The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Document of The World Bank FOR OFFICIAL USE ONLY Report No: PGD56 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF US$275 MILLION TO THE KINGDOM OF MOROCCO FOR THE DISASTER RISK MANAGEMENT DEVELOPMENT POLICY LOAN WITH A CATASTROPHE DEFERRED DRAWDOWN OPTION NOVEMBER 12, 2019 Urban, Resilience and Land Global Practice Finance, Competitiveness and Innovation Global Practice Middle East And North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. . The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Kingdom of Morocco GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of 6 November 2019) Currency Unit US$1.00 = MAD 9.647 US$1.00 = EUR 0.902 ABBREVIATIONS AND ACRONYMS ACAPS Insurance and Social Welfare Supervisory Authority [Autorité de Contrôle des Assurances et de la Prévoyance Sociale) ADM Highways of Morocco (Autoroutes du Maroc) BAM Bank Al-Maghrib Cat-DDO Deferred Drawdown Option for Catastrophe Risks CPF Country Partnership Framework CVC Monitoring and Coordination Center (Centre de Veille et de Coordination) DPF Development Policy Financing DRFI Disaster Risk Financing and Insurance DTFE Treasury and Exterior Finance Directorate (Direction du Trésor et des Finances Extérieures) FLCN Fund for the Fight against the Impacts of Natural Disasters (Fonds de Lutte Contre les Effets des Catastrophes Naturelles) FSEC Solidarity Fund against Catastrophic Events (Fonds de Solidarité contre les Evénements Catastrophiques) GCC Gulf Cooperation Council GDP Gross Domestic Product GFN Gross Financing Needs GNP Gross National Product HCP High Commission for Planning (Haut-Commissariat au Plan) IBRD International Bank for Reconstruction and Development IDRM Integrated Disaster Risk Management IMF International Monetary Fund INSARAG International Search and Rescue Advisory Group LDP Letter of Development Policy MASEN Moroccan Agency for Sustainable Energy MENA Middle East and North Africa MFD Maximizing Finance for Development MnhPRA Morocco Natural Hazards Probabilistic Risk Assessment MEFAR Ministry of Economy, Finances and Administrative Reform The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) MoI Ministry of Interior OCP Cherifian Phosphates Office Group (Office Chérifien des Phosphates) ONCF Railways National Office (Office National des Chemins de Fer) ONEE Electricity and Water National Office (Office National de l’Electricité et de l’Eau) PforR Program-for-Results PLL Precautionary and Liquidity Line SDR Special Drawing Rights SCD Systematic Country Diagnostic SGG General Secretariat of the Government (Secrétariat General du Gouvernement) SOE State-Owned Enterprise WB World Bank WBG World Bank Group . Regional Vice President: Ferid Belhaj Country Director: Jesko Hentschel Regional Director (s): Ayat Soliman, Najy Benhassine Practice Manager (s): Jaafar Sadok Friaa, Jean Pesme Augustin Maria, Oscar Anil Ishizawa Escudero, Antoine Task Team Leader (s): Bavandi The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) KINGDOM OF MOROCCO DISASTER RISK MANAGEMENT DEVELOPMENT POLICY LOAN WITH A CATASTROPHE DEFERRED DRAWDOWN OPTION TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM .......................................................................3 1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................5 2. MACROECONOMIC POLICY FRAMEWORK....................................................................................7 2.1. RECENT ECONOMIC DEVELOPMENTS............................................................................................ 7 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................ 14 2.3. IMF RELATIONS ............................................................................................................................ 19 3. GOVERNMENT PROGRAM ........................................................................................................ 19 4. PROPOSED OPERATION ............................................................................................................ 21 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 21 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 23 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 35 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 36 5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 36 5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 36 5.2. ENVIRONMENTAL ASPECTS ......................................................................................................... 38 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 39 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 40 6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 41 ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 43 ANNEX 2: FUND RELATIONS ANNEX .................................................................................................. 45 ANNEX 3: LETTER OF DEVELOPMENT POLICY..................................................................................... 53 ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 61 ANNEX 5: DEBT SUSTAINABILTY ANALYSIS ....................................................................................... 63 Page 1 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) The loan was prepared by an IBRD team consisting of Augustin Maria (Senior Urban Development Specialist, SMNUR), Oscar A. Ishizawa (Senior DRM Specialist, SAFU1) and Antoine Bavandi (Senior Financial Sector Specialist, EFNRF) (Co-Task Team Leaders); Dalia Al Kadi (Economist, EMNM1); Karima Ben Bih (Young Professional, SMNUR); Philipp Stephan Petermann (Junior Professional Officer, SMNUR); Antonio Davila-Bonazzi (Lead Financial Officer, FABBK); Khalid El Masnaoui (Senior Economist, EMNM1); Kolie Ousmane Maurice Megnan (Senior Financial Management Specialist, EMNGU); Vasco Molini (Senior Economist, EMNPV); Taoufiq Bennouna (Senior Natural Resources Management Specialist, GENME); Elena Segura Labadia (Senior Counsel, LEGAM); Eric Ranjeva (Finance Officer, WFACS); Charlene D’Almeida (Program Analyst, SMNSO); Houcine Gabi (Social Development Specialist, SMNSO); Abdeslam Dahman Saidi (Consultant, SMNUR); Luis Rolando Duran Vargas (Consultant, SMNUR); Clarisse Hida (Consultant, SMNUR); Thibault Bouessel du Bourg (Consultant, SMNUR); Pierre Uginet (Consultant, SMNUR); Amina Iraqi (Consultant, EMNM1); Victoria Ahlonkoba Bruce-Goga (Program Assistant, SMNSO); Soukaina Bachar (Program Assistant, MNCMA); Asma Khouni (Program Assistant, MNC01). This operation was undertaken under the general guidance of Jesko Hentschel (Country Director, MNC01); Marie Francoise Marie Nelly (former Country Director, MNC01); Sameh Wahba (Global Director, SURDR); Alfonso Garcia Mora (Global Director, EFNDR); Ayat Soliman (Regional Director, SMNDR); Najy Benhassine (Regional Director, EMNDR); Jaafar Friaa (Practice Manager, SMNUR); Jean Pesme (Practice Manager, EMNF1); Olivier Mahul (Practice Manager, EFNRF); and Gabriel Sensenbrenner (Program Leader, MNC01). Peer reviewers were Niels B. Holm-Nielsen (Lead DRM Specialist, SURDR); Andrea Liverani (Program Leader, ECCEU); Samantha Cook (Senior Financial Sector Specialist, EFNRF). The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Project ID Programmatic P168580 No Proposed Development Objective(s) The development objective of the proposed operation is to support the Government of Morocco in (a) strengthening the country’s institutional capacity to deal with the adverse financial impacts of disasters and climate-related shocks, and (b) strengthening Morocco's institutional framework for disaster and climate-related risk management. Organizations Borrower: KINGDOM OF MOROCCO Implementing Agency: MINISTRY OF ECONOMY, FINANCES AND ADMINISTRATIVE REFORM PROJECT FINANCING DATA (US$, Millions) SUMMARY Total Financing 275.00 DETAILS International Bank for Reconstruction and Development (IBRD) 275.00 INSTITUTIONAL DATA Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Overall Risk Rating Moderate Page 3 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) . Results Indicator Name Baseline Target Availability of an audit of the FSEC’s internal control systems confirming that the FSEC’s systems and procedures allow for the appropriate use of No [2019] Yes [2023] funds Annual revenues from the new parafiscal tax created to finance the N/A [2019] 200 [2023] FSEC (MAD million) Share of local officials of the Ministry of Interior responsible for the 0 [2019] 90% [2023] administration of the register trained on the registration procedures The Government has deployed an online platform for the registration of N/A [2019] Yes [2020] people affected by a catastrophic event The Government has developed a specific outreach and communication mechanism to inform the population of the registration procedures for N/A [2019] Yes [2023] people affected by a catastrophic event, with a specific focus on women Insurance companies comply with the prudential requirements No [2019] Yes [2023] established by the circular Number of provinces covered by an integrated flood risk management 0 [2019] 4 [2023] information system Number of Civil Protection search and rescue units applying operational 1 [2019] 12 [2023] and staffing procedures in line with INSARAG standards Percentage increase in the number of female staff members in the Civil N/A [2019] 5% [2023] Protection . Page 4 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN TO THE KINGDOM OF MOROCCO 1. INTRODUCTION AND COUNTRY CONTEXT 1. The proposed operation is a stand-alone US$275 million Disaster Risk Management Development Policy Loan with a Deferred Drawdown Option for Catastrophe Risks (Cat DDO). It has been designed to support the Government of Morocco (GoM) in: (a) strengthening the country’s institutional capacity to deal with the adverse financial impacts of disasters and climate-related shocks, and (b) strengthening Morocco’s institutional framework for disaster and climate-related risk management. 2. This operation builds on a longstanding World Bank engagement with the GoM in disaster risk management (DRM) and disaster risk finance (DRF). Over the last ten years, the World Bank has provided Technical Assistance (TA) on disaster and climate-related risk management, including governance, targeted risk assessments and hazard mapping1, as well as financial aspects relating to disaster risk insurance. Specific DRF activities included raising awareness of the GoM on the need for a comprehensive risk financing strategy supported by advanced analytical tools and financial instruments. This TA has contributed to the design of the IBRD-financed Integrated Disaster Risk Management and Resilience Program-for-Results (IDRM PforR), which was approved in April 2016. The IDRM PforR supports the GoM in strengthening the DRM institutions, infrastructure, and catastrophe insurance systems in the country. 3. Morocco is one of the countries most exposed to geological and climate-related hazards in the Middle East and North Africa (MENA) region. According to the probabilistic evaluation of disaster risks in Morocco led by the World Bank, the country has annual average losses from natural catastrophes of over US$800 million. Due to its geographical position, high rainfall variability, and topography, Morocco is regularly prone to flooding with losses estimated at over US$400 million each year. Droughts affect the agricultural sector, with an estimated annual loss of crop yields of approximately US$300 million. Earthquakes could affect two specific areas of the country: the North,2 which is experiencing strong economic growth, and the Agadir Region, one of Morocco’s main touristic centers. Earthquakes have an average impact of US$90 million per year. 4. Morocco is already bearing the brunt of climate change, with events such as the severe drought in 2016. Future climate trends include: i) rising temperatures of 1–1.5°C by 2050 with a faster rate of warming in the interior of the country; ii) decrease in average precipitation by 10–20 percent across the country, with a decrease of 30 percent in the Saharan region by 2100; iii) reduced snowpack in the Atlas Mountains; iv) increased incidence of drought conditions3; and v) rise in sea levels between 18–59 cm by 2100.4 Climate change will increase demand on groundwater for irrigation, which already consumes 90 percent of available water, and reduce the quality of surface water due to pollutants. Extreme events are expected to increase in frequency and severity with flash floods threatening urban areas, increased risk 1 For a presentation of the main results of the first phase of TA provided by the World Bank to the GoM, see: World Bank (2013). Building Morocco’s Resilience: Inputs for an Integrated Risk Management Strategy. Washington, DC. 2 The 2004 Al Hoceima earthquake occurred near the coast of northern Morocco. The strike-slip earthquake measured 6.3 Mw. About 630 people were killed, 926 were injured, and up to 15,000 people were made homeless in the wider Al Hoceima area. 3 World Bank (2013). Impacts of Climate Change on Water Resource Management and Adaptation Measures in the Oum er Rbia River Basin, Morocco. 4 World Bank (2011). Vulnerability to climate change and natural disasters of coastal cities of North Africa . Washington, DC. Page 5 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) of flooding during October-December, coastal erosion and flooding from tidal storms and erratic precipitations patterns. 5. Economic losses triggered by disasters in Morocco hamper poverty reduction efforts and threaten advances in shared prosperity. Morocco has made significant progress in reducing poverty and promoting shared prosperity over the last decade. The percentage of the population living below the national poverty line (US$2.15 per day) has fallen significantly, from 15.3 percent in 2001 to 4.8 percent in 2014, and extreme poverty has been eradicated (HCP 2016). Over the same period, the well-being of the bottom 40 percent grew both in absolute and relative terms (the well-being of the poor improved relative to that of the non-poor), pointing to an increase in shared prosperity. However, in 2014, 12.5 percent of the population remained vulnerable to poverty, with per capita consumption in the range between the poverty line and 1.5 times that threshold. This population remains at risk of slipping back into poverty if affected by adverse natural events, against which they cannot protect or insure themselves. Shocks created by adverse natural events have regressive distributional effects as vulnerability to climate shocks is higher for the poorest households. At the global scale, it is estimated that the impacts of disasters are more than twice as significant for poor people than anyone else.5 In the context of climate change, the anticipated increase in frequency and severity of hydrometeorological hazards could threaten to reverse the hard-won development gains of the past years. The policy reforms supported by the proposed operation are aimed at increasing long-term resilience and ability to recover from the adverse impacts of disasters, thereby contributing to the World Bank Group’s (WBG) twin goals of ending extreme poverty and promoting shared prosperity in a sustainable manner. 6. The GoM has developed a strong, cross-sectoral DRM and climate change adaptation policy framework over the last two decades. Since the early 2000s, the GoM has launched a large set of initiatives to improve the understanding of critical risks in the country through risk assessment studies, as well as definition of roles and responsibilities between ministries in disaster risk reduction, response and recovery from natural catastrophe. With support from the IDRM PforR (see Box 1 below), the Government has improved the approach to managing disaster and climate-related risks with a focus on promoting ex- ante risk reduction and preparedness, to complement post-event recovery activities. To this end, the Government has begun to fundamentally reform the Fund for the Fight against the Impacts of Natural Disasters (Fonds de Lutte contre les Effets des Catastrophes Naturelles, FLCN) into a “National Resilience Fund”. The reform seeks to establish a more systematic process within the Government, addressing DRM in an integrated manner, covering activities implemented by ministerial departments and other public entities as well as local governments. The restructuring of the FLCN positions the Fund as an important co-financier of local-level structural and non-structural risk reduction programs. In terms of emergency response, relevant mechanisms and institutions are well established and centrally coordinated through the national Monitoring and Coordination Center (Centre de Veille et de Coordination, CVC) and the Civil Defense, both under the Ministry of Interior. With support from the World Bank, the GoM passed a series of laws in 2013 and 2015 that aimed at ensuring the sustainability of the economy’s natural resource base, encouraging a shift towards low carbon growth and low carbon-impact investments, spurring innovation and job creation through investments in green sectors. The GoM has also implemented an integrated national policy for the protection of the environment, combating the effects of climate change and anticipating the reduction of greenhouse gas emissions by up to 32 percent by 2030. This policy furthers 5Hallegatte, Vogt-Schilb, Bangalore; Rozenberg 2017. Unbreakable: Building the Resilience of the Poor in the Face of Natural Disasters. Climate Change and Development. World Bank. https://openknowledge.worldbank.org/handle/10986/25335. Page 6 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) the Government’s recent efforts to promote a green growth strategy exemplified by the Green Morocco Plan (Plan Maroc Vert) and the National Environment Charter. In addition, the GoM is working towards liberalization of the renewable energy sector. 7. The GoM has also initiated the development of an efficient disaster risk financing mechanism with the adoption in 2016 of Law No. 110-14 introducing a catastrophic risk insurance regime. The law aims to improve the financial resilience of Moroccan households and businesses against natural and man- made disasters. It sets up a dual system which guarantees coverage for insured households and businesses through additional premium received and managed by private insurers, as well as provides basic compensation for uninsured people and households through the Solidarity Fund against Catastrophic Events (Fonds de Solidarité contre les Evénements Catastrophiques, FSEC). The FSEC provides partial financial compensation, including to the poorest and most vulnerable, in case of bodily injury or loss of principal residence. Given the potential severity of disaster-related losses faced by the FSEC, its financing will be backed by a combination of financial instruments. The GoM is currently reviewing the opportunity for the implementation of a risk transfer product (Cat Bond or reinsurance). This approach would contribute to Maximizing Finance for Development (MFD) through the mobilization of risk transfer and insurance solutions in the capital and reinsurance markets for the benefit of a solidarity fund covering the entire Moroccan population. 8. Despite this recent progress, Morocco’s DRM policy framework has several limitations. The framework still suffers from insufficient inter-ministerial coordination of DRM policies and programs, which could jeopardize the progress achieved so far. The linkages and coordination mechanisms between the central and local government layers also lack clarity. Disaster risk information is not systematically generated and shared, which reduces the ability of decision makers in various sectors to use it to inform the design of their programs. The Government’s recent reforms on catastrophe risk insurance are an important step towards building the country’s financial protection against natural catastrophes. 2. MACROECONOMIC POLICY FRAMEWORK 2.1. RECENT ECONOMIC DEVELOPMENTS Growth, Inflation, and Inclusion 9. Morocco’s economic growth over the past five years has remained modest and volatile, whereas inflation has been low. On the supply side, the volatility of growth has been driven by large swings in the growth of mainly rain-fed agriculture. On the demand side, domestic demand has been the main driver of growth in the recent past, fueled by high investment and private consumption. More recently, GDP growth decelerated to an estimated 3 percent in 2018 compared to 4.2 percent in 2017. On the supply side, this slowdown was primarily driven by the sharp decline of agricultural value-added growth (4 percent) due to the base effect following exceptionally strong agricultural growth performance in 2017 (15.2 percent). This was only partially compensated by the otherwise good performance of nonagricultural activities. Growth has been particularly high in extractives due to the continued upturn of phosphate production and exports. Growth has also been strong in tourism and new export industries (e.g. automotive, aeronautics). Growth slowed down progressively during the first two quarters of 2019, reaching an average of 2.7 percent compared to 3.1 percent during the same period in 2018. This was the result of the contraction of agricultural growth and despite the acceleration of non-agricultural growth Page 7 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) driven primarily by the recovery of the fishing and construction sectors as well as the strong performance of industry, energy and services sectors. Inflation has remained low and controlled under 2 percent throughout the past decade. Monetary authorities plan to gradually introduce an inflation-targeting regime and are evaluating the timing of a further widening of the exchange rate band (paragraphs 20-23). Figure 1. Morocco’s Growth Rate Volatility 21 16 Growth Rate (%) 11 6 1 -4 -9 -14 2010 2011 2012 2013 2014 2015 2016 2017 2018 Agricultural GDP Non-agricultural GDP GDP Source: High Commission for Planning. 