PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE February 22, 2013 Report No.: AB7252 Operation Name Morocco Inclusive Green Growth DPL Region MIDDLE EAST AND NORTH AFRICA Country Morocco Sector Irrigation and drainage (20%); Energy efficiency in Heat and Power (20%);Urban Transport (20%);Forestry (20%);Crops (20%) Operation ID P127956 Lending Instrument Development Policy Lending Borrower(s) GOVERNMENT OF MOROCCO Implementing Agency Ministry of Economy and Finance Rabat, Morocco Tel: (212-37) 774-287 Fax: (212-37) 677-530 benchekroun@affaires-générales.gov.ma; oucibles@db.finances.gov.ma; nbou@environnement.gov.ma Date PID Prepared February 22, 2013 Estimated Date of Appraisal September 1, 2013 Estimated Date of Board November 29, 2013 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. (TBC) Other Decision {Optional} Key development issues and rationale for Bank involvement The wave of democratization sweeping the MENA region since the start of the Arab Spring also enveloped Morocco. Moderate social demonstrations and sporadic outbursts of violence during 2011 led to important institutional changes. The new Constitution (approved in 2011) introduces an institutional model based on separated, balanced and complementary powers, whilst reinforcing the principles of good governance, human rights and protection of individual freedoms, as well as increased institutional responsibility and accountability. Transparent elections, held on November 25, 2011, were won by the Parti de la Justice et du Développement (PJD), an Islamist party that had traditionally been in active opposition and has seen its support increasing steadily in recent years. With 27 percent of the votes, almost twice that of the second largest political party, the PJD formed a coalition government. The Government’s program voted by Parliament on January 26, 2012 centers on the promotion of good governance, transparency, and accountability within the public sector, whilst confirming support to key sector strategies launched under the previous government, including those pursuing environmental sustainability objectives. While social indicators have improved and poverty rates have decreased, accelerated and more effective actions are necessary to address lagging human development outcomes, especially for women. Morocco is likely to miss the MDGs on child mortality and maternal health and lags behind regional neighbors and countries with comparable GDP per capita in terms of the Human Development 1 Index. The under-5 mortality rate of 38 per 1,000 live births and the maternal mortality rate of 110 per 100,000 live births are amongst the worst in MENA (only Yemen and Djibouti score worse and unlike Morocco they are both low-income countries). Furthermore, the status of women needs to be addressed more comprehensively and with greater commitment in order to ensure real impact on women’s lives, particularly in terms of service delivery. Morocco made significant economic headways during the last decade. Growth pattern shifted to a level averaging 4.9 percent over 2001-2011, much higher than the average rate of the 1990s (2.8 percent). Inflation was subdued, recording less than 2 percent in average over the period. Based on these achievements, Morocco gained “investment grade� rating in 2007, which was confirmed over 2009-2011 despite ongoing world economic turmoil. These achievements were in part the result of sound macroeconomic policies resulting into steady consolidation of public finance in 2007 and 2008 and manageable fiscal deficits in 2009 (2.2 % of GDP) and 2010 (4.7 % of GDP). As a result, the Treasury total debt steadily declined from 68 percent of GDP in 2000 to 50.3 percent of GDP in 2010. Morocco’s economic improvement was also due to the implementation of ambitious structural reforms, including the liberalization of transport, energy, and telecommunications sectors. The financial sector was strengthened and ambitious sector-specific strategies were implemented to increase investment and employment opportunities. Morocco also sought to deepen its integration into the world economy through the signing of many FTAs culminating with the “Advanced Status� granted by the European Union (EU) in 2008. Morocco however remains confronted with important human and social challenges reflecting the slow structural transformation of the economy. Morocco’s production structure has gradually shifted toward services with both primary and secondary sectors’ shares in GDP declining over time. However, the weak performance of the manufacturing sector, including on international markets, stems from the relatively slow modernization of the industrial sector. Exports continue to be concentrated around relatively undiversified, low knowledge, low value-added, traditional products. As a result, Morocco has yet to reap the benefits from the market access opportunities and trade dynamics of its trading partners. Exports have been kept below potential and their contribution to growth and employment has yet to be unleashed. Since 2008, Morocco has been hit by a number of adverse exogenous shocks. Like other emerging countries, Morocco has suffered from the global finance crisis as well as the high fuel and food prices. Internally, Morocco has suffered from a drought-related decline in its agricultural output that has put more pressure on the balance of payments and the budget due to increasing food imports, especially cereals. Despite those negative exogenous shocks, Morocco’s non-agricultural output remained robust in 2012 with low inflation and stable, but high, unemployment. While the agricultural sector suffered from insufficient rainfall resulting into a 9.8 percent drop in production, non-agricultural GDP increased by 4.6 percent, allowing overall GDP growth to post a positive rate (2.7 percent) although it is one of the lowest rates in a decade. Domestic demand remains the main driver of growth. And despite higher world