NUMBER 152 * ED Precis Operations Evaluation Department June 1997 Morocco's Potential Still Unrealized Morocco approaches the 21st century should be made to ensure that private billion through 1983-95. The Bank's in a stronger position than most coun- sector growth is encouraged and that commitments amounted to $1.4 bil- tries in the Middle East and North Af- future loans do not increase Morocco's lion between 1979-83, rose to $2 bil- rica, but very important challenges external debt without a commensurate lion in 1984-88, and reached $2.6 remain. An OED study of the World increase in growth. The Bank could billion in 1989-93. More important, Bank's assistance strategyfor Morocco also put the excellent economic and the composition of lending changed since 1983, the year the government sector work done so far to better use. as reforms evolved: almost 40 per- began a comprehensive program of re- cent of loans from 1983-95 were for forms, concluded that the country has In the early 1980s, Morocco's eco- adjustment and, unlike many Bank performed well in theface of consider- nomic conditions became quite dire. loans to other countries at the time, able obstacles but that it remains below A financial and external debt crisis the first six adjustment loans were its true potential and needs. Similarly, had been in the making for some for sector adjustment programs. the Bank could adjust its strategic ap- time, and growth prospects were A sectoral approach was expected proach and improve the overall effec- weak. The deficit exceeded 12 per- to be more effective because it re- tiveness of its assistance. cent of GDP, the current account sponded to the government's pref- deficit in the balance of payments erence for phased reforms. In thefirstfew years of adjustment, was close to 10 percent of GDP, considerable progress was made in foreign reserves were depleted, Early success policy reform, stabilization, and growth. and the country was unable to ser- But these improvements allowed the vice its external debt. In the early years of adjustment, Bank to become overly confident. Morocco made considerable Meanwhile, progress in some badly In 1983 the government, with progress. Between 1983 and 1988, needed reforms proceeded very slowly. support from the World Bank, initi- Bank programs focused primarily In the early 1990s, the Bank's bullish ated a comprehensive program of on sectoral reform, while the IMF assessment of the situation cameface reforms that were to be phased in took the lead in stabilization efforts. toface with external shocks and with over several years, starting with In addition, the Bank addressed the effects of important policy short- stabilization and industrial incen- long-term structural change through comings. Morocco lost ground and to- tives. The program was radically project lending, economic and sec- day stillfaces major structural issues. different from past efforts in that tor work (ESW), and dialogue with stabilization was to be accompanied The studyfound that the Bank's by structural reforms. focus on deficit reduction was not F*"Kingdom of Mlorocco Country matched by sufficient attention to Bank strategy Assistnnce Review," by Retie structural reforms and social develop- Vandendries, Report No. 16326. ment. While the Bank and the govern- The aims of the Bank's assistance anuariur 29. 1997. Available to ment need to pay continued attention strategy in Morocco since 1983 have Bank e.xecutive n'irectors a.nd staff to fiscal stability, the Bank should do been threefold: to stabilize the econ- frorn the Internal Documents Linit more to help the government promote omy, increase the economic growth ;and from regional ii irnrmationt ser- public investment in rural development rate, and reduce income inequality, vice centers, and to tlie public from and human resources, increase the bud- extending social services to the poor. thie Public Infornmatiorn Center: get shares of health and education (es- 1-202,458-5454. fax 1-202/522- peciallyfor rural women), improve The Bank's financial support to 1500, e-mail pic'-worldbank.org. public spending efficiency, and reduce Morocco (already a major Bank cPris wL'ritten by Stefano Petru.-ci. the public enterprise sector. Efforts borrower in the 1970s) totaled $5.53 f ec 11~~~~~~~~ 1 1 1 the government. As reducing the adverse external factors, such as * The public wage bill is still too deficit was very urgent, it was de- drought and recession in Europe, high and remains a drain on the cided that structural fiscal prob- while downplaying policy factors. budget. The Bank's assistance lems would be addressed at a later It underestimated the structural and strategy in Morocco could help stage. Four adjustment loans (in sectoral reforms needed. Meanwhile, the government improve the effi- trade, agriculture, education, and the real exchange rate was appreci- ciency of public enterprises and public enterprises) were approved ating, the import liberalization pro- pricing policies and speed up during this time. With the excep- gram had slowed considerably, privatization. tion of education sector