Document of The World Bank FOR OFFICIAL USE ONLY ReportNo. 31879-MA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTERNATIONAL FINANCE CORPORATION COUNTRY ASSISTANCE STRATEGY FOR THE KINGDOMOFMOROCCO June 14,2005 Maghreb Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties.Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYAND EQUIVALENTS Unitof Currency=MoroccanDirhams(MAD) 1US$=8.490 MAD(February 2005) ABBREVIATIONSAND ACRONYMS AAA Analytical and Advisory Activity ICA Investment Climate Assessment AAEU Association Agreement with European ICT Information and CommunicationTechnology Union IDF InstitutionalDevelopment Fund AFD French Development Agency IFC International Finance Corporation AFDB African Development Bank IMF International Monetary Fund AIDS Acquired Immune-Deficiency JBIC Japanese Bank for International Corporation Syndrome KFW GermanDevelopment Credit Agency A L M P Active Labor Market Policy LIL Learning and Innovation Loan APL Adaptable ProgramLoan MDA Master Derivatives Agreement AREF Academie RCgionale d'Education et de MDG MillenniumDevelopment Goals Formation M&E Monitoring and Evaluation BAM Bank A1Maghrib MENA Middle East and North Africa BNDE Banque Nationale de DCveloppement MFA Multi-Fiber Agreement Economique MIC Middle Income Countries CAE Country Assistance Evaluation MLT Medium and Long Term CAS Country Assistance Strategy MOU Memorandum o f Understanding CASCR Country Assistance Strategy Completion MTEF Medium-Term Expenditure Framework Report N P L N o nPerforming Loan CEM Country Economic Memorandum OED Operations Evaluation Department CFAA Country Financial Accountability PARSEM Programme d'Appui a la Reforme du ' Assessment Systbme EducatifMarocain CIDA Canadian International Development PARL Public Administration Reform Loan Agency PEP MENA Private Enterprise Partnership - Middle East and CIH CrCdit Immobilier et HBtelier North Africa CNCA Caisse Nationale de Crtdit Agricole PER Public Expenditure Review CPAR Country Procurement Assessment ' Review PESW Programmatic Economic and Sector Work CPPR Country Portfolio Performance Review PIC Public Information Center D S Debt Service PJD Parti de la Justice et du DCveloppement DPL Development Policy Loan PPI Private Participation inInfrastructure DRI Dkveloppement Rural IntCgrC QAG Quality Assurance Group EC European Commission R&D Research and Development EIB European Investment Bank ROSC Report on the Observance o f Standards and EMBI Emerging Markets Bond Index Codes ESW Economic and Sector Work SIL Sector Investment Loan EU EuropeanUnion S M E Small and MediumEnterprise FDI Foreign Direct Investment SWAP Sector Wide Approach FSAP Financial Sector Assessment Program TA Technical Assistance FY FiscalYear TDO Total Debt Outstanding and Disbursed GDP Gross Domestic Product UN United Nations GEF Global Environment Facility U N D P UnitedNations Development Program GID Gestion IntCgrCe des DCpenses UNIFEM UnitedNational Development Fundfor Women GNFS Goods and N o n Factor Services WB World Bank GTZ German Agency for Technical Corporation WBI World Bank Institute IBRD International Bank for Reconstruction and WTO World Trade Organization Development Vice President: Christiaan Poortman Vice President : Assaad Jabre Country Director: Theodore Ahlers Country Director : Sami Haddad Task Team Leader: FeridBelhaj Task Team Leader: Joumana CobeidAbdelkader Allaoua ACKNOWLEDGEMENTS The World Bank Group greatly appreciates the collaboration with the Moroccan government in the preparation o f this CAS. The document benefited from open frank, thorough and thoughtful discussions with government representatives. The extremely extensive and open consultations conducted with the Moroccan civil society, Parliament, the Private Sector, Labor Unions, professional associations and academia allowed the Bank to get the full measure o f the country's challenges and achievements. The Bank team thanks profoundly all those who participated inthese consultations. The preparation o f this CAS has been a team effort, which included hands-on involvement and thorough contribution o f the extended Morocco country team, including our IFC colleagues, as well as staff fi-om other units o f the World Bank Group. Many team members and other staff made substantial contributions - in participating in CAS and country team meetings, retreats and sector consultations, in drafting parts o f this document, in providing comments and advice, in translating or reviewing translations into French-to jointly develop the strategy presentedhere. Although it i s impossible to name them all, they are all to be thanked and congratulated for their excellent collaboration and teamwork. As this CAS was prepared from the field, a special thanks goes to each o f the Morocco Country office colleagues for their commitment, team spirit, availability and substantive contribution. A special mark o f recognition i s in order for Jennie Litvack, Lead Economist, for her substantive input all through the CAS process, Najat Yamouri, Senior Participations Officer, who made it possible for the CAS consultations to be as successful as they were, Cecile Fruman, Senior Country Officer for her focus on the outcome-based nature o f this CAS, for Dalila Bouna, Program Assistant, who demonstrated constant commitment in managing the organization o f team meetings and editing the document; for Bachir Abdaym, Information Officer who provided around the clock technical assistance to the team inthe final stages o f CAS editing; for Micheline Faucomprk, Program Assistant, for the minute final editing and finalizing the CAS package for the Board o f the Executive Directors; and for Helene Talon, Senior Program Assistant, who translated the document into French. COUNTRY ASSISTANCESTRATEGY FORMOROCCO TABLE OF CONTENTS I COUNTRYCONTEXT . .............................................................................................................................. 1 A.Politicaland Social Context................................................................................................................ 1 B.RecentEconomic Developments ........................................................................................................ 2 11 . KEY CHALLENGES AND MEDIUM-TERM PROSPECTS ................................................................ 7 A. Country Vision. Government Program. and Outstanding Challenges................................................ 7 B.Medium-TermOutlook ....................................................................................................................... 9 I11 . MOROCCO-WORLD BANKGROUPPARTNERSHIP.FY2006-09 ............................................... 11 A.PastBank Assistance ........................................................................................................................ 11 B.KeyFeaturesofthe FY2006-09 CAS............................................................................................... 13 D.Bank Instruments.............................................................................................................................. 18 C. Strategic Objectives........................................................................................................................... 14 E.Partnerships....................................................................................................................................... 19 F.LendingScenarios ............................................................................................................................. 20 G.Results-BasedMonitoring andEvaluation ....................................................................................... 20 IV. MANAGINGRISKS ................................................................................................................................. 21 CAS Annex 2 - Results Matrix: CAS 2005-09 .................................................................................... 23 CAS Annex 1.Strategic objectives ...................................................................................................... 22 CAS Annex 3 -Morocco CAS Completion Report 2001-04 ............................................................... 33 CAS Annex 3B -Morocco IFC Program FY 2002-2005...................................................................... 64 CAS Annex 4 - CAS Consultations....................................................................................................... 65 CAS Annex 5 - Morocco: Country Financing Parameters.................................................................... 74 CAS Annex 6 - A Snapshot of Morocco's Business Environment ....................................................... 81 CAS Annex 7 - Morocco at a glance ..................................................................................................... 85 CAS Annex 8 - SelectedIndicators of Bank Portfolio Performance Management............................... 87 CAS Annex 9 - IBRD/IDAProgram Summary..................................................................................... 88 CAS Annex 11- Summary ofNon-lending Services ............................................................................ CAS Annex 10- IFC Investment Portfolio............................................................................................ 89 90 CAS Annex 12 - Morocco Social Indicators ......................................................................................... 92 CAS Annex 13 - MillenniumDevelopment Goals................................................................................ 94 CAS Annex 14- Morocco Key Economic Indicators ........................................................................... 96 CAS Annex 15 - Morocco Key Exposure Indicators............................................................................. 98 CAS Annex 16 - Operations Portfolio (IBRD/IDA and Grants) ........................................................... 99 TABLES : Table 1: Selected Macroeconomic Indicators........................................................................................... 10 11 Table 3: Evolutiono f Core Performance Indicators for Pillar I............................................................... Table 2: External FinancingPlan.............................................................................................................. 35 Table 4: Activities Completed duringthe CAS Period (Pillar I) .............................................................. 36 Table 5 : Evolution o f Core Performance Indicators for Pillar I1.............................................................. 40 Table 6: Activities Completed during the CAS period (Pillar 11)............................................................. 41 Table 7: Evolution o f Core Performance Indicators for Pillar I11............................................................. 43 Table 8: Activities Completed duringthe CAS Period (Pillar 111) ........................................................... 44 Table 9: Evolution o f Core Performance Indicators for Pillar IV ............................................................ 46 Table 10: Activities Completed duringthe CAS Period (Pillar IV)......................................................... 47 Table 11: Indicators o f Portfolio Management, Fiscal Years 2000-2004 ................................................ 51 Table 12: OED Findings o fEvaluatedProjects........................................................................................ 53 Appendix Table 1: Summary Table o f the Morocco 2001 CAS Completion Report............................... 56 Appendix Table 2: Evolution of Indicators and Monitoring o f Morocco 2001 CAS ............................... Appendix Table 3a: Planned IBRDLendingProgram and Actual Deliveries, Fiscal 2001-05 ...............59 60 Appendix Table 3b: Planned Learning and InnovationLoans (LILs),Institutional Development Fund..61 Appendix Table 4: Planned AAA Program and Actual Deliveries, Fiscal 2001-04 ................................ (IDF) Grants, andActual Deliveries, Fiscal 2001-05 .................................................................................. 62 FIGURES : Figure 1:Central Government Budgetdeficit in% o fGDP....................................................................... 3 Figure2: Central Government Debt in% o f GDP...................................................................................... 4 Figure3: Gross Investmentin% o f GDP................................................................................................... 4 Figure4: National Saving and Workers' Remittances In% o f GDP .......................................................... 5 Figure5: Growth of GDP and Agricultural Output.................................................................................... 5 Figure6: REERand Terms o ftrade indices (100=1990) ........................................................................... 6 i EXECUTIVESUMMARY 1. The goal of this CAS is to help Morocco meet its key development challenges, notably 1) accelerate employment-generation and sustainable economic growth, and 2) reduce poverty and marginalization. T o achieve and sustain these goals, a series o f institutional reforms are needed to improve the transparency, accountability, and inclusiveness o f the public sector. Thus, governance i s a strong theme underlying the strategy. The Bank i s viewed as a trusted partner and a strong reform proponent. As such, it can play an important role to assist the government to implement its reform agenda. ii. ThisCASreflects differencesfrom thepast. Theoverarching objectiveof poverty reduction and the underpinning objective of governance are both morefully integrated in our country program. I n addition, the environment for reform has matured. Previous CASs frequently spoke o f "two Moroccos"--one urban, the other rural. However, recent analytical work-for example, the first community-level poverty map-has enabled both government and the Bank to fine-tune their approach. We can now focus on pockets o f poverty, whether urban or rural. The main difference betweenthis CAS period (2005-09) and the previous one (2001-04) i s the more favorable political and bureaucratic environment within which to implement institutional reforms. A greater sense o f urgency prevails, and this has generated political will at the top levels o f leadership as well as within civil society. The time i s right to pushreforms forward against bothvested interests andbureaucratic inertia. ... 111. The King has set out a strong new vision for development, placing far more emphasis on improved social conditions throughout the country. The government has elaborated upon this vision. It proposes a program of reforms and investments to generate sustainable growth, energize the labor market, reduce unemployment, raise the standard of living, and progressively eliminate poverty and exclusion. A dynamic and growing civil society i s also playing an important role by, first, helping to define and implement the country's social agenda and, second, pushing for better governance. Indeed, the unusual role of civil society inthe region strengthens the irreversibility o f reforms. Despite these positive trends, a shared global vision for the country's development i s still needed for the country to achieve its potential. iv. Despite progress in recent years, Morocco confronts formidable challenges. These include lackluster economic growth; vulnerability to variable rainfall; inadequate social indicators relative to the country's income level; high unemployment; and increasing pressure on natural resources, especially water. Large segments of the population remain socially and economically marginalized. The greatest challenge (and opportunity) in addressing the weak economic performance o f the past i s to succeed in employment generation and labor-force growth. If the economy does not accelerate and new jobs do not materialize during the coming decade, poverty and exclusion are likely to spark unmanageable social tensions. By the same token, the much lower rate of population growth (1.5 percent) combined with still- highlabor-force growth (3 percent) and increasingparticipationo f women inthe labor force could fuel a decade o f high growth, based on abundant labor supply, a low dependency ratio, and high savings. Whether or not this "demographic dividend" is received depends crucially on increased private investment. v. The CAS plans to contribute to the broad goals of accelerating sustainable employment- generating growth and reducingpoverty and marginalization. It will focus upon four objectives: a. Improve competitiveness and the investment climate. Bank group support will be directed to achieve five essential outcomes to improve the Moroccan economy's competitiveness and thus its job creation potential: (1) ensure macroeconomic stability, (2) increase the efficiency o f .. 