989. Anindication of its contents is provided below.

(a) Assistance to the Directorates of Taxes and Customs and to theTreasury General for improvements in tax administration andcollection. The fiscal census will be reconstituted and data andstatistical records improved; tax records and information systemswill be computerized; tax auditors will be trained and a tax advisoryservice established.

(b) Assistance to the Ministries of Finance and Plan in improvingbudgetar and plauninz procedures. A new, harmonized budgetnomenclature will be introduced; the budget will be fullycomputerized; and project selection and appraisal methodsstrengthened.

(c) The ability of the Treasury General to monitor both current andinvestment expenditures will be enhanced through the computerizationof its operations and through staff training.

(d) Trade fadilitation assistance will be available to the Ministry ofTrade and Industry to improve: customs procedures, export/importforecasting, assessments of Moroccan competitiveness, and the impactof exchange rate movements on external trade flows.

(e) The Debt Division of the Ministry of Finance will be strengthenedthrough the development and implementation of a revised public deEtmanagement system. The exterral debt management system will becomputerized, an inventory of publicly-guaranteed debt will beestablished, and data gathering on the borrowing activities ofspecialized financial institutions and public enterprises will beimproved.

(f) The capabilities within the Ministries of Plan and of EconomicAffairs to analyze macroeconomic developments and statistics will bestrengthened through the provision of training and through thecomputerization of technical units.

78578/p42

- 70 -

ANNEX VI

PROGRESS UNDER EXISTING ADJUSTMENT OPERATIONS

- 71 -

ANX VlIPage I of 7

to

STRUCTURAL AO.1U5Th!T LOAM

Proarass under Existino Adiustment OperationsAi

Seeond Agricultural Sector Adtustmant Loan 128a5-M)

Key tonditignalitv a Progress to Dates*'

Policy Area condttionaltv Proereis to Date

Agricultural AFood Pricino a1aketn

- Cereals Sector - Implewent grain pricing & marketing reform. - 1st phase implemented (production quotas forincluding: subsidized flour; all other types of flour(a) finalization of new methodology for liberalized; new methodology for cereal price

calculating cereals floor prices; calculation).(t, production quotas for subsidized flour;(c) preparation a submission of draft legal

texts related to the deregulation of thegrain marketing system;

(d) settlement of arrears to millers;(e) elimination of quantitative restrictions

an imports of all grains (other thansoft wheat).

- Sugar Sector - Freeze producer prices in real terms for - Price freeze in 1987/88. TORs for deregulation1987/88 & 1988/89; adopt operational plan plan under review.to deregulate sector over 5 years.beginning July 1. 1988.

- Edible Oil - Establish & adopt action plan to deregulate - TORs for plan under preparation.Sector sector.

- Livestock - Eliminate price controls on bran and - Completed.Products sugarbeet pulp.

- Increase seasonal price differential for milk - Differential is 201 at present.to 20X in 1986/87; maintain at that levelin 1987/88 & Increase it further in 1988/89.

- Inputs - Close down 80S of fertilizer outlets meeting - Criteria defined.revised criteria (401 before 2nd Tranche).

- Comply with input subsidies phase out - Proposals under discussion.program designed in ASAL-S. with weightedaverage fertilizer price increase of 11lin 1988 & 1989.

- Achieve 75S collection rate for water - 2nd a 3rd tranche release conditionscharges in 1987 & 82S in 1988. respectively.

gMa stoy oEram

- Targeted - finalize & implement targetted - Proposal approved.compensatory compensatory programs.programs

A/ In view of their relevance to the SAL Program. progress under the two industrial sand trade policy adjustmentloans (both of wdich have closed) are Included in this annex.List is limited to tranche release conditionality.Other adjustment measures by policy area are also being followed under the loan.

- 72 -

Page 2 of 7

Selend Agreuiltural Spetor Adjugtment Loan teont dl

Policy Area egndiionalitx Proaress to Oate

Public Exnenditures Progra

- Investment - Allocate sufficient budgetary resources - Allocation of 13% in 1988. Allocations forbudget to MARA in 1988 & 1989. 1989 being finalized.

Sunogrt ServXies

- Extension - Create a separate division for Extension - Agreement in principle; not yet implemnted.in KARA.

- Livestock - Privatize animal health services - Privatization in 40 zones implemented.tn a total of 60 zones.

- Transfer artificial insemination services - Transfer completed in 20 zones.to private sector in a total of 35 zones.

External trade

- Trade - Transfer progressively over 4 years all - First group of products transferred inliberalization agricultural products to List A of the PGI. the 1968 PGI. Tioetable of transfer for

other products has been defined.