reform, and external flows fell as Morocco which encountered political resis- graduated from IMF programs and Private sector tance, and irrigation, which faced rescheduling. Progress continued shortages of public funds, all on some key reforms, notably finan- Strong private sector devel- were successful. cial sector reform, privatization, and opment has yet to be achieved. a new investment code, but the Low agricultural production (and During this period, overall GDP country's medium-term strategy droughts) played an important role rose by almost 5 percent a year, was no longer clearly defined. in the slowdown of the economy in manufacturing exports grew rap- the early 1990s, but so did the slow idly, the deficit was halved, and New awareness growth of the manufacturing sec- the balance of payments current tor. Morocco's industrial sector ab- account reached a surplus. Re- Since 1994, the Bank has shown sorbed one-fourth of Bank lending strained demand, tax reform, fa- a new awareness of the unfinished to the country between 1983 and vorable weather, debt relief, and a business in several structural areas 1994, yet the sector grew only 3 sharp drop in oil prices contributed and in the agenda for reform. Ad- percent a year in real terms during to this good performance. Even af- justment lending resumed in 1995, the period. Private investment ter five years of adjustment, how- and the Bank's 1997 country assis- peaked at 13.7 percent of GDP in ever, key structural problems with tance strategy recognizes that 1989-91 but fell to 11.7 percent in fiscal and public sector manage- progress on several important de- 1994-the same level as in 1983. ment were still not being addressed. velopment issues facing Morocco For example, a wage freeze from has been limited. The reasons for this weak per- 1981-85 helped contain the public formance are many. They include sector wage bill, but no efforts were Current issues slow trade liberalization, an appre- made to help reduce the number of ciating real exchange rate since public employees. Public sector 1990, deficient infrastructure and human resources, and bureaucratic Overoptimism Morocco has applied rigorous obstacles. A new investment code and skillful fiscal management and and sharp reductions in corporate Toward the end of the 1980s, the has successfully stabilized its econ- taxation have been introduced, but Bank was excessively bullish it omy. But three issues stand out: other hurdles remain. Further ra- its assessments of Morocco's eco- tionalization of the public sector nomic future. Progress in public * Progress in stabilization was and financial sector reform are enterprise and financial sector re- achieved in part at the expense of still to be fully implemented. forms was considered excellent. structural reform. Two examples Privatization, which now appears Two adjustment loans approved are the slowdown in trade liberal- well under way, should be seen as during this period carried rela- ization and the lack of efforts to an opportunity for enhancing the tively light conditions for disburse- promote rainfed agriculture-a scope of private sector activity, es- ment because they were considered fundamental source of income for pecially in infrastructure. Efforts a continuation of a smoothly run- most poor farmers-and small- must now focus on increasing ning reform program. The Bank's scale irrigation. the external competitiveness of ESW, which was of very high qual- the economy. ity, was not sufficiently used * Priority sectors (agriculture, in- and disseminated. frastructure, and human resources) The social sector still need increased public invest- The Bank's overoptimism contin- ment. The Bank addressed the issue While progress has been made ued through 1993, despite the fact with the first structural adjustment over the past several years in reduc- that there had been hardly any eco- loans, but the concept has been ing poverty and improving social nomic growth since 1990. Growth slow to take root. In 1990, when indicators, it has been insufficient, slowed from almost 5 percent a budget cuts were called for, the especially for women in rural ar- year in the second half of the 1980s government decided to cut its in- eas. When compared with coun- to 2 percent in the early 1990s. The vestment by 15 percent across all tries at similar economic levels, Bank attributed the slowdown to sectors, including priority sectors. Morocco still rates poorly in terms June 1997 of primary and secondary school currently accounts for 85 percent agreement with the European Union enrollments and literacy rates, of water use, but future industrial will be of great benefit, while inter- especially among females. Health growth and economic development ruptions and policy reversals would indicators are also poor, especifically will increase the demand for other be especially damaging. Trade liber- maternal and infant mortality and water uses. Cost recovery has im- alization needs to be expanded in a access to health care in rural areas. proved considerably in urban nondiscriminatory fashion. Morocco's lagging social