11 public administration, (3) improve the investment climate, (4) strengthen a growth-oriented financial sector, (5) increase the competitiveness o f the agriculture sector. Increase access to basic services by poor and marginalized groups. Bank support will help (1) reduce slums and improve accessto housing for the poorest segments o f the populationand (2) foster greater access to basic services, social programs, and economic opportunity invulnerable pockets o f poverty. Improve the eficiency of the education system. Lending and advisory services will help to (1) increase access to quality and quantity o fbasic education, and (2) improve the graduation and employment rates in secondary schools, universities, and professional training. Improve water management and access to water services and sanitation. Three CAS outcomes have been identified: (1) improve legal, financial, and institutional frameworks for the water sector; (2) improve access and treatment coverage intargeted river basins; and (3) improve financial and operating performance among water sector operators. vi. Achieving results in intermediate and larger strategic objectives will require improved governance. Specifically, the essential building blocks o f good governance-transparency, accountability, and inclusiveness-will guide how Bank interventions are designed. Focusing on these three elements in budget reform work, for example, should improve efficiency in the flow o f public expenditures, a necessary requirement for implementing the government's priority investment projects. Further, by focusing on inclusiveness, poverty and gender concerns can be integrated across the program. vii. The instruments of the strategy will move toward greater use of programmatic approaches. While maintaining flexibility in the precise mix o f instruments and sectoral allocations, the CAS anticipates relatively greater emphasis on a programmatic approach to lending and to economic and sector work (ESW) to enable the most effective backing o f the government and its reform program. Analytical work will continue to drive the strategy, since experience with programmatic ESW (PESW) has repeatedly demonstrated that strong analytic work can lead to sound lending. Investment lending will increasingly take the form o f sector-wide approaches to lending (generally referred to as SWAPS). IFC will (1) focus on the financial sector, through technical assistance and investment, with a particular emphasis on SMEs, microfinance and housing, (2) support efforts for corporate governance, and (3) seek advisory and investment opportunities in the infrastructure sector, including financing large or complex transactions. viii. For FY2006-09, a flexible program of $250 to $350 million a year is planned to support the strategic CAS objectives. Morocco has diversified sources of external financing, and the level o f Bank lending does not represent traditionally conceived "leverage" for accelerated refoms. Appropriate flexibility i s in place to respond to high-quality lending opportunities and to support growth and related reforms. The planned amount o f lending i s consistent with sound risk management in view o f Morocco's recent progress, base-case projections (Annex 9), the outcome indicators set in this CAS (Annex 2), and the evolution o f IBRD exposure indicators. Reduced IBRD lending would be triggered by a failure to maintain a stable macroeconomic framework, in particular a failure o f Morocco to move inthe direction o f a sustainable fiscal deficit. ix. Theprogram is designed to mitigate risks that could affect the effectiveness of Bank support and to enhance monitoring and evaluation (M&E) of CAS outcomes. Over the four coming years, the Bank program faces a series o f risks. These include the government's continuing willingness to address the country's economic and social challenges, hesitant decision-making processes, and the possibility that the Bank financing will become less important to meeting the needs o f this middle-income country ... 111 (MIC). The Bank will mitigate these risks in several ways. We will undertake more systematic political economy analysis, and we will improve our ability to support reforms through informed outreach to important stakeholders. We will offer high-quality, timely analytical work and technical advice, as well as an intelligent mix o f lendinginstruments. The Bank also needs to buildupon synergies with Morocco's other development partners-most notably, greater complementarity with the European Union. x. Thefollowing issues are suggestedfor Board discussion: 0 Does the CAS adequately reflect the recommendations o f the M I C report? Does it provide for sufficient flexibility and responsiveness? 0 I s the lending scenario appropriate? Does it support the strategy with sufficient flexibility to deal with unanticipateddevelopments? Does the CAS adequately address the issue of institutional reform and governance? 0 Are the macroeconomic challenges and their potential repercussions on the CAS fully addressed? 1 MOROCCO: COUNTRY ASSISTANCESTRATEGY FY2006-09 I.COUNTRYCONTEXT A. Politicaland Social Context 1. Morocco stands out in the Middle East and North Africa (MENA) region for its political opening. This trend began inthe mid-1990s under former King Hassan 11, and it has accelerated since his son, King Mohammed VI, acceded to the throne in 1999. The broad political changes in Morocco have been manifested in free and fair elections and a flourishing civil society. Thousands o f development and advocacy NGOs are active today, and a dynamic press corps i s at work. A recent reform o f the family law-the Moudawana-greatly advances the rights o f women and encourages a more inclusive society. 2. This political opening is particularly notable in light of security concerns that are common elsewhere in the region. Several terrorist attacks in Casablanca shook the country on M a y 16, 2003. Many people were killed, including suicide bombers who were home-grown Islamic radicals living inthe city slums. Inresponse to these attacks, security was tightened and efforts were strengthened to improve social conditions in the urban, peri-urban, and rural areas. Poverty, exclusion, and misery are viewed widely as fertile breeding grounds for extremists. The King has guided the country along a sensitive path toward widespread political participation while ensuringsecurity and stability. 3. democratically elected officials with the guidance of the monarchy. Following the legislative elections Morocco's constitution envisions a political system that involves decision making by of September 2002, the King nominated a technocratic prime minister to lead a coalition government representing the political parties' respective weight inParliament. Despite great gains inthe popular vote, the Islamist Justice and Development Party (PJD) didnot participate inthe government. 4. Given this political evolution, government decision making ofen appears complex. Complicatedpolitical bargains are typical o f coalition governments. Inrecent months, the King has tried to address this by promoting a new law to reduce the number o f political parties and counter fragmentation. Nevertheless, complex decision making may be inevitable in a country with the unique characteristics o f Morocco, namely a democracy in transition and a King actively pursuing an ambitious economic and social agenda. There may be certain up sides, such as limits to the extent to which the country can move "off track"; however, the down side i s that lines o f authority and accountability will continue to be unclear. This ambiguity will make it more difficult to formulate a shared vision and to implement a program for the country's economic and social development. The lack o f a clear economic vision will discourage domestic and foreign private investors and as a result, badly needed economic growth and employment generation may suffer. 5. Since his accession to the throne, King Mohammed VI hasfavored Morocco's focus on poverty eradication and social development. Subsequently, the government has made poverty reduction one o f its top priorities. At present, about 15 percent o f the population i s considered to be poor. Roughly two thirds of the poor live in rural areas, though the share in urban areas i s rising. Recent analytical work by the World Bank and the government o f Morocco reveals considerable heterogeneity in poverty levels among communes (even within the same province and region) and that pockets o f poverty are common in both urban and rural areas. Inaddition to those falling below the poverty line, about a quarter o f the population i s considered to be "economically vulnerable." These people are living at or below 50 percent above the poverty line and are thus illprepared to weather shocks such as family illness, drought, or job loss. This group poses a considerable challenge to social stability. Typically, they struggle to get by, frustrated by inequality. The very poor necessarily remain more focused on the continuous daily challenge of meeting 2 basic needs. Together, the "poor" and "vulnerable" comprise about 40 percent o f the Moroccan population who need greater opportunities to participate in growth as well as access to basic services. 6. The importance of growth for poverty reduction became evident during the 1990s, when income poverty rose by about half-from 13 to 19percent of the population. The 1990s was a period o f slow growth during which real household consumption shrank, unemployment grew, and rural households encountered .years of drought. While some deterioration inincome distribution contributedto the increase inpoverty, approximately 85 percent was directly attributable to the very weak growth.' Duringthe recent years o f strong growth, poverty has declined rapidly, including inrural areas. country's ambitious literacy, education, and rural developmentprograms2; however, they are still low if 7. Social indicators, particularly for girls and women, have improved significantly because of the compared with other countries at similar income levels. Although achievements are impressive in the area o f human development, there i s still a long road ahead before Morocco reaches countries at similar income levels and meets its Millennium Development Goals.3 8. Despite improvements in private per capita consumption, poverty, and social indicators, urban unemployment has continued to climb. The increase in urban unemployment has led to greater exclusion. The increase i s disproportionately high among the young and educated, whose rates o f unemployment are 34 percent and 26 percent respectively. The active urban population i s growing by 4 percent a year, mainly because o f rural migration. The key to improving social conditions i s concerted effort toward better living standards inboth rural and urban areas. B. Recent EconomicDevelopments 9. Over the past decade, Morocco has consolidated its price stability, strengthened its external position, and initiated an ambitious program of structural reforms. Inflation remains low, and the external position is at a comfortable level. The economy has been strengthened by highand steady inflow of remittances, tourism receipts, and foreign direct investment. Structural changes are under way in many areas, including trade facilitation, customs reform, financial sector liberalization, telecom privatization, agricultural modernization, and public sector modernization. The principal concerns over the medium term are low growth, employment, and fiscal sustainability. Growth in Morocco i s variable and highly weather dependent. On average, it has been too low per capita to generate the jobs that are needed to absorb the unemployed labor force. In 2000-200 1, the fiscal stance deteriorated because o f declining revenues and higher expenditures, financed by privatization proceeds. Public debt ratios are still highbut declining. Acceleration o f growth will require a renewed sense o f urgency. Fiscal imbalances need to be corrected and then stabilized in order to complete an agenda o f structural reforms that will increase Moroccan business competitiveness at home and abroad. Reforms leading to a lower fiscal deficit would increase investor confidence, sparking the growth that i s necessary to address Morocco's poverty and social pressure. I O . Morocco has implemented successful stabilization programs since the mid-l990s, and it has achieved low inflation through prudent macroeconomic management. Strong stabilization efforts were needed to correct fiscal imbalances and reestablish credibility following the debt reschedulingagreements of the late 1980s. Inflation rates declined from double digits in the 1980s to less than 2 percent in the present decade. Prudent monetary policy supported a regime o f fixed exchange rates. The currency basket ' Kingdomof Morocco Poverty Update, World Bank, March 20,2001. For example, net primary school enrollment roseform 58 percent in 1990to 92 percent in2003. Lifeexpectancyrosefrom 67 years in 1990 to 70 in2001. Access to safe water rose from 75 percent in 1990to 80 percent in2000. Annex 12 on social indicators. 3 underlying the exchange rate was modified in 2001, implying a de facto devaluation o f 5 percent o f the dirham, Remittances, tourism receipts, and foreign direct investment linked to privatization led to substantial banking liquidity and greater international reserves. The reserve position has more than doubled from 4.6 months o f imports in 2000 to 12 months o f imports in 2004. Remittances have also contributed to increased national savings and successive current account surpluses since 2001. Remittances represented 8.2 percent o f GDP and tourism receipts 7.4 percent o f GDP in 2003. These outcomes are particularly noteworthy because they were achieved in an adverse external environment that included an economic slowdown in the international economy, highoil prices, and pervasive geopolitical uncertainty. 11. Despite achievements, the fiscal position has slipped and is unsustainable Figure1: CentralGovernment Budget deficit in YOof GDP (excludingprivatizationreceiptsandincluding Hassan I1Fund spending) in the medium term. The large budget deficit4 averaged 5.2 percent o f GDP in 2001-04 (Figure 1). These deficits were 4% financed by substantial proceeds from privatization and domestic borrowing. 2% Large budget deficits came about mainly 0% in response to the rising wage bill, representing about 13 percent o f GDP in -2% 2004; some security-related spending, -4% following the Casablanca bombings in M a y 2003; some exceptional -6% infrastructure investment, financed by the -8% Hassan I1 Fund; and weaker revenue performance on account o f selected import tariff reductions. In addition, important transfers were made to the pension system and to two ailing public banks. Fiscal deficits o f this magnitude are unsustainable over the medium term. In 2004, more than half o f the financing o f the fiscal deficit originated from privatization proceeds that are projected to phase out rapidly in 2006, making fiscal adjustment a top priority in 2005- 06. To preserve stability over the mediumterm, rapid and decisive action to increase revenue i s needed on several fronts, as well as efforts to tackle budget rigidities, reverse expansionary payroll spending, and address actual and contingent fiscal liabilities. This would also create sufficient fiscal space to cover investments in development priorities. A Bank-supported public-sector reform program i s under way to help curb rising expenditures (notably through civil service reform and budget reform) and to address declining revenue trends (through tax reform planned for 2006), and thus avoid the possibility that public debt will climb toward unsustainable levels. 12. Active debt management has helped reduce debt and boost investor confidence. Total external government debt has steadily decreased from 34 percent o f GDP in 2000 to an estimated 16 percent in 2004 (Figure 2). By contrast, domestic debt has risen from 42 percent to 5 1percent o f GDP over the same period. Overall (and despite large fiscal deficits), Morocco reduced its total public debt from 76 percent of GDP in 2000 to 67 percent o f GDP in 2004. As discussed below, the market view o f the Moroccan economy has improved considerably in response to the combination o f sound debt management, low inflation, the solid external reserve position, and an ongoing program o f structuralreforms. In July 2003, The term "budget deficit," as used here andthroughoutthe CAS does not includeprivatization receiptsand grants. It includes expenditureof the HassanI1Fund.Furtherreferencesto the "budget deficit" follow that definition throughoutthis paper. 4 the government successfully placed Figure2: Central Government Debt in YOof GDP 400 million in Eurobonds (with a low I spread o f 215 basis points over 90% European benchmarks). Despite 80% Morocco's ratings remaining below 70% investment grade, S&P improved its 60% outlook from stable to positive. EMBI+ 50% spreads for Moroccan debt in ~40% intemational markets have decreased 30% 20% from 579 basis points in January 2001 - . to 170 basis points inDecember 2004.5 10% 0Yo tlHHHHIIIItiHHHHHtlHl I 13. A series of structural reforms have been undertaken, yet a full agenda remains. Structural reforms uidertaken include trade liberalization, financial sector strengthening and privatization, fiscal and customs reform, and more recently, governance reform. Trade liberalization led to an Association Agreement signed with the European Union in 1996 and implemented inMarch 2000. An FTA was also concluded with the United States in March 2004. Prudential regulation and supervision o f the financial system was strengthened through the approval o f new banking, and Central Bank laws. Restructuringof two troubled state-banks is ongoing. Privatization o fthe state-owned telecom companies i s now complete. Awarding o f a second mobile phone license has produced substantial economic and financial benefits, triggering a major reduction o f communication prices and thousands o f new jobs. More recently, the government has taken several other important steps: issuing new public procurement regulations, initiating judiciary reform through the creation o f commercial courts, passing new laws on competition policy, establishing a competition council, and liberalizingprices. Structural reform has provided a strong foundation upon which to jump-start growth-in particular, reducing dependence on agricultural production. Further work i s needed to buildon these foundations and to fully implement and complete the full agenda ofrequiredreforms. 14. Savings and investment rates have risenfor several reasons. Figure3: GrossInvestmentin YOof GDP These include the implementation o f , 30 sound stabilization programs, ongoing structural reforms (especially in trade, 25 the financial sector, and privatization), 20 and record remittances from the large population of Moroccans working 15 abroad. In the 1980s, the distorted 10 macroeconomic environment constrained private sector development, 5 resulting in low investment and savings 0 levels. However, reforms in the mid-to- late 1990s changed this picture. The national savings rate rose from 18 percent in 1995 to 26 percent in 2004, and investment rates from 20 'Incomparison with other emerging countries, Morocco's spreads declined by 70%, while those of Turkey, Peru, Mexico and Brazil declined, 68% for the first two, 60% and 50%, respectively. 