78573/p44

- 73 -

ANNIX VIPage 3 of 7

First Publie Enternris. Ratiinsliation Loan l20.-IoR1

Policy Area Conditinait PrFrress to Date

Financial Autonomy Agrement on financing structure for investment All measures agreed for 1987 were taken onof Pts; Pricing of ONt. ONCF and OSP. for the sam PEs, agreed timetable. Neasures for 1988 are underand Investment tariff increases were scheduled for 1987 and review. 1986 tariff increases for ONE andPolicy 1988 as well as the levels of budget transfers ONEP have already been taken. Budget transfers

to finance investment for 1987 and 1988. were within in agreed limits. There are soiedelays regarding the measures affecting ONCF.

Repayment of Agreement to repay all net arrears as Bulk of the arrears were settled in 198.Arrears Between inventoried for end-1986 before ond-1987. However. a second bond issue was needed InState and PEs No recurrence of arrears In 1987 and 1968 and scheduled for November. Some arrears

subsequently. have reappeared in 1987 and 1988. Remedialaction has been taken. Solutions have beenagreed as conditions of 2nd tranche release.

Government/PC A series of measures to improve the Overall progress under this heading isRelationships functions of the management, board of PEs satisfactory. Some difficulties have

and the establishment of contract-programs appeared in the discussions regarding thebetween Government and selected PEs. contract-program between the State and ONCF.Improvewent of the accounting sector. Detailed review and assessment are planneddevelopment of HIS. and audit for before 2nd tranche release.selected PEs.

Strenthening - Strengthening the role and functions of Both OCEPP and CIPEP are now playing a verythe Oversight the OEPP and of the CIPEP active and rational role in dealing with theFunction of management of the PE sector and on arbitratingthe State - Studies to be completed and action programs major issues. This is a particularly

designed before trawche release on portfolio successful part oe PERL. Two studies startedof the State: later than expected, and their results are* tariff of electricity. water; therefore behind appraisal schedule. These* restructuring studies on transport and slips in the program may delay by aboutmining sectors. 6 months the 2nd tranche release.

7853/Mp4S

- 74 -

ANNEX VIPage 4 Of 7

Edueatiejn Soetar Ratorm Proaram £26fi44ORe /

eAlhiSLhrAn CmndIitnnalitX Prggress to Date

faulty of Access

- Basic - Expand number of students admitted to Grade - Between 1986-88, about 4,500 additionalEducation of primary school. classrooms became operational; the promotion

rate increased from 491 tn June 198S to SS in- Expand lower secondary school intakes June 1986 and 61S in June 1987.

(Grade 6).- Graduates from teacher training institutions

- Promote basic schooling in rural areas, with (all of whom are assigned to rural areas)particular attention to female enrollment. comprised 591 and 57 of female teachers in

19s86/87 and 1987/88. respectively.

- Upper Secondary - Reduce Grade 9 promotion rate. - The promotion rate was reduced to 44% inand Higher June 1986 and to 421 in June 1987; newEducation - Establish new diploma for satisfactory diploma was Introduced in June 1986.

completion of basic education (Grade 9).

- Develop program of career guidance in - The study in career guidance is underway and Islower secondary schooling. expected to be completed by December 1988.

- Institute - New intakes grew by 2.41 from 1985/86 toControl of 1986/87. However, they grew by 21X fromAdmissions to 986/87 to 1987/88. In 1988/89. provisionalUniversity results from end-of-secondary examination showFaculties that new intakes will be maintained at 1987/88

level.

- No new credits were available In FY86 andFY87. However, the 1988-92 DevelopmentProgram includes significant expansion ofuniversity faculties.

- Certification not introduced. However. NOEintroduced new examination system for uppersecondary level in 1987/88.

- The study is underway and expected to becompleted by December 1988.

Efficienev of Education

- Strengthen - Reduce fellowships by 50 for first-time - Agreed eligibility criteria are beingStudent repeaters. strictly enforced.PerformanceIncentives - Suspend foreign fellowsbips for all studentsin Higher repeating more than 1 year.Education

- Develop and implement credit-hour system. - The study on credit-hour system is underway ancis expected to be completed by Oecember 1988.

/a Actions described in Schedule 6 of the Loan Agreement as co.Jitions of the 2nd tranche release.The 2nd tranche was released on September 3. 1987.

- 75 -

X VlPage 5 of 7

tducation Sector Qeinm Preram (tont6d)

Pale ifArMA Cendgi1tnal tX Prooress to Date

Public exoefAidiupe

- Restrain Growth - Iawse registration fees. - Introduction of registration fees delayed.of RecurrentExpenditures - Raise teaching hours. - Number of hours of instruction has beenen Hitgher increased by more than 20S.Education and - Revise stipend formula.StrengthenCost Recovery - Reduce fellowships. - Agreed eligibility criteria are being strictly

enforced.