10. Despite some improvement over the past two years, performance in the area of job creation has been particularly weak, with inclusiveness and job quality posing significant challenges, especially for youth, women, and educated workers. With the working-age population increasing by over 300,000 a year, net job creation has been insufficient. The unemployment rate remained relatively elevated during the first two quarters of 2019 (9.1 percent in Q1 and 8.1 percent in Q2) and is even higher among youth and the educated, whereas female labor force participation is very low and declining. Only 17 percent of the economically active population have a formal job, and less than 10 percent have a formal private sector job. Furthermore, unemployment spells tend to be long: more than 70 percent are unemployed for more than a year, and this share is higher among those with tertiary education. 11. Growth has been pro-poor but the urban-rural gap in poverty rates remains large. Between 2007 and 2014, consumption of the bottom 40 percent of the population grew faster (5.4 percent on average) than that of the remaining population (4.7 percent), suggesting an increase in shared prosperity. Therefore, the Gini coefficient declined from 40.7 percent in 2007 to 39.5 percent in 2014. Yet, poverty incidence remains high in rural areas, and poverty reduction in these regions has been twice as slow as in urban areas. With an annual convergence rate of 4 percent, it would take 24 years for the convergence process to reduce initial regional disparities by half. Moreover, subjective poverty (the percentage of households considering themselves poor) increased from 42 percent in 2007 to 45 percent in 2014, with even higher increases in rural areas (from 47 percent to 54 percent over the same period). 12. This inadequate growth and inclusion performance reflect structural challenges of the existing growth model. Growth over the past two decades has been driven by levels of investment that were among the highest globally (over 30 percent of GDP since 2008). Around half of the investment was done by the central government and state-owned enterprises (SOEs). Although this investment has supported a noteworthy improvement in infrastructure and allowed for the development of new export-oriented sectors, much remains to be done to address the challenges that impede the level of efficiency required for public investment, thereby achieving higher growth rates and higher levels of inclusion. In fact, other Page 8 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) countries have achieved the same degree of growth acceleration with a lower investment effort. Furthermore, such high levels of public investment will not be sustainable in the future without endangering macroeconomic stability. This lackluster return can be explained by: (a) a lack of investment spillovers, which resulted in a failure to generate significant productivity gains; and (b) the low contribution of labor to economic growth. The lack of investment spillovers results from the inefficiency of public investment and its channeling into infrastructure development, which produces limited total factor productivity growth, as well as the channeling of private sector investments into low productivity sectors such as construction and commerce. The low labor contribution to recent economic growth results from: (a) Morocco’s difficulty in harnessing its growing pool of labor (particularly youth and women), with job creation remaining limited; (b) the economy’s difficulty in managing available human resources (including labor market policies that constrain recruitment and retrenchment across both public and private sectors); and (c) an inability to swiftly reallocate labor across sectors for efficiency purposes. 13. This highlights the imperative for a new growth model capable of generating inclusive growth and job creation; this is reflected in Morocco’s recent policy direction and the WBG Country Partnership Framework for Morocco. The WBG Systematic Country Diagnostic (SCD) concluded that to reach the efficiency frontier, Morocco could improve its market allocation of resources across firms and sectors and improve the efficiency of public policies, including with a view to crowding in the private sector.6 In July 2019, the King highlighted in his royal address the need for a new development model as the current one has been unable to reduce social inequalities and spatial disparities. He created a special commission charged with designing a new development model for the country and emphasized the need for more and faster reforms to improve public services, increase economic openness, and improve sectoral strategies and their coordination. The authorities are already progressing towards some of these objectives and the WBG Country Partnership Framework (CPF)7 for Morocco for FY19-24 aims to achieve these goals by focusing on three areas, namely: (1) promoting job creation by the private sector (through a more efficient business environment and greater competitiveness, increased opportunities for private sector growth, and more access to finance); (2) strengthening human capital (through improved access to, and quality of, education, health, and social protection systems); as well as (3) promoting inclusive and resilient territorial development (through improved performance of infrastructure delivery, access to sustainable water resources, and adaptation to climate change and disaster risk management). Fiscal Policy and Balance 14. In 2013, in response to the external shocks facing the country, Morocco initiated a process of fiscal consolidation and revenue development that allowed it to shrink its fiscal deficit and stabilize its debt-to-GDP ratio. The Government initiated a reform of the subsidy system in 2013 and began to rein in other recurrent expenditures. The activation of a price indexation mechanism for gasoline and diesel in 2013 and the full liberalization of these prices in 2015 (combined with the fall in international oil prices) contributed to a cut in subsidies by about 5 percentage points of GDP during 2012–2015. Between 2012 and 2018, the growth of the wage bill was contained through controls on higher wages and limits on new hiring. On the revenue side, measures to improve tax collection through broadening the tax base, 6 Chauffour, J-P et al. 2018. Kingdom of Morocco. Governing Towards Efficiency, Equity, Education, and Endurance. A Systematic Country Diagnostic. World Bank Group. Available publicly for download at http://documents.worldbank.org/curated/en/375771529960237724/Morocco-Systematic-Country-Diagnostic 7 The World Bank Group Country Partnership Framework for FY19–24 (Report No. 131039-MA) was discussed by the Board of Executive Directors on February 19, 2019. Page 9 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) harmonizing tax rates, and fighting tax evasion compensated for the impact of weaker economic activity on tax revenue. Overall, Morocco reduced its budget deficit from 6.8 percent of GDP in 2012 to 3.5 percent in 2017. The deficit increased slightly to 3.7 percent of GDP in 2018 (compared to a Budget Law target of 3 percent) driven by lower than forecasted corporate tax revenue and grants from the GCC, a current spending overrun propelled by rising global energy prices and higher than projected capital spending. Budget execution figures suggest that in 2019 the Government will achieve a deficit of around 3.6 percent of GDP as a result of the mobilization of tax and non-tax revenues, as well as privatization and other measures. Debt accumulation has slowed, and the central government debt-to-GDP ratio stabilized at around 65 percent between 2016 and 2018 (compared to 45 percent in 2008). However, the fiscal space has been eroded due to recurrent cost obligations associated with the infrastructure buildup. Figure 2. Morocco’s Fiscal Balance and Central Government Debt 8% 80% 6% 60% (% of GDP) 4% 40% 2% 20% 0% 0% Fiscal deficit (LHS) Central government debt (RHS) Source: Minister of Economy, Finances and Administrative Reform. 15. The authorities are also working towards addressing challenges with the equity and efficiency of the tax system. Following the Third National Tax Conference (Troisième Assises Nationales sur la Fiscalité, TANF), which took place in May 2019, a governmental committee is working on a multiannual programming framework law (MAPFL) that will translate the 100 recommendations formulated by the TANF into fiscal reforms and measures to be implemented over 2020-2024. The MAPFL will instill the key principles of the conference outcomes, such as equity, efficiency, and simplicity of the tax system while ensuring greater revenue mobilization and economic growth. This will be done by ensuring the progressivity of taxes, harmonizing rules around deductions and allowances, and rationalizing tax incentives. The tax system reforms would also include efforts to reduce corporate tax rates while expanding the tax base, bring the tax rates in export zones in line with corporate tax rates, and tax monopolistic and protected sectors at a higher rate. 16. The draft 2020 Budget Law reveals continuity in efforts that began with the 2019 Budget Law to boost revenue mobilization while consolidating spending and reorienting it towards social sectors. The 2019 Budget Law introduced a variety of revenue mobilization measures including taxation and privatization in order to finance the ramp up of spending on health, education, social protection, and employment in response to public discontent surrounding the high level of economic, social, and territorial inequality. The recently published draft Budget Law for 2020 identifies four key priorities that are along the same line, namely: (1) implementing the Framework Law on Reform of the Education and Training System; (2) enhancing social protection, support for the middle class and targeting of the poor; (3) boosting regions’ resources and speeding up decentralization; and (4) promoting private sector Page 10 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) development by implementing the recommendations of the Third National Tax Conference (in particular with regards to settling VAT refund debts and supporting very small and micro enterprises). It also emphasizes continued rationalization of public service expenditure, active management of state-owned assets and public institutions, and privatization. 17. The guaranteed part of SOE debt is large and is not included in central government debt statistics. The government owns 206 public establishments (or SOEs), the vast majority of which are non- market institutions that support the Government’s development agenda through public investments, social projects, and public service provision; the debt held by these institutions is limited. It also owns 19 SOEs that are more commercial in nature and sell goods and services. According to the report on public enterprises and establishments, which accompanied the 2020 Budget Law, these entities hold a total debt amounting to 25.2 percent of GDP. At mid-2019, these entities held external debt (mainly denominated in foreign currency) of around 15.8 percent of GDP, exposing borrowers without a natural hedge to currency risk. Most of this external debt is guaranteed by the government and around 80 percent of it is held by a handful of SOEs, namely Groupe OCP SA (OCP), Office National de l'Électricité et de l'Eau (ONEE), Autoroutes du Maroc (ADM), Office National des Chemins de Fer (ONCF), and Moroccan Sustainable Energy Agency (MASEN). 18. The Government is working on improving oversight of SOEs and coverage of debt statistics. The authorities are working to strengthen the governance framework for debt guarantees to address challenges with the legal framework, the absence of a formal overall ceiling, and the lack of risk-based analysis and clear procedures for guarantee issuance and monitoring; they are improving their quantification of associated contingent liabilities as well. The World Bank is supporting these efforts through technical assistance. The authorities also plan to expand their existing debt management framework to include SOEs. Moreover, they are working to improve the transparency of debt data with technical assistance from the IMF, by expanding the coverage of public debt statistics from central government debt to general government debt. This would include netting out intra-governmental claims (especially public debt held by the social security fund). The results of this data consolidation effort are expected in late 2019. Current Account and External Position 19. After several years of marked improvement in the external balance, the current account deteriorated significantly in 2018, before starting to recover in 2019. Consistent with fiscal tightening measures undertaken by the Government and supported by the decline in oil prices from mid-2014 through 2016, the current account deficit declined from 9.5 percent of GDP in 2012 to 3.4 percent in 2017. However, this decrease was reversed in 2018, with the deficit growing to 5.5 percent of GDP. In particular, and despite the healthy turnaround of exports (especially in the automotive, aeronautics, food, and phosphates sectors), the trade deficit widened by 8.5 percent compared to 2017. This was driven by rising energy prices and equipment imports resulting from growing public and private sector investment. Lower than expected official grants from the Gulf contributed to the current account deterioration, as did weak performance of tourism receipts (1.3 percent) and remittances (-1.5 percent). Figures for the period between January and August 2019 reveal a year-on-year growth of exports (3.2 percent), tourism receipts (4.5 percent), and net international reserves (2.7 percent), all of which has supported an improvement in the current account balance that exceeded the adverse impact of a decline in remittances and net foreign direct investment (FDI). Page 11 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Monetary, Exchange Rate, and Financial Sector Policy 20. Morocco’s monetary policy has been accommodative but prudent. Bank Al-Maghrib (BAM) cut its key policy rate three times between 2014 and 2016, reaching 2.25 percent, the lowest rate on record. The policy rate has not changed since then. 21. The widening of the exchange rate band in January 2018 from ±0.3 percent to ±2.5 percent has contributed to improving the economy’s shock absorption capacity. The exchange rate has remained close to the middle of the band, reflecting its alignment with macro fundamentals. While this reform could increase vulnerability to hikes in prices of imported goods, it will enhance competitiveness and improve the economy’s previously inadequate shock absorption capacity, particularly given current constraints on fiscal space and the rising risks of an external shock in an increasingly uncertain global economy. The authorities plan to progressively widen the exchange rate band in the future to further enhance the extent to which the exchange rate can absorb external shocks before the Central Bank needs to tap into foreign reserves. A wider band is also consistent with BAM’s planned move to an inflation-targeting regime. 22. In May and June 2017, ahead of the expected exchange rate reform announcement, the currency came under pressure from banks and importers before recovering most of its losses by the end of the year. International reserves took a hit, as did portfolio and other private capital inflows. Fortunately, this decline in reserves was compensated by the increase in net foreign reserves of commercial banks. The situation stabilized in early July 2017 when foreign exchange controls began to be more tightly enforced and the Head of the Government announced that the exchange rate fluctuation band would initially be ±2.5 percent (from ±0.3 percent). By end-2017, gross official reserves had rebounded to a comfortable level at US$26.2 billion, or 5.6 months of imports. 23. Following a multi-year decline, reserves have been stable this year and remain adequate; some buildup of reserves would be prudent considering external risks and ahead of further exchange rate liberalization. Gross official reserves declined from 6.3 months of imports at end-2016 to a still respectable estimated 5.1 months by end-2018 (US$24.5 billion), a decline compensated by the increase in net foreign reserves of commercial banks following the events of May-June 2017. The decline during 2018 was driven by rising global oil prices, lower official grants, and the execution of Treasury transactions mainly to service external debt. The IMF’s Assessing Reserve Adequacy (ARA) metric averaged 95 percent between 2015 and 2017 – below the 100 percent benchmark – and declined to 87.1 percent in 2018. The ARA is expected to remain below the benchmark over the medium term, but to gradually climb to around 99 percent by 2024. The adjusted metric (taking into consideration capital controls), however, averaged 122 percent between 2015 and 2018 and is expected to remain significantly above the 100 percent benchmark over the medium term. In mid-October 2019, net international reserves stood at around US$24.7 billion. Despite the adequacy of reserves by international benchmarks, Morocco would benefit from a further buildup of reserves in light of external risks which would have adverse implications for the current account should they materialize, namely the slowdown of growth in the Euro area – Morocco’s main trade partner – as well as Morocco’s exposure to oil price risk through energy import dependence. Also, as the authorities continue liberalizing the exchange rate, it is prudent to hold extra reserves to manage any uncertainties in the transition. Once liberalization has been achieved, reserves could be reduced. 24. Morocco’s financial sector remains sound overall but with rising nonperforming loans (NPLs) and credit concentration as well as risks associated with expansion into Africa. Capital adequacy ratios Page 12 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) of banks rose from 13.3 percent at end-June 2018 to 14.7 percent in December 2018. NPLs are elevated at 7.7 percent but are closely monitored and well provisioned (70 percent). Authorities are enhancing regulatory limits to reduce credit concentration and are collaborating with cross-border supervisory bodies to rein in risks of banks’ expansion into Africa. Furthermore, Morocco is still confronted with the risk of large and concentrated bank exposures to large corporate firms. Table 1. Morocco: Selected Macroeconomic Indicators 2016 –2022 (share of GDP, unless otherwise noted) Est. Proj. Proj. Proj. 2016 2017 2018 2019 2020 2021 2022 Real Economy Real GDP 1.1 4.2 3.0 2.7 3.5 3.6 3.8 Agricultural GDP -13.7 15.2 4.0 -2.1 5.3 3.9 3.5 Non-Agricultural GDP 3.0 2.9 2.9 3.4 3.4 3.6 3.7 Industry 0.6 3.6 3.0 3.5 3.6 3.6 3.7 Services 2.9 2.7 2.7 3.0 3.3 3.5 3.7 Private Consumption 3.7 3.8 3.3 3.5 3.5 3.7 4.2 Government Consumption 1.5 1.9 2.5 2.9 2.5 1.9 1.6 Gross Fixed Capital Investment 8.8 -0.2 1.2 2.2 1.9 2.5 3.1 Exports, Goods and Services 6.0 11.1 5.8 7.2 7.5 8.1 8.3 Imports, Goods and Services 14.5 7.9 7.5 6.5 6.6 7.6 8.1 Unemployment rate (ILO definition) 9.4 10.2 9.5 9.3 … … … Inflation (average CPI, in percent) 1.6 0.7 1.9 0.6 1.1 1.7 1.7 Fiscal accounts Expenditures 30.5 30.0 29.8 29.8 29.7 29.6 29.6 Revenues, including all grants 26.2 26.6 26.1 26.2 26.2 26.4 26.5 Budget Balance -4.3 -3.5 -3.7 -3.6 -3.5 -3.3 -3.1 Central Government Debt 64.9 65.1 65.3 66.5 66.3 65.8 64.8 Selected Monetary accounts Broad Money 4.7 5.5 4.1 4.3 … … … Credit to non-government 4.4 2.8 … … … … … Interest (key policy interest rate) 2.25 2.25 2.25 2.25 … … … Balance of payments Current Account balance -4.1 -3.4 -5.5 -4.3 -3.7 -3.3 -3.1 Imports 43.7 45.0 46.9 47.4 47.9 48.2 48.4 Exports 33.3 35.3 36.6 37.2 38.0 38.3 38.6 Foreign Direct Investment 1.5 1.5 2.5 1.8 1.9 1.8 2.0 Gross official reserves (bln US$, eop) 25.1 26.2 24.5 26.0 27.4 29.6 32.5 Page 13 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) In months of imports 6.3 5.6 5.1 5.6 5.2 5.3 5.5 Exchange rate (average) 9.8 9.7 9.4 … … … … Memo items Nominal GDP (in billion dirhams) 1013 1063 1107 1145 1199 1261 1330 GDP per capita (in current US$) 2996 3148 3326 3380 3535 3723 3925 Source: Moroccan authorities and World Bank staff estimates. Note: CPI = Consumer Price Index; ILO = International Labor Organization. 2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 25. Over the medium term, growth is expected to improve, enabled by sound fiscal and monetary policies, more consistent sectoral strategies, and improved investment environment, all of which would support gradual competitiveness gains. While growth is expected to drop to 2.7 percent in 2019 due to weak projected agricultural output, growth will accelerate gradually and average 3.8 percent over 2020– 2023 mainly driven by more dynamic secondary and tertiary activities and bolstered by substantial foreign investments into automotive and aeronautic industries (such as the increase of productive capacity in the automotive industry with the planned opening of a Peugeot plant in Kenitra) as well as expanding services to businesses and households (including logistics and trade services following the expansion of the Tangiers port). Inflation is projected to remain modest, averaging 1.6 percent over the medium term, with limited risk of inflation pass-through associated with exchange rate liberalization plans, particularly given the strong credibility of the Central Bank and the expectation that the reform will take place gradually following the rebuilding of strong buffers. This medium-term outlook assumes sustained reforms including those to maintain fiscal restraint, bolster tax revenues, improve governance and oversight of SOEs, enhance exchange rate flexibility, and reform the business environment and labor markets. 26. The fiscal deficit will slowly decline, resulting in a downward path for central government debt. The overall fiscal deficit is expected to dip slightly to 3.6 percent of GDP in 2019. The deficit is forecast to decrease over time, averaging 3.2 percent of GDP over 2020–2023. This baseline assumes that the authorities will maintain their current path of fiscal restraint and will improve the efficiency of public investment. The baseline also incorporates the impact of the agreement to increase civil servant wages over a three-year period. Peaking at projected 66.5 percent of GDP in 2019, central government debt levels are forecasted to decline to 63.4 percent by 2023, remaining above the government’s medium-term target. 