STRICTLY: ONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION JOINT MEETING Washington, D.C. Tuesday, October 29, 1968 A joint meeting of the Executive Directors of the International Bank for Reconstruction and Development and the International Development Association was convened at 10:03 o'clock, a.m . in the Board Room, 1818 H Street, N.W., Mr. J. Burke Knapp, Vice President, presiding. STRICTLy I ONFIDENTIAL 2 C O N T E N T S page 1. Proposed Loan - Morocco (BNDE) 3 STRICTLY ONFIDENTIAL 3 P R O C E E D I N GS MR. KNAPP: Good morning, gentlemen. Mr . McNamara made an appointment some time ago with U Thant for luncheon today in New York, and at the time I think he figured he could come to the Board meeting and still get up there for lunch, but it turned out to be an early lunch and he couldn't risk air transportation leaving too late, so he offers his apologies this morning for not being here. We have several items of business, the first being a proposed loan to Morocco , a follow-up loan to the Industrial Development Bank. Mr. Sekse of the IFC will describe the general problems of industrializatioa in Morocco. MR. SEKSE: Mr. Chairman, Members of the Board : The borrower of the proposed loan, the Banque Nationale pour le Developpement Economique, or BNDE, is now financing industrial as well as tourism ventures. We estimate that perhaps one-third of the proposed loan would be used for investment in tourism, and two-thirds-- or in any event, the major portion -- in manufacturing industry I will limit myself to speak briefly on the position of Moroccan manufacturing industry today and the outlook for the future, as I see it . 4 STRICTLY ONFIDENTIAL Industry, and I include handicraft in that term, but not mining, accounts for about 13 percent of the Moroccan gross domestic product . Most industrial enterprise are found in the Casablanca-Mohammedia region, but the Government is anxious to encourage the establishment of new enterprises outside this region. It does so by granting an investment premium or grant, when new investments are made in enterprises elsewhere. The grant is usually 15 percent, but it is 20 percent of the investment cost in the northern province of Tangiers. This grant policy has been a great stimulant to the upgrowth of new industries Moroccan industries produce mainly a quite diver- sified range of consumer goods, a large portion of which substitute for imports. Food processing industries, such as flour milling, sugar extraction and refining, fish and vegetable canning, citrus fruit juices, wine making , and oil processing, account for perhaps 40 or SO percent of tota industrial output, and are seen as a whole, the most important industrial sector . ~extiles are probably secone . Third place is occupied by metal transformation and a large number of small mechanical and repair shops. Other industries include chemicals, building materials and ceramic , leather, pulp, paper and carboard, pharmaceuticals, tires, and others. 5 STRICTLY ONFIDENTIAL Foreign investment in Morocco dropped sharply toward the middle SO's, and for some years the net flow of capital into Morocco was, in fact, reversed. There are indications that foreign investors are now again becom- ing interested in Morocco, and the Government has taken various steps to encourage this trend. In addition to the investment premiums already mentioned, a widely publicized Investment Code provides for a set of fiscal and other advantages to new or expanding enterprises. An Investment Center was established in 1967 for the guidance of local and foreign investors alike. Both foreign capital and technology are needed for many of the new, some quite large, projects now in the planning and the increasing interest of foreign investors is encouraging. The growth in industrial manufacturing output has been rather modest in recent years, despite substantial new investments of about $50 million equivalent per year, about half of which public and half private. However, there was an increase of some 5 percent in 1966 and about the same in 1967, and this was better than in +he two years before. An important reason for the slow growth was probably the modest expansion of incomes in agriculture . the largest sector in the economy, coupled with a continued · e of high-purchase-power although slowed-down, departur, STRICTLy I ONFIDENTIAL 6 expatriates. Many enterprises in Morocco are quite profitable, but the average return from investments appears to be modest. In large part the problem appears to be one of low efficiency in utilizing installed equipment and low productivity in relation to wages. I hasten to add that this is certainly not due to any inherent deficiency o Moroccan managers, technicians, and workers, but there is a serious shortage of trained people in all these categories, which has been compounded by the departure of foreign technical personnel, who have had to be replaced by Moroccans. The training of workers and personnel has not quite kept pace with the increase in jobs to be filled, but both the Government and the industrie themselves seem to have been giving increased attention to this important matter lately. The low utilization of capacity -- in some sectors, such as textiles and edible oils, little more than half of the installed capacity is in many instances due to the slow expansion of the domestic market, and must be taken into account in considering whether new investments are justified. The Five-Year Plan for 1968 through 1972 calls for new investments in industry of about $240 million equivalent in these years, about 55 percent of which would be public and 45 percent private. On the basis of the past STRICTLY ONFIDENTIAL 7 record, and of the specifications of the Plan, this appears to be a feasible target. The Government will mainly invest in fertilizers, sugar mills, and textiles . However, in view of the present difficulties in the textile industry, it is possible that further substantial expansion of this sector may be postponed until the situation has cleared up somewhat. BNDE,'the proposed'borrower, is now preparing a special study of this industry. More rapid growth in the Moroccan consumer goods industires can enly be expected to the extent that there is a greater expansion in the overall economy, particularly in agriculture . The trend in new investments seems to be gradually changing from import substitution toward export- oriented projects, in particular agro-based ones, such as fruit juices and fruit and vegetable preserves. There should be many opportunities here for private investors. The marketing abroad of a substantially larger quantity of 4 these products will, however, depend to some extent on the future relationship between Morocco and the European Economic Community. Negotiations in this respect are under way . BNDE, our client, has by and large done a commendable job in promoting and financing new enterprises. 