- Reduce boarding provisions in university - Boarding facilities were curtailed in 1986/87.faculties.

- Contain Primary - Reduce unit costs of primary and secondary - Application of revised norms and designa Secondary school construction, resulted in 30X savings for conventionalSchool Costs construction at primary and secondary levels.

- Reduce school replacement requirements - Studies on replseement and teaching staffthrough improved school maintenance, ratios are underway and expected to be

completed by December 1988.- Reduce ratio of administrative to teaching

staff at secondary level.

- Strengthen - A system of incentives to encourage developmentPrivate Sector of quality private sclools was approved byParticipation Parliament in June 1987.in Education

78S78/p47

- 76 -

ANNE VIPage 6 oF I

Lndustrial and Trade Policy adiuattmnt Loas tITPAs I a I A^

(2277-MAR a 204-MAR)

Policy Area CsnditItnalitx Proaress to Oatn

Reform - Reduction of special import tax from 15X - Achieved with SIT and stamp duty subsequentlyof Protection to 5S. replaced in January 1988 by a aw across-

the-board import tax at a rate of 12.5%.

- Elimination of import licensing requirements - Achieved with products subject to licensingon an agreed list of products. requirements equal to 11 of total import value

and 342 of total industrial production.

Tariff Reform - Reduction of maximum nominal tariff ceiling - Achieved with tariff floor increased to 2.5.from 2002 to 45X. thereby reducing the dispersion of nominal and

effective rates of protection.

Exchange Rate - Maintenance of a flexible exchange rate - Achieved with exchange rate depreciation byManagement policy. about 182 in real terms since 1983.

Export Promotion - Elimination of statistical export tax. - Achieved.

- Elimination of export licensing requirements - Achieved on all products except barytine. leadon virtually all products. minerals, unrefined lead. and charcoal.

- Completion of a study on export marketing - Achieved with OCE export monopoly beingof fresh fruits and vegetables. subsequently abolished.

- Rationalization of special customs regime. - Temporary admission scheme was broadened toinclude indirect exporters; wastage rates wererevised; negative list for exporters wasabolished: on-site customs clearance wasintroduced; Opriarw export scheme wasintroduced; customs procedures were simplifiedresulting In a 50X decrease in processing time;global annual guarantees were introduced;ex post settlement of customs litigation wasintroduced; increase in foreign exchangeallocation to exporters; revision of existingexport code.

Foreign Trade - Creation of a Committee for the - Committee has been created and is fullyProcedures simplification of Foreign Trade Procedures. functioning.

Public Investment - Introduction of new investment budgetary - Achieved with further progress envisaged underProgram and techniques to keep comitments in line with the PERL, the SAL. and the PAL.Public available resources.Enterprises

- Updatirg of arrears matrix for publicenterprises, preparation of arrears reductionprogram and reduction of net governmentarrears by ON 1 billion.

A/ All conditions were fulfilled for the second tranches of ITPA-I and ITPA-II on September 19, 1984. andOctober 30. 1986. respectively. The two loans were subsequently closed on June 30. 1985. and November 20.1986.

- 77 -

ANNEX VIPage I of 7

Industrial and Trad. Poliev Adjustment Loans IITPAs I a -Ib (contd)

Policy Are& eendttlitv Proatess to Date

Tax Reform - Approval of enabling legislation to - VAT replaced TPS regime and major studies inrationalize existing sale tax (TPS) and fiscal reform achieved in the context of theelimination of anti-expert bias. SAL.

Price Controls - Liberalization of priCe controls on - Achieved.60 product categories.

Interest Rates - Increased flexibility In establishing - Maxima and minima were set *cr lending andinterest rates at levels dictated by deposit rates respectively on maturities ofmarket forces. less than I year; a subcoamission on interest

rate policy was created: and certain interestrate rebates were eliminated.

Developoent of - Increased competition between Treasury and - Elimination of obligatory placement and reserveMoney Market their borrowers for available supply of requirements on time deposits; direct issue of

loanable funds. Treasury bonds to the non-financial public.greater recourse of the Treasury to the moneymarket.

Efficiency of - Promotion of a more competitive - Allocation of credit ceilings to reflectthe anking interbank environment, deposit mobilization efforts; extension ofSector third-signature rights to commercial banks for

medium-term credits; completion of a study torevise bank comtissions.

Foreign - Establishment of a foreign exchange risk - Achieved but will be revised under the SALExchange Risk scheme. to mitigate further losses to the Treasury.

78S7B/p49

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