prices of imported commodities, inflation has remained low (1.3 percent) thanks to generous universal basic food and fuel subsidies. Unemployment rate has been stubbornly high (9 percent) despite declining participation rates. The economic turmoil in Europe and continued high prices of commodities eventually took a toll on Morocco’s fiscal and current account balances. The fiscal deficit deteriorated to 7 percent of GDP in 2012 and central government debt picked up to more than 57 percent of GDP. The current universal and open subsidy system and higher wage bill explain most of the deficit deterioration. The current account deficit is estimated to have widened to between 9 and 10 percent of GDP in 2012 resulting in a decline in net official reserves by US$3.1 billion since end-2011 to reach the critical level of US$16.3 billion at end 2012, corresponding to 3.9 months of imports coverage. 2 Morocco’s macroeconomic room for maneuver has narrowed considerably. Macroeconomic prospects in the medium term will greatly depend on the scope, depth and pace of Morocco’s reform programs as well as developments in Europe – the main trading partner of Morocco. Morocco is expected to benefit from ongoing reforms to improve the economy’s overall competitiveness and the effectiveness of sectoral policies. Ongoing reforms to strengthen governance and justice, consolidate public finance, and deepen decentralization are critical to achieving long-lasting improvement in economic efficiency, productivity, and employment. Under these assumptions, economic growth should recover to around 5 percent by 2015. Inflation is projected to remain under control at 2.5 percent or below. In line with the new Constitutional requirement, the Government has further committed to fiscal stability and to progressively reduce the budget deficit to the medium term target of 3 percent of GDP by 2016 through the implementation of a set of critical reforms. The key measures include reforming the universal subsidy system, implementing civil service reform, including the implementation of a new remuneration system, accelerating the fiscal and pension reform agenda, and enhancing the efficiency of public investment as well as that of the private sector. The Government’s debt strategy is to diversify financing sources and take on a greater proportion of external financing. In this context, new external financing schemes are being put in place. The most important one was the August 2012 Precautionary and Liquidity Loan (PLL) of US$6.2 billion approved by the International Monetary Fund (IMF). State Owned Enterprises (SOEs) are also looking for external financing in line with the government policy. In addition, the Government has raised US$1.5 billion from international markets in December 2012 and received a US$400 million grant from Saudi Arabia in February 2013 to fund structural projects. Despite its deterioration in 2012, the external position is expected to remain sustainable over the medium term provided that key critical reforms are effectively implemented. Balance of payments financing requirements constitute a moderate concern in the medium term, given the country’s relatively low outstanding external debt and still adequate foreign reserves. As the current account deficits are projected to steadily improve in the medium term, financing them through traditional multilateral and bilateral credit lines along with other private capital flows, including FDIs should not be a major constraint. In addition, the GCC countries recently confirmed their intention to invest US$5 billion over the next 5 years in FDIs. Any remaining financing gap could be filled by tapping international financial markets. The PLL from the IMF will continue to provide a cautionary line of credit. A comprehensive public debt sustainability analysis indicates that the fiscal framework remains sustainable although it would weaken under some medium term downside risks, notably those related to “no policy change� assumption (A2) and growth shock (B2). Indeed, under the “no -policy- change� scenario, the debt stock would increase over the period 2012-2017, before inversing the trend, while under the scenario of “reduced GDP growth by half standard deviation� the debt stock steadily increases. All the other scenarios proved fully sustainable over the medium term. In sum, Morocco is facing growing economic and fiscal challenges. Assuming that the on-going key fiscal and structural reforms, including those envisaged in the 2013 budget Law, are implemented in a timely fashion, Morocco’s macroeconomic framework would remain adequate and sustainable in the medium term. In particular, the projected macroeconomic outlook and the success of the structural reforms depend on a robust fiscal consolidation, a prudent monetary policy, and more flexible exchange rate policy over the medium term that supports external competitiveness. Until now, the adverse effects of the global environment have been weathered relatively well, thanks to strong economic fundamentals and sound macroeconomic policies carried out over the last decade. Yet, in contrast to 2008, when the 3 international crisis struck, the Government has today much smaller margins for maneuver. Its commitment to deepen and expand the current reform efforts is key to the prospects for a sustainable recovery of investment, growth, and employment in the years to come. Proposed Objective The sustainability challenge facing Morocco is threefold: (i) A dwindling natural capital resource base. The economy remains reliant on a natural capital base which is rapidly being eroded. Agriculture accounts for 15 percent of GDP and 23% of total exports; but future growth will be affected by water and land constraints. The gap between water supply and demand is estimated at 2 billion m3. Land degradation translates in a reduction in crop production translating into an estimated annual cost of US$134 million per year. Shrinking