8 STRICTLY ONFIDENTIAL It has developed, we believe, a growing awareness both of the many problems facing industry in Morocco and of the need to establish economic, viable enterprises. If granted the new loan, we believe it can put it to good use. The features of the proposed loan follow those generally used now for development finance companies, including the provision under which the commitment charge begins 60 days after signature. Under the previous loans, BNDE enjoyed the benefit of the policy which then prevailed for development finance companies, under which a commitment charge accrued only on amounts credited to the Loan Account. BNDE, supported by the Minister of Finance, asked that the old procedure be followed again, but it was felt that BNDE did not meet the criteria for special exceptions envisaged in the decision taken by the Executive Directors in applying to development finance companies the standard policy on commitment charge. Thank you, Mr. Chairman. MR. KNAPP: Thank you very much, Mr. Sekse. Are there any questions or comments? Mr. Plescoff. MR. PLESCOFF: Mr. Chairman, with your permission, I I 9 STRICTLY ONFIDENTIAL I shall make this statement in French. (Interpreted from French): Mr. Chairman, I attach considerable importance to the questions which come up during my past five years on the BanJc, and I've taken part in difficult negotiations and given loans to that institution. At that time, I remember the procedures used by the World Bank and certain friction resulted, in par- ticular the marked desire of the majority of the actions of the development bank did not pertain to the Moroccan Government. I think the Bank is no longer in as firm a position as it was at the time. As far as this present loan is concerned, I should point out first of all that I am very happy to observe that the balance sheet has been cleaned, and I remember at one time not too far in the past, the balance of the National Bank was passive in the question of loans to public enterprises, which were quite sizeable and could not be reimbursed. I think measures have been taken which have al lowel these public sectors to repay the loans, and there is a much better position at the present time. The second effort of the Moroccan Government has reduced the capital of the development banJc,leading to an 10 STRICTLY ONFIDENTIAL increase in the profitability of their shares. We should salute this achievement of the Moroccan Government. The problems coming from this loan are those which appear in the report which was submitted to us, about the economic advisors of the Bank, page 9 of the report, paragraph 36, where it says, "During the loan negotiations, it was agreed that BNDE would recruit an Advisor, initially for a term of one year, before the end of 1968." I am not certain if in a loan such as this, recruitment of an advisor is necessary. I think the normal tendency of the borrowers is to hire consultants. Let us hope th,t in no case it should appear that the Bank would appoint it~ counselor or its deputy as is stated in the following paragraph; otherwise, we would have management in private affairs by the Bank, and I think this National Development Bank would have too much influence in local aff~irs, having management of this same nature. As far as the technical characteristics, that is of the loan, it is mentioned that the commission, the ~ eftl!Ja!JOIR0M says that the Morbccan Development Bank would that we would consider that the National Bank is quite young, and we cannot at this same time criticize it as we did previously and say that it is able STRICTLY ONFIDENTIAL 11 ~ to support the en~agencent ~ i o n , I would like to know why the conditions are not fulfilled. As far as profitability is concerned, I recall that in the American Development Bank there was a margin of 4, 5 or 6 percent between the rates which are not excessive, and it happens that the National Development Bank of Morocco has a margin of 2 percent. This is one which seems to me quite normal, and stronger than the case of an industrialized country. In France I think it is one percent, but for Morocco 2 percent is suitable . On page"ll of the report, paragraph 44, it says that the margin on new funds is only 2 percent. There is a doctrine in the World Bank for loans over 2 percent. I don't see any rational reason for this 2 percent margin being completely normal, suitable to the Moroccan structure. We could say this margin is not enough if the . profits are too small, so the paragraph continues saying it went from 4.64 to 8.83. This is quite risky for a country such as Morocco. The result would be considered insufficient. I would like to have IFC participate -- we would try, when we negotiate loans, to promote measures which would achieve 15 or 20 percent margin on our capital. I think it would not be suitable on the part of the World Bank to have a net profit of 8.83 percent. We shouldS:1y this is satisfying and not speak of margins of only 2 percent. 12 STRICTLY ONFIDENTIAL I find in other cases the administration of the Bank is fond of sizeable margins for the developing countries. I do not agree with this doctrine. As far as another point is concerned, in the same paragraph, one of the reasons for the structural weakness from the point of view of the profitability is the fact that there is a slight proportion of capital in comparison to the funds lent in all negotiations with the Bank for Development. There are lively discussions, in particular the study of the following parts. The World Bank declares that the Development Bank should not lend its capital more than four times -- six times; as a result, the attitude of the administration consists of limiting the Bank loans, limit them, criticize them because they are too slight. This is a new contradiction, and I think that this discussion must have taken place, according to what I understand set at a coefficient of 4-1/2 and I'd like to know what is the position of the administration on this. These various details which I have as a result of my former friendship with the Moroccan Development Bank, I have from outside, I may say, and this leads me to a more general observation. .. STRICTLY ONFIDENTIAL 13 We see this loan going on for 18 months to two years. When it is finally agreed upon, our obser'\ation can only be truly academic. Thisfpocedure has been slightly x like a midwives' consultation, and here we have a typical case. There have been difficulties in the negotiations between the lending Bank and the borrowing Bank, but other than three-line reports, we should have a report during the negotiations about the delicate points therein. We should have not a decision to make, but at least a slight deliberation and then we would be aware of the most impor- tant problems facing us. Now these observations are a bit late, and if at this stage of the negotiations it is not always too suitable about the