5 percent in 1995 to 24 percent in 2004 Figure 4: National Saving andWorkers' RemittancesIn YOof GDP (Figures 3 and 4). National savings 12 have increased parallel to the remittance patterns (Figure 4). Exports 10 diversified as tourism and other service 8 sectors grew. Banlung deposits increased. Most of the increase in 6 investments i s a product o f the private 4 sector. Turning savings into productive investments requires a number o f 2 reforms to further facilitate private 0 sector development. and below potential. Indeed, the Figure 5: Growth of GDP and Agricultural Output economy achieved a growth rate o f less than 3.5 percent on average over the 100 15 ~ past decade, and a promising but still 80 insufficient 4.5 percent rate in 2001- 60 04. In 2005, the growth rate i s lo ~ 40 projected to fall to 3 percent. A number 2o of structural factors have contributed to ::: 5~ 1 0 0 this unsatisfactory performance, including variability in Moroccan agriculture, traditional low growth in -5 ~ the nonagricultural sector, the slow -60 -101 m a b c o c n o 7 " ~ transformation o f national savings into m m m u - ~ z z z z z z o o o o o m m m m m m c n m m m o o o o o high productivity investments 7 - 7 N " " (including those generated from ~ remittances), and the weak competitive 16. Because growth has been relatively modest, new entrants into the labor force-especially youth and women-are jinding few jobs. Unless efforts are taken to accelerate the competitive position of Moroccan business, international competition will further undercut employment creation. Inrecent years, highunemployment has been exacerbated because job creation cannot keep up with the large number of women and young people who are entering the workforce. The urban unemployment rate peaked at 23 percent in 1995, and declined to 18 percent in2002 with stimulus from the dynamic manufacturing sector. However, as more women entered the workforce and registered their work status, the unemployment rate 6 went back up 20 percent in 2003. Unemployment i s particularly high-over 34 percent-among the young and educated. 17. Morocco faces an increasingly competitive external Figure 6: REER and Terms of trade indices(100=1990) environment, which offers opportunities as well as challenges. Morocco i s implementing an Association Agreement with the European Union, and it recently concluded a free-trade agreement with the United States. Both frameworks are expected to create new opportunities for exports and faster growth, but they also pose challenge for domestic investors. O N w c D c o g ~ g $0~ E0c E0 1 o O1 N Greater competitiveness o f Moroccan I c o c o c o c o w Z Z Z ? Z Z Z Z Z - firms i s the key to strong growth. For 1 I+RER--c-Termsoftrade 1 growth and jobs, deeper trade I 18. Any successful growth strategy requires price stability and reforms that support a dynamic private sector. To attract investment, competitiveness o f the business environment must be strengthened. This entails both macro- and microeconomic reforms. For a stable macroeconomic environment, a sustainable budget deficit and a competitive exchange rate are essential. To assess needs on the micro side, firm-level surveys were recently completed jointly by the Bank and the Moroccan government. The surveys demonstrate that businesses, particularly employment-generating small and medium enterprises, require (i) a financial system that provides adequate capital to small as well as medium and larger firms; (ii)a qualified and trained labor force, with effective implementation o f the new labor code; (iii)a functioning and fair land market; and (iv) a legal system that enforces property rights and contracts and resolves disputes. These key elements lower the entry barriers for new firms, particularly small and medium enterprises. A more competitive business environment encourages investment, ultimately creatingmorejobs. The dirham remains pegged to a publicly undisclosed basket in which the euro has a large weight. Movements in the real exchangerate have been modest, with a gradual depreciation over the past few years. This excludes agriculture products. 7 11. KEY CHALLENGESANDMEDIUM-TERM PROSPECTS A. CountryVision, Government Program, and OutstandingChallenges 19. The King has set out a socially oriented vision for the country's development. It emphasizes improvement in social conditions far more than has been previously articulated. The Kinghas repeatedly reiterated the need for strong growth and employment generation, education, low-income housing, responsive local decision malung, and women's rights. 20. The government has elaborated upon this vision by proposing a program of reforms and investments. As outlined by the prime minister ina speech to Parliament, the program aims "to generate sustainable growth capable o f energizing the labor market, reducing unemployment, raising the standard of living o f citizens, and progressively eliminating poverty and exclusion.'" Following upon the November 2002 elections, it proposes to strengthen private sector potential by improving the competitiveness o f Moroccan enterprises. Measures to do so include maintenance o f an appropriate macroeconomic framework, investment in infrastructure, and restructuring the national education and training system. The social agenda includes a major focus on improving income and access to and quality of services for the poor and marginalized (pditique deproximite?. It focuses on housing, transport, health, and rural development. Public administration reform, which improves the efficiency and effectiveness o f the budget and civil service, i s recognized as a key element to the success o f the agenda. Management o f water resources i s another key component o fthe govemment program. 21. Slow economic growth, weak social indicators, high unemployment, and growing pressure on natural resources (in particular, water) pose major challenges. On the other hand, Morocco's demography poses an opportunity. The population growth rate i s only 1.5 percent; the workforce i s growing at a strong 3 percent; and the rate at which women arejoining the labor force i s accelerating. An abundant workforce and low dependency rates are positive factors. Ifcombined with strong education and training measures to integrate more young people into the economy, rising growth could be sustained. However, ifgrowth andjob creation over the coming decade do not accelerate significantly faster than the rates o f the past decade, poverty and exclusion could reach levels that incite unmanageable social tension. climate.Creating (0 job-generating growth through an improved competitiveness and investment Creatingjobs for Morocco's young and growing labor force will require acceleration o f employment-generating economic growth. Maintaining overall macroeconomic equilibrium i s a clear priority, but equilibrium alone will not provide sufficient push to drive the economy to its full growth potential. Morocco has recently tried expansionary budget policies in efforts to pre- select and encourage certain highgrowth sectors. By in large, these efforts have failed to produce sustainable growth. A competitive private sector requires an environment that i s open and free, and offers all firms a level playing field. The recent Investment Climate Assessment led by the Bank and IFC reported that private sector development-particularly for small and medium enterprises-is constrained by lack o f access to capital and by problems related to public administration and justice. In addition, enterprises are hampered by a land market that lacks transparency. The "unleveled" playing field favors the large, established, well-known Moroccan firms.g Improving these factors to facilitate investment poses a critical challenge that Morocco must meet. * Prime minister's speech to Parliament, November 2002. Joint Bank-IFC Investment Climate Assessment (ICA) 2004. See also Annex 6 of this CAS study for a snapshot of Morocco's businessenvironment. 8 (ii) Improving the living standardsfor the poor and marginalized. Inaddition to dynamic growth, this requires special efforts to provide access to services and opportunities that the poor and marginalized have been denied in the past. Over the past several years, Morocco has greatly improved basic rural services for water, sanitation, roads, health care, and education. This needs to continue, and expand to both the rural and urban poor and to marginalized areas. Though economic growth remains the underlying key for reducing poverty in Morocco, pro-growth policies are not necessarily distribution-neutral. As tools are developed to assess the relative winners and losers from economy-wide policies, decision malung can be finely tuned. Positive impact can be maximized for poorer segments o f society, with social protection expanded for those who are most vulnerable duringperiods o f transition." (iii) Strengthening education. During the past decade, Morocco made great strides in improving access to basic education. The national net enrollment rate for primary education rose from 52.4 percent (1990-9 1) to 92.0 percent (2003-04). Meanwhile net enrollment rates rose from 17.5 to 32.0 percent in middle school, and from 6.1 to 14.9 percent in upper-secondary education. Future development o f the Moroccan formal education system, however, will face many new challenges. Internal inefficiency i s high, as evidenced by high dropout and repetition rates, gender and geographical disparities at all educational levels, and an unsatisfied demand for middle school entry as a consequence o f successful increases in access to primary education. Illiteracy i s an especially severe problem. At 6.6 percent o f GDP, the education sector has already been allocated substantial funding. The financial margin to expand the system i s limited, Inthis context, the government needs to manage a complex educational system and meet increasingly diverse demands while it simultaneously implements large-scale education reform. A Strategic Framework for the Development o f the Education Sector (Cadre Strattgique de DCveloppement du Systkme Educatif) was elaborated with technical assistance from the Canadian International Development Agency (CIDA), outlining strategc plans to operationalize the Education Charter over the next five years (2005-09). The framework aims to enhance the quality, relevancy, and cost effectiveness o f the education system. The key challenge will be to improve access to quality education, which i s essential for buildinga skilled labor force capable o f competing effectively in the global economy. (iv) Sustainable and efficient use of water resources. Water is a scarce strategic resource in Morocco. Since the 1960s, the country's hydraulic infrastructurehas been developed successfully inorder to secure sufficient water for urbanuse as well as irrigationwater needed for agriculture and economic development. Unfortunately, these priorities were not coupled adequately with concern for demand management, resource protection, and rural water supply. This led to inefficient utilization, depleting and degrading water resources and creating one o f the most severe rural supply deficits in the Middle East and North Africa region. A new Water Law introduced river basin agencies in order to implement integratedwater resource management and to encourage conservation and resource protection. Ambitious goals were set to improve efficiency and expand infrastructure among operators in the sector. Particular emphasis was placed on pollution control. Nevertheless, institutional and financial constraints have delayed the implementation o f these reforms. Experience shows that the institutional and financial dimensions generally featured more mixed results while the infrastructure components o f reforms were completed in a satisfactory manner. Morocco faces a crucial challenge in its need to address the institutional bottlenecks that cause less- than-satisfactory governance and financial management inthe water sector. loFor an example of this analysis applied to agricultural reform, see "Kingdom o f Morocco Poverty Report: Strengthening Policy by Identifyingthe Geographic Dimension o f Poverty," September 2004. 9 B. Medium-TermOutlook 22. Morocco has an opportunity to accelerategrowth, increase employment,and reducepoverty. To do so, it needs to build on its present macroeconomic foundation o f low inflation and a solid extemal position. It needs to continue its multi-pronged structural reform agenda, focusing on fiscal imbalances, continuing trade liberalization, and opening up o f the economy. It needs to expand the role and enhance the efficiency o f the private sector, addressing weaknesses in the financial sector and the pensionregime, and freeing the labor market. The exchange rate regime may also need to be adapted to the changing context, with a view toward further trade liberalization in the prospect o f eventual capital account opening. Exchange rate policy would thus be converted into an instrument that improves competitiveness and supports growth. 23. The Base Case scenario assumes a stable macroeconomicframework under modest growth and partial adjustment. This i s supported by partial recovery o f medium-term fiscal sustainability, slightly higher national savings ratios, and sustained export performance resulting from constant real exchange rate and terms o f trade. Ifcoupledwith the continued sizable remittances and tourism receipts, a declining butpositive current account surplus shouldbepreserved, andthe extemal positionwould remain sound. 24. Under the Base Casescenario,growth would not acceleratebeyond the recent average of thepast 10 years, that is, 4 percent; however, fiscal sustainability would be partly restored. In this scenario, partial efforts are made for fiscal consolidation but structural reforms are implemented at a slower pace. Hence, in the aftermath o f a slight slowdown for 2005-because o f projected rainfall lower than the exceptional level during 2004-the growth rate would remain at a 4 percent average until 2009. Inflation would remain subdued at 2.5 percent. Monetary policy would be expected to remain prudent in order to cope with large though declining private capital inflows related to the rapid phasing-out o f proceeds from privatization. This scenario projects two main outcomes. On the domestic balances, a partial correction o f the budgetary situation would mean a fiscal deficit reaching 3.6 percent o f GDP by 2009. While this would imply a significant reduction, it will still remain higher than the 3 percent level that Moroccan authorities have targeted. Partial but sustained reforms on the revenue and expenditure side would be implemented to bring about this outcome. Revenue measures to broaden the tax base and simplify and strengthen administration o f the tax system would be accompanied by expenditure measures regaining control o f the wage bill and tightening other current spending. The gradual implementation o f the public administrationreform program, supported by the Bank, would target a reduction o f the wage bill from 13 percent o f GDP to 11 percent, but only half o f this goal would be accomplished. Rapidly declining privatizationproceeds would also continue to partly finance the fiscal deficit in 2005. It would then phase out, making moderate capital expenditure cuts inevitable. On the extemal balances, the surplus o f the current account would gradually decline since an enhanced exports performancewill not offset a recovery of rising domestic demand for imports (also fueled by steady workers' remittances). This outcome would also reflect the effects on Morocco's textile exports o f MFA expiration in 2005. Following a temporary surge o f public debt in 2005 related to one-time recognition o f past arrears to the social security system, the public debt ratio would continue to decline to 66 percent o f GDP by the end o f 2009. Under this scenario, urban unemployment would be preserved at its present level because o f the relatively highlabor force growth coupled with modest economic growth. 25. Declining external financing gap would be filled mainly by multilateral financing and foreign direct investment.Under the base case, the aggregate financing gap would be about US$15 billion during 2005-08, roughly the same amount considered for the previous CAS period. This decrease in financing needs corresponds to the lower amounts involved in the amortization profile and current account surpluses, and lower needs for reserve gains by Bank A1 Maghrib. Multilateral financing and foreign 10 direct investment will play an increased role in filling the gap, as privatization proceeds and bilateral financing phases out. Table 1: Selected Macroeconomic Indicators Actual Est. Projected 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Growth rates (in percent) Real GDP 1.0 6.3 3.2 5.2 3.5 3.0 3.8 4.0 4.0 4.0 CAS2001-04 forecast 0.8 8.0 3.4 3.6 3.8 Real Consumption 3.0 7.1 0.5 3.7 3.4 2.8 3.7 4.1 4.4 4.5 Real Gross Domestic Investment 7.0 8.0 4.4 6.0 5.0 4.6 5.0 5.4 5.4 5.6 Export Volume, GNFS 6.4 13.0 8.8 -3.6 2.7 6.3 5.5 5.3 5.2 5.1 CAS2001-04 forecast -0.8 4.0 6.9 5.7 5.8 Import Volume, GNFS -0.5 5.7 12.2 15.6 3.5 6.4 5.9 6.5 6.9 6.8 CAS2001-04 forecast -2.8 5.5 4.9 5.6 5.9 GDP Deflator 1.5 1.8 0.6 0.0 2.5 2.5 2.5 2.5 2.5 2.5 Ratios to GDP Gross Investment 23.6 22.9 22.7 23.8 24.2 24.4 24.6 24.8 24.9 25.0 CAS 2001-04forecast 24.5 24.7 25.2 25.4 25.6 Gross National Savings 22.2 27.6 26.8 27.4 25.5 26.1 26.2 26.0 25.5 25.0 Budget Deficit (-)* -5.8 -6.3 -4.6 -5.7 -4.7 -5.0 -4.7 -4.4 -4.0 -3.6 CAS 2001-04 forecast -6.4 -7.7 -5.5 -4.3 -3.5 Direct Public Debt 75.6 74.7 71.3 69.3 66.7 68.2 67.9 67.2 66.7 66.0 External Current Balance -1.4 4.7 4.1 3.6 1.3 1.7 1.6 1.2 0.7 0.1 CAS2001-04 forecast -1.6 -1.5 -1.1 -1.0 -1.0 * Excludingprivatization receipts and including Hassan IIFund expenditures. 26. Under an alternative High-Case Scenario not only would fiscal sustainability befully restored, but growth would be stronger than in the past decade averaging 5 percent. This increase would be mainly driven by a combination o f a dynamic export performance resulting from sustained EU and U.S. demand and by higher domestic and foreign private investment. Rapid growth would benefit from solid implementation o f structural reforms-in particular, from rapid reconversion o f manufacturing to new export opportunities, adequate implementation o f the fi-ee-trade agreement, dynamic tourism and construction sectors, some recovery in agriculture because o f good weather and the acceleration o f manufacturing to new export opportunities, adequate implementation o f the free-trade agreement, dynamic tourism and construction sectors, some recovery in agriculture because o f good weather and the acceleration of agricultural modernization, and reforms to the financial sector to reduce financing costs and improve access to financing by small and medium enterprises. Following its rising trend since 1998, private investment would continue to serve as the growth engine. Higher growth would also benefit from a stronger fiscal adjustment effort leading to more-sustainable fiscal and debt ratios, higher surpluses in the external current account, and lower perceived country risks by international capital markets. Under this scenario, urbanunemploymentwould decline. 