indicators areas but not sufficiently in irriga- remain a major obstacle to eco- tion. Integrated water management * Intensify efforts tofully liberalize the nomic growth. in rural areas and rehabilitation financial system, with full convert- of existing irrigation perimeters ibility of the dirham and a market- Although school enrollments are needed. determined foreign exchange rate. have increased in recent years, ex- cessive public spending on higher Conclusions and recommendations * Focus on human and physical infra- education has taken resources from structure. Constraints to industrial basic schooling. Education sector The Bank has helped Morocco growth need to be addressed ur- reforms championed by the Bank improve its fiscal balance and liber- gently. These include the quality of failed because they proved politi- alize trade. It has helped the gov- human and natural resources, pri- cally unfeasible. The Bank's efforts ernment break away from some vate financing of infrastructure, and in the health sector have been more past policies and initiate across- the ability to generate, adopt, and successful, yet here, too, there has the-board reform. The economy has diffuse technological innovation. been excessive spending for hospi- grown without major interruptions tals (with poor cost recovery) in since the mid-1980s. Yet the Bank's In social sector development, Bank as- urban areas. perseverance, as well as the overall sistance should help: pace of reform, weakened near the Bank strategy since 1994 has end of the 1980s. As a result, the * Redirect public spending toward the focused more strongly on poverty, full potential of Bank assistance has social sectors. An increasing share social issues, and the role of women not been tapped, and results have must be allocated to basic services, in Morocco's development. Recent been mixed. rural areas, and women. Bank-funded projects have incorpo- rated these findings, but education The study makes the following * Increase thefocus on poorfarmers. reform remains a high priority. recommendations: More needs to be learned about the types of assistance that will pro- The environment In public sector management, the Bank mote farming improvements in should focus on: rainfed areas. The Bank may need Recent droughts have highlighted to increase its efforts to persuade Morocco's dependence on water * The structural aspects offiscal the government to give higher pri- and the economy's vulnerability problems. If these problems remain ority to small- and medium-sized to climatic change. Air pollution unresolved, they are likely to derail irrigation schemes. and soil erosion are also becoming any adjustment program. In Mo- more severe. The country has made rocco, these problems still include * Focus on Morocco's scarce water progress toward defining a national a large public sector wage bill and resources. Full cost pricing of irriga- environmental action plan, but public enterprise sector, inefficient tion water and integrated resource overall institutional awareness and allocation of public spending, and management would lead to impor- coordination are weak. A 1993 Bank the need for greater and more equi- tant efficiency gains and to shifts project designed to strengthen the table cost recovery. toward less water-intensive crops. institutional and regulatory frame- Water pollution practices should work for managing environmental * Rationalization of public enter- be stemmed. protection has been slow in mobiliz- prises. Not all public enterprises ing the necessary cooperation are likely to be privatized soon, and In terms of Bank assistance, the recom- among institutions. there is an urgent need to improve mendations arefor: the operational efficiency and pric- Water is the most urgent environ- ing policies of public enterprises. * More selective structural adjustment mental problem. Morocco is now lending and stronger project design. defined as a "water-stressed" coun- In private sector development, the Projects should always include try. Per capita supplies and water Bank should help the government: measurable performance indicators. quality are declining, rural areas are Lending that does not lead to accel- poorly served with potable water, * Restore momentum in trade and in- erated growth would be counter- and there are substantial losses in centive reforms. Adherence to com- productive. The high proportion of both irrigation and drinking water mitments made to the World Trade projects that have had satisfactory systems in urban areas. Irrigation Organization and to the association outcomes but limited long-term OED Precis returns raises questions about the that it intends to liberalize trade and tion. In the social sectors, the Bank relevance and appropriateness of recognizes the needfor a detailed me- should build on its ongoing efforts to some project and program designs. dium-term program of reform. increase the share of the government Financial intermediation opera- budget allocated to basic health, educa- tions in particular seem to have Management noted that the gov- tion, rural areas, and