margin, this is the doctrine of the Bank facing the borrowing government. We may return to that point, but I have seen the Moroccan Development Bank's operations, and they make excellent use and now they have taken the necessary measures to assure financial health which is suitable, and I'm convinced they will make good use of it. Thank you, Mr. Chairman. MR. KNAPP: Thank you, Mr. Plescoff. Mr. Sekse, do you want to comment on some of the STRICTLY ONFIDENTIAL 14 points that Mr. Plescoff raises? MR. SEKSE: Well, Mr. Chairman, I'm a little uncertain as to what extent I should comment or somebody else, but I can lead off, particularly when it comes to the last point, I believe, about negotiations and how they went, what difficulties we encountered. MR. KNAPP: No, I mean on the particular points raised. MR. SEKSE: Yes. I believe the first point was about cleaning up the balance sheet, the question about the advice or · conseil economique of BNDE, and that this ought not be a condition for granting a loan to private institutions. This is not a condition for this proposed loan. It has long been a feeling and as a matter of fact, BNDE itself, BNDE's management, the Chairman and Board, have felt that management ought to be strengthened. We concurred in that feeling, and tried to help BNDE find an advisor. The search has been going on for a long time, and an advisor has still not been found, to my knowledge; so finally it was agreed that BNDE would make every possible effort to find this advisor, which BNDE itsel wants, as soon as possible -- hopefully before the end of ., the year. I believe Mr. Bart1 can elaborate on that point. STRICTLY ONFIDENTIAL 15 It is not a condition of this loan. Concerning the conunitment charge, reference was made to the two criteria which were put up by the Board in its decision of the 4th of August, 1967. One was that exceptions to the standard treatment could be given in cases of a young institution, a newly established development bank. The second, and I quote from memory, one which has not been able to build up its business, I beli ve, to an adequate level. Now, BNDE is not a young institution, it is certainly not a new institution. It was established in 1959. So that criterion could not be applied. As far as having been able to build up its business, it has in fact built up its business to quite high levels. It is certainly not a question of the volume of business, I believe, but of a number of factors surrounding the volume of business which has affected, among other things, profita- bility. Whether BNDE has been in a position to do anything with these or not, is another matter; but certainly I believe it should have been able, it has been able to build up its business to an adequate level. We felt that it was quite clear that the decision made by the Board - - I am not one to try to interpret 16 STRICTLY ONFIDENTIAL the Board's policy, but we at least felt this did not fall within the intentions of the Board at that time, and that BNDE should therefore have standard treatment. I believe the third point was on profitability, particularly comments on paragraph 44, where there's a reference to a spread of "only" 2 percent. Now maybe the word "only" is not well chosen. I can also conceive of an institution having a spread of 2 percent and still being quite profitable, so to my knowledge there is no doctrine on this. You have to see the spread in connection with all the other factors, the administration costs, and then in relation to the leverage or amount of borrowings to equity. Now if you put these three factors together in BNDE, the spread itself which is 2 percent, the administrati e costs, and the amount of debt to equity, which is a low ratio, 2 percent does not seem to produce what we'd consider an adequate result in terms of profit. Now here Mr. Plescoff has another point of view, in that there has been increase from 4.64 to 8.83 over the past four years. Again I believe that you cannot set any definite standard in saying whether 8 or 9 percent profit is good or bad; it may be adequate in one case, and STRICTLY ONFIDENTIAL 17 not adequate in another case. In the case of BNDE, it has followed a policy of setting aside for reserves about two-thirds of net profit. We believe this has been a sound policy. BNDE will con- tinue to follow it, and we would fully agree that this is sound, prudent financial policy. Therefore a very small only about one-third of this almost 9 percent would be available for distribution as dividends. That makes 3, 3-1/2 or 4 percent which has actually been c\istributed. tainly Now that's not a very high dividend in Morocco; cer- ..... you can sell no shares to private investors on that basis, so that is where you set your target. Then 8.83 percent for DNBE is not very high. Another point which was, I believe, incidental or was connected with this one was the fact that there is a low leverage, or low ratio of debt to equity in BNDE, and that while we comment on this, at the same time we also want to set certain limits for this ratio. That is true but BNDE is also now far below the limits set and would have been able, should be able to expand its borrow- ings in relation to its equity far more. There are many things to consider in this. For instance, the relationship, the ratio between real equity, which is the share capital in reserves on one side, and so-called quasi-equity, which is usually a government long-term subordinate loan, on the 18 STRICTLY ONFIDENTIAL other side, has a substantial effect on the true debt- equity ratio. In the Bank, when in this forum we talk about a borrowing limitation of, say, 3 to 1 or 4 to 1, it's not a real debt-equity ratio, not a ratio involving borrowings on one side and share capital or equity on the other side, which, under such a formula could easily go up to 7, 8, 9 or 10 to l; but BNDE is still on the low side, as far as this is concerned; but here you have to balance the two points of view: how much risk you want to take and what profits do you want? You can't have your cake and eat it, certainly not, but there is a con- tinuing evaluation which has to ,go on. I believe that is all. MR. KNAPP: I'd just like to add this comment, Mr. Plescoff, that as the papers made clear, we do feel that this 7 percent lending rate is a very low rate in relation to the costs of capital in a developing country like Morocco, in relation to the profitability of the enterprises that they finance; and we are continuing to discuss this matter with the Moroccan Government. It gets into questions of general interest rate policy as an instru- ment of control of the economy. But we continue to nourish the hope that they will decide that a higher rate would be STRICTLY ONFIDENTIAL 19 appropriate. It need not be very much higher to make a substantial change in the profitability of the company. On this matter of the commitment charge, we have been operating