27. Under a Low-Case Scenario, growth would be mediocre and the lack of significant fiscal adjustment would not immediately threaten fiscal stability; however, once privatization proceeds are phased out after 2006, growth could get severely compromisedby the end of the CASperiod. Growth i s assumed to be a low average o f 3 percent if domestic shocks-for example, droughts, external shocks, or 11 a deterioration of the manufacturing industry's competitiveness more severe than projected-combine with lack of fiscal discipline. To the extent that privatizationproceeds would generate a fiscal stimulus Table2: ExternalFinancingPlan (US$ millions) Actual Est. Projected 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 FinancingRequirements 1,679 3,897 1,747 3,723 5,148 5,049 3,427 3,456 3,273 3,021 Current Account deficit (+) 467 -1,606 -1,477 -1,615 -665 -870 -879 -703 -404 -46 Long-term amortizations 1,626 1,656 2,586 3,804 3,688 2,112 1,837 2,081 2,673 2,276 Reserves changes of monetary authorities -415 3,848 638 1,534 2,126 3,807 2,469 2,077 1,005 792 FinancingSources 1,679 3,897 1,747 3,723 5,148 5,049 3,427 3,456 3,273 3,021 Long-term disbursements with gap fill 1,638 1,189 1,447 1,955 4,250 3,019 2,192 2,324 2,263 2,185 Multilateral 466 368 484 700 1,308 1,311 1,157 1,019 952 889 o/w: IBRD 138 61 45 142 283 315 329 305 322 315 Official bilateral 164 174 118 217 932 868 622 569 460 405 Private creditors (incl. gap fill) 1,009 648 845 1,039 2,011 840 414 736 851 891 Foreign direct investment 174 2,721 445 2,274 973 2,110 1,320 1,222 1,132 964 Other capital flows -134 -12 -144 -506 -75 -80 -85 -91 -122 -128 and temporarily finance high fiscal deficits, growth would remain positive, though lower than the Base- Case Scenario. However, once these proceeds are phased out and budgetary imbalances require more domestic borrowing, private investment would be crowded out. Growth would further decelerate because of the rising interest rates. Fiscal instability would also constrain private creditors and foreign direct investment. Under this scenario, urban unemployment would increase even further. 111. MOROCCO-WORLD BANK GROUPPARTNERSHIP, FY2006-09 A. PastBankAssistance 28. The CAS Completion Report assesses the implementation of the 2001 CAS as moderately satisfactory. The proposed CAS programwas highlyrelevant to Morocco's needs, and it aligned with the five-year plan o f 2000. Implementation, however, was less satisfactory. The CAS program was overly complex and not sufficiently selective. It contained 17 outcome areas, with too many activities and consequent task fragmentation. Many Analytic and Advisory Activity (AAA) tasks were added. This may have demonstrated Bank responsiveness to demand, but it lacked coherence and may have avoided some strategic tradeoffs. The lending program was much reduced to less than had been planned. Of the 18 projects planned, only 9 were delivered as investment or adjustment loans. Although the CAS had intended to step up Learning and Innovation Loans (LILs), they did not materialize. Only one LIL was delivered; but this was probably just as well, since the instrument has been shown to be costly to process, and the learning objectives can also be attained through traditional investment loans. Overall, the volume of lendingwas about half o f what had been expected. 29. Results were achieved partially or completely for 14 of the 17 CAS outcomes. As a note of caution, this assessment i s not entirely rigorous because the CAS did not specifically spell out and link the outcomes to measurable indicators. However, many results were noteworthy. These include substantial development o f rural infrastructure; modernization o f public administration and significant improvements inpublic budgeting; improvements inwater management; sustained dialogue on education and implementation o f the education charter; and better understanding o f the characteristics o f poverty, which enhanced capacity for pro-poor programs. The results are likely to be sustainable, but their impact on institutional development i s modest. The CAS period was characterized by excellent dialogue between , 12 the Bank and the government o f Morocco, including at the highest level. The Bank also expanded its dialogue with stake-holders outside o f government. The Bank presence inRabat was a key to the success inpromoting this dialogue. 30. The quality of theportfolio was moderately satisfactory during theprevious CASperiod. Quality Assurance Group (QAG) ratings for quality at entry and supervision were satisfactory overall; however, several weaknesses were evident in the portfolio. "Problem projects" accounted for nearly 20 percent o f the portfolio duringmost o f the period, although proactivity and realismremainedhigh.The disbursement ratio dipped from a 15 percent average in the three previous years to 10 percent in 2004. The portfolio was characterized by significant delays inimplementation. More than halfthe projects to be closed during the CAS period were extended for 12 to 36 months. Effectiveness was delayed-1 1 months on average after Board approval. Project preparation costs were high, about two-and-a-half times the Bank average. In part, this is relatedto the small size of most o f these loans and to the large number o fprojects that were dropped-that is, 20 projects, which added up to $2 million in dropped-project costs during FY2001-04, equivalent to more than a third o f total project preparation costs. There i s a high level o f net disconnect between project ratings at their completion and their final ratings by the Operations Evaluation Department (OED)," suggesting that project teams may have been less than sufficiently candid in evaluating their project outcomes. Borrower performance was satisfactory. Explanations for problems encountered include insufficient preparation o f projects at entry, overly ambitious assessment o f the capacity o f implementing agencies, and reduced demand for Bank financing in light o f concessional sources o f funding. 31. QAG reviewed the AAA program during thepast CASperiod, concluding that theprogram was satisfactory overall. The program was rated satisfactory on strategx relevance (clear objectives and good alignment with CAS), internal quality (good analytic quality), coherence and integration (very good integration o f AAA with lending, but moderate coherence among AAA tasks across sectors and over time), and likely impact (meaningful changes in government policies, good ownership for reforms, and effective knowledge transfers). The program was rated marginally satisfactory on two dimensions. In regard to dialogue, QAG noted strong quality o f engagement with clients and broad confidence built,but it found shortcomings inthe quality o f client participation-in particular beyond government, partnership arrangements with other donors, and appropriateness o f arrangements for dissemination. In regard to dissemination, QAG noted Bank input and processes benefited fi-om less than adequate managerial attention. Overall, the AAA climate i s favorable inMorocco, and the trend in quality and effectiveness i s upward. Programmatic ESW was introduced and appears to be a particularly effective instrument for supporting complex reforms with high-quality technical assistance over several years. 32. The CASCR and the QAG review of AAA point to similar recommendations: enhancedfocus on managing for results, greater selectivity and flexibility, shvt toward more programmatic instruments, better capacity assessment and stakeholder analysis to support institutional reforms, and enhanced dialogue and dissemination. These recommendations have been discussed extensively by the country team and are incorporated in the proposed strategy. The results focus o f the CAS provides an opportunity to manage the Bank program in a dynamic way by monitoring results and responding to changes on a regular basis. This focus on outcomes also provides an opportunity for greater selectivity. It offers an I' A Country Record Flagis one of 12portfolio indicators used to assess the level o f portfolio riskiness. "Net disconnect" measures the difference between the percentage o f projects rated unsatisfactory (that is, unlikely to achieve their development objectives) by OED and the percentage rated unsatisfactory by the regions inthe final Implementation Status and Results report. Inessence, the net disconnect reflects the degree o f convergence between the region and OED ratings. It serves as an indicator o f level o frealism b y regional staff inportfolio performance assessment. A net disconnect of 20 percent or more, based on the cumulative disconnect o f all projects exiting the portfolio over the past five years, is one of three factors that can trigger a Country Record Flag, which causes all projects inthe country's portfolio to automatically be tagged with an additional risk flag. 13 I objective lens through which to screen proposed activities according to their potential for results. The CAS i s made more flexible by not predetermining the lending and AAA program and by offering adaptable lending scenarios. The CAS plans the use o f development policy loans (DPLs) and SWAPS. These rely on a good understanding and ownership o f the institutional reforms, and they will be supported by capacity assessments and stakeholder analysis in order to better understand the political economy o f reforms and governance issues. Finally, the country team will continue and reinforce its efforts to ensure effective dialogue anddissemination o f findings inthe lending and AAA programs. 33. IFC increased its involvementin Morocco during the CASperiod with its strongpresence on the ground for technical assistance and advisory services, entrance into the local capital markets, and a selective investmentprogram. Duringthe CAS period, IFC's portfolio expanded substantially, becoming the third largest exposure inthe MENA region. Supporting the financial sector has been the centerpiece of IFC's program and strategy, particularly as it supports the development o f SMEs. IFC has worked to that effect through NAED and now PEP MENA, with leading Moroccan banks to help them develop profitable SME banlung operations. Moreover, based on the Bank-led Audit and Accounting ROSC, IFC undertook various initiatives to develop the country's financial and credit information infrastructure jointly with the Central Bank. In infrastructure, IFC played a key role in advising the government on structuring and implementing the first public-private partnership globally for irrigation, and mobilized financing for the first private mobile operator. On the Treasury front, IFC issued a bond in Morocco denominated in dirhams - a transaction that was the first domestic bond offering by a multilateral institution inAfrica as well as inthe Middle East -thus broadeningthe financial markets inthe country. B. Key Featuresof the FY2006-09 CAS 34. The World Bank Group's comparative advantage is the combination of analytic strength with financing capacity. It i s considered a trusted partner and solid reform proponent and, as such, can play an important role in addressing the key challenges o f institutional reform and strengthening through high- quality analytical work and technical assistance backed by programmatic and sector-wide financing. 35. Both flexibility and selectivity will be achieved through use of a `%esultsframework'' that specifies desired outcomes and defines intermediate indicators. The results framework provides flexibility to respondto evolving demands for analytic and financial services from a sophisticated middle- income client. The mix o f instruments and sectors o f intervention is not predefined. All new activities would be assessed according to potential for achieving the outcomes sought. This CAS spans a longer period than previous ones and will include the legislative elections in 2007. Political, economic, and social developments that are not entirely foreseeable will influence specific opportunities (and constrain) advancement. So flexibility i s essential to achieve results through different mixes o f support. Inaddition, the government requestedtwo criteria for Bank selectivity: to involve sectors inwhich the Bank can serve as a catalyst for reform, and to promote engagement among other partners. This approach would help the CAS to serve as a management tool for choices throughout the operational period. 36. The results frameworkprovides explicit strategic direction, but it is not a blueprint, In line with the recommendations o f the middle-income countries (MIC) strategy, the CAS framework i s intended to be sufficiently flexible to respond to evolving government priorities and needs, leaving ample scope for dialogue to appropriately design future investments and development-policy lending operations. The CAS does not provide a list of Bank Group activities for the next four years. To do so would neither be feasible nor desirable given the need for flexibility and responsiveness required by a middle-income country. Illustrative lending and analytic work programs are suggested for each o f the four strategic objectives (Annex 2). The Bank's strategy in Morocco will be implemented in collaboration with bilateral and multilateral partners in order to minimize duplication o f effort, strengthen synergy, and optimize use o f 14 Bank resources. The Bank's partnerships with the EU and the African Development Bank (AFDB) on public administration reform, telecommunication reform, and financial sector reform have well demonstrated the benefits o f such collaboration. C, StrategicObjectives * 37. Bank analytic work during CAS preparation involved extensive consultations with government, civil society, academia, the private sector, and parliamentarians. This led to a consensus view on the two key development challenges-accelerating job-creating growth and reducing exclusion (as discussed above). Four strategic objectives for Bank assistance will help Morocco to address these challenges. The objectives share a common underpinning-promotion o f good governance through greater accountability, transparency, and inclusi~eness.'~They will be addressed while maintaining overall macroeconomic balance and with due regard to government efforts to decrease the budget deficit. Strategic Objective 1: Improve competitiveness and the investment climate 38. Maintain macroeconomicstability (CAS Outcome 1.1). Key aspects o f achieving this outcome are the reduction o f the wage bill to sustainable levels, the reform o f the tax system, and addressing contingent liabilities-in particular, the pension system and public financial institutions. The Bank will support this agenda through the Public Administration Reform Loan (PARL), the Financial Sector DPL, technical assistance, and dialogue focused on pension system reform. Partnerships have been started, with the European Union and the African Development Bank for the PARL, and with the IMF for the fiscal system. 39. Increase efficiency of public administration (CAS Outcome 1.2). In 2002, the Bank supported a Public Expenditure Review (PER) that identified the key challenges to an efficient public administration. These include better human resources management in the Moroccan administration, combined with streamlining o f performance budgeting, administrative dkoncentration, and a clearer control environment for public spending. Through the PARL and its related Programmatic and Economic Sector Work (PESW), the Bank will continue to provide financial support, advisory, and technical assistance services to accompany and support this reform. 40. Improve the investment climate (CAS Outcome 1.3). Creating a conductive environment for private sector development and export-oriented entrepreneurship is key to economic growth and job creation. The phenomenon o f liquid financial institutions and insufficient financing o f small and medium enterprises needs to be addressed through more transparency and corporate governance and by fostering the capacity o f the banking system for cash-flow and business plan-based financing. It also requires a more effective land titling system, a functioning judiciary, and reduction o f administrative barriers to investment. Improving productivity o f the private sector also requires appropriate investments in logistics and infrastructure. While the focus of this CAS is not simply on financing infrastructure services in Morocco, it will support the institutional development needed to ensure their efficiency and sustainability. This includes work on an urban public transportation strategy; local finance reform; and the development o f a clear framework for relations between the state and local governments, as well as between government and civil society. A series o f analytical studies and projects were carried out-including the Financial Sector Assessment Program (FSAP), two Reports on the Observance o f Standards and Codes (ROSCs), the PARL, and a judicial development project. Based on these developments, the Bank will See Annex 1: Strategic Objectives. l3 See Annex 4: CAS Consultations. 15 support private sector development through analytical work on labor markets and land markets and lending(including butnot limitedto the PARL and Financial Sector DPL). 41. Increase efficiency of thefinancial sector, and business access (CAS Outcome 1.4). Morocco's financial sector i s presently in the midst o f a restructuring effort, as evidenced by important mergers and acquisitions andnew banking legislation aiming at reversing the trend o f nonperforming loans, the failure of public financial institutions (CIH, CNCA, BNDE), and unsatisfactory participation ineconomic growth financing as evidenced by high liquidities and limited SME financing. Building on the recommendations of the 2002 FSAP, the Bank i s engaged through the Financial Sector DPL in supporting restructuring and strengthening o f the sector, notably in the areas o f payment systems, banking supervision, anti-money laundering, accounting and auditing, and the restructuring o f public financial institutions. Partnerships with the IMF (FSAP) and the EUhave been the key to advancing this agenda. 