natural capital is expected to impact additional productive sectors such as fisheries, which accounts for 2.3 percent of GDP and employs nearly half a million people, and suffers from persisting trend towards overexploitation of key species menacing its medium term prospects; (ii) The long-lived impacts of physical investments. Annual damage costs of environmental degradation are estimated at 3.7 percent of GDP, driven partly by inadequate pollution and waste management. Heavy dependency on energy imports (97 percent) entail energy supply and macro risks compounded by an inefficient pricing and subsidy structure that contributes to overuse an expensive imported resource; (iii) Limited leveraging of green technologies and investments. Recent growth gains have not eradicated widespread vulnerability and income disparities. Labor market and education shortcomings only partly explain the persistently large reservoir of low productivity jobs and pervasive underemployment affecting particularly rural areas. The creation of more and better quality jobs also hinges on investments in labor intensive green sectors, accompanied by innovations that boost productivity and help rural economies to diversify. Environmental sustainability is today a national priority. In its 2009 and 2010 Throne Speeches, King Mohammed VI called for comprehensive legislation on environment management, and explicitly set Green Growth as a priority for government action. The new constitution of July 2011 singles out environmental sustainability as a key objective of public policy. In addition to stressing the specific objective of strengthening environmental governance, the current government’s program (2012-2016) confirmed support to a batch of key sectors strategies (energy, water, tourism, agriculture, fisheries) launched under the previous government, which place sustainable growth at their core. The Government is strengthening key aspects of its governance framework for environmental sustainability. The Environment and Sustainable Development Charter1 adopted in 2011 defines the rights and obligations of state and citizens for the protection and preservation of the environment and sustainable development. In May 2012, Morocco signed up to the OECD’s Declaration on Green Growth. A draft Law on Environment and Sustainable Development is being considered for adoption by Parliament. In order to further strengthen shared ownership and institutional coordination, the Government is preparing a Sustainable Development Strategy which aims to provide the framework in which Green Growth policies will be crafted. 2 As part of these efforts, the Government aims to develop a fiscal framework targeting environmentally damaging activities such as plastic packaging production and sand extraction, and to implement a politically challenging energy subsidy reform agenda, which has already led to partial subsidy reductions for transport fuels. Finally, the Government aims to leverage investments in green industries and technologies to support growth and job creation in rural areas, through the emergence and expansion of sectors such as aquaculture and eco-tourism, and the achievement of efficiency gains in established sectors such as agriculture. 1 http://www.environnement.gov.ma/PDFs/CNE_charte_VF.pdf 2 The strategy is expected to provide the background to the articulation of the Government program to be outlined in the Letter of Development Policy. 4 The proposed operation is the first in a programmatic series of two single-tranche DPLs in the amount of Euro $100 million. The choice of a programmatic option is in line with the medium to long term nature of the reform efforts. The duration of the series is within the current government’s term of office, thus ensuring clear accountability for program implementation and outcomes. The measures supported by the DPL are anchored in existing sector strategies and ongoing reform agendas and fully linked to the Government program. The Program development objective is to support the improvement of Morocco’s institutional, regulatory and fiscal framework for Green Growth and the strengthening of the environmental sustainability dimension of selected sector strategies. Preliminary Description The operation supports three policy areas: 1) Improving the management of natural assets; 2) Greening physical capital; 3) Leveraging human capital to unlock growth in green sectors. Based on the results of identification and internal government consultations, the Bank and the GoM have defined an extended menu of tentative prior actions and triggers for each policy area. POLICY AREA 1. Improving the Management of Natural Assets To sustain its contribution to the country’s wealth and long term prosperity, natural capital requires investment, maintenance and good management. Measures supported under this Policy area aim to improve the management of natural assets underpinning key economic sectors. Policy Area 1 includes the following five components. 1.1 Setting the regulatory framework for Integrated Coastal Zone Management. Coastal zones and ecosystems are crucial to the country’s future growth and job creation, be it from tourism, agriculture, fisheries or other natural-resource based activities. Increased population density and economic activities such as sand mining and sanitation are having major impacts on coastal resources. Morocco however still lacks an organizing framework for integrated coastal zone management. The sustainable management of coastal space is affected by institutional and coordination constraints, with sectoral agencies often implementing policies and investments independently. Measures under this component aim to support the the government actions to support integrated coastal zone management (ICZM) policies and planning. 