since the decision of the Board on the theory that a waiving of the commitment charge would be regarded as a definite subsidy to be given to an institution in need of a subsidy because it was a young and struggling organization. As Mr. Sekse says, this company here may be struggling with a lot of problems, but it is still a mature company, one that has achieved a position in the development of its business which we feel, if it were operated under appropriate financial policies, is entirely capable of paying the regular commitment charge . . Well, are there any other questions or comments? Mr. Gutierrez Cano. MR. GUTIERREZ CANO: Thank you, Mr. Chairman. I welcome this loan, which is in my view very important for the development of Morocco, since it will go to support the efforts of the private sector. I think that the work done during such a long period of time, almost two years, has proven the extent of cooperation between the Bank and Moroccan Government, and it has been shown 20 STRICTLY ONFIDENTIAL in decisions taken which will in the future improve also the quality and ability of BNDE. I think, Mr.Chairman, that the difficulties which have been stressed should not discourage our institution, but on the contrary should encourage our institution to increase, if possible, the cooperation with development banks set up like this one here with the assistance of one of our sister organizations, since it's obvious that the assistance of the Bank to the private sector has to be done in correspondence or in line with the general policies of the country, and consequently should bear in mind the basic limitations and needs of the sector in particular and the economy in general. Morocco is making great effort to improve its development programming, is making important progress in defining targets and priorities, and I think that Morocco should in this case and also in the future deserve the attention of our Board, so I would like to express my. full support for this loan and I welcome it as an i mportant contribution to the development of the private sector in Morocco. Thank you. MR. KNAPP; Thank you. STRICTLY ONFIDENTIAL 21 Mr. Stone. MR. STONE: Thank you, Mr. Chairman . I will begin by saying I also want to support this loan before the Board, but in supporting it, I think it is proper to say that tl:t.J:!re a r e one or two aspects of the project which gi"!,_e rise to some doubts in my mind -- not doubts of the kind which would lead me to with- hold support for the loan, but doubts which rather I think simply make me feel that I should put them on the record for such utility as they may have, limited as that may be, for the management in the future . The first point I want to make, Mr. Chairman, is that as paragraph 5 of the President's Report and Recommenda tion brings out, the past history of some of the Bank's lending operations in Morocco h9,,I\ not been at all points happy, and I simply want to say that I very much hope that difficulties of the kind that have arisen in the past have w been permanently overcome . Secondly, I note the fact that in paragraph 13 the President quite properly notes that there is still room for improvement in the quality of the projects being financed by the BNDE, and I think it is well to have that point in mind, also; and in this connection I note the / very sharp rise which has taken place in the amount of STRICTLY ONFIDENTIAL 22 rediscounts being financed by BNDE, which is referred to at the foot of paragraph 12, in 1967, and I presume since. Now I have some doubt about that particular development and the consequences it can have for financial control by the BNDE and perhaps if the staff has further information on that aspect of the matter, they may be good enough to respond to that particular point in detail. So far as financial performance is concerned, I do note·. . particularly in this connection what has already. been referred to, both by the staff and by Mr. Plescoff, the question of the lending rate of the BNDE which is mentioned in paragraph 14. Now with very great respect, I think -- I think I disagree with what Mr. Plescoff said on that subject; the reason I have some doubt whether I disagree with him or not is because I was not able to be entirely clear from the translation what he was saying on that subject, but to the extent that I did understand him I think I have to differ with him. I do want to say first of all that I think it is rather a red herring, in any case, to concentrate on this questi~of a spread between .._,... the costs of BNDE's X funds and the rate at which it lends. I don't think that apart from purely narrow financial aspects of the BNDE's STRICTLY ONFIDENTIAL 23 own finances, that is particularly important, quite frankly. I~hink what is important is the price at which the BNDE is making funds available for investment purposes in Morocco, because unless that pt±ce'is "ti~ht,"'then the resources are going to be inefficiently utilized in Morocco. I don't think anybody who has Morocco's interest at heart wants that to happen. So the question really is not whether a 2 percent · spread is or is not appropriate; that will depend entirely upon the rate at which the BNDE is getting its funds. The question is whether the 7 percent lending rate is appropriate. Now on that, Mr. Chairman, I echo a comment you just made from the chair, by ·saying that in ,my view I very much doubt whether a 7 percent lending rate in a country like Morocco is appropriate. The lending rate which one will find in operation in countries like my own is even higher than that, and frankly I don't think it is high enough, even in my own country. In a situation where capital is very short and where returns on capital ought to be very considerable, I have very great doubts about a lending rate of 7 percent. Now I note that in this connection this is bound up with certain views of the government about price STRICTLY ONFIDENTIAL 24 stability which are referred to in paragraph 14 and at a later point in the President's Report. I simply want to say that such limited experience as I have on economy policy questions does not suggest to me that one attains price stability by keeping interest rates low. Now I come to what is said in paragraph 15, 16 about the series of measures which are designed as the report says, to overcome the shortcomings mentioned above. There seem to be three measures which are referred to in particular. The first is the strengthening of the board and general managerial capacity of the BNDE, and I note that and welcome it and I hope the steps that are proposed there, that I understand have already in part, at least, been put into effect, will be effective in improving performance. Secondly, there is the proposal which again I understand has already been given effect, to reduce the BNDE share capital from $6 million to $4 million. Mr. Chairman, I want to say that on this point I don't, I