42. As part of Bank Group efforts, IFC will address these challenges by adopting a two-pronged approach. I t will mobilizefunding for large, complexprojects that exceed domestic markets' capacity, and it will undertake selective investments in the financial sector aimed at boosting sector competitiveness and capital markets development. IFC's strategy in Morocco will reflect both selectivity in its investment work and increase in its technical assistance activities. While IFC i s not competitive for standard industrial investments, there i s still an important role to play in the financial sector and infrastructure. IFC i s needed for innovative projects, namely in the financial sector and large projects with complex structuring that are not able to find financing locally. IFC will look for opportunities for equity participations, SME risk sharing facilities with banks, through structured finance instruments such as partialriskguarantees, as well as support for microfinance and housing finance. IFC also will look for opportunities to invest in private infrastructure, namely the power and water sectors, building upon such efforts as the irrigation advisory work and telecoms. 43. Building on the findings o f the FSAP and the joint World BanWFC Investment Climate Assessment, F C will also seek through PEP MENA to step up its technical assistance and advisory services, focusing on furthering financial markets development, including improving banks risk management and governance practices. These initiatives should contribute to increase SME access to finance, improve corporate governance practices among financial institutions, and build the much needed credit information and reporting systems for the country. It will also support various business-enabling environment initiatives, mandates for privatization, restructuring and public-private partnerships, particularly inthe infrastructure sector. 44. Increase competitiveness of small and middle-size farms (CAS Outcome 1.5). This outcome targets one facet o f the agricultural sector, namely its competitiveness. Through an Agriculture Sector DPL, the Bank will support an enabling environment for broad-based agriculture growth and competitivity. The DPL will aim at reducing price distortions; make better use o f public funds; enact structural and institutional reforms, notably in the areas o f land tenure and agricultural services; and upgrade main commodity chains through producer associations, public-private partnerships for R&D, capacity-building programs, and the promotion o f product quality. In addition, the Bank's recent analytical work on household impact o f possible agricultural price reforms will contribute to a dialogue on easing the social costs o f transition for the rural poor. Strategic Objective2: Increase access to basic services by poor and marginalized groups 45. Reduce the number of households living in slums by 60 percent (CAS Outcome 2.1). The Bank will support the government in designing and implementing the Cities without Slums program. The program i s progressing well; however, uncertainties remain about the sustainability o f its financial instruments, such as the guarantee mechanisms and the savings schemes. Transparent land titling and real 16 estate tax reform are also important for guaranteeing decent housing for the poor. Bank support will be mobilized through the Low-Income Housing DPL in coordination with other donors, such as the European Union and the French Development Agency (AFD). 46. Improve access to basic services, social programs, and economic opportunities in pockets of poverty and vulnerability (CAS Outcome 2.2). The Bank will continue its technical assistance to the Haut Commissariat au Plan. This will allow a second, updated poverty map to be completed. This more advanced map will be usedto target pockets o f poverty inrural, urban, and peri-urban areas. The Poverty PESW will improve coordination and sharing o f data, strengthening poverty program's capacity to develop tools to identify vulnerable groups and regions. Such information i s especially important when specific economy wide reforms are carried out. This will encourage stronger local partnerships among local governments, deconcentrated line ministries, and civil society. A series o f integrated rural development projects will be designed to develop sustainable local infrastructureand encourage economic opportunities inpoor areas. Bank work will continue on health insurance to help improve access to health services for the poor through arrangements that are financially sustainable. Strategic Objective 3: Improve education system efficiency 47. Increase access to and quality of basic education (CAS Outcome 3.1). An unresolved issue inthe Moroccan educational system i s the school-retention rate inbasic education and equitable access to post- basic studies. Through PARSEM, the Bank has a conducive sector wide instrument that spans the CAS period, to help Morocco achieve this outcome. The Bank has begun work with the government in developing the deconcentration o f the education sector's management through the development o f contract schemes with regional academies (AREFs). It also conducts a positive dialogue on the need to align the education budget with the sector's objectives through contractualisation and the development o f performance-based budgeting. The Programme d 'Appui a la Reformed du Systeme Educatif Marocain (PARSEM) and the PARL are the lead Bank instruments to achieve this outcome. It i s also proposed to include strengthening o f private sector participation in education as a topic in the Bank's dialogue with the government. 48. Increase graduation and employment rates for high school, higher education, and vocational training students (CAS Outcome 3.2). Educational quality is a major component o f the PARSEM. The challenge i s to make sustainable improvements in high school and university education, and to foster necessary linkage between formal training and entering the workforce. This will entail reorganizing and modernizing the secondary school system and giving more autonomy to universities, which will lead them incrementally toward more financial and administrative independence and greater private sector participation. The Bank has launched programmatic ESW on higher education that may emerge as a self- standing lending operation. Strategic Objective4: Improve water management and access to water and sanitation services 49. Improve the legal,financial, and institutionalframework in the water sector (Outcome 4.1). The challenge i s to optimize the roles and capacities o f water sector institutions in developing and implementing a more effective water sector strategy. This entails improving intrasectoral coordination, matching sector financing mechanisms to sector priorities (including integrated water resources management through river basin agencies), and strengthening operator regulation. Bank support for the next four years will include ongoing work on areas o f better water sector governance. This will include studies on institutional reforms for large irrigation projects and on financial and institutional aspects o f drinlungwater purification and supply, and integrated management o f water resources. Itwill also include 17 lendingI4. The indicative program involves technical assistance in institutional capacity building and sector reform. 50. Improve access and treatment coverage in targeted basins (CAS Outcome 4.2). There i s urgent need to support infrastructure development to reverse widespread environmental water quality degradation and resource depletion, promote the sustainable use and conservation o f water resources, and open more equitable access to services in urban, peri-urban and rural areas. This could be achieved in several ways. First, establish sustainable mechanisms o f output-based interventions to reduce agncultural, industrial, and municipal pollution at the basin and sub-basin levels, as well as for water supply and sanitation access in poor or unconnected communities. Second, establish an incentive and cost-recovery system for water, wastewater treatment, and industrial pollution control. Third, adopt an efficient compliance and enforcement system based on upstream considerations in planning water policy, programs, and projects, as well as more predictable environmental guidelines for private sector development. These outcomes-in particular, those linked to pollution control and environmental resource protection-could ideally be pursued through an integrated water and environmental management approach in one or two basins-Oum Rabia or Sebou. Bank support over the CAS period will involve a second water management and sanitation project (FY2006), a rural potable water and sanitation project (FY2007), and targeted WBItechnical assistance for capacity building. 51. Improved technical and financial performance of water sector operators (CAS Outcome 4.3). Closing Morocco's water infrastructure gap will require increased financing autonomy by providers inthe irrigation sub-sector and inthe water supply and sanitation sub-sector. The operating performance o f both sub-sectors needs to be improved. A wide range o f support actions are envisioned-enhancement o f revenue strategies and the operating efficiency o f selected operators, strengthening management capacities, and introducing private sector participation. The restructuring o f operating perimeters for multi-sector service distribution would be assessed and piloted, as well as innovative approaches to finance and support service in underserved urbadperi-urban and rural areas. Bank support will be provided through the lendingand technical assistance instruments described above. The underpinningfor thefour strategic objectives: Improved governance 52. The issue of governance cuts across the entire CAS,from the efficiency of service delivery to the rules that govern economic activities. The Bank program will integrate governance across sectors, focusing on transparency, accountability, and inclusi~eness.'~ 53. Transparency is a prerequisite for good governance in both public and private sectors. While transparency i s a key for public sector accountability, it i s also necessary for proper functioning o f a market economy so that investors and lenders have complete information to assess risk. Through its involvement in public administration reform (via PARL), the judiciary (via the Legal and Judicial Development Project), the financial sector (including FSAP, AAA, and ROSC), the Bank has strengthened transparency as a governance pillar and will continue to do so throughout CAS implementation. 54. Accountability requires that those who are selected to act in the name of others are answerable for theirfailures and creditedfor their successes. "Internal accountability" refers to rules and incentives to govern the public sector and establish a system o f checks and balances. This i s the main focus o f the ''Theseissuesare l4Water ResourceManagementandRuralWater SanitationandManagementprojects. identified and describedinthe MENA RegionGovemanceReport, 2003, "Better Govemance for Developmentin theMiddleEast andNorthAfrica Region." 18 work on public administrative reform (PARL), as well as the institution building accompanying sectoral efforts such as integrated rural development projects and dialogue on the rule o f law.16 Performance-based budgeting, contractualisation, and Bank support to implement the integrated management o f public expenditures (Gestion Integrie des Dipenses, known as GID) are major components o f the PARL. They reflect the need to clarify roles and responsibilities inorder to strengthen actors' performance o f assigned roles and to create new incentives to improve performance. "External accountability" refers to holding government accountable. Enhancing extemal accountability inMorocco at the present time i s particularly relevant because of the political opening and the growing potential o f civil society to help ensure good governance-as a partner to government in service delivery, as a democratic voice to express needs and preferences at the central and local levels, and as a watchdog. The Bank will continue its work with civil society organizations and local officials to improve transparency and partnershps. This includes supporting training on the budget process for parliamentarians and emphasizing outreach and dissemination to better inform the population on issues affecting the country. 55. Inclusiveness is important for reaching marginalized groups, including equal access to government and economic opportunitiesfor women. This concept cuts across the CAS since it applies to the provision o f public services as well as to productive activities for the poor and marginalized. It includes encouraging the full participation o f women and youth, promoting an impartial judiciary, and helpingto foster a business environment that will be markedby greater participation o f small and medium enterprises. D. BankInstruments 56. The Bank will rely on a mix o f analytical work, capacity building, and lending products to achieve the results specifiedinthis CAS. 57. Analytical and advisory services: The Bank will continue to invest in high-quality analytic and advisory services, with increased attention to measuring impact, responding to client demand, putting forward critical reform issues, and dissemination. Analytical work will continue to be the main driver o f the strategy, as experience with programmatic ESW has shown time and again that strong analytic work leads to sound lending. The Bank's comparative advantage lies in its focus on capacity buildinginwhich strong analytic work i s combined with financing capacity. The integrated work program o f WBI and PESW will be key to structuring reform commitments in areas where Bank financing i s not required but Bank involvement i s sought. As part o f the monitoring o f CAS outcomes, task teams will systematically document how specific AAA products contribute to achieving CAS outcomes. Dissemination will be ensured through Country Office use o f speakers programs and roundtables in the six public information centers covering the country, as well as through dialogue with civil society partners and the press. 58. Financial Products: Bank lending willfocus increasingly on developmentpolicy loans and sector wide approaches. As mentioned above, institutional dimensions will receive greater focus, as successful reform often hinges on institutional bottlenecks. DPLs and SWAPS are the most appropriate lending instruments to address such issues. The relative sophistication o f Moroccan fiduciary systems permits increasedreliance on such instruments. 59. Morocco is a good candidate for scaling up Bank interventions and reducing costs through further reliance on country systems. The Country Procurement Assessment Review (CPAR), Country Financial Accountability Assessment (CFAA), Independent Procurement Review (IPR), and environment sector work all indicate that Morocco's fiduciary and safeguard procedures are, for the most part, well l6 Legal and Judicial DevelopmentProject, 19 designed; and its laws and regulations are o f high quality. Improvement i s required, however, in implementation, so Bank technical assistance will increasingly focus on implementation issues. The Bank will assess procedures and, inparticular, implementation capacity ingiven sectors to determine the extent to which use o f country systems i s indicated. 60. The Bank will increase its assistance to structure an adequate portfolio of IBRD financial products and services. This assistance will focus on the potential use o f existing IBRD financial products to manage Morocco's financial risks. The government has diversified its funding sources in recent years, tapping financial markets efficiently. IBRD lendinghas contributed to lowering the cost and overall risk structure o f its overall funding program. For new IBRD loans, Morocco has moved to fixed-spread loans with embedded risk management tools. In addition, Morocco and the Bank signed a Master Derivatives Agreement in October 2004. This agreement provides a range o f hedging products linked to existing IBRDloans, as well as technical support from the WorldBank's treasury staff. E. Partnerships 61. Cooperation with developmentpartners has been close in recent years and will continue during the CAS period. Bank teams will continue to work with bilateral donors, Arab Funds, the Islamic Development Bank, and the African Development Bank. The focus will be on increased upstream collaboration on strateges, shared analytic work, and effective cofinancing. The Bank will continue its close ongoing collaboration with the IMF. 62. I n light of Morocco's agreement with the European Union on an Action Plan in the context of the New Neighborhood Policy, enhanced cooperation would be sought with EU institutions on upstream coordination, joint analytic work, and joint financing. More rapid integration with Europe could be a crucial economic driver for Morocco in coming years. This offers opportunities for analytic work on the implications o f economic integration and harmonization with EUrules and regulations. The Bank and the EU see their roles as complementary, and both have a strong working relationship in Morocco. Given the economic and political ties to Europe, the EU is the key strategic partner for Morocco. In addition, large financial transfers make the EU Morocco's largest official financer. The European Commission and the Bank have agreed to early consultations during preparation o f their respective strategies and will explore opportunities for joint analytic work. Joint financing i s already in place for a series of programmatic PARLs, and opportunities for expansion to other areas will be explored. The European Investment Bank (ED) and the World Bank have also agreed to explore opportunities for increased collaboration duringthe CAS period. 