i'o~~~'L FILE COPY TO DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized Not For PublicUse ReportNo. P-1466-MOR REPORTAND RECOMMENDATION Public Disclosure Authorized OF THE PRESIDENT TO THE EXECUTIVEDIRECTORS ON A PROPOSEDLOAN TO THE Public Disclosure Authorized KINGDOMOP MOROCCO FOR A SEBOUII DEVELOPMENTPROJECT June 10, 1974 Public Disclosure Authorized This report was prepared for official use only by the Bank Group. It mnaynot be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Currency Unit =Moroccan Dirham (DH) DH 1 = UV$O.23 US$1 Ili 4.35 Exchangerate fluctuateswith weighted averageof major currencies;rate used in AppraisalReport is US$1 = DH 4.08 (November1973) FiscalYear: January 1 to December31 INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT REPORT AND RECOMMENDATIONOF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCOFOR A SEBOU II DEVELOPMENTPROJECT 1. I submit the following report and recommendationon a proposed loan to the Kingdom of Morocco, for the equivalentof US$32 million to help finance the Sebou II Development Project. The loan would have a term of 25 years in- cluding 5 years of grace, with interest at 7.25 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Morocco" (No. 329-MOR, dated February 7, 1974) was distributed to the Executive Directors on March 6, 1974. The report is based on the findings of an economic mission which visited Morocco in September 1973 and completed its analyticalwork in December 1973. The impact on the Moroccan economy of more recent increases in the prices of crude oil, which Morocco has to import, and phosphate, which is the country's main export, is assessed in a preliminary way in para. 11. Country data sheets are attached in Annex I. Past Developments 3. The overall performance of the Moroccan economy improved during the Second Five-Year Plan (1968-72),despite difficult political circumstancesin 1971 and 1972. Aided by favorable weather conditions and good crops in 1968, 1971 and 1972, real GDP growth accelerated from an average annual rate of about 3 percent in 1960-67 (barely above the rate of population growth) to 5.6 percent in 1968-72, thus exceeding the modest Plan target of 4.3 percent, and permitting real gains in private consumptionof about 2 percent a year per capita. At the same time, the implementationof prudent fiscal and mone- tary policies contributed to a significant improvementin Morocco's domestic and external financial situation, despite sh,rtfalls on planned capital in- flows from official external sources. Government saving and investmentslightly exceeded the modest Plan targets, while price stabilitywas maintained. Fol- lowing a decade of recurring deficits, the balance of payments registered size- able surpluses in 1969-72, mainly because of sharply rising receipts from merchandise exports, tourism and Moroccan workers in Europe. At the end of 1972, Morocco had accumulated net foreign assets worth $280 million, equiv- alent to 3.5 months' imports of goods and non-factor services. Performance in 1973 was affected by poor weather conditions; agriculturaloutput declined, and GDP increased only by an estimated 1.3 percent. The balance of payments continued to strengthen however, and by the end of 1973, net foreign assets amounted to $453 million. 4. Although the accelerationof GDP growth in 1968-72 was in part due to generally favorableweather conditions,it appears that the economy has moved onto a path of more rapid long-termgrowth. Agriculture,export industries,tourism and sectors with derivee demand (energy,transportation, communicationsand modern services)seem to have acquired a capacity for sustained growth, in part because of past investmentand training. In agri- culture, expansionof irrigation,increased 'Use of key inputs in rainfed areas (improvedseeds, fertilizersand timely ploughing) and a larger number of trained extensionpersonnel have caused faster output growth. In the export sector, the phosphatecompany (OCP) has regained leadership in the world mar- ket as a result of internal reorganizationand investment carried out during he Second Plan; the export company (OCE), which has a monopoly over Morocco's exports of fresh and processed foodstuffs,improved its management and market- ing, while a broad range of industries,including sub-contracting companies, built up a strong competitiveposition and sizeable sales abroad. 