must say, regard this as of much significance. In fact, to be very frankJ I think that this kind of operation is simply window dressing. I do see that it has one possible beneficial consequence; namely, that it may enhance the STRICTLY ONFIDENTIAL 25 possibility of BNDE putting its shares into the market, and attaining a certain amount of private participation in the institution. That in itself would be a desirable objecti'L.e, but the view that somehow or other one is improving the financial performance of the institution by altering the distribution between share capital, on the one hand, and loan funds on the other, is simply not true. The fundamental question is, what is -- and this comes back, it seems to me, to what I was saying earlier -- what is the rate of return being achieved by BNDE on all of its funds; and the fact that some part of them are loan funds and some part are equity is not material from that point of view, which is the important point of view in my judgment. So I don't attach much significance, as I say, to this particular measure. The third measure mentioned is that the Govern- ment of Morocco intends to undertake a survey of the interest rate structure in Morocco, with a view to determi n'n~ , as is referred to in paragraph 15,"whether an increase in BNDE's lending rate would have any substantial impact on other rates and, eventually, on prices . " Well, it is very admirable that the Government proposes to undertake a survey, and it must be welcomed. I am bound to say, Mr. STRICTLY ONFIDENTIAL 26 Chairman,that one does not need to take a survey to ascertai the outcome of that question, but those points being made, Mr. Chairman, I simply want now to reemphasize what I said to begin with, that I give my support to this loan but I think that when we do that, we should be clear in our own minds that to some extent, at least, in my view, what we're doing here is making an · act of faith. We are making an act of faith that the measures which are proposed and par- ticularly the managerial measures which are proposed will indeed produce a more effective financial performance on the part of the BNDE, and it is very much to be hoped that that will prove to be the case. I for one am prepared to participate in this act of faith, but I think we should be very clear in our minds that this is, to some extent, what we are doing. Now the only other point I want to make, Mr. Chairman, is not really related to what I've been s aying about the project itself, but my eye was caught by a comment in paragraph 22 of the President's Report and Recommendation, where it says at the foot of page 6 and going over to page 7, "Morocco's economic problems call for sustained efforts over many years, " and I'm sure there wouldn't be any disagreement with that statement, Mr. 27 STRICTLY ONFIDENTIAL Chairman, but the sentence goes on to say, "and the Plan represents an improvement in the Government's effort in that direction." Well, with very great respect, Mr. Chairman, I don't think the Plan as such represents anything of the kind. I think what would represent an improvement and what I very much hope will be the case and was already indicated as likely to occur, will be actual actions on the part of the Government to improvement the performance of the economy. There is, I think, rather too much disposition I don't mean necessarily only in this institution -- but much more widespread than that, to judge the quality of a government's performance on the number of plans it produces, Mr. Chairman. Well, frankly, I think that we perhaps would be better advised to spend less of our time planning and more of our time doing. Now, having said that, I want very much to welcome the increased endeavors, indeed the continuing endeavors that are being made by the Government of Morocco in dealing with some of the very difficult problems they have had, some of which have been a product of recent political history, rather than economic history, and I wish them very well in all those endeavors, as well as wishing BNDE itself well in its future. Thank you. STRICTLY ONFIDENTIAL 28 MR. KNAPP: Mr . Stone, may I just comment on your last point that this plan is something that we take seriously , but what's more important, we think the Moroccans take it seriously, and that they do intend to follow through and not leave it as a paper document. You had one question, I think a specific question about rediscounts. Mr. Sekse, can you comment on that? MR. SEKSE: Yes, Mr. Chairman. I think it's perhaps a coincidence that rediscounts have increased so substantially ~n 1967. The major portion of that amount I believe was the equivalent of $14 million, which was a very big rediscount and credit made by the consortium and comJllercial banks to the second or third, I'm not quite sure, beet sugar mill, entirely Government owned. BNDE therefore in its policies could not grant a loan to this sugar mill, and other financing had to be found. This was 45 million Dirhams out of a total of 75 million Dirhams. The remainder is ~more or less normal discounting, you might say, on an average basis of BNDE. MR. KNAPP: Thank you. Mr. van Campenhout. MR. VAN CAMPENHOUT: Mr . Chairman, I have read the report with particular interest. The negotiation of STRICTLY ONFIDENTIAL 29 this loan has been the occasion of an examination in depth of the development bank's policies and organization. The good result of this discussion seems satisfactory to me, and together with the support n~ the Bank, is bound to fruitful when implemented, tf one considers that the development bank in the past has already played a significan and constantly developing role in development. The improvement in the efficiency of the developme bank also constitutes a significant achievement in view of all the efforts pursued by the Moroccan authorities, initiat with the Five-Year Development Plan for improving the organi zation, methods and policies of the country's development. These efforts deserve, of course, to be helped and if I coul summarize I would say that their success is essential to achievement of a satisfactory rate of growth of the Moroccan economy and for encouraging inflow of foreign private capital, a promising source of development finance. I have noted with satisfiaction' the progress report of the ~eorgAniz~~ion ~of~the applicant, which serves as an important achievement, and which will allow the Bank to resume its interest in agricultural development in Morocco. I am therefore glad to support the recommendation. MR. KNAPP: Thank you, sir. 30 STRICTLY ONFIDENTIAL Mr. Skjerdal. MR. SKJERDAL: I've been in doubt, Mr . Chairman, whether I should ask for the floor today, being a lame duck member of the Board. (Laughter) MR. KNAPP: Oh, no. One of our most experienced members. MR. SKJERDAL: But on the other hand, it gives me some advantages too, like those of President Johnson. (Laughter) MR. SKJERDAL: And I've found in particular the economic report sent to us very interesting, because I think it brings into focus many of the problems related to economic development; and since this is my last opportunity to speak to the Board, I would like to make some general comments and not stick so strictly to the technical report as the previous speakers. I think I will concentrate on what I think is an important problem of the balance between agriculture development and industrial growth. In my opinion, the most important point on principles which came out of the Annual Meeting was Mr. McNamara's statement about control of population growth, and his mentioning that one had to look not only to the progress of nations but to the progress of th STRICTLY ONFIDENTIAL 3 human beings as well. This is a recognition, I believe, of the fact that social development in a broad sense and economic progress are Siamese twins. I strongly believe and I believe this just as strongly now, as when I entered the Board twcfyears ago, that in order to gain momentum in the economic development, one has to improve the social standard and increase the buying power of the broad population. There was a time when cheap and unskilled labor was considered as a competitive advantage. Modern:technolo has changed this situation. To change from stagnation into industrialization, what is needed today is skill and incentive, not for the few but for the many. In the report before us we read that during the last five years, the economic growth in Morocco has not even kept pace with the population growth. Furthermore, there has been practically no sectoral change during this period. The percentage of contribution to the national income from agricultural and industrial mining is practicall the same in 1967 as in 1963. The contribution from agri- culture is 28 percent, but behind this production stands 70 percent of the population, which means that the najority of the population must have very little buying power for 'I STRICTLY ONFIDENTIAL 32 manufactured goods and consumer goods. In the report it is said that industrial developrne t has been disappointing in recent years for a variety of reasons, and especially the stagnation in agriculture. I think it is important to realize the link between indus- trial growth and buying power of the vast part of the popula ior Apart from industry based on natural resources, I think that all experience shows that it is very difficult for a develop ing country to build a competitive industry for export and that they need a domestic market. And there again I'm back to the agricultural sector, which in most developing countries employs the majority of the population. It is said in the report that there is evidence of a decline in per c~pita agricultural income, par- ticularly in traditional agriculture where about 90 per- cent of the rural population is engaged. It is quite clear that the failure of agricultural income represents a serious market loss for other sectors, particularly consumer goods industries and we see in the report that growth in manufacturing output has been modest in the last four years, and that there exists unused capacity because the market does not exist. STRICTLY ONFIDENTIAL 33 In the economic report are also mentioned some of the key factors explaining the low rate of growth in the agricultural sector. Aside from bad weather, it is mentioned that the majority of the population still practice traditional forms of agriculture under an archaic land tenure system. There is lack of incentive for the farmers. The tenure system inhibits growth. There is lack of land consolidation which, all together, discourages productivity. I wouldn't have mentioned this, Mr. Chairman and Mr. Tazi, if I thought Morocco was in a unique position, but I mention it because I think similar conditions in agriculture are holding back development in many developing countries. I have, for instance, had the opportunity to read an excellent report from my Alternate, Mr. Thor, from studies he made in Thailand, agriculture in Thailand; and there we had the same crucial point of a system which bereaved the land workers and small farmers of incentive and the fruit of their work. As to the loan project itself, Mr. Chairman, I find no difficulty in supporting it. In the technical report I sense a certain tone of criticism because the lending rate is fixed at 7 percent and because the profit of the development bank has been rather modest. I have · STRICTLY ONFIDENTIAL 34 myself been working on what we Norway call the Districts Problem, and I like to think what we're doing in the World Bank is we are dealing with Districts Problems on a world- wide basis, and I think we are here faced with a rather complicated problem, and it is very difficult to evaluate under the present economic situation in Morocco. I do not think we should take a too narrow profit approach to this problem. ~, shall not go deeper into this question at this, my last meeting, but I'll only say from a developmental point of view, the important thing is the economic growth resulting from development bank lending, rather than the development bank's own profit. I realize a ~ u r e of state-owned capital and jx private capital might create certain problems. I realize that but after all, when we're giving a loan to development banks, we should primarily pay attention to the developmenta effect of its re-lending. Thank you, Mr. Chairman. MR. KNAPP: Well, Mr. Skjerdal, thank you very much for your thoughtful contribution. If you referred to yourself as , a lame duck,, r W6uld-:.iay 1,[6u.~ re p:t pt:e~ty Latti~dy lame duck. Your remarks illustrate the loss we will all feel in your leaving t~ie Board plus not having the benefit of your counsel. STRICTLY ONFIDENTIAL 35 I'd like to say that on the economic report, Mr. Westebbe, who was the Chief of the Mission and Mr. Torelli, who was the Chief Economist are both present and I'm sure they very much appreciate your remarks about the report. Mr. Merchant. MR. MERCHANT: Mr. Chairman, I am also a lame duck, but I suffer from no inhibitions as a consequence, a national trait, presumably. (Laughter) MR. MERCHANT: I am happy to support this loan, for substantially the reasons which Mr. Gutierrez Cano gave at the early part of this discussion. I think this has been a very interesting discussion. I think it has dwelt possibly excessively with the problems which Morocco has encountered, and with the admitted shortcomings and operations of the envirorunent of the bank, BNDE, to which the loan is being made. It is true that the overall progress of the economy of Morocco has been disappoint~ng, particularly in the last two years, but it's certainly not unrelated to the fact that those past two years have been .excep- tionally bad crop years. It is true the Bank has had difficulties in the implementation of at least two of the STRICTLY ONFIDENTIAL 36 