27. Contingent liabilities created by the new natural catastrophic risk insurance regime supported by the proposed Cat DDO would have only a marginal impact on the total contingent liabilities of the Government. Under the proposed risk insurance regime, payouts would be provided by FSEC as well as by domestic and international private insurance schemes. The FSEC payout in the case of a 1-in-100-year earthquake event would be fully financed through a comprehensive financing strategy by the Government, and as such would not generate any additional liabilities for the GoM. Law 110-14 makes no mention of any liability by the GoM in the case of default by domestic insurers or reinsurers. Finally, Law No. 110-14 explicitly states that in the event of default by global reinsurers that will reinsure about two- thirds of the private insurance scheme, FSEC would only provide financial compensation to the extent of fund availability. This contingent liability is estimated to be in the range of US$12 million (or 0.01 percent Page 14 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) of GDP) for a 1-in-100-year earthquake (Figure 4).8 Figure 3 : FSEC Liability for a 1-in-100-year event 28. The current account balance is expected to improve. The current account deficit is projected to drop to 4.3 percent of GDP in 2019 and to gradually decrease over the remainder of the forecast period due to the growth of manufacturing exports (especially automobiles, electronics, and chemicals) and rising tourism receipts, supported by a price easing of the main imported commodities and goods. Foreign direct investment is expected to remain at 2 percent of GDP over the forecast period, whereas international reserves will remain above 5 months of imports in 2019-20. 29. External financing requirements are a moderate concern. External debt is relatively low, and Morocco’s ratings on international markets are investment grade, which serves to insulate the country from spillovers of emerging market turmoil. 8 A 1-in-100-year earthquake event would generate pay-outs by the private insurance scheme of about US$170 million and pay- outs by FSEC of about US$600 million, or 25 percent of the US$3 billion that the country would experience (because the two schemes include financial deductibles, limits and maximum payouts set by Law No. 110-14). Of the private insurance scheme pay- out, US$120 million would be paid by international reinsurers, for which default risk is considered low: international A+ rated markets may have a default value-at-risk of about 5 to 10 percent of the limit provided, on average (source: EIOPA Financial Stability Report, June 2017). For the private scheme, we may therefore reasonably consider that FSEC may be liable for 10 percent of the US$120 million if international reinsurers were to default. For the FSEC pay-out, the US$600 million would be fully financed by the Government as part of a comprehensive financing strategy comprising: US$20 million reserves for 65 percent of all events (low severity ones), about US$200 million of credit for 30 percent of events (the more severe ones) and tentatively US$400 million of insurance for 4 percent of more extreme events, covering in total 99 percent of scenarios, and relying on international aid and other budget reallocations for any other events (the 1 percent most extreme earthquakes). Page 15 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Table 2. Morocco: Key Fiscal Indicators 2016–2020 (percentage of GDP) Est. Proj. 2016 2017 2018 2019 2020 Total revenues 26.2 26.6 26.1 26.2 26.2 Tax Revenues 21.4 21.8 21.8 22.0 22.0 Social Contributions 0.0 0.0 0.0 0.0 0.0 Grants 0.9 1.1 0.4 0.4 0.3 Other revenues 3.9 3.7 3.9 3.8 3.9 Total expenditures 30.5 30.0 29.8 29.8 29.7 Compensation of employees 12.0 11.5 11.2 11.5 11.7 Use of goods and services and grants 7.2 7.4 7.4 8.2 8.4 Subsidies 1.4 1.4 1.6 1.6 1.2 Interest payments 2.7 2.5 2.5 2.3 2.4 Other expenses (incl. capital expenditures) 7.3 7.2 7.1 6.2 6.0 Overall balance -4.3 -3.5 -3.7 -3.6 -3.5 Primary balance -1.7 -0.9 -1.3 -1.3 -1.1 Arrears 0.5 -0.1 0.3 … … Government financing 3.8 3.6 3.4 3.6 3.5 External (net) 0.3 0.3 -0.2 1.6 0.7 Domestic (net) 3.5 3.2 3.6 2.0 2.8 Central Government debt stock 64.9 65.1 65.3 66.5 66.3 External (net) 14.5 14.5 13.5 15.3 15.2 Domestic (net) 50.4 50.6 51.8 51.1 51.1 Memorandum items: SOE's & Public Establishments' Debt Stock 24.8 25.0 25.2 … … of which: external debt 16.6 16.8 16.1 … … Source: Moroccan authorities and World Bank staff estimates. Note: External and domestic debt is defined on a currency-based classification; total revenue includes privatization proceeds. Table 3. External Financing Needs 2018–2022 (USD million) Proj. Proj. Proj. Proj. 2018 2019 2020 2021 2022 Total Requirements 8568 8316 11530 8901 10866 Page 16 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Current account deficit 6449 5150 4747 4469 4492 External long-term debt amortization 2119 4166 6783 4432 6375 Total Sources 8568 8316 11530 8901 10866 FDI 2970 2166 2418 2432 2881 Portfolio investments 824 1203 1654 1270 1288 Long term disbursements 2002 3249 3181 3108 3169 Other short-term capital inflows 1987 779 3310 1017 2510 IMF credit Line 0 0 0 0 0 Change in reserves 785 918 967 1074 1019 Source: Moroccan authorities and World Bank staff estimates. Debt Sustainability Analysis 30. The central government debt-to-GDP ratio has been on an upward path since 2008, but debt accumulation has decelerated in recent years. Central government debt (as covered in debt statistics) grew from 45.4 percent of GDP in 2008 to over 65.3 percent in 2018 but remains below the debt burden benchmark for emerging markets (70 percent of GDP). As mentioned earlier, this figure excludes debt held by other public entities including SOEs. Earlier this decade, central government debt accumulation was driven by high oil prices and the smoothing of the adverse impact of the economic crisis in Europe, Morocco’s key trading partner. Since 2014, growth in the central government debt-to-GDP ratio decelerated significantly, with the ratio growing merely by a cumulative 1.9 percentage points between 2014 and 2018, compared to 16.3 percentage points between 2008 and 2013. This slowdown in central government debt accumulation – which supported a stabilization in the debt-to-GDP ratio – was mainly driven by fiscal consolidation efforts (primary deficit reduction from 4.8 percent of GDP in 2012 to 1.3 percent in 2018 (before privatization), amid a difficult context of Moroccan dirham (MAD) depreciation which ended only in 2017, and slower real growth (averaging 3.1 percent over 2014–2018 compared to 4.5 percent over 2008–2013)). Gross financing needs (GFNs) decreased from 16.6 percent of GDP in 2014 to 12.5 percent in 2018 and are expected to follow a relatively stable path and to average 12.5 percent during the projection period. In 2018, the debt-to-GDP ratio reached 65.3 percent, compared to a ratio of 65.1 percent in 2017. Vulnerabilities associated with the composition of debt as of end 2018 are moderate, with external financing requirements reaching around 7 percent of GDP and foreign currency denominated debt representing 21 percent of total debt. Interest rates on debt are mainly fixed, thereby mitigating interest rate risk. 31. The World Bank’s latest Debt Sustainability Analysis (DSA) conducted in October 2019 shows that Morocco’s central government debt is sustainable over the medium term, with some risks emerging from GFNs. The DSA found that central government debt is sustainable and resilient to shocks over the medium term. During recent policy dialogue, the authorities communicated that following engagement with the World Bank during the preparation of the first Financial Inclusion and Digital Economy Development Policy Financing (DPF), they integrated the emerging market GFN benchmark of 15 percent of GDP in their debt management strategy to ensure the benchmark is not breached. In fact, the average maturity of domestic debt (which constitutes the majority of central government debt) has Page 17 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) increased from around 6 years at end-2018 to 6 years and 5 months by mid-2019, which contributes to mitigating the risk of sudden increases in GFNs arising from debt charges. Going forward, the domestic debt issuance strategy needs to continue to lengthen its maturity structure, in order to prevent sudden increases in GFNs arising from debt charges. In the IMF staff report for the 2019 Article IV Consultations (published in July 2019), the DSA also found public and external debt to be sustainable with high probability and resilient to shocks. Risks to the Macroeconomic Outlook 32. The outlook is subject to significant risks which can be mitigated by larger buffers. External risks include: (a) weaker growth in the Euro area, Morocco’s key trading partner, which could affect economic growth and, in turn, fiscal and external balances as exports, tourism receipts, FDI inflows, or remittances decline; (b) geopolitical risks in the region which could raise international oil prices and have a negative effect on tourism and investor confidence; and (c) the uncertain global trade and capital flow policy environment which may create more volatility in financial markets, increase borrowing costs, and weaken investor confidence. On the domestic side, the main risks are around: (a) delays in implementing key structural and financial sector reforms, which could adversely affect fiscal space and in turn heighten social tensions, thereby affecting the forecasted increase in potential growth and impacting the external balance through lower tourism receipts and FDI inflows; (b) the reversal of previous fiscal reforms, particularly around energy subsidies (in case of higher oil prices); and (c) pressure on the currency should foreign reserve buffers prove lower than what is required to deter speculation during the process of exchange rate liberalization. Conversely, lower international oil and butane gas prices could support an attenuation of macroeconomic imbalances whereas greater regional integration in the Maghreb could contribute to medium-term growth. Realization of downside risks could adversely affect the government’s willingness to undertake reforms with difficult social impacts or costs to vested interests, and the private sector supply response to these reforms. Mitigation of these risks ultimately derives from the government's commitment to increased social cohesion and recognition that reversal of reforms would compound the challenge of job creation and private sector development. Faced with macroeconomic and socio-economic shocks in the wake of the Arab Spring, the Government clearly showed its capacity to make policy adjustments, and buffers are available to absorb new shocks in the form of exchange rate flexibility, bond market access, official support from development partners on concessional terms, and ongoing efforts to further build up foreign reserves. 33. Fiscal consolidation could be supported by complementary reforms. The authorities are pursuing tax reforms to enhance equity and simplicity of the system and to broaden the tax base, reduce exemptions, augment value added tax revenues, and enhance corporate taxation. Long-term wage bill savings could be generated while simultaneously strengthening government efficiency if the authorities were to embark on civil service reform. Fiscal decentralization could support more effective public financial management (PFM) at the regional level and preserve fiscal sustainability. Strengthened oversight and a more robust debt management approach for SOEs, as well as the continuation of pension reform, would limit the risks of contingent liabilities. Overall Assessment of Macroeconomic Policy Stance 34. Overall, the country’s macroeconomic policy framework is adequate for the proposed operation. The macroeconomic fundamentals are sound. The authorities have made significant progress Page 18 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) over the past few years to reduce fiscal and external imbalances and vulnerabilities. They have taken a big step forward in enhancing the economy’s ability to absorb shocks and maintain competitiveness by increasing exchange rate flexibility; they are also committed to further exchange rate liberalization. Institutional frameworks have advanced as well, particularly with the implementation of the Organic Budget Law and the ongoing efforts to strengthen debt management of SOEs, oversight of the financial sector, and independence of BAM, as well as recent efforts to consider further energy subsidy (butane) reform and to pursue a comprehensive tax policy reform. With further business environment reforms and sectoral reforms (education, labor, governance), economic growth is expected to steadily accelerate— despite annual volatility—and inflation will remain under 2 percent. These reforms would increase the contribution of productivity growth to economic growth, which is necessary to ensure the sustainability of Morocco’s development path and to support greater inclusion. This will be imperative to address the population’s desires for improved job creation, economic inclusion, and enhanced standards of living, and thereby to strengthen social cohesion. Government plans for fiscal consolidation will result in shrinking fiscal deficits over the medium term and will support continued sustainability of public debt. 2.3. IMF RELATIONS 35. On June 12, 2019, the IMF’s Executive Board completed the first review of the new two -year Precautionary and Liquidity Line (PLL) arrangement which was approved in December 2018. The new PLL, the fourth successive one since 2012, amounted to US$2.97 billion at the time of approval (compared to US$6.2 billion (2012), US$5 billion (2014), and US$3.5 billion (2016) for the previous three PLL arrangements). These PLL arrangements provided insurance against external shocks as the authorities pursued their reform agenda aimed at further strengthening the economy’s resilience and fostering higher and more inclusive economic growth. The authorities did not draw on any of the PLL arrangements and continue to treat them as precautionary. This new fourth arrangement aims to enhance macroeconomic resilience in an adverse international environment and to help Morocco develop a new growth model that is more private-sector-led, broad-based and inclusive, including through strengthened public governance and reduced corruption and inequalities. The June review of the arrangement found that growth is expected to accelerate gradually over the medium term, subject to improved external conditions and continued reform implementation, while continued fiscal consolidation will help lower the public debt-to-GDP ratio while securing priority investment and social spending in the medium term. 3. GOVERNMENT PROGRAM 36. Disaster and climate-related risk management is a key priority for the GoM. The Government has developed a comprehensive legal and institutional disaster and climate-related risk management framework. Emergency response and preparedness are based on a well-established institutional setup under the authority of the Ministry of Interior based on the Decree (Dahir) of 30 April 1955 on civil defense, as well as Decree No. 2-97-176 of 15 December 1997, which entrusted the Directorate General for Civil Protection (DGCP) with organizing emergency services during catastrophes.9 At the national level, emergency response is managed by the CVC; at the regional level, it is managed by the walis and governors 9The DGCP is the first civil protection unit in Africa that was certified by the International Search and Rescue Advisory Group in 2014. Page 19 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) of prefectures and provinces based on Law No. 1-75-168 of 15 February 1977. Risk prevention and reduction are covered under sectoral laws and regulations, including Laws No. 10-95 and No. 36-15 that cover flood risk prevention, as well as Decree No. 2-12-682 of 23 May 2013 that updates the building codes for earthquake-resistant construction.10 37. The GoM has made significant progress in disaster risk reduction and is actively working to move towards a more integrated DRM governance approach. The GoM is moving from a post-disaster emergency financing approach into increasing and prioritizing structural and non-structural risk reduction investment programs through: (i) sectoral investment programs, such as the Green Morocco Plan11 and the National Food Protection Program12; and (ii) the restructuring of the FLCN. Going forward, the Government is committed to increase its investments in risk reduction by expanding the role of the FLCN as a key co-financing vehicle for risk reduction efforts. Recognizing the transversal nature of the challenges posed by disaster and climate-related risks, the GoM is working to strengthen inter-ministerial coordination and decision making to strengthen DRM. To ensure more homogeneity and avoid institutional fragmentation, the GoM is currently developing an integrated National DRM Strategy with technical support from the World Bank under the ongoing IDRM PforR. The strategy aims to strengthen the protection of the population and the economy from disaster and climate-related risks by 2025. An inter-ministerial steering committee has been set up under the leadership of the Ministry of Interior (MoI) to discuss and provide guidance for the strategy development process. The strategy is based on five priority axes: (i) strengthening disaster risk management governance, (ii) improving knowledge and assessment of disaster and climate-related risks, (iii) disaster risk prevention and building resilience to disaster and climate-related risks, (iv) preparing for early recovery and effective reconstruction, and (v) promoting scientific research, international cooperation and capacity building. The strategy, containing inputs from various line ministries, is expected to be finalized and adopted by the end of 2019. In addition, the Government is currently working towards the establishment of a robust governance structure within the Ministry of Interior to enhance a comprehensive approach to manage disaster and climate-related risks. This governance structure will be ensuring inter-ministerial coordination of DRM policies and programs and the coordination of risk reduction interventions. 38. The GoM has developed a strong disaster risk finance and insurance program. Since 2008, the GoM has been working with the World Bank on hedging disaster and climate-related risks, including through market-based solutions. While financing mechanisms for disaster recovery in Morocco have for a long time been based on an ad hoc and ex-post basis, the Ministry of Economy, Finances and Administrative Reform (MEFAR) recently developed an ambitious disaster risk financing agenda, which led to the development of a national catastrophe risk insurance program and the adoption of Law No. 110-14 in 2016. The Law sets up a dual mechanism with: (i) a private insurance scheme for the insured, and (ii) a basic compensation system for the uninsured, through the FSEC. The GoM is currently in the process of implementing a combination of cost-efficient ex-ante financing mechanisms ahead of Law No. 110-14 effectiveness (Figure 4). 10 Decree No. 2-12-682 of 23 May 2013 modifies Decree No. 2-02-177 of 22 February 2002 and introduces the Moroccan Building Code RPS 2011. 11 The Green Morocco Plan (Plan Maroc Vert) was developed by the Ministry of Agriculture and Maritime Fishing and includes important measures to reduce the vulnerability of the agricultural sector to droughts. 12 The National Flood Protection Program is led by the Ministry of Water and includes significant infrastructure investments and large dam programs. Page 20 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) 4. PROPOSED OPERATION 4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 39. The proposed development objective of this operation is to support the GoM in: (a) strengthening the country’s institutional capacity to deal with the adverse financial impacts of disasters and climate-related shocks, and (b) strengthening Morocco’s institutional framework for disaster and climate-related risk management. The proposed operation builds on the long-term engagement between the GoM and the World Bank initiated in 2005, which included TA in hazards and risk assessments, DRM institutional support, and risk modelling and analytics in disaster risk finance, and led to the approval of the US$200 million IDRM PforR in 2016. The IDRM supports an ongoing process of institutional reform and capacity building, scaling up disaster risk reduction activities, and improving disaster risk financing and insurance. The policy actions supported by the proposed operation complement the ongoing program and provide key elements to Morocco’s overall resilience to natural disasters and climate change (see Box 1 below). Specifically, the prior actions under Pillar A of the Cat DDO contribute to strengthening the outcome of the results initiated under Subprogram 3 of the IDRM PforR on disaster risk financing and insurance. While the PforR supports the development and adoption of the general legal and regulatory framework for the new catastrophic risk insurance regime introduced by Law No. 110-14, the prior actions under Pillar A of the proposed operation will further strengthen this framework by defining the key aspects of the governance, financing strategy, and operations of the FSEC, and establishing prudential requirements for the private insurance markets. Box 1: Complementarity between the IDRM PforR and the proposed Cat DDO The Cat DDO complements and further strengthens key activities supported by the IDRM PforR under implementation since April 2016. The IDRM PforR supports three subprograms: (i) Subprogram 1 – Promoting institutional development and capacity building, (ii) Subprogram 2 – Scaling up disaster risk reduction activities, and (iii) Subprogram 3 – Improving disaster risk financing and insurance. Pillar A of the Cat DDO complements and adds to the activities supported under the IDRM PforR Subprogram 3 regarding the implementation of the national insurance program against catastrophic events and the establishment of the FSEC. Pillar B of the Cat DDO further strengthens the outcomes of IDRM PforR Subprogram 1, by supporting priority actions identified as part of the preparation of the National DRM Strategy. Complementarity between Pillar A of the Cat DDO and Subprogram 3 of the PforR Subprogram 3 of the IDRM PforR supports the implementation of Law No. 110-14 through two Disbursement Linked Indicators (DLIs): • DLI 7 supports the adoption of the catastrophic risk insurance legislative and regulatory framework, including Law No. 110-14 and the implementation legal documents related to the private insurance scheme introduced by this law. • DLI 8 supports the establishment and operationalization of the FSEC, through the preparation and adoption of the implementation legal documents related to the establishment of the FSEC. The prior actions supported under Cat DDO Pillar A build on the lessons learned and technical assistance provided during the early implementation phase of the IDRM PforR and complement the activities Page 21 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) supported under Subprogram 3: • Prior Action 1 refers to Law No. 17-18 which registers FSEC as a public institution providing for the nomination of its director by the Council of Ministers. This complements the provisions of the Law No. 110-14 implementation decree No. 2.18.785 adopted on March 21, 2019 and supported under the DLI 8 of the IDRM PforR. The implementation decree defines the composition of the FSEC Board of Directors and completes the definition of the FSEC governance structure. • Prior Action 2 establishes a sustained financing mechanism for the FSEC through the introduction of a parafiscal charge on non-life insurance policies to the benefit of the FSEC. • Prior Action 3 defines a critical operational element of the FSEC consisting of the register model and enrollment procedures for the registry of victims of catastrophic events and provides for clear coordination mechanisms between the FSEC and the Ministry of Interior in the implementation of the register. • Prior Action 4 supports key provisions to introduce prudential requirements on insurance companies in order to further strengthen their financial capacity against catastrophic events – building on the outcomes foreseen under DLI 7 of the IDRM PforR. Complementarity between Pillar B of the Cat DDO and Subprogram 1 of the PforR Subprogram 1 of the IDRM PforR supports the development of a national integrated disaster risk management strategy. DLI 1 of the IDRM PforR supports the preparation of the strategy in 2019, and its adoption in 2020. The prior actions under the Pillar B of the Cat DDO stem from the inter-ministerial consultations which have been organized by the Ministry of Interior, as part of the preparation of the strategy. They represent key actions through which the Cat DDO provides additional targeted support to: • the development of an integrated disaster risk management information system through adoption of a cooperation framework to strengthen flood management and early warning systems in the country (Prior Action 5); • the improvement of the country’s disaster response capacity though the strengthening of the human resources management system of the Civil Protection (Prior Action 6). 