63. I n buildingpartnerships within Morocco, the Country Office will continue its proactive work in outreach and communication. In 2004, six public information centers (PICs) were set up in national libraries and universities, and a quarterly newsletter was published. PICs are platforms for dissemination of Bank reports and studies, debates, and roundtables about development issues o f interest to the Moroccan public. Bank teams will hold a larger number o f such meetings in regard to lending and analytical work. The PICs will serve as a gathering point to build ownership for projects and to instill stakeholder participation in the Bank's operations. The CAS team conducted a wide number o f upstream consultations, often usingthe PICs as a preferred site. Consultations included all major stakeholders inthe definition and implementation o f Morocco's economic and social agenda, and involved government officials, parliamentarians, academics, the private sector and all streams o f civil society". Taking advantage of Morocco's openness, CAS dissemination will be, as was the case for the consultations, multi-pronged. The press, the PICs, and the newsletter will all be employed as conduits and communication vehicles. "SeeAnnex4 for a complete readout of this CAS consultations process 20 F. Lending Scenarios 64. For FY2006-09, a flexible program of $250 to $350 million a year on average is proposed to support the strategic objectives of the CAS. As noted above, Morocco has diversified sources o f external financing, and the level of Bank lending does not represent traditional "leverage" for accelerating a reform agenda. The government has indicatedits desire to borrow on the order o f $300 millionper year as part o f its overall funding program under macroeconomic scenarios equivalent to the base and high- growth scenarios presented in Section 11. This provides appropriate flexibility to respond to high-quality lending opportunities to support growth and related reforms. Although IBRD credit exposure i s moderately high, the proposed lending amounts are consistent with sound risk management in view o f recent progress, base-case projections, the outcome indicators set inthis CAS, and the evolution of IBRD exposure indicators. The lending program will be managed actively to ensure that the overall size and disbursement profile o f loan commitments does not cause a deterioration o f IBRD exposure indicators and, in particular, that it maintains the ratio o f IBRD exposure to GDP broadly at or below its current level. 65. Reduced IBRD lending would be triggered by a failure to maintain a stable macroeconomic framework. The Bank would reduce annual lending inthe event o f a significant deteriorationinthe main macroeconomic indicators relative to the base case scenario (Tables 1 and 2). Inparticular, a low case scenario would be triggered by a failure o f Morocco to move in the direction o f a sustainable fiscal deficit, as evidenced by a public sector deficit that would exceed the base case targets for 2005-09 in Table 1by 0.5 percent o f GDP. A low case would also be triggered by a ratio o f central government debt to GDP exceeding 72 percent at any point over the CAS period. 66. Countryfinancing parameters have been prepared and agreed upon by the government." Bank- financed projects are fully integrated into the budget and are well aligned with the government's development programs. The Bank's lending program represents a very small share o f the Moroccan government's overall economic and social development spending. Whether financed through Bank loans, government revenues, or other sources, public expenditures are subject to the same government fiscal rules. In light o f these factors, and provided that it stays within the overall CAS lending envelope, the Bank could finance up to 100percent o f costs o f individual operations. G. Results-BasedMonitoring and Evaluation 67. Monitoring of the CAS will rely on strengthening existing mechanismsfor data collection and outcome and output indicators available in the Bank portfolio of projects and analytic work. On the government side, the current management o f information and decision-making processes i s heavily focused on outputs such as budget spending. Projected results and impact are less likely to be measured. There has been, however, a gradual shift toward performance budgeting and contractualization, as outlined in the PARL. A major challenge for the CAS i s its ability to ensure that policies and budget allocations are based on a trustworthy system o f continuous evaluation that promotes accountability. Two specific issues should be monitored. First, what i s the level o f integration and coordination of policies, activity planning, and budgetingbetweenthe Ministryo f Finance and sector ministries, as well as among the sector-level and deconcentrated entities? Second, i s the relationship clear between spending and results? The Bank will continue to assist the government in strengthening its results-based management capabilities. This includes building permanent in-country capacity through the Institutional Development Fund(IDF) on training of trainers inresults-based monitoring and evaluation. Onthe Bank side, usingthe CAS as a management tool will help task managers to closely monitor progress in outcomes. This will '* See Annex 5: Morocco-Country Financing Parameters. 21 also serve as an incentive to design simpler results-oriented projects that take into account the implementation capacity o f the borrower at appraisal time. Capacity building efforts in monitoring and evaluation within Bank teams will continue so as to ensure that the CAS i s effectively and regularly monitored, and that results are usedto address eventual challenges and to generate lessons. IV. MANAGINGRISKS 68. The broadest risk facing the Morocco program is that insufficient growth, high unemployment, and social disparities, will lead to socio-political tensions which hinder further economic and social reforms. These risks are well known to the Moroccan govemment. They can be mitigated through decisive policy and institutional reforms leading to a more growth-oriented and competitive economy and explicit policies to provide services and opportunity to extended groups. As a frank partner o f reform, the Bank is called upon to back growth-oriented policies through dialogue, policy analysis and financial assistance. 69. A second risk is that Government commitment to reform will not be translated into action. Given the multitude o f actors, Morocco's decision-malung processes are often hesitant. Consensus i s hard to reach, giving way to cumbersome negotiations with low tolerance for risk takmg. Greater interministerial coordination and improved budget mechanisms can help inimplementingthe government's programs and priorities. While the Bank i s involved through the PARL in streamlining and rationalizing budget processes, the environment in which decisions are reached i s likely to remain complex. The Bank will mitigate this risk by supporting transparent decision-mahng and systematic political-economy analysis of stakeholders. A recent pilot program focused on agriculturalreformproved very useful inthis respect. 70. Finally, the Bank faces institutional risks regarding its continued relevance to Morocco as a sophisticatedmiddle-income country. Large increased concessional financing from the European Union through its New NeighborhoodPolicy may reduce Morocco's need for Bank financing. At the same time, need will increase for technical knowledge to advance the reform agenda. To remain relevant, the Bank must respond to those demands through high-quality analytical and technical advice provided ina timely manner and accompanied by appropriate financial instruments. The Bank also has to continue building synergies with Morocco's development partners, especially greater complementarity with the EU. .-c0 -Y u Y t3 $E W -0 a C 0 m 5x 8 Y 0 0 2 a d) 0 2f 3 0 c 0 .d Y L d 2 0 D .--i 0 -0 9 c -&G 5 er 0 Y W W W 8u 6 m 0 M I 0 0 N m u 4 0 0 0 .. : X .I Y h I Y m 22I i YW .I I0 Y N !! BE Y 4 m m 8c 4 .I u BW a!i m m W .IE Y k8; .I Y h 0 0 0 . ME.. rl .I 8 Y zu *e W u .I Y cd 3;h d N a a a 8N .I 6 cb a .I Y : a 9 0 L a 0 Ba2 ah m 'Eu a a2 m u .I a2 0 Y m VI a2 : u % u L n.. d c.l $ -a Y gu a2 u .I Y 3; 2 m Q) .m 0 es .I id a Y .I E 0 m sf UE a L YQ) a B Y0 m m 0) V a 0 U8 B Y .E I a2 M a i L 58ElaE.. YQ) Y d .r 8 Y V Q) .C) $ 0 .I Y ea zL 0 I 33 C A S Annex 3 :MOROCCOCAS COMPLETIONREPORT2001-04 Date o f CAS: M a y 7,2001 Progress Report: None required Period coveredby CAS: May 2001-June 2004 (Fiscal years 2001-04) Period coveredby the present report: May 2001-February 2005 Completion Report prepared by: CCcile Fruman, Senior Country Officer Introduction 1. The C A S completion report (CASCR) assesses the effectiveness of the 2001 Country Assistance Strategy for Morocco in bringing about expected results and highlights the lessons learned over the period. The report's conclusions will shape the new CAS. It is not a formal evaluation, but a self-evaluation tool for the Bank's country team. 2. C A S C R conclusions were identified in close collaboration with the Bank's main partners in Morocco. This process was participatory in nature and consisted o f a workshop in June 2004 and two meetings with key partner ministries duringwhich completion report conclusions were discussed and validated. This analysis was accompanied by key reference documents, as well as the conclusions o f the Bank's Quality Assurance Group (QAG) Country Analytical and Advisory Activity (AAA) Assessment." In December 2004, the report's conclusions and recommendations were discussed in detail with members o f the Morocco country team. This allowed them to identify concrete measures to improve the Bank's performance duringthe new CAS period. 3 . The completion report reviews CAS implementation from the perspective of the Bank's results framework. Given that its time frame dates back to 2001, when the Bank's focus on managing for results was not yet articulated, the CAS does not identify a set o f core measurable outcomes. For this reason, the author o f t h s report had to summarize the intended CAS outcomes, which could only be formulated generally. Moreover, it was difficult to demonstrate progress ineach of the outcome areas because the CAS document did not identify monitoring indicators for each outcome, but eight core performance indicators that essentially measure long-term development goals specified in the five year Plan (the Plan) and 11 CAS monitoring indicators (see Appendix Table 2) that were no quantitative and combined outputs with intermediate outcomes." When indicators did show progress, it was difficult to attribute changes to the Bank's activities. I.TheMoroccanContextandLong-TermNationalDevelopmentGoals 4. The 2001 CAS was aligned with the five-year plan (2000-04) whose central goal was to accelerate growth to an average of 5 percent a year while ensuring that the objectives of equity and inclusion were met. The plan focused on four major challenges: (1) accelerating growth with higher levels o f public investment, structural reforms, and private sector development; (2) improving the poverty focus of public policies and expenditures; (3) reforming the state; (4) reducing the agricultural sector's vulnerability and environmental threats. Although the Millennium Development Goals (MDGs) were not identified specifically as such in the Plan, numerous goals aimed to reduce poverty and improve living conditions. Progress has been made o n the MDGs, as illustrated by the rising literacy rate o f girls aged 15-24 years from 77.9 percent in 2001 to 79.2 percent in 2002; the decreasing infant mortality rate from 41 per 1,000 in 2001 to 39 per 1,000 in 2002; the decrease in Morocco CountryAAA Assessment, QAG, January 13,2005.World Bank intemaldocument. 2' Inaddition,the CAS documenthas aprogrammatrixwith developmentindicators (AnnexB9). However,targetswere not specifiedfor eachofthe indicators with only reference dataprovided for the 1995-2000 period. 34 transmissible diseases; the noticeable improvement in indicators documenting access to computers andtelephone lines. However, large inequalities still remainbetweenrural and urban areas, andmuch progress i s yet to be made before reachngthe MDGs, especially inrural areas. 5. Duringthe CAS implementation period, Morocco's long-term goals didnot change from those specified in the 2000-04 Plan. However, priorities and policies implemented were often adapted to respond to new exogenous shocks. For example, the tourism crisis caused by the tragic events o f September 11made boosting this sector one o f the government's key priorities. A strategy called Vision 2010 was developed, setting a goal o f attracting 10 million tourists by 2010. The M a y 16, 2003, attacks in Casablanca were equally important in pushing the government to make low- income housing a priority. The government is fundamentally changing policies, paying much closer attention to social issues and making services more readily accessible to the poor and vulnerable, Creation o f the Ministry o f Social Development, Family, and Solidarity in M a y 2004 is a concrete example o f this new orientation. Finally, the government made the textile sector a main priority because it is one o f the country's largest exporters and a large source o f employment, yet i s heavily threatened by external competition. 6. During2001-04, the economic situation improved moderately and Morocco remained in the Base Case CAS scenario. The country maintained an average yearly growth rate o f 4.5 percent, principally because o f the satisfactory performance o f the agricultural sector and a more modest improvement in growth in nonagricultural sectors. Morocco's external position has strengthened as current accounts have been in surplus since 2001 and external reserves have increased. Inflation has remained stable and at low levels, around 2 percent since 2000. However, although the fiscal position began to strengthen in2002, government direct debt remains highat 69 percent o f GDP in2004. Ths cannot be sustained long-term. Privatization proceeds have weakened fiscal discipline and have been used to finance increases inthe wage bill. In2004, progress was judged sufficient for Bank financing of a sector reform program to support reforms inpublic administration. The two fiscal triggers set out inthe CAS were reached: budget revenues were maintained at 24 percent of GDP, and the wage bill and other current expenditures were contained.22 Despite an increase in the wage bill in 2003, the Bank deemed that the measures taken by the government to control future increases in the wage bill and stabilize public revenues were adequate. 11. Progress and CASResults23 7. The key objective of the 2001 CAS was to "deepen the Bank's poverty focus through community-based and decentralization approaches" and "to promote strong analytical work and dialogue on the conditions needed to revitalize private investment and This objective was chosen because Morocco was in the vanguard o f the Middle East and North Afhca in terms of an open civil society, democratization, promotion o f the rule o f law, decentralization, and community participation. Yet it was recognized that the economic policies o f the government were unlikely to have a sustained impact on poverty reduction as long as stronger growth and agncultural reform agendas were not adopted. This objective was supported by four CAS pillars, analyzed below. 8. Outcomes for each pillar are analyzed in terms of the pillar's main objective, its supportive assistance instruments, its achievements related to CAS results, and the performance and monitoring indicators. An effort was made to focus on the instruments that inform the different outcomes rather than on eachparticular project or loan. It is understoodthat activities inany particular pillar are likely to contribute to the outcomes o f other pillars,that CAS activities build on each other, andthat each outcome is likely to be influencedby more than one instrument andby activities inother 22 Budget revenues as a percentage of GDP were 24.7 percent in 2002, 24.1 percent in 2003, and 24 percent in 2004. Wage bill growth was between 1 and 3 percent a year, except for 2003 (11percent); and capital expenses and other current expenses slightly decreased(fiom 11.2percentof GDP in2002 to 10.6 percentin2004). 23 See Summary Table of CASCR in Appendix (Table l), CAS Monitoring Indicators (Table 2), PlannedIBRD Lending Programand Actual Deliveries (Table 3), PlannedAAA Programand Actual Deliveries(Table 4). 24 CAS 2001,pages 21-22. 35 pillars. Consequently, pillars are not separated or seen in isolation, but as the main arteries through which efforts and resources flow inthe direction towards achieving the CAS goals. CAS results are summarized inTable 1o f the Appendix. A. PillarIOutcomes: Poverty reduction through inclusion and participation 9. This pillar was aligned with the government's goal to better target its policies and public spending on poverty reduction. Core performance indicators identified for this pillar show a positive evolution (Table 3). The pillar combines social sectors (education, health, and social protection), rural development, and poverty analysis. Most program activities supporting this pillar were completed as projected, with some variations. In particular, some projected projects were replaced by analytical work. Activities undertaken are compared to those projected inTable 4 below, which i s organized according to each expected outcome. Table 3: Evolution of Core Performance Indicators for Pillar I Performance Indicators Reference Goals for Result 2004 (year) 0 Poverty incidence inrural 27% 22% 20-2 1%$ areas (%) (2003) 0 Net primary enrollment 53% 75% 85.6% rates of rural girls, as (2003/04) percentage o fNER o f urbanboys2("/.I 0 Maternal mortality rate in 307 250-70 220 rural areas (per 100,000)3 (2002y 0 Households with access to 42% 60-70% 54% safe water (%) (2003) Table Notes: 1. Refers to latest available year, 1997-2001 2. Related MDGis to eliminate gender disparity inprimary and secondary education by 2005. 3. Related MDGis to reduce maternal mortality rates by three quarters by 2015. 4. This indicator was not clearly defined inthe CAS, and it i s assumed to measure the share ofrural households with access to drinking water. 5. Estimate obtained by extrapolating results o f the household survey o f 1998199,using growth rates and changes ingmwth distribution (improvements inrural zones due to strong growh inthe agricultural sector.) 6. This is the national average for maternal mortality. Data for rural areas was not obtained. Source: Statistical Directory (Annuaire Statistique); 2002. Outcome1.1.Poor rural areas better developed:Achieved. 10. Performance indicators show significant progress toward achieving this outcome (see Table 3). Inrural areas, poverty levels have decreased, girls' educational levels have surpassed goals, and access to drinking water improved greatly. Rural infrastructure programs now reach a larger portion o f the rural population, however data about whether the Plan's projected coverage levels o f 60 to 70 percent were reached (a CAS monitoring indicator) was not available. One reason for the significant drop in rural poverty levels is the good rainfall levels and excellent harvests of recent years. Active government policies and programs targeting rural areas and a rise in participation o f civil society help explain progress inthe other indicators. 