past loans to Morocco, but offsetting that it seems to me is the fact that the Moroccan Government has been showing a commendable spirit of cooperation in attempting to remedy shortcomings, and I myself feel very strongly, drawing on threads which have been mentioned by disparate speakers here so far, that this discussion, this particular loan really mirrors the problem of economic development. It is full of difficulties, as has quite properly been emphasized. It is best by the necessity in many countries of changing deep-rooted social patterns and traditions, which may inter- fere -- do interfere, as we know -- with maximum economic enhancement. It involves doing difficult things in the economic field. It involves training people, which is slow. one of the speakers mentioned that he in a sense was voting for this loan in large part as an act of faith, and I would just say that I think that is a very proper element in the decision-making of this Board. I think we're in the business of wagering on people, and an act of faith is required in greater or less measure in the case of every loan we make to every developing country. I think the long-range important thing to remember is that we're wagering on people, on their desires, their ·1,: aspirations, their willingness to work; and I would say that ·~,Y., . 37 STRICTLY ONFIDENTIAL in this case, an essential element certainly in my support of this loan is the clear evidence on the part of the people and the Government of Morocco of the desire to attain a higher proportion of the economic potential of that country and to work hard and to make, in fact, sacrifices, under the friendly help and assistance of the Bank staff, to achieve a measure of development to which their people quite rightly aspire. I don't think, in other words, we should drown ourselves in a sense of depression over the difficulties. We're in a very difficult business. Thank you, Mr. Chairman. MR. KNAPP: Thank you, Mr . Merchant. Mr. Osman Ali. MR. ALI: Thank you, Mr. Chairman. Mr. Chairman, I'd like to pick up the point just made by Mr. Merchant about the difficulties which seem to be present here. In one case it is stated that there are likely to be cases in future in which the Government for ver good reasons will want to give loans, even though the cases may not be justified on strict financial and economic criteria, and because the BNDE is very closely associated with the Government, it finds it difficult to turn down such cases, particularly in the absence of there being any STRICTLY I ONFIDENTIAL 38 alternative ways of finding financing; so to solve this problem and to lessen BNDE's weakness or exposure to weak cases, it has been decided that such cases will be uncon- ditionally guaranteed by the Government and in no case will the Bank finance them. But elsewhere I find that the BNDE will be able .. to give loans up to $150,000 each without reference to the Bank, and I don't see why we shouldn't contemplate cases of that particular nature falling in this category. I wonder, therefore, if we're not giving undue attention to this so-called reliance of BNDE on the Government and its difficulty of making its own wishes known? Thank you. MR. KNAPP: Mr. Sekse, do you have a comment on that? I'm not quite sure I understand it. MR. SEKSE: I'm not quite sure I got the connection between the two, but in our limit this system of guaranteei n weak projects is MR. ALI: Mr. Chairman, if I might, I will try to clarify what I said. The Bank wants to keep clear of financing projects which would not be justified on strictly economic and financial grounds, but which the Government wants to see being financed for good reasons, whether social, political, or regional; so this category .. STRICTLY ONFIDENTIAL 39 of cases has been put aside altogether from the BNDE's consideration, and it is said the Government will uncon- ditionally guarantee loans to such projects. I don't know where the money would come from because it's said in the report that there are no alternative methods of financing. But if the concern is to protect the Bank or the Bank's loans from going into such projects, then I don't think this is being achieved because it is possible that the BNDE will, in giving smaller loans, still be under the influence of the Government, which is what concerns us here in the report, and will lower its appraisal techniques in order to accommodate those cases. MR. KNAPP: Do you get the point, Mr. Sekse? MR. SEKSE: Yes, I think I've got the point now. There are, as is being said, several aspects of this. I believe as far as use of World Bank funds is concerned, it is our policy, our duty to see to it that these funds are being put into economic projects, put to good economic use. That is one consideration. That's why we felt that projects which do not meet the usual criteria on economic, financial grounds, should also not use the funds. The second point, as you rightly mentioned, is the point about security for BNDE itself; if the projects 40 STRICTLY ONFIDENTIAL are weak and if BNDE engages in too many such projects, it will be a certain threat to its financial stability. Therefore the Government guarantee takes care of the risk. Thirdly, as far as resources are concerned, it is true that BNDE doesn't have many other resources now, practically none at the moment, but we hope BNDE will obtain other resources, whether domestically or from other lenders abroad. As a matter of fact, there are indications now that certain possibilities may be emerging as far as other resources are concerned. MR. KNAPP: I think, if I understood correctly, Mr. Osman Ali, I'd like to offer this point which may clarif _ it. We have the right of review of projects requiring loans I in excess of $150,000, but the understanding is with the BNDE that they will not use Bank funds even for lesser amounts to finance loans on which there's a Government guarantee. Loans on which they get a Government guarantee will be financed from other resources, above or below the $150,000 limit. Correct, Mr. Sekse? MR. SEKSE: Correct, Mr. Chairman, if those projec s which the Government guarantees do not meet the usual criteria of economic and financial soundness. MR. KNAPP: Yes. 41 STRICTLY ONFIDENTIAL Well, gentlemen, are there any other questions or comments, and, if not, may I hear a motion? {Motion made and seconded to adopt the draft resolution contained in Document R68-197.) MR. KNAPP: Thank you. I take it that this motion was adopted and that we approve the loan of $15 million to the BNDE. Mr. Tazi. MR. TAZI: Mr. Chairman, I am grateful to you and the distinguished members of this Board for approving the proposed loan of $15 million to the Banque Nationale pour le Developpement Economique. I will certainly convey to the Moroccan authorities the pertinent remarks and obse~vations made by my colleagues around this table. I have taken note of the points raised, particular y by Mr. Stone and Mr. Skjerdal, and I can assure both of them that the Moroccan Government is fully aware of them, that the Moroecan · authorities are permanently struggling with the assistance of the World Bank, in trying to overcome them. Mr. Chairman, I would also like to thank the staff for the work done by it in the processing of this loan proposal. 