40. The proposed operation provides a line of contingent financing and will support the Government’s ongoing efforts to increase its capacity to absorb potential fiscal impacts of a natural catastrophe. Given the magnitude of risks faced by Morocco, the GoM has been engaging in a long-term integrated risk management approach to improve the resilience of the country’s population and economic actors by transferring part of the risk to the insurance and re-insurance markets through financial risk transfer mechanisms and by strengthening DRM and climate change adaptation coordination throughout government agencies and ministerial departments. 41. The design of this operation takes into account lessons learned from similar World Bank-funded Cat DDO and DRM operations. The planned operation incorporates key lessons learned from Cat DDO operations in Romania (2018), the Dominican Republic (2017), Peru (2015), and Sri Lanka (2014). Key lessons learned include the following: (a) a successful Cat DDO operation needs to be aligned with government priorities; (b) DRM policy is most effective when incorporated within the broader development and sectoral planning in the country; and (c) the Cat DDO needs to be incorporated within Page 22 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) a comprehensive financial protection strategy against disasters and climate-related risks. 42. The Development Policy Financing with a Cat DDO allows countries to secure rapid access to financing in the event of a natural catastrophe. It will serve as bridge financing while funds from other sources (for example, concessional funding, bilateral aid, risk transfer instruments, or reconstruction loans) are being mobilized. The Cat DDO has a ‘soft’ trigger, as opposed to a ‘parametric’ trigger, which means that funds become available for disbursement after the declaration of emergency following a natural catastrophe as defined below. Drawdown conditions, financial features, and renewals are as follows: • Drawdown triggers. Loan proceeds may be withdrawn upon a declaration of catastrophic event through an administrative declaration, in accordance with article 6 of the Law No. 110-14, under terms and conditions specified in the Loan Agreement. • Financial features. The financial features of the Cat DDO are similar to those available for the DPF DDO, with one exception: The Cat DDO would have a revolving feature by which the amounts repaid before the closing date would be available for drawdown in accordance with the terms of the Loan Agreement. • Drawdown period and renewals. The proposed operation includes a deferral period of up to three years. During this time, the World Bank will continue supervision of the implementation of the program by the Government in accordance with its Letter of Development Policy (LDP). The Cat DDO may be renewed if the implementation of the program set out in the LDP remains satisfactory and macroeconomic policies are adequate. The Cat DDO may be renewed four times for up to three years each time, for a total deferral of 15 years. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS 43. The proposed operation will support the Government in implementing critical policy reforms to facilitate the strengthening of Disaster Risk Management and Climate Change Adaptation systems to increase the capacity to manage disaster and climate-related risks. This timely set of reforms is articulated around two pillars: • Pillar A is geared towards strengthening the Government’s institutional capacity to deal with the adverse financial impacts of disaster and climate-related shocks, through a series of reforms aimed at creating FSEC’s financial, governance, and operational sustainability, as well as increasing the capacity of the private insurance market to absorb these shocks. The adoption of Law No. 110-14 in 2016 has launched a complex reform program with broad institutional and regulatory implications. Since the law’s adoption, the government has worked on the development of a large number of implementing regulations, which are now in their final stages. In parallel, the government has worked with insurance companies to support the operationalization of the new catastrophic risk insurance regime. As Law No. 110-14 is expected to become effective by early 2020, it is critical to equip the FSEC with tools, processes and liquidity mechanisms to meet its legal obligations as well as cover the GoM’s contingent liability in case of a disaster event. Indeed, the government’s strategy is to ensure that both the FSEC and the insurance markets are ready to fulfill their obligation under the new regime by the time the law becomes effective. • Pillar B promotes the overall strengthening of Morocco’s institutional framework for disaster and Page 23 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) climate-related risk management, by supporting the key steps towards the creation of a National Flood Risk Management Information System and the reform of the human resources management system of the National Civil Protection to increase the emergency and disaster management capacity in the country. Specifically, this pillar represents efforts by the government to capitalize on Morocco’s long-term efforts of articulating a National DRM strategy and engaging in short- and long-term DRM planning. Pillar A: Strengthening Morocco’s institutional capacity to deal with the adverse financial impact of disasters and climate-related shocks 44. The GoM is taking significant steps to establish a robust financing mechanism to compensate victims of natural catastrophes. For this effort to move forward, there is a need to increase the government’s financial capacity to meet the objective of the FSEC introduced by Law No. 110-14. This will allow the GoM to ensure a broad and reliable financial protection is provided to the uninsured as well as support increased solvency of national insurance and reinsurance companies. The GoM has taken significant measures to improve the management of contingent liabilities related to disaster and climate- related shocks combining reserves, a contingent credit, and a risk transfer mechanism. The DPF with a Cat DDO is an important building block of this financial protection strategy, as it will increase the availability of immediate liquidity in the event of a natural catastrophe. It will also complement Government’s reserves and potential risk transfer products by offering a soft trigger which could cover for the basis risk of potential parametric financial instruments.13 This flexibility of usage of the Cat DDO will indeed help ensure a financial response can be provided when other instruments cannot be used or triggered. The Cat DDO therefore represents a component of an overall set of complementary risk financing mechanisms. The reforms supported under Pillar A of this operation will complement and strengthen the outcomes of the actions supported under Subprogram 3 of the IDRM PforR on Improving Disaster Risk Financing and Insurance (see Box 1 for a detailed discussion of the complementarity between Pillar A of the Cat DDO and Subprogram 3 of the IDRM PforR). 45. Prior Actions 1, 2, and 3 focus on strengthening the governance, financial, and operational framework of the FSEC. The FSEC aims at compensating uninsured households against property losses (loss of principal residence or loss of use of the principal residence) and personal injuries (permanent disability and death) in case of a disaster. It will have a universal coverage and is expected to benefit the estimated 95 percent of the population in Morocco without an existing insurance contract, including close to 6 million people living in poverty or in a situation of vulnerability to poverty. It is designed to provide timely financial compensations, potentially to a very large number of beneficiaries in case of disaster events. In this context, Prior Action 1 completes the definition of the FSEC governance structure, Prior Action 2 establishes a sustained financing mechanism for the Fund, and Prior Action 3 operationalizes the registry of victims of catastrophic events which constitutes a critical operational tool of the FSEC. 46. Through Prior Action 4, the Government will ensure the sustainability of the private insurance market in the case of a catastrophic event. Along with establishing the FSEC, Law No. 110-14 provides for the creation of a private insurance market for coverage against catastrophic events by establishing a mandatory multi-hazard catastrophe extension of guarantee, in particular for property, automobile and 13Basis risk corresponds to the risk associated with catastrophic events outside the parameters defined in the policy. Indeed, parametric disaster risk transfer instruments are only triggered if the specific parameters defined in the policy are met (e.g. earthquake epicenter within a specified region, magnitude above a certain threshold, etc.). Page 24 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) third-party liability insurance policies, with fixed tariffs. Prior Action 4 includes key provisions to strengthen private insurance markets through the introduction of prudential requirements to be applied to the new catastrophe insurance policies. This will minimize insolvency risk and ensure insurance companies are adequately capitalized to cover and indemnify potential victims of catastrophes. Prior Action 1: The Borrower has registered the FSEC as a public institution and appointed its director. Legal Evidence: (i) Law No. 17-18 amending Organic Law No. 02.12 on nomination to higher positions (nomination aux fonctions supérieures) published in the Official Gazette No. 6744, dated January 17, 2019; and (ii) Law-Decree (Dahir) No. 1-19-80 appointing the director of the FSEC dated June 21, 2019 published in the Official Gazette No. 6792, dated July 4, 2019. 47. This reform completes the definition of the FSEC governance structure by providing for the nomination of its director by the Council of Ministers. By establishing the mechanism for nomination of the director of the FSEC, Law No. 17-18 completed the definition of the critical elements of the FSEC governance structure. It complements the definition of the board of directors introduced by Decree No. 2.18.785, which constitutes the main legal implementation text of Law No. 110-14 related to the FSEC. The appointment of the director of FSEC by the Council of Ministers confirms the high priority given by the government to the establishment of the FSEC and ensures that the director of the FSEC has the authority required to take the strategic decisions involved in managing the fund. 48. The FSEC is equipped with an appropriate governance framework and has become functional. The governance structure of the FSEC addresses the ownership and risk elements by identifying and coordinating actions by various government entities involved in the operations and governance of the fund. By appointing its director and establishing its board of directors, the GoM is providing the FSEC with the management, expertise and decision-making authority necessary to engage on key operational decisions related to its administrative, financial and technical structure, as well as to its contingency operation mode. These governance, communication and operational aspects are considered key to the success of the FSEC as a cost-efficient, robust and reliable solidarity fund, reinforcing the Government’s ability to respond to natural catastrophes and to support the most vulnerable populations, particularly women, elderly, and populations living in remote areas. FSEC’s board of directors met for the first time on September 16, 2019. 49. Expected results. The prior action will contribute to strengthening the capacity of the FSEC to operate under a robust governance structure and sound operational principles to meet its legal obligations of responding to disaster and climate-related shocks. The result of the prior action will be availability of an audit of the FSEC’s internal control systems confirming that the FSEC’s systems and procedures allow for the appropriate use of funds starting in 2020. Prior Action 2: The Borrower has established a sustained financing mechanism for the FSEC. Legal Evidence: Decree No. 2-19-244 creating a parafiscal charge to fund the FSEC, adopted by the Council of Government on September 12, 2019 and published in the Official Gazette No. 6822, dated October 17, 2019. 50. The Government has developed a robust disaster risk financing mechanism for the FSEC. Based on an advanced catastrophe risk model and evaluations tools, the government has developed a cost- Page 25 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) effective risk financing strategy for the FSEC, which identifies the resources required in the event of natural disasters. A 1-in-100-year earthquake event in Morocco would expose the FSEC to financial losses in the order of US$600 million. The analytical work undertaken in parallel with the implementation of Subprogram 3 of the IDRM PforR and with TA support of the WBG, has allowed the GoM to better appreciate the likelihood of various peril types, as well as anticipate the contingent liability of the fund under severe disaster scenarios to fully meet its legal obligations. The proposed financing mechanism, which aims at addressing 99 percent of disaster loss scenarios, demonstrates the engagement and vision of the GoM in ensuring sustainability and efficiency of the FSEC. Given the risk of insolvency faced by the FSEC, and expectations from the GoM to meet its contingent liability in case of severe disasters, it is critical that the fund is financed through a reliable financing mechanism, which entails both sustainable cashflows feeding into an adequate amount of reserves, as well as higher-capacity instruments for the most severe events. 51. The sustained financing mechanism constitutes a critical tier within the framework of the FSEC financing strategy. The FSEC comprehensive disaster risk financing strategy (as referred to in the LDP) designed by the Treasury and Exterior Finance Directorate (Direction du Trésor et des Finances Extérieures, DTFE) with support from the World Bank combines public and private funding mechanisms and leverages domestic and international markets’ capacity into a multi-layer, robust, cost-efficient financial response framework which addresses a wide variety of disaster events and losses. The multi-layer insurance structure depicted in Figure 4 comprises a primary layer of MAD 200 million of reserves for low-severity scenarios (for 65 percent of events), which corresponds to the average annual losses of the FSEC and would therefore require a recurrent revenue flow of MAD 200 million per year to be sustained. This reserves layer will be complemented by a contingent line of credit for medium-severity events (for 30 percent of events). In addition, the government is considering the opportunity of an excess parametric risk transfer product dedicated to severe earthquakes up to 1 out of 100 events. This financing arrangement is key to ensuring viability of the fund under various scenarios and makes use of each instrument’s strength where it is the most cost effective. Figure 4. Indicative chart for the multi-layer framework for insuring FSEC catastrophe risk Page 26 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) 52. This policy reform supports establishment of a recurrent annual revenue to the benefit of the FSEC, through the creation of parafiscal charge on insurance policies. This measure will complement the initial lump-sum contribution from the GoM provided for by the 2019 Budget Law, which would allow to cover the annual financial needs for the FSEC to fulfil its commitments. To ensure adequate annual cashflow, this reform will introduce a 1 percent parafiscal charge applicable to non-life insurance policies. The charge is expected to generate an annual cashflow of about MAD 200 million for FSEC and would cover its annual average losses. 53. Expected results. The prior action will contribute to improved sustainability of the FSEC from the combined effects of significant primary reserves (MAD 400 million) with an annual revenue from the parafiscal charge (MAD 200 million). As a result of this prior action, the annual revenues from the parafiscal tax are expected to cover annual average losses (MAD 200 million per year) in 2023. Prior Action 3: The Borrower has defined the register model and enrollment procedures for the registry of victims of catastrophic events. Legal Evidence: Minister of Interior’s Order (Arrêté) No. 900-19, dated April 30, 2019 and published in the Official Gazette No. 6778, dated May 16, 2019. 54. Law No. 110-14 requires people affected by a disaster to be enrolled in a Register of People Affected by a Catastrophic Event.14 To be eligible for compensation from the FSEC, people affected by a catastrophic event will need to enroll (or be enrolled by a third party) in the register at the latest 90 days after the declaration of emergency. This will allow those victims to be considered beneficiaries of the compensation program. The definition of a robust and streamlined format for this register, and the training of local authorities under the MoI to enroll people affected by a catastrophic event in a timely and organized manner will be critical in ensuring that all potential beneficiaries of the FSEC are effectively covered. The Law is also taking into account the urban-rural distribution of population, and vulnerabilities of women and elderly, by deconcentrating the service of registration to the commune level. This will allow vulnerable people, especially women and elderly heads of households, to start the first steps toward recovery after natural catastrophes. 55. This prior action establishes the tools and procedures required to ensure that all people affected by natural disasters are officially recorded and registered. The robust and streamlined collection of data on the disaster impacts on the population is important not only to quantify the needs in terms of immediate response but also to design scenarios of recovery and to reflect on the long-term impacts of disasters and climate change on subsets of the population. This register is critical for the functioning of the FSEC, by performing as the background repository against which insurance claims could be verified, thereby minimizing the risk of fraud. As an alternative to the registration through the physical network of local agents of the MoI, an online platform will be developed to maximize the accessibility of the register. 