36 Table 4: Activities Completedduring the CASPeriod(Pillar I) Expected Outcomes Proposed Activities Activities Undertaken during CAS 1.1.Poorrural areas Three adaptable Projectsalreadyunderway at the start of CAS: better developed programspromoting LakhdarWatershed(1999-2005)' community-based Pilot FisheriesDevelopment(1999-2004) development Secondary Roads(1995-2002) Ruralinfrastructure SPP CoordinatioxdMomtoriingof Social Programs(19962004) programs(roads, (BAJ) drinking water, and SPP Education(1996-2004) (BAJ) electricity) SPP Health(19962004) (BAJ) Social funds RuralWater Supply and Sanitation (1998-2003) Proiects/activities undertakenduring CAS: Irrigation-BasedCommunityDevelopment (2001-06) RainfedAgricultural Development (2003-1 0) RuralRoads (2004-2010) SocialDevelopmentAgency (2002-08) IntegratedForestryandRural Development (under preparation) RuralWater Supply and Sanitation (under preparation) ForestandLand Review(2002-2003) 1.2. Education Non-formal Education Projects alreadyunder way at the start of CAS: Charter implemented Project SPP Education (1996-2004) Support for implementation ofthe Proiectsiactivitiesundertakenduring CAS: Education Charter(TA) EducationReformStratem Note (2001) ~I Analytical work on Public Expenditure Review (2002) ' fiscal sustainability of Non-formal EducationStudy (2003) educationreform as part Tertiary EducationSectorNote (2003) of Public Expenditure Tertiary Education,programmatic ESW (started in2004, in Review progress) Pilotprograms for Basic EducationReform SupportProgram, or PARSEM (200549) regional decentralizationor school evaluation Targeted school expansionprograms 1.3. Increased Technical assistance Proiects/activities undertakenduring CAS: number of literacy Literacyproject Social PrioritiesProgram(BAJ) Education(componentD) programparticipants EvaluationAdult LiteracyProgram(2002) Adult Literacy LIL(2003-06) 1.4. Better Participativepoverty Proiects alreadyunder way at the start of CAS: understandingof assessment Poverty update(2001) povertydimensions Initiatives to protect (including for women chldren Proiects/activitiesundertakenduring CAS: and children) Implementingthe Gender Update (2002) Action Plan for the Public Expenditure Review (2002) Integrationof Women Poverty Assessment (2004) inDevelopment Study on Child Labor with UNICEF and !LO (2003) Social ProtectionNote (2003) 1.5. Improvedhealth No new initiatives-the Projects already under way at the start of CAS: service access and Bank will support EU HealthManagement(1999-2007) sector financing and AfDB efforts SPP HealthFinancing managementthrough AIDS Strategic Action Plan(2002) implementation of nationalhealth Proiects/activitiesundertakenduring CAS: insurance HealthInsuranceTA (inprogress) Table Notes: 37 11. World Bank programs contributed to this outcome, particularly in terms of rural infrastructure development. Almost all Bank projects reached their development objectives, and many surpassed their targets in financing infrastructure. Some notable examples are hghlighted below: 0 The Secondary Roads project has led to construction o f nearly 1,000 hlometers o f paved and rural roads. The economic rate o f return on roads was hgh, estimated at 30-50 percent, and these investments appear sustainable. The CoordinatiodMonitoring o f Social Programs project contributed to construction o f 2,360 kilometers o f roads inthe 14 provinces covered by BAJ.25 All o fthese roadshave benefited localpopulations byproviding improved accessto schools and health centers as well as lowering prices on basic products and facilitating implementation o f rural electrification and drinlungwater programs, etc. 0 The Rural Water Supply and Sanitation project (PAGER) benefited 304,000 people, more than double the initial goal outlined for the project. Sanitation and access to potable water was improved considerably, and the time women and girls spent fetching water was reduced 5C-90 percent, which translated into higher school attendance among girls. 0 The SPP Education project financed more than 2,400 rural community schools in the 14 provinces covered by BAJ, well above the target o f 1,370 schools. This led to an increase in primary education from 58 percent in 1995196 to 92 percent in 2000/01, surpassing the project goal o f 86 percent. At the same time, the level o f girls' education increased from 38 percent to 82.5 percent, exceeding the target o f 72.8 percent. 12. Bankprojects'participatory approachto rural development was progressivelyadopted. The Lakhdar Watershed Management project led to creation o f 26 village committees that play a substantial role inpreparing and implementing community development plans, invigorating the socio development dynamic and improving institutional capacities. Both the Irrigation-Based Community Development project (DRI-PMH) and the Rainfed Agriculture Development project (DRI-MVB)use a participatory approach, which has increased the time needed to identify project activities and led to implementation delays. Implementation of these integrated rural development projects also has been hampered by lack o f an effective institutional set-up that promotes integration, participation, and decentralization; weak institutional capacity o f local govemments and businesses inremote areas; and complex administrative payment systems not conducive to local contract financing. However, the approach remains promising since local development associations are a driving force for institutional change. The Social Development Agency project (ADS) also encourages a participatory approach through its work with NGOs and beneficiary groups. 13. On the other hand, it is difficult to demonstratethat Bank-financedprojectshave ledto increasedrevenues and livingstandards for the ruralpopulation. This is because data is lachng andmany projects are still intheir early implementation. One effort that has had considerable impact on the population's income is the National Promotion program, supported by the Coordinationhlonitoring o f Social Programs project. More than 4 million days o f paid employment were generated from building basic infrastructure. This work, mostly unskilled, paid about US$20 million andbenefited more than 300,000 rural families inthe 14 covered provinces. Nonetheless, the program seemingly didnot reach the poorest families.26 26Morocco-PovertyReport: StrengtheningPolicy by Identifyingthe Geographic Dimension of Poverty, 2004 -MA 28223 38 Outcome 1.2.Education Charter Implemented: Achieved. 14. Implementationof the Education Charter led to important reforms in the sector and improved access to education. Rural girls' net education rate (NER) as compared to urban boys' NER progressed from 53 percent in 2000 to 85.6 percent in 2003/04. Inaddition, CAS monitoring indicators were met: (1) agreement was reachedand progressmade on implementinga reformplanfor universal primary education, and (2) the number of community schools increased and the social fund was implemented (ADS). 15. Bank activities accompanied the process of implementing the Education Charter and helped improve educationalaccess. The Bank's various analytical work (see Table 4) as well as the preparation process for a significant operation, PARSEM, supported a highlevel dialogue between the World Bank andthe government, focusing on implementation o f the Education Charter and on quality improvement. As explained in Outcome 1.1, the SPP Education project had a significant impact on access. The 14 provinces covered by BAJ saw a growth inthe number of children in primary school o f 48 percent between 1996197and2002/03, compared to a national increase o f 28 percent. However, retention-rates for girls in elementary school increased less than the 65 percent projected, moving from 36 percent in 1994195to 42 percent in2000/2001. It is fair to say that the project appraisal target was probably too ambitious. In addition, this project tested a new approach to participation and inclusionby involvingNGOs and beneficiary groups innumerous activities. Outcome 1.3.Increased number ofparticipants in literacyprograms: Achieved. 16. By year-end 2004, a total of 1.2 million people participated in the adult literacy campaign launchedin 2001. The CAS monitoring indicator, which was the successful launching of the campaign, was met. However, the campaign was unable to reach its quantitative target o f enrolling 1,800,000 people by 2004. In addition, data is unavailable to demonstrate if the campaign has increasedliteracy levels. 17. The Banksupportedthe government's efforts both conceptually and with financing, but without great impact. The 2002 evaluation of Morocco's existing adult literacy programs facilitated the preparation of the Alpha Maroc project for 2003-06. However, implementation o f this adult literacy project has been delayed and it is uncertain if it will reach its development objectives, including quality improvements in literacy programming and stronger management through partnershipsbetweenthe government andservice providers. This approach is innovative andsupports one o fthe key goals of Pillar I,which is to encourageparticipation andinclusion. Outcome 1.4. Better understanding of the dimensions of poverty (including for women and children):Achieved. 18. The Bank has had a significant impact in improving the analysis and understanding of poverty in Morocco. The 2004 Poverty Report introducedmany innovations inthe measurement and analysis o fpoverty, inparticular the development o f communal poverty maps. Analysis of these maps will allow resources to be better targeted toward the most disadvantaged communes, improving the efficiency of poverty reduction programs. The report also led to development of a simulation model that estimates in detail the effects of cereals reform on households, a qualitative study on the links between poverty and girls' education, and an evaluation of statistical systems available to monitor social conditions. The report is timely, supporting the government's renewed efforts following the Casablanca bombings in May 2003 to identify policies and programs to reduce poverty, including in urban areas, and to analyze the distribution o f economic growth among the poor and vulnerable. The government praised the participatory process adopted in drafting this report as well as its focus on buildinginstitutional capacity so that Morocco can continue to carry out analysis inthe future. QAG ratedthe report as hghly satisfactory. 39 19. The Bank also had considerable influence in the debate on women's issues and encouraged the use of gender budgeting. During the CAS period, the Bank monitored and supported implementation o f the National Action Plan for the Integration o f Women inDevelopment, which was developed with the Bank's support in 1998. The plan's recommendations became a reality when the new family code, the Moudawana, went into effect on February 5, 2004, increasing womens' rights. Numerous civil society actors say that the World Bank played a key role in the adoption o f this law. The Bank also supported the implementation o f gender budgeting withm the Ministryof Finance andother sectoral ministries through severaltrainingworkshops. This program is ongoing with the support o fUNIFEM. Outcome 1.5. Improved health service access and sectoral financial management through the implementation of national health insurance: Partially achieved. 20. Although this outcome is formulated broadly, without progress indicators, it is fair to say that access to basic health care services improved, though below expectations. The SPP Health Management project only partially achieved its development objectives. Despite construction and renovation of more than 260 health centers in 14 provinces, access to basic treatment only increased from 47 to 50 percent from 1995 to 2002, below the anticipated 60 percent. Inearly 2003, 128 health care centers closed because o f personnel shortages, and the Ministryhad yet to implement a human resource strategy to efficiently manage the distribution o f staff inrural areas. The budget for pharmaceuticals increased to 23 percent inprovinces, providing better access to medication. Assisted births greatly increased, from 18.5 percent in 1995 to 47 percent in2002, exceeding the 30 percent target; but many problems persist in maternal health. In 11 o f 14 provinces, vaccination programs reached their population target o f 90 percent. The incidence o f infectious diseases stabilized or diminished. However, it i s not possible to demonstrate if the Bank's AIDS study had any impact or ledto increased access to prevention and treatment services. 21. Much progress has been made in managing and financing the health sector. A new health insurance law was adopted in2004 and took effect inJanuary 2005, and a National Agency for Health Insurance was created. To support the Health Sector Management project, the Bank provided eight working committees headed by the Prime Minister with technical assistance to enable them to analyze reform options and develop implementation measures. Progress also was made in strengthening the strategic planning and managerial capacity, the quality, and the efficiency o f 14 public hospitals supported by the Health Management project. The Health Ministry's policy formulation and sector management ability should continue to improve as a result o f the complete organizational audit and the review o f human resources financed by the project. The project monitoring and evaluation system i s weak, however, and must be improved in order to be able to demonstrate tangible results when the project is completed. B. Pillar I1Outcomes: Growth and Private Sector Development to Support Job Creation 22. This pillar was aligned with the Plan of 2000, and performance indicators show some progress in achieving the objective. Inline with the plan's primary goal o f accelerated growth, t h s pillar aimed at creating the conditions necessary for sustainable economic expansion andjob creation. Poverty incidence-ne o f the two core performance indicators-was reduced due in large part to good agricultural seasons since nonagricultural growth has remained weak and below expectations, averaging only 3.2 percent over this period. However, fiscal deficit reduction did not reach the anticipated levels (Table 5). Although unemployment levels were not used as a performance indicator, it is worth noting that unemployment figures have evolved favorably over the period, going from a national average o f 13.6 percent and an urban rate o f 21.5 percent in 2000 to 11percent and 18.7 percent respectively in 2004. Financial support provided under t h s pillar was aligned with what was proposed, and the AAA program was even richer than anticipated (Table 6). The North Afiica Enterprise Development Program (NAEiD), established by the International Finance Corporation (IFC) inMorocco in2002, played an increasingly important role inprogramimplementation. 40 Table 5: Evolution of Core Performance Indicators for Pillar I1 Performance Indicators Reference' Goals for Result (year) 2004 Poverty incidence 19 % 15 Yo 15% (2003) ' Fiscal Deficit (% o f GDP) 7.7 % 3.4 % 5.2%3 (2003) Outcome2.1. Developed consensuson a growth-oriented economicpolicyframework: Achieved. 23. Overall, the Bank's activities met the C A S objective of "reaching an agreement on a growth-oriented economic policy framework." The various studies conducted by the Bank were good diagnostic tools, and the techmcal assistance was o f high quality and raised awareness about certainkey reforms, as illustratedbelow: 0 The public expenditure review, the continued dialogue on macroeconomic sustainability, and the public adrmnistration PESW helped raise awareness o f the importance o f monetary policy reform, trade liberalization, and above all, fiscal sustainability. A consensus was reached on the need to reduce the fiscal deficit to 3 percent by 2008 andto decrease the wage bill from 13 percent in2000 to 11percent o f GDP in2004. This was a breakthrough as a consensus o f this nature had not been reached during the previous CAS period. Nevertheless, t h s agreement did not lead to a containment o f fiscal deficit andrestructuring o f fiscal expenditures, which was one o f the two monitoring indicators o f this pillar. 0 The Financial Sector Assessment Program conducted a pertinent analysis o f the strengths and constraints of the financial system. Basedon this analysis, w h c h the Quality Assurance Group rated as highly satisfactory, the government has asked the Bank to prepare a financial sector adjustment operation, which i s currently being finalized. 0 Techmcal assistance provided to the PlanningDepartment o f the Ministry o f Finance and the report on "Labor Market Policies and Unemployment inMorocco: a Quantitative Analy~is"~' had considerable impact and helped strengthen the ministry's capacity to conduct quantitative studies o f the labor market. 0 Onthe other hand, other studies or technical assistance had a more limited impact, in particular the study on sources o f growth, w h c h had limited dissemination. The Private ParticipationinInfrastructure (PPI) strategy was never carried out. *'Agenor, Pierre-Richard, andKarimEl Aynaoui. 