1.2 Strengthening water sector governance Morocco’s potential of renewable water resources is estimated at 730 m3/capita/year, well below the water stress threshold of 1,000 m3/capita/year. Current trends would lead to an increase in water demand from 14 billion m in 2008 to 16 billion m3 in 2030, unless an appropriate policy for demand management is implemented. The operation supports measures aimed at strengthening Morocco’s modern legal and institutional framework. 1.3 Improving Groundwater Management. The gap between water supply and demand (estimated at 2 billion m3) is largely compensated by the overexploitation of groundwater (estimated at 860 million m3 beyond the renewable volume of 3,400 million m3). This situation is likely to worsen in the future, due to climate change and increasing demographic and economic pressures. Small farmers who cannot afford to deepen their wells and strengthen their pumping equipment will be the first to suffer from water resources degradation. Previous pilots of participatory approaches to groundwater management demonstrated the need for full support from local authorities (Ministry of Interior) and the deconcentrated services of the Ministry of Agriculture to ensure the buy-in from final users. The operation supports Government actions aimed at strengthening participatory management of groundwater under well designed, effective and mutually agreed aquifer contracts. 5 1.4 Strengthening the monitoring and control systems for marine fisheries In the context of its approach to fisheries management, the Government has recognized that lack of control over illegal, unreported and unregulated (IUU) fishing will undermine all conservation measures it has adopted in the past, as well as the very objectives of its fisheries strategy (Halieutis). Measures under this component will help the Government address the challenge of a) set up a new legal system that allows for effective control measures; b) develop the capacities and coordination mechanisms implementing those control measures, at sea and in the ports. 1.5 Accounting for natural resources in decision making. Implementing Green Growth requires an adaptation of the tools used to monitor economic activity. Morocco’s economy depends heavily on activities intensive in natural resources use. But as in other countries, the lack of systems to monitor investments in and management of natural assets hampers their maintenance, encourages depletion and hinders their full and sustainable productive use. The operation will help the Government setting up a system of natural capital accounting, though limited technical resources and cross-governmental coordination affect progress. POLICY AREA 2. Greening physical capital This policy area supports the Government’s objectives of reducing environmental impacts of infrastructure investments whilst promoting low carbon growth. Past physical capital investments have not fully considered their environmental sustainability dimension. Increasing energy demand and high dependence on fossil fuels are major challenges in this respect. The Policy Area is composed of the following four components: 2.1 Adopting an electricity market design and establishing a power system to support low carbon growth Successful implementation of Morocco’s low-carbon energy policy requires a legal, institutional and regulatory framework supporting a high penetration of renewables and encouraging energy conservation. But Morocco currently lacks a market organization enabling the right market signals to encourage investments in low or zero carbon plants for base load power. Power market restructuring and regulatory reform will require key components such as vertical separation to the establishment of a regulatory framework that encourages demand side participation, through creation of an independent system operator. The operation will support Government’s efforts in carrying out electricity market reforms. 2.2 Setting the policy and legal framework for energy efficiency. To reduce the energy intensity of its economy and setting it on a low carbon growth path, Morocco needs to substantially reduce the growth of its energy demand (especially electricity). This becomes particularly important when giving priority to forms of energy with high capital cost such as solar or wind power. As subsidies distort price incentives, command-and-control measures for energy efficiency (EE) become necessary. The operation will support the implementation of EE measures. 2.3 Reducing water pollution from the industrial sector Industrial pollution contributes heavily to the degradation of water resources. In 2003 the Bank estimated the total annual cost of water quality degradation at 4.3 billion dirhams, or 1.2% of GDP. Also considering the severity of the impact of industrial pollution on human health and the environment, the operation will support the Government complete the regulatory framework in consultation with all relevant departments and ensure its timely and effective implementation. 2.4 Establishing a green fiscal framework. The operation will support measures aimed at aligning price signals to account for environmental externalities. Morocco until recently had no measure in place to correct those market failures, whilst its subsidy system encourages the inefficient consumption of fossil fuels. The Government has only recently started to reflect on the introduction of green taxation and so far 6 has proceed through a piecemeal approach. In addition to committing to the reform of energy subsidies, the Government has introduced a first batch of green taxes (eco-taxes) in two sectors: a) plastic production – in order to curb demand and develop recycling value chains; and b) sand extraction – with the explicit view to reducing environmental impacts on coastal zones. The gradual approach is partly explained by the novelty of the reform agenda, but also the necessity to proceed based on consensus of sector stakeholders. Government now intends to develop a more comprehensive approach allowing for the extension of green taxes to other polluting products and