5. These achievementsshould not detract attention, however, from the serious difficultieswhich Morocco still had to overcome at the end of the Plan period. There was a need to revive private investment,which had stag- nated in 1971 and 1972 mainly because investors took a wait-and-seeattitude in the light of political developmentsand the expectationof new incentives and new regulationsregarding the associationof Moroccan and foreign capital in business ventures (Moroccanization laws). There was also a need to raise private saving which remained at an insufficientlevel, in part because of the relatively low returns on domestic financialassets. Finally, the Gov- ernment had to increase the investmentcapacity in the public sector by appropriatechanges in staffing and organization. 6. Difficult social problems also had to be tackled. Unemploymentre- mained at a high level, averaging 9 percent of the labor force nationwide and ranging between 12 and 16 percent in large urban centers. The urban popula- tion in substandardhousing was large and rising. Wealth and income differ- ences between cities and villages,among regions, and between rich and poor were widening, while about one third of the rural populationin the less fer- tile agriculturalareas was experiencinga slow decline in real consumption. Long-term Development Prospects 7. Recognizingthese problems,the Governmentbegan in 1971 to revise Its developmentpolicies, paying increasingattention to social objectives. Reflecting the changed orientations,the Third Five-YearPlan (1973-77)aims at: - sustainingreal GDP growth of 7.5 percent a year from 1973 to 1977, mainly through a 10 percent annual rise in exports and a doubling of investmentover the Plan period; and - improving the distributionof growth benefits,mainly through further land distributionto poor farmers and more emphasis on rainfed farming in agriculture,the association of Moroccan nationalswith foreigners in services and several industrial sub-sectors,large increases in Government spending on social services and low-cost housing, a mDre progressive tax system, and appropriate changes in wages aad the prices oifbasic agriculturalcommodities. Depart:ng from past financial orthodoxy, the Plan calls for an expansionary fiscal policy and a liberal credit policy, accepting the risk of less price stability. It recognizes that, in spite of faster economic growth, an in- creased public works program and continued emigration, unemploymentmay rise in absolute, and perhaps also in relative, terms because the growth of the working-age population is accelerating (from 2 percent a year in the 1960's to 4 percent a year in the 1970's). 8. In accordance with its export-orientedstrategy, the Plan gives priority to sectors contributingto exports (agriculture,fishing, mining, food processing, sub-contractingindustries, transportationand tourism). This priority is reflected in the allocation of Government resources to in- vestment in these sectors, as well as in the new measures taken in August 1973 to encourage industrial exports and private investment. Achievement of the Plan's export target will depend on further improvementsin some export sectors (fresh and processed foodstuffs, tourism and sub-contracting),and also on continued external demand. While external demand for phosphate is expected to remain strong, demand for other Moroccan goods and services may weaken over the next few years as a result of an economic slowdown in de- veloped countries following the recent increases in petroleum prices. On balance, real export growth, which exceeded Plan expectationsin 1973, will probably be somewhat below Plan targets during most of 1974-77. 9. The Plan proposes significant changes in investment strategy to increase labor intensity, and improve the situation of less favored groups of society and less developed areas of the country. Education, health and housing together receive a significantlyhigher share (23 percent) of planned Government investment than during the Second Plan (11 percent). Among sectors, the main change concerns agriculture. The Plan places less emphasis on dam constructionand favors equipment of existing irrigation areas, intensificationof rainfed cropping, improvementof animal husbandry and implementationof land reform. New incentivesfor private investment are less biased in favor of imported equipment than the previous system and encourage efficient operations and location in less developed areas. 10. In changing its investment strategy,Morocco is breaking new ground, and significant shortfallson planned investmentcould well be experienced in new priority sectors as a result of staffing and organizationalconstraints, which can only be relieved progressively. Shortfallswill probably affect rainfed cropping, livestock production, low-cost housing and tourism infra- structure. In addition, most of 1973 was lost for the revival of private in- vestment, since the new