56. Implementation modalities of the register introduced through this reform will enhance its accessibility, especially by removing barriers to women, and thus increase their ability to claim their 14 Registre de recensement des victimes d’évènements catastrophiques. Page 27 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) rights to compensation. International evidence demonstrates that women are disproportionately affected by natural disasters.15 For example, women tend to have less access to risk information, financial instruments (e.g. credit/savings, social protection) and stable income, resulting in a reduced capacity to cope with such events compared to men.16 In the case of Morocco, a number of constraints, such as restricted mobility and high illiteracy rates17 (and consequently limited access to information), currently constrain women’s access to administrative and/or municipal services. Taking into consideration these gaps and recognizing the rise in female-headed households across rural and urban areas18 and their specific needs and constraints, the register introduced through this prior action is designed to maximize its accessibility to women (as heads of households and as household members) by: (i) relying on an extensive network of physical administrative offices operated by the MoI, which has an extensive geographical coverage and is well identified by local populations as the go-to window for all administrative procedures; (ii) allowing registration by a third party or dependent to ensure that persons facing specific challenges to register in person would not be excluded from the registration process; (iii) offering various channels for registration (through the online platform, or at the designated local administrative offices), which ensures that women (as head of households and as household members) have access to registering insurance claims regardless of educational, regional or other socio-economic disparities; and (iv) developing an appropriate outreach and communication mechanism to inform the population on the registration modalities and procedures,19 with a particular focus on communication means that meet women’s specific information needs and effectively raise their awareness of registration procedures and their ability to claim their rights to compensation. 57. Expected results. This prior action will contribute to the increased capacity and readiness of the MoI to carry out victim registration in the event of a natural catastrophe, through its network of local agents. It will also contribute to enhance women’s access to information on registration procedures and strengthen their ability to claim their rights to compensation. Results will include, specifically: (i) 90 percent of local officials of the Ministry of Interior responsible for the administration of the register of people affected by a catastrophic event have been trained on the registration procedures by 2023, (ii) the deployment of an online platform for the registration of people affected by a catastrophic event by 2020, and (iii) the development of a specific outreach and communication mechanism to inform the population of the registration procedures for people affected by a catastrophic event, with a specific focus on women, by 2023.20 15 The Global Facility for Disaster Reduction and Recovery (GFDRR)’s Gender Action Plan (2016-2021) underlines that women typically face greater mortality, health risks, increased care burdens, and higher probability of gender-based violence following natural disasters. 16 United Nations Development Program, 2013. Gender and disaster risk reduction. 17 Literacy of adult females in Morocco stands at 68 percent (ONDH 2015 data), with women in rural areas lagging further behind. 18 According to 2017 data from the Observatoire national du development humain, one in five households are led by women, and this number has increased slightly since 2014. 19 This includes explaining when and how to register an insurance claim in the event of a natural disaster, as well as coverage details. 20 Considering that the register’s activation will be contingent upon the occurrence of a natural disaster, the development of an outreach and communication mechanism with a specific focus on women (as heads of households and as household members) has been identified as a priority action to enhance women’s access to the register in this context. Page 28 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Prior Action 4: The Borrower’s ACAPS has adopted Circulaire No. AS/03/19 amending Circulaire No. 01/AS/19, to establish prudential requirements on insurance companies to strengthen their financial capacity against catastrophic events. Legal Evidence: Circulaire ACAPS No. AS/03/19 dated October 30, 2019 amending insurance Circulaire No. 01/AS/19 per article 64-1 of Law No. 17-99. 58. Along with the creation of the FSEC, Law No. 110-14 provides for the creation of a private insurance market for coverage against catastrophic events. Domestic insurers will therefore be covering a new line of business (catastrophe risks), which is known to be highly volatile and exposes markets to insolvency risk in case of a large disaster event. 59. This policy reform aims to reinforce the solvency of both private insurance scheme and FSEC. Through the circular adopted by the Insurance and Social Welfare Supervisory Authority (Autorité de Contrôle des Assurances et de la Prévoyance Sociale, ACAPS), regulated insurers will be required to set aside at least 90 percent of their net technical or operating results (stemming from the new catastrophe insurance policies) into annual reserves which can only be withdrawn in case of extreme loss events and which will build up over the years. It is estimated that annual reserves would initially grow by about MAD 25 million per year (assuming average loss scenarios). The Circular mandates the insurers to progressively build up the financial capital required to meet their indemnity obligation in case of a severe disaster event, thereby contributing to making markets more resilient and the private insurance scheme as a whole more sustainable. 60. Expected results. The prior action will contribute to the insurance companies’ compliance with the prudential requirements that will be established following the homologation and publication of the adopted circular. This compliance will be assessed in 2021 and 2023, based on data from the previous years provided by ACAPS on an annual basis. Pillar B: Strengthening Morocco’s institutional framework for disaster and climate-related risk management 61. While the GoM has made significant efforts to strengthen the DRM governance architecture and move towards more integration and inter-ministerial coordination, significant gaps still remain. According to a recent OECD study,21 these gaps include, among others, a National DRM strategy (currently under preparation), a methodology for a more comprehensive approach towards disaster risk prevention, improved coordination among ministries charged with risk prevention at the sectoral levels, a national risk data center, strengthened coordination between central and local levels, and an improved risk awareness and culture. Most of these gaps are directly related to the absence of an overarching DRM coordination structure within the GoM. 62. Through the policy reforms included in Pillar B, the Government will continue strengthening the overall DRM institutional framework by enhancing the flood risk preparedness through improved risk information systems and improving the effectiveness of the Civil Protection. All these program elements will substantially reduce the human and potential economic impact of natural catastrophes. The proposed 21 OECD 2017, Préparer la gouvernance des risques de demain au Maroc, Working Document. Page 29 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) operation will support the establishment of a Flood Risk Management Center and improve the human resources management systems for the Civil Protection. Prior Action 5: The Borrower has adopted a cooperation framework to strengthen flood management and early warning systems in the country. Legal Evidence: Inter-institutional Agreement (Convention) dated July 24, 2018 on the Implementation of the Pilot Project for the Establishment of an Integrated System of Aid for Flood Risk Management in Morocco. 63. Floods are a recurrent problem in Morocco. Between 2000 and 2013, Morocco experienced 13 major flood events that together killed 263 persons and caused over US$400 million in direct property damage. The most recent major flood in Guelmim (2014) alone caused 47 deaths and overall economic losses of MAD 600 million. Earthquakes cost Morocco an average of US$90 million per year. Analysis also shows that approximately 26 percent of the total area of Morocco is susceptible to landslides, which can be exacerbated by earthquakes and floods. These recent events have raised awareness of the importance of an integrated approach for anticipating and monitoring flood risk in the country to mitigate the negative impact of major hydrometeorological events in terms of losses of lives and assets. 64. The GoM has progressively strengthened its hazard assessment, flood monitoring, and early warning systems. In addition to the National Flood Protection Plan adopted in 2002, which identifies the specific areas vulnerable to floods and identifies investment programs, the Ministry of Water formulated the Water National Strategy in 2009, including the establishment of an early warning system for floods and hazard mapping for urban planning and watershed management. In 2016, the Water Law No. 36-15 introduced reforms aimed at strengthening the institutional framework and flood risk monitoring mechanisms. 65. Despite considerable efforts, the GoM requires additional tools coupled with strengthening institutional capacity to establish a more robust flood monitoring and warning system. The warning system coverage is still insufficient, with only 60 percent of basins equipped with appropriate monitoring systems, many identified investments have not been made, and agencies work in an uncoordinated manner. 66. The collaboration of the various departments in the implementation of the system will allow faster communication on flood monitoring, and early warning systems. This initiative is the first in the country and will be piloted in four provinces, before being rolled out at a national level. This integrated system for flood risk management is set up through a partnership between the various stakeholders. The institutions included in the partnership are the Ministry of the Interior, the MEFAR, the National Meteorology Directorate, the National Directorate for Water Research and Planning (Direction de la Recherche et de la Planification de l’Eau - DRPE), and the Hydraulic Basin Agencies (ABH) covering the four basins of Bouregreg-Chaouia, Draa-Oued-noun, Sebou, and Tensift. This system will use real time information collected through partners into a Geographic Information Systems (GIS) based system, and hydrological and hydraulic models. This will provide a higher level of precision in forecasting and surveillance of basins, precipitation, and floods and allow the identification of zones at risk of imminent flooding and introduce evidence-based territorial action plans for flood anticipation and monitoring. 67. The four pilot watersheds have been selected based on technical, institutional and socio- Page 30 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) economic criteria. From a technical perspective, the four sites have high flood risk vulnerability and are representative of a wide range of flood types affecting Morocco. From an institutional perspective, they are located in four different provinces, allowing the establishment of the first inter-regional collaboration scheme. From a socio-economic perspective, the watersheds represent a wide variety of economic and social issues. More specifically, (i) the Gharb plain is an agricultural area with high poverty rates, subject to plain flooding, (ii) Mohammedia is one of the country’s main industrialized centers, located in a dense urban area, and vulnerable to urban floods compounded with industrial risks, (iii) the Ourika valley is an important environmental and touristic asset located in a mountainous areas, prone to torrential floods, and (iv) the Guelmin territory is located in a desertic and remote area, facing desertic plain flooding risks. 68. This prior action will support the creation of a national Flood Risk Management Information System. The Flood Risk Management Information System will support the development of tools and systems for flood risk monitoring, early warning, crisis communication, and prevention at a national level, including hydrological and hydraulic models. It would be housed in the Ministry of Interior. As a coordination and harmonization body, the Flood Risk Management Information System will be charged with assessing needs, developing models, ensuring forecasting consistency and dissemination, as well as steering, gathering and coordinating the local monitoring systems of the local water agencies. 69. Expected results. The reform is expected to improve collection and analysis of risk information. The Flood Risk Management Information System will enable more effective flood risk management, vertically at the national and local levels, as well as horizontally, across sectors. As a result of the prior action, four provinces will be equipped with an integrated Flood Risk Management Information System in 2023. Prior Action 6: The Borrower has strengthened the human resources management system of its Civil Protection. Legal Evidence: (i) Law-Decree (Dahir) on the Civil Protection No. 1-17-70; (ii) Decrees No. 2-18-71 and No. 2-18-72 (Application modalities of the Dahir) published in the Official Gazette No. 6694 dated July 26, 2018. 70. Morocco’s Civil Protection (CP) is the country’s first line of response to emergencies in the aftermath of a natural catastrophe. Its financial and human resources have been strengthened over the last two decades. In 2014, Morocco was the first African country to have one of the civil protection units certified by the International Search and Rescue Advisory Group (INSARAG). Morocco has also improved the post-disaster coordination capacity with the creation of the CVC in 2008, which has provided effective mechanisms to complement the CP’s capacity through a real time decision making and robust coordination structure. However, the CP’s current response capacity is limited compared to the needs. The current CP workforce at around 8,000 is relatively limited, and the response to medium to large-scale emergencies often requires the mobilization of armed forces and other security forces. 71. This prior action improves human resource processes of Morocco’s CP, which will contribute to strengthening the country’s emergency response capacity. The government has developed a reform program to clarify the CP’s organization and human resource management rules and to strengthen the CP’s training apparatus by elevating the status of the national civil protection school and providing it with Page 31 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) increased resources to train CP officers. More specifically, the reforms introduced through Prior Action 6 will allow for a clearer differentiation of CP grades, by clarifying the duties and responsibilities as well as skills and qualification requirements for each grade, and establishing a merit-based system for hiring and promotion. This will be complemented by the development of a comprehensive training curriculum that allows candidates for promotion to access the required training. The reforms will increase the capacity of the civil protection school to develop and implement the new training curriculum. 72. Furthermore, the prior action is expected to promote the employment of women in the CP workforce. Morocco is confronted with a significant gender gap in terms of employment, with a female labor force participation rate of only 23.6 percent compared to 70.8 percent for men.22 The low female labor force participation rate is attributed to various factors, including social institutions, societal values, female education levels, labor market regulations, and employers’ preferences across different industries.23 Specifically, gender bias in recruitment, along with fewer opportunities for training and professional development, often hinder women’s participation in the labor force,24 and in particular their access to male-dominated organizations25 such as Morocco’s CP, which is currently composed of only 4.4 percent women.26 Prior Action 6 is expected to reduce women’s constraints to pursue a career in Morocco’s CP through the establishment of a merit-based hiring and promotion system, which will include standardized recruitment and promotion processes that can help eliminate potential gender bias or discrimination in hiring and promotion decisions (e.g. clear definition of job profiles based on skills and qualification requirements, structured interviews with standardized questions and evaluation criteria, etc.). In addition, the comprehensive training curriculum, accessible to both women and men, will include modules that raise awareness on gender bias and discrimination and provide mentoring and professional development opportunities for women. By increasing female participation in Morocco’s CP, the above- mentioned measures will also contribute to enhance the overall effectiveness of the CP in emergency response activities following natural disasters since diverse gender representation in the field and in decision-making can improve operational versatility.27 73. Expected results. The CP reform program implemented by the government is expected to strengthen the CP’s ability to respond to major disasters and contribute to the institutionalization of disaster preparedness at the sector level. The result indicators will be: (i) the number of CP search and rescue units applying operational and staffing procedures in line with INSARAG standards, with a target of 12 certified units – one per region – by 2023, and (ii) 5 percent increase in the number of female staff members in the CP by 2023. Table 4 : DPF Prior Actions and Analytical Underpinnings Prior Actions Analytical Underpinnings Pillar A: Strengthening Morocco’s institutional capacity to deal with the adverse financial impact of disasters and climate-related shocks 22 World Bank, 2018: Labor Market in Morocco: Challenges and Opportunities. 23 Yuko Morikawa, 2015: The Opportunities and Challenges for Female Labor Force Participation in Morocco, Brookings Global Economy & Development Working Paper 86. 24 Marie-Thérèse Chicha, 2013: Inégalités de genre et pratiques d’entreprise au Maroc . Bureau international du Travail – Genève. Document de travail no. 69. 25 See “PA Secure Handbook on: Gender in Civil Protection” (EUSBSR, 2014). 26 Out of 8270 staff members, 364 are women (data from Morocco’s Civil Protection). 27 “PA Secure Handbook on: Gender in Civil Protection” (EUSBSR, 2014). Page 32 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) ASA under the WBG Sovereign Disaster Risk Financing and Insurance Program Phase 1 and 2 (P163780). The ASA has delivered ongoing analytical work and capacity building activities to MEFAR/DTFE (Treasury) and ACAPS (national insurance Prior Action 1: authority) to inform the implementation of Law No. 110-14 (Régime de The Borrower has registered couverture des conséquences d’événements catastrophiques), the FSEC as a public institution supported by the US$200 million PforR. The preparation of the law and and appointed its director. rationalizing of the fund benefited from the technical assistance during Phase 1 of the Program, including identification of a matrix of risks inherent to the operationalization of the FSEC and recommendations for operational aspects (including claims management system and loss evaluation process). Two workshops were organized (February and May 2018) and a number of bilateral meetings were held to raise awareness about the use of private markets techniques, tools and capital into the design of an operational solidarity fund. ASA under the WBG Sovereign Disaster Risk Financing and Insurance Program Phase 1 and 2 (P163780). The ASA has been supporting disaster and financial risk analytical work, enabling the preliminary analysis of various risk financing strategies (including insurance costs evaluation and reinsurance program structuring, exposure management, financial protection strategy advice, etc.), and helping the GoM directly access knowledge and expertise from private markets, including unbiased lessons learnt, sophisticated placement techniques, and other best practices from international catastrophe insurance and risk management. Prior Action 2: European Union Global Partnership on Disaster Risk Financing The Borrower has established Analytics (P157439). a sustained financing mechanism for the FSEC. The program helps improve the understanding and increase capacity of governments to take informed decisions on disaster risk financing (DRF) based on sound financial analysis. This is achieved through four outcomes: (1) governments understand their financial risk related to natural hazard; (2) they employ efficient financial/actuarial analysis, such as cost-benefit analyses, in the development of DRF strategies; (3) they effectively leverage private financial markets through market- based risk transfer solutions, when relevant in the DRF strategy; (4) they monitor and evaluate DRF strategies and ensure appropriate complementarity with other partners related activities, so as to tap the potential to replicate DRF strategies in the same region. Through global engagements over four years (2016-2019), and clear focus on analytics for decision-making, this program also helps strengthen the sharing of lessons learnt across the DRF global portfolio of clients. Page 33 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) ASA under the WBG Sovereign Disaster Risk Financing and Insurance Program Phase 1 and 2 (P163780). Design of the model for the register of people affected by a Prior Action 3: catastrophic event will benefit from the technical assistance on The Borrower has defined the operational aspects of the FSEC, including claims management system register model and enrollment and loss evaluation process. procedures for the registry of Morocco Identity and Social Protection Project (P155198). victims of catastrophic events. This ongoing Bank-financed operation supports the expansion in coverage of a unique identifying number for the Moroccan population and foreign residents, and the improvement in targeting of social safety nets in Morocco. Prior Action 4: The Borrower’s ACAPS has adopted Circulaire ASA under the WBG Sovereign Disaster Risk Financing and Insurance No. AS/03/19 amending Program Phase 1 and 2 (P163780). Circulaire No. 01/AS/19, to establish prudential The overall default risk was identified early on in the ASA, including requirements on insurance through quantification of insolvency risk or default risk from insurance companies to strengthen their markets (domestic and international). financial capacity against catastrophic events. Pillar B: Strengthening Morocco’s institutional framework for disaster and climate-related risk management Evaluation de la gestion des catastrophes naturelles. Cour des Comptes. (DRM Evaluation Study – Cour des Comptes) 2016. This evaluation developed by the Government provides a diagnostic of the disaster risk management in Morocco at a legal and institutional level, including recommendations to strengthen disaster risk reduction Prior Action 5: cycle from prevention to mitigation. The Borrower has adopted a Building Morocco's Resilience: Inputs for an Integrated Risk cooperation framework to Management Strategy. World Bank. 2014. strengthen flood management and early warning systems in Review on Risk Management Policies Morocco. OECD. 2016. the country. Préparer la gouvernance des risques de demain au Maroc. OECD. 2017. These three documents represent a roadmap to strengthen inter- ministerial coordination and develop a new operational structure of ‘Chief Risk Officer’ in Morocco. They spell out the need and role of the Flood Risk Management Center. Review on Risk Management Policies Morocco. OECD. 2016. Prior Action 6: The Borrower has The 2016 OECD Review of Risk Management Policies in Morocco strengthened the human notes the recent progress in strengthening the CP’s own capacity as resources management well as the post emergency coordination mechanisms. It notes the system of its Civil Protection. limited capacity of the CP as one factor limiting Morocco’s capacity to respond to major disasters. Page 34 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) 4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY 74. The proposed operation will contribute towards the WBG’s twin goals of ending extreme poverty and boosting shared prosperity in a sustainable manner. It is also consistent with the WBG’s CPF for Morocco for FY19–24, which highlights the importance of strengthening the adaptation to climate change and the resilience to natural disasters, and with the WBG Gender Strategy (FY16-23). CPF objective 11 is focused on strengthening adaptation to climate change and resilience to natural disasters. Through the proposed operation, the Bank will continue supporting the GoM in building its legal and institutional capacity to prepare for and manage climate and disaster risks. The proposed operation will improve the GoM’s financial resilience through the strengthening of the FSEC’s governance structure and assuring prudential requirements on insurance companies, which strengthen their financial capacity against catastrophic events. It will also provide support to the GoM in strengthening the institutional framework for DRM (through operationalizing a Flood Risk Management Center and enhancing the country’s human resources management system of the Civil Protection). By promoting female employment in Morocco’s CP, the proposed operation is also in line with the WBG Gender Strategy, and in particular its second strategic objective on removing constraints for more and better jobs for women. 