women. In public had very limited impact on indus- ernment's concern for social and politi- sector management, major structural trial growth. cal stability throughout the adjustment fiscal problems, including the very period has been a keyfactor behind the large public sector wage bill, the public * Better use of ESW. A careful re- gradualism highlighted in the report. enterprise sector, and the efficient alloca- view of past trends is indispens- In this regard, the process of economic tion of public spending remain unre- able for diagnosis and prescription. opening has been accompanied by social solved and should receive adequate More resources need to be allo- stability in a somewhat volatile region, attention. In policy dialogue, the Bank cated to dissemination and con- within a continuing process of political should try to convince the government stituency building. opening. Management agreed that the to reduce its subsidies to higher educa- slower social progress made in rural tion and expensive urban health services * Realism in the country assistance areas needs to be addressed urgently and to redirect public spending to the strategy (CAS). The CAS should and forcefully. areas mentioned above. provide a realistic assessment of conditions and thus design an ap- Management concurred that The committee emphasized that in propriate and relevant Bank assis- Morocco's performance has been on view of Morocco's debt to the Bank, tance strategy. The 1993 CAS failed the whole satisfactory but remains be- every effort should be made to use all to do so, but the 1997 CAS tries to low its true potential and needs, and of the Bank's instruments in a cohesive rectify these shortcomings. that major structural issues require fashion and to ensure that loans to continued attention. Fiscal stability, Morocco do not merely increase the * Resident mission. Establishment however, should not overshadow other country's debt but are used to contrib- of a Bank resident mission in 1998 necessary structural measures. Man- ute materially to structural reform will strengthen contact with local agement noted that most of the recom- and improved resource utilization. stakeholders, especially women, mendations of the report arefully helping to improve project design. integrated into the Bank's new country In light of Morocco's vulnerability to assistance strategy. external shocks, the committee agreed Bank management, in its response that the Bank, through country dia- to the study, agreed with most of the The Committee on Development logue, portfolio management, and the review's assessments and recommen- Effectiveness, in its discussions of the design of new operations, should sup- dations but stressed that the report OED study and of the responsefrom port Morocco's efforts to develop poli- could have placed greater emphasis on management, noted that Morocco con- cies aimed at economic diversification, Morocco's vulnerability to external tinues toface major structural prob- more efficient use of water resources, shocks. It said that Morocco deserves lems in its efforts to enhance sustainable and improved sustainability of Bank- strong credit for maintaining a consis- growth and improve social equity. While financed interventions. The committee tent track record in economic manage- acknowledging that stabilization and emphasized that a partnership should ment in theface of such external shocks. adjustment are complementary objec- beforged among the Bank, government, tives, the committee stressed that Bank and donors to maximize the effective- Management noted that stabilization lending shouldfocus on projects that ness of development assistance. and adjustment are complementary contribute measurably to accelerated objectives and that one cannot be pur- growth and enhanced equity. The committee concluded that sued in the absence of the other. At Morocco's potential gave reasons for times, this has required trade-offs, The committee agreed that the optimism and acknowledged that the but overall, Morocco has consistently priority areas for public investment country had achieved a solid record in demonstrated continued progress on are agriculture and human resources. economic performance compared with both objectives. Management agreed It emphasized that the Bank should do many countries during the period under that the lack of a medium-term pro- more to help the government promote review. But with manyfundamental gram, as well as droughts, has had an rainfedfarming and to give higher pri- issues still unresolved and low economic impact on adjustment but noted that ority than in the past to infrastructure growth, the challengefor thefuture is to the government has given clear signals and small- and medium-scale irriga- improve Bank and country performance. OED Precis is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. This and other OED publications can be found on the Internet, at http:/ / www.worldbank.org/html/oed. Please address comments and inquiries to the managing editor, OED, tel: 1-202/458-4497, fax: 1-202/522- 3200, e-mail: eline@worldbank.org June 1997