2003. "Labor MarketPolicies and Unemployment inMorocco: A Quantitative Analysis." Study preparedfor World Bank Institute, July. 41 Table 6: Activities Completed duringthe CASperiod(Pillar 11) Expected Outcomes ProposedActivities ActivitiesUndertaken during CAS l.1. Consensus formed Analytical work aiming Projects already under way at start of CAS: Ingrowth-oriented to build a consensus 0 IDF- Policy FormulationandAnalysis Support (200C xonomic policy FinancialSector 2002) iamework Assessment Program (FSAP) Proiectsiactivities undertakenduring CAS: PPIStrategy 0 Public ExpenditureReview - 2002 Sourcesof Growth- 2001 0 FinancialSector Assessment (FSAP) - 2003 Public AdministrationReforin(Programmatic ESW) (2003- 05) IDF-Economic Policy ResearchCenter (2002-04) TA on Labor Market for the Ministry of Finance- 2002 Dialogueon Sustainability of Fiscal Deficit accompanying PARL 1.2.Moredynamic SMEs Joint WBiIFC strategyto Projectsalready under \yay at start of CAS: indservices industry (in designinnovativesupport Telecommunication, Post, and Information Technology ]articular ICT and mechanisms for SMEs. (1 999-200 1) .ourism),leading to job Cultural Heritage or SustainableCoastal Tourism Dewlopment (200Cr2004) :reation TourismProject PSD I11Vocational Training (1997-2003) ICT adjustmentloan Secondary Roads. component on encouragingpri\,atesector Investmentprojects in participation(1995-2002) ICT andpostal senices, possibly combinedwith Proiects acti\ities undertakenduring CAS: support for the SME Creation ofNXED by IFC - 2002(no\v PEP MENA-2004) sector Information Infrastructure Sector Project (2001-03) TA on telecommunications and ICT (200344) IFC investment in .Meditel and Maroc Invest (SME Fund) - 2003 IFC NAED-PEP MENA TA to strengthen financial institution capacity to finance ShIEs and to increase capacity o fprofessional associations in industrial zones- in progress Cultural Heritage Strategy Note - 2003 Airport Ground HandlingStudy (PPIAF) - 2002 Training onimpact evaluation in active labor market programs- 2004 2.3. Improvedinvestment DesignPPIstrategyusing Proiectsalready under way at the start of CAS: climate for the private lessons learnedfrom Legal and Judicial Development(2000- 2004) secto? success o f liberalization Proiects activities undertakendurine CAS: inthe FirmAnalysis and Competitiveness Sunvy - 2002 telecommunications FinancialSector .4ssessment (FS.-\P) - 2003 sector Legal and Judicial Sector Assessment - 2003 Sector reformprogram ROSC .4ccounting and Auditing - 2003 Go\.emanceand Ci\,iISociety - 2003 Insolvency Assessment and Creditor Rights (ROSC) - 2005 Inwstment Climate Assessment,jointly nith IFC - being finalized IFCNAED-PEP RiEN.4 - TA to credit registryto improx financial data 2.4. Reduceddistortions Water and agriculture Proiects actillties undertakendurine CAS: inthe agriculture strategynote (reform PESW on Cereals reform and Irrigation2002-2004 : incentives systemz9 incentives framework, Agnculture Sector Note - 2003 protectionmeasuresfor .4gncultureReform and Lmgation - 2003 vulnerable populations) Sector reformprogram TableNote: 1. This outcome was one of four in which a possiblesector reform programhadbeen foreseen as part o f the basecase (Part V. E. of CAS). 42 Outcome2.2. More-dynamic SMEs and services industry (inparticular ICT and tourism), leading tojob creation: Partially achieved. 24. Growth inthe ICT sector was dynamic,thanks, inpart, to the Bank's contributions. The Telecommunications, Post, and Information Technology (1999-2001) and Information Infrastructure (2001-03) projects led to many positive outcomes: introduction o f competition in the telecommunications sector, improved regulatory capacity, partial privatization o f Maroc Telecom, restructuring of the Moroccan postal system, and increased access o f rural and poor communities to telecommunication services. In 1999, Meditel paid US$1.1 billion for a second G S M (cellular) license, resulting in one of the largest sales in the world and increased fiscal revenues (13 percent). As a result o f these programs, cellular lines have grown to 7.5 million in 2004; tens o f thousands o f direct and indirect jobs have been created; and the postal system has increased its profitability, posting its first profits in 2000. IFC invested US$79 million inMeditel, which enabled the company to attract nearly US$400 million o f financing from foreign banks. 25. Other sectors supportedby the Bank (tourism, SMEs) experiencedmore limitedgrowth. As part of the Sustainable Coastal Tourism Development project, many public-private partnerships supporting sustainable and integrated development o f coastal tourism sites were tested, and a regulatory framework for such contracts is being finalized. The Cultural Heritage Strategy Note, while offering a good evaluation o f the stakes involved (and rated satisfactory by QAG), had very little impact because the recommendations were not implemented and the study was not made public. SME support was conducted by IFC through the North Africa Enterprise Development Program (NAED). It is still too early to measure the impact o f NAED's activities, which include technical assistance to build financial institution capacity to better serve SMEs; technical assistance to strengthen professional associations inindustrial zones; and IFC's US$5 million investment inMaroc Invest (an investment fund for SMEs). However, NAEDhas designed performance indicators that will allow results t o be monitored in coming years. The Bank's PSD I11 Vocational Training project (1997-2003) reached its development objective. It increased business demand for employee professional development and corporate training in the workplace (in particular withm SMEs) and supported the emergence o f centers o f excellence inprofessional development. The number o f people who received training inthe workplace increased from 27,000 in 1996 to 133,000 in2002. Outcome2.3. Improved investment climatefor theprivate sector: Partially achieved. 26. Although progresswas made toward improving the investment climate in Morocco, the Bank's contribution was limited.This outcome was part o f the "sector reform program" component of the CAS base case scenario, yet a reform loan was not prepared during the period because the triggers (that is, establishment o f a broad PPI framework and streamlined business environment) were not met. The Bank's involvement was confined to several studies and a sole project: the Legal and Judicial Development project, w h c h has just closed after achieving its development objectives. Tribunals and trade registers are functioning better, and this has led to better service quality, the reduction o f delays, and easier access to information. The studies provided a rigorous analysis o f the obstacles that firms face and sparked a debate between different govemment stakeholders and the business world. A few studies seem to have led to positive changes, though t h s i s difficult to demonstrate. The Firm Analysis and Competitiveness Survey i s said to have encouraged important reforms in the labor law (to make the labor market more flexible), in the liberalization o f certain sectors such as telecommunications and transport, and inthe design o f regional investment centers. Outcome2.4.Reduceddistortionsin the agricultural incentives system: Not achieved, but preparatory work is under way. 43 27. While this outcome was only partially achieved, important progress has been made in identifying the key challenges and implementing certain reforms. The Bank's programmatic economic and sector work (PESW) on agriculture reform led to the following results: options for de- protection o f the agnculture sector have been analyzed; progressive abolition o f flour subsidies is underway; analysis is being undertaken to assess whether food subsidies or other assistance programs should be implemented for the poor and whether direct support to farmers affected by the reform would be warranted as a temporary measure. However, certain difficult choices have yet to be made. For example, the CAS included a monitoring indicator under pillar 111, which has been only partially achieved: the removal o f consumer subsidy systems in key agricultural products. The Bank's PESW seems to have been the best way to support reform as it allowed for the delivery o f regular analytical and technical assistance, in response to specific demand. The sector reform program that was envisioned in the CAS did not materialize, as the trigger (liberalization o f the apcultural pricing system) was not met. C. PillarI11Outcomes:Reducedvulnerabilityofthe poors' incomeandconsumptionto droughts 28. This pillar was aligned with the Plan's goals of reducingagriculturalvulnerability and environmental threats, but performance indicator targets were not reached.It aimed to help the government reform agricultural incentives, stop environmental degradation, and buildconsensus for a more sustainable and equitable global policy o f using scarce water resources. Performance indicators (Table 7) show improvement in water cost recovery, although below target, and deterioration in public expenditure on social assistance programs. In addition, there was an important shift between the instruments actually usedinimplementing the pillar and those projected (Table 8). Table 7: Evolutionof Core PerformanceIndicatorsfor Pillar I11 Water cost recover9 (%I 62 % 90 % 76% Public expenditure on social (2004) assistance programs3 ( % o f 0.6 Yo 1.2% 0.37% GDP) (2004) Table Notes: 1. Refers to latest available year, 1997-2001. 2. Rates ofrecovering operations and management costs by water fees collected in the nine largescale irrigationareas. For 2004, the definition used is average rates of recovery of water charges (outside o f overdue bills) for the seven Offices Regionaux de Mise en Valeur Agricole that bill for water. 3. Defined as resources on employment program andpublic works (Promotion nationale), welfare (Entraide nationale),and literacy programs Outcome3.1. Progress in improving social safety nets and socialprotection: Not achieved. 29. Performanceand monitoringindicatorsshow that littleprogress has been madeand the CAS outcome was not reached.Public spending on social assistance programs did not attain the 1.2 percent o f GDP projected-and even decreased from its 2000 level, amounting to only 0.37 percent o f GDP in 2004. The monitoring indicator for this outcome-xtended coverage o f social assistance programs-was also not reached. Though the Bank conducted fairly rich analytical work during t h s period, the analysis did not accelerate implementation o f a social protection system. The Bank's note on social protection introduced a new approach, emphasizing integrated management o f social, economic, and environmental risk for poor and vulnerable groups. However, QAGrated the report 44 marginally satisfactory because follow-up was laclung and dissemination limited. The 2004 Poverty Report highlighted the need for social protection programs to accompany the reform o f cereals compensation and offered recommendations for implementation. Overall, few actions were taken by government to implement these recommendations, notably those regarding a social protection framework aligned withthe poverty reduction strategy and financial sustainability. Table 8: Activities Completed during the CASPeriod(Pillar 111) ExpectedOutcomes ProposedActivities Activitiesduring CAS 3.1,Progressinimproving Policydialoguewith the Proiects/activities undertakenduring social safety nets and social govemment andcivil society CAS: protection Small catalytic institutional Social ProtectionNote -2002 projects Poverty Assessment- 2004 Scaled-up approach ifthe govemmentbegins reforming food subsidy systems or safety net programs. 3.2. Improvedwater Comprehensive review ofrural Proiects alreadyunderwav at start of management throughbetter water management CAS: utilizationmethodsandfull Emergencydrought preparedness Water SupplyV (1994-2002) cost recovery study SewerageandWater ReuseI1 Work on drought management and (19962005) integratedapproach to water Water ResourceManagement resourcemanagement (1998-2005) Irrigation LIL Proiects/activitiesundertakenduring CAS: Irrigation-BasedCommunity Development (200146) Agriculture PESW coveringcereals reformandirrigation: -Agriculture Sector Note, 2003 -AgriculturalReformand Irrigation, 2003 WB and IFC support to launch Guerdane pilot project (PPP) Water Sector Note-2005 RED1Water Sector - 2004 3.3. Implementation ofLaw on No particularprojectbut Proiectsalreadyunderwav at start of environmentalprotectionand mainstreamingof environmental CAS: Law on evaluationof issues inall future projects GEF Protected Areas Management, environmentalimpacts GEF for climatechange, energy (200249) conservation and efficiency, and renewableenergy Proiects/activitiesundertakenduring PrototypeCarbonFund CAS: Forest and LandReview (2002-03) EnvironmentAnalysis -2003 Workshops andtraining- 2004 Outcome3.2. Improved water management through better utilization methodsandfull cost recovery: Partially achieved. 30. Based on indicators identified for the irrigationsector, this outcome was only partially achieved.Cost recovery rates for water inthe nine large-scale imgation areas rangedfrom 62 percent in 2000 to 76 percent in 2003 (inthe seven areas that charged for water). However, t h s percentage was well below the 90 percent rate projected. The tariff adjustment program recommended by the 45 Bank in 2000 was implemented, and consequently, irrigation water tariffs were sufficient to cover operation and maintenance costs in five o f the seven Regional Agricultural Development Authorities (Offices Regionaux de Mise en Valeur Agricole) in2004. 31. The Bank suggested a reform process to help improve the quality and sustainability of water services in large-scale irrigation areas, but these reforms are unimplemented. Institutional reforms proposedby the Bank's Programmatic ESW-namely the delegation o f irrigation services in large-scale irrigation areas to private operators-were validated by government, which has requested Bank support for their implementation. In tandem, the Bank and IFC provided the government with technical assistance on structuring and implementing a public-private partnership (PPP) for the construction and operation o f the irrigated perimeter o f Guerdane (10,000 hectares). InAugust 2004, a private operator was selected through international competitive bidding, representing one o f the first irrigation PPPs inthe world. The project will increase the availability o f irrigation water for about 600 citrus producers, thereby increasing and stabilizing their production and revenues. It is estimated that the Guerdane irrigation perimeter will generate direct and indirect revenues for more than 10,000 people. 32. In the urban water supply and sanitation sub-sector, tariff collection is still inadequate and the related financial constraints have limited the performance of water agencies. The Water Supply V project closed in 2002 and was rated unsatisfactory in terms of institutional sustainability and results. The operational and institutional performance o f the water agencies showed a slight improvement due to the privatization o f drinking-water and sanitation services in Casablanca and Rabat. However, financial and operational efficiency showed little improvement: the water agencies and National Potable Water Office (ONEP) were unable to limit arrears, and water tariffs were not adjusted in line with the established schedule. Many environmental and rural components were cancelled. Infact, the project design was overly ambitious since it strived to support water supply and sanitation services in six cities, ONEP, three ministries, and eleven implementing agencies. However, the Sewerage and Water Reuse I1project is on track and will most likely acheve its development goals by the end of June 2005. Investments in collectors and connections to the sewerage systems will provide better environmental protection and improved public health. Fez's water supply and sanitation agency, RADEF, was also able to increase its institutional capacity and tariffs, but the project has shown less success inreducing arrears and water losses. 33. Effective water sector strategies were developed with Bank support. The Water Resources Management project led to the development of an institutional framework for integrated water resources management, including the National Water Plan (the core o f the national water sector strategy), the National Water Quality Protection Plan, the National Flood Plan, and recommendations on water pricing. There have also been improvements in the institutional capacity o f the ministry in charge o f water. A k v e r Basin Agency was set up in the Oum-er-Rbia, which should be fully operational this year once the necessary legal and financial tools to fulfill its obligations under the 1995 Water Law are in place. As such, the project can be said to have acheved its development objective to "assist the government inproviding a comprehensive water management strategy that is economically efficient, equitable, and environmentally sustainable." In addition, at the request o f government, the Bank prepared a series o f Water Sector Notes in 2004 aimed at consolidating the sector's analytic tools through specific reform recommendations to maximize economic impact. Outcome3.3. Law on environmentalprotection and Law on evaluation of environmental impacts implemented:Achieved 34. This goal was reached, with the two cited laws in force since 2002. Both laws were prepared with the World Bank's assistance prior to the CAS, which explains why they were adopted as monitoring indicators. Environmental legislative protection now extends to activities undertaken in Morocco, including those financed by the Bank. 46 35. The Bank's impact on the environment has been rather limitedduring the CAS, but it has led to government agencies adopting new tools to measure the cost of environmental degradation. The study on the Cost of Environmental Degradation was used by the Ministry o f Environment to assess damages in the Sebou basin and in Tangier. In addition, environmental safeguards are implemented more systematically and environmental issues have been mainstreamed into most o f the Bank's activities. The Bank has also trained key stakeholders in environmental impact analysis. However, such efforts will need to be sustained in the years ahead to maintain environmental focus inprojects. Finally, the Protected Areas Management GEF project is reaching its development goals, which include improved conservation of the ecosystem and endangered species, creation o f a network o f protected areas, as well as strengthened institutional capacity for sustainable development and conservation. A biodiversity survey shows that conservation and protection o f species has improvedinthe three parks included inthe project. D. PillarI V Outcomes:ImprovedPublic Governance 36. This pillar was alignedwith the Plangoal to reformthe state. The objective of this pillar was to continue the dialogue with government on governance, while recognizing the incremental nature o f the process as i t required much consensus building.The only performance indicator for this pillar was not achleved (Table 9). Outcome results were greater insome cases (public adrmnistration reform) but less so in others (municipal development and decentralization). Overall, the activities undertaken were of the kindproposed inthe CAS, namely analytical work, policy dialogue, and pilot institutional activities to test approaches on a limited scale (see Table IO). Table 9: Evolutionof Core PerformanceIndicatorsfor Pillar I V Total Government Wage Bill 12%