75. The proposed operation is aligned with the WBG Middle East and North Africa (MNA) Strategy and the MNA Climate Action Plan. It contributes specifically to the regional strategy’s pillars on renewing the social contract and on reconstruction and recovery by supporting the GoM in responding more effectively to the citizens’ demand for protection against natural hazards. The operation will strengthen the FSEC with an objective of compensating uninsured households that have been affected by natural disasters, including coverage for six million Moroccans living below the poverty line. The operation will also help advance overall Morocco’s DRM framework, which will disproportionately benefit poor communities that are often the least prepared to address vulnerabilities related to natural disasters. MNA also is committed to double the share of adaptation financing (commitment #2), through mainstreaming DRM across sector investments, and to support policy reform (commitment #3) through institutional reforms targeted at enhancing adaptation and mitigation policies and supporting DRM low carbon growth and energy efficiency.28 The proposed operation is also closely aligned with the Sendai Framework for Disaster Risk Reduction and its four priority areas. 76. The proposed operation follows the Maximizing Finance for Development (MFD) approach. The Cat DDO complements the MFD strategy articulated in the ongoing PforR, which engages private insurers in Moroccan markets to cover natural disasters. More specifically, the proposed operation will help bridge the gap between a national reserve for small disasters and a risk transfer instrument (Cat Bond or reinsurance) envisaged for the most extreme ones. It will also demonstrate higher retention of risk from the GoM, thereby making the eventual risk transfer product more cost-efficient. Indeed, insurance and reinsurance markets typically offer better terms when the insured (in this case FSEC) demonstrate enough risk ownership and vision. The implementation of a comprehensive three-tier strategy with a significant retention is minimizing perception of moral hazard by markets and contributing to competitive pricing and terms offered. Through the risk transfer instrument specifically, the GoM would also maximize risk financing where it is most cost-efficient, for extreme events for which the cost of capital is typically too high for retention instruments to operate. In addition to the use of private capital, the claims management 28 World Bank Group. Middle East and North Africa Climate Action Plan - 2016-2020 Page 35 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) processes likely to be put in place foresee the use of private firms at both national and international levels, for the monitoring, adjustment and settlement of claims following a catastrophe event. The tools and datasets produced also make use of state-of-the-art financial engineering techniques and illustrate some of the private sector’s best practices in the modelling and financing of catastrophe risks. The initiative finally sends a strong demonstration effect by piloting an advanced financial product designed and implemented with support from the World Bank and which could be further replicated in the region. 77. The operation is expected to contribute in full to strengthening climate change adaptation. Pillar A of the proposed operation will reduce the vulnerability of all Moroccans to the adverse financial impacts of disaster and climate-related shocks through the implementation of the new regime for protection against catastrophic risks. Pillar B will strengthen the country’s capacity to anticipate, manage, and respond to climate-related shocks. In addition, due to the nature of the instrument, the DPF with a Cat DDO will contribute to reducing the country’s vulnerability to the budgetary impact of disaster and climate-related shocks by providing a contingent line of credit. 78. The objectives of the proposed operation are also closely aligned with the ongoing WBG- financed operations in the country. The proposed Cat DDO builds on and complements the ongoing IDRM PforR and technical assistance on disaster risk finance and urban resilience, which is supporting two pilot municipalities in designing strategies and action plans to improve disaster resilience and climate change adaptation. It is also aligned with the overall financial sector engagement in Morocco, particularly the Joint Capital Markets Program (J-CAP) and the work on development of private capital markets. 4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS 79. The proposed operation is based on extensive consultations between the GoM and relevant stakeholders. The GoM has conducted extensive consultations with DRM, insurance, financial services, and industry professionals on the policy reforms supported through this operation. The Government has put in place the necessary legal framework establishing the procedure for publication and consultation on bills and draft regulations through Decree No. 2-08-299 published on May 21, 2009. Law No. 110-14 was published on the SGG website29 for consultation on March 11, 2015. 80. The World Bank maintains active dialogue and collaboration with various agencies engaged in DRM in Morocco. The operation complements efforts by the Organization for Economic Cooperation and Development (OECD) to strengthen Morocco’s DRM architecture. The World Bank has also consulted closely with the Swiss State Secretariat for Economic Affairs (SECO), which is a long-term partner of the GoM on DRM issues. The World Bank is also liaising and coordinating with the Japanese International Cooperation Agency (JICA), particularly on the urban resilience agenda in Morocco. Additionally, the consultations on this operation and its links to the DRM agenda were held within the country with the German development agency (GIZ), JICA, SECO, the French Development Agency (Agence Française de Développement, AFD), the European Union commission and the United Nations (UN), during the preparation. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1. POVERTY AND SOCIAL IMPACT 29 http://www.sgg.gov.ma/legislation/ListeAvant-projets.aspx. Page 36 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) 81. The overall poverty and social impact of the proposed operation is expected to be positive. Poor and most vulnerable groups, including women, youth and the elderly, are disproportionately affected by natural catastrophes. The supported policies are strengthening the overall DRM framework in Morocco and increasing access to finance for vulnerable and uninsured populations. Given the proposed operation’s universal scope covering the entire population of Morocco, poor, vulnerable and marginalized populations will all have access to financial coverage in the event of a natural catastrophe. 82. The distributional impact of the parafiscal charge on insurance policies supported by Prior Action 2 is expected to be progressive. The parafiscal charge will consist of a charge of 1 percent on premia paid by all non-life insurance policy holders. Given that this charge will affect insurance premia predominantly paid by higher-income households (auto insurance, home insurance) and/or businesses (civil responsibility), and that it will finance FSEC, whose coverage is universal by nature, the distributional effect of the parafiscal charge is expected to be progressive. 83. Prior Actions 3 and 6 are expected to have a positive impact on women by increasing their ability to claim their rights to compensation and by promoting their employment in the CP workforce. Women may face higher constraints than men, including restricted mobility and limited access to information, to claim their rights to compensation under the disaster insurance schemed supported by the proposed operation. To address such constraints, Prior Action 3 on the implementation modalities of the register supports the establishment of various registration channels (e.g. through an online platform, at the designated local administrative offices, and allowing registration by a third party or dependent). It also includes the development of a specific outreach and communication mechanism for the registration procedures that meets the specific information needs of women and can thus enhance their ability to claim their rights to compensation. In addition, Prior Action 6 is expected to promote female employment in Morocco’s CP, which is currently composed of only 4.4 percent women. To address common demand- side constraints, such as gender bias in recruitment and limited access to professional development opportunities,30 Prior Action 6 will support the establishment of a merit-based hiring and promotion system, including standardized recruitment and promotion processes, that can help eliminate potential gender bias or discrimination. Moreover, a comprehensive training curriculum will include modules that raise awareness on gender bias and discrimination and provide mentoring and professional development opportunities for women. Progress on gender-related issues of the two prior actions will be monitored through the following indicators: i) The Government has developed a specific outreach and communication mechanism to inform the population of the registration procedures for people affected by a catastrophic event, with a specific focus on women; and ii) Percentage increase in the number of female staff members in the Civil Protection. 84. The operationalization of the FSEC is expected to have a positive impact on low-income households with an inclusive coverage of vulnerable and marginalized populations across Morocco. The FSEC provides a strong tool to absorb some of the shocks of post-disaster recovery needs for vulnerable and uninsured segments of the population. This is particularly important for marginalized segments, including low-income individuals and the elderly (particularly elderly-headed households, often living alone), which often lack access to finance. In Morocco, the elderly population (above 60 years) currently makes up more than 10 percent of the population and almost 60 percent of that population are heads of 30 Bordat, Stephanie Willman and Saida Kouzzi. USAID/Morocco Gender Analysis. Prepared by Banyan Global. 2018. Page 37 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) households31. More than 50 percent of the elderly population is illiterate, and numbers are even higher in rural areas.32 The FSEC will significantly expand the number of individuals with access to a form of insurance against catastrophic risks, which will reduce vulnerability and better respond to natural and climate-related catastrophic events. 85. The flood monitoring center is expected to have a positive impact on populations living in and around basins, as the monitoring system will allow an early warning in the event of a flood. 5.2. ENVIRONMENTAL ASPECTS 86. It is anticipated that policy reforms supported by the proposed operation will have either neutral or positive indirect effects on Morocco’s environment and natural resources. Each pillar of the operation contains prior actions that would have potential effects on the natural resource and environmental assets of Morocco. Under Pillar A, the prior action on enabling a robust functioning mechanism for the FSEC will allow for a rapid recovery and reconstruction after disasters, which will ultimately put a lower stress on the natural resource and ecosystems in disaster prone areas. Under Pillar B, policies supporting the development of a sound knowledge base for flood protection programs at the national and subnational level would reduce vulnerability of the population, while also supporting the development of natural assets protection program. 87. Morocco has environmental systems that mitigate the potential negative effects of programs implemented as a result of the supported policy reforms. The Moroccan legal framework addresses both the majority of aspects related to environmental protection, pollution abatement and improving the living environment, including preventive instruments (Environmental Impact Assessment, EIA) and incentives (financial assistance and tax incentives), as well as coercive measures against natural and legal persons committing acts that are detrimental to the environment. Concerning Environmental Impact Assessments, the most important legislative text is Law No. 12-03 of 12 May 2003, the objective of which is to minimize the adverse impact of projects and improve ecological sustainability. In Morocco, the EIA constitutes a valuable legal tool which subordinates the administrative authorization of any project subject to EIA requirements to an environmental acceptability decision. This legal framework has been complemented by the recent adoption (in March 2014) of the National Charter on Environment and Sustainable Development, which promotes a balance between environmental, economic and social dimensions, and aims at improving the living environment of citizens, enhancing sustainable management of natural resources, and promoting economic activities respectful of the environment. The actual experience of Moroccan authorities in implementing the environmental legal framework is still relatively limited, especially at the level of local authorities, due to the recent publication of numerous application decrees. 88. Climate and disaster risk screening. Climate and disaster risk screening for the Cat DDO has been completed and the overall risk of the operation is low. The DPF will support policy reforms focused on DRM, Climate Change Adaptation (CCA) and financial resilience to catastrophic events for individuals, households, and government. Morocco is highly exposed to disaster and climate-related risks, including rising temperatures, propensity for droughts, rising sea levels along the coast, and severe flooding during rainy season and geophysical hazards (landslides in the northeast). The proposed Cat DDO will help build 31 https://www.medias24.com/MAROC/SOCIETE/176916-HCP-Le-Maroc-comptera-10-millions-de-personnes-agees-en- 2050.html 32 HCP: Morocco will have 10 million elderly people in 2050. Page 38 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) resilience among beneficiary populations through policy reforms that will enhance access to insurance after disasters and improve DRM institutions (early warning systems and civil protection). The operation directly addresses climate change risks through the prior actions, and it is expected that its results would positively affect beneficiaries’ capabilities to anticipate and manage climate and disaster-related risks. Therefore, the overall risk to the outcome of the operation due to climate-related and natural disasters is assessed to be low. 5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS 89. PFM. The GoM’s annual budget is made publicly available once approved by the Parliament. In addition, a citizen budget is prepared and made public on the MEFRA website (http://lof.finances.gov.ma). The last overall Public Expenditure and Financial Accountability assessment, carried out by the World Bank, African Development Bank, and the EU in 2017 confirmed that Morocco has an overall credible, comprehensive, and transparent budget. It highlighted substantial PFM reforms underway, of which many were supported by the World Bank through a programmatic series of Morocco Accountability and Transparency Development Policy Loans and accompanying TA, including in public procurement. The Moroccan PFM system performance meets the fiscal discipline objective but requires more attention to achieve a more strategic allocation of resources and provision of quality public services. 90. Foreign exchange issues. According to the various recent assessments, BAM’s safeguard framework was found robust with strong internal and external controls, supported by several good governance practices. These assessments highlighted that existing safeguards and governance practices should be complemented by stronger legal and financial reporting frameworks, which are needed to enhance the legal autonomy of BAM and strengthen the timely publication of audited financial statements. The World Bank has reviewed BAM’s latest annual report dated March 2018, which includes an unqualified audit of its 2017 accounts. Since then, BAM has implemented the recommendations from the assessment, including publication of audited financial statements. Existing governance practices and safeguards are enshrined in the new Central Bank Law No. 40-17, which became effective on July 15th, 2019. 91. Disbursement and auditing. With reference to the flow of funds, the proposed loan will follow the World Bank’s disbursement procedures for development policy financing. The GoM has elected the deferred drawdown option as the disbursement method for this operation. Specifically, disbursements will be made upon declaration of emergency following a catastrophic event pursuant to national law, and provided that the World Bank is satisfied with the program being carried out by the borrower. The account into which the loan proceeds will be deposited forms part of the country’s official foreign exchange reserves. Flow of funds (including foreign currency exchange) is subject to standard PFM processes. The government budget is comprehensive, unified, and centralized to a single treasury account. 92. The loan proceeds will be deposited by the IBRD in a dedicated account at BAM opened for this DPF by the borrower and acceptable to the World Bank, upon submission of a signed withdrawal application. The borrower should ensure that upon the deposit of loan proceeds into the said account, an equivalent amount in the local currency is credited to the treasury current account at the central Treasury Department. The borrower will report to the World Bank within 30 days of disbursement on the amounts deposited in the dedicated account and credited to the budget management system, along with the exchange rate applied and the date of the transfer. If the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, IBRD will require the borrower to promptly refund, upon Page 39 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) notice, an amount equal to the amount of the said payment to IBRD. Amounts refunded to the World Bank upon such request shall be cancelled. The loan proceeds will be administered by the MEF. 93. IBRD reserves the right to ask for a transaction audit of the dedicated account. This audit, when requested, will cover the accuracy of the transactions (credits and debits) of the dedicated account, including accuracy of exchange rate conversions, confirming that the dedicated account was used only for the purposes of the operation and that no other amounts have been deposited into the account. Also, the auditor would have to obtain confirmation from corresponding bank(s) involved in the funds flow regarding the transaction. The period for submission of the audit report to the World Bank would be not later than four months from the date a request for such audit is issued. 