42 STRICTLY ONFIDENTIAL Mr. Chairman, I would be failing in my duty if I d 'd not utilize the present occasion for pointing up certain disquieting figures which have come to light during the course of the negotiations leading to the present loan, and which might not be limited to it alone. As is evident from your report, an inordinately long time has been taken in the finalization of the present loan. In the judgment of the Government of Morocco, as well as my own, the main reason for this extraordinary delay was the insistence by the Bank group on certain conditions which were not entirely appropriate in the economic milieu of a developing country like Morocco. Maybe the Bank staff felt that it had an adequate justifica- tion for its insistence on the acceptance of its viewpoint. The Moroccan authorities, however, feel that insis tence on the •ommitment charge for example of one-quarter of one percent on the undisbursed portion of the proposed loan is not very reasonable, considering the present stage of development of BNDE. It would result in raising the cost of capital and consequently adversely affecting the profitability of the company's operations. The passing on of the commitment charge by BNDE to its customers would naturally raise the cost of capital in the country. This increase in the capital cost is bound to have unfavorable 43 STRICTLY ONFIDENTIAL consequences for expansion of BNDE's operations, given the present structure of interest rates in the country. Unfortunately, the Moroccan Government, which has con- tributed generously so far to the resources of BNDE, is not in a position to earmark further funds to offset the adverse impact of the proposed commitment charge because of the other heavy claims on its limited resources. May I recall in this context my earlier reserva- tion when this policy was discussed by the Board regarding the appropriateness of insisting on the payment of a commitment charge in all cases, irrespective of the state of development of the finance company. Aside from the commitment charge, I would also like to make a general plea for a more sympathetic attitude toward development finance companies in countries like Morocco, which have as yet no established capital markets, and where the building up of entrepreneurship needs to be encouraged in every way. A too rigid insistence on the~uirement of a particula ~ debt-equity ratio can pose difficulties in the operations and the growth of such companies. Mr. Chairman, the negotiations leading up to the present loan highlight the importance of keeping the Board in the picture regarding the difficulties which timely processing of the proposal may encounter at the negotiation STRICTLY ONFIDENTIAL 44 stage, and this I wholeheartedly support, what my colleague, Mr. Plescoff, said in connection with this. There have been many cases like the present one, where finalization of a proposal has been unduly delayed on account of insistence by the Bank staff on certain conditions which a member country finds it extremely difficult to accept, and which our Board itself may not consider very reasonable. The intervention by the Board at an appropriate stage in such negotiations could satisfactorily resolve many such difficulties, and thus speed up the operations of our group and will contribute as well to happier relation with our constituents. Unfortunately, at the present time there is a feeling in many member countries thattthe Bank staff has almost a veto on the proposal which comes up before the Board. In many cases, because of the leverag that the Bank Group has, the countries have to accept certain conditions against what they consider their better judgment. If as has been suggested before, by some of my distinguished colleagues, and again this morning by Mr. Plescoff, and as I'm doing now, the Board is kept in the picture when disagreement on important and sensitive issues STRICTLY ONFIDENTIAL 45 arise with our member countries in the course of some negotiations, the present unfortunate impressions about th~ veto power of the staff would be dispelled. Coming now to the appraisal report, I think it has not been entirely fair in its comments on the competence. of BNDE. I do not doubt the scope for further improvement, as has been mentioned by Mr. Stone, in the quality of its projects. By and large, however, BNDE has acted in a sound, businesslike manner. The importance accorded by it to the textile sector, for example, also makes good . economic sense. In this I join what Mr. Skjerdal said. In most agricultural countries, like Morocco, the textiles have led the way in industrial transformation of the country. BNDE, as the appraisal report itself points out, has not yet suffered any serious losses and its repayments record is excellent. Again, I'd like to point out here, as I did on a previous occasion, that while judging the performance of a development bank like BNDE, and again I agree with Mr. Skjerdal, the criterion of dividends alone cannot be the determining factor. One has to take into account the effect of its operations on spurring growth in the entire economy and in hastening its diversification and STRICTLY ONFIDENTIAL 46 modernization. If the narrow commercial criterion of financial profitability were to be the sole consideration, the rationale for the development finance companies' existence would be gravely weakened. Also in the appraisal report referente ±s made to the appropriateness of the interest rate charged by BNDE. Well, as has been mentioned in the report itself, the Government is now planning to make a fully review of the interest rate structure in Morocco, in order to lay a basis for reviewing its position in this matter. May I point out, in reference to it, that the Moroccan Government requested the Bank nearly four years ago and constantly, to assist it in carrying out such a review, but unfortunately its request could not be translated into necessary action. It would also be relevant here to mention that our sister organization, the IMF, found the interest rate structure of Morocco quite appropriate and lauded its role in preserving price stability in the country, to which,Mr. Stone, ~~he Moroccan Government attaches the highest importance. Mr. Chairman, I'm sure some of the issues I've raised today will be discussed at some length when we have occasion to discuss the important issue of IFC policies 47 STRICTLY ONFIDENTIAL f inance companies. toward development _ Again I thank you and my colleagues for approving the loan. MR. KNAPP: Thank you very much, Mr. Tazi.