environmentally damaging activities. POLICY AREA 3. Leveraging human capital to unlock growth in green sectors 1. This policy area aims to: (i) strengthen the adoption of new technologies for climate smart agriculture, and (ii) support the emergence of labor intensive green sectors in rural areas. Morocco needs to create more and better jobs, including in rural areas, where underemployment and weak wages drive poverty, exclusion and vulnerability, while 10.6 percent of the unemployed have a higher education diploma. The policy area aims to address institutional constraints that limit a) the application of domestic know-how (specifically in agricultural research and agro-meteorological services) allowing for efficiency gains in agriculture; and b) the creation of labor intensive and high value activities in rural areas which, while responding to specific sustainability concerns, have the potential to create quality jobs. Two sets of measures supported by this policy area complement the Bank’s existing engagement in the agricultural sector (DPL, GEF Grants, and ESWs/TAs), whilst the remaining two (aquaculture and eco-tourism) are being developed based on nascent dialogue and will require and further background analysis and TA. The Policy Area is composed of the following four components: 3.1 Removing the barriers to green innovation in agriculture. The adoption of new green technologies is essential to meet the projected increase in crop productivity necessary to the long-term performance of the agricultural sector. Morocco’s agriculture research network is a repository of know how to address these challenges. The operation aims at supporting the application of two sets of green technologies which can promote more sustainable farming whilst improving crop productivity, increasing efficiency of input use, and restoring soil quality. These include the adoption of: a) enhanced varieties and b) direct seeding techniques. 3.2 Leveraging local weather information systems to strengthen adaptation. Particularly in rainfed areas, Moroccan farmers have adapted to scarce water availability for centuries. But hotter and drier conditions and increased variability are weakening the capacity of farmers’ traditional knowledge to cope. The collection of weather information and its timely translation into relevant messages understandable to farmers is a necessary condition for intensifying agricultural production in a sustainable way, and reduce fluctuations in crop production and agricultural GDP between years. The operation will support Government actions aimed at increasing the capacity of existing networks to deliver relevant and timely information to farmers through increased coordination and closer involvement of DMN. 3.3 Supporting the enabling environment for aquaculture investments Morocco’s fisheries strategy frames the development of aquaculture as an opportunity to compensate for shrinking catches and a driver of job creation and revenue diversification in rural areas. The operation supports Government measures aimed at developing the institutional framework needed to attract aquaculture investments. 3.4 Enhancing cross-sectoral coordination to develop the eco-tourism sector. Nature-based tourism activities provide rural populations with an additional source of incomes outside agriculture, ensuring better diversification of their income sources. In addition to investments in physical capital (transportation to the destination, accommodation facilities hotels), unlocking the economic benefits of ecotourism requires complementary human capital, mainly to provide hospitality services. The operation will support measures aimed at setting up skilling and training programs for rural populations to benefit from nature based tourism investments. Poverty and Social Impacts and Environment Aspects 7 The reforms supported by the proposed operation are expected to generate mainly positive and generalized social impacts. Improvements in the management of natural assets have a clear equity dimension, including from an inter-general perspective, as environmental degradation is known to impact more adversely on the poor. Yet several reform areas can lead to adverse impacts on specific groups. These include: a) fiscal reforms; b) environmental taxation; c) energy market reform; d) control of illicit fishing practices; e) groundwater management; f) industrial wastewater management. The Bank is already helping the Government assess and address the social impacts of some of the above reforms. On others, GoM has specifically asked for assistance in assessing potential trade-offs. Based on confirmation of Bank support to reform areas, the team will launch necessary PSIA work in collaboration with Government agencies, including consultations with potentially affected groups. The policies supported by the proposed DPL are not likely to impact negatively on the country’s natural assets. The only reform area with potential negative environmental implications relates to the development of the aquaculture sector. The Government has specifically asked the Bank for assistance in strengthening the performance of the environmental impact control framework for aquaculture investments. The proposed trigger for the second operation reflects this objective. Tentative financing Source: (Euro million) Borrower 0 International Bank for Reconstruction and Development 100 Borrower/Recipient IBRD Others Total 100 Contact point World Bank Contact: Andrea Liverani Title: Senior Social Development Specialist Tel: 5360+290 / 212-537-636-050 Fax: +212 537 636 051 Email: aliverani@worldbank.org Location: Rabat, Morocco (IBRD) Borrower Contact: Sabah Benchekroun Title: Chargée de Mission, Ministère des Affaires Générales et de la Gouvernance Tel: +212 537 687316 Email: benchekroun@affaires-generales.gov.ma For more information contact: The InfoShop The World Bank 1818 H Street, NW. Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop 8