94. Procurement regulations. Morocco has conducted major reforms of its procurement system which have resulted in: (a) the adoption of a new Public Procurement Decree (PPD) effective January 1, 2014, and (b) the creation of a ‘Commission Nationale de la Commande Publique’ (CNCP) whose responsibilities include, among others, the drafting of policies and regulation, issuance of standards documents for public procurement, coordination, and oversight of training in procurement and management of complaints. The key features of the decree are the following: (a) it constitutes a unified regulatory framework for procurement applicable to public sector (state, local governments and administrative SOEs); and (b) it brings the selection criteria in line with the principles of competition and equal treatment of bidders. Following this reform, all non-administrative SOEs and autonomous government agencies have been requested to revise their procurement rules to comply with the PPD. In addition to the PPD, there are standard bidding documents that provide the procuring entities with the tools to conduct their procurement activities. 95. E-procurement. The use of an electronic procurement portal (article 147 of the PPD) has increased public access to the availability of procurement-related information such as bid opportunities, calls for proposals, cost estimates, contract-related documentation, and results of tendering. More broadly, the electronic procurement system includes additional features such as the electronic submission of bids, a supplier database, electronic reverse auctions, and grouped purchases. However, the e- procurement system is not able to process request for quotations for small contracts. 5.4. MONITORING, EVALUATION AND ACCOUNTABILITY 96. The overall responsibility to implement the program supported by the proposed operation rests with the MEF, which is the main counterpart agency of the World Bank for this operation. The results indicators selected to monitor and evaluate implementation progress and the achievement of program outcomes will be monitored by the institution in charge of implementation of the respective prior actions, under the coordination of the MEF. In all cases, the indicators selected in this program are already being tracked by the associated institution and are used as results indicators in their respective institutional progress reports. In this context, the operation builds on the existing monitoring and evaluation systems of the Government, which should ensure that program performance is monitored at no additional burden to the institutions. 97. Morocco has a number of institutions responsible for grievance handling and resolution. The available national Grievance Redress Systems and institutions have been recently elevated to constitutional bodies to provide them with more independence and financial autonomy, necessary to validate their power of self-referral. The World Bank’s GRS mechanism does not affect the efficiency of Page 40 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) the Moroccan complaints and resolution system. 98. Grievance redress. Communities and individuals who believe that they are adversely affected as a result of a Bank supported operation, as defined by the applicable policy and procedures, may submit complaints to the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank’s attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate GRS, please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. 6. SUMMARY OF RISKS AND MITIGATION 99. The overall risk of the proposed operation is assessed as moderate. The key risks ratings are presented in Table 5 below. All ratings are either moderate or low, except for the Institutional Capacity for Implementation and Sustainability risk that is assessed as substantial due to potential difficulties in coordination between MEFAR/MoI and other line ministries. This risk is mitigated by the establishment of an inter-ministerial committee, which has been motivated by the ongoing preparation of the National DRM Strategy. The World Bank will continue supporting the strengthening of inter-ministerial coordination for DRM through this operation, as well as the implementation of the IDRM PforR which supports the preparation and adoption of the National DRM Strategy. 100. In the context of this operation, the challenge will be to ensure that the reforms are fully implemented and have measurable impacts on disaster and climate-related risk management in the country. These risks will be mitigated by leveraging ongoing World Bank engagements with key counterparts, underpinned by strong technical analysis at the preparation stage to justify the proposed reforms—including a keen understanding of the country’s readiness to implement the reform program. Certain aspects of these risks fall outside the control of the authorities and the World Bank (that is, securing approvals as part of the legislative process) and will be mitigated to the extent possible through a continued dialogue with the authorities and strong analytical underpinnings to ensure that the reform program has a strong technical justification. Page 41 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Table 5: Summary Risk Ratings Risk Categories Rating 1. Political and Governance ⚫ Moderate 2. Macroeconomic ⚫ Low 3. Sector Strategies and Policies ⚫ Moderate 4. Technical Design of Project or Program ⚫ Moderate 5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial 6. Fiduciary ⚫ Low 7. Environment and Social ⚫ Low 8. Stakeholders ⚫ Low 9. Other Overall ⚫ Moderate . Page 42 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) ANNEX 1: POLICY AND RESULTS MATRIX Results Prior Actions under DPF Indicator Name Baseline [2019] Target [2023] Pillar A: Strengthening the country’s institutional capacity to deal with the adverse financial impacts of disasters and climate-related shocks TheAction Prior development objective 1. The Borrower the FSEC as operation of the proposed has registered is to support a public institution and the Government Availability of an audit of Morocco of the in (a) control FSEC’s internal systems the country’ s fiscal capacity to manage strengthening the negative appointed impact of disasters and climate-related shocks, and (b) strengthening the institutional framework for its director. confirming that the FSEC’s systems and procedures allow No management in Morocco. for disaster risk Yes the appropriate use of funds. Prior Action 2. The Borrower has established a sustained financing mechanism Annual revenues from the new parafiscal tax created to N/A 200 (annual) for the FSEC. finance the FSEC (MAD million). Share of local officials of the Ministry of Interior responsible for the administration of the register trained on the 0 90% registration procedures. Prior Action 3. The Borrower has defined the register model and enrollment procedures for the registry of victims of catastrophic events. The Government has deployed an online platform for the N/A Yes [2020] registration of people affected by a catastrophic event. The Government has developed a specific outreach and communication mechanism to inform the population of the N/A Yes registration procedures for people affected by a catastrophic event, with a specific focus on women. Prior Action 4. The Borrower’s ACAPS has adopted Circulaire No. AS/03/19 amending Circulaire No. 01/AS/19, to establish prudential requirements on Insurance companies comply with the prudential No Yes insurance companies to strengthen their financial capacity against catastrophic requirements established by the circular. events. Pillar B: Strengthening Morocco’s institutional framework for disaster and climate-related risk management Prior Action 5. The Borrower has adopted a cooperation framework to Number of provinces covered by an integrated flood risk 0 4 Page 43 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Results strengthen flood management and early warning systems in the country. management information system. Number of Civil Protection search and rescue units applying operational and staffing procedures in line with INSARAG 1 12 Prior Action 6. The Borrower has strengthened the human resources standards. management system of its Civil Protection. Percentage increase in the number of female staff members N/A 5% in the Civil Protection. Page 44 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) ANNEX 2: FUND RELATIONS ANNEX IMF Executive Board Concludes 2019 Article IV Consultation with Morocco July 16, 2019 On May 13, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco. [1] Economic activity weakened in 2018, reaching 3 percent, due to lower growth in the agricultural and tertiary sectors. The unemployment rate remains close to 10 percent and particularly high among the youth. Headline inflation reached 1.9 percent in 2018 in part due to higher food prices. Fiscal consolidation slowed in 2018, with the fiscal deficit stabilizing at 3.7 percent of GDP, due to strong VAT revenues and wage bill containment, which partially offset lower corporate taxes and grants, and higher butane subsidies. Despite strong export performance in the automobile and phosphate sectors, the current account deficit widened to 5.4 percent of GDP due to higher imports of energy and capital goods, as well as lower remittances, official grants, and tourism receipts. At the same time, net FDI increased substantially to 2.5 percent of GDP. International reserves dropped to US$24.4 billion but remain comfortable, at about 5.2 months of imports. Bank capitalization is adequate, and the risks to financial stability are limited. Nonperforming loans remain relatively high, but they are well provisioned. Regulatory limits to reduce credit concentration and cross- border supervisory collaboration to contain risks related to Moroccan banks’ expansion in Africa are being strengthened. Morocco’s medium-term prospects remain favorable, with growth expected to reach 4.5 percent by 2024. However, this outlook remains subject to significant domestic and external risks, including delays in reform implementation, lower growth in key partner countries (particularly the euro area), higher oil prices, geopolitical risks, and volatile financial conditions. On the upside, lower international oil prices could help further strengthen the economy’s resilience and increased regional integration in the Maghreb region could become an added source of medium-term growth for Morocco. Executive Board Assessment [2] Executive Directors commended the authorities for implementing sound macroeconomic policies and welcomed the acceleration in reforms that has helped improve the resilience of the Moroccan economy and increase its diversification. Nevertheless, Directors noted the potential impact of global uncertainty and risks on the Moroccan economy and called for continued commitment to sustain sound policies in order to reach higher and more inclusive growth. Page 45 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Directors encouraged the authorities to continue fiscal consolidation to preserve debt sustainability, while safeguarding priority investment and social spending in the medium term. They welcomed the ongoing control of public wage spending and the outcome of the May 2019 national tax conference, which will inform a comprehensive tax reform targeted at achieving greater equity and simplicity in the tax system. Directors supported further improvements in the efficiency and governance of the public sector through civil service reform, careful implementation of fiscal decentralization, strengthened state-owned enterprise oversight, and better targeting of social spending. Directors noted that accommodative monetary policy remains appropriate in a context of moderate inflation and subdued economic and credit growth. They welcomed the beginning of the transition to greater exchange rate flexibility last year which will help the economy absorb potential external shocks and remain competitive. They encouraged the authorities to use the current window of opportunity to continue this reform in a carefully sequenced and well-communicated manner. Directors noted that the banking sector system is sound and resilient, while stressing the need to remain vigilant given its increasing complexity and cross-border expansion. They also called for continued efforts to address weaknesses in the AML/CFT framework. Directors noted that adopting the Central Bank Law and continuing to make the supervisory framework more risk-based and forward-looking will help further improve financial sector soundness. They welcomed the recent adoption of a comprehensive financial inclusion strategy, which will ensure that the financing needs of underserved groups and small and medium-sized enterprises are better addressed. Directors stressed the importance of sustaining the pace of structural reforms to move toward a more private-sector-led and inclusive growth model while reducing inequalities and protecting the most vulnerable. Directors emphasized the need to revamp labor market policies and implement education reforms to help create job opportunities, especially for women and youth. While they welcomed the ongoing improvements to the business environment, Directors encouraged continued efforts to strengthen governance and fight corruption. Page 46 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Page 47 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Morocco: Selected Economic Indicators, 2013–19 Prel. Est. 2013 2014 2015 2016 2017 2018 2019 (annual percentage change) Output and Prices Real GDP 4.5 2.7 4.5 1.1 4.1 3.0 3.0 Real primary GDP 17.2 -2.2 11.9 -13.7 15.4 3.9 0.1 Real non-primary GDP 2.9 3.4 3.7 3.1 2.7 2.8 3.4 Consumer prices, end of period 0.4 1.6 0.6 1.8 1.9 0.1 0.6 Consumer prices, period average 1.9 0.4 1.5 1.6 0.7 1.9 0.6 (in percent of GDP) Investment and Saving Gross capital formation 34.7 32.5 30.8 32.6 32.6 33.2 34.0 Of which: Nongovernment 29.6 27.2 25.3 26.9 27.1 27.8 29.0 Gross national savings 27.0 26.5 28.8 28.4 28.9 27.8 30.0 Page 48 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Of which: Nongovernment 25.5 24.5 25.7 25.5 25.1 24.3 27.5 (in percent of GDP) Public Finances Revenue 27.8 28.0 26.5 26.0 26.6 26.0 26.2 Expenditure 32.9 32.9 30.7 30.5 30.0 29.8 29.9 Budget balance -5.1 -4.8 -4.2 -4.5 -3.5 -3.7 -3.7 Primary balance, excluding grants -3.2 -3.6 -1.9 -2.7 -2.0 -1.7 -1.5 Cyclically-adjusted primary balance, excl. grants -3.3 -3.6 -1.6 -2.5 -1.7 -1.4 -1.3 Total government debt 61.7 63.3 63.7 64.9 65.1 64.9 65.1 (Annual percentage change; unless otherwise indicated) Monetary Sector Claims to the economy 3.4 3.7 1.6 5.9 3.3 3.4 5.2 Broad money 3.1 6.2 5.7 4.7 5.5 4.1 4.0 Velocity of broad money 0.9 0.9 0.9 0.8 0.8 0.8 0.8 (In percent of GDP; unless otherwise indicated) Page 49 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) External Sector Exports of goods, in U.S. dollars, percentage change 7.4 9.2 -6.8 2.4 12.8 14.3 6.6 Imports of goods, in U.S. dollars, percentage change 3.3 0.9 -17.9 10.1 7.8 13.3 1.1 Merchandise trade balance -20.5 -18.7 -14.5 -17.1 -16.4 -17.1 -15.8 Current account excluding official transfers -8.3 -7.6 -2.6 -5.0 -4.5 -5.8 -4.4 Current account including official transfers -7.6 -5.9 -2.1 -4.0 -3.4 -5.4 -4.0 Foreign direct investment 2.8 2.8 2.6 1.5 1.5 2.5 1.8 Total external debt 30.2 31.0 33.4 33.7 34.5 31.1 32.7 Gross reserves, in billions of U.S. dollars 18.8 20.3 22.8 25.1 26.2 24.4 26.0 In months of next year imports of goods and services 4.6 5.9 6.0 6.1 5.7 5.2 5.2 In percent of short-term external debt, on remaining 959.2 1144.9 1019.7 1244.1 1182.1 1068.8 1093.9 maturity basis Memorandum Items: Nominal GDP, in billions of U.S. dollars 106.8 110.1 101.2 103.3 109.7 118.6 120.7 Page 50 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Unemployment rate, in percent 9.2 9.9 9.7 9.9 10.2 9.8 ... Population, millions 33.4 33.8 34.1 34.5 34.9 35.2 ... Net imports of energy products, in billions of U.S. dollars -12.2 -11.0 -6.8 -5.6 -7.2 -8.8 -7.9 Local currency per U.S. dollar, period average 8.4 8.4 9.8 9.8 9.7 9.4 ... Real effective exchange rate, annual average, percentage change 1.7 0.1 -0.3 2.1 -0.4 0.9 ... Sources: Moroccan authorities; and IMF staff estimates. [1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. [2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm . IMF Communications Department MEDIA RELATIONS PRESS OFFICER: WAFA AMR PHONE: +1 202 623-7100 EMAIL: MEDIA@IMF.ORG @IMFSpokesperson Page 51 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Page 52 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) ANNEX 3: LETTER OF DEVELOPMENT POLICY Page 53 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Page 54 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Page 55 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Page 56 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Unofficial English Translation of the Letter of Development Policy October 2, 2019 Mister President, As you may know, the Kingdom of Morocco pursued strategies and reforms aiming to reach a new growth threshold through economic growth, in line with the issues of an inclusive and sustainable development. Within this framework, Morocco committed itself in favor of the achievement of a sustainable, eco- friendly development, including the establishment of a disaster risk management framework. As such, I would like to highlight the adoption in 2017 of the 2030 national sustainable development strategy by the Government, laying the foundations for a green and inclusive economy in Morocco, which will be divided in sectorial action plans of sustainable development which are currently developed. Moreover, strong commitments have been made by the Government following the 22nd Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) in Marrakech. Regarding disaster risk management, several measures and actions have already been adopted by the Government, among which I would like to mention the following: • The development of a comprehensive institutional framework for disaster and climate-related risk management. Thus, emergency response is placed under the authority of the Ministry of Interior based on the Law-Decree (Dahir) of 30 April 1955 on civil protection, as well as on Decree No. 2-97- 176 of 15 December 1997, which entrusted the general directorate of the civil protection (Direction Générale de la Protection Civile) with the role of emergency response. This direction is the first civil protection unit in Africa that was certified by the International Search and Rescue Advisory Group in 2014. • The adoption of legislations and regulations on disaster risk reduction and prevention, especially in terms of flood risk through Law on Water No. 10-95 amended in 2016 by Law No. 36-15 and in terms of seismic risk through Decree No. 2-12-682 of 23 May 2013 updating the building codes for earthquake-resistant construction. • The integration of disaster risk reduction measures into the conception of several public programs. For instance, Green Morocco Plan (Plan Maroc Vert) includes measures that reduce the vulnerability of the agricultural sector to droughts and the National Flood Protection Program, adopted in 2002, specifies areas that are particularly vulnerable to floods and identifies structural and non-structural flood protection investments. • The 2009 Loi de Finance Organique (Organic Finance Law) establishes the Fund for the fight against Page 57 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) natural catastrophes (Fonds de Lutte contre les Catastrophes Naturelles) , which is housed within the Ministry of Interior. With technical assistance from the World Bank under the Morocco Integrated Disaster Risk Management and Resilience Program, this fund, which used to focus on emergency interventions, was amended in 2015 to take on the role of co-financing local-level structural and non- structural disaster risk reduction programs. Thus, since its reform in 2015, the FLCN is supporting 97 subprojects for a total co-financing amount of MAD 671 million and a total investment volume of MAD 1,120 million. As an evidence of the strong and ongoing commitment of the Kingdom of Morocco to strengthen the country’s disaster resilience, we are currently establishing an integrated national disaster risk management strategy. This work is steered by an inter-ministerial committee gathering the involved departments and coordinated by the Ministry of Interior. Mister President, The Kingdom of Morocco is determined to pursue these efforts to solidify its disaster management policy, especially strengthening its capacity to manage and face a disaster. Within this framework, we have worked closely with the World Bank over the last months to prepare the Morocco Disaster Risk Management Development Policy Financing with a Catastrophe Deferred Drawdown Option (Cat DDO). From a financial standpoint, the operation will allow the immediate availability of liquidity following a disaster, in line with our financial risk management strategy, in order to be able to bear its potential financial impacts. The governance policy program supported by this loan is based on two pillars. A first key pillar aiming at strengthening the country’s financial capacity to address disaster’s impact. First of all, I would like to remind you that Morocco has established an innovative hedging system in the aftermath of disasters through Law No. 110-14, which implement a mixed compensation regime combining on the one hand, an insurance system for the benefit of victims holding an insurance contract, and on the other hand, through the FSEC, a grant system for the benefit of uncovered individuals, who become victims of natural and man-made disasters. In this regard, I would like to thank the World Bank’s support and technical assistance in the design and implementation of this mechanism for integrated disaster risk management and resilience in Morocco. The operationalization of FSEC, which is a universal program covering the noninsured population against the loss of their main residence due to a catastrophic event, thus strengthening the sustainability of poverty reduction programs, is a necessary condition for the implementation of this mechanism. It is in this respect that Organic Law No. 17.18, which amends Organic Law No. 02.12 has integrated this entity and placed it among the public strategic establishments whose director is nominated in the Council of Ministers. In this respect, Dahir No. 1-19-80 of June 21, 2019 has nominated the FSEC Director. Moreover, Decree No. 2-18-785 which determines the composition of the Board of Directors of FSEC and the Administrative Commission (Comission de Suivi), establishes the amount of compensations and Page 58 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) determines the main claim management procedures was adopted by the Conseil de Gouvernement. In the same vein, the order (Arrêté) No. 900-19 of April 30, 2019 of the Minister of Interior established the model of the register of disaster victims in which potential beneficiaries of FSEC shall register. This register will be monitored by local government. Moreover, the Ministry of Finance has deployed major efforts to elaborate a global and sustainable strategy relating to disaster financial management to: (i) answer the population needs in case of a catastrophic event and (ii) cover the financial needs of FSEC. This financial strategy combines complementary financial tools, specifically: • A first reserve line (equity) for low amplitude events. In this framework, a decree establishing a para- fiscal tax to provide FSEC in a recurrent way. • A contingent line of credit, to face larger amplitude events. In this context, the Cat DDO constitutes a key component of the disaster management financial strategy. • Moreover, the Government is currently reviewing the establishment of a risk transfer product, for instance a Cat bond, to cover the most severe catastrophic events. The Government is committed to implementing this disaster risk management strategy. Decree No. 2-19- 244 has introduced a solidarity tax against catastrophic events for the benefit of the FSEC. In addition, on September 16, 2019, the FSEC Board of Directors has approved FSEC's financial strategy, which incorporates the elements of the global strategy developed by the Ministry of Finance. Complementary to this, the circular (Circulaire) of the Insurance and Social Welfare Supervisory Authority No. 02/AS/2019 of April 10, 2019 has established prudential requirements for insurance companies that strengthen their financial capacity against catastrophic events. The second pillar focuses the institutional framework reinforcement for disaster risk management The government has taken significant steps in recent years to strengthen the institutional framework for disaster and climate-related risks management. The recently undertaken reforms aim at the improvement of the disaster risk management governance framework, including the preparation for the occurrence of a catastrophic events and the efficiency of the Civil Protection for emergency response. All these reforms are strongly in line with the National Integrated Disaster Risk Management Strategy currently under preparation by the Ministry of Interior with all the relevant departments involved. Thus, and in direct link with flood risks, the Government has strengthened its institutional capacities for the hydrometeorological risk monitoring by creating, within the Water Ministry, the National Center for Flood Risk Management (Centre National de Gestion du Risque d’Inondation) in charge of developing new Page 59 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) tools and systems to improve forecasting, alerts, communication in case of emergency and national scaled flood prevention. The signature of the Agreement dated July 24, 2018 for the Implementation of the Pilot Project for the Establishment of an Integrated System of Aid for Flood Risk Management in Morocco constitutes an essential element of reform in the Government’s strategy to strengthen the country’s preparedness to disasters and reduce risks. Similarly, and considering emergency responses efficiency in case of the occurrence of a catastrophe, the Government has undertaken measures to reinforce the civil protection system. It has thus adopted on July 26, 2018, Dahir No. 1-17-70 and the application decrees No. 2-18-71 and No. 2-18-72, which improve the Civil Protection General Directorate (Direction Générale de la Protection Civile – DGPC) human resources management, strengthening civil protection efficiency following a catastrophic event. The Government is aware of the important challenges relating to disaster and climate change. The reforms that are supported by this by this program show the commitment of the Moroccan Government to strengthen its resilience to these risks. In this context, the Government welcomes the establishment by the World Bank of deferred drawdown financial tools, like the proposed policy financing, which are strengthening the Morocco’s financial resilience, by providing funds promptly after a major disaster, and will allow to provide timely and relevant support to the harmed population. Finally, I would also like to highlight the excellency of our partnership, in a general way and more especially in this field by wishing that the World Bank pursues and strengthens its technical and financial support to our disaster risk management strategy. Thank you for the continued and valuable support provided by the World Bank. Please accept, Mister President, the assurances of my highest regards. Mohamed Benchaaboun Minister of Economy and Finance Kingdom of Morocco Page 60 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE Significant poverty, social or Significant positive or negative Prior Actions distributional effects positive or environment effects negative Pillar A: Strengthening Morocco’s institutional capacity to deal with the adverse financial impact of disasters and climate-related shocks Positive: There is direct positive impact on uninsured vulnerable populations, especially women and populations in lagging regions, who Prior Action 1: The Borrower has thanks to the universal coverage of registered the FSEC as a public Neutral FSEC will benefit from compensation institution and appointed its director. for physical injuries and primary residence damage in case of a natural catastrophe. This ultimately will be beneficial for poverty reduction. Positive: A sustained source of revenue through the parafiscal tax for the benefit of the fund will ensure that Prior Action 2: The Borrower has coverage for vulnerable uninsured established a sustained financing portions of the population will be Neutral mechanism for the FSEC. systematic, given that funds will be available for any number of small natural catastrophes, and do not run the risk of being depleted or dependent on external sources. Positive: This register will allow the victims of natural catastrophes to take Prior Action 3: The Borrower has the first steps towards insuring their defined the register model and access to FSEC. This has indirect enrollment procedures for the Neutral impact on poverty through the registry of victims of catastrophic establishment of a social safety net events. system for the most vulnerable/poorer portion of the population. Prior Action 4: The Borrower’s ACAPS Positive: The prudential has adopted Circulaire No. AS/03/19 requirementswill help ensure that Neutral amending Circulaire No. 01/AS/19, to private insurances have access to establish prudential requirements on liquidity in case of a disaster. Page 61 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) insurance companies to strengthen their financial capacity against catastrophic events. Pillar B: Strengthening Morocco’s institutional framework for disaster and climate-related risk management Positive: The strengthening of early warning systems for flood will promote safety of riparian populations, which are often more vulnerable to life risk and property Prior Action 5: The Borrower has damage due to seasonal floods. This adopted a cooperation framework to system will also support the Neutral strengthen flood management and elaboration of action plans for early warning systems in the country. evacuation, strengthening of infrastructure and building codes in high risk areas, all of which have direct positive impact on the life and poverty level of the populations in the catchment areas. Positive: There is indirect impact through potential job creation through the CP. The clarity in regulation and Prior Action 6: The Borrower has professionalization of the practice of strengthened the human resources Neutral CP would improve the performance of management system of its Civil an important part of the response Protection. system that is currently facing challenges in terms of timely response to emergencies. Page 62 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) ANNEX 5: DEBT SUSTAINABILTY ANALYSIS 1. After an accelerated debt accumulation period during the first half of the past 10 years amid a challenging external environment, low growth, and high fiscal deficits, Morocco’s central government debt has stabilized owing to a sustained fiscal consolidation effort. At an estimated 65.3 percent as of end-2018, the central government debt-to-GDP ratio has experienced a cumulative increase of 1.9 percentage points compared to end-2014, as opposed to the significant increase of 16.3 percentage points of GDP during 2008–2013. This recent slowdown in debt accumulation – which supported a stabilization of the central government debt-to-GDP ratio – was mainly driven by fiscal consolidation efforts (primary deficit33 reduction from 4.8 percent of GDP in 2012 to 1.3 percent in 2018), with the dirham depreciating in 2014-2016 but reversing this trend in 2017-2018, and a slower real growth (averaging 3.1 percent over 2014–2018 compared to a 4.5 percent average over 2008–2013) (Figure 6.1). Gross Financing Needs (GFNs) decreased from 16.6 percent of GDP in 2014 to 12.5 percent in 2018 and are expected to follow a relatively stable path and average 12.5 percent over the forecasting period, with temporary increase due to Eurobonds’ redemptions in 2020 and 2022.34 2. Morocco’s central government debt profile at end-2018 predominantly comprised domestic debt35 (79.3 percent of total debt), mostly long-term maturities (more than 5 years) and mainly at fixed rates, a structure which mitigates against currency and interest rate risks. The central government’s external debt is also mainly long-term in nature, with more than half contracted at fixed rates from multilateral creditors (55.2 percent of total), but also including private investors (28.7 percent), and bilateral creditors (16.1 percent). With respect to currency composition, external central government debt is predominantly denominated in Euro (63.2 percent), followed by the US dollar (28.5 percent), Japanese Yen (2.9 percent) and other currencies (5.4 percent). Morocco’s average nominal interest rate remains low and followed a downward trend from 4.8 in 2015 to 4.0 percent in 2018, owing to decreasing borrowing costs in the domestic market, which accounts for most of the central government debt. 3. Baseline macroeconomic projections assume accelerating growth starting in 2020, continued fiscal consolidation, and current account balance improvement. Following a slight decline to 2.7 percent in 2019, economic growth over the medium term is expected to gradually increase -averaging 3.9 percent- and reach 4.4 percent by 2024, enabled by sound fiscal and monetary policies, more consistent sectoral strategies, and improved investment environment, all of which would support gradual competitiveness gains. Inflation is projected to remain below 2 percent in the medium term. After an initial increase to 1.7 percent of GDP expected for 2019, the primary deficit is expected to gradually decline to 0.6 percent of GDP by 2024, assuming the authorities maintain their current fiscal consolidation path and improve the efficiency of public investment, despite potentially mounting spending pressures due to social movements and rising global oil prices. The current account balance is expected to improve, dropping and staying 33 Before privatization receipts. 34 The DSA covers only central government debt and does not include publicly guaranteed debt of SOEs, due to lack of information. It is important to note also that a privatization program with an estimated yield around US$4 billion is being carried out for 2019- 2023. 35 Defined on a currency-based classification. Page 63 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) below 4 percent of GDP starting 2020 due to the growth of exports, tourism receipts and remittances, which will offset increasing energy import costs. 4. Central government debt remains sustainable. Under the baseline scenario, Morocco’s central government debt is projected to remain contained below 70 percent of GDP -the debt burden benchmark for emerging markets- and on a downtrend; risk analysis showcases resilience to a variety of shocks. Peaking in 2019 at a projected 66.5 percent of GDP,36 debt levels are forecasted to decline to 62 percent by 2024, following a continued fiscal consolidation and improved growth performance, but attenuated by debt service commitments concentrated in treasury bills as well as 2-year and 5-year government securities. Under macro-fiscal stress tests, the debt-to-GDP ratio remains below the benchmark throughout the forecast period (Figures 6.2 and 6.3). GFNs do not surpass the benchmark of 15 percent of GDP for emerging markets under the baseline scenario, although an increase up to 13.4 percent of GDP in 2020 is anticipated as a result of debt servicing. Additional stress testing, however, portrays vulnerabilities for GFNs to macroeconomic imbalances as shown in shocks to GDP growth, primary balance and real interest rates. 5. Going forward, the domestic debt issuance strategy will benefit from lengthening its maturity structure, in order to prevent sudden increases in GFNs arising from higher debt service costs and to reduce the associated refinancing risk. In this regard, it is important for the MEFAR to keep active debt management as of now by undertaking exchange operations lengthening maturities for outstanding treasury bonds, in line with market opportunities arising. The debt profile as of end-2018 shows moderate vulnerabilities as three lower early-warning benchmarks were breached: (a) external financing requirements were 7 percent of GDP; (b) debt held by non-residents accounted for 20 percent of total public debt; and, c) foreign currency-denominated debt comprised 21 percent of total public debt (Figure 6.4). 36 This 2019 central government debt-to-GDP ratio is a World Bank projection using government data available in October 2019. Page 64 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Figure 6.1. Morocco Public Sector Debt Sustainability Analysis (DSA) Baseline Scenario (in percent of GDP unless otherwise indicated) Debt, Economic and Market Indicators 1/ Actual Projections As of October 07, 2019 2/ 2008-2016 2017 2018 2019 2020 2021 2022 2023 2024 Sovereign Spreads Nominal gross public debt 56.1 65.1 65.3 66.5 66.3 65.8 64.8 63.4 62.0 Bond Spread (bp) 3/ 202 Public gross financing needs 15.2 13.0 12.5 10.9 13.4 12.7 13.0 13.1 11.9 5Y CDS (bp) 96 Real GDP growth (in percent) 3.9 4.2 3.0 2.7 3.5 3.6 3.8 4.1 4.4 Ratings Foreign Local Inflation (GDP deflator, in percent) 1.2 0.7 1.1 0.8 1.1 1.5 1.7 2.0 2.0 Moody's Ba1 Ba1 Nominal GDP growth (in percent) 5.1 4.9 4.1 3.5 4.7 5.1 5.5 6.2 6.5 S&Ps BBB- BBB- Effective interest rate (in percent) 4/ 4.9 4.2 4.0 3.7 3.8 3.6 3.7 3.8 3.8 Fitch BBB- BBB- Contribution to Changes in Public Debt Actual Projections 2008-2016 2017 2018 2019 2020 2021 2022 2023 2024 cumulative debt-stabilizing Change in gross public sector debt 1.6 0.2 0.2 1.2 -0.1 -0.5 -1.0 -1.4 -1.4 -3.3 primary 9/ Identified debt-creating flows 2.0 -0.6 0.8 0.5 0.0 -0.5 -0.8 -1.2 -1.4 -3.4 balance Primary deficit 1.8 0.9 1.3 1.7 1.4 1.4 1.0 0.9 0.6 7.0 -2.0 Primary (noninterest) revenue and grants 26.6 26.6 26.1 25.8 25.9 25.9 26.3 26.3 26.6 156.8 Primary (noninterest) expenditure 28.4 27.5 27.4 27.5 27.3 27.3 27.3 27.2 27.2 163.8 Automatic debt dynamics 5/ 0.4 -1.5 -0.5 0.1 -0.6 -1.0 -1.1 -1.5 -1.6 -5.6 Interest rate/growth differential 6/ -0.1 -0.4 0.0 0.1 -0.6 -1.0 -1.1 -1.5 -1.6 -5.6 Of which: real interest rate 1.9 2.2 1.8 1.8 1.7 1.3 1.2 1.0 1.0 8.0 Of which: real GDP growth -2.0 -2.6 -1.9 -1.7 -2.2 -2.3 -2.3 -2.5 -2.6 -13.7 7/ Exchange rate depreciation 0.4 -1.1 -0.5 … … … … … … … Other identified debt-creating flows -0.1 0.0 0.0 -1.3 -0.8 -0.9 -0.7 -0.7 -0.4 -4.8 Privatization receipts (negative) -0.1 0.0 0.0 -0.4 -0.3 -0.4 -0.2 -0.2 0.0 -1.5 Contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Non-debt financing (+ increases financing needs) 0.0 0.0 -0.9 -0.5 -0.5 -0.5 -0.5 -0.4 -3.3 Residual, including asset changes 8/ -0.5 0.8 -0.6 0.6 -0.1 0.0 -0.2 -0.1 -0.1 0.1 10 20 Debt-Creating Flows projection 8 15 (in percent of GDP) 6 10 4 5 2 0 0 -5 -2 -10 -4 -15 -6 -20 -8 -25 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 cumulative Primary deficit Real GDP growth Real interest rate Exchange rate depreciation Other debt-creating flows Residual Change in gross public sector debt Source: WB staff. 1/ Public sector is defined as Central Government. 2/ Based on available data. 3/ EMBIG (bp). 4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year. 5/ Derived as [r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ) times previous period debt ratio, with r = effective nominal interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). 6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g. 7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r). 8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period. 9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. Page 65 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Figure 6.2. Morocco Public DSA - Composition of Public Debt and Alternative Scenarios Composition of Public Debt By Maturity By Currency (in percent of GDP) (in percent of GDP) 70 70 Medium and long-term Local currency-denominated 60 Short-term 60 Foreign currency-denominated 50 50 40 40 30 30 projection 20 projection 20 10 10 0 0 2008 2010 2012 2014 2016 2018 2020 2022 2024 2008 2010 2012 2014 2016 2018 2020 2022 2024 Alternative Scenarios Baseline Historical Constant Primary Balance Gross Nominal Public Debt 1/ Public Gross Financing Needs (in percent of GDP) (in percent of GDP) 72 22 70 17 68 66 12 64 7 62 2 60 projection projection 2017 2018 2019 2020 2021 2022 2023 2024 58 -3 2017 2018 2019 2020 2021 2022 2023 2024 Underlying Assumptions (in percent) Baseline Scenario 2019 2020 2021 2022 2023 2024 Historical Scenario 2019 2020 2021 2022 2023 2024 Real GDP growth 2.7 3.5 3.6 3.8 4.1 4.4 Real GDP growth 2.7 3.6 3.6 3.6 3.6 3.6 Inflation 0.8 1.1 1.5 1.7 2.0 2.0 Inflation 0.8 1.1 1.5 1.7 2.0 2.0 Primary Balance -1.7 -1.4 -1.4 -1.0 -0.9 -0.6 Primary Balance -1.7 -2.1 -2.1 -2.1 -2.1 -2.1 Effective interest rate 3.7 3.8 3.6 3.7 3.8 3.8 Effective interest rate 3.7 3.8 3.9 4.2 4.4 4.7 Constant Primary Balance Scenario Real GDP growth 2.7 3.5 3.6 3.8 4.1 4.4 Inflation 0.8 1.1 1.5 1.7 2.0 2.0 Primary Balance -1.7 -1.7 -1.7 -1.7 -1.7 -1.7 Effective interest rate 3.7 3.8 3.6 3.7 3.8 3.8 Source: WB staff. Page 66 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Figure 6.3. Morocco Public DSA - Stress Tests Macro-Fiscal Stress Tests Baseline Primary Balance Shock Real Interest Rate Shock Real GDP Growth Shock Real Exchange Rate Shock Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 70 270 15 13 68 260 11 66 250 9 64 240 7 5 62 230 3 60 220 1 58 210 -1 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 Additional Stress Tests Baseline Combined Macro-Fiscal Shock Adverse Scenario Gross Nominal Public Debt Gross Nominal Public Debt Public Gross Financing Needs (in percent of GDP) (in percent of Revenue) (in percent of GDP) 74 290 16 72 280 14 70 270 12 68 260 10 66 250 8 64 240 6 62 60 230 4 58 220 2 56 210 0 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 2019 2020 2021 2022 2023 2024 Underlying Assumptions (in percent) Primary Balance Shock 2019 2020 2021 2022 2023 2024 Real GDP Growth Shock 2019 2020 2021 2022 2023 2024 Real GDP growth 2.7 3.5 3.6 3.8 4.1 4.4 Real GDP growth 2.7 2.3 2.4 3.8 4.1 4.4 Inflation 0.8 1.1 1.5 1.7 2.0 2.0 Inflation 0.8 0.8 1.2 1.7 2.0 2.0 Primary balance -1.7 -2.1 -2.1 -1.0 -0.9 -0.6 Primary balance -1.7 -1.8 -2.2 -1.0 -0.9 -0.6 Effective interest rate 3.7 3.8 3.6 3.7 3.8 3.9 Effective interest rate 3.7 3.8 3.6 3.7 3.8 3.8 Real Interest Rate Shock Real Exchange Rate Shock Real GDP growth 2.7 3.5 3.6 3.8 4.1 4.4 Real GDP growth 2.7 3.5 3.6 3.8 4.1 4.4 Inflation 0.8 1.1 1.5 1.7 2.0 2.0 Inflation 0.8 4.7 1.5 1.7 2.0 2.0 Primary balance -1.7 -1.4 -1.4 -1.0 -0.9 -0.6 Primary balance -1.7 -1.4 -1.4 -1.0 -0.9 -0.6 Effective interest rate 3.7 3.8 4.2 4.6 5.1 5.5 Effective interest rate 3.7 3.8 3.6 3.7 3.7 3.8 Combined Shock Real GDP growth 2.7 2.3 2.4 3.8 4.1 4.4 Inflation 0.8 0.8 1.2 1.7 2.0 2.0 Primary balance -1.7 -2.1 -2.2 -1.0 -0.9 -0.6 Effective interest rate 3.7 3.8 4.2 4.6 5.1 5.4 Adverse Scenario Real GDP growth 2.7 1.3 2.5 5.0 4.1 4.4 Inflation 0.8 2.5 2.5 0.5 1.0 2.0 Primary balance -1.7 -2.4 -2.1 -1.2 -1.1 -0.9 Effective interest rate 3.7 3.8 3.7 3.8 3.9 3.9 Source: WB staff. Page 67 The World Bank Morocco Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option (P168580) Figure 6.4. Morocco Public DSA Risk Assessment Heat Map Debt level 1/ Real GDP Primary Balance Real Interest Exchange Rate Contingent Growth Shock Shock Rate Shock Shock Liability shock 2/ Real GDP Primary Balance Real Interest Exchange Rate Contingent Gross financing needs Growth Shock Shock Rate Shock Shock Liability Shock External Change in the Public Debt Foreign Debt profile 3/ Market Financing Share of Short- Held by Non- Currency Perception Requirements Term Debt Residents Debt Evolution of Predictive Densities of Gross Nominal Public Debt (in percent of GDP) Baseline Percentiles: 10th-25th 25th-75th 75th-90th Symmetric Distribution Restricted (Asymmetric) Distribution 80 80 70 70 60 60 50 50 40 40 30 30 Restrictions on upside shocks: 20 20 no restriction on the growth rate shock no restriction on the interest rate shock 10 10 0 is the max positive pb shock (percent GDP) no restriction on the exchange rate shock 0 0 2017 2018 2019 2020 2021 2022 2023 2024 2017 2018 2019 2020 2021 2022 2023 2024 Debt Profile Vulnerabilities (Indicators vis-à-vis risk assessment benchmarks, in 2018) Morocco Lower early warning Upper early warning 600 15 1 45 60 183 7% 20% bp 21% 200 5 0.5 15 20 1 2 1 2 1 2 1 2 1 2 -1% Annual Change in External Financing Public Debt Held by Public Debt in Bond spread Short-Term Public Requirement Non-Residents Foreign Currency Debt (in basis points) 4/ (in percent of GDP) 5/ (in percent of total) (in percent of total) (in percent of total) Source: WB staff. 1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant. 2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant. 3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt. 4/ EMBIG (bp), an average over the last 3 months, 09-Jul-19 through 07-Oct-19. 5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period. Page 68